AGL CEO Sees Merger Inevitable
In October AGL Resources will become the first gas utility in
the U.S. to completely exit the gas merchant function, but its
transformation is far from over, AGL CEO Walter Higgins said
yesterday. Higgins expects his company to be snatched up like the
first pie out of the oven, probably by some hungry electric firm
eager to get its hands on a utility that has emerged from
deregulation relatively well done.
"I'd be very surprised if we're not consolidated somehow,"
Higgins told NGI, following a speech at the Natural Gas Roundtable
in Washington, D.C. "There are so many different people that call
me all the time about [merging]: foreign companies, electrics,
other gas companies. Everybody sees what's going on, and nobody is
missing the point that you need to get bigger if you want to be
"I'd say we won't look like we do in two years. That doesn't
mean we're going to announce a merger tomorrow," he said. "But I
wouldn't be surprised if we're not in some sort of alliance,
whether strategic or not, or some sort of a merger, or somebody
just plain acquires us within the next couple years."
AGL is by far the largest gas company in the Southeast, with 1.5
million customers. The next largest gas company in the region is
Piedmont Natural, with about 650,000 customers. But gas companies
are small compared to electrics, Higgins noted. "There's no way we
could ever buy -- unless we suddenly declared ourselves AGL.com and
created some phantom revenues and got a 100-to-1 P/E ratio. Any
electric company that you can imagine, even the smallest of them
like Scana or Tampa Electric, are huge by comparison to us."
In the meantime, AGL intends to focus on completing the
transition to a pure gas distribution utility with a nonregulated
retail energy marketing arm that will compete initially only in the
First and foremost is completing the transition to a
distribution-only utility, which will be accomplished when all 1.5
million of its gas customers switch or are assigned to marketers by
October. So far, 850,000 customers have switched to buying gas
from the 20 marketers operating in the state.
"The pace of customer migration has been so rapid, much faster
than anyone planned during the unbundling hearings and the
rate-setting process, that we're actually [not keeping pace],"
Higgins said. Although he didn't provide any figures, he said the
transformation is costing AGL a bundle because the regulatory
mechanisms set up to reduce AGL's revenue as merchant customers
depart is "not in sync with the reality of the market. We'll file
with the commission for some way of mitigating that problem because
right now we're sustaining costs that are not covered in our rates
and that's not right," he said.
AGL also is negotiating with Sonat to get out of their wholesale
energy marketing joint venture, Sonat Marketing. The venture has
lost AGL money in the first two quarters of its 1998-99 fiscal year
and will have a negative impact on total earnings for the year.
"We're certainly behind the eight ball in Sonat Marketing
because we lost money, as was reported in the first and the second
quarter. On the other hand, the Street has us earning in the
$1.30/share range this year and that's probably possible."
AGL hopes to grow in retail marketing through SouthStar Energy
Services LLC, a joint venture with Dynegy and Piedmont Natural Gas.
SouthStar, which sells gas in Georgia under the name Georgia
Natural Gas, began marketing in the state during the first quarter
of this year and currently holds a 35% market share. Higgins said
the company plans to target Virginia next and possibly other states
in the region. He said SouthStar probably will attempt to form
alliances with other local or regional retail marketing operations
in an effort to become the regional marketing powerhouse.