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Energy Company Valuations “It’s all in there!”
Georgia State Economic Forecasting Conference
May 25, 2005
Richard T. O’BrienExecutive Vice Presidentand Chief Financial Officer
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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
Henry Hub Nutural Gas Prices(Jan 04 - Dec 06)
$6.34
$7.90
$4.00
$4.50
$5.00
$5.50
$6.00
$6.50
$7.00
$7.50
$8.00
$8.50
Forecast
4
Natural Gas Supply
Source: National Petroleum Council
U.S. and Canadian Natural Gas Supply
5
Natural Gas Demand
Source: National Petroleum Council
U.S. and Canadian Natural Gas Demand
6
Natural Gas Consumed by Sector
Source: National Petroleum Council
7
Current Market – Natural Gas Storage Levels
8
Long-term Natural Gas Prices
Source: National Petroleum Council
Average Annual Henry Hub Prices
9
Natural Gas Price Environment
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
1980 1990 2000 2010 2025
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
Price at Wellhead Price for ResidentialConsumption Production
15%
28%Net ImportsConsumption
Production
Source: EIA
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Natural Gas Use Per Residential Customer
10696
8380 75
0
20
40
60
80
100
120
1980 1990 2001 2010 2020
No
rmal
ized
Mcf
per
Yea
r
Forecast
Source: Patterns in Residential Natural Gas Consumption, 1980-2001, American Gas Association, May 28, 2004
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0.33%
0.80%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
Annual Growth Winter Growth
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.
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Commodity VolatilityGas at the Pump vs. Natural Gas and Oil
219%
185%
439%
0%
100%
200%
300%
400%
500%
600%
700%
800%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Crude Oil Automotive Gasoline Natural Gas
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130%
106%
183%
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
LDC Peer Group Natural Gas Price Integrated Avg
Natural Gas Companies vs Gas Prices(since 2001)
Commodity VolatilityDo Gas Prices Impact LDC Valuations?
LDCs vs Natural Gas: Correlation = -.34; r2 = .12Integrateds vs Natural Gas: Correlation = .68; r2 = .46 (significant)
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Cost of Debt Cost of Equity *
Capital StructureWeights
Weighted AverageCost of Capital
Allowed Rate of Return
Rate of Return Determination
Type of Capital
Amount
Allowed Return (Cost)
Proportion
Weighted Return (Cost)
Debt $521 6.35% 52.1% 3.3% Equity $479 10.375% 47.9% 5.0%
Allowed Return
8.3%
Example:
*Cost of Equity Measurement3 Principal Methodologies:
• Capital Asset Pricing Model (“CAPM”)
• Risk Premium
• Discounted Cash Flow (“DCF”)
Government Regulation – Utility RatemakingAverage ROE Decisions
10.010.210.410.610.811.011.211.411.611.812.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 NewAGL?
Source: Regulatory Research Associates
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Government Regulation Matters
Stock Price Change since 4/26/05(ATG, Peer Group and S&P 500)
-2.2%
4.6%
2.9%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
ATG Equity Peer Group Average SPX Index
ATG lost 7% of equity value (or $200MM) relative to the LDC peers since initial rate case decision
Current AGL ROE: 11.0%Newly Proposed ROE: 10.375%
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Interest Rates Play an Important Role in Utility Valuations
0
50
100
150
200
250
300
350
400
450
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
0
2
4
6
8
10
12
14
Dow Jones Utility Index 10yr US Tsy
Correlation = -.73; r2 = .53 (significant)
Utility Index vs. 10yr Treasury Note(20 years)
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Importance of Dividend Tax Cut (cont.)
• LDC Peer Group currently trades at a premium to historical metrics
13.0
13.5
14.0
14.5
15.0
15.5
16.0
16.5
17.0
17.5
18.0
16.7x
5 and 10 yr average = 15.5x
17.0x
14.0x
One-year Investment
Price Appreciation
Dividend Yield
Pre-tax Total Return
Pre 2003 tax cut After-tax
Total Return*
Post 2003After-tax
Total Return*
Additional Income due
to tax cutAdditional
Return
7% 4% 11%
$10,000 $700 $400 $1,100 $840 $935 $95 1.0%
* Old Capital Gains Tax Rate was lowered from 20% to 15%; Old Dividend Tax Rate was lowered from 30% to 15%
30% tax bracket example
Tax cut implemented
• After-tax Return illustration
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165 LDCs in the continental United States
Gas LDCs – No Economies of Scale
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Utility and Midstream Transactions> $100MM
$79
$47
$14
$24
$52
$21
$4$8$9
$5$3
$28
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
2000 2001 2002 2003 2004 YTD 2005
Val
ue
of
Tra
nsa
ctio
ns
($B
)
U.S. Electric, Gas and Water Utilities U.S. Midstream Transactions
Number of Deals: 60 15 38 9 40 15 46 18 48 13 11 6
Source: Thompson Financial
11.8x11.7x
9.6x
8.6x8.9x
6.6x
Ag Value/ EBITDA
Very Few Utility Transactions Compared to the Market Size
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AGL vs LDC Peers and S&P 500(last 10 years)
178
152
187
0
50
100
150
200
250
300
Re
lati
ve
Pri
ce
AGL Resources LDC Peers S&P 500
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
* Excludes outlying events
Ave. EPS growth:AGL = 1%Peers = 4%
Ave. EPS growth:AGL = 17%Peers = 6%
New AGL Management Team
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How Do We Create Shareholder Value?
AGL’s Long-term Value Proposition
What the Company CAN control:
• Capital structure
– how much leverage
– % fixed/floating
• Commodity exposure – Open positions
• Dividend Payout Ratio
• Diversification
• Level of Capital Investment
What the Company CAN’T control:
• Regulation
• Commodity prices
• Interest rates
• Demand
• Market fluctuations
• Natural Disasters
4-6%Year-to-Yearearnings pershare growth
4-6%Competitive
dividend yield
