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.
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.
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