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| GAS > SEC Filings for GAS > Form 10-Q on 4-Aug-2008 | All Recent SEC Filings |
4-Aug-2008
Quarterly Report
The following discussion should be read in conjunction with the Management's Discussion and Analysis section of the Nicor 2007 Annual Report on Form 10-K. Results for the interim periods presented are not necessarily indicative of the results to be expected for the full fiscal year due to seasonal and other factors.
SUMMARY
Nicor is a holding company. Gas distribution is Nicor's primary business. Nicor's subsidiaries include Nicor Gas, one of the nation's largest distributors of natural gas, and Tropical Shipping, a transporter of containerized freight in the Bahamas and the Caribbean region. Nicor also owns several energy-related ventures, including Nicor Services, Nicor Solutions and Nicor Advanced Energy, which provide energy-related products and services to retail markets, and Nicor Enerchange, a wholesale natural gas marketing company. Nicor also has equity interests in energy-related businesses.
Net income and diluted earnings per common share are presented below (in millions, except per share data):
Three months ended Six months ended
June 30 June 30
2008 2007 2008 2007
Net income $ 28.9 $ 18.0 $ 70.3 $ 65.2
Diluted earnings per common share $ .64 $ .40 $ 1.55 $ 1.44
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Net income and diluted earnings per common share for the six months ended June 30, 2007 includes pretax mercury-related recoveries of $8.0 million ($.11 per share) associated with Nicor Gas' mercury inspection and repair program which included a reduction of $7.2 million to the company's previously established reserve and $0.8 million in cost recoveries.
Comparisons of the three months ended results reflect higher operating results in the company's gas distribution and other energy-related businesses and higher corporate operating income, partially offset by lower operating results in the company's shipping business. Comparisons of the six months ended results (excluding the effect of the mercury-related item noted above) reflect higher operating results in the company's gas distribution and other energy-related businesses and improved corporate operating results, partially offset by lower operating results in the company's shipping business.
Rate proceeding. On April 29, 2008, Nicor Gas filed with the ICC for an overall increase in rates of $140.3 million. The company's filing provides for a rate of return on rate base of 9.21 percent, which reflects an 11.05 percent cost of common equity. The requested rate increase is needed to recover higher operating costs and increased capital investments.
In its rate filing, Nicor Gas has proposed some new rate adjustment mechanisms. These include mechanisms that would adjust rates to reflect certain changes in the company's bad debt expense and cost of gas used for operations. Also included are a volume balancing rider that would adjust rates to recover fixed costs, an energy efficiency rider that would fund energy efficiency programs and a rider that would adjust rates to recover a portion of capital expenditures incurred to replace certain older infrastructure.
The ICC normally has 11 months to complete its review of the filing and to issue an order. The proposed rate increase has been suspended pending the completion of the ICC's review.
Operating income by segment. Operating income (loss) by major business segment is presented below (in millions):
Three months ended Six months ended
June 30 June 30
2008 2007 2008 2007
Gas distribution $ 20.7 $ 13.8 $ 83.0 $ 84.7
Shipping 5.7 8.3 9.6 18.2
Other energy ventures 11.0 8.0 12.0 5.3
Corporate and eliminations 3.2 (.2 ) (.8 ) (1.7 )
$ 40.6 $ 29.9 $ 103.8 $ 106.5
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The following summarizes operating income (loss) comparisons by major business segment:
· Gas distribution operating income increased $6.9 million for the three months ended June 30, 2008 compared to the prior-year period due to higher gas distribution margin ($6.5 million increase) and lower operating and maintenance expense ($2.4 million decrease), partially offset by higher depreciation expense ($1.4 million increase).
Operating income decreased $1.7 million for the six months ended June 30, 2008 compared to the prior-year period due primarily to the absence of mercury-related recoveries recorded during the first quarter of 2007 ($8.0 million decrease), higher operating and maintenance expenses ($6.5 million increase) and depreciation expense ($2.7 million increase), partially offset by higher gas distribution margin ($16.2 million increase).
· Shipping operating income decreased $2.6 million and $8.6 million for the three and six months ended June 30, 2008, respectively, compared to the corresponding prior-year periods due to higher operating costs ($8.2 million and $12.8 million increases, respectively), which were partially offset by higher operating revenues ($5.6 million and $4.2 million increases, respectively). Operating costs were higher attributable to increased transportation-related costs ($6.6 million and $11.7 million increases, respectively) due primarily to increased fuel costs. Operating revenues were higher due to higher average rates ($8.6 million and $12.8 million increases, respectively), partially offset by lower volumes shipped ($3.0 million and $8.6 million decreases, respectively).
· Nicor's other energy ventures operating income increased $3.0 million for the three months ended June 30, 2008 compared to the prior-year period due to improved results at Nicor's wholesale natural gas marketing business, Nicor Enerchange ($5.5 million increase), partially offset by lower operating income at Nicor's energy-related products and services businesses ($2.2 million decrease). Improved operating results at Nicor Enerchange were due to favorable costing of physical sales activity and improved results from the company's risk management activities associated with hedging the product risks of the utility-bill management contracts offered by Nicor's energy-related products and services businesses, partially offset by unfavorable changes in valuations of derivative instruments used to hedge purchases and sales of natural gas inventory. Lower operating results at Nicor's energy-related products and services businesses were due to lower operating revenues ($3.7 million decrease), partially offset by lower operating expenses ($1.5 million decrease).
Operating income increased $6.7 million for the six months ended June 30, 2008 compared to the prior-year period due to higher operating results at Nicor's energy-related products and services businesses ($8.4 million increase), partially offset by lower operating income at Nicor
Enerchange ($1.4 million decrease). Improved operating results at Nicor's energy-related products and services business were due to lower operating expenses ($17.7 million decrease), partially offset by lower operating revenues ($9.3 million decrease). Lower operating results at Nicor Enerchange were due primarily to unfavorable changes in valuations of derivative instruments used to hedge purchases and sales of natural gas inventory, partially offset by favorable costing of physical sales activity and improved results from the company's risk management activities associated with hedging the product risks of the utility-bill management contracts offered by Nicor's energy-related products and services businesses.
Nicor Enerchange purchases and holds natural gas in storage to earn a profit margin from its ultimate sale. Nicor Enerchange uses derivatives to mitigate commodity price risk in order to substantially lock-in the profit margin that will ultimately be realized. However, gas stored in inventory is required to be accounted for at the lower of weighted-average cost or market, whereas the derivatives used to reduce the risk associated with a change in the value of the inventory are accounted for at fair value, with changes in fair value recorded in operating results in the period of change. As a result, earnings are subject to volatility as the fair value of derivatives change, even when the underlying hedged value of the inventory is unchanged. The volatility resulting from this accounting can be significant from period to period.
· Corporate and eliminations operating results increased $3.4 million for the three months ended June 30, 2008 compared to the prior-year period due to recoveries of previously incurred legal costs ($3.1 million) and benefits realized on life insurance contracts ($1.0 million). The legal cost recoveries were from a counterparty with whom Nicor previously did business during the PBR timeframe. The total recovery was $5.0 million, of which $3.1 million was allocated to corporate and $1.9 million was allocated to the gas distribution segment (recorded as a reduction to operating and maintenance expense). Operating results increased $0.9 million for the six months ended June 30, 2008 compared to the prior-year period due primarily to the previously mentioned recoveries of legal costs ($3.1 million) and benefits realized on life insurance contracts ($1.3 million), partially offset by the impact of a natural weather hedge associated with the utility-bill management products offered by Nicor's energy-related products and services business ($3.9 million decrease). Benefits or costs resulting from variances from normal weather related to these products are recorded primarily at the corporate level as a result of an agreement between the parent company and certain of its subsidiaries. The weather impact of these products generally serves to partially offset the gas distribution segment's weather risk. The amount of the offset attributable to the utility-bill management contracts marketed by Nicor's other energy ventures will vary depending upon a number of factors including the time of year, weather patterns, the number of customers for these products and the market price for natural gas.
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 operating income.
Operating revenues. Operating revenues by major business segment are presented
below (in millions):
Three months ended Six months ended
June 30 June 30
2008 2007 2008 2007
Gas distribution $ 560.1 $ 431.4 $ 2,024.3 $ 1,639.8
Shipping 102.6 97.0 200.3 196.1
Other energy ventures 52.7 45.1 122.9 121.7
Corporate and eliminations (15.6 ) (16.6 ) (52.0 ) (66.0 )
$ 699.8 $ 556.9 $ 2,295.5 $ 1,891.6
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Gas distribution revenues are impacted by changes in natural gas costs, which are passed directly through to customers without markup, subject to ICC review. Gas distribution revenues increased $128.7 million for the three months ended June 30, 2008 compared to the prior-year period due primarily to higher natural gas costs (approximately $95 million increase). Gas distribution revenues increased $384.5 million for the six months ended June 30, 2008 compared to the prior-year period due primarily to higher natural gas costs (approximately $265 million increase) and colder weather in 2008 (approximately $105 million increase).
Shipping segment operating revenues increased $5.6 million and $4.2 million for the three and six months ended June 30, 2008, respectively, compared with the corresponding prior-year periods due to higher average rates ($8.6 million and $12.8 million increases, respectively), partially offset by lower volumes shipped ($3.0 million and $8.6 million decreases, respectively). Rates were higher due primarily to cost-recovery surcharges for fuel. Volumes shipped were adversely impacted by decreased construction cargo, decreased tourism and increased competition. Tropical Shipping recently completed an acquisition of the assets of Caribtran, Inc., which is expected to add approximately 4 percent to expected shipping revenues on an annual basis.
Nicor's other energy ventures operating revenues increased $7.6 million for the three months ended June 30, 2008 compared to the prior-year period due to higher revenues at Nicor Enerchange ($11.3 million increase), partially offset by lower revenues at Nicor's energy-related products and services businesses ($3.7 million decrease). Operating revenues increased $1.2 million for the six months ended June 30, 2008 compared to the prior-year period due to higher revenues at Nicor Enerchange ($10.5 million increase), partially offset by lower revenues at Nicor's energy-related products and services businesses ($9.3 million decrease). Higher revenues at Nicor Enerchange were due primarily to favorable costing of physical sales activity and improved results from the company's risk management activities associated with hedging the product risks of the utility-bill management contracts offered by Nicor's energy-related products and services business, partially offset by unfavorable changes in valuations of derivative instruments used to hedge purchases and sales of natural gas inventory. Lower revenues at Nicor's energy-related products and services businesses were due to lower average utility-bill management contract volumes.
Corporate and eliminations reflects primarily the elimination of gas distribution revenues against Nicor Solutions' expenses for customers purchasing the utility-bill management products.
Gas distribution margin. Nicor utilizes a measure it refers to as "gas distribution margin" to evaluate the operating income impact of gas distribution revenues. Gas distribution revenues include natural gas costs, which are passed directly through to customers without markup, subject to ICC review, and revenue taxes, for which Nicor Gas earns a small administrative fee. These items often cause significant fluctuations in gas distribution revenues, with equal and offsetting fluctuations in cost of gas and revenue tax expense, with no direct impact on gas distribution margin.
A reconciliation of gas distribution revenues and margin follows (in millions):
Three months ended Six months ended
June 30 June 30
2008 2007 2008 2007
Gas distribution revenues $ 560.1 $ 431.4 $ 2,024.3 $ 1,639.8
Cost of gas (396.2 ) (281.6 ) (1,582.9 ) (1,230.0 )
Revenue tax expense (36.1 ) (28.5 ) (115.0 ) (99.6 )
Gas distribution margin $ 127.8 $ 121.3 $ 326.4 $ 310.2
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Gas distribution margin increased $6.5 million for the three months ended June 30, 2008 compared to the corresponding prior-year period due primarily to higher demand unrelated to weather (approximately $3 million increase) and the impact of customer interest (approximately $3 million increase). Gas distribution margin increased $16.2 million for the six months ended June 30, 2008 compared to the corresponding prior-year period due primarily to colder weather in 2008 (approximately $7 million increase), the impact of customer interest (approximately $5 million increase) and higher demand unrelated to weather (approximately $4 million increase).
Gas distribution operating and maintenance expense. Gas distribution operating and maintenance expense decreased $2.4 million for the three months ended June 30, 2008 compared to the corresponding prior-year period due primarily to recoveries of previously incurred costs ($3.9 million, of which $2.0 million relates to a recovery of costs associated with the prior year PCB matter and $1.9 million relates to legal cost recoveries from a counterparty with whom Nicor previously did business during the PBR timeframe) and lower company use gas and storage-related gas costs ($3.1 million decrease attributable primarily to favorable fair value adjustments on derivatives hedging company usage), partially offset by higher bad debt expense ($2.8 million increase) and payroll and benefit-related costs ($2.2 million increase). Operating and maintenance expense increased $6.5 million for the six months ended June 30, 2008 compared to the corresponding prior-year period due primarily to higher bad debt expense ($13.4 million increase), partially offset by lower company use gas and storage-related gas costs ($4.2 million decrease) and the previously mentioned cost recoveries ($3.9 million).
Other gas distribution operating expenses. Mercury-related recoveries, net reflect the estimated costs, recoveries and reserve adjustments associated with the company's mercury inspection and repair program. For the six months ended June 30, 2007, net recoveries reflect a $7.2 million reserve adjustment and $0.8 million in cost recoveries. Additional information about the company's mercury inspection and repair program is presented in Item 1 - Notes to the Condensed Consolidated Financial Statements - Note 15 - Contingencies - Mercury.
Shipping operating expenses. Shipping segment operating expenses increased $8.2 million and $12.8 million for the three and six months ended June 30, 2008, respectively, compared to the corresponding prior-year periods. Higher operating costs were attributable to increased transportation-related costs ($6.6 million and $11.7 million increases, respectively) due primarily to increased fuel costs.
Other energy ventures operating expenses. Other energy ventures operating expenses increased $4.6 million for the three months ended June 30, 2008 compared to the corresponding prior-year period due primarily to an increase in operating expenses at Nicor Enerchange ($5.8 million increase), partially offset by a decrease in operating expenses at Nicor's energy-related products and services businesses ($1.5 million decrease). The variance in operating expense at Nicor Enerchange was due primarily to transportation and storage charges. The decrease in operating expenses at Nicor's energy-related products and services businesses was due primarily to lower average utility-bill management contract volumes. Operating expenses decreased $5.5 million for the six months ended June 30, 2008 compared to the corresponding prior-year period due to a decrease in operating expenses at Nicor's energy-related products and services businesses ($17.7 million decrease), partially offset by an increase in operating expenses at Nicor Enerchange ($11.9 million increase). The decrease in operating expenses at Nicor's energy-related products and services businesses was due primarily to lower average-utility bill management contract volumes and lower average costs associated with customer contracts. The variance in operating expense at Nicor Enerchange was due primarily to transportation and storage charges.
Interest expense. Interest expense decreased $1.0 million for the three months ended June 30, 2008 compared to the prior-year period due primarily to lower estimated interest on income tax matters ($0.7 million decrease). Interest expense decreased $4.2 million for the six months ended June 30, 2008 compared to the prior-year period due primarily to lower estimated interest on income tax matters ($2.6 million decrease), lower average interest rates ($1.0 million decrease) and lower average borrowing levels ($0.5 million decrease).
Net equity investment income. Net equity investment income increased $1.6 million and $2.3 million for the three and six months ended June 30, 2008, respectively, compared to the corresponding prior-year periods due primarily to an increase in income from the company's investment in Triton ($0.9 million and $1.0 million increases, respectively) and reduced losses from affordable housing investments ($0.7 million decrease for the three and six months ended).
Income taxes. In 2006, the company reorganized certain shipping and related operations. The reorganization allows the company to take advantage of certain provisions of the Jobs Act that provide the opportunity for tax savings subsequent to the date of the reorganization. Generally, to the extent foreign shipping earnings are not repatriated to the United States, such earnings are not expected to be subject to current taxation. In addition, to the extent such earnings are determined to be indefinitely reinvested offshore, no deferred income tax expense would be recorded by the company. For the three and six months ended June 30, 2008, income tax expense has not been provided on approximately $3 million of foreign company shipping earnings that are expected to be indefinitely reinvested offshore compared to approximately $5 million and $13 million, respectively, for the comparable periods in 2007.
As of June 30, 2008, Nicor has not recorded deferred income taxes of approximately $44 million on approximately $126 million of cumulative undistributed foreign earnings that are expected in management's judgment to be indefinitely reinvested offshore.
The effective income tax rate for the three months ended June 30, 2008 decreased to 25.3 percent from 25.6 percent for the prior-year period. The effective income tax rate for the six months ended June 30, 2008 decreased to 25.3 percent from 27.2 percent for the prior-year period. The lower effective income tax rate for 2008 reflects the impact of lower projected annual pretax income (which causes a lower effective income tax rate since permanent differences and tax credits are a larger share of pretax income) and tax reserve adjustments offset, in part, by lower untaxed foreign shipping earnings.
Nicor Inc.
Gas Distribution Statistics
Three months ended Six months ended
June 30 June 30
2008 2007 2008 2007
Operating revenues (millions)
Sales
Residential $ 363.1 $ 282.4 $ 1,376.3 $ 1,120.2
Commercial 101.9 73.7 351.6 268.9
Industrial 11.1 7.7 42.1 31.5
476.1 363.8 1,770.0 1,420.6
Transportation
Residential 8.0 6.0 21.2 15.6
Commercial 11.8 12.2 43.0 41.1
Industrial 7.6 7.4 19.4 18.7
Other 5.5 1.3 22.7 9.3
32.9 26.9 106.3 84.7
Other revenues
Revenue taxes 36.7 28.9 117.0 101.2
Environmental cost recovery 1.1 1.6 6.1 7.1
Chicago Hub 2.5 2.2 5.9 9.7
Other 10.8 8.0 19.0 16.5
51.1 40.7 148.0 134.5
$ 560.1 $ 431.4 $ 2,024.3 $ 1,639.8
Deliveries (Bcf)
Sales
Residential 26.1 24.9 130.3 124.7
Commercial 7.9 7.1 33.7 30.4
Industrial .9 .7 4.2 3.7
34.9 32.7 168.2 158.8
Transportation
Residential 3.1 2.4 14.8 11.7
Commercial 11.7 11.7 52.2 48.5
Industrial 23.1 23.6 55.4 56.4
37.9 37.7 122.4 116.6
72.8 70.4 290.6 275.4
Customers at end of period (thousands)
Sales
Residential 1,777 1,799
Commercial 128 125
Industrial 7 7
1,912 1,931
Transportation
Residential 205 169
Commercial 53 55
Industrial 5 6
263 230
2,175 2,161
Other statistics
Degree days 690 636 3,962 3,654
Colder (warmer) than normal (1) 0% (7)% 7% (1)%
Average gas cost per Mcf sold $ 11.29 $ 8.56 $ 9.37 $ 7.65
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(1) Normal weather for Nicor Gas' service territory, for purposes of this report, is considered to be 5,830 degree days per year.
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