FORWARD-LOOKING STATEMENTS

Certain expectations and projections regarding our future performance referenced in this Management's Discussion and Analysis of Financial Condition and Results of Operations section and elsewhere in this report, as well as in other reports and proxy statements we file with the SEC or otherwise release to the public and on our website are forward-looking statements. Senior officers and other employees may also make verbal statements to analysts, investors, regulators, the media and others that are forward-looking.

Forward-looking statements involve matters that are not historical facts, and because these statements involve anticipated events or conditions, forward-looking statements often include words such as "anticipate," "assume," "believe," "can," "could," "estimate," "expect," "forecast," "future," "goal," "indicate," "intend," "may," "outlook," "plan," "potential," "predict," "project," "seek," "should," "target," "would," or similar expressions. You are cautioned not to place undue reliance on our forward-looking statements. Our expectations are not guarantees and are based on currently available competitive, financial and economic data along with our operating plans. While we believe that our expectations are reasonable in view of currently available information, our expectations are subject to future events, risks and uncertainties, and there are several factors - many beyond our control - that could cause our results to differ significantly from our expectations.

Such events, risks and uncertainties include, but are not limited to, changes in price, supply and demand for natural gas and related products; the impact of changes in state and federal legislation and regulation including any changes related to climate change; actions taken by government agencies on rates and other matters; concentration of credit risk; utility and energy industry consolidation; the impact on cost and timeliness of construction projects by government and other approvals, development project delays, adequacy of supply of diversified vendors, unexpected change in project costs, including the cost of funds to finance these projects; the impact of acquisitions and divestitures; direct or indirect effects on our business, financial condition or liquidity resulting from a change in our credit ratings or the credit ratings of our counterparties or competitors; interest rate fluctuations; financial market conditions, including recent disruptions in the capital markets and lending environment and the current economic downturn; and general economic conditions; uncertainties about environmental issues and the related impact of such issues; the impact of changes in weather, including climate change, on the temperature-sensitive portions of our business; the impact of natural disasters such as hurricanes on the supply and price of natural gas; acts of war or terrorism; and other factors described in detail in our filings with the SEC.

We caution readers that, in addition to the important factors described elsewhere in this report, the factors set forth in Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2008, among others, could cause our business, results of operations or financial condition in 2009 and thereafter to differ significantly from those expressed in any forward-looking statements. There also may be other factors that we cannot anticipate or that are not described in our Form 10-K or in this report that could cause results to differ significantly from our expectations.

Forward-looking statements are only as of the date they are made. We do not update these statements to reflect subsequent circumstances or events.

Overview

We are an energy services holding company whose principal business is the distribution of natural gas through our regulated natural gas distribution business and the sale of natural gas to end-use customers primarily in Georgia through our retail natural gas marketing business. As of September 30, 2009, our six utilities serve approximately 2.3 million end-use customers, making us the largest distributor of natural gas in the southeastern and mid-Atlantic regions of the United States based on customer count. Although our retail natural gas marketing business is not subject to the same regulatory framework as our utilities, it is an integral part of the framework for providing natural gas service to end-use customers in Georgia.

We also engage in natural gas asset management and related logistics activities for our own utilities as well as for non-affiliated companies; natural gas storage arbitrage and related activities; and the development and operation of high-deliverability underground natural gas storage assets. These businesses allow us to be opportunistic in capturing incremental value at the wholesale level, provide us with deepened business insight about natural gas market dynamics and facilitate our ability, in the case of asset management, to provide transparency to regulators as to how that value can be captured to benefit our utility customers through profit-sharing arrangements. Given the volatile and changing nature of the natural gas resource base in North America and globally, we believe that participation in these related businesses strengthens our company. We manage these businesses through four operating segments - distribution operations, retail energy operations, wholesale services, energy investments and a non-operating corporate segment.

Executive Summary

We intend to continue executing our plan for long-term earnings and dividend growth. Central to that plan is the execution of our regulatory planning through the filing of rate cases and other regulatory requests to recover the investments we have made, and should continue to make, to enhance our infrastructure and improve customer service. Further, we are collaborating with regulatory agencies and other companies to promote and encourage conservation through innovative rate design mechanisms that we believe are positioning our utility businesses to benefit in an economic recovery.

Glossary of Key Terms

We continue to explore select opportunities to expand our businesses in strategic areas and maintain a disciplined approach around current capital projects. Our major capital projects - our Golden Triangle Storage natural gas storage facility project and our Hampton Roads Crossing and Magnolia pipeline connection projects - are expected to be completed by year-end and be within budget. In these challenging economic conditions, we continue to aggressively focus on capital discipline and cost control, while moving ahead with projects and initiatives that we expect to have current and future benefits and provide an appropriate return on capital.

During the last half of 2008 and continuing into 2009, natural gas prices declined significantly, reflecting the decline in the United States economy, increasing natural gas supplies and above-average storage volumes, among other factors. These lower gas prices resulted in significantly lower levels of working capital necessary for our operating segments to purchase their natural gas inventories as compared to recent inventory injection seasons. We may experience increased pressure on our working capital requirements and borrowing capacity under our existing Credit Facility should natural gas prices return to levels experienced in 2008.

Distribution Operations

Our distribution operations segment is the largest component of our business and includes six natural gas local distribution utilities. These utilities construct, manage and maintain intrastate natural gas pipelines and distribution facilities and include:

· Atlanta Gas Light in Georgia

· Chattanooga Gas in Tennessee

· Elizabethtown Gas in New Jersey

· Elkton Gas in Maryland

· Florida City Gas in Florida

· Virginia Natural Gas in Virginia

Each utility operates subject to regulations of the state regulatory agencies in its service territories with respect to rates charged to our customers, maintenance of accounting records and various other service and safety matters. Rates charged to our customers vary according to customer class (residential, commercial or industrial) and rate jurisdiction. Rates are set at levels that generally should allow us to recover all prudently incurred costs, including a return on rate base sufficient to pay interest on debt and provide a reasonable return for our shareholders. Rate base generally consists of the original cost of utility plant in service, working capital and certain other assets; less accumulated depreciation on utility plant in service and net deferred income tax liabilities, and may include certain other additions or deductions.

Customer growth declined slightly in our distribution operations segment in the first nine months of 2009 relative to last year, a trend we expect to continue through the end of 2009. For the nine months ended September 30, 2009, our year-over-year consolidated utility customer growth rate was slightly negative or (0.3)%, compared to 0.1% positive growth for the same period of 2008. We anticipate overall customer growth in 2009 to be flat to negative, primarily as a result of much slower growth in the residential housing markets throughout most of our service territories and the effects of a weak economy on our commercial and industrial customers. As compared to 3 years ago, we have reduced our customer attrition rates. As a result, we believe we should be well positioned when the economy recovers.

The weak economy is expected to continue to impact a significantly larger portion of consumer household incomes during the upcoming winter heating season. However, natural gas prices and the WACOG of our natural gas inventories have declined significantly since last year, which is expected will result in lower average customer bills and no significant increases in our bad debt expenses.

We work with regulators and state agencies in each of our jurisdictions to educate customers about energy costs in advance of the winter heating season, in particular, to ensure that those customers qualifying for the Low Income Home Energy Assistance Program and other similar programs receive any needed assistance and we expect to continue this focus for the foreseeable future.

Distribution Operations - regulatory planning

In 2010 and 2011, we expect to file base rate cases in three of our six jurisdictions. Over the past several years our utilities have been fulfilling their long-term commitments to rate freezes, which began expiring in 2009. These rate case filings are required due to settlements we reached with the applicable state authority in previous rate case or acquisition proceedings. The expected filing dates and dates for which current rates are expected to be effective are outlined in the chart below:

                            Expected
Company                  filing date (2)       Current rates effective until
Atlanta Gas Light (1)             Q2 2010                             Q4 2010
Chattanooga Gas                   Q2 2010                             Q1 2011
Virginia Natural Gas              Q1 2011                             Q3 2011

(1) In July 2009, Atlanta Gas Light filed a request with the Georgia Commission to postpone its scheduled filing of a rate case in November 2009.This request was approved by the Georgia Commission which agreed to postpone the filing until April 1, 2010, but no later than June 1, 2010.

(2) Subject to change.

Glossary of Key Terms

Elizabethtown Gas After a 5-year rate freeze and in accordance with the New Jersey BPU's order, we filed a rate case in March 2009 with a proposed effective date of January 1, 2010. Our initial request was an annual increase to base rates of $25 million. The filing also included energy conservation programs and a proposed Efficiency Usage and Adjustment mechanism (EUA), which is a form of decoupling, including weather normalization. In traditional rate designs, our utilities' recovery of a significant portion of their fixed customer service costs is tied to assumed natural gas volumes used by our customers. We believe separating, or decoupling, the recovery of these fixed costs from the natural gas deliveries will align the interests of our customers and utilities by encouraging energy conservation, achieving rate stability for our customers and ensuring stable returns for our shareholders. If the EUA is approved, the current weather normalization clause would be suspended.

In June 2009, and in accordance with New Jersey rate case rules that require the filing of quarterly updates to a case, we filed a revised request for a $17 million annual increase to base rates. The primary driver of the reduced request was a revision to our depreciation rates.

In August 2009, the New Jersey Department of the Public Counsel, Division of Rate Counsel (Rate Counsel) filed testimony recommending a base rate decrease of $13 million. We are currently in settlement discussions with the Rate Counsel and the New Jersey BPU's staff, and we expect all parties to come to an acceptable agreement that will be considered by the New Jersey BPU before the end of 2009.

Distribution Operations - capital projects

In June 2009, Atlanta Gas Light filed a request for a Strategic Infrastructure Development and Enhancement (STRIDE) program with the Georgia Commission to upgrade its distribution system and liquefied natural gas facilities to improve system reliability and create a platform to meet operational flexibility needs and forecasted growth. Under the program, Atlanta Gas Light would be required to file a ten-year infrastructure plan every three years for review and approval by the Georgia Commission. The program merges with Atlanta Gas Light's existing Pipeline Replacement Program (PRP), which was initiated in 1998 and is scheduled to end in December 2013.

In October 2009, the Georgia Commission approved the initial three years of the STRIDE program, estimated at approximately $176 million, which will increase the existing $1.95 monthly PRP charge for Atlanta Gas Light's customers by $0.39 beginning in October 2009. Beginning October 2010, the rates will increase by an additional $0.39 for a total of $0.78 per month, and beginning in October 2011, the rates will increase by an additional $0.40 per month for a total of $1.18 per month. The increased charges are subject to review and modification by the Georgia Commission every three years. Further, in October 2009 and subsequent to the Georgia Commission's approval of the STRIDE program, an organization representing members in Georgia has filed a Motion for Reconsideration of the order approving the program with the Georgia Commission, as well as an appeal to the State Superior Court for a review of the Georgia Commission's ruling that the organization did not have discovery rights in the STRIDE program proceeding. Pursuant to the Georgia Commission's approval order, neither of these filings prevents the STRIDE program from going into effect. We cannot predict what action, if any, the Georgia Commission or the State Superior Court will take in response to these filings. For more information on Atlanta Gas Light's PRP program, see Note 1 in our recast consolidated financial statements and related notes as filed on Form 8-K with the SEC on July 13, 2009, and in our Form 10-K for the year ended December 31, 2008, filed with the SEC on February 5, 2009.

In April 2009, the New Jersey BPU approved an accelerated $60 million enhanced infrastructure program for Elizabethtown Gas which started this year and is scheduled to be completed in 2011. This program was created in response to the New Jersey Governor's request for utilities to assist in the economic recovery by increasing infrastructure investments. A regulatory cost recovery mechanism will be established with estimated rates put into effect at the beginning of each year. At the end of the program the regulatory cost recovery mechanism will be trued-up and any remaining costs not previously collected will be included in base rates. Elizabethtown Gas expects that approximately $18 million in capital expenditures for this program will occur in 2009.

Retail Energy Operations

Our retail energy operations segment consists of SouthStar, a joint venture currently owned 70% by us and 30% by Piedmont. SouthStar markets natural gas and related services to retail customers on an unregulated basis, principally in Georgia, as well as to commercial and industrial customers in Alabama, Florida, Ohio, Tennessee, North Carolina and South Carolina. SouthStar is the largest marketer of natural gas in Georgia with an approximate 33% market share based on customer count.

Although our ownership interest in the SouthStar partnership is currently 70%, the majority of SouthStar's earnings in Georgia are currently allocated, by contract, 75% to us and 25% to Piedmont. SouthStar's earnings related to customers in Ohio and Florida are currently allocated 70% to us and 30% to Piedmont. We record the earnings allocated to Piedmont as a noncontrolling interest in our condensed consolidated statements of income, and we record Piedmont's portion of SouthStar's capital as a noncontrolling interest in our condensed consolidated statements of financial position. The majority of SouthStar's earnings allocated to us for the nine months ended September 30, 2009, were largely at the 75% contractual rate.

Glossary of Key Terms

In March 2009, Piedmont filed a lawsuit in the Court of Chancery of the State of Delaware against us asking the court to enter a judgment declaring that our right to purchase Piedmont's ownership interest in SouthStar expires on November 1, 2009. We reached a settlement agreement with Piedmont that dismissed the lawsuit and will result in a restructuring of the ownership interests in the SouthStar joint venture. Under the terms of the agreement, which has been approved by the boards of directors of both companies, we will purchase an additional 15% ownership share in the joint venture from Piedmont for $58 million. As a result, we will own 85% of the SouthStar joint venture, and will be entitled to 85% of the annual earnings from the business, while Piedmont will retain the remaining 15% share. As part of the agreement, our interest will remain a noncontrolling interest and we will not have any further option rights to Piedmont's remaining 15% ownership interest. The agreement was approved by the Georgia Commission in October 2009 and the effective date of the transaction will be January 1, 2010.

SouthStar's operations are sensitive to seasonal weather, natural gas prices, retail pricing plans and strategies, customer growth and consumption patterns similar to those affecting our utility operations. SouthStar's retail pricing strategies and use of various economic hedging strategies, such as futures, options, swaps, weather derivative instruments and other risk management tools, help to ensure retail customer costs are covered to mitigate the potential effect of these issues on its operations.

In the Georgia market, SouthStar continues to experience the negative impact to operating margins from increased competition and an increase in the number of customers shopping for lower retail natural gas prices. Further, the number of customers switching Marketers in the Georgia market has increased in part due to customers seeking the most competitive price plans.

SouthStar continues to use a variety of targeted marketing programs to attract new customers and to retain existing ones. Despite these efforts we have seen a 4% decline in average customer count for the nine months ended September 30, 2009, as compared to the same period of 2008. We believe this decline reflects some of the same economic conditions that have affected our utility businesses as well as the more competitive retail pricing market for natural gas in Georgia.

SouthStar may also be affected by the conservation and bad debt trends, but its overall exposure is partially mitigated by the high credit quality of SouthStar's customer base, lower wholesale natural gas prices in 2009, disciplined collection practices and the unregulated pricing structure in Georgia.

SouthStar continues to expand its business in other states as well. We are currently focusing these efforts on the Ohio and Florida markets.

Wholesale Services

Our wholesale services segment consists primarily of Sequent, our subsidiary involved in asset management and optimization, storage, transportation, producer and peaking services and wholesale marketing. Sequent seeks asset optimization opportunities, which focus on capturing the value from idle or underutilized assets, typically by participating in transactions to take advantage of pricing differences between varying markets and time horizons within the natural gas supply, storage and transportation markets to generate earnings. These activities are generally referred to as arbitrage opportunities.

Sequent's profitability is driven by volatility in the natural gas marketplace. Volatility arises from a number of factors such as weather fluctuations or the change in supply of, or demand for, natural gas in different regions of the United States. Sequent seeks to capture value from the price disparity across geographic locations and various time horizons (location and seasonal spreads). In doing so, Sequent also seeks to mitigate the risks associated with this volatility and protect its margin through a variety of risk management and economic hedging activities.

Sequent provides its customers with natural gas from the major producing regions and market hubs in the United States and Canada. Sequent acquires transportation and storage capacity to meet its delivery requirements and customer obligations in the marketplace. Sequent's customers benefit from its logistics expertise and ability to deliver natural gas at prices that are advantageous relative to other alternatives available to its customers.

During the third quarter of 2008, Sequent negotiated an agreement for 0.04 Bcf per day of transportation capacity for a period of 25 years beginning in August 2009. This agreement was executed in April 2009, and as a result, we have included approximately $89 million of future demand payments associated with this capacity within our unrecorded contractual obligations and commitment disclosures. As with its other transportation capacity agreements, Sequent has and will identify opportunities to lock-in economic value associated with this capacity through the use of financial hedges. Since the duration of this agreement is significantly longer than the average duration of Sequent's portfolio, the hedging of the capacity has increased our exposure to hedge gains and losses as well as impacting Sequent's VaR.

During the second half of 2008, we began executing hedging transactions related to this transportation capacity. As a result of changes in the fair value of these hedges, Sequent reported no hedge gains during the three months ending September 30, 2009 and $22 million during the nine months ending September 30, 2009. There was no significant impact to VaR during these periods. For transportation-related hedge gains or losses, no corresponding loss or gain is recognized on the hedged transportation transactions since the underlying transportation contracts are not recorded at fair value. The gains or losses on the transportation agreements would be recognized in the period they are realized, which is the period the transportation capacity is available for our use.

Glossary of Key Terms

Asset management transactions Sequent's asset management customers include affiliated utilities, nonaffiliated utilities, municipal utilities, power generators and large industrial customers. These customers, due to seasonal demand or levels of activity, may have contracts for transportation and storage capacity, which may exceed their actual requirements. Sequent enters into structured agreements with these customers, whereby Sequent, on behalf of the customer, optimizes the transportation and storage capacity during periods when customers do not use it for their own needs. Sequent may capture incremental operating margin through optimization, and either share margins with the customers or pay them a fixed amount.

The following table provides updated information on Sequent's asset management agreements with its affiliated utilities, including amended or extended agreements in 2008 and 2009 with Florida City Gas, Chattanooga Gas, Elizabethtown Gas and Virginia Natural Gas.

                     Expiration         % of shared
                        date       profits or annual fee
Chattanooga Gas      March 2011             50% (A)
Elizabethtown Gas    March 2011           (A) (B)
Atlanta Gas Light    March 2012        up to 60% (A)

(A) Includes aggregate annual minimum payments of $14 million for Atlanta Gas Light, Chattanooga Gas, Elizabethtown Gas and Virginia Natural Gas.

(B) Shared on a tiered structure.

Storage inventory outlook The following graph presents the NYMEX forward natural gas prices as of September 30, 2009, June 30, 2009 and December 31, 2008, for the period of October 2009 through September 2010, and reflects the prices at which Sequent could buy natural gas at the Henry Hub for delivery in the same time period. The Henry Hub is the largest centralized point for natural gas spot and futures trading in the United States. The NYMEX uses the Henry Hub as the point of delivery for its natural gas futures contracts. Many natural gas marketers also use the Henry Hub as their physical contract delivery point or their price benchmark for spot trades of natural gas.
[[Image Removed: NYMEX Curve]]
Sequent's expected natural gas withdrawals from physical salt dome and reservoir storage are presented in the following table along with the operating revenues expected at the time of withdrawal. Sequent's expected operating revenues are net of the estimated impact of regulatory sharing and reflect the amounts that are realizable in future periods based on its inventory withdrawal schedule and forward natural gas prices at September 30, 2009. Sequent's storage inventory is economically hedged with futures contracts, which results in an overall locked-in margin, timing notwithstanding.

                                      Withdrawal schedule (in Bcf)
                                                                                      Expected operating
                          Salt dome (WACOG                                                 revenues
                               $3.48)                  Reservoir (WACOG $3.36)          (in millions)
2009
Fourth quarter                            3                                  11     $                   23
2010
First quarter                             -                                  10                         18
Second quarter                            -                                   1                          3
Third quarter                             -                                   1                          1
Total                                     3                                  23     $                   45

If Sequent's storage withdrawals associated with existing inventory positions are executed as planned, it expects operating revenues from storage withdrawals . . .