FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Exact Name of Registrant as
Specified in Charter, State of
Incorporation, Address of
Commission Principal Executive IRS Employer
File Number Office and Telephone Number Identification
Number
1-5540 PEOPLES ENERGY CORPORATION 36-2642766
(an Illinois Corporation)
130 East Randolph Drive, 24th
Floor
Chicago, Illinois 60601-6207
Telephone (312) 240-4000
2-26983 THE PEOPLES GAS LIGHT AND COKE 36-1613900
COMPANY
(an Illinois Corporation)
130 East Randolph Drive, 24th
Floor
Chicago, Illinois 60601-6207
Telephone (312) 240-4000
2-35965 NORTH SHORE GAS COMPANY 36-1558720
(an Illinois Corporation)
130 East Randolph Drive, 24th
Floor
Chicago, Illinois 60601-6207
Telephone (312) 240-4000
Indicate by check mark whether the registrants (1) have filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for shorter
period that the registrant was required to file such reports), and
(2) have been subject to such filing requirements for the past 90
days. Yes [x] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date (July 31,
1999):
Peoples Energy Corporation Common Stock, No par value, 35,489,242
shares outstanding
The Peoples Gas Light and Common Stock, No par value, 24,817,566
Coke Company shares outstanding (all of which are
owned beneficially and of record by
Peoples Energy Corporation)
North Shore Gas Company Common Stock, No par value, 3,625,887
shares outstanding (all of which are
owned beneficially and of record by
Peoples Energy Corporation)
This combined Form 10-Q is separately filed by Peoples Energy
Corporation, The Peoples Gas Light and Coke Company, and North Shore
Gas Company. Information contained herein relating to any individual
company is filed by such company on its own behalf. Each company
makes no representation as to information relating to the other
companies.
PART I. FINANCIAL INFORMATION
Item Financial Statements
Peoples Energy Corporation
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended 12 Months Ended
June 30, June 30, June 30,
1999 1998 1999 1998 1999 1998
(Thousands, except per-share amounts)
OPERATING REVENUES $218,729 $198,294 $1,022,503 $1,005,833 $1,149,399 $1,122,606
OPERATING EXPENSES:
Cost of energy sold 98,716 78,783 493,737 481,309 534,082 515,598
Operation and maintenance 61,949 59,525 190,942 182,869 253,401 247,998
Depreciation, depletion and amortization 20,235 19,411 61,113 57,058 81,250 75,640
Taxes, other than income taxes 24,651 22,621 111,798 113,398 128,498 129,144
Total Operating Expenses 205,551 180,340 857,590 834,634 997,231 968,380
OPERATING INCOME 13,178 17,954 164,913 171,199 152,168 154,226
OTHER INCOME
AND (DEDUCTIONS) 3,075 1,205 17,724 3,072 19,937 4,165
INTEREST EXPENSE 9,074 9,493 29,587 29,659 39,119 39,181
EARNINGS BEFORE
INCOME TAXES 7,179 9,666 153,050 144,612 132,986 119,210
INCOME TAXES 187 1,660 56,606 53,946 47,784 42,624
NET INCOME $ 6,992 $ 8,006 $ 96,444 $ 90,666 $ 85,202 $ 76,586
Average Shares of Common
Stock Outstanding 35,485 35,293 35,473 35,216 35,449 35,176
Basic Earnings Per Share
of Common Stock $ 0.20 $ 0.23 $ 2.72 $ 2.57 $ 2.40 $ 2.18
Diluted Earnings Per Share
of Common Stock $ 0.20 $ 0.23 $ 2.72 $ 2.57 $ 2.40 $ 2.18
Dividends Declared Per Share $ 0.49 $ 0.48 $ 1.46 $ 1.43 $ 1.94 $ 1.90
The Notes to Consolidated Financial Statements are an integral part of these statements.
Peoples Energy Corporation
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
1999 September 30, 1998
(Unaudited) 1998 (Unaudited)
(Thousands of Dollars)
PROPERTIES AND OTHER ASSETS
CAPITAL INVESTMENTS:
Property, plant and equipment, at original cost $ 2,314,057 $2,209,957 $ 2,166,314
Less - Accumulated depreciation, depletion and amortization 810,620 763,296 751,727
Net property, plant and equipment 1,503,437 1,446,661 1,414,587
Other investments 110,324 45,150 18,326
Total Capital Investments - Net 1,613,761 1,491,811 1,432,913
CURRENT ASSETS:
Cash and cash equivalents 29,402 10,622 53,605
Temporary cash investments 38,016 4,393 40,500
Receivables -
Customers, net of allowance for uncollectible accounts
of $22,498, $23,395, and $24,453, respectively 69,370 54,091 83,506
Other 37,049 27,662 30,449
Accrued unbilled revenues 33,460 23,477 24,908
Materials and supplies 17,160 18,245 19,612
Gas in storage 37,483 90,790 62,770
Gas costs recoverable through rate adjustments 8,810 4,462 3,158
Regulatory assets of subsidiaries 5,531 7,859 6,678
Prepayments 86,749 71,114 65,710
Total Current Assets 363,030 312,715 390,896
OTHER ASSETS:
Non-current regulatory assets of subsidiaries 57,345 76,564 44,190
Deferred charges 23,659 23,410 28,019
Total Other Assets 81,004 99,974 72,209
Total Properties and Other Assets $ 2,057,795 $1,904,500 $ 1,896,018
The Notes to Consolidated Financial Statements are an integral part of these statements.
Peoples Energy Corporation
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
1999 September 30, 1998
(Unaudited) 1998 (Unaudited)
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common Stockholders' Equity:
Common stock, without par value -
Authorized 60,000,000 shares
Outstanding 35,489,242, 35,401,992, and
35,320,844 shares, respectively $ 296,681 $ 293,691 $ 290,792
Retained earnings 493,681 449,059 477,290
Accumulated other comprehensive income (See Note 6) (1,389) (1,389) (2,357)
Total Common Stockholders' Equity 788,973 741,361 765,725
Long-term debt of subsidiaries, exclusive of sinking
fund payments and maturities due within one year 521,734 516,604 527,004
Total Capitalization 1,310,707 1,257,965 1,292,729
CURRENT LIABILITIES:
Interim loans 75,540 8,900 814
Accounts payable 144,656 123,381 134,208
Dividends payable on common stock 17,390 16,977 16,942
Customer gas service and credit deposits 35,297 48,942 27,645
Sinking fund payments and maturities due within one year
Long-term debt of subsidiaries - 10,400 -
Accrued taxes 59,906 24,985 49,515
Gas sales revenue refundable through rate adjustments 2,949 11,028 6,377
Accrued interest 7,481 10,821 7,422
Temporary LIFO liquidation credit 13,870 - 4,546
Total Current Liabilities 357,089 255,434 247,469
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes - primarily accelerated depreciation 285,195 270,730 266,543
Investment tax credits being amortized over
the average lives of related property 31,293 32,387 32,778
Other 73,511 87,984 56,499
Total Deferred Credits and Other Liabilities 389,999 391,101 355,820
Total Capitalization and Liabilities $2,057,795 $1,904,500 $1,896,018
The Notes to Consolidated Financial Statements are an integral part of these statements.
Peoples Energy Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
June 30,
1999 1998
(Thousands of Dollars)
Operating Activities:
Net Income $ 96,444 $ 90,666
Adjustments to reconcile net income to net cash:
Depreciation, depletion, and amortization 61,113 57,058
Deferred income taxes and investment tax credits - net 10,985 14,079
Change in deferred credits and other liabilities (12,086) 10,323
Change in deferred charges 14,760 (18,315)
Change in current assets and liabilities:
Receivables - net (24,666) (2,483)
Accrued unbilled revenues (9,983) (2,166)
Materials and supplies 1,085 (226)
Gas in storage 53,307 15,073
Gas costs recoverable (4,348) 2,006
Regulatory assets 2,328 8,781
Prepayments (15,635) (22,808)
Accounts payable 21,275 (662)
Customer gas service and credit deposits (13,645) (17,741)
Accrued taxes 34,921 28,870
Gas sales revenue refundable (8,079) (8,517)
Accrued interest (3,340) (3,378)
Temporary LIFO liquidation credit 13,870 4,546
Net Cash Provided by Operating Activities 218,306 155,106
Investing Activities:
Capital expenditures (113,579) (65,172)
Capital investments (65,368) (2,055)
Special deposits 94 -
Other temporary cash investments (33,624) (24,600)
Net Cash Used in Investing Activities (212,477) (91,827)
Financing Activities:
Issuance of long-term debt 30,035 -
Interim loans - net 66,640 (1,996)
Retirement of long-term debt of subsidiaries (35,305) -
Dividends paid on common stock (51,410) (49,921)
Proceeds from issuance of common stock 2,991 8,945
Net Cash Provided by (Used in) Financing Activities 12,951 (42,972)
Net Increase in Cash and Cash Equivalents 18,780 20,307
Cash and Cash Equivalents at Beginning of Period 10,622 33,298
Cash and Cash Equivalents at End of Period $ 29,402 $ 53,605
The Notes to Consolidated Financial Statements are an integral part of these statements.
The Peoples Gas Light and Coke Company
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended 12 Months Ended
June 30, June 30, June 30,
1999 1998 1999 1998 1999 1998
(Thousands of Dollars)
OPERATING REVENUES $147,241 $157,364 $744,247 $812,732 $839,035 $909,081
OPERATING EXPENSES:
Gas costs 44,166 53,633 293,626 355,849 316,215 379,696
Operation and maintenance 50,405 49,987 158,299 155,279 209,395 211,215
Depreciation and amortization 17,375 17,042 51,582 50,543 68,790 67,055
Taxes, other than income taxes 22,132 20,296 100,374 102,515 115,160 116,815
Total Operating Expenses 134,078 140,958 603,881 664,186 709,560 774,781
OPERATING INCOME 13,163 16,406 140,366 148,546 129,475 134,300
OTHER INCOME
AND (DEDUCTIONS) 3,381 531 17,639 1,249 19,086 2,418
INTEREST EXPENSE 8,108 8,209 25,534 25,531 33,789 33,819
EARNINGS BEFORE
INCOME TAXES 8,436 8,728 132,471 124,264 114,772 102,899
INCOME TAXES 983 1,369 48,890 46,081 40,997 36,450
NET INCOME APPLICABLE
TO COMMON STOCK $ 7,453 $ 7,359 $ 83,581 $ 78,183 $ 73,775 $ 66,449
The Notes to Consolidated Financial Statements are an integral part of these statements.
The Peoples Gas Light and Coke Company
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
1999 September 30, 1998
(Unaudited) 1998 (Unaudited)
(Thousands of Dollars)
PROPERTIES AND OTHER ASSETS
CAPITAL INVESTMENTS:
Property, plant and equipment, at original cost $1,960,628 $1,888,025 $1,855,982
Less - Accumulated depreciation and amortization 692,440 654,262 645,337
Net property, plant and equipment 1,268,188 1,233,763 1,210,645
Other investments 8,782 9,745 5,229
Total Capital Investments - Net 1,276,970 1,243,508 1,215,874
CURRENT ASSETS:
Cash and cash equivalents 19,387 3,134 19,003
Temporary cash investments 25,390 500 25,100
Receivables -
Customers, net of allowance for uncollectible accounts
of $21,460, $22,613, and $23,584, respectively 65,041 50,280 77,090
Other 16,079 34,051 37,549
Accrued unbilled revenues 17,834 17,363 19,021
Materials and supplies, at average cost 11,665 12,332 13,388
Gas in storage, at last-in, first-out cost 29,770 75,767 53,188
Gas costs recoverable through rate adjustments 8,806 3,847 3,054
Regulatory assets 5,030 6,651 5,887
Prepayments 86,111 70,406 63,449
Total Current Assets 285,113 274,331 316,729
OTHER ASSETS:
Non-current regulatory assets 38,265 52,670 29,338
Deferred charges 17,687 18,933 21,540
Total Other Assets 55,952 71,603 50,878
Total Properties and Other Assets $1,618,035 $1,589,442 $1,583,481
The Notes to Consolidated Financial Statements are an integral part of these statements.
The Peoples Gas Light and Coke Company
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
1999 September 30, 1998
(Unaudited) 1998 (Unaudited)
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common Stockholder's Equity:
Common stock, without par value -
Authorized 40,000,000 shares
Outstanding 24,817,566 shares $ 165,307 $ 165,307 $ 165,307
Retained earnings 456,518 418,601 442,304
Accumulated other comprehensive income (See Note 6) (1,389) (1,389) (2,357)
Total Common Stockholder's Equity 620,436 582,519 605,254
Long-term debt, exclusive of sinking fund
payments and maturities due within one year 452,000 452,000 462,400
Total Capitalization 1,072,436 1,034,519 1,067,654
CURRENT LIABILITIES:
Interim loans 700 8,900 700
Accounts payable 86,895 100,522 109,235
Dividends payable on common stock 15,387 13,898 15,635
Customer gas service and credit deposits 31,367 43,237 24,487
Sinking fund payments and maturities, due within one year
Long-term debt - 10,400 -
Accrued taxes 56,690 25,708 42,347
Gas sales revenue refundable through rate adjustments 2,561 9,864 5,888
Accrued interest 6,370 8,788 6,523
Temporary LIFO liquidation credit 10,543 - 2,624
Total Current Liabilities 210,513 221,317 207,439
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes - primarily accelerated depreciation 263,905 247,959 245,173
Investment tax credits being amortized over
the average lives of related property 27,965 28,951 29,307
Other 43,216 56,696 33,908
Total Deferred Credits and Other Liabilities 335,086 333,606 308,388
Total Capitalization and Liabilities $1,618,035 $1,589,442 $1,583,481
The Notes to Consolidated Financial Statements are an integral part of these statements.
The Peoples Gas Light and Coke Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
June 30,
1999 1998
(Thousands of Dollars)
Operating Activities:
Net Income $83,581 $78,183
Adjustments to reconcile net income to net cash:
Depreciation and amortization 51,582 50,543
Deferred income taxes and investment tax credits - net 13,335 13,570
Change in other deferred credits and other liabilities (11,855) 2,833
Change in other assets 11,440 (6,911)
Change in current assets and liabilities:
Receivables - net 3,211 (7,150)
Accrued unbilled revenues (471) 1,088
Materials and supplies 667 (163)
Gas in storage 45,997 14,348
Gas costs recoverable (4,959) 274
Regulatory assets 1,621 7,252
Prepayments (15,705) (23,647)
Accounts payable (13,627) (4,267)
Customer gas service and credit deposits (11,870) (15,266)
Accrued taxes 30,982 23,291
Gas sales revenue refundable (7,303) (8,596)
Accrued interest (2,418) (2,240)
Temporary LIFO liquidation credit 10,543 2,624
Net Cash Provided by Operating Activities 184,751 125,766
Investing Activities:
Capital expenditures - construction (67,908) (51,858)
Other assets (13,888) 223
Other capital investments 963 241
Other temporary cash investments (24,890) (9,600)
Net Cash Used in Investing Activities (105,723) (60,994)
Financing Activities:
Interim loans - net (8,200) -
Dividends paid on common stock (44,175) (64,278)
Retirement of long-term debt (10,400) -
Net Cash Used in Financing Activities (62,775) (64,278)
Net Increase in Cash and Cash Equivalents 16,253 494
Cash and Cash Equivalents at Beginning of Period 3,134 18,509
Cash and Cash Equivalents at End of Period $19,387 $19,003
The Notes to Consolidated Financial Statements are an integral part of these
statements.
North Shore Gas Company
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended 12 Months Ended
June 30, June 30, June 30,
1999 1998 1999 1998 1999 1998
(Thousands of Dollars)
OPERATING REVENUES $21,847 $24,321 $119,661 $130,135 $133,731 $144,733
OPERATING EXPENSES:
Gas costs 8,157 10,490 57,935 68,782 62,197 73,698
Operation and maintenance 6,350 6,257 19,462 18,570 25,721 27,198
Depreciation 2,118 2,038 6,318 6,055 8,315 8,073
Taxes, other than income taxes 2,299 2,222 10,771 10,674 12,493 12,049
Total Operating Expenses 18,924 21,007 94,486 104,081 108,726 121,018
OPERATING INCOME 2,923 3,314 25,175 26,054 25,005 23,715
OTHER INCOME
AND (DEDUCTIONS) 250 181 449 258 606 387
INTEREST EXPENSE 1,200 1,207 3,842 3,976 5,056 5,173
EARNINGS BEFORE
INCOME TAXES 1,973 2,288 21,782 22,336 20,555 18,929
INCOME TAXES 509 829 8,213 8,629 7,708 7,197
NET INCOME APPLICABLE
TO COMMON STOCK $ 1,464 $ 1,459 $ 13,569 $ 13,707 $ 12,847 $ 11,732
The Notes to Consolidated Financial Statements are an integral part of these statements.
North Shore Gas Company
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
1999 September 30, 1998
(Unaudited) 1998 (Unaudited)
(Thousands of Dollars)
PROPERTIES AND OTHER ASSETS
CAPITAL INVESTMENTS:
Property, plant and equipment, at original cost $314,184 $304,487 $301,776
Less - Accumulated depreciation 113,623 107,590 105,866
Net property, plant and equipment 200,561 196,897 195,910
Other investments 22 22 21
Total Capital Investments - Net 200,583 196,919 195,931
CURRENT ASSETS:
Cash and cash equivalents 3,157 4,666 13,216
Temporary cash investments 12,225 - -
Receivables -
Customers, net of allowance for uncollectible accounts
of $778, $705, and $792, respectively 4,329 3,811 5,872
Other 2,808 828 826
Accrued unbilled revenues 2,580 2,629 2,634
Materials and supplies, at average cost 2,403 2,729 3,040
Gas in storage, at last-in, first-out cost 5,567 9,917 8,155
Gas costs recoverable through rate adjustments 4 614 103
Regulatory assets 500 1,208 791
Prepayments 322 317 356
Total Current Assets 33,895 26,719 34,993
OTHER ASSETS:
Non-current regulatory assets 19,080 23,895 14,852
Deferred charges 4,324 3,730 3,602
Total Other Assets 23,404 27,625 18,454
Total Properties and Other Assets $257,882 $251,263 $249,378
The Notes to Consolidated Financial Statements are an integral part of these statements.
North Shore Gas Company
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
1999 September 30, 1998
(Unaudited) 1998 (Unaudited)
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common Stockholder's Equity:
Common stock, without par value -
Authorized 5,000,000 shares
Outstanding 3,625,887 shares $ 24,757 $ 24,757 $ 24,757
Retained earnings 75,358 70,020 73,171
Total Common Stockholder's Equity 100,115 94,777 97,928
Long-term debt, exclusive of sinking fund
payments and maturities due within one year 69,734 64,604 64,604
Total Capitalization 169,849 159,381 162,532
CURRENT LIABILITIES:
Accounts payable 15,734 22,953 24,244
Dividends payable on common stock 2,574 2,429 2,502
Customer gas service and credit deposits 3,931 5,705 3,157
Accrued taxes 6,363 1,305 7,392
Gas sales revenue refundable through rate adjustments 389 1,163 489
Accrued interest 1,110 2,034 900
Temporary LIFO liquidation credit 3,328 - 1,921
Total Current Liabilities 33,429 35,589 40,605
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes - primarily accelerated depreciation 21,622 23,052 21,901
Investment tax credits being amortized over
the average lives of related property 3,327 3,437 3,472
Other 29,655 29,804 20,868
Total Deferred Credits and Other Liabilities 54,604 56,293 46,241
Total Capitalization and Liabilities $257,882 $251,263 $249,378
The Notes to Consolidated Financial Statements are an integral part of these statements.
North Shore Gas Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
June 30,
1999 1998
(Thousands of Dollars)
Operating Activities:
Net Income $13,569 $ 13,707
Adjustments to reconcile net income to net cash:
Depreciation 6,318 6,055
Deferred income taxes and investment tax credits - net (2,283) 578
Change in other deferred credits and other liabilities 594 8,781
Change in other assets 4,221 (9,481)
Change in current assets and liabilities:
Receivables - net (2,498) (31)
Accrued unbilled revenues 49 -
Materials and supplies 326 (64)
Gas in storage 4,350 1,848
Gas costs recoverable 610 1,733
Regulatory assets 707 1,529
Prepayments (5) (110)
Accounts payable (7,219) 5,360
Customer gas service and credit deposits (1,774) (2,477)
Accrued taxes 5,058 5,440
Gas sales revenue refundable (774) 78
Accrued interest (924) (1,137)
Temporary LIFO liquidation credit 3,328 1,921
Net Cash Provided by Operating Activities 23,653 33,730
Investing Activities:
Capital expenditures - construction (9,457) (7,690)
Other assets (524) 400
Other temporary cash investments (12,225) -
Net Cash Used in Investing Activities (22,206) (7,290)
Financing Activities:
Interim loans - net - (2,110)
Issuance of long-term debt 30,035 -
Dividends paid on common stock (8,086) (11,458)
Retirement of long-term debt (24,905) -
Net Cash Used in Financing Activities (2,956) (13,568)
Net Increase/(Decrease) in Cash and Cash Equivalents (1,509) 12,872
Cash and Cash Equivalents at Beginning of Period 4,666 344
Cash and Cash Equivalents at End of Period $ 3,157 $ 13,216
The Notes to Consolidated Financial Statements are an integral part of these
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
This Quarterly Report on Form 10-Q is a combined report of
Peoples Energy Corporation (Peoples Energy), The Peoples Gas
Light and Coke Company (Peoples Gas) and North Shore Gas Company
(North Shore Gas). The accompanying consolidated financial
statements and Notes to the Consolidated Financial Statements
include the accounts of Peoples Energy and its wholly owned
subsidiaries, Peoples Gas, North Shore Gas, Peoples District
Energy Corporation, Peoples Energy Services Corporation, Peoples
Energy Resources Corp., Peoples Energy Ventures Corporation, and
Peoples NGV Corp., and comprise the assets, liabilities,
revenues, expenses, and underlying common stockholders' equity of
these companies. Income is principally derived from Peoples
Energy's utility subsidiaries, Peoples Gas and North Shore Gas.
Significant intercompany balances and transactions have been
eliminated. Investments and partnerships for which Peoples
Energy's subsidiaries have at least a 20% interest but less than
a majority ownership are accounted for under the equity method.
The statements have been prepared by Peoples Energy in conformity
with the rules and regulations of the Securities and Exchange
Commission (SEC) and reflect all adjustments that are, in the
opinion of management, necessary to present fairly the results
for the interim periods herein and to prevent the information
from being misleading.
Certain footnote disclosures and other information, normally
included in financial statements prepared in accordance with
generally accepted accounting principles, have been condensed or
omitted from these interim financial statements, pursuant to SEC
rules and regulations. Therefore, the statements should be read
in conjunction with the consolidated financial statements and
related notes contained in Peoples Energy's, Peoples Gas' and
North Shore Gas' Annual Reports on Form 10-K for the fiscal year
ended September 30, 1998. Certain items previously reported for
the prior periods have been reclassified to conform with the
presentation in the current period.
The business of Peoples Energy's utility subsidiaries is
influenced by seasonal weather conditions because a large element
of the utilities' customer load consists of gas used for space
heating. Weather-related deliveries can, therefore, have a
significant positive or negative impact on net income.
Accordingly, the results of operations for the interim periods
presented are not indicative of the results to be expected for
all or any part of the balance of the current fiscal year.
2. SIGNIFICANT ACCOUNTING POLICIES
2A.Regulated Operations
Peoples Gas' and North Shore Gas' utility operations are
subject to regulation by the Illinois Commerce Commission
(Commission). Regulated operations are accounted for in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 71, "Accounting for the Effects of Certain Types of
Regulation." This standard controls the application of generally
accepted accounting principles for companies whose rates are
determined by an independent regulator such as the Commission.
Regulatory assets represent certain costs that are expected to be
recovered from customers through the ratemaking process. When
incurred, such costs are deferred as assets in the balance sheet
and subsequently recorded as expenses when those same amounts are
reflected in rates.
2B.Statement of Cash Flows
For purposes of the balance sheet and the statement of cash
flows, Peoples Energy, Peoples Gas, and North Shore Gas consider
all short-term liquid investments with maturities of three months
or less to be cash equivalents.
Income taxes and interest paid were as follows:
For the nine months Peoples Energy Peoples Gas North Shore
ended June 30, 1999 1998 1999 1998 1999 1998
(in thousands)
Income taxes paid $18,987 $14,409 $13,950 $11,935 $4,559 $2,101
Interest paid 31,091 31,024 24,969 25,961 4,650 5,024
2C.Recovery of Gas Costs
Under the tariffs of Peoples Gas and North Shore Gas, the
difference for any month between costs recoverable through the
Gas Charge and revenues billed to customers under the Gas Charge
is refunded to or recovered from customers. Consistent with
these tariff provisions, such difference for any month is
recorded either as a current liability or as a current asset
(with a contra entry to Gas Costs).
For each gas utility, the Commission conducts annual
proceedings regarding the reconciliation of revenues from the Gas
Charge and related costs incurred for gas. In such proceedings,
costs recovered by a utility through the Gas Charge are subject
to challenge. Such proceedings regarding Peoples Gas and North
Shore Gas for fiscal years 1997 and 1998 are currently pending
before the Commission.
2D. Oil and Gas Exploration and Production Properties
For oil and gas activities, Peoples Energy follows the full-
cost method of accounting as prescribed by the SEC. Under the
full-cost method, all costs directly associated with acquisition,
exploration and development activities are capitalized, with the
principal limitation that such amounts not exceed the present
value of estimated future net revenues to be derived from the
production of proved oil and gas reserves (the full-cost
ceiling). If net capitalized costs exceed the full-cost ceiling
at the end of any quarter, a permanent impairment of the assets
is required to be charged to earnings in that quarter. Such a
charge would have no effect on Peoples Energy's cash flow. For
the periods presented, there was no such charge to income.
2E. Accounting Standards
On October 1, 1998, Peoples Energy and its subsidiaries
adopted SFAS No. 130, "Reporting Comprehensive Income." This
Statement establishes the standards for reporting and display of
comprehensive income and its components in a full set of
financial statements. The statement requires that all items that
are required to be recognized as components of comprehensive
income be reported in a financial statement with equal prominence
as the other financial statements. (See Note 6.)
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement establishes accounting and reporting
standards for derivative financial instruments, including certain
derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the consolidated
balance sheet and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative depends
on the intended use of the derivative and resulting designation.
Changes in the fair value of derivatives will be recognized in
the current period earnings, unless specific hedge accounting
criteria are met. If an entity qualifies for hedge accounting,
the derivative's gains and losses will offset the related results
of the hedged item in the current period's income statement.
SFAS No. 133 requires that formal documentation be maintained and
that the effectiveness of the hedge be assessed quarterly. The
statement must be adopted no later than Peoples Energy's fiscal
year 2001. Peoples Energy does not expect the adoption of this
standard to have a material effect on its financial condition or
results of operations.
2F. Hedging Activities
Peoples Energy has a formal risk management policy that
establishes monitoring and control procedures for the execution,
recording and reporting of derivative financial instruments. The
intent of the policy is to utilize risk management trading solely
to minimize risk, and not for any speculative purpose. Peoples
Energy may use interest rate swaps, forward rate transactions,
commodity futures contracts, options and swaps to hedge the
impact of interest rate, price and/or volume fluctuations related
to its business activities, including price risk related to the
geographic location of the commodity (basis risk).
Peoples Energy is accounting for all current derivative
transactions through hedge accounting. These derivatives are
designated as fair value hedges. Realized gains or losses from
derivative instruments (through maturity or termination of the
hedge) are deferred until the underlying hedged item is sold or
matures. If Peoples Energy determines that any portion of the
underlying hedged item will not be purchased or sold, the
unmatched portion of the instrument is marked to market and any
gain or loss is recognized in the Consolidated Statement of
Income. Recognized gains or losses are recorded on the
Consolidated Statement of Income with the underlying hedged item.
As of June 30, 1999, Peoples Energy had open derivative financial
instruments representing hedges of natural gas equivalent
production of 4.5 Bcf. At June 30, 1999, Peoples Energy had no
deferred gain or loss on the Consolidated Balance Sheet.
3. ENVIRONMENTAL MATTERS
3A. Former Manufactured Gas Plant Operations
Peoples Gas and North Shore Gas, their predecessors, and
certain former affiliates operated facilities in the past at
multiple sites for the purpose of manufacturing gas and storing
manufactured gas (Manufactured Gas Sites). In connection with
manufacturing and storing gas, various by-products and waste
materials were produced, some of which might have been disposed
of rather than sold. Under certain laws and regulations relating
to the protection of the environment, Peoples Gas and North Shore
Gas might be required to undertake remedial action with respect
to some of these materials. Three of the Manufactured Gas Sites
are discussed in more detail below. Peoples Gas and North Shore
Gas, under the supervision of the Illinois Environmental
Protection Agency (IEPA), are conducting investigations of an
additional 31 Manufactured Gas Sites. These investigations may
require the utility subsidiaries to perform additional
investigation and remediation. The investigations are in a
preliminary stage and are expected to occur over an extended
period of time.
In 1990, North Shore Gas entered into an Administrative Order
on Consent (AOC) with the United States Environmental Protection
Agency (EPA) and the IEPA to implement and conduct a remedial
investigation/feasibility study (RI/FS) of a Manufactured Gas
Site located in Waukegan, Illinois, where manufactured gas and
coking operations were formerly conducted (Waukegan Site). The
RI/FS is comprised of an investigation to determine the nature
and extent of contamination at the Waukegan Site and a
feasibility study to develop and evaluate possible remedial
actions. North Shore Gas entered into
the AOC after being notified by the EPA that North Shore Gas,
General Motors Corporation (GMC), and Outboard Marine Corporation
were each a potentially responsible party (PRP) under the
Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended (CERCLA) with respect to the Waukegan
Site. A PRP is potentially liable for the cost of any
investigative and/or remedial work that the EPA determines is
necessary. Other parties identified as PRPs did not enter into
the AOC.
Under the terms of the AOC, 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.
Peoples Gas has observed what appear to be gas purification
wastes on a Manufactured Gas Site in Chicago, formerly called the
110th Street Station, and adjacent property (110th Street Station
Site). Peoples Gas has fenced the 110th Street Station Site and
is conducting a study under the supervision of the IEPA to
determine the feasibility of a limited removal action.
The current owner of a site in Chicago, formerly called Pitney
Court Station, filed suit against Peoples Gas in federal district
court under CERCLA. The suit seeks recovery of the past and
future costs of investigating and remediating the site. Peoples
Gas is contesting this suit.
The utility subsidiaries are accruing and deferring the costs
they incur in connection with all of the Manufactured Gas Sites,
including related legal expenses, pending recovery through rates
or from insurance carriers or other entities. At June 30, 1999,
the total of the costs deferred for Peoples Gas was $22.5
million; for North Shore Gas the total was $17.8 million; and for
Peoples Energy on a consolidated basis the total deferred was
$40.3 million. This amount includes management's best estimate
of the costs of investigating and remediating the Manufactured
Gas Sites. The estimate is based upon a comprehensive review by
management and its outside consultants of potential costs
associated with conducting investigative and remedial actions at
the Manufactured Gas Sites as well as the likelihood of whether
such actions will be necessary. While 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, among other
things, that the insurers are liable under policies in effect
between 1937 and 1986 for costs incurred or to be incurred by the
utilities in connection with five of their 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. In November 1998, the utilities reached a
settlement agreement with one of the insurance carriers. The
costs deferred at June 30, 1999 have been reduced by the proceeds
of the settlement. At this time, management cannot determine the
timing and extent of the subsidiaries' recovery of costs from the
other insurance carriers. Accordingly, the costs deferred at
June 30, 1999 have not been reduced to reflect recoveries from
other insurance carriers.
Management believes that the costs incurred by Peoples Gas and
by North Shore Gas for environmental activities relating to
former manufactured gas operations are recoverable 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 former manufactured gas
operations will not have a material adverse effect on the
financial position or results of operations of the utilities.
Peoples Gas and North Shore Gas are recovering the costs of
environmental activities relating to the utilities' former
manufactured gas operations, including carrying charges on the
unrecovered balances, under rate mechanisms approved by the
Commission.
3B. Former Mineral Processing Site in Denver, Colorado
In 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. Shattuck is a wholly owned
subsidiary of Salomon, Inc. (Salomon). The demand alleges that
North Shore Gas is a successor to the liability of a former
entity that was allegedly responsible during the period 1934-1941
for the disposal of mineral processing wastes containing radium
and other hazardous substances at the site. The cost of the
remedy at the site has been estimated by Shattuck to be
approximately $31 million. Salomon has provided financial
assurance for the performance of the remediation at the site.
North Shore Gas filed a declaratory judgment action against
Salomon in the District Court for the Northern District of
Illinois. The suit asked the court to declare that North Shore
Gas is not liable for response costs at the Denver site. Salomon
filed a counterclaim for costs incurred by Salomon and Shattuck
with respect to the site. In 1997, the District Court granted
North Shore Gas' motion for summary judgment, declaring that
North Shore Gas is not liable for any response costs in
connection with the Denver site.
On August 5, 1998, the U.S. Court of Appeals, Seventh Circuit,
reversed the District Court's decision and remanded the case for
determination of what liability, if any, the former entity has
and therefore North Shore Gas has for activities at the site.
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.
3C. Gasoline Release in Wheeling, Illinois
In June 1995, North Shore Gas received a letter from the IEPA
informing North Shore Gas that it was not in compliance with
certain provisions of the Illinois Environmental Protection Act
which prohibit water pollution within the State of Illinois. On
November 14, 1995, the Illinois Attorney General filed a
complaint in the Circuit Court of Cook County naming North Shore
Gas and four other parties as defendants. The complaint alleges
that the violations are the result of a gasoline release that
occurred in Wheeling, Illinois, in June 1992, when a contractor
who was installing a pipeline for North Shore Gas accidentally
struck a gasoline pipeline owned by West Shore Pipeline Company.
North Shore Gas is contesting this suit. North Shore Gas
believes that a substantial portion of any costs incurred by it
in connection with this matter are recoverable from its insurance
carrier. Accordingly, management does not believe the outcome of
this matter will have a material adverse effect on financial
position or results of operations of Peoples Energy or North
Shore Gas.
4. LONG-TERM DEBT
4A. Issuance of Bonds
On December 18, 1998, the Illinois Development Finance
Authority issued $30,035,000 aggregate principal amount of 5.00%
Gas Supply Revenue Bonds, Series 1998, which are secured by an
equal amount of North Shore Gas' 30-year first mortgage bonds,
Series M. The net proceeds were deposited with a trustee to be
used for the redemption of long-term debt, the payment of
issuance costs and for the payment of certain construction
expenditures.
4B. Interest Rate Adjustments
The rate of interest on the $27 million principal amount of
the City of Chicago 1993 Series B Bonds, which are secured by an
equal principal amount of Peoples Gas' Adjustable-Rate First and
Refunding Mortgage Bonds, Series EE, is subject to adjustment
annually on December 1. Owners of the Series B Bonds have the
right to tender such bonds at par during a limited period prior
to that date. Peoples Gas is obligated to purchase any such
bonds tendered if they cannot be remarketed. All Series B Bonds
that were tendered prior to December 1, 1998 have been
remarketed. The interest rate on the Series B Bonds will be
3.20 percent for the period December 1, 1998 through
November 30, 1999.
Peoples Gas classifies these adjustable-rate bonds as long-
term liabilities, since it would refinance them on a long-term
basis if they could not be remarketed. In order to ensure its
ability to do so, Peoples Gas has established a line of credit
with The Northern Trust Company which expires on January 31,
2001.
4C. Bonds Redeemed
On October 1, 1998, Peoples Gas redeemed, from general
corporate funds, $10.4 million aggregate principal amount of the
City of Joliet 1984 Series C Bonds, which were secured by Peoples
Gas' Adjustable-Rate First and Refunding Mortgage Bonds, Series
W. On January 19, 1999, North Shore Gas redeemed, from a portion
of the bond issuance proceeds deposited with the trustee,
$24,905,000 aggregate principal amount of the Illinois
Development Finance Authority Gas Supply Revenue Bonds, Series
1992, which were secured by North Shore Gas' First Mortgage
Bonds, Series K.
5. EARNINGS PER SHARE
Shares used to compute diluted earnings per share for Peoples
Energy are as follows:
Average Common Stock Shares (in thousands)
Three Months Nine Months 12 Months
Ended Ended Ended
June 30, 1999 1998 1999 1998 1999 1998
As reported shares 35,485 35,293 35,473 35,216 35,449 35,176
Effects of options 13 21 12 23 13 24
Diluted shares 35,498 35,314 35,485 35,239 35,462 35,200
Options for which the average stock price is lower than the
grant price are considered antidilutive and, therefore, are not
included in the calculation of diluted earnings per share.
6. COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," was adopted in
fiscal 1999. This statement requires the reporting of
comprehensive income in addition to net income. Comprehensive
income is the total of net income and all other nonowner changes
in equity (other comprehensive income). Comprehensive income
includes net income plus the effect of the additional pension
liability not yet recognized as net periodic pension cost.
Peoples Energy and Peoples Gas have reported accumulated other
comprehensive income in their respective Consolidated Balance
Sheets.
Comprehensive income for Peoples Energy for the three, nine,
and 12 months ended June 30, 1999 and 1998 is as follows:
Three Months Ended Nine Months Ended 12 Months Ended
June 30, June 30, June 30,
(Thousands of dollars) 1999 1998 1999 1998 1999 1998
Net income $ 6,992 $ 8,006 $ 96,444 $ 90,666 $ 85,202 $ 76,586
Other comprehensive income
Minimum pension liability - - - - 1,604 (2,645)
Income tax (expense)/benefit - - - - (636) 1,049
Other comprehensive income, net of tax - - - - 968 (1,596)
Comprehensive income $ 6,992 $ 8,006 $ 96,444 $ 90,666 $ 86,170 $ 74,990
Comprehensive income for Peoples Gas for the three, nine, and
12 months ended June 30, 1999 and 1998 is as follows:
Three Months Ended Nine Months Ended 12 Months Ended
June 30, June 30, June 30,
(Thousands of dollars) 1999 1998 1999 1998 1999 1998
Net income $7,453 $7,359 $83,581 $78,183 $73,775 $66,449
Other comprehensive income
Minimum pension liability - - - - 1,604 (2,645)
Income tax (expense)/benefit - - - - (636) 1,049
Other comprehensive income, net of tax - - - - 968 (1,596)
Comprehensive income $7,453 $7,359 $83,581 $78,183 $74,743 $64,853
7. ELIMINATION OF DECOMMISSIONING RESERVE
In January 1999, Peoples Gas eliminated a $13.0 million
decommissioning reserve associated with the 1995 retirement of
its synthetic natural gas plant. This elimination resulted in
the recognition of $13.0 million in other income. Management
determined that it does not expect the plant's decommissioning
costs to exceed amounts incurred to date.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
RESULTS OF OPERATIONS
PEOPLES ENERGY
Net Income
Net income decreased $1.0 million, to $7.0 million, for the
three-month period ended June 30, 1999. The current quarter
results reflected lower pension credits than in the year ago
period, costs associated with the recent startup of the Elwood
power facility and increased retail marketing expenses. These
impacts were partially offset by weather that was slightly colder
than last year's third quarter, increased earnings from oil and
gas investments and reduced utility operating costs.
Net income increased $5.8 million, to $96.4 million, and $8.6
million, to $85.2 million, for the nine- and 12-month periods
ended June 30, 1999, respectively, as a result of the elimination
of the decommissioning reserve associated with the 1995
retirement of Peoples Gas' synthetic natural gas plant and an
increase in diversified energy earnings. Partially offsetting
these favorable impacts were decreased pension credits and lower
gas deliveries.
A summary of variations affecting income between periods is
presented below, with explanations of significant differences
following:
Three Months Ended Nine Months Ended 12 Months Ended
June 30, 1999 June 30, 1999 June 30, 1999
Over the Prior Period Over the Prior Period Over the Prior Period
(Thousands of dollars) Amount % Amount % Amount %
Operating revenues $ 20,435 10.3 $ 16,670 1.7 $ 26,793 2.4
Cost of energy sold 19,933 25.3 12,428 2.6 18,484 3.6
Operation and maintenance expenses 2,424 4.1 8,073 4.4 5,403 2.2
Depreciation, depletion and
amortization expense 824 4.2 4,055 7.1 5,610 7.4
Taxes, other than income taxes 2,030 9.0 (1,600) (1.4) (646) (0.5)
Other income and deductions 1,870 155.2 14,652 477.0 15,772 378.7
Interest expense (419) (4.4) (72) (0.2) (62) (0.2)
Income taxes (1,473) (88.7) 2,660 5.1 5,160 12.1
Net income (1,014) (12.7) 5,778 6.4 8,616 11.3
Operating Revenues
Gross revenues are affected by changes in the unit cost of the
gas purchases of Peoples Gas and North Shore Gas and do not
include the cost of gas supplies for customers who purchase gas
directly from producers and marketers rather than from the
utilities. 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 2C of the Notes to Consolidated Financial Statements.)
The utilities' tariffs also provide for dollar-for-dollar
recovery of the cost of revenue taxes and certain other charges
imposed by the State of Illinois and various municipalities.
Operating revenues increased $20.4 million, to $218.7 million,
for the current three-month period due to weather that was more
than five percent colder than in the prior period, as well as an
increase in revenues from Peoples Energy's diversified energy
businesses. This increase in gross revenues was partially offset
by the lower unit cost of gas and lower deliveries at the
utilities.
Operating revenues increased $16.7 million, to $1.0 billion,
and $26.8 million, to $1.1 billion, for the current nine- and 12-
month periods, respectively, due mainly to increased revenues
from Peoples Energy's diversified energy businesses. Partially
offsetting these effects on revenues were lower unit costs of gas
at the utilities.
Cost of Energy Sold
Cost of energy sold increased $19.9 million to $98.7 million,
$12.4 million, to $493.7 million, and $18.5 million, to $534.1
million, for the current three-, nine-, and 12-month periods,
respectively, due to increased operating activity in the
diversified energy businesses. Partially offsetting the effects
of the diversified businesses were the lower unit costs of gas
and lower unit deliveries at the utilities.
Operation and Maintenance Expenses
Operation and maintenance expenses increased $2.4 million, to
$61.9 million, for the current three-month period due primarily
to increases in expenses at the diversified companies and to a
decrease in pension credits. Partially offsetting these effects
were a decline in costs related to outside professional services,
a reduction in labor costs at the utilities, and a decrease in
the cost of group insurance expense.
Operation and maintenance expenses increased $8.1 million, to
$190.9 million, for the current nine-month period due mainly to
decreases in pension credits, higher labor costs at the
diversified companies, and an increase in environmental costs
recovered through utility rates. These effects were partially
offset by declines in both the cost of group insurance and the
provision for uncollectible accounts.
Operation and maintenance expenses increased $5.4 million, to
$253.4 million, for the current 12-month period due to increases
in costs at the diversified companies, decreases in pension
credits, increases in environmental costs recovered through
utility rates, and higher costs of outside professional services.
Partially offsetting these effects were decreases in the cost of
group insurance, the provision for uncollectible accounts and
labor costs at the utilities.
Depreciation, Depletion and Amortization Expense
Depreciation, depletion and amortization expense increased
$824,000, to $20.2 million, $4.1 million, to $61.1 million, and
$5.6 million, to $81.3 million, for the current three-, nine-,
and 12-month ended periods, due mainly to utility depreciable
property additions and depletion expense attributable to new oil
and gas working interests of Peoples Energy Production, a
subsidiary of Peoples Energy Ventures.
Taxes, Other Than Income Taxes
Taxes, other than income taxes increased $2.0 million, to
$24.7 million, for the current three-month period as a result of
a prior period tax accrual adjustment, partially offset by the
effects on revenue and associated revenue taxes of lower unit
costs of gas.
Taxes, other than income taxes decreased $1.6 million, to
$111.8 million, and $646,000, to $128.5 million, for the current
nine- and 12-month periods due to a decrease in revenue taxes
related to lower unit costs of gas. Somewhat offsetting this
decrease in taxes was the increase in other taxes due to the
Supplemental Low Income Energy Assistance Charge and Renewable
Energy Resource and Coal Technology Assessment Charge and a prior
period tax accrual adjustment.
Other Income and Deductions
Other income and deductions increased $1.9 million, to $3.1
million, for the current three-month period primarily due to an
increase in interest income as a result of a state income tax
refund.
Other income and deductions increased $14.7 million, to $17.7
million, and $15.8 million, to $19.9 million, for the current
nine- and 12-month periods, respectively, due to the elimination
of a decommissioning reserve associated with the 1995 retirement
of Peoples Gas' synthetic natural gas plant, as well as the
interest on a state income tax refund.
Interest Expense
Interest expense decreased $419,000, $72,000, and $62,000 for
the current three-, nine-, and 12-months ended due to an increase
in capitalized interest expense.
Income Taxes
Income taxes decreased $1.5 million, to $187,000, for the
current three-month period due mainly to lower pre-tax income and
a state income tax refund. Income taxes increased $2.7 million,
to $56.6 million, and $5.2 million, to $47.8 million, for the
current nine- and 12-month periods due primarily to higher pre-
tax income.
PEOPLES GAS
Net Income
Net income increased $94,000, to $7.5 million, for the three-
month period ended June 30, 1999, as a result of weather that was
over five percent colder than the prior period. Partially
offsetting this effect was a decrease in pension credits.
Net income increased $5.4 million, to $83.6 million, and $7.3
million, to $73.8 million for the nine- and 12-month periods
ended June 30, 1999, as a result of the elimination of the
decommissioning reserve associated with the 1995 retirement of
Peoples Gas' synthetic natural gas plant. Partially offsetting
this favorable impact were decreased net profits on gas
deliveries and a reduction in pension credits.
Operating Revenues
Gross revenues of Peoples Gas are affected by changes in the
unit cost of gas purchases and do not include the cost of gas
supplies for customers who purchase gas directly from producers
and marketers rather than from Peoples Gas. The direct customer
purchases have no effect on net income because Peoples Gas
provides transportation service for such gas volumes and recovers
margins similar to those applicable to conventional gas sales.
Changes in the unit cost of gas do not significantly affect net
income because Peoples Gas' tariff provides for dollar-for-dollar
recovery of gas costs. (See Note 2C of the Notes to Consolidated
Financial Statements.) The tariff also provides for dollar-for-
dollar recovery of the cost of revenue taxes and certain other
charges imposed by the State of Illinois and the City of Chicago.
Operating revenues decreased $10.1 million, to $147.2 million,
$68.5 million, to $744.2 million, and $70.0 million, to $839.0
million for the current three-, nine-, and 12-month periods,
respectively, due primarily to the lower unit cost of gas and
lower deliveries in the current periods. Partially offsetting
the decline in the three-month period was the effect of colder
weather.
Gas Costs
Gas costs declined $9.5 million, to $44.2 million, $62.2
million, to $293.6 million, and $63.5 million, to $316.2 million,
for the three-, nine- and 12-month periods, due to lower unit
costs of gas and lower unit deliveries. This was partially
offset in the three-month period by the effects of colder
weather.
Operation and Maintenance Expenses
Operation and maintenance expenses increased $418,000, to
$50.4 million, for the current three-month period, primarily due
to a decrease in pension credits. This effect was partially
offset by a decrease in labor costs, a decline in the cost of
outside professional services, and a reduction in the cost of
group insurance.
Operation and maintenance expenses increased $3.0 million, to
$158.3 million, for the current nine-month period, due mainly to
a decrease in pension credits and an increase in environmental
costs recovered through rates. These effects were offset in part
by lower group insurance expenses and by a decline in the
provision for uncollectible accounts.
Operation and maintenance expenses decreased $1.8 million, to
$209.4 million, for the current 12-month period, due primarily to
a decline in the cost of group insurance, a reduction in labor
costs, and a decrease in the provision for uncollectible
accounts. Partially offsetting these effects was a decrease in
pension credits and an increase in environmental costs recovered
through rates.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $333,000, to
$17.4 million, $1.0 million, to $51.6 million, and $1.7 million,
to $68.8 million, for the current three-, nine-, and 12-month
periods, respectively, due mainly to depreciable property
additions.
Taxes, Other Than Income Taxes
Taxes, other than income taxes increased $1.8 million, to
$22.1 million, for the current three-month period, as a result of
a prior period tax accrual adjustment.
Taxes, other than income taxes decreased $2.1 million, to
$100.4 million, and $1.7 million, to $115.2 million, for the nine-
and 12-month periods due primarily to a decrease in revenue taxes
related to the decline in operating revenues attributable to the
lower unit cost of gas, partially offset by the effects of the
prior period accrual adjustment.
Other Income and Deductions
Other income and deductions increased $2.9 million, to $3.4
million, for the current three-month period, due to an increase
in interest income as a result of a state income tax refund.
Other income and deductions increased $16.4 million, to $17.6
million, and $16.7 million, to $19.1 million, for the current
nine- and 12-month periods, respectively, due to the elimination
of a decommissioning reserve associated with the 1995 retirement
of Peoples Gas' synthetic natural gas plant and the interest
income on a state income tax refund.
Interest Expense
Interest expense decreased $101,000 and $30,000 for the
current three- and 12-month periods, respectively, due to a
decrease in interest on long-term debt.
Income Taxes
Income taxes decreased $386,000, to $983,000, for the three-
month period, due primarily to lower pre-tax income.
Income taxes increased $2.8 million, to $48.9 million, and
$4.5 million, to $41.0 million, for the current nine- and 12-
month periods, respectively, due mainly to higher pre-tax income.
NORTH SHORE GAS
Net Income
Net income decreased $138,000, to $13.6 million, for the nine-
months ended June 30, 1999 due primarily to an increase in
operation and maintenance expenses, partially offset by the
effects of weather that was more than five percent colder than
during the prior period and by a state income tax refund.
Net income increased $1.1 million, to $12.8 million, for the
12-months ended June 30, 1999 due primarily to a decrease in
group insurance expense and other operation and maintenance
expenses and to a state income tax refund.
Operating Revenues
Gross revenues of North Shore Gas are affected by changes in
the unit cost of gas purchases and do not include the cost of gas
supplies for customers who purchase gas directly from producers
and marketers rather than from North Shore Gas. The direct
customer purchases have no effect on net income because North
Shore Gas provides transportation service for such gas volumes
and recovers margins similar to those applicable to conventional
gas sales. Changes in the unit cost of gas do not significantly
affect net income because North Shore Gas' tariff provides for
dollar-for-dollar recovery of gas costs. (See Note 2C of the
Notes to Consolidated Financial Statements.) The tariff also
provides for dollar-for-dollar recovery of the cost of revenue
taxes and certain other charges imposed by the State of Illinois
and various municipalities.
Operating revenues decreased $2.5 million, to $21.8 million,
$10.5 million, to $119.7 million, and $11.0 million, to $133.7
million, for the current three-, nine-, and 12-month periods,
respectively, due primarily to the lower unit costs of gas.
Partially offsetting the three-month period decline was the
impact of colder weather.
Gas Costs
Gas costs decreased $2.3 million, to $8.2 million, $10.8
million, to $57.9 million, and $11.5 million, to $62.2 million,
for the current three-, nine-, and 12-month periods,
respectively, primarily due to lower unit costs of gas.
Operation and Maintenance Expenses
Operation and maintenance expenses increased $93,000, to $6.4
million, for the three-month period, mainly due to a decrease in
pension credits and higher labor costs. These impacts were
partially offset by a decrease in group insurance expense.
Operation and maintenance expenses increased $892,000, to
$19.5 million, for the current nine-month period, due mainly to
increased environmental costs, a decrease in pension credits, and
higher labor costs. These effects were partially offset by a
decrease in group insurance costs.
Operation and maintenance expenses decreased $1.5 million, to
$25.7 million, for the current 12-month period, due mainly to
decreases in the cost of computer support services, group
insurance expenses and outside professional services. Partially
offsetting these effects were increases in environmental costs
and higher labor costs.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $80,000, to
$2.1 million, $263,000, to $6.3 million, and $242,000, to $8.3
million, in the current three-, nine-, and 12-month periods,
respectively, due mainly to depreciable property additions.
Taxes, Other Than Income Taxes
Taxes, other than income taxes increased $77,000, to $2.3
million, for the current three-month period, due mainly to
increases in social security taxes. Offsetting this increase was
the effect of the lower unit cost of gas.
Taxes, other than income taxes increased, $97,000, to $10.8
million, and $444,000, to $12.5 million, for the current nine-
and 12-month periods, respectively, primarily due to increases in
the Supplemental Low Income Energy Assistance Charge and the Coal
Technology Assessment Charge which became effective in January
1998. Offsetting the increases due to the new charges were the
effects of lower unit costs of gas.
Other Income and Deductions
Other income and deductions increased $69,000 to $250,000,
$191,000, to $449,000, and $219,000, to $606,000, for the current
three-, nine-, and 12-month periods, respectively, primarily due
to increased interest income as a result of a state income tax
refund.
Interest Expense
Interest expense decreased $134,000 and $117,000 for the
current nine- and 12-month periods, respectively, mainly due to a
decrease in interest expense on commercial paper.
Income Taxes
Income taxes decreased $320,000, to $509,000, and $416,000, to
$8.2 million, for the current three- and nine-month periods,
respectively, due mainly to a decrease in pre-tax income and to a
state income tax refund.
Income taxes increased $511,000, to $7.7 million, for the
current 12-month period, due mainly to an increase in pre-tax
income, partially offset by the state income tax refund.
Other Matters
Accounting Standards. In October 1998, Peoples Energy, Peoples
Gas and North Shore Gas adopted SFAS 130, "Reporting
Comprehensive Income." (See Notes 2E and 6 of the Notes to
Consolidated Financial Statements.)
Fixed Gas Charge Filing. On April 16, 1999, in their reply
briefs, Peoples Gas and North Shore Gas indicated their
willingness to accept fixed gas charges based on a historical
test period. On April 30, 1999, the Hearing Examiner issued
Proposed Orders which accepted the proposal of Peoples Gas and
North Shore Gas. On June 7, 1999 the Commission issued its
Orders for Peoples Gas and North Shore Gas. These Orders rejected
the Examiner's Proposed Orders and selected much lower levels of
fixed gas charges, which were unacceptable to Peoples Gas and
North Shore Gas. Accordingly, Peoples Gas and North Shore Gas
notified the Commission, that pursuant to the Public Utilities
Act, they were rejecting the fixed gas charges reflected in the
Commission's Orders and would each remain under the existing
purchased gas adjustment mechanism.
Diversified Energy Businesses. Peoples Energy has a financial
goal to derive 25% of its earnings from diversified energy
businesses by the end of 2002.
In furtherance of this goal, Peoples Energy Production, as of
June 30, 1999 has invested $40.1 million in a portfolio of oil
and gas properties. These properties are primarily focused on
non-operated gas reserves in the Gulf Coast and Midcontinent
regions.
Peoples Energy Resources, in partnership with Dominion Energy,
Inc., owns and operates a 600 megawatt electric generating
peaking facility (Elwood facility). The Elwood facility began
operations July 18, 1999. The entire output of the Elwood
facility has been sold to two purchasers under multi-year
contracts. Additionally, Peoples Energy Resources owns and
operates a plant that gasifies natural gas liquids to support the
sale of peaking services to area natural gas utilities and
marketers. Peoples Energy Resources' investment in diversified
energy businesses totaled $88.1 million as of June 30, 1999.
Peoples Energy Services expanded its gas marketing customer
base by buying the contract portfolios of various marketers. It
also increased the number of its customers by participating in
gas utility pilot programs and by improving its direct sales
efforts. Peoples Energy Services is soliciting various federal
government agencies to design and implement solutions to reduce
energy needs and has signed an agreement to perform such services
for the Great Lakes Naval Training Center in northeastern
Illinois. The company intends to compete in the retail electric
power market as it opens up.
Peoples Gas operates a pipeline hub that provides a full range
of storage and transportation services to the wholesale gas
marketing community. During the first nine months ended June 30,
1999, the pipeline hub has generated gross revenues of $4.6
million.
OPERATING STATISTICS
The following table represents margin components for Peoples Energy on a
consolidated basis:
Three Months Ended Nine Months Ended 12 Months Ended
June 30, June 30, June 30,
1999 1998 1999 1998 1999 1998
Revenues (thousands):
Utility Gas Sales
Residential $122,366 $134,107 $ 641,010 $ 704,426 $ 716,772 $ 782,831
Commercial 16,404 16,598 84,842 102,198 94,809 113,879
Industrial 3,269 3,268 16,215 19,820 17,343 21,117
142,039 153,973 742,067 826,444 828,924 917,827
Utility Transportation
Residential 7,303 6,771 34,131 31,029 38,935 35,202
Commercial 9,182 9,325 42,719 40,899 49,376 46,754
Industrial 5,623 5,999 21,615 22,372 26,514 27,868
Contract Pooling 1,011 1,372 8,106 7,340 10,136 7,407
Other 172 110 722 643 838 643
23,291 23,577 107,293 102,283 125,799 117,874
Other Utility Revenues 3,288 3,673 13,090 12,734 16,090 16,160
Diversified Energy Revenues 50,111 17,071 160,053 64,372 178,586 70,745
Total Operating Revenues 218,729 198,294 1,022,503 1,005,833 1,149,399 1,122,606
Less - Cost of Energy Sold 98,716 78,783 493,737 481,309 534,082 515,598
Gross Margin $120,013 $119,511 $ 528,766 $ 524,524 $ 615,317 $ 607,008
Utility Deliveries (MDth):
Gas Sales
Residential 16,696 17,404 109,424 111,682 116,949 120,114
Commercial 2,818 2,518 16,069 18,007 17,562 19,993
Industrial 713 632 3,591 3,915 3,791 4,158
20,227 20,554 129,084 133,604 138,302 144,265
Transportation (a)
Residential 4,199 4,221 23,816 22,760 25,911 24,974
Commercial 6,969 7,633 36,560 35,092 41,265 39,542
Industrial 8,402 9,536 30,678 32,232 38,482 39,623
19,570 21,390 91,054 90,084 105,658 104,139
Total Utility Deliveries 39,797 41,944 220,138 223,688 243,960 248,404
(a) Volumes associated with contract pooling revenues are included in their
respective customer classes.
The following table represents margin components for Peoples Gas:
Three Months Ended Nine Months Ended 12 Months Ended
June 30, June 30, June 30,
1999 1998 1999 1998 1999 1998
Operating Revenues (thousands):
Gas Sales
Residential $105,667 $115,636 $548,018 $603,487 $613,343 $671,350
Commercial 14,160 13,966 70,960 87,325 79,395 97,524
Industrial 2,800 2,573 12,999 16,220 14,011 17,407
122,627 132,175 631,977 707,032 706,749 786,281
Transportation
Residential 7,020 6,491 32,999 29,955 37,596 33,749
Commercial 8,102 8,231 38,018 35,819 43,926 41,036
Industrial 4,892 5,123 18,955 18,943 23,104 23,401
Contract Pooling 902 1,364 7,665 6,896 9,633 6,800
Other 172 110 722 644 838 644
21,088 21,319 98,359 92,257 115,097 105,630
Other 3,526 3,870 13,911 13,443 17,189 17,170
Total Operating Revenues 147,241 157,364 744,247 812,732 839,035 909,081
Less - Gas Costs 44,166 53,633 293,626 355,849 316,215 379,696
Gross Margin $103,075 $103,731 $450,621 $456,883 $522,820 $529,385
Deliveries (MDth):
Gas Sales
Residential 13,936 14,594 91,684 94,258 97,893 101,320
Commercial 2,415 2,078 13,207 15,248 14,466 16,992
Industrial 612 486 2,847 3,173 3,035 3,403
16,963 17,158 107,738 112,679 115,394 121,715
Transportation (a)
Residential 4,070 4,092 23,146 22,189 25,174 24,074
Commercial 5,991 6,626 31,756 30,030 35,888 34,133
Industrial 7,141 8,289 26,018 27,503 32,441 33,468
17,202 19,007 80,920 79,722 93,503 91,675
Total Deliveries 34,165 36,165 188,658 192,401 208,897 213,390
(a) Volumes associated with contract pooling revenues are included in their
respective customer classes.
The following table represents margin components for North Shore Gas:
Three Months Ended Nine Months Ended 12 Months Ended
June 30, June 30, June 30,
1999 1998 1999 1998 1999 1998
Operating Revenues (thousands):
Gas Sales
Residential $ 16,699 $ 18,471 $ 92,992 $100,939 $103,428 $111,481
Commercial 2,244 2,632 13,882 14,873 15,414 16,355
Industrial 469 695 3,216 3,600 3,332 3,710
19,412 21,798 110,090 119,412 122,174 131,546
Transportation
Residential 283 280 1,132 1,074 1,339 1,453
Commercial 1,080 1,094 4,701 5,080 5,451 5,718
Industrial 731 876 2,660 3,429 3,410 4,467
Contract Pooling 109 8 441 444 503 607
2,203 2,258 8,934 10,027 10,703 12,245
Other 232 265 637 696 854 942
Total Operating Revenues 21,847 24,321 119,661 130,135 133,731 144,733
Less - Gas Costs 8,157 10,490 57,935 68,782 62,197 73,698
Gross Margin $ 13,690 $ 13,831 $ 61,726 $ 61,353 $ 71,534 $ 71,035
Deliveries (MDth):
Gas Sales
Residential 2,760 2,810 17,740 17,424 19,056 18,794
Commercial 403 440 2,862 2,759 3,096 3,001
Industrial 101 146 744 742 756 755
3,264 3,396 21,346 20,925 22,908 22,550
Transportation (a)
Residential 129 129 670 571 737 900
Commercial 978 1,007 4,804 5,062 5,377 5,409
Industrial 1,261 1,247 4,660 4,729 6,041 6,155
2,368 2,383 10,134 10,362 12,155 12,464
Total Deliveries 5,632 5,779 31,480 31,287 35,063 35,014
(a) Volumes associated with contract pooling revenues are included in their
respective customer classes.
LIQUIDITY AND CAPITAL RESOURCES
Bonds Issued. On December 18, 1998, the Illinois
Development Finance Authority issued $30,035,000 aggregate
principal amount of 5.00% Gas Supply Revenue Bonds, Series
1998, which were collateralized by an equal amount of North
Shore Gas' 30-year First Mortgage Bonds, Series M. The net
proceeds were deposited with a trustee to be used for the
redemption of long-term debt, the payment of issuance costs,
and for the payment of certain construction expenditures.
(See Note 4A of the Notes to Consolidated Financial
Statements.)
Bonds Redeemed. On October 1, 1998, Peoples Gas redeemed,
from general corporate funds, $10.4 million aggregate
principal amount of the City of Joliet 1984 Series C Bonds,
which were secured by Peoples Gas' Adjustable-Rate First and
Refunding Mortgage Bonds, Series W. (See Note 4C of the
Notes to Consolidated Financial Statements.) On January 19,
1999, North Shore Gas redeemed, from a portion of the
proceeds deposited with the trustee, $24,905,000 aggregate
principal amount of the Illinois Development Finance
Authority Gas Supply Revenue Bonds, Series 1992, which were
secured by North Shore Gas' First Mortgage Bonds, Series K.
Environmental Matters. Peoples Energy'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 1994, North Shore Gas received a demand from a
responsible party under CERCLA for reimbursement,
indemnification and contribution for response costs incurred
at a former mineral processing site in Denver, Colorado.
North Shore Gas filed a declaratory judgment action in the
District Court for the Northern District of Illinois asking
the court to declare that North Shore Gas is not liable for
response costs relating to the site. The defendant filed a
counterclaim for costs incurred by the defendant with
respect to the site. In 1997, the District Court granted
North Shore Gas' motion for summary judgment, declaring that
North Shore Gas is not liable for any response costs in
connection with the Denver site. On August 5, 1998, the
U.S. Court of Appeals, Seventh Circuit, reversed the
District Court's decision and remanded the case for
determination of what liability, if any, the former entity
has and therefore North Shore Gas has for activities at the
site. (See Note 3B of the Notes to Consolidated Financial
Statements.)
On November 14, 1995, the Illinois Attorney General filed
a complaint in the Circuit Court of Cook County naming North
Shore Gas and four other parties as defendants. The
complaint alleges violations of certain provisions of the
Illinois Environmental Protection Act which prohibit water
pollution within the State of Illinois. The complaint
alleges that the violations are the result of a gasoline
release that occurred in Wheeling, Illinois, in June 1992
when a contractor who was installing a pipeline for North
Shore Gas accidentally struck a gasoline pipeline owned by
West Shore Pipeline Company. North Shore Gas is contesting
this suit. (See Note 3C of the Notes to Consolidated
Financial Statements.)
Credit Lines. Peoples Energy has lines of credit totaling
$170.0 million. At June 30, 1999, Peoples Energy had unused
credit available of $92.9 million. Peoples Gas and North
Shore Gas have lines of credit totaling $119.0 million of
which North Shore Gas may borrow up to $30 million. At June
30, 1999, Peoples Gas and North Shore Gas had unused credit
available from banks of $118.2 million of which $30 million
was available to North Shore Gas.
Interest Coverage. The fixed charges coverage ratios for
Peoples Gas for the 12 months ended June 30, 1999, and for
fiscal 1998 and 1997 were 4.40, 4.15, and 5.01,
respectively. The corresponding coverage ratios for North
Shore Gas for the same periods were 5.07, 5.07, and 5.74,
respectively.
Dividends. On February 3, 1999, the Directors of Peoples
Energy voted to increase the regular quarterly dividend on
Peoples Energy's common stock to 49 cents per share from the
48 cents per share previously in effect. The annualized
dividend rate now amounts to $1.96 per share.
Year 2000 Readiness. Peoples Energy, Peoples Gas and North
Shore Gas began their efforts to assess the Year 2000
readiness of their mainframe computer systems in March 1996.
Peoples Energy and North Shore Gas obtain their information
technology services from Peoples Gas. The following
discussion applies to Peoples Energy, Peoples Gas and North
Shore Gas.
Peoples Energy has developed a comprehensive Year 2000
readiness plan that incorporates all of its information
technology systems, including computer hardware and
software, and its embedded systems equipment, including
telecommunications equipment. The plan also includes a
review by Peoples Energy of the Year 2000 compliance efforts
of its key suppliers and customers and Year 2000 contingency
planning. Peoples Energy's company-wide Year 2000 effort
includes Peoples Energy's wholly owned subsidiaries, as well
as various joint ventures, and utilizes a combination of
consultants and employees of Peoples Energy's subsidiaries.
For all internal information technology systems developed
by Peoples Energy, Year 2000 compliance efforts proceed
through the following phases: inventory, assessment,
remediation (which includes replacement where appropriate),
testing, and implementation. Rather than completing each
phase for all systems prior to proceeding to the next phase,
Peoples Energy progresses through all phases on a system-by-
system basis, gradually implementing each compliant system.
When a fully-tested application has been implemented,
Peoples Energy employees follow established procedures to
maintain the compliance of the implemented application.
Peoples Energy also has retained a quality assurance expert
to ensure that any subsequent modifications to the
application do not impact its compliant status.
Of Peoples Energy's mainframe applications, 22 of 38
applications have been fully remediated, tested and
implemented, and nine have been (or are in the process of
being) eliminated. The seven remaining mainframe
applications were previously expected to be replaced by
Peoples Energy's new customer information system. Because
of a delay in the implementation schedule for the new
customer information system, the remaining applications are
now scheduled to be remediated, tested and implemented by
September 30, 1999. Additionally, all mainframe system
modules and non-mainframe applications, spreadsheets and
interfaces have been remediated and tested.
As part of its Year 2000 Project, Peoples Energy has also
contacted the vendors of its licensed or purchased hardware
and software to determine the Year 2000 compliance status of
their products. As of June 30, 1999, Peoples Energy has
received responses from 91% of the vendors and is in the
process of replacing, upgrading or eliminating non-compliant
vendor products as appropriate. Peoples Energy also has
tested its desktop computer inventory and believes that its
mission critical desktop hardware and software is Year 2000
ready in all material respects.
Peoples Energy has completed an inventory of all
equipment containing embedded systems, including
telecommunications equipment and facilities. It has also
contracted with a consultant that has significant utility
and engineering expertise to assist with the embedded
systems efforts. Peoples Energy has assessed the Year 2000
compliance status of its embedded systems, and it is
testing, repairing or replacing any critical equipment
identified as not Year 2000 ready. Peoples Energy's
timetable for implementing Year 2000 ready equipment will
depend on a variety of factors, including the availability
of compliant equipment, the relative importance of such
systems to Peoples Energy's businesses, and seasonal
maintenance schedules. Peoples Energy expects to complete
remediation, testing and implementation of all embedded
systems by the end of fiscal year 1999.
Peoples Energy currently has a written contingency plan
to address risks to Peoples Energy created by Peoples
Energy's or third parties' systems and embedded technology
that are not Year 2000 compliant. It engaged the consultant
referenced above to assist in developing detailed and
comprehensive business continuity and contingency plans to
address possible failures. Peoples Energy has substantially
completed its contingency plans for all critical processes
and such plans will be maintained and adjusted as necessary
on an ongoing basis.
Peoples Energy has contacted key suppliers to determine
their Year 2000 compliance efforts. It is in the process of
following up with certain critical suppliers for contingency
planning purposes. Peoples Energy has also contacted
certain of its major customers to determine their Year 2000
readiness.
Essential elements of Peoples Energy's business are
dependent on certain key third parties (for example,
interstate pipeline companies, natural gas suppliers, banks,
electric utilities and telecommunication companies). A
material failure by any such key third party could
significantly disrupt Peoples Energy's business. With
respect to operations over which it has direct control,
management perceives that the most significant potential
risks in the event that its Year 2000 readiness efforts are
not completed timely (which is not expected to occur) to be
an adverse effect on the ability of the utility subsidiaries
to use information systems and electronic devices to respond
appropriately to customers' requests for information and
assistance. Peoples Energy is in the process of finalizing
contingency plans to address these potential disruptions and
risks.
Peoples Energy currently estimates that it will incur
expenses of approximately $2.4 million through March 31,
2000 to complete its Year 2000 compliance efforts, in
addition to the $6.3 million already incurred through June
30, 1999. Management does not expect the cost of Peoples
Energy's Year 2000 compliance efforts to have a material
adverse impact on the financial position or results of
operations of Peoples Energy.
Market Risk Management. Peoples Energy uses market risk
sensitive financial instruments, including futures, forward
contracts, and derivatives such as swaps and options, to
manage its exposure to certain commodity price risks in its
subsidiaries' operations. These risks occur because of the
changing prices of natural gas, crude oil, ethane, and
propane. Peoples Energy's policy for risk management
activities stipulates that such financial instruments are
only to be used for hedging purposes. (See Note 2F of the
Notes to Consolidated Financial Statements.) Peoples Energy
monitors and controls derivative positions using a mark-to-
market analysis. A sensitivity analysis has been prepared
to estimate Peoples Energy's price exposure to the market
risk of its natural gas commodity financial instruments. As
of June 30, 1999, a 10% adverse movement in current prices
would have reduced future earnings before income taxes by
approximately $1.1 million.
Peoples Energy's utility subsidiaries are not currently
exposed to market risk caused by changes in commodity
prices. This is due to current Illinois rate regulation,
which allows for all reasonably incurred costs of natural
gas to be recovered from the utilities' customers through
the operation of the utilities' Gas Charges. However,
Peoples Energy entered into contracts to fix prices for less
than 1% of its utility gas supplies. Any gains or losses
from financial trades are deferred until they can be offset
by related physical purchases. As of June 30, 1999, Peoples
Energy had no open financial positions related to this
strategy.
Investments by Peoples Energy's diversified energy
subsidiaries are subject to a thorough analysis of related
market risk and an acceptable plan for each investment is
formulated to manage this risk. After a risk management
program for the investment is approved, both the operating
unit's and Peoples Energy's senior management are kept
apprised of any remaining market risk through daily mark-to-
market reports.
Peoples Energy Production has working interests in
natural gas and crude oil producing properties. Using swaps
and futures, approximately three-fourths of calendar years
1999 and 2000's production is hedged, thereby removing
market risk on that portion of the output. Price movements
in natural gas and crude oil swaps and futures are highly
correlated to any price changes in the underlying physical
commodities. Therefore, a loss in the market value of the
hedged commodity would be substantially offset by an equal
gain in value resulting from the financial transaction. As
of June 30, 1999, the exposure from non-hedged production
was immaterial to the consolidated financial statements.
Peoples Energy Services sells fixed price and capped
price products. Risk is reduced through the use of fixed
price supplier contracts and storage assets. As of June 30,
1999, exposure from these activities was not material.
The Elwood facility is a gas fired peaking facility. The
partnership has agreed to sell all of the facility's
generation capacity and energy produced at a fixed demand
and commodity charge under multi-year contracts. Therefore,
the partnership has no price risk on its power sales.
However, it does bear fuel price risk when natural gas
prices exceed the target weighted average cost of gas
(WACOG). The partnership has implemented a comprehensive
risk management program that is intended to reduce price
risk, stabilize cash flow and extract maximum value from its
peaking assets. The program includes the purchase of gas
supply at or near WACOG prices, limits to minimize the
threat of loss through market movements, daily review of
price exposure and frequent senior management review.
Peoples Energy is also exposed to credit risk when a
hedging transaction counterparty or supplier defaults on a
contract to pay for or deliver product at an agreed-upon
price. To mitigate this risk, Peoples Energy has
established procedures to determine and monitor the
creditworthiness of counterparties. Transactions are
executed only with counterparties having strong credit
ratings. Controls are also in place to limit dollar
exposure and transaction term based upon creditworthiness.
Peoples Energy does not expect any of the counterparties to
fail to meet their contractual obligations with these
controls in place.
Peoples Energy's utility subsidiaries utilize long-term
debt as a primary source of capital. Both variable and
fixed rate debt instruments are utilized. The variable
interest rate on the debt adjusts to reflect current market
conditions annually on December 1. Subject to certain
restrictions on optional redemptions, the fixed rate debt
instruments can be refinanced at lower interest rates if
Peoples Energy deems it to be economical. (See Note 4B of
the Notes to Consolidated Financial Statements.)
Forward-Looking Information. Management's Discussion and
Analysis of Results of Operations and Financial Condition
(MD&A) contains statements that may be considered forward-
looking within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, such as the statement of Peoples Energy's financial
goal regarding earnings from diversified businesses, the
effect of weather on net income, cash position and coverage
ratios, the insignificant effect on income arising from
changes in revenue from customers' gas purchases from
entities other than the utility subsidiaries, environmental
matters, and the discussion concerning year 2000 readiness
of information systems. These statements speak of
Management's plans, goals, beliefs, or expectations, refer
to estimates or use similar terms. Actual results could
differ materially, because the realization of those results
is subject to many uncertainties including:
" The future health of the U.S. and Illinois economies.
" The timing and extent of changes in energy commodity
prices and interest rates.
" Litigation concerning North Shore's liability for
CERCLA response costs relating to a former mineral
processing site in Denver, Colorado.
" Regulatory developments in the U.S., Illinois and other
states where Peoples Energy has investments.
" Changes in the nature of Peoples Energy's competition
resulting from industry consolidation, legislative change,
regulatory change and other factors, as well as action taken
by particular competitors.
" Peoples Energy's success in identifying diversified
energy investments on financially acceptable terms and
generating earnings from those investments in a reasonable
time.
" The ability of various vendors and others with whom
Peoples Energy and its subsidiaries electronically interacts
to complete year 2000 systems modification efforts on a
timely basis and in a manner that allows them to continue
normal business transactions with Peoples Energy and its
subsidiaries without disruption.
Some of these uncertainties that may affect future
results are discussed in more detail in the sections of
"Item 1 - Business" of the Peoples Energy Annual Report on
Form 10-K captioned "Competition," "Sales and Rates," "State
Legislation and Regulation," "Federal Legislation and
Regulation," "Environmental Matters," and "Current Gas
Supply." All forward-looking statements included in this
MD&A are based upon information presently available, and
Peoples Energy assumes no obligation to update any forward-
looking statements.
Item 3. Quantitative and Qualitative Disclosures about
Market Risk
Quantitative and Qualitative Disclosures About Market
risk are reported under "Management's Discussion and
Analysis of Results of Operations and Financial Condition -
Market Risk Management" and Note 2F of the Notes to
Consolidated Financial Statements.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 3 of the Notes to Consolidated Financial
Statements for a discussion pertaining to environmental
matters.
Item 6. Exhibits and Reports on Form 8-K
Peoples Energy Corporation:
a. Exhibits
Exhibit
Number Description of Document
27 Financial Data Schedule
b. Reports on Form 8-K filed during the quarter ended June 30, 1999
None
The Peoples Gas Light and Coke Company:
a. Exhibits
Exhibit
Number Description of Document
3(a) Amendment to the By-Laws of the Registrant
dated April 15, 1999
3(b) By-Laws of the Registrant, as amended,
dated April 15, 1999
27 Financial Data Schedule
b. Reports on Form 8-K filed during the quarter ended June 30, 1999
None
North Shore Gas Company:
a. Exhibits
Exhibit
Number Description of Document
27 Financial Data Schedule
b. Reports on Form 8-K filed during the quarter ended June 30, 1999
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, as amended, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized.
Peoples Energy Corporation
(Registrant)
August 13, 1999 By: /s/ J. M. LUEBBERS
(Date) J. M. Luebbers
Vice President and
Controller
(Same as above)
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, as amended, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized.
The Peoples Gas Light and
Coke Company
(Registrant)
August 13, 1999 By: /s/ J. M. LUEBBERS
(Date) J. M. Luebbers
Vice President and
Controller
(Same as above)
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, as amended, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized.
North Shore Gas Company
(Registrant)
August 13, 1999 By: /s/ J. M. LUEBBERS
(Date) J. M. Luebbers
Vice President and
Controller
(Same as above)
Principal Accounting Officer