UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
|
[X
]
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|
|
EXCHANGE
ACT OF 1934
|
For
the fiscal year ended December 31, 2006
or
|
[
]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|
|
SECURITIES
EXCHANGE ACT OF 1934
|
Commission
File Number 1-7297
NICOR
INC.
(Exact
name of registrant as specified in its charter)
|
Illinois
|
36-2855175
|
|
|
(State
of Incorporation)
|
(I.R.S.
Employer
|
|
|
Identification
Number)
|
||
|
1844
Ferry Road
|
||
|
Naperville,
Illinois 60563-9600
|
(630)
305-9500
|
|
|
(Address
of principal executive offices)
|
(Registrant’s
telephone number)
|
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of each class
|
Name
of each exchange on which registered
|
|
|
Common
Stock, par value $2.50 per share
|
New
York Stock Exchange
|
|
|
Chicago
Stock Exchange
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes
[X]
No [ ]
Indicate
by check mark if the registrant is not required to file reports pursuant
to
Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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 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 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. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
|
Large
accelerated filer [X]
|
Accelerated
filer [ ]
|
Non-accelerated
filer [ ]
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes [ ] No [X]
The
aggregate market value of common stock (based on the June 30, 2006 closing
price
of $41.50) held by non-affiliates of the registrant was approximately $1.8
billion. As of February 16, 2007, there were 44,911,933 shares of common
stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the company’s 2007 Annual Meeting Definitive Proxy Statement, to be filed on
or about March 14, 2007, are incorporated by reference into Part
III.
|
Table
of Contents
|
|||
|
Item
No.
|
Description
|
Page
No.
|
|
|
ii
|
|||
|
Part
I
|
|||
|
1.
|
1
|
||
|
1A.
|
6
|
||
|
1B.
|
10
|
||
|
2.
|
10
|
||
|
3.
|
10
|
||
|
4.
|
10
|
||
|
11
|
|||
|
Part
II
|
|||
|
5.
|
12
|
||
|
6.
|
14
|
||
|
7.
|
15
|
||
|
7A.
|
34
|
||
|
8.
|
36
|
||
|
9.
|
71
|
||
|
9A.
|
71
|
||
|
9B.
|
72
|
||
|
Part
III
|
|||
|
10.
|
73
|
||
|
11.
|
73
|
||
|
12.
|
73
|
||
|
13.
|
74
|
||
|
14.
|
74
|
||
|
Part
IV
|
|||
|
15.
|
75
|
||
|
77
|
|||
|
78
|
|||
Glossary
ARO.
Asset
retirement obligation.
Chicago
Hub.
A
venture of Nicor Gas, which provides natural gas storage and
transmission-related services to marketers and other gas distribution
companies.
Degree
day. The
extent to which the daily average temperature falls below 65 degrees Fahrenheit.
Normal
weather for Nicor Gas’ service territory, for purposes of this report, is
considered to be 5,830 degree days per year for 2006 and 2005, and 6,000
degree
days per year for 2004.
EN
Engineering. EN
Engineering, L.L.C., a 50-percent-owned joint venture that provides engineering
and consulting services.
FASB.
Financial
Accounting Standards Board.
FERC.
Federal
Energy Regulatory Commission, the agency that regulates the interstate
transportation of
natural
gas, oil and electricity.
FSP.
FASB
Staff Position.
Horizon
Pipeline. Horizon
Pipeline Company, L.L.C., a 50-percent-owned joint venture that operates
an
interstate regulated natural gas pipeline of approximately 70 miles, stretching
from Joliet, Illinois to near the Wisconsin/Illinois border.
ICC.
Illinois
Commerce Commission, the agency that establishes the rules and regulations
governing
utility
rates and services in Illinois.
IRS.
Internal
Revenue Service.
Jobs
Act. American
Jobs Creation Act of 2004.
LIBOR.
London
Inter-bank Offered Rate.
LIFO.
Last in,
first out.
Mcf,
MMcf, Bcf. Thousand
cubic feet, million cubic feet, billion cubic feet.
MMBtus.
Million
British thermal units.
Nicor
Advanced Energy.
Prairie
Point Energy, L.L.C. (doing business as Nicor Advanced Energy), a wholly
owned
business that provides natural gas and related services on an unregulated
basis
to residential and small commercial customers.
Nicor
Enerchange. Nicor
Enerchange, L.L.C., a wholly owned business that engages in wholesale marketing
of natural gas supply services primarily in the Midwest, administers the
Chicago
Hub for Nicor Gas, and manages Nicor Solutions’ and Nicor Advanced Energy’s
product risks, including the purchase of natural gas supplies.
Nicor
Gas. Northern
Illinois Gas Company (doing business as Nicor Gas Company) is a wholly owned
public utility business and one of the nation’s largest distributors of natural
gas.
Nicor.
Nicor
Inc., or the registrant.
Nicor
Services. Nicor
Energy Services Company, a wholly owned business that provides customer
relationship management services to businesses and product warranty contracts,
heating, ventilation and air conditioning repair, maintenance and installation
services and equipment to retail markets, including residential and small
commercial customers.
Nicor
Solutions. Nicor
Solutions, L.L.C., a wholly owned business that offers residential and small
commercial customers energy-related products that provide for natural gas
cost
stability and management of their utility bill.
PBR.
Performance-based
rate, a regulatory plan which ended on January 1, 2003, that provided
economic
incentives based on natural gas cost performance.
PGA.
Nicor
Gas’ Purchased Gas Adjustment.
SEC.
The
United States Securities and Exchange Commission.
SFAS.
Statement
of Financial Accounting Standard.
TEU.
Twenty-foot
equivalent unit, a measure of volume in containerized shipping equal to one
20-foot-
long
container.
Triton.
Triton
Container Investments L.L.C., a cargo container leasing company in which
Nicor
Inc. has an investment.
Tropical
Shipping. A
wholly
owned business and a carrier of containerized freight in the Bahamas and
the
Caribbean region.
Item
1. Business
Nicor,
an
Illinois corporation formed in 1976, is a holding company. Gas distribution
is
Nicor’s primary business. Nicor’s subsidiaries include Nicor Gas, one of the
nation’s largest distributors of natural gas, and Tropical Shipping, a leading
transporter of containerized freight in the Bahamas and the Caribbean region.
Nicor also owns several energy-related ventures, including Nicor Services,
Nicor
Solutions and Nicor Advanced Energy, which provide energy-related products
and
services to retail markets, and Nicor Enerchange, a wholesale natural gas
marketing company. As a consolidated group, Nicor had approximately 3,900
employees at year-end 2006.
Summary
financial information for Nicor’s major business segments is included in Item 8
- Notes to the Consolidated Financial Statements - Note 15 - Business Segment
and Geographic Information. The following sections describe Nicor’s larger
businesses. Certain terms used herein are defined in the glossary on pages
ii
and iii.
GAS
DISTRIBUTION
General
Nicor
Gas, a regulated natural gas distribution utility, serves nearly 2.2 million
customers in a service territory that encompasses most of the northern third
of
Illinois, excluding the city of Chicago. The company’s service territory is
diverse and its customer base has grown steadily over the years, providing
the
company with a well-balanced mix of residential, commercial and industrial
customers. Residential customers typically account for 45 to 50 percent of
natural gas deliveries, while commercial and industrial customers each typically
account for 25 to 30 percent. See Gas Distribution Statistics on page 23
for
operating revenues, deliveries and number of customers by customer
classification. Nicor Gas had approximately 2,100 employees at year-end
2006.
Nicor
Gas
maintains franchise agreements with most of the communities it serves, allowing
it to construct, operate and maintain distribution facilities in those
communities. Franchise agreement terms range up to 50 years. Currently, about
20
percent of the agreements will expire within five years.
Customers
have the option of purchasing their own gas supplies, with delivery of the
gas
by Nicor Gas. The larger of these transportation customers also have options
that include the use of Nicor Gas’ storage system and the ability to choose
varying supply backup levels. The choice of transportation service as compared
to gas sales service results in less revenue for Nicor Gas but has no direct
impact on net operating results. Nicor Gas continues to deliver the natural
gas,
maintain its distribution system and respond to emergencies.
Nicor
Gas
also operates the Chicago Hub, which provides natural gas storage and
transmission-related services to marketers and other gas distribution companies.
The Chicago area is a major market hub for natural gas, and demand exists
for
storage and transmission-related services by marketers, other gas distribution
companies and electric power-generation facilities. Nicor Gas’ Chicago Hub
addresses that demand. Effective in the fourth quarter of 2005, the rate
order
received by Nicor Gas provides that Chicago Hub revenues be passed directly
through to customers as a credit to Nicor Gas’ PGA rider.
Sources
of Natural Gas Supply
Nicor
Gas
purchases natural gas supplies in the open market by contracting with producers
and marketers. It also purchases transportation and storage services from
the
interstate pipelines that are regulated by the FERC. When firm pipeline services
are temporarily not needed, Nicor Gas may release the services in
the
secondary market under FERC-mandated capacity release provisions, with proceeds
reducing the cost of gas charged to customers.
Peak-use
requirements are met through utilization of company-owned storage facilities,
pipeline transportation capacity, purchased storage services and other supply
sources, arranged by either Nicor Gas or its transportation customers. Nicor
Gas
has been able to obtain sufficient supplies of natural gas to meet customer
requirements. The company believes natural gas supply and pipeline capacity
will
be sufficiently available to meet market demands in the foreseeable
future.
Natural
gas supply.
Nicor
Gas maintains a diversified portfolio of natural gas supply contracts. Supply
purchases are diversified by supplier, producing region, quantity, credit
limits
and available transportation. Gas supply pricing is generally tied to published
price indices so as to approximate current market prices. These supply contracts
also may require the payment of fixed demand charges to ensure the availability
of supplies on any given day.
The
company also purchases gas supplies on the spot market to fulfill its supply
requirements or to take advantage of favorable short-term pricing. Spot gas
purchases accounted for about 40 percent of the company’s total gas purchases in
the last three years. The majority of such spot purchases are made during
the
summer months and are directed toward satisfying storage injection
requirements.
As
part
of its purchasing practices, Nicor Gas maintains a price risk hedging strategy
to reduce the risk of short-term price volatility. A disciplined approach
is
used to systematically forward hedge a predetermined portion of forecasted
monthly volumes.
As
noted
previously, transportation customers purchase their own gas supplies. About
one-half of the gas that the company delivers is purchased by transportation
customers directly from producers and marketers.
Pipeline
transportation. Nicor
Gas
is directly connected to eight interstate pipelines, providing access to
most of
the major natural gas producing regions in North America. The company’s primary
long-term transportation contracts are as follows (daily availability in
MMBtus):
|
Availability
|
Contract
Expiration
|
|||
|
Natural
Gas Pipeline Company (NGPL)
|
968,000
|
Various
dates through March 2012
|
||
|
Horizon
Pipeline
|
300,000
|
May
2012
|
||
|
Tennessee
Gas Pipeline Company (TGPC)
|
253,000
|
October
2009
|
||
|
Midwestern
Gas Transmission Company
|
297,000
|
Various
dates through October 2009
|
||
|
Northern
Natural Gas Company
|
206,000
|
October
2008
|
||
|
ANR
Pipeline
|
100,000
|
Various
dates through March 2010
|
||
|
Texas
Gas
|
47,000
|
March
2009
|
The
company has rights of first refusal for contract extensions except for the
TGPC
contract. In addition to the above contracts, Nicor Gas enters into short-term
winter only transportation contracts and contracts that enhance Nicor Gas’
operational flexibility. The availability numbers shown above represent maximums
during the winter heating season. In some cases, the contract levels are
lower
during the summer period.
Storage.
Nicor
Gas owns and operates eight underground natural gas storage facilities. This
storage system is one of the largest in the gas distribution industry. With
about 150 Bcf of annual storage capacity, the system is designed to meet
about
50 percent of the company’s estimated peak-day deliveries and approximately 30
percent of its normal winter deliveries. In addition to company-owned
facilities, Nicor Gas has about 40 Bcf of purchased storage services under
contracts with NGPL that expire in 2009, 2010 and 2012. This level of storage
capability provides Nicor Gas with supply flexibility, improves the reliability
of deliveries, and can mitigate the risk associated with seasonal price
movements.
Competition/Demand
Nicor
Gas
is the largest natural gas distributor in Illinois and, as a regulated monopoly,
has the exclusive right to distribute natural gas in its service territory.
Substantially all single-family homes in Nicor Gas’ service territory are heated
with natural gas. In the commercial and industrial markets, the company’s
natural gas services compete with other forms of energy, such as electricity,
coal, propane and oil, based on such factors as price, service, reliability
and
environmental impact. In addition, the company has a rate that allows
negotiation with potential bypass customers, and no such customer has bypassed
the Nicor Gas system since the rate became effective in 1987. Nicor Gas also
offers commercial and industrial customers alternatives in rates and service,
increasing its ability to compete in these markets. Other significant factors
that impact demand for natural gas include weather and economic conditions.
Natural
gas deliveries are temperature-sensitive and seasonal since about one-half
of
all deliveries are used for space heating. Typically, about three-quarters
of
the deliveries and revenues occur from October through March. Fluctuations
in
weather have the potential to significantly impact year-to-year comparisons
of
operating income and cash flow. It is estimated that a 100 degree-day variation
from normal (5,830 degree days annually) would impact Nicor Gas’ net income by
approximately $1.6 million.
The
effect of weather variations on Nicor Gas’ results is mitigated, in part, due to
weather risks within the consolidated Nicor group that are expected to be
partially offsetting with the utility-bill management products marketed by
Nicor
Solutions and Nicor Advanced Energy. The amount of this offset will vary
depending upon the time of year, weather patterns, the number of customers
for
these products and the market price for natural gas. In 2006 and 2004, the
offsetting impact related to utility-bill management products was about one-half
and one-third, respectively, of the gas distribution weather effect. In 2005,
weather was near normal.
Nicor
Gas’ large residential customer base provides for a relatively stable level of
natural gas deliveries during weak economic conditions. The company’s industrial
and commercial customer base is well diversified, lessening the impact of
industry-specific economic swings. However, management believes that declines
since 2000 in natural gas deliveries to industrial customers may be permanent.
In addition, during periods of high natural gas prices, deliveries of natural
gas can be negatively affected by conservation and the use of alternative
energy
sources.
Regulation
Nicor
Gas
is regulated by the ICC, which establishes the rules and regulations governing
utility rates and services in Illinois. Those rules or regulations that may
significantly affect business performance include the following:
| · |
Base
rates, which are set by the ICC, are designed to allow the company
an
opportunity to recover its costs and earn a fair return for investors.
In
the fourth quarter of 2005, the company received approval from
the ICC for
a base rate increase. For additional information about the rate
order, see
Item 7 - Management’s Discussion and Analysis of Financial Condition and
Results of Operations and Item 8 - Notes to the Consolidated Financial
Statements - Note 19 - Rate
proceeding.
|
| · |
The
company’s ICC-approved tariffs provide that the cost of natural gas
purchased for customers will be fully charged to customers without
markup.
Therefore, the company does not profit from the sale of natural
gas.
Rather, the company earns income from fixed monthly charges and
from
variable transportation charges for delivering natural gas to customer
premises. Annually, the ICC initiates a review of the company’s natural
gas purchasing practices for prudence, and may disallow the pass-through
of costs considered imprudent.
|
| · |
As
with the cost of natural gas, the company has a tariff that provides
for
the pass-through of prudently incurred environmental costs related
to
former manufactured gas plant sites. This pass-through is also
subject to
annual ICC review.
|
The
ICC
also has other rules that impact the company’s operations. Changes in these
rules can impact operating and capital costs.
A
PBR
plan for natural gas costs went into effect in 2000 and was terminated by
the
company effective January 1, 2003. Under the PBR plan, Nicor Gas’ total gas
supply costs were compared to a market-sensitive benchmark. Savings and losses
relative to the benchmark were determined annually and shared equally with
sales
customers. The results of the PBR plan are currently under ICC review.
Additional information on the plan and the ICC review are presented in Item
8 -
Notes to the Consolidated Financial Statements - Note 21 - Contingencies
-
Performance-Based Rate Plan.
Gas
distribution, transmission and storage system, and other
properties
The
gas
distribution, transmission and storage system includes approximately 34,000
miles of steel, plastic and cast iron main; approximately 2.0 million steel,
plastic/aluminum composite, plastic and copper services connecting the mains
to
customers’ premises; and eight underground storage fields. Other properties
include buildings, land, motor vehicles, meters, regulators, compressors,
construction equipment, tools, communication and computer equipment, software
and office equipment.
Most
of
the company’s distribution and transmission property, and underground storage
fields are located on property owned by others and used by the company through
easements, permits or licenses. The company owns most of the buildings housing
its administrative offices and the land on which they sit.
Substantially
all gas distribution properties are subject to the lien of the indenture
securing Nicor Gas’ First Mortgage Bonds.
Additional
information about Nicor Gas’ business is presented in Item 1A - Risk Factors,
Item 7 - Management’s Discussion and Analysis of Financial Condition and Results
of Operations and Item 8 - Notes to the Consolidated Financial
Statements.
SHIPPING
Tropical
Shipping is one of the largest containerized cargo carriers in the Bahamas
and
the Caribbean, a region characterized by modest market growth and intense
competition. The company is a major carrier of exports from the east coast
of
the United States and Canada to these regions. The company’s shipments consist
primarily of southbound cargo such as building materials, food and other
necessities for developers, manufacturers and residents in the Caribbean
and the
Bahamas, as well as tourist-related shipments intended for use in hotels
and
resorts, and on cruise ships. The balance of Tropical Shipping’s cargo consists
primarily of northbound shipments of apparel and agricultural products, and
inter-island shipments. Other related services such as inland transportation
and
cargo insurance are also provided by Tropical Shipping or other Nicor
subsidiaries.
At
December 31, 2006, Tropical Shipping’s operating fleet consisted of 10 owned
vessels and 8 chartered vessels with a container capacity totaling approximately
5,800 TEUs. In addition to the vessels, the company owns and/or leases
containers, container-handling equipment, chassis and other equipment. Real
property, more than half of which is leased, includes office buildings, cargo
handling facilities and warehouses located in the United States, Canada and
some
of the ports served.
Additional
information about Tropical Shipping’s business is presented in Item 1A - Risk
Factors, Item 7 - Management’s Discussion and Analysis of Financial Condition
and Results of Operations and Item 8 - Notes to the Consolidated Financial
Statements.
OTHER
ENERGY VENTURES
Nicor
owns several energy-related ventures, including three companies marketing
energy-related products and services, and a wholesale natural gas marketing
company. Nicor also has equity interests in joint ventures including a
FERC-regulated natural gas pipeline.
Nicor
Services, Nicor Solutions and Nicor Advanced Energy are businesses that provide
energy-related products and services to retail markets, including residential
and small commercial customers. Nicor Services operates primarily in northern
Illinois and provides warranty and maintenance contracts, as well as repair
and
installation services of heating,
air conditioning and indoor air-quality equipment, and customer and prospect
management services. Nicor Solutions offers its residential and small commercial
customers in the Nicor Gas service territory energy-related products that
provide for natural gas price stability and management of their utility bill.
These products mitigate and/or eliminate the risks to customers of colder
than
normal weather and/or changes in natural gas prices. Nicor Advanced Energy
is
certified by the ICC as an Alternate Gas Supplier, authorizing it to be a
non-utility marketer of natural gas for residential and small commercial
customers. Nicor Advanced Energy presently operates in northern Illinois,
offering customers an alternative to the utility as its natural gas
supplier.
Nicor
Enerchange is a business that engages in wholesale marketing of natural gas
supply services primarily in the Midwest, administers the Chicago Hub for
Nicor
Gas, and manages Nicor Solutions’ and Nicor Advanced Energy’s product risks,
including the purchase of natural gas supplies.
Horizon
Pipeline, a 50-percent-owned joint venture with NGPL, operates a natural
gas
pipeline of approximately 70 miles, stretching from Joliet, Illinois to near
the
Wisconsin/Illinois border. Nicor Gas has contracted for approximately 80
percent
of Horizon Pipeline’s capacity under a 10-year agreement at rates that have been
accepted by FERC.
EN
Engineering, a 50-percent-owned joint venture between Nicor and A. Epstein
&
Sons International, is an engineering and consulting firm that specializes
in
the design, installation and maintenance of natural gas, petroleum and liquid
pipeline facilities.
Additional
information about Nicor’s other energy ventures is presented in Item 1A - Risk
Factors, Item 7 - Management’s Discussion and Analysis of Financial Condition
and Results of Operations and Item 8 - Notes to the Consolidated Financial
Statements.
CORPORATE
Nicor
has
various equity investments, the largest of which is Triton Container Investments
L.L.C., a cargo container leasing business.
AVAILABLE
INFORMATION
Nicor
files various reports with the SEC. These reports include the annual reports
on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13 (a)
of the
Securities Exchange Act of 1934. Nicor makes all of these reports available
without charge to the public on the investor relations section of the company’s
Internet site at www.nicor.com
as soon
as reasonably practicable after Nicor files them with, or furnishes them
to, the
SEC.
The
following factors are the most significant factors that can impact year-to-year
comparisons and may affect the future performance of the company’s businesses.
New risks may emerge and management cannot predict those risks or estimate
the
extent to which they may affect the company’s financial performance.
Regulation
of Nicor Gas, including changes in the regulatory environment in general,
may
adversely affect the company’s results of operations, cash flows and financial
condition.
Nicor
Gas
is regulated by the ICC, which has general regulatory power over practically
all
phases of the public utility business in Illinois, including rates and charges,
issuance of securities, services and facilities, system of accounts,
investments, safety standards and transactions with affiliated interests
and
other matters.
Nicor
Gas
is permitted by the ICC’s PGA regulation to adjust the charge to its sales
customers on a monthly basis to recover the company’s prudently incurred actual
costs to acquire the natural gas it delivers to them. The company’s gas costs
are subject to subsequent prudence reviews by the ICC for which the company
makes annual filings. The annual prudence reviews for calendar years 1999-2006
are open for review and any disallowance of costs in those proceedings could
adversely affect Nicor Gas’ results of operations, cash flows and financial
condition. See Item 7 - Management’s Discussion and Analysis of Financial
Condition and Results of Operations for further discussion of annual prudence
reviews.
Most
of
Nicor Gas’ other charges are changed only through a rate case proceeding with
the ICC. The charges established in a rate case proceeding are based on an
approved level of operating costs and investment in utility property and
are
designed to allow the company an opportunity to recover those costs and to
earn
a fair return on that investment. To the extent Nicor Gas’ actual costs to
provide utility service are higher than the levels approved by the ICC, Nicor
Gas’ results of operations, cash flows and financial condition could be
adversely affected until such time as it files for and obtains ICC approval
for
new charges through a rate case proceeding.
Nicor
Gas
is also subject to rules and regulations pertaining to the integrity of its
distribution system and environmental compliance. The company’s results of
operations, cash flows and financial condition could be adversely affected
by
any additional laws or regulations that are enacted that require significant
increases in the amount of expenditures for system integrity and environmental
compliance.
A
change in the ICC’s approved rate mechanisms for recovery of environmental
remediation costs at former manufactured gas sites, or adverse decisions
with
respect to the prudence of costs actually incurred, could adversely affect
the
company’s results of operations, cash flows and financial
condition.
Current
environmental laws may require the cleanup of coal tar at certain former
manufactured gas plant sites. To date, Nicor Gas has identified about 40
properties for which it may in part be responsible. As of December 31, 2006,
the
company had recorded a liability of $19.9 million associated with certain
remediation efforts. Management believes that any such costs that are not
recoverable from other entities or from insurance carriers are recoverable
through rates for utility services under ICC-approved mechanisms for the
recovery of prudently incurred costs. A change in these rate recovery
mechanisms, however, or a decision by the ICC that some or all of these costs
were not prudently incurred, could adversely affect the company’s results of
operations, cash flows and financial condition. See Item 7 - Management’s
Discussion and Analysis of Financial Condition and Results of Operations
for
further discussion.
An
adverse decision in the proceedings concerning Nicor Gas’ PBR Plan could result
in a refund obligation which could adversely affect the company’s results of
operations, cash flows and financial condition.
In
2000,
Nicor Gas instituted a PBR plan for natural gas costs. Under the PBR plan,
Nicor
Gas’ total gas supply costs were compared to a market-sensitive benchmark.
Savings and losses relative to the benchmark were determined annually and
shared
equally with sales customers. The PBR plan was terminated effective January
1,
2003. There are allegations that Nicor Gas acted improperly in connection
with
the PBR plan, and the ICC and SEC are reviewing these allegations in pending
proceedings. An adverse decision or decisions in these proceedings could
result
in a refund or other obligations which could adversely affect the company’s
results of operations, cash flows and financial condition. See Item 7 -
Management’s Discussion and Analysis of Financial Condition and Results of
Operations for further discussion of the PBR proceeding and related
matters.
Nicor
Gas relies on direct connections to eight interstate pipelines and extensive
underground storage capacity. If these pipelines or storage facilities were
unable to deliver natural gas for any reason it could impair Nicor Gas’ ability
to meet its customers’ full requirements.
Nicor
Gas
meets its customers’ peak day, seasonal and annual gas requirements through
deliveries of gas transported on interstate pipelines with which it or its
gas
suppliers have contracts and through withdrawals of gas from storage fields
it
owns or leases. Nicor Gas contracts with multiple pipelines for transportation
services. If a pipeline were to fail to perform transportation or storage
service, including as
a
result of war, acts or threats of terrorism or natural disaster,
on a
peak day or other day with high volume gas requirements, Nicor Gas’ ability to
meet all its customers’ gas requirements may be impaired unless or until
alternative arrangements for delivery of supply were put in place. Likewise,
if
a storage field owned by Nicor Gas, or a principal Nicor Gas-owned transmission
or distribution pipeline used to deliver gas to the market, were to be out
of
service for any reason, including as a result of war, acts or threats of
terrorism or natural disaster, this could impair Nicor Gas’ ability to meet its
customers’ full requirements.
Fluctuations
in weather have the potential to adversely affect the company’s results of
operations, cash flows and financial condition.
When
weather conditions are milder than normal, Nicor’s gas distribution segment has
historically delivered less natural gas, and consequently may earn less income.
Nicor Gas’ natural gas deliveries are temperature-sensitive and seasonal since
about one-half of all deliveries are used for space heating. Typically, about
three-quarters of the deliveries and revenues occur from October through
March.
Mild weather in the future could adversely affect the company’s results of
operations, cash flows and financial condition.
Conversely,
results from products sold by Nicor Solutions and Nicor Advanced Energy
generally benefit from milder than normal weather. Nicor Solutions and Nicor
Advanced Energy offer utility-bill management products that mitigate and/or
eliminate the risks to customers of variations in weather. Benefits or costs
related to these products resulting from variances from normal weather are
recorded primarily at the corporate level as a result of an agreement between
the parent company and certain of its subsidiaries. To the extent weather
is
colder than normal in the future, the company’s results of operations, cash
flows and financial condition could be adversely affected.
Natural
gas commodity price changes may affect the operating costs and competitive
positions of the company’s businesses which could adversely affect its results
of operations, cash flows and financial condition.
Nicor’s
energy-related businesses are sensitive to changes in natural gas prices.
Natural gas prices historically have been volatile and may continue to be
volatile in the future. The prices for natural gas are
subject
to a variety of factors that are beyond Nicor’s control. These factors include,
but are not limited to, the level of consumer demand for, and the supply
of,
natural gas, processing, gathering and transportation availability, the level
of
imports of, and the price of foreign natural gas, the price and availability
of
alternative fuel sources, weather conditions, political conditions or
hostilities in natural gas producing regions.
Any
changes in natural gas prices could affect the prices Nicor’s energy-related
businesses charge, operating costs and the competitive position of products
and
services. In accordance with the ICC’s PGA regulations, Nicor Gas adjusts its
gas cost charges to sales customers on a monthly basis to account for changes
in
the price of natural gas. However, changes in natural gas prices can also
impact
certain operating expenses such as bad debt expense, company use gas and
storage-related gas expenses, financing costs and customer service expenses,
and
these changes can only be reflected in Nicor Gas’ charges to customers if
approved by the ICC in a rate case. Increases in natural gas prices can also
have an adverse effect on natural gas distribution margin because such increases
can result in lower customer demand.
Nicor’s
other energy businesses are also subject to natural gas commodity price risk,
arising primarily from fixed-price purchase and sale agreements, natural
gas
inventories and utility-bill management arrangements. Derivative instruments
such as futures, options, forwards and swaps may be used to hedge these risks.
Nicor
is
subject to margin requirements in connection with the use of derivative
financial instruments and these requirements could escalate if prices move
adversely.
Nicor’s
use of derivative instruments could adversely affect the company’s results of
operations.
Nicor
uses derivative instruments, including futures, options, forwards and swaps,
either traded on exchanges or executed over-the-counter with natural gas
merchants as well as financial institutions, to hedge natural gas price risk.
Fluctuating natural gas prices cause earnings and financing costs of Nicor
to be
impacted. The use of derivative instruments that are not perfectly matched
to
the exposure could adversely affect the company’s results of operations, cash
flows and financial condition. Also, when Nicor’s derivative instruments and
hedging transactions fail to qualify for hedge accounting under SFAS
No. 133, Accounting
for Derivative Instruments and Hedging Activities,
the
company’s results of operations could be adversely affected.
Adverse
decisions in lawsuits seeking a variety of damages allegedly caused by mercury
spillage could adversely affect the company’s results of operations, cash flows
and financial condition.
Nicor
Gas
has incurred, and expects to continue to incur, costs related to its historical
use of mercury in various kinds of equipment. Nicor Gas is a defendant in
several private lawsuits, all in the Circuit Court of Cook County, Illinois,
seeking a variety of damages (including bodily injury, property and punitive
damages) allegedly caused by mercury spillage resulting from the removal
of
mercury-containing regulators. Adverse decisions regarding these claims or
other
mercury-related claims, to the extent they require the company to make payments
in excess of amounts provided for in its financial statements, could adversely
affect the company’s results of operations, cash flows and financial
condition.
Transporting
and storing natural gas involve numerous risks that may result in accidents
and
other operating risks and costs that could adversely affect the company’s
results of operations, cash flows and financial
condition.
Nicor
Gas’ gas distribution activities involve a variety of inherent hazards and
operating risks, such as leaks, accidents and mechanical problems, which
could
cause substantial financial losses. In addition, these risks could result
in
loss of human life, significant damage to property, environmental pollution
and
impairment
of Nicor’s operations, which in turn could lead to substantial losses. In
accordance with customary industry practice, Nicor maintains insurance against
some, but not all, of these risks and losses. The
location of pipelines and storage facilities near populated areas, including
residential areas, commercial business centers and industrial sites, could
increase the level of damages resulting from these risks. The occurrence
of any
of these events if not fully covered by insurance could adversely affect
Nicor’s
results of operations, cash flows and financial condition.
An
inability to access financial markets could affect the execution of Nicor’s
business plan and could adversely affect the company’s results of operations,
cash flows and financial condition.
Nicor
relies on access both to short-term money markets and longer-term capital
markets as a significant source of liquidity for capital and operating
requirements not satisfied by the cash flows from its operations. Management
believes that Nicor and its subsidiaries will maintain sufficient access
to
these financial markets based upon current credit ratings. However, certain
disruptions outside of Nicor’s control or events of default under its debt
agreements may increase its cost of borrowing or restrict its ability to
access
one or more financial markets. Such disruptions could include an economic
downturn, the bankruptcy of an unrelated energy company or downgrades to
Nicor’s
credit ratings. Restrictions on Nicor’s ability to access financial markets may
affect its ability to execute its business plan as scheduled and could adversely
affect the company’s results of operations, cash flows and financial condition.
Changes
in the rules and regulations of certain regulatory agencies could adversely
affect the results of operations, cash flows and financial condition of Tropical
Shipping.
Tropical
Shipping is subject to the International Ship and Port-facility Security
Code
and is also subject to the United States Maritime Transportation Security
Act,
both of which require extensive security assessments, plans and procedures.
Tropical Shipping is also subject to the regulations of both the Federal
Maritime Commission, and the Surface Transportation Board, other Federal
Agencies as well as local laws, where applicable. Additional costs that could
result from changes in the rules and regulations of these regulatory agencies
would adversely affect the results of operations, cash flows and financial
condition of Tropical Shipping.
Tropical
Shipping’s business is dependent on general economic conditions and could be
adversely affected by downturns in the economy.
Tropical
Shipping’s business consists primarily of the shipment of building materials,
food and other necessities for developers, manufacturers and residents in
the
Bahamas and the Caribbean region, as well as tourist-related shipments intended
for use in hotels and resorts, and on cruise ships. As a result, Tropical
Shipping’s results of operations, cash flows and financial condition can be
significantly affected by general economic conditions in the United States,
the
Bahamas, Caribbean region and Canada.
The
occurrence of hurricanes, storms and other natural disasters in Tropical
Shipping’s area of operations could adversely affect its results of operations,
cash flows and financial condition.
Tropical
Shipping’s operations are affected by weather conditions in Florida, Canada, the
Bahamas and Caribbean regions. During
hurricane season in the summer and fall, Tropical Shipping may be subject
to
revenue loss, higher operating expenses, business interruptions, delays and
ship, equipment and facilities damage which could adversely affect Tropical
Shipping’s results of operations, cash flows and financial condition.
Nicor
has credit risk that could adversely affect the company’s results of operations,
cash flows and financial condition.
Nicor
extends credit to its counterparties. Despite what the company believes to
be
prudent credit policies and the maintenance of netting arrangements, the
company
is exposed to the risk that it may not
be
able to collect amounts owed to it. If the
counterparty to such a transaction fails to perform and any collateral the
company has secured is inadequate, it could experience financial
losses.
The
company is involved in legal or administrative proceedings before various
courts
and agencies that could adversely affect the company’s results of operations,
cash flows and financial condition.
The
company is involved in legal or administrative proceedings before various
courts
and agencies with respect to general claims, rates, taxes, environmental,
gas
cost prudence reviews and other matters. Adverse decisions regarding these
matters, to the extent they require the company to make payments in excess
of
amounts provided for in its financial statements, could adversely affect
the
company’s results of operations, cash flows and financial condition. See Item 7
- Management’s Discussion and Analysis of Financial Condition and Results of
Operations for further discussion.
The
risks
described above should be carefully considered in addition to the other
cautionary statements and risks described elsewhere, and the other information
contained in this report and in Nicor’s other filings with the SEC, including
its subsequent reports on Forms 10-Q and 8-K. The risks and uncertainties
described above are not the only risks Nicor faces although they are the
most
significant risks. See Item 7 -
Management’s
Discussion and Analysis of Financial Condition and Results of Operations,
Item
7A - Quantitative and Qualitative Disclosures About Market Risk, and Item
8 -
Notes
to
the Consolidated Financial Statements - Note 10 - Income and Other Taxes
and
Note 21 - Contingencies for further discussion of these and other risks Nicor
faces.
None.
Information
concerning Nicor and its major subsidiaries’ properties is included in Item 1 -
Business, and is incorporated herein by reference. These properties are
suitable, adequate and utilized in the company’s operations.
See
Item
8 - Notes to the Consolidated Financial Statements - Note 21 - Contingencies,
which is incorporated herein by reference.
None.
|
Name
|
Age
|
Current
Position and Background
|
||
|
Russ
M. Strobel
|
54
|
Chairman,
Nicor and Nicor Gas (since 2005); Chief Executive Officer, Nicor
(since
2005); Chief Executive Officer, Nicor Gas (since 2003); President,
Nicor
and Nicor Gas (since 2002); Executive Vice President, General Counsel
and
Secretary, Nicor and Nicor Gas (2002); Senior Vice President, General
Counsel and Secretary, Nicor and Nicor Gas (2000-2002).
|
||
|
Richard
L. Hawley
|
57
|
Executive
Vice President and Chief Financial Officer, Nicor and Nicor Gas
(since
2003); Vice President and Chief Financial Officer, Puget Energy,
Inc., a
holding company with its primary business being an electric and
natural
gas provider (2000-2002) and Puget Sound Energy, Inc., electric
and
natural gas provider (1998-2002).
|
||
|
Rocco
J. D’Alessandro
|
48
|
Executive
Vice President Operations, Nicor Gas (since December 2006); Senior
Vice
President Operations, Nicor Gas (2002-2006); Vice President Customer
Service, Nicor Gas (1999-2002).
|
||
|
Claudia
J. Colalillo
|
57
|
Senior
Vice President Human Resources and Corporate Communications, Nicor
and
Nicor Gas (since 2002); Vice President Human Resources, Nicor and
Nicor
Gas (1998-2002).
|
||
|
Daniel
R. Dodge
|
53
|
Senior
Vice President Diversified Ventures and Corporate Planning, Nicor
and
Nicor Gas (since 2002); Vice President Business Development, Nicor
and
Nicor Gas (1998-2002).
|
||
|
Paul
C. Gracey, Jr.
|
47
|
Senior
Vice President, General Counsel and Secretary, Nicor and Nicor
Gas (since
March 2006); Vice President, General Counsel and Secretary, Nicor
and
Nicor Gas (2002-2006); Vice President and General Counsel, Midwest
Generation, Chicago, independent power producer (2000-2002).
|
||
|
Gerald
P. O’Connor
|
55
|
Vice
President Finance and Treasurer, Nicor and Nicor Gas (since June
2006);
Vice President Administration and Finance, Nicor and Nicor Gas
(2004-2006); Temporary General Manager - Internal Audit, Nicor
and Nicor
Gas (2003-2004); Partner, Tatum Partners L.L.C., professional services
(2003-2004); Vice President and Chief Financial Officer, Aux Sable
Liquid
Products L.L.P., natural gas processing (2000-2002).
|
||
|
Karen
K. Pepping
|
42
|
Vice
President and Controller, Nicor and Nicor Gas (since June 2006);
Assistant
Vice President and Controller, Nicor and Nicor Gas (2005-2006);
Assistant
Controller, Nicor and Nicor Gas (2003-2005); Assistant Corporate
Controller, Wallace Computer Services, Inc., commercial printing
(2002-2003); Director of Accounting, Tellabs, Inc., telecommunication
equipment manufacturer (2000-2002).
|
||
Item
5. Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Nicor
common stock is listed on the New York and Chicago Stock Exchanges. At February
16, 2007, there were approximately 20,900 common stockholders of record and
the
closing stock price was $46.81.
|
Stock
price
|
Dividends
|
|||||||||
|
Quarter
|
High
|
Low
|
Declared
|
|||||||
|
2006
|
||||||||||
|
First
|
$
|
43.12
|
$
|
39.25
|
$
|
.465
|
||||
|
Second
|
42.29
|
38.72
|
.465
|
|||||||
|
Third
|
44.40
|
41.01
|
.465
|
|||||||
|
Fourth
|
49.92
|
42.38
|
.465
|
|||||||
|
2005
|
||||||||||
|
First
|
$
|
38.33
|
$
|
35.50
|
$
|
.465
|
||||
|
Second
|
41.87
|
35.76
|
.465
|
|||||||
|
Third
|
42.59
|
39.10
|
.465
|
|||||||
|
Fourth
|
42.97
|
37.42
|
.465
|
|||||||
In
2001,
Nicor announced a $50 million common stock repurchase program, under which
Nicor
may purchase its common stock as market conditions permit through open market
transactions and to the extent cash flow is available after other cash needs
and
investment opportunities. There have been no repurchases under this program
during 2006 or 2005. As of December 31, 2006, $21.5 million remained authorized
for the repurchase of common stock.
STOCK
PERFORMANCE GRAPH
The
following graph shows a five-year comparison of cumulative total returns
for
Nicor Common Stock, the S&P Utilities Index and the S&P 500 Index (both
of which include Nicor Common Stock) as of December 31 of each of the years
indicated, assuming $100 was invested on January 1, 2002, and all dividends
were
reinvested.
Comparison
of Five-Year Cumulative Total Return
|
2002
|
2003
|
2004
|
2005
|
2006
|
||||||||||||
|
Nicor
|
$
|
86
|
$
|
91
|
$
|
104
|
$
|
116
|
$
|
144
|
||||||
|
S&P
Utilities
|
70
|
88
|
110
|
128
|
155
|
|||||||||||
|
S&P
500
|
78
|
100
|
111
|
117
|
135
|
|||||||||||
|
Nicor
Inc.
|
|||||||||||||||||||
|
|
|||||||||||||||||||
|
(in
millions, except per share data)
|
|||||||||||||||||||
|
Year
ended December 31
|
|||||||||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||||||
|
Operating
revenues
|
$
|
2,960.0
|
$
|
3,357.8
|
$
|
2,739.7
|
$
|
2,662.7
|
$
|
1,897.4
|
|||||||||
|
Operating
income
|
$
|
202.5
|
$
|
201.7
|
$
|
137.7
|
$
|
189.4
|
$
|
226.5
|
|||||||||
|
Income
before cumulative effect of
|
|||||||||||||||||||
|
accounting
change
|
$
|
128.3
|
$
|
136.3
|
$
|
75.1
|
$
|
109.8
|
* |
$
|
128.0
|
||||||||
|
Net
income
|
$
|
128.3
|
$
|
136.3
|
$
|
75.1
|
$
|
105.3
|
$
|
128.0
|
|||||||||
|
Earnings
per common share
|
|||||||||||||||||||
|
Basic
|
|||||||||||||||||||
|
Before cumulative effect of
|
|||||||||||||||||||
|
accounting change
|
$
|
2.88
|
$
|
3.08
|
$
|
1.71
|
$
|
2.49
|
$
|
2.90
|
|||||||||
|
Basic earnings per share
|
2.88
|
3.08
|
1.71
|
2.39
|
2.90
|
||||||||||||||
|
Diluted
|
|||||||||||||||||||
|
Before cumulative effect of
|
|||||||||||||||||||
|
accounting change
|
$
|
2.87
|
$
|
3.07
|
$
|
1.70
|
$
|
2.48
|
$
|
2.88
|
|||||||||
|
Diluted earnings per share
|
2.87
|
3.07
|
1.70
|
2.38
|
2.88
|
||||||||||||||
|
Dividends
declared per common share
|
$
|
1.86
|
$
|
1.86
|
$
|
1.86
|
$
|
1.86
|
$
|
1.84
|
|||||||||
|
Property,
plant and equipment
|
|||||||||||||||||||
|
Gross
|
$
|
4,479.7
|
$
|
4,351.3
|
$
|
4,143.6
|
$
|
3,999.5
|
$
|
3,872.8
|
|||||||||
|
Net
|
2,714.7
|
2,659.1
|
2,549.8
|
2,484.2
|
2,421.8
|
||||||||||||||
|
Total
assets
|
$
|
4,090.1
|
$
|
4,391.2
|
$
|
3,975.2
|
$
|
3,797.2
|
$
|
3,524.4
|
|||||||||
|
Capitalization
|
|||||||||||||||||||
|
Long-term
debt, net of
|
|||||||||||||||||||
|
unamortized discount
|
$
|
497.5
|
$
|
485.8
|
$
|
495.3
|
$
|
495.1
|
$
|
396.2
|
|||||||||
|
Mandatorily
redeemable preferred stock
|
.6
|
.6
|
1.6
|
1.8
|
4.3
|
||||||||||||||
|
Common
equity
|
872.6
|
811.3
|
749.1
|
754.6
|
728.4
|
||||||||||||||
|
$
|
1,370.7
|
$
|
1,297.7
|
$
|
1,246.0
|
$
|
1,251.5
|
$
|
1,128.9
|
||||||||||
|
See
Item 1A - Risk Factors and Item 7 - Management's Discussion and
Analysis
of Financial Condition and Results
|
|||||||||||||||||||
|
of
Operations for factors that can impact year-to-year comparisons
and may
affect the future performance of Nicor's
|
|||||||||||||||||||
|
business.
|
|||||||||||||||||||
|
*
The change in accounting method relates to a rescission of Emerging
Issues
Task Force Consensus No. 98-10,
|
|||||||||||||||||||
|
Accounting
for Contracts Involved in Energy Trading and Risk Management Activities,
which
disallowed the
|
|||||||||||||||||||
|
recording
of inventory at fair value. Effective January 1, 2003, Nicor’s wholesale
natural gas marketing business,
|
|||||||||||||||||||
|
Nicor
Enerchange, began applying accrual accounting rather than fair
value
accounting to gas in storage and
|
|||||||||||||||||||
|
certain
energy-related contracts, such as storage and transportation agreements.
Effective with the change, Nicor
|
|||||||||||||||||||
|
recorded
a $4.5 million cumulative effect loss from the change in accounting
principle, which was net of $3.0 million
|
|||||||||||||||||||
|
in
income tax benefits.
|
|||||||||||||||||||
14
The
purpose of this financial review is to explain changes in operating results
and
financial condition from 2004 to 2006 and to discuss business trends that
might
affect Nicor. Certain terms used herein are defined in the glossary on pages
ii
and iii. The discussion is organized into six sections - Summary, Results
of
Operations, Financial Condition and Liquidity, Outlook, Contingencies and
Critical Accounting Estimates.
SUMMARY
Nicor
is
a holding company. Gas distribution is Nicor’s primary business. Nicor’s
subsidiaries include Nicor Gas, one of the nation’s largest distributors of
natural gas, and Tropical Shipping, a leading transporter of containerized
freight in the Bahamas and the Caribbean region. Nicor also owns several
energy-related ventures, including Nicor Services, Nicor Solutions and Nicor
Advanced Energy, which provide energy-related products and services to retail
markets, and Nicor Enerchange, a wholesale natural gas marketing company.
Nicor
also has equity interests in energy-related businesses.
Net
income and diluted earnings per common share are presented below (in millions,
except per share data):
|
2006
|
2005
|
2004
|
||||||||
|
Net
income
|
$
|
128.3
|
$
|
136.3
|
$
|
75.1
|
||||
|
Diluted
earnings per common share
|
2.87
|
3.07
|
1.70
|
|||||||
Net
income and diluted earnings per common share were lower in 2006 compared
with
2005 due to a $10 million charge ($.22 per share and non-deductible for tax
purposes) associated with the company’s outstanding SEC inquiry recorded in the
second quarter of 2006, the absence of a 2005 pretax benefit of $29.9 million
($.41 per share) related to net insurance recoveries and earnings thereon
related to the securities class action and shareholder derivative lawsuit
settlements, and the absence of a $17 million tax benefit ($.38 per share)
recognized in the fourth quarter of 2005 in connection with the Jobs Act,
partially offset by a first quarter of 2006 pretax recovery of $3.8 million
($.05 per share) associated with Nicor Gas’ mercury inspection and repair
program. Year over year comparisons (excluding the effects of the items noted
above) reflect improved operating results across all business segments and
the
recognition of certain income tax benefits including those resulting from
the
reorganization of certain shipping and related operations.
Net
income and diluted earnings per common share for 2005 compared with 2004
were
impacted significantly by the absence of the 2004 first-quarter securities
class
action settlement charge of $38.5 million ($.52 per share) coupled with the
2005
pretax benefit of $29.9 million ($.41 per share) related to net insurance
recoveries mentioned earlier. 2005 was also significantly impacted by a tax
benefit of approximately $17 million ($.38 per share) in connection with
the
Jobs Act. Year over year comparisons were also impacted by higher operating
results at Tropical Shipping and lower corporate overhead costs, partially
offset by lower operating results in the gas distribution and other
energy-related businesses. Results of the gas distribution business reflect
the
impact of the base rate increase which became effective in the fourth quarter
of
2005.
For
more
information on the SEC inquiry, see the Contingencies section of this
discussion.
Rate
proceeding.
In
2005,
Nicor Gas received approval from the ICC for a $54.2 million base rate increase
which reflected an allowed rate of return on original-cost rate base of 8.85
percent, including a 10.51 percent cost of common equity. The order also
included the authorization to pass all Chicago Hub revenues directly through
to
customers as a credit to Nicor Gas’ PGA rider and the shifting of certain
storage-related
costs from the PGA rider to base rates. In addition, rates were
established using a 10-year average for weather as opposed to the previous
use
of a 30-year average. These rates were implemented in the fourth quarter
of
2005. Because the order shifts certain items between base rates and Nicor
Gas’
PGA rider, the company estimated that, under normal weather conditions and
demand as reflected in the rate case, the annual net revenue increase resulting
from implementing the rate order would have been about $34.7 million under
the
tariffs that would have been placed into effect.
In
October 2005, Nicor Gas and six other parties filed applications for rehearing
of the final order of the rate case. In March 2006, the ICC issued its
decision on rehearing in which it adjusted the amount of the annual net rate
increase to $49.7 million from the $54.2 million that had been approved in
the
earlier order. The company estimates that because the revised order similarly
shifts certain items between base rates and Nicor Gas’ PGA rider, under normal
weather conditions and demand as reflected in the rate case, the increase
in
annual net revenue decreased to $30.2 million from the estimated $34.7 million
under the previous order. Rate changes resulting from the rehearing order
were
prospective and went into effect on April 11, 2006. Parties, including Nicor
Gas, that appealed the ICC’s rate case decision to the state appellate courts
have since withdrawn their appeals. As a result, the ICC rate order is no
longer
subject to judicial review.
As
a
result of the rate order which became effective in the fourth quarter of
2005,
certain storage-related costs have been recorded in operating and maintenance
expense. Storage related gas costs recorded in operating and maintenance
expense
during 2006 and 2005 totaled $21.4 million and $6.5 million, respectively.
Storage-related gas costs incurred prior to the effective date of the rate
order
and recorded as cost of gas in 2005 totaled $11.1 million.
Details
of various financial and operating information by segment can be found on
the
pages that follow.
Operating
income by segment. Operating
income (loss) by major business segment is presented below (in
millions):
|
2006
|
2005
|
2004
|
||||||||
|
Gas
distribution
|
$
|
123.9
|
$
|
116.9
|
$
|
130.8
|
||||
|
Shipping
|
47.5
|
40.4
|
31.6
|
|||||||
|
Other
energy ventures
|
26.6
|
14.1
|
19.3
|
|||||||
|
Corporate
and eliminations
|
4.5
|
30.3
|
(44.0
|
)
|
||||||
|
$
|
202.5
|
$
|
201.7
|
$
|
137.7
|
|||||
The
following summarizes operating income (loss) comparisons by major business
segments:
| · |
Gas
distribution operating income increased $7.0 million in 2006 as
compared
with 2005 due to the positive effects of higher gas distribution
margin
($19.0 million increase), a first quarter mercury-related recovery
of $3.8
million and higher gains on property sales ($2.9 million increase).
These
positive factors were partially offset by higher operating and
maintenance
expenses ($13.7 million increase) and higher depreciation expense
($5.6
million increase). Higher gas distribution margin was primarily
due to the
impact of the base rate increase (approximately $36 million) and
higher
demand unrelated to weather (approximately $5 million increase),
partially
offset by the negative impact of warmer weather than in 2005
(approximately $17 million decrease) and the passage of Chicago
Hub
revenues through the PGA effective with the rate order (approximately
$8
million decrease).
|
Gas
distribution operating income decreased $13.9 million in 2005 as compared
with
2004 due to higher operating and maintenance expenses ($19.9 million increase),
higher depreciation expense ($5.7 million increase), and lower gains on property
sales ($5.5 million decrease). The adverse impact of these factors was partially
offset by higher gas distribution margin ($17.5 million increase). Higher
gas
distribution margin was largely driven by higher average rates (approximately
$19 million
increase)
due in part to the rate increase which became effective during the fourth
quarter of 2005 (approximately $13 million) and the positive impact of colder
weather than in 2004 (approximately $4 million increase), partially offset
by
lower demand unrelated to weather (approximately $6 million decrease).
| · |
Shipping
operating income for 2006 increased $7.1 million as compared with
2005 due
to higher operating revenues ($19.8 million increase) which were
partially
offset by higher operating costs ($12.7 million increase). Higher
operating revenues were attributable to higher average rates ($40.0
million increase), partially offset by lower volumes shipped ($19.5
million decrease). Higher operating costs were due to higher
transportation-related costs including fuel ($6.3 million increase),
employee-related costs ($5.0 million increase), repairs and maintenance
($2.7 million increase) and leased freight equipment ($2.5 million
increase), partially offset by lower legal and audit fees ($4.2
million
decrease). Included in legal and audit fees for 2005 were approximately
$5.1 million of costs incurred in connection with the repatriation
of
funds and the reorganization of Tropical Shipping to take advantage
of the
benefits of the Jobs Act.
|
Shipping
operating income for 2005 increased $8.8 million compared with 2004 due
primarily to an increase in revenue ($67.8 million increase) driven by higher
average rates and increased volumes shipped across substantially all ports,
partially offset by increased operating expenses ($59.0 million increase).
Shipping segment operating expenses increased due primarily to higher
transportation ($37.7 million increase) and payroll-related costs ($6.2 million
increase), driven by general price increases and higher volumes shipped.
Transportation-related costs include fuel, inland freight, vessel charter,
voyage and transportation, and port costs. Higher legal and audit fees also
contributed to the increase in expenses, reflecting approximately $5.1 million
of costs incurred in connection with the repatriation of funds and the
reorganization of Tropical Shipping.
| · |
Operating
income from Nicor’s other energy ventures for 2006 increased $12.5 million
primarily due to higher operating income at Nicor Enerchange ($13.2
million increase), offset by lower operating results at Nicor’s
energy-related products and services businesses ($0.6 million decrease).
Improved results at Nicor Enerchange were primarily due to a significant
positive variation in fair value adjustments associated with derivatives
hedging purchases and sales of inventory, partially offset by unfavorable
costing of physical sales activity. Lower operating results at
Nicor’s
energy-related products and services businesses were due to higher
operating costs ($45.4 million increase) offset, in part, by higher
operating revenues ($44.8 million
increase).
|
Operating
income from Nicor’s other energy ventures for 2005 decreased $5.2 million
compared with 2004 due primarily to lower operating results at Nicor Enerchange
($6.3 million decrease). Lower Nicor Enerchange results reflect unfavorable
fair
value adjustments related to derivative instruments used to hedge future
sales
of natural gas inventory.
Nicor
Enerchange purchases and holds natural gas in storage to earn a profit margin
from its ultimate sale. Nicor Enerchange uses derivatives to mitigate commodity
price risk in order to substantially lock-in the profit margin that will
ultimately be realized. However, gas stored in inventory is required to be
accounted for at the lower of weighted-average cost or market, whereas the
derivatives used to reduce the risk associated with a change in the value
of the
inventory are accounted for at fair value, with changes in fair value recorded
in operating results in the period of change. As a result, earnings are subject
to volatility as the market price of derivatives change, even when the
underlying hedged value of the inventory is unchanged. The volatility resulting
from this accounting can be significant from period to period.
| · |
“Corporate
and eliminations” operating income for 2006, 2005 and 2004 were impacted
by the following items:
|
In
2006,
the company reached a tentative agreement with the staff of the SEC Enforcement
Division in settlement of an anticipated civil action for a payment of $10
million. Nicor recorded a $10 million charge (non-deductible for tax purposes)
in the second quarter associated with the outstanding SEC inquiry. For more
information, see Item 8 - Notes to the Consolidated Financial Statements
- Note
21 - Contingencies - SEC and U.S. Attorney Inquiries.
Included
in corporate and eliminations’ 2006 operating income is approximately $9.5
million of benefits associated with Nicor’s other energy ventures’ utility-bill
management products
attributable to warmer than normal weather (excludes costs of approximately
$0.7
million recorded within other energy ventures). Benefits or costs resulting
from
variances from normal weather are recorded primarily at the corporate level
as a
result of an agreement between the parent company and certain of its
subsidiaries. The weather impact of these contracts generally serves to
partially offset the gas distribution segment’s weather risk. The amount of the
offset attributable to the utility-bill management products marketed by Nicor’s
other energy ventures will vary depending upon a number of factors including
the
time of year, weather patterns, the number of customers for these products
and
the market price for natural gas.
In
2006
and 2005, the company recognized insurance recoveries related to previously
incurred legal expenses associated with the securities class action and
shareholder derivative lawsuits. The recoveries totaled $5.2 million and
$2.8
million, respectively.
In
2005,
the company recorded a $29.4 million recovery from an insurance carrier related
to costs previously incurred by Nicor in connection with a securities class
action and a related shareholder derivative action which were previously
settled
and a $0.5 million net recovery which was comprised of a shareholder derivative
action settlement ($3.5 million) and a related Directors and Officers
(“D&O”) insurance recovery ($4.0 million).
In
2004,
the company recorded a $38.5 million settlement charge relating to a securities
class action settlement. For more information, see Item 8 - Notes to the
Consolidated Financial Statements - Note 21 - Contingencies -
Other.
These
factors are discussed in more detail in the Results of Operations
section.
RESULTS
OF OPERATIONS
Details
of various financial and operating information by segment can be found in
the
tables throughout this review. The following discussion summarizes the major
items impacting Nicor’s operating income.
Operating
revenues. Operating
revenues by major business segment are presented below (in
millions):
|
2006
|
2005
|
2004
|
||||||||
|
Gas
distribution
|
$
|
2,452.3
|
$
|
2,909.6
|
$
|
2,362.1
|
||||
|
Shipping
|
398.3
|
378.5
|
310.7
|
|||||||
|
Other
energy ventures
|
215.9
|
157.0
|
155.3
|
|||||||
|
Corporate
and eliminations
|
(106.5
|
)
|
(87.3
|
)
|
(88.4
|
)
|
||||
|
$
|
2,960.0
|
$
|
3,357.8
|
$
|
2,739.7
|
|||||
Gas
distribution revenues are impacted by changes in natural gas costs, which
are
passed directly through to customers without markup, subject to ICC review.
For
the year 2006, gas distribution revenues decreased $457.3 million as compared
to
2005 due to lower natural gas costs (approximately $300 million decrease)
and
the negative impact of warmer weather than the corresponding period in 2005
(approximately $250 million decrease), partially offset by higher demand
unrelated to weather
(approximately
$35 million increase) and the impact of the base rate increase (approximately
$36 million increase).
For
the
year 2005, gas distribution revenues increased $547.5 million as compared
with
2004 due primarily to higher natural gas costs (approximately $525 million
increase) and the positive impact of colder weather than in 2004 (approximately
$60 million increase), partially offset by lower demand unrelated to weather
(approximately $70 million decrease). These results also reflect the impact
of
the rate order tariffs, which became effective during the fourth quarter
of
2005, and increased revenues by approximately $13 million.
In
2006,
shipping segment operating revenues increased over 2005 due to higher average
rates ($40.0 million increase), partially offset by lower volumes shipped
($19.5
million decrease). Rates were higher due to general rate increases across
all
markets and higher cost-recovery surcharges for fuel and security. Volumes
were
lower due to the adverse impact of increased competition in several of the
ports
served, the strategic decision not to compete for certain low margin business,
and changing global trade patterns.
In
2005,
shipping segment operating revenues increased over 2004 due primarily to
higher
average rates ($41.8 million increase) and increased volumes shipped ($25.3
million increase). Rates were higher due to general rate increases across
all
markets and higher cost-recovery surcharges for fuel and security.
The
volume increases were recognized across substantially all ports, reflecting
improvements in the economy, significant increases in Bahamian and Caribbean
investment, and rebuilding efforts following the 2004 hurricanes.
The
2006
increase in revenues for other energy ventures was due primarily to higher
revenues at Nicor’s energy-related products and services business ($44.8 million
increase) and higher revenues at Nicor Enerchange ($14.2 million increase).
Higher revenues at Nicor’s energy-related products and services businesses were
attributable primarily to higher average prices ($17.5 million increase)
and an
increase in customer contracts ($17.0 million increase). Higher revenues
at
Nicor Enerchange were due to a significant positive variation in fair value
adjustments associated with derivatives hedging purchases and sales of
inventory, partially offset by unfavorable costing of physical sales
activity.
The
2005
increase in revenues for other energy ventures was due to improved revenues
at
Nicor’s energy-related products and services businesses ($8.3 million increase)
due primarily to new business initiatives, higher contract volumes, and improved
average contract pricing, partially offset by lower revenues at Nicor Enerchange
($6.5 million decrease) due primarily to unfavorable fair value adjustments
discussed above under the Operating income by segment section.
Corporate
and eliminations primarily reflects the elimination of gas distribution revenues
against Nicor Solutions’ expenses for customers purchasing the utility-bill
management products.
Gas
distribution margin. Nicor
utilizes a measure it refers to as “gas distribution margin” to evaluate the
operating income impact of gas distribution revenues. Gas distribution revenues
include natural gas costs, which are passed directly through to customers
without markup, subject to ICC review, and revenue taxes, for which Nicor
Gas
earns a small administrative fee. These items often cause significant
fluctuations in gas distribution revenues, and yet they have virtually no
direct
impact on gas distribution operating income.
A
reconciliation of gas distribution revenues and margin follows (in
millions):
|
2006
|
2005
|
2004
|
||||||||
|
Gas
distribution revenues
|
$
|
2,452.3
|
$
|
2,909.6
|
$
|
2,362.1
|
||||
|
Cost
of gas
|
(1,743.7
|
)
|
(2,212.4
|
)
|
(1,695.0
|
)
|
||||
|
Revenue
tax expense
|
(144.4
|
)
|
(152.0
|
)
|
(139.4
|
)
|
||||
|
Gas
distribution margin
|
$
|
564.2
|
$
|
545.2
|
$
|
527.7
|
||||
For
the
year 2006, gas distribution margin increased $19.0 million from 2005 due
primarily to the impact of the base rate increase (approximately $36 million)
and higher demand unrelated to weather (approximately $5 million increase),
partially offset by the negative impact of warmer weather than in 2005
(approximately $17 million decrease) and the passage of Chicago Hub revenues
through the PGA effective with the rate order (approximately $8 million
decrease).
For
the
year 2005, gas distribution margin increased $17.5 million from 2004 due
primarily to higher average rates (approximately $19 million increase) driven
by
the rate increase (approximately $13 million), and the positive impact of
colder
weather than in 2004 (approximately $4 million increase), partially offset
by
lower demand unrelated to weather (approximately $6 million decrease).
Gas
distribution operating and maintenance expense. The
$13.7
million increase in gas distribution operating and maintenance expense in
2006
as compared with the prior year reflects higher storage-related gas costs
($14.9
million increase) and company use gas ($9.9 million increase), partially
offset
by lower bad debt expense ($4.5 million decrease), net claims arising from
normal operations ($4.5 million decrease) and payroll and benefit-related
costs
($3.1 million decrease).
The
$19.9
million increase in gas distribution operating and maintenance expense in
2005
as compared with the prior year reflects higher bad debt expense ($12.1 million
increase), company use gas ($4.0 million increase) and storage-related gas
costs
($6.5 million increase in the fourth quarter). These increases were partially
offset by lower net legal and claims expenses ($4.7 million decrease).
The
rate
order, which became effective in the fourth quarter of 2005, results in certain
storage-related gas costs being charged
to operating and maintenance expense. Prior to the effective date of the
rate
order, storage-related gas costs were charged to cost of gas and passed through
to customers as part of the PGA rider.
Other
gas distribution operating expenses. Mercury-related
costs (recoveries), net reflect the estimated costs, credits and recoveries
associated with the company’s mercury inspection and repair program. During the
first quarter of 2006, a mercury-related recovery of $3.8 million was realized.
This net recovery resulted from a settlement reached with an independent
contractor of Nicor Gas. Net mercury-related costs (recoveries) were
insignificant in 2005 and 2004. Additional information about the company’s
mercury inspection and repair program is presented in Item 8 - Notes to the
Consolidated Financial Statements - Note 21 - Contingencies -
Mercury.
Property
sale gains and losses vary from year-to-year depending upon property sales
activity. During 2006, Nicor Gas realized a $3.3 million pretax gain on the
sale
of property. Property sale gains and losses were insignificant during 2005.
During 2004, Nicor Gas realized a $5.9 million pretax gain on the sale of
property. The company continues to assess its ownership of certain real estate
holdings.
Shipping
operating expenses.
Shipping
segment operating expenses increased $12.7 million in 2006 as compared with
2005
due to higher transportation-related costs including fuel ($6.3 million
increase), employee-related costs ($5.0 million increase), repairs and
maintenance ($2.7 million increase) and leased
freight
equipment ($2.5 million increase), partially offset by lower legal and audit
fees ($4.2 million decrease). Included in legal and audit fees for 2005 were
approximately $5.1 million of costs incurred in connection
with the repatriation of funds and the reorganization of Tropical Shipping
to
take advantage of the benefits of the Jobs Act.
Shipping
segment operating expenses increased $59.0 million in 2005 as compared with
2004
due primarily to higher transportation-related costs, which include fuel,
inland
freight, vessel charter, voyage and transportation, and port costs ($37.7
million increase), and higher payroll-related costs ($6.2 million increase).
The
increases were due to general price increases and increased volumes shipped.
Higher legal and audit fees ($5.2 million increase) also contributed to the
increase. Included in these amounts were approximately $5.1 million of costs
incurred in connection with repatriation of funds and the reorganization
of
Tropical Shipping.
Operating
expenses of other energy ventures. The
$46.4
million increase in the 2006 operating expenses compared with 2005 were due
to
higher expenses at Nicor’s energy-related products and services businesses
($45.4 million increase) reflecting a higher average cost of gas ($14.8 million
increase), costs related to an increase in customer contracts ($12.4 million
increase) and higher selling, general and administrative costs attributable
to
acquiring new customer contracts ($8.8 million increase).
The
$6.9
million increase in the 2005 operating expenses compared with 2004 was due
primarily to higher expenses at Nicor’s energy-related products and services
businesses ($7.1 million increase), due largely to higher risk management
costs
and expenses related to new business initiatives, partially offset by the
impact
of a decreased average number of fixed utility bill management
customers.
Litigation
charges (recoveries), net. In
the
second quarter of 2006, Nicor recorded a $10 million charge (non-deductible
for
tax purposes) associated with the outstanding SEC inquiry. In July 2006,
the
company reached a tentative agreement with the staff of the SEC Enforcement
Division in settlement of an anticipated civil action for a payment of $10
million. For more information, see Item 8 - Notes to the Consolidated Financial
Statements - Note 21 - Contingencies - SEC and U.S. Attorney
Inquiries.
In
the
first quarter of 2005, the company recorded a $0.5 million net recovery which
was comprised of a shareholder derivative action settlement ($3.5 million)
and a
related D&O insurance recovery ($4.0 million). During the second quarter of
2005, the company recorded $29.4 million of income related to the recovery
from
an insurance carrier of costs previously incurred by Nicor in connection
with a
securities class action and a related shareholder derivative action which
were
previously settled. For more information, see Item 8 - Notes to the Consolidated
Financial Statements - Note 21 - Contingencies - Other.
In
the
first quarter of 2004, the company recorded a $38.5 million litigation charge
related to an agreement to settle the securities class actions.
Other
corporate expenses and eliminations.
Other
corporate operating expenses (income) were ($5.2) million, ($0.8) million
and
$5.5 million in 2006, 2005 and 2004, respectively. In 2006 and 2005, the
company
recorded a benefit from insurance recoveries related to legal expenses incurred
in 2004 and prior. Also included in these amounts are business development
costs.
Intercompany
eliminations were ($115.8) million, ($86.9) million and ($88.4) million in
2006,
2005 and 2004, respectively, and related primarily to utility-bill management
products.
Interest
expense.
Interest
expense for 2006 increased $2.3 million over the 2005 period. This increase
primarily reflects the impact of higher average interest rates ($2.5 million
increase).
Interest
expense for 2005 increased $5.6 million over the 2004 period. This increase
reflects the impact of higher average interest rates ($6.2 million increase)
and
higher estimated interest on income tax matters
($3.7
million increase), partially offset by the impact of lower average borrowing
levels ($4.8 million decrease).
Net
equity investment income.
Net
equity investment income increased $1.8 million in 2006 over the 2005 period
due
primarily to a $2.4 million gain on a sale of an equity investment recognized
in
the third quarter of 2006 and higher income from EN Engineering ($0.8 million
increase). These items were partially offset by lower income from Triton
($1.6
million decrease).
Equity
investment results for 2005 increased by $3.0 million as compared with 2004
due
primarily to higher results related to low income housing investments ($1.1
million increase) and higher income from Triton ($0.9 million increase).
Equity
investment results include $5.8 million, $7.4 million and $6.5 million for
2006,
2005 and 2004, respectively, for Nicor’s share of income from
Triton.
Interest
income. Interest
income increased
$3.0 million in 2006 over 2005 and
$3.7
million in 2005 over 2004 due to higher average rates and higher investment
balances.
Income
tax expense.
During
December 2005, Nicor repatriated $132 million of cumulative undistributed
earnings of foreign subsidiaries. The repatriation was funded by cash available
from foreign subsidiaries coupled with the proceeds received by Tropical
Shipping in connection with the December 2005 issuance of a $40 million two-year
senior unsecured term loan. The federal income tax benefit resulting from
the
repatriation is approximately $17 million and was recognized in the fourth
quarter of 2005. In conjunction with the repatriation, Nicor reclassified
approximately $7.6 million of deferred income tax liabilities to other income
tax reserves.
Effective
January 2006, the company reorganized certain shipping and related operations.
The reorganization allows the company to take advantage of certain provisions
of
the Jobs Act that provide the opportunity for tax savings subsequent to the
date
of the reorganization. Generally, to the extent foreign shipping earnings
are
not repatriated to the United States, such earnings are not expected to be
subject to current taxation. In addition, to the extent such earnings are
expected to be indefinitely reinvested offshore, no deferred income tax expense
would be recorded by the company. For the year ended December 31, 2006, income
tax expense has not been provided on approximately $29 million of foreign
company shipping earnings that are expected to be indefinitely reinvested
offshore. In connection with these activities, a net income tax benefit of
$5.2
million from the elimination of certain deferred income taxes and $4.7 million
in current income tax expense was recorded in 2006.
The
overall effective income tax rate for 2006 increased to 26.3 percent from
the
prior year rate of 20.3 percent, due primarily to the 2005 tax benefits recorded
in connection with the Jobs Act (approximately $17 million). The decline
in the
company’s effective income tax rate to 20.3 percent in 2005 from 28.7 percent in
2004 was also primarily a result of the tax benefits recorded in 2005 related
to
the Jobs Act. In addition, the 2006 effective income tax rate reflects the
ongoing benefit of untaxed foreign shipping earnings, the recognition of
tax
benefits related to the first quarter 2006 reorganization of the company’s
shipping and related operations and second quarter 2006 favorable adjustments
associated with tax audits (which occur in the ordinary course of business)
offset, in part, by the non-deductible $10 million charge in the second quarter
2006 associated with the company’s outstanding SEC inquiry. The 2005 effective
income tax rate was adversely impacted by recording net litigation recoveries
and earnings thereon ($29.9 million) at the company’s marginal tax rate of
approximately 40 percent.
|
Gas
Distribution Statistics
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Operating
revenues (millions)
|
||||||||||
|
Sales
|
||||||||||
|
Residential
|
$
|
1,671.1
|
$
|
2,031.4
|
$
|
1,625.5
|
||||
|
Commercial
|
373.9
|
453.5
|
349.9
|
|||||||
|
Industrial
|
42.8
|
61.8
|
49.3
|
|||||||
|
2,087.8
|
2,546.7
|
2,024.7
|
||||||||
|
Transportation
|
||||||||||
|
Residential
|
32.0
|
27.9
|
23.6
|
|||||||
|
Commercial
|
82.1
|
73.1
|
69.9
|
|||||||
|
Industrial
|
41.0
|
39.2
|
39.9
|
|||||||
|
Other
|
3.7
|
11.7
|
14.0
|
|||||||
|
158.8
|
151.9
|
147.4
|
||||||||
|
Other
revenues
|
||||||||||
|
Revenue
taxes
|
147.7
|
156.4
|
143.5
|
|||||||
|
Environmental
cost recovery
|
11.6
|
21.0
|
20.6
|
|||||||
|
Chicago
Hub
|
26.4
|
11.5
|
7.9
|
|||||||
|
Performance-based
rate plan
|
-
|
-
|
(1.8
|
)
|
||||||
|
Other
|
20.0
|
22.1
|
19.8
|
|||||||
|
205.7
|
211.0
|
190.0
|
||||||||
|
$
|
2,452.3
|
$
|
2,909.6
|
$
|
2,362.1
|
|||||
|
Deliveries
(Bcf)
|
||||||||||
|
Sales
|
||||||||||
|
Residential
|
185.9
|
200.2
|
204.8
|
|||||||
|
Commercial
|
41.8
|
44.7
|
44.3
|
|||||||
|
Industrial
|
5.0
|
6.3
|
6.4
|
|||||||
|
232.7
|
251.2
|
255.5
|
||||||||
|
Transportation
|
||||||||||
|
Residential
|
17.0
|
18.9
|
16.6
|
|||||||
|
Commercial
|
80.4
|
87.5
|
84.1
|
|||||||
|
Industrial
|
108.6
|
113.0
|
117.0
|
|||||||
|
206.0
|
219.4
|
217.7
|
||||||||
|
438.7
|
470.6
|
473.2
|
||||||||
|
Year-end
customers (thousands)
(1)
|
||||||||||
|
Sales
|
||||||||||
|
Residential
|
1,807
|
1,796
|
1,777
|
|||||||
|
Commercial
|
123
|
120
|
117
|
|||||||
|
Industrial
|
7
|
8
|
7
|
|||||||
|
1,937
|
1,924
|
1,901
|
||||||||
|
Transportation
|
||||||||||
|
Residential
|
166
|
157
|
148
|
|||||||
|
Commercial
|
57
|
58
|
60
|
|||||||
|
Industrial
|
6
|
6
|
6
|
|||||||
|
229
|
221
|
214
|
||||||||
|
2,166
|
2,145
|
2,115
|
||||||||
|
Other
statistics
|
||||||||||
|
Degree
days
|
5,174
|
5,783
|
5,637
|
|||||||
|
Warmer
than normal (2)
|
(11
|
%)
|
(1
|
%)
|
(6
|
%)
|
||||
|
Average
gas cost per Mcf sold
|
$
|
7.44
|
$
|
8.74
|
$
|
6.56
|
||||
|
(1)
The company has redefined the customer count methodology in 2006
in
conjunction with its new
|
||||||||||
|
customer
care and billing system.
|
||||||||||
|
(2)
Normal weather for Nicor Gas' service territory, for purposes of
this
report, is considered to be 5,830
|
||||||||||
|
degree
days per year for 2006 and 2005 and 6,000 degree days for 2004.
On a 6,000
degree day basis,
|
||||||||||
|
2006
and 2005 would have been 14% and 4% warmer than normal,
respectively.
|
||||||||||
23
|
Shipping
Statistics
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
TEUs
shipped (thousands)
|
203.1
|
214.2
|
198.0
|
|||||||
|
Average
revenue per TEU
|
$
|
1,961
|
$
|
1,764
|
$
|
1,569
|
||||
|
At
end of period
|
||||||||||
|
Ports
served
|
27
|
25
|
24
|
|||||||
|
Vessels
operated at year-end
|
18
|
18
|
20
|
|||||||
FINANCIAL
CONDITION AND LIQUIDITY
The
company believes it has access to adequate resources to meet its needs for
capital expenditures, debt redemptions, dividend payments and working capital.
These resources include net cash flow from operating activities, access to
capital markets, lines of credit and short-term investments.
Operating
cash flows. The
gas
distribution business is highly seasonal and operating cash flow may fluctuate
significantly during the year and from year-to-year due to factors such as
weather, natural gas prices, the timing of collections from customers, natural
gas purchasing, and storage and hedging practices. The company relies on
short-term financing to meet seasonal increases in working capital needs.
Cash
requirements generally increase over the last half of the year due to increases
in natural gas purchases, gas in storage and accounts receivable. During
the
first half of the year, positive cash flow generally results from the sale
of
gas in storage and the collection of accounts receivable. This cash is typically
used to substantially reduce, or eliminate, short-term debt during the first
half of the year.
Nicor
maintains margin accounts related to financial derivative transactions. These
margin accounts may cause large fluctuations in cash needs or sources in
a
relatively short period of time due to daily settlements resulting from changes
in natural gas futures prices. The company manages these fluctuations with
short-term borrowings and investments.
Net
cash
flow provided from operating activities was $447.0 million, $206.2 million
and
$317.7 million in 2006, 2005 and 2004, respectively. The increase in operating
cash flow in 2006 compared to 2005 is due primarily to the impact of lower
natural gas prices on working capital. This was partially offset by the absence
of the $29.9 million of D&O net insurance recoveries, including earnings
thereon, received during 2005 related to settlement costs incurred by Nicor
in
connection with a securities class action and a related shareholder derivative
action. The decrease in operating cash flow provided in 2005 compared to
2004 is
due, in part, to the impact of higher gas prices on working capital, coupled
with the partial repayment of the income tax refund received in 2003, as
discussed below. These effects were partially offset by the $29.9 million
of
D&O net insurance recoveries mentioned above, and the absence of the $38.5
million pretax litigation charge in 2004 related to an agreement to settle
the
securities class action litigation.
In
2003,
Nicor received an income tax refund of approximately $100 million attributable
to a tax loss carryback associated with a change in tax accounting method
(which
increased its deferred income tax liability), subject to IRS review and approval
as part of normal ongoing audits. Through December 31, 2004, the total current
tax benefits previously recorded under this accounting method approximated
$135
million (amounts recorded were offset by increases to the deferred tax liability
with no net effect on reported net federal income tax expense). In 2005,
the IRS
revised the regulations pertaining to the aforementioned tax accounting method.
The new regulations required repayment in 2005 and 2006 of amounts previously
taken as current tax deductions. During 2006 and 2005, the company reclassified
income tax expense from deferred to current and repaid approximately $135
million equally over those years.
Investing
activities. Net
cash
flow used for investing activities was $192.2 million, $154.7 million and
$204.7
million in 2006, 2005 and 2004, respectively.
Capital
expenditures. Capital
expenditures is an internal measure utilized by management and represent
cash
additions to property, plant and equipment, adjusted for items including
the
accrual of work performed through period end and other non-cash items,
contributions in aid of construction and expenditures associated with asset
retirement obligations.
Capital
expenditures by business segment are presented below (in millions):
|
Estimated
|
|||||||||||||
|
2007
|
2006
|
2005
|
2004
|
||||||||||
|
Gas
distribution
|
$
|
175
|
$
|
164
|
$
|
186
|
$
|
175
|
|||||
|
Shipping
|
21
|
17
|
11
|
9
|
|||||||||
|
Other
energy ventures
|
4
|
6
|
3
|
3
|
|||||||||
|
$
|
200
|
$
|
187
|
$
|
200
|
$
|
187
|
||||||
Gas
distribution segment capital expenditures decreased in 2006 versus 2005 due,
in
part, to the absence of expenditures related to the acquisition of a storage
compressor in 2005 (approximately $9 million decrease) and a reduction in
costs
for information technology system improvements (approximately $8 million
decrease). In April 2006, the company implemented a new customer care and
billing system. Capital expenditures for 2005 increased over 2004 due primarily
to increased storage system expenditures attributable to the acquisition
of the
previously mentioned storage compressor (approximately $9 million increase).
Capital
expenditures in the gas distribution segment are expected to increase in
2007
versus 2006 due, in part, to higher expenditures associated with distribution
system improvements and facility expansion, partially offset by lower spending
on information technology.
Shipping
segment capital expenditures for 2006 increased $6 million over 2005 due
primarily to the purchase of a new vessel which was placed in service in
early
2007. Shipping segment capital expenditures for 2005 increased $2 million
over
2004 due primarily to higher purchases of freight handling
equipment.
Capital
expenditures in the shipping segment are expected to increase in 2007 versus
2006 due primarily to higher expenditures related to freight handling equipment
and facilities expansion.
Additional
investing activities.
Investment activities in 2006 also reflect the absence of proceeds from the
2005
sale of various investments, the third quarter 2006 funding of an escrow
account
associated with the tentative agreement with the staff of the SEC Enforcement
Division in settlement of an anticipated civil action of $10.0 million and
net
proceeds of $7.0 million associated with the company’s sale of an equity
investment. In 2005, additional investment activities include proceeds from
the
2005 sale of various investments coupled with the absence of $21.8 million
of
purchases of available-for-sale securities in 2004. In 2004, the company
also
realized net proceeds of $8.0 million on the sale of property.
Financing
activities. Nicor
Gas
has credit ratings that are among the highest in the gas distribution industry.
The current credit ratings for Nicor Inc. and Nicor Gas are as
follows:
|
Standard
& Poor’s
|
Moody’s
|
Fitch
|
||||||||
|
Nicor
Inc.
|
||||||||||
|
Commercial
Paper
|
A-1+
|
P-2
|
F-1
|
|||||||
|
Senior
Unsecured Debt
|
AA-
|
n/a
|
A
|
|||||||
|
Corporate
Credit Rating
|
AA
|
n/a
|
n/a
|
|||||||
|
Nicor
Gas
|
||||||||||
|
Commercial
Paper
|
A-1+
|
P-1
|
F-1+
|
|||||||
|
Senior
Secured Debt
|
AA
|
A1
|
AA-
|
|||||||
|
Senior
Unsecured Debt
|
AA-
|
A2
|
A+
|
|||||||
|
Corporate
Credit Rating
|
AA
|
n/a
|
n/a
|
In
the
second quarter of 2006, Standard and Poor’s and Fitch reaffirmed their credit
ratings of Nicor and Nicor Gas. In July 2006, Moody’s Investors Service
(“Moody’s”) downgraded Nicor’s commercial paper rating to Prime-2 from Prime-1,
Nicor’s preferred stock rating to Baa2 from Baa1, Nicor Gas’ senior secured
(First Mortgage Bonds) rating to A1 from Aa3 and Nicor Gas’ senior unsecured
debt rating to A2 from A1. Nicor Gas’ Prime-1 commercial paper rating was not
under review by Moody’s. The company does not expect this downgrade to have a
significant impact on its results of operations, cash flows or financial
condition.
Nicor’s
debt-related financial statistics at December 31 include:
|
2006
|
2005
|
2004
|
||||||||
|
Long-term
obligations, net of current maturities,
as
a percent of capitalization
|
36.3
|
%
|
37.5
|
%
|
39.9
|
%
|
||||
|
Times
interest earned, before income taxes
|
4.5
|
4.5
|
3.5
|
|||||||
Long-term
debt.
The
company typically uses the net proceeds from long-term debt for refinancing
outstanding debt, for construction programs to the extent not provided by
internally generated funds, and for general corporate purposes.
At
December 31, 2006, Nicor Gas had the capacity to issue approximately $390
million of First Mortgage Bonds under the terms of its indenture, of which
$75
million was available for issuance under a July 2001 shelf registration
filing. Nicor
believes it is in compliance with its debt covenants and believes it will
continue to remain so. Nicor’s long-term debt agreements do not include ratings
triggers or material adverse change provisions. Substantially all gas
distribution properties are subject to the lien of the indenture securing
Nicor
Gas’ First Mortgage Bonds.
In
December 2006, Nicor Gas, through a private placement, issued $50 million
of
First Mortgage Bonds at 5.85 percent, due in 2036. Proceeds from this issuance
were applied to the maturity of the $50 million 5.55 percent First Mortgage
Bond
series, due in December 2006.
In
December 2005, Tropical Shipping obtained a $40 million two-year senior
unsecured term loan which was used along with cash available from foreign
subsidiaries to fund the repatriation of $132 million of its cumulative
undistributed foreign earnings under the provisions of the Jobs Act. The
term
loan had a floating interest rate based on LIBOR plus 0.50 percent per annum.
For the purpose of obtaining a lower borrowing rate, the term loan was
guaranteed by Nicor. The loan was fully paid off as of December 31,
2006.
Short-term
debt. In
October 2006, Nicor Gas established a $400 million, 210-day seasonal revolver,
which expires in May 2007, to replace the $400 million, 210-day seasonal
revolver, which expired in April 2006. In September 2005, Nicor and Nicor
Gas
established a $600 million, five-year revolver, expiring September 2010.
These
facilities were established with major domestic and foreign banks and serve
as
backup for the issuance of commercial paper. The company had $350 million
and
$586 million of commercial paper borrowings outstanding at December 31, 2006
and
2005, respectively. The company believes it is in compliance with all debt
covenants and believes it will continue to remain so. The company expects
that
funding from commercial paper and related backup line-of-credit agreements
will
continue to be available in the foreseeable future and sufficient to meet
estimated cash requirements.
Common
stock. Nicor
maintained its quarterly common stock dividend rate during 2006 of $0.465
per
common share. The company paid dividends on its common stock of $82.9 million,
$82.1 million and $82.0 million in 2006, 2005 and 2004, respectively. Nicor
currently has no contractual or regulatory restrictions on the payment of
dividends.
In
2001,
Nicor announced a $50
million common stock repurchase program. Purchases may be made as market
conditions permit through open market transactions and to the extent cash
flow
is available after other cash needs and investment opportunities. There were
no
purchases under this program in 2006, 2005 and 2004, and at December 31,
2006,
$21.5 million remained authorized for the repurchase of common stock.
Preferred
Stock.
In
November 2005, Nicor redeemed 20,062 shares of 5% Mandatorily Redeemable
Preferred Stock, $50 par value, at a per share redemption price of $51 plus
accrued and unpaid dividends.
Off-balance
sheet arrangements.
Nicor
has certain guarantees, as further described in Item 8 -
Notes to
the Consolidated Financial Statements - Note 20 - Guarantees and Indemnities.
The company believes that it is not probable that these guarantees will have
a
material effect on its financial condition.
Contractual
obligations.
As of
December 31, 2006, Nicor had contractual obligations with payments due as
follows (in millions):
Payments due by
period
|
Less
than
1
year
|
1-3
years
|
3-5
years
|
More
than
5
years
|
Total
|
||||||||||||
|
Purchase
obligations
|
$
|
844.9
|
$
|
424.2
|
$
|
49.1
|
$
|
7.6
|
$
|
1,325.8
|
||||||
|
Long-term
debt
|
-
|
125.0
|
75.0
|
300.0
|
500.0
|
|||||||||||
|
Fixed
interest on
long-term
debt
|
30.7
|
52.8
|
42.6
|
302.7
|
428.8
|
|||||||||||
|
Operating
leases
|
30.4
|
38.3
|
10.1
|
15.6
|
94.4
|
|||||||||||
|
Other
long-term obligations
|
1.8
|
1.4
|
.2
|
.6
|
4.0
|
|||||||||||
|
$
|
907.8
|
$
|
641.7
|
$
|
177.0
|
$
|
626.5
|
$
|
2,353.0
|
|||||||
Purchase
obligations consist primarily of natural gas purchase agreements, and natural
gas transportation and storage contracts in the gas distribution and wholesale
natural gas marketing business segments. Natural gas purchase agreements
include
obligations to purchase natural gas at future market prices, calculated using
December 31, 2006 New York Mercantile Exchange futures prices. The company
also
has long-term obligations for postretirement benefits which are not included
in
the above table. Information regarding the company’s obligations for
postretirement benefits can be found in Item 8 - Notes to the Consolidated
Financial Statements - Note 11 - Postretirement Benefits.
Operating
leases are primarily for vessels, containers and equipment in the shipping
segment, office space and equipment in the gas distribution segment and office
space at other energy ventures. Tropical
Shipping
has certain equipment operating leases which include purchase and/or renewal
options, at fair market amounts at the time of purchase or renewal. Rental
expense under operating leases was $41.7 million, $37.2 million and $27.5
million in 2006, 2005 and 2004, respectively. The increase in rent expense
from
2006 to 2005 was primarily driven by the addition of equipment leases and
higher
charter rates in the shipping segment.
Nicor
Gas
signed an agreement in the second quarter of 2006 to purchase approximately
16
Bcf of synthetic natural gas annually for a 20-year term beginning as early
as
2010. Since the agreement is contingent upon various milestones to be achieved
by the counterparty to the agreement and the fact that the counterparty can
terminate, without penalty, prior to the realization of these milestones,
the
company’s obligation under this agreement is not certain at this
time.
Other.
Restrictions
imposed by regulatory agencies and loan agreements limiting the amount of
subsidiary net assets that can be transferred to Nicor are not expected to
have
a material impact on the company’s ability to meet its cash obligations.
OUTLOOK
Nicor’s
outlook assumes normal weather for 2007, but excludes, among other things,
any
future impacts associated with the ICC’s PBR plan/PGA review or other
contingencies. The company’s outlook also does not reflect the additional
variability in earnings due to fair value accounting adjustments at Nicor
Enerchange and other impacts that could occur because of future volatility
in
the natural gas markets. While these items could materially affect 2007
earnings, they are currently not estimable.
Gas
Distribution.
Nicor
Gas expects higher pretax operating results (after removing the $3.8 million
impact of the 2006 mercury-related insurance recovery) due, in part, to
increased natural gas deliveries attributable to normal weather and lower
operating and maintenance expenses, partially offset by higher depreciation
costs. Operating and maintenance expenses are expected to be lower due primarily
to lower storage-related gas costs and natural gas and fuel costs to operate
company equipment and facilities.
The
company estimates that a 100-degree day variation from normal weather would
affect Nicor Gas’ net income by approximately $1.6 million. The consolidated
impact, however, is generally reduced somewhat because of the natural weather
hedge attributable to the utility-bill management products offered by certain
of
Nicor’s other energy ventures.
Shipping.
Tropical
Shipping’s operating results are expected to be comparable to 2006. The company
also continues to expect relatively low tax costs on operating earnings
attributable to the January 2006 reorganization of certain shipping and related
operations.
Other
Energy Ventures.
The
company expects improved operating results in its other energy ventures
resulting from improved expected results from its energy-related products
and
services businesses.
Other.
Nicor
also expects earnings to be adversely impacted by higher net interest costs
and
the absence of certain benefits recorded in 2006, including the gain on the
sale
of an equity interest, insurance recoveries of previously incurred legal
costs,
and certain tax-related benefits, discussed in preceding paragraphs. Because
the
company is assuming normal weather, 2007 also reflects the absence of the
benefit recorded in 2006 from the other energy ventures’ utility-bill management
products which reduced the negative effects of warmer weather in Nicor’s gas
distribution segment. Additionally, 2007 excludes the $10 million charge
associated with the SEC inquiry recorded in 2006.
CONTINGENCIES
The
following contingencies of Nicor are in various stages of investigation or
disposition. Although in some cases the company is unable to estimate the
amount
of loss reasonably possible in addition to any amounts already recognized,
it is
possible that the resolution of these contingencies, either individually
or in
aggregate, will require the company to take charges against, or will result
in
reductions in, future earnings. It is the opinion of management that the
resolution of these contingencies, either individually or in aggregate, could
be
material to earnings in a particular period but is not expected to have a
material adverse impact on Nicor’s liquidity or financial
condition.
PBR
plan.
Nicor
Gas’ PBR plan for natural gas costs went into effect in 2000 and was terminated
by the company effective January 1, 2003. Under the PBR plan, Nicor Gas’ total
gas supply costs were compared to a market-sensitive benchmark. Savings and
losses relative to the benchmark were determined annually and shared equally
with sales customers. The PBR is currently under ICC review. There are
allegations that the company acted improperly in connection with the PBR
plan,
and the ICC and others are reviewing these allegations. On June 27, 2002,
the
Citizens Utility Board (“CUB”) filed a motion to reopen the record in the ICC’s
proceedings to review the PBR plan (the “ICC Proceedings”). As a result of the
motion to reopen, Nicor Gas, the Cook County State’s Attorney Office (“CCSAO”),
the staff of the ICC and CUB entered into a stipulation providing for additional
discovery. The Illinois Attorney General’s Office (“IAGO”) has also intervened
in this matter. In addition, the IAGO issued Civil Investigation Demands
(“CIDs”) to CUB and the ICC staff. The CIDs ordered that CUB and the ICC staff
produce all documents relating to any claims that Nicor Gas may have presented,
or caused to be presented, false information related to its PBR plan. The
company has committed to cooperate fully in the reviews of the PBR
plan.
In
response to these allegations, on July 18, 2002, the Nicor Board of Directors
appointed a special committee of independent, non-management directors to
conduct an inquiry into issues surrounding natural gas purchases, sales,
transportation, storage and such other matters as may come to the attention
of
the special committee in the course of its investigation. The special committee
presented the report of its counsel (“Report”) to Nicor’s Board of Directors on
October 28, 2002. A copy of the report is available at the Nicor website
and has
been previously produced to all parties in the ICC Proceedings.
In
response, the Nicor Board of Directors directed the company’s management to,
among other things, make appropriate adjustments to account for, and fully
address, the adverse consequences to ratepayers of the items noted in the
Report, and conduct a detailed study of the adequacy of internal accounting
and
regulatory controls.
The
adjustments were made in prior years’ financial statements resulting in a $24.8
million liability. Included in such $24.8 million liability is a $4.1 million
loss contingency. A $1.8 million adjustment to the previously recorded
liability, which is discussed below, was made in 2004 increasing the recorded
liability to $26.6 million. In addition, Nicor Gas estimates that there is
$26.9
million due to the company from the 2002 PBR plan year, which has not been
recognized in the financial statements due to uncertainties surrounding the
PBR
plan. The net of these items and interest income on certain components results
in a $1.0 million reimbursement the company plans to seek in testimony to
be
filed in compliance with the new scheduling order discussed below. By the
end of
2003, the company completed steps to correct the weaknesses and deficiencies
identified in the detailed study of the adequacy of internal
controls.
Pursuant
to the agreement of all parties, including the company, the ICC re-opened
the
1999 and 2000 purchased gas adjustment filings for review of certain
transactions related to the PBR plan and consolidated the reviews of the
1999-2002 purchased gas adjustment filings with the PBR plan review.
On
February 5, 2003, the CCSAO and CUB filed a motion for $27 million in sanctions
against the company in the ICC Proceedings. In that motion, CCSAO and CUB
alleged that Nicor Gas’ responses to certain CUB data requests were false. Also
on February 5, 2003, CUB stated in a press release that, in addition to $27
million in sanctions, it would seek additional refunds to consumers. On March
5,
2003,
the
ICC
staff filed a response brief in support of CUB’s motion for sanctions. On May 1,
2003, the Administrative Law Judges issued a ruling denying CUB and CCSAO’s
motion for sanctions. CUB has filed an appeal of the motion for sanctions
with
the ICC, and the ICC has indicated that it will not rule on the appeal until
the
final disposition of the ICC Proceedings. It is not possible to determine
how
the ICC will resolve the claims of CCSAO, CUB or other parties to the ICC
Proceedings.
In
November 2003, the ICC staff, CUB, CCSAO and the IAGO filed their respective
direct testimony in the ICC Proceedings. The ICC staff is seeking refunds
to
customers of approximately $108 million and CUB and CCSAO were jointly seeking
refunds to customers of approximately $143 million. The IAGO direct testimony
alleges adjustments in a range from $145 million to $190 million. The IAGO
testimony as filed is presently unclear as to the amount which IAGO seeks
to
have refunded to customers. On February 27, 2004, the above referenced
intervenors filed their rebuttal testimony in the ICC Proceedings. In such
rebuttal testimony, CUB and CCSAO amended the alleged amount to be refunded
to
customers from approximately $143 million to $190 million. In December 2006,
Nicor Gas withdrew its previously filed testimony. Nicor Gas anticipates
refiling its direct testimony in compliance with the new scheduling order
discussed below which it expects to be consistent with the findings of the
special committee Report. Nicor Gas plans to seek a reimbursement of
approximately $1 million as referenced above. In 2004, the evidentiary hearings
on this matter were stayed in order to permit the parties to undertake
additional third party discovery from Entergy-Koch Trading, LP (“EKT”), a
natural gas, storage and transportation trader and consultant with whom Nicor
did business under the PBR plan. In December 2006, the additional third party
discovery from EKT was obtained and the Administrative Law Judges issued
a
scheduling order that provides for Nicor Gas to submit its direct testimony
by
April 13, 2007. No date has been set for evidentiary hearings on this
matter.
During
the course of the SEC investigation discussed below, the company became aware
of
additional information relating to the activities of individuals affecting
the
PBR plan for the period from 1999 through 2002, including information consisting
of third party documents and recordings of telephone conversations from EKT.
Review of additional information completed in 2004 resulted in the $1.8 million
adjustment to the previously recorded liability referenced above.
Although
the Report of the special committee’s counsel did not find that there was
criminal activity or fraud, a review of this additional information (which
was
not available to the independent counsel who prepared the Report) and
re-interviews of certain Nicor Gas personnel in 2004 indicated that certain
former Nicor Gas personnel may have engaged in potentially fraudulent conduct
regarding the PBR plan in violation of company policy, and in possible violation
of SEC rules and applicable law. Further, certain former Nicor Gas personnel
also may have attempted to conceal their conduct in connection with an ICC
review of the PBR plan. The company has reviewed all third party information
it
has obtained and will continue to review any additional third party information
the company may obtain. The company terminated four employees in connection
with
this matter in 2004.
Nicor
is
unable to predict the outcome of the ICC’s review or the company’s potential
exposure thereunder. Because the PBR plan and historical gas costs are still
under ICC review, the final outcome could be materially different than the
amounts reflected in the company’s financial statements as of December 31,
2006.
SEC
and U.S. Attorney Inquiries.
In 2002,
the staff of the SEC Division of Enforcement (“SEC Staff”) informed Nicor that
the SEC is conducting a formal inquiry regarding the PBR plan. A representative
of the Office of the United States Attorney for the Northern District of
Illinois (the “U.S. Attorney”) also notified Nicor that that office was
conducting an inquiry on the same matters that the SEC is investigating,
and a
grand jury was also reviewing these matters. In April 2004, Nicor was advised
by
the SEC Staff that it intended to recommend to the SEC that it bring a civil
injunctive action against Nicor, alleging that Nicor violated Sections 17(a)
of
the Securities Act of 1933 and Sections 10(b) and 13(a) of the Securities
Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder.
On
July 7, 2006, the company announced that it reached a tentative agreement
with
the SEC Staff in settlement of an
anticipated
civil action to which the company and the SEC will be parties. Under the
terms
of the tentative settlement, the company will be subject to disgorgement
of one
dollar, a monetary fine of $10 million and an injunction. The company will
neither admit nor deny any wrongdoing. In July 2006, the company deposited
the
$10 million in escrow pending final approval of the tentative settlement
by the
SEC commissioners and entry of a final judgment by a federal court. The SEC
Staff will submit the tentative settlement to the SEC commissioners for
approval. The SEC commissioners have the authority to approve, modify or
reject
the tentative settlement. Nicor recorded a $10 million charge to its second
quarter earnings in connection with this matter. The $10 million fine is
not
deductible for federal or state income tax purposes. In December 2006, the
U.S.
Attorney advised that it is closing its inquiry and will not seek to prosecute
the company or any individuals in connection with this matter.
Mercury.
Future
operating results may be impacted by adjustments to the company’s estimated
mercury liability or by related recoveries. Additional information about
mercury
contingencies is presented in Item 8 - Notes to the Consolidated Financial
Statements - Note 21 - Contingencies - Mercury.
Manufactured
gas plant sites.
The
company is conducting environmental investigations and remedial activities
at
former manufactured gas plant sites. Additional information about these sites
is
presented in Item 8 - Notes to the Consolidated Financial Statements - Note
21 -
Contingencies - Manufactured Gas Plant Sites.
Fixed
Bill Service. Nicor
Services was a defendant in a purported class action. On October 7, 2005,
the
Circuit Court denied plaintiffs’ motion to certify the proposed class.
Information about this lawsuit is presented within Item 8 - Notes to the
Consolidated Financial Statements - Note 21 - Contingencies - Fixed Bill
Service.
Other
contingencies. The
company is involved in legal or administrative proceedings before various
courts
and agencies with respect to general claims, rates, taxes, environmental,
gas
cost prudence reviews and other matters. See Item 8 - Notes to the Consolidated
Financial Statements - Note 10 - Income and Other Taxes and Note 21 -
Contingencies.
In
2004,
one of Nicor’s Directors and Officers insurance carriers agreed to pay $29.0
million to a third party escrow agent on behalf of Nicor and its insured
directors and officers to be used to satisfy Nicor directors’ and officers’
liabilities and expenses associated with claims asserted against them in
then
pending securities class actions and shareholder derivative lawsuits and
related
matters, with any remaining balance to be paid to Nicor. The securities class
actions were settled in 2004 for a payment by Nicor of $38.5 million. As
a
result of this settlement and the settlement of the shareholder derivative
lawsuits in 2005, the escrow was terminated and the $29.0 million, plus earnings
of approximately $0.4 million, held by the escrow agent was paid to Nicor
in the
second quarter of 2005. These recoveries were recorded in “Litigation charges
(recoveries), net” in the Consolidated Statement of Operations for the year
ended December 31, 2005. In addition, Nicor had asserted claims against its
excess insurance carrier arising out of these securities class actions and
shareholder derivative lawsuits. In connection with the settlement of the
shareholder derivative lawsuits, in the first quarter of 2005, Nicor’s excess
insurance carrier paid Nicor $4 million. Under the terms of the shareholder
derivative lawsuits settlement, Nicor agreed to adopt certain new corporate
governance policies and to pay $3.5 million out of the $4 million received
from
the excess insurance carrier to plaintiffs’ attorneys to reimburse them for the
fees and expenses expended in pursuing the derivative actions. The $0.5 million
net of these payments was reflected in “Litigation charges (recoveries), net” in
the Consolidated Statement of Operations for the year ended December 31,
2005.
Additionally, Nicor received payments of $5.2 million and $2.8 million in
2006
and 2005, respectively, from insurance carriers as reimbursement of legal
defense costs in connection with these matters. These payments have been
recorded in “Other corporate eliminations and expenses” in the Consolidated
Statement of Operations for the respective years.
In
addition, see Item 1A - Risk Factors and Item 7A - Quantitative and Qualitative
Disclosures about Market Risk.
CRITICAL
ACCOUNTING ESTIMATES
Nicor
prepares its consolidated financial statements in accordance with accounting
principles generally accepted in the United States, which regularly require
Nicor’s management to exercise judgment in the selection and application of
accounting methods. The application of accounting methods includes making
estimates using subjective assumptions and judgments about matters that are
inherently uncertain.
The
use
of estimates and the selection of accounting policies affect Nicor’s reported
results and financial condition. The company has adopted several significant
accounting policies and is required to make significant accounting estimates
that are important to understanding its financial statements. These significant
policies and estimates are described throughout Item 8 - Notes to the
Consolidated Financial Statements.
Although
there are numerous areas in which Nicor’s management makes significant
accounting estimates, it believes its critical estimates are those that require
management’s most difficult and subjective or complex judgments. Nicor’s
management has a practice of reviewing its critical accounting estimates
and
policy decisions with the audit committee of its board of directors. Its
critical estimates typically involve loss contingencies, derivative instruments,
pension and other postretirement benefits, income taxes, credit risk, unbilled
revenues and regulatory assets and liabilities because they are estimates
which
could materially impact Nicor’s financial statements.
Loss
contingencies. Nicor
and
its subsidiaries record contingent losses as liabilities when a loss is both
probable and the amount or range of loss, including related legal defense
costs,
is reasonably estimable. When only a range of potential loss is estimable,
the
company records a liability for the minimum anticipated loss. Nicor and its
subsidiaries and affiliates are involved in various legal and regulatory
proceedings and are exposed to various loss contingencies. These loss
contingencies are in some cases resolved in stages over time, estimates may
change significantly from period to period, and the company’s ultimate
obligations may differ materially from its recorded amounts. Of particular
note
is the PBR plan contingency at Nicor Gas and the SEC inquiry described in
Item 8
- Notes to the Consolidated Financial Statements - Note 21 -
Contingencies.
Derivative
instruments. The
rules
for determining whether a contract meets the definition of a derivative
instrument or qualifies for hedge accounting treatment are numerous and complex.
The treatment of a single contract may vary from period to period depending
upon
accounting elections, changes in management’s assessment of the likelihood of
future hedged transactions or new interpretations of accounting rules. As
a
result, management judgment is required in the determination of the appropriate
accounting treatment. In addition, the estimated fair value of derivative
instruments may change significantly from period to period depending upon
market
projections, and changes in hedge effectiveness may impact the accounting
treatment. These determinations and changes in estimates may have a material
impact on reported results.
Pension
and other postretirement benefits. The
company’s cost of providing postretirement benefits is dependent upon various
factors and assumptions, including life expectancies, the discount rate used
in
determining the projected benefit obligation, the expected long-term rate
of
return on plan assets, the long-term rate of compensation increase and
anticipated health care costs. Changes in these assumptions typically do
not
have a significant impact on the expenses recorded from year to year. However,
actual experience in any one period, particularly the actual return on plan
assets, often varies significantly from these mostly long-term assumptions.
When
cumulatively significant, the gains and losses generated from such variances
are
amortized into operating income over the remaining service lives of employees
covered by the plans (approximately 11 years for the pension plan and 14
years
for the health care plan). Additional information is presented in Item 8
- Notes
to the Consolidated Financial Statements - Note 11 - Postretirement Benefits,
including plan asset investment allocation, estimated future benefit payments,
general descriptions of the plans, significant assumptions, the impact of
certain changes in assumptions, and significant changes in estimates.
The
company’s estimated postretirement benefit cost included in operating income was
$5.5 million, $9.6 million and $9.1 million in 2006, 2005 and 2004,
respectively. Nicor Gas expects to record postretirement benefit cost for
2007
of $4.6 million. Actuarial assumptions affecting 2007 include an expected
rate
of return on plan assets of 8.50 percent, consistent with the prior year,
and a
discount rate of 5.75 percent compared with 5.50 percent a year earlier.
The
5.75 percent discount rate was based upon the Citigroup Pension Liability
Index
whose underlying average benefit duration approximates Nicor’s.
Income
taxes.
A
deferred income tax liability is not recorded on undistributed foreign earnings
that are expected in management’s judgment to be indefinitely reinvested
offshore. Nicor has remaining at December 31, 2006 approximately $12 million
of
deferred income tax liabilities related to approximately $34 million of
cumulative undistributed earnings of its foreign subsidiaries. Nicor has
not
recorded deferred income taxes of approximately $28 million on approximately
$81
million of cumulative undistributed foreign earnings that are expected in
management’s judgment to be indefinitely reinvested offshore. Changes in
management’s investment or repatriation plans or circumstances could result in a
different deferred income tax liability.
Credit
risk. Nicor’s
subsidiaries and affiliates are required to estimate credit risk in establishing
allowances for doubtful accounts and in estimating the fair values of certain
derivative instruments with counterparty credit risk being an especially
difficult and critical judgment. Actual credit losses could vary materially
from
Nicor’s estimates. Nicor’s allowance for doubtful accounts at December 31, 2006,
2005 and 2004 was $33.4 million, $31.5 million and $21.9 million, respectively,
as presented on Schedule II in Item 15 - Exhibits and Financial Statement
Schedules.
Unbilled
revenues. Nicor
Gas
estimates revenues for natural gas deliveries not yet billed to customers
from
the last billing date to month-end (“unbilled revenues”). Unbilled revenue
estimates are dependent upon a number of customer-usage factors which require
management judgment, including weather factors. These revenue estimates are
adjusted when actual billings occur, and variances in estimates can be material.
Estimated unbilled revenues for Nicor Gas at December 31, 2006, 2005 and
2004
were $158.9 million, $300.4 million and $204.4 million,
respectively.
Regulatory
assets and liabilities.
Nicor
Gas is regulated by the ICC, which establishes the rules and regulations
governing utility rates and services in Illinois. As a rate-regulated company,
Nicor Gas applies SFAS No. 71, Accounting
for the Effects of Certain Types of Regulation,
which
allows Nicor Gas to recognize the economic effects of rate regulation and,
accordingly, has recorded regulatory assets and liabilities. Regulatory assets
represent probable future revenue associated with certain costs that are
expected to be recovered from customers through rate riders or rate cases,
upon
approval by the ICC. Regulatory liabilities represent probable future reductions
in revenues collected from ratepayers through a rate rider or base rates.
If all
or a portion of Nicor Gas’ operations become no longer subject to the provisions
of SFAS No. 71, a write-off of the net book value of its regulatory assets
and
liabilities would be required. Additional information on regulatory assets
and
liabilities is presented in Item 8 - Notes to the Consolidated Financial
Statements - Note 1 - Accounting Policies.
NEW
ACCOUNTING PRONOUNCEMENTS
In
2006,
the FASB issued SFAS No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans,
Interpretation
No. 48, Accounting
for Uncertainty in Income Taxes,
FASB
Staff Position No. AUG AIR-1, Accounting
for Planned Major Maintenance Activities, and
SFAS
No. 157, Fair
Value Measurements.
In
2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment. For
more
information, see Item 8 - Notes to the Consolidated Financial Statements
- Note
2 - New Accounting Pronouncements.
CAUTION
CONCERNING FORWARD-LOOKING STATEMENTS
This
document includes certain forward-looking statements about the expectations
of
Nicor and its subsidiaries and affiliates. Although Nicor believes these
statements are based on reasonable assumptions, actual results may vary
materially from stated expectations. Such forward-looking statements may
be
identified by the use of forward-looking words or phrases such as “anticipate,”
“believe,” “expect,” “intend,” “may,” “planned,” “potential,” “should,” “will,”
“would,” “project,” “estimate,” “ultimate,” or similar phrases. Actual results
may differ materially from those indicated in the company’s forward-looking
statements due to the direct or indirect effects of legal contingencies
(including litigation) and the resolution of those issues, including the
effects
of an ICC review and an SEC inquiry, and undue reliance should not be placed
on
such statements.
Other
factors that could cause materially different results include, but are not
limited to, weather conditions; natural disasters; natural gas and other
fuel
prices; fair value accounting adjustments; inventory valuation; health care
costs; insurance costs or recoveries; legal costs; borrowing needs; interest
rates; credit conditions; economic and market conditions; tourism and
construction in the Bahamas and Caribbean region; energy conservation;
legislative and regulatory actions; tax rulings or audit results; asset sales;
significant unplanned capital needs; future mercury-related charges or credits;
changes in accounting principles, interpretations, methods, judgments or
estimates; performance of major suppliers and contractors; labor relations;
and
acts of terrorism.
Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date of this filing. Nicor undertakes no obligation
to publicly release any revision to these forward-looking statements to reflect
events or circumstances after the date of this filing.
Nicor
is
exposed to market risk in the normal course of its business operations,
including the risk of loss arising from adverse changes in natural gas and
fuel
commodity prices, and interest rates. It is Nicor’s practice to manage these
risks utilizing derivative instruments and other methods, as deemed appropriate.
Commodity
price risk.
With
regard to commodity price risk, the company has established policies and
procedures governing the management of such risks and the use of derivative
instruments to hedge its exposure to such risks. Company management oversees
compliance with such policies and procedures. The company utilizes various
techniques to limit, measure and monitor market risk, including limits based
on
volume, dollar amounts, maturity, and in some cases value at risk (“VaR”).
VaR
is
the potential loss for an instrument or portfolio from adverse changes in
market
factors, for a specified time period and at a specified confidence level.
The
company has established exposure limits at such a level that material adverse
economic results are not expected. The company’s commodity price risk policies
and procedures continue to evolve with its businesses and are subject to
ongoing
review and modification.
In
accordance with SEC disclosure requirements, Nicor performs sensitivity analyses
to assess the potential loss in earnings based upon a hypothetical 10 percent
adverse change in market prices. Management does not believe that sensitivity
analyses alone provide an accurate or reliable method for monitoring and
controlling risks and therefore also relies on the experience and judgment
of
its management to revise strategies and adjust positions as deemed necessary.
Losses in excess of the amounts determined in sensitivity analyses could
occur
if market prices exceed the 10 percent shift used for the analyses.
As
a
regulated utility, Nicor Gas’ exposure to market risk caused by changes in
commodity prices is substantially mitigated because of Illinois rate regulation
allowing for the recovery of prudently incurred natural gas supply costs
from
customers. However, substantial changes in natural gas prices may impact
Nicor
Gas’ earnings by increasing or decreasing the cost of gas used by the company,
storage-related gas costs, bad debt expense, and other operating and financing
expenses. The company purchases about 4 Bcf of natural gas annually for its
own
use and to cover storage-related gas costs. The level of natural gas prices
may
also impact customer gas consumption and therefore gas distribution margin.
The
actual impact of natural gas price fluctuations on Nicor Gas’ earnings is
dependent upon several factors, including the company’s hedging practices. At
December 31, 2006, Nicor Gas had hedged its forecasted 2007 and a portion
of its
2008 company use and storage-related gas costs through the use of fixed-price
purchase and swap agreements.
Nicor’s
other energy businesses are subject to natural gas commodity price risk,
arising
primarily from purchase and sale agreements, transportation agreements, natural
gas inventories and utility-bill management contracts. Derivative instruments
such as futures, options, forwards and swaps may be used to hedge these risks.
Based on Nicor’s other energy businesses unhedged positions at December 31,
2006, a 10 percent adverse change in natural gas prices would have decreased
Nicor’s earnings for the periods ended December 31, 2006 and 2005 by about $0.4
million and $1.0 million, respectively.
At
December 31, 2006, Nicor
Enerchange, Nicor’s wholesale natural gas marketing business, held derivative
contracts with the following asset (liability) fair values, net (in
millions):
|
Maturity
|
|||||||||||||
|
Source
of Fair Value
|
Total
Fair
Value
|
Less
than
1
Year
|
1
to 3
Years
|
3
to 5
Years
|
|||||||||
|
Prices
actively quoted
|
$
|
2.1
|
$
|
2.2
|
$
|
(.1
|
)
|
$
|
-
|
||||
|
Prices
based on pricing models
|
.2
|
.2
|
-
|
-
|
|||||||||
|
Total
|
$
|
2.3
|
$
|
2.4
|
$
|
(.1
|
)
|
$
|
-
|
||||
Tropical
Shipping’s objective is to substantially mitigate its exposure to higher fuel
costs through fuel surcharges.
Credit
risk.
The
company has a diversified customer base, which limits its exposure to
concentrations of credit risk in any one industry or income class and believes
that it maintains prudent credit policies. Additionally, the gas distribution
segment offers options to help customers manage their bills, such as energy
assistance programs for low-income customers and a budget payment plan that
spreads gas bills more evenly throughout the year.
The
company is also exposed to credit risk in the event a counterparty, customer
or
supplier defaults on a contract to pay for or deliver product at agreed-upon
terms and conditions. To manage this risk, the company has established
procedures to determine and monitor the creditworthiness of counterparties,
to
require guarantees or collateral back-up, and to limit its exposure to any
one
counterparty. The company also, in some instances, enters into netting
arrangements to mitigate counterparty credit risk.
Interest
rate risk. Nicor
is
exposed to changes in interest rates. The company manages its interest rate
risk
by issuing primarily fixed-rate long-term debt with varying maturities,
refinancing certain debt and, at times, hedging the interest rate on anticipated
borrowings. If market rates were to hypothetically increase by 10 percent
from
Nicor’s weighted-average floating interest rate on commercial paper, interest
expense would have increased causing Nicor’s earnings to decrease by
approximately $0.5 million in 2006. For further information about debt
securities, interest rates and fair values, see Item 8 - Financial Statements
-
Consolidated Statements of Capitalization, and Item 8 - Notes to the
Consolidated Financial Statements - Note 7 - Short-Term and Long-Term Debt
and
Note 9 - Fair Value of Financial Instruments.
Item
8. Financial Statements
and Supplementary Data
|
Page
|
||
|
37
|
||
|
Financial
Statements:
|
||
|
39
|
||
|
40
|
||
|
41
|
||
|
42
|
||
|
43
|
||
|
43
|
||
|
44
|
||
To
the
Board of Directors and Stockholders of Nicor Inc.
We
have
audited the accompanying consolidated balance sheets and statements of
capitalization of Nicor Inc. and subsidiaries (the “Company”) as of December 31,
2006 and 2005, and the related consolidated statements of operations, common
equity, comprehensive income and cash flows for each of the three years in
the
period ended December 31, 2006. Our audits also included the financial
statement schedule listed in the Index at Item 15(a)(2). We also have
audited management's assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting, that the Company maintained
effective internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal
Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission. The
Company's management is responsible for these financial statements and financial
statement schedule, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control
over
financial reporting. Our responsibility is to express an opinion on these
financial statements and financial statement schedule, an opinion on
management's assessment, and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects.
Our audit of financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and
evaluating the overall financial statement presentation. Our audit of
internal control over financial reporting included obtaining an understanding
of
internal control over financial reporting, evaluating management's assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary
in the
circumstances. We believe that our audits provide a reasonable basis for
our opinions.
A
company's internal control over financial reporting is a process designed
by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected
by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and
the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1)
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or
timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented
or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future
periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies
or
procedures may deteriorate.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
(concluded)
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of the Company as of December
31, 2006 and 2005, and the results of its operations and its cash flows for
each
of the three years in the period ended December 31, 2006, in conformity with
accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, when considered
in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
Also, in our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2006,
is
fairly stated, in all material respects, based on the criteria established
in
Internal
Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission.
Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006,
based on the criteria established in Internal
Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission.
As
discussed in Note 2 to the consolidated financial statements, in 2006 the
Company changed its method of accounting for defined benefit pension and
other
postretirement plans, and its method of accounting for share based payments.
As
discussed in Note 5 to the consolidated financial statements, in 2005 the
Company changed its method of accounting for conditional asset retirement
obligations.
/s/
DELOITTE & TOUCHE LLP
Chicago,
Illinois
February
23, 2007
|
Nicor
Inc.
|
||||||||||
|
(millions,
except per share data)
|
||||||||||
|
Year
ended December 31
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Operating
revenues
|
||||||||||
|
Gas
distribution (includes revenue taxes of $147.7,
|
||||||||||
|
$156.4,
and $143.5, respectively)
|
$
|
2,452.3
|
$
|
2,909.6
|
$
|
2,362.1
|
||||
|
Shipping
|
398.3
|
378.5
|
310.7
|
|||||||
|
Other
energy ventures
|
215.9
|
157.0
|
155.3
|
|||||||
|
Corporate
and eliminations
|
(106.5
|
)
|
(87.3
|
)
|
(88.4
|
)
|
||||
|
Total
operating revenues
|
2,960.0
|
3,357.8
|
2,739.7
|
|||||||
|
Operating
expenses
|
||||||||||
|
Gas
distribution
|
||||||||||
|
Cost
of gas
|
1,743.7
|
2,212.4
|
1,695.0
|
|||||||
|
Operating
and maintenance
|
268.5
|
254.8
|
234.9
|
|||||||
|
Depreciation
|
160.1
|
154.5
|
148.8
|
|||||||
|
Taxes,
other than income taxes
|
163.0
|
171.0
|
158.5
|
|||||||
|
Mercury-related
costs (recoveries), net
|
(3.6
|
)
|
.4
|
-
|
||||||
|
Property
sale gains
|
(3.3
|
)
|
(.4
|
)
|
(5.9
|
)
|
||||
|
Shipping
|
350.8
|
338.1
|
279.1
|
|||||||
|
Other
energy ventures
|
189.3
|
142.9
|
136.0
|
|||||||
|
Litigation
charges (recoveries), net
|
10.0
|
(29.9
|
)
|
38.5
|
||||||
|
Other
corporate expenses and eliminations
|
(121.0
|
)
|
(87.7
|
)
|
(82.9
|
)
|
||||
|
Total
operating expenses
|
2,757.5
|
3,156.1
|
2,602.0
|
|||||||
|
Operating
income
|
202.5
|
201.7
|
137.7
|
|||||||
|
Interest
expense, net of amounts capitalized
|
49.1
|
46.8
|
41.2
|
|||||||
|
Equity
investment income, net
|
11.1
|
9.3
|
6.3
|
|||||||
|
Interest
income
|
9.0
|
6.0
|
2.3
|
|||||||
|
Other
income, net
|
.6
|
.8
|
.2
|
|||||||
|
Income
before income taxes
|
174.1
|
171.0
|
105.3
|
|||||||
|
Income
tax expense, net of benefits
|
45.8
|
34.7
|
30.2
|
|||||||
|
Net
income
|
$
|
128.3
|
$
|
136.3
|
$
|
75.1
|
||||
|
Average
shares of common stock outstanding
|
||||||||||
|
Basic
|
44.6
|
44.2
|
44.1
|
|||||||
|
Diluted
|
44.7
|
44.4
|
44.3
|
|||||||
|
Earnings
per average share of common stock
|
||||||||||
|
Basic
|
$
|
2.88
|
$
|
3.08
|
$
|
1.71
|
||||
|
Diluted
|
$
|
2.87
|
$
|
3.07
|
$
|
1.70
|
||||
|
The
accompanying notes are an integral part of these
statements.
|
||||||||||
|
Nicor
Inc.
|
||||||||||
|
(millions)
|
||||||||||
|
Year
ended December 31
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Operating
activities
|
||||||||||
|
Net
income
|
$
|
128.3
|
$
|
136.3
|
$
|
75.1
|
||||
|
Adjustments
to reconcile net income to net cash flow
|
||||||||||
|
provided
from operating activities:
|
||||||||||
|
Depreciation
|
178.1
|
172.4
|
166.6
|
|||||||
|
Deferred
income tax expense (benefit)
|
(44.5
|
)
|
(102.1
|
)
|
27.3
|
|||||
|
Net
(gain) loss on sale of property, plant and equipment
|
(3.3
|
)
|
.3
|
(5.8
|
)
|
|||||
|
Gain
on sale of equity investment
|
(2.4
|
)
|
-
|
-
|
||||||
|
Changes
in assets and liabilities:
|
||||||||||
|
Receivables,
less allowances
|
325.6
|
(305.9
|
)
|
(121.5
|
)
|
|||||
|
Gas
in storage
|
75.3
|
(40.6
|
)
|
13.3
|
||||||
|
Deferred/accrued
gas costs
|
(173.2
|
)
|
154.9
|
21.3
|
||||||
|
Pension
benefits
|
26.6
|
(6.1
|
)
|
(4.4
|
)
|
|||||
|
Regulatory
postretirement asset
|
(113.5
|
)
|
-
|
-
|
||||||
|
Other
assets
|
21.1
|
13.9
|
(.9
|
)
|
||||||
|
Accounts
payable
|
(93.7
|
)
|
155.3
|
124.1
|
||||||
|
Health
care and other postretirement benefits
|
89.1
|
12.6
|
11.2
|
|||||||
|
Other
liabilities
|
53.8
|
9.2
|
9.0
|
|||||||
|
Other
items
|
(20.3
|
)
|
||||||||