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 December 31, 1998
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)
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, 1999.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
The Peoples Gas Light and Coke Company
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Twelve Months Ended
December 31, December 31,
1998 1997 1998 1997
(Thousands of Dollars)
<S> <C> <C> <C> <C>
OPERATING REVENUES $234,980 $306,966 $835,534 $ 1,069,971
OPERATING EXPENSES:
Gas costs 91,316 144,079 325,675 502,231
Operation and maintenance 55,183 51,606 209,951 210,449
Depreciation and amortization 17,151 16,780 68,124 66,450
Taxes, other than income taxes 31,344 36,784 111,860 130,843
Total Operating Expenses 194,994 249,249 715,610 909,973
OPERATING INCOME 39,986 57,717 119,924 159,998
OTHER INCOME AND (DEDUCTIONS) (8,233) (8,174) (31,148) (29,244)
EARNINGS BEFORE INCOME TAXES 31,753 49,543 88,776 130,754
INCOME TAXES 12,160 19,119 31,229 47,341
NET INCOME APPLICABLE
TO COMMON STOCK $ 19,593 $ 30,424 $ 57,547 $ 83,413
The Notes to Consolidated Financial Statements are an integral part
of these statements.
</TABLE>
<TABLE>
The Peoples Gas Light and Coke Company
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1998 September 30, 1997
(Unaudited) 1998 (Unaudited)
(Thousands of Dollars)
PROPERTIES AND OTHER ASSETS
<S> <C> <C> <C>
CAPITAL INVESTMENTS:
Property, plant and equipment, at original cost $1,919,904 $ 1,888,025 $1,830,564
Less - Accumulated depreciation and amortization 668,134 654,262 623,906
Net property, plant and equipment 1,251,770 1,233,763 1,206,658
Other investments 7,965 9,745 5,406
Total Capital Investments - Net 1,259,735 1,243,508 1,212,064
CURRENT ASSETS:
Cash and cash equivalents 5,170 3,134 6,745
Temporary cash investments 500 500 500
Receivables -
Customers, net of allowance for uncollectible accounts
of $21,567, $22,613, and $26,144, respectively 75,515 50,280 116,343
Other 22,784 34,051 25,568
Accrued unbilled revenues 60,609 17,363 68,377
Materials and supplies, at average cost 12,265 12,332 14,739
Gas in storage, at last-in, first-out cost 47,770 75,767 65,089
Gas costs recoverable through rate adjustments 2,144 3,847 5,500
Regulatory assets 6,472 6,651 5,333
Prepayments 76,734 70,406 46,795
Total Current Assets 309,963 274,331 354,989
OTHER ASSETS:
Non-current regulatory assets 42,125 52,670 32,508
Deferred charges 18,746 18,933 17,777
Total Other Assets 60,871 71,603 50,285
Total Properties and Other Assets $1,630,569 $ 1,589,442 $1,617,338
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<TABLE>
The Peoples Gas Light and Coke Company
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31, December 31,
1998 September 30, 1997
(Unaudited) 1998 (Unaudited)
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
<S> <C> <C> <C>
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 422,311 418,601 426,064
Accumulated other comprehensive income (1,389) (1,389) (2,357)
Total Common Stockholder's Equity 586,229 582,519 589,014
Long-term debt, exclusive of sinking fund
payments and maturities due within one year 452,000 452,000 462,400
Total Capitalization 1,038,229 1,034,519 1,051,414
CURRENT LIABILITIES:
Interim loans 32,540 8,900 45,375
Accounts payable 99,265 100,522 111,868
Dividends payable on common stock 15,883 13,898 16,380
Customer gas service and credit deposits 57,122 43,237 40,938
Sinking fund payments and maturities, due within one year
Long-term debt - 10,400 -
Accrued taxes 47,389 25,708 47,133
Gas sales revenue refundable through rate adjustments - 9,864 -
Accrued interest 6,145 8,788 6,265
Total Current Liabilities 258,344 221,317 267,959
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes - primarily accelerated depreciation 249,893 247,959 234,575
Investment tax credits being amortized over
the average lives of related property 28,839 28,951 30,002
Other 55,264 56,696 33,388
Total Deferred Credits and Other Liabilities 333,996 333,606 297,965
Total Capitalization and Liabilities $1,630,569 $ 1,589,442 $1,617,338
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
The Peoples Gas Light and Coke Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
December 31,
1998 1997
(Thousands of Dollars)
Operating Activities:
Net income $19,593 $ 30,424
Adjustments to reconcile net income to net cash:
Depreciation and amortization 17,151 16,780
Deferred income taxes and investment tax credits - net 1,280 4,558
Change in deferred credits and other liabilities (890) 1,422
Change in other assets 9,328 (3,512)
Change in current assets and liabilities:
Receivables - net (13,968) (34,422)
Accrued unbilled revenues (43,245) (48,268)
Materials and supplies 67 (1,514)
Gas in storage 27,997 2,447
Regulatory assets 178 7,806
Prepayments (6,327) (6,993)
Accounts payable (1,257) (1,634)
Customer gas service and credit deposits 13,885 1,186
Accrued taxes 21,680 28,077
Rate adjustments refundable or recoverable (8,161) (16,656)
Accrued interest (2,643) (2,498)
Net Cash Provided by (Used in) Operating Activities 34,668 (22,797)
Investing Activities:
Capital expenditures - construction (14,346) (16,589)
Other assets (19,408) (102)
Other capital investments 1,780 64
Other temporary cash investments - 15,000
Net Cash Used in Investing Activities (31,974) (1,627)
Financing Activities:
Interim loans - net 23,640 44,675
Dividends paid on common stock (13,898) (32,015)
Retirement of long-term debt (10,400) -
Net Cash Provided by (Used in) Financing Activities (658) 12,660
Net Increase (Decrease) in Cash and Cash Equivalents 2,036 (11,764)
Cash and Cash Equivalents at Beginning of Period 3,134 18,509
Cash and Cash Equivalents at End of Period $ 5,170 $ 6,745
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, 1998. 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 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 Regulated Operations
The Company's 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.
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 were as follows:
For the three months
ended December 31, 1998 1997
(Thousands)
Income taxes paid $ 63 $30
Interest paid 10,656 10,578
2C Recovery of Gas Costs
Under the tariff of the Company, 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 the Company for fiscal
years 1997 and 1998, are currently pending before the Commission.
2D Accounting Standard
In October 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." This Statement establishes the standards for reporting
and display of comprehensive income and its components in a full
set of financial statements. The statement requires that all
items that are required to be recognized as components of
comprehensive income be reported in a financial statement with
equal prominence as the other financial statements. (See Note 5.)
2E Hedging Activities
The Company has a formal risk management policy that
establishes monitoring and controlling procedures for 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 December 31, 1998 the Company had
open derivative financial instruments representing hedges of
equivalent natural gas of .4 Bcf. At December 31, 1998, the
Company had deferred losses of $145,000 on the Consolidated
Balance Sheet.
3. ENVIRONMENTAL MATTERS
The Company, its 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). The Company is accruing and deferring the costs it
incurs for environmental activities 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 December 31, 1998, the total of the costs deferred by the Company
was $25.8 million. This amount includes the Company's best estimate
of the costs of investigating and remediating the Manufactured Gas
Sites. The estimate is based upon a comprehensive review by the
Company and its outside consultants of potential costs associated with
conducting investigative and remedial actions at the Manufactured
Gas Sites as well as the likelihood of whether such actions will
be necessary. While the Company intends to seek contribution from
other entities for the costs incurred at the sites, the full entent
of such contribution cannot be determines at this time.
The Company has filed suit against a number of insurance
carriers for the recovery of environmental costs relating to
the Comapny's former manufactured gas operations. The suit asks
the court to declare, among other things, that the insurers are
liable under policies in effect between 1937 and 1986 for costs
incurred or to be incurred by the Company in connection with two
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. In November 1998, the Company
reached a settlement agreement with one of the incurance
carriers. The costs deferred at December 31, 1998, have been
reduced by the proceeds of the settlement. At this time, management
cannot determine the timing and extent of the Company's
recovery of costs from the other insurance carriers.
Accordingly, the costs deferred at December 31, 1998 have
not been reduced to reflect recoveries from other insurance
carriers.
The Company belives that costs incurred by it 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 former
manufactured gas operations will not have a material adverse
effect on the financial position or results of operations of
the Company. The Company is recovering the costs of environmental
activities relating to its former manufactured gas operations,
including carrying charges on the unrecovered balances, under a rate
mechanism approved by the Commission. At December 31, 1998, it
had recovered $7.3 million of such costs through rates.
4. LONG-TERM DEBT
A. Interest-Rate Adjustments
The rate of interest on the $27.0 million principal amount
of the City of Chicago 1993 Series B Bonds, which are secured by
an equal principal amount of the Company's Adjustable-Rate First
and Refunding 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. 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, 1998, have been
remarketed. The interest rate on such bonds will be
3.20 percent for the period December 1, 1998, through
November 30, 1999.
The Company 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, the Company established a
three year line of credit with The Northern Trust Company, which
has since been extended to January 31, 2001.
B. Bonds Redeemed
On October 1, 1998, the Company redeemed, from general
corporate funds, $10.4 million aggregate principal amount of the
City of Joliet 1984 Series C Bonds, which were secured by the
Company's Adjustable-Rate First and Refunding Mortgage Bonds,
Series W.
5. COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting Comprehensive
Income," in fiscal 1999. This statement requires the reporting
of comprehensive income in addition to net income. Comprehensive
income is the total of net income and all other nonowner changes
in equity (other comprehensive income). Comprehensive income
includes net income plus the effect of the additional pension
liability not yet recognized as net periodic pension cost. The
Company has reported accumulated other comprehensive income in
the Company's Consolidated Balance Sheet.
Comprehensive income for the three and twelve months ended
December 31, 1998 and 1997 is as follows:
Three Months Ended 12 Months Ended
December 31, December 31,
1998 1997 1998 1997
Net income $19,593 $30,424 $57,547 $83,413
Other comprehensive income
Minimum pension liability - - 1,604 (2,645)
Income tax (expense)/benefit - - (636) 1,049
Other comprehensive income, net of tax - - 968 (1,596)
Comprehensive Income $19,593 $30,424 $58,515 $81,817
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
RESULTS OF OPERATIONS
Net Income
Net income decreased $10.8 million, to $19.6 million, and
$25.9 million, to $57.5 million, for the three- and 12-month
periods ended December 31, 1998, respectively, primarily due to
weather that was warmer during the current periods.
A summary of variations affecting income between periods is
presented below, with explanations of significant differences
following:
Three Months Ended 12 Months Ended
December 31, 1998 December 31, 1998
Over the Prior Period Over the Prior Period
(Thousands of dollars) Amount Percent Amount Percent
Operating revenues (71,986) (23.5) (234,437) (21.9)
Gas costs (52,763) (36.6) (176,556) (35.2)
Operation and maintenance expenses 3,577 6.9 (498) (0.2)
Depreciation and amortization expense 371 2.2 1,674 2.5
Taxes, other than income taxes (5,440) (14.8) (18,983) (14.5)
Other income and deductions (59) 0.7 (1,904) 6.5
Income taxes (6,959) (36.4) (16,112) (34.0)
Net income (10,831) (35.6) (25,866) (31.0)
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 tariff provides for
dollar-for-dollar recovery of gas costs. (See Note 2C of the
Notes to Consolidated Financial Statements.) The Company's
tariff also provides for dollar-for-dollar recovery of the cost
of revenue taxes and certain other charges imposed by the State
of Illinois and City of Chicago.
Operating revenues decreased $72.0 million, to $235.0 million,
and $234.4 million, to $835.5 million, for the current three- and
12- month periods, respectively, due to weather that was warmer
in both current periods and to lower unit costs of gas in the
current periods.
Gas Costs
Gas costs decreased $52.8 million, to $91.3 million, and
$176.6 million, to $325.7 million, for the three- and 12-month
periods ended December 31, 1998, respectively, due to reduced
sales resulting from warmer weather in the current periods and
lower unit costs of gas in the current periods.
Operation and Maintenance Expenses
Operation and maintenance expenses increased $3.6 million, to
$55.2 million, for the current three-month period, due primarily
to a reduction in pension credits. Also contributing to the
increase was an increase in the cost of outside services. These
effects were partially offset by a decrease in the provision
for uncollectible accounts and a reduction in the cost of group
insurance.
Operation and maintenance expenses decreased $498,000, to
$210.0 million, for the current 12-month period, due primarily to
a reduction in the provision for uncollectible accounts,
resulting from the decrease in revenues, a decrease in the cost
of group insurance, and other reductions in operation and
maintenance expenses. Offsetting these effects were an increase
in pension costs, primarily attributable to a reduction in
pension credits, and an increase in the cost of outside services.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $371,000, to
$17.2 million, and $1.7 million, to $68.1 million, in the current
three- and 12-month periods, respectively, due mainly to
depreciable property additions.
Taxes, Other Than Income Taxes
Taxes, other than income taxes, decreased $5.4 million, to
$31.3 million, and $19.0 million, to $111.9 million, for the
current three- and 12-month periods, respectively, primarily as a
result of the decrease in revenue taxes associated with the
decline in operating revenues attributable to the warmer weather
and to lower unit costs of gas experienced during the current
periods. Partially offsetting this decrease in taxes was the
increase in other taxes in the current periods due to the new
Supplemental Low Income Energy Assistance Charge and Renewable
Energy Resource and Coal Technology Assessment Charge which
became effective on January 1, 1998.
Other Income and Deductions
Other income and deductions increased $1.9 million, to $31.1
million, for the current 12-month period due primarily to
decreases in interest income and increases in interest on
commercial paper and on budget plan balances, partially offset by
an increase in the allowance for funds used during construction.
Income Taxes
Income taxes decreased $7.0 million, to $12.2 million, and
$16.1 million, to $31.2 million, for the current three- and 12-
month periods, respectively, due primarily to lower pre-tax
income. A prior period accrual adjustment partially offset the
decline in income taxes for the 12-month period.
Other Matters
Accounting Standard. In October 1998, the Company adopted SFAS
130, "Reporting Comprehensive Income." (See Notes 2D and 5 of
the Notes to Consolidated Financial Statements.)
Fixed Gas Charge Filing. On October 26, 1998, the Company made a
filing with the Commission under which the price for natural gas
would be set at a fixed level for at least the next five years.
By eliminating the monthly price fluctuations, the Company could
shield customers from price increases, although gas bills would
still reflect customers' increased usage during colder weather.
As the Company would assume and manage this risk, it would have
an opportunity to earn a profit on this initiative.
<TABLE>
Operating Statistics. The following table represents gas
distribution margin components:
<CAPTION>
Three Months Ended Twelve Months Ended
December 31, December 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Operating Revenues:(thousands)
Gas sales
Residential $171,980 $229,655 $611,136 $ 790,096
Commercial 21,080 32,429 84,412 121,470
Industrial 3,554 6,147 14,639 23,769
196,614 268,231 710,187 935,335
Transportation
Residential 10,807 10,514 34,845 33,760
Commercial 12,349 12,792 41,285 42,234
Industrial 6,112 6,594 22,610 24,663
Contract Pooling 3,582 3,231 9,216 17,054
Other 249 433 574 433
33,099 33,564 108,530 118,144
Other 5,267 5,171 16,817 16,492
Total Operating Revenues 234,980 306,966 835,534 1,069,971
Less- Gas Costs 91,316 144,079 325,675 502,231
Gross Margin $143,664 $162,887 $509,859 $ 567,740
Deliveries (MDth):
Gas Sales
Residential 27,919 35,416 92,970 117,031
Commercial 3,809 5,461 14,856 20,313
Industrial 753 1,124 2,989 4,339
32,481 42,001 110,815 141,683
Transportation (a)
Residential 7,377 8,009 23,584 24,917
Commercial 10,130 10,682 33,611 35,778
Industrial 8,175 8,841 33,260 31,635
Other - - 234 234
25,682 27,532 90,689 92,564
Total Gas Sales and Transportation 58,163 69,533 201,504 234,247
</TABLE>
(a)Volumes associated with contract pooling revenues are
included in their respective customer classes.
LIQUIDITY AND CAPITAL RESOURCES
Bonds Redeemed. On October 1, 1998, the Company redeemed, from
general corporate funds, $10.4 million aggregate principal amount
of the City of Joliet 1984 Series C Bonds, which were secured by
the Company's Adjustable-Rate First and Refunding Mortgage Bonds,
Series W. (See Note 4B 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 3 of the Notes
to Consolidated Financial Statements.)
Credit Lines. The Company has lines of credit totaling $119.0
million of which North Shore Gas may borrow up to $30 million.
At December 31, 1998, the Company and North Shore Gas had unused
credit available from banks of $86.4 million of which $30 million
was available to North Shore Gas.
Interest Coverage. The fixed charges coverage ratios for the
Company for the 12 months ended December 31, 1998, and for fiscal
1998 and 1997 were 3.61, 4.15, and 5.01, respectively.
Year 2000. The Company began its efforts to assess the Year 2000
compliance of its mainframe computer systems in March 1996. The
Company has since developed a comprehensive Year 2000 readiness
plan that incorporates all of its information technology systems,
including computer hardware and software, and its embedded
systems equipment, including telecommunications equipment. The
plan also includes a review by the Company of the Year 2000
compliance efforts of key suppliers and customers and Year 2000
contingency planning. The system-wide Year 2000 effort being
spearheaded by the Company includes Peoples Energy and all of its
other wholly owned subsidiaries, as well as various joint
ventures.
For all internal information technology systems developed by
the Company, Year 2000 compliance efforts proceed through the
following phases: inventory, assessment, remediation, testing,
and implementation. Rather than completing each phase for all
systems prior to proceeding to the next phase, the Company
progresses through all phases on a system-by-system basis,
gradually implementing each fully-compliant system.
The Year 2000 compliance phases utilize a combination of
consultants and employees of the Company. Once a fully-tested
application has been implemented, Company employees follow
established procedures to maintain the compliance of the
implemented systems. The Company also has retained a quality
assurance expert to ensure that any subsequent modifications to
the application do not impact its compliant status.
As of December 31, 1998, 21 of the Company's 38 mainframe
applications have been fully remediated, tested and implemented,
one is in the testing phase, and eight have been (or are in the
process of being) eliminated. The eight remaining mainframe
applications are scheduled to be replaced by the Company's new
mainframe customer information system and are not expected to be
remediated. Additionally, all mainframe system modules have been
remediated and are now in the testing phase. Many of the
Company's non-mainframe applications, spreadsheets and interfaces
have also reached the implementation stage, and most others are
in the remediation phase. The Company expects to implement all
critical internal systems (other than the customer information
system to be used by the Company and North Shore Gas) and all non-
critical internal systems by April 30, 1999; and complete
installation and testing of the customer information system by
the end of fiscal year 1999.
As part of its Year 2000 Project, the Company has also
contacted the vendors of its licensed or purchased hardware and
software to determine the Year 2000 compliance status of their
products. As of December 31, 1998, the Company has received
responses from 88% of the vendors and is in the process of
replacing, upgrading or eliminating non-compliant vendor products
as appropriate. The Company also plans to have certain products,
such as its desktop computer inventory, compliant-tested in order
to minimize the risks associated with reliance on vendor
representations.
The Company has completed an inventory of all equipment
containing embedded systems, including telecommunications
equipment and facilities. It has also contracted with a
consultant that has significant utility and engineering expertise
to assist with the embedded systems efforts. The Company has
assessed the Year 2000 compliance status of its embedded systems,
and it is beginning to test, repair or replace any critical
equipment identified as not Year 2000 compliant. The Company's
timetable for implementing compliant equipment will depend on the
availability of compliant equipment.
The Company currently has a written conceptual contingency
plan to address risks to the Company created by the Company's or
third parties' systems and embedded technology that are not Year
2000 compliant. It has engaged the consultant referenced above
to assist in developing detailed and comprehensive business
continuity and contingency plans to address possible failures in
the area of embedded systems equipment. The Company expects to
complete its contingency plans for information technology and
embedded systems, including critical third party disruptions, by
April 1999, and such plans will be maintained and adjusted as
necessary on an ongoing basis.
The Company has contacted key suppliers of all affiliated
companies to determine their Year 2000 compliance efforts. It
has received written assurances from many key suppliers that they
are making the necessary Year 2000 efforts, and it is in the
process of following up with other key suppliers that did not
respond to written inquiries. The Company is also contacting
certain of its larger customers to determine their year 2000
readiness.
Essential elements of the Company's business are dependent on
certain key third parties (for example, pipeline suppliers,
banks, electric utilities and telecommunication companies). A
material failure by any such key third party could significantly
disrupt the Company's business. The Company is in the process of
detailing and finalizing contingency plans to address potential
disruptions that may be caused by third parties.
The Company currently estimates that it will incur expenses of
approximately $1.0 million through fiscal Year 1999 to complete
its Year 2000 compliance efforts, in addition to the $4.6 million
already incurred through December 31, 1998. This estimate does
not include costs to repair or replace critical embedded systems
equipment that is non-compliant, which has yet to be determined.
Portions of the costs incurred by the Company in connection with
its Year 2000 compliance efforts will be billed to its affiliated
companies. Management does not expect the cost of the Company's
Year 2000 compliance efforts to have a material adverse impact on
the financial position or results of operations of the Company or
its affiliates.
Market Risk Management. The Company utilizes long-term debt as a
primary source of capital. Both variable and fixed rate debt
instruments are utilized. The variable interest rate on the debt
adjusts to reflect current market conditions annually on December
1. Subject to certain restrictions on optional redemptions, the
fixed rate debt instruments can be refinanced at lower interest
rates if the Company deems it to be economical. (See Note 4 of
the Notes to Consolidated Financial Statements.)
The Company is not currently exposed to market risk caused by
changes in commodity prices. This is due to current Illinois
rate regulation, which allows for all reasonably incurred costs
of natural gas to be recovered from the Company's customers
through the operation of the its Gas Charge. However, in order
to minimize the impact on customers of severe price spikes in gas
supply costs, the Company did initiate a gas supply price protection
financial trading strategy. Any gains or losses from financial
trades are offset by related physical purchases.
The Company's policy for risk management activities stipulates
that any financial trades are only to be used for hedging
purposes. (See Note 2E of the Notes to Consolidated Financial
Statements.) The Company monitors and controls derivative
positions using a mark-to-market analysis.
The Company is also exposed to credit risk when a hedging
transaction counter party or supplier defaults on a contract to
pay for or deliver product at an agreed-upon price. To mitigate
this risk, the Company has established procedures to determine
and monitor the creditworthiness of counter parties.
Transactions are executed only with counter parties having
strong credit ratings. Controls are also in place to limit
dollar exposure and transaction term based upon creditworthiness.
The Company does not expect any of the counter parties to fail to
meet their contractual obligations with these controls in place.
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 discussion of 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 Company, 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.
" Regulatory developments in the U.S. and Illinois.
" 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 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.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
Quantitative and qualitative disclosures about market risk are
reported under "Management's Discussion and Analysis of Results
of Operations and Financial Condition - Market Risk Management."
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
10(a) Firm Gas Transportation Agreement Under Rate
Schedule FT-A or FT-G between the Company and
Midwestern Gas Trasmission Company, dated
November 1, 1998.
10(b) Rate Schedule QNT Quick Notice Transportation
Service Agreement Between the Company and
Trunkline Gas Company, dated November 1, 1998.
27 Financial Data Schedule
b. Reports on Form 8-K filed during the quarter ended
December 31, 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.
The Peoples Gas Light and
Coke Company
(Registrant)
February 11, 1999 By: /s/ J. M. LUEBBERS
(Date) J. M. Luebbers
Vice President and Controller
(Same as above)
Principal Accounting
Officer
