form10k.htm
UNITED
STATES
SECURITIES
AND
EXCHANGE COMMISSION
Washington,
D.
C. 20549
FORM
10-K
(Mark
One)
[X]
|
ANNUAL
REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the fiscal year
ended December 31, 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;
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,
IL 60601
800-699-1269
|
39-1775292
|
Securities
registered
pursuant to Section 12(b) of the Act:
Title
of each
class
|
Name
of each
exchange
on
which
registered
|
|
|
Common
Stock,
$1 par value
|
New
York
Stock Exchange
|
Securities
registered
pursuant to Section 12(g) of the Act:
None
Indicate
by check
mark if the Registrant is a well-known seasoned issuer, as defined in Rule
405
of the Securities Act.
Indicate
by check
mark if the Registrant is not required to file reports pursuant to Section
13 or
Section 15(d) of the Exchange Act.
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.
Indicate
by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K
is not contained herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
[ ]
Indicate
by check
mark whether the Registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large
accelerated filer [X]
|
Accelerated
filer [ ]
|
Non-accelerated
filer [ ]
|
Smaller
reporting company [ ]
|
Indicate
by check
mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the
Exchange Act).
State
the
aggregate market value of the voting and
non-voting
common
equity held by non-affiliates of the
Registrant.
|
|
$3,853,752,238
as of June 30, 2007
|
Number
of
shares outstanding of each class
of
common stock, as of
February 28, 2008
|
|
|
Common
Stock,
$1 par value, 76,424,095 shares
|
DOCUMENT
INCORPORATED BY REFERENCE
Definitive
proxy
statement for the Integrys Energy Group, Inc. Annual Meeting of Shareholders
to
be held on May 15, 2008 is incorporated by reference into Part
III.
INTEGRYS
ENERGY GROUP, INC.
ANNUAL
REPORT ON FORM 10-K
For
the Year Ended December 31, 2007
TABLE
OF CONTENTS
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Page
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1
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3
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BUSINESS
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3
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A.
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GENERAL
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3
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Integrys
Energy Group, Inc.
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Electric
Utility Segment
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Natural
Gas
Utility Segment
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Integrys
Energy Services
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Holding
Company and Other Segment
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B.
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REGULATED
ELECTRIC
OPERATIONS
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5
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Regulated
Electric Segment Operating Statistics
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Facilities
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Power
Purchase Agreements
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Fuel
Supply
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Regulatory
Matters
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Other
Matters
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C.
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REGULATED
NATURAL GAS UTILITY
OPERATIONS
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9
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Regulated
National Gas Segment Operating Statistics
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Facilities
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Natural
Gas
Supply
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Regulatory
Matters
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Other
Matters
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D.
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INTEGRYS
ENERGY
SERVICES
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11
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Facilities
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Fuel
Supply
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Licenses
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Other
Matters
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E.
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ENVIRONMENTAL
MATTERS
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14
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F.
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CAPITAL
REQUIREMENTS
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14
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G.
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EMPLOYEES
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14
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H.
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AVAILABLE
INFORMATION
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14
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RISK
FACTORS
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16
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UNRESOLVED
STAFF
COMMENTS
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20
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PROPERTIES
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21
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A.
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REGULATED
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21
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B.
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INTEGRYS
ENERGY
SERVICES
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23
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LEGAL
PROCEEDINGS
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24
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SUBMISSION
OF
MATTERS TO A VOTE OF SECURITY HOLDERS
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25
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EXECUTIVE
OFFICERS OF INTEGRYS ENERGY GROUP AS OF JANUARY 1,
2008
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26
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PART
II
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27
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MARKET
FOR
INTEGRYS ENERGY GROUP'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND
ISSUER PURCHASES OF EQUITY SECURITIES
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27
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SELECTED
FINANCIAL
DATA
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28
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Integrys
Energy Group, Inc. Comparative Financial Statements and Financial
and
Other Statistics (2003 to 2007)
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28
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MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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29
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Introduction
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Results
of
Operations
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Balance
Sheet
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Liquidity
and
Capital Resources
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Guarantees
and Off Balance Sheet Arrangements
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Market
Price
Risk Management Activities
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Critical
Accounting Policies
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Impact
of
Inflation
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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75
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ITEM
8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY
DATA
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78
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Management
Report on Internal Control over Financial Reporting
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78
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Report
of
Independent Registered Public Accounting Firm on Internal Control
over
Financial Reporting
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79
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Consolidated
Statements of Income
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81
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Consolidated
Balance
Sheets
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82
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Consolidated
Statements of Common Shareholders'
Equity
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83
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Consolidated
Statements of Cash
Flows
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84
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Notes
to
Consolidated Financial
Statements
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85
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Note
1
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Summary
Of
Significant Accounting
Policies
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85
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Note
2
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Fair
Value Of
Financial
Instruments
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93
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Note
3
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Risk
Management
Activities
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94
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Note
4
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Discontinued
Operations
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96
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Note
5
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Property,
Plant, And
Equipment
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98
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Note
6
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Acquisitions
And Sales Of
Assets
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98
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Note
7
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Jointly-Owned
Utility
Facilities
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101
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Note
8
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Nuclear
Decommissioning
Trust
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102
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Note
9
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Regulatory
Assets And
Liabilities
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103
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Note
10
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Investments
In Affiliates, At Equity
Method
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104
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Note
11
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Goodwill
And
Other Intangible
Assets
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106
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Note
12
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Leases
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108
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Note
13
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Short-Term
Debt And Lines Of Credit
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108
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Note
14
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Long-Term
Debt
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110
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Note
15
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Asset
Retirement Obligations
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112
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Note
16
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Income
Taxes
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113
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Note
17
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Commitments
And Contingencies
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117
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Note
18
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Guarantees
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124
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Note
19
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Employee
Benefit Plans
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126
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Note
20
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Preferred
Stock Of Subsidiary
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132
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Note
21
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Common
Equity
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132
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Note
22
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Stock-Based
Compensation
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134
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Note
23
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Regulatory
Environment
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137
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Note
24
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Segments
Of
Business
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142
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Note
25
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Quarterly
Financial Information
(Unaudited)
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145
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Report
of
Independent Registered Public Accounting Firm on Financial
Statements
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146
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CHANGES
IN
AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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147
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CONTROLS
AND
PROCEDURES
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147
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OTHER
INFORMATION
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147
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PART
III
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147
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DIRECTORS
AND
EXECUTIVE OFFICERS OF INTEGRYS ENERGY GROUP
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147
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EXECUTIVE
COMPENSATION
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148
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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148
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CERTAIN
RELATIONSHIPS AND RELATED
TRANSACTIONS
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148
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PRINCIPAL
FEES AND SERVICES PAID TO INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
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149
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PART
IV
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150
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EXHIBITS
AND
FINANCIAL STATEMENT SCHEDULES
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150
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Documents
Filed as Part of this Report
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Consolidated
Financial Statements
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Financial
Statement Schedules
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Listing
of
Exhibits
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158
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SCHEDULE
I -
CONDENSED PARENT COMPANY FINANCIAL STATEMENTS INTEGRYS ENERGY GROUP,
INC.
(PARENT COMPANY ONLY)
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159
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Statements
of
Income and Retained Earnings
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159
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Balance
Sheets
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160
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Statements
of
Cash Flows
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161
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Notes
to
Parent Company Financial Statements
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162
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SCHEDULE
II - INTEGRYS ENERGY GROUP VALUATION AND
QUALIFYING ACCOUNTS
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169
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170
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Acronyms
Used in this Annual Report on Form 10-K
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ATC
|
American
Transmission Company LLC
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DOE
|
United
States
Department of Energy
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DPC
|
Dairyland
Power Cooperative
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EPA
|
United
States
Environmental Protection Agency
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ESOP
|
Employee
Stock Ownership Plan
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FASB
|
Financial
Accounting Standards Board
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FERC
|
Federal
Energy Regulatory Commission
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IBS
|
Integrys
Business Support, LLC
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ICC
|
Illinois
Commerce Commission
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ICE
|
Intercontinental
Exchange
|
IRS
|
United
States
Internal Revenue Service
|
LIFO
|
Last-in,
first-out
|
MERC
|
Minnesota
Energy Resources Corporation
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MGUC
|
Michigan
Gas
Utilities Corporation
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MISO
|
Midwest
Independent Transmission System Operator
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MPSC
|
Michigan
Public Service Commission
|
MPUC
|
Minnesota
Public Utility Commission
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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
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PSCW
|
Public
Service Commission of Wisconsin
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SEC
|
United
States
Securities and Exchange Commission
|
SFAS
|
Statement
of
Financial Accounting Standards
|
UPPCO
|
Upper
Peninsula Power Company
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WDNR
|
Wisconsin
Department of Natural Resources
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WPSC
|
Wisconsin
Public Service Corporation
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WRPC
|
Wisconsin
River Power Company
|
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 this
Annual Report on Form 10-K for the
year ended December 31,
2007.
Other
factors
include:
●
|
Unexpected
costs and/or unexpected liabilities related to the PEC
merger;
|
●
|
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;
|
●
|
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
and
possible future initiatives to address concerns about global climate
change, 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,
and the
contested case proceeding regarding the Weston 4 air
permit;
|
●
|
Resolution
of
audits or other tax disputes with the IRS and various state, local
and
Canadian revenue agencies;
|
●
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The
effects,
extent and timing of additional competition or regulation in the
markets
in which our subsidiaries operate;
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●
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Available
sources and costs of fuels and purchased power;
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●
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Investment
performance of employee benefit plan assets;
|
●
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Advances
in
technology;
|
●
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Effects
of
and changes in political and legal developments, as well as economic
conditions and its impact on customer demand, in the United States
and Canada;
|
●
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Potential
business strategies, including mergers, acquisitions, construction
or
disposition of assets or businesses, which cannot be assured to be
completed timely or within budgets;
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●
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The
direct or
indirect effects of terrorist incidents, natural disasters or responses
to
such events;
|
●
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The
impacts
of changing financial market conditions, credit ratings and interest
rates
on our financing efforts, and the risks associated with changing
commodity
prices (particularly natural gas and electricity);
|
●
|
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 us 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
I
A. GENERAL
For
purposes of
this Annual Report on Form 10-K, unless the context otherwise indicates, when
we
refer to "us," "we," "our" or "ours," we are describing Integrys Energy Group,
Inc.
Integrys
Energy Group, Inc.
Integrys
Energy
Group is domiciled in the United States and was incorporated in Wisconsin
in 1993. Integrys Energy Group is a holding company for regulated
utility and nonregulated business units. As of December 31,
2007, Integrys Energy Group served approximately 485,000 regulated electric
utility customers and approximately 1,674,000 regulated natural gas utility
customers.
See
Note 24, "Segments of Business," for
information on Integrys Energy Group’s foreign and domestic revenues, foreign
and domestic long-lived assets, and revenues from external customers, net income
(loss), and total assets by reportable segment.
Electric
Utility Segment
The
electric
utility segment includes the regulated electric utility operations of WPSC
and
UPPCO. WPSC, a Wisconsin corporation, is domiciled in the United
States and began operations in 1883. UPPCO, a Michigan corporation,
is domiciled in the United States and began operations in 1884. For
the last three years, all of the electric utility segment’s revenues were earned
within the United States and all assets were located within the United
States. In 2007, retail electric sales accounted for 82.4% of total
revenues, while wholesale electric sales accounted for 17.6% of total
revenues.
Natural
Gas Utility Segment
The
natural gas
utility segment includes the regulated natural gas utility operations of WPSC,
MGUC, MERC, PGL, and NSG. MGUC and MERC, both Delaware corporations,
are domiciled in the United States and began operations upon acquisition of
their natural gas distribution operations in Michigan and Minnesota,
respectively, from Aquila, Inc. in April 2006, and July 2006,
respectively. PGL and NSG, both Illinois corporations, are domiciled
in the United States and began operations in 1855 and 1900,
respectively. Integrys Energy Group acquired PGL and NSG in February
2007 in the PEC merger.
Integrys
Energy Services
Integrys
Energy
Services, a Wisconsin corporation, is domiciled in the United States and was
established in 1994. Integrys Energy Services is a diversified energy
supply and services company serving residential, commercial, industrial, and
wholesale customers in developed competitive markets in the United States and
Canada. In 2007, Integrys Energy Services opened an office in Denver,
Colorado, to expand its operation into the Western Systems Coordinating Council
markets. Integrys Energy Services anticipates future operations in
all viable competitive markets in the United States and Canadian natural gas
and
electric markets.
Holding
Company and Other Segment
The
Holding Company
and Other segment includes the operations of the Integrys Energy Group holding
company and the PEC holding company, along with any nonutility activities at
WPSC, MGUC, MERC, UPPCO, PGL, and NSG. Also included in the Holding
Company and Other segment is WPS Investments, LLC, a nonutility company
which holds the investment of Integrys Energy Group and its subsidiaries in
ATC. On December 31, 2007, WPS Investments was owned 15.85%
by WPSC, 3.37% by UPPCO and
80.78%
by Integrys
Energy Group. Equity earnings from our investments in ATC, WRPC, and
Guardian Pipeline, LLC (prior to its sale in 2006) are included in the Holding
Company and Other segment.
For
more
information regarding revenues, net income, and total assets for Integrys Energy
Group’s reportable segments, see Note 24, “Segments of
Business.”
B. REGULATED
ELECTRIC OPERATIONS
Integrys
Energy
Group's regulated electric operations are provided through WPSC and
UPPCO. WPSC's regulated electric operations generate and distribute
electric energy mainly to northeastern Wisconsin and a small portion of
Michigan's Upper Peninsula. UPPCO provides electric energy in
Michigan's Upper Peninsula. Wholesale electric service is provided to
various customers, including municipal utilities, electric cooperatives, energy
marketers, other investor-owned utilities, and municipal joint action
agencies.
Regulated
Electric Segment OperatingStatistics
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Operating
revenues
(millions)
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$ |
381.8 |
|
|
$ |
353.0 |
|
|
$ |
355.1 |
|
Commercial
and
industrial
|
|
|
607.0 |
|
|
|
548.8 |
|
|
|
491.7 |
|
Resale
and
other
|
|
|
257.3 |
|
|
|
197.6 |
|
|
|
190.3 |
|
Total
|
|
$ |
1,246.1 |
|
|
$ |
1,099.4 |
|
|
$ |
1,037.1 |
|
Kilowatt-hour
sales
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
3,173.6 |
|
|
|
3,144.8 |
|
|
|
3,127.4 |
|
Commercial
and
industrial
|
|
|
8,750.9 |
|
|
|
8,645.2 |
|
|
|
8,641.8 |
|
Resale
and
other
|
|
|
4,067.3 |
|
|
|
4,135.3 |
|
|
|
3,890.9 |
|
Total
|
|
|
15,991.8 |
|
|
|
15,925.3 |
|
|
|
15,660.1 |
|
Customers
served (approximate, end
of period)
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
424,400 |
|
|
|
421,000 |
|
|
|
424,100 |
|
Commercial
and
industrial
|
|
|
59,600 |
|
|
|
59,100 |
|
|
|
51,600 |
|
Resale
and
other
|
|
|
1,000 |
|
|
|
900 |
|
|
|
1,300 |
|
Total
|
|
|
485,000 |
|
|
|
481,000 |
|
|
|
477,000 |
|
In
2007, Integrys Energy Group's regulated electric facilities reached a firm
net
design peak of 2,305 megawatts on July 31, 2007. As a result of
continually reaching demand peaks in the summer months, primarily due to air
conditioning load, the summer period is the most relevant for Integrys Energy
Group's regulated electric utility capacity. WPSC expects future supply reserves
to meet the minimum 18% planning reserve margin criteria through 2008 as
required by the PSCW. The PSCW has opened a docket to review the
adequacy of the 18% reserve margin requirement. The MPSC has not
established minimum guidelines for future supply reserves.
WPSC
and UPPCO had
adequate capacity to meet all firm electric load obligations during 2007 and
expect to have adequate capacity to meet all obligations during 2008. Both
WPSC
and UPPCO are members of the MISO, which operates a financial and physical
electric wholesale market in the Midwest, and offer their generation and bid
their customer load into the market. For further information on MISO, see Item
7
- Management's Discussion and Analysis of Financial Condition and Results of
Operation - Other Future Considerations.
Facilities
For
a complete
listing of Integrys Energy Group's regulated electric facilities, see Item
2 - Properties, in this Annual Report on Form 10-K. To see
Integrys Energy Group's electric utility plant asset book value, see Note 5,
"Property, Plant, and
Equipment."
Power
Purchase Agreements
Integrys
Energy
Group' regulated electric facilities enter into short and long-term power
purchase agreements to meet a portion of electric energy supply
needs. For more information on these power purchase agreements, see
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operation - Liquidity and Capital Resources, Contractual
Obligations.
Fuel
Supply
Electric
Supply Mix
Integrys
Energy
Group's regulated electric supply mix for 2007 and 2006 was:
Energy
Source
|
|
2007
|
|
|
2006
|
|
Company-owned
generating plants
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal
|
|
|
|
|
|
52.4 |
% |
|
|
|
|
|
57.3 |
% |
Natural
gas and fuel oil
|
|
|
|
|
|
2.2 |
% |
|
|
|
|
|
1.4 |
% |
Hydroelectric
|
|
|
|
|
|
1.3 |
% |
|
|
|
|
|
1.5 |
% |
Wind
|
|
|
|
|
|
0.1 |
% |
|
|
|
|
|
0.1 |
% |
Purchased
power
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kewaunee
(nuclear)
|
|
|
19.3 |
% |
|
|
|
|
|
|
17.6 |
% |
|
|
|
|
Fox
Energy Center, LLC and Combined
Locks
Energy Center, LLC (natural gas)
|
|
|
3.4 |
% |
|
|
|
|
|
|
6.1 |
% |
|
|
|
|
Hydroelectric
|
|
|
2.4 |
% |
|
|
|
|
|
|
3.3 |
% |
|
|
|
|
Other
(including MISO)
|
|
|
18.9 |
% |
|
|
|
|
|
|
12.7 |
% |
|
|
|
|
Total
purchased power
|
|
|
|
|
|
|
44.0 |
% |
|
|
|
|
|
|
39.7 |
% |
Fuel
Costs
Integrys
Energy
Group's regulated electric fuel costs for its generating units for 2007 and
2006
were:
Fuel
Cost by Source (Per Million Btus)
|
|
2007
|
|
|
2006
|
|
Coal
|
|
$ |
1.47 |
|
|
$ |
1.30 |
|
Natural
gas
|
|
|
7.36 |
|
|
|
7.19 |
|
Fuel
oil
|
|
|
13.95 |
|
|
|
13.60 |
|
Coal
Supply and Deliveries
Coal
is the primary
fuel source for Integrys Energy Group's regulated electric generation
facilities, the majority of which is from the Powder River Basin mines located
in Wyoming. This low sulfur coal has been our least-cost coal source from any
of
the subbituminous coal-producing regions in the United States. Integrys
Energy Group's regulated electric fuel portfolio strategy is to maintain a
25-
to 40-day supply of coal at each plant site.
Historically,
WPSC
has purchased coal directly from the producer for its wholly owned plants.
Wisconsin Power and Light purchases coal for the jointly owned Edgewater and
Columbia plants and is reimbursed by WPSC for its share of the coal costs.
WPSC
currently has contracts in place for coal transportation for 90% of its 2008
coal transportation requirements. For more information on coal purchases and
coal deliveries under contract, see Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operation - Liquidity and Capital
Resources, Contractual Obligations and Note 17, "Commitments and
Contingencies."
Natural
Gas Supply - Generation
Through
a power
purchase agreement, WPSC is committed to provide fuel for 500 megawatts of
the
Fox Energy Center, a natural gas-fired combined cycle generation facility owned
by a third party with a total combined electric capacity of approximately
580 megawatts. In addition, WPSC supplies natural gas through
its natural gas distribution system to its approximately 429 megawatts of
natural gas-fired combustion turbine generation facilities. For more information
on WPSC's natural gas supply under contract, see Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Liquidity and Capital Resources, Contractual Obligations and Note 17,
"Commitments and
Contingencies."
WPSC
has received
approval from the PSCW for its Energy Market Risk Management Plan to govern
its
activities in the energy markets. The order permits activities to
limit exposure to the volatility of natural gas prices affecting its electric
generation, as well as the use of financial transmission rights for the use
of
managing energy congestion costs. The plan provides for the use of financial
futures contracts for natural gas and the use of financial options that cap
the
price of natural gas for a portion of WPSC's forecasted natural gas fuel
generation requirements and natural gas price sensitive purchased power
contracts.
Regulatory
Matters
Integrys
Energy
Group's electric utility operations are regulated by the PSCW, MPSC, and
FERC.
For
additional
information, see Note 23, "Regulatory
Environment."
Hydroelectric
Licenses
WPSC,
UPPCO, and
WRPC (a company in which we have 50% ownership), have long-term licenses from
FERC for all of their hydroelectric facilities.
UPPCO
has announced
its decision to restore Silver Lake as a reservoir to support power generation,
pending approval of an economically feasible design by the FERC. The
FERC has required that a board of consultants evaluate and oversee the design
approval process. UPPCO continues to work with its Board of Directors
and the FERC to develop an economically feasible design.
For
more
information on Silver Lake, see Note 17, "Commitments and
Contingencies."
Other
Matters
Customer
Segmentation
In
2007, paper production facilities and one wholesale customer (a private utility
that primarily provides power to paper mills) accounted for 9.3% of Integrys
Energy Group's regulated electric utility revenues. Residential sales accounted
for 30.6% of Integrys Energy Group's regulated electric utility revenues in
2007.
Seasonality
Integrys
Energy
Group's regulated electric utility sales in Wisconsin generally follow a
seasonal pattern due to the air conditioning requirements of customers that
are
primarily impacted by the variability of summer temperatures. Regulated electric
utility sales in Michigan follow no significant seasonal trend due to cooler
climate conditions in the Upper Peninsula of Michigan.
Generally
during
the winter months, the purchase price of fuel (natural gas and fuel oil) for
heating load and generation production is heavily influenced by weather and
the
availability of baseload generation units within the MISO energy
market. Sustained colder-than-normal weather and unexpected extended
generation outages can influence fuel supply and demand, impacting
the production costs at Integrys Energy Group's natural gas and oil-fired
facilities, as well as natural gas supply commitments under power purchase
agreements. For Integrys Energy Group's electric segment, the impact
on utility production costs is managed through WPSC's Energy Market Risk
Management Plan.
Competition
The
retail electric
utility market in Wisconsin is regulated by the PSCW. Retail electric
customers currently do not have the ability to choose their electric
supplier. However, in order to increase sales, utilities work to
attract new commercial/industrial customers into their service
territory. As a result, there is competition among utilities to keep
energy rates low. Wisconsin utilities have continued to refine regulated tariffs
in
order
to provide
customers with the true cost of electric energy to each class of customer by
reducing or eliminating rate subsidies among different ratepayer classes.
Although Wisconsin electric energy markets are regulated, utilities still face
competition from other energy sources.
Michigan
electric
energy markets are open to competition; however, an active competitive market
has not yet developed in the Upper Peninsula of Michigan primarily due to a
lack
of excess generation and transmission system capacity.
Working
Capital Requirements
For
information on
capital requirements related to Integrys Energy Group’s regulated electric
utility operations see Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operation - Liquidity and Capital
Resources.
C. REGULATED
NATURAL GAS UTILITY
OPERATIONS
Integrys
Energy
Group provides regulated natural gas utility service to Chicago and northeastern
Illinois, northeastern Wisconsin, adjacent portions of Michigan's Upper
Peninsula, various cities and communities throughout Minnesota,
and in the southern portion
of lower
Michigan.
Regulated
Natural Gas Segment Operating Statistics
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Operating
Revenues (millions)
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$ |
1,441.7 |
|
|
$ |
401.4 |
|
|
$ |
291.9 |
|
Commercial
and industrial
|
|
|
481.2 |
|
|
|
218.3 |
|
|
|
137.7 |
|
Other
|
|
|
180.8 |
|
|
|
57.2 |
|
|
|
92.4 |
|
Total
|
|
$ |
2,103.7 |
|
|
$ |
676.9 |
|
|
$ |
522.0 |
|
Therms
Delivered (millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
1,251.8 |
|
|
|
351.5 |
|
|
|
241.6 |
|
Commercial
and industrial
|
|
|
498.6 |
|
|
|
230.7 |
|
|
|
170.8 |
|
Other
|
|
|
47.1 |
|
|
|
27.6 |
|
|
|
70.8 |
|
Total
therm
sales
|
|
|
1,797.5 |
|
|
|
609.8 |
|
|
|
483.2 |
|
Transportation
|
|
|
1,505.6 |
|
|
|
657.5 |
|
|
|
344.0 |
|
Total
|
|
|
3,303.1 |
|
|
|
1,267.3 |
|
|
|
827.2 |
|
Customers
Served (approximate, end of period)
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
1,548,400 |
|
|
|
620,500 |
|
|
|
279,300 |
|
Commercial
and industrial
|
|
|
124,700 |
|
|
|
62,600 |
|
|
|
27,700 |
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Transportation
customers
|
|
|
900 |
|
|
|
900 |
|
|
|
1,000 |
|
Total
|
|
|
1,674,000 |
|
|
|
684,000 |
|
|
|
308,000 |
|
Facilities
For
information
regarding our regulated natural gas facilities, see Item
2 - Properties in this Annual Report on Form 10-K. To see
Integrys Energy Groups' natural gas utility plant asset book value, see Note
5,
"Property, Plant, and
Equipment."
Natural
Gas Supply
Integrys
Energy
Group's natural gas utilities manage portfolios of natural gas supply contracts,
storage services and pipeline transportation services designed to meet their
varying load pattern at the lowest reasonable cost.
Integrys
Energy
Group's regulated natural gas subsidiaries contract for fixed-term firm natural
gas supplies with various natural gas suppliers each year to meet the
November through March winter period demand of firm system sales
customers. Integrys Energy Group's regulated natural gas supply
requirements are met through a combination of physical fixed price purchases,
storage (contracted and owned), natural gas call options and physical index
purchases, and through the purchase of additional natural gas supplies on the
monthly spot market through fixed-term firm contracts to supplement natural
gas
supplies and minimize risk. During periods of colder than normal weather,
purchasing natural gas in the daily spot market may be
necessary. Integrys Energy Group's regulated natural gas operations
contract for domestic natural gas supplies and limit their purchases to minimize
potential stranded natural gas supply contract costs.
Under
current
regulatory practice, the ICC, PSCW, MPUC, and MPSC allow Integrys Energy Groups'
regulated natural gas utilities to pass the prudently incurred cost of natural
gas on to customers on a dollar-for-dollar basis through purchased gas
adjustment clauses. Changes in the cost of natural gas are reflected
in both natural gas revenues and natural gas purchases, thus having little
or no
impact on net income.
For
further
information on Integrys Energy Group's regulated natural gas utility supply
and
transportation contracts, see Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of Operation - Liquidity and Capital
Resources, Contractual Obligations and Note 17, "Commitments and
Contingencies."
Integrys
Energy
Group's natural gas utilities contract with various underground storage
facilities for underground natural gas storage capacity and have company-owned
storage. Besides providing the ability to manage significant changes
in daily natural gas demand, storage also provides Integrys Energy Group with
the ability to purchase natural gas at high load factors on a year-round basis,
thus lowering supply cost volatility. Integrys Energy Group has
approximately 397 million therms of firm natural gas storage capacity under
contract and approximately 314 million therms of firm natural gas storage
capacity located in its distribution system.
Regulatory
Matters
The
natural gas
retail rates of Integrys Energy Group are regulated by the ICC, PSCW, MPSC,
and
MPUC. PGL utilizes its storage and pipeline supply assets as a
natural gas hub. This activity is regulated by the FERC and consists
of providing wholesale transportation and storage services in interstate
commerce.
For
additional
information, see Note 23, "Regulatory
Environment."
Other
Matters
Seasonality
The
natural gas
throughput of Integrys Energy Group's regulated natural gas utilities follows
a
seasonal pattern due to the heating requirements of customers that is primarily
impacted by the variability in winter temperatures.
Competition
Integrys
Energy
Group's regulated natural gas utility operations face competition with other
entities and forms of energy in varying degrees, particularly for large
commercial and industrial customers who have the ability to switch between
natural gas and alternate fuels. Due to the volatility of natural gas prices,
Integrys Energy Group has seen customers with dual fuel capability switch to
alternate fuels for short periods of time, then switch back to natural gas
as
market rates change. Interruptible natural gas sales and natural gas
transportation service is offered for customers to enable them to reduce their
energy costs. Transportation customers purchase their natural gas directly
from
third-party natural gas suppliers at market prices and contract with Integrys
Energy Group's entities to transport the natural gas from pipelines to their
facilities. Additionally, some customers still purchase their natural
gas commodity directly from one of Integrys Energy Group's entities but have
elected to do so on an interruptible basis, as a means to reduce their
costs. Customers continue to switch between firm system supply,
interruptible system supply and transportation service each year as the
economics and service options change.
Working
Capital Requirements
For
information on
capital requirements related to the regulated natural gas utility operations
of
Integrys Energy Group see Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operation - Liquidity and Capital
Resources.
D. INTEGRYS
ENERGY SERVICES
Integrys
Energy
Services is a diversified nonregulated energy supply and services company
serving retail and wholesale customers in developed competitive markets in
the
United States and Canada.
Integrys
Energy
Services and its subsidiaries serve residential, commercial and industrial
customers, "aggregated" small commercial and residential customers as well
as
provide standard offer service. Aggregated customers are associations
or groups of customers, which have joined together to negotiate purchases of
electric or natural gas energy as a larger group. In the wholesale
market, Integrys Energy Services focuses on structured transactions with
regulated local distribution companies, pipelines, storage companies,
cooperatives, municipalities, and other nonregulated energy marketing and
trading companies.
Energy
revenues,
volumes, and assets are as follows:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Revenues
(Millions)
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
4,753.8 |
|
|
$ |
3,176.9 |
|
|
$ |
3,149.2 |
|
Canada
|
|
|
2,225.9 |
|
|
|
1,982.2 |
|
|
|
2,165.7 |
|
Total
|
|
$ |
6,979.7 |
|
|
$ |
5,159.1 |
|
|
$ |
5,314.9 |
|
Electric
Volumes
(Million Megawatt-Hours)
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
17.7 |
|
|
|
5.0 |
|
|
|
8.1 |
|
Canada
|
|
|
0.5 |
|
|
|
0.5 |
|
|
|
- |
|
Total
|
|
|
18.2 |
|
|
|
5.5 |
|
|
|
8.1 |
|
Gas
Volumes (Billion
Cubic Feet)
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
479.0 |
|
|
|
359.1 |
|
|
|
298.7 |
|
Canada
|
|
|
286.0 |
|
|
|
278.4 |
|
|
|
256.8 |
|
Total
|
|
|
765.0 |
|
|
|
637.5 |
|
|
|
555.5 |
|
Long
- Lived Assets
(Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
3,130.3 |
|
|
$ |
2,715.7 |
|
|
|
|
|
Canada
|
|
|
20.3 |
|
|
|
21.0 |
|
|
|
|
|
Total
|
|
$ |
3,150.6 |
|
|
$ |
2,736.7 |
|
|
|
|
|
Integrys
Energy
Services utilizes derivative instruments, including forwards, futures, options
and swaps, to manage its exposure to market risks in accordance with limits
and
approvals established in its risk management and credit policies. The
Market Risk Oversight Committee, comprised of cross-functional members of
management and senior leadership of Integrys Energy Services and its parent
company Integrys Energy Group, monitors compliance with these
policies.
For
more
information on the trading and risk management activities of Integrys Energy
Services, see Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operation and Market Price Risk Management
Activities.
Facilities
At
December 31, 2007, Integrys Energy Services owned and operated electric
generation facilities in the Midwest and Northeast regions of the
United States with a total rated capacity of approximately
367 megawatts.
Integrys
Energy
Services' direct ownership of generation facilities allows for more efficient
management of the market risk associated with its generation capabilities and
related contracts to provide electric energy. Integrys Energy Services focuses
on effective economic dispatch and risk management strategies in order to
enhance the returns of its generation facilities.
As
part of the asset management strategy of Integrys Energy Group, Integrys Energy
Services continues to explore opportunities regarding the future of its electric
generation facilities. Opportunities include, but are not limited to
purchase, sales or development of certain facilities, joint ventures and
long-term contracts. Opportunities change and develop with the
dynamics of the markets in which Integrys Energy Services operates.
For
a complete
listing of generation facilities of Integrys Energy Services, see
Item 2 - Properties in this Annual Report on Form
10-K.
Fuel
Supply
Integrys
Energy
Services' fuel inventory policy varies for each generation facility depending
on
the type of fuel used and available natural gas storage
facilities. In 2007, Integrys Energy Services' merchant coal-fired
generation facilities consisted of its Westwood and Stoneman
facilities. Actual fuel needs in 2008 will depend on market
conditions and operational capability of these facilities.
Integrys
Energy
Services' Westwood facility burns waste coal left behind by mining operations
and has several year's supply on site. All fuel is located within a
seven-mile radius of the plant.
The
Stoneman
facility currently has all of its anticipated 2008 coal needs on
site.
Integrys
Energy
Services currently has adequate transport and supply arrangements in place
for
its natural gas facilities (Beaver Falls, Syracuse, and Combined Locks) for
their projected needs to fulfill firm commitments in 2008.
Licenses
Integrys
Energy
Services is a FERC licensed power marketer with import/export authorization
through the DOE. Integrys Energy Services on its own, or through
certain of its subsidiaries, is registered to sell retail electric service
in
Connecticut, Delaware, District of Columbia, Illinois, Maine, Maryland,
Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio,
Pennsylvania, Rhode Island, Texas and Virginia in the United States and the
provinces of Ontario and in Alberta in Canada.
Integrys
Energy
Services, on its own, or through certain of its subsidiaries, is registered
to
sell natural gas in the states of Illinois, Iowa, Michigan, Ohio, Pennsylvania,
New York and Alberta, Canada. Integrys Energy Services also sells
natural gas in Wisconsin where no license is required. Integrys
Energy Services' subsidiary, Integrys Energy Services of Canada Corp., is
registered to do business in the Canadian provinces of Alberta, British
Columbia, Manitoba, Nova Scotia, Ontario, Quebec, and
Saskatchewan.
Integrys
Energy
Services, or certain of its subsidiaries, are also members of the following
regional transmission operators and North American Electric Reliability Council
reliability regions:
·
|
Alberta
Electric System Operator;
|
·
|
Independent
Electricity System Operator (located in Ontario);
|
·
|
Electric
Reliability Council of Texas;
|
·
|
ISO
New
England;
|
·
|
MISO;
|
·
|
Midwest
Reliability Organization;
|
·
|
New
Brunswick
System Operator;
|
·
|
New
York
Independent System Operator;
|
·
|
Northeast
Power Coordinating Council;
|
·
|
Northern
Maine Independent System Administrator;
|
·
|
PJM
Interconnection;
|
·
|
ReliabilityFirst
Corporation;
|
·
|
SERC
Reliability Corporation;
|
·
|
Texas
Regional Entity; and
|
·
|
Western
Systems Coordinating Council
|
All
the FERC
hydroelectric facility licenses held by Integrys Energy Services' subsidiaries
are current. The 33-megawatt hydroelectric facility owned in
New Brunswick, Canada, is not subject to licensing.
Other
Matters
Customer
Segmentation
Although
Integrys
Energy Services is not dependent on any one customer, a significant percentage
of its retail sales volume is derived from industries related to:
·
|
Paper
and
allied products;
|
·
|
Food
and
kindred products;
|
·
|
Chemicals
and
paint; and
|
·
|
Steel
and
foundries.
|
Although
Integrys
Energy Services' concentration of sales in any single market sector has been
generally decreasing as it continues its expansion into markets in the western
portion of the United States, with the PEC merger there has been a significant
concentration of sales in the Illinois market.
Seasonality
Integrys
Energy
Services believes that its business, in the aggregate, is not seasonal, even
though certain products sell more heavily in some seasons than in
others. Sales of natural gas generally peak in the winter months,
while sales of electric energy generally peak in the summer
months. Generally in the summer months, the demand for electric
energy is high, which increases the price at which energy can be
sold. In periods of high residential fuel consumption (generally the
winter months), the purchase price of oil and natural gas increases, which
increases the production costs at Integrys Energy Services’ natural gas- and
oil-fired generation facilities. Integrys Energy Services' business
can be volatile as a result of market conditions and the related market
opportunities available to its customers.
Competition
Integrys
Energy
Services is a nonregulated energy marketer that competes against regulated
utilities, large energy trading companies and other energy
marketers. Integrys Energy Services competes with other energy
providers on the basis of price, reliability, service, financial strength,
consumer convenience, performance and reputation.
Working
Capital
In
addition to equity infusions, long-term debt and short-term debt provided by
its
parent company (Integrys Energy Group), Integrys Energy Services also has access
to credit lines up to $175 million from independent financial institutions,
$150
million of which is guaranteed by Integrys Energy Group. The working
capital needs of Integrys Energy Services vary significantly over time due
to
volatility in commodity prices (including margin calls), levels of natural
gas
inventories, the structure of wholesale transactions, the price of natural
gas,
and alternative energy options available to its customers. Integrys
Energy Group provides guarantees for Integrys Energy Services' commodity
transactions. These guarantees provide the credit support needed to
participate in the nonregulated energy market.
See
Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operation for additional information regarding working capital needs of
nonregulated operations.
E. ENVIRONMENTAL
MATTERS
For
information on
environmental matters related to Integrys Energy Group and any of its
subsidiaries, see Note 17, "Commitments and
Contingencies."
F. CAPITAL
REQUIREMENTS
For
information on
capital requirements related to Integrys Energy Group, see Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Liquidity and Capital Resources.
G. EMPLOYEES
Integrys
Energy
Group and its subsidiaries had 5,231 employees at December 31, 2007, of which
approximately 45% are union employees.
Local
310 of the
International Union of Operating Electricians represents approximately 46%
of
WPSC's 2,158 employees. The current Local 310 collective bargaining agreement
expires on October 17, 2009.
Approximately
59%
of PGL's 1,534 employees are represented by Local 18007 of the Utility Workers
Union of America. The current collective bargaining agreement with PGL union
employees expires on April 30, 2008. Negotiations are
ongoing for renewal of the agreement.
Local
31 of the
International Brotherhood of Electrical Workers, AFL CIO, represents
approximately 19% of the 225 employees at MERC. The current collective
bargaining agreement will expire on May 31, 2011.
Approximately
67%
of NSG's 203 employees are represented by Local 2285 of the International
Brotherhood of Electrical Workers. The current collective bargaining agreement
with NSG union employees expires on June 30, 2008. Negotiations are
ongoing for renewal of the agreement.
MGUC
has labor
contracts with two unions; Local 12295 of the United Steelworkers of America,
AFL CIO CLC, and Local 417 of the Utility Workers Union of America, AFL CIO,
which represent approximately 66% of MGUC's 177 employees. The Local
12295 of the United Steelworkers of America, AFL CIO CLC, contract will expire
on January 15, 2010. The Local 417 of the Utility Workers Union of America,
AFL
CIO, collective bargaining agreement will expire on February 15,
2012.
Local
510 of the
International Brotherhood of Electrical Workers, AFL CIO, represents
approximately 77% of the 163 employees at UPPCO. The current collective
bargaining agreement expires on April 18, 2009.
H. AVAILABLE
INFORMATION
Integrys
Energy
Group files with the SEC its:
·
|
Annual
Report
on Form 10-K;
|
·
|
Quarterly
Reports on Form 10-Q;
|
·
|
Proxy
statement;
|
·
|
Registration
statements, including prospectuses;
|
·
|
Current
Reports on Form 8-K; and
|
·
|
Any
amendments to these documents.
|
Integrys
Energy
Group makes these reports available free of charge, on Integrys Energy Group's
Internet Web site, as soon as reasonably practicable after they are filed with
the SEC. Integrys Energy Group's
Internet
address is
www.integrysgroup.com. Statements and amendments posted on Integrys
Energy Group's Web site do not include access to exhibits and supplemental
schedules electronically filed with the reports or
amendments. Integrys Energy Group is not including the information
contained on or available through their Web sites as a part of, or incorporating
such information by reference into, this Annual Report on Form
10-K.
You
may also
obtain materials filed with the SEC by Integrys Energy Group at the SEC Public
Reference Room at 100 F Street, N.E., Washington,
DC 20549. To obtain information on the operation of the
Public Reference Room, you may call 1-800-SEC-0330. You
may also view reports, proxy statements and other information regarding
Integrys Energy Group (including exhibits), filed with the SEC, at its Web
site
at www.sec.gov.
You
should
carefully consider the following risk factors, as well as the other information
included or incorporated by reference in this Annual Report on Form 10-K, when
making an investment decision. The risks and uncertainties described below
are
not the only ones we face. Additional risks and uncertainties not
presently known or that we currently believe to be immaterial may also adversely
affect us.
We
may not successfully integrate recent or future acquisitions into our operations
or otherwise achieve the anticipated benefits of those
acquisitions.
As
part of our growth strategy, we continue to pursue a disciplined acquisition
strategy. While we expect to identify cost savings and growth
opportunities before we acquire companies or assets, we may not be able to
achieve these anticipated benefits due to, among other things:
·
|
Delays
or
difficulties in completing the integration of acquired companies
or
assets;
|
·
|
Higher
than
expected costs or a need to allocate additional resources to manage
unexpected operating difficulties;
|
·
|
Parameters
imposed or delays caused by regulatory agencies;
|
·
|
Reliance
on
inaccurate assumptions in evaluating the expected benefits of a given
acquisition;
|
·
|
Inability
to
retain key employees or customers of acquired companies;
and
|
·
|
Assumption
of
liabilities not identified in the due diligence
process.
|
These
risks apply
to our 2006 acquisitions of natural gas distribution operations in Michigan
and
Minnesota, as well as the 2007 merger with PEC.
The
integration of PEC presents significant challenges and we are incurring
significant transaction, merger-related and restructuring costs that may result
in a decline in the anticipated potential benefits of the merger with
PEC.
Integrys
Energy
Group expects the merger with PEC to generate potential pre-tax cost synergy
savings of $106 million on an annualized basis by the end of the fifth full
year
of operations following completion of the merger (excluding costs of
integration). These savings may not be realized within the time
periods or amounts contemplated.
In
addition to the risks noted above related to other potential or future
acquisitions, the difficulties of combining the previously independent
operations of Integrys Energy Group and PEC include, but are not limited to,
the
following:
·
|
combining
the
best practices of two companies, including utility operations,
non-regulated energy marketing operations and staff
functions;
|
·
|
the
necessity
of coordinating geographically separated organizations, systems and
facilities;
|
·
|
integrating
personnel with diverse business backgrounds and organizational
cultures;
|
·
|
reducing
the
costs associated with each company's operations; and
|
·
|
preserving
important relationships of both companies and resolving potential
conflicts that may arise.
|
The
process of
combining operations could cause an interruption of, or loss of momentum in,
the
activities of one or more of the businesses of Integrys Energy Group and the
possible loss of key personnel. The diversion of management's
attention and any delays or difficulties encountered in connection with the
integration of the two companies' operations could have an adverse effect on
the
business, results of operations, financial condition, or prospects of Integrys
Energy Group,
Integrys
Energy
Group is incurring and expects in the future to continue to incur integration
and restructuring costs associated with combining its operations with PEC,
as
well as transaction fees and other costs related to the merger. The
estimated total pre-tax cost of achieving anticipated merger
synergies
and cost
savings is approximately $155 million (excluding internal labor costs), most
of
which will be incurred through 2010. Although Integrys Energy Group expects
the
elimination of duplicative costs, as well as the realization of other
efficiencies related to the integration of the businesses, to offset incremental
transaction, merger-related and restructuring costs over time, net benefits
may
not be achieved in the near term.
Integrys
Energy Group has recorded goodwill that could become impaired and adversely
affect the company's operating results.
The
merger with PEC
and the acquisition of natural gas distribution operations in Minnesota and
Michigan are accounted for as purchases by Integrys Energy Group in accordance
with generally accepted accounting principles. Under the purchase method of
accounting, the assets and liabilities acquired have been recorded at their
respective fair values at the date of acquisition and added to those of Integrys
Energy Group. The reported financial condition and results of
operations of Integrys Energy Group reflect PEC balances and results after
completion of the merger, but such financial statements have not been and will
not be restated retroactively to reflect the historical financial position
or
results of operations of PEC for periods prior to the merger. The
earnings of Integrys Energy Group also reflect purchase accounting
adjustments.
Under
the purchase
method of accounting, the total purchase price is allocated to tangible assets
and liabilities and identifiable intangible assets based on their estimated
fair
market values as of the date the merger was completed. The excess
cost of the acquisition over those estimated fair market values is recorded
as
goodwill. As a result of the application of purchase accounting,
these transactions resulted in a significant amount of goodwill. To
the extent the value of goodwill or intangibles becomes impaired, Integrys
Energy Group may be required to incur material charges relating to such
impairment. Such a potential impairment charge could have a material
impact on the operating results of Integrys Energy Group.
We
are subject to changes in government regulation, which may have a negative
impact on our business, financial position, and results of
operations.
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 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, WDNR, and the Illinois Environmental Protection Agency 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.
We
are unable to predict the impact on our businesses and operating results from
the future regulatory activities of any of these agencies. However,
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.
A
reduction in our credit ratings could materially and adversely affect our
business, financial position, results of operations, and liquidity.
We
cannot be sure that any of our credit ratings will remain in effect for any
given period of time or that a credit rating will not be lowered by a rating
agency if, in its judgment, circumstances in the future so
warrant. Any downgrade could:
·
|
Increase
our
borrowing costs;
|
·
|
Require
us to
pay a higher interest rate in future financings and possibly reduce
the
potential pool of creditors;
|
·
|
Increase
our
borrowing costs under certain of our existing credit
facilities;
|
·
|
Limit
our
access to the commercial paper market;
|
·
|
Limit
the
availability of adequate credit support for Integrys Energy Services'
operations; and
|
·
|
Require
provision of additional credit assurance to contract
counterparties.
|
We
may not complete construction projects within estimated project
costs.
Subsidiaries
of
Intergrys Energy Group undertake very large and complex construction projects,
subject to numerous unpredictable events that could affect our ability to timely
complete construction within estimated costs. We may not be able to
meet these construction estimates due to, among other things:
·
|
Fluctuating
or unanticipated construction costs;
|
·
|
Supply
delays;
|
·
|
Legal
claims;
and
|
·
|
Environmental
regulation.
|
Our
operations are subject to risks beyond our control, including but not limited
to
weather, terrorist attacks or related acts of war.
Our
revenues are
affected by the demand for electricity and natural gas. That demand
can vary greatly based upon:
·
|
Weather
conditions, seasonality, and temperature extremes;
|
·
|
Fluctuations
in economic activity and growth in our regulated service areas, as
well as
areas in which our nonregulated subsidiaries operate;
and
|
·
|
The
amount of
additional energy available from current or new
competitors.
|
Weather
conditions
directly influence the demand for electricity and natural gas and affect the
price of energy commodities.
In
addition, the cost of repairing damage to our facilities due to storms, natural
disasters, wars, terrorist acts and other catastrophic events, in excess of
reserves established for such repairs, may adversely impact our results of
operations, financial condition, and cash flows. The occurrence or
risk of occurrence of future terrorist activity and the high cost or potential
unavailability of insurance to cover such terrorist activity may impact our
results of operations and financial condition in unpredictable
ways. These actions could also result in disruptions of power and
fuel markets. In addition, our natural gas distribution system and
pipelines could be directly or indirectly harmed by future terrorist
activity.
Costs
of environmental compliance, liabilities, fines, penalties, and litigation
could
exceed our estimates.
Compliance
with
current and future federal and state environmental laws and regulations may
result in increased capital, operating and other costs, including remediation
and containment expenses and monitoring obligations. Integrys Energy
Group cannot predict with certainty the amount and timing of all future
expenditures (including the potential or magnitude of fines or penalties)
related to environmental
matters
because of
the difficulty of estimating clean-up and compliance costs and the possibility
that changes will be made to the current environmental laws and
regulations.
On
March 15, 2005, the EPA adopted the Clean Air Mercury Rule, which is intended
to
reduce mercury emissions from coal-fired generation plants. On
February 8, 2007, a court decision vacated the federal rule. As a
result, future impacts on Integrys Energy Group or its subsidiaries resulting
from future federal or state regulation regarding mercury emissions is
uncertain. The EPA has also issued the Clean Air Interstate Rule
requiring reductions of sulfur dioxide and nitrogen oxide
emissions. In addition, the possibility exists of future initiatives
to address concerns about global climate change (such as the potential
regulation of greenhouse gases emitted from generation
facilities). Integrys Energy Group cannot be certain how these rules
will affect it. There is also uncertainty in quantifying liabilities
under environmental laws that impose joint and several liabilities on all
potentially responsible parties.
Citizen
groups that
feel there are compliance issues not sufficiently enforced by environmental
regulatory agencies may also bring citizen enforcement actions against
us. Such actions could seek penalties, injunctive relief and costs of
litigation.
Fluctuating
commodity prices may reduce regulated and nonregulated energy
margins.
Our
regulated
energy margins are directly affected by commodity costs related to coal, natural
gas, and other fuels used in the electric generation process. The
commodity price of market purchases of electricity and natural gas may also
directly affect margins in our regulated electric and natural gas
segments.
Higher
commodity
prices increase energy prices and may impact customer demand for energy in
the
nonregulated market and increase counterparty risk. This may stress
margins at our nonregulated subsidiaries.
Integrys
Energy
Services may experience increased expenses, including interest costs and
uncollectibles, higher working capital requirements, and possibly some reduction
in volumes sold as a result of any increase in the cost of fuel or purchased
power. If market prices for electric energy decline below the cost of
production at our nonregulated facilities, these units may be temporarily shut
down.
Actual
results could differ from estimates used to prepare our financial
statements.
In
preparing the financial statements in accordance with generally accepted
accounting principles, management must often make estimates and assumptions
that
affect the reported amounts of assets, liabilities, revenues, expenses, and
related disclosures at the date of the financial statements and during the
reporting period. Some of those judgments can be subjective and
complex and actual results could differ from those estimates. For
more information about these estimates and assumptions, see Item 7
''Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies'' in this Annual Report on Form
10-K.
The
use of derivative instruments could result in financial losses and liquidity
constraints.
We
use derivative instruments, including futures, forwards, options and swaps,
to
manage our commodity and financial market risks. In addition, we
purchase and sell commodity-based contracts in the natural gas and electric
energy markets for trading purposes. In the future, we could
recognize financial losses on these contracts as a result of volatility in
the
market values of the underlying commodities or if a counterparty fails to
perform under a contract. In the absence of actively quoted market
prices and pricing information from external sources, the valuation of these
contracts involves management's judgment or use of estimates. As a
result, changes in the underlying assumptions or use of alternative valuation
methods could affect the reported fair value of these
contracts. Additionally, realized values could differ from values
determined by management.
For
additional
information concerning derivatives and commodity-based trading contracts, see
Note 3, "Risk Management Activities."
We
may not utilize Section 29/45K synthetic fuel production tax
credits.
We
have significantly reduced our consolidated federal income tax liability for
the
past several years through tax credits available to us under Section 29/45K
of
the Internal Revenue Code for the production and sale of solid synthetic fuel
from coal. We have not fully utilized Section 29/45K tax credits
previously available to us. Our ability to fully utilize the Section
29/45K tax credits available to us as carryovers in connection with our interest
in the production facility will depend on whether the amount of our future
federal taxable income and related income tax liability is sufficient to permit
the use of such credits. Tax regulations providing for the creation
of Section 29/45K tax credits expired at the end of 2007.
Any
future
disallowance of some or all of those tax credits as a result of legislative
changes or examination of an open year by the IRS could materially affect our
tax obligations. At this time, we cannot predict the potential for or
the outcome of any IRS review.
Any
change in our ability to sell electricity generated from our nonregulated
facilities at market-based rates may impact earnings.
The
FERC has
authorized us to sell generation from our nonregulated facilities at market
prices. The FERC retains the authority to modify or withdraw our
market based rate authority. If the FERC determines that the market
is not workably competitive, that we possess market power or that we are not
charging just and reasonable rates, it may require our nonregulated subsidiaries
to sell power at a price based upon the costs incurred in producing the
power. Our revenues and profit margins may be negatively affected by
any reduction by the FERC of the rates we may receive.
We
are subject to provisions that can limit merger and acquisition opportunities
for our shareholders.
The
Wisconsin
Public Utility Holding Company Law precludes the acquisition of 10% or more
of
the voting shares of a holding company of a Wisconsin public utility unless
the
PSCW has first determined that the acquisition is in the best interests of
utility consumers, investors and the public. Those interests may, to
some extent, be mutually exclusive. This provision and other
requirements of the Wisconsin Public Utility Holding Company Law may delay,
or
reduce the likelihood of, a sale or change of control thus reducing the
likelihood that shareholders will receive a takeover premium for their
shares.
Provisions
of our
articles of incorporation and by-laws may delay or frustrate the removal of
incumbent directors and may prevent or delay a merger, tender offer or proxy
contest involving our company that is not approved by our board of directors,
even if the shareholders believe that such events may be beneficial to their
interests. In addition, the Wisconsin Business Corporation Law
contains provisions that may have the effect of delaying or making more
difficult attempts by others to obtain control of our company without the
approval of our board of directors.
None.
A. REGULATED
Electric
Facilities
The
following table
summarizes information on the electric generation facilities of Integrys Energy
Group, including owned or jointly-owned facilities as of December 31,
2007:
Type
|
Name
|
Location
|
Fuel
|
|
Rated
Capacity
(Megawatts)
|
|
(a)
|
|
|
|
|
|
|
|
|
Steam
|
Pulliam
(4
units)
|
Green
Bay,
WI
|
Coal
|
|
|
325.0 |
|
(c)
|
|
Weston
(3
units)
|
Wausau,
WI
|
Coal
|
|
|
473.0 |
|
(d)
|
|
Columbia
Units 1 and 2
|
Portage,
WI
|
Coal
|
|
|
351.9 |
|
(b)
|
|
Edgewater
Unit 4
|
Sheboygan,
WI
|
Coal
|
|
|
101.6 |
|
(b)
|
Total
Steam
|
|
|
|
|
|
1,251.5 |
|
|
|
|
|
|
|
|
|
|
|
Hydroelectric
|
Alexander
|
Lincoln
County, WI
|
Hydro
|
|
|
2.2 |
|
|
|
Caldron
Falls
|
Marinette
County, WI
|
Hydro
|
|
|
6.7 |
|
|
|
Castle
Rock
|
Adams
County,
WI
|
Hydro
|
|
|
9.0 |
|
(b)
|
|
Grand
Rapids
|
Menominee
County, WI
|
Hydro
|
|
|
4.0 |
|
|
|
Grandfather
Falls
|
Lincoln
County, WI
|
Hydro
|
|
|
17.3 |
|
|
|
Hat
Rapids
|
Oneida
County,
WI
|
Hydro
|
|
|
0.7 |
|
|
|
High
Falls
|
Marinette
County, WI
|
Hydro
|
|
|
1.6 |
|
|
|
Jersey
|
Lincoln
County, WI
|
Hydro
|
|
|
0.3 |
|
|
|
Johnson
Falls
|
Marinette
County, WI
|
Hydro
|
|
|
1.0 |
|
|
|
Merrill
|
Lincoln
County, WI
|
Hydro
|
|
|
1.0 |
|
|
|
Otter
Rapids
|
Vilas
County,
WI
|
Hydro
|
|
|
0.3 |
|
|
|
Peshtigo
|
Marinette
County, WI
|
Hydro
|
|
|
0.3 |
|
|
|
Petenwell
|
Adams
County,
WI
|
Hydro
|
|
|
10.6 |
|
(b)
|
|
Potato
Rapids
|
Marinette
County, WI
|
Hydro
|
|
|
0.4 |
|
|
|
Sandstone
Rapids
|
Marinette
County, WI
|
Hydro
|
|
|
1.1 |
|
|
|
Tomahawk
|
Lincoln
County, WI
|
Hydro
|
|
|
2.4 |
|
|
|
Wausau
|
Marathon
County, WI
|
Hydro
|
|
|
3.0 |
|
|
|
Victoria
(2
units)
|
Ontonagon
County, MI
|
Hydro
|
|
|
10.6 |
|
|
|
Hoist
(3
units)
|
Marquette
County, MI
|
Hydro
|
|
|
1.4 |
|
|
|
McClure
(2
units)
|
Marquette
County, MI
|
Hydro
|
|
|
3.8 |
|
|
|
Prickett
(2
units)
|
Houghton
County, MI
|
Hydro
|
|
|
0.4 |
|
|
|
Autrain
(2
units)
|
Alger
County,
MI
|
Hydro
|
|
|
0.5 |
|
|
|
Cataract
|
Marquette
County, MI
|
Hydro
|
|
|
0.3 |
|
|
|
Escanaba
#1
|
Delta
County,
MI
|
Hydro
|
|
|
1.0 |
|
|
|
Escanaba
#3
|
Delta
County,
MI
|
Hydro
|
|
|
1.3 |
|
|
|
Boney
Falls
|
Delta
County,
MI
|
Hydro
|
|
|
1.4 |
|
|
Total
Hydroelectric
|
|
|
|
|
|
82.6 |
|
|
|
|
|
|
|
|
|
|
|
Combustion
|
De
Pere Energy
Center
|
De
Pere,
WI
|
Natural
Gas
|
|
|
161.4 |
|
|
Turbine
and
|
Eagle
River
|
Eagle
River,
WI
|
Distillate
Fuel Oil
|
|
|
4.2 |
|
|
Diesel
|
Oneida
Casino
|
Green
Bay,
WI
|
Distillate
Fuel Oil
|
|
|
3.5 |
|
|
|
Juneau
#31
|
Adams
County,
WI
|
Distillate
Fuel Oil
|
|
|
6.7 |
|
(b)
|
|
West
Marinette
#31
|
Marinette,
WI
|
Natural
Gas
|
|
|
35.4 |
|
|
|
West
Marinette
#32
|
Marinette,
WI
|
Natural
Gas
|
|
|
35.5 |
|
|
|
West
Marinette
#33
|
Marinette,
WI
|
Natural
Gas
|
|
|
52.4 |
|
(b)
|
|
Weston
#31
|
Marathon
County, WI
|
Natural
Gas
|
|
|
16.7 |
|
|
|
Weston
#32
|
Marathon
County, WI
|
Natural
Gas
|
|
|
46.8 |
|
|
|
Pulliam
#31
|
Green
Bay,
WI
|
Natural
Gas
|
|
|
80.4 |
|
|
|
Portage
|
Houghton,
MI
|
Oil
|
|
|
19.1 |
|
|
|
Gladstone
|
Gladstone,
MI
|
Oil
|
|
|
19.1 |
|
|
Total
Combustion Turbine and Diesel
|
|
|
|
|
481.2 |
|
|
|
|
|
|
|
|
|
|
|
Wind
|
Lincoln
|
Kewaunee
County, WI
|
Wind
|
|
|
1.0 |
|
|
|
Glenmore
(2
units)
|
Brown
County,
WI
|
Wind
|
|
|
- |
|
|
Total
Wind
|
|
|
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
Total
System
|
|
|
|
|
|
1,816.3 |
|
|
(a)
|
Based
on
capacity ratings for July 2008. As a result of continually
reaching demand peaks in the summer months, primarily due to air
conditioning demand, the summer period is the most relevant for capacity
planning purposes.
|
(b)
|
These
facilities are jointly owned by WPSC and various other
utilities. Wisconsin Power and Light Company operates the
Columbia and Edgewater units and WPSC holds a 31.8% ownership interest
in
these facilities. WRPC owns and operates the Castle Rock,
Petenwell and Juneau units, and WPSC holds a 50% ownership interest
in
WRPC. WPSC operates the West Marinette 33 unit and holds a 68%
ownership interest in the facility; Marshfield Electric and Water
Department has a joint ownership in the rest. The capacity
indicated for each of these units is WPSC’s portion of total plant
capacity based on its percent of ownership.
|
(c)
|
Pulliam
Units
3 and 4 were retired on December 31, 2007, and capacity ratings for
these
facilities are not included in the table above.
|
(d)
|
Weston
4 is
scheduled to be placed in service in the first quarter of 2008 and,
therefore, is not included in the table above. WPSC’s 70%
ownership in the facility will increase system rated capacity by
359.8 megawatts for a total system rated capacity of 2,176.1
megawatts.
|
As
of December 31, 2007, Integrys Energy Group’s electric utilities owned 183
distribution substations and 24,744 miles of electric distribution
lines.
Natural
Gas Facilities
Integrys
Energy
Group’s natural gas properties include approximately 21,490 miles of natural gas
distribution mains, 774 miles of natural gas transmission mains, and 279 natural
gas distribution and transmission gate stations. Integrys Energy
Group’s natural gas utilities also own a 3.6 billion cubic foot natural gas
storage field located in Michigan and operate a 36.5 billion cubic foot
underground natural gas storage reservoir and a liquefied natural gas plant
located in Illinois.
Integrys
Energy
Group’s utility plant at WPSC, UPPCO, PGL, and NSG is subject to a first
mortgage lien.
B. INTEGRYS
ENERGY SERVICES
The
following table
summarizes information on the electric generation facilities owned by Integrys
Energy Services as of December 31, 2007:
Type
|
Name
|
Location
|
Fuel
|
|
Rated
Capacity
(Megawatts)
|
|
(a)
|
|
|
|
|
|
|
|
|
Steam
|
Caribou
|
Caribou,
ME
|
Oil
|
|
|
21.7 |
|
|
|
Stoneman
|
Cassville,
WI
|
Coal
|
|
|
44.5 |
|
|
|
Westwood
|
Tremont,
PA
|
Culm
|
|
|
30.0 |
|
|
Total
Steam
|
|
|
|
|
|
96.2 |
|
|
|
|
|
|
|
|
|
|
|
Combined
Cycle
|
Syracuse
|
Syracuse,
NY
|
Gas/Oil
|
|
|
85.0 |
|
|
|
Beaver
Falls
|
Beaver
Falls,
NY
|
Gas/Oil
|
|
|
78.9 |
|
|
|
Combined
Locks
|
Combined
Locks, WI
|
Gas
|
|
|
46.8 |
|
(b)
|
Total
Combined
Cycle
|
|
|
|
|
|
210.7 |
|
|
|
|
|
|
|
|
|
|
|
Hydroelectric
|
Tinker
|
New
Brunswick,
Canada
|
Hydro
|
|
|
34.5 |
|
|
|
Squa
Pan
|
Ashland,
ME
|
Hydro
|
|
|
1.4 |
|
|
|
Caribou
|
Caribou,
ME
|
Hydro
|
|
|
0.9 |
|
|
Total
Hydroelectric
|
|
|
|
|
|
36.8 |
|
|
|
|
|
|
|
|
|
|
|
Combustion
Turbine
|
Caribou
|
Caribou,
ME
|
Diesel
|
|
|
7.0 |
|
|
and
Diesel
|
Tinker
|
New
Brunswick,
Canada
|
Diesel
|
|
|
1.0 |
|
|
|
Flo's
Inn
|
Presque
Isle,
ME
|
Diesel
|
|
|
4.2 |
|
|
|
Loring
|
Limestone,
ME
|
Diesel
|
|
|
5.2 |
|
|
Total
Combustion
Turbine
and Diesel
|
|
|
|
|
|
17.4 |
|
|
|
|
|
|
|
|
|
|
|
Reciprocating
Engine
|
Winnebago
|
Rockford,
IL
|
Methane
|
|
|
6.1 |
|
(c)
|
|
|
|
|
|
|
|
|
|
Total
System
|
|
|
|
|
|
367.2 |
|
|
(a)
|
Based
on
summer rated capacity.
|
(b)
|
Combined
Locks
also has an additional five megawatts of capacity available at this
facility through the lease of an additional steam turbine.
|
(c)
|
Winnebago
was
placed into service on December 21,
2007.
|
For
information on
material legal proceedings and matters related to Integrys Energy Group and
its
subsidiaries, see Note 17, "Commitments and
Contingencies."
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
No
matters were
submitted to a vote of the security holders of Integrys Energy Group during
the
fourth quarter of 2007.
|
EXECUTIVE
OFFICERS OF INTEGRYS ENERGY GROUP AS OF JANUARY 1, 2008
|
Name
and Age
|
|
Position
and Business
Experience
During Past Five Years
|
Effective
Date
|
|
|
|
|
Larry
L.
Weyers
|
62
|
President
and
Chief Executive Officer
|
02-21-07
|
|
|
Chairman,
President and Chief Executive Officer
|
02-12-98
|
|
|
|
|
Thomas
P.
Meinz
|
61
|
Executive
Vice
President - External Affairs
|
02-21-07
|
|
|
Executive
Vice
President - Public Affairs
|
09-12-04
|
|
|
Senior
Vice
President - Public Affairs
|
12-24-00
|
|
|
|
|
Phillip
M.
Mikulsky
|
59
|
Executive
Vice
President and Chief Development Officer
|
02-21-07
|
|
|
Executive
Vice
President - Development
|
09-12-04
|
|
|
Senior
Vice
President - Development
|
02-12-98
|
|
|
|
|
Joseph
P.
O'Leary
|
53
|
Senior
Vice
President and Chief Financial Officer
|
06-04-01
|
|
|
|
|
Bernard
J.
Treml
|
58
|
Senior
Vice
President and Chief Human Resources Officer
|
02-21-07
|
|
|
Senior
Vice
President - Human Resources
|
12-19-04
|
|
|
Vice
President
- Human Resources
|
02-12-98
|
|
|
|
|
Diane
L.
Ford
|
54
|
Vice
President
and Corporate Controller
|
02-21-07
|
|
|
Vice
President
- Controller and Chief Accounting Officer
|
07-11-99
|
|
|
|
|
Bradley
A.
Johnson
|
53
|
Vice
President
and Treasurer
|
07-18-04
|
|
|
Treasurer
|
06-23-02
|
|
|
|
|
Barth
J.
Wolf
|
50
|
Vice
President
- Chief Legal Officer and Secretary
|
07-31-07
|
|
|
Vice
President
- Legal Services and Chief Compliance Officer of Integrys Business
Support, LLC
|
02-21-07
|
|
|
Secretary
and
Manager - Legal Services
|
09-19-99
|
NOTE:
|
All
ages are
as of December 31, 2007. None of the executives listed
above are related by blood, marriage, or adoption to any of the other
officers listed or to any director of the Registrants. Each
officer holds office until his or her successor has been duly elected
and
qualified, or until his or her death, resignation, disqualification,
or
removal.
|
PART
II
|
MARKET
FOR INTEGRYS ENERGY GROUP'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Integrys
Energy Group, Inc. Common Stock Two-Year Comparison
Share
Data
|
Dividends
Per
Share
|
Price
Range
|
High
|
Low
|
2007
|
|
|
|
1st
Quarter
|
$ .583
|
$58.04
|
$52.72
|
2nd
Quarter
|
.660
|
60.63
|
50.11
|
3rd
Quarter
|
.660
|
55.25
|
48.10
|
4th
Quarter
|
.660
|
54.10
|
50.02
|
Total
|
$2.563
|
|
|
|
|
|
|
2006
|
|
|
|
1st
Quarter
|
$ .565
|
$57.75
|
$49.02
|
2nd
Quarter
|
.565
|
51.60
|
47.39
|
3rd
Quarter
|
.575
|
52.88
|
47.67
|
4th
Quarter
|
.575
|
54.83
|
49.18
|
Total
|
$2.280
|
|
|
Integrys
Energy
Group common stock is traded on the New York Stock Exchange under the ticker
symbol "TEG." The transfer agent and registrar for Integrys Energy
Group's common stock is American Stock Transfer & Trust Company, 59 Maiden
Lane, New York, NY 10038.
As
of February 21, 2008, there were 35,100 common stock shareholders of
record.
Dividend
Restrictions
For
information on
dividend restrictions related to Integrys Energy Group and any of its
subsidiaries, see Note 21, "Common Equity."
See
Item 11 -
Executive Compensation of this Annual Report on Form 10-K for information
regarding our equity compensation plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEGRYS
ENERGY GROUP,
INC.
|
|
COMPARATIVE
FINANCIAL STATEMENTS
AND
|
|
FINANCIAL
AND OTHER STATISTICS
(2003 TO 2007)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of or for Year Ended December
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions,
except per share
amounts, stock price, return on average equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
number of shareholders and
employees)
|
|
2007
(1)
|
|
|
2006
(2)
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$ |
10,292.4 |
|
|
$ |
6,890.7 |
|
|
$ |
6,825.5 |
|
|
$ |
4,876.1 |
|
|
$ |
4,309.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing
operations
|
|
|
181.1 |
|
|
|
151.6 |
|
|
|
150.6 |
|
|
|
156.6 |
|
|
|
110.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
available for common
shareholders
|
|
|
251.3 |
|
|
|
155.8 |
|
|
|
157.4 |
|
|
|
139.7 |
|
|
|
94.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
11,234.4 |
|
|
|
6,861.7 |
|
|
|
5,462.5 |
|
|
|
4,376.8 |
|
|
|
4,292.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock of
subsidiaries
|
|
|
51.1 |
|
|
|
51.1 |
|
|
|
51.1 |
|
|
|
51.1 |
|
|
|
51.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt (excluding current
portion)
|
|
|
2,265.1 |
|
|
|
1,287.2 |
|
|
|
867.1 |
|
|
|
865.7 |
|
|
|
871.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
of common stock (less
treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
shares in deferred
compensation trust)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
76.0 |
|
|
|
43.1 |
|
|
|
39.8 |
|
|
|
37.3 |
|
|
|
36.6 |
|
Average
|
|
|
71.6 |
|
|
|
42.3 |
|
|
|
38.3 |
|
|
|
37.4 |
|
|
|
33.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share
(basic)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing
operations
|
|
$ |
2.49 |
|
|
$ |
3.51 |
|
|
$ |
3.85 |
|
|
$ |
4.10 |
|
|
$ |
3.26 |
|
Earnings
per common
share
|
|
$ |
3.51 |
|
|
$ |
3.68 |
|
|
$ |
4.11 |
|
|
$ |
3.74 |
|
|
$ |
2.87 |
|
Earnings
per common share
(diluted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing
operations
|
|
|
2.48 |
|
|
|
3.50 |
|
|
|
3.81 |
|
|
|
4.08 |
|
|
|
3.24 |
|
Earnings
per common
share
|
|
|
3.50 |
|
|
|
3.67 |
|
|
|
4.07 |
|
|
|
3.72 |
|
|
|
2.85 |
|
Dividend
per share of common
stock
|
|
|
2.56 |
|
|
|
2.28 |
|
|
|
2.24 |
|
|
|
2.20 |
|
|
|
2.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
price at
year-end
|
|
$ |
51.69 |
|
|
$ |
54.03 |
|
|
$ |
55.31 |
|
|
$ |
49.96 |
|
|
$ |
46.23 |
|
Book
value per
share
|
|
$ |
42.58 |
|
|
$ |
35.61 |
|
|
$ |
32.76 |
|
|
$ |
29.30 |
|
|
$ |
27.40 |
|
Return
on average
equity
|
|
|
8.5 |
%
|
|
|
10.6 |
%
|
|
|
13.6 |
%
|
|
|
13.5 |
%
|
|
|
11.5 |
%
|
Number
of common stock
shareholders
|
|
|
35,212 |
|
|
|
19,837 |
|
|
|
20,701 |
|
|
|
21,358 |
|
|
|
22,172 |
|
Number
of
employees
|
|
|
5,231 |
|
|
|
3,326 |
|
|
|
2,945 |
|
|
|
3,048 |
|
|
|
3,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)Includes
the impact of the PEC
merger on February 21, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)Includes
the impact of the
acquisition of natural gas distribution operations from Aquila by
MGUC on
April 1, 2006 and MERC on July 1, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
INTRODUCTION
Integrys
Energy
Group is a diversified holding company with regulated utility operations
operating through six wholly owned subsidiaries, WPSC, PGL, NSG, UPPCO, MGUC,
and MERC; nonregulated energy operations through its wholly owned nonregulated
subsidiary, Integrys Energy Services; and also a 34.5% equity ownership interest
in ATC (an electric transmission company operating in Wisconsin, Michigan,
Minnesota, and Illinois).
Strategic
Overview
Integrys
Energy
Group's goal is the creation of long-term value for shareholders and customers
through growth in its regulated and nonregulated portfolio (while placing
an
emphasis on regulated growth). In order to create
value,
Integrys Energy Group is focused on:
Maintaining
and
Growing a Strong Regulated Utility Base– A strong regulated
utility base is necessary 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:
·
|
The
February
2007 merger with PEC, which added the regulated natural gas distribution
operations of PGL and NSG to the regulated utility base of Integrys
Energy
Group.
|
|
|
·
|
Our
investment in ATC was at 34.5% at December 31, 2007. ATC
owned approximately $2.2 billion in net transmission and general
plant assets at December 31, 2007 and anticipates additional capital
investment of approximately $865 million over the next 3
years.
|
|
|
·
|
Construction
of the 500-megawatt coal-fired Weston 4 base-load power plant located
near Wausau, Wisconsin, which is scheduled to be placed in service
in the
first quarter of 2008. This power plant is jointly-owned with
DPC. WPSC holds a 70% ownership interest in the Weston 4
power plant, with DPC owning the remaining 30% interest in the
facility.
|
|
|
·
|
The
proposed
acceleration of investment in the natural gas distribution system
at PGL.
The replacement of cast iron mains and investment in underground
natural
gas storage facilities is expected to total approximately
$100 million through 2010.
|
|
|
·
|
Investment
of
approximately $75 million in lateral infrastructure related to the
connection of the WPSC distribution system to the Guardian II natural
gas
pipeline to Green Bay.
|
|
|
·
|
WPSC's
negotiations to purchase a 99-megawatt wind generation facility
to be
constructed in Howard County, Iowa.
|
|
|
·
|
WPSC's
continued investment 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.
|
|
|
·
|
For
more
detailed information on Integrys Energy Group's capital expenditure
program see "Liquidity
and Capital Resources, Capital Requirements,"
below.
|
Strategically
Growing Nonregulated Business– Integrys
Energy Services is
focused on growth in the competitive energy services and supply business
through
growing its customer base. Integrys Energy Group expects its nonregulated
operations to provide between 20% and 30% of Integrys Energy Group's earnings,
on average, in the future. Integrys Energy Group believes the
following recent developments have helped, or will help, maintain and grow
its
nonregulated business:
·
|
The
merger
with PEC combined the nonregulated energy marketing businesses
of both
companies. The combination provided Integrys Energy Services
with a strong market position in the Illinois retail electric market
and
expanded its originated wholesale natural gas business, creating
a
stronger, more competitive, and better balanced growth platform
for the
nonregulated business.
|
|
|
·
|
The
2007
opening of nonregulated operations in Denver, Colorado, has allowed
Integrys Energy Services to expand its operations into the Western
Systems
Coordinating Council markets.
|
|
|
·
|
The
2007
completion of a 6.5 megawatt landfill gas project, the Winnebago
Energy
Center Development in Rockford, Illinois, which consists of gas
cleanup
equipment and engines to collect and burn landfill gas at the site
to
generate electricity.
|
|
|
·
|
The
on-going
development of renewable energy products, such as land fill gas
and solar
projects.
|
Integrating
Resources to Provide Operational Excellence– Integrys
Energy Group is
committed to integrating resources of its regulated businesses and also its
nonregulated businesses, while meeting any and all applicable regulatory
and
legal requirements. This will provide the best value to customers and
shareholders by leveraging the individual capabilities and expertise of each
business and assist in lowering costs for certain
activities. Integrys Energy Group believes the following recent
developments have helped, or will help, integrate resources and provide
operational excellence:
·
|
The
PEC
merger is helping to align the best practices and expertise of
both
companies, which will continue to result in efficiencies by eliminating
redundant and overlapping functions and systems. Integrys
Energy Group expects the merger to generate annual pre-tax synergy
savings
of approximately $106 million for the combined company by the end of
the fifth full year of operations following completion of the
merger. One-time costs to achieve the synergies are expected to
be approximately $155 million.
|
|
|
·
|
Integrys
Business Support, LLC, a wholly owned service company, was formed
to
achieve a significant portion of the cost synergies anticipated
from the
merger with PEC through the consolidation and efficient delivery
of
various support services and to provide more consistent and transparent
allocation of costs throughout Integrys Energy Group and its
subsidiaries.
|
|
|
·
|
"Competitive
Excellence" and project management initiatives are being implemented
at
Integrys Energy Group and its subsidiaries to improve processes,
reduce
costs, and manage projects within budget and timeline constraints
to
provide more value to customers.
|
Placing
Strong
Emphasis on Asset and Risk Management– Our asset
management
strategy calls for the continuous assessment of our existing assets, the
acquisition of assets, and contractual commitments to obtain resources that
complement our existing business and strategy, thereby providing the most
efficient use of and best return on our resources while maintaining an
acceptable risk profile. This strategy 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 have an unacceptable risk profile. We maintain a portfolio
approach to risk and earnings. Integrys Energy Group believes the
following recent developments have helped, or will help, manage assets and
risk:
·
|
The
combination of Integrys Energy Group and PEC created 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, diversified the company's regulatory and
geographic risk due to the expansion of utility operations to multiple
jurisdictions.
|
|
|
·
|
The
September
2007 sale of PEP, Integrys Energy Group's oil and natural gas production
subsidiary acquired in the merger with PEC. The divesture of
the oil and natural gas production business reduced Integrys Energy
Group's business risk profile and provided funds to reduce
debt.
|
|
|
·
|
The
January 2007 sale of WPS Niagara Generation, LLC for
approximately $31 million. WPS Niagara Generation,
LLC owned a 50-megawatt generation facility located in the Niagara
Mohawk
Frontier region in Niagara Falls, New
York.
|
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. Oversight of the risk profile related to
these financial instruments is monitored daily in each business unit consistent
with the company's financial risk management policy. Corporate
oversight is provided through the Corporate Risk Management group which reports
through the Chief Financial Officer.
RESULTS
OF OPERATIONS
|
|
Year
Ended December
31,
|
|
|
|
|
|
|
|
(Millions
except per share amounts)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Change
in
2007
over 2006
|
|
|
Change
in
2006
over 2005
|
|
Electric
utility operations
|
|
$ |
87.4 |
|
|
$ |
85.5 |
|
|
$ |
64.2 |
|
|
|
2.2 |
% |
|
|
33.2 |
% |
Natural
gas
utility operations
|
|
|
28.7 |
|
|
|
(2.3 |
) |
|
|
13.2 |
|
|
|
- |
|
|
|
- |
|
Nonregulated
energy operations
|
|
|
98.0 |
|
|
|
72.3 |
|
|
|
74.1 |
|
|
|
35.5 |
% |
|
|
(2.4 |
)% |
Holding
company and other operations
|
|
|
(18.8 |
) |
|
|
0.3 |
|
|
|
5.9 |
|
|
|
- |
|
|
|
(94.9 |
)% |
Oil
and
natural gas operations
|
|
|
56.0 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Income
available for common shareholders
|
|
$ |
251.3 |
|
|
$ |
155.8 |
|
|
$ |
157.4 |
|
|
|
61.3 |
% |
|
|
(1.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
basic
shares of common stock
|
|
|
71.6 |
|
|
|
42.3 |
|
|
|
38.3 |
|
|
|
69.3 |
% |
|
|
10.4 |
% |
Average
diluted shares of common stock
|
|
|
71.8 |
|
|
|
42.4 |
|
|
|
38.7 |
|
|
|
69.3 |
% |
|
|
9.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings
per share
|
|
$ |
3.51 |
|
|
$ |
3.68 |
|
|
$ |
4.11 |
|
|
|
(4.6 |
)% |
|
|
(10.5 |
)% |
Diluted
earnings per share
|
|
$ |
3.50 |
|
|
$ |
3.67 |
|
|
$ |
4.07 |
|
|
|
(4.6 |
)% |
|
|
(9.8 |
)% |
2007
income
available for common shareholders increased $95.5 million and 2007 diluted
earnings per share decreased $0.17, both compared to 2006. 2006
income available for common shareholders decreased $1.6 million and 2006
diluted earnings per share decreased $0.40, both compared to
2005. Significant factors impacting the change in earnings and
diluted earnings per share were as follows (and are discussed in more detail
thereafter):
Electric
Utility Operations:
Earnings
increased
$1.9 million in 2007 over 2006, resulting primarily from the
following:
●
|
Retail
electric rate increases at both WPSC and UPPCO had a positive
year-over-year impact on operating income.
|
|
|
●
|
Favorable
weather conditions at WPSC contributed an approximate $6.0 million
($3.6 million after-tax) year-over-year increase in operating income;
however, this increase was partially offset by a decrease in weather
normalized residential and commercial and industrial customer
usage.
|
|
|
●
|
Fuel
and
purchased power costs were higher than what was recovered in rates
during
the year ended December 31, 2007, compared with fuel and purchased
power costs that were less than what was recovered in rates during
the
same period in 2006, driving a $14.4 million ($8.6 million
after-tax) negative variance in operating
income.
|
|
|
●
|
Maintenance
expense related to WPSC's power plants was higher in 2007 compared
to
2006, driven by an increase in unplanned outages in 2007 as well
as the
extension of some 2007 planned
outages.
|
Earnings
increased
$21.3 million from 2005 to 2006, primarily due to the
following:
●
|
Fuel
and
purchased power costs that were less than what was recovered in
rates
during the year ended December 31, 2006, compared with fuel and
purchased power costs that were more than what was recovered in
rates
during the same period in 2005 (the under collection in 2005 was
primarily
due to the impact 2005 hurricanes had on natural gas prices), contributed
an estimated $14 million after-tax, year-over-year increase in
earnings.
|
|
|
●
|
A
PSCW
ruling, which disallowed recovery of costs that were deferred related
to
the 2004 Kewaunee nuclear plant outage as well as a portion of
the loss on
the Kewaunee sale, resulted in the write-off of $13.7 million of
regulatory assets in 2005, which resulted in an after-tax reduction
in
earnings in 2005 of approximately $8 million (positive variance
compared with 2006 earnings).
|
|
|
●
|
Retail
electric rate increases at both WPSC and UPPCO also had a positive
year-over-year impact on earnings.
|
|
|
●
|
Unfavorable
weather conditions in 2006, compared with 2005, had an estimated
$9 million year-over-year negative after-tax impact on electric
utility earnings.
|
Natural
Gas Utility Operations:
Financial
results
improved $31.0 million in 2007 over 2006, primarily due to the
following:
●
|
Financial
results for MGUC and MERC increased $18.1 million, from a combined
net loss of $11.3 million in 2006, to earnings of $6.8 million
in 2007. The positive change in earnings at MGUC and MERC was
driven by the fact that these natural gas utilities operated during
the
first quarter heating season in 2007, but were not acquired by
Integrys
Energy Group until after the first quarter 2006 heating
season. In addition, MGUC and MERC incurred a combined
$11.8 million ($7.1 million after-tax) of transition costs in
2006 for the start-up of outsourcing activities and other legal
and
consulting fees. In 2007, MGUC and MERC were allocated
$1.7 million ($1.0 million after-tax) of external costs to
achieve merger synergies related to the PEC merger.
|
|
|
●
|
Regulated
natural gas utility earnings at WPSC increased $13.5 million, from
earnings of $9.6 million in 2006, to earnings of $23.1 million
in 2007. Higher earnings were driven by increased volumes due
to colder weather conditions during the heating season. A
natural gas rate increase effective January 12, 2007 also contributed
to the increase.
|
|
|
●
|
The
PEC
natural gas utilities (PGL and NSG), which were acquired effective
February 21, 2007, recognized a combined net loss of
approximately $1 million, primarily related to the seasonal nature of
natural gas utilities, which derive earnings during the heating
season
(first and fourth quarters). Because of the late February
acquisition date, results for the majority of the two coldest months
of
the year were not included in natural gas utility earnings in
2007. The 2007 net income for PGL was less than the level we
would normally expect, primarily due to increased costs of providing
service. It is important to note, however, that we received a
rate increase at PGL in February 2008, which will help offset rising
costs. Please see Note 23, "Regulatory
Environment," for more information on the rate
increase.
|
Earnings
decreased
$15.5 million from 2005 to 2006, primarily due to the
following:
●
|
MGUC
and MERC
(acquired on April 1 and July 1, 2006, respectively) had a combined
net
loss of approximately $11 million. Included in the net
loss incurred by MGUC and MERC, was $7.1 million of after-tax
external transition costs incurred by these regulated natural gas
utilities. The net loss recognized at MGUC and MERC in excess
of transition costs incurred can be attributed to not owning these
operations during the January through March 2006 heating season and
warmer than normal weather conditions during the last few months
of 2006.
From the acquisition dates through December 31, 2006, actual heating
degree days were 13.9% and 7.3% below normal for MGUC and MERC,
respectively.
|
|
|
●
|
Earnings
at
WPSC's natural gas utility also decreased approximately $4 million,
driven by unfavorable weather conditions and customer conservation
efforts.
|
Nonregulated
Energy Operations:
Earnings
increased
$25.7 million in 2007 over 2006, primarily due to the
following:
●
|
Operating
income at Integrys Energy Services increased $40.2 million
($24.1 million after-tax).
|
|
|
●
|
After-tax
income from discontinued operations at Integrys Energy Services
increased
$7.5 million, driven by the sale of Niagara Generation, LLC in the
first quarter of 2007.
|
|
|
●
|
Miscellaneous
expense at Integrys Energy Services decreased $11.1 million
($6.7 million after-tax), driven by a decrease in pre-tax losses
recognized for the period related to Integrys Energy Services'
investment
in a synthetic fuel facility.
|
|
|
●
|
Minority
interest income decreased $3.7 million ($2.2 million after-tax)
as Integrys Energy Services' partner elected to stop receiving
production
from the synthetic fuel facility and, therefore, did not share
in losses
from this facility in 2007.
|
|
|
●
|
Section
29/45K federal tax credits recognized from Integrys Energy Services'
investment in a synthetic fuel facility decreased $15.9 million, from
$29.5 million in 2006, to $13.6 million in
2007.
|
Earnings
decreased
$1.8 million from 2005 to 2006, primarily due to the
following:
●
|
An
$11.0 million ($6.6 million after-tax) increase in interest
expense due to higher working capital requirements, primarily related
to
growth in Integrys Energy Services' natural gas
operations.
|
|
|
●
|
A
$10.6 million ($6.4 million after-tax) increase in miscellaneous
expenses, primarily related to increased tons procured from Integrys
Energy Services' investment in a synthetic fuel facility and the
fact that
Integrys Energy Services received no royalty payments from this
investment
in 2006.
|
|
|
●
|
A
$4.2 million after-tax decrease in income from discontinued
operations.
|
|
|
●
|
The
items
negatively impacting earnings (discussed above) were partially
offset by a
$14.4 million ($8.6 million after-tax) increase in margin
(including an $11.1 million pre-tax decrease in gains on derivative
instruments used to protect the value of Section 29/45K tax
credits).
|
|
|
●
|
A
$6.7 million ($4.0 million after-tax) decrease in operating
expenses, primarily related to the recognition of a $9.0 million
pre-tax gain on the sale of WPS ESI Gas Storage, LLC in the
second quarter of 2006.
|
|
|
●
|
A
$3.4 million increase in Section 29/45K federal tax credits
recognized from Integrys Energy Services' investment in a synthetic
fuel
facility.
|
Holding
Company and Other Operations:
In
2007, financial results decreased $19.1 million, from earnings of
$0.3 million in 2006, to a net loss of $18.8 million in
2007. See "Overview of Holding Company and Other Segment Operations,"
for more information.
In
2006, earnings decreased $5.6 million from earnings of $5.9 million in
2005, to earnings of $0.3 million in 2006. See "Holding Company
and Other Segment Operations," for more information.
Oil
and Natural Gas Operations:
In
connection with the PEC merger, Integrys Energy Group announced its intent
to
divest of PEC's oil and natural gas production operations, PEP. PEP
was sold in the third quarter of 2007. In 2007, PEP recognized
earnings of $56.0 million, including $58.5 million of earnings
reported as discontinued operations. The $2.5 million loss
reported in continuing operations related primarily to intercompany expense
allocations to PEP (salaries, interest expense, etc.) related to employees
and
debt that remained at Integrys Energy Group after the sale. The sale
of PEP resulted in a $7.6 million after-tax gain.
Earnings
per share:
Diluted
earnings
per share was impacted by the items discussed above as well as an increase
of
29.4 million shares (69.3%) in the weighted average number of outstanding
shares of Integrys Energy Group's common stock from 2006 to 2007 and an increase
of 3.7 million shares (9.6%) in the weighted average number of outstanding
shares of Integrys Energy Group's common stock from 2005 to
2006. Integrys Energy Group issued 31.9 million shares of common
stock on February 21, 2007, in conjunction with the merger with PEC, 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, and
issued
1.9 million shares of common stock through a public offering in November
2005. Additional shares were also issued under the Stock Investment
Plan and certain stock-based employee benefit plans in 2007, 2006, and
2005.
Utility
Operations
In
2007, utility operations included the regulated electric segment, consisting
of
the regulated electric operations of WPSC and UPPCO, and the regulated 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 all of 2007, while the natural gas operations of PGL and
NSG
were included from February 22, 2007 through December 31,
2007. The natural gas operations of WPSC were included for all of
2006, while the natural gas operations of MGUC and MERC were included from
April 1, 2006 through December 31, 2006, and July 1, 2006 through
December 31, 2006, respectively. For the year ended December 31, 2005,
utility operations included the regulated electric segment, including the
electric operations of WPSC and UPPCO, and the regulated natural gas utility
segment, including the natural gas operations of WPSC.
Regulated
Electric Segment Operations
|
|
Year
Ended
December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Change
in
2007
over 2006
|
|
|
Change
in
2006
over 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
1,246.1 |
|
|
$ |
1,099.4 |
|
|
$ |
1,037.1 |
|
|
|
13.3 |
% |
|
|
6.0 |
% |
Fuel
and
purchased power costs
|
|
|
636.5 |
|
|
|
551.0 |
|
|
|
444.2 |
|
|
|
15.5 |
% |
|
|
24.0 |
% |
Margins
|
|
|
609.6 |
|
|
|
548.4 |
|
|
|
592.9 |
|
|
|
11.2 |
% |
|
|
(7.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
and
maintenance expense
|
|
|
321.1 |
|
|
|
265.3 |
|
|
|
355.7 |
|
|
|
21.0 |
% |
|
|
(25.4 |
)% |
Depreciation,
amortization and
decommissioning
expense
|
|
|
80.1 |
|
|
|
78.5 |
|
|
|
120.4 |
|
|
|
2.0 |
% |
|
|
(34.8 |
)% |
Taxes
other
than income
|
|
|
43.2 |
|
|
|
41.6 |
|
|
|
38.5 |
|
|
|
3.8 |
% |
|
|
8.1 |
% |
Operating
income
|
|
$ |
165.2 |
|
|
$ |
163.0 |
|
|
$ |
78.3 |
|
|
|
1.3 |
% |
|
|
108.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
in kilowatt-hours
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
3,173.6 |
|
|
|
3,144.8 |
|
|
|
3,127.4 |
|
|
|
0.9 |
% |
|
|
0.6 |
% |
Commercial
and industrial
|
|
|
8,750.9 |
|
|
|
8,645.2 |
|
|
|
8,641.8 |
|
|
|
1.2 |
% |
|
|
- |
% |
Wholesale
|
|
|
4,024.9 |
|
|
|
4,093.1 |
|
|
|
3,849.2 |
|
|
|
(1.7 |
)% |
|
|
6.3 |
% |
Other
|
|
|
42.4 |
|
|
|
42.2 |
|
|
|
41.7 |
|
|
|
0.5 |
% |
|
|
1.2 |
% |
Total
sales in kilowatt-hours
|
|
|
15,991.8 |
|
|
|
15,925.3 |
|
|
|
15,660.1 |
|
|
|
0.4 |
% |
|
|
1.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather
– WPSC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating
degree days
|
|
|
7,102 |
|
|
|
6,785 |
|
|
|
7,401 |
|
|
|
4.7 |
% |
|
|
(8.3 |
)% |
Cooling
degree days
|
|
|
634 |
|
|
|
521 |
|
|
|
649 |
|
|
|
21.7 |
% |
|
|
(19.7 |
)% |
Revenue
2007
Compared with
2006:
Regulated
electric
revenue increased $146.7 million, driven by the following:
·
|
On
January 11, 2007, the Public Service Commission of Wisconsin 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. See Note 23, "Regulatory
Environment," for more information related to the retail electric
rate increases at WPSC and UPPCO.
|
|
|
·
|
On
a per-unit
basis, fuel and purchased power costs were approximately 17% higher
during
the year ended December 31, 2007, compared with the same period in
2006. In addition, sales volumes increased 0.4%, primarily
related to an increase in sales volumes to residential and commercial
and
industrial customers, driven by warmer weather during the cooling
season
and colder weather during the heating season (a portion of heating
load is
electric) in 2007, compared with 2006. The increase in sales
volumes related to weather was partially offset by an approximate
2%
decrease in weather normalized residential and commercial and industrial
customer usage, driven by customer conservation resulting from
higher
energy costs and weaker general economic
conditions.
|
2006
Compared with
2005:
Regulated
electric
revenue increased $62.3 million, driven by the following:
·
|
Approved
2006
electric rate increases for WPSC and UPPCO retail electric customers
and
rate increases for WPSC's wholesale customers resulting from the
formula
rate mechanism in place for these customers. See Note 23, "Regulatory
Environment," for more information related to these rate
increases.
|
|
|
·
|
Electric
sales volumes increased 1.7%, primarily related to a 6.3% increase
in
sales volumes to wholesale customers due to higher demand and new
wholesale contracts.
|
|
|
·
|
Unfavorable
weather conditions during both the heating and cooling seasons
for the
year ended December 31, 2006, compared with 2005, partially offset
the increases discussed above.
|
Margin
2007
Compared with
2006:
The
regulated
electric margin increased $61.2 million, driven by the
following:
·
|
A
$57.0 million (11.5%) increase in the electric utility margin at
WPSC.
|
|
|
|
·
|
WPSC's
margin
was positively impacted by the retail electric rate increases discussed
above and by higher electric sales volumes to residential and commercial
and industrial customers related to weather. Favorable weather
conditions during both the heating and cooling seasons positively
impacted
margin by an estimated $6.0 million.
|
|
|
|
·
|
The
year-over-year change in WPSC's margin was also positively impacted
by a
$16.2 million decrease in the 2006 margin related to the accrual of
the refund to wholesale customers in 2006 of their portion of the
Kewaunee
nonqualified decommissioning trust fund. Pursuant to regulatory
accounting, the decrease in the 2006 margin related to this refund
was
offset by a corresponding decrease in operating and maintenance
expenses
in 2006 and, therefore, did not have an impact on earnings. No
such accrual to wholesale customers occurred in 2007; however,
the payment
of the refund was made in 2007.
|
|
|
|
|
·
|
Partially
offsetting the increase in WPSC's margin, fuel, and purchased power
costs
were 3.7% higher than what was recovered in rates during the year
ended
December 31, 2007, compared with fuel and purchased power costs that
were 10.5% less than what was recovered in rates during the same
period in
2006, driving a $14.4 million negative variance in WPSC's electric
margin. In 2007, fuel and purchased power prices were above
what was projected in the rate case primarily due to higher than
anticipated commodity costs and the market effects of unplanned
plant
outages. On October 6, 2007, a lightning strike hit
Weston 3. The unit returned to full service on
January 14, 2008. The unscheduled outage did not have a
significant impact on the electric utility margin as the PSCW approved
deferral of unanticipated fuel and purchased power costs directly
related
to the outage. The outage did, however, cause the price of
purchased power from other sources to increase. Excluding the
additional purchased power which resulted from the Weston 3 outage,
fuel and purchased power costs at WPSC increased 17% in 2007, compared
with the same period in 2006, primarily related to the higher per-unit
cost of fuel and purchased power required from the market to serve
WPSC's
customers.
|
|
|
·
|
UPPCO's
margin increased approximately $4 million, primarily due to its
retail electric rate increase, effective June 2006, and higher
retail
sales volumes.
|
2006
Compared with
2005:
The
regulated
electric margin decreased $44.5 million, driven by the
following:
·
|
A
$48.7 million decrease in WPSC's electric margin, primarily related
to the sale of the Kewaunee nuclear generation plant to Dominion
Energy
Kewaunee on July 5, 2005, and the related power purchase
agreement. Excluding the $54.2 million increase in fixed
payments made to Dominion Energy Kewaunee during the year ended
December 31, 2006, WPSC's electric utility margin increased
$5.5 million.
|
|
|
|
·
|
The
retail
and wholesale electric rate increases discussed above had a favorable
impact on WPSC's regulated electric margin.
|
|
|
|
|
·
|
WPSC's
fuel
and purchased power costs were less than were recovered in rates
during
the year ended December 31, 2006, compared with fuel and purchased
power costs that were more than were recovered in rates during
the same
period in 2005 (the under collection in 2005 was primarily due
to the
impact 2005 hurricanes had on natural gas prices), which had an
estimated
$23 million positive year-over-year impact on
margin.
|
|
|
|
|
·
|
WPSC's
margin
was also positively impacted by higher wholesale electric sales
volumes,
driven by higher demand from existing customers and new wholesale
customer
contracts.
|
|
|
|
|
·
|
The
increase
in WPSC's margin was partially offset by a $70.8 million decrease in
2006 margin related to the refund to retail customers and the accrual
for
the refund to wholesale customers of a portion of the Kewaunee
nonqualified decommissioning trust fund.
|
|
|
|
|
·
|
Also,
unfavorable weather conditions during the 2006 heating and cooling
seasons
negatively impacted margin by an estimated
$14 million
|
|
|
·
|
UPPCO's
margin increased approximately $4 million primarily due to its first
retail electric base rate increase since
2002.
|
Operating
Income
2007
Compared with
2006:
Operating
income
increased $2.2 million, driven by the $61.2 million increase in
regulated electric margin discussed above, partially offset by a
$54.3 million (23.7%) increase in operating and maintenance expenses at
WPSC and a combined $3.2 million increase in depreciation and taxes other
than income taxes at the regulated electric utility.
·
|
The
change in
operating and maintenance expense at WPSC was primarily related
to the
following:
|
|
|
|
·
|
Regulated
electric maintenance expenses increased $15.3 million, driven by
longer than anticipated planned outages and a higher number of
unplanned
outages year-over-year (which included major overhauls planned
at the
Weston 2 and Weston 3 generation stations and the De Pere
Energy Center, planned major turbine and generator work performed
at the
Pulliam electric generation station, and several unplanned outages
at the
Weston 3 generation station).
|
|
|
|
|
·
|
Regulated
electric transmission expenses increased $14.2 million, primarily
related to higher rates charged by MISO and ATC due to additional
transmission investment.
|
|
|
|
|
·
|
The
regulated
electric segment of WPSC was allocated external costs to achieve
merger
synergies of $11.4 million for the year ended December 31,
2007.
|
|
|
|
|
·
|
Amortization
in 2006 of the regulatory liability recorded for WPSC's obligation
to
refund proceeds received from the liquidation of the Kewaunee nonqualified
decommissioning trust fund to wholesale electric ratepayers contributed
$16.2 million to the increase in WPSC's operating and maintenance
expense. Pursuant to regulatory accounting, the 2006 increase
in operating and maintenance expense related to this refund was
offset by
a corresponding increase in 2006 margin and, therefore, did not
have an
impact on earnings.
|
|
|
|
|
·
|
Lower
pension, post-retirement, and other employee benefit costs partially
offset the increase in regulated electric operating and maintenance
expense at WPSC.
|
|
|
·
|
An
increase
in depreciation expense related to continued capital investment
at the
electric utility, while the increase in taxes other than income
reflected
an increase in sales
year-over-year.
|
2006
Compared with
2005:
Operating
income
increased $85.1 million, driven by a $90.8 million decrease in
operating and maintenance expense, and a $41.9 million decrease in
depreciation and amortization expense, partially offset by the
$44.5 million decrease in the regulated electric margin.
·
|
The
change in
operating and maintenance expense was primarily related to the
following:
|
|
|
|
·
|
Partial
amortization of the regulatory liability recorded for WPSC's obligation
to
refund proceeds received from the liquidation of the Kewaunee nonqualified
decommissioning trust fund to retail and wholesale electric ratepayers
contributed $70.8 million to the decrease in operating expenses in
2006, compared with 2005. Pursuant to regulatory accounting,
the decrease in operating expense related to this refund was offset
by a
corresponding decrease in margin.
|
|
|
|
|
·
|
Operating
and
maintenance expense related to the Kewaunee nuclear plant decreased
approximately $17 million, driven by the sale of this facility in
July 2005. The decrease in operating and maintenance expense
related to Kewaunee did not have a significant impact on income
available
for common shareholders as WPSC is still purchasing the same amount
of
power from this facility as it obtained from it when WPSC owned
a 59%
interest in the plant. The cost of the power is included as a
component of utility cost of fuel, natural gas, and purchased
power.
|
|
|
|
|
·
|
As
a result
of the PSCW's disallowance of certain costs, WPSC incurred a
$6.1 million charge in 2005 related to one-half the loss on the sale
of Kewaunee, creating a corresponding year-over-year decrease in
operating
expenses.
|
|
|
|
|
·
|
Also,
as
disallowed by the PSCW, WPSC wrote-off $2.1 million in 2005 of
previously deferred operating and maintenance expenses related
to the 2004
extended outage at Kewaunee, creating a corresponding year-over-year
decrease in operating expenses.
|
|
|
|
|
·
|
Salaries
and
employee benefits also decreased in part due to the sale of Kewaunee
in
2005.
|
|
|
|
|
·
|
Partially
offsetting the decrease in operating and maintenance expense, software
amortization increased $5.4 million, driven by the late 2005
implementation of a new customer billing system.
|
|
|
|
|
·
|
Excluding
Kewaunee, maintenance expenses at the electric utility segment
were up
$4.9 million. Planned maintenance was required on certain
combustion turbines, and maintenance expense related to electric
distribution assets also increased.
|
|
|
|
|
·
|
Electric
transmission expense increased $4.1 million.
|
|
|
|
·
|
The
change in
depreciation, amortization and decommissioning expense was primarily
related to the following:
|
|
|
|
|
·
|
Approximately
$41 million of decommissioning expense was recorded during 2005,
compared with no decommissioning expense recorded in 2006. In
2005, realized gains on decommissioning trust assets were substantially
offset by decommissioning expense pursuant to regulatory practice
(see
analysis of "Miscellaneous Income" below).
|
|
|
|
|
·
|
A
$10.2 million decrease in depreciation expense resulting from the
sale of Kewaunee in July 2005. Subsequent to the sale of Kewaunee,
decommissioning expense is no longer recorded.
|
|
|
|
|
·
|
An
increase
in depreciation expense related to continued capital investment
at the
electric utility partially offset the overall decrease in depreciation
and
decommissioning expense.
|
Regulated
Natural Gas Utility Segment Operations
|
|
Year
Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Change
in
2007
over 2006
|
|
|
Change
in
2006
over 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
2,103.7 |
|
|
$ |
676.9 |
|
|
$ |
522.0 |
|
|
|
210.8 |
% |
|
|
29.7 |
% |
Purchased
natural gas costs
|
|
|
1,453.5 |
|
|
|
493.8 |
|
|
|
397.4 |
|
|
|
194.4 |
% |
|
|
24.3 |
% |
Margins
|
|
|
650.2 |
|
|
|
183.1 |
|
|
|
124.6 |
|
|
|
255.1 |
% |
|
|
47.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
and
maintenance expense
|
|
|
427.4 |
|
|
|
121.3 |
|
|
|
69.4 |
|
|
|
252.4 |
% |
|
|
74.8 |
% |
Depreciation
and amortization expense
|
|
|
97.7 |
|
|
|
32.7 |
|
|
|
19.5 |
|
|
|
198.8 |
% |
|
|
67.7 |
% |
Taxes
other
than income
|
|
|
33.1 |
|
|
|
11.8 |
|
|
|
6.1 |
|
|
|
180.5 |
% |
|
|
93.4 |
% |
Operating
income
|
|
$ |
92.0 |
|
|
$ |
17.3 |
|
|
$ |
29.6 |
|
|
|
431.8 |
% |
|
|
(41.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Throughput
in therms
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
1,251.8 |
|
|
|
351.5 |
|
|
|
241.6 |
|
|
|
256.1 |
% |
|
|
45.5 |
% |
Commercial
and industrial
|
|
|
439.2 |
|
|
|
190.6 |
|
|
|
134.7 |
|
|
|
130.4 |
% |
|
|
41.5 |
% |
Interruptible
|
|
|
59.4 |
|
|
|
40.1 |
|
|
|
36.1 |
|
|
|
48.1 |
% |
|
|
11.1 |
% |
Interdepartmental
|
|
|
47.1 |
|
|
|
27.6 |
|
|
|
70.8 |
|
|
|
70.7 |
% |
|
|
(61.0 |
)% |
Transport
|
|
|
1,505.6 |
|
|
|
657.5 |
|
|
|
344.0 |
|
|
|
129.0 |
% |
|
|
91.1 |
% |
Total
sales in therms
|
|
|
3,303.1 |
|
|
|
1,267.3 |
|
|
|
827.2 |
|
|
|
160.6 |
% |
|
|
53.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather
(*)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WPSC
heating degree days
|
|
|
7,102 |
|
|
|
6,785 |
|
|
|
7,401 |
|
|
|
4.7 |
% |
|
|
(8.3 |
)% |
*
|
Weather
information for MGUC, MERC, PGL, and NSG is not shown as the information
is not comparable to the prior year since the companies were not
part of
Integrys Energy Group prior to April 1, 2006 (MGUC), July 1, 2006
(MERC),
and February 21, 2007 (PGL and
NSG).
|
Revenue
2007
Compared with
2006:
Regulated
natural
gas utility segment revenue increased $1,426.8 million, driven by the
following:
·
|
PGL
and NSG
(acquired February 21, 2007) generated $1,118.5 million of natural
gas utility revenue and contributed approximately 1.5 billion therms
of natural gas throughput volumes in 2007.
|
|
|
·
|
MERC
(which
acquired natural gas distribution operations in Minnesota on July
1, 2006)
generated $294.0 million of natural gas utility revenue and
approximately 705 million therms of natural gas throughput volumes in
2007, compared with $123.0 million of natural gas utility revenue and
approximately 348 million therms of natural gas throughput volumes in
2006.
|
|
|
·
|
MGUC
(which
acquired natural gas distribution operations in Michigan on April
1, 2006)
generated $220.2 million of natural gas utility revenue and
approximately 311 million therms of natural gas throughput volumes in
2007, compared with $110.1 million of natural gas revenue and
approximately 193 million therms of natural gas throughput volumes
during 2006.
|
|
|
·
|
WPSC's
natural gas utility revenue increased $27.2 million, from
$443.8 million in 2006, to $471.0 million in 2007, driven by the
following:
|
|
|
|
·
|
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. See Note 23,
"Regulatory
Environment," for more information related to the retail natural
gas rate increase at WPSC.
|
|
|
|
|
·
|
An
8.6%
increase in natural gas throughput volumes. The increase in
natural gas throughput volumes was driven by a 10.3% increase in
residential volumes and a 70.7% increase in natural gas volumes
sold to
the electric utility. The increase in sales volumes to
residential customers was driven in part by colder year-over-year
weather
conditions during the 2007 heating season. The increase in
natural gas volumes sold to the electric utility was driven by
an increase
in the need for the electric utility to run its peaking generation
units.
|
|
|
|
|
·
|
Natural
gas
prices were 10.1% lower on a per-unit basis, compared with 2006,
resulting
in a decrease in natural gas utility revenue, which partially offset
the
overall increase in natural gas utility revenue at
WPSC.
|
2006
Compared with
2005:
Regulated
natural
gas utility segment revenue increased $154.9 million, driven by the
following:
·
|
The
acquisition of natural gas distribution operations in Michigan
by MGUC on
April 1, 2006, and the acquisition of natural gas distribution
operations
in Minnesota by MERC on July 1, 2006. These
acquisitions contributed approximately $233 million to natural gas
utility revenue and approximately 541 million therms to natural gas
throughput volumes in 2006.
|
|
|
·
|
WPSC's
natural gas utility revenue was $443.8 million in 2006, compared with
$522.0 million in 2005. Lower natural gas revenues at WPSC
were primarily related to:
|
|
|
|
·
|
A
12.2%
decrease in natural gas throughput volumes, primarily related to
a 61.0%
decrease in natural gas throughput volumes sold to the electric
utility
for electric generation and a 9.2% decrease in throughput volumes
to
residential and commercial and industrial customers. The
decrease in throughput volumes to the electric utility resulted
from a
decrease in the need for the electric utility to run its natural
gas-fired
peaking generation units during the year ended December 31, 2006,
compared with 2005, and from higher dispatch of these peaking generation
units by MISO in 2005 for reliability purposes. The decrease in
throughput volumes to residential and commercial and industrial
customers
was also driven by unfavorable weather conditions in 2006 compared
with
2005, as well as customer conservation efforts. Particularly at
the beginning of 2006, customers were taking measures to conserve
energy
as a result of the high natural gas prices in the first half of
2006.
|
|
|
|
|
·
|
In
2006,
natural gas prices were 1.4% lower on a per-unit basis, compared
with
2005, resulting from a large decline in the price of natural gas
in the
second half of 2006, also contributing to the decrease in natural
gas
revenue.
|
|
|
|
|
·
|
Partially
offsetting the decrease in WPSC's natural gas utility revenue was
the 2006
natural gas rate increase at WPSC (see Note 23, "Regulatory
Environment," for more information related to this rate
increase).
|
Margin
2007
Compared with
2006:
The
regulated
natural gas utility segment margin increased $467.1 million, driven by the
following:
·
|
The
combined
margin provided by PGL and NSG in 2007 was
$387.2 million.
|
|
|
·
|
The
combined
margin at MGUC and MERC increased $55.1 million, from
$59.1 million in 2006, to $114.2 million in 2007. The
increase in natural gas margin at MGUC and MERC was driven primarily
by
the fact that MGUC and MERC operated during the first quarter heating
season in 2007, but were not acquired by Integrys Energy Group
until after
the first quarter heating season in 2006.
|
|
|
·
|
WPSC's
natural gas margin increased $24.8 million, from $124.0 million
in 2006, to $148.8 million in 2007. As discussed in more
detail above, the increase in WPSC's margin was driven by the retail
natural gas rate increase and an increase in throughput volumes
to higher
margin residential customers due in part to colder year-over-year
weather
conditions during the heating season. The increase in
throughput volumes sold to the electric utility did not have a
significant
impact on WPSC's natural gas utility
margin.
|
2006
Compared with
2005:
The
regulated
natural gas utility segment margin increased $58.5 million, driven by the
following:
·
|
The
combined
margin provided by MGUC and MERC was approximately
$59 million.
|
|
|
·
|
WPSC's
natural gas utility margin decreased $0.6 million. As
discussed in more detail above, a decrease in throughput volumes
to higher
margin residential and commercial and industrial customers was
partially
offset by the natural gas rate
increase.
|
Operating
Income
2007
Compared with
2006:
Operating
income
increased $74.7 million, driven by the $467.1 million increase in the
regulated natural gas utility margin, partially offset by a $306.1 million
increase in operating and maintenance expense, a $65.0 million increase in
depreciation and amortization expense, and a $21.3 million increase in
taxes other than income taxes.
·
|
The
increase
in operating and maintenance expense was primarily related to the
following:
|
|
|
|
·
|
Combined
operating and maintenance expenses of $292.9 million were incurred by
PGL and NSG in 2007.
|
|
|
|
|
·
|
Combined
operating and maintenance expense at MGUC and MERC increased approximately
$9 million, primarily due to the fact that both of these businesses
incurred operating expenses for only a partial year in 2006, compared
to
incurring a full year of operating and maintenance expenses in
2007. For the year ended December 31, 2006,
$11.8 million of combined operating and maintenance expense related
to external transition costs, primarily for the start-up of outsourcing
activities and other legal and consulting fees. For the year
ended December 31, 2007, MGUC and MERC were allocated
$1.7 million of external costs to achieve merger synergies related to
the PEC merger.
|
|
|
|
|
·
|
Operating
expenses related to WPSC's natural gas operations increased
$3.7 million year-over-year, due primarily to the allocation of
$2.8 million of external costs to achieve merger synergies related to
the PEC merger.
|
|
|
·
|
The
increase
in depreciation and amortization expense was primarily related
to the
merger with PEC (a combined $59.0 million of depreciation and
amortization expense was recognized at PGL and NSG in 2007) and
an
increase in depreciation expense at MERC and MGUC (these businesses
were
not included in results of operations for the full year in
2006). Depreciation and amortization expense at WPSC's natural
gas utility was relatively flat year-over-year.
|
|
|
·
|
The
increase
in taxes other than income taxes from 2006 to 2007 was primarily
related
to the merger with PEC ($16.8 million of taxes other than income
taxes were recognized at PGL and NSG in 2007), and the acquisition
of the
Michigan and Minnesota natural gas distribution operations, which
were not
included in results of operations for the full year in
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.
|
2006
Compared with
2005:
Operating
income
decreased $12.5 million, driven by a $71.0 million increase in total
operating and maintenance expense, partially offset by the $58.5 million
increase in regulated natural gas utility margin as discussed above. The
increase in operating expenses is explained below.
·
|
Operating
and
maintenance expenses increased $52.1 million. The increase
in operating and maintenance expense at the regulated natural gas
utility
segment was driven by $56.6 million of combined operating and
maintenance expense incurred by MGUC and MERC. Of the $56.6 million
of operating and maintenance expense incurred by MGUC and MERC
during the
year ended December 31, 2006, $11.8 million related to external
transition expenses, primarily for the start-up of outsourcing
activities
and other legal and consulting fees. Partially offsetting the
increase in operating and maintenance expenses related to MGUC
and MERC,
operating expenses related to WPSC's natural gas operations decreased,
driven by decreases in various employee benefit related
expenses.
|
|
|
·
|
The
$13.2 million year-over-year increase in depreciation expense
recorded at the regulated natural gas utility segment was driven
by a
combined $10.4 million of depreciation expense recorded by MGUC and
MERC for the year ended December 31, 2006. Continued
capital investment at WPSC's natural gas utility also contributed
to the
increase in depreciation expense.
|
|
|
·
|
The
$5.7 million increase in taxes other than income taxes was driven by
$4.8 million of taxes other than income taxes recorded by MGUC and
MERC, primarily related to property
taxes.
|
Integrys
Energy Services' Operations
Integrys
Energy
Services is a diversified nonregulated energy supply and services company
serving residential, commercial, industrial and wholesale customers in developed
competitive markets in the United States and Canada.
Integrys
Energy Services' Segment Results of Operations
|
|
Year
Ended
December 31,
|
|
|
|
|
|
|
|
(Millions,
except natural gas sales volumes)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Change
in 2007 Over 2006
|
|
|
Change
in 2006 Over 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
6,979.7 |
|
|
$ |
5,159.1 |
|
|
$ |
5,314.9 |
|
|
|
35.3 |
% |
|
|
(2.9 |
)% |
Cost
of fuel,
natural gas, and purchased power
|
|
|
6,675.6 |
|
|
|
4,978.0 |
|
|
|
5,148.6 |
|
|
|
34.1 |
% |
|
|
(3.3 |
)% |
Margins
|
|
$ |
304.1 |
|
|
$ |
181.1 |
|
|
$ |
166.3 |
|
|
|
67.9 |
% |
|
|
8.9 |
% |
Margin
Detail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric
and other margins
|
|
$ |
164.9 |
|
|
$ |
60.5 |
|
|
$ |
105.3 |
|
|
|
172.6 |
% |
|
|
(42.5 |
)% |
Natural
gas margins
|
|
$ |
139.2 |
|
|
$ |
120.6 |
|
|
$ |
61.0 |
|
|
|
15.4 |
% |
|
|
97.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
and
maintenance expense
|
|
$ |
159.4 |
|
|
$ |
81.5 |
|
|
$ |
88.9 |
|
|
|
95.6 |
% |
|
|
(8.3 |
)% |
Depreciation
and amortization
|
|
|
14.4 |
|
|
|
9.4 |
|
|
|
9.5 |
|
|
|
53.2 |
% |
|
|
(1.1 |
)% |
Taxes
other
than income taxes
|
|
|
7.1 |
|
|
|
7.2 |
|
|
|
5.4 |
|
|
|
(1.4 |
)% |
|
|
33.3 |
% |
Operating
Income
|
|
$ |
123.2 |
|
|
$ |
83.0 |
|
|
$ |
62.5 |
|
|
|
48.4 |
% |
|
|
32.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
volumes (includes volumes both physically delivered and net
settled)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
electric sales volumes in kilowatt-hours
|
|
|
132,623.6 |
|
|
|
58,794.9 |
|
|
|
44,778.3 |
|
|
|
125.6 |
% |
|
|
31.3 |
% |
Retail
electric sales volumes in kilowatt-hours
|
|
|
14,849.7 |
|
|
|
6,554.1 |
|
|
|
8,021.0 |
|
|
|
126.6 |
% |
|
|
(18.3 |
)% |
Wholesale
natural gas sales volumes in billion cubic feet
|
|
|
483.1 |
|
|
|
402.2 |
|
|
|
338.1 |
|
|
|
20.1 |
% |
|
|
19.0 |
% |
Retail
natural
gas sales volumes in billion cubic feet
|
|
|
368.8 |
|
|
|
314.5 |
|
|
|
276.6 |
|
|
|
17.3 |
% |
|
|
13.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Physical
volumes (includes only transactions settled physically for the
periods
shown)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
electric sales volumes in kilowatt-hours *
|
|
|
3,599.7 |
|
|
|
968.2 |
|
|
|
1,515.6 |
|
|
|
271.8 |
% |
|
|
(36.2 |
)% |
Retail
electric sales volumes in kilowatt-hours *
|
|
|
14,584.4 |
|
|
|
4,565.6 |
|
|
|
6,594.5 |
|
|
|
219.4 |
% |
|
|
(30.8 |
)% |
Wholesale
natural gas sales volumes in billion cubic feet *
|
|
|
445.6 |
|
|
|
373.5 |
|
|
|
327.8 |
|
|
|
19.3 |
% |
|
|
13.9 |
% |
Retail
natural
gas sales volumes in billion cubic feet *
|
|
|
319.4 |
|
|
|
264.0 |
|
|
|
227.7 |
|
|
|
21.0 |
% |
|
|
15.9 |
% |
*
Represents gross physical volumes.
Revenue
2007
Compared with
2006
●
|
Year-over-year,
revenues increased approximately $1.8 billion. The increase was
primarily due to increased volumes as a result of the addition
of the
nonregulated energy operations of PEC and an average increase in
2007
electric prices of over 10%. In addition to revenue and
volume contributions from the merger with PEC, retail electric
sales
volumes and related revenue increased as a result of Integrys Energy
Services' new retail electric product offerings to existing markets
and
expansion into new retail electric markets. Wholesale electric
sales volumes and revenue increased as a result of the additional
wholesale origination structured transactions. Wholesale
natural gas volumes increased as a result of an increase in the
profitability of wholesale origination structured natural gas transactions
throughout 2006 and into 2007. Some of these transactions were
entered
into in prior periods for future delivery; therefore, Integrys
Energy
Services is seeing an increase in volumes in the periods in which
these
transactions settle. Retail natural gas volumes also increased,
driven by favorable pricing compared with 2006, which encouraged
new and
existing customers to enter into or extend supply contracts with
Integrys
Energy Services.
|
2006
Compared with
2005
●
|
Year-over-year,
revenues decreased $155.8 million, primarily related to a decrease in
both physical retail and wholesale electric sales volumes and a
decrease
in energy prices during the latter half of 2006. The decrease
in physical retail electric sales volumes was driven by a decrease
in
retail electric sales volumes in Ohio as aggregation sales in Ohio
ended
on December 31, 2005, with the expiration of Integrys Energy
Services' contracts with Ohio aggregation customers. Michigan
retail electric sales volumes also decreased as many customers
returned to
their utility supplier beginning in 2005 and continuing into 2006
as a
result of high wholesale energy prices and utility tariff changes,
which
significantly lowered the savings that customers could obtain from
contracting with non-utility
|
|
|
|
suppliers. In
other areas, lower wholesale energy prices in the latter half of
2006
allowed Integrys Energy Services to sign up a significant number
of new
retail customers. The decrease in physically settled wholesale electric
sales volumes was driven by a trend toward more financially settled
transactions in 2006, compared to 2005. |
Margins
Integrys
Energy
Services' margin increased $123.0 million from 2006 to 2007 and increased
$14.8 million from 2005 to 2006. The table below provides a
summary of the significant items contributing to the change in
margin. "Other significant items" in the table below are generally
related to the timing of gain and loss recognition on certain transactions
and
the settlement of the derivative instruments used to protect the value of
Section 29/45K tax credits.
|
|
Increase
(Decrease) in Margin in
|
|
(Millions
except natural gas sales volumes)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Electric
and other
margins
|
|
|
|
|
|
|
Realized
gains on structured origination contracts
|
|
$ |
11.8 |
|
|
$ |
6.3 |
|
Realized
retail electric margin
|
|
|
15.9 |
|
|
|
(2.9 |
) |
All
other wholesale electric operations
|
|
|
3.9 |
|
|
|
4.8 |
|
|
|
|
|
|
|
|
|
|
Other
significant items:
|
|
|
|
|
|
|
|
|
Oil
option activity
|
|
|
22.0 |
|
|
|
(11.1 |
) |
Retail
mark-to-market activity
|
|
|
45.3 |
|
|
|
(27.3 |
) |
2005
liquidation of electric supply contract
|
|
|
5.5 |
|
|
|
(14.6 |
) |
Net
increase
(decrease) in electric and other margins
|
|
|
104.4 |
|
|
|
(44.8 |
) |
|
|
|
|
|
|
|
|
|
Natural
gas
margins
|
|
|
|
|
|
|
|
|
Realized
natural gas margins
|
|
|
8.0 |
|
|
|
32.2 |
|
|
|
|
|
|
|
|
|
|
Other
significant items:
|
|
|
|
|
|
|
|
|
Mass
market supply options
|
|
|
6.6 |
|
|
|
(8.4 |
) |
Spot
to forward differential
|
|
|
(0.2 |
) |
|
|
5.4 |
|
Other
mark-to-market activity
|
|
|
4.2 |
|
|
|
30.4 |
|
Net
increase
in natural gas margins
|
|
|
18.6 |
|
|
|
59.6 |
|
|
|
|
|
|
|
|
|
|
Net
increase
in Integrys Energy Services' margin
|
|
$ |
123.0 |
|
|
$ |
14.8 |
|
Electric
and Other
Margins
Integrys
Energy
Services' electric and other margins increased $104.4 million from 2006 to
2007 and decreased $44.8 million from 2005 to 2006. The 2007
electric and other margin included the negative impact of $15.2 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' electric and other
margins.
Realized
gains on structured
origination contracts
●
|
Realized
gains on structured origination contracts increased $11.8 million,
from $6.3 million in 2006 to $18.1 million in
2007. Origination contracts are physical, customer-based
agreements with municipalities, merchant generators, cooperatives,
municipalities, and regulated utilities. The increase was
primarily due to continued growth in existing markets in the Midwest
and
Northeastern United States, as well as expansion into the markets
in the
western United States.
|
|
|
●
|
Realized
gains on structured origination contracts increased $6.3 million from
2005 to 2006. The increase was primarily 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. These origination contracts were not in place in
2005. Integrys Energy Services provided products to large
origination customers desiring to take advantage of falling energy
prices.
|
Realized
retail electric
margin
●
|
The
realized
retail electric margin increased $15.9 million from
$18.3 million in 2006 to $34.2 million in 2007. The
change was primarily due to the following:
|
|
|
|
●
|
A
$13.9 million increase related to operations in Illinois, driven by
the merger with PEC's nonregulated business and the addition of
new
customers due to the expiration of certain regulatory provisions
in the
state in 2007 that effectively opened the market to nonregulated
energy
suppliers.
|
|
|
|
|
●
|
A
$6.0 million increase related to operations in Texas, as a result of
further penetration into this market resulting from continued marketing
efforts. Retail offerings in Texas first began in the third
quarter of 2006.
|
|
|
|
|
●
|
A
$3.6 million increase related to operations in New England as new
customers were added due to an increased sales focus in this
region.
|
●
|
Partially
offsetting the increases discussed above were:
|
|
|
|
●
|
A
$4.4 million decrease related to Michigan operations as many
customers continued to return to utility suppliers as a result
of high
wholesale energy prices and changes in utility tariffs which have
continued to make the Michigan energy market less
competitive.
|
|
|
|
|
●
|
A
$3.3 million decrease related to operations in the state of New York,
related to a change in the product mix offered to customers in
response to
utility rate structure changes.
|
●
|
The
realized
retail electric margin decreased $2.9 million from 2005 to
2006. The decrease was primarily driven by an $8.2 million
decrease in margin in Ohio and a $3.7 million decrease in margin in
northern Maine. These decreases were partially offset by a
$4.4 million increase in margin in Michigan, a $2.8 million
increase in margin in New York, and positive margin contributions
from
retail electric operations in Texas and Illinois. Integrys
Energy Services' retail electric aggregation sales in Ohio ended
on
December 31, 2005, with the expiration of Integrys Energy Services'
contracts with Ohio aggregation customers. The decrease in
margin from operations in northern Maine was driven by higher supply
costs
in part tied to diesel fuel prices. A portion of the
electricity purchased by Integrys Energy Services to supply customers
in
northern Maine is derived from burning wood chips. The cost to
transport wood chips, as well as the operating costs of the machine
utilized to make the wood chips, were negatively impacted by higher
diesel
fuel prices. In 2006, Integrys Energy Services shared in this
diesel fuel exposure with the generation supplier. The increase
in margin from retail electric operations in Michigan was driven
by the
elimination of the Seams Elimination Charge Adjustment (SECA) effective
March 31, 2006. See Note 23, "Regulatory
Environment," for more information related to
SECA. Integrys Energy Services began developing a product
offering in the Texas retail electric market in 2005 and started
to
deliver power to these
|
|
|
|
customers
in
July 2006. In 2006, Integrys Energy Services began offering
retail electric products to large commercial and industrial customers
in
Illinois. In 2005, Integrys Energy Services was only offering
natural gas products and energy management services to customers
in
Illinois. |
All
other wholesale electric
operations
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 reduce
market price risk and extract additional value from its generation and customer
supply portfolios 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 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 7A, Quantitative and Qualitative Disclosures
about Market Risk."
●
|
Integrys
Energy Services' margin from all other wholesale electric operations
increased $3.9 million from 2006 to 2007, driven by an increase in
net realized and unrealized gains (primarily unrealized gains)
related to
trading activities utilized to optimize the value of Integrys Energy
Services' merchant generation fleet and energy contract
portfolios. Partially offsetting the increase resulting from
realized and unrealized gains, the overall level of proprietary
trading
was less in 2007, due primarily to a decrease in electric price
volatility
during the first three quarters of 2007, increased emphasis on
structured
electric transactions in 2007, and the departure of several key
traders in
the third quarter of 2006. Proprietary trading started picking
up again in the fourth quarter of 2007 as electric price volatility
increased. Integrys Energy Services used the 2006 departure of
several of its traders as an opportunity to restructure trading
operations
into two groups. Its East trading group was relocated from
Washington D.C. to Chicago and the West trading group is located
in
Denver. The restructured trading operations allow Integrys
Energy Services to more effectively service customers in the West
by
providing better diversification of trading talent, market expertise,
and
product offerings.
|
|
|
●
|
Integrys
Energy Services' margin from all other wholesale electric operations
increased $4.8 million from 2005 to 2006, driven by an increase in
net realized and unrealized gains related to trading activities
utilized
to optimize the value of Integrys Energy Services' merchant generation
fleet and energy contract
portfolios.
|
Oil
option
activity
●
|
Oil
option
activity drove a $22.0 million increase in electric and other margins
from 2006 to 2007. The oil options were utilized to protect the
value of a portion of Integrys Energy Services' Section 29/45K
federal tax
credits from 2005 to 2007. However, companies are no longer
allowed to generate tax credits from the production of synthetic
fuel as
this program ended effective December 31, 2007. Therefore,
Integrys Energy Services exercised substantially all of its remaining
oil
options in 2007. Net mark-to-market and realized losses on oil
options of $2.4 million were recognized in 2006, compared with net
mark-to-market and realized gains on oil options of $19.6 million in
2007. These derivative instruments were not designated as
hedging instruments and, as a result, changes in the fair value
were
recorded in earnings. The increase in the fair value of these
instruments in 2007 over 2006 reflects increased oil
prices.
|
|
|
●
|
Oil
option
activity drove an $11.1 million decrease in electric and other
margins from 2005 to 2006. The decrease was driven by a
decrease in the fair value of derivative instruments utilized to
protect
the value of a portion of Integrys Energy Services' Section 29/45K
federal
tax credits from 2005 to 2006. This decrease is a result of net
mark-to market and realized losses on oil options of $2.4 million in
2006, compared with net mark-to-market and realized gains on oil
options
of $8.7 million in 2005.
|
Retail
mark-to-market
activity
Earnings
volatility
from this activity 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. As a result, 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.
●
|
Results
from
retail mark-to-market activity increased $45.3 million from
$18.5 million of unrealized losses in 2006 to $26.8 million of
unrealized gains in 2007.
|
|
|
●
|
Results
from
retail mark-to-market activity decreased $27.3 million from 2005 to
2006.
|
2005
liquidation of electric
supply contract
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 was more than the cost under the liquidated
contract. The liquidation and subsequent replacement of this contract
resulted in the following:
●
|
A
$5.5 million increase in margins from 2006 to 2007. The
replacement contract increased the cost of purchased power needed
to serve
customers in Maine by $6.4 million in 2006, compared with
$0.9 million in 2007.
|
|
|
●
|
A
$14.6 million negative impact on the 2006 electric and other margin,
as a result of higher purchased power costs recorded under the
new
contract of $6.4 million compared with an $8.2 million gain
recognized on the liquidation of the original contract in
2005.
|
Natural
Gas
Margins
Integrys
Energy
Services' natural gas margins increased $18.6 million from 2006 to 2007 and
increased $59.6 million from 2005 to 2006. The 2007 natural gas
margins included the negative impact of $6.1 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 margins.
Realized
natural gas
margins
●
|
Realized
natural gas margins increased $8.0 million, from $92.6 million
in 2006, to $100.6 million in 2007. The majority of this
increase, $5.7 million, was driven by margin contributed by the
nonregulated retail natural gas marketing operations of PEC and
improved
supply optimization, as Integrys Energy Services was able to secure
lower
supply costs for firm sales commitments to retail natural gas customers
in
Ohio and Illinois. The remaining increase in realized natural
gas margins was driven by the nonregulated wholesale natural gas
marketing
operations added with the PEC merger.
|
|
|
●
|
Realized
natural gas margins increased $32.2 million, from $60.4 million
in 2005, to $92.6 million in 2006. The majority of this
increase, $26.6 million, related to an increase in retail natural gas
margin, driven by continued expansion of Integrys Energy Services'
Canadian retail operations (including higher sales volumes to existing
customers as well as new customer additions). Margins from
retail natural gas operations in Wisconsin, Michigan, and Illinois
also
increased, as Integrys Energy Services was able to better manage
supply to
these customers, aided by favorable market conditions. The
remaining $5.6 million increase in realized natural gas margins
related to wholesale operations, driven by an increase in structured
wholesale natural gas transactions attributed to an increase in
the
volatility of the price of natural gas as well as high natural
gas storage
spreads during most of 2006.
|
Mass
market supply
options
Options
utilized to
manage supply costs for mass market customers are used 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.
●
|
In
2007,
options utilized to manage supply costs for mass market customers
drove a
$6.6 million increase in Integrys Energy Services' natural gas
margin. These options had a $1.1 million positive impact
on margin in 2007 (commensurate with higher natural gas prices),
compared
with a negative $5.5 million impact on margin in 2006 (commensurate
with declining natural gas prices).
|
|
|
●
|
In
2006,
options utilized to manage supply costs for mass market customers
drove an
$8.4 million decrease in Integrys Energy Services' natural gas
margin. These options had a $5.5 million negative impact
on Integrys Energy Services' natural gas margin in 2006 (commensurate
with
declining natural gas prices), compared with a $2.9 million positive
impact on margin in 2005 (commensurate with higher natural gas
prices in
the latter half of 2005).
|
Spot
to forward
differential
Integrys
Energy
Services experiences earnings volatility associated with the natural gas
storage
cycle, which runs annually from April through March of the next
year. Generally, injections of natural gas into storage inventory
take place in the summer months and natural gas is withdrawn from storage
in the
winter months. Integrys Energy Services' policy is to hedge the value
of natural gas storage with
contracts
in the
over-the-counter and futures markets, effectively locking in a margin on
the
natural gas in storage. However, fair market value hedge accounting
rules require the natural gas in storage to be marked-to-market using spot
prices, while the future sales contracts are marked-to-market using forward
prices. When the spot price of natural gas changes disproportionately
to the forward price of natural gas, Integrys Energy Services experiences
volatility in its earnings. Consequently, earnings volatility may
occur within the contract period for natural gas in storage. The
accounting treatment does not impact the underlying cash flows or economics
of
these transactions.
●
|
The
natural
gas storage cycle had a negative $0.2 million impact on natural gas
margins from 2006 to 2007. There was no material impact on
margin as a result of the natural gas storage cycle in 2007 compared
with
a $0.2 million positive impact in 2006. At
December 31, 2007, the market value of natural gas in storage was
$5.6 million less than the market value of future sales contracts
(net unrealized loss), related to the 2007/2008 natural gas storage
cycle. This $5.6 million difference 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.
|
|
|
●
|
The
natural
gas storage cycle had a positive $5.4 million impact on natural gas
margins from 2005 to 2006. In 2006, the natural gas storage
cycle had a positive $0.2 million impact on margin, compared with a
$5.2 million negative impact on margin in
2005.
|
Other
mark-to-market
activity
Other
mark-to-market activity primarily 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
contracts 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.
●
|
Derivative
instruments not previously discussed drove a $4.2 million increase in
the natural gas margins as mark-to-market gains on these instruments
increased to $37.5 million in 2007.
|
|
|
●
|
Derivative
instruments not previously discussed drove a $30.4 increase in the
natural gas margins as mark-to-market gains on these instruments
increased
in 2006, compared with 2005.
|
Operating
Income
2007
Compared with
2006:
●
|
Operating
income at Integrys Energy Services increased $40.2 million, driven by
the $123.0 million increase in margin discussed above, partially
offset by a $77.9 million increase in operating and maintenance
expense and a $5.0 million increase in depreciation and amortization
expense.
|
|
|
|
The
increase
in operating and maintenance expense was driven by higher payroll
and
benefit costs related to additional employees required as a result
of
continued business expansion activities at Integrys Energy Services
(the
most significant of which related to the merger of PEC's nonregulated
operation into Integrys Energy Services). A $9.0 million
pre-tax gain on the 2006 sale of WPS ESI Gas Storage, LLC,
$7.7 million of costs to achieve merger synergies and additional
costs related to plant outages of $2.6 million in 2007 also
contributed to the increase in operating and maintenance
expense.
|
2006
compared with
2005:
●
|
Operating
income at Integrys Energy Services increased $20.5 million, driven by
the $14.8 million increase in margin discussed above and a
$7.4 million decrease in operating and maintenance expense. The
decrease in operating and maintenance expense was primarily related
to a
$9.0 million pre-tax gain recognized on the sale of WPS ESI Gas
Storage, LLC in the second quarter of 2006. This gain was
partially offset by higher payroll and benefit costs related to
an
increase in the number of employees as a result of business expansion
activities.
|
Holding
Company and Other
Segment Operations
2007
Compared with
2006:
Financial
results
at the Holding Company and Other segment decreased $19.1 million, from net
income of $0.3 million for the year ended December 31, 2006, to a net
loss of $18.8 million for the year ended December 31,
2007. The change was driven by the following:
·
|
A
$42.0 million ($25.2 million after-tax) increase in interest
expense, driven by additional borrowings assumed in the merger
with PEC,
as well as an increase in short-term and long-term borrowings required
to
fund the acquisitions of the natural gas distribution operations
in
Michigan and Minnesota, higher working capital requirements at
Integrys
Energy Services, and transaction and transition costs related to
the
merger with PEC.
|
|
|
·
|
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 year-over year
earnings.
|
|
|
·
|
An
$11.5 million increase in pre-tax earnings ($6.9 million
after-tax) from Integrys Energy Group's 34.5% ownership interest
in
ATC. Integrys Energy Group recorded $50.5 million of
pre-tax equity earnings from ATC during the year ended December 31,
2007, compared with $39.0 million for the same period in
2006.
|
|
|
·
|
A
$1.7 million ($1.0 million after-tax) decrease in operating and
maintenance expenses, primarily related to the reallocation of
external
costs to achieve merger synergies associated with the PEC merger,
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 other reportable
segments,
which will ultimately be the beneficiaries of the synergy savings
resulting from the costs to
achieve.
|
2006
Compared with
2005:
Earnings
at the
Holding Company and Other segment decreased $5.6 million, from net income
of $5.9 million for the year ended December 31, 2005, to a net income
of $0.3 million for the year ended December 31, 2006. The
changes were driven by the following:
·
|
A
$12.9 million increase in interest expense, net of intercompany
interest income ($7.7 million after taxes) Higher
interest expense was driven by an increase in short-term and long-term
borrowings required to fund the acquisition of natural gas distribution
operations in Michigan and Minnesota and working capital requirements
at
Integrys Energy Services.
|
|
|
·
|
A
$9.2 million increase in operating and maintenance expense
($5.5 million after taxes). The increase in operating and
maintenance expense was driven by legal and consulting expenses
related to
business expansion activities, primarily attributed to the merger
with
PEC.
|
|
|
·
|
A
$4.8 million year-over year decrease in after-tax gains from land
sales.
|
|
|
·
|
A
$13.9 million increase in pre-tax earnings ($8.3 million
after-tax) from ATC (pre-tax equity earnings from ATC increased
to
$39.0 million in 2006, from $25.1 million in
2005).
|
|
|
·
|
A
$6.2 million ($3.7 million after-tax) gain recognized from
the 2006 sale of Integrys Energy Group's one-third interest in
Guardian Pipeline, LLC.
|
Summary
of External Costs to Achieve
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 year ended
December 31, 2007. Note that external costs to achieve incurred
at the holding company in 2006 and the first quarter of 2007 were reallocated
down to the segment level in the first quarter of 2007.
Reportable
Segment (millions)
|
|
2007
Pre-tax Impact
(Income)/Expense
|
|
Electric
utility
|
|
$ |
12.3 |
|
Natural
gas
utility
|
|
|
4.5 |
|
Integrys
Energy Services
|
|
|
7.7 |
|
Holding
company and other
|
|
|
(6.8 |
) |
Total
|
|
$ |
17.7 |
|
Other
Income (Expense)
|
|
Year
Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Change
2007
over 2006
|
|
|
Change
2006
over 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
$ |
64.1 |
|
|
$ |
42.8 |
|
|
$ |
88.8 |
|
|
|
49.8 |
% |
|
|
(51.8 |
%) |
Interest
expense
|
|
|
(164.5 |
) |
|
|
(99.2 |
) |
|
|
(62.0 |
) |
|
|
65.8 |
% |
|
|
60.0 |
% |
Minority
interest
|
|
|
0.1 |
|
|
|
3.8 |
|
|
|
4.5 |
|
|
|
(97.4 |
%) |
|
|
(15.6 |
%) |
Other
(expense) income
|
|
$ |
(100.3 |
) |
|
$ |
(52.6 |
) |
|
$ |
31.3 |
|
|
|
90.7 |
% |
|
|
- |
|
Miscellaneous
Income
2007
Compared with
2006:
The
$21.3 million increase in miscellaneous income was primarily driven
by:
·
|
An
$11.5 million increase in pre-tax equity earnings from Integrys
Energy Group's 34.5% ownership interest in ATC.
|
|
|
·
|
A
$5.7 million decrease in pre-tax losses recognized for the year
related to Integrys Energy Services' investment in a synthetic
fuel
facility. Integrys Energy Services took less production from
this facility in 2007 compared with 2006.
|
|
|
·
|
A
$3.8 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.
|
|
|
·
|
An
increase
of $2.9 million, partially due to an increase in interest income
recognized related to the transmission facilities WPSC is funding
on ATC's
behalf pending the start-up of Weston 4.
|
|
|
·
|
A
decrease
due to the $6.2 million 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.
|
2006
Compared with
2005:
Miscellaneous
income decreased $46.0 million driven primarily by:
·
|
Approximately
$41 million of realized gains on nuclear decommissioning trust assets
recorded during the year ended December 31, 2005. Pursuant
to regulatory practice, the increase in miscellaneous income related
to
these realized gains was offset by a corresponding increase in
decommissioning expense in 2005.
|
|
|
·
|
Integrys
Energy Services' equity investment in a synthetic fuel facility
contributed an additional $11.3 million decrease in miscellaneous
income, driven in part by additional synthetic fuel production
procured in
2006 from our partners in this facility.
|
|
|
·
|
Pre-tax
gains
recognized on land sales decreased $8.0 million, from
$10.3 million in 2005 to $2.3 million in
2006.
|
|
|
·
|
These
decreases were partially offset by a $13.9 million increase in
pre-tax equity earnings from ATC and a $6.2 million pre-tax gain
recognized from the sale of Integrys Energy Group's one-third interest
in
Guardian Pipeline, LLC.
|
Interest
Expense
2007
Compared with
2006:
Interest
expense
increased $65.3 million as a result of:
·
|
Interest
expense of $30.3 million recorded at PGL and NSG from February 22,
2007 through December 31, 2007.
|
|
|
·
|
The
remaining
increase in interest expense was driven by an increase in short-term
and
long-term borrowings required to fund the acquisitions of the natural
gas
distribution operations in Michigan and Minnesota, higher working
capital
requirements at Integrys Energy Services, and transaction and transition
costs related to the merger with
PEC.
|
2006
Compared with
2005:
Interest
expense
increased $37.2 million due primarily to:
·
|
An
increase
in the average amount of both short-term and long-term debt outstanding
and higher average short-term interest rates. During 2006,
borrowings were primarily utilized to fund the purchase of natural
gas
distribution operations in Michigan and Minnesota, the construction
of
Weston 4, and for working capital requirements at Integrys Energy
Services.
|
Minority
Interest
2007
Compared with
2006:
A
decrease of $3.7 million in minority interest related to Integrys Energy
Services' synthetic fuel operations. In 2007, Integrys Energy
Services' partner elected to stop receiving production from the synthetic
fuel
facility and, therefore, did not share in losses from this
facility.
2006
Compared with
2005:
Minority
interest
related to Integrys Energy Services' synthetic fuel operation did not
significantly change for the year ended December 31, 2006 compared to the
same period in 2005.
Provision
for Income Taxes
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Effective
Tax
Rate
|
|
|
32.2 |
% |
|
|
22.9 |
% |
|
|
20.8 |
% |
The
2007 increase
in the effective tax rate was driven by a decrease in Section 29/45K
federal tax credits recognized in 2007 compared with 2006. The
decrease in Section 29/45K federal tax credits recognized was driven by the
impact of high oil prices on our ability to realize the benefit of Section
29/45K federal tax credits. Section 29/45K federal tax credits
recognized from the production and sale of synthetic fuel were
$13.6 million in 2007, compared with $29.5 million in
2006.
The
2006 increase
in the effective tax rate was driven by a higher effective state tax rate,
primarily related to the acquisition of regulated natural gas operations
in
Minnesota and also due to a loss in value of various state net operating
loss
carryforwards. Section 29/45K federal tax credits from the production
and sale of synthetic fuel increased $3.4 million to $29.5 million in
2006, to partially offset the increase in effective tax rate.
Discontinued
Operations, Net
of Tax
2007
Compared with
2006:
Income
from
discontinued operations, net of tax, increased $66.0 million, from
after-tax income of $7.3 million in 2006 to after-tax income of
$73.3 million in 2007.
●
|
In
September
2007, Integrys Energy Group completed the sale of PEP for approximately
$879.1 million. Post-closing adjustments in the amount of
$9.9 million were settled in February 2008 related to this sale,
which reduced the sale price to $869.2 million. These
post-closing adjustments were funded through other current liabilities
at
December 31, 2007. During the year ended December 31,
2007, $58.5 million of income from discontinued operations was
recognized related to PEP, which included an after-tax gain of
$7.6 million on the sale.
|
|
|
●
|
Discontinued
operations, net of tax, related to WPS Niagara Generation, LLC
(Niagara), which was sold in January 2007, increased
$14.4 million, from income of $0.4 million in 2006 to income of
$14.8 million in 2007. The increase in income generated
from Niagara was mostly due to a $14.7 million after-tax gain on the
sale of the facility.
|
|
|
●
|
Partially
offsetting these increases were discontinued operations related
to Sunbury
Generation, LLC (Sunbury). Income from discontinued operations
related to Sunbury was $6.9 million for the period January 1,
2006, through the date of sale in July 2006, including a
$12.5 million after-tax gain on the sale of this
facility.
|
2006
Compared with
2005:
Income
from
discontinued operations, net of tax, decreased $4.2 million, from after-tax
income of $11.5 million in 2005 to after tax income of $7.3 million in
2006.
●
|
Discontinued
operations, net of tax, related to Sunbury decreased $2.2 million,
from income of $9.1 million in 2005, to income of $6.9 million
in 2006. The $6.9 million of income recorded in 2006
included a $12.5 million after-tax gain on the sale of Sunbury, which
was sold in July 2006.
|
|
|
●
|
Discontinued
operations, net of tax, related to WPS Niagara Generation, LLC
decreased $2.0 million, from income of $2.4 million in 2005 to
income of $0.4 million in 2006. The decrease in income
generated from WPS Niagara Generation was mostly due to a decrease in
the average price per megawatt sold from this facility in 2006
compared to
2005.
|
Cumulative
Effect of Change
in Accounting Principles
2006
compared with
2005:
In
March 2005, the FASB issued Interpretation No. 47, "Accounting for Conditional
Asset Retirement Obligations." This Interpretation clarifies when
companies are required to recognize conditional legal asset retirement
obligations that result from the acquisition, construction, and normal operation
of a long-lived asset. Because the accounting for conditional asset
retirement obligations had been interpreted differently between companies,
SFAS
No. 143, "Accounting for Asset Retirement Obligations," had been inconsistently
applied in practice.
The
adoption of
Interpretation No. 47 at Integrys Energy Services on December 31, 2005,
resulted in a negative $1.6 million after-tax cumulative effect of change
in accounting principle, related to recording a liability for asbestos
remediation at certain of Integrys Energy Services' generation
plants. For the utility segments of Integrys Energy Group, we
concluded it was probable that any differences between expenses under
Interpretation No. 47 and expenses currently recovered through customer
rates will be recoverable in future customer rates. Accordingly, the
adoption of this statement had no impact on the utility segment's
income.
BALANCE
SHEET
Net
accounts
receivable increased $368.0 million (35.5%), from $1,037.3 million at
December 31, 2006, to $1,405.3 million at December 31, 2007,
primarily due to the following:
●
|
At
December 31, 2007, PGL and NSG had a net accounts receivable balance
of $196.0 million.
|
|
|
●
|
Net
accounts
receivable at Integrys Energy Services increased $83.5 million,
driven primarily by the integration of PEC's nonregulated business
into
Integrys Energy Services, as well as continued growth in Integrys
Energy
Services' business in 2007.
|
|
|
●
|
Net
accounts
receivable at WPSC increased $84.7 million (49.8%), primarily due to
an $82.3 million receivable from ATC pertaining to transmission
facilities
required to support Weston 4 that WPSC is funding on their behalf
pending
completion of Weston 4. At December 31, 2006, the amount
owed to WPSC by ATC was $20.8 million and was included as a component
of other long-term assets. At December 31, 2007, the $20.8
million was reflected as a receivable from ATC as was the
$61.5 million of incremental funding that was incurred in
2007.
|
Accrued
unbilled
revenues increased $279.9 million (151.5%), from $184.8 million at
December 31, 2006, to $464.7 million at December 31, 2007,
primarily driven by combined accrued unbilled revenues of $155.1 million at
PGL and NSG at December 31, 2007. Accrued unbilled revenues at
Integrys Energy Services also increased $108.9 million, driven by the
integration of PEC's nonregulated business into Integrys Energy Services,
as
well as continued growth in Integrys Energy Services' business in
2007.
Inventories
increased $207.1 million (45.4%), from $456.3 million at
December 31, 2006, to $663.4 million at December 31,
2007. The inventory balance at Integrys Energy Services increased
$139.9 million (48.6%), due to the addition of PEC's nonregulated business
as well as an increase in storage volumes related to continued growth of
Integrys Energy Services' natural gas business in new and existing
markets. The inventory balance at PGL and NSG was $93.8 million
at December 31, 2007.
At
December 31, 2007, compared to December 31, 2006, total assets from risk
management activities decreased $76.8 million (5.6%) and total liabilities
from risk management activities decreased $80.9 million
(6.4%). The decrease in assets and liabilities from risk management
activities was driven by timing of mark-to-market gain and loss recognition
on
the underlying contracts. Although total risk management assets and
liabilities decreased, long-term risk management assets and liabilities
increased at December 31, 2007, compared to December 31,
2006. This increase related to more emphasis on structured
origination contracts, which are physical, customer based agreements with
municipalities, merchant generators, and regulated utilities, and are generally
longer term in nature.
Total
regulatory
assets increased $805.2 million (183.5%), from $438.8 million at
December 31, 2006, to $1,244.0 million at December 31, 2007,
primarily attributed to a $656.1 million increase in the regulatory asset
related to environmental remediation costs and a $63.2 million increase in
the regulatory asset for pension and post-retirement benefit related
items. The increase in the environmental related regulatory asset
related to estimated costs of future natural gas remediation for several
manufactured gas plant sites at PGL and NSG. See Note 17, "Commitments and
Contingencies," for more information. The increase in the
regulatory asset related to pension and postretirement benefit related items
was
driven by the merger with PEC and changes Integrys Energy Group made to certain
of its retirement benefit plans. See Note 19, "Employee Benefit Plans," for
more information.
Net
property,
plant, and equipment increased $1,929.0 million (76.1%), from
$2,534.8 million at December 31, 2006, to $4,463.8 million at
December 31, 2007, due primarily to the following:
●
|
Net
property,
plant, and equipment related to PGL and NSG at December 31, 2007 was
$1,788.6 million.
|
|
|
●
|
Net
property,
plant, and equipment at WPSC increased $106.0 million. WPSC's capital
expenditures in 2007 were $221.1 million, in part due to
$100.3 million of capital expenditures related to the construction of
Weston 4 and the purchase of unit trains for this facility, partially
offset by depreciation and amortization expense of $96.4 million in
2007.
|
The
$644.0 million (212.0%) increase in goodwill from December 31, 2006,
to December 31, 2007, is primarily related to goodwill recorded in
conjunction with the PEC merger. See Note 11, "Goodwill and Other Intangible
Assets," for more information.
The
change in
pension and post-retirement assets and liabilities recorded on the Consolidated
Balance Sheets was driven by the PEC merger as well as changes Integrys Energy
Group made to certain of its retirement benefit plans, as well as changes
made
to the assumptions used to measure these plans at December 31, 2007,
compared with December 31, 2006. See Note 19, "Employee Benefit Plans," for
more information.
Detailed
explanations for changes in the short-term and long-term debt balances at
December 31, 2007, compared to December 31, 2006, are included in Note
13, "Short-term Debt and Lines
of Credit," and Note 14, "Long-Term Debt."
Accounts
payable
increased $382.4 million (40.3%), from $949.4 million at
December 31, 2006, to $1,331.8 million at December 31,
2007. Accounts payable recorded at PGL and NSG at December 31,
2007 was $197.0 million. Accounts payable at Integrys Energy
Services increased $177.8 million, driven by the addition of PEC's
nonregulated business ($120.6 million of accounts payable related to PEC's
nonregulated operations was assumed on the merger date). Accounts
payable at Integrys Energy Services also increased as a result of an increase
in
natural gas purchases in the fourth quarter of 2007, compared with the same
quarter of 2006, due to general business growth.
Other
current
liabilities increased $304.0 million (168.8%), from $180.1 million at
December 31, 2006, to $484.1 million at December 31, 2007,
primarily due to an increase in liabilities related to vacation, salaries,
and
other general expenses related to the PEC merger.
Environmental
remediation liabilities increased $609.8 million (636.5%), from
$95.8 million at December 31, 2006, to $705.6 million at
December 31, 2007. The increase related to estimated costs of
future natural gas remediation for several manufactured gas plant sites at
PGL
and NSG. PGL and NSG anticipate that natural gas plant site
remediation costs will be collected in rates; therefore, an offsetting
regulatory asset has been recorded. See Note 17, "Commitments and
Contingencies," for more information.
LIQUIDITY
AND CAPITAL RESOURCES
We
believe that our cash balances, liquid assets, operating cash flows, access
to
equity capital markets and borrowing capacity made available because of strong
credit ratings, 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 flow 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
ratings are among the best in the energy industry (see "Financing Cash Flows -
Credit
Ratings" below).
Operating
Cash Flows
During
2007, net
cash provided by operating activities was $238.5 million, compared with
$72.9 million in 2006. The $165.6 million increase in net
cash provided by operating activities was driven by a $84.0 million
decrease in working capital requirements year-over-year. It is
important to note that changes in working capital balances at February 21,
2007,
as a result of the PEC merger are not incorporated in the Consolidated Statement
of Cash Flows, as the merger was a noncash transaction. Only PEC
changes in working capital from the merger date to December 31, 2007 are
included. Inventory levels at Integrys Energy Services increased from
December 31, 2006 to December 31, 2007, but this change was less than
the increase from December 31, 2005 to December 31, 2006, driving the
majority of the decrease in working capital requirements. Integrys
Energy Services continued to see growth in its natural gas business in both
new
and existing markets. The year-over-year change in natural gas
inventories at the regulated utilities was not significant. The remaining
increase in net cash provided by operating activities was driven by a
year-over-year increase in income available for common
shareholders.
During
2006, net
cash provided by operating activities was $72.9 million, compared with
$77.4 million in 2005. The $4.5 million decrease in net
cash provided by operating activities was driven by an $88.2 million
increase in cash required to fund working capital requirements, primarily
due to
an increase in natural gas inventories at Integrys Energy
Services. Natural gas in storage at Integrys Energy Services
increased $85.2 million primarily related to a 121% increase in natural gas
volumes in storage at December 31, 2006, compared to December 31, 2005
(partially offset by a 20% decrease in the average cost of inventory in
storage). Integrys Energy Services chose to purchase more natural gas
for storage due to high natural gas storage spreads (future natural gas sales
prices were higher than the near term price of natural gas). The
increase in cash used to fund higher Integrys Energy Services natural gas
inventories was partially offset at the regulated utilities by cash used
to fund
costs incurred in 2005 related to the unplanned outage at Kewaunee, the start-up
of MISO, and coal shortages.
Investing
Cash Flows
Net
cash used for
investing activities was $451.5 million in 2007, compared with
$1,030.1 million in 2006. The $578.6 million decrease was driven
by $659.3 million of cash used by Integrys Energy Group to acquire natural
gas operations in Michigan and Minnesota in 2006. Also contributing
$44.0 million to the decrease in net cash used for investing activities in
2007 was WPSC's liquidation of the cash that was deposited into an escrow
account in 2006, which was used for the payment of the outstanding principal
balance of first mortgage bonds in January 2007 (discussed below in
significant financing activities). Partially offsetting these
decreases were $58.4 million of proceeds received from the sale of our
investment
in
Guardian Pipeline LLC and WPS ESI Gas Storage, LLC in 2006 and a
$50.6 million year-over-year increase in capital expenditures (discussed
below).
Net
cash used for
investing activities was $1,030.1 million in 2006, compared with
$148.8 million in 2005. The $881.3 million year-over-year
increase was primarily due to $659.3 million of cash paid in 2006 for the
acquisition of the Michigan and Minnesota natural gas distribution operations
from Aquila, $112.5 million of proceeds received in 2005 related to the
sale of Kewaunee, $127.1 million of proceeds received in 2005 from the
liquidation of the related non-qualified decommissioning trust, and
$95.1 million of proceeds received in 2005 from DPC upon closing of the
sale of a 30% ownership interest in Weston 4. Also contributing
to the increase was $22.0 million of cash deposited into an escrow account
in 2006 for the payment of the outstanding principal balance of first mortgage
bonds in January 2007. Partially offsetting the increase in cash
used for investing activities was a $71.9 million decrease in capital
expenditures (discussed below), proceeds of $38.5 million received in 2006
from the sale of the company's one-third interest in Guardian Pipeline, LLC,
and
proceeds of $19.9 million received in 2006 from the sale of WPS ESI
Gas Storage, LLC.
Capital
Expenditures
Capital
expenditures by business segment for the years ended December 31, 2007,
2006, and 2005 were as follows:
|
|
Years
Ended December 31,
|
|
Reportable
Segment
(millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Electric
utility
|
|
$ |
202.6 |
|
|
$ |
282.1 |
|
|
$ |
373.9 |
|
Natural
gas
utility
|
|
|
158.8 |
|
|
|
54.6 |
|
|
|
36.4 |
|
Integrys
Energy Services
|
|
|
20.5 |
|
|
|
5.5 |
|
|
|
2.7 |
|
Holding
company and other
|
|
|
10.7 |
|
|
|
(0.2 |
) |
|
|
0.9 |
|
Integrys
Energy Group consolidated
|
|
$ |
392.6 |
|
|
$ |
342.0 |
|
|
$ |
413.9 |
|
The
decrease in
capital expenditures at the electric utility in 2007 compared with 2006 was
mainly due to a decrease in capital expenditures associated with the
construction of Weston 4. The increase in capital expenditures
at the natural gas utility was primarily driven by capital requirements of
PGL
and NSG, which were acquired in the merger with PEC on February 21,
2007. Capital expenditures in 2007 for PGL and NSG related mainly to
the natural gas distribution systems. The increase in capital
expenditures at Integrys Energy Services was due to capital required to open
new
offices in Colorado, Michigan, and Washington, D.C., as well as to move the
Chicago office; improvements at various generation facilities; new systems
infrastructure; and the Winnebago Energy Center landfill gas
project. The increase in capital expenditures at the Holding Company
and Other segment was driven by the purchase of a corporate
airplane.
The
decrease in
capital expenditures at the electric utility in 2006 compared with 2005 was
mainly due to lower capital expenditures associated with the construction
of
Weston 4. The increase in capital expenditures at the natural
gas utility was related to a combined $20.1 million of capital expenditures
incurred by MGUC and MERC for natural gas mains.
Financing
Cash Flows
Net
cash used for
financing activities was $459.2 million in 2007, compared with net cash
provided by financing activities of $891.7 million in 2006. The
$1.4 billion change was driven by $458.0 million of short-term debt
borrowings during 2006, compared with the repayment of $463.7 million of
short-term debt in 2007. In 2007, Integrys Energy Group was able to
pay down short-term debt with a portion of the proceeds received from the
sale
of PEP. The remaining net change in financing activity was driven by
a $321.8 million decrease in long-term debt issuances year-over-year and a
$119.0 million year-over year decrease in common stock
issued. Short-term borrowings in 2006 and the long-term debt and
stock
issuances
in 2006
were used primarily for the acquisitions of the natural gas distribution
operations in Michigan and Minnesota. An $81.0 million increase
in dividends paid in 2007, compared with 2006, was driven by an increase
in
shares outstanding and higher dividend rates. These items were
partially offset by natural gas loan proceeds at Integrys Energy Services
of
$34.4 million in 2007, compared with repayment of $68.4 million of
natural gas loans during 2006. An increase in natural gas spreads
made it more conducive to enter into natural gas loan deals in 2007 compared
with 2006.
Net
cash provided
by financing activities was $891.7 million in 2006, compared with net cash
related to financing activities of $0 in 2005. The change was
primarily attributed to a $458.0 million increase in short-term debt and
the issuance of $447.0 million of long-term debt in
2006. Increased borrowings were used primarily for the acquisitions
of the natural gas distribution operations in Michigan and Minnesota,
construction expenditures related to Weston 4, working capital requirements
at Integrys Energy Services, and other general corporate purposes.
Significant
Financing Activities
Dividends
paid
increased in 2007 compared with 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 cents per share in 2007. In February 2008,
Integrys Energy Group increased its quarterly common stock dividend to 67
cents
per share.
Integrys
Energy
Group had outstanding commercial paper borrowings of $308.2 million and
$562.8 million at December 31, 2007, and 2006,
respectively. Integrys Energy Group had other outstanding short-term
debt of $160.0 million as of December 31, 2007, and
2006. In April 2006, Integrys Energy Services entered into a
$150.0 million credit agreement, which has been renewed to April 2008, 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. As of December 31, 2007 and
2006, $150.0 million of borrowings were outstanding under this credit
agreement, which is guaranteed by Integrys Energy Group.
In
2007, 2006, and 2005 Integrys Energy Group issued new shares of common stock
under its Stock Investment Plan and under certain stock-based employee benefit
and compensation plans. As a result of these plans, equity increased
$45.7 million, $25.0 million, and $29.0 million in 2007, 2006,
and 2005, respectively. Integrys Energy Group did not repurchase any
existing common stock during 2007, 2006, or 2005.
In
November 2007, WPSC issued $125.0 million of 5.65%, 10-year senior
notes. The net proceeds from the issuance of the senior notes were
used to fund construction costs and capital additions, reduce short-term
indebtedness, as well as for general corporate utility purposes.
On
December 14, 2006, the Village of Weston, Wisconsin, issued
$22.0 million of 3.95% Pollution Control Refunding Revenue Bonds and loaned
the proceeds from the sale of the bonds to WPSC. In return, WPSC
issued $22.0 million of 3.95% senior notes, due in 2013, to the Village of
Weston. At December 31, 2006, the $22.0 million of proceeds
received from the Village of Weston were classified as restricted
cash. In January 2007, WPSC used the restricted cash to repay
the outstanding principal balance of its 6.90% first mortgage bonds which
originally were to mature in 2013.
In
December 2006, WPSC issued $125.0 million of 5.55% 30-year senior
notes. The net proceeds from the issuance of the senior notes were
used for general corporate utility purposes, including funding construction
costs and capital additions and reducing short-term indebtedness.
On
December 1, 2006, Integrys Energy Group issued $300.0 million of
junior subordinated notes. Interest has been fixed at 6.22% through
the use of forward-starting interest rate swaps. For more information
on the junior subordinated notes, see Note 14, "Long-Term Debt."
In
November 2005, Integrys Energy Group 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 Integrys Energy Group's common
stock. On May 10, 2006, Integrys Energy Group physically settled the
forward equity agreement by issuing 2.7 million shares of common stock, and
received proceeds of $139.6 million. The proceeds were used to
pay down commercial paper borrowings.
In
November 2005, Integrys Energy Group issued and sold 1.9 million shares of
common stock at a public offering price of $53.70 per share. The
proceeds of $98.3 million, net of underwriting discounts and commissions,
were used to reduce short-term debt and fund equity contributions to subsidiary
companies.
In
June 2005, $62.9 million of non-recourse debt at an Integrys Energy
Services subsidiary that was used to finance the purchase of Sunbury was
restructured to a five-year Integrys Energy Group obligation in connection
with
the sale of Sunbury's allocated emission allowances. An additional
$2.7 million drawn on a line of credit at Integrys Energy Services was
rolled into the five-year Integrys Energy Group obligation. The
floating interest rate on the total five-year Integrys Energy Group obligation
of $65.6 million was fixed at 4.595% through two interest rate
swaps.
Credit
Ratings
Integrys
Energy
Group uses internally generated funds and commercial paper borrowings 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, PEC, UPPCO, MGUC, and MERC. WPSC 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 returns 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, PEC, PGL, and NSG are listed in
the
table below.
Credit
Ratings
|
Standard
& Poor's
|
Moody's
|
Integrys
Energy Group
Issuer credit rating
Senior
unsecured debt
Commercial paper
Credit facility
Junior
subordinated notes
|
A-
BBB+
A-2
n/a
BBB
|
n/a
A3
P-2
A3
Baa1
|
WPSC
Issuer credit rating
First
mortgage bonds
Senior
secured debt
Preferred stock
Commercial paper
Credit facility
|
A
A+
A
BBB+
A-2
n/a
|
A1
Aa3
Aa3
A3
P-1
A1
|
PEC
Issuer
credit rating
Senior
unsecured debt
|
A-
BBB+
|
n/a
A3
|
PGL
Issuer
credit rating
Senior
secured debt
Commercial
paper
|
A-
A-
A-2
|
n/a
A1
P-1
|
NSG
Issuer
credit rating
Senior
secured debt
|
A-
A
|
n/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 and are subject
to change, and each rating should be evaluated independently of any other
rating.
In
December 2007, Standard & Poor's and Moody's withdrew the ratings
assigned to PEC's commercial paper at the request of Integrys Energy
Group.
On
November 13, 2007, Standard & Poor's revised the outlook on Integrys Energy
Group and all of its subsidiaries to stable from negative. Standard
& Poor’s outlook had been negative since February 21, 2007 for all Integrys
Energy Group companies, as discussed below. The revised outlook
reflects Integrys Energy Group's progress to improve its financial position
and
business profiles since its one-notch downgrade on February 21,
2007. On November 13, 2007, Standard & Poor's also reaffirmed its
A rating on WPSC's senior secured debt.
On
September 6, 2007, Standard & Poor's raised the senior secured debt for NSG
one notch from A- to A. The new rating was the result of a review and
changes made to the collateral coverage requirements Standard and Poor's
uses
when assigning recovery ratings to United States Utility First Mortgage
Bonds.
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 its energy marketing business,
the dividend requirements resulting from the PEC 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 was negative pending 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, and 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 were due to 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 were due to the expected business risk improvement from
the
merger with Integrys Energy Group, which resulted 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 $325.0 million of PEC 6.90% notes due in 2011.
Discontinued
Operations
Net
cash provided
by discontinued operations was $690.2 million in 2007 and
$61.0 million in 2006. The increase in net cash provided by
discontinued operations was driven by approximately $879.1 million of
proceeds received from the sale of PEP in the third quarter of
2007. Post-closing adjustments in the amount of $9.9 million
were settled in February 2008 related to this sale, which reduced the sale
price to $869.2 million. These post-closing adjustments were
funded through other current liabilities at December 31, 2007 and,
therefore, are included in Note 1(d), "Cash and Cash Equivalents,"
as a non-cash transaction.
Net
cash provided
by discontinued operations was $61.0 million in 2006 and $59.1 million
in 2005. The increase in cash provided by discontinued operations in
2006 was driven by a decrease in cash paid for emission allowances required
to
operate Sunbury in 2006, compared with 2005 (substantially all of the emission
allowances required to operate Sunbury through the 2006 sale were purchased
in
2005), and by the $33.6 million of proceeds received from the sale of
Sunbury in 2006. These increases were partially offset by
$110.9 million of proceeds received from the sale of Sunbury's allocated
emission allowances in 2005 (which was partially offset by income taxes paid
related to the gain on the sale of these emission allowances).
Future
Capital Requirements and Resources
Contractual
Obligations
The
following table
summarizes the contractual obligations of Integrys Energy Group, including
its
subsidiaries.
Contractual
Obligations
|
|
Total
|
|
|
Payments
Due By Period
|
|
As
of December 31, 2007
(Millions)
|
|
Amounts
Committed
|
|
|
2008
|
|
|
|
2009-2010 |
|
|
|
2011-2012 |
|
|
2013
and Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
principal and interest payments(1)
|
|
$ |
3,642.2 |
|
|
$ |
186.5 |
|
|
$ |
522.2 |
|
|
$ |
910.6 |
|
|
$ |
2,022.9 |
|
Operating
lease obligations
|
|
|
43.7 |
|
|
|
8.3 |
|
|
|
13.4 |
|
|
|
12.4 |
|
|
|
9.6 |
|
Commodity
purchase obligations(2)
|
|
|
6,986.7 |
|
|
|
3,352.6 |
|
|
|
2,102.8 |
|
|
|
784.7 |
|
|
|
746.6 |
|
Purchase
orders(3)
|
|
|
349.1 |
|
|
|
336.1 |
|
|
|
9.4 |
|
|
|
2.5 |
|
|
|
1.1 |
|
Other
(4)
|
|
|
379.5 |
|
|
|
72.1 |
|
|
|
79.8 |
|
|
|
40.0 |
|
|
|
187.6 |
|
Total
contractual cash obligations
|
|
$ |
11,401.2 |
|
|
$ |
3,955.6 |
|
|
$ |
2,727.6 |
|
|
$ |
1,750.2 |
|
|
$ |
2,967.8 |
|
(1)
Represents bonds issued, notes issued, and loans made to Integrys
Energy
Group and its subsidiaries. All principal
obligations are recorded on the Consolidated Balance Sheet. For
purposes of this table, it is assumed
that the
interest rates on variable rate debt at December 31, 2007 will remain in
effect
until the debt
matures.
(2)
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.
(3)
Includes 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.
(4)
Mainly represents expected
pension and postretirement funding obligations.
The
table above
does not reflect any payments related to the manufactured gas plant remediation
liability of $704.2 million at December 31, 2007, as the amount and
timing of payments are uncertain. See Note 17,"Commitments and
Contingencies," for more information about environmental
liabilities. Also, the table does not reflect any payments for our
liability at December 31, 2007, for unrecognized tax
benefits. See Note 16, "Income Taxes," for more
information about this liability.
Capital
Requirements
Estimated
construction expenditures by company for the three-year period 2008 through
2010
are as follows:
(Millions)
|
|
|
|
WPSC
|
|
|
|
Environmental
projects
|
|
$ |
300.4 |
|
Wind
generation projects
|
|
|
252.0 |
|
Electric
and natural gas distribution projects
|
|
|
223.2 |
|
Natural
gas laterals to connect to Guardian pipeline
|
|
|
65.4 |
|
Weston 4
(1)
|
|
|
18.9 |
|
Other
projects
|
|
|
131.9 |
|
|
|
|
|
|
UPPCO
|
|
|
|
|
Electric
distribution projects and repairs and safety measures at
hydroelectric facilities
|
|
|
54.4 |
|
|
|
|
|
|
MGUC
|
|
|
|
|
Natural
gas pipe distribution system and underground natural gas
storage
facilities
|
|
|
21.9 |
|
|
|
|
|
|
MERC
|
|
|
|
|
Natural
gas pipe distribution system
|
|
|
50.1 |
|
|
|
|
|
|
PGL
|
|
|
|
|
Natural
gas pipe distribution system and underground natural gas storage
facilities (2)
|
|
|
451.0 |
|
|
|
|
|
|
NSG
|
|
|
|
|
Natural
gas pipe distribution system
|
|
|
30.5 |
|
|
|
|
|
|
Integrys
Energy Services
|
|
|
|
|
Miscellaneous
projects and landfill natural gas project
|
|
|
22.2 |
|
|
|
|
|
|
IBS
|
|
|
|
|
Corporate
services infrastructure projects
|
|
|
80.3 |
|
Total
capital
expenditures
|
|
$ |
1,702.2 |
|
(1)
|
As
of
December 31, 2007, WPSC has incurred a total cost of approximately
$516 million related to its ownership interest in the
project. WPSC has incurred approximately $77 million and
expects to incur an additional $16 million related to the
construction of the transmission facilities required to support
Weston 4. ATC will reimburse WPSC for these transmission
facilities and related carrying costs (approximately $8 million
in
carrying costs) when Weston 4 becomes operational. Weston
4 is scheduled to be placed in service in the first quarter of
2008.
|
|
|
(2) |
Includes
approximately $100 million of expenditures related to the accelerated
replacement of cast iron mains at PGL. The
expenditures were initially included in a request for recovery in
a rider
to PGL's rate case; however, the
ICC
rejected the rider. The company is investigating alternative
recovery options. See Note 23, "Regulatory Environment,"
for more
information on the PGL rate case. |
Integrys
Energy
Group expects to provide additional capital contributions to ATC (not included
in the above table) of approximately $47 million for the period 2008
through 2010.
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 2008 through 2010
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 December 31, 2007, Integrys Energy Group and each of its subsidiaries
were in compliance with all of their respective covenants under their lines
of
credit and other debt obligations.
For
the period 2008
through 2010, 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.
See
Note 13, "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 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 junior
subordinated notes.
In
May 2004, WPSC filed a shelf registration with the SEC authorizing the issuance
of up to $350 million of senior debt securities. WPSC issued
$125 million of senior debt securities under this registration statement in
December 2006 and an additional $125 million of senior debt securities
under this registration statement in November 2007, leaving existing capacity
under the registration statement of $100 million as of December 31,
2007.
Other
Future Considerations
Asset
Management Strategy
Integrys
Energy
Group continues to pursue alternatives for the sale of the balance of its
identified real estate holdings no longer needed for operation.
Regulatory
Matters and Rate Trends
To
mitigate the volatility of electric fuel generation and purchased power costs
in
2008 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 case 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
case 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 December 31, 2007, will be collected from
ratepayers.
Forecasting
and
monitoring of fuel costs have become extremely 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. On May 3, 2007, the PSCW directed staff to prepare a draft
rule revision to PSCW Chapter 116 fuel rules incorporating many of the
components of the utilities' proposal, with a 2% bandwidth as opposed to
the 1%
bandwidth recommended by the utilities. The PSCW staff circulated a
draft rule to that effect and the parties have commented on the draft
rule. The draft rule is currently awaiting PSCW action.
For
a discussion of
regulatory filings and decisions, see Note 23, "Regulatory
Environment."
See
Note 9, "Regulatory Assets and
Liabilities," for a list of regulatory assets and liabilities recorded at
December 31, 2007.
Natural
Gas Charge Reconciliation Proceedings and Related Matters
For
the Integrys
Energy Group regulated retail gas operations, the ICC, PSCW, MPUC, and MPSC
conduct 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.
For
additional
information on the Gas Charge Reconciliation Proceedings and Related Matters,
see Note 17, "Commitments
and Contingencies."
Industry
Restructuring
-Illinois-
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
Commonwealth Edison and the three Ameren utilities. Integrys Energy Services
was
named in the complaint because it won three tranches of approximately 50
megawatts each in the auction. On August 29, 2007, the Attorney
General filed a motion to voluntarily dismiss the pending action at the FERC
with prejudice. The FERC ruled on that motion and issued an order dismissing
the
people's claims based on the Illinois 2006 power auction "with prejudice,
and
terminating the proceeding."
On
the heels of the Illinois Attorney General's complaint filed at FERC, two
class
action lawsuits were filed by various ratepayers in Cook County. Those
complaints, which essentially mirrored the Attorney General's complaint,
were
removed to federal court. Motions to dismiss these cases filed by the defendants
were granted on December 21, 2007, and the cases were dismissed without
prejudice.
-Maine-
Integrys
Energy
Services continues to serve retail customers in both northern and southern
Maine
by way of direct customer contracts and Standard Offer Service for a number
of
utilities. Northern Maine customers experienced a significant
increase in their energy supply rates starting January 1,
2007. This increase was a result of the competitive bid process
conducted in late 2006 whereby Integrys Energy Services was the successful
bidder. Integrys Energy Services is currently petitioning the Maine
Public Utilities Commission for rate relief as a result of market rule changes
in the northern Maine market.
These
changes are a
part of bidder conditions for the utility Standard Offer Service (default
service) that was included in Integrys Energy Services' bid in late
2006.
The
legislature is
back in session and there are a few bills that will be of interest to Integrys
Energy Services, ranging from the creation of a Northern Maine Power Authority,
changes/enhancements to transmission investment, encouragement of wind
development, and different levels of re-regulation.
New
Renewable
Portfolio Standard requirements are in effect for the state of
Maine. The new standard will cause Competitive Electric Providers to
acquire 10% of new renewable generation by 2017. As part of its
obligations as an active Competitive Electricity Provider in Maine, Integrys
Energy Services is working to meet this obligation with qualified
generators.
Seams
Elimination Charge
Adjustment
For
a discussion of
SECA, see Note 23, "Regulatory
Environment."
Income
Taxes
-Michigan
Taxes-
On
July 12, 2007, the Michigan Governor signed legislation that replaced the
Single Business Tax with an effective date of January 1,
2008. On September 30, 2007, the Michigan legislature passed, and the
governor signed into law, a "SFAS No. 109" amendment to the new Michigan
Business Tax (MBT), providing a future tax deduction for existing book-tax
differences. This legislation allows companies to record a state deferred
tax asset for this future tax deduction, which offsets the state deferred
tax
liability recorded in the third quarter of 2007 for this new MBT.
On
September 30, 2007, the Michigan legislature passed a bill that will expand
the
state's 6% sales tax to additional services. The Governor signed the
legislation on September 30, 2007. On December 1, 2007, the
Governor signed legislation that would repeal the previous expansion of the
state's sales tax. The same legislation added an annual surcharge to
taxpayer's MBT liability. These new provisions discussed above are
effective as of January 1, 2008, at which time we began recording the
effects on current earnings.
Environmental
See
Note 17,
"Commitments and
Contingencies," 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 December 31, 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. Currently, WPSC is negotiating a transaction to purchase a
99-megawatt wind generation project, to be constructed in Howard County,
Iowa. An agreement with the counterparty is anticipated to be reached
in the first quarter of 2008.
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 generation
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 introduced, 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 a financial
and
physical electric wholesale market in the Midwest. The market pricing
is based on a locational marginal pricing system. MISO participants
offer their generation and bid their customer load into the market on an
hourly
basis and on a day ahead basis. This results in net receipts from, or
net obligations to, MISO for each hour of each day. MISO aggregates
these hourly transactions and provides bi-weekly settlement
statements. These disputable settlements have an adjustment period
based on the subsequent data which may require billing adjustments resulting
in
increases or decreases to the net MISO receipt or obligation. For
WPSC and UPPCO, it is anticipated that the billing adjustments will be recovered
through the state rate recovery process.
New Accounting
Pronouncements
See
Note 1(v),
"New Accounting
Pronouncements," for a detailed discussion of new accounting
pronouncements.
GUARANTEES
AND OFF BALANCE SHEET ARRANGEMENTS
See
Note 18, "Guarantees," for information
regarding guarantees.
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. Integrys
Energy Services' marketing and trading operations manage electricity 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 on a mark-to-market
basis. The fair value is included in assets or liabilities from risk
management activities on Integrys Energy Group's Consolidated Balance Sheet,
with an offsetting entry to other comprehensive income (for the effective
portion of cash flow hedges) or to earnings. 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 year ended December 31, 2007.
Integrys
Energy Services
Mark-to-Market
Roll Forward
(Millions)
|
|
Oil
Options
|
|
|
Natural
Gas
|
|
|
Electric
|
|
|
Total
|
|
Fair
value of
contracts at December 31, 2006(1)
|
|
$ |
(4.7 |
) |
|
$ |
105.2 |
|
|
$ |
7.1 |
|
|
$ |
107.6 |
|
Plus:
Contracts assumed in the merger with PEC
|
|
|
- |
|
|
|
6.9 |
|
|
|
0.5 |
|
|
|
7.4 |
|
Less:
Contracts realized or settled during period(2)
|
|
|
(4.7 |
) |
|
|
120.6 |
|
|
|
(38.8 |
) |
|
|
77.1 |
|
Plus:
Changes
in fair value of contracts in existence at December 31, 2007(3)
|
|
|
(0.2 |
) |
|
|
98.0 |
|
|
|
1.9 |
|
|
|
99.7 |
|
Fair
value of contracts at December 31, 2007(1)
|
|
$ |
(0.2 |
) |
|
$ |
89.5 |
|
|
$ |
48.3 |
|
|
$ |
137.6 |
|
(1)
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.
(2)
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 December 31, 2007, along with the amortization of
contracts originally accounted for as
derivatives
and later designated as normal purchases and sales under SFAS No.
133.
(3)
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 December 31,
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 maturities of Integrys Energy Services' risk
management instruments.
Integrys
Energy Services
Risk
Management Contract Aging at Fair Value
As
of December 31, 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(1)
|
|
$ |
37.2 |
|
|
$ |
30.8 |
|
|
$ |
10.8 |
|
|
$ |
- |
|
|
$ |
78.8 |
|
Prices
provided by external sources(2)
|
|
|
7.5 |
|
|
|
36.9 |
|
|
|
3.0 |
|
|
|
- |
|
|
|
47.4 |
|
Prices
based
on models and other
valuation
methods
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
11.4 |
|
|
|
11.4 |
|
Total
fair value
|
|
$ |
44.7 |
|
|
$ |
67.7 |
|
|
$ |
13.8 |
|
|
$ |
11.4 |
|
|
$ |
137.6 |
|
(1)
Includes exchange-traded
contracts such as NYMEX and ICE contracts and basis swaps.
(2)
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.
CRITICAL
ACCOUNTING POLICIES
Integrys
Energy
Group has identified the following accounting policies to be critical to
the
understanding of our financial statements because their application requires
significant judgment and reliance on estimations of matters that are inherently
uncertain. Integrys Energy Group's management has discussed these
critical accounting policies with the Audit Committee of the Board of
Directors.
Risk
Management Activities
Integrys
Energy
Group has entered into contracts that are accounted for as derivatives under
the
provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended. At December 31, 2007, those derivatives
not designated as hedges are primarily commodity contracts used to manage
price
risk associated with natural gas and electricity purchase and sale
activities. The utilities defer the effects of mark-to-market
accounting for most energy-related derivatives as regulatory assets or
liabilities, pursuant to SFAS No. 71. In addition, Integrys Energy
Group may apply the normal purchases and sales exception, provided by SFAS
No.
133, as amended, to certain derivative contracts. The normal
purchases and sales exception provides that recognition of gains and losses
in
the consolidated financial statements is not required until the settlement
of
the contracts.
Cash
flow hedge
accounting treatment may be used when Integrys Energy Group enters contracts
to
buy or sell a commodity at a fixed price for future delivery to protect future
cash flows corresponding with anticipated physical sales or
purchases. Fair value hedge accounting may be used when Integrys
Energy Group holds assets or firm commitments and enters into transactions
that
hedge the risk that the price of a commodity may change between the contract's
inception and the physical delivery date of the commodity. To the
extent that the hedging instrument is fully effective in offsetting the
transaction being hedged, there is no impact on income available for common
shareholders prior to settlement of the hedge.
Derivative
contracts that are determined to fall within the scope of SFAS No. 133, as
amended, are recorded at fair value on the Consolidated Balance Sheets of
Integrys Energy Group. Changes in fair value, except those related to
derivative instruments designated as cash flow hedges or qualifying for
regulatory deferral, are generally included in the determination of income
available for common shareholders at each financial reporting date until
the
contracts are ultimately settled. When available, quoted market
prices are used to determine a contract's fair value. If no active
trading market exists for a commodity or for a contract's duration, fair
value
is estimated through the use of internally developed valuation techniques
or
models using external information wherever possible. Such estimates
require significant judgment as to assumptions and valuation methodologies
deemed appropriate by Integrys Energy Group's management. Like most
commodity markets, after some length of time, markets for natural gas and
power
become relatively illiquid, making it difficult to obtain reliable price
information.
As
a component of the fair value determination, Integrys Energy Group considers
the
requirements to service certain of its contracts as well as counterparty
credit
risk and liquidity risk. This component of the fair value
determination is especially subjective because limited liquid market information
is available. Under SFAS No. 157, "Fair Value Measurements," beginning
January 1, 2008, Integrys Energy Services will no longer include
transaction costs in these fair value determinations. See
Note 1(v), "New
Accounting Pronouncements," for more information on this
topic. The effect of changing the underlying assumptions for this
component of fair value at December 31, 2007, is as follows:
Change
in Component
|
Effect
on Fair Value of Net Risk Management Assets at December 31, 2007
(Millions)
|
100%
increase
|
$27.1
decrease
|
50%
decrease
|
$13.5
increase
|
These
potential
changes in fair value would be included in current and long-term liabilities
from risk management activities on the Consolidated Balance Sheets and as
part
of nonregulated revenue on the Consolidated Statements of Income, unless
the
related contracts are designated as cash flow hedges, in which case potential
changes would be included in Other Comprehensive Income - Cash Flow Hedges
on
the Consolidated Statements of Common Shareholders' Equity.
Purchase
Accounting
The
merger with PEC
in 2007, as well as the acquisitions of natural gas distribution operations
in
Michigan and Minnesota in 2006, were 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 per share 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 were
reported at estimated fair value less costs to sell.
Management
makes
estimates 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. As discussed below within "Asset Impairment," a significant
amount of goodwill resulted from these acquisitions, which requires impairment
testing on at least an annual basis.
In
conjunction with the PEC merger, the most significant fair value adjustments
related to nonderivative commodity contracts and customer relationships,
which
were recorded as intangible assets at Integrys Energy Services. The intangible
asset related to the contracts is being amortized into earnings as the contracts
settle, and the intangible asset related to customer relationships is being
amortized over the estimated lives of those relationships. The amortization
of
these items had a negative impact on earnings in 2008.
PGL,
NSG, MGUC, and
MERC are predominantly 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 their assets and liabilities did not change
significantly as a result of applying purchase accounting.
Environmental
Activities Relating to Former Manufactured Gas Operations
Integrys
Energy
Group's utility subsidiaries, their predecessors, and certain former affiliates
operated facilities in the past at multiple sites for the purpose of
manufacturing gas and storing manufactured gas (manufactured gas
sites). The utility subsidiaries are accruing and deferring the costs
they incur in connection with environmental activities at the manufactured
gas
sites pending recovery through rates or from other entities. The
amounts deferred include costs incurred but not yet recovered through rates
and
management's best estimates of the costs that the utilities will incur in
investigating and remediating the manufactured gas
sites. Management's estimates are based upon a probabilistic model
and an ongoing review by management of future investigative and remedial
costs.
Integrys
Energy
Group considers this policy critical due to the substantial uncertainty in
the
estimation of future costs with respect to the amount and timing of costs,
and
the extent of recovery from other potential responsible parties. (See
Note 17, "Commitments and
Contingencies" for further discussion of environmental
matters).
Asset
Impairment
Integrys
Energy
Group annually reviews its assets for impairment. SFAS No. 144,
"Accounting for the Impairment and Disposal of Long-Lived Assets," and SFAS
No. 142, "Goodwill and Other Intangible Assets," form the basis for these
analyses.
WPSC
recorded
goodwill of $36.4 million in its natural gas utility segment resulting from
the Wisconsin Fuel and Light acquisition in 2001. In 2006, Integrys
Energy Group recorded $267.0 million of goodwill in conjunction with the
acquisition of the natural gas distribution operations in Michigan and
Minnesota. In 2007, $644.9 million of goodwill attributable to
the PEC merger was recorded. The goodwill for each of our reporting
units is tested for impairment annually or when events or circumstances warrant
based on the guidance of SFAS No. 142. The test for impairment
includes estimating the fair market value of each reporting unit using
assumptions about future profitability of the reporting units. A
significant decrease in market values and/or projected future cash flows
could
result in an impairment loss.
The
review for
impairment of tangible assets is more critical to Integrys Energy Services
than
to our other segments because of its significant investment in property,
plant,
and equipment and lack of access to rate setting based on cost of service
that
is available to our regulated segments. At December 31, 2007,
the carrying value of Integrys Energy Services' property, plant, and equipment
totaled $140.1 million. Integrys Energy Group believes that the
accounting estimate related to asset impairment of power plants is a "critical
accounting estimate" because: (1) the estimate is susceptible to
change from period to period because it requires management to make assumptions
about future market sales pricing, production costs, capital expenditures,
and
generation volumes and (2) the impact of recognizing an impairment could be
material to our financial position or results of
operations. Management's assumptions about future electricity and
capacity prices and generation volumes require significant judgment because
actual prices and generation volumes have fluctuated in the past as a result
of
changing fuel costs, environmental changes, and required plant maintenance
and
are expected to continue to do so in the future.
The
primary
estimates used at Integrys Energy Services in the impairment analyses are
future
revenue streams and operating costs. A combination of inputs from
both internal and external sources is used to project revenue
streams. Integrys Energy Services forecasts future operating costs
with input from external sources for fuel costs and forward energy
prices. These estimates are modeled over the projected remaining life
of the power plants using the methodology defined in SFAS
No. 144. Integrys Energy Services evaluates property, plant, and
equipment for impairment whenever indicators of impairment
exist. These indicators include a significant underperformance of the
assets relative to historical or projected future operating results, a
significant change in the use of the assets or business strategy related
to such
assets, and significant negative industry or economic trends. SFAS
No. 144 requires that if the sum of the undiscounted expected future cash
flows
from a company's asset is less than the carrying value of the asset, an asset
impairment must be recognized in the financial statements. For assets
held for sale, impairment charges are recorded if the carrying value of such
assets exceeds the estimated fair value less costs to sell. The
amount of impairment recognized is calculated by reducing the carrying value
of
the asset to its fair value (or fair value less costs to sell if held for
sale).
Throughout
2007,
Integrys Energy Services tested various power plants for impairment whenever
events or changes in circumstances indicated that their carrying amount might
not be recoverable. No impairment charges were recorded in 2007 as a
result of the recoverability tests. Results of past impairment tests
may not necessarily be an indicator of future results given the nature of
the
accounting estimates involved, as discussed more fully above. Changes
in actual results or assumptions could result in an impairment.
Receivables
and Reserves
Our
regulated
natural gas and electric utilities and Integrys Energy Services accrue estimated
amounts of revenue for services rendered but not yet billed. Estimated
unbilled sales are calculated using actual generation and throughput volumes,
recorded sales, and weather factors. The estimated unbilled sales
are
assigned
different rates based on historical customer class allocations. At
December 31, 2007 and 2006, Integrys Energy Group's unbilled revenues were
$464.7 million and $184.8 million, respectively. Any
difference between actual sales and the estimates are recorded in revenue
in the
next period. Differences historically have not been
significant.
Integrys
Energy
Services, UPPCO, MERC, MGUC, PGL, and NSG record reserves for potential
uncollectible customer accounts as an expense on the income statement and
an
uncollectible reserve on the balance sheet. WPSC, however, records a
regulatory asset to offset its uncollectible reserve. The reserve is
most critical to PGL because their accounts receivables have higher credit
risk
and are sensitive to the price of natural gas, and to Integrys Energy Services
because their receivables comprise the majority of the total. PGL’s
reserve for uncollectible accounts reflects its best estimates of probable
losses on the accounts receivable balances. The reserve is based on
known troubled accounts, historical experience, and other currently available
evidence. Provisions for bad debt expense are affected by changes in
various factors, including the impacts of natural gas prices and
weather. Each quarter, PGL evaluates the adequacy of the reserve for
uncollectible accounts based on the most current available information and
adjusts the reserve for changes in estimated probable accounts receivable
losses. Integrys Energy Services calculates the reserve for potential
uncollectible customer receivable balances by applying an estimated bad debt
experience rate to each past due aging category and reserving for 100% of
specific customer receivable balances deemed to be uncollectible. The
basis for calculating the reserve for receivables from wholesale counterparties
considers netting agreements, collateral, and guarantees. If the
assumption that historical uncollectible experience matches current customer
default is incorrect, or if a specific customer with a large account receivable
that has not previously been identified as a risk defaults, there could be
significant changes to the expense and uncollectible reserve
balance.
Pension
and Postretirement Benefits
The
costs of
providing non-contributory defined benefit pension benefits and other
postretirement benefits, described in Note 19, "Employee Benefit Plans," are
dependent upon numerous factors resulting from actual plan experience and
assumptions regarding future experience.
Pension
and other
postretirement benefit costs are impacted by actual employee demographics
(including age, compensation levels, and employment periods), the level of
contributions made to the plans, and earnings on plan assets. Pension
and other postretirement benefit costs may be significantly affected by changes
in key actuarial assumptions, including anticipated rates of return on plan
assets, discount rates used in determining the projected pension and other
postretirement benefit obligations and pension and other postretirement benefit
costs, and health care cost trends. Changes made to the plan
provisions may also impact current and future pension and other postretirement
benefit costs.
Integrys
Energy
Group's pension and other postretirement benefit plan assets are primarily
made
up of equity and fixed income investments. Fluctuations in actual
equity market returns, as well as changes in general interest rates, may
result
in increased or decreased benefit costs in future periods. Management
believes that such changes in costs would be recovered at our regulated segments
through the ratemaking process.
The
following chart
shows how a given change in certain actuarial assumptions would impact the
projected benefit obligation and the reported annual pension cost on the
income
statement. Each factor below reflects an evaluation of the change
based on a change in that assumption only.
Actuarial
Assumption
(Millions,
except percentages)
|
|
Percent
Change
in
Assumption
|
|
|
Impact
on
Projected
Benefit
Obligation
|
|
|
Impact
on
Pension
Cost
|
|
Discount
rate
|
|
|
(0.5 |
) |
|
$ |
66.3 |
|
|
$ |
2.4 |
|
Discount
rate
|
|
|
0.5 |
|
|
|
(61.8 |
) |
|
|
(3.6 |
) |
Rate
of
return on plan assets
|
|
|
(0.5 |
) |
|
|
N/A |
|
|
|
5.2 |
|
Rate
of
return on plan assets
|
|
|
0.5 |
|
|
|
N/A |
|
|
|
(5.2 |
) |
The
following chart
shows how a given change in certain actuarial assumptions would impact the
accumulated other postretirement benefit obligation and the reported annual
other postretirement benefit cost on the income statement. Each
factor below reflects an evaluation of the change based on a change in that
assumption only.
Actuarial
Assumption
(Millions,
except percentages)
|
|
Percent
Change in Assumption
|
|
|
Impact
on Postretirement Benefit Obligation
|
|
|
Impact
on Postretirement Benefit Cost
|
|
Discount
rate
|
|
|
(0.5 |
) |
|
$ |
24.8 |
|
|
$ |
2.3 |
|
Discount
rate
|
|
|
0.5 |
|
|
|
(22.8 |
) |
|
|
(1.9 |
) |
Health
care
cost trend rate
|
|
|
(1.0 |
) |
|
|
(41.1 |
) |
|
|
(6.9 |
) |
Health
care
cost trend rate
|
|
|
1.0 |
|
|
|
49.7 |
|
|
|
7.7 |
|
Rate
of
return on plan assets
|
|
|
(0.5 |
) |
|
|
N/A |
|
|
|
1.1 |
|
Rate
of
return on plan assets
|
|
|
0.5 |
|
|
|
N/A |
|
|
|
(1.1 |
) |
Integrys
Energy
Group utilizes the assistance of its plan actuaries in determining the expected
timing of cash outflows from plan payments. Integrys Energy Group
considers bonds, rated by Moody's as "Aa" or better, when determining the
discount rate at the measurement date. Regression analysis is applied
to construct a best-fit curve that makes coupon yields to maturity a function
of
time to maturity. The pension or retiree medical cash flows are then
matched to the appropriate spot rates and discounted back to the measurement
date.
To
select an assumed long-term rate of return on qualified plan assets, the
historical returns and the future expectations for returns for each asset
class
are considered, as well as the target allocation of the benefit trust
portfolios. The assumed long-term rate of return was 8.5% in 2007,
2006, and 2005. For 2007, 2006, and 2005, the actual rates of return
on pension plan assets, net of fees, were 6.2%, 11.3%, and 6.9%,
respectively.
The
determination
of expected return on qualified plan assets is based on a market-related
valuation of assets, which reduces year-to-year
volatility. Cumulative gains and losses in excess of 10% of the
greater of the pension benefit obligation or market-related value are amortized
over the average remaining future service to expected retirement
ages. Realized and unrealized gains and losses on plan assets are
recognized for purposes of calculating benefit cost over a five-year
period. Because of this method, the future value of assets will be
impacted as previously deferred gains or losses are recorded.
In
selecting assumed health care cost trend rates, past performance and forecasts
of health care costs are considered. More information on health care
cost trend rates can be found in Note 19, "Employee Benefit
Plans."
For
a table showing
future payments that Integrys Energy Group expects to make for pension and
other
postretirement benefits, see Note 19, "Employee Benefit
Plans."
Regulatory
Accounting
The
electric and
natural gas utility segments of Integrys Energy Group follow SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation," and our financial
statements reflect the effects of the
different
ratemaking principles followed by the various jurisdictions regulating these
segments. We defer certain items that would otherwise be immediately
recognized as expenses and revenues because our regulators have authorized
deferral of these items as regulatory assets and regulatory liabilities for
future recovery or refund to customers. Future recovery of regulatory
assets is not assured, but is generally subject to review by regulators in
rate
proceedings for matters such as prudence and
reasonableness. Management regularly assesses whether these
regulatory assets and liabilities are probable of future recovery or refund
by
considering factors such as changes in the regulatory environment, earnings
at
the utility segments, and the status of any pending or potential deregulation
legislation. Once approved, we amortize the regulatory assets and
liabilities into income over the rate recovery period. If recovery of
costs is not approved or is no longer deemed probable, these regulatory assets
or liabilities are recognized in current period income.
If
our regulated electric and natural gas utility segments would no longer meet
the
criteria for application of SFAS No. 71, we would discontinue its
application as defined under SFAS No. 101, "Regulated
Enterprises - Accounting for the Discontinuation of Application of
SFAS No. 71." Assets and liabilities recognized solely due to
the actions of rate regulation would no longer be recognized on the balance
sheet and would be classified as an extraordinary item in income for the
period
in which the discontinuation occurred. A write-off of all of Integrys
Energy Group's' regulatory assets and regulatory liabilities at
December 31, 2007, would result in a 11.1% decrease in total assets and a
4.7% decrease in total liabilities.
Tax
Provision
As
part of the process of preparing our Consolidated Financial Statements, we
are
required to estimate our income taxes for each of the jurisdictions in which
we
operate. This process involves estimating our actual current tax exposure
together with assessing temporary differences resulting from differing treatment
of items, such as depreciation, for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included
within our Consolidated Balance Sheet. We must also assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and, to the extent we believe that recovery is not likely, we must
establish a valuation allowance, which is offset by an adjustment to income
tax
expense in the income statement. The interpretation of tax
laws involves
uncertainty, since tax authorities may interpret them
differently. As
of January 1, 2007, we
adopted
the provisions of
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes – an
Interpretation of FAS 109." As allowed under Interpretation No. 48,
Integrys Energy Group elected to change its method of accounting to record
interest and penalties paid on income tax obligations as a component of income
tax expense.
Significant
management judgment is required in determining our provision for income taxes,
our deferred tax assets and liabilities, and any valuation allowance recorded
against our deferred tax assets. The assumptions involved are
supported by historical data, reasonable projections, and technical
interpretations of applicable tax law and regulation across multiple taxing
jurisdictions. Significant changes in these assumptions could have a
material impact on Integrys Energy Group's financial condition and results
of
operations.
IMPACT
OF INFLATION
Our
financial
statements are prepared in accordance with accounting principles generally
accepted in the United States of America and report operating results in
terms of historic cost. The statements provide a reasonable,
objective, and quantifiable statement of financial results, but they do not
evaluate the impact of inflation. For our regulated operations, to
the extent we are not recovering the effects of inflation, we will file rate
cases as necessary in the various jurisdictions. Our nonregulated
businesses include inflation in forecasted costs. However, any
increase from inflation is offset with projected business
growth. Therefore, the estimated effect of inflation on our
nonregulated businesses is minor.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Market
Risks and Other Significant Risks
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 also
exposed to other significant risks due to the nature of our subsidiaries'
business and the environment in which we operate. Integrys Energy
Group has risk management policies in place to monitor and assist in controlling
these risks and may use derivative and other instruments to manage some of
these
exposures, as further described below.
Commodity
Price Risk and Regulatory Recovery Risk
Utilities
The
electric
utilities of Integrys Energy Group purchase natural gas and coal for use
in
power generation. They also purchase power on the MISO market at a price
that is
often reflective of the underlying cost of natural gas used in power
generation. As a result, the electric utilities are subject to
commodity price risk, which they manage in a number of ways, the primary
method
being fuel recovery mechanisms reflected in the rates charged to
customers.
Prudent
fuel and
purchased power costs are recovered from customers under one-for-one recovery
mechanisms by UPPCO and by the Michigan retail electric operations and wholesale
electric operations of WPSC. The costs of natural gas used by the
natural gas utility subsidiaries are generally also recovered from customers
under one-for-one recovery mechanisms. These recovery mechanisms
greatly reduce commodity price risk for the utilities.
WPSC's
Wisconsin
retail electric operations do not have a one-for-one recovery mechanism for
price fluctuations, but annual rate cases have mitigated the year-to-year
price
risk. For intra-year price risk, a "fuel window" mechanism is used to
recover costs resulting from significant price volatility. Under the
fuel window, if actual fuel and purchased power costs deviate by more than
2%
(the range for 2007 and 2008), a rate review can be triggered. Once a
rate review is triggered, rates may be reset (subject to PSCW approval) for
the
remainder of the year to recover, on an annualized basis, the projected increase
in the cost of fuel and purchased power. For 2008, under the order
approving the PEC merger, WPSC was allowed to adjust Wisconsin retail electric
rates effective January 1, 2008, subject to the fuel window, to take into
account the impact of natural gas prices on purchased power costs, as well
as
changes in the price of coal, rail costs to ship the coal, and natural gas
used
for fuel. However, for 2008, WPSC was not allowed to adjust retail
electric rates for other changes.
To
manage commodity price risk, our regulated utilities enter into contracts
of
various durations for the purchase and/or sale of natural gas, fuel for electric
generation, and electricity. In addition, the electric operation of
WPSC and the natural gas operations of WPSC, PGL, NSG, and MERC are employing
risk management techniques pursuant to the risk policies approved by their
respective regulators, which include the use of derivative instruments such
as
swaps, futures and options.
Nonregulated
Subsidiary
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 reduce
market price risk and extract additional value from its generation and customer
contract portfolios through the use of various financial and physical
instruments (such as forward contracts, options, financial transmission rights,
and capacity contracts).
To
measure commodity price risk exposure, Integrys Energy Group employs a number
of
controls and processes, including a value-at-risk (VaR) analysis 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.
VaR
is used to
describe a probabilistic approach to quantifying the exposure to market
risk. The VaR amount represents an estimate of the potential change
in fair value that could occur from changes in market factors, within a given
confidence level, if an instrument or portfolio is held for a specified time
period. VaR models are relatively sophisticated. However,
the quantitative risk information is limited by the parameters established
in
creating the model. The instruments being used may have features that
could trigger a potential loss in excess of the calculated amount if the
changes
in the underlying commodity price exceed the confidence level of the model
used. VaR is not necessarily indicative of actual results that may
occur. In addition to VaR, Integrys Energy Services employs other
risk measurements including mark-to-market valuations and stress
testing. In conjunction with the VaR analysis, these other risk
measurements provide the risk management analysis for Integrys Energy Services'
risk exposure.
Integrys
Energy
Services' VaR is estimated using a delta-normal approximation based on a
one-day
holding period and a 95% confidence level. The delta-normal
approximation is based on the assumption that changes in the value of the
portfolio over short time periods, such as one day, are normally
distributed. Integrys Energy Services' VaR calculation includes
derivative financial and commodity instruments, such as forwards, futures,
swaps, and options, as well as commodities held in inventory, such as natural
gas held in storage, to the extent such positions are significant.
The
VaR for
Integrys Energy Services' trading portfolio is presented in the following
table:
(Millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
95%
confidence
level, one-day holding period, one-tailed December 31
|
|
$ |
0.9 |
|
|
$ |
0.9 |
|
Average
for
twelve months ended December 31
|
|
|
1.1 |
|
|
|
1.1 |
|
High
for 12
months ended December 31
|
|
|
1.3 |
|
|
|
1.5 |
|
Low
for 12
months ended December 31
|
|
|
0.9 |
|
|
|
0.9 |
|
The
average, high,
and low amounts were computed using the VaR amounts at each of the four
quarter-ends.
Interest
Rate Risk
Integrys
Energy
Group is exposed to interest rate risk resulting from its variable rate
long-term debt and short-term borrowings. Exposure to interest rate
risk is managed by limiting the amount of variable rate obligations and
continually monitoring the effects of market changes in interest
rates. Integrys Energy Group enters into long-term fixed rate debt
when it is advantageous to do so. Integrys Energy Group may also
enter into derivative financial instruments, such as swaps, to mitigate interest
rate exposure.
Due
to decreases in
short-term commercial paper borrowings in the last year, Integrys Energy
Group
has decreased its exposure to variable interest rates. Based on the
variable rate debt of Integrys Energy Group outstanding at December 31,
2007, a hypothetical increase in market interest rates of 100 basis points
in
2007 would have increased annual interest expense by
$6.5 million. Comparatively, based on the variable rate debt
outstanding at December 31, 2006, an increase in interest rates of
100 basis points would have increased interest expense by approximately
$7.5 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.
Equity
Return and Principal Preservation Risk
Integrys
Energy
Group currently funds liabilities related to employee benefits through various
external trust funds. The trust funds are managed by numerous
investment managers and hold investments in debt and equity
securities. Changes in the market value of these investments can
have an impact on the future expenses related to these
liabilities. Integrys Energy Group maintains qualified pension plans
for employees' retirement. Declines in the equity markets or declines
in interest rates may result in increased future pension costs for the plan
and
possible future required contributions. Changes in the market value of
investments related to other employee benefits could also impact future
contributions. Integrys Energy Group monitors the trust fund
portfolio by benchmarking the performance of the investments against certain
security indices. Most of the employee benefit costs relate to Integrys Energy
Group's regulated utilities. As such, the majority of these costs are recovered
in customers' rates, mitigating the equity return and principal preservation
risk on these exposures.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
A. MANAGEMENT
REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
The
management of
Integrys Energy Group and its subsidiaries is responsible for establishing
and
maintaining adequate internal control over financial
reporting. Integrys Energy Group's control systems were designed to
provide reasonable assurance to Integrys Energy Group's management and Board
of
Directors regarding the preparation and fair presentation of published financial
statements.
All
internal
control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and
presentation.
Integrys
Energy
Group's management assessed the effectiveness of its internal control over
financial reporting as of December 31, 2007. In making this
assessment, it used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based on this assessment, management believes that,
as of December 31, 2007, Integrys Energy Group's internal control over financial
reporting is effective based on those criteria.
Integrys
Energy
Group, Inc.'s independent registered public accounting firm has issued an
audit
report on the effectiveness of Integrys Energy Group's internal control over
financial reporting.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
B. REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To
the Board of Directors and
Shareholders of Integrys Energy Group, Inc.:
We
have audited the internal control
over financial reporting of Integrys Energy Group, Inc. and subsidiaries
(the
"Company") as of December 31, 2007, based on criteria established in
Internal
Control —
Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness
of
internal control over financial reporting, included in the accompanying
Management Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company's internal control
over
financial reporting based on our audit.
We
conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board
(United States).
Those
standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over
financial reporting is a process designed by, or under the supervision of,
the
company's principal executive and principal financial officers, or persons
performing similar functions, and effected by the company's board of directors,
management, and other personnel to provide reasonable assurance regarding
the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions
and
dispositions of the assets of the company; (2) provide reasonable assurance
that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and
that
receipts and expenditures of the company are being made only in accordance
with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have
a
material effect on the financial statements.
Because
of the inherent limitations of
internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal
control
over financial reporting to future periods are subject to the risk that the
controls may become inadequate because of changes in conditions, or that
the
degree of compliance with the policies or procedures may
deteriorate.
In
our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting
as
of December 31, 2007, based on the criteria established in Internal
Control —
Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We
have also audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United States),
the consolidated financial statements
and financial statement schedules as of and
for the year
ended December 31, 2007 of the Company and our report dated February 27,
2008
expressed an unqualified opinion on those financial statements and financial
statement schedules.
/s/
Deloitte &
Touche LLP
Milwaukee,
Wisconsin
February
27, 2008
|
|
|
|
|
|
|
|
|
|
ITEM
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C. CONSOLIDATED
STATEMENTS OF
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December
31
|
|
|
|
|
|
|
|
|
|
(Millions,
except per share
data)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Nonregulated
revenue
|
|
$ |
6,987.0 |
|
|
$ |
5,156.7 |
|
|
$ |
5,301.3 |
|
Utility
revenue
|
|
|
3,305.4 |
|
|
|
1,734.0 |
|
|
|
1,524.2 |
|
Total
revenues
|
|
|
10,292.4 |
|
|
|
6,890.7 |
|
|
|
6,825.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonregulated
cost of fuel, natural
gas, and purchased power
|
|
|
6,676.2 |
|
|
|
4,968.9 |
|
|
|
5,139.5 |
|
Utility
cost of fuel, natural gas,
and purchased power
|
|
|
2,044.2 |
|
|
|
1,006.1 |
|
|
|
801.2 |
|
Operating
and maintenance
expense
|
|
|
922.1 |
|
|
|
484.3 |
|
|
|
525.9 |
|
Depreciation,
amortization, and
decommissioning expense
|
|
|
195.1 |
|
|
|
121.3 |
|
|
|
149.7 |
|
Taxes
other than income
taxes
|
|
|
87.4 |
|
|
|
60.9 |
|
|
|
50.3 |
|
Operating
income
|
|
|
367.4 |
|
|
|
249.2 |
|
|
|
158.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
|
64.1 |
|
|
|
42.8 |
|
|
|
88.8 |
|
Interest
expense
|
|
|
(164.5 |
)
|
|
|
(99.2 |
)
|
|
|
(62.0 |
)
|
Minority
interest
|
|
|
0.1 |
|
|
|
3.8 |
|
|
|
4.5 |
|
Other
(expense)
income
|
|
|
(100.3 |
)
|
|
|
(52.6 |
)
|
|
|
31.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before
taxes
|
|
|
267.1 |
|
|
|
196.6 |
|
|
|
190.2 |
|
Provision
for income
taxes
|
|
|
86.0 |
|
|
|
45.0 |
|
|
|
39.6 |
|
Income
from continuing
operations
|
|
|
181.1 |
|
|
|
151.6 |
|
|
|
150.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations, net of
tax
|
|
|
73.3 |
|
|
|
7.3 |
|
|
|
11.5 |
|
Income
before cumulative effect of
change in
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting
principle
|
|
|
254.4 |
|
|
|
158.9 |
|
|
|
162.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of change in
accounting principle, net of tax
|
|
|
- |
|
|
|
- |
|
|
|
(1.6 |
)
|
Income
before preferred stock
dividends of subsidiary
|
|
|
254.4 |
|
|
|
158.9 |
|
|
|
160.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends of
subsidiary
|
|
|
3.1 |
|
|
|
3.1 |
|
|
|
3.1 |
|
Income
available for common
shareholders
|
|
$ |
251.3 |
|
|
$ |
155.8 |
|
|
$ |
157.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares of common
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
71.6 |
|
|
|
42.3 |
|
|
|
38.3 |
|
Diluted
|
|
|
71.8 |
|
|
|
42.4 |
|
|
|
38.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share
(basic)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing
operations
|
|
$ |
2.49 |
|
|
$ |
3.51 |
|
|
$ |
3.85 |
|
Discontinued
operations, net of tax
|
|
$ |
1.02 |
|
|
$ |
0.17 |
|
|
$ |
0.30 |
|
Cumulative
effect of change in accounting principle, net of
tax
|
|
|
- |
|
|
|
- |
|
|
|
(0.04 |
)
|
Earnings
per common share (basic)
|
|
$ |
3.51 |
|
|
$ |
3.68 |
|
|
$ |
4.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share
(diluted)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing
operations
|
|
$ |
2.48 |
|
|
$ |
3.50 |
|
|
$ |
3.81 |
|
Discontinued
operations, net of tax
|
|
$ |
1.02 |
|
|
$ |
0.17 |
|
|
$ |
0.30 |
|
Cumulative
effect of change in accounting principle, net of
tax
|
|
|
- |
|
|
|
- |
|
|
|
(0.04 |
)
|
Earnings
per common share (diluted)
|
|
$ |
3.50 |
|
|
$ |
3.67 |
|
|
$ |
4.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per common
share
|
|
$ |
2.56 |
|
|
$ |
2.28 |
|
|
$ |
2.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to Integrys
Energy Group's consolidated financial statements are an integral
part of
these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D. CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
At
December
31
|
|
|
|
|
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$ |
41.2 |
|
|
$ |
23.2 |
|
Restricted
cash
|
|
|
- |
|
|
|
22.0 |
|
Accounts
receivable - net of
reserves of $51.3 and $17.0, respectively
|
|
|
1,405.3 |
|
|
|
1,037.3 |
|
Accrued
unbilled
revenues
|
|
|
464.7 |
|
|
|
184.8 |
|
Inventories
|
|
|
663.4 |
|
|
|
456.3 |
|
Assets
from risk management
activities
|
|
|
840.7 |
|
|
|
1,068.6 |
|
Regulatory
assets
|
|
|
141.7 |
|
|
|
8.7 |
|
Assets
held for
sale
|
|
|
- |
|
|
|
6.1 |
|
Other
current
assets
|
|
|
169.3 |
|
|
|
120.4 |
|
Current
assets
|
|
|
3,726.3 |
|
|
|
2,927.4 |
|
|
|
|
|
|
|
|
|
|
Property,
plant, and equipment,
net
|
|
|
4,463.8 |
|
|
|
2,534.8 |
|
Regulatory
assets
|
|
|
1,102.3 |
|
|
|
430.1 |
|
Assets
from risk management
activities
|
|
|
459.3 |
|
|
|
308.2 |
|
Goodwill
|
|
|
948.3 |
|
|
|
303.9 |
|
Pension
assets
|
|
|
101.4 |
|
|
|
- |
|
Other
|
|
|
433.0 |
|
|
|
357.3 |
|
Total
assets
|
|
$ |
11,234.4 |
|
|
$ |
6,861.7 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders'
Equity
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
$ |
468.2 |
|
|
$ |
722.8 |
|
Current
portion of long-term
debt
|
|
|
55.2 |
|
|
|
26.5 |
|
Accounts
payable
|
|
|
1,331.8 |
|
|
|
949.4 |
|
Liabilities
from risk management
activities
|
|
|
813.5 |
|
|
|
1,001.7 |
|
Regulatory
liabilities
|
|
|
77.9 |
|
|
|
22.8 |
|
Deferred
income
taxes
|
|
|
13.9 |
|
|
|
3.1 |
|
Other
current
liabilities
|
|
|
487.7 |
|
|
|
180.1 |
|
Current
liabilities
|
|
|
3,248.2 |
|
|
|
2,906.4 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
2,265.1 |
|
|
|
1,287.2 |
|
Deferred
income
taxes
|
|
|
494.4 |
|
|
|
97.6 |
|
Deferred
investment tax
credits
|
|
|
38.3 |
|
|
|
13.6 |
|
Regulatory
liabilities
|
|
|
292.4 |
|
|
|
301.7 |
|
Environmental
remediation
liabilities
|
|
|
705.6 |
|
|
|
95.8 |
|
Pension
and postretirement benefit
obligations
|
|
|
247.9 |
|
|
|
188.6 |
|
Liabilities
from risk management
activities
|
|
|
372.0 |
|
|
|
264.7 |
|
Asset
retirement
obligations
|
|
|
140.2 |
|
|
|
10.1 |
|
Other
|
|
|
143.4 |
|
|
|
111.3 |
|
Long-term
liabilities
|
|
|
4,699.3 |
|
|
|
2,370.6 |
|
|
|
|
|
|
|
|
|
|
Commitments
and
contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock of subsidiary with
no mandatory redemption
|
|
|
51.1 |
|
|
|
51.1 |
|
Common
stock
equity
|
|
|
3,235.8 |
|
|
|
1,533.6 |
|
Total
liabilities and
shareholders' equity
|
|
$ |
11,234.4 |
|
|
$ |
6,861.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to Integrys
Energy Group's consolidated financial statements are an integral
part of
these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM
8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E. CONSOLIDATED
STATEMENTS OF COMMON SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
Capital
in
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Comprehensive
|
|
|
|
|
|
Compensation
|
|
|
Common
|
|
|
Excess
of
|
|
|
Retained
|
|
|
Treasury
|
|
|
Comprehensive
|
|
(Millions)
|
|
Income
|
|
|
Total
|
|
|
Trust
|
|
|
Stock
|
|
|
Par
Value
|
|
|
Earnings
|
|
|
Stock
|
|
|
Income
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31,
2004
|
|
|
- |
|
|
$ |
1,091.8 |
|
|
$ |
(8.4 |
)
|
|
$ |
37.5 |
|
|
$ |
582.1 |
|
|
$ |
497.0 |
|
|
$ |
(0.3 |
)
|
|
$ |
(16.1 |
)
|
Income
available for common
shareholders
|
|
$ |
157.4 |
|
|
|
157.4 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
157.4 |
|
|
|
- |
|
|
|
- |
|
Other
comprehensive income - cash
flow hedges (net of tax of $7.9)
|
|
|
(12.1 |
)
|
|
|
(12.1 |
)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(12.1 |
)
|
Other
comprehensive income -
minimum pension liability (net of tax of $11.4)
|
|
|
17.1 |
|
|
|
17.1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
17.1 |
|
Other
comprehensive income -
available for sale securities (net of tax of
$0.4)
|
|
|
0.6 |
|
|
|
0.6 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.6 |
|
Other
comprehensive income -
currency translation (net of tax of $0.1)
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
Comprehensive
income
|
|
$ |
163.1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Issuance
of common
stock
|
|
|
- |
|
|
|
127.3 |
|
|
|
- |
|
|
|
2.5 |
|
|
|
124.8 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Dividends
on common
stock
|
|
|
- |
|
|
|
(85.4 |
)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(85.4 |
)
|
|
|
- |
|
|
|
- |
|
Other
|
|
|
- |
|
|
|
7.4 |
|
|
|
(2.5 |
)
|
|
|
0.1 |
|
|
|
10.1 |
|
|
|
(0.3 |
)
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31,
2005
|
|
|
- |
|
|
$ |
1,304.2 |
|
|
$ |
(10.9 |
)
|
|
$ |
40.1 |
|
|
$ |
717.0 |
|
|
$ |
568.7 |
|
|
$ |
(0.3 |
)
|
|
$ |
(10.4 |
)
|
Income
available for common
shareholders
|
|
$ |
155.8 |
|
|
|
155.8 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
155.8 |
|
|
|
- |
|
|
|
- |
|
Other
comprehensive income - cash
flow hedges (net of tax of $0.4)
|
|
|
(0.6 |
)
|
|
|
(0.6 |
)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(0.6 |
)
|
Other
comprehensive income -
minimum pension liability (net of tax of $1.6)
|
|
|
2.4 |
|
|
|
2.4 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2.4 |
|
Other
comprehensive income -
available for sale securities (net of tax of
$0.2)
|
|
|
(0.4 |
)
|
|
|
(0.4 |
)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(0.4 |
)
|
Other
comprehensive income -
currency translation (net of tax of $0.2)
|
|
|
(0.3 |
)
|
|
|
(0.3 |
)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(0.3 |
)
|
Comprehensive
income
|
|
$ |
156.9 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Issuance
of common
stock
|
|
|
- |
|
|
|
164.6 |
|
|
|
- |
|
|
|
3.2 |
|
|
|
161.4 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Dividends
on common
stock
|
|
|
- |
|
|
|
(96.0 |
)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(96.0 |
)
|
|
|
- |
|
|
|
- |
|
Adjustments
to initially apply
SFAS No. 158 (net of tax of $2.9)
|
|
|
- |
|
|
|
(4.5 |
)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4.5 |
)
|
Other
|
|
|
- |
|
|
|
8.4 |
|
|
|
(2.3 |
)
|
|
|
0.1 |
|
|
|
10.9 |
|
|
|
(0.3 |
)
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31,
2006
|
|
|
|
|
|
$ |
1,533.6 |
|
|
$ |
(13.2 |
)
|
|
$ |
43.4 |
|
|
$ |
889.3 |
|
|
$ |
628.2 |
|
|
$ |
(0.3 |
)
|
|
$ |
(13.8 |
)
|
Income
available for common
shareholders
|
|
|
251.3 |
|
|
|
251.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251.3 |
|
|
|
|
|
|
|
|
|
Other
comprehensive income - cash
flow hedge (net of taxes of $3.1)
|
|
|
4.9 |
|
|
|
4.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.9 |
|
Other
comprehensive income - SFAS
No. 158 unrecognized costs (net of taxes of $ 3.0)
|
|
|
3.8 |
|
|
|
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.8 |
|
Other
comprehensive income -
available for sale securities (net of taxes of
$0.2)
|
|
|
0.4 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
Other
comprehensive income -
foreign currency translation (net of taxes of $2.2)
|
|
|
3.6 |
|
|
|
3.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.6 |
|
Comprehensive
income
|
|
|
264.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common
stock
|
|
|
|
|
|
|
45.6 |
|
|
|
|
|
|
|
1.1 |
|
|
|
44.5 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
Peoples
Energy
merger
|
|
|
|
|
|
|
1,559.3 |
|
|
|
|
|
|
|
31.9 |
|
|
|
1,527.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
|
|
|
|
8.7 |
|
|
|
|
|
|
|
|
|
|
|
8.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
on common
stock
|
|
|
|
|
|
|
(177.0 |
)
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
(177.0 |
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
1.6 |
|
|
|
(1.5 |
)
|
|
|
|
|
|
|
3.9 |
|
|
|
(0.6 |
)
|
|
|
|
|
|
|
(0.2 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31,
2007
|
|
|
|
|
|
$ |
3,235.8 |
|
|
$ |
(14.7 |
)
|
|
$ |
76.4 |
|
|
$ |
2,473.8 |
|
|
$ |
701.9 |
|
|
$ |
(0.3 |
)
|
|
$ |
(1.3 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to Integrys
Energy Group's consolidated financial statements are an integral
part of
these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F. CONSOLIDATED
STATEMENTS OF CASH
FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December
31
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Operating
Activities
|
|
|
|
|
|
|
|
|
|
Income
before preferred stock
dividends of subsidiary
|
|
$ |
254.4 |
|
|
$ |
158.9 |
|
|
$ |
160.5 |
|
Adjustments
to reconcile net
income to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations, net of
tax
|
|
|
(73.3 |
)
|
|
|
(7.3 |
)
|
|
|
(11.5 |
)
|
|
Depreciation,
amortization, and
decommissioning expense
|
|
|
195.1 |
|
|
|
121.3 |
|
|
|
149.7 |
|
|
Recovery
(deferral) of Kewaunee
outage expenses
|
|
|
18.0 |
|
|
|
9.5 |
|
|
|
(49.2 |
)
|
|
Refund
of non-qualified
decommissioning trust
|
|
|
(70.6 |
)
|
|
|
(54.5 |
)
|
|
|
- |
|
|
Deferral
of Weston 3 outage
expenses
|
|
|
(22.7 |
)
|
|
|
- |
|
|
|
- |
|
|
Recoveries
and refunds of other
regulatory assets and liabilities
|
|
|
14.6 |
|
|
|
5.7 |
|
|
|
7.6 |
|
|
Amortization
of nonregulated
customer contract intangibles
|
|
|
21.0 |
|
|
|
- |
|
|
|
- |
|
|
Realized
gain on investments held
in trust, net of regulatory deferral
|
|
|
- |
|
|
|
- |
|
|
|
(15.7 |
)
|
|
Unrealized
(gains) losses on
nonregulated energy contracts
|
|
|
(59.5 |
)
|
|
|
7.3 |
|
|
|
(39.2 |
)
|
|
Pension
and postretirement
expense
|
|
|
67.5 |
|
|
|
51.6 |
|
|
|
50.5 |
|
|
Pension
and postretirement
funding
|
|
|
(33.4 |
)
|
|
|
(43.2 |
)
|
|
|
(28.6 |
)
|
|
Deferred
income taxes and
investment tax credit
|
|
|
66.8 |
|
|
|
12.4 |
|
|
|
9.0 |
|
|
Gains
due to settlement of
contracts pursuant to the merger with PEC
|
|
|
(4.0 |
)
|
|
|
- |
|
|
|
- |
|
|
Gain
on sale of interest in
Guardian Pipeline, LLC
|
|
|
- |
|
|
|
(6.2 |
)
|
|
|
- |
|
|
Gain
on sale of WPS ESI Gas
Storage, LLC
|
|
|
- |
|
|
|
(9.0 |
)
|
|
|
- |
|
|
Gain
on sale of partial interest
in synthetic fuel operation
|
|
|
(2.7 |
)
|
|
|
(6.4 |
)
|
|
|
(7.1 |
)
|
|
(Gain)
Loss on sale of property,
plant, and equipment
|
|
|
1.1 |
|
|
|
1.3 |
|
|
|
(5.5 |
)
|
|
Equity
income, net of
dividends
|
|
|
2.4 |
|
|
|
14.4 |
|
|
|
10.9 |
|
|
Cumulative
effect of change in
accounting principles, net of tax
|
|
|
- |
|
|
|
- |
|
|
|
1.6 |
|
|
Other
|
|
|
|
(12.1 |
)
|
|
|
25.2 |
|
|
|
(35.7 |
)
|
|
Changes
in working
capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables,
net
|
|
|
89.4 |
|
|
|
(10.0 |
)
|
|
|
(499.8 |
)
|
|
|
Inventories
|
|
|
(40.2 |
)
|
|
|
(206.5 |
)
|
|
|
(112.9 |
)
|
|
|
Other
current
assets
|
|
|
0.9 |
|
|
|
(32.4 |
)
|
|
|
(19.9 |
)
|
|
|
Accounts
payable
|
|
|
(96.5 |
)
|
|
|
7.5 |
|
|
|
487.3 |
|
|
|
Other
current
liabilities
|
|
|
(77.7 |
)
|
|
|
33.3 |
|
|
|
25.4 |
|
Net
cash provided by operating
activities
|
|
|
238.5 |
|
|
|
72.9 |
|
|
|
77.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(392.6 |
)
|
|
|
(342.0 |
)
|
|
|
(413.9 |
)
|
Proceeds
from the sale of
property, plant, and equipment
|
|
|
15.6 |
|
|
|
4.5 |
|
|
|
12.0 |
|
Purchase
of equity investments and
other acquisitions
|
|
|
(66.5 |
)
|
|
|
(60.1 |
)
|
|
|
(82.6 |
)
|
Proceeds
from the sale of interest
in Guardian Pipeline, LLC
|
|
|
- |
|
|
|
38.5 |
|
|
|
- |
|
Proceeds
from the sale of WPS ESI
Gas Storage, LLC
|
|
|
- |
|
|
|
19.9 |
|
|
|
- |
|
Proceeds
from the sale of Kewaunee
power plant
|
|
|
- |
|
|
|
- |
|
|
|
112.5 |
|
Proceeds
from the sale of partial
interest in Weston 4 power plant
|
|
|
- |
|
|
|
- |
|
|
|
95.1 |
|
Cash
paid for transaction costs
related to PEC merger
|
|
|
(14.4 |
)
|
|
|
(5.5 |
)
|
|
|
- |
|
Proceeds
from liquidation of
non-qualified decommissioning trust
|
|
|
- |
|
|
|
- |
|
|
|
127.1 |
|
Purchases
of nuclear
decommissioning trust investments
|
|
|
- |
|
|
|
- |
|
|
|
(18.6 |
)
|
Sales
of nuclear decommissioning
trust investments
|
|
|
- |
|
|
|
- |
|
|
|
18.6 |
|
Acquisition
of natural gas
operations in Michigan and Minnesota, net of liabilities
assumed
|
|
|
1.9 |
|
|
|
(659.3 |
)
|
|
|
- |
|
Restricted
cash for repayment of
long-term debt
|
|
|
22.0 |
|
|
|
(22.0 |
)
|
|
|
- |
|
Transmission
interconnection
|
|
|
(23.8 |
)
|
|
|
(11.6 |
)
|
|
|
(6.3 |
)
|
Other
|
|
|
|
|
6.3 |
|
|
|
7.5 |
|
|
|
7.3 |
|
Net
cash used for investing
activities
|
|
|
(451.5 |
)
|
|
|
(1,030.1 |
)
|
|
|
(148.8 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt,
net
|
|
|
(463.7 |
)
|
|
|
458.0 |
|
|
|
(25.0 |
)
|
Gas
loans,
net
|
|
|
|
34.4 |
|
|
|
(68.4 |
)
|
|
|
(7.1 |
)
|
Issuance
of long-term
debt
|
|
|
125.2 |
|
|
|
447.0 |
|
|
|
- |
|
Repayment
of long-term
debt
|
|
|
(26.5 |
)
|
|
|
(4.0 |
)
|
|
|
(3.4 |
)
|
Payment
of
dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
(3.1 |
)
|
|
|
(3.1 |
)
|
|
|
(3.1 |
)
|
|
Common
stock
|
|
|
(177.0 |
)
|
|
|
(96.0 |
)
|
|
|
(85.4 |
)
|
Issuance
of common
stock
|
|
|
45.6 |
|
|
|
164.6 |
|
|
|
127.3 |
|
Other
|
|
|
|
|
5.9 |
|
|
|
(6.4 |
)
|
|
|
(3.3 |
)
|
Net
cash provided by (used for)
financing activities
|
|
|
(459.2 |
)
|
|
|
891.7 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in cash and cash
equivalents - continuing operations
|
|
|
(672.2 |
)
|
|
|
(65.5 |
)
|
|
|
(71.4 |
)
|
Change
in cash and cash
equivalents - discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used for) provided by
operating activities
|
|
|
(109.3 |
)
|
|
|
41.9 |
|
|
|
(15.0 |
)
|
|
Net
cash provided by investing
activities
|
|
|
799.5 |
|
|
|
19.1 |
|
|
|
74.9 |
|
|
Net
cash used for financing
activities
|
|
|
- |
|
|
|
- |
|
|
|
(0.8 |
)
|
Change
in cash and cash
equivalents
|
|
|
18.0 |
|
|
|
(4.5 |
)
|
|
|
(12.3 |
)
|
Cash
and cash equivalents at
beginning of year
|
|
|
23.2 |
|
|
|
27.7 |
|
|
|
40.0 |
|
Cash
and cash equivalents at end
of year
|
|
$ |
41.2 |
|
|
$ |
23.2 |
|
|
$ |
27.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to Integrys
Energy Group's consolidated financial statements are an integral
part of
these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
G. NOTES
TO
CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1--SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Nature of
Operations--Integrys Energy Group is a holding company whose primary
wholly owned subsidiaries at December 31, 2007, include WPSC, UPPCO, MGUC,
MERC, PGL, NSG, and Integrys Energy Services. Of these subsidiaries,
six subsidiaries are regulated electric and/or natural gas utilities and one
subsidiary, Integrys Energy Services, is a nonregulated energy supply and
services company. For more information about our regulated and
nonregulated segments, see Note 24, "Segments of
Business."
The
term "utility"
refers to the regulated activities of the electric and natural gas utility
segments, while the term "nonutility" refers to the activities of the electric
and natural gas utility segments that are not regulated. The term
"nonregulated" refers to activities at Integrys Energy Services.
The
line item on
the Consolidated Statements of Income "Income available for common
shareholders," is net income.
(b)
Consolidation
Basis of Presentation--The
Consolidated Financial Statements include the accounts of Integrys Energy Group
and all majority owned subsidiaries, after eliminating intercompany transactions
and balances, and proportionate shares of jointly owned utility
facilities. If a minority owner's equity is reduced to zero, our
policy is to record 100% of the subsidiary's losses until the minority owner
makes capital contributions or commitments to fund its share of the operating
costs. The cost method of accounting is used for investments when
Integrys Energy Group owns less than 20% of the voting equity of the company,
unless other evidence indicates we have significant influence over the operating
and financial policies of the investee. Investments in businesses not
controlled by Integrys Energy Group, but over which we have significant
influence regarding the operating and financial policies of the investee, are
accounted for using the equity method. For additional information on
our equity method investments see Note 10, "Investments
in
Affiliates, at Equity Method."
Mergers
and
Acquisitions
Effective
February
21, 2007, the PEC merger was consummated and the assets and liabilities, results
of operations, and cash flows of PEC were included in Integrys Energy Group's
Consolidated Financial Statements commencing February 22, 2007. See
Note 6, "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 Consolidated Financial Statements effective
April 1, and July 1, 2006, respectively. See Note 6, "Acquisitions and Sales of
Assets," for more information.
Dispositions
PEP's
results of
operations and cash flows were recorded as discontinued operations in
2007. The sale of PEP was completed on September 28,
2007. Refer to Note 4, "Discontinued Operations,"
for more information.
For
all periods
presented, certain assets and liabilities of Sunbury and Niagara have been
reclassified as held for sale and Sunbury's and Niagara's results of operations
and cash flows have been reclassified as discontinued
operations. Refer to Note 4, "Discontinued Operations,"
for more information.
(c)
Use of Estimates--We
prepare our financial statements in conformity with accounting principles
generally accepted in the United States of America. We make estimates and
assumptions that affect
reported
amounts. These estimates and assumptions affect assets, liabilities,
the disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from these
estimates.
(d)
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 Consolidated Statements
of
Cash Flows:
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for
interest
|
|
$ |
144.5 |
|
|
$ |
87.6 |
|
|
$ |
59.6 |
|
Cash
paid for
income taxes
|
|
|
198.1 |
|
|
|
37.7 |
|
|
|
50.4 |
|
Significant
non-cash transactions were as follows:
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Weston 4
construction costs funded through accounts payable
|
|
$ |
26.1 |
|
|
$ |
32.0 |
|
|
$ |
33.7 |
|
Equity
issued
for net assets acquired in PEC merger
|
|
|
1,559.3 |
|
|
|
- |
|
|
|
- |
|
Realized
gain
on settlement of contracts due to PEC merger
|
|
|
4.0 |
|
|
|
- |
|
|
|
- |
|
PEP
post-closing adjustments funded through other current
liabilities
|
|
|
9.9 |
|
|
|
- |
|
|
|
- |
|
Transaction
costs related to the merger with Peoples Energy funded through other
current liabilities
|
|
|
- |
|
|
|
8.1 |
|
|
|
- |
|
(e)
Revenue and Customer
Receivables--Revenues are recognized on the accrual basis and include
estimated amounts for electric and natural gas services rendered but not
billed. Currently there are no customers or industries that account
for more than 10% of Integrys Energy Group's revenues.
Integrys
Energy
Group's regulated electric utility segment operations use automatic
fuel and purchased power adjustment clauses for the retail electric
portions of their business in Michigan and also for their FERC wholesale
electric business. There is a portion of Integrys
Energy
Group's wholesale electric business that limits cost recovery to no greater
than
the 2-year average rate charged to large industrial retail customers for that
same period. The Wisconsin retail electric portion of Integrys
Energy Group's business uses a "cost variance range" approach, based on a
specific estimated fuel and purchased power cost for the forecast
year. If the actual fuel and purchased power costs fall outside this
range, the PSCW can authorize an adjustment to future
rates. Decreases to rates can be implemented without a hearing,
unless requested by Integrys Energy Group, PSCW staff, or interveners, while
increases to rates are generally subject to a hearing.
Billings
to
Integrys Energy Group's retail electric customers under the MPSC's jurisdiction
include base rate charges and a power supply cost recovery
factor. Power supply cost recovery factors are established annually
to recover projected power supply costs approved by the MPSC. The
MPSC reconciles these factors to actual costs annually and permits 100% recovery
of allowed power supply costs. Integrys Energy Group recognizes any
over or under recovery currently in its revenues, and the regulatory asset
or
liability is recognized on the balance sheet until settlement. The
deferrals are relieved with additional billings or refunds.
Integrys
Energy
Group's regulated natural gas utility segment operations are approved to use
one-for-one natural gas cost recovery plans for all prudently incurred natural
gas costs. These plans allow Integrys Energy Group to pass changes in
the cost of natural gas on to system natural gas customers, subject to
regulatory review for reasonableness.
All
of Integrys
Energy Group's utility subsidiaries are required to provide service and grant
credit to customers within their service territories. The companies
continually review their customers' credit-worthiness and obtain or refund
deposits accordingly. The utilities are generally precluded from
discontinuing service to residential customers during winter moratorium
months.
For
Integrys Energy
Services' merchant electric generation plants, electric power revenues related
to fixed-price contracts are recognized at the lower of amounts billable under
the contract or an amount equal to the volume of the capacity made available
or
the energy delivered during the period multiplied by the estimated average
revenue per kilowatt-hour per the terms of the contract. Under
floating-price contracts, electric power revenues are recognized when capacity
is provided or energy is delivered.
For
its
nonregulated business of supplying energy, management, and consulting services
to retail and wholesale customers, Integrys Energy Services accrues revenues
in
the month that energy is delivered and/or services are
rendered. Revenues related to derivative instruments classified as
trading are reported net of related cost of sales for all periods
presented.
(f)
Inventories--Inventories
consist of natural gas in storage, liquid propane, and fossil fuels, including
coal. Average cost is used to value fossil fuels, liquid propane, and
natural gas in storage for our regulated segments, excluding PGL and
NSG. PGL and NSG price natural gas storage injections at the calendar
year average of the costs of natural gas supply
purchased. Withdrawals from storage are priced on the LIFO cost
method. Inventories stated on a LIFO basis represent approximately
14% of total inventories at December 31, 2007. The estimated
replacement cost of natural gas in inventory at December 31, 2007, exceeded
the LIFO cost by approximately $304.4 million. Inventories at
Integrys Energy Services are valued at the lower of cost or market unless hedged
pursuant to a fair value hedge, in which case changes in the fair value of
inventory subsequent to the hedge designation are recorded directly to
inventory.
(g)
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 derivative instruments pursuant to SFAS No. 133, “Accounting
for Derivatives Instruments and Hedging Activities”, as amended and
interpreted. Under the provisions of SFAS No. 133, all derivatives
are recognized on the balance sheet at their fair value except for certain
derivatives that qualify for the normal purchases and sales exception. 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," they 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.
(h)
Emission
Allowances--Integrys Energy Services accounts for emission allowances as
an intangible asset, with cash inflows and outflows related to purchases and
sales of emission allowances recorded as investing activities in the
Consolidated Statements of Cash Flows. Integrys Energy Services uses the
guidance in SFAS No. 144, "Accounting for the Impairment and Disposal of
Long-Lived Assets," to test allowances for impairment. The utilities
account for allowances as inventory at average cost by vintage
year. Emission allowances granted to WPSC are recorded at zero
cost. Charges to income result when allowances are utilized in
operating the utilities' generation plants. Gains on sale of
allowances are generally returned to ratepayers.
(i)
Property, Plant, and
Equipment--Utility plant is stated at the original cost of construction
including an allowance for funds used during construction. The costs
of renewals and betterments of units of property (as distinguished from minor
items of property) are capitalized as additions to the utility plant
accounts. Except for land, no gain or loss is recognized in
connection with ordinary retirements of utility
property
units. Maintenance, repair, replacement, and renewal costs associated
with items not qualifying as units of property are considered operating
expenses. PGL and NSG charge the cost of units of property retired,
sold, or otherwise disposed of to the accumulated provision for depreciation
and
record the cost of removal, less salvage value, associated with the retirement
to depreciation expense. The other utilities charge the cost of units
of property retired, sold, or otherwise disposed of, less salvage value, to
the
accumulated provision for depreciation and initially record a regulatory
liability for removal costs and charge the costs against the liability as
incurred.
Integrys
Energy
Group records straight-line depreciation expense over the estimated useful
life
of utility property. The PSCW approved depreciation rates for WPSC
effective January 1, 2005. Depreciation rates for
UPPCO were approved by the MPSC effective January 1,
2002. Depreciation rates for MGUC and MERC were approved by the MPSC
and MPUC effective April 1, 2006, and July 1, 2006, respectively. In
April 2005, the ICC approved depreciation rates for PGL and
NSG. Annual utility composite depreciation rates are shown
below.
Annual
Utility Composite Depreciation Rates
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
WPSC
–
Electric
|
|
|
3.35 |
% |
|
|
3.36 |
% |
|
|
3.65 |
% |
WPSC
–
Natural Gas
|
|
|
3.52 |
% |
|
|
3.57 |
% |
|
|
3.61 |
% |
UPPCO
|
|
|
3.01 |
% |
|
|
2.90 |
% |
|
|
2.85 |
% |
MGUC
|
|
|
2.67 |
% |
|
|
2.06 |
%(1) |
|
|
- |
|
MERC
|
|
|
3.42 |
% |
|
|
1.76 |
%(2) |
|
|
- |
|
PGL
|
|
|
2.86 |
%
(3)
|
|
|
- |
|
|
|
- |
|
NSG
|
|
|
1.85 |
%
(3)
|
|
|
- |
|
|
|
- |
|
(1)
Composite depreciation rate for 9 months of the year
(2)
Composite depreciation rate for 6 months of the year
(3)
Composite depreciation rate
from February 22, 2007 through the end of 2007
Interest
capitalization is applied to nonutility property during construction, and gain
and loss recognition occurs in connection with
retirements. Currently, nonutility property at the regulated
utilities consists primarily of land.
Nonregulated
plant
is stated at cost, which includes capitalized interest, or estimated fair value
at the time of acquisition. The costs of renewals, betterments, and
major overhauls are capitalized as additions to plant. The gains or
losses associated with ordinary retirements are recorded in the period of
retirement. Maintenance, repair, and minor replacement costs are
expensed as incurred.
Most
of the
nonregulated subsidiaries compute depreciation using the straight-line method
over the following estimated useful lives:
Structures
and improvements
|
15
to 40
years
|
Office
and
plant equipment
|
5
to 40
years
|
Office
furniture and fixtures
|
3
to 10
years
|
Vehicles
|
5
years
|
Computer
equipment
|
3
to 8
years
|
Leasehold
improvements
|
Shorter
of: life of the lease or life of the
asset
|
The
nonregulated
Combined Locks Energy Center uses the units of production depreciation method
for selected components of equipment having defined lives stated in terms of
hours of production.
Integrys
Energy
Group capitalizes certain costs related to software developed or obtained for
internal use and amortizes those costs to operating expense over the estimated
useful life of the related software, which ranges from 3 to 15
years.
(j)
Capitalized Interest and
Allowance for Funds Used During Construction--Our nonregulated
subsidiaries capitalize interest for construction projects, while our utilities
capitalize the cost of funds used for construction using a calculation that
includes both internal (equity) and external (debt) components, as required
by
regulatory accounting.
Approximately
50%
of WPSC's retail jurisdictional construction in progress expenditures are
subject to the allowance for funds used during construction (AFUDC) calculation,
except on specific projects approved by the PSCW. For 2007, WPSC's
AFUDC retail rate was 8.61%. Carrying costs related to Weston 4 are
currently being recovered in rates. WPSC's construction in progress
AFUDC debt and equity percentage formula for the wholesale jurisdiction is
specified in the FERC's Uniform System of Accounts. The 2007 average
AFUDC wholesale rate was 8.54%. WPSC's allowance for equity funds
used during construction for 2007, 2006, and 2005 was $0.9 million,
$0.6 million, and $1.5 million, respectively. WPSC's
allowance for borrowed funds used during construction for 2007, 2006, and 2005
was $0.3 million, $0.2 million, and $0.4 million,
respectively.
The
AFUDC
calculation for the other utilities is determined by the respective state
commissions, each with specific requirements. Based on those requirements,
the
other utilities did not record AFUDC for 2007, 2006, or 2005.
Our
nonregulated
subsidiaries calculate capitalized interest on long-term
construction. The interest rate capitalized is based upon the monthly
short-term borrowing rate Integrys Energy Group incurs for such
funds. The amount of interest capitalized during 2007, 2006, and 2005
was not significant.
(k)
Regulatory Assets and
Liabilities--The
regulated electric and natural gas utility segments are subject to the
provisions of SFAS No. 71. Regulatory assets represent probable
future revenue associated with certain incurred costs that will be recovered
from customers through the ratemaking process. Regulatory liabilities
represent amounts that are refundable in future customer rates. Based on a
current evaluation of the various factors and conditions that are expected
to
impact future cost recovery, we believe that future recovery of our regulatory
assets is probable. If at any reporting date a previously recorded
regulatory asset is no longer probable of recovery, the regulatory asset is
reduced to the amount considered probable of recovery with the reduction charged
to expense in the year the determination is made.
(l)
Asset Impairment--We
review the recoverability of long-lived tangible and intangible assets in
accordance with SFAS No. 144. This Statement requires review of
assets when circumstances indicate that the carrying amount may not be
recoverable. The carrying amount of assets held and used is not
recoverable if it exceeds the undiscounted sum of cash flows expected to result
from the use and eventual disposition of the asset. If the carrying
value is not recoverable, the impairment loss is measured as the excess of
the
asset's carrying value over its fair value. The carrying value of
assets held for sale is not recoverable if it exceeds the fair value less cost
to sell the asset. An impairment charge is recorded for any excess of
the carrying value over the fair value less cost to sell. If events
or circumstances indicate the carrying value of investments accounted for under
the equity method of accounting may not be recoverable, potential impairment
is
assessed by comparing the fair value of these investments to their carrying
values as well as assessing if a decline in fair value is
temporary. If an impairment is indicated, a charge is recognized
equal to the amount the carrying value exceeds the investment's fair
value. Impairment charges are recorded if the carrying value of such
assets exceed the future anticipated cash flows. See Note 4,
"Discontinued
Operations," for information related to the impairment charge recorded at
Sunbury in 2005.
(m)
Goodwill and Other Intangible
Assets--In accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets," goodwill and other intangible assets with indefinite lives
are not amortized, but are subject to annual impairment tests. The
regulated electric and natural gas utility segments perform their impairment
test during the second quarter of each year, while Integrys Energy Services
performs its impairment test annually during the third quarter. The
intangible asset impairment tests are updated whenever events or changes in
circumstances indicate that the assets might be impaired. Based upon
the results of testing, no impairments were noted in 2007, 2006, or
2005.
Other
intangible
assets with definite lives consist primarily of emission allowances, customer
related intangible assets, and customer contract assets and
liabilities. For more information on Integrys Energy Group's
intangible assets, see Note 11, "Goodwill and Other Intangible
Assets."
(n)
Retirement of
Debt--Premiums, discounts, and expenses incurred with the issuance of
outstanding long-term debt are amortized over the terms of the debt
issues. Any call premiums or unamortized expenses associated with
refinancing higher-cost debt obligations used to finance regulated assets and
operations are defined and amortized consistent with regulatory treatment of
those items.
(o)
Asset Retirement
Obligations--Integrys Energy Group applies SFAS No. 143, "Accounting
for Asset Retirement Obligations," and Interpretation No. 47, "Accounting
for Conditional Asset Retirement Obligations." Under these accounting
standards, Integrys Energy Group recognizes, at fair value, legal obligations
associated with the retirement of tangible long-lived assets that result from
the acquisition, construction or development, and/or normal operation of the
assets. A liability is recorded for these obligations as long as the
fair value can be reasonably estimated, even if the timing or method of settling
the obligation is unknown. The asset retirement obligations are
accreted using a credit-adjusted risk-free interest rate commensurate with
the
expected settlement dates of the asset retirement obligations. The
associated retirement costs are capitalized as part of the related
long-lived assets and are depreciated over the useful lives of the
assets.
(p)
Income Taxes--We account
for income taxes using the liability method as prescribed by SFAS No. 109,
"Accounting for Income Taxes." Under this method, deferred income
taxes have been recorded using currently enacted tax rates for
the
differences between the tax basis of assets and liabilities and the basis
reported in the financial statements. Our regulated utilities are
allowed to defer certain adjustments made to income taxes and record regulatory
assets or liabilities related to these adjustments.
Integrys
Energy
Group adopted the provisions of FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an Interpretation of FAS 109" on January 1, 2007.
As a result of the implementation of Interpretation No. 48, Integrys Energy
Group recognized a $0.1 million decrease in the liability for unrecognized
tax benefits, which was accounted for as an increase in the January 1, 2007
balance of retained earnings.
Investment
tax credits, which have been
used to reduce our federal income taxes payable, have been deferred for
financial
reportingpurposes. These deferred
investment tax credits are being amortized over the useful lives of the property
to which they relate.
Integrys
Energy Group files a
consolidated United Statesincome
tax return that includes domestic
subsidiaries of which its ownership is 80% or more. Integrys Energy Group and
its consolidated subsidiaries are parties to a tax allocation arrangement under
which each entity determines its income tax provision on a stand-alone
basis. In several states, combined or consolidated filing is
required for certain members of Integrys Energy Group doing business in that
state. The tax allocation arrangement equitably allocates the state
taxes associated with these combined or consolidated filings.
(q)
Taxes other than
income--Integrys Energy Group presents revenue net of pass-through taxes
on the Consolidated Statements of Income.
(r)
Guarantees--Integrys
Energy Group applies Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees Including Indirect Guarantees of
Indebtedness of Others," which requires that the guarantor recognize, at the
inception of the guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. See Note 18, "Guarantees," for additional
information on Interpretation No. 45.
(s)
Stock-Based Employee
Compensation--Integrys Energy Group has stock-based employee compensation
plans, which are described more fully in Note 22, "Stock-Based
Compensation." Prior to January 1, 2006, Integrys Energy Group
accounted for these plans under the recognition and
measurement
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." Accordingly, Integrys Energy Group provided pro
forma disclosure amounts in accordance with SFAS No. 148, "Accounting for
Stock-Based Compensation – Transition and Disclosure," as if the fair value
method defined by SFAS No. 123, "Accounting for Stock-Based Compensation,"
had
been applied.
The
following table
illustrates the effect on 2005 income available for common shareholders and
earnings per share if Integrys Energy Group had applied the fair value
recognition provisions of SFAS No. 123:
(Millions,
except per share amounts)
|
|
2005
|
|
|
|
|
|
Income
available for common shareholders
|
|
|
|
As
reported
|
|
$ |
157.4 |
|
Add: Stock-based
compensation expense using
the
intrinsic value method – net of tax
|
|
|
2.0 |
|
Deduct: Stock-based
compensation expense using
the
fair value method – net of tax
|
|
|
(1.9 |
) |
Pro
forma
|
|
$ |
157.5 |
|
|
|
|
|
|
Basic
earnings per common share
|
|
|
|
|
As
reported
|
|
$ |
4.11 |
|
Pro
forma
|
|
|
4.11 |
|
|
|
|
|
|
Diluted
earnings per common share
|
|
|
|
|
As
reported
|
|
$ |
4.07 |
|
Pro
forma
|
|
|
4.07 |
|
Effective
January
1, 2006, Integrys Energy Group adopted the fair value recognition provisions
of
SFAS No. 123(R), "Share-Based Payment," using the modified prospective
transition method. Under this transition method, prior periods'
results are not restated. Stock-based compensation cost for 2006
included compensation cost for all stock-based compensation awards granted
prior
to, but not yet fully vested as of January 1, 2006, based on the grant date
fair
value estimated in accordance with the original provisions of SFAS No. 123,
adjusted for estimated future forfeitures. The fair values of
stock-based compensation awards granted after January 1, 2006 were estimated
in
accordance with the provisions of SFAS No. 123(R). There was no
material cumulative effect of a change in accounting principle recorded upon
adoption of SFAS No. 123(R). The implementation of SFAS No. 123(R)
did not have a material impact on cash flows from operations and cash flows
from
financing activities.
(t)
Cumulative Effect of Change
in
Accounting Principles--The adoption of Interpretation No. 47 on
December 31, 2005, resulted in a $1.6 million after-tax cumulative
effect of change in accounting principle, decreasing income available for common
shareholders, related to recording a liability for asbestos remediation at
certain of Integrys Energy Services' generation plants. Approximately
$1.4 million of the after-tax cumulative effect of change in accounting
principle recorded in 2005 related to Sunbury. For more information
on Sunbury, see Note 4, "Discontinued
Operations." For the utility segments of Integrys Energy
Group, we concluded it was probable that any differences between expenses under
Interpretation No. 47 and expenses currently recovered through customer
rates will be recoverable or refundable in future customer
rates. Accordingly, the adoption of Interpretation No. 47 had no
impact on the utility segments' income, as its effect is offset by the
establishment of regulatory assets or liabilities pursuant to SFAS
No. 71.
(u)
Reclassifications--We
reclassified certain prior year financial statement amounts to conform to the
current year presentation. Significant reclassifications are as
follows:
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 to conform to the December 31, 2007
presentation.
Consolidated
Statements of Income
For
the year ended
December 31, 2006, and 2005, $16.5 million and $9.1 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 presentation for the year ended
December 31, 2007.
Consolidated
Statement of Cash Flows
The
reclassifications discussed above were also reflected as reclassifications
in
the Consolidated Statements of Cash Flows for the year ended December 31,
2006 and 2005. These reclassifications had no impact on total
operating, investing, or financing activities.
(v)
New Accounting
Pronouncements--In September 2006, the FASB issued SFAS No. 157, "Fair
Value Measurements," which defines fair value, establishes new criteria to
be
considered when measuring fair value and expands disclosures about fair value
measurements. SFAS No. 157 does not require any new fair value
measurements. Integrys Energy Group applies fair value measurements
to certain assets and liabilities, primarily derivative instruments,
available-for-sale securities, deferred compensation liabilities, financial
instruments required to be disclosed at fair value under SFAS No.107, "Fair
Value of Financial Instruments," and long-lived assets evaluated for
impairments. SFAS No. 157 is effective for Integrys Energy Group on
January 1, 2008 for financial assets and liabilities and January 1, 2009 for
nonfinancial assets and liabilities.
SFAS
No. 157
nullified a portion of Emerging Issues Task Force Issue No. 02-3, "Issues
Involved in Accounting for Derivative Contracts Held for Trading Purposes and
Contracts Involved in Energy Trading and Risk Management
Activities." Under Issue No. 02-3, inception gains or losses were
deferred unless the fair value of the derivative was substantially based on
quoted prices or other current market transactions. However, SFAS No.
157 provides a framework to consider, in evaluating a transaction, whether
a
transaction represents fair value at initial recognition. Integrys
Energy Services expects to recognize a pre-tax cumulative effect increase to
retained earnings of $4.5 million on January 1, 2008.
SFAS
No. 157
requires that a fair value measurement reflect the assumptions market
participants would use in pricing an asset or liability based on the best
available information. These assumptions include the risks inherent
in a particular valuation technique (such as a pricing model) and the risks
inherent in the inputs to the model. SFAS No. 157 also requires that
we consider our own credit profile in valuing liabilities and specifies that
transaction costs should not be considered in the determination of fair
value. On January 1, 2008, Integrys Energy Group expects to recognize
an increase to operating income of $0.5 million as a result of considering
its own credit profile in the measurement of certain liabilities at fair value,
and an increase of $11.0 million due to the exclusion of transaction costs
from Integrys Energy Services' fair value estimates.
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. SFAS No. 159
is effective for Integrys Energy Group beginning January 1, 2008. We
have chosen not to elect the fair value option for any of our financial assets
and liabilities.
In
December 2007,
the FASB issued SFAS No. 141(R),
"Business
Combinations." SFAS
No. 141(R) provides greater consistency
in the
accounting and financial
reportingof business
combinations. SFAS
No.
141(R) requires the acquiring entity
in a business combination to recognize all assets acquired and liabilities
assumed in the transaction and any non-controlling interest in the acquiree
at
the acquisition date, measured at the fair value as of that
date. This includes the measurement of the acquirer's shares issued
as consideration in a business combination, the recognition of contingent
consideration, the accounting for pre-acquisition gain and loss contingencies,
the recognition of capitalized in-process research and development, the
accounting for acquisition-related restructuring cost accruals, the treatment
of
acquisition-related transaction costs, and the recognition of changes in the
acquirer's income tax valuation allowance and deferred
taxes. This
statement
also establishes disclosure
requirements to enable the evaluation of the nature and financial effect of
the
business combination. SFAS No. 141(R) is effective for business combinations
consummated
after January
1, 2009. Also
effective January 1,
2009, any adjustments to uncertain tax positions from business combinations
consummated prior to January 1, 2009 will no longer be recorded as an adjustment
to goodwill, but will be reported in income.
NOTE 2--FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
following
methods and assumptions were used to estimate the fair value of each class
of
financial instrument for which it is practicable to estimate such
value:
Cash
and cash
equivalents, restricted cash, accounts receivable, accounts payable, notes
payable, and outstanding commercial paper: The carrying amount
approximates fair value due to the short maturity of these investments and
obligations.
Long-term
debt and
preferred stock: The fair values of long-term debt and preferred
stock are estimated based on the quoted market price for the same or similar
issues or on the current rates offered to Integrys Energy Group for debt of
the
same remaining maturity.
Risk
management
assets – net: Assets and liabilities from risk management activities
are recorded at fair value in accordance with SFAS No. 133.
The
estimated fair
values of our financial instruments as of December 31 were:
|
|
2007
|
|
|
2006
|
|
(Millions)
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$ |
41.2 |
|
|
$ |
41.2 |
|
|
$ |
23.2 |
|
|
$ |
23.2 |
|
Restricted
cash
|
|
|
- |
|
|
|
- |
|
|
|
22.0 |
|
|
|
22.0 |
|
Accounts
receivable –
net
|
|
|
1,405.3 |
|
|
|
1,405.3 |
|
|
|
1,037.3 |
|
|
|
1,037.3 |
|
Accounts
payable
|
|
|
1,331.8 |
|
|
|
1,331.8 |
|
|
|
949.4 |
|
|
|
949.4 |
|
Notes
payable
|
|
|
160.0 |
|
|
|
160.0 |
|
|
|
160.0 |
|
|
|
160.0 |
|
Commercial
paper
|
|
|
308.2 |
|
|
|
308.2 |
|
|
|
562.8 |
|
|
|
562.8 |
|
Long-term
debt
|
|
|
2,320.3 |
|
|
|
2,334.2 |
|
|
|
1,313.7 |
|
|
|
1,323.1 |
|
Preferred
stock
|
|
|
51.1 |
|
|
|
49.6 |
|
|
|
51.1 |
|
|
|
48.8 |
|
Risk
management assets – net
|
|
|
114.5 |
|
|
|
114.5 |
|
|
|
110.4 |
|
|
|
110.4 |
|
NOTE 3--RISK
MANAGEMENT ACTIVITIES
The
following table
shows Integrys Energy Group's assets and liabilities from risk management
activities as of December 31, 2007, and 2006:
|
|
Assets
|
|
|
Liabilities
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Utility
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
contracts
|
|
$ |
8.2 |
|
|
$ |
5.9 |
|
|
$ |
30.4 |
|
|
$ |
12.1 |
|
Financial
transmission rights
|
|
|
13.4 |
|
|
|
14.3 |
|
|
|
4.4 |
|
|
|
2.0 |
|
Cash
flow
hedges – commodity contracts
|
|
|
- |
|
|
|
- |
|
|
|
0.3 |
|
|
|
- |
|
Nonregulated
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
and foreign currency
contracts
|
|
|
1,241.4 |
|
|
|
1,237.7 |
|
|
|
1,125.7 |
|
|
|
1,195.4 |
|
Fair
value hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
contracts
|
|
|
7.4 |
|
|
|
11.0 |
|
|
|
2.0 |
|
|
|
0.3 |
|
Interest
rate swaps
|
|
|
- |
|
|
|
- |
|
|
|
0.3 |
|
|
|
- |
|
Cash
flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
contracts
|
|
|
29.6 |
|
|
|
107.9 |
|
|
|
18.3 |
|
|
|
53.3 |
|
Interest
rate swaps
|
|
|
- |
|
|
|
- |
|
|
|
4.1 |
|
|
|
3.3 |
|
Total
|
|
$ |
1,300.0 |
|
|
$ |
1,376.8 |
|
|
$ |
1,185.5 |
|
|
$ |
1,266.4 |
|
Balance
Sheet Presentation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
840.7 |
|
|
$ |
1,068.6 |
|
|
$ |
813.5 |
|
|
$ |
1,001.7 |
|
Long-term
|
|
|
459.3 |
|
|
|
308.2 |
|
|
|
372.0 |
|
|
|
264.7 |
|
Total
|
|
$ |
1,300.0 |
|
|
$ |
1,376.8 |
|
|
$ |
1,185.5 |
|
|
$ |
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
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 regulators. For most
energy-related physical and financial derivatives in our regulated operations,
our regulators allow the effects of mark-to-market accounting to be deferred
as
regulatory assets and liabilities. Management believes any gains or
losses resulting from the eventual settlement of these derivative instruments
will be collected from or refunded to customers.
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 risk associated with 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."
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 February 2009. Cash flow hedge ineffectiveness
recorded in operating and maintenance expense on the Consolidated Statements
of
Income related to these commodity contracts was insignificant for the year
ended
December 31, 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 options covering a
specified number of barrels of oil in order to manage exposure to the risk
of an
increase in oil prices. Changes in the fair value of non-hedge
derivatives are recognized currently in earnings.
In
the second quarter of 2006, Integrys Energy Services began entering into a
limited number of derivative energy contracts with terms that extend as long
as
12 years. Observable market data is not available for the
longer-dated portion (generally periods greater than five years) (the
unobservable periods) of these contracts and, therefore, Integrys Energy
Services had valued the unobservable periods of these contracts at
zero. In the third quarter of 2007, Integrys Energy Services
determined that this approach was inappropriate under generally accepted
accounting principles and began to use internally developed pricing data to
estimate the fair value of such unobservable periods. The cumulative
effect related to prior periods was an increase in income from continuing
operations and income available for common shareholders of $4.6 million,
net of taxes. Management has determined that this amount is not material to
prior periods. The determination of fair value for these derivative
contracts is subjective and requires significant management
judgment.
Our
nonregulated
segments also enter into commodity derivative contracts that are designated
as
either fair value or cash flow hedges. Integrys Energy Services uses
fair value hedges 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
Consolidated Statements of Income was not significant in 2007. Fair value hedge
ineffectiveness recorded in nonregulated revenue on the Consolidated Statements
of Income was a pre-tax gain of $3.7 million in 2006, and a pre-tax loss of
$2.5 million in 2005. 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. During 2007 and
2006, the amounts excluded were not significant. During 2005, the
amount excluded was a pre-tax loss of $5.2 million.
Commodity
contracts
that are designated as cash flow hedges extend through December 2011, and
are used to mitigate the risk of cash flow variability associated with future
purchases and sales of natural gas 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 Consolidated Statements
of Income related to commodity contracts was a pre-tax loss of $4.4 million
in 2007, a pre-tax gain of $8.6 million in 2006, and a pre-tax loss of
$2.6 million in 2005. 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 affect earnings, which is typically as
the
related contracts are settled, or if it is probable that the hedged transaction
will not occur. During 2007, the amount reclassified from other
comprehensive income into earnings as a result of the discontinuance of cash
flow hedge accounting for certain hedge transactions was not significant. During
2006 and 2005, Integrys Energy Group reclassified pre-tax gains of
$2.1 million, and $5.2 million, respectively, from other comprehensive
income into earnings as a result of the discontinuance of cash flow hedge
accounting for certain hedge transactions. In the next
12 months, subject to changes in market prices of natural gas and
electricity, Integrys Energy Group expects that a pre-tax gain of
$7.4 million will be recognized in earnings as the hedged transactions
occur. This amount is expected to be substantially offset by the settlement
of
the related nonderivative contracts that are being hedged.
NOTE 4--DISCONTINUED
OPERATIONS
PEP
In
September 2007, Integrys Energy Group completed the sale of PEP, its oil
and natural gas production subsidiary acquired in the merger with PEC, for
$879.1 million. Post-closing adjustments in the amount of
$9.9 million were settled in February 2008 related to this sale, which
reduced the sale price to $869.2 million. These post-closing
adjustments were funded through other current liabilities at December 31,
2007 and, therefore, are included in Note 1(d), "Cash and Cash Equivalents,"
as a non-cash transaction. Including the impact of the post-closing adjustments,
the pre-tax gain recorded was $12.6 million ($7.6 million after-tax),
and was included as a component of discontinued operations.
A
summary of the components of discontinued operations recorded in the
Consolidated Statements of Income related to PEP was as follows:
(Millions)
|
|
February
22, 2007 through
December 31,
2007
|
|
Nonregulated
revenue
|
|
$ |
114.2 |
|
Operating
and
maintenance expense
|
|
|
28.5 |
|
Gain
on PEP
sale
|
|
|
12.6 |
|
Taxes
other
than income
|
|
|
5.1 |
|
Other
expense
|
|
|
0.1 |
|
Income
before
taxes
|
|
|
93.1 |
|
Provision
for
income taxes
|
|
|
34.6 |
|
Discontinued
operations, net of tax
|
|
$ |
58.5 |
|
It
is Integrys Energy Group's policy to not allocate interest to discontinued
operations unless the asset group being sold has external debt
obligations. PEP did not have any external debt
obligations.
Niagara
In
January 2007, Integrys Energy Services completed the sale of Niagara for
approximately $31 million. The gain recorded in 2007 was
$24.6 million pre-tax ($14.7 million after-tax), and was included as a
component of discontinued operations. This facility was a merchant
generation 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)
|
|
|
|
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
Consolidated Statements of Income related to Niagara for the year ended
December 31 were as follows:
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Nonregulated
revenue
|
|
$ |
1.5 |
|
|
$ |
19.3 |
|
|
$ |
21.8 |
|
Nonregulated
cost of fuel, natural gas, and purchased power
|
|
|
1.0 |
|
|
|
12.9 |
|
|
|
12.2 |
|
Operating
and
maintenance expense
|
|
|
0.5 |
|
|
|
5.3 |
|
|
|
4.9 |
|
Gain
on
Niagara sale
|
|
|
24.6 |
|
|
|
- |
|
|
|
- |
|
Depreciation
and amortization expense
|
|
|
- |
|
|
|
0.4 |
|
|
|
0.3 |
|
Taxes
other
than income
|
|
|
- |
|
|
|
0.3 |
|
|
|
0.2 |
|
Other
income
|
|
|
- |
|
|
|
0.2 |
|
|
|
- |
|
Income
before
taxes
|
|
|
24.6 |
|
|
|
0.6 |
|
|
|
4.2 |
|
Income
tax
provision
|
|
|
9.8 |
|
|
|
0.2 |
|
|
|
1.8 |
|
Discontinued
operations, net of tax
|
|
$ |
14.8 |
|
|
$ |
0.4 |
|
|
$ |
2.4 |
|
No
interest expense was allocated to discontinued operations as Niagara did not
have any external debt obligations.
Sunbury
In
July 2006, Integrys Energy Services completed the sale of
Sunbury. Sunbury's primary asset was the Sunbury generation plant
located in Pennsylvania. The gain recorded in 2006 was
$20.2 million pre-tax ($12.5 million after taxes), and was included as
a component of discontinued operations. 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
Consolidated Statements of Income for the years ended December 31 related
to Sunbury were as follows:
(Millions)
|
|
2006
|
|
|
2005
|
|
Nonregulated
revenue
|
|
$ |
69.2 |
|
|
$ |
115.4 |
|
Nonregulated
cost of fuel, natural gas, and purchased power
|
|
|
61.6 |
|
|
|
68.7 |
|
Operating
and
maintenance expense
|
|
|
17.9 |
|
|
|
27.5 |
|
Gain
on
Sunbury sale
|
|
|
20.2 |
|
|
|
- |
|
Depreciation
and amortization expense
|
|
|
0.3 |
|
|
|
0.2 |
|
Gain
on sale
of emission allowances
|
|
|
- |
|
|
|
(86.8 |
) |
Impairment
loss
|
|
|
- |
|
|
|
80.6 |
|
Taxes
other
than income
|
|
|
0.3 |
|
|
|
0.4 |
|
Interest
expense
|
|
|
- |
|
|
|
(10.4 |
) |
Income
before
taxes
|
|
|
9.3 |
|
|
|
14.4 |
|
Income
tax
provision
|
|
|
2.4 |
|
|
|
5.3 |
|
Discontinued
operations, net of tax
|
|
$ |
6.9 |
|
|
$ |
9.1 |
|
For
the year ended
December 31, 2005, interest expense of $9.1 million was recognized
related to the termination of an interest rate swap pertaining to Sunbury's
non-recourse debt obligation in addition to the recognition of interest expense
on the non-recourse debt prior to the restructuring of this debt to an Integrys
Energy Group obligation in the second quarter of 2005.
NOTE 5--PROPERTY,
PLANT, AND EQUIPMENT
Property,
plant,
and equipment in service at December 31 consists of the following utility,
nonutility, and nonregulated assets:
(Millions)
|
|
2007
|
|
|
2006
|
|
Electric
utility
|
|
$ |
2,230.0 |
|
|
$ |
2,181.7 |
|
Natural
gas
utility
|
|
|
4,058.1 |
|
|
|
1,129.6 |
|
Total
utility
plant
|
|
|
6,288.1 |
|
|
|
3,311.3 |
|
Less:
Accumulated depreciation
|
|
|
2,533.1 |
|
|
|
1,366.2 |
|
Net
|
|
|
3,755.0 |
|
|
|
1,945.1 |
|
Construction
in progress
|
|
|
543.5 |
|
|
|
444.9 |
|
Net
utility
plant
|
|
|
4,298.5 |
|
|
|
2,390.0 |
|
|
|
|
|
|
|
|
|
|
Nonutility
plant
|
|
|
29.3 |
|
|
|
21.0 |
|
Less:
Accumulated depreciation
|
|
|
8.8 |
|
|
|
6.5 |
|
Net
nonutility plant
|
|
|
20.5 |
|
|
|
14.5 |
|
|
|
|
|
|
|
|
|
|
Electric
nonregulated
|
|
|
168.2 |
|
|
|
161.0 |
|
Natural
gas
nonregulated
|
|
|
12.6 |
|
|
|
1.1 |
|
Other
nonregulated
|
|
|
24.3 |
|
|
|
21.9 |
|
Total
nonregulated property, plant, and equipment
|
|
|
205.1 |
|
|
|
184.0 |
|
Less:
Accumulated depreciation
|
|
|
60.3 |
|
|
|
53.7 |
|
Net
nonregulated property, plant, and equipment
|
|
|
144.8 |
|
|
|
130.3 |
|
Total
property, plant, and equipment
|
|
$ |
4,463.8 |
|
|
$ |
2,534.8 |
|
The
increase in the
natural gas utility assets in 2007 is due to the merger with PEC. See
Note 6, "Acquisitions and
Sales of Assets" for more information on the merger with
PEC. The increase in construction in progress in 2007 is mainly due
to the construction of Weston 4, which is scheduled to be placed in service
in
the first quarter of 2008.
NOTE 6--ACQUISITIONS
AND SALES OF ASSETS
Merger
with PEC
Effective
February
21, 2007, the PEC merger was completed and WPS Resources Corporation changed
its
name to Integrys Energy Group, Inc. The merger was accounted for
under the purchase method of accounting, with Integrys Energy Group treated
as
the acquirer. In the merger, shareholders
of PEC received 0.825 shares
of Integrys Energy Group common stock, $1 par value, for each share of PEC
common stock, no par value, which they held immediately prior to the
merger. The total purchase price was approximately $1.6
billion (as shown in the table below). The results of operations attributable
to PEC are included in the Consolidated Financial Statements from February
22,
2007, through December 31,
2007.
The
purchase price
was allocated based on the estimated fair market values of the assets acquired
and liabilities assumed. The excess of the purchase price over the
estimated fair values of the tangible net assets acquired was allocated to
identifiable intangible assets, with the remainder then allocated to
goodwill. The following table shows the allocation of the purchase
price to the assets acquired and liabilities assumed at the date of the
acquisition.
(Millions)
|
|
|
|
Current
assets
|
|
$ |
959.2 |
|
Assets
held
for sale (PEP)
|
|
|
769.5 |
|
Property,
plant, and equipment, net
|
|
|
1,769.6 |
|
Regulatory
assets
|
|
|
575.5 |
|
Goodwill
|
|
|
644.9 |
|
Other
long-term assets
|
|
|
183.8 |
|
Total
assets
|
|
|
4,902.5 |
|
|
|
|
|
|
Current
liabilities
|
|
|
1,239.8 |
|
Liabilities
held for sale (PEP)
|
|
|
39.0 |
|
Long-term
debt
|
|
|
860.2 |
|
Regulatory
liabilities
|
|
|
26.4 |
|
Other
long-term liabilities
|
|
|
1,153.9 |
|
Total
liabilities
|
|
|
3,319.3 |
|
Net
assets
acquired/purchase price
|
|
$ |
1,583.2 |
|
In
connection with the 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, 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 11, "Goodwill
and Other Intangible Assets," for a description of the acquired
intangible assets.
Goodwill
of $644.9
million was recorded in connection with the merger, none of which is deductible
for tax purposes.
In
order to achieve Integrys Energy Group's anticipated merger synergies, a
restructuring plan has been implemented, which includes a process to eliminate
duplicative jobs within Integrys Energy Group. Costs associated with
the merger-related involuntary termination of employees at PEC (the acquired
company) have been recognized as a liability assumed in the merger and included
in the purchase price allocation. The following table summarizes the
activity related to these specific costs for the period February 22, 2007,
through December 31, 2007.
(Millions)
|
|
2007
|
|
Accrued
employee severance costs at beginning of period
|
|
$ |
- |
|
Adjustments
to
accrual reflected in purchase price
|
|
|
1.7 |
|
Cash
payments
|
|
|
(0.4 |
) |
Severance
cost reserve at December 31, 2007
|
|
$ |
1.3 |
|
Costs
related to
the involuntary termination of the acquirer's employees are expensed following
the guidance of SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities." Costs associated with the relocation or
voluntary termination of employees are expensed in accordance with SFAS No.
88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits." The following table
summarizes the activity related to costs incurred under SFAS No. 146 and SFAS
No. 88 for the period February 22, 2007, through December 31,
2007.
(Millions)
|
|
2007
|
|
Accrued
employee severance costs at beginning of period
|
|
$ |
- |
|
Severance
expense recorded
|
|
|
7.2 |
|
Cash
payments
|
|
|
(2.4 |
) |
Severance
cost reserve at December 31, 2007
|
|
$ |
4.8 |
|
Purchase
of Aquila's Michigan and Minnesota 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. 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. Integrys Energy
Group paid total consideration of $341.7 million for the Michigan natural
gas distribution operations, and $315.7 million for the Minnesota natural
gas distribution operations. Both amounts include closing adjustments
related primarily to purchased working capital. Both transactions
were accounted for under the purchase method of accounting.
Supplemental
Pro Forma Information
The
following table
shows pro forma results of operations for Integrys Energy Group for the year
ended December 31, 2007, as if the acquisition of PEC had been completed at
January 1, 2007, as well as pro forma results of operations for Integrys Energy
Group for the year ended December 31, 2006, as if the acquisitions 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 what the actual results would have been had the acquisitions
actually occurred on January 1, 2007, and
January 1, 2006.
|
|
Pro
Forma for the Year Ended December 31
|
|
(Millions,
except per share amounts)
|
|
2007
|
|
|
2006
|
|
Net
revenue
|
|
$ |
10,997.7 |
|
|
$ |
9,686.1 |
|
Income
from
continuing operations
|
|
|
211.2 |
|
|
|
144.8 |
|
Income
available for common shareholders
|
|
|
283.4 |
|
|
|
178.4 |
|
Basic
earnings per share – continuing operations
|
|
$ |
2.73 |
|
|
$ |
1.91 |
|
Basic
earnings per share
|
|
$ |
3.72 |
|
|
$ |
2.40 |
|
Diluted
earnings per share – continuing operations
|
|
$ |
2.73 |
|
|
$ |
1.91 |
|
Diluted
earnings per share
|
|
$ |
3.72 |
|
|
$ |
2.40 |
|
Sale
of WPS ESI Gas Storage, LLC
In
April 2006, Integrys Energy Services sold WPS ESI Gas Storage, LLC,
which owned a natural gas storage field located in the Kimball Township, St.
Clair County, Michigan for $19.9 million. The transaction
resulted in the recognition of a pre-tax gain of $9.0 million in the second
quarter of 2006.
Sale
of Guardian Pipeline
In
April 2006, WPS Investments, LLC, a consolidated subsidiary of Integrys
Energy Group, completed the sale of its one-third interest in
Guardian Pipeline, LLC to Northern Border Partners, LP for
$38.5 million. The transaction resulted in the recognition of a
pre-tax gain of $6.2 million in the second quarter of 2006.
Sale
of UPPCO Lands
DPC
In
November 2005, WPSC and DPC closed a transaction in which DPC acquired a 30%
ownership interest in Weston 4. Under the terms of the
agreement, WPSC received $95.1 million in cash from DPC for its share of
Weston 4 construction costs through the date of the closing. DPC is
remitting payments to
WPSC
for its 30%
share of the remaining costs to complete the construction of Weston 4 and
will begin to reimburse WPSC for its share of operating costs when the plant
is
operational.
Sale
of Kewaunee
On
July 5, 2005, WPSC completed the sale of its 59% ownership interest in Kewaunee
to Dominion Energy Kewaunee, LLC, a subsidiary of Dominion Resources,
Inc. At the same time, Wisconsin Power and Light Company sold its 41%
ownership interest in Kewaunee to Dominion.
WPSC's
share of the
cash proceeds from the sale of Kewaunee was $112.5 million. The
sale resulted in a loss of $12.5 million. The loss includes adjustments for
the fair value of an indemnity issued to cover certain costs Dominion may incur
related an unplanned outage in 2005, as well as certain costs related to the
termination of the plant operating agreement and withdrawal from Integrys Energy
Group's investment in the Nuclear Management Company, which served as the
licensed operator of Kewaunee.
In
conjunction with the sale, Dominion received the assets in WPSC's qualified
decommissioning trust and assumed responsibility for the eventual
decommissioning of Kewaunee. These trust assets had a pre-tax fair
value of $243.6 million at closing. WPSC retained ownership of
the assets contained in its nonqualified decommissioning
trust. Proceeds received from the liquidation of the nonqualified
decommissioning trust were $127.1 million, substantially all of which have
been refunded to ratepayers. See Note 23, "Regulatory Environment," for
details regarding regulatory treatment of the proceeds received from the
nonqualified decommissioning trust and the loss on the sale of
Kewaunee.
At
the closing date, WPSC's share of the carrying value of the assets and
liabilities that were included within the sale agreement, or that were otherwise
eliminated pursuant to the sale, were as follows:
(Millions)
|
|
July
5, 2005
|
|
|
|
|
|
Qualified
decommissioning trust fund
|
|
$ |
243.6 |
|
Other
utility
plant, net
|
|
|
165.4 |
|
Other
current
assets
|
|
|
5.5 |
|
Total
assets
|
|
$ |
414.5 |
|
|
|
|
|
|
Regulatory
liabilities
|
|
$ |
(72.1 |
) |
Accounts
payable
|
|
|
2.5 |
|
Asset
retirement obligations
|
|
|
376.4 |
|
Total
liabilities
|
|
$ |
306.8 |
|
Upon
the closing of
the sale, WPSC entered into an agreement with Dominion to purchase energy and
capacity from the plant consistent with volumes available when WPSC owned
Kewaunee. The power purchase agreement extends through 2013 when the
plant's current operating license will expire.
NOTE 7--JOINTLY-OWNED
UTILITY FACILITIES
WPSC
holds an
ownership interest in certain jointly-owned electric generating
facilities. WPSC is entitled to shares of the generating capability
and output of each facility equal to its respective ownership interest. WPSC
also pays its ownership share of additional construction costs, fuel inventory
purchases, and operating expenses unless specific agreements have been executed
to limit its maximum exposure to additional costs. WPSC's share of
significant jointly-owned electric generating facilities as of December 31,
2007, is as follows:
(Millions,
except for percentages and megawatts)
|
|
West
Marinette
Unit
No. 33
|
|
|
Columbia
Energy
Center
|
|
|
Edgewater
Unit
No. 4
|
|
Ownership
|
|
|
68.0 |
% |
|
|
31.8 |
% |
|
|
31.8 |
% |
WPSC's
share of plant nameplate capacity (megawatts)
|
|
|
56.8 |
|
|
|
335.2 |
|
|
|
105.0 |
|
Utility
plant in service
|
|
$ |
18.6 |
|
|
$ |
157.5 |
|
|
$ |
33.3 |
|
Accumulated
depreciation
|
|
$ |
9.2 |
|
|
$ |
98.7 |
|
|
$ |
21.3 |
|
In-service
date
|
|
1993
|
|
|
1975
and 1978
|
|
|
1969
|
|
Weston
4 is a
nominal 500-megawatt coal-fired generation station that is scheduled to be
placed in service in the first quarter of 2008. WPSC has a 70%
ownership in this facility.
WPSC's
share of
direct expenses for these plants is recorded in operating expenses in the
Consolidated Statements of Income. WPSC has supplied its own
financing for all jointly-owned projects.
NOTE 8--NUCLEAR
DECOMMISSIONING TRUST
In
conjunction with the sale of Kewaunee in July 2005, the qualified
decommissioning trust assets were transferred to Dominion and WPSC liquidated
the assets contained in the nonqualified decommissioning
trust. Proceeds received from the liquidation of the nonqualified
decommissioning trust are being refunded to ratepayers. See
Note 23, "Regulatory
Environment," for details regarding regulatory treatment of the proceeds
received from the nonqualified decommissioning trust.
Decommissioning
costs collected in customer rates and charges for realized earnings from the
trusts were included in depreciation expense. Realized after-tax
trust earnings totaled $41.0 million in 2005 as the trust assets were
liquidated due to the sale of Kewaunee.
NOTE 9--REGULATORY
ASSETS AND LIABILITIES
The
following
regulatory assets and liabilities are reflected in our Consolidated Balance
Sheets as of December 31:
(Millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Regulatory
assets
|
|
|
|
|
|
|
Environmental
remediation costs (net of insurance recoveries)
|
|
$ |
758.8 |
|
|
$ |
102.7 |
|
Pension
and
post-retirement benefit related items
|
|
|
221.9 |
|
|
|
158.7 |
|
De
Pere
Energy Center
|
|
|
38.2 |
|
|
|
40.5 |
|
Nuclear
costs
|
|
|
34.7 |
|
|
|
45.3 |
|
Derivatives
|
|
|
34.4 |
|
|
|
14.1 |
|
Energy
recoveries
|
|
|
27.7 |
|
|
|
21.0 |
|
Income
tax
related items
|
|
|
23.3 |
|
|
|
4.6 |
|
Weston
3
lightning strike
|
|
|
22.7 |
|
|
|
- |
|
MISO
costs
|
|
|
19.1 |
|
|
|
20.8 |
|
Asset
retirement obligations
|
|
|
17.0 |
|
|
|
4.2 |
|
Costs
to
achieve merger synergies
|
|
|
14.5 |
|
|
|
- |
|
Unamortized
loss on debt
|
|
|
13.8 |
|
|
|
0.8 |
|
Reserve
for
uncollectible accounts
|
|
|
4.0 |
|
|
|
7.0 |
|
Reduced
coal
deliveries
|
|
|
3.0 |
|
|
|
6.6 |
|
Other
|
|
|
10.9 |
|
|
|
12.5 |
|
Total
|
|
$ |
1,244.0 |
|
|
$ |
438.8 |
|
Balance
Sheet Presentation
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
141.7 |
|
|
$ |
8.7 |
|
Long-term
|
|
|
1,102.3 |
|
|
|
430.1 |
|
Total
|
|
$ |
1,244.0 |
|
|
$ |
438.8 |
|
|
|
|
|
|
|
|
|
|
Regulatory
liabilities
|
|
|
|
|
|
|
|
|
Cost
of
removal reserve
|
|
$ |
217.4 |
|
|
$ |
206.4 |
|
Pension
and
post-retirement benefit related items
|
|
|
59.1 |
|
|
|
3.6 |
|
Energy
refunds
|
|
|
55.7 |
|
|
|
22.8 |
|
Derivatives
|
|
|
13.9 |
|
|
|
16.1 |
|
Income
tax
related items
|
|
|
10.8 |
|
|
|
9.7 |
|
ATC
and MISO
refunds
|
|
|
5.3 |
|
|
|
4.2 |
|
Non-qualified
decommissioning trust
|
|
|
1.3 |
|
|
|
55.9 |
|
Other
|
|
|
6.8 |
|
|
|
5.8 |
|
Total
|
|
$ |
370.3 |
|
|
$ |
324.5 |
|
Balance
Sheet Presentation
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
77.9 |
|
|
$ |
22.8 |
|
Long-term
|
|
|
292.4 |
|
|
|
301.7 |
|
Total
|
|
$ |
370.3 |
|
|
$ |
324.5 |
|
Our
utility
subsidiaries expect to recover their regulatory assets and return their
regulatory liabilities through rates charged to customers based on specific
ratemaking decisions or precedent for each item over periods specified by the
regulators or over the normal operating period of the assets and liabilities
to
which they relate. Based on prior and current rate treatment for such
costs, we believe it is probable that our utility subsidiaries will continue
to
recover from customers the regulatory assets described above.
Pension
and
post-retirement benefit related items at December 31, 2007, and 2006
include all adjustments made to implement SFAS No. 158, "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans – an amendment of
FASB Statements No. 87, 88, 106, and 132(R)" which was effective
December 31, 2006.
See
Note 1(e),
"Summary of Significant
Accounting Policies – Revenue and Customer Receivables"; Note 3, "Risk
Management Activities";
Note 6, "Acquisitions and
Sales of Assets"; Note 15, "Asset Retirement
Obligations"; Note 17, "Commitments and
Contingencies"; Note 19, "Employee Benefit
Plans"; and
Note 23, "Regulatory
Environment"; for more information on some of the more significant
regulatory assets and liabilities listed in the above table.
NOTE 10--INVESTMENTS
IN AFFILIATES, AT EQUITY METHOD
Investments
in
corporate joint ventures and other companies accounted for under the equity
method at December 31, 2007, and 2006 are as follows:
(Millions)
|
|
2007
|
|
|
2006
|
|
ATC
|
|
$ |
296.6 |
|
|
$ |
231.9 |
|
WRPC
|
|
|
9.8 |
|
|
|
8.9 |
|
Other
|
|
|
1.3 |
|
|
|
3.2 |
|
Investments
in affiliates, at equity method
|
|
$ |
307.7 |
|
|
$ |
244.0 |
|
Investments
in
affiliates under the equity method are a component of other assets on the
Consolidated Balance Sheets, and the equity income is recorded in miscellaneous
income on the Consolidated Statements of Income. We are taxed on
ATC's equity income, rather than ATC, due to the tax flow through nature of
ATC's business structure. Accordingly, the provision for income taxes
includes our taxes on this equity income. Included in other
investments in 2006 in the above table is Integrys Energy Services' ownership
in
ECO Coal Pelletization #12, LLC. See below for further explanation of
this investment.
ATC
Integrys
Energy
Group had an approximate 34.5% ownership interest in ATC at December 31,
2007. ATC is a for-profit, transmission-only company. ATC
owns, maintains, monitors, and operates electric transmission assets in portions
of Wisconsin, Michigan, Minnesota, and Illinois.
In
January 2008, ATC's Wausau, Wisconsin, to Duluth, Minnesota, transmission line
became operational. Integrys Energy Group committed to fund 50% of total project
costs incurred by investing additional equity in ATC.
The
regulated
electric utilities provide construction and other services to and receive
network transmission services from, ATC. The charges to ATC for
services and construction provided by the regulated electric utilities and
the
network transmission service costs received from ATC by the regulated electric
utilities at December 31, were as follows:
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Total
Charges
to ATC for services and construction
|
|
$ |
98.6 |
|
|
$ |
126.5 |
|
|
$ |
72.9 |
|
Total
network
transmission service costs provided by ATC
|
|
$ |
78.1 |
|
|
$ |
63.3 |
|
|
$ |
54.2 |
|
Integrys
Energy
Group recorded dividends received of $36.7 million, $29.7 million, and
$17.8 million from ATC in 2007, 2006, and 2005,
respectively. Integrys Energy Group made capital contributions to ATC
of $50.9 million, $36.5 million, and $65.1 million in 2007, 2006, and 2005,
respectively.
WRPC
WPSC
owns 50% of
the voting stock of WRPC, which operates two hydroelectric plants on the
Wisconsin River and an oil-fired combustion
turbine. Two-thirds of the energy output of the hydroelectric plants
is sold to WPSC, and the remaining one-third is sold to Wisconsin Power and
Light. The electric power from the combustion turbine is sold in
equal parts to WPSC and Wisconsin Power and Light.
WPSC
has sales to
and purchases from WRPC and receives net proceeds from sales of energy into
the
MISO market from WRPC. The related party transactions recorded and net proceeds
received at December 31, were as follows:
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Revenues
from
services provided to WRPC
|
|
$ |
1.0 |
|
|
$ |
1.5 |
|
|
$ |
0.7 |
|
Purchases
of
energy from WRPC
|
|
|
4.7 |
|
|
|
4.1 |
|
|
|
4.3 |
|
Net
proceeds
from WRPC sales of energy into the MISO
|
|
|
6.0 |
|
|
|
4.2 |
|
|
|
3.1 |
|
WPSC
recorded
dividends received of $0.9 million, $4.2 million, and
$7.8 million from WRPC in 2007, 2006, and 2005 respectively.
Of
Integrys Energy Group's equity in net income disclosed below, $1.8 million,
$3.2 million, and $4.9 million relates to WPSC's investment in WRPC in
2007, 2006, and 2005, respectively.
ECO
Coal Pelletization #12
At
December 31, 2007, Integrys Energy Services held a 70% ownership interest in
ECO
Coal Pelletization #12, LLC, which held an equity method investment in an
entity that produced synthetic fuel for tax credits under Section 29/45K of
the
Internal Revenue Code. By law, Section 29/45K federal tax credits for
synthetic fuel produced from coal expired on December 31, 2007; therefore,
this
facility ceased operation effective January 1, 2008. Integrys Energy
Services' investment in this facility was not significant at December 31, 2007
or 2006. The losses and royalty income received from the equity
method investment Integrys Energy Services held through its ownership interest
in ECO Coal Pelletization #12, LLC, were as follows:
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Losses
generated from operations of ECO Coal Pelletization #12
|
|
$ |
18.2 |
|
|
$ |
23.9 |
|
|
$ |
16.8 |
|
Integrys
Energy Services' partners share of the losses (recorded as minority
interest)
|
|
|
(0.1 |
) |
|
|
(3.8 |
) |
|
|
(4.5 |
) |
Royalty
income recognized
|
|
|
(1.7 |
) |
|
|
- |
|
|
|
(3.5 |
) |
In
2007, 2006, and 2005, the operation of this facility generated positive earnings
when including the tax credits generated and the impact of gains on oil options
utilized to mitigate the risk that rising oil prices had on the value of the
tax
credits.
Guardian
Pipeline
Guardian
Pipeline,
LLC owns a natural gas pipeline, which began operating in 2002, that stretches
about 140 miles from near Joliet, Illinois, into southern Wisconsin. It can
transport up to 750 million cubic feet of natural gas daily. In
April 2006, Integrys Energy Group completed the sale of its one-third interest
in Guardian Pipeline to Northern Border Partners, LP. See Note 6,
"Acquisitions and Sales of
Assets," for more information related to the sale.
Integrys
Energy
Services recorded related party transactions for purchases from Guardian
Pipeline. These purchases amounted to $0.9 million in 2006
through the date of sale, and $0.6 million in 2005.
Other
Investments
Other
investments
accounted for under the equity method include various investments that were
not
significant at December 31, 2007 and 2006.
Financial
Data
Combined
financial
data of ATC and WRPC are included in the table below for 2007 and 2006. Combined
financial data of ATC, WRPC, and Guardian Pipeline are included in the table
below for 2005. The financial data of Guardian Pipeline is not
included in the 2007 or 2006 information, as Integrys Energy Group sold this
investment in April 2006 and the financial information from January 1, 2006
through the date of sale was not significant.
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Income
statement data
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
415.6 |
|
|
$ |
347.5 |
|
|
$ |
339.8 |
|
Operating
expenses
|
|
|
203.9 |
|
|
|
184.3 |
|
|
|
189.4 |
|
Other
expense
|
|
|
54.2 |
|
|
|
34.9 |
|
|
|
37.8 |
|
Net
income
|
|
$ |
157.5 |
|
|
$ |
128.3 |
|
|
$ |
112.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrys
Energy Group's equity in net income
|
|
$ |
52.3 |
|
|
$ |
42.2 |
|
|
$ |
31.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
sheet data
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$ |
52.3 |
|
|
$ |
36.2 |
|
|
$ |
40.3 |
|
Non-current
assets
|
|
|
2,207.8 |
|
|
|
1,872.4 |
|
|
|
1,791.8 |
|
Total
assets
|
|
$ |
2,260.1 |
|
|
$ |
1,908.6 |
|
|
$ |
1,832.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$ |
317.7 |
|
|
$ |
306.4 |
|
|
$ |
158.5 |
|
Long-term
debt
|
|
|
899.1 |
|
|
|
648.9 |
|
|
|
796.9 |
|
Other
non-current liabilities
|
|
|
111.1 |
|
|
|
128.2 |
|
|
|
102.4 |
|
Shareholders'
equity
|
|
|
932.2 |
|
|
|
825.1 |
|
|
|
774.3 |
|
Total
liabilities and shareholders' equity
|
|
$ |
2,260.1 |
|
|
$ |
1,908.6 |
|
|
$ |
1,832.1 |
|
NOTE 11--GOODWILL
AND OTHER INTANGIBLE ASSETS
The
following table
shows goodwill recorded by Integrys Energy Group as of December 31, 2007,
and 2006:
(Millions)
|
|
December 31,
2007
|
|
|
December 31,
2006
|
|
Natural
Gas
Utility segment
|
|
$ |
936.8 |
|
|
$ |
303.9 |
|
Integrys
Energy Services
|
|
|
11.5 |
|
|
|
- |
|
Total
goodwill by segment
|
|
$ |
948.3 |
|
|
$ |
303.9 |
|
Integrys
Energy
Group had the following changes to the carrying amount of goodwill for the
year
ended December 31, 2007:
(Millions)
|
|
|
|
Goodwill
recorded at December 31, 2006
|
|
$ |
303.9 |
|
Purchase
accounting adjustments for MGUC and MERC
|
|
|
(0.5 |
) |
Goodwill
associated with PEC merger
|
|
|
644.9 |
|
Goodwill
recorded at December 31, 2007
|
|
$ |
948.3 |
|
Identifiable
intangible assets other than goodwill are included as a component of other
assets within the Consolidated Balance Sheets. Information in the
tables below relates to purchased identifiable intangible assets for the periods
indicated.
(Millions)
|
|
December 31,
2007
|
|
|
December 31,
2006
|
|
Asset
Class
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Customer
related
|
|
$ |
32.6 |
|
|
$ |
(9.3 |
) |
|
$ |
23.3 |
(1) |
|
$ |
12.2 |
|
|
$ |
(4.3 |
) |
|
$ |
7.9 |
|
Natural
gas
and electric
contract
assets(2)
|
|
|
60.1 |
|
|
|
(34.1 |
) |
|
|
26.0 |
(3) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Natural
gas
and electric
contract
liabilities(2)
|
|
|
(33.6 |
) |
|
|
13.1 |
|
|
|
(20.5 |
)(4) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Emission
allowances(5)
|
|
|
2.4 |
|
|
|
(0.2 |
) |
|
|
2.2 |
|
|
|
5.0 |
|
|
|
(0.8 |
) |
|
|
4.2 |
|
Other
|
|
|
3.8 |
|
|
|
(1.2 |
) |
|
|
2.6 |
|
|
|
3.9 |
|
|
|
(0.8 |
) |
|
|
3.1 |
|
Total
|
|
$ |
65.3 |
|
|
$ |
(31.7 |
) |
|
$ |
33.6 |
|
|
$ |
21.1 |
|
|
$ |
(5.9 |
) |
|
$ |
15.2 |
|
(1)
|
Includes
customer relationship assets associated with both PEC's nonregulated
retail natural gas and electric operations
and
MERC's non-utility home services business. The remaining
weighted average amortization period for
customer
related intangible assets is approximately 8
years.
|
(2)
|
Represents
the
fair value of certain PEC natural gas and electric customer contracts
acquired in the merger that were not considered to be derivative
instruments, and as a result, were recorded as intangible assets.
|
(3)
|
Consists
of
both short-term and long-term intangible assets related to customer
contracts in the amount of $20.5 million and $5.5 million,
respectively, which have a weighted average amortization period of
1.2
years.
|
(4)
|
Consists
of
both short-term and long-term intangible liabilities related to customer
contracts in the amount of $7.1 million and $13.4 million,
respectively, which have a weighted average amortization period of
2.8
years.
|
(5)
|
Emission
allowances do not have a contractual term or expiration date.
|
Intangible
asset
amortization expense for all intangibles (except for the natural gas and
electric contracts, which are discussed below), in the aggregate, for the years
ended December 31, 2007, 2006, and 2005, was $8.5 million,
$2.1 million, and $2.2 million, respectively. The increase
in amortization expense in 2007 primarily related to customer related intangible
assets 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:
(Millions)
|
|
|
|
For
year
ending December 31, 2008
|
|
$ |
8.3 |
|
For
year
ending December 31, 2009
|
|
|
6.9 |
|
For
year
ending December 31, 2010
|
|
|
5.8 |
|
For
year
ending December 31, 2011
|
|
|
4.9 |
|
For
year
ending December 31, 2012
|
|
|
3.6 |
|
The
effect of
purchase accounting related to the natural gas and electric contracts is
recorded as a component of nonregulated fuel, natural gas, and purchased power
and is not included in the table above. Amortization of these contracts in
2007
resulted in an increase to nonregulated fuel, natural gas, and purchased power
in the amount of $21.0 million. Estimated future amortization of
these contracts will increase nonregulated cost of fuel, natural gas, and
purchased power by $13.3 million in 2008. The estimated future
amortization of these contracts will decrease nonregulated cost of fuel, natural
gas, and purchased power by $2.9 million in 2009, $2.7 million in
2010, $2.0 million in 2011, and $0.2 million in 2012. The
amortization of these contracts substantially reduces the PEC margin that would
have been recognized related to these contracts absent the merger.
NOTE 12--LEASES
Integrys
Energy
Group leases various property, plant, and equipment. Terms of the
operating leases vary, but generally require Integrys Energy Group to pay
property taxes, insurance premiums, and maintenance costs associated with the
leased property. Many of Integrys Energy Group's leases contain one
of the following options: (a) Integrys Energy Group can, at the end of the
lease
term, purchase the property at the current fair market value or (b) exercise
a
renewal option, as set forth in the lease agreement. Rental expense
attributable to operating leases was $13.6 million, $7.0 million, and
$6.6 million in 2007, 2006, and 2005, respectively. Future
minimum rental obligations under non-cancelable operating leases, are payable
as
follows:
Year
ending December 31
(Millions)
|
|
|
|
|
|
|
|
2008
|
|
$ |
8.3 |
|
2009
|
|
|
6.9 |
|
2010
|
|
|
6.5 |
|
2011
|
|
|
6.3 |
|
2012
|
|
|
6.1 |
|
Later
years
|
|
|
9.6 |
|
Total
payments
|
|
$ |
43.7 |
|
NOTE 13--SHORT-TERM
DEBT AND LINES OF CREDIT
Integrys
Energy
Group manages its liquidity by maintaining adequate external financing
commitments. The information in the table below relates to Integrys
Energy Group's short-term debt and lines of credit.
(Millions)
|
Maturity
|
|
12/31/2007
|
|
|
12/31/2006
|
|
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)(1)
|
9/05/07
|
|
|
- |
|
|
|
121.0 |
|
Revolving
credit facility (WPSC)
(2)
|
6/02/10
|
|
|
115.0 |
|
|
|
115.0 |
|
Revolving
credit facility (PEC)(3)
|
6/13/11
|
|
|
400.0 |
|
|
|
- |
|
Revolving
credit facility (PGL)(4)
|
7/12/10
|
|
|
250.0 |
|
|
|
- |
|
Revolving
credit facility (Integrys Energy Services)(5)
|
4/18/08
|
|
|
150.0 |
|
|
|
150.0 |
|
Revolving
short-term notes payable (WPSC)(6)
|
5/13/08
|
|
|
10.0 |
|
|
|
10.0 |
|
Uncommitted
secured cross-exchange agreement (Integrys Energy
Services)
|
4/15/08
|
|
|
25.0 |
|
|
|
- |
|
Total
short-term credit capacity
|
|
|
|
1,950.0 |
|
|
|
1,396.0 |
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Uncollateralized
portion of gross margin credit
agreement
|
|
|
|
10.8 |
|
|
|
- |
|
Letters
of credit issued inside credit facilities
|
|
|
|
138.9 |
|
|
|
152.4 |
|
Loans
outstanding under the credit agreements
|
|
|
|
160.0 |
|
|
|
160.0 |
|
Commercial
paper outstanding(7)
|
|
|
|
308.2 |
|
|
|
562.8 |
|
Accrued
interest or original discount on outstanding commercial
paper
|
|
|
|
0.5 |
|
|
|
0.7 |
|
Available
capacity under existing agreements
|
|
|
$ |
1,331.6 |
|
|
$ |
520.1 |
|
(1)
Matured on 9/05/2007.
|
(2)
Provides backup for WPSC's commercial paper borrowing program.
|
|
(3)
Borrowings under this agreement are guaranteed by Integrys Energy
Group.
|
|
(4)
Provides backup for PGL's seasonal commercial paper borrowing
program.
|
|
(5)
Matures on 04/18/2008. Borrowings under this agreement
are guaranteed by Integrys Energy Group.
|
|
(6)
Facility is renewed every six months.
|
|
(7)
A portion of the proceeds from the sale of PEP in
September 2007 were used to reduce the commercial paper borrowings.
|
Integrys
Energy
Group's short-term borrowings consist of commercial paper backed by the
unsecured revolving credit facilities (discussed above), as well as short-term
notes as shown below.
(Millions,
except for percentages)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
As
of end of year
|
|
|
|
|
|
|
|
|
|
Commercial
paper outstanding
|
|
$ |
308.2 |
|
|
$ |
562.8 |
|
|
$ |
254.8 |
|
Average
discount rate on outstanding commercial paper
|
|
|
5.51 |
% |
|
|
5.43 |
% |
|
|
4.54 |
% |
Short-term
notes payable outstanding
|
|
$ |
160.0 |
|
|
$ |
160.0 |
|
|
$ |
10.0 |
|
Average
interest rate on short-term notes payable
|
|
|
3.66 |
% |
|
|
5.56 |
% |
|
|
4.32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the year
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
amount
of short-term debt
|
|
$ |
1,127.3 |
|
|
$ |
1,085.6 |
|
|
$ |
310.7 |
|
Average
amount
of short-term debt
|
|
$ |
616.5 |
|
|
$ |
678.8 |
|
|
$ |
174.4 |
|
Average
interest rate on short-term debt
|
|
|
5.58 |
% |
|
|
5.34 |
% |
|
|
3.21 |
% |
The
commercial
paper at December 31, 2007, had varying maturity dates ranging from January
2,
2008, through January 11, 2008.
NOTE 14--LONG-TERM
DEBT
(Millions)
|
|
December 31,
2007
|
|
|
December 31,
2006
|
|
WPSC
(1)
|
|
|
|
|
|
|
|
|
|
First
mortgage
bonds
|
|
|
|
|
|
|
|
|
|
|
Series
|
|
Year
Due
|
|
|
|
|
|
|
|
|
|
|
|
6.90 |
% |
2013
|
|
|
$ |
- |
|
|
$ |
22.0 |
|
|
|
|
|
7.125 |
% |
2023
|
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
|
Senior
notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
5.65 |
% |
2017
|
|
|
|
125.0 |
|
|
|
- |
|
UPPCO (2)
|
|
|
|
|
|
|
|
|
|
|
|
Series
|
|
Year
Due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.32 |
% |
2021
|
|
|
|
12.6 |
|
|
|
13.5 |
|
PEC
(3)
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured
senior
note
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
|
|
Year
Due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A,
6.90 |
% |
2011
|
|
|
|
325.0 |
|
|
|
- |
|
|
|
|
Fair
value
hedge adjustment
|
|
|
|
0.3 |
|
|
|
- |
|
PGL (4),
(5)
|
|
|
|
|
|
|
|
|
|
+ |
|
|
Fixed
first and
refunding mortgage bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
|
|
Year
Due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HH,
4.75%
|
|
2030
|
adjustable
after July 1, 2014
|
|
|
50.0 |
|
|
|
- |
|
|
|
|
|
KK,
5.00%
|
|
2033
|
|
|
|
50.0 |
|
|
|
- |
|
|
|
|
|
LL,
3.05%
|
|
2033
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
|
|
Year
Due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OO
|
|
2037
|
|
|
|
51.0 |
|
|
|
- |
|
|
|
|
|
PP
|
|
2037
|
|
|
|
51.0 |
|
|
|
- |
|
NSG
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
First
mortgage
bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
|
|
Year
Due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
M,
5.00 |
% |
2028
|
|
|
|
29.1 |
|
|
|
- |
|
|
|
|
|
|
N-2,
4.625 |
% |
2013
|
|
|
|
40.0 |
|
|
|
- |
|
Integrys
Energy Group (7)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured
senior
notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
|
|
Year
Due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.0 |
% |
2009
|
|
|
|
150.0 |
|
|
|
150.0 |
|
|
|
|
|
|
5.375 |
% |
2012
|
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
Unsecured
junior
subordinated notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (8)
|
|
|
10.5 |
|
|
|
13.7 |
|
Integrys
Energy Services' Loan
|
|
|
0.1 |
|
|
|
- |
|
Other
term
loan (9)
|
|
|
27.0 |
|
|
|
27.0 |
|
Senior
secured
note(10)
|
|
|
1.7 |
|
|
|
2.0 |
|
Total
|
|
|
2,311.0 |
|
|
|
1,315.9 |
|
Unamortized
discount and premium on bonds and debt
|
|
|
9.3 |
|
|
|
(2.2 |
) |
Total
debt
|
|
|
2,320.3 |
|
|
|
1,313.7 |
|
Less
current
portion
|
|
|
(55.2 |
) |
|
|
(26.5 |
) |
Total
long-term debt
|
|
$ |
2,265.1 |
|
|
$ |
1,287.2 |
|
(1) In
January 2007, WPSC used the proceeds from the $22.0 million 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. WPSC's long-term
first mortgage bonds and senior notes are subject to the terms and conditions
of
WPSC's First Mortgage Indenture. Under the terms of the indenture,
substantially all property owned by WPSC is pledged as collateral for these
outstanding debt securities. All of these debt securities require
semi-annual payments of interest. Principal payments are due on the maturity
date of each series. WPSC senior notes become non-collateralized if
WPSC retires all of its outstanding first mortgage bonds and no new
mortgage is put in their place.
WPSC
issued
$125.0 million of 5.55% 30-year senior notes on December 1,
2006. The net proceeds from the issuance of the senior notes were
used for general corporate utility purposes, including funding construction
costs and capital additions and reducing short-term indebtedness.
In
November, 2007, WPSC issued $125.0 million of series 5.65% senior notes due
November 1, 2017. The net proceeds from the issuance of the senior
notes were used for general corporate utility purposes, including funding
construction costs and other capital additions.
|
(2) Under
the terms of
UPPCO's First Mortgage Indenture, substantially all property owned
by
UPPCO is pledged as collateral for this outstanding debt
series. Interest payments are due semi-annually on May 1 and
November 1 with a sinking fund payment of $900,000 due each November
1. The final sinking fund payment due November 1, 2021, will
completely retire the series.
|
|
(3)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 18, "Guarantees,"
for more information related to
this guaranty.
|
|
(4) On
February 1, 2008, the interest rate on the $50.0 million 3.05% Series
LL first mortgage bonds at PGL, which support the Illinois Development
Finance Authority Adjustable-Rate Gas Supply Refunding Revenue Bonds,
Series 2003B, was established at a term rate through January 31,
2012 at
3.75%, adjustable after February 1, 2012. These
bonds were subject to a mandatory tender for purchase for remarketing
on
February 1, 2008, and, as a result, are presented as current portion
of
long-term debt on Integrys Energy Group's Consolidated Balance Sheets
at
December 31, 2007. 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.
|
|
(5)
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 December 31, 2007, was
3.96% for both Series OO and PP bonds.
|
|
(6) 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.
|
|
(7)
On December 1, 2006, Integrys Energy Group issued $300 million of
junior
subordinated notes. Due to certain features of these notes,
rating agencies consider them to be hybrid instruments with a combination
of debt and equity characteristics. These notes have a 60-year
term and rank junior to all current and future indebtedness of Integrys
Energy Group, with the exception of trade accounts payable and other
accrued liabilities arising in the ordinary course of
business. Interest is payable semi-annually at the stated rate
of 6.11% for the first ten years, but the rate has been fixed at
6.22%
through the use of forward-starting interest rate swaps. The
interest rate will float for the remainder of the term. The
notes can be prepaid without penalty after the first ten
years. Integrys Energy Group has agreed, however, in a
replacement capital covenant with the holders of Integrys Energy
Group's
5.375% unsecured senior notes due December 1, 2012, that it will
not
redeem or repurchase the junior subordinated notes on or prior to
December
1, 2036 unless such repurchases or redemptions are made from the
proceeds
of the sale of specific securities considered by rating agencies
to have
equity characteristics equal to or greater than those of the junior
subordinated notes.
|
|
(8) Borrowings
by Integrys Energy
Services under term loans and collateralized by nonregulated assets
totaled $10.5 million at December 31, 2007. The
assets of WPS New England Generation, Inc. and WPS Canada
Generation, Inc., subsidiaries of Integrys Energy Services, collateralize
$3.0 million and $7.5 million, respectively, of the total
outstanding amount. Both loans have semi-annual installment
payments, interest rates of 8.75%, and maturity dates in May
2010.
|
|
(9)
In April 2001, the Schuylkill County Industrial Development
Authority issued $27.0 million of refunding tax-exempt
bonds. The proceeds from the bonds were loaned to
WPS Westwood Generation, LLC, a subsidiary of Integrys Energy
Services. This loan is repaid by WPS Westwood Generation
to Schuylkill County Industrial Development Authority with monthly
payments that have a floating interest rate that is reset
weekly. At December 31, 2007, the interest rate was
3.70%. The loan is to be repaid by April 2021. Integrys Energy
Group agreed to guarantee WPS Westwood Generation's obligation to
provide sufficient funds to pay the loan and the related obligations
and
indemnities.
|
|
(10)
Upper Peninsula Building Development Corporation has a senior
secured note of $1.7 million as of December 31, 2007, which
requires semi-annual payments at an interest rate of 9.25%, and matures
in
2011. The note is secured by a first mortgage lien on the
building they own, which is also leased to UPPCO for use as their
corporate headquarters.
|
PGL
and NSG utilize
mortgage bonds to secure tax exempt financing. 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 collateralized by an equal principal amount of
PGL's or NSG's first mortgage bonds.
At
December 31, 2007, Integrys Energy Group and its subsidiaries were in
compliance with all covenants relating to outstanding debt. A
schedule of all principal debt payment amounts, including bond maturities and
early retirements, for Integrys Energy Group is as follows:
Year
ending December 31
(Millions)
|
|
|
|
2008
|
|
$ |
55.3 |
|
2009
|
|
|
155.6 |
|
2010
|
|
|
119.2 |
|
2011
|
|
|
476.7 |
|
2012
|
|
|
250.9 |
|
Later
years
|
|
|
1,253.3 |
|
Total
payments
|
|
$ |
2,311.0 |
|
NOTE 15--ASSET
RETIREMENT OBLIGATIONS
The
utility
segments identified asset retirement obligations primarily related to asbestos
abatement at certain facilities, office buildings, and service centers; disposal
of PCB-contaminated transformers; removal of natural gas distribution pipe
(including asbestos and PCBs); and closure of fly-ash landfills at certain
generation facilities. 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.
As
discussed in Note 6, "Acquisitions and Sales of
Assets," the sale of Kewaunee to Dominion was completed on July 5,
2005. As a result of the sale, Dominion assumed the asset retirement
obligation related to Kewaunee. As discussed in Note 4, "Discontinued Operations,"
Integrys Energy Services completed the sale of Sunbury in July 2006, which
included the transfer of asset retirement obligations related to
Sunbury.
Changes
to Asset Retirement Obligation Liabilities
The
following table
shows changes to the asset retirement obligations of Integrys Energy Group
through December 31, 2007.
(Millions)
|
|
Utilities
|
|
|
Integrys
Energy Services
|
|
|
Total
|
|
Asset
retirement obligations at December 31, 2004
|
|
$ |
364.4 |
|
|
$ |
2.2 |
|
|
$ |
366.6 |
|
Accretion
|
|
|
12.4 |
|
|
|
0.2 |
|
|
|
12.6 |
|
Asset
retirement obligation transferred to Dominion
|
|
|
(376.4 |
) |
|
|
- |
|
|
|
(376.4 |
) |
Adoption
of
Interpretation No. 47
|
|
|
8.2 |
|
|
|
3.9 |
|
|
|
12.1 |
|
Asset
retirement obligations at December 31, 2005
|
|
|
8.6 |
|
|
|
6.3 |
|
|
|
14.9 |
|
Asset
retirement obligations from acquisition of naturalgas operations
in
Michigan and Minnesota
|
|
|
0.3 |
|
|
|
- |
|
|
|
0.3 |
|
Asset
retirement obligations transferred in sales
|
|
|
- |
|
|
|
(5.8 |
) |
|
|
(5.8 |
) |
Accretion
|
|
|
0.5 |
|
|
|
0.2 |
|
|
|
0.7 |
|
Asset
retirement obligations at December 31, 2006
|
|
|
9.4 |
|
|
|
0.7 |
|
|
|
10.1 |
|
Asset
retirement obligations from merger with PEC
|
|
|
124.9 |
|
|
|
- |
|
|
|
124.9 |
|
Asset
retirement obligations transferred in sales
|
|
|
(0.2 |
) |
|
|
- |
|
|
|
(0.2 |
) |
Asset
retirement obligations settled
|
|
|
(1.4 |
) |
|
|
- |
|
|
|
(1.4 |
) |
Accretion
|
|
|
6.8 |
|
|
|
- |
|
|
|
6.8 |
|
Asset
retirement obligations at December 31, 2007
|
|
$ |
139.5 |
|
|
$ |
0.7 |
|
|
$ |
140.2 |
|
NOTE
16--INCOME TAXES
Deferred
Tax Assets and Liabilities
Certain
temporary
differences, in which the offsetting amount is recorded as a regulatory asset
or
liability, are presented in the table below as net amounts, consistent with
regulatory treatment. The principal components of our deferred tax
assets and liabilities recognized in the balance sheets as of December 31
are as follows:
(Millions)
|
|
2007
|
|
|
2006
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
credit
carryforwards
|
|
$ |
112.0 |
|
|
$ |
105.3 |
|
Plant
related
|
|
|
53.7 |
|
|
|
61.3 |
|
Employee
benefits
|
|
|
124.4 |
|
|
|
54.8 |
|
Bad
Debts
|
|
|
17.8 |
|
|
|
4.6 |
|
Regulatory
deferrals
|
|
|
14.4 |
|
|
|
27.7 |
|
State
capital
and operating loss carryforwards
|
|
|
14.5 |
|
|
|
14.0 |
|
Deferred
deductions
|
|
|
31.4 |
|
|
|
2.8 |
|
Other
|
|
|
6.9 |
|
|
|
(0.5 |
) |
Total
deferred tax assets
|
|
|
375.1 |
|
|
|
270.0 |
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
(2.3 |
) |
|
|
(1.8 |
) |
Net
deferred
tax assets
|
|
$ |
372.8 |
|
|
$ |
268.2 |
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Plant
related
|
|
$ |
622.5 |
|
|
$ |
277.7 |
|
Regulatory
deferrals
|
|
|
87.5 |
|
|
|
49.5 |
|
Price
risk
management, net
|
|
|
93.2 |
|
|
|
35.0 |
|
Deferred
income
|
|
|
3.7 |
|
|
|
3.7 |
|
Employee
benefits
|
|
|
63.5 |
|
|
|
- |
|
Other
|
|
|
10.6 |
|
|
|
3.0 |
|
Total
deferred tax liabilities
|
|
$ |
881.0 |
|
|
$ |
368.9 |
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet Presentation:
|
|
|
|
|
|
|
|
|
Current
deferred tax liabilities
|
|
$ |
13.9 |
|
|
$ |
3.1 |
|
Long-term
deferred tax liabilities
|
|
|
494.3 |
|
|
|
97.6 |
|
Net
deferred
tax liabilities
|
|
$ |
508.2 |
|
|
$ |
100.7 |
|
Deferred
tax credit
carryforwards at December 31, 2007, include $102.1 million of
alternative minimum tax credits related to tax credits available under Section
29/45K of the Internal Revenue Code. These alternative minimum tax credit
carryforwards can be carried forward indefinitely. Carryforward
periods for state capital and operating loss carryforwards vary. In the majority
of states in which Integrys Energy Group operates the period is 15 years or
more, with the majority beginning to expire in 2013. Valuation allowances have
been established for certain state operating and capital loss carryforwards
due
to the uncertainty of the ability to realize the benefit of these losses in
the
future.
Federal
Income Tax Expense
The
following table
presents a reconciliation of federal income taxes to the provision for income
taxes reported in the Consolidated Statements of Income for the periods ended
December 31.
The
taxes are
calculated by multiplying the statutory federal income tax rate by book income
before federal income tax.
(Millions,
except for percentages)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
Statutory
federal income tax
|
|
|
35.0 |
% |
|
$ |
93.4 |
|
|
|
35.0 |
% |
|
$ |
68.8 |
|
|
|
35.0 |
% |
|
$ |
66.8 |
|
State
income
taxes, net
|
|
|
4.3 |
|
|
|
11.5 |
|
|
|
6.5 |
|
|
|
12.8 |
|
|
|
4.3 |
|
|
|
8.2 |
|
Foreign
income
taxes, net
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(0.1 |
) |
|
|
(0.2 |
) |
Unrecognized
tax benefits – Interpretation No. 48, net
|
|
|
0.4 |
|
|
|
1.0 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Benefits
and
compensation
|
|
|
(2.5 |
) |
|
|
(6.8 |
) |
|
|
(2.5 |
) |
|
|
(4.8 |
) |
|
|
(2.6 |
) |
|
|
(4.8 |
) |
Investment
tax
credit
|
|
|
(0.6 |
)
) |
|
|
(1.5 |
) |
|
|
(0.4 |
) |
|
|
(0.8 |
) |
|
|
(0.9 |
) |
|
|
(1.7 |
) |
Federal
tax
credits
|
|
|
(5.4 |
) |
|
|
(14.3 |
) |
|
|
(15.8 |
) |
|
|
(30.2 |
) |
|
|
(14.1 |
) |
|
|
(26.9 |
) |
Other
differences, net
|
|
|
1.0 |
|
|
|
2.7 |
|
|
|
0.1 |
|
|
|
(0.8 |
) |
|
|
(0.8 |
) |
|
|
(1.8 |
) |
Effective
income tax
|
|
|
32.2 |
% |
|
$ |
86.0 |
|
|
|
22.9 |
% |
|
$ |
45.0 |
|
|
|
20.8 |
% |
|
$ |
39.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
$ |
(6.8 |
) |
|
|
|
|
|
$ |
21.1 |
|
|
|
|
|
|
$ |
13.1 |
|
State
|
|
|
|
|
|
|
8.9 |
|
|
|
|
|
|
|
6.2 |
|
|
|
|
|
|
|
14.3 |
|
Foreign
|
|
|
|
|
|
|
4.7 |
|
|
|
|
|
|
|
5.3 |
|
|
|
|
|
|
|
3.2 |
|
Total
current provision
|
|
|
|
|
|
|
6.8 |
|
|
|
|
|
|
|
32.6 |
|
|
|
|
|
|
|
30.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
provision
|
|
|
|
|
|
|
78.2 |
|
|
|
|
|
|
|
11.4 |
|
|
|
|
|
|
|
13.0 |
|
Net
operating
loss carryforwards
|
|
|
|
|
|
|
(0.9 |
) |
|
|
|
|
|
|
1.8 |
|
|
|
|
|
|
|
(2.3 |
) |
Unrecognized
tax benefits – Interpretation No. 48, net
|
|
|
|
|
|
|
1.0 |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
Interest
|
|
|
|
|
|
|
2.4 |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
Penalties
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
Investment
tax
credit
|
|
|
|
|
|
|
(1.4 |
) |
|
|
|
|
|
|
(0.8 |
) |
|
|
|
|
|
|
(1.7 |
) |
Total
income tax expense
|
|
|
|
|
|
$ |
86.0 |
|
|
|
|
|
|
$ |
45.0 |
|
|
|
|
|
|
$ |
39.6 |
|
Foreign
income
before taxes was $23.3 million in 2007, $24.5 million in 2006, and
$10.2 million in 2005.
As
the related temporary differences reverse, our regulated utilities are
prospectively refunding taxes to or collecting taxes from customers for which
deferred taxes were recorded in prior years at rates different than current
rates. The regulatory (asset) liability for these and other regulatory tax
effects totaled $(11.3) million and $9.7 million as of
December 31, 2007 and 2006, respectively.
Effective
January
1, 2007, Integrys Energy Group records penalties and accrued interest related
to
income taxes as a component of income tax expense. Prior to January 1, 2007,
Integrys Energy Group recorded interest and penalties as components of income
before taxes. Integrys Energy Group recognized interest and penalties of
$2.3 million in 2007, $0.3 million in 2006, and $0.3 million in
2005. Integrys Energy Group had accrued liabilities for interest and penalties
of $4.6 million at December 31, 2007 and $0.2 million at January
1, 2007.
Unrecognized
Tax Benefits
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:
|
|
Unrecognized
Tax Benefits
|
|
|
|
(in millions)
|
|
Balance
at
January 1, 2007
|
|
$ |
3.7 |
|
Increase
related to tax positions acquired
|
|
|
13.9 |
|
Increase
related to tax positions taken in prior years
|
|
|
0.5 |
|
Decrease
related to tax positions taken in prior years
|
|
|
(0.3 |
) |
Decrease
related to tax positions taken in current year
|
|
|
(3.9 |
) |
Decrease
related to settlements
|
|
|
(3.6 |
) |
Decrease
related to lapse of statutes
|
|
|
(0.3 |
) |
Balance
at
December 31, 2007
|
|
$ |
10.0 |
|
At
December 31, 2007, unrecognized tax benefits of $0.8 million could
affect Integrys Energy Group's effective tax rate for continuing operations
if
recognized in subsequent periods.
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. Subject to the following 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 2003.
·
|
Wisconsin
Department of Revenue – WPSC has agreed to statute extensions for tax
years covering 1996-2002.
|
·
|
Illinois
Department of Revenue – PEC and combined subsidiaries have agreed to
statute extensions for tax years covering
2001-2004.
|
·
|
IRS
–
PEC
and
consolidated subsidiaries have agreed to statute extensions for tax
years
covering 1999-2004.
|
In
2007, Integrys Energy Group has closed the following examinations
for:
·
|
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.
|
·
|
IRS
–
Integrys Energy Group (formerly WPS Resources Corporation) and
consolidated subsidiaries have settled all issues for 2004 and
2005.
|
·
|
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.
|
·
|
Illinois
Department of Revenue – PEC and its combined subsidiaries have an agreed
to audit report and closing statement with the IDR for the 2001 and
2002
tax years.
|
Integrys
Energy
Group has the following open examinations:
·
|
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 2001-2006 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 our unrecognized tax benefits 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 that it is reasonably possible our
unrecognized tax benefits could be reduced up to $2.0 million within the
next twelve months.
NOTE 17--COMMITMENTS
AND CONTINGENCIES
Commodity
Purchase Obligations and Purchase Order Commitments
Integrys
Energy
Group routinely enters into long-term purchase and sale commitments that have
various quantity requirements and durations. The regulated natural
gas utilities have obligations to sell natural gas to their customers, and
the
regulated electric utilities have obligations to distribute and sell electricity
to its customers. The utilities expect to recover costs related to
these obligations in future customer rates. Additionally, the majority of the
energy supply contracts entered into by our nonregulated segment, Integrys
Energy Services, are to meet its obligations to deliver energy to
customers.
The
obligations
described below are as of December 31, 2007.
·
|
The
electric
utility segment has obligations related to coal and transportation
that
extend through 2016 and total $569.5 million, obligations of
$1.3 billion for either capacity or energy related to purchased power
that extend through 2016, and obligations for other commodities totaling
$9.2 million, which extend through
2012.
|
·
|
The
natural
gas utility segment has obligations related to natural gas supply
and
transportation contracts totaling $784.2 million, some of which
extend through 2019.
|
·
|
Integrys
Energy Services has obligations related to energy supply contracts
that
extend through 2018 and total $4.3 billion. The
majority of these obligations end by 2009, with obligations totaling
$323.9 million extending beyond
2011.
|
·
|
Integrys
Energy Group also has commitments in the form of purchase orders
issued to
various vendors, which totaled $349.1 million. A
significant portion of these commitments relate to large construction
projects.
|
Environmental
Pulliam
Air Notice of
Violation
In
September 2007, a Notice of Violation (NOV) was issued to WPSC by the WDNR
alleging various violations of the Pulliam facility's Title V permit, primarily
pertaining to certain recordkeeping and monitoring requirements. WPSC
met with the WDNR in November 2007 to discuss and attempt to resolve the matters
identified in the NOV, and subsequently submitted additional information
pursuant to the WDNR's request. While not confirmed by the WDNR, it
is WPSC's understanding that this issue is essentially resolved.
Weston 4
Air
Permit
In
November 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").
On
April 27, 2007, the Sierra Club filed a second petition requesting a contested
case hearing regarding the March 28, 2007 permit language, which was granted
by
the WDNR. Both parties subsequently moved for summary
judgment. In a decision issued on November 8, 2007, the
administrative law judge granted WPSC’s motion for summary judgment in that
proceeding, upholding the March 28, 2007 permit language.
The
Sierra Club
filed petitions with the Dane County Circuit Court on April 27, 2007, and
November 14, 2007, for judicial review of the Weston 4 air permit and the
underlying proceedings before the administrative law judge. These two
judicial review proceedings were consolidated by the court, and the parties
are
currently briefing the issues.
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 challenges. 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 any changes to the Weston 4 air permit on its future operating
or construction costs.
Weston Operating
Permits
In
July 2005 and February 2006, NOVs were issued to WPSC by the WDNR alleging
various violations of the operating permit requirements applicable to the then
existing Weston facility. Subsequently, by letter dated April 11,
2007, the WDNR referred the matters set forth in the NOVs to the Wisconsin
Attorney General's office. The referral letter alleged that the
Weston facility was not in compliance with the following provisions of the
facility's Title V operating permit: (i) limitations on the sulfur
content of the fuel oil stored at the Weston facility; (ii) the carbon monoxide
and nitrogen oxide limits for certain of the facility's combustion turbines;
(iii) the particulate matter emission limits applicable to the coal handling
equipment; (iv) opacity monitoring requirements; and (v) a requirement to
conduct an elemental metals analysis. WPSC is negotiating with the
Wisconsin Attorney General's Office to resolve the matters.
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. WPSC
believes it has undertaken and completed corrective measures to address any
identified modeling issues and anticipates issuance of a revised Title V permit
in the near future that will resolve this issue. In the unlikely
event the revised Title V permit, once issued, does not resolve the issues
caused by the WDNR air quality modeling errors, WPSC believes that such issues
could be resolved through a limited compliance plan applicable to appropriate
equipment or operations at the Weston facility. Integrys Energy Group
currently is not able to make a final determination of the probable cost impact
of this issue, if any.
Mercury
and Interstate Air
Quality Rules
Mercury
In
October 2004, the mercury emission control rule became effective in Wisconsin
(Chapter NR 446), requiring 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 require 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 had filed suit against the federal government along with other states
in opposition to the federal mercury rule. On February 8, 2007, the
U.S. Court of Appeals for the District of Columbia Circuit ruled in favor of
the
petitioners and vacated the federal rule. It is not known whether the
EPA will appeal or proceed with the new rulemaking. WPSC estimates
capital costs of approximately $22 million, which includes estimates for
both wholly-owned and jointly-owned plants, to achieve the proposed reductions
in the State's revised draft rule. The capital costs are expected to
be recovered in a future rate case.
Weston 4
installed and will operate mercury control technology, which will achieve a
mercury emission rate that meets the permit limit for mercury. The
State of Wisconsin is considering rules which would exceed the vacated federal
requirements. These rules have not been finalized at this
time. Based on
information
understood to date, these rules may require additional investment by WPSC in
order to comply. The capital costs are anticipated to be recovered in future
rate cases
Sulfur
Dioxide and Nitrogen Oxide
The
EPA 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 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
$572 million, which includes estimates for both wholly-owned and
jointly-owned plants, 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. The
capital costs are anticipated to be recovered in future rate cases.
Manufactured
Gas Plant
Remediation
Integrys
Energy
Groups' natural gas utilities, their predecessors, and certain former affiliates
operated facilities in the past at multiple sites for the purpose of
manufacturing and storing manufactured gas, and as such, are responsible for
the
environmental impacts at 55 manufactured gas plant sites located in Wisconsin,
Michigan, and Illinois. All are former regulated sites and, as such,
are being remediated, with costs charged to existing ratepayers at WPSC, MGUC,
PGL, and NSG. Nine of these sites have been transferred to the EPA
Superfund Alternative Sites Program, and 11 sites have been transferred to
the
EPA's Superfund removal program, with the intent of being transferred to the
EPA
Superfund Alternative Sites Program. Integrys Energy Group estimated
and accrued for approximately $704.2 million of future undiscounted
investigation and cleanup costs as of December 31,
2007. Integrys Energy Group has recorded a net regulatory asset of
$758.8 million related to the recovery of both unrecovered expenditures,
and estimated future expenditures as of December 31,
2007. Integrys Energy Group has received $52.5 million in
insurance recoveries as of December 31, 2007, which were recorded as a
reduction to the regulatory assets.
The
natural gas
utilities are coordinating the investigation and the cleanup of the 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.
The
EPA 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 PRPs at the Waukegan
Site. NSG and the other PRPs are parties to a consent decree that
requires NSG and General Motors, jointly and severally, to perform the remedial
action and establish and maintain financial assurance of $27 million (in
the form of certain defined net worth levels
which
NSG has
met). 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 agreed to reduce the financial assurance
requirement to $21 million to reflect completion of the soil component of
the remedial action.
With
respect to
portions of certain sites in the City of Chicago (Chicago), PGL 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 LLC. In April 2005, River
Village West 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. 05-C-2103 (N.D. Ill. 2005) (RVW II), seeks an order directing
PGL to remediate three former sites: the former South Station, the former Throop
Street Station and the former Hough Place Station.
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
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. In October 2006, the same individual
filed another suit in the United States District Court for the Northern District
of Illinois under RCRA and 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 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. This individual also notified PGL of his intent to file suit
under RCRA and CERCLA seeking an order directing PGL to remediate two other
such
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 Superfund renewal
program. On September 28, 2007, the federal district court
issued a ruling staying the litigation "pending the conclusion of the United
States EPA actions" at these sites. The effect of this ruling, if it
stands, is to bring the litigation to a halt until some future point in time
when the EPA has completed its actions and then only with respect to issues
"left over" from the EPA sections. There is no time limit on the stay
and it may be years before plaintiffs will be permitted to proceed with the
litigation, if at all. The plaintiffs have filed a motion for
reconsideration.
Management
believes
that any costs incurred for environmental activities relating to former
manufactured gas plant 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 WPSC, MGUC, PGL, and NSG.
Accordingly, management believes that the costs incurred in connection with
former manufactured gas plant operations will not have a material adverse effect
on the financial position or results of operations of Integrys Energy
Group.
Flood
Damage
In
May 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. Several lawsuits were filed related to this incident, all
of which have been settled and for which insurance recovery was received in
excess of the applicable self-insured retention.
UPPCO
has completed
significant environmental restoration activities and is working with the
Michigan Department of Environmental Quality to determine what additional
activities are necessary to resolve the impacts associated with this
event. Integrys Energy Group maintains a comprehensive insurance
program that includes UPPCO that it believes is sufficient to cover its
responsibilities related to this event. The self-insured retention on this
policy is not material to Integrys Energy Group.
In
November 2003, UPPCO received approval from the MPSC and the FERC for deferral
of incremental operation and maintenance costs that are not reimbursable through
insurance. At this time, it is expected that all of these costs will
be recovered by third party settlements. UPPCO also received approval
from the MPSC to defer incremental power supply costs associated with the
incident. Recovery of the deferred power supply costs 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 an economically feasible design by the FERC. The FERC has
required that a board of consultants evaluate and oversee the design approval
process. UPPCO continues to work with its Board of Directors and the
FERC to develop an economically feasible design.
Former
Mineral Processing
Site in Denver, Colorado
In
1994, NSG received a demand from the S.W. Shattuck Chemical Company, Inc.
alleging 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 a record of decision (ROD) for the
Denver site and remediation work began. The remedy selected in the
ROD consisted of the on-site stabilization, solidification, and capping of
soils
containing radioactive wastes. In 1998, the remedial action under the
1992 ROD was completed. In 2002, the EPA issued an amended ROD that
required removing the monolith cap and undertaking additional soil
excavation. The work performed under the Amended ROD began in
September 2002 and was completed in September 2006.
NSG
does not
believe that it has liability for the costs related to this site, 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.
Greenhouse
Gases
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 state, regional,
or federal 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. The greatest impact is likely to be on fossil fuel-fired
generation, with a less significant impact on natural gas storage and
distribution operations. 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 and we believe future expenditures by our regulated electric
utilities will be recoverable in rates. Integrys Energy Group will
continue to monitor and manage potential risks and opportunities associated
with
future greenhouse gas regulatory actions.
Natural
Gas Charge Reconciliation Proceedings and Related Matters
Natural
Gas Charge
Settlement
For
PGL and NSG,
the ICC conducts annual proceedings regarding the reconciliation of revenues
from the natural gas charge and related natural gas costs. The
natural gas charge represents the cost of natural gas and transportation and
storage services purchased by PGL and NSG (Gas Charge). In these
proceedings, interested parties review the accuracy of the reconciliation of
revenues and costs and the prudence of natural gas costs recovered through
the
Gas Charge. 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.
Pursuant
to a 2006
settlement agreement related to fiscal year 2001-2004 natural gas costs, PGL
and
NSG agreed to make payments of up to $30 million towards conservation and
weatherization programs for low and moderate income customers. At the
date of the PEC merger, $25 million of that amount had not yet been paid,
and was recorded as a preacquisition contingency. At
December 31, 2007, $20 million remains unpaid and was included in
other long-term liabilities.
PGL
and NSG also
refunded certain amounts related to fiscal 2001-2004 natural gas costs, but
those refunds had been completed prior to the PEC merger.
The
settlement
agreement provides that PGL and NSG will cooperate with Chicago and the Illinois
Attorney General ("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. Although PGL and NSG believe they have fully
complied with this provision of the Agreement, Chicago and the AG have indicated
that they believe the terms of the hardship program are broader than what PGL
and NSG believe they are obligated to implement. Management continues
to believe that it has fully complied with the obligations of the Agreement
with
respect to the hardship program.
PGL
and NSG agreed
to conduct internal and external audits of their natural gas procurement
practices. An annual internal audit is required for five years, and
the first two are completed. The external audit being performed by a
consulting firm retained by the ICC is in progress. No findings or
recommendations have yet been issued.
The
fiscal 2005 Gas
Charge reconciliation cases were initiated in November 2005. 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 witnesses recommended disallowances. The
majority of the recommended disallowances are for a one-time adjustment to
transportation customers' bank (storage) natural gas liability
balances. For PGL, the ICC issued its order, which accepted the
administrative law judges' recommendations and ICC staff's recommended
disallowances in their entirety, on January 16, 2008. The gas cost
disallowance for PGL is $20.5 million. For NSG, the ICC issued its
order, which accepted the administrative law judges' recommendations and ICC
staff's recommended disallowances in their entirety, on January 16,
2008. The natural gas cost disallowance for NSG is $1.0
million. On February 14, 2008, PGL and NSG filed for rehearing on one
of the two bank (storage) gas liability issues. The disallowance for
the rehearing issue is approximately $0.8 million for PGL and $0.3 million
for
NSG. The ICC must act on rehearing no later than March 5,
2008. The customer refunds from the 2005 Gas Charge
reconciliation cases have been accounted for as a preacquisition
contingency. As of December 31, 2007, PGL and NSG recorded a current
liability of $22.5 million and $1.1 million, respectively, including
interest.
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 change to a calendar year reconciliation period. 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. PGL's and
NSG's direct testimony for the October through December 2006 period was
filed on October 17, 2007. There is a status hearing scheduled for
March 17, 2008, to set a schedule. As of December 31, 2007, the
amounts recorded related to the 2006 Gas Charge reconciliation cases were
insignificant.
The
ICC initiated
the calendar year 2007 Gas Charge reconciliation cases on November 28,
2007. The initiating order directs PGL and NSG to file direct
testimony on April 15, 2008. There is a status hearing scheduled for
July 15, 2008.
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 of the ICC's final orders in PGL's and NSG's fiscal years 2001
through 2004 reconciliation cases, 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, PEC filed a motion to dismiss
the proceeding for failure to join a necessary party. Plaintiffs
filed an amended complaint on July 11, 2007. On December 4,
2007, the court denied PEC's motion to dismiss. Management cannot
predict the outcome of this litigation at this time.
Corrosion
Control Inspection Proceeding
Illinois
state, as
well as federal laws, 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 December 20, 2006, the
ICC entered an order approving a stipulation between the parties to this
proceeding under which 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 resolved only the ICC proceeding and did not
constitute a release of any other potential actions outside of the ICC
proceeding. 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. No
findings or recommendations have yet been communicated.
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. 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. PGL has had no further communication with the United
States Attorney's office since that time. 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 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. PGL and
NSG responded by filing motions to dismiss and are awaiting a decision on these
motions. PEC and its utility subsidiaries continue to believe they
have meritorious defenses and intend to vigorously defend against the class
action lawsuit.
NOTE 18--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
Interpretation No. 45.
The
following table
shows Integrys Energy Group's outstanding guarantees at December 31, 2007,
2006, and 2005:
(Millions)
|
|
December 31,
2007
|
|
|
December 31,
2006
|
|
|
December 31,
2005
|
|
Guarantees
of
subsidiary debt and revolving line
of
credit
|
|
$ |
903.1 |
|
|
$ |
178.3 |
|
|
$ |
27.2 |
|
Guarantees
supporting commodity transactions of subsidiaries
|
|
|
1,907.4 |
|
|
|
1,314.0 |
|
|
|
1,154.7 |
|
Standby
letters of credit
|
|
|
137.1 |
|
|
|
155.3 |
|
|
|
114.3 |
|
Surety
bonds
|
|
|
1.7 |
|
|
|
1.2 |
|
|
|
0.8 |
|
Other
guarantees
|
|
|
10.2 |
|
|
|
10.2 |
|
|
|
13.6 |
|
Total
guarantees
|
|
$ |
2,959.5 |
|
|
$ |
1,659.0 |
|
|
$ |
1,310.6 |
|
Integrys
Energy
Group's outstanding guarantees at December 31, 2007, will expire as shown
in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
Total
Amounts
Committed
at December 31, 2007
|
|
|
Less
Than
1
Year
|
|
|
1
to 3
Years
|
|
|
4
to 5
Years
|
|
|
Over
5
Years
|
|
Guarantees
of
subsidiary debt and revolving line
of
credit
|
|
$ |
903.1 |
|
|
$ |
150.0 |
|
|
$ |
- |
|
|
$ |
725.0 |
|
|
$ |
28.1 |
|
Guarantees
supporting commodity transactions of
subsidiaries
|
|
|
1,907.4 |
|
|
|
1,754.2 |
|
|
|
76.5 |
|
|
|
26.7 |
|
|
|
50.0 |
|
Standby
letters of credit
|
|
|
137.1 |
|
|
|
113.7 |
|
|
|
23.4 |
|
|
|
- |
|
|
|
- |
|
Surety
bonds
|
|
|
1.7 |
|
|
|
1.7 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
guarantees
|
|
|
10.2 |
|
|
|
- |
|
|
|
7.9 |
|
|
|
2.3 |
|
|
|
- |
|
Total
guarantees
|
|
$ |
2,959.5 |
|
|
$ |
2,019.6 |
|
|
$ |
107.8 |
|
|
$ |
754.0 |
|
|
$ |
78.1 |
|
At
December 31, 2007, management was authorized to issue corporate guarantees
in
the aggregate amount of up to $2.1 billion to support the business operations
of
Integrys Energy Services. The following outstanding amounts are subject to
this
limit:
|
|
December 31,
2007
|
|
Guarantees
supporting commodity transactions of subsidiaries
|
|
$ |
1,752.9 |
|
Guarantees
of
subsidiary debt
|
|
|
151.1 |
|
Standby
letters of credit
|
|
|
130.0 |
|
Surety
bonds
|
|
|
0.9 |
|
Total
guarantees subject to $2.1 billion limit
|
|
$ |
2,034.9 |
|
In
February 2008, Integrys Energy Group's Board of Directors increased this limit
to $2.35 billion.
Of
the parental guarantees provided by Integrys Energy Group to Integrys Energy
Services, the current amount at December 31, 2007, which Integrys Energy
Group would be obligated to support, is approximately
$620.1 million.
At
December 31, 2007, Integrys Energy Group's $903.1 million of
outstanding guarantees supporting subsidiary debt and revolving lines of credit
consisted of the following:
·
|
An
agreement
to fully and unconditionally guarantee PEC's $400.0 million revolving
line of credit,
|
·
|
An
agreement
to fully and unconditionally guarantee, on a senior unsecured basis,
PEC's
obligations under its $325.0 million, 6.90% notes due January 15,
2011,
|
·
|
A
$150.0 million credit agreement at Integrys Energy Services used to
finance natural gas in storage and margin requirements related to
natural
gas and electric contracts traded on the NYMEX and the ICE, as well
as for
general corporate purposes, and
|
·
|
$28.1 million
of guarantees supporting outstanding debt at Integrys Energy Services'
subsidiaries, of which $1.1 million is subject to Integrys Energy
Services' parental guarantee limit discussed
above.
|
At
December 31, 2007, Integrys Energy Group's $1,907.4 million of
outstanding guarantees supporting commodity transactions of subsidiaries
consisted of the following:
·
|
Parental
guarantees of $1,761.0 million to support the business operations of
Integrys Energy Services, of which $8.1 million is not included above
in the table of guarantees subject to the $2.1 billion limit, due to
specific authorization received from Integrys Energy Group's Board
of
Directors,
|
·
|
$0.1 million,
of an authorized $15.0 million, of corporate guarantees to support
energy and transmission supply at UPPCO that are not reflected on
Integrys
Energy Group's Consolidated Balance
Sheet,
|
·
|
Guarantees
of
$60.9 million and $75.4 million, respectively, related to
natural gas supply at MGUC and MERC. Corporate guarantees in
the amounts of $75.0 million and $125.0 million have been
authorized by Integrys Energy Group's Board of Directors to support
MGUC
and MERC, and
|
·
|
$10.0 million,
of an authorized $125.0 million, to support business operations at
PEC.
|
At
December 31, 2007, financial institutions, at the request of Integrys
Energy Group, have issued $137.1 million in standby letters of credit for
the benefit of third parties that have extended credit to certain
subsidiaries. Of this amount, $132.5 million was issued to
support Integrys Energy Services' operations, including $2.5 million that
received specific authorization from Integrys Energy Group's Board of Directors;
$4.3 million was issued for workers compensation coverage in Illinois; and
the remaining $0.3 million relates to letters of credit at MGUC and
MERC. Any amounts owed by our subsidiaries are reflected in Integrys
Energy Group's Consolidated Balance Sheet.
At
December 31, 2007, Integrys Energy Group furnished $1.7 million of
surety bonds for various reasons, including worker compensation coverage and
obtaining various licenses, permits, and rights of way. Liabilities
incurred as a result of activities covered by surety bonds are included in
Integrys Energy Group's Consolidated Balance Sheet.
At
December 31, 2007, Integrys Energy Group's outstanding $10.2 million
of other guarantees consisted of the following:
·
|
A
guarantee
issued by WPSC to indemnify a third party for exposures related to
the
construction of utility assets. This amount is not reflected on
the Consolidated Balance Sheet, as this agreement was entered into
prior
to the effective date of Interpretation No. 45. The maximum
exposure related to this guarantee was $3.8 million at
December 31, 2007, and $4.9 million at December 31,
2006.
|
·
|
A
liability
related to WPSC's agreement to indemnify Dominion for certain costs
arising from the resolution of design bases documentation issues
incurred
prior to Kewaunee's scheduled maintenance period in 2009. As of
December 31, 2007, WPSC had paid $4.8 million to Dominion
related to this guarantee, reducing the liability to
$4.1 million. The liability recorded for this guarantee
was $5.3 million at December 31,
2006.
|
·
|
A
$2.3 million indemnification provided by Integrys Energy Services
related to the sale of Niagara. This indemnification related to
potential contamination from ash disposed from this facility. A
$0.2 million liability was recorded related to this indemnification
at December 31, 2007.
|
Typically,
under
agreements related to the sale 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.
NOTE 19--EMPLOYEE
BENEFIT PLANS
Defined
Benefit Plans
Integrys
Energy
Group and its subsidiaries have three non-contributory qualified retirement
plans covering substantially all employees, as well as several unfunded
nonqualified retirement plans.
Integrys
Energy
Group also currently offers medical, dental, and life insurance benefits to
employees and their dependents. Integrys Energy Group expenses the
costs of these benefits for active employees as incurred and funds benefits
for
retirees through irrevocable trusts as allowed for income tax
purposes.
The
net periodic
benefit cost associated with the plans is allocated among Integrys Energy
Group's subsidiaries. Actuarial calculations are performed (based
upon specific employees and their related years of service) in order to
determine the appropriate benefit cost allocation.
The
costs of
pension and other postretirement benefits are expensed over the period during
which the employee renders service. The transition obligation related
to plans that existed at Integrys Energy Group prior to the PEC merger is being
recognized over a 20-year period beginning in 1993. Integrys Energy
Group uses a December 31 measurement date for all of its
plans.
Integrys
Energy
Group adopted SFAS No. 158, "Employers' Accounting for Defined Benefit Pension
and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88,
106, and 132(R)," at December 31, 2006. SFAS No. 158 requires
employers to recognize a defined benefit postretirement plan's funded status
in
the balance sheet, and recognize changes in the plan's funded status in
comprehensive income in the year in which the changes occur. Integrys
Energy Group's regulated utilities record changes in the funded status to
regulatory asset or liability accounts, pursuant to SFAS No. 71.
During
the third
quarter of 2007, Integrys Energy Group made a series of changes to certain
of
its retirement benefit plans. Specifically, the changes
include:
·
|
Closure
of
the defined benefit pension plans to non-union new hires, effective
as of
January 1, 2008;
|
·
|
A
freeze in
defined benefit pension service accruals for non-union employees,
effective as of January 1,
2013;
|
·
|
A
freeze in
compensation amounts used for determining defined benefit pension
amounts
for non-union employees, effective as of January 1,
2018;
|
·
|
Revised
eligibility requirements for retiree medical benefits for employees
hired
on or after January 1, 2008, and the introduction, beginning in 2013,
of
an annual premium reduction credit for employees retiring after
December 31, 2012; and
|
·
|
Closure
of
the retiree dental and life benefit programs to all new hires, effective
January 1, 2008, and elimination of these benefits for any existing
employees retiring after December 31,
2012.
|
As
a result of the changes described above, Integrys Energy Group remeasured
certain of its pension and other postretirement benefit obligations as of August
1, 2007. The curtailment gains and losses recognized, as a result of
the plan design changes, were not significant and are included in the table
below.
A
second remeasurement occurred on October 1, 2007, because the ratification
of a
union contract resulted in changes to a postretirement medical
plan. The changes did not result in a curtailment.
The
following
tables provide a reconciliation of the changes in the plans' benefit obligations
and fair value of assets during 2007, 2006, and 2005.
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Reconciliation
of benefit obligation
(qualified
and non-qualified plans)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation
at
January 1
|
|
$ |
787.3 |
|
|
$ |
727.8 |
|
|
$ |
720.7 |
|
|
$ |
292.1 |
|
|
$ |
286.9 |
|
|
$ |
294.7 |
|
Service
cost
|
|
|
39.7 |
|
|
|
24.2 |
|
|
|
23.9 |
|
|
|
15.4 |
|
|
|
7.1 |
|
|
|
8.0 |
|
Interest
cost
|
|
|
70.4 |
|
|
|
42.1 |
|
|
|
40.3 |
|
|
|
24.5 |
|
|
|
17.3 |
|
|
|
16.5 |
|
Plan
amendments
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(21.4 |
) |
|
|
- |
|
|
|
- |
|
Plan
curtailments
|
|
|
(0.7 |
) |
|
|
- |
|
|
|
- |
|
|
|
(0.6 |
) |
|
|
- |
|
|
|
- |
|
Plan
spin off
- Kewaunee sale
|
|
|
- |
|
|
|
- |
|
|
|
(25.7 |
) |
|
|
- |
|
|
|
- |
|
|
|
(13.3 |
) |
Plan
acquisitions – MGUC and MERC
|
|
|
- |
|
|
|
60.8 |
|
|
|
- |
|
|
|
- |
|
|
|
23.0 |
|
|
|
- |
|
Plan
acquisitions – PEC
|
|
|
498.1 |
|
|
|
- |
|
|
|
- |
|
|
|
156.7 |
|
|
|
- |
|
|
|
- |
|
Actuarial
(gain) loss -
net
|
|
|
(96.0 |
) |
|
|
(19.5 |
) |
|
|
8.2 |
|
|
|
(43.0 |
) |
|
|
(33.1 |
) |
|
|
(9.6 |
) |
Participant
contributions
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6.0 |
|
|
|
- |
|
|
|
- |
|
Benefit
payments
|
|
|
(88.6 |
) |
|
|
(48.1 |
) |
|
|
(39.6 |
) |
|
|
(22.8 |
) |
|
|
(10.2 |
) |
|
|
(9.4 |
) |
Federal
subsidy on benefits paid
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1.7 |
|
|
|
1.1 |
|
|
|
- |
|
Obligation
at
December 31
|
|
$ |
1,210.2 |
|
|
$ |
787.3 |
|
|
$ |
727.8 |
|
|
$ |
408.6 |
|
|
$ |
292.1 |
|
|
$ |
286.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Reconciliation
of fair value of plan assets (qualified plans)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of
plan assets at January 1
|
|
$ |
674.0 |
|
|
$ |
583.0 |
|
|
$ |
588.9 |
|
|
$ |
212.8 |
|
|
$ |
183.0 |
|
|
$ |
170.9 |
|
Actual
return
on plan assets
|
|
|
68.9 |
|
|
|
67.3 |
|
|
|
39.7 |
|
|
|
14.5 |
|
|
|
16.5 |
|
|
|
11.3 |
|
Employer
contributions
|
|
|
25.5 |
|
|
|
25.3 |
|
|
|
8.2 |
|
|
|
7.9 |
|
|
|
17.9 |
|
|
|
20.4 |
|
Participant
contributions
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6.0 |
|
|
|
- |
|
|
|
- |
|
Plan
spin off
– Kewaunee sale
|
|
|
- |
|
|
|
- |
|
|
|
(15.5 |
) |
|
|
- |
|
|
|
- |
|
|
|
(10.4 |
) |
Plan
acquisitions – MGUC and MERC
|
|
|
0.2 |
|
|
|
45.0 |
|
|
|
- |
|
|
|
- |
|
|
|
5.4 |
|
|
|
- |
|
Plan
acquisitions – PEC
|
|
|
537.6 |
|
|
|
- |
|
|
|
- |
|
|
|
29.7 |
|
|
|
- |
|
|
|
- |
|
Benefit
payments
|
|
|
(86.7 |
) |
|
|
(46.6 |
) |
|
|
(38.3 |
) |
|
|
(22.6 |
) |
|
|
(10.0 |
) |
|
|
(9.2 |
) |
Fair
value of
plan assets at
December 31
|
|
$ |
1,219.5 |
|
|
$ |
674.0 |
|
|
$ |
583.0 |
|
|
$ |
248.3 |
|
|
$ |
212.8 |
|
|
$ |
183.0 |
|
Amounts
recognized
in Integrys Energy Group's Consolidated Balance Sheet at December 31
related to the benefit plans consisted of:
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Noncurrent
assets
|
|
$ |
98.7 |
|
|
$ |
- |
|
|
$ |
2.7 |
|
|
$ |
- |
|
Current
liabilities
|
|
|
4.4 |
|
|
|
3.8 |
|
|
|
0.1 |
|
|
|
0.2 |
|
Noncurrent
liabilities
|
|
|
85.0 |
|
|
|
109.5 |
|
|
|
162.9 |
|
|
|
79.1 |
|
Net
assets
|
|
$ |
9.3 |
|
|
$ |
(113.3 |
) |
|
$ |
(160.3 |
) |
|
$ |
(79.3 |
) |
The
accumulated
benefit obligation for all defined benefit pension plans was $1.1 billion
and $700.1 million at December 31, 2007, and 2006,
respectively. Information for pension plans with an accumulated
benefit obligation in excess of plan assets is presented in the following
table.
|
|
December 31,
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
Projected
benefit obligation
|
|
$ |
276.0 |
|
|
$ |
34.3 |
|
Accumulated
benefit obligation
|
|
|
240.4 |
|
|
|
32.2 |
|
Fair
value of
plan assets
|
|
|
193.3 |
|
|
|
- |
|
The
following table
shows the amounts that have not yet been recognized in Integrys Energy Group's
net periodic benefit cost as of December 31. Amounts related to
the nonregulated entities are included in accumulated other comprehensive
income, while amounts related to the utilities are recorded as regulatory assets
or liabilities.
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Accumulated
other comprehensive
income (pre-tax)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
actuarial
loss
|
|
$ |
3.5 |
|
|
$ |
9.7 |
|
|
$ |
0.9 |
|
|
$ |
1.7 |
|
Prior
service
costs (credits)
|
|
|
1.5 |
|
|
|
1.6 |
|
|
|
(2.6 |
) |
|
|
(3.1 |
) |
Total
|
|
$ |
5.0 |
|
|
$ |
11.3 |
|
|
$ |
(1.7 |
) |
|
$ |
(1.4 |
) |
Net
regulatory assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
actuarial
loss (gain)
|
|
$ |
(16.5 |
) |
|
$ |
58.6 |
|
|
$ |
(10.4 |
) |
|
$ |
31.1 |
|
Prior
service
costs (credits)
|
|
|
27.7 |
|
|
|
32.6 |
|
|
|
(30.3 |
) |
|
|
(11.8 |
) |
Transition
obligation
|
|
|
- |
|
|
|
- |
|
|
|
1.3 |
|
|
|
2.5 |
|
Merger
related regulatory adjustment
|
|
|
89.4 |
|
|
|
- |
|
|
|
44.6 |
|
|
|
- |
|
Total
|
|
$ |
100.6 |
|
|
$ |
91.2 |
|
|
$ |
5.2 |
|
|
$ |
21.8 |
|
Integrys
Energy
Group recorded the PEC pension assets acquired and liabilities assumed at fair
value at the February 2007 acquisition date. PGL and NSG continue to have
rates set based on their historical basis of accounting, including
amortizations of prior service cost, actuarial losses, and transition
obligations, which were recognized in the Consolidated Financial Statements
as regulatory assets at the purchase date. The amount reflected in net
periodic benefit cost in the table below is based on the amount used
in the rate-setting process for PGL and NSG. The difference in the basis of
accounting is shown as a merger related regulatory adjustment in the table
above.
The
estimated net
loss and prior service cost for defined benefit pension plans that will be
amortized as a component of net periodic benefit cost during 2008 are
$0.9 million and $5.1 million, respectively. The estimated
net loss, prior service credit, and transition obligation for other
postretirement benefit plans that will be amortized as a component of net
periodic benefit cost during 2008 are $0.6 million, $(3.8) million,
and $0.3 million, respectively. The estimated merger-related
regulatory adjustment that will be amortized as a component of net periodic
benefit cost for defined pension and other postretirement benefit plans during
2008 is $2.6 million and $2.7 million, respectively.
The
following table
presents the components of the consolidated net periodic benefit cost for the
plans:
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Net
periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
39.7 |
|
|
$ |
24.2 |
|
|
$ |
23.9 |
|
|
$ |
15.4 |
|
|
$ |
7.1 |
|
|
$ |
8.0 |
|
Interest
cost
|
|
|
70.4 |
|
|
|
42.1 |
|
|
|
40.3 |
|
|
|
24.5 |
|
|
|
17.3 |
|
|
|
16.5 |
|
Expected
return on plan assets
|
|
|
(89.4 |
) |
|
|
(44.2 |
) |
|
|
(43.6 |
) |
|
|
(17.5 |
) |
|
|
(13.5 |
) |
|
|
(12.5 |
) |
Plan
curtailments (gain) loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(0.1 |
) |
|
|
- |
|
|
|
- |
|
Amortization
of transition obligation
|
|
|
- |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.4 |
|
|
|
0.4 |
|
|
|
0.4 |
|
Amortization
of prior-service cost (credit)
|
|
|
5.1 |
|
|
|
5.1 |
|
|
|
5.3 |
|
|
|
(2.6 |
) |
|
|
(2.2 |
) |
|
|
(2.2 |
) |
Amortization
of net loss
|
|
|
4.8 |
|
|
|
9.8 |
|
|
|
8.7 |
|
|
|
1.8 |
|
|
|
5.3 |
|
|
|
5.5 |
|
Amortization
of merger related regulatory adjustment
|
|
|
14.2 |
|
|
|
- |
|
|
|
- |
|
|
|
0.8 |
|
|
|
- |
|
|
|
- |
|
Net
periodic
benefit cost
|
|
$ |
44.8 |
|
|
$ |
37.2 |
|
|
$ |
34.8 |
|
|
$ |
22.7 |
|
|
$ |
14.4 |
|
|
$ |
15.7 |
|
Assumptions
– Pension and Other Postretirement Benefit Plans
The
weighted
average assumptions used at December 31 in accounting for the plans are as
follows:
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Discount
rate
for benefit obligations
|
|
|
6.40 |
% |
|
|
5.87 |
% |
|
|
5.65 |
% |
|
|
6.40 |
% |
|
|
5.87 |
% |
|
|
5.65 |
% |
Discount
rate
for net periodic benefit cost
|
|
|
5.88 |
% |
|
|
5.65 |
% |
|
|
5.75 |
% |
|
|
5.79 |
% |
|
|
5.65 |
% |
|
|
5.75 |
% |
Expected
return on assets
|
|
|
8.50 |
% |
|
|
8.50 |
% |
|
|
8.50 |
% |
|
|
8.50 |
% |
|
|
8.50 |
% |
|
|
8.50 |
% |
Rate
of
compensation increase
|
|
|
4.98 |
% |
|
|
5.50 |
% |
|
|
5.50 |
% |
|
|
- |
|
|
|
- |
|
|
|
- |
|
The
assumptions
used for Integrys Energy Group's medical and dental cost trend rates are shown
in the following table:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Assumed
medical cost trend rate (under age 65)
|
|
|
8.0%-10.0 |
% |
|
|
9.0 |
% |
|
|
10.0 |
% |
Ultimate
trend rate
|
|
|
5.0 |
% |
|
|
5.0 |
% |
|
|
5.0 |
% |
Ultimate
trend rate reached in
|
|
|
2010-2013 |
|
|
2010
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed
medical cost trend rate (over age 65)
|
|
|
10.0%-10.5 |
% |
|
|
11.0 |
% |
|
|
12.0 |
% |
Ultimate
trend rate
|
|
|
5.5%-6.5 |
% |
|
|
6.5 |
% |
|
|
6.5 |
% |
Ultimate
trend rate reached in
|
|
|
2011-2013 |
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed
dental cost trend rate
|
|
|
5.0 |
% |
|
|
5.0 |
% |
|
|
5.0 |
% |
Assumed
health care
cost trend rates have a significant effect on the amounts reported by Integrys
Energy Group for the health care plans. A 1% change in assumed health
care cost trend rates would have the following effects:
(Millions)
|
|
1%
Increase
|
|
|
1%
Decrease
|
|
Integrys
Energy Group
|
|
|
|
|
|
|
Effect
on
total of service and interest cost components of net periodic
postretirement health care benefit cost
|
|
$ |
5.3 |
|
|
$ |
(4.7 |
) |
Effect
on the
health care component of theaccumulated
postretirement benefit obligation
|
|
$ |
49.7 |
|
|
$ |
(41.1 |
) |
Pension
and Other Postretirement Benefits Plan Assets
Weighted-average
asset allocations of the plans at December 31, 2007, and 2006, are as
follows:
|
|
Pension
Plan Assets at December 31,
|
|
|
Postretirement
Plan Assets at December 31,
|
|
Asset
category
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Equity
securities
|
|
|
63 |
% |
|
|
60 |
% |
|
|
61 |
% |
|
|
61 |
% |
Debt
securities
|
|
|
33 |
% |
|
|
35 |
% |
|
|
39 |
% |
|
|
39 |
% |
Real
estate
|
|
|
4 |
% |
|
|
5 |
% |
|
|
- |
|
|
|
- |
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
The
target asset
allocations for plans in place prior to the PEC merger for the above listed
asset classes are as follows: pension plan – equity securities 60%,
debt securities 35%, and real estate 5%; postretirement plan – equity securities
65% and debt securities 35%. The target asset allocations for plans
acquired in the PEC merger are as follows: pension plan – equity securities 70%
and debt securities 30%; postretirement plan – equity securities 60% and debt
securities 40%. The Board of Directors has established the Employee
Benefits Administrator Committee to manage the operations and administration
of
all
benefit plans and related trusts. The Committee periodically reviews
the asset allocation, and the portfolio is rebalanced when
necessary.
Cash
Flows Related to Pension and Other Postretirement Benefit Plans
Integrys
Energy
Group's funding policy is to contribute at least the minimum amounts that are
required to be funded under the Employee Retirement Income Security Act, but
not
more than the maximum amounts that are currently deductible for income tax
purposes. Integrys Energy Group expects to contribute
$24.8 million to pension plans and $12.8 million to other
postretirement benefit plans in 2008.
The
following table
shows the payments, reflecting expected future service, which Integrys Energy
Group expects to make for pension and other postretirement
benefits. In addition, the table shows the expected federal
subsidies, provided under the Medicare Prescription Drug, Improvement and
Modernization Act of 2003, which will partially offset other postretirement
benefits.
(Millions)
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
|
Federal
Subsidies
|
|
2008
|
|
$ |
87.8 |
|
|
$ |
22.6 |
|
|
$ |
(2.2 |
) |
2009
|
|
|
91.3 |
|
|
|
24.5 |
|
|
|
(2.5 |
) |
2010
|
|
|
106.0 |
|
|
|
26.4 |
|
|
|
(2.7 |
) |
2011
|
|
|
107.9 |
|
|
|
28.8 |
|
|
|
(2.9 |
) |
2012
|
|
|
93.3 |
|
|
|
30.7 |
|
|
|
(3.0 |
) |
2013-2017
|
|
|
545.4 |
|
|
|
178.4 |
|
|
|
(17.5 |
) |
Defined
Contribution Benefit Plans
Integrys
Energy
Group maintains 401(k) Savings Plans for substantially all full-time
employees. Prior to 2008, employees generally could contribute from
1% to 30% of their base compensation to individual accounts within the 401(k)
Savings Plan. The Employee Stock Ownership Plan (ESOP) required a
match in the form of shares of Integrys Energy Group's common stock equivalent
to 100% of the first 4% and 50% of the next 2% contributed by non-union
employees. Certain non-union employees automatically qualified for
participation in the ESOP and certain union employees receive a contribution
to
their ESOP account regardless of their participation in the 401(k) Savings
Plan. The ESOP held 2.3 million shares of Integrys Energy
Group's common stock (market value of $121.9 million) at December 31,
2007. Certain employees participate in a discretionary profit-sharing
contribution and/or cash match in place of participation in the
ESOP. Total costs incurred under these plans were $14.4 million
in 2007, $9.4 million in 2006, and $8.4 million in 2005.
In
conjunction with the PEC merger, Integrys Energy Group made changes to the
defined contribution benefit plans effective January 1, 2008. These
changes include:
·
|
A
lump-sum
company contribution component for certain
employees;
|
·
|
Company
match
equivalent to 100% of the first 5% contributed by non-union employees;
and
|
·
|
Employees
can
contribute up to 50% of their base
compensation.
|
Integrys
Energy
Group maintains deferred compensation plans that enable certain key employees
and non-employee directors to defer a portion of their compensation or fees
on a
pre-tax basis. Non-employee directors can defer up to 100% of their
director fees. Compensation is generally deferred in the form of
cash, indexed to certain investment options, or Integrys Energy Group common
stock with deemed dividends paid on the common stock automatically
reinvested. Effective March 31, 2008, the investment option of
indexing to Integrys Energy Group's return on equity will be closed to new
contributions.
The
deferred
compensation arrangements in which distributions are made solely in Integrys
Energy Group's common stock are classified as an equity
instrument. Changes in the fair value of the deferred compensation
obligation are not recognized. The deferred compensation obligation
associated with this arrangement was $24.6 million at December 31,
2007, and $19.9 million at December 31, 2006.
The
portion of the
deferred compensation obligation associated with deferrals that allow for
distribution in cash is classified as a liability in the Consolidated Balance
Sheets and adjusted, with a charge or credit to
expense,
to reflect
changes in the fair value of the deferred compensation
obligation. The obligation classified within other long-term
liabilities was $30.2 million at December 31, 2007, and
$26.8 million at December 31, 2006. The costs incurred
under this arrangement were $2.3 million in 2007, $3.0 million in
2006, and $2.6 million in 2005.
The
deferred
compensation programs are partially funded through shares of Integrys Energy
Group's common stock that is held in a rabbi trust. The common stock
held in the rabbi trust is classified as a reduction of equity in a manner
similar to accounting for treasury stock. The total cost of Integrys
Energy Group's common stock held in the rabbi trust was $14.7 million at
December 31, 2007, and $13.2 million at December 31,
2006.
NOTE 20--PREFERRED
STOCK OF SUBSIDIARY
Integrys
Energy
Group's subsidiary, WPSC, has 1,000,000 authorized shares of preferred stock
with no mandatory redemption and a $100 par value. Outstanding shares are as
follows at December 31:
|
|
|
|
|
2007
|
|
|
2006
|
|
(Millions,
except share amounts)
|
|
Series
|
|
|
Shares
Outstanding
|
|
|
Carrying
Value
|
|
|
Shares
Outstanding
|
|
|
Carrying
Value
|
|
|
|
|
5.00 |
% |
|
|
130,714 |
|
|
$ |
13.1 |
|
|
|
130,765 |
|
|
$ |
13.1 |
|
|
|
|
5.04 |
% |
|
|
29,898 |
|
|
|
3.0 |
|
|
|
29,920 |
|
|
|
3.0 |
|
|
|
|
5.08 |
% |
|
|
49,923 |
|
|
|
5.0 |
|
|
|
49,928 |
|
|
|
5.0 |
|
|
|
|
6.76 |
% |
|
|
150,000 |
|
|
|
15.0 |
|
|
|
150,000 |
|
|
|
15.0 |
|
|
|
|
6.88 |
% |
|
|
150,000 |
|
|
|
15.0 |
|
|
|
150,000 |
|
|
|
15.0 |
|
Total
|
|
|
|
|
|
|
510,535 |
|
|
$ |
51.1 |
|
|
|
510,613 |
|
|
$ |
51.1 |
|
All
shares of
preferred stock of all series are of equal rank except as to dividend rates
and
redemption terms. Payment of dividends from any earned surplus or
other available surplus is not restricted by the terms of any indenture or
other
undertaking by WPSC. Each series of outstanding preferred stock is
redeemable in whole or in part at WPSC's option at any time on 30 days' notice
at the respective redemption prices. WPSC may not redeem less than
all, nor purchase any, of its preferred stock during the existence of any
dividend default.
In
the event of WPSC's dissolution or liquidation, the holders of preferred stock
are entitled to receive (a) the par value of their preferred stock out of
the corporate assets other than profits before any of such assets are paid
or
distributed to the holders of common stock and (b) the amount of dividends
accumulated and unpaid on their preferred stock out of the surplus or net
profits before any of such surplus or net profits are paid to the holders of
common stock. Thereafter, the remainder of the corporate assets,
surplus, and net profits shall be paid to the holders of common
stock.
The
preferred stock
has no pre-emptive, subscription, or conversion rights, and has no sinking
fund
provisions.
NOTE 21--COMMON
EQUITY
Integrys
Energy
Group had the following shares outstanding at December 31, 2007, and 2006,
respectively:
Shares
outstanding at December 31
|
|
2007
|
|
|
2006
|
|
Common
stock,
$1 par value, 200,000,000 shares authorized
|
|
|
76,340,756 |
|
|
|
43,387,460 |
|
Treasury
shares
|
|
|
10,000 |
|
|
|
12,000 |
|
Average
cost
of treasury shares
|
|
$ |
25.19 |
|
|
$ |
25.19 |
|
Shares
in
deferred compensation rabbi trust
|
|
|
338,522 |
|
|
|
311,666 |
|
Average
cost
of deferred compensation rabbi trust shares
|
|
$ |
43.48 |
|
|
$ |
42.24 |
|
Treasury
shares at
December 31, 2007, and 2006, relate to our Non-Employee Directors Stock
Option Plan. All options under this plan have a ten-year life, but
may not be exercised until one year after the date of grant.
We
issue common stock under our Stock Investment Plan and under certain of our
stock-based employee benefit plans. These stock issuances increased
equity $45.7 million, $25.0 million, and $29.0 million in 2007,
2006, and 2005, respectively.
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
31,938,491 shares and increased equity $1.6 billion as of December 31,
2007.
In
November 2005, Integrys Energy Group entered into a forward equity sale
agreement with an affiliate of JP Morgan Securities, Inc., as forward
purchaser, relating to 2.7 million shares of Integrys Energy Group's common
stock. On May 10, 2006, Integrys Energy Group 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.
Reconciliation
of Integrys Energy Group's common stock shares
|
|
Common
Stock Shares
Outstanding
|
|
|
|
|
|
Balance
at
December 31, 2004
|
|
|
37,500,791 |
|
Shares
issued
|
|
|
|
|
Stock
Investment Plan
|
|
|
370,928 |
|
Stock-based
compensation
|
|
|
262,714 |
|
Common
stock offering
|
|
|
1,900,000 |
|
Rabbi
trust shares
|
|
|
55,465 |
|
Balance
at
December 31, 2005
|
|
|
40,089,898 |
|
Shares
issued
|
|
|
|
|
Stock
Investment Plan
|
|
|
406,878 |
|
Stock-based
compensation
|
|
|
134,392 |
|
Common
stock offering
|
|
|
2,700,000 |
|
Rabbi
trust shares
|
|
|
56,292 |
|
Balance
at
December 31, 2006
|
|
|
43,387,460 |
|
Shares
issued
|
|
|
|
|
Merger
with PEC
|
|
|
31,938,491 |
|
Stock
Investment Plan
|
|
|
529,935 |
|
Stock-based
compensation
|
|
|
444,041 |
|
Rabbi
trust shares
|
|
|
40,829 |
|
Balance
at December 31, 2007
|
|
|
76,340,756 |
|
Dividends
Integrys
Energy
Group is a holding company and our ability to pay dividends is largely dependent
upon the ability of our subsidiaries to pay dividends to us. The PSCW has by
order restricted our subsidiary, WPSC, to paying normal dividends on its common
stock of no more than 103% of the previous year's common stock dividend. The
PSCW also requires WPSC to maintain a financial capital structure (i.e., the
percentages by which each of common stock equity, preferred stock equity and
debt constitute the total capital invested in a utility), which has a common
equity range of 50% to 55%. The PSCW has also established a targeted
financial common equity ratio at 52% that results in a regulatory common equity
ratio of 57.46%. The primary difference between the financial and the
regulatory common equity ratio relates to certain off-balance sheet obligations,
primarily purchased power obligations, considered by the PSCW in establishing
the financial common equity target. Each of these limitations
may be modified by a future order of the PSCW. Our right to receive
dividends on the common stock of WPSC is also subject to
the
prior rights of
WPSC's preferred shareholders and to provisions in WPSC's restated articles
of
incorporation which limit the amount of common stock dividends which WPSC
may pay if its common stock and common stock surplus accounts constitute
less than 25% of its total capitalization. These limitations are not
expected to limit any dividend payments in the foreseeable future. At
December 31, 2007, WPSC had $335.9 million of retained earnings
available for the payment of dividends.
UPPCO's
indentures
relating to its first mortgage bonds contain certain limitations on the payment
of cash dividends on its common stock, which is held solely by Integrys Energy
Group. Under the most restrictive of these provisions,
$26.1 million of retained earnings were available at December 31,
2007, for the payment of common stock cash dividends by UPPCO.
For
the year ended
December 31, 2007, PEC, MGUC, MERC, and Integrys Energy Services have not
made any dividend payments. These companies do not have any dividend
restrictions.
At
December 31, 2007, Integrys Energy Group had $680.4 million of
retained earnings available for the payment of dividends. Integrys
Energy Group does not have any dividend restrictions.
Earnings
Per Share
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 discussed above. The calculation of diluted earnings per share
for
the years shown below excludes some insignificant stock option and performance
stock rights that had an anti-dilutive effect. The following table reconciles
the computation of basic and diluted earnings per share:
(Millions,
except per share amounts)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Income
from
continuing operations
|
|
$ |
181.1 |
|
|
$ |
151.6 |
|
|
$ |
150.6 |
|
Discontinued
operations, net of tax
|
|
|
73.3 |
|
|
|
7.3 |
|
|
|
11.5 |
|
Cumulative
effect of change in accounting principles, net of tax
|
|
|
- |
|
|
|
- |
|
|
|
(1.6 |
) |
Preferred
stock dividends declared
|
|
|
(3.1 |
) |
|
|
(3.1 |
) |
|
|
(3.1 |
) |
Net
earnings
available for common shareholders
|
|
$ |
251.3 |
|
|
$ |
155.8 |
|
|
$ |
157.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares
of common stock outstanding – basic
|
|
|
71.6 |
|
|
|
42.3 |
|
|
|
38.3 |
|
Effect
of
dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
0.2 |
|
|
|
0.1 |
|
|
|
0.4 |
|
Average
shares
of common stock outstanding – diluted
|
|
|
71.8 |
|
|
|
42.4 |
|
|
|
38.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
per share of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
3.51 |
|
|
$ |
3.68 |
|
|
$ |
4.11 |
|
Diluted
|
|
|
3.50 |
|
|
|
3.67 |
|
|
|
4.07 |
|
NOTE
22--STOCK-BASED COMPENSATION
In
May 2007, Integrys Energy Group's shareholders approved the 2007 Omnibus
Incentive Compensation Plan (2007 Omnibus 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 prior plans,
although the plans will continue to exist for purposes of the existing
outstanding stock-based compensation. At December 31, 2007,
stock options, performance stock rights, restricted shares, and stock
appreciation rights were outstanding under the various plans.
Stock
Options
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. One-fourth of the stock options granted vest and become
exercisable each year on the anniversary of the grant date.
The
fair values of
stock option awards granted in May 2007 and December 2006 were estimated
using a binomial lattice model. 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 U.S. 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 fair values of
stock option awards granted in December 2005 were estimated using the
Black-Scholes option-pricing model. The following table shows the
weighted-average fair values along with the assumptions incorporated into the
models:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Weighted-average
fair value
|
|
$ |
7.80 |
|
|
$ |
6.04 |
|
|
$ |
4.40 |
|
Expected
term
|
|
7
years
|
|
|
6
years
|
|
|
6
years
|
|
Risk-free
interest rate
|
|
|
4.65 |
% |
|
|
4.42 |
% |
|
|
4.38 |
% |
Expected
dividend yield
|
|
|
4.50 |
% |
|
|
4.90 |
% |
|
|
4.73 |
% |
Expected
volatility
|
|
|
17 |
% |
|
|
17 |
% |
|
|
12 |
% |
Total
pre-tax
compensation cost recognized for stock options during the years ended
December 31, 2007, and 2006, was $1.8 million and $1.8 million,
respectively. No compensation cost was recognized for stock options
in 2005, as Integrys Energy Group did not adopt the fair value recognition
provisions of SFAS No. 123(R), "Share-Based Payment," until January 1,
2006. The total compensation cost capitalized in 2007 and 2006 was
immaterial. As of December 31, 2007, $1.9 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 2.9
years.
Cash
received from
option exercises during the years ended December 31, 2007, 2006, and 2005,
was $14.0 million, $1.9 million, and $5.9 million,
respectively. The tax benefit realized from these option exercises
was $2.3 million in 2007, immaterial in 2006, and $1.3 million in
2005.
A
summary of stock option activity for the year ended December 31, 2007, and
the number of outstanding and exercisable stock options at December 31,
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
|
|
|
355,611 |
|
|
|
39.33 |
|
|
|
|
|
$ |
4.4 |
|
Forfeited
|
|
|
1,036 |
|
|
|
46.78 |
|
|
|
|
|
|
- |
|
Expired
|
|
|
13,942 |
|
|
|
47.07 |
|
|
|
|
|
|
0.1 |
|
Outstanding
at December 31, 2007
|
|
|
2,215,999 |
|
|
$ |
47.81 |
|
|
|
6.66 |
|
|
$ |
11.6 |
|
Exercisable
at December 31, 2007
|
|
|
1,482,106 |
|
|
$ |
44.43 |
|
|
|
5.68 |
|
|
$ |
11.4 |
|
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 options were fully vested prior to the merger
date.
During
the years
ended December 31, 2006 and 2005, the intrinsic value of options exercised
totaled $0.9 million and $3.3 million, respectively.
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 December 31,
2007. This is calculated as the difference between Integrys Energy
Group's closing stock price on December 31, 2007, and the option exercise
price, multiplied by the number of in-the-money stock options.
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 right awards granted in December 2005 was estimated using
Integrys Energy Group's common stock price on the date of grant, less the
present value of expected dividends over the three-year vesting period, assuming
a payout of 100% of target. The fair values of performance stock
rights granted in May 2007 and December 2006 were estimated using a Monte
Carlo valuation model, incorporating the assumptions in the table
below. The risk-free interest rate is based on the U.S. 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.
|
|
2007
|
|
|
2006
|
|
Expected
term
|
|
3
years
|
|
|
3
years
|
|
Risk-free
interest rate
|
|
|
4.71 |
% |
|
|
4.74 |
% |
Expected
dividend yield
|
|
|
4.50 |
% |
|
|
4.90 |
% |
Expected
volatility
|
|
|
14.50 |
% |
|
|
14.40 |
% |
Pre-tax
compensation cost recorded for performance stock rights for the years ended
December 31, 2007, 2006, and 2005 was $3.5 million, $2.8 million,
and $3.4 million, respectively. The total compensation cost
capitalized during these same years was immaterial. As of
December 31, 2007, $2.3 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 1.7 years.
A
summary of the activity related to performance stock rights for the year ended
December 31, 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 |
|
|
|
39.14 |
|
Outstanding
at December 31, 2007
|
|
|
217,458 |
|
|
$ |
47.94 |
|
No
performance shares were distributed during the year ended December 31,
2007.
Restricted
Shares
In
December 2006, May 2007, and September 2007, a portion of the long-term
incentive was awarded in the form of restricted shares. Most of 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. Total pre-tax
compensation cost recognized for restricted shares was $1.4 million during
the year ended December 31, 2007 and immaterial for the year ended
December 31, 2006. The total compensation cost capitalized in
2007 and 2006 was immaterial. As of December 31, 2007,
$3.8 million of total pre-tax compensation cost related to these awards is
expected to be recognized over a weighted-average period of 3.1
years.
A
summary of the activity related to restricted shares for the year ended
December 31, 2007, is presented below:
|
|
Restricted
Shares
|
|
|
Weighted-Average
Grant
Date Fair Value
|
|
Outstanding
at December 31, 2006
|
|
|
71,424 |
|
|
$ |
52.73 |
|
Granted
|
|
|
50,530 |
|
|
|
56.77 |
|
Vested
|
|
|
17,177 |
|
|
|
52.73 |
|
Forfeited
|
|
|
3,632 |
|
|
|
54.25 |
|
Outstanding
at December 31, 2007
|
|
|
101,145 |
|
|
$ |
54.70 |
|
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 December 31,
2007. No stock appreciation rights were issued during the year ended
December 31, 2007.
NOTE 23--REGULATORY
ENVIRONMENT
Wisconsin
On
February 11, 2008, WPSC filed with the PSCW to reopen its 2008 fuel filing,
requesting an increase in retail rates. The increase is intended to
recover $13.4 million of additional fuel and related costs in
2008. The increase in costs is due to a later start-up of the Weston
4 unit, increased coal and coal transportation costs, and increased natural
gas
costs. The rate increase is anticipated to go into effect March 3,
2008, subject to refund based on an audit of the fuel filing.
On
October 6, 2007, Weston 3, a 321.6-megawatt base load coal-fired generating
facility located near Wausau, Wisconsin, sustained damage from a major lightning
strike that forced the facility out of service until January 14, 2008. The
damage required the repair of the generator rotor, the turbine rotors, and
the
boiler feed pumps. WPSC incurred approximately $7 million of
incremental pre-tax non-fuel operating and maintenance expenditures through
December 31, 2007, to repair and return Weston 3 to service. WPSC has
insurance in place that is expected to cover all equipment damage costs, less
a
$1 million deductible. WPSC was granted approval from the PSCW to defer the
costs, net of insurance recoveries, for recovery in a future rate
proceeding. WPSC also incurred a total of $21.7 million of
incremental pre-tax fuel and purchased power costs through December 31, 2007,
and a total of approximately $24 million during the entire 14-week
outage. WPSC filed a request with the PSCW to defer the replacement
purchased power costs for the Wisconsin retail portion of these costs and was
granted approval retroactive to October 6, 2007. It is anticipated
that WPSC will recover replacement purchased power costs for the Michigan retail
portion of these costs through the annual power supply cost recovery
mechanism.
Assuming
favorable
outcomes for the recovery of deferred replacement purchased power and non-fuel
operating and maintenance expenses, WPSC does not expect this incident to have
a
material impact on future earnings.
The
PSCW approved
the merger with PEC as of February 16, 2007. The merger approval
order contains the following conditions:
·
|
WPSC
will not
have a base rate increase for natural gas or electric service prior
to
January 1, 2009. WPSC was allowed to adjust rates for changes in
purchased power costs as well as fuel costs related to electric generation
due to changes in the NYMEX natural gas futures prices, coal prices,
and
transportation costs for coal. WPSC made this fuel and
purchased power cost filing on August 14, 2007, requesting an increase
of
$33.3 million (3.6%). The August 14, 2007 fuel and
purchased power cost filing included recovery of the increased electric
transmission costs and recovery of deferred MISO Day 2 costs over
three
years. The PSCW granted a proposed increase effective January
16, 2008, which reflected updated fuel and purchased power cost
information. The final rate order issued on January 15, 2008,
allowed for a $23 million (2.5%) retail electric rate increase and
included recovery of deferred 2005 and 2006 MISO Day 2 costs over
a
one-year period and increased transmission
costs.
|
·
|
WPSC
was
required to seek approval for the formation of a service 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 the necessary regulatory approvals
or waivers associated with the formation and operation of the service
company. All required regulatory approvals were received and
Integrys Business Support, LLC became an operational centralized
service
company on January 1, 2008.
|
·
|
WPSC
will not
recover merger related transaction costs. Recovery of merger related
transition costs in 2009 and later years will be limited to the verified
synergy savings in those years.
|
·
|
WPSC
will
hold ratepayers harmless from any increase in interest and preferred
stock
costs attributable to nonutility activities, provided that the authorized
capital structure is consistent with the authorized
costs.
|
·
|
WPSC
will not
pay dividends 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 3 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.
In
2006, WPSC filed an agreement with the PSCW to refund a portion of the
difference between the projected fuel costs in the 2006 Wisconsin retail rate
case and actual fuel costs incurred from January 2006 through March 2006,
as well as the projected fuel savings in April through
June 2006. In March 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
December 31, 2007, a regulatory liability of $1.9 million remained to
be refunded to customers in 2008, and was included in the final order for the
fuel filing and in the 2008 rate increase described previously.
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 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 of the proceeds received from the liquidation
of
the nonqualified decommissioning trust fund as a result of the sale of Kewaunee
(discussed below). The 2006 retail natural gas rate increase was
driven by infrastructure improvements necessary to ensure the reliability of
the
natural gas distribution system.
WPSC
received
$127.1 million of proceeds from the liquidation of the Kewaunee
nonqualified decommissioning trust fund in 2005, to be refunded to customers
in
the following manner:
·
|
The
PSCW
ruled that WPSC's Wisconsin customers were entitled to be refunded
approximately 85% of the proceeds over a two-year period beginning
on
January 1, 2006.
|
·
|
The
MPSC
ruled that WPSC's Michigan customers were entitled to be refunded
approximately 2% of the proceeds over a 60-month period, beginning
in the
third quarter of 2005. Subsequently, the MPSC issued an order
authorizing WPSC to amortize the approximately $2 million remaining
balance of the refund simultaneously with the amortization of
approximately $2 million of the 2005 power supply under collections
from January 2007 through July
2010.
|
·
|
The
FERC
ruled that WPSC's wholesale customers were entitled to be refunded
the
remaining 13% of the proceeds. A refund of approximately
$3 million was made to one customer in the second quarter of 2006,
which was offset by approximately $1 million related to both the loss
WPSC recorded on the sale of Kewaunee and costs incurred related
to the
2005 Kewaunee outage. Pursuant to the FERC order settlement
received on August 14, 2007, WPSC completed lump-sum payments to
the
remaining FERC customers of approximately $16 million (including
interest), 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. Payments made to WPSC total approximately
$1 million and $8 million, respectively, and were netted against
the $16 million refund due to these
customers.
|
At
December 31, 2007, WPSC had recorded a $1.3 million regulatory
liability representing the amount of proceeds received from the liquidation
of
the nonqualified decommissioning trust fund remaining to be refunded in
2008.
The
PSCW disallowed
recovery of 50% of the 2005 loss on the sale of Kewaunee. The entire
loss had previously been approved for deferral, resulting in WPSC writing off
$6.1 million of the regulatory asset previously recorded. WPSC
petitioned the PSCW for rehearing on this matter; however, the request for
rehearing was denied and this decision is now final.
On
February 20, 2005, Kewaunee was temporarily removed from service after a
potential design weakness was identified in its auxiliary feedwater
system. In WPSC's 2006 rate case, 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. At December 31, 2007, $29.3 million was left to be
collected from ratepayers and remained recorded as a regulatory asset related
to
this outage.
In
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. 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. The PSCW approved
WPSC's request for deferred treatment of the incremental fuel costs resulting
from
the coal supply issues. As of December 31, 2007,
$3.0 million was deferred related to this matter. These costs
were addressed in WPSC's 2007 retail electric rate case and will be recoverable
in 2008.
Michigan
On
December 4, 2007, the MPSC issued a final written order authorizing a retail
electric rates increase of $0.6 million, effective December 5,
2007. WPSC's last retail electric rate increase in Michigan was
effective in July 2003. The 2008 rates reflect a 10.6% return on
common equity. The MPSC also approved a common equity ratio of 56.4%
in its regulatory capital structure. The 2008 retail electric rate
increase was required because of increased costs primarily related to the
construction of Weston 4 and the costs to maintain and operate the plant, a
decrease in industrial load, and inflation since July 2003. As
approved by the MPSC, effective December 5, 2007, WPSC also began recovering
the
capacity payments related to its power purchase agreement with Dominion Energy
Kewaunee, LLC through the power supply cost recovery mechanism.
On
June 27, 2006, the MPSC issued a final written order authorizing a retail
electric rate increase for UPPCO that reflects a 10.75% return on common equity
and a common equity ratio of 54.9% in its regulatory capital
structure. 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 rate proceeding.
Illinois
On
March 9, 2007, PGL and NSG filed requests with the ICC to increase natural
gas
rates on an annualized basis for PGL and NSG by $102.5 million and $6.3 million,
respectively, for 2008. Both the PGL and NSG filings included an
11.06% return on common equity and a common equity ratio of 56% in their
regulatory capital structure. In addition, PGL and NSG proposed the
following “riders” that would allow changes in costs to be passed through
between rate cases. Other than the infrastructure rider, which was a
mechanism to recover the return on, and return of, capital investment in excess
of historical capital investment associated with accelerating the replacement
of
cast iron mains and only applied to PGL, the riders that applied to both PGL
and
NSG were:
·
|
a
"decoupling" mechanism that would allow PGL and NSG to adjust rates
going
forward to recover or refund the difference between actual recovered
non-gas costs recovered in revenue and authorized non-gas
costs;
|
·
|
a
mechanism
to recover the natural gas cost portion of uncollectible expense
based on
current natural gas prices; and
|
·
|
a
mechanism
to recover $6.4 million and $1.1 million of energy efficiency
costs for PGL and NSG, respectively, under a program to be approved
by the
ICC.
|
On
February 5, 2008, the ICC issued a final written order authorizing a rate
increase of $71.2 million for PGL, which includes a return on common equity
of 10.19% and a common equity ratio of 56% in its regulatory capital structure,
and a rate decrease of $0.2 million for NSG, which includes a return on
common equity of 9.99% and a common equity ratio of 56% in its regulatory
capital structure. The order includes approval of the decoupling
mechanism as a four-year pilot and the energy efficiency mechanism for both
PGL
and NSG. The infrastructure mechanism (proposed by PGL) and the uncollectible
expense mechanism (proposed by both PGL and NSG) were not approved. PGL and
NSG
filed tariffs in compliance with the order on February 8, 2008, and the new
rates went into effect on February 14, 2008. A rehearing request,
which is a prerequisite for any party wishing to appeal the order, is due 30
days after service of the order.
The
PEC merger was
effective February 21, 2007. PGL and NSG are wholly owned by PEC. 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 union
workforce,
|
·
|
maintain
both
the PGL and NSG operation and maintenance and capital budgets at
recent
levels,
|
·
|
file
a plan
for formation and implementation of a service
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 included commitments with respect to the recently completed rate
cases of PGL and NSG. These are the inclusion of merger synergy
savings of $11.4 million at PGL and $1.6 million at NSG in the
proposed test year, the recovery of $6.2 million at PGL and
$0.8 million at NSG of the merger-related costs in the test year
(reflecting recovery of $30.9 million at PGL and $4.2 million at NSG
of costs over 5 years), proposing a combined PGL and NSG $7.5 million
energy efficiency program which was 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 up to an additional
$9.9 million of combined 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. As of
December 31, 2007, the regulatory asset balance representing merger costs
to be recovered totaled $12.8 million at PGL and $1.7 million at
NSG.
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. 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 2008. Integrys Energy Services has reached settlement agreements
with three of its vendors for a combined $1.6 million.
In
August 2006, the administrative law judge hearing the case issued an Initial
Decision that was in agreement with all of Integrys Energy Services'
positions. If the Final Order, which is expected some time in 2008,
is consistent with the Initial Decision of the administrative law judge,
Integrys Energy Services' exposure of $19.2 million may be reduced by as
much as $13 million (pre-tax). 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.
The
SECA is also an
issue for WPSC and UPPCO. 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, and thus, will not have a material effect on the
financial position or results of operations of WPSC or UPPCO.
NOTE 24--SEGMENTS
OF BUSINESS
SFAS
No. 131,
"Disclosures About Segments of an Enterprise and Related Information," requires
that companies disclose segment information based on how management makes
decisions about allocating resources to segments and measuring their
performance.
Integrys
Energy
Group manages its reportable segments separately due to their different
operating and regulatory environments. At December 31, 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.
|
·
|
Integrys
Energy Services is a diversified nonregulated energy supply and services
company serving residential, commercial, industrial, and wholesale
customers in developed competitive markets in the United States and
Canada.
|
·
|
The
nonregulated oil and natural gas production segment includes the
results
of PEP, which were reported as discontinued operations. PEP
engages in the acquisition, development and production of oil and
natural
gas reserves in selected onshore basins in the United States through
direct ownership in oil, natural gas, and mineral leases. In
September 2007, Integrys Energy Group completed the sale of
PEP.
|
·
|
The
Holding
Company and Other segment, another nonregulated segment, includes
the
operations of the Integrys Energy Group holding company and the PEC
holding company, along with any nonutility activities at WPSC, MGUC,
MERC,
UPPCO, PGL, and NSG. Equity earnings from our investments in
ATC, WRPC, and Guardian Pipeline, LLC (prior to its sale in 2006)
are
included in the Holding Company and Other
segment.
|
The
tables below
present information for the respective years pertaining to our operations
segmented by lines of business.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated
Utilities
|
|
|
Nonutility
and
Nonregulated Operations
|
|
|
|
|
|
|
|
2007
(Millions)
|
|
Electric
Utility(1)
|
|
|
Natural
Gas
Utility(1)
|
|
|
Total
Utility(1)
|
|
|
Integrys
Energy Services
|
|
|
Oil
and Natural Gas Production
|
|
|
Holding
Company and Other(2)
|
|
|
Reconciling
Eliminations
|
|
|
Integrys
Energy Group Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$ |
1,202.9 |
|
|
$ |
2,102.5 |
|
|
$ |
3,305.4 |
|
|
$ |
6,975.7 |
|
|
$ |
- |
|
|
$ |
11.3 |
|
|
$ |
- |
|
|
$ |
10,292.4 |
|
Intersegment
revenues
|
|
|
43.2 |
|
|
|
1.2 |
|
|
|
44.4 |
|
|
|
4.0 |
|
|
|
- |
|
|
|
1.2 |
|
|
|
(49.6 |
) |
|
|
- |
|
Depreciation
and
amortization
expense
|
|
|
80.1 |
|
|
|
97.7 |
|
|
|
177.8 |
|
|
|
14.4 |
|
|
|
- |
|
|
|
2.9 |
|
|
|
- |
|
|
|
195.1 |
|
Miscellaneous
income
(expense)
|
|
|
8.3 |
|
|
|
5.5 |
|
|
|
13.8 |
|
|
|
(0.3 |
) |
|
|
0.1 |
|
|
|
81.4 |
(3) |
|
|
(30.9 |
) |
|
|
64.1 |
|
Interest
expense
|
|
|
32.4 |
|
|
|
53.4 |
|
|
|
85.8 |
|
|
|
13.5 |
|
|
|
2.4 |
|
|
|
93.7 |
|
|
|
(30.9 |
) |
|
|
164.5 |
|
Provision
(benefit) for income taxes
|
|
|
51.5 |
|
|
|
14.5 |
|
|
|
66.0 |
|
|
|
26.3 |
|
|
|
(1.0 |
) |
|
|
(5.3 |
) |
|
|
- |
|
|
|
86.0 |
|
Income
(loss)
from continuing operations
|
|
|
89.6 |
|
|
|
29.6 |
|
|
|
119.2 |
|
|
|
83.2 |
|
|
|
(2.5 |
) |
|
|
(18.8 |
) |
|
|
- |
|
|
|
181.1 |
|
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
14.8 |
|
|
|
58.5 |
|
|
|
- |
|
|
|
- |
|
|
|
73.3 |
|
Preferred
stock dividends of subsidiary
|
|
|
2.2 |
|
|
|
0.9 |
|
|
|
3.1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3.1 |
|
Income
(loss)
available for common shareholders
|
|
|
87.4 |
|
|
|
28.7 |
|
|
|
116.1 |
|
|
|
98.0 |
|
|
|
56.0 |
|
|
|
(18.8 |
) |
|
|
- |
|
|
|
251.3 |
|
Total
assets
|
|
|
2,470.8 |
|
|
|
4,777.8 |
|
|
|
7,248.6 |
|
|
|
3,150.6 |
|
|
|
- |
|
|
|
1,911.4 |
|
|
|
(1,076.2 |
) |
|
|
11,234.4 |
|
Cash
expenditures for long-lived assets
|
|
|
202.6 |
|
|
|
158.8 |
|
|
|
361.4 |
|
|
|
20.5 |
|
|
|
- |
|
|
|
10.7 |
|
|
|
- |
|
|
|
392.6 |
|
(1) Includes
only utility
operations.
(2) Nonutility
operations
are included in the Holding Company and Other column.
(3) Other
miscellaneous
income includes $52.3 million of pre-tax income from equity method
investments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated
Utilities
|
|
|
Nonutility
and
Nonregulated
Operations
|
|
|
|
|
|
|
|
2006
(Millions)
|
|
Electric
Utility(1)
|
|
|
Gas
Utility(1)
|
|
|
Total
Utility(1)
|
|
|
Integrys
Energy Services
|
|
|
Holding
Company and Other(2)
|
|
|
Reconciling
Eliminations
|
|
|
Integrys
Energy Group Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$ |
1,057.9 |
|
|
$ |
676.1 |
|
|
$ |
1,734.0 |
|
|
$ |
5,151.8 |
|
|
$ |
4.9 |
|
|
$ |
- |
|
|
$ |
6,890.7 |
|
Intersegment
revenues
|
|
|
41.5 |
|
|
|
0.8 |
|
|
|
42.3 |
|
|
|
7.3 |
|
|
|
1.2 |
|
|
|
(50.8 |
) |
|
|
- |
|
Depreciation
and amortization expense
|
|
|
78.5 |
|
|
|
32.7 |
|
|
|
111.2 |
|
|
|
9.4 |
|
|
|
0.7 |
|
|
|
- |
|
|
|
121.3 |
|
Miscellaneous
income (expense)
|
|
|
3.2 |
|
|
|
1.0 |
|
|
|
4.2 |
|
|
|
(11.4 |
) |
|
|
66.0 |
(3) |
|
|
(16.0 |
) |
|
|
42.8 |
|
Interest
expense
|
|
|
30.0 |
|
|
|
18.1 |
|
|
|
48.1 |
|
|
|
15.4 |
|
|
|
51.7 |
|
|
|
(16.0 |
) |
|
|
99.2 |
|
Provision
(benefit) for income taxes
|
|
|
48.6 |
|
|
|
1.5 |
|
|
|
50.1 |
|
|
|
(5.0 |
) |
|
|
(0.1 |
) |
|
|
- |
|
|
|
45.0 |
|
Income
(loss)
from continuing operations
|
|
|
87.6 |
|
|
|
(1.3 |
) |
|
|
86.3 |
|
|
|
65.0 |
|
|
|
0.3 |
|
|
|
- |
|
|
|
151.6 |
|
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7.3 |
|
|
|
- |
|
|
|
- |
|
|
|
7.3 |
|
Preferred
stock dividends of subsidiary
|
|
|
2.1 |
|
|
|
1.0 |
|
|
|
3.1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3.1 |
|
Income
(loss)
available for common shareholders
|
|
|
85.5 |
|
|
|
(2.3 |
) |
|
|
83.2 |
|
|
|
72.3 |
|
|
|
0.3 |
|
|
|
- |
|
|
|
155.8 |
|
Total
assets
|
|
|
2,368.0 |
|
|
|
1,483.9 |
|
|
|
3,851.9 |
|
|
|
2,736.7 |
|
|
|
741.5 |
|
|
|
(468.4 |
) |
|
|
6,861.7 |
|
Cash
expenditures for long-lived assets
|
|
|
282.1 |
|
|
|
54.6 |
|
|
|
336.7 |
|
|
|
5.5 |
|
|
|
(0.2 |
) |
|
|
- |
|
|
|
342.0 |
|
(1) Includes
only utility
operations.
(2) Nonutility
operations
are included in the Holding Company and Other column.
(3) Other
miscellaneous
income includes $42.2 million of pre-tax income from equity method
investments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated
Utilities
|
|
|
Nonutility
and
Nonregulated
Operations
|
|
|
|
|
|
|
|
2005
(Millions)
|
|
Electric
Utility(1)
|
|
|
Gas
Utility(1)
|
|
|
Total
Utility(1)
|
|
|
Integrys
Energy Services
|
|
|
Holding
Company and Other(2)
|
|
|
Reconciling
Eliminations
|
|
|
Integrys
Energy Group Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$ |
1,003.6 |
|
|
$ |
520.6 |
|
|
$ |
1,524.2 |
|
|
$ |
5,301.3 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
6,852.5 |
|
Intersegment
revenues
|
|
|
33.5 |
|
|
|
1.4 |
|
|
|
34.9 |
|
|
|
13.6 |
|
|
|
1.1 |
|
|
|
(49.6 |
) |
|
|
- |
|
Depreciation
and amortization expense
|
|
|
120.4 |
|
|
|
19.5 |
|
|
|
139.9 |
|
|
|
9.5 |
|
|
|
0.3 |
|
|
|
- |
|
|
|
149.7 |
|
Miscellaneous
income (expense)
|
|
|
52.0 |
|
|
|
0.7 |
|
|
|
52.7 |
|
|
|
(0.8 |
) |
|
|
41.4 |
(3) |
|
|
(4.5 |
) |
|
|
88.8 |
|
Interest
expense
|
|
|
27.1 |
|
|
|
8.7 |
|
|
|
35.8 |
|
|
|
4.4 |
|
|
|
26.3 |
|
|
|
(4.5 |
) |
|
|
62.0 |
|
Provision
(benefit) for income taxes
|
|
|
37.0 |
|
|
|
7.3 |
|
|
|
44.3 |
|
|
|
(2.4 |
) |
|
|
(2.3 |
) |
|
|
- |
|
|
|
39.6 |
|
Income
from
continuing operations
|
|
|
66.2 |
|
|
|
14.3 |
|
|
|
80.5 |
|
|
|
64.2 |
|
|
|
5.9 |
|
|
|
- |
|
|
|
150.6 |
|
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
11.5 |
|
|
|
- |
|
|
|
- |
|
|
|
11.5 |
|
Cumulative
effect of change in accounting principle
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1.6 |
) |
|
|
- |
|
|
|
- |
|
|
|
(1.6 |
) |
Preferred
stock dividends of subsidiary
|
|
|
2.0 |
|
|
|
1.1 |
|
|
|
3.1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3.1 |
|
Income
available for common shareholders
|
|
|
64.2 |
|
|
|
13.2 |
|
|
|
77.4 |
|
|
|
74.1 |
|
|
|
5.9 |
|
|
|
- |
|
|
|
157.4 |
|
Cash
expenditures for long-lived assets
|
|
|
373.9 |
|
|
|
36.4 |
|
|
|
410.3 |
|
|
|
2.7 |
|
|
|
0.9 |
|
|
|
- |
|
|
|
413.9 |
|
(1) Includes
only utility
operations.
(2) Nonutility
operations
are included in the Holding Company and Other column.
(3) Other
miscellaneous
income includes $31.8 million of pre-tax income from equity method
investments.
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Geographic
Information
(Millions)
|
|
Revenues
|
|
|
Long-Lived
Assets
|
|
|
Revenues
|
|
|
Long-Lived
Assets
|
|
|
Revenues
|
|
United States
|
|
$ |
8,066.5 |
|
|
$ |
7,028.5 |
|
|
$ |
4,908.5 |
|
|
$ |
3,605.1 |
|
|
$ |
4,659.8 |
|
Canada*
|
|
|
2,225.9 |
|
|
|
20.3 |
|
|
|
1,982.2 |
|
|
|
21.0 |
|
|
|
2,165.7 |
|
Total
|
|
$ |
10,292.4 |
|
|
$ |
7,048.8 |
|
|
$ |
6,890.7 |
|
|
$ |
3,626.1 |
|
|
$ |
6,825.5 |
|
* Revenues
and assets of Canadian subsidiaries.
NOTE 25--QUARTERLY
FINANCIAL INFORMATION (Unaudited)
(Millions,
except for share amounts)
|
|
Three
Months Ended
|
|
|
|
2007
|
|
|
|
March
|
|
|
June
|
|
|
September
|
|
|
December
|
|
|
Total
|
|
Operating
revenues
|
|
$ |
2,746.6 |
|
|
$ |
2,361.7 |
|
|
$ |
2,122.5 |
|
|
$ |
3,061.6 |
|
|
$ |
10,292.4 |
|
Operating
Income (loss)
|
|
|
183.1 |
|
|
|
(33.9 |
) |
|
|
54.1 |
|
|
|
164.1 |
|
|
|
367.4 |
|
Income
(loss)
from continuing operations
|
|
|
117.2 |
|
|
|
(39.6 |
) |
|
|
11.6 |
|
|
|
91.9 |
|
|
|
181.1 |
|
Discontinued
operations, net of tax
|
|
|
23.0 |
|
|
|
24.0 |
|
|
|
32.3 |
|
|
|
(6.0 |
) |
|
|
73.3 |
|
Preferred
stock dividends of subsidiary
|
|
|
0.8 |
|
|
|
0.8 |
|
|
|
0.7 |
|
|
|
0.8 |
|
|
|
3.1 |
|
Income
(loss)
available for common shareholders
|
|
|
139.4 |
|
|
|
(16.4 |
) |
|
|
43.2 |
|
|
|
85.1 |
|
|
|
251.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
number
of shares of common stock (basic)
|
|
|
57.5 |
|
|
|
76.0 |
|
|
|
76.2 |
|
|
|
76.5 |
|
|
|
71.6 |
|
Average
number
of shares of common stock (diluted)
|
|
|
57.8 |
|
|
|
76.0 |
|
|
|
76.5 |
|
|
|
76.6 |
|
|
|
71.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share (basic) *
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$ |
2.02 |
|
|
$ |
(0.53 |
) |
|
$ |
0.14 |
|
|
$ |
1.19 |
|
|
$ |
2.49 |
|
Discontinued
operations
|
|
|
0.40 |
|
|
|
0.31 |
|
|
|
0.43 |
|
|
|
(0.08 |
) |
|
|
1.02 |
|
Earnings
(loss) per common share (basic)
|
|
|
2.42 |
|
|
|
(0.22 |
) |
|
|
0.57 |
|
|
|
1.11 |
|
|
|
3.51 |
|
Earnings
(loss) per common share (diluted) *
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
|
2.01 |
|
|
|
(0.53 |
) |
|
|
0.14 |
|
|
|
1.19 |
|
|
|
2.48 |
|
Discontinued
operations
|
|
|
0.40 |
|
|
|
0.31 |
|
|
|
0.42 |
|
|
|
(0.08 |
) |
|
|
1.02 |
|
Earnings
(loss) per common share (diluted)
|
|
|
2.41 |
|
|
|
(0.22 |
) |
|
|
0.56 |
|
|
|
1.11 |
|
|
|
3.50 |
|
*
Earnings
per share for the individual quarters do not total the year ended earnings
per
share amount because of changes
to the
average number of shares outstanding and changes in incremental issuable shares
throughout the year.
(Millions,
except for share amounts)
|
|
Three
Months
Ended
|
|
|
|
2006
|
|
|
|
March
|
|
|
June
|
|
|
September
|
|
|
December
|
|
|
Total
|
|
Operating
revenues
|
|
$ |
1,995.7 |
|
|
$ |
1,475.3 |
|
|
$ |
1,555.1 |
|
|
$ |
1,864.6 |
|
|
$ |
6,890.7 |
|
Operating
Income
|
|
|
95.1 |
|
|
|
67.6 |
|
|
|
44.4 |
|
|
|
42.1 |
|
|
|
249.2 |
|
Income
from
continuing operations
|
|
|
59.3 |
|
|
|
41.9 |
|
|
|
28.0 |
|
|
|
22.4 |
|
|
|
151.6 |
|
Discontinued
operations, net of tax
|
|
|
1.6 |
|
|
|
(6.2 |
) |
|
|
12.2 |
|
|
|
(0.3 |
) |
|
|
7.3 |
|
Preferred
stock dividends of subsidiary
|
|
|
0.8 |
|
|
|
0.8 |
|
|
|
0.7 |
|
|
|
0.8 |
|
|
|
3.1 |
|
Income
available for common shareholders
|
|
|
60.1 |
|
|
|
34.9 |
|
|
|
39.5 |
|
|
|
21.3 |
|
|
|
155.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
number
of shares of common stock (basic)
|
|
|
40.3 |
|
|
|
42.2 |
|
|
|
43.3 |
|
|
|
43.5 |
|
|
|
42.3 |
|
Average
number
of shares of common stock (diluted)
|
|
|
40.6 |
|
|
|
42.2 |
|
|
|
43.4 |
|
|
|
43.6 |
|
|
|
42.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share (basic) *
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
1.45 |
|
|
$ |
0.97 |
|
|
$ |
0.63 |
|
|
$ |
0.50 |
|
|
$ |
3.51 |
|
Discontinued
operations
|
|
|
0.04 |
|
|
|
(0.14 |
) |
|
|
0.28 |
|
|
|
(0.01 |
) |
|
|
0.17 |
|
Earnings
per common share (basic)
|
|
|
1.49 |
|
|
|
0.83 |
|
|
|
0.91 |
|
|
|
0.49 |
|
|
|
3.68 |
|
Earnings
(loss) per common share (diluted) *
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
1.44 |
|
|
|
0.97 |
|
|
|
0.63 |
|
|
|
0.50 |
|
|
|
3.50 |
|
Discontinued
operations
|
|
|
0.04 |
|
|
|
(0.14 |
) |
|
|
0.28 |
|
|
|
(0.01 |
) |
|
|
0.17 |
|
Earnings
per common share (diluted)
|
|
|
1.48 |
|
|
|
0.83 |
|
|
|
0.91 |
|
|
|
0.49 |
|
|
|
3.67 |
|
*
Earnings
per share for the individual quarters do not total the year ended earnings
per
share amount because of changes
to the
average number of shares outstanding and changes in incremental issuable shares
throughout the year.
Because
of various
factors, the quarterly results of operations are not necessarily
comparable.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
H. REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM ON FINANCIAL STATEMENTS
To
the Board of Directors and Shareholders of Integrys Energy Group,
Inc.:
We
have audited the accompanying consolidated balance sheets of Integrys Energy
Group, Inc. and subsidiaries (the "Company") as of December 31, 2007 and 2006,
and the related consolidated statements of income, common shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
2007. Our audits also included the financial statement schedules listed in
the Index at Item 15. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedules based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In
our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Integrys Energy Group, Inc. and
subsidiaries as of December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2007, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
As
discussed in Note 19 to the consolidated financial statements, at December
31,
2006, the Company adopted Statement of Financial Accounting Standards No. 158,
"Employers' Accounting for Defined Benefit Pension and Other Postretirement
Plans – an amendment of FASB Statements No. 87, 88, 106, and
132(R)."
We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Company's internal control
over
financial reporting as of December 31, 2007, based on the criteria established
in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 27, 2008 expressed an
unqualified opinion on the Company's internal control over financial
reporting.
/s/
Deloitte &
Touche LLP
Milwaukee,
Wisconsin
February
27,
2008
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
Evaluation
of Disclosure Controls and Procedures
As
of the end of the period covered by this Annual Report on Form 10-K, 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 its consolidated subsidiaries) as appropriate
to allow timely decisions regarding required disclosure to be included in its
periodic SEC filings, particularly during the period in which this Annual Report
on Form 10-K 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
December 31, 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 December 31, 2007,
that have materially affected, or are reasonably likely to materially affect,
the internal control over financial reporting, other than the merger with
PEC.
Management
Reports on Internal Control over Financial Reporting
For
the Integrys
Energy Group's Management Report on Internal Control over Financial Reporting,
see Section A of Item 8.
Reports
of Independent Registered Public Accounting Firm
For
the Integrys
Energy Group's Reports of Independent Registered Public Accounting Firm, see
Sections B and H Item 8.
None.
PART
III
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS OF INTEGRYS
ENERGY GROUP
Information
required by this Item regarding the directors of Integrys Energy Group, Section
16 compliance and the members of the Audit Committee and the Audit Committee
financial expert can be found in Integrys Energy Group's Proxy Statement for
its
Annual Meeting of Shareholders to be held May 15, 2008, under the captions
"Election of Directors," "Ownership of Voting Securities-Section 16(a)
Beneficial
Ownership
Reporting
Compliance" and "Board Committees," respectively. Such information is
incorporated by reference as if fully set forth herein.
Information
regarding the executive officers of Integrys Energy Group can be found in this
Annual Report on Form 10-K in Item 4A.
Integrys
Energy
Group has adopted a Code of Conduct, which serves as our Code of Business
Conduct and Ethics. The Code of Conduct applies to all of our
directors, officers, and employees, including the Chief Executive Officer,
Chief
Financial Officer, Chief Accounting Officer and Controller and any other persons
performing similar functions. Integrys Energy Group has also adopted corporate
governance guidelines.
Integrys
Energy
Group's Code of Conduct, Corporate Governance Guidelines and charters of the
board committees may be accessed on the Integrys Energy Group Web site, www.integrysgroup.com
under "Investors" then select "Corporate Governance." Copies of
Integrys Energy Group's Code of Conduct, Corporate Governance Guidelines and
charters of the board committees can also be obtained by writing to Integrys
Energy Group, Inc., Attention: Barth J. Wolf, Vice President - Chief
Legal Officer and Secretary, 700 North Adams Street, Green Bay, Wisconsin
53701. Amendments to,
or waivers from, our Code of Conduct will be disclosed on our Web site within
the prescribed time period.
Information
required by this Item regarding compensation paid by Integrys Energy Group
to
its directors and its "named executive officers" in 2007 can be found in
Integrys Energy Group's Proxy Statement for its Annual Meeting of Shareholders
to be held May 15, 2008, under the captions "Director Compensation" and
"Executive Compensation." Such information is incorporated by
reference as if fully set forth herein.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
Information
required by this Item regarding the principal securities holders of Integrys
Energy Group and the security holdings of its directors and executive officers
can be found in Integrys Energy Group's Proxy Statement for its Annual Meeting
of Shareholders to be held May 15, 2008 under the caption "Ownership of Voting
Securities--Beneficial Ownership." Such information is incorporated
by reference as if fully set forth herein.
Information
required by this Item regarding equity compensation plans of Integrys Energy
Group can be found in Integrys Energy Group's Proxy Statement for its Annual
Meeting of Shareholders to be held May 15, 2008, under the caption
"Ownership of Voting Securities--Equity Compensation Plan
Information." Such information is incorporated by reference as if
fully set forth herein.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
WPSC
provides and
receives services, property, and other things of value to and from its parent,
Integrys Energy Group, and other subsidiaries of Integrys Energy
Group. All such transactions are made pursuant to a master affiliated
interest agreement approved by the PSCW. The agreement provides that
WPSC receives payment equal to the higher of its cost or fair value for services
and property and other things of value which WPSC provides to Integrys Energy
Group or its other nonregulated subsidiaries, makes payments equal to the lower
of the provider's cost or fair value for property, services, and other things
of
value which Integrys Energy Group or its other nonregulated subsidiaries provide
to WPSC. The agreement further provides that any services, property,
or other things of value provided to or from WPSC to or for any other regulated
subsidiary of Integrys Energy Group be provided at cost. Modification
or amendment to the master agreement requires the approval of the
PSCW.
PGL
and NSG, under an ICC-approved
agreement, can each provide to and receive from each other, their parent, PEC,
and other wholly-owned subsidiaries of PEC certain facilities, services and
assets. If PGL or NSG provide facilities or services, it would charge
the receiving party an amount equal to or greater than the fully distributed
cost. If PGL or NSG is receiving facilities or services, the
providing party would charge it the prevailing price to the general public
but
no more than fully distributed cost. Costs would be based on direct
charges or an allocation method. For asset transfers between PGL and
NSG, the transferring party would charge its current net book
value. For transactions involving other parties, the charge would be
the fair market value. Asset transfers by PGL or NSG to a non-utility
would be charged at the prevailing market price. Asset transfers
involving PGL or NSG may require prior ICC approval. The ICC must
approve changes or amendments to this agreement.
|
PRINCIPAL
FEES AND SERVICES PAID TO INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
|
For
a summary of
the fees billed to Integrys Energy Group (including its subsidiaries) by
Deloitte & Touche LLP for professional services performed for 2007 and 2006,
please see Integrys Energy Group's Schedule 14A.
PART
IV
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
Documents
filed as part of this report:
|
|
|
(1)
|
Consolidated
Financial Statements included in Part II at Item 8
above:
|
|
|
|
Description
|
Pages
in
10-K
|
|
|
|
|
Consolidated
Statements of Income for the three years ended December 31, 2007,
2006, and 2005
|
81
|
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
82
|
|
|
|
Consolidated
Statements of Common Shareholders' Equity for the three years ended
December 31, 2007, 2006, and 2005
|
83
|
|
|
|
Consolidated
Statements of Cash Flows for the three years ended December 31, 2007,
2006, and 2005
|
84
|
|
|
|
|
Notes
to
Consolidated Financial Statements
|
85
|
|
|
|
|
Report
of
Independent Registered Public Accounting Firm
|
146
|
|
|
|
(2)
|
Financial
Statement Schedules.
The
following
financial statement schedules are included in Part IV of this
report. Schedules not included herein have been omitted because
they are not applicable or the required information is shown in the
financial statements or notes thereto.
|
|
|
|
Description
|
Pages
in
10-K
|
|
|
|
|
Schedule
I -
Condensed Parent Company Only Financial Statements
|
|
|
|
|
|
A.
|
Statements
of
Income and Retained Earnings
|
159
|
|
|
|
|
|
B.
|
Balance
Sheets
|
160
|
|
|
|
|
|
C.
|
Statements
of
Cash Flows
|
161
|
|
|
|
|
|
D.
|
Notes
to
Parent Company Financial Statements
|
162
|
|
|
|
|
|
Schedule
II
Integrys Energy Group, Inc. Valuation and Qualifying
Accounts
|
169
|
|
|
|
(3)
|
Listing
of
all exhibits, including those incorporated by reference.
Explanatory
Note: Many of the exhibits listed below were entered into when
Integrys Energy Group, Inc. was known as WPS Resources Corporation
but have been referred to below by reference to its current
name.
|
Exhibit
Number
|
Description
of
Documents
|
|
|
2.1*
|
Asset
Contribution Agreement between ATC and Wisconsin Electric Power Company,
Wisconsin Power and Light Company, WPSC, Madison Gas & Electric Co.,
Edison Sault Electric Company, South Beloit Water, Gas and Electric
Company, dated as of December 15, 2000. (Incorporated by
reference to Exhibit 2A-3 to Integrys Energy Group's Form 10-K for
the
year ended December 31, 2000.)
|
|
|
2.3*
|
Stock
Purchase Agreement by and among PEC and El Paso E&P Company, L.P.
dated August 16, 2007. (Incorporated by reference to Exhibit
2.1 to Integrys Energy Group's Form 8-K filed August 20,
2007.)
|
|
|
3.1
|
Restated
Articles of Incorporation of Integrys Energy Group, as
amended. (Incorporated by reference to Exhibit 3.2 to
Integrys Energy Group's Form 8-K filed February 27,
2007.)
|
|
|
3.2
|
By-Laws
of
Integrys Energy Group, as amended through December 6,
2007. (Incorporated by reference to Exhibit 3.2 to Integrys
Energy Group's Form 8-K filed December 12, 2007.)
|
|
|
4.1
|
Senior
Indenture, dated as of October 1, 1999, between Integrys Energy Group
and U.S. Bank National Association (successor to Firstar Bank
Milwaukee, N.A., National Association) (Incorporated by reference
to
Exhibit 4(b) to Amendment No. 1 to Form S-3 filed October 21, 1999
[Reg.
No. 333-88525]); First Supplemental Indenture, dated as of November
1,
1999 between Integrys Energy Group and Firstar Bank, National Association
(Incorporated by reference to Exhibit 4A of Form 8-K filed November
12,
1999); and Second Supplemental Indenture, dated as of November 1,
2002
between Integrys Energy Group and U.S. Bank National
Association. (Incorporated by reference to Exhibit 4A of Form
8-K filed November 25, 2002). All references to filings are
those of Integrys Energy Group (File No. 1-11337).
|
|
|
4.2
|
Subordinated
Indenture, dated as of November 13, 2006, between Integrys Energy
Group
and U.S. Bank National Association, as trustee (Incorporated by reference
to Exhibit 4(c) to Amendment No. 1 to Form S-3 filed November 27,
2006 and December 4, 2006 [Reg. No. 333-133194]; and First Supplemental
Indenture by and between Integrys Energy Group, Inc. and U.S. Bank
National Association, as trustee, dated December 1,
2006. (Incorporated by reference to Exhibit 4 to
Integrys Energy Group's Form 8-K filed December 1,
2006)
|
|
|
4.3
|
Replacement
Capital Covenant of Integrys Energy Group, Inc., dated December 1,
2006. (Incorporated by reference to Exhibit 99 to
Integrys Energy Group Form 8-K filed December 1,
2006)
|
|
|
4.4
|
Guaranty,
dated May 18, 2007, by and among Integrys Energy Group, Inc. and
Bank of
America, N.A. in its capacity as Administrative Agent (Incorporated
by reference to Exhibit 10.1 to Integrys Energy Group's Form 8-K
filed May
22, 2007)
|
|
|
4.5
|
First
Amendment and Consent to Credit Agreement dated May 18, 2007 between
PEC
and Bank of America N.A., as Administrative Agent (Incorporated by
reference to Exhibit 10.2 to Integrys Energy Group's Form 8-K filed
May
22, 2007)
|
|
|
4.6
|
Credit
Agreement dated as of June 13, 2006, by and among PEC, the financial
institutions party hereto, and Bank of America, N.A., JPMorgan Chase
Bank,
N.A., ABN AMRO Incorporated, US Bank National Association, and The
Bank of
Tokyo-Mitsubishi, Ltd. Chicago Branch, as agents (Incorporated by
reference to Exhibit 10(a) to PEC - Form 10-Q filed August 9, 2006
[File
No. 1-05540])
|
4.7
|
First
Mortgage and Deed of Trust, dated as of January 1, 1941 from WPSC
to U.S.
Bank National Association (successor to First Wisconsin Trust Company),
Trustee (Incorporated by reference to Exhibit 7.01 - File No. 2-7229);
Supplemental Indenture, dated as of November 1, 1947 (Incorporated by
reference to Exhibit 7.02 - File No. 2-7602); Supplemental Indenture,
dated as of November 1, 1950 (Incorporated by reference to Exhibit
4.04 -
File No. 2-10174); Supplemental Indenture, dated as of May 1, 1953
(Incorporated by reference to Exhibit 4.03 - File No. 2-10716);
Supplemental Indenture, dated as of October 1, 1954 (Incorporated
by
reference to Exhibit 4.03 - File No. 2-13572); Supplemental
Indenture, dated as of December 1, 1957 (Incorporated by reference to
Exhibit 4.03 - File No. 2-14527); Supplemental Indenture, dated as of
October 1, 1963 (Incorporated by reference to Exhibit 2.02B -
File No. 2-65710); Supplemental Indenture, dated as of June 1, 1964
(Incorporated by reference to Exhibit 2.02B - File No. 2-65710);
Supplemental Indenture, dated as of November 1, 1967 (Incorporated
by
reference to Exhibit 2.02B - File No. 2-65710); Supplemental Indenture,
dated as of April 1, 1969 (Incorporated by reference to Exhibit
2.02B -
File No. 2-65710); Fifteenth Supplemental Indenture, dated as of
May 1,
1971 (Incorporated by reference to Exhibit 2.02B - File No. 2-65710);
Sixteenth Supplemental Indenture, dated as of August 1, 1973
(Incorporated by reference to Exhibit 2.02B - File No. 2-65710);
Seventeenth Supplemental Indenture, dated as of September 1, 1973
(Incorporated by reference to Exhibit 2.02B - File No. 2-65710);
Eighteenth Supplemental Indenture, dated as of October 1, 1975
(Incorporated by reference to Exhibit 2.02B - File No. 2-65710);
Nineteenth Supplemental Indenture, dated as of February 1, 1977
(Incorporated by reference to Exhibit 2.02B - File No. 2-65710);
Twentieth Supplemental Indenture, dated as of July 15, 1980 (Incorporated
by reference to Exhibit 4B to Form 10-K for the year ended
December 31, 1980); Twenty-First Supplemental Indenture, dated as of
December 1, 1980 (Incorporated by reference to Exhibit 4B to
Form 10-K for the year ended December 31, 1980); Twenty-Second
Supplemental Indenture dated as of April 1, 1981 (Incorporated
by
reference to Exhibit 4B to Form 10-K for the year ended December 31,
1981); Twenty-Third Supplemental Indenture, dated as of February
1, 1984
(Incorporated by reference to Exhibit 4B to Form 10-K for the year
ended
December 31, 1983); Twenty-Fourth Supplemental Indenture, dated as of
March 15, 1984 (Incorporated by reference to Exhibit 1 to Form
10-Q for
the quarter ended June 30, 1984); Twenty-Fifth Supplemental
Indenture, dated as of October 1, 1985 (Incorporated by reference
to
Exhibit 1 to Form 10-Q for the quarter ended September 30,
1985); Twenty-Sixth Supplemental Indenture, dated as of December 1,
1987 (Incorporated by reference to Exhibit 4A-1 to Form 10-K for
the year
ended December 31, 1987); Twenty-Seventh Supplemental Indenture,
dated as of September 1, 1991 (Incorporated by reference to Exhibit
4 to
Form 8-K filed September 18, 1991); Twenty-Eighth Supplemental
Indenture,
dated as of July 1, 1992 (Incorporated by reference to Exhibit
4B - File
No. 33-51428); Twenty-Ninth Supplemental Indenture, dated as of
October 1,
1992 (Incorporated by reference to Exhibit 4 to Form 8-K filed
October 22,
1992); Thirtieth Supplemental Indenture, dated as of February 1,
1993
(Incorporated by reference to Exhibit 4 to Form 8-K filed
January 27, 1993); Thirty-First Supplemental Indenture, dated as of
July 1, 1993 (Incorporated by reference to Exhibit 4 to Form 8-K
filed
July 7, 1993); Thirty-Second Supplemental Indenture, dated as of
November 1, 1993 (Incorporated by reference to Exhibit 4 to
Form 10-Q for the quarter ended September 30, 1993); Thirty-Third
Supplemental Indenture, dated as of December 1, 1998 (Incorporated by
reference to Exhibit 4D to Form 8-K filed December 18, 1998);
Thirty-Fourth Supplemental Indenture, dated as of August 1, 2001
(Incorporated by reference to Exhibit 4D to Form 8-K filed August
24,
2001); Thirty-Fifth Supplemental Indenture, dated as of December 1,
2002 (Incorporated by reference to Exhibit 4D to Form 8-K filed
December 16, 2002); Thirty-Sixth Supplemental Indenture, dated as of
December 8, 2003 (Incorporated by reference to Exhibit 4.2 to Form
8-K filed December 9, 2003); Thirty-Seventh Supplemental Indenture,
dated as of December 1, 2006 (Incorporated by reference to Exhibit
4.2 to Form 8-K filed November 30, 2006); Thirty-Eighth Supplemental
Indenture, dated as of August 1, 2006 (Incorporated by reference
to
Exhibit 4.1 to Form 10-K for the year ended December 31, 2006);
and
Thirty-Ninth Supplemental Indenture, dated as of November 1, 2007
(Incorporated by reference to Exhibit 4.2 to Form 8-K filed November
16,
2007). All references to periodic reports are to those of WPSC
(File No. 1-3016).
|
4.8
|
Indenture,
dated as of December 1, 1998, between WPSC and U.S. Bank National
Association (successor to Firstar Bank Milwaukee, N.A., National
Association) (Incorporated by reference to Exhibit 4A to Form 8-K
filed
December 18, 1998); First Supplemental Indenture, dated as of
December 1, 1998 between WPSC and Firstar Bank Milwaukee, N.A.,
National Association (Incorporated by reference to Exhibit 4C to
Form 8-K
filed December 18, 1998); Second Supplemental Indenture, dated as of
August 1, 2001 between WPSC and Firstar Bank, National Association
(Incorporated by reference to Exhibit 4C of Form 8-K filed August 24,
2001); Third Supplemental Indenture, dated as of December 1, 2002
between WPSC and U.S. Bank National Association (Incorporated by
reference
to Exhibit 4C of Form 8-K filed December 16, 2002); Fourth
Supplemental Indenture, dated as of December 8, 2003, by and between
WPSC and U.S. Bank National Association (successor to Firstar Bank,
National Association and Firstar Bank Milwaukee, N.A., National
Association) (Incorporated by reference to Exhibit 4.1 to Form
8-K filed December 9, 2003); Fifth Supplemental Indenture, dated as
of December 1, 2006, by and between WPSC and U.S. Bank National
Association (successor to Firstar Bank, National Association and
Firstar
Bank Milwaukee, N.A., National Association) (Incorporated by
reference to Exhibit 4.1 to Form 8-K filed November 30, 2006); Sixth
Supplemental Indenture, dated as of December 1, 2006, by and between
WPSC and U.S. Bank National Association (successor to Firstar Bank,
National Association and Firstar Bank Milwaukee, N.A., National
Association) (Incorporated by reference to Exhibit 4.2 to Form
10-K for
the year ended December 31, 2006); and Seventh Supplemental Indenture,
dated as of November 1, 2007, by and between WPSC and U.S. Bank
National Association (successor to Firstar Bank, National Association
and
Firstar Bank Milwaukee, N.A., National Association (Incorporated
by
reference to Exhibit 4.1 to Form 8-K filed November 16, 2007).
References
to periodic reports are to those of WPSC (File No.
1-3016)
|
|
|
4.9
|
Indenture,
dated as of January 18, 2001, between PEC and Bank One Trust Company
National Association. (Incorporated by reference to Exhibit
4(a) to PEC Form 10-Q filed May 15, 2001[File No.
1-05540])
|
|
|
4.10
|
First
Supplemental Indenture, dated as of March 5, 2007, by and among
PEC,
Integrys Energy Group, Inc. and The Bank of New York Trust Company,
N.A.,
as Trustee including a Guaranty of Integrys Energy Group, Inc.
(Incorporated by reference to Exhibit 4.1 to Integrys Energy Group's
Form
8-K filed March 9, 2007)
|
|
|
4.11
|
PGL
First and
Refunding Mortgage, dated January 2, 1926, from Chicago By-Product
Coke
Company to Illinois Merchants Trust Company, Trustee, assumed by
PGL by
Indenture dated March 1, 1928 (PGL - May 17, 1935, Exhibit B-6a,
Exhibit
B-6b A-2 File No. 2-2151, 1936); Supplemental Indenture dated as
of
May 20, 1936, (PGL - Form 8-K for the year 1936, Exhibit B-6f);
Supplemental Indenture dated as of March 10, 1950 (PGL - Form 8-K
for the
month of March 1950, Exhibit B-6i); Supplemental Indenture dated
as of
June 1, 1951 (PGL - File No. 2-8989, Post-Effective, Exhibit 7-4(b));
Supplemental Indenture dated as of August 15, 1967 (PGL - File
No. 2-26983, Post-Effective, Exhibit 2-4); Supplemental Indenture
dated as of September 15, 1970 (PGL - File No. 2-38168,
Post-Effective Exhibit 2-2); Supplemental Indenture dated June 1,
1995 (PGL - Form 10-K for fiscal year ended September 30, 1995);
Supplemental Indenture, First and Refunding Mortgage Multi-Modal
Bonds,
Series HH of PGL, effective March 1, 2000 (PGL - Form 10-K for
fiscal year
ended September 30, 2000, Exhibit 4(b)); Supplemental Indenture
dated as
of February 1, 2003, First and Refunding Mortgage 5% Bonds, Series
KK (PEC
and PGL - Form 10-Q for the quarter ended March 31, 2003, Exhibit
4(a));
Supplemental Indenture dated as of February 1, 2003, First and
Refunding
Mortgage Multi-Modal Bonds, Series LL (PEC and PGL - Form 10-Q
for the
quarter ended March 31, 2003, Exhibit 4(b)); Supplemental Indenture
dated
as of February 15, 2003, First and Refunding Mortgage 4.00% Bonds,
Series
MM-1 and Series MM-2 (PEC and PGL - Form 10-Q for the quarter ended
March
31, 2003, Exhibit 4(c)); Supplemental Indenture dated as of April
15,
2003, First and Refunding
|
|
Mortgage
4.625% Bonds, Series NN-1 and Series NN-2 (PEC and PGL -
Form 10-Q for the quarter ended March 31, 2003, Exhibit 4(e));
Supplemental Indenture dated as of October 1, 2003, First and Refunding
Mortgage Bonds, Series OO (PEC and PGL - Form 10-Q for the quarter
ended
December 31, 2003, Exhibit 4(a)); PGL Supplemental Indenture dated
as of
October 1, 2003, First and Refunding Mortgage Bonds, Series PP
(PEC and
PGL - Form 10-Q for the quarter ended December 31, 2003, Exhibit
4(b));
PGL Supplemental Indenture dated as of November 1, 2003, First
and
Refunding Mortgage Multi-Modal Bonds, Series QQ (PEC and
PGL - Form 10-Q for the quarter ended December 31, 2003, Exhibit
4(c)); PGL Supplemental Indenture dated as of January 1, 2005,
First and
Refunding Mortgage Bonds, Series RR (PEC and PGL - Form 10-Q for
the
quarter ended December 31, 2004, Exhibit 4(b)); Loan Agreement
between PGL and Illinois Development Finance Authority dated October
1,
2003, Gas Supply Refunding Revenue Bonds, Series 2003C (PEC and
PGL - Form 10-Q for the quarter ended December 31, 2003, Exhibit
4(d)); Loan Agreement between PGL and Illinois Development Finance
Authority dated October 1, 2003, Gas Supply Refunding Revenue Bonds,
Series 2003D (PEC and PGL - Form 10-Q for the quarter ended December
31,
2003, Exhibit 4(e)); Loan Agreement between PGL and Illinois Development
Finance Authority dated November 1, 2003, Gas Supply Refunding
Revenue
Bonds, Series 2003E (PEC and PGL - Form 10-Q for the quarter ended
December 31, 2003, Exhibit 4(f)); Loan Agreement between PGL and
Illinois
Finance Authority dated as of January 1, 2005. (Incorporated by
reference to Exhibit 4(a) to PEC Form 10-Q filed February 9,
2005) |
|
|
4.12
|
NSG
Indenture, dated as of April 1, 1955, from NSG to Continental
Bank, National Association, as Trustee; Third Supplemental Indenture,
dated as of December 20, 1963 (NSG - File No. 2-35965, Exhibit 4-1);
Fourth Supplemental Indenture, dated as of May 1 1964 (NSG -
File No.
2-35965, Exhibit 4-1); Fifth Supplemental Indenture dated as
of
February 1, 1970 (NSG - File No. 2-35965, Exhibit 4-2);
Ninth Supplemental Indenture dated as of December 1, 1987 (NSG
- Form 10-K
for the fiscal year ended September 30, 1987, Exhibit 4); Thirteenth
Supplemental Indenture dated December 1, 1998 (NSG Gas - Form
10-Q for the
quarter ended March 31, 1999, Exhibit 4); Fourteenth Supplemental
Indenture dated as of April 15, 2003, First Mortgage 4.625% Bonds,
Series
N-1 and Series N-2 (Incorporated by reference to Exhibit 4(g)
to PEC Form
10-Q filed May 13, 2003)
|
|
|
10.1+
|
Form
of Key
Executive Employment and Severance Agreement entered into between
Integrys
Energy Group and each of the following: Phillip M. Mikulsky and
Larry L. Weyers. (Incorporated by reference to
Exhibit 10.8 to Integrys Energy Group's Form 10-K for the year
ended
December 31, 2002.)
|
|
|
10.2+
|
Form
of Key
Executive Employment and Severance Agreement entered into between
Integrys
Energy Group and each of the following: Lawrence T. Borgard,
Diane L. Ford, Bradley A. Johnson, Thomas P. Meinz, Joseph P.
O'Leary,
Mark A. Radtke, Charles A. Schrock, Bernard J. Treml, and Barth
J. Wolf. (Incorporated by reference to Exhibit 10.9 to Integrys
Energy Group's Form 10-K for the year ended December 31,
2002.)
|
|
|
10.3+
|
Severance
Agreement between PEC and Desiree G. Rogers dated as of April
22, 2005
(PEC - Form 10-Q for the quarter ended June 30, 2005, Exhibit
10(a));
Severance Agreement between PEC and Steven W. Nance dated as
of June 2,
2004 (PEC - Form 10-K for fiscal year ended September 30, 2004,
Exhibit
10(e)); Severance Agreement between PEC and Thomas A. Nardi dated
as of
June 2, 2004 (PEC - Form 10-K for fiscal year ended September
30, 2004,
Exhibit 10(g)).
|
|
|
10.4+
|
Form
of
Integrys Energy Group Performance Stock Right Agreement. (Incorporated
by
reference to Exhibit 10.2 to Integrys Energy Group's Form 8-K
filed
December 13, 2005.)
|
|
|
10.5+
|
Form
of
Integrys Energy Group 2007 Omnibus Incentive Compensation Plan
Performance
Stock Right Agreement approved May 17,
2007.
|
10.6+
|
Form
of
Integrys Energy Group 2007 Omnibus Incentive Compensation Plan
Performance
Stock Right Agreement approved February 14, 2008.
|
|
|
10.7+
|
Form
of
Integrys Energy Group 2005 Omnibus Incentive Compensation Plan
Restricted
Stock Award Agreement. (Incorporated by reference to Exhibit
10.1 to Integrys Energy Group Form 8-K filed December 13,
2006).
|
|
|
10.8+
|
Form
of
Integrys Energy Group 2007 Omnibus Incentive Compensation Plan
Restricted
Stock Award Agreement approved May 17, 2007.
|
|
|
10.9+
|
Form
of
Integrys Energy Group 2007 Omnibus Incentive Compensation Plan
Restricted
Stock Award Agreement approved February 14, 2008.
|
|
|
10.10+
|
Form
of
Integrys Energy Group 2007 Omnibus Incentive Compensation Plan
NonQualified Stock Option Agreement approved May 17,
2007.
|
|
|
10.11+
|
Form
of
Integrys Energy Group 2007 Omnibus Incentive Compensation Plan
NonQualified Stock Option Agreement approved February 14,
2008.
|
|
|
10.12+
|
Integrys
Energy Group 1999 Stock Option Plan. (Incorporated by reference
to Exhibit 10-2 in Integrys Energy Group's Form 10-Q for the
quarter ended
June 30, 1999, filed August 11, 1999.)
|
|
|
10.13+
|
Integrys
Energy Group 1999 Non-Employee Directors Stock Option Plan. (Incorporated
by reference to Exhibit 4.2 in Integrys Energy Group's Form S-8,
filed
December 21, 1999. [Reg. No. 333-93193].)
|
|
|
10.14+
|
Integrys
Energy Group Deferred Compensation Plan as Amended and Restated
Effective
April 1, 2008.
|
|
|
10.15+
|
Integrys
Energy Group 2001 Omnibus Incentive Compensation
Plan. (Incorporated by reference to Exhibit 10.16 to Integrys
Energy Group's Form 10-K for the year ended December 31, 2005, filed
February 28, 2006.)
|
|
|
10.16+
|
Integrys
Energy Group 2005 Omnibus Incentive Compensation
Plan. (Incorporated by reference to Exhibit 10.2 to Integrys
Energy Group's Form 10-Q filed August 4, 2005.)
|
|
|
10.17+
|
Integrys
Energy Group 2007 Omnibus Incentive Compensation Plan.
|
|
|
10.18+
|
PEC
Directors
Stock and Option Plan as amended December 4, 2002 (Incorporated
by
reference to Exhibit 10(g) to PEC Form 10-Q, filed February 11,
2003 [File
No. 1-05540]).
|
|
|
10.19+
|
PEC
Directors
Deferred Compensation Plan as amended and restated April 7,
2004. (Incorporated by reference to Exhibit 10(a) to PEC Form
10-Q filed August 4, 2005.)
|
|
|
10.20+
|
PEC
Executive
Deferred Compensation Plan amended as of December 4,
2002. (Incorporated by reference to Exhibit 10 (c) to PEC Form
10-Q filed February 11, 2003.)
|
|
|
10.21+
|
PEC
1990
Long-Term Incentive Compensation Plan as amended December 4,
2002
(Incorporated by reference to Exhibit 10(d) to Quarterly Report
on Form
10-Q of PEC for the quarterly period ended December 31, 2002,
filed
February 11, 2003 [File No. 1-05540]).
|
|
|
10.22+
|
Amended
and
Restated Trust under PEC Directors Deferred Compensation Plan,
Directors
Stock and Option Plan, Executive Deferred Compensation Plan and
Supplemental Retirement Benefit Plan, dated as of August 13,
2003. (Incorporated by reference to Exhibit 10 (a) to PEC
Form 10-K filed December 11, 2003.)
|
|
|
10.23+
|
Amendment
Number One to the Amended and Restated Trust under PEC Directors
Deferred
Compensation Plan, Directors Stock and Option Plan, Executive
Deferred
Compensation Plan and Supplemental Retirement Benefit Plan, dated
as of
July 24, 2006. (Incorporated by reference to Exhibit 10(e) to
PEC Form
10-K filed December 14, 2006.)
|
|
|
10.24+
|
PEP
Divestiture Incentive Program (Incorporated by reference to Exhibit
10.1
to Integrys Energy Group's Form 10-Q filed November 8,
2007.)
|
|
|
10.25
|
Term
Loan
Agreement, dated as of November 5, 1999 among PDI New England, Inc.,
PDI Canada, Inc., and Bayerische Landesbank
Girozentrale. (Incorporated by reference to Exhibit 4H to
Integrys Energy Group's and WPSC's Form 10-K for the year ended
December 31, 1999.)
|
|
|
10.26
|
Five
Year
Credit Agreement among Integrys Energy Group, Inc. and the lenders
identified herein, Citibank, N.A., Wells Fargo Bank National
Association,
J P Morgan Chase Bank, N.A., UBS Securities LLC, U.S. Bank
National Association, and U.S. Bank National Association and
Citigroup Global Markets Inc., dated as of June 2,
2005. (Incorporated by reference to Exhibit 10.1 to Integrys
Energy Group's and WPSC's Form 10-Q for the quarter ended June 30,
2005, filed August 4, 2005.)
|
|
|
10.27
|
Five
Year
Credit Agreement among Integrys Energy Group, Inc., as Borrower,
the
Lenders Identified Therein, Citibank, N.A., as Syndication Agent,
U.S.
Bank National Association, Bank of America, N.A., JPMorgan Chase
Bank,
N.A., as Co-Documentation Agents, Wachovia Bank, National Association,
as
Agent, and Wachovia Bank, National Association and Citigroup
Global
Markets Inc, as Co-Lead Arrangers and Book Managers dated as
of June 9,
2006. (Incorporated by reference to Exhibit 99.1 to Integrys
Energy Group's Form 8-K filed June 15, 2006.)
|
|
|
10.28
|
Five
Year
Credit Agreement among Wisconsin Public Service Corporation,
as Borrower,
The Lenders Identified Herein, U.S. Bank National Association,
as
Syndication Agent, Wells Fargo Bank National Association, as
Co-Documentation Agent, JPMorgan Chase Bank, N.A., as Co-Documentation
Agent, UBS Securities LLC, as Co-Documentation Agent, Citibank,
N.A., as
Administrative Agent and Citigroup Global Markets, Inc. and U.S.
Bank
National Association, as Co-Lead Arrangers and Book Managers
dated as of
June 2, 2005. (Incorporated by reference to Exhibit 10.22 to
WPSC's Form 10-K filed February 28, 2008 [File No.
1-3016])
|
|
|
10.29
|
Credit
Agreement Dated as of July 12, 2005 among PGL, The Financial
Institutions
Party Hereto, s Banks, ABN AMRO Bank N.V., as Administrative
Agent,
JPMorgan Chase Bank, NA, as Syndication Agent, ABN AMRO Incorporated,
as
Co-Lead Arranger and Joint Bookrunner, and J.P. Morgan Securities
Inc., as
Co-Lead Arranger and Joint Bookrunner. (Incorporated by
reference to Exhibit 10(A) to PEC Form 10-K/A filed December
14,
2005.)
|
|
|
10.30*
#
|
Joint
Plant
Agreement by and between WPSC and Dairyland Power Cooperative,
dated as of
November 23, 2004. (Incorporated by reference to Exhibit 10.19
to Integrys Energy Group's and WPSC's Form 10-K for the year
ended
December 31, 2004.)
|
|
|
12.1
|
Integrys
Energy Group Ratio of Earnings to Fixed Charges.
|
|
|
21
|
Subsidiaries
of Integrys Energy Group, Inc.
|
|
|
23.1
|
Consent
of
Independent Registered Public Accounting Firm for Integrys Energy
Group,
Inc.
|
|
|
24
|
Powers
of
Attorney.
|
|
|
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.
|
|
|
99
|
Proxy
Statement for Integrys Energy Group's 2008 Annual Meeting of
Shareholders,
[To be filed with the SEC under Regulation 14A within 120 days after
December 31, 2007; except to the extent specifically incorporated by
reference, the Proxy Statement for the 2008 Annual Meeting of
Shareholders
shall not be deemed to be filed with the SEC as part of this
Annual Report
on Form 10-K.]
|
|
|
*
|
Schedules
and
exhibits to this document are not filed therewith. The
registrant agrees to furnish supplementally a copy of any such
schedule or
exhibit to the SEC upon request.
|
|
|
+
|
A
management
contract or compensatory plan or arrangement.
|
|
|
#
|
Portions
of
this exhibit have been redacted and are subject to a confidential
treatment request filed with the Secretary of SEC pursuant to
Rule 24b-2
under the Securities and Exchange Act of 1934, as amended. The
redacted material was filed separately with the
SEC.
|
Pursuant
to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 28th day of February,
2008.
|
|
INTEGRYS
ENERGY GROUP, INC.
|
|
|
|
|
(Registrant)
|
|
|
|
|
|
|
By:
|
/s/
Larry L. Weyers |
|
|
|
Larry
L.
Weyers
President
and
Chief
Executive Officer
|
Pursuant
to the
requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
Signature
|
Title
|
Date
|
|
|
|
Keith
E.
Bailey*
|
Director
|
|
Richard
A.
Bemis*
|
Director
|
|
James
R.
Boris*
|
Chairman
and
Director
|
|
William
J.
Brodsky*
|
Director
|
|
Albert
J.
Budney, Jr.*
|
Director
|
|
Pastora
San
Juan Cafferty*
|
Director
|
|
Ellen
Carnahan*
|
Director
|
|
Diana
S.
Ferguson*
|
Director
|
|
Robert
C.
Gallagher*
|
Director
|
|
Kathryn
M.
Hasselblad-Pascale*
|
Director
|
|
John
W.
Higgins*
|
Director
|
|
James
L.
Kemerling*
|
Director
|
|
Michael
E.
Lavin*
|
Director
|
|
John
C.
Meng*
|
Director
|
|
William
F.
Protz, Jr.*
|
Director
|
|
|
|
|
/s/
Larry L. Weyers |
President,
Chief Executive Officer and Director
(principal
executive officer)
|
February
28,
2008
|
Larry
L.
Weyers
|
|
|
|
|
|
/s/
Joseph P. O'Leary |
Senior
Vice
President and Chief Financial Officer
(principal
financial officer)
|
February
28,
2008
|
Joseph
P.
O'Leary
|
|
|
|
|
|
/s/
Diane L. Ford
|
Vice
President and Corporate Controller
(principal
accounting officer)
|
February
28,
2008
|
Diane
L.
Ford
|
|
|
|
|
|
|
|
|
*By: /s/
Diane L.
Ford
|
|
|
Diane
L. Ford
|
Attorney-in-Fact
|
February
28,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PARENT
COMPANY FINANCIAL
STATEMENTS
|
|
|
|
|
|
|
|
|
|
INTEGRYS
ENERGY GROUP, INC.
(PARENT COMPANY ONLY)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A. STATEMENTS
OF INCOME AND
RETAINED EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December
31
|
|
|
|
|
|
|
|
|
|
(Millions,
except per share
data)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Equity
earnings in excess of
dividends from subsidiaries
|
|
$ |
116.4 |
|
|
$ |
83.2 |
|
|
$ |
79.8 |
|
Dividends
from
subsidiaries
|
|
|
120.0 |
|
|
|
110.2 |
|
|
|
92.3 |
|
Income
from
subsidiaries
|
|
|
236.4 |
|
|
|
193.4 |
|
|
|
172.1 |
|
Investment
income and
other
|
|
|
17.7 |
|
|
|
16.7 |
|
|
|
3.5 |
|
Total
income
|
|
|
254.1 |
|
|
|
210.1 |
|
|
|
175.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
(income)
|
|
|
18.5 |
|
|
|
17.1 |
|
|
|
10.8 |
|
Operating
Income
|
|
|
235.6 |
|
|
|
193.0 |
|
|
|
164.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
65.5 |
|
|
|
48.4 |
|
|
|
23.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before
taxes
|
|
|
170.1 |
|
|
|
144.6 |
|
|
|
141.5 |
|
Provision
for income
taxes
|
|
|
(7.9 |
)
|
|
|
(3.9 |
)
|
|
|
(6.0 |
)
|
Income
from continuing
operations
|
|
|
178.0 |
|
|
|
148.5 |
|
|
|
147.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations, net of
tax
|
|
|
73.3 |
|
|
|
7.3 |
|
|
|
11.5 |
|
Net
income before cumulative
effect of change in accounting principle
|
|
|
251.3 |
|
|
|
155.8 |
|
|
|
159.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of change in
accounting principle, net of tax
|
|
|
- |
|
|
|
- |
|
|
|
(1.6 |
)
|
Net
Income
|
|
$ |
251.3 |
|
|
$ |
155.8 |
|
|
$ |
157.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
earnings, beginning of
year
|
|
$ |
628.2 |
|
|
$ |
568.7 |
|
|
$ |
497.0 |
|
Common
stock
dividends
|
|
|
(177.0 |
)
|
|
|
(96.0 |
)
|
|
|
(85.4 |
)
|
Other
|
|
|
(0.6 |
)
|
|
|
(0.3 |
)
|
|
|
(0.3 |
)
|
Retained
earnings, end of
year
|
|
$ |
701.9 |
|
|
$ |
628.2 |
|
|
$ |
568.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares of common
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
71.6 |
|
|
|
42.3 |
|
|
|
38.3 |
|
Diluted
|
|
|
71.8 |
|
|
|
42.4 |
|
|
|
38.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share
(basic)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing
operations
|
|
$ |
2.49 |
|
|
$ |
3.51 |
|
|
$ |
3.85 |
|
Discontinued
operations, net of
tax
|
|
$ |
1.02 |
|
|
$ |
0.17 |
|
|
$ |
0.30 |
|
Cumulative
effect of change in
accounting principle, net of tax
|
|
|
- |
|
|
|
- |
|
|
$ |
(0.04 |
)
|
Earnings
per common share
(basic)
|
|
$ |
3.51 |
|
|
$ |
3.68 |
|
|
$ |
4.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share
(diluted)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing
operations
|
|
$ |
2.48 |
|
|
$ |
3.50 |
|
|
$ |
3.81 |
|
Discontinued
operations, net of
tax
|
|
$ |
1.02 |
|
|
$ |
0.17 |
|
|
$ |
0.30 |
|
Cumulative
effect of change in
accounting principle, net of tax
|
|
|
- |
|
|
|
- |
|
|
$ |
(0.04 |
)
|
Earnings
per common share
(diluted)
|
|
$ |
3.50 |
|
|
$ |
3.67 |
|
|
$ |
4.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per common
share
|
|
$ |
2.56 |
|
|
$ |
2.28 |
|
|
$ |
2.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to Integrys
Energy Group's parent company financial statements
|
|
|
|
|
|
|
|
|
|
are
an integral part of these
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SCHEDULE
I -
CONDENSED
|
|
|
|
|
|
|
PARENT
COMPANY FINANCIAL
STATEMENTS
|
|
|
|
|
|
|
INTEGRYS
ENERGY GROUP, INC.
(PARENT COMPANY ONLY)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December
31
|
|
|
|
|
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$ |
- |
|
|
$ |
1.6 |
|
Accounts
receivable from related
parties
|
|
|
50.7 |
|
|
|
20.4 |
|
Deferred
income
taxes
|
|
|
0.2 |
|
|
|
0.1 |
|
Notes
receivable from related
parties
|
|
|
66.4 |
|
|
|
138.1 |
|
Other
current
assets
|
|
|
3.1 |
|
|
|
1.2 |
|
Current
assets
|
|
|
120.4 |
|
|
|
161.4 |
|
|
|
|
|
|
|
|
|
|
Total
investments in subsidiaries,
at equity
|
|
|
4,142.7 |
|
|
|
2,312.1 |
|
|
|
|
|
|
|
|
|
|
Notes
receivable from related
parties
|
|
|
211.5 |
|
|
|
197.0 |
|
Property
and equipment,
net
|
|
|
12.2 |
|
|
|
0.7 |
|
Advance
from related
parties
|
|
|
12.1 |
|
|
|
13.9 |
|
Deferred
income
taxes
|
|
|
25.6 |
|
|
|
15.2 |
|
Other
|
|
|
28.2 |
|
|
|
43.5 |
|
Total
assets
|
|
$ |
4,552.7 |
|
|
$ |
2,743.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt to related
parties
|
|
$ |
220.9 |
|
|
$ |
- |
|
Commercial
paper
|
|
|
70.4 |
|
|
|
524.8 |
|
Accounts
payable to related
parties
|
|
|
10.3 |
|
|
|
7.4 |
|
Accounts
payable
|
|
|
1.7 |
|
|
|
0.9 |
|
Current
liabilities from risk
management activities
|
|
|
1.5 |
|
|
|
1.5 |
|
Other
current
liabilities
|
|
|
43.2 |
|
|
|
17.8 |
|
Current
liabilities
|
|
|
348.0 |
|
|
|
552.4 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt to related
parties
|
|
|
346.0 |
|
|
|
21.0 |
|
Long-term
debt
|
|
|
615.0 |
|
|
|
614.9 |
|
Deferred
income
taxes
|
|
|
- |
|
|
|
16.0 |
|
Long-term
liabilities from risk
management activities
|
|
|
2.6 |
|
|
|
1.8 |
|
Advances
to related
parties
|
|
|
3.2 |
|
|
|
2.9 |
|
Other
long-term
liabilities
|
|
|
2.1 |
|
|
|
1.2 |
|
Long-term
liabilities
|
|
|
968.9 |
|
|
|
657.8 |
|
|
|
|
|
|
|
|
|
|
Commitments
and
contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
equity
|
|
|
3,235.8 |
|
|
|
1,533.6 |
|
Total
liabilities and
shareholders' equity
|
|
$ |
4,552.7 |
|
|
$ |
2,743.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to Integrys
Energy Group's parent company financial statements
|
|
|
|
|
|
are
an integral part of these
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SCHEDULE
I -
CONDENSED
|
|
|
|
|
|
|
|
|
|
PARENT
COMPANY FINANCIAL
STATEMENTS
|
|
|
|
|
|
|
|
|
|
INTEGRYS
ENERGY GROUP, INC.
(PARENT COMPANY ONLY)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December
31
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
$ |
251.3 |
|
|
$ |
155.8 |
|
|
$ |
157.4 |
|
Adjustments
to reconcile net
income to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations, net of
tax
|
|
|
(73.3 |
)
|
|
|
(7.3 |
)
|
|
|
(11.5 |
)
|
|
Equity
income from subsidiaries,
net of dividends
|
|
|
(116.4 |
)
|
|
|
(83.2 |
)
|
|
|
(79.8 |
)
|
|
Deferred
income
taxes
|
|
|
(8.0 |
)
|
|
|
(2.0 |
)
|
|
|
2.7 |
|
|
Gain
on sale of
investment
|
|
|
(1.6 |
)
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of change in
accounting principles, net of tax
|
|
|
- |
|
|
|
- |
|
|
|
1.6 |
|
|
Other
|
|
|
|
14.0 |
|
|
|
1.7 |
|
|
|
4.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in working
capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(2.0 |
)
|
|
|
0.1 |
|
|
|
0.9 |
|
|
|
Receivable
from related
parties
|
|
|
(30.6 |
)
|
|
|
(8.8 |
)
|
|
|
(2.9 |
)
|
|
|
Accounts
payable
|
|
|
0.8 |
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
Accounts
payable to related
parties
|
|
|
2.9 |
|
|
|
5.0 |
|
|
|
(0.4 |
)
|
|
|
Other
current
liabilities
|
|
|
33.8 |
|
|
|
3.0 |
|
|
|
(0.2 |
)
|
Net
cash provided by operating
activities
|
|
|
70.9 |
|
|
|
64.5 |
|
|
|
72.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(10.7 |
)
|
|
|
(0.1 |
)
|
|
|
(0.7 |
)
|
Notes
receivable from related
parties
|
|
|
57.2 |
|
|
|
(222.9 |
)
|
|
|
(18.6 |
)
|
Advance
to related
parties
|
|
|
1.8 |
|
|
|
2.2 |
|
|
|
2.5 |
|
Equity
contributions to
subsidiaries
|
|
|
(100.9 |
)
|
|
|
(593.9 |
)
|
|
|
(222.1 |
)
|
Return
of capital from
subsidiaries
|
|
|
34.1 |
|
|
|
54.7 |
|
|
|
86.8 |
|
Proceeds
from sale of
investment
|
|
|
2.0 |
|
|
|
- |
|
|
|
- |
|
Cash
paid for transaction cost
related to acquisitions
|
|
|
(14.4 |
)
|
|
|
(11.8 |
)
|
|
|
(1.6 |
)
|
Other
|
|
|
|
|
- |
|
|
|
0.3 |
|
|
|
(1.3 |
)
|
Net
cash used for investing
activities
|
|
|
(30.9 |
)
|
|
|
(771.5 |
)
|
|
|
(155.0 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper,
net
|
|
|
(454.4 |
)
|
|
|
345.0 |
|
|
|
(9.0 |
)
|
Notes
payable to related
parties
|
|
|
545.9 |
|
|
|
- |
|
|
|
(20.5 |
)
|
Issuance
of long-term
debt
|
|
|
- |
|
|
|
300.0 |
|
|
|
65.6 |
|
Issuance
of common
stock
|
|
|
45.6 |
|
|
|
164.6 |
|
|
|
127.3 |
|
Dividends
paid on common
stock
|
|
|
(177.0 |
)
|
|
|
(96.0 |
)
|
|
|
(85.4 |
)
|
Other
|
|
|
|
|
(1.7 |
)
|
|
|
(5.1 |
)
|
|
|
4.4 |
|
Net
cash (used for) provided by
financing activities
|
|
|
(41.6 |
)
|
|
|
708.5 |
|
|
|
82.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash
equivalents
|
|
|
(1.6 |
)
|
|
|
1.5 |
|
|
|
(0.4 |
)
|
Cash
and cash equivalents at
beginning of year
|
|
|
1.6 |
|
|
|
0.1 |
|
|
|
0.5 |
|
Cash
and cash equivalents at end
of year
|
|
$ |
- |
|
|
$ |
1.6 |
|
|
$ |
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to Integrys
Energy Group's parent company financial statements
|
|
are
an integral part of these
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SCHEDULE
I - CONDENSED
PARENT
COMPANY FINANCIAL STATEMENTS
INTEGRYS
ENERGY GROUP, INC. (PARENT COMPANY ONLY)
D. NOTES
TO
PARENT COMPANY FINANCIAL
STATEMENTS
SUPPLEMENTAL
NOTES
NOTE
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
|
Basis
of
Presentation--For Parent Company only presentation, investment in
subsidiaries are accounted for using the equity method. The consolidated
financial statements of Integrys Energy Group reflect certain businesses
as discontinued operations. The related assets for these
discontinued operations are recorded as assets held for sale in
the
consolidated financial statements. For Parent Company only
presentation, the investments in discontinued operations are recorded
in
Investment in Subsidiary Companies. In the Integrys Energy
Group consolidated financial statements no assets were reported
as held
for sale at year-end 2007 while $6.1 million was reported as assets
held
for sale as of December 31, 2006. The condensed parent company
statements of income and statements of cash flows report the earnings
and
cash flows of these businesses as discontinued operations. The
condensed parent company financial statements and notes should
be read in
conjunction with the consolidated financial statements and notes
of
Integrys Energy Group appearing in this Form
10-K.
|
(b)
|
Cash
and Cash
Equivalents--We consider short-term investments with an original
maturity of three months or less to be cash
equivalents.
|
No
taxes were paid in 2007 or 2005. Cash paid for taxes during 2006 was
$1.1 million. During 2007, 2006 and 2005, cash paid for interest
totaled $55.1 million, $44.9 million and 21.0 million,
respectively.
Non-cash
transactions were as follows:
(Millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Transaction
costs related to the merger with PEC funded through other current
liabilities
|
|
$ |
- |
|
|
$ |
8.1 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
issued
for net assets acquired in PEC merger
|
|
|
1,559.3 |
|
|
|
- |
|
|
|
- |
|
NOTE 2 FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
following
methods and assumptions were used to estimate the fair value of each class
of
financial instrument for which it is practicable to estimate such
value:
Cash,
short-term
notes receivable, and outstanding commercial paper: The carrying
amount approximates fair value due to the short maturity of these investments
and obligations.
Long-term
notes
receivable and long term debt: The fair value of long-term notes receivable
and
long term debt are estimated based on the quoted market price for the same
or
similar issues or on the current rates offered to Integrys Energy Group for
debt
of the same remaining maturity.
Risk
management
activities: Assets and liabilities from risk management activities are recorded
at fair value in accordance with SFAS No. 133.
The
estimated fair
values of Integrys Energy Group’s financial instruments as of December 31
were:
(Millions)
|
|
2007
|
|
|
2006
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
notes receivable
|
|
$ |
66.4 |
|
|
$ |
66.4 |
|
|
$ |
138.1 |
|
|
$ |
138.1 |
|
Long-term
notes receivable
|
|
|
211.5 |
|
|
|
215.0 |
|
|
|
197.0 |
|
|
|
202.6 |
|
Short-term
notes payable
|
|
|
220.9 |
|
|
|
220.9 |
|
|
|
- |
|
|
|
- |
|
Long-term
debt
|
|
|
961.6 |
|
|
|
937.1 |
|
|
|
636.6 |
|
|
|
638.0 |
|
Commercial
paper
|
|
|
70.4 |
|
|
|
70.4 |
|
|
|
524.8 |
|
|
|
524.8 |
|
Risk
management activities – net
|
|
|
4.1 |
|
|
|
4.1 |
|
|
|
3.3 |
|
|
|
3.3 |
|
Cash
and cash
equivalents
|
|
|
- |
|
|
|
- |
|
|
|
1.6 |
|
|
|
1.6 |
|
NOTE
3
|
SHORT-TERM
NOTES RECEIVABLE – RELATED PARTIES
|
|
|
|
|
Integrys
Energy Group has short-term notes receivable from related parties
outstanding as of December 31, 2007 and 2006. Notes receivable bear
interest rates that approximate current market rates.
|
|
|
|
|
|
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
|
Upper
Peninsula Power Company
|
|
$ |
1.3 |
|
|
$ |
15.4 |
|
|
Integrys
Energy Services
|
|
|
- |
|
|
|
73.4 |
|
|
Minnesota
Energy Resources
|
|
|
33.1 |
|
|
|
27.0 |
|
|
Michigan
Gas
Utilities
|
|
|
32.0 |
|
|
|
22.3 |
|
|
Total
|
|
$ |
66.4 |
|
|
$ |
138.1 |
|
NOTE
4
|
LONG-TERM
NOTES RECEIVABLE – RELATED PARTIES
|
|
|
Integrys
Energy Group has long-term notes receivable from related parties
outstanding as of December 31, 2007 and 2006.
|
|
|
|
(Millions)
|
2007
|
2006
|
|
Wisconsin
Public Service
|
|
|
|
Series
|
Year
Due
|
|
|
|
8.76%
|
2015
|
$ 4.3
|
$ 4.5
|
|
7.35%
|
2016
|
6.2
|
6.5
|
|
|
|
|
|
Upper
Peninsula Power Company
|
|
|
|
Series
|
Year
Due
|
|
|
|
5.25%
|
2013
|
15.0
|
15.0
|
|
6.06%
|
2017
|
15.0
|
-
|
|
|
|
|
|
Minnesota
Energy Resources
|
|
|
|
Series
|
Year
Due
|
|
|
|
6.03%
|
2013
|
29.0
|
29.0
|
|
6.16%
|
2016
|
29.0
|
29.0
|
|
6.40%
|
2021
|
29.0
|
29.0
|
|
|
|
|
|
Michigan
Gas
Utilities
|
|
|
|
Series
|
Year
Due
|
|
|
|
5.72%
|
2013
|
28.0
|
28.0
|
|
5.76%
|
2016
|
28.0
|
28.0
|
|
5.98%
|
2021
|
28.0
|
28.0
|
|
|
|
|
|
Total
|
$211.5
|
$197.0
|
NOTE
5
SHORT-TERM DEBT AND LINES OF CREDIT
The
information in
the table below relates to short-term debt and lines of credit for the years
indicated:
(Millions,
except for percentages)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
As
of end of year
|
|
|
|
|
|
|
Commercial
paper outstanding
|
|
$ |
70.4 |
|
|
$ |
524.8 |
|
Average
effective rate on outstanding commercial paper
|
|
|
5.54 |
% |
|
|
5.51 |
% |
Available
(unused) lines of credit
|
|
$ |
794.5 |
|
|
$ |
446.9 |
|
The
commercial
paper has varying maturity dates ranging from January 2, 2008 through January
4,
2008.
SHORT-TERM
NOTES PAYABLE – RELATED PARTIES
|
|
|
|
Integrys
Energy Group has short-term notes payable to related parties outstanding
as of December 31, 2007. Notes payable bear interest rates that
approximate current market rates.
|
|
|
|
|
|
(Millions)
|
|
2007
|
|
|
2006
|
|
Integrys
Energy Services
|
|
$ |
32.3 |
|
|
$ |
- |
|
PEC
|
|
|
188.6 |
|
|
|
- |
|
Total
|
|
$ |
220.9 |
|
|
$ |
- |
|
|
|
NOTE
6
|
LONG-TERM
DEBT
|
|
|
Integrys
Energy Group has long-term unsecured notes payable at December
31, 2007
and 2006. Interest is paid semiannually.
|
|
|
|
|
(Millions)
|
2007
|
2006
|
|
Unsecured
senior notes
|
|
|
|
Series
|
Year
Due
|
|
|
|
7.00%
|
2009
|
$150.0
|
$150.0
|
|
5.375%
|
2012
|
100.0
|
100.0
|
|
|
|
|
|
Unsecured
junior subordinated notes
|
|
|
|
Series
|
Year
Due
|
|
|
|
6.11%
|
2066
|
300.0
|
300.0
|
|
|
|
|
|
Unsecured
term loan due 2010
|
65.6
|
65.6
|
|
Unsecured
term loan due 2011
|
325.0
|
-
|
|
Unsecured
term loan due 2021
|
21.0
|
21.0
|
|
Total
|
961.6
|
636.6
|
|
Unamortized
discount on notes
|
(0.6)
|
(0.7)
|
|
Total
long-term debt
|
$961.0
|
$635.9
|
On
September
28, 2007, Integrys Energy Group issued a $325 million long-term
promissory
note to PEC. The note bears interest at a rate of 5.25% and
matures in January 2011. Proceeds of the note were used to
reduce the balance of commercial paper
outstanding.
|
|
|
On
December
1, 2006, Integrys Energy Group issued $300 million of junior subordinated
notes. Due to certain features of these notes, rating agencies
consider them to be hybrid instruments with a combination of debt
and
equity characteristics. These notes have a 60-year term and
rank junior to all current and future indebtedness of Integrys
Energy
Group, with the exception of trade accounts payable and other accrued
liabilities arising in the ordinary course of
business. Interest is payable semi-annually at the stated rate
of 6.11% for the first ten years, but the rate has been fixed at
6.22%
through the use of forward-starting interest rate swaps described
more
fully in Note 3, "Risk
Management Activities," to consolidated financial
statements. The interest rate will float for the remainder of
the term. The notes can be prepaid without penalty after the
first ten years. Integrys Energy Group has agreed, however, in
a replacement capital covenant with the holders of Integrys Energy
Group's
5.375% unsecured senior notes due December 1, 2012, that it will
not
redeem or repurchase the junior subordinated notes on or prior
to December
1, 2036, unless such repurchases or redemptions are made from the
proceeds
of the sale of specific securities considered by rating agencies
to have
equity characteristics equal to or greater than those of the junior
subordinated notes.
|
|
|
On
June 17,
2005, $62.9 million of non-recourse debt at Integrys Energy Services
collateralized by nonregulated assets was restructured to a five-year
Integrys Energy Group obligation as a result of the sale of Sunbury’s
allocated emission allowances. In addition, $2.7 million drawn
on a line of credit at Integrys Energy Services was rolled into
the
five-year Integrys Energy Group obligation. The floating
interest rate on the total five-year Integrys Energy Group’s obligation of
$65.6 million has been fixed at 4.595% through two interest rate
swaps. See Note 3, "Risk Management
Activities," to consolidated financial statements, for additional
information.
|
|
|
Integrys
Energy Group has a long-term note payable to Integrys Energy Services
at
December 31, 2007 and 2006 of $21.0 million. The note
bears interest at a rate that approximates current market rates
and is due
in 2021. We also have guaranteed other long-term debt and
obligations of our subsidiaries arising in the normal course of
business
for both years as described in
Note 7.
|
At
December
31, 2007, Integrys Energy Group (parent company) was in compliance
with
all covenants relating to outstanding debt. A schedule of all
principal debt payment amounts for Integrys Energy Group (parent
company)
is as follows:
|
|
|
|
Year
ending December 31
(Millions)
|
|
|
|
|
|
|
|
2008
|
|
$ |
- |
|
2009
|
|
|
150.0 |
|
2010
|
|
|
65.6 |
|
2011
|
|
|
325.0 |
|
2012
|
|
|
100.0 |
|
Later
years
|
|
|
321.0 |
|
Total
payments
|
|
$ |
961.6 |
|
|
|
|
|
|
NOTE
7
|
GUARANTEES
|
|
|
As
part of
normal business, Integrys Energy Group enters 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.
|
|
|
The
following
table shows Integrys Energy Group’s outstanding guarantees at
December 31, 2007, 2006, and
2005:
|
|
|
Integrys
Energy Group’s
Outstanding
Guarantees
(Millions)
|
|
December
31,
2007
|
|
|
December
31,
2006
|
|
|
December
31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees
of
subsidiary debt and revolving line of credit
|
|
$ |
903.1 |
|
|
$ |
178.3 |
|
|
$ |
27.2 |
|
Guarantees
supporting commodity transactions of subsidiaries
|
|
|
1,907.4 |
|
|
|
1,314.0 |
|
|
|
1,154.7 |
|
Standby
letters of credit
|
|
|
137.1 |
|
|
|
150.6 |
|
|
|
109.5 |
|
Surety
bonds
|
|
|
1.7 |
|
|
|
1.2 |
|
|
|
0.8 |
|
Total
guarantees
|
|
$ |
2,949.3 |
|
|
$ |
1,644.1 |
|
|
$ |
1,292.2 |
|
Integrys
Energy
Group's outstanding guarantees at December 31, 2007, will expire as shown
in the following table:
Integrys
Energy Group’s
Outstanding
Guarantees
(Millions)
Commitments
Expiring
|
|
Total
Amounts Committed At December 31, 2007
|
|
|
Less
Than
1
Year
|
|
|
1
to 3
Years
|
|
|
4
to 5
Years
|
|
|
Over
5
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees
of
subsidiary debt and revolving line of credit
|
|
$ |
903.1 |
|
|
$ |
150.0 |
|
|
$ |
- |
|
|
$ |
725.0 |
|
|
$ |
28.1 |
|
Guarantees
supporting commodity transactions of subsidiaries
|
|
|
1,907.4 |
|
|
|
1,754.2 |
|
|
|
76.5 |
|
|
|
26.7 |
|
|
|
50.0 |
|
Standby
letters of credit
|
|
|
137.1 |
|
|
|
113.7 |
|
|
|
23.4 |
|
|
|
- |
|
|
|
- |
|
Surety
bonds
|
|
|
1.7 |
|
|
|
1.7 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
guarantees
|
|
$ |
2,949.3 |
|
|
$ |
2,019.6 |
|
|
$ |
99.9 |
|
|
$ |
751.7 |
|
|
$ |
78.1 |
|
At
December 31, 2007, management was authorized to issue corporate guarantees
in
the aggregate amount of up to $2.1 billion to support the business operations
of
Integrys Energy Services. The following outstanding amounts are subject to
this
limit:
|
|
December 31,
2007
|
|
Guarantees
supporting commodity transactions of subsidiaries
|
|
$
|
1,752.9 |
|
Guarantees
of
subsidiary debt
|
|
|
151.1 |
|
Standby
letters of credit
|
|
|
130.0 |
|
Surety
bonds
|
|
|
0.9 |
|
Total
guarantees subject to $2.1 billion limit
|
|
$ |
2,034.9 |
|
In
February 2008, Integrys Energy Group's Board of Directors increased this
limit
to $2.35 billion.
Of
the parental guarantees provided by Integrys Energy Group to Integrys Energy
Services, the current amount at December 31, 2007, which Integrys Energy
Group would be obligated to support, is approximately
$620.1 million.
At
December 31, 2007, Integrys Energy Group's $903.1 million of
outstanding guarantees supporting subsidiary debt and revolving lines of
credit
consisted of the following:
●
|
An
agreement
to fully and unconditionally guarantee PEC's $400 million revolving
line of credit,
|
|
|
●
|
An
agreement
to fully and unconditionally guarantee, on a senior unsecured basis,
PEC's
obligations under its $325 million, 6.90% notes due January 15,
2011,
|
|
|
●
|
A
$150 million credit agreement at Integrys Energy Services used to
finance natural gas in storage and margin requirements related
to natural
gas and electric contracts traded on the NYMEX and the ICE, as
well as for
general corporate purposes,
|
|
|
●
|
$28.1 million
of guarantees supporting outstanding debt at Integrys Energy Services'
subsidiaries, of which $1.1 million is subject to Integrys Energy
Services' parental guarantee limit discussed
above.
|
At
December 31, 2007, Integrys Energy Group's $1,907.4 million of
outstanding guarantees supporting commodity transactions of subsidiaries
consisted of the following:
●
|
Parental
guarantees of $1,761.0 million to support the business operations of
Integrys Energy Services, of which $8.1 million is not included above
in the table of guarantees subject to the $2.1 billion limit, due to
specific authorization received from Integrys Energy Group's Board
of
Directors,
|
|
|
●
|
$0.1 million,
of an authorized $15.0 million, of corporate guarantees to support
energy and transmission supply at UPPCO that are not reflected
on Integrys
Energy Group's Consolidated Balance Sheet,
|
|
|
●
|
Guarantees
of
$60.9 million and $75.4 million, respectively, related to
natural gas supply at MGUC and MERC. Corporate guarantees in
the amounts of $75.0 million and $125.0 million have been
authorized by Integrys Energy Group's Board of Directors to support
MGUC
and MERC, and
|
|
|
●
|
$10.0 million,
of an authorized $125.0 million, to support business operations at
PEC.
|
At
December 31, 2007, financial institutions, at the request of Integrys
Energy Group, have issued $137.1 million in standby letters of credit for
the benefit of third parties that have extended credit to certain
subsidiaries. Of this amount, $132.5 million was issued to
support Integrys Energy Services' operations, including $2.5 million that
received specific authorization from Integrys Energy Group's Board of Directors;
$4.3 million was issued for workers compensation coverage in Illinois; and
the remaining $0.3 million relates to letters of credit at MGUC and
MERC. Any amounts owed by our subsidiaries are reflected in Integrys
Energy Group's Consolidated Balance Sheet.
At
December 31, 2007, Integrys Energy Group furnished $1.7 million of
surety bonds for various reasons, including worker compensation coverage
and
obtaining various licenses, permits, and rights of way. Liabilities
incurred as a result of activities covered by surety bonds are included in
Integrys Energy Group's Consolidated Balance Sheet.
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.
NOTE
8 INCOME TAXES
The
principal
components of Integrys Energy Group’s deferred tax assets and liabilities
recognized in the balance sheet as of December 31 are as follows:
(Millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Plant
related
|
|
$ |
7.7 |
|
|
$ |
4.4 |
|
State
capital
& operating loss carryforwards
|
|
|
9.8 |
|
|
|
7.9 |
|
Employee
benefits
|
|
|
6.0 |
|
|
|
3.8 |
|
Deferred
income and deductions
|
|
|
2.8 |
|
|
|
- |
|
Other
|
|
|
0.6 |
|
|
|
0.2 |
|
Total
deferred tax assets
|
|
|
26.9 |
|
|
|
16.3 |
|
Valuation
allowance
|
|
|
(1.1 |
) |
|
|
(1.0 |
) |
Net
deferred
tax assets
|
|
$ |
25.8 |
|
|
$ |
15.3 |
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Plant
related
|
|
$ |
- |
|
|
$ |
14.0 |
|
Other
|
|
|
- |
|
|
|
2.0 |
|
Total
deferred tax liabilities
|
|
$ |
- |
|
|
$ |
16.0 |
|
Carryforward
periods for state capital and operating loss carryforwards vary, but in the
majority of states in which we do business, the period is 15 years or
more. The balance of the carryforwards of state net operating losses
is $187.2 million for all states. Valuation allowances have been
established for certain state operating and capital loss carryforwards due
to
the uncertainty of the ability to realize the benefit of these losses in
the
future.
|
|
|
|
|
|
INTEGRYS
ENERGY
GROUP
|
|
|
|
|
VALUATION
AND QUALIFYING
ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Doubtful
Accounts
|
Years
Ended December 31, 2007,
2006, and 2005
|
(in
Millions)
|
|
|
|
|
|
|
|
Balance
at
|
Acquisitions
|
Additions
|
|
|
|
Beginning
of
|
of
|
Charged
to
|
|
Balance
at
|
Fiscal
Year
|
Year
|
Businesses
|
Expense
|
Reductions
*
|
End
of
Year
|
|
|
|
|
|
|
2005
|
$8.0
|
|
$9.6
|
$4.9
|
$12.7
|
|
|
|
|
|
|
2006
|
$12.7
|
$4.6
|
$10.9
|
$11.2
|
$17.0
|
|
|
|
|
|
|
2007
|
$17.0
|
$42.9
|
$29.9
|
$33.8
|
$56.0
|
|
|
|
|
|
|
|
|
|
|
|
|
* Represents
amounts
written off to the reserve, net of recoveries.
|
|
|
|
|
|
|
|
|
|
|
|
10.5+
|
Form
of
Integrys Energy Group 2007 Omnibus Incentive Compensation Plan
Performance
Stock Right Agreement approved May 17, 2007.
|
|
|
10.6+
|
Form
of
Integrys Energy Group 2007 Omnibus Incentive Compensation Plan
Performance
Stock Right Agreement approved February 14, 2008.
|
|
|
10.8+
|
Form
of
Integrys Energy Group 2007 Omnibus Incentive Compensation Plan
Restricted
Stock Award Agreement approved May 17, 2007.
|
|
|
10.9+
|
Form
of
Integrys Energy Group 2007 Omnibus Incentive Compensation Plan
Restricted
Stock Award Agreement approved February 14, 2008.
|
|
|
10.10+
|
Form
of
Integrys Energy Group 2007 Omnibus Incentive Compensation Plan
NonQualified Stock Option Agreement approved May 17,
2007.
|
|
|
10.11+
|
Form
of
Integrys Energy Group 2007 Omnibus Incentive Compensation Plan
NonQualified Stock Option Agreement approved February 14,
2008.
|
|
|
10.14+
|
Integrys
Energy Group Deferred Compensation Plan as Amended and Restated
Effective
April 1, 2008.
|
|
|
10.17+
|
Integrys
Energy Group 2007 Omnibus Incentive Compensation Plan.
|
|
|
12.1
|
Integrys
Energy Group Ratio of Earnings to Fixed Charges.
|
|
|
21
|
Subsidiaries
of Integrys Energy Group.
|
|
|
23.1
|
Consent
of
Independent Registered Public Accounting Firm for Integrys Energy
Group.
|
|
|
24
|
Powers
of
Attorney.
|
|
|
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.
|
|
|