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NiSource Inc. (NI - Analyst Report) posted third-quarter 2012 pro forma earnings per share of 5 cents, beating the Zacks Consensus Estimate by a penny. Quarterly earnings were lower than the year-ago figure of 11 cents per share due to increase in operating as well as interest expenses.
 
GAAP earnings in the reported quarter were 6 cents per share versus 13 cents per share in the year-ago quarter.

The variance between GAAP and pro forma earnings was due to a gain of a penny from a non-recurring one-time item.

Revenue

Total revenue in the quarter under review declined to $961.9 million from $1,023.8 million in the year-ago quarter. Reported revenue lagged the Zacks Consensus Estimate of $1,076.0 million.

Segment Update

Gas Transmission and Storage Operations: Third-quarter 2012 segment revenue was $278.2 million versus $283.3 million in the year-ago quarter. The company’s operating earnings were $38.8 million versus $68.2 million in the prior-year quarter.

The quarterly result was negatively affected due to customer settlement at the Columbia Gas Transmission; partially offset by the impacts related to the Columbia Gulf rate case and higher demand margin revenue from the growth projects.

Electric Operations: Revenue increased to $412.1 million in the quarter from $398.7 million in the year-ago quarter. Operating earnings in the reported quarter increased to $77.7 million from $72.9 million in the prior-year period due to higher industrial and commercial margins. This was partially offset by a decline in environmental cost recovery.

Gas Distribution Operations: Third-quarter 2012 segment revenue decreased to $225.8 million from $326.5 million in the year-ago quarter. Operating earnings in the quarter were $15.5 million, up from $8.0 million in the year-ago quarter due to utilization of new rates.

Corporate and Other Operations: Quarterly segment revenue was $45.8 million compared with $15.3 million in the year-ago quarter. This segment reported a loss of $1.9 million in third-quarter 2012 compared with a loss of $7.2 million a year ago. Quarterly loss reduced due to unrealized gains associated with higher cash surrender value of corporate-owned life insurance investments.

Operational Update

During the quarter, electric sales volume decreased to 4,622.3 Gigawatt hours (“GWh”) from 4,726.0 GWh in the year-ago quarter. Weather adjusted sales volume during the reported quarter dipped to 4,534.8 GWh from 4,644.8 GWh.

Total operating expenses in the quarter increased to $610.5 million from $600.4 million in the prior-year quarter mainly due to higher operation and maintenance (trackers) expenses and other tax charges.
 
Operating income during the reported quarter was $130.1 million versus $141.9 million in the year-ago period.

Interest expenses during the quarter increased to $107.9 million from $95.7 million a year ago. This was due to the issuance of long-term debt in June 2012 and November 2011, and expiration of deferred interest costs in the Sugar Creek operations.

Financial Update

As of September 30, 2012, NiSource’s cash and cash equivalents was $12.3 million compared with $11.5 million as of December 31, 2011.

Net cash from operating activities in the first nine months of 2012 was $941.8 million, up from $794.1 million in the year-ago comparable period.
 
In the first nine months of 2012, the company’s capital expenditure was $1.0 billion compared with $0.8 billion in the prior-year comparable period.
 
2012 Guidance

NiSource reaffirmed its full-year 2012 earnings guidance in a range of $1.40 to $1.50 per share and is optimistic about meeting its projection.
 
Peer Comparison

FirstEnergy Corporation (FE - Analyst Report), which competes with NiSource, is slated to report third-quarter 2012 earnings results on November 8, 2012. The Zacks Consensus Estimates for its third-quarter and full-year 2012 earnings per share are currently pegged at $1.06 and $3.37, respectively.

Our View

NiSource posted mixed results in the third quarter of 2012. The top line fell short of 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 $4.0 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 also pays efforts toward providing improved and uninterrupted customer services. We believe these factors will act as a positive catalyst to improve the company’s future operating as well as financial performance.
 
However, 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 has short-term Zacks #3 Rank (Hold rating).

Merrillville, Indiana-based NiSource Inc. 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 within the high-demand energy corridor stretching from the Gulf Coast through the Midwest to New England. With a market capitalization of $7.25 billion, the company has 7,957 full time employees.

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