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Energy Company Valuations “It’s all in there!”

Energy Company Valuations “It’s all in there!”. Georgia State Economic Forecasting Conference May 25, 2005. Richard T. O’Brien Executive Vice President and Chief Financial Officer. Key Factors in LDC Equity Valuations.

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Energy Company Valuations “It’s all in there!”

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  1. Energy Company Valuations “It’s all in there!” Georgia State Economic Forecasting Conference May 25, 2005 Richard T. O’Brien Executive Vice President and Chief Financial Officer

  2. Key Factors in LDC Equity Valuations • Numerous macro-economic factors influence valuations of natural gas Local Distribution Companies (LDCs) • Natural gas prices • Interest rates • State government economic regulation • Federal income taxation policies • LDC industry consolidation – economies of scale? • Regional and state specific economic factors • Company specific variables and results obviously affect valuations

  3. Short-term Natural Gas Prices Forecast

  4. Natural Gas Supply U.S. and Canadian Natural Gas Supply Source: National Petroleum Council

  5. Natural Gas Demand U.S. and Canadian Natural Gas Demand Source: National Petroleum Council

  6. Natural Gas Consumed by Sector Source: National Petroleum Council

  7. Current Market – Natural Gas Storage Levels

  8. Source: National Petroleum Council Long-term Natural Gas Prices Average Annual Henry Hub Prices

  9. Natural Gas Price Environment 28% Net Imports Consumption 15% Production Source: EIA

  10. Natural Gas Use Per Residential Customer Forecast Normalized Mcf per Year Source: Patterns in Residential Natural Gas Consumption, 1980-2001, American Gas Association, May 28, 2004

  11. Compound Annual Growth Rate of Gas Consumed(Residential and Commercial Customers) Since 1973, winter load (Dec-Feb) has been growing more than twice as fast as annual load.

  12. Commodity VolatilityGas at the Pump vs. Natural Gas and Oil

  13. Commodity VolatilityDo Gas Prices Impact LDC Valuations? Natural Gas Companies vs Gas Prices (since 2001) LDCs vs Natural Gas: Correlation = -.34; r2 = .12 Integrateds vs Natural Gas: Correlation = .68; r2 = .46 (significant)

  14. Rate of Return Determination Cost of Debt Cost of Equity * Capital Structure Weights Weighted Average Cost of Capital Allowed Rate of Return Example: Government Regulation – Utility Ratemaking Source: Regulatory Research Associates • *Cost of Equity Measurement3 Principal Methodologies: • Capital Asset Pricing Model (“CAPM”) • Risk Premium • Discounted Cash Flow (“DCF”)

  15. Government Regulation Matters Current AGL ROE: 11.0% Newly Proposed ROE: 10.375% ATG lost 7% of equity value(or $200MM) relative to the LDC peers since initial rate case decision

  16. Interest Rates Play an Important Role in Utility Valuations Utility Index vs. 10yr Treasury Note (20 years) Correlation = -.73; r2 = .53 (significant)

  17. Importance of Dividend Tax Cut (cont.) • LDC Peer Group currently trades at a premium to historical metrics 17.0x 16.7x 5 and 10 yr average = 15.5x 14.0x Tax cut implemented • After-tax Return illustration 30% tax bracket example * Old Capital Gains Tax Rate was lowered from 20% to 15%; Old Dividend Tax Rate was lowered from 30% to 15%

  18. Gas LDCs – No Economies of Scale 165 LDCs in the continental United States

  19. Very Few Utility Transactions Compared to the Market Size Number of Deals: 60 15 38 9 40 15 46 18 48 13 11 6 Source: Thompson Financial

  20. Do Earnings Correlate to Shareholder Value? • AGL has averaged 9% EPS growth over the last 9 years while our LDC peers have averaged 5%* growth Ave. EPS growth: AGL = 17% Peers = 6% Ave. EPS growth: AGL = 1% Peers = 4% New AGL Management Team * Excludes outlying events

  21. 4-6% Year-to-Year earnings per share growth 4-6% Competitive dividend yield How Do We Create Shareholder Value? What the Company CAN control: • Capital structure • how much leverage • % fixed/floating • Commodity exposure – Open positions • Dividend Payout Ratio • Diversification • Level of Capital Investment AGL’s Long-term Value Proposition What the Company CAN’T control: • Regulation • Commodity prices • Interest rates • Demand • Market fluctuations • Natural Disasters

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