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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 June 30, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Registrant, State of I.R.S. Employer
Commission Incorporation, Identification
File Number Address and Telephone Number Number
- ------------ --------------------------------------- ----------------
1-7296 Northern Illinois Gas Company 36-2863847
(Doing business as Nicor Gas Company)
(An Illinois Corporation)
1844 Ferry Road
Naperville, Illinois 60563-9600
(630) 983-8888
The registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form with a reduced disclosure
format.
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 [ ]
Shares of common stock, par value $5, outstanding at August 8, 2002, were
15,232,414, all of which are owned by Nicor Inc.
*The company's new independent public accountant, Deloitte & Touche LLP, was
unable to complete the review of the condensed unaudited 2002 financial
statements included herein, as required by Rule 10-01(d) of Regulation S-X
promulgated under the Securities Act of 1934, due to uncertainties surrounding
the current review of the performance-based rate plan referred to in the
Contingencies note beginning on page 7.
Nicor Gas Company 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 six months ended
June 30, 2002 and 2001 ............................... 2
Consolidated Statements of Cash Flows:
Six months ended
June 30, 2002 and 2001 ............................... 3
Consolidated Balance Sheets:
June 30, 2002 and 2001, and
December 31, 2001 .................................... 4
Notes to the Consolidated Financial Statements ......... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................12
Part II - Other Information
Item 1. Legal Proceedings ....................................17
Item 5. Other Information ....................................17
Item 6. Exhibits and Reports on Form 8-K .....................17
Signature ..............................................18
Exhibit Index ..........................................19
Glossary
Degree day........The extent to which the daily average temperature falls below
65 degrees Fahrenheit. Normal weather for Nicor Gas' service
territory is about 6,000 degree days per year.
ICC...............Illinois Commerce Commission, the agency that regulates
investor-owned Illinois utilities.
Mcf, MMcf, Bcf....Thousand cubic feet, million cubic feet, billion cubic feet.
PBR...............Performance-based rate, a regulatory plan that provides
economic incentives based on natural gas cost performance.
Nicor Gas Company Page 1
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The company's new independent public accountant, Deloitte & Touche LLP, was
unable to complete the review of the condensed unaudited 2002 financial
statements included herein, as required by Rule 10-01(d) of Regulation S-X
promulgated under the Securities Act of 1934, due to uncertainties surrounding
the current review of the performance-based rate plan referred to in the
Contingencies note beginning on page 7. The company will file an amendment to
this Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, as soon
as practicable after the required review is completed.
Except as set forth above, the following condensed unaudited financial
statements of Nicor Gas 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
latest Annual Report on Form 10-K.
The information furnished reflects, in the opinion of the company, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair statement of the results for the interim periods presented. Results for the
interim periods presented are not necessarily indicative of the results to be
expected for the full fiscal year due to seasonal and other factors.
Nicor Gas Company Page 2
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Consolidated Statements of Operations (Unaudited)
(millions)
Three months ended Six months ended
June 30 June 30
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Operating revenues $ 281.5 $ 271.8 $ 798.2 $1,615.9
-------- -------- -------- --------
Operating expenses
Cost of gas 148.3 143.5 466.5 1,255.0
Operating and maintenance 44.4 37.5 90.8 83.4
Depreciation 22.6 21.7 79.2 76.3
Taxes, other than income taxes 24.1 23.9 64.4 93.9
Other - (2.1) .2 (2.1)
Income taxes 12.9 13.4 29.7 31.3
-------- -------- -------- --------
252.3 237.9 730.8 1,537.8
-------- -------- -------- --------
Operating income 29.2 33.9 67.4 78.1
-------- -------- -------- --------
Other income (expense)
Other, net (3.7) 2.9 3.3 6.7
Income taxes on other income 1.5 (1.1) (1.2) (2.6)
-------- -------- -------- --------
(2.2) 1.8 2.1 4.1
-------- -------- -------- --------
Interest expense
Interest on debt, net of amounts
capitalized 7.9 11.4 17.2 24.6
Other .1 .2 .3 .3
-------- -------- -------- --------
8.0 11.6 17.5 24.9
-------- -------- -------- --------
Net income 19.0 24.1 52.0 57.3
Dividends on preferred stock - .1 .1 .2
-------- -------- -------- --------
Earnings applicable to
common stock $ 19.0 $ 24.0 $ 51.9 $ 57.1
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
Nicor Gas Company Page 3
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Consolidated Statements of Cash Flows (Unaudited)
(millions)
Six months ended
June 30
-------------------
2002 2001
-------- --------
Operating activities
Net income $ 52.0 $ 57.3
Adjustments to reconcile net income to net cash flow
provided from operating activities:
Depreciation 79.2 76.3
Deferred income tax expense 10.2 9.9
Gain on sale of property, plant and equipment (3.4) -
Changes in:
Receivables, less allowances 120.7 220.1
Gas in storage 13.1 4.8
Deferred/accrued gas costs (50.8) 191.9
Accounts payable (105.2) (323.9)
Temporary LIFO liquidation 114.6 29.1
Prepaid pension costs (6.4) (16.7)
Accrued mercury-related costs (4.2) (23.8)
Other 17.9 44.7
-------- --------
Net cash flow provided from operating activities 237.7 269.7
-------- --------
Investing activities
Capital expenditures (75.5) (62.4)
Net proceeds from the sale of property,
plant, and equipment 3.5 -
Other - (.1)
-------- --------
Net cash flow used for investing activities (72.0) (62.5)
-------- --------
Financing activities
Net proceeds from issuing long-term debt 49.9 123.7
Disbursements to retire long-term debt - (50.0)
Short-term borrowings (repayments), net (267.0) (265.6)
Dividends paid (66.2) (49.2)
Other (.4) (.5)
-------- --------
Net cash flow used for financing activities (283.7) (241.6)
-------- --------
Net decrease in cash and cash equivalents (118.0) (34.4)
Cash and cash equivalents, beginning of period 137.7 39.7
-------- --------
Cash and cash equivalents, end of period $ 19.7 $ 5.3
======== ========
The accompanying notes are an integral part of these statements.
Nicor Gas Company Page 4
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Consolidated Balance Sheets (Unaudited)
(millions)
June 30 December 31 June 30
2002 2001 2001
----------- ----------- -----------
Assets
Gas distribution plant, at cost $ 3,491.9 $ 3,425.6 $ 3,340.6
Less accumulated depreciation 1,877.4 1,804.9 1,760.3
----------- ---------- -----------
1,614.5 1,620.7 1,580.3
----------- ---------- -----------
Current assets
Cash and cash equivalents - affili1iates 13.2 137.7 .5
Cash and cash equivalents - other 6.5 - 4.8
Receivables, less allowances of
$10.0, $9.6 and $17.8, respectively 162.8 285.0 340.6
Receivables - affiliates 12.1 10.6 10.1
Gas in storage, at last-in,
first-out (LIFO) 4.1 17.2 14.5
Deferred income taxes 22.9 25.9 44.5
Other 9.8 9.3 8.9
----------- ---------- -----------
231.4 485.7 423.9
----------- ---------- -----------
Prepaid pension costs 170.7 164.3 159.5
Other assets 27.9 29.5 22.3
----------- ---------- -----------
$ 2,044.5 $ 2,300.2 $ 2,186.0
=========== ========== ===========
Capitalization and Liabilities
Capitalization
Long-term debt $ 395.9 $ 446.4 $ 421.1
Preferred stock 7.0 7.5 7.5
Common equity
Common stock 76.2 76.1 76.1
Paid-in capital 108.1 108.0 108.0
Retained earnings 461.9 431.0 437.2
Accumulated other
comprehensive income (1.0) (1.3) -
----------- ---------- -----------
645.2 613.8 621.3
----------- ---------- -----------
1,048.1 1,067.7 1,049.9
----------- ---------- -----------
Current liabilities
Long-term obligations due
within one year 100.5 .5 125.5
Short-term borrowings - other - 227.0 50.0
Short-term borrowings - affiliates - 40.0 40.0
Accounts payable 239.1 344.3 222.8
Temporary LIFO liquidation 114.6 - 29.1
Accrued gas costs 49.1 99.9 142.7
Accrued mercury-related costs 4.2 7.0 54.2
Dividends payable - 45.1 -
Other 31.1 32.6 68.0
----------- ---------- -----------
538.6 796.4 732.3
----------- ---------- -----------
Deferred credits and other liabilities
Deferred income taxes 233.3 224.2 220.5
Regulatory income tax liability 64.4 66.3 68.4
Unamortized investment tax credits 38.0 39.0 40.1
Accrued mercury-related costs 28.6 30.0 -
Other 93.5 76.6 74.8
----------- ---------- -----------
457.8 436.1 403.8
----------- ---------- -----------
$ 2,044.5 $ 2,300.2 $ 2,186.0
=========== ========== ===========
The accompanying notes are an integral part of these statements.
Nicor Gas Company Page 5
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Notes to the Consolidated Financial Statements (Unaudited)
The following notes should be read in conjunction with the financial statement
notes included in the Nicor Gas 2001 Annual Report on Form 10-K. Nicor Gas is a
wholly owned subsidiary of Nicor Inc. (Nicor).
ACCOUNTING POLICIES
Depreciation. Depreciation is calculated using a straight-line
method for the calendar year. For interim periods, depreciation is
allocated based on gas deliveries.
Gas in storage. Gas in storage injections and withdrawals are valued at cost on
a last-in, first-out (LIFO) method on a calendar-year basis. For interim
periods, the difference between current replacement cost and the LIFO cost for
quantities of gas temporarily withdrawn from storage is recorded in cost of gas
and in current liabilities as a temporary LIFO liquidation.
Reclassifications. Certain reclassifications have been made to
conform the prior years' financial statements to the current year's
presentation.
OTHER INCOME (EXPENSE)
Other income (expense) - other, net consisted of the following (in millions):
Three months Six months
ended ended
June 30 June 30
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Gain on sale of properties, net $ - $ 0.1 $ 3.4 $ 0.3
PBR plan results (4.2) 1.7 (1.3) 4.2
Interest income 0.3 1.1 1.4 2.2
Other .2 - (.2) -
-------- -------- -------- --------
$ (3.7) $ 2.9 $ 3.3 $ 6.7
======== ======== ======== ========
COMPREHENSIVE INCOME
Total comprehensive income, as defined by FASB Statement No. 130, Reporting
Comprehensive Income, is equal to net income plus other comprehensive income and
is as follows (in millions):
Three months Six months
ended ended
June 30 June 30
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net income $ 19.0 $ 24.1 $ 52.0 $ 57.3
Other comprehensive income,
net of tax .1 - .4 -
-------- -------- -------- --------
Total comprehensive income $ 19.1 $ 24.1 $ 52.4 $ 57.3
======== ======== ======== ========
Other comprehensive income includes unrealized gains and losses from derivative
financial instruments accounted for as cash flow hedges.
Nicor Gas Company Page 6
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Notes to the Consolidated Financial Statements (Unaudited) (continued)
DEBT
In April 2002, Nicor Gas issued $50 million of 3 percent unsecured notes due in
April 2003 with proceeds to be used for general corporate purposes.
RELATED PARTY TRANSACTIONS
In the ordinary course of business, under the terms of an agreement approved by
the Illinois Commerce Commission (ICC), Nicor Gas enters into transactions with
Nicor and its other wholly owned subsidiaries for the use of facilities and
services. The charges for these transactions are cost-based, except where the
charging party has a prevailing price for which the facility or service is
provided to the general public. In addition, Nicor charges Nicor Gas and its
other wholly owned subsidiaries for the cost of corporate overheads. For the
three months ended June 30, 2002 and 2001, net charges from Nicor Gas to
affiliates were $1.0 million and $.7 million, respectively, and for the six
months ended June 30, 2002 and 2001, net charges from Nicor Gas to affiliates
were $1.9 million and $2.8 million, respectively.
Under the terms of an ICC order, Nicor Gas routinely enters into transactions
with Nicor Enerchange, a wholesale natural gas marketing subsidiary of Nicor,
for the purchase and sale of natural gas, transportation and storage services.
For the three months ended June 30, 2002 and 2001, net charges to Nicor
Enerchange were $6.8 million and $9.4 million, respectively, and for the six
months ended June 30, 2002 and 2001, net charges to (from) Nicor Enerchange
were $5.8 million and $(11.5) million, respectively.
During the second quarter of 2002 Horizon Pipeline, a 50/50 joint venture
between Nicor Gas' parent Nicor Inc. and Natural Gas Pipeline Company of America
(NGPL), put into operation a 74-mile, 36-inch pipeline from Joliet, Illinois to
near the Wisconsin/Illinois border. Horizon Pipeline's capacity is nearly fully
subscribed under 10-year agreements, with Nicor Gas having contracted for
approximately 80 percent of the 380 MMcf per day initial capacity. In the second
quarter of 2002, Horizon Pipeline charged Nicor Gas $1.4 million for natural gas
transportation under FERC-approved rates. This transaction has been approved by
the ICC.
Nicor Gas had $40 million of short-term notes payable due to an affiliated
financing company as of December 31, 2001. As of June 30, 2002, the company did
not have any short-term notes payable due to this affiliated company.
Nicor Gas Company Page 7
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Notes to the Consolidated Financial Statements (Unaudited) (continued)
CONTINGENCIES
The following contingencies of Nicor Gas are in various stages of investigation
or disposition. Although the company is unable to estimate the amount of loss
reasonably possible in addition to the amount already recognized, if any, it is
possible that the resolution of these contingencies, either individually or in
aggregate, will require the company to restate prior period financial results
or take charges against or 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. It is the
opinion of management that the resolution of these contingencies, either
individually or in aggregate, is not expected to have a material adverse impact
on Nicor Gas' liquidity or financial condition.
Performance-Based Rate Plan. On January 1, 2000, Nicor Gas' performance-based
rate (PBR) plan for natural gas costs went into effect. Under the PBR plan,
Nicor Gas' total gas supply costs are compared to a market-sensitive benchmark.
Savings and losses relative to the benchmark are determined annually and are
shared equally with sales customers. Pursuant to the requirements of Illinois
law, the plan is currently under ICC review.
There have recently been allegations that the company acted improperly in
connection with the PBR plan, and the ICC has advised the company that it is
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. As a result of the motion to reopen, Nicor Gas, the Cook County State's
Attorney's Office, 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. A status hearing has been set for September 4,
2002 to assess the status of discovery and to consider the need for additional
discovery. In addition, the Illinois Attorney General's Office issued Civil
Investigation Demands (CIDs) to the 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. Other governmental agencies may be reviewing these allegations.
The company has committed to cooperate fully in the review of the PBR plan. In
response to these allegations, the Nicor Inc. Board of Directors has appointed a
special committee of independent, non-management directors to conduct an inquiry
into issues surrounding natural gas purchases, sales, transportation and storage
and such other matters as may come to the attention of the special committee in
the course of its investigation. This inquiry includes a review of transactions
with third parties, including the purchase of weather insurance, and
transactions with affiliates.
The company's earnings included pretax income of $14.9 million in 2001 and $12.2
million in 2000 related to the PBR plan. In 2002, other income in the second
quarter includes the reversal of $3.8 million of pretax earnings estimated and
recorded in the first quarter relating to the company's PBR plan. As a result of
this reversal, the year-to-date 2002 period no longer includes any estimated PBR
plan results related to the 2002 plan year; however, it does include a negative
$1.3 million correction of 2001 PBR plan results. Nicor Gas has estimated no
results for the 2002 PBR plan year because of the uncertainties surrounding the
PBR plan. The company is unable to predict the outcome of the review of the PBR
plan or the company's potential exposure thereto and has not recorded a
liability associated with this contingency.
On July 22, 2002, a purported class action was filed against Nicor Gas and Nicor
in the Circuit Court of Cook County, Illinois, on behalf of all customers of
Nicor Gas who at any time from January 2000
Nicor Gas Company Page 8
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Notes to the Consolidated Financial Statements (Unaudited) (continued)
through the present were subject to Nicor Gas' PBR plan. The plaintiff alleges
claims for breach of contract, unjust enrichment and violation of the Illinois
Consumer Fraud and Deceptive Practices Act, and that the class sustained damages
as a result of Nicor Gas improperly enriching itself by manipulating the
benchmark under the PBR. The class is seeking compensatory damages, prejudgment
and postjudgment interest, and disgorgement of all profits. Nicor Gas is unable
to predict the outcome of this litigation or the company's potential exposure
related thereto and has not recorded a liability associated with this
contingency.
Hub Services. Pursuant to a Federal Energy Regulatory Commission (FERC) Order,
Nicor Gas was issued a limited jurisdiction blanket certificate authorizing
Nicor Gas to provide interstate transportation services, including storage
services (Interstate Hub Services). FERC regulates the terms and conditions, as
well as rates, for interstate services. A periodic rate case was recently filed
with FERC. In the course of this proceeding, Nicor Gas determined that refunds
are due customers who purchased certain Hub Services. Accordingly, Nicor Gas has
accrued and will be refunding service fees plus interest in the amount of
approximately $.5 million to customers of Hub Services and is investigating to
determine whether any additional refunds or other charges are appropriate. Nicor
Gas also offers certain interruptible transportation and storage services
pursuant to tariffs on file with the ICC, which regulates such intrastate
services. Nicor Gas is investigating to determine whether refunds or charges are
appropriate related to its provision of such ICC jurisdictional services. Nicor
Gas cannot estimate the amount of any such additional refunds and has not
recorded a liability associated with this contingency.
Mercury program. Nicor Gas has incurred, and expects to continue to incur,
significant costs related to its historical use of mercury in various kinds of
company equipment. Prior to 1961, gas regulators containing small quantities of
mercury were installed in homes. These gas regulators reduce the pressure of
natural gas flow from the service line to the inside of the home. During the
third quarter of 2000, the company learned that in certain instances some
mercury was spilled or left in residences.
As a result, in September 2000, Nicor Gas was named as a defendant in a civil
lawsuit (the "Attorney General's Lawsuit") brought by the Illinois Attorney
General and the State's Attorneys of Cook, DuPage and Will Counties, Illinois,
seeking, among other things, to compel the company to inspect and clean up all
homes and other sites that may have been affected by mercury from company
equipment. The Circuit Court of Cook County hearing this action entered two
preliminary injunctions requiring Nicor Gas, among other things, to conduct
inspections and, where necessary, to clean up mercury, to pay for relocating
residents until cleanup is completed, and to pay for medical screening of
potentially affected persons. Potentially affected homes are being inspected
using mercury vapor analyzers. Nicor Gas has called on every such home, although
it still has been unable to gain entry to some homes. Approximately 1,070 homes
have been found to have traces of mercury requiring cleanup.
On October 10, 2001 Nicor Gas entered into a settlement agreement with respect
to the Attorney General's Lawsuit, and on the same date the Circuit Court of
Cook County entered an order approving the settlement. Under the settlement,
Nicor Gas is paying a total of approximately $2.25 million over a 5-year period.
Of this amount, $.4 million will be used to reimburse the plaintiffs for their
costs and the balance will be used to fund environmental programs. In addition,
Nicor Gas will continue for a period of five years to provide medical screening
to persons who may have been exposed to mercury from Nicor Gas equipment.
Nicor Gas Company Page 9
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Notes to the Consolidated Financial Statements (Unaudited) (continued)
Nicor Gas was also the subject of an Administrative Order, and an amendment
thereto, issued during the third quarter of 2000 by the U.S. Environmental
Protection Agency (EPA) pursuant to Section 106 of the Comprehensive
Environmental Response, Compensation and Liabilities Act. The order required the
company, among other things, to develop and implement work plans to address
mercury spills at recycling centers where mercury regulators may have been
taken, at company facilities where regulators and mercury may have been
temporarily stored and at commercial/industrial sites where mercury-containing
equipment may have been used in metering facilities. Pursuant to the injunctions
and the EPA order, Nicor Gas has completed the work described above for all
affected recycling centers, commercial/industrial sites and company facilities.
On July 12, 2001, Nicor Gas received a Notice of Completion letter from the EPA
regarding the work performed under the Section 106 order.
In addition to the matters described above, Nicor Gas has been named a defendant
in several private lawsuits, all in the Circuit Courts of Cook and DuPage
Counties, claiming a variety of unquantified damages (including bodily injury,
property and punitive damages) allegedly caused by mercury-containing
regulators. One of the lawsuits in the Circuit Court of Cook County involves
five previous class actions that were consolidated before a single judge. On
October 10, 2001, Nicor Gas entered into an agreement to settle the class action
litigation. Under the terms of that agreement, Nicor Gas has paid a total of
approximately $1.85 million, will continue for a period of five years 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
within four years. The class action settlement permitted class members to "opt
out" of the settlement and pursue their claims individually. On February 7,
2002, the Circuit Court of Cook County entered a final order approving the class
action settlement. The "opt out" period has ended and approximately 160
households have opted out of the class. Of those 42 households had traces of
mercury, and Nicor Gas has settled with four households.
Nicor Gas charged $148 million to other operating expense in the third quarter
of 2000 for estimated obligations related to the previously described work and
for legal defense costs. A $9 million adjustment lowered the mercury-related
reserve and reduced other operating expense in the third quarter of 2001
reflecting a lower number of homes expected to be found with traces of mercury
requiring cleanup, a lower average cleanup and repair cost, and estimated costs
of litigation. Through June 30, 2002, the company has incurred $106.2 million in
associated costs, leaving a $32.8 million estimated liability. The remaining
liability represents 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.
The company has certain insurance policies, has notified its insurers, and is
vigorously pursuing recovery of mercury-related costs pursuant to its insurance
coverage. In January 2001, the company filed suit in the Circuit Court of Cook
County against certain of its insurance carriers for a declaration that the
company's mercury-related losses are covered, and for the recovery of those
losses. Nicor Gas is also pursuing certain insurance recoveries through
arbitration. In addition, some of the removals of mercury-containing regulators
were conducted by independent contractors working for the company. In November
2000, the company filed suit in the Circuit Court of Cook County seeking
indemnification and contribution from these contractors and their insurance
carriers. Through June 30, 2002, Nicor Gas has recovered, net of related
expenses, $2.9 million from certain insurance carriers of the company and its
independent contractors. These recoveries have been recorded as a reduction to
other operating expense. Subsequent to June 30, 2002, Nicor Gas reached an
agreement with an insurer wherein Nicor Gas will recover approximately $20
million, net of related costs, which will be included in the company's results
of operations for the third quarter of 2002. At this stage, it is not possible
to estimate the likelihood of additional recoveries from insurance carriers or
Nicor Gas Company Page 10
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Notes to the Consolidated Financial Statements (Unaudited) (continued)
other third parties related to the mercury spills, and Nicor Gas has not
recorded any such recoveries in its financial statements.
Nicor Gas will not seek recovery of the costs associated with these mercury
spills from its customers, and any proceeds from insurance carriers or third
parties will be retained by the company to offset costs incurred.
Fixed Bill Service. On July 17, 2002, a purported class action was filed in
Circuit Court of Cook County, Illinois against Nicor Energy Services Company
(Nicor Services) and Nicor Gas alleging violation of the Illinois Consumer Fraud
and Deceptive Practices Act by Nicor Services and Nicor Gas relating to the
Fixed Bill Service offered by Nicor Services and a conspiracy claim against
Nicor Gas arising out of marketing efforts by Nicor Services. The Fixed Bill
program is a service that is offered to Nicor Gas residential customers which
allows the customer to pay twelve equal monthly amounts for their annual gas
service based upon the gas use profile of their home. The class is seeking
compensatory damages, prejudgment and postjudgment interest, punitive damages,
attorneys' fees and other equitable relief. Nicor Gas is unable to predict the
outcome of this litigation or Nicor Gas' potential exposure related thereto.
Nicor Gas cannot estimate and has not recorded a liability associated with this
contingency.
Manufactured gas plant sites. Gas manufacturing plants were used in the early to
mid 1900's to produce natural gas from coal, producing 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. More detailed investigations and
remedial activities are either in progress or planned at many of these sites.
The results of continued testing and analysis should determine to what extent
additional remediation is necessary and may provide a basis for estimating any
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.
In December 1995, Nicor Gas filed suit in the Circuit Court of Cook County
against certain insurance carriers seeking recovery of environmental cleanup
costs of certain former manufactured gas plant sites. Nicor Gas reached a
settlement with one of the insurance carriers, and in February 2000, the court
dismissed the company's case on summary judgment motions by certain other
defendants. The company filed an appeal in March 2000. In May 2001, Nicor Gas
reached a recovery settlement with certain insurance carriers who were involved
in this appeal. Management cannot predict the outcome of the lawsuit against the
remaining insurance carriers. All such recoveries are refunded to the company's
customers.
In December 2001, a putative 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 proposed residential cleanup
of a manufactured gas plant site in Oak Park, Illinois was inadequate.
The lawsuit claims that houses might have to be razed or removed and asks that
residents be compensated for the alleged loss in the value of their homes and
other monetary damages. An amended complaint adding additional plaintiffs and,
as defendants, the Village of Oak Park and the Oak Park Park District, was filed
in April 2002. 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.
Nicor Gas Company Page 11
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Notes to the Consolidated Financial Statements (Unaudited) (concluded)
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 MWRD) under the Comprehensive Environmental
Response, Compensation and Liability Act seeking the recovery of past and future
remediation costs and a declaration of the level of cleanup for a former
manufactured gas plant site in Skokie, Illinois now owned by the MWRD. The suit
was filed in federal court in Chicago and the company has filed responsive
pleadings. 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 these manufactured gas
plant sites are passed directly through to customers in accordance with ICC
regulations, subject to an ICC prudence review, the final disposition of these
manufactured gas plant matters is not expected to have a material impact on the
company's financial condition or results of operations.
Other. In addition to the matters set forth above, the company is involved in
legal or administrative proceedings before various courts and agencies with
respect to rates, taxes and other matters. Although unable to determine the
outcome of these other contingencies, management believes that appropriate
accruals for them have been recorded.
Nicor Gas Company Page 12
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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 Gas 2001 Annual Report on Form
10-K.
RESULTS OF OPERATIONS
Net income for the three and six months ended June 30, 2002, was $19.0 million
and $52.0 million, respectively, compared with $24.1 million and $57.3 million,
respectively, for the same periods in 2001. Net income for both 2002 periods
reflects the positive effects of increased margin and lower interest expense.
Higher property sale gains also positively affected the 2002 year-to-date
results. Offsetting these favorable factors in both periods were the
performance-based rate (PBR) plan results and higher operating and maintenance
expenses.
Nicor Gas recorded PBR plan results of $(4.2) million and $1.7 million in other
income for the second quarter of 2002 and 2001, respectively, and $(1.3) million
and $4.2 million for the six months ended June 30, 2002 and 2001, respectively.
The year-to-date 2002 period no longer includes any estimated PBR plan results
related to the 2002 plan year due to the developments described in the
Contingencies note beginning on page 7. Negative pretax corrections of 2001 PBR
plan results of $.4 million and $1.3 million were recorded in the three- and
six-month periods ended June 30, 2002, respectively.
Operating revenues. Second quarter operating revenues increased from $271.8
million in 2001 to $281.5 million in 2002 as the positive effect of increased
deliveries due primarily to colder weather was offset partially by the impact of
lower natural gas prices, which are passed directly through to customers without
markup. For the six-month period operating revenues decreased $817.7 million
from $1,615.9 million in 2001 to $798.2 million in 2002 due primarily to lower
natural gas prices.
Margin. Margin, defined as operating revenues less cost of gas and revenue
taxes, which are both passed directly through to customers, increased in the
second quarter of 2002 to $113.5 million compared to $108.6 million a year ago,
and for the year-to-date period, gas distribution margin increased slightly to
$276.5 million in 2002 compared to $275.8 million in 2001. For the quarter, the
effect of higher deliveries, resulting from 45 percent colder weather than last
year and increased demand not related to weather, was offset partially by the
reduction of accrued weather protection benefits. In both periods, the positive
effect of lower natural gas prices on the cost of gas used to operate company
equipment and facilities was more than offset by lower revenue from customer
finance charges, which was also affected by the change in natural gas prices.
Operating and maintenance. Operating and maintenance expense increased from
$37.5 million and $83.4 million in the 2001 three- and six-month periods,
respectively, to $44.4 million and $90.8 million in 2002. The increase was
related primarily to the negative effect of smaller pension credits, higher
health care costs and increased bad debt expense in both periods.
Other income (expense). Other income (expense) decreased by $4.0 million to
$(2.2) million and by $2.0 million to $2.1 million in the three- and six-month
periods, respectively. Results for both periods were negatively affected by the
negative adjustments to PBR plan results in 2002. The 2002 six-month period's
other income includes a loss from the PBR plan of $1.3 million compared to a
$4.2 million gain in 2001. The negative effect of the PBR plan results was
partially offset by increased property sale gains in the year-to-date period.
Nicor Gas Company Page 13
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Interest expense. Interest expense for the 2002 three-month period decreased
from $11.6 million in 2001 to $8.0 million. For the year-to-date period interest
expense decreased from $24.9 million in 2001 to $17.5 million in 2002. The
decline in both periods was due to lower average borrowing levels and interest
rates. Reduced natural gas costs contributed to the lower borrowing levels.
FINANCIAL CONDITION AND LIQUIDITY
Operating cash flows. Net cash flow from operating activities decreased $32.0
million to $237.7 million for the six months ended June 30, 2002, due primarily
to changes in working capital items. Working capital can swing sharply due to
certain factors including weather, the price of gas, the timing of collections
from customers and gas purchasing practices. The company generally relies on
short-term financing to meet temporary increases in working capital needs.
Investing activities. 2002 capital expenditures for Nicor Gas are estimated at
$175 million, a $20 million increase from the projection included in Nicor Gas'
latest Annual Report on Form 10-K. The increase is due primarily to storage
field improvements.
Financing activities. The company maintains short-term line of credit agreements
with major domestic and foreign banks. At June 30, 2002, these agreements, which
serve as backup for the issuance of commercial paper, allow for borrowings up to
$410 million, and the company had no commercial paper borrowings outstanding.
The company had line of credit agreements with eight banks at June 30, 2002, all
of which expire by September 30, 2002.
Nicor Gas continues to have a debt rating that is among the highest in the gas
distribution industry. However, because of uncertainties pertaining to the
energy industry in general and to the company, as described in Contingencies
beginning on page 7, the rating agencies have indicated that they have put Nicor
Gas' debt ratings under review for possible downgrade or on credit watch with
negative implications. Standard & Poor's has not put the company's commercial
paper on credit watch. The company's primary banks have indicated that they
would expect to renew their line of credit agreements with Nicor Gas. The
company's relative cost of financing will likely increase.
Nicor Gas believes it is in compliance with its debt covenants and will remain
so even if its debt ratings are lowered. Furthermore, Nicor Gas believes it will
continue to generate sufficient capital resources to fund its capital
expenditures and other cash requirements.
In April 2002, Nicor Gas issued $50 million of 3 percent unsecured notes due in
April 2003 with the proceeds to be used for general corporate purposes.
FACTORS AFFECTING BUSINESS
Contingencies. Future operating results could be materially impacted by
contingencies discussed under the heading Contingencies beginning on page 7,
which is hereby incorporated by reference.
Nicor Gas Company Page 14
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Critical accounting policies and estimates. Nicor Gas prepares its consolidated
financial statements in accordance with accounting principles generally accepted
in the United States, which regularly requires Nicor Gas' management to exercise
judgment in the selection and application of accounting methods. The application
of accounting methods includes making estimates using subjective assumptions and
judgments about matters that are inherently uncertain.
The selection of accounting methods and the use of estimates affects Nicor Gas'
reported results and financial condition. The company has adopted several
significant accounting policies that are important to understanding its
financial statements and are described in the Accounting Policies note beginning
on page 20 of Nicor Gas' 2001 Annual Report on Form 10-K. Management is also
required to make significant estimates which are similarly described in the
notes of that annual report on Form 10-K. Although there are numerous areas in
which Nicor Gas' management selects methods and makes estimates, it believes
that those requiring among the most critical judgments involve credit risk and
loss contingencies, because those judgments are susceptible to material change
and could materially impact Nicor Gas' financial statements.
Nicor Gas is required to estimate credit risk in establishing allowances for
doubtful accounts. Actual credit losses could vary materially from Nicor Gas'
estimates.
Nicor Gas records loss contingencies as liabilities when it is probable that a
liability has been incurred and the amount of loss is reasonably estimable.
Nicor Gas is involved in various legal proceedings and exposed to various loss
contingencies, the most significant of which are described beginning on page 7.
These loss contingencies are often resolved in stages over long time periods,
estimates may change significantly from period to period, and the company's
ultimate obligations may differ materially from its estimates.
Pension investment returns. Nicor Gas maintains noncontributory defined benefit
pension plans covering substantially all employees hired prior to 1998. For
valuation purposes Nicor Gas utilizes an October 1 measurement date to determine
the company's annual pension expense or credit. Since October 1, 2001, the
pension plan has experienced negative investment returns, consistent with market
conditions, and it is not possible to project what the value of the plan assets
will be at the 2002 measurement date. It is likely that lower-than-anticipated
asset values, in conjunction with possible assumption changes, would negatively
impact the company's pension credit and operating income in 2003 and could be
material. The pension plans are adequately funded. Market performance could
impact future company contributions but should not impact participant benefits.
Health care costs. Health care costs have been rising and additional increases
would negatively impact Nicor Gas' results of operations in future periods.
Nicor Gas Company Page 15
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
OTHER
The company sponsors defined contribution plans covering essentially all
domestic employees. Under the plans employees may elect to make contributions
that are partially matched by the company. In addition, substantially all Nicor
Gas employees hired after 1997 receive a separate company contribution to this
plan. These plans involve risk for the participants, who direct their
contributions and company contributions into various investment options,
including numerous mutual funds, a stable value fund and a Nicor stock fund.
FORWARD-LOOKING INFORMATION
Although management believes its statements about forwarding-looking information
are based on reasonable assumptions, actual results may vary materially from
stated expectations. Factors that could cause materially different results
include, but are not limited to, legal contingencies, the matters referred to in
the Contingencies section beginning on page 7, weather conditions, natural gas
prices, interest rates, borrowing needs, credit conditions, economic and market
conditions, health care costs, energy conservation, legislative and regulatory
actions, asset sales, any future mercury-related charges or credits, and PBR
plan review results or adjustments. These forward-looking statements speak only
as of the date of this filing, and the company assumes no obligation to update
any forward-looking statements.
Nicor Gas Company Page 16
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (concluded)
OPERATING STATISTICS
Operating revenues, deliveries, customers and other statistics are presented
below.
Three months ended Six months ended
June 30 June 30
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Operating revenues (millions):
Sales
Residential $ 179.2 $ 171.3 $ 519.3 $1,164.5
Commercial 35.4 33.5 99.8 222.0
Industrial 6.9 4.0 17.6 33.9
-------- -------- -------- --------
221.5 208.8 636.7 1,420.4
-------- -------- -------- --------
Transportation
Residential 2.9 2.0 6.0 4.9
Commercial 16.0 14.6 41.7 42.4
Industrial 11.1 11.0 22.1 23.0
Other 2.0 2.0 4.5 6.0
-------- -------- -------- --------
32.0 29.6 74.3 76.3
-------- -------- -------- --------
Other revenues
Revenue taxes 20.4 20.6 56.8 87.1
Environmental cost recovery 3.4 2.7 15.4 13.1
Chicago Hub 2.8 2.8 6.1 5.5
Weather insurance (2.9) - .6 -
Other 4.3 7.3 8.3 13.5
-------- -------- -------- --------
28.0 33.4 87.2 119.2
-------- -------- -------- --------
$ 281.5 $ 271.8 $ 798.2 $1,615.9
======== ======== ======== ========
Deliveries (Bcf):
Sales
Residential 31.2 23.5 125.9 125.9
Commercial 6.5 5.0 23.7 24.3
Industrial 1.3 .7 4.5 3.8
-------- -------- -------- --------
39.0 29.2 154.1 154.0
-------- -------- -------- --------
Transportation
Residential 1.3 .7 4.5 3.8
Commercial 14.6 11.8 54.3 52.7
Industrial 36.2 31.5 73.9 71.1
-------- -------- -------- --------
52.1 44.0 132.7 127.6
-------- -------- -------- --------
91.1 73.2 286.8 281.6
======== ======== ======== ========
Customers at end of period (thousands):
Sales
Residential 1,733.7 1,746.2
Commercial 106.6 97.5
Industrial 6.9 6.4
-------- --------
1,847.2 1,850.1
-------- --------
Transportation
Residential 103.7 63.3
Commercial 62.4 69.4
Industrial 6.8 7.4
-------- --------
172.9 140.1
-------- --------
2,020.1 1,990.2
======== ========
Other statistics:
Degree days 774 535 3,497 3,639
Average gas cost per Mcf sold $ 3.72 $ 4.84 $ 2.99 $ 8.11
Nicor Gas Company Page 17
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For information concerning legal proceedings, see Contingencies beginning on
page 7, which is incorporated herein by reference.
Item 5. Other Information
Because of the inability of the company's independent public accountant to
complete their review of the condensed unaudited 2002 financial statements
included herein, as required by Rule 10-01(d) of Regulation S-X (see Item 1),
the company's Chief Executive Officer and Chief Financial Officer are unable to
complete the statement required under 18 U.S.C. sec. 1350 (Section 906 of the
Sarbanes-Oxley Act of 2002).
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index on page 19 filed herewith.
(b) On May 3, 2002, the company filed a notice of change in
auditor on Form 8-K.
Nicor Gas Company Page 18
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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 Gas Company
Date August 13, 2002 By /s/ KATHLEEN L. HALLORAN
----------------------- -------------------------
Kathleen L. Halloran
Executive Vice President
Finance and Administration
Nicor Gas Company Page 19
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Exhibit Index
Exhibit
Number Description of Document
--------- -------------------------------------------------------
12.01 Computation of Consolidated Ratio of Earnings to Fixed Charges.
99.01 Letter regarding Sarbanes-Oxley Act of 2002.