AGL RESOURCES INC, 10-Q, 1997-05-14

AGL RESOURCES INC
10-Q, 1997-05-14
NATURAL GAS DISTRIBUTION

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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 1997

Commission Registrant; State of Incorporation; I.R.S. Employer
File Number Address; and Telephone Number Identification Number

1-14174 AGL RESOURCES INC. 58-2210952
(A Georgia Corporation)
303 PEACHTREE STREET, NE
ATLANTA, GEORGIA 30308
404-584-9470

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of March 31, 1997.

Common Stock, $5.00 Par Value
Shares Outstanding at March 31, 1997 ...............................56,059,806

<PAGE>

Form 10-Q

AGL RESOURCES INC.

Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 1997

Table of Contents

Item Page
Number PART I -- FINANCIAL INFORMATION Number

1 Financial Statements

Condensed Consolidated Income Statements 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 6

Notes to Condensed Consolidated Financial Statements 7

2 Management's Discussion and Analysis of Results of
Operations and Financial Condition 12

PART II -- OTHER INFORMATION

1 Legal Proceedings 18

4 Submission of Matters to a Vote of Security Holders 18

5 Other Information 18

6 Exhibits and Reports on Form 8-K 23

SIGNATURES 24

Page 2 of 24 Pages

<PAGE>

PART I -- FINANCIAL INFORMATION

Item 1. Financial Statements

AGL RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS, SIX MONTHS AND TWELVE MONTHS ENDED
MARCH 31, 1997 AND 1996
(MILLIONS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
Three Months Six Months Twelve Months
---------------------------------------------------------
1997 1996 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues ........................... $ 496.7 $ 482.0 $ 876.3 $ 812.7 $ 1,292.2 $ 1,100.2
Cost of Gas .................................. 315.7 309.7 546.8 499.4 772.9 613.8
- ----------------------------------------------------------------------------------------------------------
Operating Margin ............................. 181.0 172.3 329.5 313.3 519.3 486.4
- ----------------------------------------------------------------------------------------------------------
Other Operating Expenses ..................... 92.0 92.5 180.3 174.0 344.7 336.5
- ----------------------------------------------------------------------------------------------------------
Operating Income ............................. 89.0 79.8 149.2 139.3 174.6 149.9
- ----------------------------------------------------------------------------------------------------------
Other Income ................................. 3.7 6.0 6.1 7.2 10.9 7.2
- ----------------------------------------------------------------------------------------------------------
Income Before Interest and Income Taxes ...... 92.7 85.8 155.3 146.5 185.5 157.1
- ----------------------------------------------------------------------------------------------------------
Interest Expense and Preferred Stock
Dividends
Interest expense ......................... 13.7 12.4 27.3 25.2 51.2 47.3
Dividends on preferred stock of subsidiary 1.1 1.1 2.2 2.2 4.4 4.4
- ----------------------------------------------------------------------------------------------------------
Total interest expense and preferred
stock dividends ...................... 14.8 13.5 29.5 27.4 55.6 51.7
- ----------------------------------------------------------------------------------------------------------
Income Before Income Taxes ................... 77.9 72.3 125.8 119.1 129.9 105.4
- ----------------------------------------------------------------------------------------------------------
Income Taxes ................................. 28.9 27.3 47.2 45.0 49.8 41.8
- ----------------------------------------------------------------------------------------------------------
Net Income ................................... $ 49.0 $ 45.0 $ 78.6 $ 74.1 $ 80.1 $ 63.6
==========================================================================================================

Earnings Per Share of Common Stock $ 0.88 $ 0.81 $ 1.41 $ 1.34 $ 1.44 $ 1.17

Cash Dividends Paid Per Share of
Common Stock $ 0.27 $ 0.265 $ 0.54 $ 0.53 $ 1.07 $ 1.05

Weighted Average Number of Common
Shares Outstanding 56.0 55.3 55.9 55.2 55.7 54.4

</TABLE>

See notes to condensed consolidated financial statements.

Page 3 of 24 Pages

<PAGE>

AGL RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(MILLIONS)

September
March 31, 30,
----------------------------
1997 1996 1996
ASSETS (Unaudited)
- --------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents ................... $ 8.7 $ 4.5 $ 8.7
Receivables (less allowance for
uncollectible accounts of $7.3
at March 31, 1997, $6.4 at March 31,
1996, and $2.7 at September 30, 1996) ..... 219.4 215.8 93.6
Inventories
Natural gas stored underground ............ 35.5 14.5 144.0
Liquefied natural gas ..................... 12.3 4.0 16.8
Materials and supplies .................... 7.6 8.0 8.1
Other ..................................... 1.7 0.4 3.0
Deferred purchased gas adjustment ........... 19.3 19.3 4.7
Other ....................................... 9.2 8.4 10.3
- --------------------------------------------------------------------------------
Total current assets ...................... 313.7 274.9 289.2
- --------------------------------------------------------------------------------
Property, Plant and Equipment
Utility plant ............................... 2,011.5 1,969.3 1,969.0
Less accumulated depreciation ............... 627.2 607.1 607.8
- --------------------------------------------------------------------------------
Utility plant - net ....................... 1,384.3 1,362.2 1,361.2
- --------------------------------------------------------------------------------
Nonutility property ......................... 97.7 18.9 80.5
Less accumulated depreciation ............... 27.9 2.4 26.3
- --------------------------------------------------------------------------------
Nonutility property - net ................. 69.8 16.5 54.2
- --------------------------------------------------------------------------------
Total property, plant and equipment - net . 1,454.1 1,378.7 1,415.4
- --------------------------------------------------------------------------------
Deferred Debits and Other Assets
Unrecovered environmental response costs .. 40.9 34.7 38.0
Investment in joint ventures - net ........ 34.0 35.0 35.5
Unrecovered Integrated Resource Plan costs 7.7 8.0 10.0
Other ..................................... 43.0 34.1 36.6
- --------------------------------------------------------------------------------
Total deferred debits and other assets .. 125.6 111.8 120.1
- --------------------------------------------------------------------------------
Total Assets .................................. $ 1,893.4 $ 1,765.4 $ 1,824.7
================================================================================

See notes to condensed consolidated financial statements.

Page 4 of 24 Pages

<PAGE>

AGL RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(MILLIONS, EXCEPT PAR VALUE DATA)

September
March 31, 30,
----------------------------
1997 1996 1996
LIABILITIES AND CAPITALIZATION (Unaudited)
- --------------------------------------------------------------------------------
Current Liabilities
Accounts payable-trade ...................... $ 58.6 $ 81.5 $ 73.7
Short-term debt ............................. 113.0 66.5 152.0
Customer deposits ........................... 30.0 29.1 27.8
Interest .................................... 27.1 25.3 25.7
Taxes ....................................... 39.1 27.8 16.0
Other ....................................... 40.4 43.8 27.3
- --------------------------------------------------------------------------------
Total current liabilities ................. 308.2 274.0 322.5
- --------------------------------------------------------------------------------
Accumulated Deferred Income Taxes ............. 170.1 141.2 168.5
- --------------------------------------------------------------------------------
Long-Term Liabilities
Accrued environmental response costs ........ 31.3 28.6 30.4
Accrued postretirement benefits costs ....... 35.7 33.6 36.2
Deferred credits ............................ 61.0 63.2 60.9
Accrued pension costs ....................... 1.5 4.9
- --------------------------------------------------------------------------------
Total long-term liabilities ............... 128.0 126.9 132.4
- --------------------------------------------------------------------------------
Capitalization
Long-term debt .............................. 584.5 554.5 554.5
Preferred stock of subsidiary,
cumulative $100 par or stated
value, shares issued and outstanding
of 0.6 at March 31, 1997, March 31,
1996, and September 30, 1996 .............. 58.5 58.5 58.5
Common stock, $5 par value, shares
issued and outstanding of 56.1 at
March 31, 1997, 55.4 at March 31,
1996, and 55.7 at September 30, 1996 ...... 644.1 610.3 588.3
- --------------------------------------------------------------------------------
Total capitalization ...................... 1,287.1 1,223.3 1,201.3
- --------------------------------------------------------------------------------
Total Liabilities and Capitalization .......... $ 1,893.4 $ 1,765.4 $ 1,824.7
================================================================================

See notes to condensed consolidated financial statements.

Page 5 of 24 Pages

<PAGE>

AGL RESOURCES INC. AND SUBISIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS AND TWELVE MONTHS ENDED MARCH 31, 1997
(MILLIONS)

<TABLE>
<CAPTION>
Six Months Twelve Months
----------------- ------------------
1997 1996 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net income ................................... $ 78.6 $ 74.1 $ 80.1 $ 63.6
Adjustments to reconcile net income to
net cash flow from operating activities
Depreciation and amortization ............ 34.9 33.4 69.1 64.4
Deferred income taxes .................... 2.1 2.4 24.4 17.6
Non-cash compensation expense ............ 1.7 2.3 2.1 4.3
Noncash restructuring costs .............. 2.8
Other .................................... (1.1) (1.2) (2.3) (2.3)
Changes in certain assets and liabilities, net
of effects from acquisition of business .. (7.7) (45.3) (46.6) (96.7)
- ---------------------------------------------------------------------------------------------
Net cash flow from operating
activities ........................... 108.5 65.7 126.8 53.7
- ---------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Sale of common stock, net of expenses ........ 0.6 1.0 1.4 50.4
Short-term borrowings, net ................... (39.0) 15.5 46.5 66.5
Sale of long-term debt ....................... 30.0 30.0
Dividends paid on common stock ............... (25.1) (24.4) (49.8) (47.1)
- ---------------------------------------------------------------------------------------------
Net cash flow from financing
activities ........................... (33.5) (7.9) 28.1 69.8
- ---------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Utility plant expenditures ................... (61.9) (57.9) (136.1) (125.2)
Cash received from joint ventures ............ 1.3 4.1
Investment in joint ventures ................. (2.7) (32.6)
Nonutility property expenditures ............. (14.8) (15.6)
Other ........................................ 0.4 0.9 (0.4) 2.6
- ---------------------------------------------------------------------------------------------
Net cash flow from investing
activities ........................... (75.0) (57.0) (150.7) (155.2)
- ---------------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents ..................... 0.8 4.2 (31.7)
Cash and cash equivalents
at beginning of period ............... 8.7 3.7 4.5 36.2
- ---------------------------------------------------------------------------------------------
Cash and cash equivalents
at end of period ..................... $ 8.7 $ 4.5 $ 8.7 $ 4.5
=============================================================================================
Cash Paid During the Period for
Interest ..................................... $ 26.1 $ 25.5 $ 49.8 $ 48.4
Income taxes ................................. $ 18.4 $ 12.7 $ 25.0 $ 20.6

See notes to condensed consolidated financial statements.

</TABLE>

Page 6 of 24 Pages

<PAGE>

AGL RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Implementation of Holding Company Reorganization
On March 6, 1996, following shareholder approval of a corporate
restructuring, AGL Resources Inc. (AGL Resources) became the parent company
of Atlanta Gas Light Company (AGLC) and its subsidiaries. The consolidated
financial statements of AGL Resources include the financial statements of
AGLC, Chattanooga Gas Company (Chattanooga) and AGL Resources' nonregulated
subsidiaries as though AGL Resources had existed in all periods shown and
had owned all of AGLC's outstanding common stock prior to March 6, 1996.

As a result of the restructuring, AGL Resources engages in utility
activities through AGLC and its wholly owned subsidiary, Chattanooga.
Unless noted specifically or otherwise required by the context, references
to AGLC or the utility include the operations and activities of AGLC and
Chattanooga. AGL Resources engages in nonregulated business activities
through AGL Energy Services, Inc. (AGL Energy Services), a gas supply
services company; AGL Investments, Inc. (AGL Investments), a subsidiary
established to develop and manage certain nonregulated business
opportunities; The Energy Spring, Inc. (Energy Spring), a retail energy
marketing company; and their subsidiaries. AGL Resources Service Company
(Service Company), provides corporate support services to AGL Resources and
its subsidiaries.

During fiscal 1996 ownership of AGLC's nonregulated business, Georgia
Gas Company (natural gas production activities), was transferred to AGL
Energy Services. Ownership of AGLC's other nonregulated businesses, Georgia
Gas Service Company (propane sales) and Trustees Investments, Inc. (real
estate holdings), was transferred to AGL Investments. AGLC's interest in
Sonat Marketing Company L.P. was transferred to AGL Gas Marketing, Inc., a
wholly owned subsidiary of AGL Investments. In addition, AGL Investments
established two wholly owned subsidiaries: AGL Power Services, Inc., which
owns a 35% interest in Sonat Power Marketing L.P., and AGL Consumer
Services, Inc., an energy-related consumer products and services company.

Service Company was formed during fiscal 1996 to provide corporate
support services to AGL Resources and its subsidiaries. The transfer of
related assets and accumulated deferred income tax liabilities from AGLC to
Service Company and other nonregulated subsidiaries was effected through
noncash dividends of $34.3 million during the fourth quarter of fiscal 1996
and $4.8 million during the first quarter of fiscal 1997. As a result of
those noncash dividends, utility plant-net decreased and nonutility
property-net increased by approximately $48.4 million. Expenses of Service
Company are allocated to AGL Resources and its subsidiaries.

2. Interim Financial Statements

In the opinion of management, the unaudited condensed consolidated
financial statements included herein reflect all normal recurring accruals
necessary for a fair statement of the results of the interim periods
reflected. Certain information and footnote disclosure normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted from these condensed consolidated
financial statements pursuant to applicable rules and regulations of the
Securities and Exchange Commission. These financial statements should be
read in conjunction with the financial statements and the notes thereto
included in the annual reports on Form 10-K of AGL Resources for the fiscal
year ended September 30, 1996, and of AGLC for the fiscal years ended
September 30, 1996 and 1995. Certain 1996 amounts have been reclassified
for comparability with 1997 amounts.

Page 7 of 24 Pages

<PAGE>

3 . Earnings

AGL Resources' principal business is the distribution of natural gas
to customers in central, northwest, northeast and southeast Georgia and the
Chattanooga, Tennessee area through its natural gas distribution
subsidiary, AGLC. Since consumption of natural gas is dependent to a large
extent on weather, the majority of AGL Resources' income is realized during
the winter months. Earnings for three-month and six-month periods are not
indicative of the earnings for a twelve-month period.

On October 3, 1995, AGLC implemented revised firm service rates
pursuant to an order on rehearing of the rate design issues of AGLC's 1993
rate case that was issued by the Georgia Public Service Commission (Georgia
Commission) on September 25, 1995. Although neutral with respect to total
annual margins, the new rates shift margins from heating months (November -
March) into non-heating months, thereby affecting the comparisons of
earnings for the twelve-month periods ended March 31, 1997, and 1996.

4. Environmental Matters - AGLC

AGLC has identified nine sites in Georgia where it currently owns all
or part of a manufactured gas plant (MGP) site. In addition, AGLC has
identified three other sites in Georgia which AGLC does not now own, but
which may have been associated with the operation of MGPs by AGLC or its
predecessors. There are also three sites in Florida which have been
investigated by environmental authorities in connection with which AGLC may
be contacted as a potentially responsible party.

AGLC's response to MGP sites in Georgia is proceeding under two state
regulatory programs. First, AGLC has entered into consent orders with the
Georgia Environmental Protection Division (EPD) with respect to four sites:
Augusta, Griffin, Savannah and Valdosta. Under these consent orders, AGLC
is obliged to investigate and, if necessary, remediate environmental
impacts at the sites. AGLC developed a proposed Corrective Action Plan
(CAP) for the Griffin site, received conditional approval of the CAP, and
has initiated corrective measures. Assessment activities are being
conducted at Augusta and have been completed at Savannah. In addition, AGLC
is in the process of conducting certain interim remedial measures at the
Augusta MGP site. Those measures are expected to be implemented principally
during fiscal 1997.

Second, AGLC's response to all Georgia sites is proceeding under
Georgia's Hazardous Site Response Act (HSRA). AGLC submitted to EPD formal
notifications pertaining to all of its owned MGP sites, and EPD had listed
seven sites (Athens, Augusta, Brunswick, Griffin, Savannah, Valdosta and
Waycross) on the state's Hazardous Site Inventory (HSI). EPD has not listed
the Macon site on the HSI at this time. EPD has also listed the Rome site,
which AGLC has acquired, on the HSI. Under the HSRA regulations, the four
sites subject to consent orders are presumed to require corrective action;
EPD will determine whether corrective action is required at the four
remaining sites (Athens, Brunswick, Rome and Waycross) in due course. In
that respect, however, AGLC has submitted Compliance Status Reports (CSRs)
for the Athens, Brunswick and Rome MGP sites, and AGLC has concluded that
these sites do not meet applicable risk reduction standards. Accordingly,
some degree of response action is likely to be required at those sites.

Page 8 of 24 Pages

<PAGE>

be held liable, but for which neither the existence nor the amount of such
liabilities can be reasonably forecast. Within the stated range of $31.3
million to $117.3 million, no amount within the range can be reliably
identified as a better estimate than any other estimate. Therefore, a
liability at the low end of this range and a corresponding regulatory asset
have been recorded in the financial statements.

AGLC has two means of recovering the expenses associated with the
former MGP sites. First, the Georgia Commission has approved the recovery
by AGLC of Environmental Response Costs, as defined, pursuant to an
Environmental Response Cost Recovery Rider (ERCRR). For purposes of the
ERCRR, Environmental Response Costs include investigation, testing,
remediation and litigation costs and expenses or other liabilities relating
to or arising from MGP sites. In connection with the ERCRR, the staff of
the Georgia Commission conducted a financial and management process audit
related to the MGP sites, cleanup activities at the sites and environmental
response costs that have been incurred for purposes of the ERCRR. On
October 10, 1996, the Georgia Commission issued an order to prohibit funds
collected through the ERCRR from being used for the payment of any damage
award, including punitive damages, as a result of any litigation associated
with any of the MGP sites in which AGLC is involved. AGLC is currently
pursuing judicial review of the October 10, 1996 order.

Second, AGLC intends to seek recovery of appropriate costs from its
insurers and other potentially responsible parties. With respect to its
insurers, AGLC filed a declaratory judgement action against 23 of its
insurance companies in 1991. After the trial court entered a judgement
adverse to AGLC and AGLC appealed that ruling, the Eleventh Circuit Court
of Appeals held that the case did not present a case or controversy when
filed, and the case was remanded with instructions to dismiss. Since the
Eleventh Circuit's decision, AGLC has settled with, or is close to
settlement with, most of the major insurers. AGLC has not determined what
actions it will take with respect to non-settling insurers.

5. Competition - AGLC
AGLC competes to supply natural gas to interruptible customers who
are capable of switching to alternative fuels, including propane, fuel and
waste oils, electricity and, in some cases, combustible wood by-products.
AGLC also competes to supply gas to interruptible customers who might seek
to bypass its distribution system.

AGLC can price distribution services to interruptible customers four
ways. First, multiple rates are established under the rate schedules of
AGLC's tariff approved by the Georgia Commission. If an existing tariff
rate does not produce a price competitive with a customer's relevant
competitive alternative, three alternate pricing mechanisms exist:
Negotiated Contracts, Interruptible Transportation and Sales Maintenance
(ITSM) discounts and Special Contracts.

On February 17, 1995, the Georgia Commission approved a settlement
that permits AGLC to negotiate contracts with customers who have the option
of bypassing AGLC's facilities (Bypass Customers) to receive natural gas
from other suppliers. The bypass avoidance contracts (Negotiated Contracts)
can be renewable, provided the initial term does not exceed five years,
unless a longer term specifically is authorized by the Georgia Commission.
The rate provided by the Negotiated Contract may be lower than AGLC's filed
rate, but not less than AGLC's marginal cost of service to the potential
Bypass Customer. Service pursuant to a Negotiated Contract may commence
without Georgia Commission action, after a copy of the contract is filed
with the Georgia Commission. Negotiated Contracts may be rejected by the
Georgia Commission within 90 days of filing; absent such action, however,
the Negotiated Contracts remain in effect. None of the Negotiated Contracts
filed to date with the Georgia Commission have been rejected.

The settlement also provides for a bypass loss recovery mechanism to
operate until the earlier of September 30, 1998, or the effective date of
new rates for AGLC resulting from a general rate case. Under the recovery
mechanism, AGLC is allowed to recover from other customers 75% of the
difference between (a) the nongas cost revenue that was received from the
potential Bypass Customer during the most recent 12-month period and (b)
the nongas cost revenue that is calculated to be received from the lower
Negotiated Contract rate applied to the same volumetric level.

Page 9 of 24 Pages

<PAGE>

Concerning the remaining 25% of the difference, AGLC is allowed to retain a
44% share of capacity release revenues in excess of $5 million until AGLC
is made whole for discounts from Negotiated Contracts. To the extent there
are additional capacity release revenues, AGLC is allowed to retain 15% of
such amounts.

In addition to Negotiated Contracts, which are designed to serve
existing and potential Bypass Customers, AGLC's ITSM Rider continues to
permit discounts for short-term transactions to compete with alternative
fuels. Revenue shortfalls, if any, from interruptible customers as measured
by the test-year interruptible revenues determined by the Georgia
Commission in AGLC's 1993 rate case will continue to be recovered under the
ITSM Rider.

The settlement approved by the Georgia Commission also provides that
AGLC may file contracts (Special Contracts) for Georgia Commission approval
if the service cannot be provided through the ITSM Rider, existing rate
schedules, or Negotiated Contract procedures. A Special Contract, for
example, could involve AGLC providing a long-term service contract to
compete with alternative fuels where physical bypass is not the relevant
competition.

Pursuant to the approved settlement, AGLC has filed and is providing
service pursuant to 46 Negotiated Contracts. Additionally, the Georgia
Commission has approved Special Contracts between AGLC and six
interruptible customers.

On November 27, 1996, the Tennessee Regulatory Authority (TRA)
approved a settlement that permits Chattanooga to negotiate contracts with
large commercial or industrial customers who are capable of bypassing
Chattanooga's distribution system. The settlement provides for approval on
an experimental basis, with the TRA to review the measure two years from
the approval date. The pricing terms provided in any such contract may be
neither less than Chattanooga's marginal cost of providing service nor
greater than the filed tariff rate generally applicable to such service.
Chattanooga can recover 50% of the difference between the contract rate and
the applicable tariff rate through the balancing account of the purchased
gas adjustment provisions of Chattanooga's rate schedules. Pursuant to the
approved settlement Chattanooga has entered into four negotiated contracts
which are currently under review by the TRA.

The 1997 session of the Georgia General Assembly passed legislation
which provides a legal framework for comprehensive deregulation of many
aspects of the natural gas business in Georgia. Senate Bill 215, the
Natural Gas Competition and Deregulation Act, which became law on April 14,
1997, if implemented by AGLC with respect to its system, would result in
the application of an alternative form of regulation, such as performance
based regulation, to AGLC. Pursuant to a separate election, AGLC, as an
electing distribution company, could choose to exit the merchant function
and fully unbundle its system.

Senate Bill 215 provides for a transition period leading to a
condition of effective competition in the natural gas markets. An electing
distribution company would unbundle all services to its natural gas
customers, assign firm delivery capacity to certificated marketers selling
the gas commodity and create a secondary transportation market for
interruptible transportation capacity. Marketers, including unregulated
affiliates of AGLC, would compete to sell natural gas to all customers at
market-based prices. AGLC would continue to provide intrastate
transportation of the gas to end users through its existing system, subject
to continued rate regulation by the Georgia Commission. In addition, the
Georgia Commission would continue to regulate safety, access and quality of
service pursuant to an alternative form of regulation.

The law provides for marketer standards and rules of business
practice to ensure that the benefits of a competitive natural gas market
are available to all customers on the AGLC system. It imposes an obligation
to serve on marketers with a corresponding universal service fund which can
also facilitate the extension of AGLC facilities in order to serve the
public interest.

Page 10 of 24 Pages

<PAGE>

In order to implement the new law, the Georgia Commission must
undertake and complete several rulemakings by December 31, 1997. As these
rules become effective the extent of and schedule for actions under the
legislation by AGLC will evolve further.

Currently, in accordance with Statement of Financial Accounting
Standard No. 71, "Accounting for the Effects of Certain Types of
Regulation," (SFAS 71), AGLC has recorded regulatory assets and liabilities
which represent regulator-approved deferrals resulting from the ratemaking
process. Recently, the staff of the Securities and Exchange Commission has
questioned the continued applicability of SFAS 71 to portions of the
business of three California utilities, as a result of legislation recently
enacted in California. The Emerging Issues Task Force (EITF) will begin
discussion of this issue at its May 1997 meeting. While the legislation and
circumstances under review with respect to California differ substantially
from those associated with electing distribution companies in Georgia,
AGLC will monitor the deliberations of the EITF.

On May 1, 1997, Chattanooga filed a rate proceeding with the TRA
seeking an increase in revenues of $4.4 million annually. Revenues from the
rate increase will be used to improve and expand Chattanooga's natural gas
distribution system, to recover increased operation, maintenance and tax
expenses, and to provide a reasonable return to investors. Under the TRA's
rules and regulations, the effective date of the requested increase likely
will be suspended until November 1, 1997. During that time the TRA will
complete a review of the requested increase and will hold public hearings
on the request.

6. Accounting Developments

In February 1997 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, "Earnings Per Share,"
(SFAS 128), which establishes standards for computing and presenting
earnings per share. AGL Resources will adopt SFAS 128 in the first quarter
of fiscal year 1998. Management does not expect SFAS 128 to have a
significant impact on the presentation of AGL Resources' consolidated
financial statements.

(The remainder of this page was intentionally left blank.)

Page 11 of 24 Pages

<PAGE>

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION

On March 6, 1996, AGL Resources Inc. (AGL Resources) became the holding
company for Atlanta Gas Light Company (AGLC), and its subsidiaries. During
calendar 1996, ownership of AGLC's nonregulated businesses was transferred to
AGL Resources and its various subsidiaries. The following discussion and
analysis reflects the results of operations and financial condition of AGL
Resources and factors expected to impact its future operations. See Note 1 in
Notes to Condensed Consolidated Financial Statements in this Form 10-Q.

Results of Operations

Three-Month Periods Ended March 31, 1997 and 1996

Explained below are the major factors that had a significant effect on
results of operations for the three-month period ended March 31, 1997, compared
with the same period in 1996.

Operating revenues increased 3% for the three-month period ended March 31,
1997, compared with the same period in 1996 primarily due to (1) operating
revenues resulting from nonregulated operations formed subsequent to March 1996
and (2) growth in the number of utility customers served. The increase in
operating revenues was offset partly by decreased volumes of gas sold to utility
customers as a result of weather that was 34.6% warmer than during the same
period in 1996.

Cost of gas increased 1.9% during the three-month period ended March 31,
1997, compared with the same period in 1996 primarily due to cost of gas
resulting from nonregulated operations formed subsequent to March 1996. The
increase in cost of gas was offset partly by decreased volumes of gas sold to
utility customers as a result of weather that was 34.6% warmer than during the
same period in 1996. The utility balances the cost of gas with revenues
collected from customers under the purchased gas provisions of its rate
schedules. Underrecoveries or overrecoveries of utility gas costs are deferred
and recorded as current assets or liabilities, thereby eliminating the effect
that recovery of gas costs would otherwise have on net income.

Operating margin increased 5% for the three-month period ended March 31,
1997, compared with the same period in 1996 primarily due to (1) growth in the
number of utility customers served and (2) operating margin resulting from
nonregulated operations formed subsequent to March 1996. Weather normalization
adjustment riders (WNARs) approved by the Georgia Commission and the TRA
stabilized the utility's margin at the level which would occur with normal
weather for the three-month periods ended March 31, 1997 and 1996. As a result
of the WNARs, weather conditions experienced do not have a significant impact on
the comparability of operating margin.

Operating expenses decreased $0.5 million for the three-month period ended
March 31, 1997, compared with the same period in 1996 primarily due to decreased
(1) labor and labor-related expenses and (2) outside services employed. The
decrease in operating expenses was offset partly by increased (1) uncollectible
accounts expense, (2) depreciation expense recorded as a result of increased
property, (3) injuries and damages expense and (4) expenses related to AGLC's
Integrated Resource Plan (IRP) which are recovered through an IRP Cost Recovery
Rider approved by the Georgia Commission. AGLC balances IRP expenses which are
included in operating expenses with revenues collected under the rider, thereby
eliminating the effect that recovery of IRP expenses would otherwise have on net
income. Operating expenses excluding IRP expenses decreased $1.1 million.

Page 12 of 24 Pages

<PAGE>

Other income decreased $2.3 million for the three-month period ended March
31, 1997, compared with the same period in 1996 primarily due to decreased
income from a gas marketing joint venture. The decrease in other income was
offset partly by (1) the recovery from utility customers of carrying costs not
included in base rates related to storage gas inventories and (2) the recovery
from utility customers of carrying costs attributable to an increase in
underrecovered deferred purchased gas costs.

Interest expense increased $1.3 million for the three-month period ended
March 31, 1997, compared with the same period in 1996 primarily due to increased
amounts of short-term and long-term debt outstanding.

Income taxes increased $1.6 million for the three-month period ended March
31, 1997, compared with the same period in 1996 primarily due to increased
taxable income.

Net income for the three-month period ended March 31, 1997, was $49
million, compared with net income of $45 million in 1996. Earnings per share of
common stock were $0.88 for the three-month period ended March 31, 1997,
compared with earnings per share of $0.81 in 1996. The increases in net income
and earnings per share were primarily due to (1) increased operating margin and
(2) decreased operating expenses. The increases in net income and earnings per
share were offset partly by (1) decreased other income and (2) increased
interest expense.

Six-Month Periods Ended March 31, 1997 and 1996

Explained below are the major factors that had a significant effect on
results of operations for the six-month period ended March 31, 1997, compared
with the same period in 1996.

Operating revenues increased 7.8% for the six-month period ended March 31,
1997, compared with the same period in 1996 primarily due to (1) operating
revenues resulting from nonregulated operations formed subsequent to March 1996,
(2) an increase in the cost of the gas supply recovered from customers under the
purchased gas provisions of the utility's rate schedules, as explained in the
following paragraph and (3) growth in the number of utility customers served.
The increase in operating revenues was offset partly by decreased volumes of gas
sold to utility customers as a result of weather that was 30.6% warmer than
during the same period in 1996.

Cost of gas increased 9.5% during the six-month period ended March 31,
1997, compared with the same period in 1996 primarily due to (1) cost of gas
resulting from nonregulated operations formed subsequent to March 1996, (2) an
increase in the cost of gas purchased for utility system supply and (3) an
increase in the cost of gas withdrawn from underground storage for utility
system supply. The increase in cost of gas was offset partly by decreased
volumes of gas sold to utility customers as a result of weather that was 30.6%
warmer than during the same period in 1996. The utility balances the cost of gas
with revenues collected from customers under the purchased gas provisions of its
rate schedules. Underrecoveries or overrecoveries of utility gas costs are
deferred and recorded as current assets or liabilities, thereby eliminating the
effect that recovery of gas costs would otherwise have on net income.

Operating margin increased 5.2% for the six-month period ended March 31,
1997, compared with the same period in 1996 primarily due to (1) growth in the
number of utility customers served and (2) operating margin resulting from
nonregulated operations formed subsequent to March 1996. WNARs approved by the
Georgia Commission and the TRA stabilized the utility's margin at the level
which would occur with normal weather for the six-month periods ended March 31,
1997 and 1996. As a result of the WNARs, weather conditions experienced do not
have a significant impact on the comparability of operating margin.

Operating expenses increased 3.6% for the six-month period ended March 31,
1997, compared with the same period in 1996 primarily due to increased (1)
uncollectible accounts expense, (2) depreciation expense recorded as a result of
increased property, (3) expenses related to AGLC's IRP which are recovered
through an IRP Cost Recovery Rider approved by the Georgia Commission, (4) ad
valorem taxes, (5) injuries and damages expense and (6) franchise expenses which
are

Page 13 of 24 Pages

<PAGE>

recovered through a Franchise Recovery Rider approved by the Georgia Commission.
AGLC balances IRP and franchise expenses which are included in operating
expenses with revenues collected under the riders, thereby eliminating the
effect that recovery of IRP and franchise expenses would otherwise have on net
income. Operating expenses excluding IRP and franchise expenses increased 3.2%.
The increase in operating expenses was offset partly by decreased (1) labor and
labor-related expenses and (2) outside services employed.

Other income decreased $1.1 million for the six-month period ended March
31, 1997, compared with the same period in 1996 primarily due to decreased
income from a gas marketing joint venture. The decrease in other income was
offset partly by (1) the recovery from utility customers of carrying costs not
included in base rates related to storage gas inventories and (2) the recovery
from utility customers of carrying costs attributable to an increase in
underrecovered deferred purchased gas costs.

Interest expense increased $2.1 million for the six-month period ended
March 31, 1997, compared with the same period in 1996 primarily due to increased
amounts of short-term and long-term debt outstanding.

Income taxes increased $2.2 million for the six-month period ended March
31, 1997, compared with the same period in 1996 primarily due to increased
taxable income.

Net income for the six-month period ended March 31, 1997, was $78.6
million, compared with net income of $74.1 million in 1996. Earnings per share
of common stock were $1.41 for the six-month period ended March 31, 1997,
compared with earnings per share of $1.34 in 1996. The increases in net income
and earnings per share were primarily due to increased operating margin. The
increases in net income and earnings per share were offset partly by increased
(1) operating expenses and (2) interest expense.

Twelve-Month Periods Ended March 31, 1997 and 1996

Explained below are the major factors that had a significant effect on
results of operations for the twelve-month period ended March 31, 1997, compared
with the same period in 1996.

Operating revenues increased 17.5% for the twelve-month period ended March
31, 1997, compared with the same period in 1996 primarily due to (1) an increase
in the cost of the gas supply recovered from customers under the purchased gas
provisions of the utility's rate schedules, as explained in the following
paragraph, (2) growth in the number of utility customers served and (3)
operating revenues resulting from nonregulated operations formed subsequent to
March 1996. The increase in operating revenues was offset partly by decreased
volumes of gas sold to utility customers as a result of weather that was 27.2%
warmer than during the same period in 1996.

Cost of gas increased 25.9% during the twelve-month period ended March 31,
1997, compared with the same period in 1996. The increase in the cost of the
utility's gas supply was primarily due to (1) an increase in the cost of gas
purchased for utility system supply and (2) an increase in the cost of gas
withdrawn from underground storage for utility system supply. The increase in
cost of gas was offset partly by decreased volumes of utility gas sold to
utility customers as a result of weather that was 27.2% warmer than during the
same period in 1996. The utility balances the cost of gas with revenues
collected from customers under the purchased gas provisions of its rate
schedules. Underrecoveries or overrecoveries of gas costs are deferred and
recorded as current assets or liabilities, thereby eliminating the effect that
recovery of gas costs would otherwise have on net income.

Operating margin increased 6.8% for the twelve-month period ended March
31, 1997, compared with the same period in 1996 primarily due to (1) revised
firm service rates, effective October 3, 1995, which shift margins from heating
months into non-heating months (See Note 3 to Notes to Condensed Consolidated
Financial Statements in this Form 10-Q), and (2) growth in the number of utility
customers served. WNARs approved by the Georgia Commission and the TRA
stabilized the utility's margin at the level which would occur with normal
weather for the twelve-month periods ended

Page 14 of 24 Pages

<PAGE>

March 31, 1997 and 1996. As a result of the WNARs, weather conditions
experienced do not have a significant impact on the comparability of operating
margin.

Operating expenses increased 2.4% for the twelve-month period ended March
31, 1997, compared with the same period in 1996 primarily due to increased (1)
uncollectible accounts expense, (2) depreciation expense recorded as a result of
increased property, (3) franchise expenses which are recovered through a
Franchise Recovery Rider approved by the Georgia Commission, (4) IRP expenses
which are recovered through and IRP Cost Recovery Rider approved by the Georgia
Commission and (5) injuries and damages expense. AGLC balances franchise and IRP
expenses which are included in operating expenses with revenues collected under
the riders, thereby eliminating the effect that recovery of franchise and IRP
expenses would otherwise have on net income. The increase in operating expenses
was offset partly by decreased (1) labor and labor-related expenses and (2)
outside services employed.

Other income increased $3.7 million for the twelve-month period ended
March 31, 1997, compared with the same period in 1996 primarily due to (1) the
recovery from utility customers of carrying costs attributable to an increase in
underrecovered deferred purchased gas costs, (2) recoveries of environmental
response costs from insurance carriers and third parties and (3) the recovery
from utility customers of carrying costs not included in base rates related to
storage gas inventories. The increase in other income was offset partly by
decreased income from a gas marketing joint venture.

Interest expense increased $3.9 million for the twelve-month period ended
March 31, 1997, compared with the same period in 1996 primarily due to increased
amounts of short-term and long-term debt outstanding.

Income taxes increased $8 million for the twelve-month period ended March
31, 1997, compared with the same period in 1996 primarily due to increased
taxable income.

Net income for the twelve-month period ended March 31, 1997, was $80.1
million, compared with net income of $63.6 million in 1996. Earnings per share
of common stock were $1.44 for the twelve-month period ended March 31, 1997,
compared with earnings per share of $1.17 in 1996. The increases in net income
and earnings per share were primarily due to increased (1) operating margin and
(2) increased other income. The increases in net income and earnings per share
were offset partly by increased (1) operating expenses and (2) interest expense.

Financial Condition

AGL Resources' primary business is highly seasonal in nature and typically
shows a substantial increase in accounts receivable from customers from
September 30 to March 31 as a result of colder weather. The utility also uses
gas stored underground and liquefied natural gas to serve its customers during
periods of colder weather. As a result, accounts receivable increased $125.8
million and inventory of gas stored underground and liquefied natural gas
decreased $113 million during the six-month period ended March 31, 1997.

Accounts receivable increased $3.6 million from March 31, 1996 to March
31, 1997, primarily due to increased operating revenues. Inventory of gas stored
underground and liquefied natural gas increased $29.3 million from March 31,
1996 to March 31, 1997, primarily due to decreased volumes of gas withdrawn from
storage as a result of weather that was 27.2% warmer during the twelve-month
period ended March 31, 1997, compared with the same period in 1996.

The purchasing practices of AGLC are subject to review by the Georgia
Commission under legislation enacted by the Georgia General Assembly (Gas Supply
Plan Legislation). The Gas Supply Plan Legislation establishes procedures for
review and approval, in advance, of gas supply plans for gas utilities and gas
cost adjustment factors applicable to firm service customers of gas utilities.
Pursuant to AGLC's approved Gas Supply Plan for fiscal year 1997, gas supply
purchases are being recovered under the purchased gas provisions of AGLC's rate
schedules. The plan also allows recovery from the customers of AGLC of Federal
Energy Regulatory Commission's (FERC) Order No. 636 transition costs that are
currently being charged by AGLC's pipeline suppliers.

Page 15 of 24 Pages

<PAGE>

On February 27, 1997, the FERC issued Order No. 636-C, on remand from the
decision by the United States Court of Appeals for the District of Columbia
Circuit (D. C. Circuit) in United Distribution Cos. v. FERC. In Order No. 636-C,
the FERC reaffirmed its decision to permit pipelines to pass all of their gas
supply realignment (GSR) costs through to their customers, and ruled that
individual pipelines should submit proposals concerning the share of GSR costs
their interruptible transportation customers should bear. Requests for rehearing
of Order No. 636-C have been filed with the FERC.

AGLC currently estimates that its portion of transition costs resulting
from the FERC Order No. 636 restructuring proceedings from all of its pipeline
suppliers, that have been filed to be recovered to date, could be as high as
approximately $105 million. This estimate assumes that FERC approval of Southern
Natural Gas Company's (Southern) restructuring settlement agreement is not
overturned on judicial review, that FERC approval of Tennessee Gas Pipeline
Company's (Tennessee) transition cost settlement becomes final, and that FERC
does not alter its GSR recovery policies on rehearing of its Order No. 636-C.
Such filings currently are pending final FERC approval, and the transition costs
are being collected subject to refund. Approximately $87.8 million of such costs
have been incurred by AGLC as of March 31, 1997, recovery of which is provided
under the purchased gas provisions of AGLC's rate schedules. For further
discussion of the effects of FERC Order No. 636 on AGLC, see Part II, Item 5,
"Other Information - Federal Regulatory Matters" of this Form 10-Q.

As noted above, AGLC recovers the cost of gas under the purchased gas
provisions of its rate schedules. AGLC was in an underrecovery position of $19.3
million as of March 31, 1997 and March 31, 1996, and $4.7 million as of
September 30, 1996. Under the provisions of the utility's rate schedules, any
underrecoveries of gas costs are included in current assets and have no effect
on net income.

The expenditures for plant and other property totaled $76.7 million and
$151.7 million for the six-month and twelve-month periods ended March 31, 1997.
Effective February 1, 1997, Georgia Gas Service Company, a subsidiary of AGL
Investments, acquired eight related companies engaged in the retail sale and
delivery of propane gas. See Part II, Item 5, "Other Information" in this Form
10-Q.

Service Company was formed during fiscal 1996 to provide corporate support
services to AGL Resources and its subsidiaries. The transfer of related assets
and accumulated deferred income tax liabilities from AGLC to Service Company and
other nonregulated subsidiaries was effected through noncash dividends of $34.3
million during the fourth quarter of fiscal 1996 and $4.8 million during the
first quarter of fiscal 1997. As a result of those noncash dividends, utility
plant-net decreased and nonutility property-net increased by approximately $48.4
million.

AGLC has accrued liabilities of $31.3 million as of March 31, 1997, $28.6
million as of March 31, 1996, and $30.4 million as of September 30, 1996, for
estimated future expenditures which are expected to be made over a period of
several years in connection with or related to MGP sites. The Georgia Commission
has approved the recovery by AGLC of Environmental Response Costs, as defined in
Note 4 to Notes to Condensed Consolidated Financial Statements in this Form
10-Q, pursuant to the ERCRR. In connection with the ERCRR, the staff of the
Georgia Commission conducted a financial and management process audit related to
the MGP sites, cleanup activities at the sites and environmental response costs
that have been incurred for purposes of the ERCRR. On October 10, 1996, the
Georgia Commission issued an order to prohibit funds collected through the ERCRR
from being used for the payment of any damage award, including punitive damages,
as a result of any litigation associated with any of the MGP sites in which AGLC
is involved. AGLC is currently pursuing judicial review of the October 10, 1996,
order. See Note 4 to Notes to Condensed Consolidated Financial Statements in
this Form 10-Q.

On March 6, 1997, AGL Resources filed a registration statement with the
Securities and Exchange Commission for the issue and sale of 2.0 million shares
of common stock in connection with ResourcesDirect, a direct stock purchase and
dividend reinvestment plan. ResourcesDirect, which replaces the Dividend
Reinvestment and Stock Purchase Plan, allows first-time investors to purchase
shares of common stock directly from AGL Resources. It also enables existing AGL
Resources stockholders to reinvest all or a portion of their cash dividends or
to make optional cash payments to purchase additional shares of common stock.

Page 16 of 24 Pages

<PAGE>

On June 16, 1995, approximately 3.0 million shares of common stock were
issued and sold at a price of $16.81 per share, resulting in net proceeds of
$48.6 million. Proceeds from that sale of common stock were used to finance
capital expenditures and for other corporate purposes.

Short-term debt decreased $39 million for the six-month period ended March
31, 1997, primarily due to net cash flow from operating activities. Short-term
debt increased $46.5 million for the twelve-month period ended March 31, 1997,
primarily due to increased working capital requirements.

Long-term debt outstanding increased $30 million during the six-month and
twelve-month periods ended March 31, 1997, as a result of the issuance by AGLC
of $30 million in principal amount of Medium-Term Notes, Series C in November
1996. The notes were issued under a registration statement filed with the
Securities and Exchange Commission in September 1993 covering the periodic offer
and sale of up to $300 million in principal amount of Medium-Term Notes, Series
C. As of March 31, 1997, AGLC had issued $224.5 million in principal amount of
Medium-Term Notes Series C, with maturity dates ranging from ten to 30 years and
with interest rates ranging from 5.9% to 7.2%. Net proceeds from the issuance of
Medium-Term Notes were used to fund capital expenditures, to repay short-term
debt and for other corporate purposes.

On February 17, 1995, the Georgia Commission approved a settlement that
permits AGLC to negotiate contracts with customers who have the option of
bypassing AGLC's facilities (Bypass Customers) to receive natural gas from other
suppliers. The bypass avoidance contracts (Negotiated Contracts) can be
renewable, provided the initial term does not exceed five years, unless a longer
term specifically is authorized by the Georgia Commission. The rate provided by
the Negotiated Contract may be lower than AGLC's filed rate, but not less than
AGLC's marginal cost of service to the potential Bypass Customer. Service
pursuant to a Negotiated Contract may commence without Georgia Commission
action, after a copy of the contract is filed with the Georgia Commission.
Negotiated Contracts may be rejected by the Georgia Commission within 90 days of
filing; absent such action, however, the Negotiated Contracts remain in effect.
None of the Negotiated Contracts filed to date with the Georgia Commission have
been rejected.

On November 27, 1996, the TRA approved a settlement that permits
Chattanooga to negotiate contracts with large commercial or industrial customers
who are capable of bypassing Chattanooga's distribution system. The settlement
provides for approval on an experimental basis, with the TRA to review the
measure two years from the approval date. The pricing terms provided in any such
contract may be neither less than Chattanooga's marginal cost of providing
service nor greater than the filed tariff rate generally applicable to such
service. Chattanooga can recover 50% of the difference between the contract rate
and the applicable tariff rate through the balancing account of the purchased
gas adjustment provisions of Chattanooga's rate schedules.

The 1997 session of the Georgia General Assembly passed legislation which
provides a legal framework for comprehensive deregulation of many aspects of the
natural gas business in Georgia. Senate Bill 215, the Natural Gas Competition
and Deregulation Act, which became law on April 14, 1997, if implemented by AGLC
with respect to its system, would result in the application of an alternative
form of regulation, such as performance based regulation, to AGLC. Pursuant to a
separate election, AGLC, as an electing distribution company, could choose to
exit the merchant function and fully unbundle its system. See Note 5 to Notes to
Condensed Consolidated Financial Statements in this Form 10-Q.

On May 1, 1997, Chattanooga filed a rate proceeding with the TRA seeking an
increase in revenues of $4.4 million annually. Revenues from the rate increase
will be used to improve and expand Chattanooga's natural gas distribution
system, to recover increased operation, maintenance and tax expenses, and to
provide a reasonable return to investors. Under the TRA's rules and regulations,
the effective date of the requested increase likely will be suspended until
November 1, 1997. During that time the TRA will complete a review of the
requested increase and will hold public hearings on the request.

Page 17 of 24 Pages

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PART II -- OTHER INFORMATION

"Part II -- Other Information" is intended to supplement information
contained in the Annual Report on Form 10- K for the fiscal year ended September
30, 1996, and should be read in conjunction therewith.

Item 1. Legal Proceedings
See Item 5.

Item 4. Submission of Matters to a Vote of Security Holders

The Annual Meeting of Shareholders was held on February 7, 1997. "Broker
non-votes" were not considered in determining whether a quorum existed for
purposes of the Annual Meeting. At the Annual Meeting the shareholders elected
the following four nominees for director to hold office until the Annual Meeting
in the year 2000, as set forth in AGL Resources' Proxy Statement. The number of
votes "for" each nominee and the number of votes "withheld" with respect to each
nominee is as follows:

For Withheld
---------- --------
1. Otis A. Brumby, Jr .... 46,340,116 617,977
2. David R. Jones ........ 46,303,684 654,409
3. Albert G. Norman, Jr .. 46,328,483 629,610
4. Charles McKenzie Taylor 46,423,143 534,950

Item 5. Other Information

Federal Regulatory Matters

Order No. 636

On February 27, 1997, the FERC issued Order No. 636-C, on remand from the
decision by the United States Court of Appeals for the D. C. Circuit in UNITED
DISTRIBUTION COS. V. FERC. Among other matters, the court remanded Order No. 636
to the FERC for reconsideration of certain issues, including the FERC's decision
to permit pipelines to pass all of their GSR costs through to their customers
and its decision to require interruptible transportation customers to bear 10%
of GSR costs. In Order No. 636-C, the FERC reaffirmed its decision to permit
pipelines to pass all of their GSR costs through to their customers, and ruled
that individual pipelines should submit proposals concerning the share of GSR
costs their interruptible transportation customers should bear. Requests for
rehearing of Order No. 636-C have been filed with the FERC. In addition, AGLC
and others have filed petitions for certiorari to the United States Supreme
Court, seeking review of the court's ruling in UNITED DISTRIBUTION COS. V. FERC
affirming the FERC's authority over capacity release by local distribution
companies.

Page 18 of 24 Pages

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AGLC currently estimates that its portion of transition costs (which
include unrecovered gas costs, GSR costs and various stranded costs resulting
from unbundling of interstate pipeline sales service) from all of its pipeline
suppliers filed with the FERC to date to be recovered could be as high as
approximately $105 million. AGLC's estimate is based on the most recent
estimates of transition costs filed by its pipeline suppliers with the FERC, and
assumes that FERC approval of Southern's restructuring settlement agreement is
not overturned on judicial review, that FERC approval of Tennessee's transition
cost settlement becomes final, and that FERC does not alter its GSR recovery
policies on rehearing of its Order 636-C. Such filings by AGLC's pipeline
suppliers are pending final FERC approval. Approximately $87.8 million of
transition costs have been incurred by AGLC as of March 31, 1997, and are being
recovered from customers under the purchased gas provisions of AGLC's rate
schedules. Details concerning the status of the Order No. 636 restructuring
proceedings involving the pipelines that serve AGLC directly are set forth
below.

SOUTHERN GSR Cost Recovery Proceeding. Southern continues to make quarterly and
monthly transition cost filings to recover costs from contesting parties to the
settlement, and the FERC has ordered that such costs may be recovered by
Southern, subject to the outcome of a hearing for contesting parties. However,
since AGLC is a consenting party, its GSR and other transition cost charges are
in accordance with Southern's restructuring settlement. Assuming the FERC's
approval of the settlement is upheld on judicial review, AGLC's share of
Southern's transition costs is estimated to be $86.8 million. This estimate
would not be affected by the remand of Order No. 636, unless FERC's approval of
the settlement is not upheld on judicial review. As of March 31, 1997, $76.5
million of such costs have already been incurred by AGLC.

On April 14, 1997, the D.C. Circuit issued an order dismissing AGLC's
appeals of the FERC's orders in Southern's restructuring proceeding. AGLC had
requested that the dismissal be conditioned upon the outcome of the appeals
seeking to overturn the settlement, but the court did not impose the requested
condition. The court's order is subject to possible requests for rehearing.

TENNESSEE GSR Cost Recovery Proceeding. On February 28, 1997, Tennessee filed
with the FERC a settlement that would, if approved by the FERC, resolve the
majority of issues associated with Tennessee's restructuring, including its
recovery of GSR and other transition costs associated with restructuring. The
settlement provides for Tennessee to recover GSR costs via a fixed surcharge,
and limits the total amount of such costs that Tennessee may recover. The
settlement would also resolve AGLC's appeals of orders issued in Tennessee's
restructuring proceeding, as well as AGLC's appeal of the FERC's orders
approving the exit fee settlement between Tennessee and Columbia Gas
Transmission Corporation. The settlement was not opposed by any party, and was
approved by the FERC on April 16, 1997; however, the FERC's order is subject to
possible requests for rehearing, and thus is not yet final.

Tennessee has continued to make quarterly GSR cost recovery filings with
the FERC. On March 31, 1997, Tennessee filed with the FERC a proposal to
continue its existing GSR surcharge in light of the aforementioned settlement.
In the alternative, Tennessee sought the FERC's approval to recover an
additional $100 million in GSR costs. AGLC filed comments supporting Tennessee's
request to continue its existing GSR surcharge, but conditionally protested
Tennessee's alternate proposal; however, the FERC has not yet acted upon
Tennessee's filing. AGLC's estimated liability for GSR costs as a result of
Tennessee's settlement filing is approximately $13 million, assuming that the
FERC's approval of the settlement becomes final. As of March 31, 1997, $5.9
million of such costs have already been incurred by AGLC.

FERC Rate Proceedings

TENNESSEE On January 29, 1997, the FERC issued an order denying requests for
rehearing of the FERC's October 30, 1996 order approving Tennessee's rate case
settlement. One party has sought judicial review of the FERC's orders approving
the settlement, which therefore are not yet final.

TRANSCO On February 3, 1997, the FERC issued an order denying requests for
rehearing of the FERC's November 1, 1996 order approving the partial settlement
in Transcontinental Gas Pipe Line Corporation's (Transco) ongoing rate case. One
petition for judicial review of the FERC's orders approving the settlement has
been filed; therefore, the FERC's orders

Page 19 of 24 Pages

<PAGE>

are not yet final. AGLC has submitted testimony in the consolidated hearing to
address Transco's proposal to roll into its general system rates the costs
associated with the Leidy Line and Southern expansion facilities. AGLC took no
position with respect to Transco's roll-in proposal, but opposed Transco's
proposal to allocate additional costs to a bundled storage service provided by
Transco to AGLC and other customers.

ANR PIPELINE Several parties have filed exceptions to the presiding
administrative law judge's January 10, 1997 initial decision in ANR's rate
proceeding. The initial decision therefore is not yet final.

AGLC cannot predict the outcome of these federal proceedings nor can it
determine the ultimate effect, if any, such proceedings may have on AGLC.

The Energy Spring

On January 8, 1997, the FERC issued an order authorizing The Energy
Spring, Inc. to engage in wholesale electric power and energy transactions as a
marketer.

State Regulatory Matters

The 1997 session of the Georgia General Assembly passed legislation which
provides a legal framework for comprehensive deregulation of many aspects of the
natural gas business in Georgia. Senate Bill 215, the Natural Gas Competition
and Deregulation Act, which became law on April 14, 1997, if implemented by AGLC
with respect to its system, would result in the application of an alternative
form of regulation, such as performance based regulation, to AGLC. Pursuant to a
separate election, AGLC, as an electing distribution company, could choose to
exit the merchant function and fully unbundle its system.

Senate Bill 215 provides for a transition period leading to a condition of
effective competition in the natural gas markets. An electing distribution
company would unbundle all services to its natural gas customers, assign firm
delivery capacity to certificated marketers selling the gas commodity and create
a secondary transportation market for interruptible transportation capacity.
Marketers, including unregulated affiliates of AGLC, would compete to sell
natural gas to all customers at market-based prices. AGLC would continue to
provide intrastate transportation of the gas to end users through its existing
system, subject to continued rate regulation by the Georgia Commission. In
addition, the Georgia Commission would continue to regulate safety, access and
quality of service pursuant to an alternative form of regulation.

The law provides for marketer standards and rules of business practice to
ensure that the benefits of a competitive natural gas market are available to
all customers on the AGLC system. It imposes an obligation to serve on marketers
with a corresponding universal service fund which can also facilitate the
extension of AGLC facilities in order to serve the public interest.

In order to implement the new law, the Georgia Commission must undertake
and complete several rulemakings by December 31, 1997. As these rules become
effective the extent of and schedule for actions under the legislation by AGLC
will evolve further.

On May 21, 1996, the Georgia Commission adopted a Policy Statement
following its November 20, 1995, Notice of Inquiry concerning changes in state
regulatory guidelines to respond to trends toward increased competition in
natural gas markets. Among other things, the Policy Statement sets up a
distinction between competitive and natural monopoly services; favors
performance-based regulation in lieu of traditional cost-of-service regulation;
calls for unbundling interruptible service; directs the Georgia Commission's
staff to develop standards of conduct for utilities and their marketing
affiliates; and invites pilot programs for unbundling services to residential
and small business customers.

Page 20 of 24 Pages

<PAGE>

Consistent with specific goals in the Georgia Commission's Policy
Statement, AGLC filed on June 10, 1996, the Natural Gas Service Provider
Selection Plan (the Plan), a comprehensive plan for serving interruptible
markets. The Plan proposes further unbundling of services to provide large
customers more service options and the ability to purchase only those services
they require. Proposed tariff changes would allow AGLC to cease its sales
service function and the associated sales obligation for large customers;
implement delivery-only service for large customers on a firm and interruptible
basis; and provide pooling services to marketers. The Plan also includes
proposed standards of conduct for utilities and utility marketing affiliates.
The Georgia Commission granted AGLC's Motion for Continuance on January 30,
1997, moving the Georgia Commission to suspend the proceeding after a showing
that all parties of record had expressed an interest in pursuing settlement
discussions in lieu of rebuttal hearings. The hearing schedule remains suspended
for settlement discussions currently in progress.

AGLC supports both the Plan under consideration by the Georgia Commission
and the new regulatory model contemplated by Senate Bill 215. AGLC currently
makes no profit on the purchase and sale of gas because actual gas costs are
passed through to customers under the purchased gas provisions of AGLC's rate
schedules. Earnings are provided through revenues received for intrastate
transportation of the commodity. Consequently, allowing AGLC to cease its sales
service function and the associated sales obligation would not adversely affect
AGLC's ability to earn a return on its distribution system investment. Gas will
be sold to all customers by numerous marketers, including nonregulated
subsidiaries of AGL Resources.

On July 22, 1996, Chattanooga filed a plan with the TRA that permits
Chattanooga to negotiate contracts with customers in Tennessee who have
long-term competitive options, including bypass. On November 27, 1996, the TRA
approved a settlement that permits Chattanooga to negotiate contracts with large
commercial or industrial customers who are capable of bypassing Chattanooga's
distribution system. The settlement provides for approval on an experimental
basis, with the TRA to review the measure two years from the approval date. The
pricing terms provided in any such contract may be neither less than
Chattanooga's marginal cost of providing service nor greater than the filed
tariff rate generally applicable to such service. Chattanooga can recover 50% of
the difference between the contract rate and the applicable tariff rate through
the balancing account of the purchased gas adjustment provisions of
Chattanooga's rate schedules.

On May 1, 1997, Chattanooga filed a rate proceeding with the TRA seeking
an increase in revenues of $4.4 million annually. Revenues from the rate
increase will be used to improve and expand Chattanooga's natural gas
distribution system, to recover increased operation, maintenance and tax
expenses, and to provide a reasonable return to investors. Under the TRA's rules
and regulations, the effective date of the requested increase likely will be
suspended until November 1, 1997. During that time the TRA will complete a
review of the requested increase and will hold public hearings on the request.

Environmental Matters

AGLC has identified nine sites in Georgia where it currently owns all or
part of an MGP site. In addition, AGLC has identified three other sites in
Georgia which AGLC does not now own, but which may have been associated with the
operation of MGPs by AGLC or its predecessors. There are also three sites in
Florida which have been investigated by environmental authorities in connection
with which AGLC may be contacted as a potentially responsible party.

AGLC's response to MGP sites in Georgia is proceeding under two state
regulatory programs. First, AGLC has entered into consent orders with the EPD
with respect to four sites: Augusta, Griffin, Savannah and Valdosta. Under these
consent orders, AGLC is obliged to investigate and, if necessary, remediate
environmental impacts at the sites. AGLC developed a proposed CAP for the
Griffin site, received conditional approval of the CAP, and has initiated
corrective measures. Assessment activities are being conducted at Augusta and
have been completed at Savannah. In addition, AGLC is in the process of
conducting certain interim remedial measures at the Augusta MGP site. Those
measures are expected to be implemented principally during fiscal 1997.

Page 21 of 24 Pages

<PAGE>

Second, AGLC's response to all Georgia sites is proceeding under Georgia's
HSRA. AGLC submitted to EPD formal notifications pertaining to all of its owned
MGP sites, and EPD had listed seven sites (Athens, Augusta, Brunswick, Griffin,
Savannah, Valdosta and Waycross) on the state's HSI. EPD has not listed the
Macon site on the HSI at this time. EPD has also listed the Rome site, which
AGLC has acquired, on the HSI. Under the HSRA regulations, the four sites
subject to consent orders are presumed to require corrective action; EPD will
determine whether corrective action is required at the four remaining sites
(Athens, Brunswick, Rome and Waycross) in due course. In that respect, however,
AGLC has submitted CSRs for the Athens, Brunswick and Rome MGP sites, and AGLC
has concluded that these sites do not meet applicable risk reduction standards.
Accordingly, some degree of response action is likely to be required at those
sites.

AGLC has estimated that, under the most favorable circumstances reasonably
possible, the future cost to AGLC of investigating and remediating the former
MGP sites could be as low as $31.3 million. Alternatively, AGLC has estimated
that, under reasonably possible unfavorable circumstances, the future cost to
AGLC of investigating and remediating the former MGP sites could be as high as
$117.3 million. Those estimates have been adjusted from the September 30, 1996
estimates to reflect settlements of property damage claims at certain sites. If
additional sites were added to those for which action now appears reasonably
likely, or if substantially more stringent cleanups were required, or if site
conditions are markedly worse than those now anticipated, the costs could be
higher. In addition, those costs do not include other expenses, such as property
damage claims, for which AGLC may ultimately be held liable, but for which
neither the existence nor the amount of such liabilities can be reasonably
forecast. Within the stated range of $31.3 million to $117.3 million, no amount
within the range can be reliably identified as a better estimate than any other
estimate. Therefore, a liability at the low end of this range and a
corresponding regulatory asset have been recorded in the financial statements.

AGLC has two means of recovering the expenses associated with the former
MGP sites. First, the Georgia Commission has approved the recovery by AGLC of
Environmental Response Costs, as defined, pursuant to AGLC's ERCRR. For purposes
of the ERCRR, Environmental Response Costs include investigation, testing,
remediation and litigation costs and expenses or other liabilities relating to
or arising from MGP sites. In connection with the ERCRR, the staff of the
Georgia Commission conducted a financial and management process audit related to
the MGP sites, cleanup activities at the sites and environmental response costs
that have been incurred for purposes of the ERCRR. On October 10, 1996, the
Georgia Commission issued an order to prohibit funds collected through the ERCRR
from being used for the payment of any damage award, including punitive damages,
as a result of any litigation associated with any of the MGP sites in which AGLC
is involved. AGLC is currently pursuing judicial review of the October 10, 1996,
order.

Second, AGLC intends to seek recovery of appropriate costs from its
insurers and other potentially responsible parties. See Note 4 to Notes to
Condensed Consolidated Financial Statements in this Form 10-Q.

Other Legal Proceedings

With regard to other legal proceedings, AGL Resources is a party, as both
plaintiff and defendant, to a number of other suits, claims and counterclaims on
an ongoing basis. Management believes that the outcome of all litigation in
which it is involved will not have a material adverse effect on the consolidated
financial statements of AGL Resources.

Joint Venture and Propane Company Acquisition

During December 1996, AGL Resources signed a letter of intent with Transco
to form a joint venture, which would be known as Cumberland Pipeline Company, to
operate and market interstate pipeline capacity. The transaction is subject to
various corporate and regulatory approvals.

Initially, the 135-mile Cumberland pipeline will include existing pipeline
infrastructure owned by the two companies. Projected to enter service by
November 1, 2000, Cumberland will provide service to AGLC, Chattanooga and other
markets throughout the eastern Tennessee Valley, northwest Georgia and northeast
Alabama.

Page 22 of 24 Pages

<PAGE>

Affiliates of Transco and AGL Resources each will own 50% of the new
pipeline company, and an affiliate of Transco will serve as operator. The
project will be submitted to the FERC for approval in the fourth quarter of
1997.

Effective February 1, 1997, Georgia Gas Service Company (Georgia Gas
Service), a subsidiary of AGL Investments, acquired eight related companies (the
Jordan Gas Propane Companies). The acquisition of the Jordan Gas Propane
Companies is expected to increase the retail sales of Georgia Gas Service's
propane operations from 7 million gallons annually to approximately 20 million
gallons annually. As a result of the acquisition, Georgia Gas Service will serve
approximately 38,000 customers in northwest Georgia and northern Alabama.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

27 - Financial Data Schedule.

(b) Reports on Form 8-K.

None.

(The remainder of this page was intentionally left blank.)

Page 23 of 24 Pages

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

AGL Resources Inc.
(Registrant)

Date May 14, 1997 /s/ David R. Jones
David R. Jones
President and Chief Executive Officer

Date May 14, 1997 /s/ J. Michael Riley
J. Michael Riley
Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)

Page 24 of 24 Pages

<PAGE>

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