AGL Resources Inc. today reported second quarter net income of $34 million, or $0.28 per basic and diluted share, compared to net income of $18 million, or $0.23 per basic and diluted share, reported for the same period last year. Excluding merger-related expenses of $0.02 per share in 2012 and $0.10 per share in 2011, adjusted EPS was $0.30 for the second quarter of 2012 and $0.33 per diluted share for the second quarter of 2011.

For the first six months of 2012, net income was $164 million, or $1.40 per basic and diluted share, compared to net income of $142 million, or $1.83 per basic share and $1.82 per diluted share for the same period in 2011. Excluding merger-related expenses, adjusted EPS for the first half of 2012 was $1.47 per diluted share compared to $1.96 per diluted share for the same period last year.

"On a weather-normalized basis, our distribution businesses are performing well, and our retail operations segment had a solid second quarter," said John W. Somerhalder II, AGL Resources Chairman, President and Chief Executive Officer. "While reported earnings at our wholesale services segment were lower during the first half of the year, we ended the quarter with $47 million of storage-related economic value, about half of which would be realized during the second half of 2012 under our current withdrawal plan. Our midstream operations and cargo shipping segments continue to face challenging market conditions, though we are seeing modest signs of improvement in each.  Importantly, our shared-services model continues to drive cost savings throughout our business, and we remain confident we can achieve our merger savings targets." 

2012 OPERATING SEGMENT RESULTS

Distribution Operations

The distribution operations segment, which consists of our seven utilities, contributed EBIT of $100 million for the second quarter of 2012, an increase of $26 million compared to EBIT of $74 million for the same period in 2011. The increase was primarily the result of a $20 million contribution from the addition of Nicor Gas.

Year-to-date through June 30, 2012, the distribution operations segment contributed EBIT of $294 million, an increase of $79 million compared to EBIT of $215 million for the same period in 2011. The increase was primarily the result of a $71 million contribution from the addition of Nicor Gas.

Retail Operations

The retail operations segment, which consists of SouthStar Energy Services and several Nicor retail businesses that provide energy-related products and services, contributed EBIT of $14 million for the second quarter of 2012, an increase of $13 million compared to EBIT of $1 million for the same period in 2011. The increase was primarily a result of the addition of Nicor's retail businesses and increased margins resulting from reduced transportation and gas costs.

Year-to-date through June 30, 2012, the retail operations segment contributed EBIT of $74 million, an increase of $5 million compared to EBIT of $69 million for the same period in 2011. These results include the addition of the Nicor retail businesses, partially offset by a $9 million year-over-year EBIT decline resulting from the significantly warmer weather during the first half of 2012 as compared to the prior-year period.

Wholesale Services

The wholesale services segment, consisting primarily of Sequent Energy Management, reported an EBIT loss of $9 million in the second quarter of 2012, compared to an EBIT loss of $5 million for the same period in 2011. Storage hedge losses totaled $9 million during the quarter compared to storage hedge gains of $4 million in the second quarter of 2011. Additionally, the wholesale services segment experienced a $6 million decrease in commercial activity compared to the second quarter of the prior year, primarily driven by lower optimization opportunities and lower transportation spreads. These decreases were offset by higher transportation hedge gains of $14 million ($18 million for second quarter 2012 as compared to $4 million last year). Hedge gains and losses are affected primarily by changes in the price of natural gas and by changes in transportation basis spreads in the period.

Year-to-date through June 30, 2012, the wholesale services segment contributed EBIT of $10 million, compared to $28 million for the same period in 2011. Lower commercial activity along with higher natural gas inventory lower-of-cost-or-market (LOCOM) valuation adjustments, offset by higher storage and transportation hedge gains, were the primary factors influencing year-over-year results.

As the price of natural gas increased during the second quarter, Sequent recorded hedge losses on its portfolio of storage assets, adding an equivalent value to the storage-related rollout value locked-in at June 30, 2012. Further, higher seasonal price differentials (summer 2012 to winter 2012 - 2013) during the second quarter 2012 provided additional opportunities for Sequent to improve its storage positions. Sequent's storage rollout schedule as of June 30, 2012 is $47 million on 55 billion cubic feet (Bcf) of natural gas inventory. This compares to $11 million at the same point last year. The rollout value is expected to be recognized as operating revenues in 2012 and 2013 when projected withdrawals occur. This withdrawal schedule can change in response to changes in market conditions, including changes in forward NYMEX natural gas prices, and this value is expected to be partially offset by lower operating revenues from Sequent's forward transportation portfolio as compared to last year.

Midstream Operations

The midstream operations segment, consisting primarily of our natural gas storage facilities including Jefferson Island Storage and Hub, Golden Triangle Storage and Central Valley Gas Storage, as well as Magnolia pipeline contributed EBIT of $2 million in the second quarter of 2012, which is consistent with the same period in 2011.

Year-to-date through June 30, 2012, the midstream operations segment contributed EBIT of $5 million, an increase of $1 million from the same period in 2011. The year-to-year improvement is due primarily to hedge gains, partially offset by inventory valuation LOCOM at Central Valley Gas Storage for volumes of natural gas related to bringing the facility into service.

Cargo Shipping

Our cargo shipping segment consists primarily of Tropical Shipping, a containerized cargo shipping company serving the Bahamas and Caribbean regions, and Seven Seas, a domestic cargo insurance company. This segment reported an EBIT loss of $1 million in the second quarter of 2012, with a breakeven level of EBIT year to date through June 30, 2012.

INTEREST EXPENSE AND INCOME TAXES

Interest expense for the second quarter of 2012 was $45 million, an increase of $13 million from the second quarter of 2011. The increase resulted from higher average debt outstanding, primarily the result of the additional long-term debt issued during 2011 in connection with the Nicor merger and the additional debt assumed following the closing of the merger transaction. Interest expense year-to-date 2012 was $92 million, an increase of $31 million compared to the prior year due to the same factors that influenced the second quarter.

Income taxes for the second quarter of 2012 were $20 million, a $9 million increase compared to the second quarter of 2011. Year-to-date income taxes through June 30, 2012 were $100 million, $13 million higher than the same period in 2011. The increase for both periods was due to higher consolidated earnings for the quarter relative to the prior year due to the addition of Nicor's businesses.

2012 EARNINGS OUTLOOK

AGL Resources provides earnings per share guidance estimates based on normal weather, among other assumptions. The historically warm weather experienced during the first half of 2012 may lead to reported EPS results for the full year that are below our previously indicated guidance range of $2.80 to $2.95 per diluted share, which assumed normal weather. However, we are seeing a number of positive trends, particularly related to managing controllable expenses, achieving merger savings targets and generating incremental economic value at Sequent. 

Unanticipated changes in these events or other circumstances could materially impact earnings, and could result in earnings for 2012 significantly above or below this outlook. Factors that could cause such changes are described below in Forward-Looking Statements and in other company documents on file with the Securities and Exchange Commission.