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Peoples Gas Light & Coke Co – ‘10-K405’ for 9/30/97

As of:  Monday, 12/22/97   ·   For:  9/30/97   ·   Accession #:  77388-97-12   ·   File #:  2-26983

Previous ‘10-K405’:  ‘10-K405’ on 12/19/96 for 9/30/96   ·   Next:  ‘10-K405’ on 12/18/98 for 9/30/98   ·   Latest:  ‘10-K405/A’ on 12/21/00 for 9/30/00

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

12/22/97  Peoples Gas Light & Coke Co       10-K405     9/30/97    9:180K

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                51±   220K 
 2: EX-3.(A)    Articles of Incorporation/Organization or By-Laws      1      7K 
 3: EX-3.(B)    Articles of Incorporation/Organization or By-Laws     19±    50K 
 4: EX-10.(A)   Material Contract                                      5±    22K 
 5: EX-10.(B)   Material Contract                                      8±    31K 
 6: EX-10.(C)   Material Contract                                      8±    28K 
 7: EX-12       Statement re: Computation of Ratios                    1      5K 
 8: EX-21       Subsidiaries of the Registrant                         1      5K 
 9: 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
"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 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY (Continued)
"Item 11. Executive Compensation
"Item 11. EXECUTIVE COMPENSATION (Continued)
"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, 1997 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, 1997. 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 8. Financial Statements and Supplementary Data 16 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 34 Part III 10. Directors and Executive Officers of the Company 35 11. Executive Compensation 37 12. Security Ownership of Certain Beneficial Owners and Management 43 13. Certain Relationships and Related Transactions 44 Part IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 45 Signatures 47 Exhibit Index 48 The Peoples Gas Light and Coke Company ANNUAL REPORT ON FORM 10-K FISCAL YEAR ENDED SEPTEMBER 30, 1997 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 836,000 residential, commercial, and industrial retail sales and transportation customers within the City of Chicago (City). The Company had 2,602 employees at September 30, 1997. At September 30, 1997, 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 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. In return for these and other benefits, electric utilities are required to reduce their rates to residential customers. The state's two largest electric utilities, including the utility that serves northeastern Illinois, must reduce their residential rates by 15% on August 1, 1998 and by another 5% on May 1, 2002. The legislation does not require electric utilities to divest their power generation assets. It is too early to determine what effects this restructuring of the electric market will have on the competitive position of the Company. In addition to restructuring the electric market, the legislation provides for additional funding for assistance to low-income energy users, including customers of the Company. The legislation creates a fund, financed by charges to electric and gas customers of public utilities and participating municipal utilities and electric co-ops, which supplements currently available federal energy assistance. A substantial portion of the gas that the Company delivers to its customers consists of gas that the Company's customers purchase directly from producers and marketers rather than from the Company. These direct customer purchases have little effect on net income because the Company provides transportation service for such gas volumes and recovers margins similar to those applicable to conventional gas sales. A pipeline may seek to provide transportation service directly to end- users. Such direct service by a pipeline to an end-user would bypass the local distributor's service and reduce the distributor's earnings. However, none of the Company's pipeline suppliers has undertaken any service bypassing the Company. The Company has a bypass rate approved by the Illinois Commerce Commission (Commission) which allows the Company to renegotiate rates with customers that are potential bypass candidates. (See Other Matters - Large Volume Gas Service Agreements in Item 7.) SALES AND RATES The Company sells natural gas having an average heating value of approximately 1,000 British thermal units (Btu's) per cubic foot.* Sales are made and service rendered by the Company pursuant to a rate schedule on file with the Commission containing various service classifications largely reflecting customers' different uses and levels of consumption. The Gas Charge is determined in accordance with the provisions in Rider 2, Gas Charge, to recover the costs incurred by the Company to purchase, transport, manufacture, and store gas supplies. The level of the Gas Charge under the Company's rate schedules is adjusted monthly to reflect increases or decreases in natural gas supplier charges, purchased storage service costs, transportation charges, and liquefied petroleum gas costs. In addition, under the tariffs of the Company, the difference for any month between costs recoverable through the Gas Charge and the revenues billed to customers under the Gas Charge is refunded to or recovered from customers. Consistent with these tariff provisions, such difference for any month is recorded either as a current liability or a current asset (with a contra entry to Gas Costs). The Company also has been recovering, through its rates, pipeline charges billed for transition costs resulting from the implementation of Federal Energy Regulatory Commission (FERC) Order No. 636. (See Notes 1L, 2A, and 2B of the Notes to Consolidated Financial Statements.) The business of the Company is influenced by seasonal weather conditions because a large element of the Company's customer load consists of space heating. Weather-related deliveries can, therefore, have a significant positive or negative impact on net income. (For discussion of the effect of the seasonal nature of gas revenues on cash flow, see Liquidity in Item 7.) 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. * 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) STATE LEGISLATION AND REGULATION The Company is subject to the jurisdiction of and regulation by the Commission, which has general supervisory and regulatory powers over practically all phases of the public utility business in Illinois, including rates and charges, issuance of securities, services and facilities, systems of accounts, investments, safety standards, transactions with affiliated interests, as defined in the Illinois Public Utilities Act, and other matters. In 1994, the Commission entered orders providing for full recovery by the Company of FERC Order 636 transition costs from the Company's gas service customers. The Commission's orders have been appealed to the Illinois Supreme Court. (See Notes 1L, 2A, and 2B of the Notes to Consolidated Financial Statements.) On November 8, 1995, the Commission issued an order approving changes in rates of the Company. (See Note 2A of the Notes to Consolidated Financial Statements.) FEDERAL LEGISLATION AND REGULATION By Order entered on December 6, 1968 (Holding Company Act Release No. 16233), the Securities and Exchange Commission, pursuant to Section 3(a)(1) of the Public Utility Holding Company Act of 1935 (Act), exempted Peoples Energy and its subsidiary companies as such (including the Company) from the provisions of the Act, other than Section 9(a)(2) thereof. Most of the gas distributed by the Company is transported to the Company's distribution system by interstate pipelines. In their provision of gas services (gathering, transportation and storage services, and gas supply) pipelines are regulated by the FERC under the Natural Gas Act and the Natural Gas Policy Act of 1978. (See "Sales and Rates" and "Current Gas Supply" in Item 1.) ENVIRONMENTAL MATTERS The Company is subject to federal and state environmental laws. The Company is conducting environmental investigations and work at certain sites that were the location of former manufactured gas plant operations. (See Note 3 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 1997- 1998 heating season for the Company: Design Peak-Day Year of Availability Contract Source (MDth) Expiration Firm direct purchases (1) 608 1998-2000 Liquefied petroleum gas 40 Peaking Service: Peoples Energy Resources 60 (2) The Uno-Ven Co. 10 (3) Storage gas: Leased (4) 563 1998-2000 Peoples-Manlove (5) 993 Customer-owned gas (6) 260 Total expected design peak-day availability 2,534 (1)Consists of firm gas purchases from non-pipeline suppliers delivered utilizing firm pipeline transportation. The majority of the gas purchase contracts are negotiated annually. The terms of the transportation contracts vary, with the longest term being 5 years. (2)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)The contract with The Uno-Ven Company was for an initial term ending September 30, 1997; however, by its terms, the contract continues in effect for an additional two year term subject to cancellation by either party any time on or after September 30, 1997 upon one year's prior notice. (4)Consists of leased storage services required to meet design day requirements with contract lengths varying from 3 to 5 years. (5)Manlove Field, the Company's underground storage facility located near Champaign, Illinois, has a seasonal top-gas capacity (excluding volumes required to support late-season peaking requirements) of approximately 27,000 MDth, of which approximately 1,566 MDth is dedicated to 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 1997-98 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). (6)Consists of gas supplies purchased directly from producers and marketers by the Company's commercial, industrial, and larger residential customers. The sources of gas supply (including gas transported for customers) in MDth for the Company for the three fiscal years ended September 30, 1997, 1996, and 1995, were as follows: 1997 1996 1995 Gas purchases 156,097 174,552 103,476 Synthetic natural gas (SNG) (a) - - 7,622 Liquefied petroleum gas produced 7 114 14 Customer-owned gas-received 91,476 93,141 93,225 Underground storage-net (3,786) 228 28,352 Exchange gas-net (39) (4,446) - Company use and unaccounted-for gas (2,071) (3,169) (3,733) Total (b) 241,684 260,420 228,956 (a)The SNG facility terminated production during fiscal 1995. (b) See "Gas Sold and Transported" in Item 6. SYNTHETIC NATURAL GAS SUPPLY The Company owned and operated an SNG plant, the McDowell Energy Center, located near Joliet, Illinois that used refinery fuel gas and a variety of natural gas liquids, including ethane, naphtha, natural gasoline, normal butane, propane, and ethane/propane mix as feedstock for the production of SNG. The SNG facility terminated production in fiscal 1995. ITEM 2. PROPERTIES All of the principal plants and properties of the Company have been maintained in the ordinary course of business and are believed to be in satisfactory operating condition. The following is a brief description of the principal plants and operating units of the Company. The distribution system of the Company, at September 30, 1997, consisted of approximately 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 881,000 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, 1997, the Company had approximately 129,000 MDth of gas stored in the reservoir, of which approximately 95,500 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 First 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 Notes 2 and 3 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, 1997 1996 1995 1994 1993 OPERATING RESULTS (thousands) Operating Revenues: Residential $ 812,225 $ 757,598 $ 648,762 $ 820,383 $ 807,674 Commercial 127,029 122,825 101,436 139,078 135,838 Industrial 24,558 27,776 20,807 35,587 36,193 Transportation (b) 119,282 114,664 109,626 98,943 106,198 Other 16,390 13,712 18,312 17,181 15,517 Total Operating Revenues 1,099,484 1,036,575 898,943 1,111,172 1,101,420 Less- Gas costs 519,334 445,724 387,675 566,903 555,256 - Revenue taxes 115,430 110,421 100,562 121,773 121,051 Net Operating Revenues $ 464,720 $ 480,430 $ 410,706 $ 422,496 $ 425,113 Net Income applicable to common stock $ 85,098 $ 88,752 $ 53,666 $ 63,825 $ 63,637 Dividends declared on common stock $ 72,715 $ 52,117 $ 56,833 $ 55,343 $ 55,095 ASSETS AT YEAR-END (thousands) Property, plant and equipment $ 1,819,567 $ 1,761,007 $ 1,815,407 $ 1,760,004 $ 1,702,401 Less - Accumulated depreciation 614,224 571,255 628,258 596,808 557,855 Net Property, Plant and Equipment $ 1,205,343 $ 1,189,752 $ 1,187,149 $ 1,163,196 $ 1,144,546 Total assets $ 1,557,627 $ 1,522,762 $ 1,561,481 $ 1,548,792 $ 1,506,107 Capital expenditures - construction $ 75,382 $ 72,194 $ 81,081 $ 74,623 $ 108,863 CAPITALIZATION AT YEAR-END (thousands) Common equity $ 574,969 $ 564,182 $ 528,308 $ 531,475 $ 522,993 Long-term debt 462,400 462,400 549,150 549,150 447,150 Total Capitalization $ 1,037,369 $ 1,026,582 $ 1,077,458 $ 1,080,625 $ 970,143 CAPITALIZATION AT YEAR-END (per cent) Common equity 55 55 49 49 54 Long-term debt 45 45 51 51 46 Total Capitalization 100 100 100 100 100 GAS SOLD AND TRANSPORTED (MDth) Gas Sales: Residential 121,258 131,339 111,509 122,648 124,190 Commercial 21,379 23,692 19,206 22,565 22,656 Industrial 4,515 5,873 4,357 6,320 6,670 Transportation (b) 94,532 99,516 93,884 90,059 87,952 Total Gas Sales and Transportation 241,684 260,420 228,956 241,592 241,468 Margin per Dth delivered 1.92 $ 1.84 $ 1.79 $ 1.75 $ 1.76 NUMBER OF CUSTOMERS (average) Residential 781,169 783,782 784,290 786,271 787,672 Commercial 42,750 42,888 43,198 43,299 43,243 Industrial 2,816 2,839 2,963 3,125 3,260 Transportation (b) 9,300 9,671 9,308 8,768 8,335 Total Customers 836,035 839,180 839,759 841,463 842,510 DEGREE DAYS 6,806 7,080 5,897 6,701 6,679 Per cent of normal (6,536) 104 108 90 103 102 (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 Net income decreased $3.7 million, to $85.1 million, in fiscal 1997 from 1996, due principally to decreased gas deliveries due to weather that was four per cent warmer than the previous fiscal year and conservation. Also hindering this year's comparative results was the year-ago period's gain on the expiration of gas storage contracts (see Note 5 of the Notes to Consolidated Financial Statements), increased computer support services, and increased depreciation and amortization expense. Partially offsetting these decreases were a decrease in pension expense (see Note 6A of the Notes to Consolidated Financial Statements), a full year effect of the company's November 1995 rate increase (see Note 2A of the Notes to the Consolidated Financial Statements), and increased other operating revenue and a tax accrual adjustment. In 1996, net income applicable to common stock increased $35.1 million, to $88.8 million, due principally to weather that was 20 per cent colder than in 1995 and to a rate increase that went into effect on November 14, 1995 for the Company (see Note 2A of the Notes to Consolidated Financial Statements). In addition, net income benefited from a one-time gain associated with the expiration of certain natural gas storage contracts (see Note 5 of the Notes to Consolidated Financial Statements) and a net credit in pension expense. These increases were partly offset by last year's recognition of the federal income tax settlement (see Note 7D of the Notes to Consolidated Financial Statements) and the current year's higher operating costs. A summary of variations affecting income between years is presented below, with explanations of significant differences following: Fiscal 1997 Fiscal 1996 over 1996 over 1995 Amount Amount (000's) Per Cent (000's) Per Cent Net operating revenues (a) $(15,710) (3.3) $69,724 17.0 Operation and maintenance expenses (15,330) (6.6) 18,925 8.9 Depreciation and amortization expense 3,069 4.9 3,836 6.5 Income taxes (2,832) (5.7) 24,886 101.3 Other income and deductions (3,801) (14.0) 13,444 33.2 Net income applicable to common stock (3,654) (4.1) 35,086 65.4 (a) Operating revenues, net of gas costs and revenue taxes. Net Operating Revenues Gross revenues of the Company are affected by changes in the unit cost of the Company's gas purchases and do not include the cost of gas supplies for customers who purchase gas directly from producers and marketers rather than from the Company. The direct customer purchases have 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 tariffs provide for dollar-for-dollar recovery of gas costs. (See Note 1L of the Notes to Consolidated Financial Statements.) The Company's tariffs also provide for dollar-for-dollar recovery of the cost of revenue taxes imposed by the State and 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, the discussion below pertains to "net operating revenues" (operating revenues, net of gas costs and revenue taxes). The Company considers net operating revenues to be a more pertinent measure of operating results than gross revenues. Net operating revenues decreased $15.7 million, to $464.7 million, in 1997. Natural gas deliveries decreased 18.7 bcf, to 241.7 bcf, due to weather that was four per cent 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 effect of the company's rate increase improved net operating revenues by approximately $4.0 million ($2.4 million after income taxes). In 1996, net operating revenues increased $69.7 million, to $480.4 million. Natural gas deliveries increased 31.5 bcf, to 260.4 bcf, due to weather that was 20 per cent colder than in 1995 and over 8 per cent colder than normal. Net operating revenues increased approximately $25 million ($15.1 million after income taxes) as a result of the colder weather. Also, the Company's aforementioned rate increase improved net operating revenues by about $29.7 million ($17.9 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 $15.3 million, to $217.0 million, in 1997, 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 6A of the Notes to Consolidated Financial Statements.) and also lower reengineering expenses ($2.1 million). In addition, 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. In 1996, operation and maintenance expenses increased $18.9 million, to $232.4 million, due chiefly to the reduction of expense from the prior year's recognition of about $12.7 million for an IRS settlement. (See Note 7D of the Notes to Consolidated Financial Statements.) Also, the provision for uncollectible accounts increased ($5.3 million), due largely to greater sales revenue attributable to the colder weather and higher rates. In addition, increases between years resulted from greater labor costs ($3.8 million), outside services ($2.4 million), distribution system expenses ($2.6 million), and environmental costs recovered through rates ($2 million). These increases were offset, in part, by decreased pension costs ($12.9 million). (See Note 6A of the Notes to Consolidated Financial Statements.) Depreciation and Amortization Expense Deprecation and amortization expense increased $3.1 million, to $66.1 million, in 1997, due largely to depreciable property additions. In 1996, depreciation and amortization expense increased $3.8 million, to $63 million, due mainly to depreciable property additions and the amortization of costs associated with the closing of the SNG plant. Income Taxes 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. In 1996, income taxes, exclusive of the $4.1 million included in other income and deductions, increased $24.9 million, to $49.4 million, due primarily to higher pre-tax income. Other Income and Deductions 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. (See Note 5 of the Notes to Consolidated Financial Statements.) Partially offsetting this increase were reductions in interest expense on long-term debt resulting from early redemption of first mortgage bonds (see Note 12B of the Notes to Consolidated Financial Statements) and decreased amounts refunded to customers. In 1996, other income and deductions decreased $13.4 million from the prior year, due largely to the gain of $6.7 million, after income taxes, associated with the expiration of certain natural gas storage contracts. (See Note 5 of the Notes to Consolidated Financial Statements.) Additionally, the current year includes lower interest on long-term debt resulting from the Company's early redemption of first mortgage bonds. (See Note 12B of the Notes to Consolidated Financial Statements.) These decreases were offset, in part, by decreased interest income reflecting lower cash balances due mainly to the above mentioned bond redemption. 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. FERC Order 636 Costs. The Commission entered orders providing for full recovery by the Company of FERC Order 636 transition costs from the Company's gas service customers. The Commission's orders have been appealed to the Illinois Supreme Court. (See Notes 1L, 2A, and 2B of the Notes to Consolidated Financial Statements.) Large-Volume Gas Service Agreements. The Company has entered into 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 contracts will not have a material adverse effect on the financial position or results of operations of the Company. Small-Volume Transportation Service. On June 25, 1997, the Commission allowed Riders SVT and AGG to go into effect for the Company, which will initiate 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. Operating Statistics. The following table represents gas distribution margin components: For fiscal years ended September 30, 1997 1996 1995 Operating Revenues (thousands): Gas sales Residential $ 812,225 $ 757,598 $ 648,762 Commercial 127,029 122,825 101,436 Industrial 24,558 27,776 20,807 963,812 908,199 771,005 Transportation Residential 34,028 35,281 36,617 Commercial 43,090 44,944 43,459 Industrial 25,890 30,376 29,550 Contract Pooling 15,868 4,063 - Other 406 - - 119,282 114,664 109,626 Other 16,390 13,712 18,312 Total Operating Revenues 1,099,484 1,036,575 898,943 Less- Gas Costs (519,334) 445,724 387,675 - Revenues Taxes (115,430) 110,421 100,562 Net Operating Revenues $ 464,720 $ 480,430 $ 410,706 Deliveries (MDth): Gas Sales Residential 121,258 131,339 111,509 Commercial 21,379 23,692 19,206 Industrial 4,515 5,873 4,357 147,152 160,904 135,072 Transportation (a) Residential 25,154 25,106 24,232 Commercial 36,628 37,316 36,130 Industrial 32,516 37,094 33,522 Other 234 - - 94,532 99,516 93,884 Total Gas Sales and Transportation $ 241,684 260,420 228,956 Margin per Dth delivered $ 1.92 $ 1.84 $ 1.79 (a) Volumes associated with contract pooling service are included in the respective customer classes. LIQUIDITY Source of Funds. The Company has access to outside capital markets and to internal sources of funds that together provide sufficient resources to meet capital requirements. It does not anticipate any changes that would materially alter its current liquidity position. Due to the seasonal nature of gas usage, a major portion of cash collections occurs between December and May. Because of timing differences in the receipt and disbursement of cash and the level of construction requirements, the Company may borrow on a short-term basis. Short-term borrowings are repaid with cash from operations, other short- term borrowings, or refinanced on a permanent basis with debt or equity, depending on capital market conditions and capital structure considerations. Credit Lines. The Company has lines of credit of approximately $129.4 million of which North Shore Gas may borrow up to $30 million. At September 30, 1997, the Company and North Shore Gas had unused credit available from banks of $126.5 million. (See Note 11 of the Notes to Consolidated Financial Statements.) Cash Flow Activities. Net cash provided by operating activities in 1997 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. In 1996, net cash provided by operating activities declined by $133.2 million, due primarily to changes related to gas sales revenue refundable, net receivables, and other assets. Such items were partially offset by increases from net income, due mainly to colder weather and the rate increase, and from accounts payable. In 1995, net cash provided by operating activities increased by $25.9 million, due primarily to changes related to gas in storage, other assets, and deferred income taxes. These items were offset, in part, by changes in gas costs recoverable and net receivables. Net cash used in investing activities for 1997, 1996, and 1995 mainly represents the level of capital expenditures in the respective years. Net cash used in financing activities in 1997 reflects dividends paid to the common stockholder. In 1996, net cash used in financing activities reflects the redemption of previously issued debt. (See Note 12B of the Notes to Consolidated Financial Statements.) In 1995 net cash used in financing activities included drawdowns from the trust fund associated with prior financing for utility construction activities. Interest Coverage. The fixed charges coverage ratios for the Company for fiscal 1997, 1996, and 1995 were 5.01, 4.84, and 2.76, respectively. The increase in the ratio in the current fiscal year is due primarily to lower interest expense on amounts refundable to customers and on long- term debt. The increase in the ratio for fiscal year 1996 reflects the redemption of long-term debt and higher pre-tax income resulting from colder weather and the Commission approved rate increase. (See Results of Operations - Net Income.) The ratio for fiscal year 1995 includes the recording of an IRS settlement in income. (See Note 7D of the Notes to Consolidated Financial Statements.) Debt Ratings. The long-term debt of the Company has been rated Aa3 by Moody's Investors Service and AA- by Standard & Poor's Ratings Group since fiscal 1985. On November 25, 1997, Moody's raised the Company's long-term debt rating to Aa2. The commercial paper of the Company has the top rating from both agencies. Environmental Matters. The Company is conducting environmental investigations and work at certain sites that were the location of former manufactured gas operations. (See Note 3 of the Notes to Consolidated Financial Statements.) Regulatory Actions. On November 8, 1995, the Commission issued an order approving changes in rates of the Company. (See Note 2A of the Notes to Consolidated Financial Statements.) Year 2000. The Company is modifying all of its computer programs to be year 2000 compatible. The Company does not believe that the amount of expenditures it will incur in connection with its year 2000 modification will have a material adverse effect on the financial position or results of operations of the Company. CAPITAL RESOURCES Capital Spending. Capital expenditures for additions, replacements, and improvements to the utility plant were $75.4 million in 1997, $72.2 million in 1996, and $81.1 million in 1995. Expenditures in fiscal 1997 increased $3.2 million from 1996 reflecting an increase of $12.6 million for a new customer information system, offset, in part, by the continuation of a cost containment program. In fiscal 1996, expenditures decreased $8.9 million from 1995 reflecting the continuation of a cost containment program. Capital expenditures for fiscal 1998 are expected to be about $99.2 million, an increase of $23.8 million from the 1997 level. The estimate of expenditures for 1998 includes $26.0 million for the customer information system and $13.5 million for the remote automatic meter reading project. There are no sinking fund requirements for long-term debt in fiscal 1998. (See Note 12C 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. Bonds Redeemed. On December 29, 1995, the Company redeemed, from general corporate funds, approximately $87 million aggregate principal amount of the City of Joliet's 1984 Gas Supply Revenue Bonds, Series A and B, which were secured by the Company's Series U and V First and Refunding Mortgage Bonds. (See Note 12B of the Notes to Consolidated Financial Statements.) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page Statement of Management's Responsibility 17 Report of Independent Public Accountants 18 Consolidated Statements of Income for fiscal years ended September 30, 1997, 1996, and 1995 19 Consolidated Statements of Retained Earnings for fiscal years ended September 30, 1997, 1996, and 1995 19 Consolidated Balance Sheets at September 30, 1997 and 1996 20 Consolidated Capitalization Statements at September 30, 1997 and 1996 21 Consolidated Statements of Cash Flows for fiscal years ended September 30, 1997, 1996, and 1995 22 Notes to Consolidated Financial Statements 23 STATEMENT OF MANAGEMENT'S RESPONSIBILITY The financial statements and other financial information included in this report were prepared by management, who is responsible for the integrity and objectivity of the presented data. The consolidated financial statements of the Company and its subsidiaries were prepared in conformity with generally accepted accounting principles and necessarily include some amounts that are based on the best estimates and judgments of management. The Company maintains internal accounting systems and related administrative controls, along with internal audit programs, that are designed to provide reasonable assurance that the accounting records are accurate and assets are safeguarded from loss or unauthorized use. Consequently, management believes that the accounting records and controls are adequate to produce reliable financial statements. Arthur Andersen LLP, the Company's independent public accountants approved by Peoples Energy's shareholders, as a part of its audit of the financial statements, selectively reviews and tests certain aspects of internal accounting controls solely to determine the nature, timing, and extent of audit tests. Management has made available to Arthur Andersen LLP all of the Company's financial records and related data and believes that all representations made to the independent public accountants during its audit were valid and appropriate. The Audit Committee of the Board of Directors of Peoples Energy, comprised of six outside directors, meets periodically with management, the internal auditors, and Arthur Andersen LLP, jointly and separately, to assure that appropriate responsibilities are discharged. These meetings include discussion and review of accounting principles and practices, internal accounting controls, audit results, and the presentation of financial information in the annual report of Peoples Energy. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To 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, 1997 and 1996, and the related consolidated statements of income, retained earnings, and cash flows for each of the three years in the period ended September 30, 1997. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company and subsidiary companies at September 30, 1997 and 1996, and the results of their operations and cash flows for each of the three years in the period ended September 30, 1997, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedule listed in Item 14(a)2 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The financial statement schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Chicago, Illinois October 31, 1997 CONSOLIDATED STATEMENTS OF INCOME The Peoples Gas Light and Coke Company For fiscal years ended September 30, 1997 1996 1995 (Thousands) Operating Revenues: Gas sales $ 963,812 $ 908,199 $ 771,005 Transportation 119,282 114,664 109,626 Other 16,390 13,712 18,312 Total Operating Revenues 1,099,484 1,036,575 898,943 Operating Expenses: Gas costs 519,334 445,724 387,675 Operation 172,333 189,949 174,701 Maintenance 44,693 42,407 38,730 Depreciation and amortization 66,075 63,006 59,170 Taxes - Income 46,612 49,444 24,558 - State and local revenue 115,430 110,421 100,562 - Other 19,040 19,804 19,369 Total Operating Expenses 983,517 920,755 804,765 Operating Income 115,967 115,820 94,178 Other Income and (Deductions): Allowance for funds used during construction 267 23 - Interest income 4,152 4,030 8,669 Interest on long-term debt (31,094) (32,889) (40,507) Other interest expense (2,195) (4,163) (6,079) Income taxes (1,657) (4,089) (3,606) Miscellaneous - net (see Note 9) (342) 10,020 1,011 Total Other Income and Deductions (30,869) (27,068) (40,512) Net Income Applicable to Common Stock $ 85,098 $ 88,752 $ 53,666 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS The Peoples Gas Light and Coke Company For fiscal years ended September 30, 1997 1996 1995 (Thousands) Balance at Beginning of Year $ 398,875 $ 363,001 $ 366,168 Add - Net Income 85,098 88,752 53,666 Deduct- Dividends declared on common stock 72,715 52,117 56,833 - Additional minimum liability for non-qualified pension plan, net of tax 1,596 761 - Balance at End of Year $ 409,662 $ 398,875 $ 363,001 The Notes to Consolidated Financial Statements are an integral part of these statements. CONSOLIDATED BALANCE SHEETS The Peoples Gas Light and Coke Company At September 30, 1997 1996 (Thousands) Properties and Other Assets Capital Investments: Property, plant and equipment, at original cost $1,819,567 $1,761,007 Less - Accumulated depreciation 614,224 571,255 Net property, plant and equipment 1,205,343 1,189,752 Other investments 5,470 6,607 Total Capital Investments - Net 1,210,813 1,196,359 Current Assets: Cash and cash equivalents 18,509 17,537 Temporary cash investments 15,500 500 Receivables - Customers, net of allowance for uncollectible accounts of $28,959 and $25,279, respectively 67,330 63,152 Other 40,159 32,045 Accrued unbilled revenues 20,109 25,534 Materials and supplies, at average cost 13,225 14,017 Gas in storage, at last-in, first-out cost 67,536 55,876 Gas costs recoverable through rate adjustments 3,328 17,420 Prepayments 39,802 11,897 Total Current Assets 285,498 237,978 Other Assets: Regulatory assets (see Note 1H) 45,612 76,176 Deferred charges 15,704 12,249 Total Other Assets 61,316 88,425 Total Properties and Other Assets $1,557,627 $1,522,762 Capitalization and Liabilities Capitalization (see Consolidated Capitalization Statement $1,037,369 $1,026,582 Current Liabilities: Interim loans 700 700 Accounts payable 113,502 121,653 Dividends payable on common stock 32,015 13,153 Customer gas service and credit deposits 39,753 37,121 Accrued taxes 19,056 31,242 Gas sales revenue refundable through rate adjustments 14,484 10,734 Accrued interest 8,763 8,758 Total Current Liabilities 228,273 223,361 Deferred Credits and Other Liabilities: Deferred income taxes - primarily accelerated depreciatio 229,225 211,623 Investment tax credits being amortized over the average lives of related property 30,350 31,696 Other 32,410 29,500 Total Deferred Credits and Other Liabilities 291,985 272,819 Total Capitalization and Liabilities $1,557,627 $1,522,762 The Notes to Consolidated Financial Statements are an integral part of these statements. CONSOLIDATED CAPITALIZATION STATEMENTS The Peoples Gas Light and Coke Company At September 30, 1997 1996 (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) 409,662 398,875 Total Common Stockholder's Equity 574,969 564,182 Long-Term Debt: Exclusive of sinking fund payments and maturities due within one year First and Refunding Mortgage Bonds - Adjustable-Rate Series W (3.95% and 4% through September 30, 1997 and September 30, 1996, respectively), due October 1, 1999 (see Note 12A) 10,400 10,400 6.875% Series X, due March 1, 2015 50,000 50,000 7.50% Series Y, due March 1, 2015 50,000 50,000 7.50% Series Z, due March 1, 2015 50,000 50,000 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 (3.70% and 3.85% through November 30, 1997 and November 30, 1996, respectively), due December 1, 2023 (see Note 12A) 27,000 27,000 6.10% Series FF, due June 1, 2025 50,000 50,000 Total Long-Term Debt 462,400 462,400 Total Capitalization $ 1,037,369 $ 1,026,582 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, 1997 1996 1995 (Thousands) Operating Activities: Net Income $ 85,098 $ 88,752 $ 53,666 Adjustments to reconcile net income to net cash: Depreciation and amortization 66,075 63,006 59,170 Deferred income taxes and investment tax credits - net 16,398 14,169 7,295 Change in deferred credits and other liabilities 2,768 18,923 (8,305) Change in other assets 21,496 (50,395) (2,327) Other - 74 55 Change in current assets and liabilities: Receivables - net (12,292) (40,390) 17,356 Accrued unbilled revenues 5,425 (7,083) (890) Materials and supplies 792 (174) 7,721 Gas in storage (11,660) 26,275 41,433 Gas costs recoverable 14,092 (15,288) 9,892 Prepayments (27,905) (9,970) (279) Accounts payable (8,151) 33,960 (7,334) Customer gas service and credit deposits 2,632 2,109 (4,531) Accrued taxes (12,186) 4,280 271 Gas sales revenue refundable 3,750 (57,824) 27,391 Accrued interest 5 (2,267) 821 Net Cash Provided by Operating Activities 146,337 68,157 201,405 Investing Activities: Capital expenditures of subsidiaries - construction (75,382) (72,194) (81,081) Other assets (11) 11,497 (2,042) Other capital investments (1,118) (2,416) 1,153 Other temporary cash investments (15,000) 100 - Net Cash Used in Investing Activities (91,511) (63,013) (81,970) Financing Activities: Interim loans - net - (200) - Issuance of long-term debt - - 50,000 Retirement of long-term debt - (86,750) (50,000) Trust fund - utility construction - - 31,493 - bond redemption - 237 (237) Dividends paid on common stock (53,854) (53,109) (56,584) Net Cash Used in Financing Activities (53,854) (139,822) (25,328) Net Increase (Decrease) in Cash and Cash Equivalents 972 (134,678) 94,107 Cash and Cash Equivalents at Beginning of Year 17,537 152,215 58,108 Cash and Cash Equivalents at End of Year $ 18,509 $ 17,537 $152,215 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 1997 have been reclassified to conform with the current-year presentation. 1B Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 1C Concentration of Credit Risk The Company provides natural gas service to approximately 836,000 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 1997 1996 1995 September 30, Provision for depreciation 3.7% 3.6% 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 Other Assets in the Consolidated Balance Sheets at September 30, 1997 and 1996: 1997 1996 (Thousands) Environmental costs, net of recoveries (see Note 3) $ 10,821 $ 12,218 Transition costs from pipeline supplier (see Note 2B) 6,921 32,692 Regulatory income tax assets (see Note 1I) 7,146 4,340 Discount, premium, expenses, and loss on reacquired bonds 2,909 3,247 SNG plant - decommissioning 17,543 23,156 Other 272 523 Total regulatory assets $ 45,612 $ 76,176 1I Income Taxes The Company follows the liability method of accounting for deferred income taxes. Under the liability method, deferred income taxes have been recorded using currently enacted tax rates for the differences between the tax basis of assets and liabilities and the basis reported in the financial statements. Due to the effects of regulation on the Company, certain adjustments made to deferred income taxes are, in turn, debited or credited to regulatory assets or liabilities. (See Note 7C.) Each Company within the consolidated group nets its income tax related regulatory assets and liabilities. At September 30, 1997 and 1996, net regulatory income tax assets recorded in Other Assets amounted to $7.1 million and $4.3 million, while net regulatory income tax liabilities recorded in Other Liabilities equaled $0 and $50,000, respectively. Investment tax credits have been deferred and are being amortized through credits to income over the book lives of related property. The preceding deferred-tax and tax-credit accounting conforms with regulations of the Commission. 1J Gas in Storage Storage injections are priced at the fiscal-year average of costs of supply. Withdrawals from storage are priced on the last- in, first-out (LIFO) cost method. The estimated current replacement cost of gas in inventory at September 30, 1997 and 1996 exceeded the LIFO cost by approximately $88 million and $78 million, respectively. 1K Statement of Cash Flows For purposes of the balance sheet and the statement of cash flows, the Company considers all short-term liquid investments with maturities of three months or less to be cash equivalents. Income taxes and interest paid (excluding capitalized interest) were as follows: For fiscal years ended 1997 1996 1995 September 30, (Thousands) Income taxes paid $45,781 $35,096 $15,501 Interest paid 32,017 36,267 41,378 1L Recovery of Gas Costs, Including Charges for Transition Costs Under the tariffs of the Company, the difference for any month between costs recoverable through the Gas Charge and revenues billed to customers under the Gas Charge is refunded to or recovered from customers. Consistent with these tariff provisions, such difference for any month is recorded either as a current liability or as a current asset (with a contra entry to Gas Costs). For each gas utility, the Commission conducts annual proceedings regarding, the reconciliation of revenues from the Gas Charge and related costs incurred for gas. In such proceedings, costs recovered by a utility through the Gas Charge are subject to challenge. Such proceedings regarding the Company for fiscal years 1996 and 1997 are currently pending before the Commission. Pursuant to FERC Order No. 636 and successor orders, pipelines are allowed to recover from their customers transition costs. These costs arise from the restructuring of pipeline service obligations required by the 636 Orders. The Company is currently recovering pipeline charges for transition costs through the Gas Charge. (See Notes 2A and 2B.) 1M Recovery of Costs of Environmental Activities Relating to Former Manufactured Gas Operations The Company is recovering the costs of environmental activities relating to its former manufactured gas operations, including carrying charges on the unrecovered balances, under a rate mechanism approved by the Commission. For each utility with such a rate mechanism, the Commission conducts annual proceedings regarding the reconciliation of revenues from the rate mechanism and related costs. In such proceedings, costs recovered by a utility through the rate mechanism are subject to challenge. Such proceedings, regarding the Company for fiscal years 1994 through 1996 are currently pending before the Commission. (See Note 3.) 2. RATES AND REGULATION 2A Utility Rate Proceedings Rate Order. On November 8, 1995, the Commission issued an order approving changes in rates of the Company that were designed to increase annual revenues by approximately $30.8 million, exclusive of additional charges for revenue taxes. The Company was allowed a rate of return on original-cost rate base of 9.19 per cent, which reflects an 11.10 per cent cost of common equity. The new rates were implemented on November 14, 1995. FERC Order 636 Cost Recovery. In 1994, the Commission issued orders concluding its investigation into the appropriate means of recovery by Illinois gas utilities of pipeline charges for FERC Order 636 transition costs. The orders provided for the full recovery of transition costs from the Company's gas service customers. The Commission directed that gas supply realignment (GSR) costs (one of the four categories of transition costs) be recovered on a uniform volumetric basis from all transportation and sales customers. A group of industrial transportation customers has filed a petition with the Illinois Supreme Court appealing the Commission's orders. If the Illinois Supreme Court accepts the appeal, any changes made by it to the Commission's orders would have a prospective effect only. (See Notes 1L and 2B.) 2B FERC Orders 636, 636-A, and 636-B FERC Order 636 and successor orders require pipelines to make separate rate filings to recover transition costs. Under a Stipulation and Agreement (Agreement) filed by Natural Gas Pipeline Company of America (Natural) and approved by FERC, Natural's charges to the Company for GSR transition costs are subject to a cap of approximately $103 million. At September 30, 1997, the Company had made payments of $96.1 million and had accrued an additional $6.9 million toward the cap. The 636 Orders are not expected to have a material effect on financial position or results of operations of the Company. (See Notes 1L and 2A.) 3. ENVIRONMENTAL MATTERS 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, 1997, the total of the costs deferred by the Company, net of recoveries and amounts billed to other entities, was $10.8 million. This amount includes an estimate of the costs of the investigations being conducted under the supervision of the IEPA referred to above. The amount also includes an estimate of the costs of remediation at the 110th Street Station Site, at the minimum amount of the current estimated range of such costs. The costs of remediation at the other sites cannot be determined at this time. While the Company intends to seek contribution from other entities for the costs incurred at the sites, the full extent of such contributions cannot be determined at this time. The Company has filed suit against a number of insurance carriers for the recovery of environmental costs relating to its former manufactured gas operations. The suit asks the court to declare that the insurers are liable under policies in effect between 1937 and 1986 for costs incurred or to be incurred by the Company in connection with 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, 1997 have not been reduced to reflect recoveries from insurance carriers. Costs incurred by the Company for environmental activities relating to former manufactured gas operations will be recovered from insurance carriers or other entities or through rates for utility service. Accordingly, management believes that the costs incurred by the Company in connection with former manufactured gas operations will not have a material adverse effect on the financial position or results of operations of the Company. The Company is recovering the costs of environmental activities relating to its former manufactured gas operations, including carrying charges on the unrecovered balances, under a rate mechanism approved by the Commission. At September 30, 1997, it had recovered $5.4 million of such costs through rates. 4. LONG-TERM LEASE In October 1993, the Company entered into a 15-year operating lease for its headquarters office. The rental obligation consists of a base rent of $2.3 million plus operating expenses and taxes. The base rent escalates by 2 per cent each year through the 10th year. Base rent in the 11th year is approximately $3.6 million with annual increases of 2 per cent each year through the 15th year. Rental expenses for the headquarters office were $6.4 million, $6.5 million, and $6.4 million, for fiscal years 1997, 1996, and 1995, respectively. 5. EXPIRATION OF GAS STORAGE CONTRACTS The Company had certain natural gas storage contracts with Natural that expired on or before December 1, 1995. Associated with the expiration of the contracts during fiscal 1996, the Company realized a gain, of approximately $11.1 million ($6.7 million after income taxes). 6. RETIREMENT AND POSTEMPLOYMENT BENEFITS 6A Pension Benefits The Company participates in two defined benefit pension plans covering substantially all employees. These plans provide pension benefits that generally are based on an employee's length of service, compensation during the five years preceding retirement, and social security benefits. Annual contributions are made to the plans based upon actuarial determinations and in consideration of tax regulations and funding requirements under federal law. The Company also has non-qualified pension plans that provide employees with pension benefits in excess of qualified plan limits imposed by federal tax law. Net pension cost for all plans for fiscal 1997, 1996, and 1995 included the following components: 1997 1996 1995 (Millions) Service cost - benefits earned during year $ 10.9 $ 12.7 $ 13.4 Interest cost on projected benefit obligations 27.5 30.6 27.9 Actual return on plan assets (gain) (104.0) (64.9) (80.5) Net amortization and deferral 56.5 20.4 43.2 Settlement accounting (17.7) (7.8) - Net pension cost (credit) $ (26.8) $ (9.0) $ 4.0 In 1997 and 1996, the Company recognized net gains of $17.7 million and $7.8 million, respectively, from the settlement of portions of pension plan obligations. The calculation of pension cost assumed a long-term rate of return on assets of 9.0 per cent for 1997, 8.5 per cent for 1996 and 7.5 per cent for 1995. The settlement accounting cost for 1997 and 1996 was determined using a discount rate of 7.5 per cent and assumed future compensation increases of 4.5 per cent per year. The following table shows the estimated funded status of the Company's pension plans at September 30, 1997 and 1996: 1997 1996 (Millions) Plan assets at market value $ 547.7 $ 547.4 Actuarial present value of plan benefits: Vested 246.9 279.8 Non-vested 30.9 31.1 Accumulated benefit obligation 277.8 310.9 Effect of projected future compensation increases 76.0 70.5 Projected benefit obligation 353.8 381.4 Excess of plan assets over projected benefit obligation 193.9 166.0 Less: Unrecognized transition asset 18.4 23.3 Unrecognized prior service cost (5.6) (4.5) Unrecognized net gain 145.4 139.5 Non-qualified plan contributions: 7-1-97 to 9-30-97 1.5 - Recognition of non-qualified plan additional minimum liability (4.5) (1.9) Accrued pension asset $ 32.7 $ 5.8 The projected benefit obligation and plan assets at September 30, 1997 and 1996, are based on a July 1 measurement date using a discount rate of 7.5 per cent and assumed future compensation increases of 4.5 per cent per year. Plan assets consist primarily of marketable equity and fixed-income securities. 6B Other Postretirement Benefits The Company also provides certain health care and life insurance benefits for retired employees. Substantially all employees may become eligible for such benefit coverage if they reach retirement age while working for the company. The plans are funded based upon actuarial determinations and in consideration of tax regulations and funding requirements under federal law. The Company accrues the expected costs of such benefits during the employees' years of service. Net postretirement benefit cost for all plans for fiscal 1997, 1996, and 1995 included the following components: 1997 1996 1995 (Millions) Service cost - benefits earned during year $ 2.9 $ 3.1 $ 2.5 Interest cost on projected benefit obligation 7.9 7.1 7.2 Actual return on plan assets (gain) (6.2) (2.9) (3.6) Amortization of transition obligation 4.5 4.5 4.5 Net amortization and deferral 3.1 1.1 2.4 Net postretirement benefit cost $ 12.2 $ 12.9 $ 13.0 The calculation of postretirement benefit cost assumed a long- term rate of return on assets of 9.0 per cent for 1997 and 7.5 per cent for 1996 and 1995. Of the above total postretirement costs recognized for fiscal years 1997, 1996, and 1995, $5.5 million, $5.6 million, and $5.7 million, respectively, were funded through trust funds for future benefit payments. The following table sets forth the estimated funded status for the postretirement health care and life insurance plans at September 30, 1997 and 1996: 1997 1996 (Millions) Plan assets at market value $ 44.9 $ 33.7 Accumulated postretirement benefit obligation (APBO): Retirees 62.7 59.8 Fully eligible active plan participants 13.4 17.2 Other active plan participants 29.2 29.2 Total APBO 105.3 106.2 Deficiency of plan assets over the APBO (60.4) (72.5) Less: Unrecognized transition obligation (being amortized over 20 years) (72.1) (76.5) Unrecognized net gain 19.3 11.8 Contributions: July 1 to September 30 7.1 7.3 Accrued postretirement benefit (liability) $ (0.5) $ (0.5) The total APBO and plan assets at September 30, 1997 and 1996, are based on a July 1 measurement date using a discount rate of 7.5 per cent and assumed future compensation increases of 4.5 per cent per year. Plan assets consist primarily of marketable equity and fixed-income securities. For measurement purposes, a health care cost trend rate of 7.9 per cent was assumed for fiscal 1998, and that rate thereafter will decline gradually to 4.75 per cent in 2003 and subsequent years. The health care cost trend rate assumption has a significant effect on the amounts reported. Increasing the assumed health care cost trend rate by one percentage point for each future year would have increased the APBO at September 30, 1997, by $7.7 million and the aggregate of service and interest cost components of the net periodic postretirement benefit cost by $1.2 million annually. 7. TAX MATTERS 7A Provision for Income Taxes Total income tax expense as shown on the Consolidated Statements of Income is composed of the following: For fiscal years ended September 30, 1997 1996 1995 (Thousands) Current: Federal $ 26,036 $ 32,590 $ 17,311 State 5,850 6,859 3,208 Total current income taxes 31,886 39,449 20,519 Deferred: Federal 14,049 13,121 7,115 State 3,746 3,554 2,243 Total deferred income taxes 17,795 16,675 9,358 Investment tax credits - net: Federal (1,524) (2,635) (1,784) State 11 12 167 Total investment tax credits - (1,412) (2,506) (1,617) Total provision for income taxes 48,269 53,618 28,260 Less - Included in operation expense - 85 96 Net provision for income taxes $ 48,269 $ 53,533 $ 28,164 7B Tax Rate Reconciliation The following is a reconciliation between the computed federal income tax expense (tax rate of 35 per cent times pre-tax book income) and the total provision for federal income tax expenses: [Download Table] For fiscal years ended September 30, 1997 1996 1995 Per Cent Per Cent Per Cent of of of Amount Pre-tax Amount Pre-tax Amount Pre-tax (000's) Income (000's) Income (000's) Income Computed federal income tax expense $43,281 35.00 $46,140 35.00 $26,708 35.00 Amortization of investment tax credits (1,524) (1.23) (2,635) (2.00) (1,784) (2.34) Nontaxable-tax settlement - - - - (1,772) (2.32) Accrual adjustment (2,000) (1.62) - - - - Other, net (1,196) (0.97) (429) (0.32) (510) (0.67) Total provision for federal income taxes $38,561 31.18 $43,076 32.68 $22,642 29.67 7C Deferred Income Taxes Set forth in the table below are the temporary differences which gave rise to the net deferred income tax liabilities (see Note 1I): At September 30, 1997 1996 (Thousands) Deferred tax liabilities: Property - accelerated depreciation and other property related items $ 226,537 $ 214,875 Other 33,249 24,167 Total deferred income tax liabilities 259,786 239,042 Deferred tax assets: Uncollectible accounts (11,651) (10,191) Unamortized investment tax credits (12,049) (12,572) Other (6,861) (4,656) Total deferred income tax assets (30,561) (27,419) Net deferred income tax liabilities $ 229,225 $ 211,623 7D Income Tax Settlement On September 30, 1993, the Company received notification from the IRS that settlement of past income tax returns had been reached for fiscal years 1978 through 1990. The IRS settlement resulted in payments of principal and interest to the Company in 1994 of approximately $25 million, or $19.4 million after income taxes. The Company received regulatory authorization to defer the recognition of the settlement amount in income for fiscal year 1993, and to recognize its portion of the settlement amount in income for fiscal years 1994 and 1995. The Company represented to the Commission that, having received this accounting authorization, it would not file a request for an increase in base rates before December 1994. As a result of the Commission's accounting authorization, the fiscal year 1995 portion of the settlement amount for the Company was amortized (credited) to operation expense. The effect was to offset increases in costs that the Company would incur during the year. In fiscal 1995, the Company amortized approximately $12.7 million, or $9.7 million after income taxes. 8. 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. 9. OTHER INCOME AND DEDUCTIONS - MISCELLANEOUS [Enlarge/Download Table] For fiscal years ended September 30, 1997 1996 1995 (Thousands) Amortization of net gain on sale of Peoples Gas Building $ - $ - $ 576 Interest on amounts recoverable from customers 126 - 99 Gain on expiration of gas storage contracts (see Note 5) - 11,093 - Amortization of gain (loss) on reacquired bonds (165) (65) 317 Loss on donation of property (650) - - Earnings from subsidiary companies 304 275 188 Other 43 (1,283) (169) Total other income and deductions - miscellaneous $ (342) $ 10,020 $ 1,011 10. CAPITAL COMMITMENTS Total contract and purchase order commitments of the Company at September 30, 1997, amounted to approximately $2.9 million. 11. SHORT-TERM BORROWINGS AND CREDIT LINES At September 30, 1997 1996 (Thousands) Bank Loans Peoples Gas 8.50% due March 27, 1998 $ 700 $ - 8.25% due February 11, 1997 - 700 Commercial Paper North Shore Gas due October 1, 1997 $ 2,110 $ - due October 1, 1996 - 1,925 Letters of Credit Peoples Gas $ 100 $ - Available lines of credit Unused bank lines $ 126,490 $ 126,775 Short-term cash needs of the Company and 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 and commercial paper issuances cannot at any time exceed total bank credit then in effect. At September 30, 1997 and 1996, 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 million. Agreements covering $92 million of the total at September 30, 1997 will expire on August 30, 1998; the agreement covering the remaining $37.4 million will expire on January 31, 1999. Such lines of credit cover projected short-term credit needs of the Company and North Shore Gas and support the long-term debt treatment of the Company's adjustable- rate mortgage bonds. (See Note 12A.) Payment for the lines of credit is by fee. 12. LONG-TERM DEBT 12A Interest-Rate Adjustments The rate of interest on the City of Joliet 1984 Series C Bonds, which are secured by the Company's Adjustable-Rate First and Refunding Mortgage Bonds, Series W, is subject to adjustment annually on October 1. Owners of the Series C Bonds have the right to tender such bonds at par during a limited period prior to that date. The Company is obligated to purchase any such bonds tendered if they cannot be remarketed. All Series C Bonds that were tendered prior to October 1, 1997, have been remarketed. The interest rate on such bonds is 3.875 per cent for the period October 1, 1997, through September 30, 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 3.70 per cent for the period December 1, 1996, through November 30, 1997. 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, 1999. (See Note 11.) 12B Bonds Redeemed On December 29, 1995, the Company redeemed, from general corporate funds, approximately $87 million aggregate principal amount of the City of Joliet's 1984 Gas Supply Revenue Refunding Bonds, Series A and B, which were secured by the Company's Series U and V First and Refunding Mortgage Bonds. 12C Sinking Fund Requirements and Maturities At September 30, 1997, long-term debt sinking fund requirements and maturities for the next five years are: Fiscal Amounts Year (Thousands) 1998 $ -- 1999 -- 2000 10,400 2001 -- 2002 -- 12D Fair Value of Financial Instruments 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. At September 30, 1996, the carrying amount of the Company's long-term debt of $462.4 million had an estimated fair value of $494.5 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 $15.5 million in temporary cash investments approximates its fair market value. 13. QUARTERLY FINANCIAL DATA (UNAUDITED) The first quarter of fiscal 1997 included a full quarter's impact of the Commission-approved rate orders. (See Note 2A of the Notes to Consolidated Financial Statements.) All four quarters reflected the decrease in gas deliveries due primarily to warmer weather and conservation. However, this was offset in all four quarters by reduced pension expense. The last three quarters of fiscal 1996 reflected the gain from the expiration of gas storage contracts. (See Note 5 of the Notes to Consolidated Financial Statements.) Net Income Operating Operating Applicable to Fiscal Quarters Revenues Income Common Stock (Thousands) 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 1996 Fourth $ 116,395 $ (971) $ (7,570) Third 216,438 17,197 11,905 Second 429,115 58,918 52,912 First 274,627 40,675 31,505 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 11-30-97 Since Kenneth S. Balaskovits 55 1993 Vice President and Controller of the Company, Peoples Energy, and North Shore Gas; Director of North Shore Gas. J. Bruce Hasch 59 1986 President and Chief Operating Officer of the Company, Peoples Energy, and North Shore Gas; Director of Peoples Energy and North Shore Gas. James Hinchliff 57 1985 Senior Vice President and General Counsel of the Company, Peoples Energy, and North Shore Gas; Director of North Shore Gas. Thomas M. Patrick 51 1996 Executive Vice President of the Company, Peoples Energy, and North Shore Gas; Director of North Shore Gas. Richard E. Terry 60 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 Harris Bankcorp, Inc., Harris Trust and Savings Bank, Bankmont Financial Corp., and Amsted Industries. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY (Continued) IDENTIFICATION OF EXECUTIVE OFFICERS Position at Age at Position Name November 30,1997 11-30-97 Held Since Kenneth S. Balaskovits Vice President and Controller 55 1993 Emmet P. Cassidy Secretary and Treasurer 64 1989 Katherine A. Donofrio Vice President 40 1997 Willard S. Evans, Jr. Vice President 42 1997 Donald M. Field Vice President 48 1996 Joan T. Gagen Vice President 46 1994 J. Bruce Hasch President and Chief Operating 59 1990 Officer James Hinchliff Senior Vice President and 57 1989 General Counsel John C. Ibach Vice President 50 1992 James M. Luebbers Vice President 51 1997 William E. Morrow Vice President 41 1996 Thomas M. Patrick Executive Vice President 51 1996 Desiree Rogers Vice President 38 1997 Norman F. Sidler, Jr. Assistant Vice President 58 1997 Richard E. Terry Chairman of the Board and 60 1990 Chief Executive Officer Directors and executive officers of the Company were elected to serve for a term of one year or until their successors are duly elected and qualified, except for Ms. Donofrio, Messrs. Evans, Luebbers, Morrow, Ms. Rogers, and Mr. Sidler, who were appointed. There are no family relationships among directors and executive officers of the Company. All of the directors and executive officers of the Company have been continuously employed by the Company and/or its affiliates in various capacities for at least five years with the exception of Ms. Rogers. ITEM 11. 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 1997 548,500 237,900 152,663 17,800 16,455 Chairman and Chief 1996 473,500 191,600 145,722 21,200 14,205 Executive Officer 1995 455,300 137,200 137,119 21,400 12,354 J. Bruce Hasch 1997 345,900 106,700 84,525 9,800 10,377 President and Chief 1996 332,600 86,000 80,803 11,800 9,978 Operating Officer 1995 319,800 61,500 76,606 11,800 9,594 James Hinchliff 1997 260,700 67,700 54,338 6,400 7,821 Senior Vice President 1996 250,700 54,500 51,797 7,600 7,521 And General Counsel 1995 241,100 39,000 48,925 7,600 7,233 Thomas M. Patrick 1997 231,600 67,700 54,338 6,400 6,948 Executive 1996 186,800 31,900 33,150 4,800 5,604 Vice President 1995 176,800 39,200 30,900 4,800 5,304 Kenneth S. Balaskovits 1997 210,400 53,100 43,988 5,200 6,312 Vice President and 1996 172,500 25,700 33,150 4,800 5,175 Controller 1995 162,700 24,200 30,900 4,800 4,881 (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, 1997 were as follows: Mr. Terry, 14,020 shares, valued at $528,378.75; Mr. Hasch, 7,990 shares, valued at $301,123.13; Mr. Hinchliff, 5,130 shares, valued at $193,336.88; Mr. Patrick, 3,830 shares, valued at $144,343.13; and Mr. Balaskovits, 3,455 shares, valued at $130,210.31. Dividends are paid on the restricted shares at the same time and at the same rate as dividends paid to all shareholders of common stock. Aggregate market value is based on a per share price of $37.6875, the closing price of Peoples Energy's stock on the New York Stock Exchange on September 30, 1997. ITEM 11. EXECUTIVE COMPENSATION (Continued) (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 1995 constitutes 12,600 shares, of which 2,520 shares vested in 1996; 2,520 shares vested in 1997; 2,520 shares will vest in 1998; 2,520 shares will vest in 1999; and the remaining 2,520 shares will vest in 2000. Total restricted stock awarded to the named individuals for 1996 constitutes 12,475 shares, of which 2,495 shares vested in 1997; 2,495 shares will vest 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 constitutes 11,300 shares, of which 2,260 shares will vest 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. (3) Company contributions to the Capital Accumulation Plan accounts of the named executive officers during the above fiscal years. Employee contributions under the plan are subject to a maximum limitation under the Internal Revenue Code of 1986. The Company pays an employee who is subject to this limitation an additional 50 cents for each dollar that the employee is prevented from contributing solely by reason of such limitation. The amounts shown in the table above reflect, if applicable, this additional Company payment. [Enlarge/Download Table] ITEM 11. EXECUTIVE COMPENSATION (Continued) OPTIONS/SAR GRANTS IN FISCAL 1997 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 17,800 10.1% $34.19 02-Oct-06 $51,620 Chairman and Chief Executive Officer J. Bruce Hasch 9,800 5.6 34.19 02-Oct-06 28,420 President and Chief Operating Officer James Hinchliff 6,400 3.6 34.19 02-Oct-06 18,560 Senior Vice President And General Counsel Thomas M. Patrick 6,400 3.6 34.19 02-Oct-06 18,560 Executive Vice President Kenneth S. Balaskovits 5,200 2.9 34.19 02-Oct-06 15,080 Vice President and Controller (1)The grant of an Option enables the recipient to purchase Peoples Energy common stock at a purchase price equal to the fair market value of the shares on the date the Option is granted. The grant of an SAR enables the recipient to receive, for each SAR granted, cash in an amount equal to the excess of the fair market value of one share of Peoples Energy common stock on the date the SAR is exercised over the fair market value of such common stock on the date the SAR was granted. Options or SARs that expire unexercised become available for future grants. Before an Option or SAR may be exercised, the recipient must complete 12 months of continuous employment subsequent to the grant of the Option or SAR. Options and SARs may be exercised within 10 years from the date of grant, subject to earlier termination in case of death, retirement, or termination of employment. (2)Based on 88,200 Options and 88,200 SARs granted to all employees under Peoples Energy's Long-Term Incentive Compensation Plan during fiscal 1997. (3)Present value is determined a variation of using a variation of the Black- Scholes Option-Pricing Model. The model assumes: a) that Options and SARs are exercised teo years after the date of grant-the average tie Options and SARs were held by recipients under Peoples Energy Long-Term Incentive Compensation Plan over the past ten years; b) use of an interest rate equal to the interest rate on a U.S. Treasury security with a maturity date corresponding to the assumed exercise date; c) a level of volatility calculated using weekly stock prices for the two years prior to the date of grant; d) an expected dividend yield; and e) that no adjustments were made for non-transferability or risk of forfeiture. This is a theoretical value for the Options and SARs. The amount realized from an Option or SAR ultimately depends upon the excess of the market value of Peoples Energy's stock over the exercise price on the date the option or SAR is exercised. ITEM 11. EXECUTIVE COMPENSATION (Continued) [Enlarge/Download Table] AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1997 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 (#) (1) Richard E. Terry 21,200 178,875 29,000 17,800 $204,790 $62,300 Chairman and Chief Executive Officer J. Bruce Hasch 21,400 172,977 9,400 9,800 64,014 34,300 President and Chief Operating Officer James Hinchliff 13,800 118,732 6,200 6,400 42,222 22,400 Senior Vice President And General Counsel Thomas M. Patrick 2,400 27,900 10,200 6,400 79,574 22,400 Executive Vice President Kenneth S. Balaskovits 11,000 97,119 0 5,200 0.00 18,200 Vice President and Controller (1)Includes cash-only SARs exercised by the named executive officers in the following amounts: Mr. Terry, 10,600; Mr. Hasch, 10,700; Mr. Hinchliff, 6,900, Mr. Patrick, 1,200, and Mr. Balaskovits, 5,500. ITEM 11. EXECUTIVE COMPENSATION (Continued) PENSION PLAN TABLE Years Of Service Average Annual Compensation 20 25 30 35 40 $150,000 $ 54,682 $ 68,352 $ 82,022 $ 91,397 $100,772 200,000 74,682 93,352 112,022 124,522 137,022 250,000 94,682 118,352 142,022 157,647 173,272 300,000 114,682 143,352 172,022 190,772 209,522 350,000 134,682 168,352 202,022 223,897 245,772 400,000 154,682 193,352 232,022 257,022 282,022 450,000 174,682 218,352 262,022 290,147 318,272 500,000 194,682 243,352 292,022 323,272 354,522 550,000 214,682 268,352 322,022 356,397 390,772 600,000 234,682 293,352 352,022 389,522 427,022 650,000 254,682 318,352 382,022 422,647 463,272 700,000 274,682 343,352 412,022 455,772 499,522 750,000 294,682 368,352 442,022 488,897 535,772 The above table illustrates various annual straight-life benefits at normal retirement (age 65) for the indicated levels of average annual compensation and various periods of service, assuming no future changes in Peoples Energy's pension benefits. The compensation used in the computation of annual retirement benefits is substantially equivalent to the salary and bonus reported in the Summary Compensation Table. The benefit amounts shown reflect reduction for applicable Social Security benefits. Average annual compensation is the average 12-month compensation for the highest 60 consecutive months of the last 120 months of service prior to retirement. Compensation is total salary paid to an employee by the Company and/or its affiliates, including bonuses under Peoples Energy's Short-Term Incentive Compensation Plan, pre-tax contributions under Peoples Energy's Capital Accumulation Plan, pre-tax contributions under Peoples Energy's Health and Dependent Care Spending Accounts Plan, and pre-tax contributions for life and health care insurance, but excluding moving allowances, exercise of stock options and SARs, and other compensation that has been deferred. At September 30, 1997, the credited years of retirement benefit service for the individuals listed in the Summary Compensation Table were as follows: Mr. Terry, 33 years; Mr. Hasch, 37 years; Mr. Hinchliff, 25 years, Mr. Patrick, 21 years; and Mr. Balaskovits, 30 years. The benefits shown in the foregoing table are subject to maximum limitations under the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code of 1986, as amended. Should these benefits at the time of retirement exceed the then-permissible limits of the applicable Act, the excess would be paid by the Company as supplemental pensions pursuant to Peoples Energy's Supplemental Retirement Benefit Plan. The benefits shown give effect to these supplemental pension benefits. SEVERANCE AGREEMENTS Peoples Energy has entered into separate severance agreements with certain key executives including each of the executives named in the Summary Compensation Table. The intent of the severance agreements is to assure the continuity of the administration and operations of Peoples Energy and its subsidiaries, including the Company in the event of a Change in Control of the Company (as described below). The severance agreements were developed in accordance with the advice of outside consultants. The term of each severance agreement is for the longer of 36 months after the date in which a Change in Control of Peoples Energy occurs or 24 months after the completion of the transaction approved by shareholders described in (iii) below of the description of a Change in Control. A Change in Control is defined as occurring when (i) Peoples Energy receives a report on Schedule 13D filed with the Securities and Exchange Commission pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended, disclosing that any person, group, corporation, or other entity is the beneficial owner, directly or indirectly, of 20% or more of the common stock of Peoples Energy; (ii) any person, group, corporation, or other entity (except Peoples Energy or a wholly-owned subsidiary), after purchasing common stock of Peoples Energy in a tender offer or exchange offer, becomes the beneficial owner, directly or indirectly, of 20% or more of such common stock; (iii) the shareholders of Peoples Energy approve (a) any consolidation or merger of Peoples Energy in which Peoples Energy is not the continuing or surviving corporation, other than a consolidation or merger in which holders of Peoples Energy's common stock prior to the consolidation or merger have substantially the same proportionate ownership of common stock of the surviving corporation immediately after the consolidation or merger as immediately before; (b) any consolidation or merger in which Peoples Energy is the continuing or surviving corporation, but in which the common shareholders of Peoples Energy immediately prior to the consolidation or merger do not hold at least 90% of the outstanding common stock on Peoples Energy; (c) any sale, lease, exchange or other transfer of all or substantially all of the assets of Peoples Energy, except where Peoples Energy owns all of the outstanding stock of the transferee entity or Peoples Energy's common shareholders immediately prior to such transaction own at least 90% of the transferee entity or group of transferee entities immediately after such transaction; or (d) any consolidation or merger of Peoples Energy where, after the consolidation or merger, one entity or group of entities owns 100% of the shares of Peoples Energy, except where Peoples Energy's common shareholders immediately prior to such merger or consolation own at least 90% of the outstanding stock of such entity or group of entities immediately after such consolidation or merger; or (iv) a change in the majority of the members of Peoples Energy's Board of Directors within a 24-month period, unless approved by two-thirds of the directors then still in office who were in office at the beginning of the 24-month period. Each severance agreement provides for payment of severance benefits to the executive in the event that, during the term of the severance agreement, (i) the executive's employment is terminated by Peoples Energy or the Company, except for "cause" as defined therein; or (ii) the executive's employment is terminated due to a constructive discharge, which includes (a) a material change in the executive's responsibilities, which change would cause the executive's position with Peoples Energy or the Company to become of less dignity, responsibility, prestige or scope; (b) reduction, which is more than de minimis, in total compensation; (c) assignment without the executive's consent to a location more than 50 miles from the current place of employment; or (d) liquidation, dissolution, consolidation, merger, or sale of all or substantially all of the assets of Peoples Energy or the Company, unless the successor corporation has a net worth at least equal to that of Peoples Energy or the Company, as applicable, and expressly assumes the obligations of Peoples Energy under the executive's severance agreement. The principal severance benefits payable under each severance agreement consist of the following: (i) the executive's base salary and accrued benefits through the date of termination, including a pro rata portion of awards under Peoples Energy's Short-Term Incentive Compensation (STIC) Plan; (ii) three times the sum of the individual's base salary, the average of the STIC Plan awards for the prior three years and the value of the Long- Term Incentive Compensation (LTIC) Plan awards in the prior calendar year; and (iii) the present value of the executive's accrued benefits under the Peoples Energy's Supplemental Retirement Benefits Plan (SRBP) that would be payable upon retirement at normal retirement age, computed as if the executive had completed three years of additional service. In addition, the executive will be entitled to continuation of life insurance and medical benefits for the longer of (a) a period of three years after termination or (b) a period commencing after termination and ending when the executive may receive pension benefits without actuarial reduction, provided that Peoples Energy's obligation for such benefits under the severance agreement shall cease upon the executive's employment with another employer that provides life insurance and medical benefits. Each severance agreement also provides that the executive's Options and SARs shall become exercisable upon a Change in Control and that all Options and SARs shall remain exercisable for the shorter of (a) three years after termination or (b) the term of such Options and SARs. Any restricted stock previously awarded to the executive under the LTIC Plan would vest upon a Change in Control if such vesting does not occur due to a Change in Control under the terms of the LTIC Plan. Peoples Energy is also obligated under each severance agreement to pay an additional amount to the executive sufficient on an after-tax basis to satisfy any excise tax liability imposed by Section 4999 of the Internal Revenue Code of 1986, as amended. The benefits received by the executive under each agreement are in lieu of benefits under Peoples Energy's termination allowance plan and the executive's benefits under the SRBP. Each executive would be required to waive certain claims prior to receiving any severance benefits. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS At November 30, 1997, voting securities of the Company were beneficially owned as follows: Title of Number of Per Cent of Class Name and Address Shares Owned Class Common Stock Peoples Energy Corporation without 130 East Randolph Drive par value Chicago, Illinois 60601-6207 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, 1997, are as follows: Shares of Peoples Energy Common Stock Beneficially Name Owned at November 30, 1997 (1) Kenneth S. Balaskovits* 12,238 (2)(3) J. Bruce Hasch* 46,656 (2)(3) James Hinchliff* 31,005 (2)(3) Thomas M. Patrick* 19,554 Richard E. Terry* 76,717 (2)(3) All directors and officers of the Company as a group, including those named above (23 in number) 326,454 (1)(2)(3) * Director of the Company (1) The total of 326,454 shares held by all directors and executive officers as a group is less than one per cent of Peoples Energy's outstanding common stock. Unless otherwise indicated, each individual has sole voting and investment power with respect to the shares of common stock attributed to him or her in the table. (2) Includes shares that the following have a right to acquire within 60 days following November 30, 1997, through the exercise of stock options granted under Peoples Energy's Long-Term Incentive Compensation Plan: Messrs. Balaskovits, 2,600; Hasch, 9,600; Hinchliff, 6,300; Patrick, 8,300; Terry, 23,400; and all executive officers of the Company, as a group, 83,600. (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, 1997, as follows: Messrs. Balaskovits, 3,583; Hasch, 8,025; Hinchliff, 4,925; Patrick, 4,125; Terry, 14,685; and all executive officers as a group, 41,620. Owners of shares of restricted stock have the right to vote such shares and to receive dividends thereon, but have no investment power with respect to such shares until the restrictions thereon lapse. CHANGES IN CONTROL None. ITEM 13. 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 1997, the Company furnished general corporate services in the amount of $3,360,094 and support services in the amount of $120,128 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. 16 2. Financial Statement Schedules: Schedule Number VIII Valuation and Qualifying Accounts 46 3. Exhibits: See Exhibit Index on page 48. (b) Reports on Form 8-K filed during the final quarter of fiscal year 1997: None. [Enlarge/Download Table] 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, 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 Fiscal Year Ended September 30, 1995 RESERVES (deducted from assets in balance sheet): Uncollectible items $ 23,400 $22,063 $27,148 $18,315 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 22, 1997 By: /s/ RICHARD E. TERRY Richard E. Terry Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on December 22, 1997. /s/ RICHARD E. TERRY Chairman of the Board and Chief Executive Richard E. Terry Officer and Director (Principal Executive Officer) /s/ KENNETH S. BALASKOVITS Vice President and Controller and Director Kenneth S. Balaskovits (Principal Financial and Accounting Officer) /s/ J. BRUCE HASCH Director J. Bruce Hasch /s/ JAMES HINCHLIFF Director James Hinchliff /s/ THOMAS M. PATRICK Director Thomas M. Patrick 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 3(a) Amendment to the By-Laws of the Registrant, dated August 31, 1997. 3(b) By-Laws of the Registrant, as amended, dated August 31, 1997. 10(a) Firm Transportation Service Agreement under Rate Schedule FTS between the Company and Natural Gas Pipeline Company of America, dated November 13, 1996. 10(b) Firm Transportation Service Agreement under Rate Schedule FT- A or FT-G between the Company and Midwestern Gas Transmission Company, dated November 1, 1997. 10(c) Firm Transportation Service Agreement under Rate Schedule FT- A between the Company and Tennessee Gas Pipeline Company, dated November 1, 1997. 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); The Peoples Gas Light and Coke Company and Subsidiary Companies EXHIBIT INDEX (Continued) Exhibit Number Description of Document 4(a) Supplemental Indenture dated October 1, 1984, Cont'd Exhibit 4-3 (Form 10-K for fiscal year ended September 30, 1984); Supplemental Indentures dated March 1, 1985, 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 Indenture dated as of December 1, 1993 (Form 10-Q for the quarterly period ended December 31, 1993, Exhibit 4(a)); Supplemental Indentures 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(d) 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, The Peoples Gas Light and Coke Company and Subsidiary Companies EXHIBIT INDEX (Continued) Exhibit Number Description of Document 10(d) dated as of September 20, 1995. (Registrant Form Cont'd 10-K for fiscal year ended cont'd 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)). 10(e) Lease dated October 20, 1993, between Prudential Plaza Associates, as Landlord, and the Company, as Tenant (Registrant Form 10-Q for the quarterly period ended December 31, 1993, Exhibit 10(a)).

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