Nicor: Initiating Coverage at Neutral

| About: AGL Resources (GAS)

We are initiating coverage on Nicor Inc. (NYSE:GAS) with a Neutral recommendation and a target price of $45.

Nicor’s core regulated gas distribution business, Nicor Gas, boasts of a large, stable, residential, and commercial customer base of more than 2 million with sustainable growth, low costs and rates, a diverse supply portfolio that includes significant gas storage assets, solid operations, and favorable competitive standing. The company also owns Tropical Shipping, a transporter of containerized freight serving the Bahamas and the Caribbean region that provides a profitable diversification to Nicor’s base business.

Nicor’s strong financial position is a real asset in this highly uncertain period for the economy. The company has historically generated high returns on equity (a sign of efficient use of capital), while its AA credit ratings (the highest rating currently given to a gas distribution company) provide a competitive advantage in accessing capital at reasonable cost. Additionally, Nicor pays a solid dividend, currently yielding an attractive 4.3%.

However, the company’s strengths are tempered by its investment in higher-risk unregulated operations, ongoing regulatory uncertainties, and the prevailing economic uncertainty. In particular, results of the shipping segment are expected to remain weak over the next few quarters, as challenging economic environment in the U.S. continues to have a negative impact on tourism and the economies in its service territories.

Consequently, we do not anticipate a significant upside in the near future and expect the stock to perform in line with the broader market.