Attached files
file | filename |
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EX-31.01 - NICOR GAS EXHIBIT 31.01 CERTIFICATION - NORTHERN ILLINOIS GAS CO /IL/ /NEW/ | nicorgas3101certification.htm |
EX-32.02 - NICOR GAS EXHIBIT 32.02 CERTIFICATION - NORTHERN ILLINOIS GAS CO /IL/ /NEW/ | nicorgas3202certification.htm |
EX-32.01 - NICOR GAS EXHIBIT 32.01 CERTIFICATION - NORTHERN ILLINOIS GAS CO /IL/ /NEW/ | nicorgas3201certification.htm |
EX-31.02 - NICOR GAS EXHIBIT 31.02 CERTIFICATION - NORTHERN ILLINOIS GAS CO /IL/ /NEW/ | nicorgas3102certification.htm |
EX-12.01 - NICOR GAS EXHIBIT 12.01 RATIO OF EARNINGS TO FIXED CHARGES - NORTHERN ILLINOIS GAS CO /IL/ /NEW/ | nicorgasratioearnfixedcharge.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
|
|
For the quarterly period ended June 30, 2010 |
or
[ ]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
Commission
File Number 1-7296
NORTHERN
ILLINOIS GAS COMPANY
(Doing
business as Nicor Gas Company)
(Exact
name of registrant as specified in its charter)
Illinois
|
36-2863847
|
(State
of Incorporation)
|
(I.R.S.
Employer
|
Identification No.) |
1844
Ferry Road
|
|
Naperville,
Illinois 60563-9600
|
(630)
983-8888
|
(Address
of principal executive offices) (Zip Code)
|
(Registrant’s
telephone number, including area
code)
|
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months. Yes [ ] No
[ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in rule 12b-2 of the Exchange
Act.
Large
accelerated
filer [ ]
|
Accelerated
filer [ ]
|
Non-accelerated
filer [X]
|
Smaller
reporting
company [ ]
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
[ ] No [X]
All
shares of common stock are owned by Nicor Inc.
ii
|
|||
Part
I - Financial Information
|
|||
Item
1.
|
Financial
Statements (Unaudited)
|
||
1
|
|||
|
|||
2
|
|||
|
|||
3
|
|||
|
|||
4
|
|||
Item
2.
|
19
|
||
Item
3.
|
27
|
||
Item
4.
|
27
|
||
Part
II - Other Information
|
|||
Item
1.
|
28
|
||
Item
6.
|
28
|
||
29
|
ALJs. Administrative
Law Judges.
Chicago Hub. A
venture of Nicor Gas, which provides natural gas storage and
transmission-related services to marketers and other gas distribution
companies.
Degree day. The
extent to which the daily average temperature falls below 65 degrees
Fahrenheit. Normal weather for Nicor Gas’ service territory, for
purposes of this report, is considered to be 5,600 degree days.
FERC. Federal
Energy Regulatory Commission, the agency that regulates the interstate
transportation of natural gas, oil and electricity.
Financial Reform
Legislation. Dodd-Frank Wall Street Reform and Consumer
Protection Act.
Health Care
Act. Patient Protection and Affordable Care Act and the Health
Care and Education Reconciliation Act of 2010.
ICC. Illinois
Commerce Commission, the agency that establishes the rules and regulations
governing utility rates and services in Illinois.
IDR. Illinois Department
of Revenue.
Illinois
Legislation. Illinois Senate Bill 1918.
IRS. Internal
Revenue Service.
LIFO. Last-in,
first-out.
Mcf, MMcf,
Bcf. Thousand cubic feet, million cubic feet, billion cubic
feet.
Nicor. Nicor Inc.,
the parent company of Nicor Gas.
Nicor Gas. Northern
Illinois Gas Company (doing business as Nicor Gas Company), or the
registrant.
NYMEX. New York
Mercantile Exchange.
PBR. Performance-based
rate, a regulatory plan which ended on January 1, 2003, that provided economic
incentives based on natural gas cost performance.
Rider. A rate
adjustment mechanism that is part of a utility’s tariff which authorizes it to
provide specific services or assess specific charges.
SEC. The United
States Securities and Exchange Commission.
Part
I - FINANCIAL INFORMATION
|
||||||||||||||||
Item 1. Financial
Statements
|
||||||||||||||||
Nicor
Gas Company
|
||||||||||||||||
(millions)
|
||||||||||||||||
Three
months ended
|
Six
months ended
|
|||||||||||||||
June
30
|
June
30
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Operating
revenues (includes revenue taxes of $23.9, $26.6, $97.8 and $101.3,
respectively)
|
$ | 299.5 | $ | 326.3 | $ | 1,368.3 | $ | 1,310.3 | ||||||||
Operating
expenses
|
||||||||||||||||
Cost of gas
|
118.9 | 156.6 | 906.8 | 873.0 | ||||||||||||
Operating and maintenance
|
78.9 | 68.9 | 142.1 | 158.9 | ||||||||||||
Depreciation
|
45.9 | 44.6 | 91.9 | 89.0 | ||||||||||||
Taxes, other than income taxes
|
28.2 | 30.9 | 106.1 | 109.7 | ||||||||||||
Income tax expense
|
6.8 | 6.0 | 38.5 | 22.0 | ||||||||||||
278.7 | 307.0 | 1,285.4 | 1,252.6 | |||||||||||||
Operating
income
|
20.8 | 19.3 | 82.9 | 57.7 | ||||||||||||
Other
income (expense), net
|
||||||||||||||||
Interest income
|
.5 | .4 | .7 | .8 | ||||||||||||
Other income
|
.3 | .3 | .6 | .6 | ||||||||||||
Other expense
|
(.2 | ) | (.2 | ) | (.9 | ) | (.9 | ) | ||||||||
Income tax expense on other income
|
(.3 | ) | (.2 | ) | (.2 | ) | (.2 | ) | ||||||||
.3 | .3 | .2 | .3 | |||||||||||||
Interest
expense
|
||||||||||||||||
Interest on debt, net of amounts capitalized
|
9.0 | 8.1 | 18.0 | 16.5 | ||||||||||||
Other
|
.1 | .3 | .2 | .5 | ||||||||||||
9.1 | 8.4 | 18.2 | 17.0 | |||||||||||||
Net
income
|
$ | 12.0 | $ | 11.2 | $ | 64.9 | $ | 41.0 | ||||||||
The
accompanying notes are an integral part of these
statements.
|
Nicor
Gas Company
|
||||||||
(millions)
|
||||||||
Six
months ended
|
||||||||
June
30
|
||||||||
2010
|
2009
|
|||||||
Operating
activities
|
||||||||
Net income
|
$ | 64.9 | $ | 41.0 | ||||
Adjustments to reconcile net income to net cash flow provided
from operating activities:
|
||||||||
Depreciation
|
91.9 | 89.0 | ||||||
Deferred income tax expense (benefit)
|
(5.5 | ) | 15.5 | |||||
Changes in assets and liabilities:
|
||||||||
Receivables, less allowances
|
215.4 | 354.3 | ||||||
Gas in storage
|
93.2 | 167.6 | ||||||
Deferred/accrued gas costs
|
37.0 | 56.9 | ||||||
Derivative instruments
|
9.6 | (6.8 | ) | |||||
Margin accounts - derivative instruments
|
(11.2 | ) | 12.6 | |||||
Other assets
|
23.2 | 14.7 | ||||||
Accounts payable
|
(51.5 | ) | (128.1 | ) | ||||
Customer credit balances and deposits
|
(40.2 | ) | (44.2 | ) | ||||
Temporary LIFO inventory liquidation
|
87.7 | 82.9 | ||||||
Other liabilities
|
10.0 | (23.5 | ) | |||||
Other items
|
(1.8 | ) | (3.9 | ) | ||||
Net cash flow provided from operating activities
|
522.7 | 628.0 | ||||||
Investing
activities
|
||||||||
Additions to property, plant & equipment
|
(76.1 | ) | (96.4 | ) | ||||
Other investing activities
|
1.6 | 2.4 | ||||||
Net cash flow used for investing activities
|
(74.5 | ) | (94.0 | ) | ||||
Financing
activities
|
||||||||
Disbursements to retire long-term obligations
|
- | (50.5 | ) | |||||
Net repayments of commercial paper
|
(387.0 | ) | (440.9 | ) | ||||
Debt issuance costs
|
(3.6 | ) | (1.9 | ) | ||||
Dividends paid
|
(58.0 | ) | (41.6 | ) | ||||
Other financing activities
|
- | (.1 | ) | |||||
Net cash flow used for financing activities
|
(448.6 | ) | (535.0 | ) | ||||
Net
decrease in cash and cash equivalents
|
(.4 | ) | (1.0 | ) | ||||
Cash
and cash equivalents, beginning of period
|
.6 | 2.3 | ||||||
Cash
and cash equivalents, end of period
|
$ | .2 | $ | 1.3 | ||||
The
accompanying notes are an integral part of these
statements.
|
Nicor
Gas Company
|
||||||||||||
(millions)
|
||||||||||||
June
30
|
December
31
|
June
30
|
||||||||||
2010
|
2009
|
2009
|
||||||||||
Assets
|
||||||||||||
Gas
distribution plant, at cost
|
$ | 4,646.1 | $ | 4,598.2 | $ | 4,536.8 | ||||||
Less accumulated depreciation
|
1,843.4 | 1,803.4 | 1,777.2 | |||||||||
Gas
distribution plant, net
|
2,802.7 | 2,794.8 | 2,759.6 | |||||||||
Current
assets
|
||||||||||||
Cash and cash equivalents
|
.2 | .6 | 1.3 | |||||||||
Receivables, less allowances of $48.0, $30.8 and $49.6,
respectively
|
189.0 | 398.9 | 228.0 | |||||||||
Receivables - affiliates
|
6.6 | 12.1 | 6.9 | |||||||||
Gas in storage
|
11.5 | 104.7 | 6.1 | |||||||||
Derivative instruments
|
4.0 | 4.7 | 4.9 | |||||||||
Margin accounts - derivative instruments
|
52.6 | 43.6 | 112.4 | |||||||||
Other
|
93.9 | 144.4 | 96.4 | |||||||||
Total
current assets
|
357.8 | 709.0 | 456.0 | |||||||||
Regulatory
postretirement asset
|
187.6 | 195.4 | 222.7 | |||||||||
Other
assets
|
145.4 | 130.5 | 156.2 | |||||||||
Total
assets
|
$ | 3,493.5 | $ | 3,829.7 | $ | 3,594.5 | ||||||
Capitalization and
Liabilities
|
||||||||||||
Capitalization
|
||||||||||||
Long-term obligations
|
||||||||||||
Long-term debt, net of unamortized discount
|
$ | 423.3 | $ | 498.2 | $ | 498.1 | ||||||
Mandatorily redeemable preferred stock
|
1.8 | 2.1 | 2.1 | |||||||||
Total long-term obligations
|
425.1 | 500.3 | 500.2 | |||||||||
Non-redeemable preferred stock
|
1.4 | 1.4 | 1.4 | |||||||||
Common equity
|
||||||||||||
Common stock
|
76.2 | 76.2 | 76.2 | |||||||||
Paid-in capital
|
108.1 | 108.1 | 108.1 | |||||||||
Retained earnings
|
484.7 | 486.7 | 482.7 | |||||||||
Accumulated other comprehensive loss
|
(7.1 | ) | (7.0 | ) | (9.3 | ) | ||||||
Total common equity
|
661.9 | 664.0 | 657.7 | |||||||||
Total
capitalization
|
1,088.4 | 1,165.7 | 1,159.3 | |||||||||
Current
liabilities
|
||||||||||||
Long-term obligations due within one year
|
75.3 | .5 | .5 | |||||||||
Short-term debt
|
107.0 | 494.0 | 227.0 | |||||||||
Accounts payable
|
212.9 | 264.4 | 183.8 | |||||||||
Customer credit balances and deposits
|
101.5 | 141.7 | 143.1 | |||||||||
Temporary LIFO inventory liquidation
|
87.7 | - | 82.9 | |||||||||
Derivative instruments
|
62.4 | 55.6 | 120.9 | |||||||||
Other
|
108.6 | 82.0 | 83.2 | |||||||||
Total
current liabilities
|
755.4 | 1,038.2 | 841.4 | |||||||||
Deferred
credits and other liabilities
|
||||||||||||
Regulatory asset retirement liability
|
825.7 | 796.8 | 774.7 | |||||||||
Deferred income taxes
|
336.8 | 328.2 | 314.2 | |||||||||
Health care and other postretirement benefits
|
201.0 | 199.7 | 197.5 | |||||||||
Asset retirement obligation
|
186.2 | 191.3 | 188.7 | |||||||||
Other
|
100.0 | 109.8 | 118.7 | |||||||||
Total
deferred credits and other liabilities
|
1,649.7 | 1,625.8 | 1,593.8 | |||||||||
Commitments
and contingencies
|
||||||||||||
Total
capitalization and liabilities
|
$ | 3,493.5 | $ | 3,829.7 | $ | 3,594.5 | ||||||
The
accompanying notes are an integral part of these
statements.
|
Nicor
Gas Company
1.
|
BASIS
OF PRESENTATION
|
The
unaudited Condensed Consolidated Financial Statements of Nicor Gas have been
prepared by the company pursuant to the rules and regulations of the
SEC. Certain information and note 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 unaudited Condensed Consolidated Financial
Statements and Notes should be read in conjunction with the financial statements
and the notes thereto included in the company’s 2009 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.
The
company’s management evaluated subsequent events for potential recognition and
disclosure through the date the financial statements were issued.
2.
|
ACCOUNTING
POLICIES
|
Gas in storage. Gas
inventory is carried at cost on a LIFO basis. Inventory decrements
occurring during interim periods that are expected to be restored prior to
year-end are charged to cost of gas at the estimated annual replacement cost,
and the difference between this cost and the actual LIFO layer cost is recorded
on the balance sheet as a temporary LIFO inventory
liquidation. Interim inventory decrements not expected to be restored
prior to year-end are charged to cost of gas at the actual LIFO cost of the
layers liquidated. The inventory decrement as of June 30, 2010 is
expected to be restored prior to year-end.
Regulatory assets and
liabilities. Nicor Gas is regulated by the ICC, which
establishes the rules and regulations governing utility rates and services in
Illinois. As a rate-regulated company, Nicor Gas is required to
recognize the economic effects of rate regulation and, accordingly, has recorded
regulatory assets and liabilities. Regulatory assets represent
probable future revenue associated with certain costs that are expected to be
recovered from customers through rate riders or base rates, upon approval by the
ICC. Regulatory liabilities represent probable future reductions in
revenues collected from ratepayers through a rate rider or base rates, or
probable future expenditures. If Nicor Gas’ operations become no
longer subject to rate regulation, a write-off of net regulatory liabilities
would be required.
The
company had regulatory assets and liabilities as follows (in
millions):
June
30
|
December
31
|
June
|
||||||||||
2010
|
2009
|
2009
|
||||||||||
Regulatory assets –
current
|
||||||||||||
Regulatory
postretirement asset
|
$ | 20.6 | $ | 20.6 | $ | 23.3 | ||||||
Deferred
gas costs
|
- | 24.9 | - | |||||||||
Deferred
bad debt costs
|
18.7 | - | - | |||||||||
Other
|
7.2 | 5.4 | 2.3 | |||||||||
Regulatory assets –
noncurrent
|
||||||||||||
Regulatory
postretirement asset
|
187.6 | 195.4 | 222.7 | |||||||||
Deferred
gas costs
|
7.8 | 4.4 | 15.2 | |||||||||
Deferred
environmental costs
|
23.1 | 18.1 | 11.8 | |||||||||
Unamortized
losses on reacquired debt
|
13.7 | 14.2 | 14.8 | |||||||||
Other
|
12.4 | 8.9 | 12.7 | |||||||||
$ | 291.1 | $ | 291.9 | $ | 302.8 |
Regulatory liabilities –
current
|
||||||||||||
Regulatory
asset retirement liability
|
$ | 14.5 | $ | 14.5 | $ | 15.0 | ||||||
Accrued
gas costs
|
15.5 | - | 18.1 | |||||||||
Other
|
12.8 | 2.7 | .4 | |||||||||
Regulatory liabilities –
noncurrent
|
||||||||||||
Regulatory
asset retirement liability
|
825.7 | 796.8 | 774.7 | |||||||||
Regulatory
income tax liability
|
20.2 | 39.1 | 44.7 | |||||||||
Other
|
3.9 | .8 | .8 | |||||||||
$ | 892.6 | $ | 853.9 | $ | 853.7 |
All items
listed above are classified in Other on the Condensed Consolidated Balance
Sheets, with the exception of the noncurrent portions of the Regulatory
postretirement asset and the Regulatory asset retirement liability, which are
stated separately.
The ICC
does not presently allow Nicor Gas the opportunity to earn a return on its
regulatory postretirement asset. This regulatory postretirement asset
is expected to be recovered from ratepayers over a period of approximately 10 to
12 years. The regulatory assets related to debt are not included in
rate base, but are recovered over the term of the debt through the rate of
return authorized by the ICC. Nicor Gas is allowed to recover and is
required to pay, using short-term interest rates, the carrying costs related to
temporary under or overcollections of natural gas costs and certain
environmental costs charged to its customers.
Revenue recognition.
Nicor Gas accrues revenues for estimated deliveries to customers from the
date of their last bill until the balance sheet date. Receivables
include accrued unbilled revenues of $30.4 million, $137.7 million and $30.1
million at June 30, 2010, December 31, 2009 and June 30, 2009,
respectively.
Nicor Gas
classifies revenue taxes billed to customers as operating revenues and related
taxes incurred as operating expenses. Revenue taxes included in
operating expense for the three and six months ended June 30, 2010 were $23.5
million and $96.4 million, respectively, and $26.3 million and $99.9 million,
respectively, for the same periods in 2009.
Derivative
instruments. Cash
flows from derivative instruments are recognized in the Condensed Consolidated
Statements of Cash Flows, and gains and losses are recognized in the Condensed
Consolidated Statements of Operations, in the same categories as the underlying
transactions.
Cash flow
hedge accounting may be elected only for highly effective hedges, based upon an
assessment, performed at least quarterly, of the historical and probable future
correlation of cash flows from the derivative instrument to changes in the
expected future cash flows of the hedged item. To the extent cash
flow hedge accounting is applied, the effective portion of any changes in the
fair value of the derivative instruments is reported as a component of
accumulated other comprehensive income. Ineffectiveness, if any, is
immediately recognized in operating income. The amount in accumulated
other comprehensive income is reclassified to earnings when the forecasted
transaction is recognized in the Condensed Consolidated Statements of
Operations, even if the derivative instrument is sold, extinguished or
terminated prior to the transaction occurring. If the forecasted
transaction is no longer expected to occur, the amount in accumulated other
comprehensive income is immediately reclassified to operating
income.
Derivative
instruments, such as futures contracts, options and swap agreements, are
utilized primarily in the purchase of natural gas for
customers. These derivative instruments are carried at fair
value. Realized gains or losses on such instruments are included in
the cost of gas delivered and are passed directly through to customers, subject
to ICC review, and therefore have no direct impact on
earnings. Unrealized changes in the fair value of these derivative
instruments are deferred as regulatory assets or liabilities.
At times,
Nicor Gas enters into futures contracts, options, swap agreements and
fixed-price purchase agreements to reduce the earnings volatility of certain
forecasted operating costs arising from fluctuations in natural gas prices, such
as the purchase of natural gas for use in company operations. These
derivative instruments
are carried at fair value, unless they qualify for the normal purchases and
normal sales exception, in which case they are carried at cost. To
the extent hedge accounting is not elected, changes in such fair values are
immediately recorded in the current period as operating and maintenance
expense.
Credit risk and
concentrations. Nicor Gas has a diversified customer base and
the company believes that it maintains prudent credit policies which mitigate
customer receivable, supplier performance and derivative counterparty credit
risk. The company is exposed to credit risk in the event a customer
or supplier defaults on a contract to pay for or deliver product at agreed-upon
terms and conditions, or a counterparty to a derivative instrument defaults on a
settlement or otherwise fails to perform under contractual terms. To
manage this risk, the company has established procedures to determine and
monitor the creditworthiness of counterparties, to seek guarantees or collateral
back-up in the form of cash or letters of credit, to acquire credit insurance in
certain instances, and to limit its exposure to any one
counterparty. Nicor Gas also, in some instances, enters into netting
arrangements to mitigate counterparty credit risk. Credit losses are
accrued when probable and reasonably estimable.
On
February 2, 2010, the ICC approved a bad debt rider that was filed in 2009 by
Nicor Gas. The bad debt rider provides for the recovery from (or
refund to) customers of the difference between the actual bad debt expense Nicor
Gas incurs on an annual basis and the benchmark bad debt expense included in its
rates for the respective year.
3. SHORT-TERM AND LONG-TERM DEBT
In
February 2009, the $50 million 5.37 percent First Mortgage Bond series matured
and was retired. In July
2009, Nicor Gas, through a private placement, issued $50 million First Mortgage
Bonds at 4.70 percent, due in 2019. As a result of this issuance, the
company classified $50 million of short-term debt outstanding as of June 30,
2009 as a long-term obligation.
In April
2010, Nicor Gas established a $400 million, 364-day revolver, expiring April
2011 to replace the $550 million, 364-day revolver, which was set to expire in
May 2010 and Nicor and Nicor Gas established a $600 million, three-year
revolver, expiring April 2013 to replace the $600 million, five-year revolver,
which was set to expire in September 2010. These facilities were
established with major domestic and foreign banks and serve as backup for the
issuance of commercial paper. The company had $107 million, $494
million and $277 million of commercial paper borrowings outstanding at June 30,
2010, December 31, 2009 and June 30, 2009, respectively.
The
company believes it is in compliance with all debt covenants.
4.
|
INCOME
TAXES
|
The
effective income tax rate for the three months ended June 30, 2010 increased to
37.1 percent from 35.4 percent for the prior-year period. The
effective income tax rate for the six months ended June 30, 2010 increased to
37.4 percent from 35.1 percent for the prior-year period. The higher
effective income tax rate for the three and six months ended June 30, 2010 is
due primarily to higher forecasted annual pretax income (which causes a higher
effective income tax rate since permanent differences and tax credits are a
smaller share of pretax income) and the unfavorable impact of the tax law change
with respect to Medicare Part D subsidies.
In March
2010, the Health Care Act was signed into law resulting in comprehensive health
care reform. The Health Care Act contains a provision that eliminates
the tax deduction related to Medicare Part D subsidies received after
2012. Federal subsidies are provided to sponsors of retiree health
benefit plans, such as Nicor Gas, that provide a benefit that is at least
actuarially equivalent to the benefits under Medicare Part D. Such
subsidies have reduced the company’s actuarially determined projected
benefit obligation and annual net periodic benefit costs. Due to the
change in taxation, in the first quarter of 2010 Nicor Gas reduced deferred tax
assets by $17.5 million, reversed an existing regulatory income tax liability of
$10.0 million, established a regulatory income tax asset of $7.0 million and
recognized a $0.5 million charge to income tax expense. Beginning in
2010, the change in taxation will also reduce earnings by an estimated $1.5
million annually for periods subsequent to the enactment date.
The
company's major tax jurisdictions include the United States and Illinois, with
tax returns examined by the IRS and IDR, respectively. At June 30,
2010, the years that remain subject to examination include years beginning after
2006 for the IRS and years beginning after 2005 for the IDR. The
company had no liability for unrecognized tax benefits at June 30,
2010. The decrease in the liability for unrecognized tax benefits
from $3.2 million at December 31, 2009 is due primarily to settlement of an item
concerning the timing of inclusion in taxable income of recoveries for
environmental clean-up expenditures. The company does not believe
that it is reasonably possible that a significant change in the liability for
unrecognized tax benefits could occur within 12 months.
The
balance of unamortized investment tax credits at June 30, 2010, December 31,
2009 and June 30, 2009 was $24.2 million, $25.2 million and $24.7 million,
respectively.
5.
|
FAIR
VALUE MEASUREMENTS
|
The fair
value of assets and liabilities that are measured on a recurring basis are
categorized in the table below (in millions) into three broad levels (with Level
1 considered the most reliable) based upon the valuation inputs.
Quoted
prices in active markets
|
Significant
observable inputs
|
Significant
unobservable inputs
|
||||||||||||||
(Level
1)
|
(Level
2)
|
(Level
3)
|
Total
|
|||||||||||||
June
30, 2010
|
||||||||||||||||
Assets
|
||||||||||||||||
Commodity
derivatives
|
$ | .8 | $ | .3 | $ | 3.7 | $ | 4.8 | ||||||||
Liabilities
|
||||||||||||||||
Commodity
derivatives
|
$ | 33.8 | $ | 39.0 | $ | 1.4 | $ | 74.2 | ||||||||
December
31, 2009
|
||||||||||||||||
Assets
|
||||||||||||||||
Money
market funds
|
$ | .4 | $ | - | $ | - | $ | .4 | ||||||||
Commodity
derivatives
|
.5 | 2.6 | 2.4 | 5.5 | ||||||||||||
$ | .9 | $ | 2.6 | $ | 2.4 | $ | 5.9 | |||||||||
Liabilities
|
||||||||||||||||
Commodity
derivatives
|
$ | 37.3 | $ | 25.3 | $ | 2.7 | $ | 65.3 | ||||||||
June
30, 2009
|
||||||||||||||||
Assets
|
||||||||||||||||
Money
market funds
|
$ | 1.1 | $ | - | $ | - | $ | 1.1 | ||||||||
Commodity
derivatives
|
1.2 | 2.7 | 3.4 | 7.3 | ||||||||||||
$ | 2.3 | $ | 2.7 | $ | 3.4 | $ | 8.4 | |||||||||
Liabilities
|
||||||||||||||||
Commodity
derivatives
|
$ | 109.4 | $ | 26.8 | $ | 1.8 | $ | 138.0 |
When
available and appropriate, the company uses quoted market prices in active
markets to determine fair value and classifies such items within Level
1. For derivatives, Level 1 values include only those derivative
instruments traded on the NYMEX. The company enters into
over-the-counter instruments with values that are similar to, and correlate
with, quoted prices for exchange-traded instruments in active markets; the fair
value of these over-the-counter items consider credit risk and are classified
within Level 2. In certain instances, the company may be required to
determine a fair value using significant unobservable inputs such as indicative
broker prices; the resulting valuation is classified as Level 3.
The
majority of commodity derivatives held by Nicor Gas are for the purpose of
hedging natural gas purchases for its customers, and therefore their fair values
do not affect net income, as their settlement is passed directly through to
customers without markup, subject to ICC review. The change in fair
value for these derivatives is accounted for through regulatory assets and
liabilities.
Money
market funds are included in cash equivalents, are categorized as trading and
are carried at fair value.
The
following table presents a reconciliation of the Level 3 beginning and ending
net derivative asset balances (in millions):
Three
months ended
June
30
|
Six
months ended
June
30
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Beginning
of period
|
$ | .2 | $ | 2.6 | $ | (.3 | ) | $ | 1.7 | |||||||
Net
realized/unrealized gains (losses) included in regulatory assets and
liabilities
|
.5 | (1.6 | ) | (.8 | ) | (1.7 | ) | |||||||||
Settlements,
net of purchases
|
1.6 | .6 | 3.4 | 1.6 | ||||||||||||
End
of period
|
$ | 2.3 | $ | 1.6 | $ | 2.3 | $ | 1.6 | ||||||||
Nicor Gas
maintains margin accounts related to financial derivative
transactions. The company’s policy is not to offset the fair value of
assets and liabilities recognized for derivative instruments or any related
margin account. The following table represents the balance sheet
classification of margin accounts related to derivative instruments (in
millions):
June
30
|
December
31
|
June
30
|
||||||||||
2010
|
2009
|
2009
|
||||||||||
Assets
|
||||||||||||
Margin
accounts – derivative instruments
|
$ | 52.6 | $ | 43.6 | $ | 112.4 | ||||||
Other
– noncurrent
|
13.5 | 11.3 | 14.8 |
In
addition, the recorded amount of short-term borrowings approximates fair
value. Long-term debt outstanding, including current maturities, is
recorded at the principal balance outstanding, net of unamortized
discounts. The principal balance of Nicor Gas’ First Mortgage Bonds
outstanding at June 30, 2010, December 31, 2009 and June 30, 2009 was $500
million, $500 million and $450 million, respectively. Based on quoted
prices or market interest rates, the fair value of the company’s First Mortgage
Bonds outstanding was approximately $561 million at June 30, 2010, $543
million at December 31, 2009 and $485 million at June 30, 2009.
6.
|
DERIVATIVE
INSTRUMENTS
|
A
description of the company’s objectives and strategies for using derivative
instruments, and related accounting policies, is included in Note 2 – Accounting
Policies – Derivative instruments and Credit risk and
concentrations. All derivatives recognized on the Condensed
Consolidated Balance Sheets are measured at fair value, as described in Note 5 –
Fair Value Measurements.
Condensed Consolidated Balance Sheets. Derivative assets and liabilities are shown in the table below (in millions):
June
30
|
December
31
|
June
30
|
||||||||||
2010
|
2009
|
2009
|
||||||||||
Derivatives
designated as hedging instruments
|
||||||||||||
Liabilities
|
||||||||||||
Derivative
instruments
|
$ | 1.1 | $ | .7 | $ | 2.7 | ||||||
Other
– noncurrent
|
.2 | - | .3 | |||||||||
$ | 1.3 | $ | .7 | $ | 3.0 | |||||||
Derivatives
not designated as hedging instruments
|
||||||||||||
Assets
|
||||||||||||
Derivative
instruments
|
$ | 4.0 | $ | 4.7 | $ | 4.9 | ||||||
Other
– noncurrent
|
.8 | .8 | 2.4 | |||||||||
$ | 4.8 | $ | 5.5 | $ | 7.3 | |||||||
Liabilities
|
||||||||||||
Derivative
instruments
|
$ | 61.3 | $ | 54.9 | $ | 118.2 | ||||||
Other
– noncurrent
|
11.6 | 9.7 | 16.8 | |||||||||
$ | 72.9 | $ | 64.6 | $ | 135.0 |
Volumes. As of June
30, 2010, December 31, 2009 and June 30, 2009, Nicor Gas held outstanding
derivative contracts of approximately 53 Bcf, 64 Bcf and 71 Bcf, respectively to
hedge natural gas purchases for customer use, with hedges spanning approximately
three years for each of the respective periods. Commodity price-risk
exposure arising from Nicor Gas’ natural gas purchases for company use is
mitigated with derivative instruments that total to a net long position of 1.5
Bcf, 0.9 Bcf and 1.5 Bcf as of June 30, 2010, December 31, 2009 and June 30,
2009, respectively. The above volumes exclude contracts, such as
variable-priced contracts, which are accounted for as derivatives but whose fair
values are not directly impacted by changes in commodity prices.
Condensed Consolidated Statements of
Operations– cash flow
hedges. Changes in the fair value of derivatives designated as
a cash flow hedge are recognized in other comprehensive income until the hedged
transaction is recognized in the Condensed Consolidated Statements of
Operations. Cash flow hedges are used by Nicor Gas to hedge purchases
of natural gas for company use.
Cash flow
hedges affected accumulated other comprehensive income (effective portion) as
shown in the following table (in millions):
Three
months ended
June
30
|
Six
months ended
June
30
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Pretax
gain (loss) recognized in other comprehensive income
|
$ | .1 | $ | .1 | $ | (1.3 | ) | $ | (3.8 | ) | ||||||
The
pretax gain (loss) reclassified from accumulated other comprehensive income into
income (effective portion) is shown in the following table (in
millions):
Three
months ended
June
30
|
Six
months ended
June
30
|
|||||||||||||||
Location
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Operating
and maintenance
|
$ | (.3 | ) | $ | (1.2 | ) | $ | (.6 | ) | $ | (5.7 | ) | ||||
Any
amounts recognized in operating income, related to ineffectiveness or due to a
forecasted transaction that is no longer expected to occur, were immaterial for
the three and six months ended June 30, 2010 and 2009.
As of
June 30, 2010, December 31, 2009 and June 30, 2009, the time horizon of cash
flow hedges of natural gas purchases for Nicor Gas company use span
approximately two years for each of the respective periods. For these
hedges, the total pretax loss deferred in accumulated other comprehensive income
at June 30, 2010, December 31, 2009 and June 30, 2009 was $1.3 million ($0.8
million after taxes), $0.7 million ($0.4 million after taxes) and $3.2 million
($2.0 million after taxes), respectively. At the respective reporting
dates, substantially all of these amounts were expected to be reclassified to
earnings within the next 12 months.
Condensed Consolidated Statements of
Operations– derivatives not designated as hedges. The earnings
of the company are subject to volatility for those derivatives not designated as
hedges. Non-designated derivatives used by Nicor Gas, to hedge
purchases of natural gas for company use, are recorded within operating and
maintenance expense. Pretax earnings effects of these items are
summarized in the table below (in millions):
Three
months ended
June
30
|
Six
months ended
June
30
|
|||||||||||||||
Location
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Operating
and maintenance
|
$ | .1 | $ | (.1 | ) | $ | (.7 | ) | $ | (1.8 | ) |
Nicor
Gas’ derivatives used to hedge the purchase of natural gas for its customers are
also not designated as hedging instruments. Gains or losses on these
derivatives are not recognized in pretax earnings, but are deferred as
regulatory assets or liabilities until the related revenue is
recognized. Net gains (losses) deferred for the three and six months
ended June 30, 2010 were $16.2 million and ($74.1) million, respectively, and
($8.4) million and ($125.5) million, respectively, for the same periods in
2009.
Credit-risk-related contingent
features. Provisions within certain derivative agreements
require the company to post collateral if the company’s net liability position
exceeds a specified threshold. Also, certain derivative agreements
contain credit-risk-related contingent features, whereby the company would be
required to provide additional collateral or pay the amount due to the
counterparty when a credit event occurs, such as if the company’s credit rating
was to be lowered. As of June 30, 2010, December 31, 2009 and June
30, 2009 for agreements with such features, derivative contracts with liability
fair values totaled approximately $22 million, $19 million and $24 million,
respectively, for which the company had posted no collateral to its
counterparties. If it was assumed that the company had to post the
maximum contractually specified collateral or settle the liability, the company
would have been required to pay approximately $21 million, $18 million and $22
million at June 30, 2010, December 31, 2009 and June 30, 2009, respectively.
7.
|
POSTRETIREMENT
BENEFITS
|
Nicor Gas
maintains a noncontributory defined benefit pension plan covering substantially
all employees hired prior to 1998. Pension benefits are based on
years of service and the highest average salary for management employees and job
level for collectively bargained employees (referred to as pension
bands). The benefit obligation related to collectively bargained
benefits considers the company’s past practice of regular benefit
increases. Nicor Gas also provides health care and life insurance
benefits to eligible retired employees under a plan that includes a limit on the
company’s share of cost for employees hired after 1982.
The
company’s postretirement benefit costs have historically been considered in rate
proceedings in the period they are accrued. As a regulated utility,
Nicor Gas expects continued rate recovery of the eligible costs of its defined
benefit postretirement plans and, accordingly, associated changes in the plan’s
funded status have been deferred as a regulatory asset or liability until
recognized in net income, instead of being recorded in accumulated other
comprehensive income. However, to the extent Nicor Gas employees
perform services for non-regulated affiliates and to the extent such employees
are eligible to participate in these plans, the affiliates are charged for the
cost of these benefits and the changes in the funded status relating to these
employees are recorded in accumulated other comprehensive income.
About
one-fourth of the net benefit cost related to these plans has been capitalized
as a cost of constructing gas distribution facilities and the remainder is
included in operating and maintenance expense, net of amounts charged to
affiliates. Net benefit cost included the following components (in
millions):
Pension
benefits
|
Health
care and
other
benefits
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Three
months ended June 30
|
||||||||||||||||
Service
cost
|
$ | 2.5 | $ | 2.1 | $ | .5 | $ | .5 | ||||||||
Interest
cost
|
4.0 | 4.1 | 2.9 | 3.0 | ||||||||||||
Expected
return on plan assets
|
(7.3 | ) | (6.3 | ) | - | - | ||||||||||
Recognized
net actuarial loss
|
2.9 | 3.9 | 1.1 | 1.2 | ||||||||||||
Amortization
of prior service cost
|
.1 | .1 | .1 | - | ||||||||||||
Net
benefit cost
|
$ | 2.2 | $ | 3.9 | $ | 4.6 | $ | 4.7 |
Six
months ended June 30
|
||||||||||||||||
Service
cost
|
$ | 4.9 | $ | 4.3 | $ | 1.1 | $ | 1.1 | ||||||||
Interest
cost
|
8.0 | 8.2 | 5.9 | 6.0 | ||||||||||||
Expected
return on plan assets
|
(14.5 | ) | (12.6 | ) | - | - | ||||||||||
Recognized
net actuarial loss
|
5.9 | 7.7 | 2.1 | 2.3 | ||||||||||||
Amortization
of prior service cost
|
.2 | .2 | .1 | - | ||||||||||||
Net
benefit cost
|
$ | 4.5 | $ | 7.8 | $ | 9.2 | $ | 9.4 | ||||||||
The
decrease in postretirement benefit expense in 2010 compared to 2009 is due to
the positive impact on the value of plan assets of the partial capital market
recovery in 2009, which was somewhat offset by the negative impact of a decrease
in the discount rate.
The
company is evaluating the provisions of the Health Care Act and will evaluate
future interpretations to determine the impact it may have on the company’s
future results of operations, cash flows and financial condition.
8.
|
COMPREHENSIVE
INCOME
|
Total
comprehensive income is as follows (in millions):
Three
months ended
|
Six
months ended
|
|||||||||||||||
June
30
|
June
30
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
income
|
$ | 12.0 | $ | 11.2 | $ | 64.9 | $ | 41.0 | ||||||||
Other
comprehensive income (loss), after tax
|
0.4 | .9 | (0.1 | ) | 1.4 | |||||||||||
Total
comprehensive income
|
$ | 12.4 | $ | 12.1 | $ | 64.8 | $ | 42.4 |
Other
comprehensive income (loss) consists primarily of net unrealized gains and
losses from derivative financial instruments accounted for as cash flow
hedges.
9. 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. Corporate
overheads are allocated to Nicor’s subsidiaries based upon a formula approved by
the ICC. Nicor Gas had net charges to affiliates of $4.2 million and
$8.2 million for the three and six months ended June 30, 2010, respectively, and
$0.8 million and $5.6 million, respectively, for the same periods in
2009.
Key
executives and managerial employees of Nicor Gas participate in Nicor’s
stock-based compensation plans. Nicor Gas recognized compensation
expense of $1.2 million and $2.0 million for the three and six months ended June
30, 2010, respectively, in operating and maintenance expense related to these
stock-based compensation plans and $1.0 million and $1.5 million, respectively,
for the same periods in 2009.
Nicor Gas
participates in a cash management system with other subsidiaries of
Nicor. By virtue of making deposits or advances to Nicor, Nicor Gas
is exposed to credit risk to the extent it is unable to secure the return of
such deposits for any reason. Such deposits are due on
demand. There are ICC regulations addressing the amount and
circumstances under which Nicor Gas can deposit with the cash management pool or
advance to Nicor. In addition, Nicor Gas may not extend cash advances
to Nicor if Nicor Gas has any outstanding short-term
borrowings. Nicor Gas’ practice also provides that the balance of
cash deposits or advances from Nicor Gas to Nicor at any time shall not exceed
the unused balance of funds actually available to Nicor under its existing bank
credit agreements or its commercial paper facilities with unaffiliated third
parties. Nicor Gas’ positive cash deposits, if any, may be applied by
Nicor to offset negative balances of other Nicor subsidiaries and vice
versa.
Nicor Gas
had no deposits in the Nicor cash management pool at June 30, 2010, December 31,
2009 and June 30, 2009. Nicor Gas records interest income from
deposits in the Nicor cash management pool at a rate of interest equal to the
higher of Nicor’s commercial paper rate or a market rate of return on a
short-term investment. For the three and six months ended June 30,
2010 and 2009, Nicor Gas recorded no interest income.
Nicor
Solutions, L.L.C. (“Nicor Solutions”), a wholly owned business of Nicor, offers
residential and small commercial customers energy-related products that provide
for natural gas cost stability and management of their utility
bill. Under these products, Nicor Solutions pays Nicor Gas for the
utility bills issued to the utility-bill management customers. For
the three and six months ended June 30, 2010, Nicor Gas
recorded revenues of $5.7 million and $22.4 million, respectively, associated
with the payments Nicor Solutions makes to Nicor Gas on behalf of its
customers. For the three and six months ended June 30, 2009, such
revenues were $6.2 million and $22.8 million, respectively.
Prairie
Point Energy, L.L.C. (doing business as “Nicor Advanced Energy”) is a wholly
owned business of Nicor that provides natural gas and related services on an
unregulated basis to residential and small commercial customers. As a
natural gas supplier, Nicor Advanced Energy pays Nicor Gas for delivery charges,
administrative charges and applicable taxes. For the three and six
months ended June 30, 2010, Nicor Advanced Energy paid Nicor Gas $1.4 million
and $3.5 million, respectively, and $1.3 million and $3.3 million, respectively,
for the same periods in 2009 for such items. Additionally, Nicor
Advanced Energy may pay or receive inventory imbalance
adjustments. For the six months ended June 30, 2009, Nicor Advanced
Energy paid Nicor Gas $0.3 million, for inventory imbalance
adjustments.
Nicor Gas
enters into routine transactions with Nicor Enerchange, L.L.C. (“Nicor
Enerchange”), a wholly owned business of Nicor that engages in wholesale
marketing of natural gas supply services primarily in the
Midwest. Such transactions are governed by terms of an ICC
order. For the three and six months ended June 30, 2010, net
commodity-based charges to (from) Nicor Enerchange were $0.2 million and ($3.7)
million, respectively. For the three and six months ended June 30,
2009, net commodity-based charges from Nicor Enerchange were $0.2 million and
$3.1 million, respectively. Additionally, Nicor Enerchange
administers the Chicago Hub for Nicor Gas in accordance with an agreement
approved by the ICC. In both 2010 and 2009, charges from Nicor
Enerchange were $0.1 million and $0.3 million, respectively, for the three and
six months ended June 30. Nicor Gas also charged Nicor Enerchange
$0.3 million and $0.6 million, respectively, for the three and six months ended
June 30, 2009 for certain storage services at the Chicago Hub.
Horizon
Pipeline Company, L.L.C. (“Horizon”), a 50-percent-owned joint venture of Nicor,
operates an interstate regulated natural gas pipeline of approximately 70 miles
stretching from Joliet, Illinois to near the Wisconsin/Illinois border. In both
2010 and 2009, Horizon charged Nicor Gas $2.6 million and $5.2 million,
respectively, for the three and six months ended June 30 for natural gas
transportation under rates that have been accepted by the FERC.
Nicor
sold its 50 percent ownership in EN Engineering L.L.C. (“EN Engineering”) on
March 31, 2009. Prior to the sale, EN Engineering charged Nicor Gas
$1.7 million for engineering and corrosion services rendered for the three
months ended March 31, 2009. A majority of the work performed by EN
Engineering is capital in nature, and is classified as property, plant and
equipment on the Condensed Consolidated Balance Sheets.
In
addition, certain related parties may acquire regulated utility services at
rates approved by the ICC.
10. REGULATORY
PROCEEDINGS
Rate proceeding. On
March 25, 2009, the ICC issued an order approving an increase in base revenues
of approximately $69 million, a rate of return on rate base of 7.58 percent and
a rate of return on equity of 10.17 percent. The order also approved
an energy efficiency rider. Nicor Gas placed the rates approved in
the March 25, 2009 order into effect on April 3, 2009.
On April
24, 2009, Nicor Gas filed a request for rehearing with the ICC concerning the
capital structure contained in the ICC’s rate order contending the company’s
return on rate base should be higher. On October 7, 2009, the ICC
issued its decision on rehearing in which it increased the annual base revenues
approved for Nicor Gas in the March 25, 2009 order by approximately $11 million,
increasing the rate of return on rate base to 8.09 percent. Nicor Gas
placed the rates approved in the rehearing decision into effect on a
prospective basis on October 15, 2009. Therefore, the total annual
base revenue increase authorized in the rate case originally filed by the
company in April 2008 is approximately $80 million.
Bad debt rider. In
September 2009, Nicor Gas filed for approval of a bad debt rider with the ICC
under an Illinois state law which took effect in July 2009. On February 2, 2010,
the ICC issued an order approving the company’s proposed bad debt
rider. This rider provides for recovery from customers of the amount
over the benchmark for bad debt expense established in the company’s rate
cases. It also provides for refunds to customers if bad debt expense
is below such benchmarks.
As a
result of the February 2010 order, Nicor Gas recorded in the first quarter of
2010 a net recovery related to 2008 and 2009 of $31.7 million; substantially all
of this amount is expected to be collected in 2010. The benchmark,
against which 2010 actual bad debt expense will be compared, is approximately
$63 million.
Petition for Re-approval of Operating
Agreement. On July 1, 2009, Nicor Gas filed a petition seeking
re-approval from the ICC of the operating agreement that governs many
inter-company transactions between Nicor Gas and its affiliates. The
petition was filed pursuant to a requirement contained in the ICC order
approving the company’s most recent general rate increase and requested that the
operating agreement be re-approved without change. A number of
parties have intervened in the proceeding and are seeking modifications on a
prospective basis to the operating agreement to restrict or prohibit certain
services Nicor Gas and its affiliates currently are permitted to provide to one
another. Nicor Gas does not believe these proposed modifications are
appropriate and intends to oppose them. If certain of the proposed
modifications to the operating agreement are required by the ICC, they could
adversely impact the company’s results of operations, cash flows and financial
condition.
11. GUARANTEES
AND INDEMNITIES
In
certain instances, Nicor Gas has undertaken to indemnify current property owners
and others against costs associated with the effects and/or remediation of
contaminated sites for which the company may be responsible under applicable
federal or state environmental laws, generally with no limitation as to the
amount. These indemnifications relate primarily to ongoing coal tar
cleanup, as discussed in Note 12 – Contingencies – Manufactured Gas Plant
Sites. Nicor Gas believes that the likelihood of payment under its
other environmental indemnifications is remote. No liability has been
recorded for such indemnifications.
Nicor Gas
has also indemnified, to the fullest extent permitted under the laws of the
State of Illinois and any other applicable laws, its present and former
directors, officers and employees against expenses they may incur in connection
with litigation they are a party to by reason of their association with the
company. There is generally no limitation as to the
amount. While the company does not expect to incur significant costs
under these indemnifications, it is not possible to estimate the maximum future
potential payments.
12.
|
CONTINGENCIES
|
The
following contingencies of Nicor Gas are in various stages of investigation or
disposition. Although in some cases the company is unable to estimate
the amount of loss reasonably possible in addition to any amounts already
recognized, it is possible that the resolution of these contingencies, either
individually or in aggregate, will require the company to take charges against,
or will result in reductions in, future earnings. It is the opinion
of management that the resolution of these contingencies, either individually or
in aggregate, could be material to earnings in a particular period but is not
expected to have a material adverse impact on Nicor Gas’ liquidity or financial
condition.
PBR Plan. Nicor Gas’ PBR
plan for natural gas costs went into effect in 2000 and was terminated by the
company effective January 1, 2003. Under the PBR plan, Nicor Gas’
total gas supply costs were compared to a market-sensitive
benchmark. Savings and losses relative to the benchmark were
determined annually and shared equally with sales customers. The PBR
plan is currently under ICC review. There are allegations that the company
acted improperly in connection with the PBR plan, and the ICC and others are
reviewing these allegations. On June 27, 2002, the Citizens Utility
Board (“CUB”) filed a motion to reopen the record in the ICC’s proceedings to
review the PBR plan (the “ICC Proceedings”). As a result of the
motion to reopen, Nicor Gas, the staff of the ICC and CUB entered into a
stipulation providing for additional discovery. The Illinois Attorney
General’s Office (“IAGO”) has also intervened in this matter. In
addition, the IAGO issued Civil Investigation Demands (“CIDs”) to CUB and the
ICC staff. The CIDs ordered that CUB and the ICC staff produce all
documents relating to any claims that Nicor Gas may have presented, or caused to
be presented, false information related to its PBR plan. The company
has committed to cooperate fully in the reviews of the PBR plan.
In
response to these allegations, on July 18, 2002, the Nicor Board of Directors
appointed a special committee of independent, non-management directors to
conduct an inquiry into issues surrounding natural gas purchases, sales,
transportation, storage and such other matters as may come to the attention of
the special committee in the course of its investigation. The special
committee presented the report of its counsel (“Report”) to Nicor’s Board of
Directors on October 28, 2002.
In
response, the Nicor Board of Directors directed the company’s management to,
among other things, make appropriate adjustments to account for, and fully
address, the adverse consequences to ratepayers of the items noted in the
Report, and conduct a detailed study of the adequacy of internal accounting and
regulatory controls. The adjustments were made in prior years’
financial statements resulting in a $24.8 million liability. Included
in such $24.8 million liability is a $4.1 million loss contingency. A
$1.8 million adjustment to the previously recorded liability, which is discussed
below, was made in 2004 increasing the recorded liability to $26.6
million. Nicor Gas estimates that there is $26.9 million due to the
company from the 2002 PBR plan year, which has not been recognized in the
financial statements due to uncertainties surrounding the PBR
plan. In addition, interest due to the company on certain components
of these amounts has not been recognized in the financial statements due to the
same uncertainties. By the end of 2003, the company completed steps to
correct the weaknesses and deficiencies identified in the detailed study of the
adequacy of internal controls.
Pursuant
to the agreement of all parties, including the company, the ICC re-opened the
1999 and 2000 purchased gas adjustment filings for review of certain
transactions related to the PBR plan and consolidated the reviews of the
1999-2002 purchased gas adjustment filings with the PBR plan
review.
On
February 5, 2003, CUB filed a motion for $27 million in sanctions against the
company in the ICC Proceedings. In that motion, CUB alleged that
Nicor Gas’ responses to certain CUB data requests were false. Also on
February 5, 2003, CUB stated in a press release that, in addition to $27 million
in sanctions, it would seek additional refunds to consumers. On March
5, 2003, the ICC staff filed a response brief in support of CUB’s motion for
sanctions. On May 1, 2003, the ALJs assigned to the proceeding issued
a ruling denying CUB’s motion for sanctions. CUB has filed an appeal
of the motion for sanctions with the ICC, and the ICC has indicated that it will
not rule on the appeal until the final disposition of the ICC
Proceedings. It is not possible to determine how the ICC will resolve
the claims of CUB or other parties to the ICC Proceedings.
In 2004,
the company became aware of additional information relating to the activities of
individuals affecting the PBR plan for the period from 1999 through 2002,
including information consisting of third party documents and recordings of
telephone conversations from Entergy-Koch Trading, LP (“EKT”), a natural gas,
storage and transportation trader and consultant with whom Nicor did business
under the PBR plan. Review of additional information completed in
2004 resulted in the $1.8 million adjustment to the previously recorded
liability referenced above.
The
evidentiary hearings on this matter were stayed in 2004 in order to permit the
parties to undertake additional third party discovery from EKT. In
December 2006, the additional third party discovery from EKT was obtained and
the ALJs issued a scheduling order that provided for Nicor Gas to submit direct
testimony by April 13, 2007. In its direct testimony, Nicor Gas seeks
a reimbursement of approximately $6 million, which includes interest due to the
company, as noted above, of $1.6 million, as of March 31, 2007. In
September 2009, the staff of the ICC, IAGO and CUB submitted direct testimony to
the ICC requesting refunds of $109 million, $255 million and $286 million,
respectively. No date has been set for evidentiary hearings on this
matter.
Nicor Gas
is unable to predict the outcome of the ICC’s review or the company’s potential
exposure thereunder. Because the PBR plan and historical gas costs
are still under ICC review, the final outcome could be materially different than
the amounts reflected in the company’s financial statements as of June 30,
2010.
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.
As of
June 30, 2010, Nicor Gas had remaining an estimated liability of $2.0 million
related to inspection, cleanup and legal defense costs. This
represents management’s best estimate of future costs based on an evaluation of
currently available information. Actual costs may vary from this
estimate. Nicor Gas remains a defendant in several private lawsuits,
all in the Circuit Court of Cook County, Illinois, seeking a variety of
unquantified damages (including bodily injury and property damages) allegedly
caused by mercury spillage resulting from the removal of mercury-containing
regulators. Potential liabilities relating to these claims have been
assumed by a contractor’s insurer subject to certain limitations.
The final
disposition of these mercury-related matters is not expected to have a material
adverse impact on the company’s liquidity or 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.
Nicor Gas
has identified properties for which it may have some
responsibility. Most of these properties are not presently owned by
the company. Nicor Gas and Commonwealth Edison Company (“ComEd”) are
parties to an agreement to cooperate in cleaning up residue at many of these
properties. The agreement allocates to Nicor Gas 51.73 percent of
cleanup costs for 24 sites, no portion of the cleanup costs for 14 other sites
and 50 percent of general remediation program costs that do not relate
exclusively to particular sites. 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 will
determine the extent additional remediation is necessary and provide a basis for
estimating additional future costs. As of June 30, 2010, the company
had recorded a liability in connection with these matters of $ 29.3
million. In accordance with ICC authorization, the company has been
recovering, and expects to continue to recover, these costs from its customers,
subject to annual prudence reviews.
In April
2002, Nicor Gas was named as a defendant, together with ComEd, 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, if any, 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.
Municipal Tax
Matters. Many municipalities in Nicor Gas’ service territory
have enacted ordinances that impose taxes on gas sales to customers within
municipal boundaries. Most of these municipal taxes are imposed on
Nicor Gas based on revenues generated by Nicor Gas within the
municipality. Other municipal taxes are imposed on natural gas
consumers within the municipality but are collected from consumers and remitted
to the municipality by Nicor Gas. A number of municipalities have
instituted audits of Nicor Gas’ tax remittances. In May 2007, five of
those municipalities filed an action against Nicor Gas in state court in DuPage
County, Illinois relating to these tax audits. Following a dismissal
of this action without prejudice by the trial court, the municipalities filed an
amended complaint. The amended complaint seeks, among other things,
compensation for alleged unpaid taxes. Nicor Gas is contesting the
claims in the amended complaint. In December 2007, 25 additional
municipalities, all represented by the same audit firm involved in the lawsuit,
issued assessments to Nicor Gas claiming that it failed to provide information
requested by the audit firm and owed the municipalities back
taxes. Nicor Gas believes the assessments are improper and has
challenged them. While the company is unable to predict the outcome
of these matters or to reasonably estimate its potential exposure related
thereto, if any, and has not recorded a liability associated with this
contingency, the final disposition of these matters is not expected to have a
material adverse impact on the company’s liquidity or financial
condition.
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
general claims, taxes, environmental, gas cost prudence reviews and other
matters. Although unable to determine the ultimate outcome of these
other contingencies, management believes that these amounts are appropriately
reflected in the financial statements, including the recording of appropriate
liabilities when reasonably estimable.
The
following discussion should be read in conjunction with the Management’s
Discussion and Analysis section of the Nicor Gas 2009 Annual Report on Form
10-K. 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.
RESULTS
OF OPERATIONS
Operating
income and net income are presented below (in millions):
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2010
|
2009
|
2010
|
2009
|
|||||||||||||
Operating
income
|
$ | 20.8 | $ | 19.3 | $ | 82.9 | $ | 57.7 | ||||||||
Net
income
|
$ | 12.0 | $ | 11.2 | $ | 64.9 | $ | 41.0 |
Net
income increased $0.8 million for the three months ended June 30, 2010 compared
to the prior year due to higher margin ($13.7 million pretax increase),
partially offset by higher operating and maintenance expense ($10.0 million
pretax increase), higher depreciation expense ($1.3 million pretax increase),
higher interest expense ($0.7 million pretax increase) and a higher effective
income tax rate. Net income increased $23.9 million for the six
months ended June 30, 2010 compared to the prior year due to higher margin
($27.7 million pretax increase) and lower operating and maintenance expense
($16.8 million pretax decrease), partially offset by higher depreciation expense
($2.9 million pretax increase), higher interest expense ($1.2 million pretax
increase) and a higher effective income tax rate.
Rate proceeding. On
March 25, 2009, the ICC issued an order approving an increase in base revenues
of approximately $69 million, a rate of return on rate base of 7.58 percent and
a rate of return on equity of 10.17 percent. The order also approved
an energy efficiency rider. Nicor Gas placed the rates approved in
the March 25, 2009 order into effect on April 3, 2009.
On April
24, 2009, Nicor Gas filed a request for rehearing with the ICC concerning the
capital structure contained in the ICC’s rate order contending the company’s
return on rate base should be higher. On October 7, 2009, the ICC
issued its decision on rehearing in which it increased the annual base revenues
approved for Nicor Gas in the March 25, 2009 order by approximately $11 million,
increasing the rate of return on rate base to 8.09 percent. Nicor Gas
placed the rates approved in the rehearing decision into effect on a prospective
basis on October 15, 2009. Therefore, the total annual base revenue
increase authorized in the rate case originally filed by the company in April
2008 is approximately $80 million.
Bad debt rider. In
September 2009, Nicor Gas filed for approval of a bad debt rider with the ICC
under an Illinois state law which took effect in July 2009. On
February 2, 2010, the ICC issued an order approving the company’s proposed bad
debt rider. This rider provides for recovery from customers of the
amount over the benchmark for bad debt expense established in the company’s rate
cases. It also provides for refunds to customers if bad debt expense
is below such benchmarks.
As a result of the February 2010 order, Nicor Gas
recorded in the first quarter of 2010 a net recovery related to 2008 and 2009 of
$31.7 million; substantially all of this amount is expected to be collected in
2010. The benchmark, against which 2010 actual bad debt expense will
be compared, is approximately $63 million.
Health Care Reform
Legislation. The Health Care Act contains a provision that
eliminates the tax deduction related to Medicare Part D subsidies received after
2012. Federal subsidies are provided to sponsors of retiree health
benefit plans, such as Nicor Gas, that provide a benefit that is at least
actuarially equivalent to the benefits under Medicare Part D. Such
subsidies have reduced the company’s actuarially determined projected benefit
obligation and annual net periodic benefit costs. Due to the change
in taxation, in the first quarter of 2010 Nicor Gas reduced deferred tax assets
by $17.5 million, reversed an existing regulatory income tax liability of $10.0
million, established a regulatory income tax asset of $7.0 million and
recognized a $0.5 million charge to income tax expense. Beginning in
2010, the change in taxation will also reduce earnings by an estimated $1.5
million annually for periods subsequent to the enactment date.
The
company is evaluating the other provisions of the Health Care Act and will
evaluate future interpretations to determine the impact it may have on the
company’s future results of operations, cash flows and financial
condition.
Capital market environment. The
volatility in the capital markets over the past two years has caused general
concern over the valuations of investments, exposure to increased credit risk
and pressures on liquidity. The company continues to review its
investments, exposure to credit risk and sources of liquidity and does not
currently expect any future material adverse impacts relating to this past
volatility.
Operating
revenues. Operating revenues are impacted by changes in
natural gas costs, which are passed directly through to customers without
markup, subject to ICC review. Operating revenues decreased $26.8 million
for the three months ended June 30, 2010 compared to the prior year due
primarily to the impact of warmer weather (approximately $40 million decrease),
partially offset by higher revenue from bad debt and energy efficiency riders
($9.7 million and $5.2 million, respectively). Operating revenues
increased $58.0 million for the six months ended June 30, 2010 compared to the
prior year due primarily to higher natural gas costs (approximately $115 million
increase), higher revenue from bad debt and energy efficiency riders ($13.1
million and $10.8 million, respectively) and the impact of the increase in base
rates (approximately $16 million increase), partially offset by the impact of
warmer weather (approximately $85 million decrease).
Margin. Nicor Gas
utilizes a measure it refers to as “margin” to evaluate the operating income
impact of revenues. Revenues include natural gas costs, which are
passed directly through to customers without markup, subject to ICC review, and
revenue taxes, for which Nicor Gas earns a small administrative
fee. These items often cause significant fluctuations in revenues,
with equal and offsetting fluctuations in cost of gas and revenue tax expense,
with no direct impact on margin. The 2009 rate orders included a
franchise gas cost recovery rider and a rider to recover the costs associated
with energy efficiency programs. Additionally, in February 2010 the
ICC approved the company’s bad debt rider. As a result, changes in
revenue included in margin attributable to these items are expected to generally
be offset by changes within operating and maintenance expense.
A
reconciliation of revenues and margin follows (in millions):
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2010
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2009
|
2010
|
2009
|
|||||||||||||
Revenues
|
$ | 299.5 | $ | 326.3 | $ | 1,368.3 | $ | 1,310.3 | ||||||||
Cost
of gas
|
(118.9 | ) | (156.6 | ) | (906.8 | ) | (873.0 | ) | ||||||||
Revenue
tax expense
|
(23.5 | ) | (26.3 | ) | (96.4 | ) | (99.9 | ) | ||||||||
Margin
|
$ | 157.1 | $ | 143.4 | $ | 365.1 | $ | 337.4 |
Margin
increased $13.7 million for the three months ended June 30, 2010 compared to the
prior year due primarily to higher revenue from bad debt and energy efficiency
riders ($9.7 million and $5.2 million, respectively) and the impact of the
increase in base rates (approximately $2 million increase), partially offset by
the impact of warmer weather (approximately $4 million decrease) and lower
interest on customer balances ($1.7 million decrease). Margin
increased $27.7 million for the six months ended June 30, 2010 compared to the
prior year due primarily to higher revenue from bad debt and energy efficiency
riders ($13.1 million and $10.8 million, respectively) and the impact of the
increase in base rates (approximately $16 million increase), partially offset by
the impact of warmer weather (approximately $9 million decrease) and lower
interest on customer balances ($4.2 million decrease).
Operating and maintenance
expense. Operating and maintenance expense increased $10.0 million for the
three months ended June 30, 2010 compared to the prior year due primarily to
higher bad debt expense ($6.9 million increase) and higher costs associated with
the energy efficiency program ($5.2 million increase), partially offset by lower
payroll and benefit-related costs ($1.5 million decrease, of which $1.1 million
relates to lower pension expense, net of capitalization) and lower company use
and storage-related gas costs ($0.9 million decrease). Bad debt expense
for the three months ended June 30, 2010 was $17.3 million compared to $10.4
million in the prior year. Bad debt expense in 2010 includes $7.6
million, based on revenue recognized in the quarter, of the approximately $63
million annual expense assumed to be collected through base rates; and $9.7
million of expense which is equal to the revenue recognized under the bad debt
rider.
Operating
and maintenance expense decreased $16.8 million for the
six months ended June 30, 2010 compared to the prior year due primarily to lower
bad debt expense ($15.8 million decrease), lower company use and storage-related
gas costs ($7.4 million decrease) and lower payroll and benefit-related costs
($1.9 million decrease, of which $2.3 million relates to lower pension expense,
net of capitalization), partially offset by higher costs associated with the
energy efficiency program ($10.8 million increase). Bad debt expense
for the six months ended June 30, 2010 was $18.7 million compared to $34.5
million in the prior year. Bad debt expense in 2010 includes the
recognition of the $31.7 million benefit associated with the net under recovery
of bad debt expense from 2008 and 2009; $37.3 million, based on revenue
recognized in the period, of the approximately $63 million annual expense
assumed to be collected through base rates; and $13.1 million of expense which
is equal to the revenue recognized under the bad debt rider.
Income tax
expense. The effective income tax rate for the three months
ended June 30, 2010 increased to 37.1 percent from 35.4 percent for the
prior-year period. The effective income tax rate for the six months
ended June 30, 2010 increased to 37.4 percent from 35.1 percent for the
prior-year period. The higher effective income tax rate for the three
and six months ended June 30, 2010 is due primarily to higher forecasted annual
pretax income (which causes a higher effective income tax rate since permanent
differences and tax credits are a smaller share of pretax income) and the
unfavorable impact of the tax law change with respect to Medicare Part D
subsidies.
Interest
expense. Interest expense increased $0.7 million and $1.2
million for the three and six months ended June 30, 2010, respectively, compared
to the prior year due primarily to higher average borrowing levels and higher
bank commitment fees, partially offset by lower average interest
rates.
Nicor
Gas Company
|
||||||||||||||||
Gas
Distribution Statistics
|
||||||||||||||||
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2010
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2009
|
2010
|
2009
|
|||||||||||||
Operating revenues
(millions)
|
||||||||||||||||
Sales
|
||||||||||||||||
Residential
|
$ | 179.5 | $ | 195.5 | $ | 895.4 | $ | 843.6 | ||||||||
Commercial
|
40.7 | 49.2 | 226.0 | 217.0 | ||||||||||||
Industrial
|
4.2 | 5.5 | 26.1 | 25.0 | ||||||||||||
224.4 | 250.2 | 1,147.5 | 1,085.6 | |||||||||||||
Transportation
|
||||||||||||||||
Residential
|
10.0 | 10.1 | 24.3 | 24.4 | ||||||||||||
Commercial
|
15.2 | 15.6 | 39.8 | 42.9 | ||||||||||||
Industrial
|
9.1 | 9.1 | 19.6 | 19.3 | ||||||||||||
Other
|
- | .4 | 1.4 | 4.0 | ||||||||||||
34.3 | 35.2 | 85.1 | 90.6 | |||||||||||||
Other revenues
|
||||||||||||||||
Revenue taxes
|
23.9 | 26.6 | 97.8 | 101.3 | ||||||||||||
Environmental cost recovery
|
1.2 | 2.3 | 8.1 | 8.0 | ||||||||||||
Chicago Hub
|
.6 | 1.8 | 2.1 | 3.8 | ||||||||||||
Other
|
15.1 | 10.2 | 27.7 | 21.0 | ||||||||||||
40.8 | 40.9 | 135.7 | 134.1 | |||||||||||||
$ | 299.5 | $ | 326.3 | $ | 1,368.3 | $ | 1,310.3 | |||||||||
Deliveries
(Bcf)
|
||||||||||||||||
Sales
|
||||||||||||||||
Residential
|
20.2 | 25.9 | 110.9 | 122.2 | ||||||||||||
Commercial
|
5.4 | 7.1 | 29.4 | 31.9 | ||||||||||||
Industrial
|
.6 | .9 | 3.6 | 3.9 | ||||||||||||
26.2 | 33.9 | 143.9 | 158.0 | |||||||||||||
Transportation
|
||||||||||||||||
Residential
|
2.4 | 3.3 | 13.6 | 15.5 | ||||||||||||
Commercial
|
11.1 | 12.7 | 47.5 | 51.3 | ||||||||||||
Industrial
|
22.0 | 23.3 | 51.8 | 53.6 | ||||||||||||
35.5 | 39.3 | 112.9 | 120.4 | |||||||||||||
61.7 | 73.2 | 256.8 | 278.4 | |||||||||||||
Customers at end of period
(thousands)
|
||||||||||||||||
Sales
|
||||||||||||||||
Residential
|
1,777 | 1,760 | ||||||||||||||
Commercial
|
131 | 131 | ||||||||||||||
Industrial
|
8 | 7 | ||||||||||||||
1,916 | 1,898 | |||||||||||||||
Transportation
|
||||||||||||||||
Residential
|
208 | 221 | ||||||||||||||
Commercial
|
48 | 50 | ||||||||||||||
Industrial
|
5 | 5 | ||||||||||||||
261 | 276 | |||||||||||||||
2,177 | 2,174 | |||||||||||||||
Other
statistics
|
||||||||||||||||
Degree days
|
463 | 686 | 3,489 | 3,871 | ||||||||||||
Colder (warmer) than normal (1)
|
(25)% | 11% | (1)% | 10% | ||||||||||||
Average gas cost per Mcf sold
|
$ | 4.39 | $ | 4.42 | $ | 6.17 | $ | 5.38 | ||||||||
(1) Normal weather for Nicor Gas' service territory, for purposes of this
report, is considered to be 5,600 degree days.
|
FINANCIAL
CONDITION AND LIQUIDITY
The
company believes it has access to adequate resources to meet its needs for
capital expenditures, debt redemptions, dividend payments and working
capital. These resources include net cash flow from operating
activities, access to capital markets, lines of credit and short-term
investments. Capital market conditions are not currently expected to
have a material adverse impact on the company’s ability to access
capital.
Operating cash
flows. The company’s business is highly seasonal and operating
cash flow may fluctuate significantly during the year and from year-to-year due
to factors such as weather, natural gas prices, the timing of collections from
customers, natural gas purchasing, and storage and hedging
practices. The company relies on short-term financing to meet
seasonal increases in working capital needs. Cash requirements
generally increase over the last half of the year due to increases in natural
gas purchases, gas in storage and accounts receivable. During the
first half of the year, positive cash flow generally results from the sale of
gas in storage and the collection of accounts receivable. This cash
is typically used to substantially reduce, or eliminate, short-term debt during
the first half of the year. Net cash flow provided from operating
activities decreased $105.3 million for the six months ended June 30, 2010
compared to the prior year.
Nicor Gas
maintains margin accounts related to financial derivative
transactions. These margin accounts may cause large fluctuations in
cash needs or sources in a relatively short period of time due to daily
settlements resulting from changes in natural gas futures prices. The
company manages these fluctuations with short-term borrowings and
investments.
Investing
activities. Net cash flow used for investing activities
decreased $19.5 million for the six months ended June 30, 2010 compared to the
prior year.
Financing
activities. The current credit ratings for Nicor Gas have not
changed since the filing of the 2009 Annual Report on Form 10-K. Nicor Gas’ access to
financing at competitive rates is, in part, dependent on its credit
ratings.
Long-term debt. In
February 2009, the $50 million 5.37 percent First Mortgage Bond series matured
and was retired. In July 2009, Nicor Gas, through a private
placement, issued $50 million First Mortgage Bonds at 4.70 percent, due in
2019. As a result of this issuance, the company classified $50
million of short-term debt outstanding as of June 30, 2009 as a long-term
obligation.
The
company believes it is in compliance with all debt covenants. Nicor
Gas’s long-term debt agreements do not include default provisions that are
triggered by rating downgrades or material adverse changes.
Short-term
debt. In April 2010, Nicor Gas established a $400 million,
364-day revolver, expiring April 2011 to replace the $550 million, 364-day
revolver, which was set to expire in May 2010 and Nicor and Nicor Gas
established a $600 million, three-year revolver, expiring April 2013 to replace
the $600 million, five-year revolver, which was set to expire in September
2010. These facilities were established with major domestic and
foreign banks and serve as backup for the issuance of commercial
paper. The company had $107 million, $494 million and $277 million of
commercial paper borrowings outstanding at June 30, 2010, December 31, 2009 and
June 30, 2009, respectively. The company expects that funding from
commercial paper and related backup line-of-credit agreements will continue to
be available in the foreseeable future.
OTHER
MATTERS
Illinois
Legislation. In July 2009, a new Illinois state law took
effect that requires utility companies to participate in bill payment assistance
programs for low-income customers. Funding for the programs is expected to
be provided largely through federal and state government contributions, as well
as through an increase in monthly utility-customer charges. The bill
payment assistance program for low-income customers was implemented on a pilot
basis beginning in 2009. The legislation also requires utilities to
develop and implement energy efficiency measures to obtain prescribed reductions
in customer deliveries. Funding for the energy efficiency program,
excluding the adverse impact on Nicor Gas of lower deliveries and resulting
reduced margin, will be through a rate adjustment mechanism. Energy
efficiency plans are required to be submitted for approval to the ICC no later
than October 1, 2010. The company is evaluating the impact this
legislation may have on the company’s future results of operations, cash flows
and financial condition.
Petition for Re-approval of Operating
Agreement. On July 1, 2009, Nicor Gas filed a petition seeking
re-approval from the ICC of the operating agreement that governs many
inter-company transactions between Nicor Gas and its affiliates. The
petition was filed pursuant to a requirement contained in the ICC order
approving the company’s most recent general rate increase and requested that the
operating agreement be re-approved without change. A number of
parties have intervened in the proceeding and are seeking modifications on a
prospective basis to the operating agreement to restrict or prohibit certain
services Nicor Gas and its affiliates currently are permitted to provide to one
another. Nicor Gas does not believe these proposed modifications are
appropriate and intends to oppose them. If certain of the proposed
modifications to the operating agreement are required by the ICC, they could
adversely impact the company’s results of operations, cash flows and financial
condition.
Financial Reform
Legislation. Financial Reform Legislation was enacted into law
on July 21, 2010, and includes a provision that requires certain over the
counter derivative transactions to be executed through an
exchange or centrally cleared and also includes provisions under which the
Commodity Futures Trading Commission may impose collateral
requirements. Final rules on major provisions in the legislation will
be established through rulemakings. While the company does not
currently believe the legislation will have a material impact on its results of
operations, cash flows and financial condition, the company will continue to
evaluate the legislation and future rulemakings.
CONTINGENCIES
The
following contingencies of Nicor Gas are in various stages of investigation or
disposition. Although in some cases the company is unable to estimate
the amount of loss reasonably possible in addition to any amounts already
recognized, it is possible that the resolution of these contingencies, either
individually or in aggregate, will require the company to take charges against,
or will result in reductions in, future earnings. It is the opinion
of management that the resolution of these contingencies, either individually or
in aggregate, could be material to earnings in a particular period but is not
expected to have a material adverse impact on Nicor Gas’ liquidity or financial
condition.
PBR plan. Nicor
Gas’ PBR plan for natural gas costs went into effect in 2000 and was terminated
by the company effective January 1, 2003. Under the PBR plan, Nicor
Gas’ total gas supply costs were compared to a market-sensitive
benchmark. Savings and losses relative to the benchmark were
determined annually and shared equally with sales customers. The PBR
plan is currently under ICC review. There are allegations that the company
acted improperly in connection with the PBR plan, and the ICC and others are
reviewing these allegations. On June 27, 2002, the Citizens Utility
Board (“CUB”) filed a motion to reopen the record in the ICC’s proceedings to
review the PBR plan (the “ICC Proceedings”). As a result of the
motion to reopen, Nicor Gas, the staff of the ICC and CUB entered into a
stipulation providing for additional discovery. The Illinois Attorney
General’s Office (“IAGO”) has also intervened in this matter. In
addition, the IAGO issued Civil Investigation Demands (“CIDs”) to
CUB and
the ICC staff. The CIDs ordered that CUB and the ICC staff produce
all documents relating to any claims that Nicor Gas may have presented, or
caused to be presented, false information related to its PBR
plan. The company has committed to cooperate fully in the reviews of
the PBR plan.
In
response to these allegations, on July 18, 2002, the Nicor Board of Directors
appointed a special committee of independent, non-management directors to
conduct an inquiry into issues surrounding natural gas purchases, sales,
transportation, storage and such other matters as may come to the attention of
the special committee in the course of its investigation. The special
committee presented the report of its counsel (“Report”) to Nicor’s Board of
Directors on October 28, 2002. A copy of the Report is available at
the Nicor website and has been previously produced to all parties in the ICC
Proceedings.
In
response, the Nicor Board of Directors directed the company’s management to,
among other things, make appropriate adjustments to account for, and fully
address, the adverse consequences to ratepayers of the items noted in the
Report, and conduct a detailed study of the adequacy of internal accounting and
regulatory controls. The adjustments were made in prior years’
financial statements resulting in a $24.8 million liability. Included
in such $24.8 million liability is a $4.1 million loss contingency. A
$1.8 million adjustment to the previously recorded liability, which is discussed
below, was made in 2004 increasing the recorded liability to $26.6
million. Nicor Gas estimates that there is $26.9 million due to the
company from the 2002 PBR plan year, which has not been recognized in the
financial statements due to uncertainties surrounding the PBR
plan. In addition, interest due to the company on certain components
of these amounts has not been recognized in the financial statements due to the
same uncertainties. By the end of 2003, the company completed steps to
correct the weaknesses and deficiencies identified in the detailed study of the
adequacy of internal controls.
Pursuant
to the agreement of all parties, including the company, the ICC re-opened the
1999 and 2000 purchased gas adjustment filings for review of certain
transactions related to the PBR plan and consolidated the reviews of the
1999-2002 purchased gas adjustment filings with the PBR plan
review.
On
February 5, 2003, CUB filed a motion for $27 million in sanctions against the
company in the ICC Proceedings. In that motion, CUB alleged that
Nicor Gas’ responses to certain CUB data requests were false. Also on
February 5, 2003, CUB stated in a press release that, in addition to $27 million
in sanctions, it would seek additional refunds to consumers. On March
5, 2003, the ICC staff filed a response brief in support of CUB’s motion for
sanctions. On May 1, 2003, the ALJs assigned to the proceeding issued
a ruling denying CUB’s motion for sanctions. CUB has filed an appeal
of the motion for sanctions with the ICC, and the ICC has indicated that it will
not rule on the appeal until the final disposition of the ICC
Proceedings. It is not possible to determine how the ICC will resolve
the claims of CUB or other parties to the ICC Proceedings.
In 2004,
the company became aware of additional information relating to the activities of
individuals affecting the PBR plan for the period from 1999 through 2002,
including information consisting of third party documents and recordings of
telephone conversations from Entergy-Koch Trading, LP (“EKT”), a natural gas,
storage and transportation trader and consultant with whom Nicor did business
under the PBR plan. Review of additional information completed in
2004 resulted in the $1.8 million adjustment to the previously recorded
liability referenced above.
The
evidentiary hearings on this matter were stayed in 2004 in order to permit the
parties to undertake additional third party discovery from EKT. In
December 2006, the additional third party discovery from EKT was obtained and
the ALJs issued a scheduling order that provided for Nicor Gas to submit direct
testimony by April 13, 2007. In its direct testimony, Nicor Gas seeks
a reimbursement of approximately $6 million, which includes interest due to the
company, as noted above, of $1.6 million, as of March 31, 2007. In
September 2009, the staff of the ICC, IAGO and CUB submitted direct testimony to
the ICC requesting refunds of $109 million, $255 million and $286 million,
respectively. No date has been set for evidentiary hearings on this
matter.
Nicor Gas
is unable to predict the outcome of the ICC’s review or the company’s potential
exposure thereunder. Because the PBR plan and historical gas costs
are still under ICC review, the final outcome could be materially different than
the amounts reflected in the company’s financial statements as of June 30,
2010.
Mercury. Information
about mercury contingencies is presented in Item 1 – Notes to the Condensed
Consolidated Financial Statements – Note 12 – Contingencies –
Mercury.
Manufactured gas plant
sites. The company is conducting environmental investigations
and remedial activities at former manufactured gas plant
sites. Additional information about these sites is presented in
Item 1 –
Notes to the Condensed Consolidated Financial Statements – Note 12 –
Contingencies – Manufactured Gas Plant Sites.
Municipal tax
matters. Information about municipal tax contingencies is
presented in Item 1 – Notes to the Condensed Consolidated Financial Statements –
Note 12 – Contingencies – Municipal Tax Matters.
Other. The company is involved
in legal or administrative proceedings before various courts and agencies with
respect to general claims, taxes, environmental, gas cost prudence reviews and
other matters. See Item 1 – Notes to the Condensed Consolidated
Financial Statements – Note 12 – Contingencies – Other.
CRITICAL
ACCOUNTING ESTIMATES
See Item
7 – Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Critical Accounting Estimates in the 2009 Annual Report on Form
10-K for a discussion of the company’s critical accounting
estimates.
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. Such forward-looking statements may be identified by
the use of forward-looking words or phrases such as “anticipate,” “believe,”
“expect,” “intend,” “may,” “planned,” “potential,” “should,” “will,” “would,”
“project,” “estimate,” “ultimate,” or similar phrases. Actual results
may differ materially from those indicated in the company’s forward-looking
statements due to the direct or indirect effects of legal contingencies
(including litigation) and the resolution of those issues, including the effects
of an ICC review, and undue reliance should not be placed on such
statements.
Other
factors that could cause materially different results include, but are not
limited to, weather conditions; natural disasters; natural gas prices; fair
value accounting adjustments; inventory valuation; health care costs; insurance
costs or recoveries; legal costs; borrowing needs; interest rates; credit
conditions; economic and market conditions; accidents, leaks, equipment
failures, service interruptions, environmental pollution, and other operating
risks; energy conservation; legislative and regulatory actions; tax rulings or
audit results; asset sales; significant unplanned capital needs; future
mercury-related charges or credits; changes in accounting principles,
interpretations, methods, judgments or estimates; performance of major
customers, transporters, suppliers and contractors; labor relations; and acts of
terrorism.
Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date of this filing. Nicor 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.
Nicor Gas
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. Nicor Gas’ practice is to manage these
risks utilizing derivative instruments and other methods, as deemed
appropriate.
There has
been no material change in the company's exposure to market risk since the
filing of the 2009 Annual Report on Form 10-K.
The
company carried out an evaluation under the supervision and with the
participation of the company’s management, including its Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the company’s disclosure controls and procedures as of the end of the period
covered by this Quarterly Report on Form 10-Q (the “Evaluation”).
In
designing and evaluating the disclosure controls and procedures, management
recognizes that any disclosure controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management is required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and
procedures. These disclosure controls and procedures are designed so
that required information is accumulated and communicated to the registrant’s
management, including its principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required
disclosures. Based on the Evaluation, the company’s Chief Executive
Officer and Chief Financial Officer concluded that the company’s disclosure
controls and procedures, as of the end of the period covered by this Quarterly
Report on Form 10-Q, were effective at the reasonable assurance level to ensure
that information required to be disclosed by the company in reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in United
States Securities and Exchange Commission rules and forms.
There has
been no change in the company’s internal controls over financial reporting
during the company’s most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the company’s internal control over
financial reporting.
PART
II - OTHER INFORMATION
See Part
I, Item 1 – Notes to the Condensed Consolidated Financial Statements – Note 10 –
Regulatory Proceedings and Note 12 – Contingencies, which are incorporated
herein by reference.
Exhibit
|
||
Number
|
Description of Document
|
|
3.01
|
*
|
Restated
Articles of Incorporation of the company as filed with the Illinois
Secretary of State on July 21, 2006. (File No. 1-7296, Form
10-Q for June 30, 2006, Nicor Gas Company, Exhibit
3.01.)
|
3.02
|
*
|
Nicor
Gas Company Amended and Restated By-laws effective as of December 1,
2007. (File No. 1-7296, Form 8-K for November 29, 2007, Nicor
Gas Company, Exhibit 3.1.)
|
12.01
|
||
31.01
|
||
31.02
|
||
32.01
|
||
32.02
|
||
* |
These
exhibits have been previously filed with the SEC as exhibits to
registration statements or to other filings with the SEC 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.
|
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
|
|||
August
3, 2010
|
/s/
KAREN K. PEPPING
|
||
(Date)
|
Karen
K. Pepping
|
||
Vice
President and Controller
|
|||
(Principal
Accounting Officer and
|
|||
Duly
Authorized Officer)
|
29