nicorincform10q093009.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the quarterly period ended September 30, 2009
 
or

[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 

Commission File Number 1-7297

NICOR INC LOGO
NICOR INC.
(Exact name of registrant as specified in its charter)

Illinois
36-2855175
(State of Incorporation)
(I.R.S. Employer
 
Identification No.)

1844 Ferry Road
 
Naperville, Illinois 60563-9600
(630) 305-9500
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)

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.  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.

Large accelerated filer    [X]
Accelerated filer                     [   ]
   
Non-accelerated filer      [   ]
Smaller reporting company   [   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [  ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  Common stock, par value $2.50, outstanding at October 23, 2009, were 45,231,331 shares.

 



 

 

 
Table of Contents

 
ii
       
Part I - Financial Information
 
       
 
Item 1.
Financial Statements (Unaudited)
 
       
   
1
   
 
 
   
2
   
 
 
   
3
   
 
 
   
4
       
 
Item 2.
21
   
 
 
 
Item 3.
34
       
 
Item 4.
35
       
Part II - Other Information
 
       
 
Item 1.
36
       
 
Item 2.
36
       
 
Item 6.
36
       
   
37
 
 
i
 

 

Glossary

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 previously owned joint venture that provides engineering and consulting services.  Nicor sold its ownership on March 31, 2009.

FERC.  Federal Energy Regulatory Commission, the agency that regulates the interstate transportation of natural gas, oil and electricity.

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.
 
 
ii 
 



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.

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.
 
 
iii
 



Part I - FINANCIAL INFORMATION
                       
                         
Item 1.
                       
                         
Nicor Inc.
                       
                   
(millions, except per share data)
                       
   
Three months ended
   
Nine months ended
 
   
September 30
   
September 30
 
   
2009
   
2008
   
2009
   
2008
 
Operating revenues
                       
Gas distribution (includes revenue taxes of $13.1, $14.6, $114.5 and $131.6, respectively)
  $ 215.0     $ 306.1     $ 1,525.3     $ 2,330.4  
Shipping
    83.3       108.5       256.5       308.8  
Other energy ventures
    34.7       34.9       163.0       157.8  
Corporate and eliminations
    (7.4 )     (9.2 )     (60.8 )     (61.2 )
Total operating revenues
    325.6       440.3       1,884.0       2,735.8  
                                 
Operating expenses
                               
Gas distribution
                               
Cost of gas
    70.2       180.0       943.2       1,762.9  
Operating and maintenance
    63.3       64.2       223.0       212.5  
Depreciation
    44.4       42.8       133.4       128.5  
Taxes, other than income taxes
    17.6       18.9       127.3       143.3  
Property sale gains
    -       (.2 )     -       (.2 )
Shipping
    76.7       99.0       240.8       289.7  
Other energy ventures
    31.0       34.3       144.0       145.2  
Other corporate expenses and eliminations
    (7.4 )     (8.0 )     (56.9 )     (59.2 )
Total operating expenses
    295.8       431.0       1,754.8       2,622.7  
                                 
Operating income
    29.8       9.3       129.2       113.1  
Interest expense, net of amounts capitalized
    9.3       9.9       27.4       29.6  
Equity investment income, net
    1.0       2.9       14.3       7.2  
Interest income
    .7       1.4       1.8       6.9  
Other income (expense), net
    .4       (.1 )     .9       .1  
                                 
Income before income taxes
    22.6       3.6       118.8       97.7  
Income tax expense, net of benefits
    9.0       2.3       38.5       26.1  
                                 
Net income
  $ 13.6     $ 1.3     $ 80.3     $ 71.6  
                                 
Average shares of common stock outstanding
                               
Basic
    45.4       45.3       45.4       45.3  
Diluted
    45.5       45.4       45.5       45.4  
                                 
Earnings per average share of common stock
                               
Basic
  $ .30     $ .03     $ 1.77     $ 1.58  
Diluted
    .30       .03       1.77       1.58  
                                 
Dividends declared per share of common stock
  $ .465     $ .465     $ 1.395     $ 1.395  
                                 
                                 
The accompanying notes are an integral part of these statements.
                         
 
 
 

 

Nicor Inc.
           
           
(millions)
           
   
Nine months ended
 
   
September 30
 
   
2009
   
2008
 
             
Operating activities
           
Net income
  $ 80.3     $ 71.6  
Adjustments to reconcile net income to net cash flow provided from operating activities:
         
Depreciation
    147.0       142.8  
Deferred income tax expense (benefit)
    1.8       (10.3 )
Gain on sale of property, plant and equipment
    (.7 )     (.4 )
Gain on sale of equity investment
    (10.1 )     -  
Changes in assets and liabilities:
               
Receivables, less allowances
    444.4       277.3  
Gas in storage
    14.6       (120.9 )
Deferred/accrued gas costs
    90.4       (84.0 )
Derivative instruments
    (104.7 )     48.3  
Margin accounts - derivative instruments
    110.4       (66.1 )
Other assets
    13.5       (62.1 )
Accounts payable and customer credit balances and deposits
    (167.5 )     (16.3 )
Other liabilities
    (11.2 )     (16.9 )
Other items
    10.4       (6.9 )
Net cash flow provided from operating activities
    618.6       156.1  
                 
Investing activities
               
Additions to property, plant & equipment
    (165.0 )     (172.5 )
Purchases of held-to-maturity securities
    -       (1.1 )
Proceeds from maturities of held-to-maturity securities
    2.0       3.1  
Net (increase) decrease in other short-term investments
    (9.3 )     5.4  
Net proceeds from sale of property, plant and equipment
    1.6       .5  
Proceeds from sale of equity investment
    13.0       -  
Business acquisition, net of cash acquired
    (.4 )     (5.9 )
Other investing activities
    3.5       7.1  
Net cash flow used for investing activities
    (154.6 )     (163.4 )
                 
Financing activities
               
Proceeds from issuing long-term debt
    50.0       75.0  
Disbursements to retire long-term debt
    (50.0 )     (75.0 )
Net (repayments) issuances of commercial paper
    (374.9 )     70.0  
Dividends paid
    (63.5 )     (63.3 )
Proceeds from exercise of stock options
    -       1.6  
Borrowing against cash surrender value of life insurance policies
    3.4       -  
Repayment of loan against cash surrender value of life insurance policies
    -       (11.2 )
Other financing activities
    (2.3 )     (1.0 )
Net cash flow used for financing activities
    (437.3 )     (3.9 )
                 
Net increase (decrease) in cash and cash equivalents
    26.7       (11.2 )
                 
Cash and cash equivalents, beginning of period
    26.0       42.8  
                 
Cash and cash equivalents, end of period
  $ 52.7     $ 31.6  
                 
                 
The accompanying notes are an integral part of these statements.
               
 
 


Nicor Inc.
                 
             
(millions)
                 
   
September 30
   
December 31
   
September 30
 
   
2009
   
2008
   
2008
 
Assets
                 
Current assets
                 
Cash and cash equivalents
  $ 52.7     $ 26.0     $ 31.6  
Short-term investments
    77.3       69.5       42.8  
Receivables, less allowances of $42.0, $44.9 and $45.9, respectively
    245.7       690.1       365.4  
Gas in storage
    193.9       208.5       274.9  
Derivative instruments
    52.1       49.7       45.6  
Margin accounts - derivative instruments
    50.2       134.4       94.9  
Other
    151.8       160.7       153.7  
Total current assets
    823.7       1,338.9       1,008.9  
                         
Property, plant and equipment, at cost
                       
Gas distribution
    4,575.1       4,460.6       4,411.2  
Shipping
    322.1       315.1       315.2  
Other
    31.5       26.7       25.4  
      4,928.7       4,802.4       4,751.8  
Less accumulated depreciation
    2,008.0       1,943.8       1,928.3  
Total property, plant and equipment, net
    2,920.7       2,858.6       2,823.5  
                         
Pension benefits
    36.5       36.4       227.1  
Long-term investments
    127.8       136.8       139.1  
Other assets
    323.4       413.3       171.2  
                         
Total assets
  $ 4,232.1     $ 4,784.0     $ 4,369.8  
                         
Liabilities and Capitalization
                       
Current liabilities
                       
Long-term debt due within one year
  $ -     $ 50.0     $ 50.0  
Short-term debt
    365.0       739.9       439.0  
Accounts payable
    263.4       411.3       435.4  
Customer credit balances and deposits
    167.7       187.3       211.0  
Derivative instruments
    78.7       167.3       93.8  
Other
    140.7       112.2       90.1  
Total current liabilities
    1,015.5       1,668.0       1,319.3  
                         
Deferred credits and other liabilities
                       
Regulatory asset retirement cost liability
    791.6       751.7       749.6  
Deferred income taxes
    398.7       400.0       400.8  
Health care and other postretirement benefits
    198.0       196.6       187.0  
Asset retirement obligation
    190.1       185.0       183.4  
Other
    138.6       161.0       126.4  
Total deferred credits and other liabilities
    1,717.0       1,694.3       1,647.2  
                         
Commitments and contingencies
                       
                         
Capitalization
                       
Long-term obligations
                       
Long-term debt, net of unamortized discount
    498.2       448.0       448.0  
Mandatorily redeemable preferred stock
    .6       .6       .6  
Total long-term obligations
    498.8       448.6       448.6  
                         
Common equity
                       
Common stock
    113.1       113.0       113.0  
Paid-in capital
    53.1       49.5       48.8  
Retained earnings
    847.0       830.3       803.7  
Accumulated other comprehensive loss, net
    (12.4 )     (19.7 )     (10.8 )
Total common equity
    1,000.8       973.1       954.7  
                         
Total capitalization
    1,499.6       1,421.7       1,403.3  
                         
Total liabilities and capitalization
  $ 4,232.1     $ 4,784.0     $ 4,369.8  
                         
                         
The accompanying notes are an integral part of these statements.
                 
 
 
 

Nicor Inc.

Notes to the Condensed Consolidated Financial Statements (Unaudited)

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.

The company’s management evaluated subsequent events for potential recognition and disclosure through October 30, 2009, the date the financial statements were issued.

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 temporary LIFO inventory 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.

At September 30, 2009, Nicor Gas had an inventory decrement of approximately 1 Bcf which is not expected to be restored prior to year-end.  The liquidated inventory was charged to cost of gas at a LIFO cost of $8.22 per Mcf.  Applying LIFO cost in valuing the decrement, as opposed to the estimated annual replacement cost of $3.93 per Mcf, had the effect of increasing the cost of gas distributed by $3.1 million for the three and nine months ended September 30, 2009.  Since the cost of gas, including inventory costs, is charged to customers without markup, subject to ICC review, this difference had no impact on net income.  There was no permanent inventory decrement as of September 30, 2008.

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.  In 2008, Nicor Enerchange recorded a charge of $6.7 million in the third 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 is required 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 rate regulation, a write-off of net regulatory liabilities would be required.

The company had regulatory assets and liabilities as follows (in millions):

   
September 30
   
December 31
   
September 30
 
   
2009
   
2008
   
2008
 
Regulatory assets current
                 
Regulatory postretirement asset
  $ 23.3     $ 23.3     $ 5.2  
Deferred gas costs
    -       31.5       33.9  
Other
    4.0       -       -  
Regulatory assets noncurrent
                       
Regulatory postretirement asset
    218.0       232.3       60.7  
Deferred gas costs
    3.2       22.5       4.3  
Deferred environmental costs
    17.1       19.5       11.0  
Unamortized losses on reacquired debt
    14.5       15.4       15.6  
Other
    10.5       6.2       5.1  
    $ 290.6     $ 350.7     $ 135.8  

Regulatory liabilities – current
                 
Regulatory asset retirement cost liability
  $ 13.8     $ 15.0     $ 8.0  
Accrued gas costs
    39.6       -       -  
Other
    1.5       -       -  
Regulatory liabilities noncurrent
                       
Regulatory asset retirement cost liability
    791.6       751.7       749.6  
Regulatory income tax liability
    44.2       46.3       47.7  
Other
    .8       .8       .8  
    $ 891.5     $ 813.8     $ 806.1  

All items listed above are classified in other with the exception of the noncurrent portion of the Regulatory asset retirement cost liability which is stated separately on the Condensed Consolidated Balance Sheets.

The ICC does not presently allow Nicor Gas the opportunity to earn a return on its regulatory postretirement asset.  The 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.

Revenue taxes.  Nicor Gas classifies revenue taxes billed to customers as operating revenues and related taxes incurred as operating expenses.  Revenue taxes included in operating expense for the three and nine months ended September 30, 2009 were $12.9 million and $112.8 million, respectively, and $14.3 million and $129.3 million, respectively, for the same periods ending September 30, 2008.

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 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 is recognized in the income statement, 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.

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 cannot 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.  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 PRONOUNCEMENT
 
Fair value measurements.  Effective January 1, 2008, the company adopted the new requirements for fair value measurements and disclosures.  These requirements define fair value, establish a consistent framework for measuring fair value, and expand disclosure requirements about fair value measurements.  These new requirements do not establish any new fair value measurements, but rather provide guidance on how to perform fair value measurements as required or permitted under other accounting standards.  They also provide for immediate recognition of trade-date gains and losses related to certain derivative transactions whose fair value has been determined using unobservable market inputs.  Nicor elected the one-year deferral allowed by the new requirements, 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 these new requirements, in their entirety, was not material to Nicor’s results of operations or financial condition.
 
4.
INVESTMENTS
   
The company’s investments are as follows (in millions):

   
September 30
   
December 31
   
September 30
 
   
2009
   
2008
   
2008
 
                   
Money market funds
  $ 115.9     $ 81.2     $ 48.8  
Corporate bonds
    2.8       4.8       5.6  
Certificates of deposit
    .7       .6       .7  
Other investments
    3.4       2.0       2.1  
    $ 122.8     $ 88.6     $ 57.2  

Investments are classified on the Condensed Consolidated Balance Sheets as follows (in millions):

   
September 30
   
December 31
   
September 30
 
   
2009
   
2008
   
2008
 
                   
Cash equivalents
  $ 40.8     $ 15.3     $ 8.8  
Short-term investments
    77.3       69.5       42.8  
Long-term investments
    4.7       3.8       5.6  
    $ 122.8     $ 88.6     $ 57.2  

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.

Investments categorized as trading (including money market funds) are carried at fair value, and totaled $117.5 million, $82.2 million and $49.9 million at September 30, 2009, December 31, 2008 and September 30, 2008, respectively.  Corporate bonds are categorized as held-to-maturity, and their carrying value approximates fair value.  The contractual maturities of the held-to-maturity corporate bonds at September 30, 2009 are as follows (in millions):
 
Years to maturity   
Less than
1 year
   
1-5
Years
   
Total
 
               
$ 2.0     $ .8     $ 2.8  

Nicor’s investments also include certain restricted investments, including certificates of deposit and bank accounts, maintained to fulfill statutory or contractual requirements.  These investments totaled $2.5 million, $1.6 million and $1.7 million at September 30, 2009, December 31, 2008 and September 30, 2008, respectively.

Gains or losses included in earnings resulting from the sale of investments were not significant.


 
 
5.
SHORT-TERM AND LONG-TERM DEBT
     
In February 2009, the $50 million 5.37 percent First Mortgage Bond series matured and was retired.  In July 2009, Nicor Gas, through a private placement, issued $50 million First Mortgage Bonds at 4.70 percent, due in 2019.

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 May 2009, Nicor Gas established a $550 million, 364-day revolver, expiring May 2010, to replace the $600 million, nine-month seasonal revolver, which expired in May 2009.  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 $365.0 million, $739.9 million and $439.0 million of commercial paper borrowings outstanding at September 30, 2009, December 31, 2008 and September 30, 2008, respectively.

The company believes it is in compliance with all debt covenants.
 
6.
INCOME TAXES
        
The effective income tax rate for the three months ended September 30, 2009 decreased to 39.6 percent from 64.9 percent in the prior-year period.  Both quarters reflect an effective income tax rate higher than the expected annual effective income tax rate as they reflect the impact of changes to forecasted annual pretax income identified in the quarter.  The year-to-date adjustment to income taxes recognized in the quarter resulting from these changes to forecasted annual pretax income has a larger impact in quarters with lower income. The effective income tax rate for the nine months ended September 30, 2009 increased to 32.4 percent from 26.8 percent in the prior-year period.  The higher effective income tax rate for the nine months ended September 30, 2009 is due primarily to higher 2009 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), a decrease in projected untaxed foreign shipping earnings for 2009, a reduction in tax credits and the absence of tax reserve adjustments recognized in 2008.

In 2006, the company reorganized certain shipping and related operations.  The reorganization allows the company to take advantage of certain provisions of the Jobs Act that provide the opportunity for tax savings subsequent to the date of the reorganization.  Generally, to the extent foreign shipping earnings are not repatriated to the United States, such earnings are not expected to be subject to current taxation.  In addition, to the extent such earnings are determined to be indefinitely reinvested offshore, no deferred income tax expense would be recorded by the company.  For the three and nine months ended September 30, 2009, income tax expense has not been provided on approximately $3 million and $8 million, respectively, of foreign company shipping earnings that are expected to be indefinitely reinvested offshore compared to approximately $5 million and $8 million, respectively, for the three and nine months ended September 30, 2008.  As of September 30, 2009, Nicor has not recorded deferred income taxes of approximately $54 million on approximately $154 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 September 30, 2009 compared with $9 million of net 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 September 30, 2009, December 31, 2008 and September 30, 2008 was $24.5 million, $26.0 million and $26.5 million, respectively.
 
7.
ACCRUED UNBILLED REVENUES
 
Receivables include accrued unbilled revenues of $28.6 million, $199.1 million and $52.0 million at September 30, 2009, December 31, 2008 and September 30, 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.
 
8.
FAIR VALUE MEASUREMENTS
      
The tables below categorize, into three broad levels (with Level 1 considered the most reliable) based upon the valuation inputs, the fair values of those assets and liabilities that are measured on a recurring basis (in millions):

   
Fair value amount
 
   
Quoted prices in active markets
   
Significant observable inputs
   
Significant unobservable inputs
       
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total
 
September 30, 2009
 
Assets
 
Money market funds
  $ 115.9     $ -     $ -     $ 115.9  
Derivatives
    27.8       25.1       8.4       61.3  
    $ 143.7     $ 25.1     $ 8.4     $ 177.2  
   
Liabilities
 
Derivatives
  $ 62.5     $ 23.9     $ 2.5     $ 88.9  

December 31, 2008
     
Assets
 
Money market funds
  $ 81.2     $ -     $ -     $ 81.2  
Derivatives
    33.8       21.7       8.5       64.0  
    $ 115.0     $ 21.7     $ 8.5     $ 145.2  
   
Liabilities
 
Derivatives
  $ 161.4     $ 28.0     $ 6.9     $ 196.3  
                                 
September 30, 2008
               
Assets
               
Money market funds
  $ 48.8     $ -     $ -     $ 48.8  
Derivatives
    23.0       17.0       7.5       47.5  
    $ 71.8     $ 17.0     $ 7.5     $ 96.3  
                                 
Liabilities
Derivatives
  $ 74.6     $ 14.9     $ 5.4     $ 94.9  

When available and appropriate, the company uses quoted market prices in active markets to determine fair value, and classifies such items within Level 1.  For 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 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 fair values do not affect net income, as their settlement is passed directly through to customers without markup, subject to ICC review.  The change in fair value for these derivatives is accounted for through regulatory assets and liabilities.

The following table presents a reconciliation of the Level 3 beginning and ending net derivative asset balances (in millions):
 
   
Three months ended
September 30
   
Nine months ended
September 30
 
   
2009
   
2008
   
2009
   
2008
 
                         
Beginning of period
  $ 5.3     $ 6.9     $ 1.6     $ 8.2  
Net realized/unrealized gains (losses)
                               
Included in regulatory assets and liabilities
    .1       1.1       (1.6 )     7.0  
Included in net income
    2.1       -       12.4       2.5  
Settlements, net of purchases
    (3.0 )     (2.7 )     (1.7 )     (10.9 )
Transfers in and/or (out) of Level 3
    1.4       (3.2 )     (4.8 )     (4.7 )
End of period
  $ 5.9     $ 2.1     $ 5.9     $ 2.1  
                                 
Net realized/unrealized gains (losses) included in net
income relating to derivatives still held at September 30
  $ 1.5     $ (1.1 )   $ 13.0     $ 1.4  
                                 
Net realized/unrealized gains (losses) included in net income are attributable to Nicor Enerchange and are classified as operating revenues.

Nicor maintains margin accounts related to financial derivative transactions.  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):
 
   
September 30
   
December 31
   
September 30
 
   
2009
   
2008
   
2008
 
Assets
                 
Margin accounts – derivative instruments
  $ 50.2     $ 134.4     $ 94.9  
Other – noncurrent
    7.0       29.3       -  
                         
Liabilities
                       
Other – current
  $ 4.0     $ .1     $ .1  

In addition, the recorded amount of restricted short-term investments and short-term borrowings approximates fair value.  Long-term debt outstanding, including current maturities, is recorded at the principal balance outstanding, net of unamortized discounts.  The principal balance of Nicor Gas’ First Mortgage Bonds outstanding at September 30, 2009, December 31, 2008 and September 30, 2008 was $500 million.  Based on quoted prices and market interest rates, the fair value of the company’s First Mortgage Bonds outstanding was approximately $546 million at September 30, 2009, $520 million at December 31, 2008 and $486 million at September 30, 2008.
 
 
 
 
9.
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 8 – Fair Value Measurements.

Balance sheet.  Derivative assets and liabilities as of September 30, 2009, carried at fair value on the Condensed Consolidated Balance Sheets, are shown in the table below (in millions):

   
Derivatives designated
as hedging instruments
   
Derivatives not designated as hedging instruments
 
Assets
           
Derivative instruments
  $ .6     $ 51.5  
Other – noncurrent
    -       9.2  
    $ .6     $ 60.7  
                 
Liabilities
               
Derivative instruments
  $ 1.8     $ 76.9  
Other – noncurrent
    -       10.2  
    $ 1.8     $ 87.1  

Volumes.  As of September 30, 2009, Nicor Gas held outstanding derivative contracts of approximately 62 Bcf to hedge natural gas purchases for customer use, 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 short position of 0.4 Bcf as of September 30, 2009.  The above volumes exclude contracts, such as variable-priced contracts and basis swaps, which are accounted for as derivatives but whose fair values are not directly impacted by changes in commodity prices.

Income statement cash flow hedges.  Changes in the fair value of derivatives designated as a cash flow hedge are recognized in other comprehensive income until the hedged transaction is recognized in the income statement.  Cash flow hedges used by the company’s other energy ventures, to hedge utility-bill management products, are eventually recognized within operating revenues.  Cash flow hedges used by Nicor Gas, to hedge purchases of natural gas for company use, are eventually recorded within operating and maintenance expense.  Cash flow hedges affected accumulated other comprehensive income and income as shown in the following tables (in millions):
 
Three months ended September 30, 2009
 
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)
 
                 
$ .6  
Operating revenues
  $   (.4)     $ (.1)  
                       
   .1  
Operating and maintenance
     (1.2)        -  
$ .7       $ (1.6)     $ (.1)  
 
 
11 


 
Nine months ended September 30, 2009
 
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)
 
                 
$ (2.2)  
Operating revenues
  $ (10.4)     $ .1  
                       
   (3.7)  
Operating and maintenance
     (6.9)       -  
$ (5.9)       $ (17.3)     $ .1  
                       
As of September 30, 2009, the time horizon of cash flow hedges of natural gas purchases for Nicor Gas company use and for utility-bill management products sold by Nicor’s other energy ventures extends to as long as 15 months.  For these hedges, the total pretax loss deferred in accumulated other comprehensive income at September 30, 2009 was $2.1 million (or $1.3 million after taxes), of which $2.0 million (or $1.2 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 for those derivatives not designated as hedges.  Non-designated derivatives used by the company’s other energy ventures, to hedge energy trading activities and utility-bill management products, are recorded in operating revenues.  Non-designated derivatives used by Nicor Gas, to hedge purchases of natural gas for company use, are recorded within operating and maintenance expense.  Pretax earnings effects of these items are summarized in the table below for the periods ended September 30, 2009 (in millions):

   
Net gain (loss)
recognized in income
 
Location
 
Three months ended
   
Nine months ended
 
             
Operating revenues
  $ (5.6 )   $ (14.3 )
Operating and maintenance
    -       (1.8 )
    $ (5.6 )   $ (16.1 )

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 not recognized in pretax earnings, but are deferred as regulatory assets or liabilities until the related revenue is recognized.  Net losses of $8.1 million and $133.6 million were recognized in regulatory assets for the three and nine months ended September 30, 2009, respectively.



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 September 30, 2009, for agreements with such features, derivative contracts with liability fair values totaled approximately $16 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 $11 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.

10.
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 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 September 30
                       
Service cost
  $ 2.1     $ 2.1     $ .6     $ .6  
Interest cost
    4.2       4.0       3.1       3.0  
Expected return on plan assets
    (6.3 )     (9.9 )     -       -  
Recognized net actuarial loss
    3.8       -       1.1       1.2  
Amortization of prior service cost
    .1       .1       (.1 )     (.1 )
    $ 3.9     $ (3.7 )   $ 4.7     $ 4.7  
                                 
 
 
13 


 
   
Pension benefits
   
Health care and
other benefits
 
   
2009
   
2008
   
2009
   
2008
 
Nine months ended September 30
                       
Service cost
  $ 6.4     $ 6.4     $ 1.7     $ 1.6  
Interest cost
    12.4       11.9       9.1       9.0  
Expected return on plan assets
    (18.9 )     (29.9 )     -       -  
Recognized net actuarial loss
    11.5       -       3.4       3.5  
Amortization of prior service cost
    .3       .3       (.1 )     (.1 )
    $ 11.7     $ (11.3 )   $ 14.1     $ 14.0  
                                 
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.

11.
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 $1.4 million and $3.9 million for the three and nine months ended September 30, 2009, respectively, and $2.0 million and $5.2 million, for the same periods ended September 30, 2008, respectively.  Nicor received cash distributions from equity investees for the three and nine months ended September 30, 2009 of $2.0 million and $8.5 million, respectively, and $4.5 million and $11.8 million, respectively for the same periods ended September 30, 2008.
 
12.
COMPREHENSIVE INCOME

Total comprehensive income (loss) is as follows (in millions):

   
Three months ended
   
Nine months ended
 
   
September 30
   
September 30
 
   
2009
   
2008
   
2009
   
2008
 
                         
Net income
  $ 13.6     $ 1.3     $ 80.3     $ 71.6  
Other comprehensive income (loss), after tax
    1.5       (12.1 )     7.3       (2.9 )
    $ 15.1     $ (10.8 )   $ 87.6     $ 68.7  
 
Other comprehensive income (loss) consists primarily of net unrealized gains and losses from derivative financial instruments accounted for as cash flow hedges.

 
14 


 
13.
BUSINESS SEGMENT INFORMATION
 
Financial data by major business segment is presented below (in millions):

   
Gas
distribution
   
 
Shipping
   
Other energy ventures
   
Corporate and
eliminations
   
 
Consolidated
 
Three months ended September 30, 2009
                         
Operating revenues
                             
External customers
  $ 210.3     $ 83.3     $ 32.0     $ -     $ 325.6  
Intersegment
    4.7       -       2.7       (7.4 )     -  
    $ 215.0     $ 83.3     $ 34.7     $ (7.4 )   $ 325.6  
                                         
Operating income
  $ 19.5     $ 6.6     $ 3.7     $ -     $ 29.8  
                                         
Three months ended September 30, 2008
                                 
Operating revenues
                                       
External customers
  $ 299.2     $ 108.5     $ 32.6     $ -     $ 440.3  
Intersegment
    6.9       -       2.3       (9.2 )     -  
    $ 306.1     $ 108.5     $ 34.9     $ (9.2 )   $ 440.3  
                                         
Operating income (loss)
  $ .4     $ 9.5     $ .6     $ (1.2 )   $ 9.3  
                                         
Nine months ended September 30, 2009
                                 
Operating revenues
                                       
External customers
  $ 1,493.5     $ 256.5     $ 134.0     $ -     $ 1,884.0  
Intersegment
    31.8       -       29.0       (60.8 )     -  
    $ 1,525.3     $ 256.5     $ 163.0     $ (60.8 )   $ 1,884.0  
                                         
Operating income (loss)
  $ 98.4     $ 15.7     $ 19.0     $ (3.9 )   $ 129.2  
                                         
Nine months ended September 30, 2008
                                 
Operating revenues
                                       
External customers
  $ 2,275.2     $ 308.8     $ 151.8     $ -     $ 2,735.8  
Intersegment
    55.2       -       6.0       (61.2 )     -  
    $ 2,330.4     $ 308.8     $ 157.8     $ (61.2 )   $ 2,735.8  
                                         
Operating income (loss)
  $ 83.4     $ 19.1     $ 12.6     $ (2.0 )   $ 113.1  

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.

Benefits (costs) associated with Nicor’s other energy ventures’ utility-bill management contracts attributable to warmer (colder) than normal weather for the three and nine months ended September 30, 2009 were $0.1 million and $(2.8) million, respectively, and $0.4 million and $(3.6) million, respectively for the same periods in 2008.  This benefit (cost) is recorded at the corporate level as a result of an agreement between the parent company and certain of its subsidiaries.  The weather impact of these contracts generally serves to partially offset the gas distribution segment’s weather risk.
 

 
 
14.
REGULATORY PROCEEDINGS
 
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 approximately $140 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 approximately $69 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 the rates approved in the March 25, 2009 order into effect on April 3, 2009.

On April 24, 2009, the company filed a request for rehearing with the ICC concerning 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 Illinois Attorney General’s Office, Citizens 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 did not raise issues about the amount of the rate increase granted to Nicor Gas.  On May 13, 2009, the ICC agreed to conduct a rehearing concerning the capital structure but denied the remainder of the company’s request.  The ICC also denied all the rehearing requests by other parties.  On October 7, 2009, the ICC issued its decision on rehearing in which it increased the annual base revenues approved for Nicor Gas in the March 25, 2009 order by approximately $11 million, representing a rate of return on rate base of 8.09 percent.  Nicor Gas placed the rates approved in the rehearing decision into effect on a prospective basis on October 15, 2009.  This $11 million increase is incremental to the approximately $69 million increase approved in the ICC’s March 2009 rate order.  Therefore, the total annual base revenue increase resulting from the rate case originally filed by the company in April 2008 is approximately $80 million.  Nicor Gas has appeals of the ICC’s rate orders on file in state appellate court.

Bad debt rider.  In September 2009, Nicor Gas filed for approval of a rate adjustment mechanism for bad debt expense (“bad debt rider”) with the ICC under an Illinois state law which took effect in July 2009.  The ICC has 180 days to approve, or modify and approve, the company’s proposed bad debt rider.  This rider, if approved, would provide for recovery from customers of the amount over the benchmark for bad debt expense established in the Company’s rate cases.  It would also provide for refunds to customers if bad debt expense was below such benchmarks.  If approved as filed, the Company would recover, in 2010, approximately $32 million of 2008 bad debt expense in excess of those benchmarks.  New higher benchmarks apply to 2009 and future years as a result of the rate order received in 2009.  The company does not currently expect a significant recovery or refund for 2009 bad debt expense based upon current natural gas prices and normal weather for the remainder of the year.  Any refund or recovery relating to 2009 bad debt expense would be effected over a 12-month period beginning mid-2010.  Adjustments under this tracker will be recognized when probable.  Currently, the company does not expect to recognize amounts related to the bad debt rider until receipt of an ICC order related to the filing.
 

 

15.
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 $9 million at September 30, 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 product warranty contracts that provide for the repair of heating, ventilation and air conditioning equipment, natural gas lines, and other appliances within homes.  Revenues from these product warranty contracts are recognized ratably over the coverage period, and related repair costs are charged to expense as incurred.  Repair expenses of $1.8 million and $5.5 million were incurred in the three and nine months ended September 30, 2009, respectively, and $1.6 million and $4.9 million, respectively, for the same periods in 2008.

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 16 – 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.
 
16.
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
 
 
17 

 
 
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 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, CUB filed a motion for $27 million in sanctions against the company in the ICC Proceedings.  In that motion, CUB alleged that Nicor Gas’ responses to certain CUB data requests were false.  Also on February 5, 2003, CUB stated in a press release that, in addition to $27 million in sanctions, it would seek additional refunds to consumers.  On March 5, 2003, the ICC staff filed a response brief in support of CUB’s motion for sanctions.  On May 1, 2003, the Administrative Law Judges (“ALJs”) assigned to the proceeding issued a ruling denying CUB’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 CUB or other parties to the ICC Proceedings.

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 Entergy-Koch Trading, LP (“EKT”), a natural gas, storage and transportation trader and consultant with whom Nicor did business under the PBR plan.  Review of additional information completed in 2004 resulted in the $1.8 million adjustment to the previously recorded liability referenced above.

The evidentiary hearings on this matter were stayed in 2004 in order to permit the parties to undertake additional third party discovery from EKT.  In December 2006, the additional third party discovery from
 
 
18 

 
 
EKT was obtained and the ALJs issued a scheduling order that provided for Nicor Gas to submit direct testimony by April 13, 2007.  In its direct testimony, Nicor Gas seeks a reimbursement of