AGL Resources Inc (ATG)
Q4 2002 Financial Release Conference Call

Event Transcript


Friday, January 31, 2003 8:15 am


Fair Disclosure Financial Network, Inc.
www.fdfn.com
1-617-393-3354

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AGL Resources Inc (ATG) - Q4 2002 Financial Release Conference Call
Friday, January 31, 2003 8:15 am






Fair Disclosure Financial Network         www.fdfn.com � 1-617-393-3354








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THE OPERATOR:
Ladies and gentlemen, thank you for standing
by.  Welcome to the AGL Resources fourth-
quarter year-end earnings conference call.
During the presentation, all participants will be
in a listen-only mode.  Afterwards, we will
conduct a question-and-answer session.
(CALLER INSTRUCTIONS)  As a reminder,
this conference is being recorded, Friday,
January 31, 2003.  I would now like to turn the
conference over to Steve Cave, Director of
Investor Relations for AGL Resources.


MR. STEVEN CAVE:
Thank you for joining us this morning.  Sorry
for the slight delay in getting started here.  With
me today are Paula Rosput, our Chairman,
President and CEO; Nick O'Brien, our Executive
Vice President and CFO; Kevin Madden, our
Executive Vice President of Distribution and
Pipeline Operations; and Brian Little, our
Assistant Controller. Today, we will provide you
with an update on our year-end and fourth-
quarter 2002 earnings.  We will share with you
the company's outlook for 2003, and then we
will talk about some other corporate issues,

including the announcement we made last night
about the equity offering.  Today's call is being
webcast on our website at (website), and  an
archive of the webcast, as well as the digital
audio replay of the call, will be available
through next Friday, February 7.

Before we get into the year-end and quarterly
results, let me remind you to refer to the Safe
Harbor language in the press release, as we will
be making some forward-looking statements
today.  Keep in mind that it is possible that our
actual results could differ materially from the
predictions that we make today.  Additional
information on factors that could cause such a
material difference appear in the press release
and in our SEC filings.

So, by now, you should have received copies of
the news releases from last night, announcing
our earnings for the year and also the equity
offering.  Additionally, we have now filed our
audited financial statements and the related
results of operations on the SEC form 8-K.  As
you will recall, in 2002, we changed our fiscal
year to a calendar year, from September 30, so
these audited financial statements cover our
consolidated balance sheet as of December 31,
2002 and 2001, and as of September 30, 2001,
and the related statements in consolidated
income, common stockholders' equity and cash
flows for the years ended December 31, 2002,
September 30, 2001, and September 30, 2000,
and for the three months ended December 31,
2001.  We will also be filing, later today,
supplemental information within an 8-K that
will discuss results of operations on a year-over-
year calendar year basis for 2002, 2001 and
2000. So, in short, there are plenty of ways that
you can look at our current versus historical data
and make comparisons. I would also add -- and
Dick will elaborate on this in his remarks -- that
we have adopted several accounting changes
pursuant to various emerging issues
pronouncements.  So the data we have included
in the 8-K conforms to the historical data for the
current year presentation.  That also should help

AGL Resources Inc (ATG)
Q4 2002 Financial Release Conference

Call
Friday, January 31, 2003 8:15 am

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AGL Resources Inc (ATG) - Q4 2002 Financial Release Conference Call
Friday, January 31, 2003 8:15 am






Fair Disclosure Financial Network         www.fdfn.com � 1-617-393-3354

facilitate your ability to make year-over-year
comparisons.  If you have not received a copy of
the two news releases or the form 8-K, they are
available on our website, or you can contact us
and we will send one to you.

We will begin today's call with some prepared
remarks, and then open the lines to take your
questions, so with that, I will turn over to Paula.


MS. PAULA ROSPUT:
We are glad you could join us this early.  We are
pleased by the results we have announced, and
hope that you will agree that they support our
just-announced efforts to improve the financial
strength of AGL Resources.  What I would like
to do over the next few minutes is the following
-- first, I will hit the highlights of the 2002
results and describe major accomplishments of
the various businesses with emphasis on fourth-
quarter developments.  Second, I would like to
discuss the goals we have adopted for fiscal year
2003, and shed some light on our earnings
guidance, and then I will turn the call over to
Dick to cover detailed quarter and year-end
results.

If you look at our financial results for the quarter
and for the year, they obviously speak for
themselves.  The bottom line is that we earned
55 cents per share in the fourth quarter,
significantly higher than the 45 cents per share
in the same quarter last year, and beating the
street's estimate of 48 cents per share.  The same
goes for the year -- $1.84 per basic share up 10
percent over the $1.67 per share for the 12
months ended December 31, 2001. On a core
earnings basis, the increase is actually 19
percent year-over-year, when you remove the 13
cent per share onetime gain we had last year
from the sale of Utilipro.  Our year-end results
also exceeded first call estimates of $1.76 per
share.

Before going to the details, let me tell you how
really cold it is here in the South.  It is
unseasonably mild in the West, which is making

for some interesting basis differentials across the
US grid, and creating some interesting
opportunities for Sequent.  And even though our
three utilities generally do not earn on the basis
of throughput, there are some secondary effects,
including in our SouthStar marketing joint
venture.  But in any event, as of yesterday, or
degree days exceeded last winter's by 42
percent, 32 percent, and 37 percent, for Atlanta,
Chattanooga, and Virginia, respectively.  It is 2
to 11 percent colder than the 30-year average
cold, and for those of you follow weather, I can
assure you that we are skeptical about global
warming down here south of the Mason-Dixon
line.  And that will color how we think about our
results.

Let me cover the business units, whose
performance was gratifying, despite another
challenging and turbulent year. Each of our
segments did its part.  Let me start with
distribution operations, which had an excellent
fourth quarter and year.  This was due, in large
part, to the improvement of a number of active
customers' favorable regulatory treatment,
success of our technology efforts and overall
discipline in capital spending.  With respect to
customer counts, we hit bottom on the problem
of customers disconnecting, particularly from
our Atlanta system.  There is nothing like a
winter with 30-year cold to bring everyone back
to natural gas.  Moreover, the stability in the
marketer framework in Georgia contributed
significantly to the improved customer count.
The program for low-income customers alone
has reconnected about 14,000 customers this
winter.  Plus, the active collections efforts of the
marketers have improved our retention of
Atlanta Gas Light. (Indiscernible) percent of
customers who are disconnecting for
nonpayment reconnect, usually within a few
days.  Last year, at this time, the percentage was
more like 25 percent. AGLC is doing active
marketing to its at-risk customers in Georgia
Natural.  Chattanooga and Virginia are all
current on their credit collections efforts.  So
cold weather, coupled with better business

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AGL Resources Inc (ATG) - Q4 2002 Financial Release Conference Call
Friday, January 31, 2003 8:15 am






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processes, are boosting business results.  We
said that 2002 was the year that we would
change the regulatory paradigm, and throughout
the year, regulators in all of our jurisdictions
agreed that the time for change was right.  We
previously have reported on our historic rate
case decision in Georgia, and our (indiscernible)
adoption of weather normalization in Virginia.
We're appreciative that regulators in both states
were willing to adopt new concepts.  In both
states, the results of these decisions has been to
reduce rates in 2002 to customers by $10 million
in Georgia and by almost $2 million in Virginia.
But the utilities gain, however, was certainty
around operations.  For Atlanta, the
performance-based paradigm has given us the
latitude to implement productivity
improvements without the overhang of potential
base rate restatement.  In Virginia, we have
taken considerable volatility out of our earnings
while reducing volatility and customer rates.  It
has really been a win-win.

We achieved another milestone in the regulatory
arena in December in Georgia, with the receipt
of the Georgia public service commission's
decision regarding its audit of the Universal
Service Fund, or USF.  The commission issued a
decision before Christmas that clarified our
obligation to credit net revenues from asset
management generated by Sequent to customers
of Atlanta Gas Light.  We were ordered, and
agreed, to credit approximately $4.9 million of
asset management proceeds to USF.  We had
previously established reserves in anticipation of
commission action, so there was no adverse
effect on our fourth quarter.  We are extremely
appreciative of the fair-minded treatment we
received from the state's regulators.
Importantly, we have also paved the way for
future asset management activities under well-
understood rules.  We know that Sequent has the
capability to capture value in optimizing
AGLC's assets.  We are glad that the rules
regarding how that value was shared with
Georgia customers has been agreed upon.

I want to update you on one other regulatory
matter.  This month, we approached the
commission in Georgia regarding two items that
pertain to the affiliate relationship between
Sequent and Atlanta Gas Light.  One related to
two vintage transactions not reflected in the
previously-discussed USF audit, and the other
related to Sequent's provision for peaking
service.  In conjunction with the former item, we
suggested to the commission that an additional
$2.2 million be credited to the USF, and in
conjunction with the latter, we offered to relieve
Atlanta Gas Light of the commitment to
purchase (indiscernible) peaking services from
Sequent.  We were informed subsequently by
the commission in writing that the commission
unanimously accepted our proposal to credit the
additional $2.2, million and affirmed the
contract between AGLC and Sequent.  The
commission did, however, reiterate its concern
about how bidding should proceed in the future,
which we take quite seriously, and with which
we agree.  On the financial side, we have
sufficient reserves previously established, so the
additional payment will not adversely affect our
first-quarter 2003 earnings.  Several of you have
called us and asked us what prompted this
disclosure, so let me be blunt -- virtue is its own
reward.  We believe that no company in our
industry can afford any adverse regulatory
overhang.  We worked very hard in 2002 to
build greater credibility with all of our
regulators, so it was the right thing to do to
approach the regulators in Georgia, in an effort
to preempt any future issues.  I read one
analyst's note, earlier this week, that observed
that this issue surfaces the age-old concern about
affiliate relations between regulated and
unregulated entities, and I would offer this
thought in reply.  Any time you run a multistate
business, you have affiliate relationships, and
there are always issues of cost or market value
apportionment between and among corporate
entities.  It just goes with the territory.  So I
would rather take one batch of critical reports
from you or from the industry press, in order to

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AGL Resources Inc (ATG) - Q4 2002 Financial Release Conference Call
Friday, January 31, 2003 8:15 am






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avoid a year of contention with our regulators.
Again, we have worked so hard to get the
relationship right, and we want everything to be
on the up-and-up with our regulators, even if it
means going back to transactions that occurred
way back in time, in order to make sure that
there is never an issue that arises later.

Let me go ahead and finish the highlights of the
distribution segment.  During the year, we
invested in several technology products that are
already paying off for us, including the
implementation of enhanced geographic
information systems and new software to track
pipeline construction and replacement.  We also
invested in our distribution system in 2002, to
ensure that we are more prepared for times of
extreme cold.  Using dynamic system modeling,
we proceeded to spend about $9 million on
capital improvements in George and Virginia to
address either high-priority pressure problems or
to supplement our local resources with LNG.
The result of these improvements has been very
clear in the last few weeks -- during record cold
in our service areas, we had fewer than 100
customer outages due to pressure issues at the
system peak.  So that gives you a sense of the
kinds of fundamentals we are continuing to
focus on in the business.

Turning to our nonregulated businesses, let me
first talk about Sequent.  We continue to take a
cautious, controlled approach to our asset
management business.  We have nearly 100
counterparties with which we do business, with
an average credit rating of BBB+.  We remain a
net payer, and substantially all of our deals are
short-dated and with netting arrangements.  We
focused on gaining access, this quarter, to
natural gas production and transportation, and in
December, for example, we were able to
capitalize on daily opportunities to move gas
from Chicago to the Gulf Coast, among other
strategies.  We continue to manage our storage
inventory by adjusting financial hedges and
pulling inventory from the ground when space is
available, but simultaneously addressing future

storage fills.  In this way, we keep our positions
closed and lock in value differentials over time.
Networks was a bit of a disappointment to me,
because we were not earnings positive for the
year, as I had originally hoped, but we did end
the year with book deferred revenue of $37
million and collected cash of $20 million.  Due
to our relationship with a top tier financial
institution, we were able to add a second city
this year, and thus prove the repeatability of our
business model in Phoenix.  So at year end, our
networks in Atlanta and Phoenix are basically
paid for.  For 2003, our mantra is sell, sell, sell.
I am pleased that we executed a contract in
December with Turner Broadcasting System --
TBS --  that will provide dark-fiber connectivity
between TBS's Atlanta location, two IXCs
(phonetic) and TBS's sattelite uplink.  We have a
number of contracts in the pipeline in both
Atlanta and Phoenix, and should have pretty
consistent yield flow throughout 2003.

Last, let me touch on SouthStar.  As you know,
last week, we made public that we had reached a
definitive agreement with Dynegy to purchase
its 20 percent interest in SouthStar.  This
transaction will end a contentious and highly
unsatisfactory relationship between our two
companies.  Given Dynegy's financial condition,
we hope that regulators in Georgia will promptly
approve the transaction.  We expect that one
marketer may raise competitive issues.  We
expect, however, that the Georgia commission
will recognize that two of the other certificated
(phonetic) marketers directly control far more
interstate assets than our partnership share in
SouthStar might represent.  SouthStar had a very
respectable fourth quarter and year, and we are
pleased that (indiscernible), asset collection and
our risk management discipline are continuing to
improve and stabilize business results there.

Let me quickly try to summarize 2003 direction.
As you know, we try to adopt a few simple
goals, and then provide milestones so that you
can follow our progress throughout the year.
Our goals for last year, as you may recall, were

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AGL Resources Inc (ATG) - Q4 2002 Financial Release Conference Call
Friday, January 31, 2003 8:15 am






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to improve earnings, change the regulatory
paradigm and accelerate our telecommunications
business.  I think we stayed the course.  For
2003, we will again improve earnings, even after
taking into account the effect of an equity
offering, we believe we can meet analysts'
consensus expectations of approximately $1.85
to $1.90 per share.  To do this, we must execute
flawlessly in 2003, because the economy is not
putting the wind at our backs.  Our second goal
is to improve financial strength and flexibility,
with the equity offering being the first step in
that effort. The third goal is to grow around our
indigenous assets. This is obvious at Sequent
and networks, where we need to market our
capabilities more broadly.  But this is our year to
develop around our energy asset base in the
three states. As you look at the changing patterns
of gas supply and consumption between the Gulf
Coast and the Atlantic seaboard, you'll realize
that this is our back yard.  We have the financial
strength, and this is our year of opportunity to
change the paradigm of our adjacent energy
assets.  You'll see more on these goals in our
annual and quarterly reports.

Let me close these comments by once again
noting noting that we have simultaneously filed
our 8-K as we have issued our earnings release.
One of the most satisfying things to me -- and
Dick will never speak to this, but I will, because
it is really under his leadership -- is the
tremendous capabilities we have around our
financial system.  This year, we shortened our
monthly close to 5 days, and our quarterly and
annual closes, including audited year-end
financial statements, to 24 days.  This is the
result of our commitment to our information
technology and our finance personnel to make
ERP work for us.  I think one of the things that
distinguishes us from many is that we have our
business information early, and we make our
analysis turn into actionable strategies.  In short,
we always try to stay sleek -- no doubt 2003 will
challenge our record.

I will save any other comments I have for Q&A,
because I know Dick has a lot to cover, with the
equity offering, as well as the quarterly and
year-to-date results, and I know you will have
questions at the end, so with that, I'll turn it to
Dick.


MR. RICHARD O'BRIEN:
I will cover three things, and then try to get to
your questions.  I am going to talk about equity,
just a little more on earnings guidance and then a
little bit about the 2002/2001 comparison.  On
the equity offering, as the announcement said,
about 5.6 million common shares, gross
proceeds of approximately $130 million, based
on the market close yesterday.  The
underwriters, of course, have a 15 percent
overallotment option, and if that is exercised, it
would take the offering up to the full 150.
Morgan Stanley and Banc of America Securities
are the joint book runners. We expect
(indiscernible) the week of February 10, barring,
any unforeseen market dysfunctions.  We will
use the proceeds as repayment of debt, and I
wanted to focus on that for a minute.  We have
no rating agency pressures, really, to issue
equity.  We continue to enjoy good and stable
relationships with the agencies.  But I think
senior management and our Board of Directors
are clearly committed to retaining and
improving our investment-grade rating.  And
because we have been close to our rating
category ever since the acquisition of VNG, we
have really taken the opportunities presented by
us -- really, two things of these opportunities --
the first is the market, and the second is our
earnings growth.  First, in the market -- the
market, right now, really is taking a liking to
companies that provide stable dividends and
have a high percentage of regulated earnings,
and we are a company like that.  The second is
that our earnings growth for 2002 was very
good, and we have strong earnings potential for
2003, and that allows us to issue equity,
strengthen the balance sheet and still hit the
analysts' consensus for 2003.  I think that is a

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AGL Resources Inc (ATG) - Q4 2002 Financial Release Conference Call
Friday, January 31, 2003 8:15 am






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good circumstance for us, to be able to get all
those things done in this market, and with that, I
am very hopeful that we are going to have a
good equity offering.  And it will be a good
story, not just for prospective new owners, but
also for our current owners.  So a good thing that
we're moving on that.  Our earnings guidance is
$1.85 to $1.90. I just wanted to be sure and
underline that that is after giving (indiscernible)
to the shares that would be issued pursuant to the
offering announced today, and we really do have
to execute flawlessly to get to where we need to
get to for 2002 and 2003.  I think we have a lot
of good wind in our sails from 2002, and I am
hopeful that that will help steer us right in 2003.

Now I'm going to jump into the results.  Starting
with the consolidated income statement, for the
quarter, operating revenues were up about $49
million, and those revenues primarily were the
result of increased throughput and commodities
at VNG and CGC.  That's why the costs per
sales are up as well.  Operating margin up about
$9 million, and I will cover that when I get to
the EBIT discussion. Operating income about
$6.2 million up.  Other income was up about 9.7,
and I'll just stop for a minute -- sorry, about 2
million, to 9.7.  Other income, you'll recall, is
where our SouthStar venture comes through.
Interest expense down about $3 million year-to-
year.  That is primarily related to volumes that
we have -- a little lower, primarily related to
rates and volume, rather.  We have about 50
million less in average debt outstanding, on a
quarter-to-quarter basis, and our average rate
was down about 60 basis points.  And then
income taxes up about $5 million, no surprise,
with earnings before tax being up about $9
million.  So net income up about $6.3 million,
and then I did want to point out that if you look
at the basic shares outstanding, we're actually up
about 2.2 percent, as a result of the exercise of
options.  So from an income statement
perspective, good impact from lower rates,
higher income taxes, still led to a nice increase
in net income, and shares outstanding are going
up as a result of option exercises.  So I think all

of that says the earnings performance in this
company is real for the quarter.  Focusing on the
EBIT, I'm just going to go by operation.  Again,
quarter-to-quarter variant (phonetic) distribution
operations up about 600,000.  That is primarily a
result of the pipeline replacement revenues,
which came in for the quarter.  About 4.5
million of our variance comes from that.
Included in that -- roughly over a little over half
comes from a onetime true-up, which actually
covers the historic two-year period for pipeline
replacement, and we received that in October.
We also, during the quarter, the effects of the
PBR (phonetic) settlement, the net effect after
the reduction in revenue offset by a decrease in
depreciation of about $500,000.  VNG had a
really good quarter compared to last year.
You'll recall last year that we were whining
about winter not coming to Virginia -- in fact, I
think we talked about it being one of the
warmest winters on record.  We have had a
turnaround there, and even with weather
normalization in here for November and
December, VNG's operating margin is still up
about $5 million.  Additionally, to offset those
increases, we did have an increase in corporate
overhead expenses during the quarter that is
allocated to the business units.  Part of that --
(indiscernible) about $4.5 million or so -- part of
that relates to our performance (indiscernible)
that when we do well as a company, we try to
invest part of that back in our employees, so part
of that is our accrual for paying our performance
share plan. And then the other piece is -- Kevin
and his team, as Paula said, when we have good
financial information, we try to get it out of
people.  During the quarter, we gave people a
heads-up that earnings were doing pretty well,
and as a result of that, Kevin and his people
went out and caught up on maintenance in a few
places, and they got ahead on maintenance in a
lot of places.  So I think that is going to bring us
into good stead, going into 2003.

On the hotel services side, up about $900,000
for the quarter, really a result of increased
operating margin as a result of weather

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volatility.  Paula mentioned cold in the
Southeast -- that has certainly led to more
volatile gas prices, and that has allowed us, with
that volatility, to position Sequent.
Additionally, our volumes are going up. As an
indication, I think the average daily volume for
2001 -- granted, we weren't in business for the
whole year, so don't take this too strongly -- was
about 0.3 Bcf per day. For the year, our volume
this year is about 2 Bcf per day. So I think things
are actually lining up pretty well at Sequent.

For energy investments for the quarter, we were
up about $2 million, roughly.  Some of that
increase came from SouthStar, and then a
portion of it came from a contract renewal
payment, which came as part of the Utilipro sale
which was completed in the first quarter of
2001.  We had a string on that disposition
agreement where if SouthStar re-upped with
ADS (phonetic), the purchaser of Utilipro, for a
certain time period, we would receive additional
payment, and we got about $2 million from that.

And finally, on the corporate side, we're up
about $4.8 million, and that bears a little bit of
explanation.  As Paula said, we were putting
reserves up for the potential settlement with
Georgia.  We knew we had to do something --
we just weren't sure what the settlement was
going to look like, so in the fourth quarter of
2001, we actually put up some reserves, and
those reserves came into earnings this year.
Basically, we did not have -- I'm sorry, let me
get that clear.  Last year, we expensed those
reserves; this year, we did not expense those
reserves, so it is really a net pickup.  And then
we also had -- that was offset by some severance
costs and the write-off of some risk management
software related to Sequent's activities.  So net,
corporate was up about 4.8.

On a year basis -- Paula hit a lot of this, but I
will go through it quickly again.  Focusing on
the consolidated income statement, revenues up,
and I think that is primarily as a result of the
fourth quarter.  And then as you look down the
income statement, interest expense down about

$10 million -- again, that is mostly related to
lower rates, and income taxes up about $8
million, primarily as a result of higher earnings.
For the year, about a 2.4 percent increase in the
number of shares outstanding.  Going into the
various segments, with respect to distribution
operations, a good year-over-year analysis,
$11.3 million of increased EBIT from the
distribution operations.  The PBR settlement
really had a net deduct to us of about $1.1
million.  The pipeline replacement program
netted out to about $9 million, and again, that is
a rider we have, whereas we put capital into the
ground, it gets on the rider, and then comes into
us into revenues, and so we had more pipe in the
ground we came into the year, and then
throughout the year.  Also in 2001, we had an
adjustment -- a positive adjustment in 2001 --
which we do not have this year, so that is a
deduction when you do the variance analysis of
about $4.9 million, and that has to do with an
inventory adjustment that when we were
charging the marketers, we did not charge them
enough for some of the inventory related to our
LNG plants, and we put that through last year in
2001.  During the year, distribution operations
did a great job of focusing on operating and
maintenance expenses and bad debt.  So year-to-
year, operating and maintenance expenses were
down about $4.5 million.  In fact, debt expenses
were down about 4.7.  And then the final
significant variance there -- a decrease in
goodwill expense.  We did not have any
goodwill expense this year after adopting the
new FAS, and that is an adjustment of about
$3.6 million.  Hotel services up about 2.6 year-
to-year, and that is primarily a result of
increasing volumes, a little higher volatility
since we had more real winter this year, and then
that is offset some by cost.  And then, finally, we
did have, last year, a onetime write-off of an
investment in an LNG development facility
which we never brought to bear, and we wrote
that off even though it had nothing to do with
Sequent's operations.  That was something we
wrote off last year because it was part of the

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AGL Resources Inc (ATG) - Q4 2002 Financial Release Conference Call
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segment (indiscernible) subsidiary.  Energy
investments up about $5.3 million, primarily as a
result of SouthStar, and that was offset by the
sale of Utilipro in the first quarter of 2001,
which was a gain before tax of about $11
million.  And then at corporate, we are down
about 10.2 year to year, primarily as a result of
some onetime expenses and the establishment of
reserves.  The reserves that we contemplated for
AMR (phonetic), which were mentioned in the
third-quarter call, and then reserves and
expenses related to severance and the risk
management software that I mentioned at
Sequent.

A couple of things on the balance sheet, and
then we will open it up for your questions.  As
you know, there has been a lot of swirl around
pensions this year, a lot of articles about the fact
that with interest rates low, discount rates are
low, the value of the liability is going up for
companies with defined benefit plans, and at the
same time, market performance for the past
three years in the equity markets has not
returned to what people had generally
anticipated.  As a result of that, we have
increased our long-term liabilities at the end of
the year about $73 million for our minimum
pension obligation at 12/31/2002, and as you
know, how that works is the after-tax effect of
that goes into other comprehensive income as a
loss, and that loss for us was about $48 million.
So we end the year with a debt-to-cap ratio of
about 66 percent.  Given the effect of the equity
offering, we will be in the high 50's, so that will
be a significant improvement for us.

Just a couple of quick things on the cash flow
statement for the year.  We ended the year just
about cash flow breakeven.  A couple of things
during the year helped us with that.  We're going
to have to push hard for next year to try to make
sure we can continue to improve on this. During
year, we sold AMR inventory to the marketers
(indiscernible) transfer that, and as a result of
that transfer, we picked up about $38 million
that we will not get back next year, and then we

did pick up some bonus depreciation this year,
and I would say year-to-year, the difference in
deferred taxes is probably going to be
somewhere around $20 million between 2002
and 2003.  And on a capital spending basis, just
to give you some numbers, we for the year have
spent our capital in -- about $187 million of
capital, of which about $54 million was related
to the construction of distribution facilities,
about $42 million was in pipeline replacements,
about $28 million went to telecommunications --
much of, as Paula said, we recaptured through
billings to customers.  Next year, that number is
going to go down to about $158 million, and I
would say of that $158 million, there is at least
somewhere between $30 and $40 million which
is discretionary, which we are going to really
work hard to try to reduce that, or make sure that
in the case of telecom, that when we spend the
money, we get paid for those laterals.

So that covers the income statement, balance
sheet and cash flow, and we will open it up for
questions.


THE OPERATOR:
(CALLER INSTRUCTIONS) (Indiscernible),
(Indiscernible) Research.


THE CALLER:
With respect to your filings, every quarter, for
the past year or so, you have been been trying to
get them out the day of the release.  I was
curious whether that is what is going to happen
going forward, and when do you expect the 10-
K to be filed?


MR. RICHARD O'BRIEN:
We strive every quarter to try to get this done,
but I will tell you -- we really pushed our
finance staff very hard to get audited financial
statements -- and our auditors, and kudos to
Deloitte for helping us get there.  I would like to
see us try to do this every quarter.  We're going
to do everything we can to try to make that out,

14



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AGL Resources Inc (ATG) - Q4 2002 Financial Release Conference Call
Friday, January 31, 2003 8:15 am






Fair Disclosure Financial Network         www.fdfn.com � 1-617-393-3354

but I am not going to guarantee it.  The 10-K
will get filed probably still in March, although
there will not be any significant changes.  The
next thing you will se is later today, we will find
our MDNA (phonetic) analysis, so you'll be able
to pick that up before 5.30.


THE CALLER:
What is your long-term, or where you would like
to see the debt leverage percentage settle in at?


MR. RICHARD O'BRIEN:
I think mid-50's.  One thing I would like to say -
- Brian pointed this out to me -- is we have
disclosed, in our last 10-Q, the fact that we were
going to have a gain on the sale of our Caroline
Street facility of about $10 million, and I wanted
to be clear.  In our earnings guidance, that $10
million is not included in our earnings guidance.
So that is really something that we just don't
look as core earnings, so we are not looking at
that in our earnings growth.  I wanted to make
sure I pointed  that out.


THE OPERATOR:
Michael Warner, Kennedy Capital.


THE CALLER:
Do you know what your cash flow projections
would be for 2003?


MR. RICHARD O'BRIEN:
Yes.  I tried to hit the highlight, which is that I
think the big change for us will be in deferred
taxes, which I think you can expect to be down
year-over-year about $20 million.  And I think
our capital spending, as I indicated, I think will
be down year-over-year about $30 million.  And
I think that really is going to be the majority of
the change in our cash flow statement.


THE CALLER:
Do you expect to be cash flow neutral again, or
positive?


MR. RICHARD O'BRIEN:
We should be close to cash flow neutral again,
after dividends.


THE CALLER:
Are you going on the road at all for your equity
offering?


MR. RICHARD O'BRIEN:
Our managers tell us we are, yes.


MS. PAULA ROSPUT:
We don't know exactly where we are going and
when, but starting Tuesday, we will be
somewhere.


THE CALLER:
Starting next Tuesday?


MS. PAULA ROSPUT:
That's right, Tuesday.


MR. RICHARD O'BRIEN:
That is the current plan.


THE CALLER:
I would like to see you in St. Louis.


THE OPERATOR:
David Maccarrone, Goldman Sachs.


THE CALLER:
I was hoping you could talk about your
expectations for SouthStar in 2003, and
specifically, what do you expect out of the joint
venture in total, and then talk about the expected
accretion specifically, as to your acquisition of
the Dynegy stake?


MR. RICHARD O'BRIEN:

15



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AGL Resources Inc (ATG) - Q4 2002 Financial Release Conference Call
Friday, January 31, 2003 8:15 am






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We generally do not release earnings estimates
for SouthStar, primarily because it is a
partnership, and we are only one partner, and we
generally do not like to give guidance.  What I
would tell you is that SouthStar's performance
for 2002, I think, is a number which is probably
not going to be necessarily easily repeated in
2003.  I am hopeful that we're going to be able
to have earnings growth out of the other
segments that will allow us to hit the numbers,
but for SouthStar, we are really going to pick up
the 20 percent share of Dynegy, and although we
have not really said anything publicly, I know
you published something on what your estimate
was, and what I would say is with respect to
Dynegy's piece, it probably is going to add
somewhere between 3 and 5 cents of earnings,
just for the Dynegy peace itself.  And then we
have some other components (indiscernible)
which will uplift that maybe another penny or
two, but that is as a result of some
disproportionate sharing that occurs in some
partnerships, and some of that is not agreed to
yet, so I am trying to give you some guidance
without trying to tie down my partners, and that
is probably about as close as I can get.


THE CALLER:
When you did the acquisition analysis, looking
out over a 5-year period, what do you see as the
trajectory from a 2003 base, going forward -- is
this a business where you expect the cash flows
to rise, be stable or erode over time?


MR. RICHARD O'BRIEN:
I think stability is what we are counting on here.


THE CALLER:
On the telecom business, could you walk
through what you spent and what the cash
generated in that business was in 2002?  And
how that compared to your earlier expectations?


MR. RICHARD O'BRIEN:

Yes, we can.  What we spent in 2002 on capital,
as I said, was about $28 million, and that relates
to completion of the Atlanta network and the
purchase of the Phoenix network, and that is on
a gross basis.  During the year, as Paula said, we
received about $30 million in cash, and I think
as a result of that, basically, for the year,
networks was about cash breakeven for the year,
in terms of how much was spent and how much
we recovered.


MS. PAULA ROSPUT:
It is not very different than what the original
plan was. What essentially happened here was
two things -- I think number one, we were trying
to think through this issue of when you get
upfront cash, how does it translate to earnings?
What is the proper accounting on it?  What is the
proper way to structure contracts?  We were a
little off on the plan, because we assumed when
we did the plan 15 months ago that the network
in Atlanta would be commercially ready in June
2002, and when it did not become commercially
ready until September/October, we lost the
revenue recognition that goes with that upfront
cash for several months.  The second thing that
happened is the Phoenix opportunity presented
itself, and it really matched the criteria that we
had established around what makes for a good
network, and we looked at our overall earnings
picture and basically said to ourselves, "Let's go
for it -- Phoenix is the right opportunity, the
numbers really work out, and let's not worry
about trying to get to earnings positive on this
business.  Let's go ahead and deploy a little bit
more capital to get the reputable multicity thing
going."  So the bottom line is the difference
between getting it earnings positive and not
really was not that great.  It's the delay and then
adding the second network, so we just decided
that our overall corporate earnings could support
letting us invest in the business a little bit longer,
and so you'll see positive earnings for this
business throughout 2003.



16



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AGL Resources Inc (ATG) - Q4 2002 Financial Release Conference Call
Friday, January 31, 2003 8:15 am






Fair Disclosure Financial Network         www.fdfn.com � 1-617-393-3354

THE CALLER:
Could you explain the deferred revenue
account?


MR. RICHARD O'BRIEN:
Basically, what we do on the lease arrangements
is when we book a lease, because it does not all
come into income, we end up setting up a
deferred account, which when we get to that
time period, we'll take the earnings out of that
bucket on the balance sheet and then put it in
through the business statement -- it's basically
just an amortization of balance sheet, as the
leases continue to mature.


THE OPERATOR:
(CALLER INSTRUCTIONS) Peter Hark, Talon
Capital.


THE CALLER:
You mentioned your year-end debt-to-cap was
66 percent, and that by the end of this year, we
would get to 58 percent or the high 50's.  Could
you provide a reconciliation that gets us there?  I
guess you are also including in there the 225
million of preferred?


MR. RICHARD O'BRIEN:
When I say debt-to-cap -- that is a good point --
I am looking at debt plus preferred over total
capitalization. And the reconciliation -- the only
number I really gave you -- and if I didn't say
this, what I meant to say was given the effect to
the equity offering only, we're going to go from
66 to about 59.


THE CALLER:
Do you have cash flow or CapEx numbers for
2003?


MR. RICHARD O'BRIEN:
I think I gave the capital numbers for 2003 -- the
estimates of about $158 million of capital.  And
on the cash flow numbers, I tried to give the

significant differences. For the year, I would say
2003, after dividends, is about a breakeven year
for us.


THE CALLER:
Building in the equity offering, I look at it, and
you're paying down 6.5 or 7 percent debt, and it
works out to 8 to 10 cents dilution.  If I am
starting at $1.82 diluted, and I dilute those, is
there a way you can build me back up to the
$1.85 to $1.90, either through EBIT growth by
business segment or discrete earnings per share
improvements across the four segments?


MR. RICHARD O'BRIEN:
We have those numbers.  I am not prepared to
go public with those numbers, but I can tell you
that we are looking at distribution operations to
continue to improve.  Wholesale services is
going to be up year-over-year, and telecom is
going to be up year-over-year for us, probably
by several million dollars.  So I think when we
put our models together, we feel pretty confident
about where we are.  We have not historically
shared EBIT projections by business units, and I
think we are going to stand pat on that, but we
have a model and we know where we need to
go.  Paula does not let us get away with these
high-level goals.  We drill these things down so
we know where we are at.


MS. PAULA ROSPUT:
We know our math on this one.  We know what
the effective dilution is, and we know what it is
going to take to get us to live within the
consensus after dilution.  So your math lines up
pretty well, at the aggregate level, with where
we know we need to be.


THE CALLER:
On the timing, you said you are solidly
investment grade, and there is no rating agency
pressures.  I thought the timing was a little
interesting.  Somebody might speculate that you

17



Transcript produced by Fair Disclosure Financial Network, Inc.


AGL Resources Inc (ATG) - Q4 2002 Financial Release Conference Call
Friday, January 31, 2003 8:15 am






Fair Disclosure Financial Network         www.fdfn.com � 1-617-393-3354

are also preparing for some other, further
acquisitions -- are you looking at other assets
that might fit the mold here?  And your strategy?


MS. PAULA ROSPUT:
We are always looking.  I think we have always
said that we are trying to create value.  We have
acquisition criteria that say that we would
acquire gas like gas assets, mostly regulated in
character, highly regulated in character, and that
they would have to be accretive within one year
of acquisition.  Last year, we looked at a lot of
stuff. Nothing met those criteria, so we stood
back, but there's no doubt that we went to have
financial flexibility to be able to act, and this is
one step to improve our overall financial
flexibility.


THE CALLER:
And is there any need or desire on your part to
get back to an A rating from where you are
now?


MS. PAULA ROSPUT:
It is a nice aspiration, but the spreads do not
really support it at this point.


THE CALLER:
You're bringing the equity the week of February
10 -- I believe you go X dividend on the 12th.
Would the new stock be entitled to the dividend,
or would you pay that after the issue?


MR. RICHARD O'BRIEN:
That is a good question, and I do not have the
answer for that, but we will get it.


THE OPERATOR:
David Maccarrone, Goldman Sachs.


THE CALLER:
I wanted to explore the issue of the customers
coming back online, and how that is

incorporated into your outlook.  The recent
experience seems to be a distinct positive for the
company's gross margin.  I am curious how
much of that was expected, and what is
incorporated going into 2003?


MS. PAULA ROSPUT:
I think that it was not expected.  I think that the
issue of (indiscernible) disconnects roiled
through the utility systems -- we did not have a
lot of optimism going into 2002, so we did beat
our own forecast.  I think there is a profound
change in the way we deal with collections at the
regulated businesses and at SouthStar, from
2000 and 2001, and I think that there has been a
great regulatory readjustment on it.  And by way
of example, this morning, I was on the phone
with our President of VNG on the issue of his
collection patterns, and we've had terrific colds,
but we had two days of warm weather earlier
this week, and we went out and we worked as
many disconnects as we could work, because we
know that at this time of year, if you promptly
work disconnects, people will reconnect.  They
will find a way to pay, and in fact, he said that at
VNG, about half of his disconnects are
reconnecting the next day, and at AGL, I learned
last night that it is about 35 percent reconnected
the next day.  So you have people being
disconnected for smaller amounts of dollars,
because all of the companies are getting after the
non-payers more quickly, and because of the
cold, people are more inclined to reconnect very
quickly, rather than take a chance, because they
know that sometimes they will get backed up
and have to wait.  So I do think that that is a
paradigm shift; I do not think that we would see
the regulators seeking to impose moratoriums on
the disconnect/reconnect, because they saw how
harmful that was when it was done in 2000 and
2001.  The bottom line is that it is a paradigm
shift.  We are still very cautious, because we
know that high prices in the winter do lead to
seasonal disconnections when the summer
months come.  And so, I think we have
appropriately worked that into our forecast, but I

18



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AGL Resources Inc (ATG) - Q4 2002 Financial Release Conference Call
Friday, January 31, 2003 8:15 am






Fair Disclosure Financial Network         www.fdfn.com � 1-617-393-3354

raised it at the front end, because I do think that
it is a trend around the recognition that if we
keep people's bills under control through good
business practices, we have a better ability to
count on the return of those customers than if we
put them through a very bad experience, which
is what happened in 2000 and 2001.


THE CALLER:
How many customers did you reconnect in the
fourth quarter, and how many customers do you
think have not yet reconnected?


MR. KEVIN MADDEN:
In terms of those that have not reconnected, I
think it is about -- and don't hold me to it right
now, I'll get back to you on it -- I think it is
around 15,000.  But we are still drilling down to
that, and focusing on where they are located in
Georgia, and making them aware of the program
that Paula talked about, in terms of the regulated
provider, and she talked about we have now
14,000 -- SCANA projected that that program
can have up to 50,000 potential customers.


THE CALLER:
You talked about a mid-50's debt-to-cap target;
to play devil's advocate, why not get there now
with the equity offering?


MR. RICHARD O'BRIEN:
I think part of it is size -- how much equity can
you issue to get there, and use the proceeds, and
I think we're comfortable with the balance sheet
right now at the higher 50 levels, and we will
work it down over time, and I think that gives us
the ability to average in a little bit, too.


MS. PAULA ROSPUT:
We don't have quite as much courage as you
have, in theory, because this issue of trying to be
accretive after the dilution of an equity issuance
is very much with us.  We have always tried to
give growth to our shareholders, and we do not

want to create a new class of shareholders who
are not too happy with our performance.


THE OPERATOR:
(CALLER INSTRUCTIONS) I am showing no
further questions at this time; I would like to
turn the conference back over to you for any
closing remarks you may have.


MR. STEVE CAVE:
We will just end it there, and thank you for
joining us today, and please give us a call with
any follow-up questions.


THE OPERATOR:
That does conclude your conference call for
today; we thank you for your participation, and
ask that you please disconnect your lines.

(CONFERENCE CALL CONCLUDED)





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Friday, January 31, 2003 8:15 am






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