form10q.htm
______________________________________________________________________________
______________________________________________________________________________
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-Q
[x] QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE
ACT OF 1934
For
the quarterly
period ended June 30, 2007
OR
[
] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES
EXCHANGE
ACT OF 1934
For
the transition
period from __________ to __________
Commission
File
Number
|
Registrant’s;
State of Incorporation;
Address;
and Telephone Number
|
IRS
Employer
Identification
No.
|
|
|
|
1-11337
|
INTEGRYS
ENERGY GROUP, INC.
(A
Wisconsin
Corporation)
130
East
Randolph Drive
Chicago,
Illinois 60601-6207
(312)
228-5400
|
39-1775292
|
Indicate
by check
mark whether the registrant (1) has filed all reports required to be filed
by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to
file
such reports), and (2) has been subject to such filing requirements for the
past
90
days. Yes
[x] No [ ]
Indicate
by check
mark whether the registrant is a large accelerated filer, an accelerated
filer,
or a non-accelerated filer. See definition of "accelerated filer and
large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large
Accelerated filer [X]
|
Accelerated
filer [ ]
|
Non-accelerated
filer [ ]
|
Indicate
by check
mark whether the registrant is a shell company (as defined in Rule 12b-2
of the
Exchange Act).
Indicate
the number
of shares outstanding of the issuer’s classes of common stock, as of the latest
practicable date:
|
Common
stock,
$1 par value,
75,995,281
shares outstanding at
August
1,
2007
|
|
|
______________________________________________________________________________
______________________________________________________________________________
INTEGRYS
ENERGY GROUP, INC.
FORM
10-Q FOR THE QUARTER ENDED JUNE 30, 2007
CONTENTS
|
|
|
Page
|
|
|
|
|
|
3
|
|
|
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
Item
1.
|
FINANCIAL
STATEMENTS (Unaudited)
|
|
|
|
|
|
|
5
|
|
|
6
|
|
|
7
|
|
|
|
|
|
|
|
Integrys
Energy Group, Inc. and Subsidiaries
|
8-57
|
|
|
Page
|
|
|
Note
1
|
Financial
Information
|
8
|
|
|
Note
2
|
Cash
and Cash
Equivalents
|
9
|
|
|
Note
3
|
Risk
Management Activities
|
9
|
|
|
Note
4
|
Discontinued
Operations
|
12
|
|
|
Note
5
|
Acquisitions
and Sales of Assets
|
15
|
|
|
Note
6
|
Natural
Gas
in Storage
|
18
|
|
|
Note
7
|
Goodwill
and
Other Intangible Assets
|
18
|
|
|
Note
8
|
Short-Term
Debt and Lines of Credit
|
20
|
|
|
Note
9
|
Long-Term
Debt
|
22
|
|
|
Note
10
|
Asset
Retirement Obligations
|
23
|
|
|
Note
11
|
Income
Taxes
|
24
|
|
|
Note
12
|
Commitments
and Contingencies
|
25
|
|
|
Note
13
|
Guarantees
|
41
|
|
|
Note
14
|
Employee
Benefit Plans
|
44
|
|
|
Note
15
|
Stock-Based
Compensation
|
45
|
|
|
Note
16
|
Comprehensive
Income
|
48
|
|
|
Note
17
|
Common
Equity
|
48
|
|
|
Note
18
|
Regulatory
Environment
|
49
|
|
|
Note
19
|
Segments
of
Business
|
54
|
|
|
Note
20
|
New
Accounting Pronouncements
|
57
|
|
|
|
|
Item
2.
|
|
58-102
|
|
|
|
Item
3.
|
|
103-104
|
|
|
|
Item
4.
|
|
105
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
106
|
|
|
|
Item
1.
|
|
106
|
|
|
|
Item
1A.
|
|
106
|
|
|
|
Item
4.
|
|
107-108
|
|
|
|
Item
6.
|
|
108
|
|
|
|
|
|
109
|
|
|
110
|
|
|
12.1
|
Ratio
of
Earnings to Fixed Charges
|
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
Act of
1934 for Integrys Energy Group, Inc.
|
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
Act of
1934 for Integrys Energy Group, Inc.
|
|
|
32.1
|
Written
Statement of the Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350 for Integrys Energy Group,
Inc.
|
|
|
Commonly
Used Acronyms
|
|
|
ATC
|
American
Transmission Company LLC
|
DOE
|
United
States
Department of Energy
|
DPC
|
Dairyland
Power Cooperative
|
EPA
|
United
States
Environmental Protection Agency
|
ESOP
|
Employee
Stock Ownership Plan
|
FASB
|
Financial
Accounting Standards Board
|
FERC
|
Federal
Energy Regulatory Commission
|
LIFO
|
Last-in,
first-out
|
ICC
|
Illinois
Commerce Commission
|
ICE
|
Intercontinental
Exchange
|
MERC
|
Minnesota
Energy Resources Corporation
|
MGUC
|
Michigan
Gas
Utilities Corporation
|
MISO
|
Midwest
Independent Transmission System Operator
|
MPSC
|
Michigan
Public Service Commission
|
MPUC
|
Minnesota
Public Utility Commission
|
NSG
|
North
Shore
Gas Company
|
NYMEX
|
New
York
Mercantile Exchange
|
PEC
|
Peoples
Energy Corporation
|
PEP
|
Peoples
Energy Production Company
|
PGL
|
The
Peoples
Gas Light and Coke Company
|
PSCW
|
Public
Service Commission of Wisconsin
|
SEC
|
Securities
and Exchange Commission
|
SFAS
|
Statement
of
Financial Accounting Standards
|
UPPCO
|
Upper
Peninsula Power Company
|
WDNR
|
Wisconsin
Department of Natural Resources
|
WPSC
|
Wisconsin
Public Service Corporation
|
In
this report, Integrys Energy Group and its subsidiaries make statements
concerning expectations, beliefs, plans, objectives, goals, strategies, and
future events or performance. Such statements are "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934,
as
amended. Although Integrys Energy Group and its subsidiaries believe
that these forward-looking statements and the underlying assumptions are
reasonable, it cannot provide assurance that they will prove correct. Except
to
the extent required by the federal securities laws, Integrys Energy Group
and
its subsidiaries undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
In
addition to statements regarding trends or estimates in Management's Discussion
and Analysis of Financial Condition and Results of Operations forward-looking
statements included or incorporated in this report include, but are not limited
to statements regarding future:
●
|
Revenues
or
expenses,
|
●
|
Capital
expenditure projections, and
|
●
|
Financing
sources.
|
Forward-looking
statements involve a number of risks and uncertainties. There are
many factors that could cause actual results to differ materially from those
expressed or implied in this report. Some risk factors that could cause results
different from any forward-looking statement include those described in Item
1A
of our Annual Report on Form 10-K for the year ended December 31, 2006 and
as
such may be amended or supplemented in Part II, Item 1A of this report. Other
factors include:
●
|
Unexpected
costs and/or unexpected liabilities related to the PEC merger,
or the
effects of purchase accounting that may be different from our
expectations;
|
●
|
The
successful combination of the operations of Integrys Energy Group
and
PEC;
|
●
|
Integrys
Energy Group may be unable to achieve the forecasted synergies
in
connection with the PEC merger or it may take longer or cost more
than
expected to achieve these synergies;
|
●
|
The
credit
ratings of Integrys Energy Group or its subsidiaries could change
in the
future;
|
●
|
Resolution
of
pending and future rate cases and negotiations (including the recovery
of
deferred costs) and other regulatory decisions impacting Integrys
Energy
Group’s regulated businesses;
|
●
|
The
impact of
recent and future federal and state regulatory changes, including
legislative and regulatory initiatives regarding deregulation and
restructuring of the electric and natural gas utility industries,
changes
in environmental, tax and other laws and regulations to which Integrys
Energy Group and its subsidiaries are subject, as well as changes
in
application of existing laws and regulations;
|
●
|
Current
and
future litigation, regulatory investigations, proceedings or inquiries,
including but not limited to, manufactured gas plant site cleanup,
pending
EPA investigations of WPSC generation facilities and the appeal
of the
decision in the contested case proceeding regarding the Weston
4 air
permit;
|
●
|
Resolution
of
audits or other tax disputes with the Internal Revenue Service
and various
state, local and Canadian revenue agencies;
|
●
|
The
effects,
extent and timing of additional competition or regulation in the
markets
in which our subsidiaries operate;
|
●
|
The
impact of
fluctuations in commodity prices, interest rates and customer
demand;
|
●
|
Available
sources and costs of fuels and purchased power;
|
●
|
Investment
performance of employee benefit plan assets;
|
●
|
Advances
in
technology;
|
●
|
Effects
of
and changes in political, legal and economic conditions and developments
in the United States and Canada;
|
●
|
Potential
business strategies, including mergers and acquisitions or dispositions
of
assets or businesses, which cannot be assured to be completed (such
as
construction of the Weston 4 power plant; additional investment
in ATC
related to construction of the Wausau, Wisconsin, to Duluth, Minnesota,
transmission line; and the sale of PEP);
|
●
|
The
direct or
indirect effects of terrorist incidents, natural disasters or responses
to
such events;
|
●
|
Financial
market conditions and the results of financing efforts, including
credit
ratings, and risks associated with commodity prices (particularly
natural
gas and electricity), interest rates and counter-party
credit;
|
●
|
Weather
and
other natural phenomena, in particular the effect of weather on
natural
gas and electricity sales;
|
●
|
The
effect of
accounting pronouncements issued periodically by standard-setting
bodies;
and
|
●
|
Other
factors
discussed elsewhere herein and in other reports filed by the registrants
from time to time with the SEC.
|
Forward-looking
statements are subject to assumptions and uncertainties, therefore actual
results may differ materially from those expressed or implied by such
forward-looking statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
PART
1. FINANCIAL INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
1. Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEGRYS
ENERGY GROUP, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30
|
|
|
June
30
|
|
(Millions,
except per share data)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonregulated
revenue
|
|
$ |
1,649.9
|
|
|
$ |
1,125.8
|
|
|
$ |
3,426.7
|
|
|
$ |
2,682.4
|
|
Utility
revenue
|
|
|
711.8
|
|
|
|
349.5
|
|
|
|
1,681.6
|
|
|
|
788.6
|
|
Total
revenues
|
|
|
2,361.7
|
|
|
|
1,475.3
|
|
|
|
5,108.3
|
|
|
|
3,471.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonregulated
cost of fuel, natural gas, and purchased power
|
|
|
1,650.9
|
|
|
|
1,072.0
|
|
|
|
3,314.6
|
|
|
|
2,543.6
|
|
Utility
cost
of fuel, natural gas, and purchased power
|
|
|
420.2
|
|
|
|
171.4
|
|
|
|
1,072.0
|
|
|
|
440.5
|
|
Operating
and
maintenance expense
|
|
|
251.9
|
|
|
|
120.4
|
|
|
|
438.6
|
|
|
|
238.5
|
|
Depreciation
and amortization expense
|
|
|
50.6
|
|
|
|
29.3
|
|
|
|
90.8
|
|
|
|
56.5
|
|
Taxes
other
than income taxes
|
|
|
22.0
|
|
|
|
14.6
|
|
|
|
43.1
|
|
|
|
29.2
|
|
Operating
income (loss)
|
|
|
(33.9 |
) |
|
|
67.6
|
|
|
|
149.2
|
|
|
|
162.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
|
21.6
|
|
|
|
14.5
|
|
|
|
33.9
|
|
|
|
23.2
|
|
Interest
expense
|
|
|
(42.6 |
) |
|
|
(22.4 |
) |
|
|
(79.0 |
) |
|
|
(40.7 |
) |
Minority
interest
|
|
|
-
|
|
|
|
1.2
|
|
|
|
0.1
|
|
|
|
2.4
|
|
Other
expense
|
|
|
(21.0 |
) |
|
|
(6.7 |
) |
|
|
(45.0 |
) |
|
|
(15.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss)
before taxes
|
|
|
(54.9 |
) |
|
|
60.9
|
|
|
|
104.2
|
|
|
|
147.6
|
|
Provision
(benefit) for income taxes
|
|
|
(15.3 |
) |
|
|
19.0
|
|
|
|
26.6
|
|
|
|
46.4
|
|
Income
(loss) from continuing operations
|
|
|
(39.6 |
) |
|
|
41.9
|
|
|
|
77.6
|
|
|
|
101.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations, net of tax
|
|
|
24.0
|
|
|
|
(6.2 |
) |
|
|
47.0
|
|
|
|
(4.6 |
) |
Income
(loss) before preferred stock dividends of
subsidiary
|
|
|
(15.6 |
) |
|
|
35.7
|
|
|
|
124.6
|
|
|
|
96.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends of subsidiary
|
|
|
0.8
|
|
|
|
0.8
|
|
|
|
1.6
|
|
|
|
1.6
|
|
Income
(loss) available for common shareholders
|
|
$ |
(16.4 |
) |
|
$ |
34.9
|
|
|
$ |
123.0
|
|
|
$ |
95.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
76.0
|
|
|
|
42.2
|
|
|
|
66.8
|
|
|
|
41.2
|
|
Diluted
|
|
|
76.0
|
|
|
|
42.2
|
|
|
|
67.1
|
|
|
|
41.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share -- basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$ |
(0.53 |
) |
|
$ |
0.97
|
|
|
$ |
1.14
|
|
|
$ |
2.42
|
|
Discontinued
operations, net of tax
|
|
$ |
0.31
|
|
|
$ |
(0.14 |
) |
|
$ |
0.70
|
|
|
$ |
(0.11 |
) |
Earnings
(loss) per common share -- basic
|
|
$ |
(0.22 |
) |
|
$ |
0.83
|
|
|
$ |
1.84
|
|
|
$ |
2.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share -- diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$ |
(0.53 |
) |
|
$ |
0.97
|
|
|
$ |
1.13
|
|
|
$ |
2.41
|
|
Discontinued
operations, net of tax
|
|
$ |
0.31
|
|
|
$ |
(0.14 |
) |
|
$ |
0.70
|
|
|
$ |
(0.11 |
) |
Earnings
(loss) per common share -- diluted
|
|
$ |
(0.22 |
) |
|
$ |
0.83
|
|
|
$ |
1.83
|
|
|
$ |
2.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per common share declared
|
|
$ |
0.660
|
|
|
$ |
0.565
|
|
|
$ |
1.243
|
|
|
$ |
1.130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying condensed notes are an integral part of these
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEGRYS
ENERGY GROUP, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30
|
|
|
December
31
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$ |
31.7
|
|
|
$ |
23.2
|
|
Restricted
cash
|
|
|
-
|
|
|
|
22.0
|
|
Accounts
receivable - net of reserves of $69.9 and $17.0,
respectively
|
|
|
1,190.2
|
|
|
|
1,037.3
|
|
Accrued
unbilled revenues
|
|
|
208.8
|
|
|
|
184.8
|
|
Inventories
|
|
|
651.7
|
|
|
|
456.3
|
|
Current
assets
from risk management activities
|
|
|
898.5
|
|
|
|
1,068.6
|
|
Deferred
income taxes
|
|
|
13.2
|
|
|
|
-
|
|
Assets
held
for sale
|
|
|
828.4
|
|
|
|
6.1
|
|
Other
current
assets
|
|
|
129.2
|
|
|
|
129.1
|
|
Current
assets
|
|
|
3,951.7
|
|
|
|
2,927.4
|
|
|
|
|
|
|
|
|
|
|
Property,
plant, and equipment, net of accumulated depreciation of $2,584.0
and
$1,427.8,
|
|
|
|
|
|
respectively
|
|
|
4,325.0
|
|
|
|
2,534.8
|
|
Regulatory
assets
|
|
|
1,241.2
|
|
|
|
417.8
|
|
Long-term
assets from risk management activities
|
|
|
419.5
|
|
|
|
308.2
|
|
Goodwill
|
|
|
946.8
|
|
|
|
303.9
|
|
Pension
assets
|
|
|
89.4
|
|
|
|
-
|
|
Other
|
|
|
406.8
|
|
|
|
369.6
|
|
Total
assets
|
|
$ |
11,380.4
|
|
|
$ |
6,861.7
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
$ |
865.6
|
|
|
$ |
722.8
|
|
Current
portion of long-term debt
|
|
|
54.9
|
|
|
|
26.5
|
|
Accounts
payable
|
|
|
1,154.0
|
|
|
|
949.4
|
|
Current
liabilities from risk management activities
|
|
|
899.8
|
|
|
|
1,001.7
|
|
Deferred
income taxes
|
|
|
-
|
|
|
|
3.1
|
|
Liabilities
held for sale
|
|
|
46.3
|
|
|
|
-
|
|
Other
current
liabilities
|
|
|
434.6
|
|
|
|
202.9
|
|
Current
liabilities
|
|
|
3,455.2
|
|
|
|
2,906.4
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
2,142.7
|
|
|
|
1,287.2
|
|
Deferred
income taxes
|
|
|
536.6
|
|
|
|
97.6
|
|
Deferred
investment tax credits
|
|
|
38.9
|
|
|
|
13.6
|
|
Regulatory
liabilities
|
|
|
304.3
|
|
|
|
301.7
|
|
Environmental
remediation liabilities
|
|
|
637.3
|
|
|
|
95.8
|
|
Pension
and
postretirement benefit obligations
|
|
|
384.6
|
|
|
|
188.6
|
|
Long-term
liabilities from risk management activities
|
|
|
367.9
|
|
|
|
264.7
|
|
Asset
retirement obligations
|
|
|
136.7
|
|
|
|
10.1
|
|
Other
|
|
|
153.1
|
|
|
|
111.3
|
|
Long-term
liabilities
|
|
|
4,702.1
|
|
|
|
2,370.6
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock of subsidiary with no mandatory redemption
|
|
|
51.1
|
|
|
|
51.1
|
|
Common
stock
equity
|
|
|
3,172.0
|
|
|
|
1,533.6
|
|
Total
liabilities and shareholders' equity
|
|
$ |
11,380.4
|
|
|
$ |
6,861.7
|
|
|
|
|
|
|
|
|
|
|
The
accompanying condensed notes are an integral part of these
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEGRYS
ENERGY GROUP, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
|
|
|
June
30
|
|
(Millions)
|
|
|
2007
|
|
|
2006
|
|
Operating
Activities
|
|
|
|
|
|
|
Net
income
before preferred stock dividends of subsidiary
|
|
$ |
124.6
|
|
|
$ |
96.6
|
|
Adjustments
to
reconcile net income to net cash provided by operating
activities
|
|
|
|
|
|
|
Discontinued
operations, net of tax
|
|
|
(47.0 |
) |
|
|
4.6
|
|
|
Depreciation
and amortization
|
|
|
90.8
|
|
|
|
56.5
|
|
|
Recovery
of
Kewaunee outage expenses
|
|
|
5.1
|
|
|
|
6.3
|
|
|
Refund
of
non-qualified decommissioning trust
|
|
|
(27.3 |
) |
|
|
(30.0 |
) |
|
Recoveries
and
refunds of other regulatory assets and liabilities
|
|
|
17.9
|
|
|
|
13.0
|
|
|
Unrealized
gains on nonregulated energy contracts
|
|
|
(6.7 |
) |
|
|
(33.0 |
) |
|
Pension
and
postretirement expense
|
|
|
35.4
|
|
|
|
25.7
|
|
|
Pension
and
postretirement funding
|
|
|
(4.4 |
) |
|
|
(2.7 |
) |
|
Deferred
income taxes and investment tax credit
|
|
|
18.2
|
|
|
|
8.0
|
|
|
Gains
due to
settlement of contracts pursuant to the merger with PEC
|
|
|
(4.0 |
) |
|
|
-
|
|
|
Gain
on the
sale of interest in Guardian Pipeline, LLC
|
|
|
-
|
|
|
|
(6.2 |
) |
|
Gain
on the
sale of WPS ESI Gas Storage. LLC
|
|
|
-
|
|
|
|
(9.0 |
) |
|
Gain
on the
sale of partial interest in synthetic fuel operation
|
|
|
(1.4 |
) |
|
|
(3.5 |
) |
|
Equity
income,
net of dividends
|
|
|
1.6
|
|
|
|
5.8
|
|
|
Other
|
|
|
|
(2.6 |
) |
|
|
15.4
|
|
|
Changes
in
working capital
|
|
|
|
|
|
|
|
|
|
|
Receivables,
net
|
|
|
548.5
|
|
|
|
375.6
|
|
|
|
Inventories
|
|
|
(57.2 |
) |
|
|
(168.1 |
) |
|
|
Other
current
assets
|
|
|
62.6
|
|
|
|
3.0
|
|
|
|
Accounts
payable
|
|
|
(249.0 |
) |
|
|
(384.7 |
) |
|
|
Other
current
liabilities
|
|
|
(154.5 |
) |
|
|
(1.1 |
) |
Net
cash provided by (used for) operating activities
|
|
|
350.6
|
|
|
|
(27.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(155.0 |
) |
|
|
(153.6 |
) |
Proceeds
from
the sale of property, plant and equipment
|
|
|
2.3
|
|
|
|
2.4
|
|
Purchase
of
equity investments and other acquisitions
|
|
|
(34.9 |
) |
|
|
(41.5 |
) |
Proceeds
on
the sale of interest in Guardian Pipeline, LLC
|
|
|
-
|
|
|
|
38.5
|
|
Proceeds
on
the sale of WPS ESI Gas Storage, LLC
|
|
|
-
|
|
|
|
19.9
|
|
Cash
paid for
transaction costs pursuant to the merger with PEC
|
|
|
(13.8 |
) |
|
|
-
|
|
Acquisition
of
natural gas operations in Michigan and Minnesota, net of liabilities
assumed
|
|
|
1.7
|
|
|
|
(317.9 |
) |
Restricted
cash for repayment of long-term debt
|
|
|
22.0
|
|
|
|
-
|
|
Restricted
cash for acquisition
|
|
|
-
|
|
|
|
(333.3 |
) |
Transmission
interconnection
|
|
|
(23.9 |
) |
|
|
(1.8 |
) |
Other
|
|
|
|
|
6.4
|
|
|
|
2.1
|
|
Net
cash used for investing activities
|
|
|
(195.2 |
) |
|
|
(785.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
Short-term
debt, net
|
|
|
(66.3 |
) |
|
|
738.0
|
|
Gas
loans,
net
|
|
|
(7.5 |
) |
|
|
(43.1 |
) |
Repayment
of
long-term debt
|
|
|
(25.0 |
) |
|
|
(1.4 |
) |
Payment
of
dividends
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
(1.6 |
) |
|
|
(1.6 |
) |
|
Common
stock
|
|
|
(76.9 |
) |
|
|
(46.7 |
) |
Issuance
of
common stock
|
|
|
25.2
|
|
|
|
151.9
|
|
Other
|
|
|
|
|
2.1
|
|
|
|
0.3
|
|
Net
cash provided by (used for) financing activities
|
|
|
(150.0 |
) |
|
|
797.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in cash and cash equivalents - continuing
operations
|
|
|
5.4
|
|
|
|
(15.6 |
) |
Change
in cash
and cash equivalents - discontinued operations
|
|
|
|
|
|
|
|
|
|
Net
cash
provided by operating activities
|
|
|
40.1
|
|
|
|
23.1
|
|
|
Net
cash
provided by (used for) investing activities
|
|
|
(37.0 |
) |
|
|
(17.7 |
) |
Change
in cash and cash equivalents
|
|
|
8.5
|
|
|
|
(10.2 |
) |
Cash
and cash
equivalents at beginning of period
|
|
|
23.2
|
|
|
|
27.7
|
|
Cash
and cash equivalents at end of period
|
|
$ |
31.7
|
|
|
$ |
17.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying condensed notes are an integral part of these
statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEGRYS
ENERGY GROUP, INC AND SUBSIDIARIES
June 30,
2007
NOTE
1--FINANCIAL INFORMATION
We
have prepared the Condensed Consolidated Financial Statements of Integrys
Energy
Group, Inc. under the rules and regulations of the SEC.
These
financial
statements on Form 10-Q have not been audited. Management believes
that these financial statements include all adjustments (which unless otherwise
noted include only normal recurring adjustments) necessary for a fair
presentation of the financial results for each period shown. We have
condensed or omitted certain financial information and note disclosures normally
included in our annual audited financial statements. These condensed
financial statements should be read along with the audited financial statements
and notes included in our Annual Report on Form 10-K for the year ended
December 31, 2006. In addition, certain items from the prior
periods have been reclassified to conform to the current year
presentation. Significant reclassifications are as
follows:
Reclassifications
Condensed
Consolidated Balance Sheet
Customers
electing
a budget payment plan had a credit balance of $49.2 million at
December 31, 2006. Since this balance is subject to change based
upon the amount of future billings, this balance was reclassified from accounts
payable to other current liabilities.
Condensed
Consolidated Statements of Income
For
the three and
six months ended June 30, 2006, $4.1 million and $7.8 million,
respectively, of software and intangible asset amortization expense was
reclassified from operating and maintenance expense to depreciation and
amortization expense to conform to the three and six months ended June 30,
2007 presentation.
Condensed
Consolidated Statement of Cash Flows
The
reclassifications discussed above related to the Condensed Consolidated Balance
Sheets and Condensed Consolidated Statements of Income were also reflected
as
reclassifications in the Condensed Consolidated Statements of Cash Flows
for the
six months ended June 30, 2006. These reclassifications had no
impact on total operating, investing, or financing activities.
Dispositions
WPS
Niagara
Generation, LLC's (Niagara's) results of operations and cash flows were
reclassified as discontinued operations for the three and six months ended
June 30, 2006. The sale of Niagara was completed in
January 2007. Refer to Note 4, “Discontinued
Operations,” for more information.
Sunbury
Generation,
LLC's (Sunbury's) results of operations and cash flows for the three and
six
months ended June 30, 2006 were reclassified as discontinued operations.
The sale of Sunbury was completed in July 2006. Refer to Note 4,
“Discontinued Operations,” for more information.
Mergers
and Acquisitions
Effective
February
21, 2007, the merger with PEC was consummated and the assets and liabilities,
results of operations, and cash flows of PEC, were included in Integrys Energy
Group's Condensed Consolidated Financial Statements commencing February 22,
2007. See Note 5, "Acquisitions and Sales of
Assets," for more information.
The
assets and
liabilities, results of operations, and cash flows of MGUC and MERC were
included in Integrys Energy Group's Condensed Consolidated Financial Statements
effective April 1 and July 1, 2006, respectively. See
Note 5, "Acquisitions and Sales of Assets," for more
information.
NOTE
2--CASH AND CASH EQUIVALENTS
We
consider short-term investments with an original maturity of three months
or less to be cash equivalents.
The
following is
supplemental disclosure to the Integrys Energy Group Condensed Consolidated
Statements of Cash Flows:
|
|
Six
Months Ended June 30
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
Cash
paid for interest
|
|
$ |
56.8
|
|
|
$ |
35.7
|
|
Cash
paid for income
taxes
|
|
$ |
18.9
|
|
|
$ |
20.5
|
|
Under
Integrys Energy Group's cash management policy, accounting overdraft cash
balances of $30.4 million and $6.1 million at June 30, 2007, and
December 31, 2006, respectively, were reclassified to accounts
payable.
Significant
non-cash transactions were as follows:
Six
Months Ended June 30
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
Weston
4 construction costs funded
through accounts payable
|
|
$ |
29.3
|
|
|
$ |
39.3
|
|
Equity
issued for net assets acquired in
PEC merger
|
|
|
1,556.3
|
|
|
|
-
|
|
Realized
gain on settlement of contracts
due to PEC merger
|
|
|
4.0
|
|
|
|
-
|
|
Merger
transaction costs funded through
other current liabilities
|
|
|
0.3
|
|
|
|
-
|
|
Purchase
price adjustments related to
MGUC funded through accounts payable
|
|
|
-
|
|
|
|
26.0
|
|
NOTE
3--RISK MANAGEMENT ACTIVITIES
As
part of our regular operations, Integrys Energy Group enters into contracts,
including options, swaps, futures, forwards, and other contractual commitments,
to manage market risks such as changes in commodity prices and interest
rates.
Integrys
Energy
Group accounts for its derivative contracts in accordance with SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended and interpreted. SFAS No. 133 establishes
accounting and financial reporting standards for derivative instruments and
requires, in part, that we recognize certain derivative instruments on the
balance sheet as assets or liabilities at their fair
value. Subsequent changes in fair value of the derivatives are
recorded currently in earnings unless certain hedge accounting criteria are
met. If the derivatives qualify for regulatory deferral subject to
the provisions of SFAS No. 71, "Accounting for the Effects of Certain Types
of Regulation," the derivatives are marked to fair value pursuant to SFAS
No. 133 and are offset with a corresponding regulatory asset or
liability.
Integrys
Energy
Group classifies mark-to-market gains and losses on derivative instruments
not
qualifying for hedge accounting or regulatory deferral as a component of
revenues.
The
following table
shows Integrys Energy Group's assets and liabilities from risk management
activities as of June 30, 2007, and December 31, 2006:
|
|
Assets
|
|
|
Liabilities
|
|
(Millions)
|
|
June 30,
2007
|
|
|
December 31,
2006
|
|
|
June 30,
2007
|
|
|
December 31,
2006
|
|
Utility
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
contracts
|
|
$ |
6.2
|
|
|
$ |
5.9
|
|
|
$ |
45.9
|
|
|
$ |
12.1
|
|
Financial
transmission rights
|
|
|
26.0
|
|
|
|
14.3
|
|
|
|
8.6
|
|
|
|
2.0
|
|
Cash
flow hedges –
commoditycontracts
|
|
|
-
|
|
|
|
-
|
|
|
|
0.5
|
|
|
|
-
|
|
Nonregulated
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
and foreign currency
contracts
|
|
|
1,244.4
|
|
|
|
1,237.7
|
|
|
|
1,178.2
|
|
|
|
1,195.4
|
|
Fair
value hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
contracts
|
|
|
5.8
|
|
|
|
11.0
|
|
|
|
0.2
|
|
|
|
0.3
|
|
Interest
rate swaps
|
|
|
-
|
|
|
|
-
|
|
|
|
2.0
|
|
|
|
-
|
|
Cash
flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
contracts
|
|
|
35.6
|
|
|
|
107.9
|
|
|
|
30.1
|
|
|
|
53.3
|
|
Interest
rate swaps
|
|
|
-
|
|
|
|
-
|
|
|
|
2.2
|
|
|
|
3.3
|
|
Total
|
|
$ |
1,318.0
|
|
|
$ |
1,376.8
|
|
|
$ |
1,267.7
|
|
|
$ |
1,266.4
|
|
Balance
Sheet Presentation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
898.5
|
|
|
$ |
1,068.6
|
|
|
$ |
899.8
|
|
|
$ |
1,001.7
|
|
Long-term
|
|
|
419.5
|
|
|
|
308.2
|
|
|
|
367.9
|
|
|
|
264.7
|
|
Total
|
|
$ |
1,318.0
|
|
|
$ |
1,376.8
|
|
|
$ |
1,267.7
|
|
|
$ |
1,266.4
|
|
Assets
and
liabilities from risk management activities are classified as current or
long-term based upon the maturities of the underlying contracts.
Utility
Segments
The
derivatives
listed in the above table as "Commodity contracts" include a limited number
of
electric and natural gas purchase contracts as well as financial derivative
contracts (NYMEX futures and options) used by both the electric and natural
gas
utility segments to mitigate the market price volatility of natural
gas. The electric utility segment also uses financial instruments to
manage transmission congestion costs, which are shown in the above table
as
"Financial transmission rights."
Derivative
instruments at the utilities are entered into in accordance with the terms
of
the risk management policies approved by Integrys Energy Group's Board of
Directors and, if applicable, by the respective regulatory
bodies. Changes in the fair value of non-hedge derivative instruments
are recognized as regulatory assets or liabilities as our regulators have
allowed deferral of the mark-to-market effects of derivative instruments
at the
utilities. Thus, management believes any gains or losses resulting
from the eventual settlement of these derivative instruments will be collected
from or refunded to customers.
Additionally,
PGL
uses derivatives to hedge changes in the price of natural gas used to support
operations. These instruments are designated as cash flow hedges,
which allow for the effective portion of the unrealized change in value during
the life of the hedge to be recorded in comprehensive income, net of
taxes. Commodity contracts that are designated as cash flow hedges
extend through September 2008. Cash flow hedge ineffectiveness
recorded in operating and maintenance expense on the Condensed Consolidated
Statements of Income related to commodity contracts was insignificant for
the
three and six months ended June 30, 2007. When testing for
effectiveness, no portion of the derivative instruments was
excluded. Amounts recorded in other comprehensive income related to
these cash flow hedges will be recognized in earnings as the hedged transactions
occur or if it becomes probable that the hedged transaction will not
occur. The amount to be recognized in earnings over the next 12
months as the hedged transactions occur is insignificant.
Nonregulated
Segments
The
derivatives in
the nonregulated segments not designated as hedges under generally accepted
accounting principles are primarily commodity contracts used to manage price
risk associated with natural gas and electric energy purchase and sale
activities, and foreign currency contracts used to manage foreign currency
exposure related to Integrys Energy Services' Canadian operations. In
addition, Integrys Energy Services entered into interest rate swaps associated
with long-term storage contracts as well as a series of derivative contracts
(options) covering a specified number of barrels of oil in order to manage
exposure to the risk of an increase in oil prices that could result in a
phase-out of Section 29/45K federal tax credits from Integrys Energy
Services' investment in a synthetic fuel production facility for
2007. See Note 12, "Commitments and Contingencies," for
more information. Changes in the fair value of non-hedge derivatives
are recognized currently in earnings.
Our
nonregulated
segments also enter into commodity derivative contracts that are designated
as
either fair value or cash flow hedges. Fair value hedges are used to
mitigate the risk of changes in the price of natural gas held in
storage. The changes in the fair value of these hedges are recognized
currently in earnings, as are the changes in fair value of the hedged
items. Fair value hedge ineffectiveness recorded in nonregulated
revenue on the Condensed Consolidated Statements of Income was not significant
for the three months ended June 30, 2007, and 2006. Fair value
hedge ineffectiveness recorded in nonregulated revenue on the Condensed
Consolidated Statements of Income was not significant for the six months
ended
June 30, 2007, and was a pre-tax gain of $2.6 million for the six
months ended June 30, 2006. Changes in the difference between
the spot and forward prices of natural gas were excluded from the assessment
of
hedge effectiveness and reported directly in nonregulated
revenue. The amount excluded was a pre-tax gain of $2.1 million
during the three months ended June 30, 2007, and was not significant during
the three months ended June 30, 2006. The amount excluded was a
pre-tax gain of $3.1 million during the six months ended June 30,
2007, and was not significant during the six months ended June 30,
2006.
Commodity
contracts
that are designated as cash flow hedges extend through February 2011, and
are used to mitigate the risk of cash flow variability associated with the
future purchases and sales of natural gas, oil, and electricity. To
the extent they are effective, the changes in the values of these contracts
are
included in other comprehensive income, net of taxes. Cash flow hedge
ineffectiveness recorded in nonregulated revenue on the Condensed Consolidated
Statements of Income related to commodity contracts was not significant for
the
three months ended June 30, 2007, and was a pre-tax gain of
$2.8 million for the three months ended June 30, 2006. Cash
flow hedge ineffectiveness recorded in nonregulated revenue on the Condensed
Consolidated Statements of Income related to commodity contracts was a pre-tax
loss of $5.9 million for the six months ended June 30, 2007, and a
pre-tax gain of $4.1 million for the six months ended June 30,
2006. When testing for effectiveness, no portion of the derivative
instruments was excluded. Amounts recorded in other comprehensive
income related to these cash flow hedges will be recognized in earnings when
the
hedged transactions occur, which is typically as the related contracts are
settled, or if it is probable that the hedged transaction will not
occur. During the three and six months ended June 30, 2007, and
2006, the amounts reclassified from other comprehensive income into earnings
as
a result of the discontinuance of cash flow hedge accounting for certain
hedge
transactions were not significant. In the next 12 months,
subject to changes in market prices of natural gas and electricity, we expect
that a pre-tax gain of $14.8 million will be recognized in earnings as the
hedged transactions occur. We expect this amount to be substantially
offset by settlement of the related nonderivative contracts that are being
hedged.
As
a result of the merger with PEC, Integrys Energy Group assumed a fixed to
floating interest rate swap. This swap is designated as a fair value
hedge and is used to hedge the changes in fair value of $50.0 million of
PEC Series A 6.9% notes due January 15, 2011, from movements in interest
rates. The changes in the fair value of this hedge are recognized
currently in earnings, as are the changes in fair value of the hedged
notes. Fair value hedge ineffectiveness recorded in nonregulated
revenue on the Condensed Consolidated Statements of Income was not significant
for the three and six months ending June 30, 2007. When testing
for effectiveness, no portion of the derivative instruments was
excluded.
In
the second quarter of 2005, two interest rate swaps were designated as cash
flow
hedges to fix the interest rate on an unsecured term loan at Integrys Energy
Group. Since the designation of these contracts as cash flow hedges,
the changes in the fair value of the effective portion of these swaps are
included in other comprehensive income, net of taxes, while changes related
to
the ineffective portion are recorded in earnings. During the three
and six months ended June 30, 2007, and 2006, cash flow hedge
ineffectiveness recorded in earnings related to these swaps was not
significant. Amounts recorded in other comprehensive income related
to these swaps will be recognized as a component of interest expense when
the
interest expense on the related debt is recognized in earnings. The
amount to be reclassified as interest expense over the next 12 months is
insignificant. Integrys Energy Group did not exclude any component of
the derivative instruments' change in fair value from the assessment of hedge
effectiveness.
In
2006, Integrys Energy Group entered into two forward-starting interest rate
swaps with ten-year terms to hedge a portion of the interest rate risk
associated with the planned issuance of $200.0 million of fixed-rate,
long-term debt securities. Because both swaps qualified for cash flow
hedge treatment, changes in the fair value of the swaps were recorded in
other
comprehensive income, net of taxes. Both swaps were settled in 2006,
and in December 2006, Integrys Energy Group issued $300.0 million of
junior subordinated notes. Amounts remaining in accumulated other
comprehensive income for the forward-starting swaps are being reclassified
to
interest expense over a ten-year period beginning in December 2006 to
correspond with the first ten years of interest on the related
debt. The amount to be reclassified to interest expense over the next
12 months is not significant.
NOTE
4--DISCONTINUED OPERATIONS
PEP
In
February 2007, Integrys Energy Group announced its plans to divest of
PEP. SFAS No. 141 "Business Combinations," states that assets
acquired in a business combination that will be sold should be recognized
at
fair value less costs to sell in accordance with SFAS No. 144, "Accounting
for
the Impairment or Disposal of Long-Lived Assets." SFAS No. 144
requires that long-lived assets classified as held for sale be measured at
the
lower of their carrying amount or fair value, less costs to sell, and to
cease
depreciation, depletion, and amortization. At the date of the merger,
the assets and liabilities of PEP were classified as held for sale and results
of operations and related cash flows occurring subsequent to the merger were
reported as discontinued operations. Integrys Energy Group is working
with a financial advisor on this transaction and anticipates the divesture
to be
completed by December 31, 2007.
At
June 30, 2007, the assets and liabilities associated with PEP that will be
transferred in the sale have been classified as held for sale. No
adjustments to write down the PEP assets to fair value less costs to sell
were
required during the time period subsequent to the merger through June 30,
2007. The major classes of assets and liabilities held for sale at
June 30, 2007, for PEP are as follows:
(Millions)
|
|
2007
|
|
Accounts
receivable
|
|
$ |
41.3
|
|
Other
current
assets
|
|
|
3.5
|
|
Property,
plant, and equipment, net
|
|
|
783.6
|
|
Total
assets
held for sale
|
|
$ |
828.4
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
35.2
|
|
Other
current
liabilities
|
|
|
5.4
|
|
Asset
retirement obligations
|
|
|
5.7
|
|
Liabilities
held for sale
|
|
$ |
46.3
|
|
A
summary of the components of discontinued operations recorded in the Condensed
Consolidated Statements of Income related to PEP for the three months ended
June 30 was as follows:
(Millions)
|
|
2007
|
|
Nonregulated
revenue
|
|
$ |
52.6
|
|
Operating
and
maintenance expense
|
|
|
12.0
|
|
Taxes
other
than income
|
|
|
2.2
|
|
Income
before
taxes
|
|
|
38.4
|
|
Income
tax
provision
|
|
|
14.4
|
|
Discontinued
operations, net of tax
|
|
$ |
24.0
|
|
A
summary of the components of discontinued operations recorded in the Condensed
Consolidated Statements of Income related to PEP for the time period subsequent
to the merger through June 30, 2007, were as follows:
(Millions)
|
|
2007
|
|
Nonregulated
revenue
|
|
$ |
70.8
|
|
Operating
and
maintenance expense
|
|
|
16.0
|
|
Taxes
other
than income
|
|
|
3.7
|
|
Income
before
taxes
|
|
|
51.1
|
|
Income
tax
provision
|
|
|
18.9
|
|
Discontinued
operations, net of tax
|
|
$ |
32.2
|
|
It
has been Integrys Energy Group's policy to not allocate interest to discontinued
operations unless the asset group being sold has external debt
obligations. For the period ended June 30, 2007, PEP did not
have any external debt obligations.
WPS Niagara
Generation, LLC
In
January 2007, Integrys Energy Services completed the sale of
WPS Niagara Generation, LLC, which owned a 50-megawatt merchant generation
facility located near Niagara Falls, New York, for approximately
$31 million, subject to post closing adjustments. The pre-tax
gain recorded in 2007 was $24.6 million, $14.8 million after-tax, and
was included as a component of discontinued operations. This facility
was a merchant facility and sold power on a wholesale basis when market
conditions were economically favorable.
The
major classes
of assets held for sale at December 31, 2006, for Niagara were as
follows:
(Millions)
|
|
December 31,
2006
|
|
Inventories
|
|
$ |
0.4
|
|
Property,
plant, and equipment, net
|
|
|
4.6
|
|
Other
assets
|
|
|
1.1
|
|
Total
assets
held for sale
|
|
$ |
6.1
|
|
A
summary of the components of discontinued operations recorded in the Condensed
Consolidated Statements of Income related to Niagara for the three months
ended
June 30 were as follows:
(Millions)
|
|
2006
|
|
Nonregulated
revenue
|
|
$ |
3.7
|
|
Nonregulated
cost of fuel, natural gas, and purchased power
|
|
|
2.4
|
|
Operating
and
maintenance expense
|
|
|
2.1
|
|
Depreciation
and amortization expense
|
|
|
0.1
|
|
Taxes
other
than income
|
|
|
0.1
|
|
Other
income
|
|
|
0.2
|
|
Loss
before
taxes
|
|
|
(0.8 |
) |
Income
tax
benefit
|
|
|
(0.2 |
) |
Discontinued
operations, net of tax
|
|
$ |
(0.6 |
) |
A
summary of the components of discontinued operations recorded in the Condensed
Consolidated Statements of Income related to Niagara for the six months ended
June 30 were as follows:
(Millions)
|
|
2007
|
|
|
2006
|
|
Nonregulated
revenue
|
|
$ |
1.5
|
|
|
$ |
9.1
|
|
Nonregulated
cost of fuel, natural gas, and purchased power
|
|
|
1.0
|
|
|
|
6.1
|
|
Operating
and
maintenance expense
|
|
|
0.5
|
|
|
|
3.1
|
|
Gain
on
Niagara sale
|
|
|
24.6
|
|
|
|
-
|
|
Depreciation
and amortization expense
|
|
|
-
|
|
|
|
0.2
|
|
Taxes
other
than income
|
|
|
-
|
|
|
|
0.1
|
|
Other
income
|
|
|
-
|
|
|
|
0.2
|
|
Income
(loss)
before taxes
|
|
|
24.6
|
|
|
|
(0.2 |
) |
Income
tax
provision
|
|
|
9.8
|
|
|
|
-
|
|
Discontinued
operations, net of tax
|
|
$ |
14.8
|
|
|
$ |
(0.2 |
) |
Sunbury
Generation, LLC
In
July 2006, Integrys Energy Services completed the sale of Sunbury Generation,
LLC. Sunbury Generation's primary asset was the Sunbury generation
plant located in Pennsylvania. This facility sold power on a
wholesale basis when market conditions were economically favorable.
A
summary of the components of discontinued operations recorded in the Condensed
Consolidated Statements of Income for the three months ended June 30, 2006,
related to Sunbury were as follows:
(Millions)
|
|
2006
|
|
Nonregulated
revenue
|
|
$ |
22.5
|
|
Nonregulated
cost of fuel, natural gas, and purchased power
|
|
|
22.6
|
|
Operating
and
maintenance expense
|
|
|
8.8
|
|
Depreciation
and amortization expense
|
|
|
0.2
|
|
Loss
before
taxes
|
|
|
(9.1 |
) |
Income
tax
benefit
|
|
|
(3.5 |
) |
Discontinued
operations, net of tax
|
|
$ |
(5.6 |
) |
A
summary of the components of discontinued operations recorded in the Condensed
Consolidated Statements of Income for the six months ended June 30, 2006,
related to Sunbury were as follows:
(Millions)
|
|
2006
|
|
Nonregulated
revenue
|
|
$ |
59.4
|
|
Nonregulated
cost of fuel, natural gas, and purchased power
|
|
|
50.3
|
|
Operating
and
maintenance expense
|
|
|
15.6
|
|
Depreciation
and amortization expense
|
|
|
0.3
|
|
Loss
on sale
of emission allowances
|
|
|
0.4
|
|
Taxes
other
than income
|
|
|
0.1
|
|
Interest
income
|
|
|
0.1
|
|
Loss
before
taxes
|
|
|
(7.2 |
) |
Income
tax
benefit
|
|
|
(2.8 |
) |
Discontinued
operations, net of tax
|
|
$ |
(4.4 |
) |
NOTE
5--ACQUISITIONS AND SALES OF ASSETS
Merger
with
PEC
Effective
February
21, 2007, the merger with PEC was consummated. The merger was
accounted for under the purchase method of accounting, with Integrys Energy
Group treated as the acquirer. The purchase price was approximately
$1.6 billion (as shown in the table below). Pursuant to the merger,
shareholders of PEC received 0.825 shares of Integrys Energy Group (then
known
as WPS Resources) common stock, $1 par value, for each share of PEC common
stock, no par value, which they held immediately prior to the
merger. The results of operations attributable to PEC are included in
the Condensed Consolidated Financial Statements from February 22, 2007, through
June 30, 2007.
PEC
is a
diversified energy company consisting of three primary business
segments: natural gas distribution, oil and natural gas production,
and energy marketing. The regulated business of PEC (the natural gas
distribution business segment), stores, distributes, sells, and transports
natural gas to about one million customers in the city of Chicago and 54
communities in northeastern Illinois. The nonregulated energy
marketing business sells natural gas and power to more than
25,000 customers and provides a portfolio of products to manage the energy
needs of commercial, industrial, and residential customers. The oil
and natural gas production business segment of PEC acquires, develops, and
produces oil and natural gas reserves in selected onshore basins in the United
States through direct ownership in oil, natural gas, and mineral
leases. Integrys Energy Group announced its plan to divest of PEP in
February 2007. See Note 4 "Discontinued Operations," for
more information.
The
purchase price
was allocated based on the estimated fair market value of the assets acquired
and liabilities assumed. The excess cost of the acquisition over the
estimated fair value of the tangible net assets acquired was allocated to
identifiable intangible assets with the remainder then allocated to
goodwill. The fair values set forth below are preliminary and are
subject to adjustment as additional information is obtained. The
following table shows the preliminary allocation of the purchase price to
the
assets acquired and liabilities assumed at the date of the
acquisition.
(Millions)
|
|
|
|
Current
assets
|
|
$ |
953.2
|
|
Assets
held
for sale
|
|
|
763.9
|
|
Property
plant and equipment, net
|
|
|
1,739.5
|
|
Regulatory
assets
|
|
|
560.9
|
|
Goodwill
|
|
|
643.4
|
|
Other
long-term assets
|
|
|
179.2
|
|
Total
assets
|
|
|
4,840.1
|
|
|
|
|
|
|
Current
liabilities
|
|
|
1,222.5
|
|
Liabilities
held for sale
|
|
|
39.8
|
|
Long-term
debt
|
|
|
860.2
|
|
Regulatory
liabilities
|
|
|
13.4
|
|
Other
long-term liabilities
|
|
|
1,124.2
|
|
Total
liabilities
|
|
|
3,260.1
|
|
Net
assets
acquired/purchase price
|
|
$ |
1,580.0
|
|
In
connection with the PEC merger, Integrys Energy Services recorded a non-cash
gain related to the deemed settlement of existing natural gas and electricity
contracts between Integrys Energy Services and certain PEC
subsidiaries. Based on forward energy prices existing at the date of
the merger, the value of these contracts was favorable to Integrys Energy
Services. In accordance with EITF 04-1, "Accounting for Pre-Existing
Relationships between the Parties to a Business Combination," Integrys Energy
Services recognized a $4.0 million gain, representing the fair value of
these natural gas and electricity contracts at the merger date.
Acquired
intangible
assets are included in other long-term assets in the above table. See
Note 7, "Goodwill and Other Intangible Assets," for a
description of the acquired intangible assets.
Of
the $643.4 million of goodwill recorded in connection with the merger with
PEC, $624.4 million was related to the natural gas utility segment and the
remaining $19.0 million was related to Integrys Energy
Services. The $68.5 million decrease in goodwill, from
$711.9 million at March 31, 2007, to $643.4 million at June 30, 2007,
was driven by revisions to initial purchase price allocations recorded in
conjunction with the PEC merger. None of the goodwill is deductible
for tax purposes.
Specific
costs
associated with the termination of employees at PEC (the acquired company)
who
were or will be involuntarily terminated as a result of the merger have been
accounted for in accordance with Emerging Issues Task Force Issue No. 95-3
"Recognition of Liabilities in Connection with a Purchase Business
Combination." Included in the table above is an estimated
$5.1 million liability recorded in accordance with the Emerging Issues Task
Force Issue No. 95-3, related to employees at PEC (the acquired company)
who
were or will be involuntarily terminated. The following table
summarizes the activity related to the specific costs associated with the
termination of these employees for the three months ended June 30,
2007.
(Millions)
|
Three
Months Ended June 30,
2007 |
Accrued
employee severance costs at March 31, 2007
|
|
$ |
4.6
|
|
Add:
Severance expense recorded
|
|
|
-
|
|
Less:
Cash
payments during the quarter
|
|
|
0.1
|
|
Adjustments
to purchase price
|
|
|
0.5
|
|
Severance
cost reserve at June 30, 2007
|
|
$ |
5.0
|
|
In
order to achieve Integrys Energy Group's anticipated merger synergies, a
restructuring plan is being implemented, which includes a process to eliminate
duplicative jobs within Integrys Energy Group. Adjustments have been
made to the initial liability recognized to reflect Integrys Energy Group's
June 30, 2007 estimate of its obligation to severed
employees.
Also
in connection
with the restructuring plan being implemented, Integrys Energy Group has
incurred, and expects to continue to incur throughout 2007, restructuring
costs
associated with the termination of employees, relocation of employees, and
other
costs directly related to restructuring initiatives being
implemented. Liabilities required under SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities," will be recorded at the
communication date in accordance with this statement and charged to operating
and maintenance expense. For the three and six month periods ended
June 30, 2007, costs incurred under SFAS No. 146 were not
significant.
Purchase
of
Aquila's Michigan Natural Gas Distribution Operations
On
April 1, 2006, Integrys Energy Group, through its wholly owned subsidiary,
MGUC, completed the acquisition of natural gas distribution operations in
Michigan from Aquila. The Michigan natural gas assets provide natural
gas distribution service in 147 cities and communities primarily throughout
Otsego, Grand Haven, and Monroe counties. The assets operate under a
cost of service environment and are currently allowed an 11.4% return on
equity
on a 45% equity component of the regulatory capital structure.
Integrys
Energy
Group paid total consideration of $340.5 million for the Michigan natural
gas distribution operations, which included closing adjustments related
primarily to purchased working capital. The transaction was accounted
for under the purchase method of accounting.
Purchase
of
Aquila's Minnesota Natural Gas Distribution Operations
On
July 1, 2006, Integrys Energy Group, through its wholly owned subsidiary,
MERC, completed the acquisition of natural gas distribution operations in
Minnesota from Aquila. The Minnesota natural gas assets provide
natural gas distribution service in 165 cities and communities including
Eagan,
Rosemount, Rochester, Fairmount, Bemidji, and Cloquet, and Dakota
County. The assets operate under a cost of service environment and
are currently allowed an 11.71% return on equity on a 50% equity component
of
the regulatory capital structure.
Integrys
Energy
Group paid total consideration of $315.9 million for the Minnesota natural
gas distribution operations, which included closing adjustments related
primarily to purchased working capital. The transaction was accounted
for under the purchase method of accounting and no adjustments have been
made in
the second quarter of 2007.
Supplemental
Pro Forma information
The
following table
provides supplemental pro forma results of operations for Integrys Energy
Group
for the six months ended June 30, 2007, as if the acquisition of PEC had
been completed at January 1, 2007. The following table also
includes supplemental pro forma results of operations for Integrys Energy
Group
for the six and three months ended June 30, 2006, as if the acquisition of
PEC and the Michigan and Minnesota natural gas distribution operations from
Aquila had been completed at January 1, 2006. Pro forma
results are presented for informational purposes only, assume commercial
paper
was used to finance the Michigan and Minnesota transactions, and are not
necessarily indicative of the actual results that would have resulted had
the
acquisitions actually occurred on January 1, 2007, and
January 1, 2006.
|
|
Pro
Forma for the
Six
Months Ended
|
|
|
Pro
Forma for the
Three
Months Ended
|
|
|
|
June 30
|
|
|
June 30
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
Net
revenue
|
|
$ |
5,813.6
|
|
|
$ |
5,232.4
|
|
|
$ |
1,868.6
|
|
Income
from
continuing operations
|
|
|
107.7
|
|
|
|
115.7
|
|
|
|
20.2
|
|
Income
available for common shareholders
|
|
|
155.1
|
|
|
|
122.6
|
|
|
|
19.9
|
|
Basic
earnings per share – continuing operations
|
|
$ |
1.40
|
|
|
$ |
1.71
|
|
|
$ |
0.25
|
|
Basic
earnings per share
|
|
|
2.04
|
|
|
|
1.84
|
|
|
|
0.26
|
|
Diluted
earnings per share – continuing operations
|
|
|
1.38
|
|
|
|
1.70
|
|
|
|
0.25
|
|
Diluted
earnings per share
|
|
|
2.04
|
|
|
|
1.83
|
|
|
|
0.26
|
|
The
pro forma
income for the six months ended June 30, 2006, includes a pre-tax charge of
$15.6 million (approximately $9.4 million after-tax), related to PEC's
settlement with the Illinois Commerce Commission related to the natural gas
charge reconciliation proceedings for fiscal years 2001-2004.
NOTE
6--
NATURAL GAS IN STORAGE
PGL
and NSG price
natural gas storage injections at the fiscal year average of the costs of
natural gas supply purchased. Withdrawals from storage are priced on
the LIFO cost method. For interim periods, the difference between
current projected replacement cost and the LIFO cost for quantities of gas
temporarily withdrawn from storage is recorded as a temporary LIFO liquidation
credit. Due to seasonality requirements, PGL expects interim
reductions in LIFO layers to be replenished by year-end.
NOTE
7--GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
recorded
by Integrys Energy Group was $946.8 million at June 30, 2007, and
$303.9 million at December 31, 2006. At June 30, 2007,
$643.4 million of goodwill was related to the merger with PEC,
$144.3 million of goodwill was related to the acquisition of the natural
gas distribution operations in Minnesota, $122.7 million of goodwill was
related to the acquisition of the natural gas distribution operations in
Michigan, and $36.4 million related to WPSC's 2001 acquisition of Wisconsin
Fuel and Light. At December 31, 2006, $144.6 million of
goodwill was related to Minnesota, $122.9 million was related to Michigan,
and $36.4 million was related to Wisconsin Fuel and Light.
The
amount of
goodwill by reportable segment is as follows:
Segments
(in millions)
|
|
June 30,
2007
|
|
|
December 31,
2006
|
|
Natural
Gas
Utility
|
|
$ |
927.8
|
|
|
$ |
303.9
|
|
Integrys
Energy Services
|
|
|
19.0
|
|
|
|
-
|
|
Total
|
|
$ |
946.8
|
|
|
$ |
303.9
|
|
Identifiable
intangible assets other than goodwill are included as a component of other
assets within the Condensed Consolidated Balance Sheets. Information
in the tables below related to purchased identifiable intangible assets for
the
periods indicated.
(Millions)
|
|
June 30,
2007
|
|
|
December 31,
2006
|
|
Asset
Class
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Customer
related
|
|
$ |
32.6
|
|
|
$ |
(6.6 |
) |
|
$ |
26.0
|
|
|
$ |
12.2
|
|
|
$ |
(4.3 |
) |
|
$ |
7.9
|
|
Gas
and power contract assets
|
|
|
53.9
|
|
|
|
(19.0 |
) |
|
|
34.9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Gas
and power contract liabilities
|
|
|
(31.7 |
) |
|
|
3.9
|
|
|
|
(27.8 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Emission
allowances(1)
|
|
|
4.2
|
|
|
|
(0.1 |
) |
|
|
4.1
|
|
|
|
5.0
|
|
|
|
(0.8 |
) |
|
|
4.2
|
|
Other
|
|
|
3.2
|
|
|
|
(1.0 |
) |
|
|
2.2
|
|
|
|
3.9
|
|
|
|
(0.8 |
) |
|
|
3.1
|
|
Total
|
|
$ |
62.2
|
|
|
$ |
(22.8 |
) |
|
$ |
39.4
|
|
|
$ |
21.1
|
|
|
$ |
(5.9 |
) |
|
$ |
15.2
|
|
(1)Emission
allowances do not have a contractual term or expiration date.
Customer
related
intangible assets at June 30, 2007, are primarily related to
$20.0 million of customer relationships associated with PEC’s nonregulated
retail and electric operations and customer relationships associated with
MERC’s
non-utility home services business. The remaining weighted average
amortization period for customer related intangible assets is approximately
eight years.
In
connection with the merger with PEC, Integrys Energy Group recorded intangible
assets and intangible liabilities of $53.9 million and $31.7 million,
respectively, related to the fair value of certain natural gas and power
contracts that were not considered to be derivative instruments. Information
in
the table below relates to the short-term and long-term components of these
intangible assets and liabilities as of June 30, 2007.
(Millions)
|
|
Fair
Market
Value
|
|
Weighted
Average Amortization Period
|
Short-term
intangible asset customer contracts
|
|
$ |
23.9
|
|
|
Long-term
intangible asset customer contracts
|
|
|
11.0
|
|
|
Total
intangible asset customer contracts
|
|
$ |
34.9
|
|
1.4
years
|
|
|
|
|
|
|
Short-term
intangible liability customer contracts
|
|
$ |
12.9
|
|
|
Long-term
intangible liability customer contracts
|
|
|
14.9
|
|
|
Total
intangible liability customer contracts
|
|
$ |
27.8
|
|
1.5
years
|
Intangible
asset
amortization expense, in the aggregate, for the three months ended June 30,
2007, and 2006, was $1.4 million and $0.4 million,
respectively. Intangible asset amortization expense, in the
aggregate, for the six months ended June 30, 2007, and 2006, was
$2.4 million and $0.9 million, respectively. The increase
in amortization expense in 2007 primarily relates to customer relationships
associated with PEC’s nonregulated retail and electric operations and MERC’s
non-utility home services business.
Amortization
expense for the next five fiscal years is estimated as follows:
Estimated
Future Amortization Expense (millions)
|
|
|
|
For
six
months ending December 31, 2007
|
|
$ |
2.8
|
|
For
year
ending December 31, 2008
|
|
|
5.1
|
|
For
year
ending December 31, 2009
|
|
|
4.3
|
|
For
year
ending December 31, 2010
|
|
|
3.6
|
|
For
year
ending December 31, 2011
|
|
|
3.0
|
|
The
effect of
purchase accounting related to the natural gas and power contracts is recorded
as a component of nonregulated cost of sales and is not included in the table
above. In 2007 and 2008, estimated future expense related to these
contracts will increase nonregulated cost of fuel, natural gas, and purchased
power by $4.5 million and $9.5 million, respectively. In
2009, 2010, and 2011, the estimated effect of purchase accounting will decrease
nonregulated cost of fuel, natural gas, and purchased power by
$3.8 million, $2.6 million, and $1.9 million,
respectively. The effect of purchase accounting substantially offsets
the margin on contracts that were acquired at the merger date.
NOTE
8--SHORT-TERM DEBT AND LINES OF CREDIT
Integrys
Energy
Group manages its liquidity by maintaining adequate external financing
commitments. Integrys Energy Group and its wholly owned subsidiaries
had total borrowing capacity under its credit facilities of
$2,096.0 million and $1,396.0 million as of June 30, 2007, and
December 31, 2006, respectively, with total availability of
$1,119.5 million and $520.1 million remaining under these credit lines
as of June 30, 2007, and December 31, 2006, respectively.
The
information in
the table below relates to Integrys Energy Group's short-term debt and lines
of
credit.
(Millions)
|
Maturity
|
|
June 30,
2007
|
|
|
December 31,
2006
|
|
Credit
agreements and revolving notes
|
|
|
|
|
|
|
|
Revolving
credit facility (Integrys Energy Group)
|
6/02/10
|
|
$ |
500.0
|
|
|
$ |
500.0
|
|
Revolving
credit facility (Integrys Energy Group)
|
6/09/11
|
|
|
500.0
|
|
|
|
500.0
|
|
Bridge
credit facility (Integrys Energy Group)
|
9/05/07
|
|
|
121.0
|
|
|
|
121.0
|
|
Revolving
credit facility (WPSC)
|
6/02/10
|
|
|
115.0
|
|
|
|
115.0
|
|
Revolving
credit facility (PEC)
|
6/13/11
|
|
|
400.0
|
|
|
|
-
|
|
Revolving
credit facility (PGL)
|
7/12/10
|
|
|
250.0
|
|
|
|
-
|
|
Revolving
credit facility (Integrys Energy Services)
|
10/19/07
|
|
|
150.0
|
|
|
|
-
|
|
Revolving
short-term notes payable (WPSC)
|
11/13/07
|
|
|
10.0
|
|
|
|
-
|
|
Revolving
credit facility (Integrys Energy Services)
|
4/25/07
|
|
|
-
|
|
|
|
150.0
|
|
Revolving
short-term notes payable (WPSC)
|
5/13/07
|
|
|
-
|
|
|
|
10.0
|
|
Uncommitted
credit line (PEC)
|
9/04/07
|
|
|
25.0
|
|
|
|
-
|
|
Uncommitted
secured cross-exchange agreement (Integrys
Energy Services)
|
4/15/08
|
|
|
25.0
|
|
|
|
-
|
|
Total
short-term credit capacity
|
|
|
|
2,096.0
|
|
|
|
1,396.0
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Letters
of credit issued inside credit facilities
|
|
|
|
96.3
|
|
|
|
152.4
|
|
Loans
outstanding under the credit agreements
|
|
|
|
171.5
|
|
|
|
160.0
|
|
Commercial
paper outstanding
|
|
|
|
694.1
|
|
|
|
562.8
|
|
Current
margin requirements
|
|
|
|
12.4
|
|
|
|
-
|
|
Accrued
interest or original discount on outstanding commercial
paper
|
|
|
|
2.2
|
|
|
|
0.7
|
|
Available
capacity under existing agreements
|
|
|
$ |
1,119.5
|
|
|
$ |
520.1
|
|
As
a result of the merger with PEC, Integrys Energy Group's credit facilities
increased $675 million. At June 30, 2007, PEC had a
five-year $400.0 million syndicated revolving credit agreement that
provides backup for its commercial paper borrowing program, which is used
to
meet short-term cash and liquidity needs. At June 30, 2007, PGL
had a five-year $250 million syndicated revolving credit agreement
that
provides
backup for
PGL's seasonal commercial paper borrowing program, which is used for short-term
cash and liquidity needs. In addition to the committed credit
facilities discussed above, PEC also has a $25.0 million uncommitted line
of credit and letter of credit agreement available for short-term cash needs
and
to backup letters of credit. See Note 5, "Acquisitions and Sales
of Assets," for more information on the merger with PEC.
As
of April 20, 2007, the $150.0 million revolving credit agreement due
to expire on April 25, 2007, was extended for six months and has a new
expiration date of October 19, 2007.
On
February 28, 2007, UPPCO filed an application with the FERC requesting
authorization to issue short-term indebtedness in an amount not to exceed
$20 million outstanding at any one time. In addition, UPPCO
requested that the FERC extend the authorization period to issue securities
three months beyond the standard two-year authorization period. On
April 27, 2007, the FERC approved both requests, providing UPPCO the
ability to issue short-term debt through July 30, 2009. UPPCO
had no short-term borrowings outstanding at June 30, 2007.
Integrys
Energy
Group's short-term borrowings consist of sales of commercial paper backed
by the
unsecured revolving credit agreements and short-term notes as shown in the
following table.
(Millions)
|
|
June 30,
2007
|
|
|
December 31,
2006
|
|
Commercial
paper outstanding
|
|
$ |
694.1
|
|
|
$ |
562.8
|
|
Average
discount rate on outstanding commercial paper
|
|
|
5.44 |
% |
|
|
5.43 |
% |
Short-term
notes payable outstanding
|
|
$ |
171.5
|
|
|
$ |
160.0
|
|
Average
interest rate on short-term notes payable
|
|
|
5.63 |
% |
|
|
5.56 |
% |
Available
(unused) lines of credit
|
|
$ |
1,119.5
|
|
|
$ |
520.1
|
|
The
commercial
paper at June 30, 2007, had varying maturity dates ranging from July 2,
2007, through August 15, 2007.
NOTE
9--LONG-TERM DEBT
(Millions)
|
|
June 30,
2007
|
|
|
December 31,
2006
|
|
First
mortgage
bonds – WPSC
|
|
|
|
|
|
|
|
Series
|
|
Year
Due
|
|
|
|
|
|
|
|
|
6.90 |
% |
2013
|
|
$ |
-
|
|
|
$ |
22.0
|
|
|
|
7.125 |
% |
2023
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
notes –
WPSC
|
|
|
|
|
|
|
|
|
|
Series
|
|
Year
Due
|
|
|
|
|
|
|
|
|
|
|
6.125 |
% |
2011
|
|
|
150.0
|
|
|
|
150.0
|
|
|
|
4.875 |
% |
2012
|
|
|
150.0
|
|
|
|
150.0
|
|
|
|
4.80 |
% |
2013
|
|
|
125.0
|
|
|
|
125.0
|
|
|
|
3.95 |
% |
2013
|
|
|
22.0
|
|
|
|
22.0
|
|
|
|
6.08 |
% |
2028
|
|
|
50.0
|
|
|
|
50.0
|
|
|
|
5.55 |
% |
2036
|
|
|
125.0
|
|
|
|
125.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
mortgage
bonds –
UPPCO
|
|
|
|
|
|
|
|
|
|
Series
|
|
Year
Due
|
|
|
|
|
|
|
|
|
|
|
9.32 |
% |
2021
|
|
|
13.5
|
|
|
|
13.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured
senior note – PEC
|
|
|
Series
|
|
Year
Due
|
|
|
|
|
|
|
|
|
|
A,
6.90
|
% |
2011
|
|
|
325.0
|
|
|
|
-
|
|
|
Fair value hedge adjustment
|
|
|
(2.0 |
) |
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
first
and refunding mortgage bonds – PGL
|
|
|
Series
|
|
Year
Due
|
|
|
|
|
|
|
|
|
|
HH,
4.75
|
% |
2030
|
|
|
|
|
|
|
|
|
|
adjustable after July 1, 2014
|
|
|
50.0
|
|
|
|
-
|
|
|
KK,
5.00
|
% |
2033
|
|
|
50.0
|
|
|
|
-
|
|
|
LL,
3.05
|
% |
2033
|
|
|
|
|
|
|
|
|
|
adjustable after February 1, 2008
|
|
|
50.0
|
|
|
|
-
|
|
|
MM-2,
4.00
|
% |
2010
|
|
|
50.0
|
|
|
|
-
|
|
|
NN-2,
4.625
|
% |
2013
|
|
|
75.0
|
|
|
|
-
|
|
|
QQ,
4.875
|
% |
2038
|
|
|
|
|
|
|
|
|
|
adjustable after November 1, 2018
|
|
|
75.0
|
|
|
|
-
|
|
|
RR,
4.30
|
% |
2035
|
|
|
|
|
|
|
|
|
|
adjustable after June 1 2016
|
|
|
50.0
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable
first and refunding mortgage bonds – PGL
|
|
|
Series
|
|
Year
Due
|
|
|
|
|
|
|
|
|
|
OO
|
|
2037
|
|
|
51.0
|
|
|
|
-
|
|
|
PP
|
|
2037
|
|
|
51.0
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
mortgage
bonds – NSG
|
|
|
Series
|
|
Year
Due
|
|
|
|
|
|
|
|
|
|
M,
5.00
|
% |
2028
|
|
|
29.1
|
|
|
|
-
|
|
|
N-2,
4.625
|
% |
2013
|
|
|
40.0
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured
senior notes – Integrys Energy Group
|
|
|
|
|
|
|
|
|
|
Series
|
|
Year
Due
|
|
|
|
|
|
|
|
|
|
|
7.00 |
% |
2009
|
|
|
150.0
|
|
|
|
150.0
|
|
|
|
5.375 |
% |
2012
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior
subordinated notes – Integrys Energy Group
|
|
|
|
|
|
|
|
|
|
Series
|
|
Year
Due
|
|
|
|
|
|
|
|
|
|
|
6.11 |
% |
2066
|
|
|
300.0
|
|
|
|
300.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured
term
loan due 2010 – Integrys Energy Group
|
|
|
65.6
|
|
|
|
65.6
|
|
Term
loans –
nonrecourse, collateralized by nonregulated assets
|
|
|
12.2
|
|
|
|
13.7
|
|
Other
term
loan
|
|
|
27.0
|
|
|
|
27.0
|
|
Senior
secured
note
|
|
|
1.9
|
|
|
|
2.0
|
|
Total
|
|
|
2,186.4
|
|
|
|
1,315.9
|
|
Unamortized
discount and premium on bonds and debt
|
|
|
11.2
|
|
|
|
(2.2 |
) |
Total
debt
|
|
|
2,197.6
|
|
|
|
1,313.7
|
|
Less
current
portion
|
|
|
(54.9 |
) |
|
|
(26.5 |
) |
Total
long-term debt
|
|
$ |
2,142.7
|
|
|
$ |
1,287.2
|
|
In
January 2007, WPSC used the proceeds from the $22.0 million of 3.95% senior
notes issued in December 2006 to the Village of Weston, Wisconsin, to repay
the outstanding principal balance of the 6.90% first mortgage bonds in the
above
table.
The
$50.0 million 3.05% Series LL bonds at PGL which will mature February 1,
2033, were originally issued in a term mode and for a five-year
period. These bonds are subject to a mandatory tender for purchase
for remarketing on February 1, 2008. These bonds are presented on
Integrys Energy Group's Condensed Consolidated Balance Sheets at June 30,
2007, as current portion of long-term debt.
PGL
has outstanding
$51.0 million of Adjustable Rate, Series OO bonds, due October 1, 2037, and
$51.0 million of Adjustable Rate, Series PP bonds, due October 1, 2037,
which are currently in a 35-day Auction Rate Mode (the interest rate is reset
every 35 days through an auction process). The weighted-average
interest rate for the period beginning February 22, 2007, and ending
June 30, 2007, was 3.66% and 3.72% for Series OO and PP,
respectively.
Debt
Covenants
PGL
and NSG utilize
mortgage bonds to secure tax exempt interest rates. The Illinois
Finance Authority has issued tax exempt bonds for the benefit of PGL and
NSG,
and the City of Chicago has issued tax exempt bonds for the benefit of
PGL. Each issuance is secured by an equal principal amount of PGL's
or NSG's first mortgage bonds.
An
indenture of mortgage, dated January 2, 1926, as supplemented, securing the
First and Refunding Mortgage Bonds issued by PGL, constitutes a direct,
first-mortgage lien on substantially all property owned by PGL. An
indenture of mortgage, dated April 1, 1955, as supplemented, securing the
first
mortgage bonds issued by NSG, constitutes a direct, first-mortgage lien on
substantially all property owned by NSG.
On
March 6, 2007, Integrys Energy Group announced that it had entered into a
first supplemental indenture with PEC and The Bank of New York Trust Company,
N.A. The terms of the supplemental indenture provide that Integrys Energy
Group
will fully and unconditionally guarantee, on a senior unsecured basis, PEC's
obligations under its $325.0 million, 6.90% notes due January 15,
2011. See Note 13, "Guarantees," for more
information related to this supplemental indenture.
NOTE
10--ASSET RETIREMENT OBLIGATIONS
Under
the
provisions of SFAS No. 143, "Accounting for Asset Retirement Obligations,"
and Interpretation No. 47, "Accounting for Conditional Asset Retirement
Obligations," Integrys Energy Group has recorded liabilities for legal
obligations associated with the retirement of tangible long-lived
assets. The utility segments identified asset retirement obligations
primarily related to asbestos abatement at certain generation facilities,
office
buildings, and service centers; disposal of PCB-contaminated transformers;
and
closure of fly-ash landfills at certain generation facilities. As a
result of the merger with PEC, the natural gas utility segment recorded
additional asset retirement obligations related to distribution pipe removal
(including asbestos and PCBs in pipes), and asbestos in property. In
accordance with SFAS No. 71, the utilities establish regulatory assets and
liabilities to record the differences between ongoing expense recognition
under
SFAS No. 143 and Interpretation No. 47, and the rate-making practices
for retirement costs authorized by the applicable regulators. Asset
retirement obligations identified at Integrys Energy Services relate to asbestos
abatement at certain generation facilities.
The
following table
shows changes to the asset retirement obligations of Integrys Energy Group
through June 30, 2007.
(Millions)
|
|
Utilities
|
|
|
Integrys
Energy Services
|
|
|
Total
|
|
Asset
retirement obligations at December 31, 2006
|
|
$ |
9.4
|
|
|
$ |
0.7
|
|
|
$ |
10.1
|
|
Asset
retirement obligations from merger with PEC
|
|
|
123.8
|
|
|
|
-
|
|
|
|
123.8
|
|
Accretion
|
|
|
2.8
|
|
|
|
-
|
|
|
|
2.8
|
|
Asset
retirement obligations at June 30, 2007
|
|
$ |
136.0
|
|
|
$ |
0.7
|
|
|
$ |
136.7
|
|
NOTE
11--INCOME TAXES
The
effective tax
rates for the three and six months ended June 30, 2007, were 27.9% and
25.5%, respectively, while the effective tax rates for the three and six
months
ended June 30, 2006, were 31.2% and 31.4%,
respectively. Integrys Energy Group's provision (benefit) for income
taxes was calculated in accordance with APB Opinion No. 28, "Interim
Financial Reporting." Accordingly, our interim effective tax rate
reflects our projected annual effective tax rate. The effective tax
rate differs from the federal tax rate of 35%, primarily due to the effects
of
Section 29/45K federal tax credits related to Integrys Energy Services'
ownership in a synthetic fuel production facility and state income
taxes.
Effective
January
1, 2007, Integrys Energy Group adopted the provisions of FASB Interpretation
No.
48 (FIN 48), “Accounting for Uncertainty in Income Taxes – an Interpretation of
FAS 109.” The cumulative effect of adopting FIN 48 was a decrease of
$0.1 million to the January 1, 2007, retained earnings
balance.
At
January 1, 2007, Integrys Energy Group's liability for uncertain tax positions
was $3.7 million. As a result of the February 21, 2007, merger
with PEC, Integrys Energy Group's liabilities for uncertain tax positions
increased an additional $10.4 million. During the second quarter
of 2007, Integrys Energy Group recognized no additional liabilities for
uncertain tax positions. For the six months ended June 30,
2007, Integrys Energy recognized an additional $0.4 million liability for
uncertain tax positions.
At
January 1, 2007, unrecognized tax benefits of $3.2 million could affect
Integrys Energy Group's effective tax rate if recognized in subsequent
periods.
With
the adoption
of FIN 48, Integrys Energy Group now records penalties and accrued interest
related to income taxes as a component of income tax expense. Prior
to January 1, 2007, Integrys Energy Group had recorded interest and penalties
as
components of income before taxes. At January 1, 2007, Integrys
Energy Group's liability for the possible payment of interest and penalties
related to uncertain tax positions was $0.2 million. As a result
of the February 21, 2007, acquisition of PEC, Integrys Energy Group assumed
additional liabilities for possible payment of interest of $3.3 million and
penalties of $0.6 million. During the second quarter and six
months ended June 30, 2007, Integrys Energy Group recognized a reduction
in
liabilities for the possible payment of interest and penalties of
$0.5 million and $0.3 million, respectively.
Subsidiaries
of
Integrys Energy Group file income tax returns in the United States federal
jurisdiction, in various United States state and local jurisdictions, and
in Canada. With a few exceptions (major exceptions listed below),
Integrys Energy Group is no longer subject to United States federal, state
and
local, or foreign income tax examinations by tax authorities for years prior
to
2002.
·
|
Wisconsin
Department of Revenue – WPSC has agreed to statute extensions for tax
years covering 1996-2001.
|
·
|
Illinois
Department of Revenue – PEC and combined subsidiaries have agreed to
statute extensions for tax years covering
2001-2003.
|
·
|
United
States
Internal Revenue Service (IRS) – PEC and consolidated subsidiaries have
agreed to statute extensions for tax years covering
1999-2003.
|
Integrys
Energy Group has closed examinations for the following major jurisdictions
for
the following tax years:
·
|
United
States
IRS – Integrys Energy Group (formerly WPS Resources
Corporation) and consolidated subsidiaries have an agreed to audit
report
and closing statement for an IRS examination of the 2002 and 2003
tax
years.
|
·
|
United
States
IRS – Integrys Energy Group (formerly WPS Resources Corporation) and
consolidated subsidiaries have a partially agreed to audit report
and
closing statement for an IRS examination of the 2004 and 2005 tax
years,
but one open issue from the agents report has been protested by
the
taxpayer and has been sent to IRS appeals for potential
resolution. Through subsequent discussion with IRS Appeals,
this matter has been tentatively settled in our
favor. Subsequent to June 30, 2007, we received draft
settlement documentation and adjusted tax calculations for 2004-2005
tax
years. We expect that once that settlement is concluded, we
will record approximately $1 million of additional tax
benefit.
|
·
|
United
States
IRS – PEC and consolidated subsidiaries have a partially agreed to audit
report and closing statement for an IRS examination of the 1999-2003
tax
years, but one open issue from the agents report has been protested
by the
taxpayer and has been sent to IRS appeals for potential
resolution.
|
Integrys
Energy
Group has open examinations for the following major jurisdictions for the
following tax years:
·
|
United
States
IRS – PEC and consolidated subsidiaries have an open examination for
the
2004-2005 tax years.
|
·
|
Illinois
Department of Revenue – PEC and combined subsidiaries have an open
examination for the 2001-2003 tax
years.
|
·
|
Wisconsin
Department of Revenue – WPSC has an open examination for the 1996-2001 tax
years.
|
We
do not expect a significant impact to the FIN 48 liability from the expiration
of the statute of limitations in any jurisdiction to occur within the next
12
months. We do expect to settle several of the examinations listed
above within the next 12 months and estimate a reduction in the FIN 48 tax
liability of $5.4 million.
NOTE
12--COMMITMENTS AND CONTINGENCIES
Commodity
and Purchase Order Commitments
Integrys
Energy
Group routinely enters into long-term purchase and sale commitments that
have
various quantity requirements and durations. The commitments
described below are as of June 30, 2007.
Integrys
Energy
Services has unconditional purchase obligations related to energy supply
contracts that total
$4.1 billion. Substantially all of these
obligations end by 2009, with obligations totaling $416.6 million extending
from 2010 through 2018. The majority of the energy supply contracts
are to meet Integrys Energy Service's obligations to deliver energy to its
customers.
WPSC
has
obligations related to coal, purchased power, and natural
gas. Obligations related to coal supply and transportation extend
through 2016 and total $394.3 million. Through 2016, WPSC has obligations
totaling $1.2 billion for either capacity or energy related to purchased
power. Also, there are natural gas supply and transportation
contracts with total estimated demand payments of $90.7 million through
2017. WPSC has obligations for other commodities totaling
$6.1 million, which extend through 2012. WPSC expects to recover
these costs in future customer rates. Additionally, WPSC has
contracts to sell electricity and natural gas to customers.
PGL
has obligations
at June 30, 2007, related to natural gas supply and transportation
contracts with total estimated demand payments of $294.1 million through
2017. PGL expects to recover these costs in future customer
rates. Additionally, PGL has contracts to sell natural gas to
customers.
NSG
has obligations
at June 30, 2007, related to natural gas supply and transportation
contracts with total estimated demand payments of $65.0 million through
2017. NSG expects to recover these costs in future customer
rates. Additionally, NSG has contracts to sell natural gas to
customers.
UPPCO
has
commitments for the purchase of commodities, mainly capacity or energy related
to purchased power, which total $29.3 million and extend through
2010. UPPCO expects to recover these costs in future customer
rates.
MGUC
has
obligations related to natural gas contracts totaling $131.9 million,
substantially all of which end by 2009. MGUC expects to recover these
costs in future customer rates. Additionally, MGUC has contracts to
sell natural gas to customers.
MERC
has
obligations related to natural gas contracts totaling $198.8 million, some
of which extend through 2014. MERC expects to recover these costs in
future customer rates. Additionally, MERC has contracts to sell
natural gas to customers.
Integrys
Energy
Group also has commitments in the form of purchase orders issued to various
vendors. At June 30, 2007, these purchase orders totaled
$425.9 million. The majority of these commitments relate to
large construction projects, including construction of the 500-megawatt Weston
4
coal-fired generation facility near Wausau, Wisconsin.
Environmental
EPA
Section
114 Request
In
December 2000, WPSC received from the EPA a request for information under
Section 114 of the Clean Air Act. The EPA sought information and
documents relating to work performed on the coal-fired boilers located at
WPSC's
Pulliam and Weston electric generation stations. WPSC filed a
response with the EPA in early 2001.
On
May 22, 2002, WPSC received a follow-up request from the EPA seeking additional
information regarding specific boiler-related work performed on Pulliam Units
3,
5, and 7, as well as information on WPSC's life extension program for Pulliam
Units 3-8 and Weston Units 1 and 2. WPSC made an initial
response to the EPA's follow-up information request on June 12, 2002, and
filed a final response on June 27, 2002.
In
2000 and 2002, Wisconsin Power and Light Company received a similar series
of
EPA information requests relating to work performed on certain coal-fired
boilers and related equipment at the Columbia generation station (a facility
located in Portage, Wisconsin, jointly owned by Wisconsin Power and Light,
Madison Gas and Electric Company, and WPSC). Wisconsin Power and
Light is the operator of the plant and is responsible for responding to
governmental inquiries relating to the operation of the
facility. Wisconsin Power and Light filed its most recent response
for the Columbia facility on July 12, 2002.
Depending
upon the
results of the EPA's review of the information provided by WPSC and Wisconsin
Power and Light, the EPA may issue "notices of violation" or "findings of
violation" asserting that a violation of the Clean Air Act occurred and/or
seek
additional information from WPSC and/or third parties who have information
relating to the boilers or close out the investigation. To date, the
EPA has not responded to the filings made by WPSC and Wisconsin Power and
Light. In addition, under the federal Clean Air Act, citizen groups
may pursue a claim. WPSC has no notice of such a claim based on the
information submitted to the EPA.
In
response to the EPA's Clean Air Act enforcement initiative, several utilities
have elected to settle with the EPA, while others are in
litigation. In general, those utilities that have settled have
entered into consent decrees which require the companies to pay fines and
penalties, undertake supplemental environmental projects, and either upgrade
or
replace pollution controls at existing generating units or shut down existing
units and replace these units with new electric generating
facilities. Several of the settlements involve multiple
facilities. The fines and penalties (including the capital costs of
supplemental
environmental
projects) associated with these settlements range between $7.0 million and
$30.0 million. The regulatory interpretations upon which the
lawsuits or settlements are based may change based on future court decisions
that may be rendered in the pending litigations.
If
the federal government decided to bring a claim against WPSC and if it were
determined by a court that historic projects at WPSC's Pulliam and
Weston plants required either a state or federal Clean Air Act permit, WPSC
may, under the applicable statutes, be required to:
·
|
shut
down any
unit found to be operating in non-compliance,
|
·
|
install
additional pollution control equipment,
|
·
|
pay
a fine,
and/or
|
·
|
pay
a fine
and conduct a supplemental environmental project in order to resolve
any
such claim.
|
Pulliam
Air
Permit Violation Lawsuit
On
October 19, 2005, the Sierra Club Inc. and Clean Wisconsin Inc. filed a
complaint against WPSC in the Eastern District of Wisconsin pursuant to the
citizen suit provisions of the Clean Air Act. The complaint alleged
various violations at the 373-megawatt J.P. Pulliam Plant located in Green
Bay,
Wisconsin, including opacity exceedances, opacity monitoring violations,
and
other violations of limitations in the facility's Clean Air Act operating
permit. On January 10, 2007, the court entered a Consent Decree based
on the stipulated agreement of the parties, settling the
litigation. Under the terms of the Consent Decree, WPSC is to pay the
plaintiff’s attorneys fees, fund $500,000 of environmental projects through the
Wisconsin Energy Conservation Corporation, and perform upgrades on the
precipitators and other environmental control equipment at
Pulliam. For one year after the improvements are completed
(January 1 through December 1, 2008), WPSC's performance will be
evaluated and, depending upon that performance, WPSC may be required to make
additional contributions to energy efficiency projects. WPSC will
implement environmental control upgrades on Pulliam Units 5, 6, 7, and 8
and
continue to operate those units. In lieu of upgrading the
precipitators for Pulliam Units 3 and 4 (both are 30-megawatt units), WPSC
elected to shut down these units by December 31, 2007. Since
WPSC expects the 500-megawatt Weston 4 plant to achieve commercial operation
by
June 2008, it anticipates no electric supply shortfalls as there will be
power
available to replace these small units.
Weston 4
Air Permit
On
November 15, 2004, the Sierra Club filed a petition with the WDNR under
Section 285.61 of the Wisconsin Statutes, seeking a contested case hearing
on the construction permit issued for the Weston 4 generation station,
which is a necessary predicate to plant construction under the pertinent
air
emission regulations (hereinafter referred to as the “Weston 4 air
permit”). In February 2006, the Administrative Law Judge affirmed the
Weston 4 air permit with changes to the emission limits for sulfur dioxide
and nitrogen oxide from the coal-fired boiler and particulate from the cooling
tower. The changes, which were implemented by the WDNR in a revised
permit issued on March 28, 2007, set limits that are more stringent than
those
originally set by the WDNR (hereinafter referred to as the “March 28, 2007
permit language”).
The
Sierra Club and
WPSC filed petitions for judicial review of the Administrative Law Judge's
decision with the circuit court. On August 7, 2006, WPSC withdrew its
petition for judicial review and sought dismissal, without prejudice, of
the
Sierra Club's petition as premature. On October 12, 2006, the court
granted the motion to dismiss and the Sierra Club filed a petition for appeal
of
the circuit court's dismissal with the Wisconsin Court of
Appeals. The Court of Appeals affirmed the dismissal of the Sierra
Club’s petition for judicial review. On April 27, 2007, Sierra Club
filed a second petition requesting a contested case hearing regarding the
March
28, 2007 permit language. WDNR granted Sierra Club’s second petition
for a contested case hearing. A hearing date, to the extent
necessary, has not yet been set by the Administrative Law Judge. In
addition, on April 27, 2007, Sierra Club also filed a second petition with
the
Dane County Circuit Court for judicial review of the Weston 4 air permit,
including the March 28, 2007 permit language. The second judicial
review proceeding has been stayed pending the outcome of the second contested
case hearing.
These
activities
did not stay the construction of the Weston 4 facility or the Administrative
Law
Judge's decision on the Weston 4 air permit. WPSC believes that it
has substantial defenses to the Sierra Club's appeal of the circuit court's
decision and does not expect these actions to stop
construction. However, until the Sierra Club's challenge is finally
resolved, Integrys Energy Group will not be able to make a final determination
of the probable cost impact, if any, of compliance with the revised Weston
4 air
permit on its future operating or construction costs.
Weston Operating
Permits
On
April 18 and April 26, 2005, WPSC notified the WDNR that the existing
Weston facility was not in compliance with certain provisions of the Title
V air operating permit that was issued to the facility in October
2004. These provisions include: (1) the particulate emission limits
applicable to the coal handling equipment; (2) the carbon monoxide limit
for
Weston combustion turbines; and (3) the limitation on the sulfur content of
the fuel oil stored at the Weston facility. On July 25, 2005, a
Notice of Violation (“NOV”) was issued to WPSC by the WDNR alleging various
violations of the operating permit. In response to the NOV, a
compliance plan was submitted to the WDNR. Subsequently, stack
testing was performed, which indicated continuing exceedances of the particulate
limits from the coal handling equipment. On January 19, 2006,
WPSC received from the WDNR a Notice of Noncompliance seeking further
information by February 3, 2006, regarding the alleged noncompliance
event. On February 20, 2006, a NOV was issued regarding the fuel oil
issue, concerns over monitoring procedures, and the operation of baghouse
equipment. The WDNR referred the matter to the Wisconsin Attorney
General's Office for resolution on April 11, 2007. WPSC has
undertaken corrective actions and is seeking to revise the applicable permit
limits.
In
early November 2006, it came to the attention of WPSC that previous ambient
air
quality computer modeling done by the WDNR for the Weston facility (and other
nearby air sources) did not take into account the emissions from the existing
Weston 3 facility for purposes of evaluating air quality increment consumption
under the required Prevention of Significant Deterioration (“PSD”)
analysis. For the PSD analysis, a baseline of emissions was
established in each area of the country which meets National Ambient Air
Quality
Standards, with a corresponding allowable increment of additional emissions
for
each regulated pollutant which, if permitted, would still ensure that the
air
quality in the area will not be degraded below the National
Standard. Each new air permit issued by the WDNR then uses up part of
the available increment for specific pollutants, and once, and so long as
the
total increment for any pollutant is exhausted, the WDNR cannot issue air
permits for any additional sources of that pollutant.
WPSC
continues to
investigate the situation as it relates to the Weston facility in connection
with the future Weston operating permit and is continuing to work with the
WDNR. WPSC may be required to make changes to the Weston facility
operating permits to address any modeling issues that may arise. To
the extent necessary, WDNR would have the ability under the Title V program
to
incorporate any such changes in a compliance plan. Integrys Energy
Group currently is not able to make a final determination of the probable
timing
or cost impact of this issue, if any.
Mercury
and
Interstate Air Quality Rules
On
October 1, 2004, the mercury emission control rule became effective in Wisconsin
(Chapter NR 446). The rule requires WPSC to control annual system
mercury emissions in phases. The first phase will occur in 2008 and
2009. In this phase, the annual mercury emissions are capped at the
average annual system mercury emissions for the period 2002 through
2004. The next phase will run from 2010 through 2014 and requires a
40% reduction from average annual 2002 through 2004 mercury input
amounts. After 2015, a 75% reduction is required with a goal of an
80% reduction by 2018. The State of Wisconsin is currently proposing
revisions to the state’s air mercury rule in response to three separate but
related actions. They include promulgation of the federal Clean Air
Mercury Rule (“CAMR”) in May 2005, a directive from Wisconsin Governor Doyle in
August 2006 to further reduce mercury emissions, and a January 2007 Citizens
Petition requesting revision to Chapter NR 446. The draft rule
revisions contain provisions that may impact the cost of
compliance. However, following the public hearing and comment
process, those provisions may further change. Also, the State of
Wisconsin has filed suit against the federal government along with other
states
in opposition to the federal rule. WPSC estimates
capital
costs
of
approximately $18 million to achieve the proposed reductions in the State’s
revised draft rule. The capital costs are expected to be recovered in
future rate cases.
In
March 2005, the EPA finalized the mercury "maximum achievable control
technology" standards and an alternative mercury "cap and trade" program,
CAMR,
modeled on the Clear Skies legislation initiative. The EPA also
finalized the Clean Air Interstate Rule (formerly known as the Interstate
Air
Quality Rule), which will reduce sulfur dioxide and nitrogen oxide emissions
from utility boilers located in 29 states, including Wisconsin, Michigan,
Pennsylvania, and New York.
The
final mercury
rule establishes New Source Performance Standards (“NSPS") for new units based
upon the type of coal burned. Weston 4 will install and operate
mercury control technology, which will achieve a mercury emission rate that
meets the permit and NSPS for mercury.
The
final mercury
rule establishes a mercury cap and trade program, which requires a 21% reduction
in national mercury emissions in 2010 and a 70% reduction in national mercury
emissions beginning in 2018. Based on the final rule and current projections,
WPSC anticipates meeting the mercury rule cap and trade requirements and
does
not anticipate incurring additional costs beyond those to comply with the
current proposed revision to the Wisconsin rule.
Integrys
Energy
Services expects no significant capital costs for compliance with the 70%
reduction requirement.
The
final Clean Air
Interstate Rule requires reduction of sulfur dioxide and nitrogen oxide
emissions in two phases. The first phase requires about a 50%
reduction beginning in 2009 for nitrogen oxide and beginning in 2010 for
sulfur
dioxide. The second phase begins in 2015 for both pollutants and
requires about a 65% reduction in emissions. The rule allows the
State of Wisconsin to either require utilities located in the state to
participate in the EPA's interstate cap and trade program or meet the state's
emission budget for sulfur dioxide and nitrogen oxide through measures to
be
determined by the state. Wisconsin’s rule, which incorporates the cap
and trade approach, has completed the state legislative review and has been
forwarded to the EPA for final review.
Currently,
WPSC is
evaluating a number of options that include using the cap and trade program
and/or installing controls. For planning purposes, it is assumed that
additional sulfur dioxide and nitrogen oxide controls will be needed on existing
units or the existing units will need to be converted to natural gas by
2015. The installation of any controls and/or any conversion to
natural gas will need to be scheduled as part of WPSC's long-term maintenance
plan for its existing units. As such, controls or conversions may
need to take place before 2015. On a preliminary basis and assuming
controls or conversion are required, WPSC estimates capital costs of
$238.0 million in order to meet an assumed 2015 compliance
date. This estimate is based on costs of current control technology
and current information regarding the final EPA rule. The costs may
change based on the requirements of the final state rules.
Integrys
Energy
Services is evaluating the compliance options for the Clean Air Interstate
Rule. Additional nitrogen oxide controls on some of Integrys Energy
Services' facilities may be necessary, but we do not anticipate these costs
to be significant. Integrys Energy Services will evaluate a number of
options including using the cap and trade program, fuel switching, and/or
installing controls.
Clean
Air
Regulations
Most
of the
generation facilities owned by Integrys Energy Services are located in an
ozone
transport region. As a result, these generation facilities are
subject to additional restrictions on emissions of nitrogen oxide and sulfur
dioxide. In future years, Integrys Energy Services expects to purchase sulfur
dioxide and nitrogen oxide emission allowances at market rates, as needed,
to
meet its requirements for its generation facilities.
Manufactured
Gas Plant Remediation
Integrys
Energy
Group has numerous manufactured gas plant remediation sites in Wisconsin,
Illinois, and Michigan. All are former regulated utility sites and,
as such, are being remediated, with costs charged to existing ratepayers
at
WPSC, PGL, NSG, and MGUC.
WPSC
continues to
investigate the environmental cleanup of ten manufactured gas plant
sites. Cleanup of the land portion of the Oshkosh, Stevens Point,
Green Bay, Manitowoc, Menominee, and two Sheboygan sites in Wisconsin is
substantially complete. Groundwater treatment and/or monitoring at
these sites will continue into the future. Cleanup of the land
portion of three sites will be addressed in the future. River
sediment remains to be addressed at sites with sediment contamination, and
priorities will be determined in consultation with the EPA. The
additional work at the sites remains to be scheduled.
In
May 2006, WPSC transferred six sites with sediment contamination formally
under
WDNR jurisdiction to the EPA Superfund Alternative Sites Program. In
January 2007, a seventh site in Sheboygan was transferred to the EPA Superfund
Alternative Sites Program. Under the EPA's program, the remedy
decision will be based on risk-based criteria typically used at Superfund
sites. A schedule has been agreed to under which on-site
investigative work will commence in 2007. Three of WPSC’s
manufactured gas plant sites remain under state jurisdiction.
WPSC
estimated the
future undiscounted investigation and cleanup costs as of June 30, 2007, to
be approximately $68 million and has accrued this amount at June 30,
2007. WPSC may adjust these estimates in the future, contingent
upon remedial technology, regulatory requirements, remedy determinations,
and
the assessment of natural resource damages. WPSC expects to recover
actual cleanup costs, net of insurance recoveries, in future customer
rates. Under current PSCW policies, WPSC will not recover carrying
costs associated with the cleanup expenditures. WPSC has received
$15.6 million in insurance recoveries as of June 30, 2007, which were
recorded as a reduction in the regulatory asset.
MGUC,
which
acquired retail natural gas distribution operations in Michigan from Aquila
in
the second quarter of 2006, is responsible for the environmental impacts
at 11
manufactured gas plant sites. Removal of the most contaminated soil
has been completed at seven sites. Future investigations are needed
at many of the sites to evaluate on-site, off-site, and sediment
impacts.
MGUC
has estimated
future investigation and remediation costs of approximately $26 million as
of June 30, 2007. The MPSC has historically authorized recovery
of these costs. An environmental liability and related regulatory
asset were recorded at the date of acquisition to reflect the expected
investigation and clean-up costs relating to these sites and the expected
recovery of these costs in future rates. As these 11 sites are
integrated into the corporate gas plant site management program, cost estimates
may change. We will also evaluate the feasibility of
transferring the MGUC sites into the EPA Superfund Alternatives
Program.
MERC,
which
acquired retail natural gas distribution operations in Minnesota from Aquila
in
the third quarter of 2006, is not responsible for any manufactured gas plant
sites, and thus, no environmental investigations are needed.
PGL
is addressing
29 manufactured gas sites, including several sites described in more detail
below. Investigations have been completed at all or portions of 25
sites. Remediations have been completed at all or portions of nine of
these 25 sites. PGL has determined that remediations are not required
at three of these 25 sites.
NSG
is addressing
five manufactured gas sites, including one site described in more detail
below. Investigations have been completed at all or portions of four
sites. Remediations have not yet been completed at any of these four
sites. NSG has determined that remediation is not required at one of
these four sites.
The
EPA has
identified NSG as a potentially responsible party (“PRP”) under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as
amended (“CERCLA”), at the Waukegan Coke Plant Site located in Waukegan,
Illinois (“Waukegan Site”). The Waukegan Site is part of the Outboard
Marine Corporation (“OMC”) Superfund Site. The EPA also identified
OMC, General Motors Corporation and certain other parties as PRP’s at the
Waukegan Site. The EPA issued a record of decision (“ROD”) selecting
the remedial action for the Waukegan Site. The selected remedy
consists of on-site treatment of groundwater and off-site disposal of soil
containing polynuclear aromatic hydrocarbons and arsenic. NSG and the
other PRPs have executed a remedial action consent decree which has been
entered
by the federal district court. The consent decree requires NSG and
General Motors, jointly and severally, to perform the remedial action and
establish and maintain financial assurance of $27.0 million. The
soil component of the remedial action was completed in August
2005. The final design for the groundwater component of the remedial
action has been completed and construction of the groundwater treatment plan
has
commenced. The EPA has agreed to reduce the financial assurance
requirement to $21.0 million to reflect completion of the soil component of
the remedial action.
In
June and July 2007, PGL and NSG transferred 13 of their largest
manufactured gas plant sites (11 PGL sites and 2 NSG sites) which were
being addressed under Illinois Environmental Protection Agency (“IEPA”)
supervision to the EPA. The 11 PGL sites are now being addressed
under the EPA’s Superfund removal program (with the intent that they will
eventually be transferred to the EPA Superfund Alternative Sites Program)
and
the two NSG sites are now being addressed under the EPA Superfund Alternative
Sites Program. Under the EPA’s programs, the remedy decisions at
these sites will be based on risk-based criteria typically used at Superfund
sites. PGL and NSG are addressing the remaining sites under a program
supervised by the IEPA.
WPSC,
MGUC, PGL,
and NSG are coordinating the investigation and the cleanup of the Wisconsin,
Michigan, and Illinois manufactured gas plant sites under what is called
a
“multi-site” program. This program involves prioritizing the work to
be done at the sites, preparation and approval of documents common to all
of the
sites, and utilization of a consistent approach in selecting
remedies.
In
2004, the owners, River Village West LLC (“River Village West”) of a property in
the vicinity of the former Pitney Court Station filed suit against PGL in
the
United States District Court for the Northern District of Illinois under
the
Resource Conservation and Recovery Act (“RCRA”). The suit, River Village West
LLC et al v. The Peoples Gas Light and Coke Company, No. 04-C-3392 (N.D.
Ill. 2004), seeks an order directing PGL to remediate the site. In
December 2005, PGL and the plaintiffs settled and the litigation has been
dismissed with prejudice. Pursuant to the terms of the settlement agreement,
PGL
agreed to remediate the site and to investigate and, if necessary, remediate
sediments in the area of the Chicago River adjacent to the site.
With
respect to
portions of certain sites in the City of Chicago (“Chicago”), PGL has received
demands from site owners and others asserting standing regarding the
investigation or remediation of their parcels. Some of these demands seek
to
require PGL to perform extensive investigations or remediations. These demands
include notice letters sent to PGL by River Village West. These letters informed
PGL of River Village West's intent to file suit under RCRA seeking an order
directing PGL to remediate seven former manufactured gas plant sites located
on
or near the Chicago River. In April 2005, River Village West filed suit against
PGL in the United States District Court for the Northern District of Illinois
under RCRA. The suit, River Village West LLC et al v. The Peoples Gas Light
and Coke Company, No. 05-C-2103 (N.D. Ill. 2005) (“RVW II”), seeks an order
directing PGL to remediate three of the seven sites: the former South Station,
the former Throop Street Station and the former Hough Place Station. PGL
has
filed an answer denying liability.
In
August 2006, a member of River Village West individually filed suit against
PGL
in the United States District Court for the Northern District of Illinois
under
the RCRA. The suit, Thomas A. Snitzer v. The Peoples Gas Light and Coke
Company, No. 06-C-4465 (N.D. III. 2006) (“Snitzer I”), seeks an order
directing PGL to remediate the Willow Street Station former manufactured
gas
plant site which is located along the Chicago River. PGL has filed an
answer denying liability and the court has set a scheduling order. In
October 2006, the same individual filed another suit in the United States
District Court for the
Northern
District
of Illinois under the RCRA and under CERCLA. The suit, Thomas A.
Snitzer v. The Peoples Gas Light and Coke Company, No. 06-C-5901 (N.D. III.
2006) (“Snitzer II”), seeks an order directing PGL to remediate the following
four former manufactured gas plant sites, which are located on or near the
Chicago River: 22nd Street
Station,
Division Street Station, Hawthorne Station, and North Shore Avenue
Station. PGL has filed an answer to the RCRA count denying liability
and is moving to dismiss the CERCLA count. This individual has also
notified PGL of his intent to file suit under RCRA and CERCLA seeking an
order
directing PGL to remediate the following former manufactured gas plant sites:
Calumet Station and North Station.
In
February 2007, Snitzer I and Snitzer II were consolidated with the RVW II
case. In June 2007, PGL filed a motion to dismiss, or in the
alternative, stay the consolidated litigation on the basis of the transfer
of
the sites at issue in the litigation to the EPA-administered program referenced
above.
PGL
and NSG
estimated the future undiscounted investigation and cleanup costs for remaining
work to be done at all of the Illinois manufactured gas plant sites (i.e.,
those
being addressed by both the IEPA and the EPA) as of June 30, 2007, to be
approximately $454 million and $88 million,
respectively. Effective with the current quarter ended June 30, 2007,
these estimates take into account (1) the transfer of sites to the EPA, which
allows for estimates with greater certainty for sediment cleanup and remediation
of sites where access to the sites could not previously be obtained under
the
IEPA program, and (2) are based on assumptions and calculation methodology
consistent with that used by WPSC in determining its investigative and cleanup
costs for manufactured gas plant sites. PGL and NSG may adjust these
estimates in the future, contingent upon remedial technology, regulatory
requirements, remedy determinations and the assessment of natural resource
damages.
Both
PGL and NSG
intend to seek contribution from other entities for the costs incurred at
the
sites, but the full extent of such contributions cannot be determined at
this
time. PGL and NSG are recovering the costs of environmental
activities relating totheir former manufactured gas operations, including
carrying charges on the unrecovered balances, under rate mechanisms approved
by
the ICC, which authorize recovery of prudently incurred costs. Costs
incurred in each fiscal year are subject to a prudence review by the ICC
during
a reconciliation proceeding for such fiscal year. The related
regulatory assets recorded at PGL and NSG (stated in current year dollars),
representing unrecovered costs were $492.3 million and $88.2 million,
respectively. Costs are expensed in the statement of income in the
same period they are billed to customers and recognized as
revenues.
Management
believes
that any costs incurred by PGL or NSG for environmental activities relating
to
former manufactured gas operations that are not recoverable through
contributions from other entities or from insurance carriers have been prudently
incurred and are, therefore, recoverable through rates for utility service.
Accordingly, management believes that the costs incurred by PGL and NSG in
connection with former manufactured gas operations will not have a material
adverse effect on the financial position or results of operations of PGL
or NSG.
However, any changes in PGL's or NSG’s approved rate mechanisms for recovery of
these costs, or any adverse conclusions by the ICC with respect to the prudence
of costs actually incurred, could materially affect PGL’s or NSG’s recovery of
such costs through rates.
Flood
Damage
On
May 14, 2003, a fuse plug at the Silver Lake reservoir owned by UPPCO was
breached. This breach resulted in subsequent flooding downstream on
the Dead River, which is located in Michigan's Upper Peninsula near Marquette,
Michigan.
A
dam owned by Marquette Board of Light and Power, which is located downstream
from the Silver Lake reservoir near the mouth of the Dead River, also failed
during this event. In addition, high water conditions and siltation
resulted in damage at the Presque Isle Power Plant owned by Wisconsin Electric
Power Company. Presque Isle, which is located downstream from the Marquette
Board of Light and Power dam, was ultimately forced into a temporary
shutdown.
The
FERC's
Independent Board of Review issued its report in December 2003 and
concluded that the root cause of the incident was the failure of the design
of
the fuse plug to take into account the highly erodible nature of the fuse
plug's
foundation materials and spillway channel, resulting in the complete loss
of the
fuse plug, foundation, and spillway channel. This caused the release
of Silver Lake far beyond the intended design of the fuse plug. The
fuse plug for the Silver Lake reservoir was designed by an outside
engineering firm.
UPPCO
has worked
with federal and state agencies in their investigations. UPPCO is
still in the process of investigating the incident. Integrys Energy
Group maintains a comprehensive insurance program that includes UPPCO and
which
provides both property insurance for its facilities and liability insurance
for
liability to third parties. Integrys Energy Group is insured in
amounts that it believes are sufficient to cover its responsibilities in
connection with this event. Deductibles and self-insured retentions
on these policies are not material to Integrys Energy Group.
As
of May 13, 2005, several lawsuits were filed by the claimants and putative
defendants relating to this incident. The suits that have been filed
against UPPCO, Integrys Energy Group, and WPSC (collectively, “Integrys”)
include the following claimants: Wisconsin Electric Power Company;
Cleveland Cliffs, Inc.; Board of Light and Power of the City of Marquette;
the
City of Marquette; the County of Marquette; Dead River Campers, Inc.; Marquette
County Road Commission; SBC; ATC; and various land and home owners along
the
Silver Lake reservoir and Dead River system. UPPCO filed a
suit against the engineering company that designed the fuse plug (“MWH Americas,
Inc.”) and the contractor who built it (“Moyle Construction,
Inc.”). Integrys has reached confidential settlements with Wisconsin
Electric Power Company, Cleveland Cliffs, Inc., the County of Marquette,
Marquette County Road Commission, SBS, ATC, Board of Light and Power of the
City
of Marquette, City of Marquette, and various land and home owners along the
Silver Lake reservoir and Dead River systems resolving their respective
claims. The settlement payments have or will be reimbursed by
Integrys Energy Group’s insurer and, therefore, did not have a material impact
on the Condensed Consolidated Financial Statements. UPPCO has also
settled its claim against MWH Americas, Inc. and Moyle Construction,
Inc. Integrys Energy Group and UPPCO have a tentative settlement
agreement with the remaining party and are seeking final
resolution. A trial date in October 2007 has been set for the
remaining case.
In
November 2003, UPPCO received approval from the MPSC and the FERC for deferral
of costs that are not reimbursable through insurance or recoverable through
the
power supply cost recovery mechanism. Recovery of costs deferred will
be addressed in future rate proceedings.
UPPCO
has announced
its decision to restore Silver Lake as a reservoir for power generation pending
approval of a license amendment and an economically feasible design by the
FERC. The FERC has required that a board of consultants evaluate and
oversee the design approval process. UPPCO is developing a timeline
for the project, provided the FERC approves an economically feasible
design. Once work is done, Silver Lake is expected to take
approximately two years to refill, based upon natural
precipitation.
Former
Mineral Processing Site in Denver, Colorado
In
1994, NSG received a demand from the S.W. Shattuck Chemical Company, Inc.
(“Shattuck”), a responsible party under CERCLA, for reimbursement,
indemnification and contribution for the response costs incurred at Shattuck’s
Denver site. Shattuck is a wholly owned subsidiary of Salomon,
Inc. The demand alleges that NSG is a successor to the liability of a
former entity that was allegedly responsible during the period 1934 through
1941
for the disposal of mineral processing wastes containing radium and other
hazardous substances at the site. In 1992, the EPA issued the ROD for
the Denver site. The remedy selected in the ROD consisted of the
on-site stabilization, solidification and capping of soils containing
radioactive wastes. In 1997, the remedial action was
completed.
NSG
filed a
declaratory judgment action against Salomon in the United States District
Court
for the Northern District of Illinois. The suit asked the court to
declare that NSG is not liable for response costs at the Denver
site. Salomon filed a counterclaim for costs incurred by Salomon and
Shattuck with respect to
the
site. In 1997, the district court granted NSG's motion for summary
judgment, declaring that NSG is not liable for any response costs in connection
with the Denver site.
In
1998, the United States Court of Appeals, for the Seventh Circuit, reversed
the
district court’s decision and remanded the case for determination of what
liability, if any, the former entity has, and, therefore, NSG has, for
activities at the site.
In
1999, the EPA announced that it was reopening the ROD for the Denver
site. The EPA’s announcement followed a six-month
scientific/technical review by the agency of the remedy’s
effectiveness. In 2000, the EPA amended the ROD to require removal of
the radioactive wastes from the site to a licensed off-site disposal
facility.
In
December 2001, Shattuck entered into a proposed settlement agreement with
the United States and the State of Colorado regarding past and future response
costs at the site. In August 2002, the agreement was approved by the
United States District Court for the District of Colorado. Under the
terms of the agreement, Shattuck agreed to pay, in addition to amounts already
paid for response costs at the site, approximately $7 million in exchange
for a release from further obligations at the site. The release will
not apply in the event that new information shows that the remedy selected
in
the amended ROD is not protective of human health or the environment or if
it
becomes necessary to remediate contaminated groundwater beneath or emanating
from the site.
The
EPA’s website
indicates that the remediation of the site was completed in July 2006 and
that
all radioactive waste has been removed. The website further indicates
that the site has been deemed protective of human health and the
environment. According to a published news report, the EPA has stated
that the total cost of the remedy was $57 million.
NSG
does not
believe that it has liability for the response costs, but cannot determine
the
matter with certainty. At this time, NSG cannot reasonably estimate
what range of loss, if any, may occur. In the event that NSG incurs
liability, it would pursue reimbursement from insurance carriers and other
responsible parties, if any.
Other
Environmental Issues
Groundwater
testing
at a former ash disposal site of UPPCO indicated elevated levels of boron
and
lithium. Supplemental remedial investigations were performed, and a
revised remedial action plan was developed. The Michigan Department
of Environmental Quality approved the plan in January 2003. UPPCO
received an order from the MPSC permitting deferral and future recovery of
these
costs. A liability of $1.3 million and an associated regulatory
asset of $1.3 million were recorded at June 30, 2007, for
estimated future expenditures associated with remediation of the
site. In addition, UPPCO has an informal agreement, with the owner of
another landfill, under which UPPCO has agreed to pay 17% of the investigation
and remedial costs. It is estimated that the cost of addressing the
site over the next year will be $2.4 million. UPPCO has recorded
$0.4 million of this amount as its share of the liability as of
June 30, 2007.
There
is increasing
concern over the issue of climate change and the effect of emissions of
greenhouse gases. Integrys Energy Group is evaluating both the
technical and cost implications, which may result from a future greenhouse
gas
regulatory program. This evaluation indicates that it is probable
that any regulatory program that caps emissions or imposes a carbon tax will
increase costs for Integrys Energy Group and its customers. At this
time, there is no commercially available technology for removing carbon dioxide
from a pulverized coal-fired plant, but significant research is in
progress. Efforts are underway within the utility industry to develop
cleaner ways to burn coal. The use of alternate fuels is also being
explored by the industry, but there are many cost and availability
issues. Based on the complexity and uncertainty of the climate
issues, a risk exists that future carbon regulation will increase the cost
of
electricity produced at coal-fired generation units. However, we
believe the capital expenditures we are making at our generation units are
appropriate under any reasonable mandatory greenhouse gas
program. Integrys Energy Group will continue to monitor and manage
potential risks and opportunities associated with future greenhouse gas
regulatory actions.
Gas
Charge
Reconciliation Proceedings and Related Matters
Gas
Charge
Settlement
For
PGL and NSG,
the ICC conducts annual proceedings regarding the reconciliation of revenues
from the Gas Charge and related natural gas costs. The gas charge
represents the cost of natural gas and transportation and storage services
purchased ("Gas Charge"). In these proceedings, the accuracy of the
reconciliation of revenues and costs is reviewed and the prudence of natural
gas
costs recovered through the Gas Charge is examined by interested
parties. If the ICC were to find that the reconciliation was
inaccurate or any natural gas costs were imprudently incurred, the ICC would
order the utility to refund the affected amount to customers through subsequent
Gas Charge filings. The proceedings are initiated shortly after the
close of the fiscal year and historically take at least a year to 18 months
to
complete.
The
ICC issued
orders on March 28, 2006, approving a settlement that resolved all
proceedings regarding PGL and NSG for fiscal 2001-2004 costs. The
recommendations that proceedings for PGL’s and NSG’s fiscal 2000 be reopened
were made moot by approval of the settlement. The orders, which
became publicly available March 30, 2006, adopted a January 17, 2006,
Settlement Agreement and Release among and between PGL, NSG, the People of
the
State of Illinois through the Illinois Attorney General (“AG”), the City of
Chicago, and the Citizens Utility Board, as amended by an Amendment and Addendum
dated March 6, 2006 (“Agreement”).
In
its orders approving the Agreement, the ICC determined that $96.0 million
should be refunded to PGL customers and $4.0 million should be refunded to
NSG customers. In April 2006, the refunds were credited to customer
accounts.
Pursuant
to the
Agreement, PEC also paid $5.0 million jointly to Chicago and the AG in
2006. PEC also agreed to pay up to $5 million per year over the
next five years (the “Subsequent Payments”) toward the funding of conservation
and weatherization programs for low and moderate-income residential dwellings
(the “Conservation Programs”). The five Subsequent Payments of up to
$5 million each will be based upon Conservation Programs to be developed by
Chicago and/or the AG. PGL and NSG will not seek recovery in any
future rate or reconciliation cases of any amounts associated with the
Conservation Programs. In July 2007, PGL received an itemized
estimated cost and request for payment from Chicago in the amount of
$4.6 million to fund multiple programs for the remainder of 2007, covering
weatherization and residential energy assistance, weatherization fairs and
education campaigns, alternative technology, and energy
efficiency. Also in July 2007, NSG received an itemized cost and
request for payment from Chicago in the amount of $0.4 million to fund
Conservation Programs for the remainder of 2007. Integrys Energy
Group's management concluded that the estimated cost and request for payments
constitute sufficient evidence that Chicago has established or is taking
steps
to develop valid Conservation Programs as required under the Agreement and
that
it is probable that Chicago will request similar levels of annual funding
through 2011 (the City made no allowance for a partial year in its request
for
payment for 2007). A $25 million liability for the Subsequent
Payments was recorded as a pre-acquisition contingency within purchase
accounting. Of these amounts, $20.0 million was included in
other long-term liabilities and $5.0 million was included in other current
liabilities.
Under
the
Agreement, PGL and NSG each agreed to forgive all outstanding bad debt from
fiscal years 2000-2005 existing as of March 6, 2006, remove the bad debt
from customers’ records and to not use any forgiven indebtedness as a reason to
deny gas service.
The
Agreement
provides that PGL and NSG will cooperate with Chicago and the AG to identify
those customers who were not receiving natural gas as of the date of the
Agreement that are financial hardship cases. The hardship cases were
identified by the utilities, the AG and Chicago. Following
identification, PGL and NSG reconnected the hardship cases. PGL and
NSG forgave all outstanding debt for reconnected customers.
Pursuant
to the
Agreement, PGL and NSG agreed to implement recommendations proposed by the
ICC’s
staff and the interveners to conduct internal and external audits of their
natural gas procurement
practices. A
natural gas supply management audit performed by a consulting firm retained
by
the ICC is in progress. No findings or recommendations have yet been
communicated.
PGL
also agreed to
credit fiscal 2005 and fiscal 2006 revenues derived from the provision of
its
natural gas Hub (represented by its storage and pipeline supply assets) services
as an offset to utility customers’ natural gas charges and to account for such
revenues received from natural gas Hub services in the same manner in all
future
natural gas charges.
Amounts
refunded in
connection with the Gas Charge reconciliation cases for fiscal years 2001
through 2004 relate to specific issues that occurred during that period and
are
not believed to be indicative of future actions that may be taken by the
ICC
with respect to current outstanding and future Gas Charge reconciliation
cases.
The
fiscal 2005 Gas
Charge reconciliation cases were initiated in November 2005, and PGL and
NSG
filed direct testimony. The settlement of the prior fiscal years’ Gas
Charge reconciliation proceedings does not affect these cases, except for
PGL’s
agreement to credit fiscal 2005 Hub revenues as an offset to utility customers’
natural gas charges. The ICC staff and intervener direct testimony
was filed January 18, 2007. For PGL, the ICC staff witnesses
recommended a disallowance of approximately $22 million, of which
$10.7 million is the amount of Hub revenues that PGL previously testified
that it would refund to customers. An intervener witness (on behalf
of the Citizens Utility Board and Chicago) recommended a disallowance of
approximately $11 million for PGL. The majority of the proposed
disallowances, other than the Hub revenues, are for a one-time adjustment
by PGL
to transportation customers’ bank (storage) natural gas liability
balances. For NSG, the ICC staff witnesses recommended a disallowance
of approximately $1 million. An intervener witness (on behalf of
the Citizens Utility Board) recommended a disallowance of approximately
$1 million for NSG. The majority of the proposed disallowance is
for a one-time adjustment by NSG to transportation customers’ bank (storage) gas
liability balances. PGL and NSG filed their rebuttal testimony on
February 22, 2007, and the ICC staff and interveners filed their rebuttal
testimony on April 25, 2007. In their rebuttal testimony, the ICC
staff witnesses reduced their recommended disallowance to about
$20.5 million and $1 million for PGL and NSG,
respectively. Management cannot predict the outcome of these cases,
but PGL has recorded liabilities of $11.5 million at June 30, 2007
related to 2005 Hub revenues and $3.5 million related to the ICC staff’s
proposed disallowance associated with the Gas Purchase and Agency Agreement
that
was at issue in the 2001-2004 cases (and in effect for only one month after
2004), which PGL stated in its rebuttal testimony it is not
contesting. Both amounts are inclusive of accrued
interest. For NSG, management has recorded a $0.4 million
liability at June 30, 2007, primarily associated with this contingency,
which NSG stated in its rebuttal testimony it is not contesting, and which
is
inclusive of accrued interest.
The
record in these
cases was marked heard and taken on May 30, 2007, and briefing will conclude
in
August 2007, after which the Administrative Law Judges will prepare a proposed
order.
The
fiscal 2006 Gas
Charge reconciliation cases were initiated on November 21, 2006. PGL
and NSG filed their direct testimony on April 10, 2007. On May 16,
2007, the ICC initiated Gas Charge reconciliation cases for the period of
October 2006 through December 2006 to cover the gap created by PGL and NSG’s
move to a calendar year reconciliation period. PGL’s and NSG’s direct
testimony is due October 17, 2007. The ICC staff moved to consolidate
the new cases with the fiscal 2006 cases, and the Administrative Law Judge
granted the motion in July 2007. There is a status hearing in the
consolidated case in September 2007.
At
June 30, 2007, Integrys Energy Group anticipates that any adjustments to
the
liabilities recorded related to the fiscal 2005 Gas Charge reconciliation
cases
and any liabilities subsequently required to be recorded related to the 2006
Gas
Charge reconciliation cases prior to the time we finalize the purchase price
allocation will be treated as pre-acquisition contingencies and recorded
in
purchase accounting.
Class
Action
In
February 2004, a purported class action was filed in Cook County Circuit
Court
against PEC, PGL, and NSG by customers of PGL and NSG, alleging, among
other things, violation of the Illinois Consumer Fraud and Deceptive Business
Practices Act related to matters at issue in the utilities' fiscal year 2001
Gas
Charge reconciliation proceedings. The suit, Alport et al v. Peoples Energy
Corporation seeks unspecified compensatory and punitive
damages. PGL and NSG have been dismissed as defendants and the only
remaining counts of the suit allege violations of the Consumer Fraud and
Deceptive Business Practices Act and that PEC acted in concert with others
to
commit a tortious act. PEC denies the allegations and is vigorously
defending the suit.
Based
upon the
settlement and dismissal of PGL and NSG’s fiscal years 2001 through 2004
reconciliation cases by the ICC, the court, on September 25, 2006, granted
in part PEC's motion to dismiss the case by limiting the potential class
members
in the suit to those persons who were customers during the time that PEC’s joint
venture with Enron was in operation and did not receive part of the settlement
proceeds from the reconciliation cases. However, the court denied PEC’s motion
to dismiss the case to the extent that the complaint seeks punitive damages
(regardless of whether such customers received part of the settlement proceeds
from the reconciliation cases). The plaintiffs filed a third amended
complaint and a motion for class certification and on April 25, 2007 the
Court
denied, without prejudice, plaintiffs’ motion for class
certification. On June 29, 2007, PGL and NSG filed a motion to
dismiss the proceeding for failure to join a necessary
party. Plaintiffs filed an amended complaint on July 11,
2007. Subsequently, PGL's and NSG's motion to delay responding to the
amended complaint until the court rules on the motion to dismiss was
granted. Management cannot predict the outcome of this litigation and
has not recorded a liability associated with this contingency.
Corrosion
Control Inspection Proceeding
Illinois
and
federal law require natural gas utilities to conduct periodic corrosion control
inspections on natural gas pipelines. On April 19, 2006, the ICC
initiated a citation proceeding related to such inspections that were required
to be performed by PGL during 2003 and 2004, but which were not completed
in the
requisite timeframe. On November 3, 2006, PGL and all intervening
parties filed a stipulation to settle the ICC proceeding, and the ICC staff
separately filed in support of the stipulation. The ICC entered an
order approving the stipulation on December 20, 2006. Under the
stipulation, PGL agreed that it had not been in compliance with applicable
regulations, and further agreed to pay a penalty of $1 million, pay for a
consultant to conduct a comprehensive investigation of its compliance with
ICC
pipeline safety regulations, remain compliant with those regulations, not
seek
recovery in future rate cases of certain costs related to non-compliance,
and
hold meetings with the city of Chicago to exchange information. This
order resolves only the ICC proceeding and does not constitute a release
of any
other potential actions outside of the ICC proceeding. PGL recorded a
liability of $1 million associated with the settlement. On March
27, 2007, the $1 million payment was tendered to the State of
Illinois. With respect to the comprehensive investigation, the ICC
selected an auditor for this matter and the auditor, the ICC staff, and PGL
began the investigation process during the second quarter of 2007.
On
May 16, 2006, the AG served a subpoena requesting documents relating to PGL’s
corrosion inspections. PGL’s counsel has met with representatives of
the AG’s office and provided documents relating to the
subpoena. Management cannot predict the outcome of this investigation
and has not recorded a liability associated with this contingency.
On
July 10, 2006, the United States Attorney for the Northern District of Illinois
served a grand jury subpoena on PGL requesting documents relating to PGL’s
corrosion inspections. PGL’s counsel has met with the United States
Attorney’s office and provided documents relating to corrosion
inspections. Management cannot predict the outcome of this
investigation and has not recorded a liability associated with this
contingency.
Builders
Class Action
In
June 2005, a purported class action was filed against PEC and its utility
subsidiaries, including PGL and NSG, by Birchwood Builders, LLC in the Circuit
Court of Cook County, Illinois alleging that PGL and NSG were fraudulently
and
improperly charging fees to customers with respect to utility connections,
disconnections, reconnections, relocations, extensions of natural gas service
pipes and extensions of distribution natural gas mains and failing to return
related customer deposits. PGL and NSG filed two motions to dismiss
the lawsuit. On January 25, 2007, the judge entered an order
dismissing the complaint, but allowing the plaintiffs the option of filing
an
amended complaint (except as to the plaintiffs’ seeking of declaratory relief,
which was dismissed with prejudice). The judge also ruled that the
plaintiffs could file their claims directly with the ICC. On
June 28, 2007, plaintiffs filed an amended complaint with the Circuit
Court. A status meeting is set for August 16, 2007. PGL
and NSG intend to respond by filing a motion to dismiss. PEC and its
utility subsidiaries continue to believe they have meritorious defenses and
intend to vigorously defend against the class action
lawsuit. Management cannot predict the outcome of this litigation and
has not recorded a liability associated with this contingency.
Technology
License
PGL
and NSG have
purchased a license under the patent portfolio held by Ronald A. Katz Technology
Licensing, L.P. and licensed through its affiliate, A2D, L.P. This
non-exclusive license covers services offered by PGL and NSG in the energy
and
utility service fields of use including customer service delivery through
automated systems and live agents. Other terms of the license are
confidential and will not have a materially adverse impact on Integrys Energy
Group’s financial position or results of operations.
Property
Taxes
PGL
is currently
disputing property tax assessments in Harrison County, Texas in connection
with
natural gas PGL stores pursuant to storage service agreements
with Natural Gas Pipeline Company of America. This matter began in
2003 when the Harrison Central Appraisal District (“HCAD”) issued a Notice of
Appraised Value to PGL providing that property allegedly owned by PGL was
located in Harrison County and subject to property tax. The HCAD issued
similar notices for tax years 2004 through 2006. For each of these years,
PGL
filed an administrative protest to dispute the inclusion and/or valuation
of
property attributable to PGL. Following adverse decisions by the Appraisal
Review Board, PGL filed suit in state district court to review the decisions
of
the Appraisal Review Board for tax years 2003 through 2005. PGL paid
approximately $2 million in aggregate for tax years 2003 through 2007 under
protest to proceed with its judicial review of the Appraisal Review Board’s
orders. These amounts have been recorded as deferred charges on PGL’s balance
sheet pending resolution of the matter. On June 1, 2007, the trial court
entered a final judgment in favor of the HCAD and against PGL for tax years
2003
through 2005. PGL believes it has good grounds to appeal and intends to
appeal the trial court’s decision. Management cannot predict the
outcome of this litigation and has not recorded a liability associated with
this
loss contingency.
Spent
Nuclear Fuel Disposal
The
federal
government is responsible for the disposal or permanent storage of spent
nuclear
fuel. The DOE is currently preparing an application to license a
permanent spent nuclear fuel storage facility in the Yucca Mountain area of
Nevada. Spent nuclear fuel is currently being stored at the Kewaunee
Nuclear Power Plant formerly owned by WPSC.
The
United States
government through the DOE was under contract with WPSC for the pick up and
long-term storage of Kewaunee's spent nuclear fuel. Because the DOE
failed to begin scheduled pickup of the spent nuclear fuel, WPSC incurred
costs
for the storage of the spent nuclear fuel. WPSC is a participant in a suit
filed
against the federal government for breach of contract and failure to pick
up and
store the spent nuclear fuel. The case was filed on January 22, 2004,
in the United States Court of Federal Claims. The case has been
temporarily stayed until December 14, 2007.
In
July 2005, WPSC sold Kewaunee to a subsidiary of Dominion Resources,
Inc. Pursuant to the terms of the sale, Dominion has the right to
pursue the spent nuclear fuel claim, and WPSC will retain the contractual
right
to an equitable share of any future settlement or verdict. The total
amount of damages sought is unknown at this time.
Stray
Voltage Claims
The
PSCW has
established certain requirements regarding stray voltage for all utilities
subject to its jurisdiction. The PSCW has defined what constitutes
"stray voltage," established a level of concern at which some utility corrective
action is required, and set forth test protocols to be employed in evaluating
whether a stray voltage problem exists. However, in 2003, the Supreme
Court of Wisconsin ruled in Hoffmann v. WEPCO that a utility could be
found liable for damage from stray voltage even though the utility had complied
with the PSCW's requirements and no stray voltage problem existed as defined
by
the PSCW. Consequently, although WPSC believes it abides by the
applicable PSCW requirements, it is not immune from stray voltage
lawsuits.
From
time to time,
WPSC has been sued by dairy farmers who allege that they have suffered loss
of
milk production and other damages due to "stray voltage" from the operation
of
WPSC's electrical system. Past cases have been resolved without any
material adverse effect on the financial statements of WPSC. Two stray voltage
cases are now pending. The first case, Allen v. WPSC, resulted
in a June 2003 jury verdict in the plaintiff's favor. Both
parties appealed. In February 2005, the court of appeals affirmed the
damage verdict but remanded to the trial court for a determination of whether
a
post-verdict injunction was warranted. WPSC paid the damages
verdict. On August 31, 2006, the parties settled the injunction
issues. This settlement does not resolve the entire case, because the
plaintiff has been permitted to file an amended complaint seeking money damages
allegedly suffered since June 2003. Trial is scheduled for
October 30, 2007, in Green Bay, Wisconsin. The expert witnesses
retained by WPSC do not believe that there is any scientific evidence of
a
"stray voltage" problem caused by WPSC on the plaintiff's land after
June 2003. Accordingly, WPSC intends to contest the plaintiff's
claim for money damages. The second case, Wojciehowski Brothers
Farms v. WPSC, was brought in Wisconsin in Marinette County. The case is
currently in discovery, and WPSC is vigorously defending the case. No
trial date has been set. One other case has been recently
resolved. Schmoker v. WPSC was brought in Wisconsin state
court in Winnebago County and it has been settled well within WPSC's self
insured retention.
WPSC
has insurance
coverage for these pending claims, but the policies have customary self-insured
retentions per occurrence. Based upon the information known at this
time and the availability of insurance, WPSC believes that the total cost
to it
of resolving the pending actions will not be material.
Wausau,
Wisconsin, to Duluth, Minnesota, Transmission Line
Construction
of the
220-mile, 345-kilovolt Wausau, Wisconsin, to Duluth, Minnesota, transmission
line began in the first quarter of 2004 with the Minnesota portion completed
in
early 2005 and a portion in Wisconsin completed in late
2006. Construction in Wisconsin began on August 8, 2005.
ATC
has assumed
primary responsibility for the overall management of the project and will
own
and operate the completed line. WPSC received approval from the PSCW and
the
FERC and subsequently transferred ownership of the project to
ATC. WPSC will continue to manage obtaining the private property
rights, design, and construction of the Wisconsin portion of the
project.
The
Certificate of
Public Convenience and Necessity and other permits needed for construction
have
been received and are final. In addition, on August 5, 2005, the new
law allowing condemnation of county land for transmission lines approved
by the
PSCW became effective.
Integrys
Energy
Group committed to fund 50% of total project costs incurred up to
$198 million and will receive additional equity in ATC in exchange for the
project funding. Under its agreement, Integrys Energy Group invested
$24.9 million in ATC during the six months ended June 30, 2007,
bringing Integrys Energy Group's investment in ATC related to the project
to
$134.0 million since inception. Integrys Energy Group may
terminate funding if the project extends beyond January 1,
2010. On
December 19,
2003, WPSC and ATC received approval from the PSCW to continue the project
at a
revised cost estimate of $420.3 million to reflect additional costs for the
project resulting from time delays, added regulatory requirements, changes
and
additions to the project, and ATC overhead costs. Integrys Energy
Group has the right, but not the obligation, to provide additional funding
in
excess of $198 million for up to 50% of the revised cost
estimate. Integrys Energy Group's future funding of the line was
subject to being reduced by the amount funded by Allete, Inc. Allete
exercised its option to fund $60 million of capital calls for a portion of
the Wausau to Duluth transmission line and completed this funding in February
2007. During 2007 through the completion of the line in the
first quarter of 2008, Integrys Energy Group expects to fund up to
approximately $56 million in equity contributions to ATC for the Wausau to
Duluth transmission line.
Synthetic
Fuel Production Facility
Background
Integrys
Energy
Group significantly reduced its consolidated federal income tax liability
through tax credits available to it under Section 29/45K of the Internal
Revenue
Code for the production and sale of solid synthetic fuel produced from
coal. These tax credits are scheduled to expire at the end of 2007
and are provided as an incentive for taxpayers to produce fuel from alternate
sources and reduce domestic dependence on imported oil. This
incentive is not deemed necessary if the price of oil increases sufficiently
to
provide a natural market for the fuel. Therefore, the tax credits in
a given year are subject to phase-out if the annual average reference price
of
oil within that year exceeds a minimum threshold price set by the IRS and
are
eliminated entirely if the average annual reference price increases beyond
a
maximum threshold price set by the IRS. The reference price of a
barrel of oil is an estimate of the annual average wellhead price per barrel
for
domestic crude oil, which has in recent history been approximately $6 below
the
NYMEX price of a barrel of oil. The threshold price at which the
credit begins to phase-out was set in 1980 and is adjusted annually for
inflation. The IRS releases the final numbers for a given year in the
first part of the following year.
Information
Related to Section 29/45K Federal Tax Credits
In
order to mitigate exposure to the risk of an increase in oil prices that
could
reduce the amount of Section 29/45K federal tax credits that could be
recognized, Integrys Energy Services entered into derivative (option) contracts,
beginning in the first quarter of 2005, covering a specified number of barrels
of oil. If no phase-out were to occur in 2007, Integrys Energy
Services would expect to recognize approximately $39 million of Section
29/45K federal tax credits, both from its ownership interest in a synthetic
fuel
production facility as well as from additional tons of synthetic fuel production
elected as a result of the actions of one of its synthetic fuel partners,
who
chose not to receive production in 2007. Based upon actual
year-to-date and forward oil prices at June 30, 2007, we are anticipating
partial phase-outs of the 2007 Section 29/45K federal tax
credits. However, we cannot predict with certainty the future price
of a barrel of oil and, therefore, have no way of knowing what portion of
our
2007 tax credits will ultimately be phased out. Integrys Energy
Services estimates that 2007 Section 29/45K federal tax credits will begin
phasing out if the annual average NYMEX price of a barrel of oil reaches
approximately $62, with a total phase-out if the annual average NYMEX price
of a
barrel of oil reaches approximately $77. At June 30, 2007, based
upon already settled and forward NYMEX oil prices as of June 30, 2007, we
anticipate that approximately 31% of the 2007 tax credits that otherwise
would
be available from the production and sale of synthetic fuel would be
phased-out.
At
June 30, 2007, Integrys Energy Services had derivative (option) contracts
that mitigated approximately 75% of its volumetric exposure to Section 29/45K
phase-outs in 2007. The derivative contracts involve purchased and
written options that provide for net cash settlement at expiration based
on the
annual average NYMEX trading price of oil in relation to the strike price
of
each option. The derivative contracts have not been designated as
hedging instruments and, as a result, changes in the fair value of the options
are recorded currently as a component of nonregulated revenue. This
results in mark-to-market gains or losses being recognized in earnings in
different periods than the tax credits. For the year ending
December 31, 2007, including the projected tax credit phase-out of 31%, we
expect to recognize the benefit of Section 29/45K federal tax credits totaling
approximately $27 million from our ownership
interest
in a
synthetic fuel production facility. However, the actual amount of tax
credits recognized in 2007 could differ substantially from our June 30,
2007 estimate, based upon actual average annual oil prices and production
levels
for the remainder of the year. Since we began the hedging program in
2005, gains on oil option contracts utilized to economically hedge the 2007
tax
credits added an additional $5.1 million to pre-tax income. This
$5.1 million net gain will reverse by December 31, 2007, assuming no
phase-out. In addition, based upon option contracts in place at
June 30, 2007, Integrys Energy Services anticipates it would recognize
approximately $16 million of realized pre-tax losses in 2007 assuming no
phase-out, which is the cost associated with mitigating the risk of phase-out
of
approximately 75% of the 2007 Section 29/45K tax credits.
In
addition to exposure from federal tax credits, Integrys Energy Services has
also
historically received royalties tied to the amount of synthetic fuel produced,
as well as variable payments from a counterparty related to Integrys Energy
Services' 2002 sale of 30% of its interest in ECO Coal Pelletization
#12. While variable payments were received by Integrys Energy
Services quarterly, royalties are a function of annual synthetic fuel production
and are generally not received until later in the year. Because one
of Integrys Energy Services' partners in the synthetic fuel facility elected
not
to take any production in 2007, Integrys Energy Services does not anticipate
receiving any royalty income in 2007, and did not receive any royalty income
in
2006. Integrys Energy Services realized pre-tax income related to
variable payments from one of its partners in the synthetic fuel facility
of
$3.2 million through the first nine months of 2006, but did not realize any
income from variable payments in the fourth quarter of 2006 and does not
expect
to realize any income from variable payments in 2007, primarily because Integrys
Energy Services took this counterparty's production in the fourth quarter
of
2006 and the first half of 2007, and anticipates taking all of this
counterparty's production for the remainder of 2007.
Impact
of
Synthetic Fuel Activities on Results of Operations
The
following table
shows the impact that Integrys Energy Services' investment in the synthetic
fuel
production facility and procurement of additional tons, including derivative
(option) contract activity, had on the Condensed Consolidated Statements
of
Income for the quarter and year-to-date ended June 30,
respectively.
Amounts
are pre-tax, except tax credits (millions)
|
|
Income
(loss) Quarter
|
|
|
Income
(loss) Year-to-date
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Provision
for
income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Section
29/45K federal tax credits recognized
|
|
$ |
(12.6 |
) |
|
$ |
3.1
|
|
|
$ |
8.0
|
|
|
$ |
7.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonregulated
revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark-to-market
gains on 2006 oil options
|
|
|
-
|
|
|
|
11.7
|
|
|
|
-
|
|
|
|
17.7
|
|
Net
realized gains on 2006 oil options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2.0
|
|
Mark-to-market
gains on 2007 oil options
|
|
|
0.2
|
|
|
|
2.6
|
|
|
|
1.2
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
losses – synthetic fuel facility
|
|
|
(5.0 |
) |
|
|
(8.2 |
) |
|
|
(9.6 |
) |
|
|
(12.9 |
) |
Variable
payments received
|
|
|
-
|
|
|
|
1.0
|
|
|
|
0.1
|
|
|
|
1.9
|
|
Royalty
income recognized
|
|
|
(0.1 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Deferred
gain recognized
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
1.1
|
|
|
|
1.1
|
|
Interest
received on fixed note receivable
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
(0.1 |
) |
|
|
1.2
|
|
|
|
-
|
|
|
|
2.4
|
|
NOTE
13--GUARANTEES
As
part of normal business, Integrys Energy Group and its subsidiaries enter
into
various guarantees providing financial or performance assurance to third
parties
on behalf of certain subsidiaries. These guarantees are entered into
primarily to support or enhance the creditworthiness otherwise attributed
to
a
subsidiary
on a
stand-alone basis, thereby facilitating the extension of sufficient credit
to
accomplish the subsidiaries' intended commercial purposes.
Most
of the
guarantees issued by Integrys Energy Group include inter-company guarantees
between parents and their subsidiaries, which are eliminated in consolidation,
and guarantees of the subsidiaries' own performance. As such, these
guarantees are excluded from the recognition and measurement requirements
of
FASB Interpretation No. 45, "Guarantors' Accounting and Disclosure Requirements
for Guarantees, including Indirect Guarantees of Indebtedness of
Others."
Corporate
guarantees issued in the future under the Board of Directors authorized limits
may or may not be reflected on Integrys Energy Group's Condensed Consolidated
Balance Sheet, depending on the nature of the guarantee.
At
June 30, 2007, and December 31, 2006, outstanding guarantees totaled
$2,696.3 million, and $1,659.0 million, respectively, as
follows:
Integrys
Energy Group's
Outstanding
Guarantees
(Millions)
|
|
June 30,
2007
|
|
|
December 31,
2006
|
|
Guarantees
of
subsidiary debt and revolving line of credit
|
|
$ |
903.3
|
|
|
$ |
178.3
|
|
Guarantees
supporting commodity transactions of subsidiaries
|
|
|
1,687.9
|
|
|
|
1,314.0
|
|
Standby
letters of credit
|
|
|
92.5
|
|
|
|
155.3
|
|
Surety
bonds
|
|
|
1.6
|
|
|
|
1.2
|
|
Other
guarantees
|
|
|
11.0
|
|
|
|
10.2
|
|
Total
guarantees
|
|
$ |
2,696.3
|
|
|
$ |
1,659.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrys
Energy Group's
Outstanding
Guarantees
(Millions)
Commitments
Expiring
|
|
Total
Amounts
Committed
at
June 30,
2007
|
|
|
Less
Than
1
Year
|
|
|
1
to
3
Years
|
|
|
4
to
5
Years
|
|
|
Over
5
Years
|
|
Guarantees
of
subsidiary debt
|
|
$ |
903.3
|
|
|
$ |
-
|
|
|
$ |
150.0
|
|
|
$ |
-
|
|
|
$ |
753.3
|
|
Guarantees
supporting commodity transactions of subsidiaries
|
|
|
1,687.9
|
|
|
|
1,529.5
|
|
|
|
76.7
|
|
|
|
10.6
|
|
|
|
71.1
|
|
Standby
letters of credit
|
|
|
92.5
|
|
|
|
90.9
|
|
|
|
1.6
|
|
|
|
-
|
|
|
|
-
|
|
Surety
bonds
|
|
|
1.6
|
|
|
|
1.6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
guarantees
|
|
|
11.0
|
|
|
|
-
|
|
|
|
8.7
|
|
|
|
2.3
|
|
|
|
-
|
|
Total
guarantees
|
|
$ |
2,696.3
|
|
|
$ |
1,622.0
|
|
|
$ |
237.0
|
|
|
$ |
12.9
|
|
|
$ |
824.4
|
|
At
June 30, 2007, Integrys Energy Group had outstanding $903.3 million in
corporate guarantees supporting indebtedness. Of that total,
$400.0 million relates to the PEC revolving line of credit discussed in the
next paragraph and $325.0 million relates to the Supplemental Indenture
discussed below. In addition, $150.0 million supports an
Integrys Energy Services credit agreement entered into in April 2006, which
extends through October 2007, to finance its margin requirements related
to
natural gas and electric contracts traded on the NYMEX and the ICE, as well
as
the cost of natural gas in storage and for general corporate purposes.
Borrowings under this agreement are guaranteed by Integrys Energy Group and
are
subject to the aggregate $1.9 billion guarantee limit authorized for Integrys
Energy Services by Integrys Energy Group's Board of Directors (discussed
below). At June 30, 2007, $150.0 million has been borrowed
by Integrys Energy Services, leaving no availability left on the existing
credit
agreement. The remaining $28.3 million of guarantees support
outstanding debt at Integrys Energy Services' subsidiaries, of which
$1.1 million is subject to Integrys Energy Group's $1.9 billion limit
and the remaining $27.2 million received separate authorization from
Integrys Energy Group's Board of Directors.
The
underlying debt
related to these guarantees is reflected on Integrys Energy Group's Condensed
Consolidated Balance Sheet.
On
March 6, 2007, Integrys Energy Group announced that it had entered into a
first supplemental indenture with PEC and The Bank of New York Trust Company,
N.A. The terms of the Supplemental Indenture provide that Integrys
Energy Group will fully and unconditionally guarantee, on a senior unsecured
basis, PEC’s obligations under its $325 million, 6.90% Notes due January
15, 2011.
On
May 18, 2007, Integrys Energy Group announced that it had entered into an
agreement to fully and unconditionally guarantee PEC’s $400 million
revolving line of credit.
Integrys
Energy
Group's Board of Directors has authorized management to issue corporate
guarantees in the aggregate amount of up to $1.9 billion to support the business
operations of Integrys Energy Services. Integrys Energy Group
primarily issues the guarantees to counterparties in the wholesale electric
and
natural gas marketplace to provide them assurance that Integrys Energy Services
will perform on its obligations and permit Integrys Energy Services to operate
within these markets. At June 30, 2007, Integrys Energy Group
provided parental guarantees subject to this limit in the amount of
$1,555.2 million, reflected in the above table for Integrys Energy
Services' indemnification obligations for business operations, in addition
to
$8.1 million of guarantees that received specific authorization from
Integrys Energy Group's Board of Directors and are not included in the $1.9
billion general authorized amount. Of the parental guarantees
provided by Integrys Energy Group, the current amount at
June 30, 2007, which Integrys Energy Group would be obligated to
support, is approximately $605 million.
Another
$3.2 million of corporate guarantees support energy and transmission supply
at UPPCO and are not reflected on Integrys Energy Group's Condensed Consolidated
Balance Sheets. In February 2005, Integrys Energy Group's Board of
Directors authorized management to issue corporate guarantees in the aggregate
amount of up to $15.0 million to support the business operations of
UPPCO.
Corporate
guarantees in the amount of $75.0 million and $125.0 million have been
authorized by Integrys Energy Group's Board of Directors to support MGUC
and
MERC, respectively. MGUC and MERC had $50.9 million and
$60.5 million, respectively, of outstanding guarantees related to natural
gas supply at June 30, 2007.
Corporate
guarantees in the amount of $125.0 million have been authorized by Integrys
Energy Group’s Board of Directors to support PEC. PEC had
$10.0 million of outstanding guarantees at June 30, 2007.
At
Integrys Energy Group's request, financial institutions have issued
$92.5 million in standby letters of credit for the benefit of third parties
that have extended credit to certain subsidiaries. Of this amount,
$92.2 million has been issued to support Integrys Energy Services'
operations. Included in the $92.2 million is $2.5 million
that has specific authorization from Integrys Energy Group's Board of Directors
and is not included in the $1.9 billion guarantee limit. The
remaining $89.7 million counts against the $1.9 billion guarantee limit
authorized for Integrys Energy Services. If a subsidiary does not pay
amounts when due under a covered contract, the counterparty may present its
claim for payment to the financial institution, which will request payment
from
Integrys Energy Group. Any amounts owed by our subsidiaries are reflected
in
Integrys Energy Group's Condensed Consolidated Balance Sheet.
At
June 30, 2007, Integrys Energy Group furnished $1.6 million of surety
bonds for various reasons including worker compensation coverage and obtaining
various licenses, permits, and rights of way. Included in the
$1.6 million is $0.9 million of surety bonds at Integrys Energy
Services that is subject to the $1.9 billion guarantee
limit. Liabilities incurred as a result of activities covered by
surety bonds are included in the Integrys Energy Group's Condensed Consolidated
Balance Sheet.
A
guarantee was issued by WPSC to indemnify a third party for exposures related
to
the construction of utility assets. This amount is not reflected on
WPSC's Consolidated Balance Sheet, as this agreement was entered into prior
to
the effective date of FASB Interpretation No. 45. The maximum
exposure
related
to this
guarantee was $3.9 million at June 30, 2007 and $4.9 million at
December 31, 2006 and is included in the above table.
In
conjunction with the sale of Kewaunee, WPSC and Wisconsin Power and Light
Company agreed to indemnify Dominion for 70% of any and all reasonable costs
asserted or initiated against, suffered, or otherwise existing, incurred
or
accrued, resulting from or arising from the resolution of any design bases
documentation issues that are incurred prior to completion of Kewaunee's
scheduled maintenance period for 2009 up to a maximum exposure of
$15 million for WPSC and Wisconsin Power and Light Company
combined. WPSC believes that it will expend its share of costs
related to this indemnification and, as a result, recorded the fair value
of the
liability, or $8.9 million, at the time of the sale of
Kewaunee. As of June 30, 2007, WPSC has paid a total of
$4.1 million to Dominion related to this guarantee, reducing the liability
to $4.8 million. The liability recorded for this guarantee was
$5.3 million at December 31, 2006.
Typically,
under
agreements related to the sales of assets or subsidiaries, Integrys Energy
Group
or its subsidiaries agree to indemnify the buyers for losses resulting from
potential breaches of Integrys Energy Group’s or its subsidiaries'
representations and warranties thereunder. Integrys Energy Group
believes the likelihood of having to make any material cash payments under
these
sales agreements as a result of breaches of representations and warranties
is
remote, and as such, has not recorded any liability related to these
agreements.
Integrys
Energy
Services also provided a side letter indemnification with the sale of Niagara
regarding possible environmental contamination from ash disposal from the
facility, with a maximum exposure amount of $2.3 million. At
June 30, 2007, Integrys Energy Services had recorded a $0.2 million
liability related to this guarantee, representing estimated fair
value.
NOTE
14--EMPLOYEE BENEFIT PLANS
The
following table
shows the components of net periodic benefit cost for Integrys Energy Group's
benefit plans for the three months ended June 30:
Integrys
Energy Group
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Service
cost
|
|
$ |
10.4
|
|
|
$ |
5.9
|
|
|
$ |
4.0
|
|
|
$ |
1.7
|
|
Interest
cost
|
|
|
18.5
|
|
|
|
10.4
|
|
|
|
6.3
|
|
|
|
4.6
|
|
Expected
return on plan assets
|
|
|
(22.1 |
) |
|
|
(10.9 |
) |
|
|
(4.4 |
) |
|
|
(3.5 |
) |
Amortization
of transition obligation
|
|
|
-
|
|
|
|
0.1
|
|
|
|
0.4
|
|
|
|
0.1
|
|
Amortization
of prior-service cost (credit)
|
|
|
1.9
|
|
|
|
1.3
|
|
|
|
(0.5 |
) |
|
|
(0.6 |
) |
Amortization
of net loss
|
|
|
4.0
|
|
|
|
3.0
|
|
|
|
0.8
|
|
|
|
1.6
|
|
Net
periodic
benefit cost
|
|
$ |
12.7
|
|
|
$ |
9.8
|
|
|
$ |
6.6
|
|
|
$ |
3.9
|
|
The
following table
shows the components of net periodic benefit cost for Integrys Energy Group's
benefit plans for the six months ended June 30:
Integrys
Energy Group
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Service
cost
|
|
$ |
18.6
|
|
|
$ |
11.8
|
|
|
$ |
7.2
|
|
|
$ |
3.5
|
|
Interest
cost
|
|
|
32.6
|
|
|
|
20.4
|
|
|
|
11.7
|
|
|
|
8.5
|
|
Expected
return on plan assets
|
|
|
(38.0 |
) |
|
|
(21.4 |
) |
|
|
(8.5 |
) |
|
|
(6.6 |
) |
Amortization
of transition obligation
|
|
|
-
|
|
|
|
0.1
|
|
|
|
0.7
|
|
|
|
0.2
|
|
Amortization
of prior-service cost (credit)
|
|
|
3.4
|
|
|
|
2.6
|
|
|
|
(1.1 |
) |
|
|
(1.1 |
) |
Amortization
of net loss
|
|
|
7.2
|
|
|
|
5.1
|
|
|
|
1.6
|
|
|
|
2.6
|
|
Net
periodic
benefit cost
|
|
$ |
23.8
|
|
|
$ |
18.6
|
|
|
$ |
11.6
|
|
|
$ |
7.1
|
|
Transition
obligations, prior service costs (credits), and net losses that have not
yet
been recognized as a component of net periodic benefit cost are included
in
accumulated other comprehensive income for Integrys Energy Group's nonregulated
entities and are recorded as net regulatory assets for the utilities, pursuant
to SFAS No. 71. In the three and six months ended June 30, 2007,
$0.4 million and
$0.7 million,
of transition costs, $1.4 million and $2.4 million of net prior
service costs, and $4.6 million and $8.4 million of net losses,
respectively, were amortized from regulatory assets to net periodic benefit
cost.
Contributions
to
the plans are made in accordance with legal and tax requirements and do not
necessarily occur evenly throughout the year. For the six months
ended June 30, 2007, $4.4 million of contributions were made to the
pension benefit plan and no contributions were made to the other postretirement
benefit plan. Integrys Energy Group expects to contribute an
additional $21.0 million to its pension plan and $13.4 million to its
other postretirement benefit plans during 2007.
NOTE
15--STOCK-BASED COMPENSATION
Integrys
Energy
Group has five stock-based compensation plans: the 2007 Omnibus Incentive
Compensation Plan ("2007 Omnibus Plan"), the 2005 Omnibus Incentive Compensation
Plan ("2005 Omnibus Plan"), the 2001 Omnibus Incentive Compensation Plan
("2001
Omnibus Plan"), the 1999 Stock Option Plan ("Employee Plan"), and the 1999
Non-Employee Directors Stock Option Plan ("Director Plan"). Under the
provisions of the 2007 Omnibus Plan, the number of shares of stock that may
be
issued in satisfaction of plan awards may not exceed 3,500,000, and no more
than
1,500,000 shares of stock can be granted as performance shares or restricted
stock. No additional awards will be issued under the 2005 Omnibus
Plan, the 2001 Omnibus Plan, the Employee Plan, or the Director Plan, although
the plans will continue to exist for purposes of the existing outstanding
stock-based compensation. The number of shares issuable under each of
the aforementioned stock-based compensation plans, each outstanding award,
and
stock option exercise prices are subject to adjustment, at the Board of
Directors' discretion, in the event of any stock split, stock dividend, or
other
similar transaction. At June 30, 2007, stock options,
performance stock rights, and restricted shares were outstanding under the
aforementioned plans.
Stock
Options
Stock
options are
granted by the Board of Directors and may be granted at any
time. Under the provisions of the 2007 Omnibus Plan, no single
employee who is the chief executive officer of Integrys Energy Group or any
of
the other four highest compensated officers of Integrys Energy Group and
its
subsidiaries can be granted options for more than 1,000,000 shares during
any
calendar year. No stock options will have a term longer than ten
years. The exercise price of each stock option is equal to the fair
market value of the stock on the date the stock option is
granted. Under the 2007, 2005 and 2001 Omnibus Plans and the Employee
Plan, one-fourth of the stock options granted vest and become exercisable
each
year on the anniversary of the grant date. Stock options granted
under the Director Plan are immediately vested but may not be exercised until
one year after the date of grant. Shares to be delivered under the
Director Plan consist solely of treasury shares.
The
fair value of
stock option awards granted in May 2007 was estimated using a binomial lattice
model. No stock options were granted during the six months ended
June 30, 2006. The expected term of option awards is calculated based on
historical exercise behavior and represents the period of time that options
granted are expected to be outstanding. The risk-free interest rate
is based on the United States Treasury yield curve. The expected
dividend yield incorporates the post-merger dividend rate as well as historical
dividend increase patterns. Integrys Energy Group's expected stock
price volatility was estimated using the 10-year historical
volatility. The following table shows the weighted-average fair value
along with the assumptions incorporated into the model:
|
|
May
2007 Grant
|
|
Weighted-average
fair value
|
|
$ |
7.80
|
|
Expected
term
|
|
6.6
years
|
|
Risk-free
interest rate
|
|
|
4.65 |
% |
Expected
dividend yield
|
|
|
4.50 |
% |
Expected
volatility
|
|
|
17 |
% |
Total
pre-tax
compensation cost recognized for stock options during the three and six months
ended June 30, 2007, was $0.9 million and $1.1 million,
respectively. Total pre-tax compensation cost recognized for stock
options during the three and six months ended June 30, 2006, was
$0.2 million and $0.3 million, respectively. The total
compensation cost capitalized for these same periods was
immaterial. As of June 30, 2007, $2.5 million of total
pre-tax compensation cost related to unvested and outstanding stock options
is
expected to be recognized over a weighted-average period of 3.3
years.
Cash
received from
option exercises during the three and six months ended June 30, 2007 was
$4.8 million and $10.4 million, respectively. Cash received
from option exercises was immaterial during the three and six months ended
June 30, 2006. The tax benefit realized from option exercises
during the three and six months ended June 30, 2007 was $0.9 million
and $1.8 million, respectively. The tax benefit realized from
option exercises was immaterial during the three and six months ended
June 30, 2006.
A
summary of stock option activity for the six months ended June 30, 2007,
and the information related to outstanding and exercisable stock options
at
June 30, 2007, is presented below:
|
|
Stock
Options
|
|
|
Weighted-Average
Exercise Price Per Share
|
|
|
Weighted-Average
Remaining Contractual Life
(in
Years)
|
|
|
Aggregate
Intrinsic Value
(Millions)
|
|
Outstanding
at
December 31, 2006
|
|
|
1,968,625
|
|
|
$ |
45.53
|
|
|
|
|
|
|
|
Converted
options from merger
|
|
|
377,833
|
|
|
|
46.46
|
|
|
|
|
|
|
|
Granted
|
|
|
240,130
|
|
|
|
58.65
|
|
|
|
|
|
|
|
Exercised
|
|
|
262,389
|
|
|
|
39.50
|
|
|
|
|
|
$ |
4.5
|
|
Forfeited
|
|
|
562
|
|
|
|
44.73
|
|
|
|
|
|
|
-
|
|
Expired
|
|
|
7,425
|
|
|
|
44.59
|
|
|
|
|
|
|
0.3
|
|
Outstanding
at June 30, 2007
|
|
|
2,316,212
|
|
|
$ |
47.45
|
|
|
|
7.05
|
|
|
$ |
11.5
|
|
Exercisable
at June 30, 2007
|
|
|
1,257,359
|
|
|
$ |
42.57
|
|
|
|
5.60
|
|
|
$ |
10.6
|
|
On
February 21, 2007, all of PEC's then outstanding stock options were converted
into 377,833 Integrys Energy Group stock options based on the exchange ratio
of
0.825. These stock options were fully vested prior to the merger
date.
During
the six
months ended June 30, 2006, the intrinsic value of options exercised
totaled $0.2 million.
The
aggregate
intrinsic value for outstanding and exercisable options in the above table
represents the total pre-tax intrinsic value that would have been received
by
the option holders had they all exercised their options at June 30,
2007. This is calculated as the difference between Integrys Energy
Group's closing stock price on June 30, 2007, and the option exercise
price, multiplied by the number of in-the-money stock options.
Performance
Stock Rights
A
portion of the long-term incentive is awarded in the form of performance
stock
rights. Performance stock rights vest over a three-year performance
period and are paid out in shares of Integrys Energy Group's common
stock. No single employee who is the chief executive officer of
Integrys Energy Group or any of the other four highest compensated officers
of
Integrys Energy Group and its subsidiaries can receive a payout in excess
of
250,000 performance shares during any calendar year. The number of
shares paid out is calculated by multiplying a performance percentage by
the
number of outstanding stock rights at the completion of the vesting
period. The performance percentage is based on the total shareholder
return of Integrys Energy Group's common stock relative to the total shareholder
return of a peer group of companies. The payout may range from
0% to 200% of target.
The
fair value of
performance stock rights granted in May 2007 was estimated using a Monte
Carlo
valuation model, incorporating the assumptions in the table
below. The risk-free interest rate is based on the United States
Treasury yield curve. The expected dividend yield incorporates the
post-merger dividend rate as well as historical dividend increase
patterns. The expected volatility was estimated using three years of
historical data. No performance stock rights were granted during the
six months ended June 30, 2006.
|
|
May
2007 Grant
|
|
Expected
term
|
|
2.8
years
|
|
Risk-free
interest rate
|
|
|
4.71 |
% |
Expected
dividend yield
|
|
|
4.50 |
% |
Expected
volatility
|
|
|
14.50 |
% |
Pre-tax
compensation cost recorded for performance stock rights for the three and
six
months ended June 30, 2007, was $0.9 million and $1.7 million,
respectively. Pre-tax compensation cost recorded for performance
stock rights for the three and six months ended June 30, 2006, was
$0.7 million and $1.3 million, respectively. The total compensation
cost capitalized during the three and six months ended June 30, 2007, and
2006 was immaterial. As of June 30, 2007, $4.2 million of
total pre-tax compensation cost related to unvested and outstanding performance
stock rights is expected to be recognized over a weighted-average period
of
2.2 years.
A
summary of the activity of the performance stock rights plan for the six
months
ended June 30, 2007, is presented below:
|
|
Performance
Stock
Rights
|
|
|
Weighted-Average
Grant
Date Fair Value
|
|
Outstanding
at December 31, 2006
|
|
|
215,568
|
|
|
$ |
45.58
|
|
Granted
|
|
|
40,590
|
|
|
|
52.12
|
|
Forfeited
|
|
|
38,700
|
|
|
|
39.12
|
|
Outstanding
at June 30, 2007
|
|
|
217,458
|
|
|
$ |
47.95
|
|
No
performance shares were distributed during the six months ended June 30,
2007.
Restricted
Shares
In
May 2007, a portion of the long-term incentive was awarded in the form of
restricted shares. These shares have a four-year vesting period, with
25% of each award vesting on each anniversary of the grant
date. During the vesting period, award recipients have voting rights
and are entitled to dividends in the same manner as other common
shareholders. Restricted shares have a value equal to the fair market
value of the shares on the grant date. During the three and six
months ended June 30, 2007, $0.3 million and $0.5 million of
compensation cost was recorded related to restricted share awards,
respectively. As of June 30, 2007, $3.7 million of total pre-tax
compensation cost related to unvested and outstanding performance stock rights
is expected to be recognized over a weighted-average period of 3.6
years.
A
summary of the restricted shares plan for the six months ended June 30, 2007,
is
presented below.
|
|
Restricted
Shares
|
|
|
Weighted-Average
Grant
Date Fair Value
|
|
Outstanding
at December 31, 2006
|
|
|
71,424
|
|
|
$ |
52.73
|
|
Granted
|
|
|
35,594
|
|
|
|
58.65
|
|
Forfeited
|
|
|
1,800
|
|
|
|
52.73
|
|
Outstanding
at June 30, 2007
|
|
|
105,218
|
|
|
$ |
54.49
|
|
Stock
Appreciation Rights
On
February 21, 2007, all of PEC's then outstanding stock appreciation rights
were
converted into 14,021 Integrys Energy Group stock appreciation
rights. The fair value of the stock appreciation rights is estimated
with a Black-Scholes model and was not significant at June 30, 2007. No
stock appreciation rights were issued during the six months ended June 30,
2007.
NOTE
16--COMPREHENSIVE INCOME
SFAS
No. 130,
"Reporting Comprehensive Income," requires the reporting of other comprehensive
income in addition to income available for common shareholders. Total
comprehensive income includes all changes in equity during a period except
those
resulting from investments by shareholders and distributions to
shareholders. Integrys Energy Group's total comprehensive income
is:
|
|
Three
Months Ended
June 30,
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
Income
available for common shareholders
|
|
$ |
(16.4 |
) |
|
$ |
34.9
|
|
Cash
flow
hedges, net of tax of $10.4 and $7.6
|
|
|
16.7
|
|
|
|
11.8
|
|
Foreign
currency translation, net of tax
|
|
|
1.9
|
|
|
|
0.3
|
|
Unrealized
gain on available-for-sale securities, net of tax
|
|
|
-
|
|
|
|
(0.2 |
) |
Total
comprehensive income
|
|
$ |
2.2
|
|
|
$ |
46.8
|
|
|
|
Six
Months Ended
June 30,
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
Income
available for common shareholders
|
|
$ |
123.0
|
|
|
$ |
95.0
|
|
Cash
flow
hedges, net of tax of $1.5 and $19.6
|
|
|
2.4
|
|
|
|
30.4
|
|
SFAS
No. 158
amortization of net loss, net of tax
|
|
|
0.4
|
|
|
|
-
|
|
Foreign
currency translation, net of tax
|
|
|
2.0
|
|
|
|
0.3
|
|
Total
comprehensive income
|
|
$ |
127.8
|
|
|
$ |
125.7
|
|
The
following table
shows the changes to accumulated other comprehensive income (loss) from
December 31, 2006, to June 30, 2007.
(Millions)
|
|
|
|
December 31,
2006 balance
|
|
$ |
(13.8 |
) |
Cash
flow
hedges
|
|
|
2.4
|
|
Foreign
currency translation
|
|
|
2.0
|
|
SFAS
No. 158
amortization of net loss, net of tax
|
|
|
0.4
|
|
June 30,
2007 balance
|
|
$ |
(9.0 |
) |
NOTE
17--COMMON EQUITY
Integrys
Energy
Group had the following shares outstanding at June 30, 2007, and
December 31, 2006, respectively:
|
|
June 30,
2007
|
|
|
December 31,
2006
|
|
Common
stock,
$1 par value, 200,000,000 shares authorized
|
|
|
75,869,495
|
|
|
|
43,387,460
|
|
Treasury
shares
|
|
|
12,000
|
|
|
|
12,000
|
|
Average
cost
of treasury shares
|
|
$ |
25.19
|
|
|
$ |
25.19
|
|
Shares
in
deferred compensation rabbi trust
|
|
|
310,447
|
|
|
|
311,666
|
|
Average
cost
of deferred compensation rabbi trust shares
|
|
$ |
42.69
|
|
|
$ |
42.24
|
|
Integrys
Energy
Group had the following changes to common stock outstanding for the six months
ended June 30, 2007:
Integrys
Energy Group's common stock shares
|
|
Six
Months Ended June 30, 2007
|
|
|
|
|
|
Common
stock
outstanding at December 31, 2006
|
|
|
43,387,460
|
|
Shares
issued
|
|
|
|
|
Merger
with PEC
|
|
|
31,942,219
|
|
Stock
Investment Plan
|
|
|
254,069
|
|
Stock
options and employee stock option plans
|
|
|
272,992
|
|
Rabbi
trust shares
|
|
|
12,755
|
|
Common
stock
outstanding at June 30, 2007
|
|
|
75,869,495
|
|
Pursuant
to the
merger with PEC, shareholders of PEC received 0.825 shares of Integrys Energy
Group (then known as WPS Resources) common stock, $1 par value, for each
share of PEC common stock, no par value, that they held immediately prior
to the
merger. This resulted in an increase in common stock outstanding of
31,942,219 shares as of June 30, 2007.
Basic
earnings per
share are computed by dividing income available for common shareholders by
the
weighted average number of shares of common stock outstanding during the
period. Diluted earnings per share are computed by dividing income
available for common shareholders by the weighted average number of shares
of
common stock outstanding during the period adjusted for the exercise and/or
conversion of all potentially dilutive securities. Such dilutive
items include in-the-money stock options, performance stock rights, and shares
related to the forward equity transaction. The calculation of diluted
earnings per share for the periods shown excludes some stock option and
performance stock rights that had an anti-dilutive effect. The shares
having an anti-dilutive effect are not significant for any of the periods
shown. The following tables reconcile the computation of basic and
diluted earnings per share:
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
(Millions,
except per share amounts)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share – basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares of common stock outstanding – basic
|
|
|
76.0
|
|
|
|
42.2
|
|
|
|
66.8
|
|
|
|
41.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss)
from continuing operations
|
|
$ |
(0.53 |
) |
|
$ |
0.97
|
|
|
$ |
1.14
|
|
|
$ |
2.42
|
|
Discontinued
operations, net of tax
|
|
|
0.31
|
|
|
|
(0.14 |
) |
|
|
0.70
|
|
|
|
(0.11 |
) |
Earnings
(loss) per common share – basic
|
|
$ |
(0.22 |
) |
|
$ |
0.83
|
|
|
$ |
1.84
|
|
|
$ |
2.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share – diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares of common stock outstanding
|
|
|
76.0
|
|
|
|
42.2
|
|
|
|
66.8
|
|
|
|
41.2
|
|
Effect
of
dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
-
|
|
|
|
-
|
|
|
|
0.3
|
|
|
|
0.1
|
|
Average
shares of common stock outstanding – diluted
|
|
|
76.0
|
|
|
|
42.2
|
|
|
|
67.1
|
|
|
|
41.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss)
from continuing operations
|
|
$ |
(0.53 |
) |
|
$ |
0.97
|
|
|
$ |
1.13
|
|
|
$ |
2.41
|
|
Discontinued
operations, net of tax
|
|
|
0.31
|
|
|
|
(0.14 |
) |
|
|
0.70
|
|
|
|
(0.11 |
) |
Earnings
(loss) per common share – diluted
|
|
$ |
(0.22 |
) |
|
$ |
0.83
|
|
|
$ |
1.83
|
|
|
$ |
2.30
|
|
NOTE
18--REGULATORY ENVIRONMENT
Wisconsin
The
PSCW approved
the merger with PEC as of February 16, 2007. The merger approval
order contains several conditions. One condition is that WPSC will
not have a base rate increase for natural gas or
electric
service
prior to January 1, 2009. Under this condition, WPSC will
be allowed to adjust rates effective January 1, 2008, for changes in fuel
costs
related to electric generation due to changes in the NYMEX natural gas futures
prices, coal prices, and transportation costs for coal. WPSC expects
to make this fuel cost filing in the third quarter 2007, to be effective
January
1, 2008. While WPSC had asked for authority to also adjust rates
effective January 1, 2008, for the change in transmission costs from 2007
to 2008, the PSCW did not provide that authority in this order. WPSC
will seek recovery of the increased transmission costs in the upcoming fuel
cost
filing. Another condition of the merger order required WPSC to seek
approval for the formation of a services company within 120 days of the closing
of the merger. On June 8, 2007, Integrys Energy Group and its
regulated utilities filed applications with the ICC, PSCW, MPUC, and MPSC
seeking necessary regulatory approvals or waivers associated with the formation
and operation of the services company. Other conditions imposed in
the order include no recovery of transaction costs in 2008 and 2009, recovery
of
transition costs in 2009 and later years limited to the verified synergy
savings
in those years, WPSC holding ratepayers harmless from any increase in interest
and preferred stock costs demonstrated to be attributable to nonutility
activities and provided that the authorized capital structure is consistent
with
the authorized costs, and WPSC not paying a dividend to Integrys Energy Group
in
an amount greater than 103% of the prior year's dividend.
On
January 11, 2007, the PSCW issued a final written order authorizing a retail
electric rate increase of $56.7 million (6.61%) and a retail natural gas
rate increase of $18.9 million (3.77%), effective
January 12, 2007. The 2007 rates reflect a 10.9% return on
common equity. The PSCW also approved a common equity ratio of 57.46%
in its regulatory capital structure. The 2007 retail electric
rate increase was required primarily because of increased costs associated
with
electric transmission, costs related to the construction of Weston 4 and
the
additional personnel to maintain and operate the plant, and costs to maintain
the Weston 2 generation unit and the De Pere Energy Center. The 2007
retail natural gas rate increase was driven by infrastructure improvements
necessary to ensure the reliability of the natural gas distribution system
and
costs associated with the remediation of former manufactured gas plant
sites.
As
part of its January 2007 final written order, the PSCW determined that it
was
reasonable for WPSC to continue to defer the MISO Day 2 charges associated
with
net congestion and financial transmission rights costs and revenues, and
the
cost differences between marginal losses and average losses through
2007. At June 30, 2007, WPSC had deferred $17.9 million of
costs related to these matters. We expect the PSCW to issue an order
addressing the recoverability of these costs sometime in the third quarter
of
2007. Under this order, costs deferred as of June 30, 2007, should be
recoverable based on this decision.
On
April 25, 2006, WPSC filed with the PSCW a stipulation agreement with various
interveners to refund a portion of the difference between fuel costs that
were
projected in the 2006 Wisconsin retail rate case and actual Wisconsin retail
fuel costs incurred from January 2006 through March 2006 as well as the
projected fuel savings in April through June 2006. This refund
resulted in a credit to customers' bills over the months of May 2006 to
August 2006. On October 2, 2006, WPSC filed for an additional refund
of $15.6 million to reflect additional fuel cost savings. The
PSCW approved this filing and ordered this amount to be refunded based on
November and December usage. Customer refunds of
$28.6 million were made in 2006, related to the stipulation
agreement. On March 16, 2007, the PSCW approved a refund to WPSC
retail electric customers of $14.5 million. This refund had been
accrued at December 31, 2006. The refund resulted in a credit to
customers’ bills over the period mid-March through mid-April. At
June 30, 2007, a regulatory liability of $1.8 million remained to be
refunded to customers in 2008.
On
December 22, 2005, the PSCW issued a final written order authorizing a
retail electric rate increase of $79.9 million (10.1%) and a retail natural
gas rate increase of $7.2 million (1.1%), effective
January 1, 2006. The 2006 rates reflect an 11.0% return on
common equity. The PSCW also approved a common equity ratio of 59.7%
in its regulatory capital structure. The 2006 retail electric rate increase
was
required primarily because of higher fuel and purchased power costs (including
costs associated with the Fox Energy Center power purchase agreement), and
also
for costs related to the construction of Weston 4, higher transmission
expenses, and recovery of a portion of the costs related to the 2005 Kewaunee
outage. Partially offsetting the items discussed above, retail
electric rates were lowered to reflect a refund to customers in 2006 of a
portion of the proceeds received from the liquidation of the
nonqualified
decommissioning trust fund as a result of the sale of Kewaunee. The
2006 retail natural gas rate increase was driven by infrastructure improvements
necessary to ensure the reliability of the natural gas distribution
system.
In
WPSC's 2006 rate case (discussed above), the PSCW ruled that the deferred
assets
and liabilities related to the Kewaunee matters should be treated separately
and
determined that Wisconsin retail customers were entitled to be refunded
approximately 85%, or $108 million, of the total $127.1 million of
proceeds received from the liquidation of the nonqualified decommissioning
trust
fund over a two-year period beginning on January 1, 2006 (in addition to
the
refund of carrying costs on the unamortized balance at the authorized pre-tax
weighted average cost of capital). In 2005, the MPSC ruled that
WPSC's Michigan customers were entitled to be refunded approximately 2% of
the
proceeds received from the liquidation of the nonqualified decommissioning
fund
over a 60-month period. Refunding to Michigan customers began in the
third quarter of 2005. In December 2006, the MPSC issued an
order authorizing WPSC to amortize the approximately $2 million balance of
the Michigan portion of the Kewaunee nonqualified decommissioning trust fund
simultaneously with the amortization of approximately $2 million of the
2005 power supply under collections from January 2007 through July
2010. Wholesale customers will receive approximately 13% of the
proceeds received from the liquidation of the nonqualified decommissioning
fund.
On
August 8, 2005, the FERC accepted the proposed refund plan for filing and
implemented the plan effective January 1, 2006, subject to refund upon final
resolution. Settlement discussions between WPSC and wholesale parties
contesting WPSC's refund plan were held both in the fourth quarter of 2005
and
in the first quarter of 2006, and a final agreement was reached with one
FERC
customer in the second quarter of 2006. A refund of approximately
$3 million was made to this customer, offset by a payment received from
this customer of approximately $1 million related to both the loss WPSC
recorded on the sale of Kewaunee and costs incurred related to the 2005 Kewaunee
outage. In the fourth quarter of 2006 a final agreement was reached
between WPSC and the remaining FERC customers to resolve all Kewaunee related
issues, which included the loss on the sale of Kewaunee, the outage costs
related to the 2005 Kewaunee outage, and the refund of the nonqualified
decommissioning trust fund. Based upon this resolution, in
December 2006, the FERC Administrative Law Judge certified the settlement
as uncontested. WPSC expects the FERC to issue a final order
approving this settlement in the third quarter of 2007. Pursuant to
the settlement, WPSC will be required to make a lump-sum payment to the
remaining FERC customers of approximately $14 million representing their
contributions to the nonqualified decommissioning trust fund during the period
in which they received service from WPSC. The settlement would also
require these FERC customers to make two separate lump-sum payments to WPSC
with
respect to the loss from the sale of Kewaunee and the 2005 Kewaunee power
outage. The payments to WPSC total approximately $1 million and
$9 million, respectively, and will be netted against the $14 million
refund due to these customers within 30 days following the FERC's acceptance
of
the settlement.
At
June 30, 2007, WPSC had a $28.6 million regulatory liability
representing the amount of proceeds received from the liquidation of the
nonqualified decommissioning trust fund remaining to be refunded in
2007.
On
February 20, 2005, Kewaunee was temporarily removed from service after a
potential design weakness was identified in its auxiliary feedwater
system. On March 17, 2005, the PSCW authorized WPSC to defer
replacement fuel costs related to the outage. On April 8, 2005, the
PSCW approved deferral of the operating and maintenance costs, including
carrying costs at the most recently authorized pre-tax weighted average cost
of
capital. In the order granted for WPSC's 2006 rate case, which was
finalized on December 22, 2005 (discussed above), the PSCW determined that
it was reasonable for WPSC to recover all deferred costs related to the 2005
Kewaunee forced outage over a five-year period, beginning on January 1, 2006,
including carrying costs on the unamortized balance at the composite short-term
debt rate. Because the PSCW had initially approved deferral of
carrying costs based upon the weighted average cost of capital, WPSC was
required to write-off $2.2 million of carrying costs in the fourth quarter
of 2005. WPSC also filed with the FERC for approval to defer these
costs in the wholesale jurisdiction and the issue was resolved as part of
the
settlement discussed above. For WPSC's Michigan retail customers,
fuel costs are recovered through the Michigan fuel adjustment clause and no
deferral
request
was
needed. At June 30, 2007, $34.3 million was left to be
collected from WPSC’s retail customers related to this outage.
In
May 2005, WPSC received notification from its coal transportation suppliers
that
extensive maintenance was required on the railroad tracks that lead into
and out
of the Powder River Basin. The extensive maintenance ended on
November 23, 2005. During the maintenance efforts, WPSC received
approximately 87% of the expected coal deliveries. WPSC took steps to
conserve coal usage and secured alternative coal supplies at its affected
generation facilities during that time. On
September 23, 2005, the PSCW approved WPSC's request for deferred
treatment of the incremental fuel costs resulting from the coal supply
issues. As of June 30, 2007, $4.9 million was deferred
related to this matter. These costs were addressed in WPSC's 2007
retail electric rate case and will be recoverable in 2007 and 2008.
Michigan
As
a result of changing natural gas prices, MGUC implemented a natural gas cost
recovery factor increase of 16% on April 1, 2007. MGUC filed its plan
with the MPSC pertaining to projected natural gas cost recovery
charges. In addition, the plan accounts for securing future natural
gas supplies for its customers for the period of April 1, 2007, through
March 31, 2008.
On
June 27, 2006, the MPSC issued a final written order authorizing a retail
electric rate increase for UPPCO of $3.8 million (4.8%), effective
June 28, 2006. The 2006 rate increase reflects a 10.75% return
on common equity and a common equity ratio of 54.9% in its regulatory capital
structure. The retail electric rate increase was required in order to
improve service quality and reliability, upgrade technology, and manage rising
employee and retiree benefit costs.
The
increased
retail electric rate does not reflect the recovery by UPPCO of any deferred
costs associated with the Silver Lake incident, which will be addressed in
a
future proceeding.
Illinois
On
March 9, 2007, PGL and NSG filed requests with the ICC to increase natural
gas rates for PGL and NSG by $102.5 million and $6.3 million,
respectively, for 2008. The proposed rate increases are required to
allow the companies to recover their current cost of service and to earn
a
reasonable rate of return on their equity investment. The PGL filing
includes an 11.06% return on common equity and a common equity ratio of 56%
in
its regulatory capital structure. The NSG filing includes an 11.06%
return on common equity and a common equity ratio of 56% in its regulatory
capital structure. In addition, PGL and NSG filed various rider
mechanisms seeking modifications of tariffs, primarily to reflect current
operating conditions in transportation service and to provide a rate design
to
recover more fixed costs from fixed charges.
The
rate case
process in Illinois requires receipt of a written order from the ICC within
11
months from the date of filing, which would be February 5, 2008. On
June 29, 2007, the ICC staff filed their direct testimony, and on July 24,
2007, filed supplemental direct testimony on one issue in the PGL and NSG
rate
cases, which have been consolidated. The ICC staff proposed an
increase of $53.2 million for PGL and $0.3 million for
NSG. The return on common equity recommended by the ICC staff was
9.7% for PGL and 9.5% for NSG. The ICC staff did not support the
proposed riders to address specific costs and revenues between rate cases,
but
offered alternative proposals for each rider if the ICC decides to approve
the
riders. Interveners also filed direct testimony on June 29,
2007, and July 3, 2007. The ICC staff filed a motion on July 24,
2007, for leave to file supplemental direct testimony, which seeks to add
an
adjustment reducing PGL’s and NSG’s revenue requirements by approximately
$3 million and $1 million, respectively. The motion was
granted on July 30, 2007. Rebuttal testimony from the companies was
filed on July 27, 2007. In its rebuttal testimony, PGL and NSG
decreased their requested revenue requirement to approximately $99 million
and $4 million, respectively. Hearings are scheduled for
September 10 through September 18, 2007 in Chicago.
On
February 7, 2007, the ICC approved the PEC merger by accepting an agreed
upon
order among the active parties to the merger case. The order included
Conditions of Approval regarding commitments by the applicants to provide
certain reports, perform studies of the PGL natural gas system, promote and
hire
a limited number of union employees in specific areas, make no
reorganization-related layoffs or position reductions within the PGL natural
gas
union workforce, maintain PGL and NSG's operation and maintenance and capital
budgets at recent levels, file a plan for formation and implementation of
a
services company, accept certain limits on the merger-related costs that
can be
recovered from ratepayers, and not seek cost recovery for any increase in
deferred tax assets that may result from the tax treatment of the PGL and
NSG
storage natural gas inventory in connection with closing the
merger. The Conditions of Approval also include commitments by the
company with respect to the pending rate cases of PGL and NSG. These
are the inclusion of merger synergy savings of $13.1 million in the
proposed test year, the recovery of $7.0 million of the merger-related
costs in the test year (reflecting recovery of $35.0 million of costs over
5 years), proposing a $7.5 million energy efficiency program which
will be contingent on receiving cost recovery in the rate case orders, and
filing certain changes to the small volume transportation service
programs. Finally, the order provides authority for PGL and NSG to
recover from ratepayers in a future rate case after the pending rate cases
up to
an additional $9.9 million of merger costs, for a maximum potential
recovery of $44.9 million. PGL and NSG must demonstrate in the future
that merger synergy savings realized have exceeded the merger
costs.
Federal
Through
a series of
orders issued by the FERC, Regional Through and Out Rates for transmission
service between the MISO and the Pennsylvania, New Jersey, Maryland
Interconnection were eliminated effective December 1, 2004. To
compensate transmission owners for the revenue they will no longer receive
due
to this rate elimination, the FERC ordered a transitional pricing mechanism
called the Seams Elimination Charge Adjustment (“SECA”) to be put into
place. Load-serving entities paid these SECA charges during a
16-month transition period from December 1, 2004, through March 31,
2006.
For
the 16-month
transitional period, Integrys Energy Services received billings of
$19.2 million (pre-tax) for these charges, of which approximately
$17 million related to its Michigan retail electric business and
approximately $2 million related to its Ohio retail electric
business. Integrys Energy Services expensed $14.7 million of the
$19.2 million as it is probable that Integrys Energy Services' total
exposure will be reduced by at least $4.5 million due to inconsistencies
between the FERC's SECA order and the transmission owners' compliance filings.
Integrys Energy Services anticipates settling a portion of its SECA matters
through vendor negotiations in 2007. Integrys Energy Services has
reached settlement agreements with three of its vendors for a combined
$1.6 million. The SECA hearing to resolve all issues was held in
the spring of 2006. The Administrative Law Judge hearing the case
issued an Initial Decision that was in agreement with all of Integrys Energy
Services' positions. The Administrative Law Judge certified the
Initial Decision to the FERC in mid-September 2006, closing the hearing
record. Briefs on Exception to the Initial Opinion were filed with
FERC in early September 2006, and Opposing Exceptions were filed on
October 10, 2006. The FERC will review the hearing record, the Initial
Decision, and the briefs on exception, and issue a Final Order. If
the Final Order is consistent with the Initial Decision of the Administrative
Law Judge, Integrys Energy Services' total exposure may be reduced by
approximately $13 million. The Final FERC Order is subject to
rehearing and then court challenges. Any refunds to Integrys Energy
Services will include interest for the period from payment to
refund. Since SECA is a transition charge that ended on
March 31, 2006, it does not directly impact Integrys Energy Services'
long-term competitiveness because the only unresolved issue is the final
FERC
Order and pending refund. In addition to potential rehearing and
court challenges of the final FERC order in this case, the application and
legality of the SECA has been challenged by many load-serving entities,
including Integrys Energy Services, and in rehearing requests, which are
also
subject to court challenges.
The
SECA is also an
issue for WPSC and UPPCO, who have intervened and protested a number of
proposals in this docket because they believe those proposals could result
in
unjust, unreasonable, and discriminatory charges for customers. It is
anticipated that most of the SECA rate charges incurred by WPSC and UPPCO
and
any refunds will be passed on to customers through rates. WPSC and
UPPCO have reached a settlement in principle with American Electric Power
and
Commonwealth Edison, which was certified by the settlement judge as a contested
settlement and now awaits approval by the FERC along with dozens of other
full
and partial contested and uncontested settlements. Under the terms of
the settlement agreement, American Electric Power and Commonwealth Edison
will
refund almost $1 million of the approximately $4 million of SECA
charges paid by WPSC during the transition period. If FERC does not
approve this settlement, which is deemed unlikely, WPSC and UPPCO have reserved
their rights to challenge various issues in SECA which were not settled by
the
hearings. WPSC and UPPCO have also reserved their rights to challenge
any briefs on exception to the Initial Decision and the FERC's final order
in
this case if the settlement is not approved.
NOTE
19--SEGMENTS OF BUSINESS
Integrys
Energy
Group manages its reportable segments separately due to their different
operating and regulatory environments. At June 30, 2007,
Integrys Energy Group reported five segments, which are described
below.
The
two regulated
segments include the regulated electric utility operations of WPSC and UPPCO,
and the regulated natural gas utility operations of WPSC, MGUC, MERC, PGL,
and
NSG. PEC’s regulated natural gas utility operations (PGL and NSG)
were included in results of operations since the merger date. PGL and NSG
purchase, store, distribute, sell, and transport natural gas to customers
throughout Chicago and portions of northeastern Illinois.
Integrys
Energy
Services is the primary nonregulated segment offering natural gas, electric,
and
alternate fuel supplies as well as energy management and consulting services
to
retail and wholesale customers, and marketing power from its generation plants
that are not under contract to third parties. Also included in this
segment are PEC’s nonregulated energy marketing businesses.
The
nonregulated
oil and gas production segment includes the results of PEP, which have been
reported as discontinued operations. In February 2007, Integrys
Energy Group announced its commitment to divest of PEP. PEP engages
in the acquisition, development and production of oil and gas reserves in
selected onshore basins in the United States through direct ownership in
oil,
gas and mineral leases.
The
Other segment,
another nonregulated segment, includes the operations of the Integrys Energy
Group holding company, along with nonutility activities at WPSC, PGL, NSG,
MGUC,
MERC, and UPPCO.
|
|
Regulated
Utilities
|
|
|
Nonutility
and Nonregulated Operations
|
|
|
|
|
|
|
Segments
of Business
(Millions)
|
|
Electric
Utility(1)
|
|
|
Natural
Gas
Utility(1)
|
|
|
Total
Utility(1)
|
|
|
Integrys
Energy Services
|
|
|
Oil
and Gas Production
|
|
|
Holding
Company and
Other(2)
|
|
|
Reconciling
Eliminations
|
|
|
Integrys
Energy Group
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
June 30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$ |
294.0
|
|
|
$ |
417.8
|
|
|
$ |
711.8
|
|
|
$ |
1,647.1
|
|
|
$ |
-
|
|
|
$ |
2.8
|
|
|
$ |
-
|
|
|
$ |
2,361.7
|
|
Intersegment
revenues
|
|
|
11.2
|
|
|
|
-
|
|
|
|
11.2
|
|
|
|
1.3
|
|
|
|
-
|
|
|
|
0.3
|
|
|
|
(12.8 |
) |
|
|
-
|
|
Depreciation
and
amortization
expense
|
|
|
20.4
|
|
|
|
26.8
|
|
|
|
47.2
|
|
|
|
2.8
|
|
|
|
-
|
|
|
|
0.6
|
|
|
|
-
|
|
|
|
50.6
|
|
Miscellaneous
income
(expense)
|
|
|
1.4
|
|
|
|
2.0
|
|
|
|
3.4
|
|
|
|
4.4
|
|
|
|
0.1
|
|
|
|
19.6 |
(3) |
|
|
(5.9 |
) |
|
|
21.6
|
|
Interest
expense
|
|
|
7.7
|
|
|
|
13.1
|
|
|
|
20.8
|
|
|
|
2.1
|
|
|
|
0.9
|
|
|
|
24.7
|
|
|
|
(5.9 |
) |
|
|
42.6
|
|
Provision
(benefit) for
income
taxes
|
|
|
8.3
|
|
|
|
(13.0 |
) |
|
|
(4.7 |
) |
|
|
(4.0 |
) |
|
|
(0.4 |
) |
|
|
(6.2 |
) |
|
|
-
|
|
|
|
(15.3 |
) |
Income
(loss)
from
continuing
operations
|
|
|
15.6
|
|
|
|
(3.8 |
) |
|
|
11.8
|
|
|
|
(44.0 |
) |
|
|
(1.2 |
) |
|
|
(6.2 |
) |
|
|
-
|
|
|
|
(39.6 |
) |
Discontinued
operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24.0
|
|
Preferred
stock dividends
of
subsidiary
|
|
|
0.6
|
|
|
|
0.2
|
|
|
|
0.8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.8
|
|
Income
(loss)
available for
common
shareholders
|
|
|
15.0
|
|
|
|
(4.0 |
) |
|
|
11.0
|
|
|
|
(44.0 |
) |
|
|
22.8
|
|
|
|
(6.2 |
) |
|
|
-
|
|
|
|
(16.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months
Ended
June 30,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$ |
254.1
|
|
|
$ |
95.4
|
|
|
$ |
349.5
|
|
|
$ |
1,125.8
|
|
|
|
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
1,475.3
|
|
Intersegment
revenues
|
|
|
8.3
|
|
|
|
0.2
|
|
|
|
8.5
|
|
|
|
4.6
|
|
|
|
-
|
|
|
|
0.3
|
|
|
|
(13.4 |
) |
|
|
-
|
|
Depreciation
and
amortization
expense
|
|
|
19.6
|
|
|
|
7.5
|
|
|
|
27.1
|
|
|
|
2.3
|
|
|
|
-
|
|
|
|
(0.1 |
) |
|
|
-
|
|
|
|
29.3
|
|
Miscellaneous
income
(expense)
|
|
|
0.7
|
|
|
|
0.3
|
|
|
|
1.0
|
|
|
|
(4.7 |
) |
|
|
-
|
|
|
|
22.2 |
(3) |
|
|
(4.0 |
) |
|
|
14.5
|
|
Interest
expense
|
|
|
7.2
|
|
|
|
4.0
|
|
|
|
11.2
|
|
|
|
3.9
|
|
|
|
-
|
|
|
|
11.3
|
|
|
|
(4.0 |
) |
|
|
22.4
|
|
Provision
(benefit) for
income
taxes
|
|
|
13.4
|
|
|
|
(4.5 |
) |
|
|
8.9
|
|
|
|
7.0
|
|
|
|
-
|
|
|
|
3.1
|
|
|
|
-
|
|
|
|
19.0
|
|
Income
(loss)
from
continuing
operations
|
|
|
24.0
|
|
|
|
(7.3 |
) |
|
|
16.7
|
|
|
|
19.6
|
|
|
|
-
|
|
|
|
5.6
|
|
|
|
-
|
|
|
|
41.9
|
|
Discontinued
operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6.2 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6.2 |
) |
Preferred
stock dividends
of
subsidiary
|
|
|
0.6
|
|
|
|
0.2
|
|
|
|
0.8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.8
|
|
Income
(loss)
available for
common
shareholders
|
|
|
23.4
|
|
|
|
(7.5 |
) |
|
|
15.9
|
|
|
|
13.4
|
|
|
|
-
|
|
|
|
5.6
|
|
|
|
-
|
|
|
|
34.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes
only
utility operations.
|
(2)
|
Nonutility
operations are included in the Holding Company and Other
column.
|
(3)
|
Other
miscellaneous income for the three months ended June 30, 2007, and
2006, includes $12.4 and $11.3 million, respectively, of pre-tax
income from equity method
investments.
|
|
Regulated
Utilities
|
Nonutility
and Nonregulated Operations
|
|
|
|
Segments
of Business
(Millions)
|
Electric
Utility(1)
|
Natural
Gas Utility(1)
|
Total
Utility(1)
|
Integrys
Energy Services
|
Oil
and Gas Production
|
Holding
Company and
Other(2)
|
Reconciling
Eliminations
|
Integrys
Energy Group
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
June 30,
2007
|
|
|
|
|
|
|
|
|
|
External
revenues
|
$582.5
|
$1,099.1
|
$1,681.6
|
$3,421.0
|
$
-
|
$5.7
|
$ -
|
$5,108.3
|
|
Intersegment
revenues
|
21.9
|
0.5
|
22.4
|
2.8
|
-
|
0.3
|
(25.5)
|
-
|
|
Depreciation
and
amortization
expense
|
40.6
|
43.5
|
84.1
|
5.6
|
-
|
1.1
|
-
|
90.8
|
|
Miscellaneous
income
(expense)
|
2.5
|
2.8
|
5.3
|
4.3
|
0.1
|
35.3(3)
|
(11.1)
|
33.9
|
|
Interest
expense
|
15.8
|
22.6
|
38.4
|
5.7
|
1.3
|
44.7
|
(11.1)
|
79.0
|
|
Provision
(benefit) for
income
taxes
|
18.2
|
15.5
|
33.7
|
(0.9)
|
(0.5)
|
(5.7)
|
-
|
26.6
|
|
Income
(loss)
from
continuing
operations
|
32.6
|
31.7
|
64.3
|
20.9
|
(1.4)
|
(6.2)
|
-
|
77.6
|
|
Discontinued
operations
|
-
|
-
|
-
|
14.8
|
32.2
|
-
|
-
|
47.0
|
|
Preferred
stock dividends
of
subsidiary
|
1.1
|
0.5
|
1.6
|
-
|
-
|
-
|
-
|
1.6
|
|
Income
(loss)
available for
common
shareholders
|
31.5
|
31.2
|
62.7
|
35.7
|
30.8
|
(6.2)
|
-
|
123.0
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months
Ended
June 30,
2006
|
|
|
|
|
|
|
|
|
|
External
revenues
|
$500.3
|
$288.3
|
$788.6
|
$2,682.4
|
-
|
$ -
|
$ -
|
$3,471.0
|
|
Intersegment
revenues
|
18.5
|
0.3
|
18.8
|
5.8
|
-
|
0.6
|
(25.2)
|
-
|
|
Depreciation
and
amortization
expense
|
38.8
|
13.0
|
51.8
|
4.7
|
-
|
-
|
-
|
56.5
|
|
Miscellaneous
income
(expense)
|
1.2
|
0.3
|
1.5
|
(6.9)
|
-
|
34.9(3)
|
(6.3)
|
23.2
|
|
Interest
expense
|
14.6
|
6.4
|
21.0
|
6.3
|
-
|
19.7
|
(6.3)
|
40.7
|
|
Provision
(benefit) for
income
taxes
|
21.8
|
(0.4)
|
21.4
|
22.3
|
-
|
2.7
|
-
|
46.4
|
|
Income
(loss)
from continuing operations
|
39.9
|
(0.2)
|
39.7
|
55.1
|
-
|
6.4
|
-
|
101.2
|
|
Discontinued
operations
|
-
|
-
|
-
|
(4.6)
|
-
|
-
|
-
|
(4.6)
|
|
Preferred
stock dividends
of
subsidiary
|
1.0
|
0.6
|
1.6
|
-
|
-
|
-
|
-
|
1.6
|
|
Income
(loss)
available for
common
shareholders
|
38.9
|
(0.8)
|
38.1
|
50.5
|
-
|
6.4
|
-
|
95.0
|
|
|
|
|
|
|
|
|
|
|
(1) Includes
only utility operations.
(2) Nonutility
operations are included in the Holding Company and Other column.
|
(3)
|
Other
miscellaneous income for the six months ended June 30, 2007, and
2006, includes $24.5 million and $21.9 million, respectively, of
pre-tax income from equity method
investments.
|
NOTE
20--NEW ACCOUNTING PRONOUNCEMENTS
In
September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements". SFAS No. 157 defines fair value, establishes a
framework for measuring fair value under generally accepted accounting
principles, and expands disclosures about fair value
measurements. SFAS No. 157 emphasizes that fair value is a
market-based measurement, not an entity-specific measurement, and states
that a
fair value measurement should be determined based on the assumptions that
market
participants would use in pricing the asset or liability. The
standard eliminates the current requirement for deferring "day one" gains
on
energy contracts that are not evidenced by quoted market prices or other
current
market transactions. The standard will be effective for Integrys
Energy Group beginning January 1, 2008. We are currently evaluating
the impact that SFAS No. 157 will have on our financial statements.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." This standard permits
entities to choose to measure many financial instruments and certain other
items
at fair value, following the provisions of SFAS No. 157. Included
within the scope of the standard are all recognized financial assets and
financial liabilities, except consolidated investments, consolidated interests
in a variable interest entity, obligations for pension and certain other
benefits, leases, and financial instruments that are classified as a component
of shareholder's equity. Also included in the scope of the standard are firm
commitments that would otherwise not be recognized at inception and that
involve
only financial instruments, nonfinancial insurance contracts and warranties
that
the insurer can settle by paying a third party to provide those goods or
services, and host financial instruments resulting from separation of an
embedded nonfinancial derivative instrument from a nonfinancial hybrid
instrument. SFAS No. 159 is effective for Integrys Energy Group
beginning January 1, 2008. We are currently evaluating the
impact that SFAS No. 159 will have on our financial statements.
Item
2.
|
|
|
CONDITION
AND RESULTS OF OPERATIONS
|
INTRODUCTION
Integrys
Energy
Group is a diversified holding company operating through a portfolio of
subsidiaries that provide energy and related services. Our wholly
owned subsidiaries as of June 30, 2007, included six regulated utilities,
WPSC, UPPCO, MGUC, MERC, PGL, and NSG, two nonregulated subsidiaries, Integrys
Energy Services, and our oil and natural gas production company,
PEP. Of our six regulated utilities, WPSC has electric and natural
gas operations, UPPCO provides only electric operations, with the remaining
four
utilities providing only natural gas operations. Our six regulated
utilities operate in various areas of Illinois, Wisconsin, Minnesota, and
Michigan while our nonregulated operations are dispersed throughout portions
of
the Midwest and northeastern United States, and portions of Canada, Texas and
Colorado. Integrys Energy Group also owns approximately 32% of ATC, a
multi-state, transmission-only utility that provides electric transmission
service in an area from the Upper Peninsula of Michigan throughout the eastern
half of Wisconsin and into portions of Illinois. As announced, in
connection with the merger with PEC, we will be divesting of PEP, an oil and
natural gas production business acquired in the merger with PEC. The
portfolio of major subsidiaries and investments at Integrys Energy Group is
summarized as follows:
|
Integrys
Energy
Group
-
Holding
Company
|
|
|
|
|
|
6
Regulated
Subsidiaries
-
WPSC, UPPCO,
MGUC,
MERC,
PGL, and NSG
|
Nonregulated
Subsidiary
-
Integrys
Energy Services
|
32%
Ownership
in
ATC
|
Oil
&
Natural Gas
Production
-
PEP
|
Strategic
Overview
The
focal point of
Integrys Energy Group's business plan is the creation of long-term value for
our
shareholders and our customers through growth, operational excellence, asset
management, risk management, and the continued emphasis on reliable,
competitively priced, and environmentally sound energy and energy related
services. We are seeking to manage our regulated and nonregulated
portfolio of businesses with an emphasis on delivering strong earnings growth,
while maintaining a reasonable risk profile. A discussion of the
essential components of our business strategy is set forth below.
Maintain
and Grow a Strong Regulated Utility Base– We are focusing on
growth in our regulated operations. A strong regulated utility base
is important in order to maintain a strong balance sheet, predictable cash
flows, a desired risk profile, attractive dividends, and quality credit ratings,
which are critical to our success. Integrys Energy Group believes the
following recent developments have helped, or will help, maintain and grow
its
regulated utility base:
·
|
In
February
2007, we consummated the merger with PEC. As a result of the
merger, PEC is now a wholly owned subsidiary of Integrys Energy
Group. See Note 5, "Acquisitions and Sales of Assets,"
for more information.
|
|
|
·
|
WPSC
is
expanding its regulated generation fleet in order to meet growing
electric
demand and ensure continued reliability. Construction of the
500-megawatt coal-fired Weston 4 base-load power plant located near
Wausau, Wisconsin, continues in partnership with DPC, and the plant
is
expected to be commercially operational by June
2008.
|
|
|
·
|
Our
investment in ATC continues to produce strong results. We
continue to receive additional equity interest as consideration for
funding a portion of the Duluth, Minnesota, to Wausau, Wisconsin,
transmission line. As of June 30, 2007, we owned
approximately 32% of ATC and we anticipate that our ownership will
move up
to about 34% by the end of 2007 and will stabilize at about 35% in
2008.
|
|
|
·
|
WPSC
continues to invest in environmental projects to improve air quality
and
meet the requirements set by environmental regulators. Capital
projects to construct and upgrade equipment to meet or exceed required
environmental standards are planned each year.
|
|
|
·
|
To
help meet
renewable energy requirements, WPSC is looking to build or buy a
wind
generation facility of approximately 100 megawatts of nameplate capacity
within the footprint of the MISO.
|
|
|
·
|
We
continue
to upgrade electric and natural gas distribution facilities, related
systems, and processes to enhance safety, reliability, and value
for
customers and shareholders.
|
|
|
·
|
For
more
detailed information on Integrys Energy Group's capital expenditure
program see "Liquidity and Capital Resources, Capital
Requirements," below.
|
Strategically
Grow Nonregulated Businesses– Integrys Energy Services will grow
its electric and natural gas business by targeting growth in areas where it
has
market expertise and through strategic hiring and acquisitions, penetration
in
existing markets, and new product offerings. Integrys Energy Services
also focuses on optimizing the operational efficiency of its existing portfolio
of assets and pursues compatible development projects that strategically fit
with its customer base and market expertise. We expect our
nonregulated operations to provide between 20% and 30% of our earnings, on
average, in the future.
·
|
The
merger
with PEC combines the complementary nonregulated energy marketing
businesses of both companies. By combining the energy marketing
businesses, we have more strategic opportunities to grow current
nonregulated services by focusing on combined nonregulated retail
and
wholesale operations and disciplined risk management processes to
create a
stronger, more competitive, and better balanced growth platform for
our
nonregulated business.
|
|
|
·
|
In
the fourth
quarter of 2006, Integrys Energy Services hired experienced personnel
and
is currently developing the infrastructure to support a wholesale
electric
product offering in Denver, Colorado. Operations began during
the second quarter 2007, with a focus on the MISO, Alberta, Ontario
(ESCO), and Western Systems Coordinating Council (WSCC)
markets.
|
|
|
·
|
Integrys
Energy Services began developing a retail electric product offering
in the
Mid-Atlantic market (Pennsylvania, Delaware, Washington DC, Maryland,
and New Jersey) in 2006. Having been presented with a good
opportunity to leverage its infrastructure throughout the northeastern
United States, Integrys Energy Services hired experienced personnel
in the
Mid-Atlantic region and has started signing up
customers. Delivery of power to these customers commenced in
the second quarter of 2007. Integrys Energy Services has an
existing market presence in this region serving wholesale electric
customers.
|
|
|
·
|
Integrys
Energy Services began developing a product offering in the Texas
retail
electric market in late 2005 and started to deliver power to these
customers in July 2006. Integrys Energy Services continues to
increase both its customer base (by signing up new enrollments) and
volumes in the Texas retail electric market.
|
|
|
·
|
Integrys
Energy Services continues to grow its existing retail natural gas
business
through the addition of new
customers.
|
Integrate
Resources to Provide Operational Excellence– Integrys Energy Group
is committed to integrating resources of its regulated business units and also
its nonregulated business units, while complying with any and all applicable
regulatory and legal restrictions. Through innovative ideas,
embracing change, leveraging individual capabilities and expertise and utilizing
creative solutions to meet and exceed our customers' expectations, we will
provide value to shareholders and customers and assist in lowering costs for
certain activities.
·
|
The
merger
with PEC will align the best practices and expertise of both companies
and
result in efficiencies by eliminating redundant and overlapping functions
and systems. The merger is expected to ultimately result in
annual cost savings of approximately $88 million in the corporate and
regulated businesses and $6 million in the nonregulated
business. We anticipate achieving these ongoing synergies
approximately five years from the closing date of the
merger. Costs to achieve the synergies are expected to be
approximately $179 million.
|
|
|
·
|
In
June,
2007, Integrys Energy Group formed, and filed for approval with the
PSCW,
ICC, MPSC, and MPUC, a centralized service company (Integrys Business
Support) to provide administrative support primarily to Integrys
Energy
Group's six regulated utilities, with some services to also be provided
to
Integrys Energy Group's nonregulated companies. Integrys
Business Support will provide services such as Legal, Accounting
and
Finance, Environmental, Information Technology, Purchasing and
Warehousing, Human Resources, Administrative (e.g., Real Estate,
Printing,
etc.), Regulatory, Gas Services, and Gas Supply. The formation
of the centralized service company combines resources and will help
Integrys Energy Group achieve operational excellence and sustainable
value
for customers and shareholders.
|
|
|
·
|
An
initiative
we call "Competitive Excellence" is being deployed across Integrys
Energy
Group and its subsidiaries. Competitive Excellence strives to
eliminate work that does not provide value for customers. This
will create more efficient processes, improve the effectiveness of
employees, and reduce costs. Competitive Excellence is being
utilized to help Integrys Energy Group achieve the anticipated synergies
in the merger with PEC.
|
Place
Strong Emphasis on Asset and Risk Management– Our asset
management strategy calls for the continuous assessment of our existing assets
as well as a focus on the acquisition of assets that complement our existing
business and strategy. This strategy also calls for a focus on the
disposition of assets, including plants and entire business units, which are
either no longer strategic to ongoing operations, are not performing as needed,
or the disposition of which would reduce our risk profile. We
maintain a portfolio approach to risk and earnings.
·
|
The
combination of Integrys Energy Group and PEC creates a larger, stronger,
and more competitive regional energy company. This merger,
along with the 2006 acquisition of the Michigan and Minnesota natural
gas
distribution operations from Aquila, diversifies the company's regulatory
risk due to the expansion of utility operations in multiple
jurisdictions.
|
|
|
·
|
In
connection
with the merger with PEC in February 2007, Integrys Energy Group
announced
its commitment to divest of PEP. The divesture of this oil and
natural gas production business will lower Integrys Energy Group's
business risk profile and provide funds to reduce debt.
|
|
|
·
|
In
January
2007, Integrys Energy Services sold WPS Niagara Generation, LLC for
approximately $31 million. Niagara owned the 50-megawatt
Niagara Falls generation facility located in Niagara Falls, New
York. The pre-tax gain on the sale was approximately
$25 million and was recorded in the first quarter of
2007.
|
|
|
·
|
We
continue
to evaluate alternatives for the sale of all assets we have identified
as
no longer needed for our
operations.
|
Our
risk management
strategy, in addition to asset risk management, includes the management of
market, credit, and operational risk through the normal course of
business.
·
|
Forward
purchases and sales of electric capacity, energy, natural gas, and
other
commodities allow for opportunities to secure prices in a volatile
energy
market.
|
|
|
·
|
We
have
implemented formula based market tariffs to manage risk in the regulated
wholesale market.
|
Continued
Emphasis on Safe, Reliable, Competitively Priced, and Environmentally Sound
Energy and Energy Related Services – Integrys Energy
Group's mission is to provide customers with the best value in energy and
related services. By effectively operating a mixed portfolio of
generation and investing in new generation and transmission (via the ATC) while
maintaining or exceeding environmental standards, we are able to provide a
safe,
reliable, and value priced service to our customers. We concentrate
our efforts on improving and operating efficiently and effectively in order
to
reduce costs and maintain a low risk profile. We actively evaluate
opportunities for adding more renewable generation to provide additional
environmentally sound energy to our portfolio.
·
|
Contract
administration and formal project management tools have enabled us
to
better manage the costs of our construction expenditure program and
the
integration of our new subsidiaries and assets. These cost
reduction initiatives help us provide competitively priced energy
and
energy related services.
|
|
|
·
|
NatureWise®,
WPSC's renewable energy program, was selected as one of the top ten
renewable energy programs in the United States for 2006 by the DOE's
National Renewable Energy Laboratory.
|
|
|
·
|
WPSC's
and
PGL's websites were recently named among the top 25 websites for
small- to
mid-size businesses in 2007 by E Source, an information services
company
based in Colorado that provides unbiased independent analysis of
retail
energy markets, services, and technologies. This recognition
demonstrates that we are focused on meeting customers' needs and
providing
services that customers value.
|
|
|
·
|
We
manage our
operations to minimize the impact we might have on the
environment. Our new Weston 4 facility will be one of the most
efficient generating units in the country with state-of-the-art
environmental controls and will allow us to reduce the amount of
emissions
produced for each megawatt-hour of electricity that we
generate. We also expect to maintain or decrease the amount of
greenhouse gases released per megawatt-hour generated, and support
research and development initiatives that will enable further progress
toward decreasing our carbon footprint.
|
|
|
·
|
By
effectively operating a mixed portfolio of generation and investing
in new
generation, like Weston 4, and new transmission (via our ownership in
the ATC), Integrys Energy Group is helping to ensure continued reliability
for our customers.
|
Energy
Environment
The
energy industry
in the United States is changing significantly for both regulated and
nonregulated businesses. Volatility, especially price volatility, is
common for both regulated and nonregulated businesses. This
volatility allows for growth opportunities to market participants who are
flexible and innovative, like the regulated and nonregulated businesses at
Integrys Energy Group. Integrys Energy Group has utilized, and will
continue to utilize, its flexibility and innovation to seek strategic growth
opportunities and maintain strong earnings growth in a volatile
industry.
Business
Operations
Our
regulated and
nonregulated businesses have distinct competencies and business
strategies. They offer differing energy and energy related products
and services, and experience a wide array of risks and
challenges. Our regulated utilities derive revenues primarily from
the purchase, production, distribution, and sale of electricity and the
purchase, distribution, and sale of natural gas to retail
customers. The regulated utilities also provide wholesale electric
service to numerous utilities and cooperatives for resale. Our
nonregulated business offers natural gas, electricity, and alternate fuel
supplies, as well as energy management and consulting services, to retail and
wholesale customers in various areas of the United States and portions of
Canada. The market risks and challenges of our business are discussed
in Item 3, "Quantitative and Qualitative Disclosures About Market
Risk."
Integrys
Energy
Services' marketing and trading operations manage power and natural gas
procurement as an integrated portfolio with its retail and wholesale sales
commitments and sale of generation from power plants. The table below
discloses future natural gas and electric sales volumes under contract at
Integrys Energy Services as of June 30, 2007. Integrys Energy
Services expects that its ultimate sales volumes in 2007 and beyond will exceed
the volumes shown in the table below as it continues to seek growth
opportunities and as existing customers renew expiring contracts and those
who
do not have long-term contracts continue to buy their short-term requirements
from Integrys Energy Services.
Forward
Contracted Volumes at 6/30/2007 (1)
|
|
07/01/07
to
06/30/08
|
|
|
07/01/08
to
06/30/09
|
|
|
After
06/30/09
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
sales volumes – billion cubic feet
|
|
|
162.6
|
|
|
|
47.7
|
|
|
|
25.5
|
|
Retail
sales
volumes – billion cubic feet
|
|
|
204.2
|
|
|
|
66.1
|
|
|
|
49.2
|
|
Total
natural
gas sales volumes
|
|
|
366.8
|
|
|
|
113.8
|
|
|
|
74.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
sales volumes – million kilowatt-hours
|
|
|
39,528
|
|
|
|
13,390
|
|
|
|
7,999
|
|
Retail
sales
volumes – million kilowatt-hours
|
|
|
13,278
|
|
|
|
4,181
|
|
|
|
4,052
|
|
Total
electric sales volumes
|
|
|
52,806
|
|
|
|
17,571
|
|
|
|
12,051
|
|
(1)
|
This
table
represents physical sales contracts for natural gas and electric
power for
delivery or settlement in future periods; however, there is a possibility
that some of the contracted volumes reflected in the above table
will be
net settled.
|
For
comparative
purposes, the future natural gas and electric sales volumes under contract
at
June 30, 2006, are shown below. The actual electric and
natural gas sales volumes for the six months ended June 30, 2007, and
2006 are disclosed within "Results of Operations" below.
Forward
Contracted Volumes at 6/30/2006 (1)
|
|
07/01/06
to
06/30/07
|
|
|
07/01/07
to
06/30/08
|
|
|
After
06/30/08
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
sales volumes – billion cubic feet
|
|
|
127.6
|
|
|
|
22.2
|
|
|
|
7.0
|
|
Retail
sales
volumes – billion cubic feet
|
|
|
177.3
|
|
|
|
52.8
|
|
|
|
43.3
|
|
Total
natural
gas sales volumes
|
|
|
304.9
|
|
|
|
75.0
|
|
|
|
50.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
sales volumes – million kilowatt-hours
|
|
|
19,020
|
|
|
|
7,862
|
|
|
|
5,732
|
|
Retail
sales
volumes – million kilowatt-hours
|
|
|
2,511
|
|
|
|
579
|
|
|
|
316
|
|
Total
electric sales volumes
|
|
|
21,531
|
|
|
|
8,441
|
|
|
|
6,048
|
|
(1) This
table
represents physical sales contracts for natural gas and electric
power for
delivery or settlement in future periods; however, there is a possibility
that some of the contracted volumes reflected in the above table
could be
net settled.
|
|
Both
retail and
wholesale forward natural gas volumes under contract have increased as of
June 30, 2007, compared with June 30, 2006, partially due to the
merger with PEC. The nonregulated
business
of PEC,
which merged with Integrys Energy Services effective February 21, 2007,
contributed approximately 44 billion cubic feet to forward contracted natural
gas volumes. Excluding these volumes, the increase in retail natural
gas volumes under contract at Integrys Energy Services was driven by lower
natural gas prices, encouraging existing and new customers to enter into or
extend supply contracts with Integrys Energy Services. Increased
volatility in natural gas prices and high natural gas storage spreads (future
natural gas sales prices were higher than the near term price of natural gas)
increased the profitability of natural gas transactions, driving the increase
in
wholesale natural gas sales volumes under contract at June 30, 2007,
compared with June 30, 2006. Wholesale electric volumes
under contract increased significantly at
June 30, 2007. The increase in wholesale electric sales
volumes was mostly related to the continued expansion of Integrys Energy
Services' wholesale electric businesses in the eastern markets, Colorado and
Illinois. No wholesale electric volumes under contract were related
to the merger with PEC. The emphasis Integrys Energy Services is
placing on its originated wholesale customer electric business is producing
encouraging results and, as a result, Integrys Energy Services has increasingly
entered into contracts to provide electricity to wholesale customers in the
future. Retail electric sales volumes under contract have also
increased at June 30, 2007, partially due to the merger with
PEC. The nonregulated business of PEC contributed approximately
7 million megawatt-hours to forward contracted volumes. Retail
electric sales volumes also increased due to continued expansion of retail
electric product offerings in various markets. In 2006, Integrys
Energy Services expanded its retail electric product offering in Illinois,
New
Hampshire, Rhode Island, Massachusetts, and Texas. Integrys Energy
Services previously did not offer retail electric products, or offered few
products, in these areas and expects to continue to build retail electric sales
in these markets by continuing to attract new customers.
Integrys
Energy
Services employs credit policies to mitigate its exposure to credit
risk. As a result of these credit policies, Integrys Energy Services
has not experienced significant write-offs from its large wholesale
counterparties to date. The table below summarizes Integrys Energy
Services' wholesale counterparty credit exposure, categorized by maturity date,
as of June 30, 2007. At June 30, 2007, Integrys Energy
Services had exposure with one investment grade counterparty that was more
than
10% of net exposure. Net exposure with this counterparty was
$38.5 million and is included in the table below.
Counterparty
Rating (Millions) (1)
|
|
|
Exposure
(2)
|
|
|
Exposure
Less
Than
1
Year
|
|
|
Exposure
1
to
3
Years
|
|
|
Exposure
4
to
5
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
grade – regulated utility
|
|
|
$ |
66.3
|
|
|
$ |
58.9
|
|
|
$ |
4.6
|
|
|
$ |
2.8
|
|
Investment
grade – other
|
|
|
|
161.1
|
|
|
|
110.8
|
|
|
|
24.6
|
|
|
|
25.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment
grade – regulated utility
|
|
|
|
7.9
|
|
|
|
7.9
|
|
|
|
-
|
|
|
|
-
|
|
Non-investment
grade – other
|
|
|
|
10.1
|
|
|
|
9.2
|
|
|
|
0.9
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-rated
–
regulated utility (3)
|
|
|
|
6.6
|
|
|
|
3.6
|
|
|
|
3.0
|
|
|
|
-
|
|
Non-rated
–
other (3)
|
|
|
|
62.6
|
|
|
|
56.5
|
|
|
|
5.6
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exposure
|
|
|
$ |
314.6
|
|
|
$ |
246.9
|
|
|
$ |
38.7
|
|
|
$ |
29.0
|
|
(1) The
investment
and non-investment grade categories are determined by publicly available
credit ratings of the counterparty or the rating of any guarantor,
whichever is higher. Investment grade counterparties are those with a
senior unsecured Moody's rating of Baa3 or above or a Standard &
Poor's rating of BBB- or above. |
(2) Exposure
considers netting of accounts receivable and accounts payable where
netting agreements are in place as well as netting mark-to-market
exposure. Exposure is before consideration of collateral from
counterparties. Collateral, in the form of cash and letters of
credit, received from counterparties totaled $38.9 million at
June 30, 2007, $17.0 million from investment grade
counterparties, $3.0 million from non-investment grade
counterparties, and $18.9 million from non-rated
counterparties. |
(3) Non-rated
counterparties include stand-alone companies, as well as unrated
subsidiaries of rated companies without parental credit
support. These counterparties are subject to an internal credit
review process. |
RESULTS
OF
OPERATIONS
Second
Quarter 2007 Compared with Second Quarter 2006
Integrys
Energy Group Overview
Integrys
Energy
Group's results of operations for the quarters ended June 30 are shown in
the following table:
Integrys
Energy Group's Results
(Millions,
except share amounts)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss)
available for common shareholders
|
|
$ |
(16.4 |
) |
|
$ |
34.9
|
|
|
|
- |
% |
Basic
earnings (loss) per share
|
|
$ |
(0.22 |
) |
|
$ |
0.83
|
|
|
|
- |
% |
Diluted
earnings (loss) per share
|
|
$ |
(0.22 |
) |
|
$ |
0.83
|
|
|
|
- |
% |
Integrys
Energy
Group recognized a loss of $16.4 million ($0.22 loss per share) for the
quarter ended June 30, 2007, compared with income available for common
shareholders of $34.9 million ($0.83 diluted earnings per share) for the
quarter ended June 30, 2006. Significant factors impacting the
change in earnings and earnings per share were as follows (and are discussed
in
more detail thereafter):
·
|
Electric
utility earnings decreased $8.4 million, from earnings of
$23.4 million for the quarter ended June 30, 2006, to earnings
of $15.0 million for quarter ended June 30, 2007. The
decrease in electric utility earnings was driven by a $9.6 million
decrease in WPSC's electric utility earnings, from $23.7 million for
the quarter ended June 30, 2006, to $14.1 million at
June 30, 2007. UPPCO experienced a small increase in
electric utility earnings due primarily to its approved retail electric
rate increase. WPSC's earnings were negatively impacted by fuel
and purchased power costs that were higher than what was recovered
in
rates during the quarter ended June 30, 2007, compared with fuel and
purchased power costs that were less than what was recovered in rates
during the same quarter in 2006, driving a $0.6 million quarter-over
quarter decrease in the electric margin at WPSC. For the
quarter ended June 30, 2007, fuel and purchased power prices were
above what was projected in the 2007 rate case primarily due to higher
commodity costs and unplanned plant outages (which required WPSC
to
purchase higher cost power in the market to serve its
customers). Because of the decrease in WPSC's electric margin
(driven by high fuel and purchased power costs), combined with increased
operating and maintenance expenses, quarter-over-quarter earnings
were
negatively impacted. Fuel and purchased power costs are
forecasted to be lower than what will be recovered in rates during
the
second half of the year, which should have a positive impact on electric
utility margin during that period. Also, the increase in
maintenance costs for the planned outages was recorded as these costs
were
incurred, while rate recovery for these costs occurs over the entire
year. Therefore, the majority of rate recovery related to the
increase in maintenance costs for the planned outages is expected
to occur
during the second half of the year, positively impacting earnings
during
that period.
|
|
|
·
|
The
loss from
natural gas utility operations decreased $3.5 million, from a loss of
$7.5 million for the quarter ended June 30, 2006, to a loss
of $4.0 million for the quarter ended June 30,
2007. The income tax benefit was larger than the comparable
2006 quarter and helped reduce the natural gas segment net loss for
the
quarter. The effective income tax rate for the second quarter
of 2007 was not meaningful given the pre-tax loss for the quarter
and a
change in estimate this quarter of the annual expected effective
tax
rate. At June 30, 2007, our expected effective tax rate for the
natural gas segment for the year was 33%. Natural gas utility
operations at WPSC improved $2.0 million, from a loss of
$2.2 million for the quarter ended June 30, 2006, to a loss of
$0.2 million for the quarter ended June 30, 2007. Improved
financial results at WPSC were driven by a retail natural gas rate
increase in 2007 and higher sales volumes, primarily related to a
9.1%
quarter-over-quarter increase in heating degree
days. Offsetting these items, a combined loss of
$3.1 million was recognized by PGL and NSG, which were acquired on
February 21, 2007. The combined quarter-over-quarter loss from
natural gas utility operations at MGUC and MERC did not change
significantly. This loss was $6.1 million for the quarter
ended June 30, 2007, compared with $5.4 million for the quarter
ended June 30, 2006.
|
|
|
·
|
Financial
results at Integrys Energy Services decreased $57.4 million, from
earnings of $13.4 million for the quarter ended June 30, 2006,
to a loss of $44.0 million for the same quarter in
2007. These results were driven by a $55.8 million
($33.5 million after-tax) decrease in margin, largely the result of
mark-to-market activity due to a decrease in mark-to-market gains
on
derivative instruments primarily used to protect the economic value
of
retail electric and natural gas supply contracts and Section 29/45K
tax
credits. These retail electric and natural gas supply contracts protect
the economic value of customer sales contracts. The ultimate
margin related to these supply and customer sales contracts will
be
recognized when the energy is delivered. Until that time, the
fluctuation in the value of the derivative supply contracts will
be
reflected in future periods. In addition, operating and
maintenance expense increased $27.7 million ($16.6 million
after-taxes), driven by the acquisition of PEC's nonregulated companies,
other business expansion activities, and a $9.0 million pre-tax gain
on the sale of Integrys Energy Services' Kimball storage field recognized
in the second quarter of 2006. Tax credits related to Integrys
Energy Services' ownership interest in a synthetic fuel production
facility also contributed a $15.7 million decrease in
earnings. Partially offsetting these items, miscellaneous
income had a $9.1 million ($5.5 million after-tax) favorable
quarter-over-quarter impact on earnings. Integrys Energy
Services also recognized a $6.2 million after-tax loss from
discontinued operations in the second quarter of 2006.
|
|
|
·
|
Financial
results at the Holding Company and Other segment decreased
$11.8 million, from earnings of $5.6 million for the quarter
ended June 30, 2006, to a loss of $6.2 million for the quarter
ended June 30, 2007. See "Overview of Holding Company
and Other Segment Operations," for more information.
|
|
|
·
|
In
connection
with the February 21, 2007, merger with PEC, Integrys Energy Group
announced its intent to divest of PEC's Oil and Gas segment
(PEP). During the quarter ended June 30, 2007, PEP
realized after-tax earnings of $24.0 million, which were reported as
discontinued operations.
|
|
|
·
|
Diluted
earnings (loss) per share was impacted by the items discussed above
as
well as a 33.8 million share (80.1%) increase in the weighted average
number of outstanding shares of Integrys Energy Group's common stock
for
the quarter ended June 30, 2007, compared with the same quarter in
2006. Integrys Energy Group issued 31.9 million shares on
February 21, 2007, in conjunction with the merger with PEC, and also
issued 2.7 million shares of common stock in May 2006 in order to
settle its forward equity agreement with an affiliate of J.P. Morgan
Securities, Inc. Additional shares were also issued under the
Integrys Energy Group Stock Investment Plan and certain stock-based
employee benefit plans.
|
Overview
of Utility Operations
In
the second quarter of 2007, utility operations included (1) the electric utility
segment, consisting of the electric operations of WPSC and UPPCO, and (2) the
natural gas utility segment, consisting of the natural gas operations of WPSC,
PGL, NSG, MGUC, and MERC. The natural gas operations of MERC were
acquired on July 1, 2006, and, therefore, are not included within the
consolidated natural gas operations for the second quarter of
2006. PGL and NSG were acquired on February 21, 2007 and therefore
are not included in the results of operations for the second quarter of
2006.
Electric
Utility Segment Operations
Integrys
Energy Group's Electric Utility
|
|
Three
Months Ended June 30,
|
|
Segment
Results (Millions)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
305.2
|
|
|
$ |
262.4
|
|
|
|
16.3 |
% |
Fuel
and
purchased power costs
|
|
|
160.4
|
|
|
|
118.8
|
|
|
|
35.0 |
% |
Margins
|
|
$ |
144.8
|
|
|
$ |
143.6
|
|
|
|
0.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
in kilowatt-hours
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
723.5
|
|
|
|
697.9
|
|
|
|
3.7 |
% |
Commercial
and industrial
|
|
|
2,162.5
|
|
|
|
2,065.5
|
|
|
|
4.7 |
% |
Wholesale
|
|
|
1,013.8
|
|
|
|
1,005.1
|
|
|
|
0.9 |
% |
Other
|
|
|
8.5
|
|
|
|
8.5
|
|
|
|
- |
% |
Total
sales in kilowatt-hours
|
|
|
3,908.3
|
|
|
|
3,777.0
|
|
|
|
3.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather
– WPSC
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating
degree days – actual
|
|
|
850
|
|
|
|
779
|
|
|
|
9.1 |
% |
Cooling
degree days – actual
|
|
|
204
|
|
|
|
123
|
|
|
|
65.9 |
% |
Electric
utility
revenue increased $42.8 million (16.3%) for the three months ended
June 30, 2007, compared with the same period in 2006, driven by the
following:
·
|
In
January
2007, the PSCW issued a final written order to WPSC authorizing a
retail
electric rate increase of $56.7 million (6.6%), effective
January 12, 2007, for Wisconsin electric
customers. This retail electric rate increase was required
primarily because of increased costs associated with electric
transmission, costs related to the construction of Weston 4 (including
the
training of additional personnel to maintain and operate the facility),
and costs for major overhauls at Weston 2 and the De Pere Energy
Center.
|
|
|
·
|
In
June 2006, the MPSC issued a final written order to UPPCO authorizing
an annual retail electric rate increase for UPPCO of $3.8 million
(4.8%), effective June 28, 2006. UPPCO's retail electric
rate increase was required in order to improve service quality and
reliability, upgrade technology, and manage rising employee and retiree
benefit costs.
|
|
|
·
|
Sales
volumes
increased 3.5%, primarily related to a 3.7% increase in sales volumes
to
residential customers and a 4.7% increase in sales volumes to commercial
and industrial customers. The increase in sales volumes to
residential customers was driven by a 65.9% quarter-over-quarter
increase
in cooling degree days and a 9.1% quarter-over-quarter increase in
heating
degree days (a portion of heating load is electric). Volumes to
commercial and industrial customers increased due to higher demand
from
existing customers.
|
The
electric
utility margin increased $1.2 million (0.8%) for the three months ended
June 30, 2007, compared with the same period in 2006. The
increase in the electric utility margin was driven by a higher
quarter-over-quarter margin at UPPCO (primarily related to its retail electric
rate increase discussed
above),
as WPSC's
electric utility margin decreased $0.6 million (0.5%). The
decrease in WPSC's margin was
driven by fuel
and purchased power costs that were higher than what was recovered in rates
during the quarter ended June 30, 2007, compared with fuel and purchased
power costs that were less than what was recovered in rates during the same
quarter in 2006. For the quarter ended June 30, 2007, fuel and
purchased power prices were above what was projected in the 2007 rate case
primarily due to higher commodity costs and unplanned plant outages (which
required WPSC to purchase higher cost power in the market to serve its
customers). On a per-unit basis, fuel and purchased power costs were
approximately 25% higher during the three months ended June 30, 2007,
compared with the same period in 2006. Partially offsetting the
decrease in WPSC's electric utility margin related to fuel and purchased power
costs, WPSC's margin was positively impacted by rate increases (primarily
required to support higher operating expenses) and higher residential and
commercial and industrial electric sales volumes as favorable weather conditions
during both the heating and cooling seasons positively impacted margin by an
estimated $4 million. However, because of the decrease in WPSC's
electric margin (driven by high fuel and purchased power costs), combined with
increased operating and maintenance expenses, quarter-over-quarter earnings
were
negatively impacted.
Natural
Gas
Utility Segment Operations
Integrys
Energy Group's
|
|
Three
Months Ended June 30,
|
|
Natural
Gas Utility Segment Results (Millions)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
417.8
|
|
|
$ |
95.6
|
|
|
|
337.0 |
% |
Purchased
natural gas costs
|
|
|
273.2
|
|
|
|
62.0
|
|
|
|
340.6 |
% |
Margins
|
|
$ |
144.6
|
|
|
$ |
33.6
|
|
|
|
330.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Throughput
in therms
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
213.1
|
|
|
|
47.6
|
|
|
|
347.7 |
% |
Commercial
and industrial
|
|
|
66.0
|
|
|
|
21.5
|
|
|
|
207.0 |
% |
Interruptible
|
|
|
8.2
|
|
|
|
7.0
|
|
|
|
17.1 |
% |
Interdepartmental
|
|
|
9.7
|
|
|
|
4.4
|
|
|
|
120.5 |
% |
Transport
|
|
|
340.1
|
|
|
|
114.4
|
|
|
|
197.3 |
% |
Total
sales in therms
|
|
|
637.1
|
|
|
|
194.9
|
|
|
|
226.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather
– WPSC
|
|
|
|
|
|
|
|
|
|
|
|
|
WPSC
heating degree days – actual
|
|
|
850
|
|
|
|
779
|
|
|
|
9.1 |
% |
Natural
gas utility
revenue increased $322.2 million (337.0%) for the three months ended
June 30, 2007, compared with the same period in 2006, due primarily to
the following:
·
|
The
natural
gas utility companies of PEC (PGL and NSG) generated $269.1 million
of natural gas utility revenue and contributed 335 million therms of
natural gas throughput volumes during the quarter ended June 30,
2007.
|
|
|
·
|
The
acquisition of natural gas operations in Minnesota on July 1, 2006
generated $36.6 million of natural gas utility revenue and
contributed 110 million therms of natural gas throughput volumes
during the quarter ended
June 30, 2007.
|
|
|
·
|
WPSC's
natural gas utility revenue increased $9.9 million from
$68.0 million for the three months ended June 30, 2006, to
$77.9 million for the same period in 2007 driven by a retail natural
gas rate increase and a 10.0% increase in natural gas throughput
volumes. On January 11, 2007, the PSCW issued a final written
order to WPSC authorizing a retail natural gas rate increase of
$18.9 million (3.8%), effective
January 12, 2007. This retail natural gas rate
increase was required for infrastructure improvements necessary to
ensure
the reliability of the natural gas distribution system and costs
associated with the remediation of former manufactured gas plant
sites. The increase in natural gas throughput volumes was
driven by a 10.7% increase in residential volumes and a 10.1% increase
in
commercial and industrial and interruptible volumes. The
increase in sales volumes to residential customers was driven by
a 9.1%
quarter-over-quarter increase in heating degree days and a 2.9%
quarter-over-quarter increase in the average weather-normalized natural
gas usage per customer.
|
|
|
·
|
MGUC's
natural gas utility revenue increased $6.6 million from
$27.6 million for the three months ended June 30, 2006, to
$34.2 million for the same period in 2007. The increase in
natural gas revenue at MGUC was driven primarily by an increase
in natural gas throughput volumes to residential and commercial and
industrial customers, primarily due to a 13.5% quarter-over-quarter
increase in heating degree days.
|
The
natural gas
utility margin increased $111.0 million (330.4%) for the three months ended
June 30, 2007, compared with the same period in 2006. The
combined margin provided by PGL and NSG during the second quarter of 2007 was
$99.1 million. The margin provided by MERC during the second
quarter of 2007 was $8.3 million. WPSC's natural gas margin
increased $3.5 million, from $23.8 million in the second quarter of
2006 to $27.3 million in the second quarter of 2007. As
discussed in more detail above, the increase in WPSC's margin was driven by
the
retail natural gas rate increase (primarily required to support higher operating
expenses), and an increase in throughput volumes to higher margin residential
and commercial and industrial customers. While the margin impact of
the quarter-over-quarter increase in average weather-normalized sales volumes
is
difficult to quantify, the colder weather conditions contributed approximately
an additional $1 million to WPSC's margin. MGUC's margin was
relatively flat quarter-over-quarter.
Overview
of
Integrys Energy Services' Operations
Integrys
Energy
Services offers natural gas, electric, and alternative fuel supplies, as well
as
asset management and consulting services, to retail and wholesale customers
in
the Midwest and northeastern United States and portions of Canada in addition
to
Texas and Colorado.
As
a result of the merger of Integrys Energy Group and the nonregulated businesses
of PEC, these businesses were able to combine their natural gas and electricity
presence with residential, commercial, and industrial customers regionally
within Illinois, Michigan, and Ohio. Integrys Energy Services is now
one of the largest nonutility energy marketers in the northern Illinois retail
energy marketplace providing wholesale natural gas transportation, storage,
and
supply services to marketers, utilities, pipelines, and natural gas-fired
generation facilities. Also as a result of the merger, Integrys
Energy Services has significantly increased the amount of pipeline
transportation and storage under contract in the Midwest region.
Integrys
Energy
Services also owns several merchant generation plants, primarily in the Midwest
and northeastern United States and adjacent portions of Canada.
In
2007 and the beginning of 2008, Integrys Energy Services is focusing on its
existing markets by making improvements to its infrastructure to optimize
customer service, which it believes, along with its competitive energy
offerings, will allow expansion into existing and new
markets. Integrys Energy Services expects that the new retail and
wholesale product offerings launched in 2006 and 2007 will contribute favorably
to margin in 2007 and beyond. This has had a favorable impact on retail electric
and power origination in 2007, but work on infrastructure will continue until
2008.
|
|
Three
Months Ended June 30,
|
|
(Millions,
except natural gas sales volumes)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Nonregulated
revenues
|
|
$ |
1,648.4
|
|
|
$ |
1,130.4
|
|
|
|
45.8 |
% |
Nonregulated
cost of fuel, natural gas, and purchased power
|
|
|
1,649.9
|
|
|
|
1,076.1
|
|
|
|
53.3 |
% |
Margins
|
|
$ |
(1.5 |
) |
|
$ |
54.3
|
|
|
|
- |
% |
Margin
Detail
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric
and other margins (other margins mostly relate to mark-to market gains
on oil options of $0.2 million in the second quarter of 2007,
compared with mark-to-market and realized gains on oil options of
$14.3 million during the second quarter of 2006)
|
|
$ |
(20.1 |
) |
|
$ |
40.1
|
|
|
|
- |
% |
Natural
gas margins
|
|
$ |
18.6
|
|
|
$ |
14.2
|
|
|
|
31.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
volumes (includes volumes both physically delivered and net
settled)
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
electric sales volumes in kilowatt-hours
|
|
|
29,412.1
|
|
|
|
12,206.6
|
|
|
|
141.0. |
% |
Retail
electric sales volumes in kilowatt-hours
|
|
|
3,467.5
|
|
|
|
1,304.8
|
|
|
|
165.8 |
% |
Wholesale
natural gas sales volumes in billion cubic feet
|
|
|
112.4
|
|
|
|
87.7
|
|
|
|
28.2 |
% |
Retail
natural gas sales volumes in billion cubic feet
|
|
|
87.4
|
|
|
|
78.4
|
|
|
|
11.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Physical
volumes (includes only transactions settled physically for the periods
shown)
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
electric sales volumes in kilowatt-hours *
|
|
|
607.9
|
|
|
|
200.2
|
|
|
|
203.6 |
% |
Retail
electric sales volumes in kilowatt-hours *
|
|
|
3,419.8
|
|
|
|
1,035.2
|
|
|
|
230.4 |
% |
Wholesale
natural gas sales volumes in billion cubic feet *
|
|
|
105.5
|
|
|
|
81.9
|
|
|
|
28.8 |
% |
Retail
natural gas sales volumes in billion cubic feet *
|
|
|
73.5
|
|
|
|
61.8
|
|
|
|
18.9 |
% |
*
Represents gross physical volumes
Integrys
Energy
Services' revenue increased $518.0 million (45.8%) for the quarter ended
June 30, 2007, compared with the same period in 2006. The
nonregulated energy marketing businesses acquired from PEC drove a
$258 million increase in revenue, and also contributed physical sales
volumes of 1,366.1 million kilowatt-hours to retail electric operations,
11.3 billion cubic feet to wholesale natural gas operations, and 7.9 billion
cubic feet to retail natural gas operations. The addition of new
customers to Integrys Energy Services' origination business drove an increase
in
wholesale electric sales volumes and revenue. In addition to the
acquisition of PEC's nonregulated operations, Integrys Energy Services has
been
rolling out new retail electric product offerings to existing markets and has
also entered into new retail electric markets, resulting in customer additions
and an increase in retail electric sales volumes. Customer additions and volume
increases in Ohio and Michigan drove an increase in retail natural gas sales
volumes. In addition, energy prices increased in the second quarter
of 2007, compared with the same period in 2006.
Integrys
Energy
Services' margin decreased $55.8 million, from $54.3 million for the
quarter ended June 30, 2006, to a negative $1.5 million margin for the
same quarter in 2007. Many items contributed to the
quarter-over-quarter net decrease in margin and, as a result, a table has been
provided to summarize significant changes. Variances included under
"Other significant items" in the table below are generally related to the timing
of gain and loss recognition on certain transactions. A detailed
analysis of these variances follows the table.
(Millions)
|
|
Increase
(Decrease) in Margin for the Quarter Ended June 30, 2007 Compared
with Quarter Ended June 30, 2006
|
|
|
|
|
|
Electric
and other margins
|
|
|
|
Realized
gains on structured origination contracts
|
|
$ |
3.5
|
|
Realized
retail electric margin
|
|
|
0.9
|
|
All
other wholesale electric operations
|
|
|
(26.9 |
) |
|
|
|
|
|
Other
significant items:
|
|
|
|
|
Oil
option activity
|
|
|
(14.1 |
) |
Retail
mark-to-market activity
|
|
|
(24.9 |
) |
Liquidation
of an electric supply contract in 2005
|
|
|
1.3
|
|
Net
decrease
in electric and other margins
|
|
|
(60.2 |
) |
|
|
|
|
|
Natural
gas
margins
|
|
|
|
|
Realized
natural gas margins
|
|
|
(1.5 |
) |
|
|
|
|
|
Other
significant items:
|
|
|
|
|
Spot
to forward differential
|
|
|
1.8
|
|
Mass
market supply options
|
|
|
(0.5 |
) |
Other
mark-to-market activity
|
|
|
4.6
|
|
Net
increase
in natural gas margins
|
|
|
4.4
|
|
|
|
|
|
|
Net
decrease
in Integrys Energy Services' margin
|
|
$ |
(55.8 |
) |
Integrys
Energy
Services' electric and other margins decreased $60.2 million, from $40.1
million for the quarter ended June 30, 2006, to a negative $20.1 million
margin during the same quarter in 2007. The 2007 margin included the
negative impact of $6.5 million of amortization related to purchase accounting
adjustments required as a result of the merger with PEC. The
following items were the most significant contributors to the net change in
Integrys Energy Services' electric and other margins:
·
|
Realized
gains on structured origination contracts– Integrys Energy Services'
electric and other margin increased $3.5 million for the quarter
ended June 30, 2007, compared with the same quarter in 2006, due to
realized gains from origination contracts involving the sale of energy
through structured transactions to wholesale customers in the Midwest
and
northeastern United States. Originators focus on physical,
customer-based agreements with municipalities, merchant generators,
and
regulated utilities in areas where Integrys Energy Services has market
expertise. Integrys Energy Services continues to expand its
wholesale origination capabilities, taking advantage of infrastructure
developments and the addition of experienced sales
personnel.
|
·
|
Realized
retail electric margin– The realized margin from retail electric
operations increased $0.9 million, driven by a
combined $3.7 million increase in realized margin in Texas,
northern Maine, and New England. Partially offsetting these
decreases, the realized retail electric margin from operations in
New York
decreased $1.6 million and PEC's nonregulated retail electric
business contributed a negative $0.9 million to Integrys Energy
Services' realized margin in the second quarter of 2007. The
Texas retail electric offering was originally initiated in July 2006.
Integrys Energy Services contracted a new standard electric offering
in
northern Maine beginning January 1, 2007, for a 26-month
term. The margin in northern Maine increased
quarter-over-quarter due to the fact that Integrys Energy Services
restructured its deal with an energy supplier. In the prior year,
Integrys
Energy Services agreed to share in fuel transportation costs, which
reduced its margin as a result of higher than anticipated diesel
prices. In the current year, Integrys Energy Services was able
to lock in a fixed cost for supply. The margin increase in New
England was the result of market penetration through new product
offerings
and other marketing efforts.
|
·
|
All
other
wholesale electric operations– A $26.9 million decrease in margin
from other wholesale electric operations was driven by a decrease
in net
realized and unrealized gains related to
trading
|
|
activities
utilized to optimize the value of Integrys Energy Services' merchant
generation fleet and customer supply portfolios. The overall
level of proprietary trading was less in 2007 due primarily to decreased
electric price volatility, emphasis on structured electric transactions,
as well as the departure of several key traders in the third quarter
of
2006. Like many of its peers, Integrys Energy Services
experienced some turnover of personnel in its trading group. Several
traders left in the third quarter of 2006 and Integrys Energy Services
has
been working to replace their capabilities. Integrys
Energy Services used their departure as an opportunity to restructure
its
trading operations into two regional offices and focus on structured
electric transactions, which will allow the company to more effectively
service customers in the West and Midwest while providing better
diversification of trading talent, markets, and product
offerings.
|
As
part of its trading activities, Integrys Energy Services seeks to generate
profits from the volatility of the price of electricity, by purchasing or
selling various financial and physical instruments (such as forward contracts,
options, financial transmission rights, and capacity contracts) in established
wholesale markets (where Integrys Energy Services has market expertise), under
risk management policies set by management and approved by Integrys Energy
Group's Board of Directors. Integrys Energy Services also seeks to
maximize the value of its generation and customer supply portfolios to reduce
market price risk and extract additional value from these assets through the
use
of various financial and physical instruments (such as forward contracts,
options, financial transmission rights, and capacity
contracts). Period-by-period variability in the margin
contributed by Integrys Energy Services' optimization strategies and trading
activities is expected due to constantly changing market conditions and
differences in the timing of gains and losses recognized on derivative and
non-derivative contracts, as required by generally accepted accounting
principles. A diverse mix of products and markets, combined with
disciplined execution and exit strategies, has allowed Integrys Energy Services
to generate economic value and earnings from these activities while staying
within the value-at-risk (VaR) limits authorized by Integrys Energy Group's
Board of Directors. For more information on VaR, see "Item 3,
Quantitative and Qualitative Disclosures about Market Risk."
·
|
Oil
option
activity– A decrease in mark-to-market and realized gains on
derivative instruments utilized to protect the value of a portion
of
Integrys Energy Services' Section 29/45K federal tax credits in 2006
and 2007 resulted in a $14.1 million decrease to Integrys Energy
Services' electric and other margin, related to mark-to market gains
on
oil options of $0.2 million in the second quarter of 2007, compared
with mark-to-market and realized gains on oil options of
$14.3 million during the second quarter of 2006. The
derivative instruments have not been designated as hedging instruments
and, as a result, changes in the fair value are recorded currently
in
earnings. The benefit from Section 29/45K federal tax credits
during a period is primarily based upon estimated annual synthetic
fuel
production levels, annual earnings projections, and any impact projected
annual oil prices may have on the realization of the Section 29/45K
federal tax credits. This results in mark-to-market gains or
losses being recognized in different periods, compared with any tax
credit
phase-outs that may be recognized. For more
information on Section 29/45K federal tax credits, see Note 12,
"Commitments and
Contingencies."
|
·
|
Retail
mark-to-market activity– Retail mark-to-market activity was
responsible for a $24.9 million decrease to the electric and other
margin in the second quarter of 2007, compared with the same quarter
in
2006. In the second quarter of 2006, $4.9 million of
mark-to-market losses were recognized on retail electric customer
supply
contracts, compared with $29.8 million of mark-to-market losses
recognized on these contracts in the second quarter of
2007. Earnings volatility results from the application of
derivative accounting rules to customer supply contracts (requiring
that
these derivative instruments be marked-to-market), without a corresponding
mark-to-market offset related to the customer sales contracts, which
are
not considered derivative instruments. These mark-to-market
gains and losses will vary each period, and ultimately reverse as
the
related customer sales contracts settle. Due to the mix of
contracts that require mark-to-market accounting and those that do
not,
Integrys Energy Services generally experiences mark-to-market losses
on
supply contracts in periods of declining wholesale prices and
mark-to-market gains in periods of increasing wholesale
prices. Declining prices are generally favorable for Integrys
Energy Services' retail business as they increase Integrys Energy
Services' ability to offer
customers
|
|
contracts
that are both favorably priced and lower than the prices offered
by
regulated utilities. However, periods of declining prices can
cause short-term volatility in earnings. In the second quarter
of 2007, particularly near the end of the period, wholesale prices
decreased.
|
·
|
Liquidation
of an electric supply contract in 2005– In the fourth quarter of 2005,
an electricity supplier exiting the wholesale market in Maine requested
that Integrys Energy Services liquidate a firm contract to buy power
in
2006 and 2007. At that time, Integrys Energy Services
recognized an $8.2 million gain related to the liquidation of the
contract and entered into a new contract with another supplier for
firm
power in 2006 and 2007 to supply its customers in Maine. The
cost to purchase power under the new contract is more than the cost
under
the liquidated contract. As a result of the termination of this
contract, purchased power costs to serve customers in Maine were
higher in
2006, and are also slightly higher than the original contracted amount
in
2007. The liquidation of this contract had a $1.3 million
positive impact on the quarter-over-quarter change in the electric
and
other margin, as the contract had a $1.5 million negative impact on
the electric and other margin in the second quarter of 2006, compared
with
a $0.2 million negative impact on margin in the second quarter of
2007.
|
The
natural gas
margin at Integrys Energy Services increased $4.4 million (31.0%), from
$14.2 million for the quarter ended June 30, 2006, to $18.6 million during
the same quarter in 2007. The 2007 margin included the negative
impact of $0.8 million of amortization related to purchase accounting
adjustments required as a result of the merger with PEC. The
following items were the most significant contributors to the change in Integrys
Energy Services' natural gas margin:
·
|
Realized
natural gas margins– Realized natural gas margins
decreased $1.5 million, from $19.6 million in the second quarter
of 2006 to $18.1 million during the same period in
2007. Overall, retail natural gas margins decreased
$3.0 million and wholesale natural gas margins increased
$1.5 million, driven by PEC's nonregulated natural gas marketing
business. PEC's nonregulated natural gas marketing business
contributed a negative $1.2 million to realized natural gas margins
in the second quarter of 2007 (retail natural gas margins were negative
$3.5 million and wholesale natural gas margins were a positive
$2.3 million).
|
·
|
Spot
to
forward differential– The natural gas storage cycle had a
$1.8 million positive quarter over quarter impact on Integrys Energy
Services' margin. For the quarter ended June 30, 2007, the
natural gas storage cycle had a $2.1 million positive impact on
Integrys Energy Services' natural gas margin, compared with a
$0.3 million positive impact on margin for the second quarter of
2006. At June 30, 2007, there was a $2.5 million
difference between the market value of natural gas in storage and
the
market value of future sales contracts (net unrealized loss), related
to
the 2007/2008 natural gas storage cycle. This $2.5 million
difference between the market value of natural gas in storage and
the
market value of future sales contracts (net unrealized loss) related
to
the 2007/2008 storage cycle is expected to vary with market conditions,
and will reverse entirely and have a positive impact on earnings
when all
of the natural gas is withdrawn from
storage.
|
·
|
Mass
market supply options– Options utilized to manage
supply costs for mass market customers, which expire in varying months
through May 2008, had a $0.5 million negative quarter-over-quarter
impact on Integrys Energy Services' natural gas margin. In the
second quarter of 2007, these options had a $0.1 million positive
impact on Integrys Energy Services' natural gas margin, compared
with a
$0.6 million positive impact on margin in the second quarter of
2006. These contracts are utilized to reduce the risk of price
movements, customer migration, and changes in consumer consumption
patterns. Earnings volatility results from the application of
derivative accounting rules to the options (requiring that these
derivative instruments be marked-to-market), without a corresponding
mark-to-market offset related to the customer contracts. Full
requirements natural gas contracts with Integrys Energy Services'
customers are not considered derivatives and, therefore, no gain
or loss
is recognized on these contracts until settlement. The option
mark-to-market gains and losses will reverse as the related customer
sales
contracts settle.
|
Other
mark-to-market activity– Mark-to-market losses on derivatives not previously
discussed totaling $1.6 million were recognized in the second quarter of
2007, compared with the recognition of $6.2 million of mark-to-market
losses on other derivative instruments in the second quarter of
2006. A significant portion of the difference relates to changes in
the fair market value of basis swaps utilized to mitigate market price risk
associated with natural gas transportation contracts and certain natural gas
sales contracts as well as swaps utilized to mitigate market price risk related
to certain natural gas storage contracts. Earnings volatility
results from the application of derivative accounting rules to the basis and
other swaps (requiring that these derivative instruments be marked-to-market),
without a corresponding mark-to-market offset related to the physical natural
gas transportation contracts, the natural gas sales contracts, or the natural
gas storage contracts (as these contracts are not considered derivative
instruments). Therefore, no gain or loss is recognized on the
transportation contracts, customer sales contracts, or natural gas storage
contracts until physical settlement of these contracts occurs.
Overview
of
Holding Company and Other Segment Operations
Financial
results
at the Holding Company and Other segment decreased $11.8 million, from
earnings of $5.6 million for the quarter ended June 30, 2006, to a
loss of $6.2 million for the quarter ended
June 30, 2007. The decrease in earnings was driven by a
$13.4 million ($8.0 million after-tax) increase in interest expense
that was the result of additional borrowings assumed in the merger with PEC
(discussed in more detail under Interest Expense below), an increase in
short-term and long-term borrowings required to fund the acquisition of the
natural gas operations in Minnesota, and working capital requirements at
Integrys Energy Services. A $6.2 million ($3.7 million
after-tax) gain on the sale of the Integrys Energy Group's one-third interest
in
Guardian Pipeline, LLC in April 2006 also contributed to the decrease in
quarter-over-quarter earnings. Operating expenses also increased
quarter-over-quarter, primarily as a result of severance accruals and relocation
payments relating to the merger with PEC on February 21, 2007. These
items were partially offset by a $2.2 million increase in pre-tax earnings
($1.3 million after-tax) from Integrys Energy Group's 32% ownership
interest in ATC. Integrys Energy Group recorded $12.0 million of
pre-tax equity earnings from ATC during the second quarter of 2007, compared
with $9.8 million for the same period in 2006.
Operating
Expenses
|
|
Three
Months Ended June 30,
|
|
Integrys
Energy Group's Operating Expenses
(Millions)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Operating
and
maintenance expense
|
|
$ |
251.9
|
|
|
$ |
120.4
|
|
|
|
109.2 |
% |
Depreciation
and decommissioning expense
|
|
|
50.6
|
|
|
|
29.3
|
|
|
|
72.7 |
% |
Taxes
other
than income
|
|
|
22.0
|
|
|
|
14.6
|
|
|
|
50.7 |
% |
Operating
and Maintenance Expense
Operating
and
maintenance expenses increased $131.5 million (109.2%) for the quarter
ended June 30, 2007, compared with the same quarter in
2006. The components of operating and maintenance expense are as
follows:
Operating
and
maintenance expense at the electric utility segment increased
$13.7 million, from $69.8 million for the quarter ended June 30,
2006, to $83.5 million for the same quarter in 2007, driven by the
following:
·
|
Maintenance
expenses at the electric utility segment increased $5.9 million,
primarily due to major overhauls planned at the Weston 2 generation
station and the De Pere Energy Center and due to three unplanned
outages
at the Weston 3 generation station.
|
|
|
·
|
Electric
transmission expenses increased $4.9 million, primarily related to
higher rates charged by MISO and ATC due to additional transmission
investment, a trend the electric utility segment expects will
continue.
|
|
|
·
|
The
electric
utility segment was allocated external costs to achieve merger synergies
of $0.8 million in the second quarter of
2007.
|
Operating
and
maintenance expense at the natural gas utility segment increased
$83.4 million, from $31.5 million in the second quarter of 2006, to
$114.9 million in the second quarter of 2007. The increase in
operating and maintenance expense at the natural gas utility segment was driven
by the following:
·
|
Combined
operating and maintenance expense of $76.3 million was incurred by
PGL and NSG in the second quarter of 2007 (external costs to achieve
merger synergies allocated to these utilities were deferred and,
therefore, had no impact on operating and maintenance
expense). These companies were not owned in the second quarter
of 2006.
|
|
|
·
|
Operating
and
maintenance expense at MERC increased $9.0 million in the second
quarter of 2007 (MERC incurred approximately $2.1 million of
transition costs in the second quarter of 2006).
|
|
|
·
|
Operating
expenses related to WPSC's natural gas operations increased
$1.2 million quarter-over-quarter due primarily to an increase in
natural gas distribution expenses.
|
|
|
·
|
A
$2.2 million quarter-over-quarter decrease in operating expenses
related to MGUC's natural gas operations partially offset the increase
in
natural gas utility segment operating and maintenance expenses in
the
second quarter of 2007. The quarter-over-quarter decrease was
primarily due to external transition costs incurred in the second
quarter
of 2006 for the start-up of outsourcing activities and other legal
and
consulting fees.
|
Operating
and
maintenance expenses at Integrys Energy Services increased $27.7 million,
from $16.6 million for quarter ended June 30, 2006, to
$44.3 million for the quarter ended June 30, 2007. PEC's
nonregulated energy marketing subsidiaries recorded $6.0 million of
operating and maintenance expense. A $9.0 million pre-tax gain
on the sale of Integrys Energy Services' Kimball storage field recognized in
the
second quarter of 2006 resulted in an increase in quarter-over-quarter operating
and maintenance expenses, with the remainder of the increase driven by higher
payroll and benefit costs related to additional employees required as a result
of continued business expansion activities at Integrys Energy
Services.
Operating
and
maintenance expenses at the Holding Company and Other Segment also
increased. The increase in operating and maintenance expenses at the
Holding Company and Other Segment was driven primarily by costs related to
the
termination and relocation of employees as a result of the merger.
Depreciation
and Amortization Expense
Depreciation
and
amortization expense increased $21.3 million (72.7%) for the quarter ended
June 30, 2007, compared with the same quarter in 2006, as
follows:
|
|
Three
Months Ended June 30,
|
|
Reportable
Segment (millions)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
Electric
utility
|
|
$ |
20.4
|
|
|
$ |
19.6
|
|
|
|
4.1 |
% |
Natural
gas
utility
|
|
|
26.8
|
|
|
|
7.5
|
|
|
|
257.3 |
% |
Integrys
Energy Services
|
|
|
2.8
|
|
|
|
2.3
|
|
|
|
21.7 |
% |
Holding
company and other
|
|
|
0.6
|
|
|
|
(0.1 |
) |
|
|
-
|
|
The
quarter-over-quarter increase in depreciation and amortization expense was
driven by a $19.3 million increase in depreciation and amortization expense
recorded at the natural gas utility segment, driven by a combined
$17.0 million of depreciation expense recognized at PGL and NSG during the
second quarter
of
2007 and $2.3 million of depreciation expense recognized by MERC during the
second quarter of 2007. These companies were not owned in the second
quarter of 2006.
Taxes
Other
Than Income Taxes
Taxes
other than
income increased $7.4 million (50.7%), for the quarter ended June 30,
2007, compared with the same period in 2006, as follows:
|
|
Three
Months Ended June 30,
|
|
Reportable
Segment (millions)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
Electric
utility
|
|
$ |
10.7
|
|
|
$ |
10.3
|
|
|
|
3.9 |
% |
Natural
gas
utility
|
|
|
8.6
|
|
|
|
2.7
|
|
|
|
218.5 |
% |
Integrys
Energy Services
|
|
|
1.7
|
|
|
|
1.4
|
|
|
|
21.4 |
% |
Holding
company and other
|
|
|
1.0
|
|
|
|
0.2
|
|
|
|
400.0 |
% |
The
quarter-over-quarter increase in taxes other than income was driven by a
$5.9 million increase in taxes other than income recorded at the natural
gas utility segment, as the result of a combined $4.9 million of taxes
other than income recognized at PGL and NSG during the quarter as well as
$1.1 million of taxes other than income recognized by MERC for the quarter,
primarily related to property taxes, real estate taxes, gross receipts taxes,
and payroll taxes paid by these companies.
Other
Income and Expense
Integrys
Energy Group’s
|
|
Three
Months Ended June 30,
|
|
Other
Income (Expense) (Millions)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
$ |
21.6
|
|
|
$ |
14.5
|
|
|
|
49.0 |
% |
Interest
expense
|
|
|
(42.6 |
) |
|
|
(22.4 |
) |
|
|
90.2 |
% |
Minority
interest
|
|
|
-
|
|
|
|
1.2
|
|
|
|
- |
% |
Other
expense
|
|
$ |
(21.0 |
) |
|
$ |
(6.7 |
) |
|
|
213.4 |
% |
Miscellaneous
Income
The
$7.1 million increase in miscellaneous income was primarily driven
by:
·
|
A
$7.3 million increase in foreign currency gains at Integrys Energy
Services’ Canadian subsidiaries, which was offset by related losses in
gross margin. These transactions are substantially hedged from
an economic perspective, resulting in no significant impact on income
(loss) available for common
shareholders.
|
·
|
PEC,
PGL, and
NSG contributed $2.7 million to other income in the current quarter,
primarily due to interest income
recognized.
|
·
|
A
$2.2 million increase in pre-tax equity earnings from Integrys Energy
Group's 32% ownership interest in
ATC.
|
·
|
A
$2.0 million decrease in the loss recorded by Integrys Energy
Services related to its equity investment in a synthetic fuel facility,
was primarily driven by less production taken by Integrys Energy
Services
from this facility in the second quarter of 2007, compared with the
second
quarter of 2006. For more discussion related to the synthetic
fuel facility see Note 12, "Commitments and
Contingencies."
|
·
|
A
$6.2 million decrease due to the pre-tax gain recognized from the
sale of Integrys Energy Group’s one-third interest in Guardian Pipeline,
LLC in the second quarter of 2006.
|
Interest
Expense
Interest
expense
increased $20.2 million as a result of:
· |
Interest
expense of $16.2 million recorded during the second
quarter of 2007 related to PEC and its
subsidiaries. |
·
|
Subsequent
to
June 30, 2006, increased borrowings were primarily utilized to fund
the purchase of natural gas distribution operations in Michigan and
Minnesota, the construction of Weston 4, working capital requirements
at Integrys Energy Services, and transaction and transition costs
related
to the merger with PEC.
|
Minority
Interest
As
a result of WPS Power Development's sale of an approximate 30% interest in
its subsidiary, ECO Coal Pelletization #12 LLC, on December 19, 2002,
$1.2 million of losses related to the synthetic fuel operation and reported
in miscellaneous income were allocated to Integrys Energy Services' partner
and
reported as a minority interest for the quarter ended June 30,
2006. For 2007, Integrys Energy Services' partner elected to stop
receiving production from the synthetic fuel facility and, therefore, will
no
longer share in losses from this facility.
Provision
for Income Taxes
The
projected
annual effective tax rate was 25.5% at June 30, 2007, compared with a
projected annual effective tax rate of 31.4% at June 30,
2006. The projected annual effective tax rate was 26.3% at
March 31, 2007, compared with the projected annual effective tax rate of
31.6% at March 31, 2006.
Generally
accepted
accounting principles require our year-to-date interim effective tax rate to
reflect our projected annual effective tax rate. As a result, we
estimate the effective tax rate for the year and, based upon year-to-date
pre-tax earnings, we record tax expense for the period to reflect the projected
annual effective tax rate.
As
a result of applying the rates and methods described above to year-to-date
pre-tax income, the effective tax rate was 27.9% for the quarter ended
June 30, 2007, compared with an effective tax rate of 31.2% for the quarter
ended June 30, 2006.
The
quarter-over-quarter changes in the projected annual effective tax rates shown
above are primarily due to the variance in the amount of Section 29/45K tax
credits expected to be generated during the year from ownership in synthetic
fuel operations as a percentage of projected income before taxes for the
year. At June 30, 2007, it was anticipated that approximately
31% of the 2007 Section 29/45K federal tax credits will ultimately be
phased-out, compared with the assumption at June 30, 2006, that
approximately 76% of 2006 credits would be phased out. The estimated
phase-out at June 30, 2007, and June 30, 2006, was calculated based
upon year-to-date actual and published forward oil prices at those
dates.
For
the year ending
December 31, 2007, including the projected phase-out, we expect to
recognize the benefit of Section 29/45K federal tax credits totaling
approximately $27 million. If no phase-out occurs, then we would
expect to recognize approximately $39 million of tax credits in
2007. See Note 12, "Commitments and Contingencies," for more
information related to Section 29/45K federal tax credits.
Discontinued
Operations, Net of Tax
Discontinued
operations, net of tax, increased $30.2 million, from an after-tax loss of
$6.2 million in the second quarter of 2006 to after tax income of
$24.0 million in the second quarter of 2007.
In
connection with the February 21, 2007, merger with PEC, Integrys Energy Group
announced that it would proceed with the divestiture of PEP. The
divestiture will allow Integrys Energy Group to focus on its core competencies,
reduce external financing requirements, and reduce Integrys Energy Group's
risk
profile. It is anticipated that the divestiture will be completed by
December 31, 2007. During the quarter ended June 30, 2007, PEP
recorded after-tax earnings of $24.0 million as a component of discontinued
operations. As
required by generally accepted accounting principles, because of the held for
sale status of this business, PEP earnings reflect no depreciation, depletion,
or amortization expense.
During
the second
quarter of 2006, Niagara Generation, LLC (which was sold in January 2007) and
Sunbury Generation, LLC (which was sold in July 2006) recorded after-tax losses
of $0.6 million and $5.6 million, respectively, as a component of
discontinued operations.
For
more
information on the discontinued operations discussed above, see Note 4,
"Discontinued Operations," in Integrys Energy Group's
Condensed Notes to Financial Statements.
Six
Months
2007 Compared with Six Months 2006
Integrys
Energy Group Overview
Integrys
Energy
Group's results of operations for the six months ended June 30 are shown in
the following table:
Integrys
Energy Group's Results
(Millions,
except share amounts)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Income
available for common shareholders
|
|
$ |
123.0
|
|
|
$ |
95.0
|
|
|
|
29.5 |
% |
Basic
earnings per share
|
|
$ |
1.84
|
|
|
$ |
2.31
|
|
|
|
(20.3 |
%) |
Diluted
earnings per share
|
|
$ |
1.83
|
|
|
$ |
2.30
|
|
|
|
(20.4 |
%) |
Income
available
for common shareholders was $123.0 million ($1.83 diluted earnings per
share) for the six months ended June 30, 2007, compared with
$95.0 million ($2.30 diluted earnings per share) for the same period in
2006. Significant factors impacting the change in earnings and
earnings per share were as follows (and are discussed in more detail
thereafter):
·
|
Electric
utility earnings decreased $7.4 million, from earnings of
$38.9 million for the six months ended June 30, 2006, to
earnings of $31.5 million for same period in 2007. The
decrease in electric utility earnings was driven by a $9.4 million
decrease in WPSC's earnings, from $37.8 million for the six months
ended June 30, 2006, to $28.4 million for the six months ended
June 30, 2007. UPPCO experienced a small increase in
earnings due primarily to its approved retail electric rate
increase. WPSC's earnings were negatively impacted by fuel and
purchased power costs that were higher than what was recovered in
rates
during the six months ended June 30, 2007, compared with fuel and
purchased power costs that were less than what was recovered in rates
during the same period in 2006. For the six months ended
June 30, 2007, fuel and purchased power prices were above what was
projected in the 2007 rate case due to higher commodity costs and
unanticipated plant outages (which required WPSC to purchase higher
cost
power in the market to serve its customers). Because of the
high fuel and purchased power costs, the increase in margin was not
large
enough to offset increased operating and maintenance expenses negatively
impacting period-over-period earnings. Fuel and purchased power
costs are forecasted to be lower than what will be recovered in rates
during the second half of the year, which should have a positive
impact on
electric utility margin during that period. Also, the increase
in maintenance costs for the planned outages was recorded as these
costs
were incurred, while rate recovery for these costs occurs over the
entire
year (mainly during the third quarter cooling
season). Therefore, the majority of rate recovery related to
the increase in maintenance costs for the planned outages is expected
to
occur during the second half of the year, positively impacting earnings
during that period.
|
|
|
·
|
Financial
results at the natural gas utility improved $32.0 million, from a
loss of $0.8 million for the six months ended
June 30, 2006, to earnings of $31.2 million for the six
months ended June 30, 2007. Combined earnings of
$8.3 million were contributed by PGL and NSG, which were acquired on
February 21, 2007. Combined earnings contributed by MGUC
(natural gas distribution operations acquired on April 1, 2006) and
MERC
(natural gas distribution operations acquired on July 1, 2006) increased
$15.4 million. During the six months ended June 30,
2007, MERC and MGUC realized combined earnings of $6.0 million (as
both companies operated during the first quarter 2007 heating season),
compared with a loss of $9.4 million realized during the six months
ended June 30, 2006, (primarily related to external transition costs
at MGUC and MERC and the fact that MGUC was acquired in the second
quarter
of 2006, which generally is a negative quarter for natural gas utilities
as the heating season occurs during the winter months). Natural
gas utility earnings at WPSC increased $7.2 million (84.7%), driven
by an increase in throughput volumes to higher margin residential
and
commercial and industrial customers. The increase in sales
volumes to residential customers was driven by a 7.3% period-over-period
increase in heating degree days and a 5.9% period-over-period increase
in
the average weather-normalized natural gas usage per
customer.
|
|
|
·
|
Integrys
Energy Services' earnings decreased $14.8 million, from
$50.5 million for the six months ended June 30, 2006, to
$35.7 million for the same period in 2007. Lower earnings
were driven by a $26.5 million ($15.9 million after-tax)
decrease in margin, largely the result of mark-to-market activity
due to a
decrease in mark-to-market gains on derivative instruments primarily
used
to protect the economic value of retail electric and natural gas
supply
contracts and Section 29/45K tax credits. These retail electric and
natural gas supply contracts protect the economic value of customer
sales
contracts. The ultimate margin related to these supply and
customer sales contracts will be recognized when the energy is
delivered. Until that time, the fluctuation in the value of the
derivative supply contracts will be reflected in future
periods. In addition, operating and maintenance expense
increased $38.8 million ($23.3 million after-taxes), driven by
operating expenses incurred by PEC's nonregulated companies, business
expansion activities, and a $9.0 million pre-tax gain on the sale of
Integrys Energy Services' Kimball storage field recognized in the
second
quarter of 2006. Partially offsetting these items, discontinued
operations had a $19.4 million favorable after-tax period-over-period
impact on earnings, miscellaneous income had an $11.2 million
($5.5 million after-tax) favorable period-over-period impact on
earnings, and tax credits related to Integrys Energy Services' ownership
interest in a synthetic fuel production facility contributed a
$0.4 million after-tax increase to earnings.
|
|
|
·
|
Financial
results at the Holding Company and Other segment decreased
$12.6 million, from earnings of $6.4 million for the six months
ended June 30, 2006, to a loss of $6.2 million for the six
months ended June 30, 2007. See "Overview of Holding
Company and Other Segment Operations," for more
information.
|
|
|
·
|
In
connection
with the February 21, 2007, merger with PEC, Integrys Energy Group
announced its intent to divest of PEC's Oil and Gas segment
(PEP). During the six months ended June 30, 2007, PEP
realized after-tax earnings of $32.2 million, which were reported as
discontinued operations.
|
|
|
·
|
Diluted
earnings per share was impacted by the items discussed above as well
as a
25.8 million share (62.5%) increase in the weighted average number of
outstanding shares of Integrys Energy Group's common stock for the
six
months ended June 30, 2007, compared with the same period in
2006. Integrys Energy Group issued 31.9 million shares on
February 21, 2007, in conjunction with the merger with PEC and also
issued 2.7 million shares of common stock in May 2006 in order to
settle its forward equity agreement with an affiliate of J.P. Morgan
Securities, Inc. Additional shares were also issued under the
Integrys Energy Group Stock Investment Plan and certain stock-based
employee benefit plans.
|
Overview
of
Utility Operations
During
the six
months ended June 30, 2007, utility operations included (1) the electric
utility segment, consisting of the electric operations of WPSC and UPPCO and
(2)
the natural gas utility segment, consisting of the natural gas operations of
WPSC, PGL, NSG, MGUC, and MERC. The natural gas operations of WPSC,
MGUC, and MERC were included for the entire six months ended June 30, 2007,
while the natural gas operations of PGL and NSG were included from February
22,
2007, through June 30, 2007. For the six months ended
June 30, 2006, the natural gas operations of WPSC were included for the
entire six months, while the natural gas operations of MGUC were included from
April 1, 2006, through June 30, 2006, as the natural gas distribution
operations of MGUC were acquired on April 1, 2006. The natural
gas operations of MERC were acquired on July 1, 2006, and, therefore, were
not
included within the consolidated natural gas operations for the six months
ended
June 30, 2006.
Electric
Utility Segment Operations
Integrys
Energy Group's Electric Utility
|
|
Six
Months Ended June 30,
|
|
Segment
Results (Millions)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
604.4
|
|
|
$ |
518.8
|
|
|
|
16.5 |
% |
Fuel
and
purchased power costs
|
|
|
310.7
|
|
|
|
244.5
|
|
|
|
27.1 |
% |
Margins
|
|
$ |
293.7
|
|
|
$ |
274.3
|
|
|
|
7.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
in kilowatt-hours
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
1,562.1
|
|
|
|
1,491.5
|
|
|
|
4.7 |
% |
Commercial
and industrial
|
|
|
4,265.7
|
|
|
|
4,151.2
|
|
|
|
2.8 |
% |
Wholesale
|
|
|
1,995.5
|
|
|
|
1,943.4
|
|
|
|
2.7 |
% |
Other
|
|
|
20.5
|
|
|
|
20.2
|
|
|
|
1.5 |
% |
Total
sales in kilowatt-hours
|
|
|
7,843.8
|
|
|
|
7,606.3
|
|
|
|
3.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather
– WPSC
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating
degree days – actual
|
|
|
4,402
|
|
|
|
4,101
|
|
|
|
7.3 |
% |
Cooling
degree days – actual
|
|
|
204
|
|
|
|
123
|
|
|
|
65.9 |
% |
Electric
utility
revenue increased $85.6 million (16.5%) for the six months ended
June 30, 2007, compared with the six months ended June 30, 2006,
driven by the following:
·
|
In
January
2007, the PSCW issued a final written order to WPSC authorizing a
retail
electric rate increase of $56.7 million (6.6%), effective
January 12, 2007, for Wisconsin electric
customers.
|
|
|
·
|
In
June 2006, the MPSC issued a final written order to UPPCO authorizing
an annual retail electric rate increase for UPPCO of $3.8 million
(4.8%), effective June 28, 2006.
|
|
|
·
|
Sales
volumes
increased 3.1%, primarily related to a 4.7% increase in sales volumes
to
residential customers. The increase in sales volumes to
residential customers was driven by a 65.9% period-over-period increase
in
cooling degree days and a 7.3% period-over-period increase in heating
degree days (a portion of heating load is electric). Volumes to
commercial and industrial, wholesale, and other customers increased
due to
higher demand from existing
customers.
|
The
electric
utility margin increased $19.4 million (7.1%) for the six months ended
June 30, 2007, compared with the six months ended June 30,
2006. The increase in the electric utility margin included a
$15.6 million (6.3%) increase in WPSC's electric margin and a
$3.8 million (14.7%) increase in UPPCO's margin (driven by its retail
electric base rate increase in 2006). As discussed in more detail
above, WPSC's margin was positively impacted by rate increases (primarily
required to support higher operating expenses) and higher electric sales
volumes, primarily to residential and commercial and industrial
customers. Favorable weather conditions during both the heating and
cooling seasons positively impacted margin by an estimated
$5 million. These items were partially offset by fuel and
purchased
power
costs that
were higher than what was recovered in rates during the six months ended
June 30, 2007, compared with fuel and purchased power costs that were less
than what was recovered in rates during the same period in 2006. For
the six months ended June 30, 2007, fuel and purchased power prices were
above what was projected in the 2007 rate case primarily due to higher commodity
costs and unplanned plant outages (which required WPSC to purchase higher cost
power in the market to serve its customers). On a per-unit basis,
fuel and purchased power costs were approximately 21% higher during the six
months ended June 30, 2007, compared with the same period in
2006. Because of the high fuel and purchased power costs, the
increase in margin was not large enough to offset increases in operating and
maintenance expenses (discussed below), negatively impacting period-over-period
earnings.
Natural
Gas
Utility Segment Operations
Integrys
Energy Group's
|
|
Six
Months Ended June 30,
|
|
Natural
Gas Utility Segment Results (Millions)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
1,099.6
|
|
|
$ |
288.6
|
|
|
|
281.0 |
% |
Purchased
natural gas costs
|
|
|
783.1
|
|
|
|
210.2
|
|
|
|
272.6 |
% |
Margins
|
|
$ |
316.5
|
|
|
$ |
78.4
|
|
|
|
303.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Throughput
in therms
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
650.8
|
|
|
|
145.4
|
|
|
|
347.6 |
% |
Commercial
and industrial
|
|
|
243.1
|
|
|
|
80.0
|
|
|
|
203.9 |
% |
Interruptible
|
|
|
31.9
|
|
|
|
13.3
|
|
|
|
139.9 |
% |
Interdepartmental
|
|
|
14.7
|
|
|
|
8.9
|
|
|
|
65.2 |
% |
Transport
|
|
|
711.3
|
|
|
|
214.2
|
|
|
|
232.1 |
% |
Total
sales in therms
|
|
|
1,651.8
|
|
|
|
461.8
|
|
|
|
257.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather
– WPSC
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating
degree days – actual
|
|
|
4,402
|
|
|
|
4,101
|
|
|
|
7.3 |
% |
Natural
gas utility
revenue increased $811.0 million (281.0%) for the six months ended
June 30, 2007, compared with the six months ended June 30, 2006,
due primarily to the following:
·
|
The
natural
gas utility companies of PEC (PGL and NSG) generated $523.1 million
of natural gas utility revenue and contributed 649 million therms of
natural gas throughput volumes in the six months ended June 30,
2007.
|
|
|
·
|
The
acquisition of natural gas distribution operations in Minnesota on
July 1,
2006, generated $173.1 million of natural gas utility revenue and
contributed 381 million therms of natural gas throughput volumes
during the six months ended June 30, 2007.
|
|
|
·
|
MGUC
(acquired natural gas distribution operations in Michigan on April
1,
2006) generated $134.7 million of natural gas utility revenue and
188 million therms of natural gas throughput volumes during the six
months ended June 30, 2007, compared with $27.6 million of
natural gas revenue and 66 million therms of natural throughput
volumes during the six months ended June 30, 2006. The
increase in natural gas revenue at MGUC was driven primarily by the
fact
that MGUC was acquired on April 1, 2006. Therefore, MGUC
operated during the first quarter heating season in 2007, but was
not
owned by Integrys Energy Group in the first quarter heating season
in
2006.
|
|
|
·
|
WPSC's
natural gas utility revenue increased $7.7 million from
$261.0 million for the six months ended June 30, 2006 to
$268.7 million for the same period in 2007, driven by a retail
natural gas rate increase and a 9.5% increase in natural gas throughput
volumes. On January 11, 2007, the PSCW issued a final written
order to WPSC authorizing a retail natural gas rate increase of
$18.9 million (3.8%) effective
January 12, 2007. The increase in natural gas
throughput volumes was driven by a 13.8% increase in residential
volumes
and a 5.7% increase in commercial and industrial and interruptible
volumes. The increase in sales volumes to residential customers
was driven by a 7.3% increase in heating degree days and a 5.9% increase
in the average weather-normalized natural gas usage per
customer.
|
The
natural gas
utility margin increased $238.1 million (303.7%) for the six months ended
June 30, 2007, compared with the six months ended June 30,
2006. The combined margin provided by PGL and NSG was
$167.7 million in 2007. The margin provided by MERC was
$34.9 million. WPSC's natural gas margin increased
$13.7 million, from $68.6 million during the six months ended
June 30, 2006, to $82.3 million in the six months ended June 30,
2007. As discussed in more detail above, the increase in WPSC's
margin was driven by the retail natural gas rate increase (primarily required
to
support higher operating expenses), and an increase in throughput volumes to
higher margin residential and commercial and industrial
customers. While the margin impact of the increase in average
weather-normalized sales volumes is difficult to quantify, the colder weather
conditions contributed approximately an additional $3 million to WPSC's
margin. MGUC's margin for the six months ended June 30, 2007,
increased $21.8 million, from $9.8 million for the six months ended
June 30, 2006, to $31.6 million for the six months ended June 30,
2007. Integrys Energy Group acquired MGUC on April 1, 2006, and,
therefore, did not receive the benefit from MGUC operating during the heating
season in the first quarter of 2006.
Overview
of
Integrys Energy Services' Operations
|
|
Six
Months Ended June 30,
|
|
(Millions,
except natural gas sales volumes)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Nonregulated
revenues
|
|
$ |
3,423.8
|
|
|
$ |
2,688.2
|
|
|
|
27.4 |
% |
Nonregulated
cost of fuel, natural gas, and purchased power
|
|
|
3,316.6
|
|
|
|
2,554.5
|
|
|
|
29.8 |
% |
Margins
|
|
$ |
107.2
|
|
|
$ |
133.7
|
|
|
|
(19.8 |
)% |
Margin
Detail
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric
and other margins (other margins mostly relate to mark-to market gains
on oil options of $1.2 million for the six months ended June 30,
2007, compared with mark-to-market and realized gains on oil options
of
$24.7 million during the same period in 2006)
|
|
$ |
52.2
|
|
|
$ |
81.2
|
|
|
|
(35.7 |
)% |
Natural
gas margins
|
|
$ |
55.0
|
|
|
$ |
52.5
|
|
|
|
4.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
volumes (includes volumes both physically delivered and net
settled)
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
electric sales volumes in kilowatt-hours
|
|
|
55,482.8
|
|
|
|
25,552.3
|
|
|
|
117.1 |
% |
Retail
electric sales volumes in kilowatt-hours
|
|
|
5,954.4
|
|
|
|
2,443.9
|
|
|
|
143.6 |
% |
Wholesale
natural gas sales volumes in billion cubic feet
|
|
|
224.4
|
|
|
|
194.1
|
|
|
|
15.6 |
% |
Retail
natural gas sales volumes in billion cubic feet
|
|
|
199.3
|
|
|
|
152.1
|
|
|
|
31.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Physical
volumes (includes only transactions settled physically for the periods
shown)
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
electric sales volumes in kilowatt-hours *
|
|
|
1,323.3
|
|
|
|
464.9
|
|
|
|
184.6 |
% |
Retail
electric sales volumes in kilowatt-hours *
|
|
|
5,859.3
|
|
|
|
1,966.8
|
|
|
|
197.9 |
% |
Wholesale
natural gas sales volumes in billion cubic feet *
|
|
|
203.1
|
|
|
|
182.8
|
|
|
|
11.1 |
% |
Retail
natural gas sales volumes in billion cubic feet *
|
|
|
165.1
|
|
|
|
131.3
|
|
|
|
25.7 |
% |
*
Represents gross physical volumes
Integrys
Energy
Services' revenue increased $735.6 million (27.4%) for the six months ended
June 30, 2007, compared with the same period in 2006. The
nonregulated energy marketing businesses acquired from PEC drove a
$409 million increase in revenue, and also contributed physical sales
volumes of 1,873.7 million kilowatt-hours to retail electric operations,
16.4 billion cubic feet to wholesale natural gas operations, and 14.7 billion
cubic feet to retail natural gas operations. The addition of new
customers to Integrys Energy Services' origination business drove an increase
in
wholesale electric sales volumes and revenue. In addition to the
acquisition of PEC's nonregulated operations, Integrys Energy Services has
been
rolling out new product offerings to existing retail electric markets and has
also entered into new retail electric regions, resulting in customer additions
and an increase in retail electric volumes. Customer additions in
Ohio and Michigan drove most of the increase in retail natural gas sales
volumes. Partially offsetting the impact on revenues from volume
increases, energy prices decreased during the six months ended June 30,
2007, compared with the same period in 2006.
Integrys
Energy
Services' margins decreased $26.5 million (19.8%), from $133.7 million
for the six months ended June 30, 2006, to $107.2 million for the six
months ended June 30, 2007. Many items contributed to the
period-over-period net decrease in margin and, as a result, a table has been
provided to summarize significant changes. Variances included under
"Other significant items" in the table below are generally related to the timing
of gain and loss recognition on certain transactions. All variances
depicted in the table are discussed in more detail below the table.
(Millions)
|
|
Increase
(Decrease) in Margin for the Six Months Ended June 30, 2007 Compared
with Six Months Ended June 30, 2006
|
|
|
|
|
|
Electric
and other margins
|
|
|
|
Realized
gains on structured origination contracts
|
|
$ |
6.4
|
|
Realized
retail electric margin
|
|
|
(0.2 |
) |
All
other wholesale electric operations
|
|
|
(34.6 |
) |
|
|
|
|
|
Other
significant items:
|
|
|
|
|
Oil
option activity
|
|
|
(23.5 |
) |
Retail
mark-to-market activity
|
|
|
20.1
|
|
Liquidation
of an electric supply contract in 2005
|
|
|
2.8
|
|
Net
decrease
in electric and other margins
|
|
|
(29.0 |
) |
|
|
|
|
|
Natural
gas
margins
|
|
|
|
|
Realized
natural gas margins
|
|
|
5.9
|
|
|
|
|
|
|
Other
significant items:
|
|
|
|
|
Mass
market supply options
|
|
|
5.0
|
|
Spot
to forward differential
|
|
|
1.8
|
|
Other
mark-to-market activity
|
|
|
(10.2 |
) |
Net
increase
in natural gas margins
|
|
|
2.5
|
|
|
|
|
|
|
Net
decrease
in Integrys Energy Services' margin
|
|
$ |
(26.5 |
) |
Integrys
Energy
Services' electric and other margins decreased $29.0 million (35.7%), from
$81.2 million for the six months ended June 30, 2006, to $52.2 million
during the same period in 2007. The 2007 margin included the negative
impact of $9.5 million of amortization related to purchase accounting
adjustments required as a result of the merger with PEC. The
following items were the most significant contributors to the net change in
Integrys Energy Services' electric and other margins:
·
|
Realized
gains on structured origination contracts– Integrys Energy Services'
electric and other margin increased $6.4 million for the six months
ended June 30, 2007, compared with the same period in 2006, due to
realized gains from origination contracts involving the sale of energy
through structured transactions to wholesale customers in the Midwest
and
northeastern United States.
|
·
|
Realized
retail electric margin– The realized margin from retail electric
operations decreased $0.2 million. Combined, PEC's
nonregulated retail electric operations and the retail electric operations
in Ohio contributed a negative $4.7 million impact to Integrys Energy
Services' realized margin during the six months ended June 30,
2007. Offsetting the negative impact on margin related to PEC's
nonregulated electric retail business was a combined $4.9 million
period-over-period increase in margins contributed by Illinois and
Texas.
The Illinois market continued to grow through penetration of existing
markets within the state. The Texas retail electric offering
was originally initiated in July
2006.
|
·
|
All
other
wholesale electric operations– A $34.6 million decrease in margin
from other wholesale electric operations was driven by a decrease
in net
realized and unrealized gains related to trading activities utilized
to
optimize the value of Integrys Energy Services' merchant generation
fleet
and customer supply portfolios. The overall level of
proprietary trading was less in 2007 due primarily to decreased electric
price volatility, emphasis on structured electric transactions, as
well as
the departure of several key traders in the third quarter of
2006. Like many of its peers, Integrys Energy Services
experienced some turnover of personnel in its trading group. Several
traders left in the third quarter of 2006 and Integrys Energy Services
has
been working to replace their capabilities. Integrys
Energy Services used their departure as an opportunity to restructure
its
trading operations into two regional offices and focus on structured
electric transactions, which will allow the company to more effectively
service customers in the West and Midwest while providing better
diversification of trading talent, markets, and product
offerings. See additional discussion within RESULTS OF
OPERATIONS, Second Quarter 2007 Compared with Second Quarter
2006.
|
·
|
Oil
option
activity– A decrease in mark-to-market and realized gains on
derivative instruments utilized to protect the value of a portion
of
Integrys Energy Services' Section 29/45K federal tax credits in 2006
and 2007 resulted in a $23.5 million decrease to Integrys Energy
Services' electric and other margin, related to mark-to market gains
on
oil options of $1.2 million for the six months ended June 30,
2007, and mark-to-market and realized gains on oil options of
$24.7 million during the same period in 2006. See
additional discussion within RESULTS OF OPERATIONS, Second Quarter
2007 Compared with Second Quarter
2006.
|
·
|
Retail
mark-to-market activity– Retail mark-to-market activity contributed a
$20.1 million increase to the electric and other margin in the six
months ended June 30, 2007, compared with the same period in
2006. In the six months ended June 30, 2006,
$8.7 million of mark-to-market losses were recognized on retail
electric customer supply contracts, compared with $11.4 million of
mark-to-market gains recognized on these contracts in the six months
ended
June 30, 2007. See additional discussion within
RESULTS OF OPERATIONS, Second Quarter 2007 Compared with Second
Quarter 2006.
|
·
|
Liquidation
of an electric supply contract in 2005– In the fourth quarter of 2005,
an electricity supplier exiting the wholesale market in Maine requested
that Integrys Energy Services liquidate a firm contract to buy power
in
2006 and 2007. At that time, Integrys Energy Services
recognized an $8.2 million gain related to the liquidation of the
contract and entered into a new contract with another supplier for
firm
power in 2006 and 2007 to supply its customers in Maine. The
cost to purchase power under the new contract is more than the cost
under
the liquidated contract. As a result of the termination of this
contract, purchased power costs to serve customers in Maine were
higher in
2006, and are also slightly higher than the original contracted amount
in
2007. The liquidation of this contract had a $2.8 million
positive impact on the period-over-period change in the electric
and other
margin, as the contract had a $3.7 million negative impact on the
electric and other margin for six months ended June 30, 2006,
compared with a $0.9 million negative impact on margin for the six
months ended June 30, 2007.
|
The
natural gas
margin at Integrys Energy Services increased $2.5 million (4.8%), from
$52.5 million for the six months ended June 30, 2006, to $55.0 million
during the same period in 2007. In total, the year-to-date 2007
natural gas margin did not include any amortization related to purchase
accounting
adjustments
required as a result of the merger with PEC. The following items were
the most significant contributors to the change in Integrys Energy Services'
natural gas margin:
·
|
Realized
natural gas margins– Realized natural gas margins
increased $5.9 million, from $51.2 million for the six months
ended June 30, 2006, to $57.1 million for the six months ended
June 30, 2007. The majority of the increase,
$4.1 million, related to higher wholesale natural gas margins, driven
by $2.9 million of realized margins from PEC's nonregulated wholesale
natural gas business. The remaining $1.8 million increase
in realized natural gas margins related to retail
operations. Margins from retail natural gas operations in
Wisconsin, Illinois, Canada, and New York increased as Integrys Energy
Services continues to expand its existing markets, partially offset
by a
negative $2.4 million margin contribution form PEC's nonregulated
retail natural gas business.
|
·
|
Mass
market supply options– Options utilized to manage
supply costs for mass market customers, which expire in varying months
through May 2008, had a $5.0 million positive impact on Integrys
Energy Services' natural gas margin for the six months ended June 30,
2007. For the six months ended June 30, 2007, these
options had a $2.4 million positive impact on Integrys Energy
Services' natural gas margin (commensurate with increasing natural
gas
prices), compared with a $2.6 million negative impact on margin for
the six months ended June 30, 2006, (commensurate with decreasing
natural gas prices). See additional discussion within
RESULTS OF OPERATIONS, Second Quarter 2007 Compared with Second
Quarter 2006.
|
·
|
Spot
to
forward differential– The natural gas storage cycle had a
$1.8 million positive impact on Integrys Energy Services' margin for
the six months ended June 30, 2007, compared with the same period in
2006. For the six months ended June 30, 2007, the natural
gas storage cycle had a $3.1 million positive impact on Integrys
Energy Services' natural gas margin, compared with a $1.3 million
positive impact on margin for the same period in 2006. See
additional discussion within RESULTS OF OPERATIONS, Second Quarter
2007 Compared with Second Quarter
2006.
|
·
|
Other
mark-to-market activity– Mark-to-market losses on derivatives not
previously discussed totaling $7.3 million were recognized for the
six months ended June 30, 2007, compared with the recognition of
$2.9 million of mark-to-market gains on other derivative instruments
in the same period of 2006. See additional discussion within
RESULTS OF OPERATIONS, Second Quarter 2007 Compared with Second
Quarter 2006.
|
Overview
of
Holding Company and Other Segment Operations
Financial
results
at the Holding Company and Other segment decreased $12.6 million, from
earnings of $6.4 million for the six months ended June 30, 2006, to a
loss of $6.2 million for the six months ended
June 30, 2007. The decrease in earnings was driven by a
$25.0 million ($15.0 million after-tax) increase in interest expense
that was the result of additional borrowings assumed in the merger with PEC
(discussed in more detail under interest expense below), an increase in
short-term and long-term borrowings required to fund the acquisitions of the
natural gas operations in Michigan and Minnesota, and working capital
requirements at Integrys Energy Services. A $6.2 million
($3.7 million after-tax) gain on the sale of Integrys Energy Group's
one-third interest in Guardian Pipeline, LLC in April 2006 also contributed
to
the decrease in period-over-period earnings. These increases were
partially offset by a $3.5 million ($2.1 million after-tax) decrease
in operating expenses, primarily related to the reallocation of external costs
to achieve merger synergies associated with the merger with PEC, incurred from
July 2006 through March 2007. In March 2007, all external costs
to achieve were reallocated from the Holding Company and Other Segment (where
they were initially recorded) to the other reportable segments, which will
ultimately be the beneficiaries of the synergy savings resulting from the costs
to achieve. A $5.0 million increase in pre-tax earnings
($3.0 million after-tax) from Integrys Energy Group's ownership interest in
ATC also partially offset the factors discussed above. Integrys
Energy Group recorded $23.7 million of pre-tax equity earnings from ATC
during the six months ended June 30, 2007, compared with $18.7 million
for the same period in 2006.
Summary
of
External Costs to Achieve Synergy Savings
Below
is a table
depicting the pre-tax impact that external costs to achieve had on each
reportable segment of Integrys Energy Group during the six months ended
June 30, 2007. Note that external costs to achieve incurred in
2006 and during the three months ended March 31, 2007, were reallocated
down to the segment level in March 2007. After March 31, 2007, costs
to achieve are immediately allocated down to the segment level without passing
through the holding company.
Reportable
Segment (millions)
|
|
Pre-tax
Impact
(Income)/Expense
|
|
Electric
utility
|
|
$ |
5.6
|
|
Natural
gas
utility
|
|
|
2.4
|
|
Integrys
Energy Services
|
|
|
3.2
|
|
Holding
company and other
|
|
|
(7.8 |
) |
Total
|
|
$ |
3.4
|
|
Operating
Expenses
|
|
Six
Months Ended June 30,
|
|
Integrys
Energy Group's Operating Expenses
(Millions)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Operating
and
maintenance expense
|
|
$ |
438.6
|
|
|
$ |
238.5
|
|
|
|
83.9 |
% |
Depreciation
and decommissioning expense
|
|
|
90.8
|
|
|
|
56.5
|
|
|
|
60.7 |
% |
Taxes
other
than income
|
|
|
43.1
|
|
|
|
29.2
|
|
|
|
47.6 |
% |
Operating
and Maintenance Expense
Operating
and
maintenance expenses increased $200.1 million (83.9%) for the six months
ended June 30, 2007, compared with the same period in
2006. The components of operating and maintenance expense are as
follows:
Operating
and
maintenance expense at the electric utility segment increased
$27.8 million, from $139.6 million for the six months ended
June 30, 2006, to $167.4 million for the same period in 2007, driven
by the following:
·
|
Maintenance
expenses at the electric utility segment increased $9.8 million,
primarily due to major overhauls planned at the Weston 2 and 3 generation
stations and at the De Pere Energy Center, and due to three unplanned
outages at the Weston 3 generation station.
|
|
|
·
|
Electric
transmission expenses increased $9.0 million, primarily related to
higher rates charged by MISO and ATC due to additional transmission
investment, a trend the electric utility segment expects will
continue.
|
|
|
·
|
The
electric
utility segment was allocated external costs to achieve merger synergies
(discussed in more detail under "Overview of Holding Company and
Other
Segment Operations" above) of $5.6 million in the first half of
2007.
|
|
|
·
|
General
and
administrative expenses increased $2.4 million at the electric
segment, related primarily to increases in employee benefit
costs.
|
Operating
and
maintenance expense at the natural gas utility segment increased
$135.3 million, from $55.5 million in the six months ended
June 30, 2006, to $190.8 million in the six months ended June 30,
2007. The increase in operating and maintenance expense at the
natural gas utility segment was driven by the following:
·
|
Combined
operating and maintenance expense of $115.6 million was incurred by
PGL and NSG (external costs to achieve merger synergies allocated
to these
utilities were deferred and, therefore, had no impact on operating
and
maintenance expense). These companies were not owned in the
first quarter of 2006 and only MGUC was owned in the second quarter
of
2006.
|
|
|
·
|
Combined
operating expenses at MGUC and MERC increased $19.8 million, from
$20.6 million for the six months ended June 30, 2006, to
$40.4 million for the six months ended June 30,
2007. The increase in operating expense at these companies was
due to the fact that retail natural gas operations in Michigan (MGUC)
were
first acquired on April 1, 2006, and retail natural gas operations
in
Minnesota (MERC) were first acquired on July 1, 2006. For the
six months ended June 30, 2006, $8.2 million of MGUC and MERC's
combined operating expenses related to external transition costs,
primarily for the start-up of outsourcing activities and other legal
and
consulting fees.
|
Operating
and
maintenance expenses at Integrys Energy Services increased $38.8 million,
from $37.1 million for six months ended June 30, 2006, to
$75.9 million for the six months ended June 30, 2007. PEC's
nonregulated energy marketing subsidiaries recorded $8.3 million of
operating and maintenance expense. A $9.0 million pre-tax gain
on the sale of Integrys Energy Services' Kimball storage field recognized in
the
second quarter of 2006 resulted in an increase in period-over-period operating
and maintenance expenses, with the remainder of the increase driven by higher
payroll and benefit costs related to additional employees required as a result
of continued business expansion activities and the allocation of
$3.2 million of costs to achieve merger synergies
An
offsetting decrease in operating and maintenance expenses incurred by the
Holding Company and Other Segment was driven primarily by the allocation of
costs to achieve merger synergy savings incurred prior to the merger to the
subsidiaries in March 2007, as allowed by the regulators. See
"Overview of Holding Company and Other Segment Operations" for more information
related to the allocation of external transition costs.
Depreciation
and Amortization Expense
Depreciation
and
amortization expense increased $34.3 million (60.7%) for the six months
ended June 30, 2007, compared with the same period in 2006, as
follows:
|
|
Six
Months Ended June 30,
|
|
Reportable
Segment (millions)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
Electric
utility
|
|
$ |
40.6
|
|
|
$ |
38.8
|
|
|
|
4.6 |
% |
Natural
gas
utility
|
|
|
43.5
|
|
|
|
13.0
|
|
|
|
234.6 |
% |
Integrys
Energy Services
|
|
|
5.6
|
|
|
|
4.7
|
|
|
|
19.1 |
% |
Holding
company and other
|
|
|
1.1
|
|
|
|
-
|
|
|
|
-
|
|
The
period-over-period increase in depreciation and amortization expense was driven
by a $30.5 million increase in depreciation and amortization expense
recorded at the natural gas utility segment, driven by the merger with PEC
(a
combined $23.9 million of depreciation expense was recognized at PGL and
NSG during the first six months of 2007), and increased depreciation expense
related to the acquisition of the Michigan and Minnesota natural gas operations,
which were not included in results of operations for the entire six months
ended
June 30, 2006. Continued capital investment at WPSC's natural gas
utility also contributed to the increase in depreciation and amortization
expense.
Taxes
Other
Than Income Taxes
Taxes
other than
income increased $13.9 million (47.6%), for the six months ended
June 30, 2007, compared with the same period in 2006, as
follows:
|
|
Six
Months Ended June 30,
|
|
Reportable
Segment (millions)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
Electric
utility
|
|
$ |
21.6
|
|
|
$ |
20.8
|
|
|
|
3.8 |
% |
Natural
gas
utility
|
|
|
15.2
|
|
|
|
4.4
|
|
|
|
245.5 |
% |
Integrys
Energy Services
|
|
|
4.4
|
|
|
|
3.7
|
|
|
|
18.9 |
% |
Holding
company and other
|
|
|
1.9
|
|
|
|
0.3
|
|
|
|
533.3 |
% |
The
year-over-year
increase in taxes other than income was driven by a $10.8 million increase
in taxes other than income recorded at the natural gas utility segment,
primarily related to the merger with PEC ($7.4 million of taxes other than
income were recognized for PGL and NSG during the six months ended June 30,
2007), and the acquisition of the Michigan and Minnesota natural gas operations
which were not included in results of operations for the entire six months
ended
June 30, 2006. Taxes other than income taxes are primarily related to
property taxes, real estate taxes, gross receipts taxes, and payroll taxes
paid
by these companies.
Other
Income and Expense
Integrys
Energy Group’s
|
|
Six
Months Ended June 30,
|
|
Other
Income (Expense) (Millions)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
$ |
33.9
|
|
|
$ |
23.2
|
|
|
|
46.1 |
% |
Interest
expense
|
|
|
(79.0 |
) |
|
|
(40.7 |
) |
|
|
94.1 |
% |
Minority
interest
|
|
|
0.1
|
|
|
|
2.4
|
|
|
|
(95.8 |
%) |
Other
expense
|
|
$ |
(45.0 |
) |
|
$ |
(15.1 |
) |
|
|
198.0 |
% |
Miscellaneous
Income
The
$10.7 million increase in miscellaneous income was primarily driven
by:
·
|
A
$9.8 million increase in foreign currency gains at Integrys Energy
Services’ Canadian subsidiaries, which was offset by related losses in
gross margin. These transactions are substantially hedged from
an economic perspective, resulting in no significant impact on income
(loss) available for common
shareholders.
|
·
|
A
$5.0 million increase in pre-tax equity earnings from Integrys Energy
Group's 32% ownership interest in
ATC.
|
·
|
PEC,
PGL, and
NSG contributed $3.8 million to other income during the six months
ended June 30, 2007, primarily due to interest income
recognized.
|
·
|
A
$6.2 million decrease due to the pre-tax gain recognized from the
sale of Integrys Energy Group's one-third interest in Guardian Pipeline,
LLC in the second quarter of 2006.
|
Interest
Expense
Interest
expense
increased $38.3 million as a result of:
·
|
Interest
expense for both long-term and short-term debt related to PEC operations
acquired in the February 2007 merger increased interest expense
$23.3 million for the six months ended June 30,
2007.
|
·
|
Subsequent
to
June 30, 2006, increased borrowings were primarily utilized to fund
the purchase of natural gas distribution operations in Michigan and
Minnesota, the construction of Weston 4, working capital requirements
at Integrys Energy Services, and transaction and transition costs
related
to the merger with PEC.
|
Minority
Interest
As
a result of WPS Power Development's sale of an approximate 30% interest in
its subsidiary, ECO Coal Pelletization #12 LLC, on December 19, 2002,
$1.2 million of losses related to the synthetic fuel operation and reported
in miscellaneous income were allocated to Integrys Energy Services' partner
and
reported as a minority interest for the six months ended June 30,
2006. For 2007, Integrys Energy Services' partner elected to stop
receiving production from the synthetic fuel facility and, therefore, will
no
longer share in losses from this facility.
Provision
for Income Taxes
The
effective tax
rate was 25.5% for the six months ended June 30, 2007, compared with 31.4%
for the six months ended June 30, 2006. The decrease in the
effective tax rate was driven primarily by a lower projected annual effective
tax rate at June 30, 2007, compared with the projected annual effective tax
rate
at June 30, 2006. Section 29/45K federal tax credits recognized
during the six months ended June 30, 2007, compared with the same period in
2006 did not change considerably. Our ownership interest in the
synthetic fuel operation resulted in recognizing the tax benefit of
Section 29/45K federal tax credits totaling $8.0 million in the first
half of 2007, compared with $7.6 million during the first half of
2006.
Discontinued
Operations, Net of Tax
Discontinued
operations, net of tax, increased $51.6 million, from an after-tax loss of
$4.6 million in the six months ended June 30, 2006, to after tax
income of $47.0 million in the same period in 2007.
In
connection with the February 21, 2007 merger with PEC, Integrys Energy Group
announced that it would proceed with the divestiture of PEP. The
divestiture will allow Integrys Energy Group to focus on its core competencies,
reduce external financing requirements, and reduce Integrys Energy Group's
risk
profile. It is anticipated that the divestiture will be completed by
December 31, 2007. During the six months ended June 30, 2007,
PEP recorded after-tax earnings of $32.2 million as a component of
discontinued operations.
Discontinued
operations related to WPS Niagara Generation, LLC increased from an
after-tax loss of $0.2 million during the six months ended June 30,
2006, to after-tax earnings of $14.8 million in the same period in
2007. The increase in income generated from WPS Niagara
Generation was due to the $14.8 million after-tax gain recorded on the sale
of this facility in January of 2007.
During
the six
months ended June 30, 2006, Sunbury Generation, LLC (which was sold in July
2006) recorded a loss of $4.4 million as a component of discontinued
operations.
For
more
information on the discontinued operations discussed above, see Note 4,
"Discontinued Operations," in Integrys Energy Group's
Condensed Notes to Financial Statements.
LIQUIDITY
AND CAPITAL RESOURCES
We
believe that our cash balances, liquid assets, operating cash flows, access
to
equity capital markets, and borrowing capacity available, when taken together,
provide adequate resources to fund ongoing operating requirements and future
capital expenditures related to expansion of existing businesses and development
of new projects. However, our operating cash flows and access to
capital markets can be impacted by macroeconomic factors outside of our
control. In addition, our borrowing costs can be impacted by
short-term and long-term debt ratings assigned by independent rating
agencies. Currently, we believe our credit ratings are among the best
in the energy industry (see "Financing Cash Flows - Credit Ratings,"
below).
Operating
Cash Flows
During
the six
months ended June 30, 2007, net cash provided by operating activities was
$350.6 million, compared with net cash used for operating activities of
$27.8 million for the same period in 2006. The $378.4 million
increase in net cash provided by operating activities was driven by a
$325.7 million increase in cash provided from changes in working
capital. Working capital changes were primarily a result
of:
·
|
A
$172.9
million increase in cash provided by accounts receivable collections,
driven by the addition of MERC operations in July 2006 and combined
PGL
and NSG operations in February
2007,
|
·
|
A
$135.7
million period-over-period decrease in cash used for the payment
of
accounts payable, primarily due to lower accounts payable balances
as a
result of lower average gas prices for the six months ended June
30, 2007,
compared with the same period in
2006.
|
·
|
A
$110.9
million decrease in cash used to finance inventory in storage, primarily
as a result of lower average natural gas prices for the six months
ended
June 30, 2007, compared with the same period in
2006.
|
Investing
Cash Flows
Net
cash used for
investing activities was $195.2 million during the six months ended
June 30, 2007, compared with $785.2 million during the same
period in 2006. The $590.0 million decrease in cash used for
investing activities was driven by $333.3 million of cash Integrys Energy
Group was required to place into escrow in June 2006 for the July 1, 2006
purchase of natural gas distribution operations in Minnesota and $317.9 million
of cash used to purchase natural gas distribution operations in Michigan on
April 1, 2006, partially offset by the $58.4 million in proceeds received from
the sale of Guardian Pipeline LLC and WPS Energy Services Gas Storage LLC in
the
first half of 2006.
Capital
Expenditures
Capital
expenditures by business segment for the six months ended June 30 were as
follows:
Reportable
Segment (millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Electric
utility
|
|
$ |
86.4
|
|
|
$ |
134.4
|
|
Natural
gas
utility
|
|
|
53.0
|
|
|
|
17.0
|
|
Integrys
Energy Services
|
|
|
7.5
|
|
|
|
2.7
|
|
Holding
company and other
|
|
|
8.1
|
|
|
|
(0.5 |
) |
Integrys
Energy Group consolidated
|
|
$ |
155.0
|
|
|
$ |
153.6
|
|
Although
total
capital expenditures were basically unchanged at Integrys Energy Group for
the
six month periods, there were significant changes within business
segments. The decrease in capital expenditures at the electric
utility for the six months ended June 30, 2007, compared with the same
period in 2006, was mainly due to lower capital expenditures associated with
the
construction of Weston 4. Weston 4 is expected to be
commercially operational by June 2008. The increase in capital
expenditures at the gas utility was primarily driven by capital requirements
of
PGL and NSG, which were acquired in the merger with PEC. The increase
at Integrys Energy Services was due to capital required to open new offices
in
Denver, Colorado, Ann Arbor, Michigan, and Washington, D.C., as well as move
the
Chicago office, improvements at various generation facilities, and new systems
infrastructure. The increase in capital expenditures at the Holding
Company and Other segment was due to the purchase of a corporate
airplane.
Financing
Cash Flows
Net
cash used for
financing activities was $150.0 million during the six months ended
June 30, 2007, compared with net cash provided by financing activities
of $797.4 million during the same period in 2006. The change was
driven by short-term debt borrowings in the first half of 2006, compared with
the repayment of short-term debt in the first half of 2007. In the
first half of 2006, Integrys Energy Group increased its short-term debt
borrowings because it had to place $333.3 million in escrow in June 2006,
for the July 1, 2006, purchase of natural gas operations in Minnesota, and
also
used short-term borrowings in the amount of $317.9 million to finance the April
1, 2006 acquisition of natural gas distribution operations in
Michigan. During the first half of 2007, Integrys Energy Group was
able to pay down short-term debt as a result of strong cash flows provided
by
operating activities.
Significant
Financing Activities
Dividends
paid
increased in the six months ended June 30, 2007, over that paid for the
same period in 2006 as a result of the merger with PEC. Integrys
Energy Group issued 31.9 million shares of common stock as part of the
merger and increased the dividend paid per share. The quarterly
common stock dividend was increased from 57.5 cents per share to 66.0 cents
per share. Integrys Energy Group intends to continue the 66 cents per
share quarterly dividend rate in the future, subject to the evaluation by its
Board of Directors of future business needs.
Integrys
Energy
Group had outstanding commercial paper borrowings of $694.1 million and
$834.2 million at June 30, 2007, and 2006,
respectively. Integrys Energy Group had other outstanding short-term
debt of $171.5 million as of June 30, 2007, and $168.6 million as
of June 30, 2006. Of the $171.5 million outstanding at
June 30, 2007, $161.5 million related to Integrys Energy Services and
$10.0 million related to WPSC. Of the $168.6 million
outstanding at June 30, 2006, $158.6 million related to Integrys
Energy Services and $10.0 million related to WPSC.
In
January 2007, WPSC used the proceeds from the $22.0 million of 3.95% senior
notes issued in December 2006 to the Village of Weston, Wisconsin, to repay
the
outstanding principal balance of the 6.90% first mortgage bonds which originally
matured in 2013.
In
November 2005, WPS Resources entered into a forward equity sale agreement
with an affiliate of J.P. Morgan Securities, Inc., as forward purchaser,
relating to 2.7 million shares of WPS Resources' common
stock. On May 10, 2006, WPS Resources physically settled the
forward equity agreement (and, thereby, issued 2.7 million shares of common
stock) and received proceeds of $139.6 million. The proceeds
were used to pay down commercial paper borrowings originally utilized to finance
the acquisition of the natural gas distribution operations in Michigan and
for
general corporate purposes.
Credit
Ratings
Integrys
Energy
Group uses internally generated funds and commercial paper borrowing to satisfy
most of its capital requirements. Integrys Energy Group also
periodically issues long-term debt and common stock to reduce short-term debt,
maintain desired capitalization ratios, and fund future
growth. Integrys Energy Group may seek nonrecourse financing for
funding nonregulated acquisitions. Integrys Energy Group's commercial paper
borrowing program provides for working capital requirements of the nonregulated
businesses, UPPCO, MGUC, and MERC. WPSC, PEC, and PGL have their own
commercial paper borrowing programs. NSG provides for its working
capital needs through inter-company borrowings. WPSC periodically
issues long-term debt, receives equity contributions from Integrys Energy Group,
and makes payments for return of capital to Integrys Energy Group to reduce
short-term debt, fund future growth, and maintain capitalization ratios as
authorized by the PSCW. PGL and NSG periodically issue long-term debt
in order to reduce short-term debt, refinance maturing securities, maintain
desired capitalization ratios, and fund future growth. The specific
forms of long-term financing, amounts, and timing depend on business needs,
market conditions, and other factors.
The
current credit
ratings for Integrys Energy Group, WPSC, PGL, and NSG are listed in the table
below.
Credit
Ratings
|
Standard
& Poor's
|
Moody's
|
Integrys
Energy Group
Corporate credit rating
Senior
unsecured debt
Commercial paper
Credit facility
Junior
subordinated notes
|
A-
BBB+
A-2
-
BBB
|
n/a
A3
P-2
A3
Baa1
|
WPSC
Senior secured debt
Preferred stock
Commercial paper
Credit facility
|
A
BBB+
A-2
-
|
Aa3
A3
P-1
A1
|
PEC
Corporate credit rating
Senior
unsecured debt
Commercial paper
|
A-
BBB+
A-2
|
n/a
A3
P-2
|
PGL
Senior secured debt
Commercial paper
|
A-
A-2
|
A1
P-1
|
NSG
Senior
secured debt
|
A-
|
A1
|
We
believe these ratings continue to be among the best in the energy industry
and
allow us to access commercial paper and long-term debt markets on favorable
terms. Credit ratings are not recommendations to buy, are subject to
change, and each rating should be evaluated independently of any other
rating.
On
February 21, 2007, Standard & Poor's lowered the corporate credit rating on
Integrys Energy Group to A- from A and removed it from CreditWatch with negative
implications. Standard & Poor's also lowered Integrys Energy
Group's unsecured ratings to BBB+ from A and all other issue-specific ratings
by
one notch. Standard & Poor's stated that the ratings actions
were due to concerns related to plans to expand the energy marketing business,
the dividend requirements that will result from the merger, moderate capital
expenditure requirements, lower than expected performance at MGUC and MERC,
uncertainty regarding future rate relief, and full integration of the newly
acquired PEC utilities. At the same time, Standard & Poor's
lowered all WPSC's issue-specific ratings by one notch as they stated “WPSC's
liquidity is being pressured by its ongoing construction program." Standard
& Poor’s affirmed all PEC, PGL and NSG ratings. Standard &
Poor's outlook for all Integrys Energy Group related companies is negative
pending the sale of the oil and natural gas production business and successful
integration of recent acquisitions.
On
February 21, 2007, Moody's downgraded the senior unsecured rating of Integrys
Energy Group to A3 from A1, the bank credit facility to A3 from A1, the
commercial paper rating to Prime-2 from Prime-1, and the junior subordinated
notes to Baa1 from A2. Moody's also downgraded WPSC's senior secured
rating to Aa3 from Aa2, its senior unsecured bank credit facility to A1 from
Aa3, its preferred stock to A3 from A2 and confirmed WPSC's commercial paper
rating at Prime-1. At the same time, Moody's affirmed the ratings of
PGL and NSG. Moody's actions to downgrade are due to their concerns
about increases in Integrys Energy Group's consolidated debt levels and business
risk profile evidenced by the increased scale and scope of the post merger
non-regulated energy marketing business plus the entry into the historically
more challenging regulatory jurisdiction of Illinois. Moody's outlook
for all Integrys Energy Group related companies is stable.
On
February 21, 2007, Moody's also upgraded the senior unsecured rating of PEC
to
A3 from Baa2, conforming it with those of Integrys Energy Group, and affirmed
all other ratings for PEC. Moody's actions to upgrade the senior
unsecured rating are due to the expected business risk improvement
from
the
merger with
Integrys Energy Group, which will result in the sale of PEP and transferred
PEC's energy and marketing business to Integrys Energy Services, leaving PEC
holding only the two regulated subsidiaries, PGL and NSG. In
addition, the upgrade reflects Integrys Energy Group's guaranty of the
$325 million of PEC 6.90% notes due in 2011.
Rating
agencies use
a number of both quantitative and qualitative measures in determining a
company's credit rating. These measures include business risk,
liquidity risk, competitive position, capital mix, financial condition,
predictability of cash flows, management strength, and future
direction. Some of the quantitative measures can be analyzed through
a few key financial ratios, while the qualitative measures are more
subjective.
Integrys
Energy
Group, WPSC, PEC, and PGL hold credit lines to back 100% of their commercial
paper borrowing and letters of credit. A significant decrease in the
commercial paper credit ratings could adversely affect the companies by
increasing the interest rates at which they can borrow and potentially limiting
the availability of funds to the companies through the commercial paper
market. A restriction in the companies' ability to use commercial
paper borrowing to meet working capital needs would require it to secure funds
through alternate sources resulting in higher interest expense, higher credit
line fees, and a potential delay in the availability of funds.
Integrys
Energy
Services maintains underlying agreements to support its electric and natural
gas
trading operations. In the event of a deterioration of Integrys
Energy Group's credit rating, many of these agreements allow the counterparty
to
demand additional assurance of payment. This provision could pertain
to existing business, new business, or both with the
counterparty. The additional assurance requirements could be met with
letters of credit, surety bonds, or cash deposits and would likely result in
Integrys Energy Group being required to maintain increased bank lines of credit
or incur additional expenses, and could restrict the amount of business Integrys
Energy Services would be able to conduct.
Integrys
Energy
Services uses the NYMEX, the ICE, and over-the-counter financial markets to
mitigate its exposure to customer obligations. These contracts are
closely correlated to the customer contracts, but price movements on the
contracts may require financial backing. Certain movements in price
for contracts through the NYMEX and the ICE require posting of cash deposits
equal to the market move. For the over-the-counter market, the
underlying contract may allow the counterparty to require additional collateral
to cover the net financial differential between the original contract price
and
the current forward market. Increased requirements related to market
price changes usually only result in a temporary liquidity need that will unwind
as the sales contracts are fulfilled.
Future
Capital Requirements and Resources
Contractual
Obligations
The
following table
summarizes the contractual obligations of Integrys Energy Group, including
its
subsidiaries.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
Due By Period
|
|
Contractual
Obligations
As
of
June 30, 2007
(Millions)
|
|
Total
Amounts
Committed
|
|
|
2007
|
|
|
|
2008-2009
|
|
|
|
2010-2011
|
|
|
2012
and Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt principal and interest payments
|
|
$ |
3,480.9
|
|
|
$ |
64.4
|
|
|
$ |
456.4
|
|
|
$ |
795.6
|
|
|
$ |
2,164.5
|
|
Operating
lease obligations
|
|
|
57.6
|
|
|
|
5.5
|
|
|
|
18.0
|
|
|
|
15.9
|
|
|
|
18.2
|
|
Commodity
purchase obligations
|
|
|
6,580.9
|
|
|
|
2,037.3
|
|
|
|
2,759.6
|
|
|
|
922.3
|
|
|
|
861.7
|
|
Purchase
orders
|
|
|
425.9
|
|
|
|
374.9
|
|
|
|
49.9
|
|
|
|
1.1
|
|
|
|
-
|
|
Capital
contributions to equity method investment
|
|
|
29.4
|
|
|
|
29.4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Minimum
pension funding
|
|
|
422.3
|
|
|
|
38.8
|
|
|
|
87.3
|
|
|
|
40.0
|
|
|
|
256.2
|
|
Total
contractual cash obligations
|
|
$ |
10,997.0
|
|
|
$ |
2,550.3
|
|
|
$ |
3,371.2
|
|
|
$ |
1,774.9
|
|
|
$ |
3,300.6
|
|
Long-term
debt
principal and interest payments represent bonds issued, notes issued, and loans
made to Integrys Energy Group and its subsidiaries. We record all
principal obligations on the balance sheet. Energy supply contracts
at Integrys Energy Services included as part of commodity purchase obligations
are generally entered into to meet obligations to deliver energy to
customers. WPSC, UPPCO, MGUC, MERC, PGL, and NSG expect to recover
the costs of their contracts in future customer rates. Purchase
orders include obligations related to normal business operations and large
construction obligations, including 100% of Weston 4 obligations. The sale
of a 30% interest in Weston 4 to DPC was completed in November 2005, but
WPSC retains the legal obligation to initially remit payment to third parties
for 100% of all construction costs incurred, 30% of which will subsequently
be
billed to DPC. Capital contributions to equity method investment
consist of our commitment to fund a portion of ATC's Wausau, Wisconsin, to
Duluth, Minnesota, transmission line together with ATC. Minimum
pension funding represents expected pension and postretirement funding
obligations.
The
table above
does not reflect any payments related to the manufactured gas plant remediation
liability of $635.5 million at June 30, 2007, as the amount and timing
of payments are uncertain. See Note 12 to the financial statements,
“Commitments and Contingencies,” for more information about our
environmental liabilities. Also, the table does not reflect any payments
for our liability at June 30, 2007, for uncertain tax positions, as the
amount and timing of payments are uncertain. See Note 11 to the financial
statements, “Income Taxes,” for more information about this
liability.
Capital
Requirements
WPSC
makes large
investments in capital assets. Net construction expenditures are
expected to be approximately $833 million in the aggregate for the 2007
through 2009 period. The largest of these expenditures is for wind
generation projects (to help meet renewable energy requirements) and
distribution projects (which include replacement of utility poles, transformers,
meters, and other assets). WPSC is expected to incur costs of
approximately $236 million from 2007 through 2009 related to wind generation
projects and approximately $272 million during the same time period for
distribution projects.
As
part of its regulated utility operations, on September 26, 2003, WPSC
submitted an application for a Certificate of Public Convenience and Necessity
to the PSCW seeking approval to construct Weston 4, a 500-megawatt
coal-fired generation facility near Wausau, Wisconsin. The facility
is estimated to cost approximately $779 million (including the acquisition
of coal trains), of which WPSC is responsible for slightly
more than
70% (approximately $549 million) of the costs. In November 2005,
DPC purchased a
30%
ownership
interest in Weston 4, remitting proceeds of $95.1 million for its
share of the construction costs (including carrying charges) as of the closing
date of the sale. WPSC is responsible for slightly more than 70% of
the costs because of certain common facilities that will be installed as part
of
the project. WPSC will have a greater than 70% interest in these
common facilities. DPC will be billed by WPSC for 30% of all
remaining costs to complete the construction of the plant. As of
June 30, 2007, WPSC has incurred a total cost of approximately
$476 million related to its ownership interest in the
project. WPSC expects to incur additional construction costs through
the date the plant goes into service of approximately $73 million in
addition to approximately $49 million to complete the funding of
construction of the transmission facilities required to support
Weston 4. ATC will reimburse WPSC for the construction costs of
these transmission facilities and related carrying costs when Weston 4
becomes commercially operational, which is expected to occur by June
2008.
Other
significant
anticipated construction expenditures for WPSC during the three-year period
2007
through 2009 include approximately $75 million related to a natural gas
pipeline expansion project, approximately $56 million of expenditures at
WPSC generation plants to ensure continued reliability of these facilities,
approximately $49 million related to environmental projects, and corporate
services infrastructure projects of approximately $37 million.
On
April 18, 2003, the PSCW approved WPSC's request to transfer its interest in
the
Wausau, Wisconsin, to Duluth, Minnesota, transmission line to
ATC. Integrys Energy Group committed to fund 50% of total project
costs incurred up to $198 million. Integrys Energy Group will
receive additional equity in ATC in exchange for the project
funding. Integrys Energy Group may terminate funding if the
project extends beyond January 1, 2010. The total cost of
the project is estimated at $420.3 million and it is expected that the line
will be completed and placed in service in 2008. Integrys Energy
Group has the right, but not the obligation, to provide additional funding
in
excess of $198 million up to 50% of the revised cost
estimate. Integrys Energy Group’s future funding of the line will be
reduced by the amount funded by Allete, Inc. Allete exercised its
option to fund $60 million of future capital calls for the portion of the
Wausau to Duluth transmission line and had completed funding the
$60 million as of February 2007. During 2007 and through the
completion of the line in 2008, Integrys Energy Group expects to fund up to
approximately $56 million in equity contributions to ATC for the Wausau to
Duluth transmission line.
Integrys
Energy
Group expects to provide additional capital contributions to ATC of
approximately $76 million for the period 2007 through 2009 for other
projects.
Integrys
Energy
Group's expected capital contributions related to ATC for 2007 through 2009
are
as follows:
(Millions)
|
|
June 30,
2007
|
|
|
|
|
|
Wausau,
Wisconsin, to Duluth, Minnesota, transmission line
|
|
$ |
56.0
|
|
Other
capital
contributions to ATC
|
|
|
76.0
|
|
Total
future
capital contributions from 2007 to 2009 related to ATC
|
|
$ |
132.0
|
|
UPPCO
is expected
to incur construction expenditures of about $47 million in the aggregate
for the period 2007 through 2009, primarily for electric distribution
improvements and repairs and safety measures at hydroelectric
facilities.
MGUC
is expected to
incur construction expenditures of approximately $25 million in the
aggregate for the period 2007 through 2009, primarily for natural gas
mains.
MERC
is expected to
incur construction expenditures of approximately $46 million in the
aggregate for the period 2007 through 2009, primarily for natural gas
mains.
PGL
is expected to
incur construction expenditures of approximately $359 million in the
aggregate for the period 2007 through 2009, primarily for the natural gas pipe
distribution system and underground gas
storage
facilities,
including accelerated replacement of PGL's cast iron and ductile iron mains
as
discussed in the rate case filed with the ICC on March 9, 2007.
NSG
is expected to
incur construction expenditures of approximately $31 million in the
aggregate for the period 2007 through 2009, primarily for the natural gas pipe
distribution system.
Capital
expenditures identified at Integrys Energy Services for 2007 through 2009 are
expected to be approximately $28 million. In 2007, Integrys
Energy Services will develop a new landfill gas project, Winnebago Energy Center
Development. Winnebago Energy Center Development is a 6.5-megawatt
project near Rockford, Illinois, and will consist of installing gas cleanup
equipment and engines to collect and burn landfill gas at the site to generate
electricity. Integrys Energy Services plans to sell the electricity
in the PJM marketplace. The project is initially expected to cost
approximately $9 million. Other capital expenditures at Integrys
Energy Services are related to scheduled major maintenance projects at Integrys
Energy Services’ generation facilities and computer equipment related to
business expansion and normal technology upgrades.
All
projected
capital and investment expenditures are subject to periodic review and revision
and may vary significantly from the estimates depending on a number of
factors, including, but not limited to, industry restructuring, regulatory
constraints, acquisition opportunities, market volatility, and economic
trends. Other capital expenditures for Integrys Energy Group and its
subsidiaries for 2007 through 2009 could be significant depending on its success
in pursuing development and acquisition opportunities. When
appropriate, Integrys Energy Group may seek nonrecourse financing for a
portion of the cost of these acquisitions.
Capital
Resources
As
of June 30, 2007, Integrys Energy Group and each of its subsidiaries were
in compliance with their respective covenants under their lines of credit and
other debt obligations.
For
the period 2007
through 2009, Integrys Energy Group plans to use internally generated funds
net
of forecasted dividend payments, cash proceeds from asset sales, and debt and
equity financings to fund capital requirements. Integrys Energy Group
plans to maintain current debt to equity ratios at appropriate levels to support
current credit ratings and corporate growth. Management believes
Integrys Energy Group has adequate financial flexibility and resources to meet
its future needs.
We
expect to sell PEP by December 31, 2007. We will use the proceeds from the
sale to reduce debt.
See
Note 8
"Short-Term Debt and Lines of Credit," for more information on our
credit facilities and other short-term credit agreements.
In
April 2006, Integrys Energy Group filed a shelf registration under the new
SEC
securities offering reform rules for the ability to issue debt, equity, and
certain types of hybrid securities. This shelf registration statement
includes the unused capacity remaining under Integrys Energy Group’s prior
registration statement. Specific terms and conditions of securities
issued will be determined prior to the actual issuance of any specific
security. Under the new SEC securities offering reform rules,
Integrys Energy Group will be able to issue securities under this registration
statement for three years. Integrys Energy Group’s Board of Directors
has authorized the issuance of up to $700 million of equity, debt, or other
securities under this shelf registration statement, $300 million of which
was used in December 2006 when Integrys Energy Group issued the junior
subordinated notes.
Other
Future Considerations
Services
Company
As
part of the regulatory approval process associated for the merger with PEC,
Integrys Energy Group agreed to formally propose the formation of a centralized
service company to provide administrative and general support services to
Integrys Energy Group's six regulated utilities. These services will include
categories such as legal, accounting and finance, environmental, information
technology, purchasing and warehousing, human resources, administrative services
(e.g., real estate, printing, etc.), external/regulatory affairs, natural gas
services, and natural gas supply, among others. In addition, many of these
same
services will also be provided to Integrys Energy Group's nonregulated
subsidiaries. The creation of a centralized service company will require WPSC
to
move many of the employees supporting these functions into the new service
company along with many of the employees who provided these services from PEC,
PGL, and Integrys Energy Group. Certain assets will also be transferred by
affiliates (primarily WPSC, PGL, and PEC) to the service company. On
June 6, 2007, the service company entity, Integrys Business Support was
established. Integrys Business Support will become an operational
centralized service company upon receipt of necessary regulatory approvals
or
waivers in a form acceptable to Integrys Energy Group. On
June 8, 2007, Integrys Energy Group and its regulated utilities filed
applications with the ICC, PSCW, MPUC, and MPSC seeking necessary regulatory
approvals or waivers associated with the formation and operation of the service
company. The requested approvals will relate to and include the categories
of
services to be delivered by Integrys Business Support, the contracts and
arrangements governing the provision of such inter-company services, the
transfer of assets and employees to Integrys Business Support, and the
methodologies for allocating the costs for these services to the entities who
take these services. The required regulatory approvals or waivers were requested
with the intent that the service company can become operational by January
1,
2008. In states where action is required, prehearing conferences have
been held and hearing dates have been scheduled during September and October
in
anticipation of year-end approvals. Discovery from regulatory staffs
and respective interveners is currently in progress.
Merger
with
PEC
For
additional
information on the merger with PEC, see Note 5, "Acquisition and Sales of
Assets."
Asset
Management Strategy
Integrys
Energy
Group continues to evaluate alternatives for the sale of the balance of its
identified real estate holdings no longer needed for operation. See
Note 4, “Discontinued Operations,” in Integrys Energy Group’s Condensed
Notes to Consolidated Financial Statements for more information.
Regulatory
Matters and Rate Trends
To
mitigate the volatility of fuel costs in 2007 and beyond, WPSC is employing
risk
management techniques pursuant to its PSCW approved Risk Plan and Policy,
including the use of derivative instruments such as futures and
options.
In
WPSC's retail electric rate proceeding for 2006, the PSCW applied a "financial
harm" test when considering the rate recovery of certain costs previously
authorized for deferred accounting treatment. The PSCW has not
applied a financial harm test previously when considering the rate recovery
of
costs that were previously authorized for deferral. In WPSC's rate
proceeding for 2006, after applying the financial harm test, the PSCW disallowed
rate recovery of the 2004 extended outage at Kewaunee. The PSCW also
disallowed recovery of 50% of the pre-tax loss realized on the sale of
Kewaunee. None of these disallowed costs were found to be imprudent
by the PSCW. Notwithstanding the PSCW's decision on these Kewaunee
related deferred costs, WPSC still believes it is probable that all regulatory
assets recorded at June 30, 2007, will be able to be collected from
ratepayers.
Forecasting
and
monitoring of fuel costs has become increasingly difficult for both the PSCW
and
WPSC. These challenges can be attributed to the implementation of the
MISO Day 2 market and volatility in natural gas prices. In 2005,
the PSCW received several applications from various Wisconsin electric utilities
under the PSCW Chapter 116 fuel rules for large rate increases due to increased
natural gas prices. In response, on February 7, 2006, the PSCW opened
Docket 01-AC-224 to review the fuel rules. On February 1, 2007, the
five utilities subject to the current fuel rules filed proposed changes to
the
fuel rules with the PSCW. The primary proposed change was to replace
the trigger mechanism with a true “dead band” of 1%, which would limit a
utility’s annual exposure or opportunity to a maximum of 1% of fuel
costs. Discussion with the PSCW staff and other utilities
continue.
On
June 29, 2006, the PSCW opened Docket 05-EI-139 to address the recovery of
costs associated with the MISO Day 2 market. Testimony has been filed
and hearings were held February 13, 2007. As of June 30, 2007,
WPSC had recorded a regulatory asset of $17.9 million for unrecovered MISO
Day 2 costs. We expect the PSCW to issue an order addressing the
recoverability of these costs sometime in the third quarter of
2007. Under this order, costs deferred as of June 30, 2007, should be
recoverable based on this decision.
For
a discussion of
regulatory filings and decisions, see Note 18, "Regulatory
Environment," in Integrys Energy Group’s Condensed Notes to Consolidated
Financial Statements.
Gas
Charge
Reconciliation Proceedings and Related Matters
For
PGL and NSG,
the ICC conducts annual proceedings regarding the reconciliation of revenues
from the Gas Charge and related gas costs. In these proceedings, the accuracy
of
the reconciliation of revenues and costs is reviewed and the prudence of gas
costs recovered through the Gas Charge is examined by interested
parties.
In
February 2004, a purported class action was filed against PGL and NSG by
customers of PGL and NSG alleging, among other things, violation of the Illinois
Consumer Fraud and Deceptive Business Practices Act related to matters at issue
in PGL's Gas Charge reconciliation proceedings.
For
additional
information on the Gas Charge Reconciliation Proceedings and Related Matters,
see Note 12, “Commitments and Contingencies.”
Industry
Restructuring – Illinois
In
1997, the Electric Service Customer Choice and Rate Relief Law of 1997 (Customer
Choice Law) was passed by the Illinois General Assembly. The Customer Choice
Law
initiated the opportunity for customers to purchase power from the supplier
of
their choice and a restructuring of the state's electric power industry. The
Customer Choice Law provided for a transition period toward delivery service
unbundling and greater reliance on market forces. During this transition period,
rates to customers were frozen and Commonwealth Edison Company ("ComEd") and
the
three Ameren Utilities ("Ameren") (collectively "Illinois Utilities"), supplied
their customers on the basis of long-term power supply contracts.
In
September 2006, the Illinois Utilities, at the direction of the ICC held a
power
auction where competitors offered to supply full requirements wholesale service
to the Illinois Utilities in order to meet the obligations of the retail
customers that do not choose an alternate retail electric supplier.
Integrys Energy Services participated in the auction and was selected as one
of
several suppliers to supply this service to ComEd. The results of the
auction were approved by the ICC on September 15, 2006; and subsequently,
on September 19, 2006, Integrys Energy Services entered into a FERC
jurisdictional wholesale supply agreement that delineates this
obligation. In addition to supplying ComEd, Integrys Energy
Services established itself as a significant supplier to commercial
and industrial customers in Illinois retail markets.
Prior
to, and at
the time of the auction, it was envisioned that the prices derived from the
auction would be passed through to the customer; thus ending the utility rate
freeze transition period. The auction results,
reflective
of
current market price levels, resulted in substantially higher supply prices
being passed onto the customers in the ComEd and Ameren service
territories. This has prompted debate in the Illinois General Assembly about
options to lessen the impact of this price shock to end users. The state
legislature is contemplating several possibilities including an extension
of the rate freeze for Illinois customers.
We
anticipate that actions taken by the General Assembly or the ICC will not
directly impact the terms of the wholesale supply agreement. However, the
uncertainty of cost recovery through rates, and the associated potential for
this to impair ComEd’s ability to meet its obligation is of concern. On
March 9, 2007, Integrys Energy Services was notified that Fitch
downgraded ComEd's Senior Unsecured Debt to BB+. This, combined with prior
rating agency actions, allowed for Integrys Energy Services to exercise its
right to bill ComEd twice a month for wholesale energy.
These
actions
contemplated by the Illinois legislature may have detrimental impacts
on retail market opportunities in Illinois since many of these actions
involve the muting of market price signals. Integrys Energy Services
will continue to closely monitor the situation developing in Illinois
and assess the impact on business in the state.
The
Illinois
Attorney General filed a complaint at FERC on March 15, 2007, against 15
power generators and suppliers that won contracts in the auction to supply
ComEd
and Ameren. Integrys Energy Services was named as it did win three
tranches of approximately 50 megawatts each in the auction.
The
complaint
requests that FERC (a) investigate evidence of price manipulation, (b) require
refunds for sales at rates that are not just reasonable, and (c) direct certain
wholesale electricity suppliers to show cause why their market-based rate
authority should not be revoked. It should be noted that the ICC had
already made a finding that no investigation was warranted and that a successful
auction had been completed for the fixed price auction. On
June 18, 2007, numerous defendants (including Integrys Energy Services,
Inc.) filed answers and motions to dismiss. The Illinois Attorney General has
since asked FERC to hold the filed complaints in abeyance for another month
(until September 1).
On
the heels of the Illinois Attorney General’s complaint filed at the FERC, two
class actions lawsuits were filed by various ratepayers in Cook
County. Those complaints essentially mirrored the Attorney General’s
complaint.
On
July 24, 2007, a comprehensive settlement agreement was announced between ComEd,
Ameren, and various Illinois electricity generating companies. The
agreement provides for continued subsidization of residential and very small
commercial customers over the next several years. The medium and
large customers that Integrys Energy Services focuses on will generally not
be
impacted by the settlement, allowing for continued competition.
Seams
Elimination Charge Adjustment
For
a discussion of
SECA, see Note 18, "Regulatory Environment," in Integrys Energy Group’s
Notes to Condensed Consolidated Financial Statements.
Income
Taxes
-Section 29/45K
Federal Tax Credits-
For
more
information on the synthetic fuel production facility, see the Note 12,
"Commitments and Contingencies," in Integrys Energy Group’s Notes to
Condensed Consolidated Financial Statements.
-Peshtigo
River
Land Donation-
In
closing its audit of Integrys Energy Group’s 2004 and 2005 income tax
examination, the IRS issued a report denying the deduction claimed in those
years related to the value of the Peshtigo River land donated to the WDNR in
2004. Through subsequent discussion with IRS Appeals, this matter has
been tentatively settled in our favor. Subsequent to June 30, 2007,
we received draft settlement documentation and adjusted tax calculations for
2004-2005 tax years. We expect that once that settlement is
concluded, we will record approximately $1 million of additional tax
benefit.
-Michigan
Single
Business Tax-
On
August 9, 2006, the Michigan legislature approved a voters' legislative
initiative to repeal the Michigan Single Business Tax for tax years beginning
after December 31, 2007. This legislation was later signed into
law by Michigan's Governor. On June 28, 2007, the Michigan
legislature passed a bill that will replace the Single Business Tax with an
effective date of January 1, 2008. The Governor signed the
legislation on July 12, 2007. We are reviewing the new law but have
yet to determine its effect.
-Proposed
Illinois
Gross Receipts Tax-
On
March 7, 2007, Illinois' Governor, in his budget address, proposed
replacing the corporate income tax with a gross receipts tax
(“GRT”). Under this proposal, the GRT rate on goods would be 0.85%
and the rate on services would be 1.95%; the GRT would not apply to businesses
with sales of less than $2 million. It is not clear which rate
Integrys Energy Group would be subject to. The tax would take effect
on January 1, 2008, and the first full year of implementation would be the
tax/calendar year 2008. During this period, businesses would receive
a 100% credit against corporate income taxes paid. The personal
property replacement tax would remain intact and continues to apply to
partnerships and corporations. It is unclear how existing Illinois
net operating losses and Illinois corporate income tax credits will apply to
the
GRT. The proposed tax would require unitary filings only with members
who have an Illinois nexus and allow intercompany eliminations among these
members only. On May 11, 2007, the Illinois House of Representatives
voted not to support the proposed GRT plan.
Environmental
See
Note 12,
"Commitments and Contingencies," in Integrys Energy Group’s Notes to
Condensed Consolidated Financial Statements for a detailed discussion of
environmental considerations.
Wisconsin
Energy Efficiency and Renewables Act
In
March 2006, Wisconsin's Governor signed 2005 Wisconsin Act 141 (2005 Senate
Bill 459), the Energy Efficiency and Renewables Act, which requires Wisconsin
electric providers to increase the amount of renewable electricity they sell
by
2% above their current level before 2010 and 6% above their current level by
2015. The goal is to have 10% of the state's electricity generated
from renewable sources by 2015, which is intended to increase the use of
renewable energy in Wisconsin, promote the development of renewable energy
technologies, and strengthen the state's energy efficiency
programs. As of June 30, 2007, approximately 4% of Integrys
Energy Group’s generation in Wisconsin is from renewable
sources. Integrys Energy Group continuously evaluates alternatives
for cost effective renewable energy sources and will secure reliable and
efficient renewable energy sources to meet both requirements by their respective
dates.
Michigan
21st Century
Energy Plan
On
January 31, 2007, the MPSC Chairman presented the “21st Century
Energy
Plan” to Michigan's Governor. The plan recognizes the increased need
for energy in the next 20 years. The plan proposes an alternative
method of receiving pre-construction approval for significant generating plant
additions versus the alternative of building a generating plant and then seeking
approval for recovery of costs. The plan calls for legislation to
implement a 10% renewable energy portfolio standard by 2015 as well as a
statewide energy efficiency program. Discussions have moved to the
legislature and several bills have been drafted, though none have been enacted
at this time.
Midwest
Independent Transmission System Operator
WPSC,
UPPCO, and
Integrys Energy Services are members of the MISO, which operates an electric
wholesale market in the Midwest, including Wisconsin and the Upper Peninsula
of
Michigan. The market pricing is based on a locational marginal
pricing system. The pricing mechanism expanded the market from a
physical market to also include financial instruments and is intended to send
price signals to indicate to stakeholders where generation or transmission
system expansion is needed.
MISO
participants
offer their generation and bid their customer load into the market on an hourly
basis. This results in net receipts from, or net obligations to, MISO
for each hour of each day. MISO aggregates these hourly transactions
and currently provides updated settlement statements which may reflect
billing adjustments and result in an increase or decrease to the net receipt
from or net obligation to MISO. The billing adjustments may or
may not be recovered through the rate recovery process. Market
participants may dispute the updated settlement statements and related
charges. At the end of each month, the amount due from or payable to
MISO is estimated for those operating days where a 7-day settlement statement
is
not yet available. Thus, significant changes in the estimates and new
information provided by MISO in subsequent settlement statements or through
tariff interpretation changes could have a material impact on our results of
operations with potential adjustments back to the start of the
market.
MARKET
PRICE RISK MANAGEMENT ACTIVITIES
Market
price risk
management activities include the electric and natural gas marketing and related
risk management activities of Integrys Energy Services, along with oil options
used to mitigate the risk of an increase in oil prices that could reduce the
amount of Section 29/45K federal tax credits that could be
recognized. Integrys Energy Services' marketing and trading
operations manage power and natural gas procurement as an integrated portfolio
with its retail and wholesale sales commitments. Derivative
instruments are utilized in these operations. Integrys Energy
Services measures the fair value of derivative instruments (including NYMEX,
ICE, and over-the-counter contracts, options, natural gas and electric power
physical fixed price contracts, basis contracts, and related financial
instruments) on a mark-to-market basis. The fair value of derivatives
is included in assets or liabilities from risk management activities on Integrys
Energy Group’s Condensed Consolidated Balance Sheets.
The
offsetting
entry to assets or liabilities from risk management activities is to other
comprehensive income or earnings, depending on the use of the derivative, how
it
is designated, and if it qualifies for hedge accounting. The fair
values of derivative instruments are adjusted each reporting period using
various market sources and risk management systems. The primary input
for natural gas and oil pricing is the settled forward price curve of the NYMEX
and the ICE. Basis pricing is derived from published indices and
documented broker quotes. Integrys Energy Services bases electric
prices on published indices and documented broker quotes. The
following table provides an assessment of the factors impacting the change
in
the net value of Integrys Energy Services' assets and liabilities from risk
management activities for the six months ended June 30, 2007.
Integrys
Energy Services Mark-to-Market Roll Forward
(Millions)
|
|
Oil
Options
|
|
|
Natural
Gas
|
|
|
Electric
|
|
|
Total
|
|
Fair
value of
contracts at December 31, 2006
|
|
$ |
(4.7 |
) |
|
$ |
105.2
|
|
|
$ |
7.1
|
|
|
$ |
107.6
|
|
Plus:
Contracts assumed from the merger with PEC
|
|
|
-
|
|
|
|
6.9
|
|
|
|
0.5
|
|
|
|
7.4
|
|
Less:
Contracts realized or settled during period
|
|
|
-
|
|
|
|
54.4
|
|
|
|
(7.0 |
) |
|
|
47.4
|
|
Plus:
Changes
in fair value of contracts in existence at June 30,
2007
|
|
|
1.2
|
|
|
|
26.2
|
|
|
|
(4.3 |
) |
|
|
23.1
|
|
Fair
value of contracts at June 30, 2007
|
|
$ |
(3.5 |
) |
|
$ |
83.9
|
|
|
$ |
10.3
|
|
|
$ |
90.7
|
|
The
fair value of contracts at
December 31, 2006, and June 30, 2007, reflects the values reported on
the balance sheet for net mark-to-market current and long-term risk management
assets and liabilities as of those dates. Contracts realized or
settled during the period includes the value of contracts in existence at
December 31, 2006, that were no longer included in the net mark-to-market
assets as of June 30, 2007, along with the amortization of those
derivatives later designated as normal purchases and sales under SFAS No.
133. Changes in fair value of contracts in existence at June 30,
2007, includes unrealized gains and losses on contracts that existed at
December 31, 2006, and contracts that were entered into subsequent to
December 31, 2006, which are included in Integrys Energy Services'
portfolio at June 30, 2007, as well as gains and losses at the inception of
contracts when a liquid market exists. There were, in many cases,
offsetting positions entered into and settled during the period resulting in
gains or losses being realized during the current period. The
realized gains or losses from these offsetting positions are not reflected
in
the table above.
Market
quotes are
more readily available for short duration contracts (generally for contracts
with a duration of less than five years). The table below shows the
sources of fair value and maturity of Integrys Energy Services' risk management
instruments.
Integrys
Energy Services
Risk
Management Contract Aging at Fair Value
As
of
June 30, 2007 (Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Source
of Fair Value
|
|
Maturity
Less
Than
1
Year
|
|
|
Maturity
1 to
3
Years
|
|
|
Maturity
4 to 5
Years
|
|
|
Maturity
In
Excess
of
5
years
|
|
|
Total
Fair
Value
|
|
Prices
actively quoted
|
|
$ |
48.6
|
|
|
$ |
22.6
|
|
|
$ |
7.2
|
|
|
$ |
2.1
|
|
|
$ |
80.5
|
|
Prices
provided by external sources
|
|
|
(17.7 |
) |
|
|
20.7
|
|
|
|
7.0
|
|
|
|
0.2
|
|
|
|
10.2
|
|
Total
fair
value
|
|
$ |
30.9
|
|
|
$ |
43.3
|
|
|
$ |
14.2
|
|
|
$ |
2.3
|
|
|
$ |
90.7
|
|
"Prices
actively
quoted" includes exchange-traded contracts such as NYMEX and ICE contracts
and
basis swaps. "Prices provided by external sources" includes electric
and natural gas contract positions for which pricing information, used by
Integrys Energy Services to calculate fair value, is obtained primarily through
broker quotes and other publicly available sources.
Integrys
Energy
Services employs a variety of physical and financial instruments offered in
the
marketplace to limit risk exposure associated with fluctuating commodity prices
and volumes, enhance value, and minimize cash flow
volatility. However, the application of SFAS No. 133 and its related
hedge accounting rules causes Integrys Energy Services to experience earnings
volatility associated with electric and natural gas operations, as well as
oil
options utilized to protect the value of a portion of Integrys Energy Services'
Section 29/45K federal tax credits. While risks associated with power
generating capacity and power and natural gas sales are economically hedged,
certain transactions do not meet the definition of a derivative or do not
qualify for hedge accounting under generally accepted accounting
principles. Consequently, gains and losses from these positions
may not match with the related physical and financial hedging instruments
in some reporting periods. The result can cause volatility in
Integrys Energy Services' reported period-by-period earnings; however, the
financial impact of this timing difference will reverse at the time of physical
delivery and/or settlement. The accounting
treatment
does not
impact the underlying cash flows or economics of these
transactions. See "Results of Operations" for information
regarding earnings volatility caused by the natural gas storage
cycle.
CRITICAL
ACCOUNTING POLICIES
We
have reviewed our critical accounting policies for new critical accounting
estimates and other significant changes. We found that the
disclosures made in our Annual Report on Form 10-K for the year ended
December 31, 2006, are still current and that there have been no
significant changes, except as follows:
Purchase
Accounting
The
merger with PEC
was accounted for using the purchase method of accounting in accordance with
SFAS No. 141, "Business Combinations". Under this statement, the
purchase price paid by the acquirer, including transaction costs, is allocated
to the assets and liabilities acquired as of the acquisition date based on
their
fair values. The fair value of the common stock issued by Integrys
Energy Group for the acquisition of PEC was determined by using the average
market value of Integrys Energy Group's common stock over a five-day period,
beginning two days before the announcement date of the merger. As
Integrys Energy Group announced its intent to sell PEP at the time of the
closing of the merger, the PEP assets and liabilities are reported at estimated
fair value less cost to sell. Management makes assumptions of fair
value based upon historical experience and information obtained from the
management of the acquired company. Assumptions may be incomplete,
and unanticipated events and circumstances may occur which may affect the
validity of such assumptions, estimates, or actual results. A
significant amount of goodwill resulted from the merger, which will require
impairment testing on at least an annual basis.
PGL
and NSG are
regulated utilities; therefore, in accordance with SFAS No. 71, "Accounting
for
the Effects of Certain Types of Regulation," the fair value of the majority
of
the assets and liabilities did not change significantly as a result of applying
purchase accounting. Pension and postretirement benefit obligations
were identified at both PGL and NSG. Liabilities of approximately
$127 million and $15 million were recorded for PGL and NSG,
respectively, and were offset with regulatory assets.
Integrys
Energy
Group has not yet finished the actual purchase price allocation. Management
has
made a preliminary allocation of the estimated purchase price based on various
estimates; however, the actual allocation will differ as Integrys Energy Group
undergoes additional studies necessary to evaluate and finalize the purchase
price allocation.
Item
3. Quantitative and Qualitative
Disclosures about Market Risk
Integrys
Energy
Group has potential market risk exposure related to commodity price risk
(including regulatory recovery risk), interest rate risk, equity return risk,
and principal preservation risk. Integrys Energy Group is exposed to
interest rate risk resulting primarily from its variable rate long-term debt,
short-term commercial paper borrowing and projected near-term debt financing
needs. Exposure to equity return and principal preservation risk is
the result of funding liabilities (accumulated benefit obligations) related
to
employee benefits through various external trust funds. Exposure to
commodity price risk results from the impact of market fluctuations on the
prices of certain commodities, including but not limited to coal, electricity,
natural gas, and oil, which are used and/or sold by our subsidiaries in the
normal course of their business. Integrys Energy Group has risk
management policies in place to monitor and assist in controlling these market
risks and uses derivative instruments to manage some of these
exposures.
Integrys
Energy
Group is exposed to foreign currency risk as a result of foreign operations
owned and operated in Canada and transactions denominated in Canadian dollars
for the purchase and sale of natural gas and electricity by our nonregulated
subsidiaries. Forward foreign exchange contracts are utilized to
manage the risk associated with currency fluctuations on certain firm sales
and
sales commitments denominated in Canadian dollars and certain Canadian
dollar-denominated asset and liability positions. Integrys Energy
Group's exposure to foreign currency risk was not significant at June 30,
2007, or 2006.
The
total variable
debt at Integrys Energy Group increased as a result of the merger with PEC,
which increased its exposure to variable interest rates. Based on the
variable rate debt of Integrys Energy Group outstanding at June 30, 2007, a
hypothetical increase in market interest rates of 100 basis points in 2007
would
increase annual interest expense by
$17.3 million. Comparatively, based on the variable rate debt
outstanding at June 30, 2006, an increase in interest rates of
100 basis points would have increased interest expense in 2006 by
$8.7 million. This sensitivity analysis was performed assuming a constant
level of variable rate debt during the period and an immediate increase in
interest rates, with no other changes for the remainder of the
period. In the event of a significant change in interest rates,
management would take action to mitigate Integrys Energy Group’s exposure to the
change.
To
measure commodity price risk exposure, Integrys Energy Group employs a number
of
controls and processes, including a value-at-risk (VaR) analysis of certain
of
its exposures. Integrys Energy Services' VaR calculation is utilized
to quantify exposure to market risk associated with its marketing and trading
portfolio (primarily natural gas and power positions), which includes near-term
positions managed under its asset management strategy through tolling agreements
with the merchant generating fleet, but excludes the long-dated positions
created by the merchant generating fleet and associated coal, sulfur dioxide
emission allowances, and other ancillary fuels. We view long-term
natural gas transportation contracts similar to physical assets and have,
therefore, excluded from the VaR calculation the portion of these contracts
beyond 2010 for contracts that support our retail business and beyond 2012
for
contracts that support our wholesale business.
VaR
is estimated
using a delta-normal approximation based on a one-day holding period and
95%
confidence level. For further explanation of our VaR calculation, see
the 2006 Form 10-K. At June 30, 2007, and June 30, 2006,
Integrys Energy Services' VaR amount was calculated to be $1.2 million and
$1.5 million, respectively.
The
VaR for
Integrys Energy Services' trading portfolio is presented in the following
table:
|
|
June
|
|
|
June
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
95%
confidence
level, one-day holding period
|
|
$ |
1.2
|
|
|
$ |
1.5
|
|
Average
for
twelve months ended
|
|
|
1.1
|
|
|
|
1.4
|
|
High
for 12
months ended
|
|
|
1.2
|
|
|
|
1.7
|
|
Low
for 12
months ended
|
|
|
0.9
|
|
|
|
1.0
|
|
The
following table
is a summary of the fair market value of the commodity derivatives by type
used
to support the PEP business. These commodity derivatives are not
reported as held for sale.
(Fair
value amounts in millions of dollars)
|
|
Options
|
Maturity
|
Volumes
(Mmbtu's)
|
Fair
Value
|
Natural
Gas
|
Less
than 1
Year
|
4,332,000
|
$(0.3)
|
|
1-3
Years
|
3,040,000
|
0.1
|
Swaps
|
Maturity
|
Volumes
(Mmbtu's)
|
Fair
Value
|
Natural
Gas
|
Less
than 1
Year
|
4,078,000
|
$(8.0)
|
|
1-3
Years
|
829,000
|
(1.9)
|
Swaps
|
Maturity
|
Volumes
(Bbl's)
|
Fair
Value
|
WTI
Crude Oil
|
Less
than 1
Year
|
100,800
|
$(2.3)
|
|
1-3
Years
|
18,400
|
(0.3)
|
Other
than the
above-mentioned changes, Integrys Energy Group's market risks have not changed
materially from the market risks reported in the 2006 Form
10-K.
Evaluation
of Disclosure Controls and Procedures
As
of the end of the period covered by this Quarterly Report on Form 10-Q, Integrys
Energy Group management, with the participation of Integrys Energy Group’s Chief
Executive Officer and Chief Financial Officer, have evaluated the effectiveness
of the design and operation of the Integrys Energy Group’s disclosure controls
and procedures (as defined in the Securities Exchange Act of 1934 Rules
13a-15(e) and 15d-15(e)) and have concluded that, as of the date of such
evaluation, Integrys Energy Group’s disclosure controls and procedures were
effective in accumulating and timely alerting them to information relating
to
Integrys Energy Group (including their consolidated subsidiaries) as appropriate
to allow timely decisions regarding required disclosure to be included in
its
periodic Securities and Exchange Commission filing, particularly during the
period in which this Quarterly Report on Form 10-Q was being
prepared.
Changes
in
Internal Controls
Integrys
Energy
Group considers the merger with PEC material to the results of its operations,
cash flows and financial position from the date of the acquisition through
June 30, 2007, and believes that the internal controls and procedures of
PEC have a material effect on its internal control over financial
reporting. Integrys Energy Group is currently in the process of
integrating the internal controls and procedures of PEC with its internal
controls over financial reporting. Integrys Energy Group has expanded
its Section 404 compliance program under the Sarbanes-Oxley Act of 2002 and
the applicable rules and regulations under such Act to include PEC.
There
were no other
changes in the Integrys Energy Group internal controls over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934) that occurred during the quarter ended June 30, 2007,
that have materially affected, or are reasonably likely to materially affect,
the internal control over financial reporting, other than the merger with
Peoples Energy.
PART
II. OTHER INFORMATION
For
information on
material legal proceedings and matters related to Integrys Energy Group and
its
subsidiaries, see Note 11 - "Commitments and Contingencies"
in the Condensed Consolidated Financial Statements.
Labor
Contracts
Local
310 of the
International Union of Operating Engineers represents union employees of
WPSC.
The current Local 310 collective bargaining agreement expired on
October 21, 2006. In March 2007, the Local 310 membership voted
against the tentative agreement reached by WPSC and Local 310 negotiation
teams.
Negotiations resumed in April 2007. WPSC and Local 310 continue
to operate under the expired labor agreement.
Local
31 of the
International Brotherhood of Electrical Workers, AFL-CIO represents union
employees at MERC. In April 2007, MERC and Local 31 agreed to a two-year
contract which will expire on May 31, 2009.
Local
18007 of the
Utility Workers Union of America, AFL-CIO represents union employees at PGL.
The
current collective bargaining agreement expires on April 1, 2008.
Local
2285 of the
International Brotherhood of Electrical Workers, AFL-CIO represents union
employees at NSG. The current collective bargaining agreement expires on
June 30, 2008.
With
the exception
of the individual items discussed below, there were no material changes in
the
risk factors previously disclosed in the 2006 Annual Report on Form 10-K
for
Integrys Energy Group filed on February 28, 2007.
We
are
subject to changes in government regulation, which may have a negative impact
on
our business, financial position and results of
operations.
We
are subject to comprehensive regulation by several federal and state regulatory
agencies, which significantly influences our operating environment and may
affect our ability to recover costs from utility customers. In
particular, the PSCW, ICC, MPSC, MPUC, FERC, SEC, EPA, Minnesota Office of
Pipeline Safety and the WDNR regulate many aspects of our utility operations,
including siting and construction of facilities, conditions of service, the
issuance of securities and the rates that we can charge customers. We
are required to have numerous permits, approvals and certificates from these
agencies to operate our business.
The
rates our
regulated utilities are allowed to charge for their retail and wholesale
services are some of the most important items influencing our business,
financial position, results of operations and liquidity.
We
are unable to predict the impact on our business and operating results from
the
future regulatory activities of any of these agencies. Changes in
regulations or the imposition of additional regulations may require us to
incur
additional expenses or change business operations, which may have an adverse
impact on our results of operations. In addition, federal regulatory
reforms may produce unexpected changes and costs in the public utility
industry.
Item
4. Submission of Matters to a
Vote of Security Holders
At
the May 17, 2007 Integrys Energy Group Annual Meeting of Shareholders,
Ms. Pastora San Juan Cafferty, Ms. Ellen Carnahan, Mr.
Michael E. Lavin, Mr. William F. Protz, Jr., and Mr. Larry L. Weyers were
elected to three-year terms on the Board of
Directors. The vote was:
|
Class
A Directors - Term Expiring in 2010
|
|
Cafferty
|
Carnahan
|
Lavin
|
Protz
|
Weyers
|
|
|
|
|
|
|
Votes
For
|
63,507,602
|
63,662,561
|
63,635,565
|
63,363,185
|
63,580,790
|
Votes
Withheld
|
2,452,909
|
2,297,950
|
2,324,946
|
2,597,326
|
2,379,721
|
Shares
Not
Voted
|
9,658,920
|
9,658,920
|
9,658,920
|
9,658,920
|
9,658,920
|
Total
Shares
Outstanding
|
75,619,431
|
75,619,431
|
75,619,431
|
75,619,431
|
75,619,431
|
Election
of
Directors requires a plurality of the votes cast at a meeting of the common
shareholders at which a quorum is present.
The
continuing
Board members are:
Class
B Directors
Term
Expires in 2008
|
Class
C Directors
Term
Expires in 2009
|
|
|
Richard
A.
Bemis
James
R.
Boris
William
J.
Brodsky
Albert
J.
Budney, Jr.
Robert
C.
Gallagher
John
C.
Meng
|
Keith
E.
Bailey
Diana
S.
Ferguson
Kathryn
M.
Hasselblad-Pascale
John
W.
Higgins
James
L.
Kemerling
|
Shareholders
approved the Integrys Energy Group 2007 Omnibus Incentive Compensation Plan
authorizing 3.5 million shares of common stock for future
grants. The shareholders voted as follows:
Voted
|
Shares
|
For
|
39,456,357
|
Against
|
9,233,898
|
Abstained
|
2,132,143
|
Shares
Not
Voted
|
24,797,033
|
Total
|
75,619,431
|
Shareholders
approved the amendment to the Integrys Energy Group Deferred Compensation
Plan
authorizing the issuance of an additional 0.7 million shares of common
stock under the plan. The shareholders voted as follows:
Voted
|
Shares
|
For
|
41,922,283
|
Against
|
6,753,623
|
Abstained
|
2,146,451
|
Shares
Not
Voted
|
24,797,074
|
Total
|
75,619,431
|
Finally,
shareholders ratified the appointment of Deloitte & Touche LLP as the
independent registered public accounting firm for Integrys Energy Group and
its
subsidiaries for 2007. The shareholders voted as
follows:
Voted
|
Shares
|
For
|
63,816,629
|
Against
|
597,024
|
Abstained
|
1,546,856
|
Shares
Not
Voted
|
9,658,922
|
Total
|
75,619,431
|
Item
6.
|
|
|
|
|
|
The
following
documents are attached as exhibits:
|
|
|
|
|
|
|
12.1
|
Ratio
of
Earnings to Fixed Charges
|
|
|
|
|
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
Act of
1934 for Integrys Energy Group
|
|
|
|
|
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
Act of
1934 for Integrys Energy Group
|
|
|
|
|
|
|
32.1
|
Written
Statement of the Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350 for Integrys Energy
Group
|
Pursuant
to
the requirements of the Securities Exchange Act of 1934, the registrant,
Integrys Energy Group, has duly caused this report to be signed
on its
behalf by the undersigned thereunto duly authorized.
|
|
Integrys
Energy Group, Inc.
|
|
|
|
|
|
|
Date: August
8, 2007
|
/s/
Diane
L.
Ford
Diane
L.
Ford
Vice
President and Corporate Controller
(Duly
Authorized Officer and
Chief
Accounting Officer)
|
INTEGRYS
ENERGY GROUP
FOR
THE QUARTER ENDED JUNE 30, 2007
|
Exhibit
No.
|
Description
|
|
|
12.1
|
Ratio
of
Earnings to Fixed Charges
|
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
Act of
1934 for Integrys Energy Group
|
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
Act of
1934 for Integrys Energy Group
|
|
|
32.1
|
Written
Statement of the Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350 for Integrys Energy
Group
|
|
|