SouthStar Energy Services
Mike Braswell
Chief Executive Officer
SouthStar Energy Services
Forward-Looking Statements
Statements in this presentation that are not historical facts, including statements regarding our estimates, beliefs, expectations,
intentions, strategies or projections, may be “forward-looking statements” as defined in the Private Securities Litigation Reform
Act of 1995. Forward-looking statements involve matters that are not historical facts and because these statements involve
anticipated events or conditions, forward-looking statements often include words such as "anticipate," "assume," “believe,” "can,"
"could," "estimate," "expect," "forecast," “future,” “goal,” "indicate," "intend," "may," “outlook,” "plan," “potential,” "predict,"
"project,” "seek," "should," "target," "will," "would," or similar expressions. Our expectations are not guarantees and are based on
currently available competitive, financial and economic data along with our operating plans. While we believe that our
expectations are reasonable in view of the currently available information, our expectations are subject to future events, risks and
uncertainties, and there are several factors - many beyond our control - that could cause results to differ significantly from our
expectations. Such events, risks and uncertainties include, but are not limited to, changes in price, supply and demand for natural
gas and related products, impact of changes in state and federal legislation and regulation, actions taken by government
agencies on rates and other matters, concentration of credit risk, utility and energy industry consolidation, costs and timelines of
construction projects may be affected by government and other approvals, development project delays, adequacy of supply of
diversified vendors, unexpected changes in project costs including the cost of funds to finance these projects, impact of
acquisitions and divestitures, direct or indirect effects on AGL Resources' business, financial condition or liquidity resulting from a
change in our credit ratings or the credit ratings of our counterparties or competitors, interest rate fluctuations, financial market
conditions and general economic conditions, uncertainties about environmental issues and the related impact of such issues,
impacts of changes in weather upon the temperature-sensitive portions of the business, impacts of natural disaster such as
hurricanes upon the supply or price of gas, acts of war or terrorism, and other factors which can be found in our filings with the
Securities and Exchange Commission. Forward-looking statements are only as of the date they are made, and we do not
undertake any obligation to update these statements to reflect subsequent changes.
intentions, strategies or projections, may be “forward-looking statements” as defined in the Private Securities Litigation Reform
Act of 1995. Forward-looking statements involve matters that are not historical facts and because these statements involve
anticipated events or conditions, forward-looking statements often include words such as "anticipate," "assume," “believe,” "can,"
"could," "estimate," "expect," "forecast," “future,” “goal,” "indicate," "intend," "may," “outlook,” "plan," “potential,” "predict,"
"project,” "seek," "should," "target," "will," "would," or similar expressions. Our expectations are not guarantees and are based on
currently available competitive, financial and economic data along with our operating plans. While we believe that our
expectations are reasonable in view of the currently available information, our expectations are subject to future events, risks and
uncertainties, and there are several factors - many beyond our control - that could cause results to differ significantly from our
expectations. Such events, risks and uncertainties include, but are not limited to, changes in price, supply and demand for natural
gas and related products, impact of changes in state and federal legislation and regulation, actions taken by government
agencies on rates and other matters, concentration of credit risk, utility and energy industry consolidation, costs and timelines of
construction projects may be affected by government and other approvals, development project delays, adequacy of supply of
diversified vendors, unexpected changes in project costs including the cost of funds to finance these projects, impact of
acquisitions and divestitures, direct or indirect effects on AGL Resources' business, financial condition or liquidity resulting from a
change in our credit ratings or the credit ratings of our counterparties or competitors, interest rate fluctuations, financial market
conditions and general economic conditions, uncertainties about environmental issues and the related impact of such issues,
impacts of changes in weather upon the temperature-sensitive portions of the business, impacts of natural disaster such as
hurricanes upon the supply or price of gas, acts of war or terrorism, and other factors which can be found in our filings with the
Securities and Exchange Commission. Forward-looking statements are only as of the date they are made, and we do not
undertake any obligation to update these statements to reflect subsequent changes.
Management does not affirm or update earnings guidance during private and one-on-one meetings with investors, but only
updates or confirms earnings guidance through public disclosure and filing with the commission. Earnings guidance is only
effective as of the date it is given. The company further disclaims any duty to update its guidance.
updates or confirms earnings guidance through public disclosure and filing with the commission. Earnings guidance is only
effective as of the date it is given. The company further disclaims any duty to update its guidance.
Non-GAAP Measures
Company management evaluates segment financial performance based on earnings before interest and taxes (EBIT), which
includes the effects of corporate expense allocations. EBIT is a non-GAAP (accounting principles generally accepted in the
United States of America) financial measure. Items that are not included in EBIT are financing costs, including debt and interest
expense and income taxes. The company evaluates each of these items on a consolidated level and believes EBIT is a useful
measurement of our performance because it provides information that can be used to evaluate the effectiveness of our
businesses from an operational perspective, exclusive of the costs to finance those activities and exclusive of income taxes,
neither of which is directly relevant to the efficiency of those operations.
includes the effects of corporate expense allocations. EBIT is a non-GAAP (accounting principles generally accepted in the
United States of America) financial measure. Items that are not included in EBIT are financing costs, including debt and interest
expense and income taxes. The company evaluates each of these items on a consolidated level and believes EBIT is a useful
measurement of our performance because it provides information that can be used to evaluate the effectiveness of our
businesses from an operational perspective, exclusive of the costs to finance those activities and exclusive of income taxes,
neither of which is directly relevant to the efficiency of those operations.
Operating margin is a non-GAAP measure calculated as revenues minus cost of gas, excluding operation and maintenance
expense, depreciation and amortization, and taxes other than income taxes. These items are included in the company's
calculation of operating income. The company believes operating margin is a better indicator than operating revenues of the
contribution resulting from customer growth, since cost of gas is generally passed directly through to customers.
expense, depreciation and amortization, and taxes other than income taxes. These items are included in the company's
calculation of operating income. The company believes operating margin is a better indicator than operating revenues of the
contribution resulting from customer growth, since cost of gas is generally passed directly through to customers.
We also use EBIT and operating margin internally to measure performance against budget and in reports for management and
the Board of Directors. Projections of forward-looking EBIT and operating margin are used in our internal budgeting process,
and those projections are used in providing forward-looking business segment EBIT and operating margin projections to
investors. We are unable to reconcile our forward-looking EBIT and operating margin business segment guidance to GAAP
earnings per share because we do not predict the future impact of unusual items and mark-to-market gains or losses on energy
contracts. The impact of these items could be material to our operating results reported in accordance with GAAP.
the Board of Directors. Projections of forward-looking EBIT and operating margin are used in our internal budgeting process,
and those projections are used in providing forward-looking business segment EBIT and operating margin projections to
investors. We are unable to reconcile our forward-looking EBIT and operating margin business segment guidance to GAAP
earnings per share because we do not predict the future impact of unusual items and mark-to-market gains or losses on energy
contracts. The impact of these items could be material to our operating results reported in accordance with GAAP.
EBIT and operating margin should not be considered as alternatives to, or more meaningful indicators of, the company's
operating performance than operating income or net income as determined in accordance with GAAP. In addition, the
company's EBIT or operating margin may not be comparable to similarly titled measures of another company.
operating performance than operating income or net income as determined in accordance with GAAP. In addition, the
company's EBIT or operating margin may not be comparable to similarly titled measures of another company.
Reconciliation of non-GAAP financial measures referenced in this presentation are available on the company’s website at
www.aglresources.com under the Investor Relations section.
www.aglresources.com under the Investor Relations section.
SouthStar Overview
Actively monitoring, no mass mkt. unbundling activity (some large C&I opps.)
Newly authorized states, seeking large C&I customers
Recently expanded states, serving customers
Core markets, seeking incremental growth
Texas
Oklahoma
Arkansas
Mississippi
Alabama
Georgia
Tennessee
Kentucky
Virginia
West
Virginia
Illinois
Indiana
Ohio
Michigan
Pennsylvania
New York
Maine
Connecticut
Rhode Island
Mass.
Vermont
New Hampshire
North Carolina
South Carolina
Florida
New Jersey
Maryland
Delaware
District of Columbia
Louisiana
Missouri
Actively monitoring unbundling activity
• Partnership between AGL
Resources and Piedmont
Natural Gas
Resources and Piedmont
Natural Gas
• One of the largest deregulated
retail natural gas marketing
companies in the United States
retail natural gas marketing
companies in the United States
• Serve more than 530,000
customers in seven states
customers in seven states
• Manage one of the largest
portfolios of Southeastern pipeline
and storage assets
portfolios of Southeastern pipeline
and storage assets
• Approximately 85 employees and
over 200 additional full-time
employees supporting business
through customer operations
Business Process Outsourcing
(BPO)
over 200 additional full-time
employees supporting business
through customer operations
Business Process Outsourcing
(BPO)
Business Summary
4
Earnings and Key Drivers
* Earnings before tax. SouthStar’s EBT is equal to net income as it does not
record income taxes because of its partnership structure. Results represent
100% of SouthStar earnings, which are split 75% to AGL Resources and 25%
to Piedmont Natural Gas, except Ohio and Florida earnings, which are shared
70% to AGL Resources and 30% to Piedmont.
record income taxes because of its partnership structure. Results represent
100% of SouthStar earnings, which are split 75% to AGL Resources and 25%
to Piedmont Natural Gas, except Ohio and Florida earnings, which are shared
70% to AGL Resources and 30% to Piedmont.
EBT* ($ millions)
• Retail
• Customer count and market
share in Georgia
share in Georgia
• Portfolio mix for customer
value
value
• Commercial
• Price effectuation
• Seasonal spread capture from
storage
storage
• Value from transport capacity
• Weather / throughput risk
• Other
• Contribution from expanded
growth markets
growth markets
• Interest income/expense from
cash investments and
borrowings from AGL
Resources money pool
cash investments and
borrowings from AGL
Resources money pool
• Capital and operating
expenditures
expenditures
Key Drivers
5
2007 Key Achievements
• Record earnings of $119MM (EBT) with positive contributions from
key drivers and favorable market conditions
key drivers and favorable market conditions
• Executed 10-year meter-to-cash BPO agreement to transition
services to Vertex North America (expected savings of
approximately $30MM over life of agreement)
services to Vertex North America (expected savings of
approximately $30MM over life of agreement)
• Launched new retail product (service line warranty) in Georgia with
expected annual contribution from products and services of $1MM
by 2009
expected annual contribution from products and services of $1MM
by 2009
• Purchased Commerce Energy’s Georgia retail natural gas book
• Worked collaboratively with Atlanta Gas Light and other Georgia
retail marketers to design and receive approval for the Georgia
Capacity Supply Plan
retail marketers to design and receive approval for the Georgia
Capacity Supply Plan
6
2007 Key Achievements
OHIO
Dominion East Ohio (DEO)
• SouthStar continued to serve load associated with phase I of
DEO’s Standard Service Offering (SSO) program, which
contributed approximately $3MM of operating margin* in 2007
DEO’s Standard Service Offering (SSO) program, which
contributed approximately $3MM of operating margin* in 2007
• SouthStar actively participated in a stakeholder process that
resulted in DEO filing their phase 2 merchant exit application in
December 2007
resulted in DEO filing their phase 2 merchant exit application in
December 2007
• The current application contemplates another auction in July 2008
Vectren Energy Delivery of Ohio (VEDO)
• In December 2007 VEDO submitted their merchant exit
application, which contemplates a similar exit path as DEO
application, which contemplates a similar exit path as DEO
• There has been no opposition to the application and an SSO
auction is scheduled for mid-May 2008
auction is scheduled for mid-May 2008
• SouthStar continues to advocate for a robust retail model behind
VEDO
VEDO
FLORIDA
• Executed a marketing agreement with TECO Partners
• Currently serving approximately 300 C&I customers
• Won a two-year bid to be one of two marketers to provide the
supply and pricing for approximately 7,000 residential and small
commercial customers behind Central Florida Gas
supply and pricing for approximately 7,000 residential and small
commercial customers behind Central Florida Gas
7
* Operating margin is a non-GAAP measure. The reconciliation of the $3 million operating margin in Ohio is as
follows: $35 million in operating revenues - $32 million cost of gas.
follows: $35 million in operating revenues - $32 million cost of gas.
8
2008 Objectives
1. Maintain overall profitability of core retail
business while ensuring competitive market
leadership position in the long term.
business while ensuring competitive market
leadership position in the long term.
2. Position commercial business to capture
opportunities in the wholesale market while
safeguarding the business from adverse
financial impacts by actively managing risks and
exposures.
opportunities in the wholesale market while
safeguarding the business from adverse
financial impacts by actively managing risks and
exposures.
3. Continue to enhance corporate image and
maintain industry leadership role in promoting
favorable regulatory/legislative frameworks for a
retail energy model that benefits SouthStar.
maintain industry leadership role in promoting
favorable regulatory/legislative frameworks for a
retail energy model that benefits SouthStar.
4. Continue to improve operational processes and
infrastructure, while seeking opportunities to
reduce cost and risk and/or improve margin.
infrastructure, while seeking opportunities to
reduce cost and risk and/or improve margin.
5. Pursue growth opportunities in core business
and continue expansion into new markets.
and continue expansion into new markets.
Mississippi
Alabama
Georgia
Tennessee
Kentucky
Virginia
West
Virginia
Ohio
Pennsylvania
New York
Maine
Connecticut
Rhode Island
Massachusetts
Vermont
New Hampshire
North Carolina
South
Carolina
Carolina
Florida
New Jersey
Maryland
Delaware
District of Columbia
Michigan
Core Markets
Expanded Growth
Markets
Markets
Emerging Markets
9
Customer Count and Market Share
Avg. Georgia Firm Customer Count
(000s)
2001
2002
2003
2004
2005
2006
Total
Deregulated
Only
Only
2007
Market Share
• Stable customer count and
market share
market share
• Ongoing focus on high-
grading the customer
portfolio
grading the customer
portfolio
• Customer segmentation
analysis used to shift from
broad-based to focused
marketing and advertising
analysis used to shift from
broad-based to focused
marketing and advertising
• Emphasis on improving
contribution of less-profitable
segments
contribution of less-profitable
segments
0%
15%
30%
45%
J
A
J
O
J
A
J
O
J
A
J
O
J
A
J
O
J
A
J
O
J
A
J
O
J
A
J
O
10
Customer Care and Bad Debt
Customer Care Expenses
Average Monthly Cost per Customer and Total Cost
Bad Debt Expense
(As % of Revenue)
• Customer care is largest O&M expense
(currently outsourced to Alliance Data
Systems)
(currently outsourced to Alliance Data
Systems)
• Transition to Vertex expected to yield
financial and service improvements
financial and service improvements
– Approximately $30MM in savings
over 10 years
over 10 years
– Enhanced service delivery and
associated contractual
commitments
associated contractual
commitments
• Bad debt is significant O&M expense
• Portfolio high-grading and collection
process improvements implemented
to address bad debt
process improvements implemented
to address bad debt
• Actions reduced bad debt exposure
and percentage has been stable for
past 4 years
and percentage has been stable for
past 4 years
11
Commercial Operations Metrics
* Represents economic contribution of storage exclusive of accounting
adjustments such as LOCOM and fixed demand charges
adjustments such as LOCOM and fixed demand charges
Economic Storage Gross Margins*
($ millions)
Pipeline Capacity Utilization
2008F
2009F
Natural Offsets - Storage and Price Effectuation
(Contracts)
Trade Liquidity
($ millions)
$10
$311
$173
$128
$395
$480
$515
12
Hedging Philosophy
Identify Risks
Control Risks
• Risks inherent to retail gas
marketing business
marketing business
– Commodity price risk (fixed
price, inventory, swing,
price effectuation)
price, inventory, swing,
price effectuation)
– Basis risk
– Throughput risk (weather)
– Credit risk
• Each category of risk is
identified and evaluated on an
isolated, independent basis
identified and evaluated on an
isolated, independent basis
• Risks are controlled by:
– Evaluating entire portfolio
to determine whether
natural hedges exist
to determine whether
natural hedges exist
– Where natural hedges do
not exist, use financial
derivatives to hedge
residual exposures
not exist, use financial
derivatives to hedge
residual exposures
• SouthStar generally prefers to
hedge residual exposure with
options in order to retain
upside potential
hedge residual exposure with
options in order to retain
upside potential
– Option premiums are a
finite cost vs. the unknown
cost/opportunity cost of
swaps in isolation
finite cost vs. the unknown
cost/opportunity cost of
swaps in isolation
13
Keys To Continued Growth
Element
Areas of Focus
Maintain
Operational
Focus
Operational
Focus
• Capture spreads and manage risks
• Manage retail customer portfolio
• Monitor competitor activities
• Proactively participate in regulatory and market
development processes
development processes
• Focus on platform elements that address:
• Increased competition
• Greater market sophistication
• Improved growth opportunities
• Examples include:
• Customer care BPO vendor transition
• Allegro ETRM enhancements
• Executed vendor agreement for billing/
customer care outside of core markets
Strengthen
Platform
Platform
14
Growth Areas Under Development
Options
Growth Area
Strategy
Existing
Markets
Markets
Retail - - GA Organic
Acquire high-value customers
New Products / Services to
Leverage Customer Base
Leverage Customer Base
Evaluate and introduce new
products and services
products and services
Acquire and leverage incremental
assets
assets
Target small muni’s in SE
Expanded
Growth
Markets
Growth
Markets
Emerging Retail Markets - OH and FL
(C&I)
(C&I)
Use multiple entry approaches to
identify and capture opportunities
- Dominion East Ohio and Vectren SSO
- Retail model / market shaping advocacy
- Marketing partner relationships
- Inorganic opportunities
identify and capture opportunities
- Dominion East Ohio and Vectren SSO
- Retail model / market shaping advocacy
- Marketing partner relationships
- Inorganic opportunities
Large C&I
Leverage SouthStar’s assets
Large C&I
Target customers based on asset
position and creditworthiness
position and creditworthiness
15
Conclusions
• Strong retail organization with capabilities that span
customer and asset portfolios
customer and asset portfolios
• Well-defined governance, disciplined leadership and
effective risk management
effective risk management
• Operated with focus on the levers that produce financial
results
results
• Able to apply capabilities, infrastructure and experiences
to new opportunities
to new opportunities
16