Gas distributor Nicor Inc. (GAS) reported marginally weaker-than-expected third quarter 2010 results on the back of weakness in its shipping business. Earnings per share, excluding a mercury reserve adjustment, came in at 31 cents, a penny below the Zacks Consensus Estimate. However, revenues came in at $352.5 million, up 8.3% year-over-year and also beat the Zacks Consensus Estimate of $330 million amid gains across the board.

Compared to the third quarter of 2009, Nicor’s earnings per share posted a modest improvement (from 30 cents to 31 cents), reflecting improved operating income in the company’s gas distribution and other energy-related businesses.

Segmental Performance

Gas Distribution: The segment operating income for the most recent quarter was $20.9 million, a slight increase from $19.5 million achieved during the third quarter of 2009. The positive comparison can be attributed to higher gas distribution margin (on the back of base rate hike and higher revenue), which was partially offset by increased operating and maintenance costs.

Shipping: Nicor’s Shipping segment achieved an operating profit of $3.6 million versus income of $6.6 million in the year-earlier period. The main reasons for the underperformance were higher operating costs, somewhat offset by higher operating revenues. The increase in operating expenses were primarily attributable to higher transportation-related costs (due to higher fuel prices) and increase in repairs and maintenance expense, while higher operating revenues came on the back of higher average rates.

Other Energy Ventures: Operating profit came in at $7.1 million, up $3.4 million year over year. The increase came on the back of better operating performance at the company’s wholesale natural gas marketing business, partially canceled by lower operating income at Nicor’s retail energy-related products and services businesses.

Guidance

For 2010, Nicor lowered its earnings per share guidance to $3.00 – $3.10, from the earlier range of $3.10 – $3.30. The reduction in guidance was mainly on the back of lower-than-expected annual operating income in Nicor’s shipping business.

Our Recommendation

Even though the company has a Zacks #2 Rank (short-term Buy rating) on the company in the short run, we are Neutral on Nicor in the longer term.

 
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