Nicor Inc. (GAS) reported better-than-expected second quarter results, reflecting impressive performance by the Gas Distribution and Shipping segments. Earnings per share came in at 53 cents, above the Zacks Consensus Estimate of 44 cents and the prior-year figure of 50 cents.
The upbeat results were attributed to higher operating income in the company’s gas distribution and shipping businesses, as well as improved corporate operating results. These increases were partially offset by lower operating results in other energy-related businesses.
However, Nicor’s total operating revenues of $425.6 million were down 4.9% from $447.6 million in the prior-year period. The reported quarter results were below Zacks Consensus Estimate of $454 million.
Gas Distribution
The segment’s operating income for the reported quarter was $27.4 million, a slight increase from the $25.1 million achieved in the year-ago quarter. The positive comparison can be attributed to higher gas distribution margin (on the back of base rate hike, higher revenues from the energy efficiency and bad debt cost recovery), counterbalancing the higher operating and maintenance costs as well as higher depreciation expense.
Shipping
Nicor’s Shipping segment posted an operating income of $4.2 million, up 68% year over year. This was driven by increased operating revenues, which offset the higher operating costs. The improvement in operating revenues was mainly due to higher volumes shipped and average rates, while high operating expenses were primarily attributable to higher transportation-related costs as well as increase in repairs and maintenance expense, partially offset by lower payroll and benefit-related costs and reduced repairs and maintenance expense.
Other Energy Ventures
Operating profit came in at $11.4 million, down 10.2% year over year. The downfall was due to lower operating income in the company’s retail energy-related products and services businesses, somewhat counterbalanced by a boosted operating income at Nicor’s wholesale natural gas marketing business.
Guidance
For 2010, Nicor maintained its earnings per share guidance of $3.10 – $3.30.
Our Recommendation
One of the biggest gas utilities in the U.S., Nicor operates with a large, stable customer profile and low base rate. The company’s containerized shipping service provides a profitable diversification to its base business. Nicor’s strong financial position and prudent investment approach will be beneficial in the next few quarters.
However, the company’s strengths are tampered by investment in higher-risk unregulated operations, ongoing regulatory uncertainties and the challenging economic environment. Overall, we do not foresee any significant upside for the stock in the near future and retain our long-term Neutral recommendation. This is supported by the short-term Zacks #3 Rank (hold) rating.
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