XNYS:GAS AGL Resources Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended March 31, 2012
 
OR
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from        to
 
Commission File Number 1-14174
 
AGL RESOURCES INC.
(Exact name of registrant as specified in its charter)
 
Georgia
58-2210952
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
Ten Peachtree Place NE, Atlanta, Georgia 30309
(Address and zip code of principal executive offices)
 
404-584-4000
(Registrant's telephone number, including area code)
 
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” ”accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ
      Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)       
      Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ¨ No þ
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.
 
Class
Outstanding as of April 26, 2012
Common Stock, $5.00 Par Value
                        117,310,372

 
 

 
AGL RESOURCES INC.

Quarterly Report on Form 10-Q

For the Quarter Ended March 31, 2012


   
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2011 Form 10-K
Our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on February 22, 2012
 
AGL Capital
AGL Capital Corporation
 
AGL Credit Facility
$1.3 billion credit agreement entered into by AGL Capital to support the AGL Capital commercial paper program
 
Atlanta Gas Light
Atlanta Gas Light Company
 
Bcf
Billion cubic feet
 
Central Valley
Central Valley Gas Storage, LLC
 
Chattanooga Gas
Chattanooga Gas Company
 
EBIT
Earnings before interest and taxes, a non-GAAP measure that includes operating income and other income and excludes financing costs, including interest on debt and income tax expense each of which we evaluate on a consolidated level. As an indicator of our operating performance, EBIT should not be considered an alternative to, or more meaningful than, earnings before income taxes, or net income attributable to AGL Resources Inc. as determined in accordance with GAAP
 
ERC
Environmental remediation costs associated with our distribution operations segment which are generally recoverable through rate mechanisms
 
FASB
Financial Accounting Standards Board
 
FERC
Federal Energy Regulatory Commission
 
Fitch
Fitch Ratings
 
GAAP
Accounting principles generally accepted in the United States of America
 
Georgia Commission
Georgia Public Service Commission, the state regulatory agency for Atlanta Gas Light
 
Georgia Natural Gas
The name under which SouthStar does business in Georgia
 
Golden Triangle Storage
Golden Triangle Storage, Inc.
 
Hampton Roads
Virginia Natural Gas’ pipeline project which connects its northern and southern pipelines
 
Heating Degree Days
A measure of the effects of weather on our businesses, calculated when the average daily temperatures are less than 65 degrees Fahrenheit
 
Heating Season
The period from November through March when natural gas usage and operating revenues are generally higher because weather is colder
 
Henry Hub
A major interconnection point of natural gas pipelines in Erath, Louisiana where NYMEX natural gas future contracts are priced
 
Horizon Pipeline
Horizon Pipeline Company, LLC
 
Illinois Commission
Illinois Commerce Commission, the state regulatory agency for Nicor Gas
 
Jefferson Island
Jefferson Island Storage & Hub, LLC
 
LIBOR
London Inter-Bank Offered Rate
 
LOCOM
Lower of weighted average cost or current market price
 
Magnolia
Magnolia Enterprise Holdings, Inc.
   
Marketers
Marketers selling retail natural gas in Georgia and certificated by the Georgia Commission
Merger Agreement
Agreement and Plan of Merger, dated December 6, 2010, as amended by and among the Company, Nicor, Apollo Acquisition Corp, an Illinois corporation and wholly owned subsidiary of the Company and Ottawa Acquisition LLC, an Illinois Limited Liability Company and a wholly owned subsidiary of the Company
Mcf
Thousand cubic feet
MGP
Manufactured gas plant
Moody’s
Moody’s Investors Service
New Jersey BPU
New Jersey Board of Public Utilities, the state regulatory agency for Elizabethtown Gas
Nicor
Nicor Inc. - an acquisition completed in December 2011 and former holding company of Nicor Gas
Nicor Advanced Energy
Prairie Point Energy, LLC, doing business as
Nicor Advanced Energy
Nicor Gas
Northern Illinois Gas Company, doing business as Nicor Gas Company
Nicor Gas Credit Facility
$700 million credit facility entered into by Nicor Gas to support its commercial paper
program
Nicor Services
Nicor Energy Services Company
Nicor Solutions
Nicor Solutions, LLC
NUI
NUI Corporation – an acquisition completed in November 2004
NYMEX
New York Mercantile Exchange, Inc.
OCI
Other comprehensive income
Operating margin
A non-GAAP measure of income, calculated as operating revenues minus cost of goods sold, that excludes operation and maintenance expense, depreciation and amortization, taxes other than income taxes, and gains or losses on the sale of our assets; these items are included in our calculation of operating income as reflected in our Consolidated Statements of Income. Operating margin should not be considered an alternative to, or more meaningful than, operating income as determined in accordance with GAAP
PBR
Performance-based rate, a regulatory plan that provided economic incentives based on natural gas cost performance
Piedmont
Piedmont Natural Gas Company, Inc.
PP&E
Property, plant and equipment
S&P
Standard & Poor’s Ratings Services
Sawgrass Storage
Sawgrass Storage, LLC
SEC
Securities and Exchange Commission
Sequent
Sequent Energy Management, L.P.
Seven Seas
Seven Seas Insurance Company, Inc.
SNG
Substitute natural gas, a synthetic form of gas manufactured from coal
SouthStar
SouthStar Energy Services LLC
STRIDE
Atlanta Gas Light’s Strategic Infrastructure Development and Enhancement program
Term Loan Facility
$300 million credit agreement entered into by AGL Capital to repay the $300 million senior notes due in 2011
TEU
Twenty-foot equivalent unit, a measure of volume in containerized shipping equal to one 20-foot-long container
Triton
Triton Container Investments LLC, a cargo container leasing company in which we have an investment
Tropical Shipping
A wholly owned business and a carrier of containerized freight in the Bahamas and the Caribbean region
VaR
Value at risk is defined as the maximum potential loss in portfolio value over a specified time period that is not expected to be exceeded within a given degree of probability
Virginia Natural Gas
Virginia Natural Gas, Inc.
Virginia Commission
Virginia State Corporation Commission, the state regulatory agency for Virginia Natural Gas
WACOG
Weighted average cost of gas
WNA
Weather normalization adjustment



 
AGL RESOURCES INC. AND SUBSIDIARIES
(UNAUDITED)

   
As of
 
In millions
 
March 31, 2012
   
December 31, 2011
   
March 31, 2011
 
Current assets
                 
Cash and cash equivalents
  $ 71     $ 69     $ 85  
Short-term investments
    57       53       0  
Receivables
                       
Energy marketing receivables
    386       607       565  
Gas, unbilled and other receivables
    577       692       367  
Less allowance for uncollectible accounts
    19       15       21  
Total receivables
    944       1,284       911  
Inventories, net
    464       750       361  
Derivative instruments – current portion
    218       226       111  
Regulatory assets – current portion
    137       131       73  
Other current assets
    131       233       46  
Total current assets
    2,022       2,746       1,587  
Long-term assets and other deferred debits
                       
Property, plant and equipment
    9,920       9,779       6,348  
Less accumulated depreciation
    1,947       1,879       1,830  
Property, plant and equipment, net
    7,973       7,900       4,518  
Goodwill
    1,813       1,813       418  
Regulatory assets – noncurrent portion
    1,057       1,079       434  
Derivative instruments – noncurrent portion
    48       62       29  
Other
    326       313       40  
Total long-term assets and other deferred debits
    11,217       11,167       5,439  
Total assets
  $ 13,239     $ 13,913     $ 7,026  
Current liabilities
                       
Energy marketing trade payables
  $ 425     $ 590     $ 628  
Accounts payable – trade
    205       294       154  
Regulatory liabilities – current portion
    173       112       77  
Accrued expenses
    145       162       141  
Accrued regulatory infrastructure program costs – current portion
    149       131       69  
Short-term debt
    730       1,321       25  
Derivative instruments – current portion
    93       99       25  
Accrued environmental remediation liabilities – current portion
    39       37       15  
Other current liabilities
    389       338       179  
Total current liabilities
    2,348       3,084       1,313  
Long-term liabilities and other deferred credits
                       
Long-term debt
    3,558       3,561       2,173  
Accumulated deferred income taxes
    1,447       1,445       803  
Regulatory liabilities – noncurrent portion
    1,431       1,405       296  
Accrued pension obligations
    228       238       153  
Accrued regulatory infrastructure program costs
    110       145       143  
Accrued environmental remediation liabilities
    289       290       126  
Accrued other retirement benefit costs
    318       320       34  
Derivative instruments – noncurrent portion
    10       11       3  
Other long-term liabilities and other deferred credits
    74       75       62  
Total long-term liabilities and other deferred credits
    7,465       7,490       3,793  
Total liabilities and other deferred credits
    9,813       10,574       5,106  
Commitments, guarantees and contingencies (see Note 9)
                       
Equity
                       
AGL Resources Inc. common shareholders’ equity, $5 par value; 750,000,000 shares authorized
    3,410       3,318       1,903  
Noncontrolling interest
    16       21       17  
Total equity
    3,426       3,339       1,920  
Total liabilities and equity
  $ 13,239     $ 13,913     $ 7,026  
See Notes to Condensed Consolidated Financial Statements (Unaudited).
         



AGL RESOURCES INC. AND SUBSIDIARIES
(UNAUDITED)


   
Three months ended
 
   
March 31,
 
In millions, except per share amounts
 
2012
   
2011
 
Operating revenues
  $ 1,404     $ 878  
Operating expenses
               
Cost of goods sold
    719       455  
Operation and maintenance
    245       126  
Depreciation and amortization
    104       41  
Taxes other than income taxes
    64       13  
Nicor merger expenses
    10       5  
Total operating expenses
    1,142       640  
Operating income
    262       238  
Other income
    4       1  
Interest expense, net
    (47 )     (29 )
Earnings before income taxes
    219       210  
Income tax expense
    80       76  
Net income
    139       134  
Less net income attributable to the noncontrolling interest
    9       10  
Net income attributable to AGL Resources Inc.
  $ 130     $ 124  
Per common share data
               
Basic earnings per common share attributable to AGL Resources Inc. common shareholders
  $ 1.12     $ 1.60  
Diluted earnings per common share attributable to AGL Resources Inc. common shareholders
  $ 1.11     $ 1.59  
Cash dividends declared per common share
  $ 0.36     $ 0.45  
Weighted average number of common shares outstanding
               
Basic
    116.7       77.7  
Diluted
    117.0       78.0  
See Notes to Condensed Consolidated Financial Statements (Unaudited).



AGL RESOURCES INC. AND SUBSIDIARIES
(UNAUDITED)

   
Three months ended
 
   
March 31,
 
In millions
 
2012
   
2011
 
Net income
  $ 139     $ 134  
Other comprehensive income (loss), net of tax
               
Retirement benefit plans
               
Reclassification of losses and prior service costs to net periodic pension cost (net of income tax of $1 in 2012)
    1       0  
Retirement benefit plans, net
    1       0  
Cash flow hedges, net of tax
               
Net derivative instrument losses arising during the period (net of income tax of $1 in 2012 and $1 in 2011)
    (2 )     (1 )
Cash flow hedges, net
    (2 )     (1 )
Other comprehensive loss, net of tax
    (1 )     (1 )
Comprehensive income
    138       133  
    Less comprehensive income attributable to noncontrolling interest
    0       0  
Comprehensive income attributable to AGL Resources Inc.
  $ 138     $ 133  
See Notes to Condensed Consolidated Financial Statements (Unaudited).


AGL RESOURCES INC. AND SUBSIDIARIES
(UNAUDITED)

   
AGL Resources Inc. Shareholders
             
   
Common stock
   
Additional paid-in
   
Retained
   
Accumulated other comprehensive
   
Treasury
   
Noncontrolling
       
In millions, except per share amounts
 
Shares
   
Amount
   
capital
   
earnings
   
loss
   
shares
   
interest
   
Total
 
Balance as of December 31, 2010
    78.0     $ 391     $ 631     $ 943     $ (150 )   $ (2 )   $ 23     $ 1,836  
Net income
    0.0       0       0       124       0       0       10       134  
Other comprehensive loss
    0.0       0       0       0       (1 )     0       0       (1 )
Dividends on common stock ($0.45 per share)
    0.0       0       1       (35 )     0       0       0       (34 )
Distributions to noncontrolling interest
    0.0       0       0       0       0       0       (16 )     (16 )
Benefit, dividend reinvestment and stock purchase plans
    0.2       1       2       0       0       (2 )     0       1  
Purchase of treasury shares
    0.0       0       0       0       0       (2 )     0       (2 )
Stock-based compensation expense (net of tax)
    0.0       0       2       0       0       0       0       2  
Balance as of March 31, 2011
    78.2     $ 392     $ 636     $ 1,032     $ (151 )   $ (6 )   $ 17     $ 1,920  


   
AGL Resources Inc. Shareholders
             
   
Common stock
   
Additional paid-in
   
Retained
   
Accumulated other comprehensive
   
Treasury
   
Noncontrolling
       
In millions, except per share amounts
 
Shares
   
Amount
   
capital
   
earnings
   
loss
   
shares
   
interest
   
Total
 
Balance as of December 31, 2011
    117.0     $ 586     $ 1,989     $ 967     $ (217 )   $ (7 )   $ 21     $ 3,339  
Net income
    0.0       0       0       130       0       0       9       139  
Other comprehensive loss
    0.0       0       0       0       (1 )     0       0       (1 )
Dividends on common stock ($0.36 per share)
    0.0       0       0       (42 )     0       0       0       (42 )
Distributions to noncontrolling interest
    0.0       0       0       0       0       0       (14 )     (14 )
Benefit, dividend reinvestment and stock purchase plans
    0.2       1       3       0       0       (1 )     0       3  
Stock-based compensation expense (net of tax)
    0.0       0       2       0       0       0       0       2  
Balance as of March 31, 2012
    117.2     $ 587     $ 1,994     $ 1,055     $ (218 )   $ (8 )   $ 16     $ 3,426  
See Notes to Condensed Consolidated Financial Statements (Unaudited).



 


AGL RESOURCES INC. AND SUBSIDIARIES
(UNAUDITED)


   
Three months ended
 
   
March 31,
 
In millions
 
2012
   
2011
 
Cash flows from operating activities
           
Net income
  $ 139     $ 134  
Adjustments to reconcile net income to net cash flow provided by operating activities
               
Depreciation and amortization
    104       41  
Change in derivative instrument assets and liabilities
    15       48  
Deferred income taxes
    0       23  
Changes in certain assets and liabilities
               
Inventories, net of temporary LIFO liquidation
    375       278  
Receivables, other than energy marketing
    119       28  
Prepaid taxes
    90       26  
Energy marketing receivables and trade payables, net
    56       107  
Trade payables, other than energy marketing
    (89 )     (23 )
Other – net
    7       56  
Net cash flow provided by operating activities
    816       718  
Cash flows from investing activities
               
Expenditures for property, plant and equipment
    (171 )     (94 )
Net cash flow used in investing activities
    (171 )     (94 )
Cash flows from financing activities
               
Net payments and borrowings of short-term debt
    (591 )     (707 )
Dividends paid on common shares
    (42 )     (34 )
Distribution to noncontrolling interest
    (14 )     (16 )
Payment of senior notes
    0       (300 )
Payments of term loan facility
    0       (150 )
Proceeds from term loan facility
    0       150  
Issuance of senior notes
    0       495  
Other
    4       (1 )
Net cash flow used in financing activities
    (643 )     (563 )
Net increase in cash and cash equivalents
    2       61  
Cash and cash equivalents at beginning of period
    69       24  
Cash and cash equivalents at end of period
  $ 71     $ 85  
Cash paid during the period for
               
Interest
  $ 54     $ 36  
Income taxes
  $ 0     $ 1  
See Notes to Condensed Consolidated Financial Statements (Unaudited).



 


General

AGL Resources Inc. is an energy services holding company that conducts substantially all its operations through its subsidiaries. Unless the context requires otherwise, references to “we,” “us,” “our,” the “company,” or “AGL Resources” mean consolidated AGL Resources Inc. and its subsidiaries.

On December 9, 2011, we closed our merger with Nicor and created a combined company with increased scale and scope in the distribution, storage and transportation of natural gas. As such, the businesses acquired as part of the merger are included for 2012 but not 2011 in our unaudited Condensed Consolidated Financial Statements. See Note 3 for additional information.

In addition, as a result of the Nicor merger, AGL Resources shareholders of record as of the close of business on December 8, 2011, received a pro rata dividend for the stub period, accruing from November 19, 2011. The dividend payments made in February 2012 were reduced by this stub period dividend.

The December 31, 2011 Condensed Consolidated Statement of Financial Position data was derived from our audited financial statements, but does not include all disclosures required by GAAP. We have prepared the accompanying unaudited Condensed Consolidated Financial Statements under the rules and regulations of the SEC. In accordance with such rules and regulations, we have condensed or omitted certain information and notes normally included in financial statements prepared in conformity with GAAP. Our unaudited Condensed Consolidated Financial Statements reflect all adjustments of a normal recurring nature that are, in the opinion of management, necessary for a fair presentation of our financial results for the interim periods. You should read these unaudited Condensed Consolidated Financial Statements in conjunction with our Consolidated Financial Statements and related notes included in Item 8 of our 2011 Form 10-K.

Due to the seasonal nature of our business and other factors, our results of operations and our financial condition for the periods presented, are not necessarily indicative of the results of operations and financial condition to be expected as of or for any other period.

Basis of Presentation

Our unaudited Condensed Consolidated Financial Statements include our accounts, the accounts of our wholly owned subsidiaries, the accounts of our majority-owned and controlled subsidiaries and the accounts of our consolidated variable interest entity (VIE) for which we are the primary beneficiary. For unconsolidated entities that we do not control, but exercise significant influence over, we use the equity method of accounting and our proportionate share of income or loss is recorded in the unaudited Condensed Consolidated Statements of Income. See Note 8 for additional information. We have eliminated intercompany profits and transactions in consolidation except for intercompany profits where recovery of such amounts are probable under the affiliates’ rate regulation process.

Certain amounts from prior periods have been reclassified and revised to conform to the current-period presentation. The reclassifications and revisions had no material impact on our prior period balances.


Our accounting policies are described in Note 2 to our Consolidated Financial Statements and related notes included in Item 8 of our 2011 Form 10-K. There were no significant changes to our accounting policies during the three months ended March 31, 2012.

Use of Accounting Estimates
 
The preparation of our financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates on an ongoing basis. Our estimates may involve complex situations requiring a high degree of judgment either in the application and interpretation of existing literature or in the development of estimates that impact our financial statements. The most significant estimates relate to our pipeline replacement program accruals, environmental liability accruals, uncollectible accounts and other allowance for contingent losses, goodwill and intangible assets, retirement plan benefit obligations, derivative and hedging activities and provisions for income taxes. Our actual results could differ from our estimates.




 
Investments

Our investments in debt and equity securities are as follows:

In millions
 
March 31,
2012
   
December 31,
2011
   
March 31,
2011
 
Money market funds
  $ 68     $ 59     $ 0  
Corporate bonds
    8       6       0  
Other investments
    5       7       0  
Total
  $ 81     $ 72     $ 0  

Investments in debt and equity securities are classified on the unaudited Condensed Consolidated Statements of Financial Position as follows:

In millions
 
March 31, 2012
   
December 31, 2011
   
March 31,
2011
 
Cash equivalents
  $ 13     $ 9     $ 0  
Short-term investments
    57       53       0  
Long-term investments
    11       10       0  
Total
  $ 81     $ 72     $ 0  

Investments categorized as trading (including money market funds) totaled $68 million at March 31, 2012 and $59 million at December 31, 2011. 

Corporate bonds and certain other investments are categorized as held-to-maturity. The contractual maturities of the held-to-maturity investments at March 31, 2012 are as follows:

   
Years to maturity
       
 
In millions
 
Less than 1 year
   
1-5 years
   
5-10 years
   
Total
 
Held-to-maturity investments
  $ 2     $ 6     $ 0     $ 8  

Our investments also include certain investments, including certificates of deposit and bank accounts, maintained to fulfill statutory or contractual requirements. These investments totaled $1 million at March 31, 2012 and $3 million at December 31, 2011. Gains or losses included in earnings resulting from the sale of investments were not significant.

Inventories

Nicor Gas’ inventory is carried at cost on a last-in-first-out (LIFO) basis. Inventory decrements occurring during interim periods that are expected to be restored prior to year-end are charged to cost of goods sold at the estimated annual replacement cost, and the difference between this cost and the actual LIFO layer cost is recorded as a temporary LIFO inventory liquidation. This is classified in other current liabilities on our unaudited Condensed Consolidated Statements of Financial Position. The inventory decrement as of March 31, 2012 is expected to be restored prior to year-end. Interim inventory decrements not expected to be restored prior to year-end are charged to cost of goods sold at the actual LIFO cost of the layers liquidated.

Our retail operations, wholesale services and midstream operations segments evaluate the weighted average cost of their natural gas inventories against market prices to determine whether any declines in market prices below the WACOG are other-than-temporary. For any declines considered to be other-than-temporary, we record adjustments to reduce the weighted average cost of the natural gas inventory to market price. Consequently, as a result of declining natural gas prices during the three months ended March 31, 2012 and 2011, retail operations, wholesale services and midstream operations recorded LOCOM adjustments to cost of goods sold in the following amounts, to reduce the value of their inventories to market value.
 
In millions
 
2012
   
2011
 
Retail operations
  $ 3     $ 0  
Wholesale services
    18       0  
Midstream operations
    1       0  

Energy Marketing Receivables and Payables

Our wholesale services segment provides services to retail and wholesale marketers and utility and industrial customers. These customers, also known as counterparties, utilize netting agreements, which enable our wholesale services segment to net receivables and payables by counterparty. Wholesale services also nets across product lines and against cash collateral, provided the master netting and cash collateral agreements include such provisions. The amounts due from or owed to wholesale services’ counterparties are settled net, but are recorded on a gross basis in our unaudited Condensed Consolidated Statements of Financial Position as energy marketing receivables and energy marketing payables.

 
Our wholesale services segment has some trade and credit contracts that have explicit minimum credit rating requirements. These credit rating requirements typically give counterparties the right to suspend or terminate credit if our credit ratings are downgraded to non-investment grade status. Under such circumstances, wholesale services would need to post collateral to continue transacting business with some of its counterparties. No collateral has been posted under such provisions since our credit ratings have always exceeded the minimum requirements. As of March 31, 2012, December 31, 2011 and March 31, 2011, the collateral that wholesale services would have been required to post if our credit ratings had been downgraded to non-investment grade status would not have had a material impact to our consolidated results of operations, cash flows or financial condition. However, if such collateral were not posted, wholesale services’ ability to continue transacting business with these counterparties would be negatively impacted.

Fair Value Measurements

We have several financial and nonfinancial assets and liabilities subject to fair value measures. These financial assets and liabilities include cash and cash equivalents, accounts receivable, accounts payable and debt. The carrying values of cash and cash equivalents, short and long-term investments, derivative assets and liabilities, short-term debt, other current assets and liabilities and accrued interest approximate fair value. The nonfinancial assets and liabilities include pension and other retirement benefits, which are presented in Note 4 to our Consolidated Financial Statements and related notes included in Item 8 of our 2011 Form 10-K.
 
As defined in the authoritative guidance related to fair value measurements and disclosures, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We utilize market data or assumptions that market participants would use in valuing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. We primarily apply the market approach for recurring fair value measurements to utilize the best available information. Accordingly, we use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. We classify fair value balances based on the observance of those inputs in accordance with the fair value hierarchy.

Natural Gas Derivative Instruments

The fair value of natural gas derivative instruments we use to manage exposures arising from changing natural gas prices reflects the estimated amounts that we would receive or pay to terminate or close the contracts at the reporting date, taking into account the current unrealized gains or losses on open contracts. We use external market quotes and indices to value substantially all of our derivative instruments. See Note 5 for additional derivative disclosures.

Distribution Operations Nicor Gas, subject to review by the Illinois Commission, and Elizabethtown Gas, in accordance with a directive from the New Jersey BPU, enter into derivative instruments to hedge the impact of market fluctuations in natural gas prices. In accordance with the authoritative guidance related to derivatives and hedging, such derivative transactions are accounted for at fair value each reporting period in our unaudited Condensed Consolidated Statements of Financial Position. In accordance with regulatory requirements realized gains and losses related to these derivatives are reflected in natural gas costs and ultimately included in billings to customers. Thus, hedge accounting is not elected and, in accordance with accounting guidance pertaining to rate-regulated entities, unrealized changes in the fair value of these derivative instruments are deferred or accrued as regulatory assets or liabilities.

Nicor Gas also enters into swap agreements to reduce the earnings volatility of certain forecasted operating costs arising from fluctuations in natural gas prices, such as the purchase of natural gas for use in its operations. These derivative instruments are carried at fair value. To the extent hedge accounting is not elected, changes in such fair values are immediately recorded in the current period as operation and maintenance expense.

Retail Operations We have designated a portion of these derivative instruments, consisting of financial swaps to manage the risk associated with forecasted natural gas purchases and sales, as cash flow hedges under the authoritative guidance related to derivatives and hedging. We record derivative gains or losses arising from cash flow hedges in OCI and reclassify them into earnings in the same period as the settlement of the underlying hedged item.

We currently have minimal hedge ineffectiveness defined as when the gains or losses on the hedging instrument do not offset the losses or gains on the hedged item. This cash flow hedge ineffectiveness is recorded in cost of goods sold in our unaudited Condensed Consolidated Statements of Income in the period in which it occurs. We have not designated the remainder of our derivative instruments as hedges under the authoritative guidance related to derivatives and hedging and, accordingly, we record changes in the fair value of such instruments within cost of goods sold in our Consolidated Statements of Income in the period of change.

We enter into weather derivative contracts as economic hedges of operating margins in the event of warmer-than-normal weather in the Heating Season. We account for these contracts using the intrinsic value method under the authoritative guidance related to financial instruments. These weather derivative instruments do not qualify for accounting hedge designation and changes in value are reflected in cost of goods sold on our unaudited Condensed Consolidated Statements of Income.

Wholesale Services We purchase natural gas for storage when the difference in the current market price we pay to buy and transport natural gas plus the cost to store the natural gas is less than the market price we can receive in the future, resulting in a positive net operating margin. We use NYMEX futures contracts and other OTC derivatives to sell natural gas at that future price to substantially lock in the operating margin we will ultimately realize when the stored natural gas is sold. These futures contracts meet the definition of derivatives under the authoritative guidance related to derivatives and hedging and are accounted for at fair value in our Consolidated Statements of Financial Position, with changes in fair value recorded in our unaudited Condensed Consolidated Statements of Income in the period of change. These futures contracts are not designated as hedges as may be permitted under the guidance.

The purchase, transportation, storage and sale of natural gas are accounted for on a weighted average cost or accrual basis, as appropriate, rather than on the fair value basis we utilize for the derivatives used to mitigate the natural gas price risk associated with our storage portfolio. This difference in accounting can result in volatility in our reported earnings, even though the economic margin is essentially unchanged from the date the transactions were consummated.

Midstream Operations During the construction of our storage caverns, we use derivative instruments to reduce our exposure to the risk of changes in the price of natural gas that will be purchased in future periods for gas associated with bringing our facilities into service, including pad gas that is considered to be a component of the storage cavern's construction costs. We use derivative instruments to economically hedge operational and optimization purchases and sales and do not qualify as cash flow hedges.

We have designated as cash flow hedges, those derivative instruments executed to manage the risk with the purchase of pad gas. Any derivative gains or losses arising from the cash flow hedges will remain in accumulated OCI until the pad gas is sold, which will not occur until the storage caverns are decommissioned. The fair value of these derivative instruments currently have minimal hedge ineffectiveness which is recorded in cost of goods sold in our Consolidated Statements of Income in the period in which it occurs.

Earnings Per Common Share

We compute basic earnings per common share attributable to AGL Resources Inc. common shareholders by dividing our income attributable to AGL Resources Inc. by the daily weighted average number of common shares outstanding. Diluted earnings per common share attributable to AGL Resources Inc. common shareholders reflect the potential reduction in earnings per common share attributable to AGL Resources Inc. common shareholders that could occur when potentially dilutive common shares are added to common shares outstanding. The increase in weighted average shares is primarily due to the issuance of 38.2 million shares in connection with the Nicor merger.

We derive our potentially dilutive common shares by calculating the number of shares issuable under restricted stock, restricted stock units and stock options. The vesting of certain shares of the restricted stock and restricted stock units depends on the satisfaction of defined performance criteria. The future issuance of shares underlying the outstanding stock options depends on whether the exercise prices of the stock options are less than the average market price of the common shares for the respective periods. The following table shows the calculation of our diluted shares attributable to AGL Resources Inc. common shareholders for the periods presented, if performance units currently earned under the plan ultimately vest and if stock options currently exercisable at prices below the average market prices are exercised:

   
Three months ended March 31,
 
In millions (except per share amounts)
 
2012
   
2011
 
Net income attributable to AGL Resources Inc.
  $ 130     $ 124  
Denominator:
               
Basic weighted average number of shares outstanding (1)
    116.7       77.7  
Effect of dilutive securities
    0.3       0.3  
Diluted weighted average number of shares outstanding
    117.0       78.0  
                 
Basic and diluted earnings per share
               
Basic
  $ 1.12     $ 1.60  
Diluted
  $ 1.11     $ 1.59  
(1) Daily weighted average shares outstanding.
       

The following table contains the weighted average shares attributable to outstanding stock options that were excluded from the computation of diluted earnings per common share attributable to AGL Resources Inc. because their effect would have been anti-dilutive, as the exercise prices were greater than the average market price:




   
March 31,
 
In millions
 
2012
   
2011
 
Three months ended
    0.0       0.7  

The decrease in the number of shares that were excluded from the computation for the three months ended March 31, 2012 is primarily the result of an increase in the average market value of our common shares compared to the same period during 2011.

Regulatory Assets and Liabilities

We account for the financial effects of regulation in accordance with authoritative guidance related to regulated entities whose rates are designed to recover the costs of providing service. In accordance with this guidance, incurred costs and estimated future expenditures that would otherwise be charged to expense in the current period are capitalized as regulatory assets when it is probable that such costs or expenditures will be recovered in rates in the future. Similarly, we recognize regulatory liabilities when it is probable that regulators will require customer refunds through future rates or when revenue is collected from customers for expenditures that have not yet been incurred. Generally, regulatory assets are amortized into expense and regulatory liabilities are amortized into income over the period authorized by the regulatory commissions. We are not aware of any evidence that these costs will not be recoverable through either rate riders or base rates, and we believe that we will be able to recover these costs, consistent with our historical recoveries. In the event that the authoritative guidance related to regulated operations were no longer applicable, we would recognize a write-off of regulatory assets that would result in a charge to net income, and be classified as an extraordinary item.

Our regulatory assets and liabilities are summarized in the following table.

In millions
 
March 31, 2012
   
December 31,
2011 (1)
   
March 31,
2011
 
Regulatory assets - current
                 
    Recoverable regulatory infrastructure program costs
  $ 48     $ 48     $ 49  
    Recoverable retirement benefit costs
    29       29       0  
    Recoverable ERC
    7       7       7  
  Other
    53       47       17  
Total regulatory assets - current
    137       131       73  
Regulatory assets - long-term
                       
    Recoverable ERC
    349       351       162  
    Recoverable regulatory infrastructure program costs
    291       305       231  
Recoverable retirement benefit costs
    256       262       9  
Unamortized losses on reacquired debt
    21       21       10  
Other
    140       140       22  
Total regulatory assets - long-term
    1,057       1,079       434  
Total regulatory assets
  $ 1,194     $ 1,210     $ 507  
 
Regulatory liabilities - current
                       
Accrued natural gas costs
  $ 97     $ 53     $ 51  
Bad debt rider
    32       30       0  
Accumulated removal costs
    14       14       0  
Other
    30       15       26  
Total regulatory liabilities - current
    173       112       77  
Regulatory liabilities - long-term
                       
Accumulated removal costs
    1,339       1,321       250  
Unamortized investment tax credit
    32       32       11  
Regulatory income tax liability
    26       27       15  
Bad debt rider
    20       14       0  
Other
    14       11       20  
Total regulatory liabilities - long-term
    1,431       1,405       296  
Total regulatory liabilities
  $ 1,604     $ 1,517     $ 373  
(1)  
The increase in regulatory assets and liabilities from March 31, 2011, includes $545 million related to the addition of Nicor Gas’ regulatory assets and includes $1,330 million related to the addition of Nicor Gas’ regulatory liabilities.

As of March 31, 2012, there have been no new types of regulatory assets or liabilities from those discussed in Note 2 to our Consolidated Financial Statements and related notes in Item 8 of our 2011 Form 10-K.

Accounting Developments

On January 1, 2012, we adopted authoritative guidance related to fair value measurements. The guidance expands the qualitative and quantitative disclosures for Level 3 significant unobservable inputs, permits the use of premiums and discounts to value an instrument if it is standard practice. The guidance also limits the application of best use valuation to non-financial assets and liabilities. This guidance had no impact on our unaudited Condensed Consolidated Financial Statements. See Note 4 for additional fair value disclosures.

On January 1, 2012, we adopted authoritative guidance related to comprehensive income. The guidance eliminates the option to present other comprehensive income in the unaudited Condensed Consolidated Statements of Equity, but allows companies to elect to present net income and other comprehensive income in one continuous statement (unaudited Condensed Consolidated Statements of Comprehensive Income) or in two consecutive statements. This guidance does not change any of the components of net income or other comprehensive income and earnings per share will still be calculated based on net income. This guidance did not have a material impact on our unaudited Condensed Consolidated Financial Statements.


On December 9, 2011, we completed our $2.5 billion merger with Nicor. The preliminary allocation of the total consideration transferred in the merger to the fair value of assets acquired and liabilities assumed included adjustments for the fair value of Nicor’s assets and liabilities. The preliminary allocation of the purchase price is presented in the following table.
 
In millions
     
Current assets
  $ 932  
Property, plant and equipment
    3,202  
Goodwill
    1,395  
Other noncurrent assets, excluding goodwill
    791  
Current liabilities
    (1,170 )
Long-term debt
    (599 )
Other noncurrent liabilities
    (2,048 )
Total purchase consideration
  $ 2,503  
 
The estimated fair values of the assets acquired and the liabilities assumed were determined based on the accounting guidance for fair value measurements under GAAP, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The estimated fair value measurements assume the highest and best use of the assets by market participants, considering the use of the asset that is physically possible, legally permissible and financially feasible at the measurement date. Modifications to the purchase price allocation may occur as a result of continuing review of the assumptions and estimates underlying the preliminary fair value adjustments of environmental site remediation and other adjustments.

We concluded that net book value is a reasonable estimate of fair value for Nicor’s tangible and intangible assets and liabilities that are explicitly subject to cost-of-service ratemaking. The company determined the fair value of Nicor’s long-term debt using the income approach, and used a discounted cash flow technique that incorporates a market interest yield curve with adjustments for duration, optionality and risk profile. As a result, our purchase price allocation included an adjustment of $99 million to step-up the basis of Nicor’s long-term debt to fair value as of the merger date. A corresponding regulatory asset was recorded in connection with the fair value adjustment of the debt. While the regulatory asset related to debt is not included in rate base, the costs are recovered over the term of the debt through the authorized rate of return component of base rates. The following table summarizes our purchase price allocation for Nicor Gas’ regulatory assets and liabilities.

In millions
     
Current assets
  $ 36  
Other noncurrent assets, excluding goodwill
    477  
Current liabilities
    (80 )
Other noncurrent liabilities
    (1,137 )

For all other assets and liabilities acquired from Nicor, we considered the income, market and cost approaches to fair valuation. The income approach estimates the fair value by discounting the projected future cash flows at our weighted average cost of capital. We utilized this approach to obtain the business enterprise values for each reporting unit. Additionally, we used the income approach to determine the fair values for intangible trade names and customer relationships assets.

The market approach is based on the premise that the fair value can be determined through the use of prices and other relevant information generated by the market transactions involving identical or comparable assets or liabilities. Finally, the cost approach utilizes the concept of replacement cost as an indicator of fair value. We applied the market and cost approach to estimate the fair value of the property, plant and equipment. Our valuations included a $31 million step-up for Nicor’s non-regulatory property, plant and equipment. This was primarily related to the vessels and related equipment at our cargo shipping segment.

The excess of the purchase price paid over the estimated fair values of the assets acquired and liabilities assumed was recognized as goodwill, which is not deductible for tax purposes. A preliminary rollforward of total goodwill recognized by segment in our unaudited Condensed Consolidated Statements of Financial Position is as follows:

 
In millions
 
Distribution operations
   
Retail operations
   
Wholesale services
   
Midstream operations
   
Cargo shipping
   
Other
   
Consolidated
 
As of December 8, 2011
  $ 404     $ 0     $ 0     $ 14     $ 0     $ 0     $ 418  
Merger with Nicor
    1,182       124       2       2       77       8       1,395  
As of March 31, 2012
  $ 1,586     $ 124     $ 2     $ 16     $ 77     $ 8     $ 1,813  

The preliminary valuation of the additional intangible assets recorded as result of the merger is as follows:


In millions
 
Preliminary valuation
 
Weighted average amortization period
Trade names:
       
Retail operations
  $ 33  
15 years
Cargo shipping
    15  
15 years
           
Customer relationships:
         
Retail operations
    52  
10 years
Cargo shipping
    3  
18 years
Total
  $ 103    

The fair value measurements of intangible assets were primarily based on significant unobservable inputs and represent Level 3 measurements as defined in accounting guidance for fair value measurements.

The following table summarizes the estimated fair value of the acquired receivables recorded in connection with the merger:

In millions
     
Nicor accounts receivable at December 9, 2011
  $ 400  
Cash flows not expected to be collected
    24  
Fair value of acquired receivables
  $ 376  

In connection with the merger, AGL Resources recorded merger transaction costs of $10 million ($6 million net of tax) for the three months ended March 31, 2012 compared to $5 million ($3 million net of tax) incurred by AGL Resources for the same period in 2011. These costs were expensed as incurred.

Pro forma financial information The following unaudited pro forma financial information reflects our consolidated results of operations as if the merger with Nicor had taken place on January 1, 2011. The unaudited pro forma information has been calculated after conforming our accounting policies and adjusting Nicor’s results to reflect the depreciation and amortization that would have been charged assuming fair value adjustments to property, plant and equipment, debt and intangible assets had been applied on January 1, 2011, together with the consequential tax effects.

AGL Resources and Nicor together incurred approximately $86 million in the twelve months ended December 31, 2011 and $7 million in the three months ended March 31, 2011. These expenses are excluded from the pro forma earnings presented below.

The unaudited pro forma financial information has been presented for illustrative purposes only and is not necessarily indicative of results of operations that would have been achieved had the pro forma events taken place on the dates indicated, or the future consolidated results of operations of the combined company.

In millions, except per share amounts
 
Twelve months ended December 31, 2011
   
Three months ended March 31, 2011
 
Total revenues
  $ 4,715     $ 1,915  
Net income attributable to AGL Resources Inc.
  $ 313     $ 165  
Basic earnings per common share
  $ 2.69     $ 1.42  
Diluted earnings per common share
  $ 2.68     $ 1.42  




The methods used to determine the fair value of our assets and liabilities are described within Note 2 – Significant Accounting Policies and Methods of Application.

Derivative Instruments

The following table summarizes, by level within the fair value hierarchy, our derivative assets and liabilities that were accounted for at fair value on a recurring basis as of the periods presented. See Note 5 – Derivative Instruments for additional derivative instrument information.

 
Recurring fair values
Derivative instruments
 
 
March 31, 2012
   
December 31, 2011
   
March 31, 2011
 
In millions
Assets
   
Liabilities
   
Assets (1)
   
Liabilities
   
Assets (1)
   
Liabilities
 
Natural gas derivatives
                                   
    Quoted prices in active markets (Level 1)
  $ 7     $ (187 )   $ 11     $ (145 )   $ 1     $ (63 )
    Significant other observable inputs (Level 2)
    203       (68 )     229       (68 )     101       (15 )
    Netting of cash collateral
    47       162       32       115       38       50  
Total carrying value (2) (3)
  $ 257     $ (93 )   $ 272     $ (98 )   $ 140     $ (28 )
Interest rate derivatives
                                               
Significant other observable inputs (Level 2)
  $ 9     $ (10 )   $ 13     $ (13 )   $ 0     $ 0  
(1)  
Less than $1 million at March 31, 2011 and $3 million at December 31, 2011 associated with weather derivatives have been excluded as they are accounted for based on intrinsic value.
(2)  
There were no material unobservable inputs (Level 3) for any of the periods presented.
(3)  
There were no material transfers between Level 1, Level 2, or Level 3 for any of the periods presented.

Money Market Funds

In millions
 
March 31,
2012
   
December 31,
2011
   
March 31,
2011
 
Money market funds (1)
  $ 68     $ 59     $ 0  
(1)  
Recorded at fair value and classified as Level 1 within the fair value hierarchy.

Debt

Our long-term debt is recorded at amortized cost, with the exception of Nicor Gas’ first mortgage bonds, which are recorded at acquisition date fair value. We estimate the fair value of our debt using a discounted cash flow technique that incorporates a market interest yield curve with adjustments for duration, optionality and risk profile. The following table presents the amortized cost and fair value of our long-term debt as of the following periods.

In millions
 
March 31,
2012
   
December 31,
2011
   
March 31,
2011
Long-term debt amortized cost (1)
  $ 3,573     $ 3,576     $ 2,173  
Long-term debt fair value (1) (2)
  $ 3,922     $ 3,938     $ 2,304  
(1)  
March 31, 2012 and December 31, 2011 include $15 million of medium-term notes that are due in 2012 and the debt that was assumed in the Nicor merger with a carrying value of $500 million.
(2)  
Valued using Level 2 inputs.


Certain of our derivative instruments contain credit-risk-related or other contingent features that could increase the payments for collateral we post in the normal course of business when our financial instruments are in net liability positions. As of March 31, 2012 for agreements with such features, derivative instruments with liability fair values totaled approximately $103 million for which we had posted no collateral to our counterparties. In addition, our energy marketing receivables and payables, which also have credit-risk-related or other contingent features, are discussed in Note 2. Our derivative instrument activities are included within operating cash flows as an adjustment to net income and were $15 million for the three months ended March 31, 2012 and $48 million for the three months ended March 31, 2011. See Note 4 – Fair Value Measurements for additional derivative instrument information.




 
The following table summarizes the various ways in which we account for our derivative instruments and the impact on our Consolidated Financial Statements:

Accounting Treatment
 
Recognition and Measurement
 
Statement of Financial Position
 
Income Statement
Cash flow hedge
 
Derivative carried at fair value
 
Ineffective portion of the gain or loss on the derivative instrument is recognized in earnings
 
 
Effective portion of the gain or loss on the derivative instrument is reported initially as a component of accumulated other comprehensive income (loss)
 
Effective portion of the gain or loss on the derivative instrument is reclassified out of accumulated OCI (loss) and into earnings when the forecasted transaction affects earnings
Fair value hedge
 
Derivative carried at fair value
 
Changes in fair value of the hedged item are recorded as adjustments to the carrying amount of the hedged item
 
Gains or losses on the derivative instrument and the hedged item are recognized in earnings. As a result, to the extent the hedge is effective, the gains or losses will offset and there is no impact on earnings. Any hedge ineffectiveness will impact earnings.
Not designated as hedges
 
Derivative carried at fair value
 
Realized and unrealized gains or losses on the derivative instrument are recognized in earnings
   
Distribution operations’ gains and losses on derivative instruments are deferred as regulatory assets or liabilities until included in natural gas costs
 
The gain or loss on these derivative instruments is reflected in natural gas costs and is ultimately included in billings to customers

Distribution Operations

Unrealized changes in the fair value of these derivative instruments are deferred as regulatory assets or liabilities respectively within our unaudited Condensed Consolidated Statements of Financial Position until recovered from customers. The following amounts represent realized losses incurred for the three months ended March 31.
       
In millions
 
2012
   
2011
 
Nicor Gas
  $ 1       n/a  
Elizabethtown Gas
  $ 9     $ 8  

Quantitative Disclosures Related to Derivative Instruments

As of the periods presented, our derivative instruments were comprised of both long and short natural gas positions. A long position is a contract to purchase natural gas, and a short position is a contract to sell natural gas. We had net long natural gas contracts outstanding in the following quantities:

Natural gas contracts
                   
In Bcf
   
March 31, 2012 (1) (2)
   
December 31, 2011 (2)
   
March 31, 2011
 
Hedge designation:
                   
Cash flow
      7       5       3  
Not designated
      116       186       278  
Total
      123       191       281  
Hedge position:
                         
Short
      (1,942 )     (1,680 )     (1,617 )
Long
      2,065       1,871       1,898  
Net long position
      123       191       281  
(1)  
Approximately 98% of these contracts have durations of two years or less and the remaining 2% expire in 3 to 6 years.
(2)  
Volumes related to Nicor Gas exclude variable-priced contracts, which are accounted for as derivatives, but whose fair values are not directly impacted by changes in commodity prices.

Derivative Instruments on the Unaudited Condensed Consolidated Statements of Financial Position

The following table presents the fair value and unaudited Condensed Consolidated Statements of Financial Position classification of our derivative instruments as of the periods presented:
5

 
In millions
Unaudited Condensed Consolidated Statements of Financial Position location (1) (2)      
March 31, 2012
December 31, 2011
March 31, 2011
Designated as cash flow and fair value hedges
                 
Asset Instruments
                 
Current natural gas contracts
Derivative instruments assets and liabilities – current portion
  $ 5     $ 9     $ 1  
Interest rate swap agreements
Derivative instruments assets – long-term portion
    9       13       0  
Liability Instruments
                       
Current natural gas contracts
Derivative instruments assets and liabilities – current portion
    (11 )     (12 )     (2 )
Interest rate swap agreements
Derivative instruments liabilities – long-term portion
    (11 )     (13 )     0  
Total
      (8 )     (3 )     (1 )
Not designated as cash flow hedges
                       
Asset Instruments
                       
Current natural gas contracts
Derivative instruments assets and liabilities – current portion
    683       706       333  
Noncurrent natural gas contracts
Derivative instruments assets and liabilities
    82       133       77  
Liability Instruments
                       
Current natural gas contracts
Derivative instruments assets and liabilities – current portion
    (718 )     (689 )     (323 )
Noncurrent natural gas contracts
Derivative instruments assets and liabilities
    (85 )     (116 )     (62 )
Total
      (38 )     34       25  
Total derivative instruments
  $ (46 )   $ 31     $ 24  
(1)
These amounts are netted within our unaudited Condensed Consolidated Statements of Financial Position for amounts which we have netting arrangements with the counterparties.
(2)
As required by the authoritative guidance related to derivatives and hedging, the fair value amounts are presented on a gross basis. As a result, the amounts do not include cash collateral held on deposit in broker margin accounts of $209 million as of March 31, 2012, $147 million as of December 31, 2011 and $88 million as of March 31, 2011. Accordingly, these amounts will differ from the amounts presented on our unaudited Condensed Consolidated Statements of Financial Position and the fair value information presented for our derivative instruments in the recurring fair values table of Note 4.

Derivative Instruments on the Unaudited Condensed Consolidated Statements of Income

The following table presents the gain or (loss) on derivative instruments in our unaudited Condensed Consolidated Statements of Income for the three months ended March 31, 2012 and 2011:

In millions
 
2012
   
2011
Designated as cash flow hedges
         
Natural gas contracts – loss reclassified from OCI into cost of goods sold for settlement of hedged item
  $ (1 )   $ 0  
Interest rate swaps – ineffectiveness recorded as an offset to interest expense
    2       0  
                 
Not designated as hedges
               
Natural gas contracts – fair value adjustments recorded in operating revenues (1)
    4       11  
Natural gas contracts – net gain fair value adjustments recorded in cost of goods sold (2)
    (2 )     (1 )
Natural gas contracts – net loss fair value adjustments recorded in operation and maintenance expense
    (1 )     0  
Total gains on derivative instruments
  $ 2     $ 10  
(1)  
Associated with the fair value of existing derivative instruments at March 31, 2012 and 2011.
(2)  
Excludes losses recorded in cost of goods sold associated with weather derivatives of $14 million for the three months ended March 31, 2012 and gains of $3 million for the three months ended March 31, 2011.

Any amounts recognized in operating income, related to ineffectiveness or due to a forecasted transaction that is no longer expected to occur, were immaterial for the three months ended March 31, 2012 and 2011.

Our expected net loss to be reclassified from OCI into cost of goods sold, operation and maintenance expense, and operating revenues and recognized in our unaudited Condensed Consolidated Statements of Income over the next 12 months is $8 million. These pre-tax deferred losses are recorded in OCI related to natural gas derivative contracts. The expected losses are based upon the fair values of these financial instruments at March 31, 2012.

There have been no other significant changes to our derivative instruments, as described in Note 2 and Note 4 to our Consolidated Financial Statements and related notes included in Item 8 of our 2011 Form 10-K.
 



Pension Benefits

We sponsor three tax-qualified defined benefit retirement plans for our eligible employees, the Nicor Gas Retirement Plan, the AGL Retirement Plan and the NUI Retirement Plan. A defined benefit plan specifies the amount of benefits an eligible participant eventually will receive using information about the participant. Following are the combined cost components of our three defined benefit pension plans for the periods indicated:

   
Three months ended March 31,
 
In millions
 
2012
   
2011
 
Service cost
  $ 7     $ 3  
Interest cost
    11       7  
Expected return on plan assets
    (16 )     (8 )
Net amortization of prior service cost
    (1 )     (1 )
Recognized actuarial loss
    9       4  
Net pension benefit cost
  $ 10     $ 5  

Other Defined Benefit Retirement Benefits

We sponsor two defined benefit retirement health care plans for our eligible employees, the Health and Welfare Plan for Retirees and Inactive Employees of AGL Resources Inc. (AGL Welfare Plan) and the Nicor Gas Welfare Benefit Plan. Eligibility for these benefits is based on age and years of service.

Following are the cost components of our other retirement benefit costs for the periods indicated:

   
Three months ended March 31,
 
In millions
 
2012
   
2011
 
Service cost
  $ 1     $ 0  
Interest cost
    4       1  
Expected return on plan assets
    (1 )     (1 )
Net amortization of prior service cost
    (1 )     (1 )
Recognized actuarial loss
    3       1  
Net benefit cost
  $ 6     $ 0  

Contributions

Our employees generally do not contribute to these pension and other retirement plans, however, Nicor Gas and AGL Resources pre-65 retirees make nominal contributions to their health care plan. We fund the qualified pension plans by contributing at least the minimum amount required by applicable regulations and as recommended by our actuary. However, we may also contribute in excess of the minimum required amount. As required by The Pension Protection Act of 2006 (the Act), we calculate the minimum amount of funding using the traditional unit credit cost method.

The Act contained new funding requirements for single employer defined benefit pension plans and established a 100% funding target (over a 7-year amortization period) for plan years beginning after December 31, 2007. If certain conditions were met, the Worker, Retiree and Employer Recovery Act of 2008 allowed us to measure our required minimum contributions based on a funding target of 100% in 2011 and 2012. In the first three months of 2012 we contributed $17 million to the AGL Retirement Plan and the NUI Retirement Plan and $38 million during the same period last year. For more information on our pension plans, see Note 11 to our Consolidated Financial Statements and related notes included in Item 8 of our 2011 Form 10-K.




 

The following table provides maturity dates, year-to-date weighted average interest rates and amounts outstanding for our various debt securities and facilities that are included in our unaudited Condensed Consolidated Statements of Financial Position. For additional information on our debt see Note 7 in our Consolidated Financial Statements and related notes in Item 8 of our 2011 Form 10-K.

      March 31, 2012  
March 31, 2011
 
Dollars in millions
 
Year(s) due
   
Weighted average interest rate (1)
   
Outstanding
   
Outstanding at
December 31, 2011
   
Weighted average interest rate (1)
   
Outstanding
 
Short-term debt
                                   
Commercial paper- AGL Capital
 
2012
      0.5 %   $ 625     $ 869       0.4 %   $ 25  
Commercial paper- Nicor Gas
 
2012
      0.5       105       452       n/a       n/a  
Current portion of long-term debt
 
2012
      8.3       15       15       n/a       0  
Current portion of capital leases
 
2012
      4.9       2       2       4.9       1  
Total short-term debt and current portion of long-term debt and capital leases
          0.6 %   $ 747     $ 1,338       0.4 %   $ 26  
Long-term debt – excluding current portion
                                         
Senior notes
  2013-2041       5.1 %   $ 2,550     $ 2,550       5.5 %   $ 1,775  
First mortgage bonds
  2016-2038       5.6       500       500       n/a       n/a  
Gas facility revenue bonds
  2022-2033       1.1       200       200       1.2       200  
Medium-term notes
  2017-2027       7.8       181       181       7.8       196  
Capital leases
  2012       n/a       0       0       4.9       2  
Total principal long-term debt
          4.9 %   $ 3,431     $ 3,431       5.3 %   $ 2,173  
First mortgage bonds fair value adjustment
  2016-2038       n/a     $ 97     $ 99       n/a       n/a  
Interest rate swaps fair value adjustment
  2016       n/a       12       13       n/a       0  
Unamortized debt premium (discount), net
  -       n/a       18       18       n/a       n/a  
Total non-principal long-term debt
          n/a     $ 127     $ 130       n/a     $ 0  
Total long-term debt
                $ 3,558     $ 3,561             $ 2,173  
Total debt
                $ 4,305     $ 4,899             $ 2,199  
(1)  
Interest rates are calculated based on the daily average balance outstanding.

Financial and Non-Financial Covenants

The AGL Credit Facility and the Nicor Gas Credit Facility each include a financial covenant that requires us to maintain a ratio of total debt to total capitalization of no more than 70%; however, our goal is to maintain this ratio at levels between 50% and 60%. These ratios, as calculated in accordance with the debt covenants include standby letters of credit and surety bonds and exclude OCI pension adjustments. Adjusting for these items, the following table contains our debt-to-capitalization ratios for the periods presented.

   
March 31, 2012
   
December 31, 2011
   
March 31, 2011
 
AGL Credit Facility
    54 %     58 %     51 %
Nicor Gas Credit Facility
    47 %     60 %     n/a  

The credit facilities contain certain non-financial covenants that, among other things, restrict liens and encumbrances, loans and investments, acquisitions, dividends and other restricted payments, asset dispositions, mergers and consolidations and other matters customarily restricted in such agreements.

Default Provisions

Our credit facilities and other financial obligations include provisions that, if not complied with, could require early payment or similar actions. The most important default events include:

·  
a maximum leverage ratio
·  
insolvency events and nonpayment of scheduled principal or interest payments
·  
acceleration of other financial obligations
·  
change of control provisions
 

 
We have no triggering events in our debt instruments that are tied to changes in our specified credit ratings or our stock price and have not entered into any transaction that requires us to issue equity based on credit ratings or other triggering events. We are in compliance with all existing debt provisions and covenants, both financial and non-financial, as of March 31, 2012 and 2011.
 

As of March 31, 2012, we had ownership interests in SouthStar, Triton, Horizon Pipeline and Sawgrass Storage.

Variable Interest Entities

On a quarterly basis we evaluate all of our owner interests to determine if they represent a VIE as defined by the authoritative accounting guidance on consolidation, and if so, which party is the primary beneficiary. We have determined that SouthStar, a joint venture owned by us and Piedmont, is the only VIE for which we are the primary beneficiary, which requires us to consolidate its assets, liabilities and Statements of Income. See Note 10 to our Consolidated Financial Statements and related notes included in Item 8 of our 2011 Form 10-K. Earnings from SouthStar in 2012 and 2011 were allocated entirely in accordance with the ownership interests.

SouthStar markets natural gas and related services under the trade name Georgia Natural Gas to retail customers primarily in Georgia, and under various other trade names to retail customers in Ohio, Florida and New York and to commercial and industrial customers, principally in Alabama, Florida, North Carolina, South Carolina and Tennessee.

During the three months ended March 31, 2012, there have been no significant changes to the primary risks associated with SouthStar as discussed in our risk factors included in Item 1A of our 2011 Form 10-K.
 
 
SouthStar’s financial results are seasonal in nature, with business depending to a great extent on the first and fourth quarters of each year. SouthStar’s current assets consist primarily of natural gas inventory, derivative instruments and receivables from its customers. SouthStar also has receivables from us due to its participation in AGL Capital’s commercial paper program. See Note 2 for additional discussions of SouthStar’s inventories. SouthStar’s restricted assets consist of customer deposits and were immaterial as of March 31, 2012 and 2011. SouthStar’s current liabilities consist primarily of accrued natural gas costs, other accrued expenses, customer deposits, derivative instruments and payables to us from its participation in AGL Capital’s commercial paper program.

SouthStar’s other contractual commitments and obligations, including operating leases and agreements with third party providers, do not contain terms that would trigger material financial obligations in the event that such contracts were terminated. As a result, our maximum exposure to a loss at SouthStar is considered to be immaterial. SouthStar’s creditors have no recourse to our general credit beyond our corporate guarantees we have provided to SouthStar’s counterparties and natural gas suppliers. We have provided no financial or other support that was not previously contractually required. With the exception of our corporate guarantees, we have not entered into any arrangements that could require us to provide financial support to SouthStar.

Price and volume fluctuations of SouthStar’s natural gas inventories can cause significant variations in our working capital and cash flow from operations. Changes in our operating cash flows are also attributable to SouthStar’s working capital changes resulting from the impact of weather, the timing of customer collections, payments for natural gas purchases and cash collateral amounts that SouthStar maintains to facilitate its derivative instruments.

Cash flows used in our investing activities include capital expenditures of $1 million and $1 million for SouthStar for the three months ended March 31, 2012 and 2011, respectively and $2 million for the year ended December 31, 2011. Cash flows used in our financing activities include SouthStar’s distribution to Piedmont for its portion of SouthStar’s annual earnings from the previous year. Generally, this distribution occurs in the first or second quarter of each fiscal year. For the three months ended March 31, 2012, SouthStar distributed $14 million to Piedmont and $16 million during the same period last year. The decrease of $2 million was primarily the result of decreased earnings year-over-year.




 
The following table provides additional information for the dates presented, which are consolidated within our unaudited Condensed Consolidated Statements of Financial Position.
 
      March 31, 2012       December 31, 2012       March 31, 2011  
In millions     Consolidated       SouthStar (1)       % (2)       Consolidated