Integrys Energy Group Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 2.13 | About: Integrys Energy (TEG)

Integrys Energy Group (NYSE:TEG)

Q1 2013 Earnings Call

May 02, 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

Daniel J. Verbanac - President of Integrys Energy Services

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

Analysts

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Charles J. Fishman - Morningstar Inc., Research Division

Operator

Welcome to the First Quarter 2013 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 of Integrys Energy Group. Sir, you may now begin.

Steven P. Eschbach

Thank you very much, and good morning, everyone. Welcome to Integrys Energy Group's First Quarter 2013 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 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 audio replay through August 6, 2013. Now I need to direct you to Slide 3 and point out that this presentation contains forward-looking statements within the definition of the U.S. SEC 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 as 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 SEC, including the quarterly report on Form 10-Q we just filed, the Forward-Looking Statements section of yesterday's news release and Slide 40 in the Appendix of this slide deck.

Slide 4 indicates that today’s presentation includes non-GAAP financial information related to diluted EPS adjusted and adjusted earnings. 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 will 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. I'll provide a high-level overview of our first quarter 2013 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 will provide more information regarding our financial outlook. As usual, we will conclude with a question-and-answer session.

Turning to Slide 5. In the first quarter of 2013, we reported diluted EPS adjusted of $1.76 compared with $1.56 for the same period a year ago. With the exception of our Holding Company and Other segment, all segments reported increases in adjusted earnings in the first quarter of 2013 compared with the first quarter 2012. We are changing our 2013 guidance for diluted EPS adjusted to a range between $3.25 and $3.60 on a consolidated basis. This is an upward revision to the guidance range of $3.05 to $3.55 that we presented in March. Jim will provide you with additional details during his formal remarks in a few minutes.

But first, I'll provide a brief update on our operational activities. I'm pleased to report that we've made great progress on a number of fronts, and we are continuing to execute our plan to achieve long-term strategic growth. Let's take a look starting on Slide 6. The first item of note is that on March 28, we completed the purchase of the Fox Energy Center. This acquisition provides more certainty around our long-term generation strategy. Owning this asset ensures our ability to take advantage of abundant and competitively priced natural gas and allows us to better optimize asset performance, capturing synergies with our other generating assets.

Second, we received approval to move forward on our Weston 3 environmental upgrade called ReACT, a multi-pollutant control facility that will enable us to meet the emission requirements under our recent EPA settlement. Although this will be the first commercial installation of ReACT in the United States, there are 17 ReACT installations with identical processes currently installed in Europe and Japan. Construction at our Weston 3 site is expected to begin this summer, starting with site preparation. We expect the project to be in service in early 2016. We are excited about the project, and we are confident that this technology will perform well.

Third, the Columbia environmental retrofit project continues and is expected to be completed in 2014. Finally, we expect Wisconsin Public Service's System Modernization and Reliability Project to be approved by the Public Service Commission of Wisconsin in the third quarter of 2013. This project includes the undergrounding of electric distribution lines in the northern part of our Wisconsin service area to improve safety and reliability for our customers.

Turning to Slide 7 for our natural gas utility segment. The accelerated main replacement program in Chicago continues as planned, with about 20 miles installed during the first quarter of this year. We plan to replace 140 to 150 miles of main overall this year, and we are pursuing legislation in Illinois to ensure timely and adequate recovery of the costs associated with the accelerated main replacement.

Another key development in Illinois was the appellate court's denial of the attorney general's appeal of permanent decoupling. On March 29, the court ruled that the ICC did have the authority to approve permanent decoupling in our 2012 rate case decisions for Peoples Gas and North Shore Gas. Our first quarter 2013 financial results and revised 2013 guidance reflect this.

Slide 8 has a couple of points on our current rate cases. First, we filed our general rate case for Wisconsin Public Service on March 29.

Second, for the Peoples Gas and North Shore Gas combined rate case, we received a proposed order from the administrative law judges on April 26. We have included a summary of the key highlights of that proposed order on Slide 25 in the Appendix. We are encouraged by the judges' support for our accelerated main replacement program. This support is essential for us to continue with the program at its current pace.

Turning to Slide 9 for our nonregulated operations, we're making solid progress on growing our market share, as volumes are up versus the same period a year ago. For this quarter, our delivered Retail Electric volumes are up 48%, while our delivered natural gas volumes are up 28% compared with the same period a year ago. Also, our estimated contracted forward volumes, as of March 31, are up 33% for Retail Electric and 32% for Retail Natural Gas, also compared with a year ago.

This demonstrates that the investments in sales and marketing are already paying off and will help mitigate the impacts of continued competitive pressure on unit margins. Capital usage with the business has been low, driven by low commodity prices, which has created better-than-expected returns on our invested capital.

I will now turn this call over to Jim Schott. Jim?

James F. Schott

Thanks, Charlie and good morning, everyone. I'll cover our financial results for the first quarter of 2013 in a little more detail and discuss our financial expectations for the rest of 2013. Let's begin the financial review by turning to Slide 10.

In the first quarter of 2013, we posted diluted EPS adjusted of $1.76, up $0.20 from the same period a year ago. Note that in our Weather Impacts segment at the bottom of the slide, we have added a separate line item for the turnaround of the decoupling reserve we took in 2012. This change is related to the Illinois appellate court decision Charlie referred to, which upheld the commission's authority to make the decoupling mechanism permanent. As a result, decoupling is in place for 2013, and we have eliminated our 2012 reserve. This had a $0.12 per share favorable impact on our first quarter 2013 financial results.

On Slide 11, we show the changes in diluted EPS adjusted by segment and key variances for the first quarter of 2013 compared with the same period in 2012. In addition to the favorable impact of the elimination of the 2012 decoupling reserve, there are 2 key takeaways from this slide: the return to more normal weather in 2013 had a favorable impact on our earnings year-over-year in those states where we do not have full decoupling; second, operating and maintenance expense increased over last year, primarily due to employee benefits.

Slide 12 provides a little more detail related to our acquisition of the Fox Energy Center. The Wisconsin commission granted deferral of all related costs incurred during 2013 that are in excess of the previous purchase power agreement. As a reminder, under GAAP, the equity earnings on that investment that are deferred during 2013 cannot be recognized as income until the deferral is included in rates. We will seek recovery in a future rate case.

On Slide 13, we have updated the 2013 capital expenditures for Wisconsin Public Service to reflect the final purchase price for the Fox Energy Center. We've also updated the equity contribution we'll be making to the American Transmission Company during 2013. These changes are relatively minor, with only an increase -- with an increase of only $7 million over the 3-year period from what we provided to you during our March call.

Consequently, slides 14 and 15 show our estimated utility depreciation and projected average rate base for 2013 through 2015 have not changed from what we had provided during our fourth quarter conference call in March 1. As a reminder, we still expect about a 30% increase in rate base through 2015.

Moving on to Slide 16. Let me review our financial plan for 2013, as some activity has occurred here. As we discussed during our March call, we returned to issuing new shares of stock to meet the needs of our stock investment plan and other stock-based benefit plans, such as stock option exercise activity. We now expect this to add about $65 million to $70 million of common equity this year.

Turning to our long-term debt. Given the excellent interest rate environment, we committed to raise $220 million at Peoples Gas, which is $20 million more than what we projected 2 months ago, and we did so at a 3.96% interest rate for 30 years. In addition, we were able to refinance $50 million of Peoples Gas's 5% tax-exempt debt and replace it with similar-sized new issue at 4%. Finally, our new issue for North Shore Gas came in at $54 million, also at 3.96%.

Still on the horizon for us is an estimated $450 million issuance for Wisconsin Public Service, as well as an estimated $400 million hybrid debt security issuance for Integrys Energy Group. Both are planned for the second half of 2013. 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 17. As Charlie indicated, our guidance for 2013 diluted EPS adjusted is in the range of $3.25 to $3.60, with a midpoint of $3.42. This slide also shows how our revised guidance improved by comparing it to what we presented to you in March. We have increased our guidance to reflect the reversal of the 2012 decoupling reserve, and we've narrowed the guidance based on the administrative law judges' proposed order in the Peoples Gas and North Shore gas rate case. Integrys Energy Services Other was also adjusted, as was the Holding Company and Other segment. These were offset by a change to discontinued operations under special items, net of taxes.

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

Charles A. Schrock

Thanks, Jim. Before taking your questions, I'll summarize our key investment highlights shown on Slide 18. First, the execution of our business plan for the regulated utilities remains on track. We continue to make prudent investments in our utilities to provide safe, reliable and affordable service for our customers.

Our 34% ownership in American Transmission Company continues to contribute to earnings as expected. Our long-term plan is for our regulated businesses to contribute about 85% to 90% of our consolidated net income and our nonregulated businesses to contribute the remaining 10% to 15%. 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 $3.25 to $3.60. Our portfolio of regulated and nonregulated businesses, operational excellence initiatives and cost control efforts will enable us to meet our 2013 consolidated financial objectives.

Given the investments in our portfolio of businesses and assuming reasonable rate relief, we expect to average annualized growth in diluted EPS adjusted to be between 4% and 6% on an average annualized basis through 2015, with 2011 as the base year. And finally, 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 the call for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Ali Agha from SunTrust.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

A couple of questions. First off, on the energy services results, can you give us a little more insight? You had a pretty strong pickup year-over-year, yet when I look at your full year guidance, about 40%, a little over 40% of the full year guidance is already booked in the first quarter. Can you give us some sense of how you expect the rest of the year to unfold? And also, the Chicago contract, remind us, has any of that contributed in the first quarter, or is that all coming in future quarters?

Charles A. Schrock

Ali, I'm going to have Dan Verbanac give you some of the details around your questions. Just keep in mind, as we noted previously, we are investing in that company in the terms of O&M for marketing and sales type of service, which is going to help us grow in the future. Let me have Dan give you a little more detail.

Daniel J. Verbanac

Ali, if you noticed in the first quarter of 2013, there is a $3 million tax benefit that will reverse out before the end of the year, so that what is helping to attribute to the first quarter earnings. So when you adjust for that, it's on par with last year. Unit margins -- or overall margins are up compared to last year, and as Charlie mentioned, O&M is up slightly compared to last year as we continue to invest in that business. So when you make that adjustment, it's in line with our guidance for 2013. Your second question, as it relates to the City of Chicago, we did start serving those customers in February. So we have about 1.5 months worth of service to those customers in the first quarter. So there is some of that business being reflected in the first quarter, but the majority of it, you'll see over the remaining 3 quarters in 2013.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then, secondly, on the revised guidance for '13, if I just look at the midpoint of the 2 ranges, that delta can be explained by the reversal of the reserves, the $0.12 or so. So what I wanted to understand, are you guys sort of implying, as most companies do, that midpoint is kind of the base case and that things could move around? Secondly, factoring the ALJ recommendation, are you now assuming that's kind of the floor for what decision you could get out from the commission? Just wanted to get a little more insight on your change in guidance.

Charles A. Schrock

Ali, I'm going to have Jim Schott dig into that a little bit for us. But in terms of the range, we do use the range as a reasonable probability of where we expect to be as a whole. The midpoint is not so much where we expect to be per se. It's really just an arithmetic result, but the overall range is what we focus on. But let me give -- hand it over to Jim.

James F. Schott

Ali, if you recall, in the first quarter guidance, we had a wide range, and we basically said the 2 ends were our recommendation on the rate case and FAF's [ph] recommendation on the rate case. The ALJ's proposed order came out about in the middle of that range. So if you look at that from that perspective, the ALJ gave us an anchor that's more towards the middle of the range, which is why we narrowed the range in the first quarter -- I mean, in this -- yes, in the first quarter. And would I characterize the judges proposed order as a minimum? No. I think, right now, it's probably in the middle of our range, so we would say it's a reasonable number right now.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Okay. So I mean, in other words, just to be fair, the staff position, you've sort of taken that out in this -- in the range that you have right now?

James F. Schott

Yes, we took theirs out and we took ours out because we narrowed the range, right.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then my last question. Charlie, going back to your 4% to 6% EPS growth with '11 as a base to '15. Mathematically, even if I take the lower end of that 4%, that implies that '14 and '15 are going to be extremely strong growth earnings years for you versus the '13 number that you have for us right now, somewhere in the 9%, 10% range, mathematically, each year. So conceptually, can you tell us what gives you comfort that you can grow earnings so significantly over the next 2 years?

Charles A. Schrock

Well, Ali, it really starts with the investment that we're making in our regulated utilities. We have significant investments that we've shown you -- actually, I think it's Slide 15 of this deck. But that -- if you look at that investment, we're anticipating about a 30% rate base increase over the next couple of years, next few years. And assuming appropriate regulatory treatment, that translates into the types of earnings that we're anticipating to make us -- to allow us to hit that 4% to 6%.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Okay. I mean -- and you're assuming you're earning your authorized ROEs at the utilities through that period?

Charles A. Schrock

Within a fair -- a reasonable amount, right? We know that, that fluctuates a bit plus and minus, but within a reasonable amount.

Operator

[Operator Instructions] The next question is from Charles Fishman of Morningstar.

Charles J. Fishman - Morningstar Inc., Research Division

May I ask a question on Slide 17? And my question is on that -- the very first line, the $0.20 variance on your guidance, the improvement of $0.20 at the low end of the guidance for the regulated and natural gas. Just to make sure I understand this, $0.12 of that $0.20 is basically the decoupling reversal, and $0.01 is weather. So what would the other $0.07 be, if I'm looking at that correctly?

Charles A. Schrock

Charles, we've got the slide up in front of us, and I'm going to have Jim kind of break that down for you. But you're partially correct. The decoupling is in that regulated natural gas utility segment, the judges' order that we talked about. But let me have Jim kind of step through that with you.

James F. Schott

Charles, if you look at the guidance in the first quarter for the gas segment, we were at $1 to $1.35. And basically, what we did was we added $0.12 to both of those numbers and then narrowed it both ways. So we increased the bottom end, so we raised it by $0.12 plus narrowed the range by $0.08. And on the high end, we raised it by $0.12, but again, narrowed it down by $0.08. So we narrowed the range on both ends and -- raised them both by $0.12 and narrowed the range.

Charles J. Fishman - Morningstar Inc., Research Division

Okay. So that $0.07 is really just increased confidence after the first quarter is done?

Charles A. Schrock

After the judges' proposed order.

Charles J. Fishman - Morningstar Inc., Research Division

Yes, okay. Got it. And then on -- just one other one on Slide 13. The CapEx does include the SMRP at this point, the projected CapEx?

Charles A. Schrock

Larry, go ahead.

Lawrence T. Borgard

Yes, it does assume -- it does include the CapEx for SMRP, assuming that we get the proper regulatory outcome, which we expect in the third quarter.

Operator

[Operator Instructions] I'm showing no further questions. I will now turn the call back over to Steve Eschbach for closing remarks.

Steven P. Eschbach

Thank you, and thank you for being part of our first quarter earnings conference call. A replay of this conference call will be available until August 6, 2013, by dialing toll-free (866) 469-7798. The full transcript for today's conference call will be available on our website at www.integrysgroup.com before the end of the day on Thursday, May 9. 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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