Nicor Beats Ests, Guidance Intact

Gas distributor Nicor Inc. (GAS - Analyst Report) reported second quarter 2011 earnings per share of 42 cents, comfortably beating the Zacks Consensus Estimate of 32 cents. However, on a year-over-year comparison, earnings fell 20.8% from 53 cents per share, bruised by poor performance of the shipping businesses coupled with higher operating expenses.

The company’s total operating revenues were $477.0 million, up 12.1% year over year and 21.7% above our expectation.

Segmental Performance

Gas Distribution: The segment’s operating income for the most recent quarter was $27.9 million compared with $27.4 million in the second quarter of 2010. The improvement reflects effective cost saving initiatives and beneficial weather conditions.

Shipping: Nicor’s Shipping segment registered an operating loss of $0.3 million, as against income of $4.2 million in the year-earlier period. The main reasons for the underperformance were lower operating revenues (primarily due to lesser volume shipped partially offset by higher base rates as well as cost-recovery surcharges for fuel).

Other Energy Ventures: Operating profit came in at $9.4 million, down 17.5% year over year, due to weak contributions from the company’s wholesale natural gas marketing business.

Merger Follow-Up

In mid June, shareholders of Nicor and AGL Resources (AGL), the owner of Atlanta’s natural-gas utility, had approved the proposed merger of the companies.

In December 2010, AGL had announced plans to acquire Nicor for about $3.1 billion in cash, stock and debt. The deal will create a large natural gas-only distribution entity with about 4.5 million customers across seven states, annual revenues of $5.1 billion and an enterprise value of $8.6 billion.

Guidance

Nicor reiterated its 2011 earnings guidance at $2.30 to $2.50 per share, excluding the impacts of the proposed merger with AGL Resources.

Our Recommendation

Nicor operates as one of the biggest gas utilities in the U.S. with a large, stable customer profile and low base rate. The company offers a range of retail energy-related products and services, and has a number of storage projects in the pipeline.

However, the company’s strengths are offset by its investment in higher-risk unregulated operations, ongoing regulatory uncertainties and the challenging economic environment. As such, we see limited upside from the current level and maintain our long-term Neutral recommendation on the stock. Nicor currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.