Gas distributor Nicor Inc. (GAS) reported first quarter 2011 earnings per share of 98 cents, comfortably beating the Zacks Consensus Estimate of 92 cents. However, on a year-over-year comparison, earnings fell 26.3% from $1.33 per share, bruised by poor performance by gas distribution and shipping businesses coupled with lower operating income.
The company’s total operating revenues were $1,037.0 million, down 13.1% year over year and 12.3% below our expectation.
Segmental Performance
Gas Distribution: The segment’s operating income for the most recent quarter was $65.9 million compared with $93.2 million in the first quarter of 2010. The decline reflects increased operating and maintenance costs along with a lower gas distribution margin and higher depreciation expense.
Shipping: Nicor’s Shipping segment registered an operating loss of $1.2 million, much wider than the loss of $0.5 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 $4.5 million, up slightly by 2.3% year over year, supported by strong contributions from the company’s retail energy-related products and services businesses.
Merger Follow-Up
In the last week of April, Nicor and AGL Resources (AGL), the owner of Atlanta’s natural-gas utility, were informed by the U.S. Department of Justice and the Federal Trade Commission that the waiting period required under the American Hart-Scott-Rodino Antitrust Improvements Act of 1976 has ended before schedule. This will allow the two companies to proceed with their transaction.
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
We believe that 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 also owns a containerized shipping service that provides profitable diversification to its core business and displays strong financial position and prudent investment approach.
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.
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