Note 3 - Merger with Nicor

6 Months Ended

Jun. 30, 2012

Business Combination Disclosure [Text Block]

Note 3 – Merger with Nicor

On December 9, 2011, we completed our $2.5 billion merger with Nicor. The preliminary allocation of the total purchase consideration transferred to the fair value of assets acquired and liabilities assumed included adjustments for the fair value of Nicor’s assets and liabilities. During the second quarter of 2012, we completed our evaluation of the ERC liabilities for our sites in Illinois, which resulted in an increase of $109 million in the liability from the amount recorded in our initial purchase price allocation. As these costs are recoverable from our customers as they are paid, we have recorded a regulatory asset associated with the recorded liabilities, which is reflected in our table of purchase price allocation for Nicor Gas’ regulatory assets and liabilities below. See Note 9 – Commitments, Guarantees and Contingencies for additional ERC discussion. The preliminary allocation of the purchase price is presented in the following table.

In millions
Current assets	$	932
Property, plant and equipment		3,202
Goodwill		1,395
Other noncurrent assets, excluding goodwill		900
Current liabilities		(1,170	)
Long-term debt		(599	)
Other noncurrent liabilities		(2,157	)
Total purchase consideration	$	2,503

The estimated fair values of the assets acquired and the liabilities assumed were determined based on the accounting guidance for fair value measurements under GAAP. The estimated fair value measurements assume the highest and best use of the assets by market participants, considering the use of the asset that is physically possible, legally permissible and financially feasible at the measurement date. Modifications to the purchase price allocation may occur as a result of our continuing review of the assumptions and estimates underlying the preliminary allocation of the purchase price.

We concluded that net book value is a reasonable estimate of fair value for Nicor’s tangible and intangible assets and liabilities that are explicitly subject to cost-of-service ratemaking. The company determined the fair value of Nicor’s long-term debt using the income approach, and used a discounted cash flow technique that incorporates a market interest yield curve with adjustments for duration, optionality and risk profile. As a result, our purchase price allocation included an adjustment of $99 million to step-up the basis of Nicor’s long-term debt to fair value as of the merger date. A corresponding regulatory asset was recorded in connection with the fair value adjustment of the debt. While the regulatory asset related to debt is not included in rate base, the costs are recovered over the term of the debt through the authorized rate of return component of base rates. The following table summarizes our purchase price allocation for Nicor Gas’ regulatory assets and liabilities.

In millions
Current assets	$	36
Other noncurrent assets, excluding goodwill		586
Current liabilities		(80	)
Other noncurrent liabilities		(1,137	)

For all other assets and liabilities acquired from Nicor, we considered the income, market and cost approaches to fair valuation. The income approach estimates the fair value by discounting the projected future cash flows at our weighted average cost of capital. We utilized this approach to obtain the business enterprise values for each reporting unit. Additionally, we used the income approach to determine the fair values for intangible trade names and customer relationships assets.

The market approach is based on the premise that the fair value can be determined through the use of prices and other relevant information generated by the market transactions involving identical or comparable assets or liabilities. Finally, the cost approach utilizes the concept of replacement cost as an indicator of fair value. We applied the market and cost approach to estimate the fair value of the property, plant and equipment. Our valuations included a $31 million step-up for Nicor’s non-regulatory property, plant and equipment. This was primarily related to the vessels and related equipment at our cargo shipping segment. The excess of the purchase price paid over the estimated fair values of the assets acquired and liabilities assumed was recognized as goodwill, which is not deductible for tax purposes.

Within our operating expenses, we recognized merger expenses of $3 million ($2 million net of tax) for the three months ended June 30, 2012 compared to $8 million ($5 million net of tax) recorded by AGL Resources during the same period in 2011. We recognized $13 million ($8million net of tax) of merger expenses during the six months ended June 30, 2012 compared to $10 million ($6 million net of tax) recorded by AGL Resources for the same period in 2011. These costs were expensed as incurred. In addition, our 2011 unaudited Condensed Consolidated Statements of Income include incremental debt issuance costs and interest expense related to financing the cash portion of the purchase consideration in advance of the merger closing date. The amount included for the three months ended June 30, 2011 was $5 million ($3 million net of tax) and the amount included for the six months ended June 30, 2011 was $8 million ($5 million net of tax).

Pro forma financial information The following unaudited pro forma financial information reflects our consolidated results of operations as if the merger with Nicor had taken place on January 1, 2011. The unaudited pro forma information has been calculated after conforming our accounting policies and adjusting Nicor’s results to reflect the depreciation and amortization that would have been charged assuming fair value adjustments to property, plant and equipment, debt and intangible assets had been applied on January 1, 2011, together with the consequential tax effects.

AGL Resources and Nicor together incurred approximately $96 million of costs directly related to the merger in the twelve months ended December 31, 2011 and $20 million was incurred in the six months ended June 30, 2011. These expenses are excluded from the pro forma earnings presented below.

The unaudited pro forma financial information has been presented for illustrative purposes only and is not necessarily indicative of results of operations that would have been achieved had the pro forma events taken place on the dates indicated, or of the future consolidated results of operations of the combined company.

In millions, except per share amounts	Twelve months ended December 31, 2011		Six months ended June 30, 2011
Total revenues	$	4,680	$	2,767
Net income attributable to AGL Resources Inc.	$	304	$	200
Basic earnings per common share	$	2.62	$	1.72
Diluted earnings per common share	$	2.61	$	1.71