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Integrys Energy Group (NYSE:TEG)

Q4 2012 Earnings Call

March 01, 2013 9:00 am ET

Executives

Steven P. Eschbach - Vice President of Investor Relations

Charles A. Schrock - Chairman, Chief Executive Officer and President

James F. Schott - Chief Financial Officer and Vice President

Lawrence T. Borgard - President of Utilities, Chairman of of WPS, President of WPS and Chief Operating Officer of Utilities

Daniel J. Verbanac - President of Integrys Energy Services

Analysts

Maurice E. May - Wellington Shields & Co., LLC, Research Division

Michael Bates - D.A. Davidson & Co., Research Division

Kamal B. Patel - Wells Fargo Securities, LLC, Research Division

Steven Gambuzza

Maurice E. May - Power Insights

Operator

Welcome to the Fourth Quarter 2012 Earnings Conference Call for Integrys Energy Group. [Operator Instructions] At the request of Integrys Energy Group, today’s call will be recorded for instant replay.

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

Steven P. Eschbach

Thank you very much, and good morning, everyone. Welcome to Integrys Energy Group's Fourth Quarter 2012 Earnings Conference Call. Delivering formal remarks with me today are Charlie Schrock, our Chairman, President and Chief Executive Officer; and Jim Schott, our Vice President and Chief Financial Officer. Other executives, including Larry Borgard, our President and Chief Operating Officer, Utilities; Mark Radtke, Executive Vice President and Chief Strategy Officer; and Dan Verbanac, President of Integrys Energy Services, are also available for the question-and-answer session at the conclusion of our formal remarks.

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 on this call that this call is being recorded and will be available for audio replay through April 30, 2013.

Now I need to direct you to Slide 3 and to point out that this presentation contains forward-looking statements within the definition of the United States Securities and Exchange Commission’s Safe Harbor rules, including projected results for Integrys Energy Group and its subsidiaries.

Forward-looking statements contain factors that are beyond our ability to control, and in many cases, we cannot predict what factors would cause actual results to differ materially from those indicated by forward-looking statements. Except as may be required by federal securities laws, we 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.

This slide is a condensed commentary on forward-looking statements and you are encouraged to read and understand the more specific language that is contained in our filings with the Securities and Exchange Commission, including the annual report on Form 10-K we just filed, the forward-looking statement section of yesterday's news release and Slide 50 in the Appendix of the slide deck.

Slide 4 indicates that today’s presentation includes non-GAAP financial information related to diluted EPS adjusted and adjusted earnings and/or loss. We believe these are useful financial measures for providing investors with additional insight into our operating performance because they eliminate the effect of certain items that are not comparable from one period to the next. Please review the text of this slide for more information regarding these non-GAAP financial measures.

I'll now turn this call over to Charlie Schrock.

Charles A. Schrock

Thanks, Steve. Good morning, everyone, and thanks for joining us on the call today. Before commenting on our financial results, I'd like to highlight a key executive management change that became effective on January 1 of this year. Jim Schott, formerly our Vice President, External Affairs, became Vice President and Chief Financial Officer. Jim retains oversight of regulatory affairs to continue our strategic initiatives in that area. Jim has hit the ground running in his new role.

Joe O'Leary, Jim's predecessor as Chief Financial Officer, is assisting Jim in the transition and is assisting on special assignments pending his retirement later this year.

Today, I'll provide a high-level overview of our fourth quarter 2012 financial results, our operational highlights over the last few months and our expectations for the balance of 2013. Jim Schott will discuss our financial results in more detail and provide more information regarding our financial outlook. As usual, we will conclude with a question-and-answer session.

Please turn to Slide 5. The obvious challenge we faced in 2012 was weather. Chicago experienced one of the warmest years on record and the rest of our service territories experienced similar weather. This had a negative impact on our diluted earnings per share of $0.07 in the fourth quarter and $0.40 for the year. Importantly, absent this unfavorable weather, our utility segments, on average, earned above their authorized returns. You will recall that closing the gap between earned return on equity and authorized return on equity has been one of our major initiatives. In 2012, we achieved that. Our challenge going forward is to continue earning at or near our authorized return of growing our rate base. Be assured that our management team is up to that task.

In 2012, we also established the groundwork for future earnings growth. We announced the proposed purchase of the Fox Energy Center. We filed for approval of our ReACT System at the Weston plant and for our electric system modernization and reliability project in Wisconsin. We continued to move forward with the accelerated main replacement program for Peoples Gas, and we laid the groundwork for recovery of future investments in Illinois.

Before discussing our recent operational highlights, let me introduce our guidance for 2013 diluted EPS adjusted, which is shown on the bottom of Slide 5. As indicated, our guidance is in the range of $3.05 to $3.55 with a midpoint of $3.30. The range is wider than we typically provide when introducing our current year guidance. More than half of this is from the natural gas utility segment due to the uncertainty regarding the currently active rate cases for Peoples Gas and North Shore Gas in Illinois. We've widened the range for this segment to account for the large difference between our position and the position of the Illinois Commerce Commission staff in these rate cases, about $0.30 per share. Jim will have more details related to our guidance in a few minutes.

Now I'll provide a brief update on our operational activities. Slide 6 provides highlights on our regulated utility operations. I'll begin with an update on our electric utilities. First, we received all state and federal regulatory approvals needed to move forward on the Fox Energy Center transaction. We are on target to close on or about March 31 of this year as originally anticipated when we announced the deal on October 1 of last year. Further details are included in the Appendix on Slide 20.

As we noted last quarter, we've requested approval from Wisconsin -- the Wisconsin Commission or Wisconsin Public Service to install the innovative multi-pollutant control system called ReACT. This system will cost approximately $320 million and is scheduled to be in service in 2016. The ReACT project is part of our settlement with the United States EPA regarding certain of our coal-fired electric generation plants in Wisconsin. This settlement is still pending final court approval. However, it removes much of the uncertainty we were facing and provides a definitive scope for us to follow as we carry out our generation strategy.

Our environmental infrastructure improvements also included upgrade to the Columbia plant, which we owned jointly with Wisconsin Power and Light. This project began in mid-2011, and by the time that project is complete in 2014, Wisconsin Public Service will have spent about $220 million to cover our share of the upgrade.

The last regulated electric utility development has to do with our pending application for approval of system modernization, including undergrounding of electric distribution lines at the northern part of our Wisconsin service area to improve safety and reliability for our customers. We call this the System Modernization and Reliability Project or SMRP. We expect to begin this 5-year, $200 million project in 2014 after approval is received from the Public Service Commission of Wisconsin. We anticipate a Commission decision on this by the end of the third quarter of 2013.

Moving to our natural gas utility segment, we have 2 key developments. First, we installed a little over 136 miles of new main in Chicago in 2012 as part of our accelerated main replacement program, which is about 20 miles less than what we installed in 2011. The change in permitting requirements and installation methods is the reason we fell short of our 200-mile goal that we discussed in the beginning of 2012. Given these changes, a 140- to 150-mile annual run rate from this point forward seems to be reasonable, provided, of course, that we receive timely and adequate rate treatment. One vehicle for obtaining the necessary rate treatment would be through formula rates. Therefore, we have begun the legislative process for obtaining formula rates in Illinois. Legislation has been introduced in both the Illinois House and Senate. This natural gas legislation essentially mirrors what has already been approved and proposed for the electric utilities in Illinois.

As a final comment on our regulated operations, we currently have only one rate case in progress, the consolidated Peoples Gas and North Shore Gas rate cases. On or about April 1 of this year, we plan to file a full general rate case for Wisconsin Public Service for new rates to be effective in early 2014. We are considering filing rate cases for other utilities later in the year.

Turning to Slide 7, I'll provide a few highlights of our nonregulated operations. The biggest development here was that Integrys Energy Services was chosen as the exclusive supplier for the city of Chicago's Electric Aggregation Program. The enrollment process was completed by the end of January and all of our new customers are being served by Integrys Energy Services as we speak today. This is over 2 weeks ahead of schedule that we agreed to with the city, creating additional savings for our aggregation customers in Chicago.

In addition to the nearly 800,000 customers in Chicago, we enrolled another 16 communities during 2012, increasing the total number of enrolled municipalities in Illinois that we are serving through electric aggregation programs to 46 and serving more than 1 million customers.

Although our nonregulated unit margins for natural gas and electricity are lower year-over-year, delivered volumes were up and our estimated forward contracting volumes are up significantly at December 31, 2012, compared with December 31, 2011.

Even without the City of Chicago's electric business, forward contracted volumes increased for both electric, retail electric and retail natural gas businesses by over 20%.

Another development for our nonregulated operations is that we reached agreements to sell 3 of the 4 remaining legacy generating units. The Westwood plant sale closed in November, and we expect to Beaver Falls and Syracuse to close in the first quarter of this year. That leaves one unit, the Combined Locks Energy Center located in Wisconsin. As it is not core to our strategy, we expect to sell that 45-megawatt gas-fired unit within a year and are actively pursuing a buyer for the unit.

I'll now turn the call over to Jim Schott.

James F. Schott

Thank you, Charlie. I'll cover our financial results for 2012 in a little more detail and discuss our financial expectations for 2013. Before I do, Charlie, I want to thank you for that introduction and welcome to my new role. I, too, am grateful for Joe's assistance and advice during this transition.

Let's begin by reviewing the -- let's begin the financial review by turning to Slide 8. The fourth quarter of 2012, we posted diluted EPS adjusted on a consolidated basis of $0.89 per share, down $0.11 per share from the same period a year ago. For the full year 2012, we posted diluted EPS adjusted of $3.26, down $0.08 per share from the full year 2011. As Charlie noted, absent weather, our regulated utilities did very well in the year-over-year comparison, as did our investment in American Transmission Company. Competitive pressures were the main driver behind the quarterly and full year shortfalls at Integrys Energy Services.

The chart in this slide takes you from our GAAP reported numbers to adjusted numbers for both the fourth quarter and full year 2012 versus the comparable periods in 2011. Our consolidated results on a diluted EPS adjusted basis for the quarter and full year 2012 fell short of what we earned in 2011. As Charlie indicated, weather was the primary driver for this year-over-year decrease in earnings. The fourth quarter and full year weather impact for 2011 -- 2012 and 2011 compared to normal and net of decoupling is included in the table at the bottom half of Slide 8.

On Slide 9, we show the changes in adjusted earnings by segment for the fourth quarter of 2012 compared with the fourth quarter of 2011 and full year 2012 compared with the full year 2011. Additional detail on the key variance drivers for each segment can be found in the Appendix on Slides 36 through 40 for the quarter-over-quarter comparisons and Slides 43 through 47 for the full year comparisons.

Turning to Slide 10. You'll see our capital expenditure plans for 2013 through 2015. I'll summarize the changes from what we have previously provided. Note that the 3-year projection now extends through 2015. Approximately $2.1 billion of the total $2.8 billion projected capital spend over the next 3 years centers around our rate-based investments at Wisconsin Public Service and Peoples Gas. So I will focus my comments on the big projects at those 2 utilities.

First, Wisconsin Public Service's largest capital expenditure in 2013 is for the acquisition of the Fox Energy Center that we expect to complete on or about March 31. This represents $390 million of the $670 million of capital expenditures in 2013. Environmental retrofit programs, such as the projects at Columbia and Weston 3, represent another $400 million over the 3-year time frame. We expect to invest at least $40 million a year in the system modernization and reliability project beginning in 2014, assuming approval from the Public Service Commission of Wisconsin of this 5-year project.

The remaining dollars to be invested in the 3-year time frame are for a number of smaller generation and distribution projects. For Peoples Gas, the primary CapEx projects include the accelerated main replacement program, or AMRP, and other distribution projects. Regarding AMRP, we anticipate spending $220 million in 2013, the amount included in our current rate case filing with the Illinois Commerce Commission and about $140 million per year in 2014 and 2015. Our AMRP investment over the entire 3-year time frame is contingent upon receiving appropriate regulatory recovery in our current rate case, as well as appropriate rate treatment going forward such as the proposal contained in the formula rate legislation Charlie mentioned.

The largest item in our other distribution system additions is the Calumet project for Peoples Gas we have mentioned in our previous conference calls. That represents about $150 million beginning in 2013 and running through 2015.

Slide 11 shows our expected depreciation expense at the regulated utilities for 2013 through 2015.

Slide 12 shows our projected rate base for 2013 through 2015 for our regulated natural gas -- electric and natural gas segments. Our rate basis has been adjusted from our August 2012 projections due to the pending acquisition of Fox Energy Center. About $300 million of the $4.2 billion of projected rate base in 2013 is related to partial year ownership of the Fox Energy Center. I'm highlighting this because while we are authorized to defer the equity earnings of that investment for future recovery and we'll seek recovery in our upcoming Wisconsin Public Service rate case filing, GAAP does not allow us to recognize the equity earnings related to this investment until it is recovered in rates.

Second takeaway from the slide is the significant increase in rate base from 2013 to 2015. The increase in rate base from 2013 to 2015 is nearly 30%. As we have discussed elsewhere, we have regulatory strategies in place to include this rate base growth in rates. As I will discuss in the next slide, a portion of this will be financed through hybrid debt and our stock investment plan. Balance will be funded internally. As a result, this rate base increase should result in a significant contribution to EPS growth over this period.

Moving to Slide 13. You'll see our financing summary, which includes what we did in 2012 and what we expect to due in 2013. Let me focus on the latter. This anticipates our Fox Energy Center acquisition will close on or about March 31 of this year. Given this and what we know about bonus tax depreciation for this year, we have determined our new equity needs for 2013. We have begun issuing new shares of stock to cover the equity needs of our stock investment plan, which includes dividend reinvestment and our stock-based employee benefit plans. We expect to generate approximately $40 million in equity during 2013 through our stock investment plan. We do not anticipate issuing any other equity this year.

We are also planning to issue up to $400 million of hybrid debt securities, which is long-term debt that receives partial equity treatment in our capital structure by Moody's and Standard & Poor's. While we're watching the markets closely, our plan today is for this to occur in the second half of 2013.

With respect to our long-term debt financing, we plan on approximately $450 million for Wisconsin Public Service in 2013. About $147 million of that is to refinance other long-term debt maturing in 2013. The balance will be used to support the Fox Energy Center acquisition and the other projects we talked about.

For Peoples Gas, we expect to issue about $200 million of new long-term debt. Approximately $120 million of that debt will be used to refinance existing debt maturing this year. The balance will be to fund our AMRP and other distribution capital projects.

For North Shore Gas, the $55 million of new long-term debt is about $8 million higher than its 2013 maturing debt.

Our financing plans for Integrys Energy Group are expected to support our current credit ratings. Combined with our business plan and portfolio of businesses, our current dividend is sustainable. We expect our dividend payout ratio to decline to utility industry norms as our earnings grow over time.

Turning to Slide 14. As Charlie indicated, our guidance for 2013 diluted EPS adjusted is in the range of $3.05 to $3.55 with the midpoint of $3.30. At this time, the only special item in our guidance is a $0.02 per share expected loss from Integrys Energy Services' Combined Locks Energy Center in Wisconsin. The operations of that power plant are classified as discontinued operations. As such, we add the expected EPS loss back to arrive at our diluted EPS adjusted. Note that the consolidated guidance is slightly narrower than the sum of the segments. Given the large segment range as discussed above, we have slightly tempered the consolidated range.

Moving to Slide 15. We provided a table that starts out with our 2012 actual diluted EPS adjusted by reporting segment and shows the changes by key items to get you to the midpoint of our 2013 diluted EPS guidance. The easiest item to explain is the weather. The 2012 full year information in that column was taken from what we presented on Slide 8. And I will cover each segment's changes other than those for normal weather.

For the regulated electric utility segment, the $0.05 per share decline compared to weather-normalized results in 2012 is primarily related to our fuel cost. In 2012, our actual cost of fuel and purchased power was less than the amount included in rates. Under the Wisconsin fuel rules, we are allowed to retain the first 2% of fuel savings, which produced an earnings benefit last year. We have not forecasted that to recur in 2013.

For the regulated natural gas utility segment, the $0.32 per share reduction compared to weather-normalized results in 2012 is primarily related to the lag in the implementation of new rates in our current Illinois rate case versus the spend now occurring. That delay, or regulatory lag, will create a significant earnings shortfall in 2013 that did not occur in 2012.

For the electric transmission investment segment, we expect a $0.03 per share increase in 2013 earnings from our investment in the American Transmission Company.

For the holding company and other segment, we expect increased market interest for our compressed natural gas transportation fueling business will drive a smaller loss, resulting in the anticipated improvement in that segment's 2013 earnings.

For Integrys Energy Services' core diluted EPS adjusted, we are anticipating an $0.11 per share increase in total margins as volume growth is more than enough to offset a decline in unit margins. We're planning to increase our sales force and marketing efforts during 2013 to drive growth in 2014 and beyond. This investment is expected to reduce 2013 earnings by $0.14 per share.

Finally, there's a $0.03 per share decline related to taxes this year versus last year due to a onetime tax benefit we recognized in 2012 related to prior period audits.

Now I will turn the call back over to Charlie Schrock. Charlie?

Charles A. Schrock

Thanks, Jim. Before taking your questions, I'll summarize our key investment highlights shown on Slide 16, which are consistent with what we shared 3 months ago. Importantly, the execution of our business plan for the regulated utilities remains on track. We achieved a significant milestone by earning above our authorized returns on a weather-normalized basis in both the electric utility and natural gas utility segments. This is due to the outstanding effort put forth by our leadership and our employees in those businesses. We continue to make prudent investments in our utilities to continue to provide safe, reliable and affordable service for our customers.

Our 34% ownership in American Transmission Company continues to contribute to earnings as expected. We expect our regulated businesses to contribute approximately 90% of our consolidated net income and our nonregulated businesses, comprised almost entirely of Integrys Energy Services, to contribute the remaining 10%. Our business risk profile today is commensurate with this mix of regulated and nonregulated businesses.

Our guidance for 2013 diluted EPS adjusted on a consolidated basis is in the range of $3.05 to $3.55. Our portfolio of regulated and nonregulated businesses, our operational excellence initiatives and cost control efforts will enable us to meet our 2013 consolidated financial objectives. We continue to work toward growth and diluted EPS adjusted of 4% to 6% on an average annualized basis, with 2011 as the base year, and going through 2015. Our work in 2012 established the foundation for that future earnings growth.

Given our solid long-term business plan and portfolio of businesses, our current dividend is sustainable, and our dividend payout ratio will decline to utility industry norms as our earnings grow over time.

We will now open up the call for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We have a question from Maury May, Wellington Shields.

Maurice E. May - Wellington Shields & Co., LLC, Research Division

A couple of questions on Illinois, Peoples Gas. First of all, on the legislative front, time-wise, when could you expect legislation to positively impact the recovery on AMRP spending?

Charles A. Schrock

Yes, Maury, I'm going to have Larry address that.

Lawrence T. Borgard

Maury, as you know, and as Charlie and Jim mentioned, the legislation has in advanced in the Senate -- both in the Senate and the House in Illinois earlier this month, the session -- the earliest that it could happen is prior to the session ending in the end of May of this year. So that's really kind of the earliest that it could possibly happen.

Maurice E. May - Wellington Shields & Co., LLC, Research Division

Okay. Now, suppose you do get positive legislation, how does this translate into regulatory recovery?

Lawrence T. Borgard

Again, as Charlie and Jim mentioned, the legislation that's currently proposed is patterned after the electric legislation that was put into law here in Illinois. So we would expect that it would follow a similar mechanism, and there would be -- it's a formula rate mechanism that has true-ups with it.

Maurice E. May - Wellington Shields & Co., LLC, Research Division

Okay. I don't follow any electric utilities in Illinois, so can you describe this mechanism for me?

James F. Schott

Yes, Maury, it's Jim Schott. Mechanically, how the formula would work is if the legislation proceeds, as Larry described, that it would be effective in 2014, potentially 2013, but most likely 2014 and beyond.

Maurice E. May - Wellington Shields & Co., LLC, Research Division

So you would not need any approval from the Illinois Commerce Commission? You could just unilaterally put it into effect based on the legislation.

James F. Schott

No, no. There's lots of approvals that you have to go through. Financially, that's how it would occur. Once the legislation passes, you have to present a tariff to the Commission. You also have to present a -- if 2014 is the original effective year, you'd have to present an estimated 2014 rate that then gets trued up in 2015. There's several filings that are required with the Public Service Commission. Under the electric legislation, presumably that all those requirements would continue under the gas legislation.

Maurice E. May - Wellington Shields & Co., LLC, Research Division

Okay. But Jim, I think you just used the keyword "financially." And so if you had enabling legislation, you could proceed on the regulatory front. But financially, you could start reporting earnings as if the mechanism were in effect, right, 2014?

Charles A. Schrock

That is correct. That is correct.

Maurice E. May - Wellington Shields & Co., LLC, Research Division

Okay. Okay. And second question also has to do with recovery in Illinois, but on the negative side. What happens if there is no legislation? How far back do you pull the investment in the AMRP?

Lawrence T. Borgard

Maury, this is Larry again. Obviously, there are a number of kind of balls in the air with respect to that. We do, as a result of what we call the Leucadia legislation, have to file by, I believe, August of 2014. This was the requirement that we file essentially every other year. So that would be our next rate case filing in Illinois.

Maurice E. May - Wellington Shields & Co., LLC, Research Division

Okay. But I'm not talking about that. What I'm talking about is, what kind of pullback will you make? You're talking about spending a couple of hundred million this year. You're talking about spending $140 million every year on an ongoing basis. What happens to that $140 million?

Charles A. Schrock

Maury, this is Charlie. There's a lot of different things, as Larry said, that you have to consider. So a lot would depend on the circumstances at the time. But just to kind of give you an idea of where we started, the annual run rate of CapEx at Peoples, I think, was in the range of $50 million to $100 million. So one way to look at it would be to kind of go back to a more normal or measured approach towards a replacement of pipe in Chicago. Depreciation turns out to be around $45 million to $50 million for Peoples. So overall, you're going to probably going to be in that range.

Operator

[Operator Instructions] We have a question from Michael Bates, D.A. Davidson.

Michael Bates - D.A. Davidson & Co., Research Division

On the financing, I just wanted to see if we could get a little bit more color on the hybrid securities you would expect to issue in the second half of the year. How much -- what would be the mix in the cap structure between the long-term debt and equity?

Charles A. Schrock

Michael, thanks for the question. I am going to have Jim respond to that for us.

James F. Schott

Yes, Michael, it'll show up on our financial statements as debt. S&P will treat approximately -- will treat 50% of that though as equity in determining their ratios. Moody's will treat 25% of it as equity in determining their ratios. Does that answer the question?

Michael Bates - D.A. Davidson & Co., Research Division

It does. And do you have any idea as to what type of coupon you would expect to issue out? Would the coupon be comparable to traditional long-term debt?

James F. Schott

There's been similar hybrid debt offerings in the last few -- last couple of months that have been in the 5% to 5 1/4% range. And that's assuming about a 60-year term and that's pretty much the structure we're looking at.

Operator

Next question comes from Kamal Patel, Wells Fargo.

Kamal B. Patel - Wells Fargo Securities, LLC, Research Division

Wanted to go back to the Chicago muni contract and I had a couple of questions surrounding that and hopefully, I didn't miss the commentary -- much of the commentary around it. Now from what I understand, this contract is layered as an alternative to the usual standard offer service offering that you have for the Chicago customers. Could I just get some details around how the contract works?

Charles A. Schrock

Yes, Kamal, I'm going to have Dan Verbanac, our President of Integrys Energy Services, speak to that.

Daniel J. Verbanac

The contract itself with the city goes through May of 2015. Although the city lock-in price is only through May of 2014, we expect them to lock prices in for the last 12 months sometime here at this year, in 2013. And how that contract works is it's an opt-out aggregation program, meaning that customers who are eligible for the program and customers that are eligible are customers who are still on a standard service offer of the utility. They're not being served by another ARES or alternative supplier. They then get an -- there's an opt-out period of approximately 2 weeks that they have the option to opt out of the program. If they do not do that, they fall underneath this program and will be served at these new aggregation rates.

Kamal B. Patel - Wells Fargo Securities, LLC, Research Division

Does that imply that we should have an idea by month [ph] as to how many customers you've retained through this? Is that correct?

Daniel J. Verbanac

Yes, actually, the operations of this program have been going very well. In fact, we've enrolled customers, as Charlie mentioned in his comments, about 2 weeks earlier than scheduled that we gave the city. So all customers are enrolled. And as of today, we're serving all the customers that are in the program and that number is approximately 800,000 customers.

Kamal B. Patel - Wells Fargo Securities, LLC, Research Division

Okay. One last question on the same topic. How do you manage your supply contracts for serving these customers given you're able to provide under a fixed term right now, but going forward, given that your supply prices -- or your sales prices might be more fixed?

Daniel J. Verbanac

Yes, with the term of the agreement through 2015 and today because they've locked in their price through May of 2014, we have also entered into supply agreements that hedge that price for us. And as part of those supply agreements, we have some optionality built in to vary the volume based on customer load. So it is a back-to-back type transaction. We are hedged through the term of the fixed price. So when they lock in their last 12 months, we will fix the price at that time and by the associated commodity.

Operator

Our next question comes from Steve Gambuzza, Millennium.

Steven Gambuzza

I just had a question on the financing plans. How much capacity in your capital structure do you have to issue hybrid debt, in your view?

James F. Schott

Steve, this is Jim Schott. We confirmed with S&P that, that we -- that $400 million is in the range. But we really don't want to go much higher than that.

Steven Gambuzza

Okay. And so basically, you'll issue this debt at Integrys Energy level and then infuse that into Wisconsin Public Service Company as equity, effectively?

James F. Schott

Right.

Steven Gambuzza

Okay. And then I just -- with respect to kind of the long-term earnings target and when you reflect on the results that you posted in 2012 and you adjust for weather, I think you identified roughly $0.40 of earnings impact negative from weather versus normal in 2012. Would that -- that would put you in kind of $3.66 weather normalized. Is that correct for 2012?

Charles A. Schrock

Yes.

James F. Schott

Yes.

Steven Gambuzza

And I guess, you've given a wide range of earnings guidance for 2013, but even the high end is kind of below where you finished 2012. And I'm just trying to get a sense for -- I realize there's some growth in the acquisition that you've highlighted on your rate base slides, but do you view that kind of 4% to 6% growth rate as really kind of a commitment that you're going to be evaluated against or an aspiration?

Charles A. Schrock

Steve, this is Charlie. I'm going to have Jim fill in a little more detail with you in terms of the year-over-year comparison of our guidance and why we're -- where we are this year. But in terms of your last question, as I mentioned in my comments, the work we did last year, in terms of Fox Energy Center and our other utility investments, the work we did on our non-utilities has really poised us for good growth. So we got execution risks and, of course, we need to get reasonable treatment from our regulators in all of our jurisdictions to proceed. But based on where we're at, I feel pretty confident that given those risks that we have, we're going to be in pretty good shape to grow those earnings. Let me have Jim explain the differences kind of a year-over-year and why we are where we are with the earnings guidance.

James F. Schott

I think you pretty much nailed it. On a weather-normalized basis with $3.66 and the decline from the $3.66 towards the midpoint, say, of our guidance of $3.30, is the biggest driver is probably the regulatory lag in Illinois. Larry mentioned -- and so that's holding us back in 2013. Larry mentioned that we've got to file a rate case next year, and our plans would be to file that early in the year like we have traditionally done and file that in, say, February of 2014 rather than August of 2014. If we file in February 2014, we won't experience a regulatory lag in 2015. So that will go away. So we'll pick that up. And then on top of all the projected average rate base growth from the utility group, we'll drive a significant amount of growth. And then -- and finally, TEGE, our Integrys Energy Services, we're expecting -- they've always shown very strong volume growth the last couple of years. We expect that to continue. And if unit margins stabilize, there'll be growth in that area. So I think those 3 areas combined really get us to the 4% to 6% by 2015.

Charles A. Schrock

If you take a look at -- and thank you, Steve. Take a look at Slide 15 in our presentation deck. I think that one will help you understand a little bit of the year-over-year comparison.

Operator

[Operator Instructions] We have a question from Maury May.

Maurice E. May - Wellington Shields & Co., LLC, Research Division

Yes, just kind of a follow-up to what Steve was talking about, the year-over-year weather impact. We've had now 2 months of winter weather. And so can you give us a weather report on how things have been going in your service territory, especially Chicago, in January and February of this year?

Charles A. Schrock

Yes, Maury, I'm going to have Larry comment on that.

Lawrence T. Borgard

Yes, Maury, the weather in Chicago, and really across the 4 states that we operate in, for January was about 5% warmer than normal. February, obviously, just ended. But we expected February weather was at least at normal, if not a touch cooler than normal.

Maurice E. May - Power Insights

Okay. So the first 2 months are 5% warmer than normal. And what percentage warmer than normal were they were last year?

Lawrence T. Borgard

No. January of 2013 was 5% warmer. February was about right on, if not a little bit cooler.

Maurice E. May - Power Insights

Oh, I'm sorry. Okay, okay. So we're probably, on balance, a little bit warmer than normal. What is that versus last year?

Lawrence T. Borgard

That's -- last year was much warmer than normal and...

Maurice E. May - Power Insights

Can you do better than much? Can you do a little bit better than -- describe it?

James F. Schott

Yes, Maury, I'm looking at our Supplemental Data package, which has a heating degree day data for the first quarter of 2012, and we were about 24.3% warmer than normal last year.

Maurice E. May - Power Insights

Wow, okay. Good. All right. So things are looking better for the first quarter of 2013?

James F. Schott

Much.

Operator

Our next question comes from John Alli [ph], Decade Capital.

Unknown Analyst

Just a quick question, I apologize if you touched on this already. I was hopping between calls this morning. The average rate base slide you guys put in there is great. Is -- or how is bonus depreciation reflected in that? Or is it at all?

Charles A. Schrock

Yes, this would reflect the most recent -- this is Jim Schott. That would reflect the current legislation.

Unknown Analyst

Great. Jim, how much in '13 and '14 are you guys kind of putting in there?

James F. Schott

The number for -- the tax impact for 2013 is about $45 million of bonus depreciation.

Unknown Analyst

That's the cash backs?

James F. Schott

Yes.

Unknown Analyst

Okay. And does that hit rate base now? Or do you wait a rate case and then compute it?

James F. Schott

It would be factored -- I mean, it's in the Illinois rate case now. It was an update to our filing. So it's in the Illinois case now. It's not in the Wisconsin case and it will -- but it will be when we file for 2014.

Operator

I show no further questions. I'll now turn the call back over to Mr. Steve Eschbach for closing remarks.

Steven P. Eschbach

Thank you, and thank you for being a part of our fourth quarter earnings conference call. A replay of this conference call will be available until April 30, 2013, by dialing toll-free (866) 463-2176. The full transcript of today's conference call will be available on our website at www.integrysgroup.com before the end of the day on Wednesday, March 6. Just select Investors and then Presentations. If you have any additional questions, please contact me directly at (312) 228-5408 or Donna Sheedy at (920) 433-1857. Thank you.

Operator

Thank you for participating in today's call. The conference has now ended. You may disconnect at this time.

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Source: Integrys Energy Group Management Discusses Q4 2012 Results - Earnings Call Transcript

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