MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Investment in SNG
On September 1, 2016, Southern Company Gas paid approximately $1.4 billion to acquire a 50% equity interest in SNG, which is the owner of a 7,000-mile pipeline system connecting natural gas supply basins in Texas, Louisiana, Mississippi, and Alabama to markets in Louisiana, Mississippi, Alabama, Florida, Georgia, South Carolina, and Tennessee. The investment in SNG is accounted for using the equity method. Southern Company Gas recorded pre-tax earnings of $27 million ($16 million, net of tax) from this investment in September 2016. See Notes (I) and (K) to the Condensed Consolidated Financial Statements herein for additional information.
On February 12, 2016, Southern Company Gas entered into an agreement with Piedmont to purchase its 15% interest in SouthStar for $160 million. This transaction was contingent upon the closing of the merger between Piedmont and Duke Energy Corporation, which occurred on October 3, 2016. On the same day, Southern Company Gas completed its purchase of Piedmont's interest in SouthStar. Beginning in the fourth quarter 2016 SouthStar will be fully consolidated with Southern Company Gas. See Note (K) to the Condensed Consolidated Financial Statements herein for additional information.
Performance and Non-GAAP Measures
Southern Company Gas evaluates segment performance using the measures of earnings before interest and taxes (EBIT) and operating margin. EBIT includes operating income and other income and (expense) and excludes interest expense, net of amounts capitalized and income taxes, which Southern Company Gas evaluates on a consolidated basis. Southern Company Gas uses EBIT herein to discuss the results of its segments, as EBIT is the primary measure of segment profit or loss; however, the use of consolidated EBIT herein is considered a non-GAAP measure. Southern Company Gas believes the presentation of consolidated EBIT provides useful information regarding a consolidated measure of profit or loss. The reconciliation of consolidated EBIT to consolidated net income attributable to Southern Company Gas under GAAP is provided within RESULTS OF OPERATIONS – "Combined Operating Results" herein.
Operating margin is a non-GAAP measure that is calculated as operating revenues minus cost of natural gas, cost of other sales, and revenue tax expense. Operating margin excludes other operations and maintenance expenses, depreciation and amortization, taxes other than income taxes, and Merger-related expenses, which are included in the calculation of operating income as calculated in accordance with GAAP and reflected in the Condensed Consolidated Statements of Income. Southern Company Gas believes that the presentation of operating margin provides useful information regarding the contribution resulting from customer growth in the gas distribution operations segment since the cost of natural gas and revenue tax expense can vary significantly and are generally billed directly to customers. Southern Company Gas further believes that operating margin at the gas marketing services, wholesale gas services, and gas midstream operations segments allows it to focus on a direct measure of operating margin before overhead costs.
Consolidated EBIT and operating margin should not be considered alternatives to, or more meaningful indicators of, Southern Company Gas' operating performance than consolidated net income attributable to Southern Company Gas or operating income as determined in accordance with GAAP. In addition, Southern Company Gas' operating margin may not be comparable to similarly titled measures of other companies.
Southern Company Gas continues to focus on several operating metrics, which include Heating Degree Days, customer count, volumes of natural gas sold, and natural gas capacity under firm subscription. For additional information on these indicators, see Results of Operations – "Operating Metrics" of Southern Company Gas in Item 7 of the Form 10-K.
Heating Degree Days
Southern Company Gas measures weather and the effect on its business using Heating Degree Days. With the exception of Southern Company Gas' utilities in Illinois and Florida, Southern Company Gas has various regulatory mechanisms, such as weather normalization mechanisms, which limit its exposure to weather changes within typical ranges in each of its utilities' respective service areas. However, the utility customers in Illinois and the gas marketing services customers primarily in Georgia can be impacted by warmer- or colder-than-normal weather. The following table presents the Heating Degree Days information for those locations.
2016 vs. 2015
2016 vs. normal
Normal represents the 10-year average from January 1, 2006 through September 30, 2015 for Illinois at Chicago Midway International Airport and for Georgia at Atlanta Hartsfield-Jackson International Airport, based on information obtained from the National Oceanic and Atmospheric Administration, National Climatic Data Center.
The 10-year average Heating Degree Days established by the Illinois Commission in Nicor Gas' last rate case is 3,580 for the first nine months from 1998 through 2007.