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

  • Atlanta Gas Light in Georgia
  • Chattanooga Gas in Tennessee
  • Elizabethtown Gas in New Jersey
  • Elkton Gas in Maryland
  • Florida City Gas in Florida
  • Virginia Natural Gas in Virginia

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-fixedvariable 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.

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)
8.53%
7.64%
9.24%
7.36%
7.89%
Estimated 2009 return on rate base(2) (3)
7.39%
6.55%
8.80%
4.47%
6.86%
Authorized return on equity(1)
10.90%
10.30%
10.90%
11.25%
10.20%
Estimated 2009 return on equity(2) (3)
8.52%
8.02%
10.68%
4.81%
7.90%
Authorized rate base % of equity(1)
47.9%
47.9%
52.4%
36.8%
44.8%
Rate base included in 2009 return
on equity (in millions) (3) (4)
$1,323
$448
$442
$153
$105
Performance based rates(5)
Weather normalization(6)
Decoupled or straight-fixed variable rates(7)
Current rates effective until (8)
Q4 2010
N/A
Q3 2011
N/A
Q2 2010

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

 

Competition and Customer Demand All of our utilities face competition from other energy products. Our principal competition is from electric utilities and oil and propane providers serving the residential and commercial markets throughout our service areas and the potential displacement or replacement of natural gas appliances with electric appliances. The primary competitive factors are the prices for competing sources of energy as compared to natural gas and the desirability of natural gas heating versus alternative heating sources.

Competition for space heating and general household and small commercial energy needs generally occurs at the initial installation phase when the customer or builder makes decisions as to which types of equipment to install. Customers generally continue to use the chosen energy source for the life of the equipment. Customer demand for natural gas could be affected by numerous factors, including:


  • changes in the availability or price of natural gas and other forms of energy
  • general economic conditions 23
  • AGL Resources Inc. 2009 Annual Report
  • energy conservation
  • legislation and regulations
  • the capability to convert from natural gas to alternative fuels
  • weather
  • new commercial construction and
  • new housing starts.


Due to the current general economic downturn and the decline in the housing markets in the areas we serve, customer growth declined slightly in our distribution operations segment in 2009 relative to 2008, a trend we expect to continue through 2010. For the year ended December 31, 2009, our year-over-year consolidated utility customer growth rate was slightly negative or (0.3)%, compared to 0.1% positive growth for 2008. We anticipate overall customer growth in 2010 to be flat to negative, primarily as a result of continued slow growth in the residential housing markets throughout most of our service territories and the effects of a weak economy on our commercial and industrial customers. In addition, we continue to experience some customer loss because ofcompetition from alternative fuel sources, including incentives offered by the local electric utilities to switch to electric alternatives.

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

We work with regulators and state agencies in each of our jurisdictions to educate customers throughout the year about energy costs in advance of the winter heating season, and to ensure that those customers qualifying for the Low Income Home Energy Assistance Program and other similar programs receive any needed assistance and we expect to continue this focus for the foreseeable future. We have also worked with the Virginia Commission and the New Jersey BPU during 2009 to launch energySMART (Save Money and Resources Today) programs in Virginia and New Jersey to educate our customers about energy efficiency and conservation and to provide rebates and other incentives for the purchase of highefficiency natural gas-fueled equipment.

We continue to use a variety of targeted marketing programs to attract new customers and to retain existing customers. These efforts include working to add residential customers, multifamily complexes and commercial customers who use natural gas for purposes other than space heating, as well as evaluating and launching new programs, products and services to enhance customer growth and operating revenues. In addition, we partner with numerous entities to market the benefits of natural gas appliances and to identify potential retention options early in the process for those customers who might consider converting to alternative fuels.

Capital Projects In October 2009, Atlanta Gas Light received approval from the Georgia Commission for the Strategic Infrastructure Development and Enhancement (STRIDE) program. The Georgia Commission’s approval included the program’s initial three years’ expenditures, estimated at approximately $176 million. The purpose of STRIDE is to upgrade Atlanta Gas Light’s distribution system and liquefied natural gas facilities in Georgia, improve its system reliability, and create a platform to meet operational flexibility needs and forecasted growth. Under the program, Atlanta Gas Light would be required to file a ten-year infrastructure plan every three years for review and approval by the Georgia Commission. The program merges with Atlanta Gas Light’s existing pipeline replacement program, which was initiated in 1998 and is scheduled to end in December 2013. In January 2010, the Georgia Commission approved up to an additional $45 million of expenditures under the STRIDE program to extend Atlanta Gas Light’s pipeline facilities to serve customers without pipeline access and create new economic development.

In April 2009, the New Jersey BPU approved an accelerated $60 million enhanced infrastructure program for Elizabethtown Gas which started this year and is scheduled to be completed in 2011. This program was created in response to the New Jersey Governor’s request for utilities to assist in the economic recovery by increasing infrastructure investments. A regulatory cost recovery mechanism will be established with estimated rates put into effect at the beginning of each year. At the end of the program the regulatory cost recovery mechanism will be trued-up and any remaining costs not previously collected will be included in base rates. Elizabethtown Gas expects that approximately $36 million in capital expenditures for this program will occur in 2010.

In November 2009, we completed our $43 million Magnolia pipeline project in Georgia that will enable us to diversify our sources of natural gas through more access to natural gas supplies from Southern Natural Gas’ Elba Island LNG terminal located on Georgia’s Atlantic coast near Savannah. This project should provide increased reliability of service in the event that supplies coming from the Gulf Coast are disrupted.

Collective Bargaining Agreements The following table provides information about our natural gas utilities’ collective bargaining agreements. These agreements represent approximately 12%of our total employees.

 
# of Employees
Contract Expiration Date
Virginia Natural Gas
International Brotherhood of
Electrical Workers (Local No. 50)
125
May 2010
Elizabethtown Gas
Utility Workers Union of America
(Local No. 424)
168
Nov. 2011
Total
293