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AGL CEO Sees Merger Inevitable

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 competitive.

"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 Southeast.

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.

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