SOUTHERN COMPANY GAS AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER 2016 vs. THIRD QUARTER 2015
COMBINED YEAR-TO-DATE 2016 vs. YEAR-TO-DATE 2015
Southern Company Gas (formerly known as AGL Resources Inc.) is an energy services holding company whose primary business is the safe, reliable, and cost-effective distribution of natural gas in seven states – Illinois, Georgia, Virginia, New Jersey, Florida, Tennessee, and Maryland – through seven utilities. Southern Company Gas is also involved in several other complementary businesses.
In conjunction with the Merger, Southern Company Gas changed the names of its reportable segments to better align with its new parent company. Southern Company Gas has four reportable segments – gas distribution operations (formerly referred to as distribution operations), gas marketing services (formerly referred to as retail operations), wholesale gas services (formerly referred to as wholesale services), and gas midstream operations (formerly referred to as midstream operations) – and one non-reportable segment – other. For additional information on these reportable segments, see Note (J) to the Condensed Consolidated Financial Statements herein and "Business" of Southern Company Gas in Item 1 of the Form 10-K.
Many factors affect the opportunities, challenges, and risks of Southern Company Gas' business. These factors include the ability to maintain a constructive regulatory environment, to maintain and grow natural gas sales, and to effectively manage and secure timely recovery of costs. Southern Company Gas has various regulatory mechanisms that operate to address cost recovery.
Southern Company Gas' operating results can vary significantly from quarter to quarter due to seasonal fluctuations in natural gas sales and other factors. Operating results for the interim periods presented are not necessarily indicative of the results to be expected for the full fiscal period. During the Heating Season, natural gas usage and operating revenues are generally higher, as more customers are connected to the gas distribution systems and natural gas usage is higher in periods of colder weather. Alternatively, Southern Company Gas' base operating expenses, excluding cost of natural gas, revenue taxes, and certain incentive compensation costs, are incurred relatively evenly over any given year, resulting in variability in the quarterly pattern of earnings.
Merger With Southern Company
On July 1, 2016, Southern Company Gas completed the Merger, which was accounted for by Southern Company using the acquisition method of accounting whereby the assets acquired and liabilities assumed were recognized at fair value as of the acquisition date. Pushdown accounting was applied to Southern Company Gas, which created a new cost basis assigned to assets, liabilities, and equity as of the acquisition date. Accordingly, the successor financial statements reflect a new basis of accounting and successor and predecessor period financial results (separated by a heavy black line) are presented, but are not comparable.
In order to present MANAGEMENT'S DISCUSSION AND ANALYSIS in a way that offers users a meaningful period-to-period comparison, the RESULTS OF OPERATIONS and FINANCIAL CONDITION AND LIQUIDITY reported herein include disclosure of the combined successor and predecessor results of operations and cash flows. 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. The combined presentation is considered a non-GAAP disclosure. Southern Company Gas has included such disclosure to facilitate the comparison of the operating and financial performance for the nine months ended September 30, 2016 to the comparable period in 2015, as the core operations of Southern Company Gas have not changed as a result of the Merger. The combined information does not purport to represent what Southern Company Gas' consolidated results of operations would have been if the successor had actually been formed on January 1, 2016, nor has Southern Company Gas made any attempt to either include or exclude expenses or income that would have resulted had the acquisition actually occurred on January 1, 2016.
Southern Company Gas' results for the successor period July 1, 2016 through September 30, 2016 and combined year-to-date 2016 include a $17 million decrease in net income due to pushdown accounting that is comprised of reduced revenues and increased amortization expense, partially offset by lower interest expense, all of which is a result of the new basis of assets and liabilities to reflect their fair values.
In the third quarter and combined year-to-date 2016, Merger-related expenses were $35 million and $91 million, respectively, compared to $35 million for each of the corresponding periods in 2015. See RESULTS OF OPERATIONS herein for information related to Merger-related expenses. Also, see Note (I) to the Condensed Consolidated Financial Statements herein for additional information relating to the Merger.