AGL Resources (GAS) is a utility holding company. The company has interests in Georgia, Tennessee, New Jersey, Illinois and Virginia among other places. It is engaged in nonregulated natural gas marketing and other allied services. The company started as Atlanta Gas and Light and through a series of acquisitions has become the entity that it is today. Indeed, the Nicor merger of 2011 changed the size and scope of the coverage area. Moving forward, this company has several paths it can take towards continued growth.
Atlanta Gas and Light was founded in 1856. Its first contract was to light 50 gas streetlights in the city of Atlanta using 3 miles of pipeline. The country soon afterwards became caught up in the Civil War, and the company’s gas works were destroyed during the Battle of Atlanta. It took two years to become operational again. After the war, the newly invented gas stove in 1881 and gas hot water heater in 1889 were instrumental in the evolution of the company over the next century. The company was eventually acquired and spun off by Georgia Power, a subsidiary of Southern Co. (SO), and changed from the utility company Atlanta Gas and Light, to AGL Resources, a holding company, in 1996.
The new company looked for ways to expand. Though it had previously purchased Chattanooga Gas in 1988, its scope was limited to the Georgia area. It purchased Virginia Natural Gas in 2000, which was a required spinoff by regulators when Dominion Resources (D) acquired Consolidated Natural Gas Co. Then, it added NUI Corp. in 2004 for $691 million, giving it access to the New Jersey, Maryland, and Florida natural gas markets. These additions make AGL Resources a formidable player in natural gas utilities.
The aforementioned merger with Nicor in 2011 was AGL’s most significant transaction to date. The company paid $21.20 in cash and 0.8382 of an AGL share for each Nicor share, which equated to about $53 a share. This move effectively doubled the size of the business, and made AGL Resources the top natural gas distributor in the country. The combined entity covers two of the 10 largest metropolitan areas in the United States.
Originally, most of a natural gas utility’s top line was highly correlated with the amount of natural gas that was used by the customer base. Indeed, a very cold winter season could wind up being hugely profitable, and a warmer winter could have negative effects on the bottom line. The amount of gas used was somewhat dependent on the level of economic activity and conservation technology. Many natural gas utilities sought to reduce this variability through decoupling. Infrastructure buildout repayment programs have been successful in spreading out the revenue generation over the full year, and reduce the quarter-to-quarter bottom-line volatility. The company has also started non-regulated activities, such as storage and shipping, to increase profitability.
AGL Resources’ revenues sources aforementioned infrastructure replacement programs are available in Virginia, New Jersey, and Georgia, specifically under the Strategic Infrastructure Development and Enhancement (STRIDE) program. Recently, the state of Illinois approved infrastructure cost replacement legislations and the company subsequently filed a case with the state for such a program. AGL has several non-regulated businesses, as well, such as storage operations in its Central Valley Gas Storage site and Golden Triangle Storage facility. It also provides cargo shipping through its Tropical Shipping subsidiary. These programs have helped to diversify its revenue streams and improve the company’s overall business prospects.
Over the longer term, we think AGL Resources’ many services should allow for growth. The infrastructure projects will likely be steady contributors to the top line, as costs associated with natural gas distribution decline. Natural gas has increased in supply thanks to advanced drilling techniques allowing for better cost savings on appliances using the fuel. Tankless water heaters and natural gas powered heaters are now in more demand thanks to their increased cost efficiency. Industries are running more of their operations on natural gas. And even though it is still in the developmental stage, more vehicles are being run off natural gas, driving up demand for the commodity.
All told, AGL Resources looks well positioned over the next few years. The trends we have outlined ought to benefit this natural gas utility, which should, in turn drive future growth.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.