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Still Bearish on AGL Resources

GAS ATO

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We have maintained our Underperform recommendation on energy services holding company AGL Resources Inc. (GAS - Analyst Report) considering its weak fundamentals and tepid outlook. The disappointing first quarter results and a number of other challenges have added to this bearishness.

Founded in 1856, Atlanta, Georgia-based AGL is an energy services holding company whose principal business is gas distribution. Following the December 2011 acquisition of Naperville, Illinois-based Nicor Inc., AGL Resources has become the largest domestic natural gas-only distribution entity with about 4.5 million customers across seven states.

Through its seven utilities the company builds, manages and maintains intrastate natural gas pipelines, distribution facilities and peaking and storage facilities. Additionally, AGL Resources responds to and repairs gas leaks and other requirements for service and also takes meter reading. Apart from the core distribution operations, AGL Resources is also engaged in other activities that include: Retail Operations, Wholesale Services, Midstream Operations, Energy Services, Cargo Shipping and Liquefied Natural Gas (LNG) & Propane.

AGL Resources recently reported lower-than-expected EPS for the March quarter – $1.16 versus the Zacks Consensus Estimate of $1.32 – adversely affected by warm weather and higher operating expenses.

We expect shareholder sentiment towards the company to remain lukewarm, considering its investment in higher-risk unregulated operations, ongoing regulatory uncertainties and the challenging economic environment.

AGL’s earnings are likely to suffer in 2012 due to a less-than-favorable outlook at its wholesale segment. The company, which competes on a large scale with gas distributors like Atmos Energy Corp. (ATO - Snapshot Report), expects margins at this unit to be under pressure in the foreseeable future due to the narrowing transportation/storage spreads.

Results of the shipping segment are also likely to remain weak over the next few quarters, as the challenging economic environment in the U.S. continues to have a negative impact on tourism and the economies in its service territories.

Given these concerns, we expect AGL to perform below its peers and industry levels in the coming months. As such, we see little reason for investors to own the stock. Partially offsetting these negatives are the company’s large and stable customer profile, consistent dividend growth and strong liquidity position.

Our continued long-term bearish investment thesis is supported by a Zacks #4 Rank (short-term Sell rating).

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