Results of Operations

We generate nearly all our operating revenues through the sale, distribution and storage of natural gas. We include in our consolidated revenues an estimate of revenues from natural gas distributed, but not yet billed, to residential and commercial customers from the latest meter reading date to the end of the reporting period. No individual customer or industry accounts for a significant portion of our revenues. The following table provides more information regarding the components of our operating revenues.

In millions	2009	2008	2007
Residential	$1,091	$1,194	$1,143
Commercial	467	598	500
Transportation	378	459	401
Industrial	185	322	250
Other	196	227	200
Total operating revenues	$2,317	$2,800	$2,494

We evaluate segment performance using the measures of operating margin and EBIT, which include the effects of corporate expense allocations. Our operating margin and EBIT are not measures that are considered to be calculated in accordance with GAAP. Operating margin is a non-GAAP measure that is calculated as operating revenues minus cost of gas, which excludes operation and maintenance expense, depreciation and amortization, taxes other than income taxes, and the gain or loss on the sale of our assets;

MD&A

these items are included in our calculation of operating income as reflected in our consolidated statements of income. EBIT is also a non-GAAP measure that includes operating income, other income and expenses. Items that we do not include in EBIT are financing costs, including interest and debt expense and income taxes, each of which we evaluate on a consolidated level.

We believe operating margin is a better indicator than operating revenues for the contribution resulting from customer growth in our distribution operations segment since the cost of gas can vary significantly and is generally billed directly to our customers. We also consider operating margin to be a better indicator in our retail energy operations, wholesale services and energy investments segments since it is a directmeasure of operatingmargin before overhead costs.

We believe EBIT is a useful measurement of our operating segments’ performance because it provides information that can be used to evaluate the effectiveness of our businesses from an operational perspective, exclusive of the costs to finance those activities and exclusive of income taxes, neither of which is directly relevant to the efficiency of those operations. You should not consider operating margin or EBIT an alternative to, or a more meaningful indicator of, our operating performance than operating income or net income attributable to AGL Resources Inc. as determined in accordance with GAAP. In addition, our operating margin and EBIT measures may not be comparable to similarly titled measures of other companies.

The table below sets forth a reconciliation of operating margin to operating income and EBIT to earnings before income taxes and net income, together with other consolidated financial information for the last three years.

In millions	2009	2008	2007
Operating revenues	$2,317	$2,800	$2,494
Cost of gas	1,142	1,654	1,369
Operating margin	1,175	1,146	1,125
Operating expenses	699	668	636
Operating income	476	478	489
Other income	9	6	4
EBIT	485	484	493
Interest expense	101	115	125
Earnings before income taxes	384	369	368
Income tax expense	135	132	127
Net income	249	237	241
Less net income attributable to the noncontrolling interest	27	20	30
Net income attributable to AGL Resources Inc.	$ 222	$ 217	$ 211

Over the last three years, on average, we have derived 67% of our operating segments’ EBIT from our regulated natural gas distribution business whose rates are approved by state regulatory commissions. We derived our remaining operating segment’s EBIT for the last three years principally from businesses that are complementary to our natural gas distribution business. These businesses include the sale of natural gas to retail customers, natural gas asset management and the operation of high-deliverability natural gas underground storage as ancillary activities to our regulated utility franchises.

The following chart provides each operating segment’s percentage contribution to



In 2009 our net income attributable to AGL Resources Inc. increased by $5 million from the prior year primarily due to decreased interest expense and increased EBIT from retail energy operations largely due to higher operating margin. This was partly offset by decreased EBIT at distribution operations, wholesale services and energy investments. The decrease in EBIT at distribution operations was primarily due to increased operating expenses offset by increased operating margin. The decrease in EBIT at wholesale services and energy investments was the result of decreased operating margins and increased operating expenses.

In 2008 our net income attributable to AGL Resources Inc. increased by $6 million from the prior year primarily due to decreased interest expenses and increased EBIT from wholesale services and energy investments largely due to higher operating margin offset by higher operating expenses. This was offset by decreased EBIT at distribution operations and retail energy operations due to lower operating margins at both operating segments and higher operating expenses at distribution operations.

Interest expense Our decreased interest expense over the last two years was primarily due to lower short-term interest rates partially offset by higher average debt. The following table provides additional detail on interest expense for the last three years and the primary items that affect year-over-year change.

In millions	2009	2008	2007
Interest expense	$ 101	$ 115	$ 125
Average debt outstanding(1)	$2,239	$2,156	$1,967
Average rate(2)	4.5%	5.3%	6.4%

⁽¹⁾Daily average of all outstanding debt.
⁽²⁾ Excluding $3 million premium paid for early redemption of debt, average rate in 2007 would have been 6.2%.

The difficult economic conditions of the current recession have resulted in low U.S. Treasury yields and corresponding indexes on short-term borrowings. These factors have favorably impacted our earnings in 2009 and 2008 through reduced short-term rates that we paid on our commercial paper borrowings. For more information on the impact that interest rate fluctuations have on our variable- rate debt, see “Interest Rate Risk” in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk.”

Income tax expense Our income tax expense in 2009 increased by $3 million or 2% compared to 2008, and increased by $5 million or 4% in 2008 compared to 2007. These increases were primarily due to higher consolidated earnings. Our effective tax rate was 37.8% in 2009 and 2008 and was 37.6% in 2007.

As a result of our adoption of new authoritative guidance related to consolidations, income tax expense and our effective tax rate are determined from earnings before income taxes less net income attributable to the noncontrolling interest. For more information on our income taxes, including a reconciliation between the statutory federal income tax rate and the effective rate, see Note 8.

Operating metrics Selected weather, customer and volume metrics for 2009, 2008 and 2007, which we consider to be some of the key performance indicators for our operating segments, are presented in the following tables.We measure the effects of weather on our business through heating degree days. Generally, increased heating degree days result in greater demand for gas on our distribution systems. However, extended and unusually mild weather during the heating season can have a significant negative impact on demand for natural gas. Our customer metrics highlight the average number of customers to which we provide services. This number of customers can be impacted by natural gas prices, economic conditions and competition from alternative fuels. Volume metrics for distribution operations and retail energy operations present the effects of weather and our customers’ demand for natural gas. Wholesale services’ daily physical sales represent the daily average natural gas volumes sold to its customers.

MD&A

Weather

	Year ended December 31,				2009 vs. 2008 colder (warmer)	2008 vs. 2007 colderw (warmer)	2009 vs. normal colder (warmer)	2008 vs. normal colder (warmer)	2007 vs. normal colder (warmer)
Heating degree days (1)	Normal	2009	2008	2007
Georgia	2,648	2,802	2,746	2,366	2%	16%	6%	4%	(11)%
New Jersey	4,692	4,751	4,646	4,777	2%	(3)%	1%	(1)%	2%
Virginia	3,183	3,312	3,031	3,077	9%	(1)%	4%	(5)%	(3)%
Florida	513	548	416	326	32%	28%	7%	(19)%	(36)%
Tennessee	3,036	3,154	3,179	2,722	(1)%	17%	4%	5%	(10)%
Maryland	4,730	4,780	4,519	4,621	6%	(2)%	1%	(4)%	(2)%

	Quarter ended December 31,				2009 vs. 2008 colder (warmer)	2008 vs. 2007 colderw (warmer)	2009 vs. normal colder (warmer)	2008 vs. normal colder (warmer)	2007 vs. normal colder (warmer)
Heating degree days (1)	Normal	2009	2008	2007
Georgia	1,048	1,181	1,092	877	8%	25%	13%	4%	(16)%
New Jersey	1,633	1,614	1,728	1,605	(7)%	8%	(1)%	6%	(2)%
Virginia	1,100	1,065	1,151	965	(7)%	19%	(3)%	5%	(12)%
Florida	164	158	201	45	(21)%	347%	(4)%	23%	(73)%
Tennessee	1,212	1,283	1,291	969	(1)%	33%	6%	7%	(20)%
Maryland	1,678	1,662	1,691	1,558	(2)%	9%	(1)%	1%	(7)%

⁽¹⁾Obtained from the National Oceanic and Atmospheric Administration, National Climatic Data Center. Normal represents the ten-year averages from January 2000 to December 2009.

Customers

	Year ended December 31,			2009 vs. 2008 % change	2008 vs. 2007 % change
	2009	2008	2007
Distribution Operations
Average end-use customers (in thousands)
Atlanta Gas Light	1,549	1,557	1,559	(0.5)%	(0.1)%
Elizabethtown Gas	273	273	272	—	0.4
Virginia Natural Gas	273	271	269	0.7	0.7
Florida City Gas	103	104	104	(1.0)	—
Chattanooga Gas	62	62	61	—	1.6
Elkton Gas	6	6	6	—	—
Total	2,266	2,273	2,271	(0.3)%	0.1%
Operation and maintenance expenses per customer	$155	$145	$145	7%	—
EBIT per customer	$144	$145	$149	(1)%	(3)%
Retail Energy Operations
Average customers (in thousands)
Georgia	504	526	540	(4)%	(3)%
Ohio and Florida(1)	103	122	41	(16)%	198%
Total	607	648	581	(6)%	12%
Market share in Georgia	33%	34%	35%	(3)%	(3)%

Volume

	Year ended December 31,			2009 vs. 2008 % change	2008 vs. 2007 % change
In billion cubic feet (Bcf)	2009	2008	2007
Distribution Operations
Firm	218	219	211	—	4%
Interruptible	98	104	108	(6)%	(4)
Total	316	323	319	(2)%	1%
Retail Energy Operations
Georgia firm	40	41	39	(2)%	5%
Ohio and Florida	11	7	5	57%	40%
Wholesale Services
Daily physical sales (Bcf / day)	2.96	2.60	2.35	14%	11%

⁽¹⁾ A portion of the Ohio customers represents customer equivalents, which are computed by the actual delivered volumes divided by the expected average customer usage.

Segment information Operating margin, operating expenses and EBIT information for each of our segments are contained in the following tables for the last three years.

In millions	Operating margin (1)	Operating expenses	EBIT (1)
2009
Distribution operations	$ 836	$519	$326
Retail energy operations	181	76	105
Wholesale services	111	64	47
Energy investments	46	33	12
Corporate (2)	1	7	(5)
Consolidated	$1,175	$699	$485
2008
Distribution operations	$ 818	$493	$329
Retail energy operations	149	73	77
Wholesale services	122	62	60
Energy investments	50	31	19
Corporate (2)	7	9	(1)
Consolidated	$1,146	$668	$484
2007
Distribution operations	$ 820	$485	$338
Retail energy operations	188	75	113
Wholesale services	77	43	34
Energy investments	40	25	15
Corporate (2)	—	8	(7)
Consolidated	$1,125	$636	$493

⁽¹⁾ These are non-GAAP measurements. A reconciliation of operating margin to operating income and EBIT to earnings before income taxes and net income is contained in “Results of Operations” herein.
⁽²⁾ Includes intercompany eliminations.

Distribution Operations

In millions	2009	2008
EBIT – prior year Operating margin	$329	$338
Increased margins from gas storage carrying amounts at Atlanta Gas Light	8	—
Higher pipeline replacement program revenues at Atlanta Gas Light	6	6
Decreased customer growth and usage	—	(4)
Increased revenues from the Hampton Roads and Magnolia pipeline projects	2	—
Other	2	(4)
Increase (decrease) in operating margin	18	(2)
Operating expenses
Increased (decreased) pension expenses	12	(5)
Increased payroll and incentive expenses	12	11
Increased depreciation expenses	6	6
(Decreased) increased bad debt expenses	(1)	5
(Decreased) increased fleet fuel costs	(3)	2
Other, overall net due to outside services, travel and entertainment and customer service expenses	2	(6)
Increase in operating expenses	26	8
Increase in other income, primarily from regulatory allowance for funds used during construction of Hampton Roads pipeline project	5	1
EBIT – current year	$326	$329

Retail Energy Operations

In millions	2009	2008
EBIT – prior year Operating margin	$ 77	$113
Change in LOCOM adjustment	18	(24)
Increased (decreased) contributions from the management and optimization of storage and transportation assets, and from retail price spreads	15	(9)
Change in retail pricing plan mix and decrease in average number of customers	(13)	(8)
Increased operating margins for Ohio, Florida and interruptible customers	5	2
Increased average customer usage and weather	4	1
Other	4	(1)
Increase (decrease) in operating margin	32	(39)
Operating expenses and other income
(Decreased) increased bad debt expenses	(1)	3
Decreased depreciation expenses	—	(1)
Increased (decreased) marketing, compensation, customer care and other costs	4	(4)
Increase (decrease) in operating expenses	3	(2)
Other (expense) income	(1)	1
EBIT – current year	$105	$77

Wholesale Services

In millions	2009	2008
EBIT – prior year Operating margin	$60	$34
Change in storage hedge gains as a result of significant forward NYMEX natural gas price declines in 2008	(35)	24
Change in commercial activity	(19)	25
Increased gains on transportation hedges from the narrowing of transportation basis spreads and changes in park and loan hedges	27	11
Change in LOCOM adjustment, net of hedging recoveries	16	(15)
(Decrease) increase in operating margin	(11)	45
Operating expenses and other income
Increased payroll and other operating costs due to continued expansion	—	13
(Decreased) increased depreciation expenses	(2)	1
Increased incentive compensation costs	4	6
Other	—	(1)
Increase in operating expenses	2	19
EBIT – current year	$47	$ 60

The following table indicates the components of wholesale services’ operating margin for 2009, 2008 and 2007.

In millions	2009	2008	2007
Commercial activity	$ 67	$ 86	$61
Gain on transportation hedges	43	7	5
Gain on storage hedges	1	36	12
Gain on park and loan hedges	—	9	—
Inventory LOCOM, net of hedging recoveries	—	(16)	(1)
Operating margin	$111	$122	$77

For more information on Sequent’s expected operating revenues from its storage inventory in 2010 and discussion of commercial activity, see description of the inventory roll-out schedule in Item 1 “Business.”

Energy Investments

In millions	2009	2008
EBIT – prior year Operating margin	$19	$15
(Decreased) increased revenues at AGL Networks largely due to changes in network expansion projects and increased customers in 2008	(1)	7
(Decreased) increased revenues at Jefferson Island	(2)	3
Other	(1)	—
(Decrease) increase in operating margin	(4)	10
Operating expenses and other loss
Increased payroll and benefits, franchise fee and outside service costs due to expansion at AGL Networks	1	2
Increased legal and other expenses at Jefferson Island	1	3
Increased depreciation expenses	—	1
Increase in operating expenses	2	6
Increased other expenses	1	—
EBIT – current year	$12	$19