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Executives

Steven Eschbach – VP, IR

Charles Schrock – Chairman, President and CEO

Joseph O’Leary – SVP and CFO

Lawrence Borgard – President and COO, Utilities

Daniel Verbanac – President, Integrys Energy Services

Analysts

Ali Agha – SunTrust

Michael Bates – D.A. Davidson

James Bellessa – D.A. Davidson

Maurice May – Soleil Securities

Integrys Energy Group, Inc. (TEG) Q1 2011 Earnings Call May 5, 2011 9:00 AM ET

Operator

Welcome to the First Quarter 2011 Earnings conference call for Integrys Energy Group Incorporated. All lines will remain on 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 call will be recorded for instant replay.

I would now like to introduce today’s host, Mr. Steve Eschbach, Vice President of Investor Relations of Integrys Energy Group. Sir, you may now begin.

Steven Eschbach

Thank you very much and good morning everyone. Welcome to Integrys Energy Group’s First Quarter 2011 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, Utilities; Mark Radtke, Executive Vice President and Chief Strategy Officer of Integrys Energy Group and Daniel J. Verbanac, President of Integrys Energy Services are also available for the question and answer session at the conclusion of our formal remarks.

The slide supporting today’s presentation and an associated data package are located on our website at www.integrysgroup.com, select Investor, select Presentation, and then today’s presentation.

Before I begin, I will advise everyone that this call is being recorded and will be available for replay through August 2, 2011. 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 statement. I’d also refer you to the forward-looking statement section of yesterday’s news release for further information. Except as may be required by federal securities laws, Integrys Energy Group and its subsidiaries undertakes 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.

Slide 5 indicates that today’s presentation includes non-GAAP financial information related to diluted earnings per share adjusted and adjusted earnings or loss. 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 in the slide for more information regarding this non-GAAP financial information.

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

Charles Schrock

Thanks, Steve. Good morning everyone and thanks for joining us on the call today. I will begin by providing a high level overview of our 2011 first quarter financial and operating results. Joe O’Leary will then discuss our financial results for the quarter in greater detail, in addition to providing a summary of our investment and financing plans for 2011 we will conclude with a question and answer session.

Turning to Slide 6, I am pleased to report that first quarter 2011 diluted earnings per share adjusted on a consolidated basis were stronger than the same periods a year ago. Our positive financial results reflect the effective execution of our business plan. Operational excellence initiatives and cost control efforts across all of Integrys Energy Group, subsidiaries are a key element of our plan.

Our employees have been focused on reducing cost without sacrificing safety or reliability, and this has helped drive improved financial performance.

Our first quarter 2011 financial results also reflect the retail rate increases for our regulated utilities that were implemented across our various jurisdictions. And finally, the combination of customer mix and discipline pricing higher volumes from retain business and reduced operating expenses enable us to improve on the financial results from a non-regulated business.

To complete our high level financial overview, our guidance for 2011 diluted earnings per share adjusted on a consolidated basis remains between $3.24 and $3.57, with no changes among our segments.

Slide 7 provides a brief overview of the first quarter 2011 achievements for our regulated utilities. We are implementing a natural gas standardization initiative which is designed to improve processes and reduce costs. Essentially we are integrating processes and procedures at our five regulated natural gas utilities and providing common best practices where possible to increase efficiencies throughout the natural gas group. On our accelerated main replacement project at Peoples Gas responses to bid requests are coming in lower than originally anticipated.

As a result we will be able to replace more main for the dollars we spend. The efficient use of contractors will free up our own employees to work on other high value projects that require timely completions such as service work.

On the regulated electric side, the Public Service Commissioner of Wisconsin approved the environmental control equipment expenditures for the Colombia Power Plant. We jointly owned that power generating facility with other nonaffiliated utilities so our share of this environmental upgrade project will total about $200 million over the next three years.

Other activities that are regulated utilities include our rate cases. Interim rates for Minnesota Energy Resources went into effect on February 1, 2011 we expect final outcomes on the efforts leading in the first quarter of 2012. The rate cases we filed for Peoples Gas and North Shore Gas on February 15, 2011 are on schedule. We expect new rates to go into effect in mid-January of 2012.

The infrastructure rider for People Gas went to – into effect in January with customer surcharges implemented beginning April 1, 2011 for the estimated additional 2011 investment in rate base for this project. Finally, we have filed the limited rate reopened proceeding for 2011 for Wisconsin Public Service on May 2nd. We expect their resolution on the reopened by the end of 2011.

Further details regarding this rate cases, can found in the appendix of our slide deck, Slides 21 through 24.

Turning to slide eight, let me recap the accomplishments related to our non-regulated operations at Integrys Energy Services, we ended 2011 with our strategy change at Integrys Energy Services essentially complete. We now operate this business with a much lower risk profile and a focus on controlled growth. That said I am pleased to report that our retail natural gas and electric volumes for our retained businesses are up in the first quarter of 2011 versus the first quarter of 2010. See slide 25 for the detail.

Unit margins for our retail electric business increased during the first quarter of 2011 versus the first quarter of 2010, due to our customer mix and disciplined pricing. In other words, we remain focus on the appropriate blend of small, medium and large commercial and industrial customers, and see the value proposition in the commodity and related services we provide. Natural gas unit margins were down in the first quarter of 2011 versus the first quarter of 2010 partially due to fees related to our preferred supplier agreement being netted against margin.

As 2010 was a transition year, more of our supply was sourced to the agreement during the first quarter of 2011 versus the first quarter of 2010. Regarding our joint-venture with Duke Energy Generation Services, we have five new solar projects with Pennsylvania schools totaling 1.5 megawatts. Four of the solar installations were completed by April 30, 2011 and the last installation is scheduled to put into service later this summer.

I will now turn the call over to Joe O’Leary. Joe?

Joseph O’Leary

Thank you, Charlie. I will cover our financial results for the first quarter 2011 and briefly review our guidance for 2011 diluted earnings per share adjusted.

Beginning with slide nine. During the first quarter of 2011 in accordance with generally accepted accounting principles or GAAP. We’ve recognized diluted earnings per share of $1.56 for the quarter ended March 31, 2011 compared with $0.64 for the same quarter in 2010.

This slide also sets for a few additions and subtractions we have made to drive the diluted earnings per share adjusted for the first quarter of 2011. As commenting on during Charlie’s opening remarks.

I won’t go through each line item here, but I will gladly answer any questions you may have during our question-and-answer session at the completion of our formal remarks. The key takeaway is that for 2011 consolidated first quarter results increased about 5% over the comparable period in 2010.

To more information on the comparative first quarters of 2011 and 2010 adjusted endings undiluted earnings per share adjusted are reported by segment on slides 28 and 29 in the appendix.

On slide 10, we present the changes in adjusted earnings by segment for the first quarter of 2011 compared with the first quarter of 2010. The related key drivers in the quarter for each segment can be found in the appendix on slides 30 to 34. I will not go through the key drivers here, but again I will answer any questions you may have related to the key drivers during our question-and-answer session.

Moving to slide 11, we’ve provided an update on our capital expenditure plans for all of our subsidiaries. The key drivers remain the same as we have discussed recently, that is the environmental retrofits and hydro upgrades mandated by the Federal Energy Regulatory Commission for our regulated electric utility segment. The main replacement program for our regulated natural gas utility segment in Chicago and the renewable energy project investments predominately solar for Integrys Energy Services.

There are some changes in the schedule versus what we presented to you during our last conference call. Over the three-year period, the expenditures for Peoples Gas and North Shore Gas, Minnesota Energy Resources and Michigan Gas Utilities were adjusted upwards, with increase investment to fully take advantage of the cash flow from bonus tax depreciation. The slight increase at Upper Peninsula Power relates to revise estimates in the timing of certain projects.

The $26 million increase in Integrys business support consists of enhancements to our work and asset management system that is designed to automate and streamline many of our business processes and better manage regulatory compliant issues.

Slide 12 set forth our expected depreciation expense at regulated utilities. Moving to slide 13, let me summarize the slight changes to our financing plan for 2011. I will begin with our short-term credit facilities.

During the second quarter of 2011, we have $910 million of credit facility that will expire. We will replace these with $600 million of new credit facilities. This will reduce our overall credit facilities from $2 billion to $1.7 billion and that is by design. We call during our Analyst and Investor Day of presentation in February 2010, that we mentioned it was our intent to reduce our overall credit facilities to $1.7 billion by December 31, 2011 due to reduced sites and scope of Integrys Energy services.

And we are on the way to achieving that milestone. The only long-term debt we currently planned issue in 2011 is for People’s Gas and that is expected to be about $50 million. Additional cash we expect to generate from bonus tax depreciation in 2011 we have elected to eliminate new equity issuances through or stock investment and dividend reinvestment plans as well as our equity-based compensation plans. Through April 2011, we generated about $19.3 million of new equity and that will be the extensive new equity raised in 2011.

Our financing plan for 2011 is designed to maintain our current credit ratings. Please refer to slide 35 for a complete listing of our credit ratings.

Turning to slide 14, our guidance for 2011 diluted earnings per share adjusted on a consolidated basis remains between $3.24 and $3.57. This slide detects diluted earnings per share by segment as well as the removal of special items, including the net non-cash payments related to derivative and inventory activities at Integrys Energy Services to arrive at diluted earnings per share adjusted.

The elimination of new issue shares to meet the needs of our stock investment, dividend reinvestment and equity-based based compensation plans is not expected to have a meaningful impact on the share account versus what we presented during our last earnings conference call.

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

Charles Schrock

Thanks Joe. Before we take your questions I will conclude by briefly reviewing why we believe Integrys is well positioned for the future. Please turn to slide 15. First, the continued successful execution of our business plan is demonstrated by quarter-over-quarter increases in financial performance on an adjusted basis for our consolidated company.

Our operational excellence initiatives, cost control efforts and the timely filing of rate cases are improving our quarter-over-quarter performance. Our 34% ownership in the American Transmission Company will continue to contribute to earnings. You may have seen that in April 2011, American Transmission Company and Duke Energy announced the creation of Duke American Transmission Company. This was a joint venture that will build, own and operate new electric transmission infrastructure in North America. This is a good step forward in American Transmission company’s efforts to expand outside its traditional footprint. But at this point, it is too early to project the impact of this joint venture.

Regarding our non-utility operations, the successful transition to a smaller retail focused non-regulated energy services companies with a significantly lower risk profile has helped us to achieve our financial projections.

Our guidance for 2011 diluted earnings per share adjusted on a consolidated basis has not changed and that remains between $3.24 and $3.57. We look for 2011 to be a successful year for our company with continuation of what we accomplished in 2010.

Finally, we continue to expect growth in diluted earnings per share adjustment of 4 to 6% on an average annualized diluted earnings per share adjusted basis with 2011 as the base year through 2015.

We will now open the call all your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question today is from Ali Agha with SunTrust. Your line is now open.

Ali Agha – SunTrust

Thank you, good morning.

Joseph O’Leary

Good morning Ali, how are you today?

Ali Agha – SunTrust

Well, thanks. Couple of questions. First question, Joe can you brought a little more detail on the electric utility driver’s year-over-year and the short – the decline that we saw in electric utility net income. I think in your slide you referred to some rate case adjustments having an impact. Can you just give a little more detail on what drove the delta there?

Charles Schrock

Ali, I’m going to ask Larry Borgard to address that question. Okay?

Ali Agha – SunTrust

Okay.

Lawrence Borgard

Yeah, Ali if you look at the things from the margin standpoint we had a couple of things happening in 2011 that weren’t happening in 2010 or vice versa. First of all we had decoupling revenue in 2010 that is not appearing in 2011, that’s the function of our decoupling mechanism on the electric side in Wisconsin, and although we did get a rate increase at Wisconsin Public Service on the electric side.

Our actual customer counts are lower than the customer counts in the rate case decision themselves. So that’s kind of – on a margins basis and on an earnings basis we have seen some lower rate base related to the bonus depreciation maybe Joe could comment on.

Joseph O’Leary

With that said keen primarily to the increase in the deferred taxes that results from the bonus depreciation from the recent capital expenditures and that affected the – the projected rate base on a go forward basis as it relates to the new rate order that went into effect earlier this year.

Ali Agha – SunTrust

Okay, so Joe the rate base in that rate order is that reflects the bonus depreciation and they recorded that incremental to that?

Joseph O’Leary

It has that factored in to there.

Ali Agha – SunTrust

It does, okay. My second question is could you also provide us your perspective on this preliminary infrastructure related that its mission that is going through the system and what the implications could be for Integrys if that passes?

Charles Schrock

Well. Ali, our comments are little bit on in now, and I ask Larry to kind of round up the comments, but basically it’s an approach to regulation, it provides some certainty. We’ve been active in the process in terms of the gas side of the equation or the gas side of the regulation. In general, we think it’s up in that that’s worth taking a hard look at, but you want to wait till it’s done and you have all the details before you way in whether it’s a good or a bad thing, but let me ask Larry to comment additionally on that.

Lawrence Borgard

And maybe just a quick comment Ali, it’s in Illinois here it’s known as House Bill 14, if you’re trying to find it on the Internet. And we believe that if it’s going to get done, it needs to get done in this session and this session is scheduled and at the end of May, might spill over into June, but if it’s going to get done, we expect to get done essentially in the next month or so.

Ali Agha – SunTrust

Okay. And the reason you say that is right Larry?

Joseph O’Leary

I think there is some momentum that’s built up around it so far and when the session – when the legislators come back in the fall, they’re going to have a whole number of other things on their plate including as you might expect, budget issues.

Lawrence Borgard

I see.

Ali Agha – SunTrust

And my final question, looking at that Wisconsin decision, there was a reduction in your ROEs, are you seeing that trend sort of across your portfolio, is there more pressure on ROEs as commissions are looking for ways to minimize wage increases, could you give us your perspective on what you’re seeing, particularly in Illinois and other places?

Lawrence Borgard

We – I don’t know if there is a real clear trend, I mean because I get around the company or country I’d say, and talk to different people, clearly everybody isn’t concerned about rates going up and this is one thing that commissions can do to mitigate increasing rates. But the cost of debt is going bound; there are other factors that are being waived into this. I don’t know but I would say there is a strong clear trend but certainly we have seen a little bit of it.

Ali Agha – SunTrust

Okay. Thank you.

Lawrence Borgard

Thank you Ali. I appreciate the questions.

Operator

Thank you. (Operator Instructions) Our next question today is from Michael Bates with D.A. Davidson. Your line is now open.

Michael Bates – D.A. Davidson

Good morning guys. I wanted to tough quickly on ATC, it looks like your earnings from that investment were down compared to the year ago quarter, can you give us a quick comment on why that is whether you expect that kind of project on to the other quarters than ‘11?

Charles Schrock

Michael thanks for joining us this morning. I appreciate the question. I am going to ask Joe to give some more detail but I think the basic issue going on there is the bonus depreciation at ATC, so Joe...

Joseph O’Leary

Thanks Charley. Yeah part with the bonus depreciation impact on effective differed taxes that has an impact on the rate base and because they have formal rates at the ATC that gets reflected pretty quickly in their rates. There are also some development costs that are incurring as they look outside their footprint for other projects and those costs are not recoverable thought the formal rates.

Michael Bates – D.A. Davidson

Okay, fair enough. I also wanted to ask about the restructuring expense that looks like it was just a penny in the first quarter, do you expect additional restructuring expenses to be booked this year?

Charles Schrock

I’m going to have Dan to talk a little bit about that, because this is really kind of an entire utility services issue at this point.

Daniel Verbanac

Yeah. As Charlie stated in this comment, the restructuring is pretty much done. And what we defining in restructuring and expenses are – expenses associated with that transition with our strategy change in. There will be a little bit coming at in 2011, but for the most part there are minor. Most of them will – will occur in the second quarter and beyond that there should not be any additional restructuring costs.

Michael Bates – D.A. Davidson

Okay, would you expect those costs in the second quarter to be in line with what you booked this quarter or last?

Daniel Verbanac

Yes, yup.

Michael Bates – D.A. Davidson

That the same. All right, I’ll ask one more. Did you view the $1.8 million quarterly loss from the holding company segment is kind of the sustainable level as we look forward?

Joseph O’Leary

This is Joe, the holding company for the most part; the biggest drivers in there are interest class and also a charge that we make to the Integrys Energy Services for credit support. And, I guess it kind of depends upon the gas inventory and how the business does in energy services and the support that they need that might fluctuate around a little bit, but clearly the interest expense drivers are certainly sustainable given the current low interest rate environment that we have and the plans that we announced today relative to – are not issuing much more in the way of long term – no long term debt is apparent.

Michael Bates – D.A. Davidson

All right, so that loss could go up if gas prices increase or became more volatile, is that?

Joseph O’Leary

I would say that if it goes up then energy services, it needs a little more credit support and we’d be charging them a little bit more for that.

Michael Bates – D.A. Davidson

Okay, so go down there.

Joseph O’Leary

At that particular point, yeah this wash is not in consolidation anyway between energy services in the Holdco.

James Bellessa – D.A. Davidson

Okay, great. This is Jim Bellessa, and I work with Mike, I have a couple of questions, on American Transmission Company, your forecast on slide 11, shows that the capital expenditures that you plan tale off in 2013 down the $5 million. And you heard of hearts given the arrangement that they have announce with Duke do you really believe that your CapEx will be tailing off even though you’ve said it’s premature to say what’s going to exactly happen?

Joseph O’Leary

Yeah, a couple of comments, Jim. First of all the capital contributions, I will call at the normal ones for the inside the footprint for the ATC are going down because ATC is becoming more self-funding. So that’s a kind of striving down our capital contribution even though the ATC is continuing to invest. As far as the Duke ATC joint venture, it really is premature to try this speculate where that’s going to go. We just announced it. It’s an agreement to work together to develop projects and I think we have to give there some time to germinate and growth a bit.

James Bellessa – D.A. Davidson

On the customer growth in Wisconsin that did not materialize was the commission or the staff the commission in that state too ambitious about their forecast and impost up on you or did your internal forecast miss on what was going to happen in the rebounding customer growth.

Joseph O’Leary

Jim I don’t know that you can characterize it in with a black and white type of a discussion. We put in our projections in the commission outputs, and there is a dialog though their rate case process that occurs. So the fact is – we typically see a difference of opinion on where those customer accounts go. And in this particular case the Commission put in the order – they will assume customer accounts which are a little higher than what we had projected. But I’ll have Larry ask – provide any additional detail he might have.

Lawrence Borgard

Hi Charlie, I think you had most of the salient point. It’s really a question of when the read down in the economy occurs. We anticipated it occurring a little later the Commission anticipated occurring.

James Bellessa – D.A. Davidson

Is there any accommodation to make up the short fall that occurred?

Lawrence Borgard

Not in the customer account arena, no. But I think you did – you did probably see that we did file a re-opener in Wisconsin just earlier this week – last week to address some issues.

James Bellessa – D.A. Davidson

Thank you very much.

Lawrence Borgard

Thanks Joe.

Operator

(Operator Instructions) Our next question is from Maurice May with Soleil Securities. Your line is now open.

Maurice May – Soleil Securities

Yes, good morning folks.

Lawrence Borgard

Good morning May.

Maurice May – Soleil Securities

Some questions on slide 11, your three year capital expenditure projections for utilities is currently $1.498 billion, and I was just wondering you said this represented an increase for those reasons and I was wondering what it was before?

Lawrence Borgard

Maurice, let me speak a little generally about it first and then maybe I get into some detail for you, but we have updated these, some recently identified changes in the plan and factoring the bonus depreciation and as Joe mentioned, with the bonus depreciation we have some extra cash that we can then use to reinvest, so we’ve identified some project along those ways. But that’s kind of what we’re trying to do here. Leary, do you have additional thoughts or Joe?

Joseph O’Leary

Yes, I doing, Maurice, I was referring to the page 13 of our conference call slide that we used to address the yearend earnings for 2010.

Maurice May – Soleil Securities

Okay.

Lawrence Borgard

You look that slide 13, you will see the total for the years 2011 through 2013 was 1,387,000 for the utilities, because I just what you referring to a moment ago versus the 1,498,000 if you’re seeing in today’s slide 11.

Maurice May – Soleil Securities

Okay. So it’s up a little bit more than a $100 million. And it looks like for three years, you’ve got about $800 million of growth CapEx for the utilities and sound one of the rate base of about $5 billion for the utilities?

Lawrence Borgard

It’s around $3.6 billion, $3.7 billion.

Maurice May – Soleil Securities

Okay. All right, good. Okay, thank you.

Lawrence Borgard

Maurice, will you understand the second?

Maurice May – Soleil Securities

Yeah, thank you folks.

Charles Schrock

Mark, can you hold on just a second?

Maurice May – Soleil Securities

Yeah.

Charles Schrock

When Joe described the increase from our last conference call, this conference call roughly 100 million or so, the bulk of that comes in Peoples Gas associated with the main replacement program.

Maurice May – Soleil Securities

Okay. Do you have a track record to cover that, don’t you?

Charles Schrock

That’s correct.

Maurice May – Soleil Securities

Okay, thanks.

Charles Schrock

Thanks, Mark.

Operator

Thank you. (Operator Instructions) I’m clearly showing no questions. I would like to turn the call back over to Steven Eschbach for closing remarks.

Steven Eschbach

Thank you. And thank you for being part of our first quarter earnings conference call. A replay of this conference call will be available until August 2, 2011 by dialing toll free 866-455-0587. This full transcript for today’s conference call will be available on our website at www.integrysgroup.com by the end of the day Tuesday May 10. 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 for participating in today’s call. The conference has now ended. You may disconnect at this time.

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