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, 1995
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.)
24th Floor, 130 East Randolph Drive, Chicago, Illinois 60601-6207
(Address of principal executive offices) (Zip Code)
(312) 240-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes / X / No / /
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
34,898,909 shares of Common Stock, without par value, outstanding
at April 30, 1995.
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Peoples Energy Corporation
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Six Twelve
Months Ended Months Ended Months Ended
March 31, March 31, March 31,
--------------- ---------------- ----------------
1995 1994 1995 1994 1995 1994
------ ------- ------ ------ ------ -------
(Thousands, Except per-Share Amounts)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Gas sales $375,642 $533,410 $642,193 $875,690 $ 920,432 $1,189,564
Transportation of customer-
owned gas 45,313 37,591 78,065 70,990 117,203 110,074
Other 3,431 3,592 11,250 7,195 19,487 14,596
-------- -------- ------- ------- --------- ---------
Total Operating Revenues 424,386 574,593 731,508 953,875 1,057,122 1,314,234
-------- -------- ------- ------- --------- ---------
OPERATING EXPENSES:
Gas costs 211,034 334,458 357,121 536,160 490,000 693,750
Operation 49,676 59,733 98,400 113,958 205,207 218,691
Maintenance 10,441 9,722 19,863 18,123 39,687 37,235
Depreciation 16,836 16,218 33,355 31,443 66,596 62,506
Taxes - Income 27,357 30,318 41,246 47,472 25,828 36,881
- State & local revenue 46,045 59,929 77,291 99,122 110,903 136,394
- Other 5,732 5,781 10,746 10,564 20,632 20,951
-------- ------- ------- ------- ------- ---------
Total Operating Expenses 367,121 516,159 638,022 856,842 958,853 1,206,408
-------- ------- ------- ------- ------- ---------
OPERATING INCOME 57,265 58,434 93,486 97,033 98,269 107,826
-------- ------- ------- ------- ------- ---------
OTHER INCOME:
Interest income 1,791 1,085 3,151 1,542 7,776 3,296
Miscellaneous 452 1,320 966 13,155 2,439 14,751
------- ------- ------- ------- ------ --------
Total Other Income 2,243 2,405 4,117 14,697 10,215 18,047
------- ------- ------- ------- ------ --------
GROSS INCOME 59,508 60,839 97,603 111,730 108,484 125,873
------- ------- ------- ------- ------- --------
INCOME DEDUCTIONS:
Interest on long-term debt
of subsidiaries 11,426 11,336 22,773 21,563 45,445 42,572
Other interest 1,996 855 3,372 2,300 4,083 3,056
Amortization of debt discount
and expense 227 206 430 397 843 771
Preferred stock dividends of
a subsidiary -- -- -- -- -- 267
Miscellaneous 40 38 82 78 160 143
------- ------- ------- ------- ------- ------
Total Income Deductions 13,689 12,435 26,657 24,338 50,531 46,809
------- ------- ------- ------- ------- -------
NET INCOME $ 45,819 $ 48,404 $ 70,946 $ 87,392 $ 57,953 $ 79,064
======= ======= ======= ======= ======== ========
Average Shares of Common Stock
Outstanding 34,899 34,851 34,892 34,844 34,878 34,832
Earnings Per Share of Common Stock $ 1.31 $ 1.39 $ 2.03 $ 2.51 $ 1.66 $ 2.27
===== ====== ===== ====== ====== =======
Dividends Declared Per Share $ .45 $ .45 $ .90 $ .895 $ 1.80 $ 1.785
===== ====== ===== ====== ====== =======
<FN>
The Notes to Consolidated Financial Statements are an integral part of these statements.
</FN>
</TABLE>
<TABLE>
Peoples Energy Corporation
CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31, March 31,
1995 September 30, 1994
(Unaudited) 1994 (Unaudited)
----------- ------------ -----------
(Thousands)
PROPERTIES AND OTHER ASSETS
CAPITAL INVESTMENTS:
<S> <C> <C> <C>
Property, plant and equipment,
at original cost $2,050,231 $2,019,379 $1,981,589
Less - Accumulated depreciation 699,191 677,447 656,882
--------- --------- ---------
Net property, plant and equipment 1,351,040 1,341,932 1,324,707
Other investments 15,145 16,289 20,354
--------- --------- ---------
TOTAL CAPITAL INVESTMENTS - NET 1,366,185 1,358,221 1,345,061
--------- --------- ---------
CURRENT ASSETS:
Cash 42,272 3,667 11,926
Cash equivalents 174,130 73,584 101,216
Other temporary cash investments,
at cost that approximates market value 1,000 1,000 1,100
Trust fund, utility construction -- 31,493 57,234
Receivables -
Customers, net of allowance for
uncollectible accounts of $20,974,
$24,289, and $20,346, respectively 144,950 73,959 239,648
Other 4,210 2,224 13,685
Accrued unbilled revenues 44,345 19,922 51,794
Materials and supplies, at average cost 26,170 23,855 24,813
Gas in storage, at last-in, first-out cost 72,540 151,005 64,650
Gas costs recoverable through rate adjustments 8,394 14,426 23,821
Prepayments 3,589 2,050 3,516
-------- -------- --------
TOTAL CURRENT ASSETS 521,600 397,185 593,403
-------- -------- --------
DEFERRED CHARGES 57,172 53,880 48,988
-------- -------- --------
TOTAL PROPERTIES AND OTHER ASSETS $1,944,957 $1,809,286 $1,987,452
========= ========= =========
<FN>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
</FN>
</TABLE>
<TABLE>
Peoples Energy Corporation
CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31, March 31,
1995 September 30, 1994
(Unaudited) 1994 (Unaudited)
----------- ---------- -----------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
<S> <C> <C> <C>
Common Stockholders' Equity:
Common stock, without par value
Authorized - 60,000,000 shares
Outstanding - 34,898,909, 34,868,069,
and 34,850,350 shares, respectively $ 276,771 $ 276,120 $ 275,678
Retained earnings 404,795 365,258 409,633
-------- --------- ---------
Total Common Stockholders' Equity 681,566 641,378 685,311
Long-term debt of subsidiaries,
exclusive of sinking fund payments
and maturities due within one year 621,956 626,075 626,075
-------- --------- ---------
TOTAL CAPITALIZATION 1,303,522 1,267,453 1,311,386
--------- --------- ---------
CURRENT LIABILITIES:
Interim loans of subsidiaries 900 900 900
Accounts payable 104,371 109,135 116,294
Dividends payable on common stock 15,705 15,690 15,683
Customer gas service and credit deposits 29,499 45,420 16,537
Sinking fund payments and maturities,
due within one year -
Long-term debt of subsidiaries 4,000 4,000 4,000
Accrued taxes 72,025 28,936 92,530
Gas sales revenue refundable through
rate adjustments 73,335 50,943 12,001
Accrued interest 11,991 12,942 12,532
Temporary LIFO liquidation credit 58,410 -- 113,234
-------- -------- --------
TOTAL CURRENT LIABILITIES 370,236 267,966 383,711
-------- -------- --------
RESERVES AND DEFERRED CREDITS:
Deferred income taxes - primarily
accelerated depreciation 200,021 189,938 201,912
Investment tax credits being amortized
over the average lives of related property 39,003 39,887 40,792
Other 32,175 44,042 49,651
--------- -------- --------
TOTAL RESERVES AND DEFERRED CREDITS 271,199 273,867 292,355
--------- -------- --------
TOTAL CAPITALIZATION AND LIABILITIES $1,944,957 $1,809,286 $1,987,452
========= ========= =========
<FN>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
</FN>
</TABLE>
<TABLE>
Peoples Energy Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Ended
March 31,
-----------------
1995 1994
------- --------
(Thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 70,946 $ 87,392
Adjustments to reconcile net income to net cash:
Depreciation 33,355 31,443
Deferred income taxes and investment tax credits - net 7,950 1,338
Change in other deferred credits and reserves (10,618) (19,030)
Change in deferred charges (3,292) (14,167)
Other 38 18
Change in current assets and liabilities:
Receivables - net (72,977) (141,417)
Accrued unbilled revenues (24,423) (21,756)
Materials and supplies (2,315) 840
Gas in storage 78,465 80,355
Rate adjustments recoverable or refundable 28,424 31,486
Accounts payable (4,764) (1,926)
Customer gas service and credit deposits (15,921) (26,539)
Accrued taxes 43,089 64,616
Accrued interest (951) 2,161
Temporary LIFO liquidation credit 58,410 113,234
Other (1,539) (1,075)
-------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 183,877 186,973
-------- -------
INVESTING ACTIVITIES:
Capital expenditures of subsidiaries - construction (41,374) (37,494)
Other assets (1,089) (640)
Other long-term cash investments 1,555 (273)
Other capital investments (448) (3,737)
--------- --------
NET CASH USED IN INVESTING ACTIVITIES (41,356) (42,144)
--------- --------
FINANCING ACTIVITIES:
Interim loans of subsidiaries - net -- (67,700)
Issuance of long-term debt of subsidiaries -- 102,000
Trust fund, utility construction 31,493 (52,992)
Retirement of long-term debt of subsidiaries (4,119) (4,000)
Redemption of preferred stock of a subsidiary -- (3,400)
Dividends paid on common stock (31,395) (31,005)
Issuance of common stock 651 659
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (3,370) (56,438)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 139,151 88,391
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 77,251 24,751
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $216,402 $113,142
======= =======
<FN>
The Notes to Consolidated Financial Statements are an integral part of these statements.
</FN>
</TABLE>
Peoples Energy Corporation
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), Peoples
District Energy Corporation (Peoples District Energy), Peoples
Energy Services Corporation, and Peoples NGV Corp., 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, 1994.
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
2A 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.
2B Basis of Accounting
The Company and its utility subsidiaries account for their
regulated operations in accordance with Statement of Financial
Accounting Standards (SFAS) No. 71, "Accounting for the Effects
of Certain Types of Regulation." This standard controls the
application of generally accepted accounting principles for
companies whose rates are determined by an independent
regulator. Regulatory assets represent certain costs which
have been or are expected to be recovered from customers
through the ratemaking process. When such costs occur, they
are deferred as assets in the balance sheet and recorded as
expenses when like amounts are included in rates.
2C 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.
<TABLE>
Income taxes and interest paid (excluding capitalized
interest) were as follows:
<CAPTION>
For the six months
ended March 31, 1995 1994
-----------------------------------------------
(Thousands)
<S> <C> <C>
Income taxes paid $12,478 $26,954
Interest paid 24,351 21,315
</TABLE>
2D Income Taxes
In March 1993, the Company adopted, effective October 1,
1992, the liability method of accounting for deferred income
taxes required by 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.
2E Recovery of Gas Costs, Including Charges for 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.
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
through 1995 and North Shore Gas for fiscal years 1991
through 1995 are currently pending before the Commission.
Pursuant to Federal Energy Regulatory Commission (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 the Gas Charge. The Commission entered an order on
March 9, 1994, providing for the full recovery of all such
charges from customers. In September 1994, the Commission
entered orders on rehearing that retained the provision for
full recovery from customers. (See Notes 4A and 4B.)
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, 1995, such restrictions amounted to $11.6
million out of North Shore Gas' total retained earnings of $54.2
million.
4. RATES AND REGULATION
4A Utility Rate Proceedings
Rate Filings. On December 16, 1994, Peoples Gas filed with the
Commission proposed changes in rates that are designed to
increase annual revenues by about $59.9 million, exclusive of
additional charges for revenue taxes. Peoples Gas is seeking a
rate of return on original-cost rate base of 10.03 percent, which
reflects a 12.7 percent cost of common equity.
On December 16, 1994, North Shore Gas filed with the
Commission proposed changes in rates that are designed to
increase annual revenues by about $10.1 million, exclusive of
additional charges for revenue taxes. North Shore Gas is seeking
a rate of return on original-cost rate base of 10.50 percent,
which reflects a 12.6 percent cost of common equity.
The Company expects that the Commission, following its usual
practices, will not issue decisions regarding Peoples Gas' and
North Shore Gas' rate increase requests until November 1995. The
Company cannot predict the outcome of its utility subsidiaries'
rate increase requests.
Environmental Cost Recovery. In 1992, the Commission issued an
order in its consolidated proceedings, initiated in 1991,
regarding the appropriate ratemaking treatment of environmental
costs relating to past manufactured gas operations 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 over a five-year period, but required the
utilities to "share" the environmental costs by disallowing rate
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 1992, several parties,
including Peoples Gas and North Shore Gas, appealed the
Commission's order to the Illinois Appellate Court. In 1993, the
Third District Appellate Court issued its opinion affirming the
Commission's order in the consolidated proceedings, which
decision was subsequently appealed to the Illinois Supreme Court.
In April 1995, the Illinois Supreme Court upheld in part and
reversed in part the Commission's order. The Supreme Court
upheld the Commission in ruling that environmental costs are
recoverable through rates. The Supreme Court also ruled that the
Commission's approval of a rate recovery method called a "rider"
(the method utilized by Peoples Gas and North Shore Gas) as the
preferred mechanism for recovery of environmental costs is within
the Commission's authority. The Supreme Court reversed the part
of the Commission's order that required the utilities to share
environmental costs by disallowing recovery of carrying charges
on unrecovered balances. The order was remanded to the
Commission for further proceedings consistent with the Supreme
Court's opinion. Any change made pursuant to the Supreme Court's
decision will have a prospective effect only.
FERC Order No. 636 Cost Recovery. 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' gas service
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. In September 1994, the
Commission entered orders on rehearing. In its orders on
rehearing, the Commission continued to provide for full recovery
of transition costs, but directed that, effective November 1,
1994, gas supply realignment (GSR) costs (one of the four
categories of transition costs) be recovered on a uniform
volumetric basis from all transportation and sales customers. In
December 1994, a group of industrial transportation customers of
Illinois utilities appealed the Commission's orders on rehearing
to the Illinois Appellate Court. Any change made pursuant to the
Illinois Appellate Court's order on appeal would have a
prospective effect only. (See Notes 2E and 4B.)
4B FERC Orders 636, 636-A, and 636-B
In 1992, the FERC issued Order Nos. 636, 636-A, and 636-B.
Numerous appeals of the 636 Orders are pending before the Federal
Circuit Court of Appeal for the D.C. Circuit.
The 636 Orders require substantial restructuring of the
service obligations of interstate pipelines. Among other things,
the 636 Orders mandated "unbundling" of existing pipeline gas
sales services. Further, the 636 Orders provided for mechanisms
for pipelines to recover prudently incurred transition costs
associated with the restructuring process.
The restructured tariffs of Natural Gas Pipeline Company of
America (Natural), the principal pipeline serving Peoples Gas and
North Shore Gas, went into 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 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 GSR costs. The utilities are subject to charges for
transition cost recovery by Natural. Charges by Natural for
transition costs commenced on January 1, 1994. On September 29,
1994, the FERC approved a Stipulation and Agreement (Agreement)
filed by Natural. The Agreement places a cap on the amount of
GSR costs recoverable by Natural from Peoples Gas and North Shore
Gas. For Peoples Gas, that cap is approximately $103 million and
for North Shore Gas, that cap is approximately $25 million.
However, subject to these caps, the level of costs that Peoples
Gas and North Shore Gas will incur is dependent primarily upon
the future market price of natural gas and pipeline negotiations
with producers. Peoples Gas and North Shore Gas are currently
recovering transition costs through the Gas Charge. As of March
31, 1995, Peoples Gas and North Shore Gas have accrued $41.7
million and $10.2 million, and have made payments of $31.7
million and $7.8 million, respectively, toward the caps.
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 2E and 4A.)
5. ENVIRONMENTAL MATTERS
5A Former Manufactured Gas Plant Operations
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 rather than sold. 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 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. In December
1994, North Shore Gas filed suit against EJ&E in the District
Court for the Northern District of Illinois, seeking recovery of
response costs incurred by North Shore Gas at the Waukegan II
Site.
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 the 110th Street Station site (discussed 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 the
Pitney Court Station and Division Street sites under the
supervision of the IEPA. In addition, Peoples Gas is conducting
investigations under the supervision of the IEPA at the 110th
Street Station and Equitable Distribution Station sites.
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.
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 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.
In 1994, Peoples Gas became aware of a planned residential
development at a site in Chicago, formerly called the Equitable
Distribution Station. Peoples Gas is conducting 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 March 31, 1995, the total of
the costs deferred by the subsidiaries, net of recoveries and
amounts billed to other entities, was $17.5 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.
Peoples Gas and North Shore Gas have filed suit against a
number of insurance carriers for the recovery of environmental
costs relating to 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, 1995 have not
been reduced to reflect recoveries from insurance carriers.
Costs incurred by Peoples Gas or North Shore Gas for
environmental activities relating to former manufactured gas
operations will be recovered from insurance carriers or other
entities or through rates for utility service. Accordingly,
management believes that the costs incurred by the 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 recovering the
costs of environmental activities relating to the utilities'
former manufactured gas operations under rate mechanisms approved
by the Commission. As of March 31, 1995, the subsidiaries had
recovered $4.1 million of such costs through rates. (See Note 4A
for a discussion of proceedings regarding the recovery of such
costs through utility rates.)
5B Former Mineral Processing Site in Denver, Colorado
In February 1994, North Shore Gas received a demand from the
S.W. Shattuck Chemical Company, Inc. (Shattuck), a responsible
party under CERCLA, for reimbursement, indemnification and
contribution for response costs incurred at a former mineral
processing site in Denver, Colorado. Shattuck is a wholly owned
subsidiary of Salomon, Inc. (Salomon). The demand alleges that
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 by Shattuck to be
approximately $31 million. Salomon has provided financial
assurance for the performance of the remediation at the site.
North Shore Gas does not believe that it has liability for the
response costs, but cannot determine the matter with certainty.
At this time, North Shore Gas cannot reasonably estimate what
range of loss, if any, may occur. In the event that North Shore
Gas incurred liability, it would pursue reimbursement from
insurance carriers, other responsible parties, if any, and
through its rates for utility service.
In November 1994, North Shore Gas filed a declaratory judgment
action against Salomon in the District Court for the Northern
District of Illinois. The suit asks the court to declare that
North Shore Gas is not liable for response costs incurred or to
be incurred at the Denver 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.
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 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
Energy Corporation (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 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 effectively 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 obtain debt financing for a major portion of the
project.
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 1994 payments of principal and
interest to the Company in total amount of approximately $28
million, or $21.6 million after income taxes. Both Peoples Gas
and North Shore Gas received regulatory authorization to defer
the recognition of the settlement amount in income for fiscal
year 1993, and to recognize its portion of the settlement amount
in income for fiscal years 1994 and 1995. Each utility
represented to the Commission that, having received this
accounting authorization, it would 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 $10.8 million after income taxes, in income in 1994.
The amount after income taxes was included in Other Income -
Miscellaneous. At September 30, 1994, approximately $14 million
was included in Reserves and Deferred Credits - Other.
As a result of the Commission's accounting authorization, the
fiscal year 1995 portion of the settlement amount for Peoples Gas
and North Shore Gas is being amortized (credited) to operation
expense. The effect is to offset increases in costs that the
utilities will incur during the year. In the six months ended
March 31, 1995, the utilities together amortized approximately
$10.6 million, or $8.0 million after income taxes, leaving a
remaining balance of about $3.6 million included in Reserves and
Deferred Credits - Other.
9. LONG-TERM DEBT
9A 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 may issue all or a portion of the remaining bonds
during fiscal 1995 and/or fiscal 1996. Proceeds of any 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 percent 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 were held in
a trust fund until drawn by Peoples Gas for reimbursement of
construction expenditures. The final draw occurred in February
1995. All assets financed through this arrangement must be
depreciated on a straight-line basis for tax purposes.
9B 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, 1994, have been remarketed. The interest rate on such
bonds is 4.20 percent for the period October 1, 1994, through
September 30, 1995.
The rate of interest on the City of Chicago 1993 Series B
Bonds, which are secured by Peoples Gas' Adjustable-Rate Bonds,
Series EE, 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. All Series B Bonds that were tendered prior to
December 1, 1994, have been remarketed. The interest rate on
such bonds is 4.95 percent for the period December 1, 1994,
through November 30, 1995.
SFAS No. 6 sets forth the requirements for excluding from
current liabilities in the Company's financial statements
obligations that would otherwise be considered short-term
obligations. In order to meet these requirements, Peoples Gas
established a three year line of credit with The Northern Trust
Company in the amount of $37.4 million. If Peoples Gas were
required to purchase all or a part of the aforementioned
adjustable-rate bonds, Peoples Gas could draw on the line of
credit to fund such purchase or purchases.
10. POSTEMPLOYMENT BENEFITS
In November 1992, the Financial Accounting Standards Board
(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. The Company adopted SFAS No.
112 effective October 1, 1994. Implementation of this statement
did not have a material effect on financial position or results
of operations.
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 $2.6 million,
to $45.8 million, for the three-months ended March 31, 1995, due
mainly to weather that was more than 12 percent warmer than the
year-ago quarter. This decrease was partially offset by lower
operation and maintenance expenses resulting primarily from the
current quarter's benefit of recognizing about $4.7 million after
income taxes from a previously announced federal income tax
settlement. (See Note 8 of the Notes to Consolidated Financial
Statements.) Also favorably impacting the current three-month
period was a decrease in the provision for uncollectible accounts
that was prompted by a drop in revenues.
Net income applicable to common stock decreased $16.4 million,
to $70.9 million, and $21.1 million, to $58.0 million, for the
current six- and 12-month periods, respectively, from the results
of last year's like periods. Results for the current six- and
12-month periods were negatively affected by weather that was 16
percent warmer than the respective prior periods and by the
timing difference in recognizing benefits from the tax
settlement.
<TABLE>
A summary of variations affecting income between periods is
presented below, with explanations of significant differences
following:
<CAPTION>
Three Months Ended Six Months Ended 12 Months Ended
March 31, 1995 March 31, 1995 March 31, 1995
Increase/(Decrease) Increase/(Decrease) Increase/(Decrease)
from Prior Period from Prior Period from Prior Period
------------------ ------------------- ------------------
(Thousands of dollars) Amount % Amount % Amount %
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net operating revenues (a) $(12,899) (7.2) $(21,497) (6.7) $(27,871) (5.8)
Operation and
maintenance expenses (9,338) (13.4) (13,818) (10.5) (11,032) (4.3)
Depreciation expense 618 3.8 1,912 6.1 4,090 6.5
Income taxes (2,961) (9.8) (6,226) (13.1) (11,053) (30.0)
Other income (162) (6.7) (10,580) (72.0) (7,832) (43.4)
Income deductions 1,254 10.1 2,319 9.5 3,722 8.0
Net Income (2,585) (5.3) (16,446) (18.8) (21,111) (26.7)
- --------------------------------------------------------------------------------------------
<FN>
(a) Operating revenues, net of gas costs and revenue taxes.
</FN>
</TABLE>
Net Operating Revenues
Gross revenues of Peoples Gas and North Shore Gas are affected
by changes in the unit cost of the subsidiaries' gas purchases
and do not include the cost of gas supplies for customers who
purchase gas directly from producers and marketers rather than
from the subsidiaries. The 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 2E 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' gas purchases from producers or marketers
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 $12.9 million, to $167.3
million, $21.5 million, to $297.1 million, and $27.9 million, to
$456.2 million, for the three-, six-, and 12-month periods,
respectively. These results were caused by warmer weather in
each of the more recent periods.
See Other Matters - Operating Statistics for details of
selected financial and operating information by gas service
classification.
Operation and Maintenance Expenses
Operation and maintenance expenses decreased $9.3 million, to
$60.1 million, and $13.8 million, to $118.3 million, for the
current three- and six-month periods, respectively, due
principally to recognizing approximately $6.2 million for the
second quarter's portion and $10.6 million for the fiscal 1995 to
date portion of the balance of the IRS settlement. (See Note 8
of the Notes to Consolidated Financial Statements.)
Additionally, the provision for uncollectible accounts decreased
about $2.9 million in the current three- and six-month periods
from the similar prior periods, reflecting the reduction in sales
revenues due to warmer weather.
Operation and maintenance expenses decreased $11.0 million, to
$244.9 million, for the 12-month period, due mainly to
recognizing about $10.6 million for the aforementioned IRS
settlement in the current period. Also, lower group insurance
expenses ($1.6 million) related to reduced SFAS No. 106 costs
based on lower assumed health care costs and a decline in pension
expenses ($2.0 million) principally reflecting a discount rate
change were partially offset by an increase in the provision for
uncollectible accounts ($3.5 million), which includes a $3.7
million increase to adjust the balance sheet allowance.
Depreciation Expense
Depreciation expense increased $618,000, to $16.8 million,
$1.9 million, to $33.4 million, and $4.1 million, to $66.6
million, for the current three-, six-, and 12-month periods,
respectively, due primarily to depreciable property additions.
Income Taxes
Income taxes, exclusive of amounts included in other income
related to an IRS settlement, declined $3.0 million, to $27.4
million, $6.2 million, to $41.2 million, and $11.1 million, to
$25.8 million, for the current three-, six-, and 12-month
periods, due principally to lower pre-tax income.
Other Income
Other income declined $10.6 million, to $4.1 million, for the
current six-month period, due primarily to recognizing one-half
of the IRS settlement of about $10.7 million after income taxes
in last year's similar period. (See Note 8 of the Notes to
Consolidated Financial Statements.)
Other income declined $7.8 million, to $10.2 million, for the
current 12-month period, due mainly to the recognition of the
above mentioned IRS settlement ($10.7 million after income taxes)
in the prior 12-month period. This decrease was partially offset
by higher interest income reflecting larger cash balances
available for investment.
Income Deductions
Income deductions increased $1.3 million, to $13.7 million,
$2.3 million, to $26.7 million, and $3.7 million, to $50.5
million, for the current three-, six-, and 12-month periods,
respectively, due chiefly to increased interest expense on the
following items: long-term debt, amounts refundable to
customers, and budget accounts. These increased items were
partially offset by decreased interest on short-term borrowings.
Other Matters
Effect of Weather. Weather variations affect the volumes of gas
delivered for heating purposes and, therefore, can have a
significant positive or negative impact on net income and
coverage ratios.
FERC Order 636 Costs. In 1992, the FERC issued Order No. 636 and
successor orders that required substantial restructuring of the
service obligations of interstate pipelines. (See Notes 2E, 4A,
and 4B 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 its orders
on rehearing in this proceeding in September 1994. (See Notes
2E, 4A, and 4B of the Notes to Consolidated Financial
Statements.)
Postemployment Benefits. In November 1992, the FASB issued SFAS
No. 112. This statement requires the accrual of certain benefits
provided to former or inactive employees after employment but
before retirement. SFAS No. 112 required adoption by the Company
no later than fiscal 1995. (See Note 10 of the Notes to
Consolidated Financial Statements.)
Reengineering Study. Peoples Gas and North Shore Gas are
undertaking a major project to reengineer their business
processes with the goal of increasing efficiency, responsiveness
to customer needs, and cost effectiveness. The project commenced
in September 1994 and is expected to continue for at least two
years.
<TABLE>
Operating Statistics. The following table represents gas
distribution margin components:
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
March 31, March 31, March 31,
------------------- -------------------- ----------------------
1995 1994 1995 1994 1995 1994
-------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues (thousands):
Gas sales
Residential $ 311,337 $ 429,519 $ 537,845 $ 715,673 $ 773,209 $ 978,346
Commercial 52,863 81,160 86,331 126,228 121,015 167,328
Industrial 11,442 22,731 18,017 33,789 26,208 43,890
-------- ------- -------- -------- ---------- ---------
375,642 533,410 642,193 875,690 920,432 1,189,564
-------- ------- -------- ------- ---------- ---------
Transportation
Residential 14,624 12,628 25,060 23,770 36,777 35,702
Commercial 19,639 16,408 33,272 30,416 48,676 45,675
Industrial 11,050 8,555 19,733 16,804 31,750 28,697
------- ------- ------- ------- ---------- ---------
45,313 37,591 78,065 70,990 117,203 110,074
------- ------- ------- ------- ---------- ---------
Other 3,431 3,592 11,250 7,195 19,487 14,596
------- ------- ------- ------- ---------- ---------
Total Operating Revenues 424,386 574,593 731,508 953,875 1,057,122 1,314,234
Gas Costs (211,034) (334,458) (357,121) (536,160) (490,000) (693,750)
Revenues Taxes (46,045) (59,929) (77,291) (99,122) (110,903) (136,394)
-------- -------- -------- -------- --------- ---------
Net Operating Revenues $ 167,307 $ 180,206 $ 297,096 $ 318,593 $ 456,219 $ 484,090
======== ======== ======== ======== ========= =========
Deliveries (MMcf):
Sales
Residential 60,505 69,262 97,323 113,726 126,472 146,780
Commercial 10,563 13,576 16,351 20,946 21,611 27,184
Industrial 2,454 3,914 3,659 5,808 5,176 7,578
------- ------- ------- ------- -------- -------
73,522 86,752 117,333 140,480 153,259 181,542
------- ------- ------- ------- -------- -------
Transportation
Residential 10,754 10,771 17,850 18,842 24,074 25,423
Commercial 17,470 17,134 28,681 29,570 40,719 41,291
Industrial 12,270 10,913 22,287 20,723 36,914 34,533
------ ------ ------- ------- ------- -------
40,494 38,818 68,818 69,135 101,707 101,247
------ ------ ------- ------- ------- -------
Total Sales
and Transportation 114,016 125,570 186,151 209,615 254,966 282,789
======= ======= ======= ======= ======= =======
Margin per Mcf
delivered $1.47 $1.44 $1.60 $1.52 $1.79 $1.71
</TABLE>
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, 1995, such
restrictions amounted to $11.6 million out of North Shore Gas'
total retained earnings of $54.2 million. (See Note 3 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 relating to past manufactured gas operations
incurred by Illinois utilities, including Peoples Gas and North
Shore Gas. In its order, the Commission approved rate recovery
of such environmental costs but required that the recovery occur
over a five-year period without recovery of carrying charges on
unrecovered balances. The part of the Commission's order that
disallowed recovery of carrying charges on unrecovered balances
has been reversed on appeal by the Illinois Supreme Court, which
has remanded the case to the Commission. (See Note 4A of the
Notes to Consolidated Financial Statements.)
Peoples Gas and North Shore Gas filed proposed changes in
rates with the Commission in December 1994. (See Note 4A of the
Notes to Consolidated Financial Statements.)
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 5A 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 (CERCLA) for
reimbursement, indemnification and contribution for response
costs incurred at a former mineral processing site in Denver,
Colorado. In November 1994, North Shore Gas filed a declaratory
judgment action asking the court to declare that North Shore Gas
is not liable for response costs relating to the site. (See Note
5B 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.)
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, 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.)
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
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 9A 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 9A of the Notes to Consolidated
Financial Statements.)
Additional bonds are issuable by the subsidiaries, upon
approval by the Commission, subject to limitations imposed by
certain restrictive provisions of the subsidiaries' open-end
mortgages and supplements thereto. These restrictions are not
expected to have an impact on the subsidiaries' ability to issue
additional debt, as needed.
Credit Lines. On July 1, 1994, the utility subsidiaries 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 9B of the Notes
to Consolidated Financial Statements.)
Interest Coverage. Peoples Gas' fixed charges coverage ratios
for the 12-months ended March 31, 1995, and fiscal 1994 and 1993
were 2.63, 3.28, and 3.57, respectively. The decrease in the
ratio for the current 12-months ended primarily reflects lower
pre-tax income. (See Results of Operations - Net Income.)
The corresponding coverage ratios for North Shore Gas for the
same periods were 2.95, 3.33, and 2.91, respectively. The
decrease in the ratio for the current 12-months ended primarily
reflects lower pre-tax income. (See Results of Operations - Net
Income.)
Dividends. On February 1, 1995, the Directors of the Company
voted to maintain the regular quarterly dividend at 45 cents a
share, ending a string of consecutive annual increases that began
in 1984. This decision was prompted mainly by the abnormally
warm weather being experienced this fiscal year in Chicago and
the suburbs served by Peoples Gas and North Shore Gas. (See
Results of Operations - Net Income and Net Operating Revenues.)
The severe impact of warm weather on earnings may cause the
dividend payout ratio to exceed 100 percent of this year's
earnings.
Peoples Energy Corporation
PART II. OTHER INFORMATION
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 Shareholders
on February 24, 1995.
c. The following matters were voted upon at the Annual
Meeting of Shareholders:
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 29,536,784 424,408 0
Franklin A. Cole 29,782,640 424,408 0
J. Bruce Hasch 29,892,483 424,408 0
Frederick C. Langenberg 29,829,137 424,408 0
Homer J. Livingston, Jr. 29,897,221 424,408 0
William G. Mitchell 29,680,803 424,408 0
Earl L. Neal 29,830,657 424,408 0
Michael S. Reeves 29,823,440 424,408 0
Richard E. Terry 29,880,068 424,408 0
Richard P. Toft 29,686,753 424,408 0
Arthur R. Velasquez 29,878,565 424,408 0
</TABLE>
2. A proposal to approve a resolution of the Board
of Directors amending the Long-Term Incentive
Compensation Plan to extend the final date for the
granting of Options, SARs and restricted stock and to
reserve additional shares of common stock for granting
under the plan. The Inspectors of Election certified
the following vote tabulations:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTES
----------- ---------- -------- ---------
<C> <C> <C> <C>
25,522,151 3,893,509 801,343 0
</TABLE>
3. A resolution of the Board of Directors amending
the Articles of Incorporation to limit the liability of
the Company's directors and to provide for
indemnification and the advancement of expenses. The
Inspectors of Election certified the following vote
tabulations:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTES
---------- ---------- -------- -----------
<C> <C> <C> <C>
26,789,725 2,713,284 713,993 0
</TABLE>
4. A proposal to ratify the recommendation of the
Audit Committee and the appointment by the Board of
Directors of Arthur Andersen LLP as the independent
public accountants for the Company and its subsidiaries
for the fiscal year ending September 30, 1995. The
Inspectors of Election certified the following vote
tabulations:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTES
---------- -------- -------- ---------
<C> <C> <C> <C>
29,462,554 466,574 287,875 0
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
Number Description of
Document
27 Financial Data Schedule
b. Reports on Form 8-K filed during the quarter ended
March 31, 1995
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
Peoples Energy Corporation
---------------------------
(Registrant)
May 11, 1995 By: /s/ K. S. BALASKOVITS
- ------------- ----------------------------------
(Date) K. S. Balaskovits
Vice President and Controller
(Same as above)
------------------------------
Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED STATEMENTS OF INCOME, CONSOLIDATED BALANCE SHEETS,
CONSOLIDATED STATEMENTS OF CASH FLOWS, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> MAR-31-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,351,040
<OTHER-PROPERTY-AND-INVEST> 15,145
<TOTAL-CURRENT-ASSETS> 521,600
<TOTAL-DEFERRED-CHARGES> 57,172
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,944,957
<COMMON> 276,771
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 404,795
<TOTAL-COMMON-STOCKHOLDERS-EQ> 681,566
0
0
<LONG-TERM-DEBT-NET> 621,956
<SHORT-TERM-NOTES> 900
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 4,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 636,535
<TOT-CAPITALIZATION-AND-LIAB> 1,944,957
<GROSS-OPERATING-REVENUE> 731,508
<INCOME-TAX-EXPENSE> 41,246
<OTHER-OPERATING-EXPENSES> 596,776
<TOTAL-OPERATING-EXPENSES> 638,022
<OPERATING-INCOME-LOSS> 93,486
<OTHER-INCOME-NET> 3,605
<INCOME-BEFORE-INTEREST-EXPEN> 97,091
<TOTAL-INTEREST-EXPENSE> 26,145
<NET-INCOME> 70,946
0
<EARNINGS-AVAILABLE-FOR-COMM> 70,946
<COMMON-STOCK-DIVIDENDS> 31,395
<TOTAL-INTEREST-ON-BONDS> 22,773
<CASH-FLOW-OPERATIONS> 183,877
<EPS-PRIMARY> 2.03
<EPS-DILUTED> 2.03
</TABLE>
