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 December 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 2-26983
THE PEOPLES GAS LIGHT AND COKE COMPANY
(Exact name of registrant as specified in its charter)
Illinois 36-1613900
(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)
122 South Michigan Avenue, Chicago, Illinois
(Former address, if changed since last report)
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:
24,817,566 shares of Common Stock, without par value, outstanding
at January 31, 1995.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The Peoples Gas Light and Coke Company
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
December 31, December 31,
----------------- -----------------
1994 1993 1994 1993
-------- --------- -------- ---------
(Thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Gas sales $ 229,811 $295,976 $ 928,883 $ 984,436
Transportation of customer-
owned gas 29,182 30,134 97,992 102,213
Other 7,686 4,087 20,780 16,070
-------- -------- --------- ---------
Total Operating Revenues 266,679 330,197 1,047,655 1,102,719
-------- -------- --------- ---------
OPERATING EXPENSES:
Gas costs 123,662 171,678 518,887 557,102
Operation 42,929 48,588 190,386 191,481
Maintenance 8,707 7,752 35,838 32,964
Depreciation 14,786 13,671 58,939 55,259
Taxes - Income 11,979 14,845 24,548 31,605
- State & local revenue 28,634 36,028 114,379 121,149
- Other 4,488 4,288 18,634 18,543
-------- -------- ------- ---------
Total Operating Expenses 235,185 296,850 961,611 1,008,103
-------- -------- ------- ---------
OPERATING INCOME 31,494 33,347 86,044 94,616
-------- -------- ------- --------
OTHER INCOME:
Interest income 965 177 5,338 1,340
Miscellaneous 464 10,601 2,729 12,848
------ ------- ------ ------
Total Other Income 1,429 10,778 8,067 14,188
------ ------- ------ ------
GROSS INCOME 32,923 44,125 94,111 108,804
------ ------ ------ -------
INCOME DEDUCTIONS:
Interest on long-term debt 9,877 8,653 39,253 34,908
Other interest 1,088 1,283 2,438 2,651
Amortization of debt discount
and expense 175 162 702 626
Miscellaneous 34 34 137 101
------ ------ ------ ------
Total Income Deductions 11,174 10,132 42,530 38,286
------ ------ ------ ------
NET INCOME 21,749 33,993 51,581 70,518
Preferred stock dividends -- -- -- 488
------- -------- --------- -------
NET INCOME APPLICABLE
TO COMMON STOCK $ 21,749 $ 33,993 $ 51,581 $ 70,030
---------- -------- ---------- ----------
---------- -------- ---------- ----------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
The Peoples Gas Light and Coke Company
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1994 September 30, 1993
(Unaudited) 1994 (Unaudited)
------------ ------------ -----------
(Thousands)
<S> <C> <C> <C>
PROPERTIES AND OTHER ASSETS
CAPITAL INVESTMENTS:
Property, plant and equipment,
at original cost $1,773,659 $1,760,004 $1,719,025
Less - Accumulated depreciation 608,004 596,808 567,651
--------- --------- ---------
Net property, plant and equipment 1,165,655 1,163,196 1,151,374
Other investments 6,324 6,235 8,107
--------- --------- ---------
TOTAL CAPITAL INVESTMENTS - NET 1,171,979 1,169,431 1,159,481
--------- --------- ---------
CURRENT ASSETS:
Cash 4,121 3,173 15,478
Cash equivalents 39,640 54,935 --
Other temporary cash investments,
at cost that approximates market value 600 600 600
Trust fund, utility construction 16,440 31,493 68,256
Receivables -
Customers, net of allowance for
uncollectible accounts of $20,145,
$23,400, and $16,120, respectively 106,468 68,786 133,372
Other 5,093 3,377 31,619
Accrued unbilled revenues 63,367 17,561 72,184
Materials and supplies, at average cost 22,313 21,564 23,593
Gas in storage, at last-in, first-out cost 105,154 123,584 100,295
Gas costs recoverable through rate adjustments 14,983 12,024 43,082
Prepayments 1,398 1,649 1,476
-------- -------- --------
TOTAL CURRENT ASSETS 379,577 338,746 489,955
-------- -------- --------
DEFERRED CHARGES 40,430 40,615 35,753
---------- --------- ---------
TOTAL PROPERTIES AND OTHER ASSETS $1,591,986 $1,548,792 $1,685,189
---------- --------- ---------
---------- --------- ---------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
The Peoples Gas Light and Coke Company
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1994 September 30, 1993
(Unaudited) 1994 (Unaudited)
---------- ---------- -----------
(Thousands of Dollars)
<S> <C> <C> <C>
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common Stockholder's Equity:
Common stock, without par value
Authorized - 40,000,000 shares
Outstanding - 24,817,566 shares $ 165,307 $ 165,307 $ 165,307
Retained earnings 373,770 366,168 378,029
-------- --------- --------
Total Common Stockholder's Equity 539,077 531,475 543,336
Long-term debt, exclusive of sinking fund
payments and maturities due within one year 549,150 549,150 549,150
--------- --------- ---------
TOTAL CAPITALIZATION 1,088,227 1,080,625 1,092,486
--------- --------- ---------
CURRENT LIABILITIES:
Interim loans -- 900 80,650
Accounts payable 98,465 95,027 119,215
Dividends payable on common stock 14,146 13,898 13,650
Customer gas service and credit deposits 50,473 39,543 37,500
Accrued taxes 45,897 26,691 51,048
Gas sales revenue refundable through
rate adjustments 40,091 41,167 6,487
Accrued interest 8,321 10,204 7,945
Temporary LIFO liquidation credit 5,121 -- 18,452
-------- ------- -------
TOTAL CURRENT LIABILITIES 262,514 227,430 334,947
-------- ------- -------
RESERVES AND DEFERRED CREDITS:
Deferred income taxes - primarily
accelerated depreciation 181,310 176,416 186,413
Investment tax credits being amortized
over the average lives of related property 35,428 35,836 37,076
Other 24,507 28,485 34,267
--------- -------- --------
TOTAL RESERVES AND DEFERRED CREDITS 241,245 240,737 257,756
---------- --------- ---------
TOTAL CAPITALIZATION AND LIABILITIES $1,591,986 $1,548,792 $1,685,189
---------- --------- ---------
---------- --------- ---------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
The Peoples Gas Light and Coke Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------
1994 1993
------- --------
(Thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 21,749 $ 33,993
Adjustments to reconcile net income to net cash:
Depreciation 14,786 13,671
Deferred income taxes and investment tax credits - net 3,926 1,498
Change in other deferred credits and reserves (3,418) (18,003)
Change in deferred charges 185 (9,243)
Other 25 --
------- ------
37,253 21,916
Change in current assets and liabilities:
Receivables - net (39,398) (61,335)
Accrued unbilled revenues (45,806) (45,985)
Materials and supplies (749) 81
Gas in storage 18,430 19,359
Rate adjustments recoverable or refundable (4,035) (810)
Accounts payable 3,438 17,533
Customer gas service and credit deposits 10,930 (993)
Accrued taxes 19,206 25,799
Accrued interest (1,883) (326)
Temporary LIFO liquidation credit 5,121 18,452
Other 249 613
------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,756 (5,696)
------- --------
INVESTING ACTIVITIES:
Capital expenditures - construction (16,763) (20,040)
Other assets (482) (459)
Other capital investments (113) 187
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (17,358) (20,312)
-------- --------
FINANCING ACTIVITIES:
Interim loans - net (900) 17,450
Issuance of long-term debt -- 102,000
Trust fund, utility construction 15,053 (68,256)
Redemption of preferred stock -- (3,400)
Dividends paid on common stock (13,898) (14,146)
Dividends paid on preferred stock -- (71)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 255 33,577
-------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (14,347) 7,569
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 58,108 7,909
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 43,761 $ 15,478
------ ------
------ ------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
The Peoples Gas Light and Coke Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been
prepared by The Peoples Gas Light and Coke Company (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 is influenced by seasonal weather
conditions because a large element of the Company's 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 Statement of Cash Flows
For purposes of the balance sheet and the statement of cash
flows, the Company considers all short-term liquid investments
with maturities of three months or less to be cash equivalents.
Income taxes and interest paid (excluding capitalized
interest) were as follows:
<TABLE>
<CAPTION>
For the three months
ended December 31, 1994 1993
--------------------------------------------------
(Thousands)
<S> <C> <C>
Income taxes paid $ 124 $ 65
Interest paid 12,076 10,108
</TABLE>
2C Income Taxes
In March 1993, the Company adopted, effective October 1,
1992, the liability method of accounting for deferred income
taxes required by the Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes."
Under the liability method, deferred income taxes have been
recorded using currently enacted tax rates for the
differences between the tax basis of assets and liabilities
and the basis reported in the financial statements. Due to
the effects of regulation on the Company, 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.
2D Recovery of Gas Costs, Including Charges for Transition Costs
Under the tariffs of the Company, 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 the Company for fiscal years 1992
through 1994 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 Company is
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 3A and 3B.)
3. RATES AND REGULATION
3A Utility Rate Proceedings
Rate Filing. On December 16, 1994, the Company filed with the
Commission proposed changes in rates that are designed to
increase annual revenues by about $59.9 million, exclusive of
additional charges for revenue taxes. The Company is seeking a
rate of return on original-cost rate base of 10.03 percent, which
reflects a 12.7 percent cost of common equity.
The Company expects that the Commission, following its usual
practices, will not issue a decision regarding the Company's rate
increase request until November 1995. The Company cannot predict
the outcome of its rate increase request.
Environmental Cost Recovery. 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 the
Company 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 such environmental costs but required
that the recovery occur over a five-year period without recovery
of carrying charges on unrecovered balances. Reimbursements of
environmental costs from insurance carriers or other entities are
to be netted against costs and reflected in rates over a
five-year period. In November 1992, several parties, including
the Company and North Shore Gas, appealed the Commission's order
to the Illinois Appellate Court. On December 29, 1993, the Third
District Appellate Court issued its opinion affirming the
Commission's order in the consolidated proceedings. On April 6,
1994, the Illinois Supreme Court allowed an appeal of the
Appellate Court's decision. Any change made pursuant to the
Supreme Court's order on appeal would have a prospective effect
only. (See Note 4.)
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 the Company's 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 2D and 3B.)
3B 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. Mandatory unbundling requires pipelines to sell
separately the various components of their gas sales services
(gathering, transportation and storage services, and gas supply).
These components were previously combined or "bundled" in gas
services such as those purchased by the Company. To address
concerns raised by utilities about reliability of service to
their service territories, the 636 Orders required pipelines to
offer a "no-notice" transportation service under which firm
transporters can receive delivery of gas up to their contractual
capacity level on any day without prior scheduling. Further, the
636 Orders provided for mechanisms for pipelines to recover
prudently incurred transition costs associated with the
restructuring process.
The FERC initiated individual restructuring proceedings for
each interstate pipeline. Each pipeline submitted a proposal to
bring it into compliance with the requirements of the 636 Orders.
The restructured tariffs of Natural Gas Pipeline Company of
America (Natural), the principal pipeline serving the Company,
went into effect December 1, 1993. The restructured tariffs of
other pipelines serving the Company 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, the Company elected
necessary levels of restructured services, including no-notice
services, from the menu of restructured services offered by the
various pipelines. Also during 1993, the Company 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 the Company is GSR costs.
The Company is 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 of approximately $103
million on the amount of GSR costs recoverable by Natural from
the Company. However, subject to this cap, the level of costs
that the Company will incur is dependent primarily upon the future
market price of natural gas and pipeline negotiations with
producers. The Company is currently recovering transition costs
through the Gas Charge. As of December 31, 1994, the Company has
accrued $34.4 million and has made payments of $25.2 million toward the
cap.
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 2D and 3A.)
4. ENVIRONMENTAL MATTERS
The Company, its 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 Company might be required to undertake remedial
action with respect to some of these materials, if found at the
sites.
The current owner of a site in McCook, Illinois, near Chicago,
has advised the Company 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 the Company. The Company is
currently evaluating this claim.
The Company, in cooperation with the IEPA, is conducting
investigations of certain sites (a total of 29) 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. The Company has engaged environmental
consulting firms to assist in the Company's investigations. At
this time, except for 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, the Company may conduct an RI/FS
at the Pitney Court Station and Division Street sites under the
supervision of the IEPA. In addition, the Company 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 the
Company's Division Street property in Chicago. During the
inspection, the IEPA and the Company took several soil samples
for laboratory analysis. The analysis of the samples collected
by the Company indicates the presence of certain substances
within the soil of the Division Street property that could be
attributable to former manufactured gas operations. The Company
may conduct an RI/FS of the property under the supervision of the
IEPA.
The current owners of a site in Chicago, formerly called
Pitney Court Station, have advised the Company that they found
what appear to be gas manufacturing wastes underneath their
property. The owners have demanded monetary compensation from
the Company because of the presence of such wastes. The Company
has rejected this demand, but may conduct an RI/FS of the site
under the supervision of the IEPA.
The Company has observed what appear to be gas purification
wastes on a site in Chicago, formerly called the 110th Street
Station, and property contiguous thereto. The Company 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 the Company that they have found what
appear to be gas manufacturing wastes underneath their property.
The owners have demanded monetary compensation from the Company
because of the presence of such wastes. The Company is currently
evaluating this claim.
In 1994, the Company became aware of a planned residential
development at a site in Chicago, formerly called the Equitable
Distribution Station. The Company is conducting a preliminary
investigation to determine whether gas manufacturing wastes are
present at the site.
The Company is accruing and deferring the costs it incurs in
connection with all of the sites, including related legal
expenses, pending recovery through rates or from insurance
carriers or other entities. As of December 31, 1994, the total
of the costs deferred by the Company, net of recoveries, was
$10.4 million. This amount includes an estimate of the costs of
the investigations initiated at the request of the IEPA at the
sites referred to above. The amount also includes an estimate of
the costs of remediation 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 IEPA. While the Company 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.
The Company has filed suit against a number of insurance
carriers for the recovery of environmental costs relating to its
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
Company in connection with former manufactured gas sites in
Chicago. The Company is also asking the court to award damages
stemming from the insurers' breach of their contractual
obligation to defend and indemnify the Company against these
costs. At this time, management cannot determine the timing and
extent of the Company's recovery of costs from its insurance
carriers. Accordingly, the costs deferred as of December 31,
1994 have not been reduced to reflect recoveries from insurance
carriers.
Costs incurred by the Company 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 Company in connection with the sites will not
have a material adverse effect on financial position or results
of operations. The Company is authorized to recover the costs of
environmental activities relating to its former manufactured gas
operations under rate mechanisms approved by the Commission. As
of December 31, 1994, the Company had recovered $241,000 of such
costs through rates. (See Note 3A for a discussion of
proceedings regarding the recovery of such costs through utility
rates.)
5. GAS OVER-PRESSURE CONDITION
On January 17, 1992, an over-pressure condition occurred in
the gas mains of the Company 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. The Company is aware of four deaths and 14
personal injuries allegedly resulting from the explosion and
fires. The Company 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 the Company as a
result of the over-pressure condition. 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 the Company's
training of its personnel in its gas operations section and of
some of the Company's practices at the time of the incident.
The Company strongly disagrees with the criticisms by the NTSB
and the Commission Staff of the training given by the Company to
personnel in its gas operations section. The Company also
disagrees 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 carries substantial insurance coverage. If
liability were found on the part of the Company, management
believes that any costs incurred for damages will be adequately
covered by insurance. However, the Company's primary insurance
carrier has asserted that under Illinois law, liability for
punitive damages is not insurable. The Company 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 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.
6. 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 $25
million, or $19.4 million after income taxes. The Company
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. The Company 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, the Company included $12.7
million, or $9.7 million after income taxes, in income in 1994.
The amount after income taxes was included in Other Income -
Miscellaneous. At September 30, 1994, approximately $12.7 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 the Company
is being amortized (credited) to operation expense. The effect
is to offset increases in costs that the Company will incur
during the year. In the quarter ended December 31, 1994, the
Company amortized approximately $3.9 million, or $3.0 million
after income taxes, leaving a remaining balance of about $9
million included in Reserves and Deferred Credits - Other.
7. LONG-TERM DEBT
7A Issuance Of Bonds
On December 22, 1993, the City of Chicago issued $102 million,
in aggregate principal amount, of gas supply revenue bonds ($75
million 5-3/4 percent Series A and $27 million adjustable-rate
Series B), which were collateralized by an equal amount of the
Company's 30-year first mortgage bonds. The proceeds were lent
to the Company for the purpose of financing the construction of
certain facilities within the City. The proceeds are being held
in a trust fund until drawn down by the Company for reimbursement
of construction expenditures.
In accordance with provisions of the Internal Revenue Code and
regulations thereunder, any arbitrage income must be paid to the
federal government. Additionally, all assets financed through
this arrangement must be depreciated on a straight-line basis for
tax purposes.
7B Interest-Rate Adjustments
The rate of interest on the City of Joliet 1984 Series C
Bonds, which are secured by the Company's 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. The Company 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 the Company's 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. The Company
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.
8. POSTEMPLOYMENT BENEFITS
In November 1992, the Financial Accounting Standards Board
(FASB) issued SFAS No. 112, "Employers' Accounting for
Postemployment Benefits." This statement requires the accrual of
certain benefits provided to former or inactive employees after
employment but before retirement. The Company adopted SFAS No.
112 effective October 1, 1994. Implementation of this statement
did not have a material effect on financial position or results
of operations.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
RESULTS OF OPERATIONS
Net Income
Net income applicable to common stock decreased $12.2 million,
to $21.7 million, for the three-months ended December 31, 1994,
from the results of last year's similar quarter. Results for the
current three-months were adversely affected by: (1) lower gas
deliveries resulting from weather that was about 20 percent
warmer than the year-ago quarter, and (2) a timing difference in
recognizing benefits from a previously announced federal income
tax settlement ($3.0 million after income taxes that was
recognized in the current year's first quarter versus about $9.6
million after income taxes recognized in the last year's first
quarter). An additional $6.7 million from the settlement will be
recognized during the remainder of fiscal 1995. (See Note 6 of
the Notes to Consolidated Financial Statements.) Benefiting
quarterly results were the sales of certain oil and gas
interests.
Net income applicable to common stock decreased $18.4 million,
to $51.6 million, for the current 12-month period from the
results of last year's like period. Results for the current 12
months were negatively impacted by lower gas deliveries resulting
from weather that was 7 percent warmer than the prior year's like
period and by the timing difference in recognizing benefits from
the tax settlement. Further affecting the 12-months ended
results were increased operating expenses, including a higher
provision for uncollectible accounts, that were partially offset
by sales of certain oil and gas interests.
A summary of variations affecting income between periods is
presented below, with explanations of significant differences
following:
<TABLE>
<CAPTION>
Three Months Ended 12 Months Ended
December 31, December 31,
1994 Over 1993 1994 Over 1993
----------------- -----------------
(Thousands of dollars) Amount Percent Amount Percent
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net operating revenues (a) $(8,108) (6.6) $(10,079) (2.4)
Operation and maintenance expenses (4,704) (8.3) 1,779 0.8
Depreciation expense 1,115 8.2 3,680 6.7
Income taxes (2,866) (19.3) (7,057) (22.3)
Other income (9,349) (86.7) (6,121) (43.1)
Income deductions 1,042 10.3 4,244 11.1
Net Income (12,244) (36.0) (18,449) (26.3)
- -------------------------------------------------------------------------
</TABLE>
(a) Operating revenues, net of gas costs and revenue taxes.
Net Operating Revenues
Gross revenues of the Company are affected by changes in the
unit cost of the Company's 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 Company. The direct
customer purchases have no effect on net income because the
Company provides transportation service for such gas volumes and
recovers margins similar to those applicable to conventional gas
sales. Changes in the unit cost of gas do not significantly
affect net income because the Company's tariffs provide for
dollar-for-dollar recovery of gas costs. (See Note 2D of the
Notes to Consolidated Financial Statements.) The Company's
tariffs also provide for dollar-for-dollar recovery of the cost
of revenue taxes imposed by the State and City.
Since income is not significantly affected by changes in
revenue from customers' gas purchases from producers or marketers
rather than from the Company, changes in gas costs, or changes in
revenue taxes, the discussion below pertains to "net operating
revenues" (operating revenues, net of gas costs and revenue
taxes). The Company considers net operating revenues to be a
more pertinent measure of operating results than gross revenues.
Net operating revenues decreased $8.1 million, to $114.4
million, and $10.1 million, to $414.4 million, for the three- and
12-month periods, respectively. The three-month period included
weather that was about 20 percent warmer than the similar
year-ago quarter resulting in lower gas deliveries. Temperatures
in the Chicago area during the current three-months through
December were the warmest in the last 23 years. Warmer weather
in the current 12-months also resulted in lower gas deliveries.
Both current periods benefited from the sales of certain oil and
gas interests.
Operation and Maintenance Expenses
Operation and maintenance expenses decreased $4.7 million, to
$51.6 million, for the current three-month period, due primarily
to recognizing approximately $3.9 million for the fiscal 1995
first-quarter's portion of the balance of the IRS settlement.
(See Note 6 of the Notes to Consolidated Financial Statements.)
Operation and maintenance expenses increased $1.8 million, to
$226.2 million, for the current 12-month period, due mainly to an
increase in the provision for uncollectible accounts and higher
labor costs that arose mainly from weather-related overtime work
and from start-up costs for new customer-service programs.
Partially offsetting these items were a reduced workforce, lower
employee benefits expenses for pensions and group insurance, and
a decrease in the provision for injuries and damages.
Depreciation Expense
Depreciation expense increased $1.1 million, to $14.8 million,
and $3.7 million, to $58.9 million, for the current three- and
12-month periods, respectively, due primarily to depreciable
property additions.
Income Taxes
Income taxes decreased $2.9 million, to $12.0 million, in the
current three-month period, due principally to lower pre-tax
income.
Income taxes decreased $7.1 million, to $24.5 million, for the
current 12-month period, due primarily to lower pre-tax income.
Other Income
Other income decreased $9.3 million, to $1.4 million, for the
current three-month period, due primarily to recognizing one-half
of the IRS settlement of about $9.6 million after income taxes in
last year's first quarter. (See Note 6 of the Notes to
Consolidated Financial Statements.)
Other income decreased $6.1 million, to $8.1 million, for the
current 12-month period, due primarily to the recognition of the
aforementioned IRS settlement in the prior 12-month period. This
decrease was partially offset by higher interest income
reflecting larger cash balances available for investment and by
additional interest income from proceeds being held in a trust
fund generated from the December 1993 bond issuance. (See Note
7A of the Notes to Consolidated Financial Statements.)
Income Deductions
Income deductions increased $1.0 million, to $11.2 million,
and $4.2 million, to $42.5 million, for the current three- and
12-month periods, respectively, due chiefly to increased interest
on long-term debt reflecting additional debt outstanding.
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 2D, 3A,
and 3B 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
2D, 3A, and 3B 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 8 of the Notes to
Consolidated Financial Statements.)
Reengineering Study. The Company is undertaking a major project
to reengineer its 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.
LIQUIDITY AND CAPITAL RESOURCES
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 the Company 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 Commission's order is on appeal before
the Illinois Supreme Court. (See Note 3A of the Notes to
Consolidated Financial Statements.)
The Company filed proposed changes in rates with the
Commission in December 1994. (See Note 3A of the Notes to
Consolidated Financial Statements.)
Environmental Matters. The Company is conducting environmental
investigations and work at certain sites that were the location
of former manufactured gas operations. (See Note 4 of the Notes
to Consolidated Financial Statements.)
Over-pressure Condition. On January 17, 1992, an over-pressure
condition occurred in the gas mains of the Company 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 5 of the Notes to Consolidated
Financial Statements.)
Bonds Issued. On December 22, 1993, the City of Chicago issued
$102 million, in aggregate principal amount, of gas supply
revenue bonds, which were collateralized by an equal amount of
the Company's 30-year first mortgage bonds. The proceeds were
lent to the Company for the purpose of financing the construction
of certain facilities within the City. (See Note 7A of the Notes
to Consolidated Financial Statements.)
Additional bonds are issuable by the Company, 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 Company's ability to issue additional debt,
as needed.
Credit Lines. On July 1, 1994, the Company reduced its lines of
credit to approximately $131 million from $154 million of which
North Shore Gas may borrow up to $30 million. Agreements
covering $93.7 million of the total will expire on June 29, 1995.
The agreement covering the remaining $37.4 million will expire on
January 31, 1997. Such lines of credit cover projected
short-term credit needs of the Company and North Shore Gas and
support the long-term debt treatment of the Company's
adjustable-rate mortgage bonds. (See Note 7B of the Notes to
Consolidated Financial Statements.)
Interest Coverage. The Company's fixed charges coverage ratios
for the 12-months ended December 31, 1994, and for fiscal 1994
and 1993 were 2.80, 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.)
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 4 of the Notes to Consolidated Financial Statements
for a discussion pertaining to environmental matters.
See Note 5 of the Notes to Consolidated Financial Statements
for a discussion of an over-pressure condition that occurred on
January 17, 1992, in the Company's 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 ofDocument
-------- ---------------------------------
27 Financial Data Schedule
b. Reports on Form 8-K filed during the quarter ended
December 31, 1994
Date of Earliest Event Reported - November 17, 1994
Item 5. Other Events
Selected Financial Information
Date of Earliest Event Reported - December 9, 1994
Item 5. Other Events
Rates and Regulation
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.
The Peoples Gas Light and Coke Company
-------------------------------------
(Registrant)
February 9, 1995 By: /s/ K. S. BALASKOVITS
----------------- ---------------------------
(Date) K. S. Balaskovits
Vice President and Controller
(Same as above)
------------------------------
Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED STATEMENTS OF INCOME, CONSOLIDATED BALANCE SHEETS,
CONSOLIDATED STATEMENTS OF CASH FLOWS, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> DEC-31-1994
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1165655
<OTHER-PROPERTY-AND-INVEST> 6324
<TOTAL-CURRENT-ASSETS> 379577
<TOTAL-DEFERRED-CHARGES> 40430
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1591986
<COMMON> 165307
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 373770
<TOTAL-COMMON-STOCKHOLDERS-EQ> 539077
0
0
<LONG-TERM-DEBT-NET> 549150
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
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<OTHER-ITEMS-CAPITAL-AND-LIAB> 503759
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<OTHER-OPERATING-EXPENSES> 223206
<TOTAL-OPERATING-EXPENSES> 235185
<OPERATING-INCOME-LOSS> 31494
<OTHER-INCOME-NET> 1220
<INCOME-BEFORE-INTEREST-EXPEN> 32714
<TOTAL-INTEREST-EXPENSE> 10965
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0
<EARNINGS-AVAILABLE-FOR-COMM> 21749
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