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Peoples Gas Light & Coke Co – ‘10-K405’ for 9/30/98

As of:  Friday, 12/18/98   ·   For:  9/30/98   ·   Accession #:  77388-98-11   ·   File #:  2-26983

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  As Of                Filer                Filing    For·On·As Docs:Size

12/18/98  Peoples Gas Light & Coke Co       10-K405     9/30/98   10:180K

Annual Report — [x] Reg. S-K Item 405   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K405     Annual Report -- [x] Reg. S-K Item 405                52±   231K 
 2: EX-10.A     Material Contract                                     10±    39K 
 3: EX-10.B     Material Contract                                     10±    40K 
 4: EX-10.C     Material Contract                                      3±    14K 
 5: EX-10.D     Material Contract                                      2±    11K 
 6: EX-10.E     Material Contract                                      5±    20K 
 7: EX-10.F     Material Contract                                      6±    22K 
 8: EX-12       Statement re: Computation of Ratios                    1      6K 
 9: EX-21       Subsidiaries of the Registrant                         1      5K 
10: EX-27       Financial Data Schedule (Pre-XBRL)                     2±     9K 


10-K405   —   Annual Report — [x] Reg. S-K Item 405
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Item 1. Business
"Sales and Rates
"Current Gas Supply
"Item 2. Properties
"Item 3. Legal Proceedings
"Item 4. Submission of Matters to A Vote of Security Holders
"Item 5. Market for the Company's Common Stock and Related Stockholder Matters
"Item 6. SELECTED FINANCIAL DATA (a)
"Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition
"Net Operating Revenues
"Market Risk Management
"Item 7A. Quantitative and Qualitative Disclosures About Market Risk
"Item 8. Financial Statements and Supplementary Data
"Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
"Item 10. Directors and Executive Officers of the Company
"Item 11. Executive Compensation
"Item 12. Security Ownership of Certain Beneficial Owners and Management
"Item 13. Certain Relationships and Related Transactions
"Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K


UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 2-26983 THE PEOPLES GAS LIGHT AND COKE COMPANY (Exact name of registrant as specified in its charter) Illinois 36-1613900 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 24th Floor, 130 East Randolph Drive, Chicago, Illinois 60601-6207 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (312) 240-4000 Securities registered pursuant to Section 12(b) of the Act: None 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: None. 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, 24,817,566 shares outstanding at November 30, 1998. Documents Incorporated by Reference None CONTENTS Page Item No. No. Part I 1. Business 3 2. Properties 7 3. Legal Proceedings 8 4. Submission of Matters to a Vote of Security Holders 8 Part II 5. Market for the Company's Common Stock and Related Stockholder Matters 8 6. Selected Financial Data 9 7. Management's Discussion and Analysis of Results of Operations and Financial Condition 10 7A. Quantitative and Qualitative Disclosures About Market Risk 16 8. Financial Statements and Supplementary Data 17 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 35 Part III 10. Directors and Executive Officers of the Company 35 11. Executive Compensation 37 12. Security Ownership of Certain Beneficial Owners and Management 42 13. Certain Relationships and Related Transactions 43 Part IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 43 Signatures 45 Exhibit Index 46 The Peoples Gas Light and Coke Company ANNUAL REPORT ON FORM 10-K FISCAL YEAR ENDED SEPTEMBER 30, 1998 PART I ITEM 1. BUSINESS GENERAL The Peoples Gas Light and Coke Company (Company) is a corporation created by a special act of the General Assembly of the State of Illinois (State), approved February 12, 1855, as amended on February 7, 1865. The Company, an operating public utility, is engaged primarily in the purchase, storage, distribution, sale, and transportation of natural gas. It has approximately 833,000 residential, commercial, and industrial retail sales and transportation customers within the City of Chicago (City). The Company had 2,546 employees at September 30, 1998. At September 30, 1998, the common stock of the Company and of its utility affiliate, North Shore Gas Company (North Shore Gas), was wholly owned by Peoples Energy Corporation (Peoples Energy). COMPETITION AND DEREGULATION The Company is authorized by statute and/or certificates of public convenience and necessity to conduct operations in the territory that it serves. The Company holds a perpetual, non-exclusive franchise from the City. Absent extraordinary circumstances, potential competitors are barred from constructing competing gas distribution systems in the Company's service territory by a judicial doctrine known as the "first in the field" doctrine. In addition, the high cost of installing duplicate distribution facilities would render the construction of a competing system impractical. Competition in varying degrees exists between natural gas and other fuels or forms of energy available to consumers in the Company's service area. The capital cost of heating and cooling facilities in new high- rise buildings is higher for gas than for electricity. This circumstance, combined with relatively stagnant high-rise construction activity, has adversely affected the ability of the Company to attach commercial high-rise buildings. On December 16, 1997, the State of Illinois enacted legislation to restructure the electric market in Illinois. Under the legislation, approximately one-third of non-residential electric customers, including customers with very large loads, will be able to purchase electric power from the supplier of their choice beginning on October 1, 1999. All non- residential customers will have this choice by December 31, 2000. All residential customers will be given choice on May 1, 2002. Customers who buy their electricity from a supplier other than the local electric utility will be required to pay transition charges to the utility through the year 2006. These charges are intended to compensate the electric utilities for revenues lost because of customers buying electricity from other suppliers. The legislation also allows an electric utility to issue bonds, in aggregate amounts up to 50% of its Illinois jurisdictional capitalization, to be financed by a specific charge to its customers. An electric utility also may transfer up to 15% of its assets to an affiliated or unaffiliated entity without approval from the Illinois Commerce Commission (Commission). In return for these and other benefits, electric utilities are required to reduce their rates to residential customers. The state's two largest electric utilities, including the utility that serves northeastern Illinois, have reduced their residential rates by 15% on August 1, 1998 and must reduce their rates by another 5% on May 1, 2002. The legislation does not require electric utilities to divest their power generation assets. It is too early to determine what effects this restructuring of the electric market will have on the competitive position of the Company. In addition to restructuring the electric market, the legislation provides for additional funding for assistance to low-income energy users, including customers of the Company. The legislation creates a fund, financed by charges to electric and gas customers of public utilities and participating municipal utilities and electric co-ops, which supplements currently available federal energy assistance. On October 26, 1998, the Company made a filing with the Commission under which the price for natural gas would be set at a fixed level for at least the next five years. Under the current system, the Company makes purchases in the open, unregulated gas market and passes those costs, as incurred, onto customers through a monthly gas charge. While the Company makes no profit on the gas, the market price and the price customers pay can fluctuate significantly due to the effects of supply and demand. Under the current system, the customer bears the full risk of the market. The proposed fixed-price gas charge would protect the Company's gas customers from the market fluctuations and from increases in gas costs due to inflation and other market forces. The proposal reflects a fixed gas price of 32.76 cents per therm for customers of the Company. This fixed unit price is comparable to the average price paid by the Company's customers over the last two years. By eliminating the monthly price fluctuations, the Company could shield customers from price increases, although gas bills would still reflect customers' increased usage during colder weather. As the Company would assume and manage this risk, it would have an opportunity to earn a profit on this initiative. The Commission has eight months to review the filing during which period, the Company may update its proposal. At the conclusion of the review, the Commission may modify the proposal. However, the Company has the right to accept the outcome or reject it and continue under the current system. A substantial portion of the gas that the Company delivers to its customers consists of gas that the Company's customers purchase directly from producers and marketers rather than from the Company. These direct customer purchases have little effect on net income because the Company provides transportation service for such gas volumes and recovers margins similar to those applicable to conventional gas sales. A pipeline may seek to provide transportation service directly to end- users. Such direct service by a pipeline to an end-user would bypass the local distributor's service and reduce the distributor's earnings. However, none of the Company's pipeline suppliers has undertaken any service bypassing the Company. The Company has a bypass rate approved by the Commission which allows the Company to renegotiate rates with customers that are potential bypass candidates. (See Other Matters - Large-Volume Gas Service Agreements in Item 7.) SALES AND RATES The Company sells natural gas having an average heating value of approximately 1,000 British thermal units (Btu's) per cubic foot.* Sales are made and service rendered by the Company pursuant to a rate schedule on file with the Commission containing various service classifications largely reflecting customers' different uses and levels of consumption. The Gas Charge is determined in accordance with the provisions in Rider 2, Gas Charge, to recover the costs incurred by the Company to purchase, transport, manufacture, and store gas supplies. The level of the Gas Charge under the Company's rate schedules is adjusted monthly to reflect increases or decreases in natural gas supplier charges, purchased storage service costs, transportation charges, and liquefied petroleum gas costs. In addition, under the tariff of the Company, the difference for any month between costs recoverable through the Gas Charge and revenues billed to customers under the Gas Charge is refunded to or recovered from customers. Consistent with these tariff provisions, such difference for any month is recorded either as a current liability or a current asset (with a contra entry to Gas Costs). * All volumes of natural gas set forth in this report are stated on a 1,000 Btu (per cubic foot) billing basis. (100 cubic feet = 1 therm; 10 therms = 1 Dekatherm - Dth) The business of the Company is influenced by seasonal weather conditions because a large element of the Company's customer load consists of space heating. Weather-related deliveries can, therefore, have a significant positive or negative impact on net income. (For discussion of the effect of the seasonal nature of gas revenues on cash flow, see Liquidity in Item 7.) The basic marketing plan of the Company is to maintain its existing share in all market segments and develop opportunities emerging from changes in the utility environment and technological equipment advances for new, expanded, or current natural gas applications, including cogeneration, prime movers, natural gas-fueled vehicles, and natural gas air-conditioning. STATE LEGISLATION AND REGULATION The Company is subject to the jurisdiction of and regulation by the Commission, which has general supervisory and regulatory powers over practically all phases of the public utility business in Illinois, including rates and charges, issuance of securities, services and facilities, systems of accounts, investments, safety standards, transactions with affiliated interests, as defined in the Illinois Public Utilities Act, and other matters. FEDERAL LEGISLATION AND REGULATION By Order entered on December 6, 1968 (Holding Company Act Release No. 16233), the Securities and Exchange Commission, pursuant to Section 3(a)(1) of the Public Utility Holding Company Act of 1935 (Act), exempted Peoples Energy and its subsidiary companies as such (including the Company) from the provisions of the Act, other than Section 9(a)(2) thereof. Most of the gas distributed by the Company is transported to the Company's distribution system by interstate pipelines. In their provision of gas services (gathering, transportation and storage services, and gas supply) pipelines are regulated by the Federal Energy Regulatory Commission (FERC) under the Natural Gas Act and the Natural Gas Policy Act of 1978. (See "Sales and Rates" and "Current Gas Supply" in Item 1.) ENVIRONMENTAL MATTERS The Company is subject to federal and state environmental laws. The Company is conducting environmental investigations and work at certain sites that were the location of former manufactured gas plant operations. (See Note 2 of the Notes to Consolidated Financial Statements.) CURRENT GAS SUPPLY The Company has entered into various long-term and short-term firm gas supply contracts. When used in conjunction with contract peaking and contract storage, company-owned storage, and company-owned peak-shaving facilities, such supply is deemed sufficient to meet current and foreseeable peak and annual market requirements. Although the Company believes North American supply to be sufficient to meet U.S. market demands for the foreseeable future, it is unable to quantify or otherwise make specific representations regarding national supply availability. The following tabulation shows the expected design peak-day availability of gas in thousands of dekatherms (MDth) during the 1998- 1999 heating season for the Company: Design Peak-Day Year of Availability Contract Source (MDth) Expiration Firm direct purchases (1) 551 1999-2001 Liquefied petroleum gas 40 Peaking Service: Peoples Energy Resources 60 (2) Storage gas: Leased (3) 563 1999-2003 Peoples-Manlove (4) 993 Customer-owned gas (5) 300 Total expected design peak-day availability 2,507 (1)Consists of firm gas purchases from non-pipeline suppliers delivered utilizing firm pipeline transportation. The majority of the gas purchase contracts are negotiated annually. The terms of the transportation contracts vary, with the longest term being 11 years. (2)The contract with Peoples Energy Resources is for an initial term expiring November 30, 1999; the contract continues in effect from year to year thereafter unless canceled by either party upon 12 months' prior notice. (3)Consists of leased storage services required to meet design day requirements with contract lengths varying from one to five years. (4)Manlove Field, the Company's underground storage facility located near Champaign, Illinois, has seasonal top-gas inventory of approximately 27,000 MDth for system supply, of which approximately 1,566 MDth is dedicated to North Shore Gas. The Company 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 MDth and is capable of regasifying 300 MDth of gas per day. For the 1998-99 heating season, Manlove Field complex will have a maximum design peak-day delivery capability of approximately 1,056 MDth (including 63 MDth for the use of North Shore Gas). (5)Consists of gas supplies purchased directly from producers and marketers by the Company's commercial, industrial, and larger residential customers. The sources of gas supply (including gas transported for customers) in MDth for the Company for the three fiscal years ended September 30, 1998, 1997, and 1996, were as follows: 1998 1997 1996 Gas purchases 120,531 156,097 174,552 Liquefied petroleum gas produced 8 7 114 Customer-owned gas-received 93,758 91,476 93,141 Underground storage-net (2,939) (3,786) 228 Exchange gas-net 4,975 (39) (4,446) Company use and unaccounted-for gas (3,693) (2,071) (3,169) Total (a) 212,640 241,684 260,420 (a) See "Gas Sold and Transported" in Item 6. ITEM 2. PROPERTIES All of the principal plants and properties of the Company have been maintained in the ordinary course of business and are believed to be in satisfactory operating condition. The following is a brief description of the principal plants and operating units of the Company. The distribution system of the Company, at September 30, 1998, consisted of approximately 4,000 miles of distribution mains and necessary pressure regulators, approximately 495,000 services (pipe connecting the mains with piping on the customers' premises), and approximately 882,000 meters installed on customers' premises. The Company has liquefied petroleum gasification and storage facilities. In addition, it owns and has a substantial investment in office and service buildings, garages, repair shops, and motor vehicles, together with the equipment, tools, and fixtures necessary to conduct utility business. The Company has gas storage easements covering approximately 32,000 acres located at Manlove Field near Champaign, Illinois, overlying an aquifer-type underground natural gas storage reservoir, together with wells, pipes, compressors, dehydration, metering, and other equipment required to operate the facility. At September 30, 1998, the Company had approximately 123,000 MDth of gas stored in the reservoir, of which approximately 98,500 MDth was cushion gas. (Cushion gas is gas injected into the storage reservoir to hold back surrounding or underlying water and to provide the pressure necessary to make the wells deliver inventory gas at desired levels.) Also located at Manlove Field is an LNG plant, which has a storage capacity of 2,000 MDth and is capable of regasifying 300 MDth of gas per day. Such gas, together with the gas withdrawn from the Manlove Field reservoir, and the gas transmitted by Trunkline Gas Company, is carried to Chicago in Company-owned transmission mains totaling 254 miles. Most of the principal plants and properties of the Company, other than mains, services, meters, regulators, and cushion gas in underground storage, are located on property owned in fee. Substantially all gas mains are located in public streets and alleys. A small portion of the distribution facilities is located on private property under easement grants. Meters and house regulators in use and a portion of services are located on premises being served. 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. Such land rights, as well as the gas storage easements for the reservoir, have been obtained from the apparent record owners of the land involved, in some cases without joinder of all such owners, and all such leases, easements, and permits may be subject to mortgages or other liens to which the Company is not a party. Substantially all of the physical properties now owned or hereafter acquired by the Company are subject to (a) the first-mortgage lien of the Company's mortgage to U.S. Bank Trust, National Association, as Trustee, to secure the principal amount of the Company's outstanding first and refunding mortgage bonds and (b) in certain cases, other exceptions and defects that do not interfere with the use of the property. ITEM 3. LEGAL PROCEEDINGS See Note 2 of the Notes to Consolidated Financial Statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company is a wholly owned subsidiary of Peoples Energy. [Enlarge/Download Table] ITEM 6. SELECTED FINANCIAL DATA (a) For fiscal years ended September 30, 1998 1997 1996 1995 1994 OPERATING RESULTS (thousands) Operating Revenues: Residential $ 668,811 $ 812,229 $ 757,598 $ 648,762 $ 820,383 Commercial 95,761 127,479 122,825 101,436 139,078 Industrial 17,232 24,609 27,776 20,807 35,587 Transportation (b) 108,994 118,777 114,664 109,626 98,943 Other 16,722 16,390 13,712 18,312 17,181 Total Operating Revenues 907,520 1,099,484 1,036,575 898,943 1,111,172 Less- Gas costs 378,438 519,334 445,724 387,675 566,903 - Revenue taxes 91,724 115,430 110,421 100,562 121,773 - Other 6,850 - - - - Net Operating Revenues $ 430,508 $ 464,720 $ 480,430 $ 410,706 $ 422,496 Net Income applicable to common stock $ 68,378 $ 85,098 $ 88,752 $ 53,666 $ 63,825 Dividends declared on common stock $ 61,796 $ 72,715 $ 52,117 $ 56,833 $ 55,343 ASSETS AT YEAR-END (thousands) Property, plant and equipment $1,888,025 $1,819,567 $1,761,007 $1,815,407 $1,760,004 Less - Accumulated depreciation 654,262 614,224 571,255 628,258 596,808 Net Property, Plant and Equipment $1,233,763 $1,205,343 $1,189,752 $1,187,149 $1,163,196 Total assets $1,589,442 $1,557,627 $1,522,762 $1,561,481 $1,548,792 Capital expenditures - construction $ 90,219 $ 75,382 $ 72,194 $ 81,081 $ 74,623 CAPITALIZATION AT YEAR-END (thousands) Common equity $ 582,519 $ 574,969 $ 564,182 $ 528,308 $ 531,475 Long-term debt 452,000 462,400 462,400 549,150 549,150 Total Capitalization $1,034,519 $1,037,369 $1,026,582 $1,077,458 $1,080,625 CAPITALIZATION AT YEAR-END (percent) Common equity 56 55 55 49 49 Long-term debt 44 45 45 51 51 Total Capitalization 100 100 100 100 100 GAS SOLD AND TRANSPORTED (MDth) Gas Sales: Residential 100,467 121,259 131,339 111,509 122,648 Commercial 16,508 21,463 23,692 19,206 22,565 Industrial 3,360 4,521 5,873 4,357 6,320 Transportation (b) 92,305 94,441 99,516 93,884 90,059 Total Gas Sales and Transportation 212,640 241,684 260,420 228,956 241,592 Margin per Dth delivered $ 2.02 $ 1.92 $ 1.84 $ 1.79 $ 1.75 NUMBER OF CUSTOMERS (average) Residential 775,968 781,169 783,782 784,290 786,271 Commercial 38,389 42,750 42,888 43,198 43,299 Industrial 2,341 2,816 2,839 2,963 3,125 Transportation (b) 16,069 9,300 9,671 9,308 8,768 Total Customers 832,767 836,035 839,180 839,759 841,463 DEGREE DAYS 5,564 6,806 7,080 5,897 6,701 Percent of normal (6,536) 85 104 108 90 103 (a) The Company is a wholly owned subsidiary of Peoples Energy; therefore, per-share data are omitted. (b) Includes commercial, industrial, and larger residential customers. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Net Income In 1998, net income applicable to common stock decreased $16.7 million, to $68.4 million, due primarily to weather that was 18 percent warmer than last year. Increases in the costs associated with outside professional services and depreciation expense also contributed to the decline of net income. These effects were partially offset by decreases in the provision for uncollectible accounts and labor costs. In 1997, net income decreased $3.7 million, to $85.1 million, due principally to decreased gas deliveries due to weather that was four percent warmer than in 1996 and conservation. Also hindering fiscal 1997's comparative results was the prior period's gain on the expiration of gas storage contracts, increased computer support services, and increased depreciation and amortization expense. Partially offsetting these decreases, were a decrease in pension expense (see Note 4A of the Notes to Consolidated Financial Statements), a full years effect of the Company's November 1995 rate increase, increased other operating revenue and a tax accrual adjustment. [Enlarge/Download Table] A summary of variations affecting income between years is presented below, with explanations of significant differences following: Fiscal 1998 Fiscal 1997 over 1997 over 1996 Amount Amount (000's) Percent (000's) Percent Net operating revenues (a) $(34,212) (7.4) $(15,710) (3.3) Operation and maintenance expenses (10,652) (4.9) (15,330) (6.6) Depreciation and amortization expense 1,677 2.5 3,069 4.9 Income taxes (8,747) (18.8) (2,832) (5.7) Other income and deductions (543) (1.8) (3,801) (14.0) Net income applicable to common stock (16,720) (19.6) (3,654) (4.1) (a) See Management's Discussion and Analysis of Results of Operations and Financial Condition - Net Operating Revenues. Net Operating Revenues Gross revenues of the Company are affected by changes in the unit cost of the Company's gas purchases and do not include the cost of gas supplies for customers who purchase gas directly from producers and marketers rather than from the Company. The direct customer purchases have no effect on net income because the Company provides transportation service for such gas volumes and recovers margins similar to those applicable to conventional gas sales. Except for the effect of customer conservation that may result from substantial increases in the commodity cost of gas supplies, changes in the unit cost of gas do not significantly affect net income because the Company's tariff provides for dollar-for-dollar recovery of gas costs. (See Item 1 - Competition and Deregulation and Note 1L of the Notes to Consolidated Financial Statements.) The Company's tariff also provides for dollar-for-dollar recovery of the cost of revenue taxes and certain customer charges imposed by the State and the City. Since income is not significantly affected by changes in revenue from customers' gas purchases from producers or marketers rather than from the Company, changes in gas costs (except for the effect of customer conservation that may result from substantial increases in the commodity cost of gas supplies), or changes in revenue taxes and certain customer charges imposed by the State and the City, the following discussion pertains to "net operating revenues" (operating revenues, net of gas costs, revenue taxes and certain customer charges). The Company considers net operating revenues to be a more pertinent measure of operating results than gross revenues. Net operating revenues decreased $34.2 million, to $430.5 million, in 1998. Natural gas deliveries declined 29.0 bcf, to 212.6 bcf, due mainly to the effect of El Nino which caused weather to be 18 percent warmer than 1997 and 15 percent warmer than normal. In 1997, net operating revenues decreased $15.7 million, to $464.7 million. Natural gas deliveries decreased 18.7 bcf, to 241.7 bcf, due to weather that was four percent warmer than in 1996 and conservation. Net operating revenues decreased approximately $23.1 million ($13.9 million after income taxes) as a result of warmer weather and conservation. However, a full year's effect of the Company's rate increase improved net operating revenues by approximately $4.0 million ($2.4, million after income taxes). See Other Matters - Operating Statistics for details of selected financial and operating information by gas service classification. Operation and Maintenance Expenses Operation and maintenance expenses decreased $10.7 million, to $206.4 million, in 1998, due primarily to a $4.8 million decrease in the provision for uncollectible accounts, caused by reduced revenues, and to a reduction in group insurance expense ($2.8 million). In addition, costs associated with labor declined $2.6 million, along with reengineering costs ($1.1 million) and pension expense ($1.4 million). These effects were offset, in part, by an increase in the costs of outside professional services ($3.5 million). The cost of outside professional services has increased primarily due to the use of contract programmers to maintain existing systems while the Company's staff is involved in the development and implementation of a new customer information system. In 1997, operation and maintenance expenses decreased $15.3 million, to $217.0 million, due primarily to a $17.8 million decrease in pension expense, caused by changes in settlement accounting attributed to employees choosing early retirement and actuarial assumptions (see Note 4A of the Notes to Consolidated Financial Statements), and lower reengineering expenses ($2.1 million). Also contributing to the decrease were reductions in costs associated with liability insurance premiums and claim settlements ($1.6 million) and group insurance expense ($1.5 million). These decreases were partially offset by an increase in payments for outside services ($3.2 million) and higher administrative and general expenses. Depreciation and Amortization Expense Depreciation expense increased $1.7 million, to $67.8 million, and $3.1 million, to $66.1 million, in 1998 and 1997, respectively, due largely to depreciable property additions. Income Taxes Income taxes, exclusive of the $324,000 included in other income and deductions, decreased $8.7 million, to $37.9 million, in 1998, due primarily to lower pre-tax income. In 1997, income taxes, exclusive of the $1.7 million included in other income and deductions, declined $2.8 million, to $46.6 million, primarily due to a tax accrual adjustment. Other Income and Deductions In 1998, other income and deductions increased $543,000 from the prior period primarily due to a decrease in miscellaneous interest revenues and higher interest expense. Partially offsetting these effects was an increase in the allowance for funds used during construction. In 1997, other income and deductions increased $3.8 million, from the prior year, due principally to the prior period's gain associated with the expiration of natural gas storage contracts. Partially offsetting this increase were reductions in interest expense on long-term debt resulting from early redemption of first mortgage bonds and decreased interest on amounts refunded 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. Accounting Standards. The Company adopted Statement of Position (SOP) 96- 1, "Environmental Remediation Liabilities" in fiscal 1998. (See Note 1N of the Notes to the Consolidated Financial Statements.) Large-Volume Gas Service Agreements. The Company has entered into gas service contracts with certain large-volume customers under a specific rate schedule approved by the Commission. These contracts were negotiated to overcome the potential threat of bypassing the utility's distribution system. The impact on the net income of the Company as a result of these contracts is not material. Small-Volume Transportation Service. On June 25, 1997, the Commission allowed Riders SVT and AGG to go into effect for the Company, thus initiating a two-year pilot program designed to provide transportation service to certain small-volume industrial and commercial customers of the utility as well as to some of its large residential customers. The Commission also ordered a concurrent investigation of the program to ascertain if program adjustments or revisions are required. By order dated August 12, 1998, the Commission found that, with the exception of one minor modification agreed to by the Company, no revisions were required. Fixed Gas Charge Filing. On October 26, 1998, the Company made a filing with the Commission under which the price for natural gas would be set at a fixed level for at least the next five years. By eliminating the monthly price fluctuations, the Company could shield customers from price increases, although gas bills would still reflect customers' increased usage during colder weather. As the Company would assume and manage this risk, they would have an opportunity to earn a profit on this initiative. (See Competition and Deregulation in Item 1.) [Download Table] Operating Statistics. The following table represents gas distribution margin components: For fiscal years ended September 30, 1998 1997 1996 Net Operating Revenues (thousands): Gas sales Residential $668,811 $ 812,229 $ 757,598 Commercial 95,761 127,479 122,825 Industrial 17,232 24,609 27,776 781,804 964,317 908,199 Transportation Residential 34,551 34,024 35,281 Commercial 41,728 42,639 44,944 Industrial 23,092 25,839 30,376 Contract Pooling 8,865 15,868 4,063 Other 758 407 - 108,994 118,777 114,664 Other 16,722 16,390 13,712 Total Operating Revenues 907,520 1,099,484 1,036,575 Less- Gas Costs 378,438 519,334 445,724 - Revenues Taxes 91,724 115,430 110,421 - Other (a) 6,850 - - Net Operating Revenues $430,508 $ 464,720 $ 480,430 Deliveries (MDth): Gas Sales Residential 100,467 121,259 131,339 Commercial 16,508 21,463 23,692 Industrial 3,360 4,521 5,873 120,335 147,243 160,904 Transportation (b) Residential 24,216 25,153 25,106 Commercial 34,163 36,544 37,316 Industrial 33,926 32,510 37,094 Other - 234 - 92,305 94,441 99,516 Total Gas Sales and Transportation 212,640 241,684 260,420 Margin per Dth delivered $ 2.02 $ 1.92 $ 1.84 (a) See Management's Discussion and Analysis of Results of Operations and Financial Condition - Net Operating Revenues. (b) Volumes associated with contract pooling service are included in the respective customer classes. LIQUIDITY Source of Funds. The Company has access to outside capital markets and to internal sources of funds that together provide sufficient resources to meet its capital requirements. It does not anticipate any changes that would materially alter its current liquidity position. Due to the seasonal nature of gas usage, a major portion of cash collections occurs between December and May. Because of timing differences in the receipt and disbursement of cash and the level of construction requirements, the Company may borrow on a short-term basis. Short-term borrowings are repaid with cash from operations, other short- term borrowings, or refinanced on a permanent basis with debt or equity, depending on capital market conditions and capital structure considerations. Credit Lines. The Company has lines of credit of approximately $129.4 million of which North Shore Gas may borrow up to $30.0 million. At September 30, 1998, the Company and North Shore Gas had unused credit available from banks of $120.4 million. (See Note 9 of the Notes to Consolidated Financial Statements.) Cash Flow Activities. In 1998, net cash provided by operating activities decreased $11.1 million, due primarily to changes in net income, other assets and gas sales revenue refundable. These effects were offset by changes in net receivables, deferred credits and accrued taxes. In 1997, net cash provided by operating activities increased by $78.2 million, due primarily to changes in other assets, gas costs refundable and recoverable, and net receivables. Partially offsetting these items were changes in accounts payable and gas in storage. Net cash used in investing activities for 1998, 1997, and 1996 mainly represents the level of capital expenditures in the respective years. In 1998 and 1997, net cash used in financing activities reflects dividends paid to the common stockholder. In 1996, net cash used in financing activities reflects the redemption of previously issued debt. Interest Coverage. The fixed charges coverage ratios for the Company for fiscal 1998, 1997, and 1996 were 4.15, 5.01, and 4.84, respectively. The decrease in the ratio in the current fiscal year is due to the decline in pre-tax income due to warmer weather. The increase in the ratio in fiscal year 1997 is due primarily to lower interest expense on amounts refundable to customers and on long-term debt. The ratio for fiscal year 1996 reflects the redemption of long-term debt and higher pre-tax income resulting from colder weather and the Commission approved rate increase. (See Results of Operations - Net Income.) Debt Ratings. The long-term debt of the Company is rated Aa2 by Moody's Investors Service and AA- by Standard & Poor's Corporation. Moody's upgraded its ratings from Aa3 in November 1997. Standard & Poor's Corporation last changed its ratings in 1985. The commercial paper of the Company has the top rating from the major rating agencies. Environmental Matters. The Company is conducting environmental investigations and work at certain sites that were the location of former manufactured gas operations. (See Note 2 of the Notes to Consolidated Financial Statements.) Year 2000. The Company began its efforts to assess the Year 2000 compliance of its mainframe computer systems in March 1996. The Company has since developed a comprehensive Year 2000 readiness plan that incorporates all of its information technology systems, including computer hardware and software, and its embedded systems equipment, including telecommunications equipment. The plan also includes a review by the Company of the Year 2000 compliance efforts of key suppliers and customers and Year 2000 contingency planning. The system-wide Year 2000 effort being spearheaded by the Company includes Peoples Energy and all of its other wholly owned subsidiaries, as well as various joint ventures. For all internal information technology systems developed by the Company, Year 2000 compliance efforts proceed through the following phases: inventory, assessment, remediation, testing, and implementation. Rather than completing each phase for all systems prior to proceeding to the next phase, the Company progresses through all phases on a system-by- system basis, gradually implementing each fully-compliant system. The Year 2000 compliance phases utilize a combination of consultants and employees of the Company. Once a fully-tested application has been implemented, Company employees follow established procedures to maintain the compliance of the implemented systems. The Company also has retained a quality assurance expert to ensure that any subsequent modifications to the application do not impact its compliant status. As of September 30, 1998, 18 of the Company's 37 mainframe applications have been fully remediated, tested and implemented, two are in the testing phase, and nine have been (or are in the process of being) eliminated. The eight remaining mainframe applications are scheduled to be replaced by the Company's new mainframe customer information system and are not expected to be remediated. Additionally, 36 mainframe system modules have been remediated and are now in the testing phase. Many of the Company's non-mainframe applications, spreadsheets and interfaces have also reached the implementation stage; and most others are in the remediation phase. The Company expects to implement all critical internal systems (other than the customer information system to be used by the Company and North Shore Gas) by no later than March 31, 1999; complete implementation of all non-critical internal systems by April 30, 1999; and complete installation and testing of the customer information system by the end of fiscal year 1999. As part of its Year 2000 Project, the Company has also contacted the vendors of its licensed or purchased hardware and software to determine the Year 2000 compliance status of their products. As of September 30, 1998, the Company has received responses from 85% of the vendors and is in the process of replacing, upgrading or eliminating non-compliant vendor products as appropriate. The Company also plans to have certain products, such as its desktop computer inventory, compliant-tested in order to minimize the risks associated with reliance on vendor representations. The Company is in the process of determining whether the embedded systems equipment used by the Company and/or by affiliated companies is Year 2000 compliant. It has completed an inventory of all equipment containing embedded systems, including telecommunications equipment and facilities. The Company has also contracted with a consultant that has significant utility and engineering expertise to assist with the embedded systems efforts. The Company is currently in the process of determining the Year 2000 compliance status of the inventory and expects to complete this assessment by January 1999. During the assessment phase, the Company will also begin testing, repairing or replacing any critical equipment identified as not Year 2000 compliant. The Company's timetable for implementing compliant equipment will depend on the availability of compliant equipment. The Company currently has a written conceptual contingency plan to address risks to the Company created by the Company's or third parties' systems and embedded technology that are not Year 2000 compliant. It has engaged the consultant referenced above to assist in developing detailed and comprehensive business continuity and contingency plans to address possible failures in the area of embedded systems equipment. These plans are scheduled to be completed by December 1998. The Company also plans to further develop its contingency plans with respect to information technology-related failures and critical supplier failures. The Company has contacted key suppliers of all affiliated companies to determine their Year 2000 compliance efforts. It has received written assurances from many key suppliers that they are making the necessary Year 2000 efforts, and it is in the process of following up with other key suppliers that did not respond to written inquiries. Essential elements of the Company's business are dependent on certain key third parties (for example, pipeline suppliers, banks, electric utilities and telecommunication companies). A material failure by any such key third party could significantly disrupt the Company's business. The Company is in the process of detailing and finalizing contingency plans to address potential disruptions that may be caused by third parties. The Company currently estimates that it will incur expenses of approximately $1.6 million through fiscal year 1999 to complete its Year 2000 compliance efforts, in addition to the $4.0 million already incurred through September 30, 1998. This estimate does not include costs to repair or replace critical embedded systems equipment that is non- compliant, which has yet to be determined. Portions of the costs incurred by the Company in connection with its Year 2000 compliance efforts will be billed to its affiliated companies. Management does not expect the cost of the Company's Year 2000 compliance efforts to have a material adverse impact on the financial position or results of operations of the Company or its affiliates. Market Risk Management. The Company utilizes long-term debt as a primary source of capital. Both variable and fixed rate debt instruments are utilized. The variable interest rate on the debt adjusts to reflect current market conditions annually on December 1. Subject to certain restrictions on optional redemptions, the fixed rate debt instruments can be refinanced at lower interest rates if the Company deems it to be economical. (See Note 10 of the Notes to Consolidated Financial Statements.) CAPITAL RESOURCES Capital Spending. Capital expenditures and investments for the Company (capital spending) were $93.5 million in 1998, $76.5 million in 1997, and $74.6 million in 1996. In fiscal 1998 and 1997 spending increased $17 and $1.9 million, respectively, from prior years. Both years reflect increases attributable to the new customer information system, offset, in part, by the continuation of a cost containment program. Capital expenditures for fiscal 1999 are expected to be about $99.1 million, an increase of $8.9 million from the 1998 level. The estimate of expenditures for 1999 includes $18.7 million for the customer information system and $15.3 million for the Company's remote automated meter reading project. Pursuant to notice given to the trustee of the City of Joliet 1984 Series C Bonds, due October 1, 1999, which were secured by the Company's Adjustable-Rate First and Refunding Mortgage Bonds, Series W, these bonds were redeemed on October 1, 1998. There are no sinking fund requirements for long-term debt due in fiscal 1999. (See Notes 10A and 10B of the Notes to Consolidated Financial Statements.) The Company anticipates that future cash needs for capital expenditures and debt maturities will be met through internally generated funds, intercompany loans from Peoples Energy, borrowing arrangements with banks and/or the issuance of commercial paper on an interim basis, and periodic long-term financing involving first mortgage bonds or equity from Peoples Energy. ITEM 7A. 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." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page Statement of Management's Responsibility 18 Report of Independent Public Accountants 19 Consolidated Statements of Income for fiscal years Ended September 30, 1998, 1997, and 1996 20 Consolidated Statements of Retained Earnings for Fiscal years ended September 30, 1998, 1997, and 1996 20 Consolidated Balance Sheets at September 30, 1998 and 1997 21 Consolidated Capitalization Statements at September 30, 1998 and 1997 22 Consolidated Statements of Cash Flows for fiscal years ended September 30, 1998, 1997, and 1996 23 Notes to Consolidated Financial Statements 24 STATEMENT OF MANAGEMENT'S RESPONSIBILITY The financial statements and other financial information included in this report were prepared by management, who is responsible for the integrity and objectivity of the presented data. The consolidated financial statements of the Company and its subsidiaries were prepared in conformity with generally accepted accounting principles and necessarily include some amounts that are based on the best estimates and judgments of management. The Company maintains internal accounting systems and related administrative controls, along with internal audit programs, that are designed to provide reasonable assurance that the accounting records are accurate and assets are safeguarded from loss or unauthorized use. Consequently, management believes that the accounting records and controls are adequate to produce reliable financial statements. Arthur Andersen LLP, the Company's independent public accountants approved by Peoples Energy's shareholders, as a part of its audit of the financial statements, selectively reviews and tests certain aspects of internal accounting controls solely to determine the nature, timing, and extent of audit tests. Management has made available to Arthur Andersen LLP all of the Company's financial records and related data and believes that all representations made to the independent public accountants during its audit were valid and appropriate. The Audit Committee of the Board of Directors of Peoples Energy, comprised of five outside directors, meets periodically with management, the internal auditors, and Arthur Andersen LLP, jointly and separately, to assure that appropriate responsibilities are discharged. These meetings include discussion and review of accounting principles and practices, internal accounting controls, audit results, and the presentation of financial information in the annual report of Peoples Energy. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Peoples Gas Light and Coke Company: We have audited the accompanying consolidated balance sheets and consolidated capitalization statements of The Peoples Gas Light and Coke Company (an Illinois corporation, hereinafter referred to as the Company and a wholly owned subsidiary of Peoples Energy Corporation) and subsidiary companies at September 30, 1998 and 1997, and the related consolidated statements of income, retained earnings, and cash flows for each of the three years in the period ended September 30, 1998. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company and subsidiary companies at September 30, 1998 and 1997, and the results of their operations and cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedule listed in Item 14(a)2 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The financial statement schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Chicago, Illinois October 30, 1998 [Enlarge/Download Table] CONSOLIDATED STATEMENTS OF INCOME The Peoples Gas Light and Coke Company For fiscal years ended September 30, 1998 1997 1996 (Thousands) Operating Revenues: Gas sales $781,804 $ 964,317 $ 908,199 Transportation 108,994 118,777 114,664 Other 16,722 16,390 13,712 Total Operating Revenues 907,520 1,099,484 1,036,575 Operating Expenses: Gas costs 378,438 519,334 445,724 Operation 165,227 172,333 189,949 Maintenance 41,147 44,693 42,407 Depreciation and amortization 67,752 66,075 63,006 Taxes- Income 37,865 46,612 49,444 - State and local revenue 91,724 115,430 110,421 - Other 25,577 19,040 19,804 Total Operating Expenses 807,730 983,517 920,755 Operating Income 99,790 115,967 115,820 Other Income and (Deductions): Interest income 1,519 4,152 4,030 Allowance for funds used during construction 1,579 267 23 Interest on long-term debt (31,132) (31,094) (32,889) Other interest expense (2,654) (2,195) (4,163) Income taxes (324) (1,657) (4,089) Miscellaneous - net (see Note 7) (400) (342) 10,020 Total Other Income and Deductions (31,412) (30,869) (27,068) Net Income Applicable to Common Stock $ 68,378 $ 85,098 $ 88,752 [Enlarge/Download Table] CONSOLIDATED STATEMENTS OF RETAINED EARNINGS The Peoples Gas Light and Coke Company For fiscal years ended September 30, 1998 1997 1996 (Thousands) Balance at Beginning of Year $409,662 $398,875 $363,001 Add - Net Income 68,378 85,098 88,752 Deduct - Dividends declared on common stock 61,796 72,715 52,117 Increase/(decrease) - Additional minimum liability for non-qualified pension plan, net of tax 968 (1,596) (761) Balance at End of Year $417,212 $409,662 $398,875 The Notes to Consolidated Financial Statements are an integral part of these statements. [Enlarge/Download Table] CONSOLIDATED BALANCE SHEETS The Peoples Gas Light and Coke Co At September 30, 1998 1997 (Thousands) Assets Capital Investments: Property, plant and equipment, at original cost $1,888,025 $1,819,567 Less - Accumulated depreciation 654,262 614,224 Net property, plant and equipment 1,233,763 1,205,343 Other investments 9,745 5,470 Total Capital Investments - Net 1,243,508 1,210,813 Current Assets: Cash and cash equivalents 3,134 18,509 Temporary cash investments 500 15,500 Receivables - Customers, net of allowance for uncollectible accounts of $22,613 and $28,959, respectively 50,280 67,330 Other 34,051 40,159 Accrued unbilled revenues 17,363 20,109 Materials and supplies, at average cost 12,332 13,225 Gas in storage, at last-in, first-out cost 75,767 67,536 Gas costs recoverable through rate adjustments 3,847 3,328 Regulatory assets (see Note 1H) 6,651 13,139 Prepayments 70,406 39,802 Total Current Assets 274,331 298,637 Other Assets: Non-current regulatory assets (see Note 1H) 52,670 32,473 Deferred charges 18,933 15,704 Total Other Assets 71,603 48,177 Total Assets $1,589,442 $1,557,627 Capitalization and Liabilities Capitalization (see Consolidated Capitalization Statements) $1,034,519 $1,037,369 Current Liabilities: Interim loans 8,900 700 Accounts payable 100,522 113,502 Dividends payable on common stock 13,898 32,015 Customer gas service and credit deposits 43,237 39,753 Sinking fund payments and maturities, due within one year Long-term debt 10,400 - Accrued taxes 25,708 19,056 Gas sales revenue refundable through rate adjustments 9,864 14,484 Accrued interest 8,788 8,763 Total Current Liabilities 221,317 228,273 Deferred Credits and Other Liabilities: Deferred income taxes - primarily accelerated depreciation (see Note 5C) 247,959 229,225 Investment tax credits being amortized over the average lives of related property 28,951 30,350 Other 56,696 32,410 Total Deferred Credits and Other Liabilities 333,606 291,985 Total Capitalization and Liabilities $1,589,442 $1,557,627 The Notes to Consolidated Financial Statements are an integral part of these statements. [Enlarge/Download Table] CONSOLIDATED CAPITALIZATION STATEMENTS The Peoples Gas Light and Coke Company At September 30, 1998 1997 (Thousands, except number of shares) Common Stockholder's Equity: Common stock, without par value - Authorized 40,000,000 shares Outstanding 24,817,566 shares $ 165,307 $ 165,307 Retained earnings (see Consolidated Statements of Retained Earnings) 417,212 409,662 Total Common Stockholder's Equity 582,519 574,969 Long-Term Debt: Exclusive of sinking fund payments and maturities due within one year First and Refunding Mortgage Bonds - Adjustable-Rate Series W (3.875% and 3.95% through September 30, 1998 and September 30, 1997, respectively) redeemed October 1, 1998 (see Note 10A) - 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 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 75,000 Adjustable-Rate Series EE (3.90% and 3.70% through November 30, 1998 and November 30, 1997, respectively), due December 1, 2023 (see Note 10A) 27,000 27,000 6.10% Series FF, due June 1, 2025 50,000 50,000 Total Long-Term Debt 452,000 462,400 Total Capitalization $1,034,519 $1,037,369 The Notes to Consolidated Financial Statements are an integral part of these statements. [Enlarge/Download Table] CONSOLIDATED STATEMENTS OF CASH FLOWS The Peoples Gas Light and Coke Company For fiscal years ended September 30, 1998 1997 1996 (Thousands) Operating Activities: Net Income $68,378 $85,098 $ 88,752 Adjustments to reconcile net income to net cash: Depreciation and amortization 67,752 66,075 63,006 Deferred income taxes and investment tax credits - net 22,464 16,383 14,169 Change in other deferred credits and other liabilities 19,157 2,783 18,923 Change in deferred charges (29,040) (107) (24,968) Other - - 74 Change in current assets and liabilities: Receivables - net 23,158 (12,292) (40,390) Accrued unbilled revenues 2,746 5,425 (7,083) Materials and supplies 893 792 (174) Gas in storage (8,231) (11,660) 26,275 Gas costs recoverable (519) 14,092 (15,288) Regulatory assets 6,488 21,603 (25,427) Prepayments (30,604) (27,905) (9,970) Accounts payable (12,980) (8,150) 33,960 Customer gas service and credit deposits 3,484 2,631 2,109 Accrued taxes 6,652 (12,186) 4,280 Gas sales revenue refundable (4,620) 3,750 (57,824) Accrued interest 25 5 (2,267) Net Cash Provided by Operating Activities 135,203 146,337 68,157 Investing Activities: Capital expenditures - construction (90,219) (75,382) (72,194) Other assets (339) (11) 11,497 Other capital investments (3,307) (1,118) (2,416) Other temporary cash investments 15,000 (15,000) 100 Net Cash Used in Investing Activities (78,865) (91,511) (63,013) Financing Activities: Interim loans - net 8,200 - (200) Retirement of long-term debt - - (86,750) Trust fund - bond redemption - - 237 Dividends paid on common stock (79,913) (53,854) (53,109) Net Cash Used in Financing Activities (71,713) (53,854) (139,822) Net Increase (Decrease) in Cash and Cash Equivalents (15,375) 972 (134,678) Cash and Cash Equivalents at Beginning of Year 18,509 17,537 152,215 Cash and Cash Equivalents at End of Year $ 3,134 $18,509 $ 17,537 The Notes to Consolidated Financial Statements are an integral part of these statements. The Peoples Gas Light and Coke Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 1998 have been reclassified to conform with the current- year presentation. 1B Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 1C Concentration of Credit Risk The Company provides natural gas service to approximately 833,000 customers within the City. Credit risk for the Company is spread over a diversified base of residential, commercial, and industrial retail sales and transportation customers. The Company encourages customers to participate in its long-standing budget payment program that allows the cost of higher gas consumption levels associated with the heating season to be spread over a 12-month billing cycle. Customers' payment records are continually monitored and credit deposits are required, when appropriate, to minimize uncollectible write-offs. 1D Revenue Recognition Gas sales revenues are recorded on the accrual basis for all gas delivered during the month, including an estimate for gas delivered but unbilled at the end of each month. 1E Property, Plant and Equipment Property, plant and equipment is stated at original cost and includes appropriate amounts of capitalized labor costs, payroll taxes, employee benefit costs, administrative costs, and an allowance for funds used during construction. 1F Accounts Payable The Company utilizes controlled disbursement banking arrangements under which certain bank accounts have negative book balances due to checks in transit. The negative balances are classified as Accounts Payable. 1G Maintenance and Depreciation The Company charges the cost of maintenance and repairs of property and minor renewals and improvements of property to maintenance expense. When depreciable property is retired, its original cost is charged to the accumulated provision for depreciation. The provision for depreciation substantially reflects the systematic amortization of the original cost of depreciable property over estimated useful lives on the straight-line method. Additionally, actual dismantling cost, net of salvage, is included in the provision for depreciation in the month incurred. The amounts provided are designed to cover not only losses due to wear and tear that are not restored by maintenance, but also losses due to obsolescence and inadequacy. The provision for depreciation, expressed as an annual percentage of original cost of depreciable property, is as follows: For fiscal years ended September 30, 1998 1997 1996 Provision for depreciation 3.7% 3.7% 3.6% 1H Regulated Operations The Company's utility operations are subject to regulation by the Commission. Regulated operations are accounted for in accordance with SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation." This standard controls the application of generally accepted accounting principles for companies whose rates are determined by an independent regulator such as the Commission. Regulatory assets represent certain costs that are expected to be recovered from customers through the ratemaking process. When incurred, such costs are deferred as assets in the balance sheet and subsequently recorded as expenses when those same amounts are reflected in rates. The following regulatory assets were reflected in Current Assets and Other Assets in the Consolidated Balance Sheets at September 30, 1998 and 1997: 1998 1997 (Thousands) Environmental costs, net of recoveries (see Note 2) $35,667 $10,821 Transition costs from pipeline supplier - 6,921 Income tax (see Note 1I) 9,131 7,146 Discount, premium, expenses, and loss on reacquired bonds 2,572 2,909 SNG plant - decommissioning 11,929 17,543 Other 22 272 Total regulatory assets $59,321 $45,612 1I Income Taxes The Company follows the liability method of accounting for deferred income taxes. Under the liability method, deferred income taxes have been recorded using currently enacted tax rates for the differences between the tax basis of assets and liabilities and the basis reported in the financial statements. Due to the effects of regulation on the Company, certain adjustments made to deferred income taxes are, in turn, debited or credited to regulatory assets or liabilities. (See Note 5C.) The Company nets its income tax related regulatory assets and liabilities. At September 30, 1998 and 1997, net regulatory income tax assets recorded in Other Assets amounted to $9.1 million and $7.1 million, respectively. Investment tax credits have been deferred and are being amortized through credits to income over the book lives of related property. The preceding deferred-tax and tax-credit accounting conforms with regulations of the Commission. 1J Gas in Storage Storage injections are priced at the fiscal-year average of costs of supply. Withdrawals from storage are priced on the last-in, first- out (LIFO) cost method. The estimated current replacement cost of gas in inventory at September 30, 1998 and 1997 exceeded the LIFO cost by approximately $86.2 million and $88.0 million, respectively. 1K Statement of Cash Flows For purposes of the balance sheet and the statement of cash flows, the Company considers all short-term liquid investments with maturities of three months or less to be cash equivalents. Income taxes and interest paid (excluding capitalized interest) were as follows: For fiscal years ended September 30, 1998 1997 1996 (Thousands) Income taxes paid $11,775 $45,781 $35,096 Interest paid 31,185 32,017 36,267 1L Recovery of Gas Costs Under the tariff of the Company, the difference for any month between costs recoverable through the Gas Charge and revenues billed to customers under the Gas Charge is refunded to or recovered from customers. Consistent with these tariff provisions, such difference for any month is recorded either as a current liability or as a current asset (with a contra entry to Gas Costs). For each gas utility, the Commission conducts annual proceedings regarding the reconciliation of revenues from the Gas Charge and related costs incurred for gas. In such proceedings, costs recovered by a utility through the Gas Charge are subject to challenge. Such proceedings regarding the Company for fiscal years 1997 and 1998, are currently pending before the Commission. (See Item 1 - Competition and Deregulation.) 1M Recovery of Costs of Environmental Activities Relating to Former Manufactured Gas Operations The Company is recovering the costs of environmental activities relating to its former manufactured gas operations, including carrying charges on the unrecovered balances, under a rate mechanism approved by the Commission. For each utility with such a rate mechanism, the Commission conducts annual proceedings regarding the reconciliation of revenues from the rate mechanism and related costs. In such proceedings, costs recovered by a utility through the rate mechanism are subject to challenge. No such proceedings are currently pending before the Commission. 1N Accounting Standards The Company adopted SOP 96-1, "Environmental Remediation Liabilities" in fiscal 1998. The application of the statement did not have a material effect on the Company's financial condition or results of operations. 2. ENVIRONMENTAL MATTERS The Company, its predecessors, and certain former affiliates operated facilities in the past at multiple sites for the purpose of manufacturing gas and storing manufactured gas (Manufactured Gas Sites). In connection with manufacturing and storing gas, various by- products and waste materials were produced, some of which might have been disposed of rather than sold. Under certain laws and regulations relating to the protection of the environment, the Company might be required to undertake remedial action with respect to some of these materials. Two of the Manufactured Gas Sites are discussed in more detail below. The Company, under the supervision of the Illinois Environmental Protection Agency (IEPA), is conducting investigations of an additional 27 Manufactured Gas Sites. These investigations may require the Company to perform additional investigation and remediation. The investigations are in a preliminary stage and are expected to occur over an extended period of time. The Company has observed what appear to be gas purification wastes on a Manufactured Gas Site in Chicago, formerly called the 110th Street Station, and property contiguous thereto (110th Street Station Site). The Company 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 the Company in federal district court under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. The suit seeks recovery of the past and future costs of investigating and remediating the site and an order directing the Company to remediate the site. The Company is contesting this suit. The Company is accruing and deferring the costs it incurs in connection with all of the Manufactured Gas Sites, including related legal expenses, pending recovery through rates or from insurance carriers or other entities. At September 30, 1998, the total of the costs deferred by the Company, net of recoveries and amounts billed to other entities, was $35.7 million. This amount includes the Company's best estimate of the costs of investigating and remediating the Manufactured Gas Sites. The estimate is based upon a comprehensive review by the Company and its outside consultants of potential costs associated with conducting investigative and remedial actions at the Manufactured Gas Sites as well as the likelihood of whether such actions will be necessary. While the Company intends to seek contribution from other entities for the costs incurred at the sites, the full extent of such contributions cannot be determined at this time. The Company has filed suit against a number of insurance carriers for the recovery of environmental costs relating to its former manufactured gas operations. The suit asks the court to declare that the insurers are liable under policies in effect between 1937 and 1986 for costs incurred or to be incurred by the Company in connection with three Manufactured Gas Sites in Chicago. The Company is also asking the court to award damages stemming from the insurers' breach of their contractual obligation to defend and indemnify the Company against these costs. At this time, management cannot determine the timing and extent of the Company's recovery of costs from its insurance carriers. Accordingly, the costs deferred at September 30, 1998 have not been reduced to reflect recoveries from insurance carriers. Costs incurred by the Company for environmental activities relating to former manufactured gas operations will be recovered from insurance carriers or other entities or through rates for utility service. Accordingly, management believes that the costs incurred by the Company in connection with former manufactured gas operations will not have a material adverse effect on the financial position or results of operations of the Company. The Company is recovering the costs of environmental activities relating to its former manufactured gas operations, including carrying charges on the unrecovered balances, under a rate mechanism approved by the Commission. At September 30, 1998, it had recovered $6.6 million of such costs through rates. 3. LONG-TERM LEASE The Company entered into a long-term operating lease for its headquarters office which expires in fiscal 2008. The rental obligation consists of a base rent of $2.3 million plus operating expenses and taxes. The base rent escalates two percent each year through 2003. Base rent in 2004 will be approximately $3.6 million with annual increases of two percent each year through 2008. Rental expenses for the headquarters office were $6.5 million, $6.4 million, and $6.5 million, for fiscal years 1998, 1997, and 1996, respectively. 4. RETIREMENT AND POSTEMPLOYMENT BENEFITS 4A Pension Benefits The Company participates in two defined benefit pension plans covering substantially all employees. These plans provide pension benefits that generally are based on an employee's length of service, compensation during the five years preceding retirement, and social security benefits. Annual contributions are made to the plans based upon actuarial determinations and in consideration of tax regulations and funding requirements under federal law. The Company also has non-qualified pension plans that provide employees with pension benefits in excess of qualified plan limits imposed by federal tax law. Net pension cost for all plans for fiscal 1998, 1997, and 1996 included the following components: 1998 1997 1996 (Millions) Service cost - benefits earned during year $ 10.3 $ 10.9 $12.7 Interest cost on projected benefit obligations 25.8 27.5 30.6 Actual return on plan assets (gain) (106.0) (104.0) (64.9) Net amortization and deferral 58.7 56.5 20.4 Settlement accounting (17.0) (17.7) (7.8) Net pension cost (credit) $(28.2) $(26.8) $(9.0) In 1998, 1997 and 1996, the Company recognized net gains of $17.0 million, $17.7 million, and $7.8 million, respectively, from the settlement of portions of pension plan obligations. In 1998, a special benefit cost of $1.2 million was recognized to reflect the cost of an accelerated pension payout to certain former employees. The calculation of pension cost assumed a long-term rate of return on assets of 9.0 percent for 1998 and 1997, and 8.5 percent for 1996. The settlement accounting cost for all years was determined using a discount rate of 7.5 percent and assumed future compensation increases of 4.5 percent per year. The following table shows the estimated funded status of the Company's pension plans at September 30, 1998 and 1997: 1998 1997 (Millions) Plan assets at market value $638.3 $547.7 Actuarial present value of plan benefits: Vested 266.1 246.9 Non-vested 39.7 30.9 Accumulated benefit obligation 305.8 277.8 Effect of projected future compensation increases 87.4 76.0 Projected benefit obligation 393.2 353.8 Excess of plan assets over projected benefit obligation 245.1 193.9 Less: Unrecognized transition asset 14.4 18.4 Unrecognized prior service cost (5.1) (5.6) Unrecognized net gain 170.0 145.4 Non-qualified plan contributions: 7-1-98 to 9-30-98 0.2 1.5 Recognition of non-qualified plan additional minimum liability (2.9) (4.5) Accrued pension asset $ 63.1 $ 32.7 The projected benefit obligation and plan assets at September 30, 1998 and 1997, are based on a July 1 measurement date using a discount rate of 7.0 percent for 1998 and 7.5 percent for 1997 and assumed future compensation increases of 4.5 percent per year. Plan assets consist primarily of marketable equity and fixed-income securities. 4B Other Postretirement Benefits The Company also provides certain health care and life insurance benefits for retired employees. Substantially all employees may become eligible for such benefit coverage if they reach retirement age while working for the Company. The plans are funded based upon actuarial determinations and in consideration of tax regulations. The Company accrues the expected costs of such benefits during the employees' years of service. Net postretirement benefit cost for all plans for fiscal 1998, 1997, and 1996 included the following components: 1998 1997 1996 (Millions) Service cost - benefits earned during year $ 3.2 $ 2.9 $ 3.1 Interest cost on projected benefit obligation 7.8 7.9 7.1 Actual return on plan assets (gain) (8.8) (6.2) (2.9) Amortization of transition obligation 4.5 4.5 4.5 Net amortization and deferral 4.4 3.1 1.1 Net postretirement benefit cost $11.1 $12.2 $12.9 The calculation of postretirement benefit cost assumed a long-term rate of return on assets of 9.0 percent for 1998 and 1997, and 7.5 percent for 1996. Of the above total postretirement costs recognized for fiscal years 1998, 1997, and 1996, $3.9 million, $5.5 million, and $5.6 million, respectively, were funded through trust funds for future benefit payments. In 1998, a special benefit charge of $132,000 was recognized to reflect the health and life insurance costs associated with an accelerated retirement program for certain former employees. The following table sets forth the estimated funded status for the postretirement health care and life insurance plans at September 30, 1998 and 1997: 1998 1997 (Millions) Plan assets at market value $57.6 $44.9 Accumulated postretirement benefit obligation (APBO): Retirees 64.6 62.7 Fully eligible active plan participants 7.5 13.4 Other active plan participants 27.2 29.2 Total APBO 99.3 105.3 Deficiency of plan assets over the APBO (41.7) (60.4) Less: Unrecognized transition obligation (being amortized over 20 years) (57.6) (72.1) Unrecognized net gain 22.2 19.3 Contributions: July 1 to September 30 6.3 7.1 Accrued postretirement benefit liability $ - $(0.5) The total APBO and plan assets at September 30, 1998 and 1997, are based on a July 1 measurement date, using a discount rate of 7.0 percent for 1998 and 7.5 percent for 1997 and assumed future compensation increases of 4.5 percent per year. Plan assets consist primarily of marketable equity and fixed-income securities. For measurement purposes, a health care cost trend rate of 7.9 percent was assumed for fiscal 1998, and that rate thereafter will decline gradually to 4.75 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, 1998, by $7.9 million and the aggregate of service and interest cost components of the net periodic postretirement benefit cost by $1.2 million annually. 5. TAX MATTERS 5A Provision for Income Taxes Total income tax expense as shown on the Consolidated Statements of Income is composed of the following: For fiscal years ended September 30, 1998 1997 1996 (Thousands) Current: Federal $12,864 $26,036 $32,590 State 2,860 5,850 6,859 Total current income taxes 15,724 31,886 39,449 Deferred: Federal 18,991 14,049 13,121 State 4,864 3,746 3,554 Total deferred income taxes 23,855 17,795 16,675 Investment tax credits - net: Federal (1,467) (1,524) (2,635) State 76 112 129 Total investment tax credits - net (1,391) (1,412) (2,506) Total provision for income taxes 38,188 48,269 53,618 Less - Included in operation expense - - 85 Net provision for income taxes $38,188 $48,269 $53,533 5B Tax Rate Reconciliation The following is a reconciliation between the computed federal income tax expense (tax rate of 35 percent times pre-tax book income) and the total provision for federal income tax expenses: [Enlarge/Download Table] For fiscal years ended September 30, 1998 1997 1996 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 $34,568 35.00 $43,281 35.00 $46,140 35.00 Amortization of investment tax credits (1,467) (1.49) (1,524) (1.23) (2,635) (2.00) Other, net (2,713) (2.74) (3,196) (2.59) (429) (0.32) Total provision for federal income taxes $30,388 30.77 $38,561 31.18 $43,076 32.68 5C Deferred Income Taxes Set forth in the table below are the temporary differences which gave rise to the net deferred income tax liabilities (see Note 1I): At September 30, 1998 1997 (Thousands) Deferred tax liabilities: Property - accelerated depreciation and other property related items $238,559 $226,537 Other 36,068 33,249 Total deferred income tax liabilities 274,627 259,786 Deferred tax assets: Uncollectible accounts (9,134) (11,651) Unamortized investment tax credits (11,484) (12,049) Other (6,050) (6,861) Total deferred income tax assets (26,668) (30,561) Net deferred income tax liabilities $247,959 $229,225 6. ASSETS SUBJECT TO LIEN The Indenture of Mortgage, dated January 2, 1926, as supplemented, securing the first and refunding mortgage bonds issued by the Company, constitutes a direct, first-mortgage lien on substantially all property owned by the Company. 7. OTHER INCOME AND DEDUCTIONS - MISCELLANEOUS [Download Table] For fiscal years ended September 30, 1998 1997 1996 (Thousands) Interest on amounts recoverable from customers $ 119 $ 126 $ - Gain on expiration of gas storage contracts - - 11,093 Amortization of gain (loss) on reacquired bonds (268) (165) (65) Gain/loss on disposition of property (672) (650) - Earnings from subsidiary companies 348 304 275 Other 73 43 (1,283) Total other income and deductions - miscellaneous $(400) $(342) $10,020 8. CAPITAL COMMITMENTS Total contract and purchase order commitments of the Company at September 30, 1998, amounted to approximately $5.7 million. 9. SHORT-TERM BORROWINGS AND CREDIT LINES At September 30, 1998 1997 (Thousands) Bank Loans Peoples Gas 8.50% due March 27, 1998 $ - $ 700 Commercial Paper North Shore Gas due October 1, 1997 $ - $ 2,110 Peoples Gas due October 1, 1998 2,300 - due October 23, 1998 6,600 - Letters of Credit Peoples Gas $ 100 $ 100 Available lines of credit Unused bank lines $120,400 $126,490 Short-term cash needs of the Company and North Shore Gas are met through intercompany loans from Peoples Energy, bank loans, and/or the issuance of commercial paper. The outstanding total amount of bank loans, letters of credit and commercial paper issuances cannot at any time exceed total bank credit then in effect. At September 30, 1998 and 1997, the Company and North Shore Gas had combined lines of credit totaling $129.4 million. Of these amounts, North Shore Gas could borrow up to $30.0 million. Agreements covering $92.0 million of the total at September 30, 1998 will expire on August 29, 1999; the agreement covering the remaining $37.4 million will expire on January 31, 2000. Such lines of credit cover projected short-term credit needs of the Company and North Shore Gas and support the long-term debt treatment of the Company's adjustable-rate mortgage bonds. (See Note 10A.) Payment for the lines of credit is by fee. 10. LONG-TERM DEBT 10A Interest-Rate Adjustments The rate of interest on the City of Joliet 1984 Series C Bonds, which were secured by the Company's Adjustable-Rate First and Refunding Mortgage Bonds, Series W, was subject to adjustment annually on October 1. Owners of the Series C Bonds had the right to tender such bonds at par during a limited period prior to that date. The Company was obligated to purchase any such bonds tendered if they could not be remarketed. All Series C Bonds were redeemed on October 1, 1998. The rate of interest on the Series C Bonds was 3.875% during fiscal 1998. The rate of interest on the City of Chicago 1993 Series B Bonds, which are secured by the Company's Adjustable-Rate First and Refunding Mortgage Bonds, Series EE, is subject to adjustment annually on December 1. Owners of the Series B Bonds have the right to tender such bonds at par during a limited period prior to that date. The Company is obligated to purchase any such bonds tendered if they cannot be remarketed. The interest rate on such bonds is 3.90 percent for the period December 1, 1997, through November 30, 1998. The Company classifies these adjustable-rate bonds as long-term liabilities since it would refinance them on a long-term basis if they could not be remarketed. In order to ensure its ability to do so, on February 1, 1994, the Company established a $37.4 million three-year line of credit with The Northern Trust Company which has since been extended to January 31, 2000. (See Note 9.) 10B Sinking Fund Requirements and Maturities At September 30, 1998, long-term debt sinking fund requirements and maturities for the next five years are: Fiscal Year Amounts (Thousands) 1999 $10,400 2000 -- 2001 -- 2002 -- 2003 75,000 10C Fair Value of Financial Instruments At September 30, 1998, the carrying amount of the Company's long- term debt of $462.4 million had an estimated fair value of $494.9 million. At September 30, 1997, the carrying amount of the Company's long-term debt of $462.4 million had an estimated fair value of $497.0 million. The estimated fair value of the Company's long-term debt is based on yields for issues with similar terms and remaining maturities. Since the Company is subject to regulation, any gains or losses related to the difference between the carrying amount and the fair value of financial instruments may not be realized by the Company's shareholder. The carrying amount of all other financial instruments approximates fair value. The $.5 million in temporary cash investments approximates its fair value. 11. QUARTERLY FINANCIAL DATA (UNAUDITED) All four quarters of fiscal 1998 reflected weather that was significantly warmer than during the comparable quarters of fiscal 1997. The first quarter of fiscal 1998 also reflected decreased pension expense caused by changes in settlement accounting attributed to employees choosing early retirement and actuarial assumptions. (See Note 4A.) Net Income Operating Operating Applicable to Fiscal Quarters Revenues Income Common Stock (Thousands) 1998 Fourth $94,788 $(2,805) $ (9,804) Third 157,364 15,098 7,359 Second 348,402 48,757 40,399 First 306,966 38,740 30,424 1997 Fourth $96,349 $(4,144) $(11,734) Third 177,308 18,146 10,394 Second 489,348 61,642 54,328 First 336,479 40,323 32,110 12. EVENT (UNAUDITED) SUBSEQUENT TO THE AUDITORS' REPORT DATED OCTOBER 30, 1998 Environmental Matters Former Manufactured Gas Plant Operations The Company has filed suit against a number of insurance carriers for the recovery of environmental costs relating to the Company's former manufactured gas operations. In November 1998, the Company entered into a settlement agreement with one of its insurance carriers. Given the regulatory treatment discussed in Note 2, the settlement will not have an effect on income. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY IDENTIFICATION OF DIRECTORS Company Name, Principal Occupation, Age at Directorship and Other Directorships 11-30-98 Since Donald M. Field 49 1998 Executive Vice President of the Company, Peoples Energy, and North Shore Gas; Director of North Shore Gas. James Hinchliff 58 1985 Senior Vice President and General Counsel of the Company, Peoples Energy, and North Shore Gas; Director of North Shore Gas. James M. Luebbers 52 1998 Vice President and Controller of the Company, Peoples Energy, and North Shore Gas; Director of North Shore Gas. Thomas M. Patrick 52 1997 President and Chief Operating Officer of the Company, Peoples Energy, and North Shore Gas; Director of Peoples Energy and North Shore Gas. Richard E. Terry 61 1982 Chairman of the Board and Chief Executive Officer of the Company, Peoples Energy, and North Shore Gas; Director of Peoples Energy and North Shore Gas. Mr. Terry is also a director of Amsted Industries, Bankmont Financial Corp. and its subsidiaries, Harris Bankcorp, Inc. and Harris Trust and Savings Bank. IDENTIFICATION OF EXECUTIVE OFFICERS Position at Age at Position Name November 30, 1998 11-30-98 Held Since Katherine A. Donofrio Vice President 41 1997 Willard S. Evans, Jr. Vice President 43 1997 Donald M. Field Executive Vice President 49 1998 Joan T. Gagen Vice President 47 1994 James Hinchliff Senior Vice President and 58 1989 General Counsel John C. Ibach Vice President 51 1992 Peter H. Kauffman Assistant General Counsel and Secretary 52 1998 James M. Luebbers Vice President and Controller 52 1998 William E. Morrow Vice President 42 1996 Thomas M. Patrick President and Chief Operating Officer 52 1998 William W. Reynolds Treasurer 40 1998 Desiree G. Rogers Vice President 39 1997 Richard E. Terry Chairman of the Board and 61 1990 Chief Executive Officer Charles L. Thompson Vice President 51 1998 Directors and executive officers of the Company were elected to serve for a term of one year or until their successors are duly elected and qualified, except for Ms. Donofrio, Mr. Evans, and Ms. Rogers, who were appointed. There are no family relationships among directors and executive officers of the Company. All of the directors and executive officers of the Company have been continuously employed by the Company and/or its affiliates in various capacities for at least five years, with the exception of Mr. Reynolds and Ms. Rogers. ITEM 11. EXECUTIVE COMPENSATION The following tables set forth information concerning annual and long-term compensation and grants of stock options, stock appreciation rights (SARs) and restricted stock awards under Peoples Energy's Long-Term Incentive Compensation Plan. All compensation was paid by the Company and its affiliates (Peoples Energy and North Shore Gas) for services in all capacities during the three fiscal years set forth below, to (1) the Chief Executive Officer and (2) the four most highly compensated executive officers of the Company other than the Chief Executive Officer. [Enlarge/Download Table] SUMMARY COMPENSATION TABLE Long Term Compensation Annual Compensation Awards Restricted Stock All Other Name and Awards (1)(2) Options/SARs Compensation Principal Position Year Salary ($) Bonus ($) ($) (#) (3)($) Richard E. Terry 1998 600,000 245,000 192,828 20,600 18,000 Chairman and Chief 1997 548,500 237,900 152,663 17,800 16,455 Executive Officer 1996 473,500 191,600 145,722 21,200 14,205 J. Bruce Hasch 1998 359,700 132,200 99,706 10,600 10,791 Former President and 1997 345,900 106,700 84,525 9,800 10,377 Chief Operating Officer (4) 1996 332,600 86,000 80,803 11,800 9,978 James Hinchliff 1998 271,100 75,300 55,497 6,000 8,133 Senior Vice President 1997 260,700 67,700 54,338 6,400 7,821 and General Counsel 1996 250,700 54,500 51,797 7,600 7,521 Thomas M. Patrick 1998 254,800 75,300 55,497 6,000 7,644 President and Chief 1997 231,600 67,700 54,338 6,400 6,948 Operating Officer 1996 186,800 31,900 33,150 4,800 5,604 Kenneth S.Balaskovits 1998 220,900 61,800 44,209 4,800 6,627 Former Vice President 1997 210,400 53,100 43,988 5,200 6,312 and Controller (4) 1996 172,500 25,700 33,150 4,800 5,175 (1) Restricted stock awards are valued at the closing market price as of the date of grant. The total number of restricted shares held by the named executive officers and the aggregate market value of such shares at September 30, 1998 were as follows: Mr. Terry, 14,685 shares, valued at $528,660; Mr. Hasch, 8,025 shares, valued at $288,900; Mr. Hinchliff, 4,925 shares, valued at $177,300; Mr. Patrick, 4,125 shares, valued at $148,500; and Mr. Balaskovits, 3,585 shares, valued at $129,060. Dividends are paid on the restricted shares at the same time and at the same rate as dividends paid to all shareholders of common stock. Aggregate market value is based on a per share price of $36.00, the closing price of Peoples Energy's stock on the New York Stock Exchange on September 30, 1998. (2) Restricted stock awards granted to date vest in equal annual increments over a five-year period. If a recipient's employment with the Company terminates, other than by reason of death, disability, or retirement after attaining age 65, the recipient forfeits all rights to the unvested portion of the restricted stock award. In addition, the Compensation-Nominating Committee (and with respect to the CEO, the Compensation-Nominating Committee, subject to the approval of the non-employee directors) may, in its sole discretion, accelerate the vesting of any restricted stock awards granted under the Long-Term Incentive Compensation Plan. Total restricted stock awarded to the named individuals for 1996 constituted 12,475 shares, of which 2,495 shares vested in 1997; 2,495 shares vested in 1998; 2,495 shares will vest in 1999; 2,495 shares will vest in 2000; and the remaining 2,495 shares will vest in 2001. Total restricted stock awarded to the named individuals for 1997 constituted 11,300 shares, of which 2,260 shares vested in 1998; 2,260 shares will vest in 1999; 2,260 shares will vest in 2000; 2,260 shares will vest in 2001; and the remaining 2,260 shares will vest in 2002. Total restricted stock awarded to the named individuals for 1998 constituted 11,900 shares, of which 2,380 shares will vest in 1999; 2,380 shares will vest in 2000; 2,380 shares will vest in 2001; 2,380 shares will vest in 2002; and the remaining 2,380 shares will vest in 2003. (3) Company contributions to the Capital Accumulation Plan accounts of the named executive officers during the above fiscal years. Employee contributions under the plan are subject to a maximum limitation under the Internal Revenue Code of 1986. The Company pays an employee who is subject to this limitation an additional 50 cents (after October 1, 1998, 60 cents) for each dollar that the employee is prevented from contributing solely by reason of such limitation. The amounts shown in the table above reflect, if applicable, this additional Company payment. (4) Messrs. Hasch and Balaskovits retired as of November 1, 1998. [Enlarge/Download Table] OPTIONS/SAR GRANTS IN FISCAL 1998 Individual Grants % of Total Options/ Options/SARs SARs Granted to Exercise or Grant Date Granted Employees in Fiscal Base Price Expiration Present Value Name (#) (1) Year (2) ($/Sh) Date ($)(3) Richard E. Terry 20,600 12.3% $37.84 01-Oct-07 $131,428 Chairman and Chief Executive Officer J. Bruce Hasch 10,600 6.3 37.84 01-Oct-07 67,628 Former President and Chief Operating Officer (4) James Hinchliff 6,000 3.6 37.84 01-Oct-07 38,280 Senior Vice President and General Counsel Thomas M. Patrick 6,000 3.6 37.84 01-Oct-07 38,280 President and Chief Operating Officer Kenneth S. Balaskovits 4,800 2.9 37.84 01-Oct-07 30,624 Former Vice President and Controller (4) (1)The grant of an Option enables the recipient to purchase Peoples Energy common stock at a purchase price equal to the fair market value of the shares on the date the Option is granted. The grant of an SAR enables the recipient to receive, for each SAR granted, cash in an amount equal to the excess of the fair market value of one share of Peoples Energy common stock on the date the SAR is exercised over the fair market value of such common stock on the date the SAR was granted. Options or SARs that expire unexercised become available for future grants. Before an Option or SAR may be exercised, the recipient must complete 12 months of continuous employment subsequent to the grant of the Option or SAR. Options and SARs may be exercised within 10 years from the date of grant, subject to earlier termination in case of death, retirement, or termination of employment. (2)Based on 83,800 Options and 83,800 SARs granted to all employees under Peoples Energy's Long-Term Incentive Compensation Plan during fiscal 1998. (3) Present value is determined using a variation of the Black- Scholes Option-Pricing Model. The model assumes: a) that Options and SARs are exercised three and one-half years after the date of grant - the average time Options and SARs were held by recipients under Peoples Energy Long-Term Incentive Compensation Plan over the past ten years; b) use of an interest rate equal to the interest rate on a U.S. Treasury security with a maturity date corresponding to the assumed exercise date; c) a level of volatility calculated using weekly stock prices for the two years prior to the date of grant; d) an expected dividend yield; and e) that no adjustments were made for non-transferability or risk of forfeiture. This is a theoretical value for the Options and SARs. The amount realized from an Option or SAR ultimately depends upon the excess of the market value of Peoples Energy's stock over the exercise price on the date the option or SAR is exercised. (4) Messrs. Hasch and Balaskovits retired as of November 1, 1998. [Enlarge/Download Table] AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1998 AND FISCAL YEAR-END OPTION/SAR VALUES Shares Number of Unexercised Value of Unexercised Acquired on Options/SARs at Fiscal In-the-Money Options/SARs (Option/SAR) Value Year-End (#) at Fiscal Year-End ($) Name Exercise(#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable Richard E. Terry 0 0 46,800 20,600 $187,998 $0 Chairman and Chief Executive Officer J. Bruce Hasch 0 0 19,200 10,600 65,866 0 Former President and Chief Operating Officer (1) James Hinchliff 0 0 12,600 6,000 43,328 0 Senior Vice President and General Counsel Thomas M. Patrick 0 0 16,600 6,000 73,920 0 President and Chief Operating Officer Kenneth S. Balaskovits 0 0 5,200 4,800 9,412 0 Former Vice President and Controller (1) (1)Messrs. Hasch and Balaskovits retired as of November 1, 1998. PENSION PLAN TABLE Years Of Service Average Annual Compensation 20 25 30 35 40 $150,000 $ 54,400 $ 68,000 $ 81,600 $ 90,975 $100,350 200,000 74,400 93,000 111,600 124,100 136,600 250,000 94,400 118,000 141,600 157,225 172,850 300,000 114,400 143,000 171,600 190,350 209,100 350,000 134,400 168,000 201,600 223,475 245,350 400,000 154,400 193,000 231,600 256,600 281,600 450,000 174,400 218,000 261,600 289,725 317,850 500,000 194,400 243,000 291,600 322,850 354,100 550,000 214,400 268,000 321,600 355,975 390,350 600,000 234,400 293,000 351,600 389,100 426,600 650,000 254,400 318,000 381,600 422,225 462,850 700,000 274,400 343,000 411,600 455,350 499,100 750,000 294,400 368,000 441,600 488,475 535,350 800,000 314,400 393,000 471,600 521,600 571,600 850,000 334,400 418,000 501,600 554,725 607,850 900,000 354,400 443,000 531,600 587,850 644,100 The above table illustrates various annual straight-life benefits at normal retirement (age 65) for the indicated levels of average annual compensation and various periods of service, assuming no future changes in Peoples Energy's pension benefits. The compensation used in the computation of annual retirement benefits is substantially equivalent to the salary and bonus reported in the Summary Compensation Table. The benefit amounts shown reflect reduction for applicable Social Security benefits. Average annual compensation is the average 12-month compensation for the highest 60 consecutive months of the last 120 months of service prior to retirement. Compensation is total salary paid to an employee by the Company and/or its affiliates, including bonuses under Peoples Energy's Short-Term Incentive Compensation Plan, pre- tax contributions under Peoples Energy's Capital Accumulation Plan, pre-tax contributions under Peoples Energy's Health and Dependent Care Spending Accounts Plan, and pre-tax contributions for life and health care insurance, but excluding moving allowances, exercise of stock options and SARs, and other compensation that has been deferred. At September 30, 1998, the credited years of retirement benefit service for the individuals listed in the Summary Compensation Table were as follows: Mr. Terry, 34 years; Mr. Hasch, 38 years; Mr. Hinchliff, 26 years, Mr. Patrick, 22 years; and Mr. Balaskovits, 31 years. The benefits shown in the foregoing table are subject to maximum limitations under the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code of 1986, as amended. Should these benefits at the time of retirement exceed the then-permissible limits of the applicable Act, the excess would be paid by the Company as supplemental pensions pursuant to Peoples Energy's Supplemental Retirement Benefit Plan. The benefits shown give effect to these supplemental pension benefits. SEVERANCE AGREEMENTS Peoples Energy has entered into separate severance agreements with certain key executives including each of the executives named in the Summary Compensation Table. The intent of the severance agreements is to assure the continuity of the administration and operations of Peoples Energy and its subsidiaries, including the Company in the event of a Change in Control of the Company (as described below). The severance agreements were developed in accordance with the advice of outside consultants. The term of each severance agreement is for the longer of 36 months after the date in which a Change in Control of Peoples Energy occurs or 24 months after the completion of the transaction approved by shareholders described in (iii) below of the description of a Change in Control. A Change in Control is defined as occurring when (i) Peoples Energy receives a report on Schedule 13D filed with the Securities and Exchange Commission pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended, disclosing that any person, group, corporation, or other entity is the beneficial owner, directly or indirectly, of 20% or more of the common stock of Peoples Energy; (ii) any person, group, corporation, or other entity (except Peoples Energy or a wholly-owned subsidiary), after purchasing common stock of Peoples Energy in a tender offer or exchange offer, becomes the beneficial owner, directly or indirectly, of 20% or more of such common stock; (iii) the shareholders of Peoples Energy approve (a) any consolidation or merger of Peoples Energy in which Peoples Energy is not the continuing or surviving corporation, other than a consolidation or merger in which holders of Peoples Energy's common stock prior to the consolidation or merger have substantially the same proportionate ownership of common stock of the surviving corporation immediately after the consolidation or merger as immediately before; (b) any consolidation or merger in which Peoples Energy is the continuing or surviving corporation, but in which the common shareholders of Peoples Energy immediately prior to the consolidation or merger do not hold at least 90% of the outstanding common stock of Peoples Energy; (c) any sale, lease, exchange or other transfer of all or substantially all of the assets of Peoples Energy, except where Peoples Energy owns all of the outstanding stock of the transferee entity or Peoples Energy's common shareholders immediately prior to such transaction own at least 90% of the transferee entity or group of transferee entities immediately after such transaction; or (d) any consolidation or merger of Peoples Energy where, after the consolidation or merger, one entity or group of entities owns 100% of the shares of Peoples Energy, except where Peoples Energy's common shareholders immediately prior to such merger or consolation own at least 90% of the outstanding stock of such entity or group of entities immediately after such consolidation or merger; or (iv) a change in the majority of the members of Peoples Energy's Board of Directors within a 24-month period, unless approved by two-thirds of the directors then still in office who were in office at the beginning of the 24-month period. Each severance agreement provides for payment of severance benefits to the executive in the event that, during the term of the severance agreement, (i) the executive's employment is terminated by Peoples Energy or the Company, except for "cause" as defined therein; or (ii) the executive's employment is terminated due to a constructive discharge, which includes (a) a material change in the executive's responsibilities, which change would cause the executive's position with Peoples Energy or the Company to become of less dignity, responsibility, prestige or scope; (b) reduction, which is more than de minimis, in total compensation; (c) assignment without the executive's consent to a location more than 50 miles from the current place of employment; or (d) liquidation, dissolution, consolidation, merger, or sale of all or substantially all of the assets of Peoples Energy or the Company, unless the successor corporation has a net worth at least equal to that of Peoples Energy or the Company, as applicable, and expressly assumes the obligations of Peoples Energy under the executive's severance agreement. The principal severance benefits payable under each severance agreement consist of the following: (i) the executive's base salary and accrued benefits through the date of termination, including a pro rata portion of awards under Peoples Energy's Short-Term Incentive Compensation (STIC) Plan; (ii) three times the sum of the individual's base salary, the average of the STIC Plan awards for the prior three years and the value of the Long-Term Incentive Compensation (LTIC) Plan awards in the prior calendar year; and (iii) the present value of the executive's accrued benefits under the Peoples Energy's Supplemental Retirement Benefits Plan (SRBP) that would be payable upon retirement at normal retirement age, computed as if the executive had completed three years of additional service. In addition, the executive will be entitled to continuation of life insurance and medical benefits for the longer of (a) a period of three years after termination or (b) a period commencing after termination and ending when the executive may receive pension benefits without actuarial reduction, provided that Peoples Energy's obligation for such benefits under the severance agreement shall cease upon the executive's employment with another employer that provides life insurance and medical benefits. Each severance agreement also provides that the executive's Options and SARs shall become exercisable upon a Change in Control and that all Options and SARs shall remain exercisable for the shorter of (a) three years after termination or (b) the term of such Options and SARs. Any restricted stock previously awarded to the executive under the LTIC Plan would vest upon a Change in Control if such vesting does not occur due to a Change in Control under the terms of the LTIC Plan. Peoples Energy is also obligated under each severance agreement to pay an additional amount to the executive sufficient on an after-tax basis to satisfy any excise tax liability imposed by Section 4999 of the Internal Revenue Code of 1986, as amended. The benefits received by the executive under each agreement are in lieu of benefits under Peoples Energy's termination allowance plan and the executive's benefits under the SRBP. Each executive would be required to waive certain claims prior to receiving any severance benefits. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS At November 30, 1998, voting securities of the Company were beneficially owned as follows: Title of Number of Percent of Class Name and Address Shares Owned Class Common Stock Peoples Energy Corporation without 130 East Randolph Driv par value Chicago, Illinois 60601-6207 24,817,566 100 SECURITY OWNERSHIP OF MANAGEMENT No equity securities of the Company are beneficially owned directly or indirectly by any director or officer of the Company. Shares of common stock, without par value, of Peoples Energy beneficially owned directly or indirectly by all directors and certain executive officers of the Company and all directors and executive officers of the Company as a group at November 30, 1998, are as follows: Shares of Peoples Energy Common Stock Beneficially Name Owned at November 30, 1998 (1) Donald M. Field* 19,467 (2)(3) James Hinchliff* 34,918 (2)(3) James M. Luebbers* 6,633 (2)(3) Thomas M. Patrick* 25,761 (2)(3) Richard E. Terry* 90,724 (2)(3) J. Bruce Hasch (4) 48,635 Kenneth S. Balaskovits (4) 12,122 All directors and officers of the Company as a group, including those named above (15 in number) 300,989 * Director of the Company (1) The total of 300,989 shares held by all directors and executive officers as a group is less than one percent of Peoples Energy's outstanding common stock. Unless otherwise indicated, each individual has sole voting and investment power with respect to the shares of common stock attributed to him or her in the table. (2) Includes shares that the following have a right to acquire within 60 days following November 30, 1998, through the exercise of stock options granted under Peoples Energy's Long-Term Incentive Compensation Plan: Messrs. Balaskovits, 5,000; Hasch, 14,900; Hinchliff, 9,300; Patrick, 10,100; Terry, 33,700; and all executive officers of the Company, as a group, 125,200. (3) Includes shares of restricted stock awarded under Peoples Energy's Long-Term Incentive Compensation Plan, the restrictions on which had not lapsed at November 30, 1998, as follows: Messrs. Hinchliff, 4,830; Patrick, 5,720; Terry, 15,480; and all executive officers as a group, 34,585. Owners of shares of restricted stock have the right to vote such shares and to receive dividends thereon, but have no investment power with respect to such shares until the restrictions thereon lapse. (4) Messrs. Hasch and Balaskovits retired as of November 1, 1998. CHANGES IN CONTROL None. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company provides general corporate and support services to Peoples Energy pursuant to an Intercompany Service Agreement (Agreement), the terms of which were approved by the Commission. In fiscal 1998, the Company furnished general corporate services in the amount of $3,693,099 and support services in the amount of $131,978 to Peoples Energy under the Agreement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements: Page See Part II, Item 8. 17 2. Financial Statement Schedules: Schedule Number VIII Valuation and Qualifying Accounts 44 3. Exhibits: See Exhibit Index on page 46. (b) Reports on Form 8-K filed during the final quarter of fiscal year 1998: None. [Enlarge/Download Table] <CAPTIOM> Schedule VIII The Peoples Gas Light and Coke Company 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, 1998 RESERVES (deducted from assets in balance sheet): Uncollectible items $28,959 $22,251 $ 28,597 $22,613 Fiscal Year Ended September 30, 1997 RESERVES (deducted from assets in balance sheet): Uncollectible items $25,279 $27,068 $ 23,388 $28,959 Fiscal Year Ended September 30, 1996 RESERVES (deducted from assets in balance sheet): Uncollectible items $18,315 $27,345 $ 20,381 $25,279 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. THE PEOPLES GAS LIGHT AND COKE COMPANY Date: December 17, 1998 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 17, 1998. /s/ RICHARD E. TERRY Chairman of the Board and Chief Executive Richard E. Terry Officer and Director (Principal Executive Officer) /s/ JAMES M. LUEBBERS Vice President and Controller and Director James M. Luebbers (Principal Financial and Accounting Officer) /s/ DONALD M. FIELD Director Donald M. Field /s/ JAMES HINCHLIFF Director James Hinchliff /s/ THOMAS M. PATRICK Director Thomas M. Patrick The Peoples Gas Light and Coke Company and Subsidiary Companies EXHIBIT INDEX (a) The exhibits listed below are filed herewith and made a part hereof: Exhibit Number Description of Document 10(a) U.S. Shippers Service Agreement between the Company and Northern Border Pipeline Company, dated August 14, 1997; 10(b) U.S. Shippers Service Agreement between the Company and Northern Border Pipeline Company, dated October 27, 1997; 10(c) Storage Rate Schedule DSS Agreement between the Company and Natural Gas Pipeline Company of America, dated January 15, 1998; 10(d) Storage Rate Schedule NSS Agreement between the Company and Natural Gas Pipeline Company of America, dated January 15, 1998; 10(e) Transportation Rate Schedule FTS Agreement between the Company and Natural Gas Pipeline Company of America, dated January 15, 1998; 10(f) Transportation Rate Schedule FTS LN/NB Agreement between the Company and Natural Gas Pipeline Company of America, dated January 15, 1998; 12 Statement re: Computation of Ratio of Earnings to Fixed Charges. 21 Subsidiaries of the Registrant 27 Financial Data Schedule (b) Exhibits listed below have been filed heretofore with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended, and/or the Securities Exchange Act of 1934, as amended, and are incorporated herein by reference. The file number and exhibit number of each such exhibit are stated in the description of such exhibits. 3(c) Articles of Incorporation of the Registrant, as amended on April 24, 1995 (Registrant Form 10-K for fiscal year ended September 30, 1995, Exhibit 3(b)). 4(a)First and Refunding Mortgage, dated January 2, 1926, from Chicago By-Product Coke Company to Illinois Merchants Trust Company, Trustee, assumed by the Company by Indenture dated March 1, 1928 (May 17, 1935, Exhibit B-6a, Exhibit B-6b A-2 File No. 2-2151, 1936); Supplemental Indenture dated as of May 20, 1936, from the Company to Continental Illinois National Bank and Trust Company of Chicago, Trustee (Form 8-K for the year 1936, Exhibit B- 6f); Supplemental Indenture dated as of March 10, 1950 (Form 8-K for the month of March 1950, Exhibit B-6i); Supplemental Indenture dated as of June 1, 1951 (File No. 2-8989, Post-Effective, Exhibit 7-4(b)); Supplemental Indenture dated as of August 15, 1967 (File No. 2-26983, Post-Effective, Exhibit 2-4); Supplemental Indenture dated as of September 15, 1970 (File No. 2-38168, Post-Effective Exhibit 2-2); Supplemental Indenture dated October 1, 1984, Exhibit 4-3 (Form 10-K for The Peoples Gas Light and Coke Company and Subsidiary Companies EXHIBIT INDEX (Continued) Exhibit Number Description of Document 4(a) fiscal year ended September 30, 1984); Supplemental Indentures dated March 1, 1985, cont'd Exhibit 4-3, (Form 10-K for fiscal year ended September 30, 1985); Supplemental Indenture dated May 1, 1990 (Form 10-K for the fiscal year ended September 30, 1990, Exhibit 4); Supplemental Indenture dated as of April 1, 1993 (Form 8-K dated as of May 5, 1933, Exhibit 1); Supplemental Indentures dated as of December 1, 1993 (Form 10-Q for the quarterly period ended December 31, 1993, Exhibit 4(a)); Supplemental Indenture dated as of December 1, 1993 (Form 10-Q for the quarterly period ended December 31, 1993, Exhibit 4(b)); Supplemental Indenture dated June 1, 1995. (Form 10-K for fiscal year ended September 30, 1995.) 10(g) Firm Transportation Service Agreement Under Rate Schedule FT between the Company and Trunkline Gas Company, dated as of December 1, 1993 (Registrant Form 10-K for the fiscal year ended September 30, 1994, Exhibit 10). ETS Service Agreement between the Company and ANR Pipeline Company, dated September 21, 1994. (Registrant Form 10-K for fiscal year ended September 30, 1995, Exhibit 10(a)); FSS Service Agreement between the Company and ANR Pipeline Company, dated September 21, 1994. (Registrant Form 10-K for fiscal year ended September 30, 1995, Exhibit 10(b)); Storage Rate Schedule NSS Agreement between the Company and Natural Gas Pipeline Company of America, dated October 19, 1995. (Registrant Form 10-K for fiscal year ended September 30, 1995, Exhibit 10(c)); Transportation Rate Schedule FTS Agreement between the Company and Natural Gas Pipeline Company of America, dated October 19, 1995. (Registrant Form 10-K for fiscal year ended September 30, 1995, Exhibit 10(d)); Storage Rate Schedule DSS Agreement between the Company and Natural Gas Pipeline Company of America, dated December 1, 1995. (Registrant Form 10-K for fiscal year ended September 30, 1995, Exhibit 10(e)); Transportation Rate Schedule FTS Agreement between the Company and Natural Gas Pipeline Company of America, dated December 1, 1995. (Registrant Form 10-K for fiscal year ended September 30, 1995, Exhibit 10(f)); Firm Transportation Service Agreement Under Rate Schedule FT between the Company and Trunkline Gas Company, dated as of April 1, 1995. (Registrant Form 10-K for fiscal year ended September 30, 1995, Exhibit10(g)); Quick Notice Transportation Service Agreement Under Rate Schedule QNT between the Company and Trunkline Gas Company, dated as of December 1, 1995. (Registrant Form 10-K for fiscal year ended September 30, 1995, Exhibit 10(h)); Quick Notice Transportation Service Agreement Under Rate Schedule QNT between the Company and Trunkline Gas Company, dated as of December 1, 1995. (Registrant Form 10-K for fiscal year ended September 30, 1995, Exhibit 10(i)); Firm Transportation Service Agreement under Rate Schedule FTS-1 between the Company and ANR Pipeline Company, dated as of September 20, 1995. (Registrant Form 10-K for fiscal year ended September 30, 1996, Exhibit 10(j)); Firm Transportation Service Agreement under Rate Schedule FTS between the Company and Natural Gas Pipeline Company of America, dated as of February 21, 1996. (Registrant form 10-K for fiscal year ended September 30, 1996, Exhibit 10(k)); Firm Transportation Service Agreement under Rate Schedule FTS between the Company and Natural Gas Pipeline Company of America, dated as of February 21, 1996. (Registrant form 10-K for fiscal year ended September 30, 1996, Exhibit 10(l)); Firm Transportation Service The Peoples Gas Light and Coke Company and Subsidiary Companies EXHIBIT INDEX (Continued) Exhibit Number Description of Document Agreement under Rate Schedule FTS between the Company and Natural Gas Pipeline Company of America, dated November 13, 1996. (Registrant Form 10-K for fiscal year ended September 30, 1997, Exhibit 10(m)); Firm Transportation Service Agreement under Rate Schedule FT-A or FT-G between the Company and Midwestern Gas Transmission Company, dated November 1, 1997. (Registrant Form 10-K for fiscal year ended September 30, 1997, Exhibit 10(n)); Firm Transportation Service Agreement under Rate Schedule FT-A between the Company and Tennessee Gas Pipeline Company, dated November 1, 1997. (Registrant Form 10-K for fiscal year ended September 30, 1997, Exhibit 10(o)). 10(h) Leased dated Ocotber 20, 1993, between Prudential Plaza Associates, as Landlord, and the Company, as Tentant (Registrant Form 10-Q for the quarterly period ended December 31, 1993, Exhibit 10(a)).

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