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.
(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.
|
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
|
|||
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.
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.
|
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.
|
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) | ||||||
|
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 | ||||||||
|
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.
|
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
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
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