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AGL Resources (NYSE:GAS)

March 27, 2013 8:30 am ET

Executives

Sarah M. Stashak - Director of Investor Relations

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

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

Henry P. Linginfelter - Executive Vice President of Distribution Operations

Michael Braswell - Chief Executive Officer of Southstar Energy Services, President of Retail Energy and President of Southstar Energy Services

Robin B. Boren - President of Retail Services

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

Steve Cave - Senior Vice President of Finance and Treasurer

Analysts

Craig Shere - Tuohy Brothers Investment Research, Inc.

Theodore Durbin - Goldman Sachs Group Inc., Research Division

Sarah M. Stashak

Good morning, everyone. Thank you for joining us today for our 2013 Analyst Conference. Today, you'll hear from several members of our senior management team, including: John Somerhalder, who will be joining us on the stage momentarily, our Chairman, President and CEO; Drew Evans, our Executive Vice President and Chief Financial Officer; Hank Linginfelter, our Executive Vice President of Distribution Operations; Mike Braswell, who's President of our Retail Energy business; Robin Boren, who's President of our Retail Services business; and Pete Tumminello, who's Executive Vice President of Wholesale Services and our Midstream Operations. Also with us today are some familiar faces, Bryan Seas, who's our Senior Vice President and Chief Accounting Officer. You all know Steve Cave, who is Senior Vice President and Treasurer. We also have Scott Carter with us. He might be a new face to some of you. He's our Chief Regulatory Officer. He's been with the company for quite a while and joined us in New York today. So he's someone that you might want to get to know at one of the breaks. He's sitting right over here in the green [indiscernible]. And we also have Brian Little, who many of you might have met in the past. He is Senior VP and CFO of our Wholesale and Midstream businesses. And last but not least, we have Pamela Meyers, who is here with us today, who is assistant for Steve and myself. And she's been a huge help in pulling everything together for this meeting. Thank you, Pam.

For those of you listening to the webcast, the presentations we're making today are available on our website. And to access these materials, please visit aglresources.com. Let me remind you today that we'll be making some forward-looking statements and projections, and our actual results could differ materially from those forward-looking statements. The factors that could cause such material differences are included in our presentation today and in our 10-K filed in February. We also describe our business using some non-GAAP measures and reconciliation of those measures to the GAAP financial is available in the appendix of our company presentation, as well as on our website.

John will start us off today, and then he will turn it over to Drew to take you through the financial overview. We'll wait for questions for John and Drew until Drew has completed his presentation. After that, Hank will give you a good detailed overview of our distribution businesses. We'll take a break, and then we'll cover our nonutility segments: wholesale, midstream. And Drew will wrap it up again with cargo shipping. And then we'll have a nice lunch.

So feel free to get out throughout the presentation. If you need water or drinks, feel free to head to back. And if you have questions, Pamela will come around with a microphone so that everything goes through clearly on the webcast. Thanks.

John W. Somerhalder

Good morning, and thank you, Sarah. Thank you very much for being with us today. This is our management team. Just start off to remind you of our footprint, a footprint that gives us a very good opportunity to participate in a very dynamic and interesting natural gas market.

First of all, we are, to start out, talking about our distribution operations business in 7 states from Georgia and Florida up to Illinois, over to New Jersey and several states in between. We have retail operations, the base of that is in Georgia and Illinois but also in Florida, all the way from the Midwest over to Mid-Atlantic, upper Mid-Atlantic, and now up into New England. Storage facilities in the Louisiana, Texas, producing area in California, the marketing area. Our energy market and trading business, out of Houston, headquarters in Georgia, and then our Tropical Shipping business out of Florida.

Start out with a description of each of our business segments. Again, at distribution operations, we serve 4.5 million customers in those 7 states that I talked about. That means we serve approximately 1 out of every 15 customers connected to distribution systems in our country. We have a strong track record on several fronts. One is investing in those businesses for safety and integrity. And that goes back many years. We have a strong track record related to cost containment in those businesses. We have a good, strong track record related to regulatory outcomes. And that's everything from rate cases to programs that allow us to invest in that business and achieve our returns.

And now we're very focused on growth in those businesses. And with the new fundamentals of natural gas, we see improved opportunities, even in an environment where economic recovery is slower. And we see some opportunities, as Hank will talk about, to have improvement in that area. So we are well positioned in our distribution business to continue to have very stable and growing earnings. And you'll see from Hank's presentation, growth of rate base and earnings, we believe, in the range of 4% from that business.

Retail operations also is a very stable business for us. It starts with the business that we've been in for almost 15 years in Georgia, providing us retail services to those customers to almost 0.5 million customers there out of a total market of a little over 1.5 million customers. We've got a large number of customers, Mike will talk about it, in Illinois. And we're marketing in other areas like Florida and the other states that I showed you on the last chart.

The other piece that's very stable in that business is the Nicor National, Nicor services business that provided warranty and other services to utility customers. Nicor had a very good business. They know what the utility customers need and want related to those services and have had a very good track record, leading track record, of offering and providing and having a very high percentage of those customers demanding those services. We now, with the acquisition of NiSource and with our own utility franchise and with the businesses that Mike manages in states he's growing, we have much larger platform now to grow that business across that footprint. So again, stable earnings from those first 2 businesses and ability to grow the retail and distribution operations in that range that I just mentioned.

The next 3 businesses, the fundamentals have been more challenged. They've been more challenged over the past several years because of lower volatility and lower prices in those environments and then in the Caribbean because of the economic impact of what's gone on for the last 4 years globally and in the United States. But we still have very strong businesses. If you look at the bases of the wholesale business, it was, first, asset management for our own utilities, for third parties, very focused on the physical natural gas business, good customer service, a great track record of renewing those asset and other management services. Pete and the team had talked about this, they had been able to, in addition to that, continued to reduce the cost structure of the operations and reduce the cost of the contracts that we manage in this new lower-volatility environment. So that group is very well positioned to function in this lower-volatility environment and very well positioned to capitalize on improvement in that business when that starts to occur.

Same thing with our midstream operations. We have 3 very good storage facilities. Like I said, 2 in the Gulf Coast producing area, 1 in California. We also are bringing on additional capacity this year and later this year, where some of the work that Pete will be talking about in getting Cavern 1 rewatered and back on and then with additional capacity in California. We've kept our cost structure very low there, continue to focus on that. And we've significantly reduced our development costs. So again, we're positioning ourselves to do okay in this low-volatility environment, but we have good upside opportunity with the improvement in those businesses.

Cargo shipping has a very nice franchise, leading customer service, on-time, good market share in those areas. They further improved that by reducing the cost structure. We have good vessel utilization. And there we're starting to see the benefits of all of that, even though the economy is fairly flat in that area. We're starting to see, and Drew will talk about this later, improved volumes and improved profitabilities out of that business. So very stable earnings from the first 2 businesses, very well positioned in the last 3 businesses and tough fundamentals but able to capitalize on the upside.

But the pressures we've seen in those last 3 businesses have resulted in our share performance, shareholder returns, over the last several years being challenged. If you look at this, even though we're between the LDC average and the peer average, we're at a slight negative. For the 3 years, we're close to the LDC average, but we are both below the LDC average and the peer average.

I think this is one of what we focus on as one of the most important charts. We have a strong record of dividends and dividends growth. And Drew will talk about this in more detail. But if you look at the strength of our distribution operations and our retail business and you look at the fact that about 95% of our earnings coming from that business, they're stable, growing, we plan and we expect to be able to continue to deliver this earnings and dividends trajectory that you see on this chart.

Opportunities and challenges, fairly straightforward. One of the big things that have changed -- that has changed year-over-year is the fact that we had very challenging weathers, as you all know about, last year. So far this year, if you just look at the weather across the areas that we serve, you see weather much more normal, which is very much a positive for us. You also see that last year, because of that challenging conditions, we have lower incentive compensation. So on the challenge side, we expect to return to normal weather, but we expect to return to more normal incentive compensation as well. We continue to invest in our infrastructure for safety, integrity and for some growth opportunities. That gives us a good growth trajectory. That is slightly muted by the challenge that bonus depreciation continues into 2013. And you'll see that, that takes some of that growth away, but we still have a good growth with the investments we're making there.

One of the real positive things was the fact that we had very favorable natural gas prices related to all the other sources of energy. That gives us opportunities in distribution operations to improve growth, that gives us opportunities in areas like using natural gas for transportation. Hank will talk about that, Pete talk about that related to higher horsepower and LNG opportunities. It also gives us opportunities, as an example, with growing markets for power generation, many of the marketers we serve need additional pipeline capacity, not only for our markets but for the power generation market. So we believe most of our markets will have opportunities to participate in either pipeline projects, where we're subscribing for capacity, potentially equity investments in those type of projects.

Retail operations, we expect that to remain stable. There have been challenges that we've talked about in the Georgia market with customer mix and competition. Mike Braswell will talk about what we've been able to do over time to stabilize that and what you see is a strong track record of even with those pressures having very stable earnings out of the Georgia business. We think we did the same thing in Illinois, and we're looking to expand in the other areas. And then Robin will talk about this great opportunity to take very good services business that Nicor developed and expanded across this enhanced territory.

In the energy marketing and trading business, Sequent, good news is last year, where we had stronger storage spreads, we were able to capture those spreads very effectively. Even though storage spreads this year are less, we do have a very good storage rollout schedule. And Pete will talk about how that impacts any earnings that we're expecting this year. And I've mentioned earlier the improved profitability at cargo shipping because of the factors that Drew will fill in with more detail in just a few minutes.

These are our priorities, fairly straightforward: continue to focus on costs, invest in our regulated business, continue to have favorable regulatory outcomes and start to focus on the growth opportunities in that business. In retail, I've talked about where our focus is: maintain market share and profitability in Georgia and Illinois; expand to additional states; take our Nicor National services business and expand it into these other areas. Pete will continue to focus on what they've effectively done through time as capturing the value that presents itself in that business and maintain lower cost structure in this environment that we find ourselves in. Midstream, the same, continue to focus on those businesses, complete the rewatering of Cavern 1 so that we have that additional capacity available later in the year. Focus on Tropical Shipping is very much in line with the rest of our business, low-cost, good customer service, participate in the upside.

The last bullet is probably one of the most important bullets. What makes all of this work in this environment is that we have had a track record, going all the way back to early acquisitions right on through the Nicor merger, of delivering the results we promised related to cost. That's one thing that we have been able to predictably meet or exceed. And we now have a foundation to continue to deliver on that. So when you combine that ability with very stable earnings out of distribution and retail, good regulatory outcome and the ability to invest in that, we have about 95% of our earnings in those businesses, very stable and an ability to grow that in the range of 4%. On the next 3 businesses, the good news is we've reset expectations with the challenging fundamentals that's in our expectation for the year. And we're well positioned to participate in upside. That looks harder to predict the timing and the magnitude of the upside in the fundamentals of those businesses, but we're well positioned to participate in them.

With that, I'm going to turn it over to Drew to go through more details on the financial side of our businesses.

Andrew W. Evans

Good morning, and thanks for joining us. Also, thanks to Pamela and Sarah for making it possible for us to be here today. I was reading through the transcripts for last year's presentation a couple of days ago. And what stood out was that we told you that Sarah was leaving us to have a baby sometime in the summer. I'm happy to report that she's the proud mother of a beautiful baby boy. So congratulations to Sarah. We're glad you're back. She'll be as good at that job as she is with this one, so we can't wait to see him grow up a little bit.

Let me just go through a couple of our strategic priorities. I'll try to hit a couple of the bigger points here. In terms of the business, I think the biggest priority that we have is to, aside from what John talked about of safe and effective service to customers, which is the single most important thing that we focus on, optimizing service functions and focusing on their scalability is something that we talk about quite frequently internally. I'm going to show you some data in a few minutes on O&M per customer and how we break that out. But suffice it to say, I think the acquisition of Nicor just strengthens our belief that it's certainly much more efficient to operate utility properties in a larger -- in a large mode as we do. We centralize finance accounting, IT, engineering, human resources, general counsel and all of it, attendant properties. Just a number of functions are handled at the corporate level, which gives us good standardization and I think a lot more comfort in the day-to-day operation of the underlying utility. It doesn't have much real impact on the individual distribution businesses but just the way we manage those businesses. And so we really do focus on the scalability of our operations.

Another big feature is that we want to accelerate the returns on our capital investments. Really what this is it's just a minimization of lag that's very normal in the utility industry between investment and the ability to make rates that are commensurate with that investment. And I think you've seen that we've got a very strong track record of being able to shrink that gap considerably. And it shows in our ability to earn our allowed returns in virtually every jurisdiction. And we're very proud of the slide that Hank will show you later that speaks just to that item. On the financial side, we really want to maintain the integrity of our businesses. That's maybe a little bit wordsmithing around the fact that we're very focused on the credit quality of our corporation. It's very important for us to maintain investment-grade qualities in our business. It's critical that we do that so that we can operate good businesses that we do operate in utilities and otherwise. We want to continue to grow earnings and dividends. I think the board has set us on a pace of a stable and steady dividend increase that's sustainable. That's the single most important feature there. And we focus on maximizing returns on invested capital, although I think we've -- we will demonstrate that we've got a little bit of a gap to fill in a couple of the unregulated investments that we've made to date. And then we're certainly focused in aggregate on total shareholder return and our incentive compensation structure has mirrored that. And we'll talk a little bit more about that later as well.

We've gone through financial results for 2012 in pretty decent detail at the end of the year, in the very beginning of February. But there are a couple of things that I would just point out. This is a bit perturbed by the acquisition. That's what's causing the largest growth percentage change in many of these items. But the bottom line is really what we're focused on, we're not satisfied with the adjusted EPS result for last year. But I have to point out that the 2 biggest drivers of that differential were weather that we talked about at about $0.18 per share, and then certainly wholesale. The recognition of earnings, although very modest for 2012, really don't reflect the economic value created in that business. And those 2 factors really drove the vast majority of this differential that we've demonstrated in 2012.

Not a lot to press on the balance sheet. This is a good comparative because we did own the Nicor complex at the end of 2011, which is the comparative year. The only thing you're seeing shifting the balance sheet is just a little bit of our long-term debt going current and we'll make provision for terming that debt out sometime after the first quarter is completed.

In terms of the major -- let me shift now to sort of how we project forward to what's going to occur in 2013. And this is just a good slide for the major business drivers between '12 and '13. We really are going to continue to focus on investment in the regulatory infrastructure. You'll see that virtually all or the vast majority of our CapEx investment this year is centered around the distribution business, improvement in that system, and then ultimately growth in that system.

In retail operations, we're still in a very highly competitive market in Georgia. But Mike has, over the last 15 years, demonstrated a very good ability to maintain his market share and his profitability in that business. That is a very strong buoy for our business, where we're also focused on expanding into additional markets as it's prudent, and then supplementing with what we'll describe as Robin's business, that the services business that we acquired through the Nicor acquisition. Wholesale has a strong rollout schedule for 2013 but certainly faces a number of challenges related to economic opportunity. Storage spreads, in particular, have contracted, and we certainly are seeing less volatility because of the sheer mass of gas supply that is a relatively new phenomenon for us. But Pete will talk about that in good detail. Midstream operations, we'll continue to see a bit of degradation in 2013, as we have some higher-value contracts rolling off. But we are managing those exposures, and we will be somewhere within breakeven in that business for 2013. Then John talked about it a little bit and we'll talk about it in detail, but cargo shipping is certainly seeing improvement year-over-year, really a testament to the very solid management that's in place in Riviera Beach.

Let me go through a couple of the factors that influence our movement from '12 to '13. I think the largest impact is probably bonus depreciation. This is an incentive that's been in place at the federal level for investment of capital in our business for the last 3 or 4 years. And we'll see some continuation of it, to some degree, into 2013. It seems unlikely to us that we'll see a continuation of that into '14, but we'll just have to see how the economy goes and how politics handle this particular issue. But bonus depreciation does impact the rate of -- rate base growth. We've got riders in place that allow us to quickly modulate rates to take into account the increase in investment, but they do factor in the rapid return of cash related to bonus depreciation. This is effectively that we post the entire investment against earnings, and it has put the company in a position of not being a net taxpayer for a couple of years. It's great for cash, but it certainly has an impact on our ability to grow rate base. The difference you can see here between no bonus depreciation and 50% bonus depreciation really shows there are cleaves [ph] of growth rate in about -- in half. You also just have to think about our CapEx being a bit smaller than what we described because that cash is being returned rather rapidly to the company.

The other headwind generally that we face, and I think every company describes this to you but I wanted you to understand the sensitivity we have to it, is that as interest rates have declined this year, we'll have a little bit of continued headwind around pension and OPEB. Specifically, if we see a 1% change in the discount rate of the pension, which was something that actually -- close to something that occurred last year, you'll see about a $0.07 impact in EPS. This is temporal -- somewhat transitory. Our response to it is that we merge the pension plans of all the individual plans within the corporation. That's reduced the burden of contribution for us in the near term, but our primary goal is to make sure that these plans are at least 80% funded, if not better. And certainly, we'll see some improvement in this metric, not relative to peers, but we will see improvement in this metric as interest rates back up potentially over the next couple of years.

O&M per customer is a metric that we use internally that is, I think, a very important tracking metric and something that you should pay attention to. So what this demonstrates is just the decomposition of O&M per customer over time, and really demonstrates that the larger you are, the more effective you can, I think, manage some of these costs but also reduce some of the cost attendants of just being a corporation or being a big enterprise. And if I look at other O&M, which is effectively outside services required to maintain the business, you can see a good compression of that relative to our customer base.

We've also done, I think, a strong job of controlling payroll. We certainly have seen efficiency improvements in our business. And it's much more efficient for us to operate across the broader base. There are a couple of other items that just quite helps you understand relatively minute but can be impactful items, such as pension and OPEB, incentive compensation and bad debt expense. The large increase that you see in bad debt between '11 and '12 is just the aggregation of the Nicor business, nothing more nefarious than that. Very normal because we're delivering now almost twice the volume that we were delivering pre-Nicor, actually greater than twice the volume in total. The one thing I should add here is that I think when you compare this metric across our peer group, you'll find that we represent very favorably. When we do benchmarking of this particular metric against our peer group, we're always in the best quartile relative to AGA peers. Ultimately, that leads to less rate pressure on customers and a better chance, I think, for the company not to experience crowding out of items when we go in for rate case.

We're going to talk a lot about retail with Mike and Robin, so I won't describe that changed '12 to '13. But one difference or one change that we've made is that we will split out for you and have provided guidance off around EPS in a mode that excludes the trading business. There's no question that we probably see some compression of multiple because we are in this business. But I think a lot of it is -- a greater percentage of it is perception over reality. And the bigger issue that we face is that the earnings that we report in the wholesale business are quite volatile, and in particular, quite volatile quarter-to-quarter. 2011 had some issues related to transportation constraints. And 2012 was not very normal in terms of what was reported for the year, given the amount of economic generation. But you can just see from this graphic that the movement quarter-to-quarter is pretty exaggerated. One thing to note, though, is that when we did -- when we grew -- doubled the size of the business little over a year ago, we did mute the impact of this a little bit in that it's now about $2 million to generate $0.01 a share versus about $1 million per share. And so there is some muting of this volatility, but it does confuse investors quarter-to-quarter. And we're able to give you a much better quarterly projection, excluding wholesale. Nothing other to report for that activity than just we want to be able to provide you with a better way to create guidance and understand what's going on quarter-to-quarter. And we wanted to be able to reduce the volatility around -- the range around our guidance range, excluding wholesale.

This is a good bridge from '12 to '13. Hank will talk to you about distribution, but the benefits -- the underlying benefits that we're seeing are offset by a couple of factors. Weather was the biggest headwind that we faced last year, and we certainly anticipate being a bit more normal. We haven't released first quarter earnings, but certainly you can gauge whether today and 2013 appears to be much more normal than 2012. In retail, we'll see a bit of growth year-over-year, largely because of the efforts in the services business and some improvement in the underlying retail energy business. Wholesale Services, the largest change really relates to the economic value created in '12 to be reported in '13. Midstream has a slight degradation related to contract rolloff and cargo shipping will see -- we expect to see a very nice improvement year-over-year, which gets us to a total of about $705 million worth of EBIT.

This is really just a decomposition that was a chart we included at the end of the year, and so I won't go into it. But you can take a look at the earnings per diluted share that we're guiding for and what that might look like, excluding wholesale. Certainly, a small component coming out of wholesale but a greater degree of the volatility experienced in that segment. And then I won't push on this, but this really is the approximate quarterly earnings contribution expectation out of the -- each of the businesses that may help you better model our business as we report it through the quarters.

From my perspective, this is probably the most important slide I can show you, which is the share of net investment for each of our business segments. Distribution at $6 billion is the vast majority of what we've deployed. It's 81% of our capital deployment. Retail is about 3%. That's a very high return on invested capital business. It doesn't require a lot of working capital out of the corporation but brings us strong earnings. Those 2 together are very stable revenue generators and represent almost 85% of our total deployment. Wholesale, this is a mid-year look, which I think is appropriated, about $300 million, about the average that we have deployed there. But understand that the duration is quite short. There are a lot of long-term obligations in the wholesale business and doesn't represent a material portion of our capital deployment. That's not necessarily true of midstream, at nearly $600 million, that's 7% of our total deployment. And we'll talk to you a bit about the struggles that we faced there. And then shipping at about $350 million in total represents 5%.

This is a longer-term projection of our capital expenditures because there's a large majority of them, which are much more certain or much more projectable. The blue bar represents our base business. The large jump relates to about a $200 million increase because of the Nicor acquisition. The green -- the blue bars are very consistent with our rate of depreciation, so we think of that as refreshing the capital base or maintaining it. It doesn't often require rate increase because it's just maintenance of the rate base. The green section represents our additional capital deployment, all of which will be recovered virtually instantaneously or in very short order because of the rider-based programs that we have in place, very efficient deployment. The next bar is midstream, it's natural gas storage, and you'll see our investments are largely complete in that area. And certainly, in this environment, we don't anticipate any near-term expansions to those facilities. And then other is a lot -- is principally utility capital deployed in shared IT infrastructure.

When we talked to you a couple of years ago about the acquisition of Nicor, one of the things we focused on was the strong cash generation out of that business. They have a very high depreciation rate. So in Illinois, so as we back that out, you can see that we had very strong improvement in EBITDA, cash flow being the one of the principal things that we focus on. If you look at our commitments relative to that, you can see that our CapEx consumes a good deal of the cash that we generate in the business. And interest expense and dividends remain relatively small factors relative to the total amount of cash flow that's being generated by the corporation. What has been factored into it prior to available cash, I think, is cash taxes, and those have been de minimis over the last couple of years and really allowed for the greater capital deployment that's displayed here.

We've been a slight borrower -- or we've been a borrower since about 2009. That's a pretty normal condition for a utility like ours. We're retaining somewhere between 30% and 40% of our earnings, and so retained earnings are growing that allows us to grow the business through capital deployment without modulating debt to total capitalization and maintaining our credit metrics. And so pretty normal condition for us.

And then this is just our display of the major credit metrics that we're focused on. And we actually anticipate a slight improvement in debt to total cap and in debt to EBITDA over the period, but we're very focused on it. The payout ratio, I think, as a ratio is a little bit on the high side for our peer group, actually probably just barely above the mean but more a feature of the headwinds that we faced in 2012. And we'll see improvement in that metric just based on the target normal level.

Not much to tell you in terms of debt maturity schedule. We do anticipate making improvements in both the total interest cost of our debt complex. And we anticipate expanding the average duration in this low-rate environment. And we will term out a bit of our short-term debt probably after the first quarter, as I've described to you.

No question that in terms of capital allocation, we're focused on the distribution business. It's the core of our investment thesis and has the most stable returns to it. So that's going to be a #1 priority. Reducing that lag is probably the only thing that we can do to improve against our regulatory posture. Very pleased with the way the infrastructure programs have been received in every jurisdiction, and we're not standing alone in a lot of these jurisdictions. As you can see in places like Virginia or New Jersey, the other utilities are similarly situated in terms of their interest in investing.

All we can do today, I think, is optimize against the wholesale and midstream businesses. Pete has been very aggressive about reducing his cost of providing in those businesses and has done a nice job of making sure that the investment there is commensurate with the opportunity and very pleased with the way those are operating. And then we just have to continue an aggressive cost-control mode. Really what we're focused on there is abating inflations that are normal to our business, the headwinds that we face related to OPEB and pension and medical care. But I think we're in a good position to do that, given the size of our base. Maintain a strong balance sheet and liquidity profile and make sure that we stay investment-grade, and then really focus on a sustainable and competitive dividend.

I think this is sort of finally for me, but what we're targeting -- continue to target is net income growth between 4% and 6%. I think we've-- I've just shown you that we have the ability to grow rate base in the regulated businesses over that -- over a slightly longer period of time of 4%, and so helping the unregulated businesses will supplement that. It takes a fair amount of growth in those areas to push above 4% because of the sheer mass in the utility. But we think 4% is a very good sustainable base, given the investment opportunities that we have.

We have upside potential in our unregulated businesses, as John explained, but the timing of that is pretty uncertain. Volatility will drive profitability in Sequent. It will also drive the value of rents in the storage business. And it's very difficult for us to predict when we will return to a more normal state. But we don't -- we haven't built into our long-range plans and didn't build into our investments and expectation that we would see the high rates of rent that occurred in the 2005 to 2008 timeframe. And then finally, the board really targets and we target, I think, an annual dividend growth of 2% to 2.5%. That should keep us competitive relative to our peer set. And we think that stability of that increase is probably just as important as the absolute rate.

And then just finally, I think we do think we provide a decent value as an investment. We still trade a bit of a discount in terms of P/E multiples, although a bit of a premium, as does the peer group to the S&P 500. We focus a little bit more on cash flow than earnings because of the variability in depreciation rates across the utilities but still think that we're competitive in this metric relative to the peer group as well.

So John, if we take a few questions maybe on this section, and then we'll turn it over to Hank to give you a detailed review of distribution. We also have time at the end, too, if there's something that you want to focus on.

John W. Somerhalder

Okay.

Question-and-Answer Session

Craig Shere - Tuohy Brothers Investment Research, Inc.

[indiscernible] targets are for each of those metrics on Page 34?

Andrew W. Evans

Just from memory, I think it was the page for credit metrics?

Craig Shere - Tuohy Brothers Investment Research, Inc.

Yes.

Andrew W. Evans

I think we want to stay consistent with the ratings category. Those categories don't modulate quickly, but they do change, and so we want to be responsive to them. But our goal is to keep debt to total capitalization in the sub-60%, closer to 55% range, more consistent with some of our rate-making and some of our investments in unregulated subs. These metrics are very consistent with the ratings category. And really, that's our goal [indiscernible].

Craig Shere - Tuohy Brothers Investment Research, Inc.

As you approach 55% in the next couple of years, if unregulated operations are not looking more robust than today, what do you do with the free cash flow?

Andrew W. Evans

I think if we were to go below 55%, we start a different dialogue, no question about it. I don't know that being an A- company, although it's a goal of ours, is necessarily a step change in the way the business operates. Not going the other direction is more important for us than improvement there. But the credit quality is -- we would always focus on first. That would change, perhaps, the dividend trajectory a little bit or maybe our feeling about payout ratio. But I don't see that we'll be at 55% in the near term, given the CapEx opportunities that we have in distribution.

John W. Somerhalder

And I think, Craig, when we look at our opportunities to invest outside of our regulated business, we have opportunities that are tied to a return to higher commodity prices, volatility related to storage, expansion of those facilities. But we also have opportunities that would be good in an environment where we continue to have low commodity prices, low volatility. As an example, Pete will talk about the opportunities to supply LNG to existing or expanded or new facilities for transportation. That would be enhanced by low volatility. And then pipeline opportunities with continued growth in demand because of the lower prices, power generation, those types of things. So we believe that our ability to invest in unregulated is just not tied to return of the storage business, as an example. We have other opportunities should we see a continuation of the current low-volatility, low-price environment.

Craig Shere - Tuohy Brothers Investment Research, Inc.

Are we going to get an update later on about the LNG transport efforts?

John W. Somerhalder

Yes. Pete has a section on that in his presentation. And I'm glad to supplement that too with other interest you have in that area.

Theodore Durbin - Goldman Sachs Group Inc., Research Division

Can you talk about the size of the potential pipeline opportunities you're looking at in terms of dollars? And then the types of returns you'd expect to get on those investments? And I'm assuming this would be joint venture-type equity investments with some other bigger pipeline players?

Andrew W. Evans

Ted, in each state, in each market, it's a little different range of opportunities and the timing is different. But what we know today is that in the southeast, because of power generation, and that's everywhere from Florida up to Georgia, that the needs are, we believe, more immediate and the interest in that is more immediate. And so it really does depend on the weather. These are incremental expansions, laterals, backhauls, off of existing systems or whether there are more greenfield projects to get down to Florida or to get off of the pipelines that ran up. Now the 3 keys around that are more to get back into the southeast. But they range -- projects range just order of magnitude in the different states between, maybe, $0.5 billion for many of those, some of them on several billion dollars potential into those markets. And our participation could be across the broad range. Everything from simply taking in the capacity we need in a market, so that we can grow some of the new industrial, residential demand we're seeing to make sure we can backstop that with firm capacity, all the way through a joint venture with really an interstate pipeline company developing those projects. We would not take a high percentage of this, especially when you deal with the bigger projects, but we could take a meaningful percentage. The returns that self-regulated pipelines and those companies are achieving right now, are slightly favorable to what we're able to do with our distribution operations business. I mean, our judgment would be that somewhere between 11% and 12% return on equity with a 55, 45 cap structure is very achievable with those type projects. So those are the type of investments we look to make and we think the most likely opportunities or where demand is really growing recently in the south, southeast, Georgia, Florida, we think will probably be there, the first opportunities. But that doesn't -- we also see good growth in areas like Virginia and ultimately, we think in Illinois, with a shift with the Utica and Marcellus, there'll be some opportunities even in areas like that over a longer time period.

Theodore Durbin - Goldman Sachs Group Inc., Research Division

That's great. And then the other one for me is, you've seen some pretty nice multiples on some LDC sales recently, I'm wondering if you'd ever consider selling any of your subsidiaries?

John W. Somerhalder

As Drew talked about, we see value in our scale and shared services model and the ability to keep our cost low. So if we look at our 7 states, there's a nice fit for those 7 states, even in Tennessee where we're smaller is a very -- it's continuous with our Georgia operations. We see good growth opportunities in Florida, probably the only state where we don't have a critical mass is Maryland. That's a very small part of the business. So I think the answer is no, no material change. We think what we have is a very good base to control costs and continue to do the things we do from a regulatory standpoint.

Andrew W. Evans

Right. I have to say the investment in utility is kind of the investment pieces that we're offering up. It would be difficult for us to imagine kind of discharging utility just to capture a little bit of the spread between good math or slightly higher valuation. I think that the valuations haven't been overly outrageous. There have been -- you really have to look at the stories around a couple of the transactions that occurred to make a little bit more sense when you look at them in context. So I don't think it's just ravaging for higher multiple of EBITDA.

Unknown Attendee

Just a follow-up to the divestiture question. A year ago, I think you all explained that Tropical Shipping was not necessarily a long-term fundamental strategic part of your business. Looks like the economics there are starting to turn a little in a more favorable way. My first question is, should we be thinking about quarters or years in terms of eyeing when that might find a better home? And my second question, kind of referring to my first question is, what do you do with the cash?

John W. Somerhalder

You want to go first?

Andrew W. Evans

Years? We're focused on operating that business. It's got an incredible market share in that economy. It's not core to us, but it's very well managed. It doesn't require any capital from the corporation to grow and in fact retain some of its own for investment. And we'll always try to be prudent with our investments, but there really aren't any plans in the near term to do anything other than be a good operator of that business.

John W. Somerhalder

Yes. And maybe I'll go one step further. I mean, we've all said, and you may get tired of hearing this, if you look at our track record related to things like networks, we're very disciplined about operating and focusing on the business, right, and we have very much focused on Tropical Shipping business. We have a very good management team, they performed very well. So we like that business. But we also have shown that we're very disciplined that longer term it doesn't fit with our business. And that's, strategically, it doesn't fit with the natural gas business. So we will be disciplined about this. I can't answer the quarters or years question, but it is something that we'll continue to evaluate as we move forward. And then if you go to the capital allocation piece, I mean, we are really looking to really deploy capital, whether it's from that source or other sources in things like, first, regulated business, opportunities, natural gas for transportation, pipelines and then kind of share in recovery over -- shared recovery occurring in the short term or near term relating to storage in that business. I'll turn it over to Hank.

Henry P. Linginfelter

Thanks, John, Drew. Good morning. It's great to be here with you and I'm always thankful for the interest that you all share in participating in our conference, both here in the room and also online. And I want to share with you what's going on in our regulated business, what we accomplished in distribution operations and give you some insight into what we see, not only currently but where the future will lead, and we want some time for questions before the break.

Let's start with our footprint, I'm on Page 40 now. We are, as a pure play LDC, we're now the largest LDC with 4.5 million customers spread across those 7 states. And as John mentioned, about 1 out of every 15 or so gas meters in America now is in AGL meter. And so we touched a lot of the retail space with our distribution operations in the natural gas distribution footprint. 80,000 miles of pipe, a little more than that, and operate that safely and efficiently every day for the customers across the enterprise. Rate base of about $4.7 billion in the utilities and annual CapEx of about $650 million on a general run rate basis. I would remind you about 30% of that is in this regulatory recovery programs. As we deploy capital, we see a big percentage of that coming back pretty quickly in rider surcharge programs.

We've got 4,400 employees dedicated to the utilities. And I might add, our senior leadership team that is responsible for day-to-day operations of the utilities, our 3 presidents, as well as our 3 other senior officers in the core services group, and I have a grand total of something over 150 years of service inside AGL. So that team is extremely seasoned around day-to-day operations of running the business and a lot of our workforce is similarly positioned. We have a lot of experience running the day-to-day. So we operate safely and our goal is to be in the upper quartile around safe operations, particularly our days away from work, restricted time, motor vehicle accidents, on-the-job injuries and our system safety, our operational safety to run a very safe system for the public, for the company.

So our EBIT track record in the next page is -- you can see a trend of growth there and you can see the impact of the Nicor deal that added in 2011 a little bit of additional EBIT. And then in 2012, we had a full run rate year, $540 million of EBIT in the combined company. As John has mentioned and Drew as well, the goal is to grow rate base about 4% in this business. We have a path for that and we believe that we can continue to grow the rate base around that business.

Now you may wonder what's going on year-over-year, '12 to '13 on the $540 million, it's the same number. And interestingly, I'll give you the waterfall on that. 2012, $540 million. We normalize weather to get $24 million back into plan for this year, which is what we missed in 2012 on weather. It looks like, at least for the first quarter, weather is -- got to be normal, maybe somewhere very close to normal. Maybe a little better, maybe a little off, but I think very, very close to normal for the first quarter. And so that assumption should, hopefully, hold for the balance of the year. And we have weather exposure in the fourth quarter because we have weather exposure primarily in Nicor Gas.

We have $32 million incremental margin for this year in the rider programs. That's incremental margin that goes with infrastructure, deployment in the jurisdictions where we have mechanisms and about $4 million of other margins that we expect to come this year. And we offset all that, believe it or not, with -- a big chunk of that is the incentive compensation that was not paid out in 2012, we put back in as a normalized incent comp of $31 million. So I'd remind you, the estimated onetime change, that would be kind of a run rate on the go-forward basis, so we'll see that -- this should be a transition year to accommodate the incentive compensation that we did not pay last year. And so you could expect that you won't see that kind of number again the next time we pro forma in future years.

We have about $19 million of additional depreciation. As we deploy capital, we have depreciation cost that we have to book against that capital, and so that's about $19 million. That's pretty close to a normal run rate increase in depreciation year in and year out. So you'll see as continue to have that challenge each year.

Pension, about $4 million. Bad debt, we have -- probably, our lowest point of bad debt in a long time in 2012. So we're modeling some additional bad debt in this year, especially with colder weather and larger bills. We expect, from last year, our bad debt should be a little bit bigger. Couple of other notes in that to adjust the $540 million for 2013. So that's the breakdown of the EBIT for the year and the comparison to year-over-year, just to give you an idea of the details on that.

Now if you move to how we performed in overall against the regulated returns that are authorized, you can see on this chart that very, very good results in the regulated business around authorized returns. Now this is 2012, keep in mind, of course, there was some weather dilution affecting Nicor Gas and we had the offset of not having the incentive compensation tied in to these numbers. So those are sort of give a lift to the regulated results a little bit. And the -- prior to the merger, AGL utilities got a little bit of the benefit for moving the fixed cost of the company across the merged company with Nicor coming in. Modest, though it is. And so if you normalize weather back in for Nicor, you'd see were just sub-8%, just below 8%. And so that's why our opportunity is in the short run is to find ways to get the returns at Nicor to a better place. And we'll continue to work through that, and I'll talk about that some more as we go through this dialogue.

Overall, you'd have to say the regulated business is performing pretty darn well against authorized returns in all the jurisdictions, with the one exception being the challenge of Nicor that we'll manage through over time.

So our strategic focus going forward is continue to, number one, every time is the operator safe system, with our employee safety, as well as public safety and system safety to make sure that we continue our great track record of safe operations. As I mentioned, we stay in the top quartile among mega LDCs as the American Gas Association rates those. We've managed to be right around there most of the time. We set the goal to stay there. We'll continue to operate a safe and reliable distribution system for the public safety and to meet our obligations around compliance.

Our cost containment is very important to us. We really explore all the ways we can to make sure we're operating a safe system under very tight cost controls. And so you can see our track record, over time, is to be a low-cost operator and we want to be a low-cost operator where we serve. And we leverage that shared services model. We work on standardization, wherever we can standardize a practice or a resource, if it makes sense to do that, we will. And we've been doing that with the merged company now for about 14 or 15 months.

Minimize our regulatory lag. Anywhere we can deploy capital, with a mechanism to recover that capital on an expedited-time basis, we will do that. And as I already mentioned, we have about 30% of our capital deployed today under those kinds of programs. If we have that rate cases, we'll do that. But we think these mechanisms work really good outside of rate cases, and that's how we've been able to deploy them.

Continue to integrate our business successfully. The Nicor integration is going very well. We've managed to operate that business effectively now for almost 1.5 years. And we'll continue to find best practices and honor every single one of our commitments in the merger that we made, to the Illinois Commerce Commission and to the public. And so we'll continue to honor all those commitments as we integrate that business and move forward.

And really, very, very important is to position the utilities for growth, and I'll talk about that some -- a little bit. But the emerging market opportunities, there are changes in the market dynamics around the potential to add customers, and we want to position the utilities for strong growth.

I want to talk just a little bit about, on the next slide, the regulatory outcomes that we've achieved over a number of years. I'm not going to go through every one of these, this is really illustrative. If you look at the number of initiatives that our utilities have endeavored to achieve over the last several years, you could see, not just rate cases, but other mechanisms, programs and outcomes that bring good quality services to our customer base, that are valued, but also render earnings opportunities for the shareholders. And that combination really works well for a long-term success platform.

The main point of this slide is to give you a concept that these successes are an indication of where we will go as we move forward in utilities. We will continue to work for the proper kinds of mechanisms that allow us to recover capital. We look for conservation programs. We'll initiate rate cases, and we'll work on infrastructure deployment with recovery in all of our jurisdictions where we can get those achieved.

Now we talked a little bit already about what it did to utilities last year. We're largely not weather-sensitive, but we are -- we do see impacts on whether, especially fairly unprecedented weather we experienced in 2012. These charts -- these bars show the impact in 2012 by month of weather, and it's population-weighted. Where we have heavy population, we've weighted the weather impact to show what the net impact to our business is. And you can see that the dark line across the top is what you'd expect average weather to be. The green bars that have 2012 on them, show October, November, December of last year. The yellow bars for 2012 show January and February and March. And you can see that for a big part of the critical months for revenue generation, we had remarkably warm weather. Warmer by far than the average, but warmer than the previous years, clearly. So that was the impact that affected us to the tune of about $24 million inside -- primarily inside Nicor Gas.

But and the good news is we actually have a fair amount of certainty built into revenues. And this chart shows the mechanisms that we have in place across our footprint. Nicor Gas, even though it does have weather sensitivity, it's still 70% fixed in terms of the revenue that comes from that business. And that's a rate structure not so much of mechanism, it's the structure of rates that we have at Nicor. Atlanta Gas Light has have straight fixed variable now for almost 15 years. And that is a set -- a fixed set of recoveries as you can get. And we also have infrastructure programs there as well that are very meaningful to the corporation.

Virginia Natural Gas has a number of mechanisms across the footprint. We will continue to file updates of those mechanisms as they expire. We have some expiring and we'll file those. And for example, we do have a filing right now before the State Corporation Commission of Virginia around conservation and weather normalization that we have a proceeding going on right now.

Elizabethtown has mechanisms. Florida City Gas has a conservation program that actually is more geared to encouraging the use of natural gas in Florida, where the grid is fairly constrained for electricity. So there's a positive benefit to our programs in terms of low-growth potential to ease the grid in Florida. Chattanooga Gas has a number of mechanisms as well. This also is somewhat illustrative to show you that we will continue to seek mechanisms where they are prudently achievable, they render value for the customer, but they also reward the shareholder for investing in the company, for its investment.

Another slice of the margin issue for our utilities is the next chart, which shows that we are largely set around revenue. And the point of this chart is to show that in 2012, where we have this historically warm weather, we still had very little impact in terms of the net margins of the company. The red on this chart is really the impact that occurred ultimately from weather, we could not do anything about. We get a little bit of movement in weather from the weather normalization programs in Virginia Natural Gas and Elizabethtown, they're not perfect fixes for weather. So if you have unusual weather, there's a limit to how much you can true that up or down. Similarly, at Elizabethtown in New Jersey, we have a limit to what we can normalize not to exceed our authorized returns. So if we're exceeding authorized returns, we normalize only to the limit that it would get us down to an authorized return. But at Nicor you can see, even with the warm weather, because of the nature of the fixed component, there is still a volumetric sales of gas that occurs, even with warm weather, because they're still whether, the net impact to Nicor Gas came to about 2.5% of our annual margin for that business.

So we felt it, but in the whole scheme of things, it's actually a small exposure to weather. And over time, we may be able to deal with that, even future rate structures or other mechanisms. At this time, we just have some weather exposure at our biggest utility at Nicor Gas, and we'll continue to manage through that.

So I kind of mentioned these things already from this chart. We do have weather sensitivity a little bit in the jurisdictions, but very little. I didn't mention Florida. Interestingly, it's actually cold in Miami this morning. So we actually sell more gas in Florida, of all places. So weather upside, but we don't depend on weather in our Florida jurisdiction.

So with the last few slides I want to show you the stability that the utilities have, and then demonstrate their ability to generate returns that are very competitive and fair, and fairly buffered against the vagaries of weather or other volumetric swings. But you probably would like to know what are we going to do in terms of these growth opportunities that John and Drew have mentioned, and how we position the company and the utilities business to grow? So the first thing I'd point out is that we are at a really good place around competitive fuels and energies. Natural gas is historically low as a price to the -- deliver price to the customer. The bottom line down there is the Henry Hub price. But all the other lines are deliberate cost to the customer. So you can see that propane, fuel oil and electricity are all substantially higher delivered to the consumer. And our main job with these opportunities is to fund emerging markets for the customers or to make our businesses easy to do business with, so that people who want to convert from fuel oil on electric appliance or propane to natural gas. And in some cases that involves the infrastructure and in some cases, it just involves making sure that we do the necessary work and deliver the volumes that customers want.

In the large commercial and industrial sector and power generation, we're clearly seeing opportunities around these as people convert, and I'll talk about that some more in a few minutes. But this relative price competitiveness is -- really positions the utilities well for growth over the next several years. And in fact, we think, because of the way our forecasts are looking for housing starts, we will not return to the traditional housing starts of several years ago but we see from Moody's forecast, a dramatic rise in the opportunity for housing starts and a the footprint over the next several years.

This chart shows 4 counties that we serve at AGL Resources, in our utilities. This is the growth of housing starts in our territory. For the southeast it's the blue line, and then the other 2 lines are Mid-Atlantic and Northern Illinois. So you see improvement in Mid-Atlantic and Northern Illinois, but you see dramatic growth in the Southeastern part of the country. Suffice to say, we see real opportunity for adding meters over the next several years. I don't have a forecast for you, but we would see substantial increase and the ability to add meters. Really, starting after 2013, we'll probably see a good rise. We're seeing a little bit of increase right now, but I don't think we'll see quite a bit over the next several years.

Our infrastructure programs, as we've rolled out pipe to areas that are underserved through some of the rider programs that we have. We'll be well positioned to take on additional customers during this housing recovery.

Other drivers in our New Jersey territory, we're seeing a significant increase in fuel oil conversions to natural gas. Fuel oil is very expensive. The key for us there is to make sure we get infrastructure in place to serve customers that are not served today. We have over 14,000 customers in New Jersey that have a gas main in proximity to their house that we don't serve today. So we'll be going after those customers as well. So we have conversion opportunities where we serve a customer and we had new meter adds, where we also serve a customer that we can economically get to.

Virginia Natural Gas, similarly is undergoing a study of customers near the meter, and they'll be launching programs around that this year. And Georgia, Florida and Illinois, while we'll see the housing growth that I've talked about already, we also are seeing some niches of markets growth substantially. In Georgia, we have a lot of poultry farming, other livestock farming, cows and pigs and so forth. And we're seeing additional customers that are coming out of agricultural business and farms. Those are lucrative adds for us. They're commercial rates, we get good recoveries of costs for those customers.

In Florida, we've seen substantial industrial growth. The sugar business and the citrus business are demanding natural gas, because the competitive fuels that I mentioned earlier are becoming uneconomic for them. So we are running the infrastructure to serve large applications in Florida. We think we'll see some concrete and asphalt plants add there as well. On Nicor, its industrial and agricultural processes like grain drying and fertilizer facilities and asphalt plants, potentially as well there.

Natural gas on Chattanooga, Pete will talk a little bit about natural gas vehicle opportunities and I'll talk about them as well. Our opportunities in the utilities are going to be more geared to compressed natural gas for fleets and low-horsepower applications generally. Although there are some crossover, it's mostly fleets and low horsepower. Atlanta Gas Light, launched an RFP process at the Georgia Commission authorized to use the universal service line to build NGV station across the state. There are 5 stations that have been approved that will be dispersed across the region that we serve. And we think we'll have some adoptions of natural gas vehicles from third parties. We will also work on our own fleet and have a percentage of our fleet dedicated in natural gas over the next few years across our footprint. We may use some of these stations for our own use, for the public facing. We can use them, we may build in some of our own stations. Chattanooga has recently filed an NGV tariff to allow for stations, in Tennessee, to be more doable.

So in addition to emerging markets and opportunities and conversions, we will continue to invest aggressively on infrastructure. Our STRIDE program, a cornerstone of that has been our PRP program, pipeline replacement. That is sunsetting. We will finish most of our pipeline replacement under that original program that started in 1998, this year at Atlanta Gas Light. Yet we'll continue other STRIDE components like our system reliability expenditures and our extensions for economic development and customer growth. You could see the numbers there. We've spent $697 million on the pipeline replacement, to replace over 2,600 miles of aging pipe. And we spent $224 million in the system reliability and $29 million in economic development and customer growth areas. That is a substantial investment in Atlanta Gas Light, for which we're recovering those costs today.

Even with all that investment, the impact in the customer bill is about $3 and some change a month, about $3.13 a month. So we've been able to do those substantial investments of capital over a period of years with a very modest impact on the consumer. And at the same time, in the last few years, of course, the raw gas cost, the commodity itself has been dropping. So it's been a really good time to do these infrastructure replacement programs.

Now we have another issue that I'll talk about a little bit, which is our Vintage Plastic Program. And we did file at the Georgia Commission late last year, this is an emerging issue for gas companies across the country, vintage plastics are plastic pipes that were installed starting in the 1960s through the '80s, so first-generation plastics that are now coming to their useful life end and needed to be replaced. And there are substantial needs at Atlanta Gas Light, for example, where the company grew dramatically in the '60s, '70s and '80s where we put a lot of that pipe in that will be replaced. So we proposed to the Georgia Commission to replace 756 miles in the first tranche. We've identified something over or around 3,300 miles of vintage plastics at the Atlanta Gas Light company that need to be replaced over 15 to 20 years. But you can see this is just the next generation of infrastructure replacement programs that we see our company, for which we have a very progressive commission in Georgia that favors planned and thoughtful replacement of infrastructure with recoveries over time. And so we see opportunities to continue to invest there as well.

So that's, we call it i-VPR or VPR. So it will be a subset of STRIDE, and we'll file this next phase of STRIDE system reinforcement and expansion later this year, probably late summer, early fall this year for the next round of STRIDE for Atlanta Gas Light company.

At the other utilities in Virginia, we have the SAVE program that allows us to invest in infrastructure replacement there. And that's a 5-year infrastructure program, valued at about $105 million, roughly $25 million a year maximum that we can invest. We'll spend about $21 million at the NGV this year around the SAVE program. And a similar return mechanisms that we have there for the rest of the company.

In New Jersey, we have filed for an Accelerated Infrastructure Recovery program called AIR. It is the successor program to the UIE. We're finishing the UIE late last year and early this year, and AIR is the next generation of replacement programs. That is a proposal to invest several million dollars a year, $135 million all in under that program. And we'll spend about $23 million this year and invest about $22 million this year at Elizabethtown. We're waiting on approval for that from the New Jersey Board of Public Utilities. And they've already approved programs for other utilities. So they have a very progressive approach to doing recovery of investment this way, and we think will have a good outcome from the BPE.

Now a lot of our utilities have conservation programs, these are very good programs for balance and demand. They're good from a consumer goodwill standpoint. And from a regulatory standpoint, largely speaking, we get to recover our investment in conservation programs in base rates.

At Illinois, we have a $150 million 3-year program that we're in the second year in. The goal of that program is to reduce the annual sales volume by Nicor Gas of 51 million tons. That's a lot of tons. That has an effect on our revenues, last year, it was a little over $0.5 million reduction in Nicor Gas as revenues or margin. And this year, we're estimating it to be over $1 million, maybe $1.5 million of impact. We have yet to recover those impacts. So while we recover the cost of the programs, we have to absorb the downside on margin. Until we have another rate case, then we would file and try to get some of that back, if we could, because that cost hasn't changed because of these programs largely.

In Virginia, we had a filing in existence there that would allow us to have conservation programs and couple that with revenue normalization. Those programs are designed to help customers save on their bill, but also keep the company whole on the conservation that occurred from them.

Chattanooga's program sunsets over this year. We're still evaluating our options on whether we're going to renew the conservation program there. Elizabethtown has had a very good program. Ratepayer funded about $1.3 million a year, and we're impacting about 2,250 customers who are seeing a substantial savings in their bill from those programs. Very progressive programs to influence behavior on efficiency. In Florida, we have a $4 million program that affects over 5,000 participants. And as I mentioned earlier, that program is largely due to help people efficiently use natural gas, wherever they can, because the electric grid is fairly constrained in Florida.

We're up with 2013. Let me talk to you briefly about our priorities, objectives going forward. Always safety first. We will continue to operate a safe, reliable system. We expect every one of our employees to go home safely every day after fulfilling their job, and that we'll minimize our motor vehicle accidents and days away from work. We'll continue to be a best practices company around cost containment. We'll leverage our scale and our shared services to continue to add value for our customers without a cost, it's very competitive and recovery to shared services and rate cases and mechanisms.

We will hope to gain approval of our AIR program in New Jersey this year, our VPR program in Georgia and our care program in Virginia. So we have number of filings, as I mentioned, underway right now. And we want to maintain the current regulatory programs we have. They're all very effective. We have found that during these kinds of programs where you invest in your system or technology to enhance service, customers value, if you can minimize the impact from the bill, but yet a more safe and reliable system or more services at a very competitive price, the regulators happy, the customers are satisfied and the company gets to earn a return on those investments.

We'll continue to make sure our Nicor merger goes well, that our integration goes well. That we meet every one of the commitments we made in the merger under the approval from the Illinois Commerce Commission, and we'll continue to make that platform in Illinois to be a future growth engine for the corporation. And speaking of growth, we will continue to look for those opportunities to use this fabulous platform of 4.5 million customers across 7 states to take advantage of opportunities in the marketplace and deliver value where customers are satisfied, they're served safely and reliably. The investors awarded for the investment we make in our assets, whether it's technology or pipe or other means to render service, and we'll continue to operate efficiently.

We have 4.5 million customers and we touch 1 out of every 15 gas meters in America. You really have an opportunity to not only participate in the market, but to help influence where markets go and what opportunities are out there. We take that responsibility very seriously. And we see lots of opportunity over a number of years to use these utilities to serve customers and to grow the investment opportunity for our shareholders.

That is the formal part of my presentation, and so before the break, we can take some questions.

Unknown Attendee

You had some very nice allowed ROEs in your jurisdictions. What's the threat that you might be involuntarily pulled into some rate cases where those might be lowered?

Henry P. Linginfelter

The ROEs are good. They're fair. They were set in an area of cost that are fairly static and we've seen maybe some movement in different directions. Because we're operating with a high degree of customer service quality and we maintained an open dialogue with each of the jurisdictions that we operate in, we have not seen any tendency from any state to move the company into a proceeding that on their own volition. We think that the paradigm is working well. The commissions are generally satisfied. Customers are benefiting magnificently from the low cost of commodity. And so -- as well as we can continue to operate safely, continue our workforce, development, which we're doing across our footprint, satisfy the regulators generally, I think we're going to be okay. We haven't heard of any efforts on the other side around that.

Unknown Attendee

And remind me, I think there's an Illinois law that's been passed that will reinstate that infrastructure replacement. Is that going to benefit you?

Henry P. Linginfelter

There is a bill proceeding through the state legislature in Illinois around infrastructure programs. We are not actively participating in that effort. But a little context, you might be aware that some years ago, not too many, the Illinois Commission approved a rider program for one of the companies there. And the company started investing in replacement programs. I think the Attorney General intervened and said the Commission doesn't have the authority to do this and appealed to the court. The courts agreed with the Attorney General and over time, the Commission's decision around that. The companies have now moved to a legislative initiative that would empower infrastructure programs with recovery. The status of that, I'm not all that familiar with except that I know it's moving through the legislature, and we are similarly situated to those companies that are participating in that. Our infrastructure is generally new and we have some replacement we need to do, we will do that under whatever mechanisms we can work through with the Commission. But we're waiting to see what happens with that legislation and it's probably necessary given where the courts ruled in the past, but we're not participating in it.

Unknown Attendee

And then on pipeline integrity programs, is that a major expense for you, how does that impact you?

Henry P. Linginfelter

It is a significant expense, but it's basically under the numbers that I have shared with you. Our integrity management programs are robust. We invested, actually, a little more last year than we had even budgeted, to make sure we were staying on plan and keeping up with the requirements that are from -- essentially, the federal government and the states had for us. But we continue to see the need to invest and spend around integrity management. It's a significant portion of our investment in our plant.

Unknown Attendee

Just on the Illinois side, the 6.5% ROE, 7.90% with weather, I'm just -- is there anything we can do in 2013 or even in 2014 to stay out, to really improve this early? Or should we just think about this as kind of this is all going to be done in a couple of years and then maybe go in premier rates for '15, just with earnings how [ph] at Nicor?

Andrew W. Evans

Well, I think that -- of course, we'll continue to make sure we're controlling our cost. That's really important. One of the commitments we've made in Illinois was to maintain the workforce that runs the gas company day to day. So there's a limit to what we can do on cost mitigation. [indiscernible] it would help get to a better return, and there's some chance that, based on how weather has come into March, that we can do a little better than normal.

There are other things we can do, and we do have something underway right now that's really an accounting treatment, which is to look at our depreciation rates. In Illinois, at Nicor Gas, our deprecation rate is in excess of 4%. So when we spend a $1 million there, we have to endure 4% on a run rate basis at the next year of that investment.

That number at the rest of our utilities is -- may be 2.5%, something like that. And in fact, in Illinois, most of the utilities in Illinois have something more like the -- lesser than AGL in the depreciation rates.

And so we could file a depreciation study at the ICC and go through the process of that, but also we can look at a legislative initiative, which we've done. We have legislation pending in Illinois around the ability to update depreciation without a lot of other changes. And that's really a copycat of how the electric companies can update their depreciation. We just sort of copied that legislation concept, at least for Nicor Gas. And its legislation, you don't know where it'll end up, it's one remedy. If, that legislation, we decide that's not the right remedy, we'll probably move through a regulatory process on that, but that would really just change in inter cash [ph] so much in terms of what we make out of the business. But it would change our ability to invest where we think we need to invest more than we do today in that business in infrastructure, a number of fronts, that would make the investment in that business easier to absorb in terms of the run rate cost of depreciation year in, year out. Today, it's much harder to spend $1 million there than it is in Atlanta Gas Light, for example, where the impact just doesn't show up nearly as directly in terms of the ongoing cost of absorbing depreciation.

All right, thanks very much. I appreciate your time today. And it's time for break, all right? Sarah, are we going to turn this off?

Sarah M. Stashak

The -- this almost never happens. So we're running a little bit ahead of schedule, so let's just go ahead and take a 15-minute break. And we'll start back again around 10:20 so that we can give Mike, Robin and Pete plenty of time for their presentations and your questions. Thanks.

[Break]

Sarah M. Stashak

We're going to get started again with the second half of our morning.

Our retail segment reports in -- to Drew, so Drew is going to go over the segment at a high level. And then Mike Braswell will go through retail energy, and Robin will take you through retail services. We'll follow that up with Pete taking you through this wholesale and midstream, and then Drew will wrap up with cargo shipping. And then we'll have time for more Q&A. And then we'll have some lunch and we'll be done for the day. Thanks.

Andrew W. Evans

Thanks, Sarah. As she mentioned, I've had line responsibility for the retail segment for a bit over a decade, but certainly, I don't have the illusion that I have any responsibility for the success of that business. And it's much more attributable to Mike Braswell, who's sitting here today, who's generated in excess of probably $1 billion in that business over that -- over the last 15 years that we've been unregulated. My point -- the purpose of me being up here is really just to describe the investment in retail in the corporate context and then make some introductions.

I wouldn't say that we got into retail by choice. There was a pretty significant change in the regulatory paradigm in Georgia in 1998 that opened that market in its entirety. It's probably -- I think it is the only fully deregulated nonutility-served retail market in the United States, certainly in gas. But what it said, and as we described, we can go -- we touch 1 out of 15 users of natural gas in United States, and it would -- it is beholden upon us to make sure that, that interaction is as productive and comfortable for that customer as possible because, ultimately, that bodes well for growth in the distribution of natural gas.

There are a lot of companies that are attended in this business. There are competitors in Mike's retail company and there are competitor energy company and there are competitors in Robin's services company. And we want to make sure that we provide an offering in that space that's consistent with the way we value that customer, and not just pure profiteering. We want to really control the interaction that, that customer has when they call for service or served in energy and when they're -- call for repair of their equipment. Further, we want to make sure that they make good a decision about their equipment in that they become a better gas customer for us.

We do have a tremendous amount of competition with electricity in the southeastern markets, where a heat pump is an acceptable alternative. And we want to make sure that -- when they're making a decision about that equipment, that they are choosing gas. We also want to make sure that, that equipment is efficiently operating at all times, and so hence the reason that we're in these 2 businesses.

As an introduction, I'll start with Robin first because she'll speak second. But last year, you met Beth Reese who took over responsibility for retail services. A testament to the quality of Beth's leadership in that business but also her importance in the corporation in total, Beth is now the President of Nicor Gas and is serving that business very well. She joins Jodi Gidley, who runs the Mid-Atlantic properties; and Bryan Batson, who runs the Southern properties. And so now she's part of the utility complex.

We're very fortunate to have somebody in Robin Boren, who is both aggressive and, probably more importantly, interested in moving her family to Naperville and taking on a new challenge. But Robin is running the retail services component of the business today out of Naperville. She's aggressive about growing that business both through acquisition, which she'll describe to you, that allows us to really get more out of the nice base of service that we have. But also probably more importantly, we'll be very attuned to growing that across our regulated distribution base. We don't currently provide these services in our utilities -- in our legacy utilities in -- she will very quickly expand across our utility base. And that takes a little bit longer than we had anticipated at the start, but I think you'll quickly see her move into Chattanooga. She's worked through some agreements there, and it provides a nice basis, perhaps a cookie cutter but at least a form of agreement that is acceptable to both our distribution companies and to the corporation.

But first, let me introduce Mike Braswell. He's been the leader of what we call SouthStar but, more importantly, Georgia Natural Gas in Georgia since inception in 1998. He's built a very, very solid business and is taking responsibility for the energy customers in Illinois as well. He has designs on expanding his business throughout our footprint, certainly, but through the expanded southeastern region.

And with that, let me turn it over to Mike and let him talk you through what's going on in Georgia.

Michael Braswell

Thank you, Drew.

I'm here this morning to talk to you about the retail energy businesses. And what I'm going to do is give you a high-level summary of those businesses. I'm also going to give you a high-level strategic overview. I'm going to cover each of the markets, Georgia and Illinois being the principal markets, but also the expanded markets as well. I'm going to talk about what has been recently our largest risk, which is weather, and what we do to mitigate that risk; and then wrap up with the 2013 priorities.

On the first slide here, the footprint of retail energy. You can see it's principally east of the Mississippi. And the focus is in the southeast, with Georgia being our primary market. But again, with the recent acquisition of Nicor, we have 2 new businesses there, Nicor Advanced Energy and Nicor Solutions. We've been in Ohio and Florida 4 or 5 years and recently expanded into New York and Maryland.

In terms of who we are: one of the largest natural gas retailers in the U.S., with over 600,000 customers, about 0.5 million are in Georgia, that being our key market. We have about 75,000 customers in Illinois. We have about 40,000 in Ohio. And I remember, there was a question last year about the number of customers moving in Ohio. The big move that you see there is due to options. Several of the utilities there have supply options, customer options, every year, and we anticipate in those. We have a very disciplined marginal climate to take one of those trenches of customers. And so some years, we'd acquire those when we view them as profitable and meaningful; other years, we do not. So you'll see that customers change from, let's say, 45,000 into 100,000 based on those trenches moving in and out of that portfolio, but the choice customers are about 40,000. In terms of Florida, New York and Maryland, about 15,000 customers in those 3 markets.

We also have about 300 large C&I customers. And I'll talk a little bit more about that market later, but that's not a market we will elect to grow necessarily. It's more of a balanced set of customers we use to leverage transportation capacity that we get principally with our Georgia retail customers and also help to manage our supply portfolio. But a significant load.

In terms of the load in that business, we have about 70 Bcf of throughput overall, about 1/4 of that is with these 300 customers.

And in terms of earnings, very consistent over the past 4 or 5 years, right around the $100 million mark, and we finished with 2012 with about $106 million. So a good stable business and a good, stable set of markets.

In terms of a high-level strategic objectives, Georgia being our primary market, that's our greatest focus. What we're trying to do there is maintain Georgia margins. As Drew and some others have talked about, it's a very competitive business in Georgia. And what we've needed to do is expand our product set, our channels; make sure we have a strong brand. And all those things that we do help to maintain our margins.

If you look at our competitive set in Georgia, you'll see that their earnings have declined over the years, whereas ours has been very stable. So we've been very proud of how we've been able to maintain our margins, maintain our market share, despite increased competition and increased consumer shopping.

In the Illinois market, what we're looking to do there is grow. There has been some decline in terms of customer count. If you'll look at 2006, until today, what we're focused on is stopping that decline and starting to grow the business. And how we want to do that is, again, look at some new products. We have modified some of the products that Nicor has had for years. It's enabled us to market those products much better. We've looked at some new markets in Illinois, the smallest C&I market. It's been an underserved market. We'd looked to grow in that market. So what we're looking to do there is turn around some reduction in growth and get that business growing again.

The expanded markets. What we do there, it's fairly inexpensive to get into a lot of the -- what we call expanded markets, whether it be Ohio, Florida, New York, Maryland. You can get into those markets and monitor the opportunities in terms of margin growth and things of that nature. So there's more opportunistic markets that are out there for us, again, very inexpensive to get into, and we can monitor those markets and, if you want to say, fluctuate our investment in those markets as the opportunities present themselves.

We're always looking to understand and evaluate opportunities for inorganic growth, and that's across all markets, and we continue to do that.

In terms of Georgia, being our largest market, what we do is we have a lot of focus on our integrated marketing plan and managing the assets that come with that business. There's about 10 active marketers in Georgia. The top 4 have about 85% of the market. It's been a fairly stable set of competitors in that market. One of the bigger changes recently, a couple of years ago, was Constellation buying MXenergy. They stayed with that brand for about a year. They recently changed the Constellation brand. As of yet, we haven't seen any significant changes due to that, but that's been one of the larger competitive changes in the Georgia market.

We started that market, I think, as Drew have mentioned, we're in Georgia deregulated 1998. SouthStar was formed, as well as creating the Georgia Natural Gas brand. And we branded there for 15 years and to a lot of success, a lot of growth through 2007, 2008. And then with increased competition and increased consumer shopping, we've been able to maintain stability in that market since that point.

We've been the market share leader there for many, many years. We'll continue to focus on doing that. And in terms of what we've done to maintain stability in that market, what we've done is introduce some new products. One of the new products we introduced was fixed bill. We leveraged that from the Illinois business. We call it Guaranteed Bill in Georgia, just launched it this month, and it appears to be a very successful product launch. It's actually exceeded some of our growth projections in terms of customers switching over to that plan. A big part of that plan is to help to mitigate consumer switching from a variable plan to a fixed plan. So it's another risk management type product that gives consumers another choice and, actually, a better risk management alternative. The fixed price products do just that. They limit your price exposure but not your throughput. The fixed bill product covers both your throughput risk and your price risk. So it's been a very good product for us.

In terms of branding, I've mentioned that the Georgia market brand is very, very important. It's one of the key attributes to that business. We now have one of the best brands in that market. Based on our research, we believe we have the best brand, especially for the attributes that matter for us. So we think we've done an excellent job of keeping that brand relevant and in front of consumers over that time period.

We've also expanded our offerings with, I'll say, low-credit customers to no credit with, like, a prepaid plan. And so we've been able to increase our addressable market, if you want to call it that. Early on in the business, we've really high-graded our portfolio to reduce our credit exposure. The Pre-Pay plan allows us to address that market without having a lot of credit exposure. So that's been another very good product for us.

In terms of channels, the Delta SkyMiles plan, that's been very successful. It helps from a value perspective. When consumers are signing up, SkyMiles give them extra value. But it's also an extra channel in terms of the Delta customers in Atlanta and having access to market to those customers as well.

So what you can see: In terms of Georgia, you can see stable market share on the chart to the right, as well as stable margins, so we feel very good about the Georgia market.

Illinois, that weld into our portfolio late 2011 with the Nicor acquisition. That market deregulated fairly close to when Georgia did. It did not deregulate to the extent Georgia did, Georgia being completely unbundled. The Illinois market is more similar to the other expanded markets, like Ohio, Maryland, New York, in terms of their access to choice, but it's not a full unbundling. It's been a good market. We've leveraged the Nicor brand. Nicor is a very strong brand in Illinois, and we see that it's been successful in marketing to those customers.

In terms of what we're doing there to grow that business. Again, we've looked some new market segments, the small C&I either, growing up and addressed before, based on some of the approach to the view of cost and managing risk. And I would say at this point, we feel that could be a good, profitable market to expand into.

Now we've revised some of the products to help market those products better. They have, for an example, a good fixed price. But in terms of how they manage that fixed price, it was difficult to market. We have changed that product and how you hedge against it, and that's enabled us to market that product much better. We've seen good results from that.

Digital marketing, I know Robin will speak about that, but we believe there's areas for improvement there in terms of getting in front of the customers and getting them to sign up with us. Also, in channels, there's a fairly new channel with Dominion. It's a partnership with Nicor Electric. We do get some money in terms of those customers enrolling. On the electric side, leveraging the brand so we also have the opportunity to cross-sell. And we're looking at better ways to partner with Dominion to improve our cross-sells and grow, in effect, our channel as well.

Now in terms of our expanded markets. Ohio, we've been in the Ohio market about 6 years. It's been a good market for us. Like I talked about, there's principally 2 opportunities there, one being the option business, the other being choice business. We're focused on choice. The option business is really more opportunistic from a standpoint that we participate in those options. And to the extent it's profitable for that 1-year period, we'll acquire those customers.

We are focused on growing the choice business, and we've been successful in doing that. There has been some movement from a regulatory standpoint in that market, behind Dominion East Ohio. There has been some movement to unbundle the C&I business. It should be completely unbundled by April, so that's a good step forward in those markets in terms of deregulating a little further. That's very positive.

In Florida, it's been a good, stable market for us, one of the emerging markets there. We've been talking about CNG, compressed natural gas, it's a good market in Florida. We've signed up several fleets there, looking at about 1/2 Bcf of throughput. Again, it's an emerging market. It'll take time for that market to really develop and begin to materially impact our bottom line. But a lot of good success in the front end in terms of that new customer class and signing up those customers.

New York and Maryland, fairly new markets. In New York, we did not market to that market this past fall and winter. That was due to Superstorm Sandy. We view there are much bigger concerns by the constituents there than signing up and trying to switch over their natural gas marketer. So I would say, in terms of signing up customers in those markets, we really took a hiatus this fall and winter.

Maryland continues to move along as we expected. We have several thousands of customers there, and we look to continue to grow.

The large C&I segment, I spoke about that earlier. It's really a market that we don't look to grow in terms of customer count. It's having the right portfolio of customers and leveraging assets that we get from the Georgia business and helping to manage our supply portfolio with our retail business. So it's been a very profitable segment for us, and there are several different things beyond just margin it makes on the capacity.

We always look to expand in emerging markets where they look for their headwind total margin, but also the receivables risks. Can we manage those ourselves? Or is there a utility mechanism to manage that, and billing in terms of different types of billing.

There are a lot of different types of billing in Georgia. We manage that completely on our own. In some of the other markets, it's a little more gray in terms of whether you manage the bill more entirely -- entirety or you just present a couple of items. And why is that meaningful? The management of billing is meaningful because it will dictate or can dictate the amount of products that you can implement in that market. So the more control we have over billing and the bill, the better it allows us to launch new products.

So we're constantly looking at those variables on new markets to get into. I'd mention one of our largest risks in the business, and that's weather. Hank spoke about that earlier from a utility standpoint. In our business, we do have a natural position when we sign up variable customers, either a market price or a variable price. It's probably fairly straightforward. But the long HDDs or heating degree days, what that means is when it gets cold, generally, that means greater throughput and more margin. When it's really warm, just the opposite, less throughput, less margin.

There is an exception to that in Illinois, and I'll touch on that briefly. But if you look generally at our exposure weather, the big markets are Georgia and Ohio. And just how big is that exposure? If you look at 2012, on a record event, I think we found out what our exposure is exactly. It was about $30 million. So a significant impact on the business if you don't hedge. We do hedge weather. We've hedged weather for about 10 years. We hedged it through various types of derivatives. We've used puts, we've used colors, we've used swaps, and the range of that to get us protection.

And in terms of what it meant in 2012, we basically took a $30 million exposure and got it to a about $9 million exposure. So it's a risk that could have really been an impact on the business to an impact that we could manage and actually offset with some of our commercial opportunities in the business, principally storage.

2012 is a great year for storage. We were able to make money there to principally offset our residual weather exposure. So again, how we hedge that business is important. Now how do we look at each market in Georgia? Again, we have long HDDs. So in that, we typically will have a put structure that will mitigate our downside, but allow to have some upside opportunity. Ohio, we manage in the same way. In Illinois, that's the market that's a little different. If you have a fixed bill, actually your exposure is just the opposite. You become short HDDs. And what you do you is, since you have a fixed bill for that customer over the year, and it gets colder, what do you have to do? You're going to have to go out there and buy more gas with the same margin that you've already committed to that customer. So in that business, you have to look at more of a swap-type structure to completely offset that exposure to where you're more flat. And so, what we do is flatten that out. So Illinois, from the fixed bill piece, we're pretty flat on weather. We have some residual exposure on our propane products, but it's not significant.

To the extent we grow that business and it becomes more significant, we would hedge that in a manner similar to Georgia and Ohio.

In the states of Maryland and New York, those markets to-date have not been mature enough, from a weather standpoint, to really hedge weather.

Now, in terms of a wrap up of priorities and objectives, throughout the presentation, I've covered these items. In Georgia, what we're trying to do is maintain margins. And that market, again, with all the competitive pressures, we're looking to maintain that margin, keep it stable. In Nicor, looking to grow that business and grow those margins.

Principally, through products, channels, partnerships, we continue to look opportunistically in expanded markets and increase profitability there and margin opportunities.

The Commercial business, I didn't spend a lot of time talking about today. It has been a significant part of the business, not only in hedging, like I had just mentioned in terms of hedging weather risk. But it's also been a contributor to the business. It's contributed the range of approximately 10% to 20% of our earnings a year. So it's been a significant contributor in earnings, as well as mitigating risk in the business.

And what I talked about earlier in terms of developing new products, fixed bill in Georgia, although we'll continue to look for new products that we can expand into the marketplace. Delta SkyMiles started in Georgia. We expanded that to Ohio. In terms of the fixed price plan in Illinois, revised that product to allow us to market in Illinois much better. And again, we're leveraging partnership, like our Dominion partnership with Nicor Electric, to expand opportunities and profits there as well. That's the summary of the Nicor energy businesses. So at this point, I will turn it over to Robin to talk about retail services.

Robin B. Boren

Thanks, Mike. I'm Robin Boren, the President of Retail Services. Our business is really -- what we want to do is offer piece of mind to our customers through utility lines and other home appliance warranties. So we mentioned aggressive growth. I guess, the first part of that really was our acquisition of the NiSource retail services business at the end of January. And with that acquisition, we now have 1.2 million customer contracts across primarily 8 states that we serve. You can see the map here.

Our second phase of growth after making that acquisition is really behind the other AGLR utilities and affiliates where we don't serve today, and that's kind of in the yellow color here on the chart. That's one of the things we're very focused on this year, is growing that business between -- behind those utilities and behind Georgia Natural Gas.

As we think about what we're focusing on, we are focused on growth. We're also focused on our employees. We have almost 400 employees. And that we serve some 1.2 million contracts. We take a lot of customer calls, claims. We process those claims. We also own HVAC companies within the state of Illinois, so our teams are out on a lot of calls. And we really believe that if we focus on our employees, they will drive customer service and customer satisfaction and then grow -- and then drive profitability.

Through customer service is really one of the ways that we differentiate ourselves within a pretty large and fragmented industry. It's maybe not known for customer service in the home warranty industry. We have our sixth consecutive JD Power certification last year for our call center, focused on customer service and customer satisfaction. It's one of the things we're very proud of, and we consistently meet an excess of 90% customer satisfaction score with our consumers.

To talk a little bit about what our business is, we do offer warranty products and home solutions that go through a range of things. In addition to this, really separating ourselves and our industry through our customer service. The other thing that we want to do is focus on the niche of partnering with utilities, both our own utilities and third-party utilities. And we believe we bring an expertise of that through our experience with Nicor Gas over the last 10 to 15 years, and really just from being part of the AGLR family.

We really take from that, leveraging the licensing and brand from those utilities. We leveraged their bill and create a bill relationship with our partners, where our targets are actually on the utility bill. And we also leverage when those customers are moving in to territories. In various ways, we identify when customers are moving in through either taking new calls or our purchasing list and understanding when those customers are coming into those territories, as that's a very prime opportunity to sell our products and services to those customers. We kind of refocused on our call center. It is the place where we upsell from our existing customers from line guards. That's where providing value for them within our products, upselling them additional products and then through the new call channel with certain utility partners that we have.

I think from there, we have been expanding the marketing relationship through direct mail, digital and e-mail.

Our product offerings. We really bring in our customers within line repairs there, behind the gas utilities, so gas line, electric or sewer. We've timed our the electric partners, really the electric line guards or service protection, which is a protection against electrical surges in the home. Again, when we talk to our customers, we provide value to them and then opportunity to sell them additional products. We're moving up the value chain to something more comprehensive as a whole-home manager and our maintenance products, which include a premium check on your furnace, air conditioner humidifier. We really think about our revenues. Our products range from $3.95 a month to $63.95 a month, and we bring people up that value chain. It is a monthly service contract, month-to-month basis.

Our costs are primarily focused on servicing those contracts from a claim standpoint through either, a furnace is broken and a repair cost or, from an entitlement standpoint, if you really -- if you're -- if you've bought one of our Clean & Check programs and somebody goes out to service that furnace.

We are a marketing organization. We're in a growth strategy. So we're adding contracts and review marketing expenses of our call center and direct mail, and then we share profits with our utility partners. It's one of the things that we bring to our utility partners. So -- in a profit-sharing arrangement, which can take various alternatives.

Since the merger with AGL -- between Nicor and AGL, we have been able to really transition to a shared services model and use that approach to leverage cost savings. It's also have been one of the things that we're leveraging as part of the NiSource acquisition, utilizing that shared services model, both from the expertise we can get from an IT, accounting, HR, legal and other functions, but also from a cost-saving standpoint. The NiSource acquisition did close January 31 with $120 million-plus working capital. It was an asset acquisition of about 500,000 service plans and leasing contracts, primarily customers in Indiana, Massachusetts, Ohio, Pennsylvania, Kentucky and New Hampshire.

As part of that, we entered into a long-term arrangements with NiSource on licensing their utility needs, as well as an on-bill arrangement for 10 years each. There's an opportunity there forward to expand into their other markets, Virginia and Maryland, and we plan to do that in the near future.

We do expect this to be EPS-accretive in year 1, which is an 11-month year for the acquisition, and that is after one-time integration cost, which we expect to do about $2.5 million to $3 million.

We're knee-deep in integration. As you can imagine, with this acquisition, really getting on to one system, one platform, considering purchase price analysis and valuation over the -- and then integrating our work streams, our call center functions or our back office operations, marketing, et cetera.

Over the long-term, we think there's a good opportunity, both from a cost-saving standpoint and a growth standpoint in combining these 2 business. Even if we just look at processes and billing and vendor consolidation, there's some opportunities there. And then, as we think about our marketing organization, our expertise has always been what we can do within our call center, in our state-of-the-art call center. NiSource's expertise has been in direct mail, marketing campaigns. We do feel like if we can cross those over into the businesses, there's an opportunity to really even take extra growth within our existing territories in addition to expanding into the other areas where there's opportunity.

I've talked a good bit about how we react to our environment and what our niche is within a pretty large and fragmented industry. I think the only thing that we will -- we try to do, because we're dealing with consumers in a very competitive market, is understand what's going on in a macro standpoint. Be that where -- how the real estate market has changed over the last several years from ability standpoint, from a renting and owning standpoint, as well as demographic changes. How can we create products based on these changes? And how can we go after customers, given change in demographics?

I talked a good bit about our priorities and objectives. Our base business has continued opportunity to grow and our thought -- our goal is to grow that by 5%. We're especially focused on partnering with AGL's resources, utilities and affiliates, and [indiscernible] go, we'll be the first one who will launch there in the near future. We expect that to be in the second quarter.

We are secondarily focused on integrating that NiSource business. It's a strong book of business. They've got a great team. We feel like there are some things that we can learn from them and they can learn for us to really be a better business in total.

We'll continue to focus, from a marketing standpoint and technology standpoint, slowly investing capital to forward the digital experience for our customers. People want to transact on the web. They want to be able to look at features on the web. They want to start a process of marketing on the web and complete a transaction, and we want to be able to offer that to them. We feel like that's a great profit opportunity over the next averages, which will be executing slowly, but for sure. And then we really take a step back. What we've realized is, this business has changed tremendously over the last 2 years. Be it with the merger with AGL Resources and the opportunities that's presented. And then on top of that, to have the NiSource acquisition, historically, this has been very a Nicor-focused footprint business. And our brand name was also very Nicor-focused. As we sort of looked at everything that's changed over the last couple of years and what we've accomplished and where we want to go in the future, one of the things we're going to be doing this year is rebranding ourselves to really reflect the changes that have happened and the growth opportunities we have in the future.

So, thank you. I guess, with that, we've got some questions for Mike and me.

Unknown Attendee

Just one on the NiSource acquisition. Do you have any sense -- can you give us any sense of what kind of multiple you paid for that? Or kind of what's the earnings share? You said it's accretive, but I'm just going to...

Robin B. Boren

Before that, 6.25x EBITDA.

Unknown Attendee

Okay. And that's before or after the $3 million of integration?

Robin B. Boren

Before the $3 million. They're not included. On the run-rate basis.

Michael Braswell

But before synergies.

Unknown Attendee

How much working capital [indiscernible]

Robin B. Boren

From a working capital standpoint, there's not really much at all. Our plans are prepaid, 30 days in advance. So we have some receivables, but we're a pretty small part of what AGL is doing in total. We are also a cash generator.

Unknown Attendee

On the competitive supply, I was wondering how much on average through the years do you spend out-of-pocket for the hedges, for the weather-related hedges? And to the degree, this fixed bill contract becomes a larger component, is there a natural internal hedge, such that you don't have to spend that money going forward as much?

Michael Braswell

In terms of our investment hedges, as you can guess, would depend on our strategy in terms of how we'd like to hedge that weather. There's various structures. I will put it as $4 million or $5 million of an investment, if you're looking at more of a type of strategy that gives you upside. If you're looking at more of a strategic to mitigate your downside, but not keeping at the upside, you can argue that's, I chose the word free on the spot, because you're giving up something. But you can mitigate some of your risk less expensively with a swap.

And so there's various structures there, but I would say on average, we spend $4 million to $5 million to mitigate our downside exposure and give us upside for colder than normal weather. If you get to the fixed-bill product, is there a natural offsetting position internally? Yes. And for the Nicor business. That is how that hedge is constructed currently. It's an internal swap. And so it is an offset to, if you want to say, a position, a long HDD position that offsets it. If you look at Georgia, as that portfolio grows, we'll evaluate do we want to invest in options to get us the upside potential or do we want to use the swap structure more or less to offset both of those positions. So in Georgia, we will continue to evaluate that and try to understand what's the best use of dollars. Is it to invest a little bit in derivative to give us the upside of colder than normal or is it to completely flatten it with our other position.

Unknown Attendee

Robin, just on the home services business, I was curious about what kind of customer loyalty you're seeing with these contracts as they come up for renewal?

Robin B. Boren

So our customer contracts are typically 5 to 10 years -- with our partners, they're typically 5 to 10 years. And our royalties can range from anywhere from 0% up to about 10%.

Unknown Attendee

I'm sorry, that's the churn on the -- or...

Robin B. Boren

Loyalty, I'm sorry. So for churn -- I'm sorry, I thought I heard royalty. For our churn, we're seeing about 1% a month.

Unknown Attendee

And curious about the synergies that you may see between your business and the broader energy retail business. Is there a way -- is there greater customer loyalty for people who have multiple contracts with you?

Robin B. Boren

I'm sorry, could you say that again?

Unknown Attendee

Whether people who have, say, the home services contracting and would they be more likely to churn off the customer choice for the energy business or is there some stickiness that you get from having multiple contracts with the same person?

Robin B. Boren

We definitely believe there is. We think just from moving our customers at our value chain, as well as going out behind the utilities, as well as partnering with Mike's business, that it should increase retention. It's what we see with our other utility partners. It should improve retention across the board.

All right. Thank you, everyone. Yes, I guess we'll turn it over to Pete Tumminello for the wholesale and the midstream overview.

Peter I. Tumminello

Thank you, Robin. I'm Pete Tumminello. I've been with AGL Resources for 10 years and with the wholesale side of the business for that entire time. I'm going to spend some time with you and talk about our Sequent business, which is our wholesale natural gas trading marketing business, as well as our midstream business, primarily our storage and our LNG activities. And what I'd like to start with is really introduce the wholesale business in light of the market we've been experiencing and our competitors have been experiencing in the last several years. The market has been significantly impacted by the influx of tremendous shale production. It has caused natural gas volatility to come down significantly. It has caused price differentials both for pipeline transportation and storage operations to compress significantly. And that is being just a tremendous headwind for this business.

So we've really spent a lot of time making sure our cost structure is in line with this lower volatility market and give us an opportunity to participate in the market in a meaningful way if and when it does recover. So we'll talk about that a bit.

But the core of our business is really serving our utilities with asset management services. Our largest customer is Hank Linginfelter, frankly, all of these utilities, where we manage all of the gas delivery. We optimize the pipeline transportation and storage for all of our utilities with the exception of Nicor, and we hope to do that at some point in time in the future.

We focus on physical delivery. We're not a speculative trading shop at all. We are basically a logistics company. We move gas from the producing regions to the market, we optimize all the price differentials between receipt and delivery.

We also spend a lot of time serving the gas-fired power generation market. We have 25 schedulers in our business that basically are on call, all the time, we have a rotational schedule to make that happen. And we serve a lot of this hourly balancing market that's required by the increased needs of gas-fired power generators.

Our risk is very controlled, with a very low VAR. That's being around the assets that we acquire to serve all of these markets versus a trading VAR. And we have a complementary commercial/industrial business, primarily the Eastern U.S., and that has been growing over time. But we're looking at that business now where there'll be some selective growth and we will also reduce overexposure to that activity for the right opportunity. And we do see -- we have implemented opportunities to reduce our cost structure to get it more in sync with the market opportunities we see.

And as you look at the EBIT line here towards the middle, it's certainly disappointing to show that we've been about a breakeven business over the last 2 years. 2012, however, economically, was about in line with where we think we can be in this market. We have -- we added $27 million of additional value to that negative $3 million, we call it storage rollout schedule. That's basically margin that's sitting there in our storage to be realized when we withdraw it and we plan on withdrawing that at this point in time in 2013. So you see a much higher projection for our business in '13, which is going to realize some of that economic value that we've created last year.

But I would suggest you think about this business to be about a $20 million EBIT business as we go forward. That's how we're trying to position the company. And economically, we performed a little better than that last year. We think we'd be probably a little under economically this year, although our accounting results would be higher due to the rollout of the storage we spoke about.

And then to the extent there is a market recovery and volatility, to the extent we see some things pick up with demand over that next several years to balance the supply, we believe there will be upside to that estimate.

So as we look at where we're focused and where we were in 2012, we clearly were building our growth side of the gas-fired power generation customer base. That's our largest margin business. That's the service side of the business where the customer really needs you to balance the flows to their power plants every hour of the day. It allows us to match our storage contracts with our pipeline contracts and serve that customer on a bundled basis where they don't need to pick up all those assets to serve their own power plants. We also implemented significant cost reductions in the business, really, over the last 2 years.

And if you took the Nicor wholesale business premerger, the Sequent business pre-merger and with the O&M costs, sort of about 30% lower collective O&M costs with that business without giving up, I believe, any of the commercial opportunities for the long term.

And again, around our risk and our VAR, it's tremendously low. And again, around typically the assets that we pick up versus a trading VAR.

So a better description of the business is this pie chart talking about what pieces are volatility dependent and which aren't. So the kind of top 3 pieces of the pie show our asset management, but we do for our utilities as well as many third-party utilities, we do hold proprietary form of transportation from storage to serve industrial and power generation customers and then our optimization around that. That is all volatility dependent and that's the piece that has been impacted by the market volatility reduction due to shale. The bottom 2 is our producer services business. The gas-fired Powergen business are far less impacted by that activity. And that's where we've been spending our time really growing our business.

On the left, you can see the benefit that we have connected to our utilities. We've been able to return over $200 million to our AGL Resources utilities that go to reduce their rates to customers. So you heard Hank and John and Drew talk about the importance of having a very low cost utility to be able to do all the things we want to do on the regulated side. This allows us to have a lot of goodwill back to the regulators and do some things strategically at those utilities. And Sequent has kept about that share of margin over the years. And you can see our footprint with our affiliate utilities in green. We probably manage about another 20 or 30 LDCs, their portfolios as well. And we move about 6 Bcf a day of natural gas throughout the grid.

So you can see historically that before the shale impacted the market, we were about a $40 million to $50 million a year business. We certainly had reductions in opportunities over the last 2 years. We've repositioned our cost structure. We repositioned a lower cost asset base and we believe, again, we being at roughly in that $20 million range as we go forward. You can see on the left, bottom left, the number of customers or counterparties have come down because we've refocused to deal with the best margin opportunities, as you would expect. But then it's also a market dynamic, where we're seeing some trading counterparties exit the physical gas space due to the lower margin opportunities that are there. And I think long term, that may allow us to have some opportunities as folks continue to exit the space.

Credit wise, we've got strong credit portfolio with our customer base. You can see the types of customers we sell to on the left. We're about an A- weighted average credit portfolio. And that's about what it's been over the years of our business. So it's very strong. We've had very limited credit losses, basically only one that we reported this time last year and have had none since then. And it's a very strong group that manages risk with high-quality systems that report our credit on a realtime basis, as well all of our positions and P&L on a realtime basis.

So here' are some of the service business we spoke about. The producers in the market and really the shale produces really are focused on drilling, using their capital to drill more and more. That these producers are looking for a service provider such as Sequent to be able to market that gas on their behalf, bring it to market, they do want to hold firm transportation for all of their portfolio, that's an expensive way to operate as an E&P many company. So we do move that gas for them. We balance it for them. We provide scheduling services and optimization of some of the transport they hold. That's grown nicely over the years, and our gas-fired power generation business certainly has grown nicely as well. And that allows us to continue to extract some of the better margins in a tougher market.

And certainly, commercial/industrial is quite small relative to the other 2, but it's a nice outlet for assets that we have.

And this just shows you where our core gas-fired power generation customers are. And as you would suspect, it lines up just perfectly with where the pipeline transportation assets are that we manage or have on our own account. And we really want to be thought of in the market as the top provider of hourly and intra-day services to gas-fired power plants.

And as far as producers go, I don't have a docu in the Bakken, but the Bakken Shale is also an active shale area for us where we're managing pipeline capacity for producers and doing the services that I just previously described. And as production grows over time, we suspect this business will continue to grow as a service component of Sequent's business.

Now the most challenging aspect to our business, both at Sequent and in our midstream storage business, is the value of storage. And this graph shows really at a discrete point in time each year over the last 5 years or so, where it's taking the price differential from the summer to winter months and really showing what the spread is, what that intrinsic value of storage is, and you can see that, that's going down significantly. As more gas comes online, you have a tremendous capability for that new gas production to better balance the market. Storage has taken a devaluation during this time period, and you can see where it's going even down in our forecast for 2013.

Now the interesting thing is this changes. Really through the last year, we showed you what 2012 looked like in that kind of $0.77 summer to winter spread, where we had the warmest year on record in 117 years of recorded history, that meant heavy storage capacity, actually was a premium. You need to put this gas somewhere that wasn't used for burn. And that spread widens significantly to well over $1, and that led to the robust storage value that we have coming into this year. We do see that reversing. We had a very cold start to the year. We're seeing gas prices go up well over $4 now and we've seeing those spreads compress. So that's going to be a little bit of a takeaway for the business this year.

Now if we look at our transportation portfolio, we've a very diverse set of pipeline from transportation throughout the U.S. Now go from kind of the very best opportunistic market down to the most challenging. The New England market is the most constrained. And if you followed gas prices this winter here in the first quarter, we saw prices over $30 for natural gas many days during that period. We have a nice portfolio of transportation there and it shows you the forecast of the price differential on the upcoming winter to be in the $4 to $5 range in New England. It's the most robust market in the United States.

Now let's contrast that to just South of there, go down to Maryland and New Jersey, where we've had a historic strong portfolio of assets. Well, that differential is down $0.30 to $0.40 in the wintertime and just the shale gas is making its way from Pennsylvania down in the Jersey, Maryland area. There's an influx of new pipeline capacity and that's really depressing the values of pipeline transportation in that area. So those are the 2 extremes. We had somewhat stable values in our pipeline transportation out in the Midwest. In the Bakken Shale, we hold significant pipe capacity there. As the Bakken increases production, that capacity has maintained its value. And then capacities we hold in Florida, as the gas-fired power generation market continues to grow. That capacity still is up, retaining value and then we see even greater value over time.

Weather you've heard about, they're just a picture of it. That's what 2012 look like to the 30-year normal, hot. And one of the issues that we track very closely at Sequent is what's going to happen in the new largest production base that we have in the U.S., in the Marcellus. And we see that there will be opportunities for additional pipeline constraints over time as new production comes online. So we constantly monitor where these constraints could be. We've realigned our pipeline capacity portfolio and make sure we can serve our producers well and that we can get this gas to market. And we've been acquiring pipeline capacity over the last year to make sure that we can get through these pipeline constraints without any problem.

A little bit on gas-fired power generation. You see the peak there in 2012, significant growth in gas volumes to gas-fired power gens. We see that coming off this year in the first quarter of '13, we're seeing about 2 Bcf a day or greater less demand by power generators. And that's really a price impact, now we're over $4. This time last year, we're at $1.90 or so. And so we're not seeing as much of an opportunity for that switching. However, over time, with all the environmental regulation and growth of the new gas-fired power generation, we see this market as a very robust market and one that Sequent services, we believe, will be valued in the long term.

So a little bit about the 2013 forecast. The bottom line -- the bottom line there on the left. We're forecasting about $25 million to $35 million of EBIT for the year. That's on an accounting reported basis. A little under $20 million from an economic perspective. So we're really in line with that $20 million-type of forecast for this business and this lower volume market, but to be positioned for greater value to the extent pipes brought capacity, spreads improve, volatility improves. That would likely come, in our view, in a couple of years, when LNG exports are likely to occur, when large industrial demand starts to take place with the new chemical plants down in the Gulf Coast and that the new demand kicks in, we believe that we'll have some of those opportunities longer term.

I'm going to me skip back. That is just where our kind of year-end storage roll out schedule has been over time. Just briefly mention that's the $27 million number that we ended in 2012 with. That if we withdrew that gas, that would come in on earnings this year.

So a little bit about the cost of our portfolio. You see that this is how it looks over time. The legacy cost that we have for the pipe capacity is rolling off fairly quickly. Roughly 10% or so of that reduction will drop to EBIT, and that's embedded in our EBIT numbers. And so we're really recontracting and refilling. Say, in 2014, we'll be well over $66 million of asset costs when get to '14, but they will be at a much lower market rates as some of our legacy higher-cost contracts roll off. Typically, we're in a 1- to 3-year contracts for assets and as the 3-year stuff is rolling off, we'll roll it at much lower current market rates.

So what is the outlook for this business? I think I've given you a good view financially what it looks like. We'll continue to provide these services to producers and power generators and realign the cost of our portfolio and O&M costs of our business in line with these market opportunities we're seeing. Now we believe storage values are going to be the most challenging for us. But we have a healthier pipeline of capacity portfolio due to some things we spoke about in New England and elsewhere. And just in really '13, it's an interesting indicator, when we get back to some normal weather, you can have some pretty extreme volatility in certain locations. And our portfolio is well-positioned for that as we go forward.

As we look at our priorities and objectives for the year, we'll be about just squeezing every bit of value out of the market that is there from an optimization and logistics perspective. We do see that competitors continue to exit this space. And there will be, I believe, less competition in this space over time. We'll have to see if that leads to margin improvement. We really haven't seen that yet. We have seen the exits, but over time, we'll see how that impacts us from a margin perspective. And again, you see this kind of price range in $3 to $5 and volatility limits over the next couple of years until demand really starts to kick in.

So that is what I have for the Wholesale Sequent business. I will shift now to our Midstream business. And I'll talk to you primarily about our storage operations. As Drew mentioned, we have about $550 million of net investment in this business, primarily in these 3 storages, Jefferson Island in Louisiana, Golden Triangle near Beaumont, Texas and our Central Valley storage facility, which is actually started by our Nicor -- it was a Nicor property that then when we merge, we took over finalizing and completing that project.

So we have about 31 Bcf of working capacity in our storage business. The other entities that we report up through this reported segment are a few ownership interest we have in a few pipelines, Horizon, Magnolia, as well as the LNG activity that I'll talk about.

So here's the history of earnings from the Midstream business. You can see it's had some nice growth as we put new facilities in place. We brought Golden Triangle online in late 2010. We brought Central Valley storage online in the first half of 2012. And this shows the impact of those added. In 2013, though, this is where we're seeing some significant challenges to our business with these storage spreads being light with fewer parties in the market actually contracting for storage. So it could be a positive for Sequent of less competition. Actually it's a little bit of a -- it's a negative here because you don't have as many parties out contracting for storage volume, but so everything we have, if we chose, but it's just at much lower rates. But we'll position this company for 2013 really to be about a breakeven EBIT. We're going to see about a $10 million drop off in value over recontracting our storage. Unfortunately, at some of the lower market rates.

This will give you a view, though, as to how we're positioning this midstream company over time. So we made these investments, primarily and let's talk the Gulf Coast storages, Golden Triangle and Jefferson Island. Our view of the market was about a $0.15 to $0.20 per month rate for storage capacity for our Gulf Coast storage facility. And that's what we've obtained when we were initially selling these leases. Since that time, the market has dropped off to a current market value in the Gulf at about $0.07 at Jefferson Island and even lower at Golden Triangle. So we've seen a significant reduction due to all the issues we've described.

Now as we model this business and we look at it going forward, and we look at a higher price gap going forward, we looked at potential return to at least some modest growth in volatility, we see it kind of a $0.07 rate but we're getting now at Jefferson Island, able to potentially grow up back to an $0.11 rate over the next couple of years. Now we can't really pick the timing of that. But that would be our best estimate as you're modeling this business and you look at the rate structure over time. We've given you different looks at this. The market sometimes embeds different levels of extrinsic value. We can immediately hedge, really by storage lease, so we've given you kind of an estimation of model value with some of that this extrinsic value modeled, as well as just the outright intrinsic value there.

So here's more detail than maybe you'd like, but I think the more the better. This is the actual individual contracts that we have that was rolling off at the end of March of this year and then what we recontracted for basically the next day, April 1, 2013. And you can see on Jefferson Island, our weighted average rate for storage went down from $0.138 when we had recontract the storage that was rolling off. The weighted ave rate now is about $0.11 at that facility. And those contracts that we sold last year, were sold at about a $0.09 rate. Those sold this year around $0.07, $0.075 rates. You can see the challenge that we're dealing with in that market.

Down at Golden Triangle, we really -- to the left, at this point in time, not to rollover a real low-cost contract we had there. We would sell the additional 2 Bcf space that customer 3 had there for an appropriate rate. Right now, we may just sell to manage that. We believe we can get better value than what the market is willing to pay us. The same thing with Central Valley, the 1.5 Bcf that rolled off, we believe we can do better through partner loans, through other balancing services that our hub operations can do managing ourselves.

So that's a summary of the storage business. I'll briefly walk you through the micro LNG business that we have. And this, we hope, would be something will grow over time. The aggregate AGL Resources LNG assets, those out of Hank's business right now, as well as those that we have in the pivotal LNG unregulated business, can produce about 500,000 gallons a day of LNG. So we believe that's probably the largest amount of LNG that could be produced in the country to serve the burgeoning market of trucking, marine, rail, rigs, any high-horsepower application that looks at this market and so that they want to potentially switch from using diesel or liquid fuel to use the natural gas and liquid form. And -- but the density that you'd get through chilling it and bringing it to liquid form allows you to store it, allows you to go longer distance and really can be an appropriate application for a high-horsepower application.

We have completed our Trussville, Alabama facility. It's near Birmingham. And if you look at the capital we invested in that plant, we acquired it a couple of years ago. We just completed the upgrade of that facility to be able to run it 24 hours a day, 7 days a week. And we really have about, I'd say, maybe 20% to 30% of what it would take to build a facility like that from scratch. So we've got a very, very low cost entry into this market with this asset. And we've just executed what I believe can be a significant signal in the market, a very nice-sized contract with a trucking company that would be a 10-year agreement for 500,000 gallons per month that we will serve from our fleet of LNG facilities. And this is a customer we believe we can grow with over time if it works for their application and they get the benefits -- they get the cost benefits, the operational benefits that they're looking for over time.

So what's our strategy here? If you look in the market and you see recent announcements that Shell has announced a small facility in Louisiana and in Canada, they grew over somebody who would be a competitor in this market, as well as a couple of others. We believe we have a very nice position in the Southeast. If an entity is in the Southeast and looking for LNG to replace their diesel, we believe we could be the most competitive in the market.

We will also look to build new facilities for those customers that can anchor our facility and allow us to earn a return that we believe is appropriate in this business. So we would think about returns in this business to be in the mid- to high-teens as what we kind of shoot for in this business.

And the investment size would probably be in the range of $75 million, depending on the size of the facility, but I'd say anywhere between $60 million to $100 million, but kind of averaging it around $75 million or $80 million for a new micro LNG facility that can produce somewhere in the 75,000 to 100,000 gallon per day type of load.

So we would like to eventually build more of these over time. We'll only do it when we have an anchor contract that allow us to earn our appropriate return. But we believe we can help facilitate this market. We believe we have helped facilitate this market. We've taken up a position in many of the conferences that are out there, getting the market used to LNG. We're out there espousing the benefits both environmentally and economically. And I'll talk briefly economically.

This is a little bit data graph that goes back to last fall. But it shows you the price differential, the price spread that somebody can benefit from, that they can benefit from using diesel and with the forecast that goes up to $4 over the next several years, in many cases, you're already there with that diesel price. When you build up what the LNG price would be, you take the cost of the natural gas itself in red, you build up the facility cost added to that, you still have a lot of headroom in blue for the customer to spend on engine conversion, on the distribution network that they would need on their site and also provide them an appropriate return. So we believe the economics are compelling. It just is going to take some time for this market to become extremely robust.

So in summary, for this business, we do expect to be about a breakeven business this year. We will be continuing to implement strong O&M cost controls while we're in this tougher economic environment. We have recontracted the Jefferson Island 3.4 Bcf fully, as I've shown. But on Golden Triangle and Central Valley, if we can't get the rates we're looking for, we will manage those through balanced services and parts and loans. And our LNG business is really going to be focused on getting a greater profile for this opportunity in the market and hopefully, be in a position to add more contracts and potentially build more facilities over time.

So that is it for my presentation. Glad to answer any questions.

Peter I. Tumminello

Craig?

Craig Shere - Tuohy Brothers Investment Research, Inc.

Steve. Two questions. One, is the Sequent benefits from higher legacy contracts rolling over done with because you don't sound like you're talking anymore about improving overhead numbers going forward at Sequent versus where obviously talking about headwinds and revenue at Midstream? And then on the LNG side, I was wondering if you could comment on how much has been invested to date? And isn't part of that a joint venture? Once you then said it was El Paso originally?

Peter I. Tumminello

Okay, let me take the first question with Sequent. We had probably another 1 or 2 years of modest benefits of asset costs flowing off and you can see the graph that I showed you. If you look from '13 to '14, that drop off in asset cost, probably 10% of that value would be attributable to EBIT. But when you roll everything together there, that all comes into our estimation of a $20 million per year kind of average with run rate of EBIT for Sequent. And to your LNG question, yes, the -- initially, we had a Southeast LNG entity, which was a business with El Paso that we have since -- that has been kind of disbanded.

We no longer operate that joint venture. We now do it with a 100% entity, AGL Resources entity in it. It goes under the name Pivotal LNG.

Craig Shere - Tuohy Brothers Investment Research, Inc.

And how much total money do you have invested in that right now?

Peter I. Tumminello

It's under $20 million. That sound about right? $17 million-ish? Okay. So I'm right. It's under $20 million. So it's around $11 million. So if you look at that and you compare it to what it would take to build a new facility, we really do have a low-cost entry into the LNG market.

Unknown Attendee

Yes. Maybe if you could add a little commentary on an earlier question about maybe new pipeline interest going forward. How competitive is that market? I mean, there's obviously a number of proposals for Florida that a lot of people are looking at, at that space. Can you talk about sort of competitive pressure there?

Peter I. Tumminello

There's certainly are on the drawing board lots of pipelines. And because of the footprint AGL Resources has and our ability to contract full capacity and our ability to potentially partner as an equity owner, we see those as opportunities. As the largest distribution company in the U.S., I think the pipeline see us a strategic partner in some of those opportunities. So John may want to talk about that little bit more as we wrap up. But I think there are opportunities for us that we're betting a couple of those right now.

Unknown Attendee

Yes. I'm just curious, earlier you had mentioned that you're converting part of your own fleet to compressed natural gas or LNG. And I was just wondering if this facility in Trussville designed to help support that. And what are the economics of taking AGL Resources' fleet as sort of temporary or a test case? What are the economics of converting those types of vehicles over to oil and diesel?

Peter I. Tumminello

I may have to punt that one to Hank because that is in his business. But I know they've been looking at CNG conversion versus LNG conversion. But in Trussville, our LNG facility really aren't -- wouldn't be used for the conversion of our own fleet.

John W. Somerhalder

Yes. The applications for our own fleet, as Pete said, are pretty much at the range we need on those vehicles, we can use compressed natural gas. And that's a little bit less expensive to convert with a high-pressure tank versus a cryogenic tank. It's really when you get to the high-horsepower, long-range. It's really marine, rail, long-distance trucking, potentially some things like garbage trucks. But most of those are even on compressed natural gas. So the economics we're looking at are related to compressed natural gas. And you do need -- with those lower-horsepower applications, you do need quite a few miles through the year with the scale right now and the cost right now to convert. But I think Hank's got an objective of over time moving to a high percentage of his vehicles. But that's likely to be less than 50%, certainly for a while. But that does give us an opportunity to move that in a positive direction. What we're seeing, though, the real opportunities are with the high horsepower. In fact, at one of the conferences, a couple of the conferences that Pete talked about that we've attended in Houston, it's not just our industry, but Cummins Westport, Caterpillar are announcing material projections to convert from diesel to natural gas. In fact, Caterpillar is saying a high percentage of those type of engines could and probably should be fueled on natural gas. Cummins Westport are announcing a large percent market share for things like trash trucks, buses, school buses, 18-wheelers, some pretty material increases. And then companies that supply the tanks, like a Chart Industries, have made big commitments to supply these cryogenic tanks. So just a lot of interest and a lot of momentum to support that. And as Pete said, we stand ready. Between only having about $11 million invested in a facility that would cost about 4 or 5x that amount if you've built it greenfield, and then having access to our regulated facilities, which could help our customers the same way Sequent has management helps, we really have over the last 2 years built up a good position should this market move forward the way we think it is to participate in a meaningful way.

Unknown Attendee

Pete, and I'm not sure how we could just get a comment on. But if we look at 3 to 5 years -- and I guess I'm asking this question to sort of a more broad Sequent, as well as Pivotal or at least the storage assets, right. There was a slide that was showed about basically what the NYMEX spread is, right? And we think about that as sort of the more traditional single-cycle type of storage. And I guess, I'm wondering as we go out 3 to 5 years, how levered are you -- or if you had a choice, for instance, would you rather see sort of a steepening in the storage spread, the NYMEX curve? Or is it really more of the intraday natural gas volatility, something that would perhaps utilize more of the multicycle, higher utilization, maybe help [indiscernible] et cetera? And I guess, ultimately, what I'm going to as we look 3 to 5 years forward, as we think of more renewables, where gas is backstopping or just gas-fired generation or maybe even LNG exports, can you kind of give us some color on which one is the greater lever for AGL? And then do you expect to see more volatility because of those factors? Even if the NYMEX curve stays flat, I'm just curious if you could help there.

Peter I. Tumminello

That's a great question. One of the dynamics that I think we'll see this summer as we have a flatter curve is almost by definition, you'll see higher extrinsic values because folks aren't going to be incentivized to put a gas in the ground when you give a flat curve. So when there is demand and there's going to be less in the ground, there's going to be a little bit of a volatility impact that may come in at that point in time. So I believe the intraday values, when you have a hotter market with a flatter curve, will bring you a little bit more extrinsic value. So that's a comment in the short term. In the long term, if you look at the midstream business and what customers will pay you for on the midstream side, historically, they're going to pay you a percentage of the extrinsic value. They're not going to give it all to you because they need to keep it optimized. So typically, a greater percentage is going to be in that intrinsic. And so the wider the intrinsic spread, it's better for the midstream company to be able to sell those leases. So that's probably the best thing for that business. But when you look at the fundamentals going forward and you look at more variable load coming on with more gas-fired power generation, you look at a higher outright demand coming up with potentially 6 Bcf or more for the LNG exports. You add to that the industrial complexes, primarily on the Gulf Coast but elsewhere that are increasing demand. You're going to uplift demand in general that's going to need balancing in that market and arguably a lot more balancing. But I think for the short term, first several years of that is going to have to absorb the excess that's in the market. So I doubt you'll see much new greenfield get built. You'll see cheap expansions get built in the market. We have the ability to do some of that at some of our facilities but no current plans to do that. So I guess, we're probably levered to the intrinsic piece being the bulk -- a big piece of the value on the midstream side. But Sequent side, more of the extrinsic piece. We're buying those leases now at very, very low cost with very, very low extrinsic. So the extrinsic kicks in, those [indiscernible] are there, and Sequent is levered out to that opportunity. So you have a little bit of both, one in one business and one in the other. Okay. Well, thank you very much.

Andrew W. Evans

Are you tired of me yet? One more. Nobody really answered that question. Let me talk to you a little bit about cargo shipping. I appreciate the question that Craig asked me or asked us. There's no shortage of that question as we meet with investors. There's no shortage of interest in this business generally. But the problem is that the answer to it in either direction causes a tremendous amount of disruption in the underlying business. And we just -- I don't want to generate an environment where competitors talk about liquidation of assets, which is absurd notion around a business whose franchise is as strong as this one. And it causes a lot of disruption in the employee base and lost productivity. And so although it's a very logical thing to be asked and something we have to be responsive to, it's just -- it's a very sort of unwanted thing to discuss. It's also -- I don't think that's important to us in the near term in terms of our thinking.

We're very, very fortunate that Tropical Shipping is a well-run business. Rick Murrell and his team, Jeff and Mark and Bill have really understood how to operate this business day-to-day and have done so multidecades with Murrell, in particular, I think approaching 30 years. And it has manifested itself in what we believe is a very nice support of this business in terms of what we expect from it in terms of earnings. And it is a very low burden on management generally, and we're just very proud of the way that the business operates. And that's certainly the way I think about it. It's not very logical that it's part of the utility complex. But I do, in particular, think that Tropical Shipping as an entity will be around for quite a bit of time because of its absolute significance to the market that it serves.

The things that we've focused on in the last couple of years, in the last 1.5 years, really have been cost structure of the business, utilization of the vessels and health of the markets that it serves, market share principally. And what you'll see is that we're over 40% market share in the 25 ports that it directly serves and more than 50% in certain submarkets. And so it's absolutely critical to the infrastructure of the islands that Tropical exists. And we're proud to own it.

Today, it's a fleet of 12 owned vessels and 2 chartered vessels. It's complement has been as high as 20 vessels during the peak of construction activity and strong economies in the 2005 through 2007 timeframe. We maintain almost 13,000 containers and flat racks. Almost 1/3 of those are temperature-controlled in what we call -- which are refrigerated containers that serve that market. And so they serve a really well-defined purpose, which is not necessarily refueling or recharging cruise ships that are entering that area but really people that are living down there, vacationing down there and constructing down there.

Further in this segment, we have more passive investment in Triton Container. And I'll break that out for you in a second. And then attendant to it is Seven Seas Insurance. Bill Culpepper [ph] has said it's a very well-run business. It is largely -- drives the largest amount of its profits from South. So it's very critical to the shipping business but also provides a some service to third parties, which is not immaterial.

This is the service territory that Tropical serves. We break it into submarkets, which are effectively the Bahamas, the Caribbean, and then the Windward Islands to the bottom there and the Leeward Islands. There really aren't very many markets that are not served by Tropical. But we have exceptions in sort of places like Jamaica or -- although we serve Hispaniola, we don't serve the Haitian portion of that island really for issues related to corruption and stuff. We try to stick to the markets that are much more easily served without risk.

We are seeing improvement in the business as it relates to volume shift. This is a measure of TEUs or 20-foot equivalents. Most containers that are shipped down there are in the mode that it's either 20- or 40-feet. There actually are some extension to that, 43, I think, 47. But generally, as you look at transportation, most people quote in 20 foot equivalents. The volumes being shipped down there peaked somewhere about 200,000 TEU in the '06, '07 timeframe. So not quite below but close to 150,000 TEU as those economies degraded on the heels of the U.S. economy. And we've seen some improvement as we try to really move that back into the 180,000, 200,000 TEU range. The biggest issue for us, though, is that the rate per TEU ship has declined significantly. That's because of the demand disruption down there due to poor economy, and certainly not due to our market share. It's more an issue of the market in total contracting. But this gives you a really good graphical representation of the income that we've derived from this business or has derived from it over time. It's [indiscernible] for a much longer time period. And if you look at this, it's more a sign of when -- it's the picture we just started in 2002 here because it was basically the bottom with the lower point in a broader set of cycles.

We did with Tropical Shipping and Seven Seas Insurance have a slight loss in this business in 2012. We anticipate having modest profitability in this business. The entire segment itself will generate something between $10 million and $20 million worth of EBIT next year or in 2013. And that's our expectation. These economies are improving a little bit. They're a bit behind the U.S. economy always. And oddly enough, they're all probably a little bit weather-sensitive in that if the weather doesn't last very long, people don't tend to go down to warmer vacations. I would just encourage you as we do need utility to keep your windows open and your heat on, but in this business, to get down and vacation as quickly as you can.

In terms of volume, almost all of the volume -- the vast majority of the volume that's shipped in Tropical Shipping is southbound traffic from Canada, from the port in Palm Beach down into the islands. There is a good sliver of this business that is interisland but still we see very little northbound traffic.

This just gives you a decomposition of the container business. I would say refrigerated containerization is a much higher profit margin business than a simple dry containers. Dry container is much more of the commoditized business where rates have declined significantly in flat rack and other, these are items that are shipped on flat racks, which you might see pulled behind an 18-wheeler and really are driven by odd lot-sized things that are mainly for construction in these markets.

More importantly, though, I think if we decompose revenue and product mix, you can see there's a very nice diversification in terms of total revenue across the island destinations. We don't see a lot of concentration in this market. It's very healthy in that regard. And then on the right-hand side, you can see -- I would say the most profitable business is probably the less-than-container load. This is the aggregation of cargo of smaller shipments from individuals. This occurs largely in Florida. People are bringing in smaller items that they need shipped over to the islands. We aggregate them into containers, and carry it bulk and then break them back up for distribution when they hit the islands. That business is the most complex and most expensive to serve but also has the best margin in it. And then that's followed closely by the refrigerated container business, which is much more sensitive to scheduling and to arrival because of the potential storms there.

As we said, our expectation for EBIT is between $10 million and $20 million. But we are carrying a fair amount of depreciation and amortization in this business. $5 million of it is incremental to our acquisition and nothing more than sort of amortization of intangibles at the trade names in the business. But I think depreciation in total probably approaches about $25 million for Tropical. We do expect to see increases in volumes and increases in rate. We've been instituting rate increases since about October and November of last year. They do appear to be well-received as -- well-received by the shipping public. I think they understand that a healthy Tropical Shipping is important to the health of the economies down there, and so we are able to pass through rate increase. And we haven't seen pressure on volumes related to those increases. So both positive signs for 2013.

There are some risks attendant to the business. We do see from time-to-time fuel cost escalations. Those are largely handled through surcharges, which is a common practice in the industry. Always face risk related to global trade patterns, although you need to understand that most of the cargo that most of the ships that are carrying cargo this area are ships that are specific to their requirements of the individual ports that are served, and they're largely small ports, and so they're not being served by the Panamax ships that will come through the Panama Canal. That said, there will always be competition as trade moves directly from China. But most of the trade still flows through the United States or through Canada as it moves in the southern direction we could see downward pressure on shipping rates due to this competition. But as I said, I think that we'll probably see some going-up rates because they are significantly below what we've seen historically. And there are some U.S. regulations and budgetary constraints that could put potential pressure in the business.

That said, I think there are good opportunities related to our ability to increase market share. We'll continue to reduce the fixed cost portion of the infrastructure, and we will ultimately see poorly capitalized competitors in this business exit if rates don't increase over time. We talk a little lot about LNG as it relates to shipping. I do think, as John said, that we will see ships in -- we'll see increases in the use of liquefied natural gases of fuel. I don't think that we'll see very near-term benefits in Tropical Shipping nor do I think that we'll see near-term deployment with its competitors. Ships have a relatively long life and repowering those ships is rather expensive. Though as we continue to see a big disparity between costs in diesel gallon equivalents, ultimately, this sector will have to move to something if the refueling of the structure can support it, that migrates to lower fuel. My expectation is we'd probably see that first in [indiscernible] and then in trucking just based on infrastructure requirements in Wall Street Journal articles, but we'll see how it develops.

So with that, any questions about Tropical other than the obvious?

Unknown Attendee

Do you see over sort of the next 5 years, any need for major CapEx in this segment?

Andrew W. Evans

Nothing substantial or out of the ordinary. The interesting thing about Tropical is it does retain some cash and equity offshore, and so really can support its own CapEx requirements. We're always looking at the alternatives of acquiring additional ships, where the economics are more favorable than current lease rate. And we've had a number of conversations about that in the last few months. But I'd say that the cost of acquiring those ships has come down dramatically from the 2006 peak. The issue is really just finding an efficient vehicle at the right price of it. It's our trade, and that's -- these things are not very homogeneous.

Unknown Attendee

So the U.S. regulations that you mentioned, increasing environmental stringency, is not something that is a major cash user?

Andrew W. Evans

It's not as big an issue in this area as it is maybe in the Baltics, where there's not a lot of land separation. Most of the regulations relate to emissions as when you're in coastal areas. And we can meet a lot of those by changing the fuels that ships run on. This is not a Jones Act carrier, hence we can't support multiple U.S. ports. We can only serve a single U.S. port from the U.S. It's a limitation of not being able to be converted into a merchant marine vessel in time of conflict. And so there aren't a lot of restrictions for these vessels today. But we have to be mindful, particularly of the environmental ones, nothing that can't be met in the near term though. It's just better fuel, more expensive fuel.

Perfect. Thank you. With that, I think we'll open up for Q&A just generally across any of the businesses that we have.

John W. Somerhalder

I just want to make sure if there's any additional questions before we wrap up, and I'll ask you to stay up here with me. And ask Hank to be ready in case he needs to come up.

Unknown Attendee

Actually, I do have a follow-up for Hank. I didn't get the chance to ask it at the break. But this was just more of a question going back to the slide you put up on the ROEs across the different jurisdictions. And what I was wondering is that do you -- because that was for 2012, I believe. If you baked in the incentive comp target for 2013, how does that impact those numbers? And maybe perhaps more important, is it actually impacting one of those jurisdictions perhaps more than the others, where it kind of changes what that profile was?

Henry P. Linginfelter

It would dampen those returns. It would be spread largely across all the utilities. And that's a roughly $30 million impact against those returns. And I don't have the math that says what the delta is. But Scott, do you remember what our excess in dollars is when you aggregate all the utilities?

Steve Cave

It would take them down to very close to authorized returns.

Unknown Attendee

Okay. But it would be kind of sort of on a pro rata basis, right? It's not truly impacting one over...

Henry P. Linginfelter

It would not impact one over the other.

Unknown Attendee

And then maybe just -- why not for cargo, Drew? Is there a potential -- or is there anything, a scenario you run, where actually making those vessels Jones Act compliant shifting markets basically? Is there...

Andrew W. Evans

It's actually not -- we couldn't make current fleet Jones Act compliant because [indiscernible] United States, there are different specifications. And so there's not modest modifications that could be made.

Unknown Attendee

So you can't retrofit?

Andrew W. Evans

No. That is really because [indiscernible] a category that [indiscernible] those [indiscernible] in the markets that it serves and try to move out into other markets probably, I think, our best use of time and resources.

Unknown Attendee

One of the slides with the CapEx breakdown showed some CapEx kind of the top in gray, which was shared services, I think, you said. How does that CapEx get allocated? And then how does recovery for that work?

Andrew W. Evans

Yes. I think it's more toward our -- it's our categorization as opposed to being regulatory categorization of it. About 1/2 of that, I'm thinking, maybe to 1/3 is related to IT systems that support the entire complex of utilities, I mean, even some corporate. It might be people [indiscernible] upgrades or server upgrades. But there's also a sliver of that related to the LNG business and some of the things that we're doing around the utilities that are not necessarily in the regulated [indiscernible]. To answer question directly, those capital costs are very easily allocated to the utility where there's a -- we can demonstrate the benefits of utility [indiscernible].

John W. Somerhalder

Most of them at one point or the other will go back to the utilities. The piece that would be LNG, we would not move forward with that without, as Pete said, contracts that backstop a reasonable return on that investment. So in both cases, we think we have a path towards recovery of returns on those dollars.

Unknown Attendee

As far as the growth in the retail segment, I guess, beyond kind of '13 after incorporating the NiSource acquisition, is that mostly driven by the services business? Because the assumption is Georgia is flat. But can you just kind of talk a little bit more about that?

John W. Somerhalder

I'll start out. Yes, because Georgia is flat but very, very stable and a nice-sized market, we do see more growth in other areas. But it's not just services. But it would be also services in new markets, like our own utilities and in the Georgia market. So it's services in Georgia, so we do see a potential to grow that in that particular market. But there is growth in other areas. Mike and the team has shown that we can be profitable in other states like Ohio. There are a number of those opportunities. So it's also on that side. Also we think there is some new products with what we've learned in Georgia and some new opportunities in Illinois, even though Nicor had a good business there. So general answer is correct, what you've assumed. It's more on the services side, deploying that in other areas but also growth on Mike's side of the business in those other markets.

Andrew W. Evans

It's a little bit of what is short and what is long term of this. I think we'll see faster growth in the near term in services because of this deployment. We have to make investments in Mike's business in the near term to gain markets that will be profitable in the long term. And so I think we can maintain the growth rate, but the shift of work is going to come from -- it's going to occur at some point maybe 2 or 3 years along.

Unknown Attendee

All right. And then is there a base year for the 4% to 6%? Can you guys give us as far as the net income CAGR?

Andrew W. Evans

We certainly would like to grow more than 4% to 6% in the near term. We were using 4% to 6% against a larger base a couple of years ago that had a greater content coming from trading and storage. I think the reality is that it's not going to be overly smooth, but we'll see some step changes related to those businesses to push it above that range. But in the near term, we think we're pretty comfortable looking at that growth rate against the current base in the short term. Is that a fair way to describe it?

Unknown Attendee

You guys showed some of the sharing payments that, I guess, Sequent pays to the utilities. Is that -- does that flow through O&M? And if so, is that factored into that O&M per customer that you showed us in the other chart?

John W. Somerhalder

No. It does flow back in the cost of gas in different forms to the customer.

Unknown Attendee

So it's not in O&M?

John W. Somerhalder

No. So it is a clearer benefit to the customer and does not even improves the benefit we're seeing from lower commodity prices in that area. But no, we don't use that as a factor in declining trend on O&M.

Okay. Let me just wrap up very quickly. I'd like you to -- I would hope you had several takeaways from today. The first, across our business units. We think we have in each of those areas, leading assets. If you look at the size, scale and scope on where we are in distribution operations, 4.5 million customers, and our cost structure, our regulatory compact, regulatory relationship successors, that's industry leading. If you look at what we've accomplished in the Georgia retail market, what Nicor has done related to services and what they've accomplished in Illinois and then broadened that out, and now a bigger footprint to apply that to, we feel like we've got an industry leading past performance and ability to move forward. And both of those businesses are enhanced by the current fundamentals that we see with lower stable prices.

All right. We have a leading group at Sequent that has been very focused on asset management, is recognized as a leader there, physical managing risk there. We function in a very difficult environment, but when we look at that performance versus our peers, we feel very good about that performance. So very, very well-managed. And with the cost structure of the previous team, it only gets even stronger as we move forward. Midstream assets, again, we talked about that, waiting for a recovery but 3 very good, well-functioning and operating safe facilities. Cargo shipping, even in that business, we're remarkably well positioned, clearly the leader in that business, high market share. And you can see even without a recovery in the market, you can see the improvements because of their safe, low-cost, high focus on customer service. They're really good assets.

Second thing I'd like you to take away is, and I say this because I hear this from a number of different sources, but if you look at the team we have, we have the top group of management to manage these assets. And I can say that from talking to competitors, peers, talking to industry associations, talking to customers. This team is well positioned and leaders in each one of their fields across the board. And it's just this team that heard from, the next layers down the whole team, where most of the work gets done, are really the strength of the organization. We have a leading organization. So we are well positioned to succeed. Like I said, the fundamentals of some of our businesses are improving really strong, where 95% of our earnings are projected to come from last year and this year. We've got challenging fundamentals in a couple of the other businesses. But as you've heard, we've done really 3 things.

First, we've reset expectations in those 3 businesses. Second thing we've done is not wait for that improvement. We've made hard decisions on cost structures and a number of other things to position ourselves for a recovery or at least to manage that at a reasonable level through these depressed fundamental time periods. Third thing we've done is kind of behind-the-scenes developed new opportunities. You've heard about LNG and the opportunities there with low commodity prices. You've heard about the fact that we're working on pipeline opportunities. We feel good about recovery of those businesses over the long term, even though it's harder to predict. But these new opportunities, we feel good about continuing to build on those as we move forward. So very stable assets, strong management team in my opinion. We hear that a lot. And we have been proactive in repositioning the company for this new environment.

So those are the takeaways I'd like you to have. Appreciate you all being here with us. We'll be here for a while and lunch is available. And please reach out and ask us anything else you want while we go through. And I'll turn it over Sarah. Sarah and Pamela have done all the hard work, and thank you very much for all you here.

Sarah M. Stashak

Thanks again for joining us today. And thank you to our management team for taking time out of their schedules to comment, talk to us today about the business and thanks to New York Stock Exchange for hosting us in this beautiful space. We'll have our first quarter earnings call on April 30. And then I'm sure we'll see many of you at the AGA Financial Forum in Florida in early May. So feel free to contact me if you have any follow-up questions after today, and we do have lunch available in the backroom again. For those of you that might be pressed for time and can't stick around, I think they have some bag lunches that you can take with you. So thanks very much, and have a great day.

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