Fitch Affirms AGL Resources' IDR at 'A-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the outstanding ratings for AGL Resources Inc. (AGL) and its two debt issuing subsidiaries, Atlanta Gas Light Co. (AGLC) and AGL Capital Corp. The Rating Outlook is Stable. A full rating list is shown below. Approximately $1.77 billion of outstanding long-term debt is affected.

AGL's rating and Stable Rating Outlook reflect the low business risk of its core regulated gas distribution business and management's favorable track record of operating and investing in a growing portfolio of non-regulated businesses. AGL's utility operations are supported by beneficial rate design and generally favorable service territory demographics. However, overall customer growth for 2010 remains flat due to a weak residential housing market and general economic conditions. Bad debt expense, also affected by the economy, has on average stabilized and remains within acceptable norms. Key factors driving the rating are corporate strategy regarding future acquisitions and non-regulated investments, the utility subsidiaries' ability to manage the regulatory process, and parent-level debt leverage.

As a pure energy delivery company, AGLC operates under volume-insensitive straight-fixed variable rates. In addition, the adoption of weather-normalized rates (WNR) and partial rate decoupling for Virginia Natural Gas, Inc. (VNG) and WNR at Elizabethtown Gas Co. (EGC) contributes further to operating stability. In March 2009, EGC filed in New Jersey for a $25 million increase in base rates, subsequently revised downward to $17 million, and the adoption of a revenue decoupling mechanism. In late 2009 EGC received an increase in annual base rates of $3 million and a reduction in depreciation expenses of approximately $5 million. However, the NJ Board of Public Utilities did not address the proposed decoupled rate design and has set up a separate procedural schedule to consider the proposal. In May 2010, AGLC filed a rate case in Georgia requesting increased annual rates of $54.1 million, which would increase the average customer bill by $2.95 per month.

In part to support local economic recovery, during 2009 EGC and AGLC received approval to make accelerated infrastructure investments in New Jersey and Georgia, respectively. As a result of these and other regulated and non-regulated investments, estimated consolidated capital spending has ramped up in 2010 and is expected to total nearly $600 million for the year. While the increased investment will likely result in modestly higher debt leverage over the near term, regulatory mechanisms support full and timely recovery of the accelerated infrastructure portion of the investments.

AGL's non-utility businesses are primarily focused in three areas: retail gas marketing through SouthStar Energy Services LLC (SouthStar), its joint venture with Piedmont Natural Gas Co. that is 85% owned by AGL; wholesale gas services through Sequent Energy Management, L.P. (Sequent); and investments in high-deliverability natural gas storage. Fitch recognizes the earnings volatility that normally occurs in Sequent's wholesale business from changes in the fair value of the derivative instruments it uses to hedge its physical positions.

AGL has recently completed two significant regulated projects. Hampton Roads Crossing is a pipeline that connects the southern and northern portions of VNG's distribution system. The pipeline was placed into service in January 2010 at a cost of $140 million. The Magnolia project provides AGL supply diversity with access to the Southern LNG Inc.'s Elba Island liquefied natural gas (LNG) import facility through its purchase of an undivided interest in certain connecting pipelines. Firm pipeline capacity is held by AGLC's marketers. The project was completed in late 2009 at a cost of $43 million.

In addition, AGL has nearly finished construction on the first phase of the Golden Triangle Storage salt dome facility in Beaumont, Texas. The plan is to complete the facility in two stages from 2010 to 2012. Phase one will have a working gas capacity of 6 billion cubic feet (bcf) and phase two will add an additional 6 bcf of capacity. A key credit concern is management's ability to sell capacity at Golden Triangle. Currently only one-third of phase one's capacity has been contracted. The estimated cost of the project is $314 million. In addition, AGL has filed permits in June 2009 to expand its Jefferson Island Storage facility located near to the Henry Hub, in Louisiana. Current plans are to evaluate the feasibility of adding as much as 10 bcf of storage capacity by 2015.

Consolidated credit measures including debt leverage are consistent with AGL's 'A-' IDR. At June 30, 2010, AGL's consolidated funds from operation interest coverage was 5.7 times (x) and debt to EBITDA was 3.5x. While the economic value of non-regulated operations has remained relatively consistent from year to year, AGL has experienced some volatility in its reported results due to the use of mark-to-market accounting for Sequent's hedging and gas storage activities. Furthermore, cash flow from operations and liquidity are affected by the price of natural gas injected for storage.

AGLC's rating incorporates its low business risk offset by its strong financial ties with AGL, including AGL's reliance on upstream cash flows from AGLC to service holding company level debt. Affiliated companies including AGLC participate in a corporate money pool arrangement at AGL. Furthermore, the Georgia regulatory framework does not provide strong ring-fencing to limit AGLC's ability to make upstream distributions. A decision on AGLC's rate case is expected in November 2010.

Fitch affirms the following, with a Stable Outlook:

AGL Resources Inc.

--Issuer Default Rating (IDR) at 'A-'.

AGL Capital Corp. (Guaranteed by AGL)

--IDR at 'A-';

--Senior Unsecured Notes at 'A-';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

Atlanta Gas Light Co.

--IDR at 'A-';

--Senior Unsecured Medium term notes at 'A'.

Additional information is available at www.fitchratings.com.

Applicable criteria available on Fitch's website at www.fitchratings.com include:

--'U.S. Power and Gas Comparative Operating Risk (COR) Evaluation and Financial Guidelines' Aug. 22, 2007;

--'Credit Rating Guidelines for Regulated Utility Companies' July 31, 2007;

--'Utilities Sector Notching and Recovery Ratings' March 16, 2010.

Related Research:

U.S. Power and Gas Comparative Operating Risk (COR) Evaluation and Financial Guidelines

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=338030

Credit Rating Guidelines for Regulated Utility Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=334652

Utilities Sector Notching and Recovery Ratings

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=504546

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