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Mixed 2Q for NiSource Inc.

NI FE

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Diversified utility provider NiSource Inc. (NI - Analyst Report) posted second quarter 2012 net operating earnings of 23 cents per share compared with 17 cents in the prior-year quarter. Quarterly earnings beat the Zacks Consensus Estimate of 20 cents.

GAAP earnings in the reported quarter were 25 cents per share versus 14 cents per share reported in the year-ago quarter.

The variance between GAAP and net operating earnings was due to a gain of 2 cents from a non-recurring one-time item.

Revenue

Total revenue in the quarter under review declined 12.1% year over year to $1,038.1 million from $1,181 million in the second quarter of 2011. The year-over-year decline was due to significantly lower revenues from the Gas Distribution segment, which plummeted 42.3% year over year. Reported revenue missed the Zacks Consensus Estimate of $1,165 million.

Operational Update

During the quarter, electric sales volume decreased 1.0% to 4,251.5 Gigawatt hours (“GWh”) from 4,294.0 GWh in the year-ago quarter. Weather adjusted sales volume during the reported quarter dipped 3.9% year over year to 4,096.4 Gwh from 4,260.5 Gwh.

Total operating expenses increased 1.1% year over year in the quarter to $608.1 million mainly due to higher operation and maintenance (tracker) expenses and growth in depreciation and amortization charges related to higher property, plant and equipment.

Operating income during the reported quarter was $202.1 million versus $164.4 million in the year-ago period.

Interest expenses during the quarter increased to $103.2 million from $94.4 million a year ago. This was due to the issuance of long-term debt in June 2012, November 2011 and June 2011 and the expiration of deferred interest costs associated with Sugar Creek operations.

Segment Update

Gas Distribution Operations: Revenue decreased 42.3% year over year to $290.2 million from $502.7 million in the year-ago quarter. Operating earnings in the quarter were $54.6 million versus $48.9 million in the year-ago quarter.

Gas Transmission and Storage Operations: Segment revenue was $356.3 million versus $307.3 million in the year-ago quarter. Operating earnings were $91.6 million versus $84.6 million in the year-ago quarter.

Electric Operations: Revenue increased 5.7% year over year to $366.4 million in the quarter. Operating earnings in the reported quarter increased to $59.8 million from $37.8 million in the prior-year period.

Corporate and Other Operations: Segment revenue was $25.2 million, compared with $24.4 million in the year-ago quarter. The segment reported a loss of $3.9 million in second quarter 2012 compared with a loss of $6.9 million a year ago.

Financial Update

NiSource ended the quarter with cash and cash equivalents of $52.8 million, significantly up from $11.5 million as of December 31, 2011.

Net cash from operating activities in the second quarter of 2012 was $771.8 million, up from $736.0 million in the year-ago quarter.

In the second quarter, capital expenditures were $619.5 million, up 39.2% year over year from $445.0 million.

2012 Guidance

NiSource reaffirmed its full year 2012 earnings guidance in a range of $1.40 to $1.50 per share.

Peer Comparison

FirstEnergy Corporation (FE - Analyst Report), which competes with NiSource, is slated to report second quarter earnings before the market opens on August 7, 2012. The Zacks Consensus Estimates for its second quarter and full year 2012 earnings are currently pegged at 67 cents and $3.39 per share, respectively.

Our View

NiSource posted mixed numbers in the second quarter of 2012. The top line fell short of our expectation while earnings per share beat the Zacks Consensus Estimate. The company registered a slight increase in customer levels compared with the year-ago quarter.

NiSource plans to make capital investments worth $4 billion over a 10 – 15 year timeframe for its continued midstream and pipeline growth projects and modernization and development of its existing assets. In addition, the company has increased its quarterly dividend by 4.3%, leading to an annualized common stock dividend of 96 cents from 92 cents per share.

We believe that NiSource’s continuous effort towards improving customer service will act as a positive catalyst for improving its financial performance in the future.

But we are concerned about volatile weather patterns, commodity price risks and multiple regulatory barriers, which may negatively impact the company’s performance.

NiSource Inc. currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

Merrillville, Indiana-based NiSource is an energy holding company whose subsidiaries provide natural gas, electricity and other products and services in the U.S. Its operating subsidiaries deliver energy to customers within the high-demand energy corridor stretching from the Gulf Coast through the Midwest to New England.

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