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, 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 November 5, 2002, were
15,232,414, all of which are owned by Nicor Inc.
*The company's new independent public accountant, Deloitte & Touche LLP, did not
complete the review of the company's condensed unaudited 2002 financial
statements as required by Rule 10-01(d) of Regulation S-X promulgated under the
Securities Act of 1934, due to the pending financial statement restatements
discussed on page 5.
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 nine months ended
September 30, 2002 and 2001 .......................... 2
Consolidated Statements of Cash Flows:
Nine months ended
September 30, 2002 and 2001 .......................... 3
Consolidated Balance Sheets:
September 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 ..................15
Item 4. Control and Procedures .................................21
Part II - Other Information
Item 1. Legal Proceedings ......................................21
Item 5. Other Information ......................................21
Item 6. Exhibits and Reports on Form 8-K .......................21
Signature ..............................................22
Exhibit Index ..........................................25
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
INTENTION TO RESTATE FINANCIAL STATEMENTS
The company is in the process of restating these financial statements, the
company's 1999 through 2001 financial statements and its first and second
quarter 2002 financial statements, for the reasons stated in the Pending
Financial Statement Restatements and Re-audits footnote on page 5. Accordingly,
existing financial statements for those periods should not be relied upon.
Furthermore, all the notes to the consolidated financial statements,
particularly the note referred to in the first sentence, should be read in their
entirety when reading these financial statements because they materially impact
the ability to understand the historical financial information presented
regarding the company.
The company's new independent public accountant, Deloitte & Touche LLP, did not
complete the review of the company's 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 the pending financial
statement restatements. The company will file an amendment to this Quarterly
Report on Form 10-Q for the quarter ended September 30, 2002, as soon as
practicable after the restatements are completed and audited or reviewed, as
appropriate.
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, subject to the pending restatement of
financial statements referred to above.
The information furnished (including the information on this page and in the
notes to the financial statements) 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) SUBJECT TO RESTATEMENT
(millions)
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
2002 2001 2002 2001
-------- -------- -------- --------
Operating revenues (includes revenue
taxes of $9.1, $7.9, $66.0 and
$95.0, respectively) $ 172.6 $ 153.0 $ 970.7 $1,768.9
------- -------- -------- --------
Operating expenses
Cost of gas 66.8 51.5 533.2 1,306.5
Operating and maintenance 46.8 39.1 137.5 122.5
Depreciation 17.0 15.5 96.2 91.8
Taxes, other than income taxes 13.4 11.0 78.0 105.0
Mercury-related costs (recoveries) (19.7) (9.2) (19.5) (11.4)
Income taxes 14.6 13.0 44.2 44.4
------- -------- -------- --------
138.9 120.9 869.6 1,658.8
------- -------- -------- --------
Operating income 33.7 32.1 101.1 110.1
------- -------- -------- --------
Other income (expense)
Other, net 1.1 8.8 4.4 15.6
Income taxes on other income (.4) (3.5) (1.6) (6.0)
------- -------- ------- --------
.7 5.3 2.8 9.6
------- -------- ------- --------
Interest expense
Interest on debt, net of amounts
capitalized 8.2 10.3 25.4 34.9
Other - .1 .3 .5
------- -------- ------- --------
8.2 10.4 25.7 35.4
------- -------- ------- --------
Net income 26.2 27.0 78.2 84.3
Dividends on preferred stock .1 - .3 .3
------- -------- ------- --------
Earnings applicable to common stock $ 26.1 $ 27.0 $ 77.9 $ 84.0
======= ======== ======= ========
The accompanying notes are an integral part of these statements. In particular,
see Cautionary Statement on page 5.
Nicor Gas Company Page 3
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Consolidated Statements of Cash Flows (Unaudited) SUBJECT TO RESTATEMENT
(millions)
Nine months ended
September 30
-----------------
2002 2001
-------- -------
Operating activities
Net income $ 78.2 $ 84.3
Adjustments to reconcile net income to net cash flow
provided from operating activities:
Depreciation 96.2 91.8
Deferred income tax expense 13.3 7.4
Gain on sale of property, plant and equipment (3.4) (3.6)
Changes in assets and liabilities:
Receivables, less allowances 144.7 315.6
Gas in storage 4.3 3.9
Deferred/accrued gas costs (85.1) 209.5
Prepaid pension costs (9.6) (25.5)
Other assets 6.3 10.4
Accounts payable (58.9) (314.5)
Temporary LIFO liquidation 41.0 5.9
Accrued mercury-related costs (4.8) (36.5)
Accrued income taxes 13.9 28.2
Other liabilities 1.5 3.4
Other .4 .8
-------- -------
Net cash flow provided from operating activities 238.0 381.1
-------- -------
Investing activities
Capital expenditures (118.2) (101.9)
Net proceeds from the sale of property, plant,
and equipment 3.5 3.8
Other - (.1)
-------- -------
Net cash flow used for investing activities (114.7) (98.2)
-------- -------
Financing activities
Net proceeds from issuing long-term debt 49.9 197.6
Disbursements to retire long-term debt - (227.1)
Short-term borrowings (repayments), net (77.0) (156.6)
Dividends paid (88.3) (72.3)
Other (.5) (.5)
-------- -------
Net cash flow used for financing activities (115.9) (258.9)
-------- -------
Net increase in cash and cash equivalents 7.4 24.0
Cash and cash equivalents, beginning of period 137.7 39.7
-------- -------
Cash and cash equivalents, end of period $ 145.1 $ 63.7
======== =======
The accompanying notes are an integral part of these statements. In particular,
see Cautionary Statement on page 5.
Nicor Gas Company Page 4
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Consolidated Balance Sheets (Unaudited) SUBJECT TO RESTATEMENT
(millions)
September 30 December 31 September 30
2002 2001 2001
------------ ----------- ------------
Assets
------
Gas distribution plant, at cost $ 3,525.4 $ 3,425.6 $ 3,374.8
Less accumulated depreciation 1,885.8 1,804.9 1,772.8
------------ ----------- ------------
1,639.6 1,620.7 1,602.0
------------ ----------- ------------
Current assets
Cash and cash equivalents - affiliates 139.3 137.7 28.0
Cash and cash equivalents - other 5.8 - 35.7
Receivables, less allowances of
$10.5, $9.6 and $14.5, respectively 138.1 285.0 243.4
Receivables - affiliates 12.8 10.6 11.8
Gas in storage, at last-in,
first-out (LIFO)cost 12.9 17.2 15.4
Deferred income taxes 26.6 25.9 43.1
Other 8.4 9.3 11.8
------------ ----------- ------------
343.9 485.7 389.2
------------ ----------- ------------
Prepaid pension costs 173.9 164.3 167.9
Other assets 27.3 29.5 25.7
------------ ----------- ------------
$ 2,184.7 $ 2,300.2 $ 2,184.8
============ =========== ============
Capitalization and Liabilities
------------------------------
Capitalization
Long-term debt $ 396.0 $ 446.4 $ 446.0
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 444.9 431.0 441.1
Accumulated other comprehensive
income (loss) (.6) (1.3) (.1)
------------ ----------- ------------
628.6 613.8 625.1
------------ ----------- ------------
1,031.6 1,067.7 1,078.6
------------ ----------- ------------
Current liabilities
Long-term obligations due within
one year 100.5 .5 .5
Short-term borrowings - other 190.0 227.0 159.0
Short-term borrowings - affiliates - 40.0 40.0
Accounts payable 285.4 344.3 232.2
Temporary LIFO liquidation 41.0 - 5.9
Accrued gas costs 15.7 100.8 160.4
Accrued mercury-related costs 3.6 7.0 41.5
Dividends payable 21.1 45.1 -
Other 39.5 31.7 62.1
------------ ----------- ------------
696.8 796.4 701.6
------------ ----------- ------------
Deferred credits and other liabilities
Deferred income taxes 241.0 224.2 217.5
Regulatory income tax liability 63.5 66.3 67.5
Unamortized investment tax credits 37.5 39.0 39.6
Accrued mercury-related costs 28.6 30.0 -
Other 85.7 76.6 80.0
------------ ----------- ------------
456.3 436.1 404.6
------------ ----------- ------------
$ 2,184.7 $ 2,300.2 $ 2,184.8
============ =========== ============
The accompanying notes are an integral part of these statements. In particular,
see Cautionary Statement on page 5.
Nicor Gas Company Page 5
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Notes to the Consolidated Financial Statements (Unaudited; Subject to
Restatement)
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).
CAUTIONARY STATEMENT
The financial statements and information presented in this Report on Form 10-Q
do not include (1) adjustments that the company plans to make as a result of an
investigation by a special committee of independent directors (Special
Committee) of Nicor Gas' natural gas purchases, sales, transportation and
storage activities nor (2) any other adjustments that may be made when the
company restates its financial statements for prior periods and the third
quarter of 2002. For further information, see Pending Financial Statement
Restatements and Re-audits below, and Contingencies - Performance-Based Rate
Plan beginning on page 9.
PENDING FINANCIAL STATEMENT RESTATEMENTS AND RE-AUDITS
Based on the results of the special investigation of Nicor Gas' natural gas
purchases, sales, transportation, and storage activities, more fully described
under Contingencies - Performance-Based Rate Plan beginning on page 9, the
company is in the process of restating its financial statements for 1999, 2000,
2001 and interim periods in 2002. Accordingly, the financial statements for
those periods should not be relied upon.
The restatements will include accounting corrections and other adjustments
resulting from the Special Committee's investigation, other corrections not
related to the investigation that are more properly reflected in periods other
than the ones in which they were initially reported, and any additional issues
arising during the re-audits, or otherwise, but not presently known. In
addition, the restatements could include other adjustments that may be
identified as a result of Illinois Commerce Commission (ICC) review of the
company's performance-based rate (PBR) plan.
The company has engaged Deloitte & Touche LLP to audit the restated 1999, 2000
and 2001 financial statements, to review the 2002 interim financial statements
and to audit the 2002 financial statements, and will file amended reports with
the Securities and Exchange Commission (SEC) as soon as it is practical after
Deloitte & Touche completes its work.
Although all of the issues related to the restatements have not been resolved,
the company estimates that cumulative net income for the 1999 through 2002
period will be $15 million to $35 million lower than previously reported. As a
result of ICC review and independent audit, final amounts could be materially
different than these estimates. The company cannot predict with certainty when
the restatements, independent audits or ICC review will be complete. Also, while
there will likely be material changes to the amounts reported in certain
categories within the balance sheets and statements of cash flows, these changes
are not expected to have a material impact on the company's financial condition
or liquidity.
For additional information, see Contingencies beginning on page 9.
Nicor Gas Company Page 6
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Notes to the Consolidated Financial Statements (Unaudited; Subject to
Restatement) (continued)
ACCOUNTING POLICIES
Weather derivatives. Since 2000, Nicor Gas has held derivative contracts to
limit the earnings impact of weather fluctuations. These contracts settle as of
year-end, and the resulting benefit or loss is recorded in operating revenues.
For interim accounting periods, contract benefits and losses are measured by
applying the intrinsic value method, which compares actual weather during
interim periods to normal historical weather patterns.
Gas in storage. Gas in storage is carried 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.
Depreciation. Depreciation is calculated using a straight-line method for
the calendar year. For interim periods, depreciation is allocated based on
gas deliveries.
Revenue taxes. Nicor Gas classifies revenue taxes billed to customers as
operating revenues and related taxes due as operating expenses. Revenue taxes
included in operating expense for the three- and nine-month periods ended
September 30, 2002, were $8.7 million and $63.9 million, respectively, and $7.1
million and $92.2 million, respectively, for the same periods in 2001.
Reclassifications. Certain reclassifications have been made to conform the
prior years' financial statements to the current year's presentation.
ACCRUED UNBILLED REVENUE
Receivables includes accrued unbilled revenue of $37.8 million, $88.1 million
and $38.5 million at September 30, 2002, December 31, 2001, and September 30,
2001, respectively.
REGULATORY ASSETS AND LIABILITIES
Nicor Gas is regulated by the ICC, which establishes the rules and regulations
governing utility rates and services in Illinois. 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
2002 2001 2001
------------ ----------- -----------
Unamortized loss on reacquired debt $ 19.3 $ 20.1 $ 17.4
Regulatory tax liability (63.5) (66.3) (67.5)
Deferred (accrued) gas cost (15.7) (100.8) (160.4)
Deferred (accrued)environmental costs (2.5) (5.8) (9.9)
----------- ----------- -----------
$ (62.4) $ (152.8) $ (220.4)
=========== =========== ===========
The unamortized loss on reacquired debt is included in other noncurrent assets.
Accrued environmental costs are included in other current liabilities.
Nicor Gas Company Page 7
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Notes to the Consolidated Financial Statements (Unaudited; Subject to
Restatement) (continued)
POSTRETIREMENT BENEFITS
Nicor Gas maintains noncontributory defined benefit pension plans covering
substantially all employees hired prior to 1998. About one-fourth of the net
periodic benefit cost or credit related to these plans is capitalized as a cost
of constructing gas distribution facilities and the remainder is included in
operating and maintenance expense.
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.
Under the company's short-term committed lines of credit agreements, if Nicor's
ratio of consolidated total indebtedness to capitalization (including short-term
debt) exceeds 65% during the term of the credit facility, each bank may at its
option declare any amounts due immediately payable and/or terminate its
commitment to make advances to the company.
DIVIDEND RESTRICTIONS
Nicor Gas is restricted by regulation in the amount it can dividend or loan to
affiliates. Dividends are allowed only to the extent of Nicor Gas' retained
earnings balance. The balance of cash advances from Nicor Gas to an affiliate at
any time shall not exceed the unused balance of funds actually available to that
affiliate under its existing bank credit agreements or its commercial paper
facilities with an unaffiliated third party.
OTHER INCOME (EXPENSE)
Other income (expense) - Other, net consists of the following (in millions):
Three months ended Nine months ended
September 30 September 30
----------------- -----------------
2002 2001 2002 2001
-------- ------- ------- -------
Gain on sale of property,
plant and equipment $ - $ 3.6 $ 3.4 $ 3.9
PBR plan results - 3.3 (1.3) 7.5
Interest income .5 .9 1.8 3.1
Other income .6 1.2 .6 1.5
Other expense - (.2) (.1) (.4)
-------- ------- ------- -------
$ 1.1 $ 8.8 $ 4.4 $ 15.6
======== ======= ======= =======
Nicor Gas Company Page 8
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Notes to the Consolidated Financial Statements (Unaudited; Subject to
Restatement) (continued)
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 ended Nine months ended
September 30 September 30
------------------ -----------------
2002 2001 2002 2001
-------- -------- -------- -------
Net income $ 26.2 $ 27.0 $ 78.2 $ 84.3
Other comprehensive income
(loss), net of tax .4 (.1) .7 (.1)
-------- -------- -------- -------
Total comprehensive income $ 26.6 $ 26.9 $ 78.9 $ 84.2
======== ======== ======== =======
Other comprehensive income includes unrealized gains and losses from derivative
financial instruments accounted for as cash flow hedges.
RELATED PARTY TRANSACTIONS
In the ordinary course of business, under the terms of an agreement approved by
the 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 September 30, 2002
and 2001, Nicor Gas had net charges from (to) affiliates of $.5 million and
$(.8) million, respectively, and for the nine months ended September 30, 2002
and 2001, net charges to affiliates were $(3.7) million and $(3.6) 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 September 30, 2002 and 2001, net charges to Nicor
Enerchange were $1.3 million and $5.5 million, respectively, and for the nine
months ended September 30, 2002 and 2001, net charges to (from) Nicor Enerchange
were $11.4 million and $(6.1) million, respectively.
During the second quarter of 2002 Horizon Pipeline, a 50/50 joint venture
between Nicor 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. This
transaction has been approved by the ICC. For the three and nine months ended
September 30, 2002, Horizon Pipeline charged Nicor Gas $2.6 million and $4.0
million for natural gas transportation under rates that have been accepted by
FERC.
In 2002, Nicor Gas began purchasing engineering and corrosion services from
Nicor Technologies, a subsidiary of Nicor. Nicor Gas was charged $1.1 million
and $3.3 million for these services for the three- and nine-month periods ended
September 30, 2002, respectively.
Nicor Gas Company Page 9
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Notes to the Consolidated Financial Statements (Unaudited; Subject to
Restatement) (continued)
Nicor Gas had $40 million of short-term notes payable due to an affiliated
financing company as of September 30, 2001 and December 31, 2001. As of
September 30, 2002, the company did not have any short-term notes payable due to
this affiliated company.
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 materially affect the restated financial statements that the
company is planning to issue or require the company to 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 are allegations that the company acted improperly in connection with the
PBR plan, and the ICC 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 (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
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. Nicor Gas has
responded to approximately three hundred data requests that have been propounded
by the ICC Staff, CUB, CCSAO and the Illinois Attorney General's Office to date.
In response to these allegations, on July 18, 2002, the Nicor Gas 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. To conduct the
inquiry, the Special Committee retained Scott Lassar of the law firm of Sidley
Austin Brown & Wood (Sidley), and Sidley hired the accounting firm of KPMG LLP.
Mr. Lassar is the former United States Attorney for the Northern District of
Illinois.
Nicor Gas Company Page 10
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Notes to the Consolidated Financial Statements (Unaudited; Subject to
Restatement) (continued)
The Special Committee presented the report of its counsel (Report) to Nicor's
Board of Directors on October 28, 2002. The transmittal letter from the Special
Committee to Nicor's Board of Directors and Mr. Lassar's Report were filed with
the SEC on a Form 8-K on October 31, 2002, and are hereby incorporated by
reference. The findings of the independent counsel's 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 addition, the Nicor Board of Directors has directed the company's
management to:
o make appropriate adjustments to account for, and fully address the
adverse consequences to ratepayers of, the items noted in the Report,
o undertake a re-audit of 1999 to 2001 and a review of the first two
quarters of 2002,
o amend any filings with the ICC, the SEC or other regulatory agencies, as
necessary,
o conduct a full audit of management fees paid by the company to third
parties during 2000 and 2001,
o conduct a detailed study of management bonus issues, and o conduct a detailed
study of the adequacy of internal accounting and
regulatory controls.
As a result of the Special Committee's review, Nicor Gas believes that the
company's financial statements should reflect, and prior period financial
statements may require restatement for, the following items: o The $15 million
of transactions noted above. Examples of the
transactions identified in the report include a late 1999 wholesale transfer
of natural gas from Nicor Gas' storage inventory which increased customers'
gas costs by approximately $6.75 million. The Report also found that
operational transfers of natural gas between Nicor Gas' storage fields were
not consistently accounted for under the PBR plan. If accounted for on a
consistent basis, the Report concluded, the most appropriate result would be
a $3.5 million refund to customers. The Report found additional issues
totaling about $5 million related to interest costs and the purchase of
weather insurance for 2001.
o Changes in the timing of certain sales and purchases of natural gas inventory
between Nicor Gas and independent third-parties during the period December
1999 to the present. Nicor Gas had previously recorded these transactions
based upon when it held title to the natural gas, but there are additional
criteria that were not applied in determining the accounting treatment,
including those set forth in FASB Statement No. 49, Accounting for Product
Financing Arrangements and Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements. For example, the level of economic
interest in or control over the asset must be considered, which changes the
timing of recognizing gas purchases and inventory in some of the third-party
storage arrangements. Nicor and Nicor Gas believe that these restatements
will change assets and liabilities in nearly equal amounts, but the impact
will likely vary from quarter to quarter.
o PBR plan results. Since the calendar-year PBR plan calculations consider the
cost of gas charged to customers and volumes withdrawn from inventory, which
will both be restated, PBR plan results will also change.
The impact of the items listed above is estimated to result in an aggregate
reduction in Nicor Gas net income for 1999 through 2002 of $15 million to $35
million. This reduction has not been reflected in the preliminary third quarter
2002 results reported in this filing. Furthermore, because the restatements have
not been completed and are subject to independent audit and ICC review, it is
possible that the final
Nicor Gas Company Page 11
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Notes to the Consolidated Financial Statements (Unaudited; Subject to
Restatement) (continued)
reduction could be materially different, and possibly greater, than these
estimates. Certain parties in the PBR review proceeding have publicly indicated
disagreement with the findings in the Report.
Nicor Gas is unable to predict the outcome of the review of the PBR plan or the
company's potential exposure thereunder, and has not recorded a liability
associated with this contingency.
Nicor Gas' earnings included pretax income of $14.9 million in 2001 and $12.2
million in 2000 related to the PBR plan. Due to uncertainties surrounding the
PBR plan, Nicor Gas has not recorded estimated year-to-date results related to
the 2002 PBR plan year, which would have been immaterial. However, a negative
$1.3 million correction of 2001 PBR plan results is included in the year-to-date
period ended September 30, 2002.
In a letter dated October 28, 2002, Nicor Gas informed the ICC that it is
terminating its PBR plan effective January 1, 2003.
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 through the present were subject to
Nicor Gas's PBR plan. The plaintiff alleges 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 manipulating
the benchmark under the PBR plan. The class is seeking compensatory damages,
prejudgment and postjudgment interest, disgorgement of all profits, and
restitution to plaintiff and the purported class. Nicor filed a Motion to
Dismiss this action on September 24, 2002. 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 potential outcome of this
contingency.
SEC and U.S. Attorney Inquiries. The staff of the Securities and Exchange
Commission has informed the company that the SEC is conducting a formal inquiry
regarding the PBR plan. A representative of the Office of the United States
Attorney for the Northern District of Illinois has notified the company that
that office is conducting an inquiry on the same matter.
Hub Services. Nicor Gas offers interstate transportation and storage services
which are regulated by the Federal Energy Regulatory Commission (FERC) as well
as certain intrastate interruptible transportation and storage services which
are regulated by the ICC. During a periodic rate case that was filed with FERC,
Nicor Gas determined that refunds were due to certain customers of these
services. Nicor Gas has refunded, or expects to refund, service fees plus
potential interest of approximately $1 million. The company is investigating to
determine whether any additional refunds or other charges are appropriate. At
this time, Nicor Gas cannot estimate whether additional refunds will be required
with respect to either FERC or ICC-regulated services, and it has not recorded
any additional liability associated with this contingency.
Fixed Bill Service. On July 17, 2002, a purported class action was filed in the
Circuit Court of Cook County, Illinois against Nicor Energy Services Company
(Nicor Services), a subsidiary of Nicor, 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 Service is offered to Nicor Gas residential customers
and 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
Nicor Gas Company Page 12
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Notes to the Consolidated Financial Statements (Unaudited; Subject to
Restatement) (continued)
compensatory damages, prejudgment and postjudgment interest, punitive damages,
attorneys' fees and other equitable relief. On September 6, 2002, Nicor Gas and
Nicor Services filed a Motion to Dismiss the above-referenced action. Nicor Gas
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.
Troy Grove Facility. On October 15, 2002, Nicor Gas voluntarily disclosed a
potential violation of certain air pollution regulations and statutes to both
the United States Environmental Protection Agency (U.S. EPA) and the Illinois
Environmental Protection Agency (IEPA) related to commencement of construction
of certain compressor equipment at its Troy Grove storage field prior to the
issuance of a Prevention of Significant Deterioration (PSD) Permit. An
application for the PSD permit had been previously submitted to the IEPA. The
disclosure to U.S. EPA was made pursuant to the U.S. EPA's Self -Disclosure
Policy. Nicor's investigation of this matter is continuing. The potential
maximum civil penalties under the Federal and State Environmental Acts are
$27,500 to $50,000, respectively, for the initial day of violation. For each
additional day of continued violation, the potential maximum civil penalties are
$27,500 and $10,000, respectively. Nicor has not yet identified the number of
potential violations. At this early stage, Nicor is unable to predict the
outcome of this matter or to reasonably estimate its exposure related thereto
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.
Nicor Gas has been named 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. 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 five households.
Nicor Gas charged $148 million to operating expense in the third quarter of 2000
for estimated obligations related to the mercury-related inspection and cleanup
work and for legal defense costs. A $9 million adjustment lowered the
mercury-related reserve and reduced 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 September 30, 2002, the company has incurred $106.8
million in associated costs, leaving a $32.2 million estimated liability. The
remaining $32.2 million liability at September 30, 2002, represented
management's best estimate of future costs, including potential liabilities
relating to remaining lawsuits,
Nicor Gas Company Page 13
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Notes to the Consolidated Financial Statements (Unaudited; Subject to
Restatement) (continued)
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 September 30, 2002, Nicor Gas has recovered, net of related
expenses, $22.6 million from certain insurance carriers of the company and its
independent contractors, including approximately $20 million recovered in the
third quarter of 2002. These recoveries have been recorded as a reduction to
operating expense.
Subsequent to September 30, 2002, Nicor Gas reached an agreement with a
subcontractor's insurer wherein Nicor Gas will receive $.7 million for past
defense costs, which will be included in the company's results of operations for
the fourth quarter of 2002. In addition, this subcontractor's insurer has agreed
to assume certain future defense costs related to claims against this
subcontractor and to pay all judgments and settlements related to such claims up
to $50 million. The impact of this agreement will be reflected in the company's
evaluation of its mercury reserve for the fourth quarter. At this stage, it is
not possible to estimate the likelihood of additional recoveries from insurance
carriers or 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.
Manufactured Gas Plant Sites. Manufactured gas plants were used in the 1800's
and early to mid 1900's to produce natural 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 for certain properties. 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, subject to annual prudence
reviews.
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
Nicor Gas Company Page 14
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Notes to the Consolidated Financial Statements (Unaudited; Subject to
Restatement) (concluded)
insurance carriers who were involved in this appeal. In September 2002, the
Illinois Appellate Court upheld the ruling of the trial court. Nicor Gas has
filed a petition for leave to appeal to the Illinois Supreme Court. 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 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 plans for the proposed cleanup of
a manufactured gas plant site in Oak Park, Illinois are 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.
In October 2002, two lawsuits were filed against Nicor Gas in the Circuit Court
of Cook County seeking unspecified damages for various injuries and one death
that allegedly resulted from exposure to contaminants allegedly emanating from
the manufactured gas plant site in Oak Park, Illinois. The plaintiffs lived in
homes adjoining the site. 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 MWRD) under the 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 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 annual 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 15
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Subject to Restatement)
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.
CAUTIONARY STATEMENT
The company intends to restate its financial statements for 1999, 2000, 2001 and
interim periods in 2002, including the financial statements included in this
Report on Form 10-Q. The financial statements and information presented in this
Form 10-Q do not include (1) adjustments that the company plans to make as a
result of an investigation by a special committee of independent directors of
Nicor Gas' natural gas purchases, sales, transportation and storage activities
nor (2) any other adjustments that may be made when the company restates its
financial statements for prior periods and the third quarter of 2002. For
further information, see Pending Financial Statement Restatements and Re-audits
on page 5, and Contingencies - Performance-Based Rate Plan beginning on page 9,
which are hereby incorporated by reference. Accordingly, all of the notes to the
consolidated financial statements, particularly the notes referred to in the
previous sentence, should be read in their entirety when reading the financial
statements in this Form 10-Q and the following discussion because they
materially impact the ability to understand the historical financial information
presented regarding the company. All information in the following discussion is
subject to restatement.
RESULTS OF OPERATIONS
Net income for the three and nine months ended September 30, 2002, was $26.2
million and $78.2 million, respectively, compared with $27.0 million and $84.3
million, respectively, for the same periods in 2001. Results for both periods
were negatively affected by increased operating and maintenance expenses and
poorer performance-base rate (PBR) plan results. These negative factors were
partially offset by increased mercury program-related credits, improved margin
and decreased interest expense in both 2002 periods.
Operating revenues. Third quarter operating revenues increased from $153.0
million in 2001 to $172.6 million in 2002 due primarily to higher natural gas
prices, which are passed directly through to customers without markup. The
estimated effect of the higher natural gas prices on revenue in the third
quarter of 2002 compared to 2001 was about $20 million. For the nine-month
period, operating revenues decreased $798.2 million from $1,768.9 million in
2001 to $970.7 million in 2002 due primarily to significantly lower average
natural gas prices in 2002 compared to the same period of 2001. The revenue
effect of the lower average natural gas prices is estimated to be approximately
$770 million.
Margin. Margin, defined as operating revenues less cost of gas and revenue
taxes, which are both passed directly through to customers, was $97.1 million in
the third quarter of 2002 compared to $94.4 million for the same period a year
ago. For the quarter, margin was positively affected by increased average rates
($1.4 million) and increased deliveries to power generation facilities ($1.0
million). For the 2002 nine-month period, margin increased slightly to $373.6
million compared to $370.2 million in 2001. For the year-to-date period, the
positive effects of higher customer demand unrelated to weather ($4.1 million)
and a lower cost of gas used to operate company equipment and facilities ($3.8
million) were nearly offset by lower revenue from customer finance charges ($6.3
million). The reduction in company-use gas costs and customer finance charges is
related to lower natural gas prices in the first quarter of 2002.
Nicor Gas Company Page 16
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Subject to Restatement) (continued)
Operating and maintenance. Operating and maintenance expense for 2002 increased
$7.7 million to $46.8 million and $15.0 million to $137.5 million, in the three-
and nine-month periods, respectively. The quarterly increase was related to the
negative effects of reduced pension credits ($3.8 million), increased
liabilities for legal settlements ($3.6 million) and costs related to the PBR
plan and other investigations in 2002 ($2.8 million). The year-to-date increase
reflects smaller pension credits ($11.4 million), increased liabilities for
legal settlements ($3.5 million), the investigation costs ($2.8 million) and
increased retiree health care costs ($2.4 million).
Mercury-related costs (recoveries). In the third quarter, Nicor Gas reached an
agreement with an insurer wherein the company will recover approximately $20
million of mercury-related costs. A $9 million adjustment lowered the
mercury-related reserve and reduced 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. Year-to-date operating results for 2001 also reflected $2.4
million in mercury-related recoveries.
Other income (expense). Other income (expense) before the related taxes
decreased by $7.7 million to $1.1 million and by $11.2 million to $4.4 million
in the three- and nine-month periods, respectively. For the quarter, the
decrease reflects lower property sale gains ($3.6 million) and lower PBR plan
results ($3.3 million). The decline in the year-to-date period was due largely
to lower PBR plan results ($8.8 million) and lower interest income ($1.3
million) in 2002.
Nicor Gas recorded no PBR plan results in the third quarter of 2002 compared to
$3.3 million in the third quarter of 2001. For the year-to-date period, Nicor
Gas recorded a $1.3 million PBR plan loss in 2002 compared with a $7.5 million
gain for the same 2001 period. The year-to-date 2002 period excludes estimated
PBR plan results related to the 2002 plan year, which would have been
immaterial, due to the developments described in the Performance-Based Rate Plan
section beginning on page 9. The year-to-date period also includes negative
pretax corrections of 2001 PBR plan results of $1.3 million recorded in the
nine-month period ended September 30, 2002.
Interest expense. Interest expense for the 2002 three-month period decreased
from $10.4 million in 2001 to $8.2 million. For the year-to-date period interest
expense decreased from $35.4 million in 2001 to $25.7 million in 2002. The
decline in both periods was due to lower average borrowing levels and interest
rates. Reduced natural gas costs in the first quarter of 2002 compared to 2001
contributed to the lower borrowing levels in the nine-month period.
FINANCIAL CONDITION AND LIQUIDITY
Operating cash flows. Net cash flow from operating activities decreased $143.1
million to $238.0 million for the nine months ended September 30, 2002, due
primarily to changes in working capital items. Working capital can increase or
decrease significantly 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.
Nicor Gas Company Page 17
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Subject to Restatement) (continued)
Financing activities. The company maintains short-term line of credit agreements
with major domestic and foreign banks. The company had line of credit agreements
with four banks at September 30, 2002. These agreements, which serve as backup
for the issuance of commercial paper, allow for borrowings of up to $334 million
through March 31, 2003 and $259 million through September 30, 2003. At September
30, 2002 the company had $190 million of commercial paper borrowings
outstanding. The company expects to enter into an additional line of credit
agreement in the next few weeks which will allow for an additional $75 million
of borrowings.
Because of uncertainties pertaining to the energy industry in general and to the
company, as described in Contingencies beginning on page 9, the rating agencies
have put Nicor Gas' long-term debt ratings under review for possible downgrade
or on credit watch with negative implications. Moody's Investors Service also
put the company's commercial paper on credit watch. On November 5, 2002, Fitch
Ratings has lowered its rating on Nicor Gas' long-term debt to AA from AA+.
Nicor Gas' F-1+ short-term debt rating was unchanged. While ratings on the
company's debt remain among the highest in the utility industry, lower ratings
could cause higher interest costs.
Under the company's short-term committed lines of credit agreements, if Nicor
Inc.'s ratio of consolidated total indebtedness to capitalization (including
short-term debt) exceeds 65% during the term of the credit facility, each bank
may at its option declare any amounts due immediately payable and or terminate
its commitment to make advances to the company.
Nicor Gas is currently unable to issue First Mortgage Bonds under its July 2001
shelf registration filing. However, Nicor Gas is evaluating other sources of
financing available to the company and believes it will continue to be able to
access sufficient capital resources to fund its capital expenditures and other
cash requirements. Nicor Gas is in compliance with its debt covenants and
believes it will remain so even if its debt ratings are lowered. The company's
debt agreements do not include ratings triggers or material adverse change
provisions.
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 9,
which is hereby incorporated by reference.
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 and on page 6 of this
report. Management is also required to make significant estimates which are
similarly described in the notes of both reports.
Nicor Gas Company Page 18
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Subject to Restatement) (continued)
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 9.
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.
Net periodic benefit credit related to pension benefits. Nicor Gas maintains
noncontributory defined benefit pension plans covering substantially all
employees hired prior to 1998. Five percent of the company's quarterly and
year-to-date 2002 net income was related to net periodic benefit credits
compared to about 13 percent in 2001. 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. The current actuarial
valuation is in progress and Nicor Gas expects that the October 1, 2002 asset
values, along with changes in actuarial assumptions, will lead to a materially
lower pension credit, reducing operating income (after capitalization) in 2003
by at least $8 million. As of the date of this filing, the company believes its
pension plans are adequately funded. Market performance could impact future
company contributions but should not impact participant benefits.
Other operating expenses. Health care costs have been rising and Nicor Gas
expects significant additional increases in 2003. In addition, Nicor Gas now
expects bad debt expense to be higher in 2002 than in 2001 due to a number of
factors including current economic conditions. The company is also experiencing,
and expects to continue to experience in the near future, higher insurance costs
due to a tightening insurance market and company loss experience. These cost
increases, either collectively or individually, could materially reduce Nicor
Gas' future results of operations.
Credit risk. In late 2001, Enron North America Corporation (Enron), an energy
trading company, filed for bankruptcy protection. At the date of Enron's
bankruptcy, Nicor Gas' receivable from Enron was about $3 million and its
payable to Enron was about $6 million. Nicor Gas has filed its appropriate Proof
of Claims with the U.S. Bankruptcy Court. There have not been any subsequent
settlements related to the amounts outstanding with Enron at the time of the
bankruptcy filing. Nicor Gas believes that it has the right to set off
receivables against amounts owed to the Enron companies.
Nicor Gas Company Page 19
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Subject to Restatement) (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 the expected results of
financial restatements and other adjustments, and other forwarding-looking
statements are based on reasonable assumptions, actual results may vary
materially from stated expectations. Actual results may differ materially from
those indicated in the company's forward-looking statements due to the direct or
indirect effects of the results of accounting reviews and the resolution of
those issues, including the direct or indirect effects of a restatement and
re-audit of financial statements and ICC review of the PBR plan. Other factors
that could cause materially different results include, but are not limited to,
PBR plan review, the legal contingencies and other matters referred to in the
Contingencies section beginning on page 9, weather conditions, natural gas
prices, interest rates, borrowing needs, credit conditions, economic and market
conditions, health care costs, insurance costs, energy conservation, legislative
and regulatory actions, asset sales, and any future mercury-related charges or
credits. 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 20
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Subject to Restatement) (concluded)
OPERATING STATISTICS
Operating revenues, deliveries, customers and other statistics are presented
below.
Three months ended Nine months ended
September 30 September 30
------------------ ------------------
2002 2001 2002 2001
-------- -------- -------- --------
Operating revenues (millions):
Sales
Residential $ 100.8 $ 93.5 $ 620.1 $1,258.0
Commercial 20.3 13.7 120.1 235.6
Industrial 2.1 1.8 19.7 35.8
-------- -------- -------- --------
123.2 109.0 759.9 1,529.4
-------- -------- -------- --------
Transportation
Residential 4.0 1.8 10.0 6.7
Commercial 12.2 12.1 53.9 54.5
Industrial 13.7 12.8 35.8 35.8
Other 1.0 .7 5.5 6.7
-------- -------- -------- --------
30.9 27.4 105.2 103.7
-------- -------- -------- --------
Other revenues
Revenue taxes 9.1 7.9 66.0 95.0
Environmental cost recovery 1.7 1.2 17.1 14.3
Chicago Hub 3.5 3.4 9.6 9.0
Weather insurance .7 - 1.3 -
Other 3.5 4.1 11.6 17.5
-------- -------- -------- --------
18.5 16.6 105.6 135.8
-------- -------- -------- --------
$ 172.6 $ 153.0 $ 970.7 $1,768.9
======== ======== ======== ========
Deliveries (Bcf):
Sales
Residential 13.2 14.8 139.0 140.6
Commercial 3.0 2.6 26.7 26.9
Industrial .3 .4 4.8 4.3
-------- -------- -------- --------
16.5 17.8 170.5 171.8
-------- -------- -------- --------
Transportation
Residential 1.1 .5 5.6 4.2
Commercial 8.9 8.6 68.4 61.3
Industrial 42.6 32.3 116.6 103.5
-------- -------- -------- --------
52.6 41.4 190.6 169.0
-------- -------- -------- --------
69.1 59.2 361.1 340.8
======== ======== ======== ========
Customers at end of period (thousands):
Sales
Residential 1,701.5 1,748.0
Commercial 105.0 98.2
Industrial 6.7 6.4
-------- --------
1,813.2 1,852.6
-------- --------
Transportation
Residential 135.2 59.7
Commercial 63.6 67.5
Industrial 6.8 7.2
-------- --------
205.6 134.4
-------- --------
2,018.8 1,987.0
======== ========
Other statistics:
Degree days 33 85 3,530 3,724
Average gas cost per Mcf sold $ 3.93 $ 2.83 $ 3.08 $ 7.56
Nicor Gas Company Page 21
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Item 4. Control and Procedures
Within the 90 days prior to the date of filing this Quarterly Report on Form
10-Q, Nicor Gas carried out an evaluation, under the supervision and with the
participation of the company's management, including the principal executive
officer and the principal financial officer, of the effectiveness of the design
and operation of the company's disclosure controls and procedures pursuant to
Securities and Exchange Commission Rules 13a-14(c) and 15d-14(c). Based upon
that evaluation, the principal executive officer and the principal financial
officer concluded that the company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
company (including its consolidated subsidiary) required to be included in the
company's periodic SEC filings. Subsequent to the date of that evaluation, there
have been no significant changes in the company's internal controls or in other
factors that could significantly affect internal controls, nor were any
corrective actions required with regard to significant deficiencies and material
weaknesses.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For information concerning legal proceedings, see Contingencies beginning on
page 9, which is incorporated herein by reference.
Item 5. Other Information
Because of the inability of the company's independent public accountant to
complete its 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 25 filed herewith.
(b) On August 14, 2002, the company filed a Form 8-K including CEO/CFO
certifications (SEC 4-460).
Nicor Gas Company Page 22
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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 November 11, 2002 By /s/ KATHLEEN L. HALLORAN
----------------- ------------------------
Kathleen L. Halloran
Executive Vice President
Finance and Administration
Nicor Gas Company Page 23
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Certification
I, Thomas L. Fisher, Chairman and Chief Executive Officer of Nicor Gas
Company, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Nicor Gas Company;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5) The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date November 11, 2002 /s/ THOMAS L. FISHER
----------------- --------------------
Thomas L. Fisher
Chairman and Chief Executive Officer
Nicor Gas Company Page 24
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Certification
I, Kathleen L. Halloran, Executive Vice President Finance and Administration
of Nicor Gas Company, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Nicor Gas Company;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5) The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date November 11, 2002 /s/ KATHLEEN L. HALLORAN
----------------- ------------------------
Kathleen L. Halloran
Executive Vice President
Finance and Administration
Nicor Gas Company Page 25
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Exhibit Index
Exhibit
Number Description of Document
------- --------------------------------------------------------------
12.01 Computation of Consolidated Ratio of Earnings to Fixed Charges.