energy company valuations “it’s all in there!”
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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. - PowerPoint PPT PresentationTRANSCRIPT
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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
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Natural Gas Supply
Source: National Petroleum Council
U.S. and Canadian Natural Gas Supply
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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