UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission Registrant, State of Incorporation, I.R.S Employer
File Number Address and Telephone Number Identification
Number
-------------- ------------------------------------- -------------------
1-7297 Nicor Inc. 36-2855175
(An Illinois Corporation)
1844 Ferry Road
Naperville, Illinois 60563-9600
(630) 305-9500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Shares of common stock (NYSE:GAS), par value $2.50, outstanding at October 31,
2000, were 45,651,743.
<PAGE>
Nicor Inc. Page i
Table of Contents
Part I - Financial Information
Item 1. Financial Statements (Unaudited) ............................... 1
Consolidated Statement of Operations:
Three and nine months ended
September 30, 2000 and 1999 ................................... 2
Consolidated Statement of Cash Flows:
Nine months ended
September 30, 2000 and 1999.................................... 3
Consolidated Balance Sheet:
September 30, 2000 and 1999, and
December 31, 1999 ............................................. 4
Notes to the Consolidated Financial Statements ................. 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk ..... 17
Part II - Other Information
Item 1. Legal Proceedings .............................................. 17
Item 6. Exhibits and Reports on Form 8-K ............................... 17
Signature ...................................................... 18
Exhibit Index .................................................. 19
Glossary
Degree day.....The extent to which the daily average temperature falls
below 65 degrees Fahrenheit. Normal weather for Nicor Gas'
service territory is about 6,100 degree days per year.
ICC............Illinois Commerce Commission, the agency that regulates
investor-owned Illinois utilities.
Mcf, Bcf . ....Thousand cubic feet, billion cubic feet.
PBR............Performance-based rate plan, a plan that provides economic
incentives based on performance.
TEU............Twenty-foot equivalent unit, a measure of volume in
containerized shipping equal to one 20-foot-long container.
Nicor Inc. Page 1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The following condensed unaudited financial statements of Nicor Inc. have been
prepared by the company pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to SEC rules and regulations. The condensed financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the company's latest Annual Report on Form 10-K.
The information furnished reflects, in the opinion of the company, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair statement of the results for the interim periods presented. Results for the
interim periods presented are not necessarily indicative of the results to be
expected for the full fiscal year due to seasonal and other factors.
<PAGE>
Nicor Inc. Page 2
-------------------------------------------------------------------------------
Consolidated Statement of Operations (Unaudited)
(millions, except per share data)
Three months ended Nine months ended
September 30 September 30
--------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Operating revenues $ 301.0 $ 227.3 $ 1,308.7 $ 1,075.5
--------- --------- --------- ---------
Operating expenses
Cost of gas 129.2 69.6 666.2 491.0
Operating and maintenance 90.9 87.3 283.2 260.2
Depreciation 19.7 19.2 101.6 98.9
Taxes, other than income taxes 14.2 13.1 85.1 77.5
Other 148.0 - 148.0 -
--------- --------- --------- ---------
402.0 189.2 1,284.1 927.6
--------- --------- --------- ---------
Operating income (loss) (101.0) 38.1 24.6 147.9
Other income (expense), net 6.4 2.0 9.9 15.2
--------- --------- --------- ---------
Income (loss) before interest on
debt and income taxes (94.6) 40.1 34.5 163.1
Interest on debt, net of amounts
capitalized 11.9 9.9 33.9 32.3
--------- --------- --------- ---------
Income (loss) before income taxes (106.5) 30.2 .6 130.8
Income tax expense (benefit) (43.8) 10.4 (6.1) 45.5
--------- --------- --------- ---------
Net income (loss) (62.7) 19.8 6.7 85.3
Dividends on preferred stock .1 .1 .2 .3
--------- --------- --------- ---------
Earnings (loss) applicable to
common stock $(62.8) $ 19.7 $ 6.5 $ 85.0
========= ========= ========= =========
Average shares of common stock
outstanding
Basic 45.8 47.2 46.3 47.3
Diluted 45.8 47.3 46.4 47.5
Earnings (loss) per average share of
common stock
Basic $ (1.37) $ .42 $ .14 $ 1.80
Diluted (1.37) .42 .14 1.79
Dividends declared per share of
common stock $ .415 $ .390 $ 1.245 $ 1.170
The accompanying notes are an integral part of this statement.
Nicor Inc. Page 3
-------------------------------------------------------------------------------
Consolidated Statement of Cash Flows (Unaudited)
(millions)
Nine months ended
September 30
--------------------
2000 1999
--------- ---------
Operating activities
Net income $ 6.7 $ 85.3
Adjustments to reconcile net income to net cash flow
provided from operating activities:
Depreciation 101.6 98.9
Deferred income tax expense (benefit) (7.8) 18.2
Change in assets and liabilities:
Receivables, less allowances 91.6 118.4
Gas in storage (31.3) 37.9
Deferred gas costs (65.0) (63.7)
Accounts payable 73.8 71.0
Postretirement benefits (21.1) (12.9)
Other 102.9 (27.7)
--------- ---------
Net cash flow provided from operating activities 251.4 325.4
--------- ---------
Investing activities
Capital expenditures (115.8) (101.1)
Short-term investments (5.7) 24.4
Other .5 (8.9)
--------- ---------
Net cash flow used for investing activities (121.0) (85.6)
--------- ---------
Financing activities
Net proceeds from issuing long-term debt 49.9 101.5
Disbursements to retire long-term debt (73.6) (156.6)
Short-term borrowings (repayments), net (.7) (108.0)
Dividends paid (56.9) (54.8)
Disbursements to reacquire stock (44.4) (14.6)
Other 1.3 (.1)
--------- ---------
Net cash flow used for financing activities (124.4) (232.6)
--------- ---------
Net increase in cash and cash equivalents 6.0 7.2
Cash and cash equivalents, beginning of period 42.5 13.0
--------- ---------
Cash and cash equivalents, end of period $ 48.5 $ 20.2
========= =========
Supplemental information
Income taxes paid, net of refunds $ 30.6 $ 37.6
Interest paid, net of amounts capitalized 36.3 33.4
The accompanying notes are an integral part of this statement.
Nicor Inc. Page 4
-------------------------------------------------------------------------------
Consolidated Balance Sheet (Unaudited)
(millions)
September 30 December 31 September 30
2000 1999 1999
----------- ----------- ----------
Assets
Current assets
Cash and cash equivalents $ 48.5 $ 42.5 $ 20.2
Short-term investments, at cost which
approximates market 35.4 29.7 31.4
Receivables, less allowances of $8.0,
$7.1 and $7.5, respectively 268.2 359.8 145.6
Gas in storage 62.3 31.0 67.6
Deferred gas costs 80.9 15.9 33.8
Other 82.3 29.1 43.9
----------- ----------- ----------
577.6 508.0 342.5
----------- ----------- ----------
Property, plant and equipment, at cost
Gas distribution 3,262.2 3,200.3 3,171.3
Shipping 300.7 280.8 272.3
Other 2.0 2.0 2.0
----------- ----------- ----------
3,564.9 3,483.1 3,445.6
Less accumulated depreciation 1,822.1 1,747.9 1,714.4
----------- ----------- ----------
1,742.8 1,735.2 1,731.2
----------- ----------- ----------
Other assets 235.4 208.6 203.1
----------- ----------- ----------
$ 2,555.8 $ 2,451.8 $ 2,276.8
=========== =========== ==========
Liabilities and Capitalization
Current liabilities
Long-term obligations due within one year $ 126.8 $ 74.2 $ 73.8
Short-term borrowings 343.5 344.2 126.5
Accounts payable 356.2 282.4 341.3
Other 187.6 44.9 36.3
----------- ----------- ----------
1,014.1 745.7 577.9
----------- ----------- ----------
Deferred credits and other liabilities
Deferred income taxes 284.7 266.6 261.5
Regulatory income tax liability 71.9 74.8 75.7
Unamortized investment tax credits 41.5 42.7 42.7
Other 83.4 91.9 101.8
----------- ----------- ----------
481.5 476.0 481.7
----------- ----------- ----------
Capitalization
Long-term debt 360.2 436.1 436.7
Preferred stock 6.3 6.3 6.3
Common equity
Common stock 114.1 117.2 117.8
Retained earnings 579.6 670.5 656.4
----------- ----------- ----------
1,060.2 1,230.1 1,217.2
----------- ----------- ----------
$ 2,555.8 $ 2,451.8 $ 2,276.8
=========== =========== ==========
The accompanying notes are an integral part of this statement.
Nicor Inc. Page 5
Notes to the Consolidated Financial Statements (Unaudited)
ACCOUNTING POLICIES
Weather insurance. On an interim basis, estimated weather insurance benefits are
recorded based on a comparison of actual year-to-date degree days to an
allocation of annual insured degree days. Year-to-date operating revenues
include $7.3 million of estimated insurance benefits that will partially reverse
if the weather remains normal for the remainder of the year.
Depreciation. Depreciation for the gas distribution segment is calculated using
a straight-line method for the calendar year. For interim periods, depreciation
is allocated based on gas deliveries.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities. The company has
substantially completed an evaluation of the statement, as amended, and plans to
adopt it on January 1, 2001. Implementation is not expected to have a material
impact on the company's financial condition or results of operations.
At Nicor Gas, derivative instruments are primarily utilized in the natural gas
procurement function. Realized gains or losses are passed directly through to
customers through operation of the company's Uniform Purchased Gas Adjustment
Clause (PGA). As such, changes in the fair value of these derivative instruments
will be deferred or accrued as a regulatory asset or liability until realized.
Nicor's wholesale natural gas trading business will continue its practice of
marking energy-related contracts and physical inventory to fair value.
REGULATORY MATTERS
Performance-based rate plan. On January 1, 2000, Nicor Gas' performance-based
rate (PBR) plan for natural gas costs went into effect. Under the PBR plan,
Nicor Gas' total gas supply costs will be compared to a market-sensitive
benchmark. Savings and losses relative to the benchmark will be shared equally
with customers. After two years, the plan will be subject to Illinois Commerce
Commission (ICC) review.
Results of the company's PBR plan are determined annually. On an interim basis,
the company records an estimate of results attributable to the period, and
results will likely vary from quarter to quarter. Nicor recorded $5.4 million
and $7.6 million of estimated PBR plan results as operating revenue for the
three- and nine-month periods, respectively.
Customer Select(R). Customer Select is a voluntary pilot program that offers a
choice of natural gas suppliers to all commercial and industrial customers as
well as 250,000 residential customers in 16 communities. A customer's choice of
another natural gas commodity supplier has no direct impact on Nicor Gas'
operating income because natural gas costs are passed directly through to
customers without mark-up under the PGA. Nicor Gas continues to deliver the
natural gas, read meters, maintain its distribution system, ensure safety and
respond to service and emergency calls.
<PAGE>
Nicor Inc. Page 6
Notes to the Consolidated Financial Statements (Unaudited) (Continued)
In September 2000, the ICC suspended for hearings Nicor Gas' request to
permanently expand the Customer Select program to include all residential
customers. The hearings may take up to 11 months to complete and are intended to
examine concerns consumer groups have raised about the program. In the interim,
the ICC has granted a company request to extend the existing pilot program for
an additional year until April 30, 2002.
INCOME TAXES
The overall effective income tax rate for the 2000 periods varies from its
customary level due to the effect of the unusual charge by Nicor Gas related to
its mercury program described on page 7. Excluding the mercury charge, federal
and state income taxes were provided at Nicor's more typical effective income
tax rate of 35% for the three- and nine-month periods, respectively.
LONG-TERM DEBT
In January 2000, Nicor Gas issued $50 million of adjustable rate unsecured notes
due in 2001 at an initial rate of 6.11%. The issuance funded the redemption of
$50 million of maturing unsecured 5.065% notes.
DISCONTINUED OPERATIONS
The company maintains a reserve for the remaining costs related to discontinued
contract drilling, oil and gas exploration, inland barging and extractive
operations. The reserve will continue to be evaluated as remaining medical
benefit, tax and other contingencies are resolved.
BUSINESS SEGMENT INFORMATION
Financial data by business segment is presented below:
Three months ended Nine months ended
September 30 September 30
------------------- -------------------
(millions) 2000 1999 2000 1999
--------- --------- --------- ---------
Operating revenues
Gas distribution $ 203.0 $ 161.8 $ 1,039.7 $ 877.9
Shipping 60.4 55.5 180.9 164.0
Other Nicor ventures 38.1 11.3 88.7 34.9
Corporate and eliminations (.5) (1.3) (.6) (1.3)
---------- -------- --------- ---------
$ 301.0 $ 227.3 $ 1,308.7 $1,075.5
========== ======== ========= =========
Operating income (loss)
Gas distribution $ (106.6) $ 35.4 $ 5.9 $ 137.1
Shipping 5.2 4.5 16.6 13.9
Other Nicor ventures .9 (.1) 4.5 (.1)
Corporate and eliminations (.5) (1.7) (2.4) (3.0)
---------- -------- --------- ---------
$ (101.0)$ 38.1 $ 24.6 $ 147.9
========== ======== ========= =========
<PAGE>
Nicor Inc. Page 7
Notes to the Consolidated Financial Statements (Unaudited) (Continued)
CONTINGENCIES
Mercury program. Nicor Gas has incurred, and expects to continue to incur,
significant costs related to its historical use of mercury in various kinds of
equipment.
Prior to 1961, gas regulators containing small quantities of mercury were
installed in homes. The purpose of the regulators was to reduce the pressure of
natural gas flow from the service line for use inside the home. During the third
quarter of this year, the company learned that in certain instances some mercury
was spilled or left in residences when the regulators were removed.
As a result, on September 6, 2000, Nicor Gas was named as a defendant in a civil
lawsuit brought by the Illinois Attorney General and the States Attorneys of
Cook, DuPage and Will Counties seeking, among other things, to compel the
company to inspect and clean up all homes and other sites which may have been
affected by spills of mercury from company equipment. The Cook County, Illinois,
Circuit Court hearing this action has entered two agreed preliminary injunctions
requiring Nicor Gas, among other things, to conduct inspections and, where
necessary, to clean up mercury, to pay for relocating residents until clean-up
is completed, and to pay for medical screening of potentially affected persons.
At this early stage of the process it is not possible to determine the
likelihood that the plaintiffs will seek and obtain fines or penalties.
Nicor Gas is also the subject of an Administrative Order, and an amendment
thereto, entered during the third quarter by the U.S. Environmental Protection
Agency (EPA) pursuant to Section 106 of the Comprehensive Environmental
Response, Compensation and Liabilities Act. Pursuant to that order, the company
is required, among other things, to develop and implement work plans to address
mercury spills at recycling centers where mercury regulators may have been
taken, at company reporting centers, and at other large-volume
commercial/industrial sites where mercury manometers may have been used to
measure gas pressure.
Pursuant to the injunctions and the EPA Administrative Order, Nicor Gas has
initiated the work described above. Potentially affected homes are being
inspected using mercury vapor analyzers. Nicor Gas expects to have called on
every such home by December 31, 2000, although access to some homes may not be
gained until a later date. Through November 5, 2000, approximately 780 homes
have been found to have traces of mercury requiring clean-up.
Nicor Gas has also inspected all of its reporting centers where equipment
containing mercury was handled and has become aware of the presence of mercury
at nine reporting centers. Cleaning is underway at those locations. In addition,
the company is aware of four recycling centers where traces of mercury from
regulators have been discovered and is cleaning up the mercury spills. The
company has also inspected customer sites which use or previously used mercury
manometers, and the company has identified and cleaned up all 12 such sites
where mercury traces have been found.
<PAGE>
Nicor Inc. Page 8
Notes to the Consolidated Financial Statements (Unaudited) (Continued)
As of September 30, Nicor Gas accrued $144.9 million to other current
liabilities for estimated obligations related to the previously described work
and for legal defense costs. As a result, and including amounts already spent,
$148 million was charged to the company's income statement as other operating
expense. The accrual represents management's best estimate based on an
evaluation of currently available information. Actual costs incurred in the
future may vary from this estimate. The company will reassess its estimated
obligation at the end of each future accounting period and will record any
resulting adjustment in such period. Any such adjustment could be material to
operating results in the period in which it is recorded.
In addition to the matters described above, as of November 6, 2000, Nicor Gas
has been named a defendant in three private lawsuits, claiming a variety of
unquantified damages (including bodily injury, property and punitive damages)
allegedly caused by the presence of mercury-containing regulators inside
residences. One of the lawsuits involves five previous class actions that have
been consolidated before a single judge in Cook County, Illinois, Circuit Court.
At this early stage in the litigation, it is not possible to estimate what
liability, if any, may result to the company from these lawsuits. While no
amount has been recorded for this potential liability, a loss contingency for an
unfavorable outcome of these lawsuits will be accrued if it becomes probable and
can be reasonably estimated. Any such accrual could be material to operating
results in the period in which it is recorded.
The company has certain insurance policies, and has notified its insurers of the
claims. The company will vigorously pursue recovery of mercury-related costs
pursuant to its insurance coverage. In addition, some of the removals of
mercury-containing regulators were conducted by contractors working for the
company. The company intends to vigorously pursue its indemnification and
contribution rights against these contractors, as well as to seek insurance
recoveries under its contractors' policies. At this early stage, it is not
possible to estimate the likelihood that costs will be recovered from insurance
carriers or other third parties related to the mercury spills, and therefore
Nicor Gas has not recorded any such amounts as assets in its financial
statements.
Nicor Gas will not seek recovery of the costs associated with these mercury
spills from its customers, and any proceeds from insurance carriers or third
parties will be retained by the company to offset costs incurred.
It is management's opinion, taking into account the above information and
uncertainties, including currently available information concerning the
company's existing and potential obligations, insurance coverage, possible
recoveries from other third parties and available financial resources, that
costs associated with the mercury spills will not have a material adverse effect
on the liquidity or financial position of the company.
Other. The company is involved in legal or administrative proceedings before
various courts and agencies with respect to rates, taxes and other matters.
<PAGE>
Nicor Inc. Page 9
Notes to the Consolidated Financial Statements (Unaudited) (Concluded)
Current environmental laws may require the clean-up of certain former
manufactured gas plant sites. To date, Nicor Gas has identified about 40
properties for which it may, in part, be responsible. The majority of these
properties are not presently owned by the company. Information regarding
preliminary site reviews has been presented to the Illinois Environmental
Protection Agency. More detailed investigations and remedial activities are
either in progress or planned at many of these sites. The results of continued
testing and analysis should determine to what extent additional remediation is
necessary and may provide a basis for estimating any additional future costs
which, based on industry experience, could be significant. In accordance with
ICC authorization, the company has been recovering these costs from its
customers.
On December 20, 1995, Nicor Gas filed suit in Cook County, Illinois, Circuit
Court against certain insurance carriers seeking recovery of environmental
clean-up costs of certain former manufactured gas plant sites. Nicor Gas has
reached a settlement with one of the insurance carriers. In February 2000, the
court dismissed the company's case on summary judgment motions by certain
defendants. The company filed an appeal in March 2000. Management cannot predict
the outcome of the lawsuit against the remaining insurance carriers. Any
recoveries will be refunded to the company's customers.
Although unable to determine the outcome of these other contingencies,
management believes that appropriate accruals have been recorded. Final
disposition of these other matters is not expected to have a material impact on
the company's financial condition or results of operations.
<PAGE>
Nicor Inc. Page 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion should be read in conjunction with the Management's
Discussion and Analysis section of the Nicor Inc. 1999 Annual Report on Form
10-K.
SUMMARY
Nicor's third quarter 2000 diluted loss per common share was $1.37, down from
earnings per common share of $.42 in 1999. There was a net loss for the quarter
of $62.7 million, compared with net income of $19.8 million in 1999. For the
nine months ended September 30, 2000, diluted earnings per common share
decreased to $.14 from $1.79 a year ago. Net income for the nine-month period
was $6.7 million in the current year compared to $85.3 million in 1999.
An unusual charge of $148 million was recorded as operating expense in the third
quarter of 2000 related to the company's mercury inspection and repair program
described on page 7. The after-tax effect of this charge on third quarter
earnings was $1.96 per share. Net income excluding the unusual charge increased
$7.2 million and $11.1 million, to $27.0 million and $96.4 million, for the
three- and nine- month periods, respectively.
Operating income (loss) by major business segment was:
Three months ended Nine months ended
September 30 September 30
------------------- -------------------
(millions) 2000 1999 2000 1999
--------- ---------- --------- ---------
Gas distribution $ (106.6) $ 35.4 $ 5.9 $ 137.1
Shipping 5.2 4.5 16.6 13.9
Other Nicor ventures .9 (.1) 4.5 (.1)
Corporate and eliminations (.5) (1.7) (2.4) (3.0)
---------- --------- --------- ---------
$ (101.0) $ 38.1 $ 24.6 $ 147.9
========== ========= ========= =========
Excluding the effects of the mercury-related charge, results for both the
quarter and nine-month period reflect significant improvements in all business
segments, including gas distribution, shipping and Nicor's other energy-related
ventures.
The following summarizes operating income comparisons for major business
segments:
o Gas distribution operating income for the three- and nine-month periods ended
September 30, 2000, decreased $142 million and $131.2 million, respectively,
when compared to the corresponding prior-year periods. Gas distribution
operating income excluding the effect of the unusual mercury charge increased
to $41.4 million and $153.9 million for the three- and nine-month periods,
respectively. The impact of the mercury charge more than offset improvements
in both periods related to contributions from the gas cost performance-based
rate (PBR) plan, increased income from power-generation services and customer
additions. Nine-month operating results also benefited from weather insurance
benefits in 2000, which more than offset the adverse effect of weather that
was 4 percent warmer than last year. The weather insurance coverage ensures
that the net impact of weather in 2000 will be an improvement over 1999.
<PAGE>
Nicor Inc. Page 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
o Containerized shipping operating income increased $.7 million for the three
months and $2.7 million for the nine months ended September 30, 2000.
Improvements in both periods are primarily a result of an increase in volumes
shipped.
o Improvements in operating income for other Nicor ventures reflect
contributions from Nicor's service and technology businesses for both the
quarter and nine-month periods.
Other income for the quarter is $6.4 million, up from $2 million a year ago. For
the nine months ended September 30, other income decreased to $9.9 million in
2000 from $15.2 million in 1999. Results for the three- and nine-month periods
reflect the positive impact of utility property sales, improved results from
Nicor's nonregulated retail energy services joint venture and an investment in a
cargo container leasing business. Year-to-date results for 1999 included
significant contributions from various items such as interest benefits on tax
related matters and a gain on the sale of Nicor's interest in an electronic
energy trading system.
Excluding the impact of the unusual mercury charge, Nicor continues to expect
2000 earnings to be in the range of $2.85 to $2.95 per share. Furthermore,
management currently expects 2001 earnings to be in the range of $3.00 to $3.15.
Although management believes the foregoing forward-looking statements about its
earnings expectations are based on reasonable assumptions, actual results may
vary materially from stated expectations. Factors that could cause materially
different results include, but are not limited to, weather conditions, natural
gas prices, interest rates, short-term borrowing needs, economic and market
conditions, legislative and regulatory actions, asset sales, PBR plan results,
and any future mercury-related charges or credits.
RESULTS OF OPERATIONS
Details of various financial and operating information by segment can be found
in the tables on pages 15 and 16. The following discussion summarizes the major
items impacting Nicor's earnings.
Operating revenues. Operating revenues by major business segment were:
Three months ended Nine months ended
September 30 September 30
------------------- -------------------
(millions) 2000 1999 2000 1999
--------- ---------- --------- ---------
Gas distribution $ 203.0 $ 161.8 $ 1,039.7 $ 877.9
Shipping 60.4 55.5 180.9 164.0
Other Nicor ventures 38.1 11.3 88.7 34.9
Corporate and eliminations (.5) (1.3) (.6) (1.3)
---------- --------- --------- ---------
$ 301.0 $ 227.3 $ 1,308.7 $1,075.5
========= ========== ========= =========
For the third quarter, gas distribution revenues increased $41.2 million
primarily due to higher natural gas prices, which are passed directly through to
customers, and $5.4 million of revenues from the PBR plan. Year-to-date gas
distribution revenue increased $161.8 million. The impact of higher natural gas
prices more than offset the effect of warmer weather during the nine-month
period. Year-to-date gas distribution revenues also include $7.6 million from
the PBR plan and $7.3 million of estimated weather insurance benefits. The
insurance benefits will partially reverse if weather is normal in the fourth
quarter.
Nicor Inc. Page 12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Shipping revenues rose for the three- and nine-month periods due to increased
volumes. The increase in other revenues for both periods was primarily due to
revenues generated from Nicor's wholesale natural gas trading business.
Increased revenues from Nicor's technology business also contributed to the
year-to-date improvement in other revenues.
Gas distribution margin. Gas distribution margin, defined as operating revenues
less cost of gas and revenue tax expense, which are both passed directly through
to customers, increased for the three- and nine-month periods by $5.6 million to
$98.2 million and $19.7 million to $372.7 million, respectively. Improvements
for both periods reflect estimated results from the PBR plan, increased income
from power-generation services and customer additions. Although weather for the
nine-month period was warmer than last year, its adverse effect on comparative
operating results was more than offset by contributions from the company's
weather insurance policy in 2000.
Operating and maintenance. Operating and maintenance expense increased $3.6
million to $90.9 million, and $23 million to $283.2 million, respectively, in
the three- and nine-month periods ended September 30, 2000, due largely to
higher volume-related expenses in the shipping segment. The increase for the
nine-month period is also due to higher costs related to Nicor's technology
business.
Other operating expense. Other operating expense in the current-year periods
reflects estimated costs associated with the company's mercury inspection and
repair program. Additional information about this program is presented under the
heading Mercury Program on page 7.
Interest on debt. Interest on debt for the three- and nine-month periods
increased due to increased average borrowings.
Income taxes. For the 2000 periods, the effective tax rate varies from its
customary level due to the effect of the mercury charge. For further
information, see Income Taxes on page 6.
FINANCIAL CONDITION AND LIQUIDITY
Operating. Net cash flow from operating activities decreased $74 million to
$251.4 million for the nine months ended September 30, 2000, due primarily to
changes in working capital items in the gas distribution segment. Working
capital can swing sharply due to certain gas distribution factors including
weather, the price of gas, the timing of collections from customers and gas
purchasing practices. The company generally relies on short-term financing to
meet temporary increases in working capital needs and presently intends to
finance the mercury program with short-term debt.
Investing. In the second quarter of 2000, Nicor committed an additional $10
million to expand its cargo container leasing investment.
Financing. Nicor and its gas distribution subsidiary maintain short-term credit
agreements with major domestic and foreign banks. At September 30, 2000, these
agreements, which serve as backup for the issuance of commercial paper, totaled
$442.5 million and the company had $343.5 million of commercial paper
outstanding.
In January 2000, Nicor Gas issued $50 million of adjustable rate unsecured notes
due in 2001 at an initial rate of 6.11%. The issuance funded the redemption of
$50 million of maturing unsecured 5.065% notes.
<PAGE>
Nicor Inc. Page 13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Nicor completed an existing common stock repurchase program during the third
quarter of 2000 by purchasing and retiring the final 19,519 common shares at an
aggregate cost of $.7 million. In July 2000, Nicor announced another $50 million
common stock repurchase program. Purchases are being made as market conditions
permit through open market transactions and to the extent cash flow is available
after other investment opportunities. Under the program announced in July, Nicor
purchased and retired 290,000 common shares during the third quarter of 2000 at
an aggregate cost of $10.7 million. For the nine-month period, Nicor purchased
1,225,519 common shares at an aggregate cost of $42.7 million under both plans.
Effective with the dividend paid on May 1, 2000, Nicor's quarterly dividend on
common stock was increased to 41.5 cents per share. This payment represents an
annual rate of $1.66 per share, which is 6.4 percent higher than the $1.56 rate
established with the May 1, 1999 dividend.
FACTORS AFFECTING BUSINESS PERFORMANCE
Weather protection. Nicor Gas entered into an agreement with a third party
designed to protect the company's 2001 earnings and cash flow if weather is
warmer than 5,700 degree days, the same level as the current year's weather
insurance policy. To partially offset the cost of this warm weather protection,
Nicor Gas has also agreed to pay the third party if weather for 2001 is colder
than 6,100 degree days, which is approximately normal for Nicor Gas' service
territory. As a result, this weather hedge minimizes the earnings impact of
large variations in weather. Nicor's rule of thumb is that, excluding weather
protection, every 100-degree-day variation in weather has an impact of about 2
1/2 cents per share.
Customer Select(R). During the third quarter of 2000, the Illinois Commerce
Commission (ICC) suspended for hearings Nicor Gas' request to permanently expand
the Customer Select program to include all residential customers. The hearings
may take up to 11 months to complete and are intended to examine concerns
consumer groups have raised about the program. In the interim, the ICC has
granted a company request to extend the existing pilot program for an additional
year until April 30, 2002. For further information see Customer Select on Page
5.
Discontinued operations. The company maintains a reserve for the remaining costs
related to discontinued contract drilling, oil and gas exploration, inland
barging and extractive operations. The reserve will continue to be evaluated as
remaining medical benefit, tax and other contingencies are resolved.
Horizon pipeline. On September 14, 2000, Horizon Pipeline Company, L.L.C., a
joint venture of Nicor and Natural Gas Pipeline Company of America, received
preliminary approval from the Federal Energy Regulatory Commission (FERC) for
the construction and operation of a $75 million natural gas pipeline from
Joliet, Illinois to McHenry County in northern Illinois. FERC found the project
to be in the public convenience and necessity subject to a favorable
environmental review. Assuming timely approval, construction is expected to
begin in the summer of 2001 with completion anticipated in mid-2002.
<PAGE>
Nicor Inc. Page 14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Higher natural gas prices. Natural gas prices have increased significantly
during 2000. Changes in the price of natural gas have no direct impact on Nicor
Gas' margin from deliveries since gas costs are passed directly through to
customers under the company's Uniform Purchased Gas Adjustment Clause.
Furthermore, while price fluctuations can affect accounts receivable
collections, customer demand, company gas usage expenses and financing costs,
any such impact has generally not been material. Higher natural gas prices also
do not significantly affect Nicor Gas' PBR plan risks, since the PBR benchmark
is tied to market prices.
Mercury program. Future operating results may be impacted by adjustments to
estimated mercury program costs or recoveries, and any such adjustments could be
material. Additional information about this program is presented under the
heading Mercury Program on page 7.
OTHER
Market risk. The company is exposed to market risk in the normal course of its
business operations, including the risk of loss arising from adverse changes in
natural gas commodity prices and interest rates. There has been no material
change in the company's exposure to market risk since December 31, 1999.
New accounting pronouncement. In June 1998, the Financial Accounting Standards
Board issued Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities. The company has substantially completed an evaluation of the
impact the statement will have on the company's financial condition and results
of operations and has concluded that it will not be material. For further
information see New Accounting Pronouncement on page 5.
<PAGE>
Nicor Inc. Page 15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
GAS DISTRIBUTION STATISTICS
Changes in weather can materially affect operating statistics. Operating
revenues, deliveries, customers and other statistics are presented below.
Three months ended Nine months ended
September 30 September 30
------------------- -------------------
2000 1999 2000 1999
Operating revenues (millions):
Sales
Residential $ 133.2 $ 103.6 $ 691.6 $ 576.1
Commercial 20.3 16.3 126.4 118.0
Industrial 2.8 2.4 18.1 17.4
-------- -------- -------- --------
156.3 122.3 836.1 711.5
Transportation
Residential 1.8 .6 4.0 .9
Commercial 13.7 12.9 54.2 49.2
Industrial 12.8 11.2 35.6 32.6
Other .9 .9 4.5 3.1
-------- -------- -------- --------
29.2 25.6 98.3 85.8
Other revenues
Revenue taxes 9.3 8.1 70.1 62.0
Performance-based rate plan 5.4 - 7.6 -
Weather insurance - - 7.3 -
Chicago Hub 1.6 3.2 3.9 5.1
Other 1.2 2.6 16.4 13.5
-------- -------- -------- --------
17.5 13.9 105.3 80.6
-------- -------- -------- --------
$ 203.0 $ 161.8 $1,039.7 $ 877.9
======== ======== ========= ========
Deliveries (Bcf):
Sales
Residential 15.4 15.1 134.3 141.9
Commercial 2.4 2.4 24.7 28.9
Industrial .3 .5 3.8 4.6
-------- -------- -------- --------
18.1 18.0 162.8 175.4
-------- -------- -------- --------
Transportation
Residential .5 .2 1.8 .2
Commercial 10.1 9.3 60.3 55.5
Industrial 40.3 42.4 121.7 129.4
-------- -------- -------- --------
50.9 51.9 183.8 185.1
-------- -------- -------- --------
69.0 69.9 346.6 360.5
======== ======== ======== ========
Customers at end of period (thousands):
Sales
Residential 1,726.3 1,733.7
Commercial 93.9 104.0
Industrial 6.2 7.0
-------- --------
1,826.4 1,844.7
-------- --------
Transportation
Residential 54.1 16.6
Commercial 70.6 58.4
Industrial 7.5 6.7
-------- --------
132.2 81.7
-------- --------
1,958.6 1,926.4
======== ========
Other statistics:
Degree days 79 67 3,283 3,441
Colder (warmer) than normal (10)% (24)% (17)% (13)%
Average gas cost per Mcf sold $ 5.20 $ 3.31 $ 3.63 $ 2.61
Nicor Inc. Page 16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Concluded)
SHIPPING STATISTICS
Three months ended Nine months ended
September 30 September 30
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
TEUs shipped (thousands):
Southbound 33.2 30.3 100.9 90.2
Northbound 4.6 4.4 13.2 13.6
Interisland 1.6 1.9 5.3 6.4
-------- -------- -------- --------
39.4 36.6 119.4 110.2
======== ======== ======== ========
Other statistics:
Revenue per TEU $ 1,510 $ 1,512 $ 1,501 $ 1,487
Ports served 22 23
Vessels owned 13 13
Nicor Inc. Page 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For quantitative and qualitative disclosures about market risk, see Market Risk
on page 14, which is incorporated herein by reference.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For information concerning legal proceedings, see Regulatory Matters beginning
on page 5 and Contingencies beginning on page 7, which are incorporated herein
by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index on page 19 filed herewith.
(b) On September 14, 2000, the company filed an analyst presentation on
Form 8-K.
<PAGE>
Nicor Inc. Page 18
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Nicor Inc.
Date November 7, 2000 By KATHLEEN L. HALLORAN
------------------- -----------------------------
Kathleen L. Halloran
Executive Vice President
Finance and Administration
and Secretary
<PAGE>
Nicor Inc. Page 19
Exhibit Index
Exhibit
Number Description of Document
------- ------------------------------------------------------------------
27.01 Financial Data Schedule.
