Integrys Energy Group Management Discusses Q3 2013 Results - Earnings Call Transcript

| About: Integrys Energy (TEG)
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Integrys Energy Group (NYSE:TEG) Q3 2013 Earnings Call November 7, 2013 9:00 AM ET

Executives

Steven P. Eschbach - Vice President of Investor Relations

Charles A. Schrock - Chairman, Chief Executive Officer and President

James F. Schott - Chief Financial Officer and Vice President

Daniel J. Verbanac - President of Integrys Energy Services

Analysts

Ashar Khan

Operator

Welcome to the Third Quarter 2013 Earnings Conference Call for Integrys Energy Group Incorporated [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 Third Quarter 2013 Earnings Conference Call. Delivering formal remarks with me today are Charlie Schrock, our Chairman, President and Chief Executive Officer; and Jim Schott, our Vice President and Chief Financial Officer. Other executives, including Larry Borgard, our President and Chief Operating Officer, Utilities; Mark Radtke, Executive Vice President, Shared Services and Chief Strategy Officer; and Dan Verbanac, President of Integrys Energy Services, 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 Presentations, 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 February 18, 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 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, including the quarterly report on Form 10-Q we plan to file later today, the Forward-Looking Statements section of yesterday's news release and Slide 50 in the appendix of the slide deck.

Slide 4 indicates that today’s presentation includes 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 this call over to Charlie Schrock. Charlie?

Charles A. Schrock

Thank you, Steve, and good morning, everyone. And thanks for joining us on the call today. Please turn to Slide 5. While the third quarter consolidated financial results for this year were down compared to last year, our 2013 consolidated year-to-date financial results increased versus the same period in 2012. Given this, we have tightened our guidance for 2013.

The new range for 2013 diluted EPS adjusted is $3.42 to $3.58 with a midpoint of $3.50. The midpoint is now $0.03 per share higher than what we presented to you 3 months ago. Our strong results so far this year in anticipated -- anticipation of continued strong performance at our regulated utilities in the fourth quarter are expected to more than offset the underperformance of Integrys Energy Services.

Now I will provide a brief update on our operational activities. Starting on Slide 6, one of the key activities for our Regulated Natural Gas Utility segment is working with the Illinois Commerce Commission to implement the Natural Gas Consumer Safety & Reliability Act, which is also known as Rider QIP. This Rider goes into effect on January 1, 2014, and we expect to file our first monthly customer surcharge under the new law in February.

Our Natural Gas Main Replacement project continues as scheduled. We installed about 20 miles of main in Chicago during the third quarter, and we remain on track to install a total of about 90 miles of main this year.

In September, Minnesota Energy Resources entered into an agreement to acquire Alliant Energy's natural gas utility assets in Minnesota. We expect to complete the acquisition by the third quarter of 2014. This acquisition is a national geographic fit for Minnesota Energy Resources service territory and will add more than 10,000 natural gas customers in Southeastern Minnesota.

Turning to Slide 7. The major item of note for the Regulated Electric Utility segment is that construction has begun on the ReACT multi-pollutant control technology installation for our Weston 3 power plant. We remain on track for ReACT to come online in early 2016.

In July, the Wisconsin Commission approved our System Modernization and Reliability Project, which we refer to as SMRP. We expect to begin construction in 2014 and we have included the expected cost and related revenue requirements in Wisconsin Public Service's 2014 rate case.

We continue to make progress on pending rate cases. Slide 8 summarizes the key developments related to our activity. The Wisconsin Public Service rate case has advanced through the final briefing stage and a discussion of record. We expect a draft order within the next few weeks.

We reached a settlement in our Michigan Gas Utilities rate case and expect commission approval soon. The settlement would result in a rate increase of $5 million effective January 1, 2014. Our Upper Peninsula Power rate case filing has been ruled complete by the Michigan Public Service Commission and, absent settlement, implementation of interim rates would occur at the beginning of next year.

Settlement discussions for this rate case are ongoing. Minnesota Energy Resources rate case filing was also deemed complete by the Minnesota Commission, which will allow interim rates to take effect on the first day of the new year. More detailed summaries of these rate cases can be found in the appendix on Slides 22 to 27.

Our nonregulated operational update is on Slide 9. At our energy marketing business, both delivered and contracted volumes are up substantially, but unit margin compression continues, which is having a negative effect on Integrys Energy Services' 2013 results. In addition, we experienced pricing issues which did not allow full recovery of our costs for direct mass marketing electric customers in Illinois. These issues have been identified and are being addressed.

I will now turn this call over to Jim Schott to discuss the financial side of the business. Jim?

James F. Schott

Thank you, Charlie, and good morning, everyone. I'll cover our financial results for the third quarter in a little more detail and we'll discuss our financial expectations for the rest of 2013.

Let's begin the financial review by turning to Slide 10. In the third quarter of 2013, we posted diluted EPS adjusted of $0.34 versus $0.54 in the same period last year. On Slide 11, we show the changes in diluted EPS adjusted by segment, as well as the key variances for the 3-month and 9-month periods in 2013 compared with the same periods in 2012.

As anticipated, the Regulated Utility segments incurred increased costs in the third quarter of 2013. The Regulated Natural Gas Utilities segment had increased costs related to new requirements in Chicago for natural gas distribution main openings and repairs. These costs are being recovered in the Peoples Gas rate increase beginning in June of 2013. However, the majority of the increased revenue is expected to be recognized in the fourth quarter as natural gas sales volumes increase with the heating demand of customers.

The Regulated Utility segment had higher costs mainly due to a planned outage at the Weston 3 unit that occurs every 6 to 8 years. These costs are also being recovered through 2013.

Quarter-over-quarter earnings for Integrys Energy Services were negatively affected by the issues Charlie mentioned earlier. The Holding Company and Other segment's quarter-over-quarter decline is primarily driven by increased interest expense due to the new $400 million hybrid debt issuance in mid-August. Segment comparisons can be found in the appendix on Slides 34 through 47.

Moving to Slide 12, most of our planned financing activity has been completed. All that remains in our 2013 financing plans is to finance up to $450 million of long-term debt for Wisconsin Public Service during this quarter.

For common equity, $71 million was issued through September 30, 2013, via our stock investment plan. We expect an additional $10 million to be issued under the plan by the end of the year, plus any proceeds from stock option exercises between now and year end. These financing plans for Integrys Energy Group are expected to support our current credit rating.

Slide 13 provides a segment detail for the revised diluted EPS guidance that Charlie mentioned. The increased estimate for our Regulated Natural Gas Utility segment is due to lower deferred taxes as a result of the Illinois rate case decision, and continued savings in operating costs. The increased estimate for our Regulated Electric Utility segment is due to lower fuel and purchased power costs that we are able to retain under the Wisconsin fuel rules as well as continued savings in operating costs.

The estimate for Integrys Energy Services was reduced due to lower than anticipated unit margins for our commercial and industrial power customers, and the Illinois direct mass marketing electric aggregation underperformance in the third quarter.

And finally, we moved to the lower end of the range for the Holding Company and Other segment to reflect the early issuance of our hybrid debt.

Now I'll turn the call back over to Charlie. Charlie?

Charles A. Schrock

Yes. Thanks, Jim. Before taking your questions, I'll summarize our key investment highlights, which are shown on Slide 14. The execution of our business plan for the Regulated Utilities remains on track. We continue to make prudent investments in our utilities to provide safe, reliable and affordable service for our customers.

Our 34% ownership in the American Transmission Company continues to contribute to earnings as expected. We've narrowed our guidance for 2013 diluted EPS adjusted on a consolidated basis to a range of $3.42 to $3.58. Given the investment in our portfolio of businesses and assuming continued reasonable rate treatment, we continue to expect average annualized growth in EPS and diluted EPS adjusted to be between 4% and 6% through 2015, with 2011 as the base year. And given our solid long-term business plan, our current dividend is sustainable, and we expect our dividend payout ratio will decline to utility industry norms as our earnings grow over time.

We will now open the call for your questions related to today's earnings and the 2013 financial summary.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Ashar Khan from Visium.

Ashar Khan

Charlie, can you just give us -- what happened to the retail business and is this a good run rate to now expect $0.02 a quarter going forward for next -- the last quarter and next year?

Charles A. Schrock

First, thanks for joining us today and I appreciate your question. I want to have Dan Verbanac to give you a little more color around that, but at a high level, as I mentioned in my comments, we ran into some issues in the third quarter, the DMM business and we're seeing continued compression on unit margins. But we don't see that as the run rate, if you will, for the rest of the year or next year. But let me have Dan give you a little more detail.

Daniel J. Verbanac

We didn't expect the third quarter to be a strong quarter for us as natural gas volumes are obviously down in the summer. And then on the electric side, we expected and experienced some timing impacts related to margin recognition, and then we also had some tax timing impacts that were resolved by year-end. And then the unexpected items in quarter 3 were related to what Charlie mentioned, competitor pressures on pre-unit margins primarily in our commercial and industrial business. And then our inability to fully recover costs for Direct Mass Market electric customers in Illinois, which we are addressing going forward.

Ashar Khan

So can you give us on the electric side, what kind of margins are -- should we expect next year in -- if I'm right, the margin was like 2 or 2.5 or so, something like that, close to that. What should we expect on the electric side in the year 2014?

Daniel J. Verbanac

Yes, let me address the remainder of 2013. Obviously, our realized margins are down, especially on the electric side of the business. But we expect both gas and electric unit margins for the full year 2013 to come in slightly higher than the third quarter year-to-date. Longer term, we're forecasting realized unit margins to continue to drift down over the next couple of years, but not as pronounced as they have been in 2011 and 2012. Our focus continues to be on net income and adequate returns with an acceptable risk profile, obviously, unit margins are one component of that equation. One of the reasons why unit margins will continue to drift down is a lot of our higher margin business that we put on in 2010, '11 and '12 have now rolled off the books.

Ashar Khan

Okay. So we should expect something in the -- below $3 range. Is that -- higher than 2.5 and below 3. Is that a good ballpark going forward?

Charles A. Schrock

Sorry, I don't know that we can put that tight of a range around it. As Dan mentioned, we expect that the third quarter is a bit of an anomaly, so we expect the margins going forward to look better than that. But it's hard to put a specific range around it at this point.

Operator

[Operator Instructions] And I'm currently showing no further questions. I would now turn the call back over to Steve Eschbach for closing remarks.

Steven P. Eschbach

Thank you very much for being part of our third quarter earnings conference call. A replay of this conference call will be available until February 18, 2014, and by dialing toll-free (866) 395-1650. The full transcript for today's conference call will be available on our website at www.integrysgroup.com before the end of day on Thursday, November 14. Just select Investors, and then Presentations. If you have additional questions, please contact me directly at (312) 228-5408 or Donna Sheedy at (920) 433-1857. Thank you very much.

Operator

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

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