Putting to rest a Georgia Public Service Commission (GPSC) complaint from August 2001, Atlanta Gas Light Co. said last week that it reached an agreement with the GPSC regarding its commission-imposed earnings review. Under the agreement, AGLC adopted a three-year performance-based rate plan that will reduce the base rates of its customers by $10 million annually. The company also reported its first quarter 2002 earnings, which showed a small decline from the similar quarter a year ago.

The earnings review was sparked last summer when the GPSC Staff alerted the commission that AGLC was earning between 4-7% more than its authorized return on equity (ROE) (see NGI, Aug. 27, 2001). The commission said that two separate projects submitted by the GPSC staff indicated that AGLC was earning an ROE of 15% to 17%, in excess of “an appropriate ROE” in the range of 10% to 11%. The staff report was based on reviews of AGLC’s Grey Book earnings information, which showed a ROE of 13% for the 12-month period through April 1, 2001, combined with an over-allocation of costs from its unregulated affiliates to the regulated utility. Correcting the cost allocation would increase the utility’s ROE by 2% to 4%.

AGL Resources hotly contested the results of the earnings review, claiming that “the detailed monthly reporting” from the utility “clearly shows AGLC is far from over-earning” The company filed a motion for reconsideration shortly thereafter to no avail.

The net impact of this order to AGLC is expected to be a reduction to cash flow from operations, net of income taxes, of $6.5 million on an annual basis. AGLC said that this reduction to operating revenue will be largely offset by a reduction in depreciation expense. Due to the offsetting depreciation reduction, the company said it only projects a reduction of approximately $0.02 per share on AGL Resources’ 2002 earnings. Despite this projected impact, AGL Resources reaffirmed its earnings estimate for the calendar year 2002 of $1.65 to $1.70 earnings per share.

Under the performance based rate plan, the company will earn an ROE of 11%, while establishing an earnings band of between 10% and 12%. Three-quarters of any earnings above 12% will be shared with the natural gas customers of Georgia, and the remaining one-quarter will be retained by AGLC.

“We are highly satisfied to enter into a performance based rate plan,” said Kevin P. Madden, executive vice president of distribution and pipeline operations. “This decision brings Atlanta Gas Light in line with the rate structures of other companies in our peer group. Natural gas customers will benefit from a three-year period of base rate stability, and the company will realize potential benefits from the sharing mechanism. We worked closely with the commissioners and their staff in developing this plan, and view this as an affirmation of the desire of all parties to maintain a collaborative approach to regulation for the future.”

As a condition of the order, AGLC said it will be required to file a general rate case on May 1, 2005, at which time the commission will determine whether the order will remain in effect, be modified or discontinued. The company cannot file for a general base rate increase before that time unless its return on common equity falls below 10%.

AGLC added that the order does not include any effects of the recently passed Georgia legislation entitled the “Natural Gas Consumers’ Relief Act.” The company said it believes that any additional costs incurred as a result of implementing the legislation will be recoverable.

In reporting its first quarter 2002 earnings, the company cited volatility within the natural gas and electricity industry for its decline in results., AGL reported earnings of $50.1 million ($0.89 per diluted share), a slight decline from the $52.3 million ($0.96 per diluted share) during the similar quarter a year ago. Excluding the gain on the sale of Utilipro, net income for the first quarter 2001 would have been $45.2 million.

“We navigated the waters of volatile energy prices and uncertain public policy in this past quarter,” said Paula G. Rosput, CEO of AGL Resources. “We’ve brought the ship safely to shore by enabling the execution of the fundamentals in all of our operating units.”

Despite a warmer than normal winter, AGL’s distribution operations segment reported earnings before interest and taxes (EBIT) of $71.5 million, marking a $4.3 million increase over the same quarter last year. The company said that even though Virginia Natural Gas experienced warmer than normal weather in its service territory again this quarter, the resulting decline in operating margin was offset by decreased operating costs. The company said the increase in EBIT was attributable to increased revenues from its pipeline replacement program in Georgia and increased carrying charges to marketers for gas stored underground, maintained by Atlanta Gas Light Company (AGLC).

Sequent Energy Management, AGL’s wholesale services subsidiary, contributed $5.8 million in EBIT for the quarter, a decrease of $4.2 million in contributions for the same quarter year over year. AGL said that Sequent’s contribution for 2002 was derived primarily from the results of its asset management operations for Virginia Natural Gas, Chattanooga Gas Co. and AGLC. However, Sequent’s revenues were significantly higher than last year, reflecting increased momentum in creating a more liquid trading market between producers and consumers in the Southeast. Despite the increased revenues, AGL said Sequent’s margins were lower for the quarter on a comparative basis, primarily because of higher margins in the unusually volatile natural gas markets during the same quarter last year.

AGL’s energy investments segment realized EBIT of $24.6 million, a $5.7 million decrease from last year’s quarterly performance, which contained the $10.9 million pre-tax gain on the sale of Utilipro. Excluding the Utilipro sale, the energy investments segment realized a $5.2 million increase for the quarter year over year. AGL said the $5.2 million increase is a result of the improved earnings of the company’s investment in its retail marketing company, SouthStar Energy Services LLC.

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