There is no evidence that Nicor Inc. affiliate Nicor Gas engaged in criminal fraud in carrying out its performance-based rate (PBR) program for Illinois gas customers, but the local distribution company (LDC) did overcharge its customers by an estimated $15 million over the past couple of years, according to the results of an independent report commissioned by a special committee that was named by the company’s board of directors.

The Citizens Utility Board (CUB), a consumer watchdog group in Illinois, immediately blasted the report, saying it masked the full extent of Nicor Gas’ wrongdoing and the amount of overcharges owed to state gas consumers. Nicor issued a press statement about the report’s findings — not the actual report — Tuesday.

Naperville, IL-Nicor said it expects to adjust its net income for 1999 through 2002 downward by $15-$35 million, subject to the findings of the Illinois Commerce Commission’s (ICC) investigation of the Nicor Gas PBR plan and an independent audit. These could result in “materially different” estimates for Nicor’s restatements/adjustments, it noted.

Moreover, Nicor said it was taking steps to either sell or “wind down” its Nicor Energy LLC operation, a retail energy marketing joint venture with Houston-based Dynegy Marketing and Trade, in the wake of previously reported accounting problems and losses. Nicor Energy “is no longer the best vehicle for [Nicor’s] involvement in customer-choice programs,” the energy company said. The joint venture currently has about 70-80 employees, but a Nicor official was unable to say how many workers would be affected by the decision to exit the business.

Nicor reported about $14 million in pre-tax equity losses during 2002 related to Nicor Energy, including a third quarter adjustment of about $4 million to write off its remaining investment.

“After thoroughly reviewing the independent counsel’s report…I apologize for the mistakes that occurred at Nicor Gas and I pledge to take whatever measures are necessary to ensure that this does not happen again,” said Nicor Chairman Thomas L. Fisher. “The intent of the PBR program was to align customer and shareholder interests, but clearly we failed to execute properly. We accept the findings and conclusions of this report.” Nicor Gas is due to terminate its PBR plan on Jan. 1, 2003.

In a press statement, CUB called the report’s conclusions “self serving.” As part of the ICC’s probe, CUB earlier this year accused Nicor of unfairly manipulating its PBR plan to overcharge gas customers by $27 million. A Nicor whistleblower faxed a 14-page memo to CUB in June, alleging the overcharges were almost five times that amount — as much as $133 million.

“We believe the evidence shows the company lied to the ICC and cheated its [gas] customers, but Nicor refuses to acknowledge its culpability and pay back consumers every nickel they were overcharged,” said CUB Executive Director Martin Cohen. In addition to the ICC, the Illinois State Police is investigating the actions of Nicor.

Despite the disclosures, Nicor stock finished up 1.92% Tuesday to close at $30.30 a share. The credit markets appeared to be taking a wait-and-see attitude toward the company. “While the announcements will have a nominal impact on the company’s currently robust financial profile, [Nicor’s] ratings will remain on CreditWatch with negative implications until results of the Illinois Commerce Commission (ICC) and independent audit are released,” said Standard & Poor’s analyst Barbara Eiseman. Nicor has been on CreditWatch since late July.

The three-month independent review of Nicor Gas, which was carried out by the law firm of Sidley Austin Brown & Wood and the accounting firm of KPMG LLP, concluded “there was no evidence of criminal conduct or fraud,” the company reported. “However, the report identified several instances in which Nicor Gas took actions that had the effect of benefiting Nicor Gas and disadvantaging customers, and other instances where Nicor Gas made inadvertent accounting errors, sometimes to the benefit of…Nicor Gas and sometimes to the benefit of customers.”

Nicor Gas, according to its parent, “did not engage in any attempt to speculate on gas prices, any improper Nicor affiliated-party transactions, or any improper hedging activities.”

The report recommended total adjustments of $15 million for Nicor Gas customers, which translates to about $7 per customer. The $15 million resulted from an error related to a 1999 wholesale transfer of gas from Nicor Gas storage inventory ($6.75 million); inappropriate treatment of a gas transfer under the PBR program ($3.5 million); and problems associated with interest costs and the purchase of weather insurance for 2001 ($5 million).

After making adjustments and restatements, Nicor projects its cumulative net income for 1999 through 2002 will be approximately $15 million to $35 million lower than previously reported. Nicor’s outside auditor, Deloitte & Touche, will file amended reports with the Securities and Exchange Commission (SEC) “as soon as it is practical,” the company said. Nicor Gas also will file amended reports with the ICC “as appropriate,” it noted.

Citing losses from its Nicor Gas and Nicor Energy operations, Nicor reported net income of $30 million, or 68 cents per share, for the third quarter, down from $33 million, or 73 cents, for the comparable period a year ago. The earnings are subject to change once the company restates its financial statements for this year and past years.

Assuming a normal winter, the company said it has revised its earnings-per-share outlook for the year to $2.65 to $2.80, excluding any future adjustments to its operations. This is above the Wall Street consensus of $2.63 a share for Nicor in 2002.

For the year to date, Nicor reported preliminary net income of $85.5 million, or $1.93 a share, compared to $98.5 million, or $2.17 per share, for the same nine-month period in 2001.

Nicor’s gas distribution sector had almost flat operating income during the third quarter, falling to $48.3 million from $48.4 million. Operating income for the nine-month period was $144 million compared to $162.1 million during 2001. Nicor blamed higher operating costs and the absence of PBR plan results for 2002 as the “primary factors” for the lower quarter and year-to-date results.

Operating income for Nicor’s “other energy ventures” doubled during the third quarter to $2.4 million from $1.2 million for the comparable period a year ago, while third quarter income for the company’s containerized shipping operations fell slightly to $4.3 million from $4.2 million during the year-ago period, according to Nicor.

Nicor’s debt outstanding at the end of the third quarter in September was pegged at $690 million.

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