form10q.htm
______________________________________________________________________________
______________________________________________________________________________
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-Q
[x] QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE
ACT OF 1934
For
the quarterly
period ended June 30, 2008
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,
Illinois 60601-6207
(312)
228-5400
|
39-1775292
|
Indicate
by check
mark whether the registrant (1) has filed all reports required to be filed
by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past
90 days.
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 the
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).
Indicate
the number
of shares outstanding of the issuer’s classes of common stock, as of the latest
practicable date:
|
Common
stock,
$1 par value,
76,423,497
shares outstanding at
August
6,
2008
|
|
|
______________________________________________________________________________
______________________________________________________________________________
INTEGRYS
ENERGY GROUP, INC.
FORM
10-Q FOR THE QUARTER ENDED JUNE 30, 2008
CONTENTS
|
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|
Page
|
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2
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3
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PART
I.
|
FINANCIAL
INFORMATION
|
4
|
|
|
|
Item
1.
|
FINANCIAL
STATEMENTS (Unaudited)
|
4
|
|
|
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|
4
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|
5
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|
6
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7-40
|
|
Integrys
Energy Group, Inc. and Subsidiaries
|
|
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|
Page
|
|
|
Note
1
|
Financial
Information
|
7
|
|
|
Note
2
|
Cash
and Cash
Equivalents
|
7
|
|
|
Note
3
|
Risk
Management Activities
|
8
|
|
|
Note
4
|
Discontinued
Operations
|
10
|
|
|
Note
5
|
Acquisitions
and Sales of Assets
|
11
|
|
|
Note
6
|
Natural
Gas
in Storage
|
13
|
|
|
Note
7
|
Goodwill
and
Other Intangible Assets
|
13
|
|
|
Note
8
|
Short-Term
Debt and Lines of Credit
|
15
|
|
|
Note
9
|
Long-Term
Debt
|
16
|
|
|
Note
10
|
Asset
Retirement Obligations
|
16
|
|
|
Note
11
|
Income
Taxes
|
16
|
|
|
Note
12
|
Commitments
and Contingencies
|
17
|
|
|
Note
13
|
Guarantees
|
25
|
|
|
Note
14
|
Employee
Benefit Plans
|
26
|
|
|
Note
15
|
Stock-Based
Compensation
|
27
|
|
|
Note
16
|
Comprehensive
Income
|
29
|
|
|
Note
17
|
Common
Equity
|
30
|
|
|
Note
18
|
Fair
Value
|
31
|
|
|
Note
19
|
Miscellaneous
Income
|
34
|
|
|
Note
20
|
Regulatory
Environment
|
34
|
|
|
Note
21
|
Segments
of
Business
|
37
|
|
|
Note
22
|
New
Accounting Pronouncements
|
40
|
|
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|
|
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
41-72
|
|
|
|
|
Quantitative
and Qualitative Disclosures About Market Risk
|
73
|
|
|
|
|
Controls
and
Procedures
|
74
|
|
|
|
|
OTHER
INFORMATION
|
75
|
|
|
|
|
Legal
Proceedings
|
75
|
|
|
|
|
Risk
Factors
|
75
|
|
|
|
|
Submission
of
Matters to a Vote of Security Holders
|
75
|
|
|
|
|
Exhibits
|
76
|
|
|
|
|
|
12
|
Ratio
of
Earnings to Fixed Charges
|
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
Act of
1934 for Integrys Energy Group, Inc.
|
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
Act of
1934 for Integrys Energy Group, Inc.
|
|
|
32
|
Written
Statement of the Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350 for Integrys Energy Group,
Inc.
|
|
ATC
|
American
Transmission Company LLC
|
EPA
|
United
States
Environmental Protection Agency
|
FASB
|
Financial
Accounting Standards Board
|
FERC
|
Federal
Energy
Regulatory Commission
|
IBS
|
Integrys
Business Support, LLC
|
ICC
|
Illinois
Commerce Commission
|
ICE
|
Intercontinental
Exchange
|
IRS
|
United
States
Internal Revenue Service
|
LIFO
|
Last-in,
first-out
|
MERC
|
Minnesota
Energy Resources Corporation
|
MGUC
|
Michigan
Gas
Utilities Corporation
|
MISO
|
Midwest
Independent Transmission System Operator
|
MPSC
|
Michigan
Public Service Commission
|
NSG
|
North
Shore
Gas Company
|
NYMEX
|
New
York
Mercantile Exchange
|
PEC
|
Peoples
Energy
Corporation
|
PEP
|
Peoples
Energy
Production Company
|
PGL
|
The
Peoples
Gas Light and Coke Company
|
PSCW
|
Public
Service
Commission of Wisconsin
|
SEC
|
United
States
Securities and Exchange Commission
|
SFAS
|
Statement
of
Financial Accounting Standards
|
UPPCO
|
Upper
Peninsula Power Company
|
WDNR
|
Wisconsin
Department of Natural Resources
|
WPSC
|
Wisconsin
Public Service Corporation
|
Forward-Looking
Statements
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, they cannot provide assurance that such statements will prove
correct. Except to the extent required by the federal securities
laws, Integrys Energy Group and its subsidiaries undertake no obligation
to
publicly update or revise any forward-looking statements, whether as a result
of
new information, future events or otherwise.
In
addition to statements regarding trends or estimates in Management's Discussion
and Analysis of Financial Condition and Results of Operations, forward-looking
statements included or incorporated in this report include, but are not limited
to, statements regarding future:
●
|
Revenues
or
expenses,
|
●
|
Capital
expenditure projections, and
|
●
|
Financing
sources.
|
Forward-looking
statements involve a number of risks and uncertainties. There are
many factors that could cause actual results to differ materially from those
expressed or implied in this report. Some risk factors that could
cause
results different from any forward-looking statement include those described
in
Item 1A of our Annual Report on Form 10-K for the year ended December 31,
2007,
as may be amended or supplemented in Part II, Item 1A of this report. Other
factors include:
●
|
Unexpected
costs and/or unexpected liabilities related to the PEC
merger;
|
●
|
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 the 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;
|
●
|
The
effects,
extent, and timing of additional competition or regulation in the
markets
in which our subsidiaries operate;
|
●
|
Available
sources and costs of fuels and purchased power;
|
●
|
Investment
performance of employee benefit plan assets;
|
●
|
Advances
in
technology;
|
●
|
Effects
of
and changes in political and legal developments, as well as economic
conditions and the related impact on customer demand in the
United States and Canada;
|
●
|
Potential
business strategies, including mergers, acquisitions, and construction
or
disposition of assets or businesses, which cannot be assured to
be
completed timely or within budgets;
|
●
|
The
direct or
indirect effects of terrorist incidents, natural disasters, or
responses
to such events;
|
●
|
The
impacts
of changing financial market conditions, credit ratings, and interest
rates on our liquidity and financing efforts;
|
●
|
The
risks
associated with changing commodity prices (particularly natural
gas and
electricity), including counterparty credit risk and the impact
on general
market liquidity;
|
●
|
Weather
and
other natural phenomena, in particular the effect of weather on
natural
gas and electricity sales;
|
●
|
The
effect of
accounting pronouncements issued periodically by standard-setting
bodies;
and
|
●
|
Other
factors
discussed elsewhere herein and in other reports filed by the registrant
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.
|
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|
PART
1. FINANCIAL
INFORMATION
|
|
|
|
|
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|
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|
Item
1. Financial
Statements
|
|
|
|
|
|
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|
|
|
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|
|
INTEGRYS
ENERGY GROUP, INC.
|
|
|
|
|
|
|
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|
CONDENSED
CONSOLIDATED STATEMENTS
OF INCOME (Unaudited)
|
|
Three
Months
Ended
|
|
|
Six
Months
Ended
|
|
|
|
June
30
|
|
|
June
30
|
|
(Millions,
except per share
data)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonregulated
revenue
|
|
$ |
2,601.1 |
|
|
$ |
1,649.9 |
|
|
$ |
5,013.4 |
|
|
$ |
3,426.7 |
|
Utility
revenue
|
|
|
816.1 |
|
|
|
711.8 |
|
|
|
2,393.0 |
|
|
|
1,681.6 |
|
Total
revenues
|
|
|
3,417.2 |
|
|
|
2,361.7 |
|
|
|
7,406.4 |
|
|
|
5,108.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonregulated
cost of fuel, natural
gas, and purchased power
|
|
|
2,544.8 |
|
|
|
1,650.9 |
|
|
|
4,829.3 |
|
|
|
3,314.6 |
|
Utility
cost of fuel, natural gas,
and purchased power
|
|
|
483.3 |
|
|
|
420.2 |
|
|
|
1,589.6 |
|
|
|
1,072.0 |
|
Operating
and maintenance
expense
|
|
|
251.8 |
|
|
|
251.9 |
|
|
|
538.4 |
|
|
|
438.6 |
|
Goodwill
impairment
loss
|
|
|
6.5 |
|
|
|
- |
|
|
|
6.5 |
|
|
|
- |
|
Depreciation
and amortization
expense
|
|
|
55.9 |
|
|
|
50.6 |
|
|
|
107.1 |
|
|
|
90.8 |
|
Taxes
other than income
taxes
|
|
|
21.8 |
|
|
|
22.0 |
|
|
|
47.7 |
|
|
|
43.1 |
|
Operating
income
(loss)
|
|
|
53.1 |
|
|
|
(33.9 |
)
|
|
|
287.8 |
|
|
|
149.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
|
22.7 |
|
|
|
21.6 |
|
|
|
40.8 |
|
|
|
33.9 |
|
Interest
expense
|
|
|
(33.5 |
)
|
|
|
(42.6 |
)
|
|
|
(71.4 |
)
|
|
|
(79.0 |
)
|
Minority
interest
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
Other
expense
|
|
|
(10.8 |
)
|
|
|
(21.0 |
)
|
|
|
(30.6 |
)
|
|
|
(45.0 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before
taxes
|
|
|
42.3 |
|
|
|
(54.9 |
)
|
|
|
257.2 |
|
|
|
104.2 |
|
Provision
(benefit) for income
taxes
|
|
|
17.5 |
|
|
|
(15.3 |
)
|
|
|
95.8 |
|
|
|
26.6 |
|
Income
(loss) from continuing
operations
|
|
|
24.8 |
|
|
|
(39.6 |
)
|
|
|
161.4 |
|
|
|
77.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations, net of
tax
|
|
|
0.1 |
|
|
|
24.0 |
|
|
|
0.1 |
|
|
|
47.0 |
|
Income
(loss) before preferred
stock dividends of subsidiary
|
|
|
24.9 |
|
|
|
(15.6 |
)
|
|
|
161.5 |
|
|
|
124.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends of
subsidiary
|
|
|
0.8 |
|
|
|
0.8 |
|
|
|
1.6 |
|
|
|
1.6 |
|
Income
(loss) available for common
shareholders
|
|
$ |
24.1 |
|
|
$ |
(16.4 |
)
|
|
$ |
159.9 |
|
|
$ |
123.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares of common
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
76.6 |
|
|
|
76.0 |
|
|
|
76.6 |
|
|
|
66.8 |
|
Diluted
|
|
|
76.9 |
|
|
|
76.0 |
|
|
|
76.9 |
|
|
|
67.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share
(basic)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$ |
0.31 |
|
|
$ |
(0.53 |
)
|
|
$ |
2.09 |
|
|
$ |
1.14 |
|
Discontinued
operations, net of tax
|
|
|
- |
|
|
$ |
0.31 |
|
|
|
- |
|
|
$ |
0.70 |
|
Earnings
(loss) per common share (basic)
|
|
$ |
0.31 |
|
|
$ |
(0.22 |
)
|
|
$ |
2.09 |
|
|
$ |
1.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share
(diluted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$ |
0.31 |
|
|
$ |
(0.53 |
)
|
|
$ |
2.08 |
|
|
$ |
1.13 |
|
Discontinued
operations, net of tax
|
|
|
- |
|
|
$ |
0.31 |
|
|
|
- |
|
|
$ |
0.70 |
|
Earnings
(loss) per common share (diluted)
|
|
$ |
0.31 |
|
|
$ |
(0.22 |
)
|
|
$ |
2.08 |
|
|
$ |
1.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per common share
declared
|
|
$ |
0.670 |
|
|
$ |
0.660 |
|
|
$ |
1.340 |
|
|
$ |
1.243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying condensed notes
are an integral part of these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEGRYS
ENERGY GROUP,
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30
|
|
|
December
31
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$ |
46.0 |
|
|
$ |
41.2 |
|
Accounts
receivable - net of
reserves of $63.9 and $51.3, respectively
|
|
|
1,565.7 |
|
|
|
1,405.3 |
|
Accrued
unbilled
revenues
|
|
|
264.2 |
|
|
|
464.7 |
|
Inventories
|
|
|
1,017.3 |
|
|
|
663.4 |
|
Assets
from risk management
activities
|
|
|
3,447.6 |
|
|
|
840.7 |
|
Regulatory
assets
|
|
|
166.7 |
|
|
|
141.7 |
|
Other
current
assets
|
|
|
163.0 |
|
|
|
169.3 |
|
Current
assets
|
|
|
6,670.5 |
|
|
|
3,726.3 |
|
|
|
|
|
|
|
|
|
|
Property,
plant, and equipment,
net of accumulated depreciation of $2,653.0 and
$2,602.2,
|
|
|
|
|
|
|
|
|
respectively
|
|
|
4,538.6 |
|
|
|
4,463.8 |
|
Regulatory
assets
|
|
|
1,061.5 |
|
|
|
1,102.3 |
|
Assets
from risk management
activities
|
|
|
1,357.7 |
|
|
|
459.3 |
|
Goodwill
|
|
|
944.4 |
|
|
|
948.3 |
|
Pension
assets
|
|
|
101.0 |
|
|
|
101.4 |
|
Other
|
|
|
453.9 |
|
|
|
433.0 |
|
Total
assets
|
|
$ |
15,127.6 |
|
|
$ |
11,234.4 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders'
Equity
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
$ |
260.5 |
|
|
$ |
468.2 |
|
Current
portion of long-term
debt
|
|
|
5.0 |
|
|
|
55.2 |
|
Accounts
payable
|
|
|
1,789.6 |
|
|
|
1,331.8 |
|
Liabilities
from risk management
activities
|
|
|
3,279.0 |
|
|
|
813.5 |
|
Regulatory
liabilities
|
|
|
180.6 |
|
|
|
77.9 |
|
Deferred
income
taxes
|
|
|
13.5 |
|
|
|
13.9 |
|
Temporary
LIFO liquidation
credit
|
|
|
98.8 |
|
|
|
- |
|
Other
current
liabilities
|
|
|
485.0 |
|
|
|
487.7 |
|
Current
liabilities
|
|
|
6,112.0 |
|
|
|
3,248.2 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
2,258.6 |
|
|
|
2,265.1 |
|
Deferred
income
taxes
|
|
|
494.2 |
|
|
|
494.4 |
|
Deferred
investment tax
credits
|
|
|
37.4 |
|
|
|
38.3 |
|
Regulatory
liabilities
|
|
|
318.2 |
|
|
|
292.4 |
|
Environmental
remediation
liabilities
|
|
|
695.3 |
|
|
|
705.6 |
|
Pension
and postretirement benefit
obligations
|
|
|
254.8 |
|
|
|
247.9 |
|
Liabilities
from risk management
activities
|
|
|
1,245.1 |
|
|
|
372.0 |
|
Asset
retirement
obligations
|
|
|
143.6 |
|
|
|
140.2 |
|
Other
|
|
|
226.4 |
|
|
|
143.4 |
|
Long-term
liabilities
|
|
|
5,673.6 |
|
|
|
4,699.3 |
|
|
|
|
|
|
|
|
|
|
Commitments
and
contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock of subsidiary with
no mandatory redemption
|
|
|
51.1 |
|
|
|
51.1 |
|
Common
stock
equity
|
|
|
3,290.9 |
|
|
|
3,235.8 |
|
Total
liabilities and
shareholders' equity
|
|
$ |
15,127.6 |
|
|
$ |
11,234.4 |
|
|
|
|
|
|
|
|
|
|
The
accompanying condensed notes
are an integral part of these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEGRYS
ENERGY GROUP,
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(Unaudited)
|
|
Six
Months
Ended
|
|
|
|
|
|
June
30
|
|
(Millions)
|
|
|
2008
|
|
|
2007
|
|
Operating
Activities
|
|
|
|
|
|
|
Income
before preferred stock
dividends of subsidiary
|
|
$ |
161.5 |
|
|
$ |
124.6 |
|
Adjustments
to reconcile income
before preferred stock dividends of subsidiary to net cash provided
by
operating activities
|
|
|
|
|
|
|
|
|
|
Discontinued
operations, net of
tax
|
|
|
(0.1 |
)
|
|
|
(47.0 |
)
|
|
Goodwill
impairment
loss
|
|
|
6.5 |
|
|
|
- |
|
|
Depreciation
and amortization
expense
|
|
|
107.1 |
|
|
|
90.8 |
|
|
Recovery
of MISO Day 2
expenses
|
|
|
9.4 |
|
|
|
2.9 |
|
|
Refund
of non-qualified
decommissioning trust
|
|
|
(0.3 |
)
|
|
|
(27.3 |
)
|
|
Recoveries
and refunds of other
regulatory assets and liabilities
|
|
|
26.0 |
|
|
|
23.0 |
|
|
Amortization
of nonregulated
customer contract intangibles
|
|
|
10.1 |
|
|
|
15.1 |
|
|
Net
unrealized gains on
nonregulated energy contracts
|
|
|
(45.9 |
)
|
|
|
(6.7 |
)
|
|
Pension
and postretirement
expense
|
|
|
24.5 |
|
|
|
35.4 |
|
|
Pension
and postretirement
funding
|
|
|
(10.5 |
)
|
|
|
(4.4 |
)
|
|
Deferred
income taxes and
investment tax credit
|
|
|
6.4 |
|
|
|
18.2 |
|
|
Gains
due to settlement of
contracts pursuant to the merger with PEC
|
|
|
- |
|
|
|
(4.0 |
)
|
|
Loss
on sale of property, plant
and equipment
|
|
|
2.1 |
|
|
|
- |
|
|
Equity
income, net of
dividends
|
|
|
(5.8 |
)
|
|
|
1.6 |
|
|
Other
|
|
|
|
(28.6 |
)
|
|
|
(22.0 |
)
|
|
Changes
in working
capital
|
|
|
|
|
|
|
|
|
|
|
Receivables,
net
|
|
|
(44.5 |
)
|
|
|
548.5 |
|
|
|
Inventories
|
|
|
(294.3 |
)
|
|
|
(57.2 |
)
|
|
|
Other
current
assets
|
|
|
16.3 |
|
|
|
62.6 |
|
|
|
Accounts
payable
|
|
|
475.7 |
|
|
|
(249.0 |
)
|
|
|
Temporary
LIFO liquidation
credit
|
|
|
98.8 |
|
|
|
(85.6 |
)
|
|
|
Other
current
liabilities
|
|
|
(79.0 |
)
|
|
|
(68.9 |
)
|
Net
cash provided by operating
activities
|
|
|
435.4 |
|
|
|
350.6 |
|
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(198.5 |
)
|
|
|
(155.0 |
)
|
Proceeds
from the sale of
property, plant and equipment
|
|
|
- |
|
|
|
2.3 |
|
Purchase
of equity investments and
other acquisitions
|
|
|
(17.5 |
)
|
|
|
(34.9 |
)
|
Cash
paid for transaction costs
pursuant to the merger with PEC
|
|
|
- |
|
|
|
(13.8 |
)
|
Acquisition
of natural gas
operations in Michigan and Minnesota
|
|
|
- |
|
|
|
1.7 |
|
Cash
paid for the transmission
interconnection
|
|
|
(17.4 |
)
|
|
|
(23.9 |
)
|
Restricted
cash for repayment of
long-term debt
|
|
|
- |
|
|
|
22.0 |
|
Proceeds
received from the
transmission interconnection
|
|
|
99.7 |
|
|
|
- |
|
Other
|
|
|
|
|
1.8 |
|
|
|
6.4 |
|
Net
cash used for investing
activities
|
|
|
(131.9 |
)
|
|
|
(195.2 |
)
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
Short-term
debt,
net
|
|
|
(207.7 |
)
|
|
|
(66.3 |
)
|
Gas
loans,
net
|
|
|
|
68.9 |
|
|
|
(7.5 |
)
|
Repayment
of long-term
debt
|
|
|
(54.6 |
)
|
|
|
(25.0 |
)
|
Payment
of
dividends
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
(1.6 |
)
|
|
|
(1.6 |
)
|
|
Common
stock
|
|
|
(101.9 |
)
|
|
|
(76.9 |
)
|
Issuance
of common
stock
|
|
|
- |
|
|
|
25.2 |
|
Other
|
|
|
|
|
(1.8 |
)
|
|
|
2.1 |
|
Net
cash used for financing
activities
|
|
|
(298.7 |
)
|
|
|
(150.0 |
)
|
|
|
|
|
|
|
|
|
|
|
|
Change
in cash and cash
equivalents - continuing operations
|
|
|
4.8 |
|
|
|
5.4 |
|
Change
in cash and cash
equivalents - discontinued operations
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating
activities
|
|
|
- |
|
|
|
40.1 |
|
|
Net
cash used for investing
activities
|
|
|
- |
|
|
|
(37.0 |
)
|
Change
in cash and cash
equivalents
|
|
|
4.8 |
|
|
|
8.5 |
|
Cash
and cash equivalents at
beginning of period
|
|
|
41.2 |
|
|
|
23.2 |
|
Cash
and cash equivalents at end
of period
|
|
$ |
46.0 |
|
|
$ |
31.7 |
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying condensed notes
are an integral part of these statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEGRYS
ENERGY GROUP, INC. AND SUBSIDIARIES
June 30,
2008
NOTE 1--FINANCIAL
INFORMATION
We
have prepared the Condensed Consolidated Financial Statements of Integrys Energy
Group, Inc. under the rules and regulations of the SEC.
These
financial
statements on Form 10-Q have not been audited. Management believes
that these financial statements include all adjustments (which, unless otherwise
noted, include only normal recurring adjustments) necessary for a fair
presentation of the financial results for each period shown. We have
condensed or omitted certain financial information and Note disclosures
normally included in our annual audited financial statements. These
condensed financial statements should be read along with the audited financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2007.
Mergers
and
Acquisitions
Effective
February
21, 2007, the PEC merger was completed, and the assets and liabilities, results
of operations, and cash flows of PEC were included in Integrys Energy Group's
Condensed Consolidated Financial Statements beginning February 22,
2007. See Note 5, "Acquisitions and Sales of
Assets," for more information.
Dispositions
PEP's
results of
operations and cash flows were recorded as discontinued operations for the
three
and six months ended June 30, 2007. The sale of PEP was
completed in September 2007. Refer to Note 4, "Discontinued Operations," for
more information.
WPS Niagara
Generation, LLC's (Niagara) results of operations and cash flows were classified
as discontinued operations in the first quarter of 2007. The sale of
Niagara was completed in January 2007. Refer to Note 4,
"Discontinued
Operations," for more information.
NOTE 2--CASH
AND CASH EQUIVALENTS
Short-term
investments with an original maturity of three months or less are reported
as cash equivalents.
The
following is
supplemental disclosure to the Integrys Energy Group Condensed Consolidated
Statements of Cash Flows:
|
|
Six
Months Ended June 30
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
Cash
paid for interest
|
|
$ |
69.0 |
|
|
$ |
56.8 |
|
Cash
paid for income
taxes
|
|
$ |
91.3 |
|
|
$ |
18.9 |
|
Significant
non-cash transactions were:
|
|
Six
Months Ended June 30
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
Weston
4 construction costs funded
through accounts payable
|
|
$ |
20.2 |
|
|
$ |
29.3 |
|
Equity
issued for net assets acquired in
PEC merger
|
|
|
- |
|
|
|
1,559.3 |
|
Transaction
costs related to the PEC
merger funded through
other
current liabilities
|
|
|
- |
|
|
|
0.3 |
|
Realized
gain on settlement of contracts
due to PEC merger
|
|
|
- |
|
|
|
4.0 |
|
NOTE 3--RISK
MANAGEMENT ACTIVITIES
The
following table
shows Integrys Energy Group's assets and liabilities from risk management
activities as of June 30, 2008, and December 31, 2007:
|
|
Assets
|
|
|
Liabilities
|
|
(Millions)
|
|
June 30,
2008
|
|
|
December 31,
2007
|
|
|
June 30,
2008
|
|
|
December 31,
2007
|
|
Utility
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
contracts
|
|
$ |
631.0 |
|
|
$ |
8.2 |
|
|
$ |
478.4 |
|
|
$ |
30.4 |
|
Financial
transmission rights
|
|
|
20.6 |
|
|
|
13.4 |
|
|
|
11.3 |
|
|
|
4.4 |
|
Cash
flow hedges –
commoditycontracts
|
|
|
2.4 |
|
|
|
- |
|
|
|
- |
|
|
|
0.3 |
|
Nonregulated
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-hedge
derivatives
|
|
|
4,074.3 |
|
|
|
1,241.4 |
|
|
|
3,891.2 |
|
|
|
1,125.7 |
|
Fair
value hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
contracts
|
|
|
- |
|
|
|
7.4 |
|
|
|
38.0 |
|
|
|
2.0 |
|
Interest
rate swaps
|
|
|
0.4 |
|
|
|
- |
|
|
|
0.3 |
|
|
|
0.3 |
|
Cash
flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
contracts
|
|
|
76.6 |
|
|
|
29.6 |
|
|
|
101.1 |
|
|
|
18.3 |
|
Interest
rate swaps
|
|
|
- |
|
|
|
- |
|
|
|
3.8 |
|
|
|
4.1 |
|
Total
|
|
$ |
4,805.3 |
|
|
$ |
1,300.0 |
|
|
$ |
4,524.1 |
|
|
$ |
1,185.5 |
|
Balance
Sheet Presentation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
3,447.6 |
|
|
$ |
840.7 |
|
|
$ |
3,279.0 |
|
|
$ |
813.5 |
|
Long-term
|
|
|
1,357.7 |
|
|
|
459.3 |
|
|
|
1,245.1 |
|
|
|
372.0 |
|
Total
|
|
$ |
4,805.3 |
|
|
$ |
1,300.0 |
|
|
$ |
4,524.1 |
|
|
$ |
1,185.5 |
|
Assets
and
liabilities from risk management activities are classified as current or
long-term based upon the maturities of the underlying contracts.
FASB
Interpretation
No. 39, "Offsetting of Amounts Related to Certain Contracts," as amended,
provides the option to present certain asset and liability derivative positions
net on the balance sheet and to net the related cash collateral against these
net derivative positions. Integrys Energy Group elected not to net
these items in its Condensed Consolidated Balance Sheets. The
following table shows Integrys Energy Group's cash collateral
positions:
(Millions)
|
|
June
30, 2008
|
|
|
December
31, 2007
|
|
Cash
collateral provided to others
|
|
$ |
14.6 |
|
|
$ |
23.5 |
|
Cash
collateral received from others
|
|
|
183.9 |
|
|
|
49.1
|
|
On
the Condensed Consolidated Balance Sheets, the cash collateral provided to
others is reflected in Accounts receivable, and the cash collateral received
from others is reflected in Other current liabilities.
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
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 the market price volatility of natural
gas. The electric utility segment also uses financial instruments to
manage transmission congestion costs, which are shown in the above table as
"financial transmission rights."
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. Changes in the fair value of non-hedge derivatives are
recognized currently in earnings.
Integrys
Energy
Group's 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 Condensed
Consolidated Statements of Income was not significant for the three months
ended
June 30, 2008, and 2007. Fair value hedge ineffectiveness
recorded in nonregulated revenue on the Condensed Consolidated Statements of
Income was a pre-tax loss of $2.8 million for the six months ended
June 30, 2008, and was not significant for the six months ended
June 30, 2007. Changes in the difference between the spot and
forward prices of natural gas were excluded from the assessment of hedge
effectiveness and reported directly in nonregulated revenue. The
amount excluded was not significant during the three months ended June 30,
2008, and was a pre-tax gain of $2.1 million during the three months ended
June 30, 2007. The amount excluded was a pre-tax gain of
$4.3 million during the six months ended June 30, 2008, and was a
pre-tax gain of $3.1 million during the six months ended June 30,
2007.
Commodity
contracts
that are designated as cash flow hedges extend through January 2013, 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 Condensed Consolidated Statements of Income related
to commodity contracts was a pre-tax loss of $2.2 million during the three
months ended June 30, 2008, and was not significant during the three months
ended June 30, 2007. The cash flow hedge ineffectiveness
recorded in nonregulated revenue on the Condensed Consolidated Statements of
Income related to commodity contracts was a pre-tax loss of $3.5 million
during the six months ended June 30, 2008, and was a pre-tax loss of
$5.9 million during the six months ended June 30,
2007. When testing for effectiveness, no portion of the derivative
instruments was excluded. Amounts recorded in other comprehensive
income related to these cash flow hedges will be recognized in earnings when
the
hedged transactions occur, which is typically as the related contracts are
settled, or if it is probable that the hedged transaction will not
occur. 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 a pre-tax loss of $3.0 million during the
three months ended June 30, 2008, and was not significant during the three
months ended June 30, 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 a pre-tax loss
of
$2.9 million
during the six months ended June 30, 2008, and was not significant during
the six months ended June 30, 2007. In the next 12 months,
subject to changes in market prices of natural gas and electricity, we expect
that a pre-tax gain of $30.6 million will be recognized in earnings as the
hedged transactions occur. We expect this amount to be substantially
offset by settlement of the related nonderivative contracts that are being
hedged.
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
$869.2 million, net of certain post-closing adjustments.
Components
of
discontinued operations recorded in the Condensed Consolidated Statements of
Income related to PEP were:
(Millions)
|
|
Three
Months Ended
June 30,
2007
|
|
|
February
22, 2007
through
June 30,
2007
|
|
|
|
|
|
|
|
|
Nonregulated
revenue
|
|
$ |
52.6 |
|
|
$ |
70.8 |
|
|
|
|
|
|
|
|
|
|
Operating
and
maintenance expense
|
|
|
12.0 |
|
|
|
16.0 |
|
Taxes
other
than income taxes
|
|
|
2.2 |
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
Income
before
taxes
|
|
|
38.4 |
|
|
|
51.1 |
|
Provision
for
income taxes
|
|
|
14.4 |
|
|
|
18.9 |
|
Discontinued
operations, net of tax
|
|
$ |
24.0 |
|
|
$ |
32.2 |
|
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 had no external debt obligations.
Niagara
In
January 2007, Integrys Energy Services completed the sale of Niagara for
approximately $31 million. This facility was a merchant
generation facility and sold power on a wholesale basis when market conditions
were economically favorable. The gain recorded in 2007 was
$24.6 million ($14.8 million after-tax) and was included as a
component of discontinued operations.
During
the three
and six months ended June 30, 2008, Integrys Energy Services recorded
$0.1 million of discontinued operations in operating and maintenance
expenses related to amortization of an environmental indemnification guarantee
included as part of the sale agreement.
Components
of
discontinued operations recorded in the Condensed Consolidated Statements of
Income related to Niagara for the six months ended June 30, 2007
were:
(Millions)
|
|
Six
Months
Ended
June 30,
2007
|
|
|
|
|
|
Nonregulated
revenue
|
|
$ |
1.5 |
|
|
|
|
|
|
Nonregulated
cost of fuel, natural gas, and purchased power
|
|
|
1.0 |
|
Operating
and
maintenance expense
|
|
|
0.5 |
|
Gain
on
Niagara sale
|
|
|
(24.6 |
) |
|
|
|
|
|
Income
before
taxes
|
|
|
24.6 |
|
Provision
for
income taxes
|
|
|
9.8 |
|
|
|
|
|
|
Discontinued
operations, net of tax
|
|
$ |
14.8 |
|
No
interest expense was allocated to discontinued operations as Niagara had no
external debt obligations.
NOTE 5--ACQUISITIONS
AND SALES OF ASSETS
PEC
Merger
The
PEC merger was
completed on February 21, 2007. The merger was accounted for under
the purchase method of accounting, with Integrys Energy Group 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. The results of operations attributable to PEC are included
in the Condensed Consolidated Financial Statements for the three and six months
ended June 30, 2008, and for the period from February 22, 2007, through
June 30, 2007.
The
purchase price
was allocated based on the estimated fair market value 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 allocated to
goodwill. Adjustments made to the purchase price allocation and
goodwill in 2008, which were not significant, related to income
taxes.
Summary
of External Costs to Achieve PEC Merger Synergies
The
table below
reports the pre-tax external costs to achieve merger synergies reflected in
operating expenses for each reportable segment of Integrys Energy Group during
the three and six months ended June 30, 2008, and 2007. Note that external costs to
achieve merger synergies incurred at the holding company from July 2006 through
March 2007 were reallocated down to the segment level in the first quarter
of 2007.
|
|
Three
Months Ended
June 30
|
|
|
Six
Months Ended
June 30
|
|
Reportable
Segment (millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Electric
utility
|
|
$ |
2.1 |
|
|
$ |
0.8 |
|
|
$ |
3.7 |
|
|
$ |
5.6 |
|
Natural
gas
utility
|
|
|
0.7 |
|
|
|
0.4 |
|
|
|
1.3 |
|
|
|
2.4 |
|
Integrys
Energy Services
|
|
|
1.2 |
|
|
|
1.2 |
|
|
|
2.3 |
|
|
|
3.2 |
|
Holding
company and other
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(7.8 |
) |
Total
|
|
$ |
4.0 |
|
|
$ |
2.4 |
|
|
$ |
7.3 |
|
|
$ |
3.4 |
|
In
order to achieve Integrys Energy Group's anticipated merger synergies, a
restructuring plan was implemented, which included a process to eliminate
duplicative positions within Integrys Energy Group. Costs associated
with the merger-related involuntary termination of employees at PEC (the
acquired company) were 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 three and six
months ended June 30, 2008. These costs were not significant for
the period February 22, 2007, through June 30, 2007.
(Millions)
|
|
Three
Months Ended
June 30,
2008
|
|
|
Six
Months
Ended
June 30,
2008
|
|
Accrued
employee severance costs at beginning of period
|
|
$ |
0.8 |
|
|
$ |
1.3 |
|
Cash
payments
|
|
|
(0.6 |
) |
|
|
(1.1 |
) |
Accrued
employee severance costs at end of period
|
|
$ |
0.2 |
|
|
$ |
0.2 |
|
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 terminations 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." These costs are
shown in the table below.
|
|
Three
Months Ended
June 30
|
|
|
Six
Months
Ended
|
|
|
February
22, 2007
through
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
June
30, 2008
|
|
|
June
30, 2007
|
|
Accrued
employee severance costs
at
beginning of period
|
|
$ |
3.5 |
|
|
$ |
4.6 |
|
|
$ |
4.8 |
|
|
$ |
4.6 |
|
Severance
expense recorded
|
|
|
1.7 |
|
|
|
0.5 |
|
|
|
2.2 |
|
|
|
0.5 |
|
Cash
payments
|
|
|
(0.9 |
) |
|
|
(0.1 |
) |
|
|
(2.7 |
) |
|
|
(0.1 |
) |
Accrued
employee severance
costs
at end of period
|
|
$ |
4.3 |
|
|
$ |
5.0 |
|
|
$ |
4.3 |
|
|
$ |
5.0 |
|
Supplemental
Pro Forma information
The
following table
shows pro forma results of operations for Integrys Energy Group for the six
months ended June 30, 2007, as if the acquisition of PEC had been completed
at January 1, 2007. Pro forma results are presented for
informational purposes only and are not necessarily indicative of what the
actual results would have been had the acquisition actually occurred on
January 1, 2007.
Millions,
except per share amounts)
|
|
Pro
Forma for the
Six
Months Ended
June 30,
2007
|
|
Total
revenues
|
|
$ |
5,813.6 |
|
Income
from
continuing operations
|
|
$ |
107.7 |
|
Income
available for common shareholders
|
|
$ |
155.1 |
|
Basic
earnings
per share – continuing operations
|
|
$ |
1.40 |
|
Basic
earnings
per share
|
|
$ |
2.04 |
|
Diluted
earnings per share – continuing operations
|
|
$ |
1.38 |
|
Diluted
earnings per share
|
|
$ |
2.02 |
|
NOTE 6--
NATURAL GAS IN STORAGE
PGL
and NSG price
natural gas storage injections at the calendar year average of the cost of
natural gas supply purchased. Withdrawals from storage are priced on
the LIFO cost method. For interim periods, the difference between
current projected replacement cost and the LIFO cost for quantities of natural
gas temporarily withdrawn from storage is recorded as a temporary LIFO
liquidation credit. Due to seasonal natural
gas
requirements, PGL and NSG expect interim reductions in LlFO layers to be
replenished by year end.
NOTE 7--GOODWILL
AND OTHER INTANGIBLE ASSETS
Integrys
Energy
Group had the following changes to the carrying amount of goodwill for the
six
months ended June 30, 2008:
(Millions)
|
|
Natural
Gas
Utility
Segment
|
|
|
Integrys
Energy
Services
|
|
|
Total
|
|
Goodwill
recorded at December 31, 2007
|
|
$ |
936.8 |
|
|
$ |
11.5 |
|
|
$ |
948.3 |
|
Adjustments
to PEC purchase price
allocation
related to income taxes
|
|
|
2.7 |
|
|
|
(0.1 |
) |
|
|
2.6 |
|
Impairment
loss *
|
|
|
(6.5 |
) |
|
|
- |
|
|
|
(6.5 |
) |
Goodwill
recorded at June 30, 2008
|
|
$ |
933.0 |
|
|
$ |
11.4 |
|
|
$ |
944.4 |
|
*
|
A
goodwill impairment loss in the
amount of $6.5 million, after-tax, was recognized for NSG in the
second quarter of 2008. On at least an annual basis, Integrys
Energy Group is required by generally accepted accounting principles
to
test goodwill for impairment at each of its reporting
units. Reporting units at Integrys Energy Group that have a
goodwill balance and are subject to these impairment tests, include
PGL,
NSG, MGUC, MERC, WPSC's natural gas utility, and Integrys Energy
Services. These reporting units were recorded at their
approximate fair market values at the date of
acquisition. Since the acquisitions of PGL, NSG, MGUC, and MERC
all occurred within the last few years, even a slight decline in
fair
value can result in a potential impairment loss. In order to
identify a potential impairment, the estimated fair value of a reporting
unit is compared with its carrying amount, including
goodwill. A present value technique was utilized to estimate
the fair value of NSG at April 1, 2008. The goodwill impairment
recognized for NSG was due to a decline in the estimated fair value
of
NSG, caused primarily by a decrease in forecasted results as compared
to
the forecast at the time of the acquisition. Worsening economic
factors also contributed to the decline in fair
value.
|
Identifiable
intangible assets other than goodwill are included as a component of other
assets within the Condensed Consolidated Balance Sheets as listed
below.
(Millions)
|
|
June 30,
2008
|
|
|
December 31,
2007
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Amortized
intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer-related(1)
|
|
$ |
32.6 |
|
|
$ |
(11.7 |
) |
|
$ |
20.9 |
|
|
$ |
32.6 |
|
|
$ |
(9.3 |
) |
|
$ |
23.3 |
|
Natural
gas and electric
contract
assets(2),
(3)
|
|
|
60.1 |
|
|
|
(47.9 |
) |
|
|
12.2 |
|
|
|
60.1 |
|
|
|
(34.1 |
) |
|
|
26.0 |
|
Natural
gas and electric
contract
liabilities(2),
(4)
|
|
|
(33.6 |
) |
|
|
16.8 |
|
|
|
(16.8 |
) |
|
|
(33.6 |
) |
|
|
13.1 |
|
|
|
(20.5 |
) |
Emission
allowances(5)
|
|
|
2.3 |
|
|
|
(0.1 |
) |
|
|
2.2 |
|
|
|
2.4 |
|
|
|
(0.2 |
) |
|
|
2.2 |
|
Other
|
|
|
7.0 |
|
|
|
(2.5 |
) |
|
|
4.5 |
|
|
|
3.8 |
|
|
|
(1.2 |
) |
|
|
2.6 |
|
Total
|
|
|
68.4 |
|
|
|
(45.4 |
) |
|
|
23.0 |
|
|
|
65.3 |
|
|
|
(31.7 |
) |
|
|
33.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized
intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
name(6)
|
|
|
5.2 |
|
|
|
- |
|
|
|
5.2 |
|
|
|
5.2 |
|
|
|
- |
|
|
|
5.2 |
|
Total
intangible assets
|
|
$ |
73.6 |
|
|
$ |
(45.4 |
) |
|
$ |
28.2 |
|
|
$ |
70.5 |
|
|
$ |
(31.7 |
) |
|
$ |
38.8 |
|
(1)
|
Includes
customer relationship assets associated with both PEC's former
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 $8.7 million and $3.5 million,
respectively, which have a weighted-average amortization period of
1.1
years.
|
(4)
|
Consists
of
both short-term and long-term intangible liabilities related to customer
contracts in the amount of $7.4 million and $9.4 million,
respectively, which have a weighted-average amortization period of
2.5
years.
|
(5)
|
Emission
allowances do not have a contractual term or expiration date.
|
(6)
|
Represents
the
fair value of the MGUC trade name acquired from Aquila.
|
Aggregate
intangible asset amortization expense for all intangibles, excluding natural
gas
and electric contracts, which are discussed below, for the three months ended
June 30, 2008, and 2007, was $2.3 million and $1.4 million,
respectively. Aggregate intangible asset amortization expense for all
intangibles, excluding natural gas and electric contracts, which are discussed
below, for the six months ended June 30, 2008, and 2007, was
$3.7 million and $2.4 million, respectively.
Amortization
expense for the next five fiscal years is estimated to be:
(Millions)
|
|
|
|
For
six
months ending December 31, 2008
|
|
$ |
2.7 |
|
For
year
ending December 31, 2009
|
|
|
4.3 |
|
For
year
ending December 31, 2010
|
|
|
3.7 |
|
For
year
ending December 31, 2011
|
|
|
3.1 |
|
For
year
ending December 31, 2012
|
|
|
2.1 |
|
The
effect of
purchase accounting related to natural gas and electric contracts is recorded
as
a component of nonregulated cost of fuel, natural gas, and purchased power
and
is not included in the table above. Amortization of these contracts
for the three months ended June 30, 2008, and 2007, resulted in an increase
to nonregulated cost of fuel, natural gas, and purchased power of
$4.9 million and $8.4 million, respectively. Amortization
of these contracts for the six months ended June 30, 2008, and 2007,
resulted in an increase to nonregulated cost of fuel, natural gas, and purchased
power of $10.1 million and $15.1 million, respectively.
Amortization
of
these contracts for the next five fiscal years is estimated to be:
(Millions)
|
|
|
|
For
six
months ending December 31, 2008
|
|
$ |
3.2 |
|
For
year
ending December 31, 2009
|
|
|
(2.9 |
)* |
For
year
ending December 31, 2010
|
|
|
(2.7 |
)* |
For
year
ending December 31, 2011
|
|
|
(2.0 |
)* |
For
year
ending December 31, 2012
|
|
|
(0.3 |
)* |
* Amortization
of these contracts is anticipated to decrease nonregulated cost of fuel, natural
gas, and purchased
power.
NOTE 8--SHORT-TERM
DEBT AND LINES OF CREDIT
Integrys
Energy
Group's short-term borrowings consist of sales of commercial paper backed by
unsecured revolving credit facilities (discussed below), as well as short-term
notes.
(Millions,
except percentages)
|
|
June 30,
2008
|
|
|
December 31,
2007
|
|
Commercial
paper outstanding
|
|
$ |
105.9 |
|
|
$ |
308.2 |
|
Average
discount rate on outstanding commercial paper
|
|
|
2.97%2.97 |
% |
|
|
5.51 |
% |
Short-term
notes payable outstanding
|
|
$ |
154.6 |
|
|
$ |
160.0 |
|
Average
interest rate on short-term notes payable
|
|
|
2.48 |
% |
|
|
3.66 |
% |
The
commercial
paper at June 30, 2008, had varying maturity dates ranging from July 1,
2008, through July 3, 2008.
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
|
|
June 30,
2008
|
|
|
December 31,
2007
|
|
Credit
agreements and revolving notes
|
|
|
|
|
|
|
|
Revolving
credit facility (Integrys Energy Group)
(1)
|
06/02/10
|
|
$ |
500.0 |
|
|
$ |
500.0 |
|
Revolving
credit facility (Integrys Energy Group)
(1)
|
06/09/11
|
|
|
500.0 |
|
|
|
500.0 |
|
Revolving
credit facility (WPSC)(2)
|
06/02/10
|
|
|
115.0 |
|
|
|
115.0 |
|
Revolving
credit facility (PEC)(1)
(4)
|
06/13/11
|
|
|
400.0 |
|
|
|
400.0 |
|
Revolving
credit facility (PGL)(3)
|
07/12/10
|
|
|
250.0 |
|
|
|
250.0 |
|
Revolving
credit facility (Integrys Energy Services)(4)
(5)
|
04/08/09
|
|
|
175.0 |
|
|
|
150.0 |
|
Revolving
short-term notes payable (WPSC)(6)
|
11/01/08
|
|
|
10.0 |
|
|
|
10.0 |
|
Uncommitted
secured cross-exchange agreement (Integrys Energy Services)
(7)
|
04/15/09
|
|
|
25.0 |
|
|
|
25.0 |
|
Total
short-term credit capacity
|
|
|
$ |
1,975.0 |
|
|
$ |
1,950.0 |
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Uncollateralized
portion of gross margin credit
agreement
|
|
|
|
19.0 |
|
|
|
10.8 |
|
Letters
of credit issued inside credit facilities
|
|
|
|
393.2 |
|
|
|
138.9 |
|
Loans
outstanding under credit agreements
|
|
|
|
154.6 |
|
|
|
160.0 |
|
Commercial
paper outstanding
|
|
|
|
105.9 |
|
|
|
308.2 |
|
Accrued
interest or original discount on outstanding commercial
paper
|
|
|
|
- |
|
|
|
0.5 |
|
Available
capacity under existing agreements
|
|
|
$ |
1,302.3 |
|
|
$ |
1,331.6 |
|
(1)
|
Provides
support for Integrys Energy Group commercial paper borrowing
program.
|
(2)
|
Provides
support for WPSC's commercial paper borrowing
program.
|
(3)
|
Provides
support for PGL's seasonal commercial paper borrowing
program.
|
(4)
|
Borrowings
under these agreements are guaranteed by Integrys Energy
Group.
|
(5)
|
This
facility
matured in April 2008, at which time the available borrowing capacity
under the facility was increased to $175.0 million and the maturity
date was extended to April 8, 2009.
|
(6)
|
Facility
is
renewed every six months.
|
(7)
|
This
facility
matured in April 2008, at which time the facility was renewed and
the
maturity date was extended to April 15,
2009.
|
NOTE 9--LONG-TERM
DEBT
(Millions)
|
|
June 30,
2008
|
|
|
December 31,
2007
|
|
WPSC
|
|
$ |
747.1 |
|
|
$ |
747.1 |
|
UPPCO
|
|
|
12.6 |
|
|
|
12.6 |
|
PEC
|
|
|
325.1 |
|
|
|
325.3 |
|
PGL(1)
(2)
|
|
|
451.0 |
|
|
|
502.0 |
|
NSG
|
|
|
69.0 |
|
|
|
69.1 |
|
Integrys
Energy Group
|
|
|
550.0 |
|
|
|
550.0 |
|
Unsecured
term
loan due 2010 – Integrys Energy Group
|
|
|
65.6 |
|
|
|
65.6 |
|
Term
loans –
nonrecourse, collateralized by nonregulated assets
|
|
|
8.6 |
|
|
|
10.5 |
|
Integrys
Energy Services' loan
|
|
|
0.1 |
|
|
|
0.1 |
|
Other
term
loan
|
|
|
27.0 |
|
|
|
27.0 |
|
Senior
secured
note (3)
|
|
|
- |
|
|
|
1.7 |
|
Total
|
|
|
2,256.1 |
|
|
|
2,311.0 |
|
Unamortized
discount and premium on bonds and debt
|
|
|
7.5 |
|
|
|
9.3 |
|
Total
debt
|
|
|
2,263.6 |
|
|
|
2,320.3 |
|
Less
current
portion (2)
|
|
|
(5.0 |
) |
|
|
(55.2 |
) |
Total
long-term debt
|
|
$ |
2,258.6 |
|
|
$ |
2,265.1 |
|
(1)
|
PGL
has
outstanding $51.0 million of Adjustable Rate, Series OO 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 January 1, 2008, and ending June 30, 2008, was 5.005% for
these bonds. On April 17, 2008, PGL completed the purchase of
$51.0 million of Illinois Development Finance Authority Series 2003D
Bonds, due October 1, 2037, and backed by PGL Series PP
bonds. Upon repurchase, the Auction Rate Mode was converted
from a 35-day mode to a weekly mode. This transaction was
treated as a repurchase of the Series PP bonds by PGL. As a
result, the liability related to the Series PP bonds was
extinguished. The Company intends to hold the bonds while it
continues to monitor the tax-exempt market and assess potential
remarketing or refinancing opportunities.
|
(2)
|
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, were presented in the
current portion of long-term debt on Integrys Energy Group's Consolidated
Balance Sheet at December 31, 2007. These bonds were
included as long-term debt in the June 30, 2008 Condensed
Consolidated Balance Sheet.
|
(3)
|
On
June 26, 2008, Upper Peninsula Building Development Corporation, a
subsidiary of Integrys Energy Group, repaid the outstanding principal
balance on its 9.25% senior secured note. The note was
secured by a first mortgage lien on a building they own and lease
to UPPCO
for use as their corporate headquarters.
|
NOTE 10--ASSET
RETIREMENT OBLIGATIONS
The
following table
shows changes to the asset retirement obligations of Integrys Energy Group
through June 30, 2008.
(Millions)
|
|
Utilities
|
|
|
Integrys
Energy Services
|
|
|
Total
|
|
Asset
retirement obligations at December 31, 2007
|
|
$ |
139.5 |
|
|
$ |
0.7 |
|
|
$ |
140.2 |
|
Accretion
|
|
|
3.9 |
|
|
|
- |
|
|
|
3.9 |
|
Other
|
|
|
- |
|
|
|
(0.5 |
) |
|
|
(0.5 |
) |
Asset
retirement obligations at June 30, 2008
|
|
$ |
143.4 |
|
|
$ |
0.2 |
|
|
$ |
143.6 |
|
NOTE 11--INCOME
TAXES
Integrys
Energy
Group’s effective tax rates for the three and six months ended June 30,
2008, were 41.4% and 37.2%, respectively. The effective tax rates for
the three and six months ended June 30, 2007, were 27.9% and 25.5%,
respectively. Integrys Energy Group calculates its provision
for
income
taxes in
accordance with Accounting Principles Board Opinion No. 28, "Interim
Financial Reporting." Accordingly, our interim effective tax rate
reflects our projected annual effective tax rate. The effective tax
rate for the three and six months ended June 30, 2008 differed from the
federal tax rate of 35%, primarily due to state income taxes and the impact
of
certain permanent book to tax return differences. The effective tax
rate for the three and six months ended June 30, 2007, differed from the
federal tax rate of 35%, primarily due to the effects of Section 29/45K federal
tax credits related to Integrys Energy Services' ownership in a synthetic fuel
production facility, and state income taxes. Section 29/45K of the
Internal Revenue Code, which provided for Section 29/45K federal tax credits
from the production and sale of synthetic fuel expired effective
December 31, 2007.
For
the three
months ended June 30, 2008, the liability for uncertain tax positions
increased by $2.7 million. For the six months ended
June 30, 2008, the change in liability for uncertain tax positions was a
decrease of $0.8 million. These changes reflect the settlement
and remeasurement of the obligations associated with uncertain tax positions
as
part of closing and settling examinations with the IRS and the State of
Wisconsin during the second quarter of 2008.
NOTE 12--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 their 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 June 30, 2008.
●
|
The
electric
utility segment has obligations related to coal supply and transportation
that extend through 2016 and total $672.8 million, obligations of
$1.2 billion for either capacity or energy related to purchased power
that
extend through 2016, and obligations for other commodities totaling
$12.6 million, which extend through 2012.
|
●
|
The
natural
gas utility segment has obligations related to natural gas supply
and
transportation contracts totaling $1.1 billion, some of which extend
through 2019.
|
●
|
Integrys
Energy Services has obligations related to energy supply contracts
that
extend through 2018 and total $6.4 billion. The
majority of these obligations end by 2010, with obligations totaling
$556.5 million extending beyond 2011.
|
●
|
Integrys
Energy Group also has commitments in the form of purchase orders
issued to
various vendors, which totaled $690.0 million, and relate to normal
business operations as well as large construction
projects.
|
Environmental
EPA
Section 114
Request
In
2000, WPSC received a request from the EPA under Section 114 of the Clean
Air Act, seeking information related to work performed on the coal-fired boilers
located at WPSC's Pulliam and Weston electric generation
stations. WPSC filed a response with the EPA in early
2001.
In
May 2002, WPSC received a follow-up request from the EPA seeking additional
information regarding specific boiler-related work performed on Pulliam Units
3,
5, and 7, as well as information on WPSC's life extension program for Pulliam
Units 3-8 and Weston Units 1 and 2. WPSC filed a final response
to the EPA's follow-up request in June 2002.
In
2000 and 2002, Wisconsin Power and Light Company (WP&L) received a similar
series of EPA information requests relating to work performed on certain
coal-fired boilers and related equipment at the Columbia generation station
(a
facility located in Portage, Wisconsin, jointly owned by WP&L, Madison Gas
and Electric Company, and WPSC). WP&L is the operator of the
plant and is responsible for responding to governmental inquiries relating
to
the operation of the facility. WP&L filed its response for the
Columbia facility in July 2002.
Depending
upon the
results of the EPA's review of the information provided by WPSC and WP&L,
the EPA may perform any of the following:
●
|
issue
notices
of violation (NOV) asserting that a violation of the Clean Air Act
occurred,
|
●
|
seek
additional information from WPSC, WP&L, and/or third parties who have
information relating to the boilers, and/or
|
●
|
close
out the
investigation.
|
In
addition, under the Clean Air Act, citizen groups may pursue a
claim. WPSC has no notice of such a claim based on the information
submitted to the EPA.
To
date, the EPA has not responded to the 2001 and 2002 filings made by WPSC and
WP&L. However, in March 2008, a data request was received
from the EPA seeking information related to operations and projects for the
Pulliam and Weston coal-fired boilers from January 2000 to the
present. WPSC has submitted its response.
In
response to the EPA's Clean Air Act enforcement initiative, several utilities
elected to settle with the EPA, while others are in litigation. The
fines and penalties (including the cost of supplemental environmental projects)
associated with settlements involving comparably-sized facilities range between
$7 million and $30 million. The regulatory interpretations
upon which the lawsuits or settlements are based may change based on future
court decisions of the pending litigations.
If
the federal government brings a claim against WPSC and if it were determined
by
a court that historic projects at WPSC's Pulliam and Weston plants required
either a state or federal Clean Air Act permit, WPSC may, under the applicable
statutes, be required to:
●
|
shut
down any
unit found to be operating in non-compliance,
|
●
|
install
additional pollution control equipment,
|
●
|
pay
a fine,
and/or
|
●
|
pay
a fine
and conduct a supplemental environmental project in order to resolve
any
such claim.
|
Pulliam
Air Notice of
Violation
In
September 2007, a 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 finally 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, briefing is
completed, and the parties will present oral arguments once scheduled by the
court.
These
activities
did not stay the construction and startup 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 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 has completed corrective
measures to address the issues and settled the matter with the Wisconsin
Attorney General's office. The settlement included a penalty of $0.2
million and a commitment to fund $0.3 million of energy efficiency
projects.
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. 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 with the first phase beginning in 2008. 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. Chapter NR 446
applies to existing units. Weston 4 installed mercury control
technology, which will achieve a mercury emission rate that meets the permit
limit for mercury.
The
State of
Wisconsin has recently developed a revised draft rule to Chapter NR 446 that
requires a 40% reduction from the 2002 through 2004 baseline beginning January
1, 2010 through the end of 2014. Beginning in 2015, electric
generating units above 150 megawatts will be required to reduce emissions by
90%. Reductions can be phased in and the 90% target can be delayed
until 2021 if additional sulfur dioxide and nitrogen oxide reductions are
implemented. By 2015, electric generating units above
25
megawatts
but less
than 150 megawatts must reduce their mercury emissions to a level defined as
Best Available Control Technology. This rule has been approved by the
state Natural Resources Board and is now under consideration by the state
legislature. WPSC estimates capital costs of approximately
$25 million for phase one, which includes estimates for both wholly-owned
and jointly-owned plants, to achieve the proposed reductions in the State's
revised draft rule. These costs may change based on the requirements
of the final rule. The capital costs are expected to be recovered in
future rate cases. In May 2008, a group of industry stakeholders
filed suit, claiming that the WDNR’s mercury rulemaking process violates a state
statute. The court ruled against the challenge but a new suit is
likely to be filed.
Following
the
promulgation of a federal mercury control and monitoring rule in 2005 by the
EPA, the State of Wisconsin filed suit along with other states in opposition
of
the rule. On February 8, 2008, the U.S. Court of Appeals for the
District of Columbia Circuit ruled in favor of the petitioners and vacated
the
federal rule. In May 2008, the EPA’s appeal of the ruling was
denied. The EPA is reviewing options for a new
rulemaking.
Sulfur
Dioxide and Nitrogen Oxide
The
EPA issued the
Clean Air Interstate Rule (formerly known as the Interstate Air Quality Rule),
in 2005. The rule was intended to reduce sulfur dioxide and nitrogen
oxide emissions from utility boilers located in 29 states, including Wisconsin,
Michigan, Pennsylvania, and New York. The Clean Air Interstate Rule
required reduction of sulfur dioxide and nitrogen oxide emissions in two
phases. The first phase required about a 50% reduction beginning in
2009 for nitrogen oxide and beginning in 2010 for sulfur dioxide. The
second phase was to begin in 2015 for both pollutants and required about a
65%
reduction in emissions. The rule allowed 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, had completed the state legislative review and had been forwarded
to
the EPA for final review.
On
July 11, 2008, the U.S. Court of Appeals for the District of Columbia issued
a
decision vacating the Clean Air Interstate Rule and the associated Federal
Implementation Plan. The EPA, state regulatory agencies, and affected
facilities are reviewing the impacts of the court decision.
Prior
to this court
decision, WPSC was evaluating a number of options, including using the cap
and
trade program and/or installing controls. Since the court decision,
the value of annual nitrogen oxide emission allowances that were to be utilized
in the cap and trade program under the Clean Air Interstate Rule has decreased
significantly. WPSC does not currently own any annual nitrogen oxide
emission allowances, however at the time of the court decision WPSC had entered
into contracts for the purchase of a small amount of ozone seasonal nitrogen
oxide emission allowances in 2009 through 2012 and was in the process of
negotiating the purchase of annual nitrogen oxide emission allowances in
2009. Whether WPSC ultimately acquires any annual nitrogen oxide
emission allowances or not, WPSC does not expect any material impact as a result
of the vacatur of the Clean Air Interstate Rule with respect to nitrogen oxide
emission allowances. For planning purposes, it is still 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 still required, WPSC estimates capital costs of
$533 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 state and federal
rules. The capital costs are anticipated to be recovered in future
rate cases.
Manufactured
Gas Plant
Remediation
Integrys
Energy
Group's 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 utility 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
$695.3 million of future undiscounted investigation and cleanup costs as of
June 30, 2008. Integrys Energy Group recorded a regulatory asset
of $736.1 million, net of insurance recoveries received of $53.1 million,
related to the recovery of both unrecovered expenditures and estimated future
expenditures as of June 30, 2008.
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 has
identified NSG as a potentially responsible party (PRP) under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
(CERCLA), at the Waukegan Coke Plant Site located in Waukegan, Illinois
(Waukegan Site). The Waukegan Site is part of the Outboard Marine
Corporation (OMC) Superfund Site. The EPA also identified OMC,
General Motors Corporation, and certain other parties as 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 $27.0 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 reduced the financial assurance requirement to
$21.0 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. In
April 2005, River Village West filed suit against PGL in the United States
District Court for the Northern District of Illinois under 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
the RCRA. The suit, Thomas A. Snitzer v. The Peoples Gas Light and
Coke Company, No. 06-C-4465 (N.D. III. 2006) (Snitzer I), seeks an order
directing PGL to remediate the Willow Street Station former manufactured gas
plant site which is located along the Chicago River. 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 operating 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.
Construction
has
commenced in order to restore Silver Lake for power generation. UPPCO
continues to work with a board of consultants and the FERC to oversee the design
and construction process. It is anticipated that construction could
be finished by the end of 2008, but completion depends largely on site
conditions.
Former
Mineral Processing
Site in Denver, Colorado
In
1994, NSG received a demand for reimbursement, indemnification, and contribution
for response costs incurred with respect to the cleanup of a former mineral
processing site in Denver, Colorado. The demand from the S.W.
Shattuck Chemical Company, Inc. alleges that NSG is a successor to the liability
of a former entity that was allegedly responsible during the period 1934 through
1941 for the disposal of mineral processing wastes containing radium and other
hazardous substances at the site. In 1992, the EPA issued 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, in particular from the combustion of fossil
fuels. 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. Efforts are underway within the utility
industry to find a feasible method for capturing carbon dioxide from pulverized
coal-fired units and 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 that 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, as well as gains, losses, and costs
incurred under PGL’s and NSG’s hedging program (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 companies 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, PEC
agreed to make payments of up to $30.0 million toward the funding of
conservation and weatherization programs for low and moderate income
customers. PGL and NSG will not seek recovery in any future rate or
reconciliation cases of any amounts associated with these conservation
programs. At the date of the PEC merger, $25.0 million of that
amount had not yet been paid, and was recorded as a preacquisition
contingency. As of June 30, 2008, $20.0 million remained
unpaid, of which $5.0 million was included in other current liabilities,
and $15.0 million was included in other long-term
liabilities. PGL and NSG also refunded certain amounts related to
fiscal 2001 through 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 settlement 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 settlement agreement with respect to the hardship
program.
In
the settlement agreement, 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 was performed by a consulting firm
retained by the ICC. The ICC staff filed the auditor’s report on
April 10, 2008. The report included 32 recommendations, most of which
are for PGL and NSG to prepare various studies and analyses or implement changes
to certain practices and
procedures. None
of the recommendations quantified natural gas costs that the auditor believed
should not be recovered by PGL and NSG. PGL and NSG filed a response
to the auditor’s report on June 30, 2008, in which they agreed to
implement 25 of the recommendations. The ICC staff may file a reply
to PGL’s and NSG’s response.
The
fiscal 2005 Gas
Charge reconciliation cases were initiated in November 2005. The
settlement of the prior fiscal years' Gas Charge reconciliation proceedings
did
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 were for adjustments to the amount
recorded as 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
natural 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
ICC denied rehearing on February 27, 2008, and PGL and NSG did not appeal this
matter. The customer refunds from the 2005 Gas Charge reconciliation
cases have been accounted for as a preacquisition
contingency. Pursuant to the ICC orders, PGL and NSG refunded
customers $22.6 million and $1.1 million, respectively, including
interest, during the first half of 2008.
The
fiscal 2006 Gas
Charge reconciliation cases were initiated on November 21, 2006. PGL
and NSG filed their direct testimony on April 10, 2007. On May 16,
2007, the ICC initiated Gas Charge reconciliation cases for the period of
October 2006 through December 2006 to cover the gap created by PGL and
NSG's move to a calendar year reconciliation period. 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. On July 22, 2008, the ICC staff and
intervenors (the AG, the Citizens Utility Board, and the City of Chicago, filing
jointly) each filed testimony recommending disallowances for PGL and NSG for
a
bank gas liability adjustment similar to that addressed in the fiscal 2005
Gas
Charge reconciliation case. In addition, the intervenors recommended
a disallowance for PGL of $13.9 million associated with PGL’s provision of
interstate hub services. A hearing is set for December 11,
2008. As of June 30, 2008, the amounts recorded as a
liability 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. PGL and NSG filed direct testimony on April 15,
2008. A status hearing is scheduled for
October 8, 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. In the suit, Alport et al. v. Peoples Energy
Corporation, the plaintiffs seek 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 by PEC and that PEC acted in concert with
others to commit a tortious act. PEC denies the allegations and is
vigorously defending the suit. On July 30, 2008, the plaintiffs filed
a motion for class certification.
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
$1.0 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 issued.
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' claim for 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 a second amended complaint with the Circuit
Court. PGL and NSG responded by filing a motion to dismiss on August
31, 2007. This motion was granted on April 16, 2008, and this
matter was dismissed. The plaintiffs filed a motion for
reconsideration of the dismissal, and this motion was denied on August 4,
2008. The plaintiffs may now appeal the order and may still file
individual complaints with the ICC, but Integrys Energy Group does not know
if,
or when, any such appeal or complaints will be filed.
NOTE 13--GUARANTEES
The
following table
shows outstanding guarantees at Integrys Energy Group at June 30,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration
|
(Millions)
|
|
|
Total
Amounts
Committed
at
June 30,
2008
|
|
|
|
Less
Than
1
Year
|
|
|
|
1
to 3
Years
|
|
|
|
4
to 5
Years
|
|
|
|
Over
5
Years
|
|
Guarantees
supporting commodity transactions of subsidiaries(1)
|
|
$ |
2,132.7 |
|
|
$ |
1,586.3 |
|
|
$ |
417.0 |
|
|
$ |
29.4 |
|
|
$ |
100.0 |
|
Guarantees
of
subsidiary debt and revolving
line of credit(2)
|
|
|
928.1 |
|
|
|
175.0 |
|
|
|
725.0 |
|
|
|
- |
|
|
|
28.1 |
|
Standby
letters of credit(3)
|
|
|
391.9 |
|
|
|
388.8 |
|
|
|
3.1 |
|
|
|
- |
|
|
|
- |
|
Surety
bonds(4)
|
|
|
1.7 |
|
|
|
1.7 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
guarantees(5)
|
|
|
8.4 |
|
|
|
- |
|
|
|
8.4 |
|
|
|
- |
|
|
|
- |
|
Total
guarantees
|
|
$ |
3,462.8 |
|
|
$ |
2,151.8 |
|
|
$ |
1,153.5 |
|
|
$ |
29.4 |
|
|
$ |
128.1 |
|
(1)
|
Consists
of
parental guarantees of $1,966.0 million to support the business
operations of Integrys Energy Services, of which $5.0 million
received specific authorization from Integrys Energy Group’s Board of
Directors and was not subject to the guarantee limit discussed below;
$75.3 million and $86.4 million, respectively, related
|
|
to
natural gas
supply at MGUC and MERC, of an authorized $100.0 million and
$150.0 million, respectively; and $5.0 million, of an authorized
$125.0 million, to support business operations at
PEC. These guarantees are not reflected in the Condensed
Consolidated Balance Sheets.
|
(2)
|
Consists
of 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
$175.0 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 below. Parental guarantees related to
subsidiary debt and credit agreements outstanding are not included
in the
Condensed Consolidated Balance Sheets.
|
(3)
|
Comprised
of
$386.7 million 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 issued for workers compensation coverage in Illinois;
and $0.9 million related to letters of credit at UPPCO, MGUC, and
MERC. These amounts are not reflected in the Condensed
Consolidated Balance Sheets.
|
(4)
|
Primarily
for
workers compensation coverage and obtaining various licenses, permits,
and
rights of way. Surety bonds are not included in the Condensed Consolidated
Balance Sheets.
|
(5)
|
Includes
(1) 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
Condensed Consolidated Balance Sheets, as this agreement was entered
into
prior to the effective date of FASB Interpretation No. 45, “Guarantor's
Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees
of
Indebtedness of Others—an interpretation of FASB Statements No. 5, 57, and
107 and rescission of FASB Interpretation No. 34.” The
maximum exposure related to this guarantee was $3.7 million at
June 30, 2008; (2) 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 nuclear power
plant's scheduled maintenance period in 2009. As of
June 30, 2008, WPSC had paid $6.4 million to Dominion
related to this guarantee, reducing the liability to $2.4 million;
and (3) 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 $0.1 million liability was recorded related to
this indemnification at June 30, 2008.
|
Integrys
Energy
Group has provided total parental guarantees of $2,559.0 million on behalf
of Integrys Energy Services. Integrys Energy Group's exposure under
these guarantees related to open transactions at June 30, 2008, was
approximately $914 million. At June 30, 2008, management
was authorized to issue corporate guarantees up to an aggregate amount of $2.6
billion to support the business operations of Integrys Energy
Services. The following outstanding amounts are subject to this
limit:
(Millions)
|
|
June 30,
2008
|
|
Guarantees
supporting commodity transactions of subsidiaries
|
|
$ |
1,961.0 |
|
Guarantees
of
subsidiary debt
|
|
|
176.1 |
|
Standby
letters of credit
|
|
|
384.2 |
|
Surety
bonds
|
|
|
0.9 |
|
Total
guarantees subject to $2.6 billion limit
|
|
$ |
2,522.2 |
|
NOTE 14--EMPLOYEE
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. In addition, Integrys Energy Group and
its subsidiaries offer multiple postretirement benefit plans to
employees.
The
following table
shows the components of net periodic benefit cost for Integrys Energy Group's
benefit plans for the three and six months ended June 30, 2008, and
2007. Costs related to the PEC benefit plans are included after the
February 21, 2007 merger date.
|
|
Pension
Benefits
|
|
|
Other
Postretirement
Benefits
|
|
|
|
Three
Months Ended June 30
|
|
|
Six
Months
Ended
June 30
|
|
|
Three
Months
Ended
June 30
|
|
|
Six
Months
Ended
June 30
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Service
cost
|
|
$ |
8.8 |
|
|
$ |
10.4 |
|
|
$ |
19.2 |
|
|
$ |
18.6 |
|
|
$ |
3.6 |
|
|
$ |
4.0 |
|
|
$ |
7.8 |
|
|
$ |
7.2 |
|
Interest
cost
|
|
|
19.3 |
|
|
|
18.5 |
|
|
|
38.1 |
|
|
|
32.6 |
|
|
|
6.4 |
|
|
|
6.3 |
|
|
|
12.8 |
|
|
|
11.7 |
|
Expected
return on plan assets
|
|
|
(25.1 |
) |
|
|
(22.1 |
) |
|
|
(50.4 |
) |
|
|
(38.0 |
) |
|
|
(4.5 |
) |
|
|
(4.4 |
) |
|
|
(9.2 |
) |
|
|
(8.5 |
) |
Amortization
of transition obligation
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.4 |
|
|
|
0.1 |
|
|
|
0.7 |
|
Amortization
of prior service cost (credit)
|
|
|
1.3 |
|
|
|
1.9 |
|
|
|
2.5 |
|
|
|
3.4 |
|
|
|
(0.9 |
) |
|
|
(0.5 |
) |
|
|
(1.9 |
) |
|
|
(1.1 |
) |
Amortization
of net actuarial loss (gain)
|
|
|
- |
|
|
|
4.0 |
|
|
|
0.4 |
|
|
|
7.2 |
|
|
|
(0.3 |
) |
|
|
0.8 |
|
|
|
(0.1 |
) |
|
|
1.6 |
|
Amortization
of merger-related regulatory
adjustment
|
|
|
1.5 |
|
|
|
- |
|
|
|
4.1 |
|
|
|
- |
|
|
|
0.3 |
|
|
|
- |
|
|
|
1.1 |
|
|
|
- |
|
Net
periodic benefit cost
|
|
$ |
5.8 |
|
|
$ |
12.7 |
|
|
$ |
13.9 |
|
|
$ |
23.8 |
|
|
$ |
4.6 |
|
|
$ |
6.6 |
|
|
$ |
10.6 |
|
|
$ |
11.6 |
|
Transition
obligations, prior service costs (credits), and net actuarial losses (gains)
that have not yet been recognized as a component of net periodic benefit cost
are included in accumulated other comprehensive income for Integrys Energy
Group's nonregulated entities and are recorded as net regulatory assets for
the
utilities, pursuant to SFAS No. 71, “Accounting for the Effects of
Certain
Types of Regulation.” All amounts amortized for merger-related
regulatory adjustments are from regulatory assets, as these relate to the
utilities.
Contributions
to
the plans are made in accordance with legal and tax requirements and do not
necessarily occur evenly throughout the year. For the six months
ended June 30, 2008, $10.5 million of contributions were made to the
pension benefit plans and no contributions were made to the other postretirement
benefit plans. Integrys Energy Group expects to contribute $14.3 and
$7.3 to its pension and other postretirement benefit plans, respectively, during
the remainder of 2008.
NOTE 15--STOCK-BASED
COMPENSATION
Stock
Options
The
fair value of
stock option awards granted in February 2008 was estimated using a binomial
lattice model. The expected term of option awards is calculated based
on historical exercise behavior. The risk-free interest rate is based
on the United States Treasury yield curve. The expected dividend
yield incorporates the current dividend rate as well as historical dividend
increase patterns. Integrys Energy Group's expected stock price
volatility was estimated using its 10-year historical volatility. The
following table shows the weighted-average fair value along with the assumptions
incorporated into the valuation model:
|
|
February
2008 Grant
|
|
Weighted-average
fair value
|
|
$ |
4.52 |
|
Expected
term
|
|
7
years
|
|
Risk-free
interest rate
|
|
|
3.40 |
% |
Expected
dividend yield
|
|
|
5.00 |
% |
Expected
volatility
|
|
|
17 |
% |
Total
pre-tax
compensation cost recognized for stock options during the three and six months
ended June 30, 2008, and 2007, was insignificant. As of
June 30, 2008, $3.0 million of total pre-tax compensation cost related
to unvested and outstanding stock options is expected to be recognized over
a
weighted-average period of 3.1 years.
A
summary of stock option activity for the six months ended June 30, 2008,
and information related to outstanding and exercisable stock options at
June 30, 2008, 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, 2007
|
|
|
2,215,999 |
|
|
$ |
47.81 |
|
|
|
|
|
|
|
Granted
|
|
|
684,404 |
|
|
|
48.36 |
|
|
|
|
|
|
|
Exercised
|
|
|
38,475 |
|
|
|
46.01 |
|
|
|
|
|
$ |
0.2 |
|
Forfeited
|
|
|
112,393 |
|
|
|
51.29 |
|
|
|
|
|
|
0.2 |
|
Outstanding
at June 30, 2008
|
|
|
2,749,535 |
|
|
$ |
47.83 |
|
|
|
6.94 |
|
|
$ |
11.8 |
|
Exercisable
at June 30, 2008
|
|
|
1,501,296 |
|
|
$ |
42.62 |
|
|
|
5.07 |
|
|
$ |
10.1 |
|
The
aggregate
intrinsic value for outstanding and exercisable options in the above table
represents the total pre-tax intrinsic value that would have been received
by
the option holders had they all exercised their options at June 30,
2008. This is calculated as the difference between Integrys Energy
Group's closing stock price on June 30, 2008, and the option exercise
price, multiplied by the number of in-the-money stock options.
Performance
Stock Rights
The
fair value of
performance stock rights granted in February 2008 was estimated using a Monte
Carlo valuation model, incorporating the assumptions in the table
below. The risk-free interest rate is based on the United States
Treasury yield curve. The expected dividend yield incorporates the
dividend rate at the measurement date. The expected volatility was
estimated using three years of historical data.
|
|
February
2008 Grant
|
|
Expected
term
|
|
3
years
|
|
Risk-free
interest rate
|
|
|
2.18
|
% |
Expected
dividend yield
|
|
|
5.50 |
%
|
Expected
volatility
|
|
|
17 |
% |
Pre-tax
compensation cost recorded for performance stock rights for the three months
ended June 30, 2008, and 2007, was insignificant. Pre-tax
compensation cost recorded for performance stock rights for the six months
ended
June 30, 2008, and 2007, was $2.8 million and $1.7 million,
respectively. The total compensation cost capitalized during the same
periods was insignificant. As of June 30, 2008,
$4.9 million of total pre-tax compensation cost related to unvested and
outstanding performance stock rights is expected to be recognized over a
weighted-average period of 2.2 years.
A
summary of activity related to performance stock rights for the six months
ended
June 30, 2008, is presented below:
|
|
Performance
Stock
Rights
|
|
|
Weighted-Average
Grant
Date Fair Value
|
|
Outstanding
at December 31, 2007
|
|
|
217,458 |
|
|
$ |
48.72 |
|
Granted
|
|
|
125,600 |
|
|
$ |
49.22 |
|
Expired
|
|
|
54,207 |
|
|
$ |
41.62 |
|
Forfeited
|
|
|
22,991 |
|
|
$ |
51.64 |
|
Outstanding
at June 30, 2008
|
|
|
265,860 |
|
|
$ |
50.15 |
|
No
performance shares were distributed during the six months ended June 30,
2008.
Restricted
Shares and Restricted Share Units
The
fair value of
restricted share unit awards granted in February 2008 was based on Integrys
Energy Group’s closing stock price on the day the awards were
granted.
During
the three
months ended June 30, 2008, and 2007, an insignificant amount of
compensation cost was recorded related to restricted share and restricted share
unit awards. Compensation cost recorded for restricted share and
restricted share unit awards was $2.2 million for the six months ended
June 30, 2008, and an insignificant amount was recorded for the six
months ended June 30, 2007. The total compensation cost
capitalized during the same periods was insignificant. As of
June 30, 2008, $8.3 million of total pre-tax compensation cost related
to these awards is expected to be recognized over a weighted-average period
of
3.2 years.
A
summary of activity related to restricted share and restricted share unit awards
for the six months ended June 30, 2008, is presented below:
|
|
Restricted
Share and Restricted Share Unit Awards
|
|
|
Weighted-Average
Grant
Date Fair Value
|
|
Outstanding
at December 31, 2007
|
|
|
101,145 |
|
|
$ |
54.70 |
|
Granted
|
|
|
172,815 |
|
|
|
48.36 |
|
Distributed
|
|
|
8,809 |
|
|
|
58.65 |
|
Forfeited
|
|
|
12,155 |
|
|
|
51.08 |
|
Outstanding
at June 30, 2008
|
|
|
252,996 |
|
|
$ |
50.40 |
|
NOTE 16--COMPREHENSIVE
INCOME
Integrys
Energy
Group's total comprehensive income was as follows:
|
|
Three
Months Ended June 30
|
|
|
Six
Months
Ended
June 30
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Income
(loss)
available for common shareholders
|
|
$ |
24.1 |
|
|
$ |
(16.4 |
) |
|
$ |
159.9 |
|
|
$ |
123.0 |
|
Cash
flow
hedges, net of tax *
|
|
|
(2.1 |
) |
|
|
16.7 |
|
|
|
(9.0 |
) |
|
|
2.4 |
|
SFAS
No. 158
amortizations, net of tax
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.4 |
|
Foreign
currency translation, net of tax
|
|
|
0.2 |
|
|
|
1.9 |
|
|
|
(0.8 |
) |
|
|
2.0 |
|
Unrealized
gain (loss) on available-for-sale securities, net of
tax
|
|
|
0.3 |
|
|
|
- |
|
|
|
(0.1 |
) |
|
|
- |
|
Total
comprehensive income
|
|
$ |
22.5 |
|
|
$ |
2.2 |
|
|
$ |
150.0 |
|
|
$ |
127.8 |
|
|
*
|
Taxes
on cash
flow hedges were $(1.3) million and $10.4 million for the three
months ended June 30, 2008, and 2007, respectively, and were
$(5.5) million and $1.5 million for the six months ended
June 30, 2008, and 2007, respectively.
|
The
following table
shows the changes to Integrys Energy Group’s accumulated other comprehensive
loss from December 31, 2007, to June 30, 2008.
(Millions)
|
|
|
|
December 31,
2007 balance
|
|
$ |
(1.3 |
) |
Cash
flow
hedges
|
|
|
(9.0 |
) |
Foreign
currency translation
|
|
|
(0.8 |
) |
Available-for-sale
securities
|
|
|
(0.1 |
) |
June 30,
2008 balance
|
|
$ |
(11.2 |
) |
NOTE 17--COMMON
EQUITY
Integrys
Energy
Group shares issued at June 30, 2008, and December 31, 2007,
were:
|
|
June 30,
2008
|
|
|
December 31,
2007
|
|
Common
stock,
$1 par value, 200,000,000 shares authorized
|
|
|
76,348,748 |
|
|
|
76,340,756 |
|
Treasury
shares
|
|
|
7,000 |
|
|
|
10,000 |
|
Average
cost
of treasury shares
|
|
$ |
25.19 |
|
|
$ |
25.19 |
|
Shares
in
deferred compensation rabbi trust
|
|
|
356,876 |
|
|
|
338,522 |
|
Average
cost
of deferred compensation rabbi trust shares
|
|
$ |
44.30 |
|
|
$ |
43.48 |
|
Restricted
stock
|
|
|
81,747 |
|
|
|
93,339 |
|
Average
cost
of restricted stock
|
|
$ |
54.24 |
|
|
$ |
54.76 |
|
Integrys
Energy
Group had the following changes to common stock during the six months ended
June 30, 2008:
Integrys
Energy Group's common stock shares
|
|
|
|
|
|
|
|
Common
stock
at December 31, 2007
|
|
|
76,340,756 |
|
Shares
purchased for stock-based compensation *
|
|
|
(1,268 |
) |
Vesting
of
restricted stock
|
|
|
9,260 |
|
Common
stock at June 30, 2008
|
|
|
76,348,748 |
|
*
|
In
the first
six months of 2008, Integrys Energy Group purchased shares of its
common
stock on the open market to meet the requirements of its Stock Investment
Plan and certain stock-based compensation plans. During 2007, Integrys
Energy Group issued new shares of common stock to meet these requirements.
|
Basic
earnings per
share are computed by dividing income available for common shareholders by
the
weighted average number of common stock shares outstanding during the
period. Diluted earnings per share are computed by dividing income
available for common shareholders by the weighted average number of common
stock
shares 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
restricted stock. The calculation of diluted earnings per share for
the periods 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:
|
|
Three
Months Ended June 30
|
|
|
Six
Months Ended June 30
|
|
(Millions,
except per share amounts)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss)
from continuing operations
|
|
$ |
24.8 |
|
|
$ |
(39.6 |
) |
|
$ |
161.4 |
|
|
$ |
77.6 |
|
Discontinued
operations, net of tax
|
|
|
0.1 |
|
|
|
24.0 |
|
|
|
0.1 |
|
|
|
47.0 |
|
Preferred
stock dividends declared
|
|
|
(0.8 |
) |
|
|
(0.8 |
) |
|
|
(1.6 |
) |
|
|
(1.6 |
) |
Net
earnings
(loss) available for common shareholders
|
|
$ |
24.1 |
|
|
$ |
(16.4 |
) |
|
$ |
159.9 |
|
|
$ |
123.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares of common stock – basic
|
|
|
76.6 |
|
|
|
76.0 |
|
|
|
76.6 |
|
|
|
66.8 |
|
Effect
of
dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
0.3 |
|
|
|
- |
|
|
|
0.3 |
|
|
|
0.3 |
|
Average
shares of common stock – diluted
|
|
|
76.9 |
|
|
|
76.0 |
|
|
|
76.9 |
|
|
|
67.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
(loss) per share of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.31 |
|
|
$ |
(0.22 |
) |
|
$ |
2.09 |
|
|
$ |
1.84 |
|
Diluted
|
|
|
0.31 |
|
|
|
(0.22 |
) |
|
|
2.08 |
|
|
|
1.83 |
|
NOTE 18--FAIR
VALUE
Implementation
of SFAS No.
157
Effective
January 1, 2008, Integrys Energy
Group adopted
SFAS No. 157, “Fair Value
Measurements.” This standard defines
fair
value and requires enhanced disclosures about assets and liabilities carried
at
fair value. As of June 30, 2008, these additional disclosures are
required
only for financial assets and
liabilities measured at fair value and for nonfinancial assets and liabilities
measured at fair value on a recurring basis, following the guidance in FASB
Staff Position FAS 157-2, “Effective Date of FASB
Statement
No.157."
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 specifies that
transaction costs should not be considered in the determination of fair
value. On January 1, 2008, Integrys Energy Group recognized an
increase to nonregulated revenues of $11.0 million due to the exclusion of
transaction costs from Integrys Energy Services' fair value
estimates.
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 recognized a pre-tax cumulative effect increase to retained
earnings of $4.5 million on January 1, 2008, related to the
nullification of Issue No. 02-3.
In
conjunction with the implementation
of SFAS No. 157, Integrys Energy Services determined that the unit of account
for its derivative
instruments is the individual contract level; accordingly, these contracts
are
now presented on the Condensed Consolidated Balance Sheets as assets or
liabilities based on the nature of the individual
contract.
Fair
Value
Disclosures
According
to SFAS
No. 157, fair value is the price that would be received to sell an asset or
paid
to transfer a liability in an orderly transaction between market participants
at
the measurement date (exit price). However, as permitted under SFAS
No. 157, Integrys Energy Group utilizes a mid-market pricing convention (the
mid-point price between bid and ask prices) as a practical expedient for valuing
certain derivative assets and liabilities. SFAS No. 157 establishes a
fair value hierarchy that prioritizes the inputs used to measure fair
value. The hierarchy gives the highest priority to unadjusted quoted
prices in active markets for identical assets or liabilities (Level 1
measurement) and the lowest priority to unobservable inputs (Level 3
measurement). The three levels of the fair value hierarchy defined by
SFAS No. 157 are as follows:
Level
1 – Quoted
prices are available in active markets for identical assets or liabilities
as of
the reporting date. Active markets are those in which transactions for the
asset or liability occur in sufficient frequency and volume to provide pricing
information on an ongoing basis.
Level
2 – Pricing
inputs are observable, either directly or indirectly, but are not quoted prices
included within Level 1. Level 2 includes those financial instruments
that are valued using external inputs within models or other valuation
methodologies.
Level
3 – Pricing
inputs include significant inputs that are generally less observable from
objective sources. These inputs may be used with internally developed
methodologies that result in management’s best estimate of fair
value. Level 3 instruments include those that may be more structured
or otherwise tailored to customers’ needs.
As
required by SFAS No. 157, financial assets and liabilities are classified in
their entirety based on the lowest level of input that is significant to the
fair value measurement. The following table shows Integrys Energy
Group’s financial assets and liabilities that were accounted for at fair value
on a recurring basis as of June 30, 2008, categorized by level within the
fair value hierarchy.
(Millions)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk
management assets
|
|
$ |
1,159.8 |
|
|
$ |
2,444.8 |
|
|
$ |
1,195.4 |
|
|
$ |
4,800.0 |
|
Inventory
hedged by fair value hedges
|
|
|
- |
|
|
|
168.0 |
|
|
|
- |
|
|
|
168.0 |
|
Other
|
|
|
1.3 |
|
|
|
- |
|
|
|
- |
|
|
|
1.3 |
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk
management liabilities
|
|
|
1,275.5 |
|
|
|
1,946.4 |
|
|
|
1,299.4 |
|
|
|
4,521.3 |
|
Long-term
debt hedged by fair value hedge
|
|
|
- |
|
|
|
50.1 |
|
|
|
- |
|
|
|
50.1 |
|
Deferred
compensation
liability
|
|
|
9.7 |
|
|
|
- |
|
|
|
- |
|
|
|
9.7 |
|
The
determination
of the fair values above incorporates various factors required under SFAS No.
157. These factors include not only the credit standing of the
counterparties involved, but also the impact of the Company’s nonperformance
risk on its liabilities.
The
risk management
assets and liabilities listed in the table include options, swaps, futures,
physical commodity contracts, and other instruments used to manage market risks
related to changes in commodity prices and interest rates. For more
information on Integrys Energy Group’s derivative instruments, see Note 3,
“Risk Management
Activities.”
When
possible,
Integrys Energy Group bases the valuations of its risk management assets and
liabilities on quoted prices for identical assets in active
markets. These valuations are classified in Level 1. The
valuations of certain contracts are based on NYMEX prices with an adjustment
related to transportation, and certain derivative instruments are valued using
broker quotes or prices for similar contracts at the reporting
date. These valuations are classified in Level 2.
Certain
derivatives
are categorized in Level 3 due to the significance of unobservable or
internally-developed inputs. The primary reasons for a Level 3
classification are as follows:
●
|
While
price
curves may have been based on broker quotes or other external sources,
significant assumptions may have been made regarding seasonal or
monthly
shaping and locational basis differentials.
|
●
|
Certain
transactions were valued using price curves that extended beyond
the
quoted period. Assumptions were made to extrapolate prices from
the last quoted period through the end of the transaction
term.
|
●
|
The
valuations of certain transactions were based on internal models,
although
external inputs were utilized in the
valuation.
|
The
deferred
compensation liability in the table above includes only the portion that is
payable in cash and invested in hypothetical investment options that are indexed
to Integrys Energy Group’s common stock or mutual funds. Integrys
Energy Group bases the valuation of these components of the deferred
compensation liability on the closing price of Integrys Energy Group’s common
stock from the NYSE and on published values of a variety of mutual
funds.
The
following table sets forth a reconciliation
of changes
in the fair value of items categorized as Level 3
measurements:
(Millions)
|
|
Three
Months Ended June 30,
2008
|
|
|
Six
Months Ended June 30,
2008
|
|
Balance
at the beginning of
period
|
|
$ |
86.7 |
|
|
$ |
44.6 |
|
Net
realized and unrealized losses
included in earnings
|
|
|
(137.7 |
)
|
|
|
(83.0 |
)
|
Net
unrealized gains (losses)
recorded as regulatoryassets or
liabilities
|
|
|
2.0 |
|
|
|
(5.4 |
)
|
Net
unrealized gains included in
other comprehensiveincome
|
|
|
19.1 |
|
|
|
26.0 |
|
Net
purchases and
settlements
|
|
|
(4.4 |
)
|
|
|
(20.5 |
)
|
Net
transfers in/out of Level
3
|
|
|
(69.7 |
)
|
|
|
(65.7 |
)
|
Balance
at June 30,
2008
|
|
$ |
(104.0 |
)
|
|
$ |
(104.0 |
)
|
|
|
|
|
|
|
|
|
|
Net
change in unrealized losses
included in earningsrelated to
instruments still held
at June 30, 2008
|
|
$ |
(143.5 |
)
|
|
$ |
(91.7 |
)
|
Unrealized
gains
and losses included in earnings related to Integrys Energy Services’ risk
management assets and liabilities are recorded through nonregulated revenue
on
the Condensed Consolidated Statements of Income. Realized gains and
losses on these same instruments are recorded in nonregulated revenue or
nonregulated cost of fuel, natural gas, and purchased power, depending on the
nature of the instrument. Unrealized gains and losses on Level 3
derivatives at the utilities are deferred as regulatory assets or liabilities,
pursuant to SFAS No. 71. Therefore, these fair value measurements
have no impact on earnings. Realized gains and losses on these
instruments flow through utility cost of fuel, natural gas, and purchased
power.
NOTE 19--MISCELLANEOUS
INCOME
Integrys
Energy
Group's total miscellaneous income was as follows:
|
|
Three
Months Ended June 30
|
|
|
Six
Months
Ended
June 30
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Equity
earnings on investments
|
|
$ |
16.1 |
|
|
$ |
7.5 |
|
|
$ |
30.7 |
|
|
$ |
15.1 |
|
Interest
and
dividend income
|
|
|
2.9 |
|
|
|
4.2 |
|
|
|
4.4 |
|
|
|
6.8 |
|
Weston
4 ATC
interconnection agreement
|
|
|
0.7 |
|
|
|
0.8 |
|
|
|
2.5 |
|
|
|
1.3 |
|
Gain
(loss)
on investments
|
|
|
(0.3 |
) |
|
|
2.1 |
|
|
|
(0.3 |
) |
|
|
2.8 |
|
Gain
(loss)
on foreign currency exchange
|
|
|
0.4 |
|
|
|
5.8 |
|
|
|
(0.4 |
) |
|
|
6.6 |
|
Other
|
|
|
2.9 |
|
|
|
1.2 |
|
|
|
3.9 |
|
|
|
1.3 |
|
Total
miscellaneous income
|
|
$ |
22.7 |
|
|
$ |
21.6 |
|
|
$ |
40.8 |
|
|
$ |
33.9 |
|
NOTE 20--REGULATORY
ENVIRONMENT
Wisconsin
Rate
Cases
On
April 1, 2008, WPSC filed a request with the PSCW to increase retail electric
and natural gas rates $106.8 million (7.8%) and $11.7 million (2.2%),
respectively, to be effective January 1, 2009. The request was based
on rates in effect at the time of the filing. This filing also
included a request to increase retail electric rates $3.5 million (0.3%) in
2010, as well as a request for authority to file for an adjustment to retail
electric rates, effective January 1, 2010, for changes in fuel,
purchased power, and related costs. The proposed retail electric rate
increase for 2009 is driven by the completion of the refund to retail electric
customers of the non-qualified decommissioning trust fund related to the sale
of
the Kewaunee nuclear power plant, the cost of operating Weston 4, increased
electric transmission costs, and recovery of costs associated with the lightning
strike and subsequent outage at Weston 3. The retail electric rate
filing for 2009 did not include recovery of both operation and maintenance
costs
and capital costs associated with the proposed Iowa wind project, however
subsequent approval was received which increased the rate request for 2009
by
$10.4 million (1.1%). The proposed retail natural gas rate
increase is required primarily because of costs associated with the construction
of the natural gas laterals connecting the WPSC natural gas distribution system
to the new Guardian II natural gas pipeline.
On
February 11, 2008, WPSC filed an application with the PSCW to adjust its 2008
rates for fuel and purchased power costs, requesting an increase in retail
electric rates due to a delay in the in-service date of the Weston 4 power
plant, increased coal and coal transportation costs, and increased natural
gas
costs. The PSCW approved an interim annual rate increase of
$29.7 million on March 20, 2008, and an additional final rate increase
of $18.3 million, effective July 4, 2008.
On
January 15, 2008, the PSCW issued a final written order authorizing a retail
electric rate increase of $23.0 million (2.5%), which included recovery of
deferred 2005 and 2006 MISO Day 2 costs over a one-year period and increased
electric transmission costs. The new rates became effective
January 16, 2008.
On
January 11, 2007, the PSCW issued a final written order authorizing a retail
electric rate increase of $56.7 million (6.6%) and a retail natural gas
rate increase of $18.9 million (3.8%), 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.
Weston
3
Outage
On
October 6, 2007, Weston 3, a
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, turbine rotors, and boiler feed pumps. WPSC incurred
approximately $7 million of incremental pre-tax non-fuel operating and
maintenance expenditures through January 14, 2008, to repair and return Weston
3
to service. WPSC has insurance in place that is expected to cover all
equipment damage costs, less a $1.0 million deductible. WPSC
also incurred a total of $26.6 million of incremental pre-tax fuel and
purchased power costs during the 14-week outage. WPSC was granted
approval from the PSCW to defer the replacement purchased power costs for the
Wisconsinretail
portion of these costs and was
granted approval retroactive to October 6, 2007. Assuming
favorable outcomes for the recovery of deferred replacement purchased power
costs from customers, and non-fuel operating and maintenance expenses from
insurance proceeds, WPSC does not expect this incident to have a material impact
on earnings.
It
is anticipated that WPSC will recover
replacement purchased power costs for the Michiganretail
portion of these costs through
the annual power supply cost recovery mechanism.
Michigan
On
May 16, 2008, MGUC filed a request with the MPSC to increase retail natural
gas
rates $13.9 million (5.8%). The proposed rate increase is
required because of increased costs to remediate former manufactured gas plants,
increased depreciation expense, and general inflation. MGUC
simultaneously filed a request for partial and immediate rate relief of
$10.7 million (4.4%) while the current rate case is pending authorization
by the MPSC.
On
December 4, 2007, the MPSC issued a final written order authorizing WPSC a
retail electric rate increase of $0.6 million, effective December 5,
2007. WPSC's last retail electric rate increase in Michigan was in
July 2003. The new rates reflect a 10.6% return on common
equity. The MPSC also approved a common equity ratio of 56.4% in
WPSC’s regulatory capital structure. This retail electric rate
increase was driven by 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.
Illinois
Rate
Case
On
February 5, 2008, the ICC issued a final written order authorizing a retail
natural gas rate increase of $71.2 million for PGL, which included a return
on common equity of 10.19% and a common equity ratio of 56% in its regulatory
capital structure. The order also required a retail natural gas rate
decrease of $0.2 million for NSG, which included a return on common equity
of 9.99% and a common equity ratio of 56% in its regulatory capital
structure. The order included approval of a decoupling mechanism as a
four-year pilot program, which will allow PGL and NSG to adjust rates going
forward to recover or refund the difference between the actual and authorized
delivery charge components of revenue. However, legislation has been
introduced at the Illinois state legislature to roll back
decoupling. Integrys Energy Group is actively supporting the ICC’s
decision to approve this rate setting mechanism. In addition, the
order approved an enhanced efficiency mechanism, which will allow PGL and NSG
to
recover $6.4 million and $1.1 million, respectively, of energy
efficiency costs. PGL and NSG filed tariffs in compliance with the
order on February 8, 2008, and the new rates became effective February 14,
2008.
On
March 26, 2008, the ICC denied PGL’s and NSG’s request for hearing of their
orders and all but one such request from intervenors. The ICC only
granted rehearing on a request to change the allocation
between
customers
of PGL’s revenues from its interstate hub services. The rehearing
process on this issue must conclude no later than August 23, 2008. On
April 28, 2008, PGL and NSG filed with the Illinois appellate court a Notice
of
Appeal of the ICC’s order denying rehearing on certain issues. On
April 30, 2008, the ICC submitted a letter to the Court stating that
rehearing is pending before the ICC and, while the ICC would not file to dismiss
the PGL and NSG appeal as premature, it requested that the Court hold the due
date for the ICC to file the record with the Court. On May 2, 2008,
two intervenors each separately filed a Notice of Appeal. On
June 6, 2008, several parties filed a stipulation resolving the single
issue on which the ICC granted rehearing. The ICC approved a
rehearing order on July 30, 2008, in which it approved the
stipulation. The stipulation takes effect November 1, 2008, and
merely changes the way that PGL allocates hub revenues among customer
groups. On July 31, 2008, following issuance of the rehearing order,
PGL, NSG, and the AG’s office filed appeals. Other intervenors may
also file appeals.
Merger
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. The ICC approved a cost recovery mechanism for the
enhanced efficiency program costs. 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 June 30, 2008, the regulatory asset balance
representing merger costs to be recovered totalled $13.3 million at PGL and
$1.8 million at NSG.
Minnesota
On
July 31, 2008, MERC filed a request with the Minnesota Public Utilities
Commission to increase retail natural gas rates $22.0 million
(6.4%). The proposed natural gas rate increase is required because of
general inflation coupled with low sales growth and increased costs to provide
customer service functions. MERC requested that the entire rate
increase be granted as interim rates, subject to refund, and we expect the
interim rates to take effect on or about October 1, 2008. Final rates
are expected in the second quarter of 2009.
Federal
Through
a series of
orders issued by the FERC, Regional Through and Out Rates for transmission
service between the MISO and the PJM 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) 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 sometime in 2008, is
consistent with the Initial Decision of the administrative law judge, Integrys
Energy Services' pre-tax exposure of $19.2 million may be reduced by as
much as $13 million. The Final FERC Order is subject to
rehearing and then court challenges. Any refunds to Integrys Energy
Services will include interest for the period from payment to
refund.
The
SECA is also an
issue for WPSC and UPPCO. It is anticipated that most of the SECA
charges incurred or refunds received by WPSC and UPPCO will be passed on to
customers through rates, and will not have a material effect on the financial
position or results of operations of WPSC or UPPCO.
NOTE 21--SEGMENTS
OF BUSINESS
At
June 30, 2008, Integrys Energy Group reported four segments, as PEP, which
was previously reported as a segment, was sold in September 2007.
●
|
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. The regulated natural gas utility
operations of PGL and NSG have been included in results of operations
since the PEC 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
Holding
Company and Other segment, another nonregulated segment, includes
the
operations of the Integrys Energy Group holding company and the PEC
holding company (which was included in results of operations since
the
merger date), along with any nonutility activities at WPSC, MGUC,
MERC,
UPPCO, PGL, NSG, and IBS. IBS is a wholly-owned centralized
service company that provides administrative and general support
services
for Integrys Energy Group’s six regulated utilities and portions of
administrative and general support services for Integrys Energy
Services. Equity earnings from our investments in ATC and
Wisconsin River Power Company are also included in the Holding Company
and
Other segment.
|
|
|
Regulated
Utilities
|
|
|
Nonutility
and
Nonregulated Operations
|
|
|
|
|
|
|
|
Segments
of Business
(Millions)
|
|
Electric
Utility
(1)
|
|
|
Natural
Gas
Utility
(1)
|
|
|
Total
Utility
(1)
|
|
|
Integrys
Energy
Services
|
|
|
Oil
and Natural Gas Production
|
|
|
Holding
Company
and
Other (2)
|
|
|
Reconciling
Eliminations
|
|
|
Integrys
Energy Group
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
June 30,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$ |
300.5 |
|
|
$ |
515.6 |
|
|
$ |
816.1 |
|
|
$ |
2,598.0 |
|
|
$ |
- |
|
|
$ |
3.1 |
|
|
$ |
- |
|
|
$ |
3,417.2 |
|
Intersegment
revenues
|
|
|
10.6 |
|
|
|
0
.2 |
|
|
|
10.8 |
|
|
|
2.6 |
|
|
|
- |
|
|
|
- |
|
|
|
(13.4 |
) |
|
|
- |
|
Goodwill
impairment loss
|
|
|
- |
|
|
|
6.5 |
|
|
|
6.5 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6.5 |
|
Depreciation
and
amortization
expense
|
|
|
21.4 |
|
|
|
27.1 |
|
|
|
48.5 |
|
|
|
3.5 |
|
|
|
- |
|
|
|
3.9 |
|
|
|
- |
|
|
|
55.9 |
|
Miscellaneous
income
(expense)
|
|
|
1.6 |
|
|
|
2.2 |
|
|
|
3.8 |
|
|
|
2.8 |
|
|
|
- |
|
|
|
26.0 |
|
|
|
(9.9 |
) |
|
|
22.7 |
|
Interest
expense
|
|
|
8.5 |
|
|
|
12.4 |
|
|
|
20.9 |
|
|
|
(0.1 |
) |
|
|
- |
|
|
|
22.6 |
|
|
|
(9.9 |
) |
|
|
33.5 |
|
Provision
for
income
taxes
|
|
|
10.4 |
|
|
|
2.2 |
|
|
|
12.6 |
|
|
|
4.4 |
|
|
|
- |
|
|
|
0.5 |
|
|
|
- |
|
|
|
17.5 |
|
Income
(loss)
from
continuing
operations
|
|
|
20.7 |
|
|
|
(9.0 |
) |
|
|
11.7 |
|
|
|
8.9 |
|
|
|
- |
|
|
|
4.2 |
|
|
|
- |
|
|
|
24.8 |
|
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
Preferred
stock dividends
of
subsidiary
|
|
|
0.5 |
|
|
|
0.3 |
|
|
|
0.8 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.8 |
|
Income
(loss)
available for
common
shareholders
|
|
|
20.2 |
|
|
|
(9.3 |
) |
|
|
10.9 |
|
|
|
9.0 |
|
|
|
- |
|
|
|
4.2 |
|
|
|
- |
|
|
|
24.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months
Ended
June 30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$ |
294.0 |
|
|
$ |
417.8 |
|
|
$ |
711.8 |
|
|
$ |
1,647.1 |
|
|
$ |
- |
|
|
$ |
2.8 |
|
|
$ |
- |
|
|
$ |
2,361.7 |
|
Intersegment
revenues
|
|
|
11.2 |
|
|
|
- |
|
|
|
11.2 |
|
|
|
1.3 |
|
|
|
- |
|
|
|
0.3 |
|
|
|
(12.8 |
) |
|
|
- |
|
Depreciation
and
amortization
expense
|
|
|
20.4 |
|
|
|
26.8 |
|
|
|
47.2 |
|
|
|
2.8 |
|
|
|
- |
|
|
|
0.6 |
|
|
|
- |
|
|
|
50.6 |
|
Miscellaneous
income
(expense)
|
|
|
1.4 |
|
|
|
2.0 |
|
|
|
3.4 |
|
|
|
4.4 |
|
|
|
0.1 |
|
|
|
19.6 |
|
|
|
(5.9 |
) |
|
|
21.6 |
|
Interest
expense
|
|
|
7.7 |
|
|
|
13.1 |
|
|
|
20.8 |
|
|
|
2.1 |
|
|
|
0.9 |
|
|
|
24.7 |
|
|
|
(5.9 |
) |
|
|
42.6 |
|
Provision
(benefit) for
income
taxes
|
|
|
8.3 |
|
|
|
(13.0 |
) |
|
|
(4.7 |
) |
|
|
(4.0 |
) |
|
|
(0.4 |
) |
|
|
(6.2 |
) |
|
|
- |
|
|
|
(15.3 |
) |
Income
(loss)
from
continuing
operations
|
|
|
15.6 |
|
|
|
(3.8 |
) |
|
|
11.8 |
|
|
|
(44.0 |
) |
|
|
(1.2 |
) |
|
|
(6.2 |
) |
|
|
- |
|
|
|
(39.6 |
) |
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
24.0 |
|
|
|
- |
|
|
|
- |
|
|
|
24.0 |
|
Preferred
stock dividends
of
subsidiary
|
|
|
0.6 |
|
|
|
0.2 |
|
|
|
0.8 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.8 |
|
Income
(loss)
available for
common
shareholders
|
|
|
15.0 |
|
|
|
(4.0 |
) |
|
|
11.0 |
|
|
|
(44.0 |
) |
|
|
22.8 |
|
|
|
(6.2 |
) |
|
|
- |
|
|
|
(16.4 |
) |
(1)
|
Includes
only
utility operations.
|
(2)
|
Nonutility
operations of the six utility companies are included in the Holding
Company and Other column.
|
|
|
Regulated
Utilities
|
|
|
Nonutility
and
Nonregulated Operations
|
|
|
|
|
|
|
|
Segments
of Business
(Millions)
|
|
Electric
Utility
(1)
|
|
|
Natural
Gas
Utility
(1)
|
|
|
Total
Utility
(1)
|
|
|
Integrys
Energy
Services
|
|
|
Oil
and Natural Gas Production
|
|
|
Holding
Company
and
Other (2)
|
|
|
Reconciling
Eliminations
|
|
|
Integrys
Energy Group
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
June 30,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$ |
617.0 |
|
|
$ |
1,776.0 |
|
|
$ |
2,393.0 |
|
|
$ |
5,007.0 |
|
|
$ |
- |
|
|
$ |
6.4 |
|
|
$ |
- |
|
|
$ |
7,406.4 |
|
Intersegment
revenues
|
|
|
23.3 |
|
|
|
0
.3 |
|
|
|
23.6 |
|
|
|
7.7 |
|
|
|
- |
|
|
|
(0.1 |
) |
|
|
(31.2 |
) |
|
|
- |
|
Goodwill
impairment loss
|
|
|
- |
|
|
|
6.5 |
|
|
|
6.5 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6.5 |
|
Depreciation
and
amortization
expense
|
|
|
40.2 |
|
|
|
52.5 |
|
|
|
92.7 |
|
|
|
7.0 |
|
|
|
- |
|
|
|
7.4 |
|
|
|
- |
|
|
|
107.1 |
|
Miscellaneous
income
(expense)
|
|
|
3.8 |
|
|
|
3.8 |
|
|
|
7.6 |
|
|
|
3.0 |
|
|
|
- |
|
|
|
50.4 |
|
|
|
(20.2 |
) |
|
|
40.8 |
|
Interest
expense
|
|
|
17.3 |
|
|
|
26.7 |
|
|
|
44.0 |
|
|
|
2.7 |
|
|
|
- |
|
|
|
44.9 |
|
|
|
(20.2 |
) |
|
|
71.4 |
|
Provision
for
income taxes
|
|
|
13.3 |
|
|
|
45.4 |
|
|
|
58.7 |
|
|
|
34.6 |
|
|
|
- |
|
|
|
2.5 |
|
|
|
- |
|
|
|
95.8 |
|
Income
(loss)
from
continuing
operations
|
|
|
28.0 |
|
|
|
66.9 |
|
|
|
94.9 |
|
|
|
60.5 |
|
|
|
- |
|
|
|
6.0 |
|
|
|
- |
|
|
|
161.4 |
|
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
Preferred
stock dividends
of
subsidiary
|
|
|
1.0 |
|
|
|
0.6 |
|
|
|
1.6 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1.6 |
|
Income
available for
common
shareholders
|
|
|
27.0 |
|
|
|
66.3 |
|
|
|
93.3 |
|
|
|
60.6 |
|
|
|
- |
|
|
|
6.0 |
|
|
|
- |
|
|
|
159.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months
Ended
June 30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$ |
582.5 |
|
|
$ |
1,099.1 |
|
|
$ |
1,681.6 |
|
|
$ |
3,421.0 |
|
|
$ |
- |
|
|
$ |
5.7 |
|
|
$ |
- |
|
|
$ |
5,108.3 |
|
Intersegment
revenues
|
|
|
21.9 |
|
|
|
0.5 |
|
|
|
22.4 |
|
|
|
2.8 |
|
|
|
- |
|
|
|
0.3 |
|
|
|
(25.5 |
) |
|
|
- |
|
Depreciation
and
amortization
expense
|
|
|
40.6 |
|
|
|
43.5 |
|
|
|
84.1 |
|
|
|
5.6 |
|
|
|
- |
|
|
|
1.1 |
|
|
|
- |
|
|
|
90.8 |
|
Miscellaneous
income
(expense)
|
|
|
2.5 |
|
|
|
2.8 |
|
|
|
5.3 |
|
|
|
4.3 |
|
|
|
0.1 |
|
|
|
35.3 |
|
|
|
(11.1 |
) |
|
|
33.9 |
|
Interest
expense
|
|
|
15.8 |
|
|
|
22.6 |
|
|
|
38.4 |
|
|
|
5.7 |
|
|
|
1.3 |
|
|
|
44.7 |
|
|
|
(11.1 |
) |
|
|
79.0 |
|
Provision
(benefit) for
income
taxes
|
|
|
18.2 |
|
|
|
15.5 |
|
|
|
33.7 |
|
|
|
(0.9 |
) |
|
|
(0.5 |
) |
|
|
(5.7 |
) |
|
|
- |
|
|
|
26.6 |
|
Income
(loss)
from
continuing
operations
|
|
|
32.6 |
|
|
|
31.7 |
|
|
|
64.3 |
|
|
|
20.9 |
|
|
|
(1.4 |
) |
|
|
(6.2 |
) |
|
|
- |
|
|
|
77.6 |
|
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
14.8 |
|
|
|
32.2 |
|
|
|
- |
|
|
|
- |
|
|
|
47.0 |
|
Preferred
stock dividends
of
subsidiary
|
|
|
1.1 |
|
|
|
0.5 |
|
|
|
1.6 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1.6 |
|
Income
(loss)
available for
common
shareholders
|
|
|
31.5 |
|
|
|
31.2 |
|
|
|
62.7 |
|
|
|
35.7 |
|
|
|
30.8 |
|
|
|
(6.2 |
) |
|
|
- |
|
|
|
123.0 |
|
(1)
|
Includes
only
utility operations.
|
(2)
|
Nonutility
operations of the six utility operations are included in the Holding
Company and Other column.
|
NOTE 22--NEW
ACCOUNTING PRONOUNCEMENTS
In
December 2007, the FASB issued
SFAS No. 141(R), "Business Combinations." SFAS No. 141(R) provides
greater consistency in the accounting for and financial reportingof
business
combinations. Among other changes, the standard will require the
following: (1) all assets acquired and liabilities assumed must be recognized
at
the transaction date, including those related to contractual contingencies,
(2)
transaction costs and restructuring costs that the acquirer expects, but is
not
obligated, to incur are to be expensed, (3) changes to deferred tax benefits
as
a result of the business combination must be recognized immediately in income
from continuing operations or equity, depending on the circumstances, and (4)
in
a bargain purchase, a gain is to be recorded instead of writing down fixed
assets. Certain new disclosure requirements will 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.
FASB
Staff Position (FSP) EITF 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions
Are
Participating Securities,” was issued in June 2008. This FSP
clarifies that unvested stock-based compensation awards with rights to dividends
or dividend equivalents that cannot be forfeited are to be included in the
basic
earnings per share calculation using the two-class method defined in SFAS
No.
128, “Earnings per Share.” This FSP is effective for Integrys Energy
Group for the quarter ending March 31, 2009. The guidance must be
applied retrospectively. We do not expect this FSP to have a
significant impact on basic earnings per share.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
INTRODUCTION
Integrys
Energy
Group is a diversified energy holding company with regulated electric and
natural gas utility operations (serving approximately 2 million customers in
Illinois, Michigan, Minnesota, and Wisconsin), nonregulated energy operations,
and an equity ownership interest in ATC (a federally regulated electric
transmission company operating in Wisconsin, Michigan, Minnesota, and Illinois)
of approximately 34%.
Strategic
Overview
Integrys
Energy
Group's goal is to create long-term value for shareholders and customers through
growth in its regulated and nonregulated operations (while placing an emphasis
on regulated growth). In order to create
value,
Integrys Energy Group focuses 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 investments have helped, or will help, maintain and grow its regulated
utility base:
·
|
The
February
2007 merger with PEC, which added the natural gas distribution operations
of PGL and NSG to the regulated utility base of Integrys Energy
Group.
|
|
|
·
|
Our
ownership
interest in ATC, an electric transmission company which owned over
$2 billion of assets at December 31, 2007. Integrys
Energy Group will continue to fund its share of the equity portion
of
future ATC growth. ATC anticipates net investment in plant to
grow by approximately $1.1 billion from 2008 through
2017.
|
|
|
·
|
Weston 4,
a 500-megawatt coal-fired base-load power plant located near Wausau,
Wisconsin, was completed and operational in June 2008. WPSC
holds a 70% ownership interest in the Weston 4 power plant, with
Dairyland Power Cooperative owning the remaining 30% interest in
the
facility.
|
|
|
·
|
A
proposed
accelerated annual investment in natural gas distribution facilities
(replacement of cast iron mains) at PGL beginning in
2010.
|
|
|
·
|
The
investment of approximately $75 million to connect WPSC's natural gas
distribution system to the Guardian II natural gas
pipeline.
|
|
|
·
|
WPSC's
agreement to purchase a 99-megawatt wind generation facility to be
constructed in Howard County, Iowa.
|
|
|
·
|
WPSC's
announced intent to acquire (along with High Country Energy, LLC)
a
150-megawatt portion of the planned 300-megawatt High Country wind
project
located in Dodge and Olmsted counties in Minnesota.
|
|
|
·
|
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."
|
Strategically
Growing Nonregulated Business– Integrys Energy
Services
focuses on growth in the competitive energy services and supply business through
growing its customer base. Integrys Energy Group expects Integrys
Energy Services to provide between 20% and 30% of annual consolidated earnings,
on average, in the future. Integrys Energy Group believes the
following recent developments have helped, or will help, maintain and grow
Integrys Energy Services:
·
|
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.
|
|
|
·
|
Continued
expansion of operations in the Western Systems Coordinating Council
markets.
|
|
|
·
|
The
on-going
development of renewable energy products, such as a 6.4-megawatt
landfill
gas project in Illinois, a landfill gas project in Texas that includes
building a 33-mile pipeline, solar energy projects, and a new
business unit that will focus on renewable energy and
conservation.
|
Integrating
Resources to Provide Operational Excellence– Integrys Energy
Group is
committed to integrating resources of all its regulated and nonregulated
businesses, while meeting 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 lowering costs. Integrys Energy Group believes the
following recent developments have helped, or will help, integrate resources
and
provide operational excellence:
·
|
The
PEC
merger provides the opportunity 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.
|
|
|
·
|
IBS,
a wholly
owned subsidiary of Integrys Energy Group, was formed to achieve
a
significant portion of the cost synergies anticipated from the PEC
merger
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.
|
|
|
·
|
The
implementation of "Competitive Excellence" and project management
initiatives to improve processes, reduce costs, and manage projects
within
budget and timeline constraints.
|
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. The goal is to provide
the most efficient use of our resources while maximizing return and maintaining
an acceptable risk profile. This strategy focuses on the disposition
of assets, including plants and entire business units, which are 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.
Our
risk management
strategy 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
opportunities to secure prices in a volatile energy market. Each
business unit monitors daily oversight of the risk profile related to these
financial instruments consistent with the company's financial risk management
policy. The Corporate Risk Management Group, which reports through
the Chief Financial Officer, provides corporate oversight.
RESULTS
OF OPERATIONS
|
|
Three
Months
Ended
|
|
|
|
|
|
Six
Months
Ended
|
|
|
|
|
|
|
June 30
|
|
|
%
|
|
|
June 30
|
|
|
%
|
|
|
|
2008
|
|
|
2007
|
|
|
Increase
|
|
|
2008
|
|
|
2007
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss)
available for common shareholders
|
|
$ |
24.1 |
|
|
$ |
(16.4 |
) |
|
|
- |
% |
|
$ |
159.9 |
|
|
$ |
123.0 |
|
|
|
30.0 |
% |
Basic
earnings
(loss) per common share
|
|
$ |
0.31 |
|
|
$ |
(0.22 |
) |
|
|
- |
% |
|
$ |
2.09 |
|
|
$ |
1.84 |
|
|
|
13.6 |
% |
Diluted
earnings (loss) per common share
|
|
$ |
0.31 |
|
|
$ |
(0.22 |
) |
|
|
- |
% |
|
$ |
2.08 |
|
|
$ |
1.83 |
|
|
|
13.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares
of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
76.6 |
|
|
|
76.0 |
|
|
|
0.8 |
% |
|
|
76.6 |
|
|
|
66.8 |
|
|
|
14.7 |
% |
Diluted
|
|
|
76.9 |
|
|
|
76.0 |
|
|
|
1.2 |
% |
|
|
76.9 |
|
|
|
67.1 |
|
|
|
14.6 |
% |
Earnings
Summary – Second
Quarter 2008 Compared with Second Quarter 2007
Integrys
Energy
Group recognized income available for common shareholders of $24.1 million
($0.31 diluted earnings per share) for the quarter ended June 30,
2008, compared with a net loss of $16.4 million ($0.22 net loss per share)
for the quarter ended June 30, 2007. Significant factors
impacting the change in earnings and earnings per share were as follows (and
are
discussed in more detail thereafter):
·
|
The
net loss
from the regulated natural gas utility segment increased $5.3 million
(132.5%), from a net loss of $4.0 million during the second quarter
of 2007, to a net loss of $9.3 million during the second quarter of
2008. The
change was driven by the following:
|
|
|
|
|
-
|
A
non-cash
after-tax goodwill impairment loss in the amount of $6.5 million was
recognized for NSG in the second quarter of 2008.
|
|
|
|
|
-
|
The
change in
the effective tax rate from the second quarter of 2007 to the second
quarter of 2008 had a negative quarter-over-quarter impact on natural
gas
segment operating results. Quarter-over-quarter changes in the
effective tax rate can sometimes occur as a result of adjustments
required
by generally accepted accounting principles (GAAP) to ensure our
year-to-date interim effective tax rate reflects our projected annual
effective tax rate. An approximate $6 million adjustment
to the benefit for income taxes at the natural gas segment was required
in
accordance with these GAAP requirements in the second quarter of
2007,
driving a decrease in quarter-over-quarter earnings.
|
|
|
|
|
-
|
Pre-tax
operating and maintenance expenses at the natural gas utilities increased
$8.6 million ($5.2 million after-tax), driven by higher
quarter-over-quarter street restoration costs at PGL and amortization
expense related to regulatory assets recorded at PGL and NSG for
costs to
achieve merger synergies and costs related to the 2007/2008 rate
case.
|
|
|
|
|
-
|
Partially
offsetting the items discussed above, margins at the natural gas
utilities
increased $23.5 million ($14.1 million after-tax), from
$144.6 million during the second quarter of 2007, to
$168.1 million during the second quarter of 2008. A rate
increase at PGL that was effective in the first quarter of 2008 had
an
approximate $18 million ($10.8 million after-tax) positive
impact on the quarter-over-quarter margin. A 4.5% increase in
natural gas throughput volumes, driven by colder weather conditions,
had
an estimated $3 million ($1.8 million after-tax) favorable
quarter-over-quarter impact on margin.
|
|
|
|
·
|
Regulated
electric utility segment earnings increased $5.2 million (34.7%),
from earnings of $15.0 million for the quarter ended June 30,
2007, to earnings of $20.2 million for the same quarter in
2008. The quarter-over-quarter increase in earnings at the
regulated electric utility segment was driven by an $8.0 million
($4.8 million after-tax) increase in operating income at WPSC's
electric utility, resulting primarily from the
following:
|
|
|
|
|
-
|
Fuel
and
purchased power costs at WPSC were approximately $7 million
($4.2 million after-tax) lower than what was recovered in rates
during the quarter ended June 30, 2008, compared with fuel and
purchased power costs that were approximately $2 million
($1.2 million after-tax) higher than what was recovered in rates
during the same quarter in 2007, which drove a $5.4 million after-tax
increase in operating income quarter-over-quarter. As a result
of approximately $23 million of higher than anticipated energy costs
in the first quarter of 2008, the PSCW approved an interim rate increase
effective March 22, 2008, and subsequently approved a higher
final rate increase effective July 4, 2008.
|
|
|
|
|
-
|
Also
contributing to the increase in WPSC's regulated electric operating
income, electric maintenance expenses decreased $5.8 million
($3.5 million after-tax).
|
|
|
|
|
-
|
Partially
offsetting the items discussed above, cooler quarter-over-quarter
weather
conditions contributed an approximate $1 million after-tax
quarter-over-quarter decrease in operating income. Weather
normalized volumes were also down as customers are conserving energy
as a
result of high prices and a general slowdown in the economy. It
is estimated that the decrease in weather normalized sales volumes
resulted in an approximate $2 million after-tax decrease in operating
income quarter-over-quarter.
|
·
|
Financial
results at Integrys Energy Services increased $53.0 million, from a
net loss of $44.0 million for the quarter ended June 30, 2007,
to earnings of $9.0 million for the same quarter in 2008, driven by
the following:
|
|
|
|
-
|
Integrys
Energy Services recognized a combined $121.1 million
($72.7 million after-tax) increase in retail and wholesale electric
margins, driven by derivative accounting treatment of customer supply
contracts used to mitigate the price risk of related customer sales
contracts. Integrys Energy Services recognized
$70.5 million ($42.3 million after-tax) of unrealized gains on
derivative contracts in the second quarter of 2008, compared with
$50.2 million ($30.1 million after-tax) of unrealized losses
during the same period in 2007. These non-cash unrealized gains
and losses result from the application of derivative accounting rules
to
customer supply contracts, requiring that these derivative instruments
be
valued at current market prices. No gain or loss is recognized
on the corresponding customer sales contracts, which are not considered
derivative instruments. These non-cash gains and losses will
vary each period, and ultimately reverse as the related customer
sales
contracts settle. As a result, Integrys Energy Services
generally expects to experience non-cash losses on supply contracts
in
periods of declining market prices and non-cash gains in periods
of
increasing market prices. Electric prices experienced an
increase from April 1, 2008 to June 30, 2008, compared with a
decrease over the same period in 2007.
|
|
|
|
|
-
|
Integrys
Energy Services also recognized a $15.2 million net loss from its
investment in a synthetic fuel production facility during the three
months
ended June 30, 2007. Section 29/45K of the Internal
Revenue Code, which provided for Section 29/45K federal tax credits
from
the production and sale of synthetic fuel, expired effective
December 31, 2007, at which time Integrys Energy Services ended
synthetic fuel operations. This drove a $15.2 million
after-tax increase in Integrys Energy Services' earnings during the
three
months ended June 30, 2008, compared with the same period in
2007.
|
|
|
|
|
-
|
Partially
offsetting the increases noted above, Integrys Energy Services' natural
gas margins decreased $62.9 million ($37.7 million after-tax),
driven by an $84.8 million ($50.9 million after-tax) decrease in
quarter-over-quarter margins related to derivative accounting required
fair value
|
|
|
adjustments,
partially offset by a $21.9 million
($13.2 million after-tax) increase in quarter-over-quarter realized
natural gas margins.
|
|
|
-
|
Unrealized
losses related to fair value adjustments were $84.2 million
($50.5 million after-tax) in the second quarter of 2008, compared
with unrealized gains of $0.6 million ($0.4 million after-tax)
in the second quarter of 2007. Period-by-period variability in
the margin contributed by Integrys Energy Services' retail and wholesale
natural gas operations was primarily related 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. These
non-cash unrealized gains and losses result from the application
of
derivative accounting rules to the basis and other swaps (requiring
that
these derivative instruments be valued at current market prices),
without
a corresponding market value 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.
|
|
|
|
|
|
|
-
|
Realized
natural gas margins increased $21.9 million ($13.2 million
after-tax), from $18.0 million ($10.8 million after-tax) in the
second quarter of 2007, to $39.9 million ($24.0 million
after-tax) in the second quarter of 2008. This increase was
driven by realized wholesale natural gas margins that were
$15.8 million ($9.5 million after-tax) higher
quarter-over-quarter. Also, the margin from retail natural gas
operations in Illinois increased $4.6 million ($2.8 million
after-tax) quarter-over-quarter.
|
·
|
Financial
results at the Holding Company and Other segment improved
$10.4 million, from a net loss of $6.2 million during the
quarter ended June 30, 2007, to earnings of $4.2 million for the
quarter ended June 30, 2008. This improvement was driven
by an $8.6 million ($5.2 million after-tax) increase in
operating income (see "Holding Company and Other Segment Operations,"
for
more information), a $7.1 million ($4.3 million after-tax)
decrease in interest expense and a $3.9 million ($2.3 million
after-tax) increase in earnings from Integrys Energy Group's approximate
34% ownership interest in ATC (see "Miscellaneous Income," for more
information).
|
|
|
|
·
|
In
connection
with the PEC merger on February 21, 2007, Integrys Energy Group announced
its intent to divest of PEP, which was sold in the third quarter
of
2007. During the quarter ended June 30, 2007, PEP
recognized earnings of $24.0 million as a component of discontinued
operations.
|
|
|
·
|
For
the
quarter ended June 30, 2008, diluted earnings per share were impacted
by a 0.9 million share (1.2%) increase in the weighted average number
of outstanding shares of Integrys Energy Group common stock, compared
with
the same quarter in 2007. In the first six months of 2008,
Integrys Energy Group purchased shares of its common stock in the
open
market to meet the requirements of its Stock Investment Plan and
certain
stock-based employee benefit and compensation
plans. During 2007, however, Integrys Energy Group issued new
shares of common stock to meet these requirements.
|
Earnings
Summary – Six Months 2008 Compared to Six Months 2007
Integrys
Energy
Group recognized income available for common shareholders of $159.9 million
($2.08 diluted earnings per share) for the six months ended June 30,
2008, compared with income available for common shareholders of
$123.0 million ($1.83 diluted earnings per share) for the six months ended
June 30, 2007. Significant factors impacting the change in
earnings and earnings per share were as follows (and are discussed in more
detail thereafter):
·
|
Earnings
from
the regulated natural gas utility segment increased $35.1 million
(112.5%), from $31.2 million during the six months ended
June 30, 2007, to $66.3 million during the six months ended
June 30, 2008, due primarily to the following:
|
|
|
|
|
-
|
Combined
natural gas utility earnings at PGL and NSG increased approximately
$28 million, from earnings of approximately $8 million for the
six months ended June 30, 2007, to earnings of approximately
$36 million for the same period in 2008. The increase in
earnings at both of these natural gas utilities was due to the fact
that
they were not acquired until February 21, 2007. PGL was also
positively impacted by an annual rate increase of $71.2 million,
which was effective February 14, 2008, and both PGL and NSG
benefited from colder than normal weather conditions in the first
quarter
of 2008 before the Volume Balancing Adjustment rider went into
effect. These increases were partially offset by a
$6.5 million non-cash after-tax goodwill impairment loss recognized
for NSG in the second quarter of 2008.
|
|
|
|
|
-
|
An
increase
in natural gas throughput volumes at WPSC, MERC, and MGUC, primarily
related to colder period-over-period weather conditions at these
natural
gas utilities, contributed an approximate $5 million after-tax
increase to earnings.
|
|
|
·
|
Regulated
electric utility segment earnings decreased $4.5 million (14.3%),
from earnings of $31.5 million for the six months ended June 30,
2007, to earnings of $27.0 million for the same period in
2008. The period-over-period change in earnings at the
regulated electric segment was driven by a $7.0 million
($4.2 million after-tax) decrease in operating income at WPSC's
electric utility, resulting primarily from the
following:
|
|
|
|
|
-
|
Fuel
and
purchased power costs at WPSC that were approximately $16 million
($9.6 million after-tax) higher than what was recovered in rates
during the six months ended June 30, 2008, compared with fuel and
purchased power costs that were approximately $1 million
($0.6 million after-tax) less than what was recovered in rates during
the same period in 2007. This drove an approximate
$17 million ($10.2 million after-tax) decrease in operating
income period-over-period.
|
|
|
|
|
-
|
Also
contributing to the decrease in operating income at WPSC was a 2.7%
decrease in residential sales volumes, which resulted in an approximate
$4 million ($2.4 million after-tax) decrease in operating income
and was driven by customer conservation efforts related to high energy
costs and a general slowdown in the economy.
|
|
|
|
|
-
|
Partially
offsetting the decreases to WPSC's regulated electric operating income
discussed above, electric maintenance expenses decreased
$10.1 million ($6.1 million after-tax).
|
|
|
|
|
-
|
WPSC
also
experienced a decrease in pension, post-retirement pension, and medical
benefit costs (merger synergy savings) attributable to headcount
reductions and certain changes made to its retirement
plans.
|
·
|
Earnings
at
Integrys Energy Services increased $24.9 million, from earnings of
$35.7 million for the six months ended June 30, 2007, to
earnings of $60.6 million for the same period in 2008, due to the
following:
|
|
|
|
-
|
Integrys
Energy Services recognized a combined $177.3 million
($106.4 million after-tax) increase in retail and wholesale electric
margins, driven by the following:
|
|
|
|
|
|
|
-
|
Integrys
Energy Services recognized $169.5 million ($101.7 million
after-tax) of unrealized gains on derivative contracts during the
six
months ended June 30, 2008, compared with $7.0 million
($4.2 million after-tax) of unrealized gains during the same period
in 2007. See the "Earnings Summary – Second Quarter 2008
Compared with Second Quarter 2007," above for more information on
this
change.
|
|
|
|
|
|
|
-
|
Realized
retail electric margins increased $20.3 million ($12.2 million
after-tax), from $4.4 million ($2.6 million after-tax) during
the six months ended June 30, 2007, to $24.7 million
($14.8 million after-tax) during the same period in 2008, driven by
the addition of new customers in Illinois as a result of the PEC
merger,
expansion into the Mid-Atlantic region, and the resolution of certain
regulatory issues in Northern Maine.
|
|
|
|
|
|
-
|
Partially
offsetting the increase in retail and wholesale electric margins,
Integrys
Energy Services' natural gas margins decreased $96.0 million
($57.6 million after-tax), driven by a $121.9 million
($73.1 million after-tax) decrease in period-over-period margins
related to SFAS No. 133 fair value adjustments, partially offset
by a
$25.9 million ($15.5 million after-tax) increase in
period-over-period realized margins.
|
|
|
|
|
|
-
|
Unrealized
losses were $123.2 million ($73.9 million after-tax) during the
six months ended June 30, 2008, compared with unrealized losses of
$1.3 million ($0.8 million after-tax) for the six months ended
June 30, 2007. See the "Earnings Summary – Second Quarter
2008 Compared with Second Quarter 2007," above for more information
on
this change.
|
|
|
|
|
|
|
-
|
Realized
natural gas margins increased $25.9 million ($15.5 million
after-tax), from $56.7 million ($34.0 million after-tax) during
the six months ended June 30, 2007, to $82.6 million
($49.5 million after-tax) during the six months ended June 30,
2008. The increased natural gas margin was driven by realized
wholesale natural gas margins that were $18.6 million higher
period-over-period. Also, the margin from retail natural gas
operations in Illinois increased $7.2 million
period-over-period.
|
|
|
|
|
-
|
Integrys
Energy Services recognized a $14.8 million after-tax gain on the sale
of WPS Niagara Generation, LLC as a component of discontinued
operations in 2007.
|
|
|
|
|
-
|
Integrys
Energy Services also recognized $3.8 million of after-tax earnings
from its investment in a synthetic fuel production facility during
the six
months ended June 30, 2007. Section 29/45K of the Internal
Revenue Code, which provided for Section 29/45K federal tax credits
from
the production and sale of synthetic fuel, expired effective
December 31, 2007, at which time Integrys Energy Services ended
synthetic fuel operations.
|
·
|
Financial
results at the Holding Company and Other segment improved
$12.2 million, from a net loss of $6.2 million during the six
months ended June 30, 2007, to earnings of $6.0 million for the
same period in 2008. This improvement was driven by a
$5.5 million ($3.3 million after-tax) increase in operating
income (see "Holding Company and Other Segment Operations," for more
information), a $10.7 million ($6.4 million after-tax) decrease
in interest expense, and a $6.8 million ($4.0 million after-tax)
increase in earnings from Integrys Energy Group's approximate 34%
ownership interest in ATC (see "Miscellaneous Income," for more
information).
|
|
|
|
·
|
In
connection
with the PEC merger on February 21, 2007, Integrys Energy Group announced
its intent to divest of PEP, which was sold in the third quarter
of
2007. During the six months ended June 30, 2007, PEP
recognized earnings of $32.2 million as a component of discontinued
operations.
|
|
|
·
|
For
the six
months ended June 30, 2008, diluted earnings per share were impacted
by a 9.8 million share (14.6%) increase in the weighted average
number of outstanding shares of Integrys Energy Group common stock,
compared with the same quarter in 2007. Integrys Energy Group
issued 31.9 million shares of common stock on February 21, 2007,
in conjunction with the PEC merger. Accordingly, these shares
were considered outstanding for purposes of computing diluted earnings
per
share for the six months ended June 30, 2008, but were only
considered outstanding for that portion of the six-month period ended
June 30, 2007 subsequent to the PEC merger. Additional
shares were also issued during the six months ended June 30, 2007
under the Integrys Energy Group Stock Investment Plan and certain
stock-based employee benefit and compensation plans.
|
Utility
Operations
For
the three and
six months ended June 30, 2008, 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 PGL, WPSC, MERC, MGUC, and NSG.
The
regulated
electric operations of WPSC and UPPCO as well as the natural gas operations
of
WPSC, MERC, and MGUC were included for the three and six months ended
June 30, 2007, while the natural gas operations of PGL and NSG were
included in results of operations beginning February 22, 2007 through
June 30, 2007.
Regulated
Natural Gas Utility Segment Operations
|
|
Three
Months
Ended
|
|
|
%
|
|
|
Six
Months
Ended
|
|
|
%
|
|
|
|
June 30
|
|
|
Increase
|
|
|
June 30
|
|
|
Increase
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
515.8 |
|
|
$ |
417.8 |
|
|
|
23.5 |
% |
|
$ |
1,776.3 |
|
|
$ |
1,099.6 |
|
|
|
61.5 |
% |
Purchased
natural gas costs
|
|
|
347.7 |
|
|
|
273.2 |
|
|
|
27.3 |
% |
|
|
1,286.5 |
|
|
|
783.1 |
|
|
|
64.3 |
% |
Margins
|
|
|
168.1 |
|
|
|
144.6 |
|
|
|
16.3 |
% |
|
|
489.8 |
|
|
|
316.5 |
|
|
|
54.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
and
maintenance expense
|
|
|
123.5 |
|
|
|
114.9 |
|
|
|
7.5 |
% |
|
|
279.1 |
|
|
|
190.8 |
|
|
|
46.3 |
% |
Goodwill
impairment loss (1)
|
|
|
6.5 |
|
|
|
- |
|
|
|
- |
% |
|
|
6.5 |
|
|
|
- |
|
|
|
- |
% |
Depreciation
and amortization expense
|
|
|
27.1 |
|
|
|
26.8 |
|
|
|
1.1 |
% |
|
|
52.5 |
|
|
|
43.5 |
|
|
|
20.7 |
% |
Taxes
other
than income
|
|
|
7.6 |
|
|
|
8.6 |
|
|
|
(11.6 |
)% |
|
|
16.5 |
|
|
|
15.2 |
|
|
|
8.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$ |
3.4 |
|
|
$ |
(5.7 |
) |
|
|
- |
% |
|
$ |
135.2 |
|
|
$ |
67.0 |
|
|
|
101.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Throughput
in therms
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
217.7 |
|
|
|
213.1 |
|
|
|
2.2 |
% |
|
|
1,060.5 |
|
|
|
650.8 |
|
|
|
63.0 |
% |
Commercial
and industrial
|
|
|
71.8 |
|
|
|
66.0 |
|
|
|
8.8 |
% |
|
|
340.3 |
|
|
|
243.1 |
|
|
|
40.0 |
% |
Interruptible
|
|
|
12.5 |
|
|
|
8.2 |
|
|
|
52.4 |
% |
|
|
35.7 |
|
|
|
31.9 |
|
|
|
11.9 |
% |
Interdepartmental
|
|
|
9.0 |
|
|
|
9.7 |
|
|
|
(7.2 |
)% |
|
|
18.4 |
|
|
|
14.7 |
|
|
|
25.2 |
% |
Transport
|
|
|
354.6 |
|
|
|
340.1 |
|
|
|
4.3 |
% |
|
|
1,023.9 |
|
|
|
711.3 |
|
|
|
43.9 |
% |
Total
sales in therms
|
|
|
665.6 |
|
|
|
637.1 |
|
|
|
4.5 |
% |
|
|
2,478.8 |
|
|
|
1,651.8 |
|
|
|
50.1 |
% |
(1) See
Note 7, “Goodwill and Other
Intangible Assets” for more information.
Second
Quarter 2008 Compared with Second Quarter 2007
Revenue
Regulated
natural
gas utility segment revenue increased $98.0 million, driven by the
following:
·
|
An
approximate 28% increase in the per-unit cost of natural gas over
all of
the regulated natural gas utilities in the second quarter of 2008,
compared to the second quarter of 2007. For all of Integrys
Energy Group's regulated natural gas utilities, natural gas commodity
costs are directly passed through to customers in
rates.
|
|
|
·
|
An
annual
rate increase for PGL of $71.2 million, which was effective
February 14, 2008. PGL will use the new rate
structure to continue to enhance natural gas delivery safety, reliability,
and customer service. The new rate structure also includes
several tools that provide the company the opportunity to recover
the
fixed costs of operating its natural gas delivery system while also
better
aligning the energy efficiency interests of the company with those
of
consumers, regulators, and elected officials.
|
|
|
|
·
|
A
combined
4.5% increase in natural gas throughput volumes. In general,
the increase in natural gas throughput volumes was driven by colder
quarter-over-quarter weather conditions across all of the natural
gas
utilities.
|
Margin
The
regulated
natural gas utility segment margin increased $23.5 million, driven
by:
·
|
The
2008 rate
increase for PGL (discussed above), which had an estimated
$18 million positive quarter-over quarter impact on
margin.
|
|
|
·
|
An
increase
in natural gas throughput volumes, driven by colder weather conditions,
which had an estimated $3 million positive quarter-over-quarter
impact on margin.
|
Operating
Income
Operating
income
increased $9.1 million, a result of the $23.5 million increase in the
regulated natural gas utility margin, partially offset by a $14.4 million
increase in operating expenses.
The
increase
in operating expenses were primarily related to the
following:
|
|
·
|
A
non-cash
goodwill impairment loss of $6.5 million after-tax recognized for
NSG. See Note 7, "Goodwill and Other
Intangible
Assets," for more information.
|
|
|
·
|
A
quarter-over-quarter increase of $3.1 million related to street
restoration costs at PGL.
|
|
|
·
|
A
$2.0 million increase in the amortization of costs to achieve
synergies and costs related to the 2007/2008 rate case, which were
initially deferred as regulatory assets. The increase in
operating expenses related to these costs was offset in
margin. As a result, there was no significant impact on
earnings related to the amortization of these regulatory
assets.
|
Six
Months 2008 Compared with Six Months 2007
Revenue
Regulated
natural
gas utility segment revenue increased $676.7 million, driven
by:
·
|
A
combined
increase in PGL and NSG natural gas utility revenue of
$575.0 million, from $523.1 million of natural gas utility
revenue and approximately 0.6 billion therms of natural gas
throughput volumes recognized during the six months ended June 30,
2007, to $1,098.1 million of natural gas utility revenue and
approximately 1.4 billion therms of natural gas throughput volumes
recognized during the six months ended June 30, 2008. The
increase in revenue at both of these natural gas utilities was driven
primarily by the fact that they were not acquired until
February 21, 2007 in addition to higher period-over-period
natural gas prices. PGL was also positively impacted by an
annual rate increase of $71.2 million, effective
February 14, 2008. Both PGL and NSG also experienced
colder than normal weather conditions prior to February 14, 2008,
which
had a positive impact on revenue.
|
|
|
·
|
An
increase
in natural gas revenue of $101.7 million at the remaining natural gas
utilities (WPSC, MERC, and MGUC), driven by the
following:
|
|
|
|
-
|
An
approximate 14% increase in the per-unit cost of natural gas related
to
these natural gas utilities during the six months ended June 30,
2008, compared with the same period in 2007.
|
|
|
|
|
-
|
A
combined
10.3% increase in natural gas throughput volumes at WPSC, MERC, and
MGUC. This increase was driven by an 8.8% increase in
residential volumes and a 9.2% increase in commercial and industrial
volumes. The increase in sales volumes to residential and
commercial and industrial customers was driven by colder weather
conditions during the 2008 heating season, evidenced by an approximate
10%
increase in heating degree days for the six months ended June 30,
2008, compared with the same period in 2007 across these three
utilities.
|
|
|
|
|
-
|
WPSC
receiving the benefit of its 2007 retail natural gas rate increase
for the
entire six months ended June 30, 2008, whereas this rate increase did
not benefit 2007 natural gas utility results until its January 12,
2007
effective date.
|
Margin
The
regulated
natural gas utility segment margin increased $173.3 million, driven
by:
·
|
A
period-over-period increase in the combined margin at PGL and NSG
of
$162.6 million, from $167.7 million for the six months ended
June 30, 2007, to $330.3 million for the same period in
2008. The increase in the margin at both of these natural gas
utilities was driven by the fact that they were not acquired until
February 21, 2007. Therefore, their operations for the entire
heating season during the six months ended June 30, 2008, were
included in the 2008 natural gas utility margin. However, only
operations from the acquisition date through June 30, 2007, were
included in the 2007 natural gas utility margin. Due to the
seasonal nature of natural gas utilities, higher margins are generally
derived during the heating season (first and fourth
quarters). A 2008 rate increase for PGL and colder than normal
weather conditions experienced by both PGL and NSG before the Volume
Balancing Adjustment rider went into effect in March 2008 also favorably
impacted margins.
|
|
|
·
|
An
increase
in natural gas margin of $10.7 million at the remaining natural gas
utilities (WPSC, MERC, and MGUC), driven by the
following:
|
|
|
|
|
-
|
An
increase
in natural gas throughput volumes at WPSC, MERC, and
MGUC. Colder period-over-period weather conditions contributed
$8.5 million to the increase in
margin.
|
|
|
|
|
-
|
The
delay in
the effective date of WPSC's 2007 rate increase, which had an estimated
$1 million favorable impact on natural gas margin for the six months
ended June 30, 2008, compared with the same period in
2007.
|
Operating
Income
Operating
income
increased $68.2 million, driven by a $173.3 million increase in the
regulated natural gas utility margin, partially offset by a $105.1 million
increase in operating expenses.
The
increase in
operating expenses was primarily related to an increase in combined operating
expenses at PGL and NSG of $109.8 million, from $146.9 million for the
six months ended June 30, 2007, to $256.7 million for the same period
in 2008. The increase in operating expenses at PGL and NSG is
primarily due to the fact that the natural gas operations of both of these
businesses were first included in results of operations beginning February
22,
2007, compared with these operations contributing a full six months of operating
expenses during 2008. In addition, a non-cash goodwill impairment of
$6.5 million after-tax was recognized in 2008 for NSG.
Regulated
Electric Segment Operations
|
|
Three
Months
Ended
|
|
|
%
|
|
|
Six
Months
Ended
|
|
|
%
|
|
(Millions,
except heating and cooling degree days)
|
|
June 30
|
|
|
Increase
|
|
|
June 30
|
|
|
Increase
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
311.1 |
|
|
$ |
305.2 |
|
|
|
1.9 |
% |
|
$ |
640.3 |
|
|
$ |
604.4 |
|
|
|
5.9 |
% |
Fuel
and
purchased power costs
|
|
|
149.0 |
|
|
|
160.4 |
|
|
|
(7.1 |
)% |
|
|
334.4 |
|
|
|
310.7 |
|
|
|
7.6 |
% |
Margins
|
|
|
162.1 |
|
|
|
144.8 |
|
|
|
11.9 |
% |
|
|
305.9 |
|
|
|
293.7 |
|
|
|
4.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
and
maintenance expense
|
|
|
91.6 |
|
|
|
83.5 |
|
|
|
9.7 |
% |
|
|
188.7 |
|
|
|
167.4 |
|
|
|
12.7 |
% |
Depreciation
and amortization expense
|
|
|
21.4 |
|
|
|
20.4 |
|
|
|
4.9 |
% |
|
|
40.2 |
|
|
|
40.6 |
|
|
|
(1.0 |
)% |
Taxes
other
than income
|
|
|
11.1 |
|
|
|
10.7 |
|
|
|
3.7 |
% |
|
|
22.2 |
|
|
|
21.6 |
|
|
|
2.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$ |
38.0 |
|
|
$ |
30.2 |
|
|
|
25.8 |
% |
|
$ |
54.8 |
|
|
$ |
64.1 |
|
|
|
(14.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
in kilowatt-hours
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
668.2 |
|
|
|
723.5 |
|
|
|
(7.6 |
)% |
|
|
1,518.3 |
|
|
|
1,562.1 |
|
|
|
(2.8 |
)% |
Commercial
and industrial
|
|
|
2,119.1 |
|
|
|
2,162.5 |
|
|
|
(2.0 |
)% |
|
|
4,297.9 |
|
|
|
4,265.7 |
|
|
|
0.8 |
% |
Wholesale
|
|
|
1,175.1 |
|
|
|
1,013.8 |
|
|
|
15.9 |
% |
|
|
2,305.6 |
|
|
|
1,995.5 |
|
|
|
15.5 |
% |
Other
|
|
|
8.3 |
|
|
|
8.5 |
|
|
|
(2.4 |
)% |
|
|
21.3 |
|
|
|
20.5 |
|
|
|
3.9 |
% |
Total
sales in kilowatt-hours
|
|
|
3,970.7 |
|
|
|
3,908.3 |
|
|
|
1.6 |
% |
|
|
8,143.1 |
|
|
|
7,843.8 |
|
|
|
3.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WPSC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating
degree days
|
|
|
920 |
|
|
|
850 |
|
|
|
8.2 |
% |
|
|
4,875 |
|
|
|
4,402 |
|
|
|
10.7 |
% |
Cooling
degree days
|
|
|
104 |
|
|
|
204 |
|
|
|
(49.0 |
)% |
|
|
104 |
|
|
|
204 |
|
|
|
(49.0 |
)% |
UPPCO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating
degree days
|
|
|
1,518 |
|
|
|
1,296 |
|
|
|
17.1 |
% |
|
|
5,773 |
|
|
|
5,326 |
|
|
|
8.4 |
% |
Cooling
degree days
|
|
|
29 |
|
|
|
112 |
|
|
|
(74.1 |
)% |
|
|
29 |
|
|
|
112 |
|
|
|
(74.1 |
)% |
Second
Quarter 2008 Compared with Second Quarter 2007
Revenue
Regulated
electric
revenue increased $5.9 million, driven by:
·
|
A
final rate
order issued by the PSCW effective January 16, 2008, that allowed
for a
$23.0 million (2.5%) retail electric rate increase. Per
the PSCW's order approving the PEC merger, WPSC may not increase
its base
rates for natural gas or electric service prior to January 1,
2009. However, 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 NYMEX natural gas futures prices, delivered coal
prices,
and transmission costs. The increase also included recovery of
deferred 2005 and 2006 MISO Day 2 costs over a one-year
period.
|
|
|
·
|
An
interim
rate increase approved by the PSCW for WPSC's retail electric customers
effective March 22, 2008, related to higher fuel and purchased
power costs. Contributing factors in the rate change, which
obtained final approval from the PSCW on July 4, 2008, were increased
purchased power costs due to lower-than-expected generation from
the new
Weston 4 power plant during the start-up phases, increased coal and
coal
transportation costs, and increased natural gas costs.
|
|
|
·
|
A
1.6%
increase in electric sales volumes, including a 15.9% increase in
volumes
sold to lower margin wholesale customers, partially offset by a 7.6%
and
2.0% decrease in sales volumes, respectively, to higher margin residential
and commercial and industrial customers. The increase in sales
volumes to wholesale customers was driven by higher contracted sales
volumes to a large wholesale customer quarter-over-quarter as well
as an
increase in opportunity sales as WPSC had more low-cost generation
with
Weston 4 generating power for much of the 2008 second
quarter. The decrease in sales volumes to residential and
commercial and industrial customers was driven by cooler than normal
quarter-over-quarter weather conditions, which led to a decrease
in air
conditioning load. In addition, high energy prices and a
general slowdown in the economy led to more energy conservation
quarter-over-quarter.
|
Margin
The
regulated
electric margin increased $17.3 million, driven by the
following:
·
|
A
$13.5 million partial refund by WPSC to Wisconsin retail customers in
the second quarter of 2007 of their portion of proceeds from the
liquidation of the Kewaunee nonqualified decommissioning trust
fund. Pursuant to regulatory accounting, the decrease in the
2007 margin related to the refund was offset by a corresponding decrease
in operating and maintenance expenses in 2007 and, therefore, did
not have
an impact on earnings. WPSC completed the refund of proceeds
received from the liquidation of the Kewaunee nonqualified decommissioning
trust fund to Wisconsin retail customers in 2007.
|
|
|
·
|
Fuel
and
purchased power costs at WPSC that were approximately $7 million
lower than what was recovered in rates during the quarter ended
June 30, 2008, compared with fuel and purchased power costs that were
approximately $2 million higher than what was recovered in rates
during the same quarter in 2007, which drove a $9 million increase in
margin quarter-over-quarter. As a result of approximately
$23 million of higher than anticipated fuel and purchased power costs
in the first quarter of 2008, the PSCW approved an interim rate increase
effective March 22, 2008, and subsequently approved a higher
final rate increase effective July 4, 2008. In the second
quarter of 2008, the interim rate increase enabled WPSC to recover
approximately $7 million of the $23 million of under-recovered
fuel and purchased power costs incurred in the first quarter of
2008. With the approved rate increase and assuming stable fuel
costs, WPSC anticipates it will recover approximately 80% of the
remaining
$16 million of unrecovered fuel and purchased power costs by
year-end.
|
|
|
·
|
The
effect of
the 2008 retail electric rate increase at WPSC that was effective
January
16, 2008 (discussed above).
|
|
|
·
|
Partially
offsetting the increase in overall electric margin, unfavorable weather
conditions drove an approximate $2 million quarter-over-quarter
decrease in WPSC's electric utility margin, and customer conservation
efforts drove an approximate $4 million quarter-over-quarter decrease
in WPSC's electric utility margin.
|
Operating
Income
Operating
income
increased $7.8 million, driven by the $17.3 million increase in margin
discussed above, partially offset by a $7.9 million increase in operating
and maintenance expenses at WPSC.
The
increase
in operating and maintenance expenses at WPSC was the result
of:
|
|
|
·
|
An
increase
in operating expenses of $13.5 million quarter-over-quarter, related
to the partial amortization in the second quarter of 2007 of the
regulatory liability previously recorded for WPSC's obligation to
refund
proceeds received from the liquidation of the Kewaunee nonqualified
decommissioning trust fund to Wisconsin retail electric
ratepayers.
|
|
|
·
|
An
increase
in regulated electric transmission expenses of $2.5 million,
primarily related to higher rates charged by MISO and ATC due to
additional transmission costs.
|
|
|
The
increase
in operating and maintenance expenses at WPSC was offset
by:
|
|
|
·
|
A
decrease in
regulated electric maintenance expenses of $5.8 million, primarily
due to major planned outages at the Weston 3 generation station and
the De
Pere Energy Center in the second quarter of 2007, compared with fewer
plant outages in the second quarter of 2008.
|
|
|
·
|
A
decrease in
pension and postretirement benefits resulting from plan design changes
and
merger synergies.
|
Six
Months 2008 Compared with Six Months 2007
Revenue
Regulated
electric
revenue increased $35.9 million, driven by:
·
|
A
final rate
order by the PSCW, effective January 16, 2008, that allowed for a
$23.0 million (2.5%) retail electric rate increase (discussed in more
detail above).
|
|
|
·
|
An
interim
rate increase approved by the PSCW for WPSC's retail electric customers
effective March 22, 2008 related to higher fuel and purchased
power costs.
|
|
|
·
|
A
3.8%
increase in electric sales volumes, including a 15.5% increase in
volumes
sold to lower margin wholesale customers, partially offset by a 2.8%
decrease in sales volumes to higher margin residential
customers. The increase in sales volumes to wholesale customers
was driven by higher contracted sales volumes to a large wholesale
customer period-over-period as well as an increase in opportunity
sales as
WPSC had more low-cost generation with Weston 4 generating power
for much
of the 2008 second quarter. The decrease in sales volumes to
residential customers was driven by high energy prices and a general
slowdown in the economy, which led to more energy conservation during
the
six months ended June 30, 2008, compared with the same period in
2007.
|
|
|
·
|
WPSC
having
the full benefit in 2008 of the 2007 retail electric rate increase
effective January 12, 2007 for WPSC's electric customers in
Wisconsin.
|
Margin
The
regulated
electric margin increased $12.2 million, driven by an increase in electric
margin at WPSC.
The
$13.0 million (4.9%) increase in the electric margin at WPSC was a result
of:
·
|
The
effect of
the 2008 retail electric rate increase (that was effective January
16,
2008) and the 2007 retail electric rate increase (described
above).
|
|
·
|
A
$27.0 million partial refund to Wisconsin retail customers in the six
months ended June 30, 2007, of their portion of proceeds from the
liquidation of the Kewaunee nonqualified decommissioning trust
fund. Pursuant to regulatory accounting, the decrease in the
2007 margin related to the refund was offset by a corresponding decrease
in operating and maintenance expenses in 2007 and, therefore, did
not have
an impact on earnings.
|
|
The
regulated
electric margin increase at WPSC was offset by:
|
|
|
·
|
Fuel
and
purchased power costs at WPSC that were approximately $16 million
higher than what was recovered in rates during the six months ended
June 30, 2008, compared with fuel and purchased power costs that were
approximately $1 million less than what was recovered in rates during
the same period in 2007. This drove a $17 million decrease
in margin period-over-period.
|
|
|
·
|
An
approximate $4 million decrease in WPSC's regulated electric margin
due to lower residential volumes discussed
above.
|
Operating
Income
Regulated
electric
operating income decreased $9.3 million, driven by a $19.2 million
increase in operating and maintenance expenses at WPSC, partially offset by
the
$12.2 million increase in regulated electric margin discussed
above.
The
$19.2 million (12.9%) increase in operating and maintenance expenses
at WPSC was driven by the following:
|
|
|
·
|
A
$27.0 million increase for the six months ended June 30, 2008,
over the same period in 2007, relating to the partial amortization
in 2007
of the regulatory liability previously recorded for WPSC's obligation
to
refund proceeds received from the liquidation of the Kewaunee nonqualified
decommissioning trust fund to Wisconsin retail electric
ratepayers.
|
|
|
·
|
A
$5.1 million increase in regulated electric transmission expenses,
primarily related to higher rates charged by MISO and ATC due to
additional transmission costs.
|
The
increases
in operating and maintenance expenses at WPSC were offset by the
following:
|
|
|
|
|
·
|
A
$10.1 million decrease in regulated electric maintenance expenses at
WPSC, primarily due to major planned outages at the Weston 2 and
Weston 3
generation stations and the De Pere Energy Center in the first half
of
2007, compared with fewer plant outages during the same period in
2008.
|
|
|
|
|
·
|
A
decrease in
pension, postretirement expenses, and medical benefit costs resulting
from
plan design changes and merger
synergies.
|
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
|
|
Three
Months
Ended
|
|
|
%
|
|
|
Six
Months
Ended
|
|
|
%
|
|
(Millions,
except natural gas sales volumes)
|
|
June 30
|
|
|
Increase
|
|
|
June 30
|
|
|
Increase
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
2,600.6 |
|
|
$ |
1,648.4 |
|
|
|
57.8 |
% |
|
$ |
5,014.7 |
|
|
$ |
3,423.8 |
|
|
|
46.5 |
% |
Cost
of fuel,
natural gas, and purchased power
|
|
|
2,544.1 |
|
|
|
1,649.9 |
|
|
|
54.2 |
% |
|
|
4,827.4 |
|
|
|
3,316.6 |
|
|
|
45.6 |
% |
Margins
|
|
|
56.5 |
|
|
|
(1.5 |
) |
|
|
- |
% |
|
|
187.3 |
|
|
|
107.2 |
|
|
|
74.7 |
% |
Margin
Detail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric
and other margins
|
|
|
100.8 |
|
|
|
(20.1 |
) |
|
|
- |
% |
|
|
227.9 |
|
|
|
51.8 |
|
|
|
340.0 |
% |
Natural
gas margins
|
|
|
(44.3 |
) |
|
|
18.6 |
|
|
|
- |
% |
|
|
(40.6 |
) |
|
|
55.4 |
|
|
|
- |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
and
maintenance expense
|
|
|
41.2 |
|
|
|
44.3 |
|
|
|
(7.0 |
%) |
|
|
81.4 |
|
|
|
75.9 |
|
|
|
7.2 |
% |
Depreciation
and amortization
|
|
|
3.5 |
|
|
|
2.8 |
|
|
|
25.0 |
% |
|
|
7.0 |
|
|
|
5.6 |
|
|
|
25.0 |
% |
Taxes
other
than income taxes
|
|
|
1.4 |
|
|
|
1.7 |
|
|
|
(17.6 |
%) |
|
|
4.1 |
|
|
|
4.4 |
|
|
|
(6.8 |
%) |
Operating
Income
|
|
$ |
10.4 |
|
|
$ |
(50.3 |
) |
|
|
- |
% |
|
$ |
94.8 |
|
|
$ |
21.3 |
|
|
|
345.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
volumes (includes volumes both physically delivered and net
settled)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
electric sales volumes in kwh
|
|
|
41,125.2 |
|
|
|
29,412.1 |
|
|
|
39.8 |
% |
|
|
81,665.2 |
|
|
|
55,482.8 |
|
|
|
47.2 |
% |
Retail
electric sales volumes in kwh
|
|
|
4,066.0 |
|
|
|
3,467.5 |
|
|
|
17.3 |
% |
|
|
8,044.7 |
|
|
|
5,954.5 |
|
|
|
35.1 |
% |
Wholesale
natural gas sales volumes in bcf
|
|
|
148.6 |
|
|
|
112.4 |
|
|
|
32.2 |
% |
|
|
291.9 |
|
|
|
224.7 |
|
|
|
29.9 |
% |
Retail
natural
gas sales volumes in bcf
|
|
|
73.8 |
|
|
|
87.4 |
|
|
|
(15.6 |
%) |
|
|
181.9 |
|
|
|
199.3 |
|
|
|
(8.7 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Physical
volumes (includes only transactions settled physically for the periods
shown) *
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
electric sales volumes in kwh
|
|
|
1,072.8 |
|
|
|
607.9 |
|
|
|
76.5 |
% |
|
|
2,120.5 |
|
|
|
1,323.3 |
|
|
|
60.2 |
% |
Retail
electric sales volumes in kwh
|
|
|
4,036.7 |
|
|
|
3,419.8 |
|
|
|
18.0 |
% |
|
|
7,989.4 |
|
|
|
5,859.2 |
|
|
|
36.4 |
% |
Wholesale
natural gas sales volumes in bcf
|
|
|
137.4 |
|
|
|
105.5 |
|
|
|
30.2 |
% |
|
|
265.5 |
|
|
|
203.4 |
|
|
|
30.5 |
% |
Retail
natural
gas sales volumes in bcf
|
|
|
73.3 |
|
|
|
73.5 |
|
|
|
(0.3 |
%) |
|
|
180.9 |
|
|
|
165.0 |
|
|
|
9.6 |
% |
*
Represents gross physical volumes.
kwh
– kilowatt-hours
bcf
– billion cubic feet
Revenue
●
|
Revenues
increased $952.2 million quarter-over-quarter and
$1,590.9 million for the six months ended June 30, 2008,
compared with the same period in 2007, primarily resulting from higher
energy prices and increased sales volumes (in part due to the addition
of
the nonregulated energy operations of PEC in February
2007).
|
Margins
Integrys
Energy
Services' margins increased $58.0 million in the second quarter of 2008,
compared with the second quarter of 2007, and $80.1 million for the six
months ended June 30, 2008, compared with the six months ended
June 30, 2007. 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 of certain transactions and, prior to January 1,
2008,
the settlement of the derivative instruments used to protect the value of former
Section 29/45K federal tax credits.
|
|
Increase
(Decrease) in Margin for
|
|
(Millions
except natural gas sales volumes)
|
|
Three
Months Ended June 30, 2008 Compared with Three Months Ended
June 30, 2007
|
|
|
Six
Months Ended June 30, 2008 Compared with Six Months Ended
June 30, 2007
|
|
|
|
|
|
|
|
|
Electric
and other
margins
|
|
|
|
|
|
|
Realized
gains on structured origination contracts
|
|
$ |
1.6 |
|
|
$ |
2.7 |
|
Realized
retail electric margin
|
|
|
1.2 |
|
|
|
20.3 |
|
All
other realized wholesale electric margin
|
|
|
(2.4 |
) |
|
|
(8.2 |
) |
|
|
|
|
|
|
|
|
|
Other
significant items:
|
|
|
|
|
|
|
|
|
Oil
option activity
|
|
|
(0.2 |
) |
|
|
(1.2 |
) |
Retail
and wholesale fair value adjustments*
|
|
|
120.7 |
|
|
|
162.5 |
|
Net
increase
in electric and other margins
|
|
|
120.9 |
|
|
|
176.1 |
|
|
|
|
|
|
|
|
|
|
Natural
gas
margins
|
|
|
|
|
|
|
|
|
Realized
natural gas margins
|
|
|
21.9 |
|
|
|
25.9 |
|
|
|
|
|
|
|
|
|
|
Other
significant items:
|
|
|
|
|
|
|
|
|
Mass
market supply options
|
|
|
(0.2 |
) |
|
|
(0.8 |
) |
Spot
to forward differential
|
|
|
(2.0 |
) |
|
|
1.2 |
|
Other
fair value adjustments*
|
|
|
(82.6 |
) |
|
|
(122.3 |
) |
Net
decrease
in natural gas margins
|
|
|
(62.9 |
) |
|
|
(96.0 |
) |
|
|
|
|
|
|
|
|
|
Net
increase
in Integrys Energy Services' margin
|
|
$ |
58.0 |
|
|
$ |
80.1 |
|
|
*Combined,
for
the six months ended June 30, 2008, these two line items included a
total of $11.5 million of gains resulting from the adoption of SFAS
No. 157 in the first quarter of 2008. See Note 18, "Fair Value," for
more
information.
|
Second
Quarter 2008 Compared with Second Quarter 2007
Electric
and Other
Margins
Integrys
Energy
Services' electric and other margins increased $120.9 million in the second
quarter 2008, compared with the second quarter 2007. The second
quarter 2008 electric and other margins included the negative impact of
$3.9 million of amortization related to purchase accounting adjustments
required as a result of the PEC merger, compared with a $6.5 million
negative impact in the second quarter of 2007. 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 $1.6 million, from
$4.4 million in the second quarter 2007, to $6.0 million in the second
quarter 2008. Origination contracts are physical, customer-based
agreements with municipalities, merchant generators, cooperatives, 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 markets in the western United States.
Realized
retail electric
margin
The
realized retail
electric margin increased $1.2 million, from $6.2 million in the
second quarter 2007, to $7.4 million in the second quarter
2008. The increase was driven by increased margins in Illinois and
expansion into the Mid-Atlantic region, partially offset by lower margins in
New
England and Texas resulting from an increase in ancillary service
cost. Because Integrys Energy Services has fixed price contracts with
many of its electric customers, it was not able to pass all of the increased
charges for ancillary services on to its customers.
All
other realized wholesale
electric margin
All
other realized
wholesale electric margin decreased $2.4 million, from $19.3 million for quarter
ended June 30, 2007, to $16.9 million for the quarter ended June 30,
2008. Integrys Energy Services seeks to reduce market price risk and
extract additional value from its generation and energy contract portfolios
through 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, generation facilities, and
trading activities is expected due to changing market conditions. A
diverse mix of products and markets, combined with disciplined execution and
exit strategies, allows Integrys Energy Services to generate economic value
and
earnings from these activities while staying within the value-at-risk (VaR)
limits authorized by Integrys Energy Group's Board of Directors. For
more information on VaR, see Item 3, “Quantitative and Qualitative Disclosures
about Market Risk."
Oil
option
activity
Oil
option activity
drove a $0.2 million decrease in electric and other margins in the second
quarter 2008, compared with the second quarter 2007. Gains related to
derivative accounting required fair value adjustments on oil options were
$0.2 million in the second quarter of 2007. The oil options,
which were used to protect the value of the former Section 29/45K tax credits,
were settled at the end of 2007, as the legislation that provided for Section
29/45K federal tax credits from the production and sale of synthetic fuel
expired effective December 31, 2007.
Retail
and wholesale fair
value adjustments
Integrys
Energy
Services' margin from retail and wholesale fair value adjustments increased
$120.7 million in the second quarter of 2008, compared with the same
quarter in 2007. Earnings volatility results from the application of
derivative accounting rules to customer supply contracts (requiring that these
derivative instruments be reflected at fair market value), without a
corresponding offset related to the customer sales contracts, which are not
considered derivative instruments. These non-cash 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 unrealized losses on supply contracts in periods of declining market
prices and unrealized gains in periods of increasing market prices.
Natural
Gas
Margins
Integrys
Energy
Services' natural gas margins decreased $62.9 million in the second quarter
of 2008, compared with the second quarter of 2007. The second quarter
2008 natural gas margins included the positive impact of $1.5 million of
amortization related to purchase accounting adjustments required as a result
of
the PEC merger, compared with a $0.5 million positive impact related to
purchase accounting adjustments in the second quarter of 2007. 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 $21.9 million, from $18.0 million in the second
quarter of 2007, to $39.9 million during the same quarter in
2008. The increased natural gas margin was driven by realized
wholesale natural gas margins that were $15.8 million higher
quarter-over-quarter primarily as a result of realized gains on natural gas
storage transactions and increased emphasis on structured wholesale natural
gas
transactions through continued expansion into new markets. The
structured transactions involve serving customers such as regulated utilities,
pipelines, retail marketers, and other large end users of natural
gas. The margin from retail natural gas operations in Illinois also
increased $4.6 million quarter-over-quarter, driven by further market
penetration in Illinois and a quarter-over-quarter reduction in the amortization
of certain customer contracts that were required to be marked to fair value
and
recorded as intangible assets as a result of the acquisition of the nonregulated
operations of PEC.
Mass-market
supply
options
Integrys
Energy
Services uses options to manage supply costs for mass-market customers and
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 reflected at fair market value), without a
corresponding 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 unrealized gains and losses on
options will reverse as the related customer sales contracts
settle.
In
the second quarter of 2008, options utilized to manage supply costs for
mass-market customers drove a $0.2 million decrease in Integrys Energy
Services' natural gas margin. These options had a negative
$0.1 million impact on margin in the second quarter 2008, compared with a
$0.1 million positive impact on margin in second quarter 2007.
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 withdrawals take place 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 reflected at fair market value using spot
prices, while the future sales contracts are reflected at fair value 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 affect the underlying cash
flows or economics of these transactions.
The
natural gas
storage cycle had a $2.0 million negative quarter-over-quarter impact on
natural gas margins. For the second quarter of 2008, the natural gas
storage cycle had a $0.1 million positive impact on margin, compared with a
$2.1 million positive impact on margin for the same quarter in
2007. At June 30, 2008, the market value of natural gas in
storage was $1.3 million less than the market value of future sales
contracts (net unrealized loss) related to the 2008/2009 natural gas storage
cycle. This difference will vary with market conditions and will
reverse entirely having a positive impact on margin when all of the natural
gas
is withdrawn from storage.
Other
fair value
adjustments
Other
derivative
accounting required fair value adjustments 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 reflected at fair
market value), without a corresponding 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, there is no gain or loss recognized on the
transportation contracts, customer sales contracts, or natural gas storage
contracts until physical settlement of these contracts occurs.
The
impact of the
fair value adjustments discussed above drove an $82.6 million decrease in
the natural gas margins as unrealized losses on these instruments were
$84.2 million in the second quarter of 2008, compared with unrealized
losses of $1.6 million for the second quarter of 2007.
Operating
Income
Second
quarter
operating income at Integrys Energy Services increased $60.7 million, from
a $50.3 million operating loss in 2007 to $10.4 million of operating
income in 2008. This increase results primarily from the
$58.0 million quarter-over-quarter increase in margin discussed above, as
well as a $3.1 million quarter-over-quarter decrease in operating and
maintenance expense. Operating and maintenance expense decreased from
$44.3 million in the second quarter of 2007 to $41.2 million in the
second quarter of 2008, driven by approximately $3 million of costs
incurred in the second quarter of 2007 to repair a failed blade at one of
Integrys Energy Services' merchant generation plants.
Six
Months 2008 Compared with Six Months 2007
Electric
and Other
Margins
Integrys
Energy
Services' electric and other margins increased $176.1 million during the
six months ended June 30, 2008, compared with the six months ended
June 30, 2007. For the six months ended June 30, 2008,
electric and other margins included the negative impact of $5.5 million of
amortization related to purchase accounting adjustments required as a result
of
the PEC merger, compared with a $9.4 million negative impact for the six
months ended June 30, 2007. 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 $2.7 million, from
$8.8 million for the six months ended June 30, 2007, to
$11.5 million in the six months ended June 30,
2008. Origination contracts are physical, customer-based agreements
with municipalities, merchant generators, cooperatives, 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 markets in the western United States.
Realized
retail electric
margin
The
realized retail
electric margin increased $20.3 million from $4.4 million during the
six months ended June 30, 2007, to $24.7 million during the six months
ended June 30, 2008. The increase was driven by the addition of
new customers in Illinois as a result of the PEC merger, expansion into the
Mid-Atlantic region and the resolution of certain regulatory issues in Northern
Maine.
All
other realized wholesale
electric margin
All
other wholesale
electric margin decreased $8.2 million, from $30.4 million for six months ended
June 30, 2007, to $22.2 million for the six months ended June 30,
2008. Integrys Energy Services seeks to reduce market price risk and
extract additional value from its generation and energy contract portfolios
through 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, generation facilities, and
trading activities is expected due to changing market conditions. A
diverse mix of products and markets, combined with disciplined execution and
exit strategies, allows Integrys Energy Services to generate economic value
and
earnings from these activities while staying within the value-at-risk (VaR)
limits authorized by Integrys Energy Group's Board of Directors. For
more information on VaR, see Item 3, “Quantitative and Qualitative Disclosures
about Market Risk."
Oil
option
activity
Oil
option activity
drove a $1.2 million decrease in electric and other margins in the six
months ended June 30, 2008, compared with the six months ended
June 30, 2007. Unrealized gains on oil options were
$1.2 million in the six months ended June 30, 2007. The oil
options used to protect the value of former Section 29/45K tax credits settled
at the end 2007, as the legislation that provided for Section 29/45K federal
tax
credits from the production and sale of synthetic fuel expired effective
December 31, 2007.
Retail
and wholesale fair
value adjustments
Integrys
Energy
Services' margin from retail and wholesale derivative accounting required fair
value adjustments increased $162.5 million during the six months ended June
30, 2008, compared with the same period in 2007. Earnings volatility
results from the application of derivative accounting rules to customer supply
contracts (requiring that these derivative instruments be reflected at market
value), without a corresponding offset related to the customer sales contracts,
which are not considered derivative instruments. These non-cash 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 unrealized losses on supply contracts in periods of
declining market prices and unrealized gains in periods of increasing market
prices.
Natural
Gas
Margins
Integrys
Energy
Services' natural gas margins decreased $96.0 million during the six months
ended June 30, 2008, compared with the six months ended June 30,
2007. During the six months ended June 30, 2008, natural gas
margins included the negative impact of $6.5 million of amortization
related to purchase accounting adjustments required as a result of the PEC
merger, compared with no significant impact related to purchase accounting
adjustments during the six months ended June 30, 2007. 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 $25.9 million, from $56.7 million in 2007, to
$82.6 million in 2008. The higher realized natural gas margin
was primarily related to an $18.6 million increase in realized wholesale
natural gas margins, driven by realized gains on natural gas storage
transactions and increased emphasis on structured wholesale natural gas
transactions through continued expansion into new markets. The margin
from retail natural gas operations in Illinois also increased $7.2 million
period-over-period, driven by further market penetration in
Illinois.
Mass-market
supply
options
During
the six
months ended June 30, 2008, options utilized to manage supply costs for
mass-market customers drove a $0.8 million decrease in Integrys Energy
Services' natural gas margin. These options had a $1.6 million
positive impact on margin in the six months ended June 30, 2008, compared
with a $2.4 million positive impact on margin in six months ended
June 30, 2007.
Spot
to forward
differential
The
natural gas
storage cycle had a $1.2 million positive impact on natural gas margins for
the six months ended June 30, 2008, compared with the same period in
2007. For the six months ended June 30, 2008, the natural gas
storage cycle had a $4.3 million positive impact on margin, compared with a
$3.1 million positive impact on margin for the same period in
2007.
Other
fair value
adjustments
Other
fair value
adjustments caused by derivative accounting treatment primarily relate 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 reflected
at fair value), without a corresponding 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, there is no gain or loss recognized on the
transportation contracts, customer sales contracts, or natural gas storage
contracts until physical settlement of these contracts occurs.
The
impact of the
fair value adjustments discussed above drove a $122.3 million decrease in
the natural gas margins as unrealized losses on these instruments were
$129.1 million in the six months ended June 30, 2008, compared with
unrealized losses of $6.8 million for the six months ended
June 30, 2007.
Operating
Income
Integrys
Energy
Services' operating income for the six months ended June 30, 2008 increased
$73.5 million, from $21.3 million in 2007 to $94.8 million in
2008. This increase results from the $80.1 million increase in
margin discussed above, partially offset by a $5.5 million increase in
operating and maintenance expense. Operating and maintenance expense
increased from $75.9 million during the six months ended June 30, 2007
to $81.4 million during the six months ended June 30,
2008. 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 integration of PEC's nonregulated
operations into Integrys Energy Services).
Holding
Company and Other
Segment Operations
|
|
Three
Months
Ended
|
|
|
%
|
|
|
Six
Months
Ended
|
|
|
%
|
|
|
|
June 30
|
|
|
Increase
|
|
|
June 30
|
|
|
Increase
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$ |
1.3 |
|
|
$ |
(7.3 |
) |
|
|
- |
% |
|
$ |
3.0 |
|
|
$ |
(2.5 |
) |
|
|
- |
% |
Second
Quarter 2008
Compared with Second Quarter 2007
Operating
income at
the Holding Company and Other segment improved $8.6 million during the
quarter ended June 30, 2008 driven by reductions in operating
expenses relating to severance, relocation, and other costs recorded in the
first quarter of 2007 associated with the PEC merger. In addition,
operating income of $1.2 million was generated at IBS in the second quarter
of 2008, related to return on capital included in its service
charges. Operations at IBS, our wholly owned service company, did not
commence until January 1, 2008.
Six
Months 2008 Compared with Six Months 2007
Operating
income at
the Holding Company and Other segment improved $5.5 million during the six
months ended June 30, 2008.
The
increase in
operating income was driven by:
·
|
Reductions
in
operating expenses related to severance, relocation, and other costs
recorded during the first six months of 2007 associated with the
PEC
merger.
|
|
|
·
|
Operating
income of $3.1 million generated at IBS during the six months ended
June 30, 2008, which related to return on capital included in its
service charges.
|
|
|
·
|
Partially
offsetting the increases discussed above was a $7.8 million increase
in operating expenses related to external costs to achieve merger
synergies compared with the six months ended June 30,
2007. This increase was primarily because in March 2007
all external costs to achieve merger synergies incurred from July
2006
through March 2007 were reallocated from the Holding Company and
Other
segment (where they were initially recorded) to the other reportable
segments, which are the beneficiaries of the synergy savings resulting
from the costs to achieve. This had the impact of lowering
operating expenses at the Holding Company and Other segment during
the six
months ended June 30, 2007.
|
Consolidated
Integrys Energy
Group Other Income (Expense)
|
|
Three
Months
Ended
|
|
|
%
|
|
|
Six
Months
Ended
|
|
|
%
|
|
|
|
June 30
|
|
|
Increase
|
|
|
June 30
|
|
|
Increase
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$ |
53.1 |
|
|
$ |
(33.9 |
) |
|
|
- |
% |
|
$ |
287.8 |
|
|
$ |
149.2 |
|
|
|
92.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
|
22.7 |
|
|
|
21.6 |
|
|
|
5.1 |
% |
|
|
40.8 |
|
|
|
33.9 |
|
|
|
20.4 |
% |
Interest
expense
|
|
|
(33.5 |
) |
|
|
(42.6 |
) |
|
|
(21.4 |
)% |
|
|
(71.4 |
) |
|
|
(79.0 |
) |
|
|
(9.6 |
)% |
Minority
interest
|
|
|
- |
|
|
|
- |
|
|
|
- |
% |
|
|
- |
|
|
|
0.1 |
|
|
|
- |
|
Other
expense
|
|
|
(10.8 |
) |
|
|
(21.0 |
) |
|
|
(48.6 |
)% |
|
|
(30.6 |
) |
|
|
(45.0 |
) |
|
|
(32.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss)
before taxes
|
|
|
42.3 |
|
|
|
(54.9 |
) |
|
|
- |
% |
|
|
257.2 |
|
|
|
104.2 |
|
|
|
146.8 |
% |
Provision
(benefit) for income taxes
|
|
|
17.5 |
|
|
|
(15.3 |
) |
|
|
- |
% |
|
|
95.8 |
|
|
|
26.6 |
|
|
|
260.2 |
% |
Income
(loss)
from continuing
operations
|
|
|
24.8 |
|
|
|
(39.6 |
) |
|
|
- |
% |
|
|
161.4 |
|
|
|
77.6 |
|
|
|
108.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations, net of tax
|
|
|
0.1 |
|
|
|
24.0 |
|
|
|
(99.6 |
)% |
|
|
0.1 |
|
|
|
47.0 |
|
|
|
(99.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss)
before preferred stock
dividends
of subsidiary
|
|
$ |
24.9 |
|
|
$ |
(15.6 |
) |
|
|
- |
% |
|
$ |
161.5 |
|
|
$ |
124.6 |
|
|
|
29.6 |
% |
Second
Quarter 2008 Compared with Second Quarter 2007
Miscellaneous
Income
Miscellaneous
income increased $1.1 million, as a result of:
·
|
A
$3.9 million increase in miscellaneous income from Integrys Energy
Group's approximate 34% ownership interest in ATC. Integrys
Energy Group recorded $15.9 million of pre-tax equity earnings from
ATC during the second quarter of 2008, compared with $12.0 million of
pre-tax equity earnings during the same quarter in
2007.
|
|
|
·
|
A
$5.0 million loss recognized during the quarter ended June 30,
2007, related to Integrys Energy Services' former investment in a
synthetic fuel facility. As of December 31, 2007, the synthetic
fuel facility was shut down as the legislation that made Section
29/45K
federal tax credits available as a result of the production and sale
of
synthetic fuel expired effective December 31, 2007, making
continued operation of this facility uneconomical.
|
|
|
·
|
The
increase
in miscellaneous income was partially offset by a $5.4 million
decrease in foreign currency gains at Integrys Energy Services' Canadian
subsidiaries. These transactions are substantially hedged from
an economic perspective and offset in margins, resulting in no significant
impact on income available for common
shareholders.
|
Interest
Expense
Interest
expense
decreased $9.1 million, driven by the repayment of short-term borrowings
used for working capital requirements at Integrys Energy Group. A
portion of the proceeds received from the sale of PEP in September 2007
were used to pay down the short-term debt. Integrys Energy Services
also experienced lower working capital requirements
quarter-over-quarter.
Provision
for Income
Taxes
|
|
Three
Months Ended June 30
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Effective
Tax
Rate
|
|
|
41.4 |
% |
|
|
27.9 |
% |
Section
29/45K of
the Internal Revenue Code that made tax credits available from the production
and sale of synthetic fuel expired effective December 31, 2007, driving the
change in the effective tax rate for the second quarter of 2008, compared with
the second quarter of 2007.
Discontinued
Operations
Income
from
discontinued operations, net of tax, decreased $23.9 million in the second
quarter of 2008, compared with the second quarter of 2007.
·
|
In
September 2007, Integrys Energy Group completed the sale of
PEP. During the quarter ended June 30, 2007,
$24.0 million of after-tax income from discontinued operations was
recognized related to PEP.
|
For
more
information on the discontinued operations discussed above, see Note 4, "Discontinued Operations" and
Note 21, "Segments of
Business."
Six
Months 2008 Compared with Six Months 2007
Miscellaneous
Income
Miscellaneous
income increased $6.9 million, as a result of:
·
|
A
$6.8 million increase in earnings from Integrys Energy Group's
approximate 34% ownership interest in ATC. Integrys Energy
Group recorded $30.6 million of pre-tax equity earnings from ATC
during the six months ended June 30, 2008, compared with
$23.8 million for the same period in 2007.
|
|
|
·
|
A
$9.6 million loss recognized during the quarter ended June 30,
2007, related to Integrys Energy Services' former investment in a
synthetic fuel facility.
|
|
|
·
|
The
increase
in miscellaneous income was partially offset by a $7.0 million
decrease in foreign currency gains at Integrys Energy Services' Canadian
subsidiaries. These transactions are substantially hedged from
an economic perspective and offset in margins, resulting in no significant
impact on income available for common
shareholders.
|
Interest
Expense
Interest
expense
decreased $7.6 million and was primarily driven by:
·
|
The
repayment
of short-term borrowings at Integrys Energy Group. A portion of
the proceeds received from the sale of PEP in September 2007 was used
to pay down the short-term debt. Integrys Energy Services also
experienced lower working capital requirements
quarter-over-quarter.
|
|
|
·
|
The
decrease
in interest expense discussed above was partially offset by combined
interest expense at PGL and NSG, which increased $4.6 million from
$11.0 million during the six months ended June 30, 2007, to
$15.6 million for the same period in 2008. The increase in
interest expense at PGL and NSG is primarily due to the fact that
these
companies were first acquired on February 21,
2007.
|
Provision
for Income
Taxes
|
|
Six
Months Ended June 30
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Effective
Tax
Rate
|
|
|
37.2 |
% |
|
|
25.5 |
% |
Section
29/45K of
the Internal Revenue Code that made tax credits available from the production
and sale of synthetic fuel expired effective December 31, 2007, driving the
increase in the effective tax rate for the six months ended June 30, 2008,
compared with the six months ended June 30, 2007. For the six
months ended June 30, 2007, our ownership in the synthetic fuel operation
resulted in recognizing the tax benefit of Section 29/45K federal tax credits
totaling $8.0 million.
Discontinued
Operations, Net
of Tax
In
September 2007, Integrys Energy Group completed the sale of
PEP. During the six months ended June 30, 2007,
$32.2 million of after-tax income from discontinued operations was
recognized related to PEP.
During
2007,
Niagara Generation, LLC recognized after-tax income of $14.8 million, due
to the $14.8 million after-tax gain recorded in discontinued operations
related to the sale of this facility in January 2007.
For
more
information on the discontinued operations discussed above, see Note 4, "Discontinued Operations" and
Note 21, "Segments of
Business."
LIQUIDITY
AND CAPITAL RESOURCES
We
believe that our cash balances, liquid assets, operating cash flows, access
to
equity capital markets, and available borrowing capacity provide adequate
resources to fund ongoing operating requirements and future capital expenditures
related to expansion of existing businesses and development of new
projects. However, our operating cash flows and access to capital
markets can be impacted by macroeconomic factors outside of our
control. In addition, our borrowing costs can be impacted by
short-term and long-term debt ratings assigned by independent rating
agencies. Currently, we believe our credit ratings are among the best
in the energy industry.
Operating
Cash Flows
During
the six
months ended June 30, 2008, net cash provided by operating activities was
$435.4 million, compared with $350.6 million for the same period in
2007. This $84.8 million increase in cash provided by operating
activities was primarily due to an increase in income available for common
shareholders (adjusted for non-cash items) during the six months ended
June 30, 2008, compared to the same period in 2007. The increase
was also driven by the partial refund of proceeds of $27.0 million received
in 2005 from the liquidation of the nonqualified decommissioning trust fund
to
Wisconsin retail electric customers in the first half of 2007. The
refund of the proceeds received from the liquidation of this trust to Wisconsin
retail electric customers was completed in the fourth quarter of
2007.
Investing
Cash Flows
Net
cash used for
investing activities was $131.9 million during the six months ended
June 30, 2008, compared with $195.2 million for the same period
in 2007. The $63.3 million period-over-period decrease in cash
used for investing activities was primarily driven by the reimbursement of
$99.7 million from ATC related to the construction of the transmission
facilities required to support Weston 4, partially offset by an increase in
capital expenditures of $43.5 million related to the construction of a
natural gas lateral infrastructure, discussed below.
Capital
Expenditures
Capital
expenditures by business segment for the six months ended June 30
were:
Reportable
Segment (millions)
|
|
2008
|
|
|
2007
|
|
|
Increase/Decrease
|
|
|
|
|
|
|
|
|
|
|
|
Electric
utility
|
|
$ |
75.2 |
|
|
$ |
86.4 |
|
|
$ |
(11.2 |
) |
Natural
gas
utility
|
|
|
105.6 |
|
|
|
53.0 |
|
|
|
52.6 |
|
Integrys
Energy Services
|
|
|
9.8 |
|
|
|
7.5 |
|
|
|
2.3 |
|
Holding
company and other
|
|
|
7.9 |
|
|
|
8.1 |
|
|
|
(0.2 |
) |
Integrys
Energy Group consolidated
|
|
$ |
198.5 |
|
|
$ |
155.0 |
|
|
$ |
43.5 |
|
The
decrease in
capital expenditures at the electric utility for the six months ended
June 30, 2008, compared with the same period in 2007, was mainly due to a
decrease in capital expenditures associated with the construction of Weston
4. Weston 4 was commercially operational in June 2008. The
increase in capital expenditures at the natural gas utility segment for the
six
months ended June 30, 2008, compared with the same period in 2007, was
primarily due to an increase in capital expenditures at PGL and NSG due to
the
fact that they were not acquired until February 21, 2007, as well as
construction of a natural gas lateral infrastructure that will connect WPSC's
natural gas distribution system to the Guardian II natural gas
pipeline.
Financing
Cash Flows
Net
cash used for
financing activities was $298.7 million during the six months ended
June 30, 2008, compared with $150.0 million for the same period
in 2007. The $148.7 million period-over-period increase in cash
used for financing activities was primarily driven by the repayment of
short-term borrowings, made possible by the reimbursement of $99.7 million
from
ATC related to the construction of the transmission facilities required to
support Weston 4. WPSC was required to finance the cost of the ATC
interconnection during construction prior to Weston 4 becoming
operational.
Significant
Financing Activities
Dividends
paid
increased during the six months ended June 30, 2008, over that paid for the
same period in 2007, primarily as a result of the PEC
merger. Integrys Energy Group issued 31.9 million shares of
common stock in conjunction with the PEC merger. Integrys Energy
Group's quarterly common stock dividend was also increased in February 2008,
from 66 cents per share to 67 cents per share.
Integrys
Energy
Group had outstanding commercial paper borrowings of $105.9 million and
$694.1 million at June 30, 2008, and 2007,
respectively. Integrys Energy Group had other outstanding short-term
debt of $154.6 million as of June 30, 2008, and $171.5 million as
of June 30, 2007.
On
April 17, 2008, PGL completed the purchase of $51.0 million of Illinois
Development Finance Authority Series 2003D Bonds,
due October 1, 2037, and backed by PGL Series PP bonds. Upon
repurchase, the Auction Rate Mode was converted from a 35-day mode to a weekly
mode. This transaction was treated as a repurchase of the Series PP
bonds by PGL. As a result, the liability related to the Series PP
bonds was extinguished. The Company intends to hold the bonds while
it continues to monitor the tax-exempt market and assess potential remarketing
or refinancing opportunities.
Prior
to January 1,
2008, Integrys Energy Group issued new shares of common stock under its Stock
Investment Plan and certain stock-based employee benefit and compensation
plans. As a result of the plans, equity increased $25.2 million
for the six months ended June 30, 2007. In the first six months
of 2008, Integrys Energy Group purchased shares of its common stock on the
open
market to meet the requirements of its Stock Investment Plan and certain
stock-based employee benefit and compensation plans.
In
January 2007, WPSC used the proceeds from its $22.0 million 3.95% tax
exempt senior notes issued in December 2006 to the Village of Weston,
Wisconsin, to repay the outstanding principal balance of the 6.90% first
mortgage bonds which originally matured in 2013.
Credit
Ratings
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
Corporate 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. None of the credit ratings for the issuers listed above,
except WPSC's senior secured debt rating, changed since Integrys Energy Group
filed its 2007 Annual Report on Form 10-K.
On
March 13, 2008, Standard and Poor's raised the senior secured debt rating for
WPSC one notch from A to A+. The new rating was a 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.
Discontinued
Operations
Net
cash provided
by discontinued operations was $3.1 million in the six months ended
June 30, 2007, primarily related to proceeds received from the sale of
Niagara in the first quarter of 2007. For the six months ended
June 30, 2008, there was no cash provided by discontinued
operations.
Future
Capital
Requirements and Resources
Contractual
Obligations
The
following table
summarizes the contractual obligations of Integrys Energy Group, including
its
subsidiaries, as of June 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
Due By Period
|
(Millions)
|
|
Total
Amounts
Committed
|
|
|
2008
|
|
|
|
2009-2010 |
|
|
|
2011-2012 |
|
|
2013
and Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt principal and interest
payments(1)
|
|
$ |
3,441.4 |
|
|
$ |
66.0 |
|
|
$ |
514.8 |
|
|
$ |
954.2 |
|
|
$ |
1,906.4 |
|
Operating
lease obligations
|
|
|
42.1 |
|
|
|
4.7 |
|
|
|
14.8 |
|
|
|
13.0 |
|
|
|
9.6 |
|
Commodity
purchase obligations(2)
|
|
|
9,460.6 |
|
|
|
3,242.0 |
|
|
|
4,008.9 |
|
|
|
1,112.6 |
|
|
|
1,097.1 |
|
Purchase
orders(3)
|
|
|
708.1 |
|
|
|
689.8 |
|
|
|
12.4 |
|
|
|
4.3 |
|
|
|
1.6 |
|
Capital
contributions to equity
method investment
|
|
|
34.6 |
|
|
|
34.6 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Minimum
pension funding
|
|
|
319.3 |
|
|
|
21.6 |
|
|
|
60.4 |
|
|
|
49.7 |
|
|
|
187.6 |
|
Total
contractual cash obligations
|
|
$ |
14,006.1 |
|
|
$ |
4,058.7 |
|
|
$ |
4,611.3 |
|
|
$ |
2,133.8 |
|
|
$ |
3,202.3 |
|
(1)
|
Represents
bonds issued, notes issued, and loans made to Integrys Energy Group
and
its subsidiaries. Integrys Energy Group records all principal obligations
on the balance sheet. For purposes
of this
table, it is assumed that the current interest rates on variable
rate debt
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. The utility subsidiaries expect to recover
the costs of their contracts in future customer
rates.
|
(3)
|
Includes
obligations related to
normal business operations and large construction
obligations.
|
The
table above
does not reflect payments related to the manufactured gas plant remediation
liability of $695.3 million at June 30, 2008, as the amount and timing
of payments are uncertain. See Note 12, "Commitments and
Contingencies." Also, the table does not reflect any payments
for the June 30, 2008, liability for uncertain tax positions. See
Note 11, "Income
Taxes."
Capital
Requirements
Estimated
construction expenditures by company for the three-year period 2008 through
2010 are:
(Millions)
|
|
|
|
WPSC
|
|
|
|
Wind
generation projects
|
|
$ |
249.0 |
|
Environmental
projects
|
|
|
138.5 |
|
Electric
and natural gas distribution projects
|
|
|
215.5 |
|
Natural
gas laterals to connect to Guardian II pipeline
|
|
|
65.4 |
|
Weston 4
(1)
|
|
|
33.2 |
|
Other
projects
|
|
|
139.6 |
|
|
|
|
|
|
UPPCO
|
|
|
|
|
Electric
distribution projects and repairs and safety measures
at
hydroelectric facilities
|
|
|
75.0 |
|
|
|
|
|
|
MGUC
|
|
|
|
|
Natural
gas pipe distribution system and underground natural gas storage
facilities
|
|
|
26.0 |
|
|
|
|
|
|
MERC
|
|
|
|
|
Natural
gas pipe distribution system
|
|
|
49.5 |
|
|
|
|
|
|
PGL
|
|
|
|
|
Natural
gas pipe distribution system and underground natural gas storage
facilities (2)
|
|
|
391.0 |
|
|
|
|
|
|
NSG
|
|
|
|
|
Natural
gas pipe distribution system
|
|
|
30.5 |
|
|
|
|
|
|
Integrys
Energy Services
|
|
|
|
|
Landfill
natural gas project, infrastructure project, and miscellaneous
projects
|
|
|
42.9 |
|
|
|
|
|
|
IBS
|
|
|
|
|
Corporate
services infrastructure projects
|
|
|
80.3 |
|
Total
capital
expenditures
|
|
$ |
1,536.4 |
|
(1)
|
As
of
June 30, 2008, WPSC incurred a total cost of approximately
$533 million related to its ownership interest in the
project. WPSC incurred a total cost of $99.7 million
related to the construction of the transmission facilities required
to
support Weston 4, and received reimbursement for these costs from ATC
in April 2008. The Weston 4 power plant was commercially operational
in
June 2008.
|
(2)
|
Includes
approximately $40 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.
|
Integrys
Energy
Group expects to provide additional capital contributions to ATC (not included
in the above table) of approximately $49 million in 2008 and
2009. No additional capital contributions are expected in
2010.
Capital
Resources
As
of June 30, 2008, 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
and
debt and equity financings to fund capital requirements. Management
believes Integrys Energy Group has adequate financial flexibility and resources
to meet its future needs.
See
Note 8, "Short-Term Debt and Lines
of
Credit," for more information on our credit facilities and other
short-term credit agreements.
Integrys
Energy
Group has the ability to publicly issue debt, equity, certain types of hybrid
securities, and other financial instruments under an existing shelf registration
statement. Specific terms and conditions of securities issued will be
determined prior to the actual issuance of any specific
security. Integrys Energy Group's Board of Directors has authorized
the issuance of up to $700.0 million of equity, debt, or other securities
under this shelf registration statement, $300.0 million of which was used
in December 2006 when Integrys Energy Group issued junior subordinated
notes.
In
May 2008, WPSC filed a shelf registration statement, which was declared
effective by the SEC in July
2008. Under this Form S-3, WPSC may issue up to $250.0 million
of senior debt securities within the next three years with amounts, prices
and
terms to be determined at the time of future offerings.
Other
Future Considerations
Regulatory
Matters and Rate Trends
To
mitigate the volatility of natural gas prices, 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.
On
February 1, 2007, the five utilities subject to the current Wisconsin fuel
rules
filed proposed changes to the fuel rules with the PSCW. The primary
proposed change was to implement a 1% "dead band" to limit a utility's
annual exposure or opportunity to a maximum of 1% of fuel costs. The
proposed "dead band" differs from the current trigger mechanism in that it
would
allow a utility to recover or refund all fuel costs outside of the band, rather
than only those costs after the trigger date. A proposed rule for
PSCW Chapter 116, "Cost of Fuel," was issued by the Commission on July 3, 2008,
incorporating many of the components of the utilities' proposal, with a 2%
bandwidth as opposed to the 1% bandwidth recommended by the
utilities. Comments on the proposed rules could be filed through
August 6, 2008. WPSC filed comments on the proposed fuel rules,
continuing to support a true "dead band" of 1%. The PSCW will need to
agree on a proposed rule that will then be forwarded to the legislature for
review and promulgation.
For
a discussion of
regulatory filings and decisions, see Note 20, "Regulatory
Environment."
Uncollectible
Accounts at the Natural Gas Utilities
The
reserves for
uncollectible accounts at the natural gas utilities reflect management's best
estimate of probable losses on the accounts receivable balances. The
reserves are 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.
The
impact of
higher natural gas prices and a declining economic environment on natural gas
customers could cause more accounts receivable to be uncollectible at the
natural gas utilities. Higher levels of uncollectible balances from
natural gas customers at the utilities would negatively impact Integrys Energy
Group's results of operations and could result in higher working capital
requirements.
Industry
Restructuring
-Illinois-
Integrys
Energy
Services markets natural gas to small commercial and industrial customers in
Illinois. Legislation had been circulating in the Illinois legislature
that could have had a significant detrimental effect on Integrys Energy
Services' ability to compete in this market. All of the proposals have
been voted down, and none are currently pending.
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 a
new method of receiving pre-construction approval for significant generating
plant additions as opposed to the alternative method of seeking approval for
recovery of costs after building a generation plant. The plan calls
for legislation to implement a 10% renewable energy portfolio standard by 2015
as well as a state-wide energy efficiency program. Discussions have
moved to the legislature and several bills have been introduced, though none
have been enacted at this time.
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. 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 Condensed Consolidated Balance
Sheets, 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 six months ended June 30, 2008.
Integrys
Energy Services
Mark-to-Market
Roll Forward
(Millions)
|
|
Oil
Options
|
|
|
Natural
Gas
|
|
|
Electric
|
|
|
Total
|
|
Fair
value of
contracts at December 31, 2007(1)
|
|
$ |
(0.2 |
) |
|
$ |
89.5 |
|
|
$ |
42.8 |
|
|
$ |
132.1 |
|
Less:
Contracts realized or settled during period(2)
|
|
|
(0.2 |
) |
|
|
22.0 |
|
|
|
36.0 |
|
|
|
57.8 |
|
Plus:
Changes
in fair value of contracts in existence at June 30, 2008(3)
|
|
|
- |
|
|
|
(224.3 |
) |
|
|
270.1 |
|
|
|
45.8 |
|
Fair
value of contracts at June 30, 2008(1)
|
|
$ |
- |
|
|
$ |
(156.8 |
) |
|
$ |
276.9 |
|
|
$ |
120.1 |
|
(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, 2007, that were no
longer included in the net mark-to-market assets as of
June 30, 2008.
|
(3)
|
Includes
unrealized gains and losses on contracts that existed at December 31,
2007, and contracts that were entered into subsequent to December 31,
2007, which are included in Integrys Energy Services' portfolio at
June 30, 2008, as well as gains and losses at the inception of
contracts.
|
There
were, in many cases, derivative
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 derivative positions are not reflected in the table
above.
The
table below
shows Integrys Energy Services' risk management instruments categorized by
fair
value hierarchy levels and by maturity. For more information on the
fair value hierarchy, see Note 18, "Fair Value."
Integrys
Energy Services
Risk
Management Contract Aging at Fair Value
As
of June 30, 2008 (Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value Hierarchy Level
|
|
Maturity
Less
Than
1
Year
|
|
|
Maturity
1 to
3
Years
|
|
|
Maturity
4 to 5
Years
|
|
|
Maturity
In
Excess
of
5 years
|
|
|
Total
Fair
Value
|
|
Level
1
|
|
$ |
(104.7 |
) |
|
$ |
102.6 |
|
|
$ |
10.3 |
|
|
$ |
- |
|
|
$ |
8.2 |
|
Level
2
|
|
|
204.2 |
|
|
|
15.5 |
|
|
|
1.1 |
|
|
|
4.4 |
|
|
|
225.2 |
|
Level
3
|
|
|
(85.4 |
) |
|
|
(23.2 |
) |
|
|
(6.6 |
) |
|
|
1.9 |
|
|
|
(113.3 |
) |
Total
fair value
|
|
$ |
14.1 |
|
|
$ |
94.9 |
|
|
$ |
4.8 |
|
|
$ |
6.3 |
|
|
$ |
120.1 |
|
CRITICAL
ACCOUNTING POLICIES
We
have reviewed our critical accounting policies for new critical accounting
estimates and other significant changes. We found that the
disclosures made in our Annual Report on Form 10-K for the year ended
December 31, 2007, are still current and that there have been no
significant changes, except as follows:
Risk
Management Activities
In
conjunction with the implementation of SFAS No. 157, on January 1, 2008,
Integrys Energy Group categorized its fair value measurements into three levels
within a fair value hierarchy. See Note 18, "Fair Value," for more
information.
Integrys
Energy
Group has based its valuations on observable inputs whenever
possible. However, the valuation of certain derivative instruments
requires the use of internally developed valuation techniques and/or significant
unobservable inputs. These valuations require a significant amount of
management judgment and are classified as Level 3 measurements. The
majority of Integrys Energy Group's Level 3 measurements relate to risk
management activities. Of the total risk management assets on
Integrys Energy Group's Condensed Consolidated Balance Sheets,
$1,195.4 million (24.9%) utilized Level 3 measurements. Of the
total risk management liabilities, $1,299.4 million (28.7%) utilized Level
3 measurements. Integrys Energy Group believes these valuations
represent the fair values of these instruments as of the reporting date;
however, the actual amounts realized upon settlement of these instruments could
vary materially from the reported amounts due to movements in market prices
and
changes in the liquidity of certain markets. There were no
significant changes in the valuation techniques used by Integrys Energy Group
to
value its risk management instruments during the six months ended June 30,
2008.
Item
3. Quantitative and Qualitative
Disclosures about Market Risk
Integrys
Energy
Group has potential market risk exposure related to commodity price risk
(including regulatory recovery risk), interest rate risk, equity return risk,
and principal preservation risk. Integrys Energy Group has risk
management policies in place to monitor and assist in controlling these market
risks and may use derivative and other instruments to manage some of these
exposures.
Interest
Rate Risk
Due
mainly to
decreases in commercial paper borrowings, Integrys Energy Group has decreased
its exposure to variable interest rates. Based on the variable rate
debt of Integrys Energy Group outstanding at June 30, 2008, a hypothetical
increase in market interest rates of 100 basis points in 2008 would increase
annual interest expense by $3.9 million. Comparatively, based on
the variable rate debt outstanding at June 30, 2007, an increase in
interest rates of 100 basis points would have increased interest expense in
2007 by $10.4 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.
Commodity
Price Risk
To
measure commodity price risk exposure, Integrys Energy Group employs a number
of
controls and processes, including a value-at-risk (VaR) analysis of certain
of
its exposures. VaR is estimated using a delta-normal approximation
based on a one-day holding period and 95% confidence level. For
further explanation of our VaR calculation, see the 2007 Annual Report on Form
10-K.
The
VaR for
Integrys Energy Services' trading portfolio is presented in the following
table:
|
|
June
|
|
|
June
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
95%
confidence
level, one-day holding period
|
|
$ |
2.2 |
|
|
$ |
1.2 |
|
Average
for 12
months ended
|
|
|
1.3 |
|
|
|
1.1 |
|
High
for 12
months ended
|
|
|
2.2 |
|
|
|
1.2 |
|
Low
for 12
months ended
|
|
|
0.9 |
|
|
|
0.9 |
|
Other
than the
above-mentioned changes, Integrys Energy Group's market risks have not changed
materially from the market risks reported in the 2007 Annual Report on Form
10-K.
Item
4.
Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
As
of the end of the period covered by this Quarterly Report on Form 10-Q, Integrys
Energy Group's management, with the participation of Integrys Energy Group's
Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the design and operation of 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)). Integrys Energy Group's management has
concluded that, as of the date of such evaluation, Integrys Energy Group's
disclosure controls and procedures were effective in accumulating and alerting
management about information relating to Integrys Energy Group (including
its
consolidated subsidiaries) as appropriate to allow timely decisions regarding
required disclosures to be included in its periodic SEC filings, particularly
during the period in which this Quarterly Report on Form 10-Q was being
prepared.
Changes
in Internal Controls
There
were no
changes in Integrys Energy Group's 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) during the quarter ended June 30, 2008, that have
materially affected, or are reasonably likely to materially affect, its internal
control over financial reporting.
For
information on
material legal proceedings and matters related to Integrys Energy Group and
its
subsidiaries, see Note 12, "Commitments and Contingencies"
in the Condensed Consolidated Financial Statements.
Labor
Contracts
Union
employees at
PGL are represented by Local 18007 of the Utility Workers Union of
America. The collective bargaining agreement with PGL union employees
expired on April 30, 2008. PGL and the union reached
agreement on a new 5-year collective bargaining agreement which extends to
May 1, 2013.
Local
2285 of the International
Brotherhood of Electrical Workers AFL-CIO represents union employees at
NSG. The collective bargaining agreement was due to expire on June
30, 2008. NSG and the union reached agreement on a new 5-year
collective bargaining agreement, which extends to June 30, 2013.
There
were no
material changes in the risk factors previously disclosed in the 2007 Annual
Report on Form 10-K for Integrys Energy Group filed on February 28,
2008.
Item
4. Submission of Matters to a Vote
of Security Holders
At
the May 15, 2008 Integrys Energy Group Annual Meeting of Shareholders, Mr.
Richard A. Bemis, Mr. William J. Brodsky, Mr. Albert J. Budney, Jr., Mr.
Robert C. Gallagher, and Mr. John C. Meng were elected to three-year
terms on the Board of Directors. The vote was:
|
Class
B Directors - Term Expiring in 2011
|
|
Bemis
|
Brodsky
|
Budney
|
Gallagher
|
Meng
|
|
|
|
|
|
|
Votes
For
|
61,693,558
|
62,810,191
|
63,199,998
|
62,040,823
|
62,135,782
|
Votes
Withheld
|
4,347,127
|
3,230,494
|
2,840,687
|
3,999,863
|
3,904,903
|
Shares
Not
Voted
|
10,383,410
|
10,383,410
|
10,383,410
|
10,383,409
|
10,383,410
|
Total
Shares
Outstanding
|
76,424,095
|
76,424,095
|
76,424,095
|
76,424,095
|
76,424,095
|
Election
of
Directors requires a plurality of the votes cast at a meeting of the common
shareholders at which a quorum is present.
The
continuing
Board members are:
Class
C Directors
Term
Expires in
2009
|
Class
A Directors
Term
Expires in
2010
|
|
|
Keith
E.
Bailey
Kathryn
M.
Hasselblad-Pascale
John
W.
Higgins
James
L.
Kemerling
|
Pastora
San
Juan Cafferty
Ellen
Carnahan
Michael
E.
Lavin
William
F.
Protz, Jr.
Larry
L.
Weyers
|
In
addition,
shareholders ratified the appointment of Deloitte & Touche LLP as the
independent registered public accounting firm for Integrys Energy Group and
its
subsidiaries for 2008. The shareholders voted as
follows:
Voted
|
Shares
|
For
|
63,381,328
|
Against
|
567,219
|
Abstained
|
2,092,138
|
Shares
Not
Voted
|
10,383,410
|
Total
|
76,424,095
|
|
Exhibits
|
|
|
|
|
The
following
documents are attached as exhibits or incorporated by reference
herein:
|
|
|
|
|
|
|
3
|
Integrys
Energy Group, Inc. By-laws as in effect at May 15, 2008 (Incorporated
by
reference to Exhibit 3.2 to Integrys Energy Group's Current Report
on Form
8-K dated May 15, 2008 and filed on
May 20, 2008)
|
|
|
|
|
|
|
10
|
Integrys
Energy Group, Inc. Pension Restoration and Supplemental Retirement
Plan,
as amended and Restated Effective April 1, 2008 (Incorporated by
reference
to Exhibit 10.1 to Integrys Energy Group's Current Report on Form
8-K
dated April 10, 2008 and filed on
April 15, 2008)
|
|
|
|
|
|
|
12
|
Ratio
of
Earnings to Fixed Charges
|
|
|
|
|
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
Act of
1934 for Integrys Energy Group
|
|
|
|
|
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
Act of
1934 for Integrys Energy Group
|
|
|
|
|
|
|
32
|
Written
Statement of the Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350 for Integrys Energy
Group
|
Pursuant
to
the requirements of the Securities Exchange Act of 1934, the registrant,
Integrys Energy Group, Inc., has duly caused this report to be
signed on
its behalf by the undersigned thereunto duly authorized.
|
|
Integrys
Energy Group, Inc.
|
|
|
|
|
|
|
Date: August
6, 2008
|
/s/
Diane L.
Ford
Diane
L.
Ford
Vice
President and Corporate Controller
(Duly
Authorized Officer and
Chief
Accounting Officer)
|
INTEGRYS
ENERGY GROUP
EXHIBIT
INDEX TO FORM 10-Q
FOR
THE QUARTER ENDED JUNE 30, 2008
|
|
Description
|
|
|
12
|
Ratio
of
Earnings to Fixed Charges
|
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
Act of
1934 for Integrys Energy Group
|
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
Act of
1934 for Integrys Energy Group
|
|
|
32
|
Written
Statement of the Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350 for Integrys Energy
Group
|
|
|