John W. Somerhalder II
Chairman, President and Chief Executive Officer

Letter to Shareholders

To Our Shareholders:

As I begin my third year leading AGL Resources, I am extremely proud of our employees and their commitment to our company’s success. Their efforts helped us achieve several important milestones during 2007 that position our company to provide long-term value to our stakeholders.

 

I emphasize our focus on long-term value because it supports our fundamental belief that we operate this business not just for today, for this quarter or for this year. We operate this business to generate sustainable returns for you, our owners, for many years to come, and to do so in a responsible way that best balances the needs of all our stakeholders. We make every operating and financial decision with those principles in mind.

Financial Results

2007 was a year that challenged us on several fronts. We certainly felt the effects of a weakening economy and a slowdown in the housing market in each of our six utility service areas. Our business also was impacted by a relatively stagnant natural gas pricing environment that limited our ability to capitalize on wholesale marketing opportunities.

 

Despite these challenges, we earned $2.74 per basic share in 2007, a slight increase over the $2.73 per basic share we reported in 2006. Although these results were record earnings per share for the company, they were lower than we had expected, and fell short of the earnings guidance range we had provided investors during the year.


Our 2007 earnings results reflect solid year-over-year improvements in three of our operating segments — distribution operations, retail energy operations and energy investments. Our other operating segment, wholesale services, continued to expand into strategic new markets, but its earnings performance was hampered by the persistent lack of volatility and commercial activity in the natural gas market throughout the year. As a result, more than 90 percent of our earnings in 2007 were generated by regulated and retail marketing portions of our business that serve end-use retail customers.

 

In 2007, AGL Resources’ board of directors approved an 11 percent increase in the annual dividend, to $1.64 per share, and in February 2008, raised the dividend another 2 percent to $1.68 per share. We have now established a track record of five consecutive years of dividend increases, reflecting the company’s strong financial position and the long-term sustainability of our earnings growth. These dividend increases are consistent with our commitment to investors to maintain a dividend payout ratio that is in line with that of traditional gas utilities.

 

We also repurchased approximately 2 million shares of our common stock in 2007, at an aggregate cost of $80 million. The combination of dividend increases and share repurchases reflects our continuing commitment to maximize shareholder value and demonstrates our confidence in the long-term growth outlook for our company.

Strategic Execution

We took several important strategic steps in 2007 that position our businesses for long-term success. Some of these projects require significant investments of capital, and we will maintain our focus on generating returns on invested capital that are higher than the majority of companies in our peer group.

 

Our utilities intensified their marketing efforts to retain existing customers and add new ones. As a result, we saw a net addition of 21,000 customers, a 0.9 percent growth rate as compared to the prior year and a measurable improvement over the past two years. We achieved this top-line growth without losing sight of the rigorous focus on cost management that has been the longstanding hallmark of our utility business.

 

Financial Highlights

In millions,
except per share amounts and market price

2007     2006   Change
Financial Highlights
Operating revenues $ 2,494   $ 2,621   (4.8%)
Net Income $ 211   $ 212   (0.5%)
Earnings per common share              
   Basic $ 2.74   $ 2.73   0.4%
   Diluted $ 2.72   $ 2.72  
Weighted average number of
common shares outstanding:
             
   Basic   77.1     77.6   (0.6%)
   Diluted   77.4     78.0   (0.8%)
Market capitalization (year end) $ 2,876   $ 3,023   (4.9%)
Market price (year end, closing) $ 37.64   $ 38.91   (3.3%)
Total assets $ 6,268   $ 6,147   2.0%
Financial Highlights

We continued to expand the market presence of both our retail marketing and wholesale services businesses. Our retail marketer, SouthStar Energy Services, took important strategic steps toward expanding its competitive platform into other deregulating markets through its entry into the Ohio and Florida markets. Sequent Energy, our wholesale business, expanded its U.S. presence into the growing Pacific Northwest region as well as into the Canadian gas market. These moves position us well to take advantage of market opportunities in key parts of the natural gas value chain.

 

We also made significant progress on our Golden Triangle Storage project in Beaumont, Texas. When complete, the first two phases of this project will add 12 billion cubic feet (Bcf) of working natural gas storage capacity in the Gulf Coast region, where storage will be a critical resource in high demand. The Federal Energy Regulatory Commission has approved our permit for the facility, a major milestone toward beginning construction of the project in the first half of 2008. We expect to put the project into initial commercial operation in late 2010.We are evaluating other opportunities to make capital investments in the storage segment of the natural gas value chain, as we strongly believe this infrastructure expansion will be vitally important to our country’s energy needs in the future.

Environmental Focus

Beyond financial results and operating successes, our company continued to strengthen its commitment to environmental responsibility and stewardship. We believe that natural gas, as the cleanest-burning fossil fuel, will play a key long-term role in addressing many of the challenges of global climate change and greenhouse gas emissions. The direct use of natural gas is highly efficient and has a significantly lower carbon footprint than other traditional fuel sources.

 

We also continued to be active with local, state and federal officials in support of developing sound energy policies that pave the way for finding new supply sources of domestic natural gas. Ensuring that supply keeps pace with the growing demand is absolutely essential to serving our customers well and keeping the price of our product competitive with other fuel sources.

 

The progress we made in 2007 is a direct result of the hard work and commitment of the more than 2,300 employees of AGL Resources. They come to work every day focused on making sure your investment in the long-term future of our company is rewarded, and on their behalf, I thank you for your continued confidence in our company.

Sincerely,

John W. Somerhalder II Signature

John W. Somerhalder II
Chairman, President and Chief Executive Officer
February 29, 2008