<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 JUNE 30, 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: 34,868,069 shares of Common
Stock, without par value, outstanding at July 31, 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 Nine Twelve
Months Ended Months Ended Months Ended
June 30, June 30, June 30
--------------------- ---------------------- -------------------------
1994 1993 1994 1993 1994 1993
-------- -------- --------- -------- ----------- ----------
(Thousands, Except per-Share Amounts)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Gas sales $180,408 $198,513 $1,056,097 $1,011,777 $1,171,458 $1,103,373
Transportation of customer-
owned gas 21,752 21,935 92,743 100,799 109,892 120,311
Other 4,631 3,855 11,826 10,308 15,372 13,472
-------- -------- ---------- ---------- ---------- ----------
Total Operating Revenues 206,791 224,303 1,160,666 1,122,884 1,296,722 1,237,156
-------- -------- ---------- ---------- ---------- ----------
OPERATING EXPENSES:
Gas costs 92,823 103,679 628,983 592,440 682,894 635,717
Operation 48,905 51,765 162,864 160,122 215,832 209,722
Maintenance 9,853 8,911 27,976 25,491 38,177 35,290
Depreciation 16,643 15,240 48,086 44,984 63,909 59,085
Taxes - Income 143 892 47,615 49,048 36,132 35,062
- State & local revenue 22,277 23,981 121,399 118,383 134,690 129,958
- Other 4,587 5,237 15,151 15,569 20,301 20,641
-------- -------- ---------- ---------- ---------- ----------
Total Operating Expenses 195,231 209,705 1,052,074 1,006,037 1,191,935 1,125,475
-------- -------- ---------- ---------- ---------- ----------
OPERATING INCOME 11,560 14,598 108,592 116,847 104,787 111,681
-------- -------- ---------- ---------- ---------- ----------
OTHER INCOME:
Interest income 2,390 1,276 3,932 2,466 4,410 3,504
Allowance for funds used
during construction -- -- -- -- -- 91
Miscellaneous 566 958 13,722 2,764 14,360 3,189
-------- -------- ---------- ---------- ---------- ----------
Total Other Income 2,956 2,234 17,654 5,230 18,770 6,784
-------- -------- ---------- ---------- ---------- ----------
GROSS INCOME 14,516 16,832 126,246 122,077 123,557 118,465
-------- -------- ---------- ---------- ---------- ----------
INCOME DEDUCTIONS:
Interest on long-term debt
of subsidiaries 11,336 10,806 32,898 31,311 43,101 41,574
Other interest 331 320 2,631 2,509 3,067 3,168
Amortization of debt discount
and expense 206 190 604 544 787 711
Preferred stock dividends of
a subsidiary -- 196 -- 647 71 949
Miscellaneous 39 429 118 473 (246) 498
-------- -------- ---------- ---------- ---------- ----------
Total Income Deductions 11,912 11,941 36,251 35,484 46,780 46,900
-------- -------- ---------- ---------- ---------- ----------
NET INCOME $ 2,604 $ 4,891 $ 89,995 $ 86,593 $ 76,777 $ 71,565
-------- -------- ---------- ---------- ---------- ----------
-------- -------- ---------- ---------- ---------- ----------
Average Shares of Common Stock
Outstanding 34,859 34,815 34,849 34,805 34,843 34,797
Earnings Per Share of Common Stock $ .07 $ .14 $ 2.58 $ 2.49 $ 2.20 $ 2.06
-------- -------- ---------- ---------- ---------- ----------
-------- -------- ---------- ---------- ---------- ----------
Dividends Declared Per Share $ .45 $ .445 $ 1.345 $ 1.33 $ 1.79 $ 1.77
-------- -------- ---------- ---------- ---------- ----------
-------- -------- ---------- ---------- ---------- ----------
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
( ) Denotes red figure.
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>
June 30, June 30,
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 $1,997,676 $1,950,981 $1,913,130
Less - Accumulated depreciation 668,609 632,965 631,797
---------- ---------- ----------
Net property, plant and equipment 1,329,067 1,318,016 1,281,333
Gas supply advances and investments 924 941 976
Other investments 15,662 15,420 13,473
---------- ---------- ----------
TOTAL CAPITAL INVESTMENTS - NET 1,345,653 1,334,377 1,295,782
---------- ---------- ----------
CURRENT ASSETS
Cash 4,302 8,511 13,131
Cash equivalents 170,425 16,240 53,342
Other temporary cash investments,
at cost that approximates market value 1,100 1,100 1,100
Trust fund, utility construction 44,494 4,243 13,788
Receivables -
Customers, net of allowance for
uncollectible accounts of $18,975,
$19,789, and $20,382, respectively 128,327 81,218 130,789
Other 2,660 30,698 1,891
Accrued unbilled revenues 15,049 30,038 17,296
Materials and supplies, at average cost 24,629 25,652 26,547
Gas in storage, at last-in, first-out cost 99,391 145,005 99,634
Gas costs recoverable through rate adjustments 16,929 51,526 58,874
Prepayments 2,696 2,441 3,055
---------- ---------- ----------
TOTAL CURRENT ASSETS 510,002 396,672 419,447
---------- ---------- ----------
DEFERRED CHARGES 49,690 34,821 31,257
---------- ---------- ----------
TOTAL PROPERTIES AND OTHER ASSETS $1,905,345 $1,765,870 $1,746,486
---------- ---------- ----------
---------- ---------- ----------
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</TABLE>
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The Notes to Consolidated Financial Statements are an integral part of these
statements.
-3-
<PAGE>
PEOPLES ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, June 30,
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 - 34,868,069, 34,822,842,
and 34,822,538 shares, respectively $ 276,120 $ 275,019 $ 275,015
Retained earnings 396,545 353,432 382,560
---------- ---------- ----------
Total Common Stockholders' Equity 672,665 628,451 657,575
Redeemable cumulative preferred stock
of a subsidiary, $100 par value,
exclusive of sinking fund payments
and redemptions due within one year -- -- 1,700
Long-term debt of subsidiaries,
exclusive of sinking fund payments
and maturities due within one year 626,075 528,075 528,075
---------- ---------- ----------
TOTAL CAPITALIZATION 1,298,740 1,156,526 1,187,350
---------- ---------- ----------
CURRENT LIABILITIES
Interim loans of subsidiaries 100 68,600 --
Accounts payable 124,109 118,220 111,287
Dividends payable on common stock 15,690 15,496 15,496
Customer gas service and credit deposits 18,800 43,076 22,726
Sinking fund payments and maturities, and
redemptions, due within one year -
Long-term debt of subsidiaries 4,000 4,000 4,000
Redeemable cumulative preferred stock
of a subsidiary -- 3,400 1,700
Accrued taxes 54,359 27,914 55,856
Gas sales revenue refundable through
rate adjustments 38,073 8,220 7,980
Accrued interest 9,582 10,371 9,214
Temporary LIFO liquidation credit 48,720 -- 60,679
---------- ---------- ----------
TOTAL CURRENT LIABILITIES 313,433 299,297 288,938
---------- ---------- ----------
RESERVES AND DEFERRED CREDITS
Deferred income taxes - primarily
accelerated depreciation 208,416 194,664 178,472
Investment tax credits being amortized
over the average lives of related property 40,327 41,676 42,056
Other 44,429 73,707 49,670
---------- ---------- ----------
TOTAL RESERVES AND DEFERRED CREDITS 293,172 310,047 270,198
---------- ---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES $1,905,345 $1,765,870 $1,746,486
---------- ---------- ----------
---------- ---------- ----------
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</TABLE>
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>
Nine Months Ended
June 30,
------------------------
1994 1993
----------- ---------
(Thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 89,995 $ 86,593
Adjustments to reconcile net income to net cash:
Depreciation 48,086 44,984
Deferred income taxes and investment tax credits - net 5,678 2,200
Change in other deferred credits and reserves (22,553) (5,716)
Change in deferred charges (14,869) 1,939
Other 17 29
-------- --------
106,354 130,029
Change in certain current assets and liabilities:
Receivables - net (19,071) (72,332)
Accrued unbilled revenues 14,989 6,249
Materials and supplies 1,023 579
Gas in storage 45,614 42,404
Rate adjustments recoverable or refundable 64,450 (31,657)
Accounts payable 5,889 20,294
Customer gas service and credit deposits (24,276) (25,735)
Accrued taxes 26,445 39,714
Accrued interest (789) (698)
Temporary LIFO liquidation credit 48,720 60,679
Other (254) (880)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 269,094 168,646
-------- --------
INVESTING ACTIVITIES:
Capital expenditures of subsidiaries - construction (57,859) (80,115)
Other assets (1,278) (2,563)
Other temporary cash investments -- (300)
Other long-term cash investments (514) (235)
Other capital investments 272 326
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (59,379) (82,887)
-------- --------
FINANCING ACTIVITIES:
Interim loans of subsidiaries - net (68,500) (28,900)
Issuance of long-term debt of subsidiaries 102,000 115,000
Trust fund, utility construction (40,251) (13,788)
Retirement of long-term debt of subsidiaries (4,000) (74,811)
Redemption of preferred stock of a subsidiary (3,400) (11,400)
Dividends paid on common stock (46,688) (46,105)
Issuance of common stock - net 1,100 1,011
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (59,739) (58,993)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 149,976 26,766
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 24,751 39,707
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $174,727 $ 66,473
-------- --------
-------- --------
- - ------------------------------------------------------------------------------------------
</TABLE>
( ) Denotes red figure.
The Notes to Consolidated Financial Statements are an integral part of these
statements.
-5-
<PAGE>
PEOPLES ENERGY CORPORATION
PART I. FINANCIAL INFORMATION (CONTINUED)
JUNE 30,1994
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>
PEOPLES ENERGY CORPORATION
PART I. FINANCIAL INFORMATION (CONTINUED)
JUNE 30,1994
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 nine months
ended June 30, 1994 1993
----------------------------------------------------------
(Thousands)
<S> <C> <C>
Income taxes paid $33,771 $25,334
Interest paid 35,803 34,223
</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.
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<PAGE>
PEOPLES ENERGY CORPORATION
PART I. FINANCIAL INFORMATION (CONTINUED)
JUNE 30,1994
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 June 30, 1994, such
restrictions amounted to $11.6 million out of North Shore Gas' total retained
earnings of $62.2 million.
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<PAGE>
PEOPLES ENERGY CORPORATION
PART I. FINANCIAL INFORMATION (CONTINUED)
JUNE 30,1994
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 April 6, 1994, the
Illinois Supreme Court allowed an appeal of the Appellate Court's decision.
Any change made pursuant to the Supreme Court's order on appeal would have
a prospective effect only.
- 9 -
<PAGE>
PEOPLES ENERGY CORPORATION
PART I. FINANCIAL INFORMATION (CONTINUED)
JUNE 30,1994
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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>
PEOPLES ENERGY CORPORATION
PART I. FINANCIAL INFORMATION (CONTINUED)
JUNE 30,1994
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 is 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 (S & A) with the FERC addressing GSR
costs. On May 12, 1994, the FERC issued an order approving, with
modifications, the S & A. In response to that order, Natural filed a
revised S & A on July 19, 1994. If approved by the FERC, the revised S & A
would place a cap on the amount of GSR costs recoverable by Natural from
Peoples Gas and North Shore Gas. For Peoples Gas, that cap would be
approximately $103 million and for North Shore Gas, that cap would be
approximately $25 million.
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>
PEOPLES ENERGY CORPORATION
PART I. FINANCIAL INFORMATION (CONTINUED)
JUNE 30,1994
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 (CERCLA) 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>
PEOPLES ENERGY CORPORATION
PART I. FINANCIAL INFORMATION (CONTINUED)
JUNE 30,1994
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 in McCook, Illinois, near Chicago, has
advised Peoples Gas that the owner 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 of a site in Chicago, formerly called Pitney Court
Station, 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>
PEOPLES ENERGY CORPORATION
PART I. FINANCIAL INFORMATION (CONTINUED)
JUNE 30,1994
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. ENVIRONMENTAL MATTERS (Continued)
5(a) Former Manufactured Gas Plant Sites (Continued)
Peoples Gas has observed what appear to be gas purification wastes on
a site in Chicago, formerly called the 110th Street Station, 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 current owners at a site in Chicago, formerly called South
Station, have recently advised Peoples Gas that they have 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 is currently evaluating this claim.
Peoples Gas recently became aware of a planned residential development
at a site in Chicago, formerly called the Equitable Distribution Station.
The current owners of the site and Peoples Gas have agreed that Peoples Gas
should conduct a preliminary investigation to determine whether gas
manufacturing wastes are present at the site.
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 June 30, 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 the
110th Street Station 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.
- 14 -
<PAGE>
PEOPLES ENERGY CORPORATION
PART I. FINANCIAL INFORMATION (CONTINUED)
JUNE 30,1994
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. ENVIRONMENTAL MATTERS (Continued)
5(a) FORMER MANUFACTURED GAS PLANT SITES (Continued)
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 June 30, 1994 have not
been reduced to reflect recoveries from insurance carriers.
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 June 30, 1994, the subsidiaries had
recovered $3.8 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 SITE
In February 1994, North Shore Gas received a demand from a responsible
party under CERCLA 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.
- 15 -
<PAGE>
PEOPLES ENERGY CORPORATION
PART I. FINANCIAL INFORMATION (CONTINUED)
JUNE 30,1994
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. ENVIRONMENTAL MATTERS (Continued)
5(c) CLEAN WATER ACT PERMIT
Peoples District Energy is 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 other partner is a subsidiary of
Trigen Energy Corporation (Trigen), a company whose primary business is
constructing and operating district energy facilities. The partnership's
operations include operation of existing heating and cooling equipment at
McCormick Place through agreement with the exposition center's owner, the
Metropolitan Pier and Exposition Authority (MPEA). In connection with
these operations, the partnership reviewed McCormick Place's compliance
with the National Pollutant Discharge Elimination System (NPDES),
established under the Clean Water Act and found that the MPEA did not have
the necessary NPDES permit for the discharge of cooling water into Lake
Michigan. The partnership and the MPEA have applied to the IEPA for the
requisite permit. Failure to obtain the permit could result in the
partnership's having to obtain alternative cooling facilities at
substantial cost. Management expects to obtain the NPDES permit and
believes that the costs associated with the permit will not be material.
(See Note 7 for a discussion of the partnership's operations at McCormick
Place.)
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.
- 16 -
<PAGE>
PEOPLES ENERGY CORPORATION
PART I. FINANCIAL INFORMATION (CONTINUED)
JUNE 30,1994
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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
- 17 -
<PAGE>
PEOPLES ENERGY CORPORATION
PART I. FINANCIAL INFORMATION (CONTINUED)
JUNE 30,1994
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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, Trigen-Peoples District Energy Company, 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. 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
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.
- 18 -
<PAGE>
PEOPLES ENERGY CORPORATION
PART I. FINANCIAL INFORMATION (CONTINUED)
JUNE 30,1994
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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. (See
Note 5(c) for a discussion of certain environmental matters relating to the
partnership.)
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 June 30, 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.
- 19 -
<PAGE>
PEOPLES ENERGY CORPORATION
PART I. FINANCIAL INFORMATION (CONTINUED)
JUNE 30,1994
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 at 6.37 percent
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.
- 20 -
<PAGE>
PEOPLES ENERGY CORPORATION
PART I. FINANCIAL INFORMATION (CONTINUED)
JUNE 30,1994
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 $110.6 million. The unfunded
obligation will be amortized over 20 years. The cost for fiscal 1994 is
approximately $15.9 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.
- 21 -
<PAGE>
PEOPLES ENERGY CORPORATION
PART I. FINANCIAL INFORMATION (CONTINUED)
JUNE 30,1994
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 $2.3 million, to
$2.6 million, for the three-month period ended June 30, 1994, from the results
of last year's third quarter. The current quarter was adversely affected by
lower gas deliveries resulting from weather that was 13 percent warmer than the
prior year's similar quarter and, to a lesser extent, from customer conservation
measures.
Net income applicable to common stock for the nine- and 12-month periods
rose $3.4 million, to $90.0 million and $5.2 million, to $76.8 million,
respectively, from the results of last year's like periods. Results for the
current nine- 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 IRS
settlement, the current nine- and 12-month periods benefited from weather that
was 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 nine- and 12-month results were partially
offset by higher operating expenses, including increases in labor costs,
depreciation expense, and the provision for uncollectible accounts. Customer
conservation measures and an increase in the federal income tax rate also
negatively impacted both current periods.
The Company expects that earnings for the entire 1994 fiscal year through
September 30 will be in the range of $2.05 to $2.15 per share, which would
approximate 1993's performance of $2.11 per share.
A summary of variations affecting income between periods is presented
below, with explanations of significant differences following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended 12 Months Ended
June 30, June 30, June 30,
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* $(4,952) (5.1) $(1,777) (0.4) $7,657 1.6
Operation and
maintenance expenses (1,918) (3.2) 5,227 2.8 8,997 3.7
Depreciation expense 1,403 9.2 3,102 6.9 4,824 8.2
Income taxes (749) (84.0) (1,433) (2.9) 1,070 3.1
Other income 722 32.3 12,424 237.6 11,986 176.7
Income deductions (29) (0.2) 767 2.2 (120) (0.3)
Net Income (2,287) (46.8) 3,402 3.9 5,212 7.3
- - -----------------------------------------------------------------------------------------------------------------
</TABLE>
( ) Denotes red figure.
* Operating revenues, net of gas costs and revenue taxes.
- 22 -
<PAGE>
PEOPLES ENERGY CORPORATION
PART I. FINANCIAL INFORMATION (CONTINUED)
JUNE 30,1994
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 decreased $5.0 million, to $91.7 million and
$1.8 million, to $410.3 million, for the current three- and nine-month periods,
respectively. The three-month period included weather that was 13 percent
warmer than the similar year-ago quarter ; the nine-month period included
weather that was 2 percent colder than the like year-ago period. Both current
periods were adversely affected by customer conservation measures.
Net operating revenues increased $7.7 million, to $479.1 million, for the
current 12-month period, due principally to the impact of the October 1992 rate
increase for Peoples Gas (increasing net operating revenues by $9.8 million, or
$6.0 million after income taxes). The 12-month period also was affected by a
rise in customer conservation measures, partially offset by weather that was
2 percent colder than the prior 12-month period.
OPERATION AND MAINTENANCE
Operation and maintenance expenses decreased $1.9 million, to
$58.8 million, for the current three-month period, due primarily to lower
employee benefits expenses for group insurance and pensions.
- 23 -
<PAGE>
PEOPLES ENERGY CORPORATION
PART I. FINANCIAL INFORMATION (CONTINUED)
JUNE 30,1994
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (Continued)
RESULTS OF OPERATIONS (Continued)
OPERATION AND MAINTENANCE (Continued)
Operation and maintenance expenses increased $5.2 million, to
$190.8 million and $9.0 million, to $254.0 million, for the current nine-, and
12-month periods, respectively, due mainly to increases in labor costs
associated with this year's extreme winter conditions and the provision for
uncollectible accounts, partially offset by a reduction of environmental clean-
up costs recovered through rates.
DEPRECIATION EXPENSE
Depreciation expense increased $1.4 million, to $16.6 million,
$3.1 million, to $48.1 million, and $4.8 million, to $63.9 million, for the
current three-, nine-, and 12-month periods, respectively, due primarily to
depreciable property additions.
INCOME TAXES
Income taxes decreased $749,000, to $143,000, for the current three-month
period, due principally to lower pre-tax income, offset in part, by decreased
adjustments to deferred taxes.
Income taxes, exclusive of the $3.3 million included in other income
related to the IRS settlement (see Note 8 of the Notes to Consolidated Financial
Statements), decreased $1.4 million, to $47.6 million, for the current nine-
month period, due mainly to lower pre-tax income, partially offset by the
federal income tax rate change from 34 percent to 35 percent effective
January 1, 1993, and decreased adjustments to deferred taxes.
Income taxes, exclusive of the $3.3 million included in other income
related to the IRS settlement, increased $1.1 million, to $36.1 million, for the
current 12-month period, due primarily to the aforementioned federal income tax
rate change and decreased adjustments to deferred taxes, offset in part, by
lower pre-tax income.
OTHER INCOME
Other income increased $722,000, to $3.0 million, for the current three-
month period, due mainly to higher interest income reflecting larger cash
balances available for investment and to increased interest income resulting
from the proceeds being held in a trust fund generated from Peoples Gas'
December 1993 bond issuance. (See Note 9 of the Notes to Consolidated Financial
Statements.)
- 24 -
<PAGE>
PEOPLES ENERGY CORPORATION
PART I. FINANCIAL INFORMATION (CONTINUED)
JUNE 30,1994
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (Continued)
RESULTS OF OPERATIONS (Continued)
OTHER INCOME (Continued)
Other income increased $12.4 million, to $17.7 million and $12.0 million,
to $18.8 million, for the respective current nine- 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.)
In addition, both the nine- and 12-month periods include $1.1 million of
interest income resulting from the aforementioned trust fund.
INCOME DEDUCTIONS
Income deductions increased $767,000, to $36.3 million for the current
nine- month period, 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.)
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<PAGE>
PEOPLES ENERGY CORPORATION
PART I. FINANCIAL INFORMATION (CONTINUED)
JUNE 30,1994
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.
On June 10, five customers of Peoples Gas filed a complaint in the Cook
County Circuit Court asserting that the use tax is invalid on constitutional
grounds and naming the City of Chicago, the Chicago Director of Revenue, and
Peoples Gas as defendants. Under the collection agreement between Peoples Gas
and the City, if the use tax were found invalid, Peoples Gas would not be
responsible for making any refunds to customers and would not be required to
refund any fees to the City.
Peoples Gas and North Shore Gas are undertaking a major project to
reengineer their operations with the goal of increasing efficiency,
responsiveness to customer needs and cost effectiveness. The project is
expected to commence in September, 1994 and to continue for at least two years.
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<PAGE>
PEOPLES ENERGY CORPORATION
PART I. FINANCIAL INFORMATION (CONTINUED)
JUNE 30,1994
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 June 30, 1994,
such restrictions amounted to $11.6 million out of North Shore Gas' total
retained earnings of $62.2 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, Trigen-Peoples District Energy Company,
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 Notes 5(c) and 7 of the Notes to
Consolidated Financial Statements.)
INTEREST COVERAGE. Peoples Gas' fixed charges coverage ratios for the 12 months
ended June 30, 1994, and fiscal 1993 and 1992 were 3.49, 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 3.36, 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 a net gain of $3.8 million on the
sale of property at Deerfield.
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<PAGE>
PEOPLES ENERGY CORPORATION
PART I. FINANCIAL INFORMATION (CONTINUED)
JUNE 30,1994
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 CERCLA 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. (See Note 5(b) of the Notes to Consolidated
Financial Statements.)
Trigen-Peoples District Energy Company has applied for an NPDES permit
under the Clean Water Act. (See Note 5(c) of the Notes to Consolidated
Financial Statements.)
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. (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.)
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<PAGE>
PEOPLES ENERGY CORPORATION
PART I. FINANCIAL INFORMATION (CONTINUED)
JUNE 30,1994
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
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 at
6.37 percent due May 1, 2003. (See Note 9 of the Notes to Consolidated
Financial Statements.)
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.
On July 1, 1994, the utility subsidiaries again reduced their lines of credit to
approximately $131 million from $154 million. Agreements covering $93.7 million
of the total will expire on June 29, 1995. The agreement covering the remaining
$37.4 million will expire on January 31, 1997. 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 unitary tax issues and 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
JUNE 30,1994
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.
See Management's Discussion and Analysis of Results of Operations and
Financial Condition, Results of Operations - Other Matters for a discussion
pertaining to the Chicago Gas Use Tax.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
None
b. Reports on Form 8-K filed during the quarter ended June 30, 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)
AUGUST 12, 1994 By: /s/ K. S. BALASKOVITS
- - ----------------------------- -------------------------------
(Date) K. S. Balaskovits
Vice President and Controller
(SAME AS ABOVE)
---------------------------------
Principal Accounting Officer
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