Integrys Energy Group's (TEG) CEO Charles Schrock on Q2 2014 Results - Earnings Call Transcript

Aug. 7.14 | About: Integrys Energy (TEG)

Integrys Energy Group (NYSE:TEG)

Q2 2014 Earnings Call

August 07, 2014 9:00 am ET

Executives

Steven P. Eschbach - Vice President of Investor Relations

Charles A. Schrock - Chairman and Chief Executive Officer

James F. Schott - Chief Financial Officer and Executive Vice President

Operator

Welcome to the Second Quarter 2014 Earnings Conference Call for Integrys Energy Group. [Operator Instructions] At the request of Integrys Energy Group, today's call will be recorded for instant replay. I would now like to introduce today's host, Mr. Steve Eschbach, Vice President of Investor Relations at Integrys Energy Group. Sir, you may now begin.

Steven P. Eschbach

Thank you very much, and good morning, everyone. Welcome to Integrys Energy Group's Second Quarter 2014 Earnings Conference 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 Executive 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 www.integrysgroup.com, select Investors, select Presentation, and then Today's Presentation.

Before we begin, I will advise everyone that this call is being recorded and will be available for audio replay through November 5, 2014.

Now I need to direct you to Slide 3 and to point out that today's 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 statement 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 49 in the appendix of this slide deck.

Slide 4 indicates that today's presentation includes non-GAAP financial information related to diluted EPS adjusted and adjusted earnings. We believe these are useful financial measures for providing investors with additional insight into our operating performance because they eliminate the 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 the call over to Charlie Schrock. Charlie?

Charles A. Schrock

Thanks, Steve, and good morning, everyone, and thanks for joining us on the call today. Before I discuss our financial and operational performance, I'll mention 3 recent significant developments at Integrys since our first quarter earnings conference call in May. The big news occurred in June when we announced that we have entered into a definitive agreement, under which Wisconsin Energy will acquire Integrys Energy Group. Under the terms of the transaction, Integrys Energy Group's shareholders will receive common stock at a fixed ratio of 1.1:8 Wisconsin Energy shares, plus $18.58 in cash for each Integrys Energy Group share. Total consideration on the date of the announcement was valued at $71.47, with a consideration mix of 74% stock and 26% cash. This represents a 17.3% premium to Integrys Energy Group's closing price on June 20, 2014, and a 22.8% premium to the volume weighted average share price over the 30 days ending June 20, 2014. Upon closing of the transaction, Integrys shareholders will own approximately 28% of the combined companies.

Yesterday, we and Wisconsin Energy filed for approval of the transaction with the 4 state commissions with jurisdictions. Filings for the other approvals are expected to be made later in August. With these filings, we believe all regulatory approvals should be received by July 2015. Under the terms of the agreement, the transaction will close shortly after that. Additional information regarding this proposed transaction can be found on our website.

In another recent Integrys Energy Group development, on July 30, we announced that we had entered into a definitive agreement to sell our nonregulated retail energy marketing business to Exelon for a purchase price of $60 million plus adjusted net working capital at the time of closing. At May 31, 2014, the related adjusted net working capital balance was approximately $183 million. Net after-tax proceeds will be reinvested in our regulated businesses over the next 2 years, thereby avoiding any new equity issuance over that time on a stand-alone basis. We expect to close on this transaction in the fourth quarter of 2014 or the first quarter of 2015.

Summary details are included on Slide 5.

Turning to Slide 6. Our pending UPPCO sale transaction with Balfour Beatty Infrastructure Partners continues to progress through the approval process. On June 6, the Michigan Public Service Commission approved the settlement among the parties. On July 8, the Public Service Commission of Wisconsin approved the changes needed to facilitate the transfer of UPPCO's ATC interest to Integrys Energy Group. What remains is approval from the Federal Energy Regulatory Commission. We are working toward a closing in the third quarter.

Now I'll review our financial results, which are summarized on Slide 7 of the presentation. Our second quarter and year-to-date 2014 consolidated adjusted financial results were down compared with last year's performance. There are a number of moving parts underlying the period-over-period changes, and Jim will provide you with the details in his prepared remarks. We have reduced our guidance range for diluted EPS adjusted for 2014 to a range of $3.33 to $3.47. This is primarily due to weather and the impact of our strategic transactions.

Slide 8 summarizes the operational developments at our regulated utilities. Our accelerated main replacement program, the major project for our regulated natural gas segment, continues to progress, but it is unlikely that we will be able to make up for lost earnings as a result of the delay in work earlier in this year due to the extreme cold weather.

In our electric utility segment, the Columbia environmental upgrades at both units are now complete and have commenced operation. Our Weston 3 ReACT project is moving forward, as is our System Modernization and Reliability Project. We continue to evaluate our new generation options, which will likely lead to filing a request for a certificate of public convenience and necessities later this year or early next year. Finally, our rate cases are proceeding as anticipated. They are in various stages of development, and the details of each can be found in appendix Slides 26 through 31.

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

James F. Schott

Thank you, Charlie, and good morning, everyone. I'll cover our financial results through June 30, 2014, in a little more detail and discuss our financial expectations for 2014.

Let's begin the financial review by turning to Slide 9. In the second quarter of 2014, we posted diluted EPS adjusted of $0.20 versus $0.45 during the same period a year ago. For the 6 months ended June 30, we posted diluted EPS adjusted of $1.94 in 2014 versus $2.20 in 2013. For the quarter, the natural gas utility segment adjusted earnings were down, mainly due to higher natural gas distribution costs at Peoples Gas. These costs were up due to higher repairs and maintenance expense, in part to address compliance requirements and a part due to the impact of the colder-than-normal weather earlier in the year. Impact of this was about $0.08 per share.

Another factor was higher depreciation, which added $0.03 impact. The increase in depreciation was driven by AMRP capital expenditures and a onetime reduction to depreciation expense at Minnesota Energy Resources in 2013 due to a depreciation study.

For the utility segment, the decline in adjusted earnings was primarily driven by scheduled outages at Weston 4 and at the Fox Energy Center. This quarter-over-quarter change amounted to about $7 million in adjusted earnings or just under $0.09 a share. Unlike 2013, our 2014 outage schedule is front-loaded. Through June 2014, we have spent $24 million more than in the same period in 2013 for plant maintenance. Barring any major unforeseen outages, we expect this differential to reverse over the second half of the year, and that full year 2014 spending will be in line with 2013 spend.

For the transmission segment, ATC had a marginal increase in adjusted earnings in the second half of the year versus the same period last year. For the holding company and other segment, the primary driver for the year-over-year decline was a 2014 interest on the hybrid debt that had not yet been issued in the second quarter of 2013.

Adjusted earnings at Integrys Energy Services improved in the second quarter of 2014, primarily due to the acquisition of Compass Energy Services in May 2013, organic growth in existing markets and stabilized unit margins. Quarter-over-quarter segment comparisons can be found on Slides 33 through 39 in the appendix.

For the year-to-date comparisons, the drivers for the regulated utilities, ATC and the holding company are essentially the same. With the addition of the period-over-period unfavorable impact of a onetime decoupling reserve reversal in the natural gas utility segment, that benefit the results for the first half of 2013 and did not recur in the first half of 2014. The year-to-date adjusted earnings are down for Integrys Energy Services, as the improved second quarter 2014 adjusted financial results were not enough to overcome the shortfall in the first quarter. Year-to-date segment comparisons can be found on Slides 40 through 46 in the appendix.

Exhibits related to our capital expenditures, depreciation, projected average rate base, financing summary and credit ratings are included in appendix Slides 13 through 19.

We have adjusted our 2014 capital expenditures in our 3-year capital expenditure plan. The primary change was to reduce Peoples Gas capital expenditures to reflect the late start to the construction season, which reduced our opportunity to invest in the main replacement program earlier this year. The only additional comment I will make on our financing plans going forward is that the proceeds from our sale of the Upper Peninsula Power Company and our nonregulated retail energy marketing business will eliminate any -- our new equity needs on a stand-alone basis for the next 2 years.

Moving on to Slide 10. As Charlie mentioned earlier, we are lowering our guidance range for 2014. This is primarily due to weather impacts we discussed last quarter and the impact of our strategic announcements. There are 2 components to the weather impact. As we mentioned on our first quarter call, for the first time under the Wisconsin fuel rules, we will be under-recovering our fuel costs due to the cold winter.

Our guidance assumed we would neither over-recover nor under-recover our fuel costs. Under the fuel rules, shareholders are responsible for the first 2% of any under-recovery. This under-recovery represents approximately $0.05 per share.

We also mentioned that the main replacement work in Illinois was delayed due to the cold weather, which reduced our opportunity to generate earnings under the new Rider QIP. We have now calculated that impact to be approximately $0.04 per share.

There are 2 impacts from the strategic announcements. Due to the increase in our stock price after the merger announcement, our stock-based compensation impact increased by approximately $0.06 per share. And the lost earnings from an earlier-than-expected close in our UPPCO sale will reduce earnings approximately $0.04 per share. Due to these and other minor items, our revised diluted EPS adjusted guidance range is $3.33 to $3.47. This guidance assumes we will own our nonregulated retail energy marketing business through year end. As a result, this guidance may change should we close on the retail energy marketing business prior to year end.

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

Charles A. Schrock

Thanks, Jim. 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 in order to provide safe, reliable and affordable service for our customers. Our guidance for 2014 diluted EPS adjusted on a consolidated basis is in the range of $3.33 to $3.47.

We will now open the call for your questions related to today's earnings and the second quarter 2014 financial summary.

Question-and-Answer Session

Operator

[Operator Instructions] I'm showing no questions at this time. I'll now turn the call back over to Steve Eschbach for closing remarks.

Steven P. Eschbach

Thank you very much, and thank you for being part of our second quarter earnings conference call. A reply of this conference call will be available until November 5, 2014, by dialing toll-free (888) 403-4662. The full transcript for today's conference call will be available on our website at www.integrysgroup.com before the end of the day on Thursday, August 14. Just select Investors and then Presentations. If you have any additional questions, please contact me at (312) 228-5408 or Donna Sheedy at (920) 433-1857. Thank you.

Operator

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

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