AGL Resources

AGL resources Inc. is a company based in Atlanta. It is one of the oldest enterprises dealing with the distribution of natural gas to six states: Georgia, New Jersey, Virginia, Florida Tennessee, and Maryland in America. The company has been in business for more than 150 years. It is listed at the NYSE and serves 4.5 million end users. In addition to distribution, it provides asset management services to natural gas wholesalers both in the US and Canada (Annual Report, 2011). Natural gas is 92% efficient compared to electricity’s 30% and with domestic abundance of natural gas, AGL has been able to carry out its operations successfully for a long time (Annual Report, 2011). 

Energy Australia, on the other hand, is one of the largest and oldest Australian energy supply corporations that sells gas and electricity to consumers in many states. It was established under the Energy Services corporations Act 1995 and the State Owned Corporations Act 1989 (Annual Report, 2009/10).  It is also governed by other subordinate statutory and legislative requirements passed and stipulated by the government through Australian Energy Regulator (AER). It has a customer base of 1.3 million around Australia and targets both residential and business energy consumers. Energy Australia also distributes electricity around Australia by operating one of the largest NSW’s electricity networks (Wallenius, Platt, & McKenzie, 2008). Currently Energy Australia moves towards providing green renewable energy and offers 5% discount to their customers who consume both electricity and gas from the same supplier (Annual Report, 2009).

Fundamental Philosophical

Core Business

One major difference between AGL and Energy Australia is based on their core products. AGL deals with distribution of natural gas to end users across six states in the United States while Energy Australia suppliers both gas and electricity to end users. The company, however, sold its retail business to TRUenergy in 2011 as a strategy to concentrate on the electricity delivery.

AGL serves nearly 4.5 million end users and has been an active market player for more than 150 years. In addition to distribution, it provides asset management services to natural gas whole sellers both in the US and Canada (Annual Report, 2011).  In comparison, Energy Australia serves a customer base of 1.3 million around Australia which is less than the number in AGL and targets both residential and business energy consumers. Energy Australia also distributes electricity in Australia by operating one of the largest NSW’s electricity networks (Wallenius, Platt, & McKenzie, 2008). According to Annual Report 2009, Energy Australia moves towards providing green renewable energy and offered 5% discount to their customers who consume both electricity and gas from the same supplier.

Business and Industry

As it was stated before, AGL’s core business is the distribution of natural gas. The company is also engaged in various related and complimentary businesses like natural gas asset management, logistic activities, and storage among others. Management of these ventures is undertaken through four segments which include distribution operations, retail energy operations, energy investments, and wholesale services. Each of the departments has its head and six distribution utilities that construct and manage gas pipelines in each of the states.

Natural gas industry is very competitive with several players in the market. Further, the industry is subjected to strict government regulatory measures that guide pricing, distribution, and storage. In Georgia, the Public Service Commission sets the base rate for pricing. Given that AGL operates in six different states, the company is affected by the regulatory changes that vary from state to state.

Unlike AGL resources, Energy Australia is an Australian government corporation, the core business of which is selling of natural gas and electricity to clients in Australia. It supplies gas and electricity to clients both in residential homes and in the business places. It is also a distributor of electricity to NSW’s wide electricity network around Australia: in Australian Capital Territory, South Australia, Queensland, NSW and Victoria through a partnership deal with TRUenergy Company (Pitts, 1973).  The main concern of Energy Australia is providing sustainable, reliable, green energy to its customers with safety being a top priority for all employees and clients (Hinnawi, 1981).

Management and Governance

Governance in a firm includes organizational structure coupled with the activities of the board of directors and the audit committee. Board of directors represents top management of AGL. It is directly responsible for company’s day to day operations in line with the Georgia Business Corporation Code. Board of directors supports business operations through the provision of qualified managerial skills. AGL has its governance regulations outlined in a special document that incorporates several issues e.g. selection of chairman and CEO, time commitment of directors, frequency of committee meetings, evaluation of CEO, and assessment of Board’s performance among other issues. To gain understanding of AGL’s governance system, it is important to appreciate the corporate charters and bylaws and the organization’s code of ethics (Annual Report, 2011). 

The corporate charter is issued by the state in which the company operates. It recognizes a company as a separate legal entity. Among other things it includes the exact name of the organization, date of establishment, types of business activities it is authorized to conduct, and the nature and amount of stock it is authorized to issue. Bylaws, on the other hand, include the description of voting methods available to directors in making major decisions, powers of corporate executives, and frequency of shareholder meetings among others (Annual Report, 2010). The code of ethics entails organizational values and ethical standards and must be frequently communicated to staff. Each public company, AGL included, is required by law to disclose the code of ethics. Any company that fails to do so must state this fact and explain the reasons of this failure to the regulatory authority. Any amendment to any of these codes must equally be disclosed.

Energy Australia, on the other hand, being a state owned corporation is governed under the Energy Services Corporations act 1995 by Board of Directors, Audit Compliance team, Human Resource team, Capital Investment team, Retail team and other sub committees (Annual Report, 2009). According to the IBM, selected as systems assimilation partner, the Board of Directors is responsible for making key decisions regarding the business. These include safety measures, provision of green energy through the Smart-Grid Smart-City technology, reliability and sustainability of energy for all customers, corporate responsibility, and financial performance of the firm (Clean Energy Australia, 2009). The board of directors operates at the top of Energy Australia’s level of management and is responsible for ensuring stability in business through everyday provision of qualified managerial techniques and skills. This role is similar to that of the AGL’s board of directors. Similarly, Energy Australia also operates under codes of conduct and ethics that outline organizational values and ethical standards of behavior. To be integrated in daily operations, these values  must be communicated to all staff members frequently to ensure compliance. Each state corporation, Energy Australia being one of them, is obligated by law to disclose the code of ethics to all staff including those that refer to senior management. 

Future Challenges that AGL and Energy Australia May Face

There exist several business risks that energy firms like AGL and Energy Australia are exposed to. These risks must be minimized, while other independent challenges that vary from one company to another must be taken into account as well.

Challenges Faced by AGL

Given the fact that most of the business operations of AGL are subject to routine regulations by the relevant authorities, compliance costs are a significant part of expenses that the entity must handle. Legislation enacted in Georgia in 1997 that provided for deregulation of gas distribution stated that AGL operations and personnel were to be recognized as substantial expenses. This had an important impact on the financial statement of a company (Annual Report, 2011). This regulation denied the management team a chance to independently make major decisions regarding expansion, and eventually led to a decrease of company’s revenues. For example, the table below indicates the costs that the regulatory authority mandated AGL to pay to remediate the previous MGP operating sites (Annual Report, 2011).

The storage portfolios of AGL include contracts that are paid on delivery of commodity or cash. If the values of these contacts shift in unforeseen direction, then the resulting losses to AGL will be unbearable. This risk exists due to the inflammable nature of the gasses.

The infrastructure necessary for safe distribution of gas requires a colossal amount of capital. This means that any further expansion and improvement projects on the existing infrastructure will require large financial support that the company may not raise from the retained earnings. Funds to finance these projects are, therefore, subject to prevailing economic climate. Failure to secure the company financially would, therefore, have a negative impact on its expansion. This in turn will not allow the company to supply energy to new customers as well as it will slow down overall revenue growth.

Transport and storage risks.

 Distribution and storage of gas carry with it several hazards that range from operating risks like leakages to third party damages and mechanical failures. All might cause significant financial losses to a company. In addition, there is the risk of severe injury to staff, damage to property, and environmental pollution challenges. For AGL to minimize these risks a comprehensive review of protection measures needs to be done, such as reexamining the insurance policies against some of the most serious risks.

Financial risk as a result of climate change.

 Many companies in the word today are paying serious attention to global warming as a result of greenhouse gases. As a result, legislators are coming up with very strict laws that impact the energy industry. These laws result in increased operational costs, decline in demand for natural gas, which is the core product of AGL resources, and impact consumer prices of energy (Annual Report, 2011). With further implementation of environmental laws, companies’ cash flow statements will be impacted to a great extent. This is a challenge Energy Australia is also likely to face in future. This is due to the belief that pollution from burning natural gas and the environmental changes have led to unpredictable and unreliable rainfall distribution, which has direct effects on the generation of hydropower.

Inflation and increased gas costs.

Future operations of companies are influenced by global gas prices, which are not likely to go down in the near future. Given that infrastructural improvements are capital intensive, inflation adversely affects acquisition of new machinery necessary to improve the existing infrastructure. This is because new purchases are at a much higher price because of inflationary forces. There should, therefore, be a constant policy for improvements that would facilitate continual investment in infrastructure. This objective can be achieved through implementation of proper information technology systems.

Challenges Faced by Energy Australia

Inflation and increased gas and electricity costs.

 Due to the global economic recession, companies like Energy Australia that are fully depended on customer consumption may not witness upward trends in revenue collection in the future. Their prospects in the future are also dependent on global gas prices, which are likely to be unstable. Instability in gas prices results from high costs due to inflation, which in its turn eventually leads to reduced customer consumption. Inflation also reduces chances for success of possible expansion programs due to sky rocketed costs of new machinery and equipment necessary to improve infrastructure (Cubria et al, 2011).

Distribution and storage safety risks.

Gas and electricity are commodities associated with very serious safety risks to both Energy Australia employees and their customers. Even after selling the retail gas business to TRUenergy, safety performance of the firm regarding electricity distribution is still below acceptable rate. This is a result of the massive network development carried out by inexperienced staff (Annual Report, 2009).  Leakages from gas distribution lines is another risk that negatively impacts environment and can also lead to contamination of nature  and cause damage to human health (Hinnawi, 1981). Energy Australia’s management team must, therefore, create necessary measures to minimize the challenge in the future to guarantee safety to employees and consumers.

Important Decisions Made by the Two Competitors

AGL reviewed its depreciation rates that amounted to total $ 2 million per annum in 2010. This was as a result of the May 2010 authorization of new depreciation rates by authorities in Tennessee for Chattanooga (Annual Report, 2011). This indicates the negative impact of regulations on profitability declarations.

In March 2011 Energy Australia signed an agreement to sell its retail business to TRUenergy, which is another gas and electricity supplier. This partnership was a strategy that has helped increase the market base to over 2.5 million consumers across Australian Capital Territory, South Australia, Queensland, NSW and Victoria (Cubria et al, 2011). Similarly, in March 2012 Energy Australia signed another five-year partnership with Swimming Australia to bethe new main sponsor of the Australian swim team. This is a part of company’s marketing effort to improve its public relations and become closely associated with all sport fans.  

Fundamental Differences

AGL’s core business is the distribution of natural gas within six states that it operates in. The company is, however, engaged in numerous related and complimentary activities like natural gas asset management, logistic activities, and storage among others. Management of the various ventures is undertaken with a help of four elements which are: distribution operations, retail energy operations, energy investments, and wholesale services.

Energy Australia is a corporation that operates within the energy industry, core business of which is selling natural gas and electricity to clients in Australia. It supplies gas and electricity to clients both in residential homes and in the business places. It is also a distributor of electricity to NSW’s wide electricity network around Australia in Australian Capital Territory, South Australia, Queensland, NSW and Victoria through a partnership deal with TRUenergy Company (Cubria et al, 2011). 

Specific Competitive Advantages of Each Rival

Energy Australia is one of the largest and oldest Australian gas and electricity energy supply Corporation that sells gas and electricity to consumers in many states. Being a government institution, it has competitive advantage over the other competitors since it distributes the largest NSW’s electricity networks (Wallenius, Platt & McKenzie, 2008). According to Annual Report 2009, Energy Australia is moving towards providing green renewable energy and offers 5% discount to their customers who consume both electricity and gas from the same supplier. This move has created positive image about the firm, which is now viewed as a responsible organization with interest in environmental protection and consumer safety.

Strategic Moves Made by one Rival that Might Affect the Other

The major strategy currently adopted by AGL is the purchase of Nicor in December 2011. This strategy has increased the market share of the company since all the former Nicor customer base is fully added to AGL (Annual Report, 2011).  This gives AGL a competitive advantage over other competitors. On the contrary, Energy Australia sold its retail business to TRUenergy but maintained the wholesale business. This has equally expanded its customer base to over 2.5 million in one year.

Company Success Stories

The strategy used by Energy Australia to sell its retail business in March 2011 to TRUenegy brought success to the company since it managed to increase its customer base to more than 2.5 million, which is nearly 100% increase in number of customers within one year. The company has also been showing the positive trend in revenues and profitability owing to its dominance of the Australian energy market (Cubria et al, 2011). Similarly, AGL has also managed to expand its share due to the recent acquisition of Nicor in December 2011(Annual Report, 2011).  This is expected to inject more revenues into the company. The company’s financial reports have also been showing this positive trend over the years.

Comparison of Performance Statistics

In 2011, AGL Resources Inc. achieved a net income of $172 million, which is $2.14 per basic share and $2.12 per diluted share. This illustrated a drop from 2010 income that was $234 million, making $3.02 and $3.00 per basic share and diluted share respectively, because a substantial part of revenue was used for the acquisition of Nicor. When expenses related to Nicor merger in December 9, 2011 totaling to $64 million were excluded, the new adjusted EPS reached 2.92 USD per diluted share in 2011. The GAAP and adjusted figures for the full year comprised 22 days of contribution received from Nicor after acquisition. AGL natural gas serves approximately 4.5 million, which is the largest share in a market (Annual Report, 2011).

Energy Australia in 2009/10 achieved earnings of $913 million before interest and tax from revenues of $3.98 billion. This was higher than the earnings before interest and tax (EBIt) recorded in 2008/09 which was $596 million. This was, however, well above the target. The reports of the two companies indicate the upward trend in their financial performance.

Conclusion

AGL Resources and Energy Australia energy companies operate in different geographical areas with slightly different competitive environments. Unlike AGL resources, Energy Australia is a state corporation operating under the Energy Services corporations Act 1995 and the State Owned Corporations Act 1989, thus enjoying government support. The core product for AGL is natural gas while Energy Australia supplies both natural gas and electricity (Annual Report, 2011). There is a number of differences and similarities in the operation of the two companies relating to governance styles, future challenges that the two energy firms may face, important decisions made, competitive advantages enjoyed over their rivals, strategic decisions made, the successes, and the general performance of the companies.