Integrys Energy Group Inc. Q3 2008 Earnings Call Transcript

| About: Integrys Energy (TEG)

Integrys Energy Group Inc. (NYSE:TEG)

Q3 2008 Earnings Call

November 6, 2008 9:00 am ET

Executives

Steve Eschbach - VP of IR

Larry Weyers - Chairman, President and CEO

Joe O'Leary - SVP and CFO

Larry Borgard - President and COO, Integrys Gas Group

Charlie Schrock - President and CEO, Wisconsin Public Service Corporation

Mark Radtke - President of Nonregulated Subsidiary, Integrys Energy Services

Analysts

David Grumhaus - Copia Capitals

Ed Hyne - Catapult Capital Management.

Peter Hark - Talon Capital.

Operator

Welcome to the third quarter 2008 earnings call for Integrys Energy Group Inc. (Operator Instructions). At the request of Integrys Energy Group today's call will be recorded for instant replay.

I'd now like to introduce today's host Mr. Steve Eschbach, Vice President of Investor Relations at Integrys Energy Group. Sir, you may now begin.

Steve Eschbach

Thank you. Good morning, everyone. Welcome to Integrys Energy Group's 2008 third quarter Earnings Call.

Delivering formal remarks with me today are Larry Weyers, our Chairman, President and Chief Executive Officer; Joe O'Leary, our Senior Vice President and Chief Financial Officer; Larry Borgard, President and Chief Operating Officer of Integrys Gas Group, Charlie Schrock, President and Chief Executive Officer of Wisconsin Public Service Corporation; and Mark Radtke, President of our Non-regulated Subsidiary, Integrys Energy Services.

The slides supporting today's presentation and an associated data package are located on our website at www.integrysgroup.com. Select Investors, select Presentations and then today's presentation.

Before we begin, I will advise everyone that this call is being recorded and will be available for replay through February 17, 2009.

I need to direct you to Slides two and three of our presentation, and to point out that this presentation contains forward-looking statements within the definition of the Securities and Exchange Commission's Safe Harbor rules, including projected results for 2008 for Integrys Energy Group and its subsidiaries. Forward-looking statements are beyond the ability of Integrys Energy Group to control, and in many cases Integrys Energy Group cannot predict what factors would cause actual results to differ materially from those indicated by forward-looking statements.

I also refer you to the forward-looking statement section of yesterday's news release and to our filed Securities and Exchange Commission disclosure documents for further information. Except as may be required by federal securities laws, Integrys Energy Group and its subsidiaries undertake no obligation to publicly update or revise any forward-looking statement contained in this presentation, whether the result of new information, future events, or otherwise.

Slide four indicates that today's presentation includes non-GAAP financial information related to “diluted earnings per share from continuing operations, adjusted,” “forward book value,” and “managerial gross margin.” We believe that diluted earnings per share from continuing operations, adjusted, forward book value, and managerial gross margin are useful measures for providing investors with additional insight into our operating performance and the effects of certain items that are not comparable from one period to the next. Please review the text of this slide regarding non-GAAP financial information.

I will now turn the call over to Larry Weyers. Larry?

Larry Weyers

Thanks, Steve. Good morning, everyone, and thanks for joining us on the call today. Please turn to Slide five. I want to start out with a slide that is similar to what we used during our second quarter 2008 conference call, describing our prospects for future growth. Integrys Energy Group continues to have growth opportunities.

Despite the turmoil that has occurred in the financial and credit markets over the past 90 days, our strategic focus has remained largely unchanged as evidenced by the fact that the main bullets have been carried over from our previous presentation without any change, except for narrowing our focus for our non regulated operations to optimizing our existing business activity, instead of expanding into new markets.

I won't go through these, as I did during our earnings conference call in August, but they are presented as a reminder for you Integrys has earnings growth opportunities. The third quarter update on Slide six discusses market conditions and how we are handling them. I want to cover this briefly before the others provide you with additional details.

First is the fact that energy prices declined precipitously during the third quarter of 2008 by about 40 percent, and this has had a significant adverse impact in terms of reported results in accordance with generally accepted accounting principles. There are two important points that I want to bring out at this time.

First, these are non-cash charges. Second, these are merely timing differences. Additionally, our financial position and solid investment grade credit ratings have enabled us to weather the storm thus far. We have used the commercial paper market and have drawn on our credit facilities to carry out our short-term borrowing needs. We expect to continue with our long-term financing plans to support our capital expenditure programs and reduce our short-term debt levels.

Finally, we have been able to grow our non regulated energy services business, with the third quarter of 2008 being our best ever in terms of economic value growth. Our near term focus for this business segment has been to be more selective in terms of business opportunities we are pursuing, and that has worked well for us during the third quarter.

Now, we will take a more in-depth look at how we are accomplishing our goals. Joe O'Leary will discuss our third quarter 2008 financial results, anticipated financings and construction expenditure opportunities, and revised guidance for 2008 earnings per share. Then Charlie Schrock, Larry Borgard, and Mark Radtke will follow with brief operational updates. I will then return to wrap up our formal remarks, and moderate a question and answer session.

Now, I will turn the call over to Joe O'Leary.

Joe O'Leary

Thank you, Larry. Turning to Slide seven, during the third quarter of 2008, in accordance with generally accepted accounting principles, which are commonly referred to as GAAP, we recognized a net loss of $59.1 million compared with income available for common shareholders of $43.2 million in the same quarter a year ago. This resulted in a net loss per share of $0.77 for the quarter ended September 30, 2008, compared with diluted earnings per share of $0.56 for the same quarter in 2007.

There are eight key items driving the $102.3 million quarter-over-quarter change from income available for common shareholders for the third quarter ended 2007 to the net loss for the same quarter in 2008. And we have presented them in after-tax dollars.

Keep in mind that the accounting results for the third quarter of 2008 include, net after-tax non-cash accounting losses of $79.6 million at Integrys Energy Services. The non-cash accounting losses were primarily related to the required accounting treatment of derivative electric supply contracts that were used to economically hedge non-derivative electric customer sales contracts.

When electric energy prices fell during the third quarter, Integrys Energy Services was required, under GAAP, to adjust the electric supply contracts to fair value, resulting in the recognition of non-cash accounting losses. However, the related customer sales contracts could not be adjusted to fair value.

Integrys Energy Services will recover net after-tax non-cash accounting losses when electricity is physically delivered to customers and the related derivative electric supply contracts are settled.

Although not apparent from the non-cash accounting losses, the 2008 third quarter was strong for all of our reportable business segments. You will find more details in our earnings news release issued last night.

Additional details related to the quarter-over-quarter changed drivers by segment can be found in the Appendix contained in the slide deck for today's presentation and in the Form 10-Q report we filed with the Securities and Exchange Commission last evening.

Moving on to Slide eight, I would like to update you on our current liquidity situation, as well as, cash needs and generation over the next couple of quarters. We currently have credit facilities totaling approximately $2.4 billion that are supported by 27 different financial institutions. We have JPMorgan Chase Bank, Mizuho Corporate Bank, Bank of America, Citibank, UBS, and U.S. Bank among the financial institutions participating in our credit facilities.

This represents an increase of $400 million from what we had available at September 30, 2008, as we have since expanded our credit facilities by entering into short-term debt and revolving credit agreements in November. We currently have approximately $1 billion of the credit facilities unused and available for us to support our short-term borrowing needs.

During the third quarter, the country's credit crunch challenged us in terms of our short-term borrowing. Commercial paper financing was possible for the most part, albeit for shorter maturities and at rates that were approximately 2 percentage points higher than in early September. On one occasion during the third quarter, commercial paper was not available for us, but we were able to draw down on our bank lines for the time period needed.

Since the end of the third quarter, we have made additional draws on bank lines due to market conditions. Our total short-term borrowing levels are similar; we have simply substituted bank borrowing for commercial paper. Our balance sheet and solid investment credit ratings continue to serve us well during these unprecedented market conditions.

There is also good news regarding our subsequent cash requirements through 2010 in terms of long-term debt maturities, with less than $300 million coming due through those years. And, as we are now heading into the winter heating season, our natural gas storage cycle at the regulated natural gas distribution utilities and Integrys Energy Services fulfillment of customer obligations is expected to generate approximately $1.1 billion of cash through April 2009, as we deliver the natural gas from storage to our customers and fulfill customer obligations.

Our capital expenditure plan, as I will outline a little later, can be pared back if needed, depending upon capital market conditions.

With respect to our non regulated energy marketing business segment, Integrys Energy Services, our strategy has been to adjust our pricing to reflect the increase in operating costs, business risks, and cash margin requirements. Mark Radtke will have more to say on this later.

Moving to Slide nine, I will give you an update on our long-term financing needs through the end of 2009. Earlier this week, we closed on long-term financing transactions, a $45 million, 7%, 5-year private placement of first mortgage bonds and a $5 million, 8%, 10-year private placement of first mortgage bonds for Peoples Gas, as well as, a $6.5 million, 7%, 5-year private placement of first mortgage bonds for North Shore Gas.

While these rates are higher than we have become accustomed to in recent years, we were pleased to be able to access the capital markets under current conditions. For the balance of 2008, we still expect to issue long-term debt of up to $300 million for the parent holding company, Integrys Energy Group, and $125 million for Wisconsin Public Service.

We are also still planning a $100 million offering in 2009 for Wisconsin Public Service. Our plans may change, however, depending upon market conditions. As far as common equity, earlier this year we indicated that we would not need additional equity through 2009. However, we may need to revise our plans as we re-evaluate market conditions.

Slide 10, shows our projected construction expenditures for 2008 through 2010. The $125 million increase in construction expenditures at the utilities, since our second quarter 2008 earnings conference call, is comprised of an $82 million increase primarily due to higher costs for cast iron main replacement at Peoples Gas, an $18 million increase in Federal Energy Regulatory Commission mandated hydro projects at Upper Peninsula Power, $14 million for Integrys Energy Services' solar projects, $10 million for the laterals to connect to the Guardian Pipeline, and $10 million for wind facilities at Wisconsin Public Service.

Some of the dollars have shifted slightly among the three years as well. Keep in mind that we are able to postpone some of our construction expenditures if the credit market and economic conditions warrant a change in plans.

The American Transmission Company published a new 10-year forecast in September, mentioning in a news release that $2.7 billion will need to be invested in the next 10 years to ensure that the power grid will continue to meet the needs of its customers in Wisconsin and Michigan's Upper Peninsula. This is evidence that there is continued earnings growth potential from our 34% equity investment in that company.

We expect to provide additional equity contributions to American Transmission Company of approximately $35 million in 2008, $24 million in 2009, and $12 million 2010.

Slide 11 shows our estimated utility depreciation through 2010. The data has been modified since last quarter's conference call in accordance with our revised capital expenditures.

Now we will move on to our 2008 financial guidance, which is covered in Slide 12. We expect our 2008 diluted earnings per share to be between $3.11 and $3.22 for Integrys Energy Group. This is a reduction from our previous guidance.

Also included in the news release and supplemental data package is the projected guidance range for 2008 diluted earnings per share from continuing operations, adjusted, which is anticipated to be between $3.33 and $3.44. This is a reduction from our previous guidance.

See our slides, news release, and supplemental data package for further details relating to this guidance.

Slide 13 summarizes the key drivers in the change in the 2008 earnings guidance as compared to what we provided as guidance last August. The key drivers behind the change in both the lower, and upper-end ranges of our 2008 guidance are related to; Increased interest expense, increased bad debt expenses, which includes $0.06 of additional bad debt expense due to the Lehman Brother's bankruptcy, reduced land sales, and a decrease in Integrys Energy Services' earnings, due to a potential solar project syndication that requires lower capital expenditures with the addition of a syndication partner.

I will now turn this call over to Charlie Schrock, President and Chief Executive Officer of Wisconsin Public Service, for an update on our Wisconsin and Upper Michigan utilities. Charlie?

Charlie Schrock

Thank you, Joe. I ask our listeners to refer to Slide 14. Key accomplishments recently achieved for Wisconsin Public Service included, Weston 4 being declared commercially operational on June 30. Recall that during our second quarter earnings conference call we mentioned that Weston 4 earned the 2008 Power Plant of the Year award from POWER Magazine.

Since then, Weston 4 has been nominated as a finalist for two more awards, the 2008 Best Coal-Fired Project award given by Power Engineering Magazine and the ENR Energy Construction Project of the Year award, which is given for a construction project that shows innovation in approach to engineering problems and all-around excellence in implementation and is part of Platts 2008 Global Energy Awards. The winner of these awards will be named in December.

The Wisconsin Public Service general rate case filed on April 1 with the Public Service Commission of Wisconsin has advanced to the briefing stage. Forward energy prices for 2009 have declined significantly. We anticipate that when we refresh our filing toward the end of November, our revised revenue requirement request will go down to reflect these lower forecasted costs. There should be no impact on margins relating to this.

Additionally, Wisconsin Public Service and the Citizens Utility Board filed an agreement with the Commission to implement a decoupling mechanism as a four-year pilot program, which, if approved as part of the general rate decision, is expected to stabilize revenues and earnings for Wisconsin Public Service. We are still expecting the Commission to finalize its decision by the end of 2008, with new electric and natural gas rates anticipated to be effective in January 2009. Additional information on the rate case can be found in the Appendix on Slide 30.

On July 4, we were granted approval to increase Wisconsin Public Service's 2008 retail electric rates through a surcharge of $18.3 million, or about 2%, due to increased fuel and purchased power costs. However, with the decline in energy prices since July and corresponding lower fuel and purchased power costs, the Public Service Commission of Wisconsin ordered that the fuel and purchased power surcharge be subject to refund effective September 30, 2008. We expect that any over or under recovery of fuel costs will not be significant for the year.

The economy and weather has continued to have an impact on our customers' usage at Wisconsin Public Service as indicated on Slide 14. Weather normalized usage per customer is down across all classes for our electric operations at Wisconsin Public Service. Year-to-date, residential usage is down approximately 4%, while commercial and industrial customer usage is down approximately one percent.

For the third quarter of 2008, weather-normalized usage per residential customer was down approximately 4% as well; while commercial and industrial customer usage was down approximately 3% for the quarter. This had an after-tax impact of $1.8 million dollars, or approximately $0.02 per share, for the third quarter of 2008.

Initiatives that will drive Wisconsin Public Service's value proposition are listed on Slide 15 and includes construction of natural gas laterals to the Guardian 2 pipeline in Wisconsin, which we expect to be placed in-service by the end of 2008 at a cost of approximately $85 million. This is about $10 million more than anticipated earlier in the year, and the increase is the result of flooding caused by heavy rainfalls in June.

Although the weather caused an increase in the expected capital cost, it did not cause an adverse impact on completion of the project as we expect construction of the pipeline laterals to be completed before the end of 2008.

We expect to close on the $250 million purchase of the 99-megawatt Crane Creek Wind Farm project in November 2008, and to begin construction on this project around year-end. We anticipate that this project will be placed in service by the end of 2009. The project has been approved by the Public Service Commission of Wisconsin and is included in our current general rate case filing.

Now I'll turn the call over to Larry Borgard, President and Chief Operating Officer of Integrys Gas Group. Larry?

Larry Borgard

Thanks, Charlie. Good morning, everyone. Recent key accomplishments in the Integrys Gas Group are indicated on Slide 16 and are primarily rate case-related. On July 31, we filed with the Minnesota Public Utilities Commission to increase retail natural gas delivery rates by $22 million, or 6.4% percent, for customers of Minnesota Energy Resources. In the filing, we requested the entire rate increase be granted as interim rates, subject to refund, and we were granted a $19.8 million interim rate increase, subject to refund again, on October 1, 2008.

Higher rates are needed as a result of general inflation, coupled with low sales growth, and increased costs to provide customer service. This is the first distribution rate increase request since 2000 for our Minnesota customers, and we expect final rates to be effective in June 2009. Additional information on the rate case can be found in the Appendix on Slide 31.

In May, we filed to increase retail natural gas rates by $13.9 million, or 5.81%, for Michigan Gas Utilities' customers. In the rate filing, we requested a $10.7 million, or 4.44%, interim rate increase for immediate rate relief, again subject to refund. On October 29, the Michigan Public Service Commission staff recommended that the Commission authorize a $3.5 million interim natural gas rate increase.

The recommendation is based on a 10.7% return on equity and a 7.83% return on average rate base valued at $202.1 million for a 2007 calendar test year adjusted for certain known-and-measurable changes. We are anticipating an order on the interim rates in December at the earliest. We would expect final rates to follow in the second quarter of 2009. This is the first distribution rate increase request since 2003 for Michigan Gas Utilities' customers. Additional information on the rate case can be found in the Appendix on Slide 32.

Initiatives that will drive the Gas Group's value proposition are indicated on Slide 17.

Now that we have effectively integrated the Gas Group's regulated natural gas utilities, both operationally and financially, we are moving forward with rate filings, so that our rate base investments and expenses are adequately reflected in rates and we have an opportunity to earn our allowed rates of return. As a result, you can expect to see us move forward with the accelerated investment in replacing cast iron and unprotected steel pipe in Chicago, if we can achieve an appropriate rate recovery mechanism.

Recall that approximately 2,000 miles of the 4,000 miles of mains in Chicago need replacement, which amounts to a $3.4 billion capital project over a number of years.

We continue to monitor the bad debt situation at all of our natural gas distribution utilities. Bad debt expense is up quarter-over-quarter for Integrys Gas Group as a whole, but bad debt expense is down year-to-date for Michigan Gas Utilities and Minnesota Energy Resources.

This came about as a result of decisive action on our customers' delinquent accounts in April 2007. We introduced eligible customers to funding sources to assist them in becoming current on their natural gas distribution bills. We also took the needed step of shutting off service to those customers who had not paid their bills and were unable to access publicly available funding sources. This resulted in a substantial improvement in the bad debt situation at these companies on a year-to-date basis.

Bad debt expense for Peoples Gas and North Shore Gas is up for the quarter and year-to-date following the national trend of many natural gas companies, due largely to higher energy prices on overall accounts receivable balances, as well as an increase in the number of past due accounts related to worsening economic conditions.

A similar bad debt reduction plan was implemented with our delinquent customers at Peoples Gas and North Shore Gas. This type of program can have a 12-month lag before positive financial results can be achieved, as was evident from our experience with Michigan Gas Utilities and Minnesota Energy Resources.

Consequently, we do not expect to see a material turn-around in our bad debt situation at Peoples Gas and North Shore Gas until the second quarter of 2009 at the earliest. However, this could be longer if the current economic persists. We are continuing to monitor our bad debt situation at all of our natural gas distribution companies for any improvements we can make along the way.

Now, Mark Radtke, President of Integrys Energy Services, will discuss our non regulated operations.

Mark Radtke

Thanks, Larry. Although you wouldn't know it from our GAAP results, our non regulated business had its best economic quarter ever. Natural gas and electric forward prices decreased almost 40% during the quarter and continued to decline even further in October. While this creates the non-cash accounting losses that were mentioned earlier, this falling price environment provided attractive hedging opportunities for our customers, who began to return to their longer term contracting norms. This is clearly evident in our Managerial Gross Margin and forward book volume metrics.

First, let's discuss managerial gross margin, which we use to measure our business performance on an economic basis. On Slide 18, you'll see that our managerial gross margin has grown to almost $260 million for the year, a $107 million increase since June 30, 2008 as set forth in the slides from our second quarter 2008 earnings conference call. This compares to a $56 million increase for the third quarter of 2007.

The primary difference between this metric and GAAP margins is that managerial gross margin includes the changes in fair value of all commodity contracts, regardless of their treatment, under the derivative accounting rules, making it a more complete representation of economic performance during the period.

Over the life of any contract, GAAP margins and managerial gross margins will eventually be the same, but the timing of recognition can be dramatically different.

Both of our retail business units benefited from the energy price decline, as you can see, from the increase in the forward book values. While we were confident that customers would eventually return to longer term contracts, we take a great deal of pride in the fact that they continue to choose Integrys Energy Services.

Our wholesale business units also had a strong quarter. Our natural gas team was able to capitalize on opportunities to optimize our natural gas in storage and related hedges, in order to create additional margin in the forward book. The differential or spread between this summer and the coming winter's natural gas price was sufficient to justify the injection of additional natural gas into the ground.

To secure the intended margin levels, we locked the seasonal price spread using various exchange-based and over-the-counter contracts. Most of the stored natural gas will be withdrawn throughout the peak winter months of December, January, and February.

Not to be outdone, our wholesale electric team added a number of new customers to the portfolio. Additionally, we have diligently grown our renewable energy credit business, having completed over four times the business volume during the first three quarters of this year, compared to all of 2007.

This type of business fits nicely into our clean and green asset strategy and overall focus on expanding the level of renewable activity in our business. Slide 19 summarizes contracted natural gas and electric volumes for you.

We have previously discussed managerial gross margin and how it differs from GAAP gross margin. The large derivative accounting losses and inventory write-downs that are reflected in our GAAP results are not reflected in our Managerial Gross Margin results, as they do not represent changes in the economic value of our portfolio. It's understandable, however, that you would be interested in seeing how that mismatch will reverse over time.

On Slide 20, we have scheduled out the future earnings stream that would occur if prices remained at September 30 levels. You can see that approximately $90 million of our current portfolio will be realized in the fourth quarter of 2008, while the remainder falls into 2009 and beyond.

With that being said, we cannot predict the impact that derivative accounting treatment might have on transactions that settle beyond the current year. Further decreases in energy prices will push GAAP margins into the future, while energy price increases will accelerate the recognition of GAAP margins.

It is important to note that the amounts on this slide are based on current contracts and prices and do not reflect future new business and further optimization of our portfolio of assets.

Slide 21 takes it one step further by giving a total adjustment that eliminates the volatility that derivative accounting can introduce. The mark-to-market volatility adjustment line items represent the difference between GAAP and managerial gross margin-based earnings. As we have described in the past, this measure removes the timing mismatches caused by derivative accounting rules and provides a better perspective on the value we actually created during the period. All of the other numbers on this schedule are reflected in our reported actual earnings per share information that Joe O'Leary referred to earlier.

So, while a year ago our GAAP results would have been increased by $200,000, as indicated on Slide 21, under this year's conditions, to get a better picture of business economic performance, our quarterly results would have to be increased by $120.9 million.

Slide 22 highlights some of the initiatives we see for the continued success of Integrys Energy Services. Given the current credit market conditions that are expected to continue into the foreseeable future, as well as the volatile energy marketplace, our near-term focus will be to improve our existing business operations. While there are many opportunities to add new business, we are being very selective so that we can manage the business within our means.

You may ask what are we experiencing as a result of the current financial conditions? Certainly a more complex credit risk assessment, given the rapid deterioration we have seen among certain counterparties and dramatic commodity price movement; increased financing costs, a direct result of the turmoil in the credit markets; and a reduced number of active wholesale counterparties in the energy marketplace, which results in concentration risk and higher supply costs.

How are we responding? We are closely monitoring exposures to financial institutions and others, and taking mitigation steps where necessary. More closely monitoring counterparty concentrations; increasing our margin requirements to account for increased costs and

Risks, and shoring up and increasing our credit with others, where possible.

What is our end result? We are able to add new customers within our existing markets, but we have put plans to expand into new geographical markets on hold. The energy marketing business climate has changed dramatically for us as well as our peers, increasing operating costs, business risks, and cash margin requirements for our economic hedging activities.

My sense is that we took a leadership position when increasing prices to reflect these new realities, and that is working well for us at this point.

Other initiatives include our photovoltaic solar projects. We have a number of projects in advanced stages of development or installation on both the East and West Coasts that we expect will add up to 7 megawatts of solar capacity before the year is out.

Additionally, we have launched our Ecovations Renewable Gas product in Ohio, which permits customers to elect, at no additional cost to them, to have 8% of their natural gas come from renewable sources such as landfills.

We have positioned ourselves to offer other renewable products and services to meet the needs of our customers and have developed a carbon footprint reporting capability to help our customers put forth their environmental strategies. We expect our early success with this foundational work, coupled with a great deal of interest from our growing customer base, to serve as an important source of business, business that is aligned with resource scarcity and climate change concerns.

Now, I will turn the call back to Larry Weyers. Larry?

Larry Weyers

Thanks Mark. Before I summarize the key points from today's discussion, let me briefly discuss the steps in the succession planning process at Integrys Energy Group that will ultimately result in the naming of a new President and Chief Executive Officer to take my place when I retire.

As indicated on Slide 23, I asked the Board to begin the process that was announced in September to ensure that we have the best internal and external candidates available to fill the role of President of Integrys Energy Group. Five members of our Board are working with an internationally recognized executive search firm to develop rigorous criteria to evaluate the candidates.

Although there are a number of leaders within the company who have the potential to assume my role, we want to find the best person to lead the company, to represent our customers, shareholders, and employees, and the process will evaluate both internal and external candidates.

By starting now, we will have time to evaluate the candidates, select an individual, and work through a smooth transition. We expect to have the successful candidate appointed before the end of the second quarter of 2009. I would expect that the person selected for this role will serve as President during a transition period and then add the responsibilities of CEO.

The transition period does not have a firm end date. The Board has asked that I remain as Chairman of the Board for a period of time, and I have agreed to do so. You can be assured that I am committed to remaining throughout this process and will be here to weather the current economic challenges. I have not determined an exact retirement date, but will remain flexible in working with the Board on ensuring that the transition to a new President is as seamless as possible.

Now, let me remind you of the key points from today's discussion relating to the drivers of our future earnings growth. First, growth will be driven by excellent investment potential across the enterprise and the rate case process at our regulated utilities. Second, we have opportunities for growing profitability at our non regulated energy services business. Third, we expect to continue enhancing shareholder value for our investors through dividend increases and by increasing our earnings per share by 6% to 8% on an average annualized long-term basis, although we will be evaluating whether 6% to 8% percent is still an achievable growth target, as we re-evaluate long-term market conditions.

Finally, as set forth in Slide 24, our earnings guidance for 2008 for diluted earnings per share from continuing operations, adjusted, is between $3.33 and $3.44.

We appreciate you listening to our prepared remarks, and now I would like to open the line for questions.

Question-And-Answer Session

Operator

(Operator Instructions). The first question comes from [David Dickens] of Integrys Energy.

Unidentified Analyst

Good morning. I hadn't known I joined your company.

Larry Weyers

Well, welcome.

Unidentified Analyst

But you know, maybe it's a good career shift given the market. You've taken $0.30 out of the guidance range, the low end compared to what you gave in August, but if I read slide 12 correctly, you are saying weather impact in '08 is going to be a $0.10 positive, has that number changed from the August guidance?

Joe O'Leary

No, I don't believe it has.

Unidentified Analyst

Okay. And also in the deltas, where you showed the difference, Joe can you remind us what is the land sale number that's in guidance or what was the land sale number in guidance that you reduced by $0.07?

Joe O'Leary

I believe, originally we had about $0.07 in there.

Unidentified Analyst

Okay. So you are neutral for now?

Joe O'Leary

Well we've said that we don't think we are going to be able to get that completed before year end.

Unidentified Analyst

Okay.

Joe O'Leary

And we don't want to be doing fire sales of the real estate. We will take our time out and make sure that we get good value for our shareholders.

Unidentified Analyst

How long do you think the real estate sales will extend at this point, I mean is that just pushing that $0.07 back into '09 or should we look at it more as adding on to the tail end of the whole program?

Larry Weyers

This is Larry. I think it's going to be very dependent on the financial markets, and liquidity. As soon as the potential buyers are able to access the markets, and actually get the mortgages at reasonable rates, I think the real estate market will return. We have got some excellent properties. There is lot of people interested in it, and it's just not a very good time being going to our market with it.

Unidentified Analyst

Okay. Thank you very much.

Larry Weyers

Thank you.

Operator

(Operator Instructions). The next question comes from David Grumhaus of Copia Capitals.

David Grumhaus - Copia Capitals

Good morning, guys.

Larry Weyers

Good morning, David.

David Grumhaus - Copia Capitals

Couple of questions for you. Can you review at Peoples, where you are tracking on a bad debts basis, just sort of percentage of revenue and again what the rate case situation there. I know you have a stay out until some point, but when do you would expect to file there.

Larry Borgard

Sure, this is Larry Borgard. Our bad debt at Peoples has historically been between about 2.5% and 3% of revenue. We are still in that range today. With respect to the rate case, you would recall that, as part of the merger proceeding, we agreed that we would not file our next rate case, such that rates would not be implemented at any time before January 1, 2010. So, conceivably we could file in the first quarter of February 2009, and we could then have rates in place for January 1, 2010 at the earliest.

David Grumhaus - Copia Capitals

And what are you earning currently in that business or what do you expect to earn through the winter. Is that likely to happen?

Larry Borgard

I think we had talked in previous conference calls that it’s looking more and more likely that we’ll have file in 2009.

David Grumhaus - Copia Capitals

Okay.

Larry Weyers

David, this is Larry Weyers I have to remind you that dollars are available I think at an all time record at $5 billion plus and we are going to take advantage of those also for our bad debt customers.

David Grumhaus - Copia Capitals

Okay. Larry, it seems like both in your long-term guidance of 6% to 8%, when I read the release, as well as where you are taking energy services, that you are pulling back a little bit on both the 6% to 8% growth rate, and on potentially, I am guessing that growth at energy service is now that you are focusing more on not expanding. Am I interpreting that correctly?

Larry Weyers

Well, we haven't made any decisions as to whether the 6% to 8% is still an achievable target, and it does depend on the market conditions that develop or persist here in the next 18, 24 months I guess. But we are refocusing on non regulated business to concentrate on improving the bottom-line as opposed to expanding the topline. That's going have an impact, but we are still being able to get earnings growth out of that facility.

We tend to look at things, on a very long-term basis as oppose to short-term, and so we want to make sure that 6% to 8% is still an achievable target and still an appropriate target for us to, but we do, as we pointed out in one of the early slides, have the ability to grow earnings after utility level, as well as at the (inaudible) level, if that makes sense for our long-term health.

David Grumhaus - Copia Capitals

I guess, lastly any concerns with the Management, or with the Board, or with the rating agencies that in this new credit environment that the energy services business is a very difficult business for a relatively small utility like yourself to be holding. I mean, when you are generating multi $100 million accounting gains and losses every quarter. Does that worry you? Is that a concern? Is it something that caused you to say, well maybe this isn't a business we should be in?

Larry Weyers

Well I think the volatility is always a concern. We have so far been able to manage our risk exposure and managed through the extensive volatility since twice. Obviously, as we've told you before, we continue to evaluate that subsidiary, as well all of our subsidiaries, to make sure that we have portfolio of opportunities available to us that are consistent, and the risk profile we believe that are invested [we want to see]. We would probably be taking another look at the portfolio with the better understanding now we have from the severe financial changes that have occurred in the marketplace.

So you ask me, if I worry about things? I always worry about things. I worry about what is the Board going to say, what are the rating agency is going to say, but so far we've been able to manage that very successfully. We will be revealing that portfolio extensively in the next few months.

David Grumhaus - Copia Capitals

Okay. Thanks for the time today, guys.

Larry Weyers

Thank you, David.

Operator

(Operator Instructions). The next question comes from Ed Hyne of Catapult Capital Management.

Ed Hyne - Catapult Capital Management.

Good morning.

Larry Weyers

Good morning, Ed.

Ed Hyne - Catapult Capital Management.

I just had a quick question to clarify on your comments about financing over the next couple of years, you mentioned that you are still don't expect the issue equity in 2009, but you may need to reassess, can you give a little flavor about what would change that view? Does it have anything to do with the fact that you are expecting to issue $300 million a holdco debt and that those markets may not be open on a holdco level as opposed to opco level?

Joe O'Leary

This is Joe O'Leary. Yeah that's certainly plays, there are a number of variables that played in that segment, and the access to the debt market clearly is one of them. We also take a look at what our earnings are going to be going forward. What our capital needs are going to be determining, in terms of what our capital expenditure program is going to be, whether we pared it back or not, so there are a number of factors that go into consideration. We also looking at what some of the needs will be, relative to short-term debt, for gas in storage in the future, when we get into the next winter heating season.

Ed Hyne - Catapult Capital Management.

Okay, but right now under these conditions your expectation is no equity in '09?

Larry Weyers

That’s right. At this point we are not seeing it, but we are going to be reevaluating that. We typically go through budget process around this time of year and we are still putting the finishing touches on it, trying to adjust things for the change in the business environment that’s occurred over the last 60 to 90 days.

Ed Hyne - Catapult Capital Management.

Got you. Thanks a lot.

Steve Eschbach

Thank you, Ed.

Operator

Next question comes from Peter Hark of Talon Capital.

Peter Hark - Talon Capital.

Couple of questions for Larry and Joe. As you look out through ’09 on the known and quantifiable long-term debt issuances. The $300 million at the parent, $225 million at WPS, and another $100 million at WPS in ’09, what does the balance sheet look like at the end of next year? What cash flow needs are there that may impact the balance sheet going through ’09?

Joe O'Leary

At this time, we are not prepared to give guidance on what our balance sheet is going to be for 2009, I think. Once we get through the rate case in Wisconsin that will help us determine and get an idea what our earnings per share guidance will be for ’09. I think that would be an appropriate time to discuss what’s going to happen with the balance sheet towards the end of ’09.

In terms of overall, our long-term target of equity as a percentage of the total capital is probably around 50% to 55%. Again, as we mentioned, we are looking at the capital expenditures, determining whether because of economic conditions or market conditions whether we need to pare any of that back, so that comes in to play as well.

Peter Hark - Talon Capital.

That's right. Joe that's exactly to the point, because the balance sheet seems so strong now, to the extent that it is impacted by financing and if you could ratchet back on the CapEx, is that really what's going to determine whether or not equity would be needed at all in '09 or are there other factors? Are the rating agencies pressuring you yet, it wouldn't appear so, but are you getting something back from the rating agencies that are causing you to relook at this?

Joe O'Leary

Well, another thing that has an impact on us is what kind of gas in storage needs are we going have for our business in 2009. Now with regards to your question on rating agencies, that's something we are always working with the rating agencies, credit ratings that we've are very important to us and we want to try to do if we can to uphold those ratings. In terms of whether the rating agencies change the way that they are viewing businesses in general is something that is probably best asked to them as suppose to me.

Larry Weyers

Peter this is Larry. We are reviewing our CapEx programs right now. We do have ability to cut those back extensively, depending on what financing is available. So we are reviewing the CapEx programs. You have to remember that the planned financings have been in that plan for a long time, but the market conditions have changed, so, we will be reviewing, what the appropriate path is going forward. I do want to say though that, we are very protective of credit ratings and we will try to preserve those as much as possible.

Peter Hark - Talon Capital.

Thank you, Larry for that comment. Is that, what's really also impacting the growth rate, the 6% to 8%, as you ratchet back potentially the CapEx, is that what might have the greatest impact on that or is it stuff at the energy services or a combination? When you talk about growth rate, is it off of a new base for '08, to the extent that you've adjusted the operating number down modestly here or are we growing 6% to 8% off of this new base?

Larry Weyers

Well I think there is a number of factors that go into our reassessment of the 6% to 8%. One of those factors is, of course, that with the change in the competition in our non regulated business, we do have opportunities there too actually be selective and pursue that business, which is going to increase the margins and increase the bottom-line as opposed to increasing the topline, so that's one of the things that will play heavily into it. And you always have to remember we look at things in the long-term as opposed to a short-term situation, so that's another one of the impacts that will come into account. I forget you had the second question at the end, it slipped my mind.

Peter Hark - Talon Capital.

That's okay, Larry. We'll catch over you down in Phoenix. Thank you very much.

Larry Weyers

Okay. We'll see you there.

Steve Eschbach

Thanks Peter.

Operator

At this time I would like to turn the call back over to Mr. Steve Eschbach.

Steve Eschbach

Thank you again for participating on our conference call. A replay of this conference call will be available until February 17, 2009, by dialing toll free 866-453-1995. The text for today's presentation is available on our website at www.integrysgroup.com. Just select Investors and then Presentations. If you have additional questions, you may contact me directly at 312-228-5408 or Donna Sheedy at 920-433-1857. Thank you.

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