Fitch Affirms AGL, AGLC and Nicor's Ratings; Outlook Stable

Fitch Ratings has affirmed the long-term Issuer Default Ratings (IDRs) of AGL Resources, Inc. (AGL) and Atlanta Gas Light Company (AGLC) at 'BBB+'. Fitch has also affirmed the long-term IDR of Northern Illinois Gas Company (Nicor Gas) at 'A'. The Rating Outlook for all entities is Stable. Approximately $3.8 billion of long-term debt is affected by these rating actions. A full list of rating actions follows this release.

KEY RATING DRIVERS

AGL Resources, Inc.

Diversified Utility Operations in Supportive Jurisdictions:

AGL's 'BBB+' IDR and Stable Outlook reflect the low-risk profile of its diverse utility operations which represent nearly 80% of the consolidated earnings. AGL owns gas distribution utilities in seven states, all of which have full recovery of gas commodity costs through adjustment mechanisms. AGLC benefits from a volume-insensitive straight-fixed-variable rate design whereby revenue is not directly affected by weather fluctuations or customer usage. Virginia Natural Gas Co. (VNG) and Elizabethtown Gas Co. (EGC) both have weather normalization provisions and partial revenue decoupling. While Nicor Gas' rates are not fully decoupled, its last rate order authorized the recovery of approximately 70% of its fixed costs through fixed tariffs. These mechanisms help mitigate tepid customer growth and higher-than-average unemployment rate particularly in Illinois and Georgia.

Most distribution subsidiaries other than Nicor Gas and Florida City Gas were able to earn returns that exceeded authorized levels in 2013. There are no major rate case filings in the near term. A number of infrastructure and replacement programs will be recovered through riders in Georgia, New Jersey, Virginia and Illinois. Rider programs are expected to represent 22% of total utility capex in 2014 and 47% on average from 2015 to 2018.

Manageable Non-Utility Exposure:

While results from the non-utility businesses are volatile, the exposure is somewhat contained, given their relatively small contribution to AGL's consolidated earnings. Additionally, over the past year, financial results in the retail and wholesale segments appeared to be improving.

Retail earnings are subject to weather conditions, market competition, commodity price risks and operating scale. The segment has seen improvement in 2014 primarily due to cold winter and the addition of two new retailers in 2013. The acquisitions improved margins by 17% in the first nine months of 2014. Meanwhile, migrating to fixed-price plans for residential and commercial customers in response to competition continues to compress margins, partially offset by relatively low bad-debt expense primarily as a result of low commodity prices.

The wholesale segment in 2014 has benefited from transportation and storage positions in the Northeast and Midwest especially in the first half of year, but its earnings will continue to be highly volatile and unpredictable.

The midstream storage business experienced lower re-contracting rates and capacity subscription in 2014. This segment will continue to be challenged by low seasonal storage spreads and continued natural gas oversupply in the next 12 to 18 months.

AGL has announced definitive plans to participate in three pipeline projects in 2014 totaling nearly $700 million, supplying its gas customers in Georgia, New Jersey and Virginia.

The majority of the pipeline capacities are contracted to highly-rated offtakers. The projects are expected to complete in the 2017 and 2018 timeframe. The company also has announced a non-binding open season to explore building a pipeline (Prairie State Pipeline) that would serve customers in Illinois. Although these projects appear to expand its midstream footprint, high level of contractual commitment and expected balanced financing structure help neutralize the competitive market risks.

Consolidated Financial Profile:

AGL's credit ratios are expected to be in line with its 'BBB+' rating given the overall low-risk business profile. Elevated capex spending and expiration of bonus depreciation in the next several years are offset by revenue recovery under infrastructure riders and synergy savings from the merger with Nicor Inc. AGL expects to spend on average $870 million in capex in the next several years, compared to the historical average of $617 million annually. In the next five years, Fitch expects AGL to generate an average funds from operations (FFO) fixed charge coverage ratio of approximately 4.9x. Over the same period, adjusted debt/EBITDAR is expected to average approximately 4.1x.

Atlanta Gas Light Company

Strong Parent Ratings Linkage:

AGLC's ratings reflect its close linkage to AGL. The parent subsidiary linkage is driven by AGLC's reliance on AGL for access to capital and liquidity, and AGL's dependence on upstream dividends from AGLC to service holding company-level debt. Intercompany loans represent nearly 84% of AGLC's total debt in 2014. AGLC has approximately $182 million of medium-term notes outstanding which are being refinanced at the parent level over time. All AGL's subsidiaries except for Nicor Gas participate in a corporate money pool arrangement for short-term borrowing needs. Georgia's regulatory framework does not limit AGLC's ability to upstream dividends to AGL.

Supportive Regulatory Recovery Mechanisms:

As a pure energy delivery company, AGLC operates under volume-insensitive straight-fixed-variable rates. Accordingly, changes in customer usage patterns due to weather, improvements in equipment efficiencies or other business conditions have minimal financial impact. Weather only indirectly influences the number of customers that have active accounts during the heating season, and this has a small seasonal impact on AGLC's revenues, since generally more customers are connected in periods of colder weather than in periods of warmer weather. AGLC also benefits from a constructive regulatory environment which includes riders for recovery of infrastructure investments.

Manageable Customer Concentration:

While AGLC has customer concentration risk, billing only 12 marketers, it is able to obtain security support in an amount equal to a minimum of 2x a marketer's highest monthly bill. In addition, AGLC bills its delivery service to marketers in advance rather than as arrears.

Northern Illinois Gas Company

Solid Utility Operations:

Nicor Gas' utility operations are supported by a large, mostly residential customer base, diverse source of gas supply and 150 billion cubic feet (Bcf) of gas storage, a monthly purchased gas adjustment (PGA) mechanism, and manageable capital spending and external funding requirements. Nicor Gas owns eight underground gas storage facilities with inventory capacity of 150 Bcf. The system is designed to meet 50% of the estimated peak-day deliveries and approximately 40% of normal winter deliveries in Illinois. The system provides supply flexibility, mitigates risks of seasonal price movements and returns a healthy margin. While Nicor Gas' rates are not fully decoupled, it is authorized to recover 70% of fixed costs through a fixed customer charge. Use of weather derivatives protects operating margin against usage decline when weather is warmer than normal in the heating season.

Weak Linkage to Parent Though Contagion Risk Exists:

The notching difference between Nicor Gas and AGL reflects the relatively weak linkages between the two companies. Unlike AGLC, Nicor Gas maintains capital market access independent of AGL and has its own commercial paper program and liquidity facilities. Illinois regulation prohibits Nicor from lending to affiliates. Nicor Gas's rating is somewhat constrained as current regulation does not effectively prohibit it from upstreaming dividends. Nicor Gas' rating could be pressured if it demonstrates stronger linkage to AGL by contributing dividends disproportionately large relative to its earnings or provides other forms of financial support to AGL.

Strong Credit Metrics:

Fitch expects Nicor Gas' credit metrics to remain strong for its rating category in the next three years though cash flow is affected by the termination of bonus depreciation. FFO fixed charge coverage is projected to average approximately 8.5x. Leverage is expected to remain strong with adjusted debt/EBITDAR projected to be 2.7x over the forecast period.

RATING SENSITIVITIES

AGL Resources Inc.

Positive:

--Unlikely absent a material reduction in leverage or robust customer growth in the distribution business.

Negative:

--Material debt-funded expansion or shift towards non-utility businesses;

--Negative regulatory developments in the states that AGL's utilities operate;

--Adjusted debt/EBITDAR above 4.5x and/or FFO fixed charge coverage below 4x on a sustained basis.

Atlanta Gas Light Company

Positive:

--With close linkage to its parent, primary triggers would be any positive changes in the ratings of AGL.

Negative:

--Negative regulatory developments in Georgia;

--With close linkage to its parent, primary triggers would be any negative changes in the ratings of AGL.

Northern Illinois Gas Company

Positive:

--Positive rating action is unlikely absent a rating upgrade at AGL.

Negative:

--Adverse change in regulatory environment;

--Downgrade at AGL;

--Stronger parent subsidiary linkage through dividend or other financial support provided to AGL that is disproportionate to its earnings;

--Adjusted debt-to-EBITDAR above 3.75x and/or FFO fixed charge coverage below 4.5x on a sustained basis.

Fitch affirms the following ratings, with a Stable Outlook:

AGL Resources Inc.

--IDR at 'BBB+'.

AGL Capital Corp. (guaranteed by AGL)

--Senior unsecured notes at 'BBB+';

--Commercial paper at 'F2'.

Atlanta Gas Light Company

--IDR at 'BBB+';

--Senior unsecured medium-term notes at 'A-'.

Northern Illinois Gas Company

--IDR at 'A';

--Senior unsecured notes at 'A+';

--First mortgage bonds at 'AA-';

--Short-term IDR at 'F1';

--Commercial paper at 'F1'.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014);

--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 13, 2013);

--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013);

--'Rating U.S. Utilities, Power and Gas Companies, (March 9, 2014).

Applicable Criteria and Related Research:

Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552

Recovery Ratings and Notching Criteria for Utilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=813608

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=931715

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