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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 March 31, 2003
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
I.R.S. Employer
Commission Registrant, State of 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Shares of common stock, par value $5, outstanding at April 28, 2003 were
15,232,414, all of which are owned by Nicor Inc.
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 months ended
March 31, 2003 and 2002 ..................................... 2
Consolidated Statements of Cash Flows:
Three months ended
March 31, 2003 and 2002 ..................................... 3
Consolidated Balance Sheets:
March 31, 2003 and 2002, and
December 31, 2002 ........................................... 4
Notes to the Consolidated Financial Statements ................ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...........................12
Item 4. Controls and Procedures .......................................18
Part II - Other Information
Item 1. Legal Proceedings .............................................21
Item 6. Exhibits and Reports on Form 8-K ..............................21
Signature .....................................................22
Certifications ................................................23
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.
FERC.........Federal Energy Regulatory Commission, the agency that regulates the
interstate transportation of natural gas, oil and electricity.
Mcf, MMcf,
Bcf..........Thousand cubic feet, million cubic feet, billion cubic feet.
PBR..........Performance-based rate, a regulatory plan that provided economic
incentives based on natural gas cost performance.
Nicor Gas Company Page 1
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The following condensed unaudited consolidated 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 2002 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
March 31
---------------------
2003 2002
---------- ---------
Operating revenues (includes revenue taxes
of $62.4 and $36.4, respectively) $ 1,096.7 $ 516.5
---------- ---------
Operating expenses
Cost of gas 862.9 315.0
Operating and maintenance 58.5 49.4
Depreciation 36.0 56.6
Taxes, other than income taxes 65.9 40.3
Mercury-related costs (recoveries) (.3) .2
Income taxes 23.3 16.8
---------- ---------
1,046.3 478.3
---------- ---------
Operating income 50.4 38.2
---------- ---------
Other income (expense)
Other, net .2 6.3
Income taxes on other income - (2.4)
---------- ---------
.2 3.9
---------- ---------
Interest expense
Interest on debt, net of amounts capitalized 8.5 9.3
Other .6 .2
---------- ---------
9.1 9.5
---------- ---------
Net income 41.5 32.6
Dividends on preferred stock .1 .1
---------- ---------
Earnings applicable to common stock $ 41.4 $ 32.5
========== =========
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)
Three months ended
March 31
------------------
2003 2002
-------- -------
Operating activities
Net income $ 41.5 $ 32.6
Adjustments to reconcile net income to net cash flow
provided from operating activities:
Depreciation 36.0 56.6
Deferred income tax expense 3.6 4.6
Gains on sale of property, plant and equipment - (3.4)
Changes in:
Receivables, less allowances (189.6) (13.9)
Gas in storage 13.0 23.7
Deferred/accrued gas costs (93.3) (60.7)
Prepaid pension costs - (3.2)
Other assets 18.3 5.8
Accounts payable 34.2 (80.0)
Accrued mercury-related costs (recoveries) (.5) (3.4)
Temporary LIFO liquidation 258.6 124.5
Other liabilities (9.1) 36.2
Other .3 .9
-------- -------
Net cash flow provided from operating activities 113.0 120.3
-------- -------
Investing activities
Capital expenditures (34.9) (34.4)
Net proceeds from sale of property, plant and equipment - 3.5
-------- -------
Net cash flow used for investing activities (34.9) (30.9)
-------- -------
Financing activities
Short-term borrowings (repayments), net (125.0) (60.0)
Dividends paid (21.1) -
-------- -------
Net cash flow used for financing activities (146.1) (60.0)
-------- -------
Net (decrease) increase in cash and cash equivalents (68.0) 29.4
Cash and cash equivalents, beginning of period 182.2 137.7
-------- -------
Cash and cash equivalents, end of period $ 114.2 $ 167.1
======== =======
The accompanying notes are an integral part of these statements.
Nicor Gas Company Page 4
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Consolidated Balance Sheets (Unaudited)
(millions)
March 31 December 31 March 31
2003 2002 2002
----------- ----------- -----------
Assets
------
Gas distribution plant, at cost $ 3,589.9 $ 3,558.1 $ 3,455.4
Less accumulated depreciation 1,940.6 1,910.1 1,858.8
----------- ----------- -----------
1,649.3 1,648.0 1,596.6
----------- ----------- -----------
Current assets
Cash and cash equivalents - affiliates 72.6 115.3 164.3
Cash and cash equivalents - other 41.6 66.9 2.8
Receivables, less allowances of $23.3,
$14.4 and $7.9, respectively 572.8 382.4 290.7
Receivables - affiliates 9.9 10.7 14.5
Gas in storage, at last-in, first-out
(LIFO)cost 5.6 18.6 8.3
Deferred gas costs 26.0 - -
Deferred income taxes 30.9 31.4 38.0
Other 10.2 12.2 9.0
----------- ----------- -----------
769.6 637.5 527.6
----------- ----------- -----------
Prepaid pension costs 177.1 177.1 167.5
Other assets 66.5 82.2 24.5
----------- ----------- -----------
$ 2,662.5 $ 2,544.8 $ 2,316.2
=========== =========== ===========
Capitalization and Liabilities
------------------------------
Capitalization
Long-term debt $ 396.3 $ 396.2 $ 445.8
Preferred stock 7.0 7.0 7.5
Common equity
Common stock 76.2 76.2 76.2
Paid-in capital 108.0 108.0 108.0
Retained earnings 450.9 424.5 412.2
Accumulated other comprehensive
income (loss) (1.1) (.9) (1.0)
----------- ----------- -----------
634.0 607.8 595.4
----------- ----------- -----------
1,037.3 1,011.0 1,048.7
----------- ----------- -----------
Current liabilities
Long-term obligations due
within one year 100.5 100.5 .5
Short-term borrowings - other 190.0 315.0 167.0
Short-term borrowings - affiliates - - 40.0
Accounts payable 495.9 461.7 317.7
Temporary LIFO liquidation 258.6 - 124.5
Accrued gas costs - 67.3 47.3
Accrued mercury-related costs 4.9 5.0 6.3
Accrued dividends payable 15.1 21.1 66.2
Other 43.9 46.4 46.4
----------- ----------- -----------
1,108.9 1,017.0 815.9
----------- ----------- -----------
Deferred credits and other liabilities
Deferred income taxes 257.5 253.5 229.2
Regulatory income tax liability 61.3 62.2 65.4
Unamortized investment tax credits 37.0 37.5 38.5
Accrued mercury-related costs 18.0 18.4 27.3
Other 142.5 145.2 91.2
----------- ----------- -----------
516.3 516.8 451.6
----------- ----------- -----------
$ 2,662.5 $ 2,544.8 $ 2,316.2
=========== =========== ===========
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 2002 Annual Report on Form 10-K. Nicor Gas is a
wholly owned subsidiary of Nicor Inc. (Nicor).
ACCOUNTING POLICIES
Gas in storage. Gas in storage inventory is carried at cost applying 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.
Regulatory assets and liabilities. Nicor Gas is regulated by the Illinois
Commerce Commission (ICC), which establishes the rules and regulations governing
utility rates and services in Illinois. The company applies accounting standards
that recognize the economic effects of rate regulation and, accordingly, has
recorded regulatory assets and liabilities. The company had regulatory assets
(liabilities) as follows (in millions):
March 31 December 31 March 31
2003 2002 2002
---------- ----------- ----------
Deferred (accrued) gas cost $ 26.0 $ (67.3) $ (47.3)
Regulatory income tax liability (61.3) (62.2) (65.4)
Unamortized loss on reacquired debt 18.8 19.0 19.9
Deferred (accrued)environmental costs 39.1 54.7 (4.0)
---------- ----------- ----------
$ 22.6 $ (55.8) $ (96.8)
========== =========== ==========
The unamortized loss on reacquired debt is classified in other noncurrent
assets. Deferred (accrued) environmental costs are included in other noncurrent
assets and other noncurrent liabilities, respectively.
In addition, consistent with its regulatory treatment, Nicor Gas depreciates
anticipated future removal costs over the useful lives of its property, plant
and equipment. The balance of removal costs in accumulated depreciation at March
31, 2003, December 31, 2002 and March 31, 2002 was approximately $635 million,
$625 million and $590 million, respectively.
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 quarters ended March 31, 2003 and 2002
were $61.5 million and $35.5 million, respectively.
Depreciation. Property, plant and equipment are depreciated over estimated
useful lives on a straight-line basis. The composite depreciation rate is 4.1
percent, which includes estimated future removal costs.
Effective January 1, 2003, Nicor Gas began using the straight-line method for
allocating annual depreciation to interim periods. See Accounting Changes -
Depreciation on page 6 for details of this accounting change.
Nicor Gas Company Page 6
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Notes to the Consolidated Financial Statements (Unaudited) (continued)
ACCOUNTING CHANGES
Depreciation. Effective January 1, 2003, Nicor Gas began using the straight-line
method for allocating annual depreciation to interim periods, the predominant
method used by other companies in its industry. Nicor Gas' 2002 results include
the company's depreciation allocated based upon the level of weather-normalized
gas deliveries. The following table provides a comparison of Nicor Gas' results
as reported for the first quarter of 2002 to pro forma results had depreciation
been allocated on a straight-line basis (in millions):
Period ended
March 31, 2002
----------------------
As
Reported Pro Forma
---------- ----------
Depreciation expense $ 56.6 $ 34.4
Operating income 38.2 51.6
Net income 32.6 46.0
Asset retirement obligations. In August 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (FAS) No. 143,
Accounting for Asset Retirement Obligations. This standard requires entities to
record the fair value of a liability for an asset retirement obligation in the
period in which the obligation is incurred. When the liability is initially
recorded, the entity capitalizes the cost by increasing the carrying amount of
the related long-lived asset. Over time, the liability is accreted to its
present value, and the capitalized cost is depreciated over the useful life of
the related asset. This standard became effective on January 1, 2003.
The obligation of retiring gas distribution, transmission, storage and certain
general plant assets at Nicor Gas meets the definition of a legal obligation
within the meaning of FAS 143. However, the company, like most other gas
distribution utility companies, has determined that due to the indefinite life
of such assets a liability is generally not measurable. On January 1, 2003, a
$3.5 million asset retirement obligation for the expected replacement of inside
mercury regulators was recorded at Nicor Gas. Certain costs associated with the
retirement of other items at Nicor companies, including polychlorinated
biphenyls, underground storage tanks and asbestos abatement, are determined to
be immaterial or cannot be measured at this time.
Nicor Gas continues its practice of accruing for future retirement costs as
accumulated depreciation, subject to cost-of-service utility rate regulation,
even when an asset removal obligation does not exist under FAS 143. Through
December 31, 2002, the company has accrued and recovered about $625 million
associated with the future removal of these long-lived assets.
No cumulative effect gain or loss was recorded as a result of adopting this
standard. The application of this standard did not have a material effect on the
company's financial position and results of operations.
ACCRUED UNBILLED REVENUES
Receivables include accrued unbilled revenues of $164.2 million, $142.4 million
and $63.1 million at March 31, 2003, December 31, 2002, and March 31, 2002,
respectively. Nicor Gas accrues revenues for estimated deliveries to customers
from the date of their last bill until the balance sheet date.
Nicor Gas Company Page 7
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Notes to the Consolidated Financial Statements (Unaudited) (continued)
OTHER INCOME (EXPENSE)
Other income (expense) - other, net consists of the following (in millions):
Three
months ended
March 31
----------------
2003 2002
------- -------
PBR plan results $ - $ 2.2
Gains on sale of property, plant and equipment - 3.4
Interest income .5 1.0
Other income .1 .2
Other expense (.4) (.5)
------- -------
$ .2 $ 6.3
======= =======
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
March 31
-----------------
2003 2002
-------- --------
Net income $ 41.5 $ 32.6
Other comprehensive income (loss), net of tax (.2) .3
-------- --------
Total comprehensive income $ 41.3 $ 32.9
======== ========
Other comprehensive income (loss) consists primarily of 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 March 31, 2003 and
2002, Nicor Gas had net charges to affiliates of $3.7 million and $2.1 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 March 31, 2003 and 2002, net charges to Nicor
Enerchange were $.6 million and $3.3 million, respectively.
Nicor Gas Company Page 8
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Notes to the Consolidated Financial Statements (Unaudited) (continued)
In the first quarter of 2003, Horizon Pipeline, a 50/50 joint venture between
Nicor and Natural Gas Pipeline Company of America (NGPL), charged Nicor Gas $2.6
million for natural gas transportation under rates that have been accepted by
FERC.
Nicor Gas purchases engineering and corrosion services from Nicor Technologies,
a subsidiary of Nicor. Nicor Gas was charged $.9 million and $1.1 million for
these services for the three months ended March 31, 2003 and 2002, respectively.
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 any amounts already recognized, it is
possible that the resolution of these contingencies, either individually or in
aggregate, will require the company to take charges against, or will result in
reductions in, future earnings. It is the opinion of management that the
resolution of these contingencies, either individually or in aggregate, could be
material to earnings in a particular period, but is not expected to have a
material adverse impact on Nicor Gas' liquidity or financial condition.
Performance-Based Rate (PBR) Plan. Nicor Gas' PBR plan for natural gas costs
went into effect in 2000 and was terminated by the company effective January 1,
2003. Under the PBR plan, Nicor Gas' total gas supply costs were compared to a
market-sensitive benchmark. Savings and losses relative to the benchmark were
determined annually and shared equally with sales customers. The PBR plan is
currently under Illinois Commerce Commission (ICC) review.
There are allegations that the company acted improperly in connection with the
PBR plan, and the ICC 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 (the ICC Proceedings). 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 CUB and the ICC staff. The CIDs ordered that CUB
and the ICC staff produce all documents relating to any claims that Nicor Gas
may have presented, or caused to be presented, false information related to its
PBR plan. The Securities and Exchange Commission (SEC) and the Office of the
United States Attorney for the Northern District of Illinois are also reviewing
the allegations that the company acted improperly in connection with the PBR
plan. The company has committed to cooperate fully in the reviews of the PBR
plan.
Pursuant to the agreement of all parties, including the company, the ICC
re-opened the 1999 and 2000 purchased gas adjustment filings for review of
certain transactions related to the PBR plan and consolidated the reviews of the
1999-2002 purchased gas adjustment filings with the PBR plan review.
Certain parties in the PBR plan review proceeding have indicated that they
believe substantial adjustments or penalties are warranted. In addition, on
February 5, 2003, the CCSAO and CUB filed a motion for $27 million in sanctions
against the company in the ICC Proceedings. In that motion, CCSAO and CUB
alleged that Nicor Gas' responses to certain CUB data requests were false. Also
on February 5, 2003, CUB stated in a press release that, in addition to $27
million in sanctions, it would seek additional
Nicor Gas Company Page 9
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Notes to the Consolidated Financial Statements (Unaudited) (continued)
refunds to consumers. On March 5, 2003, the ICC staff filed a response brief in
support of CUB's motion for sanctions. On May 1, 2003, the Administrative Law
Judges issued a ruling denying CUB and CCSAO's motion for sanctions, which
ruling may be subject to review by the ICC. It is not possible to determine how
the ICC will resolve the claims of CCSAO, CUB or other parties to the ICC
Proceedings.
Nicor Gas is unable to predict the outcome of any of the foregoing reviews or
the company's potential exposure thereunder. Due to the uncertainties
surrounding the PBR plan, Nicor Gas has not recognized a $26.9 million pretax
gain from the 2002 PBR plan year. Because the PBR plan and historical utility
gas costs are still under ICC review, it is possible that the final outcome
could be materially different than the amounts reflected in the company's
financial statements as of March 31, 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' PBR plan. The named plaintiffs alleged 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 named plaintiffs sought, on behalf of
themselves and the purported class, compensatory damages, prejudgment and
postjudgment interest, disgorgement of all profits, and restitution to
plaintiffs and the purported class. Nicor filed a Motion to Dismiss this action
on September 24, 2002. On December 4, 2002, the named plaintiffs voluntarily
dismissed the case, but indicated an intent to bring their claims before the
ICC. Nicor is unable to predict the outcome of any such proceeding 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. In 2002, the staff of the SEC 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 that the SEC is investigating, and a grand jury is
also reviewing this 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 accrued customer refunds and other costs totaling $1.4
million in the years 2000 to 2002. On March 14, 2003, FERC issued an order
approving a settlement with Nicor Gas.
Other FERC Matters. In 2002, Nicor Gas determined that it may not have complied
with regulations of FERC governing the release of certain transportation and
storage capacity that it contracts for with interstate pipelines, and the
company brought these matters to the attention of FERC. The company accrued a
$.4 million liability associated with these matters in the fourth quarter of
2002. On March 14, 2003, FERC issued an order approving a settlement with Nicor
Gas.
Nicor Gas Company Page 10
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Notes to the Consolidated Financial Statements (Unaudited) (continued)
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. Based on
various communications between Nicor Gas and IEPA, the company does not expect
the resolution of this matter to have a material adverse impact on the company's
financial condition or results of operations.
Mercury. Nicor Gas has incurred, and expects to continue to incur, costs
related to its historical use of mercury in various kinds of company
equipment.
Nicor Gas is a defendant in several private lawsuits, all in the Circuit Courts
of Cook and DuPage Counties, Illinois, claiming a variety of unquantified
damages (including bodily injury, property and punitive damages) allegedly
caused by mercury-containing regulators. Under the terms of a class action
settlement agreement, Nicor Gas will continue, until 2006, to provide medical
screening to persons exposed to mercury from its equipment, and will use its
best efforts to replace any remaining inside residential mercury regulators by
2005. The class action settlement permitted class members to "opt out" of the
settlement and pursue their claims individually. Approximately 160 households
have opted out of the class. Of those, 45 households had traces of mercury, and
Nicor Gas has settled with seven households.
As of March 31, 2003, Nicor Gas had remaining an estimated liability of $22.9
million, representing management's best estimate of future costs, including
potential liabilities relating to remaining lawsuits, based on an evaluation of
currently available information. Actual costs may vary from this estimate. The
company will continue to reassess its estimated obligation and will record any
necessary adjustment, which could be material to operating results in the period
recorded.
Nicor Gas continues to vigorously pursue recovery from insurers and independent
contractors that had performed work for the company. When received, these
recoveries are recorded as a reduction to gas distribution operating expense. At
this stage, it is not possible to estimate the likelihood of additional
recoveries and Nicor Gas has not accrued any such recoveries in its financial
statements.
The final disposition of these mercury-related matters is not expected to have a
material adverse impact on the company's financial condition.
Manufactured Gas Plant Sites. Manufactured gas plants were used in the 1800's
and early to mid 1900's to produce manufactured gas from coal, creating a coal
tar byproduct. Current environmental laws may require the cleanup of coal tar at
certain former manufactured gas plant sites.
To date, Nicor Gas has identified about 40 properties for which it may, in part,
be responsible. Most of these properties are not presently owned by the company.
Information regarding preliminary site reviews has been presented to the
Illinois Environmental Protection Agency for certain properties. More detailed
investigations and remedial activities are complete, in progress or planned at
many of these sites. The results of the detailed site-by-site investigations
determines the extent additional remediation is necessary and provides a basis
for estimating additional future costs which, based on industry experience,
could be significant. In accordance with ICC authorization, the company is and
has been recovering these costs from its customers, subject to annual prudence
reviews.
Nicor Gas Company Page 11
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Notes to the Consolidated Financial Statements (Unaudited) (concluded)
In December 2001, a purported class action lawsuit was filed against Exelon
Corporation, Commonwealth Edison Company and Nicor Gas in the Circuit Court of
Cook County alleging, among other things, that the ongoing cleanup of a former
manufactured gas plant site in Oak Park, Illinois is inadequate. Since then,
three additional lawsuits have been filed in that court related to this same
former manufactured gas plant site. These lawsuits seek, in part, unspecified
damages for property damage, nuisance, various personal injuries and one death
that allegedly resulted from exposure to contaminants allegedly emanating from
the site, and punitive damages. Management cannot predict the outcome of this
litigation or the company's potential exposure thereto and has not recorded a
liability associated with this contingency.
In April 2002, Nicor Gas was named as a defendant, together with Commonwealth
Edison Company, in a lawsuit brought by the Metropolitan Water Reclamation
District of Greater Chicago (the MWRDGC) under the Federal Comprehensive
Environmental Response, Compensation and Liability Act seeking recovery of past
and future remediation costs and a declaration of the level of appropriate
cleanup for a former manufactured gas plant site in Skokie, Illinois now owned
by the MWRDGC. In January 2003, the suit was amended to include a claim under
the Federal Resource Conservation and Recovery Act. The suit was filed in the
United States District Court for the Northern District of Illinois. Management
cannot predict the outcome of this litigation or the company's potential
exposure thereto and has not recorded a liability associated with this
contingency.
Since costs and recoveries relating to the cleanup of manufactured gas plant
sites are passed directly through to customers in accordance with ICC
regulations, subject to an annual ICC prudence review, the final disposition of
manufactured gas plant matters is not expected to have a material impact on the
company's financial condition or results of operations.
Other. In 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 2002 Annual Report on Form
10-K.
RESULTS OF OPERATIONS
Net income for the first quarter of 2003 rose to $41.5 million from $32.6
million in the first quarter of 2002 due to higher operating income resulting
from the positive impact of a new interim depreciation allocation method.
Effective January 1, 2003, Nicor Gas began using a straight-line method to
allocate annual depreciation to interim periods, a method predominantly used by
others in the industry. While this change has a significant impact on the
quarterly results, it has no impact on depreciation for the full year. Nicor
Gas' first quarter 2002 results include the company's depreciation allocated
based upon the level of weather-normalized gas deliveries. Net income for the
2002 quarter would have been $46 million had the company allocated annual
depreciation on the straight-line basis. Higher operating and maintenance
expenses partially offset the impact of the new interim depreciation allocation
method.
Operating revenues. Operating revenues increased significantly to $1,096.7
million in the first quarter of 2003 from $516.5 million in 2002 due primarily
to higher natural gas costs, which are passed directly through to customers
without markup, and colder weather. The average cost of natural gas sold in the
2003 period was more than double the comparable 2002 period. The revenue effect
of higher natural gas costs was approximately $420 million and colder weather
increased revenues by about $80 million.
Margin. Nicor Gas utilizes a measure it refers to as "margin" to evaluate the
operating income impact of gas distribution revenues. Gas distribution revenues
include gas costs, which are passed directly through to customers without
markup, and revenue taxes, for which Nicor Gas earns only a small administrative
fee. These items often cause significant fluctuations in gas distribution
revenues, and yet they have virtually no direct impact on gas distribution
operating income. Therefore, Nicor Gas and many other gas utility companies
exclude these items in evaluating performance. A reconciliation of gas
distribution revenues and margin is as follows (in millions):
Three months
ended
March 31
-------------------
2003 2002
--------- ---------
Gas distribution revenues $1,096.7 $ 516.5
Cost of gas (862.9) (315.0)
Revenue tax expense (61.5) (35.5)
--------- ---------
Gas distribution margin $ 172.3 $ 166.0
========= =========
Margin in 2003 was positively impacted by increased deliveries from higher
customer demand ($6.0 million). Higher customer demand was driven primarily by
colder weather than the prior year ($10.7 million), partially offset by an
unfavorable variance from the company's weather protection in 2003 compared to
2002 ($7.0 million), and higher demand unrelated to weather ($2.3 million).
Increased customer finance charges ($1.7 million) related to larger customer
bills also contributed to the 2003 increase. These improvements were partially
offset by lower results from the Chicago Hub ($.9 million).
Operating and maintenance expense. Operating and maintenance expense increased
$9.1 million in the first quarter of 2003 to $58.5 million. The increase from
the prior-year period was due primarily to lower pension credits ($2.4 million),
increased bad debt expense ($2.2 million), higher costs of natural gas used
Nicor Gas Company Page 13
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
to operate company equipment and facilities ($1.4 million) and increased health
care and insurance costs ($1.7 million). Gas distribution operating and
maintenance expense included $.3 million of pension expense in 2003 compared
with $2.1 million of pension credits in 2002. The higher bad debt and
company-use gas expenses are related to higher average natural gas costs in 2003
compared to 2002.
Depreciation. Depreciation decreased significantly due to the change to a
straight-line interim depreciation allocation method. Previously, Nicor Gas
allocated annual depreciation to interim periods based upon the level of
weather-normalized gas deliveries each quarter. Depreciation would have been
$22.2 million lower than reported in the first quarter of 2002 had interim
depreciation been allocated on a straight-line basis.
Other income (expense). Other income (expense) before taxes was $6.1 million
lower in the first quarter of 2003 compared with the first quarter of 2002 due
primarily to the absence of results from the performance-based rate (PBR) plan
($2.2 million), which was discontinued beginning January 1,2003, and $3.4
million in property sale gains recorded in the first quarter of 2002.
Interest expense. Interest expense for the three-month period ended March 31,
2003 decreased $.4 million to $9.1 million due primarily to lower interest
rates.
Nicor Gas Company Page 14
- -------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
OPERATING STATISTICS
Operating revenues, deliveries, customers and other statistics are presented
below.
Three months ended
March 31
-------------------
2003 2002
-------- --------
Operating revenues (millions)
Sales
Residential $ 765.8 $ 340.2
Commercial 171.9 64.3
Industrial 26.8 10.7
-------- --------
964.5 415.2
-------- --------
Transportation
Residential 7.1 3.1
Commercial 25.9 25.7
Industrial 11.3 11.0
Other 5.1 2.5
-------- --------
49.4 42.3
-------- --------
Other revenues
Revenue taxes 62.4 36.4
Environmental cost recovery 15.7 12.0
Chicago Hub 2.4 3.3
Other 2.3 7.3
-------- --------
82.8 59.0
-------- --------
$1,096.7 $ 516.5
======== ========
Deliveries (Bcf)
Sales
Residential 107.6 94.7
Commercial 23.4 17.2
Industrial 3.7 3.1
-------- --------
134.7 115.0
-------- --------
Transportation
Residential 8.1 3.2
Commercial 39.7 39.8
Industrial 36.5 37.7
-------- --------
84.3 80.7
-------- --------
219.0 195.7
======== ========
Customers at end of period (thousands)
Sales
Residential 1,748.9 1,777.0
Commercial 111.0 105.5
Industrial 7.1 6.9
-------- --------
1,867.0 1,889.4
-------- --------
Transportation
Residential 122.4 58.2
Commercial 61.2 64.7
Industrial 6.6 6.9
-------- --------
190.2 129.8
-------- --------
2,057.2 2,019.2
======== ========
Other statistics
Degree days 3,254 2,723
Percent colder (warmer) than normal 5.5% (11.7)%
Average gas cost per Mcf sold $ 6.36 $ 2.71
Nicor Gas Company Page 15
- -------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
FINANCIAL CONDITION AND LIQUIDITY
Operating cash flows. Net cash flow provided from operating activities decreased
$7.3 million to $113.0 million in the first quarter from $120.3 million in the
year earlier period. Year-to-year changes in operating cash flow result largely
from fluctuations in working capital items due to such factors as 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.
Financing. Nicor Gas maintains short-term line of credit agreements with major
domestic and foreign banks. At March 31, 2003, these agreements, which serve as
backup for the issuance of commercial paper, totaled $334 million and the
company had $190 million of commercial paper outstanding.
In April 2003, Moody's Investors Service downgraded the long-term debt ratings
of Nicor Gas from Aa1 to Aa3, while affirming the company's short-term ratings.
Standard and Poor's Rating Services and Fitch Ratings affirmed Nicor Gas'
short-term and long-term debt ratings, which continue to be among the highest in
the gas distribution industry. All three rating agencies removed the debt
ratings from negative ratings watch.
FACTORS AFFECTING BUSINESS PERFORMANCE
Critical accounting policies. Nicor Gas made a change to an accounting policy in
the first quarter of 2003 related to the method of allocating annual
depreciation to interim periods. This change had a significant favorable impact
on first-quarter results and will have an adverse impact on second- and
third-quarter results. It will have no impact on full-year results. For further
information about the changes in accounting methods, see the Notes to the
Consolidated Financial Statements - Accounting Changes on page 6, which explains
all material changes to the company's critical accounting policies since
December 31, 2002.
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 any amounts already
recognized, it is possible that the resolution of these contingencies, either
individually or in aggregate, will require the company to take charges against,
or will result in reductions in, future earnings. It is the opinion of
management that the resolution of these contingencies, either individually or in
aggregate, could be material to earnings in a particular period, but is not
expected to have a material adverse impact on Nicor Gas' liquidity or financial
condition.
Performance-based rate plan. Nicor Gas' PBR plan for natural gas costs went into
effect in 2000 and was terminated by the company effective January 1, 2003.
Under the PBR plan, Nicor Gas' total gas supply costs were compared to a
market-sensitive benchmark. Savings and losses relative to the benchmark were
determined annually and shared equally with sales customers.
There are allegations that the company acted improperly in connection with the
PBR plan, and the Illinois Commerce Commission (ICC) and others are reviewing
these allegations. On June 27, 2002 the Citizens Utility Board (CUB) filed a
motion to reopen the record in the ICC's proceedings to review the PBR plan (the
ICC Proceedings). As a result of the motion to reopen, Nicor Gas, the Cook
County State's Attorney Office (CCSAO), the staff of the ICC and CUB entered
into a stipulation providing for additional discovery. The Illinois Attorney
General's Office has also intervened in this matter. In addition, the
Nicor Gas Company Page 16
- -------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Illinois Attorney General's Office issued Civil Investigation Demands (CIDs) to
CUB and the ICC staff. The CIDs ordered that CUB and the ICC staff produce all
documents relating to any claims that Nicor Gas may have presented, or caused to
be presented, false information related to its PBR plan. The Securities and
Exchange Commission (SEC) and the Office of the United States Attorney for the
Northern District of Illinois are also reviewing the allegations that the
company acted improperly in connection with the PBR plan. The company has
committed to cooperate fully in the reviews of the PBR plan.
In response to these allegations, on July 18, 2002, the Nicor Board of Directors
appointed a special committee of independent, non-management directors to
conduct an inquiry into issues surrounding natural gas purchases, sales,
transportation, storage and such other matters as may come to the attention of
the special committee in the course of its investigation. The special committee
presented the report of its counsel (Report) to Nicor's Board of Directors on
October 28, 2002. The findings of the Report include:
o Certain transactions increased customer costs in the aggregate amount of
approximately $15 million.
o No improper Nicor affiliated-party transactions or improper hedging
activities were identified.
o Inadvertent accounting errors occurred, sometimes to the benefit of customers
and sometimes to the benefit of Nicor Gas.
o No criminal activity or fraud was identified.
In response, the Nicor Board of Directors directed the company's management to,
among other things, make appropriate adjustments to account for, and fully
address, the adverse consequences to ratepayers of the items noted in the
Report, and conduct a detailed study of the adequacy of internal accounting and
regulatory controls. The adjustments were made in restated financial statements
previously filed with the SEC, and the study of internal controls is ongoing.
Pursuant to the agreement of all parties, including the company, the ICC
re-opened the 1999 and 2000 purchased gas adjustment filings for review of
certain transactions related to the PBR plan and consolidated the reviews of the
1999-2002 purchased gas adjustment filings with the PBR plan review. Certain
parties in the PBR plan review proceeding have indicated disagreement with the
findings in the Report or have indicated that they believe substantially greater
adjustments or penalties are warranted. In addition, on February 5, 2003, the
CCSAO and CUB filed a motion for $27 million in sanctions against the company in
the ICC Proceedings. In that motion, CCSAO and CUB alleged that Nicor Gas'
responses to certain CUB data requests were false. Also on February 5, 2003, CUB
stated in a press release that, in addition to $27 million in sanctions, it
would seek refunds to consumers in an amount much greater than the $15 million
of adjustments identified in the Report. On March 5, 2003, the ICC staff filed a
response brief in support of CUB's motion for sanctions. On May 1, 2003, the
Administrative Law Judges issued a ruling denying CUB and CCSAO's motion for
sanctions, which ruling may be subject to review by the ICC. It is not possible
to determine how the ICC will resolve the claims of CCSAO, CUB or other parties
to the ICC Proceedings.
Nicor Gas is unable to predict the outcome of any of the foregoing reviews or
the company's potential exposure thereunder. Due to the uncertainties
surrounding the PBR plan, Nicor Gas has not recognized a $26.9 million pretax
gain from the 2002 PBR plan year. Because the PBR plan and historical utility
gas costs are still under ICC review, it is possible that the final outcome
could be materially different than the amounts reflected in the company's
financial statements as of March 31, 2003.
Nicor Gas Company Page 17
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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' PBR plan. The named plaintiffs alleged 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 named plaintiffs sought, on behalf of
themselves and the purported class, compensatory damages, prejudgment and
postjudgment interest, disgorgement of all profits, and restitution to
plaintiffs and the purported class. Nicor filed a Motion to Dismiss this action
on September 24, 2002. On December 4, 2002, the named plaintiffs voluntarily
dismissed the case, but indicated an intent to bring their claims before the
ICC. Nicor is unable to predict the outcome of any such proceeding 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. In 2002, the staff of the SEC 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 that the SEC is investigating, and a grand jury is
also reviewing this matter.
Mercury. Future operating results may be impacted by adjustments to the
company's estimated mercury liability or by related recoveries. Additional
information about mercury contingencies is presented in the Notes to the
Consolidated Financial Statements - Contingencies - Mercury on page 10.
Manufactured gas plant sites. The company is conducting environmental
investigations and remedial activities at former manufactured gas plant sites.
Additional information about these sites is presented in the Notes to the
Consolidated Financial Statements - Contingencies - Manufactured Gas Plant Sites
beginning on page 10.
Other contingencies. The company is involved in legal or administrative
proceedings before various courts and agencies with respect to rates, taxes and
other matters. See the Notes to the Consolidated Financial Statements -
Contingencies beginning on page 8.
Market risk. The company is exposed to market risk in the normal course of its
business operations, including the risk of loss arising from adverse changes in
natural gas commodity prices and interest rates. There has been no material
change in the company's exposure to market risk since the filing of the 2002
Annual Report on Form 10-K.
Nicor Gas Company Page 18
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (concluded)
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
This document includes certain forward-looking statements about the expectations
of Nicor Gas. Although Nicor Gas believes these 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 legal contingencies (including litigation) and the resolution of
those issues, including the effects of an Illinois Commerce Commission review.
Other factors that could cause materially different results include, but are not
limited to, weather conditions; natural gas prices; health care costs; insurance
costs; borrowing needs; interest rates; credit conditions; economic and market
conditions; energy conservation; legislative and regulatory actions, results, or
adjustments; asset sales; significant unplanned capital needs and any future
mercury-related charges or credits. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this filing. Nicor Gas undertakes no obligation to publicly release any revision
to these forward-looking statements to reflect events or circumstances after the
date of this filing.
Item 4. Controls and Procedures
Immediately following the Signatures section of this Quarterly Report are
certifications of the company's CEO and the CFO required in accord with Section
302 of the Sarbanes-Oxley Act of 2002 (the "Section 302 Certification"). This
portion of our Quarterly Report on Form 10-Q is our disclosure of the results of
our controls evaluation referred to in paragraphs (4), (5) and (6) of the
Section 302 Certification and should be read in conjunction with the Section 302
Certification for a more complete understanding of the topics presented.
In July 2002, in response to allegations that Nicor Gas acted improperly in
connection with its performance-based rate plan for natural gas costs, the Nicor
Board of Directors appointed a special committee of independent, non-management
directors to conduct an inquiry into issues surrounding natural gas purchases,
sales, transportation and storage, and certain other matters. In addition,
following up on the work of the committee, the Nicor Board of Directors later
directed Nicor's management to, among other things, (a) undertake a reaudit of
the Nicor and Nicor Gas financial statements for the years 1999 through 2001 and
a review of subsequent quarterly periods, (b) amend any filings with the SEC as
necessary, and (c) conduct a detailed study of the adequacy of internal
accounting and regulatory controls. See Notes to Consolidated Financial
Statements - Contingencies.
To assist management in assessing the control environment and related issues
associated with Nicor's natural gas supply, transport, storage and marketing
activities, including Nicor Gas Hub administration and Nicor Enerchange trading
("gas supply activities"), Nicor retained a consulting firm with experience in
internal controls and the energy industry that is not and has not been the
company's external auditor. Through this review of gas supply activities
("gas supply review"), it was observed that:
o Although key controls have been designed to facilitate the complete and
accurate capture and processing of gas supply activities, many control
activities are not standardized. As such, the reliability and effectiveness
of these control processes are dependent on interpretation and execution by
business unit personnel.
o Existing processes provide limited oversight and monitoring to ensure that
transaction activities and control procedures are performed reliably and
consistent with management expectations.
Nicor Gas Company Page 19
- -------------------------------------------------------------------------------
Item 4. Controls and Procedures (continued)
o As a result, gas supply activities are not adequately documented, overly
dependent on people, and not supported by formal training or communication of
controls.
In light of the foregoing, and reflecting the consultant's work related to gas
supply activities, management has concluded that the following steps related to
gas supply activities should be undertaken:
o Enhance the effectiveness of corporate governance and independent oversight
of gas supply activities by creating a formal risk management function and
expanding senior management oversight through the company's risk management
committee.
o Enhance senior management monitoring and oversight of gas supply activities
by creating formal reporting frameworks designed to effectively communicate
performance, existing risk profile/position, and compliance with
policies/procedures.
o Enhance the communication of senior management's expectations regarding
objectives, risk tolerances, and business practices in connection with gas
supply activities by creating codified and standardized policies and
procedures for these activities.
o Given the high degree of regulatory oversight and review over gas supply
activities, develop formal documentation and retention standards for key
decision-making and transaction activities that are subject to regulatory
review.
o For each business unit responsible for gas supply contract negotiation and
execution, establish a dedicated contract administration function as well as
a contract compliance program.
o Develop formal contracting standards, including practices and procedures
surrounding contract execution, contract review and approval and contract
modification.
In May 2002, the company engaged new accountants, Deloitte & Touche LLP ("D&T"),
who were asked in October to audit the company's 1999, 2000 and 2001 restated
financial statements in addition to its audit of 2002 financial statements. In
connection with the completion of its audit of, and the issuance of an
unqualified report on, Nicor's and Nicor Gas' restated financial statements for
the years ended December 31, 1999, 2000 and 2001, D&T issued a letter dated
February 28, 2003 (the "D&T Letter"), in which it identified to management and
the Audit Committee of the Board of Directors certain deficiencies that existed
in the design or operation of Nicor Gas' internal accounting controls which,
considered collectively, constituted a material weakness in Nicor Gas' internal
controls pursuant to standards established by the American Institute of
Certified Public Accountants. Such deficiencies at Nicor Gas' regulated gas
purchasing operations included significant weaknesses in the design of controls
surrounding execution, monitoring and accounting for gas commodity,
transportation, storage and related contracts due, in part, to the lack of a
centralized independent back office for these activities. D&T also concluded
that these weaknesses had resulted in errors that affected gas purchase costs,
inventory, regulatory assets and liabilities, and results of the
performance-based rate plan, and led to a restatement of Nicor's and Nicor Gas'
financial statements. D&T has made the following recommendations to Nicor and
Nicor Gas with respect to these deficiencies:
o Establish a centralized, independent back office function for gas supply
activities, staffed with an adequate number of appropriately skilled
individuals.
o Charge the gas supply back office function with responsibility for, among
other matters, contract analysis to determine correct accounting treatment,
ensuring that contract terms are followed, overseeing the contract approval
process and contract administration.
Within the 90 days prior to the date of filing this Quarterly Report on Form
10-Q, the company carried out an evaluation under the supervision and with the
participation of the company's management,
Nicor Gas Company Page 20
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Item 4. Controls and Procedures (continued)
including its principal executive officer and principal financial officer, of
the effectiveness of the design and operation of the company's disclosure
controls and procedures (the "Evaluation").
During the course of the Evaluation, the company's principal executive officer
and principal financial officer took note of, and considered as part of the
company's disclosure controls and procedures (as defined in the Rule 13a-14
under the Securities Exchange Act of 1934), additional procedures performed and
controls instituted by the company (the "Additional Procedures") to supplement
its internal controls in order to mitigate the effect of the weaknesses and
deficiencies identified in the gas supply review and the D&T Letter and to
prevent misstatements or omissions in its consolidated financial statements
resulting from such factors. Based on the Evaluation, the company's Chief
Executive Officer and Chief Financial Officer concluded, as of the date of the
Evaluation, that the company's disclosure controls and procedures, including the
Additional Procedures, were effective to ensure that information required to be
disclosed by the company in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms.
Management has considered the matters referred to above, D&T's recommendations
with respect thereto and the gas supply review in connection with management's
general evaluation of the company's internal controls in particular and its
disclosure controls and procedures generally. The company has accepted the
recommendations identified in the D&T Letter and in the gas supply review. The
company's management has assigned a high priority to the short-term and
long-term correction of the internal control weaknesses and deficiencies
identified by D&T and in the gas supply review, and has implemented and
continues to implement changes to the company's policies, procedures, systems
and personnel to address these issues. The company's management has implemented
or is in the process of implementing the following changes based upon the D&T
Letter and the gas supply review:
o The company has dedicated, and will continue to dedicate, additional internal
audit and external resources to the assessment of the internal controls of
the company.
o New policies with respect to the approval and authorization of all
transactions related to gas supply activities and affiliated transactions are
being developed and adopted, some of which are now in place.
o Additional gas supply purchasing testing was performed to verify that prices
are consistent with market rates.
o Personnel in gas supply accounting now report directly to the company's
Controller.
o The company's Risk Management Committee has increased its oversight level,
and a new Chief Risk Officer position is being established.
o An outside consultant has been retained to coordinate documentation and
implementation of appropriate processes, procedures and controls changes, and
has been assigned a number of full-time employees and has commenced this
process.
o The company has implemented, and will continue to implement, controls
designed to ensure compliance with regulatory rules and mandates.
o A review of contract administration processes is underway to develop and
implement a more effective method of contract administration, including
documentation of related policies and procedures.
The company will continue to evaluate and implement corrective actions to
improve the effectiveness of its disclosure controls and procedures, and will
take further actions as dictated by such continuing reviews. These actions will
include additional procedures to supplement its internal controls in order to
prevent misstatements or omissions in its financial statements resulting from
factors such as the weaknesses and deficiencies identified in the gas supply
review and the D&T Letter. The steps taken and
Nicor Gas Company Page 21
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Item 4. Controls and Procedures (concluded)
to be taken to correct the weaknesses and deficiencies identified in the gas
supply review and the D&T Letter have constituted and will constitute
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of the Evaluation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For information concerning legal proceedings, see the Notes to the Consolidated
Financial Statements - Contingencies beginning on page 8 and Management's
Discussion and Analysis - Contingencies beginning on page 15, which are
incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index on page 25 filed herewith.
(b) The company did not file a report on Form 8-K during the first
quarter of 2003.
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: May 2, 2003 /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: May 2, 2003 /s/ THOMAS L. FISHER
----------- ------------------------------------
Thomas L. Fisher
Chairman and Chief Executive Officer
Nicor Gas Company Page 24
- -------------------------------------------------------------------------------
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: May 2, 2003 /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
--------- ----------------------------------------------------------------
3.01 * Articles of Incorporation of the company. (File No. 1-7296,
Form 10-K for 1980, Exhibit 3-01.)
3.02 * Amendment to Articles of Incorporation of the company. (File
No. 1-7296, Form 10-Q for June 1994, Exhibit 3.01.)
3.03 * By-Laws of the company as amended by the company's Board of
Directors on May 3, 1995. (File No. 1-7296, Form 10-Q for March
1995, Exhibit 3(ii).01.)
12.01 Computation of Consolidated Ratio of Earnings to Fixed Charges.
18.01 Preferability Letter regarding Change in Accounting of Interim
Depreciation.
99.01 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.02 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* These exhibits have been previously filed with the Securities and Exchange
Commission as exhibits to registration statements or to other filings with
the Commission and are incorporated herein as exhibits by reference. The file
number and exhibit number of each such exhibit, where applicable, are stated,
in parentheses, in the description of such exhibit.
Upon written request, the company will furnish free of charge a copy of any
exhibit. Requests should be sent to Investor Relations at the corporate
headquarters.