UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
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[X]
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF
1934
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For the quarterly period ended March 31, 2009
or
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[ ]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF
1934
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Commission
File Number 1-7297
NICOR
INC.
(Exact
name of registrant as specified in its charter)
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Illinois
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36-2855175
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(State
of Incorporation)
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(I.R.S.
Employer
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Identification
No.)
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1844
Ferry Road
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Naperville,
Illinois 60563-9600
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(630)
305-9500
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(Address
of principal executive offices) (Zip Code)
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(Registrant’s
telephone number, including area
code)
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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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes
[ ] 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.
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Large
accelerated filer [X]
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Accelerated
filer [ ]
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Non-accelerated
filer [ ]
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Smaller
reporting
company [ ]
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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 April 24, 2009, were 45,214,530 shares.
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ii
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Part
I - Financial Information
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Item
1.
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| 2 | |||
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| 3 | |||
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| 4 | |||
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Item
2.
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20 | ||
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Item
3.
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31 | ||
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Item
4.
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31 | ||
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Part
II - Other Information
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Item
1.
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33 | ||
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Item
2.
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33 | ||
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Item
6.
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34 | ||
| 35 | |||
ALJs. Administrative
Law Judges.
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 5,600 degree days per year for 2009
and 5,830 degree days per year for 2008.
EN Engineering. EN
Engineering, L.L.C., a 50-percent-owned joint
venture that provides engineering and consulting services that was sold on March
31, 2009.
FASB. Financial
Accounting Standards Board.
FIN. FASB
Interpretation.
FSP. FASB Staff
Position.
GSA. General
Services Administration, a governmental agency of the United
States.
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, serves commercial and
industrial customers in the Chicago market area, 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 move connection services for other utilities 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, a rate rider that passes natural gas costs directly through to
customers without markup, subject to ICC review.
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.
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Part
I - FINANCIAL INFORMATION
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||||||||
| Item 1. Financial Statements | ||||||||
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Nicor
Inc.
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||||||||
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(millions,
except per share data)
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||||||||
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Three
months ended
|
||||||||
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March
31
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||||||||
|
2009
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2008
|
|||||||
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Operating
revenues
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||||||||
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Gas distribution (includes revenue taxes of $74.7 and $80.3,
respectively)
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$ | 984.0 | $ | 1,464.2 | ||||
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Shipping
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89.4 | 97.7 | ||||||
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Other energy ventures
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77.1 | 70.2 | ||||||
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Corporate and eliminations
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(39.7 | ) | (36.4 | ) | ||||
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Total operating revenues
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1,110.8 | 1,595.7 | ||||||
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Operating
expenses
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||||||||
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Gas distribution
|
||||||||
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Cost of gas
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716.4 | 1,186.7 | ||||||
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Operating and maintenance
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90.6 | 88.6 | ||||||
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Depreciation
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44.4 | 42.8 | ||||||
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Taxes, other than income taxes
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78.8 | 83.8 | ||||||
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Shipping
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82.8 | 93.8 | ||||||
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Other energy ventures
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74.5 | 69.2 | ||||||
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Other corporate expenses and eliminations
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(36.6 | ) | (32.4 | ) | ||||
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Total operating expenses
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1,050.9 | 1,532.5 | ||||||
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Operating
income
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59.9 | 63.2 | ||||||
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Interest
expense, net of amounts capitalized
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9.3 | 10.6 | ||||||
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Equity
investment income, net
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11.7 | 1.5 | ||||||
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Interest
income
|
.6 | 1.3 | ||||||
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Other
income, net
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.2 | - | ||||||
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Income
before income taxes
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63.1 | 55.4 | ||||||
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Income
tax expense, net of benefits
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19.3 | 14.0 | ||||||
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Net
income
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$ | 43.8 | $ | 41.4 | ||||
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Average
shares of common stock outstanding
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||||||||
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Basic
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45.4 | 45.3 | ||||||
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Diluted
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45.4 | 45.3 | ||||||
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Earnings
per average share of common stock
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||||||||
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Basic
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$ | .97 | $ | .92 | ||||
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Diluted
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.96 | .91 | ||||||
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Dividends
declared per share of common stock
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$ | .465 | $ | .465 | ||||
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The
accompanying notes are an integral part of these
statements.
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||||||||
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Nicor
Inc.
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||||||||
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(millions)
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||||||||
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Three
months ended
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||||||||
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March
31
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||||||||
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2009
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2008
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|||||||
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Operating
activities
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||||||||
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Net income
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$ | 43.8 | $ | 41.4 | ||||
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Adjustments to reconcile net income to net cash flow provided from
operating activities:
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Depreciation
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49.0 | 47.4 | ||||||
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Deferred income tax expense (benefit)
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3.2 | (1.5 | ) | |||||
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Gain on sale of equity investment
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(10.1 | ) | - | |||||
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Changes in assets and liabilities:
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Receivables, less allowances
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99.3 | (265.0 | ) | |||||
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Gas in storage
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188.1 | 113.6 | ||||||
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Deferred/accrued gas costs
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(.5 | ) | 13.0 | |||||
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Derivative instruments
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63.6 | (97.1 | ) | |||||
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Margin accounts - derivative instruments
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(73.4 | ) | 48.9 | |||||
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Other assets
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17.1 | (25.3 | ) | |||||
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Accounts payable and customer credit balances and deposits
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(210.7 | ) | (88.3 | ) | ||||
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Temporary LIFO inventory liquidation
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197.1 | 559.0 | ||||||
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Other liabilities
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(1.2 | ) | 38.5 | |||||
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Other items
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6.8 | 13.7 | ||||||
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Net cash flow provided from operating activities
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372.1 | 398.3 | ||||||
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Investing
activities
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Additions to property, plant & equipment
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(51.2 | ) | (46.5 | ) | ||||
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Proceeds from maturities of held-to-maturity securities
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.6 | - | ||||||
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Net decrease in other short-term investments
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1.7 | .6 | ||||||
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Proceeds from sale of equity investment
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13.0 | - | ||||||
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Other investing activities
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- | 2.6 | ||||||
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Net cash flow used for investing activities
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(35.9 | ) | (43.3 | ) | ||||
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Financing
activities
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Repayments of long-term debt
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(50.0 | ) | - | |||||
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Net repayments of commercial paper
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(255.9 | ) | (341.0 | ) | ||||
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Dividends paid
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(21.1 | ) | (21.1 | ) | ||||
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Borrowing against cash surrender value of life insurance
policies
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3.4 | - | ||||||
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Repayment of loan against cash surrender value of life insurance
policies
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- | (11.2 | ) | |||||
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Other financing activities
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- | (.1 | ) | |||||
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Net cash flow used for financing activities
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(323.6 | ) | (373.4 | ) | ||||
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Net
increase (decrease) in cash and cash equivalents
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12.6 | (18.4 | ) | |||||
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Cash
and cash equivalents, beginning of period
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26.0 | 42.8 | ||||||
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Cash
and cash equivalents, end of period
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$ | 38.6 | $ | 24.4 | ||||
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The
accompanying notes are an integral part of these
statements.
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Nicor
Inc.
|
||||||||||||
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(millions)
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||||||||||||
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March
31
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December
31
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March
31
|
||||||||||
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2009
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2008
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2008
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||||||||||
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Assets
|
||||||||||||
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Current
assets
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||||||||||||
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Cash
and cash equivalents
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$ | 38.6 | $ | 26.0 | $ | 24.4 | ||||||
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Short-term
investments
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67.8 | 69.5 | 48.5 | |||||||||
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Receivables, less allowances of $52.8, $44.9 and $53.0,
respectively
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590.8 | 690.1 | 906.5 | |||||||||
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Gas
in storage
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20.4 | 208.5 | 40.4 | |||||||||
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Derivative
instruments
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61.2 | 49.7 | 125.0 | |||||||||
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Margin
accounts - derivative instruments
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191.4 | 134.4 | 8.5 | |||||||||
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Other
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128.1 | 160.7 | 94.2 | |||||||||
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Total
current assets
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1,098.3 | 1,338.9 | 1,247.5 | |||||||||
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Property,
plant and equipment, at cost
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||||||||||||
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Gas
distribution
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4,488.6 | 4,460.6 | 4,305.5 | |||||||||
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Shipping
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322.9 | 315.1 | 311.6 | |||||||||
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Other
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27.5 | 26.7 | 23.8 | |||||||||
| 4,839.0 | 4,802.4 | 4,640.9 | ||||||||||
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Less
accumulated depreciation
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1,969.5 | 1,943.8 | 1,881.3 | |||||||||
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Total
property, plant and equipment, net
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2,869.5 | 2,858.6 | 2,759.6 | |||||||||
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Pension
benefits
|
36.5 | 36.4 | 219.3 | |||||||||
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Long-term
investments
|
130.2 | 136.8 | 142.6 | |||||||||
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Other
assets
|
442.5 | 413.3 | 152.9 | |||||||||
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Total
assets
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$ | 4,577.0 | $ | 4,784.0 | $ | 4,521.9 | ||||||
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Liabilities and
Capitalization
|
||||||||||||
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Current
liabilities
|
||||||||||||
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Long-term
debt due within one year
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$ | - | $ | 50.0 | $ | 125.0 | ||||||
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Short-term
debt
|
484.0 | 739.9 | 28.0 | |||||||||
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Accounts
payable
|
259.4 | 411.3 | 441.2 | |||||||||
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Customer
credit balances and deposits
|
128.5 | 187.3 | 133.2 | |||||||||
|
Temporary
LIFO inventory liquidation
|
197.1 | - | 559.0 | |||||||||
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Derivative
instruments
|
219.1 | 167.3 | 30.0 | |||||||||
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Other
|
114.4 | 112.2 | 239.3 | |||||||||
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Total
current liabilities
|
1,402.5 | 1,668.0 | 1,555.7 | |||||||||
|
Deferred
credits and other liabilities
|
||||||||||||
|
Regulatory
asset retirement cost liability
|
763.2 | 751.7 | 730.4 | |||||||||
|
Deferred
income taxes
|
399.8 | 400.0 | 402.8 | |||||||||
|
Health
care and other postretirement benefits
|
197.0 | 196.6 | 185.4 | |||||||||
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Asset
retirement obligation
|
186.9 | 185.0 | 178.7 | |||||||||
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Other
|
177.3 | 161.0 | 123.7 | |||||||||
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Total
deferred credits and other liabilities
|
1,724.2 | 1,694.3 | 1,621.0 | |||||||||
|
Commitments
and contingencies
|
||||||||||||
|
Capitalization
|
||||||||||||
|
Long-term
obligations
|
||||||||||||
|
Long-term debt, net of unamortized discount
|
448.1 | 448.0 | 372.8 | |||||||||
|
Mandatorily redeemable preferred stock
|
.6 | .6 | .6 | |||||||||
|
Total
long-term obligations
|
448.7 | 448.6 | 373.4 | |||||||||
|
Common
equity
|
||||||||||||
|
Common stock
|
113.0 | 113.0 | 112.8 | |||||||||
|
Paid-in capital
|
51.4 | 49.5 | 45.9 | |||||||||
|
Retained earnings
|
852.9 | 830.3 | 815.8 | |||||||||
|
Accumulated other comprehensive loss, net
|
(15.7 | ) | (19.7 | ) | (2.7 | ) | ||||||
|
Total
common equity
|
1,001.6 | 973.1 | 971.8 | |||||||||
|
Total
capitalization
|
1,450.3 | 1,421.7 | 1,345.2 | |||||||||
|
Total
liabilities and capitalization
|
$ | 4,577.0 | $ | 4,784.0 | $ | 4,521.9 | ||||||
|
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 2008 Annual Report on Form
10-K.
The
information furnished reflects, in the opinion of the company, all adjustments
(consisting only of normal recurring adjustments) 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. The inventory decrement as of March 31, 2009
is expected to be restored prior to year-end.
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 2009, Nicor Enerchange recorded a
charge of $2.8 million in the first quarter 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, or
probable future expenditures. 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):
|
March
31
|
December
31
|
March
31
|
||||||||||
|
2009
|
2008
|
2008
|
||||||||||
|
Regulatory
assets
|
||||||||||||
|
Regulatory
postretirement asset – current
|
$ | 23.3 | $ | 23.3 | $ | 5.2 | ||||||
|
Regulatory
postretirement asset – noncurrent
|
227.5 | 232.3 | 63.1 | |||||||||
|
Deferred
gas costs – current
|
15.4 | 31.5 | - | |||||||||
|
Deferred
gas costs – noncurrent
|
39.1 | 22.5 | - | |||||||||
|
Deferred
environmental costs
|
15.0 | 19.5 | 7.0 | |||||||||
|
Unamortized
losses on reacquired debt
|
15.1 | 15.4 | 16.2 | |||||||||
|
Other
|
14.7 | 6.2 | 3.4 | |||||||||
| $ | 350.1 | $ | 350.7 | $ | 94.9 | |||||||
|
Regulatory
liabilities
|
||||||||||||
|
Regulatory
asset retirement cost liability – current
|
$ | 15.0 | $ | 15.0 | $ | 8.0 | ||||||
|
Regulatory
asset retirement cost liability – noncurrent
|
763.2 | 751.7 | 730.4 | |||||||||
|
Accrued
gas costs
|
- | - | 63.1 | |||||||||
|
Regulatory
income tax liability
|
45.5 | 46.3 | 48.8 | |||||||||
|
Other
|
.8 | .8 | 4.5 | |||||||||
| $ | 824.5 | $ | 813.8 | $ | 854.8 | |||||||
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 and accrued gas costs are
classified in current liabilities – other. All other regulatory
liabilities are 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 postretirement asset
is expected to be recovered from ratepayers over a period of approximately 10 to
13 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. Nicor Gas is allowed to recover and is
required to pay, using short-term interest rates, the carrying costs related to
temporary under or overcollections of natural gas costs and certain
environmental costs charged to its customers.
Goodwill. Tropical
Shipping had goodwill of $19.0 million, $19.0 million and $15.6 million at March
31, 2009, December 31, 2008 and March 31, 2008, respectively. The
increase in goodwill since March 31, 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 months ended March 31, 2009 and 2008 were $73.6
million and $78.9 million, respectively.
Derivative
instruments. Cash flows from derivative instruments
are recognized in the Condensed Consolidated Statements of Cash Flows, and gains
and losses are recognized in the Condensed Consolidated Statements of
Operations, in the same categories as the underlying
transactions.
Cash flow
hedge accounting may be elected under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, only for highly effective hedges,
based upon an assessment, performed at least quarterly, of the historical and
probable future correlation of cash flows from the derivative instrument
to
changes
in the expected future cash flows of the hedged item. To the extent
cash flow hedge accounting is applied, the effective portion of any changes in
the fair value of the derivative instruments is reported as a component of
accumulated other comprehensive income. Ineffectiveness, if any, is
immediately recognized in operating income. The amount in accumulated
other comprehensive income is reclassified to earnings when the forecasted
transaction occurs, even if the derivative instrument is sold, extinguished or
terminated prior to the transaction occurring. If the forecasted
transaction is no longer expected to occur, the amount in accumulated other
comprehensive income is immediately reclassified to earnings.
Nicor
Gas. Derivative instruments, such as futures contracts,
options and swap agreements, are utilized primarily in the purchase of natural
gas for customers. These derivative instruments are reflected at fair
value. Realized gains or losses on such instruments are included in
the cost of gas delivered and are passed directly through to customers, subject
to ICC review, and therefore have no direct impact on
earnings. Unrealized changes in the fair value of these derivative
instruments are deferred as regulatory assets or liabilities and classified on
the balance sheet as deferred or accrued gas costs, respectively.
At times,
Nicor Gas enters into futures contracts, options, swap agreements and
fixed-price purchase agreements to reduce the earnings volatility of certain
forecasted operating costs arising from fluctuations in natural gas prices, such
as the purchase of natural gas for use in company operations. These
derivative instruments are carried at fair value, unless they qualify for the
normal purchases and normal sales exception, in which case they are carried at
cost. To the extent hedge accounting is not elected, changes in such
fair values are immediately recorded in current period earnings as operating and
maintenance expense.
Nicor
Enerchange. Derivative instruments, such as futures contracts,
options, forward contracts, swap agreements and other energy-related contracts
are held by Nicor’s wholesale natural gas marketing business, Nicor Enerchange,
for trading purposes. Certain of these derivative instruments are
used to economically hedge price risk associated with inventories of natural
gas, fixed-price purchase and sale agreements and other future natural gas
commitments. Nicor Enerchange records such derivative instruments at
fair value and generally does not elect hedge accounting. As a
result, changes in derivative fair values may have a material impact on Nicor’s
financial statements. Other derivative instruments are used by Nicor
Enerchange to hedge price risks related to certain utility-bill management
products. These derivative instruments are carried at fair value and
cash flow hedge accounting may or may not be elected.
Nicor Inc. For
derivative instruments that were designated as hedges of interest payments on
30-year bonds issued by Nicor Gas in December 2003, the amount deferred in
accumulated other comprehensive income is being amortized to interest expense on
a straight-line basis over the remaining life of the bonds.
|
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. In 2008, 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 pertained 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, in its
entirety, was not material to Nicor’s results of operations or financial
condition.
|
4.
|
SHORT-TERM
AND LONG-TERM DEBT
|
In
February 2009, the $50 million 5.37 percent First Mortgage Bond series matured
and was retired.
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 $484.0
million, $739.9 million and $28.0 million of commercial paper borrowings
outstanding at March 31, 2009, December 31, 2008 and March 31, 2008,
respectively.
The
company believes it is in compliance with all debt covenants.
5. INCOME
TAXES
The
effective income tax rate for the three months ended March 31, 2009 increased to
30.6 percent from 25.3 percent in the prior-year period. The higher
effective income tax rate for the three months ended March 31, 2009 is due
primarily to higher forecasted annual pretax income (which causes a higher
effective income tax rate since permanent differences and tax credits are a
smaller share of pretax income), lower forecasted annual undistributed
foreign earnings and lower forecasted tax credits.
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 months ended March 31, 2009 and 2008, income tax expense has not been
provided on approximately $5 million and $1 million, respectively, of foreign
company shipping earnings that are expected to be indefinitely reinvested
offshore. As of March 31, 2009, Nicor has not recorded deferred
income taxes of approximately $53 million on approximately $151 million of
cumulative undistributed foreign earnings that are expected in management’s
judgment to be indefinitely reinvested offshore.
The
company has approximately $6 million of net interest receivable accrued at March
31, 2009 compared with $9 million of interest receivable as of December 31,
2008. The change is due primarily to the settlement of interest in
the first quarter of 2009 related to a state income tax matter.
The
balance of unamortized investment tax credits at March 31, 2009, December 31,
2008 and March 31, 2008 was $25.4 million, $26.0 million and $26.9 million,
respectively.
6. ACCRUED
UNBILLED REVENUES
Receivables
include accrued unbilled revenues of $89.7 million, $199.1 million and $237.0
million at March 31, 2009, December 31, 2008 and March 31, 2008, 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.
7. FAIR
VALUE MEASUREMENTS
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 tables below categorize those fair values
across the three levels (in millions):
|
Fair
value amount
|
||||||||||||||||
|
Quoted
prices in active markets
|
Significant
observable inputs
|
Significant
unobservable inputs
|
||||||||||||||
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
Total
|
|||||||||||||
|
March
31, 2009
|
||||||||||||||||
|
Assets
|
||||||||||||||||
|
Money
market funds
|
$ | 90.2 | $ | - | $ | - | $ | 90.2 | ||||||||
|
Derivatives
|
35.1 | 20.4 | 17.0 | 72.5 | ||||||||||||
|
Total
|
$ | 125.3 | $ | 20.4 | $ | 17.0 | $ | 162.7 | ||||||||
|
Liabilities
|
||||||||||||||||
|
Derivatives
|
$ | 225.1 | $ | 42.0 | $ | 1.3 | $ | 268.4 | ||||||||
|
December
31, 2008
|
||||||||||||||||
|
Assets
|
||||||||||||||||
|
Money
market funds
|
$ | 81.2 | $ | - | $ | - | $ | 81.2 | ||||||||
|
Derivatives
|
33.8 | 21.7 | 8.5 | 64.0 | ||||||||||||
|
Total
|
$ | 115.0 | $ | 21.7 | $ | 8.5 | $ | 145.2 | ||||||||
|
Liabilities
|
||||||||||||||||
|
Derivatives
|
$ | 161.4 | $ | 28.0 | $ | 6.9 | $ | 196.3 | ||||||||
|
March
31, 2008
|
||||||||||||||||
|
Assets
|
||||||||||||||||
|
Money
market funds
|
$ | 63.1 | $ | - | $ | - | $ | 63.1 | ||||||||
|
Derivatives
|
81.3 | 35.8 | 11.0 | 128.1 | ||||||||||||
|
Total
|
$ | 144.4 | $ | 35.8 | $ | 11.0 | $ | 191.2 | ||||||||
|
Liabilities
|
||||||||||||||||
|
Derivatives
|
$ | 20.7 | $ | 7.7 | $ | 1.7 | $ | 30.1 | ||||||||
When
available and appropriate, the company uses quoted market prices in active
markets to determine fair value, and classifies such items within Level
1. For commodity derivatives, Level 1 values include only those
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.
Money
market funds held by domestic subsidiaries are included in cash equivalents,
whereas such funds held by non-U.S. subsidiaries are included in short-term
investments.
The
following table presents a reconciliation of the Level 3 beginning and ending
net derivative asset balances for the three months ended March 31 (in
millions):
|
2009
|
2008
|
|||||||
|
Beginning
of Period
|
$ | 1.6 | $ | 8.2 | ||||
|
Net
realized/unrealized gains (losses)
|
||||||||
|
Included
in regulatory assets and liabilities
|
(.1 | ) | 5.9 | |||||
|
Included
in net income
|
9.4 | 2.5 | ||||||
|
Settlements,
net of purchases
|
1.1 | (7.2 | ) | |||||
|
Transfers
in and/or out of Level 3
|
3.7 | (.1 | ) | |||||
|
End
of period
|
$ | 15.7 | $ | 9.3 | ||||
|
Net
realized/unrealized gains (losses) included in net income relating to
derivatives still held at March 31
|
$ | 9.3 | $ | 2.5 | ||||
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. The company’s policy is not to offset the fair value of
assets and liabilities recognized for derivative instruments or any related
margin account. The following table represents the balances of margin
accounts related to derivative instruments (in millions):
|
March
31
|
December
31
|
March
31
|
||||||||||
|
2009
|
2008
|
2008
|
||||||||||
|
Assets
|
||||||||||||
|
Margin
accounts – derivative instruments
|
$ | 191.4 | $ | 134.4 | $ | 8.5 | ||||||
|
Other
– noncurrent
|
45.7 | 29.3 | - | |||||||||
|
Liabilities
|
||||||||||||
|
Other
– current
|
$ | - | $ | .1 | $ | 28.6 | ||||||
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 March 31, 2009 was $450 million
and at December 31, 2008 and March 31, 2008 was $500
million. Based on quoted market interest rates, the fair value of the
company’s First Mortgage Bonds outstanding was approximately $453 million
at March 31, 2009, $520 million at December 31, 2008 and $510 million
at March 31, 2008.
|
8.
|
DERIVATIVE
INSTRUMENTS
|
A
description of the company’s objectives and strategies for using derivative
instruments, and related accounting policies, is included in Note 2 – Accounting
Policies – Derivative instruments. All derivatives recognized on the
Condensed Consolidated Balance Sheets are measured at fair value, as described
in Note 7 – Fair Value Measurements.
Balance
sheet. Derivative assets and liabilities as of March 31, 2009,
carried at fair value on the Condensed Consolidated Balance Sheets, are shown in
the table below (in millions):
|
Asset
derivatives
|
Liability
derivatives
|
|||||||||
|
Location
|
Fair
value
|
Location
|
Fair
value
|
|||||||
|
Commodity
derivatives designated as hedging instruments under SFAS No.
133
|
||||||||||
|
Current
|
Derivative
instruments
|
$ | - |
Derivative
instruments
|
$ | 6.1 | ||||
|
Noncurrent
|
Other
|
- |
Other
|
.5 | ||||||
|
Total
|
$ | - | $ | 6.6 | ||||||
|
Commodity
derivatives not designated as hedging instruments under SFAS No.
133
|
||||||||||
|
Current
|
Derivative
instruments
|
$ | 61.2 |
Derivative
instruments
|
$ | 213.0 | ||||
|
Noncurrent
|
Other
|
11.3 |
Other
|
48.8 | ||||||
|
Total
|
$ | 72.5 | $ | 261.8 | ||||||
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.
Volumes. As of
March 31, 2009, Nicor Gas held outstanding derivative contracts of approximately
75 Bcf to hedge natural gas purchases for customer use, with hedges spanning
approximately three years. Commodity price-risk exposure arising from
Nicor Enerchange’s activities and Nicor Gas’ natural gas purchases for company
use is mitigated with derivative instruments that total to a net long position
of 0.4 Bcf as of March 31, 2009. The above volumes exclude contracts
such as variable-priced contracts and basis swaps, which are accounted for as
derivatives but are not directly impacted by changes in commodity prices.
Income statement – cash flow
hedges. Derivatives designated as a cash flow hedge relate to
purchases of natural gas for Nicor Gas company use, risk management activities
associated with the utility-bill management products, and hedges of anticipated
fixed-rate debt issuances. For the three months ended March 31, 2009,
cash flow hedges affected accumulated other comprehensive income and income as
shown in the following table (in millions):
|
Cash
flow hedging relationships
|
Pretax
gain (loss) recognized in other comprehensive income
(Effective
portion)
|
Location
|
Pretax
gain
(loss)
reclassified from accumulated other comprehensive income into
income
(Effective
portion)
|
Pretax
gain (loss) recognized in income
(Ineffective
portion)
|
|||||||||
|
Commodity
contracts – Nicor Gas
|
$ |
(3.9)
|
Operating
and maintenance
|
$ |
(
4.5)
|
$ |
-
|
||||||
|
Commodity
contracts – other energy ventures
|
(2.6)
|
Operating
revenues
|
(8.3)
|
.2
|
|||||||||
|
Interest
rate contracts
|
-
|
Interest
expense
|
(.1)
|
-
|
|||||||||
|
Total
|
$ |
(6.5)
|
$ |
(12.9)
|
$ |
.2
|
|||||||
As of
March 31, 2009, the time horizon of cash flow hedges for Nicor Gas company use
and utility-bill management products sold by Nicor’s other energy ventures
extends to as long as 20 months. For these hedges, the total pretax
loss deferred in accumulated other comprehensive income at March 31, 2009 was
$7.1 million (or $4.3 million after taxes), of which $6.6 million (or $4.0
million after taxes) is expected to be reclassified to earnings within the next
12 months. For interest rate hedges, the amounts deferred in
accumulated other comprehensive income are being amortized to interest expense
on a straight-line basis over the remaining life of the hedged
bonds. The total pretax loss deferred in accumulated other
comprehensive income at March 31, 2009, was $6.0 million (or $3.6 million after
taxes), of which $0.2 million (or $0.1 million after taxes) is expected to be
reclassified to earnings within the next 12 months.
Income statement – derivatives not
designated as hedges. The earnings of the company are subject
to volatility to the extent that derivatives used by the company’s other energy
ventures, to hedge energy trading activities and utility-bill management
products, and by Nicor Gas, to purchase gas for company use, are not designated
as hedging instruments. For the three months ended March 31, 2009,
these pretax earnings effects are summarized in the table below (in
millions):
|
Derivatives
not designated as hedging
instruments
under SFAS No. 133
|
Location
|
Net
gain (loss) recognized in income
|
||||
|
Commodity
contracts – other energy
ventures
|
Operating
revenues
|
$ | (.8 | ) | ||
|
Commodity
contracts – Nicor
Gas
|
Operating
and maintenance
|
(1.7 | ) | |||
| $ | (2.5 | ) | ||||
Nicor
Gas’ derivatives to hedge the purchase of natural gas for its customers are also
not designated as hedging instruments. Gains or losses on these
derivatives are deferred as regulatory assets or liabilities until the related
revenue is recognized. Net losses of $117.1 million were recognized
in regulatory assets for the three months ended March 31, 2009.
Credit-risk-related contingent
features. Provisions within certain derivative agreements
require the company to post collateral if the company’s net liability position
exceeds a specified threshold. Also, certain derivative agreements
contain credit-risk-related contingent features, whereby the company would be
required to provide additional collateral or pay the amount due to the
counterparty when a credit event occurs, such as if the company’s credit rating
was to be lowered. As of March 31, 2009, for agreements with such
features, derivative contracts with liability fair values totaled approximately
$38 million, for which the company had posted no collateral to its
counterparties. If it was assumed that the company had to post the
maximum contractually specified collateral or settle the liability, the company
would have been required to pay approximately $37 million.
Concentrations of credit
risk. In instances in which the company holds an
uncollateralized net asset per an over-the-counter derivative contract, there is
potential credit risk in the event the counterparty defaults on a settlement or
fails to perform under the agreed-upon terms. To manage this credit
risk, the company maintains prudent credit policies to determine and monitor the
creditworthiness of counterparties, seeks guarantees or collateral, in the form
of cash or letters of credit, acquires credit insurance in certain instances and
limits its exposure to any one counterparty. The company also, in
some instances, enters into netting arrangements to mitigate counterparty credit
risk.
|
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 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 a limit 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. As a regulated utility,
Nicor Gas expects continued rate recovery of the eligible costs of its defined
benefit postretirement plans and, accordingly, associated changes in the plan’s
funded status have been deferred as a regulatory asset or liability until
recognized in net income, instead of being recorded in accumulated other
comprehensive income. However, 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 and the changes in the funded status relating to these
employees are recorded in accumulated other comprehensive income.
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
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Three
months ended March 31
|
||||||||||||||||
|
Service
cost
|
$ | 2.2 | $ | 2.1 | $ | .6 | $ | .5 | ||||||||
|
Interest
cost
|
4.1 | 4.0 | 3.0 | 3.0 | ||||||||||||
|
Expected
return on plan assets
|
(6.3 | ) | (10.0 | ) | - | - | ||||||||||
|
Recognized
net actuarial loss
|
3.8 | - | 1.1 | 1.2 | ||||||||||||
|
Amortization
of prior service cost
|
.1 | .1 | - | - | ||||||||||||
|
Net
periodic benefit cost (credit)
|
$ | 3.9 | $ | (3.8 | ) | $ | 4.7 | $ | 4.7 | |||||||
Due to
the significant decline in the fair value of the pension plan’s assets during
2008, the expected return on plan assets has decreased in 2009 as compared to
2008. Also, the fair value decline in 2008 has created an actuarial
loss that is being amortized over the average remaining service lives of
employees covered by the plan.
|
10.
|
EQUITY
INVESTMENT INCOME, NET
|
On March
31, 2009, the company sold its 50-percent interest in EN
Engineering. The company’s share of the sale price is $16.0 million,
with an additional $1.5 million which is contingent on EN Engineering’s 2010
performance and would be due in 2011. After closing costs and other
adjustments, Nicor received cash of $13.0 million and recorded a gain on the
sale of $10.1 million. Equity investment income also includes
investment income from Triton of $1.2 million and $1.0 million for the three
months ended March 31, 2009 and 2008, respectively. Nicor received
cash distributions from equity investees for the three months ended March 31,
2009 and 2008 of $2.8 million and $3.3 million, respectively.
|
11.
|
COMPREHENSIVE
INCOME
|
Total
comprehensive income is as follows (in millions):
|
Three
months ended
|
||||||||
|
March
31
|
||||||||
|
2009
|
2008
|
|||||||
|
Net
income
|
$ | 43.8 | $ | 41.4 | ||||
|
Other
comprehensive income, after tax
|
4.0 | 5.2 | ||||||
|
Total
comprehensive income
|
$ | 47.8 | $ | 46.6 | ||||
Other
comprehensive income 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 March 31, 2009
|
||||||||||||||||||||
|
Operating
revenues
|
||||||||||||||||||||
|
External
customers
|
$ | 964.8 | $ | 89.4 | $ | 56.6 | $ | - | $ | 1,110.8 | ||||||||||
|
Intersegment
|
19.2 | - | 20.5 | (39.7 | ) | - | ||||||||||||||
| $ | 984.0 | $ | 89.4 | $ | 77.1 | $ | (39.7 | ) | $ | 1,110.8 | ||||||||||
|
Operating
income (loss)
|
$ | 53.8 | $ | 6.6 | $ | 2.6 | $ | (3.1 | ) | $ | 59.9 | |||||||||
|
Three
months ended March 31, 2008
|
||||||||||||||||||||
|
Operating
revenues
|
||||||||||||||||||||
|
External
customers
|
$ | 1,432.7 | $ | 97.7 | $ | 65.3 | $ | - | $ | 1,595.7 | ||||||||||
|
Intersegment
|
31.5 | - | 4.9 | (36.4 | ) | - | ||||||||||||||
| $ | 1,464.2 | $ | 97.7 | $ | 70.2 | $ | (36.4 | ) | $ | 1,595.7 | ||||||||||
|
Operating
income (loss)
|
$ | 62.3 | $ | 3.9 | $ | 1.0 | $ | (4.0 | ) | $ | 63.2 | |||||||||
The
majority of intersegment revenues represent 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.
Costs
associated with Nicor’s other energy ventures’ utility-bill management contracts
attributable to colder than normal weather for the three months ended March 31,
2009 and 2008 were $2.6 million and $3.8 million,
respectively. This 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. The company sought a revenue increase of $140.4 million for a
rate of return on rate base of 9.27 percent, which reflects an 11.15 percent
cost of common equity. The increase is needed to recover higher operating costs
and increased capital investments.
In its
rate filing, Nicor Gas proposed some new rate adjustment
mechanisms. These included 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 were 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.
On March
25, 2009, the ICC issued an order approving an increase in base revenues of
$69.0 million, a rate of return on rate base of 7.58 percent and a rate of
return on equity of 10.17 percent. The order also approved an energy
efficiency rider. Nicor Gas placed its new rates into effect on April
3, 2009.
On April
24, 2009, the company filed a request for rehearing with the ICC to appeal the
capital structure and return on equity contained in the ICC’s rate order
contending the company’s return on rate base should be higher. The
Attorney General’s office, Citizen’s Utility Board and the Environmental Law and
Policy Center also filed requests for rehearing on items including the
management structure of the Energy Efficiency Plan and the rate design for
residential customers. These other parties do not raise issues about
the amount of the rate increase granted to Nicor Gas. The ICC has
until May 14, 2009 to either grant or deny the requests for
rehearing. Any further changes in rates as a result of rehearing
would be effective prospectively.
|
14.
|
GUARANTEES
AND INDEMNITIES
|
Nicor and
certain subsidiaries enter into various financial and performance guarantees and
indemnities providing assurance to third parties.
Financial
guarantees. TEL has an obligation 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 obligation
continues for the life of the Triton partnerships and any payment is effectively
limited to the assets of TEL, which were approximately $13 million at March 31,
2009. Nicor believes the likelihood of any such payment by TEL is
remote. No liability has been recorded for this
obligation.
Performance guarantees.
Nicor Services markets separately priced product warranty contracts
that provide, over a period of one to fifteen years, 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 $1.9
million and $1.7 million were incurred in the three months ended March 31, 2009
and 2008, respectively.
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. These indemnifications relate primarily to ongoing coal tar
cleanup, as discussed in Note 15 – Contingencies – Manufactured Gas Plant
Sites. Nicor believes that the likelihood of payment under its other
environmental indemnifications is remote. No liability has been
recorded for such 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. In 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 ALJs
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 ALJs 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 March 31,
2009.
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.
As of
March 31, 2009, Nicor Gas had remaining an estimated liability of $2.4 million
related to inspection, cleanup 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.
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 cleanup 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 cleanup costs for 24 sites, no portion of the cleanup 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 March
31, 2009, the company had recorded a liability in connection with these matters
of $20.1 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 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 cleanup 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 cleanup 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. The company believes that the USEPA and the Illinois
Attorney General have concluded their investigations and does not expect either
agency to assess fines to, or pursue any enforcement actions, against Nicor Gas
with respect to this matter.
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. In April 2009, a purported class action lawsuit was
filed against Nicor Gas in state court in Cook County, Illinois on behalf of
customers who have been charged a municipal utility tax by the company but who
are not residents of the taxing municipality. The lawsuit asserts
claims under the Illinois Consumer Fraud Act and the Illinois Public Utilities
Act and for unjust enrichment, and seeks actual and punitive damages and an
injunction. 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 2008 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):
|
Three
months ended
|
||||||||
|
March
31
|
||||||||
|
2009
|
2008
|
|||||||
|
Net
income
|
$ | 43.8 | $ | 41.4 | ||||
|
Diluted
earnings per common share
|
$ | .96 | $ | .91 | ||||
Comparisons
of the three months ended results reflect lower operating income in the
company’s gas distribution business and a higher effective income tax rate in
2009, partially offset by higher operating income in the company’s shipping and
other energy-related businesses, higher corporate operating results and higher
equity investment income.
Rate proceeding. On
April 29, 2008, Nicor Gas filed with the ICC for an overall increase in
rates. The company sought a revenue increase of $140.4 million for a
rate of return on rate base of 9.27 percent, which reflects an 11.15 percent
cost of common equity. The increase is needed to recover higher operating costs
and increased capital investments.
In its
rate filing, Nicor Gas proposed some new rate adjustment
mechanisms. These included 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 were 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.
On March
25, 2009, the ICC issued an order approving an increase in base revenues of
$69.0 million, a rate of return on rate base of 7.58 percent and a rate of
return on equity of 10.17 percent. The order also approved an energy
efficiency rider. Nicor Gas placed its new rates into effect on April
3, 2009. As a result of the new rates, it is estimated that a
100-degree day variation from normal (5,600 degree days annually) impacts Nicor
Gas’ distribution margin, net of income taxes, by approximately $1.3
million.
On April
24, 2009, the company filed a request for rehearing with the ICC to appeal the
capital structure and return on equity contained in the ICC’s rate order
contending the company’s return on rate base should be higher. The
Attorney General’s office, Citizen’s Utility Board and the Environmental Law and
Policy Center also filed requests for rehearing on items including the
management structure of the Energy
Efficiency
Plan and the rate design for residential customers. These other
parties do not raise issues about the amount of the rate increase granted to
Nicor Gas. The ICC has until May 14, 2009 to either grant or deny the
requests for rehearing. Any further changes in rates as a result of
rehearing would be effective prospectively.
Capital market
environment. The volatility in the capital markets during 2008
and 2009 has caused
general concern over the valuations of investments, exposure to increased credit
risk and pressures on liquidity. The company has reviewed its
investments, exposure to credit risk and sources of liquidity and does not
currently expect any future material adverse impacts relating to these
items.
The
company sponsored defined benefit pension plan experienced significant declines
in the market values of its investments in 2008. These market value
declines adversely impact the company’s future postretirement benefit costs in
two ways. First, the expected return on the pension plan’s assets
(which serves to reduce postretirement benefit costs) declined as a result
of the lower asset market values. Second, the pension plan’s 2008
actuarial losses (largely due to the decline in asset market values) are
being amortized over the average remaining service life of plan
participants. As a regulated utility, Nicor Gas expects continued
rate recovery of the eligible costs of its defined benefit postretirement plans
and, accordingly, associated changes in the plan’s funded status have been
deferred as a regulatory asset or liability until recognized in net income,
instead of being recorded in accumulated other comprehensive
income. The adverse impact of both factors on 2009 postretirement
benefit costs compared to 2008 costs is approximately $30
million. About one-fourth of this added cost will be capitalized as a
cost of constructing gas distribution facilities and the remainder will be
included in gas distribution operating and maintenance expense, net of any
amounts charged to affiliates. The company does not expect to make
any contributions to the pension plan in 2009. However, if market
values of the pension plan assets continue to significantly decline, the company
may be required to make future contributions.
Operating income by
segment. Operating income (loss) by major business segment is
presented below (in millions):
|
Three
months ended
|
||||||||
|
March
31
|
||||||||
|
2009
|
2008
|
|||||||
|
Gas
distribution
|
$ | 53.8 | $ | 62.3 | ||||
|
Shipping
|
6.6 | 3.9 | ||||||
|
Other
energy ventures
|
2.6 | 1.0 | ||||||
|
Corporate
and eliminations
|
(3.1 | ) | (4.0 | ) | ||||
| $ | 59.9 | $ | 63.2 | |||||
The
following summarizes operating income (loss) comparisons by major business
segment:
|
·
|
Gas
distribution operating income decreased $8.5 million for the three months
ended March 31, 2009 compared to the prior year due primarily to
lower gas distribution margin ($4.6 million decrease), higher operating
and maintenance expense ($2.0 million increase) and higher depreciation
expense ($1.6 million increase).
|
|
·
|
Shipping
operating income increased $2.7 million for the three months ended March
31, 2009 compared to the prior year due to lower operating costs
($11.0 million decrease), which were partially offset by lower operating
revenues ($8.3 million decrease). Operating costs were
lower due primarily to lower transportation-related costs ($8.4 million
decrease, largely attributable to lower fuel prices and lower volumes
shipped), employee-related costs ($1.0 million decrease) and charter costs
($1.0 million decrease). Operating revenues were lower due to
lower volumes shipped ($11.0 million decrease), partially offset by higher
average rates ($2.7 million
increase).
|
|
·
|
Nicor’s
other energy ventures operating income increased $1.6 million for the
three months ended March 31, 2009 compared to the prior year due to
higher operating income at Nicor’s wholesale natural gas marketing
business, Nicor Enerchange ($4.5 million increase), partially offset by
lower operating results at Nicor’s energy-related products and services
businesses ($2.5 million decrease). Higher operating income at
Nicor Enerchange was due primarily to favorable changes in valuations of
derivative instruments used to hedge purchases and sales of natural gas
inventory and favorable costing of physical sales activity, partially
offset by 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. Lower operating results at Nicor’s energy-related
products and services businesses were due to higher operating expenses
($4.8 million increase), partially offset by higher operating revenues
($2.3 million increase).
|
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, the changes in fair value are
recorded in operating results in the period of change. As a result,
earnings are subject to volatility as the fair value of derivatives
change. The volatility resulting from this accounting can be
significant from period to period.
|
·
|
Corporate
and eliminations operating results increased $0.9 million for the three
months ended March 31, 2009 compared to the prior year due to lower
costs of a natural weather hedge associated with the utility-bill
management products offered by Nicor’s energy-related products and
services businesses ($1.2 million decrease). The company
recorded $2.6 million of costs in the current year compared to $3.8
million of costs recorded in the prior year. Benefits or costs
resulting from variances from normal weather related to these products 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.
|
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):
|
Three
months ended
|
||||||||
|
March
31
|
||||||||
|
2009
|
2008
|
|||||||
|
Gas
distribution
|
$ | 984.0 | $ | 1,464.2 | ||||
|
Shipping
|
89.4 | 97.7 | ||||||
|
Other
energy ventures
|
77.1 | 70.2 | ||||||
|
Corporate
and eliminations
|
(39.7 | ) | (36.4 | ) | ||||
| $ | 1,110.8 | $ | 1,595.7 | |||||
Gas
distribution revenues are impacted by changes in natural gas costs, which are
passed directly through to customers without markup, subject to ICC
review. Gas distribution revenues decreased $480.2 million for the
three months ended March 31, 2009 compared to the prior year due primarily to
lower natural gas costs (approximately $365 million decrease), warmer weather
(approximately $55 million decrease) and lower demand unrelated to weather
(approximately $45 million decrease).
Shipping
segment operating revenues decreased $8.3 million for the three months ended
March 31, 2009 compared to the prior year due to lower volumes shipped
($11.0 million decrease), partially offset by higher average rates ($2.7 million
increase). Higher average rates were attributable to general rate
increases, partially offset by lower cost-recovery surcharges for
fuel. Volumes shipped were adversely impacted by the economic
slowdown. During the second quarter of 2008, Tropical Shipping
completed an acquisition of the assets of Caribtran, Inc., which is expected to
add approximately 4 percent to expected shipping revenues on an annual
basis.
Nicor’s
other energy ventures operating revenues increased $6.9 million for the three
months ended March 31, 2009 compared to the prior year due primarily to
higher operating revenues at Nicor Enerchange ($4.5 million increase) and at
Nicor’s energy-related products and services businesses ($2.3 million
increase). Higher operating revenues at Nicor Enerchange were due
primarily to favorable changes in valuations of derivative instruments used to
hedge purchases and sales of natural gas inventory and favorable costing of
physical sales activity, partially offset by 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. Higher operating revenues at Nicor’s
energy-related products and services businesses were attributable to higher
average contract volumes and higher average revenue per utility-bill management
contract.
Corporate
and eliminations reflects primarily the elimination of 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, with equal and offsetting fluctuations in cost of gas and
revenue tax expense, with no direct impact on gas distribution
margin.
A
reconciliation of gas distribution revenues and margin follows (in
millions):
|
Three
months ended
|
||||||||
|
March
31
|
||||||||
|
2009
|
2008
|
|||||||
|
Gas
distribution revenues
|
$ | 984.0 | $ | 1,464.2 | ||||
|
Cost
of gas
|
(716.4 | ) | (1,186.7 | ) | ||||
|
Revenue
tax expense
|
(73.6 | ) | (78.9 | ) | ||||
|
Gas
distribution margin
|
$ | 194.0 | $ | 198.6 | ||||
Gas
distribution margin decreased $4.6 million for the three months ended March 31,
2009 compared to the prior year due primarily to lower demand unrelated to
weather (approximately $4 million decrease) and warmer weather (approximately $2
million decrease), partially offset by the impact of customer interest
(approximately $3 million increase).
Gas distribution operating and
maintenance expense. Gas distribution operating and
maintenance expense increased $2.0 million for the
three months ended March 31, 2009 compared to the prior year due to higher
payroll and benefit-related costs ($7.2 million increase, of which $5.4 million
relates to higher pension expense, net of capitalization), partially offset by
lower bad debt expense ($5.1 million decrease due to lower
revenues attributable principally to lower natural gas
prices).
Shipping operating
expenses. Shipping segment operating expenses decreased $11.0
million for the three months ended March 31, 2009 compared to the
prior year due primarily to lower transportation-related costs ($8.4
million decrease, largely attributable to lower fuel prices and lower volumes
shipped), employee-related costs ($1.0 million decrease) and charter costs ($1.0
million decrease).
Other energy ventures
operating
expenses. Other energy ventures operating expenses increased
$5.3 million for the three months ended March 31, 2009 compared to the
prior year due primarily to an increase in operating expenses at Nicor’s
energy-related products and services businesses ($4.8 million
increase). The increase in operating expenses at Nicor’s
energy-related products and services businesses was due primarily to higher
average contract volumes and higher average cost per utility-bill management
contract.
Interest
expense. Interest expense decreased $1.3 million for the
three months ended March 31, 2009 compared to the prior year due primarily
to lower average interest rates, partially offset by higher average borrowing
levels.
Net equity investment
income. Net equity investment income increased $10.2 million
for the three months ended March 31, 2009 compared to the
prior year. On March 31, 2009, the company sold its 50-percent
interest in EN Engineering and recognized a gain on the sale of $10.1
million.
Interest
income. Interest income decreased $0.7 million for the three
months ended March 31, 2009 compared to the prior year due primarily to the
impact of lower average interest rates, partially offset by higher average
investment balances.
Income tax
expense. 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 months ended March 31, 2009
and 2008, income tax expense has not been provided on approximately $5 million
and $1 million, respectively, of foreign company shipping earnings that are
expected to be indefinitely reinvested offshore. As of March 31,
2009, Nicor has not recorded deferred income taxes of approximately $53 million
on approximately $151 million of cumulative undistributed foreign earnings that
are expected in managementR