Liquidity and Capital Resources

Overview Our primary sources of liquidity are cash provided by operating activities, short-term borrowings under our commercial paper program (which is supported by our Credit Facility) and borrowings under subsidiary lines of credit. Our capital market strategy has continued to focus on maintaining a strong consolidated statement of financial position; ensuring ample cash resources and daily liquidity; accessing capital markets at favorable times as needed; managing critical business risks; and maintaining a balanced capital structure through the appropriate issuance of equity or long-term debt securities.

Our issuance of various securities, including long-termand shortterm debt, is subject to customary approval, or review by state and federal regulatory bodies including state public service commissions, the SEC and the FERC. Furthermore, a substantial portion of our consolidated assets, earnings and cash flow is derived from the operation of our regulated utility subsidiaries, whose legal authority to pay dividends ormake other distributions to us is subject to regulation.

We believe the amounts available to us under our Credit Facility and the issuance of debt and equity securities together with cash provided by operating activities will continue to allow us to meet our needs for working capital, pension contributions, construction expenditures, anticipated debt redemptions, interest payments on debt obligations, dividend payments, common share repurchases and other cash needs through the next several years. Nevertheless, our ability to satisfy our working capital requirements and debt service obligations, or fund planned capital expenditures, will substantially depend upon our future operating performance (which will be affected by prevailing economic conditions), and financial, business and other factors, some of which are beyond our control.

We will continue to evaluate our need to increase available liquidity based on our view of working capital requirements, including the impact of changes in natural gas prices, liquidity requirements established by rating agencies and other factors. See Item 1A, “Risk Factors,” for additional information on items that could impact our liquidity and capital resource requirements.

The following table provides a summary of our operating, investing and financing activities for the last three years.

In millions
2009
2008
2007
Net cash provided by (used in):
Operating activities
$ 592
$ 227
$ 377
Investing activities
(476)
(372)
(253)
Financing activities
(106)
142
(122)
Net increase (decrease) in cash and cash equivalents
$ 10
$ (3)
$ 2


Cash Flow from Operating Activities We prepare our statement of cash flows using the indirect method. Under this method, we reconcile net income to cash flows from operating activities by adjusting net income for those items that impact net income but may not result in actual cash receipts or payments during the period. These reconciling items include depreciation and amortization, changes in derivative financial instrument assets and liabilities, deferred income taxes and changes in the consolidated statements of financial position for working capital from the beginning to the end of the period.

Our operations are seasonal in nature, with the business depending to a great extent on the first and fourth quarters of each year. As a result of this seasonality, our natural gas inventories are usually at their highest levels in November each year, and largely are drawn down in the heating season, providing a source of cash as this asset is used to satisfy winter sales demand. The injections in and price fluctuations of our natural gas inventories, which meet customer demand during the winter heating season, can cause significant variations in our cash flow from operations from period to period and are reflected in changes to our working capital.

Year-over-year changes in our operating cash flows are attributable primarily to working capital changes within our distribution operations, retail energy operations and wholesale services segments resulting from the impact of weather, the price of natural gas, the timing of customer collections, payments for natural gas purchases and deferred gas cost recoveries as our business has grown and prices for natural gas have increased. The increase or decrease in the price of natural gas directly impacts the cost of gas stored in inventory.

2009 compared to 2008 In 2009, our net cash flow provided fromoperating activities was $592million, an increase of $365million or 161% from 2008. The primary contributor to the recovery of working capital during 2009 was significantly lower natural gas commodity prices as compared to 2008. During 2008, the cost of natural gas increased significantly during the natural gas storage injection season. This resulted in a higher cost of inventories in 2008 as compared to 2009, and consequently higher customer bills and accounts receivable at the end of 2008. The higher receivable balances and inventory costs were billed to and/or collected from customers during 2009, which resulted in a $173 million increase in cash from the collection of our natural gas receivables and a $103 million increase in cash from our inventory withdrawals.

As a result of the lower natural gas prices during 2009, we used less cash as we refilled our natural gas inventories. The lower natural gas prices and associated inventory costs reduced customer bills at the end of 2009, allowing us to reduce our working capital needs. Also contributing to the higher operating cash flows was the return of cash collateral requirements posted during 2008 due to unrealized hedge losses resulting from the dramatic decline in natural gas prices during the second half of 2008 and into 2009. Cash collateral requirements decreased $200 million for our derivative financial instrument activities at Sequent and SouthStar due to the change in hedge values as forward NYMEX curve prices shifted downward in 2009 and as positions settled.

2008 compared to 2007 In 2008, our net cash flow provided from operating activities was $227 million, a decrease of $150 millionor 40%from 2007. This decrease was primarily a result of increased working capital requirements of $104 million, principally driven by increased cash used for inventory purchases which were impacted by rising natural gas prices during the first half of 2008.

Cash Flow from Investing Activities Our net cash used in investing activities consisted primarily of PP&E expenditures. The majority of our PP&E expenditures are within our distribution operations segment, which includes our investments in new construction and infrastructure improvements.

Our estimated PP&E expenditures in 2010 and actual PP&E expenditures in 2009, 2008 and 2007 are shown within the following categories and are presented in the table below.

  • Base business – new construction and infrastructure improvements at our distribution operations segment
  • Natural gas storage – salt-dome cavern expansions at Golden Triangle Storage and Jefferson Island
  • Hampton Roads – Virginia Natural Gas’ pipeline project, which connects its northern and southern systems
  • Regulatory infrastructure programs – Programs that update or expand our distribution systems and liquefied natural gas facilities to improve system reliability and meet operational flexibility and growth. These programs include the pipeline replacement program and STRIDE at Atlanta Gas Light and Elizabethtown Gas’ utility infrastructure enhancements program.
  • Magnolia project – pipelines which diversify our sources of natural gas by connecting our Georgia service territory to the Elba Island LNG terminal
  • Other – primarily includes information technology, building and leasehold improvements and AGL Networks’ telecommunication expenditures
     
    In millions
    2007
    2008
    2009
    2010(1)
    Base business
    $135
    $131
    $132
    $155
    Natural gas storage
    16
    64
    95
    98
    Hampton Roads
    5
    48
    93
    Regulatory infrastructure programs
    41
    70
    76
    155
    Magnolia project
    43
    Other
    62
    59
    37
    61
    Total
    $259
    $372
    $476
    $469

(1) Estimated

In 2009, our PP&E expenditures were $104 million or 28% higher than in 2008. This was primarily due to $43 million expended for the completed Magnolia project, $45 million in increased spending for the completed Hampton Roads pipeline project and an increase in our natural gas storage project expenditures of $31 million as we continued construction of our Golden Triangle Storage facility. This was largely offset by decreased expenditures of $22 million for the other category, primarily on information technology and building and leasehold improvements.

In 2008, our PP&E expenditures were $113 million or 44% higher than in 2007. This was primarily due to an increase in our natural gas storage project expenditures of $48 million as we began construction of our Golden Triangle Storage facility, $43 million in increased expenditures for the Hampton Roads project and increased expenditures of $29 million for the pipeline replacement program at Atlanta Gas Light as we replaced larger-diameter pipe in more densely populated areas. This was offset by decreased expenditures of $7 million on our base business and other projects.

Our estimated expenditures for 2010 include discretionary spending for capital projects principally within the base business, natural gas storage and other categories. We continually evaluate whether to proceed with these projects, reviewing them in relation to factors including our authorized returns on rate base, other returns on invested capital for projects of a similar nature, capital structure and credit ratings, among others. We will make adjustments to these discretionary expenditures as necessary based upon these factors.

Cash Flow from Financing Activities Our capitalization and financing strategy is intended to ensure that we are properly capitalized with the appropriate mix of equity and debt securities. This strategy includes active management of the percentage of total debt relative to total capitalization, appropriate mix of debt with fixed to floating interest rates (our variable debt target is 20% to 45% of total debt), as well as the term and interest rate profile of our debt securities.

As of December 31, 2009, our variable-rate debt was $762 million or 30% of our total debt, compared to $1,026 million or 40% as of December 31, 2008. This decrease was principally due to lower natural gas prices during the 2009 inventory injection season and thus requiring lower working capital needs, as well as our issuance of $300 million in senior notes in 2009. As of December 31, 2009, our Credit Facility and commercial paper borrowings were $601 million or 22% lower than the same time last year, primarily a result of higher working capital requirements in 2008, driven by higher natural gas prices during the 2008 inventory injection season. For more information on our debt, see Note 6.

Our cash flows from financing activities reflect a net use of cash of $106 million in 2009 as compared to a net source of cash of $142 million in 2008. This change primarily reflects the repayment in 2009 of short-term debt outstanding at the end of 2008 coupled with our net borrowing last year to meet working capital needs due to higher natural gas prices.

Credit Ratings We strive to maintain or improve our credit ratings on our debt to manage our existing financing cost and enhance our ability to raise additional capital on favorable terms. Factors we consider important in assessing our credit ratings include our statements of financial position leverage, capital spending, earnings, cash flow generation, available liquidity and overall business risks. We do not have any trigger events in our debt instruments that are tied to changes in our specified credit ratings or our stock price and have not entered into any agreements that would require us to issue equity based on credit ratings or other trigger events. The following table summarizes our credit ratings as of December 31, 2009.

     
      S&P Moody’s Fitch
    Corporate rating A    
    Commercial paper A-2 P-2 F2
    Senior unsecured BBB+ Baa1 A
    Ratings outlook Stable Stable Stable


A credit rating is not a recommendation to buy, sell or hold securities. The highest investment grade credit rating for S&P is AAA, Moody’s is Aaa and Fitch is AAA. Our credit ratings may be subject to revision or withdrawal at any time by the assigning rating organization, and each rating should be evaluated independently of any other rating. We cannot ensure that a rating will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances so warrant. If the rating agencies downgrade our ratings, particularly below investment grade, it may significantly limit our access to the commercial paper market and our borrowing costs would increase. In addition, we would likely be required to pay a higher interest rate in future financings, and our potential pool of investors and funding sources would decrease.

Default Events Our debt instruments and other financial obligations include provisions that, if not complied with, could require early payment, additional collateral support or similar actions. Our most important default events include maintaining covenants with respect to amaximumleverage ratio, insolvency events, nonpayment of scheduled principal or interest payments, and acceleration of other financial obligations and change of control provisions.

Our Credit Facility has financial covenants that require us to maintain a ratio of total debt to total capitalization of no greater than 70%; however, our goal is to maintain this ratio at levels between 50% and 60%. Our ratio of total debt to total capitalization calculation contained in our debt covenant includes standby letters of credit, surety bonds and the exclusion of other comprehensive income pension adjustments. Our debt-to-equity calculation, as defined by our Credit Facility, was 57% at December 31, 2009 and 59%at December 31, 2008. These amounts are within our required and targeted ranges. The components of our capital structure, as calculated from our consolidated statements of financial position, as of the dates indicated, are provided in the following table.

    In millions
    Dec. 31, 2009
    Dec. 31, 2008
    Short-term debt
    $ 602
    14%
    $ 866
    20%
    Long-term debt
    1,974
    45
    1,675
    40
    Total debt
    2,576
    59
    2,541
    60
    Equity
    1,819
    41
    1,684
    40
    Total capitalization
    $4,395
    100%
    $4,225
    100%


We currently comply with all existing debt provisions and covenants. We believe that accomplishing our capitalization objectives and maintaining sufficient cash flow are necessary to maintain our investment-grade credit ratings and to allow us access to capital at reasonable costs.

Short-term Debt Our short-term debt is composed of borrowings and payments under our Credit Facility and commercial paper program, lines of credit and payments of the current portion of our capital leases. Our short-term debt financing generally increases between June and December because our payments for natural gas and pipeline capacity are generally made to suppliers prior to the collection of accounts receivable from our customers. We typically reduce short-term debt balances in the spring because a significant portion of our current assets are converted into cash at the end of the winter heating season.

Our commercial paper borrowings are supported by our $1 billion Credit Facility, which expires in August 2011. Our supplemental $140 million Credit Facility expired in September 2009. We have the option to request an increase in the aggregate principal amount available for borrowing under the $1 billion Credit Facility to $1.25 billion on not more than three occasions during each calendar year.

We expect to begin the process of renewing our Credit Facility during 2010. Because of the current conditions in the credit markets, we are anticipating that the costs of a renewed Credit Facility will be significantly higher and that the term could be significantly shorter than the 5-year term of the current facility. These market conditions could also result in the need for us to increase the number of financial institution participants to provide a similar amount of financial commitments as our existing Credit Facility. As part of our renewal process we will consider whether the facility should increase or decrease from its current capacity of $1 billion.

SouthStar has a $75 million line of credit which is used for its working capital and general corporate needs. Additionally, Sequent has a $5 million line of credit that bears interest at the London interbank offered rate (LIBOR) rate plus 3.0%. Sequent’s line of credit is used solely for the posting of margin deposits for NYMEX transactions and is unconditionally guaranteed by us.

The lenders under our Credit Facility and lines of credit are major financial institutions with committed balances and investment grade credit ratings as of December 31, 2009 as indicated in the following table. Investment grade, in the context of bond ratings, is the rating level above which institutional investors are authorized to invest (a bond judged likely enough to meet payment obligations.

    Lender rating
    Amount committed
    (S&P / Moody’s)
    (in millions)
    % of total
    AAA / Aaa
    $ —
    AA / Aa
    328
    31%
    A / A
    582
    54%
    BBB / Baa
    165
    15%
    Total
    $1,075
    100%


Based on current credit market conditions, it is possible that one or more lending commitments could be unavailable to us if the lender defaulted due to lack of funds or insolvency. However, based on our current assessment of our lenders’ creditworthiness, we believe the risk of lender default is minimal.

As of December 31, 2009 we had no outstanding borrowings under our Credit Facility. As of December 31, 2008, we had $500 million of outstanding borrowings under the Credit Facility.We normally access the commercial paper markets to finance our working capital needs. However, during the third and fourth quarters of 2008, adverse developments in the global financial and credit markets made it more difficult for us to access the commercial paper market at reasonable rates. As a result, at times we relied instead upon our Credit Facility for our liquidity and capital resource needs. The credit markets improved in 2009, allowing us to resume our commercial paper borrowings.

Increasing natural gas commodity prices can have a significant impact on our liquidity and working capital requirements. Based on current natural gas prices and our expected purchases during the upcoming injection season, a $1 increase per Mcf in natural gas prices could result in an additional $50 to $70 million of working capital requirements during the peak of the heating season based upon our current injection plan. This range is sensitive to the timing of storage injections and withdrawals, collateral requirements and our portfolio position.

Long-term Debt Our long-term debt matures more than one year from the statements of financial position date and consists of medium-term notes, senior notes, gas facility revenue bonds, and capital leases. The following represents our long-term debt activity over the last three years.

Gas Facility Revenue Bonds

  • In June 2008, we refinanced $122 million of our gas facility revenue bonds, $47 million due October 2022, $20 million due October 2024 and $55 million due June 2032. There was no change to the maturity dates of these bonds. The $55 million bond had an interest rate that resets daily and the $47 million and $20 million bonds had a 35-day auction period where the interest rate adjusted every 35 days. Both the bonds with principal amounts of $47 million and $55 million now have interest rates that reset daily and the bond with a principal amount of $20 million has an interest rate that resets weekly. The interest rates at December 31, 2009, ranged from 0.2% to 0.4%.
  • In September 2008, we refinanced $39 million of our gas facility revenue bonds due June 2026. The bonds had a 35-day auction period where the interest rate adjusted every 35 days now they have interest rates that reset daily. The maturity date of these bonds remains June 2026. The interest rate at December 31, 2009, was 0.2%.

    Senior notes
  • In December 2007, AGL Capital issued $125 million of 6.375% senior notes. The proceeds of the note issuances, equal to approximately $123 million, were used to pay down short-term indebtedness incurred under our commercial paper program.
  • In August 2009, AGL Capital issued $300 million of 10-year senior notes at an interest rate of 5.25%. The net proceeds from the offering were approximately $297 million.We used the net proceeds from the sale of the senior notes to repay a portion of our short-term debt.

    Notes payable to Trusts
  • In July 2007, we used the proceeds fromthe sale of commercial paper to pay AGL Capital Trust I the $75million principal amount of 8.17% junior subordinated debentures plus a $3 million premium for early redemption of the junior subordinated debentures, and to pay a $2 million note representing our common securities interest in AGL Capital Trust I.

    Medium-term notes
  • In January 2007, we used proceeds from the sale of commercial paper to redeem $11 million of 7% medium-term notes previously scheduled to mature in January 2015.

Noncontrolling Interest A cash distribution for SouthStar’s dividend distributions to Piedmont of $20 million in 2009, $30 million in 2008 and $23 million in 2007 was recorded in our consolidated statement of cash flows as a financing activity.

Dividends on Common Stock Our common stock dividend payments were $127 million in 2009, $124 million in 2008, and $123million in 2007. The increases were generally the result of annual dividend increases of $0.04 per share for each of the last two years. Our average dividend yield over the last three years was 4.8%, which is slightly higher than the average 4.0% dividend yield of our peer companies. Our dividend payout ratio was 60% in 2009, 59% in 2008 and 60%in 2007.We expect that our dividend payout ratio will remain consistent with the dividend payout ratios of our peer companies, which is currently an average of 63%. For information about restrictions on our ability to pay dividends on our common stock, see Note 1 “Accounting Policies and Methods of Application.”

Treasury Shares In February 2006, our Board of Directors authorized a plan to purchase up to 8 million shares of our outstanding common stock over a five-year period. These purchases are intended principally to offset share issuances under our employee and non-employee director incentive compensation plans and our dividend reinvestment and stock purchase plans. Stock purchases under this program may be made in the open market or in private transactions at times and in amounts that we deem appropriate. There is no guarantee as to the exact number of common shares that we will purchase, and we can terminate or limit the program at any time.

For the years ended December 31, 2009 and 2008, we did not purchase shares of our common stock. During the same period in 2007, we purchased approximately 2 million shares of our common stock at a weighted average cost of $39.56 per common share and an aggregate cost of $80 million.We currently anticipate holding the purchased shares as treasury shares. For more information on our common share repurchases see Item 5 “Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”

Shelf Registration In August 2007, we filed a shelf registration with the SEC, which expires in August 2010. The debt securities and related guarantees will be issued by AGL Capital under an indenture dated as of February 20, 2001, as supplemented and modified, as necessary, among AGL Capital, AGL Resources and The Bank of New York Trust Company, N.A., as trustee. The indenture provides for the issuance from time to time of debt securities in an unlimited dollar amount and an unlimited number of series, subject to our Credit Facility financial covenants related to total debt to total capitalization. The debt securities will be guaranteed by AGL Resources. In 2010, we expect to file a new shelf registration statement with the SEC that would expire in 2013.

Contractual Obligations and Commitments We have incurred various contractual obligations and financial commitments in the normal course of our operating and financing activities that are reasonably likely to have a material effect on liquidity or the availability of requirements for capital resources. Contractual obligations include future cash payments required under existing contractual arrangements, such as debt and lease agreements.

These obligations may result from both general financing activities and from commercial arrangements that are directly supported by related revenue-producing activities. Contingent financial commitments represent obligations that become payable only if certain predefined events occur, such as financial guarantees, and include the nature of the guarantee and the maximum potential amount of future payments that could be required of us as the guarantor. As we do for other subsidiaries, AGL Resources provides guarantees to certain gas suppliers for SouthStar in support of payment obligations. The following table illustrates our expected future contractual obligation payments such as debt and lease agreements, and commitments and contingencies as of December 31, 2009.

     
    In millions
    Total
    2010
    2011 & 2012
    2013 & 2014
    2015 & thereafter
    Recorded contractual obligations:
    Long-term debt
    $1,974
    $ —
    $318
    $318
    $1,431
    Short-term debt
    602
    602
    Pipeline replacement program costs(1)
    210
    55
    111
    44
    Environmental remediation liabilities(1)
    144
    25
    54
    38
    27
    Total
    $2,930
    $682
    $483
    $307
    $1,458
    Unrecorded contractual obligations and commitments:(2)
    Pipeline charges, storage capacity and gas supply(3)
    $2,049
    $510
    $712
    $354
    $ 473
    Interest charges(4)
    1,014
    109
    176
    156
    573
    Operating leases
    115
    28
    40
    14
    33
    Asset management agreements(5)
    37
    23
    14
    Pension contributions
    21
    21
    Standby letters of credit, performance/surety bonds
    19
    18
    1
    Total
    $3,255
    $709
    $943
    $524
    $1,079

(1) Includes charges recoverable through rate rider mechanisms.
(2) In accordance with GAAP, these items are not reflected in our consolidated statements of financial position.
(3)Charges recoverable through a natural gas cost recovery mechanism or alternatively billed to Marketers, and includes demand charges associated with Sequent. The gas supply amount includes SouthStar gas commodity purchase commitments of 16 Bcf at floating gas prices calculated using forward natural gas prices as of December 31, 2009, and is valued at $97 million.
(4) Floating rate debt is based on the interest rate as of December 31, 2009, and the maturity of the underlying debt instrument. As of December 31, 2009, we have $41 million of accrued interest on our consolidated statements of financial position that will be paid in 2010.
(5)Represent fixed-fee minimum payments for Sequent’s asset management agreements.


Operating leases. We have certain operating leases with provisions for step rent or escalation payments and certain lease concessions.We account for these leases by recognizing the future minimum lease payments on a straight-line basis over the respective minimum lease terms, in accordance with authoritative guidance related to leases. However, this accounting treatment does not affect the future annual operating lease cash obligations as shown herein. We expect to fund these obligations with cash flow from operating and financing activities.

Standby letters of credit and performance/surety bonds. We also have incurred various financial commitments in the normal course of business. Contingent financial commitments represent obligations that become payable only if certain predefined events occur, such as financial guarantees, and include the nature of the guarantee and the maximum potential amount of future payments that could be required of us as the guarantor. We would expect to fund these contingent financial commitments with operating and financing cash flows.

Pension and postretirement obligations. Generally, our funding policy is to contribute annually an amount that will at least equal the minimum amount required to comply with the Pension Protection Act. Additionally, we calculate any required pension contributions using the projected unit credit cost method. However, additional voluntary contributions are made from time to time as considered necessary. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. The contributions represent the portion of the postretirement costs we are responsible for under the terms of our plan and minimum funding required by state regulatory commissions.

The state regulatory commissions have phase-ins that defer a portion of the postretirement benefit expense for future recovery.We recorded a regulatory asset for these future recoveries of $10 million as of December 31, 2009 and $11 million as of December 31, 2008. In addition, we recorded a regulatory liability of $5 million as of December 31, 2009 and $5 million as of December 31, 2008 for our expected expenses under the AGL Postretirement Plan. See Note 3 “Employee Benefit Plans,” for additional information about our pension and postretirement plans.

In 2009, we contributed $24 million to our qualified pension plans. In 2008, we did not make a contribution, as one was not required. Based on the current funding status of the plans, we would be required to make a minimum contribution to the plans of approximately $21 million in 2010. We are planning to make additional contributions in 2010 up to $17 million, for a total of up to $38 million, in order to preserve the current level of benefits under the plans and in accordance with the funding requirements of the Pension Protection Act.