Article for Medill: Nicor Gas’s earnings take a hit

Nicor Inc., parent company of natural gas utility Nicor Gas, reported a 10.7 percent drop in fourth quarter earnings from the same year-ago period under the pressure of increased operating costs and sub-par results from the gas distribution portion of its business.

Nicor earned $35.1 million for the quarter ended Dec. 31, or 80 cents per share, compared with $39.3 million, or 89 cents per share, for the same period a year earlier. The consensus earnings estimate from analysts polled by Zacks.com was 85 cents per share for the quarter ended Dec. 31.

For 2003, Naperville-based Nicor earned $105.2 million, or $2.38 per diluted share, compared with $128 million, or $2.88 per diluted share, earned in 2002. The consensus earnings estimate from analysts polled by Zacks.com was $2.07 per share for 2003.

“The big driver in the reduction of earnings was lower gas distribution results,” said Richard Hawley, chief financial officer of Nicor, during a conference call. A sluggish national economy and high natural gas prices contributed to those results, he added. On top of that, increasing maintenance and operation expenses — including health insurance and compliance costs –- also whittled away earnings.

Industrial deliveries, one component of the gas distribution business, were down about 6 percent, noted Mark Knox, assistant secretary and director of investor relations at Nicor, during a conference call.

The drop in industrial demand would be slow to recover, and could be permanent, said Thomas Fisher, chairman and chief executive officer of Nicor, during a conference call. In response, Nicor plans to enact tight cost control and to request a raise in the rates the company is allowed to charge its customers, he added. Rates are regulated by the Illinois Commerce Commission, and it would review any proposed rate changes.

Another factor contributing to the drop in 2003 earnings was a change in accounting rules, according to a company press release.

Revenues for the quarter ended Dec. 31 were $743.9 million, 5.6 percent higher than the $704.7 million reported for the same period a year earlier. For 2003, Nicor reported revenues of $2.66 billion, a whopping 40 percent higher than the $1.90 billion in revenues reported for 2002.

”An overwhelming amount of that will be the much higher gas prices,” said Craig Shere, a utility analyst with Standard & Poor’s Equity Research Services. “In addition, the first quarter of ’03 was colder.”

In 2003, natural gas prices reached record highs. Nicor bought more expensive natural gas and that gas was sold to customers –- at the price the utility paid for it– thus creating leaps in revenues but not earnings, Shere said. Utilities, by regulation, are allowed to profit from its natural gas distribution services, but not the sale of natural gas. Whatever the utility pays for gas is what the customer pays.

Due to lowered expectations for the performance of Nicor’s gas distribution segment and continued increasing operations costs, the company has set earnings estimates at $2.10 to $2.30 per diluted share in 2004.

Nicor Inc. is the holding company for Northern Illinois Gas, a natural gas utility company doing business as Nicor Gas. Nicor Gas serves about two million customers in Illinois. Nicor Inc. also owns Tropical Shipping, a freight shipping business based in the Caribbean.

The stock’s price was $33.59 during late afternoon trading, up 79 cents.

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