Integrys Energy Group Inc Earnings Call Nuggets: Equity, Energy Services

On Thursday, Integrys Energy Group Inc (NYSE:TEG) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared with analysts and investors.

Equity

Ashar Khan – Visium Asset Management: Joe, I saw you guys give the rate paid on the last slides. Could you just tell us to what is the expectation of equity to finance the growth? Could you give us some highlights till 2014?

Charles A. Schrock – Chairman, President and CEO: Joe is going to get to that page so he can explain it to you.

Joseph P. O’Leary – SVP and CFO: This slide that you are referring to is Slide 38. I believe the projected rate base 2012 to 2014 is that correct, Ashar.

A Closer Look: Integrys Energy Earnings Cheat Sheet>>

Ashar Khan – Visium Asset Management: That is correct. I wanted to – as we try to kind of like estimate earnings, what should we kind of – can you give us some help with how much equity could be needed during that timeframe?

Joseph P. O’Leary – SVP and CFO: Although we are not giving out financing details, I think generally you can expect that we will try to maintain our equity ratio on a consolidated basis somewhere between 50% to 55% and the rest to be refinanced through debt.

Ashar Khan – Visium Asset Management: But usually what you had needed what like $50 million or $70 million of equity annually? I know bonus depreciation is helping you this year and it says it helps you in ‘13, could you give us any kind of indication of what equity needs could be without bonus depreciation?

Joseph P. O’Leary – SVP and CFO: At this time Ashar, we are only giving out information relative to 2012. We are waiting to see what other cash flow sources will come up. As you know there is various things going on in the government right now. There could be an extension of bonus depreciation and that’s thrown off a lot of cash for us the last couple of years, so that’s a possibility. There are other things that we are looking at relative to cash flows as well.

Ashar Khan – Visium Asset Management: If I can just –

Charles A. Schrock – Chairman, President and CEO: (indiscernible) on financing for 2013 as we get closer towards that year.

Ashar Khan – Visium Asset Management: Could you just help us, how much bonus depreciation is helping in 2012?

Joseph P. O’Leary – SVP and CFO: In 2012 we are getting somewhere I think between $150 million to $240 million.

Energy Services

Ali Agha – SunTrust: Charlie or Joe, Energy Services results were less than half what they were in the first quarter of last year, and yet your guidance for the year would still imply that Energy Services at a minimum is flat, and the mid-point is actually above last year. So can you give us some more color of why you are confident? You can do that given where first quarter has trended so far?

Charles A. Schrock – Chairman, President and CEO: Ali, let me comment a little bit, then I’ll have Dan Verbanac chime in. Fundamentally we are growing the business as I noted in the earlier remarks. We are seeing some positive things in terms of the growth of the business and customer retention. The aggregation opportunities in Illinois are still out there. So we do still see opportunities in that area. We did have some one-time things that can even act with us as first quarter, but we are going to try to overcome those as well. Dan any additional comments.

Daniel J. Verbanac – President, Integrys Energy Services, Inc.: Sure, with the headwinds that already have been mentioned certainly getting to the mid-point on the Integrys Energy Services guidance range we provided in February will be a challenge but there are certainly some positive items that will assist in pushing us towards the range. On Slide 36, it talks about the variances from quarter-to-quarter there were some timing issues that hit in the first quarter of 2012 that will reverse out later this year. Second the new aggregation loan that we are bringing on in Illinois really won’t start hitting the books until the end of the second quarter and third quarter of this year. Then on Slide 28, although delivered volumes were down slightly in the first quarter of 2012 on the gas side that was primarily driven by weather. Contracted volumes were up as Charlie mentioned for remainder of 2012. In the third quarter of last year, we talked about entering the Mid-Atlantic gas market, and we have entered that region and now have gotten our licenses and have started putting some new business on in the Mid-Atlantic region, and then recently we received a license to sell power in Pepco service territory in Pennsylvania, so that’s another growth area we are looking at in 2012. So all those things combined, we think give us a chance to hit our guidance that we put out in February of this year.

Ali Agha – SunTrust: Sort of longer term, I know in the past you guys talked about you are looking at maybe yet 5% to 7% growth from this business, but more backend loaded. Have any of those parameters changed? You still think that’s the longer term growth and are you still comfortable that you’ll get it even though it’ll be backend loaded?

Joseph P. O’Leary – SVP and CFO: Yes. Ali, we have put plans in place that get us to 6% to 8% growth over that time period that we had outlined based on 2011. Part of that as we came out of restructuring a few years ago as a retail-only marketing company, we had certain return expectations going forward, and we did expect to lose some larger customers lower margin, and we did both on the gas and power side. On the gas side, that happened primarily at the end of 2010 and in 2011. On the power side coincidentally, we lost some of those customers right at the end of 2011. But going forward, we’re targeting customers where we can add value to the bottom line and get the returns that we expect from this business going forward and we’ve got plans in place that we think will get us there by 2015.

Ali Agha – SunTrust: One last question Joe for you. I think you alluded to in the numbers there were some tax benefit that you accrued or booked in the first quarter. Can you just elaborate on that? Your effective tax rate looked like around just 32.4% in the quarter, what should we be looking at for the full year 2012?

Joseph P. O’Leary – SVP and CFO: With regards to the tax benefit, it had to do – it related to a state income tax issue associated with the sale of our oil and gas production business back around 2007, 2008 timeframe when we sold that business right after the merger. I think it’s about maybe $1.9 million and you find that in discontinued operations that’s the bulk of it. The rest of it is just you know, typically we’ve got changes in the mix of income within various state jurisdictions and that kind of affect our effective rates from time to time. Your other question was what we expect the effective rate to be? About where it’s at where you see at the end of the first quarter is probably a good idea of where we expect to be by the end of the year.