Integrys Energy Group Inc. Q4 2008 Earnings Call Transcript

Integrys Energy Group Inc. (TEG)

Q4 2008 Earnings Call

February 26, 2009 9:00 am ET

Executives

Steve Eschbach – Vice President of Investor Relations

Larry Weyers – Chairman, President and Chief Executive Officer

Joe O'Leary – Senior Vice President and Chief Financial Officer

Larry Borgard – President and Chief Operating Officer, Integrys Gas Group

Charlie Schrock – President and Chief Executive Officer, Wisconsin Public Service Corporation

Mark Radtke – President of Non-regulated Subsidiary, Integrys Energy Services

Analysts

Faisel Khan – Citigroup

Steven Gambuzza – Longbow Capital

Maurice May – Soleil-Power Insights

[Brad McLennen] – Fidelity

Ted Hyne – Catapult Capital Management

Paul Patterson – Glenrock Associates

David Grumhaus – Copia Capitals

Brian Olson – Luminous Capital

Presentation

Operator

Welcome to the fourth quarter 2008 earnings conference 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 begin.

Steve Eschbach

Thank you and good morning. Welcome to Integrys Energy Group's 2008 fourth quarter earnings conference call. Delivering formal remarks today with me today are Larry Weyers, our Executive Chairman, Charlie Schrock, President and Chief Executive Officer of Integrys Energy Group, and Wisconsin Public Service, Joe O'Leary, our Senior Vice President and Chief Financial Officer, Larry Borgard, President and Chief Operating Officer of Integrys Gas Group and Mark Radtke, President of our unregulated subsidiary, Integrys Energy Services.

The slides supporting today's presentation and 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 May of 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 2009 for Integrys Energy Group and its subsidiaries.

Forward-looking statements contain factors that 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'd also refer you to the forward-looking statements section of yesterday's news release and to our Securities and Exchange Commission disclosure documents that were filed last evening 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 information related to diluted earnings per share and continued operations adjusted forward book value, and managerial gross margin. We believe that diluted earnings per share from continued operations, adjusted forward book value and manager of gross margins are useful measures for providing investors with additional insight into our operating performance, and the effect of certain items that are not comparable from one period to the next.

Please review the text of this slide regarding the non-GAAP financial information. I will now turn this call over to Larry Weyers. Larry?

Larry Weyers

Thank you, Steve. Good morning everyone and thanks for joining us on the call today. Now please turn to slide five and I will highlight our key accomplishments for 2008. First and foremost we successfully managed our business through the unprecedented and continuing global credit crises, while at the same time keeping our focus on our business. Our financial results net of all non-cash derivative and inventory accounting adjustments exceeded our expectations.

Our 2008 synergy savings from the People's Energy merger of $83 million were $10 million greater than what we forecasted early in 2008, and this was done with approximately $10 million less in cost to achieve the savings.

Next we completed construction of the 500-megawatt [Westin Four] generating facility in mid 2008, placed it in service on July, 1, and garnered two national recognition awards. Additionally we completed four rate cases and have interim rate relief on a fifth rate case.

Currently 1.7 million of our approximately 2.2 million regulated utility customers or approximately 80%, now have a form of decoupling in their rate structures. Decoupling encourages customer conservation, enables us to more conservatively promote energy efficiency and helps stabilize our margins and net income.

Finally, our board of directors selected a new president and chief executive office, announcing that Charlie Schrock would assume that role on January 1, 2009, and I would remain as executive chairman. I expect to retain that role for as long as the board deems appropriate to ensure a smooth transition. Not withstanding the successful achievements during the year, the current economic environment and credit crises in the financial markets has caused us the reassess our strategic direction.

We are taking steps to reduce risk and preserve liquidity during current general market conditions that challenge all businesses, and we believe this is the best course of action to deliver value to our shareholders.

Our 2009 initiatives are set forth on slide six, the most significant change for Integrys Energy Group is that we have decided to substantially scale back the operations of our non-regulated energy services business, or exit that business entirely.

Our preference is a full divestiture of this business segment with alternatives including divestiture of portions of this business, or scaling back by further modifying the scope of the products offered and/or the markets we serve. The goal is to reduce demands on our balance sheet and the capital support obligations that are driven by commodity prices, which at this time have demonstrated unprecedented volatility. We are seeking to deploy our capital to areas with more desirable risk adjusted rates of return.

We expect to significantly reduce corporate guarantees and invested capital that have been required by our non regulated energy services segment. If we do not divest this business segment entirely, our ultimate objective is to size and scope for Integrys Services that will reduce the liquidity, capital and credit support requirements for our non-regulated energy services segment, and will give us greater control of our own destiny.

If we remain in this business at a reduced level, the expected contributions from Integrys Energy Services, is no more than [$30] million of core net income by the end of 2009. Our ultimate intent is to reduce our non-regulated business segment such that its demands on liquidity and capital are not significant by the end of calendar year 2010.

We began to scale back this business in late 2008, by modifying the products offered. We expect to fully implement our strategy by December 31, 2009. We are committed to this strategy and we have engaged JP Morgan to act as our financial advisor to assist us. Be assured that this strategy change is not the result of a deteriorating customer portfolio. This business segment, formed in 1994 is strong, and has demonstrated success for many years. The merger with [People's Energy] in 2007 increased the regulated utility component of our consolidated earnings, enabling us to accommodate our non-regulated energy services business segment growth.

This was anticipated to reduce the non-regulated component of our consolidated earnings to between 20 and 30%. However, given the recent growth of our non regulated business segment, the reduced liquidity in the financial markets and the extraordinary energy price volatility that increased potential cash collateral requirements in an era of shrinking and more expensive credit availability, we have reevaluated the future of our non regulated business segment, and determined that this is the path we need to take.

As we stated during our last earnings conference call, we proactively put many conservative measures in place in response to the current market environment, prudently deploying our resources and managing credit risk to protect the integrity of our book of business. These measures are working as intended and Mark Radtke will have more to say on this during his formal remarks.

Another strategy change is taking place at our regulated utilities. We are reducing our capital expenditure programs by approximately 30% in 2009 and approximately 40% in 2010. Note that the focus here is on the short term. We are continuing to take a hard look at our capital programs with an eye towards future reductions. Projects essential for reliability are proceeding forward while those that can be deferred are being evaluated on a case by case basis.

There are several potential drivers of utility investment on the horizon, and they are typically investments in generation and distribution upgrades that are required due to aging infrastructure, investments to meet new needs such as requirements to create a smart grid, energy efficiency investments, renewable energy mandates and environmental mandates.

Other changes cut across all business segments. Integrys Energy Group's senior executives and our board members have agreed to forego any pay increases in 2009. We also implemented a hiring freeze whereby open positions will remain unfilled. Providing this action does not adversely impact reliability or customer service.

In addition the use of external contractors will be reduced, again, providing there is no adverse impact on reliability and customer service. Our long-term growth target is also being impacted by the near term economic and general financial market conditions.

Although we anticipate continued growth it will come from improving the earnings from our regulated subsidiaries as we work to bring all of these businesses closer to their allowed rates of return during the next few years and making selective investments in required, renewable, environmental and infrastructure improvements longer term.

As a result, we expect our long-term growth in earnings per share from continuing operations adjusted to be between 4% and 6% on an average annualized basis with 2009 as our foundational base for future growth rather than the 6% to 8% we had previously indicated. I'll illustrate this at the close of my formal remarks before we open this call to your questions.

Now, I turn this call over to Joe O'Leary who will provide you with an overview of our financial results, current liquidity situation, and our scaled-back capital expenditure programs, and our long-term financing plans. He will be followed by Larry Borgard who will highlight the Gas Group. Charlie Schrock will follow and will be reporting on both Wisconsin Public Service and Upper Peninsula Power. Mark Radtke will then highlight the non-regulated energy services business segment.

Joe will then return and review our 2009 guidance and assumptions and I will provide a brief recap and moderate your questions. Joe?

Joe O'Leary

Thank you, Larry. Turning to slide 7, during the fourth quarter of 2008 in accordance with generally accepted accounting principles or GAAP, we recognized income available for common shareholders of $25.6 million compared with income available for common shareholders of $85.1 million in the same quarter a year ago.

This resulted in diluted earnings per share of $0.33 for the quarter ended December 31, 2008, compared with diluted earnings per share of $1.11 for the same quarter in 2007. There are seven key items driving the $59.5 million quarter-over-quarter change, and we have presented them in after tax dollars.

Keep in mind that the accounting results for the fourth quarter of 2008 included, net after tax non-cash accounting losses of $41.9 million at Integrys Energy Services compared with net after tax non-cash accounting gains of $47.2 million for the fourth quarter of 2007. 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 fourth 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 in the related derivative electric supply contracts are settled.

Although not apparent due to non-cash accounting losses, the 2008 fourth quarter was strong. You will find more details in our earnings news release issued last night. Additional detail related to the quarter-over-quarter drivers by segment can be found in the appendix, contained in the slide deck for today's presentation and in the Form 10-K 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. Our credit facilities totaling approximately $2.4 billion remain unchanged from what we described on our previous earnings conference call. At December 31, 2008 approximately $750 million of the credit facilities were unused and available for us to support our short-term borrowing needs on top of $254 million of cash on hand.

This improved since then with our unused credit facilities increasing to approximately $890 million to support our short-term borrowing needs on top of about $320 million of cash on hand at February 25, 2009. Cash requirements for long-term debt maturities due in 2009 have not changed with approximately $155 million coming due in 2009.

And as we are now heading out of the winter heating season, our natural gas storage cycle as a regulated natural gas distribution utility and Integrys Energy Services fulfillment of customer obligations, is expected to generate approximately $1 billion of cash from January 1, through April 30, 2009.

As Larry mentioned, our capital expenditure plan as I will outline a little later has been reduced from what we presented previously, and can be further adjusted if needed, depending upon economic and capital market conditions. Some of our energy procurement contracts contain collateral provisions that are affected by our credit ratings.

Slide nine sets fourth additional collateral requirements in year end 2008 in the theoretical event of our credit ratings being down-graded. In such a theoretical worse case scenario, which would be a downgrade of four notches below our current level, we would be required to provide approximately $829 million of additional collateral.

While we do not anticipate any credit ratings changes that would move us to below investment grade. This slide shows that the current availability under our credit facilities and expected cash receipts over the next few months would be sufficient to accommodate this.

Slide 10 shows our revised projected capital expenditures for 2009 through 2011. The decreases in 2009 and 2010 from what was recorded in November 2008 from Wisconsin Public Service are primarily related to the planned delay of a number of projects associated with our fleet of generating units, and a projected delay in the number of electric and natural gas distribution projects resulting from this slowing economy.

For People's Gas the changes are primarily related to modifications of our previous kept cast iron main replacement program in 2009 and 2010, approximately $40 million per year. In other words, we would over the next two years implement that program on an opportunistic basis, replace required mains if needed when the City of Chicago street repairs are being performed rather than removing and replacing the street surface ourselves.

Our accelerated cast iron main replacement program could return as early as 2010 if we are granted approval of an infrastructure rider in our current general rate case filing and the present financial market crisis eases. For Upper Peninsula Power, we are delayed a number of hydro projects from 2009 into 2010. The rest of the changes on this chart are the results of shifting a number of small projects between years.

Slide 11 shows our estimated utility depreciation through 2011. The data has been modified since last quarter's conference call in accordance with our revised capital expenditures. Our projected net growth in regulated utility rate base investment for 209 through 2011 is summarized on slide 12. As you can see that totals $596 million over the next three years.

Assuming that timely filing and regulatory approval incorporating the net utility plant growth and rate at the regulated utilities, plus the anticipated growth in earnings from our 34% ownership in the American Transmission Company resulting from their projected growth in net utility plant, we expect our net income growth will be positively impacted.

Slide 13 sets forth our expected long-term financing needs through the end of 2009. Our long-term debt financing includes up to $350 million for Integrys Energy Group and $50 million in People's Gas. As far as common equity, we have decided to return to issuing new shares of common stock to meet the needs of our stock investment plan and stock-based employee benefit plans rather than purchasing the shares on the open market.

We estimate that the issuance of new common shares for these plans will total about $40 million for 2009. We do not anticipate going to market for any other equity in 2009 but we will continue to assess this as capital market conditions change.

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

Larry Borgard

Thanks, Joe, and good morning everyone. Recent key accomplishments in the Integrys Gas Group are indicated on slide 14, and like last quarter are primarily rate case related. In December, we reached a settlement on our general rate case filing for Michigan Gas Utilities that was approved by the Michigan Public Service Commission on January 13, 2009.

We agreed to a $6 million rate increase and the details of this can be found in the appendix on slide 32. As we mentioned during our last earnings conference call, we received an interim rate increase for Minnesota Energy Resources that went into effect on October 1, 2008, allowing us an increase of $19.8 million on an annual basis subject to refund of our $22 million full-rate increase request. We expect the Minnesota Commission to issue a decision on this rate case by June 2009. Details of that rate case can also be found in the appendix on slide 32.

We continue to monitor the bad debt situation at all of our gas distribution utilities, and our results reflect no material change. In absolute dollars, bad debt expense was up in the fourth quarter 2008, as well as for the full year versus the same periods in 2007. However, as a percent of revenues our diligent collection efforts kept us under control.

For the fourth quarter and full year 2008 bad debt expense was under 1% of revenues for North Shore Gas and Minnesota Energy Resources. For Michigan Gas Utilities it was approximately 1% of revenues for the fourth quarter and full year of 2008. For People's Gas it was just under 3% for both the fourth quarter and full year 2008.

Initiatives that will drive the Gas Group's value proposition are indicated on slide 15. Yesterday we re-filed general rate increase requests with the Illinois Commerce Commission for both People's Gas and North Shore gas, for new rates to be effective in early 2010. Details of those filings are set forth on slide 34 in the appendix. A key component of that filing is our request for reconsideration of an infrastructure rider to support our accelerated investment in replacing cast iron and unprotected steel pipe in Chicago.

As Joe discussed earlier our 2011 capital expenditure plan assumes that we will increase our cast iron main replacement by approximately $100 million versus 2010. Some acceleration could occur in 2010 depending upon regulatory treatment and capital market conditions. Recall that approximately 2,000 miles of the 4,000 miles of mains in Chicago need replacement at a cost which we anticipate will range between $2 billion and $3 billion and will be reflected in our capital spending over a number of years.

We also intend to pursue decoupling for Michigan Gas Utilities and Minnesota Energy Resources in future rate cases. Per our recent rate case decision in Michigan we are required to include a decoupling plan for Michigan Gas Utilities in our next rate case filling.

I'll now turn the call over to Charlie Schrock for an update on our Wisconsin and Upper Michigan Utilities.

Charlie Schrock

Thank you, Larry, and I ask our listeners to please refer to slide 16 for operational data related to Wisconsin Public Service and Upper Peninsula Power.

Key accomplishments recently achieved for Wisconsin Public Service include the general rate case decision reached by the Public Service Commission of Wisconsin at the end of December, 2008. Details are set forth in the appendix on slide 35, but let me provide you with two key components of that decision.

Although our electric customers essentially saw no increase in the rates effective January 1, 2009 the decision effectively ordered a $48 million rate increase over the rates that were in effect on January 12, 2008. The fuel surcharges that went into effect in July, 2008 which totaled $48 million on an annual basis and which were set to end on December 31, 2008 were rolled into base rates beginning January 1, 2009.

Further, lower forecasted 2009 fuel costs of $41 million and an extended amortization period for the 2007 and 2008 [Westin Three] deferred purchase power costs, reduced Wisconsin Public Services 2009 revenue requirement as compared to the Public Service Commission of Wisconsin staff audit which was completed in the summer of 2008.

The rate also included a rate stabilization mechanism which is a form of decoupling with maximum annual recoverable or refundable revenues of $8 million for natural gas and $14 million for electric as agreed to earlier this month.

Other accomplishments during the quarter include a second award for [Westin Four], our 500-megawatt coal fire power plant currently jointly owned with [Dairyland] Power.

In addition to receiving Power magazine's 2008 Plant of the Year award [Westin Four] received Power Engineering magazine's 2008 Best Coal Fire Project award. Additionally we've closed on the 99-megawatt Crane Creek Wind Farm project in December 2008 which was approved in Wisconsin Public Services recently completed general rate case and is expected to be in service by the end of this year.

Finally we completed construction of the laterals for the Guardian Two Pipeline project on schedule and slightly under budget at $79 million versus a revised budget estimate of $85 million. We are now ready to provide a competitive source of natural gas in North Eastern Wisconsin when the Guardian Two Pipeline is placed in service.

The economy and weather have continued to impact customer's usage at Wisconsin's Public Service as was indicated on slide 16. Weather and normalized usage per customer is down across all classes for our electric operations at Wisconsin Public Service. For all of 2008 residential usage was down approximately 4% while commercial and industrial customer usage was down approximately 2%.

For the fourth quarter of 2008 weather normalized usage per residential customer was down approximately 4% while commercial and industrial customer usage was down approximately 6%. This had an after tax impact of $1.2 million or approximately $0.02 per share for the fourth quarter of 2008 as compared with the fourth quarter of 2007.

Bad debt expense at Wisconsin Public Service and Upper Peninsula Power has seen a slight increase of approximately $1 million pre-tax quarter-over-quarter and year-over-year. Both Wisconsin Public Service and Upper Peninsula Power's total bad debt expense as a percent of revenues is approximately one half of 1%.

Going forward as indicated on slide 17 the recently completed Wisconsin Public Service general rate case provides us an opportunity for a limited reopener for rates effective in 2010 for consideration of a number of items including fuel and purchase power costs, construction costs associated with our 99-megawatt wind farm project, amortization of deferred replacement power costs related to the October 2007 [Westin Three] outage, changes in pension and benefit plan costs, amortization and current recovery of emission allowances cost and amortization and recovery of energy conservation costs.

Beyond the reopener for 2010 the required capital investments related to environmental mandates and renewable portfolio standards will drive future growth in value at Wisconsin Public Service.

In Upper Peninsula Power we will continue work on a number of hydro projects projected to cost approximately $30 million to improve existing dams pursuant to Federal Energy Regulatory Commission mandates.

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

Mark Radtke

Before I get into the discussion about our future plans let me review the strong fourth quarter that Integrys Energy Services had allowing us to deliver economic performance well above what we had projected at the beginning of the year.

Our focus for the quarter was to prudently deploy limited capital in existing markets and that successfully contributed to increased profitability at the expense of volume. While there was tremendous opportunity to grow our customer base in the fourth quarter it was a time to exercise restraint. Consequently our delivered volumes were down, while our forward contract volumes were up year-over-year as depicted on slide 18.

As a result the economic performance of the business exceeded our expectations. Much like the third quarter of 2008 this performance is not evident in our GAAP results driven by accounting coupled with commodity price declines creates non-cash GAAP losses, while commodity price increases produced non-cash GAAP gains.

Natural gas and electric forward prices decreased another 20% during the quarter above and beyond the 40% decline in the third quarter. While this creates non-cash accounting losses that were mentioned earlier, this continued falling price environment provided attractive hedging opportunities for our customers. We worked with our customers through this period implementing mechanisms to satisfy their needs, while operating within the new financial market framework.

Managerial gross margin which we use to measure our requirements on an economic basis is set forth in slide 19. You'll see that our managerial gross margin finished the year at $353 million $200 million more than what we reported at June 30, 2008 and about $100 million ahead of where we were on September 30, 2008. The strong second half of the year more than made up for the slow start in the first half of the year, and we finished 2008 with an improvement of almost $82 million or about a 30% increase over 2007.

The primary difference between this metric and the 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 the 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 that recognition can be dramatically different. On slide 20 we have scheduled out the future margin recognition that would occur if energy prices remained at December 31 levels. You can see that approximately $328 million of our current portfolio will be recognized over the remaining life of the contracts. About $182 million of that portfolio will be recognized in 2009 fairly ratably over the course of the year.

That said, we can not predict the impact that derivative accounting treatment might have on transactions that settle beyond the current period. 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 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. So while a year ago we showed you that our quarterly GAAP results would have been decreased by $45.5 million, under this quarter's conditions to get a better picture of business economic performance our results would have been increased by $59.8 million. Similarly our full year 2007 results would have been decreased by $21.3 million dollars.

Under this year's conditions to get a better picture of the business’ economic performance, our results would have been increased by $152.2 million. The quarterly and annual core earnings contribution of $34.2 million and $102.8 million dollars, respectively, exceeded our expectations set forth earlier in the year.

This success notwithstanding the unprecedented events in the market place that unfolded during the second half of 2008, the credit crises in financial markets, volatile energy price impact on collateral requirements, fewer market participants that increase counterparty concentrations and demands on collateral capital, and an increase in the required credit availability levels converged to create a new paradigm.

Consequently we are well on our way to implementing a number of strategic alternatives with a preference to divest of this entire business segment and alternatives including divestiture of portions of the business or scaling back farther by modifying the scope of products offered or markets in which we operate. As a result of this, we have realigned several of our priorities for 2009 and they are set forth on slide 22.

First is to facilitate a value monetizing divestiture of this business fully cognizant of the current financial environment. In the event we do not execute on a full divestiture we want to reduce the corporate guarantees to not exceed $1.1 billion from $2.6 billion dollars at December 31 2008. Additionally we have plans to reduce the capital deployed by at least $400 million from about $1 billion to $600 million or less by the end of this year.

While my comments do not provide you with an assurance that we will be in this business at all nor the specifics as to how we are going to refocus this business segment, the targets have been defined. The strategic alternatives have been identified. Some steps have already been taken and the due diligence in exploring alternatives is underway. Naturally we will keep you apprised of our developments as the specifics of our revised strategy unfolds.

Now I will turn the call back to Joe O’Leary. Joe.

Joe O’Leary

Now we will move on to our 2009 financial guidance, which is covered in slide 23. Also included in the news release and supplemental data package is the projected guidance range for 2009 diluted earnings per share from continuing operations adjusted, which is anticipated to be between $2.53 and $2.68. See our slides, news release and supplemental data package for further details relating to this guidance.

Slide 24 summarizes by business segment our 2009 earnings guidance from continuing operations adjusted. For our regulated electric segment, we expect our earnings per share to be between $1.05 per share and $1.13 per share. This is about a $10 million dollar reduction from 2008, which is primarily driven by a five percentage point reduction in the authorized equity components of our capital structure for Wisconsin Public Service and the decline in weather normalized usage per costumer net of effects of decoupling.

For our regulated natural gas segment, we expect our earnings per share to be between $0.91 and $0.97. This is an approximate $12 million reduction from 2008, which is driven by a full year’s impact of decoupling at our Illinois utilities and normal weather. Colder weather had a positive impact on this segment’s results for 2008 and decoupling did not go into effect for our Illinois natural gas distribution utilities until March 2008.

Also our rates that went into effect on February 14, 2008 were based on a historic test year ended September 30, 2006. In the latest rate cases that we filed and recently, we are using a 2010 forward trust year in requesting recovery for over three years of inflation.

For our non-regulated energy services business segment, we are targeting $30 million of turnings contribution, which equates to $0.39 per share. This estimate for 2009 excludes derivative accounting volatility adjustment, and any financial results from divestiture of all or parts of this business segment.

For our holding company Other segment, we expect our earnings per share to be between $0.18 and $0.19 per share. This is approximately $4 million dollars greater than 2008 and is primarily attributable to our expected increase in earnings from our 34% investment in the American Transmission Company.

Note that with the announced strategic changes to our non-regulated business and the projected reduced earnings capacity of our non-regulated energy services business segment we anticipate our business risk profile should improve and overall liquidity should be in hand. In recent months, the financial community has expressed concern relative to the potential liquidity requirements and business risk associated with energy marketing businesses. The changes we are making will address those issues.

Now I will turn the call back to Larry Weyers.

Larry Weyers

Before I highlight the key points from today’s discussion, let me illustrate for you where we see our growth opportunities going forward. Clearly it will come from our regulated utility segments and it will come from moving our actual returns closer to authorized levels. As we have discussed previously we agreed to moratoriums on rate cases with our four recently acquired natural gas utilities as part of our merger agreements in 2006 and 2007 with the jurisdictional commissioners.

As set forth in slide 25, we estimate that these regulated utilities work earning their allowed returns on equity in 2008 that would generate an additional $45 million in earnings. The only way to close that gap is to continue what we did in 2008 and that is the timely filling of rate cases. We are currently involved in three rate cases and we have an opportunity later this year for Wisconsin Public Service with a limited reopener for 2010 proceeding.

Continued investment along with filing of rate cases is expected to provide us the opportunity for continued growth in earnings by increasing our rate base to reflect construction investments. Growth in investments and rate base for our regulated natural gas utilities segment will be driven by our required infrastructure investments in Illinois.

Growth for our regulated electric utilities segment will be driven by capital projects in accordance with environmental mandates and renewable portfolio standards. Additional growth will come from our investment in the American Transmission Company, which will be driven by their continued investment in the transmission assets need to replace an aging system and continued expansion.

Looking back at slide 12, the net growth and rate base investment in 2011 of $337 million would generate an additional $16 million of earnings assuming the timely filing of rate cases and recovery of such in rates. This represents a 6% growth rate over the mid-point of our 2009 guidance for diluted earnings per share from continuing operations adjusted. With the 2009 strategic change in our portfolio of assets, we believe a long term growth in earnings per share target of 4% to 6% on average annualized basis is achievable.

Turning to slide 26 let me remind you of the key points from today’s discussion. We have made and have begun implementation of strategic decisions that are positioning us to succeed in the face of the global economic and financial market changes. The most notable strategies shift is to divest entirely, divest a portion, or substantially scale back on non-regulated energies services business segment, which we expect will improve our business risk profile and provide greater earnings predictability.

We expect our efforts to be completed by the end of this year, with no more than a $30 million earnings contribution, excluding the impact of mark-to-market volatility to consolidated earnings from our non-regulated energy services segment in 2009. By the end of 2010 this segment’s demands on liquidity and capital are expected to be not significant. Consequently, 2009 becomes the foundational base for future growth.

Our Board of Directors has supported and endorsed these actions as the best opportunity for us to achieve our long-term earnings per share growth target. Consequently, they approved a common stock dividend increase effective with the March 20 dividend, marking the 51st consecutive year we have increased our quarterly dividend. This is a record we are proud of and we will continue to work to enhance shareholder value.

We appreciate you listening to our prepared remarks and now I would like to open the floor to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Faisel Khan – Citigroup.

Faisel Khan – Citigroup

Was there anything else, besides the change in the economic conditions or the liquidity requirements that caused you guys to re-look at this business and possibly divest it. Was there anything else that happened in a part of the business that caused you to rethink your strategy here?

Larry Weyers

Well, I think the change in the environment was certainly the primary reason. We’ve been very successful in building [TEGE] and it has contributed to our success and our shareholder value for several years. We have chosen now to monetize that business in an effort to adjust our risk profile in the existing environment. And I think that’s consistent with our asset management initiative and, also our portfolio approach to managing risk.

When you see a change in the environment, we adjust the portfolio much like we did, when we sold our nuclear plant or the oil and gas exploration and production company in 2007. The environment’s clearly changed for [TEGE], while relies on liquidity in the financial markets and that liquidity is impacted by the volatility of the commodity prices, which has been extreme in the past year or two. So we believe that that change in the environment is enough reason for us to adjust the strategy.

Faisel Khan – Citigroup

Assuming that it’s a difficult market, assuming that it could be difficult to sell this business entirely to someone else, how long would it take you to wind down that business, because it looks like, on your balance sheet, it’s roughly $2 million to $3 million of assets and $2 million to $3 million in liability. So what’s the duration of that book and how long would it take you to completely unwind that position?

Larry Weyers

I think Mark can provide some specifics on that, but we intend to substantially wound down by the end of 2010 and we will be pretty far wound down by the end of 2009. Mark, you have any more specifics on your portfolio?

Mark Radtke

Yes, I think if you look at the statistics associated with the news release that went out last night, you can see the duration of the forward contracts and the vast majority drop off in the next two-year timeframe, and a very significant portion drop off at the end of 2009. So we took all of that into account when we can up with this glide path, if you will, lowering the guaranteed target from the $2.6 billion at the start of the year to $1.1 billion at the end of the year and then that rate would continue.

Now, there are some longer-dated contracts in the portfolio, but, frankly, it would be fairly easy to transact around those and transfer them to another entity at some point, really through the normal course of business, those are the types of transactions we do on a daily basis.

Larry Weyers

Our real goal is to reduce the amount of capital required for this business and also the amount of guarantees, corporate guarantees required. There’s numerous ways we can accomplish that and we will on our customer contracts.

Faisel Khan – Citigroup

Looking at your guidance for 2009, you’ve got Energy Services in there at least $0.39 for the year; if you decide to sell that business, then are we effectively looking at a much lower number or is there a way to replace those earnings that you will lose in the sale of that asset?

Larry Weyers

Our guidance does reflect a reduced contribution from Energy Services. What we have not included in the guidance is any return of capital that we get from this strategy shift.

Faisel Khan – Citigroup

And one last question. Can you discuss a little bit, your ’08 guidance has been around $3.70, your ’09 guidance is $2.53 to $2.68, except for Energy Services can you give us a little more color about what are the other impacts year-over- year, that are causing you to take your numbers down for 09, outside of Energy Services?

Larry Weyers

Joe has an answer for that, I believe.

Joe O’Leary

Yes, the first thing to remember is when we gave the guidance for 2008, we didn’t include anything in there for mark-to-market volatility adjustments. So if you want to try to get this on a comparable basis, you’d have to take the GAAP earnings and add back that mark-to-market volatility that Mark mentioned earlier, and that equates to about $1.98 per share. So on that basis you’re looking at $3.81 compared to the range that we gave of $3.33 to $3.44.

Now, some of the items that caused it to come out so well, we had some weather impacts, primarily due to weather at utilities of about $0.06 and then we’ve got some solar tax credits from a solar project that we did, that’s about $0.09 per share, and then the rest is pretty much the good quarter and good year that Energy Services had that Mark talked about spoke about earlier.

Faisel Khan – Citigroup

I want to also try to bridge the gap between ’08 to ’09; I understand the Energy Service segment is going to be down in ’09, but what can you tell me what bridges the gap from ’08 to ’09 in the utilities?

Joe O’Leary

Well, you know, I kind of covered that already, but I’m happy to go back to that again. We [inaudible] about the fact that the regulated segment is going to be a reduction of $10 million from 2008 and that’s driven by the five percentage point reduction authorized equity component of our capital structure for Wisconsin Public Service and a decline in the weather normalized usage per customer net of the effects of decoupling. And keep in mind that in 2008 we had some favorable weather impacts. In 2009, we assume normal weather and we also assume the decoupling mechanisms.

On the regulated natural gas segment, again, you have a weather impact. Cold weather in 2008 helped that business segment in ’08 and we’re assuming normal weather and again we’ve got decoupling in 2009. So there’s about a $12 million reduction from 2008 driven by that.

One other item is on the holding company, which we’ve got an increase there in – it's holding company Other segment. Again that’s $4 million greater than 2008 and that’s attributed to our expected increase in earnings from the American Transmission Company.

Again, remember that the guidance for 2009 doesn’t include mark-to-market volatility adjustment. Now part of that mark-to-market volatility adjustment is that we’re going to have net after tax gains of about $29.6 million coming through in 2009, but that’s not included in the guidance because there’s going to be other mark-to-market volatility that talks to the portfolio contracts and energy services that we’re not factoring in.

Operator

Our next question comes from Steve Gambuzza – Longbow Capital.

Steve Gambuzza – Longbow Capital

The ROEs that you have listed on Page 25 of the presentation, those utility ROEs, are those regulatory ROEs or would that include any goodwill that might be on the balance sheet?

Larry Weyers

Those are regulatory ROEs.

Steve Gambuzza – Longbow Capital

So it's just kind of a return on a rate base?

Larry Weyers

Right.

Joe O’Leary

Right.

Steve Gambuzza – Longbow Capital

I just wanted to ask just general thoughts on the dividend in relation to kind of the utility earnings power and what you think kind of an acceptable long term PAT ratio is in terms of what you’ll target prospectively?

Larry Weyers

Well, I’m not sure I can – well, our long-term target has always been in the 60%, 65% range we expected that we would get a question about the dividend and its safety and the sustainability of companies with high yielding dividends like us is certainly being questioned in today’s environment. At the same time I want everybody to understand that we recognize the importance of the sustained dividend policy to our shareholders and we as a management team and the board of directors are striving to maintain the dividend and our dividend policies.

We’re not at this point able to predict the proceeds that we will receive from our strategy change, whether that be the return of working capital or any benefits from changing ownership. But the impact – or the impact on the restructured balance sheet at this time, but there definitely will be a restructure in the balance sheet.

We also we’re looking at several different opportunities to replace the lost earnings and there are some of those opportunities available so we will strive to maintain our existing dividend policies. Whether we’re able to do that will depend on the financial environment that we’re operating in and the opportunities that we’re able to invest our capital in.

Steve Gambuzza – Longbow Capital

Okay, and I take it in your financing plan you intend on doing something like $250 million of parent debt, is that correct, this year?

Joe O'Leary

It’s up to about $350 million of parent company debt and then we’ve got another $50 million in People's gas.

Steve Gambuzza – Longbow Capital

And, okay, and you mentioned that equity, you have about $40 million of equity in the plan which is generally for it to offset options, right? But you might consider additional equity, I guess if some of those balance sheet issues related to the restructuring don’t go quite as planned?

Joe O'Leary

I mean, fairly all those alternatives [Doug] you know, there’s a lot of stuff you threw in there but yes we’re assuming about $40 million being issued to provide capital from – and that’s from our stock investment plan that we’ve had running all along. Last year we pretty much were making markets [inaudible] stock to supply into the demand on that program and now we expect that it will be utilizing new shares for that.

Steve Gambuzza – Longbow Capital

Under what situation might you have to issue more equity than the $40 million?

Larry Weyers

Well right now we don’t see any need to do that unless we’re required by regulating agencies to invest in more renewables or something, but that’s not going to happen in the near term.

Steve Gambuzza – Longbow Capital

Do you see – is there a potential, when you think about the impact of the restructuring on the balance sheet obviously a lot of working capital will get freed up related to the gas storage issue, are there potential for any impairments or are there any cash costs to exit this business?

Larry Weyers

Well I think there’d probably be definitely some cash costs associated with exiting it, it depends on the opportunities that become available to us, but there could be some exit costs in the event that we have to scale back considerably.

Steve Gambuzza – Longbow Capital

Could you put some parameters around what some range of alternatives around what they might be?

Mark Radtke

I would think of them in terms of just as you’re reducing the size of the business, you lose some of the economies of scale so it's increased operating expense on a per unit volume basis but there are no – and we don’t think in terms of liquidation costs because that’s not the activity that we’re contemplating here.

It’s really adjusting the strategy and so you’ve got some essentially some friction costs associated with you know, reorganizing to properly size the business to support the volume that you’ve got on a go forward basis.

Steve Gambuzza – Longbow Capital

And presumably that’s in your guidance?

Mark Radtke

It is, that is baked into that $30 million and the numbers are – they're not large.

Steve Gambuzza – Longbow Capital

And is there any goodwill on the balance sheet related to ESI?

Joe O'Leary

Very, very modest.

Unknown Corporate Participant

Goodwill?

Joe O'Leary

Yes.

Mark Radtke

Less than $10 million.

Operator

(Operator Instructions) Our next question comes from Maurice May – Power Insights.

Maurice May – Power Insights

I’m still trying to, you know, get my arms around the decision to either sell or shrink IES, and I was just wondering, did you have a lot of pressure from rating agencies to do this?

Larry Weyers

Well, we’ve been engaged in discussion with rating agencies fairly often because of the financial situation that all businesses are facing today, so we’ve been in discussions with them. I think you can see from our cash position and our liquidity position today that we are pretty – are very solid right now. But given the illiquidity in the market place that could continue to exist for a significant number of months and given the volatility of gas commodity prices that we’ve seen in the past year or so, we believe the risk profile in this business goes up quite a bit.

Maurice May – Power Insights

Okay, and of course the issue I’m trying to grapple with here is you know, the loss of earnings from IES and the implication on your share price, which has already really taken effect I guess this morning. But you had core earnings in ’08 in the unregulated of about $100 million and if that goes down to $30 million that’s a loss of you know $0.80, $0.85 or $0.90. And so I guess what we should do is focus on other opportunities for replacement of these earnings. Can you give us any color there or elaborate for us please?

Larry Weyers

Well, first of all the major unknown right now is the amount of capital that will be returned from this strategic shift as I’ve mentioned a couple times already. In terms of opportunities for us to invest there are a number of opportunities to invest.

We talk about the infrastructure investments in the utilities that have to be made, we talk about the environmental investments, the renewable portfolio investments, but in addition to that I think we’ll probably have a non-regulated business going forward which may be more concentrated on other types of investments such as solar investments, perhaps energy efficiency investments and those types of things. We haven’t actually identified the appropriate investment strategy yet, but we will be doing that in the near term here.

Maurice May – Power Insights

Okay, so this is – this whole move can be viewed as kind of an ultra conservative move in an unprecedented time since the financial volatility is that correct? You wouldn’t have done this a year ago.

Larry Weyers

Maury, I think that’s exactly right Maury. You know we’re getting pressure because of the illiquidity in the marketplaces today and the volatility of the commodity prices and so what we end up with, with this strategic move is hopefully and unregulated business that has a lot less risk and a lot more predictability.

Maurice May – Power Insights

Yes, okay, no I understand that.

Larry Weyers

And a much larger utility base compared to our non-regulated base.

Maurice May – Power Insights

Okay, and one other question, on your guidance for 2009, the segment guidance, could you give us the ROEs that are implied in segment guidance for the various gas and electric utilities? Or maybe just the big ones, you know like WPS on the electric side and People's on the gas side.

Joe O'Leary

Maury, this is Joe, I think at this point we’re not prepared to give that type of information out. As you know we’re kind of involved in some rate cases currently and I think more information will be coming out relating to that as we get involved in those rate case proceedings.

Maurice May – Power Insights

Okay, well Joe, how about in the Wisconsin WPS Electric service territory, you just got a decision there. What do you think you could earn there, you know versus what, the 10.5 from last year?

Charlie Schrock

Maury, this is Charlie Schrock, I can’t pin it down to an exact number. Currently the authorized ROE is 10.9 and based on our estimates we’ve probably come in a little shy of that, but in the range of.

Maurice May – Power Insights

Okay, but not 100 or 200 basis points below?

Charlie Schrock

I don’t believe so.

Operator

(Operator Instructions) Your next question comes from [Brad McLennan] – Fidelity.

[Brad McLennan] – Fidelity

You know, I just want to follow up on some of the other questions being asked about the rating agencies and it seems to me that those agencies have a little bit more scrutiny when they’re looking at the unregulated businesses.

So I was just wondering, if in the recent discussions you’ve had, that’s the sense that you’ve gone as well and as Faisel and some of the other guys have mentioned, if that’s part of the reason why you’re taking this strategic look at IES?

Larry Weyers

Well, as I’ve mentioned we’ve had numerous discussions with the rating agencies and I think that the rating agencies have clearly said that if you’re going to be in the trading and marketing business like our non-regulated businesses are and you're also going to be in the utility businesses, that you can probably expect that your ratings are going to be more reflective of the riskier investment going forward, at least to the extent that it's a larger substantial part of your earnings.

But the reality is that whatever your position the rating agencies take we're free to be in any of these businesses we want to. But if you look at the other factors impacting us the illiquidity in the marketplace, the extreme volatility in gas prices and not knowing when or where this is all going to end right now because it's a global phenomena that I don't think that we've ever witnessed before.

It just raises the risk profile and so while we still feel that the trading and marketing business is a good business to be in, there are other companies I think that are better able to deal with the risk and the capital requirements for it.

[Brad McLennan] – Fidelity

So do you think if you were to execute on either divesting or at least scaling it back significantly in the next year that'll settle some of the issues at S&P and calm some of their nerves as well, or what's your view on that negative outlook?

Larry Weyers

Well, yes, I think that that probably will go a long ways towards improving our risk profile in their eyes and in the eyes of many investors.

Operator

Your next question comes from Ted Hyne – Catapult Capital Management

Ted Hyne – Catapult Capital Management

Just a quick question on just to understand the long-term growth rate, does – I know that the ultimate end game for the trading business is kind of up in the air and there's kind of a dynamic piece of that, but what have you assumed for the trading business in that 4% to 6% long-term growth rate? Is that assuming that after '09 trading contributes nothing or and that will be upside? Or is that assuming that trading continues to give at least that $0.40 number going forward?

Larry Weyers

Well, I think what we've included, and I'd ask Joe to Chime in here in case I don't have these facts straight, but what we've assumed in our budgeting for this year is that we would at least be traded, we were scaled back if we don't get some type of a transaction, we would be scaled back at the non-regulateds to something in the order of $30 million in contribution.

Now, by the end of 2010 we anticipate that we're going to be out of the riskier parts of this business compeltely and so we in the meantime we will be replacing that earnings strain by reinvesting the capital that we would be getting back from this business, or modifying our balance sheet so that we have a minimal impact on earnings per share as possible.

Ted Hyne – Catapult Capital Management

Okay, but I guess it just seems like a big chunk of the business; it's $0.40 of the $2.60 and is the 4% to 5% growth assuming that that $0.40 stays or it doesn't? I'm just confused at do I start off at the $2.20 base and grow it 4% to 5% or do I start off at the $2.60 base and grow out 4% to 5%.

Larry Weyers

I think you start off with the 2009 guidance and our 4 to 6 is based on that as a base year, so I mean if you take the earnings growth that we get from just improving our return on equity from the utilities and you add that to the investments that we're going to be making in the utility rate base, it's pretty easy to get to 6% or better.

Ted Hyne – Catapult Capital Management

Okay.

Joe O'Leary

Another thing that you have is we've got it's a 4% to 6%. It's a long-term average annual growth rate so we continue to make investments in the regulated utilities and that would also help earnings as well.

Ted Hyne – Catapult Capital Management

Okay. So it sounds like in 2010 we should assume a minimal contribution from trading and that with that fall off the return to earning close to ROEs at the utility will make up for that so we'll still be growing 4% to 6% off of the $2.60 base?

Larry Weyers

That's the general strategy, general plan, yes.

Ted Hyne – Catapult Capital Management

Okay, and then just on the – question on, and I apologize if I miss this but what are you assuming for kind of volume growth in the segments of your utilities for 2009?

Larry Weyers

Well I think Larry Borgard maybe and Charlie Schrock can handle this, but –

Larry Borgard

With respect to the natural gas utilities I think you're all familiar with the fact that on a per customer basis the volumes actually have decreased over the last 20 years at a pace of about 1% to 2% per year and that's principally why we've sought decoupling in all of our jurisdictions, or will be seeking decoupling in all of our jurisdictions to help mitigate that effect.

Charles Schrock

And on the electric side similar story but not quite the same. We expect our volumes to be relatively flat, basically flat. Perhaps slightly increasing but basically flat and as Larry said we also have decoupling now in our Wisconsin jurisdictions on both the electric and gas.

Ted Hyne – Catapult Capital Management

The electric has decoupling? I thought that was just a pilot program.

Charles Schrock

It's a four-year pilot program, correct.

Ted Hyne – Catapult Capital Management

Okay so the 4% decrease in growth you saw in the fourth quarter, you're assuming that it flattens out in our guidance.

Charles Schrock

Yes. That is correct.

Operator

Your next question comes from Paul Patterson – Glenrock Associates.

Paul Patterson – Glenrock Associates

The balance sheet, the assets in risk management activities went up about, I don't know, from $2.75 billion to about $3 billion now and the net asset value when I take the liabilities out seems to have declined to about $30 million. So I was just wondering what actually happened there and why is, since you guys are planning on getting out of it, why is it that the assets went up and the liabilities went up?

Mark Radtke

With risk assets and liabilities much like derivative accounting, there's not perfect matching there so over time we do see that net number rise up and down by not huge dollar amounts, you know, $75 million to $100 million. However, from a percentage basis that net number actually swings around quite a bit so that in and of itself is not indicative of anything other than how prices are moving on the particular assets that get the treatment to be placed in either the risk management asset or risk management liability category. It doesn't really speak to a change in underlying portfolio value. To get a perspective on that you should be looking at the total book value that we outlined in our managerial or gross margin schedules.

Paul Patterson – Glenrock Associates

Right, but I guess when we're looking at the increase, and I've asked this question before, I think you guys said it was commodity-driven, and I think commodities were going down –since the middle of the year they've been going down and we're still seeing these assets and liabilities growing I guess. So I'm wondering if there's some activity that's occurring in the business that's driving that more. Do you follow me?

Mark Radtke

Yes. No, I understand. We have a significant amount of gas storage associated with our natural gas business and that actually moves in the opposite direction of commodity prices so that perhaps is why if you're trying to correlate that to commodity moves over time you see that.

Paul Patterson – Glenrock Associates

Okay. I just seems that last year though at the end of last year it wasn't that big a number. I mean we can talk about this I guess off line but it just seems like, I mean the same thing I was going to mention was short-term debt as well. I mean I know you guys have a storage business and I was just wondering. I know you guys are planning on getting some from a working capital perspective, some cash coming in, but it does seem that the short-term debt balance difference is just considerably higher than it was last year. A little bit down quarter-over-quarter.

How should we think about how those business will be operating I guess? Let me ask it this way, how should we think about 2009 and how – what your expectation is from the assets from risk management activity and short-term debt? What you guys are comfortable with and what you're seeing there?

Mark Radtke

Yes. I would expect that short-term debt by the end of 2009 just from the non-regulated business perspective, I mean we will have that eliminated. But the net assets and liabilities, I have to tell you that we really don't think about how they are going to move. I mean that's not reflective of any economics in the business. They track with commodity prices, and you’re right, different at the end of '08 versus the end of '07 commodity prices were up significantly at the end of '08 compared to '07.

And depending upon where commodity prices end '09 and certainly we’re going to have a much smaller portfolio of contracts. That number is going to be different but I couldn’t predict it and don’t really even think in terms of trying to predict it.

Joe O'Leary

I think with that [bad debt up] in there with regards to the short-term debts, I would expect it by the end of this year we’re probably and assuming we get our long-term financing done. I would expect that the short-term debt is probably down somewhere around $350 million – down to about $350 million by the end of the year.

Paul Patterson – Glenrock Associates

Can you give us an idea about what you think you’re going to be able to sell this business for?

Joe O'Leary

And one other pre-condition, that’s for the consolidated company, just to make sure that you understand that. That was from a consolidated company basis consolidated Integrys.

Paul Patterson – Glenrock Associates

Could you just give us a feeling on what we should be thinking about in terms of comparable for this company? I mean we’re going to be selling it as you said, I mean times are tough and I know that the guys at Great Plains sort of sol – it's not exactly the same kind of business but they sold it a while ago, any sense as to what we might be thinking about in terms of the value of this business?

Larry Weyers

I personally thing it’s pre hired to think in terms of comparables, because this business as we’ve outlined year-over-year is performing very, very well and continues to perform very, very well. That’s not necessarily the case of many of the comparables you might be looking at. So I personally believe that acquires will recognize that value.

Paul Patterson – Glenrock Associates

What kind of multiples should we be thinking about? I mean can we get any sense, because this has sort of come up in other formats in terms of okay you guys are going to sell this. There are going to be some earnings going away but on the other hand you’re going to get some cash from it. Do we have any sense out there to what you guys think this might be going for when you guys talk to JP Morgan or whatever I mean I think that’s a different [inaudible] –

Larry Weyers

I think we've answered that question. We would jeopardize our negotiating ability with anybody who might be interested in a segment of it.

Paul Patterson – Glenrock Associates

And then in terms of, I guess Maurice asked this question about you guys do say in that in your 2009 guidance you expect reasonable rate release. And I can appreciate that you guys don’t want to say specifically what ROE you guys are going to be earning in what kind of areas, but what specific service territories?

But just in general, what should we think about? Because obviously you guys had some very level ROEs in 2008. Just in general I mean not being specific I guess is what I’m trying to say.

Larry Weyers

There’s pressure on the rating agencies, or not rating agencies the Commissions to try to lower the ROEs in order to keep the rate increases down. But you have to take in account the fact that debt, the cost of debt has gone up pretty dramatically in the last six months or last year. And when you take that into account, I think they’ve got to consider that when they set their authorized returns on equity.

We requested 12% in the ,12% return on equity in the Illinois rate case. And we think there are pretty good arguments that instead of lowering returns in equity at this point they ought to be thinking about making sure that utilities are solid.

Paul Patterson – Glenrock Associates

And just finally what caused the lower cost of market write down?

Mark Radtke

Metro Gas and Storage is required to get inventory treatment, so even though we have the future value of that storage hedged we need to take the physical gas in storage and market to the current market price. There’s an offset in mark-to-market gains that will be recognized when the gas is taken out of storage and all the contracts settle.

Operator

Our next question comes from David Grumhaus – Copia Capitals.

David Grumhaus – Copia Capitals

I just wanted to go back to some of the questions, because I’m still confused. When you look at the –if we think about long-term guidance and long term earnings, and you’ve got earnings in there next year in non-reg. If that business is sold do we take the $0.35, to $0.39 away and start at a lower number? I mean if you’re going to sell that business does that $0.39 disappear? I realize that from proceeds you may be able to replace it with other stuff, but -

Larry Weyers

First of all let me clarify we were talking about 2009. You said next year, which would be 2010, and we’re not giving out guidance on 2010 today, but I think you meant 2009. With regards to 2009 it—in terms of what happens to that $0.39, that depends upon what kind of deal is negotiated and with regards to a – if we do a divestiture of all or parts of the business.

David Grumhaus – Copia Capitals

But your preference is to do divestiture of all. So if you do divestiture of all, am I right in saying that $0.39 goes away?

Larry Weyers

Yes that’s correct and then we would make that up in the following year –

David Grumhaus – Copia Capitals

That’s another step. So if you sell that business and then your earnings are down at $2.20, and I realize you’re going to have upticks from rate cases and stuff like that. You’re still comfortable that you can keep paying it, a dividend that’s at $2.70 or $2.72?

Joe O'Leary

Again this gets back to depending upon what kind of deal you’re struck with and what kind of capital is returned as a result of that type of transaction. What you do to restructure your balance sheet and all of those things need to be taken into consideration.

And part of that thinking would be to also look and see what’s appropriate for dividends and we’ve shown a preference to try to maintain that dividend stream for our shareholders because we know it’s important to them and will continue to keep that in mind as we make these types of decisions going forward.

Larry Weyers

David if you look at 2009 we’ve got capital expenditures planned of just under $500 million and dividends probably shortly north of $209. That’s $700 million of cash going out for those two aspects of it, and we’re looking at a couple hundred million in earnings and a couple hundred million in depreciation, so we come up $300 million short on cash in 2009. But that does not include getting any working capital or any value from the strategy change. And by 2010 we will have that balance sheet restructured and our capital redeployed.

And on top of that we still have the earnings coming in, the earnings growth coming in from the utilities from just the rate case process and also from the investments that we can make in the regulated arena. So we think it’s a much lower risk profile and does give us a very good shot at earning a 4% to 6% earnings per share growth rate and –

David Grumhaus – Copia Capitals

In terms of the hold co. debt, any sense on timing on that? I know the markets been for hold co. debt has been less difficult today then it was two months ago, but still difficult.

Joe O'Leary

This is Joe. I would anticipate we’d be doing something probably by mid-year, but again that depends upon what happens of with regard to Energy Services, and that debt that the hold co. level debt, the parent company debt which is I think related to.

David Grumhaus – Copia Capitals

One last question, pensions. I know you get fairly good regulatory in Wisconsin, just if can you talk a little bit pensions and particularly in Illinois.

Larry Weyers

Well we haven’t had—I don’t believe we have any concerns about getting recovery of the pension makeup that has to be done in our regulatory jurisdictions. They’ve been very good to us in that regard, and so we don’t consider that a serious risk.

David Grumhaus – Copia Capitals

And in terms of having to make cash contributions in. I mean I got to say you’re fairly underfunded at this point.

Joe O'Leary

This is Joe. I think with regards to contribution for the pension plan in 2009 we anticipate we’ll end about $26 million in cash contributions in '09. That’s around what we put in is the contribution that we had in 2008. We’ve got other post retirement benefits and we expect we’ll contribute about $28 million relating to that.

Given the overall market conditions and having a well diversified portfolio [trout-casted], like many others we’ve seen decline in the valuations relating to that portfolio, that is something that will have to be addressed on a going forward basis over the longer term and I would anticipate that we’ll see that in our expected contributions to the benefit plans going forward. You know since 2010 it probably stepped up, you know significantly more from the 26 with regards to pensions.

David Grumhaus – Copia Capitals

Okay, Joe, thanks, that’s very helpful guys I appreciate the time today.

Joe O'Leary

You know just to reiterate the one point that you said is that the jurisdictions that we operate in our regulated businesses have been typically pretty good about letting us recover those types of costs during our rate cases.

Operator

(Operator Instructions) Our next question comes from Brian Olson – Luminous Management.

Brian Olson – Luminous Management

This question has sort of been asked, but I just kind of wanted to go back. If you guys are assuming kind of a 260 base losing about $0.40 as you wind down the energy services business and you’re holding a 100% dividend payout ratio, it seems like there has to be some assumption on either the long-term payout or sales proceeds from the business in order to get the kind of 3% to 4% growth rate. Just wondering if you could expand on where that’s coming from and how that works.

Larry Weyers

Well, and its very difficult for us to identify what we might be getting in terms of return of capital as well as benefits of changing ownership of the non-regulated business but you at reasonable levels we are pretty certain that we can reinvest the capital that we get back from that business and get the 4% to 6% growth rate going forward. This really will identify how that growth rate in the utilities is going to occur and I talked about the shortfall of cash in 2009, which is – if you take into account whatever we might get back from the change in strategy is not that significant to overcome.

Brian Olson – Luminous Management

I guess it looks like you’re earning a decent cash return on the business right now, that you get a fair amount of guarantees that unwind? How do you earn the same kind of return I guess on whatever, I guess on the guarantees of the comeback that you’d be earning today or in 2008?

Joe O'Leary

Well let me – this is Joe, let me try to answer that. In terms of earning on guarantees, that relates to the non-regulated business and you know, if we’re not utilizing guarantees in a non-regulated business well then you’re really back to focusing on these regulated businesses and I think we’ve covered that in quite a bit of detail here about how we expect to grow that regulated business.

It does provide some opportunities there you know going forward in the future, but I think at this time we’re trying to figure out how to reduce the overall level of corporate guarantees being utilized and also trying to preserve the liquidity and get through the next couple years here as the economy presents challenges to the entire business community.

Brian Olson – Luminous Management

So should we be looking at like a higher implied return on a lower earnings base then? Or is it really the 4% to 6% off of – or the 4% off of the 260?

Larry Weyers

4% to 6% off the 2009 guidance.

Operator

(Operator Instructions) Our next question comes from Maurice May – Power Insights.

Maurice May – Power Insights

Just a follow-up again on the downsizing of IES, if you don’t sell any of IES and you wind the book down to a level of, let’s say $30 million of earnings. What kind of cash comes back, and I’m taking about two forms of cash one, collateral and then the other just non collateral working capital.

Mark Radtke

By the end of 2009, given that glide path that we illustrated, we would see about $400 million less invested capital in the business and so that’s about 40% reduction at the end of ’09. I wouldn’t personally consider that an end state, I think that there’s optimization that can be done going forward, but that takes a little bit of time.

So, by the end of the year about 40% reduction and then the corporate guarantees come down from $2.6 billion down to the $1.1 billion target by the end of the year. And that’s perhaps a bit more of a steady state unless we were to implement alternative financing where we would finance based on a balance sheet of the non-reg independent of the parent.

Maurice May – Power Insights

The $400 million that you’re talking about as invested capital, would this be equity essentially returned to the parent?

Mark Radtke

Yes, essentially, right.

Operator

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

Steve Eschbach

Thank you very much for being part of our fourth quarter earnings conference call. A replay of this conference call will be available until May 5, 2009 by dialing tool free 866-365-4158. The text for today’s presentation is available on our website at www.integrysgroup.com, just select investors and then presentations. If you have any additional questions you may contact me directly at 312-228-5408 or [Donna Cedey] at 920-433-1857. Thank you much.

Operator

Thank you for participating in today’s call. The conference is now ended.

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