Add
ATG to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| ATG > SEC Filings for ATG > Form 10-K on 5-Feb-2009 | All Recent SEC Filings |
5-Feb-2009
Annual Report
Overview
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 more than 2.2 million end-use customers, making us the largest distributor of natural gas in the southeastern and mid-Atlantic regions of the United States based on customer count. We are involved in various related businesses, including retail natural gas marketing to end-use customers primarily in Georgia; natural gas asset management and related logistics activities for our own utilities as well as for nonaffiliated companies; natural gas storage arbitrage and related activities; and the development and operation of high-deliverability underground 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 - distribution operations, retail energy operations, wholesale services and energy investments - and a nonoperating corporate segment.
The distribution operations segment is the largest component of our business and is subject to regulation and oversight by agencies in each of the six states we serve. These agencies approve natural gas rates designed to provide us the opportunity to generate revenues to recover the cost of natural gas delivered to our customers and our fixed and variable costs such as depreciation, interest, maintenance and overhead costs, and to earn a reasonable return for our shareholders. With the exception of Atlanta Gas Light, our largest utility, the earnings of our regulated utilities can be affected by customer consumption patterns that are a function of weather conditions, price levels for natural gas and general economic conditions that may impact their ability to pay for gas consumed. Various mechanisms exist that limit our exposure to weather changes within typical ranges in all of our jurisdictions. Our retail energy operations segment, which consists of SouthStar, also is weather sensitive and uses a variety of hedging strategies, such as weather derivative instruments and other risk management tools, to mitigate potential weather impacts. Our Sequent subsidiary within our wholesale services segment is temperature insensitive, but generally has greater opportunity to capture operating margin due to price volatility as a result of extreme weather .Our energy investments segment's primary activity is our natural gas storage business, which develops, acquires and operates high-deliverability salt-dome storage assets in the Gulf Coast region of the United States. While this business also can generate additional revenue during times of peak market demand for natural gas storage services, the majority of our storage services are covered under medium to long-term contracts at a fixed market rate.
Executive Summary
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 2008, a trend we expect to continue through 2009.
For the year ended December 31, 2008, our consolidated utility customer growth rate was 0.1%, compared to 0.9% for 2007. We anticipated customer growth in 2008 of about 0.5%. 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.
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 have seen a 3% decline in average customer count at SouthStar for the year ended December 31, 2008, as compared to 2007. This decline reflects some of the same economic conditions that have affected our utility businesses; as well as a more competitive retail pricing market for natural gas in Georgia.
Natural gas prices Increased energy and transportation prices are expected to impact a significantly larger portion of consumer household incomes during the current winter heating season. As a result, we may incur additional bad debt expense, as well as lower operating margins, due to increased customer conservation. While these factors could adversely impact our results of operations, we expect regulatory and operational mechanisms in place in most of our jurisdictions will help to mitigate some of our exposure to these factors.
The risks of increased bad debt expense and decreased operating margins from conservation are minimized at our largest utility, Atlanta Gas Light, as a result of its straight-fixed variable rate structure. In addition, customers in Georgia buy their natural gas from Marketers rather than from Atlanta Gas Light. Our credit exposure at Atlanta Gas Light is primarily related to the provision of services to the Marketers, but that exposure is mitigated, as we obtain security support in an amount equal to a minimum of no less than two times a Marketer's highest month's estimated bill. At our other utilities, while customer conservation could adversely impact our operating margins, we utilize measures to collect delinquent accounts and continue to be rigorous in monitoring and mitigating the impact of these expenses. We do, however, expect that our bad debt expense for the current winter heating season will be higher than the prior year.
We worked with regulators and state agencies in each of our jurisdictions to educate customers about higher energy costs in advance of the winter heating season, in particular to ensure that those qualified for the Low Income Home Energy Assistance Program and other similar programs receive any needed assistance.
SouthStar may also be affected by the conservation and bad debt trends, but its overall exposure is partially mitigated by the high credit quality of SouthStar's customer base, disciplined collection practices and the unregulated pricing structure in Georgia.
The rising commodity prices during the first six months of 2008, along with reduced opportunities related to the management of storage and transportation assets throughout 2008 negatively affected SouthStar's operating margin. More favorable market conditions and decreasing natural gas prices in the first six months of 2007 as compared to rising prices during the same time frame in 2008 enabled SouthStar to recognize higher operating margins for 2007 as compared to 2008. SouthStar's reported results were also negatively impacted during 2008 by the significant decrease in natural gas prices during the second half of the year as SouthStar was required to record $24 million of LOCOM adjustments to reduce its natural gas inventory to market value.
Due to the rising commodity price environment and the widening of transportation basis spreads during the first six months of 2008, Sequent recorded $70 million in losses on the financial instruments it used to hedge its storage and transportation positions. The natural gas market remained volatile with significant decreases in prices and narrowing of basis spreads during the second half of 2008. Consequently Sequent recognized gains on hedging instruments of $52 million for 2008. This is a $35 million net increase compared to 2007. In addition to the increase in hedge gains, Sequent's commercial activity improved by $25 million for 2008 over 2007, due to more favorable business opportunities presented by the greater volatility in the marketplace. In addition, the decrease in forward prices caused Sequent to be subject to a LOCOM adjustment on its natural gas inventory. The increase in the impact of the adjustment, net of estimated hedging recoveries, was $15 million for 2008 from the prior year. These changes resulted in Sequent reporting operating margin that was $45 million higher for 2008, as compared to 2007.
Results of Operations
Revenues We generate nearly all our operating revenues through the sale, distribution and storage of natural gas. We include in our consolidated revenues an estimate of revenues from natural gas distributed, but not yet billed, to residential and commercial customers from the latest meter reading date to the end of the reporting period. The following table provides more information regarding the components of our operating revenues.
In millions 2008 2007 2006 Residential $ 1,194 $ 1,143 $ 1,127 Commercial 500 500 460 Transportation 482 401 434 Industrial 280 250 310 Other 344 200 290 Total operating revenues $ 2,800 $ 2,494 $ 2,621 |
Operating margin and EBIT We evaluate the performance of our operating segments using the measures of operating margin and EBIT. We believe operating margin is a better indicator than operating revenues for the contribution resulting from customer growth in our distribution operations segment since the cost of gas can vary significantly and is generally billed directly to our customers. We also consider operating margin to be a better indicator in our retail energy operations, wholesale services and energy investments segments since it is a direct measure of operating margin before overhead costs. We believe EBIT is a useful measurement of our operating segments' performance because it provides information that can be used to evaluate the effectiveness of our businesses from an operational perspective, exclusive of the costs to finance those activities and exclusive of income taxes, neither of which is directly relevant to the efficiency of those operations.
Our operating margin and EBIT are not measures that are considered to be calculated in accordance with GAAP. You should not consider operating margin or EBIT an alternative to, or a more meaningful indicator of, our operating performance than operating income or net income as determined in accordance with GAAP. In addition, our operating margin and EBIT measures may not be comparable to similarly titled measures of other companies. The table below sets forth a reconciliation of our operating margin and EBIT to our operating income, earnings before income taxes and net income, together with other consolidated financial information for the last three years.
In millions, except per share amounts 2008 2007 2006 Operating revenues $ 2,800 $ 2,494 $ 2,621 Cost of gas 1,654 1,369 1,482 Operating margin 1,146 1,125 1,139 Operating expenses Operation and maintenance 472 451 473 Depreciation and amortization 152 144 138 Taxes other than income 44 41 40 Total operating expenses 668 636 651 Operating income 478 489 488 Other income (expense) 6 4 (1 ) Minority interest (20 ) (30 ) (23 ) EBIT 464 463 464 Interest expense 115 125 123 Earnings before income taxes 349 338 341 Income taxes 132 127 129 Net income $ 217 $ 211 $ 212 Earnings per common share: Basic $ 2.85 $ 2.74 $ 2.73 Diluted $ 2.84 $ 2.72 $ 2.72 Weighted average number of common shares outstanding: Basic 76.3 77.1 77.6 Diluted 76.6 77.4 78.0 |
In 2008 our net income increased by $6 million from the prior year primarily due to increased EBIT from wholesale services and energy investments largely due to higher operating margin. This was offset by decreased EBIT at distribution operations and retail energy operations due to lower operating margins as compared to 2007. Additionally, distribution operations' EBIT contribution decreased due to higher operating expenses as compared to 2007. Our basic earnings per share increased by $0.11 and our diluted earnings per share increased by $0.12, primarily due to our increased earnings and the reduction in the average number of shares outstanding as a result of purchases made under our share repurchase program during 2007.
In 2007 our net income decreased by $1 million from 2006 primarily due to decreased EBIT from wholesale services largely due to lower operating margin. This was offset by increased EBIT at distribution operations, retail energy operations and energy investments due to higher operating margins as compared to 2006. Additionally, distribution operations' EBIT contribution increased due to lower operating expenses as compared to 2006. Our basic earnings per share increased by $0.01, primarily due to the reduction in the average number of shares outstanding as a result of our share repurchase program. Our diluted earnings per share were unchanged from 2006.
Operating metrics Selected weather, customer and volume metrics for 2008, 2007 and 2006, which we consider to be some of the key performance indicators for our operating segments, are presented in the following tables. We measure the effects of weather on our business through heating degree days. Generally, increased heating degree days result in greater demand for gas on our distribution systems. However, extended and unusually mild weather during the heating season can have a significant negative impact on demand for natural gas. Our marketing and customer retention initiatives are measured by our customer metrics which can be impacted by natural gas prices, economic conditions and competition from alternative fuels. Volume metrics for distribution operations and retail energy operations present the effects of weather and our customers' demand for natural gas. Wholesale services' daily physical sales represent the daily average natural gas volumes sold to its customers.
Weather
Heating degree days
(1) 2008 vs. 2007 vs. 2008 vs. 2007 vs. 2006 vs.
Year ended December 31, 2007 2006 normal normal normal
colder colder colder colder
Normal 2008 2007 2006 colder (warmer) (warmer) (warmer) (warmer) (warmer)
Florida 496 416 326 468 28 % (30 )% (16 )% (34 )% (6 )%
Georgia 2,608 2,746 2,366 2,455 16 % (4 )% 5 % (9 )% (6 )%
Maryland 4,705 4,521 4,621 4,205 (2 )% 10 % (4 )% (2 )% (11 )%
New
Jersey 4,654 4,647 4,777 4,074 (3 )% 17 % - 3 % (12 )%
Tennessee 2,991 3,179 2,722 2,892 17 % (6 )% 6 % (9 )% (3 )%
Virginia 3,151 3,031 3,077 2,870 (1 )% 7 % (4 )% (2 )% (9 )%
2008 vs. 2007 vs. 2008 vs. 2007 vs. 2006 vs.
Quarter ended December 31, 2007 2006 normal normal normal
colder colder colder colder colder
Normal 2008 2007 2006 (warmer) (warmer) (warmer) (warmer) (warmer)
Florida 160 201 45 111 347 % (59 )% 26 % (72 )% (31 )%
Georgia 1,021 1,092 877 955 25 % (8 )% 7 % (14 )% (6 )%
Maryland 1,673 1,693 1,558 1,493 9 % 4 % 1 % (7 )% (11 )%
New Jersey 1,623 1,729 1,605 1,372 8 % 17 % 7 % (1 )% (15 )%
Tennessee 1,184 1,291 969 1,193 33 % (19 )% 9 % (18 )% 1 %
Virginia 1,096 1,151 965 993 19 % (3 )% 5 % (12 )% (9 )%
|
(1) Obtained from the National Oceanic and Atmospheric Administration, National Climatic Data Center. Normal represents the ten-year averages from January 1999 to December 2008.
Customers Year ended December 31, 2008 vs. 2007 2007 vs. 2006
2008 2007 2006 % change % change
Distribution Operations
Average end-use
customers (in thousands)
Atlanta Gas Light 1,557 1,559 1,546 (0.1 )% 0.8 %
Chattanooga Gas 62 61 61 1.6 -
Elizabethtown Gas 273 272 269 0.4 1.1
Elkton Gas 6 6 6 - -
Florida City Gas 104 104 104 - -
Virginia Natural Gas 271 269 264 0.7 1.9
Total 2,273 2,271 2,250 0.1 % 0.9 %
Operation and
maintenance expenses per
customer $ 145 $ 145 $ 156 - (7 )%
EBIT per customer $ 145 $ 149 $ 138 (3 )% 8 %
Retail Energy Operations
Average customers (in
thousands) 526 540 533 (3 )% 1 %
Market share in Georgia 34 % 35 % 35 % (3 )% -
Volumes
In billion cubic feet
(Bcf) Year ended December 31, 2008 vs. 2007 2007 vs. 2006
2008 2007 2006 % change % change
Distribution Operations
Firm 219 211 199 4 % 6 %
Interruptible 104 108 117 (4 )% (8 )
Total 323 319 316 1 % 1 %
Retail Energy Operations
Georgia firm 41 39 37 5 % 5 %
Ohio and Florida 7 5 1 40 % 400 %
Wholesale Services
Daily physical sales
(Bcf / day) 2.60 2.35 2.20 11 % 7 %
|
Segment information Operating revenues, operating margin, operating expenses and EBIT information for each of our segments are contained in the following tables for the last three years.
Operating Operating Operating
In millions revenues margin (1) expenses EBIT (1)
2008
Distribution operations $ 1,768 $ 818 $ 493 $ 329
Retail energy operations 987 149 73 57
Wholesale services 170 122 62 60
Energy investments 55 50 31 19
Corporate (2) (180 ) 7 9 (1 )
Consolidated $ 2,800 $ 1,146 $ 668 $ 464
2007
Distribution operations $ 1,665 $ 820 $ 485 $ 338
Retail energy operations 892 188 75 83
Wholesale services 83 77 43 34
Energy investments 42 40 25 15
Corporate (2) (188 ) - 8 (7 )
Consolidated $ 2,494 $ 1,125 $ 636 $ 463
2006
Distribution operations $ 1,624 $ 807 $ 499 $ 310
Retail energy operations 930 156 68 63
Wholesale services 182 139 49 90
Energy investments 41 36 26 10
Corporate (2) (156 ) 1 9 (9 )
Consolidated $ 2,621 $ 1,139 $ 651 $ 464
|
(1) These are non-GAAP measurements. A reconciliation of operating margin, earnings before income taxes and EBIT to our operating income and net income is contained in " Results of Operations " herein.
(2) Includes intercompany eliminations
Operating margin Our operating margin in 2008 increased by $21 million or 2% compared to 2007 primarily due to higher operating margins at wholesale services and energy investments segments, partially offset by decreased operating margin at our retail energy operations segment. In 2007 our operating margin decreased $14 million or 1% compared to 2006 primarily due to lower operating margin at our wholesale services segment.
Distribution operations The 2008 operating margin for distribution operations decreased by $2 million, compared to 2007, primarily due to lower customer growth and use of natural gas, offset by an increase in revenues from Atlanta Gas Light's pipeline replacement program (PRP).
Distribution operations' 2007 operating margin increased $13 million or 2% compared to 2006 primarily due to an increase in customers and slightly overall higher customer use of natural gas. The following table indicates the significant changes in distribution operations' operating margin for 2008 and 2007.
In millions 2008 2007 Operating margin for prior year $ 820 $ 807 (Decreased) increased customer growth and use of natural gas (4 ) 8 Higher PRP revenues at Atlanta Gas Light 6 2 Base rate increase at Chattanooga Gas - 2 Other (4 ) 1 Operating margin for year $ 818 $ 820 |
Retail energy operations The 2008 operating margin for retail energy operations decreased $39 million or 21% compared to 2007. This was primarily due to a reduction of customers in Georgia, lower contributions from the optimization and management of storage and transportation assets and a $24 million LOCOM adjustment. Retail energy operations did not record a similar LOCOM adjustment in 2007. While 2008 was 16% colder than 2007, and 2007 was 4% warmer than 2006, retail energy operations use of weather derivatives largely offset the effects of weather in operating margin.
Retail energy operations' 2007 operating margin increased $32 million or 21% compared to 2006. This was primarily due to an increase in customer use of natural gas in Georgia and the combination of retail price spreads and contributions from the optimization of storage and transportation assets and commodity risk management activities. The following table indicates the significant changes in retail energy operations' operating margin for 2008 and 2007.
In millions 2008 2007 Operating margin for prior year $ 188 $ 156 Inventory LOCOM (24 ) 6 (Decreased) increased contributions from management and optimization of storage and transportation assets, and from retail price spreads (9 ) 12 (Decreased) increased average number of customers (8 ) 2 Pricing settlement with the Georgia Commission (3 ) - Increased operating margins in Ohio and Florida 2 3 Increased customer use of natural gas 1 8 Increased late payment fees - 2 Other 2 (1 ) Operating margin for year $ 149 $ 188 |
Wholesale services The 2008 operating margin for wholesale services increased $45 million or 58% compared to 2007. This increase was due to a $35 million increase in reported hedge gains and a $25 million increase in commercial activity, due in part to increased inventory storage and transportation spreads and higher volatility in the marketplace. These increases were partially offset by a $36 million increase in the required LOCOM adjustments to natural gas inventories for the year ended December 31, 2008, net of $21 million in estimated hedging recoveries.
. . .
|
|