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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-7297
NICOR INC.
(Exact name of registrant as specified in its charter)
Illinois 36-2855175
(State of Incorporation) (I.R.S. Employer
Identification Number)
1844 Ferry Road
Naperville, Illinois 60563-9600 (630) 305-9500
(Address of principal executive offices) (Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. Common stock,
par value $2.50, outstanding at November 1, 2004, were 44,084,022 shares.
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Nicor Inc. Page i
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Table of Contents
Part I - Financial Information
Item 1. Financial Statements (Unaudited) ................................. 1
Consolidated Statements of Operations:
Three and nine months ended
September 30, 2004 and 2003 .................................... 2
Consolidated Statements of Cash Flows:
Nine months ended
September 30, 2004 and 2003 .................................... 3
Consolidated Balance Sheets:
September 30, 2004 and 2003, and
December 31, 2003 .............................................. 4
Notes to the Consolidated Financial Statements ................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................20
Item 3. Quantitative and Qualitative Disclosures about Market Risk .......34
Item 4. Controls and Procedures ..........................................34
Part II - Other Information
Item 1. Legal Proceedings ................................................35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ..... 35
Item 6. Exhibits .........................................................36
Signature ........................................................38
Glossary
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
about 6,000 degree days per year.
ICC..............Illinois Commerce Commission, the agency that regulates
investor-owned Illinois utilities.
FERC.............Federal Energy Regulatory Commission, the agency that regulates
the interstate transportation of natural gas, oil and
electricity.
Mcf, MMcf, Bcf...Thousand cubic feet, million cubic feet, billion cubic feet.
PBR..............Performance-based rate, a regulatory plan that provided
economic incentives based on natural gas cost performance.
TEU..............Twenty-foot equivalent unit, a measure of volume in
containerized shipping equal to one 20-foot-long container.
Nicor Inc. Page 1
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The following condensed unaudited consolidated financial statements of Nicor
Inc. (Nicor) have been prepared by the company pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to SEC
rules and regulations. The condensed financial statements should be read in
conjunction with the financial statements and the notes thereto included in
the company's 2003 Annual Report on Form 10-K/A (Amendment No. 1).
The information furnished reflects, in the opinion of the company, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair statement of the results for the interim periods presented. Results for
the interim periods presented are not necessarily indicative of the results
to be expected for the full fiscal year due to seasonal and other factors.
Nicor Inc. Page 2
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Consolidated Statements of Operations (Unaudited)
(millions, except per share data)
Three months ended Nine months ended
September 30 September 30
---------------- -----------------
2004 2003 2004 2003
-------- ------- -------- -------
Operating revenues
Gas distribution (includes revenue taxes
of $13.4, $11.4, $109.5 and $98.3,
respectively) $ 225.1 $ 223.4 $ 1,598.6 $1,699.6
Shipping 73.2 63.8 213.3 197.4
Other energy ventures 9.7 15.1 94.9 53.7
Corporate and eliminations (8.1) (7.5) (61.7) (31.8)
------- ------- -------- -------
299.9 294.8 1,845.1 1,918.9
Operating expenses
Gas distribution
Cost of gas 118.4 117.6 1,111.1 1,221.5
Operating and maintenance 55.3 51.4 173.9 164.5
Depreciation 37.2 35.6 111.8 107.6
Taxes, other than income taxes 17.1 14.4 120.8 108.4
Mercury-related costs (recoveries), net (.3) - (.2) (17.8)
Property sale gains - - (5.5) (.4)
Shipping 68.1 60.8 197.1 183.8
Other energy ventures 19.2 15.8 96.1 51.4
Litigation charge - - 38.5 -
Other corporate expenses and eliminations (5.5) (5.0) (56.3) (24.5)
------- ------- -------- -------
309.5 290.6 1,787.3 1,794.5
------- ------- -------- -------
Operating income (loss) (9.6) 4.2 57.8 124.4
Equity investment income (loss), net 1.1 4.8 4.0 12.9
Other income (expense), net .7 .4 2.0 1.5
Interest expense, net of amounts capitalized 10.8 8.8 30.3 27.8
------- ------- -------- -------
Income (loss) before income taxes and
cumulative effect of accounting change (18.6) .6 33.5 111.0
Income tax expense (benefit) (7.0) .1 6.0 36.3
------- ------- -------- -------
Income (loss) before cumulative effect
of accounting change (11.6) .5 27.5 74.7
Cumulative effect of accounting change, net
of $3.0 income tax benefit - - - (4.5)
------- ------- -------- -------
Net income (loss) (11.6) .5 27.5 70.2
Dividends on preferred stock - - - -
------- ------- -------- -------
Earnings (loss) applicable to common stock $(11.6) $ .5 $ 27.5 $ 70.2
======= ======= ======== =======
Average shares of common stock outstanding
Basic 44.1 44.0 44.0 44.0
Diluted 44.1 44.2 44.3 44.2
Earnings (loss) per average share of
common stock
Basic
Before cumulative effect of accounting
change $ (.26) $ .01 $ .62 $ 1.69
Cumulative effect of accounting change,
net of tax - - - (.10)
------- ------- -------- -------
Basic earnings (loss) per share $ (.26) $ .01 $ .62 $ 1.59
======= ======= ======== =======
Diluted
Before cumulative effect of accounting
change $ (.26) $ .01 $ .62 $ 1.69
Cumulative effect of accounting change,
net of tax - - - (.10)
------- ------- -------- -------
Diluted earnings (loss) per share $ (.26) $ .01 $ .62 $ 1.59
======= ======= ======== =======
Dividends declared per share of common
stock $ .465 $ .465 $ 1.395 $ 1.395
The accompanying notes are an integral part of these statements.
Nicor Inc. Page 3
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Consolidated Statements of Cash Flows (Unaudited)
(millions)
Nine months ended
September 30
-------------------
2004 2003
-------- ---------
Operating activities
Net income $ 27.5 $ 70.2
Adjustments to reconcile net income to net cash flow
provided from operating activities:
Depreciation 125.2 121.0
Deferred income tax expense 12.0 129.8
Cumulative effect of accounting change - 4.5
Gain on sale of fixed assets (5.5) (1.7)
Other noncash items 6.8 (16.0)
Changes in assets and liabilities:
Receivables, less allowances 241.4 205.1
Gas in storage (113.5) (307.8)
Deferred/accrued gas costs 45.4 (48.7)
Prepaid pension costs (3.3) -
Other assets (50.4) (93.6)
Accounts payable 78.8 (160.9)
Other liabilities 3.8 (34.7)
-------- ---------
Net cash flow provided from (used for)
operating activities 368.2 (132.8)
-------- ---------
Investing activities
Capital expenditures (133.2) (133.9)
Purchases of marketable securities (22.7) (7.8)
Sales and maturities of marketable securities 7.6 -
Net decrease (increase) in other short-term investments 5.5 (4.6)
Net proceeds from sale of fixed assets 7.5 2.7
Distributions from joint ventures - 8.9
Other investing activities (1.3) .7
-------- ---------
Net cash flow used for investing activities (136.6) (134.0)
-------- ---------
Financing activities
Disbursements to retire long-term debt - (100.1)
Short-term borrowings (repayments), net (185.0) 375.0
Dividends paid (61.5) (61.3)
Borrowing against cash surrender value of life
insurance policies 26.1 -
Repayment of loan against cash surrender value
of life insurance policies (11.7) -
Disbursements to reacquire stock - (2.2)
Other financing activities 1.5 1.1
-------- ---------
Net cash flow provided from (used for)
financing activities (230.6) 212.5
-------- ---------
Net increase (decrease) in cash and cash
equivalents 1.0 (54.3)
Cash and cash equivalents, beginning of period 50.3 75.2
-------- ---------
Cash and cash equivalents, end of period $ 51.3 $ 20.9
======== =========
Supplemental schedule of noncash investing and financing activities:
One of Nicor's Directors and Officers insurance carriers paid $29 million into
an escrow account as described in Note 4. Assets and liabilities were recorded
as follows:
Restricted short-term investments $ 29.0 $ -
Obligation related to restricted investments 29.0 -
The accompanying notes are an integral part of these statements.
Nicor Inc. Page 4
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Consolidated Balance Sheets (Unaudited)
(millions)
September 30 December 31 September 30
2004 2003 2003
------------ ----------- ------------
Assets
------
Current assets
Cash and cash equivalents $ 51.3 $ 50.3 $ 20.9
Restricted short-term investments 29.0 - -
Short-term investments, at cost which
approximates market 29.4 32.9 30.3
Receivables, less allowances of $24.4,
$21.2 and $23.0, respectively 220.3 461.7 252.5
Gas in storage 347.5 236.0 348.2
Deferred income taxes 76.8 66.8 47.8
Other 110.1 68.2 178.4
--------- --------- ---------
864.4 915.9 878.1
--------- --------- ---------
Property, plant and equipment, at cost
Gas distribution 3,791.8 3,694.8 3,662.3
Shipping 300.0 296.6 304.5
Other 10.2 8.1 7.8
--------- --------- ---------
4,102.0 3,999.5 3,974.6
Less accumulated depreciation 1,575.6 1,515.3 1,505.0
--------- --------- ---------
2,526.4 2,484.2 2,469.6
--------- --------- ---------
Prepaid pension costs 180.4 177.1 177.1
Other assets 224.6 220.0 214.1
--------- --------- ---------
$ 3,795.8 $ 3,797.2 $ 3,738.9
========= ========= =========
Liabilities and Capitalization
------------------------------
Current liabilities
Long-term obligations due
within one year $ .2 $ - $ -
Short-term borrowings 390.0 575.0 690.0
Accounts payable 457.6 378.8 383.9
Accrued gas costs 92.4 47.0 18.6
Dividends payable 20.5 20.5 20.5
Obligations related to restricted
investments 29.0 - -
Other 56.0 57.4 55.1
--------- --------- ---------
1,045.7 1,078.7 1,168.1
--------- --------- ---------
Deferred credits and other liabilities
Accrued future removal costs 694.4 660.0 650.0
Deferred income taxes 584.5 561.4 529.9
Regulatory income tax liability 46.6 48.4 60.7
Unamortized investment tax credits 34.1 35.6 36.0
Other 167.5 161.6 159.6
--------- --------- ---------
1,527.1 1,467.0 1,436.2
--------- --------- ---------
Capitalization
Long-term obligations
Long-term bonds 495.1 495.1 396.7
Mandatorily redeemable preferred stock 1.6 1.8 1.7
--------- --------- ---------
496.7 496.9 398.4
--------- --------- ---------
Common equity
Common stock 110.2 110.1 110.1
Paid-in capital 5.0 3.6 2.4
Retained earnings 613.1 647.1 632.5
Unearned compensation (.1) (.2) (.2)
Accumulated other comprehensive
income (loss), net (1.9) (6.0) (8.6)
--------- --------- ---------
726.3 754.6 736.2
--------- --------- ---------
$ 3,795.8 $ 3,797.2 $ 3,738.9
========= ========= =========
The accompanying notes are an integral part of these statements.
Nicor Inc. Page 5
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Notes to the Consolidated Financial Statements (Unaudited)
The following notes should be read in conjunction with the consolidated
financial statement notes included in the Nicor Inc. (Nicor) 2003 Annual
Report on Form 10-K/A (Amendment No. 1). Results for the interim periods
presented are not necessarily indicative of the results to be expected for
the full fiscal year due to seasonal and other factors.
1. ACCOUNTING POLICIES
Regulatory assets and liabilities. Northern Illinois Gas Company (Nicor
Gas), a wholly owned subsidiary of Nicor, is regulated by the Illinois
Commerce Commission (ICC), which establishes the rules and regulations
governing utility rates and services in Illinois. The company applies
accounting standards that recognize the economic effects of rate regulation
and, accordingly, has recorded regulatory assets and liabilities. The
company had regulatory assets (liabilities) as follows (in millions):
September 30 December 31 September 30
2004 2003 2003
------------ ------------ ------------
Accrued future removal costs
- Noncurrent $ (694.4) $ (660.0) $ (650.0)
- Current (11.6) (10.0) (10.0)
Accrued gas costs (92.4) (47.0) (18.6)
Regulatory income tax liability (46.6) (48.4) (60.7)
Deferred environmental costs 34.3 37.0 39.0
Unamortized losses on reacquired debt 20.1 20.9 18.3
Other noncurrent regulatory assets 2.4 - -
Other noncurrent regulatory liabilities (3.4) - -
--------- ------------ ---------
$ (791.6) $ (707.5) $ (682.0)
========== ============ =========
Deferred environmental costs and unamortized losses on reacquired debt are
classified in other noncurrent assets. At December 31, 2003, accrued future
removal costs were reclassified from accumulated depreciation to a noncurrent
liability to conform to new guidance issued to the utility industry. At
September 30, 2004 a portion of the accrued future removal costs was
reclassified from noncurrent to current liabilities. Accrued future removal
costs for all periods presented have similarly been reclassified to conform
to such presentation.
Marketable securities. Investments in marketable securities are classified
into held-to-maturity or available-for-sale categories. Securities are
classified as held-to-maturity when the company has the positive intent and
ability to hold the securities to maturity. The company carries
held-to-maturity securities at amortized cost. Securities not classified as
held-to-maturity are classified as available for sale and are carried at fair
market value, with unrealized gains and losses, net of tax, reported in
common equity as a component of accumulated other comprehensive income.
Investments in both classifications are primarily debt securities, which are
included in either short-term investments or other noncurrent assets based
upon contractual maturity date. Nicor's shipping segment held approximately
$7.5 million, $7.3 million and $7.2 million of held-to-maturity securities at
September 30, 2004, December 31, 2003 and September 30, 2003, respectively.
The recorded amount of these held-to-maturity securities approximated fair
value at September 30, 2004. Nicor's shipping segment held approximately $15
million of available-for-sale securities at September 30, 2004 and none at
December 31, 2003 and September 30, 2003.
Nicor Inc. Page 6
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Notes to the Consolidated Financial Statements (Unaudited) (continued)
Revenue taxes. Nicor Gas classifies revenue taxes billed to customers as
operating revenues and related taxes incurred as operating expenses. Revenue
taxes included in operating expense for the three and nine months ended
September 30, 2004 were $12.6 million and $106.6 million, respectively, and
$10.7 million and $96 million, respectively, for the same periods ended
September 30, 2003.
Income taxes. The company's effective income tax rate was 38 percent and 18
percent for the three and nine months ended September 30, 2004, respectively,
compared to 13 percent and 33 percent for the corresponding 2003 periods.
The increase for the third quarter 2004 was due principally to a combination
of a pretax loss for the third quarter of 2004 and lower projected annual
income.
For the year-to-date period, the decline in the effective income tax rate was
primarily a result of recording an income tax benefit on the first-quarter
securities class action litigation charge at the marginal income tax rate of
about 40 percent. As a result, the 18 percent effective income tax rate for
the nine months ended September 30, 2004, is lower than the estimated rate
for the full year of about 25 percent. Lower projected income for 2004
(which typically causes a lower effective income tax rate since permanent
differences and tax credits are a larger share of pretax income) and a
favorable IRS settlement in the second quarter of 2004 also contributed to
the decline in the year-to-date effective income tax rate. The change in the
effective income tax rate reflected in the 2004 third quarter reduced income
tax expense by $1.5 million.
Stock options and awards. Nicor does not recognize compensation expense for
awards granted under its stock-based compensation plans as it continues to
apply the intrinsic value accounting method. The effect on net income (loss)
and earnings (loss) per share had it applied the fair value accounting method
is as follows (in millions, except per share data):
Three months ended Nine months ended
September 30 September 30
------------------ ------------------
2004 2003 2004 2003
-------- -------- -------- -------
Net income (loss) - as reported $ (11.6) $ .5 $ 27.5 $ 70.2
Less: Total stock-based
employee compensation
expense determined under
the fair value method
for all awards, net
of tax .2 .2 .7 .5
-------- -------- -------- -------
Net income (loss) - pro forma $ (11.8) $ .3 $ 26.8 $ 69.7
======== ======== ======== =======
Earnings (loss) per share
Basic - as reported $ (.26) $ .01 $ .62 $ 1.59
Basic - pro forma (.27) .01 .61 1.58
Diluted - as reported (.26) .01 .62 1.59
Diluted - pro forma (.27) .01 .60 1.58
Reclassifications. Certain reclassifications have been made to conform the
prior year's financial statements to the current year's presentation.
Accounting for Medicare Prescription Drug, Improvement and Modernization
Act. In May 2004, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position No. FAS 106-2, Accounting and Disclosure Requirements Related
to the Medicare Prescription Drug, Improvement and Modernization Act of 2003
(FSP FAS 106-2). The Medicare Prescription Drug, Improvement and
Nicor Inc. Page 7
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Notes to the Consolidated Financial Statements (Unaudited) (continued)
Modernization Act of 2003 (the Act) provides a prescription drug benefit as
well as a potential federal subsidy to sponsors of certain retiree health
care benefit plans. FSP FAS 106-2 provides guidance on accounting for the
effects of the Act, including the potential subsidy, and requires public
companies to reflect the impact by the third quarter of 2004, if determinable
and significant. These financial statements and accompanying notes do not
reflect the effects of the Act because the company estimates that any impact
on 2004 periodic postretirement health care costs and net income would be
minimal.
Consolidation of Variable Interest Entities. In December 2003, the FASB
issued Interpretation 46(R), Consolidation of Variable Interest Entities (FIN
46R). FIN 46R addresses the application of Accounting Research Bulletin 51,
Consolidated Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support. FIN 46R was
effective for Nicor on January 1, 2004, and had no impact on the company's
financial position or results of operations.
2. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
Effective January 1, 2003, Nicor's wholesale natural gas marketing business,
Nicor Enerchange, began applying accrual accounting rather than fair value
accounting to gas in storage and certain energy-related contracts, such as
storage and transportation agreements. The change in accounting method
relates to a rescission of Emerging Issues Task Force Consensus No. 98-10,
Accounting for Contracts Involved in Energy Trading and Risk Management
Activities, and a prohibition against recording inventory at fair
value. Effective with the change, Nicor recorded a $4.5 million cumulative
effect loss from the change in accounting principle, which was net of $3
million in income tax benefits.
3. SHORT-TERM DEBT
In September 2004, Nicor Inc. and Nicor Gas established two new revolving
credit facilities with major domestic and foreign banks. These new
facilities consist of a $500 million, 3-year revolver, expiring September
2007, available to Nicor Inc. and Nicor Gas, and a $400 million, 210-day
seasonal revolver, expiring in April 2005, available to Nicor Gas. The
company had $390 million of commercial paper borrowings outstanding at
September 30, 2004. The company is in compliance with the covenants relating
to its credit facilities at September 30, 2004.
4. RESTRICTED SHORT-TERM INVESTMENTS
At September 30, 2004 Nicor had $29 million of restricted short-term
investments and a corresponding $29 million current liability. The escrow
fund was established through a $29 million deposit by one of Nicor's
Directors and Officers insurance carriers to be used to satisfy Nicor
directors' and officers' liabilities and expenses associated with claims
asserted against them. (See also Note 14 Contingencies).
5. ACCRUED UNBILLED REVENUES
Receivables include accrued unbilled revenues of $44.5 million, $140 million
and $55.1 million at September 30, 2004, December 31, 2003, and September 30,
2003, respectively, related primarily to gas distribution operations. Nicor
Gas accrues revenues for estimated deliveries to customers from the date of
their last bill until the balance sheet date.
Nicor Inc. Page 8
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Notes to the Consolidated Financial Statements (Unaudited) (continued)
6. EQUITY INVESTMENT INCOME (LOSS), NET
Equity investment income (loss), net includes the following (in millions):
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
2004 2003 2004 2003
-------- -------- ------- -------
Triton Container Investments
(Triton) $ 1.5 $ 1.5 $ 4.5 $ 4.1
Nicor Energy - 3.3 - 8.9
Affordable housing investments (1.0) (.4) (1.9) (1.4)
Horizon Pipeline .4 .4 1.3 1.1
All other .2 - .1 .2
-------- -------- ------- -------
$ 1.1 $ 4.8 $ 4.0 $12.9
======== ======== ======= =======
7. OTHER INCOME (EXPENSE), NET
Other income (expense), net includes the following (in millions):
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
2004 2003 2004 2003
-------- -------- ------- -------
Interest income $ .6 $ .4 $ 1.7 $ 1.5
Other income .2 .1 .8 .7
Other expense (.1) (.1) (.5) (.7)
-------- -------- ------- -------
$ .7 $ .4 $ 2.0 $ 1.5
======== ======== ======= =======
8. COMPREHENSIVE INCOME
Total comprehensive income (loss), as defined by FAS 130, Reporting
Comprehensive Income, is equal to net income (loss) plus other comprehensive
income (loss) and is as follows (in millions):
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
2004 2003 2004 2003
-------- -------- ------- -------
Net income (loss) $ (11.6) $ .5 $ 27.5 $ 70.2
Other comprehensive income
(loss), net of tax 3.6 (2.6) 4.1 (2.3)
-------- -------- ------- -------
Total comprehensive income (loss) $ (8.0) $ (2.1) $ 31.6 $ 67.9
======== ======== ======= =======
Net other comprehensive income (loss) consists primarily of unrealized gains
and losses from derivative financial instruments accounted for as cash flow
hedges, including Nicor's share of such amounts from joint ventures and other
equity-method investees.
Nicor Inc. Page 9
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Notes to the Consolidated Financial Statements (Unaudited) (continued)
9. BUSINESS SEGMENT INFORMATION
Financial data by major business segment is presented below (in millions):
Other Corporate
Gas energy and
distribution Shipping ventures eliminations Total
------------ ---------- --------- ------------- ---------
Three months ended September 30, 2004
Operating revenues
External customers $ 217.7 $ 73.2 $ 9.0 $ - $ 299.9
Intersegment 7.4 - .7 (8.1) -
------------ ---------- --------- ------------- ---------
$ 225.1 $ 73.2 $ 9.7 $ (8.1) $ 299.9
============ ========== ========= ============= =========
Operating income (loss) $ (2.6) $ 5.1 $ (9.5) $ (2.6) $ (9.6)
Three months ended September 30, 2003
Operating revenues
External customers $ 217.3 $ 63.8 $ 13.7 $ - $ 294.8
Intersegment 6.1 - 1.4 (7.5) -
------------ ---------- --------- ------------- ---------
$ 223.4 $ 63.8 $ 15.1 $ (7.5) $ 294.8
============ ========== ========= ============= =========
Operating income (loss) $ 4.4 $ 3.0 $ (.7) $ (2.5) $ 4.2
Nine months ended September 30, 2004
Operating revenues
External customers $ 1,541.6 $ 213.3 $ 90.2 $ - $ 1,845.1
Intersegment 57.0 - 4.7 (61.7) -
------------ ---------- --------- ------------- ---------
$ 1,598.6 $ 213.3 $ 94.9 $ (61.7) $ 1,845.1
============ ========== ========= ============= =========
Operating income (loss) $ 86.7 $ 16.2 $ (1.2) $ (43.9) $ 57.8
Nine months ended September 30, 2003
Operating revenues
External customers $ 1,669.9 $ 197.4 $ 51.6 $ - $ 1,918.9
Intersegment 29.7 - 2.1 (31.8) -
------------ ---------- --------- ------------- ---------
$ 1,699.6 $ 197.4 $ 53.7 $ (31.8) $ 1,918.9
============ ========== ========= ============= =========
Operating income (loss) $ 115.8 $ 13.6 $ 2.3 $ (7.3) $ 124.4
The majority of intersegment revenues represent Nicor Gas revenues related to
customers purchasing utility-bill management products from Nicor Solutions.
Under these products, Nicor Solutions bills a fixed amount to a customer and
in exchange pays the customer's utility bills from Nicor Gas. Intersegment
revenues have been eliminated in the consolidated financial statements.
The $43.9 million operating loss in the "Corporate and eliminations" column
for the nine months ended September 30, 2004 includes a $38.5 million
litigation charge related to an agreement to settle securities class actions
as described in Note 14 Contingencies - Securities Class Actions.
Nicor Inc. Page 10
- -------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (Unaudited) (continued)
10. POSTRETIREMENT BENEFITS
Nicor Gas maintains a noncontributory defined benefit pension plan covering
substantially all employees hired prior to 1998. Pension benefits are based
on years of service and highest average salary for management employees and
job level for unionized employees. The benefit obligation related to
collectively bargained benefits considers the company's past practice of
regular benefit increases to reflect current wages. Nicor Gas also provides
health care and life insurance benefits to eligible retired employees under a
plan that includes a limit on the company's share of cost for most future
retirees. The company's postretirement benefit costs have been considered in
rate proceedings on the accrual basis.
About one-fourth of the net periodic benefit cost or credit related to these
plans has been capitalized as a cost of constructing gas distribution
facilities and the remainder is included in gas distribution operating and
maintenance expense. Net periodic benefit cost (credit) included the
following components (in millions):
Pension benefits Other benefits
---------------- ---------------
2004 2003 2004 2003
------- ------- ------- ------
Three months ended September 30
Service cost $ 2.2 $ 1.8 $ .6 $ .5
Interest cost 3.9 4.1 2.5 2.8
Expected return on plan assets (7.9) (7.2) (.2) (.3)
Recognized net actuarial loss .5 1.1 1.2 .7
Amortization of unrecognized
transition obligation - - - .8
Amortization of prior service cost .2 .2 - -
------- ------- ------- ------
Net periodic benefit cost (credit) $ (1.1) $ - $ 4.1 $ 4.5
======= ======= ======= ======
Nine months ended September 30
Service cost $ 6.7 $ 5.5 $ 1.8 $ 1.5
Interest cost 11.8 12.3 7.6 8.4
Expected return on plan assets (23.8) (21.5) (.7) (.9)
Recognized net actuarial loss 1.5 3.2 3.4 2.2
Amortization of unrecognized
transition obligation - - - 2.3
Amortization of prior service cost .5 .5 .1 -
------- ------- ------- ------
Net periodic benefit cost (credit) $ (3.3) $ - $12.2 $13.5
======= ======= ======= ======
In 2003, the company amended the retiree health care plan as it applies to
non-unionized employees to improve consistency of benefits among participant
groups and reduce the company's share of plan costs effective January 1,
2004. The resultant cost reduction is reflected in the 2004 net periodic
benefit costs presented above. In 2004, further cost-sharing amendments were
made to the plan for all employees. The impact of the 2004 amendments is not
expected to be material.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The recorded amount of short-term investments and short-term borrowings
approximates fair value because of the short maturity of the instruments.
Long-term debt outstanding, including current maturities, is recorded at the
principal balance outstanding, net of unamortized discount and issuance
costs. The principal balance of Nicor Gas' First Mortgage Bonds outstanding
was $500 million, $500 million and $400 million at September 30, 2004,
December 31, 2003, and September 30, 2003,
Nicor Inc. Page 11
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Notes to the Consolidated Financial Statements (Unaudited) (continued)
respectively. Based on quoted market interest rates, the fair value of the
company's First Mortgage Bonds outstanding, including current maturities, was
approximately $534 million, $530 million and $437 million at September 30,
2004, December 31, 2003 and September 30, 2003, respectively.
Derivative financial instruments are recorded at fair value as determined
primarily from actively quoted prices. The net fair value of these instruments
was $40 million, $13 million and $(5) million at September 30, 2004,
December 31, 2003 and September 30, 2003. Most of these financial instruments
relate to Nicor Gas hedging of natural gas purchases, and their settlement is
passed directly through to customers without markup, subject to ICC review. The
remaining $(5) million, $1 million and zero, respectively, relates to Nicor
Enerchange and Nicor Solutions.
12. RELATED PARTY TRANSACTIONS
Horizon Pipeline, a 50-percent-owned joint venture of Nicor, charged Nicor
Gas $2.6 million and $7.8 million for the three and nine months ended
September 30, 2004, respectively, for natural gas transportation under rates
that have been accepted by the Federal Energy Regulatory Commission. For the
three and nine months ended September 30, 2003, Horizon Pipeline charged
Nicor Gas $2.6 million and $7.7 million, respectively, for this service.
EN Engineering, a 50-percent-owned joint venture of Nicor, charged Nicor
Technologies, a wholly owned subsidiary of Nicor, $1.1 million and $2.9
million for the three and nine months ended September 30, 2004, respectively,
for engineering and corrosion services. For the three and nine months ended
September 30, 2003, EN Engineering charged Nicor Technologies $1.2 million
and $3.3 million, respectively, for these services.
In addition, certain related parties may acquire regulated utility services
at rates approved by the ICC.
13. GUARANTEES AND INDEMNITIES
Nicor and certain subsidiaries enter into various financial and performance
guarantees and indemnities providing assurance to third parties.
Financial guarantees. The company has issued guarantees of affiliate
obligations to vendors and other third parties, requiring Nicor to repay the
obligations should its affiliates default. The obligations of the company's
wholly owned subsidiaries are reflected in Nicor's consolidated balance
sheet, while the obligations of its unconsolidated equity investments are
not. As of September 30, 2004 Nicor had guaranteed the payment of
approximately $1 million of lease obligations in support of one of its
unconsolidated equity investee's operations, and had outstanding letters of
credit and surety bonds totaling approximately $7 million.
Tropic Equipment Leasing Inc. (TEL), an indirectly wholly owned subsidiary of
Nicor, holds the company's interests in Triton, a cargo container leasing
company. TEL has a contingent liability to restore to zero any deficit in
its equity account for income tax purposes in the unlikely event that Triton
is liquidated and a deficit balance remains. This contingent liability
continues for the life of the Triton partnerships and any payment is
effectively limited to the assets of TEL, which were about $4 million at
September 30, 2004. Nicor believes the likelihood of any such payment by TEL
is remote and has recorded no liability for this contingency.
Nicor Inc. Page 12
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Notes to the Consolidated Financial Statements (Unaudited) (continued)
Performance guarantees. Nicor Services markets separately priced product
warranty contracts that provide for the repair of heating, ventilation and
air conditioning (HVAC) equipment, natural gas lines, and other appliances
within homes. Revenues from these product warranty contracts are recognized
ratably over the coverage period, and related repair costs are charged to
expense as incurred. Repair expenses of $.6 million and $1.9 million were
incurred for the three and nine months ended September 30, 2004, respectively,
and $.8 million and $2.6 million, respectively, for the same periods last year.
Indemnities. In certain instances, Nicor has undertaken to indemnify current
property owners and others against costs associated with the effects and/or
remediation of contaminated sites for which the company may be responsible
under applicable federal or state environmental laws, generally with no
limitation as to the amount. Aside from liabilities recorded in connection
with coal tar cleanup, as discussed in Note 14 Contingencies - Manufactured Gas
Plant Sites, Nicor believes that the likelihood of payment under these
indemnifications is either remote or the amount would be immaterial. No
liability has been recorded for these indemnifications.
Nicor has also indemnified, to the fullest extent permitted under the laws of
the State of Illinois and any other applicable laws, its present and former
directors, officers and employees against expenses they may incur in
connection with litigation they are a party to by reason of their association
with the company, subject to certain limitations. For the three and nine months
ended September 30, 2003, the company recorded expenses of $.8 million and $2.2
million, respectively, in connection with this indemnification. No such
expenses were recorded in the corresponding 2004 periods. As of September 30,
2004, the company had recorded a $1.4 million liability in connection with this
indemnification.
14. 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.
Performance-Based Rate (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 Illinois Commerce Commission (ICC) review.
There are allegations that the company acted improperly in connection with
the PBR plan, and the ICC and others are reviewing these allegations. On
June 27, 2002 the Citizens Utility Board (CUB) filed a motion to reopen the
record in the ICC's proceedings to review the PBR plan (the ICC
Proceedings). As a result of the motion to reopen, Nicor Gas, the Cook
County State's Attorney Office (CCSAO), the staff of the ICC and CUB entered
into a stipulation providing for additional discovery. The Illinois Attorney
General's Office has also intervened in this matter. In addition, the
Illinois Attorney General's Office 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. Parties who were plaintiffs in a dismissed class
Nicor Inc. Page 13
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Notes to the Consolidated Financial Statements (Unaudited) (continued)
action proceeding against the company could potentially intervene in these
proceedings. The company has committed to cooperate fully in the reviews of
the PBR plan.
In response to these allegations, on July 18, 2002, the Nicor Board of
Directors appointed a special committee of independent, non-management
directors to conduct an inquiry into issues surrounding natural gas
purchases, sales, transportation, storage and such other matters as may come
to the attention of the special committee in the course of its investigation.
The special committee presented the report of its counsel (Report) to Nicor's
Board of Directors on October 28, 2002.
In response, the Nicor Board of Directors directed the company's management
to, among other things, make appropriate adjustments to account for, and
fully address, the adverse consequences to ratepayers of the items noted in
the Report, and conduct a detailed study of the adequacy of internal
accounting and regulatory controls. The adjustments were made in prior
years' financial statements resulting in a $24.8 million liability. Included
in such $24.8 million liability is a $4.1 million loss contingency. A $1.8
million adjustment to the previously recorded liability, which is discussed
below, was made in the third quarter of 2004 increasing the recorded
liability to $26.6 million. In addition, 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. The net of these items and interest income on certain
components results in a $1.0 million reimbursement the company is seeking as
of September 30, 2004, pending resolution of the proceedings discussed
below. The company took steps to correct the weaknesses and deficiencies
identified in the detailed study of the adequacy of internal controls.
Pursuant to the agreement of all parties, including the company, the ICC
re-opened the 1999 and 2000 purchased gas adjustment filings for review of
certain transactions related to the PBR plan and consolidated the reviews of
the 1999-2002 purchased gas adjustment filings with the PBR plan review.
On February 5, 2003, the CCSAO and CUB filed a motion for $27 million in
sanctions against the company in the ICC Proceedings. In that motion, CCSAO
and CUB alleged that Nicor Gas' responses to certain CUB data requests were
false. Also on February 5, 2003, CUB stated in a press release that, in
addition to $27 million in sanctions, it would seek additional refunds to
consumers. On March 5, 2003, the ICC staff filed a response brief in support
of CUB's motion for sanctions. On May 1, 2003, the Administrative Law Judges
issued a ruling denying CUB and CCSAO's motion for sanctions. CUB has filed
an appeal of the motion for sanctions with the ICC, and the ICC has indicated
that it will not rule on the appeal until the final disposition of the ICC
proceedings. It is not possible to determine how the ICC will resolve the
claims of CCSAO, CUB or other parties to the ICC Proceedings.
In November 2003, the ICC staff, CUB, CCSAO and the Illinois Attorney
General's Office (IAGO) filed their respective direct testimony in the ICC
Proceedings. The ICC staff is seeking refunds to customers of approximately
$108 million and CUB and CCSAO were jointly seeking refunds to customers of
approximately $143 million. The IAGO direct testimony alleges adjustments in
a range from $145 million to $190 million. The IAGO testimony as filed is
presently unclear as to the amount which IAGO seeks to have refunded to
customers. On February 27, 2004 the above referenced intervenors filed their
rebuttal testimony in the ICC Proceedings. In such rebuttal testimony, CUB
and CCSAO amended the alleged amount to be refunded to customers from
approximately $143 million to $190 million. Nicor Gas filed rebuttal
testimony in January 2004, which is consistent with the findings of the
special committee Report. Nicor Gas seeks a reimbursement of approximately
$1.0 million as referenced above. The parties to the ICC Proceedings have
agreed to a stay of the evidentiary hearings on this matter in order to
Nicor Inc. Page 14
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Notes to the Consolidated Financial Statements (Unaudited) (continued)
undertake additional third party discovery from Entergy-Koch Trading, LP
(EKT), a natural gas, storage and transportation trader and consultant with
whom Nicor did business under the PBR plan.
During the course of the SEC investigation discussed below, the company
became aware of additional information relating to the activities of
individuals affecting the PBR plan for the period from 1999 through 2002,
including information consisting of third party documents and recordings of
telephone conversations from EKT. The company continues to obtain access to
and review this information. Review of additional information completed in
the third quarter of 2004 resulted in the $1.8 million adjustment to the
previously recorded liability referenced above.
Although the Report of the special committee's counsel did not find that
there was criminal activity or fraud, a review of this additional information
(which was not available to the independent counsel who prepared the Report)
and re-interviews of certain Nicor Gas personnel indicates that certain
former Nicor Gas personnel may have engaged in potentially fraudulent conduct
regarding the PBR plan in violation of company policy, and in possible
violation of SEC rules and applicable law. Further, certain former Nicor Gas
personnel also may have attempted to conceal their conduct in connection with
an ICC review of the PBR plan. The company continues to cooperate with the
SEC, the U.S. Attorney's office and the ICC on this matter and to review and
produce additional documents as requested by these agencies. The company
also will review any third party information the company obtains. The
company terminated four employees in connection with this matter in the third
quarter of 2004.
Nicor is unable to predict the outcome of any of the foregoing reviews or the
company's potential exposure thereunder. Because the PBR plan and historical
gas costs are still under ICC review, the final outcome could be materially
different than the amounts reflected in the company's financial statements as
of September 30, 2004.
Nicor Energy. Nicor is a 50-percent owner of Nicor Energy, a retail energy
marketing joint venture with Dynegy Marketing and Trade.
As a result of an audit and review process in 2002, accounting irregularities
were identified at Nicor Energy. Appropriate accounting adjustments were
made by Nicor in restated financial statements previously filed with the
United States Securities and Exchange Commission (SEC).
Nicor Energy has disposed of all of its customer accounts and is in the
process of liquidating its remaining assets and resolving remaining
contingent liabilities. Nicor's investment in Nicor Energy was written off
in the third quarter of 2002 due to the belief at that time that Nicor
ultimately would not recover its investment balance. During 2003, Nicor
recorded gains of $9.6 million upon the receipt of cash from Nicor Energy. No
recoveries occurred in the nine months ended September 30, 2004, and any future
gains or losses are not expected to be material.
On December 10, 2003, the United States Attorney for the Northern District of
Illinois indicted three former employees of Nicor Energy and an outside
lawyer for Nicor Energy. The indictments alleged that the defendants
fraudulently deprived Nicor Energy of their honest services and caused a loss
to investors in Nicor Inc. and Dynegy Inc. During the time period covered by
the indictments, Nicor Energy was a stand alone entity with its own
management and was operated independently from Nicor Inc. and Nicor Gas.
None of the individuals indicted are employees of Nicor Inc. or Nicor Gas nor
were they at the time of the charged conduct. The three former employees of
Nicor Energy have pled guilty to certain charges. Separately, on December
10, 2003, the SEC filed its own civil enforcement action against the same
three
Nicor Inc. Page 15
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Notes to the Consolidated Financial Statements (Unaudited) (continued)
former employees and one additional former employee of Nicor Energy.
While Nicor is unable to predict the final outcome of these matters, the
resolution of such matters is not expected to have a material adverse impact
on the company's financial condition or results of operations.
SEC and U.S. Attorney Inquiries. In 2002, the staff of the SEC informed
Nicor and Nicor Energy that the SEC is conducting a formal inquiry regarding
both the PBR plan and Nicor Energy. A representative of the Office of the
United States Attorney for the Northern District of Illinois has notified
Nicor that that office is conducting an inquiry on the same matters that the
SEC is investigating, and a grand jury is also reviewing these matters. In
April 2004, Nicor was advised by the SEC Division of Enforcement that it
intended to recommend to the SEC that it bring a civil injunctive action
against Nicor, alleging that Nicor violated Sections 17(a) of the Securities
Act of 1933 and Sections 10(b) and 13(a) of the Securities Exchange Act of
1934 and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. The SEC may also
seek injunctive relief, disgorgement and civil penalties. The SEC staff
invited Nicor to make a formal response (known as a Wells Submission) with
respect to the proposed recommendation. In June 2004, Nicor filed its Wells
Submission with the SEC. In addition, in connection with the SEC's
invitation to the company to make a Wells Submission, the SEC informed the
company of additional sources of information relating to activities affecting
the PBR plan, the status of which is addressed in detail in the
Performance-Based Rate (PBR) Plan section set forth above. In August 2004,
Nicor withdrew its Wells Submission in light of its continuing review of the
newly available additional sources of information referenced above. Nicor
continues in its efforts to resolve this matter with the SEC and has
requested that the SEC allow Nicor to file an updated Wells Submission if
necessary. Nicor is unable to predict the outcome of these inquiries or
Nicor's potential exposure related thereto and has not recorded a liability
associated with the outcome of these contingencies.
Securities Class Actions. Following a July 18, 2002 Nicor press release
concerning Nicor Energy and the PBR plan, several purported class actions
were brought against Nicor, Thomas Fisher (Chairman and CEO) and Kathleen
Halloran (former Executive Vice President Finance and Administration and
former Executive Vice President and Chief Risk Officer). The actions were
brought in the United States District Court for the Northern District of
Illinois, Eastern Division, and have been consolidated. On February 14,
2003, plaintiffs filed an amended complaint adding as defendants George
Behrens (Vice President and Treasurer), Philip Cali (former Executive Vice
President of Operations) and Arthur Andersen LLP, the company's former
independent auditor. The plaintiffs sought to represent a class consisting
of all persons or entities who purchased Nicor common stock on the open
market during the period from November 24, 1999 through and including July
19, 2002. They alleged that the defendants violated Section 10(b) and
Section 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder. Plaintiffs alleged that during the class period defendants
misrepresented the PBR plan, Nicor's historical financial condition and
results of operations, and its future prospects. The class sought
compensatory damages, prejudgment interest, and attorneys' fees and costs.
On April 16, 2004 Nicor announced that its board of directors had approved an
agreement to settle the above referenced action. Under the terms of the
settlement, all claims against Nicor and Nicor-related defendants have been
dismissed without any finding or admission of wrongdoing or liability, for a
payment of $38.5 million. On July 13, 2004 the court granted final approval
of the settlement. All appeal rights expired on August 12, 2004. In the
first quarter of 2004, the company recorded a litigation charge of $38.5
million related to this agreement. In the third quarter of 2004, the $38.5
million previously placed in escrow was released to the plaintiff's
representatives.
Shareholder Derivative Lawsuits. Also following Nicor's issuance of the
press release concerning Nicor Energy and the PBR plan, three purported
derivative lawsuits were brought against Thomas Fisher (Chairman and CEO),
Kathleen Halloran (former Executive Vice President Finance and Administration
Nicor Inc. Page 16
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Notes to the Consolidated Financial Statements (Unaudited) (continued)
and former Executive Vice President and Chief Risk Officer) and all members
of Nicor's Board of Directors (the "individual defendants"). Nicor was named
as a nominal defendant in all three suits, which have since been consolidated
in an amended complaint. The actions were brought in the Circuit Court of
Cook County, Illinois, Chancery Division. The plaintiffs allege that the
individual defendants breached their fiduciary duties to Nicor by allegedly
causing or allowing Nicor to disseminate to the market materially misleading and
inaccurate information, failing to establish and maintain adequate accounting
controls and approving the PBR plan despite allegedly knowing that the plan was
unlawful or that ICC approval would be improperly obtained. Plaintiffs also
contend that two of the defendants (Mr. Fisher and Mr. Birdsall) engaged in
improper insider selling of Nicor stock at inflated prices. The plaintiffs seek
compensatory and punitive damages, attorneys' fees and costs, and other relief
against the individual defendants on behalf of Nicor but do not seek any damages
against the company. On May 8, 2003, Nicor filed a Motion to Dismiss. On
October 7, 2003, the Court granted Nicor's Motion to Dismiss and Plaintiffs were
granted leave to file a Consolidated Third Amended Complaint. In November 2003,
the Plaintiffs filed a Consolidated Third Amended Complaint and in December
2003, Nicor filed a Motion to Dismiss. The Court denied Nicor's Motion to
Dismiss on March 26, 2004. The parties are currently engaged in discovery.
Nicor is unable to predict the outcome of this litigation or Nicor's potential
exposure related thereto and has not recorded a liability associated with the
outcome of this contingency.
Fixed Bill Service. On April 29, 2003, a second amended purported class
action complaint was filed in the Circuit Court of Cook County, Illinois
against Nicor Energy Services Company (Nicor Services) alleging violation of
the Illinois Consumer Fraud and Deceptive Practices Act (ICFA) by Nicor Services
relating to the fixed bill service offered by Nicor Services. Nicor Services
offered a fixed bill product under which it paid the annual gas service
portion of a customer's Nicor Gas utility bill in exchange for twelve equal
monthly payments by the customer to Nicor Services, regardless of changes in
the price of natural gas or weather. The plaintiff is seeking compensatory
damages, prejudgment and postjudgment interest, punitive damages, attorneys'
fees and injunctive relief. Nicor is unable to predict the outcome of this
litigation or to reasonably estimate its potential exposure related thereto
and has not recorded a liability associated with this contingency.
Horizon Pipeline Lien. The general contractor on the construction of the
Horizon Pipeline (Horizon) filed a $5.7 million Notice of Claim for Lien
against Horizon. On May 23, 2003, Horizon filed a Declaratory Judgment
Complaint in the United States District Court for the District of Colorado
seeking resolution of this dispute. On June 23, 2003, the general contractor
filed an answer and counterclaim to Horizon's complaint seeking in excess of
$11 million in damages from Horizon. On June 25, 2004 the parties to the
above referenced actions entered into a final settlement agreement. In
consideration for a payment of $6.8 million by Horizon to the general
contractor, which was capitalized by Horizon as a construction cost, all
claims by the parties have been dismissed with prejudice and all recorded
liens have been released.
FERC Stipulation. On August 2, 2004, Nicor Gas entered into a settlement
with the Federal Energy Regulatory Commission (FERC) that resolves an
investigation by the Office of Market Oversight and Investigations involving
the sharing of confidential storage information with one of Nicor Gas'
interstate storage customers in violation of FERC's regulations. FERC's
regulations prohibit the provision of undue preferences among customers.
There was no evidence that Nicor Gas profited either directly or indirectly
by communicating its storage information to its customer. Under the
settlement, Nicor Gas paid a civil penalty in the amount of $600,000, and
will implement a compliance plan to prevent similar violations in the future.
Nicor Inc. Page 17
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Notes to the Consolidated Financial Statements (Unaudited) (continued)
Mercury. Nicor Gas has incurred, and expects to continue to incur, costs
related to its historical use of mercury in various kinds of company
equipment.
Nicor Gas is a defendant in several private lawsuits, all in the Circuit
Courts of Cook and DuPage Counties, Illinois, claiming a variety of
unquantified damages (including bodily injury, property and punitive damages)
allegedly caused by mercury-containing regulators. Under the terms of a
class action settlement agreement, Nicor Gas will continue, until 2006, to
provide medical screening to persons exposed to mercury from its equipment,
and will use its best efforts to replace any remaining inside residential
mercury regulators by 2005. The class action settlement permitted class
members to "opt out" of the settlement and pursue their claims individually.
Nicor Gas is currently defending claims brought by 29 households.
As of September 30, 2004, Nicor Gas had remaining an estimated liability of
$20.4 million, representing management's best estimate of future costs,
including potential liabilities relating to remaining lawsuits, based on an
evaluation of currently available information. Actual costs may vary from
this estimate. The company will continue to reassess its estimated
obligation and will record any necessary adjustment, which could be material
to operating results in the period recorded.
Nicor Gas continues to pursue recovery from insurers and independent
contractors that had performed work for the company. When received, these
recoveries are recorded as a reduction to gas distribution operating
expense. Nicor Gas recovered approximately $18 million and $20 million of
pretax mercury-related costs, net of legal fees, from insurers and
independent contractors in 2003 and 2002, respectively. Amounts recovered
during the nine months ended September 30, 2004 were immaterial. On October
25, 2004 the Circuit Court of Cook County, Illinois entered judgment in favor
of Nicor and against various insurers in the amount of $10.2 million with
respect to one of Nicor's mercury-related insurance claims. The judgment is
subject to appeal, and the insurers have indicated their intention to appeal
the judgment.
The final disposition of these mercury-related matters is not expected to
have a material adverse impact on the company's financial condition.
Manufactured Gas Plant Sites. Manufactured gas plants were used in the
1800's and early to mid 1900's to produce manufactured gas from coal, creating
a coal tar byproduct. Current environmental laws may require the cleanup of
coal tar at certain former manufactured gas plant sites.
To date, Nicor Gas has identified about 40 properties for which it may, in
part, be responsible. Most of these properties are not presently owned by
the company. Information regarding preliminary site reviews has been
presented to the Illinois Environmental Protection Agency (IEPA) for certain
properties. More detailed investigations and remedial activities are
complete, in progress or planned at many of these sites. The results of the
detailed site-by-site investigations determine the extent additional
remediation is necessary and provide a basis for estimating additional future
costs which, based on industry experience, could be significant. In
accordance with ICC authorization, the company is and has been recovering
these costs from its customers, subject to annual prudence reviews.
Nicor Inc. Page 18
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Notes to the Consolidated Financial Statements (Unaudited) (continued)
In December 2001, a purported class action lawsuit was filed against Exelon
Corporation, Commonwealth Edison Company and Nicor Gas in the Circuit Court
of Cook County alleging, among other things, that the ongoing cleanup of a
former manufactured gas plant site in Oak Park, Illinois is inadequate.
Since then, additional lawsuits have been filed related to this same former
manufactured gas plant site. These lawsuits seek, in part, unspecified
damages for property damage, nuisance, and various personal injuries that
allegedly resulted from exposure to contaminants allegedly emanating
from the site, and punitive damages. Management cannot predict the outcome
of this litigation or the company's potential exposure thereto and has not
recorded a liability associated with this contingency.
In April 2002, Nicor Gas was named as a defendant, together with Commonwealth
Edison Company, in a lawsuit brought by the Metropolitan Water Reclamation
District of Greater Chicago (the MWRDGC) under the Federal Comprehensive
Environmental Response, Compensation and Liability Act seeking recovery of
past and future remediation costs and a declaration of the level of
appropriate cleanup for a former manufactured gas plant site in Skokie,
Illinois now owned by the MWRDGC. In January 2003, the suit was amended to
include a claim under the Federal Resource Conservation and Recovery Act.
The suit was filed in the United States District Court for the Northern
District of Illinois. Management cannot predict the outcome of this litigation
or the company's potential exposure thereto and has not recorded a liability
associated with this contingency.
Since costs and recoveries relating to the cleanup of manufactured gas plant
sites are passed directly through to customers in accordance with ICC
regulations, subject to an annual ICC prudence review, the final disposition of
manufactured gas plant matters is not expected to have a material impact on the
company's financial condition or results of operations.
Other. In a recent Illinois Supreme Court decision, the court affirmed the
appellate court's decision to permit proceedings to move forward against
Nicor Gas relating to a home explosion, which resulted in a fatality,
allegedly caused by a faulty gas appliance connector installed by the
homeowner. Although unable to determine the ultimate outcome of the above
referenced proceeding, the resolution is not expected to have a material
adverse impact on the company's financial condition or results of operations.
The company is unable to predict any potential operational impact of the
Illinois Supreme Court decision on Nicor.
On April 27, 2004 one of Nicor's Directors and Officers (D&O) insurance
carriers agreed to pay $29 million to a third party escrow agent on behalf of
Nicor and its insured directors and officers to be used to satisfy Nicor
directors' and officers' liabilities and expenses associated with claims
asserted against them in a securities class action, a related shareholder
derivative lawsuit and related matters, with any remaining balance to be paid
to Nicor. Nicor's financial statements do not reflect any benefit related to
such potential future payment because the amount of funds held in escrow
ultimately attributable to Nicor, if any, is not presently determinable.
Nicor also continues to seek coverage from its other D&O insurance carrier
for additional coverage in connection with the same matters but is unable to
predict the outcome of this matter and therefore no additional potential
insurance recoveries have been reflected in the financial statements.
In addition to the matters set forth above, the company is involved in legal
or administrative proceedings before various courts and agencies with respect
to general claims, rates, taxes, environmental, gas costs prudence reviews
and other matters. Although unable to determine the ultimate outcome of
these other contingencies, management believes that it has recorded
appropriate liabilities when reasonably estimable.
Nicor Inc. Page 19
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Notes to the Consolidated Financial Statements (Unaudited) (concluded)
15. SUBSEQUENT EVENTS
Rate Proceeding. On November 4, 2004, Nicor Gas filed with the ICC for an
overall increase in rates of approximately $83.3 million (or about 16.5
percent of base rates revenue). The company is seeking a rate of return on
original-cost rate base of 9.34 percent, which reflects an 11.37 percent cost
of common equity. The requested rate increase is needed to recover higher
operating costs and increased capital investments. Nicor Gas has not raised
base rates since 1996. The ICC normally has 11 months to complete its review
of the filing and to issue an order.
The American Jobs Creation Act of 2004. On October 22, 2004, the American
Jobs Creation Act of 2004 (the Act) was enacted. Certain provisions of the
Act may impact income taxes related to Tropical Shipping's foreign earnings.
One provision provides that a portion of a foreign subsidiary's income would
no longer be subject to federal taxation, beginning in 2005, to the extent
such earnings are retained by the foreign subsidiary. Another provision of
the Act allows a portion of cumulative undistributed foreign earnings to be
repatriated to the United States in 2004 or 2005 at an effective federal
income tax rate of 5.25 percent. Presently Nicor has approximately $47
million in deferred income tax liabilities, based on an effective federal
income tax rate of 35 percent, associated with foreign earnings it may
repatriate. In addition, Nicor presently has not recorded deferred income
taxes on approximately $25 million of cumulative undistributed foreign
earnings that it believes to be indefinitely reinvested offshore. Nicor is
currently assessing the impact of these provisions. These financial
statements do not reflect any impact of the Act. Any future adjustments to
income tax expense that may result from the Act will depend on the amount, if
any, of foreign earnings that are repatriated or expected to be repatriated
to the United States. Such adjustments could be material to the results of
operations in the period recorded.
Nicor Inc. Page 20
- -------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion should be read in conjunction with the Management's
Discussion and Analysis section of the Nicor Inc. (Nicor) 2003 Annual Report
on Form 10-K/A (Amendment No. 1). Results for the interim periods presented
are not necessarily indicative of the results to be expected for the full
fiscal year due to seasonal and other factors.
SUMMARY
Nicor's 2004 year-to-date earnings were significantly impacted by a $38.5
million pretax litigation charge recorded in the first quarter of 2004
related to an agreement in April 2004 to settle securities class actions.
The charge reduced net income by $23.2 million and diluted earnings per share
by $.52. More information about this agreement is presented within the Notes
to the Consolidated Financial Statements - Note 14 Contingencies - Securities
Class Actions.
In addition, the 2004 third-quarter and year-to-date periods were impacted in
part by lower results at Nicor's wholesale natural gas marketing business,
Nicor Enerchange, reflecting the variability in earnings caused by the
required accounting treatment to adjust derivative contracts, but not natural
gas inventory or other energy-related contracts, to estimated fair value.
The third quarter included an unfavorable fair value adjustment of
approximately $8 million related to derivative contracts in place at
September 30, 2004.
The following table provides a comparison of Nicor's results as reported for
the third-quarter and year-to-date periods of 2004 and 2003 (in millions,
except per share data):
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
2004 2003 2004 2003
-------- -------- -------- -------
Income (loss) before cumulative
effect of accounting change $ (11.6) $ .5 $ 27.5 $ 74.7
Net income (loss) (11.6) .5 27.5 70.2
Diluted earnings (loss) per average
share of common stock:
Before cumulative effect of
accounting change (.26) .01 .62 1.69
After cumulative effect of
accounting change (.26) .01 .62 1.59
Third quarter 2004 net income and diluted earnings per share decreased
compared to the reported 2003 amounts due primarily to lower operating
results for Nicor Enerchange, lower operating results in the gas distribution
segment and an absence of recoveries related to Nicor Energy that occurred in
2003. The investment in Nicor Energy was written off in 2002. Partially
offsetting these negative factors were higher operating results at Nicor
Solutions and in the shipping segment.
Net income and diluted earnings per share for the 2004 year-to-date period
decreased compared to 2003 due primarily to the first-quarter 2004 litigation
charge, lower operating results in the gas distribution segment, lower
operating results for Nicor Enerchange and an absence of recoveries related
to Nicor Energy that occurred in 2003. Partially offsetting these negative
factors were higher operating results at
Nicor Inc. Page 21
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Nicor Solutions and in the shipping segment. In addition, the 2003
year-to-date period was negatively impacted by the first-quarter 2003 $4.5
million after-tax cumulative effect loss from an accounting change recorded
for Nicor Enerchange.
Operating income (loss) by major business segment is presented below (in
millions):
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
2004 2003 2004 2003
-------- -------- -------- -------
Gas distribution $ (2.6) $ 4.4 $ 86.7 $ 115.8
Shipping 5.1 3.0 16.2 13.6
Other energy ventures (9.5) (.7) (1.2) 2.3
Corporate and eliminations (2.6) (2.5) (43.9) (7.3)
-------- -------- -------- -------
$ (9.6) $ 4.2 $ 57.8 $ 124.4
======== ======== ======== =======
The following summarizes operating income (loss) comparisons for major
business segments:
o Gas distribution operating loss of $2.6 million in the third quarter of
2004 compared to operating income of $4.4 million in the 2003 third
quarter was due primarily to higher operating and maintenance expenses
($3.8 million), lower natural gas deliveries due to warmer weather
(approximately $2.1 million), a reduction in revenue related to the
performance-based rates (PBR) plan ($1.8 million) and higher
depreciation expense ($1.6 million). These negative factors were
partially offset by an increase in natural gas deliveries unrelated to
weather (approximately $2 million).
The $29.1 million decrease in operating income for the nine-month period
was due primarily to decreased insurance recoveries relating to the
mercury inspection and repair program ($17.6 million, net of recovery
costs), higher operating and maintenance expenses ($9.4 million), the
negative impact of warmer weather than in 2003 (approximately $5.7
million) and higher depreciation expense ($4.2 million). These negative
factors were partially offset by an increase in property sale gains
($5.1 million) and an increase in natural gas deliveries unrelated to
weather (approximately $3 million).
o Shipping operating income increased $2.1 million for the quarter ended
September 30, 2004, compared to the year-earlier period due primarily to
the impact of higher rates, offset in part by the impact on costs of
three hurricanes. For the nine-month period, operating income increased
$2.6 million due primarily to the impact of higher volumes, partially
offset by lower charter income.
o Operating loss at Nicor's other energy ventures increased $8.8 million
in the third quarter of 2004 compared to the 2003 third quarter due
primarily to the increase in the operating loss at Nicor Enerchange
($11.8 million), partially offset by improved operating results at Nicor
Solutions ($3.4 million). The $3.5 million decrease in operating income
for the nine-month period was due primarily to lower operating results
at Nicor Enerchange ($8.8 million), partially offset by improved
operating results at Nicor Solutions ($4.6 million) and the absence of
prior-year losses from former business activities ($1.4 million). A
significant portion of the decrease in operating
Nicor Inc. Page 22
- -------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
results at Nicor Enerchange is due to the impact of the required
accounting associated with the company's storage activities. Nicor
Enerchange purchases and holds gas in storage to earn a profit margin
from its ultimate sale in the future. Nicor Enerchange uses derivatives
to mitigate commodity price risk in order to substantially lock-in the
profit margin that will ultimately be realized. However, gas stored in
inventory is accounted for at the lower of average cost or market; the
derivatives used to reduce the risk associated with a change in the
value of the inventory are accounted for at fair value, with changes in
fair value recorded in operating results in the period of change. As a
result, earnings are subject to volatility as the market price of
derivatives change, even when the underlying hedged value of the
inventory is unchanged. The volatility resulting from this accounting
can be significant from period to period, as it was in the third quarter
of 2004.
o Corporate and eliminations operating loss was essentially flat in the
third quarter of 2004 compared to the 2003 third quarter. The $36.6
million increase in corporate and eliminations operating loss for the
nine-month period is due to the first-quarter 2004 litigation charge
($38.5 million) related to the securities class actions.
These factors are discussed in more detail in the Results of Operations
section.
RESULTS OF OPERATIONS
The following discussion provides additional information about the major
items impacting Nicor's results of operations.
Operating revenues. Operating revenues by major business segment are
presented below (in millions):
Three months ended Nine months ended
September 30 September 30
------------------- --------------------
2004 2003 2004 2003
-------- -------- --------- ---------
Gas distribution $ 225.1 $ 223.4 $ 1,598.6 $ 1,699.6
Shipping 73.2 63.8 213.3 197.4
Other energy ventures 9.7 15.1 94.9 53.7
Corporate and eliminations (8.1) (7.5) (61.7) (31.8)
-------- -------- --------- ---------
$ 299.9 $ 294.8 $ 1,845.1 $ 1,918.9
======== ======== ========= =========
Gas distribution revenues are impacted by changes in natural gas costs, which
are passed directly through to customers without markup subject to Illinois
Commerce Commission (ICC) review. For the third quarter of 2004 compared
with a year ago, revenues increased slightly due primarily to higher natural
gas prices ($10 million), higher revenue taxes ($3 million) and an increase
in natural gas deliveries unrelated to weather (approximately $2 million).
These positive items were partially offset by the effect of warmer weather
than in 2003 (approximately $12 million). For the year-to-date period of
2004 compared with a year ago, revenues decreased $101 million due primarily
to the effect of warmer weather than in 2003 (approximately $93 million), an
increase in customers utilizing only transportation services (approximately
$21 million), decreased recoveries of environmental cleanup costs ($10
million) and lower natural gas prices ($9 million). These negative factors
were partially offset by higher revenue taxes ($18 million) and an increase
in natural gas deliveries unrelated to weather (approximately $13 million).
Nicor Inc. Page 23
- -------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Third quarter 2004 shipping revenues increased $9.4 million due to higher
volumes shipped ($6.2 million) and higher average rates ($3.9 million). The
$15.9 million increase for the nine-month period related primarily to higher
volumes shipped ($18 million), partially offset by decreased charter activity
($1.9 million). Higher volumes reflect increased tourism and construction
activity in the Caribbean region.
Revenues in the third quarter of 2004 for other energy ventures decreased
$5.4 million due to lower revenues from Nicor Enerchange ($12.1 million),
primarily as a result of the previously discussed fair value adjustment on
derivative contracts ($8 million). This decrease was partially offset by
higher revenues at Nicor Solutions ($5 million) and higher revenues at Nicor
Services ($1.7 million). For the nine-month period, the $41.2 million
increase in revenues for other energy ventures resulted primarily from higher
revenues at Nicor Solutions ($43.5 million) and Nicor Services ($5.9
million), which was partially offset by lower revenues at Nicor Enerchange
($7.7 million).
Corporate and eliminations reflects primarily the elimination of intersegment
revenues, as described in the Notes to the Consolidated Financial Statements
- - Note 9 Business Segment Information.
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, and yet they have virtually no direct impact on gas distribution
operating income. Therefore, Nicor Gas excludes these items in evaluating
performance.
A reconciliation of gas distribution revenues and margin follows (in
millions):
Three months ended Nine months ended
September 30 September 30
------------------ ----------------------
2004 2003 2004 2003
-------- -------- ---------- ----------
Gas distribution revenues $ 225.1 $ 223.4 $ 1,598.6 $ 1,699.6
Cost of gas (118.4) (117.6) (1,111.1) (1,221.5)
Revenue tax expense (12.6) (10.7) (106.6) (96.0)
-------- -------- ---------- ----------
Gas distribution margin $ 94.1 $ 95.1 $ 380.9 $ 382.1
======== ======== ========== ==========
For the quarter, gas distribution margin decreased $1 million due primarily
to lower natural gas deliveries due to warmer weather (approximately $2.1
million) and the adjustment related to the PBR plan recorded in the third
quarter of 2004 ($1.8 million). These negative factors were partially offset
by increased natural gas deliveries unrelated to weather (approximately $2
million) and larger contributions from the Chicago Hub ($.7 million).
For the nine-month period, gas distribution margin decreased $1.2 million due
primarily to the negative impact of warmer weather than in 2003
(approximately $5.7 million) and the adjustment related to the PBR plan
recorded in the third quarter of 2004 ($1.8 million). These negative factors
were partially offset by increased natural gas deliveries unrelated to
weather (approximately $3 million), larger contributions from the Chicago Hub
($1.2 million), higher revenue tax administration fees ($.7 million) and
higher average rates charged during the period ($.7 million).
Nicor Inc. Page 24
- -------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Gas distribution operating and maintenance expense. Gas distribution
operating and maintenance expense increased $3.9 million to $55.3 million in
the third quarter of 2004 from $51.4 million in the 2003 third quarter due
primarily to an increase to the estimated liability for legal defense costs
related to the PBR plan review ($2.4 million), an adjustment related to
customer reimbursements ($1.1 million) and higher payroll costs ($1
million). These negative factors were partially offset by lower bad debt
expense for the quarter as compared to 2003 ($2.4 million).
For the year-to-date periods, gas distribution operating and maintenance
expense increased $9.4 million to $173.9 million in 2004 from $164.5 million
in 2003. This increase was due to an increase in legal defense costs related
to the PBR plan review ($5.4 million), higher payroll costs ($3.2 million),
higher bad debt expense ($2.4 million) and adjustments related to customer
reimbursements ($1.8 million). These negative factors were partially offset
by higher pension credits ($2.3 million) and the absence of expenses related
to a 2003 service outage ($2 million).
Mercury-related costs (recoveries), net. In the second quarter of 2003,
Nicor Gas recovered approximately $17.4 million of mercury-related costs, net
of legal fees, from insurers and independent contractors. Recoveries since
then have been insignificant.
Property sale gains. In the second quarter of 2004, Nicor Gas realized a
$5.5 million gain on the sale of land.
Shipping operating expenses. Increases in the shipping segment's third
quarter and year-to-date 2004 operating expenses, compared to the
corresponding 2003 periods, are due primarily to the higher volumes shipped.
Year-to-date operating expenses of $197.1 million, which included higher fuel
costs and hurricane costs, increased by $13.3 million from last year. The
2003 year-to-date expenses also were reduced by a $1.3 million vessel gain.
Other energy ventures operating expenses. A $3.4 million increase in third
quarter 2004 operating expenses compared to 2003 was due primarily to higher
expenses at Nicor Services ($2.2 million) and Nicor Solutions ($1.6
million). A $44.7 million increase in 2004 year-to-date operating expenses
compared to 2003 was due primarily to higher expenses at Nicor Solutions
($38.9 million) and Nicor Services ($6.7 million). These higher expenses were
largely associated with increased revenues.
Litigation charge. The year-to-date 2004 litigation charge ($38.5 million)
relates to an agreement to settle the securities class actions. More
information about this agreement is presented within the Notes to the
Consolidated Financial Statements - Note 14 Contingencies - Securities Class
Actions.
Other corporate operating expenses and eliminations. Other corporate
operating expenses were $2.7 million and $2.3 million in the third quarter of
2004 and 2003, respectively. Intercompany eliminations aggregated $8.2
million and $7.3 million in the third quarter of 2004 and 2003, respectively,
related primarily to utility-bill management products.
For the nine-month periods, other corporate operating expenses were $4.4
million and $7 million in 2004 and 2003, respectively. The decrease is
attributable primarily to lower legal expenses ($2.6 million). Intercompany
eliminations aggregated $60.7 million and $31.5 million in the 2004 and 2003
year-to-date periods, respectively, related primarily to utility-bill
management products.
Nicor Inc. Page 25
- -------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Equity investment income (loss), net. Net equity investment income decreased
$3.7 million and $8.9 million in the three-month and nine-month periods ended
September 30, 2004, respectively, compared with the corresponding 2003
periods. The decreases were due primarily to the absence of cash recoveries
related to Nicor Energy that occurred in the third quarter of 2003 ($3.3
million) and in the nine months ended September 30, 2003 ($8.9 million).
Information related to this investment is more fully described in the Notes
to the Consolidated Financial Statements - Note 14 Contingencies - Nicor
Energy.
Interest expense. Interest expense increased $2 million and $2.5 million for
the third quarter and year-to-date periods ended September 30, 2004 compared
to the corresponding 2003 periods. The increases were due to the impact of
higher effective interest rates and higher estimated interest on income tax
matters, partially offset by the impact of lower average borrowing levels.
Income taxes. The company's effective income tax rate was 38 percent and 18
percent for the three and nine months ended September 30, 2004, respectively,
compared to 13 percent and 33 percent for the corresponding 2003 periods.
The increase for the third quarter 2004 was due principally to a combination
of a pretax loss for the third quarter of 2004 and lower projected annual
income.
For the year-to-date period, the decline in the effective income tax rate was
primarily a result of recording an income tax benefit on the first-quarter
securities class action litigation charge at the marginal income tax rate of
about 40 percent. As a result, the 18 percent effective income tax rate for
the nine months ended September 30, 2004, is lower than the estimated rate
for the full year of about 25 percent. Lower projected income for 2004
(which typically causes a lower effective income tax rate since permanent
differences and tax credits are a larger share of pretax income) and a
favorable IRS settlement in the second quarter of 2004 also contributed to
the decline in the year-to-date effective income tax rate. The change in the
effective income tax rate reflected in the 2004 third quarter reduced income
tax expense by $1.5 million.
Cumulative effect of accounting change. The cumulative effect of a January
1, 2003 required accounting change relates to the application of accrual
accounting, rather than fair value accounting, to gas in storage and certain
energy-related contracts, such as storage and transportation contracts, at
Nicor Enerchange.
Nicor Inc. Page 26
- -------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Gas Distribution Statistics
Three months ended Nine months ended
September 30 September 30
------------------ --------------------
2004 2003 2004 2003
-------- -------- --------- ---------
Operating revenues (millions)
Sales
Residential $ 143.0 $ 142.0 $ 1,079.2 $ 1,158.2
Commercial 30.6 31.2 236.9 256.2
Industrial 3.6 4.3 32.1 37.7
-------- -------- --------- ---------
177.2 177.5 1,348.2 1,452.1
-------- -------- --------- ---------
Transportation
Residential 4.1 3.9 17.2 15.7
Commercial 11.8 11.0 50.7 51.5
Industrial 10.9 11.1 31.2 32.5
Other 1.8 1.3 9.2 10.4
-------- -------- --------- ---------
28.6 27.3 108.3 110.1
-------- -------- --------- ---------
Other revenues
Revenue taxes 13.4 11.4 109.5 98.3
Environmental cost recovery 2.1 2.4 11.9 22.1
Chicago Hub 1.7 1.1 5.8 4.6
Performance-based rate plan (1.8) - (1.8) -
Weather insurance - - - (3.5)
Other 3.9 3.7 16.7 15.9
-------- -------- --------- ---------
19.3 18.6 142.1 137.4
-------- -------- --------- ---------
$ 225.1 $ 223.4 $ 1,598.6 $ 1,699.6
======== ======== ========= =========
Deliveries (Bcf)
Sales
Residential 13.4 14.3 138.2 150.3
Commercial 3.1 3.5 30.5 33.2
Industrial .3 .5 4.3 5.1
-------- -------- --------- ---------
16.8 18.3 173.0 188.6
-------- -------- --------- ---------
Transportation
Residential 1.0 1.0 11.9 11.2
Commercial 9.2 8.7 58.9 61.8
Industrial 25.2 27.8 88.3 89.8
-------- -------- --------- ---------
35.4 37.5 159.1 162.8
-------- -------- --------- ---------
52.2 55.8 332.1 351.4
======== ======== ========= =========
Customers at end of period (thousands)
Sales
Residential 1,765.6 1,726.9
Commercial 114.3 111.4
Industrial 7.2 7.0
-------- --------
1,887.1 1,845.3
-------- --------
Transportation
Residential 134.3 138.9
Commercial 58.4 58.3
Industrial 6.0 6.3
-------- --------
198.7 203.5
-------- --------
2,085.8 2,048.8
======== ========
Other statistics
Degree days 51 97 3,672 4,094
Colder (warmer) than normal (28)% 37% (4)% 7%
Average gas cost per Mcf sold $ 6.87 $ 6.31 $ 6.35 $ 6.41
Nicor Inc. Page 27
- -------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Shipping Statistics
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
2004 2003 2004 2003
-------- -------- -------- --------
TEUs shipped (thousands) 46.7 42.5 139.2 127.4
Revenue per TEU $ 1,567 $ 1,484 $ 1,533 $ 1,534
Ports served 24 24
Vessels operated 17 16
FINANCIAL CONDITION AND LIQUIDITY
Operating cash flows. 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, and natural gas purchasing and storage
practices. The company relies on short-term financing to meet seasonal
increases in working capital needs. Cash requirements generally increase
over the third and fourth quarters due to increases in natural gas purchases,
gas in storage and accounts receivable. Over the first and second quarters,
positive cash flow generally results from the sale of gas in storage and the
collection of accounts receivable. This cash is typically used to
significantly reduce short-term debt during the second quarter. As discussed
in the 2003 Form 10-K/A (Amendment No. 1), the 2003 year-end gas in storage
balance was higher than a year earlier due to an increased quantity of owned
natural gas.
In the fourth quarter of 2003, Nicor received an income tax refund of
approximately $100 million attributable to a tax loss carryback associated
with a change in tax accounting methods, subject to future Internal Revenue
Service review and approval. Decisions by taxing authorities may
significantly impact the company's cash flow.
Investing activities. In the second quarter of 2004, one of Nicor's
Directors and Officers insurance carriers paid $29 million into an escrow
account for use in settling outstanding shareholder litigation. More
information about this agreement is presented within the Notes to the
Consolidated Financial Statements - Note 14 Contingencies - Other.
In the second quarter of 2004, Nicor Gas realized net proceeds of $7.2
million on the sale of land.
In the second quarter of 2004, Tropical Shipping sold $15 million of
short-term investments and invested the proceeds in available-for-sale
marketable securities. Additional information about these investments is
presented in the Notes to the Consolidated Financial Statements - Note 1
Accounting Policies - Marketable Securities.
Financing activities. In September 2004, Nicor Inc. and Nicor Gas
established two new revolving credit facilities with major domestic and
foreign banks. These new facilities consist of a $500 million, 3-year
revolver, expiring September 2007, available to Nicor Inc. and Nicor Gas, and
a $400 million, 210-day seasonal revolver, expiring in April 2005, available
to Nicor Gas. The company had $390 million of commercial paper borrowings
outstanding at September 30, 2004. The company is in compliance with
Nicor Inc. Page 28
- -------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
the covenants relating to its credit facilities at September 30, 2004. The
company expects that funding from commercial paper and related backup credit
facilities will continue to be available in the foreseeable future and
sufficient to meet estimated cash requirements.
On April 15, 2004, Nicor announced a quarterly dividend on common stock of
46.5 cents per share payable August 1, 2004. On July 15, 2004, Nicor
announced a quarterly dividend on common stock of 46.5 cents per share
payable November 1, 2004.
On June 29, 2004, Fitch Ratings (Fitch) downgraded Nicor Inc.'s long-term
ratings to A, Nicor Gas' First Mortgage Bonds from AA to AA-, and affirmed
Nicor Inc.'s and Nicor Gas' commercial paper at F1 and F1+, respectively.
Fitch revised the ratings outlook for the company to Stable from Negative.
Contractual obligations. In addition to the long-term debt obligations
reported in the company's 2003 Annual Report on Form 10-K/A (Amendment No.
1), the company was obligated to make related interest payments as of
December 31, 2003 as follows (in millions):
Payments due by period
----------------------------------------------
Less More
Than 1 1-3 3-5 than 5
Total Year years years years
-------- ------- ------- -------- --------
Fixed interest on
long-term debt $ 432.1 $ 30.5 $ 60.8 $ 53.7 $ 287.1
CRITICAL ACCOUNTING ESTIMATES
See Management's Discussion and Analysis - Critical Accounting Estimates in
the 2003 Annual Report on Form 10-K/A (Amendment No. 1) for a detailed
discussion of the company's critical accounting policies.
FACTORS THAT MAY AFFECT BUSINESS PERFORMANCE
Rate Proceeding. On November 4, 2004, Nicor Gas filed with the ICC for an
overall increase in rates of approximately $83.3 million (or about 16.5
percent of base rates revenue). The company is seeking a rate of return on
original-cost rate base of 9.34 percent, which reflects an 11.37 percent cost
of common equity. As regulated by the ICC, base rates are designed to allow
the company an opportunity to recover its costs and to earn a fair return for
its investors. The requested rate increase is needed to recover higher
operating costs and increased capital investments. Nicor Gas has not raised
base rates since 1996. The ICC normally has 11 months to complete its review
of the filing and to issue an order.
The American Jobs Creation Act of 2004. On October 22, 2004, the American
Jobs Creation Act of 2004 (the Act) was enacted. Certain provisions of the
Act may impact income taxes related to Tropical Shipping's foreign earnings.
One provision provides that a portion of a foreign subsidiary's income would
no longer be subject to federal taxation, beginning in 2005, to the extent
such earnings are retained by the foreign subsidiary. Another provision of
the Act allows a portion of cumulative undistributed foreign earnings to be
repatriated to the United States in 2004 or 2005 at an effective federal
income tax rate of 5.25 percent. Presently Nicor has approximately $47
million in deferred income tax liabilities,
Nicor Inc. Page 29
- -------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
based on an effective federal income tax rate of 35 percent, associated with
foreign earnings it may repatriate. In addition, Nicor presently has not
recorded deferred income taxes on approximately $25 million of cumulative
undistributed foreign earnings that it believes to be indefinitely reinvested
offshore. Nicor is currently assessing the impact of these provisions.
These financial statements do not reflect any impact of the Act. Any future
adjustments to income tax expense that may result from the Act will depend on
the amount, if any, of foreign earnings that are repatriated or expected to
be repatriated to the United States. Such adjustments could be material to
the results of operations in the period recorded.
Weather. Natural gas deliveries are temperature-sensitive and seasonal since
about one-half of all deliveries are used for space heating. Typically,
about 70 percent of 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.
In the first quarter of 2003, Nicor Gas purchased earnings protection against
the impact of significantly warmer-than-normal or colder-than-normal
weather. No such protection has been in effect since the first quarter of
2003. It is estimated that a 100-degree-day variation from normal weather
affects Nicor's gas-distribution earnings by about 2-1/2 cents per share.
Since mid-2003 Nicor bears the partially offsetting weather risk associated
with the utility-bill management products marketed by Nicor Solutions. The
amount of this offset will vary depending upon the time of year, weather
patterns, the number of customers for these products and the market price for
natural gas.
Gas distribution operating and maintenance expenses. Operating and
maintenance expenses at Nicor Gas have increased in recent years, and it is
expected that they will continue to rise in the near future.
Gas distribution labor negotiations. On April 7, 2004, Nicor Gas announced
that the International Brotherhood of Electrical Workers Local 19 ratified a
new five-year labor agreement which expires on February 28, 2009. This
agreement covers approximately 1,500 physical and clerical employees of Nicor
Gas.
Property sales. Property sale gains and losses vary from year-to-year
depending upon property sales activity, and the company continues to assess
its ownership of real estate holdings.
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.
Performance-based rate 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 is
currently under Illinois Commerce Commission (ICC) review.
Nicor Inc. Page 30
- -------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
There are allegations that the company acted improperly in connection with
the PBR plan, and the ICC and others are reviewing these allegations. On
June 27, 2002 the Citizens Utility Board (CUB) filed a motion to reopen the
record in the ICC's proceedings to review the PBR plan (the ICC Proceedings).
As a result of the motion to reopen, Nicor Gas, the Cook County State's
Attorney Office (CCSAO), the staff of the ICC and CUB entered into a
stipulation providing for additional discovery. The Illinois Attorney
General's Office has also intervened in this matter. In addition, the
Illinois Attorney General's Office 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. Parties
who were plaintiffs in a dismissed class action proceeding against the company
could potentially intervene in these proceedings. 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. The findings of the Report include:
o Certain transactions increased customer costs in the aggregate amount of
approximately $15 million.
o No improper Nicor affiliated-party transactions or improper hedging
activities were identified.
o Inadvertent accounting errors occurred, sometimes to the benefit of
customers and sometimes to the benefit of Nicor Gas.
o No criminal activity or fraud was identified.
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 the third quarter of 2004 increasing the recorded liability
to $26.6 million. In addition, 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. The
net of these items and interest income on certain components results in a $1.0
million reimbursement the company is seeking as of September 30, 2004, pending
resolution of the proceedings discussed below. The company took steps to
correct the weaknesses and deficiencies identified in the detailed study of the
adequacy of internal controls.
Pursuant to the agreement of all parties, including the company, the ICC
re-opened the 1999 and 2000 purchased gas adjustment filings for review of
certain transactions related to the PBR plan and consolidated the reviews of
the 1999-2002 purchased gas adjustment filings with the PBR plan review.
On February 5, 2003, the CCSAO and CUB filed a motion for $27 million in
sanctions against the company in the ICC Proceedings. In that motion, CCSAO
and CUB alleged that Nicor Gas' responses to certain CUB data requests were
false. Also on February 5, 2003, CUB stated in a press release that, in
addition to $27 million in sanctions, it would seek additional refunds to
consumers. On March 5, 2003,
Nicor Inc. Page 31
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
the ICC staff filed a response brief in support of CUB's motion for sanctions.
On May 1, 2003, the Administrative Law Judges issued a ruling denying CUB and
CCSAO's motion for sanctions. CUB has filed an appeal of the motion for
sanctions with the ICC, and the ICC has indicated that it will not rule on the
appeal until the final disposition of the ICC proceedings. It is not possible
to determine how the ICC will resolve the claims of CCSAO, CUB or other parties
to the ICC Proceedings.
In November 2003, the ICC staff, CUB, CCSAO and the Illinois Attorney
General's Office (IAGO) filed their respective direct testimony in the ICC
Proceedings. The ICC staff is seeking refunds to customers of approximately
$108 million and CUB and CCSAO were jointly seeking refunds to customers of
approximately $143 million. The IAGO direct testimony alleges adjustments in
a range from $145 million to $190 million. The IAGO testimony as filed is
presently unclear as to the amount which IAGO seeks to have refunded to
customers. On February 27, 2004 the above referenced intervenors filed their
rebuttal testimony in the ICC Proceedings. In such rebuttal testimony, CUB
and CCSAO amended the alleged amount to be refunded to customers from
approximately $143 million to $190 million. Nicor Gas filed rebuttal
testimony in January 2004, which is consistent with the findings of the
special committee Report. Nicor Gas seeks a reimbursement of approximately
$1.0 million as referenced above. The parties to the ICC Proceedings have
agreed to a stay of the evidentiary hearings on this matter in order to
undertake additional third party discovery from Entergy-Koch Trading, LP
(EKT), a natural gas, storage and transportation trader and consultant with
whom Nicor did business under the PBR plan.
During the course of the SEC investigation discussed below, the company
became aware of additional information relating to the activities of
individuals affecting the PBR plan for the period from 1999 through 2002,
including information consisting of third party documents and recordings of
telephone conversations from EKT. The company continues to obtain access to
and review this information. Review of additional information completed in
the third quarter of 2004 resulted in the $1.8 million adjustment to the
previously recorded liability referenced above.
Although the Report of the special committee's counsel did not find that
there was criminal activity or fraud, a review of this additional information
(which was not available to the independent counsel who prepared the Report)
and re-interviews of certain Nicor Gas personnel indicates that certain
former Nicor Gas personnel may have engaged in potentially fraudulent conduct
regarding the PBR plan in violation of company policy, and in possible
violation of SEC rules and applicable law. Further, certain former Nicor Gas
personnel also may have attempted to conceal their conduct in connection with
an ICC review of the PBR plan. The company continues to cooperate with the
SEC, the U.S. Attorney's office and the ICC on this matter and to review and
produce additional documents as requested by these agencies. The company
also will review any third party information the company obtains. The
company terminated four employees in connection with this matter in the third
quarter of 2004.
Nicor is unable to predict the outcome of any of the foregoing reviews or the
company's potential exposure thereunder. Because the PBR plan and historical
gas costs are still under ICC review, the final outcome could be materially
different than the amounts reflected in the company's financial statements as
of September 30, 2004.
Nicor Energy. Significant developments occurred in 2002 and 2003 relating to
Nicor's 50-percent interest in Nicor Energy. Information about these
developments is presented within the Notes to the Consolidated Financial
Statements - Note 14 Contingencies - Nicor Energy.
Nicor Inc. Page 32
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
On December 10, 2003, the United States Attorney for the Northern District of
Illinois indicted three former employees of Nicor Energy and an outside
lawyer for Nicor Energy. The indictments alleged that the defendants
fraudulently deprived Nicor Energy of their honest services and caused a loss
to investors in Nicor Inc. and Dynegy Inc. During the time period covered by
the indictments, Nicor Energy was a stand alone entity with its own
management and was operated independently from Nicor Inc. and Nicor Gas.
None of the individuals indicted are employees of Nicor Inc. or Nicor Gas nor
were they at the time of the charged conduct. The three former employees of
Nicor Energy have pled guilty to certain charges. Separately, on December
10, 2003, the United States Securities and Exchange Commission (SEC) filed
its own civil enforcement action against the same three former employees and
one additional former employee of Nicor Energy. While Nicor is unable to
predict the final outcome of these matters, the resolution of such matters is
not expected to have a material adverse impact on the company's financial
condition or results of operations.
SEC and U.S. Attorney Inquiries. In 2002, the staff of the SEC informed
Nicor and Nicor Energy that the SEC is conducting a formal inquiry regarding
both the PBR plan and Nicor Energy. A representative of the Office of the
United States Attorney for the Northern District of Illinois has notified
Nicor that that office is conducting an inquiry on the same matters that the
SEC is investigating, and a grand jury is also reviewing these matters. In
April 2004, Nicor was advised by the SEC Division of Enforcement that it
intended to recommend to the SEC that it bring a civil injunctive action
against Nicor, alleging that Nicor violated Sections 17(a) of the Securities
Act of 1933 and Sections 10(b) and 13(a) of the Securities Exchange Act of
1934 and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. The SEC may also
seek injunctive relief, disgorgement and civil penalties. The SEC staff
invited Nicor to make a formal response (known as a Wells Submission) with
respect to the proposed recommendation. In June 2004, Nicor filed its Wells
Submission with the SEC. In addition, in connection with the SEC's
invitation to the company to make a Wells Submission, the SEC informed the
company of additional sources of information relating to activities affecting
the PBR plan, the status of which is addressed in detail in the
Performance-Based Rate (PBR) Plan section set forth above. In August 2004,
Nicor withdrew its Wells Submission in light of its continuing review of the
additional sources of newly available information referenced above. Nicor
continues in its efforts to resolve this matter with the SEC and has
requested that the SEC allow Nicor to file an updated Wells Submission if
necessary. Nicor is unable to predict the outcome of these inquiries or
Nicor's potential exposure related thereto and has not recorded a liability
associated with the outcome of these contingencies.
Securities Class Actions. Nicor and certain of its executives were
defendants in a consolidated class action lawsuit. Information about the
settlement of this action is presented within the Notes to the Consolidated
Financial Statements - Note 14 Contingencies - Securities Class Actions.
Shareholder Derivative Lawsuits. Certain Nicor executives and all members of
its Board of Directors are defendants in a consolidated derivative lawsuit.
Further information about this lawsuit is presented within the Notes to the
Consolidated Financial Statements - Note 14 Contingencies - Shareholder
Derivative Lawsuits.
Mercury. Future operating results may be impacted by adjustments to the
company's estimated mercury liability or by related recoveries. Additional
information about mercury contingencies is presented in the Notes to the
Consolidated Financial Statements - Note 14 Contingencies - Mercury.
Nicor Inc. Page 33
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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 the Notes to
the Consolidated Financial Statements - Note 14 Contingencies - Manufactured
Gas Plant Sites.
Fixed Bill Service. Nicor Energy Services Company is a defendant in a
purported class action. Information about this lawsuit is presented within
the Notes to the Consolidated Financial Statements - Note 14 Contingencies -
Fixed Bill Service.
Horizon Pipeline Lien. Horizon Pipeline, LLC was a party to a lien action
relating to the construction of the Horizon Pipeline. Information about the
settlement of this action is presented within the Notes to the Consolidated
Financial Statements - Note 14 Contingencies - Horizon Pipeline Lien.
FERC Stipulation. Nicor Gas entered into a settlement with the Federal
Energy Regulatory Commission (FERC). Further information about this
settlement is presented within the Notes to the Consolidated Financial
Statements - Note 14 Contingencies - FERC Stipulation.
Other contingencies. The company is involved in legal or administrative
proceedings before various courts and agencies with respect to general
claims, rates, taxes, environmental, gas costs prudence reviews and other
matters. See the Notes to the Consolidated Financial Statements - Note 14
Contingencies.
On April 27, 2004 one of Nicor's Directors and Officers (D&O) insurance
carriers agreed to pay $29 million to a third party escrow agent on behalf of
Nicor and its insured directors and officers to be used to satisfy Nicor
directors' and officers' liabilities and expenses associated with claims
asserted against them in a securities class action, a shareholder derivative
lawsuit and related matters, with any remaining balance to be paid to Nicor.
Nicor's financial statements do not reflect any benefit related to such future
payment because the amount of funds to be held in escrow ultimately
attributable to Nicor, if any, is not presently determinable. Nicor also
continues to seek coverage from its other D&O insurance carrier for additional
coverage in connection with the same matters but is unable to predict the
outcome of this matter and therefore no potential insurance recoveries have
been reflected in the financial statements.
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. There has been
no material change in the company's exposure to market risk since the filing
of the 2003 Annual Report on Form 10-K/A (Amendment No. 1).
Energy trading activities. At September 30, 2004, Nicor Enerchange, Nicor's
wholesale natural gas marketing business, held derivative contracts with the
following asset (liability) fair values (in millions):
Maturity
---------------------------
Total Less than 1 to 3 3 to 5
Source of Fair Value Fair Value 1 Year Years Years
- ---------------------------------- ---------- --------- ------- -------
Prices actively quoted $ (5.5) $ (4.6) $ (.9) $ -
Prices based on pricing models - - - -
---------- --------- ------- -------
Total $ (5.5) $ (4.6) $ (.9) $ -
========== ========= ======= =======
Nicor Inc. Page 34
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (concluded)
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," 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 SEC and U.S. Attorney
inquiries, 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 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; Caribbean tourism; 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
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 3. Quantitative and Qualitative Disclosures about Market Risk
For disclosures about market risk, see Management's Discussion and Analysis -
Market Risk, which is incorporated herein by reference.
Item 4. Controls and Procedures
The company carried out an evaluation under the supervision and with the
participation of the company's management, including its Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the company's disclosure controls and procedures as of the end
of the period covered by this Quarterly Report on Form 10-Q (the
"Evaluation").
In designing and evaluating the disclosure controls and procedures,
management recognizes that any disclosure controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is required to apply
its judgment in evaluating the cost-benefit relationship of possible
disclosure controls and procedures. Based on the Evaluation, the company's
Chief Executive Officer and Chief Financial Officer concluded that the
company's disclosure controls and procedures, as of the end of the period
covered by this Quarterly Report on Form 10-Q, were effective at the
reasonable assurance level to ensure that information required to be
disclosed by the company in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms.
Nicor Inc. Page 35
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Item 4. Controls and Procedures (concluded)
There has been no change in the company's internal controls over financial
reporting during the company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the company's
internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Management's Discussion and Analysis - Contingencies and the Notes to the
Consolidated Financial Statements - Note 14 Contingencies and Note 15
Subsequent Events - Rate Proceeding, which are incorporated herein by
reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Equity Securities.
(c) Total (d)
Number of Approximate
Shares Dollar Value
Purchased of Shares that
as Part of May Yet Be
(a) Total Publicly Purchased
Number of (b) Average Announced Under the
Shares Price Paid Plans or Plans or
Period Purchased per Share Programs (1) Programs (1)
- -------------------- ---------- ----------- ------------ ------------
July 1 to 31, 2004 - $ - - $21,513,176
August 1 to 31, 2004 - - - 21,513,176
September 1 to 30, 2004 - - - 21,513,176
---------- ----------- -----------
- $ - -
========== =========== ===========
(1) In September 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 were no repurchases under this program in 2004. At September 30,
2004, $21,513,176 remained authorized for the repurchase of common stock.
Nicor Inc. Page 36
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Item 6. Exhibits
Exhibit
Number Description of Document
-------- -------------------------------------------------------------------
3.01 * Articles of Incorporation of the company. (File No. 2-55451, Form
S-14, Nicor Inc., Exhibit 1-03 and Exhibit B of Amendment No. 1
thereto.)
3.02 * Amendment to Articles of Incorporation of the company. (Proxy
Statement dated April 20, 1979, Nicor Inc., Item 3 thereto.)
3.03 * Amendment to Articles of Incorporation of the company. (File No.
2-68777, Form S-16, Nicor Inc., Exhibit 2-01.)
3.04 * Amendment to Articles of Incorporation of the company. (File No.
1-7297, Form 10-K for 1985, Nicor Inc., Exhibit 3-03.)
3.05 * Amendment to Articles of Incorporation of the company. (Proxy
Statement dated March 12, 1987, Nicor Inc., Exhibit A and Exhibit
B thereto.)
3.06 * Amendment to Articles of Incorporation of the company. (File No.
1-7297, Form 10-K for 1992, Nicor Inc., Exhibit 3-06.)
3.07 * Amendments to Articles of Incorporation of the company. (Proxy
Statement dated March 9, 1994, Nicor Inc., Exhibit A-1 and Exhibit
B thereto.)
3.08 * Amendment to Articles of Incorporation of the company. (Proxy
Statement dated March 6, 1998, Nicor Inc., Item 2 thereto.)
3.09 * By-Laws of the company as amended by the company's Board of
Directors on January 15, 2004. (File No. 1-7297, Form 10-K for
2003, Nicor Inc., Exhibit 3.09.)
10.1 210-Day Credit Agreement dated as of September 2, 2004.
10.2 3-Year Credit Agreement dated as of September 2, 2004.
10.3 Agreement, dated July 30, 2004, between Nicor Inc. and Ms. Halloran.
Nicor Inc. Page 37
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Item 6. Exhibits (concluded)
Exhibit
Number Description of Document
-------- -------------------------------------------------------------------
31.1 Rule 13a-14(a)/15d-14(a) Certification.
31.2 Rule 13a-14(a)/15d-14(a) Certification.
32.1 Section 1350 Certification.
32.2 Section 1350 Certification.
* These exhibits have been previously filed with the Securities and
Exchange Commission as exhibits to registration statements or to other
filings with the Commission and are incorporated herein as exhibits by
reference. The file number and exhibit number of each such exhibit,
where applicable, are stated, in parentheses, in the description of such
exhibit.
Upon written request, the company will furnish free of charge a copy of any
exhibit. Requests should be sent to Investor Relations at the corporate
headquarters.
Nicor Inc. Page 38
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Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Nicor Inc.
November 5, 2004 /s/ JEFFREY L. METZ
------------------- ------------------------------
(Date) Jeffrey L. Metz
Vice President and Controller
(Chief Accounting Officer)