UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
|
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|
|
SECURITIES
EXCHANGE ACT OF 1934
|
For
the quarterly period ended September 30, 2008
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)
|
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 whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in rule 12b-2 of the Exchange
Act.
|
Large
accelerated filer [X]
|
Accelerated
filer [ ]
|
|
Non-accelerated
filer [ ]
|
Smaller
reporting
company [ ]
|
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes [ ] No [X]
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date. Common stock, par value
$2.50, outstanding at October 27, 2008, were 45,191,267 shares.
|
ii
|
|||||
|
Part
I - Financial Information
|
|||||
|
Item
1.
|
|||||
| 1 | |||||
| 2 | |||||
| 3 | |||||
| 4 | |||||
|
Item
2.
|
18 | ||||
|
Item
3.
|
30 | ||||
|
Item
4.
|
30 | ||||
|
Part
II - Other Information
|
|||||
|
Item
1.
|
31 | ||||
|
Item
1A.
|
31 | ||||
|
Item
2.
|
31 | ||||
|
Item
6.
|
32 | ||||
| 33 | |||||
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.
EN Engineering. EN
Engineering, L.L.C., a 50-percent-owned joint
venture that provides engineering and consulting services.
FASB. Financial
Accounting Standards Board.
FIN. FASB
Interpretation.
FSP. FASB Staff
Position.
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.
LIFO. Last-in,
first-out.
Mcf, MMcf,
Bcf. Thousand cubic feet, million cubic feet, billion cubic
feet.
MMBtus. Million
British thermal units.
Nicor. Nicor Inc.,
or the registrant.
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
regulated wholly owned public utility business and one of the
nation’s largest distributors of natural gas.
Nicor
Services. Nicor Energy Services Company, a wholly owned business
that provides customer and prospect 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.
NYMEX. New York Mercantile
Exchange.
PBR. Performance-based
rate, a regulatory plan which ended on January 1, 2003, that provided economic
incentives based on natural gas cost performance.
PCBs. Polychlorinated
Biphenyls.
PGA. Purchased Gas
Adjustment.
SEC. The United
States Securities and Exchange Commission.
SFAS. Statement of
Financial Accounting Standards.
TEL. Tropic
Equipment Leasing Inc., a wholly owned subsidiary of Nicor, holds the company’s
interests in Triton.
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.
USEPA. United
States Environmental Protection Agency.
|
Part
I - FINANCIAL INFORMATION
|
|||||||||||||||||
| Item 1. Financial Statements | |||||||||||||||||
|
Nicor
Inc.
|
|||||||||||||||||
|
Condensed
Consolidated Statements of Operations (Unaudited)
|
|||||||||||||||||
|
(millions,
except per share data)
|
|||||||||||||||||
|
Three
months ended
|
Nine
months ended
|
||||||||||||||||
|
September
30
|
September
30
|
||||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
||||||||||||||
|
Operating
revenues
|
|||||||||||||||||
|
Gas
distribution (includes revenue taxes of
|
|||||||||||||||||
|
$14.6,
$12.8, $131.6 and $114.0, respectively)
|
$ | 306.1 | $ | 238.9 | $ | 2,330.4 | $ | 1,878.7 | |||||||||
|
Shipping
|
108.5 | 97.5 | 308.8 | 293.6 | |||||||||||||
|
Other
energy ventures
|
34.9 | 37.3 | 157.8 | 159.0 | |||||||||||||
|
Corporate
and eliminations
|
(9.2 | ) | (8.5 | ) | (61.2 | ) | (74.5 | ) | |||||||||
|
Total
operating revenues
|
440.3 | 365.2 | 2,735.8 | 2,256.8 | |||||||||||||
|
|
|||||||||||||||||
|
Operating
expenses
|
|||||||||||||||||
|
Gas
distribution
|
|||||||||||||||||
|
Cost
of gas
|
180.0 | 118.4 | 1,762.9 | 1,348.4 | |||||||||||||
|
Operating
and maintenance
|
64.2 | 59.7 | 212.5 | 201.5 | |||||||||||||
|
Depreciation
|
42.8 | 41.4 | 128.5 | 124.4 | |||||||||||||
|
Taxes,
other than income taxes
|
18.9 | 17.0 | 143.3 | 126.1 | |||||||||||||
|
Mercury-related
recoveries, net
|
- | - | - | (8.0 | ) | ||||||||||||
|
Property
sale gains
|
(.2 | ) | (1.2 | ) | (.2 | ) | (2.0 | ) | |||||||||
|
Shipping
|
99.0 | 88.8 | 289.7 | 266.7 | |||||||||||||
|
Other
energy ventures
|
34.3 | 26.8 | 145.2 | 143.2 | |||||||||||||
|
Other
corporate expenses and eliminations
|
(8.0 | ) | (8.5 | ) | (59.2 | ) | (72.8 | ) | |||||||||
|
Total
operating expenses
|
431.0 | 342.4 | 2,622.7 | 2,127.5 | |||||||||||||
|
Operating
income
|
9.3 | 22.8 | 113.1 | 129.3 | |||||||||||||
|
Interest
expense, net of amounts capitalized
|
9.9 | 10.4 | 29.6 | 34.3 | |||||||||||||
|
Equity
investment income, net
|
2.9 | 2.4 | 7.2 | 4.4 | |||||||||||||
|
Interest
income
|
1.4 | 2.3 | 6.9 | 7.1 | |||||||||||||
|
Other
income (expense), net
|
(.1 | ) | - | .1 | .2 | ||||||||||||
|
Income
before income taxes
|
3.6 | 17.1 | 97.7 | 106.7 | |||||||||||||
|
Income
tax expense
|
2.3 | 2.6 | 26.1 | 27.0 | |||||||||||||
|
Net
income
|
$ | 1.3 | $ | 14.5 | $ | 71.6 | $ | 79.7 | |||||||||
|
Average
shares of common stock outstanding
|
|||||||||||||||||
|
Basic
|
45.3 | 45.2 | 45.3 | 45.1 | |||||||||||||
|
Diluted
|
45.4 | 45.3 | 45.4 | 45.2 | |||||||||||||
|
Earnings
per average share of common stock
|
|||||||||||||||||
|
Basic
|
$ | .03 | $ | .32 | $ | 1.58 | $ | 1.77 | |||||||||
|
Diluted
|
.03 | .32 | 1.58 | 1.76 | |||||||||||||
|
Dividends
declared per share of common stock
|
$ | .465 | $ | .465 | $ | 1.395 | $ | 1.395 | |||||||||
|
The
accompanying notes are an integral part of these
statements.
|
|||||||||||||||||
| Nicor Inc. | ||||||||
|
Condensed
Consolidated Statements of Cash Flows (Unaudited)
|
||||||||
| (millions) | ||||||||
|
Nine
months ended
|
||||||||
|
September
30
|
||||||||
|
2008
|
2007
|
|||||||
|
*
As Adjusted
|
||||||||
|
Operating
activities
|
||||||||
|
Net income
|
$ | 71.6 | $ | 79.7 | ||||
|
Adjustments to reconcile net income to net cash flow
|
||||||||
|
provided from operating activities:
|
||||||||
|
Depreciation
|
142.8 | 138.4 | ||||||
|
Deferred income tax benefit
|
(10.3 | ) | (2.5 | ) | ||||
|
Gain on sale of property, plant and equipment
|
(.4 | ) | (1.8 | ) | ||||
|
Changes in assets and liabilities:
|
||||||||
|
Receivables, less allowances
|
277.3 | 267.1 | ||||||
|
Gas in storage
|
(120.9 | ) | (59.1 | ) | ||||
|
Deferred/accrued gas costs
|
(84.0 | ) | 4.6 | |||||
|
Derivative instruments
|
48.3 | (46.4 | ) | |||||
|
Margin accounts - derivative instruments
|
(66.1 | ) | 7.3 | |||||
|
Other
assets
|
(62.1 | ) | (12.6 | ) | ||||
|
Accounts payable and customer credit balances and deposits
|
(16.3 | ) | 17.1 | |||||
|
Litigation charge
|
- | (10.0 | ) | |||||
|
Other
liabilities
|
(16.9 | ) | (19.6 | ) | ||||
|
Other items
|
(6.9 | ) | 7.2 | |||||
|
Net cash flow provided from operating activities
|
156.1 | 369.4 | ||||||
|
Investing
activities
|
||||||||
|
Additions to property, plant & equipment
|
(172.5 | ) | (119.1 | ) | ||||
|
Release of restricted short-term investments
|
- | 10.0 | ||||||
|
Purchases of held-to-maturity securities
|
(1.1 | ) | (1.3 | ) | ||||
|
Proceeds from sales or maturities of held-to-maturity
securities
|
3.1 | 2.1 | ||||||
|
Purchases of available-for-sale securities
|
- | (156.7 | ) | |||||
|
Proceeds from the sales of available-for-sale securities
|
- | 156.7 | ||||||
|
Net decrease (increase) in other short-term investments
|
5.4 | (23.9 | ) | |||||
|
Net proceeds from sale of property, plant and equipment
|
.5 | 1.8 | ||||||
|
Business acquisition, net of cash acquired
|
(5.9 | ) | - | |||||
|
Other investing activities
|
7.1 | (1.7 | ) | |||||
|
Net cash flow used for investing activities
|
(163.4 | ) | (132.1 | ) | ||||
|
Financing
activities
|
||||||||
|
Proceeds from issuing long-term debt
|
75.0 | - | ||||||
|
Disbursements to retire long-term debt
|
(75.0 | ) | - | |||||
|
Net issuances (repayments) of commercial paper with maturities
of
|
||||||||
|
90 days or less
|
70.0 | (188.0 | ) | |||||
|
Dividends paid
|
(63.3 | ) | (63.0 | ) | ||||
|
Proceeds from exercise of stock options
|
1.6 | 8.1 | ||||||
|
Repayment of loan against cash surrender value of life insurance
policies
|
(11.2 | ) | - | |||||
|
Other financing activities
|
(1.0 | ) | .4 | |||||
|
Net cash flow used for financing activities
|
(3.9 | ) | (242.5 | ) | ||||
|
Net
decrease in cash and cash equivalents
|
(11.2 | ) | (5.2 | ) | ||||
|
Cash
and cash equivalents, beginning of period
|
42.8 | 41.1 | ||||||
|
Cash
and cash equivalents, end of period
|
$ | 31.6 | $ | 35.9 | ||||
|
*
Prior periods were adjusted due to the retrospective application of FSP
No. FIN 39-1. See New Accounting Pronouncements footnote for further
information.
|
||||||||
|
The
accompanying notes are an integral part of these
statements.
|
||||||||
|
Nicor
Inc.
|
|||||||||||||
|
Condensed
Consolidated Balance Sheets (Unaudited)
|
|||||||||||||
|
(millions)
|
|||||||||||||
|
September
30
|
December
31
|
September
30
|
|||||||||||
|
2008
|
2007
|
2007
|
|||||||||||
|
Assets
|
*
As Adjusted
|
*
As Adjusted
|
|||||||||||
|
Current
assets
|
|||||||||||||
|
Cash
and cash equivalents
|
$ | 31.6 | $ | 42.8 | $ | 35.9 | |||||||
|
Short-term
investments, at cost which approximates market
|
42.8 | 49.1 | 40.2 | ||||||||||
|
Receivables,
less allowances of $45.9, $35.1and $34.0, respectively
|
365.4 | 641.5 | 280.2 | ||||||||||
|
Gas
in storage
|
274.9 | 154.0 | 245.1 | ||||||||||
|
Deferred
income taxes
|
48.4 | 37.5 | 34.6 | ||||||||||
|
Derivative
instruments
|
45.6 | 28.4 | 27.4 | ||||||||||
|
Margin
accounts - derivative instruments
|
94.9 | 28.8 | 37.8 | ||||||||||
|
Other
|
105.3 | 61.0 | 62.8 | ||||||||||
|
Total
current assets
|
1,008.9 | 1,043.1 | 764.0 | ||||||||||
|
Property,
plant and equipment, at cost
|
|||||||||||||
|
Gas
distribution
|
4,411.2 | 4,279.7 | 4,234.9 | ||||||||||
|
Shipping
|
315.2 | 309.2 | 306.3 | ||||||||||
|
Other
|
25.4 | 22.8 | 22.1 | ||||||||||
| 4,751.8 | 4,611.7 | 4,563.3 | |||||||||||
|
Less
accumulated depreciation
|
1,928.3 | 1,854.4 | 1,833.1 | ||||||||||
|
Total
property, plant and equipment, net
|
2,823.5 | 2,757.3 | 2,730.2 | ||||||||||
|
Pension
benefits
|
227.1 | 215.5 | 169.9 | ||||||||||
|
Long-term
investments
|
139.1 | 132.9 | 133.6 | ||||||||||
|
Other
assets
|
171.2 | 122.5 | 162.1 | ||||||||||
|
Total
assets
|
$ | 4,369.8 | $ | 4,271.3 | $ | 3,959.8 | |||||||
|
Liabilities and
Capitalization
|
|||||||||||||
|
Current
liabilities
|
|||||||||||||
|
Long-term
debt due within one year
|
$ | 50.0 | $ | 75.0 | $ | 75.0 | |||||||
|
Short-term
debt
|
439.0 | 369.0 | 162.0 | ||||||||||
|
Accounts
payable
|
435.4 | 428.2 | 345.2 | ||||||||||
|
Customer
credit balances and deposits
|
211.0 | 234.5 | 234.0 | ||||||||||
|
Accrued
gas costs
|
- | 50.1 | 54.6 | ||||||||||
|
Derivative
instruments
|
93.8 | 28.3 | 52.7 | ||||||||||
|
Other
|
90.1 | 110.6 | 114.1 | ||||||||||
|
Total
current liabilities
|
1,319.3 | 1,295.7 | 1,037.6 | ||||||||||
|
Deferred
credits and other liabilities
|
|||||||||||||
|
Regulatory
asset retirement cost liability
|
749.6 | 720.7 | 709.9 | ||||||||||
|
Deferred
income taxes
|
400.8 | 400.4 | 396.4 | ||||||||||
|
Health
care and other postretirement benefits
|
187.0 | 185.1 | 183.3 | ||||||||||
|
Asset
retirement obligation
|
183.4 | 177.5 | 175.3 | ||||||||||
|
Regulatory
income tax liability
|
47.7 | 49.5 | 51.4 | ||||||||||
|
Unamortized
investment tax credits
|
26.5 | 27.5 | 28.1 | ||||||||||
|
Other
|
52.2 | 46.3 | 45.7 | ||||||||||
|
Total
deferred credits and other liabilities
|
1,647.2 | 1,607.0 | 1,590.1 | ||||||||||
|
Commitments
and contingencies
|
|||||||||||||
|
Capitalization
|
|||||||||||||
|
Long-term
obligations
|
|||||||||||||
|
Long-term
debt, net of unamortized discount
|
448.0 | 422.8 | 422.7 | ||||||||||
|
Mandatorily
redeemable preferred stock
|
.6 | .6 | .6 | ||||||||||
|
Total
long-term obligations
|
448.6 | 423.4 | 423.3 | ||||||||||
|
Common
equity
|
|||||||||||||
|
Common
stock
|
113.0 | 112.8 | 112.8 | ||||||||||
|
Paid-in
capital
|
48.8 | 44.8 | 44.4 | ||||||||||
|
Retained
earnings
|
803.7 | 795.5 | 761.1 | ||||||||||
|
Accumulated
other comprehensive loss, net
|
(10.8 | ) | (7.9 | ) | (9.5 | ) | |||||||
|
Total
common equity
|
954.7 | 945.2 | 908.8 | ||||||||||
|
Total
capitalization
|
1,403.3 | 1,368.6 | 1,332.1 | ||||||||||
|
Total
liabilities and capitalization
|
$ | 4,369.8 | $ | 4,271.3 | $ | 3,959.8 | |||||||
|
*
|
Prior periods were adjusted due to the retrospective application of FSP
No. FIN 39-1. See New Accounting Pronouncements footnote for further
information.
|
||||||||||||
|
The
accompanying notes are an integral part of these
statements.
|
|||||||||||||
Nicor
Inc.
|
1.
|
BASIS
OF PRESENTATION
|
The
unaudited Condensed Consolidated Financial Statements of Nicor have been
prepared by the company pursuant to the rules and regulations of the
SEC. Certain information and note disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to SEC
rules and regulations. The unaudited Condensed Consolidated Financial
Statements and Notes should be read in conjunction with the financial statements
and the notes thereto included in the company’s 2007 Annual Report on
Form
10-K.
The
information furnished reflects, in the opinion of the company, all adjustments
(consisting only of normal recurring adjustments and adjustments to reflect the
changes in accounting policy as described in Note 3 – New Accounting
Pronouncements) necessary for a fair statement of the results for the interim
periods presented. Results for the interim periods presented are not
necessarily indicative of the results to be expected for the full fiscal year
due to seasonal and other factors.
|
2.
|
ACCOUNTING
POLICIES
|
Gas in storage. Gas
distribution segment inventory is carried at cost on a LIFO
basis. Inventory decrements occurring during interim periods that are
expected to be restored prior to year-end are charged to cost of gas at the
estimated annual replacement cost, and the difference between this cost and the
actual LIFO layer cost is recorded on the balance sheet as a current temporary
LIFO liquidation. Interim inventory decrements not expected to be
restored prior to year-end are charged to cost of gas at the actual LIFO cost of
the layers liquidated.
Nicor
Enerchange inventory is carried at the lower of weighted-average cost or market
(market is represented by the cash price per the close of business on the last
trading day of the period). In 2008, Nicor Enerchange recorded a
charge of $6.7 million in the third quarter resulting from a lower of cost or
market valuation. Nicor Enerchange also recorded a charge of $5.0 million in the
second quarter of 2007 resulting from a lower of cost or market
valuation.
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 requires 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 base rates, upon approval by the
ICC. Regulatory liabilities represent probable future reductions in
revenues collected from ratepayers through a rate rider or base
rates. If Nicor Gas’ operations become no longer subject to the
provisions of SFAS No. 71, a write-off of net regulatory liabilities would be
required.
The
company had regulatory assets and liabilities as follows (in
millions):
|
September
30
|
December
31
|
September
30
|
||||||||||
|
2008
|
2007
|
2007
|
||||||||||
|
Regulatory
assets
|
||||||||||||
|
Regulatory
postretirement asset – current
|
$ | 5.2 | $ | 5.2 | $ | 8.8 | ||||||
|
Regulatory
postretirement asset – noncurrent
|
60.7 | 64.2 | 101.0 | |||||||||
|
Deferred
gas costs
|
33.9 | - | - | |||||||||
|
Deferred
environmental costs
|
11.0 | 9.5 | 10.9 | |||||||||
|
Unamortized
losses on reacquired debt
|
15.6 | 16.5 | 16.8 | |||||||||
|
Deferred
rate case costs
|
4.9 | 2.6 | 2.7 | |||||||||
|
Other
|
4.5 | .1 | 1.1 | |||||||||
| $ | 135.8 | $ | 98.1 | $ | 141.3 | |||||||
|
Regulatory
liabilities
|
||||||||||||
|
Regulatory
asset retirement cost liability – current
|
$ | 8.0 | $ | 8.0 | $ | 8.0 | ||||||
|
Regulatory
asset retirement cost liability – noncurrent
|
749.6 | 720.7 | 709.9 | |||||||||
|
Accrued
gas costs
|
- | 50.1 | 54.6 | |||||||||
|
Regulatory
income tax liability
|
47.7 | 49.5 | 51.4 | |||||||||
|
Other
|
.8 | 1.1 | - | |||||||||
| $ | 806.1 | $ | 829.4 | $ | 823.9 | |||||||
The
current portion of the regulatory postretirement asset and the deferred gas
costs are classified in current assets – other. All other regulatory
assets are classified in noncurrent other assets. The current portion
of the regulatory asset retirement cost liability is classified in current
liabilities – other. Regulatory liabilities – other is classified in
noncurrent other liabilities.
The ICC
does not presently allow Nicor Gas the opportunity to earn a return on its
regulatory postretirement asset. This regulatory asset is expected to
be recovered from ratepayers over a period of approximately 10 to 15
years. The regulatory assets related to debt are not included in rate
base, but are recovered over the term of the debt through the rate of return
authorized by the ICC.
Goodwill. Tropical
Shipping had goodwill of $18.8 million, $15.6 million and $15.6 million at
September 30, 2008, December 31, 2007 and September 30, 2007,
respectively. The increase in goodwill from December 31, 2007 to
September 30, 2008 is due to the acquisition of the assets of Caribtran, Inc., a
provider of less-than-container load and full container load consolidation
services from the United States to the Caribbean and Central
America.
Revenue taxes. Nicor Gas
classifies revenue taxes billed to customers as operating revenues and related
taxes incurred as operating expenses. Revenue taxes included in
operating expense for the three and nine months ended September 30, 2008 were
$14.3 million and $129.3 million, respectively, and $12.6 million and $112.2
million, respectively, for the same periods ending September 30,
2007.
Mercury-related recoveries,
net. Mercury-related recoveries, net reflect the estimated
costs, recoveries and reserve adjustments associated with the company’s mercury
inspection and repair program.
|
3.
|
NEW
ACCOUNTING PRONOUNCEMENTS
|
Fair value
measurements. Effective January 1, 2008, the company adopted
SFAS No. 157, Fair Value
Measurements, which defines fair value, establishes a consistent
framework for measuring fair value, and expands disclosure requirements about
fair value measurements. This Statement does not require any new fair
value measurements, rather it provides guidance on how to perform fair value
measurements as required or permitted under other accounting
pronouncements. It also provides for immediate recognition of trade-date
gains and losses related to certain derivative transactions whose fair value has
been determined using unobservable market inputs. Nicor elected the
one-year deferral allowed by FSP SFAS 157-2, Effective Date of FASB Statement No.
157, for
certain nonfinancial assets and liabilities. As it applies to Nicor,
the deferral pertains to fair value measurements for business combinations,
impairment testing of goodwill and other intangible assets, as well as asset
retirement obligations. The effect of adopting SFAS No. 157 was not
material to Nicor’s results of operations or financial condition.
Offsetting of amounts related to
certain contracts. Effective January 1, 2008, Nicor adopted
FSP No. FIN 39-1, Amendment of
FIN 39, Offsetting of Amounts Related to Certain
Contracts. This FSP amends FIN 39 to replace the terms
“conditional contracts” and “exchange contracts” with the term “derivative
instruments” as defined in SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. Also, this FSP provides
guidance on whether the receivable or liability recognized upon payment or
receipt of cash collateral in a master netting agreement must be offset against
fair value amounts recognized for contracts that have been offset in the same
master netting agreement. Upon adoption of this FSP, the company
elected not to offset fair value assets and liabilities recognized for
derivative instruments. As a result, any related cash collateral is
not offset against the derivatives.
This FSP
was required to be applied retrospectively to all prior periods. As a
result of the application of this FSP, the company’s Condensed Consolidated
Balance Sheets line items increased (decreased) by the following amounts (in
millions):
|
September
30 2008
|
December
31 2007
|
September
30 2007
|
||||||||||
|
Assets
|
||||||||||||
|
Receivables
|
$ | (44.6 | ) | $ | (22.5 | ) | $ | (22.8 | ) | |||
|
Derivative
instruments
|
25.0 | 13.0 | 15.5 | |||||||||
|
Margin
accounts – derivative instruments
|
94.9 | 28.8 | 37.8 | |||||||||
|
Liabilities
|
||||||||||||
|
Derivative
instruments
|
$ | 75.2 | $ | 19.3 | $ | 30.5 | ||||||
|
Current
other liabilities
|
.1 | - | - | |||||||||
Defined benefit pension and other
postretirement plans. On December 31, 2006, Nicor adopted the
recognition provisions of SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans. In addition,
SFAS No. 158 requires Nicor to
change its plan measurement date to match its fiscal year-end. Such
provision is effective for Nicor no later than December 31, 2008 and will be
adopted prospectively at that time. In accordance with SFAS No. 158,
Nicor has elected to use a 15-month approach for transitioning from an October 1
measurement date to a December 31 measurement date. An adjustment to
retained earnings will be recorded on December 31, 2008 to account for the
transition since the total impact will not be known until the December 31, 2008
actuarial valuation of the plan is complete.
|
4.
|
RESTRICTED
SHORT-TERM INVESTMENTS
|
In July
2006, Nicor reached a tentative agreement with the staff of the Enforcement
Division of the SEC in settlement of an anticipated civil action against the
company for a payment of $10 million. At that time, the company
deposited $10 million in an escrow account pending review and final approval of
the tentative settlement by the SEC commissioners. The SEC
commissioners approved the tentative settlement in March 2007. A
final judgment, dated April 30, 2007, was entered by a federal court approving
the settlement and the funds held in escrow were released.
|
5.
|
SHORT-TERM
AND LONG-TERM DEBT
|
In August
2008, Nicor Gas, through a private placement, issued $75 million First Mortgage
Bonds at 6.25 percent, due in 2038. Nicor Gas retired the $75 million
5.875 percent First Mortgage Bond series that became due in August
2008.
In August
2008, Nicor Gas established a $600 million, 9-month seasonal revolver, expiring
May 2009, to replace the $400 million, 210-day seasonal revolver, which expired
in May 2008. 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 $439
million, $369 million and $162 million of commercial paper borrowings
outstanding at September 30, 2008, December 31, 2007 and September 30, 2007,
respectively.
The
company believes it is in compliance with all debt covenants.
6. INCOME
TAXES
The
effective income tax rate for the three months ended September 30, 2008
increased to 64.9 percent from 15.2 percent for the prior-year
period. The effective income tax rate for the three months ended
September 30, 2008 is higher than the expected annual effective income tax
rate as it reflects the impact of a reduction in projected annual untaxed
foreign shipping earnings identified in the quarter. The effective
income tax rate for the three months ended September 30, 2007 was lower
than the annual effective income tax rate as it reflected a reduction in taxable
foreign shipping earnings which was recognized in the third quarter of
2007. Such matters have a disproportionate impact on the third
quarter effective income tax rate as the income before income taxes is
relatively low. The effective income tax rate for the nine months
ended September 30, 2008 increased to 26.8 percent from 25.3 percent for the
prior-year period. The higher effective income tax rate for the first
nine months of 2008 reflects a decrease in projected untaxed foreign shipping
earnings for 2008 and the absence of the reduction in taxable foreign earnings
recognized in the third quarter of 2007, offset, in part, by tax reserve
adjustments and lower projected 2008 annual pretax income (which causes a lower
effective income tax rate since permanent differences and tax credits are a
larger share of pretax income).
In 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 determined to be indefinitely reinvested offshore, no
deferred income tax expense would be recorded by the company. For the
three and nine months ended September 30, 2008, income tax expense has not been
provided on approximately $5 million and $8 million, respectively, of foreign
company shipping earnings that are expected to be indefinitely reinvested
offshore compared to approximately $6 million and $19 million, respectively, for
the comparable periods in 2007. As of September 30, 2008, Nicor has
not recorded deferred income taxes of approximately $46 million on approximately
$131 million of cumulative undistributed foreign earnings that are expected in
management’s judgment to be indefinitely reinvested offshore.
The
company’s liability for unrecognized tax benefits was $8.2 million at September
30, 2008 of which about $1 million, if recognized, would impact the company’s
effective income tax rate. The increase in unrecognized tax benefits
from $5.7 million at December 31, 2007 is due primarily to an item concerning
the timing of inclusion in taxable income of recoveries for environmental
clean-up expenditures, partially offset by settlements and adjustments to
estimates. The company believes that it is reasonably possible that a
change in its unrecognized tax benefits could occur within 12 months,
potentially increasing by $7 million or decreasing by $13 million its
unrecognized tax benefits.
The
company has approximately $8 million of net interest receivable related to
interest and penalties on tax matters at September 30, 2008 compared with
approximately $8 million of net interest payable related to interest and
penalties on tax matters at December 31, 2007. The change is due
primarily to an interest payment made in the second quarter of
2008.
|
7.
|
ACCRUED
UNBILLED REVENUES
|
Receivables
include accrued unbilled revenues of $52.0 million, $191.2 million and $57.4
million at September 30, 2008, December 31, 2007 and September 30, 2007,
respectively, related primarily to gas distribution operations. Nicor
Gas accrues revenues for estimated deliveries to customers from the date of
their last bill until the balance sheet date.
8. FAIR
VALUE
Effective
January 1, 2008, SFAS No. 157, Fair Value Measurements,
defines a three-level hierarchy which prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels, with Level 1
considered the most reliable. For assets and liabilities measured at
fair value on a recurring basis on the Condensed Consolidated Balance Sheets,
the table below categorizes those fair values across the three levels as of
September 30, 2008 (in millions):
|
Fair
Value Amount
|
||||||||||||||||
|
Quoted
Prices in Active Markets
|
Significant
Observable Inputs
|
Significant
Unobservable Inputs
|
||||||||||||||
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
Total
|
|||||||||||||
|
Assets
|
||||||||||||||||
|
Commodity
Derivatives:
|
||||||||||||||||
|
Financial
- current
|
$ | 23.0 | $ | 7.1 | $ | .8 | $ | 30.9 | ||||||||
|
Physical
- current
|
- | 9.8 | 4.9 | 14.7 | ||||||||||||
|
Physical
- noncurrent
|
- | .1 | 1.8 | 1.9 | ||||||||||||
|
Total
|
$ | 23.0 | $ | 17.0 | $ | 7.5 | $ | 47.5 | ||||||||
|
Liabilities
|
||||||||||||||||
|
Commodity
Derivatives:
|
||||||||||||||||
|
Financial
- current
|
$ | 74.6 | $ | 11.2 | $ | 1.6 | $ | 87.4 | ||||||||
|
Financial
- noncurrent
|
- | 1.0 | - | 1.0 | ||||||||||||
|
Physical
- current
|
- | 2.7 | 3.7 | 6.4 | ||||||||||||
|
Physical
- noncurrent
|
- | - | .1 | .1 | ||||||||||||
|
Total
|
$ | 74.6 | $ | 14.9 | $ | 5.4 | $ | 94.9 | ||||||||
When
available and appropriate, the company uses quoted market prices in active
markets to determine fair value, and classifies such items within Level
1. Level 1 values only include derivative instruments traded on the
NYMEX. The company enters into over-the-counter instruments with
values that are similar to, and correlate with, quoted prices for
exchange-traded instruments in active markets; these over-the-counter items are
classified within Level 2. In certain instances, the company may be
required to use one or more significant unobservable inputs for a model-derived
valuation; the resulting valuation is classified as Level 3.
The net
fair value of commodity derivatives relates largely to Nicor Gas. The
majority of derivatives held by Nicor Gas are for the purpose of hedging natural
gas purchases for its customers, and therefore their values do not affect net
income, as their settlement is passed directly through to customers without
markup, subject to ICC review. The change in fair value for these
derivatives is accounted for through regulatory assets and
liabilities.
The
current portions of the derivatives noted in the table on the previous page are
stated separately within current assets and current liabilities on the
Condensed Consolidated Balance Sheets. The noncurrent portions of the
derivatives are classified in noncurrent other.
The
following table presents a reconciliation of the Level 3 beginning and ending
net derivative asset balance for the periods ended September 30, 2008 (in
millions):
|
Three
months ended
|
Nine
months ended
|
|||||||
|
Beginning
of Period
|
$ | 6.9 | $ | 8.2 | ||||
|
Net
realized/unrealized gains (losses)
|
||||||||
|
Included
in regulatory assets and liabilities
|
1.1 | 7.0 | ||||||
|
Included
in net income
|
- | 2.5 | ||||||
|
Settlements,
net of purchases
|
(2.7 | ) | (10.9 | ) | ||||
|
Transfers
in and/or out of Level 3
|
(3.2 | ) | (4.7 | ) | ||||
|
End
of period
|
$ | 2.1 | $ | 2.1 | ||||
|
Net
realized/unrealized gains (losses) included in net income relating to
derivatives still held at September 30, 2008
|
$ | (1.1 | ) | $ | 1.4 | |||
Net realized/unrealized gains (losses)
included in net income are attributable to
Nicor Enerchange and are classified as operating revenues.
Nicor
maintains margin accounts related to financial derivative
transactions. As of September 30, 2008, Nicor Gas recorded $79.0
million and Nicor Enerchange recorded $15.9 million in margin accounts -
derivative instruments within current assets on the Condensed Consolidated
Balance Sheets. The company’s policy is not to offset fair value assets and
liabilities recognized for derivative instruments or any related margin
account.
The
recorded amount of short-term investments, restricted short-term investments,
and short-term borrowings approximates fair value. Long-term debt
outstanding, including current maturities, is recorded at the principal balance
outstanding, net of unamortized discounts. The principal balance of
Nicor Gas’ First Mortgage Bonds outstanding at September 30, 2008, December 31,
2007 and September 30, 2007 was $500 million. Based on quoted market
interest rates, the fair value of the company’s First Mortgage Bonds outstanding
was approximately $486 million at September 30, 2008, $513 million at
December 31, 2007 and $508 million at September 30, 2007.
|
9.
|
POSTRETIREMENT
BENEFITS
|
Nicor Gas
maintains a noncontributory defined benefit pension plan covering substantially
all employees hired prior to 1998. Pension benefits are based on
years of service and highest average salary for management employees and job
level for collectively bargained employees. The benefit obligation
related to collectively bargained employee benefits considers the company’s past
practice of regular benefit increases to reflect current wages. Nicor
Gas also provides health care and life insurance benefits to eligible retired
employees under a plan that includes limits on the company’s share of cost for
employees hired after 1982. The company’s postretirement benefit
costs have historically been considered in rate proceedings in the period they
are accrued. To the extent Nicor Gas employees perform services for
non-regulated affiliates and to the extent such employees are eligible to
participate in these plans, the affiliates are charged for the cost of these
benefits.
About
one-fourth of the net periodic benefit cost or credit related to these plans has
been capitalized as a cost of constructing gas distribution facilities and the
remainder is included in gas distribution operating and maintenance expense, net
of amounts charged to affiliates. Net periodic benefit cost (credit)
included the following components (in millions):
|
Pension
benefits
|
Health
care and
other
benefits
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Three
months ended September 30
|
||||||||||||||||
|
Service
cost
|
$ | 2.1 | $ | 2.2 | $ | .6 | $ | .5 | ||||||||
|
Interest
cost
|
4.0 | 3.8 | 3.0 | 2.7 | ||||||||||||
|
Expected
return on plan assets
|
(9.9 | ) | (9.0 | ) | - | - | ||||||||||
|
Recognized
net actuarial loss
|
- | - | 1.2 | 1.3 | ||||||||||||
|
Amortization
of prior service cost
|
.1 | .1 | (.1 | ) | (.1 | ) | ||||||||||
|
Net
periodic benefit cost (credit)
|
$ | (3.7 | ) | $ | (2.9 | ) | $ | 4.7 | $ | 4.4 | ||||||
|
Nine
months ended September 30
|
||||||||||||||||
|
Service
cost
|
$ | 6.4 | $ | 6.8 | $ | 1.6 | $ | 1.7 | ||||||||
|
Interest
cost
|
11.9 | 11.3 | 9.0 | 8.1 | ||||||||||||
|
Expected
return on plan assets
|
(29.9 | ) | (27.0 | ) | - | - | ||||||||||
|
Recognized
net actuarial loss
|
- | - | 3.5 | 3.6 | ||||||||||||
|
Amortization
of prior service cost
|
.3 | .4 | (.1 | ) | (.1 | ) | ||||||||||
|
Net
periodic benefit cost (credit)
|
$ | (11.3 | ) | $ | (8.5 | ) | $ | 14.0 | $ | 13.3 | ||||||
|
10.
|
EQUITY
INVESTMENT INCOME, NET
|
Net
equity investment income includes investment income from Triton of $2.0 million
and $5.2 million, respectively, for the three and nine months ended September
30, 2008 and $1.5 million and $3.7 million for the same periods ended September
30, 2007, respectively. Nicor received cash distributions from equity
investees for the three and nine months ended September 30, 2008 of $4.5 million
and $11.8 million, respectively, and $2.6 million and $8.9 million,
respectively, for the same periods ended September 30, 2007.
|
11.
|
COMPREHENSIVE
INCOME
|
Total
comprehensive income is as follows (in millions):
|
Three
months ended
|
Nine
months ended
|
|||||||||||||||
|
September
30
|
September
30
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Net
income
|
$ | 1.3 | $ | 14.5 | $ | 71.6 | $ | 79.7 | ||||||||
|
Other
comprehensive income (loss), after tax
|
(12.1 | ) | (1.6 | ) | (2.9 | ) | 3.8 | |||||||||
|
Total
comprehensive income (loss)
|
$ | (10.8 | ) | $ | 12.9 | $ | 68.7 | $ | 83.5 | |||||||
Other
comprehensive income (loss) consists primarily of net unrealized gains and
losses from derivative financial instruments accounted for as cash flow hedges,
including Nicor’s share of such amounts from joint ventures and other
equity-method investees.
12.
BUSINESS SEGMENT INFORMATION
Financial
data by major business segment is presented below (in millions):
|
Gas
distribution
|
Shipping
|
Other
energy
ventures
|
Corporate
and
eliminations
|
Consolidated
|
||||||||||||||||
|
Three
months ended September 30, 2008
|
||||||||||||||||||||
|
Operating
revenues
|
||||||||||||||||||||
|
External
customers
|
$ | 299.2 | $ | 108.5 | $ | 32.6 | $ | - | $ | 440.3 | ||||||||||
|
Intersegment
|
6.9 | - | 2.3 | (9.2 | ) | - | ||||||||||||||
| $ | 306.1 | $ | 108.5 | $ | 34.9 | $ | (9.2 | ) | $ | 440.3 | ||||||||||
|
Operating
income (loss)
|
$ | .4 | $ | 9.5 | $ | .6 | $ | (1.2 | ) | $ | 9.3 | |||||||||
|
Three
months ended September 30, 2007
|
||||||||||||||||||||
|
Operating
revenues
|
||||||||||||||||||||
|
External
customers
|
$ | 232.8 | $ | 97.5 | $ | 34.9 | $ | - | $ | 365.2 | ||||||||||
|
Intersegment
|
6.1 | - | 2.4 | (8.5 | ) | - | ||||||||||||||
| $ | 238.9 | $ | 97.5 | $ | 37.3 | $ | (8.5 | ) | $ | 365.2 | ||||||||||
|
Operating
income
|
$ | 3.6 | $ | 8.7 | $ | 10.5 | $ | - | $ | 22.8 | ||||||||||
|
Nine
months ended September 30, 2008
|
||||||||||||||||||||
|
Operating
revenues
|
||||||||||||||||||||
|
External
customers
|
$ | 2,275.2 | $ | 308.8 | $ | 151.8 | $ | - | $ | 2,735.8 | ||||||||||
|
Intersegment
|
55.2 | - | 6.0 | (61.2 | ) | - | ||||||||||||||
| $ | 2,330.4 | $ | 308.8 | $ | 157.8 | $ | (61.2 | ) | $ | 2,735.8 | ||||||||||
|
Operating
income (loss)
|
$ | 83.4 | $ | 19.1 | $ | 12.6 | $ | (2.0 | ) | $ | 113.1 | |||||||||
|
Nine
months ended September 30, 2007
|
||||||||||||||||||||
|
Operating
revenues
|
||||||||||||||||||||
|
External
customers
|
$ | 1,825.8 | $ | 293.6 | $ | 137.4 | $ | - | $ | 2,256.8 | ||||||||||
|
Intersegment
|
52.9 | - | 21.6 | (74.5 | ) | - | ||||||||||||||
| $ | 1,878.7 | $ | 293.6 | $ | 159.0 | $ | (74.5 | ) | $ | 2,256.8 | ||||||||||
| Operating income (loss) | $ | 88.3 | $ | 26.9 | $ | 15.8 | $ | (1.7 | ) | $ | 129.3 | |||||||||
The
majority of intersegment revenues represent gas distribution revenues related to
customers entering into utility-bill management contracts with Nicor
Solutions. Under the utility-bill management contracts, Nicor
Solutions bills a fixed amount to a customer, regardless of changes in natural
gas prices or weather, and in exchange pays the customer’s utility bills from
Nicor Gas. Intersegment revenues are eliminated in the Condensed
Consolidated Financial Statements.
Benefits
(costs) associated with Nicor’s other energy ventures’ utility-bill management
contracts attributable to warmer (colder) than normal weather for the three and
nine months ended September 30, 2008 were $0.4 million and ($3.6) million,
respectively, and $0.3 million and $0.2 million, respectively, for the same
periods in 2007. This benefit (cost) is recorded 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.
|
13.
|
RATE
PROCEEDING
|
On April
29, 2008, Nicor Gas filed with the ICC for an overall increase in rates of
$140.3 million. The company’s filing provides for a rate of return on
rate base of 9.21 percent, which reflects an 11.05 percent cost of common
equity. The requested rate increase is needed to recover higher
operating costs and increased capital investments.
In its
rate filing, Nicor Gas has proposed some new rate adjustment
mechanisms. These include mechanisms that would adjust rates to
reflect certain changes in the company’s bad debt expense and cost of gas used
for operations. Also included are a volume balancing rider that would
adjust rates to recover fixed costs, an energy efficiency rider that would fund
energy efficiency programs and a rider that would adjust rates to recover a
portion of capital expenditures incurred to replace certain older
infrastructure.
The ICC
normally has 11 months to complete its review of the filing and to issue an
order. The proposed rate increase has been suspended pending the
completion of the ICC’s review.
On
September 25, 2008, Nicor Gas filed rebuttal testimony with the ICC, in response
to direct testimony of the ICC staff and intervenors in the proceeding, and
revised its proposed rate increase to approximately $141.6 million. The revised
proposal provides for a rate of return on rate base of 9.27 percent, which
reflects an 11.15 percent cost of common equity.
|
14.
|
GUARANTEES
AND INDEMNITIES
|
Nicor and
certain subsidiaries enter into various financial and performance guarantees and
indemnities providing
assurance to third parties.
Financial
guarantees. The company has issued guarantees of affiliate
obligations to vendors and other third parties, requiring Nicor to pay the
obligations should its affiliates default. The obligations of the
company’s wholly owned subsidiaries are reflected in Nicor’s Condensed
Consolidated Balance Sheets, while the obligations of its unconsolidated equity
investments are not.
TEL has a
contingent liability to restore to zero any deficit in its equity account for
income tax purposes in the unlikely event that Triton is liquidated and a
deficit balance remains. This contingent liability continues for the
life of the Triton partnerships and any payment is effectively limited to the
assets of TEL, which were approximately $8 million at September 30,
2008. Nicor believes the likelihood of any such payment by TEL is
either remote, or the fair value of the indemnification was immaterial, and no
liability has been recorded for this contingent liability.
Performance guarantees.
Nicor Services markets separately priced product warranty contracts
that provide for the repair of heating, ventilation and air conditioning
equipment, natural gas lines, and other appliances within
homes. Revenues from these product warranty contracts are recognized
ratably over the coverage period, and related repair costs are charged to
expense as incurred. Repair expenses of $1.6 million and $4.9 million
were incurred in the three and nine months ended September 30, 2008,
respectively, and $1.5 million and $4.7 million, respectively, for the same
periods last year.
Indemnities. In
certain instances, Nicor has undertaken to indemnify current property owners and
others against costs associated with the effects and/or remediation of
contaminated sites for which the company may be responsible under applicable
federal or state environmental laws, generally with no limitation as to the
amount. Aside from liabilities recorded in connection with coal tar
clean-up, as discussed in Note 15 – Contingencies – Manufactured Gas Plant
Sites, Nicor believes that the likelihood of payment under these
indemnifications is either remote, or the fair value of the indemnification was
immaterial, and no liability has been recorded for these
indemnifications.
Nicor has
also indemnified, to the fullest extent permitted under the laws of the State of
Illinois and any other applicable laws, its present and former directors,
officers and employees against expenses they may incur in connection with
litigation they are a party to by reason of their association with the
company. There is generally no limitation as to the
amount. During 2007, the SEC filed a civil injunctive action against
three former officers of Nicor relating to the PBR Plan. Defense
costs that are being incurred by these former officers in connection with the
SEC action currently are being tendered to, and paid by, the company’s
insurer. While the company does not expect to incur significant costs
relating to the indemnification of present and former directors, officers and
employees after taking into account available insurance, it is not possible to
estimate the maximum future potential payments.
|
15.
|
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
plan 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.
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. 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. In addition, interest due to the company on certain components
of these amounts has not been recognized in the financial statements due to the
same uncertainties. 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 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, Nicor Gas withdrew its
previously filed testimony and the Administrative Law Judges issued a scheduling
order that provided for Nicor Gas to submit direct testimony by April 13,
2007. In its direct testimony filed pursuant to the scheduling order,
Nicor Gas seeks a reimbursement of approximately $6 million, which includes
interest due to the company as noted above of $1.6 million, as of March 31,
2007. No date has been set for evidentiary hearings on this
matter.
In 2004,
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 September 30,
2008.
Mercury. Nicor
Gas has incurred, and expects to continue to incur, costs related to its
historical use of mercury in various kinds of company equipment.
In the
first quarter of 2007, Nicor Gas recorded a $7.2 million reduction to its
previously established reserve for mercury-related matters. The
reduction was attributable primarily to the favorable settlement during that
quarter of certain lawsuits that had been pending against Nicor
Gas. As of September 30, 2008, Nicor Gas had remaining an estimated
liability of $2.1 million related to inspection, clean-up and legal defense
costs. This represents management’s best estimate of future costs
based on an evaluation of currently available information. Actual
costs may vary from this estimate.
Nicor Gas
remains a defendant in several private lawsuits, all in the Circuit Court of
Cook County, Illinois, seeking a variety of unquantified damages (including
bodily injury and property damages) allegedly caused by mercury spillage
resulting from the removal of mercury-containing
regulators. Potential liabilities relating to these claims have been
assumed by a contractor’s insurer subject to certain limitations.
Nicor Gas
continues to pursue recovery from insurers and independent contractors that had
performed work for the company. In the first quarter of 2007, the
company recorded a net recovery of approximately $0.8 million.
The final
disposition of these mercury-related matters is not expected to have a material
adverse impact on the company’s liquidity or financial condition.
Manufactured Gas Plant
Sites. Manufactured gas plants were used in the 1800’s and
early to mid 1900’s to produce manufactured gas from coal, creating a coal tar
byproduct. Current environmental laws may require the clean-up of
coal tar at certain former manufactured gas plant sites.
To date,
Nicor Gas has identified about 40 properties for which it may have some
responsibility. Most of these properties are not presently owned by
the company. Nicor Gas and Commonwealth Edison Company (“ComEd”) are
parties to an interim agreement to cooperate in cleaning up residue at many of
these
properties. Under the interim agreement, mutually agreed costs are to
be evenly split between Nicor Gas and ComEd until such time as they are finally
allocated either through negotiation or arbitration. On April 17,
2006, Nicor Gas initiated arbitration to determine the final allocations of
these costs between Nicor Gas and ComEd. On January 3, 2008, Nicor
Gas and ComEd entered into a definitive agreement concerning final cost
allocations. The definitive agreement allocates to Nicor Gas 51.73
percent of clean-up costs for 24 sites, no portion of the clean-up costs for 14
other sites and 50 percent of general remediation program costs that do not
relate exclusively to particular sites. The definitive agreement is
subject, among other things, to approval by the ICC. The arbitration
that was initiated by Nicor Gas in 2006 currently is stayed pursuant to the
arbitration panel’s order and is expected to be stayed pending the ICC review of
the definitive allocation agreement. Information regarding
preliminary site reviews has been presented to the Illinois Environmental
Protection Agency for certain properties. More detailed
investigations and remedial activities are complete, in progress or planned at
many of these sites. The results of the detailed site-by-site
investigations will determine the extent additional remediation is necessary and
provide a basis for estimating additional future costs. As of
September 30, 2008, the company had recorded a liability in connection with
these matters of $11.9 million. In accordance with ICC authorization,
the company has been recovering, and expects to continue to recover, these costs
from its customers, subject to annual prudence reviews.
In
December 2001, a purported class action lawsuit was filed against Exelon
Corporation, ComEd and Nicor Gas in the Circuit Court of Cook County alleging,
among other things, that the clean-up of a former manufactured gas plant site in
Oak Park, Illinois was inadequate. Additional lawsuits were later
filed related to this same former manufactured gas plant site. These
lawsuits sought, in part, unspecified damages for property damage, nuisance, and
various personal injuries that allegedly resulted from exposure to contaminants
allegedly emanating from the site, injunctive relief to compel the defendants to
engage in
various clean-up activities and punitive damages. An agreement in
principle to settle the purported class action was reached in the first quarter
of 2006 at which time a $2.3 million reserve for this matter was recorded by the
company. The settlement was approved by the trial court and the
lawsuit was dismissed
during the second quarter of 2007. Under the settlement, the company
made a payment of $2.2 million which was charged against a previously
established reserve. The remaining lawsuits relating to the Oak Park
site were settled and the claims dismissed during the first quarter of
2008. In accordance with ICC authorization, the company expects to
recover costs of such settlements from its customers, subject to an annual
prudence review.
In April
2002, Nicor Gas was named as a defendant, together with ComEd, in a lawsuit
brought by the Metropolitan Water Reclamation District of Greater Chicago (the
“MWRDGC”) under the Federal Comprehensive Environmental Response, Compensation
and Liability Act seeking recovery of past and future remediation costs and a
declaration of the level of appropriate clean-up for a former manufactured gas
plant site in Skokie, Illinois now owned by the MWRDGC. In January
2003, the suit was amended to include a claim under the Federal Resource
Conservation and Recovery Act. The suit was filed in the United
States District Court for the Northern District of
Illinois. Management cannot predict the outcome of this litigation or
the company’s potential exposure thereto, if any, and has not recorded a
liability associated with this contingency.
Since
costs and recoveries relating to the clean-up of manufactured gas plant sites
are passed directly through to customers in accordance with ICC regulations,
subject to an annual ICC prudence review, the final disposition of manufactured
gas plant matters is not expected to have a material impact on the company’s
financial condition or results of operations.
PCBs. In June 2007,
Nicor Gas notified the USEPA of the discovery by Nicor Gas of PCBs at four homes
in Park Ridge, Illinois. Nicor Gas has cleaned up the PCBs at these
four homes. In July 2007, the USEPA issued a subpoena to Nicor Gas
pursuant to Section 11 of the Toxic Substances Control Act. In
the
subpoena, the USEPA indicated that it was investigating Nicor Gas’
identification of PCB-contaminated liquids in its distribution
system. The subpoena sought documents related to Nicor Gas’ pipeline
liquids and the extent and location of PCBs contained
therein. The Illinois Attorney General made a similar request for
information from Nicor Gas. Nicor Gas has provided documentation to
the USEPA and the Illinois Attorney General, including information about the
presence of PCBs in its system, and has conducted sample testing at additional
customer locations. While Nicor is unable to predict the outcome of
these inquiries or to reasonably estimate its potential exposure related
thereto, if any, and has not recorded a liability associated with this
contingency, the final disposition of this matter is not expected to have a
material adverse impact on the company’s liquidity or financial
condition.
Municipal Tax
Matters. Many municipalities in Nicor Gas’ service territory
have enacted ordinances that impose taxes on gas sales to customers within
municipal boundaries. Most of these municipal taxes are imposed on
Nicor Gas based on revenues generated by Nicor Gas within the
municipality. Other municipal taxes are imposed on natural gas
consumers within the municipality but are collected from consumers and remitted
to the municipality by Nicor Gas. A number of municipalities have
instituted audits of Nicor Gas’ tax remittances. In May 2007, five of
those municipalities filed an action against Nicor Gas in state court in DuPage
County, Illinois relating to these tax audits. Following a dismissal
of this action without prejudice by the trial court, the municipalities filed an
amended complaint in August 2008. The amended complaint seeks, among
other things, compensation for alleged unpaid taxes. Nicor Gas is
contesting the claims in the amended complaint. In December 2007, 25
additional municipalities, all represented by the same audit firm involved in
the lawsuit, issued assessments to Nicor Gas claiming that it failed to provide
information requested by the audit firm and owed the municipalities back
taxes. Nicor Gas believes the assessments are improper and has
challenged them. While the company is unable to predict the outcome
of these matters or to reasonably estimate its potential exposure related
thereto, if any, and has not recorded a liability associated with this
contingency, the final disposition of these matters is not expected to have a
material adverse impact on the company’s liquidity or financial
condition.
Other. In addition
to the matters set forth above, the company is involved in legal or
administrative proceedings before various courts and agencies with respect to
general claims, taxes, environmental, gas cost prudence reviews and other
matters. Although unable to determine the ultimate outcome of these
other contingencies, management believes that these amounts are appropriately
reflected in the financial statements, including the recording of appropriate
liabilities when reasonably estimable.
The
following discussion should be read in conjunction with the Management’s
Discussion and Analysis section of the Nicor 2007 Annual Report on Form
10-K. Results for the interim periods presented are not necessarily
indicative of the results to be expected for the full fiscal year due to
seasonal and other factors.
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 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):
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2007
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Net
income
|
$ | 1.3 | $ | 14.5 | $ | 71.6 | $ | 79.7 | ||||||||
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Diluted
earnings per common share
|
$ | .03 | $ | .32 | $ | 1.58 | $ | 1.76 | ||||||||
Net
income and diluted earnings per common share for the nine months ended September
30, 2007 includes pretax mercury-related recoveries of $8.0 million ($.11 per
share) associated with Nicor Gas’ mercury inspection and repair program which
included a reduction of $7.2 million to the company’s previously established
reserve and $0.8 million in cost recoveries.
Comparisons
of the three months ended results reflect lower operating income in the
company’s gas distribution and other energy-related businesses and lower
corporate operating results, partially offset by higher operating income in the
company’s shipping business. Comparisons of the nine months ended
results (excluding the effect of the mercury-related item noted above) reflect
lower operating income in the company’s shipping and other energy-related
businesses and lower corporate operating results, partially offset by higher
operating income in the company’s gas distribution business.
Rate proceeding. On
April 29, 2008, Nicor Gas filed with the ICC for an overall increase in rates of
$140.3 million. The company’s filing provides for a rate of return on
rate base of 9.21 percent, which reflects an 11.05 percent cost of common
equity. The requested rate increase is needed to recover higher
operating costs and increased capital investments.
In its
rate filing, Nicor Gas has proposed some new rate adjustment
mechanisms. These include mechanisms that would adjust rates to
reflect certain changes in the company’s bad debt expense and cost of gas used
for operations. Also included are a volume balancing rider that would
adjust rates to recover fixed costs, an energy efficiency rider that would fund
energy efficiency programs and a rider that would adjust rates to recover a
portion of capital expenditures incurred to replace certain older
infrastructure.
The ICC
normally has 11 months to complete its review of the filing and to issue an
order. The proposed rate increase has been suspended pending the
completion of the ICC’s review.
On
September 25, 2008, Nicor Gas filed rebuttal testimony with the ICC, in response
to direct testimony of the ICC staff and intervenors in the proceeding, and
revised its proposed rate increase to approximately $141.6 million. The revised
proposal provides for a rate of return on rate base of 9.27 percent, which
reflects an 11.15 percent cost of common equity.
Capital market
environment. The recent volatility in the capital markets has caused general
concern over the valuations of investments, exposure to increased credit risk
and pressures on liquidity. To date, the company has not incurred,
for financial statement purposes, any material adverse impacts due to these
market conditions. However, if market values of certain investments
of the company’s defined benefit pension plan do not recover during the fourth
quarter of 2008, the company’s net periodic benefit costs will be adversely
impacted in 2009 and beyond. The company has reviewed its
investments, exposure to credit risk and sources of liquidity and, with the
exception of the potential impact on future net periodic benefit costs, does not
currently expect any future material adverse impacts relating to these
items.
Operating income by
segment. Operating income (loss) by major business segment is
presented below (in millions):
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2007
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Gas
distribution
|
$ | .4 | $ | 3.6 | $ | 83.4 | $ | 88.3 | ||||||||
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Shipping
|
9.5 | 8.7 | 19.1 | 26.9 | ||||||||||||
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Other
energy ventures
|
.6 | 10.5 | 12.6 | 15.8 | ||||||||||||
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Corporate
and eliminations
|
(1.2 | ) | - | (2.0 | ) | (1.7 | ) | |||||||||
| $ | 9.3 | $ | 22.8 | $ | 113.1 | $ | 129.3 | |||||||||
The
following summarizes operating income (loss) comparisons by major business
segment:
|
·
|
Gas
distribution operating income decreased $3.2 million for the three months
ended September 30, 2008 compared to the prior-year period due primarily
to higher operating and maintenance expense ($4.5 million increase),
depreciation expense ($1.4 million increase) and lower gains on property
sales ($1.0 million decrease), partially offset by higher gas distribution
margin ($3.9
million increase).
|
Operating
income decreased $4.9 million for the nine months ended September 30, 2008
compared to the prior-year period due primarily to higher operating and
maintenance expense ($11.0 million increase), the absence of mercury-related
recoveries recorded during the first quarter of 2007 ($8.0 million decrease),
higher depreciation expense ($4.1 million increase) and lower gains on property
sales ($1.8 million decrease), partially offset by higher gas distribution
margin ($20.1 million increase).
|
·
|
Shipping
operating income increased $0.8 million for the three months ended
September 30, 2008 compared to the prior-year period due to higher
operating revenues ($11.0 million increase), which were partially
offset by higher operating costs ($10.2 million
increase). Operating revenues were higher due to higher
average rates ($13.8 million increase), partially offset by lower volumes
shipped ($2.8 million decrease). Operating costs were higher
due primarily to increased transportation-related costs ($9.3 million
increase) attributable primarily to increased fuel
costs.
|
Operating
income decreased $7.8 million for the nine months ended September 30, 2008
compared to the prior-year period due to higher operating revenues ($15.2
million increase) which were more than offset by higher operating costs
($23.0 million increase). Operating revenues were higher due to
higher average rates ($26.6 million increase), partially offset by lower volumes
shipped ($11.4 million decrease). Operating costs were higher due
primarily to increased transportation-related costs ($21.0 million increase)
attributable primarily to increased fuel costs.
|
·
|
Nicor’s
other energy ventures operating income decreased $9.9 million for the
three months ended September 30, 2008 compared to the prior-year period
due primarily to lower operating results at Nicor’s wholesale natural gas
marketing business, Nicor Enerchange ($7.1 million decrease), and lower
operating income at Nicor’s energy-related products and services
businesses ($2.6 million decrease). Lower operating results at Nicor
Enerchange were due to unfavorable costing of physical sales activity and
lower results from the company's risk management activities associated
with hedging the product risks of the utility-bill management contracts
offered by Nicor's energy-related products and services businesses,
partially offset by favorable changes in valuations of derivative
instruments used to hedge purchases and sales of natural gas
inventory. Lower operating results at Nicor's energy-related
products and services businesses were due to higher operating expenses
($1.8 million increase) and lower operating revenues ($0.8 million
decrease).
|
Operating
income decreased $3.2 million for the nine months ended September 30, 2008
compared to the prior-year period due primarily to lower operating income at
Nicor Enerchange ($8.5 million decrease), partially offset by higher operating
income at Nicor’s energy-related products and services businesses ($5.8 million
increase). Lower operating income at Nicor Enerchange was due
primarily to unfavorable changes in valuations of derivative instruments used to
hedge purchases and sales of natural gas inventory and lower results from the
company’s risk management activities associated with hedging the product risks
of the utility-bill management contracts offered by Nicor’s energy-related
products and services businesses, partially offset by the favorable costing of
physical sales activity. Improved results at Nicor’s energy-related
products and services business were due to lower operating expenses ($15.9
million decrease), partially offset by lower operating revenues ($10.1 million
decrease).
Nicor
Enerchange uses derivatives to mitigate commodity price risk in order to
substantially lock-in the profit margin that will ultimately be
realized. A source of commodity price risk arises as Nicor Enerchange
purchases and holds natural gas in storage to earn a profit margin from its
ultimate sale. 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 carried at fair value, with changes in fair value recorded in
operating results in the period of change. In addition, Nicor
Enerchange also uses derivatives to mitigate the commodity price risks of the
utility-bill management products offered by Nicor’s energy-related products and
services businesses. The gains and losses associated with the utility-bill
management products are recognized in the months that the services are provided.
However, the underlying derivatives used to hedge the price exposure are carried
at fair value. For those derivatives that don’t meet the requirements for hedge
accounting