Integrys Energy Group, Inc. Q4 2009 Earnings Call Transcript

Feb.26.10 | About: Integrys Energy (TEG)

Integrys Energy Group, Inc. (NYSE:TEG)

Q4 2009 Earnings Call Transcript

February 26, 2010 9:00 am ET

Executives

Steven Eschbach – VP, IR

Charlie Schrock – President and CEO

Joe O’Leary – SVP and CFO

Mark Radtke – CEO, Integrys Energy Services

Analysts

Barry Klein – Citigroup

Paul Patterson – Glenrock Associates

Ted Heyn – Catapult

Reza Hatefi – Decade Capital

Operator

Welcome to the fourth quarter 2009 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 conference 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.

Steven Eschbach

Thank you very much, and good morning, everyone. Welcome to Integrys Energy Group’s fourth quarter 2009 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 Borgard, our President and Chief Operating Officer of Utilities; and Mark Radtke, Chief Executive Officer of our non-regulated 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 Web site 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 May 4, 2010.

I need to direct you to Slides 3 and 4 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 may be required by federal securities laws, Integrys Energy Group and its subsidiaries undertake no obligation to publicly update or revise any forward-looking statement contained in this presentation, whether the result of new information, future events, or otherwise.

Slide 5 indicates that today’s presentation includes non-GAAP financial information related to “diluted earnings per share – adjusted.” We believe that this is a useful measure 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 the call over to Charlie Schrock. Charlie?

Charlie Schrock

Thanks, Steve. Good morning, everyone, and thanks for joining us on the call today. On February 17, we hosted an Investor and Analyst Day in New York. A webcast of each presentation and Q&A session is archived on our website, and the associated slides are available there as well. We had approximately 40 people join us in person for that event, and many more listened to the webcast and we appreciate your interest in the company and we thank you for your participation.

For those who were unable to participate, I encourage you to review the materials from the event, as they cover in detail our regulated utility operations, the results of our Integrys Energy Services strategy change, our restructured non-regulated business, and detailed financial information. We also discussed our decision to maintain our quarterly dividend at its current level and management’s confidence that successful execution of our business plan will lead to a reasonable payout ratio over time.

Today, as listed on the agenda on Slide 6, I will provide an overview of 2009 as well as the key takeaways from the Investor and Analyst Day. Joe O’Leary will discuss our fourth quarter and full year 2009 results and our diluted earnings per share guidance for 2010 and 2011. Finally, we will be happy to take your questions, either on our fourth quarter and full year results for 2009, or on any information that we discussed at our event last week.

Turning to Slide 7, we are pleased to report 2009 diluted earnings per share adjusted results of $2.41, which exceeds our previously communicated 2009 diluted earnings per share adjusted guidance range of $2.26 to $2.38.

We are continuing on a deliberate path that will bring our utilities closer to earning their authorized returns on equity over time. We are advancing along this path with the operational progress that we made through our two-pronged approach to achieving this goal. First, we completed a number of rate cases during 2009 and early 2010. Second, we are continually making progress on our operational excellence initiatives to further streamline and improve the efficiency of our operations.

Another major accomplishment is that we met our key strategic objectives for Integrys Energy Services. We substantially reduced the invested capital and collateral support requirements of this business. Upon completion of our announced transactions, we will have exited wholesale operations and we have refocused the remaining non-regulated retail natural gas marketing and retail electric marketing operations to achieve a platform for controlled growth within acceptable parameters. These accomplishments in our regulated and non-regulated operations position us well for 2010 and beyond.

I would now like to briefly review the key takeaways for our regulated and non-regulated operations from our Investor and Analyst Day last week.

In our regulated business, covered on Slide 8, our objective is to bring each utility closer to earning its authorized return on equity. As I said earlier, one major way that we are doing this is through cost control efforts focused on operational excellence and timely and regular filings of rate cases, when appropriate. We have also been able to incorporate mechanisms that help us achieve more predictable earnings over time. The decoupling and bad debt riders that we have in place in several of our jurisdictions are examples of these mechanisms. Our rate base will grow through investment in capital projects needed for environmental compliance, renewable portfolio standard mandates, and maintaining and improving our infrastructure.

American Transmission Company will continue to positively impact our earnings. Although this is an equity investment for us, we treat this investment as a separate reportable segment. We have included American Transmission Company on this slide, under the category of regulated operations, because the ATC is subject to regulation by the Federal Energy Regulatory Commission.

And finally, but no less importantly, our commitment to continuous improvements in operational excellence and cost controls will allow us to deliver on our financial expectations, while delivering safe, reliable, and outstanding customer service.

Slide 9 shows our potential earnings growth for 2008 and 2009’s financial results associated with our efforts to have our regulated utilities earn closer to their authorized returns on equity. You can find the 2008 and 2009 data for each utility in the Appendix of the presentation. We have also displayed estimates of our earnings potential for our regulated natural gas and regulated electric segments for 2010 and 2011, which we calculated using the mid-point of the 2010 and 2011 diluted earnings per share guidance range that we presented at the Investor and Analyst Day last week.

Although we are confident in the diluted earnings per share guidance ranges that we have provided to you, I do want to stress that the figures you see for 2010 and 2011 are estimates to give you an idea of the improving trends in earnings that we expect to deliver in the next two years. The actual results could vary by as much as $5 million to $10 million either way, and still remain within our guidance range.

Consistent with what we said during our presentation last week, the earnings shortfall between what was authorized and what was actually earned for all of our regulated utilities increased in 2009, going from about $45 million in 2008 to about $57 million in 2009. Given the economy and the timing of rate cases, this was not unexpected. And, while we experienced a decline in utility earnings from 2008 to 2009, the longer-term trend shows improvement. A closer look at the individual utility results also shows the progress we are making. For example, Minnesota Energy Resources’ financial results for 2009 show that it has slightly exceeded its allowed return on equity, and Michigan Gas Utilities’ financial results show an improvement in earnings. Peoples Gas and North Shore Gas were involved in rate cases in 2009, with new rates going into effect in late January of 2010, which will lead to an improvement in earnings for these companies as well. Wisconsin Public Service’s 2009 financial results were impacted by a shortfall in sales and limitations of the decoupling cap at the electric utility. We will be filing a rate case for Wisconsin Public Service in April and expect its earnings to improve upon implementation of new rates in 2011.

So, in total, we are expecting a substantial improvement in the utility earnings for 2010, which is the first full year that the recent rate cases are in effect. We expect the shortfall to be reduced to approximately $37 million in total, roughly $20 million for the natural gas utility business and $17 million for the electric business.

From 2010 and 2011, there is a bit of lumpiness, as the expected increase in the electric utility segment due to anticipated rate case awards will be somewhat offset by a decline at Peoples Gas and North Shore Gas, which will be in a rate case filing year. Again, I want to emphasize that these are estimates using the diluted earnings per share guidance mid-point, and the actual numbers will vary. Nevertheless, we believe that the improving trend will continue in 2011, when we expect the total shortfall to be approximately $34 million, roughly $25 million for the natural gas utility business and $9 million for the electric business.

One of our major strategic objectives is to bring our utilities closer to earning their authorized returns on equity over time. Due to the inherent nature of the regulatory process in terms of timing and typical disallowances, complete eradication of the shortfall is probably not likely; however, we will keep trying to improve on that number as much as we can through our operational excellence program and rate case filings when they are appropriate.

In our non-regulated business, covered on Slide 10, we are pleased to have achieved our strategic objectives for Integrys Energy Services. We are completely exiting the wholesale portions of this business. We have restructured the remaining portions of our non-regulated business, which now encompasses retail electric and retail natural gas marketing and solar and other renewable energy projects, and we have restructured it so that it is positioned for controlled growth. Our refocused non-regulated retail customer business is lower risk and more predictable than our prior integrated business; and our renewable energy projects will focus on customer-sited solar and renewable contracted asset development. Our commitment to operational excellence extends to Integrys Energy Services as well, and we will make improvements in that arena as we continue to provide exceptional energy solutions for our customers.

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

Joe O’Leary

Thank you, Charlie. I will cover our results for the fourth quarter and full year 2009, as well as our annual diluted earnings per share guidance for 2010 and 2011.

Beginning with Slide 9, during the fourth quarter of 2009, in accordance with generally accepted accounting principles, or GAAP, we recognized total diluted earnings per share of $0.31 for the quarter ended December 31, 2009, compared with $0.33 for the same quarter in 2008. To arrive at diluted earnings per share adjusted for the quarter, 2009 expenses relating to our reductions in the workforce at the regulated utilities and holding company are added back, as is Integrys Energy Services’ net loss from continuing operations in 2009 and 2008. Diluted earnings per share adjusted was $0.49 for the fourth quarter of 2009 compared with $0.68 for the same period in 2008.

For the full year 2009, on a GAAP basis, we experienced a net loss per share of $0.92, compared with net income of $1.64 per diluted share for the full year 2008. To arrive at diluted earnings per share adjusted, the non-cash goodwill impairment losses for our natural gas utility segment, expenses related to our reductions in the workforce at the regulated utilities and holding company, and the Integrys Energy Services’ net loss from continuing operations in 2008 and 2009 are removed, resulting in diluted earnings per share adjusted of $2.41 for 2009, compared with $2.51 cents for 2008.

Last year, 2009, was a difficult year for many companies and a lot of our customers, and we did not escape the impact of a tough economy, nor did we expect to. We are pleased that our performance allows us to report 2009 results that exceed our previously-communicated guidance for the full year. This was due primarily to lower fuel and purchased power costs for our electric utility segment than we had forecasted earlier in 2009. Considering the difficult economic environment in 2009, it is no surprise that our sales volumes were negatively affected. We were able to partially mitigate the impact through the decoupling mechanisms that we have in place in our jurisdictions for our regulated utility operations. However, we reached our decoupling cap relating to our electric utility in Wisconsin in the first half of 2009, which is why the lower sales volumes have had a relatively larger earnings impact in the second half of this year, 2009.

On Slide 12, you will see that there are seven key items driving the $2.1 million quarter-over-quarter decrease in fourth quarter GAAP net income. Slide 13 is a similar chart that compares factors that drove the $197.3 million decrease in GAAP net income for the full year 2009 versus the same period a year ago.

Additional detail related to the key drivers by segment for the fourth quarter and full year can be found on Slides 23 through 32 contained in the Appendix of the slide deck for today’s presentation, in the news release we issued last evening, and in the Form 10-K we filed with the Securities and Exchange Commission last evening, which are also available on our website.

Moving to Slide 14, I would like to refer you to the Appendix for slides replicated from our February 17 Investor and Analyst Day presentation for detail on our financings; recent, favorable credit rating agency action; capital expenditure plans; utility depreciation; utility rate base growth; and a simplified cash flow model.

Slides 15 and 16 cover our diluted earnings per share guidance for 2010 and 2011, which is the same information we presented last week in New York. We are now providing diluted earnings per share guidance for all of Integrys Energy Group, instead of on a diluted earnings per share adjusted basis, which we had provided in November during our third quarter conference call.

As indicated on Slide 15, we expect our 2010 diluted earnings per share to be between $3.09 and $3.37. Our guidance related to the Integrys Energy Services Other line includes gains and losses and certain other impacts related to divestiture transactions, restructuring costs related to Integrys Energy Services, net non-cash gains or losses related to derivative accounting, and the non-cash impact on margin resulting from inventory adjustments made in prior periods. Our guidance does not include any Integrys Energy Group restructuring costs related to the reduction in workforce that is currently in progress, other than those related to Integrys Energy Services.

Slide 16 shows our guidance for 2011. We expect 2011 diluted earnings per share to be between $3.28 and $3.61. Our guidance for the Integrys Energy Services Other line includes net non-cash gains and losses related to derivative accounting, the non-cash impact on margin resulting from inventory adjustments made in prior periods, and certain impacts related to divestiture transactions.

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

Charlie Schrock

Thanks, Joe. Turning to Slide 17, I will summarize the key points from today’s call before we take your questions.

We completed five rate cases in 2009 and early 2010, made progress on our operational excellence initiatives, and put certain mechanisms in place to improve the predictability of our regulated utilities. In 2010, we will be filing general rate cases for Wisconsin Public Service and Upper Peninsula Power. These efforts will move our utilities closer to earning their authorized returns on equity over time. At Integrys Energy Services, we achieved our key strategic objectives by reducing the amount of invested capital and collateral support requirements. We are exiting the wholesale portions of the business and, overall, have significantly reduced the scale of operations and risk profile of this business. We have refocused the remaining non-regulated retail natural gas and retail electric marketing operations, while allowing room for controlled growth in the future. From a corporate perspective, we have taken steps to improve our productivity and processes throughout the company, resulting in more streamlined and efficient operations.

Moving on to Slide 18, future earnings will be driven by our utilities and complemented by our non-regulated operations. This will be achieved by investing approximately $1.2 billion in regulated utility capital projects between 2010 and 2012. These investments in our utilities will be for environmental controls, renewable portfolio standards, and infrastructure improvements.

The infrastructure investment in Chicago will be done in accordance with the Rider ICR, which the Illinois Commerce Commission approved in our last rate case at Peoples Gas. Additionally, for our regulated utilities, we will file rate cases when appropriate. This will be complemented by controlled growth at our non-regulated energy services business. All of these efforts will be accompanied by continually focusing on operational excellence and cost controls that will deliver on our financial commitments. We also expect to continue achieving earnings growth from our investment in American Transmission Company.

On February 16, the Board of Directors declared a quarterly common stock dividend of $0.68 per share payable on March 20 to shareholders of record on February 26, 2010. The dividend was maintained at the same amount as the previous quarterly dividend declaration. While this remains subject to quarterly review by our Board of Directors, management is confident that with the dividend at this level, the successful execution of our business plan will lead to a reasonable payout ratio over time.

We are reaffirming the diluted earnings per share guidance for 2010 and 2011 that we provided on February 17, 2010, as well as an expected 4% to 6% growth rate on an average annualized basis, using 2011 as the base year, through 2015.

We would now like to open the call up for your questions.

Question-and-Answer Session

Operator

Thank you. At this time, we are ready to begin the question and answer session. (Operator Instructions).

Our first question comes from Barry Klein with Citigroup. You may ask your question.

Barry Klein – Citigroup

Yes, in your 2011 guidance, retail volumes appeared to tick up quite a bit. With regards to the electric volume, what are you assuming, because it looks like – it looks as though the volumes you are expecting are significantly above levels that you have ever done in the past? And also with regards to the gas volumes on the retail side, approximately how large will the impact on volumes from the sale of Canadian operations or any other operations that (inaudible)? Thanks.

Charlie Schrock

Hey, Barry. Thanks for joining us and thanks for your question today. I would assume you are talking about our non-utility volumes, correct?

Barry Klein – Citigroup

Yes, Integrys Energy Services retail volumes.

Charlie Schrock

Sure. What I am going to do is have Mark Radtke address your question.

Mark Radtke

Sure. Thanks, Barry. Good questions, and one piece of information that I would direct you to is in our Supplemental Data Package, we have a section titled non-regulated segment Integrys Energy Services before contracted volumes, and it shows you for both where we were a year ago and then our forward contracted portfolio in 2009. One caution, however, is that is what is completely, you know, on the books for the retail business, and we continue to go through some restructuring, most notable in the Texas market. And at year end, we had but 5.5 million megawatt hours in that forward book, related to primarily Texas, where we won't be going forward. The way to think about our sales goals that we have outlined in 2011 as well as visibility that I provided for 2010 in this table is to look both at what we currently have contracted up, and for the retail electric business, when I strip those markets again, notably Texas, that we will not remaining in or we don’t really include that in that forward projection that we have provided at the analyst meeting.

We have got, for 2010, about 10.8 million megawatt hours currently contracted up. And as you saw on the slides, we have got a sales goal and expectation for sales of about 16.5 million megawatt hours. So we have 65% of the 2010 business contracted up coming into the year. Now, that is a little lower than historically has been the case. 2008, which was a more normal year, we had 83% of our 2009 volumes on the books at the end of 2008. So you can look at that and say, these guys have a little bit more headwind than they have in the past, but keep in mind that we have really had this business throttle back over the course of 2009, and with the restructuring in place and our financings getting configured, the sales force is now back in the market, signing customers up consistent with the new targets that we have in the markets that we have identified.

So there is certainly some kind of pent-up demand, if you will, among our customer base in the markets that we are in and we really expect that growth to come through organic growth. We don't project, you know, acquisitions to facilitate this; but through organic growth in the markets that we operate, and we have some components around that, because while the Illinois market we have got significant share, we continue to see growth there.

Entering some of our eastern markets, particularly like mid-Atlantic and New England, we had entered those a few years ago and really have a growth play. And so we are at the early stages of the growth curve in those markets, and that is what gives us confidence associated with being able to reach those goals in 2010 and 2010 is really that stepping stone to 2011. The other thing to keep in mind is that it is not just a volume game, it is really about the overall margins that you take away from the business, and our margins are running essentially a little bit ahead of plan at this point. So, while our volumes are 65% of plan, you know margins, when we look at it, we are a little better than that, probably closer to 75% or 80% of plan.

On the gas side, exiting the Canadian business – significant impact, to be sure. That was a very high volume business and you can see our actual volumes in that same supplemental data pack. You can see our actual volumes on our prior page. Retail natural gas sales in 2008 were like 336 Bcf; 236 Bcf in 2009, as we lost the tail end of the year for the Canadian business, and that is why we are projecting about 118 Bcf in 2010 for that business that remains. Now we have today, in the forward book, about 76 Bcf of volume associated with markets that will stay and you will note that is very, very similar to the total portfolio that we have described in that supplemental data pack, because the markets – we are essentially – the markets that we have on the books today are essentially the markets that we are going to be in. And of that 118 Bcf plan for the year, we have 76 Bcf under contract, so about 65%, that is very, very consistent with historical practice, kind of coming into the year with about 60% to 65% of our gas sales volumes under contract, so we are very, very comfortable with achieving our gas objectives.

Barry Klein – Citigroup

Of that 336 Bcf, how much related to the Canadian operations?

Mark Radtke

It was about half. Actually, I apologize, I don't have that exact number here, but about half of our retail natural gas business was Canadian volumes.

Barry Klein – Citigroup

Okay. Thank you very much.

Charlie Schrock

Thanks, Barry.

Operator

Thank you. Our next question comes from Paul Patterson with Glenrock Associates. You may ask your question.

Paul Patterson – Glenrock Associates

Good morning, guys.

Charlie Schrock

Good morning, Paul.

Paul Patterson – Glenrock Associates

I apologize for not being able to make your meeting. I really looked forward to it, but anyway, I couldn't make it, but I did look into part of it on the web. What I wanted to ask you guys and what wasn't completely clear to me is the %0.50 to $0.55 for 2011 in the retail business. When was the last time you guys were at that level, historically? I know you guys are catching up now and that was my understanding as to why the growth should show up there, but what was the last time historically that you guys were at that level?

Mark Radtke

Paul, this is Mark, again. You will recall that you know, one of the challenges with this business was the non-cash impacts of derivative accounting. And so, 2008 for instance was on a GAAP basis, a really lousy year. When we look at it on an economic basis, or a realized margin basis, it was a much, much stronger year.

Paul Patterson – Glenrock Associates

What was it on an economic basis, and I guess if we were to – taking away one mark-to-market, how should we have thought about it?

Mark Radtke

Yes, and I don't have that exact number in front of me. We looked at it as a year of about $100 million after-tax net income on an economic basis, using our managerial gross margins to substitute for GAAP gross margins. It was $100 million, plus or minus a couple.

Paul Patterson – Glenrock Associates

And that was the retail business, right?

Mark Radtke

No, that was the entire business.

Paul Patterson – Glenrock Associates

Right. What was the retail business?

Mark Radtke

In terms of the retail business, we had that question out in New York, and it is a good question. The difficulty is that our operations for the business have been integrated, the retail and wholesale. You know, we do some cost allocation internally, but it is not really disclosure-grade data. So I think the thing to look at, the thing to focus on more so than just that $0.50 to $0.55 is the margin level of the retail business versus the margins that we are projecting. And with each release, we have provided both our realized margins and our non-cash margins, split by retail and wholesale. You can look back to those and focus just on the retail realized margins to get a sense for the levels that we are at. But to really cut to the chase, I mean, it is a true statement that the retail business on a standalone basis historically would not have earned at these levels. Now we have restructured this business to focus on our current period results, taking the emphasis away from growth. We have a lot of expense and investment that we were making in growing in the new markets. We have backed away from that, now growing just within the control parameters that Charlie had referred to, and that results in a business that performs much better. How we measure it is return on investment capital, and we have a much higher expectation for this business going forward than it had performed in the past, because it is a different business, operating in a different environment.

Paul Patterson – Glenrock Associates

Can you give us a flavor for the margin per megawatt hour or for mcf or what have you in terms of what you guys are expecting with these kind of results that you are anticipating in 2011?

Mark Radtke

Yes. Actually in the deck from the meeting in New York, outlined in 2011, we have a –

Charlie Schrock

That was the meeting last week, the Analyst Day one ran out of assessment.

Mark Radtke

Right. On Slide 37, and this deck is available on our website, if you don't have it. Slide 37 in that deck describes the total margin, delivered volumes, and then unit margins. For retail gas, on an average basis, we are expecting a $0.34 per unit margin and in retail power, we are expecting (inaudible). You can compare that to, you know, to the actuals that you are seeing in this period and that is what we are seeing in the business today.

Paul Patterson – Glenrock Associates

The sensitivity here, I have got to think that with the low prices that we are seeing out there, that obviously offers you some substantial opportunity. Are you guys at some risk if the price of power or the price of gas goes up, particularly I guess the price of power on a retail basis if that could be – would that be a problem if you are competing against the Polar around here, or what?

Mark Radtke

Great point. When you are competing against the Polar, I mean, the difficulty with an option like that is it tends to be a price that is based on you know some blended historical prices that were posted through some auctions or something like that. In general, and our segment is commercial and industrial segment and in general, the markets that we operate, those markets are competitive and there is not this customer decision, do I take up Polar that has some kind of legacy price or buy at the current market? I mean, the healthiest markets from our perspective are those that customers didn't choose a standard offer that is based on prevailing market prices or choose from a competitive supplier. And that is the majority of our electric business.

On the gas side, we – you know, there, it is fully competitive. So, there is no kind of regulatory regulator offer that distorts market prices. What we do tend to see is a change in contracting behavior on the part of customers. As prices rise, they tend to maybe contract a little bit shorter term, get less aggressive in firming up their future commitments, and in a lower market like we are seeing today, customers are interested in contracting a little bit longer term.

Paul Patterson – Glenrock Associates

Okay. Well, thanks so much guys, and like I said, I am sorry I missed you guys in person.

Charlie Schrock

Well, Paul, I am glad that you listened in. At least that was good for you to do that.

Paul Patterson – Glenrock Associates

Thank you.

Operator

Thank you. (Operator Instructions). Our next question comes from Ted Heyn with Catapult. You may ask your questions.

Ted Heyn – Catapult

Good morning.

Charlie Schrock

Good morning, Ted.

Ted Heyn – Catapult

I had a quick question. I was just with the severance charges; I was having trouble kind of getting a comparable like earnings segments for the actual for 2009, kind of how you would lay them out when you do your guidance for 2010 and 2011. Do you have account of where the earnings are coming on in the bucket from an actual basis?

Joe O’Leary

Are you talking in terms of trying to break it down by segments?

Ted Heyn – Catapult

Yes, exactly. It was just kind of how you are laying out the guidance. How did the actuals come in?

Joe O’Leary

Okay, if you were to pull out the – and this is for the full year, if you exclude the goodwill impairment and also exclude the restructuring charges and excluding Integrys Energy Services, if you exclude those results, you must have found severance payment of $1.22 per share in the natural gas segment. And again, that excludes the impact of goodwill impairment, and it came in at $1.05. And the other category, which now we have had to split that out into two components, there is the investment in our transmission company that came in at $0.59 positive, and (inaudible) is a negative $0.45. So if you want to combine the two of those to get a comparable to what we gave out at our third-quarter call, that comes out to a positive $0.14.

Ted Heyn – Catapult

Got you.

Joe O’Leary

That is roughly $3.41.

Ted Heyn – Catapult

Okay, great. Thank you for just walking through that, because I just wanted to make sure that my numbers were right. The one question that I also had getting now that you have given out those numbers is, the holding company, when you look at the guidance for 2010 and 2011, that $0.45 drag is going down pretty drastically in 2010 and 2011 to about a $0.25 drag and a $0.20 drag in 2011. Can you kind of walk through the drivers of what is kind of causing a compression in that drag?

Joe O’Leary

So you are talking more about 2011 and how it has decreased from the guidance we gave previously for 2011?

Ted Heyn – Catapult

No, just from an actual standpoint, you had a $0.45 drag in 2009, and that drag at the holding company is now going to be $0.20 in 2011. What are the drivers that have that – you know, cutting that drag in more than half?

Joe O’Leary

Well, you know, there are a couple of things going on there, but it is primarily due to less interest expenses. We get more returns of capital coming out of our transactions related to Integrys Energy Services, and that is used to pay down debt.

Ted Heyn – Catapult

Okay. And your cash flow slides, you are saying that you have already had about 450 of tidy capital returns and then you are getting another 250?

Joe O’Leary

Yes, that is correct. You are referring to that simplified cash flow line in Slide 37 of today’s presentation?

Ted Heyn – Catapult

Yes. Okay. So those returns of capital along with just higher earnings power allows for reduction, and that is a big-enough driver for the whole co-drag reduction?

Joe O’Leary

Yes, that is a significant part of it.

Ted Heyn – Catapult

Okay, great. Thanks. Sorry to beleaguer that, but thanks for the color.

Charlie Schrock

Thanks for the question, Ted.

Operator

Thank you. Our next question comes from Reza Hatefi with Decade Capital. You may ask your questions.

Reza Hatefi – Decade Capital

Thank you. First, I missed this, you might have talked about on your Analyst Day, but with the IES segment, I guess in deciding to keep it, was there some sort of restructuring in terms of restructuring some of the old existing contracts, or any cash inflow or outflow regarding, you know, after having decided to keep it in an ongoing basis, does anything of that nature have to happen for you to keep the business?

Charlie Schrock

Reza, thanks for the question. I think what you are referring to would be kind of like the cost of transactions and things like that or I am not quite sure.

Reza Hatefi – Decade Capital

Yes, exactly. Or else, you know, maybe there is some contracts that you wanted to sort of you know, get out of and start afresh. Maybe there are some unfavorable contracts that may be you decided it is better to get out of them now and start afresh and have a fresh look at the business going forward?

Charlie Schrock

Okay. I understand your question. I am going to ask Mark Radtke to respond to that.

Mark Radtke

Yes, thank you. Now really, what we did is, we looked at what segments of business best accomplished our objectives and exiting the wholesale business seemed to do that best. So we did certainly have inter-company transactions between our wholesale and our retail business, but we bifurcated those businesses along the commercial lines that we had operated in the past. And then (inaudible) our wholesale contracts as part of the wholesale business sale, retaining all of our retail contracts intact as they will be way forward. Now certainly, some of the retail businesses that we have exited were businesses that we wanted to exit, because they didn’t meet our objectives going forward, but there was not kind of a picking and choosing of selling contracts that were in the money. They only did some cash today or that type of a thing, if that is what you are suggesting, no, that was not the case.

Reza Hatefi – Decade Capital

So I guess early in 2009, as you were considering selling the business, was it fair that during those first six or nine months of 2009 as you were considering what to do that you still saw these kinds of margins out in 2010 and 2011 or you know, the $0.30 to $0.40 on the gas and the $5 area for the retail power?

Mark Radtke

Yes, in fact, you can see that if you look back at our 2008 reported results. The realized margins that we were seeing in the latter of 2008 April were already ramping up toward the levels that we saw in 2009, and the improvement that we see in margins from 2010 versus 2011, that is really a function of some long-dated older contracts that were on the books, and those contracts remain on the books. In fact, if you look back at, you know, at the start of 2009, so following 2008 business, the forward contracted volume that we had in 2010, and then compare that to the 2010 forward contracted volume that we have on the books today, at the end of 2009, about 55% of our 2010 volume was contracted up in 2008 and prior. So when we were seeing a much lower margin environment, I mean back in the 2007 timeframe, you can look at our realized margins and they were in the high $2s to low $3 range, and it really wasn't until the second half of 2008 that those began to step up.

Reza Hatefi – Decade Capital

Okay, thank you very much.

Charlie Schrock

Thank you for the questions.

Operator

Thank you. And at this time, I am showing no further questions. I will turn the call back over to Mr. Steve Eschbach.

Steve Eschbach

Thank you, and thank you for being part of our fourth-quarter earnings conference call. A replay of this conference call will be available until May 4, 2010, by dialing toll free 888-568-0411. 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 directly at 312-228-5408 or Donna Sheedy at 920-433-1857. Thank you.

Operator

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

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