Integrys Energy Group, Inc., Q1 2009 Earnings Call Transcript.

May. 1.09 | About: Integrys Energy (TEG)

Integrys Energy Group, Inc., (NYSE:TEG)

Q1 2009 Earnings Call

May 1, 2009 9:00 am ET

Executives

Steven Eschbach - VP IR

Charlie Schrock - President and CEO

Joe O'Leary - CFO and SVP

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

Larry Borgard - President and COO, Integrys Gas Group

Analysts

Paul Patterson - Glenrock Associates

Faisel Khan - Citigroup

Maurice May - Power Insights

David Grumhaus - Copia Capital

Mullin Robert - Duquesne

Vasaha Tafi - Jaket Capital

Operator

Welcome to the First Quarter 2009’s Earnings Conference Call for Integrys Energy Group Incorporated. All lines will remain in listen-only until the question-and-answer session. At that time instructions will be given should you wish to participate. 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.

Steven Eschbach

Thank you, good morning. Welcome to Integrys Energy Group’s 2009 first quarter earnings conference call. Delivering formal remarks with me today are Charlie Schrock, our President and Chief Executive Officer; and Joe O'Leary, our Senior Vice President and Chief Financial Officer. Other executives, including Larry Weyers, our Executive Chairman; Larry Borgard, our newly appointed President and Chief Operating Officer – Utilities; and Mark Radtke, President and Chief Executive Officer of our nonregulated subsidiary, Integrys Energy Services, are 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 Investor, 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 August 4, 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 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 also refer you to the forward-looking statement section of yesterday’s news release for further information. Except as maybe required by federal securities laws, Integrys Energy Group and its subsidiaries undertake no obligation to publicly update or revise any forward-looking statements contained in this presentation, whether the result of new information, future events or otherwise.

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

I will now turn this call over to Charlie Schrock. Charlie?

Charlie Schrock

Thanks, Steve. Good morning everyone and thanks for joining us on the call today. Please turn to slide five as I review today’s agenda.

First, I am going to give a short overview of our first quarter results, a quarter where absent non-cash accounting charges, Integrys Energy Group performed well. Since our last quarterly conference call on February 26, our executive management team has spoken to many of you in a number of different forums, and you have provided us with valuable insights. So today I will address the status of our strategy change and capital redeployment effort with respect to Integrys Energy Services. We are prepared to give you a better sense on the timing of the transaction, more clarity on what transactions are being considered, an update on quantifying potential proceeds and recovered capital, and the anticipated redeployment of these funds.

Our objective is to strike a balance. We want to be as transparent as possible with the financial community and our investors without compromising our goal of executing an effective divestiture process that maximizes value for our shareholders. I will then comment on our quarterly dividend and the future potential of our strategy that focuses on our core utilities. This will be followed by Joe O’Leary, who will provide the financial overview for the first quarter of 2009, the details on our current financial position and liquidity, an update on our guidance for 2009, and introduce guidance for 2011, the first full year we expect to be a predominantly regulated Midwest regional utility company.

Moving to slide six, our loss for the quarter included two large non-cash losses totaling $300.3 million after tax. One was related to a $248.8 million after tax goodwill impairment loss in the natural gas utility segment, and the other related to accounting losses totaling $51.5 million after tax for Integrys Energy Services, resulting from derivative and inventory accounting activities. Integrys Energy Services expects to recover certain non-cash accounting losses when the related transactions are physically settled. Again, these are non-cash losses and our core utility businesses performed well during the quarter. Absent these non-cash losses, Integrys Energy Group would have earned $120.1 million in the first quarter of 2009 compared with about $96.1 million in the same quarter last year.

We are moving forward with our capital redeployment program and core utility focus, which I’ll now cover beginning with slide seven. At the heart of our strategy for the full divestiture of Integrys Energy Services and redeployment of capital is a desire to achieve the highest value for our investors. The planned divestiture is part of a coherent, logical strategy, which will yield proceeds and recovered capital to support our core utility business and strengthen our balance sheet. Our dividend policy is unchanged. We have revised our diluted earnings per share guidance for 2009 and are providing initial guidance for 2011 to reflect the divestiture of Integrys Energy Services. Our divestiture process is moving forward as planned, and we are somewhat constrained in terms of the detail we can provide surrounding the divestiture, but I want to emphasize that our first priority is maximizing value for our shareholders.

Now please turn to slide eight, and I will provide an update on our planned divestiture of Integrys Energy Services. We are driving a structured divestiture process with assistance from our financial advisor, JPMorgan Securities, and we are making progress. And as we stated during our last earnings conference call, our preference is for a full divestiture of Integrys Energy Services. We may be able to achieve this through either one transaction or multiple transactions with various buyers. At this point, it is too early to disclose specifics about discussions we are currently engaged in, or the value we are expecting to receive. However, I can tell you that there are a few smaller transactions that could arise in the near-term that should not adversely affect and could actually enhance a larger transaction of greater value.

Given the status of our negotiations to date, it is not prudent for us to provide a value, or a range of values that we expect any one or a series of transactions may provide. However, we want to provide some guidance on the potential proceeds and return of recovered capital for Integrys Energy Services. We continue to anticipate that the recovered capital will be roughly $600 million by the time we have fully executed our strategy change.

Again, our ultimate goal is to achieve the highest value for our investors, and we believe the initiatives we have underway and the interest we have seen from potential buyers will achieve this goal. With respect to timing, we expect to make an announcement regarding Integrys Energy Services or provide more details by the end of the third quarter or early fourth quarter 2009. Given this timeline, we could have a divestiture completed as early as the fourth quarter of this year, providing all regulatory approvals that may be required are received.

What will we do with the anticipated proceeds and return of recovered capital? Slide nine discusses the balance sheet restructuring we mentioned previously. The most advantageous thing we can do is to pay down debt. This will position us well to fund future investment in rate base growth. In addition, following the full divestiture of Integrys Energy Services, we would expect to have reduced liquidity needs and we will be able to reduce our credit facilities from $2.4 billion at December 31, 2008, to approximately $1.4 billion. As we execute our financing strategy, we are continuing to communicate with the credit rating agencies, so they fully understand the timing of and benefit from exiting the Nonregulated Energy Services business segment.

Lastly, I will comment on the status of our quarterly dividends. The company understands how important the quarterly dividend is to its shareholders. During the review of the quarterly dividend, we take a long-term view on our financial expectations, including earnings as well as cash flow. At this point in time, the Board has left the dividend unchanged.

Our focus is to maintain the financial strength of the corporation by ensuring that it has the cash to satisfy its needs and the necessary financial facilities to back core operations. We believe that the financial strength of the corporation is important to our long-term investors. We also believe that the long-term earnings outlook for our company will reduce our current payout ratio to a lower level. We strive to provide good returns to investors through the payment of dividends, an increase in earnings per share, and limiting the number of shares outstanding.

Moving to slide 10. While we work on the sale of our nonregulated operations at Integrys Energy Services, we will concentrate our efforts on growth in our utility investments. Our goal is to have all utilities earn at or close to their authorized return on equity. At this time, many of our utility subsidiaries are earning below their authorized return. We discussed in our last earnings conference call that our 2008 net income attributed to common shareholders would have been higher by $44.7 million if all of our regulated utilities had earned their authorized returns on equity. In 2008, we completed five rate cases, which has had a positive impact on our first quarter 2009 results compared with the same quarter last year.

In 2009, we will be processing five more rate cases and expect our earnings to improve beginning in 2010 as a result of those rate cases. As always, we will strive for operational excellence to control costs and to help improve earnings. We have substantial opportunity to increase investment in our regulated rate base and thereby increase earnings. We have opportunities to invest capital exceeding $3 billion in our regulated utilities over time. For example, over $2 billion is expected to be required to replace the aging natural gas mains at Peoples Gas, and an additional $500 million to $1 billion is planned for environmental retrofits and renewable energy investments required for our regulated electric utilities. The timing of these investments will be dependent on the regulatory treatment received and the impact on our customers.

In addition, we expect to continue investing in the growth of the American Transmission Company. Recall that we have a 34% equity ownership in this company, and American Transmission Company is projecting growth in its net investment in utility plant of $1.1 billion from 2009 through 2018.

Now I will turn this call over to Joe, who will provide you with an overview of our financial results, our current liquidity situation, our capital expenditure program, and our long-term financing plans. Joe will also provide an update to our 2009 diluted earnings per share guidance and introduce guidance for 2011. Joe?

Joe O'Leary

Thank you, Charlie. Turning to slide 11, during the first quarter of 2009 in accordance with generally accepted accounting principles or GAAP, we recognized a net loss attributed to common shareholders of $180.2 million compared with net income attributed to common shareholders of $135.8 million in the same quarter a year ago. This resulted in a loss per share of $2.35 for the quarter ended March 31, 2009 compared with diluted earnings per share of $1.77 for the same quarter in 2008.

There are six key items driving the negative $316 million quarter-over-quarter change, and we have presented them in after-tax dollars. Additional detail related to the quarter-over-quarter drivers by segment can be found on slides 26 through 29 in the Appendix contained in the slide deck for today’s presentation and in the news release we issued last evening.

The first quarter 2009 net loss attributed to common shareholders of $180.2 million included $300.3 million of after tax non-cash losses related to a goodwill impairment loss in the natural gas utility segment, and accounting losses at Integrys Energy Services resulting from derivative and inventory accounting activities.

First quarter 2008 net income attributed to common shareholders of $135.8 million, included $39.7 million of after tax non-cash accounting gains at Integrys Energy Services resulting from derivative and inventory accounting activities.

Exclusive of these after tax non-cash items recognized in the first quarters of 2009 and 2008, Integrys Energy Group’s earnings would have increased quarter over quarter to net income attributed to common shareholders of $120.1 million, or $1.56 diluted earnings per share for the quarter ended March 31, 2009, from net income attributed to common shareholders of $96.1 million, or $1.25 per share for the quarter ended March 31, 2008.

Turning to slide 12, let me mention a couple of important details surrounding the $248.8 million decrease in earnings related to the goodwill impairment loss. First, the goodwill impairment is a non-cash charge to earnings. Second, this will not create problems in complying with current covenants for our credit facilities or our long-term debt contracts.

On slide 13, note that this non-cash goodwill impairment loss is added back when arriving at diluted earnings per share-adjusted. This table also removes the financial results from Integrys Energy Services for the first quarter of 2009 as well as the first quarter of 2008 given that the impact on earnings of our change in strategy for this segment is not comparable to the strategy in place during 2008. As Charlie commented earlier, our core utilities performed well in the first quarter of 2009 versus the same period a year ago.

Moving on to slide 14, I would like to update you on our current liquidity situation. First and foremost, Integrys Energy Group continues to have a strong financial position. We have credit facilities totaling approximately $2.2 billion in 23 financial institutions. The largest exposure we have at any one financial institution is about 13% of our total credit facilities. At April 30, 2009, approximately $1.3 billion of the credit facilities were unused and available for us to support our short-term borrowing needs in addition to $300 million of cash on hand.

Please note that our estimated capital expenditures and estimated utility depreciation are set forth in the Appendix on slides 23 and 24. Slide 15 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 for Peoples Gas. We do not currently have plans to issue common stock through the end of 2011, with the possible exception of a minimal number of common equity shares for certain stock-based compensation programs. We will continue to assess this throughout the year based on the outcome around Integrys Energy Services and prevailing market conditions.

Turning to slide 16, I will now update you on our earnings guidance for 2009. Note that we have changed the format for presentation of this information from what we provided during our last earnings conference call, and our focus is primarily on our core utilities and on operations included within our holding company and other segment. The form that the divestiture of Integrys Energy Services could ultimately assume will produce a wide range of earnings that will impact our financial results. Accordingly, and given our strategic shift to focus on our core utility business, we have excluded guidance for our nonregulated energy services and marketing segment. We have added back the impact of the goodwill impairment when arriving at diluted earnings per share-adjusted.

Please note that we have slightly increased our estimated diluted earnings per share-adjusted for the remainder of our business. Our new guidance assumes rate relief for certain utilities, availability of generation units, and normal weather conditions for the remainder of 2009. We have also provided diluted earnings per share-adjusted guidance by segment, which excludes Integrys Energy Services and the impact of the goodwill impairment. We have indicated our previous earnings per share guidance for 2009 that we provided on February 26, 2009 as a point of reference for our revised 2009 guidance.

Turning to slide 17, we have provided revised 2009 guidance for diluted earnings per share-adjusted along with our initial guidance for 2011. Note that 2011 will be our first full-year operating primarily as a predominantly Midwestern regional regulated utility company, assuming the divestiture timing proceeds as planned. We have not given 2010 guidance because it will be a transitional year. Please note also that our earnings per share guidance for 2011 of $2.80 to $3.20 per share assumes continued rate relief for certain utilities, availability of generation units, reasonable execution of the Integrys Energy Services divestiture, including related capital redeployment, and normal weather.

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

Charlie Schrock

Thanks, Joe. Please turn to slide 18, as I summarize the key points from today’s discussion. First, we have provided additional clarity on our strategy change with respect to Integrys Energy Services. We are driving a structured capital redeployment process with an announcement expected at the end of the third quarter or early fourth quarter of 2009, and we will continue to focus on our core regulated natural gas and electric utilities. We will use the proceeds and recovered capital to restructure our balance sheet and to support our future investment in rate base growth. Because, we believe, there are a number of outcomes that will support the current quarterly dividend, our current dividend policy is unchanged. We remain comfortable with our long-term growth target in earnings per share of four to 6% on an average annualized basis.

Finally, our earnings per share guidance, which excludes Integrys Energy Services and goodwill impairment, for 2009 is between $2.17 and $2.32 and for 2011 it is between $2.80 and $3.20.

We appreciate the opportunity to share our prepared remarks. Now, I would like to open the floor for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Paul Patterson with Glenrock Associates. You may ask your question.

Paul Patterson - Glenrock Associates

Good morning, guys. Can you hear me?

Charlie Schrock

Yes, we can.

Paul Patterson - Glenrock Associates

I wanted to ask you just a few quick questions. On the goodwill impairment, what exactly is triggering the effect of that? What cause that to happen and -- I mean it just seems to be -- you guys bought these relatively recently -- Can you just a give a little bit more flavor on that?

Joe O'Leary

Sure. This is Joe O’Leary. With goodwill impairment related to several natural gas utility operations acquired over the past few years, and the loss is an indication of the market environment that we faced in the overall declining evaluations for our gas utility operations, largely because of the recent global credit and equity market movements, and that causes an increase in the weighted average cost of capital that’s used in the valuation process. And as I mentioned, the overall lower market valuations for natural gas distribution companies, but this is a non-cash charge and it will not affect Integrys Energy Group’s liquidity position, cash flows from operating activities, compliance with debt covenants or future operations.

Paul Patterson - Glenrock Associates

Okay. But that mean -- okay. So when -- well, let me fill on to another question, actually. With the earnings guidance, is there any land sales in earnings guidance for 2009 and 2011?

Joe O'Leary

Yes. I think there may be some but they are relatively insignificant.

Paul Patterson - Glenrock Associates

Okay. Then finally, when we are looking at depreciation, you guys gave some stuff in the appendix, and we look at the dividend, and we look at the -- we look at the fact that you’re selling this asset that you hope to get $600 million for, you got a high payout ratio. How should we think about your financing needs and your expectations to sort of take care of this utility CapEx?

Charlie Schrock

This is Charlie. Can you help us a little bit to understand better where you are headed with the question?

Paul Patterson - Glenrock Associates

Well, I guess I’m wondering, should we expect like an equity issuance, and how do you guys evaluate the dividend, vis-à-vis issuing equity, vis-à-vis the potential CapEx program that you have, or how should we think about the potential income into the market and how you might be financing that and your needs considering that there is some moving parts here there is the asset sale and you’re selling Integrys Energy, there may be some bonus depreciation from the stimulus. I mean in general, how should we think about your ability or how you are measuring your high dividend payout, vis-à-vis, this CapEx program and all those things mixed together, how should we think about that?

Charlie Schrock

Okay. That’s a helpful clarification. Let me have Joe address that.

Joe O'Leary

First of all, one of the basic assumptions that you should have is that, we anticipate between now and when we finish the exit from Integrys Energy services, we will recover about $600 million of capital. We expect to utilize that to pay down debt as Charlie mentioned earlier. And so that gives us the ability to do some debt financing going forward in the future to meet some of our capital expenditure needs and also limits our need to go to seek equity in the equity markets as well.

Paul Patterson - Glenrock Associates

Okay. And then, so should we think about -- how should we think about the dividend? I mean, in other words, you guys mentioned that you guys are looking at in the long-term basis, you guys seem to be paying now, should we basically feel confident that you guys are going to be -- and how does the Board -- I mean, I realize that the Board makes the decision, but how confident should we be in those dividend that you’re currently paying?

Charlie Schrock

Well, Paul, this is Charlie. It is a good question. And we understand that a lot of our investors, in fact probably all of them are looking at the dividend, it’s very important one. And as I mentioned, the policy remains unchanged at this time but it is a Board decision. They do look at it at a long-term view and they look at it every quarter when it comes up based on what we project our earnings to be. So as I mentioned earlier, we do have a number of scenarios that we believe could yield or get us to sustainable payoff ratios. So over the longer-term, we look at that and that’s what the Board factors into its decision-making process. I don’t know, Joe, do you have anything to add to that?

Joe O'Leary

Yeah. I guess what I’d add to that is, given that there is no change in the dividend right now, our2011 guidance that we provided assumes the continuation of the dividend where we are at right now with some rather modest increases contemplated not too different than what you’ve seen in the past from us. The recent past.

Paul Patterson - Glenrock Associates

Okay. Thank you very much.

Charlie Schrock

Thank you, Paul.

Operator

Faisel Khan with Citigroup. You may ask your question.

Faisel Khan - Citigroup

Good morning, guys.

Charlie Schrock

Good morning, Faisel.

Faisel Khan - Citigroup

How much -- I know you guys gave us a little bit of liquidity update and how much available capacity you have with the liquidity facilities. How much collateral do you guys have outstanding from the (inaudible)

Charlie Schrock

Faisel, you’re breaking in and out a little bit.

Faisel Khan - Citigroup

Yeah, it’s Faisel from Citigroup. But -- just on how much collateral do you guys have outstanding in the IES business right now?

Mark Radtke

Faisel, this is Mark Radtke. We have about $2.8 billion of parental guarantees and included in that we have letters of credit totaling about $650 million and now we’ve got cash proceeds a little bit north of $300 million and two exchanges.

Faisel Khan - Citigroup

Okay. And is there an offsetting asset on that, are you holding cash on behalf of counterparties also or?

Mark Radtke

We are holding some cash, probably less than $200 million right now, that moves with the market.

Faisel Khan - Citigroup

Okay.

Mark Radtke

But then the other offsetting asset of course is contractual values that you get out there for forwards.

Faisel Khan - Citigroup

Okay, I got you. And right now the tender of the book, how long is the book -- I’m looking about your slides and it looks like about three or four years, but it’s hard for me to tell.

Mark Radtke

The majority of the books drops off in the next two years, about three quarters of it.

Faisel Khan - Citigroup

Okay.

Mark Radtke

And then it continues to run on, I mean, there are some small commitments that run out as far as like 2017, 2018 timeframe. But the vast majority runs off in the next two years.

Faisel Khan - Citigroup

Okay. Understood. And then I guess from the 250 megawatts, the 257 megawatts that sits at IES? I guess, it’s -- I take it that’s part of the proposed source of proceeds from the sale of the asset, is that a fair assumption?

Charlie Schrock

That’s correct. We have a process in place to divest those as well. I mean it’s entirely possible that the company interested in the marketing business, may not be interested in the generation business. So we’re not requiring that to go as a package.

Faisel Khan - Citigroup

Okay.

Charlie Schrock

And additionally, the generation asset do not contribute to the difficult characteristics that the marketing business does with respect to variable capital commitments, as (inaudible). And so we have some flexibility around the timing with respect to divesting generation assets.

Faisel Khan - Citigroup

Okay. And just curious, if you were to kind of dissect the profitability of IES, how much would you say comes from the normal -- People business and marketing gas and electricity what you see their customers versus the actual generation of power on that portfolio?

Charlie Schrock

Yeah. The marketing business contributes about 100% of the income.

Faisel Khan - Citigroup

Okay, understood. And then in your guidance going from 2009 to 2011, there is a – is an uptick in other income, trying to figure out. Is that just ATC in your investments and ATC going up over time? So you would give --

Joe O'Leary

This is, Joe. That uptick is due primarily to the decrease in interest cost and we also have an increase in earnings coming out of the American Transmission Company, our equity ownership in that company.

Faisel Khan - Citigroup

Okay. Thanks, Joe. And also on CapEx, let’s talk about the plans to grow your invested capital base in both the electric utility and also most notably at Peoples Gas. When I’m looking at your CapEx for 2011, I believe it’s about $550 million, and in 2010, that’s obviously lowered at $300 million. What I’m trying to figure out is like, given that, given your goals of increasing rate base over the next several years, what should that CapEx number look like post 2011? Is it 550 million or is it closer to 300 million?

Larry Weyers

Well, this is Larry Weyers. I would say that beyond 2011 depends on a number of moving parts. It kind of depends on what kind of renewable portfolio standards we have to meet within the state of Wisconsin and also depends on what the regulatory treatment is going to be from potential investments in and other jurisdictions. It could be reasonably high, if a lot of those regulations come down requiring us to invest in those types of things. But there will be regulated investments and have regulated returns associated with them.

Faisel Khan - Citigroup

Sure, absolutely. I was just trying to figure out if 550 is the high number or is that 300 too lower, is reality somewhere in the middle?

Larry Weyers

Probably closer to 500 million, probably – I would say 500 million.

Faisel Khan - Citigroup

Okay, fair enough. Thanks guys. I appreciate the time.

Charlie Schrock

Thank you, Faisel.

Operator

Maurice May with Power Insights, you may ask your question.

Maurice May - Power Insights

Yes. Good morning, folks. I have a couple of questions on Integrys Energy Services. First of all, are you all continuing to book new business in that segment?

Charlie Schrock

We’ll have Mark answer that question.

Maurice May - Power Insights

Okay.

Mark Radtke

Hi, Maury. So, we have for all practical purposes, not continue to book new business. Now, we do have commitments with existing customers whereby they have the opportunity to fix their prices over the terms of contracts. That is the majority of our transacting activity. There are some unique situations with customers but by and large, the transacting activity effective following our announcement, so beginning in 1st of March, has flattened off.

Maurice May - Power Insights

Okay.

Mark Radtke

The quarter does reflect transacting activity in January and February albeit at more moderate levels than would have been the case, say, a year ago this quarter.

Maurice May - Power Insights

Okay. Okay, and second of all, it seems like this morning you are guiding us more towards sale or sales of the entity rather than winding down, is that correct?

Larry Weyers

Yeah. This is Larry Weyers. As we’ve mentioned, our primary goal is the full divestiture of Integrys Energy Services and we’ve designed a divestiture process, and we’re expecting to make that announcement in the third or fourth quarter of 2009. We’re really focused on a full divestiture, but we do have backup plans in the event that it becomes more attractive to do a wind down.

Maurice May - Power Insights

Okay. But the implication this morning is based on maybe some knowledge that you have or just your goal?

Charlie Schrock

Well, we said we definitely have been engaging various counterparties that might be interested in acquiring all of the assets or certain portions of the assets. And so, we believe there is enough interest from other parties in acquiring those assets, that we will accomplish a divestiture.

Maurice May - Power Insights

Okay. And the proceeds, you have, what, 600 million of equity invested in the unit. And that is kind of floor as I understand it. That would be the amount of cash you get back, if you just let the book of business unwind over the next couple of years. And is that correct?

Charlie Schrock

Well, we anticipate getting roughly $600 million in cash back from the recovery of working capital as well as proceeds. And that would be the case, whether we have a transaction or whether we have a wind down. Now, the wind down has some additional costs associated with it, but the amount of proceeds is relatively the same.

Maurice May - Power Insights

Okay. And these proceeds would go for, I guess, debt buyback at the parent level. And this morning, you’re not talking about any potential share repurchase as part of the balance sheet restructuring. Is that correct?

Charlie Schrock

I believe the most advantageous thing that we can do right now is to pay down debt and that would position us well for future investments in the rate base growth. We see that there is some pretty good opportunities in redeploying capital by investing in rate base opportunities. And I think our guidance shows the benefits of that with lower interest rates. Other options are still on the table. We have not ruled out any of the other options. But even if we do not do a buyback, we would definitely delay the issuance of new shares.

Maurice May - Power Insights

Okay. Okay, and as far as regulatory approvals on the marketing part of the business, not the generation, but the marketing part of the business, do you have to apply I guess do you have to apply for regulatory approvals?

Charlie Schrock

Yeah, there will be some regulatory approvals and Mark Radtke can probably give you some more details on it. But we will have to do go through federal approvals for the transfers of certain new contracts, and there will also be some state approvals, I believe –

Mark Radtke

Various state.

Charlie Schrock

Various state approvals required.

Maurice May - Power Insights

Okay. Now, you’ve said the timing of the announcement might be late third quarter or early fourth quarter. But if you have to apply to state of federal agencies for approvals, won’t there be public knowledge before that time, and that we might learn before that time of who might be the buyer of the book business?

Charlie Schrock

Yeah, it’s not likely that that information is going to be available before the third quarter of this year.

Maurice May - Power Insights

Okay. Okay, and then the final question on the generation assets, you have these 300-odd megawatts of generation. But you also have hydro assets in the state of Maine, do you not? And are those probably the most attractive assets that would attract a good price?

Mark Radtke

Sure, Maury. This is Mark. There is I mean, the asset portfolio is currently diverse and you’re right, the hydro assets in Maine are very attractive to some buyers, while the fluidized bed coal unit in Pennsylvania is attractive to another class of buyers. So, the portfolio has its pluses and minuses. We’ve been over the past few years working on cleaning it up. It had been certainly a bit of a problem for us in the past. And that’s my answer to, Faisel, was perhaps a bit trait in indicating that the assets weren’t contributing over the long history, that’s been the case.

But portfolio has been cleaned up and improved quite a bit and it is now modestly contributing income at more like the level of 10% of our total company. And so, there are stronger assets and weaker assets, and the value is in the eye of the beholder in each of those assets.

Charlie Schrock

The profitability of those assets could change in a positive manner also in a carbon-constrained environment.

Maurice May - Power Insights

Okay. Good. Thank you very much, folks.

Charlie Schrock

Thank you, Maury.

Operator

[David Grumhaus with Copia Capital], you may ask our questions.

David Grumhaus - Copia Capital

Good morning, guys. Thanks a lot for the slide deck, a lot of helpful information in there. Couple of questions for you, you’re obviously focusing on the guidance with 2011 and not 2010, what is the transition in 2010 that we need to wait for?

Charlie Schrock

Yeah, it’s something that we really took a hard look at. For starters, we are really focused on becoming what I would say is primarily a regulated utility company, and we think there is a lot of opportunity there. So we thought it would be best to give you look out into the future and we think 2011 is the best initial year to do that. So given that, we look at 2010 as a transition year, because it’s possible that there will still be some aspects of the Integrys Energy Services operations involved, the completion of the divestiture during that year.

There are rate cases and things going on that are difficult to accurately predict. So when we look at it, we thought, well, maybe if we just skip 2010 to 2011, that would give you a view to what we think our bright future look like out there.

David Grumhaus - Copia Capital

Okay. I guess what confuses me is Peoples will be done and you’re investing almost no CapEx in 2010. So I guess the only possible big rate case would be at Wisconsin, although that one seems to be earning about allowed. So, I’m still struggling where the jump comes from ‘10 to ‘11.

Charlie Schrock

Well, again we thought we could provide better clarity on the future looking at 2011. We do have a number of rate cases that are going to be in the works and the last thing I don’t want to be too out of here, we still have some clean up issues with Integrys Energy Services. So we just thought it was --

David Grumhaus - Copia Capital

Okay.

Charlie Schrock

The number. Okay.

David Grumhaus - Copia Capital

Okay. When we look at ‘11 and the guidance you’ve given, the big driver seems to be one at the gas LDCs, are you assuming in your numbers that you can get pretty close to allowed by ‘11 in those businesses?

Charlie Schrock

Let me have Larry Borgard address that.

Larry Borgard

Yeah, David. We’re obviously already filed here in Illinois in ‘09 for rates to be effective in January of 2010. And we’re going to be filing at other utilities as well, UPPCO, MGU, later this summer. It’s not expected we’re going to get all the way back to our authorized levels in those rate cases. It likely may take another step.

David Grumhaus - Copia Capital

So does that mean with Peoples that you would look again to refile in ’10, get an increase and then turn around and file again?

Larry Borgard

Well, we would look to see what we get in this current rate case before making any determination along those lines. But if the companies need rate release, we will file.

David Grumhaus - Copia Capital

Okay. Obviously, the other big driver in ’10 the other and you might have mentioned this with Faisel, but I just want to be clear. The big drivers basically that’s up about $0.35 from ‘09 to ‘11. I understand some of that is ATC, but what’s the rest of it is? Is it just debt rolling off?

Larry Borgard

Yes.

David Grumhaus - Copia Capital

It seems like a lot of debt.

Charlie Schrock

It’s a decrease in the interest expense.

David Grumhaus - Copia Capital

And is that just 600 million coming in?

Charlie Schrock

Yeah, that’s pretty much, that’s the lion share of it.

David Grumhaus - Copia Capital

Okay. All right. So that’s the driver there. The five rate cases this year that you mentioned, you got Peoples, you’re going to do a reopener in Wisconsin, what are the others?

Charlie Schrock

Yeah, let me run through the list for you. We were filed Illinois for Peoples and North Shore Gas. We will file in the July timeframe for Upper Peninsula Power Company and Michigan Gas Utilities, and we hope to finalize the case at Minnesota Energy Resources in about the June-July timeframe.

David Grumhaus - Copia Capital

Okay. That’s helpful. You mentioned the electric fuel, it sounds like you over-collected in the first quarter, I know you really under-collected last year. Is that over-collection go away over the next three quarters, do you have to file a fuel opener?

Charlie Schrock

The fuel rules in Wisconsin allow the Commission to bring us in when the costs are below the levels in the rate case, and they have initiated that procedure as of a week or so ago. So, any cost below the window, so to speak, for the balance of the year will be subject to refund.

David Grumhaus - Copia Capital

Okay, but in the first quarter the five million extra you made, you keep that or you have to refund that?

Joe O'Leary

That is not subject to refund prior to the Commission bringing us in.

David Grumhaus - Copia Capital

Okay. And they have brought you in as of now?

Charlie Schrock

As of a week or so ago.

David Grumhaus - Copia Capital

Okay. So whatever you took in the first quarter and in the first week of April, for a few weeks of April, you over-earn on.

Charlie Schrock

It’s not subject to refund, that’s correct.

David Grumhaus - Copia Capital

Okay. Okay, that’s helpful. All right, I think that does it for me. I appreciate all the time.

Charlie Schrock

Thank you.

David Grumhaus - Copia Capital

Thanks.

Operator

[Mullin Robert with Duquesne], you may ask your question.

Mullin Robert - Duquesne

Thank you. I just have two quick questions. One, the $600 million of return of capital from the sale process, could you just give us a sense as to sort of short-term debt versus long-term debt assumed in terms of the use of those proceeds just to better understand kind of where the balance sheet is that you’re targeting?

Charlie Schrock

Robert, thanks for the question. Hold on just a second while we look at some data here, Okay?

Mullin Robert - Duquesne

Okay. Thank you.

Charlie Schrock

Let me answer that in general, first, to start off with --

Mullin Robert - Duquesne

Okay.

Charlie Schrock

General, when we restructure that balance sheet, we will restructure it so that we need some metrics of our current debt rating. So, we do not want to jeopardize debt ratings with the restructuring of that balance sheet. So to the extend that we can pay down short-term debt we’ll take it down to some level, a level that we’re very comfortable with keeping on the balance sheet, and then we’ll repay long-term debt to the extent that we need to. But we will structure that in order to maintain the credit ratings that we have.

Joe O'Leary

Yeah. I think if you look at some of the long-term debt maturities that are coming up, we’ve got probably about a $155 million due in 2009, excluding energy services in 2010, we have about 116. And then in 2011 kind of early on in 2011 we’ve got about $479 million coming due.

Mullin Robert - Duquesne

So then you’re saying that the majority of the 600 would be used to repay debt, long-term debt?

Charlie Schrock

Yeah, that’s --

Joe O'Leary

The majority of it is going to be utilized in the early phases we’ll be using it to – and depending upon the time of the falls, which is another consideration to the extent we have it coming in earlier, we’d use it to keep down our short-term debt.

Mullin Robert - Duquesne

Okay.

Joe O'Leary

Which typically runs up for us being more of a gas utility operation nowadays, that tends to run up in a wintertime. So we could keep that short-term debt level down and then as the cash comes in from the customers it, and as I said, the cash gets replaced, it’s available to go on, retire the long-term debt, some of it coming due in 2010 and most of it coming due in 2011.

Mullin Robert - Duquesne

And then on your financing slides, you talked about this year’s kind of financing activities, you referenced parent debt issuances for rolling basically rolling 155 and then doing functioning incremental 200? Is that assumed that you do that regardless of doing the Integrys Energy Services sale or is that assuming that you don’t do it sort of static state, and then if you did do it, you wouldn’t have to do the incremental 195 whatever, whatever million as incremental parent debt?

Joe O'Leary

I believe you picked up on the fact that we said up to 350. So obviously that would depend upon the timing of any proceeds that could be received from divestiture of Energy Services.

Mullin Robert - Duquesne

Okay. Okay, so then when we think about debt if we think about the long-term debt balance, we should sort of think about some of the proceeds being an offset to the potential need up for future debt, plus paying down some current debt, is that a fair way to think about it given that up to 350 thought?

Joe O'Leary

Yeah.

Mullin Robert - Duquesne

But you have funding needs of maybe 200 that that proceeds could be used for, and then maybe you think of sort of under your 600 example, may be $400 million available for next year short-term and long-term debt?

Joe O'Leary

Yeah, that’s a good way of looking at it.

Mullin Robert - Duquesne

Okay. So then all right, I got it. Okay, thank you very much.

Charlie Schrock

Thank you.

Operator

(Operator Instructions). [Vasaha Tafi with Jaket Capital], you may ask your question.

Vasaha Tafi - Jaket Capital

Thank you. Sorry, if this was answered earlier, but there is $600 million of cash coming in at the utility. Is some of that a timing issue where it comes in, but then it needs to go out next fall or winter due to working capital needs?

Joe O'Leary

Well, this is, Joe. I think you’re referring to the fact that we mentioned in one of the slides that we had $1 billion come in since January 1, as we had expected. And about $600 million of that relates to the utilities and typically, as we start putting gas in the ground and we’re going to need that for some of our it goes back to purchases of the gas. And we do have lower gas prices. So, that’s helping us out on that end as well.

Vasaha Tafi - Jaket Capital

And the other 400 from Energy Services that’s permanently back to you guys. That’s pure cash that you guys are now holding?

Charlie Schrock

It’s a similar situation, where high-priced gas came out of storage, and we have retail customer commitments to fulfill that will require some gas going back in storage this fall, but it’s de minimis amount relative to that 400 million. So I think that fundamentally the answer to your question is yes, but permanent is a very definitive word. So it is working capital, it goes in and out a little bit.

Joe O'Leary

So I think you can see that our short-term debt has declined significantly from where it was as of the end of 2008.

Vasaha Tafi - Jaket Capital

So I guess the question is, including just from Energy Services, what is the other excluding proceeds from selling the business? What is the expected permanent cash back that will go on the balance sheet in the next year and half or so rather than proceeds from actual sale of the business?

Charlie Schrock

That’s the $600 million that we’ve been referring to. It’s essentially recovery of the balance sheet.

Vasaha Tafi - Jaket Capital

Okay. So that 600 is different here in addition to this other 400 that we just mentioned?

Mark Radtke

That’s correct. You could kind of think of it as, we started the year with 1 billion to be recovered, 400 has come off, there is another 600 yet to come.

Vasaha Tafi - Jaket Capital

Okay. And just to confirm just a quick question on the dividend. So you expect the Board in the coming few days to declare a $0.68 dividend?

Charlie Schrock

No, we can’t say exactly what the Board is going to do. But you’re correct, the Board will be taking it up as part of their normal course of business in their upcoming scheduled meeting. But we really can’t predict what they’re going to do actually.

Vasaha Tafi - Jaket Capital

And when is that meeting date?

Charlie Schrock

May 13.

Vasaha Tafi - Jaket Capital

May 13. And I think in previous call you’ve mentioned – or in previous times you’ve mentioned that your goal payout ratio is somewhere in the 60% ballpark, 65 or something like that. Is that still a sort of a long-term goal or not?

Charlie Schrock

We haven’t used that number in the past as a payout ratio, but as we look towards the future and being more of a predominantly regulated entity, we believe that higher payout ratios are sustainable and reasonable and consistent with the peer group in that area.

Vasaha Tafi - Jaket Capital

Is there a new level? I’d like to – is it more like 75 or is it in the 80s?

Charlie Schrock

We haven’t really zeroed in on a specific number. We look at kind of over the long-term, our ability to sustain it and pay it at reasonable levels.

Vasaha Tafi - Jaket Capital

Okay. And I think in the past you talked about 4 to 6% earnings growth rate, is that sort of, I know it’s a little early because you’re in a transition stage, but is that sort of your goal still post-2011 once everything is cleared?

Charlie Schrock

I am glad you ask that, because as we look out in time, we do feel pretty comfortable with that 4 to 6% earnings growth rate over the long-term. And in fact in the early years as we look on our rate cases and cost control operational excellence, it may be a little bit higher than that.

Vasaha Tafi - Jaket Capital

Okay.

Charlie Schrock

I do want to clarify those are the average annual rates that we talk about.

Vasaha Tafi - Jaket Capital

And so if I look at I think earlier on the call you mentioned that in your ’11 guidance, you’re sort of still assuming a $2.72 dividend, which on your $3 midpoint ’11 guidance is around a 91% payout ratio, and if you just grow your earnings by 5 or 6%, it will still take you probably till 2015 or so to get to a 75, mid-70 type payout ratio. But is that something you I guess you’re considering now and you might be comfortable with that?

Joe O'Leary

This is Joe. What I would suggest is, over the next couple of years it’s tough going out through 2011, you can see that our rate of growth and earnings per share is above the 4 to 6% range Charlie was talking about. He’d mentioned that subsequent to 2011, an average annual rate would be around the 4 to 6% range. But there is as you mentioned, that’s an average annual, we put in the early part, after 2011, we would expect the growth rate in excess of that 4 to 6% and then it probably average about over a period of time from 4 to 6%.

Vasaha Tafi - Jaket Capital

Okay. Thank you very much.

Charlie Schrock

Thank you.

Operator

Thank you. Mr. Eschbach, there are no further questions.

Steven Eschbach

Thank you very much for being part of our first quarter’s earnings conference call. A replay of this conference call will be available until August 4, 2009 by dialing toll-free 866-411-1705. I repeat, 866-411-1705. The text for today’s presentation is available on our website at www.integrysgroup.com. Just select Investor and then Presentations. If you have any additional questions, you may contact me at 312-228-5408 or Donna Sheedy at 920-433-1857. Thank you.

Operator

Thank you for your participation in today’s call. The conference has now ended, you may now disconnect at this time.

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