High natural gas prices have struck again; this time it's the second quarter earnings of AGL Resources Inc. where the pain will be felt. The company last Thursday warned that Q2 earnings would be hit by pre-tax hedging losses of $53-57 million, or 43-47 cents/share.
The company's Wholesale Services business uses gas futures contracts to hedge storage inventory. These are recorded at fair value, with unrealized gains and losses from the change in value reflected in earnings, while the related storage inventory is generally recorded at historical cost. The hedged value of the storage transactions is ultimately realized when the gas is withdrawn and delivered to customers. In addition, the widening of future basis spreads can result in losses on futures contracts used to hedge the value of pipeline capacity. The hedging losses are due to the increase in forward New York Mercantile Exchange (Nymex) gas prices during the second quarter relative to the prior-year quarter and the widening of transportation basis spreads, both marked as of June 30.
A significant portion of the reported hedge losses is expected to be recovered in the third and fourth quarters as gas inventory is withdrawn from storage and delivered, and hedging instruments are settled. This could change if Wholesale Services adjusts its daily injection and withdrawal plans in response to changes in market conditions in future months, AGL said.
During the second quarter of 2007, a decrease in forward Nymex prices for gas and the narrowing of basis spreads resulted in reported gains of $19 million, or 15 cents/share, on Wholesale Services' storage and transportation hedges.
"Our Wholesale Services business remains on track to generate economic value for the full year that is consistent with our expectations and with the guidance we provided our investors," said AGL CEO John W. Somerhalder II. "However, the dramatic increase we have seen in natural gas prices clearly has had a significant impact on our accounting results that we expect to report for the second quarter. We wanted to provide some early transparency around those results, given last year's reported second quarter results and current FirstCall expectations. Our corporate guidance for the full year remains $2.75 to $2.85 per share."
AGL said it will report second quarter and year-to-date earnings on July 31.
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