Stung by reduced demand, natural gas distributor Nicor Inc. reported an 18% decline in second quarter profit on Monday. The company also revealed that it has terminated four employees in connection with their involvement in “potentially fraudulent” conduct in its performance-based rate (PBR) gas supply program that may have violated Securities and Exchange Commission (SEC) rules.

During a conference call with financial analysts Monday, CEO Thomas L. Fisher said the employees were fired after the company became aware of “additional information” relating to activities affecting the PBR plan in its gas distribution business, Nicor Gas, between 1999 and 2002. The information consisted of third-party documents and recordings of telephone conversations from Entergy-Koch Trading LP, with whom the company did business under the PBR program. The information was discovered during the course of its ongoing SEC investigation (see Daily GPI, April 20).

The SEC launched a formal investigation in 2002 into the company’s PBR program and Nicor Energy, which was a joint venture with Dynegy Inc. Since that investigation was announced, the U.S. Attorney for the Northern District of Illinois has begun a grand jury probe. An internal investigation has found no evidence of criminal conduct, but accounting errors at Nicor Gas were found.

Details of the latest internal investigation may be released to the commission (SEC) later this month, Fisher said. “We learned of the existence of the tapes in April,” but he said determining what was on them took time because “they were not voluntarily produced.” However, Fisher noted that the “discovery of these old tapes does not undermine our confidence in our changes that we’ve made” in the PBR program. Names of the employees who were terminated were not disclosed.

Management determined that the newly discovered information did not affect previously issued financial statements and also determined that no adjustment to the accrual for loss contingencies in the quarterly statements will be required. Fisher said the company was continuing to cooperate with the SEC, the U.S. Attorney’s office and the Illinois Commerce Commission (ICC) to review and produce additional documents as requested. Nicor also plans to review any third-party information it obtains.

The Naperville, IL-based distributor earned $19.5 million (44 cents/diluted share) in 2Q2004 net income versus $23.8 million (54 cents) a year earlier. Operating income was $33.1 million, compared with $38.9 million in 2Q2003. Management noted that last year’s financial results were increased by pretax net mercury-related recoveries of $17.4 million (24 cents/share) in the company’s gas distribution business and gains from the wind-down of its Nicor Energy equity investment of $5.6 million (8 cents).

“Absent the litigation charge in the first quarter, our 2004 results are in line with our expectations,” said Fisher. “Despite continuing upward pressure on operating costs, our gas distribution business is performing as expected. At the same time, we are seeing the positive impact on our shipping business of improvements in the economy in the Caribbean and Bahamas and growth in the earnings of our other energy-related ventures.”

Gas distribution operating income in the quarter fell to $22.1 million from $37.6 million because of lower net mercury-related recoveries of $17.6 million in 2003, decreased gas deliveries because of warmer weather ($2.4 million) and higher depreciation expenses ($1.4 million). Partially offsetting these factors were increased property asset sales, which totaled $5.1 million. Nicor’s shipping expenses also were higher in the quarter, at $6.9 million versus $4.9 million in 2Q2003 mostly because of higher volumes.

For the year, Nicor’s earnings forecast is between $1.58-1.78. The estimate is unchanged from its first quarter guidance of $2.10-2.30, except for an adjustment to legal expenses in the first quarter associated with the SEC investigation.

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