Mixed 2Q for AGL Resources

Energy services holding company AGL Resources Inc. (GAS - Analyst Report) reported mixed second quarter 2012 results, owing to better performing Distribution and Retail segments, partially offset by the difficult market scenario and steeper operating expenses.

The company – the largest domestic natural gas-only distribution entity with about 4.5 million customers across seven states following the December 2011 acquisition of Naperville, Illinois-based Nicor Inc. – announced earnings per share (excluding merger-related expenses) of 30 cents, surpassing the Zacks Consensus Estimate of 28 cents, while falling 9.1% from 33 cents earned in the comparable quarter last year.

Total operating revenues, at $686.0 million, were shy of the Zacks Consensus Estimate of $869.0 million but were up from the year-ago level of $375.0 million.

Segmental Performance

Distribution Operations: This segment, comprised of seven utilities, witnessed earnings before interest and taxes (EBIT) of $100.0 million, up from $74.0 million obtained during the second quarter of 2011. The positive comparison can be attributed to contributions from the inclusion of Nicor Gas.

Retail Operations: AGL’s ‘Retail’ segment – made up of SouthStar Energy Services, Nicor Services, Nicor Solutions and Nicor Advanced Energy – achieved an EBIT of $14.0 million, up substantially from an income of $1.0 million in the year-earlier period. The quarter’s performance benefited from the addition of a retail business unit from Nicor along with lower transportation and gas costs.

Wholesale Services: The segment that includes Sequent Energy Management reported a loss of $9.0 million, wider than the loss of $5.0 million recorded in the prior-year quarter. The underperformance was primarily due to a fall in the commercial activity as a result of reduced storage and transportation spreads.

The earnings contribution from AGL’s other businesses – Midstream Operations and Cargo Shipping – were insignificant.

Guidance

Management stated that the unfavorable weather conditions that prevailed in the first half of 2012 will likely generate lower earnings results for 2012 than the previous guidance range of $2.80-$2.95 per diluted share.

Rating & Recommendation

Another natural gas distributor – Tulsa, Oklahoma-based ONEOK Inc (OKE - Analyst Report) – reported second-quarter 2012 earnings of 29 cents per diluted share, missing our projection of 34 cents per diluted share.

AGL Resources currently retains a Zacks #4 Rank (short-term Sell rating). We are also maintaining our long-term 'Underperform' recommendation on the stock.

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