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Integrys Energy Group, Inc. (NYSE:TEG)

Q2 2009 Earnings Call

August 06, 2009 9:00 am ET

Executives

Steve Eschbach - Vice President of Investor Relations

Charles A. Schrock - President, Chief Executive Officer, Director

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

Joseph P. O'Leary - Chief Financial Officer, Senior Vice President

Analysts

Paul Patterson - Glenrock

Maurice May - Power Insights

David Grumhaus - Copia Capital

Melissa Copley – Copley Advisors

John Alley – Decade Capital

Barry Klein - Citigroup

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2009 Earnings Conference Call for Integrys Energy Group Incorporated. (Operator's Instructions) At the request of Integrys Energy Group, today's call will be recorded for instant reply. I would now like to introduce today's host, Mr. Steve Eschbach, Vice President of Investor Relations at Integrys Energy Group. Sir, you may now begin.

Steve Eschbach

Thank you very much and god morning, everyone. Welcome to the Integrys Energy Group's 2009 Second Quarter Earnings Conference Call. Delivering formal remarks with me today are Charlie Schrock, our President and Chief Executive Officer, Larry Borgard, our President and Chief Operating Officer of Utilities, and Joe O'Leary, our Senior Vice President and Chief Financial Officer. Other executives, including Larry Weyers, our Executive Chairman, and Mark Radtke, President and Chief Executive Officer of our non-regulated subsidiaries, 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 October 30th, 2009.

I need to direct you to slides three and four 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 statements section of yesterday's news release for further information. Except as made and required by federal securities laws, Integrys Energy Group and its subsidiaries undertake no obligation to publicly update or revise any forward-looking statement contained in this presentation, whether the result of new information, future events, or otherwise.

Slide five indicates that today's presentation includes non-GAAP financial information related to diluted earnings per share adjusted, forward book value, and managerial gross margins. 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 this slide regarding non-GAAP financial information.

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

Charles A. Schrock

Thanks, Steve. Good morning, everyone, and thanks for joining us on the call today. I will begin with our agenda on slide six. I will review our second quarter results, our earnings per share guidance, our Integrys Energy Services divestiture progress, and our dividend. Then Larry Borgard will discuss our core utility operations and provide an update on our regulatory filings. Joe O'Leary will discuss our 2009 financial results in detail, our current liquidity situation, capital expenditure plans through 2011, long-term financing plans, and details for our earnings per share guidance. Finally, we will be happy to take your questions.

Moving to slide seven, let me give you a high-level overview of our financial results. Second quarter 2009 diluted earnings per share adjusted was $0.30 compared with $0.27 for the same period in 2008. This figure has been calculated by excluding from our diluted earnings per share adjusted the Integrys Energy Services results and the natural gas utility goodwill impairment charge for 2008.

We have presented our results to you in this way because it depicts our strategy to divest Integrys Energy Services and to evolve into a predominantly regulated mid-Western utility company. In the second quarter, our core regulated utilities performed well. The financial impact of a decrease in natural gas and electric throughput volumes in our regulated utilities segment was more than offset by the impact of finalized rate cases in the electric and natural gas segments, increased margin for our electric utility wholesale customers, decoupling, and the results of our operational optimization and cost-reduction efforts.

We are also reaffirming our earnings per share guidance for 2009 and 2011. To address some of the demand implications of a weakened economic environment, we have continued to implement initiatives to improve our operational performance to overcome the recession's impact on our regulated utilities and to conserve cash. Some specific examples from what we have previously mentioned include hiring restrictions, reduced travel, and decreased use of contractors.

Finally, our Integrys Energy Services divestiture process is moving forward as I will now discuss. Moving onto slide eight, as we have said before, Integrys Energy Services is a good profitable business, however, it is one that has outgrown our balance sheet due to its growth and variable collateral support requirements.

Recent transaction announcements demonstrate the progress we are making on our objective to divest of Integrys Energy Services. With this divestiture we will strengthen our balance sheet and support our core utility business with divestiture proceeds and recover capital. We are executing this plan through multiple transactions to achieve the highest value for our investors. The process is ongoing and we expect to make additional transaction announcements later in the third quarter or early in the fourth quarter of 2009. To date, the amount of recovered capital has been consistent with our expectations.

On slide nine we have summarized the two transactions that we announced in July. First, we announced that we have reached a definitive agreement to sell our Canadian natural gas and electric power marketing business to Shell Energy North America Incorporated. We expect this transaction to close in the fall of 2009. Our exit from this Canadian business is expected to free up about $300 million of collateral support requirements.

Now just to be clear about the terminology that we are using, collateral support requirements differed from invested capital because it also includes cash, letters of credit, and corporate guarantees. The collateral support requirements for this Canadian business required very little cash collateral, primarily using letters of credit and non-cash corporate guarantees.

Second, we announced that we closed on the sale of our energy management consulting services business to US Energy Services. The small group of employees in this business generated about $4 million in revenue during 2008 and provided services to above 30 clients. This business required minimal collateral support and capital investment.

We recognize that many of you are looking for more information with respect to the proceeds that we expect to receive from these two transactions and a portion of the Integrys Energy Services segment that they represent. I hope you can appreciate that since we are in the various stages of negations for other Integrys Energy Services business, we have decided not to disclose individual transaction proceeds at this time.

To give you a sense of the portion of Integrys Energy Services that we have announced transactions for, the lines highlighted in red and green on slide 10 are three of the 12 operations of Integrys Energy Services that have definitive agreements in place to be sold or have already been sold. The slide is not designed to provide the relative size of each operation within Integrys Energy Services; instead, it provides a listing of their diverse operations.

Moving onto slide 11, we have provided a progress report on capital recovery and the reduction in collateral support requirements. We have previously announced our expectations to recover approximately $1 billion of capital as a result of our Integrys Energy Services strategy change by the end of 2010. As a result of operations since the start of the year, we have received approximately $400 million of capital through June 30th, 2009. In addition, corporate guarantees issued on behalf of Integrys Energy Services have decreased from $2.6 billion at March 31st, 2009 to $2 billion at June 30th, 2009. Our target for this year is to further reduce corporate guarantees for our Integrys Energy Services to $1.1 billion at the December 31st, 2009.

Slide 12 will look familiar to you as our plans for the use of the proceeds have not changed so I will not go into too much detail. Our first priority is to pay down debt, which will improve our ability to fund future investment in our regulated utility rate-based growth. Upon conclusion of our planned Integrys Energy Services divestiture, we expect to have substantially reduced liquidity needs in credit facilities.

We, as a regular course of business, continue to communicate with credit-rating agencies as we execute our plan.

Turning to slide 13, I will comment on our quarterly dividends. Our board of directors has approved a dividend of $0.68 per share, payable in September 2009. The board continues to carefully consider the quarterly dividend level based on a number of factors. These include our long-term corporate strategy, the long-term financial strength of the company, earnings and cash flow, the impacts of the economy, the long-term outlook for authorized regulatory returns on equity, capital market conditions, and Integrys Energy Services' divestiture, to name a few. We continue to strive to provide shareholder value through the payment of dividends and increased earnings per share.

I will now turn the call over to Larry Borgard.

Lawrence T. Borgard

Thanks, Charlie, and good morning, everyone. I'll review our core regulated utility operations beginning with an overview of our plan to drive growth, and then provide an update on our ongoing rate cases.

Beginning with slide 14, we are focused on having our regulated utilities earn at or close to their authorized return on equity, and we intend to achieve this through a combination of operational improvements and successful rate case executions. If you recall, in 2008 we completed five rate cases which has had a positive impact on our earnings. In 2009 we are processing five more rate cases, and this is consistent with our past to deliver on our financial expectations for 2011.

Hand in hand with these rate cases and our goal of achieving at or close to our allowed return on equity is our initiative to continually improve operations, reduce costs, and generally run a leaner company. Through investments in infrastructure in Chicago, in environmental and renewable projects in Wisconsin, we will increase our regulated utility-rate based investment over time.

We also continue to benefit from our investment in the American Transmission Company, which has announced that it expects to invest $2.7 billion over the next 10 years.

Moving to slide 15, I'll give you an update on our regulatory calendar. We are anticipating a final order for Wisconsin Public Service Corporation by the end of 2009 and final orders for People's Gas and North Share Gas by January 2010. We also anticipate final rates for Minnesota Energy Resources by the end of 2009 and interm rates for both Michigan Gas Utilities and Upper Peninsula Power Company by January 2010.

We hope that this slide gives you a helpful overview of our rate-case calendar items, as well as individual milestones for each utility. On the left-hand side is each jurisdiction and/or utility, and the key milestones in their respective regulatory proceedings. Each item is coded so you can reference it to the monthly calendar that appears on the right-hand side.

This slide is designed to facilitate reference either by utility or by date, whichever is your preference. Details for each regulatory filing are included in the appendix on slides 31 through 35.

Before turning the call over to Joe, I want to comment briefly on a change we are making to our capital expenditure plan, particularly at Wisconsin Public Services Corporation and its next wind farm project.

In March 2008 we announced that we had signed a letter of intent to acquire a 150-megawatt wind farm project that High Country Energy was developing in Minnesota. Although we did enter into an acquisition and sale agreement in February of 2009, due to the changing marketplace forces, High Country was unable to meet certain requirements of that agreement. So in July 2009 we terminated that agreement.

This will not have an adverse impact on us meeting the renewable portfolio standards requirements in Wisconsin for 2010 or 2015, as our 99-megawatt Crane Creek wind farm project is expected to come online by the end of 2009, as well as other projects that will enable us to meet any current or future renewable energy generation mandate.

Where future wind generation will be located is uncertain at this time, as we believe that there are significant transmission issues with expanding wind generation in Minnesota.

With that I will now turn the call over to Joe O'Leary.

Joseph P. O'Leary

Thank you, Larry. I will begin with slide 16. During the second quarter of 2009, in accordance with generally accepted accounting principles or GAAP, we recognize net income attributed to common shareholders of $34.7 million compared with net income attributed to common shareholders of $24.1 million in the same quarter a year ago. This resulted in diluted earnings per share of $0.45 for the quarter ended June 30th, 2009 compared with diluted earnings per share of $0.31 for the same quarter in 2008.

To arrive at diluted earnings per share adjusted, the non-cash goodwill impairment losses are added back. This table also removes the financial results from Integrys Energy Services for the second quarter of 2009, as well as the second 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 you can see, our core utilities, in aggregate, performed well in the second quarter of 2009 versus the same period a year ago. Similarly, year-to-date results in 2009 are up versus the same period a year ago. There are seven key items driving the positive $10.6 million quarter-over-quarter change in GAAP net income, so we have presented them in after-tax dollars on slide 17. Additional detail related to the quarter-over-quarter drivers by segment can be found on slides 36 through 39 in the appendix contained in the slide deck for today's presentation, in the news release we issued last evening, and in the Form 10-Q we filed with the Securities and Exchange Commission last evening, which are also available on our website.

Moving onto slide 18, 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 totalling approximately $2.2 billion with 27 financial institutions. The largest exposure we have at any one financial institution is about 12% of our total credit facilities. At July 31, 2009, approximately $1.7 billion of the credit facilities were unused and available for us to support our short-term borrowing needs, in addition to approximately $150 million of cash on hand.

Slide 19 sets forth our expected long-term financing activity through the end of 2009. In June we completed a $155 million financing transaction for Integrys Energy Group. Our long-term debt financing plan for the remainder of 2009 includes the potential additional issuance of up to $195 million for Integrys Energy Group, and approximately $50 million for People's Gas. We have not issued any new shares of common equity to date in 2009 and 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.

Slide 20 provides updated information on our planned capital expenditures through 2011. Our expenditures for Wisconsin Public Service have been reduced due to the elimination of our planned investment in the High Country wind farm that Larry described earlier.

Other changes have been made with respect to scheduling of specific projects. In summary, planned capital expenditures for the regulated utilities have been reduced by $75 million for the three-year period 2009 through 2011.

Slide 21 provides updated utility depreciation by company through 2011. Slide 22 provides projected net growth in regulated utility rate based investment through 2011.

Turning to slide 23, I will now discuss our earnings guidance for 2009, and we are presenting it in the same format as we did for our first quarter 2009 conference call. While we are reaffirming our total guidance for 2009 for diluted earnings per share adjusted in the range of $2.17-$2.32, note that there is a slight change by business segment.

The electrics segment has been reduced to reflect the fact that we have reached the decoupling cap for Wisconsin Public Services electric utility, and anticipate lower sales volumes for the balance of the year. The natural gas segment, exclusive of the aftertax non-cash goodwill impairment charge, has been increased to reflect lower anticipated operating and maintenance expenses. Our assumptions for our guidance are detailed on the bottom of the slide.

Turning to slide 24, you can see that we are reaffirming our guidance for 2011 as previously announced on our May 1st, 2009 conference call. The 2009 diluted earnings per share adjusted has been carried over to this slide for ease of reference. Again, we have included the assumptions for our guidance on the bottom of the slide.

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

Charles A. Schrock

Thanks, Joe. Turning to slide 25, I will summarize the key points from today's discussion. First, we are executing our previously stated business strategy in a number of ways that begins with improved core utility earnings. Our core utilities continue to perform well with diluted earnings per share adjusted up for the three months and six months ended June 30th, 2009, versus the same period in 2008.

Second, our divestiture of Integrys Energy Services is advancing. On July 31 we closed on the sale of our energy management consulting services business, and we have a definitive agreement in place to sell our Canadian natural gas and electric power marketing business, which we expect to close this fall.

We anticipate additional transaction announcements later in the third quarter or early fourth quarter of 2009. Third, we are driving earnings growth by our continued focus on improving the performance of our core utilities. We will continue to grow our core utilities by investing approximately $1.1 billion in capital projects between 2009 and 2011, bringing to successful resolution the five rate cases that we have in progress this year and by focusing on operational excellence and cost controls to deliver on our financial commitments. Also, we realized continued growth in earnings through our investment in the American Transmission Company.

Fourth, our quarterly dividend of $0.68 per share payable in September 2009 was maintained, and our board of directors will continue to review the dividend on a periodic basis. Fifth, we are reaffirming our earnings per share guidance which excludes Integrys Energy Services and goodwill impairment for 2009 of between $2.17-$2.32 and for 2011 of between $2.80-$3.20.

Finally, we are also reaffirming our expected long-term average annualized earnings per share growth target of 4%-6%. We appreciate the opportunity to share our prepared remarks. Now I would like to open the floor to questions.

Question-and-Answer Session

Operator

(Operator's Instructions) Our first question comes from Paul Patterson with Glenrock. Sir, your line is open.

Paul Patterson - Glenrock

Good morning, guys. I wanted to sort of review again the terminology and exactly how much cash we should expect or you guys might be expecting from this energy services sale. You mention $1 billion of capital being returned. I remember a number of $600 million. Is that simply the difference between the $400 million that you guys have recovered so far, and is that cash? How should we think about that?

Joseph P. O'Leary

You do seem to have the right thought on that. The difference is — the $400 million was taken in. We started out with $1 billion, we took in $400 million this year, we anticipate recovery of the additional $600 million, and cash is a good way to look at that.

Paul Patterson - Glenrock

Okay. So we should be getting cash coming in, basically, and that's by the end of 2010, is that right?

Joseph P. O'Leary

That's correct.

Paul Patterson - Glenrock

Okay. Now when we look at slide 10 and you guys mentioned the different businesses, there was the description before the potential of selling this all as a whole, and since we've gone a little bit further in the process it seems that you guys are selling individual businesses. Should we think that that's probably how the rest of this business is going to be sold?

Charles A. Schrock

Yeah, Paul, we are continuing to work to process and we would expect a few more transactions that we'll be announcing later this year.

Paul Patterson - Glenrock

Okay. And is there any sense as to that $600 million between now and the end of 2010, how much we might see by the end of this year?

Charles A. Schrock

I don't think we have a good feel for that because of the timing of things as things go on, so we're not really in a position to try to predict that specific number.

Paul Patterson - Glenrock

Okay. When will IES be described as a discontinued operation?

Joseph P. O'Leary

The rules under GAAP for doing that are kind of specific, but essentially what is required is once you have a definitive agreement in place, you would consider them discontinued operations. Until then you have the — as the process continues it depends on whether we determine to wind down or sell them off.

Paul Patterson - Glenrock

Okay. So in other words you can't have them as assets for sale or anything until you actually make a determination or an actual definitive agreement; they will still just be accounted for as continuing operations, is that right?

Joseph P. O'Leary

That's correct.

Paul Patterson - Glenrock

Okay. And then I guess when we're looking at the natural gas marketing and the electric marketing, those businesses, are those excluded from the numbers or are those going to be included because you do have definitive agreements on those, do you follow me?

Charles A. Schrock

Paul, are you talking about the sales —

Paul Patterson - Glenrock

The Canadian operations that you've sold. You've got a definitive agreement on those so those are not discontinued — I mean, how do we think about that?

Joseph P. O'Leary

In the third quarter they'll be categorized as discontinued operations. For the second quarter, as of June 30th, we did not have a definitive agreement at that time so they're not being depicted as discontinued operations in our second quarter financials.

Paul Patterson - Glenrock

Fair enough. I got you. And then on the dividends, in terms of the board, if you could just sort of give us a little bit more feeling for — again, you guys are a little further along the process, your comfort levels or the board's comfort level with respect to the dividend and the CapEx levels and what have you. Could you just sort of give us an update there considering the high payout and what have you — it's one of the things people think about. How should we think? I mean, has there been any change here? Do you guys feel more comfortable with it with the announced transactions and what you're seeing going forward, or what kind of flavor can you give us for that?

Charles A. Schrock

Paul, I'm not sure I can give you much more in terms of comfort. I just want to reiterate, it is a board level decision. As I just mentioned, it depends on a lot of factors that we consider each and every time the issue comes up, so we have to keep monitoring the situation and monitoring (inaudible) and all of them. But the board will continue to consider it and deliberate all those factors that we talked about. There is a slide in our deck that kind of lists some of those factors, that was slide 13 that I referred to earlier, and we're in a very unique situation at this point in time so there's not much more I can say to give you some comfort there.

Paul Patterson - Glenrock

Okay. Thank you.

Operator

Our next question comes from Maurice May with Power Insights. Your line is open.

Maurice May - Power Insights

Good morning, folks. I want to focus in on common-stock issuances. You said that you would not have to have an equity issuance except for various company plans. I was wondering if you could detail those plans? For example, dividend —

Joseph P. O'Leary

I mean, I would not expect them to be very significant in terms of issuances. I don't have specific details, but it would not be significant as it relates to those plans.

Maurice May - Power Insights

Okay. Do you issue new stock for your dividend reinvestment program?

Joseph P. O'Leary

We are not currently doing that.

Maurice May - Power Insights

Okay. Any plans to do that?

Joseph P. O'Leary

At this point we're not planning on doing it this year and we don't anticipate doing it through 2011 at this point.

Maurice May - Power Insights

Okay. As I model your cash over the next several years from '09 to 2011 and using the 10-K information, and of course some of my own assumptions, I see you as about $600-700 million cash flow negative, and can I assume that the collateral cash coming back from IES pretty much covers that deficiency, and is that the basis for your no-equity issuance forecast through 2011?

Joseph P. O'Leary

When you say cash collateral coming back, I think you were referring to the return of capital, the $600 million?

Maurice May - Power Insights

Yes. I am, yes.

Joseph P. O'Leary

Yeah, that's a good way to look at it.

Maurice May - Power Insights

And so that would cover any cash flow deficiency?

Joseph P. O'Leary

Yeah. That's what we anticipate at this point.

Maurice May - Power Insights

Okay. Thank you very much.

Operator

David Grumhaus with Copia Capital, your line is open.

David Grumhaus - Copia Capital

Good morning, guys. Just following up on Maury's question, so does that mean as we look at long-term debt over the next 18 to 24 months that long-term debt really isn't going to go down, that basically the proceeds from this are going to go to cover cash shortfalls from CapEx and dividends? Is that the right way to look at it?

Joseph P. O'Leary

I mean, if you look at 2009, we have long-term debt maturities of $155 million. In 2010 it's $116 million and out in 2011 we've got $479 million coming due. So as the cash is received in conjunction with that return of capital that we spoke of earlier, at varying points in time we may be paying down the long-term debt, and then depending upon the needs of the business as we go forward we might start reissuing some of that again, reissuing debt. And that's the reason why we don't expect to have to issue the equity.

David Grumhaus - Copia Capital

But the shortfall, you will be cash flow negative in the next few years as well, right? So I mean, some of that has got to go towards covering that cash negative.

Joseph P. O'Leary

Yeah. That's right.

David Grumhaus - Copia Capital

So from that perspective you will have to reissue a lot of that long-term debt, correct?

Joseph P. O'Leary

In terms of the next couple of years, no, I wouldn't expect that, but when you get out into 2011, yeah, there's a possibility there as the construction starts to ramp up that we'd be reissuing some of that long-term debt at that point.

David Grumhaus - Copia Capital

Okay. Is your expected CapEx at 11 at People's contingent on getting the tracker, or would you invest that level of proceeds on that (inaudible) replacement if you didn't have a tracker?

Lawrence T. Borgard

We obviously believe that the tracker is the most advantageous investment mechanism for that. It's a little difficult for us to say at this point if we don't get the tracker what we will do because quite honestly, we think that the tracker has a lot of support and a lot of traction. We filed it the last time we filed in Illinois and we've got continued support and additional support for that going forward. So we're pretty focused on the tracker and that's where we think we're going to end up.

David Grumhaus - Copia Capital

So you think this time around you will get it — (inaudible) was against it, right, and then immunities were against it?

Lawrence T. Borgard

Yeah. We're pretty comfortable that we've improved it based on comments that we've received from the Commission and other interveners, and we're pretty positive about it.

David Grumhaus - Copia Capital

Okay. So we should think that there's a very good chance that when you get the rate order in January that you'll have it?

Lawrence T. Borgard

We continue to support it and we feel very positive about it.

David Grumhaus - Copia Capital

Oh, okay. Question for you on the ceilings with regards to decoupling Wisconsin. You mentioned that you've used up the maximum level of deferral, and I'm guess that just given the economy and with the weather that you will go through that in the third quarter if you haven't already. Does that reset with the rate case that you're filing? How do we think about that going forward?

Lawrence T. Borgard

Remember that I think we mentioned that only on the electric side will we anticipate going through the cap. We do not anticipate exceeding the cap on the natural gas side of the business, and the cap would reset on an annual basis irrespective of the reopener that we filed in May.

David Grumhaus - Copia Capital

Okay. So it resets back to the original level of sales or it resets based on the revised number of sales? I mean, in other words, if your sales in '09 are less than '08, does the cap set at the '09 level or does it still stay on the '08 level? I mean, I guess my question is, is this cap problem if the economy stays bad going to continue to be a problem in '10 as well?

Lawrence T. Borgard

Yeah. It would reset to our last full rate case. In the May reopener that we filed, we did not file to readjust the sales forecast, so it would go back to the last rate case that was settled in end of '08.

David Grumhaus - Copia Capital

Okay. So as long as your sales in '10 are within $12 million of your sales in '08, you're okay, but if you go beyond that you'll hit up against the cap.

Lawrence T. Borgard

Yeah. The cap's actually $14 million, but you got the general concept right.

David Grumhaus - Copia Capital

Okay, great. That's helpful. One quick question, you guys in your release talk about — you obviously give the estimates for '11, but then you also have something in there that you expect 4%-6% growth off the '09 base. How do I reconcile those two?

Charles A. Schrock

David, this is Charlie again. As we look at it over the longer term, we expect to be in that 4%-6% range on an annual average basis. We do now that we look to improve our utilities in the near-term here, that number actually might be bigger than 4%-6%.

David Grumhaus - Copia Capital

Okay. So it's really 4%-6% off the old leaven base, right?

Charles A. Schrock

Actually, we're looking at that on kind of an '09 on a longer-term basis, recognizing that their near-term is going to be even higher than that. I know that's a little confusing, but that's how we kind of look at our modeling and how we project ourselves out in time.

David Grumhaus - Copia Capital

I mean, does that mean after '11 that we should expect it to be very flat for a while? Because obviously, you know, '11's got a – you know, that's a huge increase to be projecting '11.

Charles A. Schrock

Actually, after '11 we do expect to return to that 4%-6% range.

David Grumhaus - Copia Capital

Okay. I guess I wondered why you just wouldn't say it's 4%-6% off the '11 base, but –

Charles A. Schrock

Well. We're trying to make – I understand the confusion because well, we started off talking at the beginning of the year of using 2009 as a base, and we're trying to stay consistent with those numbers.

David Grumhaus - Copia Capital

Okay. All right, thanks for the time today.

Charles A. Schrock

Thank you, David.

Operator

Our next question comes from Melissa Copley with Copley Advisors. Your line is open.

Melissa Copley – Copley Advisors

Good morning, and congratulations on the transaction. My question has to do with the real estate, regarding the sales. Are the assets, the real estate assets of those entities owned or leased? And does the property go with the sales? Will there be excess space under your economic responsibility after the closing of the transaction?

Charles A. Schrock

Good morning, Melissa. This is Charlie. Thanks for the congratulations, by the way. I'm going to turn that over to Mark Radtke to address that question, okay?

Melissa Copley – Copley Advisors

Thank you.

Mark A. Radtke

Good morning, Melissa. The operations – the physical operations associated with these are really office buildings, and we lease all of our office space within the non-regulated business. We are keeping those obligations; they're not particularly large obligations, but for one lease in our Louisville office, which is being transferred to the buyer, US Energy Services.

Melissa Copley – Copley Advisors

And how large are they, and otherwise where were they? Apart from the Louisville one, where were the others?

Mark A. Radtke

Yes, our Canadian operations, we have offices in Calgary, Toronto, and Montreal.

Melissa Copley – Copley Advisors

Okay.

Mark A. Radtke

They're small offices. We have like 15 employees total –

Melissa Copley – Copley Advisors

Oh, wow.

Mark A. Radtke

At those locations, and then beyond our Louisville office, the balance of that team in the energy management consulting business was in our DePere offices, and that's the facility that we continue to hold. That's a major office location for us.

Melissa Copley – Copley Advisors

Okay, I appreciate that very much. Thank you.

Operator

Our next question comes from John Alley with Decade Capital.

John Alley – Decade Capital

Good morning. It seems now that your '11 guidance is predicated upon operation improvements and economic recovery. I was wondering if you could talk a little bit more about those two items because it didn't appear that those were in the full 1Q release.

Charles A. Schrock

Well, John, as we look out to '11, for starters, we like to look at '11 just to get people focused on where we're moving the company to in terms of the incoming of predominantly regulated utility.

John Alley – Decade Capital

Sure.

Charles A. Schrock

You are correct in the sense that as we look out there, our strategy is to improve the performance of our core utilities, and that's through a combination of things. That's through rate cases, through operational improvements, cost control, all those sorts of efforts. It's no one thing that will get us there, but it's really a focus on all of those things.

John Alley – Decade Capital

Could you put a number around or magnitude around the O&M savings that you need, or that you at least hope to achieve?

Charles A. Schrock

Actually, it's hard for me to estimate specifically that because of the combination of the rate cases, the operational excellent efforts that we have ongoing. So at this point, I don't want to try and predict one versus the other. I do expect the operational excellence to result in some significant saving for us, though.

John Alley – Decade Capital

Got it. And is it possible that any of your synergies sharing mechanisms will claw back any of those savings, or will you be free and clear at that point?

Charles A. Schrock

If I understand your question, you're talking about – from the merger that WPS Resources and People's had, right?

John Alley – Decade Capital

Right.

Charles A. Schrock

As we look out in time, all of that is really behind us.

John Alley – Decade Capital

Okay.

Charles A. Schrock

So we're really (inaudible) in terms of the incremental savings that we can get.

John Alley – Decade Capital

Got it. In terms of the economy, what are you looking to achieve?

Charles A. Schrock

Obviously, our goal is to produce the results that we projected, even with the economy. It's hard to actually predict it, but one comment I would make is we do have the coupling of around about 80% of our customers, so that helps us mitigate the volumetric changes that occur as the economy changes. We have to manage around the caps that we have in Wisconsin, but that is a great help for us there.

John Alley – Decade Capital

And if you could clarify one of the responses to Paul Patterson. There's $600 million returning between now and the end of '10, and that's classified as capital. Can you further break that down between collateral and proceeds? What's already sitting on the balance sheet basically as another form of cash, and what do you expect to bring in as the sale proceeds?

Charles A. Schrock

I'm going to have Joe comment on that.

Joseph P. O'Leary

Well, just to give you an example. We started a year that we had $1 billion of capital that we're looking to get recovered. Of the $400 million that we did recover to date, that related primarily to working capital. We ended up using that to pay down – we had a revolver loan at Energy Services of about $175 million that we've paid down. We've paid down some short-term debt at Integrys Group, at the group level, at corporate level, of about $200 million, and then it built up our cash by about $25 million. Going forward, of the $600 million, maybe 60% of it relates to inventory and working capital.

John Alley – Decade Capital

That's of the $600 million, or of the $400 million that's already come in?

Joseph P. O'Leary

That's of the $600 million.

John Alley – Decade Capital

Okay, got it. And on slide 13, you talk about some of the factors that could affect dividend. I was wondering if you could expand on those a little bit more. How do those play into the timing of the Energy Services sale?

Joseph P. O'Leary

In terms of those factors, maybe just to provide a little more detail, but some of these things are just ongoing things. In terms of Integrys Energy Services sales, that's going to go through the third quarter, fourth quarter, and some of those transactions could actually tail into 2010. So we have to keep watching that. Of course, the rate cases – we were in for five rate cases last year; we have another five this year. We're going to keep looking at going in for rate cases as long as we need to, to get our utilities to perform at or near the return on equity. The economy is a bit difficult to predict, but with our decoupling, as I mentioned earlier, that helps them mitigate the impact of the volumetric changes. So all these things are kind of dynamic, changing in time, and the board takes a look at the whole package every quarter when we look at the dividend issue.

John Alley – Decade Capital

Sure. Just one last question, if you don't mind. Slide 22 talks about expected rate base growth, and that's down to about $75 million off the last quarter. I was wondering, is that just related to the wind project, or is there other CapEx that's no longer there? Sorry if I missed those other calls this morning.

Lawrence T. Borgard

Yeah, John, this is Larry. The vast majority of that $75 million is related to the High Country wind project that I discussed earlier.

John Alley – Decade Capital

Got it. Okay guys, thank you very much. I appreciate your time.

Joseph P. O'Leary

Thank you, John.

Operator

Our next question comes from Barry Klein with Citigroup. Your line is open.

Barry Klein - Citigroup

Hey, guys. Just a clarification. On the fourth quarter call you had a chart showing, and you mentioned that you had about an additional $20 million in synergy savings. I didn't see it in the first quarter call, and you didn't have that chart again. Also, on one of the previous questions you mentioned that the synergies are behind you. Is that the case, or were you speaking about something else?

Joseph P. O'Leary

This is Joe. With regards to 2009, by the end of the year we'll probably have accomplished the $20 million. We got a lot of that in 2008, to the extent that we've taken those costs permanently out of the business, so they recur each year but there's not an incremental change per se, year over year – 2009 versus 2008. I think overall, we expected by the time we're done with all of our integration efforts to get $96 million of synergies, and at this point, we're on target to hit that.

Barry Klein - Citigroup

Okay, because at the end of the fourth quarter it was up to $115 million by 2011, I believe.

Joseph P. O'Leary

Yes.

Barry Klein - Citigroup

So, end of the year that's it for this energy saving.

Joseph P. O'Leary

Yes. We're pretty much there. We got what we wanted to get.

Barry Klein - Citigroup

Okay. All right, thanks a lot for the time, guys.

Joseph P. O'Leary

Thank you.

Operator

I'm showing no further questions at this time. I will now turn the call back over to Steve Eschbach.

Steven Eschbach

Thank you very much, and thank you for being part of our Second Quarter Earnings Conference Call. A replay of this conference call will be available until October 30th, 2009 by dialing toll-free 866-434-5245. I repeat, 866-434-5245. 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 212-228-5408, 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 Q2 2009 Earnings Call Transcript

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