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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-5540
PEOPLES ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
ILLINOIS 36-2642766
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
122 SOUTH MICHIGAN AVENUE, CHICAGO, ILLINOIS 60603
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 431-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name on each exchange
Title of Each Class on which registered
------------------------------- -----------------------
Common Stock, without par value New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (#229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. X
---
State the aggregate market value of the voting stock held by non-affiliates of
the registrant:
Approximately $855 million computed on the basis of the closing market
price of $24.50 for a share of Common Stock on November 30, 1994.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, without par value, 34,898,353 shares outstanding at
November 30, 1994.
DOCUMENTS INCORPORATED BY REFERENCE
Document Part of Form 10-K
-------- -----------------
Portions of the Company's Notice of Annual Meeting and
Proxy Statement to be filed on or about December 30, 1994 Part III
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CONTENTS
Page
Item No. No.
- -------- ----
PART I
1. Business 3
2. Properties 10
3. Legal Proceedings 10
4. Submission of Matters to a Vote of Security Holders 10
Executive Officers of the Company 11
PART II
5. Market for the Company's Common Stock and Related
Stockholder Matters 13
6. Selected Financial Data 14
7. Management's Discussion and Analysis of Results
of Operations and Financial Condition 15
8. Financial Statements and Supplementary Data 22
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 49
PART III
10. Directors and Executive Officers of the Company 51
11. Executive Compensation 51
12. Security Ownership of Certain Beneficial Owners and
Management 51
13. Certain Relationships and Related Transactions 51
PART IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 52
Signatures 58
Exhibit Index 59
-2-
PEOPLES ENERGY CORPORATION
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED SEPTEMBER 30, 1994
PART I
ITEM 1. BUSINESS
GENERAL
Peoples Energy Corporation (Company) is solely a holding company and does
not engage directly in any business of its own. Income is derived principally
from the Company's utility subsidiaries, The Peoples Gas Light and Coke Company
(Peoples Gas) and North Shore Gas Company (North Shore Gas).
The Company was incorporated in 1967 under the Illinois Business
Corporation Act and has its principal executive offices at 122 South Michigan
Avenue, Chicago, Illinois 60603 (Telephone [312] 431-4000). The Company has no
employees of its own.
Peoples Gas, an operating public utility, is engaged primarily in the
purchase, production, storage, distribution, sale, and transportation of natural
gas. It has approximately 842,000 residential, commercial, and industrial
retail sales and transportation customers within the City of Chicago (City).
Peoples Gas had 3,031 employees at September 30, 1994.
North Shore Gas, an operating public utility, is engaged primarily in the
purchase, storage, distribution, sale, and transportation of natural gas. It
has more than 129,000 residential, commercial, and industrial retail sales and
transportation customers within its service area of approximately 275 square
miles, located in Northeastern Illinois. North Shore Gas had 247 employees at
September 30, 1994.
Peoples District Energy Corporation (Peoples District Energy), a wholly
owned subsidiary of the Company, is a 50 percent participant in a partnership
formed to provide heating and cooling services to the McCormick Place exposition
and convention center in Chicago, Illinois and other large buildings near
McCormick Place. Neither the partnership nor any of its partners is regulated
as a public utility. (See Note 5 of the Notes to Consolidated Financial
Statements.)
Two other wholly owned subsidiaries of the Company are: Peoples Energy
Services Corporation (Peoples Energy Services) and Peoples NGV Corp. Peoples
Energy Services' operations consist of the sale and distribution of carbon
monoxide detectors. Peoples NGV Corp. is a participant in a partnership that
was formed to develop on-site fueling services for natural gas-powered fleet
vehicles. Neither the partnership nor any of its partners is regulated as a
public utility.
COMPETITION
Peoples Gas and North Shore Gas are authorized by statute and/or
certificates of public convenience and necessity to conduct operations in the
territories they serve. In addition, these subsidiaries operate under
franchises and license agreements granted them by the communities they serve.
Peoples Gas holds a perpetual, non-exclusive franchise from the City. North
Shore Gas' franchises with communities within its service territory are of
various terms and expiration dates.
-3-
ITEM 1. BUSINESS (Continued)
COMPETITION (Continued)
Absent extraordinary circumstances, potential competitors are barred from
constructing competing gas distribution systems in the utility subsidiaries'
service territories 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 Peoples Gas' and North Shore Gas'
service areas. The capital cost of heating and cooling facilities in new high-
rise buildings is higher for gas than for electricity. This circumstance,
combined with stagnant high-rise construction activity, has adversely affected
the ability of Peoples Gas to attach commercial high-rise buildings. However,
Peoples Gas has had some success in attaching high-rise residential buildings,
as gas heating results in lower operating costs.
A substantial portion of the gas that Peoples Gas and North Shore Gas
deliver to their customers consists of gas that the subsidiaries' customers
purchase directly from producers and marketers rather than from the
subsidiaries. These direct customer gas purchases have no effect on net income
because the utilities provide transportation service for such gas volumes and
recover margins similar to those applicable to conventional gas sales.
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, none of
the subsidiaries' pipeline suppliers has undertaken any service bypassing the
subsidiaries. Both utility subsidiaries have a bypass rate approved by the
Illinois Commerce Commission (Commission) which allows the utilities to
renegotiate rates with customers that are potential bypass candidates.
Peoples District Energy intends to compete in the heating and cooling
market through a partnership that will offer unregulated district energy
services for large buildings. (See Note 5 of the Notes to Consolidated
Financial Statements.)
Peoples Energy Services competes in the sale and distribution of carbon
monoxide detectors to wholesale and retail customers and is considering entry
into other lines of unregulated business in the future. Peoples NGV Corp.
intends to compete, through a partnership, in the development of unregulated on-
site fueling services for natural gas-powered fleet vehicles.
SALES AND RATES
Peoples Gas and North Shore Gas sell 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 Peoples Gas and North Shore Gas pursuant
to rate schedules on file with the Commission containing various service
classifications largely reflecting customers' different uses and levels of
consumption. The Gas Charge is determined in accordance with the provisions in
Rider 2, Gas Charge and Refund Adjustments, to recover the costs incurred by
Peoples Gas and North Shore Gas to purchase, transport, manufacture, and store
gas supplies. The level of the Gas Charge under both subsidiaries' rate
schedules is adjusted monthly to reflect increases or decreases in natural gas
supplier charges, purchased storage service costs, transportation charges,
liquefied petroleum gas costs, and feedstock costs for synthetic natural gas
(SNG). In addition, under the tariffs of Peoples Gas and North Shore Gas, the
difference for any fiscal year between costs
- -------------------------------------------------------------------------------
* All volumes of natural gas set forth in this report are stated on a 1,000 Btu
(per cubic foot) billing basis.
-4-
ITEM 1. BUSINESS (Continued)
SALES AND RATES (Continued)
recoverable through the Gas Charge and the revenues billed to customers under
the Gas Charge is refunded or recovered over a 12-month billing cycle beginning
the following January 1. Consistent with these tariff provisions, such
difference for any month is recorded either as a current liability or a current
asset (with a contra entry to gas costs), and the fiscal year-end balance is
amortized over the 12-month period beginning the following January 1. Peoples
Gas and North Shore Gas have been recovering, through their rates, pipeline
charges billed for transition costs resulting from the implementation of Federal
Energy Regulatory Commission (FERC) Order No. 636. (See Notes 1H, 2A, and 2B of
the Notes to Consolidated Financial Statements.)
The business of the Company's utility subsidiaries is influenced by
seasonal weather conditions because a large element of the subsidiaries'
customer load consists of space heating. Weather-related deliveries can,
therefore, have a significant positive or negative impact on net income. (For
discussion of the effect of the seasonal nature of gas sales on cash flow, see
"Liquidity" in Item 7.)
The basic marketing plans of Peoples Gas and North Shore Gas are to
maintain their existing shares in all market segments and develop opportunities
emerging from changes in the utility environment and technological advances in
new, expanded, or current natural gas applications, including cogeneration,
prime movers, natural gas-fueled vehicles, and air conditioning.
STATE LEGISLATION AND REGULATION
Peoples Gas and North Shore Gas are subject to the jurisdiction of and
regulation by the Commission, which has general supervisory and regulatory
powers over practically all phases of the public utility business in Illinois,
including rates and charges, issuance of securities, services and facilities,
systems of accounts, investments, safety standards, transactions with affiliated
interests, as defined in the Illinois Public Utilities Act, and other matters.
On October 6, 1992, the Commission issued an order approving changes in the
rates of Peoples Gas that were designed to increase annual revenues by
approximately $30.6 million, exclusive of additional charges for revenue taxes.
The new rates were implemented on October 10, 1992. Peoples Gas was allowed a
10.40 percent return on its original-cost rate base, reflecting a 12.25 percent
cost of common equity. The Commission's order also approved a rate mechanism by
which Peoples Gas will recover costs associated with environmental activities,
relating to past manufactured gas operations (see discussion below). (See Note
2A of the Notes to Consolidated Financial Statements.)
On September 30, 1992, the Commission issued an order in its consolidated
proceedings, initiated in March 1991, regarding the appropriate ratemaking
treatment of environmental costs relating to past manufactured gas operations
incurred by Illinois utilities, including Peoples Gas and North Shore Gas, in
connection with the investigation and treatment of residues associated with past
manufactured gas operations ("environmental costs"). In its order, the
Commission approved rate recovery of such environmental costs but required that
the recovery occur over a five-year period without recovery of carrying charges
on unrecovered balances. The Commission's order is on appeal before the
Illinois Supreme Court. (See Note 2A of the Notes to Consolidated Financial
Statements.)
On September 15, 1993, the Commission entered an order initiating an
investigation into the appropriate means of recovery by Illinois gas utilities
of pipeline charges for FERC Order No. 636 transition costs. The Commission
issued its orders on rehearing in this proceeding in September 1994. (See Notes
1H, 2A, and 2B of the Notes to Consolidated Financial Statements.)
-5-
ITEM 1. BUSINESS (Continued)
On December 16, 1994, Peoples Gas filed with the Commission proposed
changes in rates that are designed to increase annual revenues by about
$59.9 million, exclusive of additional charges for revenue taxes. Peoples Gas
is seeking a rate of return on original-cost rate base of 10.03 percent, which
reflects a 12.7 percent cost of common equity. Peoples Gas expects that the
Commission, following its usual practices, will not issue a decision regarding
Peoples Gas' filed rate increase request until November 1995. Peoples Gas
cannot predict the outcome of its rate increase request.
On December 16, 1994, North Shore Gas filed with the Commission proposed
changes in rates that are designed to increase annual revenues by about
$10.1 million, exclusive of additional charges for revenue taxes. North Shore
Gas is seeking a rate of return on original-cost rate base of 10.50 percent,
which reflects a 12.6 percent cost of common equity. North Shore Gas expects
that the Commission, following its usual practices, will not issue a decision
regarding North Shore Gas' filed rate increase request until November 1995.
North Shore Gas cannot predict the outcome of its rate increase request.
FEDERAL LEGISLATION AND REGULATION
The Company is a holding company as defined in the Public Utility Holding
Company Act of 1935 (Act). 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 Act, exempted the Company and its subsidiary companies
as such from the provisions of the Act, other than Section 9(a)(2) thereof.
Most of the gas distributed by Peoples Gas and North Shore Gas is
transported to the utilities' distribution systems by interstate pipelines. In
their provision of gas sales 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.)
The Company and its subsidiaries are subject to federal and state
environmental laws. Peoples Gas and North Shore Gas are 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, North Shore Gas has received a
demand for payment of environmental response costs at a former mineral
processing site in Denver, Colorado. (See Note 3B of the Notes to Consolidated
Financial Statements.)
In 1992, the FERC issued Order No. 636 and successor orders that required
substantial restructuring of the service obligations of interstate pipelines.
(See Notes 1H, 2A, and 2B of the Notes to Consolidated Financial Statements.)
ENVIRONMENTAL MATTERS
See Note 3 of the Notes to Consolidated Financial Statements.
-6-
ITEM 1. BUSINESS (Continued)
CURRENT GAS SUPPLY
Peoples Gas and North Shore Gas have each entered into long- and short-term
firm gas supply contracts. When used in conjunction with contract storage,
Peoples Gas' company-owned storage, and peak-shaving facilities, as shown in the
following table, such supply is deemed sufficient to meet current and
foreseeable peak and annual market requirements. SNG production is a source of
Peoples Gas' annual, peak-season, and peak-day supply. The SNG plant is run at
production levels that are consistent with orders of the Commission. The
feedstock for the SNG plant is procured via firm supply contracts and spot
purchases, as required. The current feedstocks are primarily ethane and
refinery fuel gas, with naphtha and natural gasoline used for peaking.
Although the Company believes North American supply to be sufficient to
meet U.S. market demands for some time, it is unable to quantify or otherwise
make specific representations regarding national supply availability.
The following tabulation shows the expected peak-day availability of gas in
million cubic feet (MMcf) during the 1994-95 heating season for Peoples Gas and
North Shore Gas:
Peoples Gas North Shore Gas
-------------------------------- --------------------------------
Peak-Day Year of Peak-Day Year of
Availability Contract Availability Contract
Source (MMcf) Expiration (MMcf) Expiration
- ------------------- ------------- ---------- ------------ ----------
Flow Gas
Firm Gas Purchases 540(a) 1995-1998(a) 125(a) 1995-1998(a)
Synthetic Natural Gas 170(b) --
Liquefied Petroleum Gas 40 59
--- ---
750 184
--- ---
Storage Gas
Leased 793(c) 1995-1996(c) 122(d) 1995-1996(d)
Peoples Gas - Manlove Storage 993(e) 87(e) (f)
----- ---
1,786 209
----- ---
Total expected peak-day
availability 2,536 393
----- ---
----- ---
(a) Consists of firm gas purchases from non-pipeline suppliers delivered via
firm pipeline transportation. Under the 636 Orders' right-of-first-refusal
process, Peoples Gas and North Shore Gas may retain the firm transportation
contract capacity if it matches the best bid made for that capacity in
terms of rate (up to the maximum rate permitted) and contract length (up to
20 years).
(b) Peoples Gas' SNG plant has a design peak-day production capability of 170
MMcf. Feedstock contracts for the plant expire during the period 1995-
1997. (See "Synthetic Natural Gas Supply" in Item 1.)
-7-
ITEM 1. BUSINESS (Continued)
CURRENT GAS SUPPLY (Continued)
(c) Peoples Gas has maximum storage service withdrawal capacity under contracts
with Natural Gas Pipeline Company of America (Natural) of (1) 554 MMcf per
day in the period November 1 through February 15, decreasing to 449 MMcf
per day until February 28 and to 343 MMcf per day for the balance of the
withdrawal season, under a service agreement extending until 1995, (2) 69
MMcf per day under a service agreement extending until 1995, (3) 46 MMcf
per day under a service agreement extending until 1995, (4) 24 MMcf per day
under a service agreement extending until 1995, (5) 59 MMcf per day,
including transportation fuel, under a service agreement extending until
1996, and (6) including transportation fuel, 65 MMcf per day in November,
decreasing to 60 MMcf per day in December, 45 MMcf per day in January and
30 MMcf per day in February and March, under a service agreement extending
until 1995. All daily withdrawals under the foregoing seasonal and
interseasonal agreements are subject to maximum withdrawal constraints.
Before terminating any of the services noted in (1) through (4) above,
Natural must first seek authority from FERC. The service noted in (5) and
(6) are subject to the 636 Orders' right-of-first-refusal process. Under
this process, Peoples Gas may retain the storage capacity if it matches the
best bid made for that capacity in terms of rate (up to the maximum rate
permitted under Natural's tariff) and contract length (up to 20 years).
(d) North Shore Gas has maximum storage service withdrawal capacity under
contracts with Natural of (1) 56 MMcf per day in the period November 1
through February 15, decreasing to 45 MMcf per day until February 28 and to
34 MMcf per day for the balance of the withdrawal season, under a service
agreement extending until 1995, (2) 30 MMcf per day under a service
agreement extending until 1995, (3) 7 MMcf per day under a service
agreement extending until 1995, (4) 3 MMcf per day under a service
agreement extending until 1995, (5) 22 MMcf per day, including
transportation fuel, under a service agreement extending until 1996, and
(6) including transportation fuel, 6.5 MMcf per day in November, decreasing
to 6 MMcf per day in December, 4.5 MMcf per day in January and 3 MMcf per
day in February and March, under a service agreement extending until 1995.
All daily withdrawals under the foregoing seasonal and interseasonal
agreements are subject to maximum withdrawal constraints. Before
terminating any of the services noted in (1) through (4) above, Natural
must first seek authority from FERC. The services noted in (5) and (6) are
subject to the 636 Orders' right-of-first-refusal process. Under this
process, North Shore Gas may retain the storage capacity if it matches the
best bid made for that capacity in terms of rate (up to the maximum rate
permitted under Natural's tariff) and contract length (up to 20 years).
(e) 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
33,000 MMcf, of which approximately 2,884 MMcf is dedicated to North Shore
Gas. Peoples Gas also owns a liquefied natural gas (LNG) plant at Manlove
Field for the primary purpose of supporting late-season deliverability from
the storage facility. The LNG plant has a storage capacity of 2,000 MMcf
and is capable of regasifying 300 MMcf of gas per day. For the 1994-95
heating season, Manlove Field will have a maximum peak-day delivery
capability of approximately 1080 MMcf (including 87 MMcf for the use of
North Shore Gas).
(f) 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.
-8-
ITEM 1. BUSINESS (Continued)
CURRENT GAS SUPPLY (Continued)
The sources of gas supply (including gas transported for customers) in
million cubic feet (MMcf) for Peoples Gas and North Shore Gas for the three
fiscal years ended September 30, 1994, 1993, and 1992, were as follows:
Peoples Gas North Shore Gas
------------------------------- ----------------------------
1994 1993 1992 1994 1993 1992
------- ------- ------- ------ ------ ------
Source:
Natural (a) 14,378 63,996 80,743 2,384 12,293 15,758
Midwestern Gas
Transmission Company (b) -- 7,217 6,538 -- -- --
Other Suppliers (c) 134,104 76,006 62,024 23,415 12,296 8,556
Synthetic Natural Gas (d) 8,350 9,723 8,059 -- -- --
Liquefied Petroleum Gas Produced 30 14 2 79 61 7
Customer-Owned Gas - Received 91,187 91,046 87,433 12,017 11,956 12,296
Underground Storage - Net (2,196) (1,762) (1,688) (718) (80) (998)
Company Use, Franchise
Requirements, and
Unaccounted-for Gas (4,261) (4,772) (2,920) (339) (381) (297)
------- ------- ------- ------ ------ ------
Total (e) 241,592 241,468 240,191 36,838 36,145 35,322
------- ------- ------- ------ ------ ------
------- ------- ------- ------ ------ ------
(a) The DMQ-1 supply contract terminated on November 30, 1993.
(b) The CD-1 supply contract terminated on August 31, 1993.
(c) The Company purchases significant quantities of gas directly from various
suppliers. Commencing December 1, 1993, purchases were more oriented
towards long-term supply contracts than short-term spot gas. However, some
gas supply is still purchased on a short-term basis whenever such purchases
are projected to produce a savings in gas costs without jeopardizing supply
security and reliability.
(d) See "Synthetic Natural Gas Supply" in Item 1.
(e) See "Gas Sold and Transported" in Item 6.
SYNTHETIC NATURAL GAS SUPPLY
Peoples Gas owns and operates an SNG plant, the McDowell Energy Center,
located near Joliet, Illinois. The plant can use refinery fuel gas and a
variety of natural gas liquids, including ethane, naphtha, natural gasoline,
normal butane, propane, and ethane/propane mix as feedstock for the production
of SNG. While sufficient annual supplies of natural gas are now available, the
SNG plant remains a key part of Peoples Gas' annual, peak-season, peak-day, and
longer-term gas supply assurance program.
-9-
ITEM 2. PROPERTIES
All of the principal plants and properties of Peoples Gas and North Shore
Gas have been maintained in the ordinary course of business and are believed to
be in satisfactory operating condition. The distribution facilities serve the
City and other areas in Northeastern Illinois. In addition to the SNG plant
mentioned in Item 1, Peoples Gas owns and operates an underground gas storage
reservoir and an LNG plant at Manlove Field located near Champaign, Illinois.
Peoples Gas also owns a transmission system that transports gas from Manlove
Field to Chicago. The underground storage reservoir and LNG plant also serve
North Shore Gas. General properties include 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 Peoples Gas and North Shore
Gas, 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 under 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. Certain
SNG facilities, certain storage wells and other facilities of the Manlove Field
storage reservoir, and certain portions of the transmission system are located
on land held pursuant to leases, easements, or permits.
Substantially all of the physical properties now owned or hereafter
acquired by Peoples Gas and North Shore Gas are subject to (a) the first-
mortgage lien of each company's mortgage to Bank of America Illinois, (formerly
named Continental Bank, National Association) Trustee, to secure the principal
amount of each company's outstanding first mortgage bonds, respectively, and (b)
in certain cases, other exceptions and defects that do not interfere with the
use of the property.
ITEM 3. LEGAL PROCEEDINGS
See Notes 2, 3, and 4 of the Notes to Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-10-
EXECUTIVE OFFICERS OF THE COMPANY
The following is a list of the names, ages, and positions of the executive
officers of the Company. Executive officers are elected to serve for a term of
one year or until their successors are duly elected and qualified.
Age at
Name 11-30-94 Position with the Company
- ----------------------- -------- -----------------------------------
Kenneth S. Balaskovits 52 Vice President and Controller
(1993).
Mr. Balaskovits is also Vice
President and Controller and
Director (1993) of Peoples Gas and
North Shore Gas. Mr. Balaskovits
has been an employee of the Company
and/or its subsidiaries since 1967.
Emmet P. Cassidy 61 Secretary and Treasurer (1989).
Mr. Cassidy is also Secretary and
Treasurer (1989) of Peoples Gas and
North Shore Gas. Prior to that, he
was Assistant Secretary and
Assistant Treasurer of the Company
and both subsidiaries (1981-1989).
Mr. Cassidy has been an employee of
the Company and/or its subsidiaries
since 1955.
J. Bruce Hasch 56 President and Chief Operating
Officer (1990) and Director (1987)
of the Company.
Mr. Hasch is also President and
Chief Operating Officer (1990) and a
Director (1986) of Peoples Gas and
North Shore Gas. Prior to becoming
President, Mr. Hasch was Executive
Vice President (1985-1990) of the
Company and its subsidiaries and
Vice President (1981-1985) of both
subsidiary companies. Mr. Hasch has
been an employee of the Company
and/or its subsidiaries since 1960,
including 16 years with Natural Gas
Pipeline Company of America, a
former subsidiary.
James Hinchliff 54 Senior Vice President and General
Counsel (1989) of the Company.
Mr. Hinchliff is also Senior Vice
President and General Counsel (1989)
and a Director (1985) of Peoples Gas
and North Shore Gas. Prior to that,
he was Vice President and General
Counsel (1984-1989) of the Company
and of both subsidiaries, and he was
Assistant General Counsel of the
Company (1979-1984) and of both
subsidiaries (1981-1984). Mr.
Hinchliff has been an employee of
the Company and/or its subsidiaries
since 1972.
-11-
EXECUTIVE OFFICERS OF THE COMPANY (Continued)
Age at
Name 11-30-94 Position with the Company
- ----------------------- -------- -----------------------------------
Michael S. Reeves 59 Executive Vice President (1987) and
Director (1991) of the Company.
Mr. Reeves is also Executive Vice
President (1987) and Director (1988)
of Peoples Gas and North Shore Gas.
Prior to becoming Executive Vice
President, Mr. Reeves was Vice
President (1977-1987) of both
subsidiaries. Mr. Reeves has been
an employee of the Company and/or
its subsidiaries since 1956.
Richard E. Terry 57 Chairman of the Board and Chief
Executive Officer (1990) and
Director (1984) of the Company.
Mr. Terry is also Chairman of the
Board and Chief Executive Officer
(1990) and a Director (1982) of
Peoples Gas and North Shore Gas.
Prior to becoming Chairman, Mr.
Terry was President and Chief
Operating Officer (1987-1990),
Executive Vice President (1984-
1987), and Vice President and
General Counsel (1981-1984) of the
Company and its subsidiaries. Mr.
Terry has been an employee of the
Company and/or its subsidiaries
since 1972.
-12-
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The common stock of the Company is listed on the New York, Chicago, and
Pacific Stock Exchanges (trading symbol: PGL). As of November 30, 1994, there
were 28,922 registered stockholders.
The common stock price range and dividends declared per common share by
quarters for fiscal 1994, 1993, and 1992, are as follows:
Stock Price
Fiscal ---------------------------------- Dividends
Quarters High Low Close Declared
-------- ------- -------- ------- ---------
1994
Fourth $27-3/8 $23-5/16 $26-1/4 $.45
Third 31-1/4 23-3/8 23-3/8 .45
Second 32-1/8 27 27-3/8 .45
First 32-1/2 27-1/2 30-1/2 .445
1993
Fourth $35 $31-3/8 $31-7/8 $.445
Third 33-1/4 29-3/8 32-3/8 .445
Second 33 29 31-3/8 .445
First 31-1/2 29-1/2 30-1/8 .44
1992
Fourth $31-5/8 $26 $31-1/4 $.44
Third 27 24-3/4 26-1/4 .44
Second 27-1/8 24-3/8 25-5/8 .44
First 28-1/4 25-3/8 26-5/8 .43
-13-
ITEM 6. SELECTED FINANCIAL DATA
For fiscal years ended September 30, 1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------------
COMMON STOCK INFORMATION
Earnings per share $2.13 $2.11 $2.06 $2.05 $2.07
Cash dividends declared per share $1.795 $ 1.775 $1.75 $ 1.705 $ 1.645
Book value per share at year-end $18.39 $18.05 $17.72 $16.95 $16.61
Average shares outstanding (thousands) 34,854 34,809 34,151 32,741 32,672
- ------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS (thousands)
Operating Revenues:
Residential $951,037 $929,407 $784,677 $791,758 $813,620
Commercial 160,912 156,377 132,456 144,135 169,962
Industrial 41,979 41,354 34,595 41,355 59,802
Transportation of customer-owned gas (a) 110,128 117,949 132,745 115,720 111,031
Other 15,432 13,854 12,279 10,735 10,753
- ------------------------------------------------------------------------------------------------------------------------
Total Operating Revenues $1,279,488 $1,258,941 $1,096,752 $1,103,703 $1,165,168
Gas costs 669,039 646,351 531,845 564,899 620,081
Revenue taxes 132,734 131,673 118,265 118,640 129,290
- ------------------------------------------------------------------------------------------------------------------------
Net Operating Revenues $477,715 $480,917 $446,642 $420,164 $415,797
Net Income $74,399 $73,375 $70,384 $66,975 $67,516
- ------------------------------------------------------------------------------------------------------------------------
ASSETS AT YEAR-END (thousands)
Property, plant and equipment $2,019,379 $1,950,981 $1,843,603 $1,746,851 $1,667,807
Less - Accumulated depreciation 677,447 632,965 599,965 565,626 533,774
- ------------------------------------------------------------------------------------------------------------------------
Net Property, Plant and Equipment $1,341,932 $1,318,016 $1,243,638 $1,181,225 $1,134,033
Total assets $1,809,286 $1,765,870 $1,615,758 $1,541,447 $1,534,188
Capital expenditures - construction $87,218 $131,669 $118,084 $101,563 $103,138
- ------------------------------------------------------------------------------------------------------------------------
CAPITALIZATION AT YEAR-END (thousands)
Common equity $641,378 $628,451 $616,271 $555,199 $543,225
Preferred stock of subsidiaries -- -- 12,850 16,750 20,650
Long-term debt of subsidiaries 626,075 528,075 489,553 493,038 502,224
- ------------------------------------------------------------------------------------------------------------------------
Total Capitalization $1,267,453 $1,156,526 $1,118,674 $1,064,987 $1,066,099
- ------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS (percent)
Capitalization at Year-end:
Common equity 51 54 55 52 51
Preferred stock of subsidiaries -- -- 1 2 2
Long-term debt of subsidiaries 49 46 44 46 47
- ------------------------------------------------------------------------------------------------------------------------
Total Capitalization 100 100 100 100 100
Return on common equity at year-end 11.6 11.7 11.4 12.1 12.4
- ------------------------------------------------------------------------------------------------------------------------
GAS SOLD AND TRANSPORTED (million cubic feet)
Gas Sales:
Residential 142,876 144,199 142,759 137,881 147,175
Commercial 26,206 26,185 26,239 27,429 32,863
Industrial 7,325 7,623 7,330 8,572 11,996
Transportation of customer-owned gas (a) 102,023 99,607 99,185 94,109 86,487
- ------------------------------------------------------------------------------------------------------------------------
Total Sales and Transportation 278,430 277,614 275,513 267,991 278,521
- ------------------------------------------------------------------------------------------------------------------------
NUMBER OF CUSTOMERS (average)
Residential 905,461 904,316 904,374 901,112 898,984
Commercial 50,955 50,736 50,567 49,676 49,322
Industrial 3,927 4,069 3,938 3,870 4,107
Transportation (a) 10,247 9,734 9,500 9,963 9,068
- ------------------------------------------------------------------------------------------------------------------------
Total Customers 970,590 968,855 968,379 964,621 961,481
- ------------------------------------------------------------------------------------------------------------------------
DEGREE DAYS 6,701 6,679 6,320 5,927 6,168
Percent of normal (6,536) 103 102 97 91 94
- ------------------------------------------------------------------------------------------------------------------------
(a) Includes commercial, industrial, and larger residential customers.
-14-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
NET INCOME
Net income applicable to common stock increased $1.0 million, to $74.4
million, in fiscal 1994 from 1993. Results for the current fiscal year include
the recording of one-half of an Internal Revenue Service (IRS) income tax
settlement that increased net income by $10.8 million. (See Note 9 of the Notes
to Consolidated Financial Statements.) However, this benefit was largely offset
by increased operating costs related to the provision for uncollectible
accounts, labor, and depreciation.
In 1993, net income applicable to common stock increased $3.0 million, to
$73.4 million, due principally to a rate increase that went into effect for
Peoples Gas on October 10, 1992. (See Note 2A of the Notes to Consolidated
Financial Statements.) Fiscal 1993 also benefited from colder weather as
compared to fiscal 1992; however, such benefit was offset by a decline in gas
deliveries arising principally from energy conservation measures. Fiscal 1993
was negatively affected by increased operating expenses other than gas costs,
including an increase in the provision for uncollectible accounts. Also, fiscal
1992 included the net gain on the sale of certain property by North Shore Gas.
(See Note 11 of the Notes to Consolidated Financial Statements.)
A summary of variations affecting income between years is presented below,
with explanations of significant differences following:
Fiscal 1994 Fiscal 1993
over 1993 over 1992
------------------ ------------------
Amount Amount
(000's) Percent (000's) Percent
- -------------------------------------------------------------------------------
Net operating revenues (a) $(3,202) (0.7) $34,275 7.7
Operation and maintenance expenses 9,930 4.0 20,593 9.0
Depreciation expense 3,877 6.4 3,460 6.0
Income taxes (5,513) (14.7) 3,995 11.9
Other income 14,450 227.7 (4,598) (42.0)
Income deductions 2,199 4.8 (1,824) (3.8)
Net income 1,024 1.4 2,991 4.2
- -------------------------------------------------------------------------------
(a) Operating revenues, net of gas costs and revenue taxes.
NET OPERATING REVENUES
Gross revenues of Peoples Gas and North Shore Gas are affected by changes
in the unit cost of the subsidiaries' gas purchases and do not include the cost
of gas supplies for customers who purchase gas directly from producers and
marketers rather than from the subsidiaries. The direct customer purchases have
no effect on net income because the utilities provide transportation service for
such gas volumes and recover margins similar to those applicable to conventional
gas sales. Changes in the unit cost of gas do not significantly affect net
income because the utilities' tariffs provide for dollar-for-dollar recovery of
gas costs. (See Note 1H of the Notes to Consolidated Financial Statements.) The
utilities' tariffs also provide for dollar-for-dollar recovery of the cost of
revenue taxes imposed by the state and various municipalities.
-15-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (Continued)
Since income is not significantly affected by changes in revenue from
customers' gas purchases from producers or marketers rather than from the
subsidiaries, changes in gas costs, or changes in revenue taxes, the discussion
below pertains to "net operating revenues" (operating revenues, net of gas costs
and revenue taxes). The Company considers net operating revenues to be a more
pertinent measure of operating results than gross revenues.
Net operating revenues in fiscal 1994 amounted to $477.7 million, virtually
flat as compared with fiscal 1993. Although the weather in January 1994 was
significantly colder than January 1993, the total fiscal 1994 weather impact was
comparable with fiscal 1993. Customers' energy conservation measures had a
negative effect in the current period.
In 1993, net operating revenues increased $34.3 million, to $480.9 million,
due primarily to the impact of the October 1992 rate increase for Peoples Gas
that raised net operating revenues by $32.0 million, or $19.6 million after
income taxes.
OPERATION AND MAINTENANCE EXPENSES
Operation and maintenance expenses increased $9.9 million, to $258.7
million, in 1994, due mainly to an increase in Peoples Gas' provision for
uncollectible accounts and higher labor costs that arose mainly from weather-
related overtime work and from start-up costs for new customer-service programs.
Partially offsetting these items were a reduced workforce and lower employee
benefits expenses for pensions and group insurance. Fiscal 1994 results reflect
an increase of $9.5 million in the provision for uncollectible accounts, which
includes a $3.7 million increase to adjust the balance sheet allowance. Without
the increase in the provision for uncollectible accounts, operation and
maintenance expenses would have increased by $461,000 over fiscal 1993 levels.
In 1993, operation and maintenance expenses increased $20.6 million, to
$248.8 million, due principally to increased group insurance expenses, primarily
attributable to the accrual of postretirement benefit costs of $9.9 million.
(See Note 8B of the Notes to Consolidated Financial Statements.) This is
consistent with the rate treatment allowed Peoples Gas in October 1992. Also,
higher expenses resulted from labor costs, Peoples Gas' provision for
uncollectible accounts, and pension costs.
DEPRECIATION EXPENSE
Depreciation expense increased $3.9 million, to $64.7 million, in 1994, and
$3.5 million, to $60.8 million, in 1993, due chiefly to depreciable property
additions.
-16-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (Continued)
INCOME TAXES
Income taxes, exclusive of the $3.4 million included in other income
related to an IRS settlement, decreased $5.5 million, to $32.1 million, in 1994,
due principally to lower pre-tax income.
In 1993, income taxes rose by $4.0 million, to $37.6 million, due primarily
to higher pre-tax income and the federal tax rate change from 34 percent to 35
percent effective January 1, 1993.
OTHER INCOME
Other income increased $14.5 million, to $20.8 million, in 1994, due
primarily to recording an IRS settlement of approximately $10.8 million after
income taxes. (See Notes 9 and 11 of the Notes to Consolidated Financial
Statements.) Also, the current fiscal year includes higher interest income
reflecting larger cash balances available for investment and additional interest
income from proceeds being held in a trust fund generated from Peoples Gas'
December 1993 bond issuance. (See Note 14A of the Notes to Consolidated
Financial Statements.)
In 1993, other income decreased $4.6 million, to $6.3 million, due
partially to lower interest income on short-term investments. Also, the prior
fiscal year included the net gain on the North Shore Gas property sale. (See
Note 11 of the Notes to Consolidated Financial Statements.) An offsetting factor
was increased interest on amounts recoverable from customers.
INCOME DEDUCTIONS
Income deductions rose by $2.2 million, to $48.2 million, in 1994, due
primarily to increased interest on long-term debt reflecting additional debt
outstanding. (See Note 14A of the Notes to Consolidated Financial Statements.)
In 1993, income deductions decreased $1.8 million, to $46.0 million, due
chiefly to reduced interest on gas bill credit deposits, budget accounts, and
amounts refundable to customers.
OTHER MATTERS
EFFECT OF WEATHER. Weather variations affect the volumes of gas delivered for
heating purposes and, therefore, can have a significant positive or negative
impact on net income and coverage ratios.
EFFECT OF INFLATION. The utility subsidiaries are affected by inflation through
increases in operating expenses and replacement of utility plant assets at costs
higher than historical costs. Gas costs, the utilities' largest operating cost,
and revenue taxes are recovered dollar-for-dollar in rates. Increases in other
operating costs are recovered through rate cases. Although there is a time lag
in the recovery through rate cases of increased cost levels, the effect of this
lag is mitigated by the use of a future test year in rate decisions. The
utilities recover the cost of depreciable utility property through depreciation
charges based on historical costs. Such charges do not reflect current costs or
inflation-adjusted costs of utility plant. However, the Company believes that
the manner of setting utility rates generally affords an opportunity to earn a
fair return on shareholder investment.
-17-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (Continued)
ACCOUNTING STANDARDS. In March 1993, the Company adopted, effective October 1,
1992, the liability method of accounting for deferred income taxes required by
Statement of Financial Accounting Standards (SFAS) No. 109. (See Note 1G of the
Notes to Consolidated Financial Statements.)
Effective October 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." This statement
requires the accrual of the expected costs of such benefits during the
employees' years of service. (See Note 8B of the Notes to Consolidated Financial
Statements.)
In November 1992, the Financial Accounting Standards Board (FASB) issued
SFAS No. 112, "Employers' Accounting for Postemployment Benefits." This
statement requires the accrual of certain benefits provided to former or
inactive employees after employment but before retirement. SFAS No. 112 requires
adoption by the Company no later than fiscal 1995. (See Note 8C of the Notes to
Consolidated Financial Statements.)
FERC ORDER 636 COSTS. In 1992, the FERC issued Order No. 636 and successor
orders that required substantial restructuring of the service obligations of
interstate pipelines. (See Notes 1H, 2A, and 2B of the Notes to Consolidated
Financial Statements.)
On September 15, 1993, the Commission entered an order initiating an
investigation into the appropriate means of recovery by Illinois gas utilities
of pipeline charges for FERC Order No. 636 transition costs. The Commission
issued its orders on rehearing in this proceeding in September 1994. (See Notes
1H, 2A, and 2B of the Notes to Consolidated Financial Statements.)
REENGINEERING STUDY. Peoples Gas and North Shore Gas are undertaking a major
project to reengineer their business processes with the goal of increasing
efficiency, responsiveness to customer needs, and cost effectiveness. The
project commenced in September 1994 and is expected to continue for at least two
years.
LIQUIDITY
SOURCE OF FUNDS. The Company has access to outside capital markets and to
internal sources of funds that together provide sufficient resources to meet
capital requirements. It does not anticipate any changes that would materially
alter its current liquidity position.
Due to the seasonal nature of gas usage, a major portion of cash
collections occurs between November and April. Because of timing differences in
the receipt and disbursement of cash and the level of construction requirements,
the utility subsidiaries 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.
-18-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (Continued)
CREDIT LINES. The Company has a line of credit of $10 million that expires
December 16, 1994. The utility subsidiaries have lines of credit of
approximately $131 million. At September 30, 1994, the Company and its utility
subsidiaries had unused credit available from banks of approximately $140
million. (See Note 13 of the Notes to Consolidated Financial Statements.)
CASH FLOW ACTIVITIES. Net cash provided by operating activities in 1994
increased by approximately $83.5 million, due mainly to increases related to net
receivables and rate adjustments recoverable or refundable. Such items were
partially offset by decreases associated with deferred credits and accounts
payable. In 1993, net cash provided by operating activities increased by $15.1
million, due primarily to increases related to deferred credits, deferred
charges, rate adjustments recoverable or refundable, accounts payable, and
accrued taxes. These increases were offset in part by a decrease associated with
net receivables.
Net cash used in investing activities for 1994, 1993, and 1992 mainly
represents the level of capital expenditures in the respective years.
Net cash used in financing activities in 1994 reflects the new debt issues
during the year, primarily used for construction activities. In 1993, net cash
provided by financing activities reflects the debt issuance during the period,
primarily to refund previously issued debt and preferred stock. Net cash used in
financing activities in 1992 reflects the January issuance of $49.7 million, net
of issuance expense, of common stock of the Company. (See Note 16 of the Notes
to Consolidated Financial Statements.)
INDENTURE RESTRICTIONS. North Shore Gas' indenture relating to its first
mortgage bonds contains provisions and covenants restricting the payment of cash
dividends and the purchase or redemption of capital stock. At September 30,
1994, such restrictions amounted to $11.6 million out of North Shore Gas' total
retained earnings of $58.9 million. (See Note 6 of the Notes to Consolidated
Financial Statements.)
DISTRICT ENERGY. On December 16, 1992, Peoples District Energy Corporation
(Peoples District Energy) became a 50 percent participant in a partnership,
Trigen-Peoples District Energy Company, formed to provide heating and cooling
services to the McCormick Place exposition and convention center in Chicago,
Illinois and other large buildings near McCormick Place. The services will be
supplied from a central plant, a concept known as district energy. The other
partner is a subsidiary of Trigen Energy Corporation (Trigen), a company whose
primary business is constructing and operating district energy facilities.
Neither the partnership nor its partners are regulated as a public utility. (See
Note 5 of the Notes to Consolidated Financial Statements.)
INTEREST COVERAGE. Coverage ratios for Peoples Gas' fixed charges for fiscal
1994, 1993, and 1992 were 3.28, 3.57, and 3.18, respectively. The current fiscal
year ratio reflects the recording of Peoples Gas' fiscal 1994 portion of an IRS
settlement in income. (See Note 9 of the Notes to Consolidated Financial
Statements.) The 1993 ratio includes the effect of the rate increase granted in
October 1992 as well as decreased fixed charges, partially offset by increased
operating expenses.
-19-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (Continued)
The corresponding coverage ratios for North Shore Gas for the same three
years were 3.33, 2.91, and 4.20, respectively. The current fiscal year ratio
reflects the recording of North Shore Gas' fiscal 1994 portion of an IRS
settlement in income. (See Note 9 of the Notes to Consolidated Financial
Statements.) The 1993 ratio includes the effect of the rate increase granted in
November 1991 and colder weather, offset by higher operating costs and interest
expense. The fiscal 1992 ratio includes a net gain of $3.8 million from the sale
of a land parcel as well as the November 1991 rate increase.
DEBT RATINGS. The long-term debt of both utility subsidiaries is rated Aa3 by
Moody's Investors Service and AA- by Standard and Poor's Corporation. There has
been no change in these ratings since fiscal 1985. The commercial paper of both
utilities has the top rating from the major rating agencies. On
October 24, 1994, Standard and Poor's Corporation affirmed its ratings of both
utilities' long-term debt and commercial paper but changed its ratings outlook
for both utilities to "negative" from "stable."
ENVIRONMENTAL MATTERS. The Company's utility subsidiaries are conducting
environmental investigations and work at certain sites that were the location of
former manufactured gas operations. (See Note 3A of the Notes to Consolidated
Financial Statements.)
In February 1994, North Shore Gas received a demand from a responsible
party under the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended (CERCLA) for reimbursement, indemnification and
contribution for response costs incurred at a site in Denver, Colorado. (See
Note 3B of the Notes to Consolidated Financial Statements.)
REGULATORY ACTIONS. On October 6, 1992, the Commission issued an order
approving changes in rates of Peoples Gas that were designed to increase annual
revenues by approximately $30.6 million, exclusive of additional charges for
revenue taxes. (See Note 2A of the Notes to Consolidated Financial Statements.)
In addition, the order approved a rate mechanism by which Peoples Gas will
recover costs associated with environmental activities, relating to past
manufactured gas operations. (See Note 3A of the Notes to Consolidated Financial
Statements.)
On September 30, 1992, the Commission issued an order in its consolidated
proceedings, initiated in March 1991, regarding the appropriate ratemaking
treatment of environmental costs relating to past manufactured gas operations
incurred by Illinois utilities, including Peoples Gas and North Shore Gas. In
its order, the Commission approved rate recovery of such environmental costs but
required that the recovery occur over a five-year period without recovery of
carrying charges on unrecovered balances. The Commission's order is on appeal
before the Illinois Supreme Court. (See Note 2A of the Notes to Consolidated
Financial Statements.)
Peoples Gas and North Shore Gas filed proposed changes in rates with the
Commission in December 1994. (See Item 1. Business - State Legislation and
Regulation of this report.)
-20-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (Continued)
CAPITAL RESOURCES
CAPITAL SPENDING. Capital expenditures for additions, replacements, and
improvements to the utility plant were $87.2 million in 1994, $131.7 million in
1993, and $118.1 million in 1992.
The decline in fiscal 1994 expenditures from 1993 was partly the result of
completing certain major projects that were undertaken to enhance gas supply.
The current year amount reflects a level consistent with the financial goals of
the Company and maintains system safety. Expenditures in 1994 included $9.0
million for the third year of the four-year program to enhance the peak-day
withdrawal capability at the Manlove Field underground storage site.
Expenditures for that project in fiscal 1993 and 1992 amounted to $10.7 million
and $4.0 million, respectively.
Additional expenditures in fiscal 1993 included $7.7 million for a
liquefied natural gas vaporizer replacement project at Manlove Field and $9.0
million to complete the second pipeline supply connection for North Shore Gas.
Expenditures in 1992 for the latter project amounted to $14.9 million. Fiscal
1992 expenditures also included $5.0 million for the purchase and installation
of high-tech meter-reading devices.
Capital expenditures for fiscal 1995 are expected to be about $94.4
million, an increase of $7.2 million from the 1994 level. Estimated expenditures
in 1995 include the continuation of the cast iron main replacement program,
$10.4 million for computer and office equipment, and $1.3 million to complete
the underground storage site enhancement.
Fiscal 1995 sinking fund requirements for long-term debt are $4.0 million
for North Shore Gas. (See Note 14C of the Notes to Consolidated Financial
Statements.)
The Company anticipates that the subsidiaries' future cash needs for
capital expenditures and sinking fund requirements and maturities will be met
through internally generated funds, intercompany loans from the Company,
borrowing arrangements with banks and/or the issuance of commercial paper on an
interim basis, and periodic long-term financing involving equity or the
subsidiaries' first mortgage bonds.
BONDS ISSUED. On March 30, 1993, North Shore Gas filed a shelf registration
with the Securities and Exchange Commission (SEC) for the issuance of $40
million aggregate principal amount of first mortgage bonds. On May 13, 1993,
North Shore Gas issued a portion of those first mortgage bonds in an aggregate
principal amount of $15 million at 6.37 percent, due May 1, 2003. (See Note 14A
of the Notes to Consolidated Financial Statements.)
On December 22, 1993, the City of Chicago issued $102 million, in aggregate
principal amount, of gas supply revenue bonds, which were collateralized by an
equal amount of Peoples Gas' 30-year first mortgage bonds. The proceeds were
lent to Peoples Gas for the purpose of financing the construction of certain
facilities within the City. (See Note 14A of the Notes to Consolidated Financial
Statements.)
Additional bonds are issuable by the subsidiaries, upon approval by the
Commission, subject to limitations imposed by certain restrictive provisions of
the subsidiaries' open-end mortgages and supplements thereto. These restrictions
are not expected to have an impact on the subsidiaries' ability to issue
additional debt, as needed.
-21-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Statement of Management's Responsibility 23
Report of Independent Public Accountants 24
Consolidated Statements of Income for fiscal years ended
September 30, 1994, 1993, and 1992 25
Consolidated Statements of Retained Earnings for fiscal
years ended September 30, 1994, 1993, and 1992 25
Consolidated Balance Sheets as of September 30, 1994 and 1993 26
Consolidated Capitalization Statements as of September 30, 1994
and 1993 27
Consolidated Statements of Cash Flows for fiscal years ended
September 30, 1994, 1993, and 1992 28
Notes to Consolidated Financial Statements 29
-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 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
the shareholders, as a part of their audit of the financial statements,
selectively reviews and tests certain aspects of internal accounting controls
solely to determine the nature, timing, and extent of their audit tests.
Management has made available to Arthur Andersen LLP all of the Company's
financial records and related data and believes that all representations made to
the independent public accountants during their audit were valid and
appropriate.
The Audit Committee of the Board of Directors, 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.
-23-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Shareholders of Peoples Energy Corporation:
We have audited the accompanying consolidated balance sheets and consolidated
capitalization statements of Peoples Energy Corporation (an Illinois
corporation) and subsidiary companies as of September 30, 1994 and 1993, and the
related consolidated statements of income, retained earnings, and cash flows for
each of the three years in the period ended September 30, 1994. These financial
statements and the schedules referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company and subsidiary
companies as of September 30, 1994 and 1993, and the results of their operations
and their cash flows for each of the three years in the period ended
September 30, 1994, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedules listed
in Item 14(a)2 are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial statements.
These financial statement schedules have been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly state, in all material respects, the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
November 2, 1994
-24-
CONSOLIDATED STATEMENTS OF INCOME
Peoples Energy Corporation
- --------------------------------------------------------------------------------------------
For fiscal years ended September 30, 1994 1993 1992
- --------------------------------------------------------------------------------------------
(Thousands, except per-share amounts)
Operating Revenues:
Gas sales $1,153,928 $1,127,138 $ 951,728
Transportation of customer-owned gas 110,128 117,949 132,745
Other 15,432 13,854 12,279
- --------------------------------------------------------------------------------------------
Total Operating Revenues 1,279,488 1,258,941 1,096,752
- --------------------------------------------------------------------------------------------
Operating Expenses:
Gas costs 669,039 646,351 531,845
Operation 220,765 213,090 191,363
Maintenance 37,947 35,692 36,826
Depreciation 64,684 60,807 57,347
Taxes - Income 32,053 37,566 33,571
- State and local revenue 132,734 131,673 118,265
- Other 20,450 20,719 20,257
- --------------------------------------------------------------------------------------------
Total Operating Expenses 1,177,672 1,145,898 989,474
- --------------------------------------------------------------------------------------------
Operating Income 101,816 113,043 107,278
- --------------------------------------------------------------------------------------------
Other Income:
Interest income 6,168 2,944 5,038
Miscellaneous (see Note 11) 14,628 3,402 5,906
- --------------------------------------------------------------------------------------------
Total Other Income 20,796 6,346 10,944
- --------------------------------------------------------------------------------------------
Gross Income 122,612 119,389 118,222
- --------------------------------------------------------------------------------------------
Income Deductions:
Interest on long-term debt of subsidiaries 44,234 41,514 41,461
Other interest 3,012 2,945 4,349
Amortization of debt discount and expense 810 727 732
Preferred stock dividends of subsidiaries -- 719 1,218
Miscellaneous 157 109 78
- --------------------------------------------------------------------------------------------
Total Income Deductions 48,213 46,014 47,838
- --------------------------------------------------------------------------------------------
Net Income $ 74,399 $ 73,375 $ 70,384
- --------------------------------------------------------------------------------------------
Average Shares of Common Stock Outstanding 34,854 34,809 34,151
Earnings Per Share of Common Stock $ 2.13 $ 2.11 $ 2.06
- --------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Peoples Energy Corporation
- --------------------------------------------------------------------------------------------
For fiscal years ended September 30, 1994 1993 1992
- --------------------------------------------------------------------------------------------
(Thousands)
Balance at Beginning of Year $ 353,432 $ 342,267 $ 331,872
Add - Net Income 74,399 73,375 70,384
Deduct - Dividends on common stock of
$1.795, $1.775, and $1.75
per share, respectively 62,573 61,796 59,989
- Preferred stock redemption
premiums of a subsidiary -- 414 --
- --------------------------------------------------------------------------------------------
Balance at End of Year $ 365,258 $ 353,432 $ 342,267
- --------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
-25-
CONSOLIDATED BALANCE SHEETS
Peoples Energy Corporation
- --------------------------------------------------------------------------------------------
As of September 30, 1994 1993
- --------------------------------------------------------------------------------------------
(Thousands)
PROPERTIES AND OTHER ASSETS
- --------------------------------------------------------------------------------------------
Capital Investments:
Property, plant and equipment, at original cost $2,019,379 $1,950,981
Less - Accumulated depreciation 677,447 632,965
- --------------------------------------------------------------------------------------------
Net property, plant and equipment 1,341,932 1,318,016
Other investments 16,289 16,361
- --------------------------------------------------------------------------------------------
Total Capital Investments - Net 1,358,221 1,334,377
- --------------------------------------------------------------------------------------------
Current Assets:
Cash 3,667 8,511
Cash equivalents 73,584 16,240
Other temporary cash investments, at cost
that approximates market value 1,000 1,100
Trust fund, utility construction 31,493 4,243
Receivables -
Customers, net of allowance for uncollectible
accounts of $24,289 and $19,789, respectively 73,959 81,218
Other 2,224 30,698
Accrued unbilled revenues 19,922 30,038
Materials and supplies, at average cost 23,855 25,652
Gas in storage, at last-in, first-out cost 151,005 145,005
Gas costs recoverable through rate adjustments 14,426 51,526
Prepayments 2,050 2,441
- --------------------------------------------------------------------------------------------
Total Current Assets 397,185 396,672
- --------------------------------------------------------------------------------------------
Deferred Charges (see Note 17) 53,880 34,821
- --------------------------------------------------------------------------------------------
Total Properties and Other Assets $1,809,286 $1,765,870
- --------------------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
- --------------------------------------------------------------------------------------------
Capitalization (see Consolidated Capitalization Statements) $1,267,453 $1,156,526
- --------------------------------------------------------------------------------------------
Current Liabilities:
Interim loans of subsidiaries 900 68,600
Accounts payable 109,135 118,220
Dividends payable on common stock 15,690 15,496
Customer gas service and credit deposits 45,420 43,076
Sinking fund payments and maturities, due within one year -
Long-term debt of subsidiaries 4,000 4,000
Redeemable cumulative preferred stock of a subsidiary -- 3,400
Accrued taxes 28,936 27,914
Gas sales revenue refundable through rate adjustments 50,943 8,220
Accrued interest 12,942 10,371
- --------------------------------------------------------------------------------------------
Total Current Liabilities 267,966 299,297
- --------------------------------------------------------------------------------------------
Reserves and Deferred Credits:
Deferred income taxes - primarily accelerated depreciation 189,938 194,664
Investment tax credits being amortized over
the average lives of related property 39,887 41,676
Other 44,042 73,707
- --------------------------------------------------------------------------------------------
Total Reserves and Deferred Credits 273,867 310,047
- --------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $1,809,286 $1,765,870
- --------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
-26-
CONSOLIDATED CAPITALIZATION STATEMENTS
Peoples Energy Corporation
- ----------------------------------------------------------------------------------------------------
As of September 30, 1994 1993
- ----------------------------------------------------------------------------------------------------
(Thousands, except number of shares)
Common Stockholders' Equity:
Common stock, without par value -
Authorized 60,000,000 shares
Outstanding 34,868,069 and 34,822,842 shares, respectively $ 276,120 $ 275,019
Retained earnings (see Consolidated Statements
of Retained Earnings) 365,258 353,432
- ----------------------------------------------------------------------------------------------------
Total Common Stockholders' Equity 641,378 628,451
- ----------------------------------------------------------------------------------------------------
Long-Term Debt:
Exclusive of sinking fund payments and maturities
due within one year
The Peoples Gas Light and Coke Company
First and Refunding Mortgage Bonds -
8% Series U, due June 1, 1999 43,375 43,375
8% Series V, due June 1, 1999 43,375 43,375
Adjustable-Rate Series W (3% and 3.30% through
September 30, 1994 and September 30, 1993, respectively),
due October 1, 1999 10,400 10,400
6.875% Series X, due March 1, 2015 50,000 50,000
7.50% Series Y, due March 1, 2015 50,000 50,000
7.50% Series Z, due March 1, 2015 50,000 50,000
10-1/4% Series AA, due March 1, 2015 50,000 50,000
8.10% Series BB, due May 1, 2020 75,000 75,000
6.37% Series CC, due May 1, 2003 75,000 75,000
5-3/4% Series DD, due December 1, 2023 75,000 --
Adjustable-Rate Series EE (2.55% through
November 30, 1994), due December 1, 2023 27,000 --
North Shore Gas Company
First Mortgage Bonds -
10.20% Series I, due October 27, 1997 12,000 16,000
8% Series J (converted to a fixed rate effective
November 1, 1993; previous adjustable rate was 8.125%
through October 31, 1993), due November 1, 2020 24,925 24,925
6-3/8% Series K, due October 1, 2022 25,000 25,000
6.37% Series L, due May 1, 2003 15,000 15,000
- ----------------------------------------------------------------------------------------------------
Total Long-Term Debt 626,075 528,075
- ----------------------------------------------------------------------------------------------------
Total Capitalization $1,267,453 $1,156,526
- ----------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
-27-
CONSOLIDATED STATEMENTS OF CASH FLOWS
Peoples Energy Corporation
- -------------------------------------------------------------------------------------------------
For fiscal years ended September 30, 1994 1993 1992
- -------------------------------------------------------------------------------------------------
(Thousands)
OPERATING ACTIVITIES:
Net Income $ 74,399 $ 73,375 $ 70,384
Adjustments to reconcile net income to net cash:
Depreciation 64,684 60,807 57,347
Deferred income taxes and investment tax
credits - net (14,599) 8,337 17,707
Change in other deferred credits and reserves (21,581) 27,996 18,857
Change in deferred charges (19,059) (1,625) (12,952)
Other 41 64 224
- -------------------------------------------------------------------------------------------------
83,885 168,954 151,567
Change in current assets and liabilities:
Receivables - net 35,733 (51,568) 148
Accrued unbilled revenues 10,116 (6,493) 1,577
Materials and supplies 1,797 1,474 (2,915)
Gas in storage (6,000) (2,967) (8,282)
Rate adjustments recoverable or refundable 79,823 (24,069) (49,284)
Accounts payable (9,085) 27,227 14,327
Customer gas service and credit deposits 2,344 (5,385) (3,971)
Accrued taxes 1,022 11,772 1,482
Accrued interest 2,571 459 (551)
Other 390 (266) (128)
- -------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 202,596 119,138 103,970
- -------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures of subsidiaries - construction (87,218) (131,669) (118,084)
Other assets (1,382) (3,516) (1,677)
Other temporary cash investments 100 (300) 200
Other long-term cash investments (601) (278) 708
Other capital investments 633 (1,578) 1,050
- -------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (88,468) (137,341) (117,803)
- -------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Retirement of long-term debt of subsidiaries (4,000) (74,811) (34,118)
Redemption of preferred stock of subsidiaries (3,400) (11,814) (3,900)
Interim loans of subsidiaries - net (67,700) 39,700 25,000
Issuance of long-term debt of subsidiaries 102,000 115,000 --
Trust fund, utility construction (27,250) (4,243) --
Dividends paid on common stock (62,378) (61,601) (58,776)
Issuance of common stock - net 1,100 1,016 50,677
- -------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities (61,628) 3,247 (21,117)
- -------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 52,500 (14,956) (34,950)
Cash and Cash Equivalents at Beginning of Year 24,751 39,707 74,657
- -------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 77,251 $ 24,751 $ 39,707
- -------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
-28-
PEOPLES ENERGY CORPORATION
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 1994 have been reclassified
to conform with the current-year presentation.
1B Concentration of Credit Risk
Peoples Gas provides natural gas service to approximately 842,000 customers
within the City of Chicago. North Shore Gas provides natural gas service to
about 129,000 customers within approximately 275 square miles in Northeastern
Illinois. Credit risk for each utility is spread over a diversified base of
residential, commercial, and industrial retail sales and transportation
customers.
Peoples Gas and North Shore Gas encourage customers to participate in their
long-standing budget payment programs, which allow the cost of higher gas
consumption levels, associated with the heating season, to be spread over a 12-
month billing cycle. Customers' payment records are continually monitored and
credit deposits are required, where indicated, to minimize uncollectible write-
offs.
1C Revenue Recognition
Gas sales revenues for retail customers are recorded on the accrual basis
for all gas delivered during the month, including an estimate for gas delivered
but unbilled at the end of each month.
1D Property, Plant and Equipment
Property, plant and equipment is stated at original cost and includes
appropriate amounts of payroll taxes, employee benefit costs, administrative
costs, and an allowance for funds used during construction.
1E Maintenance and Depreciation
The Company's utility subsidiaries charge 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.
-29-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The provision for depreciation, expressed as an annual percentage of
original cost of depreciable property, is as follows:
For fiscal years ended September 30, 1994 1993 1992
------------------------------------ ---- ---- ----
Peoples Gas 3.6% 3.6% 3.6%
North Shore Gas 3.2 3.1 3.2
Consolidated 3.6 3.6 3.6
1F Statement of Cash Flows
For purposes of the balance sheet and the statement of cash flows, the
Company considers all short-term liquid investments with maturities of three
months or less to be cash equivalents.
Income taxes and interest paid (excluding capitalized interest) were as
follows:
For fiscal years ended September 30, 1994 1993 1992
------------------------------------ ---- ---- ----
(Thousands)
Income taxes paid $50,160 $25,343 $19,655
Interest paid 44,970 43,730 44,736
1G Income Taxes
The recording of deferred income taxes results from the use of accelerated
depreciation methods and certain other timing differences in recognition of
income and expense for tax and financial statement purposes.
Investment tax credits have been deferred and are being amortized through
credits to income over the book lives of related property.
In March 1993, the Company adopted, effective October 1, 1992, the
liability method of accounting for deferred income taxes required by SFAS No.
109, "Accounting for Income Taxes." Under the liability method, deferred income
taxes have been recorded using currently enacted tax rates for the differences
between the tax basis of assets and liabilities and the basis reported in the
financial statements. Due to the effects of regulation on Peoples Gas and North
Shore Gas, certain adjustments made to deferred income taxes to reflect the
adoption of SFAS No. 109 are, in turn, debited or credited to regulatory assets
or liabilities. Such adjustments had no material impact on financial position or
results of operations of the Company. (See Note 9.)
The preceding deferred-tax and tax-credit accounting conforms with
regulations of the Commission.
-30-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1H Recovery of Gas Costs, Including Charges for Transition Costs
Under the tariffs of Peoples Gas and North Shore Gas, the difference for
any fiscal year between costs recoverable through the Gas Charge and revenues
billed to customers under the Gas Charge is refunded or recovered over a 12-
month billing cycle beginning the following January 1. Consistent with these
tariff provisions, such difference for any month is recorded either as a current
liability or as a current asset (with a contra entry to Gas Costs), and the
fiscal year-end balance is amortized over the 12-month period beginning the
following January 1.
The Commission conducts annual proceedings regarding, for each gas utility,
the reconciliation of revenues from the Gas Charge and related costs incurred
for gas. In such proceedings, costs recovered by a utility through the Gas
Charge are subject to challenge. Such proceedings regarding Peoples Gas for
fiscal years 1992 through 1994 and North Shore Gas for fiscal years 1991 through
1994 are currently pending before the Commission.
Pursuant to FERC Order No. 636 and successor orders, pipelines are allowed
to recover from their customers so-called transition costs. These costs arise
from the restructuring of pipeline service obligations required by the 636
Orders. The utilities are currently recovering pipeline charges for transition
costs through an existing provision of the Gas Charge. The Commission entered an
order on March 9, 1994, providing for the full recovery of all such charges from
customers. In September 1994, the Commission entered orders on rehearing that
retained the provision for full recovery from customers. (See Notes 2A and 2B.)
1I Gas in Storage
Storage injections are priced at the fiscal-year average of costs of
natural gas purchased and synthetic natural gas (SNG) produced. Peoples Gas' SNG
production costs include costs of feedstock plus plant operation and maintenance
costs. Withdrawals from storage are priced on the last-in, first-out (LIFO) cost
method. The estimated current replacement cost of gas in inventory, at September
30, 1994 and 1993, exceeded the LIFO cost by approximately $210 million and $258
million, respectively.
-31-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. RATES AND REGULATION
2A Utility Rate Proceedings
PEOPLES GAS' RATE ORDER. On October 6, 1992, the Commission issued an order
approving changes in the rates of Peoples Gas that were designed to increase
annual revenues by approximately $30.6 million, exclusive of additional charges
for revenue taxes. The new rates were implemented on October 10, 1992. Peoples
Gas was allowed a 10.40 percent return on its original-cost rate base,
reflecting a 12.25 percent cost of common equity. The Commission's order also
approved a rate mechanism by which Peoples Gas will recover costs associated
with environmental activities, relating to past manufactured gas operations (see
discussion below). Peoples Gas and several parties appealed the Commission's
order to the Illinois Appellate Court. In August 1994, the Illinois Appellate
Court dismissed the appeal. That dismissal is now final and non-appealable.
ENVIRONMENTAL COST RECOVERY. On September 30, 1992, the Commission issued an
order in its consolidated proceedings, initiated in March 1991, regarding the
appropriate ratemaking treatment of environmental costs relating to past
manufactured gas operations incurred by Illinois utilities, including Peoples
Gas and North Shore Gas, in connection with the investigation and treatment of
residues associated with past manufactured gas operations ("environmental
costs"). In its order, the Commission approved rate recovery of such
environmental costs but required that the recovery occur over a five-year period
without recovery of carrying charges on unrecovered balances. Reimbursements of
environmental costs from insurance carriers or other entities are to be netted
against costs and reflected in rates over a five-year period. In November 1992,
several parties, including Peoples Gas and North Shore Gas, appealed the
Commission's order to the Illinois Appellate Court. On December 29, 1993, the
Third District Appellate Court issued its opinion affirming the Commission's
order in the consolidated proceedings. On April 6, 1994, the Illinois Supreme
Court allowed an appeal of the Appellate Court's decision. Any change made
pursuant to the Supreme Court's order on appeal would have a prospective effect
only.
FERC ORDER NO. 636 COST RECOVERY. On September 15, 1993, the Commission entered
an order initiating an investigation into the appropriate means of recovery by
Illinois gas utilities of pipeline charges for FERC Order No. 636 transition
costs. The Commission issued a final order in this proceeding on March 9, 1994.
The order provides for the full recovery of transition costs from Peoples Gas'
and North Shore Gas' gas service customers and transportation customers to the
extent they contract for firm standby service. The Citizens Utility Board and
State's Attorney of Cook County filed an application for rehearing of the March
9 order with the Commission. On May 4, 1994, the Commission granted rehearing,
limited to the question of the allocation of transition costs. In September
1994, the Commission entered orders on rehearing. In its orders on rehearing,
the Commission continued to provide for full recovery of transition costs, but
directed that, effective November 1, 1994, gas supply realignment (GSR) costs
(one of the four categories of transition costs) be recovered on a uniform
volumetric basis from all transportation and sales customers. (See Notes 1H and
2B.)
-32-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2B FERC Orders 636, 636-A, and 636-B
In 1992, the FERC issued Order Nos. 636, 636-A, and 636-B. There are
numerous appeals of the 636 Orders pending before the Federal Circuit Court of
Appeal for the D.C. Circuit.
The 636 Orders require substantial restructuring of the service obligations
of interstate pipelines. Among other things, the 636 Orders mandated
"unbundling" of existing pipeline gas sales services. Mandatory unbundling
requires pipelines to sell separately the various components of their gas sales
services (gathering, transportation and storage services, and gas supply). These
components were previously combined or "bundled" in gas services such as those
purchased by Peoples Gas and North Shore Gas. To address concerns raised by
utilities about reliability of service to their service territories, the 636
Orders required pipelines to offer a "no-notice" transportation service under
which firm transporters can receive delivery of gas up to their contractual
capacity level on any day without prior scheduling. Further, the 636 Orders
provided for mechanisms for pipelines to recover prudently incurred transition
costs associated with the restructuring process.
The FERC initiated individual restructuring proceedings for each interstate
pipeline. Each pipeline submitted a proposal to bring it into compliance with
the requirements of the 636 Orders. The restructured tariffs of Natural Gas
Pipeline Company of America (Natural), the principal pipeline serving Peoples
Gas and North Shore Gas, went into effect December 1, 1993. The restructured
tariffs of other pipelines serving Peoples Gas had previously gone into effect.
Several appeals of the orders approving Natural's and other pipelines'
restructured tariffs are pending before the Federal Circuit Court of Appeal for
the D.C. Circuit.
As part of the restructuring process, Peoples Gas and North Shore Gas
elected necessary levels of restructured services, including no-notice services,
from the menu of restructured services offered by the various pipelines. Also
during 1993, the utilities took the steps necessary to obtain reliable gas
supply as a replacement for the bundled merchant service supply which was no
longer available from the interstate pipelines to any significant extent.
Under the 636 Orders, pipelines must make separate rate filings to recover
transition costs. There are four categories of such costs, the largest of which
for Peoples Gas and North Shore Gas is GSR costs. The utilities are subject to
charges for transition cost recovery by Natural. Charges for transition costs
commenced on January 1, 1994. Appropriate accruals for transition costs have
been recorded. Peoples Gas and North Shore Gas are currently recovering
transition costs through the Gas Charge. On September 29, 1994, the FERC
approved a Stipulation and Agreement (Agreement) filed by Natural. The Agreement
places a cap on the amount of GSR costs recoverable by Natural from Peoples Gas
and North Shore Gas. For Peoples Gas, that cap would be approximately $103
million and for North Shore Gas, that cap would be approximately $25 million.
The 636 Orders are not expected to have a material adverse effect on
financial position or results of operations of the Company or its subsidiaries.
(See Notes 1H and 2A.)
-33-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. ENVIRONMENTAL MATTERS
3A Former Manufactured Gas Plant Operations
The Company's utility subsidiaries, their predecessors, and certain former
affiliates operated facilities in the past for manufacturing gas and storing
manufactured gas. In connection with manufacturing and storing gas, various by-
products and waste materials were produced, some of which might have been
disposed of rather than sold. Under certain laws and regulations relating to the
protection of the environment, the subsidiaries might be required to undertake
remedial action with respect to some of these materials, if found at the sites.
Two sites in Waukegan, Illinois, are the subjects of investigations (discussed
below) initiated by the United States Environmental Protection Agency (EPA).
In May 1990, North Shore Gas was notified by the EPA that the EPA had
documented the release or threatened release of hazardous substances,
pollutants, and contaminants at a site located in Waukegan, Illinois, where
manufactured gas and coking operations were formerly conducted (Waukegan I
Site). Also, North Shore Gas, General Motors Corporation (GMC), and Outboard
Marine Corporation were notified that each may be a potentially responsible
party (PRP) under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended (CERCLA) with respect to the Waukegan I Site.
A PRP is potentially liable for the cost of any investigative and/or remedial
work that the EPA determines is necessary.
In September 1990, North Shore Gas entered into an Administrative Order on
Consent (AOC) with the EPA and the Illinois Environmental Protection Agency
(IEPA) to implement and conduct a remedial investigation/feasibility study
(RI/FS) of the Waukegan I Site. The RI/FS is comprised of an investigation to
determine the nature and extent of contamination at the site and a feasibility
study to develop and evaluate possible remedial actions. Other parties
identified as PRPs did not enter into the AOC. Under the terms of the AOC, North
Shore Gas is responsible for the cost of the RI/FS. North Shore Gas believes,
however, that it will recover a significant portion of the costs of the RI/FS
from other entities. GMC has agreed to share equally with North Shore Gas in
funding of the RI/FS cost, without prejudice to GMC's or North Shore Gas' right
to seek a lesser cost responsibility at a later date.
In September 1991, North Shore Gas, the Elgin, Joliet and Eastern Railway
(EJ&E), and the North Shore Sanitary District (NSSD) each received an
administrative order (AO) issued by the EPA. The AO directed all three entities
to remove and dispose of all visible free tar in a pit located within a separate
site in Waukegan, Illinois (Waukegan II Site) and to conduct a study to
determine the extent of contamination of the tar from the pit to the surrounding
property. All of the work under the AO has been completed. North Shore Gas has
entered into a settlement agreement with NSSD with respect to costs incurred
under the AO and intends to recover an appropriate amount of the remaining costs
from EJ&E.
The current owner of a site in McCook, Illinois, near Chicago, has advised
Peoples Gas that the owner has found what appear to be wastes associated with
by-products of the gas manufacturing process under its property. The owner has
asserted that these wastes are the responsibility of Peoples Gas. Peoples Gas is
currently evaluating this claim.
-34-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Peoples Gas and North Shore Gas, in cooperation with the IEPA, are
conducting investigations of other sites (a total of 32) to determine whether
remedial action might be necessary. The investigations were initiated pursuant
to an informal request by the IEPA. To the best of the Company's knowledge,
similar informal requests have been made by the IEPA to other major Illinois gas
and electric utilities. Peoples Gas and North Shore Gas have engaged
environmental consulting firms to assist in the utilities' investigations. At
this time, except for the Waukegan I Site and the 110th Street Station site
(discussed below), it is not known what, if any, remedial action will be
necessary at the sites or, if necessary, what the cost of any such action would
be. As discussed below, Peoples Gas may conduct an RI/FS at the Pitney Court
Station and Division Street sites under the supervision of the IEPA. In
addition, Peoples Gas is conducting investigations under the supervision of the
IEPA at the 110th Street Station and Equitable Distribution Station sites.
In August 1988, the IEPA conducted an inspection at Peoples Gas' Division
Street property in Chicago. During the inspection, the IEPA and Peoples Gas took
several soil samples for laboratory analysis. The analysis of the samples
collected by Peoples Gas indicates the presence of certain substances within the
soil of the Division Street property that could be attributable to former
manufactured gas operations. Peoples Gas may conduct an RI/FS of the property
under the supervision of the IEPA.
The current owners of a site in Chicago, formerly called Pitney Court
Station, have advised Peoples Gas that they found what appear to be gas
manufacturing wastes underneath their property. The owners have demanded
monetary compensation from Peoples Gas because of the presence of such wastes.
Peoples Gas has rejected this demand, but may conduct an RI/FS of the site under
the supervision of the IEPA.
Peoples Gas has observed what appear to be gas purification wastes on a
site in Chicago, formerly called the 110th Street Station, and property
contiguous thereto. Peoples Gas has fenced the site and the contiguous property
and is conducting a study under the supervision of the IEPA to determine the
feasibility of a limited removal action.
The current owners at a site in Chicago, formerly called South Station,
have advised Peoples Gas that they have found what appear to be gas
manufacturing wastes underneath their property. The owners have demanded
monetary compensation from Peoples Gas because of the presence of such wastes.
Peoples Gas is currently evaluating this claim.
Peoples Gas recently became aware of a planned residential development at a
site in Chicago, formerly called the Equitable Distribution Station. The current
owners of the site and Peoples Gas have agreed that Peoples Gas should conduct a
preliminary investigation to determine whether gas manufacturing wastes are
present at the site.
The utility subsidiaries are accruing and deferring the costs they incur in
connection with all of the sites, including related legal expenses, pending
recovery through rates or from insurance carriers or other entities. As of
September 30, 1994, the total of the costs deferred by the subsidiaries, net of
recoveries and amounts billed to other entities, was $17.5 million. This amount
includes an estimate of the costs of
-35-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
completing the studies required by the EPA at the Waukegan I Site and the
Waukegan II Site and the investigations initiated at the request of the IEPA at
the other sites referred to above. The amount also includes an estimate of the
costs of remediation at the Waukegan I Site and at the 110th Street Station site
in Chicago, at the minimum amount of the current estimated range of such costs.
The costs of remediation at the other sites cannot be determined until more is
known about the nature and extent of contamination and the remedial action, if
any, to be required by the EPA or the IEPA. While each subsidiary intends to
seek contribution from other entities for the costs incurred at the sites, the
full extent of such contributions cannot be determined at this time.
Peoples Gas and North Shore Gas have filed suit against a number of
insurance carriers for the recovery of environmental costs relating to the
utilities' former manufactured gas operations. The suit asks the court to
declare that the insurers are liable under policies in effect between 1938 and
1985 for costs incurred or to be incurred by the utilities in connection with
five former manufactured gas sites in Chicago and Waukegan. The utilities are
also asking the court to award damages stemming from the insurers' breach of
their contractual obligation to defend and indemnify the utilities against these
costs. At this time, management cannot determine the timing and extent of the
subsidiaries' recovery of costs from their insurance carriers. Accordingly, the
costs deferred as of September 30, 1994 have not been reduced to reflect
recoveries from insurance carriers.
Costs incurred by Peoples Gas or North Shore Gas 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 subsidiaries in
connection with the sites will not have a material adverse effect on financial
position or results of operations of the subsidiaries. Peoples Gas and North
Shore Gas are authorized to recover the costs of environmental activities
relating to the utilities' former manufactured gas operations under rate
mechanisms approved by the Commission. As of September 30, 1994, the
subsidiaries had recovered $3.8 million of such costs through rates. (See Note
2A for a discussion of proceedings regarding the recovery of such costs through
utility rates.)
3B Former Mineral Processing Site in Denver, Colorado
In February 1994, North Shore Gas received a demand from the S.W. Shattuck
Chemical Company, Inc. (Shattuck), a responsible party under CERCLA, for
reimbursement, indemnification and contribution for response costs incurred at a
former mineral processing site in Denver, Colorado. The demand alleges that
North Shore Gas 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.
North Shore Gas is examining this claim. The cost of the remedy at the site has
been estimated by Shattuck to be approximately $31 million.
-36-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
No legal proceedings have been commenced against North Shore Gas. In the
event of litigation, North Shore Gas would vigorously defend itself. North Shore
Gas has strong defenses against any claim that it was responsible for the
disposal of hazardous substances at the site or that it had control over, or
succeeded to the liability of, any entity that disposed of hazardous substances
at the site. Accordingly, North Shore Gas does not believe that it has liability
for the response costs, but cannot determine the matter with certainty. At this
time, North Shore Gas cannot reasonably estimate what range of loss, if any, may
occur. In the event that North Shore Gas incurred liability, it would pursue
reimbursement from insurance carriers, other responsible parties, if any, and
through its rates for utility service.
4. GAS OVER-PRESSURE CONDITION
On January 17, 1992, an over-pressure condition occurred in the gas mains
of Peoples Gas serving an approximately one-square-mile area of the Near
Northwest Side of the City of Chicago. The over-pressure condition caused a
major explosion and numerous fires. Peoples Gas is aware of four deaths and 14
personal injuries allegedly resulting from the explosion and fires. Peoples Gas
also has been informed that damage occurred in an estimated 28 buildings. There
was also damage, such as broken windows, wall cracks, and water damage, to
additional buildings.
A number of lawsuits have been filed against Peoples Gas as a result of the
over-pressure condition. Some lawsuits also have named the Company as a
defendant. The Company is not a proper party to these suits, and management
expects that the Company will be dismissed from the litigation. The lawsuits
include wrongful-death claims and several class actions that seek to certify as
a class those persons who suffered bodily harm and/or property damage. All of
the suits allege negligence and seek compensatory damages. Some of the lawsuits
also seek punitive damages. These suits have not quantified the alleged damages
except for certain amounts that are not material.
In January 1993, the National Transportation Safety Board (NTSB) completed
its report regarding its investigation of the over-pressure incident that
occurred on January 17, 1992. In its report, the NTSB stated that "the probable
cause of the over-pressure accident and the resulting losses was the failure of
Peoples Gas Light Coke Company to adequately train its gas operations section
employees in recognizing and correctly responding to abnormal situations, which
consequently led to the failure of the gas operations section crew to properly
monitor and control the pressure of the gas being supplied to the low-pressure
gas system during a routine inspection."
In June 1993, the Staff of the Illinois Commerce Commission (Commission
Staff) released its report concerning the over-pressure incident. In its report,
the Commission Staff concluded that employee error was the probable cause of the
over-pressurization. The report was critical of Peoples Gas' training of its
personnel in its gas operations section and of some of Peoples Gas' practices at
the time of the incident.
-37-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company and Peoples Gas strongly disagree with the criticisms by the
NTSB and the Commission Staff of the training given by Peoples Gas to personnel
in its gas operations section. The Company and Peoples Gas also disagree with
some of the findings and conclusions of the Commission Staff, including several
of the Commission Staff's findings and its theory, analysis, and conclusions
pertaining to the probable cause of the over-pressurization.
The Company and Peoples Gas carry substantial insurance coverage. If
liability were found on the part of the Company or Peoples Gas, management
believes that any costs incurred for damages will be adequately covered by
insurance. However, Peoples Gas' primary insurance carrier has asserted that
under Illinois law, liability for punitive damages is not insurable. Peoples Gas
has advised the insurance carrier that it disagrees and intends to assert all of
its rights against the carrier including its right to obtain recovery for
punitive damages, if any. Management is not aware of any conduct on its part or
by employees of Peoples Gas or of the Company that would give rise to punitive
damages under Illinois law. Accordingly, management believes that the incident
will not have a material adverse effect on financial position or results of
operations of the Company or Peoples Gas.
5. DISTRICT ENERGY
On December 16, 1992, Peoples District Energy became a 50 percent
participant in a partnership, Trigen-Peoples District Energy Company, formed to
provide heating and cooling services to the McCormick Place exposition and
convention center in Chicago, Illinois and other large buildings near McCormick
Place. The services will be supplied from a central plant, a concept known as
district energy. The other partner is a subsidiary of Trigen. Neither the
partnership nor its partners are regulated as a public utility.
In December 1992, the partnership entered into a 28-year contract with the
Metropolitan Pier and Exposition Authority (MPEA) to construct and operate a
plant that will provide steam and chilled water to McCormick Place for heating
and cooling purposes. On November 1, 1993, the partnership assumed operation of
the current space-conditioning system and began providing service to the two
existing halls. The partnership also will provide heating and cooling to a
planned exhibition hall that is scheduled to be in operation early in 1997. The
partnership is obligated to provide services to McCormick Place for the term of
the contract at or below the cost (as determined by a contractual formula) that
the MPEA would incur to produce heating and cooling for itself. The contract
also obligates the partnership to complete and pay for construction of the plant
by certain dates specified in the contract. To secure its obligations during the
service period under the contract, the partnership is obligated to provide,
maintain, and reinstate a letter of credit upon which the MPEA can draw to pay
its costs, expenses, and damages, up to $4 million per incident, principally in
the event of the partnership's failure to cure timely an interruption of
service.
The district energy plant is estimated to cost approximately $36 million.
The MPEA has effectively funded $8 million of the construction costs, and the
partnership will fund the balance. The Company and Trigen have each posted an
$18 million irrevocable letter of credit in favor of the partnership to fund the
partnership's portion of construction costs. The partnership plans to seek debt
financing for a major portion of the project.
-38-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In addition to committing capital to the partnership, the Company and
Trigen have provided two joint and several guarantees to the MPEA of the
partnership's performance of its obligations under the contract. One of the
guarantees covers all obligations of the partnership relating to construction of
the project (Construction Obligations), and is limited in the aggregate to $15
million, except for the guarantors' funding obligations described above and
costs to the extent incurred by the MPEA in connection with enforcement of
obligations of the partnership or the guarantors. The second guarantee covers
all obligations of the partnership other than the Construction Obligations,
including liabilities arising from an interruption of service to McCormick
Place, insolvency of the partnership, or other partnership default. This second
guarantee is limited in the aggregate to $11 million, except for an additional
$4 million to $8 million in the event of insolvency of the partnership or the
installation (pursuant to enforcement of lender or MPEA remedies) of any other
operator of the district energy plant in lieu of the partnership, and except for
the partnership's obligations relating to the letter of credit in favor of the
MPEA described above and costs to the extent incurred by the MPEA in connection
with the enforcement of obligations of the partnership or the guarantors.
6. COVENANTS REGARDING RETAINED EARNINGS
North Shore Gas' indenture relating to its first mortgage bonds contains
provisions and covenants restricting the payment of cash dividends and the
purchase or redemption of capital stock. At September 30, 1994, such
restrictions amounted to $11.6 million out of North Shore Gas' total retained
earnings of $58.9 million.
7. LONG-TERM LEASE
In March 1985, Peoples Gas sold its headquarters office building and
entered into a lease with an initial 10-year term and two five-year renewal
options at the market rate in effect at each option date. Peoples Gas is
accounting for this as an operating lease in accordance with SFAS No. 13,
"Accounting for Leases." The rental obligation consists of a base rent of
approximately $4.3 million per year and additional annual escalations based on
operating costs, taxes, and increases in the Consumer Price Index. Rental
expense under this arrangement was $6.1 million for each of the fiscal years
1994 and 1993.
In October 1993, Peoples Gas entered into a new 15-year lease to relocate
its headquarters office on or before March 1, 1995. Rental expense will be
comparable with the present lease.
-39-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. EMPLOYEE BENEFITS
8A Pensions
The Company and its subsidiaries participate 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. Peoples Gas
and North Shore Gas make annual contributions to the plans based upon actuarial
determinations and in consideration of tax regulations and funding requirements
under federal law.
The Company also has a non-qualified pension plan that provides certain
employees with pension benefits in excess of qualified plan limits imposed by
federal tax law.
Net pension cost for all plans for fiscal 1994, 1993, and 1992 included the
following components:
- --------------------------------------------------------------------------------------------
1994 1993 1992
- --------------------------------------------------------------------------------------------
(Millions)
Service cost--benefits earned during year $ 15.8 $ 17.1 $ 14.2
Interest cost on projected benefit obligations 30.0 30.4 31.9
Actual return on plan assets (gain) loss (15.0) (56.8) (52.6)
Net amortization and deferral (25.5) 17.0 12.1
- --------------------------------------------------------------------------------------------
Net pension cost $ 5.3 $ 7.7 $ 5.6
- --------------------------------------------------------------------------------------------
The calculation of pension cost assumed a long-term rate of return on
assets of 7.5 percent for 1992 through 1994.
The following table shows the estimated funded status of the Company's
pension plans at September 30, 1994 and 1993:
- ---------------------------------------------------------------------------------
1994 1993
- ---------------------------------------------------------------------------------
(Millions)
Plan Assets at Market Value $531.1 $576.1
- ---------------------------------------------------------------------------------
Actuarial present value of plan benefits:
Vested 334.2 355.6
Non-vested 39.1 47.2
- ---------------------------------------------------------------------------------
Accumulated benefit obligation 373.3 402.8
Effect of projected future compensation increases 101.0 124.3
- ---------------------------------------------------------------------------------
Projected Benefit Obligation 474.3 527.1
- ---------------------------------------------------------------------------------
Excess of plan assets over projected benefit obligation 56.8 49.0
Less:
Unrecognized transition asset 29.9 32.7
Unrecognized prior service cost (5.5) (6.0)
Unrecognized net gain (loss) 35.4 34.9
- ---------------------------------------------------------------------------------
Accrued Pension (Liability) Asset $(3.0) $(12.6)
- ---------------------------------------------------------------------------------
-40-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The projected benefit obligation was determined using a discount rate of
6.5 percent for 1994 and 5.75 percent for 1993, and assumed future compensation
increases of 5.0 percent for each year. Plan assets consist primarily of
marketable equity and fixed-income securities.
8B Postretirement Benefits Other Than Pensions
The Company and its subsidiaries also provide 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 companies. The plans are funded based upon actuarial determinations and
in consideration of tax regulations and funding requirements under federal law.
The Company adopted SFAS No. 106 effective October 1, 1993. SFAS No. 106
requires the accrual of the expected costs of such benefits during the
employees' years of service.
Net postretirement benefit cost for all plans for fiscal 1994 included the
following components:
- -----------------------------------------------------------------
1994
- -----------------------------------------------------------------
(Millions)
Service cost--benefits earned during year $ 3.1
Interest cost on projected benefit obligations 7.7
Actual return on plan assets (gain) loss (0.3)
Amortization of transition obligation 4.9
Net amortization and deferral (0.2)
- -----------------------------------------------------------------
Net postretirement benefit cost $15.2
- -----------------------------------------------------------------
The calculation of postretirement benefit cost assumed a long-term rate of
return on assets of 7.5 percent.
The Company recognized total postretirement costs of $15.2 million during
fiscal 1994. Of this amount, $8.5 million was funded through trust funds for
future benefit payments. Such costs during fiscal year 1993 were $16.5 million,
of which $9.9 million was funded.
In October 1992, Peoples Gas was granted rates by the Commission that
included its estimated postretirement benefit costs determined on the accrual
basis of accounting. (See Note 2A.) The financial reporting for postretirement
benefit costs of Peoples Gas is consistent with the related rate treatment. Due
to regulatory treatment, the adoption of SFAS No. 106 did not have a material
effect on financial position or results of operations.
-41-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth the estimated funded status for the
postretirement health care and life insurance plans at September 30, 1994:
- ----------------------------------------------------------------------
1994
- ----------------------------------------------------------------------
(Millions)
Plan Assets at Market Value $ 21.2
- ----------------------------------------------------------------------
Accumulated postretirement benefit obligation (APBO):
Retirees 61.0
Fully Eligible Active Plan Participants 17.1
Other Active Plan Participants 29.0
- ----------------------------------------------------------------------
Total APBO 107.1
- ----------------------------------------------------------------------
APBO in excess of plan assets (85.9)
Less:
Unrecognized transition obligation (93.7)
Unrecognized net gain 7.5
- ----------------------------------------------------------------------
Accrued Postretirement Benefit (Liability) Asset $ 0.3
- ----------------------------------------------------------------------
The total APBO was determined using a discount rate of 7.75 percent and
assumed future compensation increases of 5.0 percent. The unfunded obligation
will be amortized over 20 years. Plan assets consist primarily of marketable
equity and fixed-income securities.
For measurement purposes, a health care cost trend rate of 10.25 percent
was assumed for fiscal 1995, and that rate thereafter will decline to 5.0
percent in 2003 and subsequent years. The health care cost trend rate assumption
has a significant effect on the amounts reported. Increasing the assumed health
care cost trend rate by one percentage point for each future year would have
increased the APBO at September 30, 1994, by $8.0 million and the aggregate of
service and interest cost components of the net periodic postretirement benefit
cost by $1.1 million annually.
8C Postemployment Benefits
In November 1992, the FASB issued SFAS No. 112. This statement requires the
accrual of certain benefits provided to former or inactive employees after
employment but before retirement. The Company adopted SFAS No. 112 effective
October 1, 1994. Implementation of this statement will not have a material
effect on financial position or results of operations.
-42-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. TAX MATTERS
Provision for Income Taxes
- --------------------------------------------------------------------------------------------------
For fiscal years ended September 30, 1994 1993 1992
- --------------------------------------------------------------------------------------------------
(Thousands)
Current:
Federal $38,438 $24,888 $15,232
State 8,419 4,792 3,119
- --------------------------------------------------------------------------------------------------
Total current income taxes 46,857 29,680 18,351
- --------------------------------------------------------------------------------------------------
Deferred:
Federal (8,582) 6,968 14,855
State (987) 2,478 4,179
- --------------------------------------------------------------------------------------------------
Total deferred income taxes (9,569) 9,446 19,034
- --------------------------------------------------------------------------------------------------
Investment tax credits - net:
Federal (2,017) (2,044) (1,801)
State 252 536 474
- --------------------------------------------------------------------------------------------------
Total investment tax credits - net (1,765) (1,508) (1,327)
- --------------------------------------------------------------------------------------------------
Total provision included in income taxes 35,523 37,618 36,058
Less - Included in other income or operation expense 3,470 52 2,487
- --------------------------------------------------------------------------------------------------
Total provision for income taxes $32,053 $37,566 $33,571
- --------------------------------------------------------------------------------------------------
See Note 1G for discussion of the adoption of SFAS No. 109 effective
October 1, 1992. Set forth in the table below are the temporary differences
which gave rise to the net deferred income tax liabilities:
- --------------------------------------------------------------------------------------------
As of September 30, 1994 1993
- --------------------------------------------------------------------------------------------
(Thousands)
Deferred tax liabilities:
Property - accelerated depreciation and
other property related items $223,865 $214,352
Gas costs reconciliation -- 18,303
Other 4,097 3,250
- --------------------------------------------------------------------------------------------
Total deferred income tax liabilities 227,962 235,905
- --------------------------------------------------------------------------------------------
Deferred tax assets:
Unamortized investment tax credits (15,820) (16,547)
Uncollectible accounts (9,635) (7,852)
Other (12,569) (16,842)
- --------------------------------------------------------------------------------------------
Total deferred income tax assets (38,024) (41,241)
- -------------------------------------------------------------------------------------------
Net deferred income tax liabilities $189,938 $194,664
- --------------------------------------------------------------------------------------------
-43-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The sources of significant timing differences which gave rise to federal
deferred income taxes for the year prior to adoption of SFAS No. 109 was as
follows:
- ------------------------------------------------------------------------------
For fiscal year ended September 30, 1992
- ------------------------------------------------------------------------------
(Thousands)
Accelerated depreciation $ 5,331
Gas costs reconciliation 10,375
Other (851)
- ------------------------------------------------------------------------------
Total federal deferred income tax expense $14,855
- ------------------------------------------------------------------------------
The following is a reconciliation between the computed federal income tax
expense (tax rate of 35 percent for 1994, 34.75 percent for 1993, and 34 percent
for 1992, times pre-tax book income) and the total provision for federal income
tax expenses:
- ---------------------------------------------------------------------------------------------------------------------------
For fiscal years ended September 30, 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
Percent Percent Percent
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 $35,783 35.00 $36,107 34.75 $33,962 34.0
Amortization of investment
tax credits (2,017) (1.97) (2,044) (1.97) (1,801) (1.8)
Amortization of deferred taxes (1,951) (1.91) (2,027) (1.95) (2,074) (2.1)
Nontaxable-tax settlement principal (1,965) (1.92) 22 0.02 -- --
Other, net (2,011) (1.97) (2,246) (2.16) (1,801) (1.8)
- ---------------------------------------------------------------------------------------------------------------------------
Total provision for federal
income taxes $27,839 27.23 $29,812 28.69 $28,286 28.3
- ---------------------------------------------------------------------------------------------------------------------------
On September 30, 1993, the Company received notification from the IRS that
settlement of past income tax returns had been reached for fiscal years 1978
through 1990. The IRS settlement resulted in 1994 payments of principal and
interest to the Company in total amount of approximately $28 million, or $21.6
million after income taxes. Peoples Gas and North Shore Gas have each received
regulatory authorization to defer the recording of the settlement amount in
income for fiscal year 1993, and to record its portion of the settlement amount
in income for fiscal years 1994 and 1995. Each utility has represented to the
Commission that, having received this accounting authorization, it will not file
a request for an increase in base rates before December 1994. The regulatory
treatment of the IRS settlement having been resolved in November 1993, Peoples
Gas and North Shore Gas together included $14 million, or $10.8 million after
income taxes, in income in 1994. The amount after income taxes is included in
Other Income - Miscellaneous. At September 30, 1994, approximately $14 million
is included in Reserves and Deferred Credits - Other. Each utility will amortize
its remaining portion of the settlement amount in income in fiscal year 1995,
the effect of which will be to offset increases in costs that the utilities will
incur during that year.
-44-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. ASSETS SUBJECT TO LIEN
The Indenture of Mortgage, dated January 2, 1926, as supplemented, securing
the first and refunding mortgage bonds issued by Peoples Gas, constitutes a
direct, first-mortgage lien on substantially all property owned by Peoples Gas.
The Indenture of Mortgage, dated April 1, 1955, as supplemented, securing the
first mortgage bonds issued by North Shore Gas, constitutes a direct, first-
mortgage lien on substantially all property owned by North Shore Gas.
11. OTHER INCOME - MISCELLANEOUS
For fiscal years ended September 30, 1994 1993 1992
- -------------------------------------------------------------------------------------------------------
(Thousands)
Amortization of net gain on sale of Peoples Gas Building $ 1,151 $1,151 $ 1,151
Interest on amounts recoverable from customers 2,495 1,632 40
Amortization of gain on reacquired bonds 380 380 652
Income tax settlement (see Note 9) 14,164 -- --
Income taxes on income tax settlement (see Note 9) (3,372) -- --
Gain on sale of property -- -- 6,207
Income taxes on sale of property -- -- (2,404)
Other (190) 239 260
- -------------------------------------------------------------------------------------------------------
Total Other Income - Miscellaneous $14,628 $3,402 $ 5,906
- -------------------------------------------------------------------------------------------------------
12. CAPITAL COMMITMENTS
Total contract and purchase order commitments of the Company and its
subsidiaries at September 30, 1994, amounted to approximately $6.6 million.
13. SHORT-TERM BORROWINGS AND CREDIT LINES
As of September 30, 1994 1993
- -----------------------------------------------------------------------------
(Thousands)
Bank Loans
Peoples Gas
7.75% due December 22, 1994 $ 900 $ --
- -----------------------------------------------------------------------------
Commercial Paper
Peoples Gas
due October 1, 1993,
through October 21, 1993 -- 63,200
North Shore Gas
due October 1, 1993,
through October 21, 1993 -- 5,400
- -----------------------------------------------------------------------------
Available Lines of Credit at End of Year
Unused bank lines $140,150 $46,400
- -----------------------------------------------------------------------------
-45-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Short-term cash needs of Peoples Gas and North Shore Gas are met through
intercompany loans from the Company, 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.
The Company has a line of credit of $10 million that expires December 16,
1994, to cover projected short-term credit needs of the Company. On February 1,
1994, the utility subsidiaries reduced their lines of credit to approximately
$154 million from $184 million in effect since November 1, 1993. On
July 1, 1994, the utility subsidiaries again reduced their lines of credit to
approximately $131 million from $154 million. Agreements covering $93.7 million
of the total will expire on June 29, 1995. The agreement covering the remaining
$37.4 million will expire on January 31, 1997. Such lines of credit cover
projected short-term credit needs of the subsidiaries and support the long-term
debt treatment of Peoples Gas' adjustable-rate mortgage bonds. Payment for the
lines of credit is by fee.
14. LONG-TERM DEBT
14A Issuance of Bonds
On March 30, 1993, North Shore Gas filed a shelf registration with the SEC
for the issuance of $40 million aggregate principal amount of first mortgage
bonds. On May 13, 1993, North Shore Gas issued a portion of those first mortgage
bonds in an aggregate principal amount of $15 million at 6.37 percent due May 1,
2003. Proceeds of the offering were used to refund approximately $11 million
aggregate principal amount of North Shore Gas' previously issued first mortgage
bonds and for general corporate purposes. North Shore Gas may issue all or a
portion of the remaining bonds during fiscal 1995 and/or fiscal 1996. Proceeds
of the future offering will be used for general corporate purposes.
On December 22, 1993, the City of Chicago issued $102 million, in aggregate
principal amount, of gas supply revenue bonds ($75 million 5-3/4 percent Series
A and $27 million adjustable-rate Series B), which were collateralized by an
equal amount of Peoples Gas' 30-year first mortgage bonds. The proceeds were
lent to Peoples Gas for the purpose of financing the construction of certain
facilities within the City. The proceeds are being held in a trust fund until
drawn down by Peoples Gas for reimbursement of construction expenditures.
In accordance with provisions of the Internal Revenue Code and regulations
thereunder, any arbitrage income must be paid to the federal government.
Additionally, all assets financed through this arrangement must be depreciated
on a straight-line basis for tax purposes.
14B Interest-Rate Adjustments
The rate of interest on the City of Joliet 1984 Series C Bonds, which are
secured by Peoples Gas' Adjustable-Rate Bonds, Series W, is subject to
adjustment annually on October 1. Owners of the Series C Bonds have the right to
tender such bonds at par during a limited period prior to that date. Peoples Gas
is obligated to purchase any such bonds tendered if they cannot be remarketed.
All Series C Bonds that were tendered prior to October 1, 1994, have been
remarketed. The interest rate on such bonds is 4.2 percent for the period
October 1, 1994, through September 30, 1995.
-46-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The rate of interest on the City of Chicago 1993 Series B Bonds, which are
secured by Peoples Gas' Adjustable-Rate Bonds, Series EE, currently is subject
to adjustment annually on December 1. Owners of the Series B Bonds have the
right to tender such bonds at par during a limited period prior to that date.
Peoples Gas is obligated to purchase any such bonds tendered if they cannot be
remarketed. The interest rate on such bonds is 2.55 percent for the period
December 1, 1993, through November 30, 1994.
Effective November 1, 1993, the rate of interest on North Shore Gas'
Adjustable-Rate Bonds, Series J, was fixed at 8 percent until maturity,
November 1, 2020.
14C Sinking Fund Requirements of Subsidiaries
As of September 30, 1994, long-term debt sinking fund requirements of North
Shore Gas for fiscal years 1995 through 1998 equal $4 million each year.
14D Fair Value of Financial Instruments
The estimated fair value of the Company's $626.1 million carrying amount of
long-term debt approximated $662.7 million as of September 30, 1994. As of
September 30, 1993, the estimated fair value of the Company's $528.1 million
carrying amount of long-term debt approximated $560.4 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 Peoples Gas
and North Shore Gas are subject to regulation, any gains or losses related to
the difference between the carrying amount and the fair value of financial
instruments would not be realized by the Company's shareholders. The carrying
amount of all other financial instruments approximates fair value.
15. PREFERRED STOCK
The Company has five million shares of Preferred Stock, no par value,
authorized for issuance, of which none was issued and outstanding at September
30, 1994.
-47-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. COMMON STOCK
For fiscal years ended September 30, 1994 1993 1992
- ------------------------------------------------------------------------------------------
Shares outstanding--beginning of year 34,822,842 34,773,944 32,761,763
Shares issued:
Employee Stock Purchase Plan 35,570 28,848 30,816
Long-Term Incentive Compensation Plan 13,345 81,425 126,656
Other Deferred Compensation Plans 1,278 1,206 3,921
Public Offering -- -- 1,950,000
Shares reacquired (4,966) (62,581) (99,212)
- ------------------------------------------------------------------------------------------
Shares outstanding-end of year 34,868,069 34,822,842 34,773,944
- ------------------------------------------------------------------------------------------
Shares Reserved As of September 30, 1994 1993 1992
- ------------------------------------------------------------------------------------------
Dividend Reinvestment and Stock
Purchase Plan 1,036,891 1,036,891 1,036,891
Employee Stock Purchase Plan 1,051,734 1,087,304 1,116,152
Long-Term Incentive Compensation Plan 469,280 482,625 564,050
- ------------------------------------------------------------------------------------------
Total shares reserved 2,557,905 2,606,820 2,717,093
- ------------------------------------------------------------------------------------------
Stock
Non-Qualified Appreciation
Long-Term Incentive Compensation Plan Price Range Stock Options Rights (SARs)
- ------------------------------------------------------------------------------------------
Outstanding at September 30, 1992 $23.69-25.69 77,300 77,300
- ------------------------------------------------------------------------------------------
Granted $ 30.38 56,300 56,300
Exercised 23.69-25.69 (69,200) (69,200)
- ------------------------------------------------------------------------------------------
Outstanding at September 30, 1993 $25.69-30.38 64,400 64,400
- ------------------------------------------------------------------------------------------
Granted $ 30.88 52,700 52,700
Exercised 30.38 (1,200) (1,200)
- ------------------------------------------------------------------------------------------
Outstanding at September 30, 1994 $25.69-30.88 115,900 115,900
- ------------------------------------------------------------------------------------------
Restricted stock awarded to officers of the Company during the last three
fiscal years are as follows: 1994, 12,625 shares; 1993, 12,225 shares; and 1992,
13,350 shares. As of September 30, 1994, there were 353,380 shares available for
future grant under options or restricted stock awards. As of September 30, 1994,
there were 420,450 SARs available for future grant.
-48-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. DEFERRED CHARGES
As of September 30, 1994 1993
- --------------------------------------------------------------------------------------------
(Thousands)
Debt expense being amortized over the lives of outstanding issues $14,286 $13,389
Energy Conservation Plan expenses 1,054 1,071
Environmental costs, net of recoveries 17,505 13,973
Clearing accounts, primarily applicable to construction projects 936 523
Interest on gas sales revenue refundable 2,965 397
Recoverable gas over-pressure condition costs 2,193 3,426
Peoples District Energy 757 897
Transition gas costs from pipeline supplier 11,300 --
Other 2,884 1,145
- --------------------------------------------------------------------------------------------
Total Deferred Charges $53,880 $34,821
- --------------------------------------------------------------------------------------------
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
The fluctuation in quarterly results is primarily due to the seasonal
nature of the gas distribution business. Results for the first quarter of fiscal
1994 include the recording of one-half of an IRS settlement, in income,
increasing net income by $10.7 million or 31 cents per share.
Earnings
Operating Operating Per
Fiscal Quarters Revenues Income Net Income Share
- -------------------------------------------------------------------------
(Thousands, except per-share amounts)
1994
Fourth $118,822 $(6,776) $(15,597) $(0.45)
Third 206,791 11,560 2,604 0.07
Second 574,593 58,434 48,404 1.39
First 379,282 38,598 38,988 1.12
1993
Fourth $136,057 $(3,805) $(13,218) $(0.38)
Third 224,303 14,598 4,891 0.14
Second 522,455 60,762 50,643 1.45
First 376,126 41,488 31,059 0.89
Quarterly earnings-per-share amounts are based on the weighted average
common shares outstanding for each quarter and, therefore, might not equal the
amount computed for the total year.
-49-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-50-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information relating to the directors of the Company is set forth under the
caption "Information Concerning Nominees for Election as Directors" of the
Company's Proxy Statement, to be filed with the SEC on or about December 30,
1994, and to be distributed in connection with the Company's Annual Meeting of
Shareholders to be held on February 24, 1995. Such information is incorporated
herein by reference.
Information relating to the executive officers of the Company is set forth
in Part I of this report under the caption "Executive Officers of the Company."
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is set forth under the
captions "Executive Compensation" and "Report on Executive Compensation" of the
Company's Proxy Statement, to be filed with the SEC on or about December 30,
1994, and to be distributed in connection with the Company's Annual Meeting of
Shareholders to be held on February 24, 1995. Such information is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to this item is set forth under the caption "Share
Ownership of Director Nominees, and Executive Officers" of the Company's Proxy
Statement, to be filed with the SEC on or about December 30, 1994, and to be
distributed in connection with the Company's Annual Meeting of Shareholders to
be held on February 24, 1995. Such information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
-51-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) 1. Financial Statements: Page
----
See Part II, Item 8. 22
2. Financial Statement Schedules:
Schedule
Number
--------
V Property, Plant and Equipment, at
Original Cost 53
VI Accumulated Provision for Depreciation of
Property, Plant and Equipment 54
VIII Valuation and Qualifying Accounts 55
IX Short-Term Borrowings 56
X Supplementary Income Statement Information 57
3. Exhibits:
See Exhibit Index on page 59.
(b) Reports on Form 8-K filed during the final quarter of fiscal year 1994:
None.
-52-
SCHEDULE V
PEOPLES ENERGY CORPORATION AND SUBSIDIARY COMPANIES
PROPERTY, PLANT AND EQUIPMENT, AT ORIGINAL COST
(Thousands)
Column A Column B Column C Column D Column E Column F
- ---------------------------------------- ------------ ---------- ----------- ---------- -----------
Balance Transfers Balance
at beginning Additions between at end of
Classification of period at cost Retirements accounts period
- ---------------------------------------- ------------ ---------- ----------- ---------- -----------
Fiscal Year Ended September 30, 1994
------------------------------------
Public utility facilities:
Gas plant in service -
Production plant $ 124,743 $ 510 $ 4 $ -- $ 125,249
Storage plant 200,336 11,061 727 -- 210,670
Transmission plant 108,231 4,852 10 -- 113,073
Distribution plant 1,390,762 65,375 12,682 (27) 1,443,428
General plant 96,414 10,830 5,336 27 101,935
Gas plant leased to others 6,517 -- -- -- 6,517
Construction work in progress 15,244 (5,782) -- -- 9,462
Gas stored underground - non-current 8,165 311 -- -- 8,476
---------- -------- ------- ------- ----------
Total public utility facilities 1,950,412 87,157 18,759 0 2,018,810
Non-utility property 569 -- -- -- 569
---------- -------- ------- ------- ----------
Total property, plant and equipment, at original cost $1,950,981 $ 87,157(a) $18,759(b) $ 0 $2,019,379
---------- -------- ------- ------- ----------
---------- -------- ------- ------- ----------
Fiscal Year Ended September 30, 1993
------------------------------------
Public utility facilities:
Gas plant in service -
Production plant $ 122,053 $ 224 $ 199 $ 2,665 $ 124,743
Storage plant 176,651 24,773 1,704 616 200,336
Transmission plant 92,741 16,375 12 (873) 108,231
Distribution plant 1,329,688 80,108 21,154 2,120 1,390,762
General plant 85,973 16,137 5,683 (13) 96,414
Gas plant leased to others 6,509 8 -- -- 6,517
Construction work in progress 21,605 (6,361) -- -- 15,244
Gas stored underground - non-current 7,814 351 -- -- 8,165
---------- -------- ------- ------- ----------
Total public utility facilities 1,843,034 131,615 28,752 4,515 1,950,412
Non-utility property 569 -- -- -- 569
---------- -------- ------- ------- ----------
Total property, plant and equipment, at original cost $1,843,603 $131,615(c) $28,752(b) $ 4,515(d) $1,950,981
---------- -------- ------- ------- ----------
---------- -------- ------- ------- ----------
Fiscal Year Ended September 30, 1992
------------------------------------
Public utility facilities:
Gas plant in service -
Production plant $ 121,847 $ 333 $ 84 $ (43) $ 122,053
Storage plant 175,136 1,852 337 -- 176,651
Transmission plant 82,770 8,197 70 1,844 92,741
Distribution plant 1,254,399 93,556 16,437 (1,830) 1,329,688
General plant 80,470 9,677 4,192 18 85,973
Gas plant leased to others 6,509 -- -- -- 6,509
Construction work in progress 16,862 4,743 -- -- 21,605
Gas stored underground - non-current 7,814 -- -- -- 7,814
---------- -------- ------- ------- ----------
Total public utility facilities 1,745,807 118,358 21,120 (11) 1,843,034
Non-utility property 1,044 -- 475 -- 569
---------- -------- ------- ------- ----------
Total property, plant and equipment, at original cost $1,746,851 $118,358(e) $21,595(b) $ (11)(d) $1,843,603
---------- -------- ------- ------- ----------
---------- -------- ------- ------- ----------
( ) Denotes red figure.
Notes: (a) Includes construction expenditures of $87,218 less amortization of capital lease of $61.
(b) Represents: 1994 1993 1992
------- ------- -------
Retirements charged to accumulated provision for depreciation (Schedule VI) $18,759 $28,752 $21,577
Cost of land retired at Deerfield -- -- 18
------- ------- -------
$18,759 $28,752 $21,595
------- ------- -------
------- ------- -------
(c) Includes construction expenditures of $131,669 less amortization of capital lease of $54.
(d) Represents the following: 1993 1992
-------- --------
Implementation of Statement of Financial Accounting Standards Number 109 $ 4,515 $ --
Amortization of Capital Lease for Oct. - Dec., 1991 -- (11)
-------- --------
$ 4,515 $ (11)
-------- --------
-------- --------
(e) Includes construction expenditures of $118,084 plus net capital lease of $274.
-53-
SCHEDULE VI
PEOPLES ENERGY CORPORATION AND SUBSIDIARY COMPANIES
ACCUMULATED PROVISION FOR DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
(Thousands)
Column A Column B Column C Column D Column E Column F
- ------------------------- ------------ ----------------------- -------------------------------------- -------- ----------
Additions charged to
costs and expenses(a) Deduct Retirements
---------------------- --------------------------------------
Balance Retirement Stores and Balance
at beginning Depreciation Clearing of property Cost of misc. Other at end of
Description of period expense accounts at cost dismantling (salvage) Charges period
- ------------------------- ------------ ------------ -------- ----------- ----------- ---------- ------- ---------
Fiscal Year Ended September 30, 1994
------------------------------------
Public utility facilities:
Gas plant in service -
Production plant $102,362 $ 2,930 $ -- $ 4 $ 11 $ -- $ -- $105,277
Storage plant 77,509 6,104 -- 727 93 (3) 3 82,799
Transmission plant 27,509 2,079 -- 10 44 -- (686) 28,848
Distribution plant 382,713 47,970 -- 12,682 6,429 (46) 959 412,577
General plant 36,057 5,601 3,901 5,336 3 (333) 572 41,125
-------- ------- ------ ------- ------ ------- ------ --------
Total gas plant in service 626,150 64,684 3,901 18,759 6,580 (382) 848 670,626
Gas plant leased to others 6,372 6 -- -- -- -- -- 6,378
-------- ------- ------ ------- ------ ------- ------ --------
Total public utility facilities 632,522 64,690 3,901 18,759 6,580 (382) 848 677,004
Non-utility property 443 -- -- -- -- -- -- 443
-------- ------- ------ ------- ------ ------- ------ --------
Total accumulated provision
for depreciation $632,965 $64,690 $3,901 $18,759 $6,580 $ (382) $ 848(b) $677,447
-------- ------- ------ ------- ------ ------- ------ --------
-------- ------- ------ ------- ------ ------- ------ --------
Fiscal Year Ended September 30, 1993
------------------------------------
Public utility facilities:
Gas plant in service -
Production plant $ 97,418 $ 2,892 $ -- $ 199 $ 5 $ -- $2,256 $102,362
Storage plant 73,344 5,709 -- 1,704 176 -- 336 77,509
Transmission plant 25,640 1,700 -- 12 3 -- 184 27,509
Distribution plant 364,033 46,164 -- 21,154 6,762 (30) 402 382,713
General plant 32,715 4,342 4,148 5,683 36 (587) (16) 36,057
-------- ------- ------ ------- ------ ------- ------ --------
Total gas plant in service 593,150 60,807 4,148 28,752 6,982 (617) 3,162 626,150
Gas plant leased to others 6,372 -- -- -- -- -- -- 6,372
-------- ------- ------ ------- ------ ------- ------ --------
Total public utility facilities 599,522 60,807 4,148 28,752 6,982 (617) 3,162 632,522
Non-utility property 443 -- -- -- -- -- -- 443
-------- ------- ------ ------- ------ ------- ------ --------
Total accumulated provision
for depreciation $599,965 $60,807 $4,148 $28,752 $6,982 $ (617) $3,162(b) $632,965
-------- ------- ------ ------- ------ ------- ------ --------
-------- ------- ------ ------- ------ ------- ------ --------
Fiscal Year Ended September 30, 1992
------------------------------------
Public utility facilities:
Gas plant in service -
Production plant $ 94,655 $ 2,834 $ -- $ 84 $ 1 $ (16) $ (2) $ 97,418
Storage plant 68,388 5,297 -- 337 4 -- -- 73,344
Transmission plant 24,083 1,562 -- 70 20 -- 85 25,640
Distribution plant 343,095 44,213 -- 16,437 6,945 (43) 64 364,033
General plant 28,303 3,441 4,124 4,192 4 (1,079) (36) 32,715
-------- ------- ------ ------- ------ ------- ------ --------
Total gas plant in service 558,524 57,347 4,124 21,120 6,974 (1,138) 111 593,150
Gas plant leased to others 6,372 -- -- -- -- -- -- 6,372
-------- ------- ------ ------- ------ ------- ------ --------
Total public utility facilities 564,896 57,347 4,124 21,120 6,974 (1,138) 111 599,522
Non-utility property 730 -- -- 457 -- -- 170 443
-------- ------- ------ ------- ------ ------- ------ --------
Total accumulated provision
for depreciation $565,626 $57,347 $4,124 $21,577 $6,974 $(1,138) $ 281(b) $599,965
-------- ------- ------ ------- ------ ------- ------ --------
-------- ------- ------ ------- ------ ------- ------ --------
( ) Denotes red figure.
Notes: (a) See Note 1E of the Notes to Consolidated Financial Statements with respect to the basis for the provision for
depreciation.
(b) Represents the following: 1994 1993 1992
------ ------ ------
Accumulated provision for depreciation applicable to property acquired $ 581 $ -- $ --
Capitalized depreciation transferred 161 154 147
Adjustment for sale of non-utility property -- -- 134
Implementation of Statement of Financial Accounting Standards Number 109 -- 3,039 --
Contractor and Insurance Settlements 100 -- --
Sundry Items - Net 6 (31) --
------ ------ ------
$ 848 $3,162 $ 281
------ ------ ------
------ ------ ------
-54-
SCHEDULE VIII
PEOPLES ENERGY CORPORATION AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
(Thousands)
Column A Column B Column C Column D Column E
- -------------------------------------------------- ------------- --------- -------------------- ----------
Additions Deductions
--------- --------------------
Charged Charges for the
Balance to costs purpose for which the Balance
at beginning and reserves or deferred at end of
Description of period expenses credits were created period
- -------------------------------------------------- ------------- --------- -------------------- ----------
Fiscal Year Ended September 30, 1994
------------------------------------
RESERVES (deducted from assets in balance sheet):
Uncollectible items $19,789 $32,016 $27,516 $24,289
Fiscal Year Ended September 30, 1993
------------------------------------
RESERVES (deducted from assets in balance sheet):
Uncollectible items $16,755 $22,490 $19,456 $19,789
Fiscal Year Ended September 30, 1992
------------------------------------
RESERVES (deducted from assets in balance sheet):
Uncollectible items $17,426 $19,703 $20,374 $16,755
-55-
SCHEDULE IX
PEOPLES ENERGY CORPORATION AND SUBSIDIARY COMPANIES
SHORT-TERM BORROWINGS
Column A Column B Column C Column D Column E(a) Column F(b)
- --------------------- ------------- ---------------- ----------------- ----------------- -----------------
Weighted Average Maximum Amount Average Amount Weighted Average
Category of Aggregate Balance at Interest Rate Outstanding Outstanding Interest Rate
Short-Term Borrowings End of period End of Period During the Period During the Period During the Period
- --------------------- ------------- ---------------- ----------------- ----------------- -----------------
(Thousands) (Thousands)
Fiscal Year Ended September 30, 1994
------------------------------------
Bank Loans $ 900 7.75% $ 900 $ 573 6.66%
Commercial Paper -- -- 123,800 31,739 3.13
Fiscal Year Ended September 30, 1993
------------------------------------
Bank Loans $ -- --% $ 900 $ 417 6.21%
Commercial Paper 68,600 3.21 87,000 25,718 3.26
Fiscal Year Ended September 30, 1992
------------------------------------
Bank Loans $ 900 6.00% $ 900 $ 838 6.74%
Commercial Paper 28,000 3.24 28,000 4,638 4.30
(a) Computed by multiplying the amounts outstanding by the days
outstanding and dividing the results by the number of days used.
(b) Computed by dividing the applicable interest expense by the
average amount outstanding during the period.
-56-
SCHEDULE X
PEOPLES ENERGY CORPORATION AND SUBSIDIARY COMPANIES
SUPPLEMENTARY INCOME STATEMENT INFORMATION
Maintenance, depreciation, royalties, and advertising costs, other than
those specifically disclosed in the Consolidated Statements of Income, are not
significant.
Significant taxes charged to costs and expenses, other than payroll and
income taxes, are summarized as follows:
Fiscal Years Ended September 30, 1994 1993 1992
- ------------------------------------------------------------------------
(Thousands)
Illinois public utility $ 47,481 $ 48,297 $ 44,868
Municipal public utility 84,130 82,305 72,430
Other 12,315 12,451 12,400
- ------------------------------------------------------------------------
Total $143,926 $143,053 $129,698
- ------------------------------------------------------------------------
-57-
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.
PEOPLES ENERGY CORPORATION
Date: December 22, 1994 By: /s/ RICHARD E. TERRY
-------------------------------
Richard E. Terry
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on December 22, 1994.
/s/ RICHARD E. TERRY Chairman of the Board and Chief
- ------------------------------- Executive Officer and Director
Richard E. Terry (Principal Executive Officer)
/s/ KENNETH S. BALASKOVITS Vice President and Controller
- ------------------------------ (Principal Financial and
Kenneth S. Balaskovits Accounting Officer)
/s/ J. BRUCE HASCH Director
- ------------------------------
J. Bruce Hasch
/s/ MICHAEL S. REEVES Director
- ------------------------------
Michael S. Reeves
/s/ PASTORA SAN JUAN CAFFERTY Director
- ------------------------------
Pastora San Juan Cafferty
/s/ FRANKLIN A. COLE Director
- ------------------------------
Franklin A. Cole
/s/ FREDERICK C. LANGENBERG Director
- ------------------------------
Frederick C. Langenberg
/s/ H. J. LIVINGSTON, JR. Director
- ------------------------------
H. J. Livingston, Jr.
/s/ WILLIAM G. MITCHELL Director
- ------------------------------
William G. Mitchell
/s/ EARL L. NEAL Director
- ------------------------------
Earl L. Neal
/s/ RICHARD P. TOFT Director
- ------------------------------
Richard P. Toft
/s/ ARTHUR R. VELASQUEZ Director
- ------------------------------
Arthur R. Velasquez
-58-
PEOPLES ENERGY CORPORATION AND SUBSIDIARY COMPANIES
EXHIBIT INDEX
(a) The exhibits listed below are filed herewith and made a part thereof:
Exhibit
Number Description of Document
------- ----------------------------------------------
3(a) Amendment to the By-Laws of the Registrant,
dated February 24, 1994.
3(b) By-Laws of the Registrant, as amended on
February 24, 1994.
3(c) Amendment to the By-Laws of the Registrant,
dated December 7, 1994.
3(d) By-Laws of the Registrant, as amended on
December 7, 1994.
10(a) Short-Term Incentive Compensation Plan of the
Registrant, as amended on December 7, 1994.
10(b) Executive Deferred Compensation Plan of the
Registrant, effective October 1, 1994.
10(c) Supplemental Retirement Benefit Plan, Part A,
Part B and Part C, of the Registrant, effective
December 7, 1994.
10(d) Firm Transportation Service Agreement Under Rate
Schedule FT between Peoples Gas and Trunkline
Gas Company, dated as of December 1, 1993.
10(e) Firm Transportation Service Agreement Under Rate
Schedule FTS between North Shore Gas and
Natural Gas Pipeline Company of America,
dated as of February 1, 1994.
23 Arthur Andersen LLP consent to incorporation
by reference in Registration Statement
Nos. 2-82760, 2-88307, 33-6369, and 33-6370.
27 Financial Data Schedule
99 Form 11-K for the Employee Stock Purchase Plan
of the Registrant for the fiscal year ended
September 30, 1994.
-59-
PEOPLES ENERGY CORPORATION AND SUBSIDIARY COMPANIES
EXHIBIT INDEX (Continued)
(b) Exhibits listed below have been filed heretofore with the Securities and
Exchange Commission pursuant to the Securities Act of 1933, as amended,
and/or the Securities Exchange Act of 1934, as amended, and are
incorporated herein by reference. The file number and exhibit number of
each such exhibit are stated in the description of such exhibits.
Exhibit
Number Description of Document
------- ------------------------------------------------------------
3(e) Articles of Incorporation of the Registrant, as amended on
February 1, 1980 (Registrant Form 10-K for fiscal year ended
September 30, 1980, Exhibit 3(a)).
4(a) The Peoples Gas Light and Coke Company First and Refunding
Mortgage, dated January 2, 1926, from Chicago By-Product
Coke Company to Illinois Merchants Trust Company, Trustee,
assumed by The Peoples Gas Light and Coke Company (Peoples)
by Indenture dated March 1, 1928 (Peoples - May 17, 1935,
Exhibit B-6a, Exhibit B-6b A-2 File No. 2-2151, 1936);
Supplemental Indenture dated as of May 20, 1936, (Peoples -
Form 8-K for the year 1936, Exhibit B-6f); Supplemental
Indenture dated as of March 10, 1950 (Peoples - Form 8-K for
the month of March 1950, Exhibit B-6i); Supplemental
Indenture dated as of June 1, 1951 (Peoples - File No. 2-
8989, Post-Effective, Exhibit 7-4(b)); Supplemental
Indenture dated as of July 15, 1966 (Peoples - Form 8-K for
the month of July 1966, Exhibit 2); Supplemental Indenture
dated as of August 15, 1967 (Peoples - File No. 2-26983,
Post-Effective, Exhibit 2-4); Supplemental Indenture dated
as of September 15, 1970 (Peoples - File No. 2-38168, Post-
Effective Exhibit 2-2); Supplemental Indenture dated as of
April 1, 1972 (Peoples - File No. 2-43367, Post-Effective
Exhibit 2-2); Supplemental Indenture dated as of July 15,
1973 (Peoples - File No. 2-48430, Exhibit 4-2); Supplemental
Indenture dated as of June 1, 1984, and Supplemental
Indenture dated as of October 1, 1984 (Peoples - Form 10-K
for fiscal year ended September 30, 1984, Exhibits 4-1, 4-2
and 4-3, respectively); Supplemental Indentures dated March
1, 1985, (Peoples - Form 10-K for fiscal year ended
September 30, 1985, Exhibits 4-1, 4-2, 4-3, 4-4,
respectively); Supplemental Indenture dated May 1, 1990
(Peoples - Form 10-K for the fiscal year ended September 30,
1990, Exhibit 4); Supplemental Indenture dated as of
April 1, 1993 (Peoples - Form 8 dated as of May 5, 1993,
Exhibit 1); Supplemental Indenture dated as of December 1,
1993 (Peoples - Form 10-Q for the quarterly period ended
December 31, 1993, Exhibits 4(a) and 4(b)).
4(b) North Shore Gas Company (North Shore) Indenture, dated as of
April 1, 1955, from North Shore 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 (North Shore - File No. 2-
35965, Exhibit 4-2); Sixth Supplemental Indenture dated as
of October 1, 1973 (North Shore) - Form 10-K for the fiscal
year ended September 30, 1980, Exhibit 4-3); Seventh
Supplemental
-60-
PEOPLES ENERGY CORPORATION AND SUBSIDIARY COMPANIES
EXHIBIT INDEX (Continued)
Exhibit
Number Description of Document
------ ------------------------------------------------------------
4(b) Indenture dated as of February 15, 1977 (North Shore - Form
cont. 10-K for the fiscal year ended September 30, 1980, Exhibit
4-4; Eighth Supplemental Indenture dated as of September 15,
1980 (North Shore - Form 10-K for the fiscal year ended
September 30, 1980, Exhibit 4-5); Ninth Supplemental
Indenture dated as of December 1, 1987 (North Shore - Form
10-K for the fiscal year ended September 30, 1987, Exhibit
4); Tenth Supplemental Indenture dated as of
November 1, 1990 (North Shore - Form S-3 Registration
Statement No. 33-37332, Exhibit 4b); and Eleventh
Supplemental Indenture dated as of October 1, 1992 (North
Shore - Form 10-K for the fiscal year ended September 30,
1992, Exhibit 4): Twelfth Supplemental Indenture dated as of
April 1, 1993 (North Shore - Form 8-K dated April 23, 1993,
Exhibit 4).
10(f) Storage Service Agreement Under Rate Schedule S-1 between
Peoples Gas and Natural Gas Pipeline Company of America,
dated as of November 30, 1990 (Registrant Form 10-K for
fiscal year ended September 30, 1993, Exhibit 10(a)); Firm
Transportation Service Agreement Under Rate Schedule FTS
between Peoples Gas and Natural Gas Pipeline Company of
America, dated as of August 13, 1990 (Registrant Form 10-K
for fiscal year ended September 30, 1993, Exhibit 10(b));
Firm Transportation Service Agreement Under Rate Schedule
FTS between Peoples Gas and Natural Gas Pipeline Company of
America, dated as of October 8, 1990 (Registrant Form 10-K
for fiscal year ended September 30, 1993, Exhibit 10(c));
Firm Transportation Service Agreement Under Rate Schedule
FTS between Peoples Gas and Natural Gas Pipeline Company of
America, dated as of October 8, 1990 (Registrant Form 10-K
for fiscal year ended September 30, 1993, Exhibit 10(d));
Firm Transportation Service Agreement Under Rate Schedule
FTS between Peoples Gas and Natural Gas Pipeline Company of
America, dated as of January 1, 1992 (Registrant Form 10-K
for fiscal year ended September 30, 1993, Exhibit 10(e));
Firm Transportation Service Agreement Under Rate Schedule
FTS between Peoples Gas and Natural Gas Pipeline Company of
America, dated as of January 1, 1992 (Registrant Form 10-K
for fiscal year ended September 30, 1993, Exhibit 10(f));
Firm Transportation Service Agreement Under Rate Schedule
FTS between Peoples Gas and Natural Gas Pipeline Company of
America, dated as of January 1, 1992 (Registrant Form 10-K
for fiscal year ended September 30, 1993, Exhibit 10(g));
Firm Transportation Service Agreement Under Rate Schedule
FTS between Peoples Gas and Natural Gas Pipeline Company of
America, dated as of February 1, 1992 (Registrant Form 10-K
for fiscal year ended September 30, 1993, Exhibit 10(h));
Storage Service Agreement Under Rate Schedule S-1 between
North Shore Gas and Natural Gas Pipeline Company of America,
dated as of November 30, 1990 (Registrant Form 10-K for
fiscal year ended September 30, 1993, Exhibit 10(i)).
-61-
PEOPLES ENERGY CORPORATION AND SUBSIDIARY COMPANIES
EXHIBIT INDEX (Continued)
Exhibit
Number Description of Document
10(g) Lease dated October 20, 1993, between Prudential Plaza
Associates, as Landlord, and Peoples Gas, as Tenant
(Registrant Form 10-Q for the quarterly period ended
December 31, 1993, Exhibit 10(a)).
10(h) Firm Transportation Service Agreement Under Rate Schedule
FTS between Peoples Gas and Natural Gas Pipeline Company of
America, dated as of December 1, 1993 (Registrant Form 10-Q
for the quarterly period ended December 31, 1993, Exhibit
10(b)); Firm Transportation Service Agreement Under Rate
Schedule S-2 between Peoples Gas and Natural Gas Pipeline
Company of America, dated as of December 1, 1993 (Registrant
Form 10-Q for the quarterly period ended December 31, 1993,
Exhibit 10(c)); Firm Transportation Service Agreement Under
Rate Schedule S-2 between North Shore Gas and Natural Gas
Pipeline Company of America, dated as of December 1, 1993
(Registrant Form 10-Q for the quarterly period ended
December 31, 1993, Exhibit 10(d)); Firm Transportation
Service Agreement Under Rate Schedule FTS between North
Shore Gas and Natural Gas Pipeline Company of America, dated
as of December 1, 1993 (Registrant Form 10-Q for the
quarterly period ended December 31, 1993, Exhibit 10(e)).
10(i) Construction Guaranty Agreement dated December 16, 1992, by
the Company and Trigen Energy Corporation (Registrant Form
10-Q for the quarterly period ended December 31, 1993,
Exhibit 10(f)); Service Guaranty Agreement dated
December 16, 1992, by the Company and Trigen Energy
Corporation (Registrant Form 10-Q for the quarterly period
ended December 31, 1993, Exhibit 10(g)).
21 Subsidiaries of the Registrant (Registrant Form 10-K for the
fiscal year ended September 30, 1982, Exhibit 22).
-62-