Integrys Energy's CEO Discusses Q1 2014 Results - Earnings Call Transcript

| About: Integrys Energy (TEG)

Integrys Energy Group, Inc. (NYSE:TEG)

Q1 2014 Results Earnings Conference Call

May 02, 2014, 09:00 AM ET


Steven P. Eschbach - Vice President of Investor Relations

Charles A. Schrock - Chairman and Chief Executive Officer

James F. Schott - Chief Financial Officer and Vice President

Daniel J. Verbanac - President of Integrys Energy Services Inc.

Lawrence T. Borgard - President and Chief Operating Officer


Ali Agha - SunTrust

Charles J. Fishman - Morningstar


Welcome to the First Quarter 2014 Earnings Conference Call for Integrys Energy Group Incorporated. All lines will remain in listen-only until the question and answer session. [Operator Instructions] At the request of Integrys Energy Group, today's call will be recorded for instant replay. I would now like to introduce today's host, Mr. Steve Eschbach, Vice President of Investor Relations at Integrys Energy Group. Sir, you may now begin.

Steven P. Eschbach

Thank you very much, and good morning, everyone and thank you for joining us on this call. With me today are Charlie Schrock, our Chairman and Chief Executive Officer; Larry Borgard, our President and Chief Operating Officer; and Jim Schott, our Vice President and Chief Financial Officer. Other executives are also 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, select Investors, select Presentation, and then Today's Presentation. Before I begin, I will remind everyone that this call is being recorded and will be available for audio replay through July 29, 2014.

Now I need to direct you to Slide 3 and to point out that this presentation contains forward-looking statements within the definition of the United States 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 our ability to control, and in many cases, we cannot predict what factors would cause actual results to differ materially from those indicated by forward-looking statements. Except as may be required by federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements contained in this presentation, whether the result of new information, future events or otherwise.

This slide is a condensed commentary on forward-looking statements, and you are encouraged to read and understand the more specific language that is contained in our filings with the SEC, the Forward-Looking Statements section of yesterday's news release and Slide 46 in the Appendix of the slide deck.

Slide 4 indicates that today's presentation include of non-GAAP financial information related to diluted EPS adjusted and adjusted earnings. We believe that these are useful financial measures for providing investors with additional insight into our operating performance because they eliminate the effects of certain items that are not comparable from one period to the next. Please review the text of this slide for more information regarding these non-GAAP financial measures.

I will now turn our call over to Charlie Schrock. Charles?

Charles A. Schrock

Thanks, Steve. Good morning, everyone. And thanks for joining us on the call today. I’ll begin with a review of our financial results which are summarized on slide 5 of the presentation. Our first quarter 2014 consolidated financial results were relatively flat compared to the last year’s performance. Diluted EPS adjusted was up for both the natural gas and electric utility segments and the electric transmission segment was unchanged.

As expected the Holding Company loss increased to a penny given the hybrid debt that we issued last August. The extremely cold weather adversely impacted Integrys Energy Services although our portfolio of businesses in this segment and our risk management and hedging activities significantly reduced the effect. We anticipated the quarter-over-quarter decline for this segment and excluding the severe weather impacts our non-regulated earnings were inline with our expectations. We are maintaining our guidance for diluted EPS adjusted of $3.50 to $3.75 but we maybe in the lower end of the range. Jim will discuss this in greater detail.

Based solely on our strong regulated utility growth which is from well defined and pre-approved rate based investments we are reiterating that we can grow Integrys Energy Group’s consolidated earnings in the range of 4% to 6% per year on an average annualized basis for the foreseeable future starting from 2013. This is supported by the 35% growth in rate base from 2013 to 2016 as shown on Appendix slide 16.

Turning to slide 6, I’ll provide an update on our operational activities beginning with our regulated natural gas utilities. The coldest weather in the past three decades created challenges but it also presented opportunities for this segment. We recorded throughput for Integrys Energy Group which resulted in additional margin in states where we don’t decoupling. The cold weather presented operational challenges for natural gas leak identification and repair, meter reading and other outside activities especially in our Chicago service area further demonstrating the importance of upgrading our distribution system.

In addition propane price increases and shortages have elevated interest in natural gas conversions throughout our service territories. Finally in extreme weather we build areas in our system that would benefit from reinforcement to avoid potential low pressures in the future. Peoples Gas concluded its third monthly surcharge filing for Rider QIP that became effective on the 1st of this year. Although this winter's deeper than normal frost delayed most of the planned ground installation, peripheral work that included connections and meter installations was completed.

A late start to the construction season will likely reduce the opportunity to generate earnings from Rider QIP capital expenditures. We still intend to meet our 2014 planned expenditures and miles of pipe replaced. In summary the Rider QIP is in our Appendix on slides 24 through 26.

Moving to the regulated electric operational update on slide 7. The environmental upgrades at our jointly owned Colombia plant are nearing completion. A scrubber was recently added to unit 2 and commenced operation in April. We expect the new scrubber in unit 1 to be in service in June. The ReACT environmental upgrade at Weston Unit 3 has an advanced from site preparation stage to foundation work.

Our SMRP program is progressing well. Relocating electric distribution lines underground and adding automation is on target. Various required permits have been received and easements for 2014 project segments are completed. We plan to underground 185 miles of electric distribution lines this year.

Let me now summarize some of the recent developments related to our generation strategy. Wisconsin Public Service selected its Fox Energy center site for the potential construction of a natural gas combined cycle power plant of up to 500 megawatts. And recently WPS announced the retirement of Pulliam units 5 and 6 as well as Weston unit 1. Weston unit 2 can operate on natural gas and we have decided to use that ability for future operations of this unit. The three unit retirements will be effective no later than June 2015 as will the operation of Weston unit 2 on natural gas.

The regulated electric utility segment also experienced some adverse weather impacts which affected our generation mix, reduced our coal deliveries and increased our fuel cost as a result of higher natural gas prices. We managed these challenges and maintained the availability of our generation fleet throughout the winter.

Slide 8 summarizes the key developments regarding our rate case activity. In our (inaudible) testimony before the Minnesota Public Utilities Commission we lowered our original rate increase request for Minnesota Energy Resources by about $2 million to reflect the more up-to-date numbers on sales, rate base and certain expense items. Additional details on the Merck rate case can be found in the Appendix on slides 27 and 28.

As we noted last quarter we filed a Wisconsin Public Service retail electric and retail natural gas rate case in Wisconsin on April 1st for new rates to be effective on January 1st, 2015. The details of our original filing can be found on Appendix slide 29. This marks the third consecutive year we filed a general rate case for WPS in our Wisconsin retail jurisdiction. Even so given decline in fuel and purchase power cost as-well-as our management of operating and maintenance expenses, our Wisconsin rate cases -- rates are essentially unchanged while our electric utilities segment has earned above it's authorized return on equity.

Average customer billing impacts over the last six years are shown on Appendix slide 30. We still expect to file a general rate case for Wisconsin Public Service on our Michigan jurisdiction later this year. Our Peoples Gas and North Shore Gas rate cases continue to progress. The rate case has schedule has been set. Two milestone dates for these rate cases can be found in the Appendix on slide 31.

Our pending Apco sale transaction is summarized on slide 9. Since our last earnings call we filed for all required regulatory approvals. The Michigan commission has published a proposed time line for its review. We've encoded link on the slide to the milestone dates.

The severe winter weather challenged our non-regulated electric business. The primary impact was extremely high, ancillary service cost from the independent system operators. Our diverse portfolio of non-regulated businesses and our disciplined risk management for this segment substantially offset these costs along with better than expect performance from the retail and natural gas business. Forward book volumes continue to grow compared to the same quarter last year and delivered volumes were up and inline with expectations.

I'll now turn the call over to Jim Schott. Jim?

James F. Schott

Thank you, Charlie and good morning everyone. I'll cover our financial results for the first quarter of 2014 in a little more detail and discuss our financial expectations for 2014.

Let's begin the financial review by turning to Slide 10. In the first quarter of 2014, we posted diluted EPS adjusted of $1.73 versus $1.76 during the same period a year ago. Adjusted earnings for both the regulated natural gas and electric utilities segment increased quarter-over-quarter. The key drivers were rate increases for all of our natural gas utilities and higher throughput due to the cold weather. Wisconsin Public Service and Michigan Gas Utilities no longer have decoupling mechanisms to offset sales volumes, variances for natural gas.

In addition (inaudible) Electric Utility has decoupling mechanisms in place beginning the 1st of this year. As a result the higher sales volumes due to the weather contributed to margins for these utilities. On the other hand the extreme cold weather also had an adverse impact by increasing operating and maintenance expenses this quarter compared with the same quarter of last year. Also increasing operating and maintenance expenses was a significant increase in our plant outage schedule and cost for Fox Energy center which we did not own in the first quarter of 2013.

The electric transmission investment segments adjusted earnings were up slightly over the last year due to increased rate base investment at the American Transmission Company. Adjusted earnings at Integrys Energy Services were negatively impacted by the extreme cold weather. Margin recognition timing impacts, higher operating and maintenance expenses and a 2013 tax benefit that reversed over the rest of 2013.

The Holding Company and Other segments quarter-over-quarter decline was driven by increased interest expense due to the $400 million hybrid debt issuance in mid-August 2013. Segment comparisons can be found on Slides 39 through 45 in the Appendix.

At this time we have no substantial changes to our three year capital expenditure plan for Integrys Energy Group subsidiaries. Exhibits related to our estimated capital expenditures, depreciation, projected average rate base, financing summary and credit rates have been carried over from our previous presentations and are included in Appendix slides 14 to 20.

Our projected rate base growth is shown on Appendix slide 16. We have had a data supporting slide 16 and Appendix slide 17. This chart demonstrates the solid foundation of the 35% growth in projected average rate base between 2013 and 2016.

Now I would like to provide some insight to our guidance on slide 11. On utility (inaudible) segments, we expect the favorable impact of margin from the cold weather in our non-decoupled states to be offset by an increase in forecasted operating maintenance expenditures primarily due to the same cold weather. While these two items offset our fuel cost are also much higher due to delayed coal shipments and higher natural gas prices again due to the weather. The midpoint of our guidance assumed no net impact from the fuel window, and it now appears that we will have to absorb 2% of the fuel cost or about $0.05 per share.

Keep in mind that means in the previous four years we were able to retain savings of 2% for fuel costs. Finally the late start to the construction season for the natural gas main replacement program we reduced our earnings opportunity from Rider QIP. As a result of all these weather driven factors at this time we may be in the lower end of the guidance ranges for the utilities segment. For Integrys Energy Services we still expect to be within the guidance range we discussed on our last call. For our existing book of business which as you now is already hedged also more frontloaded in 2014 than they were in 2013. As a result we expect higher unit margins for this existing book of business over the balance of the year.

The tax benefit recorded in the first quarter of last year will also reverse over the balance of the year. We have addressed the pricing issues from last summer, so that should not reoccur. Finally we expect margins from new business and cost management will get us to our projected earnings for 2014. For Integrys as a whole then while we maybe in the lower end of the range we are maintaining our guidance range. Now I will turn the call back over to Charlie. Charlie?

Charles A. Schrock

Thanks Jim. Before taking your questions I’ll summarize our key investment highlights that are shown on slide 12. The execution of our business plan for the regulated utilities remains on track. We continue to make prudent infrastructure investments based on pre-approved projects for our utilities to provide safe, reliable and affordable service for our customers. Our asset management strategy supports the pending sale of Upper Peninsula Power which will significantly reduce our near term equity needs.

Our 34% ownership in American Transmission Company continues to contribute to earnings as expected. Our guidance for 2014 diluted EPS adjusted on a consolidated basis is in the range of $3.50 to $3.75, as Jim indicated we maybe in the lower end of the range. We expect long-term earnings per share growth of 4% to 6% on an average annualized basis using 2013 as a base year for Integrys Energy Group consolidated based solely on utility performance.

Given our solid long-term business plan and portfolio of businesses our current dividend is sustainable and we expect our dividend payout ratio to decline to utility industry norms as our earnings grow overtime.

We’ll now open the call for your questions related to today’s earnings and the first quarter 2014 financial summary.

Question-and-Answer Session


Thank you. We will now open the question and answer session. (Operator Instructions) Our first question is from Ali Agha from SunTrust. Your line is open.

Ali Agha - SunTrust

Thank you, good morning.

Charles A. Schrock

Good morning, Ali.

Ali Agha - SunTrust

Good morning. A couple of things I wanted to clarify from your remarks, first on energy services as you mentioned there was a fair amount of weather related issues that hit you in the first quarter I guess I didn’t quite get this how do you make that up over the course of the year to stay in the guidance range? In other words, you’re starting off with this headwind that you were not anticipating. So what’s the positive incremental tailwind over the rest of the year that makes you still get back to your range?

Charles A. Schrock

Ali, thanks for the question. Let me comment a little bit of a high level and then I’ll ask Dan Verbanac to fill in with some more details. If you think about it -- we have some visibility in to how we expect our revenues to flow in and how we price out our contracts with our customers. And sometimes there’s a disconnect between the average over the year versus the amount of revenue that comes in over the course of the year. So we expect some of that.

And in addition if you recall last summer we have had some issues with the hot weather and we’ve made some changes in how we price contracts and pick some things there as well so we don’t expect those types of things. And then the final thing there is a tax impact that we saw in the first quarter, quarter-over-quarter comparison that will basically average out over the course of the year. So that’s kind of a real high level let me ask Dan to clarify and then Jim may have a couple of comments as well.

Daniel J. Verbanac

Good morning Ali. As Charlie mentioned the expectations aren’t as far behind as it looks quarter-over-quarter. We’re about $2 million behind where we expect it to be because of the weather impacts and the primary drivers that are going to get us back on track is since the cold weather and high volatility in the market we’ve seen more customers switching to our fixed price product versus the market based product, so we’ve seen some high margins there.

And just overall the unit margins have increased since the cold weather and volatility for renewal business and new business. We’re managing our O&M expenses as Jim mentioned and we expect to come in lower for the year there. And then with the city of Chicago extension being finalized we have a better estimate of 2014 impact and we were conservative in our initial estimate.

Ali Agha - SunTrust

Okay. Got it. I guess second question going back to the Holding Company trend line or expenses. If I looked at the trend in the third and fourth quarter of last year when these hybrids [ran] there, you were reporting a much bigger net income loss. What happened to costs there to come down so significantly in the first quarter of this year?

Charles A. Schrock

And Ali, I’ll have Jim comment on that.

James F. Schott

Good Morning Ali, thank you. Yeah you’re correct that the hybrid will be having a significant drag, it was offset in this quarter by a tax through-up and a couple of other tax items related to those factors and what not. So it was offset by some tax items.

Ali Agha - SunTrust

Should we consider those to be one-time in nature?

Charles A. Schrock

It's a mix. To be on the safe side consider them one-time in nature.

Ali Agha - SunTrust

Okay. And my last question, Charlie. Previously when you talked about the 4% to 6% EPS growth rate, I recall the period was ’13 through ’16 you didn’t put a timeline on the other side maybe it’s still the same. Just [wondered] if you declared what time period are you looking at of that ‘13 base when you talk about 4% to 6%?

Charles A. Schrock

Actually Ali, we I think we spoke about in the context of for the foreseeable. And starting in 2013 we have real good visibility in that ’13 to ’16 timeframe as you know. But we also see that 4% to 6% continuing beyond that for the foreseeable future.

Ali Agha - SunTrust

Got it, thank you.

Charles A. Schrock

Thank you, Ali.


Thank you. (Operator Instructions). Our next question or comment comes from Charles Fishman from Morningstar. Your line is open.

Charles J. Fishman - Morningstar

Good morning. You indicated that I believe you said that unit margins in the non-regulated will improve next year just through the contract structures, did I hear that -- understand that right? And then I guess the add on would be is that due to Chicago primarily the restructuring of that contract?

Charles A. Schrock

Charles, first thanks for joining us and thanks for the question. We do expect margins to be improving. I’ll have Dan comment on that a little bit.

Daniel J. Verbanac

Yes. Good morning, Charles. Margins year-over-year 2014 compared to 2013 will be down slightly as we still have some higher margin business still rolling off the book. What we’re seeing here is since the volatility in January and February as new business that we’ve been putting on, we’re seeing slightly better margin. So overtime you will see better unit margins come through on a realized basis. But that will take a little bit of time as the….

Charles J. Fishman - Morningstar

So, really the improvement in margins is due to this customer migration to the fixed prices rather than the City of Chicago contract?

Charles A. Schrock

That is one reason, Charles. The city of Chicago contract we are still under the existing contracts that we put in -- in place that actually runs through May of 2015. What this extension does because though it's a little different product we're going to -- our margins certainly should be more predictable and that's a positive for us in 2014 over 2013.

Charles J. Fishman - Morningstar

Okay. And then a second question. Weston 3 last quarter you had indicated a CapEx of the environmental program was going to run a little bit higher than you anticipated -- you needed because of the amount of the increase you had to go back to the commission for approval on that, where does that stand?

Charles A. Schrock

Charles, I will have Larry Borgard comment on our discussions with the commission with respect to that.

Lawrence T. Borgard

Yeah. Charles. We did identify an increased cost in the ReACT project. We did not have to go back for a re-approval though. The initial order strictly required us to notify the commission on the cost increase -- we've done that and we've had fairly positive feedback from the commission on that.

Charles J. Fishman - Morningstar

Okay. Thank you.

Charles A. Schrock

Yeah. Thanks for joining in.


Thank you. I show no further questions. I would now turn the call back over to Steve Eschbach for closing remarks.

Steven P. Eschbach

Thank you very much and thanks for being part of our first quarter earnings conference call. A replay of this conference call will be available until July 29, 2014, by dialing toll-free (866) 424-4009. The full transcript of today's conference call will be available on our website at before the end of the day on Friday, May 9. Just select Investors, and then Presentations. If you have any additional questions, please contact me directly at 312-228-5408 or Donna Sheedy at 920-433-1857. Thank you.


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

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