Nicor Inc.’s CEO Friday said the company’s natural gas utility subsidiary is “simply not earning our allowed rate of return,” which likely will lead to a rate hike request with Illinois officials by mid-year.

The Naperville, IL-based gas utility, which serves more than two million customers in the state, reported that its 4Q2007 earnings slipped 4.8% — even with a 10% rise in revenues. Net income was $55.5 million ($1.22/share) compared with $58.3 million ($1.29) in 4Q2006. Revenue rose to $919.5 million from $838.2 million.

Nicor as a whole “delivered solid financial results in the face of an increasingly difficult economic and cost environment” in 2007, CEO Russ Strobel told financial analysts during a conference call. However, with “continued demand weakness and operating cost pressures” at gas subsidiary Nicor Gas, “we are evaluating the need to file for rate relief” with the Illinois Commerce Commission.

Earnings were pinched in part because the cost of gas distributed to customers climbed 15% to $558.1 million from the same period a year earlier. The gas cost increases led to a 6.5% decline in operating profit at the Nicor Gas subsidiary to $40.4 million.

Nicor’s unregulated shipping subsidiary reported flat revenues of $110.3 million in the quarter, with operating profit up 2.8% to $18.2 million. Other energy ventures reported a 30% drop in operating profit to $18.2 million.

This year the company is forecasting lower earnings per share (EPS) compared with 2007. The company expects 2008 EPS to range $2.20 to $2.40, excluding rate adjustments and on normal weather conditions, a decline from the $1.35.2 million (2.99/share) reported for full-year 2007.

“The most significant decline in the company’s earnings outlook is projected in the company’s gas distribution business, resulting from the impact of higher operating and maintenance, depreciation and interest costs,” said CFO Richard Hawley. He said that “in spite of the intense focus on cost management…the company is under-recovering its allowed costs for delivery service…”

Strobel said he wanted to “emphasize the importance of earning a fair rate of return. I will not hesitate in trying to achieve that objective…” and Nicor thinks it is “reasonable to request a rate of return that will help to maintain the financial health and stability of the company.”

If Nicor files for a rate hike, the ICC “normally has 11 months to complete its review,” the company said.

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