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, 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:
34,913,426 shares of Common Stock, without par value, outstanding
at July 31, 1995.
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Peoples Energy Corporation
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Nine Twelve
Months Ended Months Ended Months Ended
June 30, June 30, June 30,
------------- --------------- --------------
1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
(Thousands, except per-share amounts)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Gas sales $ 158,069 $180,407 $800,262 $1,056,097 $898,093 $1,171,458
Transportation of customer-
owned gas 25,835 21,752 103,900 92,742 121,286 109,892
Other 3,283 4,632 14,533 11,827 18,139 15,372
------- ------- ------- --------- --------- ---------
Total Operating Revenues 187,187 206,791 918,695 1,160,666 1,037,518 1,296,722
------- ------- ------- --------- --------- ---------
OPERATING EXPENSES:
Gas costs 68,682 92,823 425,804 628,983 465,859 682,894
Operation 49,212 48,905 147,611 162,864 205,513 215,832
Maintenance 10,848 9,853 30,711 27,976 40,682 38,177
Depreciation 16,124 16,643 49,479 48,086 66,077 63,909
Taxes - Income 1,188 143 42,434 47,615 26,873 36,132
- State & local revenue 20,697 22,277 97,988 121,399 109,323 134,690
- Other 5,499 4,587 16,245 15,151 21,544 20,301
------- ------- ------- --------- ------- ----------
Total Operating Expenses 172,250 195,231 810,272 1,052,074 935,871 1,191,935
------- ------- ------- --------- ------- ----------
OPERATING INCOME 14,937 11,560 108,423 108,592 101,647 104,787
------- ------- ------- --------- ------- ----------
OTHER INCOME:
Interest income 3,492 2,390 6,642 3,932 8,877 4,410
Miscellaneous 103 566 1,070 13,722 1,977 14,360
------- ------- ------- --------- ------- ----------
Total Other Income 3,595 2,956 7,712 17,654 10,854 18,770
------- ------- ------- -------- ------- ----------
GROSS INCOME 18,532 14,516 116,135 126,246 112,501 123,557
------- ------- ------- -------- ------- ----------
INCOME DEDUCTIONS:
Interest on long-term debt
of subsidiaries 11,441 11,336 34,214 32,898 45,550 43,101
Other interest 2,268 331 5,640 2,631 6,021 3,067
Amortization of debt discount
and expense 222 206 652 604 858 787
Preferred stock dividends of
a subsidiary -- -- -- -- -- 71
Miscellaneous 38 39 120 118 159 (246)
------- ------- ------- ------- ------- -------
Total Income Deductions 13,969 11,912 40,626 36,251 52,588 46,780
------- ------- ------- ------- ------- -------
NET INCOME $ 4,563 $ 2,604 $ 75,509 $ 89,995 $ 59,913 $ 76,777
======= ======= ======= ======= ======= =======
Average Shares of Common Stock
Outstanding 34,906 34,859 34,897 34,849 34,890 34,843
Earnings Per Share of Common Stock $ .13 $ .07 $ 2.16 $ 2.58 $ 1.72 $ 2.20
======= ====== ====== ====== ====== =======
Dividends Declared Per Share $ .45 $ .45 $ 1.35 $ 1.345 $ 1.80 $ 1.79
======= ====== ====== ====== ====== =======
<FN>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<TABLE>
Peoples Energy Corporation
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, June 30,
1995 September 30, 1994
(Unaudited) 1994 (Unaudited)
----------- ------------- -----------
(Thousands)
<S> <C> <C> <C>
PROPERTIES AND OTHER ASSETS
CAPITAL INVESTMENTS
Property, plant and equipment,
at original cost $2,068,616 $2,019,379 $1,997,676
Less - Accumulated depreciation 710,014 677,447 668,609
---------- ---------- ----------
Net property, plant and equipment 1,358,602 1,341,932 1,329,067
Other investments 13,471 16,289 16,586
---------- ---------- ----------
TOTAL CAPITAL INVESTMENTS - NET 1,372,073 1,358,221 1,345,653
---------- ---------- ----------
CURRENT ASSETS
Cash 3,650 3,667 4,302
Cash equivalents 245,643 73,584 170,425
Other temporary cash investments,
at cost that approximates market value 1,000 1,000 1,100
Trust fund - utility construction -- 31,493 44,494
- bond redemption 50,237 -- --
Receivables -
Customers, net of allowance for
uncollectible accounts of $19,821,
$24,289, and $18,975, respectively 75,239 73,959 128,327
Other 1,821 2,224 2,660
Accrued unbilled revenues 15,873 19,922 15,049
Materials and supplies, at average cost 19,180 23,855 24,629
Gas in storage, at last-in, first-out cost 88,696 151,005 99,391
Gas costs recoverable through rate adjustments 6,252 14,426 16,929
Prepayments 2,634 2,050 2,696
---------- ---------- ----------
TOTAL CURRENT ASSETS 510,225 397,185 510,002
---------- ---------- ----------
DEFERRED CHARGES 49,333 53,880 49,690
---------- ---------- ----------
TOTAL PROPERTIES AND OTHER ASSETS $1,931,631 $1,809,286 $1,905,345
========== ========== ==========
<FN>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
</TABLE>
<TABLE>
Peoples Energy Corporation
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, June 30,
1995 September 30, 1994
(Unaudited) 1994 (Unaudited)
----------- ------------- -----------
(Thousands of Dollars)
<S> <C> <C> <C>
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stockholders' Equity:
Common stock, without par value
Authorized - 60,000,000 shares
Outstanding - 34,913,426, 34,868,069,
and 34,868,069 shares, respectively $ 277,113 $ 276,120 $ 276,120
Retained earnings 393,648 365,258 396,545
----------- ---------- ----------
Total Common Stockholders' Equity 670,761 641,378 672,665
Long-term debt of subsidiaries,
exclusive of sinking fund payments
and maturities due within one year 621,874 626,075 626,075
----------- ---------- ----------
TOTAL CAPITALIZATION 1,292,635 1,267,453 1,298,740
----------- ---------- ----------
CURRENT LIABILITIES
Interim loans of subsidiaries -- 900 100
Accounts payable 92,292 109,135 124,109
Dividends payable on common stock 15,711 15,690 15,690
Customer gas service and credit deposits 30,148 45,420 18,800
Sinking fund payments and maturities,
due within one year -
Long-term debt of subsidiaries 54,000 4,000 4,000
Accrued taxes 55,325 28,936 54,359
Gas sales revenue refundable through
rate adjustments 68,441 50,943 38,073
Accrued interest 9,975 12,942 9,582
Temporary LIFO liquidation credit 40,869 -- 48,720
---------- ---------- ----------
TOTAL CURRENT LIABILITIES 366,761 267,966 313,433
---------- ---------- ----------
RESERVES AND DEFERRED CREDITS
Deferred income taxes - primarily
accelerated depreciation 203,832 189,938 208,416
Investment tax credits being amortized
over the average lives of related property 38,565 39,887 40,327
Other 29,838 44,042 44,429
----------- ---------- ----------
TOTAL RESERVES AND DEFERRED CREDITS 272,235 273,867 293,172
----------- ---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES $1,931,631 $1,809,286 $1,905,345
=========== ========== ==========
<FN>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
</TABLE>
<TABLE>
Peoples Energy Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended
June 30,
-----------------
1995 1994
------ ------
(Thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 75,509 $ 89,995
Adjustments to reconcile net income to net cash:
Depreciation 49,479 48,086
Deferred income taxes and investment tax credits - net 10,813 8,903
Change in other deferred credits and reserves (12,444) (25,778)
Change in deferred charges 4,547 (14,869)
Other 38 17
Change in current assets and liabilities:
Receivables - net (877) (19,071)
Accrued unbilled revenues 4,049 14,989
Materials and supplies 4,675 1,023
Gas in storage 62,309 45,614
Rate adjustments recoverable or refundable 25,672 64,450
Accounts payable (16,843) 5,889
Customer gas service and credit deposits (15,272) (24,276)
Accrued taxes 26,389 26,445
Accrued interest (2,967) (789)
Temporary LIFO liquidation credit 40,869 48,720
Other (584) (254)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 255,362 269,094
------- -------
INVESTING ACTIVITIES:
Capital expenditures of subsidiaries - construction (65,200) (57,859)
Other assets (949) (1,278)
Other long-term cash investments 3,150 (514)
Other capital investments (369) 272
-------- -------
NET CASH USED IN INVESTING ACTIVITIES (63,368) (59,379)
-------- -------
FINANCING ACTIVITIES:
Interim loans of subsidiaries - net (900) (68,500)
Issuance of long-term debt of subsidiaries 50,000 102,000
Trust fund, bond redemption (50,237) --
Trust fund, utility construction 31,493 (40,251)
Retirement of long-term debt of subsidiaries (4,201) (4,000)
Redemption of preferred stock of a subsidiary -- (3,400)
Dividends paid on common stock (47,100) (46,688)
Issuance of common stock 993 1,100
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (19,952) (59,739)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 172,042 149,976
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 77,251 24,751
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $249,293 $174,727
======== ========
<FN>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
</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 nine months
ended June 30, 1995 1994
--------------------------------------------------
(Thousands)
<S> <C> <C>
Income taxes paid $12,659 $33,771
Interest paid 38,655 35,803
</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 June 30, 1995, such restrictions amounted to $11.6
million out of North Shore Gas' total retained earnings of $65.4
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. Peoples Gas subsequently
lowered its request and is seeking changes in rates that are
designed to increase annual revenues by about $41 million,
exclusive of additional charges for revenue taxes, based on a
rate of return on original-cost rate base of 9.55 percent which
reflects an 11.8 percent cost of common equity.
On December 16, 1994, North Shore Gas filed with the
Commission proposed changes in rates that were designed to
increase annual revenues by about $10.1 million, exclusive of
additional charges for revenue taxes. In June 1995, North Shore
Gas lowered its request by $2.9 million, to $7.2 million, which
is based on a rate of return on original-cost rate base of 10.14
percent, reflecting a 12.0 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. The Commission has until December 20, 1995 to
issue its order on remand. 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 June
30, 1995, Peoples Gas and North Shore Gas have accrued $41.7
million and $10.2 million, and have made payments of $38.1
million and $9.3 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 Division
Street site 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.
Peoples Gas has been sued by a prior owner and has received
demands from the current owner of a site in Chicago formerly
called Pitney Court Station. The former owner alleges damages of
over $1 million arising from alleged contamination by Peoples Gas
resulting from past gas manufacturing activities on the property.
The current owner has demanded that Peoples Gas assume
responsibility for investigation and remediation of the alleged
contamination. Peoples Gas is currently evaluating these claims.
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 June 30, 1995, the total of
the costs deferred by the subsidiaries, net of recoveries and
amounts billed to other entities, was $17.8 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 June 30, 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 June 30, 1995, the subsidiaries had
recovered $4.2 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.
5C Gasoline Release in Wheeling, Illinois
In June 1995, North Shore Gas received a letter from the IEPA
informing North Shore Gas that it was in noncompliance with
certain provisions of the Illinois Environmental Protection Act
which prohibit water pollution within the State of Illinois. The
letter stated that the alleged violations were the result of a
gasoline release which occurred in Wheeling, Illinois in June
1992 when a contractor who was installing a pipeline for North
Shore Gas accidentally struck a gasoline pipeline owned by West
Shore Pipeline Company. The letter further advised that the
matter had been referred to the Office of the Illinois Attorney
General for the preparation of a formal enforcement complaint.
North Shore Gas is currently evaluating this matter.
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 nine months ended
June 30, 1995, the utilities together amortized approximately
$12.9 million, or $9.8 million after income taxes, leaving a
remaining balance of about $1.3 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 June 29, 1995, the City of Chicago issued $50 million
aggregate principal amount of 6.10 percent gas supply refunding
revenue bonds, 1995 Series A, which were collateralized by an
equal amount of Peoples Gas' 30-year first mortgage bonds. On
August 1, 1995, the proceeds were used to redeem $50 million
aggregate principal amount of previously issued gas supply
revenue bonds. Other funds provided by Peoples Gas' will be used
for the payment of expenses of issuance, including the
underwriters' fee.
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 increased $2.0 million,
to $4.6 million, for the three-months ended June 30, 1995, from
the results of last year's similar quarter. The current
three-month period benefited from higher natural gas deliveries,
partly due to increased fuel usage during this year's cooler
springtime weather. Also favorably impacting the current
three-month period was the recognition of a portion of the
previously announced federal income tax settlement. (See Note 8
of the Notes to Consolidated Financial Statements.) These
benefits were partially offset by higher operating costs and
interest expense.
Net income applicable to common stock decreased $14.5 million,
to $75.5 million, for the current nine-month period, due mainly
to a decline in natural gas deliveries resulting from weather
that was 13 percent warmer than in the year-ago period. Results
for the current nine-month period were also hindered by higher
depreciation and interest expense, partially offset by the sale
of certain oil and gas rights.
Net income applicable to common stock decreased $16.9 million,
to $59.9 million, for the current 12-month period, due mainly to
a decline in natural gas deliveries resulting from weather that
was 14 percent warmer than the respective prior period. Results
for the current 12-month period were also adversely affected by
increased operating costs and interest expense, partially offset
by the sale of oil and gas rights, along with an increase in
interest income.
<TABLE>
A summary of variations affecting income between periods is
presented below, with explanations of significant differences
following:
<CAPTION>
Three Months Ended Nine Months Ended 12 Months Ended
June 30, 1995 June 30, 1995 June 30, 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) $6,117 6.7 $(15,381) (3.7) $(16,802) (3.5)
Operation and
maintenance expenses 1,302 2.2 (12,518) (6.6) (7,814) (3.1)
Depreciation expense (519) (3.1) 1,393 2.9 2,168 3.4
Income taxes 1,045 730.8 (5,181) (10.9) (9,259) (25.6)
Other income 639 21.6 (9,942) (56.3) (7,916) (42.2)
Income deductions 2,057 17.3 4,375 12.1 5,808 12.4
Net Income 1,959 75.2 (14,486) (16.1) (16,864) (22.0)
----------------------------------------------------------------------------------------------
<FN>
(a) Operating revenues, net of gas costs and revenue taxes.
</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 increased $6.1 million, to $97.8
million, for the current three-month period, due mainly to higher
gas deliveries reflecting colder weather than the year-ago
period.
Net operating revenues decreased $15.4 million, to $394.9
million, and $16.8 million, to $462.3 million, for the nine- and
12-month periods, respectively, primarily reflecting warmer
weather than in the similar year-ago periods, partially offset by
increased other gas deliveries.
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 increased $1.3 million, to
$60.1 million, in the current three-month period due primarily to
increased costs associated with the following items:
distribution system ($961,000), group insurance expenses
($523,000), rental expenses ($485,000), reengineering expenses
($660,000), and contractor maintenance at Peoples Gas'
underground storage plant ($341,000). These increases were
partially offset by recognizing about $2.3 million for the
current period's portion of the balance of the IRS settlement.
(See Note 8 of the Notes to Consolidated Financial Statements.)
Operation and maintenance expenses decreased $12.5 million, to
$178.3 million, in the current nine-month period due principally
to recognizing approximately $12.9 million for the aforementioned
IRS settlement. Also affecting the current period were a
reduction in the provision for uncollectible accounts ($3.0
million) reflecting lower sales due to weather partially offset
by an increase in the provision rate, a decline in pension
expenses ($526,000) principally reflecting a change in discount
rate, and lower group insurance expenses ($412,000) related to
SFAS No. 106 costs. Partially offsetting these decreases were
increased expenses for the distribution system ($1.9 million) and
Peoples Gas' underground storage plant ($1.2 million), an
increase in the provision for injuries and damages ($1.1
million), and incurred reengineering expenses ($1.2 million).
Operation and maintenance expenses decreased $7.8 million, to
$246.2 million, in the current 12-month period due mainly to
recognizing approximately $12.9 million for the aforementioned
IRS settlement. Additionally, a decline in pension expenses
($1.3 million) impacted the current period. These
items were partially offset by an increase in the provision for
uncollectible accounts ($3.4 million), which includes a $3.7
million increase to adjust the balance sheet allowance, increased
expenses for the distribution system ($1.6 million) and Peoples
Gas' underground storage plant ($1.7 million), and incurred
reengineering expenses ($1.2 million).
Depreciation Expense
Depreciation expense decreased $519,000, to $16.1 million in
the current three-month period, due principally to an adjustment
for net dismantling costs.
Depreciation expense increased $1.4 million, to $49.5 million,
and $2.2 million, to $66.1 million, for the current nine- and
12-month periods, respectively, due primarily to depreciable
property additions.
Income Taxes
Income taxes increased $1.0 million, to $1.2 million, in the
current three-month period due primarily to higher pre-tax
income.
Income taxes, exclusive of amounts included in other income
related to an IRS settlement, declined $5.2 million, to $42.4
million, and $9.3 million, to $26.9 million, for the current
nine- and 12-month periods, due principally to lower pre-tax
income.
Other Income
Other income increased $639,000, to $3.6 million, for the
current three-month period, due primarily to higher interest
income ($2.0 million) reflecting larger cash balances available
for investment. This increase was partially offset by reduced
interest income ($470,000) from the proceeds being held in a
trust fund generated from Peoples Gas' December 1993 bond
issuance and lower interest ($594,000) on amounts recoverable
from customers.
Other income declined $9.9 million, to $7.7 million, and $7.9
million, to $10.9 million, for the current nine-, and 12-month
periods, due mainly to the recognition of the IRS settlement of
$10.7 million after income taxes (see Note 8 of the Notes to
Consolidated Financial Statements) in the prior periods and by
reduced interest ($2.0 million, and $1.9 million, respectively)
on amounts recoverable from customers. This decrease was
partially offset by higher interest income ($3.9 million, and
$5.2 million, respectively) reflecting larger cash balances
available for investment.
Income Deductions
Income deductions increased $2.1 million, to $14.0 million,
$4.4 million, to $40.6 million, and $5.8 million, to $52.6
million, for the current three-, nine-, 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
in the current nine- and 12-month periods.
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.
District Energy. On May 30, 1995, Trigen-Peoples District Energy
Company announced that it had signed a letter of intent with
Chicago Union Station Co. to develop a major district energy
plant to supply heating and cooling to buildings in the West Loop
area of Chicago. The Union Station plant would represent a major
expansion of the Trigen-Peoples energy capacity in Chicago. (See
Note 7 of the Notes to Consolidated Financial Statements.)
<TABLE>
Operating Statistics. The following table represents gas
distribution margin components:
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ ------------------- -------------------
1995 1994 1995 1994 1995 1994
------- ------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues (thousands):
Gas sales
Residential $134,351 $151,863 $672,196 $ 867,536 $ 755,698 $965,816
Commercial 19,435 22,987 105,766 149,215 117,462 163,333
Industrial 4,283 5,557 22,300 39,346 24,933 42,309
------- ------- ------- --------- ------- ---------
158,069 180,407 800,262 1,056,097 898,093 1,171,458
------- ------- ------- --------- ------- ---------
Transportation
Residential 7,873 6,914 32,933 30,684 37,736 35,632
Commercial 10,129 8,689 43,402 39,105 50,116 45,573
Industrial 7,833 6,149 27,565 22,953 33,434 28,687
------- ------- ------- ------- ------- -------
25,835 21,752 103,900 92,742 121,286 109,892
------- ------- ------- ------- ------- -------
Other 3,283 4,632 14,533 11,827 18,139 15,372
------- ------- ------- --------- --------- ---------
Total Operating Revenues 187,187 206,791 918,695 1,160,666 1,037,518 1,296,722
Gas Costs (68,682) (92,823) (425,804) (628,983) (465,859) (682,894)
Revenues Taxes (20,697) (22,277) (97,988) (121,399) (109,323) (134,690)
-------- -------- ------- -------- -------- --------
Net Operating Revenues $ 97,808 $ 91,691 $394,903 $ 410,284 $462,336 $ 479,138
======== ======== ======= ======== ======= ========
Deliveries (MMcf):
Sales
Residential 22,898 20,064 120,221 133,791 129,306 144,385
Commercial 3,865 3,518 20,216 24,464 21,958 26,419
Industrial 986 1,005 4,644 6,813 5,156 7,282
------- ------- ------- -------- ------- -------
27,749 24,587 145,081 165,068 156,420 178,086
------- ------- ------- -------- ------- -------
Transportation
Residential 4,675 4,087 22,525 22,929 24,661 25,186
Commercial 7,793 6,997 36,474 36,566 41,516 41,401
Industrial 8,714 7,528 31,002 28,251 38,101 34,749
------- ------- ------- ------- ------- -------
21,182 18,612 90,001 87,746 104,278 101,336
------- ------- ------- ------- ------- -------
Total Sales
and Transportation 48,931 43,199 235,082 252,814 260,698 279,422
======= ======= ======= ======= ======= =======
Margin per Mcf
delivered $2.00 $2.12 $1.68 $1.62 $1.77 $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 June 30, 1995, such restrictions
amounted to $11.6 million out of North Shore Gas' total retained
earnings of $65.4 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.)
In June 1995, North Shore Gas was informed by the Illinois
Environmental Protection Agency (IEPA) that an enforcement action
would be brought against North Shore Gas for violating certain
provisions of the Illinois Environmental Protection Act which
prohibit water pollution within the State of Illinois. According
to the IEPA, the alleged violations occurred as the result of a
gasoline spill which occurred in Wheeling, Illinois during June
1992 when a contractor who was installing a pipeline for North
Shore Gas accidentally struck a gasoline pipeline owned by West
Shore Pipeline Company. (See Note 5C 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.)
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 June 29, 1995, the City of Chicago issued $50 million
aggregate principal amount of 6.10 percent gas supply refunding
revenue bonds, 1995 Series A, which were collateralized by an
equal amount of Peoples Gas' 30-year first mortgage bonds. On
August 1, 1995, the proceeds were used to redeem $50 million
aggregate principal amount of previously issued gas supply
revenue bonds. Other funds provided by Peoples Gas' will be used
for the payment of expenses of issuance, including the
underwriters' fee. (See Note 9A of the Notes to Consolidated
Financial Statements.)
Additional bonds are issuable by the utility 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 26, 1996. 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 June 30, 1995, and fiscal 1994 and 1993
were 2.62, 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 2.99, 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.
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 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
June 30, 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)
August 10, 1995 By: /s/ K. S. BALASKOVITS
----------------- --------------------------------
(Date) K. S. Balaskovits
Vice President and Controller
(Same as above)
-----------------------------
Principal Accounting Officer
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