Integrys Energy Group, Inc. Q1 2008 Earnings Call Transcript

Integrys Energy Group, Inc. (TEG)

Q1 2008 Earnings Call

May 8, 2008 9:00 am ET

Executives

Steve Eschbach – Vice President Investor Relations

Larry L. Weyers – President & Chief Executive Officer

Joseph P. O’Leary – Chief Financial Officer & Senior Vice President

Lawrence T. Borgard – President & Chief Operating Officer Integrys’ Gas Group

Charles A. Schrock – President Wisconsin Public Service Corporation

Mark A. Radtke – President Non-Regulated Subsidiary Integrys’ Energy Services

Analysts

Barry Klein – Citigroup

Maurice May – Soleil–Power Insights

Presentation

Operator

Welcome to the first quarter 2008 earnings conference call for Integrys Energy Group, Inc. All lines will remain in listen only until the questions and answer session. At that time instructions will be given should you like to ask a question or participate. At the request of Integrys Group today’s call will be recorded for instant replay. I’d now like to introduce today’s host Steve Eschbach, Vice President of Investor Relations at Integrys Energy Group.

Steve Eschbach

Good morning everyone. Welcome to Integrys Energy Group’s 2008 first quarter earnings conference call. Delivering formal remarks with me today are Larry Weyers, our President and Chief Executive Officer, Joe O’Leary, our Senior Vice President and Chief Financial Officer, Larry Borgard, President and Chief Operating Officer of Integrys’ Gas Group, Charlie Shcrock, President of Wisconsin Public Service Corporation and Mark Radtke, President of our Non-Regulated Subsidiary, Integrys Energy Services. Other members of our executive management team are also present to assist in answering any question you may have after our formal remarks are presented.

The Slides supporting today’s presentation and associated data package are located on our website at www.IntegrysGroup.com. Select investors, 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 5, 2008. I need to direct you to Slides Two and Three of our presentation and to point out that this presentation contains forward-looking statements within the definition of the Securities & Exchange Commission Safe Harbor rules including projected results for 2008 for Integrys Energy Group and its subsidiaries. Forward-looking statements 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 statement section of today’s news release and to our filed Securities & Exchange Commission disclosure documents for further information. Except as may be required by federal securities laws Integrys Energy Group and its subsidiary undertake no obligation to publically update or revise any forward-looking statement contained in this presentation whether the result of new information, future events or otherwise.

Slide Four indicates that today’s presentation includes non-GAAP financial information related to diluted earnings per share from continued operations adjusted, forward book value and managerial gross margin. We believe that diluted earnings per share from continuing operations adjusted, forward book value and managerial gross margin are useful measures for providing investors with additional insight in to 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 this call over to Larry Weyers.

Larry L. Weyers

Good morning everyone and thanks for joining us on the call today. Please turn to Slide Five and I will begin with an overview of the first quarter of 2008. March 20, 2008 marked the 50^th consecutive year of increasing our common stock dividends. More importantly it demonstrates the board of director’s confidence in our long term prospects of increasing earnings per share by 6% to 8% on an average annualized basis. We are looking at this year, 2008, as the basis for this goal. The dividend payment on our common stock last month also marked the 68^th consecutive year that we have paid a dividend. We are very proud of these records.

Other key accomplishments this quarter, Wisconsin Public Service Weston 4 power plant generated its first megawatt hour of electricity in March. Being declared in service for accounting purposes in April and remaining on target for full commercial operation in June, 2008. We received approval to increase retail electric rates for Wisconsin Public Service to accommodate higher purchased power and fuel costs. We also filed for authorization to increase Wisconsin Public Service’s retail electric and natural gas rates effective January 1, 2009. Our retail natural gas rate cases in Illinois are complete. Intervener request for re-hearing of the decision to approve decoupling or in the alternative to adjust the allowed return on equity were not allowed. Our non-regulated business unit Integrys Energy Services completed the integration of the former people’s energy services and WPS Energy Services organization. Our equity investment in American Transmission Company continues to be a strong contributor to our overall earnings.

Moving to Slide Six you will see our initiatives for 2008. Our merger integration efforts with People’s Energy are continuing as planned and remain on target. Details related to our efforts can be found on Slides 29, 30 and 31 in the appendix. We are also continuing to advance our regulated construction projects and you’ll hear more on this from Larry Borgard and Charlie Schrock. In addition to the rate case we recently filed in Wisconsin we plan to file for authorization to increase retail natural gas rates for Minnesota Energy Resources and Michigan Gas Utilities. And, our non-regulated business unit Integrys Energy Services will be moving forward on its target of growing long term core earnings on an average annualized basis by 10% to 15% using 2008 as the basis.

Now, we will take a more in depth look at how we faired during the quarter. Joe O’Leary will discuss our first quarter 2008 financial results and our earnings guidance for 2008. Larry Borgard, Charlie Schrock and Mark Radtke will follow with operational updates. I will then return to wrap up our formal remarks and moderate a question and answer session. I will now turn the call over to Joe O’Leary.

Joseph P. O’Leary

I will begin by reviewing the major financial and segment highlights for the quarter. Please keep in mind it is challenging to make quarter-over-quarter comparisons this year given the increase in our portfolio of assets. We would like to remind you that our first quarter 2008 results include the operations of People’s Energy for a full quarter but the first quarter of 2007 results only include the operations of People’s Energy starting on February 22, 2007 through the end of the quarter.

Turning to Slide Seven, during the first quarter of 2008 we recognized income from continuing operations of $136.6 million compared with $117.2 million in the same quarter a year ago. This resulted in diluted earnings per share of $1.77 for the quarter ended March 31, 2008 compared with $2.01 for the same period in 2007. Our diluted earnings per share were impacted by a $19 million share increase in the weighted average number of outstanding shares of common stock as a result of issuing 31.9 million shares of common stock on February 21, 2007 in conjunction with the People’s Energy merger.

There are seven key items driving the positive $19.4 million quarter-over-quarter change in income from continuing operations. We have presented them in after tax dollars and will discuss them in more detail a little bit later. First, the addition of People’s Gas and North Shore Utilities effective February 22, 2007 contributed $33.8 million more to earnings in the first quarter 2008 compared to the first quarter of 2007. Second, the electric margin in our non-regulated Integrys Energy Services segment increased by $33.7 million. Third, heating degree days increased by 11.3% at Wisconsin Public Service which drove the majority of the $6.1 million of increased earnings at its natural gas utility. Fourth, Integrys Energy Service’s operating expenses increased by $5.2 million. Fifth, higher purchase power and fuel costs at Wisconsin Public Service electric utility were the primary factor in earnings decreasing by $8 million. Note that about $9 million of these higher first quarter 2008 after tax costs are expected to be recovered through the remainder of the year. Sixth, Section 29 tax credits expired which resulted in an $18.2 million quarter-over-quarter decrease in earnings. Seventh, Integrys Energy Service’s natural gas margin decreased by $19.9 million. Finally, $23 million were included in discontinued operations in 2007 as a result of the gain on the sale of [Niagara] in January 2007 and earnings related to the oil and natural gas production business unit that was sold in the third quarter of 2007.

Moving on to Slide Eight, I will provide you with more details regarding our first quarter financial results. Our income from continuing operations was $136.6 million or $1.77 per diluted share. Special items in the first quarter of 2008 that are not comparable with the first quarter 2007 results include a net loss of $0.07 per share from purchase accounting adjustments due to the People’s Energy merger, a net loss of $0.03 per diluted share for external costs to achieve synergy savings associated with the People’s Energy merger, income of $0.01 per diluted share from our synthetic fuel facility. Taking in to consideration the items I mentioned, our diluted earnings per share from continuing operations adjusted was $1.86 for the first quarter of 2008 compared with $1.74 in the comparable quarter last year.

Turning to Slide Nine, earnings for the regulated natural gas utility segment increased by $40.4 million in the first quarter of 2008 versus the first quarter of 2007. Key drivers of the increase in after tax dollars are listed on the bottom of Slide Nine. The primary drivers were the increased earnings at People’s Gas and North Shore Gas and colder weather than normal for Wisconsin Public Service.

Turning to Slide 10, earnings for the regulated electric utilities segment decreased by $9.7 million in the first quarter of 2008 versus the first quarter of 2007. The key drivers of the decrease in after tax dollars are listed on the bottom of Slide 10. The primary drivers were increased purchase power and fuel costs offset by less maintenance activity for planned outages at our power plants. Remember, the after tax impact of the recovery of significant portion of the fuel and purchase power costs during the remainder of the year is about $9 million.

Turning to Slide 11, income from continuing operations for the non-regulated Integrys Energy Service segment decreased by $13.3 million in the first quarter of 2008 versus the first quarter of 2007. The key drivers of the decrease in after tax dollars are listed on the bottom of Slide 11. There are a number of items contributing to the quarter-over-quarter decrease but the key items are no significant syn fuel production earnings and increased operating and maintenance expenses in 2008 for increased sales staff and infrastructure build out for future growth.

Turning to our holding company and other segment on Slide 12, results improved by $1.8 million from breaking even in the first quarter 2007 to earnings of $1.8 million in the same period in 2008. The key drivers of the increase in earnings in after tax dollars are listed on the bottom of Slide 12. The primary drivers include a $1.7 million increase in earnings from the American Transmission Company and reduced interest expense.

Slide 13 shows our projected capital expenditures for 2008 through 2010. Wisconsin Public Services expenditures are up slightly for Weston 4 in 2008 due to a number of small final work order changes needed to place the plant in service. Wisconsin Public Services environmental expenditures are down slightly in 2008 and 2009 from what we projected during our conference call in February due to delays in environmental projects. Projected expenditures at People’s Gas were also reduced by $20 million in 2008 and $40 million in 2009 due to a change in the accelerated cast iron [inaudible] replacement program for those years but keeping the expenditures at the projected level in 2010. Integrys Energy Service’s projected capital expenditures increased by $18 million in 2008 due to a landfill gas project. Estimated utility depreciation through 2010 can be found in Slide 32 in the appendix and information related to our projected debt financings for 2008 and 2009 is contained on Slide 33 in the appendix. We do not plan on any new equity issuances through the end of 2009.

Now, we will move on to our 2008 financial guidance which is covered in Slide 14. We expect our 2008 diluted earnings per share to be between $3.37 and $3.82 for Integrys Energy Group. For the remainder of 2008 our guidance assumes normal weather, the continued availability of generating units, the anticipated merger impacts relating to transition costs and the anticipated purchase accounting adjustments, anticipated merger synergy savings and recently obtained rate relief for out utilities as approved by regulators. Our diluted earnings per share guidance does not include the impact of Integrys Energy Service’s mark-to-market volatility in 2008 which will include about $20 million of net mark-to-market after tax losses in 2008 relating to contracts terminating in 2008 that had net mark-to-market after tax gains recognized in the prior year. See our news release and supplemental data package relating to this guidance.

Also included in the news release and supplemental data package is the projected guidance range for 2008 diluted earnings per share from continuing operations adjusted which is anticipated to be between $3.60 and $4.05. The diluted earnings per share from continuing operations adjusted guidance indicates the financial results we anticipate will come from our continuing operations after excluding the negative impacts of the People’s Energy merger transition costs to achieve merger synergy savings and merger purchase accounting adjustments. See our news release and supplemental data package for further details relating to these special items. Please note that this Slide has been revised from the Slide provided with our February 20, 2008 earnings call to reflect a $0.06 increase to 2007 diluted earnings per share from continuing operations adjusted which was required to accurately reflect the impact of the purchase accounting adjustments related to the People’s Energy merger.

Now, I’ll turn the call over to Larry Borgard, President of Integrys Gas Group.

Larry L. Weyers

Good morning everyone. Beginning on Slide 15, our Illinois natural gas rate cases are essentially complete and the details of the rate orders are repeated on the top of this Slide. New information since our last earnings conference call is contained in the last supplement on this Slide. We petitioned the Illinois Commerce Commission to reopen the rate case proceedings for reconsideration of a number of issues including the infrastructure rider. A number of other parties requested reconsideration of certain other issues including the elimination of the decoupling rider. All of the request for reopening this rate case on the more substantive issues were denied by the Illinois Commerce Commission in April. However, legislation has been introduced in the state legislature to roll back decoupling. We are actively supporting the Illinois Commerce Commission’s decision to approve this rate setting mechanism.

As a result of this rider, in the first month of operation customers of People’s Gas and North Shore Gas will receive an overall net credit of $1 million on their May, 2008 bills. The May adjustment is based on natural gas usage for March, 2008 when weather was colder than normal and revenues collected where higher than what the utilities were expected to recover. This new tool aligns the utilities’ interests with our customers’ interest to encourage conversation, protect the environment and provide peace of mind that the utilities will be able to focus on ensuring a safe, efficient and reliable natural gas delivery system. It should be noted that Illinois’ Attorney General recently filed a notice of appeal with the Illinois Appellate Court identifying as issue the volume bouncing rider, its impact on return on equity and an adjustment to rate base for post test year depreciation. A final decision on this appeal is not expected until at least 2009.

Also doing the first quarter we signed a new collective bargaining agreement with the union representing many of People’s Gas employees extending our relationship building success from regulatory relations to employee relations. Key resolutions include a five year contract expiring in 2013, annual wage increase ranging from 3% to 3.25% and moving all new hires to a defined contribution pension plan from the traditional defined benefit plan.

Initiatives for the balance of 2008 are indicated on Slide 16 and include the development of plans to accelerate investment and replacement of cast iron [main] in Chicago. In our next rate case we plan to see traditional rate taking treatment for recovery of these capital improvement expenditures and to seek reconsideration of our proposed infrastructure rider for future expenditures. We also plan to move forward with retail natural case rate cases for Minnesota Energy Resources and Michigan Utilities by the summer of 2008. We have made substantial progress on our bad debt exposure through our improved credit and collection efforts for these companies. It has been over five years since Minnesota Energy Resources and Michigan Gas Utilities last received authorized rate increases from their respective state regulatory authorities. We anticipate interim rate increase becoming effective subject to refund prior to the heating season.

As a final note, we have reviewed our bad debt reserves at all of our natural gas companies taking in to consideration current economic conditions. We feel comfortable with where these levels are at this point but will closely monitor our receivables as we move in to our traditionally heavy collection period. Additionally, we are working aggressively to make sure our customers access low income assistance program dollars available to them.

I’ll now turn the call over to Charlie Schrock, President of Wisconsin Public Service for an update on our Wisconsin and upper Michigan utilities.

Charles A. Schrock

I ask our listeners to refer to Slide 17. Key accomplishments for our Wisconsin and upper Michigan utilities included Weston 4 generating its first megawatt hour of electricity in March. This was about two months beyond the mid January date that was assumed in our rate case. The delay was due to a few equipment issues that were encountered as we were going through the start up process. We also experienced a failure on one of the two horse draft fans. While this failure did not impact our initial start up testing, it has delayed the testing of the unit above 50% power. Notwithstanding this, we are still targeting full commercial operation of Weston 4 in June, 2008.

As a result of the delayed startup we’ve filed for authorization to increase retail electric rates to recover increased purchase power and fuel costs. A $29.7 million annual rate increase was granted and became effective on March 22, 2008. Because Wisconsin’s current fuel rules only allow for prospective recovery it is anticipated that $23.6 million will be collected in rates over the next three quarters.

Wisconsin Public Service filed on April 1^st for authorization to increase its retail electric rates by $106.8 million or 7.75% and its retail natural gas rates by $11.7 million or 2.16% effective January 1, 2009. It should be noted that this rate filing did not include recovery of both operation and maintenance costs and capital costs associated with our proposed 99 megawatt Iowa wind project as we didn’t have a certificate of authority from the Public Service Commission of Wisconsin for that project at the time of the filing of the rate case. We will amend our filing to include the Iowa wind project after a written order is received. This rate filing also requested authorization to increase retail electric rates in 2010 by 0.33% plus an adjustment for fuel related costs.

The proposed retail electric rate increase in 2009 is required because of the completion of the refund to retail electric customers of the non-qualified decommissioning trust fund related to the sale of the Kewaunee Nuclear Plant of approximately $54 million in 2007, the cost of operating Weston 4, increased electric transmission costs and the recovery of the cost associated with the October, 2007 lightening strike and subsequent outage at Weston 3. The proposed retail natural gas rate increase is required primarily because of the cost associated with the construction of the natural gas laterals connecting the Wisconsin Public Service natural gas distribution system to the Guardian II natural gas pipeline. Details related to our rate case filing are summarized for you in the appendix on Slide 34.

Our initiative for the remainder of 2008 are indicated on Slide 18 and include ensuring that Weston 4, a 500 megawatt supercritical pulverized coal plant becomes commercially operational in June. In March we announced the signing of a letter of intent to require a 150 megawatt wind farm in Minnesota that is expected to achieve commercial operation between 2012 and 2014. Negotiations for a definitive agreement are underway. This is in addition to the 99 megawatt wind farm acquisition in Iowa that we announced in November, 2007 and for which the Public Service Commission of Wisconsin recently granted approval to purchase. Estimated acquisition and construction related activities for this approved project are approximately $251 million excluding any capitalized allowance for funds used during construction. The closing on the purchase is expected to occur in the third quarter of 2008 with the wind farm becoming commercially operational late in December, 2009. The wind farm acquisitions are expected to help Wisconsin Public Service reach its renewable portfolio standard target of generating 10% of its retail electric sales from renewable power by 2015.

In April, we began construction of the natural gas laterals that will connect to the Guardian II natural gas pipeline. We expect to complete this $75 million project near the end of 2008. The Guardian II pipeline will create competition by having an alternate natural gas transportation source for our Wisconsin customers and will create additional much needed pipeline capacity in our regulated natural gas business territory.

Now, Mark Radtke, President of Integrys Energy Services will discuss our non-regulated operations.

Mark A. Radtke

Our non-regulated businesses is continuing to grow and Slide 19 illustrates that growth in terms of our physical, retail, delivered volumes in the first quarter of 2008 versus the first quarter of 2007. While the People’s Energy merger was a major component of that growth in both our retail natural gas and electric business lines we are beginning to see the contributions of our larger sales team across the geographic markets I which we operate. Organic retail natural gas sales growth was most pronounced in our Illinois, Michigan and Wisconsin markets. We grew our retail electric delivered volumes over 1.5 million megawatt hours and Texas led our organic growth followed by post-merger growth in Illinois. Slide 20 depicts our growing forward book sales, our backlog. I am pleased with our continued success in growing the forward book especially in this rising energy price environment. Rising prices tend to reduce our customers’ enthusiasm for making long term price commitments, instead often choosing to re-contract on a seasonal or even monthly basis. For example at the end of March last year the average retail natural gas contract had 11.5 months remaining effectively through the middle of March, 2008. At the end of March this year that average term is down 17% to 9.6 months. We see a similar effect in our retail electric business where the average term of our largest market, Illinois, is down 65% on a quarter-over-quarter basis.

Other than my empathy for our customers experiencing these higher prices I’m not particularly alarmed by this reduced contract in term and would expect it to stretch back out when prices stabilize or decline. Whether or not prices remain high we generally we don’t expect customers to stay away from longer term contracts indefinitely.

On Slide 21 you can see that our managerial gross margin, the metrics that we like to use to measure our business performance showed a fairly significant decrease from where it was a year ago. Now including in the 2007 results, however, is the value associated with the Peoples’ merger. For comparability removing that one time top in forward book value in 2007 results in a $5.5 million increase in managerial gross margin in 2008 compared with 2007. I’m quite pleased about this result particularly in a rising energy price environment. Evidence of our customer base shortening their contract term is demonstrated by the decline in our forward book value. The increase in realized gross margin commensurate with our increased delivered volume more than offsets the forward book decline to result in managerial gross margin increase of almost 9%.

We have previously discussed managerial gross margin and how it differs from Generally Accepted Accounting Principles, or GAAP, gross margin. Slide 22 takes it one step further by giving you a total adjustment that eliminates the volatility derivative accounting can introduce. The mark-to-market volatility adjustment line item represents the difference between GAAP and managerial gross margin based earnings. As we have described in the past this measure removes the timing mismatches caused by derivative accounting rules and provides a better perspective on the value we actually created during the period. All of the other numbers on this schedule are reflected in our earnings per share adjusted numbers that Joe presented earlier.

Slide 23 demonstrates the future impact on GAAP gross margins related to the large mark-to-market gains we have recorded to date. As you can see in the far right column most of our mark-to-market timing differences will reverse out during the remainder of 2008. With that being said we cannot predict the impact that mark-to-market might have on transactions that settle beyond the current year. It is important to note that these amounts are based on current contracts and do not reflect new business and further optimization of our portfolio of assets.

Turning now to Slide 24 for an operational update our organizational integration of Peoples Energy and the associated platforms are in place. Our systems and process integration is substantially complete although we still have improvements to make and are working through a number of operational issues that have impacted our ability to bill some of our customers on a timely basis. We have moved virtually all of the Peoples Energy Contracts over to Integrys Energy Services and have begun contract renewal of those customers many of whom have contracts coming due in the second quarter. From on operational perspective we did see a period of reduced transaction liquidity in electric markets with the crisis in the financial sector. Liquidity has returned and we remain acutely aware of the credit risk we have with all of our counterparties especially banks impacted by the mortgage crisis regardless of their credit rating as we have seen how quickly that can change. We have continued to grow our originated wholesale customer base to business even in these tough market conditions.

We are seeing higher default rates among our retail customers, our bad debt reserves have risen compared with the first quarter of 2007 as our credit team works through a challenging environment. To date the team has been able to remediate the bad debt issues and employ tools like credit insurance which has reduced adverse financial exposure for us. Although we have yet to see any significant financial impacts of this credit challenged environment we will continue to monitor this closely.

On March 31 we announced the creation of a new group that is focused on renewable energy, efficiency and conservation. This renewable energy group was created in response to customers’ growing interest in sustainability and our concern for the environment. We are focused on delivering value added energy services and renewable energy products to our wholesale and retail customers. Examples of new offerings from this group include electric supply involving renewable energy certificates, energy efficiency programs that promote conservation and the development of renewable energy projects. Integrys Energy Services has been involved in developing renewable energy projects in the past including the recently commissioned Winnebago Energy Center, a 6.4 megawatt landfill gas-to-electric project in Rockford, Illinois.

The formation of this group is consistent with our asset management strategy and it formally brings our existing activities like the Winnebago Energy Center under one area. It also allows us to accelerate our activities in this sector by deploying expertise within this group across all of our business lines.

Moving to Slide 25 I will discuss our key initiatives for the balance of this year. We have continued to add to our sales force that will support our existing wholesale customers and provide added strength to the expansion of our business opportunities. We are working on building out our natural gas capability and adding originators that focus on serving the producer market. We also anticipate launching a new product to our environmentally aware customers late in the second quarter. Even with the competitive energy landscape we still expect to achieve a 10% to 15% long term annual growth rate in core earnings using 2008 as a base.

This will be drive by expansion in our more recently entered markets, Texas, New England and the West as well as continued improvement in our capability to optimize supply in existing markets. We have seen the benefits of increased regional scope within each of our markets. Essentially we are capitalizing on expanded opportunities with our improved capabilities. Our commercial and industrial electric business still has small market share in most of the markets open to competition and our originated customer business has lots of potential to increase market share. And that is the real silver lining because existing markets are the easiest and lowest cost to grow.

Now I will turn the call back to Larry Weyers.

Larry L. Weyers

Let me remind you of the key points from today’s discussion relating to the drivers of our future earnings growth. First, we will advance our construction projects, the 500 megawatt Weston 4 Power Plant and the Guardian 2 Pipeline laterals, among others. Second, we will move forward with rate cases as needed to ensure opportunities to earn reasonable returns on these investments. Third, our expansion into developed markets in the United States and Canada is expected to grow core earnings at Integrys Energy Services on an average annualized basis by 10% to 15% using 2008 as the base. Fourth, using 2008 as a starting point we expect to grow earnings per share at 6% to 8% on an average annualized basis although there could be some variation on a year-to-year basis. Finally as set forth in Slide 26 our earnings guidance for 2008 for diluted earnings per share from continuing operations adjusted is between $3.60 and $4.05.

We appreciate your listening to our prepared remarks and now we would like to open the floor to questions.

Question-And-Answer Session

Operator

(Operator Instructions) We do have Barry Klein – Citi.

Barry Klein – Citigroup

On Peoples Gas the timing of the acquisition on February 22^nd, you talked about, I think it was a $30 million increase, quarter-on-quarter for both the rate increase and the acquisition date, how much related to each? How much related to the rate increase and how much related to the date of the acquisition?

Lawrence T. Borgard

I believe the rate impacts were about $7 million pre-tax and the remainder would be the difference in timing.

Barry Klein – Citigroup

On your guidance, the $3.60 to the $4.05, I noted normalized weather for the rest of the year. Does it normalize to date or are you including the impact of weather for the first quarter?

Joseph P. O’Leary

We are including the impact of weather through the end of March of 2008, also considering the impact of decoupling as it relates to the Illinois utilities.

Operator

Next question Maurice May – Power Insights.

Maurice May – Soleil–Power Insights

First of all, it seems like in Illinois decoupling is under fire by the Legislature and by the Attorney General. Can you give us some more details on what’s going on there?

Lawrence T. Borgard

Obviously you’re familiar with the fact that the Commission approved decoupling as has been done in I think 12 other states for 26 other utilities comprising about 20 million customers. Certain interveners particularly the Attorney General opposed that during the rate hearings, has opposed it in conjunction with a bill introduced in the House to essentially roll back decoupling. We strong are supporting the Commission’s decision to grant decoupling and we believe that there is significant support in the remainder of the Legislature.

Larry L. Weyers

I would also add there is significant support across the country for decoupling from institutions like the American Gas Association, the Edison Electric Institute, the National Association Regulatory Utility Commission which is strong behind it as well as several environmental groups who can see the benefit of decoupling. I believe that it was not portrayed appropriately in the Illinois jurisdictions and that needs to be changed.

Maurice May – Soleil–Power Insights

Can you give us some detail, which court was it appealed in and whose Committee is it being discussed in?

Larry L. Weyers

It was appealed to the Appellate Court in Illinois and the Bill is being read in the House in the Illinois Legislature. It hasn’t moved to the Senate yet.

Maurice May – Soleil–Power Insights

Do you know what Committee and who’s sponsoring it in the House?

Larry L. Weyers

I don’t recall.

Maurice May – Soleil–Power Insights

I can get that later. My second question has to do on the unregulated side, because margin was negative on the gas side but hugely positive on the electric side and Mark I was just wondering whether you could give us some indication of the conditions in the first quarter that produced the positive electric results and the negative gas results?

Mark A. Radtke

The numbers that you’re referring to there are combined realized and unrealized margin and if you really want to look at the margins of volumes that actually flowed in the quarter, then I think you want to look just at realized gross margin. On Slide 39 in the deck, it’s built into Slide 40 as well, we’ve broken out realized versus unrealized and given you some per unit measures there as well. And you’ll see there that our performance is consistent with the past in terms of our gas margins and actually our electric margins are up quite dramatically on a per unit basis using realized margins divided by our delivered volumes. And that’s because in the first quarter of last year we had some operational difficulties that negatively impacted our delivered gross margins.

In terms of the conditions that we’re seeing that are contributing to the combined results that you refer to there, Maury, when power prices rise the value of the derivative contracts that we use to hedge the commitments that we make to our customers, the value of those derivatives rise as well because we’re essentially, if you look only at the derivative purchases, we get long power. We have an offsetting obligation with our retail customers that does not get derivative accounting treatment, that creates the disconnect and in this case a large non-cash increase. If next quarter electric prices would decline, you would see a large or a commensurate non-cash loss in electric margins.

Now in the gas business, even though prices are rising, you see a similar phenomenon but what actually contributes to the decrease is more a change in basis contracts that hedge transportation commitments that we have out there. So when we make a transportation commitment to a customer we lock that in just like we lock in a commodity commitment with an IMAX contract. Also in the natural gas business we’ve got storage used to supply our customer commitments and storage spreads have contracted, the derivative hedges of that storage then contract in value as well and contribute to that non-cash loss.

Operator

At this time we’re showing no questions.

Steve Eschbach

This is Steve Eschbach, Vice President of Investor Relations. I want to thank you all for being a part of our first earnings conference call. A replay of this conference call will be available until August 5^th, 2008 by dialing toll free 800-947-6332. The text for today’s presentation is available on our website at www.IntegrysGroup.com. Just select Investors and then Presentations. If you have any additional questions you may contact me at 312-228-5408 or Donna Sheedy at 920-433-2857. Thank you again.

Operator

Thank you for participating in today’s call. The conference has now ended. You may disconnect.

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