Nature
of Our Business
Unless
the context requires otherwise, references to “we,” “us,” “our,” the “company”
and “AGL Resources” are intended to mean consolidated AGL Resources Inc. and its
subsidiaries.
We are an
energy services holding company whose principal business is the distribution of
natural gas in six states - Florida, Georgia, Maryland, New Jersey, Tennessee
and Virginia. Our six utilities serve approximately 2.3 million end-use
customers. We are also involved in several related and complementary businesses,
including retail natural gas marketing to end-use customers primarily in
Georgia; natural gas asset management and related logistics activities for each
of our utilities as well as for nonaffiliated companies; natural gas storage
arbitrage and related activities; and the development and operation of
high-deliverability natural gas storage assets. We also own and operate a small
telecommunications business that constructs and operates conduit and fiber
infrastructure within select metropolitan areas. We manage these businesses
through four operating segments and a nonoperating corporate
segment.
Our
distribution operations segment is the largest component of our business and
includes six natural gas local distribution utilities. These utilities
construct, manage and maintain intrastate natural gas pipelines and distribution
facilities and include:
·
Atlanta
Gas Light in Georgia
Chattanooga
Gas in Tennessee
Elizabethtown
Gas in New Jersey
Elkton
Gas in Maryland
Florida
City Gas in Florida
Virginia
Natural Gas in Virginia
Regulatory
Planning
Each
utility operates subject to regulations of the state regulatory agencies in its
service territories with respect to rates charged to our customers, maintenance
of accounting records and various service and safety matters. Rates charged to
our customers vary according to customer class (residential, commercial or
industrial) and rate jurisdiction. Rates are set at levels that generally should
allow recovery of all prudently incurred costs, including a return on rate base
sufficient to pay interest on debt and provide a reasonable return for our
shareholders. Rate base generally consists of the original cost of utility plant
in service, working capital and certain other assets; less accumulated
depreciation on utility plant in service and net deferred income tax
liabilities, and may include certain other additions or deductions.
For our largest utility, Atlanta Gas
Light, the natural gas market was deregulated in 1997. Prior to this,
Atlanta Gas Light was the supplier and seller of natural gas to its
customers. Today, Marketers sell
natural gas to end-use customers in Georgia and handle customer billing
functions. The Marketers file
their rates monthly with the Georgia Commission. Atlanta Gas Light's role
includes:
distributing natural gas for
Marketers
constructing,
operating and maintaining the gas system infrastructure, including
responding to customer service calls and
leaks
reading
meters and maintaining underlying customer premise information for
Marketers
planning
and contracting for capacity on interstate transportation and storage
systems
Atlanta
Gas Light recognizes revenue under a straight-fixed-variable rate design whereby
it charges rates to its customers based primarily on monthly fixed charges that
are periodically adjusted. The Marketers bill these charges directly to their
customers. This mechanism minimizes the seasonality of Atlanta Gas Light’s
revenues since the monthly fixed charge is not volumetric or directly weather
dependent. However, weather indirectly influences the number of customers that
have active accounts during the heating season, and this has a seasonal impact
on Atlanta Gas Light’s revenues since generally more customers are connected in
periods of colder weather than in periods of warmer weather.
All of
our utilities, excluding Atlanta Gas Light, are authorized to use a natural gas
cost recovery mechanism that allows them to adjust their rates to reflect
changes in the wholesale cost of natural gas and to ensure they recover 100% of
the costs incurred in purchasing gas for their customers. Since Atlanta Gas
Light does not sell natural gas directly to its end-use customers, it does not
need or utilize a natural gas cost recovery mechanism.
Regulatory Agreements Over
the past several years our utilities have been fulfilling their long-term
commitments to rate freezes, which began expiring in 2009. In 2009 we filed rate
cases for Elizabethtown Gas and Chattanooga Gas which included reforms that
encourage conservation and “decoupling.” In traditional rate designs, our
utilities’ recovery of a significant portion of their fixed customer service
costs is tied to assumed natural gas volumes used by our customers. We believe
separating, or decoupling, the recovery of these fixed costs from the natural
gas deliveries will align the interests of our customers and utilities by
encouraging energy conservation and ensuring stable returns for our
shareholders.
4
In March
2009, Elizabethtown Gas filed a rate case requesting an annual increase to base
rates of $25 million. The filing also included energy conservation programs and
a proposed Efficiency Usage and Adjustment mechanism (EUA), which is a form of
decoupling. In June 2009, and in accordance with the New Jersey rate case rules
that require the filing of quarterly updates to a case, we filed a revised
request for a $17 million annual increase to base rates. The primary driver of
the reduced request was a revision to depreciation rates.
In
December 2009, the New Jersey BPU approved an agreement with Elizabethtown Gas
regarding its base rate filing and the energy conservation programs. Under the
terms of the agreement, Elizabethtown Gas received an increase in base rates
which equates to approximately $3 million on an annual basis. Additionally,
Elizabethtown Gas will reduce its overall composite depreciation rate from 3.20%
to 2.58%, which equates to an annual reduction in depreciation expenses of
approximately $5 million. The agreement includes a two-year freeze on base rates
except as may be adjusted in the second phase of our rate case, in which the New
Jersey BPU will consider, among other things, our request for the
EUA.
In
November 2009, Chattanooga Gas filed a rate case with the Tennessee Authority
requesting an annual increase to base rates of approximately $3 million. The
rate case proposal includes energy-efficiency and conservation programs, as well
as a mechanism to recover lost revenue resulting from these programs. A decision
by the Tennessee Authority is expected in the second quarter of
2010.
The
following table provides regulatory information for our largest
utilities.
Atlanta Gas Light
(9)
Elizabethtown
Gas
Virginia
Natural Gas
Florida
City Gas
Chattanooga
Gas
Authorized
return on rate base (1)
Estimated
2009 return on rate base (2) (3)
Authorized
return on equity (1)
Estimated
2009 return on equity (2)
(3)
Authorized
rate base % of equity (1)
Rate
base included in 2009 return on equity (in millions) (3) (4)
Performance
based rates (5)
ü
Weather
normalization (6)
Decoupled
or straight-fixed variable rates (7)
Current
rates effective until (8)
(1)
The
authorized return on rate base, return on equity, and percentage of equity
were those authorized as of December 31,
2009.
(2)
Estimates
based on principles consistent with utility ratemaking in each
jurisdiction, and are not necessarily consistent with GAAP
returns.
(3)
Florida
City Gas includes the impacts of the acquisition adjustment, as approved
by the Florida Commission in December 2007, in its rate base, return on
rate base and return on equity
calculations.
(4)
Estimated
based on 13-month average.
(5)
Involves
frozen rates for a determined
period.
(6)
Involves
regulatory mechanisms that allow us to recover our costs in the event of
unseasonal weather, but are not direct offsets to the potential impacts of
weather and customer consumption on earnings. These mechanisms are
designed to help stabilize operating results by increasing base rate
amounts charged to customers when weather is warmer than normal and
decreasing amounts charged when weather is colder than
normal.
(7)
Decoupled
and straight-fixed variable rate designs allow for the recovery of fixed
customer service costs separately from assumed natural gas volumes used by
our customers.