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Executives

Sarah M. Stashak - Director of Investor Relations

Andrew W. Evans - Chief Financial Officer and Executive Vice President

John W. Somerhalder - Chairman, Chief Executive Officer, President, Member of Executive Committee and Member of Finance & Risk Management Committee

Peter I. Tumminello - Executive Vice President of Wholesale Services and President of Sequent Energy Management

Henry P. Linginfelter - Executive Vice President of Distribution Operations

Scott Carter - Chief Regulatory Officer and Senior Vice President of Commercial Operations

Analysts

Craig Shere - Tuohy Brothers Investment Research, Inc.

Daniel M. Fidell - U.S. Capital Advisors LLC, Research Division

Mark Barnett - Morningstar Inc., Research Division

Christine Cho - Barclays Capital, Research Division

Reza Hatefi

AGL Resources (GAS) Q4 2012 Earnings Call February 6, 2013 9:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 AGL Resources Earnings Conference Call. My name is Carissa, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I will now turn the presentation over to your host for today's conference, Ms. Sarah Stashak, Director, Investor Relations. Please proceed.

Sarah M. Stashak

Thank you, Carissa. Thanks, everyone, for joining us this morning to review our fourth quarter and year end 2012 results. Joining me on the call today are John Somerhalder, our Chairman, President and CEO; and Drew Evans, our Executive Vice President and CFO. We also have several members of our management team available to answer your questions following our prepared remarks.

Our earnings release, earnings presentation and our Form 10-K are available on our website. To access these materials, please visit aglresources.com. Let me remind you today that we will be making some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve matters that are not historical facts, and our forward-looking statements and projections could differ materially from our actual results. The factors that could cause such material differences are included in our earnings release and more fully described in today's 10-K filing.

We also describe our business using some non-GAAP measures, such as operating margin, EBIT, adjusted net income and adjusted EPS. A reconciliation of these measures to the GAAP financials is available in the appendix of our presentation as well as on our website.

We'll begin the call with some prepared remarks before taking your questions. Drew, I'll turn it over to you to begin.

Andrew W. Evans

Thanks, Sarah, and good morning, everyone. I'll begin our prepared remarks today with a recap of the 2012 results, and then John will address our expectations for 2013.

Before detailing our results for the year, I want to address our earnings shortfall relative to the guidance that we initially provided for 2012, undoubtedly the warmest weather on record negatively impacted our 2012 performance. Fortunately, we do have weather normalization for several of our utilities and effectively hedged a significant portion of our weather risk in our retail operations. As a result, even with the historically warm weather, we had a negative impact of only about $32 million on an EBIT basis in our distribution operations and our retail operations businesses.

In addition, while our Wholesale Service business generated higher economic value during the year, in part supported by its storage rollout schedule, mark-to-market accounting on our hedge positions resulted in a year-over-year negative impact to reported earnings. A majority of the economic value captured in 2012 is expected to be recognized in our accounting earnings in 2013. As you know, we expected to generate at least $60 million of savings across the enterprise following the close of the Nicor transaction. We were able to achieve our targeted savings primarily across our distribution, retail and Wholesale Services segment. However, revenues from the combined businesses were weaker than we anticipated across most of our operating segments in part due to market fundamentals that were weaker than we expected at the time of the merger announcement.

Due to the 3 primary factors I just described, our EPS excluding nonrecurring items was $2.46 for the year, which is $0.42 lower than the midpoint of our initial guidance range. As a result, our incentive compensation expense for 2012 was lower than our target levels by approximately $29 million, which shielded our investors by approximately $0.15 per share.

Now turning to Slide 3 of our presentation. You can see that we reported GAAP earnings per diluted share for the fourth quarter of $0.84. On an adjusted basis, excluding $5 million of merger-related costs and additional $8 million accrual related to the Nicor Gas PBR issue, which I'll address momentarily, diluted earnings per share was $0.91, which compares to $0.94 on an unadjusted basis for the fourth quarter of 2011. The primary year-over-year driver of our fourth quarter earnings is the addition of the Nicor businesses. As a reminder, 2011 included only 22 days of contribution from Nicor following the close of the merger.

Turning next to Slide 4. You can see our full year 2012 financial results. Diluted EPS adjusted for Nicor expenses was $2.46, down from $2.92 for 2011. The primary reason for the decline are the -- reasons for the decline are the impact of the unprecedented warmer than normal weather throughout much of the year, as well as mark-to-market hedge gains that were lower than 2011.

A snapshot of fourth quarter and full year EBIT for our distribution business is on Slide 5. EBIT was up $31 million compared to the fourth quarter of 2011. This includes an EBIT contribution of $15 million from Nicor Gas. The primary driver of results for both the fourth quarter and the year were warmer than normal weather for our 2.2 million customers in Illinois. In 2012, the Chicago area had 19% fewer heating degree days than the 10-year average, and this weather impact reduced our EBIT in the distribution business by $24 million.

While this certainly presents a challenge, I do want to point out that the rate structure in Illinois is such that a significant portion of our revenue is recovered through base rates, which partially mitigates our exposure to weather. As such, the negative weather impact represents only about 1.5% of the total operating margin for our distribution segment for 2012.

While weather was a major driver in Illinois, the remainder of this segment performed well during 2012, posting an $11 million increase in EBIT compared to 2011, primarily due to effective expense management, achievement of merger-related cost savings and higher contribution from regulatory infrastructure programs. In this segment, we also recorded an additional $8 million or $0.04 liability related to the long-running performance-based rate or PBR case in Illinois. The administrative law judge issued a proposed order in November, which included a recommended amount that was $8 million higher than our settlement with the ITC staff, and we are awaiting a final ruling from the Illinois Commerce Commission. We increased our accrual for this issue by $8 million in the fourth quarter, though obviously, based on our agreement with the ITC staff, we disagree with the ALJ's position.

Turning to operating expenses. The $557 million for O&M in 2012 includes higher than anticipated expenses related to compliance and integrity work, particularly in the second half of the year. Our customer count remains stable and reflects a slight increase year-to-year.

Turning to the retail segment on Slide 6. We reported EBIT for the fourth quarter of $37 million, an $8 million increase compared to the fourth quarter of 2011. The increase mainly reflects the addition of Nicor's retail businesses to our portfolio, as well as a reduction in transportation and gas costs and lower bad debt expense at SouthStar. Our SouthStar joint venture continued to perform well and maintained its market-leading position in Georgia while expanding into other markets when it can do so profitably.

You may have seen the press release we issued last Thursday announcing our acquisition of NiSource's retail services business. This business provides home warranty solutions such as appliance repair and line protection services and complements the retail services business that we acquired as part of the Nicor acquisition. We view this as an opportunity to essentially double the size of that business and to gain scale on a cost-effective manner. We expect the transaction to add more than $7 million of EBIT to the retail services segment -- retail segment in 2013 after the merger-related expenses and amortizations of intangibles and will be accretive to EPS this year. We are working to quickly integrate these 2 businesses, and we look forward to sharing more with you about the outlook for retail services at our Analyst Day.

You'll find fourth quarter 2012 results for our Wholesale Services segment on Slide 7. There are a few moving pieces affecting our year-over-year results, so let me take you through them. EBIT declined by $4 million year-over-year for the fourth quarter. As we noted in our January press release, we had mark-to-market losses of $22 million related to the transportation positions along the Northeast corridor. This was the primary driver of the year-over-year decline.

For the full year, EBIT declined by $8 million due mainly to transportation and storage hedge gains that were lower in aggregate than in 2011, though commercial activity improved year-over-year. While hedge movements in our accounting results can sometimes mask the true economic value generated by the wholesale segment, I do want to highlight this increase in value during the quarter and throughout the year.

We ended the year with a storage rollout schedule of $27 million, which you can see on Slide 8, and we expect to realize that value in operating revenues in 2013. This is a significant improvement over the $3 million rollout schedule at year end 2011. Taking into account our fourth quarter transportation hedge losses, as well as transportation hedge gains realized earlier in 2012, we have about $7 million of economic value related to transportation hedge positions that we expect to realize in 2013.

Now let's move to Slide 9. EBIT at our midstream segment was $4 million during the fourth quarter of 2012, slightly higher than the prior year. For the full year, EBIT was $10 million, up $1 million over 2011. The increase for both the quarter and the year is due primarily to revenues from Central Valley, offset by lower revenues at Jefferson Island versus the prior year due to re-contracting at lower rates. You can see the blended rates for each storage facility on the chart at the bottom right side of this page. Overall, the market for storage remains weak, but we continue to focus on ways to optimize the value of our available capacity while not committing to long-term contracts in this low price environment.

Briefly, you can see results for the Cargo Shipping segment on Slide 10. We reported EBIT of $9 million during the fourth quarter of 2012, and $8 million for the full year. Factors impacting this business have remained consistent throughout the year. Market share and utilization are slowly improving. And while volume is higher year-over-year, rate per 20-foot equivalent, or TEU, has fallen. We have worked with the management team at Tropical to maximize efficiencies in this business, and we are all focused on appropriately improving profitability per TEU. I would also note that of the $22 million of depreciation and amortization at the Cargo Shipping segment, EBIT is burdened by approximately $8 million of purchase accounting depreciation and amortizations.

Book balance sheet highlights are noted on Slide 11. Our long-term debt was 33 -- $3.3 billion at the end of the year, which reflects the additional debt issued to finance the Nicor transaction and the additional Nicor debt we assumed when we closed the transaction. Interest expense was up $3 million for the quarter compared to same period in 2011, mainly driven by the recapitalization.

For the full year, interest expense was $184 million, which compares favorably to our expectation of $193 million for the year. We do plan to issue some long-term debt later this year in part to refinance our $225 million April maturity, as well as to term-out of some of our current short-term debt balances.

Turning to our capital expenditures. CapEx for the year was $784 million. We anticipated -- we anticipate spending about $650 million of utility CapEx in 2013. More than $200 million, or roughly 1/3 of those expenditures are on rider-based programs with minimal regulatory lag compared to about $270 million of rider-related spending in 2012. Our nonutility capital spending is expected to be around $40 million, about half of what it was in 2012, reflecting the wind-down of construction spending at our storage facilities.

Thanks for your time today, and I'll turn the call over to John.

John W. Somerhalder

Thank you, Drew. First, I wanted to highlight some significant operational accomplishments for 2012, particularly in our Distribution Operations segment, where we continue to focus on being the leader in the sector with regard to pipeline safety, maintenance and upgrades.

During the year, we replaced more than 280 miles of aging pipeline infrastructure across our footprint, continuing our strategy of deploying capital into regulated business in a way that minimizes regulatory lag and ensures timely recovery of and on our capital. We also achieved good success in extending our system and promoting the use of natural gas in several communities.

We also managed an excellent recovery effort in the wake of Hurricane Sandy. On our system in New Jersey, we performed more than 8,000 meter assessments, and we replaced or restored nearly 1,500 meters systemwide. Further, we deployed nearly 60 employees for mutual aid to supporting -- support neighboring utilities in their restoration efforts.

The proper maintenance and operation of our distribution system is paramount to the health of our company, so you will see us continue to invest in these areas. Operational accomplishments notwithstanding, I'll reiterate that we are disappointed in last year's financial results relative to our guidance and our initial guidance.

While there were some factors beyond our control, such as weather and marks related to our wholesale positions, we were successful in achieving cost savings relative to the Nicor merger at our forecasted level of $60 million. However, as Drew mentioned, revenues from the combined businesses were weaker than we anticipated. We have a much clearer picture now that we've operated the combined businesses through a difficult year, and our 2013 guidance reflects both our expected opportunities and our challenges.

Turning to Slide 12. You can see that our EPS range for 2013 is $2.50 per share to $2.70 per share for the consolidated the business. We also have provided the expected EBIT range for each segment as well as our estimated interest expense for the year. Due to the volatility of earnings from our wholesale business, we are introducing a more granular measure, earnings per share, excluding the Wholesale Services segment, which is $2.40 per share to $2.50 per share. This metric should allow you to better track our business performance as we progress through the year without quarterly volatility driven by mark-to-market accounting clouding our results.

Our wholesale business continues to be extremely important in managing many of our utility assets and has returned more than $200 million under our Asset Management agreements over the last decade. However, we view the EPS measure, excluding wholesale, to be a better gauge of success for our remaining businesses, which have seasonally, but less -- they are seasonal but they have less volatility.

Our wholesale business continues to be a low-risk energy marketing business focused on serving our utilities, third-party utilities, power generation and producers. Though this business is delivering lower earnings consistent with our expectations and low-volatility environment, it provides us an option on higher earnings under improving wholesale market conditions.

Turning to Slide 13. You will find the assumptions underpinning our guidance. I won't go through each of these but note that we assume normal weather for the entire year, exclude mark-to-market impacts and expect continued low volatility in the price of natural gas. We also have provided the approximate quarterly earnings contribution that we expect from our distribution retail and shipping segments, so you can see the anticipated shape of our earnings distribution across the year.

On Slide 14, you will find a bridge of our 2012 actual EBIT adjusted to exclude the merger cost and additional Nicor PBR litigation accrual to the midpoint of our 2013 EBIT estimate. As you can see, Distribution Operations is expected to be consistent year-over-year. There are quite a few items that are largely offsetting, and I will address those on the next slide.

Retail is expected to be higher by roughly $15 million in part because of warmer weather in 2012 and reflecting our acquisition of NiSource's retail services business. Wholesale is expected to contribute approximately $30 million, driven by a strong storage rollout schedule in 2012 and the recruitment of losses association with transportation positions. Midstream is expected to be lower due to re-contracting at lower rates and higher depreciation expense associated with the startup of new facilities in 2012, and we expect an improvement out of our Cargo Shipping related to increased profitability per TEU.

If you turn to Slide 15, I will take you through some of the moving parts impacting Distribution Operations. One of the biggest impacts year-to-year comes from the normalization for weather, which had the positive EBIT impact of $24 million versus 2012. Second, we expect our infrastructure investment programs to add approximately $30 million to 2012 levels. This reflects the programs we have in place in Georgia, Virginia and New Jersey. However, this increase is offset somewhat by additional systemwide depreciation expense of around $20 million.

Looking at the main decrements, the one that clearly stands out is incentive compensation. As I mentioned, we did not meet incentive compensation criteria for 2012 from a cash or a stock perspective, and prior stock awards that included a performance measure were not granted due mainly to warm weather. Assuming a return to target levels in incentive compensation in 2013, that will lead to a year-over-year swing of roughly $27 million that takes us back to market median pay. To put this amount in perspective, this incentive compensation covers about 3,200 of our utility and corporate service employees.

Lastly, pension and retirement benefits expense is up slightly due to declining discount rates as a result of further interest rate declines in the past year. As a reminder, pension and retirement benefit expenses increased $14 million from 2011 to 2012, and we expect an additional increase of about $6 million from 2012 to 2013.

A further note on the pension front is that effective December 31, 2012, we have officially combined our 3 pension programs for Atlanta Gas Light, Nicor Gas and the former NUI utilities. Combining these plans will significantly reduce any required minimum funding contributions over the next several years. The merging of the plans was a significant undertaking, and we are pleased to have accomplished this one -- just one year into the merged operations.

While we expect our EBIT results to be unchanged year-over-year at Distribution Operations, this does not reflect our strong cash generation. Cash flows generated by our operations were more than $1 billion in 2012, supporting our ongoing commitment to increase dividends, which you see on Slide 16.

Yesterday, our Board of Directors approved the 11th consecutive annual dividend increase for 2013. Our dividend now stands at $1.88, a 2% increase over last year. Though our payout ratio has increased a bit relative to the peer group due to weaker earnings in 2012, again, we are generating strong cash flows to support the dividend.

On Slide 17, you can see a summary of priorities for 2013. These are consistent with the business initiatives we had previously discussed with you, and we will review each of them in greater detail at our Analyst Day in New York on March 27.

In closing, while our 2012 financial results were disappointing relative to our expectations, our core distribution and retail businesses are stable, healthy and continue to perform well. Combined, they contributed 97% of operating EBIT in 2012, and we expect approximately 95% of operating EBIT from these 2 segments in 2013. We recognize that we face significant challenges in our wholesale, midstream and shipping segments, and we'll continue to work to position these businesses for success as market fundamentals improve.

We are very proud of the significant time and effort invested by our people across all of our businesses to accomplish key merger integration and operational milestones this past year, and I am confident that their efforts will result in long-term benefits for the combined company. We thank you for your time today and for your continued interest in AGL Resources.

Operator, I'll turn the call back over to you to begin the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question will come from the line of Craig Shere of Tuohy Brothers.

Craig Shere - Tuohy Brothers Investment Research, Inc.

So I'm sorry, on the NiSource retail, is that $7 million first full year or a partial year EBIT contribution? And how much is the full year D&A?

Andrew W. Evans

It's full year, and D&A, I have to pull up, is $8 million in total.

John W. Somerhalder

And Craig, I mean, we'll essentially see 11 months of the benefit this year.

Craig Shere - Tuohy Brothers Investment Research, Inc.

Okay. But your -- these numbers of $15 million EBITDAs assumed 12-month contributions?

Andrew W. Evans

No, they assume 11-month contribution.

Craig Shere - Tuohy Brothers Investment Research, Inc.

Okay. $15 million for 11 months. Okay. Got you. And is that including synergies that you expect?

Andrew W. Evans

It actually includes some of our integration expense for the first full year, and so we'll be able to give you a better run rate when we meet in March. Robin will actually present that -- will likely present that business to you. I think the main thing is that we've got a really nice platform for retail services that was built by Nicor. It's a very logical consolidation for us because we've got a really nice call center and good personnel in Naperville and we wanted to expand off that base.

Craig Shere - Tuohy Brothers Investment Research, Inc.

Okay. So just to be clear, you paid $120 million in 11 months, you're expecting $15 million EBITDA, but that includes some headwinds on integration expense but no uplift on ongoing synergies?

Andrew W. Evans

That's right, for 2013.

Craig Shere - Tuohy Brothers Investment Research, Inc.

Okay. And in midstream storage, what is the cents per Mcf month pricing of the 3.4 Bcf at JISH and 2.0 Bcf at Golden Triangle contract expirations this year?

Peter I. Tumminello

I'll be glad to handle that, Craig. This is Pete Tumminello. JISH, we're rolling off about $0.125 rates there, and we're seeing market rates certainly far less than that going into '13. At CVGS, we're rolling off rates a little under $0.10, 1.5 Bcf and certainly seeing rates near half that rate as we go into 2013.

John W. Somerhalder

Yes, without being too precise, I think Pete stated it correctly. At this point, if you just look at where the market is today, it is roughly half of the rates that we see those rolling off.

Craig Shere - Tuohy Brothers Investment Research, Inc.

I'm sorry, you're saying that it's mid-single-digit rates right now?

Peter I. Tumminello

Mid- to high-single-digit rates, yes.

John W. Somerhalder

That's correct.

Craig Shere - Tuohy Brothers Investment Research, Inc.

One wonders how sustainable that is.

Peter I. Tumminello

Well, we do believe that this is an extreme low point. You never can call the lowest point. But as fewer facilities get built over time, as industrial loads start improving, as exports start improving, fundamentally, we do see that returning and growing off of that number, but it is hard to estimate how much it will grow off of that number.

Andrew W. Evans

And Craig, I mean, that's an important point because what we are seeing this year if you look at the fourth quarter and how this year has started out compared to last year; last year, because storage was so full and we had such mild weather in the fourth quarter of the year before and then early in 2012, the storage spreads had -- the single-cycle storage spreads seasonally had moved out because of that full storage. So that gave some value to storage above what we see this year. Even though this year we're seeing colder weather and we've seen some volatility because of that, we haven't seen enough to move the storage value up. So we're somewhat in a middle position where we're not getting the benefit of storage congestion that helps storage and volatility value. We're getting enough weather to pull storage levels down but not enough to drive significant volatility. So we're somewhat in a middle position where that impact not only storage and storage rates, but that's also impacting our outlook for the new commercial value we can capture with energy market and trade with our Sequent business. So that's how we're looking at the year as a challenging year from the standpoint of storage values and price volatility impacting our business.

Craig Shere - Tuohy Brothers Investment Research, Inc.

Understood. But how much, and I guess, Pete, I'll throw this to you, but how much do you think is perpetually systemic just because the new kind of manufacturing-like work-in-process shale drilling results in virtual storage anyhow, so people aren't just worried about getting what their needs are?

Peter I. Tumminello

Yes, I think that's going to also be locationally sensitive. I think if you look out in California, that's going to be less impacted, in my opinion, by the systemic shale issues as that not impacting that market. Gulf Coast storages tend to be more impacted by the systemic growth of shale, and those will have to only recover when shale volumes temper or they're offset by material growth in industrial power demand and exports.

Craig Shere - Tuohy Brothers Investment Research, Inc.

Understood. And I guess I'll stick with you, Pete, with the last question. I was a little surprised at Sequent with the modest guidance given $27 million built in from the storage rollout schedule. Where do we stand -- well, first, do you want to comment on that? And then where do we stand on the roll-off of above market legacy contracts or overhead for both pipeline capacity and storage at Sequent?

Peter I. Tumminello

And we'll talk more about this at the analyst meeting, but we are managing the asset cost roll-off according to our plans, and that's going well. We are keeping a tight rein on expense management as well. So all of that's consistent with what we described in the past related to '13 guidance. What really backs that up is our view that we're seeing a storage market that is materially tighter in terms of the spreads compared to this time last year. Roughly $0.30 of tighter spreads ballpark compared to this time last year, and that's the material reason for not being more aggressive on guidance in 2013. Other than that, we're managing our cost roll-off as expected and everything else pretty much as expected.

Operator

And your next question comes from the line of Dan Fidell of U.S. Capital Advisors.

Daniel M. Fidell - U.S. Capital Advisors LLC, Research Division

Just a couple of quick questions for me. I guess, first, maybe you could talk just a little bit about your regulatory strategy into the next year or so. You talked about the hit from weather, pension expense, bad debt expense. Just any general thoughts in terms of rate cases and maybe going after some additional weather norm in Georgia or Illinois, CapEx track or Illinois? Just any kind of thoughts in terms of how we proceed into the next year or 2, maybe make up some of this.

Henry P. Linginfelter

Okay. Thanks, Dan. This is Hank Linginfelter, and I've got Scott Carter, who's our Chief Regulatory Officer, with me today as well. We think there are opportunities. We have a number of programs we'll have to re-up in the regulatory arena in several states. Our infrastructure programs, some of them are coming to sunset, but we have programs that we've anticipated and some of the regulators to replace those because we have lots of infrastructure needs across the system. And the regulators in most of our states have shown eagerness to work with us around investment in infrastructure and of course, we have the liquidity to do that. So we're in good shape across those businesses. In Nicor, it's a more complex environment. There are multiple utilities there that have various needs and there are a number of initiatives that each of those utilities have launched. We're participating in some ways around those. And while I don't think we see a weather fix in Illinois anytime soon, we do see opportunities around some of the more structural nature of the business, whether it's how we treat things like depreciation or how we invest in infrastructure, there are initiatives around those things in the state. And Scott may have some other things to add to that.

Scott Carter

Yes, Dan. The one clarification point, you'd asked about weather in Georgia, and just to remind you that the utility business in Georgia is not sensitive to weather. They have a straight conservative rate environment. So I think certainly what Hank hit on from Illinois is certainly our focus. There are needs there, and we're looking at several different opportunities to improve the position up there relative to those issues.

Andrew W. Evans

I'll add that -- you mentioned rate case as well. I think the -- you might recall, we're in a 3-year stay out in Illinois around general rate cases that was part of the merger on order. And so we won't have a general rate case this year or next in terms of implementation. We may see a need for rate case, and we'll be prepared to file one when we're authorized to do so, if the numbers justify that. We don't have any pending rate cases in the other jurisdictions where we're performing pretty well against our authorized returns at the moment.

John W. Somerhalder

And just to summarize that as well. We do have a focus, as Scott and Hank talked about, related to rider surcharge programs in Georgia, New Jersey, Virginia and in other locations. Those have been very successful. The benefits of those have been muted to some extent by continuation of bonus depreciation. So they've worked very well. We have programs in place that we need from a regulatory standpoint. But the growth from those, because of bonus depreciation, has been muted. As Hank and Scott indicated, rate cases in our other jurisdictions and weather normalization, we believe, is in, other than Illinois, in very good shape. So no immediate plans in those areas. But over this next 1 year to 2 years, it will be important for us to look at ways to invest in infrastructure, depreciation rates, potentially weather normalization, the right things that work both for our customers in Illinois and will produce continued better results out of that business. So that will be our focus primarily.

Daniel M. Fidell - U.S. Capital Advisors LLC, Research Division

Great. Appreciate that color, and maybe just a final one, if could, different topic. Can you give us -- and I know you're going to cover this at the Analyst Day, but can you give us a little bit more color behind the NiSource transaction? Are there other opportunities for retail service layer ons? Is this an area that you're interested in building upon beyond this transaction?

Andrew W. Evans

This is Drew, Dan. I think we've reached a pretty decent critical mass. We've got to absorb what we've got and make sure that we can operate it efficiently. Our next set of priorities really relates to our own distribution businesses and in the retail energy component here in Georgia. And so we'll focus the next -- in 2013 on getting the NiSource calls moved over or integrated, and then we'll focus on rollout in our own utilities, which is actually underway. We just -- we want to make sure we get it more fulsome deployment across our own utility base. So I wouldn't expect that we would go out and identify additional properties like this to acquire. These happen to be contiguous in a very nice block of customers.

Operator

[Operator Instructions] And your next question comes from the line of Mark Barnett of Morningstar.

Mark Barnett - Morningstar Inc., Research Division

Just a couple of quick questions on costs. From the 2012 figures, you gave the sum for PBR and merger at about $18 million, and you broke out the accrual for about $5 million in 4Q. Could you give the accrual figure that you took for the full year?

Andrew W. Evans

I'm sorry, for PBR? Is that what you're asking, Mark?

Mark Barnett - Morningstar Inc., Research Division

Yes, sorry, the PBR accrual figure.

Andrew W. Evans

Yes, Mark, it's $72.1 million, I believe, is the full accrual in 2000...

Peter I. Tumminello

That wasn't the accrual for the year. For the year, it was $8 million.

Andrew W. Evans

$8 million. So we already ran through that as booked on…

Peter I. Tumminello

The remainder was in 4Q [indiscernible].

Andrew W. Evans

So $8 million just for the year.

Mark Barnett - Morningstar Inc., Research Division

Okay. $8 million, all right. And second question, looking at your 2013 guidance on Slide 17 or 16, you give your comparable EBIT. And I'm just wondering looking at the compensation, is that just tied to hitting -- assumptions of hitting targets in 2013 versus not in 2012? Or are these mostly driven by just normal compensation increases?

Andrew W. Evans

No, the assumption is driven largely by what you mentioned first, which is hitting target budget and compensation guidelines that would allow us to pay our employees at a median is the largest piece of -- from a very low level of compensation in that area in 2012 is the largest bridge. But also, a smaller piece would be hitting the trigger level that would vest stock awards, which is a much smaller piece. We did not hit that level in 2012, and then we have performance measures related to total shareholder return for our PASUs. That was not achieved in 2012. But it really is returning to target levels on those 3 programs makes up that variance between 2012 and 2013.

Mark Barnett - Morningstar Inc., Research Division

Okay. I guess one more quick question on the retail business. You had mentioned or have consistently mentioned that maybe looking in the future, you could see potentially some revenue synergies start to roll in, in that business. And with the NiSource expansion, as you mentioned, you'll be able to maybe leverage your Illinois business a little bit further. Can you talk about the potential there?

Andrew W. Evans

I'm sorry, Mark, could you repeat just the last sentence? You broke up there.

Mark Barnett - Morningstar Inc., Research Division

Sorry, just could you talk about the potential there given the acquisition and being able to sort of leverage that off of the Illinois – or the business that you inherited from Nicor?

Andrew W. Evans

Yes, I mean I think in total, retail services represents a relatively small -- not that small -- smallish component of retail in total, but we haven't addressed the Georgia, Virginia, Florida, Chattanooga or New Jersey markets. Did I catch them all? And so that's really the goal. If you look at that customer base, between Mike's nearly 0.5 million customers in Georgia and what's probably close to 750,000 customers across the balance, we sort of estimate long-term penetration to these things that are just sort of 30% to 40% of customer base in total, but it takes some time to get there. We've got an infrastructure in place, and so I think all of the stuff comes on at something greater than our average profitability per customer. But I think we probably should wait and do some pretty heavy reconciliations for you at the analyst meeting. Our addressable market in the near term really is the integration of the NiSource customers and then really deploying it across the utility base.

Operator

And your next question comes from the line of Christine Cho of Barclays.

Christine Cho - Barclays Capital, Research Division

I just have one question, clarifying the 2013 earnings guidance. When you say EPS excluding wholesale, is that just the mark-to-market noise tied to wholesale? Or does that include what you expect to generate from commercial activity too?

Andrew W. Evans

It's in the entire piece. So what we want to do is give -- I think people struggled this year with being able to compare operational performance to some of the guidance that we gave and it was perturbed by the mark-to-market noise. I think we have a slide in here that shows how the rollout changed significantly quarter-to-quarter, and we'd expect the greatest amount of noise in that because of the storage levels in the second and third quarter. And we wanted to give people a chance to be able to kind of compare our performance x the wholesale business without the noise. But to be specific on your question, it includes both the underlying economic earnings and the mark-to-market changes that'll occur in each quarter.

John W. Somerhalder

Yes, the straightforward math is roughly the 260, the $30 million of earnings out of the wholesale business at about – it's about $2 million per $0.01 of earnings, so that gets you down to the $0.15 gap. So it's fairly straightforward.

Operator

And your next question comes from the line of Noah Hauser of Decade Capital.

Reza Hatefi

It's actually Reza Hatefi from Decade. Sorry if you addressed this earlier in the call, but could you comment on -- I guess you guys used to have an earnings CAGR. With all these changes with '13 guidance, how should we think about that going forward in terms of an earnings trajectory?

Andrew W. Evans

We hadn't really talked about long-term CAGRs today. I think probably, we should wait until the analyst meeting so we can derive it by segment.

John W. Somerhalder

But I would -- we will go into quite a bit more detail on that. But I would indicate that when we look at our rider surcharge programs in our utility without bonus depreciation, and right now we continue to have bonus depreciation, we do see a way to be close to the -- with our core business and with retail, we do see a way to be close to the ranges we talked about before. So what we really need to focus on is the improvement in the fundamentals of the unregulated businesses and what that does to that rate. And so we'll focus on that in more detail when we get to the Analyst Day in March. But we do have a way through investment and growth in our retail business to still approach the levels we've talked about historically. So a lot will depend on projections and what we see happening as far as recovery of the fundamentals in the midstream, wholesale and in the shipping businesses.

Operator

And your next question comes from the line of Craig Shere of Tuohy Brothers.

Craig Shere - Tuohy Brothers Investment Research, Inc.

I just wanted to follow up on the pension. And Drew, maybe you have to help me a little bit with my freshman accounting here. How does the $56 million to $63 million guidance compared to the net periodic cost in the 10-K of $40 million?

Andrew W. Evans

I think -- let me just sort of take that one offline and we can walk you through the pension calculation because there -- I don't want to misstate and there are masters in pension, whether it's ERISA or IRS. But our expectation is that our total pension expense for next year will be roughly $60 million in total. I think what you see in the financial statements is probably a calculation that's required under perhaps a different methodology related to pension and SEC.

John W. Somerhalder

There's a portion that gets capitalized as part of our overhead on our capital programs, so not all of it hits the bottom line and what you see calculated.

Andrew W. Evans

The big issue for us is a $5 million increase year-over-year. We've lowered our expected return on assets to be consistent with market, and we've seen a slight decline in the discount rate, I think, just as everybody else has.

Craig Shere - Tuohy Brothers Investment Research, Inc.

Well, I guess the main thing, so there's a $5 million delta into 2013. But the main thing I want to try to understand is, is that a recurring headwind or a catch-up from changes in actuarial assumptions?

John W. Somerhalder

The major driver of -- it's actually a $6 million GAAP year-over-year. The major driver of that is that the discount rate at the end of the year was down by about 45 basis points. So that could change in the future. In fact, it should change. It could continue to compress or it could move back out. So in fact, the last 2 years where we've had a $20 million change, the majority of that is because of the discount rate that you used at the end of the year compressing, and that could move back in the other direction, could continue to compress.

Andrew W. Evans

And none of the changes related to our combination. It's just the straight calculation off of our liability and our asset for all plans combined. So what you're seeing is just a normal change related – normal, interesting word, normal change related to discount rates and expected return.

Operator

And there are no further questions. At this time, I'd like to turn the call over to Ms. Stashak for closing remarks.

Sarah M. Stashak

Thank you for joining us this morning. We'll be available today and the rest of the week for any call -- follow-up questions that you might have. Thanks.

Operator

Thank you very much for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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