AGL RESOURCES INC, 10-Q, 1997-08-14

AGL RESOURCES INC
10-Q, 1997-08-14
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 June 30, 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 June 30, 1997.

Common Stock, $5.00 Par Value
Shares Outstanding at June 30, 1997 .................................56,456,402

<PAGE>

AGL RESOURCES INC.

Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 1997

Table of Contents

Item Page
Number Number

PART I -- FINANCIAL INFORMATION

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 13

PART II -- OTHER INFORMATION

1 Legal Proceedings 21

5 Other Information 21

6 Exhibits and Reports on Form 8-K 26

SIGNATURES 27

Page 2 of 27 Pages

<PAGE>

PART I -- FINANCIAL INFORMATION

Item 1. Financial Statements

AGL RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS, NINE MONTHS AND TWELVE MONTHS ENDED
JUNE 30, 1997 AND 1996
(MILLIONS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
Three Months Nine Months Twelve Months
----------------- --------------------- ---------------------
1997 1996 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues .................... $ 216.7 $ 241.6 $ 1,093.0 $ 1,054.3 $ 1,267.3 $ 1,163.7
Cost of Gas ........................... 117.5 141.1 664.3 640.5 749.3 669.8
- -------------------------------------------------------------------------------------------------------
Operating Margin ...................... 99.2 100.5 428.7 413.8 518.0 493.9
- -------------------------------------------------------------------------------------------------------
Other Operating Expenses .............. 84.1 83.1 264.4 257.1 345.7 339.7
- -------------------------------------------------------------------------------------------------------
Operating Income ...................... 15.1 17.4 164.3 156.7 172.3 154.2
- -------------------------------------------------------------------------------------------------------
Other Income .......................... 2.3 2.2 8.4 9.4 11.0 8.9
- -------------------------------------------------------------------------------------------------------
Income Before Interest and Income Taxes 17.4 19.6 172.7 166.1 183.3 163.1
- -------------------------------------------------------------------------------------------------------
Interest Expense and Preferred Stock
Dividends
Interest expense ................ 12.5 11.7 39.8 36.9 52.0 47.9
Dividends on preferred stock
of subsidiaries ............... 1.5 1.1 3.7 3.3 4.8 4.4
- -------------------------------------------------------------------------------------------------------
Total interest expense and
preferred stock dividends 14.0 12.8 43.5 40.2 56.8 52.3
- -------------------------------------------------------------------------------------------------------
Income Before Income Taxes ............ 3.4 6.8 129.2 125.9 126.5 110.8
- -------------------------------------------------------------------------------------------------------
Income Taxes .......................... 2.0 3.2 49.2 48.2 48.6 43.9
- -------------------------------------------------------------------------------------------------------
Net Income ............................ $ 1.4 $ 3.6 $ 80.0 $ 77.7 $ 77.9 $ 66.9
=======================================================================================================

Earnings Per Share of Common Stock $ 0.03 $ 0.06 $ 1.43 $ 1.41 $ 1.40 $ 1.21

Cash Dividends Paid Per Share of
Common Stock $ 0.27 $ 0.265 $ 0.81 $ 0.795 $ 1.075 $ 1.055

Weighted Average Number of Common
Shares Outstanding 56.2 55.4 56.0 55.2 55.9 55.1

</TABLE>

See notes to condensed consolidated financial statements.

Page 3 of 26 Pages

<PAGE>

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

<TABLE>
<CAPTION>
September
June 30, 30,
--------------------- ----------
1997 1996 1996
ASSETS (Unaudited)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents ................... $ 4.3 $ 2.2 $ 8.7
Receivables (less allowance for uncollectible
accounts of $4.8 at June 30, 1997, $3.2
at June 30, 1996, and $2.7 at September
30, 1996) ............................... 124.2 131.2 93.6
Inventories
Natural gas stored underground .......... 95.4 72.7 144.0
Liquefied natural gas ................... 15.1 9.7 16.8
Materials and supplies .................. 7.8 8.4 8.1
Other ................................... 4.3 1.4 3.0
Deferred purchased gas adjustment ........... 9.0 4.7
Other ....................................... 9.3 10.1 10.3
- --------------------------------------------------------------------------------------
Total current assets .................... 269.4 235.7 289.2
- --------------------------------------------------------------------------------------
Property, Plant and Equipment
Utility plant ............................... 2,041.5 1,999.2 1,969.0
Less accumulated depreciation ............... 638.7 619.3 607.8
- --------------------------------------------------------------------------------------
Utility plant - net ..................... 1,402.8 1,379.9 1,361.2
- --------------------------------------------------------------------------------------
Nonutility property ......................... 105.5 16.4 80.5
Less accumulated depreciation ............... 29.7 5.5 26.3
- --------------------------------------------------------------------------------------
Nonutility property - net ............... 75.8 10.9 54.2
- --------------------------------------------------------------------------------------
Total property, plant and equipment - net 1,478.6 1,390.8 1,415.4
- --------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Unrecovered environmental response costs .... 44.4 36.0 38.0
Investment in joint ventures - net .......... 33.9 35.9 35.5
Unrecovered integrated resource plan costs .. 4.5 9.5 10.0
Other ....................................... 45.7 34.9 36.6
- --------------------------------------------------------------------------------------
Total deferred debits and other assets .. 128.5 116.3 120.1
- --------------------------------------------------------------------------------------
Total Assets ...................................... $ 1,876.5 $ 1,742.8 $ 1,824.7
======================================================================================

</TABLE>

See notes to condensed consolidated financial statements.

Page 4 of 26 Pages

<PAGE>

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

<TABLE>
<CAPTION>
September
June 30, 30,
--------------------- ----------
1997 1996 1996
LIABILITIES AND CAPITALIZATION (Unaudited)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Current Liabilities
Accounts payable-trade ................. $ 65.7 $ 70.0 $ 73.7
Short-term debt ........................ 33.5 71.9 152.0
Customer deposits ...................... 29.1 27.8 27.8
Interest ............................... 18.9 17.6 25.7
Taxes .................................. 33.3 28.2 16.0
Redemption requirements on
preferred stock ..................... 14.3 0.3 0.3
Deferred purchased gas adjustment ...... 3.4
Other .................................. 29.6 27.7 27.0
- ---------------------------------------------------------------------------------
Total current liabilities .......... 224.4 246.9 322.5
- ---------------------------------------------------------------------------------
Accumulated Deferred Income Taxes ............ 180.8 150.0 168.5
- ---------------------------------------------------------------------------------
Long-Term Liabilities
Accrued environmental response
costs ............................... 31.3 28.6 30.4
Accrued postretirement benefits
costs ............................... 36.7 34.7 36.2
Deferred credits ....................... 62.1 62.6 60.9
Accrued pension costs .................. 4.9 4.9
- ---------------------------------------------------------------------------------
Total long-term liabilities ........ 130.1 130.8 132.4
- ---------------------------------------------------------------------------------
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 June 30, 1997, June 30,
1996, and September 30, 1996 ....... 44.5 58.5 58.5
Subsidiary obligated mandatorily
redeemable preferred securities .... 74.3
Common stock, $5 par value, shares
issued and outstanding of 56.5
at June 30, 1997, 55.5 at June 30,
1996, and 55.7 at September 30, 1996 637.9 602.1 588.3
- ---------------------------------------------------------------------------------
Total capitalization ............... 1,341.2 1,215.1 1,201.3
- ---------------------------------------------------------------------------------
Total Liabilities and Capitalization ......... $ 1,876.5 $ 1,742.8 $ 1,824.7
=================================================================================

</TABLE>

See notes to condensed consolidated financial statements.

Page 5 of 26 Pages

<PAGE>
AGL RESOURCES INC. AND SUBISIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS AND TWELVE MONTHS ENDED JUNE 30, 1997 AND 1996
(MILLIONS)

<TABLE>
<CAPTION>
Nine Months Twelve Months
------------------ ------------------
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net income ................................... $ 80.0 $ 77.7 $ 77.9 $ 66.9
Adjustments to reconcile net income to
net cash flow from operating activities
Depreciation and amortization ............ 53.3 49.8 70.1 65.0
Deferred income taxes .................... 10.6 11.2 24.5 19.7
Non-cash compensation expense ............ 2.5 2.4 2.8 2.7
Noncash restructuring costs .............. 1.0
Other .................................... (1.8) (1.7) (2.5) (2.2)
Changes in certain assets and liabilities, net
of effects from acquisition of businesses 14.0 (33.9) (34.8) (92.8)
- ---------------------------------------------------------------------------------------------
Net cash flow from operating
activities ........................... 158.6 105.5 138.0 60.3
- ---------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Sale of common stock, net of expenses ........ 1.1 1.4 1.4 1.7
Short-term borrowings, net ................... (118.5) 20.9 (38.4) 71.9
Sale of long-term debt ....................... 30.0 30.0
Sale of preferred securities, net of expenses 74.3 74.3
Dividends paid on common stock ............... (37.9) (36.7) (50.2) (48.5)
- ---------------------------------------------------------------------------------------------
Net cash flow from financing
activities ........................... (51.0) (14.4) 17.1 25.1
- ---------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Utility plant expenditures ................... (94.5) (91.3) (135.3) (129.4)
Cash received from joint ventures ............ 1.9 2.5
Investment in joint ventures ................. (0.9) (0.9) (1.5) (33.5)
Nonutility property expenditures ............. (17.9) 0.3 (17.9) 0.8
Other ........................................ (0.6) (0.7) (0.8) 0.5
- ---------------------------------------------------------------------------------------------
Net cash flow from investing
activities ........................... (112.0) (92.6) (153.0) (161.6)
- ---------------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents ..................... (4.4) (1.5) 2.1 (76.2)
Cash and cash equivalents
at beginning of period ............... 8.7 3.7 2.2 78.4
- ---------------------------------------------------------------------------------------------
Cash and cash equivalents
at end of period ..................... $ 4.3 $ 2.2 $ 4.3 $ 2.2
=============================================================================================
Cash Paid During the Period for
Interest ..................................... $ 46.9 $ 44.9 $ 51.2 $ 49.0
Income taxes ................................. $ 19.3 $ 13.3 $ 28.3 $ 18.2

</TABLE>

See notes to condensed consolidated financial statements.

Page 6 of 26 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.

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), which develops and manages 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.

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

Page 7 of 27 Pages

<PAGE>

AGLC for the fiscal years ended September 30, 1996 and 1995. Certain 1996
amounts have been reclassified for comparability with 1997 amounts.

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 nine-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 June 30, 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. In that regard, AGLC has
learned that the U. S. Environmental Protection Agency (EPA) has conducted
an Expanded Site Investigation at the former MGP site in Sanford, Florida
and has concluded that MGP impacts are present in a nearby lake. The
consequences of this finding have not been determined.

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 obligated to investigate and, if necessary, remediate environmental
impacts at the sites. AGLC has completed soil remediation at the Griffin
site and expects to monitor groundwater for three to six years. Assessment
activities are being conducted at Augusta and have been completed at
Savannah. Those assessment activities are expected to be completed
principally during fiscal 1997. In addition, AGLC has completed removal of
the gas storage holder at the Augusta site.

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

Page 8 of 27 Pages

<PAGE>

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. AGLC cannot
at this time determine the range of costs that may be associated with
investigation and cleanup of the lake near the Sanford MGP site, which
costs may be material. Accordingly, the foregoing estimated range now
excludes those costs and reflects only AGLC's current estimate of the range
of costs for which cost recovery claims against AGLC are reasonably likely.
In addition, those costs do not include other expenses, such as property
damage claims and natural resource 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 on 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 is seeking recovery of appropriate costs from its
insurers and other potentially responsible parties. With respect to its
insurers, AGLC filed a declaratory judgment action against 23 of its
insurance companies in 1991. After the trial court entered a judgment
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.

Page 9 of 27 Pages

<PAGE>

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. 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 50 Negotiated Contracts. Additionally, the Georgia
Commission has approved Special Contracts between AGLC and seven
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

Page 10 of 27 Pages

<PAGE>

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 the
process of considering and adopting these rules progresses, 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) held
discussions of this issue at its July 1997 meeting. The EITF concluded that
once legislation is passed to deregulate a segment of a utility and that
legislation includes sufficient detail for the enterprise to determine how
the transition plan will affect that segment, SFAS 71 should be
discontinued for that segment of the utility. The state of Georgia has
enacted legislation (Senate Bill 215) which allows deregulation of the
merchant function and unbundling of certain ancillary services of local gas
distribution companies. Each local gas company within the state may elect
to be subject to Senate Bill 215 or continue to be regulated in the
traditional manner. Under either scenario, the rates to transport natural
gas through the intrastate pipe system of the local gas distribution
company will be regulated by the Georgia Commission. Since the activities
associated with AGLC's SFAS 71 regulatory assets and liabilities continue
to be regulated, AGLC has concluded that the continued application of SFAS
71 remains appropriate.

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 new rates has
been suspended until November 1, 1997. A schedule for hearings has not yet
been established by the TRA.

Page 11 of 27 Pages

<PAGE>

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.

In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income" (SFAS 130) and Statement of Financial Accounting
Standard No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131). AGL Resources will adopt SFAS 130 and SFAS 131 in
fiscal year 1999. SFAS 130 establishes standards for the reporting and
displaying of comprehensive income and its components (revenues, expenses,
gains, and losses) in a full set of general-purpose financial statements.
SFAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements
and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders.

Management does not expect these new pronouncements to have a
significant impact on the presentation of AGL Resources' consolidated
financial statements.

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

Page 12 of 27 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.

Forward Looking Statements

The Private Securities Litigation Reform Act of 1995 provides for the use
of cautionary statements accompanying forward looking statements. Management's
Discussion and Analysis of Results of Operations and Financial Condition
includes forward looking statements concerning, among other things, estimated
costs of environmental remediation, deregulation and restructuring costs. The
future results for AGL Resources generally may be affected by many factors,
among which are uncertainty as to the regulatory issues, both state and federal,
and uncertainty with regard to environmental issues and competitive issues in
general.

Results of Operations

Three-Month Periods Ended June 30, 1997 and 1996

Explained below are the major factors that had a significant effect on
results of operations for the three-month period ended June 30, 1997, compared
with the same period in 1996.

Operating revenues decreased 10.3% for the three-month period ended June
30, 1997, compared with the same period in 1996 primarily due to decreased
volumes of gas sold as a result of a shift by certain interruptible customers
from interruptible sales to transportation service. Operating revenues are less
when gas is transported for a customer than when it is sold to that customer.
The utility's transportation rate generates the same operating margin as the
applicable sales rate schedule for interruptible sales of gas; therefore,
earnings are not affected. The decrease in operating revenues was offset partly
by increased operating revenues attributable to a nonregulated retail marketing
company formed in July 1996 and the acquisition of propane operations during
February and June, 1997. See Part II, Item 5, "Other Information" in this Form
10-Q.

Cost of gas decreased 16.7% for the three-month period ended June 30,
1997, compared with the same period in 1996 primarily due to decreased volumes
of gas sold to utility customers principally as a result of a shift by certain
interruptible customers from interruptible sales to transportation service. The
decrease in the cost of gas was offset partly by increased cost of gas
attributable to a nonregulated retail marketing company formed in July 1996 and
the acquisition of propane operations during February and June, 1997. See Part
II, Item 5, "Other Information" in this Form 10-Q.

Operating margin decreased 1.3% for the three-month period ended June 30,
1997, compared with the same period in 1996 primarily due to decreased volumes
of gas sold and transported to utility customers. The decrease in operating
margin was offset partly by increased operating margin attributable to a
nonregulated retail marketing company formed in July 1996 and the acquisition of
propane operations during February and June, 1997.See Part II, Item 5, "Other
Information" in this Form 10-Q.

Page 13 of 27 Pages

<PAGE>

Operating expenses increased 1.2% for the three-month period ended June
30, 1997, compared with the same period in 1996 primarily due to increased
operating expenses attributable to a nonregulated retail marketing company
formed in July 1996 and the acquisition of propane operations during February
and June, 1997. See Part II, Item 5, "Other Information" in this Form 10-Q.

Interest expense increased $0.8 million for the three-month period ended
June 30, 1997, compared with the same period in 1996 primarily due to increased
amounts of long-term and short-term debt outstanding during the period.

Dividends on preferred stock of subsidiaries increased $0.4 million for
the three-month period ended June 30, 1997, compared to the same period in 1996
primarily due to dividend requirements related to the issuance of $75 million
principal amount of subsidiary obligated mandatorily redeemable preferred
securities in June 1997 (Capital Securities), as more fully described below
within the caption "Financial Condition."

Income taxes decreased $1.2 million for the three-month period ended June
30, 1997, compared with the same period in 1996 primarily due to decreased
taxable income.

Net income for the three-month period ended June 30, 1997, was $1.4
million, compared with net income of $3.6 million for the same period in 1996.
Earnings per share of common stock were $0.03 for the three-month period ended
June 30, 1997, compared with earnings per share of $0.06 for the same period in
1996. The decreases in net income and earnings per share were primarily due to
(1) decreased operating margin and (2) increased interest expense and preferred
dividend requirements.

Nine-Month Periods Ended June 30, 1997 and 1996

Explained below are the major factors that had a significant effect on
results of operations for the nine-month period ended June 30, 1997, compared
with the same period in 1996.

Operating revenues increased 3.7% for the nine-month period ended June 30,
1997, compared with the same period in 1996 primarily due to (1) increased
operating revenues attributable to a nonregulated retail marketing company
formed in July 1996 and the acquisition of propane operations during February
and June, 1997 (See Part II, Item 5, "Other Information" in this Form 10-Q) and
(2) growth in the number of utility customers served. The increase in operating
revenues was offset partly by (1) decreased volumes of gas sold as a result of
weather that was 24.7% warmer that during the same period in 1996 and (2) a
shift by certain interruptible customers from interruptible sales to
transportation service. Operating revenues are less when gas is transported for
a customer than when it is sold to that customer. The utility's transportation
rate generates the same operating margin as the applicable sales rate schedule
for interruptible sales of gas, therefore, earnings are not affected.

Cost of gas increased 3.7% for the nine-month period ended June 30, 1997,
compared with the same period in 1996 primarily due to (1) increased cost of gas
attributable to a nonregulated retail marketing company formed in July 1996 and
the acquisition of propane operations during February and June, 1997 (See Part
II, Item 5, "Other Information" in this Form 10-Q) and (2) an increase in the
cost of gas purchased for utility system supply. The increase in cost of gas was
offset partly by (1) decreased volumes of gas sold to utility customers as a
result of weather that was 24.7% warmer than during the same period in 1996 and
(2) a shift by certain interruptible customers from interruptible sales to
transportation service. 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.

Page 14 of 27 Pages

<PAGE>

Operating margin increased 3.6% for the nine-month period ended June 30,
1997, compared with the same period in 1996 primarily due to (1) growth in the
number of utility customers served and (2) operating margin attributable to a
nonregulated retail marketing company formed in July 1996 and the acquisition of
propane operations during February and June, 1997. See Part II, Item 5, "Other
Information" in this Form 10-Q. 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 nine-month periods ended June 30, 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 2.8% for the nine-month period ended June 30,
1997, compared with the same period in 1996 primarily due to increased (1)
operating expenses attributable to a nonregulated retail marketing company
formed in July 1996 and the acquisition of propane operations during February
and June, 1997 (See Part II, Item 5, "Other Information" in this Form 10-Q), (2)
uncollectible accounts expense and (3) depreciation expense recorded as a result
of increased depreciable property. The increase in operating expenses was offset
partly by decreased (1) outside services employed and (2) informational
advertising expense.

Other income decreased $1 million for the nine-month period ended June 30,
1997, compared with the same period in 1996 primarily due to (1) decreased
income from a gas marketing joint venture and (2) start-up losses associated
with a power marketing joint venture entered into in August, 1996. 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,
(2) the recovery from utility customers of carrying costs attributable to an
increase in underrecovered deferred purchased gas costs and (3) recoveries of
environmental response costs from insurance carriers and third parties.

Interest expense increased 7.9% for the nine-month period ended June 30,
1997, compared with the same period in 1996 primarily due to increased amounts
of short-term and long-term debt outstanding during the period.

Dividends on preferred stock of subsidiaries increased $0.4 million for
the nine-month period ended June 30, 1997, compared to the same period in 1996
primarily due to dividend requirements related to the issuance of $75 million
principal amount of Capital Securities in June 1997 as more fully described
below within the caption "Financial Condition."

Income taxes increased $1 million for the nine-month period ended June 30,
1997, compared with the same period in 1996 primarily due to increased taxable
income.

Net income for the nine-month period ended June 30, 1997, was $80 million,
compared with net income of $77.7 million for the same period in 1996. Earnings
per share of common stock were $1.43 for the nine-month period ended June 30,
1997, compared with earnings per share of $1.41 for the same period 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 (1) increased operating expenses, (2) increased interest expense and
preferred dividend requirements and (3) decreased other income.

Twelve-Month Periods Ended June 30, 1997 and 1996

Explained below are the major factors that had a significant effect on
results of operations for the twelve-month period ended June 30, 1997, compared
with the same period in 1996.

Operating revenues increased 8.9% for the twelve-month period ended June
30, 1997, compared with the same period in 1996 primarily due to (1) increased
operating revenues attributable to a nonregulated retail marketing company
formed in July 1996 and the acquisition of propane operations during February
and June, 1997 (See Part

Page 15 of 27 Pages

<PAGE>

II, Item 5, "Other Information" in this Form 10-Q), (2) an increase in the cost
of gas 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 (1) decreased volumes of gas sold as a result of
weather that was 25.2% warmer than during the same period in 1996 and (2) a
shift by certain interruptible customers from interruptible sales to
transportation service. Operating revenues are less when gas is transported for
a customer than when it is sold to that customer. The utility's transportation
rate generates the same operating margin as the applicable sales rate schedule
for interruptible sales of gas; therefore, earnings are not affected.

Cost of gas increased 11.9% for the twelve-month period ended June 30,
1997, compared with the same period in 1996 primarily due to (1) increased cost
of gas attributable to a nonregulated retail marketing company formed in July
1996 and the acquisition of propane operations during February and June, 1997
(See Part II, Item 5, "Other Information" in this Form 10-Q) and (2) an increase
in the cost of gas purchased for utility system supply. The increase in cost of
gas was offset partly by (1) decreased volumes of gas sold to utility customers
as a result of weather that was 25.2% warmer than during the same period in 1996
and (2) a shift by certain interruptible customers from interruptible sales to
transportation service. 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 4.9% for the twelve-month period ended June 30,
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 June 30, 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 1.8% for the twelve-month period ended June
30, 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 depreciable property, (3) expenses related to AGLC's Integrated
Resource Plan (IRP) which are recovered through an IRP cost recovery rider
approved by the Georgia Commission, (4) injuries and damages expense and (5)
franchise expenses which are 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 1.3%. The increase in operating expenses was
offset partly by decreased outside services employed.

Other income increased $2.1 million for the twelve-month period ended June
30, 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 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 (1)
decreased income from a gas marketing joint venture and (2) start-up losses
associated with a power marketing joint venture entered into in August, 1996.

Interest expense increased 8.6% for the twelve-month period ended June 30,
1997, compared with the same period in 1996 primarily due to increased amounts
of short-term and long-term debt outstanding during the period.

Page 16 of 27 Pages

<PAGE>

Dividends on preferred stock of subsidiaries increased $0.4 million for
the twelve-month period ended June 30, 1997, compared to the same period in 1996
primarily due to dividend requirements related to the issuance of $75 million
principal amount of Capital Securities in June 1997 as more fully described
below within the caption "Financial Condition."

Income taxes increased $4.7 million for the nine-month period ended June
30, 1997, compared with the same period in 1996 primarily due to increased
taxable income.

Net income for the twelve-month period ended June 30, 1997, was $77.9
million, compared with net income of $66.9 million for the same period in 1996.
Earnings per share of common stock were $1.40 for the twelve-month period ended
June 30, 1997, compared with earnings per share of $1.21 for the same period in
1996. The increases in net income and earnings per share were primarily due to
increased (1) operating margin and (2) other income. The increases in net income
and earnings per share were offset partly by (1) increased operating expenses
and (2) increased interest expense and preferred dividend requirements.

Financial Condition

AGL Resources' primary gas utility business is highly seasonal in nature
and typically shows a substantial increase in accounts receivable from customers
from September 30 to June 30 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
$30.6 million and inventory of gas stored underground and liquefied natural gas
decreased $50.3 million during the nine-month period ended June 30, 1997.
Accounts payable decreased $8 million during the nine-month period ended June
30, 1997, primarily due to a $7 million decrease in accounts payable to gas
suppliers.

Accounts receivable decreased $7 million from June 30, 1996 to June 30,
1997, primarily due to decreased operating revenues. Inventory of gas stored
underground and liquefied natural gas increased $28.1 million from June 30, 1996
to June 30, 1997, primarily due to decreased volumes of gas withdrawn from
storage as a result of weather that was 25.2% warmer during the twelve-month
period ended June 30, 1997, compared with the same period in 1996. Accounts
payable decreased $4.3 million from June 30, 1996 to June 30, 1997, primarily
due to a $5.8 million decrease in accounts payable to gas suppliers.

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. See Part II, Item 5,
"Other Information - Federal Regulatory Matters - Order No. 636," in this Form
10-Q.

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 the restructuring
settlement of Southern Natural Gas Company (Southern) approved by FERC is not
overturned on judicial review and that FERC does not alter its gas supply
realignment (GSR) cost recovery policies on rehearing of its Order No. 636-C.
Although some filings by AGLC's pipeline suppliers have been finally approved by
FERC, other such filings are pending final FERC approval, and the transition
costs are being collected subject to refund. Approximately $90.4 million of such
costs

Page 17 of 27 Pages

<PAGE>

have been incurred by AGLC as of June 30, 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.

On August 1, 1997, AGLC filed its Gas Supply Plan for the twelve-month
period beginning October 1, 1997, which consists of gas supply, transportation
and storage options designed to provide reliable service to firm customers at
the best cost. The proposed plan is similar to the plan currently in effect. The
Georgia Commission may approve the entire supply portfolio contained in the
proposed 1998 Gas Supply Plan, modify the proposed plan or adopt a plan of its
own. A Georgia Commission decision is scheduled for September 12, 1997. Since
the passage of Gas Supply Plan Legislation, the Georgia Commission has
consistently approved AGLC's proposed supply portfolio.

Additionally, the proposed 1998 Gas Supply Plan contains a gas supply
incentive mechanism for off-system sales that is consistent with the incentive
mechanism in Senate Bill 215 (the Natural Gas Competition and Deregulation Act)
and an expanded hedging program. Under the plan, firm service customers and
shareholders would share revenues in excess of the costs of the sale and the
actual cost of the sale would be passed through to firm service customers under
the purchased gas adjustment provisions (PGA) of AGLC's rate schedules. The
financial results of all hedging activities are passed through to firm service
customers under the PGA and, accordingly, there is no earnings impact as a
result of the hedging program.

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 $9
million as of June 30, 1997, an overrecovery position of $3.4 million as of June
30, 1996, and an underrecovery position of $4.7 million as of September 30,
1996. Under the provisions of the utility's rate schedules, any underrecoveries
or overrecoveries of purchased gas costs are included in current assets or
liabilities and have no effect on net income.

The expenditures for plant and other property totaled $112.4 million and
$153.2 for the nine-month and twelve-month periods ended June 30, 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. Effective June 12, 1997, Georgia Gas Service Company
acquired a retail propane distribution company headquartered in Blairsville,
Georgia through the issuance of common stock. See Part II, Item 5, "Other
Information" in this Form 10-Q. Those acquisitions were accounted for using the
purchase method of accounting.

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 decreased by approximately $48.4
million.

AGLC has accrued liabilities of $31.3 million as of June 30, 1997, $28.6
million as of June 30, 1996, and $30.4 million as of September 30, 1996, for
estimated future expenditures covering investigation and remediation of MGP
sites which are expected to be made over a period of several years. 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

Page 18 of 27 Pages

<PAGE>

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.

In June 1997, AGL Resources formed AGL Capital Trust, a Delaware business
trust (the Trust), of which AGL Resources owns all of the common voting
securities. The Trust issued and sold to certain initial investors 8.17% Capital
Securities (liquidation amount $1,000 per Capital Security), the proceeds of
which were used to purchase 8.17% Junior Subordinated Deferrable Interest
Debentures, due June 1, 2037, from AGL Resources. The Capital Securities are
subject to mandatory redemption upon repayment of the Junior Subordinated
Debentures on the stated maturity date of June 1, 2037, upon the earlier
occurrence of certain events or upon the optional prepayment by AGL Resources on
or after June 1, 2007. AGL Resources has fully and unconditionally guaranteed
all of the Trust's obligations with respect to the Capital Securities. Net
proceeds to AGL Resources from the sale of the Junior Subordinated Debentures of
approximately $74 million was used to repay short-term debt and for other
corporate purposes.

In July 1997, AGLC called for the redemption on August 15, 1997, of its
4.5% Cumulative Preferred Stock, 4.72% Cumulative Preferred Stock, 5% Cumulative
Preferred Stock, 7.84% Cumulative Preferred Stock, and 8.32% Cumulative
Preferred Stock at the current call price in effect for each issue. Accordingly,
a current liability associated with those redemptions of $14.3 million is
recorded in the financial statements.

Long-term debt outstanding increased $30 million during the nine-month and
twelve-month periods ended June 30, 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
June 30, 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. During July 1997, the remaining $75.5
million principal amount of Medium Term Notes Series C were issued, with
maturity dates ranging from 20 to 30 years and with interest rates ranging from
7.2% to 7.3%. Net proceeds from that issuance will be used to repay short-term
debt and for other corporate purposes.

Short-term debt decreased $118.5 million and $38.4 million for the
nine-month and twelve-month periods ended June 30, 1997, respectively, primarily
due to the issuance of Capital Securities and long-term debt.

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.

Page 19 of 27 Pages

<PAGE>

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 enacted 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 new rates has been
suspended until November 1, 1997. A schedule for hearings has not yet been
established by the TRA.

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.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income" (SFAS
130) and Statement of Financial Accounting Standard No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131). AGL Resources
will adopt SFAS 130 and SFAS 131 in fiscal year 1999. SFAS 130 establishes
standards for the reporting and displaying of comprehensive income and its
components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders.

Management does not expect these new pronouncements to have a significant
impact on the presentation of AGL Resources' consolidated financial statements.

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

Page 20 of 27 Pages
<PAGE>

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 5. Other Information

Federal Regulatory Matters

Order No. 636

On May 12, 1997, the United States Supreme Court denied petitions for
certiorari filed by AGLC and others challenging the ruling of the United States
Court of Appeals for the District of Columbia Circuit in United Distribution
Cos. v. FERC that FERC has authority over capacity release by local distribution
companies.

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 $105.1 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 the restructuring settlement agreement of Southern approved by FERC
is not overturned on judicial review and that FERC does not alter its GSR
recovery policies on rehearing of its Order 636-C. Although some filings by
AGLC's pipeline suppliers have been finally approved by FERC, other such filings
are pending final FERC approval. Approximately $90.4 million of transition costs
have been incurred by AGLC as of June 30, 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 $86.9 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 June 30, 1997, $78
million of such costs have already been incurred by AGLC.

TENNESSEE GSR Cost Recovery Proceeding. FERC's April 16, 1997 order approving
the restructuring settlement between Tennessee Gas Pipeline Company (Tennessee)
and its customers became final when no party sought rehearing within the
statutory period. As a consequence, Tennessee's recovery of GSR costs from AGLC
is now pursuant to the settlement. AGLC's estimated liability for GSR costs as a
result of the settlement is approximately $13 million. As of June 30, 1997, $6.7
million of such costs have already been incurred by AGLC.

Page 21 of 27 Pages

<PAGE>

FERC Rate Proceedings

TRANSCO The consolidated hearing to address the proposal of Transcontinental Gas
Pipe Line Corporation (Transco) to roll into its general system rates the costs
associated with the Leidy Line and Southern expansion facilities has concluded,
and the matter currently is pending briefing by the parties and an initial
decision by the administrative law judge. AGLC has submitted testimony in
Transco's current rate case to advocate the creation of a balancing charge on
Transco's system.

Arcadian

On May 20, 1997, the United States Court of Appeals for the Eleventh
Circuit issued an order consolidating the various appeals filed by AGLC and
others of the FERC's orders in Arcadian Corp. v. Southern Natural Gas Co. and
ruling that those appeals are no longer being held in abeyance. The consolidated
cases are now pending briefing and decision.

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

State Regulatory Matters

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 the process of
considering and adopting these rules progresses, 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

Page 22 of 27 Pages

<PAGE>

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.

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. On August 5, 1997, AGLC notified the
Georgia Commission that the settlement discussion had concluded without reaching
a settlement. Pursuant to the Georgia Commission's order dated January 30, 1997,
granting AGLC's motion to suspend the proceeding, the new statutory deadline for
a decision by the Georgia Commission on the Plan is September 19, 1997. A
schedule for rebuttal testimony and briefs has not yet been established by the
Georgia Commission.

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 new rates has been
suspended until November 1, 1997. A schedule for hearings has not been
established by the TRA.

See Note 5 to Notes to Condensed Consolidated Financial Statements in this
Form 10-Q for a discussion of state regulatory matters relating to competition.

Page 23 of 27 Pages

<PAGE>

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. In that
regard, AGLC has learned that the EPA has conducted an Expanded Site
Investigation at the former MGP site in Sanford, Florida and has concluded that
MGP impacts are present in a nearby lake. The consequences of this finding have
not been determined.

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 obligated to investigate and, if necessary, remediate
environmental impacts at the sites. AGLC has completed soil remediation at the
Griffin site and expects to monitor groundwater for three to six years.
Assessment activities are being conducted at Augusta and have been completed at
Savannah. Those assessment activities are expected to be completed principally
during fiscal 1997. In addition, AGLC has completed removal of the gas storage
holder at the Augusta site.

Second, AGLC's response to all Georgia sites is proceeding under Georgia's
HSRA. AGLC submitted to EPD formal notifications relating to all of its nine
owned MGP sites, and EPD had listed seven of those sites (Athens, Augusta,
Brunswick, Griffin, Savannah, Valdosta and Waycross) on the HSI. EPD has not
listed the Macon site on the HSI at this time. EPD also has listed the Rome
site, which AGLC has acquired, on the HSI. Under the HSRA regulations, EPD has
determined the four sites subject to consent orders require corrective action;
EPD also has determined the Athens site requires corrective action and will
determine whether corrective action is required at the three remaining sites
(Brunswick, Rome and Waycross) in due course. In that respect, however, AGLC has
submitted to EPD CSRs for the Brunswick and Rome MGP sites, and AGLC has
concluded that 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.
AGLC cannot at this time determine the range of costs that may be associated
with investigation and cleanup of the lake near the Sanford MGP site, which
costs may be material. Accordingly, the foregoing estimated range now excludes
those costs and reflects only AGLC's current estimate of the range of costs for
which cost recovery claims against AGLC are reasonably likely. In addition,
those costs do not include other expenses, such as property damage claims and
natural resource 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 on 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

Page 24 of 27 Pages

<PAGE>

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 is seeking 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

On February 10, 1995, a class action lawsuit captioned Trinity Christian
Methodist Episcopal Church, et al. v. Atlanta Gas Light Company, No. 95-RCCV-93,
was filed in the Superior Court of Richmond County, Georgia seeking to recover
for damage to property owned by persons adjacent to and nearby the former
manufactured gas plant site in Augusta, Georgia. On December 13, 1996, the
parties reached a preliminary settlement, which was finally approved by the
Court on April 15, 1997. Pursuant to the settlement, there is a claims process
before an umpire to determine either the full fair market value of properties
tendered to AGLC or the diminution in fair market value of properties not
tendered to AGLC. Thus far, awards have been made to fifty-four (54) property
owners in the class totaling approximately $5.7 million, including legal fees
and expenses of the plaintiffs. There are approximately eighty-four (84) awards
yet to be made. AGLC has filed motions to vacate six awards totaling
approximately $4.4 million. An order was entered on July 8, 1997, denying the
motion to vacate. AGLC has filed a notice of appeal to the Georgia Court of
Appeals seeking to reverse the denial of the motion to vacate.

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 Acquisitions

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.

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). Effective June 12, 1997, Georgia Gas Service
acquired Capitol Fuels, Inc., a retail propane distribution company
headquartered in Blairsville, Georgia. The acquisitions of the Jordan Gas
Propane Companies and Capitol Fuels, Inc. are expected to increase the retail
sales of Georgia Gas Service's propane operations from 7 million gallons
annually to

Page 25 of 27 Pages

<PAGE>

approximately 33 million gallons annually. As a result of the acquisitions,
Georgia Gas Service will serve approximately 43,000 customers in northern
Georgia, northern Alabama and western North Carolina.

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 26 of 27 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 August 14, 1997 /s/ David R. Jones
David R. Jones
President and Chief Executive Officer

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

Page 27 of 27 Pages

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