UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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[X]
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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| For the fiscal year ended December 31, 2009 |
or
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[ ]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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Commission
File Number 1-7297
NICOR
INC.
(Exact
name of registrant as specified in its charter)
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Illinois
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36-2855175
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(State
of Incorporation)
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(I.R.S.
Employer Identification No.)
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1844
Ferry Road
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Naperville,
Illinois 60563-9600
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(630)
305-9500
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(Address
of principal executive offices) (Zip Code)
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(Registrant’s
telephone number, including area
code)
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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
Stock, par value $2.50 per share
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New
York Stock Exchange
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Chicago
Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
[X] No [ ]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
[ ] No [X]
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days. Yes [ X ] No
[ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
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Large
accelerated filer [X]
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Accelerated
filer
[ ]
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Non-accelerated
filer [ ]
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Smaller
reporting
company [ ]
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes [ ] No [X]
The
aggregate market value of common stock (based on the June 30, 2009 closing price
of $34.62) held by non-affiliates of the registrant was approximately $1.5
billion. As of February 17, 2010, there were 45,245,188 shares of
common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the company’s 2010 Annual Meeting Definitive Proxy Statement, to be filed on
or about March 10, 2010, are incorporated by reference into Part
III.
Nicor Inc.
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Item No.
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Description
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Page No.
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ii
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Part I
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1.
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1
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1A.
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7
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1B.
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13
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2.
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13
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3.
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13
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4.
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13
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14
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Part II
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5.
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15 | |
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6.
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17
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7.
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18 | |
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7A.
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38
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8.
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40
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9.
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76
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9A.
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76
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9B.
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77
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Part III
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10.
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78
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11.
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78
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12.
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78
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13.
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79
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14.
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79
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Part IV
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15.
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80
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82
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83
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Nicor
Inc.
ALJs. Administrative
Law Judges.
ARO. Asset
retirement obligation.
Central
Valley. Central Valley Gas Storage, L.L.C., a wholly owned
business that is developing a natural gas storage facility in the Sacramento
River valley of north-central California.
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 and 2007.
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.
Horizon
Pipeline. Horizon Pipeline Company, L.L.C., a 50-percent-owned
joint venture that operates an interstate regulated natural gas pipeline of
approximately 70 miles, stretching from Joliet, Illinois to near the
Wisconsin/Illinois border.
ICC. Illinois
Commerce Commission, the agency that establishes the rules and regulations
governing utility rates and services in Illinois.
IDR. Illinois Department
of Revenue.
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.
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 customer move connection services for 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.
Rider. A rate
adjustment mechanism that is part of a utility’s tariff which authorizes it to
provide specific services or assess specific charges.
SEC. The
United States Securities and Exchange
Commission.
TEL. Tropic
Equipment Leasing, Inc., a wholly owned subsidiary of Nicor, holds the company’s
interest 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.
U.S. United States
of America.
PART
I
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Business
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Nicor, an
Illinois corporation formed in 1976, is a holding company. Gas
distribution is Nicor’s primary business. Nicor’s major subsidiaries
include Nicor Gas, one of the nation’s largest distributors of natural gas, and
Tropical Shipping, a transporter of containerized freight in the Bahamas and the
Caribbean region. Nicor also owns several energy-related ventures,
including Nicor Services, Nicor Solutions and Nicor Advanced Energy, which
provide energy-related products and services to retail markets, and Nicor
Enerchange, a wholesale natural gas marketing company. As a
consolidated group, Nicor had approximately 3,900 employees at year-end
2009.
Summary
financial information for Nicor’s major businesses is included in Item 8 – Notes
to the Consolidated Financial Statements – Note 15 – Business Segment and
Geographic Information. The following sections describe Nicor’s
larger businesses. Certain terms used herein are defined in the
glossary on pages ii and iii.
GAS
DISTRIBUTION
General
Nicor
Gas, a regulated natural gas distribution utility, serves 2.2 million customers
in a service territory that encompasses most of the northern third of Illinois,
excluding the city of Chicago. The company’s service territory is
diverse, providing the company with a well-balanced mix of residential,
commercial and industrial customers. Residential customers typically
account for approximately 50 percent of natural gas deliveries, while commercial
and industrial customers each typically account for approximately 25
percent. See Gas Distribution Statistics on page 26 for operating
revenues, deliveries and number of customers by customer
classification. Nicor Gas had approximately 2,200 employees at
year-end 2009.
Nicor Gas
maintains franchise agreements with most of the incorporated municipalities it
serves, allowing it to construct, operate and maintain distribution facilities
in those incorporated municipalities. Franchise agreement terms range
up to 50 years. Currently, about one-third of the agreements will
expire within five years.
Customers
have the option of purchasing their own natural gas supplies, with delivery of
the gas by Nicor Gas. The larger of these transportation customers
also have options that include the use of Nicor Gas’ storage system and the
ability to choose varying supply backup levels. The choice of
transportation service as compared to natural gas sales service results in less
revenue for Nicor Gas but has no direct impact on net operating
results. Nicor Gas continues to deliver natural gas, maintain its
distribution system and respond to emergencies.
Nicor Gas
also operates the Chicago Hub, which provides natural gas storage and
transmission-related services to marketers and other gas distribution
companies. The Chicago area is a major market hub for natural gas,
and demand exists for storage and transmission-related services by marketers,
other gas distribution companies and electric power-generation
facilities. Nicor Gas’ Chicago Hub addresses that
demand. Chicago Hub revenues are passed directly through to customers
as a credit to Nicor Gas’ PGA rider.
Sources of Natural Gas
Supply
Nicor Gas
purchases natural gas supplies in the open market by contracting with producers
and marketers. It also purchases transportation and storage services
from interstate pipelines that are regulated by the FERC. When firm
pipeline services are temporarily not needed, Nicor Gas may release the services
in the secondary market under FERC-mandated capacity release provisions, with
proceeds reducing the cost of natural gas charged to customers.
Peak-use
requirements are met through utilization of company-owned storage facilities,
pipeline transportation capacity, purchased storage services and other supply
sources, arranged by either Nicor Gas or its transportation
customers. Nicor Gas has been able to obtain sufficient supplies of
natural gas to meet customer requirements. The company believes
natural gas supply and pipeline capacity will be sufficiently available to meet
market demands in the foreseeable future.
Natural gas
supply. Nicor Gas maintains a diversified portfolio of natural
gas supply contracts. Supply purchases are diversified by supplier,
producing region, quantity, credit limits and available
transportation. Natural gas supply pricing is generally tied to
published price indices so as to approximate current market
prices. These supply contracts also may require the payment of fixed
demand charges to ensure the availability of supplies on any given
day. The company also purchases natural gas supplies on the spot
market to fulfill its supply requirements or to take advantage of favorable
short-term pricing.
As part
of its purchasing practices, Nicor Gas maintains a price risk hedging strategy
to reduce the risk of price volatility. A disciplined approach is
used to systematically forward hedge a predetermined portion of forecasted
monthly volumes.
As noted
previously, transportation customers purchase their own natural gas
supplies. About one-half of the natural gas that the company delivers
is purchased by transportation customers directly from producers and
marketers.
Pipeline
transportation. The Nicor Gas distribution and storage system
is directly connected to eight interstate pipelines. This provides
the company with direct access to most of the major natural gas producing
regions in North America. The company has long-term transportation
contracts with nearly all of these interstate pipelines and generally has a
right-of-first-refusal for contract extensions. The largest of these
long-term transportation contracts is with Natural Gas Pipeline Company of
America (“NGPL”) which provides approximately 70 percent of the firm
transportation capacity. In addition,
Nicor Gas enters into short-term winter-only transportation contracts and
market-area transportation contracts that enhance Nicor Gas’ operational
flexibility.
Storage. Nicor Gas
owns and operates eight underground natural gas storage
facilities. This storage system is one of the largest in the gas
distribution industry. The storage reservoirs provide a total
inventory capacity of about 150 Bcf, approximately 135 Bcf of which can be
cycled on an annual basis. The system is designed to meet about 50
percent of the company’s estimated peak-day deliveries and approximately 40
percent of its normal winter deliveries. In addition to company-owned
facilities, Nicor Gas has about 40 Bcf of purchased storage services under
contracts with NGPL that expire in 2012 and 2013. This level of
storage capability provides Nicor Gas with supply flexibility, improves the
reliability of deliveries, and can mitigate the risk associated with seasonal
price movements.
Competition/Demand
Nicor Gas
is the largest natural gas distributor in Illinois and is regulated by the
ICC. The company is the sole distributor of natural gas in
essentially all of its service territory. Substantially all
single-family homes in Nicor Gas’ service territory are heated with natural
gas. In the commercial and industrial markets, the company’s natural
gas services compete with other forms of energy, such as electricity, coal,
propane and oil, based on such factors as price, service, reliability and
environmental impact. In addition, the company has a tariff that
allows negotiation with potential bypass customers. Nicor Gas also
offers commercial and industrial customers alternatives in rates and service,
increasing its ability to compete in these markets. Other significant
factors that impact demand for natural gas include weather, conservation and
economic conditions.
Natural
gas deliveries are temperature-sensitive and seasonal since about one-half of
all deliveries are used for space heating. Typically, about
three-quarters of the deliveries and revenues occur from October through
March. Fluctuations in weather have the potential to significantly
impact year-to-year comparisons of operating income and cash flow. It
is estimated that a 100 degree-day variation from normal weather impacts Nicor
Gas’ distribution margin, net of income taxes, by approximately $1.3 million
under the company’s current rate structure.
The
effect of weather variations on Nicor Gas’ results is offset, in part, due to
weather risks within the consolidated Nicor group related to the utility-bill
management products marketed by Nicor Solutions and Nicor Advanced
Energy. The amount of this offset has approximated 30 percent to 65
percent and will vary depending upon the time of year, weather patterns, the
number of customers for these products and the market price for natural
gas.
Nicor
Gas’ large residential customer base provides for a relatively stable level of
natural gas deliveries during weak economic conditions. The company’s
industrial and commercial customer base is well diversified, lessening the
impact of industry-specific economic swings. However, during periods
of high natural gas prices, deliveries of natural gas can be negatively affected
by conservation and the use of alternative energy sources.
Regulation
Nicor Gas
is regulated by the ICC, which governs utility rates and services in
Illinois. Those ICC orders and regulations that may significantly
affect business performance include the following:
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·
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Base
rates, which are set by the ICC, are designed to allow the company an
opportunity to recover its costs and earn a fair return for
investors. On March 25, 2009, the ICC issued an order approving
an increase in Nicor Gas’ 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. On October 7, 2009, the ICC increased the
annual base revenues approved for Nicor Gas in the March 25, 2009 order by
approximately $11 million as a result of a rehearing decision and
increased the rate of return on rate base to 8.09
percent. Therefore, the total annual base revenue increase
resulting from these ICC orders is approximately $80
million. For additional information about the rate proceeding,
see Item 7 – Management’s Discussion and Analysis of Financial Condition
and Results of Operations and Item 8 – Notes to the Consolidated Financial
Statements – Note 19 – Regulatory
Proceedings.
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·
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The
company’s ICC-approved tariffs provide that the cost of natural gas
purchased for customers will be fully charged to customers without
markup. Therefore, the company does not profit from the sale of
natural gas. Rather, the company earns income from fixed
monthly charges and from variable transportation charges for delivering
natural gas to customers. Annually, the ICC initiates a review
of the company’s natural gas purchasing practices for prudence, and may
disallow the pass-through of costs considered imprudent. The
annual prudence reviews for calendar years 1999-2009 are open for
review.
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·
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As
with the cost of natural gas, the company has ICC-approved tariffs that
provide for the pass-through of prudently incurred environmental costs
(related to the remediation of former manufactured gas plant sites) and,
effective in 2009, franchise gas costs and costs associated with an energy
efficiency program. These costs are also subject to annual ICC
review.
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·
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On
February 2, 2010, the ICC approved a bad debt rider that was filed for in
2009. The bad debt rider provides for the recovery from (or
refund to) customers of the difference between the actual bad debt expense
Nicor Gas incurs on an annual basis and the benchmark bad debt expense
included in its base rates for the respective year. For
additional information about the bad debt rider, see Item 7 – Management’s
Discussion and Analysis of Financial Condition and Results of Operations
and Item 8 – Notes to the Consolidated Financial Statements – Note 19 –
Regulatory Proceedings.
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Nicor Gas
enters into various service agreements with Nicor and its
affiliates. Nicor Gas, to the extent required, obtains ICC approvals
for these agreements.
The ICC
has other rules that impact the operations of utilities in
Illinois.
A PBR
plan for natural gas costs went into effect in 2000 and was terminated by the
company effective January 1, 2003. Under the PBR plan, Nicor Gas’
total natural gas supply costs were compared to a market-sensitive
benchmark. Savings and losses relative to the benchmark were
determined annually and shared equally with sales customers. The
results of the PBR plan are currently under ICC review. Additional
information on the plan and the ICC review are presented in Item 8 – Notes to
the Consolidated Financial Statements – Note 21 – Contingencies – PBR
Plan.
Gas distribution,
transmission and storage system, and other properties
The gas
distribution, transmission and storage system includes approximately 34,000
miles of steel, plastic and cast iron main; approximately 2.0 million steel,
plastic/aluminum composite, plastic and copper services connecting the mains to
customers’ premises; and eight underground storage fields. Other
properties include buildings, land, motor vehicles, meters, regulators,
compressors, construction equipment, tools, communication and computer
equipment, software and office equipment.
Most of
the company’s distribution and transmission property, and underground storage
fields are located on property owned by others and used by the company through
easements, permits or licenses. The company owns most of the
buildings housing its administrative offices and the land on which they
sit.
Substantially
all gas distribution properties are subject to the lien of the indenture
securing Nicor Gas’ First Mortgage Bonds.
Additional
information about Nicor Gas’ business is presented in Item 1A – Risk Factors,
Item 7 – Management’s Discussion and Analysis of Financial Condition and Results
of Operations and Item 8 – Notes to the Consolidated Financial
Statements.
SHIPPING
Tropical
Shipping is a transporter of containerized freight in the Bahamas and the
Caribbean, a region generally characterized by modest market growth and intense
competition. The company is a major carrier of exports from the east
coast of the United States and Canada to these regions. The company’s
shipments consist primarily of southbound cargo such as building materials, food
and other necessities for developers, manufacturers and residents in the
Caribbean and the Bahamas, as well as tourist-related shipments intended for use
in hotels and resorts, and on cruise ships. The balance of Tropical
Shipping’s cargo consists primarily of interisland shipments and northbound
shipments of apparel and agricultural products. Other related
services such as inland transportation and cargo insurance are also provided by
Tropical Shipping or other Nicor subsidiaries.
At
December 31, 2009, Tropical Shipping’s operating fleet consisted of 11 owned
vessels and 4 chartered vessels with a container capacity totaling approximately
5,270 TEUs. In addition to the vessels, the company owns and/or
leases containers, container-handling equipment, chassis and other
equipment. Real
property, more than half of which is leased, includes office buildings, cargo
handling facilities and warehouses located in the United States, Canada and some
of the ports served.
Additional
information about Tropical Shipping’s business is presented in Item 1A – Risk
Factors, Item 7 – Management’s Discussion and Analysis of Financial Condition
and Results of Operations and Item 8 – Notes to the Consolidated Financial
Statements.
OTHER
ENERGY VENTURES
Nicor
owns several energy-related ventures, including three companies marketing
energy-related products and services and a wholesale natural gas marketing
company. Nicor is also developing natural gas storage facilities and
owns an interest in an interstate natural gas pipeline.
Nicor
Services, Nicor Solutions and Nicor Advanced Energy are businesses that provide
energy-related products and services to retail markets, including residential
and small commercial customers. Nicor Services operates primarily in
northern Illinois and provides warranty and maintenance contracts, as well as
repair and installation services of heating, air conditioning and indoor
air-quality equipment, and customer move connection services for
utilities. In conjunction with national expansion efforts, Nicor
Services began doing business under the Nicor National brand in
2009. Nicor Solutions offers its residential and small commercial
customers, primarily in the Nicor Gas service territory, energy-related products
that provide for natural gas price stability and management of their utility
bill. These products mitigate and/or eliminate the risks to customers
of colder than normal weather and/or changes in natural gas
prices. Nicor Advanced Energy is certified by the ICC as an Alternate
Gas Supplier, authorizing it to be a non-utility marketer of natural gas for
residential and small commercial customers. Nicor Advanced Energy
presently operates in northern Illinois, offering customers an alternative to
the utility as its natural gas supplier.
Nicor
Enerchange is a business that engages in wholesale marketing of natural gas
supply services primarily in the Midwest, administers the Chicago Hub for Nicor
Gas, serves commercial and industrial customers in the Chicago market area, and
manages Nicor Solutions’ and Nicor Advanced Energy’s product risks, including
the purchases of natural gas supplies.
Central
Valley is developing a natural gas storage facility in the Sacramento River
valley of north-central California and plans to provide approximately 10 Bcf of
working natural gas capacity, offering flexible, high-deliverability multi-cycle
services and interconnection to regional pipelines. Central
Valley currently expects to begin injections of natural gas starting in 2010 and
to begin to offer initial service in 2012. Nicor also is evaluating
the development of other natural gas storage facilities in the United
States.
Horizon
Pipeline, a 50-percent-owned joint venture with NGPL, operates a natural gas
pipeline of approximately 70 miles, stretching from Joliet, Illinois to near the
Wisconsin/Illinois border. Nicor Gas has contracted for approximately
80 percent of Horizon Pipeline’s capacity under an agreement expiring in 2012 at
rates that have been accepted by FERC.
EN
Engineering, a previously-owned joint venture between Nicor and A. Epstein &
Sons International, is an engineering and consulting firm that specializes in
the design, installation and maintenance of natural gas, petroleum and liquid
pipeline facilities. EN Engineering provides engineering and
corrosion services to Nicor Gas. Nicor sold its ownership on March
31, 2009.
Additional
information about Nicor’s other energy ventures is presented in Item 1A – Risk
Factors, Item 7 – Management’s Discussion and Analysis of Financial Condition
and Results of Operations and Item 8 – Notes to the Consolidated Financial
Statements.
CORPORATE
Nicor has
equity investments in a cargo container leasing business and certain affordable
housing investments. Additional information on Nicor’s equity
investments are presented in Item 8 – Notes to the Consolidated Financial
Statements – Note 16 – Equity Investment Income, Net.
AVAILABLE
INFORMATION
Nicor
files various reports with the SEC. These reports include the annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and amendments to those reports filed or furnished pursuant to Section 13
(a) of the Securities Exchange Act of 1934. Nicor makes all of these
reports available without charge to the public on the investor section of the
company’s Internet site at www.nicor.com as soon
as reasonably practicable after Nicor files them with, or furnishes them to, the
SEC.
Item
1A. Risk
Factors
The
following factors are the most significant factors that can impact year-to-year
comparisons and may affect the future performance of the company’s
businesses. New risks may emerge and management cannot predict those
risks or estimate the extent to which they may affect the company’s financial
performance.
Regulation
of Nicor Gas, including changes in the regulatory environment in general, may
adversely affect the company’s results of operations, cash flows and financial
condition.
Nicor Gas
is regulated by the ICC, which has general regulatory power over practically all
phases of the public utility business in Illinois, including rates and charges,
issuance of securities, services and facilities, system of accounts,
investments, safety standards, transactions with affiliated interests and other
matters.
Nicor Gas
is permitted by the ICC’s PGA regulation to adjust the charge to its sales
customers on a monthly basis to recover the company’s prudently incurred actual
costs to acquire the natural gas it delivers to them. The company’s
gas costs are subject to subsequent prudence reviews by the ICC for which the
company makes annual filings. The annual prudence reviews for
calendar years 1999-2009 are open for review and any disallowance of costs in
those proceedings could adversely affect Nicor Gas’ results of operations, cash
flows and financial condition.
Additionally,
Nicor Gas is permitted by ICC regulations to periodically adjust the charge to
its customers to recover the company’s prudently incurred actual costs
associated with environmental remediation at former manufactured gas plant
sites, franchise payments to municipalities, energy efficiency programs and, as
approved in February 2010, bad debt expense. These charges are
subject to subsequent prudence reviews by the ICC and any disallowance of costs
by the ICC could adversely affect Nicor Gas’ results of operations, cash flows
and financial condition.
Most of
Nicor Gas’ other charges are changed only through a rate case proceeding with
the ICC. The charges established in a rate case proceeding are based
on an approved level of operating costs and investment in utility property and
are designed to allow the company an opportunity to recover those costs and to
earn a fair return on that investment based upon an estimated volume of annual
natural gas deliveries. To the extent Nicor Gas’ actual costs to
provide utility service are higher than the levels approved by the ICC, or its
actual natural gas deliveries are less than the annual volume estimated by the
ICC, Nicor Gas’ results of operations, cash flows and financial condition could
be adversely affected until such time as it files for and obtains ICC approval
for new charges through a rate case proceeding.
Nicor Gas
is subject to rules and regulations pertaining to the integrity of its
distribution system and environmental compliance. The company’s
results of operations, cash flows and financial condition could be
adversely affected by any additional laws or regulations that are enacted that
require significant increases in the amount of expenditures for system integrity
and environmental compliance.
The ICC
has other rules that impact the operations of utilities in
Illinois. Changes in these rules could impact the company’s results
of operations, cash flows and financial condition.
Nicor Gas
enters into various service agreements with Nicor and its affiliates. Nicor Gas
obtains the required ICC approvals for these agreements. The
company’s results of operations, cash flows and financial condition could be
adversely affected if, as a result of a change in law or action by the ICC, new
restrictions are imposed that limit or prohibit certain service agreements
between Nicor Gas and its affiliates.
A
change in the ICC’s approved rate mechanism for recovery of environmental
remediation costs at former manufactured gas plant sites, or adverse decisions
with respect to the prudence of costs actually incurred, could adversely affect
the company’s results of operations, cash flows and financial
condition.
Current
environmental laws may require the cleanup of coal tar at certain former
manufactured gas plant sites for which the company may in part be
responsible. Management believes that any such costs that are not
recoverable from other entities or from insurance carriers are recoverable
through rates for utility services under an ICC-approved mechanism for the
recovery of prudently incurred costs. A change in this rate recovery
mechanism, however, or a decision by the ICC that some or all of these costs
were not prudently incurred, could adversely affect the company’s results of
operations, cash flows and financial condition.
An adverse
decision in the proceeding concerning Nicor Gas’ PBR plan could result in a
refund obligation which could adversely affect the company’s results of
operations, cash flows and financial condition.
In 2000,
Nicor Gas instituted a PBR plan for natural gas costs. Under the PBR
plan, Nicor Gas’ total gas supply costs were compared to a market-sensitive
benchmark. Savings and losses relative to the benchmark were
determined annually and shared equally with sales customers. The PBR
plan was terminated effective January 1, 2003. There are allegations
that Nicor Gas acted improperly in connection with the PBR plan, and the ICC is
reviewing these allegations in a pending proceeding. An adverse
decision in this proceeding could result in a refund to ratepayers or other
obligations which could adversely affect the company’s results of operations,
cash flows and financial condition.
Nicor Gas relies
on direct connections to eight interstate pipelines and extensive underground
storage capacity. If these pipelines or storage facilities were
unable to deliver natural gas for any reason it could impair Nicor Gas’ ability
to meet its customers’ full requirements which could adversely affect the
company’s results of operations, cash flows and financial
condition.
Nicor Gas
meets its customers’ peak day, seasonal and annual gas requirements through
deliveries of natural gas transported on interstate pipelines, with which it or
its natural gas suppliers have contracts, and through withdrawals of natural gas
from storage fields it owns or leases. Nicor Gas contracts with
multiple pipelines for transportation services. If a pipeline were to
fail to perform transportation or storage service, including as a result of war,
acts or threats of terrorism, mechanical problems or natural disaster, on a peak
day or other day with high volume gas requirements, Nicor Gas’ ability to meet
all of its customers’ natural gas requirements may be impaired unless or until
alternative arrangements for delivery of supply were put in
place. Likewise, if a storage field owned by Nicor Gas, or a
principal Nicor Gas-owned transmission or distribution pipeline used to deliver
natural gas to the market, were to be out of service for any reason, including
as a result of war, acts or threats of terrorism, mechanical problems or natural
disaster, this could impair Nicor Gas’ ability to meet its customers’ full
requirements which could adversely affect the company’s results of operations,
cash flows and financial condition.
Fluctuations
in weather, economic conditions and use of alternative fuel sources have the
potential to adversely affect the company’s results of operations, cash flows
and financial condition.
When
weather conditions are milder than normal, Nicor Gas has historically delivered
less natural gas, and consequently may earn less income. Nicor Gas’
natural gas deliveries are temperature-sensitive and seasonal since about
one-half of all deliveries are used for space heating. Typically,
about three-quarters of the deliveries and revenues occur from October through
March. Mild weather in the future could adversely affect the
company’s results of operations, cash flows and financial
condition. In addition, factors including, but not limited to,
conservation, economic conditions and the use of alternative fuel sources could
also result in lower customer demand.
Conversely,
results from products sold by Nicor Solutions and Nicor Advanced Energy
generally benefit from milder than normal weather. Nicor Solutions
and Nicor Advanced Energy offer utility-bill management products that mitigate
and/or eliminate the risks to customers of variations in
weather. Benefits or costs related to these products resulting from
variances from normal weather are recorded primarily at the corporate level as a
result of an agreement between the parent company and certain of its
subsidiaries. To the extent weather is colder than normal in the
future, Nicor Solutions and Nicor Advanced Energy’s results of operations, cash
flows and financial condition could be adversely affected.
Conservation
could adversely affect the company's results of operations, cash flows and
financial condition.
As a
result of recent legislative and regulatory initiatives, the company is putting
in place programs to promote additional energy efficiency by its
customers. Funding for such programs will be recovered through a cost
recovery rider. However, the adverse impact of lower deliveries and
resulting reduced margin could adversely affect the company's results of
operations, cash flows and financial condition until such time as it files for
and obtains ICC approval for new charges through a rate case
proceeding.
Possible
legislation or regulation intended to address concerns about climate change
could adversely affect the company’s results of operations, cash flows and
financial condition.
Governmental
agencies are evaluating changes in laws to address concerns about the possible
effects of greenhouse gas emissions on climate. Among other things,
future laws may mandate reductions in future emissions by the company and its
customers. If enacted, such laws could require the company to reduce
emissions and to incur compliance costs that could adversely affect the
company’s results of operations, cash flows and financial
condition.
Natural
gas commodity price changes may affect the operating costs and competitive
positions of the company’s businesses which could adversely affect its results
of operations, cash flows and financial condition.
Nicor’s
energy-related businesses are sensitive to changes in natural gas prices.
Natural gas prices historically have been volatile and may continue to be
volatile in the future. Prices for natural gas are subject to a
variety of factors that are beyond Nicor’s control. These factors
include, but are not limited to, the level of consumer demand for, and the
supply of, natural gas, processing, gathering and transportation availability,
the level of imports of, and the price of foreign natural gas, the price and
availability of alternative fuel sources, weather conditions, natural disasters
and political conditions or hostilities in natural gas producing
regions.
Any
changes in natural gas prices could affect the prices Nicor’s energy-related
businesses charge, operating costs and the competitive position of products and
services. In accordance with the ICC’s PGA regulations, Nicor Gas
adjusts its gas cost charges to sales customers on a monthly basis to account
for changes in the price of natural gas. However, changes in natural
gas prices can also impact certain operating and financing costs that can only
be reflected in Nicor Gas’ charges to customers if approved by the ICC in a rate
case. Increases in natural gas prices can also have an adverse effect
on natural gas distribution margin because such increases can result in lower
customer demand.
Nicor’s
other energy businesses are also subject to natural gas commodity price risk,
arising primarily from fixed-price purchase and sale agreements, natural gas
inventories and utility-bill management arrangements. Derivative
instruments such as futures, options, forwards and swaps may be used to hedge
these risks.
Nicor’s
use of derivative instruments could adversely affect the company’s results of
operations, cash flows and financial condition.
Nicor
uses derivative instruments, including futures, options, forwards and swaps,
either traded on exchanges or executed over-the-counter with natural gas
merchants as well as financial institutions, to hedge natural gas price
risk. Fluctuating natural gas prices cause earnings and financing
costs of Nicor to be impacted. The use of derivative instruments that
are not perfectly matched to the exposure could adversely affect the company’s
results of operations, cash flows and financial condition. Also, when
Nicor’s derivative instruments do not qualify for hedge accounting treatment or
for which hedge accounting is not elected, the company’s results of operations,
cash flows and financial condition could be adversely affected.
Nicor is
subject to margin requirements in connection with the use of derivative
financial instruments and these requirements could escalate if prices move
adversely.
Adverse
decisions in lawsuits seeking a variety of damages allegedly caused by mercury
spillage could adversely affect the company’s results of operations, cash flows
and financial condition.
Nicor Gas
has incurred, and expects to continue to incur, costs related to its historical
use of mercury in various kinds of equipment. Nicor Gas remains a
defendant in several private lawsuits, all in the Circuit Court of Cook County,
Illinois, seeking a variety of unquantified damages (including bodily injury and
property damages) allegedly caused by mercury spillage resulting from the
removal of mercury-containing regulators. Potential liabilities
relating to these claims have been assumed by a contractor’s insurer subject to
certain limitations. Adverse decisions regarding these claims, if
not fully covered by such insurance, could adversely affect the company’s
results of operations, cash flows and financial condition.
Transporting
and storing natural gas involves numerous risks that may result in accidents and
other operating risks and costs that could adversely affect the company’s
results of operations, cash flows and financial condition.
Nicor
Gas’ activities involve a variety of inherent hazards and operating risks, such
as leaks, accidents and mechanical problems, which could cause substantial
financial losses. In addition, these risks could result in loss of
human life, significant damage to property, environmental pollution and
impairment of Nicor Gas’ operations, which in turn could lead to substantial
losses. In accordance with customary industry practice, Nicor Gas
maintains insurance against some, but not all, of these risks and
losses. The location of pipelines and storage facilities near
populated areas, including residential areas, commercial business centers and
industrial sites, could increase the level of damages resulting from these
risks. The occurrence of any of these events if not fully covered by
insurance could adversely affect the company’s results of operations, cash flows
and financial condition.
A
significant decline in the market value of investments held within the pension
trust maintained by Nicor Gas adversely affects the company’s results of
operations, cash flows and financial condition.
Nicor Gas
sponsors a defined benefit pension plan and, over the years, has made
contributions to a trust to fund future benefit obligations of the pension plan
participants. A significant decline in the market value of
investments held in the trust of the pension plan unfavorably impacts the
benefit costs associated with the pension plan and could adversely affect Nicor
Gas’ liquidity if additional contributions to the trust are required. These
impacts, either individually or in aggregate, may adversely affect the company’s
results of operations, cash flows and financial condition.
An
inability to access financial markets could affect the execution of Nicor’s
business plan and could adversely affect the company’s results of operations,
cash flows and financial condition.
Nicor
relies on access to both short- and long-term capital markets as a significant
source of liquidity for capital and operating requirements not satisfied by the
cash flows from its operations. Management believes that Nicor and
its subsidiaries will maintain sufficient access to these financial markets
based upon current credit ratings. However, certain disruptions
outside of Nicor’s control or events of default under its debt agreements may
increase its cost of borrowing or restrict its ability to access one or more
financial markets. Such disruptions could include an economic downturn, the
bankruptcy of an unrelated energy company or downgrades to Nicor’s credit
ratings. Restrictions on Nicor’s ability to access financial markets
may affect its ability to execute its business plan as scheduled and could
adversely affect the company’s results of operations, cash flows and financial
condition.
Changes
in the rules and regulations of certain regulatory agencies could adversely
affect the results of operations, cash flows and financial condition of Tropical
Shipping.
Tropical
Shipping is subject to the International Ship and Port-facility Security Code
and is also subject to the United States Maritime Transportation Security Act,
both of which require extensive security assessments, plans and
procedures. Tropical Shipping is also subject to the regulations of
both the Federal Maritime Commission, and the Surface Transportation Board,
other federal agencies as well as local laws, where
applicable. Additional costs that could result from changes in the
rules and regulations of these regulatory agencies would adversely affect the
results of operations, cash flows and financial condition of Tropical
Shipping.
Tropical
Shipping’s business is dependent on general economic
conditions. Changes or downturns in the economy could adversely
affect the results of operations, cash flows and financial condition of Tropical
Shipping.
Tropical
Shipping’s business consists primarily of the shipment of building materials,
food and other necessities from the United States and Canada to developers,
manufacturers and residents in the Bahamas and the Caribbean region, as well as
tourist-related shipments intended for use in hotels and resorts, and on cruise
ships. As a result, Tropical Shipping’s results of operations, cash
flows and financial condition can be significantly affected by adverse general
economic conditions in the United States, Bahamas, Caribbean region and
Canada. Also, a shift in buying patterns that results in such goods
being sourced directly from other parts of the world, including China and India,
rather than the United States and Canada, could significantly affect Tropical
Shipping’s results of operations, cash flows and financial
condition.
The
occurrence of hurricanes, storms and other natural disasters in Tropical
Shipping’s area of operations could adversely affect its results of operations,
cash flows and financial condition.
Tropical
Shipping’s operations are affected by weather conditions in Florida, Canada, the
Bahamas and Caribbean regions. During hurricane season in the summer
and fall, Tropical Shipping may be subject to revenue loss, higher operating
expenses, business interruptions, delays, and ship, equipment and facilities
damage which could adversely affect Tropical Shipping’s results of operations,
cash flows and financial condition.
Nicor
has credit risk that could adversely affect the company’s results of operations,
cash flows and financial condition.
Nicor
extends credit to its counterparties. Despite what the company
believes to be prudent credit policies and the maintenance of netting
arrangements, the company is exposed to the risk that it may not be able to
collect amounts owed to it. If counterparties fail to perform and any
collateral the company has secured is inadequate, it could adversely affect the
company’s results of operations, cash flows and financial
condition.
The
company is involved in legal or administrative proceedings before various courts
and governmental bodies that could adversely affect the company’s results of
operations, cash flows and financial condition.
The
company is involved in legal or administrative proceedings before various courts
and governmental bodies with respect to general claims, rates, taxes,
environmental issues, billing, credit and collection matters, intersegment
services, gas cost prudence reviews and other matters. Adverse
decisions regarding these matters, to the extent they require the company to
make payments in excess of amounts provided for in its financial statements,
could adversely affect the company’s results of operations, cash flows and
financial condition.
Changes
in taxation could adversely affect the company’s results of operations, cash
flows and financial condition.
Various
tax and fee increases may occur in locations in which the company
operates. The company cannot predict whether legislation or
regulation will be introduced, the form of any legislation or regulation, or
whether any such legislation or regulation will be passed by the legislatures or
other governmental bodies. New taxes or an increase in tax rates
would increase tax expense and could adversely affect the company’s results of
operations, cash flows and financial condition.
Changes
in the laws and regulations regarding the sale and marketing of products and
services offered by Nicor’s other energy ventures could adversely affect the
results of operations, cash flows and financial condition of Nicor.
Nicor’s
other energy ventures provide various energy-related products and
services. These include sales of natural gas and utility-bill
management services to residential and small commercial customers, the sale,
repair, maintenance and warranty of heating, air conditioning and indoor air
quality equipment and wholesale natural gas supply services. The sale
and marketing of these products and services by Nicor’s other energy ventures
are subject to various state and federal laws and
regulations. Changes in these laws and
regulations could impose additional costs on, or restrict or prohibit certain
activities by, Nicor’s other energy ventures which could adversely affect the
results of operations, cash flows and financial condition of Nicor.
The risks
described above should be carefully considered in addition to the other
cautionary statements and risks described elsewhere, and the other information
contained in this report and in Nicor’s other filings with the SEC, including
its subsequent reports on Forms 10-Q and 8-K. The risks and
uncertainties described above are not the only risks Nicor faces although they
are the most significant risks. See Item 7 – Management’s Discussion
and Analysis of Financial Condition and Results of Operations, Item 7A –
Quantitative and Qualitative Disclosures About Market Risk, and Item 8 – Notes
to the Consolidated Financial Statements – Note 10 – Income Taxes and Note 21 –
Contingencies for further discussion of these and other risks Nicor
faces.
Item
1B. Unresolved Staff
Comments
None.
|
Properties
|
Information
concerning Nicor and its major subsidiaries’ properties is included in Item 1 –
Business, and is incorporated herein by reference. These properties
are suitable, adequate and utilized in the company’s operations.
|
Legal
Proceedings
|
Illinois Attorney General
Subpoena. On February 8,
2010, the Office of the Attorney General for the State of Illinois (“IOAG”)
issued a subpoena to Nicor to provide documents in connection with an IOAG
investigation pursuant to the Illinois Whistleblower Reward and Protection
Act. According to the subpoena, the IOAG investigation relates to
billing practices used with certain customer accounts involving government
funds. While the company believes its billing practices comply with
ICC requirements, the company is unable to predict the outcome of this matter or
reasonably estimate its potential exposure, if any, and has not recorded a
liability associated with this matter.
Also see
Item 8 – Notes to the Consolidated Financial Statements – Note 21 –
Contingencies, which is incorporated herein by reference.
|
Submission
of Matters to a Vote of Security
Holders
|
None.
|
Name
|
Age
|
Position
and Business Experience during past five years
|
||
|
Russ
M. Strobel
|
57
|
Chairman,
Nicor and Nicor Gas (since 2005); Chief Executive Officer, Nicor (since
2005); Chief Executive Officer, Nicor Gas (since 2003); President, Nicor
and Nicor Gas (since 2002).
|
||
|
Richard
L. Hawley
|
60
|
Executive
Vice President and Chief Financial Officer, Nicor and Nicor Gas (since
2003).
|
||
|
Rocco
J. D’Alessandro
|
51
|
Executive
Vice President Operations, Nicor Gas (since 2006); Senior Vice President
Operations, Nicor Gas (2002-2006).
|
||
|
Daniel
R. Dodge
|
56
|
Executive
Vice President Diversified Ventures, Nicor (since 2007); Senior Vice
President Diversified Ventures and Corporate Planning, Nicor and Nicor Gas
(2002-2007).
|
||
|
Claudia
J. Colalillo
|
60
|
Senior
Vice President Human Resources and Corporate Communications, Nicor (since
2002) and Nicor Gas (since 2006); Senior Vice President Human Resources
and Customer Care, Nicor Gas (2002-2006).
|
||
|
Paul
C. Gracey, Jr.
|
50
|
Senior
Vice President, General Counsel and Secretary, Nicor and Nicor Gas (since
2006); Vice President, General Counsel and Secretary, Nicor and Nicor Gas
(2002-2006).
|
||
|
Gerald
P. O’Connor
|
58
|
Senior
Vice President Finance and Strategic Planning, Nicor and Nicor Gas (since
2007); Senior Vice President Finance and Treasurer, Nicor and Nicor Gas
(2007); Vice President Administration and Finance, Nicor and Nicor Gas
(2004-2006).
|
||
|
Karen
K. Pepping
|
45
|
Vice
President and Controller, Nicor and Nicor Gas (since 2006); Assistant Vice
President and Controller, Nicor and Nicor Gas (2005-2006); Assistant
Controller, Nicor and Nicor Gas (2003-2005).
|
||
|
Douglas
M. Ruschau
|
51
|
Vice
President and Treasurer, Nicor and Nicor Gas (since 2007); Vice President
Finance and Treasurer, Peoples Energy Corporation
(2002-2007).
|
||
|
Rick
Murrell
|
63
|
Chairman
and President, Tropical Shipping and Construction Company Limited (since
2006); President and CEO, Tropical Shipping and Birdsall Inc.
(1986-2005).
|
PART
II
|
Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity
Securities
|
Nicor
common stock is listed on the New York and Chicago Stock
Exchanges. At February 17, 2010, there were approximately 17,700
common stockholders of record and the closing stock price was
$39.92.
|
Stock
price
|
Dividends
|
||||||||||||
|
Quarter
|
High
|
Low
|
Declared
|
||||||||||
|
2009
|
|||||||||||||
|
First
|
$ | 36.34 | $ | 27.50 | $ | .465 | |||||||
|
Second
|
35.37 | 30.28 | .465 | ||||||||||
|
Third
|
38.08 | 32.83 | .465 | ||||||||||
|
Fourth
|
43.39 | 34.96 | .465 | ||||||||||
|
2008
|
|||||||||||||
|
First
|
$ | 42.70 | $ | 32.35 | $ | .465 | |||||||
|
Second
|
44.55 | 33.33 | .465 | ||||||||||
|
Third
|
51.99 | 38.01 | .465 | ||||||||||
|
Fourth
|
48.42 | 32.53 | .465 | ||||||||||
In 2001,
Nicor announced a $50 million common stock repurchase program, under which Nicor
may purchase its common stock as market conditions permit through open market
transactions and to the extent cash flow is available after other cash needs and
investment opportunities. There have been no repurchases under this
program during 2009 or 2008. As of December 31, 2009, $21.5 million
remained authorized for the repurchase of common stock.
STOCK
PERFORMANCE GRAPH
The
following graph shows a five-year comparison of cumulative total returns for
Nicor Common Stock, the S&P Utilities Index and the S&P 500 Index (both
of which include Nicor Common Stock) as of December 31 of each of the years
indicated, assuming $100 was invested on January 1, 2005, and all dividends were
reinvested.
Comparison
of Five-Year Cumulative Total Return
 |
|
2005
|
2006
|
2007
|
2008
|
2009
|
||||||||||||||||
|
Nicor
|
$ | 111 | $ | 139 | $ | 131 | $ | 113 | $ | 144 | ||||||||||
|
S&P
Utilities
|
117 | 141 | 168 | 120 | 134 | |||||||||||||||
|
S&P
500
|
105 | 121 | 128 | 81 | 102 | |||||||||||||||
|
Nicor
Inc.
|
|||||||||||||||||||||
|
Item 6.
Selected Financial
Data
|
|
||||||||||||||||||||
|
(in
millions, except per share data)
|
|||||||||||||||||||||
|
Year
ended December 31
|
|||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||||
|
Operating
revenues
|
$ | 2,652.1 | $ | 3,776.6 | $ | 3,176.3 | $ | 2,960.0 | $ | 3,357.8 | |||||||||||
|
Operating
income
|
$ | 220.3 | $ | 185.0 | $ | 206.5 | $ | 202.5 | $ | 201.7 | |||||||||||
|
Net
income
|
$ | 135.5 | $ | 119.5 | $ | 135.2 | $ | 128.3 | $ | 136.3 | |||||||||||
|
Earnings
per average share of common stock
|
|||||||||||||||||||||
|
Basic
|
$ | 2.99 | $ | 2.64 | $ | 2.99 | $ | 2.88 | $ | 3.08 | |||||||||||
|
Diluted
|
2.98 | 2.63 | 2.99 | 2.87 | 3.07 | ||||||||||||||||
|
Dividends
declared per common share
|
$ | 1.86 | $ | 1.86 | $ | 1.86 | $ | 1.86 | $ | 1.86 | |||||||||||
|
Property,
plant and equipment
|
|||||||||||||||||||||
|
Gross
|
$ | 4,961.0 | $ | 4,802.4 | $ | 4,611.7 | $ | 4,479.7 | $ | 4,351.3 | |||||||||||
|
Net
|
2,939.1 | 2,858.6 | 2,757.3 | 2,714.7 | 2,659.1 | ||||||||||||||||
|
Total
assets
|
$ | 4,435.7 | $ | 4,784.0 | $ | 4,271.3 | $ | 4,137.2 | $ | 4,453.4 | |||||||||||
|
Capitalization
|
|||||||||||||||||||||
|
Long-term
debt, net of unamortized discount
|
$ | 498.2 | $ | 448.0 | $ | 422.8 | $ | 497.5 | $ | 485.8 | |||||||||||
|
Mandatorily
redeemable preferred stock
|
.1 | .6 | .6 | .6 | .6 | ||||||||||||||||
|
Common
equity
|
1,037.7 | 973.1 | 945.2 | 876.1 | 814.8 | ||||||||||||||||
| $ | 1,536.0 | $ | 1,421.7 | $ | 1,368.6 | $ | 1,374.2 | $ | 1,301.2 | ||||||||||||
|
See
Item 1A - Risk Factors and Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of
Operations for factors that can impact year-to-year comparisons and may
affect the future performance of Nicor's business.
|
|||||||||||||||||||||
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
The
purpose of this financial review is to explain changes in operating results and
financial condition from 2007 to 2009 and to discuss business trends that might
affect Nicor. Certain terms used herein are defined in the glossary
on pages ii and iii. The discussion is organized into six sections –
Summary, Results of Operations, Financial Condition and Liquidity, Outlook,
Contingencies and Critical Accounting Estimates.
SUMMARY
Nicor is
a holding company. Gas distribution is Nicor’s primary
business. Nicor’s subsidiaries include Nicor Gas, one of the nation’s
largest distributors of natural gas, and Tropical Shipping, a transporter of
containerized freight in the Bahamas and the Caribbean region. Nicor
also owns several energy-related ventures, including Nicor Services, Nicor
Solutions and Nicor Advanced Energy, which provide energy-related products and
services to retail markets, and Nicor Enerchange, a wholesale natural gas
marketing company. Nicor also has equity interests in a cargo
container leasing business, a FERC-regulated natural gas pipeline and certain
affordable housing investments.
Net
income and diluted earnings per common share are presented below (in millions,
except per share data):
|
2009
|
2008
|
2007
|
||||||||||
|
Net
income
|
$ | 135.5 | $ | 119.5 | $ | 135.2 | ||||||
|
Diluted
earnings per common share
|
$ | 2.98 | $ | 2.63 | $ | 2.99 | ||||||
When
comparing 2009 results to 2008, net income and diluted earnings per common share
for 2008 include pretax mercury-related costs of $0.6 million ($.01 per
share). Year over year comparisons (excluding the effect of the
mercury-related costs) reflect improved operating results in the company’s gas
distribution business and other energy-related businesses and higher equity
investment income, partially offset by lower operating income in the company’s
shipping business, lower interest income and a higher effective income tax
rate.
When
comparing 2008 results to 2007, net income and diluted earnings per common share
for 2007 include pretax mercury-related recoveries of $8.0 million ($.11 per
share) associated with Nicor Gas’ mercury inspection and repair program which
included a reduction of $7.2 million to the company’s previously established
reserve and $0.8 million in cost recoveries. Net income and diluted
earnings per common share for 2008 include pretax mercury-related costs of $0.6
million ($.01 per share). Year over year comparisons (excluding the
effects of the items noted above) reflect improved operating results in the
company’s gas distribution business and higher equity investment income, which
were more than offset by lower operating income in the company’s shipping
business and other energy-related businesses, lower corporate operating results
and higher interest expense.
Rate proceeding. 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, Nicor Gas 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. On May
13, 2009, the ICC agreed to conduct a rehearing concerning the capital structure
but denied the remainder of the company’s request. 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, increasing the rate of return on rate base to 8.09
percent. Nicor Gas placed the rates approved in the rehearing
decision into effect on a prospective basis on October 15,
2009. Therefore, the total annual base revenue increase resulting
from the rate case originally filed by the company in April 2008 is
approximately $80 million. In December 2009, Nicor Gas withdrew
appeals of the
ICC rate orders that it previously had filed in state appellate
court. The ICC’s decision on rehearing, therefore, is final and no
longer subject to appeal.
As a
result of the rates placed into effect in 2009, it is estimated that a
100-degree day variation from normal (5,600 degree days annually) impacts Nicor
Gas’ distribution margin, net of income taxes, by approximately $1.3
million.
Bad debt rider. In
September 2009, Nicor Gas filed for approval of a bad debt rider with the ICC
under an Illinois state law which took effect in July 2009. On
February 2, 2010, the ICC issued an order approving the company’s proposed bad
debt rider. This rider will provide for recovery from customers of
the amount over the benchmark for bad debt expense established in the company’s
rate cases. It will also provide for refunds to customers if bad debt
expense is below such benchmarks.
As a
result of the February order, Nicor Gas will record in the first quarter of 2010
a net recovery related to 2008 and 2009 of approximately $32 million;
substantially all of this amount is expected to be collected in
2010. The benchmark, against which 2010 actual bad debt expense will
be compared, is approximately $63 million.
Capital market
environment. The volatility in the capital markets over the
past two years has caused general concern over the valuations of investments,
exposure to increased credit risk and pressures on liquidity. The
company continues to review its investments, exposure to credit risk and sources
of liquidity and does not currently expect any future material adverse impacts
relating to these items.
Operating
income. Operating income (loss) by the company’s major
businesses is presented below (in millions):
|
2009
|
2008
|
2007
|
||||||||||
|
Gas
distribution
|
$ | 149.7 | $ | 124.4 | $ | 128.7 | ||||||
|
Shipping
|
29.2 | 39.3 | 45.4 | |||||||||
|
Other
energy ventures
|
45.5 | 25.3 | 34.0 | |||||||||
|
Corporate
and eliminations
|
(4.1 | ) | (4.0 | ) | (1.6 | ) | ||||||
| $ | 220.3 | $ | 185.0 | $ | 206.5 | |||||||
The
following summarizes operating income (loss) comparisons by the company’s major
businesses:
|
·
|
Gas
distribution operating income increased $25.3 million in 2009 compared to
the prior year due to higher gas distribution margin ($39.0 million
increase), partially offset by higher depreciation expense ($6.5 million
increase) and operating and maintenance expense ($5.8 million
increase).
|
Gas
distribution operating income decreased $4.3 million in 2008 compared to the
prior year due primarily to higher operating and maintenance expense ($24.8
million increase), the absence of $8.0 million in mercury-related recoveries
recorded in 2007, higher depreciation expense ($5.3 million increase) and lower
gains on property sales ($1.2 million decrease), partially offset by higher gas
distribution margin ($35.7 million increase).
|
·
|
Shipping
operating income decreased $10.1 million in 2009 compared to the prior
year due to lower operating revenues ($72.6 million decrease), which were
partially offset by lower operating costs ($62.5 million
decrease). Lower operating revenues were attributable to lower
volumes shipped and lower average rates. Operating costs were
lower due primarily to lower transportation-related costs, charter costs
and payroll and benefit-related
costs.
|
Shipping
operating income decreased $6.1 million in 2008 compared to the prior year as
higher operating revenues ($21.3 million increase) were more than offset by
higher operating costs ($27.4 million increase). Higher operating
revenues were attributable to higher average rates, partially offset by lower
volumes shipped. Operating costs were higher due primarily to higher
transportation-related costs.
|
·
|
Nicor’s
other energy ventures operating income increased $20.2 million in 2009
compared to the prior year due primarily to higher operating income at
Nicor’s wholesale natural gas marketing business, Nicor Enerchange ($18.2
million increase) and at Nicor’s energy-related products and services
businesses ($1.7 million increase). Higher operating income at
Nicor Enerchange was due primarily to favorable results from the company’s
risk management activities associated with hedging the product risks of
the utility-bill management contracts offered by Nicor’s energy-related
products and services businesses. Higher operating income at
Nicor’s energy-related products and services businesses was due to lower
operating expenses ($7.0 million decrease), partially offset by lower
operating revenues ($5.3 million
decrease).
|
Nicor’s
other energy ventures operating income decreased $8.7 million in 2008 compared
to the prior year due primarily to lower operating income at Nicor Enerchange
($11.9 million decrease), partially offset by higher operating income at Nicor’s
energy-related products and services businesses ($4.8 million
increase). Lower operating income at Nicor Enerchange was due
primarily to unfavorable changes in valuations of derivative instruments used to
hedge purchases and sales of natural gas inventory and lower results from the
company’s risk management activities associated with hedging the product risks
of the utility-bill management contracts offered by Nicor’s energy-related
products and services businesses, partially offset by the favorable costing of
physical sales activity. Improved operating results at Nicor’s
energy-related products and services businesses were due to lower operating
expenses ($12.2 million decrease), partially offset by lower operating revenues
($7.4 million decrease).
Nicor
Enerchange uses derivatives to mitigate commodity price risk in order to
substantially lock-in the profit margin that will ultimately be
realized. A source of commodity price risk arises as Nicor Enerchange
purchases and holds natural gas in storage to earn a profit margin from its
ultimate sale. However, gas stored in inventory is required to be
accounted for at the lower of weighted-average cost or market, whereas the
derivatives used to reduce the risk associated with a change in the value of the
inventory are carried at fair value, with changes in fair value recorded in
operating results in the period of
change. In addition, Nicor Enerchange also uses derivatives to
mitigate the commodity price risks of the utility-bill management products
offered by Nicor’s energy-related products and services
businesses. The gains and losses associated with the utility-bill
management products are recognized in the months that the services are
provided. However, the underlying derivatives used to hedge the price
exposure are carried at fair value. For derivatives that either do
not meet the requirements for hedge accounting or for which hedge accounting is
not elected, the changes in fair value are recorded in operating results in the
period of change. As a result, earnings are subject to volatility as
the fair value of derivatives change. The volatility resulting from
this accounting can be significant from period to period.
|
·
|
Corporate
and eliminations’ operating income for 2009, 2008 and 2007 was impacted by
the following items:
|
In 2009
and 2008, corporate and eliminations’ operating income included costs of $3.7
million and $6.2 million, respectively, associated with Nicor’s other energy
ventures’ utility-bill management products attributable to colder than normal
weather. Both periods exclude costs of approximately $0.6 million
recorded within other energy ventures. In 2007, there was no material
weather impact related to other energy ventures’ utility-bill management
contracts. The above noted benefits or costs resulting from variances
from normal weather related to these products are recorded primarily at the
corporate level as a result of an agreement between the parent company and
certain of its subsidiaries. The weather impact of these contracts
generally serves to partially offset the gas distribution business weather
risk. The amount of the offset attributable to the utility-bill
management products marketed by Nicor’s other energy ventures will vary
depending upon a number of factors including the time of year, weather patterns,
the number of customers for these products and the market price for natural
gas.
In 2008,
corporate and eliminations’ operating income included recoveries of previously
incurred legal costs of $3.1 million. The legal cost recoveries were
from a counterparty with whom Nicor previously did business during the PBR
timeframe. The total recovery was $5.0 million, of which $3.1 million
was allocated to corporate and $1.9 million was allocated to the gas
distribution business (recorded as a reduction to operating and maintenance
expense).
RESULTS
OF OPERATIONS
Details
of various financial and operating information by major business can be found in
the tables throughout this review. The following discussion
summarizes the major items impacting Nicor’s operating income.
Operating
revenues. Operating revenues by the company’s major businesses
are presented below (in millions):
|
2009
|
2008
|
2007
|
||||||||||
|
Gas
distribution
|
$ | 2,140.8 | $ | 3,206.9 | $ | 2,627.5 | ||||||
|
Shipping
|
352.6 | 425.2 | 403.9 | |||||||||
|
Other
energy ventures
|
239.0 | 230.3 | 244.5 | |||||||||
|
Corporate
and eliminations
|
(80.3 | ) | (85.8 | ) | (99.6 | ) | ||||||
| $ | 2,652.1 | $ | 3,776.6 | $ | 3,176.3 | |||||||
Gas
distribution operating revenues are impacted by changes in natural gas costs,
which are passed directly through to customers without markup, subject to ICC
review. Gas distribution operating revenues decreased $1,066.1
million in 2009 compared to the prior year due primarily to lower natural gas
costs (approximately $900 million decrease), warmer weather in 2009
(approximately $140 million decrease) and lower demand unrelated to weather
(approximately $60 million decrease), partially offset by the impact of the
increase in base rates (approximately $60 million increase).
Gas
distribution operating revenues increased $579.4 million in 2008 compared to the
prior year due primarily to higher natural gas costs (approximately $370 million
increase) and colder weather in 2008 (approximately $185 million
increase).
Shipping
operating revenues decreased $72.6 million in 2009 compared to the prior year
due to lower volumes shipped ($44.2 million decrease) and lower average rates
($28.4 million decrease). Volumes shipped were adversely impacted by
the economic slowdown. Lower average rates were attributable to lower
cost-recovery surcharges for fuel.
Shipping
operating revenues increased $21.3 million in 2008 compared to the prior year
due to higher average rates ($39.9 million increase), partially offset by lower
volumes shipped ($18.6 million decrease). Rates were higher due
primarily to cost-recovery surcharges for fuel. Volumes shipped were
adversely impacted by decreased construction cargo, decreased tourism and
increased competition.
Nicor’s
other energy ventures operating revenues increased $8.7 million in 2009 compared
to the prior year due primarily to higher operating revenues at Nicor Enerchange
($13.9 million increase) partially offset by lower operating revenues at Nicor’s
energy-related products and services businesses ($5.3 million
decrease). Higher operating revenues at Nicor Enerchange were due to
favorable results from the company’s risk management activities associated with
hedging the product risks of the utility-bill management contracts offered by
Nicor’s energy-related products and services businesses. Lower
revenues at Nicor’s energy-related products and services businesses were due to
lower average revenue per utility-bill management contract, partially offset by
higher average contract volumes.
Nicor’s
other energy ventures operating revenues decreased $14.2 million in 2008
compared to the prior year due primarily to lower revenues at Nicor’s
energy-related products and services businesses ($7.4 million decrease) and
Nicor Enerchange ($6.7 million decrease). Lower revenues at Nicor’s
energy-related products and services businesses were due to lower average
revenue per utility-bill management
contract,
attributable to product mix. Lower revenues at Nicor Enerchange were
due primarily to unfavorable
changes in valuations of derivative instruments used to hedge purchases and
sales of natural gas inventory and lower results from the company’s risk
management activities associated with hedging the
product risks of the utility-bill management contracts offered by Nicor’s
energy-related products and services businesses, partially offset by the
favorable costing of physical sales activity.
Corporate
and eliminations primarily reflects the elimination of revenues against Nicor
Solutions’ expenses for customers purchasing the utility-bill
management products.
Gas distribution
margin. Nicor utilizes a measure it refers to as “gas
distribution margin” to evaluate the operating income impact of gas distribution
revenues. Gas distribution revenues include natural gas costs, which
are passed directly through to customers without markup, subject to ICC review,
and revenue taxes, for which Nicor Gas earns a small administrative
fee. These items often cause significant fluctuations in gas
distribution revenues, with equal and offsetting fluctuations in cost of gas and
revenue tax expense, with no direct impact on gas distribution
margin. The 2009 rate orders included a franchise gas cost recovery
rider and a rider to recover the costs associated with energy efficiency
programs. As a result, changes in revenue included in gas
distribution margin attributable to these items are expected to generally be
offset by changes within operating and maintenance expense.
A
reconciliation of gas distribution revenues and margin follows (in
millions):
|
2009
|
2008
|
2007
|
||||||||||
|
Gas
distribution revenues
|
$ | 2,140.8 | $ | 3,206.9 | $ | 2,627.5 | ||||||
|
Cost
of gas
|
(1,345.7 | ) | (2,427.8 | ) | (1,906.5 | ) | ||||||
|
Revenue
tax expense
|
(148.1 | ) | (171.1 | ) | (148.7 | ) | ||||||
|
Gas
distribution margin
|
$ | 647.0 | $ | 608.0 | $ | 572.3 | ||||||
Gas
distribution margin increased $39.0 million in 2009 compared to the prior year
due to the impact of the increase in base rates (approximately $60 million
increase), partially offset by warmer weather (approximately $8 million
decrease), lower demand unrelated to weather (approximately $5 million decrease)
and lower revenue from cost recovery riders (approximately $3 million
decrease). As a result of the 2009 rate orders, Nicor Gas will
recover annual franchise gas costs over a twelve-month period beginning the
subsequent May. Prior to the 2009 rate orders, such costs were
recovered based upon a fixed amount determined periodically through a rate case
proceeding. As a result of this change, franchise gas cost recoveries
in 2009 are lower than prior periods with minimal impact on operating
income. In 2009, the company also began recovering costs associated
with an energy efficiency program.
Gas
distribution margin increased $35.7 million in 2008 compared to the prior year
due primarily to colder weather (approximately $15 million increase) and the
impact of customer interest (approximately $12 million increase).
Gas distribution operating and
maintenance expense. Gas distribution operating and
maintenance expense increased $5.8 million in 2009 compared to the prior year
due primarily to higher payroll and benefit-related costs ($26.5 million
increase of which $21.8 million relates to higher pension expense, net of
capitalization), the absence of prior year cost recoveries of previously
incurred costs ($3.9 million, of which $2.0 million relates to a 2007
investigation of the presence of PCBs in the company’s distribution system and
$1.9 million relates to legal cost recoveries from a counterparty with whom
Nicor previously did business during the PBR timeframe), higher postage charges
($2.0 million increase) and higher costs on legal matters ($1.8 million
increase). Partially offsetting these amounts were lower bad debt
expense ($17.5 million decrease due to lower revenues attributable principally
to lower natural gas costs), lower company use and storage-related gas costs
($7.3 million decrease) and lower costs associated with the aforementioned cost
recovery riders approved in the 2009 rate orders ($5.7 million
decrease).
Gas
distribution operating and maintenance expense increased $24.8 million in 2008
compared to the prior year due primarily to higher bad debt expense ($17.7
million increase) and payroll and benefit-related costs ($4.9 million
increase). Higher bad debt expense is attributable to higher revenues
and worsening economic conditions. Also included in gas distribution
operating and maintenance expense for 2008 were the recoveries of previously
incurred costs ($3.9 million) mentioned above.
Other gas distribution operating
expenses. Mercury-related costs (recoveries), net reflect the
estimated costs, recoveries and reserve adjustments associated with the
company’s mercury inspection and repair program. Mercury-related
costs in 2008 were $0.6 million. Mercury-related recoveries in 2007
reflect a $7.2 million favorable reserve adjustment and $0.8 million in cost
recoveries. Additional information about the company’s mercury
inspection and repair program is presented in Item 8 – Notes to the Consolidated
Financial Statements – Note 21 – Contingencies – Mercury.
Property
sale gains and losses vary from year-to-year depending upon property sales
activity. During 2008 and 2007, Nicor Gas realized pretax gains of
$0.8 million and $2.0 million, respectively. The company periodically
assesses its ownership of certain real estate holdings.
Shipping operating
expenses. Shipping operating expenses decreased $62.5 million
in 2009 compared to the prior year due primarily to lower transportation-related
costs ($36.9 million decrease, largely attributable to lower volumes shipped and
fuel prices), charter costs ($10.1 million decrease) and payroll and
benefit-related costs ($5.8 million decrease).
Shipping
operating expenses increased $27.4 million in 2008 compared to the prior year
due primarily to higher transportation-related costs ($20.7 million increase)
attributable primarily to increased fuel costs.
Other energy ventures operating
expenses. Nicor’s other energy ventures operating expenses
decreased $11.5 million in 2009 compared to the prior year due primarily to a
decrease in operating expenses at Nicor’s energy-related products and services
businesses ($7.0 million decrease) and at Nicor Enerchange ($4.3 million
decrease). The decrease in operating expenses at Nicor’s
energy-related products and services businesses was due to lower average costs
associated with utility-bill management contracts, partially offset by higher
average contract volumes and higher selling, general and administrative costs
attributable to business growth. The decrease in operating expenses
at Nicor Enerchange was due primarily to lower transportation and storage
charges attributable to lower natural gas prices.
Nicor’s
other energy ventures operating expenses decreased $5.5 million in 2008 compared
to the prior year due to a decrease in
operating expenses at Nicor’s energy-related products and services businesses
($12.2 million decrease), partially offset by an increase in operating expenses
at Nicor Enerchange ($5.2 million increase). The decrease in
operating expenses at Nicor’s energy-related products and services businesses
was due to lower average costs associated with utility-bill management
contracts, attributable to product mix. Higher operating expenses at
Nicor Enerchange were due primarily to an increase in charges resulting from
increased transportation capacity.
Other corporate expenses and
eliminations. Other corporate operating expenses (income) were
$0.6 million, ($2.0) million and $1.8 million in 2009, 2008 and 2007,
respectively. In 2008, Nicor recorded a benefit of $3.1 million
related to recoveries of previously incurred legal costs. Also
included in the amounts for all years presented are certain business development
costs.
Intercompany
eliminations were ($76.7) million, ($79.8) million and ($99.8) million in 2009,
2008 and 2007, respectively, and related primarily to utility-bill management
products.
Interest
expense. Interest expense decreased $1.4 million in 2009
compared to the prior year due to lower average interest rates ($5.3 million
decrease), partially offset by the impact of higher interest on income tax
matters ($1.9 million increase) and bank commitment fees ($1.5 million
increase).
Interest
expense increased $2.2 million in 2008 compared to the prior
year. This increase reflects the impacts of higher interest on income
tax matters ($5.4 million increase) and higher average borrowing levels,
partially offset by lower average interest rates. In 2007, Nicor
recorded the effects of a settlement with the IRS related to the timing of
certain deductions taken as part of a change in accounting method on its 2002
tax return. As a result of the settlement, Nicor reduced its reserve
for interest payable by $9.6 million.
Net equity investment
income. Net equity investment income increased $6.4 million in
2009 compared to the prior year due primarily to a $10.1 million gain recognized
on the sale of the company’s 50-percent interest in EN Engineering in the first
quarter of 2009, partially offset by the absence of income from the company’s
investment in EN Engineering ($2.8 million decrease) and a decrease in income
from the company’s investment in Triton ($1.1 million decrease).
Net
equity investment income increased $3.1 million in 2008 compared to the prior
year due primarily to higher income from Triton ($1.3 million increase) and EN
Engineering ($1.3 million increase).
Equity
investment results include $5.3 million, $6.4 million and $5.1 million for 2009,
2008 and 2007, respectively, for Nicor’s share of income from
Triton.
Interest
income. Interest income decreased $6.5 million in 2009
compared to the prior year due primarily to the impact of lower average interest
rates ($2.5 million decrease), interest on tax matters ($2.2 million decrease)
and average investment balances ($1.5 million decrease).
Income tax
expense. In 2006, the company reorganized certain shipping and
related operations. The reorganization allows the company to take
advantage of certain provisions of the Jobs Act that provide the opportunity for
tax savings subsequent to the date of the reorganization. Generally,
to the extent foreign shipping earnings are not repatriated to the United
States, such earnings are not expected to be subject to current
taxation. In addition, to the extent such earnings are expected to be
indefinitely reinvested offshore, no deferred income tax expense would be
recorded by the company. For the years ended December 31, 2009, 2008
and 2007, income tax expense has not been provided on approximately $19 million,
$23 million and $39 million, respectively, of foreign company shipping
earnings.
At
December 31, 2009, Nicor has approximately $12 million of deferred income tax
liabilities related to approximately $34 million of cumulative undistributed
earnings of its foreign subsidiaries. Nicor has not recorded deferred
income taxes of approximately $58 million on approximately $165 million of
cumulative undistributed foreign earnings.
The
effective income tax rate was 32.4 percent, 27.0 percent and 26.6 percent for
2009, 2008 and 2007, respectively. The higher effective income tax
rate in 2009 compared to 2008 reflects higher pretax income in 2009 (which
causes a higher effective income tax rate since permanent differences and tax
credits are a smaller share of pretax income), as well as a decrease in untaxed
foreign earnings and the absence of the 2008 tax reserve
adjustments. The higher effective income tax rate in 2008 compared to
2007 reflects a decrease in untaxed foreign earnings in 2008, offset, in part,
by tax reserve adjustments.
|
Nicor
Inc.
|
||||||||||||
|
Gas
Distribution Statistics
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Operating revenues
(millions)
|
||||||||||||
|
Sales
|
||||||||||||
|
Residential
|
$ | 1,377.9 | $ | 2,176.2 | $ | 1,791.4 | ||||||
|
Commercial
|
350.4 | 551.4 | 426.2 | |||||||||
|
Industrial
|
38.2 | 61.9 | 47.6 | |||||||||
| 1,766.5 | 2,789.5 | 2,265.2 | ||||||||||
|
Transportation
|
||||||||||||
|
Residential
|
47.1 | 40.9 | 31.1 | |||||||||
|
Commercial
|
79.1 | 82.2 | 76.7 | |||||||||
|
Industrial
|
39.4 | 38.3 | 37.5 | |||||||||
|
Other
|
4.1 | 25.7 | 10.6 | |||||||||
| 169.7 | 187.1 | 155.9 | ||||||||||
|
Other
revenues
|
||||||||||||
|
Revenue
taxes
|
150.3 | 174.0 | 149.6 | |||||||||
|
Environmental
cost recovery
|
12.5 | 9.7 | 10.9 | |||||||||
|
Chicago
Hub
|
7.7 | 11.3 | 19.0 | |||||||||
|
Other
|
34.1 | 35.3 | 26.9 | |||||||||
| 204.6 | 230.3 | 206.4 | ||||||||||
| $ | 2,140.8 | $ | 3,206.9 | $ | 2,627.5 | |||||||
|
Deliveries
(Bcf)
|
||||||||||||
|
Sales
|
||||||||||||
|
Residential
|
199.8 | 214.4 | 201.8 | |||||||||
|
Commercial
|
52.7 | 54.7 | 48.7 | |||||||||
|
Industrial
|
6.3 | 6.4 | 5.7 | |||||||||
| 258.8 | 275.5 | 256.2 | ||||||||||
|
Transportation
|
||||||||||||
|
Residential
|
25.4 | 25.6 | 19.7 | |||||||||
|
Commercial
|
89.6 | 93.1 | 84.6 | |||||||||
|
Industrial
|
102.1 | 103.9 | 107.8 | |||||||||
| 217.1 | 222.6 | 212.1 | ||||||||||
| 475.9 | 498.1 | 468.3 | ||||||||||
|
Year-end customers
(thousands)
|
||||||||||||
|
Sales
|
||||||||||||
|
Residential
|
1,763 | 1,760 | 1,789 | |||||||||
|
Commercial
|
132 | 130 | 128 | |||||||||
|
Industrial
|
8 | 8 | 7 | |||||||||
| 1,903 | 1,898 | 1,924 | ||||||||||
|
Transportation
|
||||||||||||
|
Residential
|
218 | 222 | 191 | |||||||||
|
Commercial
|
50 | 53 | 54 | |||||||||
|
Industrial
|
5 | 5 | 5 | |||||||||
| 273 | 280 | 250 | ||||||||||
| 2,176 | 2,178 | 2,174 | ||||||||||
|
Other
statistics
|
||||||||||||
|
Degree
days
|
6,106 | 6,348 | 5,756 | |||||||||
|
Colder
(warmer) than normal (1)
|
9% | 9% | (1%) | |||||||||
|
Average
gas cost per Mcf sold
|
$ | 5.06 | $ | 8.76 | $ | 7.36 | ||||||
|
(1)
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 and 2007.
|
||||||||||||
|
Shipping
Statistics
|
2009
|
2008
|
2007
|
|||||||||
|
TEUs
shipped (thousands)
|
176.6 | 197.1 | 206.6 | |||||||||
|
Revenue
per TEU
|
$ | 1,997 | $ | 2,158 | $ | 1,955 | ||||||
|
At
end of period
|
||||||||||||
|
Ports
served
|
25 | 25 | 26 | |||||||||
|
Vessels
operated
|
15 | 17 | 19 | |||||||||
FINANCIAL
CONDITION AND LIQUIDITY
The
company believes it has access to adequate resources to meet its needs for
capital expenditures, debt redemptions, dividend payments and working
capital. These resources include net cash flow from operating
activities, access to capital markets, lines of credit and short-term
investments. Capital market conditions are not currently expected to
have a material adverse impact on the company’s ability to access
capital.
Operating cash
flows. Net cash flow provided from (used for) operating
activities was $570.8 million, ($27.4) million and $252.2 million in 2009, 2008
and 2007, respectively. The gas distribution business is highly
seasonal and operating cash flow may fluctuate significantly during the year and
from year-to-year due to factors such as weather, natural gas prices, the timing
of collections from customers, natural gas purchasing, and storage and hedging
practices. The company relies on short-term financing to meet
seasonal increases in working capital needs. Cash requirements
generally increase over the last half of the year due to increases in natural
gas purchases, gas in storage and accounts receivable. During the
first half of the year, positive cash flow generally results from the sale of
gas in storage and the collection of accounts receivable. This cash
is typically used to substantially reduce, or eliminate, short-term debt during
the first half of the year.
Nicor
maintains margin accounts related to financial derivative
transactions. These margin accounts may cause large fluctuations in
cash needs or sources in a relatively short period of time due to daily
settlements resulting from changes in natural gas futures prices. The
company manages these fluctuations with short-term borrowings and
investments.
Investing
activities. Net cash flow used for investing activities was
$211.5 million, $265.3 million and $193.9 million in 2009, 2008 and 2007,
respectively.
Capital expenditures. Capital expenditures is
an internal measure utilized by management that represents cash additions to
property, plant and equipment, adjusted for items including the accrual of work
performed through period end and other non-cash items, contributions in aid of
construction and expenditures associated with asset retirement obligations. Capital
expenditures by the company’s major businesses are presented in the following
table (in millions):
|
Estimated
|
||||||||||||||||
|
2010
|
2009
|
2008
|
2007
|
|||||||||||||
|
Gas
distribution
|
$ | 195 | $ | 203 | $ | 229 | $ | 159 | ||||||||
|
Shipping
|
65 | 22 | 17 | 14 | ||||||||||||
|
Other
energy ventures
|
60 | 6 | 4 | 4 | ||||||||||||
| $ | 320 | $ | 231 | $ | 250 | $ | 177 | |||||||||
Gas
distribution capital expenditures decreased in 2009 versus 2008 due to the
impact of lower customer additions (approximately $10 million decrease),
information technology improvements (approximately $10 million decrease),
facility construction (approximately $9 million decrease) and lower expenditures
associated with gas distribution, transmission and storage system improvements
(approximately $7 million decrease), partially offset by higher capitalized
overhead costs attributable to higher postretirement benefit costs
(approximately $9 million increase).
Gas
distribution capital expenditures increased in 2008 versus 2007 due to higher
expenditures associated with gas distribution, transmission and storage system
improvements (approximately $55 million increase), facility construction
(approximately $15 million increase) and information technology improvements
(approximately $10 million increase), partially offset by the impact of lower
customer additions (approximately $10 million decrease).
Gas
distribution capital expenditures are expected to decrease in 2010 versus 2009
due to lower expenditures associated with gas distribution, transmission and
storage system improvements, partially offset by the impact of new service
additions and information technology improvements.
Shipping
capital expenditures increased in 2009 due primarily to progress payments on the
construction of a new vessel, partially offset by a decrease in facility
expansion.
Shipping
capital expenditures increased in 2008 due to an increase in container
replacements, partially offset by a decrease in facility expansion and freight
handling equipment expenditures.
Shipping
capital expenditures are expected to increase in 2010 versus 2009 due primarily
to the budgeted purchase of two vessels, increased expenditures related to
containers, and port and facility expansion.
Nicor’s
capital budget in 2010 also includes approximately $55 million for the continued
development of a natural gas storage field. Central Valley is
developing an underground natural gas storage facility north of Sacramento,
California. Central Valley currently expects to start initial
injections beginning in 2010 and full service by 2012.
Additional investing
activities. Yearly fluctuations in additional investing
activities include the following items:
|
·
|
All
three years reflect increased short-term investments primarily at the
company’s shipping business.
|
|
·
|
In
March 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.
|
|
·
|
The
release of $10.0 million from escrow in 2007 associated with the
settlement of the company’s SEC
inquiry.
|
Financing
activities. The current credit ratings for Nicor Inc. and
Nicor Gas are as follows:
|
Standard
&
Poor’s
|
Moody’s
|
Fitch
|
||||
|
Nicor Inc.
|
||||||
|
Commercial
Paper
|
A-1+
|
P-2
|
F-1
|
|||
|
Senior
Unsecured Debt
|
AA
|
n/a
|
A
|
|||
|
Corporate
Credit Rating
|
AA
|
n/a
|
n/a
|
|
Nicor Gas
|
||||||
|
Commercial
Paper
|
A-1+
|
P-1
|
F-1
|
|||
|
Senior
Secured Debt
|
AA
|
Aa3
|
AA-
|
|||
|
Senior
Unsecured Debt
|
AA
|
A2
|
A+
|
|||
|
Corporate
Credit Rating
|
AA
|
n/a
|
n/a
|
In the
third quarter of 2009, Moody’s upgraded Nicor Gas’ senior secured debt rating to
“Aa3” from “A1.” The rating revision by Moody’s reflects an upgrade
to the majority of senior secured debt ratings of investment-grade regulated
utilities by one notch.
Long-term
debt. The company typically uses the net proceeds from
long-term debt for refinancing outstanding debt, for construction programs (to
the extent not provided by internally generated funds) and for general corporate
purposes.
In July
2009, Nicor Gas, through a private placement, issued $50 million in First
Mortgage Bonds at 4.70 percent, due in 2019. In February 2009, the
$50 million 5.37 percent First Mortgage Bond series matured and was
retired.
In August
2008, Nicor Gas, through a private placement, issued $75 million First Mortgage
Bonds at 6.25 percent, due in 2038. Nicor Gas retired the $75 million
5.875 percent First Mortgage Bond series that became due in August
2008.
Substantially
all gas distribution properties are subject to the lien of the indenture
securing Nicor Gas’ First Mortgage Bonds.
At
December 31, 2009, Nicor Gas had the capacity to issue approximately $440
million of additional First Mortgage Bonds under the terms of its
indenture. On February 25, 2009, Nicor Gas filed a new shelf
registration with a $225 million capacity, which became effective on March 20,
2009.
Nicor
believes it is in compliance with its debt covenants. Nicor’s
long-term debt agreements do not include ratings triggers or material adverse
change provisions.
Short-term debt. 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 $494.0
million and $739.9 million of commercial paper outstanding at December 31, 2009
and 2008, respectively. The company expects that funding from
commercial paper and related backup line-of-credit agreements will continue to
be available in the foreseeable future and sufficient to meet estimated cash
requirements.
Common stock. Nicor maintained its
quarterly common stock dividend rate during 2009 of $0.465 per common
share. The company paid dividends on its common stock of $84.8
million, $84.4 million and $84.1 million in 2009, 2008 and 2007,
respectively. Nicor currently has no contractual or regulatory
restrictions on the payment of dividends.
Nicor
currently has a dividend reinvestment program that offers the opportunity to
holders of Nicor common and preferred shares to purchase additional shares of
Nicor common stock by reinvesting the dividends paid on all of their shares
and/or making direct cash purchases. Shares are acquired by Nicor on
behalf of participants through purchases in the open market. Nicor
amended the program in 2009 to allow Nicor to issue new shares of common stock
as opposed to purchasing them in the open market. Proceeds from newly
issued shares will be used for advances to or equity investments in its
subsidiaries, for other investment opportunities, or for general corporate
purposes. In 2009, no new shares were issued under the dividend
reinvestment program.
In 2001,
Nicor announced a $50 million common stock repurchase
program. Purchases may be made as market conditions permit through
open market transactions and to the extent cash flow is available after other
cash needs and investment opportunities. There were no purchases
under this program in 2009, 2008 and 2007, and at December 31, 2009, $21.5
million remained authorized for the repurchase of common stock.
Preferred
Stock. In 2009 and 2007, Nicor redeemed 10,150 and 100 shares,
respectively, of 4.48 percent Mandatorily Redeemable Preferred Stock, $50 par
value, at an average redemption price of $46.43 and $43.00 per share,
respectively, plus accrued unpaid dividends. There were 1,431 shares
of the 4.48 percent Series Mandatorily Redeemable Preferred Stock, $50 par
value, outstanding at December 31, 2009.
Off-balance sheet
arrangements. Nicor has certain guarantees, as further
described in Item 8 – Notes to the
Consolidated Financial Statements – Note 20 – Guarantees and
Indemnities. The company believes the likelihood of any such payment
under these guarantees is remote. No liability has been recorded for
these guarantees.
Contractual
obligations. At December 31, 2009, Nicor had contractual
obligations with payments due as follows (in millions):
| Payments due by period | ||||||||||||||||||||
|
Less
than
1
year
|
1-3
years
|
3-5
years
|
More
than
5
years
|
Total
|
||||||||||||||||
|
Purchase
obligations
|
$ | 640.4 | $ | 287.9 | $ | 48.7 | $ | 12.5 | $ | 989.5 | ||||||||||
|
Long-term
debt
|
- | 75.0 | - | 425.0 | 500.0 | |||||||||||||||
|
Fixed
interest on long-term debt
|
30.6 | 51.7 | 51.3 | 368.4 | 502.0 | |||||||||||||||
|
Operating
leases
|
15.2 | 16.2 | 5.9 | 22.2 | 59.5 | |||||||||||||||
| $ | 686.2 | $ | 430.8 | $ | 105.9 | $ | 828.1 | $ | 2,051.0 | |||||||||||
In
addition to the contractual obligations included in the table above, Nicor has
potential liabilities to taxing authorities (unrecognized tax benefits) which
are dependent on the resolution of particular income tax
positions. The timing of future cash outflows, if any, associated
with such potential liabilities is uncertain. The company has accrued
a liability for estimated unrecognized tax benefits of $9.6 million at December
31, 2009, of which approximately $6 million is reasonably expected to be paid
within the next 12 months.
The
company also has long-term obligations for postretirement benefits which are not
included in the above table. Information regarding the company’s
obligations for postretirement benefits can be found in Item 8 – Notes to the
Consolidated Financial Statements – Note 11 – Postretirement
Benefits.
Purchase
obligations consist primarily of natural gas purchase agreements, and natural
gas transportation and storage contracts in the gas distribution and wholesale
natural gas marketing businesses. Natural gas
purchase
agreements include obligations to purchase natural gas at future market prices,
calculated using NYMEX futures prices as of December 31, 2009.
Operating
leases are primarily for vessels, containers and equipment in the shipping
business, office space and equipment in the gas distribution business and office
space for the other energy ventures. Tropical Shipping has certain
equipment operating leases which include purchase and/or renewal options, at
fair market amounts at the time of purchase or renewal. Rental expense
under operating leases was $31.4 million, $41.7 million and $41.3 million in
2009, 2008 and 2007, respectively.
OTHER
MATTERS
Recent Illinois
Legislation. In July 2009, a new Illinois state law took
effect that requires utility companies to participate in bill payment assistance
programs for low-income customers. Funding for the programs is expected to
be provided largely through federal and state government contributions, as well
as through an increase in monthly utility-customer charges. The bill
payment assistance program for low-income customers was implemented on a pilot
basis beginning in 2009. The legislation also requires utilities to
develop and implement energy efficiency measures to obtain prescribed reductions
in customer deliveries. Funding for the energy efficiency program,
excluding the adverse impact on Nicor Gas of lower deliveries and resulting
reduced margin, will be through a rate adjustment mechanism. The
legislation also allows utility companies to implement, subject to ICC approval,
a rider for bad debt expense starting with expense incurred in the 2008 fiscal
year. As previously noted, the ICC approved a bad debt rider for
Nicor Gas on February 2, 2010.
Petition for Re-approval of Operating
Agreement. On July 1, 2009, Nicor Gas filed a petition seeking
re-approval from the ICC of the operating agreement that governs many
inter-company transactions between Nicor Gas and its affiliates. The
petition was filed pursuant to a requirement contained in the ICC order
approving the company’s most recent general rate increase. A number
of parties have intervened in the proceeding. Changes to the
operating agreement by the ICC that restrict or prohibit inter-company
transactions that currently are permitted could adversely impact the company’s
results of operations, cash flows and financial condition.
Labor
negotiations. On April 17, 2009, Nicor Gas announced that the
International Brotherhood of Electrical Workers Local 19 ratified a new labor
contract which expires on February 28, 2014. The agreement covers
approximately 1,400 employees of Nicor Gas. The new contract provides
for, among other things, general wage increases and changes to various employee
benefits, and it is not expected to have a material impact on the company’s
results of operations, cash flows and financial condition.
Other. Restrictions
imposed by regulatory agencies and loan agreements limiting the amount of
subsidiary net assets that can be transferred to Nicor are not expected to have
a material impact on the company’s ability to meet its cash
obligations.
OUTLOOK
Nicor’s
2010 outlook assumes weather based on historical patterns, but excludes, among
other things, the ICC’s PBR plan/PGA review or other
contingencies. The company’s outlook also does not reflect the
additional variability in earnings due to fair value accounting adjustments at
Nicor Enerchange and other impacts that could occur because of future volatility
in the natural gas markets. While these items could materially affect
2010 earnings, they are currently not estimable.
Gas
distribution. Nicor Gas expects operating results to increase
in 2010 resulting from a full year of rate relief from the 2009 rate orders,
offset, in part, by higher operating costs and estimated weather warmer than in
2009. Additionally, the ICC approved the company’s bad debt rider in
February 2010 which will add approximately $32 million, pretax, to 2010
operating results related to net bad debt recoveries for 2008 and
2009.
The
company estimates that a 100-degree day variation from normal weather affects
Nicor Gas’ distribution margin, net of income taxes, by approximately $1.3
million under the company’s current rate structure. The consolidated
impact, however, is generally reduced somewhat because of the natural weather
hedge attributable to the utility-bill management products offered by certain of
Nicor’s other energy ventures.
Shipping. Tropical
Shipping’s operating results are expected to be similar to 2009 as we believe
the challenging economic environment will continue in the Bahamas and the
Caribbean region. The company
also continues to expect relatively low tax costs on operating earnings in 2010
attributable to the 2006 reorganization of certain shipping and related
operations.
Other energy
ventures. The company expects lower operating results from its
other energy ventures due primarily to a decline in earnings recognized at its
wholesale natural gas marketing company.
Other. The company
also expects lower income from equity investments due to the absence of the
$10.1 million gain recognized in 2009 on the sale of its equity investment in EN
Engineering.
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. A copy of the Report is available at
the Nicor website and has been previously produced to all parties in the ICC
Proceedings.
In
response, the Nicor Board of Directors directed the company’s management to,
among other things, make appropriate adjustments to account for, and fully
address, the adverse consequences to ratepayers of the items noted in the
Report, and conduct a detailed study of the adequacy of internal accounting and
regulatory controls. The adjustments were made in prior years’
financial statements resulting in a $24.8 million liability. Included
in such $24.8 million liability is a $4.1 million loss contingency. A
$1.8
million
adjustment to the previously recorded liability, which is discussed below, was
made in 2004 increasing the recorded liability to $26.6
million. 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 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 approximately $6 million, which includes interest due to the
company, as noted above, of $1.6 million, as of March 31, 2007. In
September 2009, the staff of the ICC, IAGO and CUB submitted direct testimony to
the ICC requesting refunds of $109 million, $255 million and $286 million,
respectively. No date has been set for evidentiary hearings on this
matter.
Nicor is
unable to predict the outcome of the ICC’s review or the company’s potential
exposure thereunder. Because the PBR plan and historical gas costs
are still under ICC review, the final outcome could be materially different than
the amounts reflected in the company’s financial statements as of December 31,
2009.
Mercury. Information
about mercury contingencies is presented in Item 8 – Notes to the Consolidated
Financial Statements – Note 21 – Contingencies – Mercury.
Manufactured gas plant
sites. The company is conducting environmental investigations
and remedial activities at former manufactured gas plant
sites. Additional information about these sites is presented in Item
8 – Notes to the Consolidated Financial Statements – Note 21 – Contingencies –
Manufactured Gas Plant Sites.
Municipal tax
matters. Information about municipal tax contingencies is
presented in Item 8 – Notes to the Consolidated Financial Statements – Note 21 –
Contingencies – Municipal Tax Matters.
Other. The company is involved
in legal or administrative proceedings before various courts and agencies with
respect to general claims, taxes, environmental, gas cost prudence reviews and
other matters. See Item 8 – Notes to the Consolidated Financial
Statements – Note 21 – Contingencies – Other.
CRITICAL
ACCOUNTING ESTIMATES
Nicor
prepares its consolidated financial statements in accordance with accounting
principles generally accepted in the United States, which regularly require
Nicor’s management to exercise judgment in the selection and application of
accounting methods. The application of accounting methods includes
making estimates using subjective assumptions and judgments about matters that
are inherently uncertain.
The use
of estimates and the selection of accounting policies affect Nicor’s reported
results and financial condition. The company has adopted several
significant accounting policies and is required to make significant accounting
estimates that are important to understanding its financial
statements. These significant policies and estimates are described
throughout Item 8 – Notes to the Consolidated Financial Statements.
Although
there are numerous areas in which Nicor’s management makes significant
accounting estimates, it believes its critical estimates are those that require
management’s most difficult and subjective or complex
judgments. Nicor’s management has a practice of reviewing its
critical accounting estimates and policy decisions with the audit committee of
its board of directors. Its critical estimates typically involve loss
contingencies, derivative instruments, pension and other postretirement
benefits, income taxes, credit risk, unbilled revenues and regulatory assets and
liabilities because they are estimates which could materially impact Nicor’s
financial statements.
Loss
contingencies. Nicor and its subsidiaries record contingent
losses as liabilities when a loss is both probable and the amount or range of
loss, including related legal defense costs, is reasonably
estimable. When only a range of potential loss is estimable, the
company records a liability for the minimum anticipated loss. Nicor
and its subsidiaries and affiliates are involved in various legal and regulatory
proceedings and are exposed to various loss contingencies. These loss
contingencies are in some cases resolved in stages over time, estimates may
change significantly from period to period, and the company’s ultimate
obligations may differ materially from its recorded amounts. Of
particular note is the PBR plan contingency at Nicor Gas described in Item 8 –
Notes to the Consolidated Financial Statements – Note 21 –
Contingencies.
Derivative
instruments. The rules for determining whether a contract
meets the definition of a derivative instrument or qualifies for hedge
accounting treatment are numerous and complex. The treatment of a
single contract may vary from period to period depending upon accounting
elections, changes in management’s assessment of the likelihood of future hedged
transactions or new interpretations of accounting rules. As a result,
management judgment is required in the determination of the appropriate
accounting treatment. In addition, the estimated fair value of
derivative instruments may change significantly from period to period depending
upon market conditions, and changes in hedge effectiveness may impact the
accounting treatment. These determinations and changes in estimates
may have a material impact on reported results.
Pension and other postretirement
benefits. The company’s cost of providing postretirement
benefits is dependent upon various factors and assumptions, including life
expectancies, the discount rate used in determining the projected benefit
obligation, the expected long-term rate of return on plan assets, the long-term
rate of compensation increase and anticipated health care
costs. Actual experience in any one period, particularly the actual
return on plan assets, often varies significantly from these mostly long-term
assumptions. When cumulatively significant, the gains and losses
generated from such variances are amortized into operating income over the
remaining service lives of employees covered by the plans (approximately 10
years for the pension plan and 12 years for the health care
plan). Additional information is presented in Item 8 – Notes to the
Consolidated Financial Statements – Note 11 – Postretirement Benefits, including
plan asset investment allocation, estimated future benefit payments, general
descriptions of the plans, significant assumptions, the impact of certain
changes in assumptions and significant changes in estimates.
The
company’s postretirement benefit expense (net of capitalization) included in
operating income was $24.6 million, $2.7 million and $4.8 million in 2009, 2008
and 2007, respectively. Significant market declines in the values of plan assets
in 2008 caused the increase in postretirement benefit expense for 2009 when
compared to prior years. The company expects to record postretirement
benefit expense (net of capitalization) for 2010 of $19.6
million. The decrease in postretirement benefit expense in 2010
compared to 2009 is due to the positive impact on the value of plan assets of
the partial capital market recovery in 2009, which was somewhat offset by the
negative impact of decreases in the discount rates. Actuarial
assumptions affecting 2010 include an expected long-term rate of return on plan
assets of 8.25 percent and discount rates of 5.45 percent for the company’s
defined benefit pension plan and 5.75 percent for the health care and other
benefit plans, compared with a 8.50 percent rate of return on plan assets and
discount rates of 6.35 percent and 6.00 percent, respectively, in the prior
year. The discount rates for each plan were determined by performing
a cash flow matching study using the Citigroup Pension Discount
Curve. The Citigroup Pension Discount Curve is constructed from a
Treasury yield curve and adjusted by adding a corporate bond
spread. The corporate bond spread is developed from a large pool of
high quality corporate bonds and mitigates the risks associated with selecting
individual corporate bonds whose values may not be representative of the broader
market.
The
discount rate is critical to the measurement of the plans’ obligations and
costs. Additionally, the assumed rate of return on plan assets is
critical to the determination of the pension plan’s cost. The
following table illustrates the effect of a one-percentage-point change in these
actuarial assumptions (in millions).
|
Actuarial
assumption
|
Increase
(decrease)
|
Effect
on net benefit cost
|
Effect
on benefit obligation
|
||||||||||
|
Discount
rate
|
1.0% | $ | (6.2) | $ | (59.8) | ||||||||
| (1.0%) | 7.4 | 73.4 | |||||||||||
|
Rate
of return on plan assets
|
1.0% | (3.5) | - | ||||||||||
| (1.0%) | 3.5 | - | |||||||||||
Income taxes. A
deferred income tax liability is not recorded on undistributed foreign earnings
that are expected in management’s judgment to be indefinitely reinvested
offshore. Management considers, among other factors, actual cash
investments offshore as well as projected cash requirements in making this
determination. Changes in management’s investment or repatriation
plans or circumstances could result in a different deferred income tax
liability.
The
company records unrecognized tax benefits based on a recognition threshold and
valuation method to recognize and measure an income tax position taken, or
expected to be taken, in a tax return. The evaluation is based on a
two-step approach. The first step requires the company to evaluate
whether the tax position would “more likely than not,” based upon its technical
merits, be sustained upon examination by the appropriate taxing
authority. The second step requires the tax position to be measured
at the largest amount of tax benefit that is greater than 50 percent likely of
being realized upon settlement. Changes between what the company
recognizes as an unrecognized tax benefit and what is actually settled with the
taxing authority could be materially different.
Credit risk. The
company is required to estimate counterparty credit risk in estimating the fair
values of certain derivative instruments. The company’s
counterparties consist primarily of major energy companies and financial
institutions. This concentration of counterparties may materially
impact the company’s exposure to credit risk resulting from market, economic or
regulatory conditions. To manage this credit risk, the company
believes it maintains prudent credit policies to determine and monitor the
creditworthiness of counterparties. In doing so, the company seeks
guarantees or collateral, in the form of cash or letters of credit, acquires
credit insurance in certain instances, limits its exposure to any one
counterparty, and, in some instances, enters into netting arrangements to
mitigate counterparty credit risk. However, the volatility in the
capital markets over the past two years has made it more difficult for the
company to assess the creditworthiness of its counterparties. Based
on this uncertainty, actual losses relating to credit risk could materially vary
from Nicor’s estimates.
The
company maintains an allowance for doubtful accounts for estimated losses from
the failure of its customers to make required payments. Such
estimates are based on historical experience, existing economic conditions and
certain collection-related patterns. Circumstances which could affect
these estimates include, but are not limited to, customer credit issues, natural
gas prices, customer deposits and economic conditions. Actual credit
losses could vary materially from Nicor’s estimates. Nicor’s
allowance for doubtful accounts at December 31, 2009, 2008 and 2007 was $33.0
million, $44.9 million and $35.1 million, respectively, as presented on Schedule
II in Item 15 – Exhibits, Financial Statement Schedules.
On
February 2, 2010, the ICC approved a bad debt rider that was filed for in 2009
by Nicor Gas. The bad debt rider provides for the recovery from (or
refund to) customers of the difference between the actual bad debt expense Nicor
Gas incurs on an annual basis and the benchmark bad debt expense included in its
rates for the respective year.
Unbilled
revenues. Nicor Gas accrues revenues for natural gas
deliveries not yet billed to customers from the last billing date to
month-end. Accrued unbilled revenue estimates are dependent upon a
number of customer-usage factors which require management judgment, including
weather factors. These estimates are adjusted when actual billings
occur, and variances in estimates can be material. Accrued unbilled
revenues for Nicor Gas at December 31, 2009 and 2008 were $137.7 million and
$196.1 million, respectively.
Regulatory assets and
liabilities. Nicor Gas is regulated by the ICC, which
establishes the rules and regulations governing utility rates and services in
Illinois. As a rate-regulated company, Nicor Gas 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. Additional information on regulatory assets and
liabilities is presented in Item 8 – Notes to the Consolidated Financial
Statements – Note 1 – Accounting Policies.
NEW
ACCOUNTING PRONOUNCEMENT
For
information concerning fair value measurements, see Item 8 – Notes to the
Consolidated Financial Statements – Note 2 – New Accounting
Pronouncement.
CAUTION
CONCERNING FORWARD-LOOKING STATEMENTS
This
document includes certain forward-looking statements about the expectations of
Nicor and its subsidiaries and affiliates. Although Nicor believes
these statements are based on reasonable assumptions, actual results may vary
materially from stated expectations. Such forward-looking statements
may be identified by the use of forward-looking words or phrases such as
“anticipate,” “believe,” “expect,” “intend,” “may,” “planned,” “potential,”
“should,” “will,” “would,” “project,” “estimate,” “ultimate,” or similar
phrases. Actual results may differ materially from those indicated in
the company’s forward-looking statements due to the direct or indirect effects
of legal contingencies (including litigation) and the resolution of those
issues, including the effects of an ICC review, and undue reliance should not be
placed on such statements.
Other
factors that could cause materially different results include, but are not
limited to, weather conditions; natural disasters; natural gas and other fuel
prices; fair value accounting adjustments; inventory valuation; health care
costs; insurance costs or recoveries; legal costs; borrowing needs; interest
rates; credit conditions; economic and market conditions; accidents, leaks,
equipment failures, service interruptions, environmental pollution, and other
operating risks; tourism and construction in the Bahamas and Caribbean region;
energy conservation; legislative and regulatory actions; tax rulings or audit
results; asset sales; significant unplanned capital needs; future
mercury-related charges or credits; changes in accounting principles,
interpretations, methods, judgments or estimates; performance of major
customers, transporters, suppliers and contractors; labor relations; and acts of
terrorism.
Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date of this filing. Nicor undertakes no
obligation to publicly release any revision to these forward-looking statements
to reflect events or circumstances after the date of this filing.
Item
7A. Quantitative and Qualitative
Disclosures About Market Risk
Nicor is
exposed to market risk in the normal course of its business operations,
including the risk of loss arising from adverse changes in natural gas and fuel
commodity prices and interest rates. Nicor’s practice is to manage
these risks utilizing derivative instruments and other methods, as deemed
appropriate.
Commodity price
risk. With regard to commodity price risk, the company has
established policies and procedures with respect to the management of such risks
and the use of derivative instruments to hedge its exposure to such
risks. Company management oversees compliance with such policies and
procedures. The company utilizes various techniques to limit, measure
and monitor market risk, including limits based on volume, dollar amounts,
maturity, and in some cases value at risk (“VaR”).
VaR is a
tool to assess the potential loss for an instrument or portfolio from adverse
changes in market factors, for a specified time period and at a specified
confidence level. The company has established exposure limits at such
a level that material adverse economic results are not expected. The
company’s commodity price risk policies and procedures continue to evolve with
its businesses and are subject to ongoing review and modification.
In
accordance with SEC disclosure requirements, Nicor performs sensitivity analyses
to assess the potential loss in earnings based upon a hypothetical 10 percent
adverse change in market prices. Management does not believe that
sensitivity analyses alone provide an accurate or reliable method for monitoring
and controlling risks and therefore also relies on the experience and judgment
of its management to revise strategies and adjust positions as deemed
necessary. Losses in excess of the amounts determined in sensitivity
analyses could occur if market prices exceed the 10 percent shift used for the
analyses.
As a
regulated utility, Nicor Gas’ exposure to market risk caused by changes in
commodity prices is substantially mitigated because of Illinois rate regulation
allowing for the recovery of prudently incurred natural gas supply costs from
customers. However, substantial changes in natural gas prices may
impact Nicor Gas’ earnings by increasing or decreasing the cost of gas used by
the company, storage-related gas costs, and other operating and financing
expenses. The company expects to purchase in 2010 about 2 Bcf of
natural gas for its own use and to cover storage-related gas
costs. The volume of natural gas purchased by the company, which is
exposed to market risk, has declined as a result of certain changes approved in
the 2009 rate orders. The level of natural gas prices may also impact
customer gas consumption and therefore gas distribution margin. The
actual impact of natural gas price fluctuations on Nicor Gas’ earnings is
dependent upon several factors, including the company’s hedging
practices. The company generally hedges its forecasted company use
and storage-related gas costs through the use of fixed-price purchase and swap
agreements.
On
February 2, 2010, the ICC approved a bad debt rider that was filed for in 2009
by Nicor Gas. The bad debt rider provides for the recovery from (or
refund to) customers of the difference between the actual bad debt expense Nicor
Gas incurs on an annual basis and the benchmark bad debt expense included in its
rates for the respective year.
Nicor’s
other energy businesses are subject to natural gas commodity price risk, arising
primarily from purchase and sale agreements, transportation agreements, natural
gas inventories and utility-bill management contracts. Derivative
instruments such as futures, options, forwards and swaps may be used to hedge
these risks. Based on Nicor’s other energy businesses unhedged
positions at December 31, 2009, a 10 percent adverse change in natural gas
prices would have decreased Nicor’s earnings for the periods ended December 31,
2009 and 2008 by about $0.2 million and $1.0 million, respectively.
At
December 31, 2009, Nicor
Enerchange, Nicor’s wholesale natural gas marketing business, held derivative
contracts with the following net asset fair values (in millions):
|
Maturity
|
|||||||||||||
|
Source
of Fair Value
|
Total
Fair
Value
|
Less
than
1
Year
|
1
to 3
Years
|
||||||||||
|
Prices
actively quoted
|
$ | (2.9 | ) | $ | (2.4 | ) | $ | (.5 | ) | ||||
|
Prices
correlated to external sources
|
10.3 | 7.9 | 2.4 | ||||||||||
|
Prices
based on models and other valuation methods
|
5.3 | 3.9 | 1.4 | ||||||||||
|
Total
|
$ | 12.7 | $ | 9.4 | $ | 3.3 | |||||||
Actively
quoted prices are for those derivative instruments traded on the
NYMEX. Nicor Enerchange enters into over-the-counter derivative
instruments with values that are similar to, and correlate with, quoted prices
for exchange-traded instruments in active markets. Nicor Enerchange
uses one or more significant unobservable inputs for model-derived
valuations.
Tropical
Shipping’s objective is to substantially mitigate its exposure to higher fuel
costs through fuel surcharges.
Credit risk. The
company has a diversified customer base, which limits its exposure to
concentrations of credit risk in any one industry or income class and believes
that it maintains prudent credit policies. Additionally, the gas
distribution business offers options to help customers manage their bills, such
as energy assistance programs for low-income customers and a budget payment plan
that spreads gas bills more evenly throughout the year. This risk has
been substantially mitigated by the previously mentioned bad debt
rider.
The
company is also exposed to credit risk in the event a counterparty, customer or
supplier defaults on a contract to pay for or deliver product at agreed-upon
terms and conditions. To manage this credit risk, the company
believes it maintains prudent credit policies to determine and monitor the
creditworthiness of counterparties. In doing so, the company seeks
guarantees or collateral, in the form of cash or letters of credit, acquires
credit insurance in certain instances, limits its exposure to any one
counterparty, and, in some instances, enters into netting arrangements to
mitigate counterparty credit risk. However, the volatility in the
capital markets over the past two years has made it more difficult for the
company to assess the creditworthiness of its counterparties. Based
on this uncertainty, the company has taken additional steps including, but not
limited to, reducing available credit to some of its
counterparties.
Interest rate
risk. Nicor is exposed to changes in interest
rates. The company manages its interest rate risk by issuing
primarily fixed-rate long-term debt with varying maturities, refinancing certain
debt and, at times, hedging the interest rate on anticipated
borrowings. If market rates were to hypothetically increase by 10
percent from Nicor’s weighted-average floating interest rate on commercial
paper, interest expense would have increased causing Nicor’s earnings to
decrease by approximately $0.1 million in 2009. For further
information about debt securities, interest rates and fair values, see Item 8 –
Consolidated Statements of Capitalization, Note 7 – Short-Term and Long-Term
Debt and Note 8 – Fair Value Measurements.
|
Nicor
Inc.
|
|
Financial Statements
and Supplementary Data
|
|
Page
|
||
|
41
|
||
|
Financial
Statements:
|
||
|
43
|
||
|
44
|
||
|
45
|
||
|
46
|
||
|
47
|
||
|
47
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|
48
|
||
To the
Board of Directors and Stockholders of Nicor Inc.
We have
audited the accompanying consolidated balance sheets and statements of
capitalization of Nicor Inc. and subsidiaries (the “Company”) as of December 31,
2009 and 2008, and the related consolidated statements of operations, common
equity, comprehensive income and cash flows for each of the three years in the
period ended December 31, 2009. Our audits also included the
financial statement schedule at Item 15(a)(2). We also have audited
the Company’s internal control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Company's management is responsible for
these financial statements and financial statement schedule, for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on these
financial statements and financial statement schedule and an opinion on the
Company's internal control over financial reporting based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (concluded)
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2009 and 2008, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2009, in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth
therein. Also, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2009, based on the criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
/s/
DELOITTE & TOUCHE LLP
Chicago,
Illinois
February
24, 2010
|
Nicor
Inc.
|
||||||||||||
|
(millions,
except per share data)
|
||||||||||||
|
Year
ended December 31
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Operating
revenues
|
||||||||||||
|
Gas
distribution (includes revenue taxes of $150.3, $174.0
and $149.6, respectively)
|
$ | 2,140.8 | $ | 3,206.9 | $ | 2,627.5 | ||||||
|
Shipping
|
352.6 | 425.2 | 403.9 | |||||||||
|
Other
energy ventures
|
239.0 | 230.3 | 244.5 | |||||||||
|
Corporate
and eliminations
|
(80.3 | ) | (85.8 | ) | (99.6 | ) | ||||||
|
Total
operating revenues
|
2,652.1 | 3,776.6 | 3,176.3 | |||||||||
|
Operating
expenses
|
||||||||||||
|
Gas
distribution
|
||||||||||||
|
Cost
of gas
|
1,345.7 | 2,427.8 | 1,906.5 | |||||||||
|
Operating
and maintenance
|
300.4 | 294.6 | 269.8 | |||||||||
|
Depreciation
|
177.4 | 170.9 | 165.6 | |||||||||
|
Taxes,
other than income taxes
|
167.6 | 189.4 | 166.9 | |||||||||
|
Mercury-related
costs (recoveries), net
|
- | .6 | (8.0 | ) | ||||||||
|
Property
sale gains
|
- | (.8 | ) | (2.0 | ) | |||||||
|
Shipping
|
323.4 | 385.9 | 358.5 | |||||||||
|
Other
energy ventures
|
193.5 | 205.0 | 210.5 | |||||||||
|
Other
corporate expenses and eliminations
|
(76.2 | ) | (81.8 | ) | (98.0 | ) | ||||||
|
Total
operating expenses
|
2,431.8 | 3,591.6 | 2,969.8 | |||||||||
|
Operating
income
|
220.3 | 185.0 | 206.5 | |||||||||
|
Interest
expense, net of amounts capitalized
|
38.7 | 40.1 | 37.9 | |||||||||
|
Equity
investment income, net
|
15.8 | 9.4 | 6.3 | |||||||||
|
Interest
income
|
2.3 | 8.8 | 8.8 | |||||||||
|
Other
income, net
|
.9 | .7 | .6 | |||||||||
|
Income
before income taxes
|
200.6 | 163.8 | 184.3 | |||||||||
|
Income
tax expense, net of benefits
|
65.1 | 44.3 | 49.1 | |||||||||
|
Net
income
|
$ | 135.5 | $ | 119.5 | $ | 135.2 | ||||||
|
Average
shares of common stock outstanding
|
||||||||||||
|
Basic
|
45.4 | 45.3 | 45.2 | |||||||||
|
Diluted
|
45.5 | 45.4 | 45.3 | |||||||||
|
Earnings
per average share of common stock
|
||||||||||||
|
Basic
|
$ | 2.99 | $ | 2.64 | $ | 2.99 | ||||||
|
Diluted
|
2.98 | 2.63 | 2.99 | |||||||||
|
The
accompanying notes are an integral part of these
statements.
|
||||||||||||
|
Nicor
Inc.
|
||||||||||||
|
(millions)
|
||||||||||||
|
Year
ended December 31
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Operating
activities
|
||||||||||||
|
Net
income
|
$ | 135.5 | $ | |||||||||