Item 1. Business
Nicor Inc. (Nicor), incorporated in 1976, is a holding company. Its principal subsidiaries are Northern Illinois Gas Company (doing business as Nicor Gas Company), one of the nation's largest distributors of natural gas, and Tropical Shipping, a leading transporter of containerized freight in the Caribbean. Gas distribution is Nicor's primary business, representing approximately 90 percent of consolidated operating income and assets in a typical year. Nicor also owns several unregulated energy-related ventures, including a partnership in Nicor Energy, a provider of energy products and services. Nicor had approximately 3,300 employees at year-end 2000.
Financial information on Nicor's major business segments is included in Business Segment and Geographic Information beginning on page 34. Certain terms used herein are defined in the glossary on page i.
GAS DISTRIBUTION
General
Nicor Gas, a regulated natural gas distribution utility, serves nearly 2 million customers, in a service territory that encompasses most of the northern third of Illinois, excluding the city of Chicago. The company's service territory is diverse and has grown steadily over the years, providing the company with a well-balanced mix of residential, commercial and industrial customers. In 2000, residential customers accounted for 43 percent of natural gas deliveries, while commercial and industrial customers accounted for 25 percent and 32 percent, respectively. Nicor Gas' large residential customer base provides relative stability during weak economic periods. In addition, the company's industrial and commercial customer base is well diversified, lessening the impact of industry-specific economic swings. See Gas Distribution Statistics on page 16 for operating revenues, deliveries and customers by customer classification.
Gas deliveries are seasonal since about one-half are used for space heating. Typically, about 70 percent of deliveries and revenues occur from October through March. Fluctuations in weather have the potential to significantly impact year-to-year comparisons of operating income and cash flow. To provide protection from the financial impact of unusually warm weather, 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, approximately the same level as actual degree days in 2000. To partially offset the cost of this earnings 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.
Nicor Gas maintains franchise agreements with most of the communities it serves, allowing it to construct, operate and maintain distribution facilities in those communities. Franchise agreement terms range up to 50 years. Currently, less than 5 percent of the agreements will expire within five years. The company has approximately 2,200 employees.
Customer Services
In addition to gas sales to all customer classes, Nicor Gas provides transportation service to commercial and industrial customers who purchase their own gas supplies. Beginning in 1999, the company's Customer Select(R) voluntary pilot program also allowed residential customers in certain communities to
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Item 1. Business (continued)
choose their natural gas supplier. Nicor Gas supports customer choice and has filed with the Illinois Commerce Commission (ICC) to permanently expand the Customer Select program to all of its customers. Additional information on the program is presented under the heading Unbundling on page 15. Transportation customers have options that include the use of the company's storage system and the ability to choose varying supply backup levels and service options. The company receives a margin generally comparable to gas sales for transportation service with full supply backup.
In recent years, Nicor Gas has been pursuing several nontraditional activities. These activities include finding innovative ways to utilize its physical assets by providing natural gas storage and transmission-related services to marketers, other gas distribution companies and electric power generation facilities.
Sources of Gas Supply
Nicor Gas purchases gas supplies in the open market by contracting directly with producers and marketers. Pipeline transportation and purchased storage services are contracted for at rates regulated by the Federal Energy Regulatory Commission (FERC). Firm pipeline capacity and purchased storage services held by the company that are temporarily not needed can be released in the secondary market under FERC-mandated capacity release provisions, with proceeds reducing the company's cost of gas charged to customers.
The company's peak day requirements are met through utilization of company-owned storage facilities, firm pipeline capacity, purchased storage services and other supply arrangements. Nicor Gas has been able to obtain sufficient supplies of natural gas to meet customer requirements. The company believes natural gas supply availability will be sufficient to meet market demands in the foreseeable future.
Gas supply. Nicor Gas maintains a diversified portfolio of gas supply contracts. Firm gas supply contracts are diversified by supplier, producing region, quantity and available transportation. Contract pricing is generally tied to published price indices so as to approximate current market prices. The contracts also generally provide for the payment of fixed demand charges to ensure the availability of supplies on any given day and are generally negotiated annually.
The company also purchases gas supplies on the spot market to fulfill its supply requirements or to take advantage of favorable short-term pricing. Spot gas purchases accounted for about one-half of the company's total gas purchases in the last three years.
Customers served under the company's transportation service tariffs purchase their own gas supplies. About one-half of the gas that the company delivered in 2000 was purchased by transportation customers directly from producers and marketers rather than from the company.
Pipeline transportation. Nicor Gas is directly connected to seven interstate pipelines which provide access to most of the major natural gas producing regions in North America. The company's primary firm transportation contracts are with: Natural Gas Pipeline Company of America, which accounts for about two-thirds of the contracted capacity, Midwestern Gas Transmission Company and Northern Natural Gas Company. Nearly all of the contracted capacity will expire by 2004.
Storage. Nicor Gas owns and operates seven underground gas storage facilities. This storage system is one of the largest in the gas distribution industry. With about 140 Bcf of top storage capacity, the system is designed to meet about 55 percent of the company's peak day deliveries and approximately 30 percent
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Item 1. Business (continued)
of its normal winter deliveries. In addition to the company-owned facilities, Nicor Gas purchases about 40 Bcf of storage service. Storage provides supply flexibility and improves reliability of deliveries.
Competition/Demand
Nicor Gas is one of the largest utility energy suppliers in Illinois, delivering about one-third of all utility energy consumed in the state. Substantially all single-family homes in Nicor Gas' service territory are heated with natural gas. The company's natural gas services compete with other forms of energy, such as electricity and oil, based on such factors as price, service and reliability. Significant factors that impact demand for natural gas include weather, economic conditions and the price of natural gas.
The energy industry has undergone fundamental changes over the past several years. In 1997, Illinois adopted legislation directing the process of deregulating the state's electric utility industry. All customers will be given a choice of electric supplier by 2002. While natural gas prices increased significantly in 2000, Nicor Gas has traditionally maintained a pricing advantage over electricity and expects to maintain an advantage in the foreseeable future.
Additional information on competition and demand is presented in Factors Affecting Business Performance beginning on page 14.
Regulation
Nicor Gas is regulated by the ICC, which establishes the rules and regulations governing utility rates and services in Illinois. Rates are generally designed to allow the company to recover its costs and provide an opportunity to earn a fair return for its investors. Changes in the regulatory environment could affect the longer-term performance of Nicor Gas.
The cost of gas the company purchases for customers is recovered through a monthly gas supply charge, which accounted for approximately 70 percent of a typical residential customer's annual bill in the last three years. The company's cost of gas is passed on to the customer without markup.
Nicor Gas' performance-based rate (PBR) plan for natural gas costs went into effect January 1, 2000. Under the PBR plan, Nicor Gas' total gas supply costs are compared to a market-sensitive benchmark. Annual savings and losses relative to the benchmark are shared equally with customers. After 2001, the ICC is required to review the plan. Additional information on the plan is presented under the heading Performance-based rate plan beginning on page 14.
Customer Select, a voluntary pilot program that offers customers a choice of natural gas suppliers, is in its fourth year. Additional information on the program is presented under the heading Unbundling on page 15.
Properties
The gas distribution, transmission and storage system includes approximately 30,000 miles of steel, plastic and cast iron main; approximately 27,000 miles of steel, plastic/aluminum composite, plastic and copper service pipe connecting the mains to customers' premises; and seven underground storage fields.
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Item 1. Business (concluded)
Other properties include buildings, land, motor vehicles, meters, regulators, compressors, construction equipment, tools, communication and computer equipment, software and office equipment.
The principal real properties are held under easements, permits, or licenses or in fee. Land in fee is owned for essentially all administrative offices and for certain transmission mains and underground storage fields. Substantially all properties are subject to the lien of the indenture securing the company's First Mortgage Bonds.
SHIPPING
Tropical Shipping is one of the largest containerized cargo carriers in the Caribbean, a region characterized by modest market growth and intense competition. Tropical Shipping's financial results can be significantly affected by general economic conditions in the United States and the Caribbean. The company's shipments consist primarily of southbound cargo such as building materials, food and other necessities for developers, manufacturers and residents in the Caribbean, as well as tourist-related shipments intended for use in hotels and resorts, and on cruise ships. The balance of Tropical Shipping's cargo consists of northbound shipments of agricultural products and apparel, and interisland shipments. The company also provides additional related services including inland transportation and cargo insurance.
Tropical Shipping's fleet consists of 11 owned vessels and 5 chartered vessels with a container capacity totaling approximately 4,800 TEUs. In 1999, Tropical Shipping ordered the construction of two vessels to replace chartered capacity and to support growth. These vessels are currently scheduled for completion in late 2001 and early 2002. In addition, the company owns containers, container-handling equipment, chassis and other equipment. Real property, approximately half of which is leased, includes office buildings, cargo handling facilities and warehouses located in the United States, as well as in some of the ports served.
Additional information about Tropical Shipping's business is presented under Shipping on page 17.
OTHER ENERGY VENTURES
Nicor has several smaller ventures that provide products and services that meet customers' energy needs. Additional information pertaining to these ventures is presented under Other energy ventures on page 18.
ENVIRONMENTAL MATTERS
For information on environmental matters, see Contingencies beginning on page 37.
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Item 2.
Item 2. Properties
Information with respect to this item concerning Nicor and its major subsidiaries' properties is included in Item 1, Business, beginning on page 1, and is incorporated herein by reference. These properties are suitable, adequate and utilized in the company's operations.
Item 3.
Item 3. Legal Proceedings
See Contingencies beginning on page 37, which is incorporated herein by reference. One of the lawsuits referred to under Mercury Program involves five previous class actions that have been consolidated before a single judge. On March 7, 2001, the Circuit Court of Cook County entered an order dismissing the pending consolidated class action complaint without prejudice and allowing plaintiffs to file an amended consolidated class action complaint.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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Executive Officers of the Registrant
Executive officers of the company are elected annually by the Board of Directors.
Name Age Current Position and Background - ----------------------------- ------ ---------------------------------------
Thomas L. Fisher 56 Chairman, Nicor and Nicor Gas (since 1996); Chief Executive Officer, Nicor (since 1995) and Nicor Gas (since 1988); and President, Nicor (since 1994) and Nicor Gas (since 1988).
Philip S. Cali 53 Executive Vice President Operations, Nicor and Nicor Gas (since 1999); and Senior Vice President Operations, Nicor Gas (1995-1999).
Kathleen L. Halloran 48 Executive Vice President Finance and Administration, Nicor and Nicor Gas (since 1999); Senior Vice President Administration, Nicor Gas (1998-1999); Senior Vice President Information Services, Rates and Human Resources, Nicor Gas (1996-1998); and Vice President Information Services, Rates and Human Resources, Nicor Gas (1995-1996).
Russ M. Strobel 48 Senior Vice President, General Counsel and Corporate Secretary, Nicor and Nicor Gas (since 2000); Partner, Altheimer & Gray (2000); and Partner, Jenner & Block (1986-2000).
George M. Behrens 45 Vice President Administration and Treasurer, Nicor and Nicor Gas (since 1999); Vice President and Controller, Nicor and Nicor Gas (1998-1999); Vice President Accounting, Nicor Gas (1996-1998); and Vice President and Treasurer, Tropical Shipping (1991-1996).
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PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Nicor common stock is listed on the New York and Chicago Stock Exchanges. At February 28, 2001, there were approximately 29,000 common stockholders of record.
Stock price ------------------------------------ Dividends Quarter High Low declared ------------ ----------- ----------- ---------
First $ 36.38 $ 29.38 $ .415 Second 37.50 32.06 .415 Third 40.06 32.13 .415 Fourth 43.88 32.19 .415
First $ 42.94 $ 34.69 $ .39 Second 39.50 34.13 .39 Third 40.00 35.69 .39 Fourth 39.38 31.19 .39 ------------------------------------------------
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Item 6.
Item 6. Selected Financial Data
Year ended December 31 --------------------------------------------------- (millions, except per share data) 2000 1999 1998 1997 1996 --------- --------- --------- ---------- --------
Operating revenues $ 2,298.1 $ 1,615.2 $ 1,465.1 $1,992.6 $ 1,850.7
Operating income $ 94.1 $ 212.0 $ 208.6 $ 229.8 $ 233.1
Net income Continuing operations $ 46.7 $ 124.4 $ 116.4 $ 127.9 $ 121.2 Discontinued operations - - - - 15.0 --------- --------- --------- -------- -------- $ 46.7 $ 124.4 $ 116.4 $ 127.9 $ 136.2 ========= ========= ========= ======== ========
Basic earnings per common share Continuing operations $ 1.01 $ 2.63 $ 2.43 $ 2.62 $ 2.42 Discontinued operations - - - - .30 --------- --------- --------- -------- -------- $ 1.01 $ 2.63 $ 2.43 $ 2.62 $ 2.72 ========= ========= ========= ======== ========
Diluted earnings per common share Continuing operations $ 1.00 $ 2.62 $ 2.42 $ 2.61 $ 2.41 Discontinued operations - - - - .30 --------- --------- --------- -------- -------- $ 1.00 $ 2.62 $ 2.42 $ 2.61 $ 2.71 ========= ========= ========= ======== ========
Dividends declared per common share $ 1.66 $ 1.56 $ 1.48 $ 1.40 $ 1.32
Property, plant and equipment Gross $ 3,576.6 $ 3,483.1 $ 3,379.8 $3,267.7 $ 3,192.7 Net 1,729.6 1,735.2 1,731.8 1,735.8 1,771.9
Total assets $ 2,885.4 $ 2,451.8 $ 2,364.6 $2,394.6 $ 2,438.6
Capitalization Long-term debt, net of current maturities $ 347.1 $ 436.1 $ 557.3 $ 550.2 $ 518.0 Redeemable preferred stock 6.3 6.3 6.3 6.4 7.5 Common equity 707.8 787.7 759.0 744.0 729.6 --------- --------- --------- --------- -------- $ 1,061.2 $ 1,230.1 $ 1,322.6 $1,300.6 $ 1,255.1 ========= ========= ========= ========= ========
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Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The purpose of this financial review is to explain changes in Nicor's operating results and financial condition from 1998 to 2000, and to discuss business trends and uncertainties that might affect Nicor. Certain terms used herein are defined in the glossary on page i.
SUMMARY
Nicor's two major business segments are gas distribution and shipping, with gas distribution representing about 90 percent of consolidated operating income and assets in a typical year.
Nicor's 2000 diluted earnings per common share decreased to $1.00 from $2.62 a year ago. Net income decreased $77.7 million to $46.7 million. These decreases resulted from an unusual pretax charge of $148 million recorded as operating expense in the third quarter of 2000 related to the company's mercury inspection and repair program described beginning on page 37. The after-tax effect of this charge on 2000 earnings was $1.94 per share. Excluding the unusual charge, net income increased $12 million from a year ago to $136.4 million, or $2.94 diluted earnings per common share, due to improvements in operating results in all business segments.
Nicor's 1999 diluted earnings per common share increased to $2.62 from $2.42 in 1998, due primarily to a positive contribution from nonoperating items and improved gas distribution operating results. Nicor's 1999 net income increased $8 million to $124.4 million.
Per share results in both 2000 and 1999 benefited from the company's common stock repurchase programs.
Operating income. Operating income (loss) by business segment is presented below:
(millions) 2000 1999 1998 --------- -------- -------- Gas distribution $ 64.9 $ 191.7 $ 185.5 Shipping 25.7 22.5 27.6 Other energy ventures 6.5 1.3 (1.9) Corporate and eliminations (3.0) (3.5) (2.6) --------- -------- -------- $ 94.1 $ 212.0 $ 208.6 ========= ======== ========
The following summarizes operating income comparisons by business segment:
o Gas distribution operating income decreased $126.8 million in 2000 to $64.9 million. Excluding the effect of the unusual mercury-related charge, gas distribution operating income increased $21.2 million, or 11 percent, to $212.9 million in 2000. The impact of the mercury-related charge more than offset improvements from higher gas deliveries, contributions from the performance-based rate (PBR) plan for gas costs and increased income from power-generation services. Gas deliveries rose to 526 Bcf in 2000 compared with 508 Bcf in 1999 due to 8 percent colder weather and customer additions. In 1999, gas distribution operating income increased $6.2 million due to higher deliveries related primarily to 9 percent colder weather than the prior year. Results for both years also include increased operating and maintenance expenses and depreciation.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
o Containerized shipping operating income increased $3.2 million to $25.7 million in 2000. The improvement is primarily a result of record volumes shipped due to continued strong economic conditions in the Caribbean region and growth in tourism, and modest rate improvements. In 1999, shipping operating income decreased $5.1 million from 1998, due to pressure on rates, higher operating expenses and a decline in charter revenues. These factors more than offset the additional revenues generated from increased volumes shipped.
o Operating income from other energy ventures increased $5.2 million in 2000 to $6.5 million due to better results from Nicor's technology, wholesale natural gas marketing and retail energy services businesses. The $3.2 million increase in 1999 from 1998 reflects lower branding costs and improvements in operating income from Nicor's wholesale natural gas marketing business.
Nonoperating items. Other income for 2000 is $15.6 million, down from $23.2 million a year ago, as a number of improvements in 2000 did not match various nonoperating benefits in 1999. Results for 2000 reflect the positive impact of higher property sale gains and improved results from both Nicor's retail energy services joint venture and an investment in a cargo container leasing business. In 1999, other income increased $7.7 million to $23.2 million as several positive factors, including interest benefits on tax-related matters and a gain on the sale of Nicor's interest in an electronic energy trading system, more than offset a decline in property sale gains and the write-off of software development costs. Nicor's retail energy services joint venture also contributed to the improvement in 1999.
Interest expense rose 8 percent in 2000 to $48.6 million due primarily to increased average borrowings. In 1999, interest expense of $45.1 million was 3 percent lower than 1998 due primarily to refinancing at lower interest rates and reduced average borrowing levels.
The lower-than-normal effective income tax rate of 23.6 percent in 2000 is due to the effect of the unusual charge by Nicor Gas related to its mercury program described beginning on page 37. Excluding the mercury-related charge, the combined effective income tax rate was 34.8 percent, which is comparable to the 1999 and 1998 rates.
2001 Outlook. Management currently estimates 2001 diluted earnings per common share to be in the range of $3.00 to $3.15, assuming a return to normal weather and excluding any mercury-related adjustments. Although management believes the foregoing forward-looking statement about its earnings expectations is 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, natural gas prices, interest rates, borrowing needs, weather conditions, 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 throughout this review. The following discussion summarizes the major items impacting Nicor's results of operations.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Operating revenues. Operating revenues by business segment are presented below:
(millions) 2000 1999 1998 --------- --------- --------- Gas distribution $1,896.0 $1,326.2 $1,229.0 Shipping 248.3 229.9 224.5 Other energy ventures 169.9 61.0 11.6 Corporate and eliminations (16.1) (1.9) - --------- --------- --------- $2,298.1 $1,615.2 $1,465.1 ========= ========= =========
Nicor's operating revenues rose sharply to almost $2.3 billion in 2000. Gas distribution revenues increased over 40 percent reflecting significantly higher natural gas prices and related revenue taxes, which are both passed directly through to customers without markup; increased deliveries resulting from colder weather and customer additions; and benefits generated from the PBR plan. Shipping revenues rose by $18.4 million, or 8 percent, due to record volumes and higher average rates. The increase in other energy ventures was due primarily to revenues at Nicor's wholesale natural gas marketing business.
In 1999, Nicor's operating revenues increased slightly to more than $1.6 billion from about $1.5 billion in 1998. Gas distribution revenues increased nearly $100 million due to higher deliveries of natural gas and higher natural gas prices. Partially offsetting this increase was the impact of customers switching from sales to transportation service, which reduces revenue but generally has no impact on margin. Shipping revenues rose by more than $5 million as the impact of higher volumes shipped more than offset a decline in charter revenue and lower average rates. Revenues generated from Nicor's wholesale natural gas marketing business accounted for the increase in the other energy ventures category.
Gas distribution margin. Gas distribution margin, defined as operating revenues less cost of gas and revenue taxes, which are both passed directly through to customers without markup, increased $31.7 million in 2000 to $518.9 million and $17.8 million in 1999 to $487.2 million. Improvements in 2000 reflect results from the PBR plan, the impact of colder weather compared to 1999, customer additions, and increased income from power-generation services. Colder weather was the largest factor contributing to increased margin during 1999.
Operating and maintenance. In 2000, operating and maintenance expenses increased $30.9 million to $386.9 million due largely to higher volume-related expenses in the shipping segment. A larger provision for uncollectible accounts and weather insurance premiums in the gas distribution segment also contributed to the increase. The $18 million increase in 1999 to $356 million was due to higher volume-related costs in the shipping segment and higher costs in the gas distribution segment caused, in part, by increased information technology spending. In the gas distribution segment, operating and maintenance expenses were partially offset by net pension credits of $19.9 million, $13.3 million and $14.7 million in 2000, 1999 and 1998, respectively. The increase in the 2000 credit resulted principally from favorable pension fund investment returns.
Other operating expense. Other operating expense in 2000 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 beginning on page 37.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
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.
Operating cash flows. Net cash flow provided from operating activities was $230.2 million, $205.7 million and $368.4 million in 2000, 1999 and 1998, respectively. Typically, year-to-year changes in operating cash flow result largely from fluctuations in working capital items occurring mainly in the gas distribution segment because of 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 such temporary increases in working capital needs.
Capital expenditures. Capital expenditures by business segment are presented below:
Estimated (millions) 2001 2000 1999 1998 ---------- ---------- ---------- ---------- Gas distribution $ 140 $ 124.6 $ 127.4 $ 112.6 Shipping 35 33.8 26.0 23.3 Other energy ventures - - .6 .3 ---------- ---------- ---------- ---------- $ 175 $ 158.4 $ 154.0 $ 136.2 ========== ========== ========== ==========
Gas distribution capital expenditures were higher in 2000 and 1999 than in 1998 due primarily to enhancements to the company's operating system. The estimated increase in capital expenditures for 2001 is related mostly to information technology projects and improvements to the company's operating system.
Shipping segment capital expenditures increased in 2000 due, in part, to the construction of a new warehouse which was completed in 2000 and the construction of two vessels expected to be completed in 2001 and 2002. In 1999, the increase in expenditures was related, in part, to costs associated with the construction of the warehouse. In both periods, expenditures for information technology also contributed to the increase. Higher expenditures are expected in 2001 due primarily to additional vessel progress payments and the replacement of freight-handling equipment.
Other investments. Nicor invested $10 million, $12 million and $15 million in 2000, 1999 and 1998, respectively, in a cargo container leasing business and will likely make a similar investment in 2001. The company also invested $2 million, $2 million and $8 million in 2000, 1999 and 1998, respectively, in affordable housing tax credit funds.
Financing activities. Nicor Gas has the highest long-term debt ratings given in the gas distribution industry. Interest coverage for 2000 was negatively affected by the unusual mercury-related charge.
2000 1999 1998 -------- -------- --------- Long-term debt, net of current maturities, as a percent of capitalization 32.7% 35.5% 42.1%
Times interest earned, before income taxes 2.2 5.2 4.8
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Long-term debt. At December 31, 2000, Nicor Gas had $250 million of First Mortgage Bonds remaining available for issuance under a December 1998 shelf registration filing. Net proceeds from securities issued are typically used for refinancing certain outstanding First Mortgage Bonds, construction programs to the extent not provided by internally generated funds, and general corporate purposes.
In February 2001, Nicor Gas issued $75 million of First Mortgage Bonds due in 2011 at 6.625%. A portion of the net proceeds replaced $50 million of 5.875% First Mortgage Bonds due May 1, 2000 that had been temporarily refinanced through the issuance of unsecured notes. The remainder of the net proceeds replenished a portion of corporate funds used previously to redeem $50 million of 8.25% First Mortgage Bonds due in 2024.
In January 2000, Nicor Gas issued $50 million of adjustable-rate unsecured notes due in 2001 at an initial rate of 6.11% to fund the redemption of $50 million of unsecured notes at 5.065% due in 2000.
During 1999, Nicor Gas issued $50 million of First Mortgage Bonds at 5.37% due in 2009 and $50 million of unsecured notes at 5.065% due in 2000. Redemptions of First Mortgage Bonds during 1999 were as follows: $50 million at 5.875% due in 2000, $50 million at 7.375% due in 2023 and $50 million at 8.25% due in 2024.
In 1998, Nicor Gas issued First Mortgage Bonds as follows: $50 million at 5.75% due in 2003 and $50 million at 6.58% due in 2028. Redemptions of First Mortgage Bonds during 1998 were as follows: $25 million at 5.875% due in 1998, $25 million at 6.25% due in 1999 and $75 million at 8.25% due in 2022.
Short-term debt. Nicor and Nicor Gas maintain short-term line of credit agreements with major domestic and foreign banks. At December 31, 2000, these agreements, which serve as backup for the issuance of commercial paper, totaled $532.5 million. Nicor had $442 million and $342.5 million of commercial paper outstanding at year-end 2000 and 1999, respectively.
Common stock. In the third quarter of 2000, Nicor completed a $50 million common stock repurchase program initiated in June 1999 and announced a new $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 cash needs or investment opportunities. The company purchased and retired 1.4 million, .6 million and .7 million common shares in 2000, 1999 and 1998, respectively, at a cost of $50 million, $23 million and $28 million. At December 31, 2000, approximately $31.5 million remained authorized for the repurchase of common stock under the existing program. Since January 1990, the company has repurchased almost one quarter of its outstanding stock.
Nicor increased its quarterly common stock dividend rate during 2000 by 6.4 percent, which was the thirteenth consecutive year of an increase. The company paid dividends on its common stock of $75.7 million, $72.9 million and $70 million in 2000, 1999 and 1998, respectively.
Other. Restrictions imposed by regulatory agencies and loan agreements limiting the amount of subsidiary net assets that can be transferred to Nicor are not expected to have a material impact on the company's ability to meet its cash obligations.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
FACTORS AFFECTING BUSINESS PERFORMANCE
The following factors can impact year-to-year comparisons and may affect the future performance of Nicor's businesses.
Gas distribution. Nicor Gas, a regulated natural gas distribution utility, serves nearly 2 million customers in a service territory that encompasses most of the northern third of Illinois, excluding the city of Chicago. The region's economy is diverse and has grown steadily over the years, providing Nicor Gas with a well-balanced mix of residential, commercial and industrial customers. In 2000, residential, commercial and industrial customers accounted for 43 percent, 25 percent and 32 percent of natural gas deliveries, respectively.
Weather. Since about one-half of gas deliveries are used for space heating, fluctuations in weather have the potential to significantly impact year-to-year comparisons of operating income and cash flow. 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, approximately the same level as actual degree days in 2000. To partially offset the cost of this earnings 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 limits the earnings impact of large variations in weather. Nicor estimates that, excluding weather protection, every 100-degree-day variation in weather has an impact on earnings per share of approximately 2-1/2 cents.
Demand and natural gas prices. In addition to the impact of weather, significant changes in economic conditions or natural gas prices can impact customer gas usage. However, Nicor Gas' large residential customer base provides relative stability during weak economic periods. Also, the industrial and commercial customer base is well diversified, lessening the impact of industry-specific economic swings. Nicor Gas' growth in deliveries has traditionally come from a combination of customer additions and increased usage among existing commercial and industrial customers. Deliveries to power-generation facilities have also contributed to growth. While the company anticipates continued growth in deliveries attributable to these factors, a partial offset is expected as customers install more energy-efficient equipment.
Natural gas prices increased significantly during 2000. Changes in the price of natural gas have no direct impact on Nicor Gas' margin since gas costs are passed directly through to customers without markup under the company's Purchased Gas Adjustment (PGA). However, the unprecedented level of current gas prices will likely have an adverse effect on accounts receivable collections, customer demand, company gas usage expenses, financing costs and customer service expenses. In January 2001, Nicor Gas announced its intention to institute a 12-month budget plan to allow customers the opportunity to manage the effects of high winter bills. The new plan, which has been approved, will create a temporary lag in collections from participating customers, but provides for recovery of carrying costs.
Performance-based rate plan. Nicor Gas' PBR plan for natural gas costs went into effect in 2000. Under the PBR plan, Nicor Gas' total gas supply costs are compared to a benchmark tied to a market index. Savings and losses relative to the benchmark are shared equally with customers. Assuming a benchmark of $1 billion, each one-percent deviation from the benchmark would affect net income by about $3
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
million. After 2001 the ICC is required to review the plan. Transportation customers, who are responsible for their own gas supplies, are generally not affected by the PBR plan.
Generally, higher natural gas prices would not significantly affect PBR plan risk since the PBR benchmark is tied to market prices. However, the unprecedented high natural gas prices experienced at the end of 2000 and into 2001, combined with demand variability, may impact PBR plan results since any performance variance from the benchmark may be significantly greater in magnitude. The company does have strategies in place to manage these risk factors. In addition, PBR plan results are shared equally with customers.
Competition. Nicor Gas competes with other energy suppliers based on such factors as price, service and reliability. The company is well positioned to deal with the possibility of fuel switching by customers because it has rates and services designed to compete against alternative fuels. In addition, the company has a rate which allows negotiation with potential bypass customers, and no customer has bypassed since the rate became effective in 1987. Nicor Gas also offers commercial and industrial customers flexibility and alternatives in rates and service, increasing its ability to compete in these markets.
Storage and supply. Direct connection to seven interstate pipelines and extensive underground storage capacity provide the company and its transportation customers with flexibility and alternatives for gas supply procurement and storage services. In addition, in an effort to ensure supply reliability, the company purchases gas from several different producing regions under varied contract terms.
Unbundling. The company's voluntary pilot program, Customer Select(R), offers a choice of natural gas suppliers to all commercial and industrial customers and more than 270,000 residential customers in 16 communities. In the program's first three years, about 37 percent of eligible business customers and 22 percent of eligible residential customers signed up. The 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 markup under the PGA. Nicor Gas continues to deliver the natural gas, maintain its distribution system and respond to emergencies.
Nicor Gas received approval in November 2000 to continue the current Customer Select pilot program for another year. The company's August 2000 filing with the ICC to permanently expand the Customer Select program to include all of its customers is currently in the public hearing process, which may take up to 11 months.
Nontraditional activities. In order to generate additional contributions to earnings growth, Nicor Gas continues to pursue several nontraditional activities, including the Chicago Hub, which provides interruptible transportation and storage service to interstate natural gas pipeline shippers. The Chicago area has become a major market hub for natural gas, and demand for storage- and transmission-related services by marketers, other gas distribution companies and electric power-generation facilities is expected to increase significantly.
Nicor Gas is also developing the property surrounding its corporate headquarters, and the company continues to assess its other nonstrategic real estate holdings. The gas distribution property development project is expected to continue for a number of years.
Nicor Inc. Page 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Gas Distribution Statistics 2000 1999 1998 --------- --------- --------- Operating revenues (millions) Sales Residential $ 1,353.9 $ 899.8 $ 813.6 Commercial 236.0 172.3 189.4 Industrial 37.0 24.5 27.5 --------- --------- --------- 1,626.9 1,096.6 1,030.5 --------- --------- --------- Transportation Residential 6.7 1.7 - Commercial 78.9 70.3 57.2 Industrial 47.5 43.7 39.2 Other 6.2 4.2 1.6 --------- --------- --------- 139.3 119.9 98.0 --------- --------- --------- Other revenues Revenue taxes 101.7 84.6 79.8 Performance-based rate plan 12.2 - - Chicago Hub 6.3 6.0 4.1 Other 9.6 19.1 16.6 --------- --------- --------- Revenue taxes and other 129.8 109.7 100.5 --------- --------- --------- $ 1,896.0 $ 1,326.2 $ 1,229.0 ========= ========= =========
Deliveries (Bcf) Sales Residential 219.0 209.0 192.4 Commercial 38.4 39.8 44.3 Industrial 6.2 6.1 7.1 --------- --------- --------- 263.6 254.9 243.8 --------- --------- --------- Transportation Residential 4.4 .9 - Commercial 94.0 82.1 67.5 Industrial 163.9 170.2 175.7 --------- --------- --------- 262.3 253.2 243.2 --------- --------- --------- 525.9 508.1 487.0 ========= ========= =========
Year-end customers (thousands) Sales Residential 1,746.3 1,753.0 1,737.6 Commercial 98.9 108.9 127.9 Industrial 6.6 7.4 9.1 --------- --------- --------- 1,851.8 1,869.3 1,874.6 --------- --------- --------- Transportation Residential 52.8 16.2 - Commercial 68.7 57.2 35.9 Industrial 7.4 6.6 5.0 --------- --------- --------- 128.9 80.0 40.9 --------- --------- --------- 1,980.7 1,949.3 1,915.5 ========= ========= =========
Other statistics Degree days (normal 6,116) 5,717 5,272 4,834 Colder (warmer) than normal (7)% (14)% (21)% Average gas cost per Mcf sold $ 4.80 $ 2.93 $ 2.76
Nicor Inc. Page 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Regulation. Nicor Gas is regulated by the ICC, which establishes the rules and regulations governing utility rates and services in Illinois. Rates are generally designed to allow the company to recover its costs and provide an opportunity to earn a fair return for its investors. Significant changes in the regulatory environment could affect the longer-term performance of Nicor Gas.
Shipping. Tropical Shipping is one of the largest containerized cargo carriers in the Caribbean, a region characterized by modest market growth and intense competition. Tropical Shipping has a reputation for providing quality, on-time delivery service -- a reputation that has helped the company establish a dominant position in many of the markets it serves. The company is the top carrier of U.S. exports from the East Coast to the Caribbean.
The company's shipments consist primarily of southbound cargo such as building materials, food and other necessities for developers, manufacturers and residents in the Caribbean, as well as tourist-related shipments intended for use in hotels and resorts, and on cruise ships. The balance of Tropical Shipping's cargo consists of northbound shipments of agricultural products and apparel, and interisland shipments.
Tropical Shipping's financial results can be significantly affected by general economic conditions in the United States and the Caribbean. Economic development is expected to be supported by the 1999 Caribbean Basin Trade Partnership Act, which is intended to give Caribbean markets parity with those markets operating under the North American Free Trade Agreement (NAFTA) in terms of manufacturing and trade incentives.
The Caribbean marketplace is very competitive with global carriers recently establishing a presence in several markets that Tropical Shipping serves. Additionally, the Ocean Shipping Reform Act, which allows confidential contracts between shipping companies and their customers, created the potential for further price competition when it went into effect during 1999. Tropical Shipping is continuing to meet these challenges by focusing on superior customer service, controlling costs, and maximizing the efficiency and utilization of its vessel fleet and shore assets. In 1999, Tropical Shipping ordered the construction of two vessels to replace chartered capacity and to support growth. The vessels are expected to be delivered in late 2001 and early 2002. The company also replaced its Miami warehouse during 2000 with a larger and more flexible facility.
Shipping Statistics 2000 1999 1998 ---------- ---------- ---------- TEUs shipped (thousands) Southbound 136.6 126.5 119.4 Northbound 17.9 17.6 16.1 Interisland 6.9 8.3 8.7 ---------- ---------- ---------- 161.4 152.4 144.2 ========== ========== ==========
Other statistics Revenue per TEU $ 1,523 $ 1,508 $ 1,526 Ports served 22 23 23 Vessels operated 16 17 17
Nicor Inc. Page 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Other energy ventures. Nicor is involved in several unregulated energy ventures that leverage the company's reputation, location, assets and expertise into new income-producing opportunities. These ventures include Nicor Energy, Nicor Enerchange, Nicor Services, Horizon Pipeline and other energy-related opportunities.
Nicor Energy. Nicor Energy is a 50/50 joint venture with Dynegy Inc. that was formed in 1997 to offer natural gas, electricity and related energy services primarily to retail customers in the Midwest region. Unlike Nicor Gas, Nicor Energy may profit from the sale of natural gas as a commodity. The company currently serves close to 100,000 natural gas customers and approximately 3,000 electric customers, primarily in Illinois. The company is also expanding its presence in other midwestern states as deregulation progresses.
After four years of operations, Nicor Energy was modestly profitable in generating pretax nonoperating income for Nicor of $1.4 million in 2000 compared with a loss of $.4 million in 1999. Factors expected to contribute to its future success are an increased customer base resulting in economies of scale, the quality and experience of its management team, an efficient back-room operation and relatively low customer-acquisition costs.
Nicor Enerchange. Nicor Enerchange is an unregulated natural gas marketing company formed in 1998 to engage in wholesale marketing and trading of natural gas supply services in the Midwest. Nicor Enerchange also administers the Chicago Hub for a fee. The company focuses on niche opportunities that allow it to leverage its unique knowledge of natural gas movement in and around the Midwest. Nicor Enerchange contributed $3 million of operating income in 2000, compared with $2 million in 1999.
Nicor Services. Nicor Services offers maintenance and repair contracts on inside gas piping and on residential and business space heating, water heating and air conditioning equipment. Nicor Services contributed $1 million in operating income in 2000, compared with $50,000 in 1999.
Horizon Pipeline. Horizon Pipeline is a 50/50 joint venture between Nicor and Natural Gas Pipeline Company of America, a subsidiary of Kinder Morgan, Inc. Excellent progress was made in 2000 to obtain approval to construct and operate a 74-mile, 36-inch pipeline from Joliet, Illinois to near the Wisconsin/Illinois border. The project has received Federal Regulatory Energy Commission (FERC) support. Final certification is awaiting an environmental review and is expected to be received in the spring of 2001. The pipeline capacity is nearly fully subscribed under 10-year agreements, with Nicor Gas having contracted for approximately 80 percent of the 380 MMcf per day initial capacity. Assuming timely FERC approval, construction on the $80 million pipeline should begin in the summer of 2001 with completion expected in 2002.
Other. Nicor has a number of other energy-related businesses engaged in activities such as pipeline design and construction, corrosion protection services and energy system design and construction. Nicor also is participating in the development of the market for natural gas vehicles. Combined, these services and activities contributed $2.5 million of operating income to Nicor in 2000 compared with a loss of $.7 million in 1999.
Nicor Inc. Page 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
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.
Commodity price risk. The company has established policies and procedures governing the management of commodity price risks and the use of derivative commodity instruments to hedge its exposure to such risks. A risk management committee exists to oversee compliance with such policies and procedures.
Nicor's regulated utility, Nicor Gas, is generally not exposed to market risk caused by changes in commodity prices. This is due to current Illinois rate regulation allowing the recovery of all natural gas supply costs from customers. Although the company has a PBR plan for natural gas costs, the plan does not directly expose the company to commodity price risk because actual gas costs are compared to a market-sensitive benchmark as opposed to a fixed benchmark.
Nicor's unregulated energy businesses are subject to natural gas commodity price risk, arising primarily from fixed-price purchase and sale agreements and natural gas inventories. Derivative commodity instruments such as futures, options, forwards and swaps may be used to hedge this risk. Open positions are restricted by policy to an immaterial amount. To manage credit risk inherent in the company's commodity price risk management programs, the company contracts with creditworthy counterparties and limits its exposure to any one counterparty.
Interest rate risk. Nicor is also exposed to changes in interest rates, primarily as a result of its short- and long-term debt. The company manages its interest rate risk by issuing long-term fixed-rate debt with varying maturities, refinancing certain debt and periodically hedging the interest rate on anticipated borrowings. For further information about debt securities, interest rates and fair values, see the Consolidated Statements of Capitalization on page 26, the Fair Value of Financial Instruments footnote on page 29 and the Short- and Long-Term Debt footnote on page 31.
Discontinued operations. The company maintains a reserve for estimated 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.
New accounting pronouncement. In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. Nicor adopted this statement, as amended, on January 1, 2001. The initial application of the statement had no impact on the company's results of operations and no material impact on its financial condition. For further information, see Derivative Instruments beginning on page 28.
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 beginning on page 37, which is incorporated herein by reference. One of the lawsuits referred to therein involves five previous class actions that have been consolidated before a single judge. On March 7, 2001, the Circuit Court of Cook County entered an order dismissing the pending consolidated class action complaint without prejudice and allowing plaintiffs to file an amended consolidated class action complaint.
Nicor Inc. Page 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (concluded)
Other contingencies. The company is involved in legal or administrative proceedings before various courts and agencies with respect to rates, taxes and other matters. In addition, the company is conducting environmental investigations and remedial activities at former manufactured gas plant sites. Although unable to determine the outcome of these contingencies, management believes that appropriate accruals have been recorded. Final disposition of these matters is not expected to have a material impact on the company's financial condition or results of operations. For further information, see Other beginning on page 38, which is incorporated herein by reference.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
For disclosures about market risk, see Market Risk beginning on page 19, which is incorporated herein by reference.
Nicor Inc. Page 21
Item 8.
Item 8. Financial Statements and Supplementary Data
Page
Report of Independent Public Accountants................................... 22
Financial Statements:
Consolidated Statements of Operations................................... 23
Consolidated Statements of Cash Flows................................... 24
Consolidated Balance Sheets............................................. 25
Consolidated Statements of Capitalization............................... 26
Consolidated Statements of Common Equity................................ 27
Notes to the Consolidated Financial Statements.......................... 28
Nicor Inc. Page 22
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Nicor Inc.:
We have audited the accompanying consolidated balance sheets and statements of capitalization of Nicor Inc. (an Illinois corporation) and subsidiary companies as of December 31, 2000 and 1999, and the related consolidated statements of operations, common equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements and the schedule referred to below are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nicor Inc. and subsidiary companies as of December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedule on page 41 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP Chicago, Illinois January 22, 2001
Nicor Inc. Page 23
Consolidated Statements of Operations (millions, except per share data)
Year ended December 31 -------------------------------- 2000 1999 1998 --------- --------- ---------
Operating revenues $ 2,298.1 $ 1,615.2 $ 1,465.1 --------- --------- ---------
Operating expenses Cost of gas 1,403.8 802.3 682.7 Operating and maintenance 386.9 356.0 338.0 Depreciation 144.3 140.3 136.5 Taxes, other than income taxes 121.0 104.6 99.3 Other 148.0 - - --------- --------- --------- 2,204.0 1,403.2 1,256.5 --------- --------- ---------
Operating income 94.1 212.0 208.6
Other income (expense), net 15.6 23.2 15.5 --------- --------- ---------
Income before interest on debt and income taxes 109.7 235.2 224.1
Interest expense, net of amounts capitalized 48.6 45.1 46.6 --------- --------- ---------
Income before income taxes 61.1 190.1 177.5
Income taxes 14.4 65.7 61.1 --------- --------- ---------
Net income 46.7 124.4 116.4
Dividends on preferred stock .3 .3 .3 --------- --------- ---------
Earnings applicable to common stock $ 46.4 $ 124.1 $ 116.1 ========= ========= =========
Average shares of common stock outstanding Basic 46.2 47.3 47.9 Diluted 46.3 47.4 48.1
Earnings per average share of common stock Basic $ 1.01 $ 2.63 $ 2.43 Diluted 1.00 2.62 2.42
The accompanying notes are an integral part of these statements.
Nicor Inc. Page 24
Consolidated Statements of Cash Flows (millions)
Year ended December 31 -------------------------------- 2000 1999 1998 --------- --------- --------- Operating activities Net income $ 46.7 $ 124.4 $ 116.4 Adjustments to reconcile net income to net cash flow provided from operating activities: Depreciation 144.3 140.3 136.5 Deferred income tax expense (benefit) (15.6) 14.4 18.6 Changes in assets and liabilities: Receivables, less allowances (300.2) (95.8) 90.6 Gas in storage (.8) 74.5 22.3 Deferred/accrued gas costs (33.3) (45.8) 4.8 Accounts payable 324.2 12.1 28.4 Postretirement benefits (26.6) (16.5) (19.2) Accrued mercury-related costs 78.0 - - Other 13.5 (1.9) (30.0) --------- --------- --------- Net cash flow provided from operating activities 230.2 205.7 368.4 --------- --------- ---------
Investing activities Capital expenditures (158.4) (154.0) (136.2) Short-term investments (13.3) 26.1 (35.6) Other 5.4 (7.4) (19.9) --------- --------- --------- Net cash flow used for investing activities (166.3) (135.3) (191.7) --------- --------- ---------
Financing activities Net proceeds from issuing long-term debt 49.9 101.5 107.3 Disbursements to retire long-term debt (72.5) (156.9) (129.9) Short-term borrowings (repayments), net 97.8 109.7 (44.4) Dividends paid (75.9) (73.2) (70.3) Disbursements to reacquire stock (51.9) (23.1) (33.4) Other 2.0 1.1 1.8 --------- --------- --------- Net cash flow used for financing activities (50.6) (40.9) (168.9) --------- --------- ---------
Net increase in cash and cash equivalents 13.3 29.5 7.8
Cash and cash equivalents, beginning of year 42.5 13.0 5.2 --------- --------- ---------
Cash and cash equivalents, end of year $ 55.8 $ 42.5 $ 13.0 ========= ========= =========
Supplemental information Income taxes paid, net of refunds $ 30.6 $ 46.2 $ 42.9 Interest paid, net of amounts capitalized 50.6 45.5 49.1
The accompanying notes are an integral part of these statements.
Nicor Inc. Page 25
Consolidated Balance Sheets (millions)
December 31 ------------------------ 2000 1999 ----------- ---------- Assets
Current assets Cash and cash equivalents $ 55.8 $ 42.5 Short-term investments, at cost which approximates market 43.0 29.7 Receivables, less allowances of $14.5 and $7.1, respectively 660.0 359.8 Gas in storage 31.8 31.0 Deferred gas costs 49.2 15.9 Deferred income taxes 57.6 10.1 Other 17.2 19.0 ----------- ---------- 914.6 508.0 ----------- ----------
Property, plant and equipment, at cost Gas distribution 3,292.8 3,200.3 Shipping 281.8 280.8 Other 2.0 2.0 ----------- ---------- 3,576.6 3,483.1 Less accumulated depreciation 1,847.0 1,747.9 ----------- ---------- 1,729.6 1,735.2 ----------- ----------
Other assets 241.2 208.6 ----------- ----------
$ 2,885.4 $ 2,451.8 =========== ==========
Liabilities and Capitalization
Current liabilities Long-term obligations due within one year $ 125.0 $ 74.2 Short-term borrowings 442.0 344.2 Accounts payable 606.6 282.4 Accrued mercury-related costs 78.0 - Other 59.9 44.9 ----------- ---------- 1,311.5 745.7 ----------- ----------
Deferred credits and other liabilities Deferred income taxes 296.6 266.6 Regulatory income tax liability 70.4 74.8 Unamortized investment tax credits 41.1 42.7 Other 104.6 91.9 ----------- ---------- 512.7 476.0 ----------- ----------
Capitalization Long-term debt 347.1 436.1 Preferred stock 6.3 6.3 Common equity 707.8 787.7 ----------- ---------- 1,061.2 1,230.1 ----------- ----------
$ 2,885.4 $ 2,451.8 =========== ==========
The accompanying notes are an integral part of these statements.
Nicor Inc. Page 26
Consolidated Statements of Capitalization (millions, except share data)
December 31 ------------------------------------- 2000 1999 ------------------ -----------------
First Mortgage Bonds Maturity Interest rate -------- --------- 2001 6.45 % $ 75.0 $ 75.0 2002 6.75 50.0 50.0 2003 5.75 50.0 50.0 2009 5.37 50.0 50.0 2021 8.875 50.0 50.0 2025 7.26 50.0 50.0 2027 7.375 50.0 50.0 2028 6.58 50.0 50.0 --------- -------- 425.0 425.0 Less: Amount due within one year 75.0 - Unamortized debt discount, net of premium 2.9 3.3 --------- -------- 347.1 32.7 % 421.7 34.3 % --------- --------
Other long-term debt Notes payable due 2001, at variable interest rate 50.0 - Notes payable due 2000, 5.065% - 50.0 Notes payable due 2000, 6.83% - 22.5 Other - 16.1 --------- -------- 50.0 88.6 Less: Amount due within one year 50.0 74.2 --------- -------- - - 14.4 1.2 --------- --------
Preferred and preference stock Cumulative, $50 par value, 1,600,000 preferred shares authorized; and cumulative, without par value, 20,000,000 preference shares authorized Redeemable preferred stock, 4.48% and 5.00% series, 125,223 shares outstanding 6.3 .6 6.3 .5 --------- --------
Common equity Common stock, $2.50 par value, 160,000,000 shares authorized (4,767,796 and 4,822,428 shares reserved for conversion and other purposes, and 45,491,458 and 46,890,301 outstanding, respectively) 113.7 117.2
Retained earnings 594.1 670.5 --------- -------- 707.8 66.7 787.7 64.0 --------- ---- -------- ---- $1,061.2 100.0 % $1,230.1 100.0% ========= ====== ========= ======
The accompanying notes are an integral part of these statements.
Nicor Inc. Page 27
Consolidated Statements of Common Equity (millions, except per share data)
Year ended December 31 -------------------------------- 2000 1999 1998 --------- --------- --------- Common stock Balance at beginning of year $ 117.2 $ 118.8 $ 120.5 Issued and converted stock .2 .1 .3 Reacquired and cancelled stock (3.7) (1.7) (2.0) --------- --------- --------- Balance at end of year 113.7 117.2 118.8 --------- --------- ---------
Paid-in capital Balance at beginning of year - - - Issued and converted stock 1.8 1.2 3.0 Reacquired and cancelled stock (1.8) (1.2) (3.0) --------- --------- --------- Balance at end of year - - - --------- --------- ---------
Retained earnings Balance at beginning of year 670.5 640.2 623.5 Net income 46.7 124.4 116.4 Dividends on common stock ($1.66, $1.56 and $1.48 per share, respectively) (76.4) (73.6) (70.6) Dividends on preferred stock (.3) (.3) (.3) Reacquired and cancelled stock (46.4) (20.2) (28.8) --------- --------- --------- Balance at end of year 594.1 670.5 640.2 --------- --------- --------- $ 707.8 $ 787.7 $ 759.0 ========= ========= =========
The accompanying notes are an integral part of these statements.
Nicor Inc. Page 28
Notes to the Consolidated Financial Statements
ACCOUNTING POLICIES
Consolidation. The consolidated financial statements include the accounts of Nicor and its subsidiaries. All significant intercompany balances and transactions have been eliminated.
Use of estimates. The preparation of the financial statements requires management to make estimates that affect reported amounts. Actual results could differ from those estimates.
Reclassifications. Certain reclassifications have been made to conform the prior years' financial statements to the current year's presentation.
Regulation. Nicor Gas is regulated by the Illinois Commerce Commission (ICC) which establishes the rules and regulations governing utility rates and services in Illinois. The company applies accounting standards that recognize the economic effects of rate regulation and, accordingly, has recorded regulatory assets and liabilities. The company had net regulatory assets of about $4 million at December 31, 2000 and net regulatory liabilities of about $40 million at December 31, 1999.
Operating revenues and gas costs. Gas distribution revenues are recorded when gas is delivered to customers. Nicor Gas classifies revenue taxes billed to customers as operating revenues and related taxes due as operating expenses. In the gas distribution segment, the cost of gas purchased, adjusted for inventory activity, is reflected in volumetric charges to customers through operation of the Purchased Gas Adjustment (PGA). Any difference between PGA revenues and recoverable gas costs is deferred or accrued with a corresponding decrease or increase to cost of gas. This difference is amortized as it is collected from or refunded to customers through the PGA.
In the shipping segment, revenues and related delivery costs are recorded at the time vessels depart from port.
Depreciation. Property, plant and equipment are depreciated over estimated useful lives on a straight-line basis. The gas distribution composite depreciation rate is 4.1 percent.
Income taxes. Deferred income taxes are provided for temporary differences between the tax basis of an asset or liability and its reported amount in the financial statements. Nicor Gas amortizes prior deferred tax credits and excess deferred taxes to income over the lives of the applicable properties.
Cash and cash equivalents. The company considers investments purchased with a maturity of three months or less to be cash equivalents.
Receivable credit risk. Nicor's major subsidiaries have diversified customer bases and prudent credit policies which mitigate risk.
DERIVATIVE INSTRUMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. Nicor adopted the statement, as amended, on January 1, 2001. The initial application of the statement had no impact on the company's results of operations and no material impact on its financial condition.
Nicor Inc. Page 29
Notes to the Consolidated Financial Statements (continued)
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 PGA. As such, beginning in 2001, changes in the fair value of these derivative instruments are being deferred or accrued as a regulatory asset or liability until realized.
Nicor Gas also holds weather derivative instruments to limit the earnings impact of weather fluctuations. For 2001, these instruments hedge the earnings impact related to weather warmer than 5,700 degree days or colder than 6,100 degree days. These weather derivative instruments are recorded using the intrinsic value method.
Derivative instruments and other energy-related contracts are used by Nicor's wholesale natural gas marketing business to hedge price risk associated with inventories of natural gas and fixed-price purchase and sale agreements. The company records energy-related contracts and physical inventory at fair market value.
Nicor periodically utilizes derivative instruments to reduce interest rate risk associated with the issuance of debt. At December 31, 2000, Nicor held treasury lock agreements that hedge the risk-free interest rate of an anticipated debt issuance of $75 million in August 2001. Beginning in 2001, the change in the fair market value of the treasury lock agreements will be reported as a component of other comprehensive income. Upon settlement of the treasury lock agreements and issuance of the debt, accumulated other comprehensive income will be amortized to interest expense over the life of the debt instrument.
GAS IN STORAGE
The gas distribution segment's inventory is carried at cost on a last-in, first-out (LIFO) basis. Based on the average cost of gas purchased in December 2000 and 1999, the estimated replacement cost of inventory at December 31, 2000 and 1999 exceeded the LIFO cost by $491.7 million and $172.4 million, respectively.
Nicor's wholesale gas marketing business carries its inventory at market value. At December 31, 2000 and 1999, the market value of the inventory was $12.5 million and $8.9 million, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The recorded amount of short-term investments and short-term borrowings approximates fair value because of the short maturity of the instruments. Based on quoted market interest rates, the recorded amount of long-term debt outstanding, including current maturities, also approximates fair value.
Nicor Inc. Page 30
Notes to the Consolidated Financial Statements (continued)
INCOME TAXES
The components of income tax expense (benefit) are presented below:
(millions) 2000 1999 1998 -------- -------- -------- Current Federal $ 29.3 $ 44.3 $ 36.4 State 1.9 8.2 7.9 -------- -------- -------- 31.2 52.5 44.3 -------- -------- -------- Deferred Federal (12.2) 13.9 16.6 State (3.4) .5 2.0 -------- -------- -------- (15.6) 14.4 18.6 -------- -------- --------
Amortization of investment tax credits, net (1.5) (1.5) (2.1) Foreign taxes .3 .3 .3 -------- -------- --------
Income tax expense, net $ 14.4 $ 65.7 $ 61.1 ======== ======== ========
The temporary differences which gave rise to the net deferred tax liability at December 31, 2000 and 1999, are as follows:
(millions) 2000 1999 -------- -------- Deferred tax liabilities Property, plant and equipment $ 217.5 $ 222.9 Investment in foreign subsidiaries 48.5 43.8 Investment in partnerships 39.3 24.5 Employee benefits 18.7 10.2 Other 23.6 19.6 -------- -------- 347.6 321.0 -------- -------- Deferred tax assets Unamortized investment tax credits 26.6 27.8 Regulatory income tax liability 17.4 18.6 Accrued mercury-related costs 30.9 - Other 33.7 18.1 -------- -------- 108.6 64.5 -------- -------- Net deferred tax liability $ 239.0 $ 256.5 ======== ========
The effective combined federal and state income tax rate was 23.6 percent, 34.6 percent and 34.4 percent in 2000, 1999 and 1998, respectively. Differences between federal income taxes computed using the statutory rate and reported income tax expense are shown below:
(millions) 2000 1999 1998 -------- -------- -------- Federal income taxes using statutory rate $ 21.4 $ 66.5 $ 62.1 State income taxes, net (.3) 6.3 6.7 Tax credits (4.3) (3.8) (2.9) Excess deferred tax adjustment (2.4) (2.1) (1.8) Other, net - (1.2) (3.0) -------- -------- -------- Income tax expense, net $ 14.4 $ 65.7 $ 61.1 ========= ======== ========
Nicor Inc. Page 31
Notes to the Consolidated Financial Statements (continued)
SHORT- AND LONG-TERM DEBT
The company maintains short-term lines of credit with major domestic and foreign banks. These lines, which serve as backup for the issuance of commercial paper, totaled $532.5 million at December 31, 2000. Commitment fees of up to .08 percent per annum were paid on these lines. All lines of credit have variable interest rate options tied to short-term markets.
The company had $442 million and $342.5 million of commercial paper outstanding with a weighted average interest rate of 6.5 percent and 5.9 percent at December 31, 2000 and 1999, respectively.
Bank cash balances averaged about $4 million during 2000, which partially compensated for the cost of maintaining accounts and other banking services. Such demand balances may be withdrawn at any time.
First Mortgage Bonds are secured by liens on substantially all gas distribution property.
Interest on debt was net of amounts capitalized of $1.1 million, $.4 million and $.5 million in 2000, 1999 and 1998, respectively.
STOCK-BASED COMPENSATION
Nicor has a long-term incentive compensation plan that permits the granting of stock options, restricted stock and alternate stock rights to key executives and managerial employees, as well as an employee stock purchase plan. The company does not recognize compensation expense for these plans. If compensation expense for these plans had been recognized based on the fair value of awards at the grant dates, the impact on the company's net income and earnings per share would not have been material.
Long-term incentive compensation plan. The company may grant options for up to 3.5 million shares and has granted options on 1.9 million shares through December 31, 2000. The stock option exercise price equals the stock's market price on the date of grant. Options vest after one year, generally become exercisable after three years and expire after ten years.
Nicor Inc. Page 32
Notes to the Consolidated Financial Statements (continued)
A summary of stock option activity is presented below:
Weighted Number average of exercise shares price ---------- -----------
Options outstanding at: December 31, 1997 672,900 $ 27.70 Granted 113,500 40.56 Exercised (158,100) 26.05 Cancelled (4,500) 40.63 ---------- December 31, 1998 623,800 30.37 Granted 149,000 38.06 Exercised (3,500) 28.25 Cancelled (7,500) 38.06 ---------- December 31, 1999 761,800 31.81 Granted 251,500 32.37 Exercised (33,200) 27.44 Cancelled (78,000) 32.13 ---------- December 31, 2000 902,100 32.10 ----------
Options exercisable at: December 31, 1998 264,500 $ 26.25 December 31, 1999 383,900 26.87 December 31, 2000 434,100 28.38
Stock options outstanding at December 31, 2000, had exercise prices ranging from $19.63 to $40.69 and a weighted average remaining contractual life of seven years.
The weighted average fair value of options granted in 2000 and 1999 is $3.25 and $3.52, respectively. The fair value of each option was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 2000 and 1999, respectively: dividend yield of 5.7 percent and 4.6 percent; volatility of 16.8 percent and 14.7 percent; risk-free interest rate of 6.4 percent and 5.2 percent; and expected periods outstanding of three years for both years.
There were no shares of restricted stock or alternate stock rights outstanding at December 31, 2000.
Employee stock purchase plan. Under the employee stock purchase plan, the company may sell up to 1.5 million shares of common stock to its employees and has sold about 887,000 shares through December 31, 2000. Under the terms of this plan, eligible employees may purchase shares at 90 percent of the stock's market price. The company sold about 28,900 shares and 28,400 shares to employees in 2000 and 1999, respectively. The weighted average market value of shares sold in 2000 and 1999 was $33.01 and $36.71, respectively.
POSTRETIREMENT BENEFITS
Nicor Gas maintains noncontributory defined benefit pension plans covering substantially all employees hired prior to January 1, 1998 and provides health care and life insurance benefits to eligible retired employees. Certain employees' postretirement health care benefits have been capped to a defined annual per capita medical cost. The following table sets forth the components of the changes in the plans'
Nicor Inc. Page 33
Notes to the Consolidated Financial Statements (continued)
benefit obligations and assets, and reconciles the funded status to the prepaid (accrued) benefit cost recorded in the financial statements at December 31:
Pension benefits Other benefits --------------------- --------------------- (millions) 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Change in benefit obligation Benefit obligation at beginning of period $ 214.8 $ 242.3 $ 116.1 $ 118.3 Service cost 5.4 6.4 1.2 1.3 Interest cost 15.3 15.7 8.4 7.7 Actuarial loss (gain) 7.3 (25.8) (5.3) (1.0) Participant contributions - - .7 .6 Plan amendments 4.2 - - - Benefits paid (29.7) (23.8) (8.5) (10.8) ---------- ---------- ---------- ---------- Benefit obligation at end of period 217.3 214.8 112.6 116.1 ---------- ---------- ---------- ----------
Change in plan assets Fair value of plan assets at beginning of period 445.3 401.7 19.4 16.6 Actual return on plan assets 72.1 67.1 3.2 2.8 Employer contributions 1.5 .3 7.8 10.2 Participant contributions - - .7 .6 Benefits paid (29.7) (23.8) (8.5) (10.8) ---------- ---------- ---------- ---------- Fair value of plan assets at end of period 489.2 445.3 22.6 19.4 ---------- ---------- ---------- ----------
Funded status 271.9 230.5 (90.0) (96.7) Unrecognized net actuarial (gain) loss (134.1) (114.4) (4.7) 1.3 Unrecognized transition (asset) obligation (4.8) (8.6) 37.1 40.2 Unrecognized prior service cost 6.8 3.0 - - Other .1 .1 1.2 1.5 ---------- ---------- ---------- ---------- Prepaid (accrued) benefit cost $ 139.9 $ 110.6 $ (56.4) $ (53.7) ========== ========== ========== ==========
Net periodic benefit cost (credit) included the following components:
Pension benefits Other benefits ------------------------ ------------------------ (millions) 2000 1999 1998 2000 1999 1998 ------- ------- ------- ------- ------- -------- Service cost $ 5.4 $ 6.4 $ 6.7 $ 1.2 $ 1.3 $ 1.3 Interest cost 15.3 15.7 16.0 8.4 7.7 8.3 Expected return on plan assets (39.2) (35.3) (35.1) (1.8) (1.6) (1.4) Recognized net actuarial gain (5.8) (1.8) (4.7) - - - Amortization of unrecognized transition (asset) obligation (3.8) (3.8) (3.8) 3.1 3.1 3.1 Amortization of prior service cost .4 .3 .4 - - - ------- ------- ------- ------- ------- ------ Net periodic benefit cost (credit) $(27.7) $(18.5) $ (20.5) $ 10.9 $ 10.5 $11.3 ======= ======= ======= ======= ======= ======
Assumptions used in the computations included the following:
Pension benefits Other benefits ----------------------- ---------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ---------- Discount rate 7.75% 7.50% 7.75% 7.50% Expected return on plan assets 9.25 9.00 9.25 9.00 Rate of compensation increase 4.00 4.00 4.00 4.00
Nicor Inc. Page 34
Notes to the Consolidated Financial Statements (continued)
For measurement purposes, the health care cost trend rate for pre-Medicare benefits was assumed to be 6.5 percent for 2001, declining to 5 percent by 2004 and remaining at that level thereafter. The health care cost trend rate for post-Medicare benefits was assumed to be 5 percent.
Assumed health care cost trend rates can have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in the assumed health care cost trend rates would have the following effects:
One-percent ------------------- (millions) Increase Decrease -------- -------- Effect on total of service and interest cost components $ 1.1 $ (.9) Effect on benefit obligation 11.3 (9.5)
The company also sponsors defined contribution plans covering substantially all domestic employees. These plans provide for employer matching contributions. The total cost of these plans was $4.0 million, $3.8 million and $3.4 million in 2000, 1999 and 1998, respectively.
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 the remaining medical benefit, legal, tax and other contingencies are resolved.
BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
Nicor is a holding company that through its wholly owned subsidiaries, Nicor Gas and Tropical Shipping, operates in two separately managed reportable segments: gas distribution and shipping. The gas distribution segment, Nicor's principal business, serves nearly 2 million customers in a service territory that encompasses most of the northern third of Illinois, excluding the city of Chicago. The shipping segment transports containerized freight between Florida and the Caribbean. Other energy ventures include businesses that participate in the following activities: retail energy marketing; wholesale natural gas marketing; pipeline design and construction; corrosion protection services; energy system design and construction; residential energy-related products and services and natural gas vehicle market development.
Tropical Shipping's vessels are under foreign registry, and its containers are considered instruments of international trade. Although the majority of its long-lived assets are foreign owned, and its revenues are derived from foreign operations, the functional currency is generally the U.S. dollar.
Nicor evaluates segment performance based on operating income. Intercompany billing among segments is generally based on direct and indirect costs incurred unless a market price is available. Financial data by business segment is presented on the following page:
Nicor Inc. Page 35
Notes to the Consolidated Financial Statements (continued)
Other Corporate Gas energy and Consol- distribution Shipping ventures eliminations idated
(millions) Operating revenues 2000 $ 1,896.0 $ 248.3 $ 169.9 $ (16.1) $ 2,298.1 1999 1,326.2 229.9 61.0 (1.9) 1,615.2 1998 1,229.0 224.5 11.6 - 1,465.1
Operating income (loss) 2000 $ 64.9 $ 25.7 $ 6.5 $ (3.0) $ 94.1 1999 191.7 22.5 1.3 (3.5) 212.0 1998 185.5 27.6 (1.9) (2.6) 208.6
Equity investment income (loss) 2000 $ (.3) $ - $ 1.5 $ 2.0 $ 3.2 1999 - - (.3) .8 .5 1998 (.2) - (2.6) .1 (2.7)
Interest expense, net of amounts capitalized 2000 $ 43.9 $ .8 $ .6 $ 3.3 $ 48.6 1999 40.4 1.3 .2 3.2 45.1 1998 43.4 1.3 .2 1.7 46.6
Income taxes 2000 $ 6.8 $ 10.2 $ 3.1 $ (5.7) $ 14.4 1999 55.9 8.3 2.6 (1.1) 65.7 1998 55.3 10.2 (.9) (3.5) 61.1
Property, plant and equipment, net 2000 $ 1,600.8 $ 127.8 $ 1.0 $ - $ 1,729.6 1999 1,610.7 123.2 1.3 - 1,735.2 1998 1,617.8 113.3 .7 - 1,731.8
Capital expenditures 2000 $ 124.6 $ 33.8 $ - $ - $ 158.4 1999 127.4 26.0 .6 - 154.0 1998 112.6 23.3 .3 - 136.2
Depreciation 2000 $ 128.1 $ 15.9 $ .3 $ - $ 144.3 1999 123.9 16.1 .3 - 140.3 1998 120.8 15.4 .3 - 136.5
See Gas Distribution Statistics on page 16 for disclosure of sales and transportation revenues in the gas distribution segment. The operating revenues of other energy ventures include $14.9 million of revenues from the sale of natural gas to Nicor Gas.
Nicor Inc. Page 36
Notes to the Consolidated Financial Statements (continued)
COMMON STOCK
Shareholder rights plan. Under a shareholder rights plan, shareholders are assigned one right for each share of Nicor common stock held. The rights will be exercisable only if a person acquires, or announces a tender offer that would result in, ownership of 10 percent or more of Nicor's common stock. If a person acquires beneficial ownership of 10 percent or more of Nicor's common stock, all holders of rights other than the acquiring person will be entitled to purchase Nicor common stock at a 50 percent discount from the market price. Nicor may redeem the rights at $.01 per right at any time before someone becomes a 10 percent beneficial owner. The rights expire on September 30, 2007.
Changes in common shares. Changes in common shares outstanding are summarized below:
(millions) 2000 1999 1998 ---------- --------- ---------- Beginning of year 46.9 47.5 48.2 Issued and converted .1 - .1 Reacquired and cancelled (1.5) (.6) (.8) ---------- --------- ---------- End of year 45.5 46.9 47.5 ========== ========= ==========
Through common stock repurchase programs, Nicor has purchased and retired 1.4 million, .6 million and .7 million shares in 2000, 1999 and 1998, respectively.
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 are compared to a market-sensitive benchmark. Savings and losses relative to the benchmark are shared equally with customers. Nicor recorded $12.2 million of PBR plan results as operating revenue in 2000. After 2001, the plan will be subject to ICC review.
Customer choice of commodity supplier. All industrial and commercial customers and about 14 percent of residential customers are able to acquire their natural gas supplies from third-party marketers. The choice of another natural gas commodity supplier has no impact on Nicor Gas' operating income because natural gas costs are passed directly through to customers without a markup under the PGA. Nicor Gas continues to deliver the natural gas, maintain its distribution system and respond to emergencies. The company's August 2000 filing with the ICC to permanently expand the Customer Select(R) program to include all of its residential customers is currently in the public hearing process, which may take up to 11 months.
GUARANTEES
Nicor has a 50 percent interest in Nicor Energy, a joint venture that offers natural gas, electricity and related retail services to customers primarily in Illinois. Nicor guarantees up to $15 million of the joint venture's borrowings under a line of credit. At December 31, 2000, Nicor had guaranteed $11.3 million of Nicor Energy's debt. Management believes that the likelihood of a payment pursuant to such guarantee is remote.
Nicor Inc. Page 37
Notes to the Consolidated Financial Statements (continued)
COMMITMENTS
In 1999, Tropical Shipping committed about $40 million for the construction of two vessels. Through December 31, 2000 the company made construction payments of $9.3 million. Remaining payments are scheduled as construction progresses through early 2002.
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 company equipment.
Prior to 1961, gas regulators containing small quantities of mercury were installed in homes. These gas regulators reduce the pressure of natural gas flow from the service line to the inside of the home. During the third quarter of 2000, the company learned that in certain instances some mercury was spilled or left in residences.
As a result, in September 2000, Nicor Gas was named as a defendant in a civil lawsuit brought by the Illinois Attorney General and the State's 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 that may have been affected by mercury from company equipment. The Circuit Court of Cook County 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 cleanup is completed, and to pay for medical screening of potentially affected persons. 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, issued during the third quarter of 2000 by the U.S. Environmental Protection Agency (EPA) pursuant to Section 106 of the Comprehensive Environmental Response, Compensation and Liabilities Act. The order requires the company, among other things, to develop and implement work plans to address mercury spills at recycling centers where mercury regulators may have been taken, at company facilities where regulators and mercury may have been temporarily stored and at commercial/industrial sites where mercury-containing equipment may have been used in metering facilities.
Pursuant to the injunctions and the EPA Administrative Order, Nicor Gas has completed the work described above for all affected recycling centers and commercial/industrial sites, and cleaning is underway at company facilities. Potentially affected homes are being inspected using mercury vapor analyzers. By December 31, 2000, Nicor Gas had called on every such home, although it has been unable to gain access to some homes. Approximately 1,100 homes have been found to have traces of mercury requiring cleanup.
As of December 31, 2000, Nicor Gas accrued $78 million as a current liability for estimated obligations related to the previously described work and for legal defense costs. Including amounts already incurred, $148 million was charged to the company's income statement as other operating expense in the third quarter of 2000. The accrual represents management's best estimate of future costs based on an evaluation of currently available information, and actual costs may vary from this estimate. The company will continue to reassess its estimated obligation and will record any necessary adjustment, which could be material to operating results in the period recorded.
Nicor Inc. Page 38
Notes to the Consolidated Financial Statements (continued)
In addition to the matters described above, Nicor Gas has been named a defendant in several private lawsuits, all in the Circuit Court of Cook County, claiming a variety of unquantified damages (including bodily injury, property and punitive damages) allegedly caused by mercury-containing regulators. One of the lawsuits involves five previous class actions that have been consolidated before a single judge. 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, has notified its insurers, and will vigorously pursue recovery of mercury-related costs pursuant to its insurance coverage. In January 2001, the company filed suit in the Circuit Court of Cook County against certain of its insurance carriers for a declaration that the company's mercury-related losses are covered, and for the recovery of those losses. In addition, some of the removals of mercury-containing regulators were conducted by independent contractors working for the company. In November 2000, the company filed suit in the Circuit Court of Cook County seeking indemnification and contribution from these contractors. 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.
Current environmental laws may require the cleanup of certain former manufactured gas plant sites. To date, Nicor Gas has identified more than 40 properties for which it may, in whole or 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 EPA, which oversees the company's investigations and remedial actions. More detailed investigations and remedial activities have either been completed, are in progress or are being 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 could be significant. In accordance with ICC authorization, the company has been recovering these costs from its customers.
In December 1995, Nicor Gas filed suit in the Circuit Court of Cook County against certain insurance carriers seeking recovery of environmental cleanup costs of certain former manufactured gas plant sites. Nicor Gas 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
Nicor Inc. Page 39
Notes to the Consolidated Financial Statements (concluded)
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.
QUARTERLY RESULTS (UNAUDITED)
Quarterly results fluctuate due mainly to the seasonal nature of the gas distribution business.
Quarter ended ------------------------------------------- (millions, except per share data) Mar. 31 June 30 Sept. 30 Dec. 31 ---------- ---------- ---------- ----------
Operating revenues $ 659.3 $ 348.4 $ 301.0 $ 989.4 Operating income (loss) 70.2 55.4 (101.0) 69.5 Net income (loss) 38.8 30.6 (62.7) 39.9 Earnings (loss) per common share Basic .83 .66 (1.37) .87 Diluted .83 .66 (1.37) .87
Operating revenues $ 576.4 $ 271.8 $ 227.3 $ 539.7 Operating income 65.4 44.5 38.1 64.0 Net income 39.0 26.5 19.8 39.1 Earnings per common share Basic .82 .56 .42 .83 Diluted .82 .56 .42 .83
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Nicor Inc. Page 40
PART III
Items 10. and 11. Directors and Executive Officers of the Registrant and Executive Compensation
Information on directors, Section 16(a) Beneficial Ownership Reporting Compliance and executive compensation is contained on pages 2 through 7, 9 and 14 through 18 of the Definitive Proxy Statement, dated March 8, 2001, and is incorporated herein by reference. Information relating to the executive officers of the registrant is provided on page 6 in Part I of this document.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information about shares beneficially owned by directors and executive officers is contained on pages 7 through 9 of the Definitive Proxy Statement, dated March 8, 2001, and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
Information about certain relationships and related transactions is contained on page 19 of the Definitive Proxy Statement, dated March 8, 2001, and is incorporated herein by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1) Financial Statements:
See Item 8, Financial Statements and Supplementary Data, on page 21 filed herewith, for a list of financial statements.
2) Financial Statement Schedules:
Schedule Number Page
Report of Independent Public Accountants 22 II Valuation and Qualifying Accounts 41
Schedules other than those listed are omitted because they are not applicable.
3) Exhibits Filed:
See Exhibit Index beginning on page 43 filed herewith.
(b) The company did not file a report on Form 8-K during the fourth quarter of 2000.
Nicor Inc. Page 41
Nicor Inc. Page 42
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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 March 12, 2001 By KATHLEEN L. HALLORAN Kathleen L. Halloran Executive Vice President Finance and Administration
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 12, 2001.
Signature Title - ------------------------------------- ------------------------------------
THOMAS L. FISHER - ------------------------------------- Thomas L. Fisher Chairman, President and (Principal Executive Officer) Chief Executive Officer
KATHLEEN L. HALLORAN - ------------------------------------- Kathleen L. Halloran Executive Vice President Finance (Principal Financial and Accounting and Administration Officer)
ROBERT M. BEAVERS, JR.* Director
BRUCE P. BICKNER* Director
JOHN H. BIRDSALL, III* Director
THOMAS A. DONAHOE* Director
JOHN E. JONES* Director
DENNIS J. KELLER* Director
WILLIAM A. OSBORN* Director
SIDNEY R. PETERSEN* Director
JOHN RAU* Director
PATRICIA A. WIER* Director
* By JEFFREY L. METZ . Jeffrey L. Metz (Attorney-in-fact)
Nicor Inc. Page 43
Exhibit Index
Exhibit Number Description of Document
3.01 * Articles of Incorporation of the company. (File No. 2-55451, Form S-14, Nicor Inc., Exhibit 1-03 and Exhibit B of Amendment No. 1 thereto.)
3.02 * Amendment to Articles of Incorporation of the company. (Proxy Statement dated April 20, 1979, Nicor Inc., Item 3 thereto.)
3.03 * Amendment to Articles of Incorporation of the company. (File No. 2-68777, Form S-16, Nicor Inc., Exhibit 2-01.)
3.04 * Amendment to Articles of Incorporation of the company. (File No. 1-7297, Form 10-K for 1985, Nicor Inc., Exhibit 3-03.)
3.05 * Amendment to Articles of Incorporation of the company. (Proxy Statement dated March 12, 1987, Nicor Inc., Exhibit A and Exhibit B thereto.)
3.06 * Amendment to Articles of Incorporation of the company. (File No. 1-7297, Form 10-K for 1992, Nicor Inc., Exhibit 3-06.)
3.07 * Amendments to Articles of Incorporation of the company. (Proxy Statement dated March 9, 1994, Nicor Inc., Exhibit A-1 and Exhibit B thereto.)
3.08 * Amendment to Articles of Incorporation of the company. (Proxy Statement dated March 6, 1998, Nicor Inc., Item 2 thereto.)
3.09 * By-Laws of the company as amended by the company's board of Directors on May 3, 1995. (File No. 1-7297, Form 10-Q for March 1995, Nicor Inc., Exhibit 3(ii).01.)
4.01 * Indenture of Commonwealth Edison Company to Continental Illinois National Bank and Trust Company of Chicago, Trustee, dated as of January 1, 1954. (File No. 1-7296, Form 10-K for 1995, Nicor Gas, Exhibit 4.01.)
4.02 * Indenture of Adoption of Nicor Gas to Continental Illinois National Bank and Trust Company of Chicago, Trustee, dated February 9, 1954. (File No. 1-7296, Form 10-K for 1995, Nicor Gas, Exhibit 4.02.)
4.03 * Supplemental Indenture, dated June 1, 1963, of Nicor Gas to Continental Illinois National Bank and Trust Company of Chicago, Trustee, under Indenture dated as of January 1, 1954. (File No. 2-21490, Form S-9, Nicor Gas, Exhibit 2-8.)
4.04 * Supplemental Indenture, dated May 1, 1966, of Nicor Gas to Continental Illinois National Bank and Trust Company of Chicago, Trustee, under Indenture dated as of January 1, 1954. (File No. 2-25292, Form S-9, Nicor Gas, Exhibit 2-4.)
Nicor Inc. Page 44
Exhibit Index (continued)
Exhibit Number Description of Document
4.05 * Supplemental Indenture, dated June 1, 1971, of Nicor Gas to Continental Illinois National Bank and Trust Company of Chicago, Trustee, under Indenture dated as of January 1, 1954. (File No. 2-44647, Form S-7, Nicor Gas, Exhibit 2-03.)
4.06 * Supplemental Indenture, dated April 30, 1976, between the company and Continental Illinois National Bank and Trust Company of Chicago, Trustee, under Indenture dated as of January 1, 1954. (File No. 2-56578, Form S-9, Nicor Gas, Exhibit 2-25.)
4.07 * Supplemental Indenture, dated April 30, 1976, of Nicor Gas to Continental Illinois National Bank and Trust Company of Chicago, Trustee, under Indenture dated as of January 1, 1954. (File No. 2-56578, Form S-9, Nicor Gas, Exhibit 2-21.)
4.08 * Supplemental Indenture, dated August 15, 1991, of Nicor Gas to Continental Bank, National Association, Trustee, under Indenture dated as of January 1, 1954. (File No. 1-7296, Form 8-K for August 1991, Nicor Gas, Exhibit 4-01.)
4.09 * Supplemental Indenture, dated October 15, 1995, of Nicor Gas to Bank of America Illinois, Trustee, under Indenture dated as of January 1, 1954. (File No. 1-7296, Form 10-Q for September 1995, Nicor Gas, Exhibit 4.01.)
4.10 * Supplemental Indenture, dated May 10, 1996, of Nicor Gas to Harris Trust and Savings Bank, Trustee, under Indenture dated as of January 1, 1954. (File No. 1-7296, Form 10-Q for June 1996, Nicor Gas, Exhibit 4.01.)
4.11 * Supplemental Indenture, dated August 1, 1996, of Nicor Gas to Harris Trust and Savings Bank, Trustee, under Indenture dated as of January 1, 1954. (File No. 1-7296, Form 10-Q for June 1996, Nicor Gas, Exhibit 4.02.)
4.12 * Supplemental Indenture, dated June 1, 1997, of Nicor Gas to Harris Trust and Savings Bank, Trustee, under Indenture dated as of January 1, 1954. (File No. 1-7296, Form 10-Q for June 1997, Nicor Gas, Exhibit 4.01.)
4.13 * Shareholder Rights Agreement, dated September 9, 1997, between the company and Harris Trust and Savings Bank, as Rights Agent. (File No. 1-7297, Form 8-K for September 1997, Nicor Inc., Exhibit 1.)
4.14 * Supplemental Indenture, dated October 15, 1997, of Nicor Gas to Harris Trust and Savings Bank, Trustee, under Indenture dated as of January 1, 1954. (File No. 1-7296, Form 10-Q for September 1997, Nicor Gas, Exhibit 4.01.)
4.15 * Supplemental Indenture, dated February 15, 1998, of Nicor Gas to Harris Trust and Savings Bank, Trustee, under Indenture dated as of January 1, 1954. (File No. 1-7296, Form 10-K for 1997, Nicor Gas, Exhibit 4.19.)
Nicor Inc. Page 45
Exhibit Index (continued)
Exhibit Number Description of Document
4.16 * Supplemental Indenture, dated June 1, 1998, of Nicor Gas to Harris Trust and Savings Bank, Trustee, under Indenture dated as of January 1, 1954. (File No. 1-7296, Form 10-Q for June 1998, Nicor Gas, Exhibit 4.01.)
4.17 * Supplemental Indenture, dated February 1, 1999, of Nicor Gas to Harris Trust and Savings Bank, Trustee, under Indenture dated as of January 1, 1954. (File No. 1-7296, Form 10-K for 1998, Nicor Gas, Exhibit 4.19.)
4.18 * Supplemental Indenture, dated February 1, 2001, of Nicor Gas to BNY Midwest Trust Company, Trustee, under Indenture dated as of January 1, 1954. (File No. 1-7296, Form 10-K for 2000, Nicor Gas, Exhibit 4.17.)
Other debt instruments are omitted in accordance with Item 601(b)(4)(iii)(A) of Regulation S-K. Copies of such agreements will be furnished to the Commission upon request.
10.01 * 1984 Nicor Officers' Capital Accumulation Plan Participation Agreement. (File No. 1-7297, Form 10-K for 1988, Nicor Inc., Exhibit 10-10.)
10.01(a)* 1985 Nicor Officers' Capital Accumulation Plan Participation Agreement. (File No. 1-7297, Form 10-K for 1988, Nicor Inc., Exhibit 10-10(a).)
10.02 * 1984 Nicor Directors' Capital Accumulation Plan Participation Agreement. (File No. 1-7297, Form 10-K for 1983, Nicor Inc., Exhibit 10-13.)
10.02(a)* 1985 Nicor Directors' Capital Accumulation Plan Participation Agreement. (File No. 1-7297, Form 10-K for 1984, Nicor Inc., Exhibit 10-13(a).)
10.03 * Directors' Deferred Compensation Plan. (File No. 1-7297, Form 10-K for 1983, Nicor Inc., Exhibit 10-16.)
10.04 * Directors' Pension Plan. (File No. 1-7297, Form 10-K for 1985, Nicor Inc., Exhibit 10-18.)
10.05 * Flexible Spending Account for Executives. (File No. 1-7297, Form 10-K for 1986, Nicor Inc., Exhibit 10-20.)
10.06 * Amendment and Restatement of the Nicor Gas Incentive Compensation Plan.(File No. 1-7297, Form 10-K for 1986, Nicor Inc., Exhibit 10-21.)
10.07 * Nicor Inc. 1989 Long-Term Incentive Plan. (Filed with Nicor Inc. Proxy Statement, dated April 20, 1989, Exhibit A.)
10.08 * Nicor Salary Deferral Plan. (File No. 1-7297, Form 10-K for 1989, Nicor Inc., Exhibit 10-29.)
Nicor Inc. Page 46
Exhibit Index (continued)
Exhibit Number Description of Document
10.09 * Nicor Inc. Stock Deferral Plan. (File No. 1-7297, Form 10-Q for September 1996, Nicor Inc., Exhibit 10.01.)
10.10 * Amendment to Nicor Inc. Stock Deferral Plan. (File No. 1-7297, Form 10-K for 1997, Nicor Inc., Exhibit 10.22.)
10.11 * Nicor Inc. 1995 Directors' Stock Plan. (File No. 1-7297, Form 10-Q for September 1996, Nicor Inc., Exhibit 10.02.)
10.12 * 1997 Long-Term Incentive Program. (File No. 1-7297, Form 10-Q for March 1997, Nicor Inc., Exhibit 10.01.)
10.13 * Nicor Inc. 1997 Long-Term Incentive Plan. (Filed as appendix to the Nicor Inc. Proxy Statement, dated March 6, 1997.)
10.14 * 1998 Long-Term Incentive Program. (File No. 1-7297, Form 10-K for 1997, Nicor Inc., Exhibit 10.25.)
10.15 * 1999 Long-Term Incentive Program. (File No. 1-7297, Form 10-K for 1998, Nicor Inc., Exhibit 10.26.)
10.16 * 2000 Nicor Incentive Compensation Plan. (File No. 1-7297, Form 10-K for 1999, Nicor Inc., Exhibit 10.21.)
10.17 * 2000 Nicor Gas Incentive Compensation Plan. (File No. 1-7297, Form 10-K for 1999, Nicor Inc., Exhibit 10.22.)
10.18 * 2000 Long-Term Incentive Program. (File No. 1-7297, Form 10-K for 1999, Nicor Inc., Exhibit 10.23.)
10.19 * Security Payment Plan. (File No. 1-7297, Form 10-K for 1999, Nicor Inc., Exhibit 10.24.)
10.20 * Amendment and Restatement of Nicor Gas Supplementary Retirement Plan. (File No. 1-7297, Form 10-Q for March 2000, Nicor Inc., Exhibit 10.01.)
10.21 * Amendment and Restatement of Nicor Gas Supplementary Savings Plan. (File No. 1-7297, Form 10-Q for March 2000, Nicor Inc., Exhibit 10.02.)
10.22 * First Amendment to Nicor Salary Deferral Plan. (File No. 1-7297, Form 10-Q for March 2000, Nicor Inc., Exhibit 10.03.)
10.23 * First Amendment to Agreements Restating 1984 and 1985 Nicor Capital Accumulation Plan Participation Agreements for Officers and Directors. (File No. 1-7297, Form 10-Q for March 2000, Nicor Inc., Exhibit 10.04.)
Nicor Inc. Page 47
Exhibit Index (concluded)
Exhibit Number Description of Document
10.24 * First Amendment to Nicor 1989 Long -Term Incentive Plan. (File No. 1-7297, Form 10-Q for March 2000, Nicor Inc., Exhibit 10.05.)
10.25 * First Amendment to Nicor 1997 Long -Term Incentive Plan. (File No. 1-7297, Form 10-Q for March 2000, Nicor Inc., Exhibit 10.06.)
10.26 * Second Amendment to Nicor Stock Deferral Plan. (File No. 1-7297, Form 10-Q for March 2000, Nicor Inc., Exhibit 10.07.)
10.27 * Form of Change-in-Control Agreement, dated June 2, 2000, between Nicor Inc. and Mr. Cali and Ms. Halloran. (File No. 1-7297, Form 10-Q for June 2000, Nicor Inc., Exhibit 10.01.)
10.28 Change-in-Control Agreement, dated June 2, 2000, between Nicor Inc. and Mr. Fisher.
10.29 Change-in-Control Agreement, dated June 2, 2000, between Nicor Inc. and Mr. Behrens.
Exhibits 10.01 through 10.29 constitute management contracts and compensatory plans and arrangements required to be filed as exhibits to this Form pursuant to Item 14(c) of Form 10-K.
21.01 * Subsidiaries. (File No. 69-228, Form U-3A-2 for 2000, Nicor Inc., Item 1.)
23.01 Consent of Independent Public Accountants.
24.01 Powers of Attorney.
99.01 * Form of Letter to Shareholders relating to Shareholder Rights Agreement. (File No. 1-7297, Form 8-K for September 1997, Nicor Inc., Exhibit 2.)
* These exhibits have been previously filed with the Securities and Exchange Commission as exhibits to registration statements or to other filings with the Commission and are incorporated herein as exhibits by reference. The file number and exhibit number of each such exhibit, where applicable, are stated, in parentheses, in the description of such exhibit.
Upon written request, the company will furnish free of charge a copy of any exhibit. Requests should be sent to Investor Relations at the corporate headquarters.