Integrys Energy Group Earnings Call Insights: Growth Rate Outlook and Deltas

Integrys Energy Group Inc (NYSE:TEG) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Growth Rate Outlook

Ashar Khan – Visium Asset Management: Can you just go and check, I guess, going back to the growth rate that you have from ’11 going onwards? Does that suggest that we should have some meaningful growth next year from this year’s base to achieve that line through 2015?

Charles A. Schrock – Chairman, President and CEO: I guess, the simple answer to the question is, yes, and this is based on the rate-based investment that we’ve been making and the rate cases that we will be implementing over the next couple of years. Jim, do you have any additional comments on that.

James F. Schott – VP and CFO: I think, one, be sure to come by tomorrow, where we’ll have more detail on this. But the two big items, I think, affecting 2014 over 2013 is, first of all, you have a full year of the Illinois rate case. We just got $63 million rate increase in Illinois, but it was well (set) on like June 27th, so you get a full year of that. You won’t have a half year in 2013, so you will have a full year in 2014. The second piece is the Fox Energy Center, $440 million of rate base. Because of GAAP, while we were able to defer the equity return on that, we can’t recognize that in 2013, so that’s not in the $3– in the range of $3.35 to $3.65. So in 2014, you will have an increase on rate base of $440 million for Fox Energy Center. Those are two of the bigger items. Then I think some of the smaller pieces are we continued AMRP investments, etc.

Ashar Khan – Visium Asset Management: Then if I heard you correct. You mentioned that hybrid sale you have forwarded it, so I am assuming it’s going to be a hybrid, great so it should have no dilutive effect, is that correct for ’14? Is that the way to look at it?

James F. Schott – VP and CFO: There is no additional shares issued, so it’s not dilutive in that way. But obviously the interest expense will affect net income.

Ashar Khan – Visium Asset Management: I understand that, but this is right. But there will be no shares issued, so it should not impact higher shares outstanding for ’14?

James F. Schott – VP and CFO: Correct. But if you are looking in our cap structure, S&P treats that as 50-50 debt equities. So even though, shares aren’t issued, we get credit for having the equity in our cap structure.

Ashar Khan – Visium Asset Management: And you said the timing is earlier, so the timing is what in the fall September-October timeframe or what?

James F. Schott – VP and CFO: I’d say earlier rather than later. I think, you we can’t pin down as an exact yet. We’re watching the markets carefully, and we take our opportunities when we can, but again sooner rather than later.

Deltas

Ali Agha – SunTrust Robinson Humphrey: Couple of quick questions. One, just on the water itself, perhaps for you Jim, the deltas that you laid out for the regulated businesses, this other utility margins that went up significantly year-over-year, can you remind us what was driving those numbers?

James F. Schott – VP and CFO: You’re back in the additional pages.

Ali Agha – SunTrust Robinson Humphrey: I’m looking at the delta that you show us for the regulated going from Q2 last year to Q2 this year.

James F. Schott – VP and CFO: If you go to Slide 37, I think, has the detail that you’re referring to, and there is a $14.1 million of other utility margin impacts.

Ali Agha – SunTrust Robinson Humphrey: What is that?

James F. Schott – VP and CFO: I think a $1 million of that is pass through costs related to manufactured gas plant and energy efficiency costs, So that’s really offset in the $12.8 million of operating expense increase. So you can net $7 million out of both of those numbers. The other $7 million is frankly non-weather related margin increases. I would caution you this is year-over-year and 2012 was a very warm year. So, we had an unusually warm year, shoulder months are notoriously hard to weather normalize. So I think those factors – how much of that other margin really belongs in the weather, I think, is an issue. But we did have $7 million of other margin increase.

Ali Agha – SunTrust Robinson Humphrey: Similarly on the electric side, then roughly $9 million or $8.9 million what was that?

James F. Schott – VP and CFO: The biggest there, Ali, is $6 million for Fox capacity payments. When we bought Fox, we no longer had the capacity payments. So that will be a reduction in our fuel costs – show up a reduction in fuel costs, show up in our reduction in fuel purchased and power costs. Again though all that’s deferred, but the deferral would show up in the O&M column, which is Column E. So those two offset similar to the riders effect, so those two offset. So there is $6 million of savings in the $8.9 million, and the $6 million offset income in Column E…

Ali Agha – SunTrust Robinson Humphrey: Separate question; on the energy services front, your margins, as you point out, Charlie, have been coming down. I think year-to-date electric is about 5.50, gas is about $0.28. Can you just remind us how we should think about them on a full year basis and what we should think about as the new contracts are coming in and old ones are rolling off what is the correct margin that we should be thinking about?

Charles A. Schrock – Chairman, President and CEO: For starters, if you look at the guidance range that we have, that really is indicative of where we expect energy services to come in. We are seeing them continuing pressure on unit margins, and as I noted, volumes continue to grow, so that’s one way to offset those margins. But that’s about where we’re at. Dan, any additional comments on that?

Daniel J. Verbanac – President – Integrys Energy Services, Inc.: Just one additional comment, Charlie. When we think about unit margins, 2013 has business that was put on in 2011-2012. A lot of that business (still has –) is rolling of the book. So the way to think about unit margins going forward, I think, is similar to the unit margin changes we saw between 2011 and 2012. You can think about similar type changes between 2012 and 2013. I think year-to-date that’s in line with that.

Ali Agha – SunTrust Robinson Humphrey: So when ’14 – assuming all of this is flushed out by ’14, should we see a similar decline ’14 versus ’13? Is that the way to think about it?

Daniel J. Verbanac – President – Integrys Energy Services, Inc.: I think so, yes. By the end of ’14 most of those higher unit margin contracts will have rolled off by the end of ’14 and will be contracted (a penny) in these new environment. But the offset to that, our volumes are up considerably, as Charlie mentioned in his comments.

Ali Agha – SunTrust Robinson Humphrey: Last question related to that, can you also remind us, the $0.04 to $0.06 EPS growth ’11 through ’15, what is that assumed for the growth in energy services? Is that comparable, higher, lower, how should we think about that?

Charles A. Schrock – Chairman, President and CEO: We haven’t given that specific sort of guidance out through 2015. We are assuming some growth in energy services, but on a consolidated basis, which is the way we’re looking at $0.04 to $0.06. Again, given appropriate rate treatment for the investments we’re making, we do expect to be in that range and we’ll have some detail tomorrow at the Analyst Day.