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Board Planning Session

Municipal Gas Authority of Georgia. Board Planning Session. Kennesaw, GA March 21, 2011. Agenda. 2010 Financial Results G&A True-up Swing Supply Charge Capacity Management Credits Storage Programs Long-Term Supply Projects 2010 Corporate Goal and Incentive Compensation Plan

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Board Planning Session

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  1. Municipal Gas Authority of Georgia Board Planning Session Kennesaw, GA March 21, 2011

  2. Agenda • 2010 Financial Results • G&A True-up • Swing Supply Charge • Capacity Management Credits • Storage Programs • Long-Term Supply Projects • 2010 Corporate Goal and Incentive Compensation Plan • Proposed 2011 Corporate Goal

  3. Agenda • Conasauga Shale Supply Opportunity in Georgia • Portfolio III Investments in Member Debt • Draft 2016 Strategic Plan • 2010 Audit Results* – Meeting with Ernst & Young (Tuesday morning before MGAG Board Meeting) * Discussion Materials to be Provided at the Meeting

  4. 2010 Financial Results • Actual net G&A represents a favorable variance from budget of $52,000 • The overall favorable variance is comprised of the following: • Unfavorable variance of approximately $139,000 on G&A expenses • Due primarily to office expansion costs incurred to support new PGP services • Favorable variance of approximately $47,000 in Revenue Credits due to • Higher than expected revenues from interest income and Main Street administrative fees • Offset somewhat by reserved amounts of almost $600,000 for timing differences and risk related to Pine Needle, MGC and FUEL • Favorable variance of approximately $145,000 in Member billings due to colder than normal weather • Overall favorable variance has been recorded as additional Net Assets

  5. 2010 G&A True-Up

  6. 2010 Financial Results Swing Supply Charge • Purpose • Implemented Oct 1, 2003 to pro-actively collect funds to maintain first-of-month (FOM) pricing for ALL Gas Supply to ALL Members • $2 MM collection is less than 1% of $265 MM in annual gas purchases • Goal • Minimize cost impact of swings through use of Member assets and Gas Authority purchased assets • Historic Results • Since inception, returned more than 60% of funds collected • FOM pricing maintained for ALL Members in light of increasing load and price volatility, and increasing pipeline limitations

  7. 2010 Financial Results Swing Supply Charge • 2010 Activity • SSC Collections$1,975,000 • Load Management Gains / Losses • Load / Price Volatility Gains $ 963,000 • Load / Price Volatility Losses ($ 450,000) • Storage / Option Costs ($ 420,000) • Net Gain $ 93,000 • Balance to Return to Members $2,068,000 • 2011 Expectation - $1,250,000 • First quarter losses of approximately $500,000 • Costs in Jan / Feb from incremental needs at higher prices • Costs in Feb / Mar from sales at lower prices

  8. 2010 Financial Results Capacity Management Credits • Production Area Supply Savings (PASS Credits) • Use of upstream capacity to purchase monthly gas when pricing is significantly below FOM (Monthly credit on bill) • 2011 Challenges • Very limited production area savings expected on TR and TETCO • Historically constrained supply sold to us at a discount is now flowing to other pipelines which will result in less savings

  9. 2010 Financial Results Capacity Management Credits • Capacity Release • Release of excess capacity to 3rd parties and internally • Monthly credit to reduce capacity costs • 2011 Challenges • Transco – Reduced value for capacity • Southern - Reduced capacity available and lower value

  10. 2010 Financial Results Storage Programs • Background: • Southern Storage (CSS) assets were acquired and financed in 1994 with Storage Revenue Bonds • All debt and deferred balances were fully paid in 2009 • Initial returns to Members began in 2009 • Transco ESS storage assets were transitioned to active price management in early 2009

  11. 2010 Financial Results Storage Programs • Current Operations: • Storage assets are critical to managing load swings during peak periods • Spreads between summer and winter gas prices are used to pay operating and working capital costs • Remaining margins are available for Member returns • Summary of Results • Annual net operating income has been strong and reliable as spread trades have been an effective hedging strategy for several years • Current storage year (2011-12) is partially hedged (40%) • Next storage year (2012-13) is 20% hedged • Future years are not yet hedged • Propose Member returns of $1.73 million (CSS) and $138,000 (ESS)

  12. CSS Storage 2009-10 Actual 2010-11 Estimated 2011-12 Projected 2012-13 Projected 2013-14 Projected Total $/Dt** Total $/Dt*** Total $/Dt*** Total $/Dt*** Total $/Dt*** $ Operating Margin $ 3,757,999 $ 1.25 $ 3,025,000 $ 0.96 1,700,000 $ 0.54 1,350,000 $ 0.43 $ 1,150,000 $ 0.36 $ $ Non-Operating Expense* $ 220,789 $ 0.07 $ 297,000 $ 0.09 $ 350,000 $ 0.11 $ 350,000 $ 0.11 350,000 $ 0.11 Net Income $ 3,537,210 $ 1.18 $ 2,728,000 $ 0.87 $ 1,350,000 $ 0.43 $ 1,000,000 $ 0.32 $ 800,000 $ 0.25 Member Returns $ 1,650,000 $ 0.55 $ 1,737,000 $ 0.55 $ 1,737,000 $ 0.55 $ 1,737,000 $ 0.55 $ 1,737,000 $ 0.55 Project Balance $ 1,887,210 $ 2,878,210 $ 2,491,210 $ 1,754,210 $ 817,210 Storage Withdrawals (Dt) 2,900,000 3,000,000 3,000,000 3,000,000 3,000,000 % Hedged 100% 40% 20% 0% • * Primarily internal interest expense charged project on working capital • ** $/Dt based on maximum storage quantities of 3,013,804 Dt • *** Addition of Dublin increased maximum storage quantities to 3,158,371 Dt starting 2010-11 2010 Financial Results

  13. ESS Storage 2009-10 Actual 2010-11 Estimated 2011-12 Projected 2012-13 Projected 2013-14 Projected Total $/Dt** Total $/Dt** Total $/Dt** Total $/Dt** Total $/Dt** $ $ $ Operating Margin $ 412,000 $ 1.65 205,000 $ 0.82 125,000 $ 0.50 86,000 $ 0.34 $ 85,000 $ 0.34 Non-Operating Expense* $ 35,000 $ 0.14 $ 20,000 $ 0.10 28,000 $ 0.11 $ 28,000 $ 0.11 $ 28,000 $ 0.11 $ Net Income $ 377,000 $ 1.51 $ 185,000 $ 0.72 $ 97,000 $ 0.39 $ 58,000 $ 0.23 $ 57,000 $ 0.23 Member Returns $ 138,000 $ 0.55 $ 138,000 $ 0.55 $ 138,000 $ 0.55 $ 138,000 $ 0.55 $ 138,000 $ 0.55 Project Balance $ 239,000 $ 286,000 $ 245,000 $ 165,000 $ 84,000 Storage Withdrawals (Dt) 240,000 240,000 240,000 240,000 240,000 % Hedged 100% 40% 0% 0% • * Primarily internal interest expense charged project on working capital • ** $/Dt based on maximum storage quantities of 250,442 Dt 2010 Financial Results

  14. 2010 Financial Results Long-Term Supply Projects • Gas Reserves • Gas Authority • Alabama and Kansas Coalbed Methane reserves • PGP - Portfolios of producing reserves • Pool 1 – MGAG 46% share • Pool 2 – MGAG 54% share • Pool 3 – MGAG 70% share • Prepayment transactions • TEAC and PEAK participation • Main Street transactions – JPMorgan, Merrill (2), and RBC

  15. 2010 Financial Results Long-Term Supply Projects – Gas Reserves • Reserve Diversity • Mix of conventional and unconventional reserves • Oil reserves are adding significant value • Geographic Diversity • 16 states – Greatest Value in Texas / Oklahoma • 5,500 + wells – Greatest number in Texas / Alabama • Solid Operating Partners • Mix of large / small private and large public companies • Generally using industry standard agreements • Operational exposure and risks • Hedged commodity prices for 5 – 6 years • Ongoing development opportunities

  16. 2010 Financial Results Long-Term Supply Projects – Gas Authority Reserves • Alabama CBM (Energen Operates) • Production at 12,000 Mcfe/day • Final year of 100 well drilling program (81 complete) • Kansas CBM (Dart Oil & Gas Operates) • Production at 8,400 Mcfe/day • Project economics have improved due to operating efficiencies • Dart is continuing to market their interest • Small oil play may be developing

  17. Transaction Locations # Wells Closed Price Sundown TX, AR, OK, NM, AL, MS, LA 2000 Jan. 2006 $268.9 MT, WY, CO, AL 308 Saga $61.0 Jan. 2008 $329.9 Saga Saga 2010 Financial Results – PGP Pool 1 Map Field/Sundown Cedar Cove McNic Cheyenne-Putnam/McNic II Cymreac Exploration Jetta/Permian HSA/Ward FGL/Future Potash Dome/Greka Tiger/Exco

  18. 2010 Financial Results Long-Term Supply Projects – Public Gas Partners • Pool 1 • Continuing to transition administrative services from largest operating partner (Sundown) to the Gas Authority • Net savings of $1.2 million per year • Better decision-making capabilities and visibility • Most planned development is focused on oil reserves in West Texas • Developed new database for managing operating decisions and additional accounting activity • Over $20 million in development expected for 2011 • Fixed assessments, which began in January 2011, will be used to accelerate debt repayment

  19. Transaction Locations # Wells Closed Price Apache Davis Four Corners Edna Hollow East Liberty Pine Hollow Kerr McGee Orion PetroNova Saga TGP TX, OK, LA TX KS/OK KS OK TX OK AL MT, WY, AL TX, MS, NM 170 5 30 20 82 8 4 6 200 40 June 2005 Dec. 2005 Oct. 2005 Nov. 2006 Apr. 2007 Nov. 2006 Oct. 2007 May 2007 Jan. 2008 June 2005 $ 67.0 7.5 1.8 3.9 7.1 20.0 3.3 3.0 19.0 5.7 $138.3 Apache TGP Davis – OK/KS Orion Davis – TX PetroNova Kerr-McGee Saga 2010 Financial Results - Pool 2 Map

  20. 2010 Financial Results Long-Term Supply Projects – Public Gas Partners • Pool 2 • Wide range of results among various projects / operators • Potential opportunities could provide significant upside • Texas Gas Partners – S. TX wells • Considering partial sale of partnership interests to capture value from high current oil prices • Continuing drilling of oil related reserves • Orion - Oklahoma tight sands project • Shallow oil play is developing in the area • Pool 2 has interests in 20,000 acres that may be productive • Recent core analysis had encouraging results

  21. 2010 Financial Results Long-Term Supply Projects – Public Gas Partners • Pool 2 • Challenges • Fixed assessments, which began in January 2011, will be used to accelerate debt repayment • Davis Oklahoma reserves • Prior operator sold out and transferred operations to the new owner in late 2010 without proper authorization • New owner has limited experience and financial resources – PGP has filed suit against new owner to take over operations • Alabama CBM assets • 10-well pilot program to establish a new field has been very disappointing and may need to be plugged and abandoned

  22. Total Possible Wells Purchase Price # PDP Wells Closed Transaction Location Description Orion-North Fork OK LA 0 20 180 300 May 2008 Sept 2008 $ 7.0 $11.0 $18.0 Hunton Dev Program CBM PDP + Dev Program CHC Energy Louisiana 2010 Financial Results – PGP Pool 3 Oklahoma

  23. 2010 Financial Results Long-Term Supply Projects – Public Gas Partners • Pool 3 • Two existing projects • Early-stage Louisiana CBM project • 20-well pilot program has continued to have operational issues • No additional activity while we wait for adjacent operator to complete new wells and share results • Oklahoma Dolomite de-watering project • Drilled 8 wells with existing partners in 2009 – 2010 • Currently drilling 6 additional wells • Existing partners did not participate due to lack of funding • Seismic information on one section indicates an unexpected shallow oil-producing formation that could be significant • New well has been authorized and will be drilled in May / June

  24. 2010 Financial Results Long-Term Supply Projects – Expected Results Key Assumptions • All key project reserve reports are updated annually by nationally recognized engineering firms • NYMEX pricing for 6 years and then $6.50 flat for gas and $80 flat for oil • Alabama CBM pricing is based on $5.00 long-term gas prices for conservatism • Interest rates averaging 3 – 4 %, based on current debt components and continuing blend of fixed and floating rates

  25. 2010 Financial Results Long-Term Supply Projects – Expected Results

  26. 2010 Financial Results Long-Term Supply Projects – Debt Management • Portfolio project obligations include • Direct debt and liquidity at the Gas Authority, and • Indirect debt owed by PGP • $307 million total debt, including proportionate share of PGP debt • Combination of long-term bonds, short-term notes and bank lines of credit • Combination of fixed and floating interest rates with approximately half in committed, fixed-rate obligations • Maintaining portion of debt in short-term, variable-rate structures is avoiding significant additional interest expense • $100 million at 3% higher fixed-rate bonds would cost an additional $3,000,000 in interest per year • Short-term rates have averaged less than 3.5% over last 10 years

  27. 2010 Financial Results Long-Term Supply Projects – Debt Management

  28. 2010 Financial Results Analysis of Individual Projects Within LT Supplies

  29. 2010 Financial Results Expected Long-Term Supply Project Results

  30. Corporate Goals and Incentive Compensation Plan • Based on Net Benefits to Members • Cost of Membership above Spot Index • General & Administrative Costs (G&A) • Swing Supply Charge • Less: Savings from Membership • Portfolio Savings and Current Year Reserves • Capacity Release Revenues and Swing Supply Returns • Storage Project Net Operating Revenues/Expenses • Drives Incentive Compensation Plan • Pays out only if Corporate Goal achieved • 80% based on Corporate results • 20% based on Group results • Multiplier between 0 and 1.1 for individual performance 2010 Corporate Goal

  31. Corporate Goals and Incentive Compensation Plan 2010 Corporate Goal

  32. Corporate Goals and Incentive Compensation Plan • 2010 Corporate Goal Results - ¢ Below Spot • Weighted Average Payout – 0%

  33. Proposed 2011 Corporate Goal Note: 2011 Averages $/MMBtu are based on 2011 budgeted volumes versus 2010 actual volumes to minimize the impact of weather related fluctuations

  34. Proposed 2011 Corporate Goal • 2010 and 2011 Corporate Goal Comparison

  35. Portfolio Supply Conasauga Shale Opportunity • Conasauga Shale • Shale in Eastern Alabama / Northwest Georgia • Dry gas - shale in excess of 9,000’ thick • Mitchell Resources • Small firm from Atlanta has leased mineral rights on 33,000 acres in Chattooga County, GA and Cherokee County, AL • Mitchell Resources says it has operator lined up and financial backing to build gathering system and drill 3-4 test wells • Learned from mistakes of 16 wells drilled in Alabama • Opportunity • Production to be physically connected to Summerville, Trion and LaFayette transmission system to feed all cities • MGAG to acquire 100% of production on behalf of all members at discount to market / avoid transport & fuel • Economic benefits with direct connect cities / portfolio

  36. Portfolio III Investments in Member Debt • Existing and proposed Member Debt in excess of the SPP threshold ($1 million) presents an opportunity for Portfolio III investment • PIII is authorized to invest in municipal debt obligations with at least an ‘A’ credit rating • PIII would benefit from investments through higher investment earnings on excess cash • Members would benefit through access to lower current interest rates

  37. Portfolio III Investments in Member Debt • Same legal structure as Small Projects Pool • Supplemental Contract • General Obligation of the Member • Rates established including small premium over market rates • Potential investments

  38. Shaping Our Future Today! Draft Strategic Plan 2016 • Gas Authority Mission - Unchanged To provide municipalities a reliable, economical supply of natural gas and to assist them in developing and growing their gas systems to optimize the benefits of public ownership • Outline • Introduction • Environmental Assessment • Strategic Issues • Goals & Strategies

  39. Shaping Our Future Today! Draft Strategic Plan 2016 • Results from “Vision 2011” • Two Corporate Goals • Improve Member margins by 15¢ per MMBtu • Achieved 17¢ per MMBtu • Grow annual throughput volumes by 7 Bcf to 77 Bcf • Averaged less than 61 Bcf • Member throughput +10% • Partner throughput -20%

  40. Shaping Our Future Today! Draft Strategic Plan 2016

  41. Shaping Our Future Today! Draft Strategic Plan 2016

  42. Shaping Our Future Today! Draft Strategic Plan 2016 • Environmental Assessment • Abundant, affordable supply of domestic natural gas for a long time • Financial Markets remain uncertain • Natural gas assumes increasing share of U.S. energy mix • Natural gas maintains price advantage over other fuels • Federal and state governments continue to influence gas business through policies and regulations • Strategic Issues • Greater Regulatory Burdens & Obstacles • Growing Retail Customers, Burner-Tips, Membership & Partners • Balancing Risks & Rewards • Competition from Alternate Fuels & Natural Gas Suppliers • Finding, Training & Retaining Quality Staff

  43. Shaping Our Future Today! Draft Strategic Plan 2016 Big 5 Shale Regions Projected to Grow Rapidly

  44. Shaping Our Future Today! Draft Strategic Plan 2016 • Goals & Strategies • Corporate Goals • Functional Goals & Strategies • Corporate Goals • Sustain Member Returns at More Than 3.5 Times G&A Costs • 3.5 times 2011 Budget G&A is $13.5 million in Member Returns • Grow Member Throughput by More Than 1.5% Per Year • Based on 2010 Member Throughput, 1.5% is 560,000 MMBtu • Grow Member Customers by More Than 500 Annually • Member Customers declined over 1,200 from 2009 to 2010

  45. Shaping Our Future Today! Draft Strategic Plan 2016 • Grow Member Throughput more than 1.5% per year (560,000 MMBtu) • Grow Member Customers more than 500 per year Corporate Goal $13.5 Million

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