Integrys Energy Group, Inc. Q1 2010 Earnings Call Transcript

May. 6.10 | About: Integrys Energy (TEG)

Integrys Energy Group, Inc. (NYSE:TEG)

Q1 2010 Earnings Call

May 6, 2010 9:00 am ET

Executives

Steve Eschbach - Vice President of Investor Relations

Charles A. Schrock – Chairman, President, Chief Executive Officer

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

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

Mark Radtke – Chief Executive Officer, Integrys Energy Services

Analysts

Ali Agha - Suntrust Robinson Humphrey

Barry Klein - Citigroup

Maurice May - Soleil - Power Insights

Paul Patterson – Glenrock Associates

John Alley – Decade Capital

Operator

Welcome to the first quarter 2010 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 replay.

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

Steven Eschbach

Thank you very much, and good morning, everyone. Welcome to Integrys Energy Group’s first quarter 2010 earnings conference call. Delivering formal remarks with me today are Charlie Schrock, our Chairman, 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 August 3, 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” and “net income or loss attributed to common shareholders – adjusted.” We believe these 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 the call over to Charlie Schrock.

Charlie Schrock

Thanks, Steve. Good morning everyone and thanks for joining us on the call today. I’ll begin by mentioning the key takeaways form our discussion this morning. First, our plan to move our utilities closer to authorize returns on equity and to implement the strategy change at Integrys Energy Services is on course.

Second, although our plan is on course, we have adjusted our 2010 diluted earnings per share guidance to reflect the impact of the Federal healthcare legislation. Third, we are reaffirming our guidance for 2011 and fourth, we have achieved our target to recover $700 million of invested capital at Integrys Energy Services. This achievement is ahead of schedule.

Moving on to Slide 6, let me briefly review the agenda for the balance of today’s call. I will provide an overview of our 2010 first quarter from an operational standpoint as well as a brief overview of our financial results. Joe O'Leary will discuss our finances for the first quarter of 2010 in more detail and our diluted earnings per share guidance for 2010 and 2011. We will conclude with a question and answer session.

In the first quarter of 2010 we recognized net income attributed to common shareholders on a generally accepted accounting principles basis of $0.64 per diluted share compared with a net loss attributed to common shareholders of $2.35 per share in the same period in 2009.

Turning to Slide 7, we recorded diluted earnings per share adjusted for the first quarter 2010 which excludes the effects of certain items that are not comparable from one period to the next of $1.49 versus $1.56 for the same period a year ago. While our consolidated financial results quarter-over-quarter are down, we are seeing positive progress in a number of areas of our business. For example, quarterly financial results for our regulated utilities and electric transmission segments improved during the first quarter of 2010 compared with the same period in 2009.

In addition, quarterly financial results for the holding company segment also showed improvement in the first quarter of 2010 compared with the same period in 2009. The quarterly financial results for Integrys Energy Services were down in the first quarter this year compared with the same period a year ago, but this was expected since the scope and scale of our non-regulated energy services business have been substantially reduced and there is still transition work underway at Integrys Energy Services.

Even so, the implementation of our revised strategy at Integrys Energy Services is proceeding according to plan which I will touch on in just a moment. You likely saw our quarterly dividend declaration of $0.68 per share payable in June 2010 which is the same dividend rate paid to shareholders in March 2010. We continue to remain confident that successful execution of our business plan will lead to a reasonable dividend payout ratio over time.

Moving on to Slide 8, let me give you a little more information regarding our cost management efforts which are a critical component in our strategy to move utility earnings closer to authorized rates of return. Our reduction in force initiative that we announced last year is about 75% complete. We targeted the elimination of about 300 positions at Integrys Business Support and the regulated utilities. When completed, we expect this will reduce our annual labor costs by $20 million after tax which includes salaries and benefits.

We are also projecting other cost reductions. One example is the company-wide furloughs instituted for 2010 that are expected to result in additional cost savings of $5 million after tax. We are implementing operational excellence initiatives in concert with our cost management efforts to ensure that the cost savings we have already achieved or expect to achieve are sustained over the long haul. All of this is factored into our guidance.

As we have mentioned in our recent presentations, we plan to file rate cases as needed to bring our regulated utilities closer to their authorized returns on equity. We took another step down this path on April 1 when we filed an electric and natural gas rate case for Wisconsin Public Service. The key items of the Wisconsin Public Service rate case which requests new rates to be effective in January of 2011 are presented on Slide 9.

I won’t go through all the details set forth on that slide other than to mention that we are requesting the decoupling cap for both electric and natural gas to be replaced by an earnings cap. You will recall that the existing decoupling mechanism includes a pre-tax cap of $14 million for electric and $8 million for natural gas.

Moving on to Slide 10, one of the key achievements for Integrys Energy Services this quarter was the closing of the sale of its United States wholesale record and marketing trading business on March 31, 2010. As a result of this, as well as other operating activities, we achieved our objective to recover $700 million of capital invested by Integrys Energy Services. This milestone was achieved on April 30, 2010 which is 8 months ahead of schedule.

Because of the timing of the related contract assignments to the purchaser in this transaction, and a 20% decline in energy prices during the quarter, our corporate guarantees increased by $300 million versus where we were at year end 2009 but we remain on target to reduce Integrys Energy Group’s corporate guarantees to $500 million by the end of 2010 from a high of $2.6 billion at March 31, 2009.

Moving to Slide 11 with the divestiture transactions largely behind us, we are now focusing on completing the restructuring of Integrys Energy Services. As I mentioned early, our progress is proceeding as expected. Our non-regulated energy marketing business now consists primarily of retail natural gas and electric customers in the northeastern quadrant of the United States with an energy supply agreement in place where our retail natural gas business to stabilize the collateral support requirements going forward.

As we’ve said before, 2010 is a transitioned year. Our financial results will be impacted by transition and restructuring items such as the gains and losses on transactions as well as the impacts of non-cash gains and losses related to derivative accounting. Non-cash mark to market gains and losses will continue to be significant this issue but not as large as in historical quarters.

We have previously shared our growth projection for our restructured Integrys Energy Services segment which is based on our past experience in these markets. We recognize that it is early in our implementation of this strategy but based on our current progress and actual results in the first quarter of 2010, we continue to believe that our projections for 2010 and 2011 are reasonable and achievable. We expect that overall volumes will be lower in 2010 compared to prior years because of divestitures and reduced sales during our restructuring process.

As our lower margin legacy contracts are running off, we are steadily replacing them with higher margin contracts reflecting new market conditions. So despite the fact that the financial results were down for the Integrys Energy Services segment in the first quarter of 2010 compared with the same period in 2009, we see progress that indicates our implementation of the revised strategy for this segment is going according to plan.

I will now turn the call over to Joe O’Leary who will discuss our financial results in more detail.

Joseph P. O'Leary

Thanks, Charlie. I’ll cover our results for the first quarter of 2010 and briefly review our annual diluted earnings per share guidance for 2010 and 2011. Beginning with Slide 12, during the first quarter of 2010, in accordance with generally accepted accounting principles or GAAP, we recognized total diluted earnings per share of $0.64 for the quarter ended March 31, 2010 compared with a loss of $2.35 for the same quarter in 2009.

To arrive at diluted earnings per share adjusted for each of the quarters, we have removed net non-cash losses related to derivative and inventory accounting activities at Integrys Energy Services. For the three months ended March 31, 2010, we have also removed the net loss and dispositions related to Integrys Energy Services strategy change that deferred any income tax expense resulting from the enactment of federal healthcare legislation and restructuring charges.

There were no comparable adjustments for these items for the same period in 2009. In addition, we have also removed the goodwill impairment loss related to the utility segment that occurred in the first quarter of 2009. There was no comparable charge for this in the first quarter of 2010. Eliminating the impact of these special items, our first quarter 2010 diluted earnings per share adjusted of $1.49 was slightly below the $1.56 we reported in the first quarter of 2009.

As Charlie mentioned, we showed improvement in each of our reporting segments except Integrys Energy Services, and the results were in line with our expectations. Given the warmer weather this year versus last year and the general economic slowdown that remains we are pleased with these results. We attribute that to recent rate increases at our regulated utilities, as well as our cost management initiatives that Charlie discussed earlier.

On Slide 13 we have presented the net income changes by segment for the first quarter of 2010. The related key drivers by segment can be found on Slides 25 through 30 in the appendix. I won't go through them here, but I will answer any questions you may have on this during our question and answer session. Moving on to Slide 14, I will give you an update on our credit facilities.

As most of you are aware, $1.3 billion of our $2.2 billion total credit line was due to mature during 2010. We decided to renew $1.1 billion and that was completed during the latter part of April. This reduction in credit facilities is in accordance with our plan to reduce our total credit line to $1.7 billion by December 31, 2011 as a result of the reduced size and scope of operations following Integrys Energy Services' restructuring. With these new facilities in place, our total credit facilities now total $2 billion.

Moving to Slide 15, I will give you an update on our 3 year capital expenditure plan. Not much has changed at the utility level. We added $40 million to 2012 for Integrys Energy Services in anticipation of additional non-regulated expenditures for solar projects we see on the horizon.

Moving to Slide 16, we show our estimated utility depreciation. The numbers for Wisconsin Public Service and Upper Peninsula Power have declined in the aggregate by $24 million over the 3 year timeframe compared with what we presented during our last quarterly conference call due to updated depreciation studies.

Our net growth and regulated utility rate base for the 3 year period 2010 through 2012 is $482 million, as presented on Slide 17. As set forth in Slide 18, our financing summary remains unchanged from what we presented at our Investor and Analyst Day in New York on February 17. It's repeated here for ease of reference.

As Charlie mentioned earlier, we are adjusting our diluted earnings per share guidance for 2010 downward to reflect the impact of the recently enacted federal healthcare legislation. And that $0.15 per share impact is set forth on Slide 19. We are reaffirming our diluted earnings per share guidance for 2011, and this is reflected in Slide 20.

As a reminder, the number for Integrys Energy Services other for both 2010 and 2011 was our estimate based on the information we had at the end of 2009. This number will change over time, and it is impacted by energy prices as well as contracts that are terminating throughout the year and new business that is being entered into. As such, we suggest you focus on the Integrys Energy Services core number for this segment. Now I'll turn the call back over to Charlie Schrock.

Charles A. Schrock

Thanks Joe. Turning to Slide 21, I will summarize why we believe we are well positioned for the future before we take your questions. First, the execution of our plan is on target. Our utilities and our restructured Integrys Energy Services are performing as expected. Our recovered capital target of $700 million for Integrys Energy Services was achieved ahead of schedule.

Our quarterly common stock dividend of $0.68 per share was declared payable on June 19 to shareholders of record on May 28, 2010. The dividend was maintained at the same amount as previously quarterly dividend declaration. Although our utilities and Integrys Energy Services are performing as expected, we are adjusting our 2010 diluted earnings per share guidance to reflect the impact of the federal healthcare reform legislation.

We are reaffirming our 2011 diluted earnings per share guidance. Going forward our earnings will be driven by our regulated utilities and continuing investment in the American Transmission Company, complemented by our focused non-regulated operations and our cost management efforts. And finally, we expect our earnings per share growth of 4% to 6% on an average annualized basis, with 2011 as the base year, through 2015. We'd like to now open up the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ali Agha – Suntrust Robinson Humphrey.

Ali Agha – Suntrust Robinson Humphrey

Joe, first of all I was curious. Going back to your guidance numbers, when you talk about adjusted Q1 earnings of $1.49 you're taking out that $0.15 hit from the healthcare issue. And yet, when you talk about your full year guidance you're including it in there. So it appears to me they're looking at apples to oranges here. Can you just clarify that so we'll all be on the same page?

Joseph P. O'Leary

Sure Ali, that's a good question. I think you're referring to Slide 12 in the presentation, where we're taking earnings per share and we're trying to adjust it for certain items so we can do the comparisons to the prior year. And so the healthcare affects 2010, does not affect 2009.

So we're kind of pulling it out just for comparison purposes there so we can get down to an adjusted rate that kind of shows what's happening for business operations for that quarter in either year. You know, separate from those particular items that we've adjusted for. When we get to providing guidance for 2010 for the entire year, we're just trying to show you where we anticipate the guidance is going to end up for that year.

And clearly, there is going to be an impact from the federal healthcare legislation. We've noted how much that is. And there is not an impact on that for 2011 and going forward. The healthcare legislation will impact our costs, but we anticipate getting recovery of that in future rate cases.

So it's really just the 2010 year that we have the $0.15 that we have to deal with. Now, we had recognized deferred tax assets in prior years, and that's just us reversing that during the year 2010 upon the enactment of the legislation. Although we did expense it, we do expect to go in and seek recovery of those amounts in our future rate case proceedings.

Ali Agha – Suntrust Robinson Humphrey

To be clear, every quarter as you're reporting numbers and you're reporting them on an adjusted value, you're giving us an adjusted number, and including the GAAP number. If you were to add up the four quarters over the course of the year, the adjusted numbers would be excluding that $0.15. It's the same $0.15 we're talking about.

Joseph P. O'Leary

To the extent that we're doing a comparison with 2009, yes we would be adjusting that out because it did not occur in 2009. It just happens in 2010.

Ali Agha – Suntrust Robinson Humphrey

Separate question, on Energy Services, the backlog data that you give us in your release is from April 1 onwards. I was just wondering, do you have data you could share with us on what is a backlog, specifically for calendar 2010 and calendar 2011?

Ali, let me ask Mark to comment on that.

Mark Radtke

Ali, I don't have perfect numbers to be able to share with you in kind of a tabular form. I can tell you that for the balance of 2010, compared to year end, we have during the first quarter since restarting the marketing business, we have added about $5 million of forward book value for calendar 2010. For the remainder of calendar 2010, so from April forward, and about 8000 megawatt hours.

But as I sit here today I don't have the exact same table, in other words a calendarized table as we showed you at year end. It's a good suggestion though, because what you're trying to see is apples to apples how much was added in each of those buckets during the quarter. Is that what you're saying?

Ali Agha – Suntrust Robinson Humphrey

Yes, that is correct.

Mark Radtke

And as I said, for the balance of 2010 we added about 800,000 megawatt hours, $5 million of value, that lifted the overall per unit value of backlog around $0.20 because of these higher margin contracts that are being done in the marketplace today.

Ali Agha – Suntrust Robinson Humphrey

And my last question, Charlie coming back to you. Going back to your regulator strategy as you laid out and rate case filings, etc. Based on your own numbers, you still end up with a fairly large regulatory lag by the end of 2011. I think it's $34 million in the slide. Can you give us some sense, presuming the strategy moves forward, what that lag should look like in '12. Should we presume the bulk of it could well be taken care of by the end of 2012?

Charles A. Schrock

Ali, it's a great question. I mentioned, in our Analyst Day you'll recall that getting all the way to ROE over the long haul on a consistent basis is going to be difficult just because of the regulatory process and the types of things that the regulators disallow as you go through a rate case. On the other hand, our objective, our strategy is to continue to whittle away at any remaining backlog if you will, or lag.

So we keep every year looking at what can we do to minimize those numbers. So I would expect to see an improvement in 2012, but at this point in time it's hard to say exactly where we're going to end up. And let me ask Larry Borgard if he has any additional comments in respect to that.

Larry Borgard

Charlie, maybe just one thing. Ali, I think you see if you look at Page 24, the biggest deficit in 2011 is on the natural gas side. And we would expect that to come largely from peoples' gas in Chicago. So that's where our focus will be, in improving that number going into 2012.

Operator

Your next question comes from Barry Klein – Citigroup.

Barry Klein – Citigroup

You referred to Integrys Energy Services, some lower margin contracts being replaced by higher margin contracts. What is the average length of the contracts at that unit?

Joseph P. O'Leary

Barry, thanks for the question. I'm going to turn it right over to Mark and have him talk a little bit about that.

Mark Radtke

Customer contracts vary in terms of customers almost always will contract for at least a 12 month timeframe. And then you'll see some 2-year and some 3-year contracts. As I sit here today, I didn't calculate what the actual average tenor of each contract is. You look at that on a weighted average basis given the forward contracted volumes table in our supplemental data. But in general, it's very rare to be less than a year, quite unusual to be longer than 3.

Barry Klein – Citigroup

As I went through the slides, it looks like there was still some realized margins included from wholesale. I guess it was a small amount, but are you keeping a small piece of the wholesale unit, or will those earnings and margins fall off over time?

Mark Radtke

They'll fall off. Remember that we had our wholesale electric business on the books through March 31. We put Muir's in place at February 1, but we still own that business through the entire quarter. Gas, you'll recall when we announced the completion of that sale in December of 2009 we said it's a two-step, we had these storage contracts. And those have all been completed, but actually the last one closed on May 1.

So in the second quarter you'll see a little smidge of gas carrying over as well. But when we look at the business going forward, our forward volumes, tables, you’ll note that it’s based on the business that we’re retaining. I’d consider those wholesale margins just residual margins to not be focused on.

Barry Klein - Citigroup

The other ones, I guess, are just [inaudible] the other ones that have been sold, right?

Charles A. Schrock

Not necessarily. Based on the business, sometimes it will qualify for discount treatment sometimes not. That’s why Slide 32 and 33 are helpful because it gives you that break down of what’s in wholesale and what’s in retail.

Barry Klein - Citigroup

A couple questions for Larry, I notice there was an $11 million impact from weather but it was my impression that most of your service areas, at least on the residential and commercial side had decoupling or weather normalization. Is there sensitivity or is that only the excess above and beyond that WPS, what are your limitations on the decoupling?

Lawrence T. Borgard

Barry, that’s a good pick up. We have about 80% of our customers, residential and small commercial customers are covered by decoupling but our decoupling varies from state to state and it is not perfect, I will tell you. For example, in Wisconsin we have the caps that Charlie mentioned, $14 million in electric, $8 million in natural gas so anything above that isn’t covered by decoupling and Charlie mentioned capped out on gas already in Wisconsin.

In Illinois, for example, the process doesn’t really cover switches in customer classes so it’s a margin per customer on a class basis. It’s imperfect and we will work to improve those decoupling mechanisms but that’s really what you’re getting at when you see those numbers.

Barry Klein – Citigroup

With regard to the cap on gas and WPS is that by heating season or as we get into the next heating season and Q4 should we see some extra sensitivity than we’re used to, if there is an impact from weather?

Lawrence T. Borgard

It’s on a calendar basis.

Barry Klein – Citigroup

I’m sure you saw the results from Ameren’s recent rate case. I was just wondering if you could give some comments on what you thought the potential impact on [people’s] might be down the road based on the change in methodology. I think they had a change in methodology surrounding a rate base and also a slightly lower ROE than had been approved at in [inaudible].

Lawrence T. Borgard

Charlie is motioning that I should take that one as well. Let me just suggest that the dust has not settled on the Ameren rate case at this point. You may or may not be aware of this, but I believe there is going to be a special open meeting of the Illinois Commerce Commission later today to discuss the amendatory order. I think Ameren filed an emergency motion just a couple days ago in which they identified what they described as “significant errors” in the order. I wouldn’t take what the initial order was to the bank quite yet.

Let me remind you that we’ve told you folks pretty consistently that we pride ourselves on having solid, positive regulatory relationships across all four states that our regulated utilities operate in. We think that we’ve been responsive to regulatory inquiries. We’ve put together complete and compelling evidentiary records for the commissions to make decisions on and quite honestly our results have been, what we would describe as reasonable across all four jurisdictions.

We would not expect any of that to change. I didn’t look specifically into the details of the Ameren order but I’ll tell you that we’ve had good success in Illinois and we would expect reasonable treatment to continue.

Operator

You next question come from Maurice May – Soleil-Power Insights.

Maurice May – Soleil-Power Insights

A couple of questions on rate base growth. First of all, you have a couple $100 million in there going forward for Wisconsin Public Service and I was just wondering where that’s going to take place?

Charles A. Schrock

The main thing we’re looking at there, and I’ll ask Larry to provide additional detail if necessary, are things where environmental retrofits on our power plants, that’s probably the biggest chunk of those dollars.

Maurice May – Soleil-Power Insights

Which power plants?

Charles A. Schrock

Larry, do you want to comment on that?

Lawrence T. Borgard

These would be our coal plants both our joint owned plants, Columbia unit. I will tell you that none of the numbers that you see in the slides are dependent upon any climate change legislation either at this state or at the federal level.

Charles A. Schrock

Today’s environment.

Maurice May – Soleil-Power Insights

Your growth target going forward based upon 2011 as a base year, 4% to 6%, just looking at the [inaudible] Association slide, it likes a couple million a year. It looks like there are around 4% per year of the growth that 4% to 6% can come from rate based growth but if you were to grow at the upper end of that 4% to 6% range where does the 6% come from? Where does that incremental 2% come from?

Charles A. Schrock

What we look at when we model this thing out is obviously all of that capital investment and everything but also continuing to close that ROE gap. If you put the two together, that’s what gets us in that range.

Maurice May – Soleil-Power Insights

Also on capital expenditures, at American Transmission Company, I know they have a 10 year plan for $2.5 million and all that, but that is pretty much business as usual there. Is there any extraordinary potential doubling of investment there that any opportunities in the upper Midwest for ATC where they could really expand their rate base?

Charles A. Schrock

You did hit the nail on the head. Our estimates are based on, as you described, the business as usual, their projections within their current footprint. That’s what we based the projections on. There is potential for growth in addition to that but at this point that’s just being investigated there are no definite plans in that regard.

Maurice May – Soleil-Power Insights

Can you give us some of the potential opportunities for ATC in the upper Midwest? Maybe to bring renewables from the upper Midwest plains into load centers?

Charles A. Schrock

Just speaking generally, right? There’s transmission being considered to do exactly what you described, bringing renewable energy in from the Great Plains. In various states around us there are transmission corridors being defined with opportunities for investment. We are looking at a lot of different opportunities to do that. Another thing is, as you know, we’ve talked to Manitoba about buying power from Manitoba Hydro. There may be potential opportunities in terms of transmission bringing that down as well.

Operator

Your next question comes from Paul Patterson – Glenrock Associates

Paul Patterson – Glenrock Associates

I want to circle back on energy services. The margin doesn’t seem particularly high. Part of that I guess is because of the unrealized losses. How should we think about that in terms of your expectation for this year and your goals and what have you?

Charles A. Schrock

I’ll have Mark elaborate on that, but as I said in my prepared remarks, what we’ve seen so far this year, and it’s early in the game, is pretty much on track with what we had expected. Mark, why don’t you comment on that.

Mark Radtke

The thing that gives you the best visibility is the margin details schedule on Slide 32 and it carries on to Slide 33. Really focus your attention on the retail realized margins. We’re pretty comfortable there and when I look at the realized margins that have occurred in the first quarter coupled with what we have in the forward look to be settled and realized in the balance of 2010, we’re pretty much on track.

Now, like Charlie said, it’s early in the game and we’ve really had our sales engine up and running for half of the quarter, if you will, working on 2010 and beyond. When I look at those realized margins, in the natural gas side we trailed 2009 by $11.3 million, well that’s a function of exiting the Canadian markets and then in Illinois in 2009 we pulled a lot of gas out of storage as we were working to improve our liquidity position. That really drives that delta.

On the electric side we’ve got a smaller delta and that’s really a function of some reduced sales volumes in Illinois and that’s consistent with scaled back marketing operations while we were working through our strategic change. Our Texas business that we have announced our intent to move forward with the sale on as the opportunities present themselves so that business is not running at the rate that it was in 2009 and then also a miscellaneous in there we divested of our Northern Maine electric marketing business.

When I look at our forecast, I’m comfortable and when I look at compared to 2009 everything holds together. That’s why we’re saying we’re comfortable with the trajectory that we’re on to hit our objectives.

Paul Patterson – Glenrock Associates

What’s the settlement of the four contracts sold, what is that referring to?

Charles A. Schrock

When we sell, like our wholesale contracts, you’ve got contracts that are in the forward book, they get settled so they go to realized.

Lawrence T. Borgard

We wanted to break that out because we want you to focus on realized margins going forward but that’s a different kind of realized. That’s realized associated with a sale.

Paul Patterson – Glenrock Associates

Do you think of that as a onetime item? How should we think of that?

Charles A. Schrock

Absolutely.

Paul Patterson – Glenrock Associates

So we should really back that out if we’re trying to get to an operating, sort of a run of the mill sort of thing? Does that make sense?

Charles A. Schrock

It’s not in our per unit margins, either. As I mentioned earlier, I would look past the wholesale margins and in their entirety from a go forward projection standpoint.

Paul Patterson – Glenrock Associates

How should we think of it as unrealized loss? That looks like a big number. Is this something that won’t get realized or I mean, if we’re going to look at this and dissect these numbers, should we basically be backing out the unrealized gains and losses going forward? How should we think about this?

Charles A. Schrock

If you’re referring to the unrealized in the retail section, retail electric and retail natural gas…

Paul Patterson – Glenrock Associates

Well, I was looking at total unrealized of $71.7 million on Slide 32 when we’re looking at the total gross margin.

Charles A. Schrock

What I do is focus you at a little lower level of granularity. Both the retail natural gas and retail electric sections have their own unrealized gain/loss in them and that is that historical, derivative accounting mismatch that we have talked about in the past. On a go forward basis we’re saying that that can be minimized because we’re out of the wholesale business.

As we get out of the wholesale business the accounting treatment, that we’re able to take if we can get more hedge accounting treatment on retail contracts. So this amount should reduce going forward but it will ultimately reverse as contracts settles. In the meantime, it’s noise. If you focus on realized margins in the retail business you get the real story for how the business performed in that particular period.

Paul Patterson – Glenrock Associates

How about the unrealized losses in the retail business? There’s also significant…if we leave out the wholesale we also have some unrealized losses $28.6 million in the electric and $12.3 million. I guess what I’m saying is again [inaudible] talking about apples and oranges when we’re looking at this should we…is that something we should be taking out or is that something that’s going to be realized in the future?

How should we think about this business and just wondering whether or not from a consistency standpoint how should we be thinking about these unrealized gains and losses and what sort of noise, like you said, is going to be changing from quarter to quarter but doesn’t really actually sound like an economic impact versus, you follow me?

Charles A. Schrock

Actually, I do Paul. You’re right. You should take that out because it is a function of derivative accounting, and as I said, we expect it to be lessened going forward but it will still be there to some extent. It will be positive or negative. In general, when energy prices decline it creates an unrealized loss and when energy prices rise it creates an unrealized gain.

So you’ll have that noise but when contracts settle the real underlying value of those contracts comes through realized. That’s why we keep reinforcing if you focus on the realized margins in the retail segment you’ll get an accurate representation of how the business has performed in that period.

Paul Patterson – Glenrock Associates

The unrealized gains in the retail and wholesale sides you’d be saying is [inaudible] is that correct?

Charles A. Schrock

That is correct. And that’s why when we project the business going forward we have adjusted out any unrealized gain or loss.

Mark Radtke

Let me clarify that in terms of the guidance. If you go to Slide 19, if you go to Integrys Energy Services segments we’ve got ‘Core’ and we’ve got ‘Other.’ Now Mark said we’ve adjusted out of our projections. In this particular case we’ve included those unrealized gains and losses in the ‘Other’ category under ‘Integrys Energy Services’ segment. So, we’ve tried to highlight that piece for you so you have the ability to take that out of the total consolidated Integrys Energy Group earnings for shared guides if you desire to do that.

Paul Patterson – Glenrock Associates

Okay so for share guides we probably should adjust that for that.

Charles A. Schrock

Yes. If you’re trying to project going forward what the Core business without the mark-to-market derivative accounting noise as Mark called it. That would be the item to pull out of there.

Operator

Our next question comes from John Alley with Decade Capital. You may ask your question.

John Alley – Decade Capital

Good quarter. Just one quick question on the Wisconsin rate case and then I had a couple on Energy Services. When does [inaudible] in that case?

Charles A. Schrock

I think we have a Slide on that John. Let me look that up for you.

John Alley – Decade Capital

Yes, it wasn’t on the Slide that why I asked. I could follow it up afterwards if that’s…

Charles A. Schrock

It’s going to be in that June-September timeframe. Larry, do you have any visibility on that?

Lawrence T. Borgard

Yes, that would be my guess but I guess I’d ask [inaudible] for definitive dates. But we would fully expect the end result to be in place that’s the rates would become effective 1/1/2011.

John Alley – Decade Capital

I was going to ask what the timestamp was on that [rebate] on that slide?

Charles A. Schrock

Let’s follow up with that [inaudible] again.

Mark Radtke

Well that would be our projected rate base.

John Alley – Decade Capital

For 2011 then?

Charles A. Schrock

Correct, right.

John Alley – Decade Capital

And then just on energy services. You know you guys had a Slide on volumes and projected unit margins. I was wondering two things. One the growth of the volumes is actually somewhat high and I understand that when the business was somewhat in limbo you had the customers that were maybe reluctant to sign up so, the growth is somewhat large but I guess it’s coming off a lower base for 2010.

But my question is more about commodity prices. In a lower commodity price environment are these unit margins still achievable and was there any commodity price uplift built into your forecasts?

Charles A. Schrock

John, I might have Mark comment on that but in general I can say that you’ve got the right idea. We’re starting from a lower base on the volume growth trajectory. The margins we think are reasonable and sustainable on given our knowledge of the market so, with that let me have Mark elaborate a little bit.

Mark Radtake

Yes, thanks John. I think it’s a great question and it does, on the natural gas side we really don’t see any impact of available margin and underlying commodity price because that is across the board a competitive market.

In some electric markets customers have a regulated alternative some kind of a standard offer that they will compare against. And then what we see is more so than margin impact because we ultimately make the decision about the margin levels that we’re willing to contract up. But what will happen is if prices rise relative to the standard offer alternative that a customer may have you’ll just see lots of opportunity to save customers money compared to that alternative and then they’ll stay with the standard offers. So, it reduces your contract volumes more so than impact the [inaudible] margins that are available.

John Alley – Decade Capital

Then was there any commodity price uplift built into your assumptions?

Mark Radtake

No, we were projecting it based on forward [inaudible] that existed at the time. The reason that you see the increase in [inaudible] margins between 2010 and 2011 is really the roll-off of legacy contracts that were done at lower margin levels in the [inaudible] across the capital regime.

John Alley – Decade Capital

And those should be kind of cleared by 2012?

Mark Radtake

Yes, well actually 2011 is when there’s significant improvement, right.

John Alley – Decade Capital

Okay so, but just so as I understand kind of the trajectory of the business. In a commodity environment where their commodity prices are lower relative to the standard offer you have more opportunities for volumes but year-end margins will stay relatively the same. But if the commodity prices lift up then you’ll have less opportunities. Is that kind of the…?

Mark Radtake

Depending upon the market [constraint] When there’s a standard offer that customers can choose they’re more inclined to stay with that if they’ve based on legacy prices because it had been contracted up in the past 12 months or something like that.

John Alley – Decade Capital

And what’s your geographic distribution for your marketing business?

Mark Radtake

But we’re focused in the North East quarter of the US. Our largest electorate market is Illinois and then followed by New York and then the Mid Atlantic and New England regions. And then we see smaller volumes in Michigan and Ohio. The regulatory constructs there create more of a niche opportunity for us.

John Alley – Decade Capital

Okay. And is there any kind of percentages like what’s Ohio what’s New York what’s Chicago just percentage wise?

Mark Radtake

Oh yes, you see I think we might have had a Slide on that in February.

Charles A. Schrock

John, we’re checking something right now hold on just a sec.

John Alley – Decade Capital

Okay. I could just follow up offline if this not [inaudible]

Mark Radtake

Yes, we think it’s in that presentation that we gave you in February. If we can’t find that in a second we’ll have you follow up with the…

Slide 32 of our Feb 17 deck gives you a breakdown and it shows that Illinois when we get to a steady state 2011 we’re projecting that to be a little more than half of our volumes and then as I said New York is the next largest that’s from 14%, New England at 13%, Mid Atlantic at 11%.

Operator

There are no further questions. I’ll turn the call back over to Steve Eschbach for closing remarks.

Steve Eschbach

Thank you for being part of our first quarter earnings conference call. A replay of this conference call will be available until August 3, 2010 by dialing Toll Free 1-800-666-0517. The text for today’s presentation is available on our website at www.integrysgroup.com just select ‘Investor’ and then ‘Presentation.’

If you have any additional questions you may contact me directly at 312 228 5408 or Donna Seedy at 920 433 1857

Thank you.

Operator

Thank you for participating in today’s call. This conference is now ended. You may disconnect at this time.

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