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<SEC-DOCUMENT>0000072020-01-000002.txt : 20010313
<SEC-HEADER>0000072020-01-000002.hdr.sgml : 20010313
ACCESSION NUMBER: 0000072020-01-000002
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 5
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010312
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: NICOR INC
CENTRAL INDEX KEY: 0000072020
STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924]
IRS NUMBER: 362855175
STATE OF INCORPORATION: IL
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 001-07297
FILM NUMBER: 1566665
BUSINESS ADDRESS:
STREET 1: 1844 FERRY RD
CITY: NAPERVILLE
STATE: IL
ZIP: 60563
BUSINESS PHONE: 6303059500
MAIL ADDRESS:
STREET 1: PO BOX 3014
CITY: NAPERVILLE
STATE: IL
ZIP: 60566-7014
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>0001.txt
<DESCRIPTION>ANNUAL REPORT FOR 2000
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
I.R.S
Employer
Commission Registrant, State of Incorporation, Identification
File Number Address and Telephone Number Number
- ---------------- ------------------------------------- ---------------
1-7297 Nicor Inc. 36-2855175
(An Illinois Corporation)
1844 Ferry Road
Naperville, Illinois 60563-9600
(630) 305-9500
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock, par value $2.50 per share New York Stock Exchange
including Preference Stock purchase right Chicago Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of February 28, 2001, 45,370,776 common shares were outstanding. The
aggregate market value of voting securities held by non-affiliates of the
registrant was approximately $1.6 billion.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the company's 2001 Annual Meeting Definitive Proxy Statement, dated
March 8, 2001, are incorporated by reference into Part III.
<PAGE>
Nicor Inc. Page i
Table of Contents
Item No.
Part I
1. Business ....................................................... 1
2. Properties ..................................................... 5
3. Legal Proceedings............................................... 5
4. Submission of Matters to a Vote of
Security Holders.............................................. 5
Executive Officers of the Registrant............................ 6
Part II
5. Market for Registrant's Common Equity
and Related Stockholder Matters .............................. 7
6. Selected Financial Data ........................................ 8
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 9
7A. Quantitative and Qualitative
Disclosures about Market Risk................................. 20
8. Financial Statements and Supplementary Data..................... 21
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................... 39
Part III
10. Directors and Executive Officers of
the Registrant... ............................................ 40
11. Executive Compensation.......................................... 40
12. Security Ownership of Certain
Beneficial Owners and Management.............................. 40
13. Certain Relationships and Related
Transactions.................................................. 40
Part IV
14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K............................ 40
Signatures...................................................... 42
Exhibit Index................................................... 43
Glossary
Degree day.........The extent to which the daily average temperature falls
below 65 degrees Fahrenheit. Normal weather for Nicor
Gas' service territory is about 6,100 degree days.
FERC...............Federal Energy Regulatory Commission, the agency that
regulates the interstat transportation of natural gas, oil
and electricity.
ICC................Illinois Commerce Commission, the agency that regulates
investor-owned Illinois utilities.
Mcf, MMcf, Bcf.....Thousand cubic feet, million cubic feet, billion cubic feet.
PBR................Performance-based rate, a plan that provides economic
incentives based on performance.
PGA................Purchased Gas Adjustment, a rate mechanism designed to allow
utilities, like Nicor Gas, to recover their gas costs without
markup.
TEU................Twenty-foot equivalent unit, a measure of volume in
containerized shipping equal to one 20-foot-long
container.
<PAGE>
Nicor Inc. Page 1
PART I
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
Nicor Inc. Page 2
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
<PAGE>
Nicor Inc. Page 3
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.
<PAGE>
Nicor Inc. Page 4
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.
<PAGE>
Nicor Inc. Page 5
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. 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. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
Nicor Inc. Page 6
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).
<PAGE>
Nicor Inc. Page 7
PART II
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
------------ ----------- ----------- ---------
2000
First $ 36.38 $ 29.38 $ .415
Second 37.50 32.06 .415
Third 40.06 32.13 .415
Fourth 43.88 32.19 .415
1999
First $ 42.94 $ 34.69 $ .39
Second 39.50 34.13 .39
Third 40.00 35.69 .39
Fourth 39.38 31.19 .39
------------------------------------------------
Nicor Inc. Page 8
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
========= ========= ========= ========= ========
<PAGE>
Nicor Inc. Page 9
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.
Nicor Inc. Page 10
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.
Nicor Inc. Page 11
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.
Nicor Inc. Page 12
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
Nicor Inc. Page 13
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.
Nicor Inc. Page 14
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
Nicor Inc. Page 15
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
<PAGE>
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. 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.
<PAGE>
Nicor Inc. Page 21
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
<PAGE>
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.
<PAGE>
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 proce