ITEM 1. BUSINESS
GENERAL
North Shore Gas Company (Company), an operating public utility, is engaged primarily in the purchase, storage, distribution, sale, and transportation of natural gas. It has more than 129,000 residential, commercial, and industrial retail sales and transportation customers within its service area of approximately 275 square miles, located in Northeastern Illinois. It serves 54 communities and adjacent areas, including those situated along Lake Michigan from Winnetka, Illinois, to the Illinois-Wisconsin state line. This area, with an estimated population of about 400,000, contains residential concentrations and a diversity of industrial and commercial establishments, as well as some farm lands. The Company had 247 employees at September 30, 1994.
At September 30, l994, the common stock of the Company and of its affiliate, The Peoples Gas Light and Coke Company (Peoples Gas), was wholly owned by Peoples Energy Corporation (Peoples Energy).
COMPETITION
The Company holds certificates of public convenience and necessity issued by the Illinois Commerce Commission (Commission) for the conduct by the Company of its operations in the territory that it serves. It holds a license agreement from Lake County, Illinois, and, with minor exceptions, franchises from all of the incorporated cities and villages in its service territory. The franchises are of various terms and expiration dates and are generally subject to various other conditions, restrictions, or limitations not deemed materially burdensome.
Absent extraordinary circumstances, potential competitors are barred from constructing competing gas distribution systems in the Company's service territory by a judicial doctrine known as the "first in the field" doctrine. In addition, the high cost of installing duplicate distribution facilities would render the construction of a competing system impractical.
Competition in varying degrees exists between natural gas and other fuels or forms of energy available to consumers in the Company's service area.
ITEM 1. BUSINESS (Continued)
A substantial portion of the gas that the Company delivers to its customers consists of gas that the Company's customers purchase directly from producers and marketers rather than from the Company. These direct customer gas 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.
A pipeline may seek to provide transportation service directly to end- users. Such direct service by a pipeline to an end-user would bypass the local distributor's service and reduce the distributor's earnings. However, the Company's pipeline supplier has not undertaken any service bypassing the Company. The Company has a bypass rate approved by the Commission which allows the Company to renegotiate rates with customers that are potential bypass candidates.
SALES AND RATES
The Company sells natural gas having an average heating value of approximately 1,000 British thermal units (Btu's) per cubic foot.* Sales are made and service rendered by the Company pursuant to a rate schedule on file with the Commission containing various service classifications largely reflecting customers' different uses and levels of consumption. The Gas Charge is determined in accordance with the provisions in Rider 2, Gas Charge and Refund Adjustments, to recover the costs incurred by the Company to purchase, transport, manufacture, and store gas supplies. The level of the Gas Charge under the Company's rate schedule is adjusted monthly to reflect increases or decreases in natural gas supplier charges, purchased storage service costs, transportation charges, and liquefied petroleum gas costs. In addition, under the tariffs of the Company, the difference for any fiscal year between costs recoverable through the Gas Charge and the 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 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 Company also has been recovering, through its rates, pipeline charges billed for transition costs resulting from the implementation of Federal Energy Regulatory Commission (FERC) Order No. 636. (See Notes 1H, 2A, and 2B of the Notes to Consolidated Financial Statements.)
The business of the Company is influenced by seasonal weather conditions because a large element of the Company's customer load consists of space heating. Weather-related deliveries can, therefore, have a significant positive or negative impact on net income. (For discussion of the effect of the seasonal nature of gas sales on cash flow, see "Liquidity" in Item 7.)
________________________________________________________________________________ * All volumes of natural gas set forth in this report are stated on a 1,000 Btu (per cubic foot) billing basis.
ITEM 1. BUSINESS (Continued)
The basic marketing plan of the Company is to maintain its existing share in all market segments and develop opportunities emerging from changes in the utility environment and technological advances in new, expanded, or current natural gas applications, including cogeneration, prime movers, natural gas- fueled vehicles, and air conditioning.
STATE LEGISLATION AND REGULATION
The Company is subject to the jurisdiction of and regulation by the Commission, which has general supervisory and regulatory powers over practically all phases of the public utility business in Illinois, including rates and charges, issuance of securities, services and facilities, systems of accounts, investments, safety standards, transactions with affiliated interests, as defined in the Illinois Public Utilities Act, and other matters.
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 Peoples 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. The Commission's order is on appeal before the Illinois Supreme Court. (See Note 2A 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 1H, 2A, and 2B of the Notes to Consolidated Financial Statements.)
On December 16, 1994, the Company filed with the Commission proposed changes in rates that are designed to increase annual revenues by about $10.1 million, exclusive of additional charges for revenue taxes. The Company is seeking a rate of return on original-cost rate base of 10.50 percent, which reflects a 12.6 percent cost of common equity. The Company expects that the Commission, following its usual practices, will not issue a decision regarding the Company's filed rate increase request until November 1995. The Company cannot predict the outcome of its rate increase request.
FEDERAL LEGISLATION AND REGULATION
By Order entered on December 6, 1968 (Holding Company Act Release No. 16233), the Securities and Exchange Commission, pursuant to Section 3(a)(1) of the Public Utility Holding Company Act of 1935 (Act), exempted Peoples Energy and its subsidiary companies as such (including the Company) from the provisions of the Act, other than Section 9(a)(2) thereof.
All of the gas distributed by the Company is transported to the Company's distribution system by Natural Gas Pipeline Company of America (Natural). In its provision of gas sales services (gathering, transportation and storage services, and gas supply) Natural is regulated by the FERC under the Natural Gas Act and the Natural Gas Policy Act of 1978. (See "Sales and Rates" and "Current Gas Supply" in Item 1.)
ITEM 1. BUSINESS (Continued)
The Company is subject to federal and state environmental laws. The Company is conducting environmental investigations and work at certain sites that were the location of former manufactured gas plant operations. (See Note 3A of the Notes to Consolidated Financial Statements.) In addition, the Company has received a demand for payment of environmental response costs at a former mineral processing site in Denver, Colorado. (See Note 3B of the Notes to Consolidated Financial Statements.)
In 1992, the FERC issued Order No. 636 and successor orders that required substantial restructuring of the service obligations of interstate pipelines. (See Notes 1H, 2A, and 2B of the Notes to Consolidated Financial Statements.)
ENVIRONMENTAL MATTERS
See Note 3 of the Notes to Consolidated Financial Statements.
CURRENT GAS SUPPLY
The Company has entered into long- and short-term firm gas supply contracts. When used in conjunction with contract storage, Peoples Gas' company-owned storage, and peak-shaving facilities, as shown in the following table, such supply is deemed sufficient to meet current and foreseeable peak and annual market requirements.
Although the Company believes North American supply to be sufficient to meet U.S. market demands for some time, it is unable to quantify or otherwise make specific representations regarding national supply availability.
The following tabulation shows the Company's expected peak-day availability of gas in million cubic feet (MMcf) during the 1994-95 heating season:
The sources of gas supply (including gas transported for customers) in million cubic feet (MMcf) for the Company for the three fiscal years ended September 30, 1994, 1993, and 1992, were as follows:
ITEM 2.
ITEM 2. PROPERTIES
All of the principal plants and properties of the Company have been maintained in the ordinary course of business and are believed to be in satisfactory operating condition. The following is a brief description of the principal plants and operating units of the Company.
The distribution system of the Company, as of September 30, 1994, consisted of approximately 2,000 miles of distribution mains and necessary pressure regulators, approximately 117,000 services (pipe connecting the mains with piping on the customers' premises), and approximately 132,000 meters installed on customers' premises. During fiscal 1993, the Company installed approximately 14.6 miles of transmission pipeline. The Company also has liquefied petroleum gasification and storage facilities. In addition, it owns and has a substantial investment in office and service buildings, garages, repair shops, and motor vehicles, together with the equipment, tools, and fixtures necessary to conduct utility business.
Most of the principal plants and properties of the Company, other than mains, services, meters, regulators, and cushion gas in underground storage, are located on property owned in fee. Substantially all gas mains are located in public streets, alleys, and highways, or under property owned by others under grants of easements. Meters and house regulators in use and a portion of services are located on premises being served.
Substantially all of the physical properties now owned or hereafter acquired by the Company are subject to (a) the first-mortgage lien of the Company's mortgage to Bank of America Illinois, (formerly named Continental Bank, National Association) Trustee, to secure the principal amount of the Company's outstanding first mortgage bonds and (b) in certain cases, other exceptions and defects that do not interfere with the use of the property.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
See Notes 2 and 3 of the Notes to Consolidated Financial Statements.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company is a wholly owned subsidiary of Peoples Energy.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (a)
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
NET INCOME
Net income applicable to common stock increased $1.4 million, to $10.4 million, in fiscal 1994 from 1993. Results for the current fiscal year include the recording of one-half of an Internal Revenue Service (IRS) income tax settlement that increased net income by $1.1 million. (See Note 6 of the Notes to Consolidated Financial Statements.)
In fiscal 1993, net income applicable to common stock decreased $3.6 million, to $9.0 million, primarily due to increased operation and maintenance expenses, higher long-term debt interest expense, and the effect in fiscal 1992 of the net gain on the sale of property at the Company's former Deerfield sub- shop. These decreases were partially offset by the benefit of colder weather in fiscal 1993 as compared to fiscal 1992 and a rate increase that became effective on November 11, 1991.
A summary of variations affecting income between years is presented below, with explanations of significant differences following:
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 1H 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 various municipalities.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
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 declined $682,000, to $55.1 million, in 1994, attributable mainly to a decrease of $1.6 million in environmental costs recovered through rates partially offset by higher gas deliveries reflecting an increase of about 3,000 customers over the prior period. Although the weather in January 1994 was significantly colder than January 1993, the fiscal 1994 weather impact was comparable with fiscal 1993.
In 1993, net operating revenues increased $3.6 million, to $55.8 million, due primarily to higher gas deliveries caused in large part by weather that was 6 percent colder than in 1992 and the impact of the rate increase effective November 11, 1991 (increasing net operating revenues by $865,000, or $530,000 after income taxes). In addition, environmental costs recovered through rates increased $1.2 million.
OPERATION AND MAINTENANCE EXPENSES
Operation and maintenance expenses decreased $937,000, to $26.5 million, due principally to lower environmental costs and injuries and damages expenses, offset in part, by increased legal and group insurance expenses, largely related to postretirement benefits.
In 1993, operation and maintenance expenses increased $2.6 million, to $27.4 million, due mainly to increases in environmental costs recovered through rates (see Note 2A of the Notes to Consolidated Financial Statements), injuries and damages expenses, pension costs, and group insurance expenses.
DEPRECIATION EXPENSE
Depreciation expense increased $668,000, to $6.9 million, in 1994, and $386,000, to $6.2 million, in 1993, due chiefly to depreciable property additions.
OTHER INCOME
Other income increased $972,000, to $2.0 million, due mainly to recording an IRS settlement of about $1.1 million after income taxes. (See Notes 4 and 6 of the Notes to Consolidated Financial Statements.)
In 1993, other income decreased $3.1 million, to $1.0 million, due principally to the effect in fiscal 1992 of the net gain on the sale of property at Deerfield. (See Note 4 of the Notes to Consolidated Financial Statements.)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
INCOME DEDUCTIONS
Income deductions declined $559,000, to $6.7 million, due largely to reduced interest on long-term debt reflecting less principal outstanding at lower rates.
In 1993, income deductions increased $1.0 million, to $7.2 million, due primarily to increased interest on long-term debt, reflecting the issuance of additional bonds in October 1992 and May 1993.
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.
EFFECT OF INFLATION. The Company is affected by inflation through increases in operating expenses and replacement of utility plant assets at costs higher than historical costs. Gas costs, the Company's largest operating cost, and revenue taxes are recovered dollar-for-dollar in rates. Increases in other operating costs are recovered through rate cases. Although there is a time lag in the recovery through rate cases of increased cost levels, the effect of this lag is mitigated by the use of a future test year in rate decisions. The Company recovers the cost of depreciable utility property through depreciation charges based on historical costs. Such charges do not reflect current costs or inflation-adjusted costs of utility plant. However, the Company believes that the manner of setting utility rates generally affords an opportunity to earn a fair return on shareholder investment.
ACCOUNTING STANDARDS. In March 1993, the Company adopted, effective October 1, 1992, the liability method of accounting for deferred income taxes required by Statement of Financial Accounting Standards (SFAS) No. 109. (See Note 1G of the Notes to Consolidated Financial Statements.)
Effective October 1, 1993, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." This statement requires the accrual of the expected costs of such benefits during the employees' years of service. (See Note 5B of the Notes to Consolidated Financial Statements.)
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. SFAS No. 112 requires adoption by the Company no later than fiscal 1995. (See Note 5C of the Notes to Consolidated Financial Statements.)
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 1H, 2A, and 2B 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 1H, 2A, and 2B of the Notes to Consolidated Financial Statements.)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
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
SOURCE OF FUNDS. The Company has access to outside capital markets and to internal sources of funds that together provide sufficient resources to meet capital requirements. It does not anticipate any changes that would materially alter its current liquidity position.
Due to the seasonal nature of gas usage, a major portion of cash collections occurs between November and April. Because of timing differences in the receipt and disbursement of cash and the level of construction requirements, the Company may borrow on a short-term basis. Short-term borrowings are repaid with cash from operations, other short-term borrowings, or refinanced on a permanent basis with debt or equity, depending on capital market conditions and capital structure considerations.
CREDIT LINES. Peoples Gas has lines of credit of approximately $131 million of which the Company may borrow up to $30 million. At September 30, 1994, Peoples Gas and the Company had unused credit available from banks of approximately $130 million. (See Note 8 of the Notes to Consolidated Financial Statements.)
CASH FLOW ACTIVITIES. Net cash provided by operating activities rose by $10.1 million in 1994, principally resulting from increases relating to rate adjustments recoverable or refundable and accounts receivable. These increases were partially offset by decreases associated with accounts payable, deferred charges, and deferred taxes. In 1993, net cash provided by operating activities increased by $2.0 million reflecting increases relating to operating earnings, rate adjustments recoverable or refundable, gas in storage, and accounts payable. These increases were partially offset by a decrease in accounts receivable.
Net cash used in investing activities for 1994, 1993, and 1992 mainly represents the level of capital expenditures in the respective years.
Net cash used in financing activities in 1994 reflects the retirement of long-term debt and interim loans. In 1993, net cash provided by financing activities includes the issuance of additional long-term debt, partially offset by debt retirements and a decrease in interim loans.
INDENTURE RESTRICTIONS. The Company's 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 September 30, 1994, such restrictions amounted to $11.6 million out of total retained earnings of $58.9 million. (See Note 12 of the Notes to Consolidated Financial Statements.)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
INTEREST COVERAGE. Coverage ratios for the Company's fixed charges for fiscal 1994, 1993, and 1992 were 3.33, 2.91, and 4.20, respectively. The current fiscal year ratio reflects the recording of the fiscal 1994 portion of an IRS settlement in income. (See Note 6 of the Notes to Consolidated Financial Statements.) The 1993 ratio includes the effect of the rate increase granted in November 1991 and colder weather, offset by higher operating costs and interest expense. The fiscal 1992 ratio includes a net gain of $3.8 million from the sale of a land parcel as well as the November 1991 rate increase.
DEBT RATINGS. The long-term debt of the Company is rated Aa3 by Moody's Investors Service and AA- by Standard and Poor's Corporation. There has been no change in these ratings since fiscal 1985. The commercial paper of the Company has the top rating from the major rating agencies. On October 24, 1994, Standard and Poor's Corporation affirmed its ratings of the Company's long-term debt and commercial paper but changed its ratings outlook for the Company to "negative" from "stable."
ENVIRONMENTAL MATTERS. The Company is conducting environmental investigations and work at certain sites that were the location of former manufactured gas plant operations. (See Note 3A of the Notes to Consolidated Financial Statements.)
In February 1994, the Company received a demand from a responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA) for reimbursement, indemnification and contribution for response costs incurred at a site in Denver, Colorado. (See Note 3B of the Notes to Consolidated Financial Statements.)
REGULATORY ACTIONS. On September 30, 1992, the Commission issued an order in its consolidated proceedings, initiated in March 1991, regarding the appropriate ratemaking treatment of environmental costs relating to past manufactured gas operations incurred by Illinois utilities, including the Company and Peoples 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 2A of the Notes to Consolidated Financial Statements.)
The Company filed proposed changes in rates with the Commission in December 1994. (See Item 1. Business - State Legislation and Regulation of this report.)
CAPITAL RESOURCES
CAPITAL SPENDING. Capital expenditures for additions, replacements, and improvements to the utility plant were $12.6 million in 1994, $22.8 million in 1993, and $26.1 million in 1992.
The decline in fiscal 1994 expenditures from 1993 and 1992 was largely the result of increased spending in the earlier years for a second pipeline supply connection project that was undertaken to enhance gas supply. The current year amount reflects a level consistent with the financial goals of the Company and maintains system safety. Capital expenditures for fiscal 1993 and fiscal 1992 included $9.0 million and $14.9 million, respectively, for the pipeline project.
Capital expenditures for fiscal 1995 are estimated to be $12.7 million, about the same level as 1994.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Fiscal 1995 sinking fund requirements for long-term debt are $4.0 million. (See Note 7C of the Notes to Consolidated Financial Statements.)
The Company anticipates that future cash needs for capital expenditures and sinking fund requirements and maturities will be met through internally generated funds, intercompany loans from Peoples Energy, borrowing arrangements with banks and/or the issuance of commercial paper on an interim basis, and periodic long-term financing involving equity or first mortgage bonds.
BONDS ISSUED. On March 30, 1993, the Company filed a shelf registration with the Securities and Exchange Commission (SEC) for the issuance of $40 million aggregate principal amount of first mortgage bonds. On May 13, 1993, the Company issued a portion of those first mortgage bonds in an aggregate principal amount of $15 million at 6.37 percent, due May 1, 2003. (See Note 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 Company's open-end mortgage and supplements thereto. These restrictions are not expected to have an impact on the Company's ability to issue additional debt, as needed.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Statement of Management's Responsibility 16
Report of Independent Public Accountants 17
Consolidated Statements of Income for fiscal years ended September 30, 1994, 1993, and 1992 18
Consolidated Statements of Retained Earnings for fiscal years ended September 30, 1994, 1993, and 1992 18
Consolidated Balance Sheets as of September 30, 1994 and 1993 19
Consolidated Capitalization Statements as of September 30, 1994 and 1993 20
Consolidated Statements of Cash Flows for fiscal years ended September 30, 1994, 1993, and 1992 21
Notes to Consolidated Financial Statements 22
STATEMENT OF MANAGEMENT'S RESPONSIBILITY
The financial statements and other financial information included in this report were prepared by management, who is responsible for the integrity and objectivity of the presented data. The consolidated financial statements of the Company and its subsidiaries were prepared in conformity with generally accepted accounting principles and necessarily include some amounts that are based on the best estimates and judgments of management.
The Company maintains internal accounting systems and related administrative controls, along with internal audit programs, that are designed to provide reasonable assurance that the accounting records are accurate and assets are safeguarded from loss or unauthorized use. Consequently, management believes that the accounting records and controls are adequate to produce reliable financial statements.
Arthur Andersen LLP, the Company's independent public accountants approved by Peoples Energy's shareholders, as a part of their audit of the financial statements, selectively reviews and tests certain aspects of internal accounting controls solely to determine the nature, timing, and extent of audit tests. Management has made available to Arthur Andersen LLP all of the Company's financial records and related data and believes that all representations made to the independent public accountants during their audit were valid and appropriate.
The Audit Committee of the Board of Directors of Peoples Energy, comprised of six outside directors, meets periodically with management, the internal auditors, and Arthur Andersen LLP, jointly and separately, to assure that appropriate responsibilities are discharged. These meetings include discussion and review of accounting principles and practices, internal accounting controls, audit results, and the presentation of financial information in the annual report.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To North Shore Gas Company:
We have audited the accompanying consolidated balance sheets and consolidated capitalization statements of North Shore Gas Company (an Illinois corporation, hereinafter referred to as the Company and a wholly owned subsidiary of Peoples Energy Corporation) and subsidiary companies as of September 30, 1994 and 1993, and the related consolidated statements of income, retained earnings, and cash flows for each of the three years in the period ended September 30, 1994. These financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company and subsidiary companies as of September 30, 1994 and 1993, and the results of their operations and cash flows for each of the three years in the period ended September 30, 1994, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedules listed in Item 14(a)2 are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These financial statement schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois November 2, 1994
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
The Notes to Consolidated Financial Statements are an integral part of these statements.
CONSOLIDATED BALANCE SHEETS
The Notes to Consolidated Financial Statements are an integral part of these statements.
CONSOLIDATED CAPITALIZATION STATEMENTS
The Notes to Consolidated Financial Statements are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The Notes to Consolidated Financial Statements are an integral part of these statements.
NORTH SHORE GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1A Principles of Consolidation
All subsidiaries of the Company are included in the consolidated financial statements. All significant intercompany transactions have been eliminated in consolidation. Certain items previously reported for years prior to 1994 have been reclassified to conform with the current-year presentation.
1B Concentration of Credit Risk
The Company provides natural gas service to about 129,000 customers within approximately 275 square miles in Northeastern Illinois. Credit risk for the utility is spread over a diversified base of residential, commercial, and industrial retail sales and transportation customers.
The Company encourages customers to participate in its long-standing budget payment program that allows the cost of higher gas consumption levels, associated with the heating season, to be spread over a 12-month billing cycle. Customers' payment records are continually monitored and credit deposits are required, where indicated, to minimize uncollectible write-offs.
1C 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.
1D Property, Plant and Equipment
Property, plant and equipment is stated at original cost and includes appropriate amounts of payroll taxes, employee benefit costs, administrative costs, and an allowance for funds used during construction.
1E Maintenance and Depreciation
The Company charges the cost of maintenance and repairs of property and minor renewals and improvements of property to maintenance expense. When depreciable property is retired, its original cost is charged to the accumulated provision for depreciation.
The provision for depreciation substantially reflects the systematic amortization of the original cost of depreciable property over estimated useful lives on the straight-line method. Additionally, actual dismantling cost, net of salvage, is included in the provision for depreciation in the month incurred. The amounts provided are designed to cover not only losses due to wear and tear that are not restored by maintenance, but also losses due to obsolescence and inadequacy.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The provision for depreciation, expressed as an annual percentage of original cost of depreciable property, is as follows:
1F 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:
1G Income Taxes
The recording of deferred income taxes results from the use of accelerated depreciation methods and certain other timing differences in recognition of income and expense for tax and financial statement purposes.
Investment tax credits have been deferred and are being amortized through credits to income over the book lives of related property.
In March 1993, the Company adopted, effective October 1, 1992, the liability method of accounting for deferred income taxes required by SFAS No. 109, "Accounting for Income Taxes." Under the liability method, deferred income taxes have been recorded using currently enacted tax rates for the differences between the tax basis of assets and liabilities and the basis reported in the financial statements. Due to the effects of regulation on 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. (See Note 6.)
The preceding deferred-tax and tax-credit accounting conforms with regulations of the Commission.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1H 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 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 1991 through 1994 are currently pending before the Commission.
Pursuant to 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 an existing provision of 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 2A and 2B.)
1I Gas in Storage
Storage injections are priced at the fiscal-year average of costs of natural gas purchased. Withdrawals from storage are priced on the last-in, first-out (LIFO) cost method. The estimated current replacement cost of gas in inventory, at September 30, 1994 and 1993, exceeded the LIFO cost by approximately $35 million and $41 million, respectively.
2. RATES AND REGULATION
2A Utility Rate Proceedings
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 Peoples 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 Peoples 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. (See Notes 1H and 2B.)
2B FERC Orders 636, 636-A, and 636-B
In 1992, the FERC issued Order Nos. 636, 636-A, and 636-B. There are numerous appeals of the 636 Orders 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 pipeline serving the Company, went into effect December 1, 1993. Several appeals of the orders approving Natural's 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 Natural. 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 Natural 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 for transition costs commenced on January 1, 1994. Appropriate accruals for transition costs have been recorded. The Company is currently recovering transition costs through the Gas Charge. On September 29, 1994, the FERC approved a Stipulation and Agreement (Agreement) filed by Natural. The Agreement places a cap of approximately $25 million on the amount of GSR costs recoverable by Natural from the Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The 636 Orders are not expected to have a material adverse effect on financial position or results of operations of the Company. (See Notes 1H and 2A.)
3. ENVIRONMENTAL MATTERS
3A Former Manufactured Gas Plant Operations
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. Two sites in Waukegan, Illinois, are the subjects of investigations (discussed below) initiated by the United States Environmental Protection Agency (EPA).
In May 1990, the Company was notified by the EPA that the EPA had documented the release or threatened release of hazardous substances, pollutants, and contaminants at a site located in Waukegan, Illinois, where manufactured gas and coking operations were formerly conducted (Waukegan I Site). Also, the Company, General Motors Corporation (GMC), and Outboard Marine Corporation were notified that each may be a potentially responsible party (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA) with respect to the Waukegan I Site. A PRP is potentially liable for the cost of any investigative and/or remedial work that the EPA determines is necessary.
In September 1990, the Company entered into an Administrative Order on Consent (AOC) with the EPA and the Illinois Environmental Protection Agency (IEPA) to implement and conduct a remedial investigation/feasibility study (RI/FS) of the Waukegan I Site. The RI/FS is comprised of an investigation to determine the nature and extent of contamination at the site and a feasibility study to develop and evaluate possible remedial actions. Other parties identified as PRPs did not enter into the AOC. Under the terms of the AOC, the Company is responsible for the cost of the RI/FS. The Company 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 the Company in funding of the RI/FS cost, without prejudice to GMC's or the Company's right to seek a lesser cost responsibility at a later date.
In September 1991, the Company, the Elgin, Joliet and Eastern Railway (EJ&E), and the North Shore Sanitary District (NSSD) each received an administrative order (AO) issued by the EPA. The AO directed all three entities to remove and dispose of all visible free tar in a pit located within a separate site in Waukegan, Illinois (Waukegan II Site) and to conduct a study to determine the extent of contamination of the tar from the pit to the surrounding property. All of the work under the AO has been completed. The Company has entered into a settlement agreement with NSSD with respect to costs incurred under the AO and intends to recover an appropriate amount of the remaining costs from EJ&E.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company, in cooperation with the IEPA, is conducting investigations of other sites (a total of three) 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, 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.
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 September 30, 1994, the total of the costs deferred by the Company, net of recoveries and amounts billed to other entities, was $7.2 million. This amount includes an estimate of the costs of completing the studies required by the EPA at the Waukegan I Site and the Waukegan II Site and the investigations initiated at the request of the IEPA at the other sites referred to above. The amount also includes an estimate of the costs of remediation at the Waukegan I Site, at the minimum amount of the current estimated range of such costs. The costs of remediation at the other sites cannot be determined until more is known about the nature and extent of contamination and the remedial action, if any, to be required by the EPA or the IEPA. While the Company intends to seek contribution by other entities for the costs incurred at the sites, the extent of such contributions cannot be determined at this time. Finally, the Company is currently researching its insurance coverages and has initiated the claim process with respect to certain carriers. At this time, management cannot determine the timing and extent of the Company's recovery of costs from its insurance carriers. Accordingly, the foregoing amount has not been reduced to reflect recoveries from insurance carriers.
Costs incurred by the Company for environmental activities at the sites 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 its 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 a rate mechanism approved by the Commission. As of September 30, 1994, it had recovered $3.6 million of such costs through rates. (See Note 2A for a discussion of proceedings regarding the recovery of such costs through utility rates.)
3B Former Mineral Processing Site in Denver, Colorado
In February 1994, the Company 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. The demand alleges that the Company is a successor-in-interest to certain companies that were allegedly responsible during the period 1934-1941 for the disposal of mineral processing wastes containing radium and other hazardous substances at the site. The Company is examining this claim. The cost of the remedy at the site has been estimated by Shattuck to be approximately $31 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
No legal proceedings have been commenced against the Company. In the event of litigation, the Company would vigorously defend itself. The Company has strong defenses against any claim that it was responsible for the disposal of hazardous substances at the site or that it had control over, or succeeded to the liability of, any entity that disposed of hazardous substances at the site. Accordingly, the Company does not believe that it has liability for the response costs, but cannot determine the matter with certainty. At this time, the Company cannot reasonably estimate what range of loss, if any, may occur. In the event that the Company incurred liability, it would pursue reimbursement from insurance carriers, other responsible parties, if any, and through its rates for utility service.
4. OTHER INCOME - MISCELLANEOUS
5. EMPLOYEE BENEFITS
5A Pensions
The Company participates in two defined benefit pension plans covering substantially all employees. These plans provide pension benefits that generally are based on an employee's length of service, compensation during the five years preceding retirement, and social security benefits. Annual contributions are made to the plans based upon actuarial determinations and in consideration of tax regulations and funding requirements under federal law.
The Company also has a non-qualified pension plan that provides certain employees with pension benefits in excess of qualified plan limits imposed by federal tax law.
Net pension cost for all plans for fiscal 1994, 1993, and 1992 included the following components:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The calculation of pension cost assumed a long-term rate of return on assets of 7.5 percent for 1992 through 1994.
The following table shows the estimated funded status of the Company's pension plans at September 30, 1994 and 1993.
The projected benefit obligation was determined using a discount rate of 6.5 percent for 1994 and 5.75 percent for 1993, and assumed future compensation increases of 5.0 percent for each year. Plan assets consist primarily of marketable equity and fixed-income securities.
5B Postretirement Benefits Other Than Pensions
The Company also provides certain health care and life insurance benefits for retired employees. Substantially all employees may become eligible for such benefit coverage if they reach retirement age while working for the Company. The plans are funded based upon actuarial determinations and in consideration of tax regulations and funding requirements under federal law.
The Company adopted SFAS No. 106 effective October 1, 1993. SFAS No. 106 requires the accrual of the expected costs of such benefits during the employees' years of service.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net postretirement benefit cost for all plans for fiscal 1994 included the following components:
The calculation of postretirement benefit cost assumed a long-term rate of return on assets of 7.5 percent.
The Company recognized total postretirement costs of $1.3 million during fiscal 1994. Of this amount, $777,000 was funded through trust funds for future benefit payments. Such costs during fiscal year 1993 were approximately $400,000; no funding was made.
Due to expected regulatory treatment, the adoption of SFAS No. 106 will not have a material effect on financial position or results of operations.
The following table sets forth the estimated funded status for the postretirement health care and life insurance plans at September 30, 1994:
The total APBO was determined using a discount rate of 7.75 percent and assumed future compensation increases of 5.0 percent. The unfunded obligation will be amortized over 20 years. Plan assets consist primarily of marketable equity and fixed-income securities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For measurement purposes, a health care cost trend rate of 10.25 percent was assumed for fiscal 1995, and that rate thereafter will decline to 5.0 percent in 2003 and subsequent years. The health care cost trend rate assumption has a significant effect on the amounts reported. Increasing the assumed health care cost trend rate by one percentage point for each future year would have increased the APBO at September 30, 1994, by $633,000 and the aggregate of service and interest cost components of the net periodic postretirement benefit cost by $94,000 annually.
5C 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. The Company adopted SFAS No. 112 effective October 1, 1994. Implementation of this statement will not have a material effect on financial position or results of operations.
6. TAX MATTERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
See Note 1G for discussion of the adoption of SFAS No. 109 effective October 1, 1992. Set forth in the table below are the temporary differences which gave rise to the net deferred income tax liabilities:
The sources of significant timing differences which gave rise to federal deferred income taxes for the year prior to adoption of SFAS No. 109 were as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following is a reconciliation between the computed federal income tax expense (tax rate of 35 percent for 1994, 34.75 percent for 1993, and 34 percent for 1992, times pre-tax book income) and the total provision for federal income tax expenses:
On September 30, 1993, the Company received notification from the 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 $3 million, or $2.2 million after income taxes. The Company has received regulatory authorization to defer the recording of the settlement amount in income for fiscal year 1993, and to record its portion of the settlement amount in income for fiscal years 1994 and 1995. The Company has represented to the Commission that, having received this accounting authorization, it will 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 $1.4 million, or $1.1 million after income taxes, in income in 1994. The amount after income taxes is included in Other Income - Miscellaneous. At September 30, 1994, approximately $1.4 million is included in Reserves and Deferred Credits - Other. The Company will amortize its remaining portion of the settlement amount in income in fiscal year 1995, the effect of which will be to offset increases in costs that the utility will incur during that year.
7. LONG-TERM DEBT
7A Issuance of Bonds
On March 30, 1993, the Company filed a shelf registration with the SEC for the issuance of $40 million aggregate principal amount of first mortgage bonds. On May 13, 1993, the Company issued a portion of those first mortgage bonds in an aggregate principal amount of $15 million at 6.37 percent due May 1, 2003. Proceeds of the offering were used to refund approximately $11 million aggregate principal amount of the Company's previously issued first mortgage bonds and for general corporate purposes. The Company may issue all or a portion of the remaining bonds during fiscal 1995 and/or fiscal 1996. Proceeds of the future offering will be used for general corporate purposes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
Effective November 1, 1993, the rate of interest on the Company's Adjustable-Rate Bonds, Series J, was fixed at 8 percent until maturity, November 1, 2020.
7C Sinking Fund Requirements of Subsidiaries
As of September 30, 1994, long-term debt sinking fund requirements of the Company for fiscal years 1995 through 1998 equal $4 million each year.
7D Fair Value of Financial Instruments
The estimated fair value of the Company's $76.9 million carrying amount of long-term debt approximated $77.0 million as of September 30, 1994. As of September 30, 1993, the estimated fair value of the Company's $80.9 million carrying amount of long-term debt approximated $81.7 million. The estimated fair value of the Company's long-term debt is based on quoted market prices or yields for issues with similar terms and remaining maturities. The carrying amount of all other financial instruments approximates fair value.
8. SHORT-TERM BORROWINGS AND CREDIT LINES
Short-term cash needs of the Company and Peoples Gas are met through intercompany loans from Peoples Energy, bank loans, and/or the issuance of commercial paper. The outstanding total amount of bank loans and commercial paper issuances cannot at any time exceed total bank credit then in effect.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On February 1, 1994, Peoples Gas reduced its lines of credit to approximately $154 million from $184 million in effect since November 1, 1993. The Company was authorized to borrow up to $20 million of the aggregate $154 million. On July 1, 1994, Peoples Gas reduced its lines of credit to approximately $131 million of which the Company 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 Peoples Gas and the Company and support the long-term debt treatment of Peoples Gas' adjustable-rate mortgage bonds. Payment for the lines of credit is by fee.
9. DEFERRED CHARGES
10. CAPITAL COMMITMENTS
Total contract and purchase order commitments of the Company at September 30, 1994, amounted to approximately $995,000.
11. ASSETS SUBJECT TO LIEN
The Indenture of Mortgage, dated April 1, 1955, as supplemented, securing the first mortgage bonds issued by the Company, constitutes a direct, first-mortgage lien on substantially all property owned by the Company.
12. COVENANTS REGARDING RETAINED EARNINGS
The Company's indenture relating to the first mortgage bonds contains provisions and covenants restricting the payment of cash dividends and the purchase or redemption of capital stock. At September 30, 1994, such restrictions amounted to $11.6 million out of the Company's total retained earnings of $58.9 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. QUARTERLY FINANCIAL DATA (Unaudited)
The fluctuation in quarterly results is primarily due to the seasonal nature of the gas distribution business. Results for the first quarter of fiscal 1994 include the recording of one-half of an IRS settlement, in income, increasing net income by $1.1 million.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
IDENTIFICATION OF DIRECTORS
Company Name, Principal Occupation, Age at Directorship and Other Directorships 11-30-94 Since - -------------------------------------------------- -------- ------------
Kenneth S. Balaskovits 52 1993 Vice President and Controller of the Company, Peoples Energy, and Peoples Gas; Director of Peoples Gas.
J. Bruce Hasch 56 1986 President and Chief Operating Officer of the Company, Peoples Energy, and Peoples Gas; Director of Peoples Energy and Peoples Gas.
James Hinchliff 54 1985 Senior Vice President and General Counsel of the Company, Peoples Energy, and Peoples Gas; Director of Peoples Gas.
Michael S. Reeves 59 1988 Executive Vice President of the Company, Peoples Energy, and Peoples Gas; Director of Peoples Energy and Peoples Gas.
Richard E. Terry 57 1982 Chairman of the Board and Chief Executive Officer of the Company, Peoples Energy, and Peoples Gas; Director of Peoples Energy and Peoples Gas. Mr. Terry is also a director of Harris Bankcorp, Inc., Harris Trust and Savings Bank, and Amsted Industries.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY (Continued)
IDENTIFICATION OF EXECUTIVE OFFICERS
Position at Age at Position Name November 30, 1994 11-30-94 Held Since - ---------------------- ----------------------------- -------- ----------
Kenneth S. Balaskovits Vice President and Controller 52 1993
Frank H. Blackmore Vice President 59 1989
Emmet P. Cassidy Secretary and Treasurer 61 1989
Patrick J. Doyle Vice President 57 1985
Joan T. Gagen Vice President 43 1994
J. Bruce Hasch President and Chief Operating 56 1990 Officer
James Hinchliff Senior Vice President and 54 1989 General Counsel
John C. Ibach Vice President 47 1992
Donald H. Keller Vice President 61 1986
Thomas J. O'Sullivan Division Vice President 52 1992
Thomas M. Patrick Vice President 48 1989
James D. Pitts, Jr. Vice President 56 1989
Michael S. Reeves Executive Vice President 59 1987
Richard E. Terry Chairman of the Board and 57 1990 Chief Executive Officer
Directors and executive officers of the Company were elected to serve for a term of one year or until their successors are duly elected and qualified, except for Messrs. Keller and O'Sullivan, who were appointed.
There are no family relationships among directors and executive officers of the Company.
All of the directors and executive officers of the Company have been continuously employed by the Company and/or its affiliates in various capacities for at least 10 years.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following tables set forth information concerning annual and long-term compensation and grants of stock options, stock appreciation rights and restricted stock awards under Peoples Energy's Long-Term Incentive Compensation Plan. Cash compensation for executive officers, except for Mr. Keller, is paid by Peoples Gas with appropriate amounts billed to the Company for the time such officers serve the Company. All compensation was paid by the Company and its affiliates (Peoples Energy and Peoples Gas) for services in all capacities during the three fiscal years set forth below, to (1) the Chief Executive Officer and (2) the most highly compensated executive officer of the Company other than the Chief Executive Officer. No executive officer's cash compensation paid by the Company for service to the Company exceeded $100,000, except for Mr. Keller's.
SUMMARY COMPENSATION TABLE
OPTIONS/SAR GRANTS IN FISCAL 1994
ITEM 11. EXECUTIVE COMPENSATION (Continued)
AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1994 AND FISCAL YEAR-END OPTION/SAR VALUES
PENSION PLAN TABLE
The above table illustrates various annual straight-life benefits at normal retirement (age 65) for the indicated levels of average annual compensation and various periods of service, assuming no future changes in Peoples Energy's pension benefits. The compensation used in the computation of annual retirement benefits is substantially equivalent to the salary and bonus reported in the Summary Compensation Table. The benefit amounts shown reflect reduction for applicable Social Security benefits.
Average annual compensation is the average 12-month compensation for the highest 60 consecutive months of the last 120 months of service prior to retirement. Compensation is total salary paid to an employee by the Company and/or its affiliates, including bonuses under Peoples Energy's Short-Term Incentive Compensation Plan, pre-tax contributions under Peoples Energy's Capital Accumulation Plan, pre-tax contributions under Peoples Energy's Health and Dependent Care Spending Accounts Plan, and pre-tax contributions for life and health care insurance, but excluding moving allowances, exercise of stock options and SARs, and other compensation that has been deferred.
ITEM 11. EXECUTIVE COMPENSATION (Continued)
As of September 30, 1994, the credited years of retirement benefit service for the individuals listed in the Summary Compensation Table were as follows: Mr. Terry, 30 years; and Mr. Keller, 39 years. The benefits shown in the foregoing table are subject to maximum limitations under the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code of 1986, as amended. Should these benefits at the time of retirement exceed the then-permissible limits of the applicable Act, the excess would be paid by the Company as supplemental unfunded pensions. The benefits shown give effect to these supplemental pension benefits.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of November 30, 1994, voting securities of the Company were beneficially owned as follows:
SECURITY OWNERSHIP OF MANAGEMENT
No equity securities of the Company are beneficially owned directly or indirectly by any director or officer of the Company.
Shares of common stock, without par value, of Peoples Energy beneficially owned directly or indirectly by all directors and certain executive officers of the Company and all directors and executive officers of the Company as a group at November 30, 1994, are as follows:
CHANGES IN CONTROL
None.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page (a) 1. Financial Statements: ----
See Part II, Item 8. 15
2. Financial Statement Schedules:
Schedule Number --------
V Property, Plant and Equipment, at Original Cost 45 VI Accumulated Provision for Depreciation of Property, Plant and Equipment 46 VIII Valuation and Qualifying Accounts 47 IX Short-Term Borrowings 48 X Supplementary Income Statement Information 49
3. Exhibits:
See Exhibit Index on page 51.
(b) Reports on Form 8-K filed during the final quarter of fiscal year 1993:
None.
NORTH SHORE GAS COMPANY AND SUBSIDIARY COMPANIES Schedule V PROPERTY, PLANT AND EQUIPMENT, AT ORIGINAL COST (Thousands)
NORTH SHORE GAS COMPANY AND SUBSIDIARY COMPANIES Schedule VI ACCUMULATED PROVISION FOR DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT (Thousands)
SCHEDULE VIII
NORTH SHORE GAS COMPANY AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
(Thousands)
SCHEDULE IX
NORTH SHORE GAS COMPANY AND SUBSIDIARY COMPANIES
SHORT-TERM BORROWINGS
SCHEDULE X
NORTH SHORE GAS COMPANY AND SUBSIDIARY COMPANIES
SUPPLEMENTARY INCOME STATEMENT INFORMATION
Maintenance, depreciation, royalties, and advertising costs, other than those specifically disclosed in the Consolidated Statements of Income, are not significant.
Significant taxes charged to costs and expenses, other than payroll and income taxes, are summarized as follows:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
NORTH SHORE GAS COMPANY
Date: December 22, 1994 By: /s/ RICHARD E. TERRY ----------------- ------------------------------- Richard E. Terry Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on December 22, 1994.
/s/ RICHARD E. TERRY Chairman of the Board and Chief - ---------------------------------- Executive Officer and Director Richard E. Terry (Principal Executive Officer)
/s/ KENNETH S. BALASKOVITS Vice President and Controller and - ---------------------------------- Director (Principal Financial and Kenneth S. Balaskovits Accounting Officer)
/s/ J. BRUCE HASCH Director - ---------------------------------- J. Bruce Hasch
/s/ JAMES HINCHLIFF Director - ---------------------------------- James Hinchliff
/s/ MICHAEL S. REEVES Director - ---------------------------------- Michael S. Reeves
NORTH SHORE GAS COMPANY AND SUBSIDIARY COMPANIES
EXHIBIT INDEX
(a) The exhibits listed below are filed herewith and made a part thereof:
Exhibit Number Description of Document ------- ---------------------------------------------
3(a) Amendment to the By-Laws of the Registrant, dated December 7, 1994.
3(b) By-Laws of the Registrant, as amended on December 7, 1994.
10 Firm Transportation Service Agreement Under Rate Schedule FTS between the Company and Natural Gas Pipeline Company of America, dated as of February 1, 1994.
12 Statement re: Computation of Ratio of Earnings to Fixed Charges.
23 Arthur Andersen LLP consent to incorporation by reference in Registration Statement No. 33-60256
27 Financial Data Schedule
(b) Exhibits listed below have been filed heretofore with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended, and/or the Securities Exchange Act of 1934, as amended, and are incorporated herein by reference. The file number and exhibit number of each such exhibit are stated in the description of such exhibits.
Exhibit Number Description of Document ------- -------------------------------------------------------------- 3(c) Articles of Incorporation of the Registrant, as amended on April 13, 1987 (Registrant Form 10-K for fiscal year ended September 30, 1987, Exhibit 3(b)).
NORTH SHORE GAS COMPANY AND SUBSIDIARY COMPANIES
EXHIBIT INDEX (Continued)
Exhibit Number Description of Document ------- -------------------------------------------------------------- 4(a) Indenture, dated as of April 1, 1955, from the Company to Continental Bank, National Association, as Trustee; Third Supplemental Indenture, dated as of December 20, 1963 (North Shore - File No. 2-35965, Exhibit 4-1); Fifth Supplemental Indenture, dated as of February 1, 1970 (File No. 2-35965, Exhibit 4-2); Sixth Supplemental Indenture, dated as of October 1, 1973 (Form 10-K for the fiscal year ended September 30, 1980, Exhibit 4-3; Seventh Supplemental Indenture, dated as of February 15, 1977 (Form 10-K for the fiscal year ended September 30, 1980, Exhibit 4-4); Eighth Supplemental Indenture, dated as of September 15, 1980 (Form 10-K for the fiscal year ended September 30, 1980, Exhibit 4-5); Ninth Supplemental Indenture, dated as of December 1, 1987 (Form 10-K for the fiscal year ended September 30, 1987, Exhibit 4); and Tenth Supplemental Indenture, dated as of November 1, 1990 (Form S-3 Registration Statement No. 33-37332, Exhibit 4b); Eleventh Supplemental Indenture, dated as of October 1, 1992 (Form 10-K for the fiscal year ended September 30, 1992, Exhibit 4); and Twelfth Supplemental Indenture dated as of April 1, 1993 (Form 8-K dated April 23, 1993, Exhibit 4).
10(a) Storage Service Agreement Under Rate Schedule S-1 between the Company and Natural Gas Pipeline Company of America, dated as of November 30, 1990 (Registrant Form 10-K for the fiscal year ended September 30, 1993, Exhibit 10(a)); Firm Transportation Service Agreement Under Rate Schedule S-2 between the Company and Natural Gas Pipeline Company of America, dated as of December 1, 1993 (Registrant Form 10-Q for the quarterly period ended December 31, 1993, Exhibit 10(a)); Firm Transportation Service Agreement Under Rate Schedule FTS between the Company and Natural Gas Pipeline Company of America, dated as of December 1, 1993 (Registrant Form 10-Q for the quarterly period ended December 31, 1993, Exhibit 10(b)).