Income Taxes
|
|
|
|
|
|
|
|
Third Quarter 2016 vs. Third Quarter 2015
|
|
Combined Year-to-Date 2016 vs. Year-to-Date 2015
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change)
|
$—
|
|
—%
|
|
$(56)
|
|
(37.3)%
|
In both the
third
quarters
2016
and 2015, income taxes were
$7 million
. For combined year-to-date
2016
, income taxes were
$94 million
compared to
$150 million
in the corresponding period in
2015
. The effective tax rates in 2016 were impacted by the nondeductibility of certain Merger-related expenses and other charges, which were re-assessed in the second and third quarters 2016 and resulted in additional income tax expense of $11 million for combined year-to-date 2016. Also contributing to the decrease were lower pre-tax earnings.
See Note
(G)
to the Condensed Consolidated Financial Statements herein for additional information regarding income taxes.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Segment Information
Operating margin, operating expenses, and EBIT information for each of Southern Company Gas' segments is contained in the tables below. A reconciliation of operating revenue and operating margin to operating income and EBIT to income before income taxes and net income is contained in "
Combined Operating Results
" herein. See Note
(J)
to the Condensed Consolidated Financial Statements herein for additional segment information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Third Quarter 2016
|
|
|
Third Quarter 2015
|
|
|
Operating margin
(*)
|
|
Operating expenses
(*)
|
|
EBIT
|
|
|
Operating margin
(*)
|
|
Operating expenses
(*)
|
|
EBIT
|
|
|
(in millions)
|
|
|
(in millions)
|
Gas distribution operations
|
|
$
|
353
|
|
|
$
|
284
|
|
|
$
|
75
|
|
|
|
$
|
341
|
|
|
$
|
256
|
|
|
$
|
86
|
|
Gas marketing services
|
|
45
|
|
|
51
|
|
|
(6
|
)
|
|
|
48
|
|
|
37
|
|
|
11
|
|
Wholesale gas services
|
|
(8
|
)
|
|
10
|
|
|
(17
|
)
|
|
|
33
|
|
|
15
|
|
|
18
|
|
Gas midstream operations
|
|
9
|
|
|
13
|
|
|
25
|
|
|
|
9
|
|
|
25
|
|
|
(16
|
)
|
All other
|
|
2
|
|
|
31
|
|
|
(27
|
)
|
|
|
—
|
|
|
39
|
|
|
(37
|
)
|
Intercompany eliminations
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
Consolidated
|
|
$
|
400
|
|
|
$
|
388
|
|
|
$
|
50
|
|
|
|
$
|
430
|
|
|
$
|
371
|
|
|
$
|
62
|
|
|
|
(*)
|
Operating margin and operating expenses are adjusted for revenue tax expenses, which are passed through directly to customers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Predecessor
|
|
|
Year-to-Date 2016
|
|
|
Year-to-Date 2015
|
|
|
Operating margin
(*)
|
|
Operating expenses
(*)
|
|
EBIT
|
|
|
Operating margin
(*)
|
|
Operating expenses
(*)
|
|
EBIT
|
|
|
(in millions)
|
|
|
(in millions)
|
Gas distribution operations
|
|
$
|
1,264
|
|
|
$
|
844
|
|
|
$
|
428
|
|
|
|
$
|
1,213
|
|
|
$
|
798
|
|
|
$
|
420
|
|
Gas marketing services
|
|
235
|
|
|
132
|
|
|
103
|
|
|
|
237
|
|
|
122
|
|
|
115
|
|
Wholesale gas services
|
|
(44
|
)
|
|
43
|
|
|
(85
|
)
|
|
|
118
|
|
|
52
|
|
|
66
|
|
Gas midstream operations
|
|
24
|
|
|
37
|
|
|
19
|
|
|
|
27
|
|
|
48
|
|
|
(20
|
)
|
All other
|
|
6
|
|
|
96
|
|
|
(87
|
)
|
|
|
4
|
|
|
49
|
|
|
(41
|
)
|
Intercompany eliminations
|
|
(5
|
)
|
|
(5
|
)
|
|
—
|
|
|
|
(4
|
)
|
|
(4
|
)
|
|
—
|
|
Consolidated
|
|
$
|
1,480
|
|
|
$
|
1,147
|
|
|
$
|
378
|
|
|
|
$
|
1,595
|
|
|
$
|
1,065
|
|
|
$
|
540
|
|
|
|
(*)
|
Operating margin and operating expenses are adjusted for revenue tax expenses, which are passed through directly to customers.
|
Gas Distribution Operations
The gas distribution operations segment is the largest component of Southern Company Gas' business and is subject to regulation and oversight by agencies in each of the states it serves. These agencies approve natural gas rates designed to provide Southern Company Gas the opportunity to generate revenues to recover the cost of natural gas delivered to its customers and its fixed and variable costs, such as depreciation, interest, maintenance and overhead costs, and to earn a reasonable return on its investments.
With the exception of Atlanta Gas Light, Southern Company Gas' second largest utility that operates in a deregulated natural gas market and has a straight-fixed-variable rate design that minimizes the variability of its revenues based on consumption, the earnings of Southern Company Gas' 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 customers’ ability to pay for natural gas consumed. Southern Company Gas has various weather mechanisms, such as weather normalization mechanisms and weather derivative instruments, that limit its exposure to weather changes within typical ranges in its respective service areas. Gas distribution operations' EBIT
decreased
by
$11 million
for the
third
quarter
2016
and
increased
by
$8 million
for combined year-to-date
2016
compared to the corresponding periods in
2015
, as shown in the following table.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
Combined
Year-to-Date
|
|
|
(in millions)
|
EBIT – September 30, 2015
|
|
$
|
86
|
|
|
$
|
420
|
|
Operating margin
|
|
|
|
|
|
|
Increase from pipeline infrastructure programs, primarily at Atlanta Gas Light and Nicor Gas
|
|
19
|
|
|
55
|
|
Decrease in rider program recoveries at Nicor Gas, offset by operating expenses below
|
|
(7
|
)
|
|
—
|
|
Increase mainly driven by non-weather-related customer usage and growth
|
|
—
|
|
|
11
|
|
Decrease in weather-related customer usage, net of weather hedges
|
|
—
|
|
|
(15
|
)
|
Increase in operating margin
|
|
12
|
|
|
51
|
|
Operating expenses
|
|
|
|
|
|
|
Increase due to customer rate credits at Elizabethtown Gas in accordance with Merger approval
|
|
18
|
|
|
18
|
|
Increase in other expenses primarily due to pipeline compliance and maintenance costs
|
|
8
|
|
|
16
|
|
Increase in depreciation due to additional assets placed in service
|
|
7
|
|
|
20
|
|
Increase in variable incentive compensation costs
|
|
5
|
|
|
—
|
|
Decrease in benefit expenses primarily related to lower pension costs
|
|
(3
|
)
|
|
(8
|
)
|
Decrease in rider program recoveries at Nicor Gas, offset by operating margin above
|
|
(7
|
)
|
|
—
|
|
Increase in operating expenses
|
|
28
|
|
|
46
|
|
Increase in other income primarily due to tax gross-up of contributions received from customers
|
|
5
|
|
|
3
|
|
EBIT – September 30, 2016
|
|
$
|
75
|
|
|
$
|
428
|
|
Gas Marketing Services
The gas marketing services segment consists of several businesses that provide energy-related products and services to natural gas markets. Gas marketing services is weather sensitive and uses a variety of hedging strategies, such as weather derivative instruments and other risk management tools, to partially mitigate potential weather impacts. For the
third
quarter and combined year-to-date
2016
, gas marketing services' EBIT
decreased
by
$17 million
and
$12 million
, respectively, compared to the corresponding periods in
2015
, as shown in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
Combined
Year-to-Date
|
|
|
(in millions)
|
EBIT – September 30, 2015
|
|
$
|
11
|
|
|
$
|
115
|
|
Operating margin
|
|
|
|
|
|
|
Increase in value of unrealized hedge movement as a result of changes in NYMEX natural gas prices, net of recoveries
|
|
2
|
|
|
1
|
|
Increase in warranty margins, including the impact of warranty service contracts acquired in the second half of 2015
|
|
2
|
|
|
6
|
|
Increase (decrease) in gas marketing margins
|
|
(3
|
)
|
|
3
|
|
Decrease in warranty margins due to purchase accounting adjustments to eliminate deferred revenues
|
|
(4
|
)
|
|
(4
|
)
|
LOCOM adjustments, net of recoveries
|
|
—
|
|
|
(1
|
)
|
Decrease in weather-related customer usage, net of weather hedging
|
|
—
|
|
|
(4
|
)
|
Decrease in interruptible commercial opportunities
|
|
—
|
|
|
(3
|
)
|
Decrease in operating margin
|
|
(3
|
)
|
|
(2
|
)
|
Operating expenses
|
|
|
|
|
|
|
Increase in depreciation and amortization primarily due to intangible asset amortization from purchase accounting adjustments
|
|
11
|
|
|
10
|
|
Increase in other expenses, primarily marketing, payroll and bad debt expense
|
|
3
|
|
|
—
|
|
Increase in operating expenses
|
|
14
|
|
|
10
|
|
EBIT – September 30, 2016
|
|
$
|
(6
|
)
|
|
$
|
103
|
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Wholesale Gas Services
The wholesale gas services segment is involved in asset management and optimization, storage, transportation, producer and peaking services, natural gas supply, natural gas services, and wholesale gas marketing. Southern Company Gas has positioned the business to generate positive economic earnings even under low volatility market conditions that can result from a number of factors. When market price volatility increases, as was experienced in 2015, wholesale gas services is well positioned to capture significant value and generate stronger results. Wholesale gas services generated strong economic results for both the
third
quarter and combined year-to-date
2016
primarily due to capturing natural gas storage value resulting from widening forward storage seasonal spreads that will be realized upon the ultimate withdrawal from storage and sale of natural gas. For the
third
quarter and combined year-to-date
2016
, EBIT
decreased
by
$35 million
and
$151 million
, respectively, compared to the corresponding periods in
2015
, as shown in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
Combined
Year-to-Date
|
|
|
(in millions)
|
EBIT – September 30, 2015
|
|
$
|
18
|
|
|
$
|
66
|
|
Operating margin
|
|
|
|
|
|
|
LOCOM adjustments, net of recoveries
|
|
2
|
|
|
8
|
|
Decrease in mark-to-market gains of storage derivatives as a result of changes in NYMEX natural gas prices
|
|
(8
|
)
|
|
(44
|
)
|
Decrease in mark-to-market gains for third quarter and increase in mark-to-market losses for combined year-to-date of transportation and forward commodity derivatives from price movements related to natural gas transportation positions
|
|
(14
|
)
|
|
(31
|
)
|
Decrease due to purchase accounting adjustments to fair value inventory and contracts
|
|
(22
|
)
|
|
(22
|
)
|
Increase (decrease) in commercial activity driven by changes in price volatility
|
|
1
|
|
|
(73
|
)
|
Decrease in operating margin
|
|
(41
|
)
|
|
(162
|
)
|
Operating expenses
|
|
|
|
|
|
Decrease in payroll and benefits driven largely by incentive compensation due to year-over-year changes in earnings and capture of natural gas storage value
|
|
(4
|
)
|
|
(9
|
)
|
Other
|
|
(1
|
)
|
|
—
|
|
Decrease in operating expenses
|
|
(5
|
)
|
|
(9
|
)
|
Increase in other income due to favorable property tax refund settlement
|
|
1
|
|
|
2
|
|
EBIT – September 30, 2016
|
|
$
|
(17
|
)
|
|
$
|
(85
|
)
|
The following table illustrates the components of wholesale gas services' operating margin for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
Combined Year-to-Date
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
(in millions)
|
Commercial activity recognized
|
|
$
|
10
|
|
|
$
|
9
|
|
|
$
|
38
|
|
|
$
|
111
|
|
Gain (loss) on storage derivatives
|
|
11
|
|
|
19
|
|
|
(23
|
)
|
|
21
|
|
Gain (loss) on transportation and forward commodity derivatives
|
|
(7
|
)
|
|
7
|
|
|
(37
|
)
|
|
(6
|
)
|
LOCOM adjustments, net of recoveries
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
(8
|
)
|
Purchase accounting adjustments to fair value inventory and contracts
|
|
(22
|
)
|
|
—
|
|
|
(22
|
)
|
|
—
|
|
Operating margin
|
|
$
|
(8
|
)
|
|
$
|
33
|
|
|
$
|
(44
|
)
|
|
$
|
118
|
|
Change in commercial activity
The commercial activity at wholesale gas services includes recognized storage and transportation values that were generated in prior periods, which reflect the impact of prior period hedge gains and losses as associated physical transactions occur in the period. Additionally, the commercial activity includes operating margin generated and recognized in the current period. For combined year-to-date
2016
, commercial activity
decreased
due to:
|
|
•
|
Lower price volatility as compared to the high volatility experienced in
2015
as a result of colder-than-normal weather;
|
|
|
•
|
Lower transportation and storage spreads experienced primarily in the second quarter
2016
; and
|
|
|
•
|
Higher operating margin resulting from the withdrawal of storage inventory hedged at the end of
2015
that was included in the storage withdrawal schedule.
|
Increases in natural gas supply and warmer-than-normal weather during the 2015/2016 Heating Season and the resulting higher natural gas inventories at the end of 2015 caused natural gas prices to decline in the early part of 2016. However, as natural gas prices and forward storage or time spreads increased largely in the first half of 2016, wholesale gas services was able to capture higher storage values to accommodate the increase in natural gas supply. While wholesale gas services experienced unusually
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
high volatility in natural gas prices in early 2015 and low volatility in 2016 due partly to weather, in the near term it anticipates continued low volatility in certain areas of its portfolio.
Change in storage and transportation derivatives
There has been little price volatility to date in
2016
; however, the potential for market fundamentals indicating some level of increased volatility that would potentially benefit its portfolio of pipeline transportation capacity exists. The storage derivative gains in the third quarter 2016 are mainly due to a moderate decrease in forward natural gas prices. The combined year-to-date storage derivative
losses
, primarily recorded in the second quarter 2016, are mainly due to increases in natural gas prices and forward storage or time spreads applicable to the locations of wholesale gas services' specific storage positions.
Losses
in the transportation and forward commodity derivative positions in the third quarter and combined year-to-date
2016
are primarily the result of widening transportation basis spreads due to continued supply constraints and increases in natural gas supply, which impacted forward prices at natural gas receipt and delivery points, primarily in the Northeast and Midwest regions.
Withdrawal schedule and physical transportation transactions
The expected natural gas withdrawals from storage and expected offset to prior hedge losses/gains associated with the transportation portfolio of wholesale gas services are presented in the following table, along with the net operating revenues expected at the time of withdrawal from storage and the physical flow of natural gas between contracted transportation receipt and delivery points. Wholesale gas services’ expected net operating revenues exclude storage and transportation demand charges, as well as other variable fuel, withdrawal, receipt, and delivery charges, but are net of the estimated impact of profit sharing under its asset management agreements. Further, the amounts that are realizable in future periods are based on the inventory withdrawal schedule, planned physical flow of natural gas between the transportation receipt and delivery points, and forward natural gas prices at
September 30, 2016
. A portion of wholesale gas services’ storage inventory and transportation capacity is economically hedged with futures contracts, which results in the realization of substantially fixed net operating revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Storage withdrawal schedule
|
|
|
|
|
Total storage
(WACOG $2.66)
|
|
Expected net operating gains
(a)
|
|
Physical transportation transactions – expected net operating gains
(b)
|
|
|
(in mmBtu in millions)
|
|
(in millions)
|
|
(in millions)
|
2016
|
|
19.0
|
|
|
$
|
5
|
|
|
$
|
10
|
|
2017 and thereafter
|
|
43.6
|
|
|
21
|
|
|
27
|
|
Total at September 30, 2016
|
|
62.6
|
|
|
$
|
26
|
|
|
$
|
37
|
|
|
|
(a)
|
Represents expected operating gains from planned storage withdrawals associated with existing inventory positions and could change as wholesale gas services adjusts its daily injection and withdrawal plans in response to changes in future market conditions and forward NYMEX price fluctuations. Also includes the impact of purchase accounting adjustments to reflect natural gas storage inventory at its market value. Excluding the impact of these adjustments, the expected net operating gains at September 30, 2016 would have been $60 million.
|
|
|
(b)
|
Represents the periods associated with the transportation derivative losses during which the derivatives will be settled and the physical transportation transactions will occur that offset the derivative losses that were previously recognized.
|
The unrealized storage and transportation derivative losses do not change the underlying economic value of wholesale gas services' storage and transportation positions and, based on current expectations, will primarily be reversed in
2017
and the balance thereafter when the related transactions occur and are recognized. For more information on wholesale gas services’ energy marketing and risk management activities, see Quantitative and Qualitative Disclosures About Market Risk – "Weather and Natural Gas Price Risks" of Southern Company Gas in Item 7A of the Form 10-K.
Gas Midstream Operations
The gas midstream operations segment’s primary activity is owning and/or operating non-utility pipelines and storage facilities, including the development and operation of high-deliverability underground natural gas storage and pipeline assets. While this business can also generate additional revenue during times of peak market demand for natural gas storage services, certain of its storage services are covered under short-, medium-, and long-term contracts at fixed market rates. For the
third
quarter and combined year-to-date
2016
, gas midstream operations' EBIT
increased
by
$41 million
and
$39 million
, respectively. These
increases
were primarily due to
$27 million
of earnings from the equity method investment in SNG and a
$14 million
goodwill impairment charge recorded in the third quarter 2015. See Notes
(I)
and
(K)
to the Condensed Consolidated Financial Statements herein for additional information relating to this investment.
All Other
All other includes Southern Company Gas' investment in Triton, AGL Services Company, and Southern Company Gas Capital as well as various corporate operating expenses that are not allocated to the reportable segments. For the
third
quarter and combined year-to-date
2016
, these operating expenses included Merger-related expenses of
$17 million
and
$73 million
, respectively, compared to
$35 million
for the corresponding periods in 2015. As discussed herein, these expenses are primarily comprised of financial advisory and legal expenses, and additional compensation-related expenses, including acceleration of share-based compensation expenses and change in control compensation charges. Also included in the
third
quarter and
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
combined year-to-date
2016
in operating expenses was
$8 million
in additional expense associated with certain benefit arrangements.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Southern Company Gas' future earnings potential. The level of Southern Company Gas' future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Southern Company Gas' primary business of natural gas distribution and complementary businesses in the gas marketing services, wholesale gas services, and gas midstream operations sectors. These factors include Southern Company Gas' ability to maintain a constructive regulatory environment that allows for the timely recovery of prudently-incurred costs, the completion and subsequent operation of ongoing infrastructure and other construction projects, creditworthiness of customers, Southern Company Gas' ability to optimize its transportation and storage positions, and its ability to re-contract storage rates at favorable prices. Future earnings in the near term will depend, in part, upon maintaining and growing sales and customers which are subject to a number of factors. These factors include weather, competition, new energy contracts with other utilities, energy conservation practiced by customers, the use of alternative energy sources by customers, the price of natural gas, the price elasticity of demand, and the rate of economic growth or decline in Southern Company Gas' service territories. Demand for natural gas is primarily driven by economic growth. The pace of economic growth and natural gas demand may be affected by changes in regional and global economic conditions, which may impact future earnings.
Volatility of natural gas prices has a significant impact on Southern Company Gas' customer rates, long-term competitive position against other energy sources, and the ability of Southern Company Gas' gas marketing services and wholesale gas services segments to capture value from locational and seasonal spreads. Additionally, changes in commodity prices subject a significant portion of Southern Company Gas' operations to earnings variability.
Over the longer term, Southern Company Gas expects volatility to be low to moderate and locational and/or transportation spreads to decrease as new pipelines are built to reduce the existing supply constraints in the shale areas of the Northeast U.S. To the extent these pipelines are delayed or not built, volatility could increase. Additional economic factors may contribute to this environment, including a significant drop in oil and natural gas prices, which could lead to consolidation of natural gas producers or reduced levels of natural gas production. Further, if economic conditions continue to improve, including the new housing market, the demand for natural gas may increase, which may cause natural gas prices to rise and drive higher volatility in the natural gas markets on a longer-term basis.
For additional information relating to these issues, see "Risk Factors" of Southern Company Gas in Item 1A and "Business" of Southern Company Gas in Item 1 of the Form 10-K.
On September 1, 2016, Southern Company Gas acquired a 50% equity interest in SNG. See
OVERVIEW
– "
Investment in SNG
" and Notes
(I)
and
(K)
to the Condensed Consolidated Financial Statements herein for information on this investment.
Environmental Matters
Compliance costs related to federal and state environmental statutes and regulations could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis or through market-based contracts. Environmental compliance spending over the next several years may differ materially from the amounts estimated. The timing, specific requirements, and estimated costs could change as environmental statutes and regulations are adopted or modified, as compliance plans are revised or updated, and as legal challenges to rules are completed. Further, higher costs that are recovered through regulated rates could contribute to reduced demand for natural gas, which could negatively affect results of operations, cash flows, and financial condition. See Note
(B)
under "Environmental Remediation" to the Condensed Consolidated Financial Statements herein for additional information.
FERC Matters
Southern Company Gas is involved in three significant pipeline projects within its gas midstream operations segment. Southern Company Gas received FERC approval for the Dalton Pipeline on August 3, 2016 and began construction of the 115-mile project in September 2016. FERC approval is expected for the Atlantic Coast Pipeline and PennEast Pipeline in 2017. As a result of this updated timing, and due to other factors such as increased costs for materials and labor, capital expenditures may exceed Southern Company Gas' initial expectations. The ultimate outcome of these matters cannot be determined at this time.
Regulatory Matters
See "Business" of Southern Company Gas in Item 1 of the Form 10-K for additional information on Southern Company Gas' regulatory matters.
Natural Gas Cost Recovery
Southern Company Gas has established natural gas cost recovery rates approved by the relevant state regulatory agencies in the states in which it serves. Natural gas cost recovery revenues are adjusted for differences in actual recoverable natural gas costs and amounts billed in current regulated rates. Accordingly, changes in the billing factor will not have a significant effect on Southern Company Gas' revenues or net income, but will affect cash flows. See Note
(B)
to the Condensed Consolidated Financial Statements under "
Regulatory Matters
"
herein for additional information.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Gas Cost Prudence Review
In 2014, the Illinois Commission Staff and the CUB filed testimony in the Nicor Gas 2003 gas cost prudence review disputing certain gas loan transactions offered by Nicor Gas under its Chicago Hub services and requested refunds of $18 million and $22 million, respectively. Nicor Gas filed surrebuttal testimony later in 2014 disputing that any refund was due, as Nicor Gas was authorized to enter into these transactions and revenues associated with such transactions reduced ratepayers’ costs as either credits to the purchased gas adjustment or reductions to base rates consistent with then-current Illinois Commission orders governing these activities. In July 2015, the administrative law judge issued a proposed order concluding that Nicor Gas’ supply costs and purchases in 2003 were prudent, its reconciliation of the related costs was proper, and the propositions by the Illinois Commission Staff and the CUB were based on hindsight speculation, which is expressly prohibited in a prudence review examination. In November 2015, the Illinois Commission granted the CUB's petition for a rehearing on this matter. On February 10, 2016, the administrative law judge issued a proposed order on the rehearing affirming the original order by the Illinois Commission, which was approved by the Illinois Commission on March 23, 2016 and concluded this matter.
The Illinois Commission approved the purchase gas adjustments for the years 2004 through 2007 on August 9, 2016, and years 2008 and 2009 on August 24, 2016. As a condition of these approvals, Nicor Gas agreed to revise the way in which interest is reflected in the calculations beginning in 2013. Southern Company Gas does not expect this to have a material impact on its consolidated financial statements. The gas cost prudence reviews for years 2010 through 2015 are underway. The ultimate outcome of these matters cannot be determined at this time.
Base Rate Case
On September 1, 2016, Elizabethtown Gas filed a general base rate case with the New Jersey BPU as required under its Aging Infrastructure Replacement (AIR) program, requesting an additional revenue requirement of
$19 million
, which reflects an allowed return on equity of
10.25%
. Southern Company Gas expects the New Jersey BPU to issue an order on the filing in the third quarter 2017. The ultimate outcome of this matter cannot be determined at this time.
Asset Management Agreement
On April 14, 2016, as part of its approval order for the Merger, the Georgia PSC approved an extension of Atlanta Gas Light's asset management agreement with Sequent to March 31, 2020.
Regulatory Infrastructure Programs
Southern Company Gas is engaged in various infrastructure programs that update or expand its gas distribution systems to improve reliability and ensure the safety of its utility infrastructure, and recovers in rates its investment and a return associated with these infrastructure programs.
Nicor Gas
In 2014, the Illinois Commission approved Nicor Gas' nine-year regulatory infrastructure program, Investing in Illinois. Nicor Gas expects to invest $290 million on qualifying assets under this program during
2016
,
$207 million
of which was incurred during the combined year-to-date
2016
.
Atlanta Gas Light
Atlanta Gas Light's Strategic Infrastructure Development and Enhancement (STRIDE) program, which started in 2009, consists of three individual programs that update and expand gas distribution systems and liquefied natural gas facilities as well as improve system reliability to meet operational flexibility and customer growth. Through the programs under STRIDE, Atlanta Gas Light expects to invest
$143 million
during
2016
,
$100 million
of which was incurred during combined year-to-date
2016
.
On August 1, 2016, Atlanta Gas Light filed a petition with the Georgia PSC for approval of a four-year extension of its Integrated System Reinforcement Program seeking approval to invest an additional
$177 million
to improve and upgrade its core gas distribution system in years 2017 through 2020. The ultimate outcome of this matter cannot be determined at this time.
Elizabethtown Gas
In September 2015, Elizabethtown Gas filed the Safety, Modernization and Reliability Tariff plan with the New Jersey BPU seeking approval to invest more than
$1.1 billion
to replace
630
miles of vintage cast iron, steel, and copper pipeline, as well as
240
regulator stations. If approved as filed, the program is expected to be completed by 2027. As currently proposed, costs incurred under the program would be recovered primarily through a rider surcharge over a period of 10 years. A regulatory order is expected to be issued on this filing in the first half of 2017. The ultimate outcome of this matter cannot be determined at this time.
The New Jersey BPU approved the extension of Elizabethtown Gas' AIR program in 2013, under which Elizabethtown Gas expects to invest
$29 million
in
2016
,
$16 million
of which was incurred during the combined year-to-date
2016
.
Virginia Natural Gas
On March 9, 2016
, the Virginia Commission approved the Steps to Advance Virginia's Energy II program, under which Virginia Natural Gas expects to invest
$32 million
on qualifying infrastructure projects in
2016
,
$25 million
of which was incurred during the combined year-to-date
2016
, and up to
$35 million
annually thereafter through 2021 to replace more than
200
miles
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
of aging pipeline infrastructure. In accordance with the order approving the program, Virginia Natural Gas may exceed the total allowed program expenditures by up to $5 million, a portion of which is expected to be used in 2016.
Florida City Gas
The Florida Public Service Commission approved Florida City Gas' Safety, Access and Facility Enhancement program in September 2015. Under the program, Florida City Gas expects to spend
$10 million
in
2016
,
$8 million
of which was incurred during the combined year-to-date
2016
.
Other Matters
Southern Company Gas is involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Southern Company Gas is subject to certain claims and legal actions arising in the ordinary course of business.
The ultimate outcome of such pending or potential litigation against Southern Company Gas cannot be predicted at this time; however, for current proceedings not specifically reported in Note
(B)
to the Condensed Consolidated Financial Statements herein or in Note 12 to the consolidated financial statements of Southern Company Gas in Item 8 of the Form 10-K, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on Southern Company Gas' financial statements. See Note
(B)
to the Condensed Consolidated Financial Statements herein for a discussion of various other contingencies and regulatory matters, and other matters being litigated which may affect future earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Southern Company Gas prepares its consolidated financial statements in accordance with GAAP. Significant accounting policies are described in Note 3 to the consolidated financial statements of Southern Company Gas in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Southern Company Gas' results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See Management's Discussion and Analysis – "Critical Accounting Policies and Estimates" of Southern Company Gas in Item 7 of the Form 10-K for a complete discussion of Southern Company Gas' critical accounting policies and estimates related to Rate-Regulated Subsidiaries, Goodwill, Long-Lived and Intangible Assets, Derivatives and Hedging Activities, Contingencies, Pension and Welfare Plans, and Income Taxes.
Recently Issued Accounting Standards
On November 20, 2015, the FASB issued ASU No. 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
(ASU 2015-17), which simplifies the presentation of deferred income taxes. ASU 2015-17 requires deferred tax assets and liabilities to be presented as non-current in a classified balance sheet and is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. As permitted, Southern Company Gas elected to early adopt the guidance as of September 30, 2016 and applied its provisions retrospectively to each prior period presented for comparative purposes. Prior to the adoption of ASU 2015-17, all deferred income tax assets and liabilities were required to be separated into current and non-current amounts. The new guidance resulted in a reclassification of
$31 million
deferred income taxes, current to non-current accumulated deferred income taxes in Southern Company Gas' December 31, 2015 balance sheet. Other than the reclassification, the adoption of ASU 2015-17 did not have an impact on the results of operations, financial position, or cash flows of Southern Company Gas.
On February 25, 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
(ASU 2016-02). ASU 2016-02 requires lessees to recognize on the balance sheet a lease liability and a right-of-use asset for all leases. ASU 2016-02 also changes the recognition, measurement, and presentation of expense associated with leases and provides clarification regarding the identification of certain components of contracts that would represent a lease. The accounting required by lessors is relatively unchanged. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. Southern Company Gas is currently evaluating the new standard and has not yet determined its ultimate impact; however, adoption of ASU 2016-02 is expected to have a significant impact on Southern Company Gas' balance sheet.
On March 30, 2016, the FASB issued ASU No. 2016-09,
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(ASU 2016-09). ASU 2016-09 changes the accounting for income taxes and the cash flow presentation for share-based payment award transactions. Most significantly, entities are required to recognize all excess tax benefits and deficiencies related to the exercise or vesting of stock compensation as income tax expense or benefit in the income statement. Southern Company Gas currently recognizes any excess tax benefits and deficiencies related to the exercise and vesting of stock compensation in additional paid-in capital. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted and Southern Company Gas intends to adopt the ASU in the fourth quarter 2016. The adoption is not expected to have a material impact on the results of operations, financial position, or cash flows of Southern Company Gas.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY
Overview
See Management’s Discussion and Analysis – Liquidity and Capital Resources – "Overview" of Southern Company Gas in Item 7 of the Form 10-K for additional information. As a result of the Merger that closed on July 1, 2016, the results reported herein include disclosure of the combined predecessor and successor periods. The combined data consists of predecessor information for the period
January 1, 2016 through June 30, 2016
and successor information for the period
July 1, 2016 through September 30, 2016
. See
OVERVIEW
– "
Merger With Southern Company
" herein for additional information.
Southern Company Gas' financial condition remained stable at
September 30, 2016
. Southern Company Gas intends to continue to monitor its access to short-term and long-term capital markets as well as bank credit agreements to meet future capital and liquidity needs. See "
Capital Requirements and Contractual Obligations
," "
Sources of Capital
," and "
Financing Activities
" herein for additional information.
By regulation, Nicor Gas is restricted, to the extent of its retained earnings balance, in the amount it can dividend or loan to affiliates and is not permitted to make money pool loans to affiliates. Elizabethtown Gas is restricted by its dividend policy as established by the New Jersey BPU in the amount it can dividend to its parent company to the extent of 70% of its quarterly net income. Additionally, as stipulated in the New Jersey BPU's order approving the Merger, Southern Company Gas is prohibited from paying dividends to its parent company, Southern Company, if Southern Company Gas' senior unsecured debt rating falls below investment grade. As of September 30, 2016, the amount of subsidiary retained earnings and net income available to dividend totaled $649 million.
Net cash provided from operating activities totaled
$0.8 billion
for combined year-to-date
2016
compared to
$1.4 billion
for the corresponding period in
2015
. The
decrease
was primarily due to lower volume of natural gas sales and higher natural gas for sale during 2016 compared to 2015 as a result of warmer weather and the timing of recoveries of related gas costs and weather normalization adjustments from customers. Additionally, a voluntary pension contribution was made during the third quarter 2016. Net cash used for investing activities totaled
$2.3 billion
for combined year-to-date
2016
primarily due to investments in Southern Company Gas' ownership interest in SNG and infrastructure programs as well as spending for other rate-based investments at gas distribution operations. Net cash provided from financing activities totaled
$1.5 billion
for combined year-to-date
2016
primarily due to capital contributions received from Southern Company to fund the investment in SNG and proceeds received from debt issuances in 2016. Cash flows from financing activities vary from period to period based on capital needs and the maturity or redemption of securities.
Significant balance sheet changes for combined year-to-date
2016
include increases of
$7.0 billion
in paid-in capital,
$4.1 billion
in goodwill associated with the Merger,
$2.0 billion
in long-term debt primarily related to issuances of senior notes and first mortgage bonds,
$1.5 billion
in equity investments in unconsolidated subsidiaries related to the investment in SNG, and
$0.5 billion
in property, plant, and equipment due to capital expenditures at gas distribution operations, as well as a decrease of
$0.4 billion
in notes payable primarily due to the use of debt securities issuances for recent funding needs.
Capital Requirements and Contractual Obligations
See Management’s Discussion and Analysis – Liquidity and Capital Resources – "Cash Flow from Investing Activities" and "Contractual Obligations and Commitments" of Southern Company Gas in Item 7 of the Form 10-K for a description of Southern Company Gas' capital requirements for its infrastructure programs, scheduled maturities of long-term debt, as well as the related interest, environmental remediation obligations, pipeline charges, storage capacity and gas supply, leases, asset management agreements, standby letters of credit, performance/surety bonds, and other purchase commitments. Approximately
$142 million
will be required through
September 30, 2017
to fund maturities of long-term debt. See "
Sources of Capital
" herein for additional information.
Southern Company Gas' capital investment is currently estimated to total $1.7 billion for 2017, $1.8 billion for 2018, $1.7 billion for 2019, $1.3 billion for 2020, and $1.2 billion for 2021.
The regulatory infrastructure programs and other construction programs are subject to periodic review and revision, and actual costs may vary from these estimates because of numerous factors. These factors include: changes in business conditions; changes in FERC rules and regulations; state regulatory approvals; changes in legislation; the cost and efficiency of labor, equipment, and materials; project scope and design changes; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered. See Note 4 to the consolidated financial statements of Southern Company Gas in Item 8 of the Form 10-K and Note
(B)
to the Condensed Consolidated Financial Statements herein for information regarding additional factors that may impact infrastructure investment expenditures.
Sources of Capital
Southern Company Gas plans to obtain the funds to meet its future capital needs through operating cash flows, short-term debt borrowings under its commercial paper programs, external securities issuances, and equity contributions from Southern Company. However, the amount, type, and timing of any future financings, if needed, depend upon regulatory approval, prevailing market conditions, and other factors. See Management’s Discussion and Analysis – "Liquidity and Capital Resources" of Southern Company Gas in Item 7 of the Form 10-K for additional information.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As of
September 30, 2016
, Southern Company Gas' current liabilities exceeded current assets by
$562 million
, primarily due to commercial paper borrowings, the mandatorily redeemable noncontrolling interest that represents the amount paid in October 2016 to acquire Piedmont's interest in SouthStar, long-term debt that is due within one year, and significant seasonal fluctuations in cash needs. Southern Company Gas intends to utilize operating cash flows, commercial paper, and debt securities issuances, as market conditions permit, and equity contributions from Southern Company to fund its short-term capital needs. Southern Company Gas has substantial cash flow from operating activities and access to the capital markets and financial institutions to meet liquidity needs.
At
September 30, 2016
, Southern Company Gas had approximately
$48 million
of cash and cash equivalents. Committed credit arrangements with banks at
September 30, 2016
were as follows:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expires
|
|
|
|
|
Company
|
|
2017
|
|
2018
|
|
Total
|
|
Unused
|
|
|
(in millions)
|
|
(in millions)
|
Southern Company Gas Capital
|
|
$
|
49
|
|
|
$
|
1,251
|
|
|
$
|
1,300
|
|
|
$
|
1,247
|
|
Nicor Gas
|
|
26
|
|
|
674
|
|
|
700
|
|
|
700
|
|
Total
|
|
$
|
75
|
|
|
$
|
1,925
|
|
|
$
|
2,000
|
|
|
$
|
1,947
|
|
Additionally, Pivotal Utility Holdings is party to a series of loan agreements with the New Jersey Economic Development Authority and Brevard County, Florida under which five series of gas facility revenue bonds have been issued totaling
$200 million
.
See Note 9 to the consolidated financial statements of Southern Company Gas under "Short-term Debt" in Item 8 of the Form 10-K and Note
(E)
to the Condensed Consolidated Financial Statements under "Bank Credit Arrangements" herein for additional information.
The Southern Company Gas Credit Facility and Nicor Gas Credit Facility included in the table above each contain a covenant that limits the ratio of debt to capitalization (as defined in each Facility) to a maximum of 70% and contain cross acceleration provisions to other indebtedness (including guarantee obligations) of Southern Company Gas. Such cross acceleration provisions to other indebtedness would trigger an event of default if Southern Company Gas defaulted on indebtedness, the payment of which was then accelerated. Southern Company Gas is in compliance with all covenants in each facility. None of the bank credit arrangements contain material adverse change clauses at the time of borrowings.
Subject to applicable market conditions, Southern Company Gas expects to renew or replace its bank credit arrangements as needed, prior to expiration. In connection therewith, Southern Company Gas may extend the maturity dates and/or increase or decrease the lending commitments thereunder.
Southern Company Gas makes short-term borrowings primarily through commercial paper programs that have the liquidity support of the committed bank credit arrangements described above. Southern Company Gas may also borrow through various other arrangements with banks. Commercial paper borrowings are included in notes payable in the balance sheets.
Details of short-term borrowings were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term Debt at September 30, 2016
|
|
Short-term Debt During the Period
(*)
|
|
|
Amount
Outstanding
|
|
Weighted Average Interest Rate
|
|
Average Amount Outstanding
|
|
Weighted Average Interest Rate
|
|
Maximum Amount Outstanding
|
Commercial paper:
|
|
(in millions)
|
|
|
|
(in millions)
|
|
|
|
(in millions)
|
Southern Company Gas Capital
|
|
$
|
230
|
|
|
0.72
|
%
|
|
$
|
381
|
|
|
0.71
|
%
|
|
$
|
738
|
|
Nicor Gas
|
|
356
|
|
|
0.59
|
|
|
159
|
|
|
0.56
|
|
|
358
|
|
Total
|
|
$
|
586
|
|
|
0.64
|
%
|
|
$
|
540
|
|
|
0.67
|
%
|
|
|
|
|
(*)
|
Average and maximum amounts are based upon daily balances during the successor three-month period ended
September 30, 2016
.
|
Southern Company Gas believes the need for working capital can be adequately met by utilizing commercial paper programs, lines of credit, and operating cash flows.
Credit Rating Risk
Southern Company Gas does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade.
There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change below BBB- and/or Baa3. These contracts are for physical gas purchases and sales and energy price risk management. The maximum potential collateral requirements under these contracts at
September 30, 2016
was immaterial.
Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, a credit rating downgrade could impact the ability of Southern Company Gas to access capital markets, and would be likely to impact the cost at which it does so.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On May 12, 2016, Fitch revised its ratings outlook for Southern Company Gas from positive to stable. On July 11, 2016, in conjunction with the close of the Merger, S&P raised Southern Company Gas' and Nicor Gas' corporate and senior unsecured long-term debt ratings from BBB+ to A- and revised their ratings outlooks from positive to negative.
Financing Activities
The long-term debt on Southern Company Gas' consolidated balance sheets includes both principal and non-principal components. As of
September 30, 2016
, the non-principal component was
$583 million
, which consisted of the unamortized portions of the fair value adjustment recorded in purchase accounting, debt premiums, debt discounts, and debt issuance costs.
In February and May 2016,
$75 million
and
$50 million
, respectively, of Nicor Gas' first mortgage bonds matured and were repaid using the proceeds from commercial paper borrowings. In June 2016, Nicor Gas issued
$250 million
aggregate principal amount of first mortgage bonds with the following terms:
$100 million
at
2.66%
due June 20, 2026,
$100 million
at
2.91%
due June 20, 2031, and
$50 million
at
3.27%
due June 20, 2036. The proceeds were used to repay short-term indebtedness incurred under the Nicor Gas commercial paper program and for other working capital needs.
In May 2016, Southern Company Gas Capital issued
$350 million
aggregate principal amount of
3.250%
Senior Notes due June 15, 2026, which are guaranteed by Southern Company Gas. A portion of the proceeds were used to repay at maturity
$300 million
aggregate principal amount of
6.375%
Senior Notes due July 15, 2016, and the remaining proceeds were used for general corporate purposes.
In September 2016, Southern Company Gas Capital issued
$350 million
aggregate principal amount of
2.45%
Senior Notes due October 1, 2023 and
$550 million
aggregate principal amount of
3.95%
Senior Notes due October 1, 2046, both of which are guaranteed by Southern Company Gas. The proceeds were used to repay a
$360 million
promissory note issued to Southern Company for the purpose of funding a portion of the purchase price for Southern Company Gas' 50% equity interest in SNG, to fund the purchase of Piedmont's interest in SouthStar, to make a voluntary pension contribution, to repay at maturity
$120 million
aggregate principal amount of Series A Floating Rate Senior Notes due October 27, 2016, and for general corporate purposes.
The remaining purchase price of Southern Company Gas' investment in SNG was funded by a
$1.05 billion
equity contribution from Southern Company. See Note
(I)
to the Condensed Consolidated Financial Statements under "Investment in SNG" herein for additional information on the SNG investment.
The principal amounts of the long-term debt instruments issued in 2016 are due in 2023 and thereafter. Under these debt instruments, interest payments of
$10 million
will be made in the fourth quarter
2016
,
$50 million
will be made in 2017,
$49 million
will be made in each year 2018 through 2020, and
$733 million
will be made thereafter.
Certain of Southern Company Gas' senior notes with a principal amount of
$275 million
were subject to change in control provisions that were triggered by the Merger. Under the applicable Note Purchase Agreement, Southern Company Gas Capital was required to provide notice to the holders of these notes of the change in control and offer to prepay these notes in August 2016. None of the holders of these notes accepted the offer for prepayment. These senior notes, which were recorded as current portion of long-term debt as of June 30, 2016 include
$120 million
due October 27, 2016 and
$155 million
due October 27, 2018, will remain on their original payment schedules and the portion related to the notes due in 2018 has been reclassified to long-term debt in the balance sheet as of September 30, 2016.
In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Southern Company Gas plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Other than the items discussed below, there were no material changes to Southern Company Gas' disclosures about market risk during the combined
nine
months ended
September 30, 2016
. For an in-depth discussion of Southern Company Gas' market risks, see "Quantitative and Qualitative Disclosures About Market Risk" of Southern Company Gas in Item 7A of the Form 10-K. Also, see Notes
(C)
and
(H)
to the Condensed Consolidated Financial Statements herein for information relating to derivative instruments.
Southern Company Gas is exposed to market risks, primarily commodity price risk, interest rate risk, and weather risk. Due to various cost recovery mechanisms, the natural gas distribution utilities of Southern Company Gas that sell natural gas directly to its end-use customers have limited exposure to market volatility of natural gas prices. Certain natural gas distribution utilities of Southern Company Gas manage fuel-hedging programs implemented per the guidelines of their respective state regulatory agencies to hedge the impact of market fluctuations in natural gas prices for customers. For the weather risk associated with Nicor Gas, Southern Company Gas has a corporate weather hedging program that utilizes weather derivatives to reduce the risk of lower operating margins potentially resulting from significantly warmer-than-normal weather. In addition, certain non-regulated operations routinely utilize various types of derivative instruments to economically hedge certain commodity price and weather risks inherent in the natural gas industry. These instruments include a variety of exchange-traded and over-the-
counter energy contracts, such as forward contracts, futures contracts, options contracts, and swap agreements. Some of these economic hedge activities may not qualify, or are not designated, for hedge accounting treatment.
The following tables include the fair values and average values of Southern Company Gas' derivative instruments as of the dates indicated. Southern Company Gas bases the average values on monthly averages for the predecessor period
January 1, 2016 through June 30, 2016
, the successor period
July 1, 2016 through September 30, 2016
, and the predecessor
nine
months ended
September 30, 2015
:
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|
|
|
|
|
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Derivative instruments average values at
(*)
|
|
|
Successor
|
|
|
Predecessor
|
|
|
July 1, 2016 through September 30, 2016
|
|
|
January 1, 2016 through June 30, 2016
|
|
Nine Months Ended
September 30, 2015
|
|
|
(in millions)
|
|
|
(in millions)
|
|
(in millions)
|
Asset
|
|
$
|
144
|
|
|
|
$
|
168
|
|
|
$
|
185
|
|
Liability
|
|
79
|
|
|
|
69
|
|
|
87
|
|
(*) Excludes cash collateral amounts.
The following table illustrates the change in the net fair value of Southern Company Gas' derivative instruments during the periods presented, and provides details of the net fair value of contracts outstanding as of the dates presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
Successor
|
|
|
Predecessor
|
|
|
Three months ended September 30, 2016
|
|
|
Three months ended September 30, 2015
|
|
July 1, 2016, through September 30, 2016
|
|
|
January 1, 2016, through June 30, 2016
|
|
Nine months ended September 30, 2015
|
|
|
(in millions)
|
|
|
(in millions)
|
|
(in millions)
|
|
|
(in millions)
|
Contracts outstanding at beginning of period, assets (liabilities), net
|
|
$
|
(54
|
)
|
|
|
$
|
35
|
|
|
$
|
(54
|
)
|
|
|
$
|
75
|
|
|
$
|
61
|
|
Contracts realized or otherwise settled
|
|
(3
|
)
|
|
|
21
|
|
|
(3
|
)
|
|
|
(77
|
)
|
|
(17
|
)
|
Change in net fair value of derivative contracts
|
|
—
|
|
|
|
(35
|
)
|
|
—
|
|
|
|
(82
|
)
|
|
(23
|
)
|
Contracts outstanding at the end of period, assets (liabilities), net
|
|
(57
|
)
|
|
|
21
|
|
|
(57
|
)
|
|
|
(84
|
)
|
|
21
|
|
Netting of cash collateral
|
|
111
|
|
|
|
89
|
|
|
111
|
|
|
|
120
|
|
|
89
|
|
Cash collateral and net fair value of contracts outstanding at end of
period
(*)
|
|
$
|
54
|
|
|
|
$
|
110
|
|
|
$
|
54
|
|
|
|
$
|
36
|
|
|
$
|
110
|
|
|
|
(*)
|
Net fair value of derivative instruments outstanding includes premium and associated intrinsic value associated with weather derivatives of
$7 million
at
September 30, 2016
,
$5 million
at
June 30, 2016
, and
$6 million
at
September 30, 2015
.
|
The maturities of Southern Company Gas' energy-related derivative contracts at
September 30, 2016
were as follows:
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
Successor – September 30, 2016
|
|
|
Total
Fair Value
|
|
Maturity
|
|
|
|
Year 1
|
|
Years 2&3
|
|
Years 4 and thereafter
|
|
|
(in millions)
|
Level 1
(a)
|
|
$
|
(64
|
)
|
|
$
|
(19
|
)
|
|
$
|
(36
|
)
|
|
$
|
(9
|
)
|
Level 2
(b)
|
|
7
|
|
|
5
|
|
|
1
|
|
|
1
|
|
Fair value of contracts outstanding at end of period
(c)
|
|
$
|
(57
|
)
|
|
$
|
(14
|
)
|
|
$
|
(35
|
)
|
|
$
|
(8
|
)
|
|
|
(a)
|
Valued using NYMEX futures prices.
|
|
|
(b)
|
Valued using basis transactions that represent the cost to transport natural gas from a NYMEX delivery point to the contract delivery point. These transactions are based on quotes obtained either through electronic trading platforms or directly from brokers.
|
|
|
(c)
|
Excludes cash collateral of $111 million at September 30, 2016.
|
Value at Risk (VaR)
VaR is the maximum potential loss in portfolio value over a specified time period that is not expected to be exceeded within a given degree of probability. Southern Company Gas' VaR may not be comparable to that of other companies due to differences in the factors used to calculate VaR. Southern Company Gas' VaR is determined on a 95% confidence interval and a 1-day holding period, which means that 95% of the time, the risk of loss in a day from a portfolio of positions is expected to be less than or equal to the amount of VaR calculated. Southern Company Gas' open exposure is managed in accordance with established policies that limit market risk and require daily reporting of potential financial exposure to senior management, including the Chief Risk Officer. Because Southern Company Gas generally manages physical gas assets and economically protects its positions by hedging in the futures markets, Southern Company Gas' open exposure is generally mitigated. Southern Company Gas employs daily risk testing, using both VaR and stress testing, to evaluate the risk of its positions.
Southern Company Gas actively monitors open commodity positions and the resulting VaR. Southern Company Gas also continues to maintain a relatively small risk exposure as total buy volume is close to sell volume, with minimal open natural gas price risk. Based on a 95% confidence interval and employing a 1-day holding period, SouthStar’s portfolio of positions for the predecessor period
January 1, 2016 through June 30, 2016
, the successor period
July 1, 2016 through September 30, 2016
, and the predecessor
nine
months ended
September 30, 2015
was immaterial and wholesale gas services had the following VaRs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
Successor
|
|
|
Predecessor
|
|
|
Three months ended September 30, 2016
|
|
|
Three months ended September 30, 2015
|
|
July 1, 2016, through September 30, 2016
|
|
|
January 1, 2016, through June 30, 2016
|
|
Nine months ended September 30, 2015
|
|
|
(in millions)
|
|
|
(in millions)
|
|
(in millions)
|
|
|
(in millions)
|
Period end
|
|
$
|
1.8
|
|
|
|
$
|
2.0
|
|
|
$
|
1.8
|
|
|
|
$
|
1.9
|
|
|
$
|
2.0
|
|
Average
|
|
2.0
|
|
|
|
2.6
|
|
|
2.0
|
|
|
|
2.0
|
|
|
3.4
|
|
High
|
|
2.6
|
|
|
|
3.9
|
|
|
2.6
|
|
|
|
2.5
|
|
|
7.3
|
|
Low
|
|
1.4
|
|
|
|
1.8
|
|
|
1.4
|
|
|
|
1.6
|
|
|
1.8
|
|
Interest Rate Risk
Interest rate fluctuations expose Southern Company Gas' variable-rate debt to changes in interest expense and cash flows. Southern Company Gas' policy is to manage interest expense using a combination of fixed-rate and variable-rate debt. Based on
$906 million
of variable-rate debt outstanding at
September 30, 2016
, a 100 basis point change in market interest rates would have resulted in an increase in pre-tax interest expense of
$9 million
on an annualized basis.
In January 2015, Southern Company Gas executed
$800 million
in notional value
10
-year and
30
-year fixed-rate, forward-starting interest rate swaps to hedge potential interest rate volatility prior to issuances of long-term debt in the fourth quarter 2015 and during 2016. Southern Company Gas designated the forward-starting interest rate swaps, which were settled in conjunction with the debt issuances, as cash flow hedges. Southern Company Gas settled
$200 million
of these interest rate swaps in November 2015 for an immaterial loss,
$400 million
in May 2016 at a loss of
$26 million
, and the remaining
$200 million
in September 2016 at a
loss
of
$35 million
. Due to the application of pushdown accounting, only
$5 million
of the loss, which represents the loss incurred and deferred in the successor period, will be amortized into earnings.
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures.
As of the end of the period covered by this Quarterly Report on Form 10-Q, Southern Company Gas conducted an evaluation under the supervision and with the participation of Southern Company Gas' management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended). Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures are effective.
(b) Changes in internal control over financial reporting.
There have been no changes in Southern Company Gas' internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the third quarter 2016 that have materially affected or are reasonably likely to materially affect Southern Company Gas' internal control over financial reporting.