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. For the three months ended March 31, 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 strategy through the filing of rate cases 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.

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 on schedule and 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.

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 three months of 2009 relative to last year, a trend we expect to continue through 2009. For the three months ended March 31, 2009, our year-over-year consolidated utility customer growth rate was slightly negative or (0.1)%, compared to 0.3% 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. Over the last 3 years we have reduced our customer attrition rates. As a result, we believe we should be well positioned when the economy recovers.

The weak economy also impacted a significantly larger portion of consumer household incomes during the most recent winter heating season. As a result, we incurred additional bad debt expense and increased customer conservation. We expect these factors may continue to adversely impact our results of operations during the current economic situation. However, we expect operational and collections efforts combined with regulatory mechanisms in place in most of our jurisdictions to help mitigate some of our exposure to these factors.

The risks of increased bad debt expense and decreased operating margins from conservation are minimized at our largest utility, Atlanta Gas Light, as a result of its straight-fixed variable rate structure. In addition, customers in Georgia buy their natural gas from Marketers rather than from Atlanta Gas Light. Our credit exposure at Atlanta Gas Light is primarily related to the provision of services to the Marketers, but that exposure is mitigated, because we obtain security support in an amount equal to a minimum of no less than two times a Marketer's highest month's estimated bill. At our other utilities, while customer conservation could adversely impact our operating margins, we utilize measures to collect delinquent accounts and continue to be rigorous in monitoring and mitigating the impact of these expenses. Due to the timing of usage and billing, the full effects of the most recent heating season will not be known until several months following the end of the heating season.

We worked with regulators and state agencies in each of our jurisdictions to educate customers about higher energy costs in advance of the winter heating season, in particular, to ensure that those customers qualified 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.

Glossary of Key Terms

Upcoming rate cases In 2009 and 2010, we expect to file base rate cases in four of our six jurisdictions. Over the past several years our utilities have been fulfilling their long-term commitments to rate freezes, which begin expiring in 2009. As these rate cases are filed, we plan to seek rate reforms that encourage conservation and "decoupling." 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. 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       Current rates effective until
Atlanta Gas Light            Q4 2009                             Q2 2010
Virginia Natural Gas         Q2 2010                             Q3 2011
Chattanooga Gas              Q2 2010                             Q1 2011

Elizabethtown Gas After a 5-year rate freeze and in accordance with the New Jersey Commission's order, we filed a rate case in March 2009 with a proposed effective date of January 1, 2010. We are requesting an annual increase to base rates of $25 million. This filing included energy conservation programs and a proposed Efficiency Usage and Adjustment mechanism (EUA), which is a form of decoupling. If the EUA is approved, the current weather normalization clause would be eliminated. Our requested increase consists of:

· increased carrying costs and depreciation expense associated with increased rate base ($15 million)

· increased operating expenses, including higher bad debt expenses and other ($6 million)

· increased return on equity from 10% to 11.25% and return on rate base from 7.95% to 8.57% ($4 million)

In January 2009, and in response to New Jersey Governor Corzine's call for utilities to assist in the economic recovery by increasing infrastructure investments, Elizabethtown Gas proposed an accelerated $60 million enhanced infrastructure program over the next two years. In April 2009, the New Jersey Commission approved a stipulation between Elizabethtown Gas and certain intervenors to the case. Under the stipulation, the infrastructure program should begin in 2009 and end in 2011, unless extended by the New Jersey Commission. 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.

Atlanta Gas Light In March 2009 the Georgia Commission approved a new economic development and environmental program developed by Atlanta Gas Light to encourage smart new investment in Georgia. The new program, Georgia Sustainable Environmental Economic Development (Georgia SEED), is designed to attract and retain jobs, support projects to reduce carbon emissions and encourage new investment in Georgia.

Under Georgia SEED, Atlanta Gas Light will contract with new and existing business customers that may be considering expanding into Georgia. Atlanta Gas Light will have the option to invest capital to help customers finance line extensions, new natural gas equipment and equipment installations. This is a five-year experimental program and offers three potential avenues for contracts:

· Providing customers with the benefit of a new utility service extension to plant sites;

· Offering financing for the purchase and installation of new higher-efficiency gas equipment, such as engines, boilers, fleet vehicles, refueling stations and gas-fired air conditioning equipment; and

· Discounting utility rates to help lower overall energy costs.

Retail Energy Operations

Our retail energy operations segment consists of SouthStar, a joint venture 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 34% market share based on customer count.

Although our ownership interest in the SouthStar partnership is 70%, the majority of SouthStar's earnings in Georgia are allocated by contract 75% to us and 25% to Piedmont. SouthStar's earnings related to customers in Ohio and Florida are 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 three months ended March 31, 2009, were at the 75% contractual rate.

Our amended and restated joint venture agreement with Piedmont includes a series of options granting us the evergreen opportunity to purchase all or a portion of Piedmont's ownership interest in SouthStar. We have the right to exercise an option to purchase on or before November of each year, with the purchase being effective as of January 1, of the following year. We currently have options to purchase up to 50% of Piedmonts' ownership interest. Effective November 1, 2009, the option allows us to purchase 100% of Piedmont's ownership interest. If we were to exercise any option to purchase less than 100% of Piedmont's ownership interest in SouthStar, Piedmont, at its discretion, could require us to purchase their entire ownership interest. The purchase price, in any exercise of our option, would be based on the then current fair market value of SouthStar. In March 2009, Piedmont filed a lawsuit against GNGC regarding GNGC's right to purchase Piedmont's interest in SouthStar. See Note 7 of the financial statements for additional information.

Glossary of Key Terms

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, we have experienced and expect through 2009 that we will 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. These programs emphasize GNG as the Marketer of choice. Despite these efforts we have seen a 3% decline in average customer count at SouthStar for the three months ended March 31, 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, 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 Ohio and Florida, which are growing more rapidly than anticipated.

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 country. 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 U.S. 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 40,000 dekatherms 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 hedge gains of $19 million during the first quarter of 2009. There was no significant impact to VaR during the period.

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.

In 2009, Sequent extended its asset management agreement with Virginia Natural Gas for three additional years. The new agreement includes a tiered structure of profit sharing along with guaranteed annual minimums. With this renewal, Sequent has completed renewal of all its affiliated asset management contracts for multi-year periods.

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.

                                              % of shared
                      Expiration date    profits or annual fee
Virginia Natural Gas    March 2012              (A) (B)
Chattanooga Gas         March 2011                50% (B)
Elizabethtown Gas       March 2011              (A) (B)
Atlanta Gas Light       March 2012           up to 60% (B)
Florida City Gas        March 2013                  50%

(A) Shared on a tiered structure.

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

Storage inventory outlook The following graph presents the NYMEX forward natural gas prices as of March 31, 2009 and December 31, 2008, for the period of April 2009 through March 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 Graph]]

During the last half of 2008 and continuing into 2009, natural gas prices declined significantly, reflecting the decline in the U.S. economy, increasing natural gas supplies and above-average storage volumes, among other factors. These lower gas prices expected for 2009, as reflected in the NYMEX forward curve, would result in significantly lower levels of working capital necessary for Sequent to purchase its natural gas inventories as compared to 2008, which saw significantly higher prices.

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 the inventory withdrawal schedule and forward natural gas prices at March 31, 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
                                                               revenues
           Salt dome (WACOG      Reservoir (WACOG                (in
                $3.96)                $2.94)                  millions)
2009
Second
quarter                   -                      1           $          1
Third
quarter                   2                      2                      2
Fourth
quarter                   -                      1                      1
2010
First
quarter                   -                      1                      1
Total                     2                      5           $          5

If Sequent's storage withdrawals associated with existing inventory positions are executed as planned, it expects operating revenues from storage withdrawals of approximately $5 million during the next twelve months. This could change as Sequent adjusts its daily injection and withdrawal plans in response to changes in market conditions in future months and as forward NYMEX prices fluctuate. For more information on Sequent's energy marketing and risk management activities, see Item 3, Quantitative and Qualitative Disclosures About Market Risk - Commodity Price Risk.

Glossary of Key Terms

Energy Investments

Our energy investments segment includes a number of businesses that are related . . .