Lower results in its wholesale business related to natural gas prices and their effects on storage and transportation hedges, along with weather impacts on its retail business, weighed down second quarter earnings for Atlanta-based AGL Resources Inc., but better days aren't far away, according to CEO John W. Somerhalder II.

"During the second quarter we achieved a number of important milestones that should strengthen our future performance, including the approval of a rate increase and new rate design for our Chattanooga Gas franchise, significant progress in creating the first cavern at our Golden Triangle storage project in Texas, and filing a permit application to expand our existing natural gas storage facility in Louisiana," Somerhalder said during a conference call with financial analysts Thursday.

AGL reported 2Q2010 net income of $14 million (17 cents/share), compared with $20 million (26 cents) for 2Q2009. At the same time AGL reaffirmed its 2010 earnings guidance range of $2.95-3.05/share.

AGL Houston-based subsidiary Sequent Energy Management recorded an earnings before interest and taxes (EBIT) loss of $20 million for 2Q2010, compared with an $11 million loss in 2Q2009. Operating margin in the wholesale services unit was down $11 million compared to the prior-year period, primarily due to $8 million in losses on the instruments used to hedge storage and transportation positions as a result of rising natural gas prices and the widening of transportation basis spreads during the quarter. A total of $13 million in storage and hedge gains were recorded during 2Q2010. The losses were partially offset by a $10 million improvement in commercial activity compared with the same period last year.

"In the forward market, obviously the natural gas environment is being impacted by a lot of the shale activity [in the] Haynesville, Marcellus and other significant shale developments," said Sequent President Peter Tumminello. "Sequent's very active in providing services to those producers, and so we're seeing a lot more commercial activity around that activity to support those producers' growing volumes in the shale."

AGL's distribution operations segment contributed EBIT of $69 million in 2Q2010 compared with $63 million in 1Q2009.

AGL's retail energy operations segment, consisting of SouthStar Energy Services, reported 2Q2010 EBIT of $1 million, compared with $5 million in 2Q2009. The segment's results were affected by decreased average customer usage, largely due to warmer weather as well as a change in the customer portfolio and retail pricing plan mix and a decrease in the average number of customers as compared to last year.

AGL released the earnings report one day after announcing the formation with El Paso Corp. of a joint venture (JV) to distribute liquefied natural gas (LNG) across the southeastern United States to the heavy-duty transportation market (see Daily GPI, July 29). The 50/50 JV, Southeast LNG Distribution Co., would own and operate a fleet of LNG-fueled tankers and distribution facilities to support the use of LNG as a fuel source for this emerging market segment.

AGL on July 1 completed the sale of telecommunications unit AGL Networks -- "a non-core asset for us" -- to Colorado-based Zayo Group LLC, Somerhalder said. Terms of the sale were not released.

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