Who is soliciting my proxy?

The board of directors of AGL Resources is providing you these proxy materials in connection with the solicitation of proxies to be voted at our 2009 annual meeting of shareholders and at any postponement or adjournment of the annual meeting. The proxies will be voted in accordance with your instructions by John W. Somerhalder II, our chairman, president and chief executive officer; Paul R. Shlanta, our executive vice president, general counsel and chief ethics and compliance officer; and Andrew W. Evans, our executive vice president and chief financial officer, or any of them. If your shares are held in our Retirement Savings Plus Plan, our 401(k) plan, your proxy will be voted by Merrill Lynch Bank & Trust Co., FSB, which is the trustee for the Retirement Savings Plus Plan, in accordance with the discretionary instructions of the Administrative Committee of the Retirement Savings Plus Plan. It is expected that the Administrative Committee will instruct the trustee to vote the 401(k) shares in accordance with your telephone, internet or written proxy vote, or, if you do not vote, “FOR” each of the three proposals.

Why did I receive a Notice of Internet Availability of Proxy Materials in the mail instead of a printed set of proxy materials?

Pursuant to the new rules adopted by the Securities and Exchange Commission, we are permitted to furnish our proxy materials over the internet to our shareholders by delivering a Notice in the mail. We are sending the Notice to certain record and beneficial shareholders. These shareholders have the ability to access the proxy materials, including our proxy statement and annual report, at www.proxyvote.com or to request a printed or email set of the proxy materials. Instructions on how to access the proxy materials over the

internet or to receive a printed set may be found in the Notice. Shareholders who receive a printed set of proxy materials will not receive the Notice, but may still access our proxy materials over the internet at www.proxyvote.com.

Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting to be Held on April 29, 2009

The proxy statement and annual report are available at www.proxyvote.com.

What will I be voting on?

You will be voting on:

How does the board recommend I vote on the proposals?

The board of directors recommends you vote “FOR” each of the three proposals listed above.

How do I vote?

Most of our shareholders have three options for submitting their votes:

If your AGL Resources shares are held in your name on the records maintained by Wells Fargo Bank, N.A., our transfer agent (meaning you are a “shareholder of record”), please follow the instructions on your proxy card.

If your AGL Resources shares are held through a brokerage firm or bank (that is, in “street name”), your ability to vote by telephone or over the internet depends on the voting process of your brokerage firm or bank. Please follow the directions on your vote instruction card.

Regardless of whether your AGL Resources shares are held by you as a record shareholder or in street name, you may attend the meeting and vote your shares in person. Please note that if your shares are held in street name and you want to vote in person, you must bring evidence of your stock ownership, such as a proxy obtained from your street name nominee (particularly if you want to vote your shares at the annual meeting) or your most recent brokerage account statement (in which case you will not be able to vote your shares at the meeting), together with valid picture identification.

Even if you plan to attend the meeting, we encourage you to vote your shares by telephone, internet or mail to simplify the voting process at the meeting.

How do I vote if my shares are held in the AGL Resources 401(k) plan?

If your AGL Resources shares are held in the Retirement Savings Plus Plan, only the trustee of the plan can vote your plan shares even if you attend the annual meeting in person. The plan trustee will vote your shares in accordance with your telephone, internet or written proxy vote. Please follow the instructions on your proxy card.

May I revoke my proxy?

Yes. You may revoke your proxy or vote instructions at any time before the annual

meeting by voting again by telephone or via the internet or by timely signing and returning another proxy or vote instruction card with a later date. Additionally, if you are a shareholder of record or if you are a street name holder who has obtained a vote instruction card from your street name nominee, and you decide to attend the meeting and vote in person, you may request that any proxy or vote instruction card that you previously submitted not be used.

What if I don’t specify my choices when returning my proxy or vote instruction card?

If you return a signed and dated proxy or vote instruction card without indicating your vote, your shares will be voted “FOR” each of the three proposals specified in the notice of the meeting and in the discretion of the proxies on any other matter that may properly come before the meeting.

If you hold AGL Resources shares through the Retirement Savings Plus Plan and you return the proxy card but do not properly sign or date it or specify how you want your plan shares voted, it is expected that the plan trustee, upon instruction from the Administrative Committee of the Retirement Savings Plus Plan, will vote your plan shares “FOR” each of the three proposals specified in the notice of the meeting and as instructed by the Administrative Committee on any other proposals that may properly come before the meeting.

May my shares be voted if I don’t submit a proxy or voting instructions?

If your AGL Resources shares are registered in your name on the books kept by our transfer agent and you do not return a signed proxy and do not vote by telephone or via the internet or in person at the meeting, your shares will not be voted.

If your AGL Resources shares are held in street name and you do not submit any voting

instructions, your brokerage firm or bank may or may not vote your shares with regard to each of the three proposals, depending on stock exchange rules. If your AGL Resources shares are held through the Retirement Savings Plus Plan and you do not return the proxy card for those plan shares and do not vote by telephone or the internet or in person, it is expected that the plan trustee, upon instruction from the Administrative Committee of the Retirement Savings Plus Plan, will vote your shares “FOR” each of the three proposals specified in the notice of the meeting and as instructed by the Administrative Committee on any other proposals that may properly come before the meeting.

How many shares may I vote?

As of the February 20, 2009, record date for voting at the annual meeting, 77,086,652 shares of common stock of AGL Resources were outstanding and entitled to be voted at the annual meeting. You are entitled to one vote for each share of AGL Resources common stock you owned on the record date. Shares held by a trust which holds assets for our Nonqualified Savings Plan are included in the number of shares outstanding but are not eligible to be voted.

Is there a list of shareholders entitled to notice of the annual meeting?

A list of shareholders entitled to notice of the annual meeting is available for inspection by any shareholder between the hours of 9:00 a.m. and 5:00 p.m., Eastern time, at our headquarters at Ten Peachtree Place, Atlanta, Georgia. Please contact our Corporate Secretary at AGL Resources Inc., P.O. Box 4569, Location 1466, Atlanta, Georgia 30302-4569, if you would like to review the shareholder list. The shareholder list will also be available at the annual meeting for inspection by any shareholder.

How many votes must be present to hold the annual meeting?

A majority of the 77,086,652 shares of AGL Resources common stock outstanding on the record date, not including the shares held by the Nonqualified Savings Plan trust which are not eligible to be voted, must be present, either in person or represented by proxy, to conduct the annual meeting.

How many votes are needed to elect directors?

Directors are elected by a plurality of the total number of votes cast, which means the five nominees who receive the largest number of properly cast votes will be elected as directors.

What happens if a director nominee fails to receive a majority of the votes cast in his or her election?

As described in “Proposal 1—Election of Directors—General,” our bylaws provide that if a director nominee in an uncontested election is elected by the required plurality vote of the shareholders but does not receive the affirmative vote of the holders of a majority of the shares voted, the director must promptly tender his or her resignation to the board of directors following certification of the shareholder vote. The Nominating, Governance and Corporate Responsibility Committee must then recommend to the board of directors whether to accept or reject the tendered resignation or whether to take other action. The board must then act on the tendered resignation and publicly disclose its decision and the rationale behind the decision within 90 days after the certification of the election results.

What if I vote “withhold authority” to elect directors?

In voting for the election of directors, a vote to “withhold authority” for the election of one or

more director nominees will be counted for quorum purposes, but because the vote required to elect directors is a plurality vote, a vote to “withhold authority” will not affect the outcome of the election. However, a vote to “withhold authority” will be counted for purposes of determining whether a director nominee received the affirmative vote of holders of a majority of the shares voted. Please see “What happens if a director nominee fails to receive a majority of the votes cast in his or her election?” above.

How many votes are required to adopt the proposed amendment to our articles of incorporation?

The adoption of the amendment to our articles of incorporation to eliminate the classification of the board of directors requires approval by a majority of the votes entitled to be cast.

How many votes are required to ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm?

The ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm requires the votes cast “FOR” to exceed the votes cast “AGAINST” the proposal.

How will abstentions and broker non-votes be treated?

Abstentions and broker non-votes will be treated as shares present and entitled to vote for quorum purposes. Abstentions and broker non-votes will not be treated as “votes cast,” and consequently they will not affect the outcome of the vote on the election of directors or the determination of whether a director nominee has received the affirmative vote of the holders of a majority of the shares voted (Proposal 1) or the proposal to ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm (Proposal 3). However, abstentions and broker non-votes will have the

same effect as votes “against” the proposal to amend our articles of incorporation (Proposal 2).

“Broker non-votes” occur on a matter up for vote when a broker, bank or other holder of shares you own in “street name” is not permitted to vote on that particular matter without instructions from you, you do not give such instructions and the broker or other nominee indicates on its proxy card, or otherwise notifies us, that it does not have authority to vote its shares on that matter. Whether a broker has authority to vote its shares on uninstructed matters is determined by stock exchange rules.

Could other matters be decided at the annual meeting?

We do not know of any other matters that will be considered at the annual meeting. If a matter that is not listed on the proxy or vote instruction card is properly brought before the annual meeting in accordance with Section 1.2 of our bylaws, the persons named as proxies will vote in accordance with their judgment of what is in the best interest of the Company, based on the discretionary voting authority conferred on them by the proxy and vote instruction cards.

Who will count the votes?

Representatives of Broadridge Financial Solutions, Inc. will count the votes and act as inspector of elections.

Where and when will I be able to find the voting results?

We will post the voting results on our web site at www.aglresources.com approximately two weeks after the annual meeting. You also may find the results in our Form 10-Q for the second quarter of 2009, which we expect to file with the Securities and Exchange Commission, or SEC, no later than August 10, 2009.

What does it mean if I receive more than one proxy card?

It means that you have multiple accounts with brokerage firms, banks and/or our transfer agent. Please vote all of these shares. We recommend that you contact your broker, bank and/or our transfer agent to consolidate as many accounts as possible under the same name and address. All communications concerning accounts for shares registered in your name on the books kept by our transfer agent, including address changes, name changes, inquiries to transfer shares and similar issues, may be handled by making a toll-free call to Wells Fargo Shareowner Services at (800) 468-9716.

What do I need to bring with me if I want to attend the annual meeting?

The annual meeting is open to all holders of our common stock. To attend the annual meeting, you will need to bring an admission ticket and valid picture identification. If your shares are registered in your name on the books kept by our transfer agent or your shares are held as 401(k) plan shares, your admission ticket is part of your proxy card or may be printed from the internet when you vote online. If your shares are held in street name by your brokerage firm or bank, you will need to bring evidence of your stock ownership, such as a proxy obtained from your street name nominee (particularly if you want to vote your shares at the annual meeting) or your most recent brokerage account statement (in which case you will not be able to vote your shares at the meeting), together with valid picture identification. You may also request us to send you an admission ticket. If you do not have either an admission ticket or proof that you own our common stock, together with valid picture identification, you may not be admitted to the meeting.

What happens if the annual meeting is postponed or adjourned?

Your proxy will still be valid and may be voted at a postponed or adjourned meeting, unless the board of directors fixes a new record date for the postponed or adjourned meeting, which the board is required to do if the postponement or adjournment is for more than 120 days. If the meeting is postponed or adjourned, you will still be able to change or revoke your proxy until it is voted.

When are shareholder proposals for the 2010 annual meeting due?

Our bylaws require shareholders to give us advance notice of any shareholder nominations of directors and of any other matters shareholders wish to present for action at an annual meeting of shareholders. The required notice must be given within a prescribed time frame, which is calculated by reference to the date of the proxy statement relating to our most recent annual meeting.

Accordingly, with respect to our 2010 annual meeting of shareholders, our bylaws require notice to be provided to our Corporate Secretary at AGL Resources Inc., P.O. Box 4569, Location 1466, Atlanta, Georgia 30302-4569 no later than November 16, 2009. If a shareholder fails to provide timely notice of a proposal to be presented at the 2010 annual meeting, the persons designated as proxies by the board of directors will have discretionary authority to vote, and the trustee of the Retirement Savings Plus Plan will vote in accordance with the instructions of the Administrative Committee of the Retirement Savings Plus Plan based on its discretionary authority, on any such proposal that may come before the meeting.

If you are interested in submitting a proposal for inclusion in our proxy statement for the annual meeting in 2010, you need to follow the procedures outlined in the SEC’s Rule 14a-8. To be eligible for inclusion, your

shareholder proposal intended for inclusion in the proxy statement for the 2010 annual meeting of shareholders must be received no later than November 16, 2009, by our Corporate Secretary at the address above.

This deadline does not apply to questions a shareholder may wish to ask at the annual meeting.

Who pays the costs associated with this proxy solicitation?

AGL Resources pays the expenses of soliciting proxies. We have hired The Altman Group, Inc., a proxy solicitation firm, to assist in the solicitation of proxies. We will pay The Altman Group, Inc. approximately $20,000 for services and reasonable out-of-pocket expenses. Additionally, proxies may be solicited on our behalf by directors, officers and employees, in person or by telephone, facsimile or electronic transmission. Directors, officers and employees will not be paid additional fees for those services.

Board of Directors

Our business affairs are managed under the direction of the board of directors in accordance with the Georgia Business Corporation Code, our articles of incorporation and our bylaws. The role of the board of directors is to govern our affairs for the benefit of our shareholders and other constituencies, which include our employees, customers, suppliers, creditors and the communities in which we do business. The board strives to ensure the success and continuity of our business through the appointment of qualified executive management, overseen by the board.

Ethics and Compliance Program

The board of directors is responsible for overseeing management’s implementation of the Company’s ethics and compliance program to ensure that our business is conducted in a consistently legal and ethical manner. As part of the ethics and compliance program, our Company has established, and the board of directors has approved, a code of conduct entitled “Commitment to Integrity and Ethics—Our Code of Conduct and Ethics.” Our Code of Conduct and Ethics governs the way we treat our customers and co-workers, guides our community interactions, and strengthens our commitment to excellence and integrity. The Code of Conduct and Ethics covers a wide range of professional conduct, including environmental, health and safety standards, employment policies, conflicts of interest, accuracy of records, fair dealing, insider trading and strict adherence to all laws and regulations applicable to the conduct of our business. Under the Code of Conduct and Ethics, employees are required to conduct the Company’s activities in an ethical and lawful manner and all employees are expected to report any situation where they believe our internal policies or external laws are being

violated. Our Code of Conduct and Ethics applies to our directors, officers and all of our employees.

In addition, the board of directors has adopted a Code of Ethics for the Chief Executive Officer and the Senior Financial Officers, or our Officers Code of Ethics, designed to deter wrongdoing and promote the following: honest and ethical conduct; full, fair, accurate, timely and understandable disclosure in documents filed with or submitted to the SEC; compliance with applicable governmental laws, rules and regulations; prompt internal reporting of violations of the Officers Code of Ethics; and accountability for adherence to the Officers Code of Ethics.

Any waiver of the Code of Conduct and Ethics or Officers Code of Ethics for an executive officer or, where applicable, for a member of the board of directors, requires the approval of the board of directors or a duly authorized committee of the board and will be promptly disclosed on our website at www.aglresources.com. No waivers have been granted under the codes.

The board of directors also has adopted Guidelines on Significant Corporate Governance Issues, or our Corporate Governance Guidelines, that set forth guidelines for the operation of the board of directors and its committees. The board periodically reviews our governance practices and procedures, evaluating them against corporate governance best practices.

Our Code of Conduct and Ethics, our Officers Code of Ethics and our Corporate Governance Guidelines are available on our website at www.aglresources.com. They also are available to any shareholder upon request to Investor Relations, AGL Resources Inc. at P.O. Box 4569, Location 1071, Atlanta, Georgia 30302-4569.

Director Independence

Pursuant to New York Stock Exchange listing standards, our board of directors has adopted a formal set of categorical Standards for Determining Director Independence. In accordance with these Standards, a director must be determined to have no material relationship with the Company other than as a director in order to be considered an independent director. The Standards specify the criteria by which the independence of our directors will be determined, including strict guidelines for directors and their immediate family members with respect to past employment or affiliation with the Company or its independent registered public accounting firm. The Standards also set forth independence criteria applicable to members of the Audit Committee, the Compensation and Management Development Committee and the Nominating, Governance and Corporate Responsibility Committee of the board of directors. These Standards are available on our website at www.aglresources.com.

In accordance with these Standards, the board undertook in February 2009 an annual review of director independence. Based on this review, the board has affirmatively determined that, as to each current non-employee director (Messrs. Bell, Crisp, Johnson, Knox, Love, McTier, O’Hare, Riddle, Rubright, Ward and Wolf and Mmes. Bane and Whyte), no material relationship exists that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each current non-employee director qualifies as “independent” in accordance with the Standards and the independence standards of the New York Stock Exchange. John W. Somerhalder II, our chairman, president and chief executive officer, is not independent because of his employment by the Company.

Mr. Somerhalder will not participate in any action of the board related to his compensation or any other matters requiring action by only non-employee directors.

In making these independence determinations, the board considered that in the ordinary course of business, transactions may occur between the Company and its subsidiaries and companies at which some of our directors are or have been directors, officers or employees. The board also considered that the Company and its subsidiaries may make charitable contributions to not-for-profit organizations where our directors or their immediate family members serve or are executive officers.

For information about a certain transaction between us and a business entity with which Mr. Bell is associated and the board’s determination that Mr. Bell is independent notwithstanding this transaction, see “Certain Relationships and Related Transactions.” The board of directors concluded that this relationship is not material and has no effect on the independence of Mr. Bell.

Policy on Related Person Transactions

The board of directors recognizes that related person transactions present a heightened risk of conflicts of interest and therefore, in December 2007, adopted a written policy with respect to related person transactions. For the purpose of the policy, a “related person transaction” is a transaction between us and any related person, other than (1) transactions available to all employees or customers generally, or (2) transactions involving less than $120,000 when aggregated with all similar transactions. “Related persons” are (a) executive officers as defined under Section 16 of the Securities Exchange Act of 1934, as amended, (b) executive and senior vice presidents of AGL Resources, (c) each member of the board of directors, (d) holders of more than 5% of our common stock and (e) any immediate family member, as defined under the Exchange Act, of the persons listed in (a) through (d) above.

Under the policy, when management becomes aware of a related person transaction involving

a dollar amount that is less than one percent of either the Company’s consolidated gross revenues or the consolidated gross revenues of the related person, or any affiliate of such related person, for the prior fiscal year, management reports the transaction to the Chairman of the Nominating, Governance and Corporate Responsibility Committee. When management becomes aware of a related person transaction involving a dollar amount that is equal to or exceeds one percent of either the Company’s consolidated gross revenues or the consolidated gross revenues of the related person, or any affiliate of such related person, for the prior fiscal year, management reports the transaction to the Nominating, Governance and Corporate Responsibility Committee and requests approval or ratification of the transaction.

Transactions requiring approval or ratification must be (1) on terms comparable to those that could be obtained in arm’s length dealings with an unrelated third person; and (2) approved by a majority of the disinterested members of the Nominating, Governance and Corporate Responsibility Committee. The Nominating, Governance and Corporate Responsibility Committee will report to the full board all related person transactions presented to it.

The related party transaction concerning Mr. Bell referred to in this proxy statement did not require review by the Nominating, Governance and Corporate Responsibility Committee because it existed prior to the board of directors’ adoption of the policy.

Board and Committee Meetings

Members of the board are kept informed through reports routinely presented at board

and committee meetings by our chief executive officer and other officers and through other means. During 2008, the board of directors held five meetings. Each director, with the exception of Mr. Johnson, attended 75% or more of the aggregate of all meetings of the board and each committee on which he or she served. Mr. Johnson attended 73% of all such meetings.

Executive Sessions without Management

To promote open discussion among the non-management directors, the board of directors schedules regular executive sessions in which the non-management directors meet without management’s participation. Such sessions are scheduled to occur at every regularly scheduled board meeting. The presiding director at such executive sessions is the Lead Director and Chairman of the Executive Committee of the board of directors. During 2008, the board met in executive session five times.

Communications with Directors

Shareholders and other interested parties may communicate with our board of directors or, alternatively, with the presiding director of executive sessions of our non-management directors or with the non-management directors as a group via our Ethics and Compliance Helpline at (800) 350-1014 or at www.mycompliancereport.com. A copy of our Procedures for Communicating with the Board of Directors of AGL Resources Inc. is available on our web site at www.aglresources.com and is available in print to any shareholder who requests it from our Corporate Secretary at AGL Resources Inc., P.O. Box 4569, Location 1466, Atlanta, Georgia 30302-4569.

Committees of the Board

The board of directors has established five standing committees to assist it in discharging its duties. Actions taken by any committee of the board are reported to the board, usually at the board meeting next following a committee meeting. Each standing committee has

adopted a written charter, which is available on our web site at www.aglresources.com and is available upon request to our Corporate Secretary at AGL Resources Inc., P.O. Box 4569, Location 1466, Atlanta, Georgia 30302-4569. The committees of the board and their members at December 31, 2008 were as shown in the following table.

Audit Committee

The Audit Committee met six times during 2008. The Audit Committee’s primary function is to assist the board of directors in fulfilling its oversight responsibilities. Among other things, the Audit Committee reviews (1) the integrity of our financial statements, including our internal control over financial reporting, (2) our compliance with legal and regulatory requirements, (3) the independent registered public accounting firm’s qualifications and independence, (4) the performance of our internal audit function, and (5) the performance of the independent registered public accounting firm. Our chief financial officer, chief ethics and compliance officer,

chief internal auditor, chief accounting officer and controller, and representatives of our independent registered public accounting firm each provide a quarterly report to and meet in separate executive sessions with the Audit Committee each quarter.

The board of directors has determined that all members of the Audit Committee satisfy the enhanced independence standards applicable to all members of the Audit Committee under the independence requirements of the SEC, the New York Stock Exchange and the Company’s Standards for Determining Director Independence. The board also has determined that all members of the Audit Committee meet the financial literacy requirements of the New

York Stock Exchange listing standards. The board has further determined that Henry C. Wolf, the Audit Committee Chair, is an “audit committee financial expert” within the meaning of SEC regulations. Information regarding Mr. Wolf’s qualification as an “audit committee financial expert” is included in his biographical information under the caption, “Proposal 1—Election of Directors—Directors Whose Terms Continue Until the Annual Meeting in 2012.”

Additional information regarding the Audit Committee and its functions and responsibilities is included in this proxy statement under the captions “Audit Committee Report” and “Proposal 3—Ratification of the Appointment of PricewaterhouseCoopers LLP as our Independent Registered Public Accounting Firm for 2009.”

Compensation and Management Development Committee

The Compensation and Management Development Committee met six times during 2008. All members of the Compensation and Management Development Committee are independent, non-employee directors, as defined under the listing standards of the New York Stock Exchange and our Standards for Determining Director Independence. Among other things, the Compensation and Management Development Committee assists the board of directors in its efforts to achieve its goal of maximizing the long-term total return to shareholders by establishing policies by which officers, directors and employees are to be compensated in accordance with the board’s compensation philosophy and objectives and by overseeing management succession and executive development processes.

The board of directors delegated to the Compensation and Management Development

Committee the following areas of responsibility that

are more fully described in the Compensation and Management Development Committee’s charter:

The Compensation and Management Development Committee has delegated to our chief executive officer the authority to grant equity awards to employees of the Company solely in connection with non-annual grants to employees other than executive officers. The Committee has established narrowly defined, pre-approved parameters regarding the terms and conditions of grants under the delegated authority, including the eligible employee groups, the maximum number of shares subject to the delegation, the determination of the exercise price and other terms and conditions of the awards. The Committee also adopted a stock option grant policy that provides additional terms and conditions for grant making. See “Compensation Discussion and Analysis—Grants of Long-Term Incentive Awards” for more detail concerning our stock option grant policy.

Our chief executive officer, based on the performance evaluations of the other executive officers, recommends to the Compensation and Management Development Committee compensation for those executive officers. The executive officers, including our chief executive officer, also provide recommendations to the Committee from time to time related to compensation philosophy, program design, compliance, performance measures and competitive strategy.

The Compensation and Management Development Committee’s charter provides that the Committee, in its sole discretion, has the authority to retain a compensation consultant. Accordingly, Towers Perrin was retained directly by the Compensation and Management Development Committee to assist it in 2008. Towers Perrin’s role is to provide expertise and data as needed by the Committee pertaining to all aspects of executive and director compensation, including but not limited to advice and counsel as to the amount and form of executive and director compensation, and to advise the Committee on emerging trends, best practices and regulatory practices.

Executive Committee

The Executive Committee did not meet during 2008. The Executive Committee may meet during intervals between board meetings and has all the authority of the board, subject to limitations imposed by law or our bylaws.

Finance and Risk Management Committee

The Finance and Risk Management Committee met four times during 2008. The Finance and Risk Management Committee’s primary function is to assist the board of directors in fulfilling its oversight responsibilities. Among other things, the Finance and Risk Management Committee oversees (1) the management of our balance sheet including leverage, liquidity, funding sources, and related matters, (2) the annual capital budget and certain capital projects, (3) management’s assessments, actions, processes and procedures concerning our exposure to risks identified in the Finance and Risk Management Committee’s charter, and (4) any other matters that the board may delegate to the Finance and Risk Management Committee from time to time. Our chief risk officer provides a quarterly report to and meets in executive session with the Finance and Risk

Management Committee at each regularly scheduled meeting.

Nominating, Governance and Corporate Responsibility Committee

The Nominating, Governance and Corporate Responsibility Committee met five times during 2008. All members of the Nominating, Governance and Corporate Responsibility Committee are independent, non-employee directors, as defined under the listing standards of the New York Stock Exchange and our Standards for Determining Director Independence, which are available at www.aglresources.com and are available upon request to our Corporate Secretary at AGL Resources Inc., P.O. Box 4569, Location 1466, Atlanta, Georgia 30302-4569. The Nominating, Governance and Corporate Responsibility Committee’s primary responsibilities include (1) identifying individuals qualified to serve on the board of directors and recommending director nominees for selection by the full board of directors or shareholders, (2) evaluating, formulating and recommending to the board of directors corporate governance policies, and (3) overseeing the Company’s position on corporate social and environmental responsibilities.

Nomination of Director Candidates. The board of directors is responsible for recommending director candidates for election by the shareholders and for electing directors to fill vacancies or newly created directorships. The board of directors has delegated the screening and evaluation process for director candidates to the Nominating, Governance and Corporate Responsibility Committee, which identifies, evaluates and recruits highly qualified director candidates and recommends them to the board of directors. Potential candidates for director may come to the attention of the Nominating, Governance and Corporate Responsibility Committee through current directors, management, professional search firms, shareholders or other persons.

If the Nominating, Governance and Corporate Responsibility Committee has either identified

a prospective nominee or determined that an additional or replacement director is required, the Nominating, Governance and Corporate Responsibility Committee may take such measures that it considers appropriate in connection with its evaluation of a director candidate, including candidate interviews, engagement of an outside firm to gather additional information and inquiry of persons with knowledge of the candidate’s qualifications and character. In its evaluation of director candidates, including the members of the board of directors eligible for reelection, the Nominating, Governance and Corporate Responsibility Committee considers the current size and composition of the board of directors and the needs of the board of directors and the respective committees of the board in view of the criteria for directors described in our Corporate Governance Guidelines, a copy of which is available on our web site at www.aglresources.com.

The Nominating, Governance and Corporate Responsibility Committee will consider director nominees proposed by shareholders. A shareholder may recommend a person for nomination for election to our board of directors by writing to our Corporate Secretary at AGL Resources Inc., P.O. Box 4569, Location 1466, Atlanta, Georgia 30302-4569. Pursuant to our Corporate Governance Guidelines, each submission must include:

A shareholder’s recommendation for a candidate for nomination to be elected at the next annual meeting of shareholders must be received by our corporate secretary no later than 45 days prior to the end of the year preceding such annual meeting of shareholders. The Nominating, Governance and Corporate Responsibility Committee will evaluate these recommendations in the same manner as it evaluates all other nominees, using the criteria described in our Corporate Governance Guidelines.

The Nominating, Governance and Corporate Responsibility Committee periodically engages a third party search firm to identify possible director candidates for the Nominating, Governance and Corporate Responsibility Committee’s consideration based on skills and characteristics identified by the Nominating, Governance and Corporate Responsibility Committee and in light of gaps in board composition that the Nominating, Governance and Corporate Responsibility Committee may identify from time to time as the issues facing the board evolve. Such skills and characteristics desirable in the context of the then current make-up of the board of directors may include diversity, age, business or professional background, financial literacy and expertise, availability, commitment, independence and other relevant criteria.

General

A director who is one of our employees receives no additional compensation for his or her services as a director or as a member of a committee of our board. A director who is not one of our employees (a non-employee director) receives compensation for his or her services as described in the following paragraphs. All directors are reimbursed for reasonable expenses incurred in connection with attendance at board and committee meetings.

Initial Stock Award

Stock awards include shares of our common stock and common stock equivalents as more fully described in the following paragraphs. All stock awards are 100% vested as of date of grant, eligible for dividend treatment at the same rate as our other shares of common stock, may be voted and may be transferred by the recipient.

Upon his or her initial election or appointment to the board, each non-employee director receives 1,000 shares of our common stock.

Annual Retainer

Each non-employee director receives an annual retainer for service as a director on the first day of each annual service term. The amount and form of the annual retainer are fixed from time to time by resolution of the board. The annual retainer is currently $105,000, of which $35,000, or the Cash Portion, is payable in cash and $70,000, or the Equity Portion, is payable in shares of our common stock. Alternatively, a director may choose to receive his or her entire retainer (including the Cash Portion) in shares of our common stock, or to defer the retainer under the Common Stock Equivalent Plan.

Amounts deferred under the Common Stock Equivalent Plan are invested in common stock equivalents that track the performance of our

common stock and are credited with equivalents to dividend payments that are made on our common stock. Common stock equivalents may not be voted or transferred. At the end of a participating non-employee director’s board service, he or she receives a cash distribution based on the then-current market value of his or her common stock equivalents and dividend equivalents.

Committee Chair and Lead Director Retainer

Committee chairs receive an additional annual retainer on the first day of each annual service term. The Audit Committee chair receives $12,000; the Compensation and Management Development Committee chair receives $8,000; and all other committee chairs receive $6,000. The Lead Director receives an additional annual retainer of $20,000. The committee chair and Lead Director retainers are payable, at the election of each director, in cash or shares of our common stock, or they may be deferred under the Common Stock Equivalent Plan.

Meeting Fees

Each non-employee director receives $2,000 for attendance in person or by telephone at each meeting of the board and any committee of the board of which he or she is a member.

Meeting fees may be paid in cash or, at the election of a director, may be deferred under the Common Stock Equivalent Plan. As noted above, under the Common Stock Equivalent Plan, deferred meeting fees are invested in common stock equivalents that track the performance of our common stock and are credited with dividend equivalent payments. At the end of a non-employee director’s board service, a participating director receives a cash distribution based on the then-current market value of his or her common stock equivalents and dividend equivalents.

2008 Non-Employee Director Compensation Paid

As noted above, during the 2008 service term, each non-employee director received compensation as follows:

The following table sets forth compensation earned and paid to or deferred by each non-employee director for service as a director during 2008.

Share Ownership and Holding Period Requirements for Non-Employee Directors

In order to serve on our board, directors are required to own shares of our common stock. Our share ownership guidelines for non-employee directors require that non-employee directors own shares of our common stock having a value of at least $350,000, which represents five times the value of the Equity Portion, and ten times the value of the Cash Portion of the annual retainer. Each director has five years from the date of his or her initial election to meet the share ownership requirement. Common stock equivalents and shares issuable upon the exercise of vested stock options are included in the determination of the ownership guideline

amount. We believe that the equity component of non-employee director compensation serves to further align the interests of the non-employee directors with the interests of our shareholders.

Under the terms of the 2006 Non-Employee Directors Equity Compensation Plan, non-employee directors are required to hold shares awarded under such plan until the earlier of (i) five years from the date of the initial stock award or subsequent stock grant; (ii) termination of the non-employee director’s service; or (iii) a change in control of the Company. Shares subject to the holding period include all shares issued in connection with the initial stock award under the plan and all shares issued under the plan in payment of all or part of a director’s annual retainer.

The board of directors presently consists of fourteen members, thirteen of whom are non-employee directors. The board is divided into three classes of approximately equal size, with the directors in each class serving a three-year term. The terms are staggered so that the term of one class expires at each annual meeting. However, if you approve our proposal to eliminate the classification of the board of directors, as more fully described in Proposal 2 of this proxy statement, then directors will be elected for one-year terms beginning with the 2010 annual meeting of shareholders, and the directors elected at the 2009 annual meeting will serve out their three-year terms.

Our bylaws provide that directors are elected by a plurality of the votes cast by shareholders at a meeting at which a quorum is present. Our bylaws, while not changing the requirement for a plurality vote in the election of directors, require additionally that any director nominee in an uncontested election who does not receive the affirmative vote of a majority of the votes cast (including votes to withhold authority) with respect to that director’s election must promptly tender his or her resignation to the board following certification of the shareholder vote. The requirement that a director tender his or her resignation if he or she does not receive a majority of the votes cast does not apply in the case of a contested election where the number of nominees exceeds the number of directors to be elected.

Following such a tender of resignation, the Nominating, Governance and Corporate Responsibility Committee, excluding any director tendering his or her resignation if he or she is a member of the Nominating, Governance and Corporate Responsibility Committee, will make a recommendation to the board as to whether to accept or reject

the resignation or whether other action should be taken. The board will then act on the Nominating, Governance and Corporate Responsibility Committee’s recommendation and publicly disclose its decision and rationale within 90 days after the date of the certification of the election results. The director who tenders his or her resignation will not participate in the board’s decision. If the director’s resignation is not accepted by the board, the director shall continue to serve until his or her successor is duly elected or until his or her earlier death, resignation or removal. If the director’s resignation is accepted by the board of directors, any resulting vacancy may be filled as provided in the bylaws or the board of directors may decrease the size of the board.

If a majority of the Nominating, Governance and Corporate Responsibility Committee does not receive a majority of the votes cast in their respective elections, then the independent members of the board who did not fail to receive a majority of the votes cast will appoint a committee from among themselves to consider the resignation offers and recommend to the board whether to accept them. If the only directors who did not fail to receive a majority of the votes cast constitute three or fewer directors, all directors may participate in the action regarding whether to accept the resignation offers.

The board of directors, based on the recommendation of its Nominating, Governance and Corporate Responsibility Committee, has nominated Charles R. Crisp, Wyck A. Knox, Jr., Dennis M. Love, Charles H. “Pete” McTier and Henry C. Wolf for election as directors at the annual meeting. All of the nominees are current directors of the Company. If elected, each of the nominees will hold office for a three-year term expiring at the annual meeting of shareholders in 2012. Each

of the nominees has agreed to serve as a director if elected by the shareholders.

If any nominee becomes unable to stand for election, the board may:

Set forth below is information as of December 31, 2008, about the five director nominees, followed by information as of December 31, 2008, about all other current directors whose terms of office will continue after the annual meeting. Unless otherwise stated, all directors have been engaged in their principal occupations for more than the past five years.

Amendment to our Articles of Incorporation to Eliminate the Classification of the Board of Directors

Article III, Section 3.02 of our articles of incorporation provides for the classification of the board of directors into three classes, with each class being elected every three years and serving a three-year term, and contains provisions relating to the filling of director vacancies and the removal of directors. The board of directors has determined that the articles of incorporation should be amended to repeal the provision providing for the classification of the board of directors and to make certain conforming changes as appropriate, and has unanimously adopted a resolution approving such amendment, declaring its advisability and recommending it to our shareholders.

If this proposal is approved, current directors, including those elected to a three-year term at the 2009 annual meeting, would continue to serve the remainder of their respective elected terms. Beginning with the 2010 annual meeting of shareholders, directors with expiring terms would be elected for one-year terms, the result being that by the 2012 annual meeting of shareholders all multi-year terms will have expired and all directors will be elected annually.

A classified board of directors can deter unfriendly and unsolicited takeover proposals and proxy contests, because a hostile bidder or shareholder insurgent must win two elections to replace a majority of a classified board. A classified board of directors can also promote continuity and encourage a long-term perspective by directors. Alternatively, the

continuity of a classified board can be viewed as a disadvantage; two election cycles are required to replace a majority of a classified board even where a majority of shareholders are dissatisfied with the performance of incumbent directors. Many institutional investors believe that the election of directors is the primary means for shareholders to influence corporate governance policies and to hold management accountable for implementing these policies.

The board of directors has examined the arguments for and against continuation of the classified board in light of the size and financial strength of the Company, listened to the views of a number of its shareholders and outside advisors, and determined that the Company’s classified board structure should be eliminated. The board of directors concluded that all directors should be equally accountable at all times for the Company’s performance and that the will of the majority of shareholders should not be impeded by a classified board of directors.

The proposed amendment will allow shareholders to review and express their opinions on the performance of all directors each year. Because there is no limit to the number of terms an individual may serve, the continuity and stability of the board of director’s membership and our policies and long-term strategic planning should not be affected.

The text of the proposed amendment to the articles of incorporation is attached as Annex A to this proxy statement.

The Audit Committee of the board of directors is composed of seven directors each of whom is an independent director, as defined under the listing standards of the New York Stock Exchange and the Company’s Standards for Determining Director Independence. The Audit Committee operates under a written charter adopted by the board of directors, a copy of which is available on the Company’s web site at www.aglresources.com.

The Audit Committee reviews the Company’s financial reporting process on behalf of the board of directors. In fulfilling its responsibilities, the Audit Committee has reviewed and discussed the audited financial statements contained in the Company’s Annual Report on Form 10-K for 2008 with management and the Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP. Management is responsible for the Company’s financial statements and the financial reporting process, including the system of internal control over financial reporting. PricewaterhouseCoopers is responsible for expressing an opinion on the conformity of those audited financial statements with accounting principles generally accepted in the United States and on the effectiveness of the Company’s internal control over financial reporting.

The Audit Committee has discussed with PricewaterhouseCoopers the matters required to be discussed by Public Company Accounting Oversight Board statement on Auditing Standards No. 6, as amended, regarding PricewaterhouseCooper’s

judgments about the quality of the Company’s accounting principles as applied in its financial reporting. In addition, the Audit Committee has discussed with PricewaterhouseCoopers its independence from the Company and from Company management, including the matters in the written disclosures and the letter provided to the Audit Committee by PricewaterhouseCoopers as required by the applicable requirements of the Public Company Accounting Oversight Board. The Audit Committee has concluded that PricewaterhouseCoopers is independent from the Company and its management.

Based on the reviews and discussions referred to above, the Audit Committee recommended that the board of directors approve the inclusion of the audited financial statements in the Company’s Annual Report on Form 10-K for 2008 for filing with the SEC.

Henry C. Wolf (Chair)

Sandra N. Bane

Wyck A. Knox, Jr.

Dennis M. Love

Charles H. McTier

Dean R. O’Hare

Felker W. Ward, Jr.

The information contained in the Audit Committee Report shall not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate it by reference in such filing.

Appointment of Independent Registered Public Accounting Firm

PricewaterhouseCoopers LLP served as our independent registered public accounting firm and audited our annual financial statements for the fiscal year ended December 31, 2008, and the effectiveness of our internal control over financial reporting as of December 31, 2008.

PricewaterhouseCoopers has served as our principal independent registered public accounting firm since 2003.

The Audit Committee has appointed PricewaterhouseCoopers to be our independent registered public accounting firm

for the fiscal year ending December 31, 2009. The shareholders are asked to ratify this appointment at the annual meeting. In the event shareholders do not ratify the appointment of PricewaterhouseCoopers as our independent registered public accounting firm for 2009, the Audit Committee will review its future selection of our independent registered public accounting firm.

Representatives of PricewaterhouseCoopers will attend the annual meeting and will have the opportunity to make a statement if they so desire. They will also be available to answer appropriate questions.

Set forth below is a description of the nature of the services that PricewaterhouseCoopers provided to us in exchange for such fees.

Audit Fees

Represents fees PricewaterhouseCoopers billed us for the audit of our annual financial statements and the review of our quarterly financial statements and for services normally provided in connection with statutory and regulatory filings. These fees include fees incurred in meeting the internal control over financial reporting compliance requirements of Section 404 of the Sarbanes-Oxley Act of

2002, as well as audit fees for our subsidiary, SouthStar Energy Services LLC.

Audit-Related Fees

Represents fees PricewaterhouseCoopers billed us for audit and review-related services, including services relating to the issuance of a SAS 70 review report for Atlanta Gas Light Company’s Marketers, potential business acquisitions and dispositions, the audit of employee benefit plan financial statements, assistance with implementation of rules and regulations pursuant to the Sarbanes-Oxley Act of 2002 and compliance with rules and regulations applicable to accounting matters.

Tax Fees

Represents fees PricewaterhouseCoopers billed us for tax compliance, planning and advisory services.

All Other Fees

Represents fees PricewaterhouseCoopers billed us for professional services related to an online research tool and professional training in 2007.

The $155,135, or 7%, decrease in fees from 2007 to 2008 primarily reflects $239,994 in reduced audit fees as a result of audit efficiencies and lower bond issuance and refinancing services partially offset by higher audit-related fees of $99,350 as a result of a change in the review period for the SAS 70 review. The decreased fees also reflected a reduction of $11,491 in tax fees.

The Audit Committee pre-approved all of the above audit, audit-related, tax and other fees of PricewaterhouseCoopers, as required by the pre-approval policy described below. The Audit Committee concluded that the provision of the above services by PricewaterhouseCoopers was compatible with maintaining PricewaterhouseCoopers’ independence.

Audit Committee Audit and Non-Audit Services Approval Policy

Consistent with rules and regulations pursuant to the Sarbanes-Oxley Act of 2002 regarding registered public accounting firm independence, the Audit Committee has responsibility for appointing, setting compensation and overseeing the work of the

Company’s independent registered public accounting firm. In recognition of this responsibility, the Audit Committee adopted a policy that requires specific Audit Committee approval before any services are provided by the independent registered public accounting firm.

Prior to engagement of the independent registered public accounting firm for the next year’s audit, management submits to the Audit Committee for approval a summary of services expected to be rendered during that year and an estimate of the related fees for (1) audit services, (2) audit-related services, (3) tax services, and (4) all other services. The Audit Committee pre-approves these services by category of service and budget amount. The services and fees must be deemed compatible with the maintenance of the independent registered public accounting firm’s independence. The Audit Committee requires the independent registered public accounting firm and management to report actual fees versus the budget periodically throughout the year by category of service. During the year, circumstances may arise when it may become necessary to engage the independent registered public accounting firm for additional services not contemplated in the original pre-approval. In those instances, the Audit Committee requires that management obtain specific approval from the Audit Committee before engaging the independent registered public accounting firm.

The Audit Committee may delegate approval authority to one or more of its members. The member to whom such authority is delegated must present for ratification any approval decisions to the Audit Committee at its next scheduled meeting.

The Compensation and Management Development Committee of the board of directors is composed of six directors, each of whom is an independent director, as defined under the listing standards of the New York Stock Exchange and the Company’s Standards for Determining Director Independence. The Compensation and Management Development Committee operates under a written charter adopted by the board of directors, a copy of which is available on the Company’s web site at www.aglresources.com.

The Compensation and Management Development Committee has reviewed and discussed with management the “Compensation Discussion and Analysis,” or CD&A, section of this proxy statement required by Item 402(b) of Regulation S-K promulgated by the SEC. Based on the Committee’s review and discussions with management, the Committee recommended

to the board of directors that the CD&A be included in the Company’s 2008 annual report on Form 10-K and in this proxy statement.

Arthur E. Johnson (Chair)

Sandra N. Bane

Thomas D. Bell, Jr.

Charles R. Crisp

James A. Rubright

Bettina M. Whyte

The information contained in the Compensation and Management Development Committee Report shall not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate it by reference in such filing.

The following directors served on the Compensation and Management Development Committee at December 31, 2008: Sandra N. Bane, Thomas D. Bell, Jr., Charles R. Crisp, Arthur E. Johnson (Chair), James A. Rubright and Bettina M. Whyte. None of such persons was, during 2008 or previously, an officer or employee of AGL Resources or any of its subsidiaries and each such person was an independent director as defined under the listing standards of the New York Stock Exchange and our Standards for Determining Director Independence.

Thomas D. Bell, Jr. is Chairman and Chief Executive Officer of Cousins Properties Incorporated. Cousins holds a 50% general partnership interest in Ten Peachtree Place Associates, or TPPA, which owns the building where we lease space for our corporate headquarters. Mr. Bell is not an officer of

TPPA. Although Cousins is the managing member of TPPA, major business decisions for the TPPA partnership must be decided unanimously by Cousins and its partner. Prior to Mr. Bell joining our board of directors, we entered into a ten-year lease agreement with TPPA that commenced in 2003. Cousins’ 50% interest in the amount we paid in lease payments to TPPA in 2006 was approximately $3,104,000, in 2007 was approximately $3,466,000 and in 2008 was approximately $3,510,000, which was less than 2% of both our consolidated gross revenues and Cousins’ consolidated gross revenues for such respective years. The board of directors determined that Mr. Bell is independent because our business relationship with TPPA is not material as payments of less than 2% do not create any presumption of materiality under our Standards for Determining Director Independence.

This Compensation Discussion and Analysis provides an overview of our compensation objectives and policies, the elements of compensation that we provide to our top executive officers, and the material factors that we considered in making the decisions to pay such compensation. Later in this proxy statement under the heading “Executive Compensation,” you will find a series of tables containing specific information about the compensation earned or paid in 2008 to the following individuals, whom we refer to as our “named executive officers”:

Executive Summary

The following provides a brief overview of the more detailed information provided in this Compensation Discussion and Analysis.

Executive Compensation Program Objectives

Our executive compensation program has three primary objectives, each of which relates to our desire to reflect the long-term value-creation goals for the Company and the industries in which we compete. These objectives are:

In accordance with these goals, we provide a significant portion of each executive’s compensation in the form of at-risk incentive awards that measure individual performance and our success as a company in achieving our business strategy and objectives. With respect to Company performance, we focus on two primary criteria:

The Compensation and Management Development Committee of our board of directors, which we refer to as the Compensation Committee, governs our executive compensation program. Information about the Compensation Committee and its composition, responsibilities and operations can be found on page 11 of this proxy statement, under the caption “Corporate Governance—Compensation and Management Development Committee.”

Compensation Program Elements and their Purpose

Our executive compensation program primarily consists of the following integrated components which make up an executive’s total direct compensation in a given year: base salary, annual incentive awards, and long-term incentive opportunities. The program also contains elements related to retirement, severance, and other employee

benefits. The following provides a brief description of each of these elements.

Benchmarking Practices

Each year we review our executives’ compensation for market competitiveness and performance impact. We compare our compensation levels to the amounts paid to executives in similar roles in other companies,

a process called “benchmarking,” to determine if our executive compensation is competitive in the market. In connection with this annual review, we re-evaluate the companies included in our peer groups to assure that we have the appropriate marketplace focus. For 2008, the Compensation Committee engaged the services of Towers Perrin as its independent compensation consultant to benchmark three items: base salary, target annual incentive opportunities and annual long-term incentive award opportunities. Each of these was benchmarked from two market perspectives:

Atmos Energy Corp

Energen Corp

Equitable Resources Inc.

National Fuel Gas Co

New Jersey Resources Corp

Nicor Inc.

ONEOK Inc.

Peoples Energy Corp

Piedmont Natural Gas Co Inc.

Questar Corp

UGI Corp

WGL Holdings Inc.

Note: While these companies reported survey data in 2007 for 2008 benchmarking purposes, Peoples Energy was acquired by Integrys during 2008 and its compensation information is no longer reported in public filings.

Allegheny Energy, Inc.

Allete Inc.

Ameren Corp.

American Electric Power

Areva NP Inc.

AEI Services LLC

Atmos Energy Corp.

Avista Corp.

Black Hills Corporation

California Independent System             Operator

Calpine Corporation

CenterPoint Energy Inc.

Cleco Corp.

CMS Energy Corp.

Colorado Springs Utilities

Consolidated Edison Inc.

Constellation Energy Group

Covanta Energy Corp.

DKRW Energy LLC

Dominion Resources Inc.

DTE Energy Co.

Duke Energy Corp.

Dynegy Inc.

E. ON U.S.

Edison International

El Paso Co.

Enbridge Energy Partners LP

Energen Corp.

Energy Northwest

Enron

Entergy Corp.

EPCO Inc.

Equitable Resources Inc.

Eugene Water & Electric Board

Exelon Corp.

FirstEnergy Corp.

FPL Group Inc.

Great Plains Energy Inc.

IDACORP Inc.

Jacksonville Electric Authority

KAPL, Inc.

Lower Colorado River Authority

MDU Resources Group, Inc.

MGE Energy Inc.

Mirant Corp.

National Fuel Gas Co.

New York Independent System             Operator

New York Power Authority

Nicor Inc.

Northeast Utilities

NorthWestern Corporation

NRG Energy, Inc.

NSTAR Electric Co.

Nuclear Management

Northwest Natural

OGE Energy Corp.

Omaha Public Power

ONEOK Inc.

Otter Tail Corp.

Pacific Gas & Electric Co.

PacifiCorp

Pepco Holdings Inc.

Pinnacle West Capital Corp.

PNM Resources Inc.

Portland General Electric Co.

PPL Corp

Progress Energy Corp.

Public Service Enterprise Group Inc.

Puget Energy Inc.

Salt River Project

Santee Cooper

SCANA Corp.

Sempra Energy

Southern Company

Southern Union Company

Spectra Energy Corp.

STP Nuclear Operating Co.

SUEZ Energy North America

Targa Resources Inc.

Tennessee Valley Authority

TransCanada Corporation

TXU Energy

UIL Holdings Corp.

UniSource Energy Corp.

Unitil Corp.

USEC Inc.

Westar Energy Inc.

Williams Companies Inc.

Wisconsin Energy Corp.

Xcel Energy Inc.

Because the companies in the energy industry peer group vary widely in size, Towers Perrin adjusts the market data to reflect a company of our revenue size. Since larger companies typically pay higher levels of executive pay, and smaller companies typically pay less, we believe that this adjustment provides us with more accurate information. We do not adjust the proxy peer group market data in this manner because Towers Perrin has informed us that the adjustment method is not accurate when analyzing such a small number of companies.

The Compensation Committee also periodically reviews compensation levels and practices from a broader, general industry perspective for general reference purposes only. We do not benchmark our pay against the general industry, and we do not consider this comparison to play a material part in our compensation decisions.

The Compensation Committee examines each component of pay on both a stand-alone basis and together as a whole when setting levels of base pay and targets for annual and long-term incentives. We seek to be generally competitive with our proxy peers and our energy industry peers, across the three pay elements that make up total direct compensation (base salary, annual incentive and long-term incentives). However, we recognize that the companies that comprise our proxy and energy industry peer groups and our own performance may change from year to year and that these changes may cause our compensation levels relative to our peer groups to vary, as well. Accordingly, we do not apply a specific formula to determine any adjustments to overall or individual executive pay. Instead, the Compensation Committee determines individual compensation amounts in a deliberative process with input from Towers Perrin and our chief executive officer. This process is described in more detail below.

Determining the Amount of Each Compensation Program Element

Base salary—The factors that the Compensation Committee considered in setting base salary for our named executive

officers in 2008 include: years in position as well as pay for comparable positions among peers, individual executive performance, internal equity comparisons and mastery of position responsibilities. Base salary is considered the foundation of the total, direct compensation package, as other elements of the package are awarded as a percentage of base salary.

Annual incentives—In 2008, (other than for Mr. Schantz, as described below), our Annual Incentive Plan provided the individual performance portion of our named executive officers’ annual incentive, and our Omnibus Performance Incentive Plan provided the corporate performance portion. The Omnibus Performance Incentive Plan was approved by our shareholders, and awards earned under it are intended to qualify for the performance-based compensation exception to the deduction limits under Section 162(m) of the U.S. tax code.

We consider multiple factors when determining the compensation elements for our executives, as described below.

Target bonuses under both incentive plans are calculated as a percentage of base salary and represent the amount of money to be paid if

performance is met exactly as expected. Target bonuses for our named executive officers ranged from 60% to 100% of base salary. Actual awards may be substantially greater or smaller than the target bonus, based upon actual performance against performance measures set by the Compensation Committee. Annual payout opportunity can range from 0% to 200% of the target bonus. To achieve a 200% award, performance must meet or exceed maximum performance levels on both corporate and individual performance measures.

For 2008, the Compensation Committee derived performance measures from our annual operating plan and business strategy, as reviewed by the board of directors. Measures applicable to the named executive officers included our corporate EPS target, which was weighted at 75% of the total award, and individual performance, which was weighted at 25%. In administering our incentive plans (both annual and long-term), when we use EPS as a performance measure, we adjust our EPS, which is based on net income determined in accordance with accounting principles generally accepted in the United States of America (GAAP), for economic value created in a plan year by certain of our operating segments, but not yet reflected in GAAP earnings reported for that year. For 2008, this included economic value adjustments related to both our wholesale and retail energy operations segments. We refer to this as Plan EPS. For 2008, this adjustment took into account both (i) economic value related to 2008 and created in a prior year but not reflected in our GAAP net income for such prior year; and (ii) economic value created in 2008, related to 2009 and not reflected in our GAAP net income for 2008.

The Compensation Committee feels that Plan EPS is an appropriate measure of our performance, as it reflects any growth of the business and any changes in the value of shareholder investment. EPS is also a

common measure of general financial and operating health used by stock and financial analysts as well as investors. The Compensation Committee chose individual measures as the second performance factor to drive the achievement of operational goals considered critical to the overall success of our Company. Regardless of the achievement of individual performance measures, absent the Compensation Committee’s discretion, our named executive officers are not eligible to receive incentive pay unless a threshold Plan EPS performance is met. The individual goals for each executive were aligned with our corporate and business unit objectives.

For our chief executive officer, the individual performance component was based on the Compensation Committee’s assessment of performance against his individual objectives established at the beginning of the year. Our chief executive officer performed a similar assessment of the performance of other named executive officers related to their respective individual goals and reviewed that assessment with the Compensation Committee. Further details regarding these goals are provided on page 42.

Mr. Schantz serves as president of Sequent, our wholesale services segment, which maintains an annual incentive plan specific to its employees and separate from the Annual Incentive Plan and the Omnibus Performance Incentive Plan. He does not participate directly in any of our formal annual incentive plans; instead, to establish Mr. Schantz’ incentive compensation for 2008, the Compensation Committee considered our Plan EPS performance, Mr. Schantz’ individual performance, and Sequent’s specific performance. Although not subject to a cap, Mr. Schantz’ annual incentive compensation is subject to mandatory deferral of 50% of any amount earned in a plan year that exceeds his annual base salary for that year. The deferred amount is payable in approximately equal installments on each of the first two

anniversaries of the deferral date. Should Mr. Schantz terminate employment for any reason before an anniversary date, the remaining deferred balances are forfeited. During the deferral period, deferred amounts earn interest calculated at the treasury rate, which was 4.63% during 2008.

Long-term incentives—For 2008, the Compensation Committee, using market and benchmarking data furnished by Towers Perrin, determined that the overall long-term incentive compensation opportunity for the named executive officers should range between 75% and 219% of base salary.

As noted earlier, for the purpose of providing 2008 annual grants, we used three vehicles to deliver long-term incentives. The proportional mix of options, restricted stock units and performance cash awards was set with consideration of the respective attributes that each of these vehicles represent from the Company’s and executive’s perspective, as described below. This mix was chosen to ensure maximum efficiency of our run rate and to minimize the number of shares reserved for grants to executives.

The Compensation Committee believes that using cash for these awards rather than shares limits share dilution, while continuing to provide significant performance incentive and retention value. For 2008, target performance cash awards constituted 40% of the total long-term incentive at the target award level.

The realized compensation value from equity-based long-term incentives is ultimately

determined by our stock price performance over the term of the awards and the executive’s decision as to when to exercise stock options and to sell shares.

Factors influencing actual individual grant levels include executive level, position retention concerns, if any, and Company performance. The 20%-40%-40% mix used in 2008 was determined based upon energy industry peer group data and by balancing factors that included the cost of equity awards and projected impact on shareholder dilution.

Employee retirement/health and welfare benefit plans—Our executives participate in the same programs pertaining to medical coverage, life insurance, disability, pension and retirement offered to all of our eligible employees. In addition, we provide our executives and other highly compensated employees non-qualified retirement benefits in excess of Internal Revenue Service qualified plan limits on contributions, and total benefits. These additional benefits generally are calculated based upon benefits an executive would be entitled to under our qualified retirement plans if such tax limitations did not

apply. The retirement plans available to the named executive officers are described in more detail beginning on page 53. We believe that our benefits and retirement programs, including the amount of the retirement benefit, is comparable to those offered by similar companies and, as a result, are competitive.

Executive perquisites—Our executive officers are entitled to a financial planning benefit that may be used exclusively for tax preparation, financial planning and estate planning. The maximum level of this benefit is $15,000 per year, but the value of this benefit is based upon the actual charge for services, which can be found in the perquisite column of the table for “All Other Compensation Detail” on page 48. We do not provide any other perquisites such as executive life insurance, or country club memberships to our executives. Benefits such as housing allowances or use of a Company car, are provided only on a temporary basis in the event of relocation or other exceptional circumstances, as determined by pre-established policy or by the Compensation Committee.

Role of Executive Officers in Determining Executive Compensation

Our chief executive officer develops recommendations regarding executive compensation, including proposals relative to compensation for individual executive officers, other than himself, using internal and external resources. These resources include such things as compensation surveys, external data and reports from the Compensation Committee’s consultant and data, reports and recommendations from internal staff.

Recommendations from the chief executive officer include and consider all aspects of the compensation program—philosophy, design, compliance and competitive strategy—as well as specific actions regarding individual executive officer compensation, including individual performance. The Compensation Committee reviews these recommendations along with data provided by Towers Perrin,

and decides whether to accept, reject, or revise these proposals. The Compensation Committee may recommend certain decisions to the full board for its approval.

Our chief financial officer assists the Compensation Committee in understanding key business drivers included in program designs, especially incentive programs and performance measures. This may include defining related measures and explaining the mutual influence on or by other business drivers and the accounting and tax treatment relating to certain awards. Our chief financial officer also provides regular updates to the Compensation Committee regarding current and anticipated business performance outcomes and their impact on executive compensation.

Our general counsel ensures that appropriate plan documentation and approvals are

received in order to keep executive pay programs in compliance with applicable laws and stock exchange listing requirements. Our general counsel also advises the Compensation Committee and board of directors regarding compliance with appropriate governance standards and requirements.

2008 Executive Compensation Analysis

Early each year, the Compensation Committee meets to review and consider whether any adjustments to each executive’s base salary, short-term and long-term incentive targets are appropriate, and the mix between cash and stock-based pay for the upcoming year, as well as to review performance-based payments to be made based upon the prior year’s performance. Additionally, the Compensation Committee may consider and make adjustments due to unforeseen circumstances that may have occurred during the year.

Annual Total Direct Compensation Review

Mr. Somerhalder—Chairman, President and Chief Executive Officer. Towers Perrin reported that while Mr. Somerhalder’s total direct compensation continues to be slightly higher than proxy peers, it was significantly below our energy industry peers. Towers Perrin further noted that Mr. Somerhalder’s base pay and annual incentive was between the 50^th and 75^th percentile of proxy peers, and both of these components were well below our energy industry peers. The Compensation Committee increased his base salary from $750,000 to $800,000 and his annual incentive target from 85% to 100% of base salary in order to more closely align with our energy industry peers. The Compensation Committee determined that these increases were reflective of Mr. Somerhalder’s increasing tenure and progression in his role as chief executive officer and noted that, from an overall perspective, these amounts are still

generally below market. The Compensation Committee decided to continue to maintain Mr. Somerhalder’s long-term incentive target at a flat $1,750,000, which has remained the same for three years.

We note that Mr. Somerhalder’s compensation, in general, is greater than our other named executive officers. In benchmarking our executives, the data collected by Towers Perrin indicated that this is common among our peer groups. The Compensation Committee determined that the difference in compensation between our chief executive officer and the other executive officers was appropriate, based upon the difference in duties and responsibilities.

Mr. Evans—Executive Vice President and Chief Financial Officer. Towers Perrin reported to the Compensation Committee that Mr. Evans’ total direct compensation paid was slightly higher than our proxy peers, as well as slightly higher than our energy industry peers at the 50^th percentile. However, after considering that his base salary and targeted short-term incentive are slightly below our energy industry peers, and with consideration of his personal growth within his role, the Compensation Committee approved a base salary increase for 2008 from $420,000 to $445,000, to coincide with the 50^th percentile of our energy industry peers. The Compensation Committee decided to maintain his current annual and long-term incentive targets at 60% and 140% of base salary, respectively.

Mr. Linginfelter—Executive Vice President, Utility Operations. Towers Perrin advised the Compensation Committee that, as the head of our regulated businesses, an appropriate match could not be found for Mr. Linginfelter within our proxy peers, and therefore, data could not be reported from our proxy peer group. Towers Perrin also reported that Mr. Linginfelter’s total direct compensation paid was significantly lower than our energy industry peers. In determining Mr. Linginfelter’s compensation, the

Compensation Committee considered that Mr. Linginfelter was promoted to his position in June 2007 and increased his salary from $350,000 to $405,000, which is still below his energy industry peers. Although Mr. Linginfelter’s annual and long-term incentives were adjusted closer to market when he was originally promoted, the Compensation Committee further adjusted his long-term incentive from 130% of base salary to 140% of base salary. This is significantly below energy industry peers, but it provides internal parity between Mr. Linginfelter and our Executive Vice President, Chief Financial Officer.

Mr. Madden—Executive Vice President, External Affairs. As mentioned earlier, because of the lack of an appropriate match, Towers Perrin used the 3^rd highest paid executive data when comparing Mr. Madden to the proxy peer group. Towers Perrin reported that in his current role of executive vice president, external affairs, Mr. Madden’s total direct compensation surpassed the 75^th percentile for both peer groups. However, when reviewing his compensation for 2008, the Compensation Committee took into consideration the high level of experience and ability Mr. Madden brings to the role, based in part upon his tenure in other senior roles within our Company. The Compensation Committee decided to provide Mr. Madden with a salary increase from $400,000 to $412,000 to maintain his current position within market. No changes were made to either annual or long-term incentives, which remained at 60% and 140% of base salary, respectively. On October 28, 2008 Mr. Madden announced his retirement from our Company, effective March 1, 2009.

Mr. Schantz—President, Sequent. As mentioned earlier, because of the lack of an appropriate match, Towers Perrin used the 2^nd highest paid executive when comparing Mr. Schantz to the proxy peer group. To provide more accurate data for the head of

our wholesale services segment, Towers Perrin matched Mr. Schantz to Towers Perrin’s Energy Trading and Marketing Survey, rather than the aforementioned energy industry peers. Towers Perrin reported to the Compensation Committee that Mr. Schantz’ actual total direct compensation was on par with the 75^th percentile of both our proxy peers and the Energy Trading and Marketing Survey. They further reported that while his base salary, annual, and long-term incentives generally lagged his proxy peer match, they were generally favorable to the Energy Trading and Marketing Survey. The Compensation Committee approved an increase in base salary from $305,000 to $320,000 and increased his long-term incentive target from 71% of base salary to 75% of base salary to bring parity between Mr. Schantz and his peers. Mr. Schantz’ short-term incentive opportunity is not expressed as a “target,” but rather is determined by Mr. Somerhalder and the Compensation Committee following the year end, based on performance criteria related to our corporate earnings per share, Sequent’s performance and Mr. Schantz’ individual performance. Although Mr. Schantz’ annual incentives are generally higher than market and his long-term incentives are generally lower than market, the Compensation Committee considers his incentives and range of opportunity to be appropriate in the aggregate. Since a portion of Mr. Schantz’ short-term incentive may be subject to mandatory deferral, as explained on page 36, the Compensation Committee believes his overall incentives to be appropriate.

Determination of 2008 Annual Incentive Payouts

Annual incentives earned in 2008, were calculated according to achievement against Plan EPS and individual performance measures. Performance against our corporate target was weighted at 75% of the total award, and individual performance was weighted at 25%.

Individual Performance. We believe that a portion of an executive’s annual incentive award should reflect his or her contributions to the Company’s overall objectives for the year.

Early in the year, certain individual objectives are assigned to each named executive officer by Mr. Somerhalder, and/or the Compensation Committee. With these objectives in mind, shortly following the end of the year Mr. Somerhalder subjectively assesses the individual performance of each of the other named executive officers, discusses his conclusions with each individual named executive officer and presents his review to the Compensation Committee for discussion. The Compensation Committee undertakes a similar process with regard to Mr. Somerhalder’s performance and reviews that assessment with him.

These individual assessments directly impacted the performance rating of each named executive officer for 2008, as explained further below. Specific achievements related to Mr. Somerhalder’s performance included:

Achievements related to the assessments of the other named executive officers were based on their individual functions with the Company. The following are the performance categories upon which the individual achievements of each executive officer were considered:

Payments associated with these awards can be found in the “Non-Equity Incentive Plan Payout Detail” table on page 48.

Performance Cash. As discussed above, performance cash awards granted in 2008 to our named executive officers provide a potential cash payment based on average compound annual earnings growth and average dividend yield above a preset level over a three-year period that began January 1, 2008 and will end on December 31, 2010. Details on the performance cash awards granted to our named executive officers can be found on page 49 in the “Grants of Plan-Based Awards” table.

Stock Options. Stock option awards are time vested. Details can be found on page 49 in the “Grants of Plan-Based Awards” table.

Discretion to Modify Awards. Under the long-term incentive program the Compensation Committee has discretion to extend an award that would otherwise be forfeited, but not

beyond the original term of the award. The Compensation Committee does not generally have the authority to unilaterally rescind an award. Each award defines the terms under which it could be forfeited according to the terms approved by shareholders in each of the Long-Term Incentive Plan and the Omnibus Performance Incentive Plan. The Compensation Committee did not exercise such discretion in determining award payments for 2008 performance.

Change-of-Control Severance Agreements

Each of our named executive officers is party to an individual change in control severance agreement. Prior to approving these agreements in 2007, the Compensation Committee sought and received guidance from Towers Perrin regarding the current state of common practices in connection with the use of and appropriate terms and conditions of change-of-control agreements at companies including our proxy peers and

energy industry peers. The Compensation Committee also sought input from Company management from the standpoint of determining the requirements for effective retention. In addition, the Compensation Committee used an independent accounting firm to estimate the costs associated with providing agreements to named executive officers and select other Company officers, under a variety of scenarios.

The Compensation Committee determined that based on all the factors and information it considered, it was appropriate to authorize the Company to enter into these agreements which replaced predecessor agreements that provided for greater potential severance payments. Such agreements align with the Company’s business objectives, including but not limited to, retaining the management team during the period of a potential transaction, preserving the objectivity of the management team in negotiating and executing a potential transaction, keeping management team members focused on the business, rather than their personal financial security and bridging potential periods of unemployment for covered executives. Tables disclosing the estimated costs associated with these agreements, as well as costs associated with termination of employment under other circumstances, are set forth on page 56 under the heading “Potential Payments upon Termination or Change in Control.”

Other Policies Governing our Executive Compensation Program

Grants of Long-Term Incentive Awards

The Compensation Committee generally grants long-term incentive awards on an annual basis at a regularly scheduled meeting of the board of directors, usually in late January or early February. The meeting date is scheduled well in advance and without regard to potential stock price movement.

In 2006, the Compensation Committee adopted a stock option grant policy. The stock

option grant policy provides that in the ordinary course, stock option grants to executive officers and annual stock option grants to all other key employees will be made by the Compensation Committee at a regularly scheduled meeting. However, this policy also provides that the Compensation Committee may make grants through use of a unanimous written consent, in lieu of a meeting, but only when circumstances prevent the action from being taken at a regularly scheduled meeting.

Impact of restated earnings on previously paid or awarded compensation

We have not had to restate earnings in a manner that would impact incentive award payments. If future restatements are necessary, the Compensation Committee and the board of directors will consider the facts and circumstances relating to the cause of the restatement, as well as the requirements under Section 304 of the Sarbanes-Oxley Act of 2002, in determining whether any payments based upon the financial results were made unjustly and the materiality and methods for recovering such payments.

Accounting and tax treatment of direct compensation

All compensation is subject to federal, state and local taxes as ordinary income or capital gains as various tax jurisdictions provide. Section 162(m) of the U.S. tax code places a limit of $1,000,000 on the amount of compensation that we may deduct in any one year with respect to any one of our named executive officers. However, qualifying performance-based compensation will not be subject to the deduction limit if certain requirements are met. The Compensation Committee anticipates that most awards under our long-term incentive programs and the corporate portion of the annual incentive for executive officers will continue to qualify as performance-based compensation. To maintain flexibility in compensating our

executives, however, the Compensation Committee reserves the right to use its judgment to authorize compensation payments that may be subject to the limit, when the Compensation Committee believes that such payments are appropriate. Accordingly, certain components of our executive compensation program are designed to be qualifying performance-based compensation under Section 162(m) while others are not.

Since the adoption of the Financial Accounting Standards Board’s FAS 123R, “Accounting for Stock-Based Compensation”, the equity-based accounting treatment of differing forms of stock-issued awards does not have a material effect on the selection of particular forms of compensation.

Stock ownership

We maintain stock ownership guidelines that are designed to ensure sustained, meaningful executive share ownership, align executive long-term interests with shareholder interests, and demonstrate our officers’ commitment to

enhancing long-term shareholder value. As chief executive officer, Mr. Somerhalder is encouraged to own shares of our common stock with a market value of at least five times his annual base salary, and our other named executive officers are encouraged to own shares of our common stock with a market value of three times their annual base salaries, depending on position level. The Compensation Committee regularly reviews the attainment of these ownership levels. We include all of the stock owned by an executive, restricted stock and vested stock options, and stock included in the executive’s account under our Retirement Savings Plus Plan and Nonqualified Savings Plan in calculating compliance with the ownership guidelines. Reports are provided regularly to the Compensation Committee as to the status of each executive’s stock ownership. On December 9, 2008, it was reported to the Compensation Committee that our Named Executive Officers continue to make appropriate progress towards meeting their guidelines, despite the current negative impact of the economy on our share price.