FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
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:
35,387,368 shares of Common Stock, without par value, outstanding
at July 31, 1998.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Peoples Energy Corporation
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended
June 30, June 30, June 30,
1998 1997 1998 1997 1998 1997
(Thousands, except per-share amounts)
OPERATING REVENUES:
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Gas sales $ 171,787 $ 173,410 $ 893,395 $ 1,027,081 $ 991,144 $ 1,139,079
Transportation 23,577 25,104 102,283 117,980 117,874 136,791
Other 4,351 3,930 13,697 11,855 17,130 15,051
Total Operating Revenues 199,715 202,444 1,009,375 1,156,916 1,126,148 1,290,921
OPERATING EXPENSES:
Gas costs 80,204 72,651 484,851 581,245 519,140 626,870
Operation 47,961 45,950 151,065 149,084 202,778 198,141
Maintenance 11,564 12,748 31,804 34,210 45,220 47,309
Depreciation, depletion, and amortization 19,411 18,649 57,058 55,492 75,640 73,500
Taxes - Income 1,529 6,515 53,719 66,448 41,865 58,880
- State and local revenue 14,555 20,282 91,684 116,166 101,742 128,214
- Other 8,066 5,219 21,714 15,609 27,402 21,222
Total Operating Expenses 183,290 182,014 891,895 1,018,254 1,013,787 1,154,136
OPERATING INCOME 16,425 20,430 117,480 138,662 112,361 136,785
OTHER INCOME
AND (DEDUCTIONS):
Interest income 1,204 1,311 2,551 3,890 4,072 4,968
Allowance for funds used
during construction 436 82 1,030 143 1,153 157
Interest on long-term debt
of subsidiaries (8,941) (8,930) (26,816) (26,792) (35,746) (35,728)
Other interest expense (551) (387) (2,843) (2,160) (3,436) (2,782)
Income taxes (132) (442) (228) (1,309) (759) (2,798)
Miscellaneous - net (435) (329) (508) 50 (1,059) 2,942
Total Other Income
and Deductions (8,419) (8,695) (26,814) (26,178) (35,775) (33,241)
NET INCOME $ 8,006 $ 11,735 $ 90,666 $ 112,484 $ 76,586 $ 103,544
Average Shares of Common
Stock Outstanding 35,293 34,988 35,216 34,980 35,176 34,975
Basic Earnings
Per Share of Common Stock $ 0.23 $ 0.34 $ 2.57 $ 3.22 $ 2.18 $ 2.96
Diluted Earnings
Per Share of Common Stock $ 0.23 $ 0.34 $ 2.57 $ 3.21 $ 2.18 $ 2.96
Dividends Declared Per Share $ 0.48 $ 0.47 $ 1.43 $ 1.40 $ 1.90 $ 1.86
The Notes to Consolidated Financial Statements are an integral part of these statements.
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Peoples Energy Corporation
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
1998 September 30, 1997
(Unaudited) 1997 (Unaudited)
(Thousands of Dollars)
PROPERTIES AND OTHER ASSETS
CAPITAL INVESTMENTS:
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Property, plant and equipment, at original cost $ 2,166,314 $ 2,117,509 $ 2,088,570
Less - Accumulated depreciation 751,727 715,279 705,020
Net property, plant and equipment 1,414,587 1,402,230 1,383,550
Other investments 18,326 16,305 13,671
Total Capital Investments - Net 1,432,913 1,418,535 1,397,221
CURRENT ASSETS:
Cash and cash equivalents 53,605 33,298 100,041
Temporary cash investments 40,500 15,900 15,900
Receivables -
Customers, net of allowance for uncollectible accounts
of $24,453, $29,895, and $32,425, respectively 83,506 72,290 127,212
Other 30,449 39,182 30,939
Accrued unbilled revenues 24,908 22,742 20,972
Materials and supplies, at average cost 19,612 19,385 17,361
Gas in storage, at last-in, first-out cost 62,770 77,843 46,865
Gas costs recoverable through rate adjustments 3,158 5,164 353
Regulatory assets of subsidiaries 6,678 15,460 23,608
Prepayments 65,710 42,902 36,829
Total Current Assets 390,896 344,166 420,080
OTHER ASSETS:
Non-current regulatory assets of subsidiaries 44,190 38,676 39,128
Deferred charges 28,019 19,428 20,015
Total Other Assets 72,209 58,104 59,143
Total Properties and Other Assets $ 1,896,018 $ 1,820,805 $ 1,876,444
The Notes to Consolidated Financial Statements are an integral part of these statements.
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Peoples Energy Corporation
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
1998 September 30, 1997
(Unaudited) 1997 (Unaudited)
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
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Common Stockholders' Equity:
Common stock, without par value -
Authorized - 60,000,000 shares
Outstanding - 35,320,844, 35,069,517, and
34,996,835 shares, respectively $ 290,792 $ 281,847 $ 278,926
Retained earnings 474,933 434,652 466,810
Total Common Stockholders' Equity 765,725 716,499 745,736
Long-term debt of subsidiaries, exclusive of sinking
fund payments and maturities due within one year 527,004 527,004 527,039
Total Capitalization 1,292,729 1,243,503 1,272,775
CURRENT LIABILITIES:
Interim loans of subsidiaries 814 2,810 -
Accounts payable 134,208 134,870 129,282
Dividends payable on common stock 16,942 16,479 16,446
Customer gas service and credit deposits 27,645 45,386 20,211
Accrued taxes 49,515 20,645 62,575
Gas sales revenue refundable through rate adjustments 6,377 14,894 15,247
Accrued interest 7,422 10,800 7,408
Temporary LIFO liquidation credit 4,546 - 29,777
Total Current Liabilities 247,469 245,884 280,946
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes - primarily accelerated depreciation 266,543 249,178 244,374
Investment tax credits being amortized over
the average lives of related property 32,778 33,942 34,264
Other 56,499 48,298 44,085
Total Deferred Credits and Other Liabilities 355,820 331,418 322,723
Total Capitalization and Liabilities $ 1,896,018 $ 1,820,805 $ 1,876,444
The Notes to Consolidated Financial Statements are an integral part of these statements.
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Peoples Energy Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
June 30,
1998 1997
(Thousands of Dollars)
Operating Activities:
Net Income $ 90,666 $ 112,484
Adjustments to reconcile net income to net cash:
Depreciation, depletion, and amortization 57,058 55,492
Deferred income taxes and investment tax credits - net 14,079 9,248
Change in deferred credits and other liabilities 10,323 4,581
Change in deferred charges (18,315) 1,795
Change in current assets and liabilities:
Receivables - net (2,483) (57,077)
Accrued unbilled revenues (2,166) 8,342
Materials and supplies (227) (1,233)
Gas in storage 15,073 18,637
Gas costs recoverable 2,006 19,567
Regulatory assets 8,781 18,672
Prepayments (22,808) (24,542)
Accounts payable (662) (18,690)
Customer gas service and credit deposits (17,741) (22,179)
Accrued taxes 28,870 29,754
Gas sales revenue refundable (8,517) 1,326
Accrued interest (3,378) (3,388)
Temporary LIFO liquidation credit 4,546 29,777
Net Cash Provided by Operating Activities 155,105 182,566
Investing Activities:
Capital expenditures of subsidiaries (65,792) (53,168)
Other assets 621 194
Other capital investments (2,055) (2,102)
Other temporary cash investments (24,600) (15,000)
Net Cash Used in Investing Activities (91,826) (70,076)
Financing Activities:
Interim loans of subsidiaries - net (1,996) (2,625)
Retirement of long-term debt of subsidiaries - (25)
Dividends paid on common stock (49,921) (48,614)
Proceeds from issuance of common stock 8,945 1,045
Net Cash Used in Financing Activities (42,972) (50,219)
Net Increase in Cash and Cash Equivalents 20,307 62,271
Cash and Cash Equivalents at Beginning of Period 33,298 37,770
Cash and Cash Equivalents at End of Period $ 53,605 $ 100,041
The Notes to Consolidated Financial Statements are an integral part of these
statements.
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, Peoples Energy Resources Corp., Peoples Energy Ventures
Corporation, and Peoples NGV Corp., and comprise the assets,
liabilities, 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.
Significant intercompany balances and transactions have been
eliminated. Investments and partnerships for which the Company's
subsidiaries have at least a 20% interest but less than a majority
ownership are accounted for under the equity method. 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, 1997. Certain items previously reported for the prior
periods have been reclassified to conform with the presentation in the
current periods.
The business of the Company'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 Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
2B Revenue Recognition
Gas sales revenues 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.
2C Regulated Operations
Peoples Gas' and North Shore Gas' utility operations are subject to
regulation by the Illinois Commerce Commission (Commission). Regulated
operations are accounted for in accordance with Statement of Financial
Accounting Standards (SFAS) No. 71, "Accounting for the Effects of
Certain Types of Regulation." This standard controls the application
of generally accepted accounting principles for companies whose rates
are determined by an independent regulator such as the Commission.
Regulatory assets represent certain costs that are expected to be
recovered from customers through the ratemaking process. When
incurred, such costs are deferred as assets in the balance sheet and
subsequently recorded as expenses when those same amounts are reflected
in rates.
2D Income Taxes
The Company follows the liability method of accounting for deferred
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 are, in turn, debited or credited to regulatory assets or
liabilities.
2E Statement of Cash Flows
For purposes of the balance sheet and the statement of cash flows,
the Company considers all short-term liquid investments with maturities
of three months or less to be cash equivalents.
Income taxes and interest paid (excluding capitalized interest)
were as follows:
For the nine months
ended June 30, 1998 1997
(Thousands)
Income taxes paid $14,409 $37,708
Interest paid 31,024 31,311
2F Recovery of Gas Costs
Under the tariffs of Peoples Gas and North Shore Gas, the difference
for any month between costs recoverable through the Gas Charge and
revenues billed to customers under the Gas Charge is refunded to or
recovered from customers. Consistent with these tariff provisions,
such difference for any month is recorded either as a current liability
or as a current asset (with a contra entry to Gas Costs).
For each gas utility, the Commission conducts annual proceedings
regarding the reconciliation of revenues from the Gas Charge and
related costs incurred for gas. In such proceedings, costs recovered
by a utility through the Gas Charge are subject to challenge. Such
proceedings regarding Peoples Gas and North Shore Gas for fiscal year
1997 are currently pending before the Commission.
2G Hedging Activities
The Company has a formal risk management policy that monitors and
controls the execution, recording and reporting of derivative financial
instruments. The intent of the policy is to utilize risk management
trading solely to minimize risk, and not for any speculative purpose.
The Company may use interest rate swaps, forward rate transactions,
commodity futures contracts, options and swaps to hedge the impact of
interest rate, price and/or volume fluctuations related to its business
activities, including price risk related to the geographic location of
the commodity (basis risk).
The Company accounts for all derivative transactions through hedge
accounting. All derivatives are designated as fair value hedges.
Realized gains or losses from derivative instruments (through maturity
or termination of the hedge) are deferred until the underlying hedged
item is sold or matures. If the Company determines that any portion of
the underlying hedged item will not be purchased or sold, the unmatched
portion of the instrument is marked to market and any gain or loss is
recognized in the Consolidated Statement of Income. Recognized gains
or losses are recorded on the Consolidated Statement of Income with the
underlying hedged item. As of June 30, 1998 the Company had open
derivative financial instruments representing hedges of natural gas
production of 0.7 Bcf. At June 30, 1998, the Company had no deferred
gains or losses on the Consolidated Balance Sheet.
2H Oil and Gas Exploration and Production Properties
For oil and gas activities, the Company follows the full-cost method
of accounting as prescribed by the SEC. Under the full-cost method,
all costs directly associated with the acquisition, exploration and
development activities are capitalized, with the principal limitation
that such amounts not exceed the present value of estimated future net
revenues to be derived from the production of proved oil and gas
reserves (the full-cost ceiling). If net capitalized costs exceed the
full-cost ceiling at the end of any quarter, a permanent impairment of
the assets is required to be charged to earnings in that quarter. Such
a charge would have no effect on the Company's cash flow. At June 30,
1998, there was no such charge to income.
2I Depreciation, Depletion, and Amortization
Depreciation, depletion, and amortization are recorded over the
estimated useful lives on the straight-line method. In the case of oil
and gas producing properties, the Company is amortizing the capitalized
costs on an overall units-of-production method based on total estimated
proved oil and gas reserves.
Other non-utility depreciable property is amortized over their
estimated useful lives; gains and losses are recognized at the time of
sale or disposition.
2J Accounting Standards
The Company adopted SFAS No. 128, "Earnings per Share" in the first
quarter of fiscal 1998. This statement simplifies the calculation of
earnings per share (EPS) and increases conformity to international
standards. Under SFAS No. 128, primary EPS is replaced by "basic" EPS,
which excludes the effects of any dilution. It is calculated by
dividing net income available to common shareholders by the weighted-
average number of common shares outstanding for the period. "Diluted"
EPS, which is computed similarly to fully diluted EPS, reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock.
Previous periods have been restated to reflect this standard. (See Note
6.)
The Company adopted Statement of Position (SOP) 96-1,
"Environmental Remediation Liabilities" in the first quarter of fiscal
1998. The application of the statement did not have a material effect
on the Company's financial condition or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This statement
establishes accounting and reporting standards for derivative financial
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the
consolidated balance sheet and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative depends on
the intended use of the derivative and resulting designation.
Changes in the fair value of derivatives shall be recognized in the
current period earnings, unless specific hedge accounting criteria are
met. If an entity qualifies for hedge accounting, the derivative's
gains and losses will offset the related results of the hedged item in
the current period's income statement. SFAS No. 133 requires that
formal documentation be maintained and that the effectiveness of the
hedge be assessed quarterly. The Company expects to designate its
derivative instruments as fair value hedges. The statement must be
adopted no later then the Company's fiscal year 2000. The Company does
not expect the adoption of this standard to have a material effect on
its financial condition or results of operations.
3. ENVIRONMENTAL MATTERS
3A Former Manufactured Gas Plant Operations
The Company's utility subsidiaries, their predecessors, and certain
former affiliates operated facilities in the past at multiple sites for
the purpose of manufacturing gas and storing manufactured gas
(Manufactured Gas Sites). 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. Three of the Manufactured Gas
Sites are discussed in more detail below. Peoples Gas and North Shore
Gas, under the supervision of the Illinois Environmental Protection
Agency (IEPA), are conducting investigations of an additional 29
Manufactured Gas Sites. These investigations may require the utility
subsidiaries to perform additional investigation and remediation. The
investigations are in a preliminary stage and are expected to occur
over an extended period of time.
In 1990, North Shore Gas entered into an Administrative Order on
Consent (AOC) with the United States Environmental Protection Agency
(EPA) and the IEPA to implement and conduct a remedial
investigation/feasibility study (RI/FS) of a Manufactured Gas Site
located in Waukegan, Illinois, where manufactured gas and coking
operations were formerly conducted (Waukegan Site). The RI/FS is
comprised of an investigation to determine the nature and extent of
contamination at the Waukegan Site and a feasibility study to develop
and evaluate possible remedial actions. North Shore Gas entered into
the AOC after being notified by the EPA that North Shore Gas, General
Motors Corporation (GMC), and Outboard Marine Corporation were each a
potentially responsible party (PRP) under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as
amended (CERCLA), with respect to the Waukegan Site. A PRP is
potentially liable for the cost of any investigative and/or remedial
work that the EPA determines is necessary. 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.
Peoples Gas has observed what appear to be gas purification wastes
on a Manufactured Gas Site in Chicago, formerly called the 110th Street
Station, and property contiguous thereto (110th Street Station Site).
Peoples Gas has fenced the 110th Street Station Site and is conducting
a study under the supervision of the IEPA to determine the feasibility
of a limited removal action.
The current owner of a site in Chicago, formerly called Pitney Court
Station, filed suit against Peoples Gas in federal district court under
CERCLA. The suit seeks recovery of the past and future costs of
investigating and remediating the site. Peoples Gas is contesting this
suit.
The utility subsidiaries are accruing and deferring the costs they
incur in connection with all of the Manufactured Gas Sites, including
related legal expenses, pending recovery through rates or from
insurance carriers or other entities. At June 30, 1998, the total of
the costs deferred by the subsidiaries, net of recoveries and amounts
billed to other entities, was $26.2 million. This amount includes an
estimate of the costs of completing the studies required by the EPA at
the Waukegan Site and the investigations being conducted under the
supervision of the IEPA referred to above. The amount also includes an
estimate of the costs of remediation at the Waukegan 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 at this time. 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 1937 and 1986 for costs incurred or to be incurred by the
utilities in connection with five of their 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 at June 30, 1998 have not been reduced
to reflect recoveries from insurance carriers.
The Company believes that the costs incurred by Peoples Gas and by
North Shore Gas for environmental activities relating to former
manufactured gas operations are recoverable from insurance carriers or
other entities or through rates for utility service. Accordingly,
management believes that the costs incurred by the subsidiaries in
connection with former manufactured gas operations will not have a
material adverse effect on the financial position or results of
operations of the utilities. Peoples Gas and North Shore Gas are
recovering the costs of environmental activities relating to the
utilities' former manufactured gas operations, including carrying
charges on the unrecovered balances, under rate mechanisms approved by
the Commission. At June 30, 1998, the subsidiaries had recovered $13.6
million of such costs through rates.
3B Former Mineral Processing Site in Denver, Colorado
In 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 to the liability of
a former entity that was 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 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. Salomon
filed a counterclaim for costs to be incurred by Salomon and Shattuck
with respect to the site. In 1997, the District Court granted North
Shore Gas' motion for summary judgment, declaring that North Shore Gas
is not liable for any response costs in connection with the Denver
site.
On August 5, 1998, the U. S. Court of Appeals, Seventh Circuit,
reversed the District Court's decision and ruled that North Shore is a
successor to the liability, if any, of the former entity allegedly
associated with the site. The Appellate Court remanded the case to the
District Court for determination of what liability, if any, the former
entity has, and therefore North Shore has, for activities at the site.
At this time, North Shore has not determined whether to seek review of
the Appellate Court's decision.
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.
3C Gasoline Release in Wheeling, Illinois
In June 1995, North Shore Gas received a letter from the IEPA
informing North Shore Gas that it was not in compliance with certain
provisions of the Illinois Environmental Protection Act which prohibit
water pollution within the State of Illinois. On November 14, 1995,
the Illinois Attorney General filed a complaint in the Circuit Court of
Cook County naming North Shore Gas and four other parties as
defendants. The complaint alleges that the violations are the result
of a gasoline release that 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. North Shore Gas is contesting this suit. Management
does not believe the outcome of this suit will have a material adverse
effect on financial position or results of operations of the Company or
North Shore Gas.
4. 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, 1998, such restrictions amounted to $11.6 million out of North
Shore Gas' total retained earnings of $73.2 million.
5. LONG-TERM DEBT
Interest-Rate Adjustments
The rate of interest on the City of Joliet 1984 Series C Bonds,
which are secured by Peoples Gas' Adjustable-Rate First Mortgage 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, 1997 have been
remarketed. The interest rate on such bonds is 3.875 percent for the
period October 1, 1997 through September 30, 1998.
The rate of interest on the City of Chicago 1993 Series B Bonds,
which are secured by Peoples Gas' Adjustable-Rate First Mortgage 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, 1997, have been
remarketed. The interest rate on such bonds is 3.90 percent for the
period December 1, 1997, through November 30, 1998.
Peoples Gas classifies these adjustable-rate bonds as long-term
liabilities, since it would refinance them on a long-term basis if they
could not be remarketed. In order to ensure its ability to do so, on
February 1, 1994, Peoples Gas established a $37.4 million three year
line of credit with The Northern Trust Company, which has since been
extended to January 31, 2000.
6. EARNINGS PER SHARE
In fiscal 1998, the Company adopted SFAS No. 128, "Earnings Per
Share". The statement simplifies the methodology for computing both
basic and diluted earnings per share. The only difference in the two
methods for computing the Company's per share amounts is attributable
to stock options outstanding under the Long-Term Incentive Compensation
Plan. The effect of the stock options was determined using the
treasury stock method. Consolidated net income as reported was not
affected. Shares used to compute diluted earnings per share are as
follows:
Average Common Stock Shares (in thousands)
Three months Nine months 12-months
Ended Ended Ended
June 30, 1998 1997 1998 1997 1998 1997
As reported shares 35,293 34,988 35,216 34,980 35,176 34,975
Effects of options 21 23 22 24 24 26
Diluted shares 35,314 35,011 35,238 35,004 35,200 35,001
Options for which the average stock price is lower than the grant
price are considered antidilutive and, therefore, are not included in
the calculation of diluted earnings per share. (See Note 2J.)
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
RESULTS OF OPERATIONS
Net Income
Net income decreased $3.7 million, to $8.0 million, for the current
three-month period ended June 30, 1998, as a result of weather that was
almost 39 percent warmer than last year's third quarter. Increases in
outside professional services and depreciation, depletion and
amortization expense also contributed to the decline. Partially
offsetting these effects were decreases in the provision for
uncollectible accounts and an adjustment to reduce taxes accrued.
Net income decreased $21.8 million, to $90.7 million, and $27.0
million, to $76.6 million, for the current nine- and 12-month period
ended June 30, 1998, reflecting weather that was 18 percent warmer than
the year-ago periods. Also contributing to the declines in both
periods were increases in outside professional services. A one-time
gain associated with the expiration of certain gas storage contracts in
the prior period also affected the 12-month comparison.
<TABLE>
A summary of variations affecting income between periods is
presented below, with explanations of significant differences
following:
Three Months Ended Nine Months Ended 12 Months Ended
June 30, 1998 June 30, 1998 June 30, 1998
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) $(4,555) (4.2) $(26,665) (5.8) $(30,571) (5.7)
Operation and maintenance expenses 827 1.4 (425) (0.2) 2,548 1.0
Depreciation, depletion, and
amortization expense 762 4.1 1,566 2.8 2,140 2.9
Other taxes 2,847 54.6 6,105 39.1 6,180 29.1
Income taxes (4,986) (76.5) (12,729) (19.2) (17,015) (28.9)
Other income and deductions (276) (3.2) 636 2.4 2,534 7.6
Net income (3,729) (31.8) (21,818) (19.4) (26,958) (26.0)
(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 2F 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 utility 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 declined $4.6 million, to $105.0
million, for the current three-month period, due primarily to the
effect of El Nino which caused weather to be 39 percent warmer
than during the same period a year-ago.
Net operating revenues declined $26.7 million, to $432.8
million, and $30.6 million, to $505.3 million, for the current
nine- and 12-month periods, respectively, due primarily to
weather that was 18 percent warmer than during comparable periods
a year-ago.
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 $827,000, to
$59.5 million, for the current three-month period, due mainly to
an increase in the costs of outside professional services of $3.1
million, primarily as a result of Peoples Gas' increased use of
contract programmers to maintain existing systems while that
company's staff is involved in the development and implementation
of a new customer information system for Peoples Gas and North
Shore Gas. An increase in labor costs of $1.3 million also
contributed to the variation between periods. These effects were
partially offset by decreases in the provision for uncollectible
accounts ($692,000), decreased pension costs ($570,000), lower
group insurance expenses ($377,000), and decreased non-labor
costs associated with operating and maintaining the Companies
distribution systems ($318,000).
Operation and maintenance expenses decreased $425,000, to
$182.9 million, for the current nine-month period, due primarily
to a decrease in the provision for uncollectible accounts ($5.1
million), a reduction in environmental costs recovered through
rates ($2.3 million) and lower administrative and general
expenses. These effects were offset by increases in the costs of
outside professional services ($5.8 million) and increased labor
costs ($2.1 million).
Operation and maintenance expenses increased $2.5 million, to
$248.0 million, for the current 12-month period, due principally
to increased outside professional services ($8.5 million) and
labor expense ($4.1 million). Offsetting these effects were
reductions in the provision for uncollectible accounts
($5.6 million), environmental costs recovered through rates ($2.7
million) and group insurance expense ($2.2 million).
Depreciation, Depletion, and Amortization Expense
Depreciation, depletion, and amortization expense increased
$762,000, to $19.4 million, $1.6 million, to $57.1 million, and
$2.1 million, to $75.6 million, for the current three-, nine- and
12-month periods, respectively, due mainly to depreciable
property additions.
Other Taxes
Other taxes increased $2.8 million, to $8.1 million, $6.1 million,
to $21.7 million, and $6.2 million, to $27.4 million, for the current
three-, nine-, and 12-month periods, respectively, due primarily to
the new Supplemental Low Income Energy Assistance Charge. Since
this charge was collected from customers, it had no impact on
net income.
Income Taxes
Income taxes, exclusive of taxes in other income and
deductions, decreased $5.0 million, to $1.5 million, $12.7
million, to $53.7 million, and $17.0 million, to $41.9 million,
for the current three-, nine-, and 12-month periods,
respectively, due primarily to lower pre-tax income and a current
period adjustment to reduce taxes accrued. Partially offsetting
these effects in the nine- and 12-month comparative periods was a
prior period adjustment to reduce income tax accruals.
Other Income and Deductions
Other income and deductions decreased $276,000 for the current
three-month period, due chiefly to an increase in the allowance
for funds used during construction, partially offset by higher
interest expense and lower interest income.
Other income and deductions increased $636,000, for the
current nine-month period, primarily due to lower miscellaneous
interest revenues and higher interest expense. These effects
were partially offset by an increase in the allowance for funds
used during construction.
Other income and deductions increased $2.5 million, for the
current 12-month period, due chiefly to the prior period's gain
of $1.8 million, net of income taxes, associated with the
expiration of natural gas storage contracts, decreased
miscellaneous interest revenues, and increased interest expense.
These effects were offset, in part, by an increase in the
allowance for funds used during construction.
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, cash
position, and coverage ratios.
Accounting Standards. In October 1997, the Company adopted SFAS
No. 128, "Earnings Per Share". (See Notes 2J and 6 of the Notes
to Consolidated Financial Statements.)
In fiscal 1998, the Company adopted SOP 96-1, "Environmental
Remediation Liabilities". (See Note 2J of the Notes to
Consolidated Financial Statements.)
Large Volume Gas Service Agreements. Peoples Gas and North Shore
Gas have entered into gas service contracts with certain large
volume customers under specific rate schedules approved by the
Commission. These contracts were negotiated to overcome the
potential threat of bypassing the utilities' distribution
systems. The impact on the net income of Peoples Gas and North
Shore Gas as a result of these contracts is not material.
Small-Volume Transportation Service. On June 25, 1997, the
Commission allowed Riders SVT and AGG to go into effect for
Peoples Gas, thus initiating a two-year pilot program designed to
provide transportation service to certain small-volume industrial
and commercial customers of the utility as well as to some of its
large residential customers. The Commission also ordered a
concurrent investigation of the program to ascertain if program
adjustments or revisions are required.
Investment in Non-utility Energy Business. The Company has a
financial goal to earn 25% of its earnings from non-utility
investments by the end of 2002. In accordance with this goal,
during May, the Company entered into a commitment with Dominion
Energy to develop and operate a jointly-owned electric generating
peaking facility. The total cost of the project is estimated at
$90 million. In June, the Company and three major natural gas
companies announced their intent to develop, construct, own, and
operate a $220-$280 million pipeline to serve developing markets
in Northern Illinois and Wisconsin.
<TABLE>
Operating Statistics. The following table represents margin components:
Three Months Ended Nine Months Ended Twelve Months Ended
June 30, June 30, June 30,
1998 1997 1998 1997 1998 1997
Operating Revenues (Thousands):
<S> <C> <C> <C> <C> <C> <C>
Gas sales
Residential $ 134,107 $ 146,519 $ 704,426 $ 863,159 $ 782,831 $ 958,857
Commercial 16,598 22,437 102,198 135,183 113,879 149,473
Industrial 3,268 4,424 19,820 27,673 21,117 29,667
Non-utility 17,814 30 66,951 1,066 73,317 1,082
171,787 173,410 893,395 1,027,081 991,144 1,139,079
Transportation
Residential 6,771 7,219 31,029 32,633 35,202 37,373
Commercial 9,325 8,888 40,899 41,801 46,754 48,138
Industrial 5,999 6,525 22,372 25,522 27,868 30,733
Contract Pooling 1,372 2,472 7,340 17,623 7,407 20,147
Other 110 - 643 401 643 400
23,577 25,104 102,283 117,980 117,874 136,791
Other 4,351 3,930 13,697 11,855 17,130 15,051
Total Operating Revenues 199,715 202,444 1,009,375 1,156,916 1,126,148 1,290,921
Less - Gas Costs 80,204 72,651 484,851 581,245 519,140 626,870
- Revenue Taxes 14,555 20,282 91,684 116,166 101,742 128,214
Net Operating Revenues $ 104,956 $ 109,511 $ 432,840 $ 459,505 $ 505,266 $ 535,837
Deliveries (MDth):
Gas Sales
Residential 17,404 23,313 111,682 134,406 120,114 144,342
Commercial 2,518 4,359 18,007 23,008 19,993 25,068
Industrial 632 966 3,915 5,124 4,158 5,488
Non-utility 7,004 - 23,218 - 25,582 -
27,558 28,638 156,822 162,538 169,847 174,898
Transportation (a)
Residential 4,221 5,181 22,760 25,695 24,974 28,142
Commercial 7,633 7,238 35,092 36,029 39,542 40,405
Industrial 9,536 8,537 32,232 31,516 39,623 38,390
Non-utility - - 5 234 5 234
21,390 20,956 90,089 93,474 104,144 107,171
Total Gas Sales
and Transportation 48,948 49,594 246,911 256,012 273,991 282,069
Margin per Dth delivered $ 2.14 $ 2.21 $ 1.75 $ 1.79 $ 1.84 $ 1.90
(a) Volumes associated with contract pooling revenues are included in their
respective customer classes.
</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, 1998, such restrictions
amounted to $11.6 million out of North Shore Gas' total retained
earnings of $73.2 million.
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 3A of the Notes to Consolidated Financial Statements.)
In 1994, North Shore Gas received a demand from a responsible
party under CERCLA for reimbursement, indemnification, and
contribution for response costs incurred at a former mineral
processing site in Denver, Colorado. 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. Salomon filed a counterclaim for costs to be incurred by
Salomon and Shattuck with respect to the site. In 1997, the
District Court granted North Shore Gas' motion for summary
judgment, declaring that North Shore Gas is not liable for any
response costs in connection with the Denver site. On August 5,
1998, the U. S. Court of Appeals, Seventh Circuit, reversed the
District Court's decision. (See Note 3B of the Notes to
Consolidated Financial Statements.)
On November 14, 1995, the Illinois Attorney General filed a
complaint in the Circuit Court of Cook County naming North Shore
Gas and four other parties as defendants. The complaint alleges
violations arising out of a gasoline release that 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. North
Shore Gas is currently contesting this suit. (See Note 3C of the
Notes to Consolidated Financial Statements.)
Credit Lines. The Company has lines of credit totaling $170
million. At June 30, 1998, the Company had unused credit
available of $169.1 million.
The utility subsidiaries have lines of credit totaling $129.4
million. At June 30, 1998, the utility subsidiaries had unused
credit available from banks of $91.2 million.
Interest Coverage. The fixed charges coverage ratios for Peoples
Gas for the 12 months ended June 30, 1998, and for fiscal 1997
and 1996 were 4.04, 5.01, and 4.84, respectively.
The corresponding coverage ratios for North Shore Gas for the
same periods were 4.66, 5.74, and 5.62, respectively.
Dividends. On February 4, 1998, the Directors of the Company
voted to increase the regular quarterly dividend on the Company's
common stock to 48 cents per share from the 47 cents per share
previously in effect. The annualized dividend rate now amounts
to $1.92 per share.
Year 2000. The Company is modifying all of its computer programs
to be year 2000 compliant. The Company does not believe that the
amount of expenditures it will incur in connection with its year
2000 modifications will have a material adverse effect on the
financial position or results of operations of the Company. The
Company's year 2000 modification program has achieved substantial
progress and the Company expects that the modifications will be
completed and fully tested prior to the year 2000. The Company
is also requiring that other parties, particularly vendors with
whom the Company electronically interacts, have year 2000
compatible computer systems. The Company, however, cannot
control the success of other parties' year 2000 modification
efforts.
Forward-Looking Information. Management's Discussion and
Analysis of Results of Operations and Financial Condition
("MD&A") contains statements that may be considered forward-
looking, such as the statement of the Company's financial goal
regarding non-utility earnings, the effect of weather on net
income, cash position and coverage ratios, the insignificant
effect on income arising from changes in revenue from customers'
gas purchases from entities other than the utility subsidiaries,
environmental matters, and the discussion concerning year 2000
compliant information systems. These statements speak of the
Company's plans, goals, beliefs, or expectations, refer to
estimates or use similar terms. Actual results could differ
materially, because the realization of those results is subject
to many uncertainties including:
" The future health of the U.S. and Illinois economies.
" The timing and extent of changes in energy commodity prices
and interest rates.
" Litigation concerning North Shore's liability for CERCLA
response costs relating a former mineral processing site in
Denver, Colorado.
" Regulatory developments in the U.S., Illinois and other
states where the Company has investments.
" Changes in the nature of the Company's competition resulting
from industry consolidation, legislative change, regulatory
change and other factors, as well as action taken by particular
competitors.
" The Company's success in identifying non-utility investments
on financially acceptable terms and generating earnings from
those investments in a reasonable time.
" The ability of various vendors and others with whom the
Company electronically interacts to complete year 2000 systems
modification efforts on a timely basis and in a manner that
allows them to continue normal business transactions with the
Company without disruption.
Some of these uncertainties that may affect future results are
discussed in more detail in the sections of "Item 1 - Business"
of the Annual Report on Form 10-K captioned "Competition", "Sales
and Rates", "State Legislation and Regulation", "Federal
Legislation and Regulation", "Environmental Matters", and
"Current Gas Supply". All forward-looking statements included in
this MD&A are based upon information presently available, and the
Company assumes no obligation to update any forward-looking
statements.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 3 of the Notes to Consolidated Financial Statements
for a discussion pertaining to environmental matters.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
Number Description of
Document
27 Financial Data Schedule
b.
Reports on Form 8-K filed during the quarter ended
June 30, 1998
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
Peoples Energy Corporation
(Registrant)
August 12, 1998 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 INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENTS OF INCOME, CONSOLIDATED BALANCE SHEETS, AND CONSOLIDATED
STATEMENTS OF CASH FLOWS, AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,414,587
<OTHER-PROPERTY-AND-INVEST> 18,326
<TOTAL-CURRENT-ASSETS> 390,896
<TOTAL-DEFERRED-CHARGES> 28,019
<OTHER-ASSETS> 44,190
<TOTAL-ASSETS> 1,896,018
<COMMON> 290,792
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 474,933
<TOTAL-COMMON-STOCKHOLDERS-EQ> 765,725
0
0
<LONG-TERM-DEBT-NET> 527,004
<SHORT-TERM-NOTES> 814
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
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0
<CAPITAL-LEASE-OBLIGATIONS> 0
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<OTHER-ITEMS-CAPITAL-AND-LIAB> 602,475
<TOT-CAPITALIZATION-AND-LIAB> 1,896,018
<GROSS-OPERATING-REVENUE> 1,009,375
<INCOME-TAX-EXPENSE> 53,719
<OTHER-OPERATING-EXPENSES> 838,176
<TOTAL-OPERATING-EXPENSES> 891,895
<OPERATING-INCOME-LOSS> 117,480
<OTHER-INCOME-NET> 2,845
<INCOME-BEFORE-INTEREST-EXPEN> 120,325
<TOTAL-INTEREST-EXPENSE> 29,659
<NET-INCOME> 90,666
0
<EARNINGS-AVAILABLE-FOR-COMM> 90,666
<COMMON-STOCK-DIVIDENDS> 49,921
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<CASH-FLOW-OPERATIONS> 155,105
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</TABLE>
