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We have recalibrated our investment thesis on energy services holding company AGL Resources Inc. (GAS - Analyst Report) to Neutral from Underperform.

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

AGL Resources is a premier electric utility with relatively low risk earnings growth and pays an annual dividend of $1.84 per share, yielding an attractive 4.5%. The utility increased its dividend payout by 2% in February 2012, maintaining its streak of dividend hikes for seven consecutive years. AGL Resources has a long and consistent dividend paying record. The company has paid dividends in each of the last 259 quarters for more than 60 years. As such, we believe AGL Resources’ dividend to be safe and reliable.

Positioned in a niche industry with high barriers to entry, the company enjoys near-monopoly status in its area of operation. On top of this, the utility’s best-in-class cost control and recession-proof business model presents a unique opportunity to own a safe stock. Sporting a low beta – translating into less volatility – and a cheap valuation, we see AGL Resources as a core holding in the energy infrastructure space.

Overall, we see AGL Resources is a quality utility that provides the security of regularly expanding dividend payments as well as the potential for moderate-to-high capital appreciation. In particular, the safety and reliability of AGL Resources’ distribution operations – that contribute more than three fourths of its operating profits – and the utility’s consistent earnings make it a must-hold for income-oriented investors.

While being incrementally more positive on AGL Resources – one of the major distributors of natural gas in the nation along with the likes of Atmos Energy Corp. (ATO - Snapshot Report) – its investment in higher-risk unregulated operations, ongoing regulatory uncertainties and the challenging economic environment keeps us on the sidelines. Our new long-term Neutral recommendation is supported by a Zacks #3 Rank (short-term Hold rating).

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