Executive Summary
Regulatory strategy We continue to actively pursue a regulatory
strategy that reduces the lag between our investments in
infrastructure and the recovery of those investments through various
rate mechanisms. Our regulatory planning includes rate design
proposals that should provide stabilized revenues through
decoupling, or separating the recovery of fixed costs for providing
service from the volumes of customer throughput. Our rate cases
also include proposals for energy-efficiency programs that should
help customers lower the amount of gas used and conserve energy.
Capital projects We continue to focus aggressively on capital
discipline and cost control, while moving ahead with projects and
initiatives that we expect to have current and future benefits and
provide an appropriate return on invested capital. In 2009, our
infrastructure improvement programs were approved in Georgia andNew Jersey. Additionally, the Magnolia pipeline project, completed in
November 2009, allowing access to Elba Island LNG, should enable
us to meet future demand for and diversify our supply of natural gas
for Atlanta Gas Light customers. Our Hampton Roads Crossing
pipeline project, with portions placed in service in December 2009
and the remainder in January 2010, provides additional infrastructure
to accommodate growth to the Virginia Natural Gas distribution
system. In addition, our Golden Triangle Storage project in Beaumont,
Texas is on schedule and we expect the first cavern to be in operation
in the second half of 2010.
Customer growth We continue to see challenging economic
conditions in all of the areas we serve and, as a result, have
experienced lower than expected customer growth in our distribution
operations and retail energy operations segments throughout 2009,
a trend we expect to continue through 2010.
For the year ended December 31, 2009, our distribution
operations customer growth rate was (0.3)%, compared to 0.1%
for 2008. The lower levels of customer growth are primarily a result
of much slower growth in the residential housing markets throughout
our service territories. This trend has been offset slightly by growth
in the commercial customer segment in certain areas, primarily as a
result of conversions to natural gas from other fuel sources as well
as new product and service offerings.
We continue to use a variety of targeted marketing programs
to attract new customers and to retain existing ones. These
programs generally emphasize natural gas as the fuel of choice for
customers and seek to expand the use of natural gas through a
variety of promotional activities. We also use analytical predictive
models to identify and target customers who might consider
switching from natural gas to other sources of energy in order to
retain them as a customer.
We have seen a 4% decline in average customer count in
Georgia at SouthStar for the year ended December 31, 2009, as
compared to 2008. This decline reflects some of the same economic
conditions that have affected our utility businesses, as well as a more
competitive retail market for natural gas in Georgia.
Natural gas price volatility Natural gas commodity prices have
a significant impact on our customer rates and on our long-term
competitive position against other energy sources. Over the last two
years, daily Henry Hub spot market prices for natural gas in the
United States has been extremely volatile and ranged between a
high of $13.58 per Mcf in July 2008 to a low of $2.51 per Mcf in
September 2009. Our natural gas acquisition strategy is designed
to secure sufficient supplies of natural gas to meet the needs of our
utility customers and to hedge gas prices to effectively manage
costs, reduce price volatility and maintain a competitive advantage.
Although spot natural gas prices were as low as $2.51 per Mcf
during 2009, the current forward price of natural gas continues to
remain at much higher levels from $5.12 to $6.47 per Mcf over the
next year. Our hedging strategies and physical natural gas suppliesin storage enable us to reduce earnings risk exposure due to higher
gas costs.
Capital market plan Our capital market plan over the next 12 to
18 months includes maintaining our total debt to total capitalization
targets between 50% and 60%, the renewal of our $1 billion Credit
Facility, the renewal of the letter of credit agreements which provide
credit support for our variable-rate gas facility revenue bonds and
refinancing of $300 million in 7.125% senior notes set to mature in
January 2011.
We cannot predict whether renewing our Credit Facility or
refinancing the senior notes would result in favorable terms or
interest rates. Additionally, due to the significant changes in the credit
markets, we expect that the costs of a renewed credit facility would
increase and the duration to be less than the 5-year term under our
existing Credit Facility. We have not yet determined whether we will
seek to increase or decrease the size of the Credit Facility from its
current $1 billion level.
Hedges
Changes in commodity prices subject a significant portion of our
operations to earnings variability. Our nonutility businesses principally
use physical and financial arrangements to reduce the risks associated
with both weather-related seasonal fluctuations in market conditions
and changing commodity prices. These economic hedges may not
qualify, or are not designated for, hedge accounting treatment. As a
result, our reported earnings for the wholesale services and retail
energy operations segments reflect changes in the fair values of
certain derivatives. These valuesmay change significantly fromperiod
to period and are reflected as gains or losses within our operating
revenues or our OCI for those derivative instruments that qualify and
are designated as accounting hedges. The net losses on weather
hedges during 2009 at retail energy operations weremore than offset
by corresponding increases in operatingmargin due to colder weather
the hedges were designed to protect against.
Elizabethtown Gas utilizes certain financial derivatives in accordance
with a directive from the New Jersey BPU to create a hedging
program to hedge the impact of market fluctuations in natural
gas prices. These derivative products are accounted for at fair value
each reporting period. In accordance with regulatory requirements,
realized gains and losses related to these financial derivatives are
reflected in deferred natural gas costs and ultimately included in
billings to customers. Unrealized gains and losses are reflected as
a regulatory asset or liability, as appropriate, in our consolidated
statements of financial position.
Seasonality
The operating revenues and EBIT of our distribution operations, retail
energy operations and wholesale services segments are seasonal.
During the heating season, natural gas usage and operating revenues
are generally higher because more customers are connected to our
distribution systems and natural gas usage is higher in periods of
colder weather than in periods of warmer weather. Occasionally in the
summer, Sequent’s operating revenues are impacted due to peak
usage by power generators in response to summer energy demands.
Seasonality also affects the comparison of certain statements of
financial position items such as receivables, unbilled revenue,
inventories and short-term debt across quarters. However, these
items are comparable when reviewing our annual results.
Approximately 70%of these segments’ operating revenues and
79%of these segments’ EBIT for the year ended December 31, 2009
were generated during the first and fourth quarters of 2009, and are
reflected in our consolidated statements of income for the quarters
ended March 31, 2009 and December 31, 2009. Our base operating
expenses, excluding cost of gas, interest expense and certain
incentive compensation costs, are incurred relatively equally over
any given year. Thus, our operating results can vary significantly from
quarter to quarter as a result of seasonality.
