AGL Lowers 2001 Earnings Citing SouthStar Impact

Due to "overstated" revenues at its SouthStar retail marketing joint venture, AGL Resources Inc. has revised its earnings guidance for fiscal year 2001 to between $1.49 and $1.51 per share, from the current First Call consensus of $1.55 per share. SouthStar Energy Services LLC is a partnership among AGL Resources, Piedmont Natural Gas and Dynegy Inc.

At a meeting of the SouthStar executive committee last Monday, SouthStar's management reported that the joint venture's audited revenues and net income as reported to AGL Resources for SouthStar's 1998, 1999 and 2000 fiscal years and its unaudited revenues and net income for SouthStar's seven-month period ended July 31, 2001, were "overstated." SouthStar said its estimation of the cumulative amount of unbilled revenues, compared with actual revenues recorded, was inaccurate and resulted in an estimated $27 million overstatement of revenues. AGL Resources said its portion is approximately $14 million, of which approximately two-thirds is attributable to AGL Resources' fiscal year 2001.

"One of our primary goals this year has been to dedicate AGL managerial resources to improve the performance of the SouthStar joint venture, and we have focused our energy on stabilizing this business and moving it toward sustainable profitability,'' said Paula G. Rosput, AGL Resources CEO. "Along with greater scrutiny on how interstate assets are traded, we brought in our team to improve the accounting and collection processes. In the effort, we discovered an accounting issue with SouthStar's unbilled revenue, and are now assessing the impact and addressing this issue with our partners."

In July, Georgia Natural Gas Co., a subsidiary of AGL Resources, filed a complaint on behalf of SouthStar Energy Services to compel Dynegy Marketing and Trade to provide a full and fair accounting of its activities as asset manager for SouthStar. The lawsuit alleges that Dynegy, despite repeated requests by Georgia Natural Gas, has failed to provide necessary documentation and records of purchase and sales transactions in its role as asset manager for SouthStar.

The lawsuit also alleges that Dynegy, as SouthStar's agent, failed in its fiduciary responsibilities to provide regular accounting of key transactions involving SouthStar's assets. The lawsuit charges that Dynegy deprived information, overstating the wholesale market price that Dynegy charged for SouthStar as its asset manager, and alleges that, in doing so, Dynegy diverted these unreported profits to its own trading book.

The lawsuit also alleges that Dynegy has "consistently misstated the value of the transactions" it performed as SouthStar's agent and that after Georgia Natural raised the issue with Dynegy earlier this year, Dynegy refused to provide information that would show how much money had been redirected from SouthStar to Dynegy.

"We certainly are distressed to uncover this problem, but we do have reserves in place to cover the majority of our exposure," Rosput said. "Nevertheless, we feel it is prudent to revise our estimates based on our assessment of the overall impact on our earnings for the year. This issue also underscores the importance of SouthStar getting credit for the asset management revenues owed to the joint venture by Dynegy. To date, Dynegy has resisted providing an accounting to management or to the partners. We know for a fact that significant value should have been created, based on prevailing market conditions."

Even as the one AGL Resources' subsidiary is searching for answers from Dynegy, another subsidiary, Atlanta Gas Light Co. (AGLC), is the subject of an earnings review by the Georgia Public Service Commission (GPSC). The Commission two weeks ago, upon its staff's urgings, scheduled hearings regarding an earnings review for AGLC, which it said is earning between 4% and 7% more than its authorized return on equity (ROE) (see NGI, Aug. 27).

Two weeks ago, Rosput said that AGL would file a motion for reconsideration this month with the GPSC revealing that a "full and fair review" of the case will show that the company is "underearning relative to its allowed return."

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