Gas distributor Nicor Inc. (GAS - Analyst Report) reported third quarter 2011 earnings per share of 12 cents, lagging way behind the Zacks Consensus Estimate of 30 cents. Comparing year-over-year, earnings dropped 38.7% from 31 cents per share (adjusted), bruised by poor performance by the shipping and other energy businesses, coupled with increased operating expenses.

The company’s total operating revenues were $348.4.0 million, down slightly from $352.5 million in the prior year quarter. The result was also 1.0% below our expectation.

Segmental Performance

Gas Distribution: The segment’s operating income for the reported quarter was $21.3 million compared with $20.9 million in the third quarter of 2010. The improvement reflects reduced operating and maintenance costs, partially negated by a lower gas distribution margin.

Shipping: Nicor’s Shipping segment registered an operating loss of $3.7 million, as against income of $3.6 million in the year-earlier period. The main reasons for the underperformance were lower operating revenues (primarily due to lesser volume shipped) and steeper operating expenses (due to higher transportation costs).

OtherEnergy Venture: The segment’s operating profit of $1.7 million, plunged 76.1% 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 (), 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 expects 2011 earnings in the range of $2.30 to $2.40 per share (down from the previous guidance of $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. We expect Nicor to benefit from an active hedging policy, growth projects and a healthy balance sheet.

However, the company’s strengths are offset by its investment in higher-risk unregulated operations, ongoing regulatory uncertainties and a challenging economic environment. As such, we see limited upside from the current level and maintain our long-term Neutral recommendation on the stock.