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Hedging Loss Hits AGL Resources Results

As it predicted last month, AGL Resources Inc.'s second quarter results took a hit from hedging losses as forward natural gas prices moved against the company's program.

AGL last Thursday reported a net loss of $11 million (-15 cents/share) for the second quarter of 2008, compared with net income of $30 million (40 cents/share) for the second quarter of 2007. The company's second-quarter 2008 results include a loss of 45 cents/share from $55 million in pre-tax hedge losses in its wholesale services segment related to a significant increase in forward New York Mercantile Exchange (Nymex) natural gas prices (see NGI, July 14) and the widening of transportation basis spreads during the quarter.

The impacts of hedge gains and losses, as well as any required lower-of-cost-or-market inventory valuation adjustments, on earnings for the wholesale services segment primarily affect the timing of earnings recognition and are not reflective of the economic value of the underlying storage inventory or gas transportation transactions, the company said. Second quarter 2008 and 2007 earnings, exclusive of the impact of these items, were 30 cents/share, compared with 27 cents/share, respectively.

The wholesale services segment, consisting primarily of Sequent Energy Management, had an earnings before interest and taxes (EBIT) loss of $65 million for the second quarter, compared with EBIT of $6 million for the prior-year period. Operating margin decreased $68 million relative to the prior-year period, primarily due to losses on the instruments used to hedge storage and transportation positions as a result of rising gas prices and the widening of transportation basis spreads during the quarter.

As of June 30 Sequent expected operating revenues from future storage withdrawals of approximately $55 million in 2008 and $16 million in 2009, assuming all factors remain the same. Based upon the current projection of year-end storage positions at Dec. 31, 2008, a $1.00 change in the first quarter 2009 forward Nymex prices would result in a $4 million impact to Sequent's reported EBIT for the year ending Dec. 31, 2008 (after regulatory sharing).

"We continue to operate in challenging market conditions, but our results for the quarter and year-to-date show that our business fundamentals are solid and we are positioned for growth despite those challenges," said AGL CEO John W. Somerhalder II. "As a result, we continue to expect fiscal 2008 earnings in the range of $2.75 to $2.85 per share."

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