AGL Resources' CEO Presents 2012 Investor Conference Call (Transcript)

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AGL Resources Inc. (NYSE:GAS) Analyst Day Call, March 20, 2012 8:30 AM ET


Sarah Stashak – Director, Investor Relations

John W. Somerhalder II – Chairman, President and Chief Executive Officer

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

Hank Linginfelter – Executive Vice President, Distribution Operations

Michael Braswell – President of Retail Energy, AGL Resources and President and Chief Executive Officer, SouthStar Energy Services

Beth Reese – Senior Vice President and President, Retail Services

Peter Tumminello – Executive Vice President, Wholesale Services, and President, Sequent Energy Management


Sarah Stashak

Hi, good morning everyone. Thanks for joining us here at the New York Stock Exchange today for our 2012 Analyst Conference. Today, we'll hear from several members of our senior management team, including John Somerhalder, who is our Chairman, President & CEO; Drew Evans, Executive Vice President & Chief Financial Officer, though he likes to be called the Chief Fun Officer; Hank Linginfelter, our EVP of Distribution Operations; Mike Braswell, President of Retail Energy; Beth Reese who’s probably a new face to many of you, those who have been in the company for quite some time, she is now heading up our Retail Services business, which is the warranty business that we acquired, as part of our Nicor merger. And Pete Tumminello, who is our Executive Vice President of Wholesale Services and now also have the storage complement under his watch.

Also with us today, those who are sitting up here at the table in the front, are Bryan Seas, our SVP and Chief Accounting Officer and his right hand woman, Angela Nagy, who is our VP and Controller. And these are some of our background players who are unsung heroes who have done many, many hours, hundreds of thousands of hours in combining the company and coming out with financial report that we filed on February and they’ve just done a tremendous job.

You all know Steve Cave, our VP of Finance and Treasurer. He is jack of all trades and master of all and my boss. And we have two new members, to add to our management team who came over from Nicor. We have Steve Cittadine who heads up Storage business under Pete, and Mike Pellicci who captains the Tropical Shipping business. And we are, I’ve been asked probably no fewer than 25 analysts and investors when we can have our Analyst Day in Palm Beach. So we'll consider that for next year. Last but not least we have Alpa Patel, who is Director of Special Project and my colleague in the treasury organization.

Those of you listening via webcast the presentations we’re making today are available on the website. To access these materials please visit Let me remind you and this is the most exciting part of the day and I’m sure while you are here I will read the forward-looking statements.

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

John will start us off today; will be happy to take your questions at the end of each of presentation. And we’ve also reserved some time for additional Q&A at the end of all the presentations. If you have a question just raise your hand and we will bring a microphone over to you. Thanks for being with us today and I will turn this over to John.

John W. Somerhalder II

Thank you, Sarah and good morning. Thanks for spending some time with us this morning. The real purpose is for you to hear from each of the business units and segments about their plans and their opportunities and their challenges that I want to start out by walking through a summary of where we are.

First thing that is very important to look at is what has been accomplished in the last year. You have seen some of the numbers, 4.5 million customers, almost 80,000 miles of pipelines operating in about 10 states with our business units, corporate headquarters in Atlanta, wholesale and midstream headquartered out of Houston, out of Chicago we had both our distribution operations headquarters and the retail services that Sarah mentioned and that we’ll talk about a little bit more. And then also, in Atlanta in addition to the corporate headquarters, we have the retail energy piece, Georgia, Illinois, Ohio, Florida and some other states that Mike Braswell will talk about. A very strong platform focused in the natural gas business.

At the same time we were putting together these assets and preparing for the future, we achieved right around a 24% total shareholder return in 2011. When you exclude the after-tax, Nicor merger related cost of $64 million, we earned $2.92 on a non-GAAP basis.

Importantly, we also in this time period saw very strong performance and good growth out of our Distribution Operations business and we had a very good regulatory outcomes, not only with the approval of the merger in Illinois, but a little over a year ago approval of the Atlanta Gas Light rate case and then late last year, a very solid outcome related to our Virginia Natural Gas rate case.

We saw, even with competitive pressures in some of our retail marketing businesses, we continue to see stability in that business and in the earnings there and good performance out of that business. Even though all those positives were occurring, what impacted us most directly in the short-term was the fact that the natural gas market, we saw the oversupply of natural gas and we saw very low volatility and that seriously impacted our energy market and trading business and Pete will talk a little bit more about that and our Midstream operations, which we’ll spend a little bit more time on.

Importantly, like I said, we completed the acquisition and merger with Nicor on December 9, 2011 and made our regulated company almost twice as large as it was before.

And importantly, we do not just focus on those issues. One of our core missions is to make sure we operate a very safe pipeline system. And we can do that for several reasons. It’s not only the fact that we have very favorable rate mechanisms and surcharge and rider programs in places like Georgia, New Jersey, and you’ll hear some more from Hank about plans in places like Virginia, but we also have had for more than a decade a strong focus on those programs.

So we have very good programs in place to make sure we deploy those capital dollars, those O&M dollars to make sure we maintain a very safe pipeline system moving forward.

I started off talking about total shareholder return. If you look at it either on a one-year basis or a three-year basis compared to our peers, either at LVC average or our peer average over the one or the three-year time period, we’ve been above the LVC average and we’ve been at or near the peer average over those two time periods as you’ll see from these two slides.

The opportunities we have moving forward and challenges and risk are fairly straightforward. The opportunity we have is to continue on with the integration and cost savings initiatives related to the merger and the acquisition.

And as Sarah talked about earlier, we’ve had very good performance to-date, very much in line with expectations related to the integration of these businesses. And that’s been because of a lot of hard work, mostly by the people that we introduced out in the audience that work with us, Angela, Bryan, Steve and a number of other people who’ve made sure that we’ve met expectations, and things have gone well and continue to go well related to that.

That also sets up a platform long-term, with scale and with best practices to control our costs, and that works well for us. And that’s one of the core values we look to take advantage of as we move forward. At the same time, I’ll bounce back and forth with the risk and the challenges. We have seen remarkably mild weather across the entire the U.S. so far.

And I’m sure you’ve heard this from almost everyone, but we believe that will either be the mildest winter in 80 years or possibly the second mildest winter in 80 years. And if you look at how that impacts our businesses, it’s not a large impact, but it’s an important impact, that impact primarily in Northern Illinois with Nicor Gas and then also with Georgia Natural Gas.

In Atlanta the combined effect of that is about a $15 million EBIT impact on our business so far this year. And that’s through roughly today. When we fist saw the numbers in January and saw that variance that’s a little more expected when you have the mild January, but even March has been so mild that we’ve seen a significant variance because of weather, because of the extremely low usage in natural gas in this environment.

In addition to that challenge even our utilities have performed very well because of the economic situation, we have seen minimal growth and we’re just down to rate cases; had very well successful outcomes. Do not plan to file additional rate cases, and even though we’re investing in surcharge and writer programs and Drew will talk about this in a minute.

Bonus depreciation is very good, it returns that capital to us quickly, but when you look at how much we’re investing in a regulated business, because of that return, because of bonus depreciation. Some of the growth that we see is a little muted in that and Drew will go through some of the examples, still very good. Returning, investing, making our system more safe, more reliable for our customers and either growing our rate base or getting that cash return quickly through bonus depreciation, works very well, but that does limit to some extend our ability to grow our regulated businesses with modest depreciation.

At the same time, we still do have those opportunities and we have good surcharge writer programs and we’ve had success in extending those in places like Georgia and when processing in New Jersey and then implementing that in a place like Virginia.

As I talked about, we have had increasing competition in the retail space from other marketers in the Georgia market. We have been very successful though with the programs we have put in place in Georgia, being very competitive and responsive to those programs, maintaining reasonable market share, and now with the combination of Nicor’s retail businesses and our retail businesses, we can take some of our commodity expertise to places like Illinois, and we can take some of our services and warranty expertise down to places like Georgia and some of the other states we operate in and we have that opportunity moving forward.

As I talked, probably the biggest challenge we have short-term relates to the low volatility and opportunities in our energy marketing trading and in our midstream business. So we’ve got that challenge, but at the same time, we have opportunities, Pete and the rest of the team have been very effective in looking at the cost structure, reducing that.

We have a number of legacy contracts, pipeline transportation storage that we entered into in a more volatile time period when we had to pay more for that capacity. Now we are able to renegotiate that in a lower price environment, which is providing benefits in this time period. So we not only have that challenge, but we do have a number of ways and a number of opportunities to mitigate that and position ourselves very well for the future.

Also, even though we’ve seen lower storage spreads in this time period, we do have two very good facilities that are coming online, Golden Triangle Cavern 1 was already in service, Cavern 2 is coming online this year, and Central Valley, very good facilities.

And we have at least seen not so much on the volatility side, but on the simple cycle spread and Pete will talk about this. We’ve seen some improvement in that, summer, winter spread, because of the low gas prices we’re seeing now. We’ve seen that spread move out somewhat significantly, so some positive trend on that issue.

And then we’ve already, obviously seen the impact of the weaker economy and how that impacts the Caribbean and construction there and tourists in there. And that impact on Tropical Shipping, that you’ll see some positive trends related to that businesses as well.

Our priorities and objectives are pretty straight forward, very much inline with what I just talked about. And that is, continue to show growth in our distribution operations business, a lot of that will be through investment and surcharge writer programs to minimize the regulatory lag. And we will continue to focus on being a low cost, be probably be one or two lowest cost operators, so that we can have good returns between rate cases.

Maintain market share on retail and bring together the expertise from both SouthStar, Georgia Natural Gas and from Nicor National to leverage those opportunities across the two new geographies. Wholesale focus on our cost structure, focus on [weak] contracting, capacity at lower-cost and then stick with the discipline we have around risk control and those metrics.

Midstream, keep the cost low, make sure that we get those facilities up and operational just like we have, just like we operate very successfully Jefferson Island and GTS Cavern 1, get the other facilities up and operating, that’s going very well.

And at Cargo shipping, focus on maintaining a very strong position in those markets, good market share, position ourselves for return to more normal economy there. And as you see overall objective related to continuing to control cost.

If you look at the risk and the opportunities I hope what you saw is a number of the opportunities and the number of the strengths relate to the foundation of our business and the long term success of our business. A number of the challenges we face are more short term in nature, although we do know as an example volatility in the natural gas market. It may take several years for that to return and we don’t know to what levels that will return.

So the good news is we see our opportunities and the foundation of our business long term very strong, we’ve built that over the last several years. We do face shorter to medium term risk and challenges, but through the type of things I talked about you’ll hear more from me to the business units. We’re well positioned to deal with those challenges and continue to grow our business. With that I’m, before we move to Drew, I am going to open it up for questions. So, at this time let’s open it up for questions.

This could work pretty well for me. You really do want to hear from the business and that’s great. We’ll also take questions at the end so let’s go ahead and then quickly move to, we’re going to be ahead of schedule. I will move to Drew Evans, the Chief Financial Officer.

Andrew W. Evans

Good morning and thanks for joining us on the first day of the spring. We feel like we’ve had it in Atlanta and I know folks from Illinois feel like they’ve had it for at least a couple of months, but it’s nice to be here. Sarah introduced everybody and thanked folks but she really is the person who put this together for us and should be available to serve you through about June, once she’ll take a break to reproduce. And we’ll be excited welcome a new potential AGL Resources employee sometime this summer. So let’s see how that goes. I just wanted to build a little bit on what John said, and talk you a little bit about our financial condition, which I think is quite strong, but I’ll start with our strategic priorities this actually is a chart from a last year.

And what we’d like to have you better understand is that we continue to be very bullish on our general strategy, and we’d try to maintain some consistency year-over-year, but the cornerstone of it really is centralized service function that is scalable. And what that means for us in the sort of indicative of the transaction that we’ve just gone through, is that we can centralize the areas of finance accounting, IT, engineering, human resources, general council. And be much more affective across the broader based and we would be [approved] just a single utility operator.

And today about a third of the expense that we’ve seen each of our utilities is handled in a centralized fashion. That does mean it’s all coming out of Atlanta, we have bits and parts scattered about now big center of excellence, I think in Illinois. But it really is the scalability that drives the profitability in our business. And if you look at O&M for customers is simple measure, we went quite well relative to our peer group, but you find that it really is dominated by the larger utility, but it is significantly more efficient to operate utility in mass as oppose to an individual jurisdiction.

Not without its complications from a regulatory perspective, but certainly the most efficient thing in our minds for providing service to customers. You’ll find also that we’re one of the lowest cost providers in each of the jurisdictions that we serve.

We want to be able to enhance those returns by having complementary unregulated businesses. Sequent is probably the best example of this in the near term. One of the things that Pete will show you is that we’ve returned nearly $200 million to ratepayers over the last decade or so, as Sequent been in operation, we’re in sharing situation where we keep some portion, some slightly diminishing portion for shareholders that are able to rebate the customers each year based on the optimization of the assets that are retained by the utilities.

We think this is the very complementary model that adds 100 basis points of return for us as we look at the complex and aggregate, but more importantly reduces builds for customers and the rebates have been pretty substantial over the last few years. Another big area because we’re making large investments is that we need to accelerate, returns on the regulated infrastructure that we have. And Hank will talk to you a bit about his efforts in the distribution business to focus on writer based programs, so that we can eliminate the lag between investment and return.

There are a number of important features of that kind of strategy. We’re able to provide good jobs in the jurisdictions that we’re operating in. I think he will talk a little bit about job numbers, but we’re able to maintain much stronger employment by refreshing the infrastructure and that’s very important to the jurisdictions that we’re serving in. We can reduce the lag and bring a little bit more certainty to the returns from a shareholder perspective and it makes a lot easier for us throughout and source capital, and so ultimately it brings our cost down in that mode so very positive activity.

On the financial side, we’re very focused on return on invested capital in each of our business units and we’re constantly making adjustments to the level of capital deployments in those areas. We’ll talk a little bit about some of the lower returning investments that we have and what our strategies are around them later today. The bullet probably should be broken into two, but maintaining financial integrity of the business is paramount. We think that having high investment grade ratings with our agencies is critical, and we’ll operate in the mode that maintains those ratings above most [are well]. And then from a shareholder perspective our goal is to grow dividends and earnings in a consistent way. I think our Board as it relates to dividends has taken a very good approach over the last half a decade and we’ve been able to grow dividends at a very modest, but constant pace of a couple of percentage points each year. And that our intent is to continue that track record over a very long period of time. Then ultimately we’re focusing our total shareholder return and just making sure that our employee base is some percentage for safe and efficient operation and also [incented] in the way (inaudible) shareholders as well.

Let me just pick out a couple of financial highlights, this is a little bit of a complicated graph or trough numbers. Operating revenue is kind of an odd measure for a company like ours where the commodity is largely a pass-through to customers. I see a lot of headlines that relate to the change in our total revenue, and although I think that relates well to perhaps unregulated retail business, really doesn’t have much of an impact on the corporation.

We don’t see as much of a contraction in gross margin or net margin before expenses as we do in our revenue line that’s just because of the regulatory mechanisms that pass these costs through. I think we’ve been able to maintain operating income in a responsible way, despite the fact that we’re challenged in the couple of our business units and you’ll see the breakout of that relative to our plan in a couple of slides.

Interest expense is a little bit perturbed in the 2011 time period and that's because we took the opportunity to ensure that we could finance the debt complex consistent with our pro formas, maintain strong credit metrics and went ahead and did a fair amount of financing in the course of the year to prepare for the Nicor transaction. So almost all of the [guarantee] relates to that increase in the complex.

And then our focus really is on diluted earnings per share. We fell a bit short of our goal that you adjust for, the Nicor transaction cost that would have normally been bought through in purchase accounting that are now excluded, and our detriment between 305 and 292 really is driven by a reduction in volatility. That’s hampered the trading business in this gas storage business.

So if you look at these things in total, last year, our earnings contribution from the distribution business represented 80% of our earnings in total. We would normally expect this to be somewhere between 70% and 80%, so we find ourselves on the high side really because the reduction in trading earnings.

But if you look at these segments over a longer time period, you really can see a nice trajectory on distribution, very stable earnings out of this retail segment and then the compression from really lack of volatility in the markets that we serve on a wholesale basis.

This really is just the mathematical computation consistent with the chart that we just showed you that gives you some sense of how we think about these segments for 2012. 2011 is a little bit perturbed by the 22 days that we operated the Nicor businesses, but our expectation this year is for the distribution segment to contribute between $550 million and $570 million worth of EBIT.

Retail, Mike will talk to you a little bit about movement from year-to-year for EBIT in his segment. But if you normalize for a couple of simple variables the greatest of which is lower across the market adjustments for inventory that segment has been significantly more stable than represented here. What we’ll add this year will be the commodity, retail energy component of Illinois, and the services component that we’re just a number of up state, and so we’ve added to the mass of what we’re doing in retail.

Wholesale services, 2011 was bit perturbed by a couple of incidents related to constrains in the Marcellus Shale that we’ve talked to you about in the third quarter, and small credit loss, a credit loss that we took in that same time period, but we really don’t anticipate that in 2012. We’ll see a return to what we’d expect to be normal levels of profitability out of the trading business. That’s also coming at a time when the total amount of capital that we’re deploying in that business is declining.

The gas price is actually given us quite a bit of benefit as it relates to our balance sheet, and as we build a couple of hundred of Bcf of inventory for utilities and Sequent takes on inventory and transportation, the amount of working capital deployed in that businesses has compress. We’re still not satisfied with the return on that investment capital, but we expect some slight return to normalization, or lease to progression toward through 2012.

Cargo shipping, our midstream operations, the reason you see a decline here is that we – as we bringing facilities on-line, we’ll incur additional depreciation related these assets. And we don’t anticipate that the rents will pickup in this area for a couple of years. And Pete will talk a bit about our expectations around storage in particular, the midstream operations, the core that really are the three operating storage facilities, which will be complete by the end of the first half of this year.

Then Cargo Shipping, I haven’t given you any history on tropical, we have tried to stay away from a replicating the Nicor financials, you can go back and take a look at their statements, but suffices to say Mike’s business has faced the same economic challenges that we’re facing in the U.S. only in a more magnified way. We are very focused on utilization of ships and in market share in the markets that we serve, I’ll give you some very specific detail about that later, but our anticipation is that we probably seen the trough in that business and are starting to see a migration up in terms of earnings and the returns there. Then the rest of it is just a straight math that’s not based on the debt complex.

So how does our 2012 guidance relate to what was our original plan. We always operate under our four or five year projection of our business that’s stays relatively consistent year-over-year. And I think this point I had a couple of interesting things from an investment perspective.

Our goal originally was to generate about $3.15 worth of earnings in this year. We do relative to that expectation expect to actually outperform a little bit with the utility to give you a gauge, we were use to be about a $1 million equal to penny a share, now we’re about $2 million equal to penny a share. And so because of our share math, but the calculus is a little bit different. But we do expect because of the synergies or the benefits that we derived from being a bigger utility that will be able to improve relative to our expectation and distribution.

Retail operations because of the complements that we have just brought on and our ability to really manage that whole business much more efficiently that we’ll see some improvement relative to our plan.

But now we get into the three large detriments to our expectation. Wholesale services, the trading business, we expect to be significantly less than what we would have expected if we just looked at a normal growth rate for that business. But we do view that this is highly temporal, and with a return of some volatility in that market, with some reduction in our fixed cost and as Pete will describe the reduction in his cost of operating that segment that we’ll be able to close that gap over time. But in 2012, it is a very sizable gap.

It’s coming out of the trading business and so I think that’s a little less impactful from shareholder value as it would be if it were in distribution, but we are certainly focused on that segment. We do however think that it’s a very nice complement and a requirement to eke out all the profitability of the assets that we maintain on behalf of utility customers.

Midstream operations, the biggest gap here relates to our ability to contract our storage assets. With the lack of volatility and storage viewed as an option on volatility, rents are down in the segment and this gap will continue to grow into 2013, as we had expected more complete year operations in ’13, and so we are focused on this segment.

Steve (inaudible) will focus exclusively on contracting for these facilities and driving greater rents from them. To the extent that we are not doing that with third parties, we will manage these assets on our own, and they don’t represent a very significant working capital requirement because these facilities are relatively small compared to the total complex of storage that we are operating.

I think we are now one of the largest operators of storage in the U.S., independent operators.

Cargo Shipping, this is another business that seems a bit temporal to us in terms of the gap that it creates. We're starting to see some recovery in the economies in the islands that we serve, but we're seeing very strong market share and very good utilization, and Mike's business is just keenly focused on those metrics and we would expect this gap to compress over time.

And then brokerage, well planned, because of the financings that we are able to do, you have positive variance related to interest expense, which is always in my mind an important positive variance.

So you look at our diluted earnings per share, we certainly would like to get back onto the trajectory that we established 10 years ago, but I think we've described to you what the detriments are and what really is putting a little bit compression on the 2012 results. Our focus is not growing off of the space, but returning to a baseline that we established a couple of years ago.

In terms of dividend declared, I think this is probably a focus of a growing number of our shareholders, given our inclusion in the S&P 500 and the type of investors that we have seen migrate into our stock over the last couple of years. The Board is taking a very deliberate approach of growing dividends at a reasonable, sustainable pace. We don't want this obligation to get ahead of ourselves, and I think that our payout ratio, we are very consistent with the peer group average and we've continually focused on the amount of that dividend that is supported by earnings out of the distribution business, in particular the more stable components fully support the distributions that we're making.

We'd like to keep the payout ratio in the low 60s. We'd certainly like to see income come up a bit so that we could, through that level drop just a tad.

So we're going to undertake a pretty sizable CapEx program done with the movement between 2011 and 2012, make your eyes pop out at the large jump, mainly because we’ve acquired the Nicor Complex which has a couple hundred million dollars worth of CapEx requirements. Very consistent with our historical expenditures and will maintain levels there, and so we have writer-based programs that might allow us to grow that capital deployment a bit.

But if you look at 2012, we’re very focused on the base regulated business. The dark blue line is very consistent with our rate of depreciation, so we think of that as refresh of our rate base. That doesn’t put a lot of pressure on us to go and look for rate increases because we’re just maintaining the capital deployed in the base businesses. The light blue line, our regulatory infrastructure investments, they are sizable and vary across jurisdiction, everything from PRP and STRIDE in Georgia to UIE in New Jersey and SAVE in Virginia.

It's a lot of acronyms, but really these are infrastructure replacement programs. For each dollar invested on an annual basis, as these assets replaced new service we have an instantaneous increase in rates, and so really just intra-year lag of capital deployment, very real time. They don’t require commissions to go back and vote, which is good for our commissioners, but it’s also good for our rate payers, and it brings these increases in rates in a very stable and de minimus fashion.

In terms of natural gas storage, we will see a slight increase in our investments this year as we complete the two facilities, Central Valley and Golden Triangle. The largest block of this investment in 2012 relates to pad gas to establish service in these facilities and we’re certainly benefiting from the fact that gas prices are compressed in the near-term, and Pete’s taking advantage of what’s going in the cash markets to further reduce what would be the total capital cost of these assets.

The yellow bar is really just our corporate investments in systems and they tend to serve all of our businesses, but about 70% or 80% of those CapEx expenditures are related to the distribution business.

So I want to talk a little bit about bonus depreciation. We’ve identified some I think misconceptions as it relates to capital deployment and how that’s reflected in margin. And I’ve seen this on both the electric and the gas side, but bonus depreciation does have an impact on rate based growth.

If you look at our net investment this year relative to our rate base, it would look like we’re increasing that rate base by about 8.2%. We’re actually increasing our investment in that rate base by about 8.2%. Because of bonus depreciation that we’ve been living under for a couple of years, there is a pretty rapid accelerated return of that capital and the net result of that is that under bonus depreciation at 50% in 2012 that’s currently legislated, our rate base growth will only be about 5.5%.

If we see a shift toward 100% bonus depreciation, which has some probability as many of you know, that increase in rate base will only be about 2.8%, and so we have to monitor this very closely. And that's simply because rate making takes into account the cash investment, not just sort of the book investment. And if we see bonus depreciation lift, we'll see a very rapid increase in rate base because of the investment.

It’s a little bit of noise. When you talk about an $800 million investment, you have to understand that a good portion of that capital actually comes back to us because of the way taxes are made. And so our net investment probably is closer to a number like $600 million. That won't create 8.8% growth in earnings simply because of bonus depreciation.

So pension expense is one of the biggest drivers bearing, one of the drivers weighting us down a little bit in 2012. Let me talk a little bit about the pensions that we do maintain. We took a proactive step this year and will no longer offer pension to new employees in all of our jurisdictions, particularly in the non-union portion of our jurisdictions through our system.

This is something that Nicor did in the late 90s, something we probably should have done in late 90s or early 2000s, but I think this is consistent with what is occurring in each of the states that we’re operating in and consistent with what’s happening to some of the staffers in the jurisdictions that we’re operating in. And I think it was just a prudent step for us to take. We do replace it with something that’s very consistent and more of a cash and carry type benefit, but we wanted to at least stem the tide of long-term issues related to the pension.

We would also like at some point this year to aggregate these pensions, so that we can manage them on a singular basis. It’s just a form of efficiency and I think long-term that benefits all of us who are part of the pension and ultimately will keep the funding requirements there contained.

It would also reduce the requirement over capital infused, cash infusion into the pensions in the near-term. We just need to be mindful that we need to maintain at least 80% funding in these assets in this economy, so that we don’t have to notice pensioners or change the benefits that we provide to pensioners. That’s really our singular focus for people that are already in the system and we’ve made this commitment to.

The biggest thing that’s impacting us here is the discount rate on the liability is changing, not increasing the number of pensioners, we're not increasing the benefit, but the discount rate itself has a huge impact on the calculation of the liability size. And we saw nearly an 80 basis point reduction in that rate right at year end with a good portion maybe half of that reduction coming in the last three weeks of the year. This is kind of a latent issue for, probably everybody in industry, but most of our peer group marks that to market in September. We're marking it a year-end and there was a pretty substantial compression in rates.

We view long-term that this is very prudently incurred costs and ultimately recoverable, but that doesn't mean that we shouldn't manage it appropriately and so we’ll continue to take steps to mitigate the volatility that we're seeing in the pension liability.

In terms of our debt maturity schedules, what we’re trying to demonstrate here is that we really don't have a lot of requirements in the near term for tapping the debt capital markets. We did a substantial amount of financing this year probably something like $3.5 million in aggregate, if you include our credit facilities at each of the logical entities. But there is really nothing putting pressure on us for refinancer in near-term.

We do have a bit of what we would call persistent need where we might take some short-term debt and move it into long-term debt this year and take advantage of, but it still serve a compressed rate environment, but one of the things that I think we're most proud of is, that we picked a very nice time to do long-term financings related to asset acquisition, and we took an opportunity not just to reduce the total cost of debt on our complex.

But more importantly from Treasury's perspective we extended the maturity and the average duration of our complex is now 14 years. I think that exceeds pretty significantly what our peer group is faced with, fills a lot of long-term stability into our debt complex.

The other thing that we focus on from a credit perspective is the liquidity in our business. This is critical as we operate particularly the non-regulated subsidiaries but also build inventory, quite large inventories on behalf of the utility. We’re constantly tracking our utilization relative to our availability but also taking a look at what our collateralization requirements would be if we had some systemic downgrade of the industry or something more endemic to our business and had the cash collateralized, the trading company.

We tend to maintain facilities large enough to withstand that collateralization. We report that to you and we’re constantly reporting that to the rating agencies but we’re keenly focused on liquidity understanding that that’s one of our larger risks that corporations face.

Balance sheet highlights. I just think the only, the big things that I would highlight to you, is that we’ve become quite a large company in our consolidation. I think that brings more stability ultimately to our businesses. There aren’t a lot of near-term shocks that could impact the business in total.

We’re trying to maintain a debt-to-total capitalization at peak that doesn’t exceed; I think we will have 58% or so. We want to keep our highs below 60% and we want to focus on our average as being about 55%. If we think about long-term, our capital investment in the regulated businesses, pipeline replacement although these things will be continuous over our lifetimes probably their size ultimately will compress a little bit and at that point we’ll start to see balance sheet improvement. We’re not expanding our leverage to make investments and ultimately our bias is toward higher ratings rather than the opposite.

Our CapEx particularly because of the bonus depreciation making that net a little bit milder. Doesn’t have an adverse impact to those leverage ratios and we’re very cognizant of the financial ratios and metrics that we’re providing to the rating agencies with the bias toward improvement. And I think we’ve already told you we have a bias toward reducing our CapEx in unregulated enterprise until we see some improvement particularly in rents and the storage business.

So not unlike what John showed you, we have a number of pretty straight forward priorities for 2012, very focused on the successful integration of the non-core business. I’m very pleased with our abilities particularly in the finance and accounting area this year through all parts of the business, but certainly the parts I have some responsibility for. It is a very complex thing to aggregate [four] general letters into a single financial statement.

We’ve doubled the number of registrants from one to two, Nicor Gas is a registrant, AGL Resources is really just through a lot of hard work had no difficulty meeting our own internal expectations about producing very high quality financial statements.

If you have any issue with the way we report in the K, please let us know because we’re constantly modulating what we say to make sure that those statements are clear and correct but very, very pleased with the way we’re able to assimilate our businesses at the end of the year. 22 days of operation meant that we closed multiple times in 30 day period and each time very cleanly, so we thank Bryan and Angela for their efforts there.

Our departments are very focused on prudent capital deployment, just a constant thing you’ll hear. We’re always looking at the return on invested capital for each of our assets, trying to better understand what our internal valuations of these assets are, trying to understand if there are owners or markets that are better owners for the businesses that we have or have different investment, time horizons that we have.

That’s across all of our businesses. We know in distribution that we’re not quite as sufficient at operating utilities for about 50,000 customers. We know that in trading we’ve got to reduce the total capital deployed there while volatility is low. In retail we don’t have this issue, that business tends to have strength in a number of market conditions.

In wholesale we have to always evaluate the value of those assets relative to our expectations initially and the value of those assets to third parties. Our main goal is just to have and ask for these assets, we know what our thresholds are and to better understand the people that would own assets like this. And the same is true, Tropical Shipping. I can’t argue that it’s a core competency of ours.

I know that we’ll be an excellent steward of it, and as I talk about it, later I hope that sort of flushes out in your minds, but we’re focused on that business as well. But ultimately we want to maintain a strong balance sheet, maintain our commitments to shareholders. That’s our primary focus.

So, I think with that if anybody has any questions about our financial condition or our balance sheet or statement, I would be happy to take them or we can take questions in aggregate at the end.

Question-and-Answer Session

Unidentified Analyst


Secondly, what are you going to do with all the cash casual overtime? What is your major investment opportunities as we think about this before all the department had talked of the upcoming?

Andrew W. Evans

Lot of good questions in there, but the root of your question was are we seeing increased cash flow relative to our total complement. And the simply answers is yes. We bought, our view of Nicor was that it was a business with very high depreciation rates, that regulated utility is in excess of 4%. Our complement is typically more like 2.5% and that’s because it, in Illinois they decided it was important to begin to accumulate a removal obligation there.

That means that we have a very, a lot of depreciation relative to the base. I think Hank will talk a little bit about it but we should likely see in the next couple of years some elongation of that depreciation rate. We built up because of that depreciation about $1 billion for removal which is probably more than most nuclear facilities have for removal and it seems very unlikely that this infrastructure will come out of the ground in the near term. And so we’ve looked at this transaction as being something in seven times multiple of cash flow even though it was a significantly higher multiple of net income, the gap there being exclusively depreciation.

Also it was a very strong balance sheet, one of the highest rated utilities. We did use a little bit more leverage in this transaction to bring it closer to the way we typically operated but the underlying business had very strong cash flow. So what are we going to do? You asked me two questions. The first one, help me out again. Payout was your second, there was another one related to. So should the payout ratio migrate? I think that gave us comfort in the payout ratio being at about 64% versus the peer group average of 62%.

So in the near term it gives us some stability, in the long term I think what will happen rather than the dividend moving up significantly is that we’ll see an increase in income related to the elongation of depreciation in Illinois. And so we’ll be able to maintain a payout ratio that is consistent in the low 60s, but the amount that’s being paid out will increase.

And so I think ultimately it does come back in terms of dividend. What we would do with surplus though as these other capital investments in the utility compress is that we would likely, I think first focus on the balance sheet and make sure that we’re migrating toward higher ratings categories and then ultimately proportionately drive return to shareholders.

Share buyback is not our favorite thing to do. We haven’t had a lot of success in terms of moving our PE relative to the peer group by doing it. I think we’d much prefer to find ways to invest in our core business which is distribution and it comes at a time when everybody wants more substantial infrastructure for it to become a more important commodity in the home and ultimately in transportation. So we’re just going to focus on investments there with a bias toward improving the balance sheet and improving total shareholder return.

Unidentified Company Representative

[Craig] as you mentioned if we do have that situation looking for capital allocation opportunities clearly the first opportunity is if we have good surcharge writer programs and what that does for jobs and safety and integrity. That will be our highest priority as we’ve always said. Issues that Drew has talked about, balance sheet strength and those things will be a high priority but that does not mean we’re not looking for other opportunities outside of that. And it really will be a balance of opportunity. One would be, as an example you will see if natural gas prices stay low and stable which we expect and to be more stable and lower moving forward with that some opportunities related to natural gas for transportation, there are not large opportunities in the near term, but that would be one opportunity. Another opportunity is just like the success we had with Magnolia Pipeline and HRX where we can develop pipeline infrastructure that really supports our utilities as an example potentially working on a pipeline that would probe move Marcellus gas back into the Southeast.

We've recently announced that we’re working with Spectra and something similar to that. That’s early on, but that would be something else we'd look at as an opportunity. And clearly if we did see a return to more normal volatility in the storage business we still have very good low-cost expansion opportunities there.

So, in addition to doing all those things relating to allocating capital, but our regulated business and making sure we have a strong balance sheet. We are making sure we have those opportunities, but we’re not going to move quickly into those other opportunities still we make sure the market fully supports in.

Unidentified Analyst

First just a quick follow up to the reclination expense, if that cash in an [escrow] account somewhere?

Andrew W. Evans

No, the basic equity accounts of the corporation. So, it's not segregated at all, and ultimately is an obligation for us to remove those assets. I just think it’s probably a 100 year obligation.

Unidentified Analyst

And then, in your forecast for improved EPS as a result of the growth in the distribution operations, what assumptions are you making about weather there? Is 2012 still being hit by bad weather or you being able to forecasting about [those]?

Andrew W. Evans

Yeah, I would tend to create a projection that's based on normal weather. We've certainly seen the extremes in both cases. We are somewhat weather agnostic I think our exposures are principally in the Illinois area, and in the retail marketing company. John talked about a $15 million variance, but I’m going to – I’m guessing at a number now, but we were sort of $880 million worth of margin in our core businesses, hope something that’s not this similar from that number, and so it’s a less than a 1% variance in total related to weather. It doesn’t seem to have – it’s not a giant driver of our coverage ratios in a number of those things, and so I don’t know that we’ll actively seek to reduce our weather exposures. But in terms of a long range projection, we tend assume normal weather there. Especially had – we had good weather at the beginning of last year, as it related to the Nicor complex. We had rough weather as it relates to that at the end of last year, and we just don’t see those things being – anything other than temporal and not having a very great impact on our ability to make dividends and service debt.

Unidentified Analyst


Andrew W. Evans

No. But our guidance, I think we’ll have to be forthright. Our guidance did anticipate normal weather. We’ve seen some decrement. We just don’t have enough clear insight as to what will occur in – we tend to be split season, lot of our brethren have a single financial cycle also split into two, and so we get a little bit of diversification from the 2011-2012 winter to the 2012-2013 winter.

Unidentified Analyst

Thanks. Just a quick follow-up, John, you mentioned the structure pipe that you’re coordinating on, if that happen you took an equity interest, if you, do you want to comment, would that put you over the edge of what you need in terms of critical mass to finally sponsor an MLP, IPO?

John W. Somerhalder II

Craig, I think there are two issues we now face. One would be clearly, and again this is very early on, but the fundamentals have changed radically as far as the need for natural gas for power generation in the Southeast and need [abundance] in Marcellus. So fundamentals are moving in a very positive direction to make that pipeline a higher probability, but we’re very early on in the process. And it will take more than our subscriptions for that it will require a number of the power generators to Tennessee and Georgia to support that.

Should that happen that would be a very good stable asset for MLP that would be a good part of the critical mass. At the same time, as long as we see the lower rents in our storage business and shorter and in that environment we think it’s prudent to enter into a shorter term contracts until we see some returns. Those assets are harder to put in an MLP. So I think we’d need both the pipeline and some stability in the storage business and longer term contracts to really have a effective set of MLP types of assets. Do you agree Beth?

Andrew W. Evans

Yeah I don’t. Press releases and business investment decisions to get sort of [two order] plan. The Spectra pipe would – could be a very interesting diversification for supply coming into our principle markets in the Southeast, but we would only probably make that investment, if we thought that was prudent to have that as part of the gas supply cohort that we have got for all of the utilities. But, that sort of one piece of that as it relates to the MLP, it’s an interesting prospect, we’ve been hoping for something that we would have the opportunity to hold all of these assets in a more efficient structure, but as John said without reasonable rents in the storage facilities. They're just not very conducive to the formation of an MLP.

We really have to wait for rents to improve and we certainly would wait for rents to improve before we continue to make any expansion investments in those assets. Conversely, you wouldn’t want to trade them for MLP units. In an MLP that you didn’t control, that might produce nice net income for the corporation, but being a passive investor in these type assets, probably there is not a lot of [feeling to us] either.

So with that, let me turn it over to Hank Linginfelter. Actually before I do this, let me tell you a little bit about what we are going to describe to you. Hank is going to talk to you about the distribution business, principally he will talk to you about the focus on the very strong regulatory constructs that he has. I think we’ve performed very well in our states and earn a very high rate of return relative to our allows in each jurisdiction. That’s by design. We can only earn what we are allowed to earn, and our goal is to maximize against that and to make sure that we’re operating safely and reliably.

Then we are going to introduce you to Mike Braswell and Beth Reese. They are going to talk about our retail business in aggregate. That business has a few components, the energy delivery component which looks more like the traditional stuff that we’ve served in the past, which is the retail sale of commodities. What complements that business is the retail sale of service, which is the business that Beth Reese is running for us.

Those two things are aggregated into this segment because they are managed in a very similar way, but the product type is a little bit different. The services business is not a large business, but it’s new to us, and so we want to spend as much time with you on it as we can so that you understand the basic business drivers. And so I think this presentation is a little bit outsized relative to its contribution to EBIT in total.

Then Pete's going to describe too what’s happening in the wholesale business and in storage and what the major drivers are there. And I’ll come back to you and talk to you a little bit about Tropical Shipping, which is the same. I think we’ve got a very robust presentation relative to its EBIT contribution, but since it’s new to our complex, we want you to understand what we think are the major business drivers there.

So with that I’ll turn it over to Hank.

Hank Linginfelter

Thanks Drew. Good morning and I’ll add one more housekeeping note. When I’m done with my part, we will take a short break and I’m sure we will all be able to use that if I am done. Let me walk through a little bit of the details of the distribution business. I'll give you an overview and then a little bit about how we got here over the last year or two or three, and then what’s on the horizon for each of our large utilities separately, some discreet information about what’s going on.

If you look at our footprint, which we have up here, you can see we've assembled a wonderful set of utilities across sort of the East of the Mississippi at this point and the largest gas oil and utility company now in the country with $4.5 million customers, 80,000 miles of pipeline, that's more pipeline than any distribution company has in America and a rate base of about $4 billion.

With CapEx, Drew talked a little bit about our CapEx and utilities, $725 million pro forma this year. And the good news about that is, we've talked a lot about surcharge and writer programs, but about 40% of that CapEx is embedded in those kinds of programs, so very good, limited lag opportunities to invest in utilities. 44,000 employees and top quartile ratings in our safety metrics, particularly injuries we have in our company in terms of personal safety and days away from work. And so, this group of companies now, I have had the great fortune in my career to be a part of each one of these additions to the AGR family. And it is a really complementary group of companies, where our shared services model has great impact on how we deliver service and how we do it efficiently.

EBIT growth in utilities has been very impressive, the last few years in particular with 2011 coming at something of a crescendo of EBIT growth. And you can see here, number of years results in utility and those mechanisms that we’ve had approved have been helpful in reducing that lag and helping us. When you are a low cost provider, you don’t need a lot of rate cases but when you’re also deploying a lot of infrastructure, you do need mechanisms that allow that to happen.

And so, we have been able to, as we need rate cases, do them, but also we get these programs approved and there has been very prudently invested capital to improve our reliability and our safety in our operating pipeline system, but also with very good returns in growth in the investment that we’ve made in terms of returns on that.

So we will continue to focus on cost containment in our business. You’ll see in a minute how effective we were in 2011 around that and we’ll also prudently invest and get recovery of that investment over time. Very strong track record the last few years.

So let me go into 2011 s little bit and some of the key accomplishments and activities that were done in that year. You can see, our total operating revenues year-over-year went up 7%, margin 10%. And the one statistic I would really highlight is our operating and maintenance costs actually went down about a 1% and well below inflation for the year. And so when you look at that accomplishment of margin growth and reduction in operating costs that made for a very strong 2011 in our utilities and very successful year and operating income increased by 17%, and so our EBIT also by 17%.

Along that same path during the year and John mentioned this a little bit, we had a number of other things that happened and of course the merger we talked about a lot and we’ll continue to. But at the same time we were doing that we resolved the rate case in Virginia, we settled that case. And many of you’ll recall a major part of that case was our investment in a large pipeline in Virginia, the Hampton Roads Crossing Pipeline.

We were already recognizing EBIT from that pipeline, because of AFUDC and carrying costs that were approved by the commission and legislatively, and so while the impact in rates was $11 million in base rates, the actual increment of earnings that came out were very modest because we’re already recognizing those earnings for a period of years as we put the pipelines in service.

We also hired about 100 employees at Atlanta Gas Light Company that you might recall was part of our rate case there. And was authorized specifically in the rate case and funded and so the funded started as soon as rates were into effect and we spent last year actually staffing out to the commitment we’ve made. And I’m proud to report, we are delivering on the commitments we’ve made in that program with the Georgia Commission and we report to them regularly about our progress and its going very well. We’ve improved the quality of service to the marketers who serve customers in Georgia and that was funded in the rate case.

We’ve talked a lot about infrastructure replacement programs, we spend 2011 we placed about a 100 miles of pipeline in the Georgia program, we’ve done over 2,500 miles in the life of that program. It’s been a model for the country around pipeline replacement, because it allows to forecast and plan design and construct, on a very structured method. So we’ve done that very efficiently for our customers and replaced very, very old infrastructure with brand new infrastructures operating very well. I mentioned already, we reduced our O&M cost by about a 1%, below inflation also for 2011. And one other item, it’s up significance as we finish the automation of our meter reading to technology across our footprint not including Nicor. And Nicor is an un-automated system but the rest of legacy AGL Resources is virtually 100% automated across the system. So we read meters, efficiently not having to walk up to every house in order to our business to read the meter.

We did that program, a little bit out of schedule, a little bit under budget. And so now we have more than a couple of $1 million customers on automated meter reading across our footprint. Well one of things of course that you know about our company and then we are all committed to is the safe and reliable operation of our system, the replacement of aging infrastructure. And we are committed everyday to run a very safe reliable cash utility system. But the other piece of that is at the same time that you know we are going to do that. We are also going to very, creative and very energetic around regulatory outcomes. And so I want to give you a little bit of each utilities current regulatory environment and what we have going on at each of them.

I will start with Nicor Gas, their last rate case, our last rate case at Nicor Gas was in March of 2009, it was an $80 million rate increase, we got a bad debt rider or tracker that goes with bad debt, which is a big item in the cold climates obviously, you have very high gas bills if it’s cold and watermark on that program was set at $63 million of bad debt.

It was sort of embedded in the rates. So that’s a tracker that we follow and of course as you might guess bad debt is well below that, less than half that number today at Nicor. So we’re in sort of a refunding or rebating or discounting environment for the bad debt. So the $63 million that we would normally been collecting in base rates in a [rider] or tracker is now we’re collecting about $30 million of bad debt in this current year.

So our customers are getting a benefit of that tracker. The (inaudible) in that case was 5,600 down from 5,830 and that seems like it based on weather we have seen so far was probably the right move in the right direction.

Now, in the merger agreement with the Illinois Commerce Commission we agreed to a three year stay out. So we will not be filing a rate case in Illinois any time soon. We will monitor that and look and see how things go with the integration and cost and so forth around the business. We will continue to focus heavily on keeping our cost low. We could follow it just prior to the end of the three years, the three years ends December 2014. We are going to have rates effective about that time we filed sometime earlier in the year 2014.

At Atlanta Gas Light I just mentioned we finished a rate case in late 2010, very good rate case $26.7 million increase and that came with an obligation of about $10 million at the spending we needed to do to improve quality of service we delivered and our own time delivery of our service to the marketers and so forth. That has largely been accomplished and one other thing you might recall we’ve talked about before is a synergy sharing mechanism that the Georgia commission approved to encourage AGL who is a very acquisitive company that continue to do that and more memorialized the accounting for that in a way that allows us to keep some of the synergy for the risk that we take with our shareholders, but share some of that synergy savings back to rate payers at the same time. And so it’s about a 50-50 sharing mechanism once we understand what all the cost are and we go forward and we’re ways from doing that of course of the Atlanta Gas Light right now.

No stay out agreement, at this point we could file whenever we think we need it. Virginia Natural Gas just finished that rate case in December, very good outcome, $11 million in base rates plus about $3.1 million of increases associated with things that go into the gas cost, bad debt and carrying cost for storage, for our gas cost. So that was a very good outcome and as I mentioned it put into a cash recovery, the investment in our pipeline there.

In Elizabethtown Gas, we had a rate case in late 2009. It was a $3 million. We don’t anticipate another case there anytime soon. We had need depreciation rates that also reduced our expenses about $5 million. So the net impact on that case was healthy for us as a company very fair. And we agreed to, two year rate frees or stay out there and that two year stay out includes in 2011. So we’re eligible for an increase but there is also a rate case but there is no business for one at this point.

The one that I would stand out in this group would be our Florida City Gas, utility where we had a five year stay out in order to achieve recognition of the purchase premium that was paid for the Florida utility in July. And that five year period will expire this year, October of this year we could go back in for case if we thought when it was necessary we haven’t evaluated that completely that yet but we’re eligible after October to seek new rates.

and in Chattanooga Gas, we had a rate case in late 2010 to put a new rate design in place to encourage conservation. Also there are a couple of other good things for us. Decoupled rate design, the first utility in Tennessee to have that and new depreciation rates.

So you can see a lot of our work over a period of few years across the enterprise, from Nicor down to Florida and while we will always continue to evaluate our needs around rate cases, we’re thankful to be a low-cost operator with a shared services environment that allows us to maintain a lot of efficiency. and we’re not in great need of new rates in most of our jurisdictions.

In addition to these cases, there’s a number of regulatory mechanisms that I’ll highlight for you briefly. They’re different from state-to-state, but there’s a fair amount of similarity in some of them. In Atlanta Gas Light, we have straight-fixed-variable. In Chattanooga, we would call those decoupled rates. They’re really not dependent on throughput or weather to achieve the results, although we also have weather normalization at Chattanooga Gas to mitigate any effects of weather. And through weather normalization, Elizabethtown Gas in New Jersey and Virginia Natural both have normalization along with Chattanooga.

We have bad debt recovery mechanisms in Illinois, in Virginia and in Chattanooga. And then we have conservation recovery in Illinois, New Jersey, Florida and Tennessee. So as we [send] customers to be efficient and to be put new equipment in and increased our efficiency, we’re getting those kinds of investments and rebates so forth recovered through customer charges for those investments in conservation.

And then finally, we certainly do like to highlight our infrastructure replacement programs.

In New Jersey and in Georgia, we’ve had now for a number of years, Georgia more than a decade and New Jersey for a few years, infrastructure replacement, and we’ll continue to invest in those programs. We have filed in Virginia for a similar program, it’s called SAVE, and our filing has been deemed complete by the State Corporation Commission in Virginia. And we think that pertains that they will probably accept our filing and approve it sometime later this year.

We are currently scheduled to start infrastructure replacement mid to late summer this year under that program. But of course we have to have the approval from the commission in terms of recovery. So we will continue to work on that.

One other thing is not only a mechanism, it’s not on this list, but it is very profound, and we've talked about it a little bit already. We had asset management agreements in all six of our legacy AGL Resources jurisdictions. And Pete will talk about a little bit more the value of those for the customers and for the corporation and some extensions that we’ve been granted most recently in a couple of states. But those are very good mechanisms and we hope to continue those and maybe continue to expand as we have.

Let me run through a little bit with each of the utilities, the large utilities in the AGL family. First Nicor Gas. You can see almost 2.2 million customers, a rate base of almost $1.5 billion. Authorized return, ROR is 8.09%, and our ROE is 10.17% and then our CapEx this year. About $205 million is what we plan to invest in capital in Illinois.

I mentioned the bad debt recovery rider and what it means to us. We do have some weather risk as Drew mentioned, but interestingly as warm as the weather has been, we’ve seen rather modest impact in the results of margins because of high percentage of the margin is in fixed charges in our customer bills. But we do see an impact. It's about a 100 degree-day variation equals about $1 million of margin impact. So if you want to do some round math, you can calculate about what that would be.

The 2009 rate case, reset the heating degree days, which I have already mentioned. And one thing that's very valuable for us we believe in Illinois is the conservation programs, where we'll spend over the next few years about $150 million on energy conservation programs for individual homes, and also businesses large and small, and we've already seen some more powerful impacts of that around companies that are investing in efficiency and preserving employment in their local operations and reducing their bills. And of course we have a rebate for that helps make those things happen. And those programs are the most aggressive in the family of utilities we have in the AGL family.

Another item at Nicor and you've probably read something about this is the situation we've reached with the ICC staff on the PBR program that happened many years ago, more than a decade ago there was an issue around performance-based rate making mechanism. It has to be reported on every quarter by the company, and there was an overhang and we went into the deal fully understanding that we believe, and now we've resolved the issue in terms of how the staff views that issue with a $64 million settlement that would be money that would go to customers of the company.

And we have not had the other parties join that stipulation, the Attorney General's Office and the Citizens Utility Board, but the staff has. We've filed it, we've got hearings now on that issue with the PVR. Nicor had already accrued a $27 million accrual, and we added to that in the fourth quarter when we reached the settlement of the stipulation that is with the staffs. So we feel like that’s already embedded in our numbers right now, and we’re hopeful that the commission will accept that settlement and rule in our favor and with the staff.

The Illinois Attorney General's Office and CUB we’ll just wait and see what happens with them. They did oppose in the hearings this settlement. So you can see the timetable on their hearings already occurred. We have briefings to file in April and we expect the ruling later this year on these stipulation for the PVR. It’s very good to have that stipulation in place.

Atlanta Gas Light Company 1.54 million customers, rate base of 1.3 billion, authorized ROR of 8.1 and ROE of 10.75. CapEx is about $322 million for this year. I’ll talk some of our infrastructure, but we call the infrastructure programs in Georgia STRIDE. It replace aging infrastructure, but also to do reinforcement, long-term growth in the order reaches of our system and need that reinforcement to serve our customers on the coldest days. These writer programs have great recovery of cash to them, and so our investment at Atlanta Gas Light has very little lag.

I mentioned the synergy sharing policy 50% share back once we’ve established what that is, we’ll go through a process with the commission to validate what those numbers are. We have a long way from knowing in the end we still as you would kind of imagine just integrating the company and getting all the run rates down to a normal run rate over the period of many months in the next year to we’ll do that. And ultimately we’ll work through the commission’s process to validate and initiate the sharing that goes with the synergy. And that sharing mechanism is good for any further acquisitions we do now, it’s an incentive for us to be acquisitive and we think that was [rated] policy.

Our operating margins decoupled and we received in 2011 funding approval from something called the Universal Service Fund, which in the deregulated market in Georgia the fund adds I think about $30 million to $35 million set of side for the issues as including system expansion in bad debt for our market of loss reserve.

And we taped we will tap that program for something over $11 million to build infrastructure across to stay for compressed natural gas fueling facilities, and even some home refueling devices in Georgia. So very effective use of a program and our tool that we have in Georgia, and we think ultimately will underpin the conversion of vehicles across the states of natural gas, and that’s really our ambition there.

So you can see we’re earning at the top or above our authorized return, some of this is temporal circumstances just overtime. We will continue to deploy capital it’s not in the writer programs. And we add improving other fundamentals and we didn’t have as much incentive comp in 2011 as we would modeled in. So that’s another reason.

Our Virginia Natural Gas, I mention to save filing that’s steps to advance Virginia’s Energy Act and that allows for accelerated deployment of infrastructure to improve the system reliability and safety. And we will propose to spend about $25 million this year maybe of $20 million to $25 million in that (inaudible) cap that about $105 million over a five year period. So we’ll depending on, when we get approval we’ll roll-out the capital deployment for that. Weather risk is mostly dealt with through weather normalization, 30 year normalized weather and one of these about our rate case every – so many years we had to refill the commercial piece of that for the commercial customer class that was made permanent as an WNA factor in the rate case. So we don’t have to continue file for that and it was an experimental rate to became permanent.

And I’ve already mentioned the outcomes of the rate case there. So you could see 270,000 customers rate base of little over $0.5 billion, and right now we are exceeding authorized returns in Virginia that’s very temporary, some of this is just to settle out post-rate case that we’ll work through, and that we’ll probably earn right at the authorized returns overtime. We’ll continue to spend CapEx there and you see $61 million of CapEx and obviously not all of that is in recovery mechanisms, so that will dampen the returns a little bit as well.

At our Elizabethtown franchise, the UIE program, the utility infrastructure enhancement is the – infrastructure program has approved a number of years ago by the State and by the Governor. It was designed to move aging infrastructure and also create jobs, and we’re pleased to report that that program has created about a 170 jobs in our footprint where we served the territory, so it’s been a very good jobs creator, but more than that a very good program to improve the safety and reliability of our system and to allow us virtually real time recovery. That mechanism was originally a rider, but became an amendment to base rates on a regular basis. And so that investment goes into base rates on a real time basis. It’s very unique and a creative way to deal with the recovery of those investments.

We’ll continue to work on that program. We hope that it can be extended, past 2012 and we’re going to work to that, I believe one of the company in New Jersey has already file to extend the program, and we’ll fall in right in behind that.

We do have weather normalization in New Jersey, but we have a little bit of a risk around that if we are, for a period of time exceeding authorized returns what risk if reducing some of that normalization down to damp into back to our authorized return.

So you could see right now we’re currently exceeding authorized returns. That also is temporary. We’ve had some improvement in the bad debt for example, we had some pay out risk that we didn’t pay because of the corporate performance, and those that they were baked in and normally would dampen those returns a little bit. But it is temporary, but we are pleased that we have the challenge that we are exceeding authorized return, but it does come with some regulatory overhang.

Our CapEx estimate for this year is $56 million at Elizabethtown. So, very good programs there that we have and we will continue to invest in our utility in New Jersey. At Florida and Chattanooga our two smallest utilities, even Elkton which is the tiniest of all. Florida City Gas, we had that five year stay on it I mentioned, that is expiring this year. We will evaluate whether there is an equal rate case.

As you can imagine we are settling through a lot of allocation shifts as we’ve grown the company and so our shared services allocations will adjust and that may change our need for rate case in Florida but we will just have to see. The rate base is 163 million. We have over 100,000 customers there. We are currently underachieving authorized returns by a good bit but as I mentioned there could be some pick up overtime with allocations and other things. We are just going to have to measure that and see.

Our CapEx $32 million in Florida and there is some replacement of infrastructure that we are doing down there, but we don’t have a mechanism for that. We don’t have much weather risk, because it doesn’t get cold in Florida. So we don’t count on cold weather, and we have not really seen much weather risk this year, we know it’s been warm everywhere. Its kind of normal year for us in Florida, we’ve very good energy conservation programs in place.

We have recovery of those investments and in Florida, natural gas is heavily favored by policy makers because it’s a peninsula, it’s hard to get infrastructure into Florida, that PowerGen needs and challenges and so natural gas is a great substitute in some cases for PowerGen.

So we have very good favored status in Florida for natural gas. In Tennessee with Chattanooga Gas we have 62,000 customers, rate base of $92 million. And we are currently exceeding authorized returns in that jurisdiction as well. And we think that’s also temporary. We did have again improving fundamentals around bad debt and compensation was a little bit down year-over-year.

So we will spend about $9 million of CapEx in Chattanooga Gas. Our bad debt is recovered through the PGA there and at least for the gas portion. The gas commodity portion has recovered in PGA. Good Energy conservation programs we are seeing some effects from that, very good programs that are delivering for our customers. And 72% of our margins is decoupled with weather normalization program in effect.

That’s the highlights of our gas companies, just closing now and looking at 2012, the things were going to really work on for 2012 will be to continue to make those very fine prudent capital investments in the business and to make sure, we are constantly improving the overall system safety, reliability and quality.

Try to minimize that regulatory and lag, it’s very important to us obviously. We want to keep a leadership role in pipeline, safety and infrastructure. When I mentioned Atlanta Gas, I haven’t replaced 2,500 miles of the system. There are very few gas companies in America that could claim something like that. And so we have virtually a brand new system there, and still some work to do, but really, really improved. We will continue to execute on that program and the one in New Jersey as I mentioned. And we hope to receive the approval for the safe program in Virginia. There is also some good models for other states, and we have to look at whether we can expand those into other states.

We want the utilities to grow, we do see a little bit of improvement in planning of new developments in our territory particularly we’ve seen some in the Atlanta metro area where we are starting to see some national builders return to the construction business and so they’re in the development phase of that. We think natural gas is a great alternative to other fuels, propane and fuel oil in particular in our territory and certainly electricity but we like to continue to look for opportunities to grow our top line with conversions and extensions of our service in new towns and communities, which we are doing each year.

We do think markets are stabilizing a little bit in housing. We do see some movement there, and John mentioned this a little bit, but we think there is a niche for natural gas transportation that is vehicles. And the utilities, our mission is basically to build infrastructure that fosters the development of natural gas as a transportation fuel. And so behind our city gates we think we can build stations that would create opportunities for either our utilities or marketers or whoever might want to retail natural gas in the transportation business.

And (Inaudible) just never escape from, we’re always going to try to be the low cost provider or one of the lowest cost providers in the sector and will control cost by being very efficient around productivity, by taking advantage of our shared service model across growing system. We want to complete our Nicor integration very effectively. It’s a terrific group of employees and leaders in that business.

And we are getting to know them very well. And we want to be a leader in the natural gas distribution business with the combination of the AGL and Nicor businesses. Nicor is very good at standardization and efficiency around how the [dispatch] works. We’re going to take advantage of those things. And AGL will add its commercial [acumen] and its ability to grow topline and create new regulatory mechanisms and opportunities. And so as a combination we think the marriage is very fitting, similar cultures, a little bit different in the way we do things, but very complimentary. Ad we’ll learn from each other effectively. So we want to make sure that integration goes very well.

That is the totality of my comments and so there is maybe time for questions before we take a break, any questions from anyone. Yeah.

Question-and-Answer Session

Unidentified Analyst

You mentioned trying to [defer] growth in natural gas usage, two questions related to that. One is the potential for coal to gas switching in your service territories and are you seeing central growth from that?

Hank Linginfelter

There is some potential. A lot of large power producers, particularly utilities will often bypass the distribution system to go to their plans. And we see that a little bit overtime. But on the other hand, you can’t do it everywhere. And I do think we’ll see some coal to gas, that we will serve in our footprint.

I couldn’t tell you exactly where we know we’ve have [toxic] power companies in multiple states. We think there’s the potential for some to put gas plants on our system. There’s also a little bit of independent power production in states that have very high electric rates. With gas prices being as good as they are right now in the spread between, how you can produce with a gas turbine, relative small megawatt power plant to serve incremental loads, that’s very completive. And I think we’ll see a little bit of that as well in our footprint and those are more likely to be on our system as opposed to large pathway.

Unidentified Analyst

And then just a general question about overall demand for gas, are you seeing per capita demand dropping because of efficiency, but what kind of throughput levels are you seeing overtime?

Hank Linginfelter

On throughput we do see the continuation of a 20-year trend of very modest reduction in use per customer of natural gas. And it’s almost exclusively the result of improved efficiency replacing old equipment with new equipment and customers tightening their thermal envelopes of their properties. That’s just a trend I think we will continue to see.

And our efficiency programs are designed to help make that happen as well and so we are – in that combination I think we will see a continued slight less than 1% a year but slight degradation of throughput. And thankfully because we are largely not volume sensitive in terms of that and we have rate cases in between over those periods of years. But where we are (inaudible) in Atlanta we don’t see much impact from that where we have de-coupled in Tennessee. We don’t see a much impact but it’s something we have to deal with between rate cases because we do see a slight reduction over time.

Unidentified Analyst

I mean that the AGL family of (inaudible) can you speak to the temperament that you are seeing on non-utility commission these days in terms of how quickly the migration or evolution for rethinking cost structures, the need for to lock-in multiple sources of long haul capacity to meet contingencies, when in fact basins and basin spreads are dramatically changing.

Hank Linginfelter

Sure. Our history broadly has been that commissions recognize a number of things. How important is to have a reliable set of pipelines serving your region? They have become more enlightened around source, where gas is coming from and the Marcellus in particular because we have utilities that could be served by Marcellus particularly. Well, even Atlanta Gas Light could be, but Virginia and Elizabethtown their commissions are fairly enlightened around the value of supply diversity.

In the conversations I’ve had with commissions over the years, they recognize often that hitting a new tranche of capacity or supply is lumpy, where there are big investments made upfront, they have to be swallowed over a pretty short period of time but then you won't have to do it again for a long time. They recognize the need for that.

More broadly across the country I think commissions, they want the companies to be very efficient around how they source capacity and supply. But they also, in a lower gas price environment I think they are willing to recognize that you can make investments that give you flexibility and reliability. And the impact on bills is very modest in this current era.

So we’ve seen mostly support from commissions across our footprint for additional access to the markets. And I haven’t heard anything that would change that. And you may have something in particular you are looking for on that question. I don’t know if you have one.

Unidentified Analyst

Again, there may be other utilities more impacted, but that’s (inaudible) dollar gas, $0.40, $0.50 of firm unused capacity can, even though compared to historical rate's kind of a big deal compared to what the actual costs are today is a big deal. And the question is are utility commissions paying attention to that?

Hank Linginfelter

Well, we'd stand out more obviously in an era of low commodity costs. I have to flip back to our very effective use of asset management programs across our utilities. And in every jurisdiction where we deploy that commissions have fully recognized the value of that. And even where we have a new supply option, they recognize that somewhere along the way there is going to be value that comes back to our consumers in the way we asset manage. And so, we've really had only good support up to now. So I hope that continues. We haven’t seen anything other than that. John?

John W. Somerhalder II

[Greg] and I talked a little bit about this earlier. I think the real positive thing is we have seen support (inaudible) to thinking about sourcing more gas from Marcellus. So we’ve seen it more on the positive side of looking how we could support new projects, new supply diversity. But I have the same concern you do, and that is when you look at the change in fundamentals for the interstate pipelines you would believe that over time there might be pressure for some of the legacy contracts that people have from the Gulf Coast all the way to New England to look at what’s the right level.

At this point we’ve seen no pressure from our commissions, and that also speaks to the fact that we have been effective at managing those assets. Even when the supply has changed, we have seen other ways to use that capacity through Sequent and the share value back. So essentially no pressure, but it does seem like that’s a trend we all should monitor, especially on some of the pipelines where the Marcellus and other shales have radically changed the loads on those systems.

Unidentified Analyst

Thank you, [Greg].

Unidentified Analyst

There have been reports that in California that they are finding problems with some of what they are calling plastic pipelines cracking. And I was wondering whether you have discovered that same problem and that might cause additional repair needs?

Hank Linginfelter

There are some classes of pipe that have longer lives than others. And some of the early generations of plastic pipe had some issues around becoming brittle. We have some of that pipe in a little bit of our system. We monitor it very carefully and we have got those segments on a replacement program that we put ahead of other sections. But right now we are mostly in a monitor and replace as we schedule replacement. But that’s certainly an issue that some states are going to face that will be significant, and we are in a good place around understanding our system and have a timetable for how we would work through any of those issues. But most of the pipe we have in our system is not that early generation. It's a little bit later and it's much better, I should say.

Unidentified Analyst

Yeah, when I add up the individual CapEx fees for 2012 from the different subsidiaries, I'm getting a number that’s less than the 7.5 at [the front] of your presentation in December. What's the extra $40 million being spent on?

Hank Linginfelter

You probably spoke with O&M, that's not reported in the individual utilities segment, system-related, the yellow bar on top, information technology and so forth, those phone systems, customer information systems and (inaudible).

Unidentified Analyst

Okay, but is that allocated into the segment or is it a share services [incentive]?

Hank Linginfelter

It’s allocated. The customer information system is done in aggregate. Fleet's done a little bit that way, ultimately gets allocated to utility (inaudible) very specific for pipeline operations and maintenance improvements in pipeline.

Unidentified Analyst

Okay, thanks, Steve.

Hank Linginfelter

Great, thank you so much.

Unidentified Company Representative

And it’s time for a break. Are you going to make an announcement?

Sarah Stashak

We're running a little bit behind schedule, so we will take a break and we will reconvene right around 10.20...

Hank Linginfelter

Okay everyone, we are going to get started again here, in just a minute.

We’ll hear next from Mike Braswell and Beth Reese who jointly run our retail businesses. And then we’ll hear from Pete he will go over Wholesale & Midstream and then Drew will talk about Cargo Shipping. We'll take some Q&A and then we will have a casual outlines available before we take off for the rest of the day. Thanks.

Michael Braswell

Thank you, Sarah good morning. I'm Mike Braswell, I run the Retail Energy Operations for AGLR. And what I going to do first, just give you a little bit of the high level summary of the Retail Operations segment, it changed with the acquisition of Nicor, historically it represented SouthStar, and now in addition to SouthStar it has the Nicor retail businesses.

Some had an energy focus, and some of those businesses also had a services focus. So, I’ll give you a little bit about background there, and then I'll go into more detail on Retail Energy and then Beth Reese will go into more detail about Retail Services.

So in terms of a Retail Energy and Retail Services together they represent about 1.2 million customers. We’re in 10 states, we offer various deregulated energy products and services, as well as warranties and home solutions. In terms of the 10 states, nine of those states were served by Retail Energy, there are three states that Retail Services been, in terms of a customer account Retail Energy has about 700,000 Retail Services over $0.5 million.

In terms of throughput to Retail Energy about 80 Bcf of throughput on an annual basis weather normalized. We provide service to residential customers as well as the C&I, Retail Services focused on residential. And so like I said at the inclusion of my presentation for Retail Energy, but pleased to go into a more detail on Retail Services.

First, what I’ll do is go through these financials from last year and what it’s going to do is primarily be SouthStar Energy Services financials those represent a full year of earnings the Nicor retail businesses just in December. So the $93 million about $2 million of EBIT represents the Nicor retail businesses. In terms of year-over-year, in terms of the 103 to 93 the predominant if you want to say headwind in that business was weather, and it really wasn’t headwind for 2011 is upside for 2010. 2010 was about 20% colder than normal in Georgia our primary market, and the way we hedge whether and I’ll go to that a little more detail later. We typically get to keep the upside and mitigate the downside of weather.

So we had some upside in 2010 did a weather and in 2011 we’re relatively flat due to weather. Now we also had a low comp adjustment in 2011 as well and 2010 we did not. In terms some offset from the expenses we had lower bad debt and legal, and bad debt with the result principally lower gas cost. And later on I’ll get in the lower gas cost to about a couple of questions if that good for your business or bad, and I’ll run through to present times of couple of factors gas cost being one of those.

Now in terms of the year again achieved $93 million of EBIT stable market share of 33% we’ve had that for three years, what we done in Georgia is really focused on new products and marketing channels those have enabled us to maintain our market share and our margins in a very competitive market, we’ve been very pleased with that, Delta SkyMiles we've enrolled over 20,000 customers in that plan. So, that's been a great success for us, we got retention in acquisition of new customers.

We've also begin to integrate the Nicor businesses in total our reference here the two energy businesses, but also incorporating certain lease services businesses around. In terms of the commercial business, as such assigned to us with customers, we manage there, it's provided about 10% of our EBIT in terms of an incremental contribution. So, that's been an important part of our business.

And in addition we managed commodity risk and weather risk and like I said earlier I'll go to the weather risk in a little more detail later. Large C&I in Ohio and Florida (inaudible) two together represent another about 10% of our bottom-line, various markets are an important contribution and in terms of the future we are looking at expanding in all the choice market and going into mid market such as New York and Maryland.

In terms of the EBIT track record, (inaudible) some adjustments in terms of the earnings the economic value creation is more stable than what we earnings with share (inaudible) if you look at the 113 from a low LOCOM adjusted basis there was a prior LOCOM at about 6 million loan in that year to get a 2008 was about $70 million negative LOCOM in that year with some of the areas storage values where not in subsequent period.

In 2011, we had another LOCOM is about five. So, once you adjust for LOCOM you'll see a fairly even and stable earnings income in this business. Certainly, in 2012 what we're seeing there is the legacy business of (inaudible) representing about 80% of earnings and then about 20% from the new Nicor energy businesses as well as services.

So, we're seeing a significant growth opportunity for 2012. In terms of our primary markets Georgia, Ohio, Florida and Illinois, Georgia is our key market, it has been since the inception of SouthStar, about a half million customers, 35 Bcf of throughput, about 40 million of 40 Bcf, weather normalized last year again I think it was 8%, 9% warmer than normal. But certainly you see a slight reduction in throughput, Ohio and Florida, about a 100,000 customers now, a significant number of those about 50,000 are option customers.

And in last year there was question around, what moved in the Ohio customer account, and again those are [auction] customers that moved year-to-year as we went different transits of that business. Florida has been fairly stable, its steady growth, slow growth, but stable.

And Illinois being our new business about 80,000 customers some very good products there, that we plan on even leveraging in Georgia. They have a great risk management product, the Fixed Bill product. It has great value to the customer and great value to our retial energy. So again that’s a product we look at extending into the Georgia markets. But as you can see collectively with these markets and all of our markets together, about 700,000 customers and again approaching about 80 Bcf of throughput.

Now in terms of the competencies with retail energy, we’ve covered this before in terms of what does it take to be a good retail energy marketer? First brands, there is different values for brands in each market. In the Georgia market I would say your brand is very, very critical. I would say in Ohio it’s important than some of the other markets, probably a little though. But again our philosophy around brands is to have a local brand by state as opposed to one national brand. We’ve seen in the utility type of space, local brands resonate with customers and it’s the best response we can get. National brands tend to not have as much value in this space as in other market segments. In terms of local brands, you’ve seen in Georgia Natural Gas for Georgia, Ohio Natural Gas for Ohio; Florida Natural Gas for Florida. You can certainly see the trend in terms of what we do. We are trying to link a local name with a product we sell.

In terms of managing and retail customer portfolio, I think some retail marketers grow customer account just to grow customer account. We do not do that. We try to make sure we have the right products and the right customers to create long term value with our customer base. It’s very important how you manage that, and how you introduce new products for long term growth and stability. We think we’ve done a good job of that over a long period of time. In terms of customer care very critical function of a retail marketer. It’s the number one cost we have in our business as well as the number one touch point day-to-day. So it’s critical, you not only have very efficient service but very positive service with your customers.

That’s a way to we acquire new customers as well as retain existing customers. In terms of assets and risk management, another critical function certainly year-to-year managing commodity risks and also weather risks. Both of those risks can significantly impact your business. We have a group that’s focused on that. I think [inception] and again they do an excellent job of managing that risk. In terms of market advocacy, one of the things we want to make sure is we want to look at every model we operate in, make sure we understand the key drivers in those markets and always advocate to a model that, our ideal model is behind Atlanta Gas Light Company with Georgia Natural Gas.

That gives us the full ability to leverage our retail expertise and manage the customer and profitability. Now in terms of the Georgia overview, again this is the market we’ve been in since inception. About a half million customers primarily residential, we also have large significant C&I base there. The C&I usually choice C&I is what we call firm C&I customers that’s more the McDonald's that type of size then the large C&I it tends to be more hospitals, large industrials. The large industrial group allow us to not only make money, by bundling gas and some capacity link we have that also enables us to manage and balance our system very efficiently. So those customers are important in terms of balancing our portfolio, we will see later in terms of how we look at that market. Its really having a balanced portfolio to balance their system as a oppose to having this many customers as you can.

In terms of the system (inaudible) Atlanta Gas Light Company deregulated in 1998, that’s the only fully unbundled system in the U.S. it’s a great model for us, again with our capabilities and competencies we are able to manage that in the Georgia market very, very well, its certainly one we would like to see in other jurisdictions. In terms of the competitive set about 10 competitors there, the top four control about 85% of the market. So you have full load pretty stable marketers that are competed there. And tend to be very, very good we market there as Georgia natural gas under our SouthStar partnership that’s AGLR and Piedmont.

AGLR has 85% of that entity and Piedmont 15%, again in terms of market share, stable market share there about 33% from the last three years, we felt very good at maintaining that market share level with the increased competitions. And part of how we done that again, is focusing on new products and services the Delta SkyMiles program again talked about at earlier that’s been a great marketing channel. Atlanta is the hub for Delta and a lot of people there loved to SkyMiles program. I think they put a value on SkyMiles even greater than the actual monetary value. So that works very, very well for us in terms of the tracking customers and retaining customers. And again like I mentioned, we are actually looking at expanding the fixed bill product in Georgia as well. It was a great product that the Nicor team put together and we are going to try to expand that throughout Georgia.

Now in terms of the Illinois market. As you can see and hear they are behind our three jurisdictions there, Nicor Gas, North Shore and Peoples. Most of the customers are behind Nicor Gas. In that jurisdiction they do leverage the local brand Nicor and again that’s consistent with what we have done in other jurisdictions. It’s a market where the utilities are still competing in the marketplace that’s not like Georgia. In Georgia, the Atlanta Gas Light company does not sell to any of his customers, in Illinois they do. All three markets do that.

So about 90% of customers are still at the utility but does provide for large opportunity to acquire those customers through choice, but there is some headwind down that around natural gas prices and more volatility. It does make it more difficult to attract customers away from the utility but again with a 90% still with utility that’s a large set of customers to market to and try to acquire. In terms of products offered again, the major product in terms of (inaudible) and margin are there fixed annual, fixed bill products. There are two varieties, one is a physical fixed bill, that’s a customers less utility and there are choice customer and we fixed the bill and revenue there and then on the other side there is a financial fixed bill, that’s actually offered to customers still with Nicor Gas. And with that we actually (inaudible). So in terms of risk management for any of our consumer there is no risk at all. You get a fixed bill amount for the entire year, that has not change based on the weather or commodity conditions. So for those looking for certainty, it’s the ultimate product. And it results in good benefits in terms of how that effects weather with from a portfolio standpoint. Now I’ll get in to that in just a minute.

Now in terms of our markets, the expanded markets. Ohio, I talked about earlier, we’re behind three markets there. We’re going to be expanding into a fourth market. We have also expanded our Delta SkyMiles program there. There are four more hub in Ohio with Cincinnati, which is in Duke’s territory, so that seems to be a good step to start expanding behind Duke, and in delta channels or initial acquisitions. We certainly want to expand our choice market there. We’re looking at some projections for significant expansion in Ohio in 2012.

In Florida again, steady market there. It had stable earnings, again it’s not dramatically affected by weather and in (inaudible) business and it’s true for ours. Behind New York, we started out during last year, expanded international grid. We are looking to have a run rate of $1 million in that business later this year. So again we’re looking to expand market share there.

In terms of Maryland, we’re just getting in that market, we look at building a customer base, and are growing familiar, but Maryland appears to be another good market. Large C&I, I talked about that earlier, really the goal there is more about balanced portfolio. And again, it really helps us in terms of our asset link, principally with the Georgia market, and then also helps to balance the system as well. So it’s a good customer portfolio to have if you’re in Georgia in our firm customers.

In terms of emerging markets we continue to monitor markets all over the U.S. that appear appealing for a retail energy market or a natural gas. And the sourced gas market southwest appear appealing. We’re looking at those markets for 2013, and then there’s certainly some other markets on the East Coast that we continue to evaluate and look out to expand into it.

Now, in terms of the market fundamentals. I talked earlier about natural gas and low prices and more volatility, what you mean by your business. Certainly in some aspects of the business like bad debt, it has a significant benefit from 2010 to 2011, about a $3 million reduction in bad debt. So that’s a significant improvement and an opportunity on the commercial side of our business, no different in piece, very difficult to make a commercial return, you did historically, but one other interesting piece is, in a lot of the choice markets where the utility is still in the market, that does make it more difficult to convince customers to leave the utility and come to you.

The bills are already low. There is not a lot of volatility, so there is less interest and leave in the utility, and adding a risk management product. So it does make it more difficult in our choice market. In terms of all these same factors, Hank had also discussed that, and drilled a little bit as well. In terms of overall LDC growth, it’s not where it once was, that just makes the overall pie for a smaller in terms of the addressable market, so we just don’t see the growth of new customers there – that would help our business.

In terms of retail markets, I think retail markets were really driven by a ship in consumers around 2008, when the economy changed pretty significantly. You saw consumers in all markets becoming more value oriented shoppers going through all of their bills, scaling through and saying how can I save money. As we saw consumers react to that, also our competitors reacted, because they saw their customers moving around.

So what you had was, consumers reacting to the market, competitors reacting to those consumers and creating a much tougher market for us to operate in. So what we’ve seen is, certainly increased pressures on margin and market share. And with that, it has forced us to become more creative and innovative in terms of the products we offer and the channels we use to acquire and retain those customers.

And again, in terms of top line growth, it’s challenged, but not impossible. What we’re certainly looking at doing again is, looking into new markets, even if those margins are smaller than they had been historically, we would make sure to go in where they’re profitable, and we do see growth again in new markets for those opportunity there as well as new products and services in our existing markets. So even though it’s a tough market, there are opportunities.

In terms of weather hedging, I’ll try to simplify those in terms of what all these terms mean. In terms of Georgia, where it talks about net long HDD. HDD is Heating Degree Day, all that’s really saying is in Georgia, and in most markets, the colder it gets and HDD is increased, the more money we make. So that’s a very typical scenario for gas utilities and customers in our margin.

And so what we do in Georgia is go out and try it on a Chicago Mercantile Exchange, and look at swaps and put options to offset and balance that length we have in HDD. and again, in terms of using puts, what it’s allowed us to do is get the upside of colder than normal weather, while it mitigates the warmer than normal weather.

Now in terms of Illinois, this is where it’s somewhat unique, and that’s why we’re actually net short HDD. And the reason for that is, as you fixed your revenue on a fixed bill. So once you fixed your revenue with the weather exchange in your gas costs, when it’s warmer, you have less gas costs being applied to that total bill. so actually, your margin increases, when it’s cold, you have the opposite effect.

So what that does, it provides a natural offset to the more traditional risk associated with an end-use retail customer. So what we can do is, look at those from a portfolio basis and use internal hedging to allow the offset of short HDDs in the Illinois fixed bill product with the lead in HDDs in the Illinois market by the Nicor Gas for us. So it’s a good natural offset, and we’re looking to deploy that in Georgia as well.

In Ohio same thing, net long HDDs we use Cincinnati as the weather station, similar process we do in Georgia in terms of generally purchasing puts, given us the upside protecting our downside.

Florida, New York and Maryland, even the markets are too smaller like Florida, not enough weather changes tied to margin to really justify hedging at this point. But I can’t mention that in this presentation as well, same for our market.

In terms of review of 2012 priorities, certainly want to maintain market share and margin in Georgia. Again that’s our primary market, even in the combined retail operations, it still represents close to 80% of EBITDA that segment, so that’s still a very significant portion of the portfolio, and we have to manage that core business very well.

Obviously, we want to integrate the retail energy businesses, and make sure again those operate consistent and well, like it had in the past, and also looking at what markets can we grow in. There are few markets that we view are under-tapped currently, and we’re putting together plans to go into those markets and try to grow our customer base and margins

Again, continue to grow on our expanded markets as I talked about earlier Ohio, Florida and New York and Maryland. I think for next year, the greatest opportunity of grow is Ohio. Certainly, the commercial business we have to manage our risk in the business as well as continue to make incremental margins by the assets that are assigned to us.

And certainly, evaluating the products and services like I said in a tough market, we have a lot of headwinds in terms of retail markets, the way to come back, that is to be creative around new products, services and channels and how you approach those markets. And we plan on doing that like I’ve mentioned in terms of a fixed bill in Georgia and then Beth is going to go into a lot more detail on this from a warranty standpoint, but we’re also looking at bundling warranty with our energy products in Georgia as well and we believe that will help us from an acquisition as well as a retention standpoint.

But at this point that summarizes my presentation, and Beth will go into more detail on retail services. Beth?

Elizabeth W. Reese

Good morning. My name is Beth Reese and I’m here to talk about one of the new businesses that we have the fortune of running as a result of the merger with Nicor. This was a business that Nicor has started and I will give a little bit of history about it, but it’s a business that they have started and we’re really excited about adding to our retail portfolio.

Simply put, the business offers peace of mind to our customers for their utilities and their appliances in their home. We do that, we offer it to our customers by partnering with other utilities, those are owned and third-parties, and leveraging their brand, their bill and our channel. So our strategy really is to use the bill. Customers tend to pay their utility bills, although you heard a lot about bad debt, you always do, but they do tend to pay their utility bills. They are paid on a monthly basis.

Mike did a nice job of talking about the brand. We too in the retail services business believe that brand is really important. Utilities generally have a strong brand, we leverage that. And then we leverage our own inbound call centers.

So our strategy is a little different than some of our competitors in that we certainly do direct mail and we’re looking at e-mail and other less expensive acquisition channels from a marketing perspective. We leverage the inbound calls from people moving, they are making choices of their time, they are learning about their utilities and they are really looking for peace of mind as they move into a new home.

And that is why we have as many employees as we do. We have employees that both answer calls on behalf of our partners, as well as we fulfill our warranty claims and claims on our products both through third-party providers and in-house providers. So we actually own and operate three HVAC businesses in the State of Illinois.

Some of our products, and as we move through continuum is really creating lifetime value for our customers. We start at the lower end with products that start at about $395 a month. There's what we call line guard products. They really provide protection to the consumer for their lines, their electric or gas lines from the meter inside the house. They provide safety inspections on an annual basis, and if something would happen if they were weak or a breakage within the home then they would know that they have a trusted provider to whom they can call to respond to that issue.

All the way through the continuum of appliances, [white spreads] within your home, everything from those things in your larger rooms, those appliances that are in your kitchen, to your TV, believe it or not people still pay for warranty products for their TVs.

We also provide maintenance. I mentioned that we have our own HVAC businesses. That is more of an, what we call an entitlement product. That means that actually as a consumer you are entitled to a service, and those are more like what we call payment checks, annual checks and inspections on your heating and cooling equipment.

One other item to note, Hank mentioned the energy efficiency program in the Nicor Gas territory. We are actually a certified service provider within that territory. We see that as a really nice opportunity to create some efficiencies between the two businesses, whereby if we have consumers who have an energy audit done in Illinois, we can also be the person responding to the recommendations that come out of that energy audit.

Right now, it's really focused on inflation, but that will grow into furnaces and air-conditioners and other things as those programs at Nicor Gas mature.

Quickly just how we make money. All of our contracts are on a month-to-month basis, so we don’t have long-term commitments either from the customer [doesn’t] through us, and we don’t through the customer. All of our warranty products are billed on a fixed monthly amount, and believe or not, they range from $3.95 all the way to $63.95 a month. But $3.95 are our line guard products and $63.95 is more of a whole zone product.

The services that are entitlement-based the revenue is recognized a little differently. It’s recognized either at the lesser of when the service is rendered or the end of an annual period or when a contract is discontinued. Our claims, same thing thing, the warranty claims the costs are recognized when incurred and the entitlement claims incurred when a customer requests services.

Our primary O&M is all about the customer marketing, which includes our call center costs. We also have multiple structures that goes through our cost line of sharing revenue or costs with our partners, depending on how that deal is structured. And then we do have some SG&A costs that are fixed, that help run the business. We see this as a real opportunity to leverage our shared services model that AGL has been so successful in implementing over the years.

Nicor National, the name of this business, has not really leveraged that as successfully, and we really believe that that’s an opportunity. There's an IT accounting just under corporate overhead.

Quickly on the Nicor Gas partnership, Nicor Gas partnered with Nicor National in 1992 to start providing self-administered HVAC repair and maintenance plans. So it really was an idea that was formed out of the Nicor Gas group and they formed an unregulated business, and that run for about eight years. And then they decided to start leveraging the calls and bought those in-house in 2000. In 2005, they actually (inaudible) that we now use and really started leveraging those calls more effectively.

The relationship between Nicor Gas and Nicor National is actually governed through an operating agreement. The operating agreement was put in place by Nicor Inc. in 1976. It is governed by the ICC. It has been reviewed. It has lots of audit requirements.

And in 2009, the ICC began looking at the relationship between Nicor National and Nicor Gas. As part of the merger agreement that issue was brought into the merger agreement approval process. It was a little bit of a separate process, but the findings and the ultimate ruling that came on December 7 approving the merger, also dealt with all the operating agreement issues.

The biggest issue there, that Nicor Gas can no longer use its inbound calls to sell products for its affiliate. So we really haven’t seen an impact on our customer base, we haven’t seen customers leaving as a result of that. We still have the ability, Nicor National and Nicor Services still has the ability to market to those customers that Nicor Gas just no longer used to call.

So one of our priorities, and we’ll see it in a minute is to get beyond the move calls, what we call it and to really start marketing and using other opportunities to touch customers who aren’t moving, who are still spending money and have appliances that are aging in their homes.

From a competitive standpoint, we really have two types of competitors, and you probably see this with some of the companies that you follow that we have utilities but also have retail services businesses. Dominion and NiSource are two that have broken our service territories. But there are also non-utility companies that are very large significant companies out there that are warranty-based companies. Home Serve, Utility Service Partners that's owned by Macquarie Capital, American Home Shield and Cross Country, some of them have partnered with utilities, and some of them are unpartnering with utilities and trying to get drastic consumers. Those of you who bought a home in your life time may have been offered the opportunity to buy a warranty at that time American Home Shield is one of those companies that you'll be very (inaudible) is definitely competitors out there that are touching our customers everyday.

From a regulatory perspective, we're obviously keenly aware of our regulators, and that both the companies and the product get regulated to in Illinois in addition to that relationship with Nicor Gas its regulated by the ICC, the company itself was registered with the Department of Insurance, but in most of our states the products are really regulated or at least have some sort of over sight by a product – Consumer Products Division.

There are, in some stage consider insurance, so we're obviously looking with our, looking at our captive to leverage our captive to enable us to really go to market in a more cost-effective manner.

And finally, just our priorities consistent with all my colleagues that you've heard from, we really want to grow our existing customer base and increase EBIT and the contribution to the segment and to the company.

Mike mentioned that we're really focused on implementing new partnerships both in Georgia Natural Gas this summer and then partnering with [Hank], rest of his utility utilities starting with Chatanooga and Virginia in the call. And now we are continuing to cultivate other non-utility prospects. Utilities are very focused on how to grow, when customers they’re not really growing customers, we offer that opportunity through revenue sharing and cost sharing, and offering this product. They also recognized as we have and Atlantic Gas Light we learned this lesson very early that when consumers want to make a choice for their appliances being there when they make the choice and influencing that to gas as a very positive, and our gas brethren in the utilities segment are also learning that and really looking to us a potential partner to leverage those.

One thing about partnerships is they do required investment, because we are investing to get on the bill to leverage the brand and to get across center up in running prior to having all of our contracts in place. So it is a nice long term return, but it does take some investment. And that depends on each partner and what their goals are and what they’re trying to improve for their own customers.

I mention that we’re trying to market to end use customers of using means other than move calls, we’re testing that right now in the Illinois market place, and plan on rolling that out to our other markets as we learn what we can in Illinois. We definitely need to leverage e-commence, Nicor National really was focused on the move calls and really didn’t invest in e-commerce as a huge opportunity there. It is a nice costs saving opportunity, but it also allows convenience for our customers to understand what products they have and make appointments arrangements on their own terms. I mentioned that we really want to leverage AGL Resources shared services in a well under the way, we’re doing that and we’ll continue our cost [cutting]. And that is all there is about Retail Services.

Any questions for either Mike or myself?

Question-and-Answer Session

Unidentified Analyst

Mike this question for you on the customer churns, and also how margins are trending in the business, and what your customer acquisition costs trends there?

Michael Braswell

Okay so in terms of churn, I would say churn is probably increased slightly, most of the churn is, I guess I’ll take it market by market. In Georgia market most of the churn is really turn-ons, turn-offs that’s been pretty consistent over the years actually what the economy it may have come off just a little bit. If you look at churn amongst marketers it’s up slightly, but I wouldn’t say dramatically. So some increase around churn, if you look at acquisition cost, acquisition cost has increased and it depends on how you calculate it, some of it is the acquisition cost is related to mix. So on a lot of times what you’re doing as you acquiring a fixed customer that maybe replacing a variable customer with the higher margin.

So if you look at that in a total context of acquisition cost and than the value of that customer, there is some again headwind and pressure around acquisition cost and then if you want to say mix degradation.

Unidentified Analyst

Okay, you were talking about the churns, so just a customer deciding they’re in their home now, they just want to switch to a different customer that’s just not very typical what you’re seeing?

Michael Braswell

That’s a marketer switching, like I said earlier, there is churn that [two times] of churn, some is just people moving from a home to different home, that still is the vast majority of the churn, we’ll see in our business, it’s not customers moving the market out to marketer. So the underlying churn associated with people moving that’s actually dropped a little bit over the years, just because of some of the economic conditions fewer people are moving. So that piece of a churn is actually dropped off a little bit, if you look at the churn associated with marketers people moving from marketer A to marketer B that has increased slightly, but again I wouldn’t consider it dramatic.

Unidentified Analyst

And then can you talk about the competitive landscape and how you’re seeing different people coming in and leaving?

Michael Braswell

The competitive landscape in Georgia has been, I would say fairly consistent over the years, there have been top four marketers that they’ve had the majority of share, we have seen some acquisitions in MXenergy now which just acquired by Constellation, also that is a new marketer. But in terms of their approach and their brand, it’s still under EMEX synergy. We have seen some smaller marketers enter, and we continue to see three EMCs complete, but they’ve been in the market for four or five years.

So I would say in terms of the overall portfolio, competitors that’s remained I would say, fairly typical in terms of top four large marketers. Again, little bit of movement around EMEX synergy in terms of few who owns them and three EMC, and then some very small niche marketers, but their compliments is pretty similar to what’s been for years.

Unidentified Analyst

And as far as the other markets that you are evaluating?

Michael Braswell

If you look at Ohio, I would say the competitors in Ohio again I would say that’s fairly consistent as well, obviously I could go to probably all the markets. I haven’t seen a dramatic increase in the number of competitors. I would say competitive activity is heightened, amongst those currently in the marketplace, especially in Georgia, you can certainly see marketers like SCANA becoming more aggressive and what they are offering and their marketing approaches. But in terms of the compliment of competitors, it hasn’t changed dramatically.

Unidentified Analyst

And one more question on the retail energy business, can you tie that in (inaudible) particularly in Georgia say with the your unregulated gas supply business, can you some how tie in one or two business with that and one product?

Michael Braswell

I guess you are saying, can we tie together products and bundle them, the natural gas commodity product that are one or two product yes. And that’s something that we do look to do in 2012.

Unidentified Analyst

Hi, good morning this message is about, is it possible to (inaudible) list of business. Is it possible to expand our private service area perhaps because of the IPC rolling and consolidate nationally and lift this business opportunity is that something that you considered ?

Beth Reese

It is not referred to Georgia on looking at that, but I mean rolling it out and listing it separately as an own business.

Unidentified Analyst

Yeah, I am not sure, if you’re only active Illinois in your service areas, I believe home service backed in nationally.

Beth Reese

We actually…

Unidentified Analyst

And then can you maintain a national preference, would you have to acquire other companies (inaudible) and does the IPC ruling might not allowing utility to this whole market. Does that enable you to move into areas by making the market more open?

Beth Reese

There is two different questions there, the first is we actually are registered in almost every state. And we offer our products currently through wide span. So we have any number of two customers to 2,000 customers not to put in. One of the things we really got to look at is, is that really effective and efficient. That being said, we are in talks every day with respective utility partners to be able to go behind our territories. So we really try to leverage our strategy of the build brand and the move call. So it particularly to bill in a brand. So any where we can get – into a territory where we can partner with somebody else to leverage there, billing their brand, we’re willing to talk about that as a mixed economics.

Whether now we roll-out separately it becomes a separate company. We just have a lot of growth to do, to do that. The other question about the Nicor ruling and does that remind me again.

Unidentified Analyst

Again, I am not familiar with your business, but it seems to be from the slide that you’re unable to tell markets or they making calls about customer and end customer, they are not able to offer the warranty product at the same time, which seems to be – we are moving their competitive advantage for the utility part in the past, to the extend that you are entering a service area, I know you marketed with utility partners that’s keep saying you are not in a market with utility does that make it easier for you to enter a market, because utility no longer has the incoming advantage in offering the warranty product, in other words, yes really national its only specific in Nicor.

Beth Reese

No, its only specific to Nicor, it is only for Illinois. It does however part of the impendent for the whole operating agreement issue was that there were some barriers that within the operating agreement that Nicor Gas had put up to really make it much harder for other entrants. And so that was really impeditive to starts the whole proceeding. So part of the what is the result of the ruling is to allow other competitors. So it’s a little bit hard to get in the market, we have to have two other non affiliated parties who also are delivering gas, who are interested billings to be able to do that. But it certainly changes the competitive landscape in Illinois, but we are still out of market, we still can use the bill we can fill market on the billing or look at markets or we just take it move across.

Unidentified Analyst


Beth Reese

Anybody else.

Unidentified Analyst

Are you able to state who your others utilities and marketing partners are?

Sarah Stashak


Unidentified Analyst

Okay, the deal is for the utilities it’s a simple answer and other good question is it do it for own utilities which has got specific offering. Could you just quickly maybe describe or reemphasis the employees or customers touches it relates to the pension because of the broader issue for the corporate. But can you talk about it little bit?

Sarah Stashak

It’s a broader issue for the corporate, it’s a broader issue for the industries. So every time a consumer decides to touch their appliances, they are at a decision point either because the appliance itself broke or because they decide that they don’t like this black. So when they are in kitchen any more they really want shiny new one. They are at the decision point to decide if they want to stay with gas or if they want to go with electric.

Obviously, we care a whole a lot about the heating load but we care all about every appliance, every burner step in home matters a lot. So we believe that by having the warranty product and enabling the consumer to replace with the same product that that will keep appliances as importantly when they’re looking at repairing or maintaining or changing out their equipment specifically their HVAC equipment. When they are at that decision point, if we can be there influencing them just stay with gas that’s a great thing.

And it really is something that we find very important to help manage the attrition with our own customers but also within the gas industry itself. Interestingly enough in Illinois, a lot of the Clinitek products are focused on furnace because that’s really what people are worried about their heating equipment.

Our experience in Georgia overtime has taught us that people really focused on the HVAC equipment in the spring and – probably in February of this year but in the spring when they are turning on their air conditioners, the HVAC dealer or repair person who responses to the request for customer looking at their AC but also saying well I am here I can change out your furnace and you know it will be great if you had a heat pump instead of gas.

So we really believe that by being there when they’re making that decision and influencing to gas is a really important thing. And that really is a selling point with our other perspective partners as well as internal partners.

Anything else? With that I will turn it over to Pete who will talk about our wholesale and storage segments.

Peter Tumminello

Good morning, I’m going to talk to you about wholesale services, which includes on the wholesale side of the business will be Sequent, on wholesale marketing and trading, Compass and Nicor Interchange, our commercial industrial businesses and then I’ll go into our storage business, which is pivotal storage and I’ll be talking about relatively new business, our pivotal fuels business, which is an LNG, LAN based LNG activity that we’ve been embarking on over the last year or so.

So little bit out last year first, the earnings for the wholesale side, this is not Midstream, this is Sequent and Compass in the 22 days of only Nicor Interchange was a very difficult year, it was a $5 million EBIT and we’re being used to running in $40 million to $50 million a year level.

Of that five, nine was the Sequent and Compass contribution and negative four from Nicor Interchange and that was primarily some year-end 22 days lower cost of market activity as well as a very warm weather there in the Chicago area in December.

As we talk about last year, and then we’ve disclosed this in the third quarter, you can see there is a difficult third quarter we had around Marcellus constraint. We see it stabilize that with some primary firm capacity and we’ll see some cost overhang in 2012 and ‘13, but not a very large amount. And again, we were near the level we experienced last year.

We also had our first bankruptcy in 12 years of operation and that was a $4 million bankruptcy and we don’t anticipate that we being a very strong process and procedures, and think we’re in a very good shape continuum there.

And then just fundamentally the market was extremely difficult last year in terms of pipeline transportation being devalued, the oversupply of natural gas just meant that you didn’t need to transport from location to location as much. You could buy the gas in all those different regions where – excuse me, where shale is being produced. So that was a difficulty for the last year. We responded to that in several ways, which we’ll talk about here.

Our operating costs are down significantly. We had a reduction in force in the fourth quarter of last year and then when we combined with Nicor Interchange we really streamlined those combined businesses as well.

As we look at 2011 some of the things that we did accomplish in a difficult environment was that we did combine very seamlessly with Nicor Interchange. Day 1 when we started operating there in early December we were operating on one wholesale system and operating as one company in the market and that was just to do a great job in the transition process.

Now we’re working on combining our commercial and industrial business into one existing the compass and the remaining Nicor Interchange C&I activity. We did stabilize the Marcellus position. We have primary firm transportation on Tennessee Gas pipeline and we’re taking advantage of that positioning the market. We also added a storage position at stagecoach in Pennsylvania to allow us to inject gas opportunistically in the Marcellus.

We’ve been growing our gas-fired PowerGen market very significantly. We will talk about that some and we purchased first volumes from a land field facility, a facility that AGL entity build our (inaudible) subsidiary, in Tennessee and Sequent is transporting that gas out west to markets that highly value green gas and we’re handling all the logistics of that gas from the facility west.

We do see issues with our competitors, certainly we look at all of our competitors they experienced some of the same things Sequent experienced and I do believe outside of the 2011 results, our earnings have been the most stable of our peers that publically announced, but and then you look at everybody having issues in 2011 which were equally impacted.

One thing about VAR, we are not increasing our risks levels at all we have very solid systems that we’ve had for years since inception and are maintaining a relatively low VAR under $2 million.

As we look at the business mix, we have a diverse geography and a diverse set of products and services. I will do the products and services first. If you see we’ve got a mix of affiliate asset management in the green pieces of the pie, where we’ve been having these transactions for over 10 years and they provide about 15% to 25% of our gross margin each year.

And if you look at the other pieces of the pie, power generation, serving PowerGen with hourly load balance and types of services that’s about 15% to 25%. And you go across the pie where each of these buckets of activity at Sequent are in that same ballpark of contribution in a different years, different parts of that pie performed better or worse. In 2011 unfortunately it was almost a perfect storm of low volatility, so our proprietary positions didn’t perform as well.

And we had a very little warm weather in the summer and our east coast markets, all the heats was in Texas and Oklahoma where we have primary gas by PowerGen load in the east. So that business underwent some challenges as well. So those are some of the reasons for the performance of last year. As we look into the diversity, our geography Sequent has done a very nice job to expand our footprint into the west and then with the addition of Nicor Interchange more into the Midwest we’ve added a new storage position out in (inaudible), out in Wyoming.

We’ve added, as I mentioned the stage (Inaudible) position. We’ve grown significantly our transport position in the Bakken Shale on northern border. That is an area where there will be continual drilling, it’s a world based play that has significant amount of associated gas and Sequent has a very nice position on the pipeline out west to be able to transport that gas to market. Right now, not that volumes, we’re managing the volumes at all but gas daily, gas daily has (Inaudible) number 11, in terms of sales volumes in the market.

As we look at our affiliated business, this really is the cornerstone of Sequent. And it’s not that we are very proud of, it’s a three way win. It’s a win for our shareholders to get to retain that percentage of the profit, certainly a win for our utilities that gets reduce the bills to customers and its moving to the regulators who have been very proud and that we can provide reports that show every single transaction and all the share of the dollars and that’s allowed us to expand these transactions every time we build that with a very transparent type of transaction. And I mentioned that we had the longest extension that we entered into last year both in Virginia and now we are completing the Atlanta extension for four and five years.

And typically those transactions are extended for two and three year terms. I think they go to show again the conditions appreciating the work we do and the utilities enjoying the funds that get through that (inaudible) I would briefly mention as Hank mentioned Universal Services Fund funding some of the CNG activities in Georgia meeting those dollars were contributors from the activities of the asset management.

So, you can see that the activity between our unregulated wholesale business back to our utilities and we do hope Illinois will provide us better opportunity to bring that same value to customers and some point in time.

Here is a slide we showed last year just updated it based on where our key focus has been on some of the fee-based activity, when I say fee-based really is less dependent on volatility and you're earning fees through the throughput and our gas-fired power generation business is growing significantly about 30% as you see in the coal to gas switching somewhere between 6 Bcf and 8 Bcf a day and the market has switched. Sequent has been a very nice share of that market.

We have a full complement of people continuing to grow that activity for us. On producer services, we have grown significantly there as well mainly tied to where we have firm transportation on a primary basis and can offer a service to that produce to bring that gas to market on their behalf or to manage the asset the transport that they picked up.

In our commercial, industrial activity (inaudible) do continue to grow as well.

Little bit of a history here it’s not on this slide but our peak EBIT at Sequent was back in 2006 was about $90 million that’s when everything was going well as a perfect storm. There were Hurricanes, there was extreme volatility, there were higher prices and we had assets in the right locations take advantage of that. And obviously in 2011, we saw the low volatility impacts. We are showing some significant movement upward in 2012 in our estimations for 2012 budget that’s really going to come from not having the cost and stabilizing the Marcellus that we had last year. We are seeing some benefits in storage. I’ll show you how storage values have improved year-over-year and we are seeing the significant growth in our gas-fired power generation. And then we have about 10% to 15% of that total 2012 estimate is going to come from the Nicor Interchange activity.

Our credits metrics continue to be very strong. Our weighted average customer credit is at an A minus. Our credit exposures by the industry show that we are focused on natural gas utilities, power generators, electric utilities as well and in some of the pipelines that we do a lot of transactions here. So we have a very strong credit profile and diverse group of customers that have strong credit quality. And then oversight of this business goes through multiple committees. We have a secret credit committee that reviews all our policies and procedures frequently and monthly and then we have a corporate risk management committee that also provides the oversight for this activity as well.

Let’s talk a little bit about storage value. This is where we are seeing some improvement in the market and this is basically over the last two years. We are showing a graph of what our spread of two sample months have done basically, the January of one year to February of the next year, so basically we [carried gas for a] year. And we are showing on this slide that that spread was about [$0.40] out of two years ago and we’ve seen through the oversupply and then on weather (Inaudible) storage capacity and we see that’s spread on the green line grow to about a dollar. So that’s very good for Sequent activity so we have generate more value through storing gas and hedging it.

I’ll give you a quick real-time example, this week you could purchase gas at the Henry Hub and hedge it out to next winter at about $1.50 of value, so significantly higher than we even knew. So you’re seeing the market being tremendously stressed, lot of strain going on with excess supply and those with storage capacity that can bring it to market store and hedge it to next winter for being in an nice positions. So we’re seeing some benefits there.

Now the counter to that and some of the challenges we’re facing are continually in the transport side of our business and the oversupply of gas continuing it to drive transportation spread to challenging levels. I’ll mention these briefly. The first one is from Texas to Louisiana, from Houston Ship Channel to the Henry Hub. We’ve seen that flatten out significantly over the last couple of years due to the Eagle Ford Shale development though in Texas, we’re starting to see some movement of that spread widening and that would be beneficial for our portfolio.

The area undergoing the most challenge though was in the Northeast, it’s a combination of the Marcellus driving new production that is hitting the northeast city gates combined with new projects from the northeast pipelines brining that gas to market. And very warm weather this winter which is really driving down the spread from the Gulf Coast to the Northeast and that’s probably the most challenging to our portfolio.

And as we go forward and look at some of the others, I’m going to go ahead and just mention briefly the Western Canada [eco] to the Midwest on Northern Natural. This is where our ability to transport Bakken, gas has been favorable and we see a trend up in terms of that spread becoming a little bit more robust for us due to the additional drilling going on for oil.

And I’ll give you a brief look with the forward markets are doing; if you look at the Northeast Citygates that the Transco Zone 6, New York Citygate and the Texas Eastern Market Zone 3 Citygate, you’re seeing the next three years being driven down in price, in basis due to the oversupply and due to the warm weather, so both of those are contributing to that.

And we hedge our portfolio very well. We’ve taken a lot of hedge gains in hedging our transportation. But at some point those will allow and that will be a bit more of a challenge. Now a little bit of an offset to that is that the cost of purchasing gas into the transport is also going down as represented by the menu, and you could look at Columbia Gas Transmission as well, but those bases are going now in price. But still we’re at absolute spread. It’s getting a little bit challenged even though if (inaudible) some benefit on the supply side.

Okay, here is the difficult slide weather that we just need to show, it’s shown year-on-year, December of ‘11 through ’10 as well as January of ‘12 to January of ’11, just significantly warmer eight to 10 degrees we warmer than the prior year and that is really impacted the day-to-day optimizations values not only for us, but for others in our industry.

And this is the slide that I think we’ll give you some perspective as to how we’re managing through this environment. Obviously, we plan our portfolio for typically one to three year term loan assets. And as those assets will (inaudible) we contract them at the new market rates.

Well, the assets on a portfolio now are higher costs. They were secured and entered into one to three years ago. While those are dropping off fairly significantly will be reentering and have been reentering into these extending transport and storage contracts and doing that at late significantly less than our current portfolio. And we estimate that of that drop-off in costs about 10% to 15% of that cost reduction will drop to the bottom line in terms of EBIT growth.

So as an example, kind of towards the end of this slide, we have $76 million of cost dropping out from ‘12 to ‘13 and about 10% to 15% of that should be attributed to our 2013 EBIT.

We do see, as far as our outlook at Sequent, very strong growth in gas-fired power generation. We have the assets, the storage, the pipeline transportation, we have the people. We have about 25 schedulers scheduling round the clock natural gas to gas-fired power generators. So we are a core provider to the gas-fired power generation market. That will continue to grow.

And we will also continue to be looking for opportunities where there are constraints in the market due to growing shale gas and security pipeline transportation to serve that market. Our priorities for the year certainly are to grow our earnings to try to get back towards our historic level. We won’t be quite there yet based on our estimation. We hope to be a $15 million to $30 million contributor this coming year. We will continue to renew our customer AMA’s.

We have just significant historical rollover rates, almost 100% rollover rates with most of our customers. And we entered into some new, very significant asset management deals with utilities who are in multiple jurisdictions last year that really enjoy the profit sharing and the transparency that we bring the market. So we continue to grow that side of our business as well.

Okay, so that will wrap up the Sequent Company’s interchange of it. Now I would like to move to the storage and fuel side of the business. And before I do, I would like to introduce Steve Cittadine to you. Steve is here at the front table. I have known Steve a long time. He has been with Nicor since 2000.

He was hired to lead the Nicor interchange activity, both on the wholesale market and utility as well as the storage development efforts there, and we are proud to have him as the leader of our Midstream businesses here. He is based up in Naperville, Illinois.

Okay, so an overview of our storage activity is basically, we have combined Nicor’s storage development business and AGL Resources’ Pivotal storage development business. And what we have is a nice combination of geology and geography, where Nicor was focused on reservoir storages and AGL Pivotal has been focused on multi-cycle Gulf Coast storages. So we’ve combined those businesses under Steve’s leadership.

And at the end of development of some of the expansions we have at Golden Triangle, where we are putting in the second cavern, and at Central Valley we’re getting that facility to startup here by mid-year, we’ll have in combination about 24 Bcf of working gas that we can bring to the market between these new facilities.

I’ll give a quick highlight of the earnings. As you can see here over the last several years, as well as the subscription rates, Jefferson Island is well positioned, because it’s at the Henry Hub, so there is tremendous liquidity, a lot of market interest for storage at Jefferson Island, but certainly has been challenged with market rates. But it stays highly subscribed, 93% subscription rate, we’ve just closed the renewal of 3 Bcf that we’re rolling off, and I’ll show you those market rates shortly.

At Golden Triangle, we received FERC approval for Caverns three and four. We will be just monitoring the market. We’re not going to be in a rush to go and expand there, we do need the market to support that. So it will be a little time before that would take place.

In Cavern 2, we have completed the leaching. We’re doing wellhead work and we should be bringing that online I feel shortly, midyear. And then Central Valley is getting close to be complete out in the Sacramento area of California with 11 Bcf of working gas. We're working on getting that facility up [in ton] and we have 3 Bcf of the 11 subscribed. In the other eight, we'll be doing a combination of short-term and multiyear contracts here a little bit later in 2012.

And you may have seen an announcement recently, we received FERC approval for a new facility in North Louisiana called Sawgrass that we have with a partner. Again, market conditions will dictate whether we go forward with that project or not. I wanted to mention that as a very new piece of news that came out.

Here are the subscription rates for all of our customers at all facilities, and you’ll be able to see that the market environment here in 2012 through that yellow line in renewals is certainly challenged compared to where they’ve been, about $0.083 average rate compared to that in the 20s in prior years.

So that’s something we’re managing through. We’re entering into shorter term agreements to get through that cycle and leaving some opportunity for us to optimize around an activity.

Golden Triangle, the first cavern is fully subscribed. As you can see, in Central Valley three out of the 10.5 to 11 are subscribed. Now, I am not going to spend time through the individual assets here. We can certainly answer any questions, but just in the interest of time I will move past these, but can go through that in any detail with you a little bit later.

And I will just go through the market fundamentals. And you've heard that a lot through all the presentations, but I do think we’ll see over time whether exports will provide some uplift to pricing and there’s some volatility over the next several years.

We know gas-fired power generation is growing, but I do think it’s going to take a little time to work off the overhang of supply in this market. But those are some of the main things that could certainly be the drivers for that.

So let’s move to a very interesting new activity that the company has been working on over the last year or so. Let’s talk a little bit about LNG. Now this is not maritime-based LNG, this is LNG that is done through pipeline liquefaction, and AGL Resources has a very good history here. We've developed for our utilities about 7.3 Bcf of energy capacity behind a gas utility. And this LNG needed primarily to serve utilities on peak day. There is excess capability for this LNG to go into market, and we're obviously looking at doing that and providing value to the utilities as well as bringing that LNG to market.

What we’ve also done is, we acquired a facility in Trussville, Alabama last year and we’re now putting in some capital to get the facility in shape to go around the clock type operation to generate LNG offer pipeline quality natural gas. And the cost that we entered into that transaction, plus the capital we're going to put into that facility is significantly less than what a Greenfield project would cost. It would be into that ballpark, $10 million $11 million between the acquisition and the capital we’re putting into it.

So here is the overall market dynamic that’s going on. You have crude oil, and all associated liquid products at extremely high prices, $17, $18 an MMBtu. You have natural gas, and it’s methane for $2 to $3 an MMBtu. There’s a tremendous amount of headroom to put in LNG infrastructure to enter into the transportation fuel market that's burning liquid fuels to green driers to drilling rigs that are burning diesel that can convert to an LNG base. And you saw the announcement last year that we’re serving some of Encana’s rigs in the Haynesville with the LNG as they’ve converted from burning diesel to burning a lower cost LNG.

And so you go this market environment of less emissions, certainly less CO2 emissions from a gas-based product versus a liquid. You can reduce the United States’ dependence on foreign oil by bringing more gas into the transportation market, and you’ve less emissions. Now you’ve got some challenges as well. There is not great LNG infrastructure for refueling. And we also have capital costs that the customers have to go through to convert vehicles or to convert their process to burn LNG versus fuel oil.

But we are actively engaged in this market, we have a small team set up based out of Houston and Atlanta, talking to many of the markets burning fuel, and we’re engaged in this market to see if we can not only build additional LNG facilities, but really try to position ourselves to be a leader into the wholesale side of LNG.

So that is some of the things that we are using the utility experience on engineering and design, our commercial experience sequence where we can bring the pipeline quality gas up to the facilities. And then just the outright market dynamics that provide a very nice opportunity for us. So we’ll be able to give you, I think a deeper dive on this, we meet again next year. I did want to provide an overview on this.

And here’s just the price environment that is leading to this, that’s extremely robust. If you look at what EIA put out, not that long ago, and they showed a forecast for oil and for natural gas. And when you see the spread there in blue, well, since that time, the market has done nothing, but get better for this type of market. In a low price, low volatility market, that spread with oil, this activity has some running room. Now that is where we’ve challenges in our other businesses, where there are low prices and low volatility as we spoke about.

So this could be a very good complement to what we’re doing, long term and the market environment on pricing certainly seems to support it. So, I’ll stop there, and see if there are any – Oh, you know what, I won’t, I’ve to finish with a band here.

So let’s just go to what the delivery would be. The LNG business, we really expect to be somewhat of a break-even business this year, when we get it ramped up – start getting some market share. The storage business as you’ve seen has been challenged due to the subscription rates being much lower, and some depreciation of some of the new facilities that we brought online.

But we’re going to continue with the process to evaluate the market conditions, for cavern 3 and 4 at Jefferson Island as well as evaluating, expanding our existing caverns, the Golden Triangle. We’re going to work towards putting that second cavern into service and getting contracts there, and Central Valley as well to get that position to come into service here in the mid part of the year. And then in the LNG side, become a meaningful, a wholesale option for the market to replace liquid fuels with a lower cost LNG option.

So now I’ll stop and see if there are any questions. Yes?

Question-and-Answer Session

Unidentified Analyst

A couple of questions first from 572, and you’re talking about the recent expansion of the seasonal spreads, should we (inaudible) from that, that verus the guidance for 2012, that things got a little better going into ‘13?

Peter Tumminello

Yeah, my boss asks me that question everyday. So I’m going to give you the same answer that I gave him. Certainly like the direction that storage is providing, the transport though isn’t in overhang still, and that is a challenge, whether in Q1, a significant challenge. We weren’t able to generate the cash values that we normally would, because it was so warm in January and February.

So storage is definitely a plus, I guess our power generation activity is definitely a plus to move our cost overhang coming off is a positive, but then the oversupply issue impacting transportation values and one the warmer weather.

So a little too early to tell, but hopefully that gives you a little bit of a [focus] balancing on the challenges and opportunities there.

Unidentified Analyst

And on slide 77, where you talked about 10% to 15% of lower recontracting rates versus marked up as those roll over falling to EBITDA. I’m a little confused by that. All things remaining equal if you lease up the same amount of infrastructure at a lower rate doesn’t that all fall to the bottom line and over a three year period can you quantify in millions of dollars versus current market what the spread might be currently?

Peter Tumminello

Well, it’s a difficult calculation. As you can imagine, what we did was, we looked at the contracts that are rolling-off on 12 to 13, and basically we said okay, we’re going to recontract at a lower rate and we’ll be able to take that in delta of the lower rate has benefit, but they were also some contracts that are in the money that are rolling off that we’re going to have to renew at higher rates. So we net all that out and we do the math, I think with the $77 million cost reduction we’re estimating somewhere $8 to $12 million EBIT benefit from 2012 to 2013 from the net aggregate of that activity.

Unidentified Analyst

So even though time starts rolling off over three years, you say that’s from 12 to 13 is it reasonable to think that we have incremental improvement following year to after that?

Peter Tumminello

When we look at from 13 to 14, we have about a $40 million to $50 million roll-off and have that same estimate of 10% to 15%, so anywhere between and now they’re $6 million to $10 million of incremental from 13 to 14.

Unidentified Analyst

And can you quantify the reasonable size, I mean what you think in terms of Bcf of consumptions on your activities with the LNG and the marketplace? And how faraway are you from early turbocharging and that’s where you guys have been coordinating with manufacturers, so that things don’t have to be converted over. But we actually have rigs running from day one and the lower costs fuel and so we have other large vehicles running in lower costs fuel and we can actually drill it over the next two, three years.

Peter Tumminello

That’s a great question, and it’s one that we deal with every day. We are opportunity long in this area. There are some tremendous amount of incoming calls as well as outgoing calls to customers who are very interested in this as you can imagine. And our key is privatizing these. We’d like to certainly get our trust bill facility fully engaged into the market and then we’d like to very quickly have the capability to get another facility that we can build into the market.

And so we’re evaluating where that location ought to be? What customers could anchor those facilities? So we’re just right in the middle of that activity. But what I’d like to say, the best success we could have this year is to get the trust bill volumes fully in the market and have a strong line of sight to at least one, if not more, if not multiple new facilities. But I think one would be the most reasonable case and remaining LNG facility through the activities we have in the market right now.

Unidentified Company Representative

And probably some of what you’ve mentioned has already started to happen. If we talk to through the build or straight line that are came more – all of them are now looking at starting a role, and they do to some extent, but depending on with the larger engine now, higher horsepower engine. So more of the tractor are going to start rolling off the line with an engine built by (inaudible) west port or take one of the manufacturers as well that have to lift the many out right now, that will start roll-off with LNG tanks installed to start out with, so that’s starting with major progresses and that has made rapidly over the last year. We’re seeing the dedication of coming to Westport and all those platform and OEMs on that. Also there are more vehicles available, the most people know, most and all of these trucks can be purchased in an LNG version right-off the line now too. And so that’s kind of comes back to one, obviously one single point that works with [hubs] standpoint.

We are long way though from having the commitment we need to really – really start seeing multiple Bcf a day load. It’s going to take us a number of years to ramp-up to that point. But the good news is we’d seen the commitment pretty much on our plants, the OEM’s from a wholesale standpoint we’re committed and a number of other companies are.

From a retail standpoint, we’ve seen clean energy and other company started that, make announcement, Chesapeake and what they’re willing to do. So we do think the fundamentals are strong and that things are moving in that direction. But it just is not going to be a major driver, we believe of our business for several years because of the time that takes to develop business, Steve talk about it.

Steve Lindsey

And I’ve just heard John’s comment. Our approach is going to be not to commercially price list LNG just right underneath where the oil is we want to really try to accelerate this market. We want to price the LNG based on what our costs are, this was a reasonable margin above that to really try to get the interest and get this accelerated into the market. So that’s been our approach in terms of how we commercially go to the market. Any other questions? Yes.

Unidentified Analyst

On your asset management business that you do with the utility companies, are there any guaranteed on profits that you kind of to take pay for those obligations you have or today although equal partners to be ensuring both the profits and the losses….

Unidentified Company Representative

They mostly have some small levels of guarantee. And that’s very good for the regulators and for the utility in order they are going to get something. It’s seriously at a level that we are comfortable. We can cover and then have a reasonable margin for Sequent, but yes, there is some level of guarantee that’s included in the sharing.

Unidentified Company Representative

Okay, if no other questions, thank you (inaudible).

Unidentified Analyst

Sir, how much of the time you (inaudible)….

Peter Tumminello

Okay, I want to give the appropriate amount of time and I just want to make sure that we have enough time for questions in aggregate at the end, so what I make you is just for give you, the overall view of that year. Mike Pellicci is here. He is 12 year better one of the industry and six year [better one of] Tropical Shipping. I just didn’t feel like, it was fair to him after being in as part of the business complement for a few months have to get up and describe this business to someone going to do my best, do that for you.

Cargo shipping is now segment of our company and encompasses three principal businesses the largest, which certainly is Tropical Shipping. We have also include in the segments Seven Seas Insurance, which is a highly related and complementary insurance based business related to continue our shipping. And then the company does have an investment and try to continue, which is generally a passive, it does produce between $18 million $50 million [source of] income for the company 15 (inaudible) close to 8, this year compared to last year.

But let me describe really the Corpus, which is Tropical Shipping. It is a containerized shipping company that was started in 1963. It’s my estimates of this business as it top-rated for nearly 50 years. We’ll probably be operating in another 50 years. It serves a very vital component of the Caribbean and has tremendous market share, and the service that provides us is very basic needs as opposed to being highly specialized or that is a component.

It serves virtually all the ports in Bahamas and the Caribbean about 25 ports with the vast majority of its traffic being southbound. So we’re looking really at goods leaving the Port of Palm Beach, entering these markets. There is a bit of transport between Canada in these markets. There is about 15% of its activity is intra-island, but a very little is coming intra, and very little of it is coming back into the United States. We’re seeing from concentrates and (inaudible) very modest production that returns to United States. We’re just – there is a lot of textiles being manufactured down there. We’re just not seeing – that business hasn’t been in the Caribbean for quite some time.

Currently, the fleet is 12 owned in two chartered vessels, that’s important because it’s come down from a peak approach to 20 of 18 in total. And really that’s a function trying to make sure that utilization of the ships that are owned and operated is this highest possible. Utilization and market share are the two things that we are keenly focused on in this business.

Quite a few containers involved here and very – a great number of them are refrigerated or as they say in that business [refer] that are bringing down a very specialized cargos really refrigerated goods and grocery products. There is a very big difference between grocery products that have need very timely delivery frozen products that can allow a little bit of delivery lag and then more durables like lumber that really doesn’t require quite as timely a service, and this business tends to focus on the things that have more, that have much more refined timing requirements and has built a customer base around it. We’ll talk about Seven Seas in a second, but it’s essentially that business ensures good majority of the cargos that are transported by customers at Tropical Shipping.

This graph although very short-term in nature, is probably the one of the single most important things that we were focused on, 20-foot equivalent units is the measure, its TEUs a standard container that you might see on the back of the tractor trailer rig might be a smallest 20-feet generally the standard container that you see drag across the road is 40, we convert things into TEUs for simplicity. They are actually are some outsize lots and 43s and 48s, that get converted in this way.

But what I’m trying to describe to you here is that the economy has compressed, we’ve seen a general compression in the number of total number of TEUs that are shipped. But what the company is focused on and what we have seen is actually improvement in market share. These economies will suffer a bit of a hangover from the U.S. economy issues, and will take a longer to recover than U.S. economy. We certainly would not have anticipated the length in the United States nor the length of depression in these markets as well.

For 2011, the control really was lower volumes there is an overall market contraction really in construction, principally but also in visitation to these Islands, this business will strengthen as people spend seven to ten days of vacation in this area. It’s not just fulfillments of crew ships. It really is vacation in residential space that makes a big difference.

We are seeing a little bit of pressure related to higher vessel fuel cost. The growth or the increase in crude oil and bunker fuels has an impact to you. Generally the Tropical is able as its competitors are to incorporated a fuel surcharge that allows rates to fluctuate with intra year changes in gas price. Oil price and then ultimately those arose into general rate increases, so that we’re just capturing the delta but there has been a compression overall in the rate split, that particularly a standardized container can garner.

2011 was a little bit clouded by a couple of things. There were some higher severance cost related to some reorganization that Mike has done in his own business to respond appropriately to market conditions. But I think the most important feature from my perspective is that Mike, just in 2011 established his role as the head of this business unit, and is now establishing.

We’ve given him more flexibility post acquisition to really form that business in a way he best sees that. What that means is we’re focused on marketing to our customers and focusing on having efficient operations in the Port of Palm Beach.

There are thousand people deployed in this exercise and so there are number of barriers to entry, the fact that ship lease rates have declined or that there might be over capacity in this area is only offset by the fact that you have to have very high customer touch to maintain you business and there literally are thousand people deployed in making tropical work.

And then I’ll show you how we think about the segments in the tropics in just a second but this is just a broader overview of the markets that they serve. I think some of the exclusions or the most notable, they tend not to serve islands that can be accommodated by larger ships were competition from nationals is the greatest.

Intend to serve with a smaller fleet of ships and smaller ships, places where draft is an issue and very few containers are moving into that market everyday and so I would not that I would view to as a niche business, but it does from a very specialized market that can’t be served by the likes of a (inaudible) the company is tended to stay away from islands where that competition is more likely.

Also don’t serve the principal U.S. forts because this is not a Jones Act Carrier, it’s fleet can’t be converted to Merchant Marines. So there is some limitations as to the U.S. ports that are conserved like a Puerto Rico and then tends to stay away like in Hispaniola up from the less profitable trade.

I’ve described the CU but just understand that almost all of the shipments are soft bound and intra island if you look at revenue by island destination these are the six principle markets the way that they are aggregated for our purposes Western Caribbean Windward Islands, Virgin Islands Leeward, Hispaniola and Bahamas, the mix of containers being shipped to those areas does vary significantly and if you see 70% greater than 70% of that business is in full container load.

Let me just quickly breakdown full container load for you because it’s not it’s homogenous as you might think, 60% of that is dry container that would be a full container load. That business is the one business that’s under the most significant amount of pressure, because it is the most highly commoditized. And so Mike as had good focus on refrigerated containers the nature tropical business is on time and reliable delivery something that’s very hard to combine in these markets these ever listed with them. And grocery have to make down there and refrigerated groceries the one of the simple places, but we’ve seen the least amount of impression in margin and enjoy the better profits. Flat track another really is down the bit pipe construction materials that are going forward.

We’ve consolidates a little bit of data here and last the little bit of the message, but if you look at this by principle competitor of the story that it held there is not a single competitor in this market that serves the breadth of ports the tropical serves. The top line represents department of commerce actually journal of commerce data that you can take a look at now we track very closely. But our goals are to move market share from the high 30s that we’re mid 30s into the high 30s and low 40s in most of the markets that we served. This is an incredibly dominate position if you look at those breakdown of who serves these markets other than tropical. It also sort of tells us a little bit about we’re not likely to see a consolidation of these markets, because you would end up the market share that’s probably a little [extraverted] in the couple of the markets that are served (inaudible) important.

The focusing on market share and focusing on utilization of these ships really is what’s going to drive profitability here. And we would like to utilization of the individual ships greater than say 75% are moving into the low-to-mid 80s.

Seven Seas Insurance is a complementary business, there is a great demand for about 40% of Tropical's shipments to be covered by insurance, and so Seven Seas provides it. About 70% of the revenues that Seven Seas derives are from Tropical Shipping's shipments, although it is involved in shipping, the insurance of cargoes for other carriers and for other land based carrying of containerized shipping.

The amounts for the loss ratios here, they are typically pretty mild, and individual cargo shipment insured by itself doesn’t carry a lot of liability because the dollar value of what's being shipped is not that high. This is really a mass and volume issue as opposed to an individual exposure issue.

So there are some risks and opportunities that we are focused on, certainly continued steel cost escalation. We’ve got to monitor our ability to pass those costs through to customers. But there are standard procedures, and if you look at the general commerce data, it does describe few surcharges and we’ve got a good history of being able to pass those through.

We do would anticipate that global carriers might start to enter these markets as they diversify horizontally. But many of the markets that are served by ships that are significantly smaller in size. I mentioned most because that is the one that comes to mind for most folks. But even with the migration of larger ships coming through the Panama Canal, a lot of those larger ships need to be trans-docked, that is, shipments need to be broken into smaller parcels, then it requires smaller vessels to take them into the individual markets that we are serving.

Not all of these things are the mega carriers that we display in pictures, made them a more very shallow draft have roll-on, roll-off capabilities. And literally dock the ship to the beach. Some of them have capabilities to their own stevedoring in the smaller markets, which means they have to be able to move the shipments of the boat without being at a proper dock.

We’re going to focus in the near-term for this business in stabilizing its management that’s occurred in the November, December, January timeframe, putting proper incentives in place to focus on maintaining market share and profitability and bringing utilization of the ships up, Mike is a very disciplined operator, we have a very good relationship and he’ll bring, continue to bring focus on cost reduction and making sure, that his fixed costs are appropriate to the size of the business.

And then I think ultimately as it begins to grow again you’ll see a deployment of additional capacity as we see some competitors start to consolidate or perhaps lead the market. Do you remiss if I didn’t sort of address it directly, we’ve had a lot of in bound inquiry about our long-term interest in this business. I find a lot of that conversation to be highly destabilizing for the underlying business and so I try not to participate in very much of it. But it’s very difficult for me to make an argument, because this is a core business for the utility.

I think that this is not a business that will be broken up for its assets; it maintains a dominant market position and provides a very important need. I think long-term they’re maybe a better owner for us, but if you’re tropical customer, this is a business that’s going to have a great deal of longevity, because of the quality of service that it provides.

I think it would be destabilizing in the near-term for us to put a per se or sign on this business and we’re going to focus on bringing its market fundamentals back more inline with how it's operated in the past. It's generated roughly in the range of $20 million to $60 million of EBITDA as a Tropical Shipping business. And we find ourselves that, what we do as a trough of that business.

If we would have a different outlook on it, perhaps that's not the case and we see continued erosion, but I think that the people that might have some place in the quality of operators in this business are going to allow it to move back into a more normal part of the cycle. And it might comes to us, and there is a more appropriate equity for this business, we would entertain it, but it certainly not something that we want to hang a shingle on it, certainly it felt to bit more stabilized business. And we will certainly look to deliver fuels as part of this business, and we are seeing LNG and some CNG to some degree shipping, I saw approved containers that can move down to these Islands, and as we see oil refineries closed and pressure on oil certainly is a fuel down there have been real focus in this area.

The good part about Mike’s business is that it, our business is that it is, although it is capital-intensive with $330 million of somewhat assets including the way we value the brand name. It is capital-intensive, there are high barriers to entry, but it doesn’t require a capital and we’re paying some great deal of cash somewhere south of a $100 million, but north of $50 million in deferred taxes, because it's a foreign entity.

We will make it, we've made adjustments in the way, we treat it for tax purposes and we'll begin to repatriate cash from this business half of what’s made with the assumption that the path that it left behind will be used for permanent reinvestment in that business. We hope, just hope to be a very good steward of it, we've had, we've owned things for a number of years, that have been non-core to our business like the fiber optic network business, and I just hope you’ll give us some latitude to be responsible around the way we operate this business as well.

Any question as it relates to Tropical, that’s probably the biggest one that most people ask, but we wanted to give you enough metrics to be able to track it and model it. It probably represents less than 3% to 4% of our total EBIT in the business, in our corporate.

Question-and-Answer Session

Unidentified Analyst

You mentioned among the headwinds the fuel costs, while you’re talking about transporting LNG for use on the islands, how about running on the LNG themselves and lowering the costs?

Peter Tumminello

Mike, it’s probably better to address this. The issue that I would see forward is that ships are very tight consolidated unit power plants that aren’t removed and replaced willy-nilly, it’s a pretty extensive capital cost. I think as the fleet refreshes itself, which happens quite slowly in these things, these are assets that can operate for 30 or 40 years absolutely people will migrate. We’ve seen a lot of public report of the larger international shippers that are talking about moving towards using LNG as opposed to oil. There are also environmental restrictions which make it – make as far as toward more refined products that have lower emissions, that are at higher cost that make that comparison even better and if environment is one of the constraints then LNG certainly has some advantage.

This is not a global trade business, it’s a niche, is even though wrong word, because it serves so many markets, but it is a very isolated, relatively isolated community, and you can’t just track global shipments in either the Atlantic and Pacific and get a good read on this. You have to understand the capacities of the individual vessels, the utilization of the individual containers and container types. And in particular, we have to really understand the markets that it serves and certainly we all understand that the Caribbean’s had a difficult four or five years. If we had a bad, theirs has been a little worse.

So I’m going to just turn it over to John for a little bit of summary and then open it up for your questions in aggregate.

John W. Somerhalder II

And I’ll make this pretty fast. What we’ve attempted to do is provide quite a bit of transparency into all of our businesses. And the goal was to help you see the stability of our businesses, and we feel very good about everything from pipeline, safety, integrity, to regulatory outcomes, to the strength of our distribution operations business, to our market share in our retail businesses, to how we've managed the cost structure around our energy marketing and trading and how we’re dealing with our storage in a disciplined way.

So we’ve attempted to do the right things in those areas. But we also do know, and I hope it came through, that the fundamentals are challenged in some of these businesses. And even though we see some signs of improvements, like we've mentioned, the storage spreads and improvement, we need to be prepared to run our business even if it takes a long time for movements, though not for a considerable time. And that’s what we’re attempting to do by making sure we have the right cost structure, the right set of contracts, the right assets.

Ultimate goal obviously is to make those right decisions so that we can continue to do what we’ve done and that’s to deliver solid, strong shareholder value for all of this.

We have a number of people here that can answer questions in more detail. Please feel free to approach Mike’s team and anyone here over lunch and as you need to obviously feel free to get a hold of Sarah as we move forward if you have additional questions coming out of this. But before I close it we did want to take this opportunity to make sure if there are any additional questions that you have before we go to lunch that we take this opportunity to answer them. So I’ll open it up one more time for any last questions that you all might have. Yeah, David?

Question-and-Answer Session

Unidentified Analyst

May be a question for you and also for Drew. First, how much tangible capital is employed between the shipping business and the gas storage business?

Unidentified Company Representative

So do you want me to guess first and then you want to correct me.

Unidentified Company Representative

Yes. So storage at completion I think it will be about $550 million worth of deployed capital representing about 30 Bcf of storage capacity. And in Tropical the book value if I remember our balance sheet correctly is about $400 million, $70 million of that is related to the Triton investments and so probably $330 million including goodwill for Tropical.

Unidentified Analyst

How much of goodwill?

Peter Tumminello

Ahead of intangibles about a third of that maybe is goodwill but some of goodwill is less (inaudible) to answer your question directly it’s probably close to $900 million.

Unidentified Analyst

And then help me in the context of the corporate objective of maximizing returns on capital employed, help me understand how you’re going to translate that capital inflows into shareholder value?

Peter Tumminello

Well, I think our storage in particular since that one’s – gives a certain probably the most difficultly in the near-term. We certainly had an expectation. It’s evidenced in the GAAP that we have got relative to the 315. It's taken us off of the trajectory that we have, and we have now sit down and estimate whether that market will return in ’13, ’15 or ’17, and we really do have to make very different decisions around that business based on that timeline. And we would be remiss if we thought it was ’17 to retain those assets in our complement, because they won’t produce benefit to shareholders in a term that’s maybe satisfactory or is consistent with most people's investment horizons.

And I have talked about this lot. I think we have a lot of alternatives around it. Our goal is to make sure that we understand what our trajectory for those businesses are what our alternatives for deployment would be and who other alternative owners of those assets might be. I don’t think that doing a flat out auction of the storage properties in particular and then some comments really that I described here on Mike's business, but we'd be remiss if we didn’t better understand who the right, more appropriate owners might be.

To be specific, a master limited partnership is very unlikely to move into an MLP, just as an MLP would be unlikely to acquire, nor would it benefit the corporation by being a minority shareholder in something where everybody [sees for] and certainly the outcomes.

Our issue is probably a horizon issue, and private equity probably has a more appropriate time horizon for the return of profitability of those assets. And so it’s beholden on us to understand the people that are in that business and who might be best interested in owning those assets. They are all pretty core to our strategy, and John should talk more to that thing, but since there is a perspective, I have got to evaluate those alternatives at all times, and we are evaluating those alternatives here at all times.

John W. Somerhalder II

That’s a very important question for us. And I think I will say essentially the same thing Drew said, I want to make sure I say it in my way as well. And that is I believe the storage, we’ve shown that we can effectively develop – operate and develop those facilities. We have very good facilities at this point, Jefferson Island, Golden Triangle, Central Valley that we are just coming up with operations at Central Valley, but things have gone well.

And also it’s a set of assets we understand because of our utility business and because of Sequent, it’s a business that we are well-positioned to operate. At the same time, we develop these facilities over the last several years at a time were fundamentals were loading rapidly. And we saw that also until we had line of site to a commercial operation not only the first Cavern at GTS, but the second that would have been in difficult time to look to see whether there was an appropriate third-party or another owner of those facilities. And so we saw the fundamentals going down and we were falling off the way from commercial operations that would have been difficult. What has changed today and as Drew talked about it, is we now have very good line of site, three very good facilities being up in operational with 7 Bcf, the capacity Jefferson Island, 13 roughly at GTS and 11 at Central Valley. So we are over 30 Bcf of capacity.

It’s a good time from that standpoint and we at least see some indication that the fundamentals are improving. So things have changed and as Drew said it is prudent for us to look at our analysis of this. If something we see value and continuing to operate we see improving fundamentals, we take it first, but it would be – I think it is encumbered on us to look and see if there is someone else who has greater strategic fit with their business has a longer term horizon, we’ll believe the fundamentals will come back very quickly than we do, and make that decision. And that’s something that we will do as we move forward, because at least those fundamentals have changed in the business just in the last year, closer to the commercial service and improving fundamental. I think I said the same thing you did.

Peter Tumminello

Well, I think we will have to be all in roll-out of that business selling a couple of assets doesn’t make a whole lot of sense to us. We had exposure to the storage business through a trading subsidiary and the retail subsidiary to some degree, and that stayed levers to those storage generally that way if that will betray that. I don’t want to put there is a, for sale side in front of those assets either, but we were anticipating $40 million worth of income in the relatively near term related to those and a pay down of debt and equity pro rata would generate perhaps $25 million to $30 million worth of similar benefit. So we have to make a projection of what those options are work, which is the expansion capability to these things and certainly that option is push quite a bit further out, its good to have the permit, but there is no way we deployed capital without [rent]. We just need to see have any more exposure there.

This is true of – we try to maintain a (inaudible) any subsidiary, you don’t have a good projection where we think the businesses are, but certainly not true in distribution, because we view that is core, but we do have some very small utilities that don’t benefit from the economies of scale where that might be a possibility as well. So I don’t want to isolated to Tropical Shipping were storage I think we always evaluate in the options around.

John W. Somerhalder II

Okay any further questions, if not thank you all very much for joining us today. And again please approach any others with additional questions. And Sarah, I will turn it back to you for final directions.

Sarah Stashak

And again, thanks so much for joining us and thank you to all these guys for taking time out of their schedules and their comments and talk to you about our businesses. The catering team has been very gracious, put out a nice lunch for us. If you cannot stay, there are some bag lunches, so feel free take those with you and otherwise we’ll be around and just to mingle and talk with you informally and feel free to follow up with me after today if you have any other questions. Thanks.

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