<PAGE>
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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, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-5540
PEOPLES ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
ILLINOIS 36-2642766
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
122 SOUTH MICHIGAN AVENUE, CHICAGO, ILLINOIS 60603
(Address of principal executive offices) (Zip Code)
(312) 431-4000
(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: 34,850,350 shares of Common
Stock, without par value, outstanding at April 30, 1994.
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
PEOPLES ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
March 31, March 31, March 31,
------------------------ ------------------------ --------------------------
1994 1993 1994 1993 1994 1993
--------- --------- --------- --------- ----------- -----------
(Thousands, except per-share amounts)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Gas sales $ 533,410 $ 477,930 $ 875,690 $ 813,264 $ 1,189,564 $ 1,074,928
Transportation of customer-
owned gas 37,591 41,193 70,990 78,865 110,074 124,614
Other 3,592 3,332 7,195 6,453 14,596 13,049
--------- --------- --------- --------- ----------- -----------
Total Operating Revenues 574,593 522,455 953,875 898,582 1,314,234 1,212,591
--------- --------- --------- --------- ----------- -----------
OPERATING EXPENSES:
Gas costs 334,458 291,447 536,160 488,761 693,750 617,261
Operation 59,733 55,701 113,958 108,357 218,691 203,041
Maintenance 9,722 8,600 18,123 16,580 37,235 35,540
Depreciation 16,218 15,246 31,443 29,744 62,506 58,936
Taxes - Income 30,318 29,941 47,472 48,156 36,881 36,490
- State and local revenue 59,929 55,187 99,122 94,402 136,394 127,854
- Other 5,781 5,571 10,564 10,332 20,951 20,411
--------- --------- --------- --------- ----------- -----------
Total Operating Expenses 516,159 461,693 856,842 796,332 1,206,408 1,099,533
--------- --------- --------- --------- ----------- -----------
OPERATING INCOME 58,434 60,762 97,033 102,250 107,826 113,058
--------- --------- --------- --------- ----------- -----------
OTHER INCOME:
Interest Income 1,085 563 1,542 1,190 3,296 4,134
Allowance for funds used during
construction -- -- -- -- -- 193
Miscellaneous 1,320 894 13,155 1,806 14,751 6,505
--------- --------- --------- --------- ----------- -----------
Total Other Income 2,405 1,457 14,697 2,996 18,047 10,832
--------- --------- --------- --------- ----------- -----------
GROSS INCOME 60,839 62,219 111,730 105,246 125,873 123,890
--------- --------- --------- --------- ----------- -----------
INCOME DEDUCTIONS:
Interest on long-term debt of
subsidiaries 11,336 10,301 21,563 20,505 42,572 41,295
Other interest 855 867 2,300 2,189 3,056 3,578
Amortization of debt discount
and expense 206 179 397 354 771 689
Preferred stock dividends of a
subsidiary -- 221 -- 451 267 1,055
Miscellaneous 38 8 78 44 143 84
--------- --------- --------- --------- ----------- -----------
Total Income Deductions 12,435 11,576 24,338 23,543 46,809 46,701
--------- --------- --------- --------- ----------- -----------
NET INCOME $ 48,404 $ 50,643 $ 87,392 $ 81,703 $ 79,064 $ 77,189
--------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- ----------- -----------
Average Shares of Common Stock
Outstanding 34,851 34,808 34,844 34,800 34,832 34,782
Earnings Per Share of Common
Stock $ 1.39 $ 1.45 $ 2.51 $ 2.35 $ 2.27 $ 2.22
--------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- ----------- -----------
Dividends Declared Per Share $ .45 $ .445 $ .895 $ .885 $ 1.785 $ 1.765
--------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- ----------- -----------
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</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
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<PAGE>
PEOPLES ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, March 31,
1994 September 30, 1993
(Unaudited) 1993 (Unaudited)
-------------- -------------- --------------
(Thousands)
<S> <C> <C> <C>
PROPERTIES AND OTHER ASSETS
CAPITAL INVESTMENTS
Property, plant and equipment,
at original cost $ 1,981,589 $ 1,950,981 $ 1,886,790
Less - Accumulated depreciation 656,882 632,965 622,825
------------ ------------ ------------
Net property, plant and equipment 1,324,707 1,318,016 1,263,965
Gas supply advances and investments 924 941 975
Other investments 19,430 15,420 13,178
------------ ------------ ------------
TOTAL CAPITAL INVESTMENTS - NET 1,345,061 1,334,377 1,278,118
------------ ------------ ------------
CURRENT ASSETS
Cash 11,926 8,511 12,979
Cash equivalents 101,216 16,240 55,898
Other temporary cash investments,
at cost that approximates market value 1,100 1,100 1,100
Trust fund, utility construction 57,234 4,243 18,169
Receivables -
Customers, net of allowance for
uncollectible accounts of $20,346,
$19,789,and $19,848, respectively 239,648 81,218 212,573
Other 13,685 30,698 1,769
Accrued unbilled revenues 51,794 30,038 58,138
Materials and supplies, at average cost 24,813 25,652 27,394
Gas in storage, at last-in, first-out cost 64,650 145,005 62,833
Gas costs recoverable through rate adjustments 23,821 51,526 77,775
Prepayments 3,516 2,441 3,777
------------ ------------ ------------
TOTAL CURRENT ASSETS 593,403 396,672 532,405
------------ ------------ ------------
DEFERRED CHARGES 48,988 34,821 29,646
------------ ------------ ------------
TOTAL PROPERTIES AND OTHER ASSETS $ 1,987,452 $ 1,765,870 $ 1,840,169
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
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The Notes to Consolidated Financial Statememts are an integral part of these
statements.
-3-
<PAGE>
PEOPLES ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, March 31,
1994 September 30, 1993
(Unaudited) 1993 (Unaudited)
------------- -------------- -------------
(Thousands, except share data)
<S> <C> <C> <C>
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stockholders' Equity:
Common stock, without par value
Authorized - 60,000,000 shares
Outstanding - 34,850,350, 34,822,842
and 34,807,936 shares, respectively $ 275,678 $ 275,019 $ 274,597
Retained earnings 409,633 353,432 393,165
------------ ------------ ------------
Total Common Stockholders' Equity 685,311 628,451 667,762
Redeemable cumulative preferred stock of a
subsidiary, $100 par value, exclusive of sinking
fund payments and redemptions due within one year -- -- 8,950
Long-term debt of subsidiaries, exclusive of sinking
fund payments and maturities due within one year 626,075 528,075 509,800
------------ ------------ ------------
TOTAL CAPITALIZATION 1,311,386 1,156,526 1,186,512
------------ ------------ ------------
CURRENT LIABILITIES
Interim loans of subsidiaries 900 68,600 900
Accounts payable 116,294 118,220 115,056
Dividends payable on common stock 15,683 15,496 15,490
Customer gas service and credit deposits 16,537 43,076 21,257
Sinking fund payments, maturities, and redemptions
due within one year -
Long-term debt of subsidiaries 4,000 4,000 6,395
Redeemable cumulative preferred stock
of a subsidiary -- 3,400 1,950
Accrued taxes 92,530 27,914 78,354
Gas sales revenue refundable through rate adjustments 12,001 8,220 8,107
Accrued interest 12,532 10,371 9,502
Temporary LIFO liquidation credit 113,234 -- 126,053
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 383,711 299,297 383,064
------------ ------------ ------------
RESERVES AND DEFERRED CREDITS
Deferred income taxes - primarily
accelerated depreciation 201,912 194,664 174,167
Investment tax credits being amortized
over the average lives of related property 40,792 41,676 42,424
Other 49,651 73,707 54,002
------------ ------------ ------------
TOTAL RESERVES AND DEFERRED CREDITS 292,355 310,047 270,593
------------ ------------ ------------
TOTAL CAPITALIZATION AND LIABILITIES $ 1,987,452 $ 1,765,870 $ 1,840,169
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
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The Notes to Consolidated Financial Statements are an integral part of these
statements.
-4-
<PAGE>
PEOPLES ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
-------------------------------
1994 1993
---------- -----------
(Thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 87,392 $ 81,703
Adjustments to reconcile net income to net cash:
Depreciation 31,443 29,744
Deferred income taxes and investment tax credits - net 1,338 200
Change in other deferred credits and reserves (19,030) (3,321)
Change in deferred charges (14,167) 3,550
Other 18 30
---------- ----------
86,994 111,906
Change in certain current assets and liabilities:
Receivables - net (141,417) (153,994)
Accrued unbilled revenues (21,756) (34,593)
Gas in storage 80,355 79,205
Rate adjustments recoverable or refundable 31,486 (50,431)
Accounts payable (1,926) 24,365
Customer gas service and credit deposits (26,539) (27,204)
Accrued taxes 64,616 62,212
Accrued interest 2,161 (410)
Temporary LIFO liquidation credit 113,234 126,053
Other (235) (2,174)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 186,973 134,935
---------- ----------
INVESTING ACTIVITIES:
Capital expenditures of subsidiaries - construction (37,494) (47,855)
Other assets (640) (2,215)
Other temporary cash investments -- (300)
Other long-term cash investments (273) (73)
Other capital investments (3,737) 460
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (42,144) (49,983)
---------- ----------
FINANCING ACTIVITIES:
Retirement of long-term debt of subsidiaries (4,000) (691)
Redemption of preferred stock of a subsidiary (3,400) (3,900)
Interim loans of subsidiaries - net (67,700) (28,000)
Issuance of long-term debt of subsidiaries 102,000 25,000
Trust fund, utility construction (52,992) (18,169)
Dividends paid on common stock (31,005) (30,616)
Issuance of common stock - net 659 594
---------- ----------
NET CASH USED IN FINANCING ACTIVITIES (56,438) (55,782)
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 88,391 29,170
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 24,751 39,707
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 113,142 $ 68,877
---------- ----------
---------- ----------
<FN>
- - -------------------------------------------------------------------------------
( ) Denotes red figure.
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
-5-
<PAGE>
PEOPLES ENERGY CORPORATION
PART I. FINANCIAL INFORMATION (CONTINUED)
MARCH 31, 1994
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Peoples Energy Corporation (Company) and its wholly owned subsidiaries, The
Peoples Gas Light and Coke Company (Peoples Gas), North Shore Gas Company (North
Shore Gas), and Peoples District Energy Corporation (Peoples District Energy),
and comprise the assets, liabilities, preferred stock, revenues, expenses, and
underlying common stockholders' equity of these companies. Income is
principally derived from the Company's utility subsidiaries, Peoples Gas and
North Shore Gas. The statements have been prepared by the 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, 1993.
The business of the Company's utility subsidiaries is influenced by
seasonal weather conditions because a large element of the utilities' 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
2(a) Revenue Recognition
Gas sales revenues for retail customers 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.
-6-
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
2(b) 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:
<TABLE>
<CAPTION>
For the six months
ended March 31, 1994 1993
---------------------------------------------------------------
(Thousands)
<S> <C> <C>
Income taxes paid $26,954* $24,894
Interest paid 21,315 22,862
<FN>
* Excludes income taxes paid on the interest portion of the IRS
settlement refund received in March. (See Note 8.)
</TABLE>
2(c) Income Taxes
In March 1993, the Company adopted, effective October 1, 1992, the
liability method of accounting for deferred income taxes required by the
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting
for 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 Peoples
Gas and North Shore Gas, certain adjustments made to deferred income
taxes to reflect the adoption of SFAS No. 109 are, in turn, debited or
credited to regulatory assets or liabilities. Such adjustments had no
material impact on financial position or results of operations of the
Company.
2(d) Recovery of Gas Costs, Including Charges for Take-or-Pay and Transition
Costs
Under the tariffs of Peoples Gas and North Shore Gas, the difference
for any fiscal year between costs recoverable through the Gas Charge and
revenues billed to customers under the Gas Charge is refunded or
recovered over a 12-month billing cycle beginning the following
January 1. 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), and the fiscal year-end balance is
amortized over the 12-month period beginning the following January 1.
-7-
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
2(d) Recovery of Gas Costs, Including Charges for Take-or-Pay and
Transition Costs (Continued)
The Illinois Commerce Commission (Commission) conducts annual
proceedings regarding, for each gas utility, the reconciliation of
revenues from the Gas Charge and related costs incurred for gas. In such
proceedings, costs recovered by a utility through the Gas Charge are
subject to challenge. Such proceedings regarding Peoples Gas for fiscal
years 1992 and 1993 and North Shore Gas for fiscal years 1991 through
1993 are currently pending before the Commission.
Pursuant to Federal Energy Regulatory Commission (FERC) Order No.
500, and successor orders, pipelines were allowed to direct-bill firm
sales customers for a portion of so-called "past" take-or-pay costs.
These costs arose from the settlement of liabilities under agreements
between pipelines and producers whereby pipelines were required to pay
for contracted supplies, whether or not they were taken. The utilities
have recovered all take-or-pay charges, billed by their pipeline
suppliers, through the Gas Charge. Although additional recoveries may be
required in the future, any amount is anticipated to be insignificant.
Pursuant to FERC Order No. 636 and successor orders, pipelines are
allowed to recover from their customers so-called transition costs.
These costs arise from the restructuring of pipeline service obligations
required by the 636 Orders. The utilities are currently recovering
pipeline charges for transition costs through an existing provision of
the Gas Charge. The Commission entered an order on March 9, 1994,
providing for the full recovery of all such charges from customers. (See
Notes 4(a) and 4(b).)
3. COVENANTS REGARDING RETAINED EARNINGS
North Shore Gas' 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, 1994, such restrictions
amounted to $11.6 million out of North Shore Gas' total retained earnings of
$63.4 million.
-8-
<PAGE>
4. RATES AND REGULATION
4(a) Utility Rate Proceedings
On October 6, 1992, the Commission issued an order approving changes
in the rates of Peoples Gas that are designed to increase annual revenues
by approximately $30.6 million, exclusive of additional charges for
revenue taxes. The new rates were implemented on October 10, 1992.
Peoples Gas was allowed a 10.40 percent return on its original-cost rate
base, reflecting a 12.25 percent cost of common equity. The Commission's
order also approved a rate mechanism by which Peoples Gas will recover
costs associated with environmental activities, principally the
investigation and remediation of residues associated with past
manufactured gas operations. Consistent with the order it issued in
separate rate proceedings (see discussion below), the Commission directed
that such costs be recovered over a five-year period without recovery of
carrying charges on unrecovered balances. Peoples Gas and several
parties have appealed the Commission's order to the Illinois Appellate
Court. Any change made pursuant to the Appellate Court's order on appeal
would have a prospective effect only.
On September 30, 1992, the Commission issued an order in its
consolidated proceedings, initiated in March 1991, regarding the
appropriate ratemaking treatment of costs incurred by Illinois utilities,
including Peoples Gas and North Shore Gas, in connection with the
investigation and treatment of residues associated with past manufactured
gas operations ("environmental costs"). In its order, the Commission
approved rate recovery of environmental costs but required that such
recovery occur over a five-year period without recovery of carrying
charges on unrecovered balances. Reimbursements of environmental costs
from insurance carriers or other entities are to be netted against costs
and reflected in rates over a five-year period. In November 1992,
several parties, including Peoples Gas and North Shore Gas, appealed the
Commission's order to the Illinois Appellate Court. On
December 29, 1993, the Third District Appellate Court issued its opinion
affirming the Commission's order in the consolidated proceedings. On
February 2, 1994, a petition for leave to appeal the Third District
Court's decision to the Illinois Supreme Court was filed. On April 6,
1994, the Illinois Supreme Court granted that petition. Any change made
pursuant to the Supreme Court's order on appeal would have a prospective
effect only.
-9-
<PAGE>
4. RATES AND REGULATION (Continued)
4(a) Utility Rate Proceedings (Continued)
On September 15, 1993, the Commission entered an order initiating an
investigation into the appropriate means of recovery by Illinois gas
utilities of pipeline charges for FERC Order No. 636 transition costs.
The Commission issued a final order in this proceeding on March 9, 1994.
The order provides for the full recovery of transition costs from Peoples
Gas' and North Shore Gas' sales customers and transportation customers to
the extent they contract for firm standby service. The Citizens Utility
Board and State's Attorney of Cook County filed an application for
rehearing of the March 9 order with the Commission. On May 4, 1994, the
Commission granted rehearing, limited to the question of the allocation
of transition costs. (See Notes 2(d) and 4(b).)
4(b) FERC Orders 636, 636-A, and 636-B
On April 8, 1992, the FERC issued Order No. 636, and on August 3,
1992, the FERC issued Order No. 636-A. On November 27, 1992, the FERC
issued Order No. 636-B, which substantially confirmed Order Nos. 636 and
636-A. There are numerous appeals of the 636 Orders pending before the
Federal Circuit Court of Appeal for the D.C. Circuit.
The 636 Orders required substantial restructuring of the service
obligations of interstate pipelines. Among other things, the 636 Orders
mandated "unbundling" of existing pipeline gas sales services. Mandatory
unbundling requires pipelines to sell separately the various components
of their gas sales services (gathering, transportation and storage
services, and gas supply). These components were previously combined or
"bundled" in gas services such as those purchased by Peoples Gas and
North Shore Gas. To address concerns raised by utilities about
reliability of service to their service territories, the 636 Orders
required pipelines to offer a "no-notice" transportation service under
which firm transporters can receive delivery of gas up to their
contractual capacity level on any day without prior scheduling. Further,
the 636 Orders provided for mechanisms for pipelines to recover prudently
incurred transition costs associated with the restructuring process.
The FERC initiated individual restructuring proceedings for each
interstate pipeline. Each pipeline submitted a proposal to bring it into
compliance with the requirements of the 636 Orders. The restructured
tariffs of Natural Gas Pipeline Company of America (Natural), the
principal pipeline serving Peoples Gas and North Shore Gas, went into
-10-
<PAGE>
4. RATES AND REGULATION (Continued)
4(b) FERC Orders 636, 636-A, and 636-B (Continued)
effect December 1, 1993. The restructured tariffs of other pipelines
serving Peoples Gas had previously gone into effect. Several appeals of
the orders approving Natural's and other pipelines' restructured tariffs
are pending before the Federal Circuit Court of Appeal for the D.C.
Circuit.
As part of the restructuring process, Peoples Gas and North Shore
Gas elected necessary levels of restructured services, including no-
notice services, from the menu of restructured services offered by the
various pipelines. Also during 1993, the utilities took the steps
necessary to obtain reliable gas supply as a replacement for the bundled
merchant service supply which was no longer available from the interstate
pipelines to any significant extent.
Under the 636 Orders, pipelines must make separate rate filings to
recover transition costs. There are four categories of such costs, the
largest of which for Peoples Gas and North Shore Gas is gas supply
realignment (GSR) costs. The utilities are subject to charges for
transition cost recovery by two pipelines: Midwestern Gas Transmission
Company/Tennessee Gas Pipeline Company (for Peoples Gas only) and
Natural. Contracts with Midwestern and Tennessee having been terminated
effective November 30, 1993, transition cost billings by these companies
are limited to the period September 1993 through November 1993. Charges
for Natural's transition costs commenced on January 1, 1994. While the
total amount of the transition costs expected to be billed to the utility
companies by Natural are uncertain at this time, such total amount is
expected to be substantial. Peoples Gas and North Shore Gas are
currently recovering transition costs through the Gas Charge. On
February 1, 1994, Natural filed a Stipulation and Agreement with the FERC
addressing GSR costs. If approved by the FERC, the Stipulation and
Agreement would place a cap on the amount of GSR costs recoverable by
Natural from Peoples Gas and North Shore Gas.
The 636 Orders are not expected to have a material adverse effect on
financial position or results of operations of the Company or its
subsidiaries. (See Notes 2(d) and 4(a).)
-11-
<PAGE>
5. ENVIRONMENTAL MATTERS
5(a) Former Manufactured Gas Plant Sites
The Company's utility subsidiaries, their predecessors, and certain
former affiliates operated facilities in the past for manufacturing gas
and storing manufactured gas. In connection with manufacturing and
storing gas, various by-products and waste materials were produced, some
of which might have been disposed of on sites where the facilities were
located. Under certain laws and regulations relating to the protection
of the environment, the subsidiaries might be required to undertake
remedial action with respect to some of these materials, if found at the
sites. Two sites in Waukegan, Illinois, are the subjects of
investigations (discussed below) initiated by the United States
Environmental Protection Agency (EPA).
In May 1990, North Shore Gas was notified by the EPA that the EPA
had documented the release or threatened release of hazardous substances,
pollutants, and contaminants at a site located in Waukegan, Illinois,
where manufactured gas and coking operations were formerly conducted
(Waukegan I Site). Also, North Shore Gas, General Motors Corporation
(GMC), and Outboard Marine Corporation were notified that each may be a
potentially responsible party (PRP) under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended (commonly
called Superfund) with respect to the Waukegan I Site. A PRP is
potentially liable for the cost of any investigative and/or remedial work
that the EPA determines is necessary.
In September 1990, North Shore Gas entered into an Administrative
Order on Consent (AOC) with the EPA and the Illinois Environmental
Protection Agency (IEPA) to implement and conduct a remedial
investigation/feasibility study (RI/FS) of the Waukegan I Site. The
RI/FS is comprised of an investigation to determine the nature and extent
of contamination at the site and a feasibility study to develop and
evaluate possible remedial actions. Other parties identified as PRPs did
not enter into the AOC. Under the terms of the AOC, North Shore Gas is
responsible for the cost of the RI/FS. North Shore Gas 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 North
Shore Gas in funding of the RI/FS cost, without prejudice to GMC's or
North Shore Gas' right to seek a lesser cost responsibility at a later
date.
In September 1991, North Shore Gas, the Elgin, Joliet and Eastern
Railway (EJ&E), and the North Shore Sanitary District (NSSD) each
received an administrative order (AO) issued by the EPA. The AO directed
all three entities to remove and dispose of all visible
-12-
<PAGE>
5. ENVIRONMENTAL MATTERS (Continued)
5(a) Former Manufactured Gas Plant Sites (Continued)
free tar in a pit located within a separate site in Waukegan, Illinois
(Waukegan II Site) and to conduct a study to determine the extent of
contamination of the tar from the pit to the surrounding property. All
of the work under the AO has been completed. North Shore Gas has entered
into a settlement agreement with NSSD with respect to costs incurred
under the AO and intends to recover an appropriate amount of the
remaining costs from EJ&E.
The current owner of a site near Chicago has advised Peoples Gas
that it has found what appear to be wastes associated with by-products of
the gas manufacturing process under its property. The owner has asserted
that these wastes are the responsibility of Peoples Gas. Peoples Gas is
currently evaluating this claim.
Peoples Gas and North Shore Gas, in cooperation with the IEPA, are
conducting investigations of other sites (a total of 32) to determine
whether remedial action might be necessary. The investigations were
initiated pursuant to an informal request by the IEPA. To the best of
the Company's knowledge, similar informal requests have been made by the
IEPA to other major Illinois gas and electric utilities. Peoples Gas and
North Shore Gas have engaged environmental consulting firms to assist in
the utilities' investigations. At this time, except for the Waukegan I
Site and one site in Chicago (discussion below), it is not known what, if
any, remedial action will be necessary at the sites or, if necessary,
what the cost of any such action would be. As discussed below, Peoples
Gas may conduct an RI/FS at two of these sites under the supervision of
the IEPA and, with the agreement of the IEPA, has commenced limited work
at a third site.
In August 1988, the IEPA conducted an inspection at Peoples Gas'
Division Street property in Chicago. During the inspection, the IEPA and
Peoples Gas took several soil samples for laboratory analysis. The
analysis of the samples collected by Peoples Gas indicates the presence
of certain substances within the soil of the Division Street property
that could be attributable to former manufactured gas operations.
Peoples Gas may conduct an RI/FS of the property under the supervision of
the IEPA.
The current owners at another site in Chicago have advised Peoples
Gas that they found what appear to be gas manufacturing wastes underneath
their property. The owners have demanded monetary compensation from
Peoples Gas because of the presence of such wastes. Peoples Gas has
rejected this demand, but may conduct an RI/FS of the site under the
supervision of the IEPA.
-13-
<PAGE>
5. ENVIRONMENTAL MATTERS (Continued)
5(a) Former Manufactured Gas Plant Sites (Continued)
Peoples Gas has observed what appear to be gas purification wastes
on another former site in Chicago and property contiguous thereto.
Peoples Gas has fenced the site and the contiguous property and is
conducting a study under the supervision of the IEPA to determine the
feasibility of a limited removal action.
The utility subsidiaries are accruing and deferring the costs they
incur in connection with all of the sites, including related legal
expenses, pending recovery through rates or from insurance carriers or
other entities. As of March 31, 1994, the total of the costs deferred by
the subsidiaries, net of recoveries and amounts billed to other entities,
was $16.5 million. This amount includes an estimate of the costs of
completing the studies required by the EPA at the Waukegan I Site and the
Waukegan II Site and the investigations initiated at the request of the
IEPA at the other sites referred to above. The amount also includes an
estimate of the costs of remediation at the Waukegan I Site and at one
site in Chicago, at the minimum amount of the current estimated range of
such costs. The costs of remediation at the other sites cannot be
determined until more is known about the nature and extent of
contamination and the remedial action, if any, to be required by the EPA
or the IEPA. While each subsidiary 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.
Peoples Gas and North Shore Gas have filed suit against a number of
insurance carriers for the recovery of costs associated with the
investigation and remediation of residues from the utilities' former
manufactured gas operations. The suit asks the court to declare that the
insurers are liable under policies in effect between 1938 and 1985 for
costs incurred or to be incurred by the utilities in connection with five
former manufactured gas sites in Chicago and Waukegan. The utilities are
also asking the court to award damages stemming from the insurers' breach
of their contractual obligation to defend and indemnify the utilities
against these costs. At this time, management cannot determine the
timing and extent of the subsidiaries' recovery of costs from their
insurance carriers. Accordingly, the costs deferred as of March 31, 1994
have not been reduced to reflect recoveries from insurance carriers.
-14-
<PAGE>
5. ENVIRONMENTAL MATTERS (Continued)
5(a) Former Manufactured Gas Plant Sites (Continued)
Costs incurred by Peoples Gas or North Shore Gas for environmental
activities relating to the sites of their 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 subsidiaries in connection with the sites will
not have a material adverse effect on financial position or results of
operations of the subsidiaries. Peoples Gas and North Shore Gas are
authorized to recover the costs of environmental activities relating to
the utilities' former manufactured gas operations under rate mechanisms
approved by the Commission. As of March 31, 1994, the subsidiaries had
recovered $3.7 million of such costs through rates. (See Note 4(a) for a
discussion of proceedings regarding the recovery of such costs through
utility rates.)
5(b) Denver Superfund Site
In February 1994, North Shore Gas received a demand from a
responsible party under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, for reimbursement,
indemnification and contribution for response costs incurred at a site in
Denver, Colorado. The demand alleges that North Shore Gas 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 to be
approximately $31 million. North Shore Gas is in the process of
examining this claim and is currently unable to determine what liability,
if any, it may have for response costs relating to the site.
6. GAS OVER-PRESSURE CONDITION
On January 17, 1992, an over-pressure condition occurred in the gas mains
of Peoples Gas serving an approximately one-square-mile area of the Near
Northwest Side of the City of Chicago. The over-pressure condition caused a
major explosion and numerous fires. Peoples Gas is aware of four deaths and 14
personal injuries allegedly resulting from the explosion and fires. Peoples Gas
also has been informed that damage occurred in an estimated 28 buildings. There
was also damage, such as broken windows, wall cracks, and water damage, to
additional buildings.
-15-
<PAGE>
6. GAS OVER-PRESSURE CONDITION (Continued)
A number of lawsuits have been filed against Peoples Gas as a result of
the over-pressure condition. Some lawsuits also have named the Company as a
defendant. The Company is not a proper party to these suits, and management
expects that the Company will be dismissed from the litigation. The lawsuits
include wrongful-death claims and several class actions that seek to certify as
a class those persons who suffered bodily harm and/or property damage. All of
the suits allege negligence and seek compensatory damages. Some of the lawsuits
also seek punitive damages. These suits have not quantified the alleged damages
except for certain amounts that are not material.
In January 1993, the National Transportation Safety Board (NTSB)
completed its report regarding its investigation of the over-pressure incident
that occurred on January 17, 1992. In its report, the NTSB stated that "the
probable cause of the over-pressure accident and the resulting losses was the
failure of Peoples Gas Light Coke Company to adequately train its gas operations
section employees in recognizing and correctly responding to abnormal
situations, which consequently led to the failure of the gas operations section
crew to properly monitor and control the pressure of the gas being supplied to
the low-pressure gas system during a routine inspection."
In June 1993, the Staff of the Illinois Commerce Commission (Commission
Staff) released its report concerning the over-pressure incident. In its
report, the Commission Staff concluded that employee error was the probable
cause of the over-pressurization. The report was critical of Peoples Gas'
training of its personnel in its gas operations section and of some of Peoples
Gas' practices at the time of the incident.
The Company and Peoples Gas strongly disagree with the criticisms by the
NTSB and the Commission Staff of the training given by Peoples Gas to personnel
in its gas operations section. The Company and Peoples Gas also disagree with
some of the findings and conclusions of the Commission Staff, including several
of the Commission Staff's findings and its theory, analysis, and conclusions
pertaining to the probable cause of the over-pressurization.
The Company and Peoples Gas carry substantial insurance coverage. If
liability were found on the part of the Company or Peoples Gas, management
believes that any costs incurred for damages will be adequately covered by
insurance. However, Peoples Gas' primary insurance carrier has asserted that
under Illinois law, liability for punitive damages is not insurable. Peoples
Gas has advised the insurance carrier that it disagrees and intends to assert
all of its rights against
-16-
<PAGE>
6. GAS OVER-PRESSURE CONDITION (Continued)
the carrier including its right to obtain recovery for punitive damages, if any.
Management is not aware of any conduct on its part or by employees of Peoples
Gas or of the Company that would give rise to punitive damages under Illinois
law. Accordingly, management believes that the incident will not have a
material adverse effect on financial position or results of operations of the
Company or Peoples Gas.
7. DISTRICT ENERGY
On December 16, 1992, Peoples District Energy became a 50 percent
participant in a partnership formed to provide heating and cooling services to
the McCormick Place exposition and convention center in Chicago, Illinois and
other large buildings near McCormick Place. The services will be supplied from
a central plant, a concept known as district energy. The other partner is a
subsidiary of Trigen Energy Corporation (Trigen), a company whose primary
business is constructing and operating district energy facilities. Neither the
partnership nor its partners are regulated as a public utility.
In December 1992, the partnership entered into a 28-year contract with
the Metropolitan Pier and Exposition Authority (MPEA) to construct and operate a
plant that will provide steam and chilled water to McCormick Place for heating
and cooling purposes. On November 1, 1993, the partnership assumed operation of
the current space-conditioning system and began providing service to the two
existing halls. The partnership also will provide heating and cooling to a
planned exhibition hall that is scheduled to be in operation early in 1997. The
partnership is obligated to provide services to McCormick Place for the term of
the contract at or below the cost (as determined by a contractual formula) that
the MPEA would incur to produce heating and cooling for itself. The contract
also obligates the partnership to complete and pay for construction of the plant
by certain dates specified in the contract. To secure its obligations during
the service period under the contract, the partnership is obligated to provide,
maintain, and reinstate a letter of credit upon which the MPEA can draw to pay
its costs, expenses, and damages, up to $4 million per incident, principally in
the event of the partnership's failure to cure timely an interruption of
service.
The district energy plant is estimated to cost approximately $36 million.
The MPEA has funded $8 million of the construction costs, and the partnership
will fund the balance. The Company and Trigen have each posted an $18 million
irrevocable letter of credit in favor of the partnership to fund the
partnership's portion of construction costs. The partnership plans to seek debt
financing for a major portion of the project.
-17-
<PAGE>
7. DISTRICT ENERGY (Continued)
In addition to committing capital to the partnership, the Company and
Trigen have provided two joint and several guarantees to the MPEA of the
partnership's performance of its obligations under the contract. One of the
guarantees covers all obligations of the partnership relating to construction
of the project (Construction Obligations), and is limited in the aggregate to
$15 million, except for the guarantors' funding obligations described above and
costs to the extent incurred by the MPEA in connection with enforcement of
obligations of the partnership or the guarantors. The second guarantee covers
all obligations of the partnership other than the Construction Obligations,
including liabilities arising from an interruption of service to McCormick
Place, insolvency of the partnership, or other partnership default. This second
guarantee is limited in the aggregate to $11 million, except for an additional
$4 million to $8 million in the event of insolvency of the partnership or the
installation (pursuant to enforcement of lender or MPEA remedies) of any other
operator of the district energy plant in lieu of the partnership, and except for
the partnership's obligations relating to the letter of credit in favor of the
MPEA described above and costs to the extent incurred by the MPEA in connection
with the enforcement of obligations of the partnership or the guarantors.
8. TAX MATTERS
On September 30, 1993, the Company received notification from the
Internal Revenue Service (IRS) that settlement of past income tax returns had
been reached for fiscal years 1978 through 1990. The IRS settlement resulted in
March 1994 payments of principal and interest to the Company in total amount of
approximately $28 million, or $21 million after income taxes. Peoples Gas and
North Shore Gas have each received regulatory authorization to defer the
recording of the settlement amount in income for fiscal year 1993, and to record
its portion of the settlement amount in income for fiscal years 1994 and 1995.
Each utility has represented to the Commission that, having received this
accounting authorization, it will not file a request for an increase in base
rates before December 1994. The regulatory treatment of the IRS settlement
having been resolved in November 1993, Peoples Gas and North Shore Gas together
included $14 million, or $10.7 million after income taxes, in income for that
month; the amount after income taxes is included in Other Income -
Miscellaneous. At March 31, 1994, approximately $14 million is included in
Reserves and Deferred Credits - Other. Each utility will amortize its remaining
portion of the settlement amount in income in fiscal year 1995, the effect of
which will be to offset increases in costs that the utilities will incur during
that year.
-18-
<PAGE>
9. ISSUANCE OF BONDS
On March 30, 1993, North Shore Gas filed a shelf registration with the
SEC for the issuance of $40 million aggregate principal amount of first mortgage
bonds. On May 13, 1993, North Shore Gas issued a portion of those first
mortgage bonds in an aggregate principal amount of $15 million due May 1, 2003.
Proceeds of the offering were used to refund approximately $11 million aggregate
principal amount of North Shore Gas' previously issued first mortgage bonds and
for general corporate purposes. North Shore Gas expects to issue all or a
portion of the remaining bonds during fiscal 1995 and/or fiscal 1996. Proceeds
of the future offering will be used for general corporate purposes.
On December 22, 1993, the City of Chicago issued $102 million, in
aggregate principal amount, of gas supply revenue bonds ($75 million 5 3/4%
Series A and $27 million adjustable-rate Series B), which were collateralized by
an equal amount of Peoples Gas' 30-year first mortgage bonds. The proceeds were
lent to Peoples Gas for the purpose of financing the construction of certain
facilities within the City. The proceeds are being held in a trust fund until
drawn down by Peoples Gas for reimbursement of construction expenditures.
In accordance with provisions of the Internal Revenue Code and
regulations thereunder, any arbitrage income must be paid to the federal
government. Additionally, all assets financed through this arrangement must be
depreciated on a straight-line basis for tax purposes.
10. INTEREST-RATE ADJUSTMENTS
The rate of interest on the City of Joliet 1984 Series C Bonds, which are
secured by Peoples Gas' Adjustable-Rate Bonds, Series W, is subject to
adjustment annually on October 1. Owners of the Series C Bonds have the right
to tender such bonds at par during a limited period prior to that date. Peoples
Gas is obligated to purchase any such bonds tendered if they cannot be
remarketed. All Series C Bonds that were tendered prior to October 1, 1993,
have been remarketed. The interest rate on such bonds is 3 percent for the
period October 1, 1993, through September 30, 1994.
The rate of interest on the City of Chicago 1993 Series B Bonds, which
are secured by Peoples Gas' Adjustable-Rate Bonds, Series EE, currently is
subject to adjustment annually on December 1. Owners of the Series B Bonds have
the right to tender such bonds at par during a limited period prior to that
date. Peoples Gas is obligated to purchase any such bonds tendered if they
cannot be remarketed. The interest rate on such bonds is 2.55 percent for the
period December 1, 1993, through November 30, 1994.
-19-
<PAGE>
10. INTEREST-RATE ADJUSTMENTS (Continued)
Effective November 1, 1993, the rate of interest on North Shore Gas'
Adjustable-Rate Bonds, Series J, was fixed at 8 percent until maturity, November
1, 2020.
11. RETIREMENT AND OTHER POSTEMPLOYMENT BENEFITS
In December 1990, the Financial Accounting Standards Board (FASB) issued
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." The Company adopted SFAS No. 106 effective October 1, 1993. SFAS
No. 106 requires the accrual of the expected costs of such benefits during the
employees' years of service. The Accumulated Postretirement Benefit Obligation
as of October 1, 1993, was approximately $113.9 million. The unfunded
obligation will be amortized over 20 years. The estimated cost for fiscal 1994
is approximately $17.5 million.
In October 1992, Peoples Gas was granted rates by the Commission that
included its estimated postretirement benefit costs determined on the accrual
basis of accounting. (See Note 4(a).) The financial reporting for
postretirement benefit costs of Peoples Gas is consistent with the related rate
treatment. Due to regulatory treatment, the adoption of SFAS No. 106 will not
have a material effect on financial position or results of operations.
In November 1992, the FASB issued SFAS No. 112, "Employers' Accounting
for Postemployment Benefits." This statement requires the accrual of certain
benefits provided to former or inactive employees after employment but before
retirement. Adoption of SFAS No. 112 is required by the Company no later than
fiscal 1995. The Company does not expect the adoption of SFAS No. 112 to have a
material effect on financial position or results of operations.
12. GAIN ON DISPOSITION OF PROPERTY
In June 1992, North Shore Gas completed the sale of certain property at
its former Deerfield sub-shop. The sale resulted in a $3.8 million gain, net of
selling expenses and income taxes.
-20-
<PAGE>
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 $2.2 million, to $48.4
million, for the three-month period ended March 31, 1994, from the results of
last year's second quarter. The current quarter benefited from uncommonly cold
weather that was 8 percent colder than the year-ago period, but the extreme
winter conditions increased operating expenses. In addition, the provision for
uncollectible accounts was increased, reflecting experience in the fiscal year
through the second quarter.
Net income applicable to common stock for the six- and 12-month periods
rose $5.7 million, to $87.4 million, and $1.9 million, to $79.1 million,
respectively, from the results of last year's like periods. Results for the
current six- and 12-month periods include the recording of one-half of the IRS
settlement, in income, increasing net income by $10.7 million. (See Note 8 of
the Notes to Consolidated Financial Statements.) In addition to the tax
settlement, the current six- and 12-month periods benefited from weather that
was 4 percent and 2 percent colder than the respective year-ago periods, while
the current 12-month period also was aided by Peoples Gas' rate increase that
went into effect on October 10, 1992. (See Note 4(a) of the Notes to
Consolidated Financial Statements.) However, the current six- and 12-month
results were adversely affected by the same higher operating expenses that
hampered the second-quarter's performance. The 12-month figures were reduced
further by customer conservation measures and by the accrual of postretirement
benefit costs consistent with rate treatment granted Peoples Gas. Also, the
prior 12-month period included the net gain on the sale of North Shore's
Deerfield property.
A summary of variations affecting income between periods is presented
below, with explanations of significant differences following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended 12 Months Ended
March 31, March 31, March 31,
1994 Over 1993 1994 Over 1993 1994 Over 1993
---------------------- -------------------- ---------------------
(Thousands of dollars) Amount % Amount % Amount %
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net operating revenues* $ 4,385 2.5 $ 3,174 1.0 $ 16,614 3.6
Operation and
maintenance expenses 5,154 8.0 7,144 5.7 17,345 7.3
Depreciation expense 972 6.4 1,699 5.7 3,570 6.1
Income taxes 377 1.3 (684) (1.4) 391 1.1
Other income 948 65.1 11,701 390.6 7,215 66.6
Income deductions 859 7.4 795 3.4 108 0.2
Net Income (2,239) (4.4) 5,689 7.0 1,875 2.4
<FN>
- - --------------------------------------------------------------------------------
( ) Denotes red figure.
* Operating revenues, net of gas costs and revenue taxes.
</TABLE>
-21-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (Continued)
RESULTS OF OPERATIONS (Continued)
NET OPERATING REVENUES
Gross revenues of Peoples Gas and North Shore Gas have been affected in
recent years by customers who purchase gas directly from producers and
marketers, rather than from the subsidiaries, and also by changes in the unit
cost of the subsidiaries' gas purchases. These direct customer purchases have
no effect on net income because the utilities provide transportation service for
such gas volumes and recover margins similar to those applicable to conventional
gas sales. Changes in the unit cost of gas do not significantly affect net
income because the utilities' tariffs provide for dollar-for-dollar recovery of
gas costs. (See Note 2(d) of the Notes to Consolidated Financial Statements.)
The utilities' 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' direct gas purchases rather than from the subsidiaries, changes in
gas costs, or changes in revenue taxes, the discussion below pertains to "net
operating revenues" (operating revenues, net of gas costs and revenue taxes).
The Company considers net operating revenues to be a more pertinent measure of
operating results than gross revenues.
Net operating revenues increased $4.4 million, to $180.2 million and
$3.2 million, to $318.6 million, for the three- and six-month periods,
respectively, due primarily to weather that was 8 and 4 percent colder than the
weather in the comparable prior periods.
Net operating revenues increased $16.6 million, to $484.1 million, for
the 12-month period, due principally to the impact of the October 1992 rate
increase for Peoples Gas (increasing net operating revenues by $19.4 million, or
$11.9 million after income taxes). The 12-month period also was affected by a
rise in customers' energy conservation measures, partially offset by weather
that was 2 percent colder than the prior 12-month period.
OPERATION AND MAINTENANCE
Operation and maintenance expenses increased $5.2 million, to
$69.5 million, $7.1 million, to $132.1 million, and $17.3 million, to
$255.9 million, for the three-, six-, and 12-month periods, respectively, due
mainly to increases in labor costs associated with the current second quarter's
extreme winter conditions and the provision for uncollectible accounts.
The current 12-month period was also affected by an increase in group insurance
expenses, due primarily to the accrual of postretirement benefit costs
consistent with rate treatment allowed Peoples Gas (see Note 11 of the Notes to
Consolidated Financial Statements).
-22-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (Continued)
RESULTS OF OPERATIONS (Continued)
DEPRECIATION EXPENSE
Depreciation expense increased $972,000, to $16.2 million, $1.7 million
to $31.4 million, and $3.6 million, to $62.5 million, for the three-, six-, and
12-month periods, respectively, due primarily to depreciable property additions.
INCOME TAXES
Income taxes increased $377,000, to $30.3 million, for the three-month
period and increased $391,000 to $36.9 million, exclusive of $3.3 million
included in other income related to the IRS settlement (see Note 8 of the Notes
to Consolidated Financial Statements), for the 12-month period, due principally
to the federal tax rate change from 34 percent to 35 percent effective
January 1, 1993 and decreased adjustments to deferred taxes, partially offset by
lower pre-tax income.
Income taxes, exclusive of the $3.3 million included in other income
related to the IRS settlement, decreased $684,000 to $47.5 million, for the six-
month period, due mainly to lower pre-tax income, partially offset by the
aforementioned tax rate change.
OTHER INCOME
Other income increased $948,000, to $2.4 million, for the three-month
period, due mainly to increased interest income resulting from the proceeds
being held in a trust fund generated from Peoples Gas' December 1993 issuance of
bonds. (See Note 9 of the Notes to Consolidated Financial Statements.)
Other income increased $11.7 million, to $14.7 million, and $7.2 million,
to $18.0 million, for the six- and 12-month periods, due primarily to recording
the IRS settlement of approximately $10.7 million after income taxes. (See Note
8 of the Notes to Consolidated Financial Statements.) The prior 12-month period
included the net gain on the sale of certain property by North Shore Gas. (See
Note 12 of the Notes to Consolidated Financial Statements.)
-23-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (Continued)
RESULTS OF OPERATIONS (Continued)
INCOME DEDUCTIONS
Income deductions increased $859,000, to $12.4 million, and $795,000, to
$24.3 million, for the three- and six-month periods, respectively, due chiefly
to increased interest on long-term debt reflecting additional debt issued,
partially offset by lower preferred stock dividends resulting from redemptions.
OTHER MATTERS
Weather variations affect the volumes of gas delivered for heating
purposes and, therefore, can have a significant positive or negative impact on
net income.
On September 30, 1993, the Company received notification from the IRS
that settlement of past income tax returns had been reached for fiscal years
1978 through 1990. The IRS settlement resulted in March 1994 payments of
principal and interest to the Company in total amount of approximately $28
million, or $21 million after income taxes. (See Note 8 of the Notes to
Consolidated Financial Statements.)
In March 1993, the Company adopted, effective October 1, 1992, the
liability method of accounting for deferred income taxes required by SFAS No.
109. (See Note 2(c) of the Notes to Consolidated Financial Statements.)
In November 1992, the FASB issued SFAS No. 112, "Employers' Accounting
for Postemployment Benefits." This statement requires the accrual of certain
benefits provided to former or inactive employees after employment but before
retirement. SFAS No. 112 requires adoption by the Company no later than fiscal
1995. (See Note 11 of the Notes to Consolidated Financial Statements.)
-24-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (Continued)
RESULTS OF OPERATIONS (Continued)
OTHER MATTERS (Continued)
Effective October 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." This statement
requires the accrual of the expected costs of such benefits during the
employees' years of service. (See Note 11 of the Notes to Consolidated
Financial Statements.)
In 1992, the FERC issued Order No. 636 and successor orders that require
substantial restructuring of the service obligations of interstate pipelines.
(See Notes 2(d), 4(a), and 4(b) of the Notes to Consolidated Financial
Statements.)
On September 15, 1993, the Commission entered an order initiating an
investigation into the appropriate means of recovery by Illinois gas utilities
of pipeline charges for FERC Order No. 636 transition costs. The Commission
issued a final order in this proceeding on March 9, 1994. (See Notes 2(d),
4(a), and 4(b) of the Notes to Consolidated Financial Statements.)
On May 1, 1994, a Chicago city ordinance imposing a use tax on natural
gas became effective. Under the ordinance, the use or consumption of natural
gas in Chicago is taxed at a rate of 1.5 cents per therm. The use tax does not
apply to gas used or consumed by a governmental body, a purchaser exempt from
the municipal utility tax, a gas public utility, or a person using natural gas
as vehicle fuel. To prevent multiple taxation, the use tax also does not apply
to the use of gas by persons who are charged for a state or municipal tax with
respect to the purchase of such gas. Because Peoples Gas is subject to such
state and municipal taxes and recovers the cost of such taxes from its
customers, the use tax does not apply to the use of gas which is purchased from
Peoples Gas. Rather, the tax is directed at users who are transportation
customers of Peoples Gas; these users have been avoiding local taxation on
purchases of gas by purchasing gas from out-of-state sellers. Peoples Gas is
collecting the tax for the City and is paid a fee of three percent of the taxes
collected. Peoples Gas will not be liable for failure of users to pay the use
tax.
-25-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (Continued)
LIQUIDITY AND CAPITAL RESOURCES
INDENTURE RESTRICTIONS. North Shore Gas' 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, 1994,
such restrictions amounted to $11.6 million out of North Shore Gas' total
retained earnings of $63.4 million. (See Note 3 of the Notes to Consolidated
Financial Statements.)
DISTRICT ENERGY. On December 16, 1992, Peoples District Energy became a 50
percent participant in a partnership formed to provide heating and cooling
services to the McCormick Place exposition and convention center in Chicago,
Illinois and other large buildings near McCormick Place. The services will be
supplied from a central plant, a concept known as district energy. The other
partner is a subsidiary of Trigen Energy Corporation, a company whose primary
business is constructing and operating district energy facilities. Neither the
partnership nor its partners are regulated as a public utility. (See Note 7 of
the Notes to Consolidated Financial Statements.)
INTEREST COVERAGE. Peoples Gas' fixed charges coverage ratios for the 12 months
ended March 31, 1994, and fiscal 1993 and 1992 were 3.63, 3.57, and 3.18,
respectively. The current 12-month period ratio reflects the recording of
Peoples Gas' fiscal 1994 portion of the IRS settlement in income. (See Note 8
of the Notes to Consolidated Financial Statements.) In addition, the increase
in the current 12-month period and fiscal 1993 ratios as compared to fiscal 1992
is primarily attributable to the benefit of the rate increase approved in
October 1992 and decreased fixed charges, partially offset by increased
operating expenses.
The corresponding coverage ratios for North Shore Gas for the same
periods were 3.29, 2.91, and 4.20, respectively. The current 12-month period
ratio reflects the recording of North Shore Gas' fiscal 1994 portion of the IRS
settlement in income. (See Note 8 of the Notes to Consolidated Financial
Statements.) The fiscal 1992 ratio includes the net gain on the sale of
property at Deerfield. (See Note 12 of the Notes to Consolidated Financial
Statements.)
-26-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
ENVIRONMENTAL MATTERS. The Company's utility subsidiaries are conducting
environmental investigations and work at certain sites that were the location of
former manufactured gas operations. (See Note 5(a) of the Notes to Consolidated
Financial Statements.)
In February 1994, North Shore Gas received a demand from a responsible
party under the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended, for reimbursement, indemnification and contribution for
response costs incurred at a site in Denver, Colorado. The demand alleges that
North Shore Gas 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 to be approximately $31
million. North Shore Gas is in the process of examining this claim and is
currently unable to determine what liability, if any, it may have for response
costs relating to the site.
REGULATORY ACTIONS. On September 30, 1992, the Commission issued an order in
its consolidated proceedings, initiated in March 1991, regarding the appropriate
ratemaking treatment of environmental costs incurred by Illinois utilities,
including Peoples Gas and North Shore Gas. In its order, the Commission
approved rate recovery of environmental costs but required that such recovery
occur over a five-year period without recovery of carrying charges on
unrecovered balances. The Commission also required that North Shore Gas amend
the environmental cost-recovery provisions of its tariff to conform with the
order. (See Note 4(a) of the Notes to Consolidated Financial Statements.)
OVER-PRESSURE CONDITION. On January 17, 1992, an over-pressure condition
occurred in the gas mains of Peoples Gas serving an approximately one-square-
mile area of the Near Northwest Side of the City of Chicago. The over-pressure
condition caused a major explosion and numerous fires. Four deaths, 14 personal
injuries, and extensive property damage allegedly resulted from the explosion
and fires. (See Note 6 of the Notes to Consolidated Financial Statements.)
BONDS ISSUED. On March 30, 1993, North Shore Gas filed a shelf registration
with the SEC for the issuance of $40 million aggregate principal amount of first
mortgage bonds. On May 13, 1993, North Shore Gas issued a portion of those
first mortgage bonds in an aggregate principal amount of $15 million due
May 1, 2003. (See Note 9 of the Notes to Consolidated Financial Statements.)
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
On December 22, 1993, the City of Chicago issued $102 million, in
aggregate principal amount, of gas supply revenue bonds, which were
collateralized by an equal amount of Peoples Gas' 30-year first mortgage bonds.
The proceeds were lent to Peoples Gas for the purpose of financing the
construction of certain facilities within the City. (See Note 9 of the Notes to
Consolidated Financial Statements.)
CREDIT LINES. The Company has a line of credit of $10 million that expires
December 16, 1994, to cover projected short-term credit needs of the Company.
On February 1, 1994, the utility subsidiaries reduced their lines of credit to
approximately $154 million from $184 million in effect since November 1, 1993.
Such lines of credit cover projected short-term credit needs of the subsidiaries
and support the long-term debt treatment of Peoples Gas' adjustable-rate
mortgage bonds. (See Note 10 of the Notes to Consolidated Financial
Statements.)
OTHER MATTERS. In February 1994, MidCon Corp. (MidCon) paid the Company
approximately $7.3 million. The payment relates to the reorganization of the
Company that occurred in November 1981. Prior to the reorganization, MidCon
and its subsidiaries were subsidiaries of the Company. The Company and MidCon
agreed to allocate state income tax liabilities for certain years ending prior
to October 1, 1982. The $7.3 million payment was made pursuant to such
agreement. Payment was delayed until MidCon was assured of appropriate federal
income tax treatment.
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<PAGE>
PEOPLES ENERGY CORPORATION
PART II. OTHER INFORMATION
MARCH 31, 1994
ITEM 1. LEGAL PROCEEDINGS
See Note 5 of the Notes to Consolidated Financial Statements for a
discussion pertaining to environmental matters.
See Note 6 of the Notes to Consolidated Financial Statements for a
discussion of an over-pressure condition that occurred on January 17, 1992, in
Peoples Gas' gas mains on the Near Northwest Side of the City of Chicago.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. The Company held its Annual Meeting of Stockholders on
February 25, 1994.
c. The following matters were voted upon at the Annual Meeting of
Stockholders:
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:
Pastora San Juan Cafferty, Franklin A. Cole, J. Bruce Hasch,
Frederick C. Langenberg, Homer J. Livingston, Jr., William G.
Mitchell, Earl L. Neal, Michael S. Reeves, Richard E. Terry, Richard
P. Toft, and Arthur R. Velasquez. The Inspectors of Election
certified the following vote tabulations:
<TABLE>
<CAPTION>
BROKER
FOR WITHHELD NON-VOTES
------------ ---------- -----------
<S> <C> <C> <C>
Pastora San Juan Cafferty . . . . . 29,449,584 338,960 0
Franklin A. Cole. . . . . . . . . . 29,511,929 289,796 0
J. Bruce Hasch. . . . . . . . . . . 29,613,656 220,606 0
Frederick C. Langenberg . . . . . . 29,564,123 249,911 0
Homer J. Livingston, Jr . . . . . . 29,600,474 226,283 0
William G. Mitchell . . . . . . . . 29,603,157 231,496 0
Earl L. Neal. . . . . . . . . . . . 29,560,608 250,176 0
Michael S. Reeves . . . . . . . . . 29,529,403 262,321 0
Richard E. Terry. . . . . . . . . . 29,611,294 224,219 0
Richard P. Toft . . . . . . . . . . 29,614,225 226,253 0
Arthur R. Velasquez . . . . . . . . 29,543,770 261,532 0
</TABLE>
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<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (Continued)
2. A proposal to ratify the recommendation of the Audit
Committee and the appointment by the Board of Directors of Arthur
Andersen & Co. as the independent public accountants for the Company
and its subsidiaries for the fiscal year ending September 30, 1994.
The Inspectors of Election certified the following vote tabulations:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTES
---------- ------- ------- ---------
<S> <C> <C> <C>
29,257,513 327,507 206,894 0
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
None
b. Reports on Form 8-K filed during the quarter ended
March 31, 1994
None
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<PAGE>
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.
PEOPLES ENERGY CORPORATION
(Registrant)
MAY 11, 1994 By: K. S. BALASKOVITS
- - ---------------------------------- ----------------------------------
(Date) K. S. Balaskovits
Vice President and Controller
(Same as above)
---------------------------------
Principal Accounting Officer
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