We are initiating coverage on AGL Resources Inc. (GAS) with an Underperform recommendation and a target price of $39. We expect shareholder sentiment towards the company to remain lukewarm, considering its investment in higher-risk unregulated operations, ongoing regulatory uncertainties and the challenging economic environment.

AGL had warned that its earnings will suffer in 2011 due to lower results at the wholesale segment. Additionally, the inclusion of the shipping operations (post Nicor acquisition) has left AGL with a weak business, thereby heightening its risk profile.

Considering these factors, we see little reason for investors to own the stock and, therefore, we initiate the company with an Underperform recommendation. Our $39 price objective reflects a 2012 P/E multiple of 12.5x.

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