Retail Energy Operations
Our retail energy operations segment consists of SouthStar, a joint
venture currently owned 85%by our subsidiary, Georgia Natural Gas
Company, and 15% by Piedmont. SouthStar markets natural gas
and related services under the trade name Georgia Natural Gas to
retail customers on an unregulated basis, primarily in Georgia as well
as Ohio and Florida. In addition, SouthStar markets gas to larger
commercial and industrial customers in Alabama, Tennessee, North
Carolina, South Carolina and Georgia. Based on its market share,
SouthStar is the largest Marketer of natural gas in Georgia, with
average customers in excess of 500,000 over the last three years.
Prior to January 1, 2010, we owned a 70% interest in
SouthStar and Piedmont owned 30%. However, in July 2009, we
entered into an amended joint venture agreement with Piedmont
pursuant to which we purchased an additional 15% ownership
interest for $58 million, effective January 1, 2010, thus increasing
our interest to 85%. This purchase will affect our consolidated
statements of financial position, but will not result in a gain or loss on
our consolidated statements of income. Prior to the effectivenessof our ownership increase, SouthStar’s earnings for customers in
Georgia were allocated 75% to us and 25% to Piedmont, while its
earnings for customers in Ohio and Florida were allocated 70% to
us and 30% to Piedmont. Earnings are now allocated entirely in
accordance with the ownership interests. We have no contractual
rights to acquire Piedmont’s remaining 15% ownership interests.
The amended agreement was approved by the Georgia
Commission in October 2009.
SouthStar is governed by an executive committee, which is
comprised of sixmembers, three representatives fromAGL Resources
and three from Piedmont. Under a joint venture agreement, all
significant management decisions require the unanimous approval of
the SouthStar executive committee; accordingly, our 85% financial
interest is considered to be noncontrolling. We record the earnings
allocated to Piedmont as a noncontrolling interest in our consolidated
statements of income, and we record Piedmont’s portion of
SouthStar’s capital as a noncontrolling interest in our consolidated
statements of financial position.
SouthStar’s operations are sensitive to seasonal weather,
natural gas prices, customer growth and consumption patterns
similar to those affecting our utility operations. SouthStar’s retail
pricing strategies and the use of a variety of hedging strategies, such
as futures, options, swaps, weather derivative instruments and other
risk management tools, help to ensure retail customer costs are
covered to mitigate the potential effect of these issues and
commodity price risk on its operations. For more information on
SouthStar’s energy marketing and risk management activities,
see Item 7A, “Quantitative and Qualitative Disclosures About Market
Risk – Commodity Price Risk.”
Competition SouthStar competes with other energy Marketers
to provide natural gas and related services to customers in Georgia
and the Southeast. In the Georgia market, SouthStar continues to
experience the negative impact to operating margins from
increased competition and an increase in the number of customers
seeking the most competitive price plans. In addition, similar to our
distribution operations, SouthStar faces competition based on
customer preferences for natural gas compared to other energy
products and the comparative prices of those products. Also, price
volatility in the wholesale natural gas commodity market has
contributed to an increase in competition for residential and
commercial customers.
SouthStar continues to use a variety of targeted marketing
programs to attract new customers and to retain existing ones.
Despite these efforts we have seen a 4% decline in average
customer count for the year ended December 31, 2009, as
compared to 2008. We believe this decline reflects some of the
same economic conditions that have affected our utility businesses
as well as the more competitive retail pricing market for natural gas
in Georgia.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, lower wholesale natural
gas prices in 2009, disciplined collection practices and the
unregulated pricing structure in Georgia.
SouthStar continues to expand its business in other states
as well. We are currently focusing these efforts on the Ohio and
Florida markets.
Operating margin SouthStar generates operating margin primarily
in three ways. The first is through the sale of natural gas to
residential, commercial and industrial customers, primarily in
Georgia where SouthStar captures a spread between wholesale
and retail natural gas prices. The second is through the collection
of monthly service fees and customer late payment fees.
SouthStar evaluates the combination of these two retail price
components to ensure such pricing is structured to cover related
retail customer costs, such as bad debt expense, customer service
and billing, and lost and unaccounted-for gas, and to provide a
reasonable profit, as well as being competitive to attract new
customers and maintain market share. SouthStar’s operating margin
is affected by seasonal weather, natural gas prices, customer growth
and their related market share in Georgia, which has historically been
in excess of approximately 33%, based on customer count.
SouthStar employs strategies to attract and retain a higher creditquality
customer base. These strategies result not only in higher
operating margin, as these customers tend to utilize higher volumes
of natural gas, but also help to mitigate bad debt expense due to the
higher credit-quality of these customers.
The third way SouthStar generates operating margin is through
its commercial operations of optimizing storage and transportation
assets and effectively managing commodity risk, which enables
SouthStar to maintain competitive retail prices and operating margin.
SouthStar is allocated storage and pipeline capacity that is used to
supply natural gas to its customers in Georgia. Through hedging
transactions, SouthStar manages exposures arising from changing
commodity prices using natural gas storage transactions to
capture operating margin from natural gas pricing differences that
occur over time. SouthStar’s risk management policies allow the use
of derivative instruments for hedging and risk management
purposes but prohibit