Financial Issues: A Natural Gas Utilitys View

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Financial IssuesA Natural Gas Utilitys View
Laurie Mitchell Sherwood VP, Corporate
Development, and Treasurer Atmos Energy
Corporation

• AGAs Introduction to the Natural Gas Industry
• October 10, 2007

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Atmos Energy Operations
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Atmos Energy Corporate Structure
Atmos Energy Corporation (Natural Gas Utility
Divisions)
Atmos Energy Holdings, Inc. (Nonutility
Businesses)
Colorado-Kansas
Atmos Energy Marketing
Kentucky/Mid-States
Atmos Pipeline Storage
Louisiana
Mississippi
Other Nonutility
Mid-Tex

West Texas
Texas pipeline and storage operations are legally
a division of Atmos Energy Corporation, but are
included in the Atmos Pipeline Storage segment
for reporting purposes.
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Financial Strength Our View

• Key factors
• Generating stable earnings and cash flow
• Maintaining ample liquidity
• Maintaining a strong balance sheet
• Managing risk associated with non-utility
  operations

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Stable Earnings and Cash Flow

• Stress factors
• Weather
• Natural gas prices
• Expenses (especially benefits costs)
• Declining usage / conservation

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Stable Earnings and Cash Flow (cont.)

• How have we responded?
• Weather We are protected from most of the
  effects of weather through rate designs (weather
  normalized rates and/or higher fixed customer
  charges) that now cover over 90 of our utility
  customer base
• Natural gas prices We dampen volatility through
  storage and hedging, while also seeking better
  rate designs that allow us to recover higher bad
  debt expense through rates
• Expenses We keep our pension plan fully funded
  and have redesigned some aspects of our medical
  benefit plan
• Declining usage We continually seek rate
  designs that allow us to earn our allowed return
  on rate base independent of actual gas usage by
  customers

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Ample Liquidity

• Our view of liquidity its like insurance.
• More is better
• Get it before you need it
• Stress factors
• Two factors drive liquidity requirements
  weather and natural gas prices
• Both are unpredictable and out of our control
• Weather normalized rates help, but not quite in
  real time
• The world looks different after Katrina and Rita
• In late 2005, natural gas futures spiked into the
  mid-teens
• What if that winter had been colder than normal
  (or even normal)?

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Ample Liquidity (continued)

• How has Atmos responded?
• Today, we maintain over 900 million in committed
  revolving credit facilities at the parent level
• Includes a 600 million 5-year facility that
  backstops our CP program and a 300 million
  364-day facility that is renewed annually
• We added the 300 million facility in November
  2005 as a direct response to unprecedented high
  natural gas prices
• Our peak short-term debt since then has been
  under 500 million, but the treasurer sleeps more
  soundly
• Our non-regulated marketing subsidiary maintains
  its own 580 million bank facility
• We increased this facility from 250 million in
  fall 2005, again due to high natural gas prices
• Our peak usage has so far been less than half of
  the higher amount, but again we sleep much
  more soundly

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A Strong Balance Sheet

• Stress factors
• Significant growth through acquisitions
• Atmos has tripled its customer base since 1999
• Our most recent transaction was also our largest
  the 1.9 billion purchase of TXU Gas in October
  2004
• Higher capital spending levels in 2005 and 2006
• Past earnings and cash flow variability, largely
  due to weather

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A Strong Balance Sheet (continued)

• How has Atmos responded?
• We have funded major acquisitions (including TXU
  Gas) with a combination of debt and common
  equity
• We issued common stock in December 2006 to pay
  down debt and bring our capital structure back to
  within our target range (50-55 debt)
• Through weather normalized rates in key
  jurisdictions (including Texas) and other
  improved rate designs, we have largely eliminated
  our utility earnings and cash flow variability
  due to weather

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Non-Utility Operations

• Atmos Energys non-utility businesses include
  regulated and unregulated intrastate gas
  pipelines, storage fields, and natural gas
  marketing operations
• Stress factors
• Although some of these businesses generate stable
  and predictable earnings and cash flow, the
  marketing business in particular can produce
  significant quarter-to-quarter earnings
  volatility due to FAS 133 (mark to market)
  effects
• Taken as a whole, these businesses by their
  nature have somewhat higher risk than our
  regulated utility business, but they offer
  greater opportunities for earnings growth in
  return

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Non-Utility Operations (continued)

• How has Atmos responded?
• We seek to grow our non-utility lines of business
  in balance with and in ways that are
  complementary to our utility operations
• We invest in stable, cash-generating assets such
  as intrastate pipelines, storage fields and
  gathering systems
• We tightly control and monitor risk at our
  natural gas marketing business
• We maintain ample liquidity for the marketing
  business, and adhere to state regulatory
  restrictions that strictly limit the amount of
  funding provided to our non-regulated
  subsidiaries by the utility parent

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A Few Final Thoughts

• Natural gas utilities have to balance the
  financial interests of shareholders with those of
  other key constituencies, such as bondholders,
  rating agencies, state regulatory commissions and
  customers.
• Growing EPS and mitigating risk are each
  important objectives.
• Good rate designs are critical to achieving both
  of these goals.
• Most utility investors want stable, predictable
  earnings not to mention dividends and are
  less interested in capturing upside.
• Bondholders and rating agencies also like
  predictable earnings, but have little interest in
  upside and none in dividends.
• State regulators and customers want safe,
  reliable natural gas service at reasonable,
  predictable rates.

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A Few Final Thoughts (conclusion)

• Non-utility businesses can add value to the mix,
  but its key to manage their risk, finance them
  prudently and educate your key financial
  constituents about their characteristics.
• Surprises are hardly ever welcome, especially
  negative ones.
• To carry on this balancing act, natural gas
  utilities must maintain ample liquidity, a strong
  balance sheet and solid credit ratings.
• This ensures continued access to capital and an
  ability to withstand unexpected natural gas price
  spikes or other events.
• It also reassures key constituents such as state
  regulators.
• Last but not least, it helps treasurers to sleep
  well at night!