| NICOR INC Item 1A Risk Factors The following factors are the most significant factors that can impact year-to-year comparisons and may affect the future performance of the company’s businesses |
| New risks may emerge and management cannot predict those risks or estimate the extent to which they may affect the company’s financial performance |
| Regulation of Nicor Gas, including changes in the regulatory environment in general, may adversely affect the company’s results of operations, cash flows and financial condition |
| Nicor Gas is regulated by the ICC, which has general regulatory power over practically all phases of the public utility business in Illinois, including rates and charges, issuance of securities, services and facilities, system of accounts, investments, safety standards and transactions with affiliated interests and other matters |
| Nicor Gas is permitted by the ICC’s PGA regulation to adjust the charge to its sales customers on a monthly basis to recover the company’s prudently incurred actual costs to acquire the natural gas it delivers to them |
| The company’s gas costs are subject to subsequent prudence reviews by the ICC for which the company makes annual filings |
| The annual prudence reviews for calendar years 1999-2005 are open for review and any disallowance of costs in those proceedings could adversely affect Nicor Gas’ results of operations, cash flows and financial condition |
| Most of Nicor Gas’ other charges are changed only through a rate case proceeding with the ICC The charges established in a rate case proceeding are based on an approved level of operating costs and investment in utility property and are designed to allow the company an opportunity to recover those costs and to earn a fair return on that investment |
| To the extent Nicor Gas’ actual costs to provide utility service are higher than the levels approved by the ICC, Nicor Gas’ results of operations, cash flows and financial condition could be adversely affected until such time as it files for and obtains ICC approval for new charges through a rate case proceeding |
| Nicor Gas is also subject to rules and regulations pertaining to the integrity of its system and environmental compliance |
| The company’s results of operations, cash flows and financial condition could be adversely affected by any additional laws or regulations that are enacted that require significant increases in the amount of expenditures for system integrity and environmental compliance |
| A change in the ICC’s approved rate mechanisms for recovery of environmental remediation costs at former manufactured gas sites, or adverse decisions with respect to the prudence of costs actually incurred, could adversely affect the company’s results of operations, cash flows and financial condition |
| Current environmental laws may require the cleanup of coal tar at certain former manufactured gas plant sites |
| To date, Nicor Gas has identified about 40 properties for which it may in part be responsible |
| As of December 31, 2005, the company had recorded a liability of dlra19dtta5 million associated with certain remediation efforts |
| Management believes that any such costs that are not recoverable from other entities 6 _________________________________________________________________ or from insurance carriers are recoverable through rates for utility services under ICC-approved mechanisms for the recovery of prudently incurred costs |
| A change in these rate recovery mechanisms, however, or a decision by the ICC that some or all of these costs were not prudently incurred, could adversely affect the company’s results of operations, cash flows and financial condition |
| See Item 7- Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion |
| An adverse decision in the proceedings concerning Nicor Gas’ Performance-Based Rate Plan could result in a refund obligation which could adversely affect the company’s results of operations, cash flows and financial condition |
| In 2000, Nicor Gas instituted a PBR plan for natural gas costs |
| Savings and losses relative to the benchmark were determined annually and shared equally with sales customers |
| The PBR plan was terminated effective January 1, 2003 |
| There are allegations that Nicor Gas acted improperly in connection with the PBR plan, and the ICC, SEC and US Attorney for the Northern District of Illinois are reviewing these allegations in pending proceedings |
| An adverse decision or decisions in these proceedings could result in a refund or other obligations which could adversely affect the company’s results of operations, cash flows and financial condition |
| See Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion of the PBR proceeding and related matters |
| Nicor Gas relies on direct connections to eight interstate pipelines and extensive underground storage capacity |
| If these pipelines or storage facilities were unable to deliver for any reason it could impair Nicor Gas’ ability to meet its customers’ full requirements |
| Nicor Gas meets its customers’ peak day, seasonal and annual gas requirements through deliveries of gas transported on interstate pipelines with which it or its gas suppliers have contracts and through withdrawals of gas from storage fields it owns or leases |
| Nicor Gas contracts with multiple pipelines for these services |
| If a pipeline were to fail to perform transportation or storage service, including as a result of war, acts or threats of terrorism or natural disaster, on a peak day or other day with high volume gas requirements, Nicor Gas’ ability to meet all its customers’ gas requirements may be impaired unless or until alternative arrangements for delivery of supply were put in place |
| Likewise, if a storage field owned by Nicor Gas, or a principal Nicor Gas-owned transmission or distribution pipeline used to deliver gas to the market, were to be out of service for any reason, including as a result of war, acts or threats of terrorism or natural disaster, this could impair Nicor Gas’ ability to meet its customers’ full requirements |
| Fluctuations in weather have the potential to adversely affect the company’s results of operations, cash flows and financial condition |
| When weather conditions are milder than normal, Nicor’s gas distribution segment has historically delivered less natural gas, and consequently may earn less income |
| Nicor Gas’ natural gas deliveries are temperature-sensitive and seasonal since about one-half of all deliveries are used for space heating |
| Typically, about three-quarters of the deliveries and revenues occur from October through March |
| Mild weather in the future could adversely affect the company’s results of operations, cash flows and financial condition |
| Natural gas commodity price changes may affect the operating costs and competitive positions of the company’s businesses which could adversely affect its results of operations, cash flows and financial condition |
| Nicor’s energy-related businesses are sensitive to changes in natural gas prices |
| Natural gas prices historically have been volatile and may continue to be volatile in the future |
| The prices for natural gas are 7 _________________________________________________________________ subject to a variety of factors that are beyond Nicor’s control |
| These factors include, but are not limited to, the level of consumer demand for, and the supply of, natural gas, processing, gathering and transportation availability, the level of imports of, and the price of foreign natural gas, the price and availability of alternative fuel sources, weather conditions, political conditions or hostilities in natural gas producing regions |
| Any changes in natural gas prices could affect the prices Nicor’s energy-related businesses charge, operating costs and the competitive position of products and services |
| In accordance with the ICC’s PGA regulations, Nicor Gas adjusts its gas cost charges to sales customers on a monthly basis to account for changes in the price of natural gas |
| However, changes in natural gas prices can also impact certain operating expenses such as bad debt expense, company use gas and storage-related gas expenses, financing costs and customer service expenses, and these changes can only be reflected in Nicor Gas’ charges to customers if approved by the ICC in a rate case |
| Increases in natural gas prices can also have an adverse effect on natural gas distribution margin because such increases can result in lower customer demand |
| Nicor’s other energy businesses are also subject to natural gas commodity price risk, arising primarily from fixed-price purchase and sale agreements, natural gas inventories and utility-bill management arrangements |
| Derivative instruments such as futures, options, forwards and swaps may be used to hedge these risks |
| Nicor is subject to margin requirements in connection with the use of derivative financial instruments and these requirements could escalate if prices move adversely |
| Nicor’s use of derivative instruments could adversely affect the company’s results of operations |
| Nicor uses derivative instruments, including futures, options, forwards and swaps, either traded on exchanges or executed over-the-counter with natural gas merchants as well as financial institutions, to hedge natural gas price risk |
| Fluctuating natural gas prices cause earnings and financing costs of Nicor to be impacted |
| The use of derivative instruments that are not perfectly matched to the exposure could adversely affect the company’s results of operations, cash flows and financial condition |
| Also, when Nicor’s derivative instruments and hedging transactions fail to qualify for hedge accounting under Statement of Financial Accounting Standard Nodtta 133, Accounting for Derivative Instruments and Hedging Activities, the company’s results of operations could be adversely affected |
| Adverse decisions in lawsuits seeking a variety of damages allegedly caused by mercury spillage could adversely affect the company’s results of operations, cash flows and financial condition |
| Nicor Gas has incurred, and expects to continue to incur, costs related to its historical use of mercury in various kinds of equipment |
| Nicor Gas is a defendant in several private lawsuits, all in the Circuit Court of Cook County, Illinois, seeking a variety of damages (including bodily injury, property and punitive damages) allegedly caused by mercury spillage resulting from the removal of mercury-containing regulators |
| Adverse decisions regarding these claims or other mercury-related claims, to the extent they require the company to make payments in excess of amounts provided for in its financial statements, could adversely affect the company’s results of operations, cash flows and financial condition |
| See Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion |
| Transporting and storing natural gas involves numerous risks that may result in accidents and other operating risks and costs that could adversely affect the company’s results of operations, cash flows and financial condition |
| 8 _________________________________________________________________ Nicor Gas’ gas distribution activities involve a variety of inherent hazards and operating risks, such as leaks, accidents and mechanical problems, which could cause substantial financial losses |
| In addition, these risks could result in loss of human life, significant damage to property, environmental pollution and impairment of Nicor’s operations, which in turn could lead to substantial losses |
| In accordance with customary industry practice, Nicor maintains insurance against some, but not all, of these risks and losses |
| The location of pipelines and storage facilities near populated areas, including residential areas, commercial business centers and industrial sites, could increase the level of damages resulting from these risks |
| The occurrence of any of these events if not fully covered by insurance could adversely affect Nicor’s results of operations, cash flows and financial condition |
| An inability to access financial markets could affect the execution of Nicor’s business plan and could adversely affect the company’s results of operations, cash flows and financial condition |
| Nicor relies on access to both short-term money markets and longer-term capital markets as a significant source of liquidity for capital and operating requirements not satisfied by the cash flows from its operations |
| Management believes that Nicor and its subsidiaries will maintain sufficient access to these financial markets based upon current credit ratings |
| However, certain disruptions outside of Nicor’s control or events of default under its debt agreements may increase its cost of borrowing or restrict its ability to access one or more financial markets |
| Such disruptions could include an economic downturn, the bankruptcy of an unrelated energy company or downgrades to Nicor’s credit ratings |
| Restrictions on Nicor’s ability to access financial markets may affect its ability to execute its business plan as scheduled and could adversely affect the company’s results of operations, cash flows and financial condition |
| Changes in the rules and regulations of certain regulatory agencies could adversely affect the results of operations, cash flows and financial condition of Tropical Shipping |
| Tropical Shipping is subject to the International Ship and Port-facility Security ( "e ISPS "e ) Code and is also subject to the United States Maritime Transportation Security Act ( "e MTSA "e ), both of which require extensive security assessments, plans and procedures |
| Tropical Shipping is also subject to the regulations of both the Federal Maritime Commission (“FMC”), and the Surface Transportation Board (“STB”), other Federal Agencies as well as local laws, where applicable |
| Additional costs that could result from changes in the rules and regulations of these regulatory agencies would adversely affect the results of operations, cash flows and financial condition of Tropical Shipping |
| Tropical Shipping’s business is dependent on general economic conditions and could be adversely affected by downturns in the economy |
| Tropical Shipping’s business consists primarily of building materials, food and other necessities for developers, manufacturers and residents in the Bahamas and the Caribbean region, as well as tourist-related shipments intended for use in hotels and resorts, and on cruise ships |
| As a result, Tropical Shipping’s results of operations, cash flows and financial condition can be significantly affected by general economic conditions in the United States, the Bahamas, Caribbean region and Canada |
| The occurrence of hurricanes, storms and other natural disasters in Tropical Shipping’s area of operations could adversely affect its results of operations, cash flows and financial condition |
| Tropical Shipping’s operations are affected by weather conditions in Florida, Canada, the Bahamas and Caribbean regions |
| During hurricane season in the summer and fall, Tropical Shipping may be subject to revenue loss, higher operating expenses, business interruptions, delays and ship, equipment and facilities damage which could adversely affect Tropical Shipping’s results of operations, cash flows and financial condition |
| 9 _________________________________________________________________ Nicor Enerchange has credit risk that could adversely affect the company’s results of operations, cash flows and financial condition |
| Nicor Enerchange extends credit to its counterparties |
| Despite prudent credit policies and the maintenance of netting arrangements, the company is exposed to the risk that it may not be able to collect amounts owed to it |
| If the counterparty to such a transaction fails to perform and any collateral Nicor Enerchange has secured is inadequate, Nicor Enerchange could experience financial losses |
| The company is involved in legal or administrative proceedings before various courts and agencies that could adversely affect the company’s results of operations, cash flows and financial condition |
| The company is involved in legal or administrative proceedings before various courts and agencies with respect to general claims, rates, taxes, environmental, gas cost prudence reviews and other matters |
| Adverse decisions regarding these matters, to the extent they require the company to make payments in excess of amounts provided for in its financial statements, could adversely affect the company’s results of operations, cash flows and financial condition |
| See Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion |
| The risks described above should be carefully considered in addition to the other cautionary statements and risks described elsewhere, and the other information contained in this report and in Nicor’s other filings with the SEC, including its subsequent reports on Forms 10-Q and 8-K The risks and uncertainties described above are not the only risks Nicor faces although they are the most significant risks |
| See Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations, Item 7A - Quantitative and Qualitative Disclosures About Market Risk, and Item 8 - Notes to the Consolidated Financial Statements - Note 8 - Income and Other Taxes and Note 19 - Contingencies for further discussion of these and other risks Nicor faces |