AGL Resources (NYSE: AGL) operates gas utilities in Georgia and five other states in the eastern United States. As a utilities operator, AGL's businesses are subject to government price regulations that vary from state to state; generally, these regulations put a ceiling on the price that utilities companies can charge customers, ensuring that utilities services are accessible but can still turn a profit. Such price regulations, however, do not allow utilities like AGL to pass costs on to consumers, so one of the company's main challenges is working with state regulators to obtain more favorable rates. It is essentially the regulators, not the company, who control AGL's margins.
Volatile natural gas costs can make AGL's margins unpredictable, since they allow the company's costs to change while regulations keep prices fixed. The weather also plays a large part in demand for natural gas, which is used for heating, so unseasonable weather patterns can lead to demand fluctuations as well. Fortunately for AGL, the majority of its business occurs in Georgia, a state with a regulatory system that allows the company to charge a monthly rate regardless of gas usage. This insulates the company against the effects of good weather and fluctuating gas use. On the flip side, AGL hasn't been able to negotiate a favorable rate change in the State for over 12 years. AGL Resources doesn't have any real competition in its service areas, thanks to the difficulty of installing infrastructure, but competes on a large scale with other utilities companies like Atmos Energy.
The Company also owns and operates a telecommunications business that constructs and operates conduit and fiber infrastructure within select metropolitan areas.
In July 2010, AGL Resources Inc. sold its AGL Networks dark fiber telecommunications business to Zayo Group, LLC.
AGL Resources is a regulated energy services holding company, which through its subsidiaries and partnerships, is engaged in natural gas distribution and wholesale natural gas asset management. With the acquisition of NUI Corporation, AGL Resources became a leading distributor of natural gas on the East Coast, serving more than 2.27 million customers in six states: Florida, Georgia, Maryland, New Jersey, Tennessee, and Virginia. The company also engages in various non-regulated operations such as telecommunications infrastructure, retail energy marketing and other energy-related services. For the past three years, however, 85% of its EBIT came from its businesses involved in natural gas.
The company sells both to end-use customers and other distribution utilities. The company has relationships with 12 different natural gas marketing firms; these companies peddle the gas to end users, so all AGL is responsible for is delivering it to them. This allows AGL to sell a large amount of gas without the high overhead costs associated with marketing and delivery; it also decreases AGL's debt exposure, as regulations require utilities and marketing companies to exhibit their ability to pay before making the purchase. The only downside is that revenues from sales to marketing firms are lower than with sales to end users, because AGL must sell the gas at a better price if marketing customers are to eventually turn it around and sell it to consumers for a profit.
Second Quarter 2010 Results (ended June 30, 2010)
AGL Resources reported second quarter net income of $14 million, or $0.17 per basic (and diluted) share, compared with $20 million, or $0.26 per basic (and diluted) share, for the second quarter of 2009. The company's second quarter 2010 financials reflect lower results in the wholesale business related to natural gas prices and their effects on storage and transportation hedges and, to a lesser extent, weather impacts on the retail business during the quarter. Revenues for the quarter totaled $359 million, compared to $377 in the second quarter of 2009.
Important developments during the quarter included the approval of a rate increase and new rate design for the AGL's Chattanooga Gas franchise, significant progress in creating the first cavern at the Golden Triangle Storage project in Texas, and filing a permit application to expand its existing natural gas storage facility in Louisiana. In addition, on July 1, AGL completed the sale of AGL Networks, the company's telecommunications business, which was a non-core asset.
In the past, utilities paid high dividends because stringent government regulation kept them from having much growth potential. This made them very sensitive to short-term interest rates, as higher interest rates made government bonds more attractive as investments; more people investing in government bonds meant less people buying utilities stock, causing shares to fall. Now, however, the combination of deregulation and the diversification of gas utilities into energy trading, generation, and other businesses mean that the companies have greater growth potential and less exposure to interest rate effects. Now, though utilities still pay dividends, these are lower than in the past - because utilities companies now have a chance for strong share growth, so high dividends are no longer necessary to serve shareholder interests.
The distribution operations segment includes six natural gas local distribution utilities. These utilities construct, manage and maintain intrastate natural gas pipelines and distribution facilities. It includes Atlanta Gas Light in Georgia, Chattanooga Gas in Tennessee, Elizabethtown Gas in New Jersey, Elkton Gas in Maryland, Florida City Gas in Florida and Virginia Natural Gas in Virginia. Atlanta Gas Light’s role includes distributing natural gas for marketers; constructing, operating and maintaining the gas system infrastructure, including responding to customer service calls and leaks; reading meters and maintaining underlying customer information for marketers, and planning and contracting for capacity on interstate transportation and storage systems.
The retail energy operations segment consists of SouthStar Energy Services LLC (SouthStar), a joint venture owned 85% by the Company’s subsidiary, Georgia Natural Gas Company, and 15% by Piedmont Natural Gas (Piedmont). SouthStar markets natural gas and related services under Georgia Natural Gas to retail customers on an unregulated basis in Georgia, as well as Ohio and Florida. In addition, SouthStar markets gas to commercial and industrial customers in Alabama, Tennessee, North Carolina, South Carolina and Georgia.
The wholesale services segment consists primarily of Sequent Energy Management, L.P. (Sequent), a subsidiary involved in asset management and optimization, storage, transportation, producer and peaking services and wholesale marketing. Sequent provides its customers with natural gas from the producing regions and market hubs in the United States and Canada. Sequent’s asset management customers include affiliated and non-affiliated utilities, municipal utilities, power generators and industrial customers. Sequent’s producer services business focuses on aggregating natural gas supply from various small and medium-sized producers located throughout the natural gas production areas of the United States.
The energy investments segment includes businesses that are related and complementary to the primary business. It includes natural gas storage business, which develops, acquires and operates salt-dome and other storage assets in the Gulf Coast region of the United States. Jefferson Island Storage & Hub, LLC (Jefferson Island), the Company’s wholly owned subsidiary operates a salt dome storage and hub facility in Louisiana, approximately eight miles from the Henry Hub and consists of two salt dome storage caverns.
AGL Networks, LLC (AGL Networks), the Company’s wholly owned subsidiary provides telecommunications conduit and available for use or dark fiber optic cable. AGL Networks leases and sells its fiber to a range of customers in the Atlanta, Georgia, Phoenix, Arizona and Charlotte, North Carolina metropolitan areas in the United States. Its customers include local, regional and national telecommunications companies, Internet service providers, educational institutions and other commercial entities. AGL Networks provides underground conduit and dark fiber to its customers under leasing arrangements with terms that vary from one to twenty years. In addition, AGL Networks offers telecommunications construction services to its customers.
The corporate segment includes the nonoperating business units. AGL Services Company is a service company established to provide certain centralized shared services to the operating segments. AGL Capital Corporation (AGL Capital), the wholly owned finance subsidiary provides for ongoing financing needs through a commercial paper program, the issuance of various debt and hybrid securities, and other financing arrangements. The corporate segment also includes intercompany eliminations for transactions between the operating business segments.
Utilities tend to be highly regulated business in the U.S., with the national government setting transmissions rates and state governments setting electric and gas distribution rates. These rules are designed to ensure both profitability for the company and accessibility for the consumer, but often hold back utilities companies, like AGL, from achieving potential revenues and profitability by preventing them from charging delivery rates that the level of demand would really allow. Regulation can also cause the company's margins to be very volatile, as lobbying the government is the only way the company can control its prices. Unfortunately, natural gas costs fluctuate very rapidly, but it takes a long time for AGL's lobbyists to convince state and regional regulators to raise the price ceiling. For the most part, regulators will only raise rates if the company can show that something, whether rising costs or inflationary pressure, is causing their margins to shrink to unfair levels.
Utilities regulations vary from state to state and, sometimes, region to region. AGL Resources operates in Florida, Georgia, Maryland, New Jersey, Tennessee, and Virginia. Most regulatory schemes limit the amount a gas company can charge for a unit of gas (such as a cubic foot). In Georgia, however, the regulatory scheme allows AGL Resources to charge a set monthly rate independent of a customer's usage. This means that the company's revenues stay stable in the region no matter what the weather. Of AGL's 2.27 million gas customers, 68.6% percent live in Georgia, meaning that the majority of the company's sales are hedged against the weather and gas-use fluctuations that are the bane of other gas utilities.
Natural gas is used most commonly in home heating systems, making its demand partially dependent on the temperature outside. First- and fourth-quarter revenues for AGL Resources tend to be higher than second- and third-quarter revenues because late fall through early spring are much colder than late spring through early fall. AGL Resources' distribution segment saw 2007 revenues of $123 million (1Q), $64 million (2Q), $55 million (3Q), and $96 million (4Q), effectively illustrating how cold temperatures lead to higher gas revenues. This temperature dependence also means that unusual seasonality has a real effect on the company's operations; warmer winters, a predicted outcome of global climate change, will damage the company's revenues by decreasing demand at a key part of the year.
Incidentally, the gas utilities demand cycle is exactly opposite that of electric utilities, who see higher demand in warmer months because air conditioning units are electrically powered.
AGL Resources is not a natural gas exploration and production company, so it must purchase the natural gas it sells from other companies. Natural gas prices are extremely volatile, fluctuating between $5/cf and $10/cf several times in the past three years; though AGL tries to hedge against these fluctuations by purchasing long-term supply contracts, most E&P companies are loath to sell at fixed prices natural gas prices are trending upwards. Furthermore, utilities regulations mean that AGL Resources cannot pass rising costs onto consumers, giving the company less control of its margins.
AGL Resources operates its gas delivery services in Florida, Georgia, Maryland, New Jersey, Tennessee, and Virginia. In the markets it serves, the company has little real competition thanks to the high cost of infrastructure installation; government regulation, however, keeps the company from charging the rates and turning the profits that would otherwise be expected of a monopolist that sells products with inelastic demand. On a larger scale, AGL competes with other gas utilities like:
|AGL Resources||Atmos Energy||Energen||Equitable Resources||National Fuel Gas Company||ONEOK||Sempra Energy||Southern Union Company||National Grid Transco|
|Total Revenue (Millions)||$2,494||$5,898||$1,435||$1,361||$2,039||$13,488||$11,438||$2,617||£8,778|
|Gas Delivered (Bcf)||319||297.3||82.7||49.5||38.98||176.55||N/A||56.2||N/A|
|Number of Utilities Customers (thousands)||2,271||3,187||451||274||725||2,050||N/A||552||11,571|