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 about 140,000 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 460,000, contains residential concentrations and a diversity of industrial and commercial establishments, as well as some farm lands. The Company had 250 employees at September 30, 1997.
At September 30, l997, the common stock of the Company and of its utility 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.
On December 16, 1997, the State of Illinois enacted legislation to restructure the electric market in Illinois. Under the legislation, approximately one-third of non-residential electric customers, including customers with very large loads, will be able to purchase electric power from the supplier of their choice beginning on October 1, 1999. All non-residential customers will have this choice by December 31, 2000. All residential customers will be given choice on May 1, 2002. Customers who buy their electricity from a supplier other than the local electric utility will be required to pay transition charges to the utility through the year 2006. These charges are intended to compensate the electric utilities for revenues lost because of customers buying electricity from other suppliers. The legislation also allows an electric utility to issue bonds, in aggregate amounts up to 50% of its Illinois jurisdictional capitalization, to be financed by a specific charge to its customers. An electric utility also may transfer up to 15% of its assets to an affiliated or unaffiliated entity without approval from the Illinois Commerce Commission. In return for these and other benefits, electric utilities are required to reduce their rates to residential customers. The state's two largest electric utilities, including the utility that serves northeastern Illinois, must reduce their residential rates by 15% on August 1, 1998 and by another 5% on May 1, 2002. The legislation does not require electric utilities to divest their power generation assets. It is too early to determine what effects this restructuring of the electric market will have on the competitive position of the Company.
In addition to restructuring the electric market, the legislation provides for additional funding for assistance to low-income energy users, including customers of the Company. The legislation creates a fund, financed by charges to electric and gas customers of public utilities and participating municipal utilities and electric co-ops, which supplements currently available federal energy assistance.
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 purchases have little 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 suppliers have 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. (See Other Matters - Large Volume Gas Service Agreements in Item 7.)
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, 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 schedules 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 month between costs recoverable through the Gas Charge and the 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 a current asset (with a contra entry to Gas Costs). 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 1L, 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 revenues 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. (100 cubic feet = 1 therm; 10 therms = 1 Dekatherm - Dth)
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 equipment advances for new, expanded, or current natural gas applications, including cogeneration, prime movers, natural gas- fueled vehicles, and natural gas 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.
In 1994, the Commission entered orders providing for full recovery by the Company of FERC Order 636 transition costs from the Company's gas service customers. The Commission's orders have been appealed to the Illinois Supreme Court. (See Notes 1L, 2A, and 2B of the Notes to Consolidated Financial Statements.)
On November 8, 1995, the Commission issued an order approving changes in rates of the Company. (See Note 2A of the Notes to Consolidated Financial Statements.)
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.
Most of the gas distributed by the Company is transported to the Company's distribution system by interstate pipelines. In their provision of gas services (gathering, transportation and storage services, and gas supply) pipelines are 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.)
ENVIRONMENTAL MATTERS
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.) Also, the Company was informed by the Illinois Environmental Protection Agency (IEPA) that it was not in compliance with certain provisions of the Illinois Environmental Protection Act which prohibit water pollution within the State of Illinois. (See Note 3C of the Notes to Consolidated Financial Statements.)
CURRENT GAS SUPPLY
The Company has entered into various long-term and short-term firm gas supply contracts. When used in conjunction with contract storage and company-owned peak-shaving facilities, 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 the foreseeable future, it is unable to quantify or otherwise make specific representations regarding national supply availability.
The following tabulation shows the Company's expected design peak-day availability of gas in thousands of dekatherms (MDth) during the 1997-1998 heating season:
Design Peak-Day Year of Availability Contract Source (MDth) Expiration Firm direct purchases (1) 90 1998-2000 Liquefied petroleum gas (2) 40 Storage gas: Leased (3) 165 1998-2000 Peoples-Manlove (4) 63 (5) Customer-owned gas (6) 50 Total expected design peak-day availability 408
(1)Consists of firm gas purchases from non-pipeline suppliers delivered utilizing firm pipeline transportation. The majority of the gas purchase contracts are negotiated annually. The terms of the transportation contracts vary, with the longest term being 5 years.
(2)Reflects derating of capacity, as accepted by the Commission Staff in Docket 91-0581.
(3)Consists of leased storage services required to meet design day requirements with contract lengths varying from 3 to 5 years.
(4)Manlove Field, Peoples Gas' underground storage facility located near Champaign, Illinois, has a seasonal top-gas capacity (excluding volumes required to support late-season peaking requirements) of approximately 27,000 MDth, of which approximately 1,566 MDth is dedicated to the Company. For the 1997-98 heating season, the Company has a contract for a maximum daily deliverability of 63 MDth.
(5)The contract with Peoples Gas was for an initial term expiring May 1, 1990. However, by its terms, the contract continues in effect unless canceled by either party upon 120 days notice prior to April 30 of any year thereafter.
(6)Consists of gas supplies purchased directly from producers and marketers by the Company's commercial, industrial, and larger residential customers.
The sources of gas supply (including gas transported for customers) in MDth for the Company for the three fiscal years ended September 30, 1997, 1996, and 1995, were as follows:
1997 1996 1995
Gas purchases 27,226 27,940 20,250 Liquefied petroleum gas produced 20 151 9 Customer-owned gas-received 12,618 12,777 12,379 Underground storage-net (123) 468 3,103 Exchange gas-net (151) (104) - Company use, franchise requirements, and unaccounted-for gas (546) (983) (636) Total (a) 39,044 40,249 35,105
(a) See "Gas Sold and Transported" in Item 6.
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, at September 30, 1997, consisted of approximately 2,100 miles of distribution mains and necessary pressure regulators, approximately 126,000 services (pipe connecting the mains with piping on the customers' premises), and approximately 143,000 meters installed on customers' premises. Also, the Company's transmission system consists of approximately 15 miles of transmission pipeline. In addition, the Company has liquefied petroleum gasification and storage facilities. It also 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 First Trust, National Association, as 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 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 decreased $1.5 million, to $14.8 million, in fiscal 1997 from 1996, primarily a result of the year-ago period's gain on the expiration of gas storage contracts (see Note 5 of the Notes to Consolidated Financial Statements). Also hindering this year's comparative results were decreased gas deliveries due to weather that was four per cent warmer than the previous fiscal year and conservation, increased computer support services associated with the implementation of the new customer information system and increased depreciation and amortization expense. Partially offsetting these effects were a decrease in pension expense (see Note 6A of the Notes to Consolidated Financial Statements), a full year's effect of the Company's November 1995 rate increase (see Note 2A of the Notes to Consolidated Financial Statements), and decreased net interest expense.
In 1996, net income applicable to common stock increased $7.3 million, to $16.3 million, due chiefly to weather that was 20 per cent colder than in 1995 and to the aforementioned rate increase. In addition, net income benefited from the previously mentioned gain associated with the expiration of certain natural gas storage contracts and a net credit in pension expense. These increases were partially offset by the prior year's recognition of the federal income tax settlement (see Note 7D of the Notes to Consolidated Financial Statements) and the fiscal year's higher operating costs.
A summary of variations affecting income between years is presented below, with explanations of significant differences following: Fiscal 1997 Fiscal 1996 over 1996 over 1995 Amount Amount (000's) Per Cent (000's) Per Cent Net operating revenues (a) $ (980) (1.5) $12,198 22.4 Operation and maintenance expenses (2,064) (7.1) 4,533 18.4 Depreciation expense 234 3.1 391 5.4 Income taxes 642 7.6 3,770 81.4 Other income and deductions (1,755) (56.6) 3,718 54.5 Net income applicable to common stock (1,533) (9.4) 7,299 80.7 (a) Operating revenues, net of gas costs and revenue taxes.
Net Operating Revenues
Gross revenues of the Company are affected by changes in the unit cost of the Company's gas purchases and do not include the cost of gas supplies for customers who purchase gas directly from producers and marketers rather than from the Company. The direct customer purchases have little 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. Except for the effect of customer conservation that may result from substantial increases in the commodity cost of gas supplies, 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 1L 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.
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 (except for the effect of customer conservation that may result from substantial increases in the commodity cost of gas supplies), or changes in revenue taxes, the discussion below pertains to "net operating revenues" (operating revenues, net of gas costs and revenue taxes). The Company considers net operating revenues to be a more pertinent measure of operating results than gross revenues.
Net operating revenues decreased $980,000 to $65.8 million, in 1997. Natural gas deliveries decreased 1.2 bcf to 39.0 bcf, due to weather that was four per cent warmer than in 1996 and conservation. Net operating revenues decreased approximately $1.1 million ($654,000 after income taxes) as a result of warmer weather and conservation. However, a full year's effect of the Company's rate increase improved net operating revenues by approximately $520,000 ($314,000 after income taxes).
In 1996, net operating revenues increased $12.2 million, to $66.8 million. Natural gas deliveries increased 5.1 bcf, to 40.2 bcf, due to weather that was 20 per cent colder than in 1995 and over eight per cent colder than normal. Net operating revenues increased approximately $4 million ($2.4 million after income taxes) as a result of the colder weather. Also, the Company's aforementioned rate increase improved net operating revenues by about $5 million ($3 million after income taxes).
See Other Matters - Operating Statistics for details of selected financial and operating information by gas service classification.
Operation and Maintenance Expenses
Operation and maintenance expenses decreased $2.1 million, to $27.1 million, in 1997, due chiefly to an $814,000 decrease in pension expense caused by changes in settlement accounting attributed to employees choosing early retirement and actuarial assumptions (see Note 6A of the Notes to Consolidated Financial Statements), reductions in costs associated with liability insurance premiums and claim settlements ($674,000), and lower reengineering expenses ($433,000).
In 1996, operation and maintenance expenses increased $4.5 million, to $29.1 million, due principally to the reduction of expense from the prior year's recognition of approximately $1.5 million for an IRS settlement. (See Note 7D of the Notes to Consolidated Financial Statements.) In addition, increases between years resulted from greater environmental costs recovered through rates ($1.4 million), costs associated with liability insurance premiums and claim settlements ($562,000), and distribution system expenses ($438,000).
Depreciation Expense
Depreciation expense increased $234,000, to $7.9 million, in 1997, and $391,000, to $7.6 million, in 1996, due largely to depreciable property additions.
Income Taxes
Income taxes, exclusive of the $183,000 included in other income and deductions, increased $642,000, to $9.0 million, due mainly to higher pre-tax income.
In 1996, income taxes, exclusive of the $1.8 million included in other income and deductions, increased $3.8 million, to $8.4 million, due mainly to higher pre-tax income.
Other Income and Deductions
Other income and deductions increased $1.8 million from the prior year, due chiefly to the prior period's gain associated with the expiration of natural gas storage contracts. (See Note 5 of the Notes to Consolidated Financial Statements.) Partially offsetting this increase were reductions in interest expense on long-term debt resulting from the Company's early redemption of first mortgage bonds (see Note 12A of the Notes to Consolidated Financial Statements) and other interest expense.
In 1996, other income and deductions decreased $3.7 million from the prior year, due largely to the gain of $2.2 million, after income taxes, associated with the expiration of certain natural gas storage contracts. (See Note 5 of the Notes to Consolidated Financial Statements.) Additionally, fiscal year 1996 includes lower interest on long-term debt resulting from the Company's early redemption of first mortgage bonds. (See Note 12A of the Notes to Consolidated Financial Statements.)
Other Matters
Effect of Weather. Weather variations affect the volumes of gas delivered for heating purposes and, therefore, can have a significant positive or negative impact on net income, cash position, and coverage ratios.
FERC Order 636 Costs. In 1994, the Commission entered orders providing for full recovery by the Company of FERC Order 636 transition costs from the Company's gas service customers. The Commission's orders have been appealed to the Illinois Supreme Court. (See Notes 1L, 2A, and 2B of the Notes to Consolidated Financial Statements.)
Large-Volume Gas Service Agreements. The Company has entered into a gas service contract with a large-volume customer under a specific rate schedule approved by the Commission. This contract was negotiated to overcome the potential threat of bypassing the utility's distribution system. The contract will not have a material adverse effect on the financial position or the results of operations of the Company.
Operating Statistics. The following table represents gas distribution margin components:
For fiscal years ended SepteMBER 30, 1997 1996 1995 Operating Revenues (thousands): Gas sales Residential 129,332 125,502 104,034 Commercial 19,383 18,769 14,677 Industrial 4,360 4,299 3,321 153,075 148,570 122,032
Transportation Residential 2,784 1,852 1,233 Commercial 5,018 6,307 6,859 Industrial 5,128 5,683 5,096 Contract Pooling 1,874 370 - 14,804 14,212 13,188
Other 996 1,027 1,309
Total Operating Revenues 168,875 163,809 136,529 Less- Gas Costs 92,307 86,304 72,815 - Revenues Taxes 10,794 10,751 9,158 Net Operating Revenues 65,774 66,754 54,556
Deliveries (MDth): Gas Sales Residential 21,578 22,789 19,062 Commercial 3,531 3,698 2,873 Industrial 846 930 702 25,955 27,417 22,637
Transportation (a) Residential 2,756 1,415 579 Commercial 3,936 5,145 5,518 Industrial 6,397 6,272 6,371 13,089 12,832 12,468
Total Gas Sales and Transportation 39,044 40,249 35,105
Margin per Dth delivered 1.68 1.66 1.55
(a) Volumes associated with contract pooling service are included in the respective customer classes.
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 December and May. 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 $129.4 million of which the Company may borrow up to $30 million. At September 30, 1997, Peoples Gas and the Company had unused credit available from banks of $126.5 million. (See Note 11 of the Notes to Consolidated Financial Statements.)
Cash Flow Activities. Net cash provided by operating activities in 1997 decreased by $7.6 million, due chiefly to changes in accounts payable and gas in storage. Partially offsetting these items were increases in net receivables and other assets. In 1996, net cash provided by operating activities increased $4.8 million, due primarily to changes resulting from increased net income, due mainly to colder weather and the rate increase, and from accounts payable, partially offset by other assets and gas sales revenue refundable. In 1995, net cash provided by operating activities decreased by $800,000, due primarily to changes related to gas costs recoverable, gas sales revenue refundable, and net receivables, largely offset by increases associated with gas in storage, deferred income taxes, and other assets.
Net cash used in investing activities for 1997, 1996, and 1995 mainly represents the level of capital expenditures in the respective years.
Net cash used in financing activities in 1997 primarily reflects dividends paid on common stock. In 1996, net cash used in financing activities reflects the redemption of previously issued debt (see Note 12A of the Notes to Consolidated Financial Statements) and higher dividends paid on common stock due to the increase in net income. In 1995, net cash used in financing activities reflects lower dividends paid on common stock resulting from the reduction in net income.
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, 1997, such restrictions amounted to $11.6 million out of total retained earnings of $67.9 million. (See Note 4 of the Notes to Consolidated Financial Statements.)
Interest Coverage. The fixed charges coverage ratios for the Company for fiscal 1997, 1996, and 1995 were 5.74, 5.62, and 2.93, respectively. The increase in the current fiscal year is due to lower interest expense on bank loans, amounts refundable to customers and long-term debt. The increase in the ratio for fiscal year 1996 reflects the redemption of long-term debt and higher pre-tax income resulting from colder weather and the Commission approved rate increase. (See Results of Operations - Net Income.) The ratio for fiscal 1995 includes the recording of an IRS settlement in income. (See Note 7D of the Notes to Consolidated Financial Statements.)
Debt Ratings. The long-term debt of the Company has been rated Aa3 by Moody's Investors Service and AA- by Standard & Poor's Rating Group since fiscal 1985. On November 25, 1997, Moody's raised the Company's long-term debt rating to Aa2. The commercial paper of the Company has the top rating from both agencies.
Environmental Matters. The Company is conducting environmental investigations and work at certain sites that were the location of former manufactured gas operations. (See Note 3A of the Notes to Consolidated Financial Statements.)
In 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 former mineral processing site in Denver, Colorado. The Company filed a declaratory judgment action asking the court to declare that the Company is not liable for response costs relating to the site. Salomon filed a counterclaim for costs to be incurred by Salomon and Shattuck with respect to the site. On March 7, 1997, the District Court granted North Shore Gas' motion for summary judgment, declaring that North Shore Gas is not liable for any response costs in connection with the Denver site. Salomon has appealed the ruling of the District Court to the United States Court of Appeals, Seventh Circuit. (See Note 3B of the Notes to Consolidated Financial Statements.)
On November 14, 1995, the Illinois Attorney General filed a complaint in the Circuit Court of Cook County naming the Company and four other parties as defendants. The complaint alleges violations arising out of a gasoline release that occurred in Wheeling, Illinois, in June 1992, when a contractor who was installing a pipeline for the Company accidentally struck a gasoline pipeline owned by West Shore Pipeline Company. The Company is contesting this suit. (See Note 3C of the Notes to Consolidated Financial Statements.)
Regulatory Actions. On November 8, 1995, the Commission issued an order approving changes in rates of the Company. (See Note 2A of the Notes to Consolidated Financial Statements.)
Year 2000. The Company is modifying all of its computer programs to be year 2000 compatible. The Company does not believe that the amount of expenditures it will incur in connection with its year 2000 modification will have a material adverse effect on the financial position or results of operations of the Company.
CAPITAL RESOURCES
Capital Spending. Capital expenditures for additions, replacements, and improvements to the utility plant were $12.0 million in 1997, $13.3 million in 1996, and $14.9 million in 1995.
Expenditures in fiscal 1997 decreased $1.3 million from 1996 and decreased $1.6 million in 1996 as compared to 1995. Both years reflect the Company's commitment to its cost containment program.
While capital expenditures for fiscal 1998 are estimated to be $15.1 million, an increase of $3.1 million from 1997, the 1998 amount reflects a level that is consistent with the financial goals of the Company.
There are no sinking fund requirements for long-term debt due in fiscal 1998. (See Note 12B 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 first mortgage bonds or equity from Peoples Energy.
Bonds Redeemed. On February 1, 1996, the Company redeemed $8 million aggregate principal amount of its Series I First Mortgage Bonds using the proceeds of a short-term bank loan as well as other monies of the Company. (See Note 12A of the Notes to Consolidated Financial Statements.)
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Statement of Management's Responsibility 16
Report of Independent Public Accountants 17
Consolidated Statements of Income for fiscal years ended September 30, 1997, 1996, and 1995 18
Consolidated Statements of Retained Earnings for fiscal years ended September 30, 1997, 1996, and 1995 18
Consolidated Balance Sheets at September 30, 1997 and 1996 19
Consolidated Capitalization Statements at September 30, 1997 and 1996 20
Consolidated Statements of Cash Flows for fiscal years ended September 30, 1997, 1996, and 1995 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 its 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 its 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 of Peoples Energy.
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 at September 30, 1997 and 1996, and the related consolidated statements of income, retained earnings, and cash flows for each of the three years in the period ended September 30, 1997. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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 at September 30, 1997 and 1996, and the results of their operations and cash flows for each of the three years in the period ended September 30, 1997, 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 schedule listed in Item 14(a)2 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The financial statement schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states, 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 October 31, 1997
CONSOLIDATED STATEMENTS OF INCOME North Shore Gas Company For fiscal years ended September 30, 1997 1996 1995 (Thousands)
Operating Revenues: Gas sales $153,075 $148,570 $122,032 Transportation 14,804 14,212 13,188 Other 996 1,027 1,309 Total Operating Revenues 168,875 163,809 136,529 Operating Expenses: Gas costs 92,307 86,304 72,815 Operation 24,131 25,893 21,595 Maintenance 2,933 3,235 3,000 Depreciation 7,863 7,629 7,238 Taxes- Income 9,046 8,404 4,634 - State and local revenue 10,794 10,751 9,158 - Other 2,133 2,147 2,224 Total Operating Expenses 149,207 144,363 120,664 Operating Income 19,668 19,446 15,865 Other Income and (Deductions): Interest income 447 414 564 Interest on long-term debt (4,627) (4,937) (5,905) Other interest expense (441) (804) (1,291) Income taxes (183) (1,750) (225) Miscellaneous - net (see Note 9) (50) 3,978 40 Total Other Income and Deductions (4,854) (3,099) (6,817) Net Income Applicable to Common Stock $ 14,814 $ 16,347 $ 9,048
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS North Shore Gas Company For fiscal years ended September 30, 1997 1996 1995 (Thousands)
Balance at Beginning of Year $ 66,623 $ 62,024 $ 58,923 Add - Net Income 14,814 16,347 9,048 Deduct- Dividends declared on common stock 13,525 11,748 5,947 Balance at End of Year $ 67,912 $ 66,623 $ 62,024
The Notes to Consolidated Financial Statements are an integral part of these statements.
CONSOLIDATED CAPITALIZATION STATEMENTS
North Shore Gas Company At September 30, 1997 1996 (Thousands, except number of shares) Common Stockholder's Equity: Common stock, without par value - Authorized 5,000,000 shares Outstanding 3,625,887 shares $ 24,757 $ 24,757 Retained earnings (see Consolidated Statements of Retained Earnings) 67,912 66,623 Total Common Stockholder's Equity 92,669 91,380
Long-Term Debt: Exclusive of sinking fund payments and maturities due within one year First and Refunding Mortgage Bonds - 8% Series J, due November 1, 2020 24,699 24,734 6-3/8% Series K, due October 1, 2022 24,905 24,930 6.37% Series L, due May 1, 2003 15,000 15,000 Total Long-Term Debt 64,604 64,664 Total Capitalization $ 157,273 $ 156,044
The Notes to Consolidated Financial Statements are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS North Shore Gas Company For fiscal years ended September 30, 1997 1996 1995 (Thousands)
Operating Activities: Net Income $ 14,814 $ 16,347 $ 9,048 Adjustments to reconcile net income to net cash: Depreciation 7,863 7,629 7,238 Deferred income taxes and investment tax credit 126 (425) 3,339 Change in deferred credits and other liabilities 319 1,168 (1,146) Change in other assets 7,298 (5,965) 573 Other - 11 8 Change in current assets and liabilities: Receivables - net 2,277 (3,776) 131 Accrued unbilled revenues 1,147 (1,064) (355) Materials and supplies (867) 89 (247) Gas in storage (376) 8,769 9,025 Gas costs recoverable 664 1,573 (1,671) Payables (8,045) 12,640 351 Customer gas service and credit deposits 365 (295) (313) Accrued taxes (345) 1,028 (846) Gas sales revenue refundable (2,778) (7,756) 1,168 Accrued interest - 266 (966) Prepayments 125 (24) 30
Net Cash Provided by Operating Activities 22,587 30,215 25,367
Investing Activities: Capital expenditures - construction (12,003) (13,286) (14,901) Other assets 632 482 480 Net Cash Used in Investing Activities (11,371) (12,804) (14,421)
Financing Activities: Interim loans - net 185 1,925 - Retirement of long-term debt (60) (12,060) (4,201) Dividends paid on common stock (11,386) (9,971) (6,164)
Net Cash Used in Financing Activities (11,261) (20,106) (10,365)
Net Increase (Decrease) in Cash and Cash Equivalents (45) (2,695) 581 Cash and Cash Equivalents at Beginning of Year 389 3,084 2,503
Cash and Cash Equivalents at End of Year $ 344 $ 389 $ 3,084
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 are included in the consolidated financial statements. All significant intercompany transactions have been eliminated in consolidation. Certain items previously reported for years prior to 1997 have been reclassified to conform with the current-year presentation.
1B Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
1C Concentration of Credit Risk
The Company provides natural gas service to about 140,000 customers within approximately 275 square miles in Northeastern Illinois. Credit risk for the Company 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, when appropriate, to minimize uncollectible write-offs.
1D Revenue Recognition
Gas sales revenues are recorded on the accrual basis for all gas delivered during the month, including an estimate for gas delivered but unbilled at the end of each month.
1E Property, Plant and Equipment
Property, plant and equipment is stated at original cost and includes appropriate amounts of capitalized labor costs, payroll taxes, employee benefit costs, administrative costs, and an allowance for funds used during construction.
1F Accounts Payable
The Company utilizes controlled disbursement banking arrangements under which certain bank accounts have negative book balances due to checks in transit. The negative balances are classified as Accounts Payable.
1G 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.
The provision for depreciation, expressed as an annual percentage of original cost of depreciable property, is as follows:
For fiscal years ended 1997 1996 1995 September 30,
Provision for depreciation 3.1% 3.1% 3.1%
1H Regulated Operations
The Company's utility operations are subject to regulation by the Commission. Regulated operations are accounted for in accordance with 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.
The following regulatory assets were reflected in Other Assets in the Consolidated Balance Sheets at September 30, 1997 and 1996:
1997 1996 (Thousands) Environmental costs, net of recoveries (see Note 3A) $ 6,899 $ 7,166 Transition costs from pipeline supplier (see Note 2B) 1,422 7,746 Rate case expenses 82 158 Discount, premium, expenses, and loss on reacquired bonds 113 236 Other 8 16 Total regulatory assets $ 8,524 $ 15,322
1I Income Taxes
The Company follows the liability method of accounting for deferred income taxes. Under the liability method, deferred income taxes have been recorded using currently enacted tax rates for the differences between the tax basis of assets and liabilities and the basis reported in the financial statements. Due to the effects of regulation on the Company, certain adjustments made to deferred income taxes are, in turn, debited or credited to regulatory assets or liabilities. (See Note 7C.)
Each company within the consolidated group nets its income tax related regulatory assets and liabilities. At September 30, 1997 and 1996, net regulatory income tax liabilities recorded in Other Liabilities amounted to $5.2 million and $5.5 million, respectively.
Investment tax credits have been deferred and are being amortized through credits to income over the book lives of related property.
The preceding deferred-tax and tax-credit accounting conforms with regulations of the Commission.
1J Gas in Storage
Storage injections are priced at the fiscal-year average of costs of supply. 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, 1997 and 1996, exceeded the LIFO cost by approximately $16 million and $13 million, respectively.
1K Statement of Cash Flows
For purposes of the balance sheet and the statement of cash flows, the Company considers all short-term liquid investments with maturities of three months or less to be cash equivalents.
Income taxes and interest paid (excluding capitalized interest) were as follows:
For fiscal years ended 1997 1996 1995 September 30, (Thousands)
Income taxes paid $9,053 $9,435 $ 839 Interest paid 4,889 5,119 6,354
1L Recovery of Gas Costs, Including Charges for Transition Costs
Under the tariffs 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 1996 through 1997 are currently pending before the Commission.
Pursuant to FERC Order No. 636 and successor orders, pipelines are allowed to recover from their customers transition costs. These costs arise from the restructuring of pipeline service obligations required by the 636 Orders. The Company is currently recovering pipeline charges for transition costs through the Gas Charge. (See Notes 2A and 2B.)
1M Recovery of Costs of Environmental Activities Relating to Former Manufactured Gas Operations
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. For each utility with such a rate mechanism, the Commission conducts annual proceedings regarding the reconciliation of revenues from the rate mechanism and related costs. In such proceedings, costs recovered by a utility through the rate mechanism are subject to challenge. Such proceedings, regarding the Company for fiscal years 1994 through 1996 are currently pending before the Commission. (See Note 3A.)
2. RATES AND REGULATION
2A Utility Rate Proceedings
Rate Order. On November 8, 1995, the Commission issued an order approving changes in rates of the Company that were designed to increase annual revenues by approximately $5.6 million, exclusive of additional charges for revenue taxes. The Company was allowed a rate of return on original-cost rate base of 9.75 per cent, which reflected an 11.30 per cent cost of common equity. The new rates were implemented on November 14, 1995.
FERC Order 636 Cost Recovery. In 1994, the Commission issued orders concluding its investigation into the appropriate means of recovery by Illinois gas utilities of pipeline charges for FERC Order 636 transition costs. The orders provided for the full recovery of transition costs from the Company's gas service customers. The Commission directed that 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. A group of industrial transportation customers has filed a petition with the Illinois Supreme Court appealing the Commission's orders. If the Illinois Supreme Court accepts the appeal, any changes made by it to the Commission's orders would have a prospective effect only. (See Notes 1L and 2B.)
2B FERC Orders 636, 636-A, and 636-B
FERC Order 636 and successor orders require pipelines to make separate rate filings to recover transition costs. Under a Stipulation and Agreement (Agreement) filed by Natural Gas Pipeline Company of America (Natural) and approved by FERC, Natural's charges to the Company for GSR transition costs are subject to a cap of approximately $25 million. At September 30, 1997, the Company had made payments of $23.6 million and had accrued an additional $1.4 million toward the cap.
The 636 Orders are not expected to have a material effect on financial position or results of operations of the Company. (See Notes 1L and 2A.)
3. ENVIRONMENTAL MATTERS
3A Former Manufactured Gas Plant Operations
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). 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. One of the Manufactured Gas Sites is discussed in more detail below. The Company, under the supervision of the IEPA, is conducting investigations of two additional Manufactured Gas Sites. These investigations may require the Company to perform additional investigation and remediation. The investigations are in a preliminary stage and are expected to occur over an extended period of time.
In 1990, the Company entered into an Administrative Order on Consent (AOC) with the United States Environmental Protection Agency (EPA) and the IEPA to implement and conduct a remedial investigation/feasibility study (RI/FS) of a Manufactured Gas Site located in Waukegan, Illinois, where manufactured gas and coking operations were formerly conducted (Waukegan Site). The RI/FS is comprised of an investigation to determine the nature and extent of contamination at the Waukegan Site and a feasibility study to develop and evaluate possible remedial actions. The Company entered into the AOC after being notified by the EPA that the Company, General Motors Corporation (GMC) and Outboard Marine Corporation were each a potentially responsible party (PRP) under CERCLA with respect to the Waukegan Site. A PRP is potentially liable for the cost of any investigative and/or remedial work that the EPA determines is necessary. Other parties identified as PRPs did not enter into the AOC. Under the terms of the AOC, 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.
The Company is accruing and deferring the costs it incurs 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 September 30, 1997, the total of the costs deferred by the Company, net of recoveries and amounts billed to other entities, was $6.9 million. This amount includes an estimate of the costs of completing the studies required by the EPA at the Waukegan Site and the investigations being conducted under the supervision of the IEPA referred to above. The amount also includes an estimate of the costs of remediation at the Waukegan Site at the minimum amount of the current estimated range of such costs. The costs of remediation at the other sites cannot be determined at this time. While the Company intends to seek contribution from other entities for the costs incurred at the sites, the full extent of such contributions cannot be determined at this time.
The Company has filed suit against a number of insurance carriers for the recovery of environmental costs relating to its former manufactured gas operations. The suit asks the court to declare that the insurers are liable under policies in effect between 1937 and 1986 for costs incurred or to be incurred by the Company in connection with its Manufactured Gas Sites in Waukegan. The Company is also asking the court to award damages stemming from the insurers' breach of their contractual obligation to defend and indemnify the Company against these costs. At this time, management cannot determine the timing and extent of the Company's recovery of costs from its insurance carriers. Accordingly, the costs deferred at September 30, 1997 have not been reduced to reflect recoveries from insurance carriers.
Costs incurred by the Company for environmental activities relating to former manufactured gas operations will be recovered from insurance carriers or other entities or through rates for utility service. Accordingly, management believes that the costs incurred by the Company in connection with 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 September 30, 1997, it had recovered $6.6 million of such costs through 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. Shattuck is a wholly owned subsidiary of Salomon, Inc. (Salomon). 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 cost of the remedy at the site has been estimated by Shattuck to be approximately $31 million. Salomon has provided financial assurance for the performance of the remediation at the site.
The Company filed a declaratory judgment action against Salomon in the District Court for the Northern District of Illinois. The suit asked the court to declare that the Company is not liable for response costs incurred or to be incurred at the Denver site. Salomon filed a counterclaim for costs to be incurred by Salomon and Shattuck with respect to the site. On March 7, 1997, the District Court granted the Company's motion for summary judgment, declaring that the Company is not liable for any response costs in connection with the Denver site. Salomon has appealed the ruling of the District Court to the United States Court of Appeals, Seventh Circuit.
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.
3C Gasoline Release in Wheeling, Illinois
In June 1995, the Company received a letter from the IEPA informing the Company that it was not in compliance with certain provisions of the Illinois Environmental Protection Act which prohibit water pollution within the State of Illinois. On November 14, 1995, the Illinois Attorney General filed a complaint in the Circuit Court of Cook County naming the Company and four other parties as defendants. The complaint alleges that the violations are the result of a gasoline release that occurred in Wheeling, Illinois in June 1992, when a contractor who was installing a pipeline for the Company accidentally struck a gasoline pipeline owned by West Shore Pipeline Company. The Company is contesting this suit. Management does not believe the outcome of this suit will have a material adverse effect on financial position or results of operations of the Company.
4. COVENANTS REGARDING RETAINED EARNINGS
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, 1997, such restrictions amounted to $11.6 million out of the Company's total retained earnings of $67.9 million.
5. EXPIRATION OF GAS STORAGE CONTRACTS
The Company had certain natural gas storage contracts with Natural that expired on or before December 1, 1995. Associated with the expiration of the contracts, the Company realized a gain of approximately $3.7 million ($2.2 million after income taxes) during fiscal 1996.
6. RETIREMENT AND POSTEMPLOYMENT BENEFITS
6A Pension Benefits
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 non-qualified pension plans that provide employees with pension benefits in excess of qualified plan limits imposed by federal tax law.
Net pension cost for all plans for fiscal 1997, 1996, and 1995 included the following components:
1997 1996 1995 (Millions)
Service cost - benefits earned during year 0.8 1.0 1.0 Interest cost on projected benefit obligations 1.9 2.0 2.0 Actual return on plan assets (gain) (6.0) (3.9) (4.5) Net amortization and deferral 3.7 1.7 2.3 Settlement accounting (0.3) 0.1 - Net pension cost 0.1 0.9 0.8
In 1997 and 1996 the Company recognized a net gain of $300,000 and a net loss of $100,000, respectively, from the settlement of portions of pension plan obligations.
The calculation of pension cost assumed a long-term rate of return on assets of 9.0 per cent for 1997, 8.5 per cent for 1996 and 7.5 per cent for 1995. The settlement accounting cost for 1997 and 1996 was determined using a discount rate of 7.5 per cent and assumed future compensation increases of 4.5 per cent per year.
The following table shows the estimated funded status of the Company's pension plans at September 30, 1997 and 1996:
1997 1996 (Millions)
Plan assets at market value 31.3 30.1 Actuarial present value of plan benefits: Vested 18.2 18.6 Non-vested 2.7 2.3 Accumulated benefit obligation 20.9 20.9 Effect of projected future compensation increases 5.8 5.3 Projected benefit obligation 26.7 26.2 Excess of plan assets over projected benefit obligation 4.6 3.9 Less: Unrecognized transition asset 0.3 0.4 Unrecognized prior service cost (0.2) (0.1) Unrecognized net gain 5.4 4.5 Recognition of non-qualified plan contributions 7-1-97 to 9-30-97 (0.1) - Accrued pension liability (1.0) (0.9)
The projected benefit obligation and plan assets at September 30, 1997 and 1996, are based on a July 1 measurement date using a discount rate of 7.5 per cent and assumed future compensation increases of 4.5 per cent per year. Plan assets consist primarily of marketable equity and fixed-income securities.
6B Other Postretirement Benefits
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 accrues the expected costs of such benefits during the employees' years of service.
Net postretirement benefit cost for all plans for fiscal 1997, 1996, and 1995 included the following components:
1997 1996 1995 (Millions)
Service cost - benefits earned during year 0.3 0.3 0.2 Interest cost on projected benefit obligation 0.7 0.7 0.7 Actual return on plan assets (gain) (0.5) (0.2) (0.1) Amortization of transition obligation 0.4 0.4 0.4 Net amortization and deferral 0.3 0.1 0.1 Net postretirement benefit cost 1.2 1.3 1.3
The calculation of postretirement benefit cost assumed a long- term rate of return on assets of 9.0 per cent for 1997 and 7.5 per cent for 1996 through 1995.
Of the above total postretirement costs recognized for fiscal years 1997, 1996, and 1995, $600,000, $600,000, and $700,000, respectively, were funded through trust funds for future benefit payments.
The following table sets forth the estimated funded status for the postretirement health care and life insurance plans at September 30, 1997 and 1996:
1997 1996 (Millions)
Plan assets at market value 2.8 1.9 Accumulated postretirement benefit obligation (APBO): Retirees 6.5 5.8 Fully eligible active plan participants 0.8 1.5 Other active plan participants 2.7 2.6 Total APBO 10.0 9.9 Deficiency of plan assets over the APBO (7.2) (8.0) Less: Unrecognized transition obligation (6.8) (7.3) Unrecognized net gain 0.4 0.1 Contributions: July 1 to September 30 0.8 0.8 Accrued postretirement benefit asset (liability) - -
The total APBO and plan assets at September 30, 1997 and 1996, are based on a July 1 measurement date using a discount rate of 7.5 per cent and assumed future compensation increases of 4.5 per cent per year. Plan assets consist primarily of marketable equity and fixed-income securities.
For measurement purposes, a health care cost trend rate of 7.9 per cent was assumed for fiscal 1998, and that rate thereafter will decline gradually to 4.75 per cent 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, 1997, by $800,000 and the aggregate of service and interest cost components of the net periodic postretirement benefit cost by $100,000 annually.
7. TAX MATTERS
7A Provision for Income Taxes
Total income tax expense as shown on the Consolidated Statements of Income is composed of the following:
For fiscal years ended September 30, 1997 1996 1995 (Thousands) Current: Federal $ 7,519 $ 8,715 $ 1,337 State 1,584 1,864 183 Total current income taxes 9,103 10,579 1,520 Deferred: Federal 162 (278) 2,797 State 111 11 688 Total deferred income taxes 273 (267) 3,485 Investment tax credits - net: Federal (189) (189) (191) State 42 31 45 Total investment tax credits - net (147) (158) (146) Total provision for income taxes $ 9,229 $ 10,154 $ 4,859
7B Tax Rate Reconciliation
The following is a reconciliation between the computed federal income tax expense (tax rate of 35 per cent times pre-tax book income) and the total provision for federal income tax expenses:
For fiscal years ended September 30, 1997 1996 1995 Per Cent Per Cent Per Cent of of of Amount Pre-tax Amount Pre-tax Amount Pre-tax (000's) Income (000's) Income (000's) Income Computed federal income tax expense $7,807 35.00 $8,608 35.00 $4,547 35.00 Amortization of deferrred taxes (155) (0.70) (182) (0.74) (256) (1.97) Other, net (160) (0.73) (178) (0.74) (348) (2.68) Total provision for federal income taxes $7,492 33.57 $8,248 33.52 $3,943 30.35
7C Deferred Income Taxes
Set forth in the table below are the temporary differences which gave rise to the net deferred income tax liabilities (see Note 1I):
At September 30, 1997 1996 (Thousands)
Deferred tax liabilities: Property - accelerated depreciation and other property related items $ 23,910 $ 22,225 Other 995 2,453 Total deferred income tax liabilities 24,905 24,678 Deferred tax assets: Net regulatory liabilities - income tax amounts (2,062) (2,173) Unamortized investment credits (1,427) (1,485) Other (1,000) (1,332) Total deferred income tax assets (4,489) (4,990) Net deferred income tax liabilities $ 20,416 $ 19,688
7D Income Tax Settlement
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 payments of principal and interest to the Company in 1994 of approximately $3 million, or $2.2 million after income taxes. The Company received regulatory authorization to defer the recognition of the settlement amount in income for fiscal year 1993, and to recognize its portion of the settlement amount in income for fiscal years 1994 and 1995. The Company represented to the Commission that, having received this accounting authorization, it would not file a request for an increase in base rates before December 1994.
As a result of the Commission's accounting authorization, the fiscal year 1995 portion of the settlement amount for the Company was amortized (credited) to operation expense. The effect was to offset increases in costs that the Company would incur during the year. In fiscal 1995, the Company amortized approximately $1.4 million, or $1.1 million after income taxes.
8. 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.
9. OTHER INCOME AND DEDUCTIONS - MISCELLANEOUS
For fiscal years ended September 30, 1997 1996 1995 (Thousands)
Amortization of loss on reacquired long-term debt $(125) $ (93) $(24) Interest on amounts recoverable from customers 42 224 20 Gain on expiration of gas storage contracts (see Note 5) - 3,717 - Other 33 130 44 Total other income and deductions - miscellaneous $ (50) $ 3,978 $ 40
10. CAPITAL COMMITMENTS
Total contract and purchase order commitments of the Company at September 30, 1997, amounted to approximately $900,000.
11. SHORT-TERM BORROWINGS AND CREDIT LINES
At September 30, 1997 1996 (Thousands) Bank Loans Peoples Gas 8.50% due March 27, 1998 $ 700 $ - 8.25% due February 11, 1997 - 700 Commercial Paper North Shore Gas due October 1, 1997 $ 2,110 $ - due October 1, 1996 - 1,925 Letters of Credit Peoples Gas $ 100 $ - Available lines of credit Unused bank lines $ 126,490 $ 126,775
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.
At September 30, 1997 and 1996, Peoples Gas and the Company had combined lines of credit totaling $129.4 million. Of these amounts, the Company could borrow up to $30 million. Agreements covering $92 million of the total at September 30, 1997 will expire on August 30, 1998; the agreement covering the remaining $37.4 million will expire on January 31, 1999. 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.
12. LONG-TERM DEBT
12A Bonds Redeemed
On February 1, 1996, the Company redeemed $8 million aggregate principal amount of its Series I First Mortgage Bonds using the proceeds of a short-term bank loan as well as other monies of the Company.
12B Sinking Fund Requirements and Maturities
At September 30, 1997, there were no long-term debt sinking fund requirements and maturities for the next five years.
12C Fair Value of Financial Instruments
At September 30, 1997, the carrying amount of the Company's long-term debt of $64.6 million had an estimated fair value of $67.6 million. At September 30, 1996, the carrying amount of the Company's long-term debt of $64.7 million had an estimated fair value of $67.4 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. Since the Company is subject to regulation, any gains or losses related to the difference between the carrying amount and the fair value of financial instruments may not be realized by the Company's shareholder. The carrying amount of all other financial instruments approximates fair value.
13. QUARTERLY FINANCIAL DATA (Unaudited)
The first quarter of fiscal 1997 included a full quarter's impact of the Commission-approved rate order. (See Note 2A of the Notes to Consolidated Financial Statements.) All four quarters reflected the decrease in gas deliveries due primarily to warmer weather and conservation. However, this was offset in all four quarters by reduced pension expense. The last three quarters of fiscal 1996 reflected the gain from the expiration of gas storage contracts. (See Note 5 of the Notes to Consolidated Financial Statements.)
Net Income Operating Operating Applicable to Fiscal Quarters Revenues Income Common Stock (Thousands)
Fourth $ 14,597 $ (848) $ (1,975) Third 25,648 3,615 2,490 Second 77,581 9,855 8,600 First 51,049 7,046 5,699
Fourth $ 18,099 $ (225) $ (895) Third 32,584 2,988 2,761 Second 69,967 9,901 9,300 First 43,159 6,782 5,181
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 11-30-97 Since
Kenneth S. Balaskovits 55 1993 Vice President and Controller of the Company, Peoples Energy, and Peoples Gas; Director of Peoples Gas.
J. Bruce Hasch 59 1986 President and Chief Operating Officer of the Company, Peoples Energy, and Peoples Gas; Director of Peoples Energy and Peoples Gas.
James Hinchliff 57 1985 Senior Vice President and General Counsel of the Company, Peoples Energy, and Peoples Gas; Director of Peoples Gas.
Thomas M. Patrick 51 1996 Executive Vice President of the Company, Peoples Energy, and Peoples Gas; Director of Peoples Gas.
Richard E. Terry 60 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, Bankmont Financial Corp., 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, 1997 11-30-97 Held Since
Kenneth S. BalaskovitsVice President and Controller 55 1993
Emmet P. Cassidy Secretary and Treasurer 64 1989
Katherine A. Donofrio Vice President 40 1997
Willard S. Evans, Jr. Vice President 42 1997
Donald M. Field Vice President 48 1996
Joan T. Gagen Vice President 46 1994
J. Bruce Hasch President and Chief Operating 59 1990 Officer
James Hinchliff Senior Vice President and 57 1989 General Counsel
John C. Ibach Vice President 50 1992
James M. Luebbers Vice President 51 1997
William E. Morrow Vice President 41 1996
Thomas M. Patrick Executive Vice President 51 1996
Desiree Rogers Vice President 38 1997
Richard E. Terry Chairman of the Board and 60 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 Ms. Donofrio, Messrs. Evans, Luebbers, Morrow, and Ms. Rogers, 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 five years with the exception of Ms. Rogers.
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 (SARs) and restricted stock awards under Peoples Energy's Long-Term Incentive Compensation Plan. Cash compensation for executive officers, 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.
(1) The total number of restricted shares held by Mr. Terry and the aggregate market value of such shares at September 30, 1997, was 14,020 shares valued at $528,378.75. Dividends are paid on the restricted shares at the same time and at the same rate as dividends paid to all shareholders of common stock. Aggregate market value is based on a per share price of $37.6875, the closing price of Peoples Energy's stock on the New York Stock Exchange composite transactions on September 30, 1997.
(2) Restricted stock awards granted to date vest in equal annual increments over a five year period. If a recipient's employment with the Company terminates, other than by reason of death, disability or retirement after attaining age 65, the recipient forfeits all rights to the unvested portion of the restricted stock award. In addition, the Compensation-Nominating Committee (and with respect to the CEO, the Compensation-Nominating Committee, subject to the approval of the non- employee directors) may, in its sole discretion, accelerate the vesting of any restricted stock awards granted under the Long-Term Incentive Compensation Plan. Total restricted stock awarded to Mr. Terry for 1995 constitutes 5,325 shares, of which 1,065 shares vested in 1996; 1,065 shares vested in 1997; 1,065 shares will vest in 1998; 1,065 shares will vest in 1999; and the remaining 1,065 shares will vest in 2000. Total restricted stock awarded to Mr. Terry for 1996 constitutes 5,275 shares, of which 1,055 shares vested in 1997; 1,055 shares will vest in 1998; 1,055 shares will vest in 1999; 1,055 shares will vest in 2000; and the remaining 1,055 shares will vest in 2001. Total restricted stock awarded to Mr. Terry for 1997 constitutes 4,425 shares, of which 885 shares will vest in 1998; 885 shares will vest in 1999; 885 shares will vest in 2000; 885 shares will vest in 2001; and the remaining 885 shares will vest in 2002.
ITEM 11. EXECUTIVE COMPENSATION (Continued)
(3) Company contributions to the Capital Accumulation Plan accounts of the named executive officers during the above fiscal years. Employee contributions under the plan are subject to a maximum limitation under the Internal Revenue Code of 1986. The Company pays an employee who is subject to this limitation an additional 50 cents for each dollar that the employee is prevented from contributing solely by reason of such limitation. The amounts shown in the table above reflect, if applicable, this additional Company payment.
(1)The grant of an Option enables the recipient to purchase Peoples Energy common stock at a purchase price equal to the fair market value of the shares on the date the Option is granted. The grant of an SAR enables the recipient to receive, for each SAR granted, cash in an amount equal to the excess of the fair market value of one share of Peoples Energy common stock on the date the SAR is exercised over the fair market value of such common stock on the date the SAR was granted. Options or SARs that expire unexercised become available for future grants. Before an Option or SAR may be exercised, the recipient must complete 12 months of continuous employment subsequent to the grant of the Option or SAR. Options and SARs may be exercised within 10 years from the date of grant, subject to earlier termination in case of death, retirement, or termination of employment.
(2)Based on 88,200 Options and 88,200 SARs granted to all employees under Peoples Energy's Long-Term Incentive Compensation Plan during fiscal 1997.
(3)Present value is determined using a variation of the Black-Scholes Option- Pricing Model. The model assumes: a) that Options and SARs are exercised two years after the date of grant-the averagee time Options and SARs were held by recipients under Peoples Energy Long-Term Incentive Compensation Plan over the past ten years; b) use of an interest rate equal to the interest rate on a U.S. Treasury security with a maturity date corresponding to the assumed exercise date; c) a level of volatility calculated using weekly stock prices for the two years prior to the date of grant; d) an expected dividend yield; and e) that no adjustments were made for non-transferability or risk of forfeiture. This is a theoretical value for the Options and SARs. The amount realized from an Option or SAR ultimately depends upon the excess of the market value of Peoples Energy's stock over the exercise price on the date the option or SAR is exercised.
ITEM 11. EXECUTIVE COMPENSATION (Continued)
(1)Includes cash-only SARs exercised by the named executive officer in the following amount: Mr. Terry, 10,600.
PENSION PLAN TABLE
Years of Service Average Annual Compensation 20 25 30 35 40
$150,000 $ 54,682 $ 68,352 $ 82,022 $ 91,397 $100,772 200,000 74,682 93,352 112,022 124,522 137,022 250,000 94,682 118,352 142,022 157,647 173,272 300,000 114,682 143,352 172,022 190,772 209,522 350,000 134,682 168,352 202,022 223,897 245,772 400,000 154,682 193,352 232,022 257,022 282,022 450,000 174,682 218,352 262,022 290,147 318,272 500,000 194,682 243,352 292,022 323,272 354,522 550,000 214,682 268,352 322,022 356,397 390,772 600,000 234,682 293,352 352,022 389,522 427,022 650,000 254,682 318,352 382,022 422,647 463,272 700,000 274,682 343,352 412,022 455,772 499,522 750,000 294,682 368,352 442,022 488,897 535,772
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)
At September 30, 1997, the credited years of retirement benefit service for the individuals listed in the Summary Compensation Table are as follows: Mr. Terry, 33 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 pensions pursuant to Peoples Energy's Supplemental Retirement Benefit Plan. The benefits shown give effect to these supplemental pension benefits.
SEVERANCE AGREEMENTS
Peoples Energy has entered into separate severance agreements with certain key executives including each of the executives named in the Summary Compensation Table. The intent of the severance agreements is to assure the continuity of the administration and operations of Peoples Energy and its subsidiaries, including the Company in the event of a Change in Control of the Company (as described below). The severance agreements were developed in accordance with the advice of outside consultants.
The term of each severance agreement is for the longer of 36 months after the date in which a Change in Control of Peoples Energy occurs or 24 months after the completion of the transaction approved by shareholders described in (iii) below of the description of a Change in Control. A Change in Control is defined as occurring when (i) Peoples Energy receives a report on Schedule 13D filed with the Securities and Exchange Commission pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended, disclosing that any person, group, corporation, or other entity is the beneficial owner, directly or indirectly, of 20% or more of the common stock of Peoples Energy; (ii) any person, group, corporation, or other entity (except Peoples Energy or a wholly-owned subsidiary), after purchasing common stock of Peoples Energy in a tender offer or exchange offer, becomes the beneficial owner, directly or indirectly, of 20% or more of such common stock; (iii) the shareholders of Peoples Energy approve (a) any consolidation or merger of Peoples Energy in which Peoples Energy is not the continuing or surviving corporation, other than a consolidation or merger in which holders of Peoples Energy's common stock prior to the consolidation or merger have substantially the same proportionate ownership of common stock of the surviving corporation immediately after the consolidation or merger as immediately before; (b) any consolidation or merger in which Peoples Energy is the continuing or surviving corporation, but in which the common shareholders of Peoples Energy immediately prior to the consolidation or merger do not hold at least 90% of the outstanding common stock on Peoples Energy; (c) any sale, lease, exchange or other transfer of all or substantially all of the assets of Peoples Energy, except where Peoples Energy owns all of the outstanding stock of the transferee entity or Peoples Energy's common shareholders immediately prior to such transaction own at least 90% of the transferee entity or group of transferee entities immediately after such transaction; or (d) any consolidation or merger of Peoples Energy where, after the consolidation or merger, one entity or group of entities owns 100% of the shares of Peoples Energy, except where Peoples Energy's common shareholders immediately prior to such merger or consolation own at least 90% of the outstanding stock of such entity or group of entities immediately after such consolidation or merger; or (iv) a change in the majority of the members of Peoples Energy's Board of Directors within a 24-month period, unless approved by two-thirds of the directors then still in office who were in office at the beginning of the 24-month period.
Each severance agreement provides for payment of severance benefits to the executive in the event that, during the term of the severance agreement, (i) the executive's employment is terminated by Peoples Energy or the Company, except for "cause" as defined therein; or (ii) the executive's employment is terminated due to a constructive discharge, which includes (a) a material change in the executive's responsibilities, which change would cause the executive's position with Peoples Energy or the Company to become of less dignity, responsibility, prestige or scope; (b) reduction, which is more than de minimis, in total compensation; (c) assignment without the executive's consent to a location more than 50 miles from the current place of employment; or (d) liquidation, dissolution, consolidation, merger, or sale of all or substantially all of the assets of Peoples Energy or the Company, unless the successor corporation has a net worth at least equal to that of Peoples Energy or the Company, as applicable, and expressly assumes the obligations of Peoples Energy under the executive's severance agreement.
The principal severance benefits payable under each severance agreement consist of the following: (i) the executive's base salary and accrued benefits through the date of termination, including a pro rata portion of awards under Peoples Energy's Short-Term Incentive Compensation (STIC) Plan; (ii) three times the sum of the individual's base salary, the average of the STIC Plan awards for the prior three years and the value of the Long- Term Incentive Compensation (LTIC) Plan awards in the prior calendar year; and (iii) the present value of the executive's accrued benefits under the Peoples Energy's Supplemental Retirement Benefits Plan (SRBP) that would be payable upon retirement at normal retirement age, computed as if the executive had completed three years of additional service. In addition, the executive will be entitled to continuation of life insurance and medical benefits for the longer of (a) a period of three years after termination or (b) a period commencing after termination and ending when the executive may receive pension benefits without actuarial reduction, provided that Peoples Energy's obligation for such benefits under the severance agreement shall cease upon the executive's employment with another employer that provides life insurance and medical benefits. Each severance agreement also provides that the executive's Options and SARs shall become exercisable upon a Change in Control and that all Options and SARs shall remain exercisable for the shorter of (a) three years after termination or (b) the term of such Options and SARs. Any restricted stock previously awarded to the executive under the LTIC Plan would vest upon a Change in Control if such vesting does not occur due to a Change in Control under the terms of the LTIC Plan. Peoples Energy is also obligated under each severance agreement to pay an additional amount to the executive sufficient on an after-tax basis to satisfy any excise tax liability imposed by Section 4999 of the Internal Revenue Code of 1986, as amended. The benefits received by the executive under each agreement are in lieu of benefits under Peoples Energy's termination allowance plan and the executive's benefits under the SRBP. Each executive would be required to waive certain claims prior to receiving any severance benefits.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
At November 30, 1997, voting securities of the Company were beneficially owned as follows:
Title of Number of Per Cent of Class Name and Address Shares Owned Class
Common Stock Peoples Energy Corporation without 130 East Randolph Drive par value Chicago, Illinois 60601 3,625,887 100
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, 1997, are as follows:
Shares of Peoples Energy Common Stock Beneficially Name Owned at November 30, 1997 (1)
Kenneth S. Balaskovits* 12,238 (2)(3) J. Bruce Hasch* 46,656 (2)(3) James Hinchliff* 31,005 (2)(3) Thomas M. Patrick* 19,554 (2)(3) Richard E. Terry* 76,717 (2)(3)
All directors and officers of the Company as a group, including those named above (22 in number) 317,357 (1)(2)(3)
* Director of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (Continued)
(1) The total of 317,357 shares held by all directors and executive officers as a group is less than one per cent of Peoples Energy's outstanding common stock. Unless otherwise indicated, each individual has sole voting and investment power with respect to the shares of common stock attributed to him in the table.
(2) Includes shares that the following have a right to acquire within 60 days following November 30, 1997, through the exercise of stock options granted under the Long-Term Incentive Compensation Plan of Peoples Energy: Messrs. Balaskovits, 2,600; Hasch, 9,600; Hinchliff, 6,300; Patrick 8,300; Terry, 23,400; and all executive officers of the Company, as a group, 78,700.
(3) Includes shares of restricted stock awarded under the Long- Term Incentive Compensation Plan of Peoples Energy, the restrictions on which had not lapsed at November 30, 1997, as follows: Messrs. Balaskovits, 3,583; Hasch, 8,025; Hinchliff, 4,925; Patrick, 4,125; Terry, 14,685; and all executive officers as a group, 41,620. Owners of shares of restricted stock have the right to vote such shares and to receive dividends thereon, but have no investment power with respect to such shares until the restrictions thereon lapse.
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
(a) 1. Financial Statements: Page
See Part II, Item 8. 15
2. Financial Statement Schedule:
Schedule Number
VIII Valuation and Qualifying Accounts 43
3. Exhibits:
See Exhibit Index on page 44.
(b) Reports on Form 8-K filed during the final quarter of fiscal year 1997:
None
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, 1997 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, 1997.
/s/ RICHARD E. TERRY Chairman of the Board and Chief Executive Richard E. Terry Officer and Director (Principal Executive Officer)
/s/ KENNETH S. BALASKOVITS Vice President and Controller and Director Kenneth S. Balaskovits (Principal Financial and Accounting Officer)
/s/ J. BRUCE HASCH Director J. Bruce Hasch
/s/ JAMES HINCHLIFF Director James Hinchliff
/s/ THOMAS M. PATRICK Director Thomas M. Patrick
North Shore Gas Company and Subsidiary Companies
EXHIBIT INDEX
(a) The exhibits listed below are filed herewith and made a part hereof:
Exhibit Number Description of Document
3(a) Amendment to the By-Laws of the Registrant, dated August 31, 1997.
3(b) By-Laws of the Registrant, as amended, dated August 31, 1997.
10(a) Firm Transportation Service Agreement under Rate Schedule FT-A or FT-G between North Shore and Midwestern Gas Transmission Company, dated May 1, 1997.
10(b) Firm Transportation Service Agreement under Rate Schedule FT-A between North Shore and Tennessee Gas Pipeline Company, dated May 1, 1997.
10(c) Firm Transportation Service Agreement under Rate Schedule FT-A or FT-GS between North Shore and Midwestern Gas Transmission Company, dated November 1, 1997.
10(d) Firm Transportation Service Agreement under Rate Schedule FT-A between North Shore and Tennessee Gas Pipeline Company, dated November 1, 1997.
10(e) Firm Transportation Service Agreement under Rate Schedule FT-A or FT-GS between North Shore and Midwestern Gas Transmission Company, dated April 1, 1998.
10(f) Firm Transportation Service Agreement under Rate Schedule FT-A between North Shore and Tennessee Gas Pipeline Company, dated April 1, 1998.
12 Statement re: Computation of Ratio of Earnings to Fixed Charges.
21 Subsidiaries of the Registrant.
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.
3(c) Articles of Incorporation of the Registrant, as amended on April 24, 1995 (Registrant Form 10-K for the fiscal year ended September 30, 1995, Exhibit 3(b)).
North Shore Gas Company and Subsidiary Companies
EXHIBIT INDEX (Continued)
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); 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(g) ETS Service Agreement between the Company and ANR Pipeline Company, dated September 21, 1994. (Registrant Form 10-K for fiscal year ended September 30, 1995, Exhibit 10(a)); FSS Service Agreement between the Company and ANR Pipeline Company, dated September 21, 1994. (Registrant Form 10-K for fiscal year ended September 30, 1995, Exhibit 10(b)); Transportation Rate Schedule FTS Agreement between the Company and Natural Gas Pipeline Company of America, dated September 22, 1995. (Registrant Form 10-K for fiscal year ended September 30, 1995, Exhibit 10(c)); Storage Rate Schedule NSS Agreement between the Company and Natural Gas Pipeline Company of America, dated October 19, 1995. (Registrant Form 10-K for fiscal year ended September 30, 1995, Exhibit 10(d)); Transportation Rate Schedule FTS Agreement between the Company and Natural Gas Pipeline Company of America, dated October 19, 1995. (Registrant Form 10-K for fiscal year ended September 30, 1995, Exhibit 10(e)); Storage Rate Schedule DSS Agreement between the Company and Natural Gas Pipeline Company of America, dated December 1, 1995. (Registrant Form 10-K for fiscal year ended September 30, 1995, Exhibit 10(f)); Firm Transportation Service Agreement under Rate Schedule FTS-1 between the Company and ANR Pipeline Company, dated as of October 25, 1995. (Registrant form 10-K for fiscal year ended September 30, 1996, Exhibit 10(g)).