form10k.htm
UNITED
STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, D.
C. 20549
FORM
10-K
(Mark
One)
[X]
|
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the fiscal year
ended December 31, 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,
IL 60601
800-699-1269
|
39-1775292
|
Securities registered
pursuant to Section 12(b) of the Act:
Title of each class
|
Name of each
exchange
on which registered
|
|
|
Common Stock,
$1 par value
|
New York
Stock Exchange
|
Securities registered
pursuant to Section 12(g) of the Act:
None
Indicate by check
mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act.
Indicate by check
mark if the Registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act.
Indicate by check
mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [
]
Indicate by check
mark whether the Registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large
accelerated filer [X]
|
Accelerated
filer [ ]
|
Non-accelerated
filer [ ]
|
Smaller
reporting company [ ]
|
Indicate by check
mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
State the
aggregate market value of the voting and
non-voting common
equity held by non-affiliates of the Registrant.
|
|
$3,884,606,353
as of June 30, 2008
|
Number of
shares outstanding of each class
of common stock, as of February 25,
2009
|
|
|
Common Stock,
$1 par value, 76,425,737
shares
|
DOCUMENT
INCORPORATED BY REFERENCE
Definitive proxy
statement for the Integrys Energy Group, Inc. Annual Meeting of Shareholders to
be held on May 13, 2009 is incorporated by reference into Part
III.
INTEGRYS
ENERGY GROUP, INC.
ANNUAL
REPORT ON FORM 10-K
For
the Year Ended December 31, 2008
TABLE
OF CONTENTS
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Page
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Forward-Looking
Statements
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1
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PART
I
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3
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ITEM
1.
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BUSINESS
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3
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A.
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GENERAL
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3
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B.
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REGULATED
NATURAL GAS UTILITY
OPERATIONS
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4
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C.
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REGULATED
ELECTRIC UTILITY
OPERATIONS
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7
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D.
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INTEGRYS
ENERGY
SERVICES
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10
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E.
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ENVIRONMENTAL
MATTERS
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18
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F.
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CAPITAL
REQUIREMENTS
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18
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G.
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EMPLOYEES
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18
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H.
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AVAILABLE
INFORMATION
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19
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ITEM
1A.
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RISK
FACTORS
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20
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ITEM
1B
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UNRESOLVED
STAFF
COMMENTS
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26
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ITEM
2.
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PROPERTIES
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27
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A.
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REGULATED
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27
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B.
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INTEGRYS
ENERGY
SERVICES
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29
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ITEM
3.
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LEGAL
PROCEEDINGS
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30
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ITEM
4.
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SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
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30
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ITEM
4A.
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EXECUTIVE
OFFICERS OF INTEGRYS ENERGY GROUP AS OF JANUARY 1,
2009
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31
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PART
II
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33
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ITEM
5.
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MARKET FOR
INTEGRYS ENERGY GROUP'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
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33
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ITEM
6.
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SELECTED
FINANCIAL DATA
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34
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ITEM
7.
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MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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35
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ITEM
7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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83
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ITEM
8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY
DATA
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86
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A.
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Management
Report on Internal Control over Financial Reporting
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86
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B.
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Report of
Independent Registered Public Accounting Firm
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87
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C.
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Consolidated
Statements of Income
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89
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D.
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Consolidated
Balance
Sheets
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90
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E.
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Consolidated
Statements of Common Shareholders'
Equity
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91
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F.
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Consolidated
Statements of Cash
Flows
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92
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G.
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Notes to
Consolidated Financial Statements
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93
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Note
1
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Summary of
Significant Accounting
Policies
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93
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Note
2
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Risk
Management
Activities
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102
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Note
3
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Discontinued
Operations
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103
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Note
4
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Property,
Plant, and
Equipment
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106
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Note
5
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Acquisitions
and
Dispositions
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106
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Note
6
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Jointly-Owned
Utility
Facilities
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108
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Note
7
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Regulatory
Assets and
Liabilities
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109
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Note
8
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Investments
in Affiliates, at Equity
Method
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110
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Note
9
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Goodwill and
Other Intangible
Assets
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112
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Note
10
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Leases
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114
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Note
11
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Short-Term
Debt and Lines of Credit
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115
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Note
12
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Long-Term
Debt
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117
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Note
13
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Asset
Retirement Obligations
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120
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Note
14
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Income
Taxes
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121
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Note
15
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Commitments
and Contingencies
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124
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Note
16
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Guarantees
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132
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Note
17
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Employee
Benefit Plans
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133
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Note
18
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Preferred
Stock of Subsidiary
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139
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Note
19
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Common
Equity
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139
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Note
20
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Stock-Based
Compensation
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141
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Note
21
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Fair
Value
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144
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Note
22
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Miscellaneous
Income
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146
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Note
23
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Regulatory
Environment
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146
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Note
24
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Segments of
Business
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151
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Note
25
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Quarterly
Financial Information
(Unaudited)
|
154
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H.
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Report of
Independent Registered Public Accounting Firm on Financial
Statements
|
155
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ITEM
9.
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CHANGES IN
AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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156
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ITEM
9A.
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CONTROLS AND
PROCEDURES
|
156
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ITEM
9B.
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OTHER
INFORMATION
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156
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PART
III
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156
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ITEM
10.
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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156
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ITEM
11.
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EXECUTIVE
COMPENSATION
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157
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ITEM
12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
157
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ITEM
13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
157
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ITEM
14.
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PRINCIPAL
ACCOUNTING FEES AND
SERVICES
|
158
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PART
IV
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159
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ITEM
15.
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EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
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159
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SIGNATURES
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160
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SCHEDULE I -
CONDENSED PARENT COMPANY FINANCIAL STATEMENTS INTEGRYS ENERGY GROUP, INC.
(PARENT COMPANY ONLY)
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A.
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Statements of
Income and Retained Earnings
|
161
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B.
|
Balance
Sheets
|
162
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C.
|
Statements of
Cash Flows
|
163
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D.
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Notes to
Parent Company Financial Statements
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164
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SCHEDULE II -
VALUATION AND QUALIFYING ACCOUNTS
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171
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EXHIBIT
INDEX
|
172
|
Acronyms
Used in this Annual Report on Form 10-K
|
|
|
AFUDC
|
Allowance for
Funds Used During Construction
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ATC
|
American
Transmission Company LLC
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EPA
|
United States
Environmental Protection Agency
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ESOP
|
Employee
Stock Ownership Plan
|
FASB
|
Financial
Accounting Standards Board
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FERC
|
Federal
Energy Regulatory Commission
|
GAAP
|
United States
Generally Accepted Accounting Principles
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IBS
|
Integrys
Business Support, LLC
|
ICC
|
Illinois
Commerce Commission
|
IRS
|
United States
Internal Revenue Service
|
LIFO
|
Last-in,
first-out
|
MERC
|
Minnesota
Energy Resources Corporation
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MGU
|
Michigan Gas
Utilities Corporation
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MISO
|
Midwest
Independent Transmission System Operator, Inc.
|
MPSC
|
Michigan
Public Service Commission
|
MPUC
N/A
|
Minnesota
Public Utility Commission
Not
Applicable
|
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
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VBA
|
Volume
Balancing Adjustment
|
WDNR
|
Wisconsin
Department of Natural Resources
|
WPS
|
Wisconsin
Public Service Corporation
|
WRPC
|
Wisconsin
River Power Company
|
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. 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. 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.
Forward-looking
statements include, among other things, statements concerning management's
expectations and projections regarding earnings, regulatory matters, fuel costs,
sources of electric energy supply, coal and natural gas deliveries, remediation
costs, environmental and other capital expenditures, liquidity and capital
resources, trends, estimates, completion of construction projects, and other
matters.
Forward-looking
statements involve a number of risks and uncertainties. Some risk factors that could cause
results to differ from any forward-looking statement include those described in
Item 1A of this Annual Report on Form 10-K for the year ended December 31,
2008. Other factors include:
●
|
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;
|
●
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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,
reconciliation of revenues from the Gas Charge and related natural gas
costs, and the contested case proceeding regarding the Weston 4 air
permit;
|
●
|
The impacts
of changing financial market conditions, credit ratings, and interest
rates on the liquidity and financing efforts of Integrys Energy
Group and its subsidiaries;
|
●
|
The risks
associated with executing Integrys Energy Group's plan to significantly
reduce the scope and scale of, or divest in its entirety, the nonregulated
energy services business;
|
●
|
The risks
associated with changing commodity prices (particularly natural gas and
electricity) and the available sources of fuel and purchased power,
including their impact on margins;
|
●
|
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 Integrys Energy Group's subsidiaries operate;
|
●
|
The retention
of market-based rate authority;
|
●
|
The risk
associated with the value of goodwill or other intangibles and their
possible impairment;
|
●
|
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;
|
●
|
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
effectiveness of risk management strategies and the use of financial and
derivative instruments;
|
●
|
The risks
associated with the inability of Integrys Energy Group's and its
subsidiaries' counterparties, affiliates, and customers to meet their
obligations;
|
●
|
Weather and
other natural phenomena, in particular the effect of weather on natural
gas and electricity sales;
|
●
|
The
utilization of tax credit carryforwards;
|
●
|
The effect of
accounting pronouncements issued periodically by standard-setting bodies;
and
|
●
|
Other factors
discussed elsewhere herein and in other reports filed by Integrys Energy
Group from time to time with the
SEC.
|
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.
PART
I
ITEM
1. BUSINESS
A. GENERAL
For purposes of
this Annual Report on Form 10-K, unless the context otherwise indicates, when
referring to "us," "we," "our" or "ours," we are referring to Integrys Energy
Group, Inc. References to "Notes" are to the Notes to the
Consolidated Financial Statements included in this Annual Report on Form
10-K.
Integrys
Energy Group, Inc.
Integrys Energy
Group is domiciled in the United States and was incorporated in Wisconsin
in 1993. Integrys Energy Group is a holding company for its regulated
utility and nonregulated business units.
Natural
Gas Utility Segment
The natural gas
utility segment includes the regulated natural gas utility operations of WPS,
MGU, MER, PGL, and NSG. MGU and MER, both Delaware corporations, are
domiciled in the United States and began operations upon acquisition of their
natural gas distribution operations in Michigan and Minnesota, respectively,
from Aquila, Inc. in April 2006 and July 2006, respectively. PGL and
NSG, both Illinois corporations, are domiciled in the United States and began
operations in 1855 and 1900, respectively. Integrys Energy Group
acquired PGL and NSG in February 2007 in the PEC merger.
Electric
Utility Segment
The electric
utility segment includes the regulated electric utility operations of WPS and
UPPCO. WPS, a Wisconsin corporation, is domiciled in the United
States and began operations in 1883. UPPCO, a Michigan corporation,
is domiciled in the United States and began operations in 1884. For
the last three years, all of the electric utility segment's revenues were earned
within the United States and all assets were located within the United
States.
Integrys
Energy Services
Integrys Energy
Services, a Wisconsin corporation, is domiciled in the United States and was
established in 1994. Integrys Energy Services is a diversified
nonregulated natural gas and electric power supply and services company serving
residential, commercial, industrial, and wholesale customers in certain
developed competitive markets in the United States and
Canada. Integrys Energy Services provides energy supply solutions,
products, and strategies that enable customers to manage energy needs while
capitalizing on opportunities resulting from deregulated markets.
See Item 7,
“Management's Discussion and
Analysis of Financial Condition and Results of Operations –
Introduction,” for a discussion of the
revised strategy for Integrys Energy Services going forward.
Holding
Company and Other Segment
The Holding Company
and Other segment includes the operations of the Integrys Energy Group holding
company and the PEC holding company, along with any nonutility activities at
WPS, MGU, MER, UPPCO, PGL, and NSG. Also included in the Holding
Company and Other segment is WPS Investments, LLC, a nonutility company
which holds an approximate 34% ownership interest in ATC. On
December 31, 2008, WPS Investments was owned 82.9% by Integrys Energy
Group, 14.1% by WPS, and 3.0% by UPPCO. Equity earnings from our
investments in ATC, WRPC, and Guardian Pipeline, LLC (prior to its sale in 2006)
are included in the Holding Company and Other segment.
See Note 24, "Segments of Business," for
information on Integrys Energy Group's foreign and domestic revenues, foreign
and domestic long-lived assets, revenues from external customers, income (loss)
available for common shareholders, and total assets by reportable
segment.
B. REGULATED NATURAL GAS UTILITY
OPERATIONS
Integrys Energy
Group provides regulated natural gas utility service to Chicago and northern
suburbs of Chicago, northeastern Wisconsin, adjacent portions of Michigan's
Upper Peninsula, various cities and communities throughout Minnesota, and in the southern portion of lower
Michigan.
Regulated
Natural Gas Utility Segment Operating Statistics
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Operating
Revenues (Millions)
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$ |
2,128.3 |
|
|
$ |
1,441.7 |
|
|
$ |
401.4 |
|
Commercial
and industrial
|
|
|
668.0 |
|
|
|
481.2 |
|
|
|
218.3 |
|
Transportation
|
|
|
185.4 |
|
|
|
130.3 |
|
|
|
22.1 |
|
Other
|
|
|
44.2 |
|
|
|
50.5 |
|
|
|
35.1 |
|
Total
|
|
$ |
3,025.9 |
|
|
$ |
2,103.7 |
|
|
$ |
676.9 |
|
Therms
Delivered (Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
1,708.9 |
|
|
|
1,251.8 |
|
|
|
351.5 |
|
Commercial
and industrial
|
|
|
610.9 |
|
|
|
498.6 |
|
|
|
230.7 |
|
Other
|
|
|
28.6 |
|
|
|
47.1 |
|
|
|
27.6 |
|
Total therm
sales
|
|
|
2,348.4 |
|
|
|
1,797.5 |
|
|
|
609.8 |
|
Transportation
|
|
|
1,834.0 |
|
|
|
1,505.6 |
|
|
|
657.5 |
|
Total
|
|
|
4,182.4 |
|
|
|
3,303.1 |
|
|
|
1,267.3 |
|
Customers
Served (Approximate, end
of period)
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
1,489,800 |
|
|
|
1,497,000 |
|
|
|
620,500 |
|
Commercial
and industrial
|
|
|
111,900 |
|
|
|
111,100 |
|
|
|
62,600 |
|
Transportation
customers
|
|
|
68,200 |
|
|
|
64,100 |
|
|
|
900 |
|
Total
|
|
|
1,669,900 |
|
|
|
1,672,200 |
|
|
|
684,000 |
|
Average
therm price (Cents)
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
124.54 |
|
|
|
115.17 |
|
|
|
114.20 |
|
Commercial
and industrial
|
|
|
109.35 |
|
|
|
96.51 |
|
|
|
94.63 |
|
Facilities
For information
regarding our regulated natural gas facilities, see Item 2, "Properties,"
in this Annual Report on Form 10-K. For Integrys Energy Group's
natural gas utility plant asset book value, see Note 4, "Property, Plant, and
Equipment."
Natural
Gas Supply
Integrys Energy
Group's natural gas utilities manage portfolios of natural gas supply contracts,
storage services, and pipeline transportation services designed to meet their
varying load patterns at the lowest reasonable cost.
Integrys Energy
Group's regulated natural gas subsidiaries contract for fixed-term firm natural
gas supplies with various natural gas suppliers each year to meet the
November through March winter period demand of firm system sales
customers. Integrys Energy Group's regulated natural gas supply
requirements are met through a combination of physical fixed price purchases,
storage (contracted and
owned), natural gas
call options and physical index price purchases, and through the purchase of
additional natural gas supplies on the monthly spot market through fixed-term
firm contracts to supplement natural gas supplies and minimize
risk. During periods of colder than normal weather, purchasing
natural gas in the daily spot market may be necessary.
Integrys Energy
Group's natural gas utilities contract with various underground storage
facilities for underground natural gas storage capacity and have company-owned
storage. Besides providing the ability to manage significant changes
in daily natural gas demand, storage also provides Integrys Energy Group with
the ability to purchase steady levels of natural gas on a year-round basis, thus
lowering supply cost volatility.
For further
information on Integrys Energy Group's regulated natural gas utility supply and
transportation contracts, see Note 15, "Commitments and
Contingencies."
The following table
shows the expected design peak-day availability of natural gas in thousands of
dekatherms (MDth) during the 2008 through 2009 heating season for Integrys
Energy Group's natural gas utilities:
|
|
Design
Peak-Day
|
|
|
Year
of Contract
|
|
Source
(MDth)
|
|
Availability
|
|
|
Expiration
|
|
Firm pipeline
capacity
|
|
|
897 |
|
|
|
2009-2027 |
|
Firm
city-gate supply
|
|
|
142 |
|
|
2009
|
|
Liquefied
petroleum gas
|
|
|
40 |
|
|
|
N/A |
|
Natural gas
in storage:
|
|
|
|
|
|
|
|
|
Contracted
|
|
|
1,136 |
|
|
|
2010-2028 |
|
Company-owned
|
|
|
1,150 |
|
|
|
N/A |
|
Customer-owned
|
|
|
333 |
|
|
|
N/A |
|
Total expected design peak-day
availability
|
|
|
3,698 |
|
|
|
|
|
Integrys Energy
Group's natural gas utilities forecast design peak-day demand of 3,622 MDth for
the 2008 through 2009 heating season. Design peak-day demand for WPS
and MERC is associated with firm system sales customers only. Design
peak-day demand for WPS includes 732 dekatherms per day of peak-day back-up
service.
Regulatory
Matters
Legislation
and Regulation at State Level
The natural gas
retail rates of Integrys Energy Group are regulated by the ICC, PSCW, MPSC, and
MPUC. Under current regulatory practice, the ICC, PSCW, MPUC, and
MPSC allow Integrys Energy Group's regulated natural gas utilities to pass the
prudently incurred cost of natural gas on to customers on a one-for-one basis
through purchased gas adjustment clauses. Changes in the cost of
natural gas are reflected in both natural gas revenues and natural gas
purchases, thus having little or no impact on net income.
Effective March 1,
2008, PGL and NSG received approval from the ICC for a four-year pilot program
of a VBA decoupling mechanism that mitigates the impact of variations in weather
from normal conditions and mitigates the impact of customer
conservation. The VBA decoupling mechanism allows PGL and NSG to
adjust rates going forward to recover or refund the difference between the
actual and authorized margin impact of variations in volumes. (See
Note 23, "Regulatory
Environment," for further discussion of the PGL and NSG 2008 rate case
and VBA decoupling mechanism.)
Effective January
1, 2009, WPS received approval from the PSCW for a four-year pilot program of a
decoupling mechanism, which will allow WPS to adjust rates to recover or refund
the difference between the actual and authorized margin impacts of variations in
volumes. The PSCW approved this decoupling
mechanism, with
certain conditions, in the 2009 WPS rate case order. (See Note 23,
"Regulatory
Environment," for further discussion of the WPS 2009 rate case and the
decoupling mechanism.)
All of Integrys
Energy Group's utility subsidiaries are required to provide service and grant
credit to customers within their service territories. The utilities
are generally precluded from discontinuing service to residential customers
during winter moratorium months.
Legislation
and Regulation at Federal Level
Most of the natural
gas distributed by Integrys Energy Group is transported to its distribution
systems by interstate pipelines. The pipelines' services
(transportation and storage) are regulated by the FERC under the Natural Gas Act
and the Natural Gas Policy Act of 1978 (see "Natural Gas Supply" section
above).
Under United States
Department of Transportation regulations, the state commissions are responsible
for monitoring the regulated natural gas utilities' safety compliance program
for its pipelines under 49 Code of Federal Regulations (CFR) Part 192
(Transportation of Natural and Other Gas by Pipeline: Minimum Federal Safety
Standards) and 49 CFR Part 195 (Transportation of Hazardous Liquids by
Pipeline).
PGL utilizes its
storage and transmission assets as a natural gas hub. This activity
is regulated by the FERC and consists of providing wholesale transportation and
storage services in interstate commerce.
For additional
information, see Note 23, "Regulatory
Environment."
Other
Matters
Seasonality
The natural gas
throughput of Integrys Energy Group's regulated natural gas utilities follows a
seasonal pattern because the heating requirements of customers are temperature
driven. Specifically, customers typically use more natural gas during
the winter months. During 2008, the regulated natural gas utility
segment recorded approximately 68% of its revenues from January through March
and November through December.
Competition
Integrys Energy
Group's regulated natural gas utility operations face competition with other
entities and forms of energy in varying degrees, particularly for large
commercial and industrial customers who have the ability to switch between
natural gas and alternate fuels. Due to the volatility of natural gas
prices, Integrys Energy Group has seen customers with dual fuel capability
switch to alternate fuels for short periods of time, then switch back to natural
gas as market rates change. Interruptible natural gas sales and
natural gas transportation service is offered for customers to enable them to
reduce their energy costs. Transportation customers purchase their
natural gas directly from third-party natural gas suppliers and contract with
one of Integrys Energy Group's natural gas utility entities to transport the
natural gas from pipelines to their facilities. These purchases have
little effect on net income because these transportation services provide
margins similar to those applicable to conventional natural gas
sales. Additionally, some customers still purchase their natural gas
commodity directly from one of Integrys Energy Group's natural gas utility
entities but have elected to do so on an interruptible basis, as a means to
reduce their costs. Customers continue to switch between firm system
supply, interruptible system supply, and transportation service each year as the
economics and service options change.
Working
Capital Requirements
The seasonality of
natural gas revenues causes the timing of cash collections to be concentrated
from January through June. A portion of the winter natural gas supply
needs is typically purchased and stored from April through
November. In addition, planned capital spending on the natural gas
distribution facilities is concentrated in April through
November. Because of these timing differences, the cash flow
from customers is
typically supplemented with temporary increases in short-term borrowings during
the late summer and fall. Short-term debt is typically reduced over
the January through June period.
C. REGULATED
ELECTRIC UTILITY OPERATIONS
Integrys Energy
Group's regulated electric utility operations are provided through WPS and
UPPCO. WPS's regulated electric operations generate and distribute
electric energy mainly to northeastern Wisconsin and a small portion of
Michigan's Upper Peninsula. UPPCO provides electric energy in
Michigan's Upper Peninsula. Wholesale electric service is provided to
various customers, including municipal utilities, electric cooperatives, energy
marketers, other investor-owned utilities, and municipal joint action
agencies.
Both WPS and UPPCO
are members of MISO, a FERC-approved, independent, non-profit organization,
which operates a financial and physical electric wholesale market in the
Midwest. WPS and UPPCO offer their generation and bid their customer
load into the MISO market. MISO evaluates WPS's, UPPCO's, and other
market participants' energy injections into, and withdrawals from, the system to
economically dispatch the MISO system. MISO settles the participants'
offers and bids based on locational marginal prices, which are market-driven
values based on the specific time and location of the purchase and/or sale of
energy.
Regulated Electric Utility Segment
Operating Statistics
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Operating revenues (Millions)
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$ |
391.7 |
|
|
$ |
381.8 |
|
|
$ |
353.0 |
|
Commercial and
industrial
|
|
|
649.6 |
|
|
|
607.0 |
|
|
|
548.8 |
|
Wholesale and
other
|
|
|
287.6 |
|
|
|
257.3 |
|
|
|
197.6 |
|
Total
|
|
$ |
1,328.9 |
|
|
$ |
1,246.1 |
|
|
$ |
1,099.4 |
|
Kilowatt-hour sales (Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
3,064.5 |
|
|
|
3,173.6 |
|
|
|
3,144.8 |
|
Commercial and
industrial
|
|
|
8,632.8 |
|
|
|
8,750.9 |
|
|
|
8,645.2 |
|
Wholesale and
other
|
|
|
4,807.2 |
|
|
|
4,067.3 |
|
|
|
4,135.3 |
|
Total
|
|
|
16,504.5 |
|
|
|
15,991.8 |
|
|
|
15,925.3 |
|
Customers served (Approximate,
end of period)
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
426,500 |
|
|
|
424,400 |
|
|
|
421,000 |
|
Commercial and
industrial
|
|
|
60,200 |
|
|
|
59,600 |
|
|
|
59,100 |
|
Wholesale and
other
|
|
|
800 |
|
|
|
1,000 |
|
|
|
900 |
|
Total
|
|
|
487,500 |
|
|
|
485,000 |
|
|
|
481,000 |
|
In
2008, WPS reached a firm net design peak of 2,171 megawatts on July
15. As a result of continually reaching demand peaks in the summer
months, primarily due to air conditioning load, the summer period is the most
relevant for WPS's regulated electric utility capacity. WPS expects
future supply reserves to meet the minimum planning reserve margin criteria
through 2009 as required by the PSCW. The PSCW requires WPS to
maintain a planning reserve margin above its projected annual peak demand
forecast to help ensure reliability of electric service to its
customers. In October 2008, the PSCW issued a written order to lower
the reserve margin requirement from 18.0% to 14.5% for long-term planning
(planning years two through ten). The PSCW also determined that the
short-term planning (planning year one) reserve margin for Wisconsin utilities
will follow the planning reserve margin established by MISO under Module E of
its Open Access Transmission and Energy Markets Tariff. In 2008,
UPPCO reached a firm net design peak of 174 megawatts on December
16. The MPSC has not established minimum guidelines for future supply
reserves.
WPS and UPPCO had
adequate capacity to meet all firm electric load obligations during 2008 and
expect to have adequate capacity to meet all obligations during
2009.
Facilities
For a complete
listing of Integrys Energy Group's regulated electric facilities, see Item
2, "Properties,"
in this Annual Report on Form 10-K. For Integrys Energy Group's
electric utility plant asset book value, see Note 4, "Property, Plant, and
Equipment."
Electric
Supply
Electric
Supply Mix
The sources of
Integrys Energy Group's regulated electric supply were as follows:
Energy
Source
|
|
2008
|
|
|
2007
|
|
Company-owned
generating plants
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal
|
|
|
59.6 |
% |
|
|
|
|
|
52.4 |
% |
|
|
|
Hydroelectric
|
|
|
1.6 |
% |
|
|
|
|
|
1.3 |
% |
|
|
|
Natural
gas and fuel oil
|
|
|
1.2 |
% |
|
|
|
|
|
2.2 |
% |
|
|
|
Wind
|
|
|
0.1 |
% |
|
|
|
|
|
0.1 |
% |
|
|
|
Total
company-owned generating plants
|
|
|
|
|
|
|
62.5 |
% |
|
|
|
|
|
|
56.0 |
% |
Purchased
power
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nuclear
(Kewaunee Power Station)
|
|
|
16.5 |
% |
|
|
|
|
|
|
19.3 |
% |
|
|
|
|
Natural
gas (Fox Energy Center, LLC and Combined Locks Energy Center,
LLC)
|
|
|
4.4 |
% |
|
|
|
|
|
|
3.4 |
% |
|
|
|
|
Hydroelectric
|
|
|
2.3 |
% |
|
|
|
|
|
|
2.4 |
% |
|
|
|
|
Other
(including MISO)
|
|
|
14.3 |
% |
|
|
|
|
|
|
18.9 |
% |
|
|
|
|
Total
purchased power
|
|
|
|
|
|
|
37.5 |
% |
|
|
|
|
|
|
44.0 |
% |
Fuel
Costs
The cost of fuel
per generation of one million British thermal units (Btus) was as
follows:
Fuel
Type
|
|
2008
|
|
|
2007
|
|
Coal
|
|
$ |
1.78 |
|
|
$ |
1.47 |
|
Natural
gas
|
|
|
9.74 |
|
|
|
7.36 |
|
Fuel
oil
|
|
|
19.07 |
|
|
|
13.95 |
|
Coal
Supply
Coal is the primary
fuel source for WPS's regulated electric generation facilities, the majority of
which is purchased from the Powder River Basin mines located in
Wyoming. This low sulfur coal has been WPS's lowest cost coal source
from any of the subbituminous coal-producing regions in the
United States. WPS's regulated electric fuel portfolio strategy
is to maintain a 25- to 40-day supply of coal at each plant site.
Historically, WPS
has purchased coal directly from the producer for its wholly owned
plants. Wisconsin Power and Light purchases coal for the jointly
owned Edgewater and Columbia plants and is reimbursed by WPS for its share of
the coal costs. At December 31, 2008, WPS had coal transportation
contracts in place for 90% of its 2009 coal transportation
requirements. For more information on coal purchases and coal
deliveries under contract, see Note 15, "Commitments and
Contingencies."
Natural
Gas Supply – Generation
WPS supplies
natural gas through its natural gas distribution system to its approximately 437
megawatts of natural gas-fired combustion turbine generation
facilities. In addition, WPS is committed through a power purchase
agreement to provide fuel for 500 megawatts of the Fox Energy Center, a natural
gas-fired combined cycle generation facility owned by a third party with a total
combined electric capacity of approximately 600 megawatts. For
more information on natural gas supply under contract, see Note 15, "Commitments and
Contingencies."
In
December 2008, WPS received approval from the PSCW to continue its Energy Market
Risk Management Plan to govern its activities in the energy
markets. The order extends WPS's authority to engage in activities to
limit exposure to the volatility of natural gas prices affecting its electric
generation, as well as to use financial transmission rights to manage energy
congestion costs. The plan provides for the use of financial futures
contracts for natural gas and the use of financial options that cap the price of
natural gas for a portion of WPS's forecasted natural gas fuel generation
requirements and natural gas price sensitive purchased power
contracts.
Power
Purchase Agreements
Integrys Energy
Group's regulated electric facilities enter into short-term and long-term power
purchase agreements to meet a portion of electric energy supply
needs. The most significant of these is an agreement through 2013
with Dominion Energy Kewaunee, LLC to purchase energy and capacity from the
Kewaunee Power Station consistent with volumes available when WPS owned the
facility. For more information on power purchase obligations, see
Note 15, "Commitments and
Contingencies."
Regulatory
Matters
Integrys Energy
Group's electric utility operations are regulated by the PSCW, MPSC, and
FERC. WPS's retail electric rates are regulated by the PSCW and MPSC,
and UPPCO's retail electric rates are regulated by the MPSC. The FERC
regulates wholesale electric rates for WPS and UPPCO. In 2008, retail
electric revenues accounted for 79.5% of total electric revenues, while
wholesale electric revenues accounted for 20.5% of total electric
revenues.
The PSCW sets rates
through its ratemaking process, which is based upon recovery of operating costs
and a return on invested capital. One of the cost recovery components
is fuel and purchased power, which is governed by a fuel window
mechanism. Under the fuel window, if actual fuel and purchased power
costs deviate by more than 2% from costs included in the rates charged to
customers, a rate review can be triggered. Once a rate review is
triggered, rates may be reset (subject to PSCW approval) for the remainder of
the year to recover or refund, on an annualized basis, the projected increase or
decrease in the cost of fuel and purchased power. The MPSC and FERC
ratemaking processes are similar to those of the PSCW, with the exception of
fuel and purchased power, which are recovered on a one-for-one
basis.
Effective January
1, 2009, WPS received approval from the PSCW for a four-year pilot program of a
decoupling mechanism, which will allow WPS to adjust rates to recover or refund
the difference between the actual and authorized margin impacts of variations in
volumes. The PSCW approved this decoupling mechanism, with certain
conditions, in the 2009 WPS rate case order. (See Note 23, "Regulatory Environment," for
further discussion of the WPS 2009 rate case and the decoupling
mechanism.)
For additional
information, see Note 23, "Regulatory
Environment."
Hydroelectric
Licenses
WPS, UPPCO, and
WRPC (a company in which WPS has 50% ownership), have long-term licenses from
FERC for all of their hydroelectric facilities.
In
2007, UPPCO decided to restore Silver Lake as a reservoir to support power
generation, pending approval of an economically feasible design by the
FERC. In November 2008, the construction phase at Silver Lake was
completed and approved by the FERC. The project will be completed
after the FERC approves the refill plan and the reservoir regains historical
water levels.
For more
information on Silver Lake, see Note 15, "Commitments and
Contingencies."
Other
Matters
Seasonality
Integrys Energy
Group's regulated electric utility sales in Wisconsin generally follow a
seasonal pattern due to the air conditioning requirements of customers that are
primarily impacted by the variability of summer
temperatures. Regulated electric utility sales in Michigan follow no
significant seasonal trend due to cooler climate conditions in the Upper
Peninsula of Michigan.
Generally, during
the winter months, the purchase price of fuel (natural gas and fuel oil) for
generation is heavily influenced by weather and the availability of baseload
generation units within the MISO energy market. Sustained colder than
normal weather and unexpected extended generation outages
can influence fuel supply and demand, impacting the production
costs at Integrys Energy Group's natural gas and oil-fired facilities, as well
as natural gas supply commitments under power purchase
agreements. For Integrys Energy Group's regulated electric utility
segment, the impact on utility production costs is managed through WPS's Energy
Market Risk Management Plan.
Competition
The retail electric
utility market in Wisconsin is regulated by the PSCW. Retail electric
customers currently do not have the ability to choose their electric
supplier. However, in order to increase sales, utilities work to
attract new commercial and industrial customers into their service
territory. As a result, there is competition among utilities to keep
energy rates low. Wisconsin utilities have continued to refine
regulated tariffs in order to provide the true cost of electric energy to each
class of customer by reducing or eliminating rate subsidies among different
ratepayer classes. Although Wisconsin electric energy markets are
regulated, utilities still face competition from other energy sources, such as
self-generation by large industrial customers and alternative energy
sources.
Michigan electric
energy markets are open to competition; however, an active competitive market
has not yet developed in the Upper Peninsula of Michigan, primarily due to a
lack of excess generation and transmission system capacity.
D. INTEGRYS
ENERGY SERVICES
Integrys Energy
Services is a diversified nonregulated natural gas and electric power supply and
services company serving residential, commercial, industrial, and wholesale
customers in certain developed competitive markets in the United States and
Canada. Integrys Energy Services provides energy supply solutions,
products, and strategies that enable customers to manage energy needs while
capitalizing on opportunities resulting from deregulated markets.
Integrys Energy
Services and its subsidiaries market energy products in the retail market
serving commercial and industrial customers, direct and "aggregated" small
commercial and residential customers, as well as provide standard offer
service. Aggregated customers are associations or groups of
customers, which have joined together to negotiate purchases of electric or
natural gas energy as a larger group.
In
the wholesale market, Integrys Energy Services focuses on the execution and
optimization of structured transactions with large end-users, regulated local
distribution companies, generators, pipelines, storage companies, and other
nonregulated energy marketing and trading companies.
Integrys Energy
Services currently owns and operates electric generation facilities in the
United States and Canada.
Integrys Energy
Services is investing in and promoting renewable energy, which it believes is
key to the future of the energy industry. Clean, renewable, and
efficient energy sources are developed, acquired, owned, and operated by
Integrys Energy Services. Integrys Energy Services assists customers
with selecting an energy solution that is economically optimal and collaborates
with energy developers of wholesale energy projects to overcome challenges with
integrating the technical, regulatory, and financial aspects of their
projects.
Integrys Energy
Services utilizes derivative instruments, including forwards, futures, options
and swaps, to manage its exposure to market risks and to extract additional
value from its generation and energy contract portfolios in accordance with
limits and approvals established in its risk management and credit
policies. A diverse mix of products and markets, combined with
disciplined execution and exit strategies, generally 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. The Market Risk Oversight Committee,
comprised of cross-functional members of management and senior leadership of
Integrys Energy Services and its parent company, Integrys Energy Group, monitors
compliance with these policies.
For more
information on the trading and risk management activities of Integrys Energy
Services, see Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations – Market Price Risk Management
Activities."
See Item 7,
“Management's Discussion and
Analysis of Financial Condition and Results of Operations –
Introduction,” for a discussion of the
revised strategy for Integrys Energy Services going forward.
Recent
Developments
As
part of Integrys Energy Group's asset management strategy, Integrys Energy
Services continually assesses its portfolio by reviewing opportunities regarding
existing assets, the acquisition of assets, and contractual commitments to
obtain resources that complement its existing business and strategy while
maintaining an acceptable risk profile. This strategy calls for a
focus on the disposition of assets, including plants and entire business units,
which are either no longer strategic to ongoing operations, are not performing
as needed, or have an unacceptable risk profile. Integrys Energy
Services believes the following developments in the past five years have helped,
or will help, manage assets and risk:
Acquisitions
·
|
In 2008,
Integrys Energy Services continued its development of renewable energy
products by investing in 14 solar projects located throughout the United
States and construction of a pipeline that will transport methane gas
produced at a landfill for use at a chemical plant as a replacement for
natural gas, scheduled to be in-service in
2009.
|
·
|
In 2007, the
merger with PEC combined the nonregulated energy marketing businesses of
both companies. The combination created a stronger, more
competitive, and better-balanced market position in the Illinois retail
electric market and expanded its originated wholesale natural gas
business.
|
·
|
In 2007,
Integrys Energy Services opened an office in Denver, Colorado, to expand
its operation into the Western Systems Coordinating Council
markets.
|
·
|
In 2007,
Integrys Energy Services initiated its renewable energy program by
developing the Winnebago Energy Center, a landfill gas-to-electricity
plant in Rockford, Illinois.
|
·
|
In 2006,
Integrys Energy Services developed a retail electric product offering in
the Mid-Atlantic market (Pennsylvania, Delaware, Washington, D.C.,
Maryland, and New Jersey) as well as the Texas
market.
|
·
|
In 2004,
Integrys Energy Services completed the acquisition of Advantage Energy, a
privately held nonregulated electric power marketer based in Buffalo, New
York. This acquisition provided enhanced opportunities to
participate in the New York market and sell new
products.
|
Dispositions
·
|
In 2008,
Integrys Energy Services sold its subsidiary Mid-American Power, LLC for
approximately $5 million, which resulted in a pre-tax gain of $1.5
million. Mid-American Power, LLC owned the 44.5-megawatt
Stoneman generation facility. In the fourth quarter of 2008,
Integrys Energy Services recognized an additional pre-tax gain of
$6.3 million on the sale of this facility as a component of
discontinued operations when a previous contingent payment was earned and
paid by the buyer. This contingent payment resulted from
legislation that passed in the fourth quarter of 2008, which extended the
production tax credits available for certain biomass
facilities.
|
·
|
In 2007,
Integrys Energy Services sold WPS Niagara Generation, LLC for
approximately $31 million. WPS Niagara Generation, LLC owned the
50.1-megawatt Niagara Falls generation facility located in Niagara Falls,
New York. The pre-tax gain on the sale was approximately
$25 million.
|
·
|
In 2006,
Integrys Energy Services completed the sale of Sunbury Generation, LLC for
approximately $34 million. Sunbury Generation's primary
asset was the Sunbury generation facility located in
Pennsylvania. The pre-tax gain on the sale was approximately
$20 million.
|
·
|
In 2006,
Integrys Energy Services sold WPS ESI Gas Storage, LLC, which owned a
natural gas storage field located in Michigan, for approximately
$20 million. This facility was used for structured
wholesale natural gas transactions as natural gas storage spreads
arbitrage opportunities. The pre-tax gain on the sale was
approximately $9 million.
|
See Item 7,
“Management's Discussion and
Analysis of Financial Condition and Results of Operations –
Introduction,” for a discussion of the
revised strategy for Integrys Energy Services going forward.
Integrys Energy
Services' revenues, margin, operating income, volumes, and long-lived assets
include the operations of Integrys Energy Services' Canadian subsidiaries and
are reported as follows:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Revenues
(Millions)
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
7,326.7 |
|
|
$ |
5,031.1 |
|
|
$ |
3,177.0 |
|
Canada
|
|
|
2,408.5 |
|
|
|
1,948.6 |
|
|
|
1,982.1 |
|
Total
|
|
$ |
9,735.2 |
|
|
$ |
6,979.7 |
|
|
$ |
5,159.1 |
|
Margin
(Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
64.9 |
|
|
$ |
275.3 |
|
|
$ |
148.3 |
|
Canada
|
|
|
20.8 |
|
|
|
28.8 |
|
|
|
32.8 |
|
Total
|
|
$ |
85.7 |
|
|
$ |
304.1 |
|
|
$ |
181.1 |
|
Operating Income
(Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
(131.8 |
) |
|
$ |
100.9 |
|
|
$ |
55.7 |
|
Canada
|
|
|
13.5 |
|
|
|
22.3 |
|
|
|
27.3 |
|
Total
|
|
$ |
(118.3 |
) |
|
$ |
123.2 |
|
|
$ |
83.0 |
|
Physical Electric Volumes
(Million Kilowatt-Hours)
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
21,038.6 |
|
|
|
18,143.2 |
|
|
|
5,502.2 |
|
Canada
|
|
|
156.8 |
|
|
|
40.9 |
|
|
|
31.6 |
|
Total
|
|
|
21,195.4 |
|
|
|
18,184.1 |
|
|
|
5,533.8 |
|
Physical Natural Gas Volumes
(Billion Cubic Feet)
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
655.8 |
|
|
|
522.7 |
|
|
|
408.2 |
|
Canada
|
|
|
275.1 |
|
|
|
242.3 |
|
|
|
229.3 |
|
Total
|
|
|
930.9 |
|
|
|
765.0 |
|
|
|
637.5 |
|
Long-Lived Assets
(Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
210.7 |
|
|
$ |
168.3 |
|
|
|
|
|
Canada
|
|
|
20.0 |
|
|
|
20.6 |
|
|
|
|
|
Total
|
|
$ |
230.7 |
|
|
$ |
188.9 |
|
|
|
|
|
Facilities
Generation
At
December 31, 2008, Integrys Energy Services owned and operated electric
generation facilities in the Midwest and Northeast regions of the
United States with a total rated capacity of approximately
329 megawatts. In July 2008, Integrys Energy Services sold its
subsidiary Mid-American Power, LLC, which owned the 44.5 megawatt Stoneman
coal-fired, electric generating facility.
Integrys Energy
Services' direct ownership of generation facilities allows for more efficient
management of the market risk associated with its generation capabilities and
related contracts to provide electric energy. Integrys Energy Services focuses
on effective economic dispatch and risk management strategies in order to
enhance the returns of its generation facilities.
A
possible disposition of these assets is under consideration based on Integrys
Energy Group implementing its strategic decision to either divest of this
business segment or significantly reduce its size. See Item 7, “Management's Discussion and Analysis
of Financial Condition and Results of Operations – Introduction,” for a discussion of the
revised strategy for Integrys Energy Services going forward.
Renewable
Energy
In
response to customers' growing interest in sustainability and Integrys Energy
Group's own concern for the environment, Integrys Energy Services is now
focusing on delivering value-added energy services and renewable commodities to
its wholesale and retail customers. New product offerings include
Renewable
Energy
Certificates, energy-efficiency programs that promote conservation, and
development of green power generation projects.
Integrys Energy
Services initially showed its commitment to a greener environment by developing
the Winnebago Energy Center in 2007. The 6.4-megawatt plant captures
methane gas produced by decomposing trash at a landfill, and the gas powers
generators producing enough electricity to power about 5,000 homes while
offering the potential to save nearly 590,000 barrels of oil a
year.
In
2008, Integrys Energy Services continued its development of renewable energy
products and focus on conservation by investing approximately $46 million
in 14 solar projects located throughout the United States for a total capacity
of 6.2 megawatts. Integrys Energy Services' business model offers
clients solar-generated electric power without the need for any customer capital
investment. Customers agree to purchase all the solar power produced
at a price generally less than their current retail rate. These solar
investments receive substantial tax benefits, including the Investment Tax
Credit and accelerated tax depreciation. These projects may also
benefit from attractive state incentive programs including rebates or Solar
Renewable Energy Certificates.
In
2009, Integrys Energy Services, through its partially owned subsidiary, LGS
Renewables I, LC, expects to complete construction of a pipeline, which will
transport methane gas produced at a landfill for use at a chemical plant as a
replacement for natural gas. As of December 31, 2008, Integrys Energy
Services' investment in construction was approximately $17
million. For a complete listing of energy-producing facilities of
Integrys Energy Services, see Item 2, "Properties."
Fuel
Supply for Generation Facilities
Integrys Energy
Services' fuel inventory policy varies for each generation facility depending on
the type of fuel used and available natural gas storage
facilities. In 2008, Integrys Energy Services' merchant coal-fired
generation facilities consisted of its Westwood and Stoneman facilities until
the Stoneman facility was sold in July 2008. Actual fuel needs in
2009 will depend on market conditions and operational capability of the Westwood
facility. Integrys Energy Services' Westwood facility burns waste
coal left behind by mining operations and has several year's supply on
site. All fuel is located within a seven-mile radius of the
plant.
Energy
Supply
Physical supply
obligations are created when Integrys Energy Services' wholesale and retail
marketing groups execute forward sales contracts which may have fixed or
variable volumes, or a combination thereof. Additionally, contracts
may have fixed or variable pricing components. Whenever possible, any
price risk is mitigated at the time the commitment is executed with the
customer. Smaller contracts may remain open for short periods of time
until a hedgeable volume has been sold.
Integrys Energy
Services' electricity and natural gas supply requirements are primarily met
through the procurement of natural gas and electricity in the wholesale
markets. Only a small portion of its electricity supply requirements
are met through owned generation. Integrys Energy Services does not
own any reserves, so all natural gas supply is procured from producers and other
suppliers in the wholesale markets.
Retail
Electricity
The majority of
Integrys Energy Services' obligations to provide physical electricity results
from retail sales to commercial and industrial customers, many of which are
full-requirements in nature. Integrys Energy Services uses a
combination of bilateral electricity purchase agreements from generation
companies and other marketers as well as regional power pools to meet those
obligations. Integrys Energy Services employs load forecasting models
populated with historical usage data and current weather and production
assumptions to estimate the amount of electric supply to be
acquired. Day-to-day shortfalls or overages are balanced out in the
day ahead and real-time markets.
Wholesale
Electricity
Wholesale supply
obligations primarily result from the activities of Integrys Energy Services'
electric origination operation. Sales to energy intermediaries such
as local distribution companies (LDCs), municipalities, aggregators, and
marketers require Integrys Energy Services to procure electric supply for fixed
and variable volume contracts. Supply is acquired directly from
merchant generation companies, electric utilities, marketers, and regional power
pools. Some of Integrys Energy Services' supply contracts are unit
contingent, which means that electricity is only provided to the extent that a
specific generator is operational. Integrys Energy Services attempts
to match unit contingent sales and supply contracts in order to reduce the risk
of supply disruptions.
Retail
Natural Gas
Physical natural
gas supply obligations are created by the execution of forward sales contracts
by Integrys Energy Services' retail marketing operation. Commercial
and industrial customers, as well as some residential customers, make up the
majority of its load requirements. Natural gas is sourced in the
wholesale markets at the load zone, or in some cases is transported to the load
zone using natural gas transportation contracts. Floating volume
contracts are aggregated and modeled in order to estimate the load requirements
taking into consideration the potential impact of weather and operational
variability of the customer. Integrys Energy Services balances the
differences between the actual sales demand or usage of customers and its block
purchases by buying and selling any shortfall or excess in the spot
market. Many of Integrys Energy Services' customers are also allotted
storage capacity from their LDCs which Integrys Energy Services utilizes to
manage daily load variability.
Wholesale
Natural Gas
Integrys Energy
Services' wholesale natural gas operation acquires physical supply as part of
its asset optimization and trading program. When Integrys Energy
Services signs sales contracts with wholesale origination customers such as
utilities and other marketing companies, it hedges the majority of the price
risk using financial contracts such as NYMEX futures and over-the-counter NYMEX
swaps. The physical supply is acquired from producers or other
suppliers at the load zone or is transported into the load zone using natural
gas transportation contracts. Integrys Energy Services also contracts
to store the natural gas it purchases in lower priced periods for sale in higher
priced future periods. The usage and optimization of transportation
and storage contracts ultimately results in more reliable and lower cost
supply.
Regulatory
Matters
Integrys Energy
Services is a FERC-authorized power marketer and has received import/export
authorization from the United States Department of Energy (DOE) and the Canadian
National Energy Board (NEB). Integrys Energy Services on its own, or
through certain of its subsidiaries, is registered to sell retail electric
service in Connecticut, Delaware, District of Columbia, Illinois, Maine,
Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio,
Pennsylvania, Rhode Island, Texas, and Virginia in the United States, and
in the provinces of Ontario and Alberta in Canada.
Integrys Energy
Services, on its own, or through certain of its subsidiaries, is registered to
sell natural gas in the states of Illinois, Iowa, Michigan, Ohio, Pennsylvania,
New York and Alberta, Canada. Integrys Energy Services also sells
natural gas in Wisconsin where no license is required. Integrys
Energy Services' subsidiary, Integrys Energy Services of Canada Corp., is
registered to do business in the Canadian provinces of Alberta, British
Columbia, Manitoba, Nova Scotia, Ontario, Quebec, and
Saskatchewan. Integrys Energy Services and Integrys Energy Services
of Canada Corp. have a natural gas import/export permit through the DOE and the
NEB.
Integrys Energy
Services, or certain of its subsidiaries, are also members of the following
regional transmission operators and North American Electric Reliability Council
reliability regions:
·
|
Alberta
Electric System Operator;
|
·
|
California
Independent System Operator;
|
·
|
Independent
Electricity System Operator (located in Ontario);
|
·
|
Electric
Reliability Council of Texas;
|
·
|
ISO New
England;
|
·
|
MISO;
|
·
|
New Brunswick
System Operator;
|
·
|
New York
Independent System Operator;
|
·
|
Northeast
Power Coordinating Council;
|
·
|
Northern
Maine Independent System Administrator;
|
·
|
PJM
Interconnection;
|
·
|
ReliabilityFirst
Corporation;
|
·
|
SERC
Reliability Corporation;
|
·
|
Texas
Regional Entity; and
|
·
|
Western
Systems Coordinating Council.
|
All the FERC
hydroelectric facility licenses held by Integrys Energy Services' subsidiaries
are current.
Other
Matters
Customer
Segmentation
As
of December 31, 2008, Integrys Energy Services was delivering electricity and
natural gas supply to customers in 20 states in the United States and 6
provinces in Canada. Integrys Energy Services periodically reviews
and evaluates the profitability of its operations in each of these
markets. See Item 7, “Management's Discussion and Analysis
of Financial Condition and Results of Operations – Introduction,” for a discussion of the
revised strategy for Integrys Energy Services going forward.
As
of December 31, 2008, Integrys Energy Services served electricity customers
within 18 states in the United States and 2 Canadian provinces, including its
largest markets in Illinois, Texas, and the northeastern United
States. Integrys Energy Services served natural gas customers within
10 states in the United States and 6 Canadian provinces, including its largest
markets in Illinois, Wisconsin, Michigan, Ohio, and Canada.
Although Integrys
Energy Services is not dependent on any one customer, a significant percentage
of its retail sales volume is derived from industries related to:
·
|
Paper and
allied products;
|
·
|
Food and
kindred products;
|
·
|
Chemicals and
paint;
|
·
|
Steel and
foundries; and
|
·
|
Ethanol
production facilities.
|
Seasonality
Integrys Energy
Services believes that its business, in the aggregate, is not seasonal, even
though certain products sell more heavily in some seasons than in
others. Sales of natural gas generally peak in the winter months,
while sales of electricity generally peak in the summer
months. Generally in the summer months, the demand for electricity is
high, which increases the price at which electricity can be sold. In
periods of high
residential fuel consumption (generally the winter months), the purchase price
of oil and natural gas increases, which increases the production costs at
Integrys Energy Services' natural gas- and oil-fired generation
facilities. Integrys Energy Services' business can be volatile as a
result of market conditions and the related market opportunities available to
its customers.
Competition
Integrys Energy
Services is a nonregulated energy marketer that competes against regulated
utilities, energy marketers, and energy trading companies. Integrys
Energy Services competes with other energy providers on the basis of price,
reliability, customer service, product offerings, financial strength, consumer
convenience, performance, and reputation.
The competitive
landscape differs in each service area and within each targeted customer
segment. For residential and small commercial customers, the primary
competitive challenges come from the incumbent utility and affiliated utility
marketing companies. The large commercial, institutional and
industrial segments are very competitive in most markets with nearly all natural
gas customers having already switched away from utilities to an alternative
provider. National affiliated marketers, energy producers and other
independent retail energy companies compete for customers in this
segment.
The incumbent
regulated utilities and the nationally-branded utility affiliates typically
benefit from the economies of scale derived from the strength of substantial
asset-based balance sheets, and vertically integrated business models that
combine production, transmission, and distribution assets. These
advantages are offset by the lack of flexibility to offer multiple product
choices to their customers, while the nationally-branded utility affiliates
struggle with long-term focus and cultural adaptation to a nonregulated market
environment.
The local utilities
have the advantage of long-standing relationships with their customers, and they
have longer operating histories, greater financial and other resources, and
greater name recognition in their markets than Integrys Energy Services
does. In addition, local utilities have been subject to many years of
regulatory oversight and thus have a significant amount of experience regarding
the policy preferences of their regulators. Local utilities may seek
to decrease their tariff retail rates to limit or preclude the opportunities for
competitive energy suppliers and may seek to establish rates, terms, and
conditions to the disadvantage of competitive energy suppliers.
Working
Capital
The working capital
needs of Integrys Energy Services vary significantly over time due to volatility
in commodity prices, and related margin calls, levels of natural gas
inventories, the structure of wholesale transactions, and the price of energy
for natural gas and electricity. Integrys Energy Services' working
capital needs are met by cash generated from operations, equity infusions, and
debt (both long-term and short-term). Integrys Energy Services has
access to its own credit line (up to $175 million) from independent
financial institutions, and has the ability to borrow up to $400 million through
an intercompany loan agreement with Integrys Energy Group. At
December 31, 2008, Integrys Energy Group was authorized to provide aggregate
guarantees for Integrys Energy Services' commodity and financial transactions up
to $2.95 billion (which includes guarantees on the $175 million credit
line). These guarantees provide the credit support needed to
participate in the nonregulated energy market.
The capital and
credit markets experienced extreme volatility, uncertainty, and disruption in
2008, which has continued into 2009. The strength and depth of
competition in the nonregulated energy markets depends heavily on active
participation by multiple trading parties, which could be adversely affected by
disruptions in the capital and credit markets. Reduced capital and
liquidity and failures of significant institutions that participate in the
nonregulated energy markets could diminish the liquidity and competitiveness of
those markets, which are important to the business of Integrys Energy
Services.
See Item 7,
“Management's Discussion and
Analysis of Financial Condition and Results of Operations –
Introduction,” for a discussion of the
revised strategy for Integrys Energy Services going forward.
E. ENVIRONMENTAL
MATTERS
For information on
environmental matters related to Integrys Energy Group and any of its
subsidiaries, see Note 15, "Commitments and
Contingencies."
F. CAPITAL
REQUIREMENTS
For information on
capital requirements related to Integrys Energy Group, see Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations – Liquidity
and Capital Resources."
G. EMPLOYEES
Integrys Energy
Group and its subsidiaries had 5,191 employees at December 31, 2008, of which
approximately 44% were union employees. The reduction in the number
of employees at Integrys Energy Group's subsidiaries listed below at December
31, 2008, compared with December 31, 2007, was primarily due to the 2008
formation of IBS, a wholly owned subsidiary of Integrys Energy
Group. A significant portion of Integrys Energy Group's
administrative employees were transferred to IBS on January 1,
2008. At December 31, 2008, IBS had 1,296 employees.
At
December 31, 2008, WPS had 1,543 employees, of which approximately 64% were
union employees represented by Local 310 of the International Union of Operating
Electricians. The current Local 310 collective bargaining agreement
expires on October 17, 2009.
At
December 31, 2008, PGL had 1,085 employees, of which approximately 83% were
union employees represented by Local 18007 of the Utility Workers Union of
America. The current collective bargaining agreement with PGL union
employees expires on April 30, 2013.
At
December 31, 2008, MERC had 224 employees, of which approximately 19% were union
employees represented by Local 31 of the International Brotherhood of Electrical
Workers, AFL CIO. The current collective bargaining agreement expires
on May 31, 2011.
At
December 31, 2008, NSG had 168 employees, of which approximately 81% were union
employees represented by Local 2285 of the International Brotherhood of
Electrical Workers. The current collective bargaining agreement with
NSG union employees expires on June 30, 2013.
At
December 31, 2008, MGU had 167 employees, of which approximately 69% were union
employees represented by Local 12295 of the United Steelworkers of America, AFL
CIO CLC, and Local 417 of the Utility Workers Union of America, AFL
CIO. The Local 12295 of the United Steelworkers of America, AFL CIO
CLC, contract expires on January 15, 2010. The Local 417 of the
Utility Workers Union of America, AFL CIO, collective bargaining agreement
expires on February 15, 2012.
At
December 31, 2008, UPPCO had 153 employees, of which approximately 78% were
union employees represented by Local 510 of the International Brotherhood of
Electrical Workers, AFL CIO. The current collective bargaining
agreement expires on April 18, 2009. A new collective bargaining
agreement has been reached and is effective April 19, 2009. The new
agreement expires on April 12, 2014.
H. AVAILABLE
INFORMATION
Integrys Energy
Group files with the SEC its:
·
|
Annual Report
on Form 10-K;
|
·
|
Quarterly
Reports on Form 10-Q;
|
·
|
Proxy
statement;
|
·
|
Registration
statements, including prospectuses;
|
·
|
Current
Reports on Form 8-K; and
|
·
|
Any
amendments to these documents.
|
Integrys Energy
Group makes these reports available, free of charge, on Integrys Energy Group's
Internet website, www.integrysgroup.com, as soon as reasonably practicable after
they are filed with the SEC. Integrys Energy Group's Code of Conduct
may also be accessed on Integrys Energy Group's website, and any amendments to,
or waivers from the Code of Conduct will be timely disclosed on Integrys Energy
Group's website. Statements and amendments posted on Integrys Energy
Group's website do not include access to exhibits and supplemental schedules
electronically filed with the reports or amendments. Integrys Energy
Group is not including the information contained on or available through its
website as a part of, or incorporating such information by reference into, this
Annual Report on Form 10-K.
You may also
obtain materials filed with the SEC by Integrys Energy Group at the SEC Public
Reference Room at 100 F Street, N.E., Washington,
DC 20549. To obtain information on the operation of the
Public Reference Room, you may call 1-800-SEC-0330. You
may also view reports, proxy statements and other information regarding
Integrys Energy Group (including exhibits), filed with the SEC, at the SEC's
website at www.sec.gov.
ITEM
1A. RISK FACTORS
You should
carefully consider the following risk factors, as well as the other information
included or incorporated by reference in this Annual Report on Form 10-K, when
making an investment decision. The risks and uncertainties described below are
not the only ones Integrys Energy Group faces. Additional risks and
uncertainties not presently known or that Integrys Energy Group currently
believes to be immaterial may also adversely affect Integrys Energy
Group.
Adverse
capital and credit market conditions could negatively affect Integrys Energy
Group's ability to meet liquidity needs, access capital, and/or grow or sustain
its current businesses. Cost of capital and disruptions, uncertainty,
and/or volatility in the financial markets could also adversely impact the
results of operations and financial condition of Integrys Energy Group, as well
as exert downward pressure on its stock price.
The capital and
credit markets experienced extreme volatility, uncertainty, and disruption in
2008, which has continued into 2009. Having access to the credit and
capital markets, at a reasonable cost, is necessary for Integrys Energy Group to
fund its operations, including capital requirements. The capital and
credit markets provide Integrys Energy Group with liquidity to operate and grow
its businesses that is not otherwise provided from operating cash
flows. The credit and capital markets also support the ability of
Integrys Energy Group to provide credit support for the nonregulated operations
of Integrys Energy Services. Disruptions, uncertainty, and/or
volatility in those markets could increase Integrys Energy Group's cost of
capital. If Integrys Energy Group or its subsidiaries are unable to
access the credit and capital markets on terms that are reasonable, they may
have to delay raising capital, issue shorter-term securities, and/or bear an
increased cost of capital. This, in turn, could impact Integrys Energy Group's
ability to grow or sustain its current businesses including its ability to
provide adequate credit support for Integrys Energy Services, cause a reduction
in earnings, and/or limit Integrys Energy Group's ability to sustain its current
common stock dividend level.
The strength and
depth of competition in the nonregulated energy markets depends heavily on
active participation by multiple trading parties, which was adversely affected
by disruptions in the capital and credit markets in 2008 and could continue to
be affected in 2009. Reduced capital and liquidity and failures of
significant institutions that participate in the nonregulated energy markets
have diminished the liquidity and competitiveness of those markets and could
continue to do so into 2009, which could negatively impact the business of
Integrys Energy Services. These diminished markets have also increased
counterparty credit risk.
A
reduction in Integrys Energy Group's or its subsidiaries' credit ratings could
materially and adversely affect their business, financial position, results of
operations, and liquidity.
Integrys Energy
Group cannot be sure that any of Integrys Energy Group's or its subsidiaries'
credit ratings will remain in effect for any given period of time or that a
credit rating will not be lowered by a rating agency if, in the rating agency’s
judgment, circumstances in the future so warrant. Any downgrade
could:
·
|
Require the
payment of higher interest rates in future financings and possibly reduce
the potential pool of creditors;
|
·
|
Increase
borrowing costs under certain existing credit
facilities;
|
·
|
Limit access
to the commercial paper market;
|
·
|
Limit the
availability of adequate credit support for Integrys Energy Services'
operations; and
|
·
|
Require
provision of additional credit assurance, including cash margin calls, to
contract counterparties.
|
The
failure to effectively execute Integrys Energy Group’s plan to significantly
reduce the scope and scale, partially divest of, or fully divest of the
nonregulated energy services business segment, Integrys Energy Services, could
negatively impact the future results of operations and financial condition of
Integrys Energy Group.
We cannot be
certain that we will be able to execute our strategic decision for our
nonregulated business segment in a timely manner. The process of selling assets
or the full business segment, exiting markets, reducing operating costs, and
managing exposures can result in increased risks, including but not limited
to:
·
|
A reduction
in operating efficiencies, as operating margins may decline at a faster
rate than the associated operating
expenses;
|
·
|
Potential
loss of key employees during periods of increased employment
uncertainty;
|
·
|
A reduction
in the value of the nonregulated business segment, including a potential
corresponding negative impact on Integrys Energy
Group;
|
·
|
Lower
customer retention rates at Integrys Energy Services due to short-term
uncertainty about the ultimate outcome of the strategic
decision;
|
·
|
Losses on the
disposition of specific assets, components of the business segment, or the
entire business segment during this period of economic
turmoil;
|
·
|
Lower
earnings capacity from this business segment going forward, which Integrys
Energy Group may not be able to
replace.
|
Refer to
Item 7, “Management's Discussion and Analysis
of Financial Condition and Results of Operations – Introduction,” for a further
discussion of the revised strategy for Integrys Energy Services.
Counterparties and
customers may not meet their obligations.
Integrys Energy Group is exposed to the
risk that counterparties to various arrangements who owe Integrys Energy Group
money, energy, natural gas, coal or other commodities or services will not be
able to perform their obligations. Should the counterparties to these
arrangements fail to perform, Integrys Energy Group might be forced to replace
or to sell the underlying commitment at then-current market prices. In such
event, Integrys Energy Group might incur losses, or its results of operations,
financial position, or liquidity could otherwise be adversely
affected.
Some of Integrys Energy Group's
customers are experiencing, or may experience, financial problems that could
have a significant impact on their creditworthiness. Integrys Energy
Group cannot provide assurance that its financially distressed customers will
not default on their obligations to Integrys Energy Group and that such a
default will not have a material adverse effect on Integrys Energy Group's
business, financial position, results of operations, or cash flows. Furthermore, the bankruptcy of one or
more of its customers, or some other similar proceeding or liquidity constraint,
might make it unlikely that Integrys Energy Group would be able to collect all
or a significant portion of amounts owed by distressed entities or residential
customers. Such events could adversely impact Integrys Energy Group's
receivable collections and additional allowances may be required, which could
adversely affect its operating results. In addition, such events
might force customers to reduce or curtail their future use of Integrys Energy
Group's products and services, which could have a material adverse effect on
Integrys Energy Group’s results of operations and financial
condition.
The
use of derivative instruments could result in financial losses and liquidity
constraints.
Integrys Energy
Group uses derivative instruments, including futures, forwards, options and
swaps, to manage its commodity and financial market risks. Integrys
Energy Group also purchases and sells commodity-based contracts in the natural
gas and electric energy markets for trading purposes. Integrys Energy
Group has in the past, and could in the future, recognize financial losses (on
both an economic and GAAP basis) on these contracts as a result of volatility in
the market values of the underlying commodities or if a counterparty fails to
perform under a contract. Additionally, significant volatility in
energy prices could adversely impact Integrys Energy Group's cash collateral
requirements due to counterparty margin calls.
In
the absence of actively quoted market prices and pricing information from
external sources, the valuation of derivative contracts involves management's
judgment or use of estimates. As a result, changes in the underlying
assumptions or use of alternative valuation methods could affect the reported
fair value of these contracts. Furthermore, realized values could
differ from values determined by management.
For additional
information concerning derivatives and commodity-based trading contracts, see
Note 2, "Risk
Management Activities."
Integrys
Energy Group has recorded goodwill that could become impaired and adversely
affect financial results.
The merger with PEC
and the acquisition of natural gas distribution operations in Minnesota and
Michigan are accounted for as purchases by Integrys Energy Group in accordance
with GAAP. Under the purchase method of accounting, the assets and liabilities
acquired were recorded at their respective fair values at the date of
acquisition and added to those of Integrys Energy Group. As a result
of the application of purchase accounting, these transactions resulted in a
significant amount of goodwill. To the extent the value of goodwill
or intangibles becomes impaired, Integrys Energy Group may be required to incur
material charges relating to such impairment. Such an impairment
charge could have a material impact on the financial results of Integrys Energy
Group.
Integrys
Energy Group is subject to changes in government regulation, which may have a
negative impact on its businesses, financial position, and results of
operations.
The rates that
Integrys Energy Group's regulated utilities are allowed to charge for their
retail and wholesale services are some of the most important items influencing
its business, financial position, results of operations, and
liquidity.
Integrys Energy
Group is subject to comprehensive regulation by several federal and state
regulatory agencies, which significantly influences its operating environment
and may affect Integrys Energy Group's ability to recover costs from utility
customers. In particular, the PSCW, ICC, MPSC, MPUC, FERC, SEC, EPA,
Minnesota Office of Pipeline Safety, United States Department of Transportation,
WDNR, and Illinois Environmental Protection Agency regulate many aspects of
Integrys Energy Group's utility operations, including, but not limited to,
construction of facilities, conditions of service, the issuance of securities,
and the rates that it can charge customers. Integrys Energy Group is
required to have numerous permits, approvals, and certificates from these
agencies to operate its business.
Existing statutes
and regulations may be revised or reinterpreted by these agencies or these
agencies may adopt new laws and regulations that apply to Integrys Energy
Group. Integrys Energy Group is unable to predict the impact on its
businesses and operating results of any such actions by these
agencies. However, changes in regulations or the imposition of
additional regulations may require Integrys Energy Group to incur additional
expenses or change business operations, which may have an adverse impact on
results of operations. In addition, federal regulatory reforms may
produce unexpected changes and costs in the public utility
industry.
Any
change in Integrys Energy Group's ability to sell electricity generated from its
facilities at market based rates may impact earnings.
The FERC has
authorized Integrys Energy Group to sell generation from certain of its
facilities at market prices. The FERC retains the authority to modify
or withdraw Integrys Energy Group's market based rate authority. If
the FERC determines that the market is not workably competitive, that Integrys
Energy Group possesses market power, or that it is not charging just and
reasonable rates, it may require its subsidiaries to sell power at a price based
upon the costs incurred in producing the power. Integrys Energy
Group's revenues and profit margins may be negatively affected by any reduction
by the FERC of the rates it may receive.
Integrys
Energy Group may face significant costs to comply with the regulation of
greenhouse gas emissions.
Climate change and
the effect of greenhouse gas emissions, most notably carbon dioxide, are
increasingly becoming a concern for the energy industry. While there
is currently no federal regulation in the United States that mandates the
reduction of greenhouse gas emissions, it is possible that such legislation may
be enacted in the future. To that end, federal and state legislative
proposals have been introduced to regulate the emission of greenhouse
gases. Until legislation is passed at the federal or state level, it
remains unclear as to (1) which industry sectors will be impacted, (2) when
compliance will be required, (3) the magnitude of the greenhouse gas emissions
reductions that will be required, and (4) the costs and opportunities
associated with compliance. Integrys Energy Group is evaluating both
the technical and cost implications which may result from future state,
regional, or federal greenhouse gas regulatory programs, but at this time, it is
uncertain as to the effect climate change regulation may have on Integrys Energy
Group's future operations, capital expenditures, and financial
results.
Based on the
complexity and uncertainty of these issues, it is possible that future carbon
regulation will increase the cost of electricity produced at coal-fired
generation units and may affect the capital expenditures Integrys Energy Group
would make at its generation units. At this time, there is no
commercially available technology for removing carbon dioxide from a pulverized
coal-fired plant. In addition, future legislation designed to reduce
greenhouse gas emissions could make some of the generating units uneconomic to
maintain or operate and could affect future results of operations, cash flows,
and financial condition if such costs are not recoverable through regulated
rates.
Integrys Energy Group's natural gas delivery systems may also
generate fugitive gas as a result of normal operations and as a result of
excavation, construction, and repair of natural gas delivery
systems. Fugitive gas typically vents to the atmosphere and consists
primarily of methane, a
greenhouse gas.
Costs
of environmental compliance, liabilities, fines, penalties, and litigation could
exceed Integrys Energy Group's estimates.
Compliance with
current and future federal and state environmental laws and regulations may
result in increased capital, operating and other costs, including remediation
and containment expenses and monitoring obligations. Integrys Energy
Group cannot predict with certainty the amount and timing of all future
expenditures (including the potential or magnitude of fines or penalties)
related to environmental matters because of the difficulty of estimating
clean-up and compliance costs and the possibility that changes will be made to
the current environmental laws and regulations.
Integrys Energy
Group's natural gas utility subsidiaries are accruing liabilities and deferring
costs (recorded as regulatory assets) incurred in connection with their former
manufactured gas plant sites, including related legal expenses, pending recovery
through rates or from other entities. Regulatory assets reflect the
net amount of (1) costs incurred to date, (2) carrying costs (excluding those
for WPS), (3) amounts recovered from insurance companies, other entities
and customers, and (4) management's best estimates of the costs Integrys Energy
Group will spend in the future for investigating and remediating the
manufactured gas plant sites. Integrys Energy Group believes that any of these
costs that are not recoverable from other entities or from insurance carriers
are recoverable through rates for utility services under approved mechanisms for
the recovery of prudently incurred costs. A change in these rate
recovery
mechanisms, however, or a decision by the applicable state commission that some
or all of these costs were not prudently incurred, could result in the present
recognition as expense of some or all of these costs. For more information, see
Note 15, "Commitments and
Contingencies."
In
addition, impacts resulting from future federal or state regulation regarding
mercury, sulfur dioxide, and nitrogen oxide emissions are
uncertain. There is also uncertainty in quantifying liabilities under
environmental laws that impose joint and several liability on all potentially
responsible parties.
Citizen groups that
feel there are compliance issues not sufficiently enforced by environmental
regulatory agencies may also bring citizen enforcement actions against Integrys
Energy Group. Such actions could seek penalties, injunctive relief,
and costs of litigation.
Poor investment performance of
retirement plan investments and other factors impacting retirement plan costs
could unfavorably impact Integrys Energy Group’s liquidity and results of
operations.
Integrys Energy Group has employee
benefit plans that cover substantially all of its employees and
retirees. Integrys Energy Group's cost of providing these benefit
plans is dependent upon actual plan experience and assumptions concerning the
future, such as earnings on and/or valuations of plan assets, discount rates,
the level of interest rates used to measure the required minimum funding levels
of the plans, future government regulation and required or voluntary
contributions to the plans. Depending upon the investment
performance over time and other factors impacting its costs (as listed above),
Integrys Energy Group could be required to make larger contributions in the
future to fund these plans. These additional funding obligations could have a
material adverse impact on Integrys Energy Group's cash flows, financial
condition, and/or results of operations. Changes made to the plans
may also impact current and future pension and other postretirement benefit
costs.
Fluctuating
commodity prices may reduce energy margins.
Integrys Energy
Group’s regulated natural gas margins are sensitive to changes in natural gas
commodity prices. Any changes could affect the prices the regulated
natural gas utilities charge, their operating costs, and the competitive
position of their products and services. Prudently incurred costs for
purchased natural gas and pipeline transportation and storage services are fully
recoverable through the annual reconciliation of revenues from the natural gas
charge. However, increases in natural gas costs affect total retail
prices and, therefore, the competitive position of Integrys Energy Group's
natural gas business relative to other forms of energy. In addition,
the timing and extent of high natural gas prices can adversely affect accounts
receivable, bad debts, fuel cost, and interest expense. Integrys
Energy Group is also subject to margin requirements in connection with its use
of forward contracts and these requirements could escalate if prices move
adversely relative to these positions.
Integrys Energy
Group's regulated electric utility margins are directly affected by commodity
costs related to coal, natural gas, and other fuels used in the electric
generation process. Integrys Energy Group may experience increased
expenses, including interest costs and bad debts, higher working capital
requirements, and possibly reduction in demand as a result of any increase in
the cost of fuel or purchased power.
Higher commodity
prices result in increased energy prices that may impact customer demand for
energy in the nonregulated market and increase counterparty and bad debt
risk. This may stress margins at Integrys Energy Group's nonregulated
subsidiaries. If market prices for electric energy decline below the
cost of production at Integrys Energy Group's nonregulated facilities, these
units may be temporarily shut down.
Integrys
Energy Group's operations are subject to risks beyond our control, including but
not limited to weather, terrorist attacks, or acts of war.
Integrys Energy
Group's revenues are affected by the demand for electricity and natural
gas. That demand can vary greatly based upon:
·
|
Weather
conditions, seasonality, and temperature extremes;
|
·
|
Fluctuations
in economic activity and growth in Integrys Energy Group's regulated
service areas, as well as areas in which its nonregulated subsidiaries
operate; and
|
·
|
The amount of
additional energy available from current or new
competitors.
|
Weather conditions
directly influence the demand for electricity and natural gas and affect the
price of energy commodities.
In
addition, the cost of repairing damage to Integrys Energy Group's facilities due
to storms, natural disasters, wars, terrorist acts and other catastrophic
events, that is in excess of insurance limits established for such repairs or
excluded by insurance policies, may adversely impact Integrys Energy Group's
results of operations, financial condition, and cash flows. The
occurrence or risk of occurrence of future terrorist activity and the high cost
or potential unavailability of insurance to cover such terrorist activity may
impact Integrys Energy Group's results of operations and financial condition in
unpredictable ways. These actions could also result in disruptions of
power and fuel markets. In addition, Integrys Energy Group's natural
gas distribution system and pipelines could be directly or indirectly harmed by
future terrorist activity.
Actual
results could differ from estimates used to prepare Integrys Energy Group's
financial statements.
In
preparing the financial statements in accordance with GAAP, management must
often make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, expenses, and related disclosures at the date of the
financial statements and during the reporting period. Some of those
judgments can be subjective and complex and actual results could differ from
those estimates. For more information about significant estimates and
assumptions, see Item 7, ''Management's Discussion and
Analysis of Financial Condition and Results of Operations – Critical Accounting
Policies.''
Integrys
Energy Group may not be able to utilize tax credit carryforwards.
Integrys Energy
Group has significantly reduced its consolidated federal and state income tax
liability in the past through tax credits and tax losses available under the
applicable tax codes. Integrys Energy Group has not fully utilized
these tax credits and tax losses in its previous tax filings, but expects to
prior to their expiration in future filings. However, Integrys Energy
Group may not be able to fully utilize the tax credits and tax losses available
as carryforwards if its future federal and state taxable income and related
income tax liability is insufficient to permit the use of such credits and
losses.
In
addition, any future disallowance of some or all of those tax credits or tax
losses as a result of legislative change or adverse determination by one of the
applicable taxing jurisdictions could materially affect Integrys Energy Group's
tax obligations.
Integrys
Energy Group is subject to provisions that can limit merger and acquisition
opportunities for its shareholders.
The Wisconsin
Public Utility Holding Company Law precludes the acquisition of 10% or more of
the voting shares of a holding company of a Wisconsin public utility unless the
PSCW has first determined that the acquisition is in the best interests of
utility consumers, investors and the public. Those interests may, to
some extent, be mutually exclusive. This provision and other
requirements of the Wisconsin Public Utility Holding Company Law may delay, or
reduce the likelihood of, a sale or change of control thus reducing the
likelihood that shareholders will receive a takeover premium for their
shares.
Provisions of
Integrys Energy Group's articles of incorporation and by-laws may delay or
frustrate the removal of incumbent directors and may prevent or delay a merger,
tender offer or proxy contest involving Integrys Energy Group that is not
approved by its board of directors, even if the shareholders believe that such
events may be beneficial to Integrys Energy Group's interests. In
addition, the Wisconsin Business Corporation Law contains provisions that may
have the effect of delaying or making more difficult attempts by others to
obtain control of Integrys Energy Group without the approval of its board of
directors.
ITEM
1B. UNRESOLVED
STAFF COMMENTS
None.
ITEM
2. PROPERTIES
A. REGULATED
Electric
Facilities
The following table
summarizes information on the electric generation facilities of Integrys Energy
Group, including owned and jointly owned facilities as of December 31,
2008:
Type
|
Name
|
Location
|
Fuel
|
|
Rated
Capacity
(Megawatts)
|
|
(a)
|
|
|
|
|
|
|
|
|
Steam
|
Columbia
Units 1 and 2
|
Portage,
WI
|
Coal
|
|
|
355.6 |
|
(b)
|
|
Edgewater
Unit 4
|
Sheboygan,
WI
|
Coal
|
|
|
101.9 |
|
(b)
|
|
Pulliam (4
units)
|
Green Bay,
WI
|
Coal
|
|
|
326.8 |
|
|
|
Weston Units
1, 2, and 3
|
Wausau,
WI
|
Coal
|
|
|
471.2 |
|
|
|
Weston Unit
4
|
Wausau,
WI
|
Coal
|
|
|
374.8 |
|
(b)
|
Total
Steam
|
|
|
|
|
|
1,630.3 |
|
|
|
|
|
|
|
|
|
|
|
Combustion
|
De Pere Energy
Center
|
De Pere,
WI
|
Natural
Gas
|
|
|
170.4 |
|
|
Turbine
and
|
Eagle
River
|
Eagle River,
WI
|
Distillate
Fuel Oil
|
|
|
4.2 |
|
|
Diesel
|
Gladstone
|
Gladstone,
MI
|
Oil
|
|
|
18.7 |
|
|
|
Juneau
#31
|
Adams County,
WI
|
Distillate
Fuel Oil
|
|
|
6.3 |
|
(b)
|
|
Oneida
Casino
|
Green Bay,
WI
|
Distillate
Fuel Oil
|
|
|
3.5 |
|
|
|
Portage
|
Houghton,
MI
|
Oil
|
|
|
17.6 |
|
|
|
Pulliam
#31
|
Green Bay,
WI
|
Natural
Gas
|
|
|
81.2 |
|
|
|
West Marinette
#31
|
Marinette,
WI
|
Natural
Gas
|
|
|
36.0 |
|
|
|
West Marinette
#32
|
Marinette,
WI
|
Natural
Gas
|
|
|
34.2 |
|
|
|
West Marinette
#33
|
Marinette,
WI
|
Natural
Gas
|
|
|
51.7 |
|
(b)
|
|
Weston
#31
|
Marathon
County, WI
|
Natural
Gas
|
|
|
16.9 |
|
|
|
Weston
#32
|
Marathon
County, WI
|
Natural
Gas
|
|
|
46.8 |
|
|
Total
Combustion Turbine and Diesel
|
|
|
|
|
487.5 |
|
|
|
|
|
|
|
|
|
|
|
Hydroelectric
|
Alexander
|
Lincoln
County, WI
|
Hydro
|
|
|
2.2 |
|
|
|
Autrain (2
units)
|
Alger County,
MI
|
Hydro
|
|
|
0.4 |
|
|
|
Boney
Falls
|
Delta County,
MI
|
Hydro
|
|
|
1.3 |
|
|
|
Caldron
Falls
|
Marinette
County, WI
|
Hydro
|
|
|
6.7 |
|
|
|
Castle
Rock
|
Adams County,
WI
|
Hydro
|
|
|
12.0 |
|
(b)
|
|
Cataract
|
Marquette
County, MI
|
Hydro
|
|
|
0.3 |
|
|
|
Escanaba
#1
|
Delta County,
MI
|
Hydro
|
|
|
1.1 |
|
|
|
Escanaba
#3
|
Delta County,
MI
|
Hydro
|
|
|
1.0 |
|
|
|
Grand
Rapids
|
Menominee
County, WI
|
Hydro
|
|
|
4.0 |
|
|
|
Grandfather
Falls
|
Lincoln
County, WI
|
Hydro
|
|
|
17.3 |
|
|
|
Hat
Rapids
|
Oneida County,
WI
|
Hydro
|
|
|
0.7 |
|
|
|
High
Falls
|
Marinette
County, WI
|
Hydro
|
|
|
1.6 |
|
|
|
Hoist (3
units)
|
Marquette
County, MI
|
Hydro
|
|
|
1.1 |
|
|
|
Jersey
|
Lincoln
County, WI
|
Hydro
|
|
|
- |
|
|
|
Johnson
Falls
|
Marinette
County, WI
|
Hydro
|
|
|
1.0 |
|
|
|
McClure (2
units)
|
Marquette
County, MI
|
Hydro
|
|
|
3.6 |
|
|
|
Merrill
|
Lincoln
County, WI
|
Hydro
|
|
|
1.0 |
|
|
|
Otter
Rapids
|
Vilas County,
WI
|
Hydro
|
|
|
0.3 |
|
|
|
Peshtigo
|
Marinette
County, WI
|
Hydro
|
|
|
0.3 |
|
|
|
Petenwell
|
Adams County,
WI
|
Hydro
|
|
|
13.3 |
|
(b)
|
|
Potato
Rapids
|
Marinette
County, WI
|
Hydro
|
|
|
0.4 |
|
|
|
Prickett (2
units)
|
Houghton
County, MI
|
Hydro
|
|
|
0.4 |
|
|
|
Sandstone
Rapids
|
Marinette
County, WI
|
Hydro
|
|
|
1.1 |
|
|
|
Tomahawk
|
Lincoln
County, WI
|
Hydro
|
|
|
2.4 |
|
|
|
Victoria (2
units)
|
Ontonagon
County, MI
|
Hydro
|
|
|
10.8 |
|
|
|
Wausau
|
Marathon
County, WI
|
Hydro
|
|
|
3.0 |
|
|
Total
Hydroelectric
|
|
|
|
|
|
87.3 |
|
|
|
|
|
|
|
|
|
|
|
Wind
|
Glenmore (2
units)
|
Brown County,
WI
|
Wind
|
|
|
- |
|
|
|
Lincoln
|
Kewaunee
County, WI
|
Wind
|
|
|
1.0 |
|
|
Total
Wind
|
|
|
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
Total
System
|
|
|
|
|
|
2,206.1 |
|
|
(a)
|
Based on
capacity ratings for July 2009. As a result of continually
reaching demand peaks in the summer months, primarily due to air
conditioning demand, the summer period is the most relevant for capacity
planning purposes at Integrys Energy Group’s electric
segment.
|
|
|
(b)
|
These
facilities are jointly owned by WPS and various other
utilities. The capacity indicated for each of these units is
equal to WPS’s portion of total plant capacity based on its percent of
ownership, with the exception of Petenwell and Castle Rock, as discussed
below.
|
|
|
|
|
-
|
Wisconsin
Power and Light Company operates the Columbia and Edgewater units, and WPS
holds a 31.8% ownership interest in these facilities.
|
|
|
|
|
-
|
WRPC owns and
operates the Castle Rock, Petenwell, and Juneau units. WPS
holds a 50% ownership interest in WRPC; however, WPS is entitled to 66.7%
of total capacity at Petenwell and Castle Rock.
|
|
|
|
|
-
|
WPS operates
the West Marinette 33 unit and holds a 68% ownership interest in the
facility, while Marshfield Electric and Water Department holds the
remaining 32% ownership.
|
|
|
|
|
-
|
WPS operates
the Weston 4 facility and holds a 70% ownership in this facility, while
Dairyland Power Cooperative holds the remaining
30%.
|
As
of December 31, 2008, Integrys Energy Group’s electric utilities owned
approximately 24,800 miles of electric distribution lines located in Michigan
and Wisconsin and approximately 160 distribution substations.
Natural
Gas Facilities
At
December 31, 2008, Integrys Energy Group’s natural gas properties were located
in Illinois, Wisconsin, Minnesota, and Michigan, and consisted of the
following:
●
|
Approximately
22,000 miles of natural gas distribution mains,
|
●
|
Approximately
980 miles of natural gas transmission mains,
|
●
|
Approximately
260 natural gas distribution and transmission gate
stations,
|
●
|
Approximately
1.3 million natural gas lateral services,
|
●
|
A
3.6 billion-cubic-foot natural gas storage field located in Michigan,
and
|
●
|
A 36.5
billion-cubic-foot underground natural gas storage reservoir and a
liquefied natural gas plant at Manlove Field located in central
Illinois.
|
General
Integrys Energy
Group’s utility plant at WPS, UPPCO, PGL, and NSG is subject to first mortgage
liens.
B. INTEGRYS
ENERGY SERVICES
The following table
summarizes information on the electric generation facilities owned by Integrys
Energy Services as of December 31, 2008:
Type
|
Name
|
Location
|
Fuel
|
|
Rated
Capacity
(Megawatts)
|
|
(a)
|
|
|
|
|
|
|
|
|
Combined
Cycle
|
Beaver
Falls
|
Beaver Falls,
NY
|
Gas/Oil
|
|
|
78.9 |
|
|
|
Combined
Locks
|
Combined
Locks, WI
|
Gas
|
|
|
46.8 |
|
(b)
|
|
Syracuse
|
Syracuse,
NY
|
Gas/Oil
|
|
|
85.0 |
|
|
Total Combined
Cycle
|
|
|
|
|
|
210.7 |
|
|
|
|
|
|
|
|
|
|
|
Steam
|
Caribou
|
Caribou,
ME
|
Oil
|
|
|
21.7 |
|
|
|
Westwood
|
Tremont,
PA
|
Culm
|
|
|
30.0 |
|
|
Total
Steam
|
|
|
|
|
|
51.7 |
|
|
|
|
|
|
|
|
|
|
|
Hydroelectric
|
Caribou
|
Caribou,
ME
|
Hydro
|
|
|
0.9 |
|
|
|
Squa
Pan
|
Ashland,
ME
|
Hydro
|
|
|
1.4 |
|
|
|
Tinker
|
New Brunswick,
Canada
|
Hydro
|
|
|
34.5 |
|
|
Total
Hydroelectric
|
|
|
|
|
|
36.8 |
|
|
|
|
|
|
|
|
|
|
|
Combustion
Turbine
|
Caribou
|
Caribou,
ME
|
Diesel
|
|
|
7.0 |
|
|
and
Diesel
|
Flo's
Inn
|
Presque Isle,
ME
|
Diesel
|
|
|
4.2 |
|
|
|
Loring
|
Limestone,
ME
|
Diesel
|
|
|
5.2 |
|
|
|
Tinker
|
New Brunswick,
Canada
|
Diesel
|
|
|
1.0 |
|
|
Total
Combustion
Turbine
and Diesel
|
|
|
|
|
|
17.4 |
|
|
|
|
|
|
|
|
|
|
|
Reciprocating
Engine
|
Winnebago
|
Rockford,
IL
|
Methane
|
|
|
6.4 |
|
|
|
|
|
|
|
|
|
|
|
Solar
|
Solar
Man
|
Salem,
NJ
|
|
|
|
0.6 |
|
|
|
Solar Star
CA
|
Palmdale,
CA
|
|
|
|
0.6 |
|
|
|
Solar Star
CA
|
Redlands,
CA
|
|
|
|
0.4 |
|
|
|
Solar Star
CA
|
Santa Clarita,
CA
|
|
|
|
0.3 |
|
|
|
Solar Star
CA
|
El Cajon,
CA
|
|
|
|
0.4 |
|
|
|
Solar Star
NJ
|
Wayne,
NJ
|
|
|
|
0.6 |
|
|
|
Solar Star
NJ
|
Woodbridge,
NJ
|
|
|
|
0.3 |
|
|
|
Solar Star
NJ
|
Cherry Hill,
NJ
|
|
|
|
0.3 |
|
|
|
Solar Star
NJ
|
Deptford,
NJ
|
|
|
|
0.3 |
|
|
|
Solar Star
NJ
|
East
Brunswick, NJ
|
|
|
|
0.5 |
|
|
|
Soltage
ADC
|
Monroe
Township, NJ
|
|
|
|
0.6 |
|
|
|
Soltage
MAZ
|
Tinton Falls,
NJ
|
|
|
|
0.3 |
|
|
|
Soltage
PLG
|
Milford,
CT
|
|
|
|
0.3 |
|
|
|
Sun Devil
Solar
|
Tempe,
AZ
|
|
|
|
0.7 |
|
(c)
|
Total
Solar
|
|
|
|
|
|
6.2 |
|
|
|
|
|
|
|
|
|
|
|
Total
System
|
|
|
|
|
|
329.2 |
|
|
(a)
|
Based on
summer rated capacity.
|
(b)
|
Combined Locks
has an additional five megawatts of capacity available at this
facility through the lease of a steam turbine.
|
(c)
|
As of December
31, 2008, only one of the three generating units at the Sun Devil Solar
project was placed into service. The remaining two generating
units were completed in February 2009. The total capacity for
this facility is 1.7 megawatts.
|
ITEM
3. LEGAL PROCEEDINGS
For information on
material legal proceedings and matters related to Integrys Energy Group and its
subsidiaries, see Note 15, "Commitments and
Contingencies."
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of the security holders of Integrys Energy
Group during the fourth quarter of 2008.
ITEM
4A.
|
EXECUTIVE
OFFICERS OF INTEGRYS ENERGY GROUP AS OF
JANUARY 1, 2009
|
Name
and Age (1)
|
|
Position
and Business
Experience
During Past Five Years
|
Effective
Date
|
|
|
|
|
Larry L.
Weyers
|
63
|
Executive
Chairman
|
01-01-09
|
|
|
Chairman,
President and Chief Executive Officer
|
05-15-08
|
|
|
President and
Chief Executive Officer
|
02-21-07
|
|
|
Chairman,
President and Chief Executive Officer
|
02-12-98
|
|
|
|
|
Charles A.
Schrock
|
55
|
President and
Chief Executive Officer
|
01-01-09
|
|
|
President and
Chief Executive Officer of WPS (2)
|
05-31-08
|
|
|
President of
WPS
|
02-21-07
|
|
|
President and
Chief Operating Officer – Generation of WPS
|
08-15-04
|
|
|
Senior Vice
President of WPS
|
09-14-03
|
|
|
|
|
Thomas P.
Meinz
|
62
|
Executive Vice
President and Chief External Affairs Officer
|
05-15-08
|
|
|
Executive Vice
President – External Affairs
|
02-21-07
|
|
|
Executive Vice
President – Public Affairs
|
09-12-04
|
|
|
Senior Vice
President – Public Affairs
|
12-24-00
|
|
|
|
|
Phillip M.
Mikulsky
|
60
|
Executive Vice
President – Corporate Development and Shared Services
|
09-21-08
|
|
|
Executive Vice
President and Chief Development Officer
|
02-21-07
|
|
|
Executive Vice
President – Development
|
09-12-04
|
|
|
Senior Vice
President – Development
|
02-12-98
|
|
|
|
|
Joseph P.
O'Leary
|
54
|
Senior Vice
President and Chief Financial Officer
|
06-04-01
|
|
|
|
|
Diane L.
Ford
|
55
|
Vice President
and Corporate Controller
|
02-21-07
|
|
|
Vice President
– Controller and Chief Accounting Officer
|
07-11-99
|
|
|
|
|
Bradley A.
Johnson
|
54
|
Vice President
and Treasurer
|
07-18-04
|
|
|
Treasurer
|
06-23-02
|
|
|
|
|
Barth J.
Wolf
|
51
|
Vice
President, Chief Legal Officer and Secretary
|
07-31-07
|
|
|
Vice President
– Legal Services and Chief Compliance Officer of Integrys Business
Support, LLC
|
02-21-07
|
|
|
Secretary and
Manager – Legal Services
|
09-19-99
|
|
|
|
|
Lawrence T.
Borgard
|
47
|
President and
Chief Operating Officer – Integrys Gas Group (3)
|
02-21-07
|
|
|
President and
Chief Operating Officer – Energy Delivery of WPS
|
08-15-04
|
|
|
Vice President
– Distribution and Customer Service of WPS
|
11-25-01
|
|
|
|
|
William D.
Laakso (4)
|
46
|
Vice President
– Human Resources
|
09-21-08
|
|
|
Interim Vice
President – Human Resources – IBS
|
05-15-08
|
|
|
Director –
Workforce Planning and Organizational Design – WPS
|
08-12-07
|
|
|
Director
Organizational Development – WPS
|
07-11-06
|
|
|
Director of
Organizational Development – WPS
|
12-12-05
|
|
|
Vice President
– Operations/Clinical Director – Employee Resource Center,
Inc.
|
02-04-02
|
|
|
|
|
Mark A
Radtke
|
47
|
President and
Chief Executive Officer – Integrys Energy Services
|
06-01-08
|
|
|
President –
Integrys Energy Services (previously named WPS Energy Services,
Inc.)
|
10-17-99
|
(1)
|
All ages are
as of January 1, 2009. None of the executives listed above
are related by blood, marriage, or adoption to any of the other officers
listed or to any director of Integrys Energy Group. Each
officer holds office until his or her successor has been duly elected and
qualified, or until his or her death, resignation, disqualification, or
removal.
|
|
|
(2)
|
Continues to
serve as President and Chief Executive Officer of WPS.
|
|
|
(3)
|
The Integrys
Gas Group includes PGL, NSG, MERC and MGU.
|
|
|
(4)
|
Prior to
joining Integrys Energy Group, William D. Laakso’s responsibilities at
Employee Resource Center, Inc. (ERC) included leadership of ERC’s
management team and duties of Clinical Director. ERC provides
employee assistance programs to over 200 corporate customers in Northeast
Wisconsin and covers 75,000 employees and their
dependents.
|
PART
II
ITEM
5.
|
MARKET
FOR INTEGRYS ENERGY GROUP'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
|
Integrys
Energy Group, Inc. Common Stock Two-Year Comparison
Share
Data
|
Dividends
Per
Share
|
Price Range
|
High
|
Low
|
2008
|
|
|
|
1st
Quarter
|
$ .670
|
$53.26
|
$44.04
|
2nd
Quarter
|
.670
|
52.74
|
46.89
|
3rd
Quarter
|
.670
|
53.92
|
48.88
|
4th
Quarter
|
.670
|
51.47
|
36.91
|
Total
|
$2.680
|
|
|
|
|
|
|
2007
|
|
|
|
1st
Quarter
|
$ .583
|
$58.04
|
$52.72
|
2nd
Quarter
|
.660
|
60.63
|
50.11
|
3rd
Quarter
|
.660
|
55.25
|
48.10
|
4th
Quarter
|
.660
|
54.10
|
50.02
|
Total
|
$2.563
|
|
|
Integrys Energy
Group’s common stock is traded on the New York Stock Exchange under the ticker
symbol "TEG." The transfer agent and registrar for Integrys Energy
Group's common stock is American Stock Transfer & Trust Company, 59 Maiden
Lane, New York, NY 10038.
As
of February 23, 2009, there were 34,140 common stock shareholders of
record.
Dividend
Restrictions
For information on
dividend restrictions related to Integrys Energy Group and any of its
subsidiaries, see Note 19, "Common Equity."
Equity
Compensation Plans
See Item 11, "Executive Compensation," for
information regarding Integrys Energy Group’s equity compensation
plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 6. SELECTED
FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEGRYS ENERGY GROUP,
INC.
|
|
COMPARATIVE FINANCIAL STATEMENTS
AND
|
|
FINANCIAL AND OTHER STATISTICS
(2004 TO 2008)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or for Year Ended December
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions, except per share
amounts, stock price, return on average equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and number of shareholders and
employees)
|
|
2008
|
|
|
2007 (1)
|
|
|
2006 (2)
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$ |
14,047.8 |
|
|
$ |
10,292.4 |
|
|
$ |
6,890.7 |
|
|
$ |
6,825.5 |
|
|
$ |
4,876.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
|
124.8 |
|
|
|
181.1 |
|
|
|
151.6 |
|
|
|
150.6 |
|
|
|
156.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available for common
shareholders
|
|
|
126.4 |
|
|
|
251.3 |
|
|
|
155.8 |
|
|
|
157.4 |
|
|
|
139.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
14,272.5 |
|
|
|
11,234.4 |
|
|
|
6,861.7 |
|
|
|
5,462.5 |
|
|
|
4,376.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock of
subsidiaries
|
|
|
51.1 |
|
|
|
51.1 |
|
|
|
51.1 |
|
|
|
51.1 |
|
|
|
51.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (excluding current
portion)
|
|
|
2,288.0 |
|
|
|
2,265.1 |
|
|
|
1,287.2 |
|
|
|
867.1 |
|
|
|
865.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of common stock (less
treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and shares in deferred
compensation trust)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
76.0 |
|
|
|
76.0 |
|
|
|
43.1 |
|
|
|
39.8 |
|
|
|
37.3 |
|
Average
|
|
|
76.7 |
|
|
|
71.6 |
|
|
|
42.3 |
|
|
|
38.3 |
|
|
|
37.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share
(basic)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
$ |
1.59 |
|
|
$ |
2.49 |
|
|
$ |
3.51 |
|
|
$ |
3.85 |
|
|
$ |
4.10 |
|
Earnings per common
share
|
|
|
1.65 |
|
|
|
3.51 |
|
|
|
3.68 |
|
|
|
4.11 |
|
|
|
3.74 |
|
Earnings per common share
(diluted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
|
1.58 |
|
|
|
2.48 |
|
|
|
3.50 |
|
|
|
3.81 |
|
|
|
4.08 |
|
Earnings per common
share
|
|
|
1.64 |
|
|
|
3.50 |
|
|
|
3.67 |
|
|
|
4.07 |
|
|
|
3.72 |
|
Dividends per share of common
stock
|
|
|
2.68 |
|
|
|
2.56 |
|
|
|
2.28 |
|
|
|
2.24 |
|
|
|
2.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock price at
year-end
|
|
$ |
42.98 |
|
|
$ |
51.69 |
|
|
$ |
54.03 |
|
|
$ |
55.31 |
|
|
$ |
49.96 |
|
Book value per
share
|
|
$ |
40.78 |
|
|
$ |
42.58 |
|
|
$ |
35.61 |
|
|
$ |
32.76 |
|
|
$ |
29.30 |
|
Return on average
equity
|
|
|
3.7 |
% |
|
|
8.5 |
% |
|
|
10.6 |
% |
|
|
13.6 |
% |
|
|
13.5 |
% |
Number of common stock
shareholders
|
|
|
34,016 |
|
|
|
35,212 |
|
|
|
19,837 |
|
|
|
20,701 |
|
|
|
21,358 |
|
Number of
employees
|
|
|
5,191 |
|
|
|
5,231 |
|
|
|
3,326 |
|
|
|
2,945 |
|
|
|
3,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes the impact of the PEC
merger on February 21, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) Includes the impact of the
acquisition of natural gas distribution operations from Aquila by MGU on
April 1, 2006 and MERC on July 1, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM
7.
|
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 2.2 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
primarily through growth in its core regulated businesses. The
company has made a decision to either fully or partially divest of its
nonregulated energy services business segment, Integrys Energy Services, or
reduce its size, risk, and financial requirements in response to increased
collateral requirements at a time when global credit and financial markets are
constraining the availability and increasing the cost of capital. 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, which owned over $2.5 billion of assets at
December 31, 2008. Integrys Energy Group will continue to
fund its share of the equity portion of future ATC growth. ATC
plans to invest $2.7 billion in the next ten years to ensure that the
power grid will continue to meet the needs of its
customers.
|
|
|
·
|
Weston 4,
a 537-megawatt coal-fired base-load power plant located near Wausau,
Wisconsin, was completed and became operational June 30,
2008. WPS holds a 70% ownership interest in the Weston 4
power plant.
|
|
|
·
|
A proposed
accelerated annual investment in natural gas distribution facilities
(replacement of cast iron mains) at PGL.
|
|
|
·
|
The
investment of approximately $79 million to connect WPS's natural gas
distribution system to the Guardian II natural gas pipeline to be
completed in 2009.
|
|
|
·
|
WPS's
purchase of a 99-megawatt wind generation project to be constructed in
2009 in Howard County, Iowa.
|
|
|
·
|
WPS'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."
Systematically Reduce the Size and
the Capital and Liquidity Commitments of the Nonregulated Energy Services
Business Segment – Unprecedented energy price volatility, combined with
significant
growth in the
forward customer business, has increased the collateral requirements of Integrys
Energy Services at a time when global credit and financial market conditions are
both constraining the availability and increasing the cost of
capital. As a result, Integrys Energy Group has decided to take steps
to protect its financial position and liquidity by either fully or partially
divesting of its nonregulated energy services business segment or significantly
scaling it back. On an operational level, Integrys Energy Group’s
short-term strategy will be to reduce and refocus its financial, credit, and
risk capital on those aspects of Integrys Energy Services’ business that yield
the highest return, with consideration given toward lower
risk. Integrys Energy Services has recently, and as necessary in the
future, expects it will continue to adjust pricing strategies to capture margins
that are commensurate with its increasing capital costs and collateral
requirements.
Longer term, in the
event that a full divestiture of Integrys Energy Services does not occur and a
portion of the nonregulated energy services business segment remains, it will be
a smaller segment that requires significantly less capital, parental guarantees,
and overall financial liquidity from Integrys Energy Group. Integrys
Energy Group is seeking to deploy its capital to areas with more desirable
risk-adjusted rates of return. Although Integrys Energy Group
anticipates a reduction in future earnings capacity from this business segment
going forward, an improvement in the liquidity position and reduced business
risk profile of Integrys Energy Group is expected.
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 service company of Integrys Energy Group, became operational on
January 1, 2008. IBS 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.
|
|
|
·
|
"Operational
Excellence" initiatives were implemented to provide top performance in the
areas of project management, process improvement, and contract
administration and compliance in order to reduce costs and manage projects
and activities within appropriate budgets, schedules, and
regulations.
|
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 decision regarding the future of Integrys Energy
Services noted above illustrates our asset management strategy.
Our risk management
strategy includes the management of market, credit, and operational risk through
the 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 instruments
consistent with the company's risk management policy. The Corporate
Risk Management Group, which reports through the Chief Financial Officer,
provides corporate oversight.
RESULTS
OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
|
|
|
|
(Millions
except per share amounts)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Change
in
2008
Over 2007
|
|
|
Change
in
2007
Over 2006
|
|
Natural gas
utility operations
|
|
$ |
84.5 |
|
|
$ |
28.7 |
|
|
$ |
(2.3 |
) |
|
|
194.4 |
% |
|
|
N/A |
|
Electric
utility operations
|
|
|
92.6 |
|
|
|
87.4 |
|
|
|
85.5 |
|
|
|
5.9 |
% |
|
|
2.2 |
% |
Nonregulated
energy operations
|
|
|
(61.5 |
) |
|
|
98.0 |
|
|
|
72.3 |
|
|
|
N/A |
|
|
|
35.5 |
% |
Holding
company and other operations
|
|
|
10.8 |
|
|
|
(18.8 |
) |
|
|
0.3 |
|
|
|
N/A |
|
|
|
N/A |
|
Oil and
natural gas operations
|
|
|
- |
|
|
|
56.0 |
|
|
|
- |
|
|
|
(100.0 |
)% |
|
|
N/A |
|
Income
available for common shareholders
|
|
$ |
126.4 |
|
|
$ |
251.3 |
|
|
$ |
155.8 |
|
|
|
(49.7 |
)% |
|
|
61.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average basic
shares of common stock
|
|
|
76.7 |
|
|
|
71.6 |
|
|
|
42.3 |
|
|
|
7.1 |
% |
|
|
69.3 |
% |
Average
diluted shares of common stock
|
|
|
77.0 |
|
|
|
71.8 |
|
|
|
42.4 |
|
|
|
7.2 |
% |
|
|
69.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
per share
|
|
$ |
1.65 |
|
|
$ |
3.51 |
|
|
$ |
3.68 |
|
|
|
(53.0 |
)% |
|
|
(4.6 |
)% |
Diluted
earnings per share
|
|
$ |
1.64 |
|
|
$ |
3.50 |
|
|
$ |
3.67 |
|
|
|
(53.1 |
)% |
|
|
(4.6 |
)% |
Earnings
Summary
From 2007 to 2008,
income available for common shareholders decreased $124.9 million and
diluted earnings per share decreased $1.86. From 2006 to 2007, income
available for common shareholders increased $95.5 million and diluted
earnings per share decreased $0.17. Significant factors impacting the
change in earnings and diluted earnings per share were as follows (and are
discussed in more detail thereafter).
Natural
Gas Utility Operations:
Earnings improved
$55.8 million in 2008, compared with 2007, primarily due to the
following:
●
|
The inclusion
of PGL and NSG for all of 2008 compared with only a partial year of
operations in 2007 since they were acquired on February 21,
2007. A rate increase for PGL in February 2008 also contributed
to the increase in earnings in 2008. From 2007 to 2008,
after-tax earnings related to PGL and NSG operations increased
$43.3 million, after including a $6.5 million after-tax goodwill
impairment loss related to NSG in 2008.
|
|
|
●
|
An increase
in natural gas sales volumes, which drove an approximate $11 million
($6.6 million after-tax) increase in margin for WPS, MERC, and
MGU.
|
|
|
●
|
An interim
rate increase for MERC, effective October 1, 2008, which had a positive
impact on margin.
|
Financial results
improved $31.0 million in 2007, compared with 2006, primarily due to the
following:
●
|
Financial
results for MGU and MERC increased $18.1 million, from a combined net
loss of $11.3 million in 2006, to earnings of $6.8 million in
2007. The positive change in earnings at MGU and MERC was
driven by the fact that these natural gas utilities operated during the
first quarter heating season in 2007, but were not acquired by Integrys
Energy Group until after the first quarter 2006 heating
season. In addition, MGU and MERC incurred a combined
$11.8 million ($7.1 million after-tax) of transition costs in
2006 for the start-up of outsourcing activities and other legal and
consulting fees. In 2007, MGU and MERC were allocated
$1.7 million ($1.0 million after-tax) of external costs to
achieve merger synergies related to the PEC
merger.
|
|
|
●
|
Regulated
natural gas utility earnings at WPS increased $13.5 million, from
earnings of $9.6 million in 2006, to earnings of $23.1 million
in 2007. Higher earnings were driven by increased volumes due
to colder weather during the heating season. The full year
impact of the natural gas rate increase that was effective
January 12, 2007, also contributed to the
increase.
|
|
|
●
|
PGL and NSG,
which were acquired effective February 21, 2007, recognized a
combined net loss of approximately $1 million in 2007, primarily
related to the seasonal nature of natural gas utilities, which derive
earnings during the heating season (first and fourth
quarters). Because of the late February acquisition date,
results for the majority of the two coldest months of the year were not
included in natural gas utility earnings in 2007. The 2007 net
income for PGL was less than the level we would normally expect, primarily
due to increased costs of providing
service.
|
Electric
Utility Operations:
Earnings increased
$5.2 million in 2008 compared with 2007, resulting primarily
from:
●
|
A combined
$17.7 million ($10.6 million after-tax) decrease in electric
maintenance expense and costs to achieve merger synergies related to the
PEC merger.
|
|
|
●
|
An
approximate $10 million ($6 million after-tax) increase in
margin from WPS's 2008 retail electric rate increase effective
January 16, 2008, and the full benefit of WPS's 2007 retail electric
rate increase effective January 12, 2007.
|
|
|
●
|
An
approximate $10 million ($6 million after-tax) increase in
margin driven by higher contracted sales volumes to a large wholesale
customer year-over-year.
|
|
|
●
|
An
approximate $5 million ($3 million after-tax) increase in
regulated electric utility margin year-over-year, driven by fuel and
purchased power costs that were approximately $1 million lower than
what was recovered in rates during 2008, compared with fuel and purchased
power costs that were approximately $4 million higher than what was
recovered in rates during 2007.
|
|
|
The above
increases were partially offset by:
|
|
|
●
|
A
$13.8 million ($8.3 million after-tax) increase in electric
transmission expenses primarily related to higher rates charged by MISO
and ATC due to additional transmission costs.
|
|
|
●
|
An increase
in depreciation and amortization expense of $4.2 million
($2.5 million after-tax) driven by depreciation related to
Weston 4, which was placed in service for accounting purposes in
April 2008.
|
|
|
●
|
An
approximate $11 million ($6.6 million after-tax) decrease in
margin due to a decline in residential and commercial and industrial sales
volumes at WPS as a result of cooler weather during the cooling season and
customer conservation efforts.
|
|
|
●
|
A
$4.3 million ($2.6 million after-tax) increase in interest
expense.
|
Earnings increased
$1.9 million in 2007 over 2006, resulting primarily from the
following:
●
|
Retail
electric rate increases at both WPS and UPPCO had a positive
year-over-year impact on operating income.
|
|
|
●
|
Favorable
weather at WPS contributed an approximate $6 million
($3.6 million after-tax) year-over-year increase in operating income;
however, this increase was partially offset by a decrease in weather
normalized residential and commercial and industrial customer
usage.
|
|
|
●
|
Fuel and
purchased power costs were higher than what was recovered in rates during
the year ended December 31, 2007, compared with fuel and purchased
power costs that were less than what was recovered in rates during the
same period in 2006, driving a $14.4 million ($8.6 million
after-tax) negative variance in operating income.
|
|
|
●
|
Maintenance
expense related to WPS's power plants was higher in 2007 compared with
2006, driven by an increase in unplanned outages in 2007 as well as longer
than anticipated 2007 planned
outages.
|
Nonregulated
Energy/Integrys Energy Services’ Operations:
Financial results
decreased $159.5 million in 2008, compared with 2007, primarily due to the
following:
●
|
A $133.6
million after-tax decrease in Integrys Energy Services' GAAP margin
year-over-year related to non-cash activity, of which $106.1 million was
related to non-cash activity associated with electric operations, with the
remaining $27.5 million related to non-cash activity associated with
natural gas operations. An overview of this non-cash activity
has been provided below.
Non-cash
electric operations:
A decline in
energy prices during 2008 drove an $82.4 million net after-tax non-cash
loss, compared with a $23.7 million net after-tax non-cash gain recognized
in 2007, related to an increase in energy prices during
2007. The non-cash unrealized gains and losses recognized
resulted from the application of derivative accounting rules to Integrys
Energy Services' portfolio of derivative electric customer supply
contracts, requiring that these derivative instruments be adjusted to fair
market value. The derivative instruments are utilized to
economically hedge the price, volume, and ancillary risks associated with
related electric customer sales contracts. The associated
electric customer sales contracts are not adjusted to fair value, as they
do not meet the definition of derivative instruments under GAAP, creating
an accounting mismatch. As such, the non-cash unrealized gains
and losses related to the electric customer supply contracts will vary
each period, with noncash unrealized gains being recognized in periods of
increasing energy prices and non cash unrealized losses being recognized
in periods of declining energy prices, and will ultimately reverse when
the related customer sales contracts settle.
Non-cash
natural gas operations:
The spot
price of natural gas decreased significantly during the second half of
2008 (below the average cost of natural gas in inventory which Integrys
Energy Services had injected into storage earlier in 2008), which resulted
in a lower-of-cost-or-market adjustment, as required by
GAAP. This adjustment contributed a $96.2 million
year-over-year decrease in the non-cash natural gas margin, driven by
non-cash inventory write-downs in the third and fourth quarters of
2008. The negative impact on realized margin related to these
inventory adjustments was substantially offset by $91.9 million
of net after-tax non-cash unrealized gains recognized in 2008,
primarily related to derivative instruments utilized to mitigate the price
risk on natural gas inventory underlying natural gas storage
transactions. In 2007, natural gas derivative instruments
resulted in the recognition of $23.2 million of net after-tax non-cash
unrealized gains. Similar to the electric operations discussed
above, non-cash gains and losses related to derivative natural gas sales
and customer supply contracts will vary each period, and will ultimately
reverse when the physical contracts settle, or when natural gas is
withdrawn from inventory.
|
|
|
●
|
The
recognition of $17.1 million of after-tax earnings from Integrys
Energy Services’ investment in a synthetic fuel production facility during
the year ended December 31, 2007. Production and sale of
synthetic fuel by Integrys Energy Services ended when 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.
|
|
|
●
|
After-tax
income from discontinued operations decreased $10.9 million as a
result of the sale of Niagara Generation in 2007, which was partially
offset by a contingent gain that was realized in the fourth quarter of
2008 related to the sale of the Stoneman generating facility in the third
quarter of 2008.
|
|
|
●
|
Operating and
maintenance expenses at Integrys Energy Services increased
$22.3 million ($13.4 million after-tax) in 2008 compared with
2007, driven by an increase in bad debt expense, broker commissions, a
full year of operations from businesses acquired in the PEC merger, and
employee benefit costs.
|
|
|
●
|
Partially
offsetting the above decreases, the realized retail electric margin
increased $28.1 million ($16.9 million after-tax), driven
primarily from operations in Illinois, due to the addition of new
customers as a result of the PEC merger, and the reduced impact from
purchase accounting in 2008.
|
Earnings increased
$25.7 million in 2007, compared with 2006, primarily due to the
following:
●
|
Operating
income at Integrys Energy Services increased $40.2 million
($24.1 million after-tax).
|
|
|
●
|
After-tax
income from discontinued operations at Integrys Energy Services increased
$7.5 million, driven by the sale of Niagara Generation, LLC in the
first quarter of 2007.
|
|
|
●
|
Miscellaneous
expense at Integrys Energy Services decreased $11.1 million
($6.7 million after-tax), driven by a decrease in pre-tax losses
recognized for the period related to Integrys Energy Services' investment
in a synthetic fuel facility.
|
|
|
●
|
Minority
interest income decreased $3.7 million ($2.2 million after-tax)
as Integrys Energy Services' partner elected to stop receiving production
from the synthetic fuel facility and, therefore, did not share in losses
from this facility in 2007.
|
|
|
●
|
Section
29/45K federal tax credits recognized from Integrys Energy Services'
investment in a synthetic fuel facility decreased $15.9 million, from
$29.5 million in 2006, to $13.6 million in 2007. The
decrease in Section 29/45K federal tax credits recognized was driven by
the impact of high oil prices on our ability to realize the benefit of
Section 29/45K federal tax credits.
|
Holding
Company and Other Operations:
Financial results
increased $29.6 million from 2007 to 2008, largely due to higher earnings
from our investment in ATC, lower interest expense, and lower operating expenses
at the holding company, partially offset by the negative year-over-year impact
on operating income related to the reallocation of external costs to achieve
merger synergies in 2007.
In
2007, financial results decreased $19.1 million, from earnings of
$0.3 million in 2006, to a net loss of $18.8 million.
See "Overview of
Holding Company and Other Segment Operations" for more information.
Oil
and Natural Gas Operations:
In
connection with the PEC merger, Integrys Energy Group announced its intent to
divest of PEC's oil and natural gas production operations, PEP. PEP
was sold in the third quarter of 2007. In 2007, PEP recognized
earnings of $56.0 million, including $58.5 million of earnings
reported as discontinued operations. The sale of PEP resulted in a
$7.6 million after-tax gain in 2007. In 2008, tax adjustments of
$0.8 million related to the 2007 PEP sale were recorded as discontinued
operations.
Earnings
per share:
Diluted earnings
per share was impacted by a 5.2 million share (7.2%) increase in the
weighted average number of outstanding shares of Integrys Energy Group common
stock from 2007 to 2008, as well as an increase of 29.4 million shares
(69.3%) in the weighted average number of outstanding shares of Integrys Energy
Group's common stock from 2006 to 2007. Integrys Energy Group issued
31.9 million shares of common stock on February 21, 2007, in
conjunction with the merger with PEC, and issued an additional 2.7 million
shares of common stock in May 2006 in order to settle its forward equity
agreement with an affiliate of J.P. Morgan Securities. Additional
shares were also issued under the Stock Investment Plan and certain stock-based
employee benefit plans in 2007 and 2006.
The following
discussion provides the analysis of Integrys Energy Group's four segments:
regulated natural gas utility, regulated electric utility, Integrys Energy
Services, and its holding company and other segment.
Utility
Operations
In
2008, the utility operations included the regulated natural gas utility segment,
consisting of the natural gas operations of PGL, WPS, MERC, MGU, and
NSG. The regulated natural gas operations of WPS, MERC, and MGU, were
included in results of operations for all of 2007, while the regulated natural
gas operations of PGL and NSG were included in results of operations beginning
February 22, 2007 through December 31, 2007. The natural
gas operations of WPS were included for all of 2006, while the natural gas
operations of MGU and MERC were included from April 1, 2006 through
December 31, 2006, and
July 1, 2006
through December 31, 2006, respectively.
Utility operations
also included the regulated electric segment, consisting of the regulated
electric operations of WPS and UPPCO for all of 2008, 2007, and
2006.
Regulated
Natural Gas Utility Segment Operations
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Change
in
2008
Over 2007
|
|
|
Change
in
2007
Over 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
3,025.9 |
|
|
$ |
2,103.7 |
|
|
$ |
676.9 |
|
|
|
43.8 |
% |
|
|
210.8 |
% |
Purchased
natural gas costs
|
|
|
2,147.7 |
|
|
|
1,453.5 |
|
|
|
493.8 |
|
|
|
47.8 |
% |
|
|
194.4 |
% |
Margins
|
|
|
878.2 |
|
|
|
650.2 |
|
|
|
183.1 |
|
|
|
35.1 |
% |
|
|
255.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and
maintenance expense
|
|
|
539.1 |
|
|
|
427.4 |
|
|
|
121.3 |
|
|
|
26.1 |
% |
|
|
252.4 |
% |
Goodwill
impairment loss *
|
|
|
6.5 |
|
|
|
- |
|
|
|
- |
|
|
|
N/A |
|
|
|
- |
% |
Depreciation
and amortization expense
|
|
|
108.3 |
|
|
|
97.7 |
|
|
|
32.7 |
|
|
|
10.8 |
% |
|
|
198.8 |
% |
Taxes other
than income taxes
|
|
|
32.1 |
|
|
|
33.1 |
|
|
|
11.8 |
|
|
|
(3.0 |
)% |
|
|
180.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
192.2 |
|
|
|
92.0 |
|
|
|
17.3 |
|
|
|
108.9 |
% |
|
|
431.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
|
7.0 |
|
|
|
5.5 |
|
|
|
1.0 |
|
|
|
27.3 |
% |
|
|
450.0 |
% |
Interest
expense
|
|
|
(56.6 |
) |
|
|
(53.4 |
) |
|
|
(18.1 |
) |
|
|
6.0 |
% |
|
|
195.0 |
% |
Other
expense
|
|
|
(49.6 |
) |
|
|
(47.9 |
) |
|
|
(17.1 |
) |
|
|
3.5 |
% |
|
|
180.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before
taxes
|
|
$ |
142.6 |
|
|
$ |
44.1 |
|
|
$ |
0.2 |
|
|
|
223.4 |
% |
|
|
21,950.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Throughput
in therms
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
1,708.9 |
|
|
|
1,251.8 |
|
|
|
351.5 |
|
|
|
36.5 |
% |
|
|
256.1 |
% |
Commercial
and industrial
|
|
|
550.8 |
|
|
|
439.2 |
|
|
|
190.6 |
|
|
|
25.4 |
% |
|
|
130.4 |
% |
Interruptible
|
|
|
60.1 |
|
|
|
59.4 |
|
|
|
40.1 |
|
|
|
1.2 |
% |
|
|
48.1 |
% |
Interdepartmental
|
|
|
28.6 |
|
|
|
47.1 |
|
|
|
27.6 |
|
|
|
(39.3 |
)% |
|
|
70.7 |
% |
Transport
|
|
|
1,834.0 |
|
|
|
1,505.6 |
|
|
|
657.5 |
|
|
|
21.8 |
% |
|
|
129.0 |
% |
Total
sales in therms
|
|
|
4,182.4 |
|
|
|
3,303.1 |
|
|
|
1,267.3 |
|
|
|
26.6 |
% |
|
|
160.6 |
% |
*
See Note 9, "Goodwill and
Other Intangible Assets," for more information.
Revenue
2008 Compared with
2007:
Regulated natural
gas utility segment revenue increased $922.2 million, driven
by:
·
|
A combined
increase in PGL and NSG natural gas utility revenue of
$780.5 million, from $1,118.5 million during 2007, to
$1,899.0 million during 2008. The increase in revenue at
both of these natural gas utilities was driven primarily by the fact that
they were not included in regulated natural gas utility results until
after the merger with PEC on February 21, 2007. Other
factors that contributed to this combined increase
include:
|
|
|
|
-
|
PGL's
annualized rate increase effective February 14, 2008, which
increased revenue year-over-year by approximately
$61 million. See Note 23, "Regulatory
Environment," for more information on the PGL and NSG rate
cases.
|
|
|
|
|
-
|
Higher
year-over-year natural gas prices. Increases in natural gas
commodity costs are passed directly through to customers in
rates.
|
|
|
|
|
-
|
Colder
weather during the 2008 heating season, partially offset by energy
conservation efforts by natural gas utility customers and a larger number
of customer disconnections, which we believe resulted from high energy
prices and a general slowdown in the economy.
|
|
|
·
|
An increase
in natural gas revenue of $141.7 million at the remaining natural gas
utilities (WPS, MERC, and MGU) from $985.1 million during 2007, to
$1,126.8 million during 2008, which resulted primarily
from:
|
|
|
|
-
|
A combined
$112.2 million increase in revenue driven by the approximate 13%
increase in the per-unit cost of natural gas in 2008 compared with
2007.
|
|
|
|
|
-
|
A
$43.4 million increase in revenue from colder weather during the 2008
heating season compared with 2007, evidenced by an approximate 11%
year-over-year increase in heating degree days across these three
utilities.
|
|
|
|
|
-
|
An increase
in revenue from MERC's interim rate increase, effective October 1, 2008,
for retail natural gas customers. This interim rate increase is
subject to refund pending the final rate order, which is expected in the
second quarter of 2009. See Note 23, "Regulatory
Environment," for more information on MERC's interim rate
increase.
|
|
|
|
|
-
|
The combined
increase in revenue at WPS, MGU, and MERC, was partially offset by a
$17.9 million decrease in revenue driven by a decrease in
year-over-year volumes normalized for the impact of weather,
$15.6 million of which was driven by a 39.3% decrease in natural gas
throughput volumes sold by WPS to its electric utility
segment. The decrease in volumes sold to the electric utility
segment was a result of a decrease in the need for the electric utility to
run its peaking generation units during the 2008 summer cooling season
because of cooler year-over-year weather. In addition,
additional electricity was available within the electric utility segment
from Weston 4, a coal-fired generating facility that became
commercially operational in June 2008. The remaining decrease
in weather normalized volumes was driven by energy conservation efforts of
residential customers and a larger number of customer disconnections
year-over-year, which we believe resulted from high energy prices and a
general slowdown in the economy.
|
2007 Compared with
2006:
Regulated natural
gas utility segment revenue increased $1,426.8 million, driven by the
following:
·
|
PGL and NSG
(acquired February 21, 2007) generated $1,118.5 million of natural
gas utility revenue and contributed approximately 1.5 billion therms
of natural gas throughput volumes in 2007.
|
|
|
·
|
MERC (which
acquired natural gas distribution operations in Minnesota on July 1, 2006)
generated $294.0 million of natural gas utility revenue and
approximately 705 million therms of natural gas throughput volumes in
2007, compared with $123.0 million of natural gas utility revenue and
approximately 348 million therms of natural gas throughput volumes in
2006.
|
|
|
·
|
MGU (which
acquired natural gas distribution operations in Michigan on April 1, 2006)
generated $220.2 million of natural gas utility revenue and
approximately 311 million therms of natural gas throughput volumes in
2007, compared with $110.1 million of natural gas revenue and
approximately 193 million therms of natural gas throughput volumes
during 2006.
|
|
|
·
|
WPS's natural
gas utility revenue increased $27.2 million, from $443.8 million
in 2006, to $471.0 million in 2007, driven by the
following:
|
|
|
|
-
|
On
January 11, 2007, the PSCW issued a final written order to WPS
authorizing a retail natural gas distribution rate increase of
$18.9 million (3.8%), effective
January 12, 2007. See Note 23, "Regulatory
Environment," for more information related to the retail natural
gas rate increase at WPS.
|
|
|
|
|
-
|
An 8.6%
increase in natural gas throughput volumes. The increase in
natural gas throughput volumes was driven by a 10.3% increase in
residential volumes and a 70.7% increase in natural gas volumes sold to
the electric utility. The increase in sales volumes to
residential customers was driven in part by colder year-over-year weather
during the 2007 heating season. The increase in natural gas
volumes sold to the electric utility was driven by an increase in the need
for the electric utility to run its peaking generation
units.
|
|
|
|
|
-
|
Natural gas
prices were 10.1% lower on a per-unit basis, compared with 2006, resulting
in a decrease in natural gas utility revenue, which partially offset the
overall increase in natural gas utility revenue at
WPS.
|
Margin
2008 Compared with
2007:
The regulated
natural gas utility segment margin increased $228.0 million, primarily due
to:
·
|
An increase
in the combined margin at PGL and NSG of $208.6 million, from
$387.2 million in 2007 to $595.8 million in 2008. The
increase in combined margin was driven by:
|
|
|
|
-
|
The
acquisition of PGL and NSG on February 21, 2007. The
combined operations for the entire heating season were included in the
2008 natural gas utility margin. However, only operations from
the merger date through December 31, 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).
|
|
|
|
-
|
The 2008 rate
increase for PGL which resulted in an approximate $61 million
increase in margin.
|
|
|
|
-
|
Colder than
normal weather experienced by both PGL and NSG resulted in an approximate
$7 million increase in 2008 margin before the decoupling mechanism
went into effect on March 1, 2008.
|
|
|
|
·
|
An increase
in natural gas margin of $19.4 million at the remaining natural gas
utilities (WPS, MERC, and MGU), primarily driven by:
|
|
|
|
|
-
|
A combined
5.2% increase in natural gas throughput volumes at WPS, MERC, and MGU,
which had an approximate $11 million positive impact on natural gas
utility margins. Colder year-over-year weather had an
approximate $14 million positive impact on
margins. Partially offsetting the positive impact of colder
weather, were energy conservation efforts by residential customers and a
larger number of customer disconnections year-over-year, which had an
approximate $3 million negative impact on margins.
|
|
|
|
|
-
|
The interim
rate increase for MERC, effective October 1, 2008, which had a positive
impact on natural gas margin.
|
|
|
|
|
-
|
An
approximate $2 million year-over-year increase in margin at MGU
related to an adjustment for recovery of prior natural gas costs in an
MPSC proceeding.
|
2007 Compared with
2006:
The regulated
natural gas utility segment margin increased $467.1 million, driven by the
following:
·
|
The combined
margin provided by PGL and NSG in 2007 of
$387.2 million.
|
|
|
·
|
The combined
margin at MGU and MERC increased $55.1 million, from
$59.1 million in 2006, to $114.2 million in 2007. The
increase in natural gas margin at MGU and MERC was driven primarily by the
fact that MGU and MERC operated during the first quarter heating season in
2007, but were not acquired by Integrys Energy Group until after the first
quarter heating season in 2006.
|
|
|
·
|
WPS's natural
gas margin increased $24.8 million, from $124.0 million in 2006,
to $148.8 million in 2007. The increase in WPS's margin
was driven by the retail natural gas rate increase and an increase in
throughput volumes to higher margin residential customers due in part to
colder year-over-year weather during the heating season. The
increase in throughput volumes sold to the electric utility did not have a
significant impact on WPS's natural gas utility
margin.
|
Operating
Income
2008 Compared with
2007:
Operating income at
the regulated natural gas utility segment increased $100.2 million, driven
by the $228.0 million increase in the natural gas utility margin, partially
offset by a $127.8 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 $125.8 million, from $368.7 million for
2007 to $494.5 million for 2008.
The increase
in operating expenses related to PGL and NSG was primarily driven
by:
|
|
|
·
|
The
acquisition of these natural gas utilities on February 21,
2007. As a result, operating expenses for the period
January 1, 2007 to the acquisition date were not included in the 2007
operating results.
|
|
|
·
|
A non-cash
goodwill impairment charge of $6.5 million recognized in the second
quarter of 2008 related to NSG.
|
|
|
·
|
A combined
increase in bad debt expense, driven by the impact of high energy prices
and worsening economic conditions on overall accounts receivable
balances.
|
2007 Compared with
2006:
Operating income
increased $74.7 million, driven by the $467.1 million increase in the
regulated natural gas utility margin, partially offset by a $306.1 million
increase in operating and maintenance expense, a $65.0 million increase in
depreciation and amortization expense, and a $21.3 million increase in
taxes other than income taxes.
·
|
The increase
in operating and maintenance expense was primarily related to the
following:
|
|
|
|
-
|
Combined
operating and maintenance expenses of $292.9 million incurred by PGL
and NSG in 2007.
|
|
|
|
|
-
|
Combined
operating and maintenance expense at MGU and MERC that increased
approximately $9 million, primarily due to the fact that operating
expenses at both of these utilities incurred prior to the acquisition were
not included in earnings in 2006, compared to incurring a full year of
operating and maintenance expenses in 2007. For the year ended
December 31, 2006, $11.8 million of combined operating and
maintenance expense related to external transition costs, primarily for
the start-up of outsourcing activities and other legal and consulting
fees. For the year ended December 31, 2007, MGU and MERC
were allocated $1.7 million of external costs to achieve merger
synergies related to the PEC merger.
|
|
|
|
|
-
|
Operating
expenses related to WPS's natural gas operations increased
$3.7 million year-over-year, due primarily to the allocation of
$2.8 million of external costs to achieve merger synergies related to
the PEC merger.
|
|
|
·
|
The increase
in depreciation and amortization expense was primarily related to the
merger with PEC (a combined $59.0 million of depreciation and
amortization expense was recognized at PGL and NSG from February 21, 2007
to December 31, 2007) and an increase in depreciation expense at MERC
and MGU (these businesses were not included in results of operations for
the full year in 2006). Depreciation and amortization expense
at WPS's natural gas utility was relatively flat
year-over-year.
|
|
|
·
|
The increase
in taxes other than income taxes from 2006 to 2007 was primarily related
to the merger with PEC ($16.8 million of taxes other than income
taxes were recognized at PGL and NSG in 2007), and the acquisition of the
Michigan and Minnesota natural gas distribution operations, which were not
included in results of operations for the full year in
2006. Taxes other than income taxes are primarily related to
property taxes, gross receipts taxes, and payroll taxes paid by these
companies.
|
Other
Expense
2008 Compared with
2007:
Other expense at
the regulated natural gas utilities increased $1.7 million, driven by a
$3.2 million increase in interest expense, partially offset by a
$1.5 million increase in miscellaneous income. The increase in
other expense was a result of:
·
|
A
$6.1 million increase in combined interest expense at PGL and NSG,
from $30.3 million in 2007 to $36.4 million in
2008. The increase in interest expense at PGL and NSG is
primarily due to the fact that these utilities were first acquired on
February 21, 2007, and, therefore, did not recognize a full year of
interest expense in 2007. The increase in interest expense was
also due to additional long-term debt borrowings and higher interest rates
on new and remarketed long-term
debt.
|
|
|
·
|
The increase
in other expense was offset by:
|
|
|
|
-
|
A
$2.6 million increase in AFUDC at WPS related to the construction of
natural gas laterals for connection to the Guardian II
pipeline.
|
|
|
|
-
|
A decrease in
interest expense resulting from a decrease in short-term borrowing levels
and a decrease in interest rates for WPS's natural gas
segment.
|
2007 Compared with
2006:
Other expense at
the regulated natural gas utilities increased $30.8 million, driven by a
$35.3 million increase in interest expense, partially offset by a
$4.5 million increase in miscellaneous income. The increase in
other expense was a result of combined interest expense of $30.3 million,
partially offset by $4.5 million of miscellaneous income, recorded both at
PGL and NSG from February 22, 2007, through December 31, 2007.
Regulated
Electric Segment Operations
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Change
in
2008
Over 2007
|
|
|
Change
in
2007
Over 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
1,328.9 |
|
|
$ |
1,246.1 |
|
|
$ |
1,099.4 |
|
|
|
6.6 |
% |
|
|
13.3 |
% |
Fuel and
purchased power costs
|
|
|
651.5 |
|
|
|
636.5 |
|
|
|
551.0 |
|
|
|
2.4 |
% |
|
|
15.5 |
% |
Margins
|
|
|
677.4 |
|
|
|
609.6 |
|
|
|
548.4 |
|
|
|
11.1 |
% |
|
|
11.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and
maintenance expense
|
|
|
375.3 |
|
|
|
321.1 |
|
|
|
265.3 |
|
|
|
16.9 |
% |
|
|
21.0 |
% |
Depreciation
and amortization expense
|
|
|
84.3 |
|
|
|
80.1 |
|
|
|
78.5 |
|
|
|
5.2 |
% |
|
|
2.0 |
% |
Taxes other
than income taxes
|
|
|
44.3 |
|
|
|
43.2 |
|
|
|
41.6 |
|
|
|
2.5 |
% |
|
|
3.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
173.5 |
|
|
|
165.2 |
|
|
|
163.0 |
|
|
|
5.0 |
% |
|
|
1.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
|
6.0 |
|
|
|
8.3 |
|
|
|
3.2 |
|
|
|
(27.7 |
)% |
|
|
159.4 |
% |
Interest
expense
|
|
|
(36.7 |
) |
|
|
(32.4 |
) |
|
|
(30.0 |
) |
|
|
13.3 |
% |
|
|
8.0 |
% |
Other
expense
|
|
|
(30.7 |
) |
|
|
(24.1 |
) |
|
|
(26.8 |
) |
|
|
27.4 |
% |
|
|
(10.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before
taxes
|
|
$ |
142.8 |
|
|
$ |
141.1 |
|
|
$ |
136.2 |
|
|
|
1.2 |
% |
|
|
3.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
in kilowatt-hours
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
3,064.5 |
|
|
|
3,173.6 |
|
|
|
3,144.8 |
|
|
|
(3.4 |
)% |
|
|
0.9 |
% |
Commercial
and industrial
|
|
|
8,632.8 |
|
|
|
8,750.9 |
|
|
|
8,645.2 |
|
|
|
(1.3 |
)% |
|
|
1.2 |
% |
Wholesale
|
|
|
4,764.6 |
|
|
|
4,024.9 |
|
|
|
4,093.1 |
|
|
|
18.4 |
% |
|
|
(1.7 |
)% |
Other
|
|
|
42.6 |
|
|
|
42.4 |
|
|
|
42.2 |
|
|
|
0.5 |
% |
|
|
0.5 |
% |
Total
sales in kilowatt-hours
|
|
|
16,504.5 |
|
|
|
15,991.8 |
|
|
|
15,925.3 |
|
|
|
3.2 |
% |
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather
– WPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating
degree days
|
|
|
7,969 |
|
|
|
7,102 |
|
|
|
6,785 |
|
|
|
12.2 |
% |
|
|
4.7 |
% |
Cooling
degree days
|
|
|
464 |
|
|
|
634 |
|
|
|
521 |
|
|
|
(26.8 |
)% |
|
|
21.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather
– UPPCO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating
degree days
|
|
|
9,348 |
|
|
|
8,625 |
|
|
|
8,386 |
|
|
|
8.4 |
% |
|
|
2.8 |
% |
Cooling
degree days
|
|
|
138 |
|
|
|
352 |
|
|
|
297 |
|
|
|
(60.8 |
)% |
|
|
18.5 |
% |
Revenue
2008 Compared with
2007:
Regulated electric
utility segment revenue increased $82.8 million, driven by:
·
|
A 3.2%
increase in electric sales volumes, which resulted in an approximate
$26 million increase in revenue year-over-year, related
to:
|
|
|
|
-
|
An 18.4%
increase in wholesale volumes year-over-year, which drove an
approximate
$48 million
increase in revenue. There was an approximate $36 million
increase in opportunity sales year-over-year as the electric utility had
more low-cost generation with Weston 4 becoming commercially
operational in 2008, combined with available capacity from lower sales
volumes to residential customers. In addition, WPS experienced
an approximate $12 million increase in wholesale revenue, driven by
higher contracted sales volumes to a large wholesale customer
year-over-year.
|
|
|
|
-
|
The increase
in revenue related to wholesale volumes was partially offset by a 3.4%
decrease in residential sales volumes and a 1.3% decrease in commercial
and industrial sales volumes year-over-year, which drove an approximate
$22 million decrease in revenue. Of this decrease in
revenue, approximately $13 million related to energy conservation
efforts on the part of residential customers, which we believe was the
result of high energy prices and the general economic
slowdown. Approximately $6 million related to decreased
demand by our commercial and industrial customers in the third and fourth
quarters of 2008 as the economy weakened. In addition, cooler
weather during the 2008 cooling season compared to 2007 contributed
approximately $3 million to the decrease in
revenue.
|
|
|
·
|
An interim
fuel surcharge approved by the PSCW for WPS's retail electric customers
effective March 22, 2008, related to higher fuel and purchased
power costs. In addition, a surcharge increase was approved by
the PSCW effective July 4, 2008. Both orders had an overall
impact on revenue of approximately
$25 million. Contributing factors in this rate change 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. On September 30, 2008, the PSCW reopened the 2008 fuel
surcharge to review forecasted fuel costs as WPS's current and anticipated
annual fuel costs were below those projected in the fuel
surcharge. As a result of these lower costs, WPS accrued at
December 31, 2008 a refund payable in 2009 to its electric customers of
approximately $5 million, which is already excluded from the $25 million
noted above. See Note 23, "Regulatory
Environment," for more information on WPS's interim fuel
surcharges.
|
|
|
·
|
A retail
electric rate increase, effective January 16, 2008, which contributed
an approximate $23 million increase in revenue. The full
benefit of the 2007 retail electric rate increase, effective
January 12, 2007, also contributed to the increase in revenue
year-over-year. Per the PSCW's order approving the PEC merger,
WPS was not permitted to increase its base rates for natural gas or
electric service prior to January 1, 2009. However, WPS
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. See Note 23,
"Regulatory
Environment," for more information on WPS's interim rate
increase.
|
|
|
·
|
An
approximate $5 million increase in revenue at UPPCO related to
increased energy and transmission costs in 2008 compared with
2007. Increases in fuel and purchased power costs at UPPCO are
passed directly through to customers in
rates.
|
2007 Compared with
2006:
Regulated electric
revenue increased $146.7 million, driven by the following:
·
|
On
January 11, 2007, the PSCW issued a final written order to WPS
authorizing a retail electric rate increase of $56.7 million (6.6%),
effective January 12, 2007, for Wisconsin electric
customers.
|
|
|
·
|
In
June 2006, the MPSC issued a final written order to UPPCO authorizing
an annual retail electric rate increase for UPPCO of $3.8 million
(4.8%), effective June 28, 2006. See Note 23, "Regulatory
Environment," for more information related to the retail electric
rate increases at WPS and UPPCO.
|
|
|
·
|
On a per-unit
basis, fuel and purchased power costs were approximately 17% higher in
2007 compared with 2006. In addition, sales volumes increased
0.4%, primarily related to an increase in sales volumes to residential and
commercial and industrial customers, driven by warmer weather during the
cooling season and colder weather during the heating season (a portion of
heating load is electric) in 2007, compared with 2006. The
increase in sales volumes related to weather was partially offset by an
approximate 2% decrease in weather normalized residential and commercial
and industrial customer usage, driven by customer conservation resulting
from higher energy costs and weaker general economic
conditions.
|
Margin
2008 Compared with
2007:
The regulated
electric utility segment margin increased $67.8 million, driven by an
increase in electric margin at WPS. The $68.4 million increase
in the electric margin at WPS was a result of:
·
|
A
$54.0 million partial refund to Wisconsin retail customers for 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 expense in
2007 and, therefore, did not have an impact on earnings. WPS
completed this refund in 2007.
|
|
|
·
|
An
approximate $10 million increase in margin from the 2008 retail
electric rate increase effective January 16, 2008, and the full
benefit of the 2007 retail electric rate increase effective
January 12, 2007.
|
|
·
|
An
approximate $10 million increase in margin driven by higher
contracted sales volumes to a large wholesale customer
year-over-year.
|
|
|
·
|
An
approximate $5 million increase in regulated electric utility margin
year-over-year driven by fuel and purchased power costs that were
approximately $1 million lower than what was recovered in rates
during 2008, compared with fuel and purchased power costs that were
approximately $4 million higher than what was recovered in rates
during 2007. As a result of approximately $23 million of
under-recovered fuel and purchased power costs in the first quarter of
2008, the PSCW approved an interim rate surcharge effective
March 22, 2008, and subsequently approved a higher final
surcharge effective July 4, 2008. The $5 million increase in
electric margin includes lower fuel costs from the fuel window reset and
the net impact of the refund accrued at December 31, 2008, payable in 2009
to electric customers from the reopening of the 2008 fuel surcharge on
September 30, 2008, by the
PSCW.
|
|
·
|
These
increases in the electric margin were offset by an approximate
$11 million decrease in margin due to a decline in residential and
commercial and industrial sales volumes. Of this decrease,
approximately $8 million related to energy conservation efforts on
the part of residential customers, which we believe were the result of
high energy prices and the general economic
slowdown. Approximately $1 million related to decreased
demand by our commercial and industrial customers in the third and fourth
quarters of 2008 as the economy worsened. In addition, cooler
weather during the 2008 cooling season compared with 2007 contributed
approximately $2 million to the decrease in gross
margin.
|
2007 Compared with
2006:
The regulated
electric margin increased $61.2 million, driven by the
following:
·
|
A
$57.0 million (11.5%) increase in the electric utility margin at
WPS.
|
|
|
|
-
|
WPS's margin
was positively impacted by the retail electric rate increases discussed
above and by higher electric sales volumes to residential and commercial
and industrial customers related to weather. Favorable weather
during both the heating and cooling seasons positively impacted margin by
an estimated $6 million.
|
|
|
|
-
|
The
year-over-year change in WPS's margin was also positively impacted by a
$16.2 million decrease in the 2006 margin related to the accrual of
the refund to wholesale customers in 2006 of their portion of the Kewaunee
nonqualified decommissioning trust fund. Pursuant to regulatory
accounting, the decrease in the 2006 margin related to this refund was
offset by a corresponding decrease in operating and maintenance expenses
in 2006 and, therefore, did not have an impact on earnings. No
such accrual to wholesale customers occurred in 2007; however, the payment
of the refund was made in 2007.
|
|
|
|
|
-
|
Partially
offsetting the increase in WPS's margin, fuel, and purchased power costs
were 3.7% higher than what was recovered in rates during the year ended
December 31, 2007, compared with fuel and purchased power costs that
were 10.5% less than what was recovered in rates during the same period in
2006, driving a $14.4 million negative variance in WPS's electric
margin. In 2007, fuel and purchased power prices were above
what was projected in the rate case primarily due to higher than
anticipated commodity costs and the market effects of unplanned plant
outages. On October 6, 2007, lightning hit Weston 3, and
the unit returned to full service on January 14, 2008. The
unscheduled outage did not have a significant impact on the electric
utility margin as the PSCW approved deferral of unanticipated fuel and
purchased power costs directly related to the outage. The
outage did, however, cause the price of purchased power from other sources
to increase. Excluding the additional purchased power which
resulted from the Weston 3 outage, fuel and purchased power costs at
WPS increased 17% in 2007, compared with the same period in 2006,
primarily related to the higher per-unit cost of fuel and purchased power
required from the market to serve WPS's customers.
|
|
|
·
|
UPPCO's
margin increased approximately $4 million, primarily due to its
retail electric rate increase, effective June 2006, and higher retail
sales volumes.
|
Operating
Income
2008 Compared with
2007:
Operating income at
the regulated electric utility segment increased $8.3 million, driven by
the $67.8 million increase in the electric utility margin, partially offset
by a $59.5 million increase in operating expenses.
The increase in
operating expenses was driven by:
·
|
A
$54.0 million year-over-year increase related to the partial
amortization in 2007 of the regulatory liability previously recorded for
WPS's obligation to refund proceeds received from the liquidation of the
Kewaunee nonqualified decommissioning trust fund to Wisconsin retail
electric ratepayers.
|
|
|
·
|
A
$13.8 million increase in electric transmission expenses, primarily
related to higher rates charged by MISO and ATC due to additional
transmission costs.
|
|
|
·
|
A
$6.1 million increase in cost of capital and depreciation expense
charged by IBS for assets transferred from WPS to IBS in the beginning of
2008 and reported as operating and maintenance expense in
2008. Similar costs were reported as depreciation and
amortization expense in 2007, prior to the start-up of
IBS.
|
|
|
·
|
A
$4.2 million increase in depreciation and amortization expense,
primarily related to $9.2 million of depreciation expense from
Weston 4 being placed in service for accounting purposes in April
2008, partially offset by a decrease in depreciation related to assets
transferred to IBS and reported in operating and maintenance expense in
2008.
|
These
increases in operating expenses were partially offset
by:
|
|
|
·
|
An
$11.6 million decrease in electric maintenance expenses at WPS,
primarily due to major planned outages at the Weston 2 and
Weston 3 generation stations, the De Pere Energy Center, and the
Pulliam generation station, as well as several unplanned outages at the
Weston 3 generation station in 2007, compared with fewer outages in
2008.
|
|
|
·
|
A decrease in
external costs to achieve merger synergies of $6.6 million related to
the merger with PEC, from $12.3 million in 2007, to $5.7 million
in 2008. This decrease occurred primarily because all external
costs to achieve merger synergies incurred from July 2006 through
March 2007 were reallocated in 2007 from the holding company segment to
the other reportable segments, including the regulated electric
segment. These reportable segments are the beneficiaries of the
synergy savings resulting from the costs to achieve. In
addition, the reduction in 2008 external costs to achieve merger synergies
was due to less integration work required in 2008 compared with
2007.
|
2007 Compared with
2006:
Operating income
increased $2.2 million, driven by the $61.2 million increase in
regulated electric margin discussed above, partially offset by a
$54.3 million (23.7%) increase in operating and maintenance expenses at
WPS, and a combined $3.2 million increase in depreciation and taxes other
than income taxes at the regulated electric utilities.
·
|
The change in
operating and maintenance expense at WPS was primarily related to the
following:
|
|
|
|
-
|
Regulated
electric maintenance expenses increased $15.3 million, driven by
longer than anticipated planned outages and a higher number of unplanned
outages year-over-year (which included major overhauls planned at the
Weston 2 and Weston 3 generation stations and the De Pere
Energy Center, planned major turbine and generator work performed at the
Pulliam generation station, and several unplanned outages at the
Weston 3 generation station).
|
|
|
|
|
-
|
Regulated
electric transmission expenses increased $14.2 million, primarily
related to higher rates charged by MISO and ATC due to additional
transmission investment.
|
|
|
|
|
-
|
The regulated
electric segment of WPS was allocated external costs to achieve merger
synergies of $11.4 million for the year ended December 31,
2007.
|
|
|
|
|
-
|
Amortization
in 2006 of the regulatory liability recorded for WPS's obligation to
refund proceeds received from the liquidation of the Kewaunee nonqualified
decommissioning trust fund to wholesale electric ratepayers contributed
$16.2 million to the increase in WPS's operating and maintenance
expense. Pursuant to regulatory accounting, the 2006 increase
in operating and maintenance expense related to this refund was offset by
a corresponding increase in 2006 margin and, therefore, did not have an
impact on earnings.
|
|
|
|
|
-
|
Lower
pension, postretirement, and other employee benefit costs partially offset
the increase in regulated electric operating and maintenance expense at
WPS.
|
|
|
·
|
An increase
in depreciation expense related to continued capital investment at the
electric utilities, while the increase in taxes other than income taxes
reflected an increase in sales
year-over-year.
|
Other
Expense
2008 Compared with
2007:
Other expense at
the regulated electric utilities increased $6.6 million, driven by a
$4.3 million increase in interest expense and a $2.3 million decrease
in miscellaneous income.
·
|
The increase
in interest expense was due to higher long-term borrowings at WPS,
primarily utilized to fund various construction projects and to retire
short-term borrowing levels related to construction.
|
|
|
·
|
The decrease
in miscellaneous income was driven by:
|
|
|
|
-
|
A
$1.4 million decrease in interest income recognized related to the
construction of transmission facilities WPS funded on ATC's behalf related
to Weston 4. WPS was reimbursed for these transmission
facilities by ATC in April 2008.
|
|
|
|
-
|
A
$1.8 million gain on the sale of a generation facility by UPPCO in
July 2007.
|
|
|
|
-
|
The decrease
in miscellaneous income was partially offset by an increase in AFUDC
related to the wind generation
project.
|
2007 Compared with
2006:
Other expense at
the regulated electric utilities decreased $2.7 million, driven by a
$5.1 million increase in miscellaneous income, partially offset by a
$2.4 million increase in interest expense.
·
|
The increase
in miscellaneous income was driven by:
|
|
|
|
|
|
-
|
A $2.9
million increase in interest income recognized related to the construction
of transmission facilities WPS funded on ATC's behalf pending the start-up
of Weston 4.
|
|
|
|
|
|
-
|
A
$1.8 million gain on the sale of a generation facility by UPPCO in
July 2007.
|
|
|
|
·
|
The increase
in interest expense was due to higher borrowings at WPS, primarily
utilized to fund various construction projects.
|
|
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.
|
|
Year Ended
December 31,
|
|
|
|
|
|
|
|
(Millions,
except natural gas sales volumes)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Change
in 2008 Over 2007
|
|
|
Change
in 2007 Over 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
9,735.2 |
|
|
$ |
6,979.7 |
|
|
$ |
5,159.1 |
|
|
|
39.5 |
% |
|
|
35.3 |
% |
Cost of fuel,
natural gas, and purchased power
|
|
|
9,649.5 |
|
|
|
6,675.6 |
|
|
|
4,978.0 |
|
|
|
44.5 |
% |
|
|
34.1 |
% |
Margins
|
|
$ |
85.7 |
|
|
$ |
304.1 |
|
|
$ |
181.1 |
|
|
|
(71.8 |
)% |
|
|
67.9 |
% |
Margin
Detail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric
and other margins
|
|
$ |
(15.7 |
) |
|
$ |
164.9 |
|
|
$ |
60.5 |
|
|
|
N/A |
|
|
|
172.6 |
% |
Natural
gas margins
|
|
$ |
101.4 |
|
|
$ |
139.2 |
|
|
$ |
120.6 |
|
|
|
(27.2 |
)% |
|
|
15.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and
maintenance expense
|
|
|
181.7 |
|
|
$ |
159.4 |
|
|
$ |
81.5 |
|
|
|
14.0 |
% |
|
|
95.6 |
% |
Depreciation
and amortization
|
|
|
14.5 |
|
|
|
14.4 |
|
|
|
9.4 |
|
|
|
0.7 |
% |
|
|
53.2 |
% |
Taxes other
than income taxes
|
|
|
7.8 |
|
|
|
7.1 |
|
|
|
7.2 |
|
|
|
9.9 |
% |
|
|
(1.4 |
)% |
Operating
income (loss)
|
|
|
(118.3 |
) |
|
$ |
123.2 |
|
|
$ |
83.0 |
|
|
|
N/A |
|
|
|
48.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income (expense)
|
|
|
8.7 |
|
|
|
(0.3 |
) |
|
|
(11.4 |
) |
|
|
N/A |
|
|
|
97.4 |
% |
Interest
expense
|
|
|
(12.1 |
) |
|
|
(13.5 |
) |
|
|
(15.4 |
) |
|
|
(10.4 |
)% |
|
|
(12.3 |
)% |
Minority
Interest
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
3.8 |
|
|
|
- |
% |
|
|
(97.4 |
)% |
Other
expense
|
|
|
(3.3 |
) |
|
|
(13.7 |
) |
|
|
(23.0 |
) |
|
|
(75.9 |
)% |
|
|
(40.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before taxes
|
|
|
(121.6 |
) |
|
|
109.5 |
|
|
|
60.0 |
|
|
|
N/A |
|
|
|
82.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
volumes (includes volumes both physically delivered and net
settled)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
electric sales volumes in kilowatt-hours
|
|
|
184,446.3 |
|
|
|
132,623.6 |
|
|
|
58,794.9 |
|
|
|
39.1 |
% |
|
|
125.6 |
% |
Retail
electric sales volumes in kilowatt-hours
|
|
|
16,680.9 |
|
|
|
14,849.7 |
|
|
|
6,554.1 |
|
|
|
12.3 |
% |
|
|
126.6 |
% |
Wholesale
natural gas sales volumes in billion cubic feet
|
|
|
642.8 |
|
|
|
483.1 |
|
|
|
402.2 |
|
|
|
33.1 |
% |
|
|
20.1 |
% |
Retail natural
gas sales volumes in billion cubic feet
|
|
|
339.2 |
|
|
|
368.8 |
|
|
|
314.5 |
|
|
|
(8.0 |
)% |
|
|
17.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Physical
volumes (includes only transactions settled physically for the periods
shown)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
electric sales volumes in kilowatt-hours *
|
|
|
4,634.1 |
|
|
|
3,599.7 |
|
|
|
968.2 |
|
|
|
28.7 |
% |
|
|
271.8 |
% |
Retail
electric sales volumes in kilowatt-hours *
|
|
|
16,561.3 |
|
|
|
14,584.4 |
|
|
|
4,565.6 |
|
|
|
13.6 |
% |
|
|
219.4 |
% |
Wholesale
natural gas sales volumes in billion cubic feet *
|
|
|
594.9 |
|
|
|
445.6 |
|
|
|
373.5 |
|
|
|
33.5 |
% |
|
|
19.3 |
% |
Retail natural
gas sales volumes in billion cubic feet *
|
|
|
336.0 |
|
|
|
319.4 |
|
|
|
264.0 |
|
|
|
5.2 |
% |
|
|
21.0 |
% |
*
Represents gross physical volumes.
Revenue
2008 Compared with
2007
●
|
Revenues
increased $2.8 billion in 2008 compared with 2007, primarily due to
increased volumes, (in part due to the merger with PEC in 2007) and higher
average sales prices in 2008. Average sales prices rose in 2008
due to large market price increases from January 1, 2008 through
June 30, 2008. Market prices began to decline beginning in
the third quarter of 2008 and continued to decline through the end of the
year to levels below that of January 1, 2008. Integrys
Energy Services recognizes revenue at the time energy is
delivered. As a result, Integrys Energy Services is currently
recognizing revenue based on the higher market prices from contracts
entered into earlier in the year.
|
2007 Compared with
2006
●
|
Year-over-year,
revenues increased approximately $1.8 billion. The increase was
primarily due to increased volumes as a result of the addition of the
nonregulated energy operations of PEC and an average increase in 2007
electric prices of over 10%. In addition to revenue and volume
contributions from the merger with PEC, retail electric sales volumes and
related revenue increased as a result of Integrys Energy Services' new
retail electric product offerings to existing markets and expansion into
new retail electric markets. Wholesale electric sales volumes
and revenue increased as a result of the additional wholesale origination
transactions. Wholesale natural gas volumes increased as a
result of an increase in the profitability of wholesale origination
structured natural gas transactions throughout 2006 and into
2007. Some of these transactions
|
|
were entered
into in prior periods for future delivery; therefore, Integrys Energy
Services saw an increase in volumes in the periods in which these
transactions settle. Retail natural gas volumes also increased,
driven by favorable pricing compared with 2006, which encouraged new and
existing customers to enter into or extend supply contracts with Integrys
Energy Services.
|
Margins
Changes in
commodity prices subject a portion of our nonregulated operations to earnings
volatility. Integrys Energy Services uses financial instruments to
economically hedge risks associated with physical transactions. The
financial instruments mitigate the impacts of significant economic loss caused
by fluctuations in market conditions, changing commodity prices, volumetric
exposure, and other associated risks. Because derivative instruments
utilized in these transactions may not qualify, or are not designated, as hedges
under GAAP, reported earnings for the nonregulated energy operations segment
include the changes in the fair values of the derivative
instruments. These values may change significantly from period to
period and are reflected as unrealized gains or losses within
margin. However, on the other side of these transactions,
fluctuations in the fair value of the physical instruments that are subject to
the economic hedges do not impact margin until settlement, as they do not meet
the GAAP definition of derivative instruments.
Integrys Energy
Services' margin decreased $218.4 million from 2007 to 2008 and increased
$123.0 million from 2006 to 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 primarily
related to 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 Section 29/45K federal tax credits.
|
|
Increase
(Decrease) in Margin in
|
|
(Millions,
except natural gas sales volumes)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Electric and other margins
|
|
|
|
|
|
|
Realized
gains on structured origination contracts
|
|
$ |
6.2 |
|
|
$ |
11.8 |
|
All
other realized wholesale electric margin
|
|
|
(19.4 |
) |
|
|
(21.6 |
) |
Realized
retail electric margin
|
|
|
28.1 |
|
|
|
15.9 |
|
|
|
|
|
|
|
|
|
|
Other
significant items:
|
|
|
|
|
|
|
|
|
Retail
and wholesale fair value adjustments *
|
|
|
(176.8 |
) |
|
|
70.8 |
|
Oil
option activity
|
|
|
(19.6 |
) |
|
|
22.0 |
|
2005
liquidation of electric supply contract
|
|
|
0.9 |
|
|
|
5.5 |
|
Net increase
(decrease) in electric and other margins
|
|
|
(180.6 |
) |
|
|
104.4 |
|
|
|
|
|
|
|
|
|
|
Natural gas margins
|
|
|
|
|
|
|
|
|
Lower
of cost or market inventory adjustments
|
|
|
(160.3 |
) |
|
$ |
(6.1 |
) |
Other
realized natural gas margins
|
|
|
8.0 |
|
|
|
14.1 |
|
|
|
|
|
|
|
|
|
|
Other
significant items:
|
|
|
|
|
|
|
|
|
Spot
to forward differential
|
|
|
5.5 |
|
|
|
(0.2 |
) |
Other
fair value adjustments *
|
|
|
109.0 |
|
|
|
10.8 |
|
Net increase
(decrease) in natural gas margins
|
|
|
(37.8 |
) |
|
|
18.6 |
|
|
|
|
|
|
|
|
|
|
Net increase
(decrease) in Integrys Energy Services' margin
|
|
$ |
(218.4 |
) |
|
$ |
123.0 |
|
|
*For 2008,
these two line items included a total of $11.5 million of gains
resulting from the adoption of SFAS No. 157, “Fair Value
Measurements,” in the first quarter of 2008. See Note 21,
"Fair Value," for
more information.
|
Electric and Other
Margins
Integrys Energy
Services' electric and other margins decreased $180.6 million from 2007 to
2008 and increased $104.4 million from 2006 to 2007. The 2008
and 2007 electric and other margin included the negative impact of
$8.8 million and $15.2 million, respectively, of amortization related
to purchase accounting adjustments required as a result of the merger with
PEC. The following items were the most significant contributors to
the change in Integrys Energy Services' electric and other margins.
Realized gains on structured
origination contracts
●
|
Realized
gains on structured origination transactions increased $6.2 million,
from $18.1 million in 2007 to $24.3 million in
2008. Origination transactions are physical, customer-based
agreements with municipalities, merchant generators, cooperatives,
municipalities, and regulated utilities. The increase was
primarily due to continued growth in existing markets with an emphasis on
structured transactions with small environmentally friendly
generators.
|
|
|
●
|
Realized
gains on structured origination contracts increased $11.8 million,
from $6.3 million in 2006 to $18.1 million in
2007. The increase was primarily due to continued growth in
existing markets in the Midwest and northeastern United States, as well as
expansion into the markets in the western United
States.
|
All other realized wholesale
electric margin
All other realized
wholesale electric margin decreased $19.4 million from 2007 to
2008. In general, realized margins are impacted by trading activity
in prior periods. Integrys Energy Services recognizes realized margin
when the contracts actually settle, which lag as much as 12 to 24 months from
the time the contract was actually entered into. The reduced volume
of proprietary trading that began in 2007 continued to reduce realized margin in
2008.
All other realized
wholesale electric margin decreased $21.6 million from 2006 to
2007. The decrease from 2006 to 2007 is due to the overall reduced
level of proprietary trading in 2007, due primarily to a decrease in electric
price volatility during the first three quarters of 2007, increased emphasis on
structured electric transactions in 2007, and the departure of several key
traders in the third quarter of 2006.
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
and the timing associated with the settlement of these
transactions. A diverse mix of products and markets, combined with
disciplined execution and exit strategies, generally 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."
Realized retail electric
margin
The realized retail
electric margin increased $28.1 million from $34.2 million in 2007 to
$62.3 million in 2008. The change was primarily due to the
following:
●
|
An increase
of $19.5 million from operations in Illinois due to the addition of
new customers as a result of the PEC merger and a reduced impact from
purchase accounting in 2008.
|
|
|
●
|
A
$12.7 million increase due to expansion in the Mid-Atlantic region
and the resolution of certain regulatory issues in Northern
Maine.
|
|
|
●
|
Partially
offsetting these increases was a $3.4 million decrease from
operations in Texas. This reduction is a result of higher
ancillary costs in Texas and the effects of Hurricane Ike, which disrupted
the electric infrastructure in Texas for a period of time, causing some of
Integrys Energy Services' customers to be without electricity or take only
a fraction of their normal load during that
period.
|
The realized retail
electric margin increased $15.9 million from $18.3 million in 2006 to
$34.2 million in 2007. The change was primarily due to the
following:
●
|
A
$13.9 million increase related to operations in Illinois, driven by
the merger with PEC's nonregulated business and the addition of new
customers due to the expiration of certain regulatory provisions in the
state in 2007 that effectively opened the market to nonregulated energy
suppliers.
|
|
|
●
|
A
$6.0 million increase related to operations in Texas, as a result of
further penetration into this market resulting from continued marketing
efforts. Retail offerings in Texas first began in the third
quarter of 2006.
|
|
|
●
|
A
$3.6 million increase related to operations in New England as new
customers were added due to an increased sales focus in this
region.
|
|
|
●
|
Partially
offsetting the increases discussed above was a $4.4 million decrease
related to Michigan operations as many customers continued to return to
utility suppliers as a result of high wholesale energy prices and changes
in utility tariffs, which continued to make the Michigan energy market
less competitive. Also offsetting these increases was a
$3.3 million decrease related to operations in the state of New York,
due to a change in the product mix offered to customers in response to
utility rate structure changes.
|
Retail and wholesale fair
value adjustments
From 2007 to 2008,
Integrys Energy Services' margin from electric retail and wholesale fair value
adjustments decreased $176.8 million, as it recognized $137.4 million
of non-cash unrealized losses related to derivative instruments in 2008,
compared with $39.4 million of non-cash unrealized gains during
2007. From 2006 to 2007, margin from retail and wholesale fair value
adjustments increased $70.8 million, from $31.4 million of non-cash
unrealized losses in 2006 to $39.4 million of non-cash unrealized gains in
2007.
The non-cash
unrealized gains and losses resulted from the application of GAAP derivative
accounting rules to Integrys Energy Services' portfolio of electric customer
supply contracts, requiring that these derivative instruments be adjusted to
fair market value. The derivative instruments are utilized to
mitigate the price, volume, and ancillary risks associated with related customer
sales contracts. These customer sales contracts are not adjusted to
fair value, as they do not meet the definition of derivative instruments under
GAAP, creating an accounting mismatch. As such, the non-cash
unrealized gains and losses related to the customer supply contracts will vary
each period, with non-cash unrealized gains being recognized in periods of
increasing energy prices and non-cash unrealized losses being recognized in
periods of declining energy prices, and will ultimately reverse when the related
customer sales contracts settle. Although energy prices rose
approximately 20% in the first half of 2008, they declined approximately 45% in
the second half of the year, which led to the recognition of large non-cash
unrealized losses in 2008 on these electric customer supply
contracts. These unrealized losses will turnaround in future years as
the contracts settle. Our mark-to-market activity also reflects
increases in portfolio reserves in recognition of the increased risk of credit
losses and reduced market liquidity. Finally, our mark-to-market activity
was also negatively impacted as our short-term cost of borrowing
increased. The discount rate is a component of the fair value of our
derivative portfolio and, therefore, the current increased interest rates
resulted in a reduction in the fair value presented on the balance
sheet. In 2007, energy prices increased, resulting in unrealized
gains.
Oil option
activity
●
|
Oil option
activity drove a $19.6 million decrease in electric and other margins
from 2007 to 2008. There was no activity related to these oil
options in 2008. Prior to 2008, oil options were utilized to
protect the value of a portion of Integrys Energy Services' Section 29/45K
federal tax credits from 2005 to 2007. However, companies can
no longer generate tax credits from the production of synthetic fuel as
the provisions of Section 29/45K of the Internal Revenue Code expired
effective December 31, 2007. As a result, Integrys Energy
Services exercised substantially all of its remaining oil options in
2007.
|
|
|
●
|
Oil option
activity drove a $22.0 million increase in electric and other margins
from 2006 to 2007. Net mark-to-market and realized losses on
oil options of $2.4 million were recognized in 2006, compared with
net mark-to-market and realized gains on oil options of $19.6 million
in 2007. These derivative instruments were not designated as
hedging instruments and, as a result, changes in the fair value were
recorded in earnings. The increase in the fair value of these
instruments in 2007 over 2006 reflects increased oil
prices.
|
2005 liquidation of electric
supply contract
In
the fourth quarter of 2005, an electricity supplier exiting the wholesale market
in Maine requested that Integrys Energy Services liquidate a firm contract to
buy power in 2006 and 2007. At that time, Integrys Energy Services
recognized an $8.2 million gain related to the liquidation of the contract
and entered into a new contract with another supplier for firm power in 2006 and
2007 to supply its customers in Maine. The cost to purchase power
under the new contract was more than the cost under the liquidated
contract. The liquidation and subsequent replacement of this contract
resulted in a $0.9 million increase in realized wholesale electric margins
from 2007 to 2008 and a $5.5 million increase in realized wholesale
electric margins from 2006 to 2007. The replacement contract
increased the cost of purchased power needed to serve customers in Maine by
$6.4 million in 2006, compared with $0.9 million in
2007. There was no impact on electric margin in 2008.
Natural Gas
Margins
Integrys Energy
Services' natural gas margins decreased $37.8 million from 2007 to 2008 and
increased $18.6 million from 2006 to 2007. The 2008 and 2007
natural gas margins included the negative impact of $5.0 million and
$6.1 million, respectively, of amortization related to purchase accounting
adjustments required as a result of the merger with PEC. The
following items were the most significant contributors to the change in Integrys
Energy Services' natural gas margins.
Lower of cost or market
inventory adjustments
The spot price of
natural gas decreased significantly during the second half of 2008 (below the
average cost of natural gas in inventory which Integrys Energy Services had
acquired and injected earlier in 2008), which resulted in a lower of cost or
market adjustment, as required by GAAP. This adjustment contributed a
$160.3 million decrease in non-cash realized natural gas margins from 2007
to 2008, and a $6.1 million decrease in non-cash realized natural gas
margins from 2006 to 2007. The negative impact on realized margin
related to these inventory adjustments was offset by unrealized gains recognized
in 2008 and 2007 on derivative instruments utilized to mitigate the price risk
on natural gas inventory underlying natural gas storage transactions (See "Other
fair value adjustments" below).
Other realized natural gas
margins
Other realized
natural gas margins increased $8.0 million, from $107.6 million in
2007, to $115.6 million in 2008, primarily related to realized gains on
wholesale natural gas storage transactions. In 2008 over 2007,
Integrys Energy Services increased its storage withdrawals which drove the
year-over-year increase in other realized natural gas margins. In
addition, Integrys Energy Services placed greater emphasis on structured
wholesale natural gas transactions in 2008 in existing markets, which
also
contributed to the
increase. These structured transactions involve serving customers
such as regulated utilities, pipelines, retail marketers, and other large end
users of natural gas.
Other realized
natural gas margins increased $14.1 million, from $93.6 million in
2006, to $107.6 million in 2007. The majority of this increase,
$5.7 million, was driven by margin contributed by the nonregulated retail
natural gas marketing operations added with the PEC merger and improved supply
optimization, as Integrys Energy Services was able to secure lower supply costs
for firm sales commitments to retail natural gas customers in Ohio and
Illinois. The remaining increase in realized natural gas margins was
driven by the nonregulated wholesale natural gas marketing operations added with
the PEC merger.
Spot to forward
differential
Integrys Energy
Services experiences earnings volatility associated with the natural gas storage
cycle, which runs annually from April through March of the next
year. Generally, injections of natural gas into storage inventory
take place in the summer months and natural gas is withdrawn from storage in the
winter months. Integrys Energy Services' policy is to hedge the value
of natural gas storage with contracts in the over-the-counter and futures
markets, effectively locking in a margin on the natural gas in
storage. However, fair market value hedge accounting rules require
the natural gas in storage to be marked-to-market using spot prices, while the
future sales contracts are marked-to-market using forward
prices. When the spot price of natural gas changes disproportionately
to the forward price of natural gas, Integrys Energy Services experiences
volatility in its earnings. Consequently, earnings volatility may
occur within the contract period for natural gas in storage. The
accounting treatment does not impact the underlying cash flows or economics of
these transactions.
●
|
The natural
gas storage cycle had a positive $5.5 million impact on natural gas
margins from 2007 to 2008. There was no material impact on
margin as a result of the natural gas storage cycle in 2007 compared with
a $5.5 million positive impact in 2008. At
December 31, 2008, the market value of natural gas in storage was not
significantly different than the market value of future sales contracts
related to the 2008/2009 natural gas storage cycle.
|
|
|
●
|
The natural
gas storage cycle had a negative $0.2 million impact on natural gas
margins from 2006 to 2007. There was no material impact on
margin as a result of the natural gas storage cycle in 2007 compared with
a $0.2 million positive impact in 2006. At
December 31, 2007, the market value of natural gas in storage was
$5.6 million less than the market value of future sales contracts
(net unrealized loss) related to the 2007/2008 natural gas storage
cycle.
|
Other fair value
adjustments
Other derivative
accounting required fair value adjustments primarily relate to changes in the
fair market value of contracts utilized to mitigate market price risk related to
certain natural gas storage contracts, as well as basis swaps utilized to
mitigate market price risk associated with natural gas transportation contracts
and certain natural gas sales contracts. Earnings volatility results
from the application of derivative accounting rules to the transactions used to
mitigate price risk (requiring that these derivative instruments be reflected at
fair market value), without a corresponding offset related to the physical
natural gas storage contracts, the natural gas transportation contracts, or the
natural gas sales contracts (as these contracts are not considered derivative
instruments). Therefore, there is no gain or loss recognized on the
natural gas storage contracts (unless the inventory underlying these storage
contracts becomes subject to lower of cost or market adjustments, as was the
case in 2008, and to a lesser extent in 2007 and 2006 as well), the
transportation contracts, or the customer sales contracts until physical
settlement of these contracts occurs.
In
2008, the impact of these fair value adjustments drove a $109.0 million
increase in the natural gas margins as unrealized gains on these instruments
were $147.6 million in 2008, compared with unrealized gains of
$38.6 million 2007.
In
2007, the impact of these fair value adjustments drove a $10.8 million
increase in the natural gas margins as unrealized gains on these instruments
were $38.6 million in 2007, compared with unrealized gains of
$27.8 million 2006.
Operating Income
(Loss)
2008 Compared with
2007
Operating income at
Integrys Energy Services decreased $241.5 million, from $123.2 million
in 2007 to a $118.3 million operating loss in 2008. This
decrease resulted primarily from the $218.4 million decrease in margin
discussed above. In addition, there was a $22.3 million increase
in operating and maintenance expense. Operating and maintenance
expense increased from $159.4 million in 2007 to $181.7 million in
2008, driven largely by a $9.1 million increase in bad debt expense, $7.3
million of which resulted from the bankruptcy of Lehman Brothers in the third
quarter of 2008, a $5.1 million increase in broker commissions as a result
of higher transaction volumes, and higher employee benefit costs.
2007 Compared with
2006
Operating income at
Integrys Energy Services increased $40.2 million, from $83.0 million
in 2006, to $123.2 million in 2007, driven by the $123.0 million
increase in margin discussed above, partially offset by a $77.9 million
increase in operating and maintenance expense. The increase in
operating and maintenance expense was driven by higher payroll and benefit costs
related to additional employees required as a result of continued business
expansion activities at Integrys Energy Services (the most significant of which
related to the merger of PEC's nonregulated operation into Integrys Energy
Services). A $9.0 million pre-tax gain on the 2006 sale of
WPS ESI Gas Storage, LLC, $7.7 million of costs to achieve merger
synergies and additional costs related to plant outages of $2.6 million in
2007 also contributed to the increase in operating and maintenance
expense.
Other
Expense
2008 Compared with
2007
Other expense at
Integrys Energy Services decreased $10.4 million, from $13.7 million
in 2007 to $3.3 million in 2008. This decrease resulted
primarily from an increase in miscellaneous income of $9.0 million, driven
by a $13.8 million decrease in pre-tax net losses related to Integrys
Energy Services' former investment in a synthetic fuel facility. This
increase in miscellaneous income was partially offset by a decrease of
$1.5 million in foreign currency gains related to Integrys Energy Services'
Canadian subsidiaries and a $3.7 million decrease in interest and dividend
income on margin deposits.
2007 Compared with
2006
Other expense
decreased $9.3 million, from $23.0 million in 2006, to
$13.7 million in 2007. The decrease resulted primarily from a
$5.7 million decrease in pre-tax net losses recognized year-over-year
related to Integrys Energy Services' investment in a synthetic fuel
facility. Integrys Energy Services took less production from this
facility in 2007 compared with 2006. A $3.8 million increase in
foreign currency gains at Integrys Energy Services' Canadian subsidiaries in
2007, which was offset by related losses in gross margin, also contributed to
the decrease. These transactions are substantially hedged from an
economic perspective, resulting in no significant impact on income (loss)
available for common shareholders.
Minority
Interest
2007 Compared with
2006:
A
decrease of $3.7 million in minority interest related to Integrys Energy
Services' synthetic fuel operations. In 2007, Integrys Energy
Services' partner elected to stop receiving production from the synthetic fuel
facility and, therefore, did not share in losses from this
facility.
Holding Company and Other
Segment Operations
|
|
|
|
|
|
|
|
|
|
|
Change
in
|
|
|
Change
in
|
|
|
|
Year Ended
December 31,
|
|
|
2008
Over
|
|
|
2007
Over
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
$ |
(0.7 |
) |
|
$ |
(11.8 |
) |
|
$ |
(14.1 |
) |
|
|
(94.1 |
)% |
|
|
(16.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
(expense)
|
|
|
12.9 |
|
|
|
(12.3 |
) |
|
|
14.3 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before taxes
|
|
$ |
12.2 |
|
|
$ |
(24.1 |
) |
|
$ |
0.2 |
|
|
|
N/A |
|
|
|
N/A |
|
Operating
Loss
2008 Compared with
2007:
Operating loss at
the Holding Company and Other segment improved $11.1 million during 2008
compared with 2007. The decrease in the operating loss was driven
by:
·
|
Reductions in
operating expenses related to consulting fees, compensation and benefits,
and contractor costs at the holding company.
|
|
|
·
|
Operating
income of $1.9 million generated at IBS, which related to return on
capital included in its service charges beginning in
2008.
|
|
|
·
|
Partially
offsetting the decrease in operating loss, was a $6.5 million
increase in the year-over-year operating loss related to external costs to
achieve merger synergies associated with the PEC merger. This
increase occurred primarily because in March 2007 all external costs
to achieve merger synergies incurred from July 2006 through March 2007
were allocated 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 these
costs. This resulted in lower operating expenses at the Holding
Company and Other segment during
2007.
|
2007 Compared with
2006:
The operating loss
at the Holding Company and Other segment decreased $2.3 million during 2007
compared with 2006. The change was driven by a $1.7 million
decrease in operating expenses, primarily related to the reallocation of
external costs to achieve merger synergies associated with the PEC merger
incurred from July 2006 through March 2007. In March 2007, all
external costs to achieve were reallocated from the Holding Company and Other
segment (where they were initially recorded) to other reportable segments, which
are the beneficiaries of the synergy savings resulting from the costs to
achieve.
Other Income
(Expense)
2008 Compared with
2007:
Other income
increased $25.2 million and was driven by:
·
|
A
$15.6 million increase in income from Integrys Energy Group's
approximate 34% ownership interest in ATC. Integrys Energy
Group recorded $66.1 million of pre-tax equity earnings from ATC
during 2008, compared with $50.5 million of pre-tax equity earnings
during 2007. ATC's earnings continue to increase due to a
significant capital expansion program.
|
|
|
·
|
A
$10.5 million decrease in external interest expense due to lower
interest rates and lower average 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 was used to
pay down the short-term debt.
|
2007 Compared with
2006:
Other income
decreased $26.6 million and was driven by:
·
|
A
$31.8 million increase in external interest expense, driven by
additional borrowings assumed in the merger with PEC, as well as an
increase in short-term and long-term borrowings required to fund the
acquisitions of the natural gas distribution operations in Michigan and
Minnesota, and transaction and transition costs related to the merger with
PEC.
|
|
|
·
|
A
$6.2 million gain on the sale of Integrys Energy Group's one-third
interest in Guardian Pipeline, LLC in April 2006 also contributed to the
decrease in year-over-year earnings.
|
|
|
·
|
The decrease
in other income was partially offset by an $11.5 million increase in
earnings from Integrys Energy Group's approximate 34% ownership interest
in ATC. Integrys Energy Group recorded $50.5 million of
pre-tax equity earnings from ATC during the year ended December 31,
2007, compared with $39.0 million for the same period in
2006.
|
Provision for Income
Taxes
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Effective Tax
Rate
|
|
|
29.1 |
% |
|
|
32.2 |
% |
|
|
22.9 |
% |
The decrease in the
effective tax rate was primarily driven by the impact of large permanent tax
deductions pertaining to items that exceeded the related book expense being
applied to the lower income before taxes in 2008, compared with
2007. In addition, in 2008 we recognized $10.0 million of
investment tax credits related to solar projects completed in the fourth quarter
of 2008. These were offset by the reduction in Section 29/45K tax
credits in 2008 due to the December 31, 2007, expiration of Section 29/45K of
the Internal Revenue Code that made tax credits available from the production
and sale of synthetic fuel. In 2007, our ownership in the synthetic
fuel operation resulted in recognizing the tax benefit of Section 29/45K federal
tax credits of $13.6 million compared with $0.8 million of Section
29/45K tax credits recognized in 2008.
The 2007 increase
in the effective tax rate was driven by a decrease in Section 29/45K
federal tax credits recognized in 2007 compared with 2006. The
decrease in Section 29/45K federal tax credits recognized was driven by the
impact of high oil prices on our ability to realize the benefit of Section
29/45K federal tax credits. Section 29/45K federal tax credits
recognized from the production and sale of synthetic fuel were
$13.6 million in 2007, compared with $29.5 million in
2006.
Discontinued
Operations, Net of Tax
2008 Compared with
2007:
Income from
discontinued operations, net of tax, decreased $68.6 million in 2008,
compared with 2007.
In
the third quarter of 2008, Integrys Energy Services sold its subsidiary
Mid-American Power, LLC, which owned the Stoneman generation facility, located
in Wisconsin. The historical revenue, expenses, and effects of
disposing of this facility were not significant. In the fourth
quarter of 2008, Integrys Energy Services recognized an additional
$3.8 million after-tax gain on the sale of this facility in discontinued
operations when a previously contingent payment was paid by the
buyer. This contingent payment resulted from legislation that passed
in the fourth quarter of 2008, which extended the production tax credits
available for certain biomass facilities.
During 2007,
$58.5 million of after-tax income from discontinued operations was
recognized related to PEP. This included an after-tax gain of
$7.6 million on the sale. In 2008, discontinued operations
reflect the $0.8 million impact of tax adjustments related to the 2007 PEP
sale.
During 2007, WPS
Niagara Generation, LLC recognized after-tax income of $14.8 million from
discontinued operations, primarily related to the $14.7 million after-tax
gain on the sale of this facility.
2007 Compared with
2006:
Income from
discontinued operations, net of tax, increased $66.0 million, from
after-tax income of $7.3 million in 2006 to after-tax income of
$73.3 million in 2007.
●
|
In September
2007, Integrys Energy Group completed the sale of PEP for approximately
$879.1 million. Post-closing adjustments in the amount of
$9.9 million were settled in February 2008 related to this sale,
which reduced the sale price to $869.2 million. These
post-closing adjustments were funded through other current liabilities at
December 31, 2007. During the year ended December 31,
2007, $58.5 million of income from discontinued operations was
recognized related to PEP, which included an after-tax gain of
$7.6 million on the sale.
|
|
|
●
|
Discontinued
operations, net of tax, related to WPS Niagara Generation, LLC
(Niagara), which was sold in January 2007, increased
$14.4 million, from income of $0.4 million in 2006 to income of
$14.8 million in 2007. The increase in income generated
from Niagara was mostly due to a $14.7 million after-tax gain on the
sale of the facility.
|
|
|
●
|
Partially
offsetting these increases were discontinued operations related to Sunbury
Generation, LLC (Sunbury). Income from discontinued operations
related to Sunbury was $6.9 million for the period January 1,
2006, through the date of sale in July 2006, including a
$12.5 million after-tax gain on the sale of this
facility.
|
For more
information on the discontinued operations discussed above, see Note 3,
"Discontinued
Operations" and Note 24, "Segments of
Business."
BALANCE
SHEET
Cash and cash
equivalents increased $212.9 million, from $41.2 million at December
31, 2007, to $254.1 million at December 31, 2008. For a detailed
explanation for the change in the cash and cash equivalents balance, see "Liquidity and Capital
Resources."
Net accounts
receivable and accrued unbilled revenues increased $285.3 million (15.3%),
from $1,870.0 million at December 31, 2007, to $2,155.3 million
at December 31, 2008, primarily due to the following:
|
|
●
|
Net accounts
receivable and accrued unbilled revenues at Integrys Energy Services
increased $223.6 million (20.9%), driven primarily by an increase in
electric and natural gas revenues in the fourth quarter of 2008, compared
with the same period in 2007, due mainly to higher volumes
sold.
|
|
|
●
|
Net accounts
receivable and accrued unbilled revenues at PGL increased
$102.2 million (34.2%), driven primarily by an increase in
revenues in the fourth quarter of 2008, compared with the same period in
2007. The increase in revenues was primarily due to higher
natural gas prices. |
|
|
●
|
These
increases were partially offset by a $72.2 million (22.1%) decrease
in WPS’s net accounts receivable and accrued unbilled revenues, primarily
due to an $82.3 million receivable at December 31, 2007, from
ATC related to the transmission facilities required to support Weston 4
that WPS funded on ATC’s behalf. WPS received payment for the
ATC receivable in 2008. This decrease was partially offset by a
$16.2 million year-over-year increase in accrued unbilled
revenues. |
Inventories
increased $69.5 million (10.5%), from $663.4 million at
December 31, 2007, to $732.9 million at December 31,
2008. The inventory balance at WPS increased $33.5 million
(41.2%), driven by a $22.2 million (43.4%) increase in natural gas in
storage due to an increase in natural gas prices year-over-year, and an increase
in fossil fuel inventory of $11.3 million (37.3%), primarily due to an
increase in coal prices and an increase in coal quantities, related to Weston 4
becoming operational in June 2008. PGL’s inventory increased
$26.2 million (30.9%) due to
an increase in natural gas prices and volumes
year-over-year.
At
December 31, 2008, compared to December 31, 2007, total assets from
risk management activities increased $1,682.4 million and total liabilities
from risk management activities increased $1,767.5 million. The
increase in assets and liabilities from risk management activities was driven by
changes in the fair values of the underlying derivative contracts, driven by
extremely volatile energy prices in 2008. Total liabilities from risk
management activities also increased at PGL and NSG, primarily due to changes in
the fair values of the underlying derivative contracts.
Total regulatory
assets increased $444.8 million (35.8%), from $1,244.0 million at
December 31, 2007, to $1,688.8 million at December 31,
2008. The regulatory asset related to pension and other
postretirement related items increased $412.8 million, primarily related to
an increase in the unfunded status of the pension and other postretirement
benefit plans due to decreases in the value of plan assets during
2008. Also contributing to the increase was the regulatory asset
related to derivatives, which increased $127.6 million year-over-year, due
to an increase in PGL’s and NSG’s net risk management liabilities arising from
changes in natural gas prices. Partially offsetting these increases
was the regulatory asset related to environmental remediation costs, which
decreased $77.7 million year-over-year, mainly due to PGL collecting these
costs in rates. See Note 7, "Regulatory Assets and
Liabilities," for more information.
Net property,
plant, and equipment increased $309.5 million (6.9%), from
$4,463.8 million at December 31, 2007, to $4,773.3 million at
December 31, 2008, due primarily to the following:
|
|
●
|
Net property,
plant, and equipment at WPS increased
$151.8 million. Capital expenditures in 2008 were
$275.4 million, in part due to $71.3 million related to the
construction of the Crane Creek Wind Farm, $55.6 million related to
natural gas service laterals to the Guardian II natural gas transmission
pipeline, $48.0 million related to the construction of Weston 4,
$12.3 million related to the purchase of new line transformers, and
$12.1 million related to electric and natural gas service for new and
existing customers. The increase due to capital expenditures
was partially offset by depreciation and amortization expense of
$99.5 million in 2008.
|
|
|
●
|
Net property,
plant, and equipment at PGL increased $54.5 million, primarily due
to capital expenditures of
$113.3 million, partially offset by depreciation and amortization
expense of $67.4 million. Capital expenditures in 2008
related mainly to the natural gas distribution
systems. |
|
|
●
|
Net property,
plant, and equipment at Integrys Energy Services increased
$47.4 million, primarily due to capital expenditures related to solar
energy and landfill gas
projects. |
Accounts payable
increased $202.5 million (15.2%), from $1,331.8 million at
December 31, 2007, to $1,534.3 million at December 31,
2008. Accounts payable at Integrys Energy Services increased
$252.8 million, primarily due to an increase in the volume of natural gas
borrowed. This increase was partially offset by a $62.8 million
year-over-year decrease in accounts payable at WPS driven by the completion of
Weston 4, which became commercially operational in June 2008. WPS
paid contractors related to work performed at Weston 4 during 2008 as these
contracts were completed and closed out, and purchased power decreased, mainly
as a result of Weston 4 becoming operational.
Detailed
explanations for changes in the short-term and long-term debt balances
year-over-year are included in Note 11, "Short-term Debt and Lines of
Credit," and Note 12, "Long-Term Debt."
Environmental
remediation liabilities decreased $65.0 million (9.2%), from
$705.6 million at December 31, 2007, to $640.6 million at
December 31, 2008. The decrease related mainly to expenditures
for manufactured gas plant remediation at PGL. See Note 15, "Commitments and
Contingencies," for more information.
The
$388.6 million year-over-year increase in long-term pension and other
postretirement liabilities and the $101.4 million year-over-year decrease
in pension and other postretirement assets were primarily related to a decrease
in the value of plan assets during 2008 related to losses on investments, which
caused an increase in the unfunded status of the pension and other
postretirement benefit plans.
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. Our borrowing costs can be impacted by short-term
and long-term debt ratings assigned by independent credit rating
agencies. Our operating cash flows and access to capital markets can
be impacted by macroeconomic factors outside of our control.
Due to
unprecedented volatility within the global financial markets beginning in the
second half of 2008, Integrys Energy Group has been exposed to increased
interest costs and challenges, at times, accessing short-term capital
markets. Due to disruptions in the commercial paper markets, Integrys
Energy Group made draws under its syndicated revolving credit agreements for
funds that would normally have been borrowed in the commercial paper market, and
$300 million of these borrowings were outstanding at December 31,
2008.
Operating
Cash Flows
2008 Compared with
2007:
Net cash used for
operating activities was $250.0 million in 2008, compared with net cash
provided by operating activities of $238.5 million in 2007. The
$488.5 million year-over-year increase in cash used for operating
activities was driven by:
·
|
A
$498.2 million decrease in cash provided by accounts receivable
collections, as colder weather conditions led to higher natural gas
throughput volumes in the fourth quarter 2008, compared with the same
quarter in 2007, contributing to higher accounts receivable
balances. Also contributing to higher accounts receivable
balances, Integrys Energy Group and its subsidiaries, primarily Integrys
Energy Services, had cash collateral payments outstanding at December 31,
2008, that were $232.9 million higher than cash collateral payments
outstanding at December 31, 2007. The increase in cash
collateral payments was driven by large mark-to-market losses
incurred by Integrys Energy Services during the latter part of 2008, due
to declining prices, as discussed in more detail in "Results of Operations
– Integrys Energy Services' Operations."
|
|
|
·
|
A
$139.1 million increase in cash used for natural gas inventory
purchases due to an increase in the average price of natural gas during
the summer of 2008 (when natural gas is generally injected into
inventory), compared with the same period in 2007.
|
|
|
·
|
An
$88.7 million decrease in net refunds of regulatory assets and
liabilities, driven by a decrease in the refund to ratepayers in 2008,
compared with 2007, of proceeds WPS received from the liquidation of the
nonqualified decommissioning trust fund upon the sale of
Kewaunee.
|
2007 Compared with
2006:
During 2007, net
cash provided by operating activities was $238.5 million, compared with
$72.9 million in 2006. The $165.6 million increase in net
cash provided by operating activities was driven by a $64.8 million
decrease in working capital requirements year-over-year. It is
important to note that changes in working capital balances at February 21, 2007,
as a result of the PEC merger are not incorporated in the Consolidated Statement
of Cash Flows, as the merger was a noncash transaction. Only PEC
changes in working capital from the merger date to December 31, 2007, are
included. Inventory levels at Integrys Energy Services increased from
December 31, 2006, to December 31, 2007, but this change was less than
the increase from December 31, 2005, to December 31, 2006, driving the
majority of the decrease in working capital requirements. Integrys
Energy Services continued to see growth in its natural gas business in both new
and existing markets. The year-over-year change in natural gas
inventories at the regulated utilities was not significant. The
remaining increase in net cash provided by operating activities was driven by a
year-over-year increase in income available for common
shareholders.
Investing
Cash Flows
2008 Compared with
2007:
Net cash used for
investing activities was $452.2 million in 2008, compared with
$451.5 million in 2007. The $0.7 million year-over-year
increase in cash used for investing activities was primarily driven by a
$140.2 million increase in cash used for capital expenditures (discussed
below), partially offset by the reimbursement of $99.7 million from ATC,
related to the construction of the transmission facilities required to support
Weston 4, and a $15.5 million year-over-year increase in cash proceeds
received from the sale of property, plant, and equipment.
2007 Compared with
2006:
Net cash used for
investing activities was $451.5 million in 2007, compared with
$1,030.1 million in 2006. The $578.6 million decrease was
driven by $659.3 million of cash used by Integrys Energy Group to acquire
natural gas operations in Michigan and Minnesota in 2006. Also
contributing $44.0 million to the decrease in net cash used for investing
activities in 2007 was WPS's liquidation of the cash that was deposited into an
escrow account in 2006, which was used for the payment of the outstanding
principal balance of first mortgage bonds in January 2007 (discussed below
in significant financing activities). Partially offsetting these
decreases were $58.4 million of proceeds received from the sale of our
investment in
Guardian Pipeline LLC and WPS ESI Gas Storage, LLC in 2006 and a
$50.6 million year-over-year increase in capital expenditures (discussed
below).
Capital
Expenditures
Capital
expenditures by business segment for the years ended December 31, 2008,
2007, and 2006 were as follows:
Reportable
Segment
(millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Electric
utility
|
|
$ |
207.4 |
|
|
$ |
202.6 |
|
|
$ |
282.1 |
|
Natural gas
utility
|
|
|
237.3 |
|
|
|
158.8 |
|
|
|
54.6 |
|
Integrys
Energy Services
|
|
|
68.1 |
|
|
|
20.5 |
|
|
|
5.5 |
|
Holding
company and other
|
|
|
20.0 |
|
|
|
10.7 |
|
|
|
(0.2 |
) |
Integrys
Energy Group
|
|
$ |
532.8 |
|
|
$ |
392.6 |
|
|
$ |
342.0 |
|
The increase in
capital expenditures at the natural gas utility segment in 2008 compared with
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 the natural gas lateral infrastructure that will connect WPS’s
natural gas distribution system to the Guardian II natural gas
pipeline. The increase in capital expenditures at Integrys Energy
Services in 2008 compared with 2007 was primarily due to solar energy projects
as well as the construction of a pipeline that will transport methane gas
produced at a landfill for use at a chemical plant as a replacement for natural
gas.
The decrease in
capital expenditures at the electric utility in 2007 compared with 2006 was
mainly due to a decrease in capital expenditures associated with the
construction of Weston 4. The increase in capital expenditures
at the natural gas utility was primarily driven by capital requirements of PGL
and NSG, which were acquired in the PEC merger on February 21,
2007. Capital expenditures in 2007 for PGL and NSG related mainly to
the natural gas distribution systems. The increase in capital
expenditures at Integrys Energy Services was due to capital required to open new
offices in Colorado, Michigan, and Washington, D.C., as well as to move the
Chicago office; improvements at various generation facilities; new systems
infrastructure; and the Winnebago Energy Center landfill gas
project. The increase in capital expenditures at the Holding Company
and Other segment was driven by the purchase of a corporate
airplane.
Financing
Cash Flows
2008 Compared with
2007:
Net cash provided
by financing activities was $911.3 million in 2008, compared with net cash
used for financing activities of $459.2 million in 2007. In
2007, Integrys Energy Group was able to pay down short-term debt with a portion
of the proceeds received from the sale of PEP. In 2008, proceeds were
required to fund higher year-over-year working capital
requirements.
2007 Compared with
2006:
Net cash used for
financing activities was $459.2 million in 2007, compared with net cash
provided by financing activities of $891.7 million in 2006. The
$1.4 billion change was driven by $458.0 million of short-term debt
borrowings during 2006, compared with the repayment of $463.7 million of
short-term debt in 2007. In 2007, Integrys Energy Group was able to
pay down short-term debt with a portion of the proceeds received from the sale
of PEP. The remaining net change in financing activity was driven by
a $321.8 million decrease in long-term debt issuances year-over-year and a
$119.0 million year-over year decrease in common stock
issued. Short-term borrowings in 2006 and the long-term debt and
stock issuances in 2006 were used primarily for the acquisitions of the natural
gas distribution operations in Michigan and Minnesota. An
$81.0 million increase in dividends paid in 2007, compared with 2006, was
driven by an increase in shares outstanding and higher dividend
rates. These items were partially offset by net natural gas loan
proceeds at Integrys Energy Services of $34.4 million in 2007, compared
with the net repayment of $68.4 million of natural gas loans during
2006. An increase in natural gas spreads made it more conducive to
enter into natural gas loan deals in 2007 compared with 2006.
Significant
Financing Activities
Dividends paid
increased in 2008 compared with 2007. In February 2008, Integrys
Energy Group increased its quarterly common stock dividend to 67 cents per
share. The quarterly common stock dividend was increased from 57.5
cents per share to 66 cents per share in 2007.
Integrys Energy
Group had outstanding commercial paper borrowings of $552.9 million and
$308.2 million at December 31, 2008, and 2007,
respectively. Integrys Energy Group had short-term notes payable
outstanding of $181.1 million as of December 31, 2008, and
$10.0 million as of December 31, 2007,
respectively. Integrys Energy Group had borrowings under revolving
credit facilities of $475.0 million and $150.0 million as of
December 31, 2008, and 2007, respectively. See Note 11, "Short-Term Debt and Lines of
Credit" for more information.
In
December 2008, WPS issued $125.0 million of Series 6.375%, 7-year
Senior Notes. The net proceeds from the issuance of the Senior Notes
were used to fund construction costs and capital additions, retire short-term
indebtedness, and for general corporate utility purposes.
In
November 2008, Integrys Energy Group entered into an approximate
$156 million short-term debt agreement extending through March 2009 to
finance its working capital requirements and for general corporate
purposes. The agreement requires principal and interest payments to
be made in yen. Integrys Energy Group entered into two forward
foreign currency exchange contracts to hedge the exchange rate variability of
these principal and interest payments.
In
November 2008, Integrys Energy Group entered into a $250 million revolving
credit agreement to finance its working capital requirements and for general
corporate purposes, which extends to May 2009.
In
November 2008, PGL issued $45 million of Series SS, 7.0%, 5-year First and
Refunding Mortgage Bonds and $5 million of Series TT, 8.0%, 10-year First
and Refunding Mortgage Bonds. The net proceeds from the issuance of
these bonds were used to reduce short-term debt and for general corporate
utility purposes.
In
November 2008, NSG issued $6.5 million of Series O, 7.0%, 5-year First
Mortgage Bonds. The net proceeds from the issuance of the First
Mortgage Bonds were used for general corporate utility purposes.
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 variable rate 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 under certain stock-based employee benefit and compensation
plans. As a result of the plans, equity increased $45.7 million
and $25.0 million in 2007 and 2006, respectively. During 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. Integrys Energy Group did
not repurchase any existing common stock during 2007 or 2006.
In
November 2007, WPS issued $125.0 million of 5.65%, 10-year Senior
Notes. The net proceeds from the issuance were used to fund
construction costs and capital additions, retire short-term indebtedness, and
for general corporate utility purposes.
On
December 14, 2006, the Village of Weston, Wisconsin, issued
$22.0 million of 3.95% Pollution Control Refunding Revenue Bonds and loaned
the proceeds from the sale of the bonds to WPS. In return, WPS issued
$22.0 million of 3.95% Senior Notes, due in 2013, to the Village of
Weston. At December 31, 2006, the $22.0 million of proceeds
received from the Village of Weston were classified as restricted
cash. In January 2007, WPS used the restricted cash to repay the
outstanding principal balance of its 6.90% First Mortgage Bonds which originally
were to mature in 2013.
In
December 2006, WPS issued $125.0 million of 5.55% 30-year Senior
Notes. The net proceeds from the issuance were used to fund
construction costs and capital additions, retire short-term indebtedness, and
for general corporate utility purposes.
On
December 1, 2006, Integrys Energy Group issued $300.0 million of
Junior Subordinated Notes. Interest has been fixed at 6.22% through
the use of forward-starting interest rate swaps for the first ten years, after
which, the interest rate will float for the remainder of the term.
Credit
Ratings
Integrys Energy
Group uses internally generated funds, commercial paper borrowings, and other
short-term borrowings to satisfy most of its capital
requirements. Integrys Energy Group also periodically issues
long-term debt and common stock to reduce short-term debt, maintain desired
capitalization ratios, and fund future growth.
WPS, PEC, and PGL
have their own commercial paper borrowing programs. WPS periodically
issues long-term debt and receives equity contributions from Integrys Energy
Group to reduce short-term debt, fund future growth, and maintain capitalization
ratios as authorized by the PSCW.
PGL and NSG
periodically issue long-term debt in order to reduce short-term debt, refinance
maturing securities, maintain desired capitalization ratios, and fund future
growth. The specific forms of long-term financing, amounts, and
timing depend on business needs, market conditions, and other
factors.
The current credit
ratings for Integrys Energy Group, WPS, PEC, PGL, and NSG are listed in the
table below.
Credit
Ratings
|
Standard
& Poor's
|
Moody's
|
Integrys
Energy Group
Issuer credit rating
Senior
unsecured debt
Commercial paper
Credit facility
Junior
Subordinated Notes
|
A-
BBB+
A-2
N/A
BBB
|
N/A
A3
P-2
A3
Baa1
|
WPS
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
|
Credit ratings are
not recommendations to buy and are subject to change, and each rating should be
evaluated independently of any other rating.
On
November 25, 2008, Standard & Poor's revised the outlook on Integrys Energy
Group and all of its subsidiaries to negative from stable. The
revised outlook reflects pressure on the current credit ratings given Integrys Energy Groups'
liquidity needs for its nonregulated business, as well as cash flow measures
that have not met Standard & Poor's expectations since the PEC
merger.
On
March 13, 2008, Standard & Poor's raised the senior secured debt rating for
WPS 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.
In
December 2007, Standard & Poor's and Moody's withdrew the ratings
assigned to PEC's commercial paper at the request of Integrys Energy
Group.
On
November 13, 2007, Standard & Poor's revised the outlook on Integrys Energy
Group and all of its subsidiaries to stable from negative. Standard
& Poor's outlook had been negative since February 21, 2007, for
all Integrys Energy Group companies, as discussed below. The revised
outlook reflected Integrys Energy Group's progress to improve its financial
position and business profiles since its one-notch downgrade on February 21,
2007. On November 13, 2007, Standard & Poor's also reaffirmed its
A rating on WPS's senior secured debt.
On
September 6, 2007, Standard & Poor's raised the senior secured debt for NSG
one notch from A- to A. The new rating was the result of a review and
changes made to the collateral coverage requirements Standard and Poor's uses
when assigning recovery ratings to United States Utility First Mortgage
Bonds.
On
February 21, 2007, Standard & Poor's lowered the corporate credit rating on
Integrys Energy Group to A- from A and removed it from CreditWatch with negative
implications. Standard & Poor's also lowered
Integrys Energy
Group's unsecured ratings to BBB+ from A and all other issue-specific ratings by
one notch. Standard & Poor's stated that the ratings actions
were due to concerns related to plans to expand its energy marketing business,
the dividend requirements resulting from the PEC merger, moderate capital
expenditure requirements, lower than expected performance at MGU and MERC,
uncertainty regarding future rate relief, and full integration of the newly
acquired PEC utilities. At the same time, Standard & Poor's
lowered all WPS's issue-specific ratings by one notch as they stated "WPS's
liquidity is being pressured by its ongoing construction
program." Standard & Poor's affirmed all PEC, PGL, and NSG
ratings. Standard & Poor's outlook for all Integrys Energy Group
related companies was negative pending successful integration of recent
acquisitions.
On
February 21, 2007, Moody's downgraded the senior unsecured rating of Integrys
Energy Group to A3 from A1, the bank credit facility to A3 from A1, the
commercial paper rating to Prime-2 from Prime-1, and the Junior Subordinated
Notes to Baa1 from A2. Moody's also downgraded WPS's senior secured
rating to Aa3 from Aa2, its senior unsecured bank credit facility to A1 from
Aa3, and its preferred stock to A3 from A2 and confirmed WPS's commercial paper
rating at Prime-1. At the same time, Moody's affirmed the ratings of
PGL and NSG. Moody's stated that the rating actions to downgrade were
due to concerns about increases in Integrys Energy Group's consolidated debt
levels and business risk profile evidenced by the increased scale and scope of
the post merger non-regulated energy marketing business plus the entry into the
historically more challenging regulatory jurisdiction of
Illinois. Moody's outlook for all Integrys Energy Group related
companies is stable.
On
February 21, 2007, Moody's also upgraded the senior unsecured rating of PEC to
A3 from Baa2, conforming it with those of Integrys Energy Group, and affirmed
all other ratings for PEC. Moody's actions to upgrade the senior
unsecured rating were due to the expected business risk improvement from the
merger with Integrys Energy Group, which resulted in the sale of PEP and
transferred PEC's energy and marketing business to Integrys Energy Services,
leaving PEC holding only the two regulated subsidiaries, PGL and
NSG. In addition, the upgrade reflects Integrys Energy Group's
guaranty of the $325.0 million of PEC 6.90% notes due in 2011.
Discontinued
Operations
2008 Compared with
2007:
Net cash provided
by discontinued operations was $3.8 million in 2008 compared with
$690.2 million in 2007. The decrease in net cash provided by
discontinued operations was driven by the approximate $869.2 million of
proceeds received from the sale of PEP.
2007 Compared with
2006:
Net cash provided
by discontinued operations was $690.2 million in 2007 compared with
$61.0 million in 2006. The increase in net cash provided by
discontinued operations was driven by approximately $879.1 million of
proceeds received from the sale of PEP in the third quarter of
2007. Post-closing adjustments in the amount of $9.9 million
were settled in February 2008 related to this sale, which reduced the sale
price to $869.2 million. These post-closing adjustments were
funded through other current liabilities at December 31, 2007 and,
therefore, are included in Note 1(d), "Summary of Significant Accounting
Policies – Cash and Cash Equivalents," as a non-cash
transaction.
Future
Capital Requirements and Resources
Contractual
Obligations
The following table
shows the contractual obligations of Integrys Energy Group, including its
subsidiaries, as of December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
Due By Period
|
(Millions)
|
|
Total
Amounts
Committed
|
|
|
2009
|
|
|
|
2010-2011 |
|
|
|
2012-2013 |
|
|
2014
and Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt principal and interest payments (1)
|
|
$ |
3,622.8 |
|
|
$ |
294.1 |
|
|
$ |
832.4 |
|
|
$ |
728.7 |
|
|
$ |
1,767.6 |
|
Operating
lease obligations
|
|
|
47.4 |
|
|
|
11.1 |
|
|
|
18.5 |
|
|
|
13.2 |
|
|
|
4.6 |
|
Commodity
purchase obligations (2)
|
|
|
7,260.2 |
|
|
|
3,328.6 |
|
|
|
2,036.2 |
|
|
|
911.3 |
|
|
|
984.1 |
|
Purchase
orders (3)
|
|
|
626.8 |
|
|
|
626.5 |
|
|
|
0.3 |
|
|
|
- |
|
|
|
- |
|
Capital
contributions to equity method investment
|
|
|
27.3 |
|
|
|
27.3 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Pension and
other postretirement
funding
obligations (4)
|
|
|
545.9 |
|
|
|
54.2 |
|
|
|
141.3 |
|
|
|
163.0 |
|
|
|
187.4 |
|
Total
contractual cash obligations
|
|
$ |
12,130.4 |
|
|
$ |
4,341.8 |
|
|
$ |
3,028.7 |
|
|
$ |
1,816.2 |
|
|
$ |
2,943.7 |
|
(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.
|
(4)
|
Obligations for certain pension
and other postretirement benefits plans cannot be estimated beyond
2011.
|
The table above
does not reflect any payments related to the manufactured gas plant remediation
liability of $639.0 million at December 31, 2008, as the amount and
timing of payments are uncertain. See Note 15,"Commitments and
Contingencies," for more information about environmental
liabilities. In addition, the table does not reflect any payments for
the December 31, 2008 liability related to uncertain tax positions, as the
amount and timing of payments are uncertain. See Note 14, "Income Taxes," for more
information about this liability.
Capital
Requirements
Estimated
construction expenditures by company for the three-year period 2009 through 2011
are listed below.
(Millions)
|
|
|
|
WPS
|
|
|
|
Wind
generation projects
|
|
$ |
247.1 |
|
Environmental
projects
|
|
|
171.4 |
|
Electric
and natural gas distribution projects
|
|
|
127.6 |
|
Other
projects
|
|
|
162.0 |
|
|
|
|
|
|
UPPCO
|
|
|
|
|
Electric
distribution projects and repairs and safety measures at hydroelectric
facilities
|
|
|
70.7 |
|
|
|
|
|
|
MGU
|
|
|
|
|
Natural
gas pipe distribution system and underground natural gas storage
facilities
|
|
|
26.2 |
|
|
|
|
|
|
MERC
|
|
|
|
|
Natural
gas pipe distribution system
|
|
|
43.9 |
|
|
|
|
|
|
PGL
|
|
|
|
|
Natural
gas pipe distribution system and underground natural gas storage
facilities *
|
|
|
357.8 |
|
|
|
|
|
|
NSG
|
|
|
|
|
Natural
gas pipe distribution system
|
|
|
35.1 |
|
|
|
|
|
|
Integrys
Energy Services
|
|
|
|
|
Landfill
methane gas project, infrastructure project, solar energy projects,
and
miscellaneous
projects
|
|
|
43.4 |
|
|
|
|
|
|
IBS
|
|
|
|
|
Corporate
services infrastructure projects
|
|
|
83.2 |
|
Total capital
expenditures
|
|
$ |
1,368.4 |
|
|
* Includes
approximately $55 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 2008 rate
case; however, the ICC rejected the rider. PGL again requested
recovery in a rider as part of the rate case filed on February 25,
2009.
|
Integrys Energy
Group expects to provide additional capital contributions to ATC (not included
in the above table) of approximately $27 million in 2009 and approximately
$12 million in 2010. No capital contributions are expected in
2011.
All projected
capital and investment expenditures are subject to periodic review and revision
and may vary significantly from the estimates depending on a number of factors,
including, but not limited to, industry restructuring, regulatory constraints,
acquisition opportunities, market volatility, and economic trends.
Capital
Resources
As
of December 31, 2008, Integrys Energy Group and each of its subsidiaries
were in compliance with all respective covenants relating to outstanding
short-term and long-term debt and expect to be in compliance with all such debt
covenants for the foreseeable future.
Integrys Energy
Group and certain of its subsidiaries’ revolving credit agreements and term
loans contain financial and other covenants, including but not limited to, a requirement to maintain a debt to
total capitalization ratio not to exceed 65%, excluding non-recourse
debt. Failure to meet these covenants beyond applicable grace periods
could result in accelerated due dates and/or termination of the
agreements. Termination of the agreements could permit lenders to
require immediate repayment of the outstanding borrowings
thereunder.
Integrys Energy
Group and certain of its subsidiaries’ long-term debt obligations contain
covenants related to payment of principal and interest when due and various
financial reporting obligations. Failure to comply with these
covenants could result in an event of default which, if not cured or waived,
could result in the acceleration of outstanding debt
obligations.
Integrys Energy
Group plans to meet its capital requirements for the period 2009 through 2011
primarily through internally generated funds, net of forecasted dividend
payments, and debt and equity financings. Integrys Energy Group plans
to maintain current debt to equity ratios at appropriate levels to support
current credit ratings and corporate growth. Management believes
Integrys Energy Group has adequate financial flexibility and resources to meet
its future needs. See Item 7, "Management Discussion and Analysis,
Other Future Considerations" for additional information.
See Note 11, "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, which expires in April 2009. 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 million of equity, debt, or other
securities under this shelf registration statement, $300 million of which
was used in December 2006 when Integrys Energy Group issued Junior
Subordinated Notes. Integrys Energy Group plans to file a new shelf
registration statement in the first quarter of 2009.
In
May 2008, WPS filed a shelf registration statement. As a result, WPS
may issue up to $250 million of senior debt securities within the next
three years with amounts, prices, and terms to be determined at the time of
future offerings. On December 5, 2008, WPS issued
$125.0 million of 6.375%, 7-year Senior Notes under this shelf registration
statement.
Other
Future Considerations
Impact
of Financial Market Turmoil
Volatility and uncertainty in the
financial markets has impacted Integrys Energy Group in a number of ways.
Due to unprecedented volatility within the global financial markets beginning in
the second half of 2008, Integrys Energy Group has been exposed to increased
interest costs and challenges, at times, accessing short-term capital
markets. Due to disruptions in the commercial paper markets, Integrys
Energy Group made draws under its syndicated revolving credit agreements for
funds that would normally have been borrowed in the commercial paper market,
and $300.0 million of these
borrowings were outstanding at December 31,
2008. In addition, we believe that a decrease in the number of wholesale
counterparties actively trading in the energy markets has reduced market
liquidity and increased the risk of counterparty concentrations. This
factor, combined with worsening economic conditions, has also increased the risk
of credit losses. A decline in the overall level of natural gas and
electricity prices has resulted in increased cash margin calls on the exchanges
utilized by Integrys Energy Group for economically hedging its supply
obligations.
In
response to the factors discussed above, Integrys Energy Group has taken several
steps to improve its available liquidity. In the fourth quarter of 2008,
several transactions were closed in support of this effort. First, PGL
issued $50.0 million of first mortgage bonds, and NSG issued
$6.5 million of first mortgage
bonds in private placement
transactions. Next, Integrys Energy Group entered into an approximate
$156 million drawn credit facility extending through March 2009
and entered into a $250 million
undrawn credit facility extending to May 2009. Finally, WPS issued $125 million
of 7-year fading lien first mortgage bonds. In addition to the foregoing,
Integrys Energy Services has adjusted its product pricing strategy to account
for the increased operating costs, collateral requirements, business risks, and
potential cash margining impact. This new pricing strategy has reduced the
flow of new business, therefore reducing future liquidity requirements, while
improving the profitability of transactions that are executed. Management
believes that these efforts have reduced its exposure to adverse market
conditions. While the impact of continued market volatility and the extent
and impacts of any economic downturn cannot be predicted, Integrys Energy Group
currently believes it has sufficient operating flexibility and access to funding
sources to maintain adequate liquidity. Also, as Integrys Energy Group
heads out of the winter heating season, the natural gas storage cycle at both
the regulated natural gas utilities and Integrys Energy Services will aid in the
generation of positive cash flow as inventory that has been built up in storage
will be sold to customers. These positive cash flows will be used to
reduce short-term debt.
The recent
volatility in global capital markets has also led to a reduction in the current
market value of long-term investments held in Integrys Energy Group's pension
and other postretirement benefit plan trusts. The recent decline in
asset value of the plans will likely result in higher pension and other
postretirement benefit expenses, and additional future funding
requirements.
Impact
of Divesting of or Scaling Back the Nonregulated Business Segment
Integrys Energy
Group has made a decision to divest of its nonregulated energy services business
segment, Integrys Energy Services, or reduce its size, risk, and financial
requirements in response to increased collateral requirements at a time when
global credit and financial markets are constraining the availability and
increasing the cost of capital. As a result, Integrys Energy
Services' operations will either be fully or partially divested, or scaled back
to include only the most profitable products and markets, resulting in lower
operating expenses and a reduced level of financial liquidity support, while
invested capital will be managed downward in order to obtain an acceptable level
of return. Integrys Energy Group is seeking to deploy its capital to
areas with more desirable risk-adjusted rates of return.
Execution of this
strategic decision will result in lower earnings capacity from this business
segment going forward, although, in return, Integrys Energy Group expects an
improved business risk profile and enhanced financial security. A
divestiture of the nonregulated business segment, or a reduced segment scale,
will also allow Integrys Energy Group to either eliminate or reduce the amount
of credit facilities and other forms of financial support committed to Integrys
Energy Services.
Regulatory
Matters and Rate Trends
To
mitigate the volatility of the price of natural gas used for electric
generation, and purchased power costs in 2009 and beyond, WPS 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 PSCW 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. WPS 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.
In
the current political, economic, and regulatory environment, the focus on energy
efficiency can lead to the implementation of decoupling
mechanisms. Under decoupling, utilities are allowed to adjust rates
to recover or refund the difference between the actual and authorized margin
impact of variations in volumes. In the recently completed WPS rate
case, the PSCW approved a settlement filed by WPS and the Wisconsin Citizens
Utility Board to implement decoupling for natural gas and electric residential
and small commercial sales, along with several energy efficiency
initiatives. In approving the settlement, the PSCW capped the annual
amount that can be recovered under the decoupling mechanism to $4.0 million for
natural gas service, and $12.0 million for electric service. On
January 16, 2009, WPS requested rehearing to remove or increase the decoupling
caps. On February 24, 2009, in a written order, the PSCW increased
the caps to $8.0 million for natural gas service and $14.0 million for electric
service. Recently passed legislation in Michigan authorizes the MPSC
to approve decoupling mechanisms, and in its January 2009 rate order, MGU was
ordered to submit a proposal for decoupling in its next rate case
filing. In Minnesota, the legislature required the MPUC to evaluate
decoupling. The MPUC is currently engaged in that process and has
sought and received comments on decoupling mechanisms from utilities and
interveners in Minnesota. Decoupling for residential and small
commercial sales was approved by the ICC for PGL and NSG on a four-year trial
basis on February 5, 2008, and became effective March 1,
2008. Interveners, including the Illinois Attorney General, oppose
decoupling, and have appealed the ICC's approval. PGL and NSG are
actively supporting the ICC's decision to approve decoupling.
For a discussion of
regulatory filings and decisions, see Note 23, "Regulatory
Environment."
Uncollectible
Accounts
The reserves for
uncollectible accounts at Integrys Energy Group 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 the economy,
energy prices, and weather.
The impact of
higher prices and the declining economic environment could cause more accounts
receivable to become uncollectible. Higher levels of uncollectible
balances would negatively impact Integrys Energy Group's results of operations
and could result in higher working capital requirements.
Goodwill
Impairment Testing
Integrys Energy
Group performs its required annual goodwill impairment tests each April
1. SFAS No. 142, "Goodwill
and Other Intangible Assets," requires goodwill to be tested on an annual basis
and between required annual testing dates if certain conditions
exist. One of these conditions is a change in business climate, which
may be evidenced by, among other things, a prolonged decline in a company's
market capitalization below book value. Any annual or interim
goodwill impairment test could result in the recognition of a goodwill
impairment loss. See Note 9, "Goodwill and Other Intangible
Assets," for more information on goodwill balances for Integrys Energy
Group's reporting units at December 31, 2008.
New
Laws
In
February 2009, the American Recovery and Reinvestment Act of 2009 (ARRA) was
signed into law. ARRA contains various provisions intended to
stimulate the economy. Integrys Energy Group is currently evaluating
the impacts of ARRA on its financial condition, results of operations and cash
flows from operations.
In
February 2009, Wisconsin Senate Bill (SB) 62 was signed into law. SB
62 contains various tax provisions intended to reduce Wisconsin’s current budget
gap. Integrys Energy Group is currently evaluating the impacts of SB
62 on its financial condition, results of operations and cash flows from
operations.
OFF
BALANCE SHEET ARRANGEMENTS
See Note 16, "Guarantees," for information
regarding guarantees.
MARKET
PRICE RISK MANAGEMENT ACTIVITIES
Market price risk
management activities include the electric and natural gas marketing and related
risk management activities of Integrys Energy Services. Integrys
Energy Services' marketing and trading operations manage electricity and natural
gas procurement as an integrated portfolio with its retail and wholesale sales
commitments. Derivative instruments are utilized in these
operations.
Integrys Energy
Services measures the fair value of derivative instruments on a mark-to-market
basis. The fair value is included in assets or liabilities from risk
management activities on Integrys Energy Group's Consolidated Balance Sheets,
with an offsetting entry to other comprehensive income (for the effective
portion of cash flow hedges), also on Integrys Energy Group's Consolidated
Balance Sheets, or to earnings. The following table provides an
assessment of the factors impacting the change in the net value of Integrys
Energy Services' assets and liabilities from risk management activities for the
year ended December 31, 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 |
) |
|
|
(68.1 |
) |
|
|
165.6 |
|
|
|
97.3 |
|
Plus: Changes
in fair value of contracts in existence at December 31, 2008 (3)
|
|
|
- |
|
|
|
136.4 |
|
|
|
(12.6 |
) |
|
|
123.8 |
|
Fair
value of contracts at December 31, 2008 (1)
|
|
$ |
- |
|
|
$ |
294.0 |
|
|
$ |
(135.4 |
) |
|
$ |
158.6 |
|
(1)
|
Reflects the values reported on
the balance sheets 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
December 31, 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 were included in Integrys Energy Services' portfolio at
December 31, 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 1(t), "Summary of Significant Accounting
Policies – Fair Value."
Integrys
Energy Services
Risk
Management Contract Aging at Fair Value
As
of December 31, 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
|
|
$ |
(74.4 |
) |
|
$ |
(34.7 |
) |
|
$ |
0.5 |
|
|
$ |
(0.5 |
) |
|
$ |
(109.1 |
) |
Level
2
|
|
|
146.3 |
|
|
|
(49.6 |
) |
|
|
(4.5 |
) |
|
|
(3.4 |
) |
|
|
88.8 |
|
Level
3
|
|
|
76.3 |
|
|
|
82.6 |
|
|
|
12.3 |
|
|
|
7.7 |
|
|
|
178.9 |
|
Total
fair value
|
|
$ |
148.2 |
|
|
$ |
(1.7 |
) |
|
$ |
8.3 |
|
|
$ |
3.8 |
|
|
$ |
158.6 |
|
CRITICAL
ACCOUNTING POLICIES
Integrys Energy
Group has determined that the following accounting policies are critical to the
understanding of its financial statements because their application requires
significant judgment and reliance on estimations of matters that are inherently
uncertain. Integrys Energy Group's management has discussed these
critical accounting policies with the Audit Committee of the Board of
Directors.
Risk
Management Activities
Integrys Energy
Group has entered into contracts that are accounted for as derivatives under the
provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended. At December 31, 2008, those derivatives
not designated as hedges are primarily commodity contracts used to manage price
risk associated with natural gas and electricity purchase and sale
activities. If the derivatives qualify for regulatory deferral
subject to the provisions of SFAS No. 71, "Accounting for the Effects of
Certain Types of Regulation," there is no impact on income available for common
shareholders prior to settlement of the contracts. In addition,
Integrys Energy Group may apply the normal purchases and sales exception,
provided by SFAS No. 133, as amended, to certain derivative
contracts. The normal purchases and sales exception provides that
recognition of gains and losses in the consolidated financial statements is not
required until the settlement of the contracts.
Cash flow hedge
accounting treatment may be used when Integrys Energy Group enters into
contracts to buy or sell a commodity at a fixed price for future delivery to
protect future cash flows corresponding with anticipated physical sales or
purchases. In addition, Integrys Energy Group uses cash flow hedge
accounting to protect against changes in foreign currency exchange rates, and
interest rates. Fair value hedge accounting may be used when Integrys
Energy Group holds assets, liabilities, or firm commitments and enters into
transactions that hedge the risk of changes in commodity prices or interest
rates. To the extent that the hedging instrument is fully effective
in offsetting the transaction being hedged, there is no impact on income
available for common shareholders prior to settlement of the hedge.
Derivative
contracts that are determined to fall within the scope of SFAS No. 133, as
amended, are recorded at fair value on the Consolidated Balance Sheets of
Integrys Energy Group. Changes in fair value, except effective
portions of derivative instruments designated as hedges or qualifying for
regulatory deferral, generally affect income available for common shareholders
at each financial reporting date until the contracts are ultimately
settled.
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 1(t), "Summary of Significant Accounting
Policies – Fair Value," and Note 21, "Fair Value," for more
information.
Integrys Energy
Group has based its valuations on observable inputs whenever
possible. However, at times, 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. Of the total risk management assets on Integrys Energy
Group's Consolidated Balance Sheets, $755.4 million (25.3%) utilized Level
3 measurements. Of the total risk management liabilities,
$573.4 million (19.4%) 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.
As
a component of the fair value determination, Integrys Energy Group considers
counterparty credit risk (including its own credit risk) and liquidity
risk. The liquidity component of the fair value determination may be
especially subjective when limited liquid market information is
available. Under SFAS No. 157, beginning January 1, 2008,
Integrys Energy Services no longer includes transaction costs in these fair
value determinations, but included this in determining fair value prior to
2008. Changes in the underlying assumptions for these components of
fair value at December 31, 2008, would have the following
effects:
Change
in Components
|
Effect
on Fair Value of Net Risk Management Assets at December 31, 2008
(Millions)
|
100%
increase
|
$34.5
decrease
|
50%
decrease
|
$17.3
increase
|
These hypothetical
changes in fair value would be included in current and long-term assets and
liabilities from risk management activities on the Consolidated Balance Sheets
and as part of nonregulated revenue on the Consolidated Statements of Income,
unless the related contracts are designated as cash flow hedges, in which case
potential changes would be included in Other Comprehensive Income – Cash Flow
Hedges on the Consolidated Statements of Common Shareholders'
Equity.
Purchase
Accounting
The 2007 PEC
merger, as well as the acquisitions of natural gas distribution operations in
Michigan and Minnesota in 2006, were accounted for using the purchase method of
accounting in accordance with SFAS No. 141, "Business
Combinations." Under this statement, the purchase price paid by the
acquirer, including transaction costs, is allocated to the assets and
liabilities acquired as of the acquisition date based on their fair
values. The per share fair value of the common stock issued by
Integrys Energy Group for the acquisition of PEC was determined by using the
average market value of Integrys Energy Group's common stock over a five-day
period, beginning two days before the announcement date of the
merger. As Integrys Energy Group announced its intent to sell PEP at
the time of the closing of the merger, the PEP assets and liabilities were
reported at estimated fair value less costs to sell.
Management makes
estimates of fair value based upon historical experience and information
obtained from the management of the acquired company. Assumptions may
be incomplete, and unanticipated events and circumstances may occur which could
affect the validity of such assumptions, estimates, or actual
results. As discussed below within "Asset Impairment," a significant
amount of goodwill resulted from these acquisitions, which requires impairment
testing on at least an annual basis. Goodwill was allocated to the
various segments based on the excess of the purchase price over the estimated
fair value of net identifiable assets.
In
conjunction with the PEC merger, a significant fair value estimate related to
nonderivative commodity contracts and customer relationships, which were
recorded as intangible assets at Integrys Energy Services. The
intangible asset related to the contracts is being amortized into earnings as
the contracts settle, and the intangible asset related to customer relationships
is being amortized over the estimated lives of those
relationships. The amortization of these items had a negative impact
on earnings in 2008.
PGL, NSG, MGU, and
MERC are predominantly regulated utilities; therefore, in accordance with SFAS
No. 71, the carrying value of the majority of their assets and liabilities
approximated fair value, and as such, did not change significantly as a result
of applying purchase accounting.
Asset
Impairment
Integrys Energy
Group reviews certain assets for impairment as required by SFAS No. 144,
"Accounting for the Impairment and Disposal of Long-Lived Assets," and SFAS
No. 142.
The carrying value
of goodwill by segment for the year ended December 31, 2008
was:
(Millions)
|
|
Carrying
Value of Goodwill
|
|
WPS (1)
|
|
$ |
36.4 |
|
PGL (2)
|
|
|
549.3 |
|
NSG (2)
|
|
|
74.3 |
|
MERC (3)
|
|
|
144.3 |
|
MGU (3)
|
|
|
122.7 |
|
Total
Gas Segment
|
|
$ |
927.0 |
|
Integrys
Energy Services (2)
|
|
|
6.9 |
|
Balance
at December 31, 2008
|
|
$ |
933.9 |
|
(1) Related to the acquisition
of Wisconsin Fuel and Light in 2001.
(2) Related to the PEC merger in
2007.
(3) Related to the acquisition
of the natural gas distribution operations in Michigan and Minnesota in
2006.
The goodwill for
each of our reporting units is tested for impairment annually on April 1 or more
frequently when events or circumstances warrant based on the guidance of SFAS
No. 142. The test for impairment includes estimating the fair market
value of each reporting unit using assumptions about future
profitability. Key assumptions used in the analysis include the use
of an appropriate discount rate, long-term growth rates, return on equity,
financial forecasts, capital expenditures, and other factors. A
significant decrease in market values and/or projected future cash flows could
result in an impairment loss. In 2008, an after-tax goodwill
impairment loss of $6.5 million was recognized for NSG, related to a
decrease in forecasted results and worsening economic factors. (See
Note 9, "Goodwill and Other
Intangible Assets," for further discussion of
the impairment).
The review for
impairment of tangible assets is more critical to Integrys Energy Services than
to our other segments because of its lack of access to rate setting based on
cost of service that is available to our regulated segments. At
December 31, 2008, the carrying value of Integrys Energy Services'
property, plant, and equipment totaled $187.5 million. Integrys
Energy Group believes that the accounting estimate related to asset impairment
of power plants is a "critical accounting estimate"
because: (1) the estimate is susceptible to change from period
to period because it requires management to make assumptions about future market
sales pricing, production costs, capital expenditures, and generation volumes
and (2) the impact of recognizing an impairment could be material to our
financial position or results of operations. Management's assumptions
about future market sales prices and generation volumes require significant
judgment because actual prices and generation volumes have fluctuated in the
past as a result of changing fuel costs and required plant maintenance and are
expected to continue to do so in the future.
The primary
estimates used at Integrys Energy Services in the impairment analyses are future
revenue streams, capital expenditures, environmental landscape, and operating
costs. A combination of inputs from both internal and external
sources is used to project revenue streams. Integrys Energy Services
forecasts future operating costs with input from external sources for fuel
costs. These estimates are modeled over the projected remaining life
of the power plants using the methodology defined in SFAS
No. 144.
Integrys Energy
Services evaluates property, plant, and equipment for impairment whenever
indicators of impairment exist. These indicators include a
significant underperformance of the assets relative to historical or projected
future operating results, a significant change in the use of the assets or
business strategy related to such assets, and significant negative industry or
economic trends. SFAS No. 144 requires that if the sum of the
undiscounted expected future cash flows from a company's asset is less than the
carrying value of the asset, an asset impairment must be recognized in the
financial statements. For assets held for sale, impairment charges
are recorded if the carrying value of such assets exceeds the estimated fair
value less costs to sell. The amount of impairment recognized is
calculated by reducing the carrying value of the asset to its fair value (or
fair value less costs to sell if held for sale).
Throughout 2008,
Integrys Energy Services tested various power plants for impairment whenever
events or changes in circumstances indicated that a test was required in
compliance with SFAS No. 144. No material impairment charges were
recorded in 2008 as a result of the recoverability tests. Results of
past impairment tests may not necessarily be an indicator of future results
given the nature of the accounting estimates involved, as discussed more fully
above. Future results or changes in assumptions could result in an
impairment.
Receivables
and Reserves
Our regulated
natural gas and electric utilities and Integrys Energy Services accrue estimated
amounts of revenues for services rendered but not yet billed. Estimated
unbilled revenues are calculated using a variety of factors based on customer
class. At December 31, 2008 and 2007, Integrys Energy Group's
unbilled revenues were $525.5 million and $464.7 million,
respectively. Any difference between actual revenues and the
estimates are recorded in revenue in the next period. Differences
historically have not been significant.
With the exception
of WPS, Integrys Energy Group records reserves for potential uncollectible
customer accounts as an expense on the income statement and an uncollectible
reserve on the balance sheet. At WPS, the PSCW follows the direct
write-off approach in rates rather than the allowance method; therefore, a
regulatory asset is debited rather than an expense account when the reserve for
uncollectible accounts is set up. Actual write-offs at WPS are
charged directly to an expense account in lieu of the reserve
account. At the utilities, 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 the economy, commodity prices, and
weather. Each quarter, the utilities evaluate the adequacy of the
reserves for uncollectible accounts based on the most current available
information and adjust the reserves for changes in estimated probable accounts
receivable losses. Integrys Energy Services calculates the reserve
for potential uncollectible customer receivable balances by applying an
estimated bad debt experience rate to each past due aging category and reserving
for 100% of specific customer receivable balances deemed to be
uncollectible. The basis for calculating the reserve for receivables
from wholesale counterparties considers netting agreements, collateral, and
guarantees. If the assumption that historical uncollectible
experience matches current customer default is incorrect, or if a specific
customer with a large account receivable that has not previously been identified
as a risk defaults, there could be significant changes to bad debt expense and
the uncollectible reserve balance. At December 31, 2008 and
2007, Integrys Energy Group's reserve for uncollectible accounts was
$62.5 million and $56.0 million, respectively.
Pension
and Other Postretirement Benefits
The costs of
providing non-contributory defined benefit pension benefits and other
postretirement benefits, described in Note 17, "Employee Benefit Plans," are
dependent upon numerous factors resulting from actual plan experience and
assumptions regarding future experience.
Pension and other
postretirement benefit costs are impacted by actual employee demographics
(including age, compensation levels, and employment periods), the level of
contributions made to the plans, and earnings on plan assets. Pension
and other postretirement benefit costs may be significantly affected by changes
in key actuarial assumptions, including anticipated rates of return on plan
assets, discount rates
used in determining
the projected pension and other postretirement benefit obligations and costs,
and health care cost trends. Changes made to the plan provisions may
also impact current and future pension and other postretirement benefit
costs.
Integrys Energy
Group's pension and other postretirement benefit plan assets are primarily made
up of equity and fixed income investments. Fluctuations in actual
equity and fixed income market returns, as well as changes in general interest
rates, may result in increased or decreased benefit costs in future
periods. Management believes that such changes in costs would be
recovered at our regulated segments through the ratemaking process.
The following chart
shows how a given change in certain actuarial assumptions would impact the
projected benefit obligation and the reported annual pension cost on the income
statement. Each factor below reflects an evaluation of the change
based on a change in that assumption only.
Actuarial
Assumption
(Millions,
except percentages)
|
|
Percentage-
Point
Change in
Assumption
|
|
|
Impact
on Projected Benefit
Obligation
|
|
|
Impact
on 2008
Pension
Cost
|
|
Discount
rate
|
|
|
(0.5 |
) |
|
$ |
60.0 |
|
|
$ |
1.2 |
|
Discount
rate
|
|
|
0.5 |
|
|
|
(57.2 |
) |
|
|
(2.0 |
) |
Rate of
return on plan assets
|
|
|
(0.5 |
) |
|
|
N/A |
|
|
|
5.9 |
|
Rate of
return on plan assets
|
|
|
0.5 |
|
|
|
N/A |
|
|
|
(5.9 |
) |
The following chart
shows how a given change in certain actuarial assumptions would impact the
accumulated other postretirement benefit obligation and the reported annual
other postretirement benefit cost on the income statement. Each
factor below reflects an evaluation of the change based on a change in that
assumption only.
Actuarial
Assumption
(Millions,
except percentages)
|
|
Percentage-Point
Change in Assumption
|
|
|
Impact
on Postretirement Benefit Obligation
|
|
|
Impact
on 2008 Postretirement Benefit Cost
|
|
Discount
rate
|
|
|
(0.5 |
) |
|
$ |
25.7 |
|
|
$ |
2.2 |
|
Discount
rate
|
|
|
0.5 |
|
|
|
(24.2 |
) |
|
|
(2.9 |
) |
Health care
cost trend rate
|
|
|
(1.0 |
) |
|
|
(46.0 |
) |
|
|
(9.0 |
) |
Health care
cost trend rate
|
|
|
1.0 |
|
|
|
55.5 |
|
|
|
9.4 |
|
Rate of
return on plan assets
|
|
|
(0.5 |
) |
|
|
N/A |
|
|
|
1.1 |
|
Rate of
return on plan assets
|
|
|
0.5 |
|
|
|
N/A |
|
|
|
(1.1 |
) |
Integrys Energy
Group has developed an interest rate yield curve to enable it to make judgments
pursuant to Emerging Issues Task Force Topic No. D-36, "Selection of Discount
Rates Used for Measuring Defined Benefit Pension Obligations and Obligations of
Post Retirement Benefit Plans Other Than Pensions." The yield curve is comprised
of non-callable (or callable with make-whole provisions), high-quality corporate
bonds with maturities between 0 and 30 years. The included bonds are
generally rated by Moody's as Aaa and Aa with a minimum amount outstanding of
$50 million. The expected annual benefit cash flows are discounted
for each of Integrys Energy Group's pension and retiree welfare plans using this
yield curve, and a single-point discount rate is developed matching each plan's
expected payout structure.
Integrys Energy
Group establishes its expected return on asset assumption based on consideration
of historical and projected asset class returns, as well as the target
allocations of the benefit trust portfolios. The assumed long-term
rate of return was 8.5% in 2008, 2007, and 2006. For 2008, 2007, and
2006, the actual rates of return on pension plan assets, net of fees, were
(25.9%), 6.2%, and 11.3%, respectively.
The determination
of expected return on qualified plan assets is based on a market-related
valuation of assets, which reduces year-to-year
volatility. Cumulative gains and losses in excess of 10% of the
greater of the pension benefit obligation or market-related value are amortized
over the average remaining future service to expected retirement
ages. Changes in fair value are recognized over the
subsequent five
years for plans previously sponsored by WPS, while differences between actual
investment returns and the expected return on plan assets are recognized over a
five-year period for plans previously sponsored by PEC. Because of
this method, the future value of assets will be impacted as previously deferred
gains or losses are included in market related value.
In
selecting assumed health care cost trend rates, past performance and forecasts
of health care costs are considered. More information on health care
cost trend rates can be found in Note 17, "Employee Benefit
Plans."
For a table showing
future payments that Integrys Energy Group expects to make for pension and other
postretirement benefits, see Note 17, "Employee Benefit
Plans."
Regulatory
Accounting
The electric and
natural gas utility segments of Integrys Energy Group follow SFAS No. 71, and
our financial statements reflect the effects of the different ratemaking
principles followed by the various jurisdictions regulating these
segments. Certain items that would otherwise be immediately
recognized as revenues and expenses are deferred as regulatory assets and
regulatory liabilities for future recovery or refund to customers, as authorized
by our regulators. Future recovery of regulatory assets is not
assured, and is generally subject to review by regulators in rate proceedings
for matters such as prudence and reasonableness. Management regularly
assesses whether these regulatory assets and liabilities are probable of future
recovery or refund by considering factors such as changes in the regulatory
environment, earnings at the utility segments, and the status of any pending or
potential deregulation legislation. Once approved, the regulatory
assets and liabilities are amortized into income over the rate recovery
period. If recovery of costs is not approved or is no longer deemed
probable, these regulatory assets or liabilities are recognized in current
period income.
If
our regulated electric and natural gas utility segments or a separable portion
of those segments would no longer meet the criteria for application of SFAS
No. 71, we would discontinue its application as defined under SFAS No. 101,
"Regulated Enterprises – Accounting for the Discontinuation of Application of
SFAS No. 71." Assets and liabilities recognized solely due to
the actions of rate regulation would no longer be recognized on the balance
sheet, but rather would be classified as an extraordinary item in income for the
period in which the discontinuation occurred. A write-off of all of
Integrys Energy Group's' regulatory assets and regulatory liabilities at
December 31, 2008, would result in an 11.9% decrease in total assets and a
3.0% decrease in total liabilities. See Note 7, "Regulatory Assets and
Liabilities," for more information.
Environmental
Activities Relating to Former Manufactured Gas Operations
Integrys Energy
Group's utility subsidiaries, their predecessors, and certain former affiliates
operated facilities in the past at multiple manufactured gas plant sites for the
purpose of manufacturing gas and storing manufactured gas. The
utility subsidiaries are accruing and deferring the costs incurred in connection
with environmental activities at the manufactured gas plant sites pending
recovery through rates or from other entities. The amounts deferred
include costs incurred but not yet recovered through rates and management's best
estimates of the costs that the utilities will incur in investigating and
remediating the manufactured gas sites. Management's estimates are
based upon a probabilistic model and an ongoing review by management of future
investigative and remedial costs.
Management
considers this policy critical due to the substantial uncertainty in the
estimation of future costs with respect to the amount and timing of costs, and
the extent of recovery from other potential responsible parties. See
Note 15, "Commitments and
Contingencies," for further discussion of environmental
matters.
Tax
Provision
As
part of the process of preparing our Consolidated Financial Statements, we are
required to estimate our income taxes for each of the jurisdictions in which we
operate. This process involves estimating our actual current tax
liabilities together with assessing temporary differences resulting from
differing treatment of items, such as depreciation, for tax and accounting
purposes. These differences result in deferred tax assets and
liabilities, which are included within our Consolidated Balance
Sheet. We must also assess the likelihood that our deferred tax
assets will be recovered through future taxable income and, to the extent we
believe that recovery is not likely, we must establish a valuation allowance,
which is offset by an adjustment to income tax expense in the Consolidated
Income Statements. The
interpretation of tax laws involves uncertainty, since tax authorities may
interpret them differently. As of January 1, 2007, we adopted
the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes – an Interpretation of FAS 109." As allowed under
Interpretation No. 48, Integrys Energy Group elected to change its method of
accounting to record interest and penalties paid on income tax obligations as a
component of income tax expense.
Significant
management judgment is required in determining our provision for income taxes,
our deferred tax assets and liabilities, and any valuation allowance recorded
against our deferred tax assets. The assumptions involved are
supported by historical data, reasonable projections, and technical
interpretations of applicable tax law and regulation across multiple taxing
jurisdictions. Significant changes in these assumptions could have a
material impact on Integrys Energy Group's financial condition and results of
operations. See Notes 1(p) "Income Taxes," and 14, "Income Taxes," for a
discussion of accounting for income taxes.
IMPACT
OF INFLATION
Our financial
statements are prepared in accordance with accounting principles generally
accepted in the United States of America and report operating results in
terms of historic cost. The statements provide a reasonable,
objective, and quantifiable statement of financial results, but they do not
evaluate the impact of inflation. For our regulated operations, to
the extent we are not recovering the effects of inflation, we will file rate
cases as necessary in the various jurisdictions. Our nonregulated
businesses include inflation in forecasted costs.
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
|
Market
Risks and Other Significant Risks
Integrys Energy
Group has potential market risk exposure related to commodity price risk
(including regulatory recovery risk), interest rate risk, equity return and
principal preservation risk, and foreign currency exchange rate
risk. Integrys Energy Group is also exposed to other significant
risks due to the nature of our subsidiaries' businesses and the environment in
which we operate. Integrys Energy Group has risk management policies
in place to monitor and assist in controlling these risks and may use derivative
and other instruments to manage some of these exposures, as further described
below.
Commodity
Price Risk and Regulatory Recovery Risk
Utilities
The electric
utilities of Integrys Energy Group purchase natural gas and coal for use in
power generation. They also buy and sell power from the MISO market at a price
that is often reflective of the underlying cost of natural gas used in power
generation. Prudent fuel and purchased power costs are recovered from
customers under one-for-one recovery mechanisms by UPPCO and by the wholesale
electric operations and Michigan retail electric operations of
WPS. The costs of natural gas used by the natural gas utility
subsidiaries are generally also recovered from customers under one-for-one
recovery mechanisms. These recovery mechanisms greatly reduce
commodity price risk for the utilities.
WPS's Wisconsin
retail electric operations do not have a one-for-one recovery mechanism for
price fluctuations, but biennial rate cases with fuel adjustments have mitigated
the year-to-year price risk. For intra-year price risk, a "fuel
window" mechanism is used to recover costs resulting from significant price
volatility. Under the fuel window, if actual fuel and purchased power
costs deviate by more than 2% from costs included in the rates charged to
customers, a rate review can be triggered. Once a rate review is
triggered, rates may be reset (subject to PSCW approval) for the remainder of
the year to recover or refund, on an annualized basis, the projected change in
the cost of fuel and purchased power.
To
manage commodity price risk, our regulated utilities enter into contracts of
various durations for the purchase and/or sale of natural gas, fuel for electric
generation, and electricity. In addition, the electric operations of
WPS and the natural gas operations of WPS, PGL, NSG, and MERC employ risk
management techniques, which include the use of derivative instruments such as
swaps, futures, and options.
Integrys Energy
Services
As
part of its trading activities, Integrys Energy Services seeks to generate
profits from the volatility of the price of electricity by purchasing or selling
various financial and physical instruments (such as forward contracts, options,
financial transmission rights, and capacity contracts) in established wholesale
markets where Integrys Energy Services has market expertise, under risk
management policies set by management and approved by Integrys Energy Group's
Board of Directors. Integrys Energy Services also seeks to reduce
market price risk and extract additional value from its generation and customer
contract portfolios through the use of various financial and physical
instruments.
To
measure commodity price risk exposure, Integrys Energy Group employs a number of
controls and processes, including a value-at-risk (VaR) analysis of its
exposures. Integrys Energy Services' VaR calculation is utilized to
quantify exposure to market risk associated with its marketing and trading
portfolio (primarily natural gas and power positions), which also includes
near-term positions managed under its asset management strategy through tolling
agreements with the merchant generating fleet. The VaR calculation excludes the
long-dated positions created by owning merchant generation and associated coal,
sulfur dioxide emission allowances, and other ancillary
fuels. Additionally, financial
transmission
rights, renewable energy credits, and certain portions of long-dated natural gas
storage and transportation contracts are also excluded from the VaR
calculation. The capped downside nature of the risks and duration of
these positions would result in a VaR that would not be representative of the
actual exposure. Therefore, Integrys Energy Services evaluates the
exposures for these types of contracts by assessing the maximum potential loss
of the positions which would represent the cost of the physical asset or the
fixed demand charges for the contract.
VaR is used to
describe a probabilistic approach to quantifying the exposure to market
risk. The VaR amount represents an estimate of the potential change
in fair value that could occur from changes in market factors, within a given
confidence level, if an instrument or portfolio is held for a specified time
period. VaR models are relatively sophisticated. However,
the quantitative risk information is limited by the parameters established in
creating the model. The instruments being used may have features that
could trigger a potential loss in excess of the calculated amount if the changes
in the underlying commodity price exceed the confidence level of the model
used. VaR is not necessarily indicative of actual results that may
occur. In addition to VaR, Integrys Energy Services employs other
risk measurements including mark-to-market valuations, stress testing, and
scenario based testing. In conjunction with the VaR analysis, these
other risk measurements provide the risk management analysis for Integrys Energy
Services' risk exposure. Additionally, Integrys Energy Services also
uses volume limits and stop loss limits to limit its exposure to commodity price
movements.
VaR has a number of
limitations that are important to consider when evaluating the calculation
results. Most importantly, VaR does not represent the maximum
potential loss of the portfolio. Price movements outside of the
relevant confidence levels can and do occur and may result in losses exceeding
the reported VaR. Large short-term price moves can be caused by
catastrophic weather events or other drivers of short term supply and demand
disruptions. Also, the holding period may not always be an adequate
assessment of the timeframe to close out positions. Short-term
reductions in market liquidity could cause Integrys Energy Services to hold
positions open longer than anticipated, resulting in greater than predicted
losses. Additionally, there are other risks not captured by the VaR
metric including, but not limited to, the risk of customer and vendor
nonperformance and the risks associated with the liquidity in the markets in
which Integrys Energy Services transacts. Customer and vendor
nonperformance risk could result in bad debt losses, realized and unrealized
losses on commodity contracts or increased supply costs in the event that
contractual obligations of our counterparties are not met. Market
liquidity risk refers to the risk that Integrys Energy Services will not be able
to efficiently enter or exit commodity positions.
Integrys Energy
Services' VaR is calculated using non-discounted positions with a delta-normal
approximation based on a one-day holding period and a 95% confidence level, as
well as a ten-day, 99% confidence level. The delta-normal
approximation is based on the assumption that changes in the value of the
portfolio over short time periods, such as one day or ten days, are normally
distributed. Integrys Energy Services' VaR calculation includes
financial and physical commodity instruments, such as forwards, futures, swaps,
and options, as well as natural gas inventory, natural gas storage, and
transportation contracts, to the extent such positions are significant, but
excludes the positions mentioned above.
The VaR for
Integrys Energy Services' trading portfolio at a 95% confidence level and a
one-day holding period is presented in the following table:
(Millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
As of
December 31
|
|
$ |
1.3 |
|
|
$ |
0.9 |
|
Average for
12 months ended December 31
|
|
|
1.4 |
|
|
|
1.1 |
|
High for 12
months ended December 31
|
|
|
2.3 |
|
|
|
1.3 |
|
Low for 12
months ended December 31
|
|
|
0.9 |
|
|
|
0.9 |
|
The VaR for
Integrys Energy Services' trading portfolio at a 99% confidence level and a
ten-day holding period is presented below:
(Millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
As of
December 31
|
|
$ |
5.6 |
|
|
$ |
5.2 |
|
Average for
12 months ended December 31
|
|
|
6.2 |
|
|
|
5.1 |
|
High for 12
months ended December 31
|
|
|
10.2 |
|
|
|
5.6 |
|
Low for 12
months ended December 31
|
|
|
4.8 |
|
|
|
4.2 |
|
The average, high,
and low amounts were computed using the VaR amounts at each of the four quarter
ends.
Interest
Rate Risk
Integrys Energy
Group is exposed to interest rate risk resulting from its variable rate
long-term debt and short-term borrowings. Exposure to interest rate
risk is managed by limiting the amount of variable rate obligations and
continually monitoring the effects of market changes on interest
rates. Integrys Energy Group enters into long-term fixed rate debt
when it is advantageous to do so. Integrys Energy Group may also
enter into derivative financial instruments, such as swaps, to mitigate interest
rate exposure.
Due to increases in
short-term borrowings in the last year, Integrys Energy Group has increased its
exposure to variable interest rates. Based on the variable rate debt
of Integrys Energy Group outstanding at December 31, 2008, a hypothetical
increase in market interest rates of 100 basis points would have increased
annual interest expense by $11.7 million. Comparatively, based
on the variable rate debt outstanding at December 31, 2007, an increase in
interest rates of 100 basis points would have increased interest expense by
approximately $6.5 million. This sensitivity analysis was performed
assuming a constant level of variable rate debt during the period and an
immediate increase in interest rates, with no other changes for the remainder of
the period.
Equity
Return and Principal Preservation Risk
Integrys Energy
Group currently funds liabilities related to employee benefits through various
external trust funds. The trust funds are managed by numerous
investment managers and hold investments in debt and equity
securities. Changes in the market value of these investments can
have an impact on the future expenses related to these
liabilities. Declines in the equity markets or declines in interest
rates may result in increased future costs for the plans and possible future
required contributions for the pension plans. Integrys Energy Group
monitors the trust fund portfolio by benchmarking the performance of the
investments against certain security indices. Most of the employee benefit costs
relate to Integrys Energy Group's regulated utilities. As such, the majority of
these costs are recovered in customers' rates, mitigating the equity return and
principal preservation risk on these exposures. During 2008, Integrys
Energy Group closed its qualified pension plans to non-union new hires, and to
PGL's and NSG's union new hires. In April 2009, the plans will also
be closed to UPPCO's union new hires. This will reduce future
exposure to equity return and principal preservation risk.
Foreign
Currency Exchange Rate Risk
Integrys Energy
Group is exposed to foreign currency exchange rate risk as a result of
operations owned and operated in Canada and transactions denominated in Canadian
dollars for the purchase and sale of natural gas and electricity by Integrys
Energy Services. In addition, Integrys Energy Group has a Japanese
yen denominated term loan that matures on March 30, 2009. Forward
foreign exchange contracts are utilized to manage the risk associated with
certain transactions denominated in Canadian dollars, as well as the risk
associated with the yen denominated loan.
Integrys Energy
Group's exposure to foreign currency exchange rate risk was not significant at
December 31, 2008, or 2007.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
A. MANAGEMENT
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of
Integrys Energy Group and its subsidiaries is responsible for establishing and
maintaining adequate internal control over financial
reporting. Integrys Energy Group's control systems were designed to
provide reasonable assurance to Integrys Energy Group's management and Board of
Directors regarding the preparation and fair presentation of published financial
statements.
All internal
control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and
presentation.
Integrys Energy
Group's management assessed the effectiveness of its internal control over
financial reporting as of December 31, 2008. In making this
assessment, it used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control —
Integrated Framework. Based on this assessment, management
believes that, as of December 31, 2008, Integrys Energy Group's internal control
over financial reporting is effective based on those criteria.
Integrys Energy
Group, Inc.'s independent registered public accounting firm has issued an audit
report on the effectiveness of Integrys Energy Group's internal control over
financial reporting.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
B. REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of Integrys Energy Group, Inc.:
We have audited the internal control
over financial reporting of Integrys Energy Group, Inc. and subsidiaries (the
"Company") as of December 31, 2008, based on criteria established in
Internal Control —
Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying
Management Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company's internal control over
financial reporting based on our audit.
We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal control over
financial reporting is a process designed by, or under the supervision of, the
company's principal executive and principal financial officers, or persons
performing similar functions, and effected by the company's board of directors,
management, and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because of the inherent limitations of
internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal control
over financial reporting to future periods are subject to the risk that the
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as
of December 31, 2008, based on the criteria established in Internal Control —
Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United States),
the consolidated financial statements and financial statement schedules
as of and for the year ended December 31, 2008 of the Company and our report
dated February 25, 2009 expressed an unqualified opinion on those financial
statements and financial statement schedules and included an explanatory
paragraph regarding the Company's adoption of a new accounting
standard.
/s/ Deloitte & Touche
LLP
Milwaukee, Wisconsin
February 25, 2009
|
|
|
|
|
|
|
|
|
|
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C. CONSOLIDATED STATEMENTS OF
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31
|
|
|
|
|
|
|
|
|
|
(Millions, except per share
data)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Nonregulated
revenue
|
|
$ |
9,737.9 |
|
|
$ |
6,987.0 |
|
|
$ |
5,156.7 |
|
Utility
revenue
|
|
|
4,309.9 |
|
|
|
3,305.4 |
|
|
|
1,734.0 |
|
Total
revenues
|
|
|
14,047.8 |
|
|
|
10,292.4 |
|
|
|
6,890.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonregulated cost of fuel, natural
gas, and purchased power
|
|
|
9,654.3 |
|
|
|
6,676.2 |
|
|
|
4,968.9 |
|
Utility cost of fuel, natural gas,
and purchased power
|
|
|
2,744.1 |
|
|
|
2,044.2 |
|
|
|
1,006.1 |
|
Operating and maintenance
expense
|
|
|
1,081.2 |
|
|
|
922.1 |
|
|
|
484.3 |
|
Goodwill impairment
loss
|
|
|
6.5 |
|
|
|
- |
|
|
|
- |
|
Depreciation and amortization
expense
|
|
|
221.4 |
|
|
|
195.1 |
|
|
|
121.3 |
|
Taxes other than income
taxes
|
|
|
93.6 |
|
|
|
87.4 |
|
|
|
60.9 |
|
Operating
income
|
|
|
246.7 |
|
|
|
367.4 |
|
|
|
249.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
|
87.3 |
|
|
|
64.1 |
|
|
|
42.8 |
|
Interest
expense
|
|
|
(158.1 |
) |
|
|
(164.5 |
) |
|
|
(99.2 |
) |
Minority
interest
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
3.8 |
|
Other
expense
|
|
|
(70.7 |
) |
|
|
(100.3 |
) |
|
|
(52.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before
taxes
|
|
|
176.0 |
|
|
|
267.1 |
|
|
|
196.6 |
|
Provision for income
taxes
|
|
|
51.2 |
|
|
|
86.0 |
|
|
|
45.0 |
|
Income from continuing
operations
|
|
|
124.8 |
|
|
|
181.1 |
|
|
|
151.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of
tax
|
|
|
4.7 |
|
|
|
73.3 |
|
|
|
7.3 |
|
Income before preferred stock
dividends of subsidiary
|
|
|
129.5 |
|
|
|
254.4 |
|
|
|
158.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends of
subsidiary
|
|
|
3.1 |
|
|
|
3.1 |
|
|
|
3.1 |
|
Income available for common
shareholders
|
|
$ |
126.4 |
|
|
$ |
251.3 |
|
|
$ |
155.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares of common
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
76.7 |
|
|
|
71.6 |
|
|
|
42.3 |
|
Diluted
|
|
|
77.0 |
|
|
|
71.8 |
|
|
|
42.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share
(basic)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
$ |
1.59 |
|
|
$ |
2.49 |
|
|
$ |
3.51 |
|
Discontinued
operations, net of tax
|
|
|
0.06 |
|
|
|
1.02 |
|
|
|
0.17 |
|
Earnings
per common share (basic)
|
|
$ |
1.65 |
|
|
$ |
3.51 |
|
|
$ |
3.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share
(diluted)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
$ |
1.58 |
|
|
$ |
2.48 |
|
|
$ |
3.50 |
|
Discontinued
operations, net of tax
|
|
|
0.06 |
|
|
|
1.02 |
|
|
|
0.17 |
|
Earnings
per common share (diluted)
|
|
$ |
1.64 |
|
|
$ |
3.50 |
|
|
$ |
3.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per common
share
|
|
$ |
2.68 |
|
|
$ |
2.56 |
|
|
$ |
2.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to Integrys
Energy Group's consolidated financial statements are an integral part of
these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D. CONSOLIDATED BALANCE
SHEETS
|
|
|
|
|
|
|
|
|
At December
31
|
|
|
|
|
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
254.1 |
|
|
$ |
41.2 |
|
Accounts receivable and accrued
unbilled revenues, net of reserves of $62.5 and
$56.0,
|
|
|
|
|
|
|
|
|
respectively
|
|
|
2,155.3 |
|
|
|
1,870.0 |
|
Inventories
|
|
|
732.9 |
|
|
|
663.4 |
|
Assets from risk management
activities
|
|
|
2,223.7 |
|
|
|
840.7 |
|
Regulatory
assets
|
|
|
244.0 |
|
|
|
141.7 |
|
Other current
assets
|
|
|
280.8 |
|
|
|
169.3 |
|
Current
assets
|
|
|
5,890.8 |
|
|
|
3,726.3 |
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment,
net of accumulated depreciation of $2,710.0 and
$2,602.2,
|
|
|
|
|
|
|
|
|
respectively
|
|
|
4,773.3 |
|
|
|
4,463.8 |
|
Regulatory
assets
|
|
|
1,444.8 |
|
|
|
1,102.3 |
|
Assets from risk management
activities
|
|
|
758.7 |
|
|
|
459.3 |
|
Goodwill
|
|
|
933.9 |
|
|
|
948.3 |
|
Pension
assets
|
|
|
- |
|
|
|
101.4 |
|
Other
|
|
|
471.0 |
|
|
|
433.0 |
|
Total
assets
|
|
$ |
14,272.5 |
|
|
$ |
11,234.4 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders'
Equity
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
$ |
1,209.0 |
|
|
$ |
468.2 |
|
Current portion of long-term
debt
|
|
|
155.2 |
|
|
|
55.2 |
|
Accounts
payable
|
|
|
1,534.3 |
|
|
|
1,331.8 |
|
Liabilities from risk management
activities
|
|
|
2,190.3 |
|
|
|
813.5 |
|
Regulatory
liabilities
|
|
|
58.8 |
|
|
|
77.9 |
|
Deferred income
taxes
|
|
|
71.6 |
|
|
|
13.9 |
|
Other current
liabilities
|
|
|
494.8 |
|
|
|
487.7 |
|
Current
liabilities
|
|
|
5,714.0 |
|
|
|
3,248.2 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
2,288.0 |
|
|
|
2,265.1 |
|
Deferred income
taxes
|
|
|
435.7 |
|
|
|
494.4 |
|
Deferred investment tax
credits
|
|
|
36.9 |
|
|
|
38.3 |
|
Regulatory
liabilities
|
|
|
275.5 |
|
|
|
292.4 |
|
Environmental remediation
liabilities
|
|
|
640.6 |
|
|
|
705.6 |
|
Pension and other postretirement
benefit obligations
|
|
|
636.5 |
|
|
|
247.9 |
|
Liabilities from risk management
activities
|
|
|
762.7 |
|
|
|
372.0 |
|
Asset retirement
obligations
|
|
|
179.1 |
|
|
|
140.2 |
|
Other
|
|
|
152.8 |
|
|
|
143.4 |
|
Long-term
liabilities
|
|
|
5,407.8 |
|
|
|
4,699.3 |
|
|
|
|
|
|
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock of subsidiary with
no mandatory redemption - $100 par value; 1,000,000
shares
authorized; 511,882 shares issued; 510,516 shares
outstanding
|
|
|
51.1 |
|
|
|
51.1 |
|
Common stock - $1 par value;
200,000,000 shares authorized; 76,430,037 shares
issued;
|
|
|
|
|
|
|
|
|
75,992,768
shares outstanding
|
|
|
76.4 |
|
|
|
76.4 |
|
Additional paid-in
capital
|
|
|
2,487.9 |
|
|
|
2,473.8 |
|
Retained
earnings
|
|
|
624.6 |
|
|
|
701.9 |
|
Accumulated other comprehensive
loss
|
|
|
(72.8 |
) |
|
|
(1.3 |
) |
Treasury stock and shares in
deferred compensation trust
|
|
|
(16.5 |
) |
|
|
(15.0 |
) |
Total liabilities and
shareholders' equity
|
|
$ |
14,272.5 |
|
|
$ |
11,234.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to Integrys
Energy Group's consolidated financial statements are an integral part of
these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
|
|
|
|
|
|
|
|
|
|
E. CONSOLIDATED STATEMENTS OF
COMMON SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
Retained
|
|
|
Treasury
|
|
|
Cash
Flow
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
Total
|
|
|
Trust
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Stock
|
|
|
Hedges
|
|
|
Liability
|
|
|
Costs
|
|
|
Securities
|
|
|
Translation
|
|
Balance
at December 31, 2005
|
|
$ |
1,304.2 |
|
|
$ |
(10.9 |
) |
|
$ |
40.1 |
|
|
$ |
717.0 |
|
|
$ |
568.7 |
|
|
$ |
(0.3 |
) |
|
$ |
(7.6 |
) |
|
$ |
(3.8 |
) |
|
$ |
- |
|
|
$ |
0.6 |
|
|
$ |
0.4 |
|
Income
available for common shareholders
|
|
|
155.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Comprensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized (losses) on cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(net
of tax of $11.9)
|
|
|
(18.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
into earnings from cash flow
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
hedges
(net
of tax of $11.4)
|
|
|
17.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
pension liability
(net of tax of $1.6)
|
|
|
2.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale securities
(net of tax of $0.2)
|
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.4 |
) |
|
|
|
|
Foreign
currency translation
(net of tax of $0.2)
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.3 |
) |
Total
Comprehensive Income
|
|
|
156.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock
|
|
|
164.6 |
|
|
|
|
|
|
|
3.2 |
|
|
|
161.4 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
on common stock
|
|
|
(96.0 |
) |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
(96.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment
to initially apply SFAS No. 158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(net
of taxes of $2.9)
|
|
|
(4.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.4 |
|
|
|
(5.9 |
) |
|
|
|
|
|
|
|
|
Other
|
|
|
8.4 |
|
|
|
(2.3 |
) |
|
|
0.1 |
|
|
|
10.9 |
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
$ |
1,533.6 |
|
|
$ |
(13.2 |
) |
|
$ |
43.4 |
|
|
$ |
889.3 |
|
|
$ |
628.2 |
|
|
$ |
(0.3 |
) |
|
$ |
(8.2 |
) |
|
$ |
- |
|
|
$ |
(5.9 |
) |
|
$ |
0.2 |
|
|
$ |
0.1 |
|
Income
available for common shareholders
|
|
|
251.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Comprensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized (losses) on cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(net
of tax of $11.9)
|
|
|
(18.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
into earnings from cash flow
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
hedges
(net of tax of $15.0)
|
|
|
23.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS
No. 158 unrecognized pension costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(net
of taxes of $ 3.0)
|
|
|
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.8 |
|
|
|
|
|
|
|
|
|
Available
for sale securities (net of tax of
$0.2)
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
Foreign
currency translation (net of tax of
$2.2)
|
|
|
3.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.6 |
|
Comprehensive
income
|
|
|
264.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock
|
|
|
45.6 |
|
|
|
|
|
|
|
1.1 |
|
|
|
44.5 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PEC
merger
|
|
|
1,559.3 |
|
|
|
|
|
|
|
31.9 |
|
|
|
1,527.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
based compensation
|
|
|
8.7 |
|
|
|
|
|
|
|
|
|
|
|
8.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
on common stock
|
|
|
(177.0 |
) |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
(177.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
1.6 |
|
|
|
(1.5 |
) |
|
|
|
|
|
|
3.9 |
|
|
|
(0.6 |
) |
|
|
|
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
Balance
at December 31, 2007
|
|
$ |
3,235.8 |
|
|
$ |
(14.7 |
) |
|
$ |
76.4 |
|
|
$ |
2,473.8 |
|
|
$ |
701.9 |
|
|
$ |
(0.3 |
) |
|
$ |
(3.6 |
) |
|
$ |
- |
|
|
$ |
(2.1 |
) |
|
$ |
0.6 |
|
|
$ |
3.8 |
|
Income
available for common shareholders
|
|
|
126.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Comprensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized (losses) on cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(net
of tax of $53.7)
|
|
|
(84.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(84.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
into earnings from cash flow
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
hedges
(net of tax of $20.0)
|
|
|
31.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS
No. 158 unrecognized pension costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(net
of taxes of $8.1)
|
|
|
(12.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12.7 |
) |
|
|
|
|
|
|
|
|
Available
for sale securities (net of tax of $0.3)
|
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.5 |
) |
|
|
|
|
Foreign
currency translation (net of tax of
$3.4)
|
|
|
(5.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5.5 |
) |
Comprehensive
income
|
|
|
54.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of change in accounting principle
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects
of changing pension plan measurement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
date
pursuant to SFAS No. 158
|
|
|
(3.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of deferred compensation shares
|
|
|
(2.7 |
) |
|
|
(2.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
based compensation
|
|
|
12.6 |
|
|
|
|
|
|
|
|
|
|
|
12.5 |
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
on common stock
|
|
|
(203.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(203.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
1.9 |
|
|
|
1.1 |
|
|
|
|
|
|
|
1.6 |
|
|
|
(0.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
$ |
3,099.6 |
|
|
$ |
(16.3 |
) |
|
$ |
76.4 |
|
|
$ |
2,487.9 |
|
|
$ |
624.6 |
|
|
$ |
(0.2 |
) |
|
$ |
(56.4 |
) |
|
$ |
- |
|
|
$ |
(14.8 |
) |
|
$ |
0.1 |
|
|
$ |
(1.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to Integrys Energy Group consolidated financial
statements are an integral part of these
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F. CONSOLIDATED STATEMENTS OF
CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Operating
Activities
|
|
|
|
|
|
|
|
|
|
Income before preferred stock
dividends of subsidiary
|
|
$ |
129.5 |
|
|
$ |
254.4 |
|
|
$ |
158.9 |
|
Adjustments to reconcile income
before preferred stock dividends of subsidiary to net cash (used for)
provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of
tax
|
|
|
(4.7 |
) |
|
|
(73.3 |
) |
|
|
(7.3 |
) |
|
Goodwill impairment
loss
|
|
|
6.5 |
|
|
|
- |
|
|
|
- |
|
|
Depreciation and amortization
expense
|
|
|
221.4 |
|
|
|
195.1 |
|
|
|
121.3 |
|
|
Refund of nonqualified
decommissioning trust
|
|
|
(0.5 |
) |
|
|
(70.6 |
) |
|
|
(54.5 |
) |
|
Weston 3 outage
expenses
|
|
|
0.4 |
|
|
|
(22.7 |
) |
|
|
- |
|
|
Recovery of MISO Day 2
expenses
|
|
|
19.8 |
|
|
|
- |
|
|
|
- |
|
|
Recoveries and refunds of other
regulatory assets and liabilities
|
|
|
31.4 |
|
|
|
32.6 |
|
|
|
15.2 |
|
|
Amortization of nonregulated
customer contract intangibles
|
|
|
13.3 |
|
|
|
21.0 |
|
|
|
- |
|
|
Net unrealized (gains) losses on
nonregulated energy contracts
|
|
|
(15.8 |
) |
|
|
(59.5 |
) |
|
|
7.3 |
|
|
Nonregulated lower of cost or
market inventory adjustments
|
|
|
167.3 |
|
|
|
7.0 |
|
|
|
0.9 |
|
|
Bad debt
expense
|
|
|
76.8 |
|
|
|
39.1 |
|
|
|
10.9 |
|
|
Pension and other postretirement
expense
|
|
|
50.7 |
|
|
|
67.5 |
|
|
|
51.6 |
|
|
Pension and other postretirement
funding
|
|
|
(40.8 |
) |
|
|
(35.3 |
) |
|
|
(43.2 |
) |
|
Deferred income taxes and
investment tax credit
|
|
|
62.4 |
|
|
|
66.8 |
|
|
|
12.4 |
|
|
Gain on sale of
investments
|
|
|
- |
|
|
|
(2.7 |
) |
|
|
(21.6 |
) |
|
(Gain) loss on sale of property,
plant, and equipment
|
|
|
(1.2 |
) |
|
|
1.1 |
|
|
|
1.3 |
|
|
Equity income, net of
dividends
|
|
|
(15.1 |
) |
|
|
2.4 |
|
|
|
14.4 |
|
|
Other
|
|
|
|
(3.9 |
) |
|
|
(22.5 |
) |
|
|
22.8 |
|
|
Changes in working
capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables and unbilled revenues,
net
|
|
|
(446.9 |
) |
|
|
51.3 |
|
|
|
(19.4 |
) |
|
|
Inventories
|
|
|
(312.0 |
) |
|
|
(172.9 |
) |
|
|
(206.5 |
) |
|
|
Other current
assets
|
|
|
(124.6 |
) |
|
|
0.9 |
|
|
|
(32.4 |
) |
|
|
Accounts
payable
|
|
|
(53.2 |
) |
|
|
(96.5 |
) |
|
|
7.5 |
|
|
|
Other current
liabilities
|
|
|
(10.8 |
) |
|
|
55.3 |
|
|
|
33.3 |
|
Net cash (used for) provided by
operating activities
|
|
|
(250.0 |
) |
|
|
238.5 |
|
|
|
72.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(532.8 |
) |
|
|
(392.6 |
) |
|
|
(342.0 |
) |
Proceeds from sale or disposal of
property, plant, and equipment
|
|
|
31.1 |
|
|
|
15.6 |
|
|
|
4.5 |
|
Purchase of equity investments and
other acquisitions
|
|
|
(37.8 |
) |
|
|
(66.5 |
) |
|
|
(60.1 |
) |
Proceeds from the sale of
investments
|
|
|
- |
|
|
|
- |
|
|
|
58.4 |
|
Cash paid for transaction costs
related to PEC merger
|
|
|
- |
|
|
|
(14.4 |
) |
|
|
(5.5 |
) |
Acquisition of natural gas
operations in Michigan and Minnesota, net of liabilities
assumed
|
|
|
- |
|
|
|
1.9 |
|
|
|
(659.3 |
) |
Restricted cash for repayment of
long-term debt
|
|
|
- |
|
|
|
22.0 |
|
|
|
(22.0 |
) |
Cash paid for transmission
interconnection
|
|
|
(17.4 |
) |
|
|
(23.9 |
) |
|
|
(11.6 |
) |
Proceeds received from
transmission interconnection
|
|
|
99.7 |
|
|
|
- |
|
|
|
- |
|
Other
|
|
|
|
|
5.0 |
|
|
|
6.4 |
|
|
|
7.5 |
|
Net cash used for investing
activities
|
|
|
(452.2 |
) |
|
|
(451.5 |
) |
|
|
(1,030.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt,
net
|
|
|
569.7 |
|
|
|
(463.7 |
) |
|
|
458.0 |
|
Issuance of notes
payable
|
|
|
155.7 |
|
|
|
- |
|
|
|
- |
|
Proceeds from sale of borrowed
natural gas
|
|
|
530.4 |
|
|
|
211.9 |
|
|
|
197.0 |
|
Purchase of natural gas to repay
natural gas loans
|
|
|
(257.2 |
) |
|
|
(177.5 |
) |
|
|
(265.4 |
) |
Issuance of long-term
debt
|
|
|
181.5 |
|
|
|
125.2 |
|
|
|
447.0 |
|
Repayment of long-term
debt
|
|
|
(58.1 |
) |
|
|
(26.5 |
) |
|
|
(4.0 |
) |
Payment of
dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
(3.1 |
) |
|
|
(3.1 |
) |
|
|
(3.1 |
) |
|
Common
stock
|
|
|
(203.9 |
) |
|
|
(177.0 |
) |
|
|
(96.0 |
) |
Issuance of common
stock
|
|
|
- |
|
|
|
45.6 |
|
|
|
164.6 |
|
Other
|
|
|
|
|
(3.7 |
) |
|
|
5.9 |
|
|
|
(6.4 |
) |
Net cash provided by (used for)
financing activities
|
|
|
911.3 |
|
|
|
(459.2 |
) |
|
|
891.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash
equivalents - continuing operations
|
|
|
209.1 |
|
|
|
(672.2 |
) |
|
|
(65.5 |
) |
Change in cash and cash
equivalents - discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used for) provided by
operating activities
|
|
|
- |
|
|
|
(109.3 |
) |
|
|
41.9 |
|
|
Net cash provided by investing
activities
|
|
|
3.8 |
|
|
|
799.5 |
|
|
|
19.1 |
|
Change in cash and cash
equivalents
|
|
|
212.9 |
|
|
|
18.0 |
|
|
|
(4.5 |
) |
Cash and cash equivalents at
beginning of year
|
|
|
41.2 |
|
|
|
23.2 |
|
|
|
27.7 |
|
Cash and cash equivalents at end
of year
|
|
$ |
254.1 |
|
|
$ |
41.2 |
|
|
$ |
23.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to Integrys
Energy Group's consolidated financial statements are an integral part of
these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
G. NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Operations--Integrys
Energy Group is a holding company whose primary wholly owned subsidiaries at
December 31, 2008, included WPS, UPPCO, MGU, MERC, PGL, NSG, and Integrys
Energy Services. Of these subsidiaries, six subsidiaries are
regulated electric and/or natural gas utilities and one subsidiary, Integrys
Energy Services, is a nonregulated energy supply and services
company.
The term "utility"
refers to the regulated activities of the electric and natural gas utility
segments, while the term "nonutility" refers to the activities of the electric
and natural gas utility segments that are not regulated. The term
"nonregulated" refers to activities at Integrys Energy Services.
The line item on
the Consolidated Statements of Income titled "Income available for common
shareholders" is net income.
(b) Consolidation Basis
of Presentation--The
Consolidated Financial Statements include the accounts of Integrys Energy Group
and all majority owned subsidiaries, after eliminating intercompany transactions
and balances. If a minority owner's equity is reduced to zero, our
policy is to record 100% of the subsidiary's losses until the minority owner
makes capital contributions or commits to fund its share of the operating
costs. The cost method of accounting is used for investments when
Integrys Energy Group owns less than 20% of the voting equity of a company,
unless other evidence indicates we have significant influence over the operating
and financial policies of the investee. Investments in businesses not
controlled by Integrys Energy Group, but over which we have significant
influence regarding the operating and financial policies of the investee, are
accounted for using the equity method. For additional information on
our equity method investments see Note 8, "Investments in
Affiliates, at Equity Method."
Mergers and
Acquisitions
Effective February
21, 2007, the PEC merger was consummated and the assets and liabilities, results
of operations, and cash flows of PEC were included in Integrys Energy Group's
Consolidated Financial Statements commencing February 22, 2007. See
Note 5, "Acquisitions and
Dispositions," for more information.
The assets and
liabilities, results of operations, and cash flows of MGU and MERC were included
in Integrys Energy Group's Consolidated Financial Statements effective April 1,
and July 1, 2006, respectively. See Note 5, "Acquisitions and
Dispositions," for more information.
Dispositions
A
contingent payment made by the buyer of Integrys Energy Services' Stoneman
generation facility resulted in a gain that was recorded as a component of
discontinued operations in the fourth quarter of 2008. See
Note 3, "Discontinued
Operations," for more information.
PEP's results of
operations and cash flows are reported in discontinued operations in
2007. The sale of PEP was completed on September 28,
2007. Refer to Note 3, "Discontinued
Operations," for more
information.
For all applicable
periods presented, Sunbury (sold in 2006) and Niagara (sold in 2007) have been
reclassified as held for sale, and results of operations and cash flows for
these entities have been reclassified as discontinued
operations. Refer to Note 3, "Discontinued
Operations," for more
information.
(c) Use of Estimates--We prepare
our consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America. We make
estimates and assumptions that affect assets, liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from these estimates.
(d) Cash and Cash
Equivalents--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 Consolidated Statements of
Cash Flows:
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Cash paid for
interest
|
|
$ |
156.8 |
|
|
$ |
144.5 |
|
|
$ |
87.6 |
|
Cash paid for
income taxes
|
|
|
100.9 |
|
|
|
198.1 |
|
|
|
37.7 |
|
Significant
non-cash transactions were:
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Construction
costs funded through accounts payable
|
|
$ |
34.2 |
|
|
$ |
26.1 |
|
|
$ |
32.0 |
|
Equity issued
for net assets acquired in PEC merger
|
|
|
- |
|
|
|
1,559.3 |
|
|
|
- |
|
Realized gain
on settlement of contracts due to PEC merger
|
|
|
- |
|
|
|
4.0 |
|
|
|
- |
|
PEP
post-closing adjustments funded through other current
liabilities
|
|
|
- |
|
|
|
9.9 |
|
|
|
- |
|
Transaction
costs related to the merger with PEC funded through other current
liabilities
|
|
|
- |
|
|
|
- |
|
|
|
8.1 |
|
(e) Revenue and Customer
Receivables--Revenues are recognized on the accrual basis and include
estimated amounts for electric and natural gas services provided but not
billed. At December 31, 2008, and 2007, Integrys Energy Group's
unbilled revenues were $525.5 million and $464.7 million,
respectively. Currently there are no customers or industries that
account for more than 10% of Integrys Energy Group's revenues.
Prudent fuel and
purchased power costs are recovered from customers under one-for-one recovery
mechanisms by UPPCO and by the wholesale electric operations and Michigan retail
electric operations of WPS, which provide for subsequent adjustments to rates
for all changes in commodity costs. There is a portion of WPS's
wholesale electric business that limits cost recovery to no greater than the
2-year average rate charged to large industrial retail customers for that same
period. The costs of natural gas prudently incurred by the natural
gas utility subsidiaries are also recovered from customers under one-for-one
recovery mechanisms.
WPS's Wisconsin
retail electric operations do not have a one-for-one recovery
mechanism. Instead, a "fuel window" mechanism is used to recover fuel
and purchased power costs. Under the fuel window, if actual fuel and
purchased power costs deviate by more than 2% from costs included in the rates
charged to customers, a rate review can be triggered. Once a rate
review is triggered, rates may be reset (subject to PSCW approval) for the
remainder of the year to recover or refund, on an annualized basis, the
projected increase or decrease in the cost of fuel and purchased
power.
All of Integrys
Energy Group's utility subsidiaries are required to provide service and grant
credit to customers within their service territories. The companies
continually review their customers' credit-worthiness and obtain or refund
deposits accordingly. The utilities are generally precluded from
discontinuing service to residential customers during winter moratorium
months.
Revenues related to
derivative instruments classified as trading are reported net of related cost of
sales for all periods presented.
In
connection with the March 2006 settlement of Natural Gas Charge proceedings for
fiscal years 2001 through 2004, PGL now nets revenues against expenses from
natural gas hub services, resulting in a credit to utility customers' natural
gas charges.
Integrys Energy
Group presents revenue net of pass-through taxes on the Consolidated Statements
of Income.
(f) Inventories--Inventories
consist of natural gas in storage, liquid propane, and fossil fuels, including
coal. Average cost is used to value fossil fuels, liquid propane, and
natural gas in storage for our regulated segments, excluding PGL and
NSG. PGL and NSG price natural gas storage injections at the calendar
year average of the costs of natural gas supply
purchased. Withdrawals from storage are priced on the LIFO cost
method. Inventories stated on a LIFO basis represent approximately
16% of total inventories at December 31, 2008, and 14% of total inventories
at December 31, 2007. The estimated replacement cost of natural gas
in inventory at December 31, 2008, and December 31, 2007, exceeded the LIFO cost
by approximately $212.2 million and $304.4 million, respectively. In
calculating these replacement amounts, PGL and NSG used a Chicago city-gate
natural gas price per dekatherm of $5.80 at December 31, 2008, and $7.33 at
December 31, 2007.
Inventories at
Integrys Energy Services are valued at the lower of cost or market unless hedged
pursuant to a fair value hedge, in which case changes in the fair value of
inventory subsequent to the hedge designation are recorded directly to
inventory.
(g) Risk Management Activities--As
part of our regular operations, Integrys Energy Group enters into contracts,
including options, swaps, futures, forwards, and other contractual commitments,
to manage market risks such as changes in commodity prices, interest rates, and
foreign currency exchange rates, which are described more fully in Note 2,
"Risk Management
Activities." 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.
Integrys Energy
Group accounts for derivative instruments pursuant to SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended and
interpreted. Under the provisions of SFAS No. 133, all
derivatives are recognized on the balance sheet at their fair value unless they
qualify for the normal purchases and sales exception. Most
energy-related physical and financial derivatives in our regulated operations
qualify for regulatory deferral subject to the provisions of
SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation." These derivatives are marked to fair value pursuant to
SFAS No. 133 and are offset with a corresponding regulatory asset or
liability. Management believes any gains or losses resulting from the
eventual settlement of these derivative instruments will be collected from or
refunded to customers.
Integrys Energy
Group classifies unrealized gains and losses on derivative instruments that do
not qualify for hedge accounting or regulatory deferral as a component of
revenues. Unrealized gains and losses on fair value hedges are
recognized currently in revenue, as are the changes in fair value of the hedged
items. To the extent they are effective, the changes in the values of
contracts designated as cash flow hedges are included in other comprehensive
income, net of taxes. Fair value hedge ineffectiveness and cash flow
hedge ineffectiveness are recorded in revenue or operating and maintenance
expense on the Consolidated Statements of Income, based on the nature of the
transactions.
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. On the
Consolidated Balance Sheets, cash collateral provided to others is reflected in
accounts receivable, and cash collateral received from others is reflected in
other current liabilities.
(h) Emission Allowances--Integrys
Energy Services accounts for emission allowances as intangible assets, with cash
inflows and outflows related to purchases and sales of emission allowances
recorded as
investing
activities in the Consolidated Statements of Cash Flows. Integrys
Energy Services uses the guidance in SFAS No. 144, "Accounting for the
Impairment and Disposal of Long-Lived Assets," to test allowances for
impairment. The utilities account for emission allowances as
inventory at average cost by vintage year. Charges to income result
when allowances are utilized in operating the utilities' generation
plants. Gains on sales of allowances at the utilities are generally
returned to ratepayers.
(i) Property, Plant, and
Equipment--Utility plant is stated at the original cost of construction,
including AFUDC. The costs of renewals and betterments of units of
property (as distinguished from minor items of property) are capitalized as
additions to the utility plant accounts. Except for land, no gain or
loss is recognized in connection with ordinary retirements of utility property
units. Maintenance, repair, replacement, and renewal costs associated
with items not qualifying as units of property are considered operating
expenses. PGL and NSG charge the cost of units of property retired,
sold, or otherwise disposed of to the accumulated provision for depreciation and
record the cost of removal, less salvage value, associated with the retirement
to depreciation expense. The other utilities charge the cost of units
of property retired, sold, or otherwise disposed of, less salvage value, to the
accumulated provision for depreciation and record a regulatory liability for
removal costs, with removal costs charged against the liability as
incurred.
Integrys Energy
Group records straight-line depreciation expense over the estimated useful life
of utility property, using depreciation rates as approved by the applicable
regulators. Annual utility composite depreciation rates are shown
below.
Annual
Utility Composite Depreciation Rates
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
WPS –
Electric
|
|
|
3.09 |
% |
|
|
3.35 |
% |
|
|
3.36 |
% |
WPS – Natural
gas
|
|
|
3.39 |
% |
|
|
3.52 |
% |
|
|
3.57 |
% |
UPPCO
|
|
|
2.98 |
% |
|
|
3.01 |
% |
|
|
2.90 |
% |
MGU
|
|
|
2.67 |
% |
|
|
2.67 |
% |
|
|
2.06 |
% (1) |
MERC
|
|
|
3.32 |
% |
|
|
3.42 |
% |
|
|
1.76 |
% (2) |
PGL
|
|
|
2.55 |
% |
|
|
2.86 |
% (3) |
|
|
- |
|
NSG
|
|
|
1.80 |
% |
|
|
1.85 |
% (3) |
|
|
- |
|
(1)
Composite depreciation rate for 9 months of the year.
(2)
Composite depreciation rate for 6 months of the year.
(3)
Composite depreciation rate
from February 22, 2007 through the end of 2007.
Interest
capitalization is applied to nonutility property during construction, and a gain
and loss is recognized for retirements. Currently, nonutility
property at the regulated utilities consists primarily of land.
Nonregulated plant
is stated at cost, which includes capitalized interest, or estimated fair value
at the time of acquisition. The costs of renewals, betterments, and
major overhauls are capitalized as additions to plant. The gains or
losses associated with ordinary retirements are recorded in the period of
retirement. Maintenance, repair, and minor replacement costs are
expensed as incurred.
Most of the
nonregulated subsidiaries compute depreciation using the straight-line method
over the following estimated useful lives:
Structures
and improvements
|
15 to 40
years
|
Office and
plant equipment
|
5 to 40
years
|
Office
furniture and fixtures
|
3 to 10
years
|
Vehicles
|
5
years
|
Computer
equipment
|
3 to 8
years
|
Leasehold
improvements
|
Shorter
of: life of the lease or life of the
asset
|
The nonregulated
Combined Locks Energy Center uses the units of production depreciation method
for selected components of equipment having defined lives stated in terms of
hours of production.
Integrys Energy
Group capitalizes certain costs related to software developed or obtained for
internal use and amortizes those costs to operating expense over the estimated
useful life of the related software, which ranges from 3 to 15
years.
See Note 4, "Property, Plant, and
Equipment," for details regarding Integrys Energy Group's property,
plant, and equipment balances.
(j) Capitalized Interest and
AFUDC--Our nonregulated subsidiaries capitalize interest for construction
projects, while our utilities capitalize the cost of funds used for construction
using a calculation that includes both internal equity and external debt
components, as required by regulatory accounting. The internal equity
component of capitalized AFUDC is accounted for as other income, and the
external debt component is accounted for as a decrease to interest
expense.
Approximately 50%
of WPS's retail jurisdictional construction work in progress expenditures are
subject to the AFUDC calculation. For 2008, WPS's average AFUDC
retail rate was 8.61%. WPS's construction work in progress average
AFUDC wholesale rate was 8.04%. WPS's allowance for equity funds used
during construction for 2008, 2007, and 2006 was $5.2 million,
$0.9 million, and $0.6 million, respectively. WPS's allowance for
borrowed funds used during construction for 2008, 2007, and 2006 was
$1.8 million, $0.3 million, and $0.2 million,
respectively.
The AFUDC
calculation for the other utilities is determined by the respective state
commissions, each with specific requirements. Based on these
requirements, the other utilities did not record significant AFUDC for 2008,
2007, or 2006.
The interest rate
capitalized on long-term construction at our nonregulated subsidiaries is based
upon the monthly short-term borrowing rate Integrys Energy Group incurs for such
funds. The nonregulated subsidiaries had no significant interest
capitalized during 2008, 2007, and 2006.
(k) Regulatory Assets and
Liabilities--The
regulated electric and natural gas utility segments of Integrys Energy Group are
subject to the provisions of SFAS No. 71. Regulatory assets
represent probable future revenue associated with certain costs or liabilities
that have been deferred and are expected to be recovered from customers through
the ratemaking process. Regulatory liabilities represent amounts that
are expected to be refunded to customers in future rates or amounts collected in
rates for future costs. If at any reporting date a previously
recorded regulatory asset is no longer probable of recovery, the regulatory
asset is reduced to the amount considered probable of recovery with the
reduction charged to expense in the year the determination is
made. See Note 7, "Regulatory Assets and
Liabilities," for more information.
(l) Asset Impairment--We review
the recoverability of long-lived tangible and intangible assets in accordance
with SFAS No. 144. This statement requires review of assets
when events or circumstances indicate that the carrying amount may not be
recoverable. We base our evaluation on the presence of impairment
indicators such as the nature of the assets, the future economic benefit of the
assets, any historical or future profitability measurements, and other external
market conditions or factors.
The carrying amount
of assets held and used is considered not recoverable if it exceeds the
undiscounted sum of cash flows expected to result from the use and eventual
disposition of the asset. If the carrying value is not recoverable,
the impairment loss is measured as the excess of the asset's carrying value over
its fair value.
The carrying value
of assets held for sale is not recoverable if it exceeds the fair value less
cost to sell the asset. An impairment charge is recorded for any
excess of the carrying value over the fair value less cost to sell.
The carrying values
of cost and equity method investments are assessed for impairment by comparing
the fair values of these investments to their carrying values, if a fair value
assessment was completed, or by reviewing for the presence of impairment
indicators. If an impairment exists and it is determined to
be
other-than-temporary,
a charge is recognized equal to the amount the carrying value exceeds the
investment's fair value.
(m) Goodwill and Other Intangible
Assets--In accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets," goodwill and other intangible assets with indefinite lives
are not amortized, but are subject to an annual impairment test. WPS,
MGU, MERC, PGL, NSG, and Integrys Energy Services, our reporting units with
goodwill, perform their annual goodwill impairment tests during the second
quarter of each year. Interim impairment tests are performed whenever
events or changes in circumstances indicate that the asset might be
impaired.
Other intangible
assets with definite lives consist primarily of emission allowances, customer
related intangible assets, and customer contract assets and
liabilities. The impairment testing for these intangible assets is
performed in accordance with SFAS No. 144 and is discussed in
Note 1(l), "Summary of
Significant Accounting Policies – Asset Impairment."
For more
information on Integrys Energy Group's goodwill and other intangible assets, see
Note 9, "Goodwill and
Other Intangible Assets."
(n) Retirement of Debt--Any call
premiums or unamortized expenses associated with refinancing utility debt
obligations are amortized consistent with regulatory treatment of those
items. Any gains or losses resulting from the retirement of
nonutility debt are recorded through earnings, while gains or losses resulting
from the retirement of utility debt that is not refinanced are either amortized
over the remaining life of the original debt or recorded through
earnings.
(o) Asset Retirement
Obligations--Integrys Energy Group applies SFAS No. 143,
"Accounting for Asset Retirement Obligations," and FASB Interpretation
No. 47, "Accounting for Conditional Asset Retirement
Obligations." Under these accounting standards, Integrys Energy Group
recognizes legal obligations at fair value associated with the retirement of
tangible long-lived assets that result from the acquisition, construction or
development, and/or normal operation of the assets. A liability is
recorded for these obligations as long as the fair value can be reasonably
estimated, even if the timing or method of settling the obligation is
unknown. The asset retirement obligations are accreted using a
credit-adjusted risk-free interest rate commensurate with the expected
settlement dates of the asset retirement obligations; this rate is determined at
the date the obligation is incurred. The associated retirement costs
are capitalized as part of the related long-lived assets and are
depreciated over the useful lives of the assets. See Note 13, "Asset Retirement
Obligations," for more information.
(p) Income Taxes--We account for
income taxes using the liability method as prescribed by SFAS No. 109,
"Accounting for Income Taxes." Under this method, deferred income
taxes have been recorded using currently enacted tax rates for the
differences between the tax basis of assets and liabilities and the basis
reported in the financial statements. Our regulated utilities are
allowed to defer certain adjustments made to income taxes and record regulatory
assets or liabilities related to these adjustments.
Integrys Energy
Group adopted the provisions of FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an Interpretation of FAS 109," on
January 1, 2007. As a result of the implementation of
Interpretation No. 48, Integrys Energy Group recognized a $0.1 million
decrease in the liability for unrecognized tax benefits, which was accounted for
as an increase in the January 1, 2007 balance of retained
earnings.
Investment tax
credits that reduce our income taxes payable for the current year are eligible
for carryover are recognized as a reduction of income tax expense if the credits
are generated in our nonregulated operations. We do not reduce our
current year income tax expense if it is likely that we will sell the related
property that generated the tax credits after the end of the year and the tax
credits would also be transferred to the seller as permitted under tax
law. For credits generated in our regulated operations that apply SFAS No.
71, our regulators reduce our future rates over the lives of the property to
which the tax
credits relate;
accordingly, we defer the investment tax credits in the year our taxes payable
are reduced and we reduce income tax expense over the useful lives of the
related property.
Integrys Energy Group files a
consolidated United States income tax return that includes
domestic subsidiaries of which its ownership is 80% or more. Integrys
Energy Group and its consolidated subsidiaries are parties to a tax allocation
arrangement under which each entity determines its income tax provision on a
stand-alone basis. In several states, combined or consolidated
filing is required for certain members of Integrys Energy Group doing business
in that state. The tax allocation arrangement equitably allocates the
state taxes associated with these combined or consolidated filings.
For more
information regarding Integrys Energy Group's accounting for income taxes, see
Note 14, "Income
Taxes."
(q) Guarantees--Integrys Energy
Group applies Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees Including Indirect Guarantees of Indebtedness of
Others," which requires that the guarantor recognize, at the inception of the
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. For additional information on guarantees, see
Note 16, "Guarantees."
(r) Employee Benefits--The costs
of pension and other postretirement benefits are expensed over the periods
during which employees render service. The transition obligation
related to other postretirement plans that existed at Integrys Energy Group
prior to the PEC merger is being recognized over a 20-year period beginning in
1993. In computing the expected return on plan assets, Integrys
Energy Group uses a market related value of plan assets. Changes in
fair value are recognized over the subsequent five years for plans previously
sponsored by WPS, while differences between actual investment returns and the
expected return on plan assets are recognized over a five-year period for plans
previously sponsored by PEC. The benefit costs associated with
employee benefit plans are allocated among Integrys Energy Group's subsidiaries
based on employees' time reporting and actuarial calculations, as
applicable. Integrys Energy Group's regulators allow recovery in
rates for the regulated utilities' net periodic benefit cost calculated under
GAAP.
Integrys Energy
Group adopted SFAS No. 158, "Employers' Accounting for Defined Benefit
Pension and Other Postretirement Plans – an amendment of FASB Statements
No. 87, 88, 106, and 132(R)," at December 31,
2006. SFAS No. 158 requires employers to recognize a
defined benefit postretirement plan's funded status in the balance sheet, and
recognize changes in the plan's funded status in other comprehensive income in
the year in which the changes occur. Integrys Energy Group's
regulated utilities record changes in the funded status to regulatory asset or
liability accounts, pursuant to SFAS No. 71.
Integrys Energy
Group uses a December 31 measurement date for all of its pension and other
postretirement benefit plans.
For additional
information on Integrys Energy Group's employee benefits, see Note 17, "Employee Benefit
Plans."
(s) Stock-Based Employee
Compensation--Integrys Energy Group has stock-based employee compensation
plans, which are described more fully in Note 20, "Stock-Based
Compensation." Effective January 1, 2006, Integrys Energy
Group adopted the fair value recognition provisions of
SFAS No. 123(R), "Share-Based Payment," using the modified prospective
transition method. Under this transition method, prior periods'
results were not restated. Stock-based compensation cost for 2006
included compensation cost for all stock-based compensation awards granted prior
to, but not yet fully vested as of January 1, 2006, based on the grant date
fair value estimated in accordance with the original provisions of
SFAS No. 123, adjusted for estimated future
forfeitures. The fair values of stock-based compensation awards
granted after January 1, 2006 were estimated in accordance with the
provisions of SFAS No. 123(R). The cumulative effect of a
change in accounting principle recorded upon adoption of
SFAS No. 123(R) was not significant.
(t) Fair Value -- 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
December 31, 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." These disclosures can be found in Note 21,
"Fair
Value."
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 the
aforementioned portion 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 Consolidated Balance Sheets as assets or liabilities based
on the nature of the individual contract.
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). 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.
(u) 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 reporting of 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.
SFAS No. 160,
"Noncontrolling Interests in Consolidated Financial Statements," was issued in
December 2007. This standard changes the accounting and reporting
related to noncontrolling interests and requires, among other things, that
the amount of consolidated net
income attributable to the parent and to the noncontrolling interest be clearly
identified and presented on the face of the consolidated statement of
income. This standard is effective for Integrys Energy Group for the
period ending March 31, 2009. Integrys Energy Group expects this standard to
change the presentation of the preferred stock dividends of its subsidiary on
its Consolidated Statements of Income.
FASB Staff Position (FSP) No. 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.
Emerging Issues Task Force (EITF) Issue
No. 08-6, "Equity Method Investment Accounting Considerations," was
ratified in November 2008. Issue No. 08-6 is intended to
clarify the application of the equity method of accounting following adoption of
SFAS No. 141(R). According to the guidance, the initial
carrying value of an equity method investment should include transaction costs;
an other-than-temporary impairment test should be performed on the overall
investment, rather than on the underlying indefinite-lived intangible assets;
the equity method investee's issuance of shares should be accounted for as the
sale of a proportionate share of the investment; and no gain or loss should be
recognized when changing the method of accounting for an investment from the
equity method to the cost method. This EITF Issue is effective for
Integrys Energy Group for the quarter ending March 31, 2009. Integrys
Energy Group does not expect EITF Issue No. 08-6 to have a significant
impact on its financial statements.
FSP
No. FAS 132(R)-1, "Employers' Disclosures about Postretirement Benefit
Plan Assets," was issued in December 2008. This FSP amends
SFAS No. 132(R), "Employers' Disclosures about Pensions and Other
Postretirement Benefits," and requires additional disclosures about plan
assets. These disclosures include: a description of investment
policies and strategies, disclosures of the fair value of each major category of
plan assets, information about the fair value measurements of plan assets, and
disclosures about significant concentrations of risk in plan
assets. This FSP is effective for Integrys Energy Group
for
the reporting
period ending December 31, 2009, and will result in expanded disclosures
related to postretirement benefit plan assets.
NOTE 2--RISK
MANAGEMENT ACTIVITIES
The following table
shows Integrys Energy Group's assets and liabilities from risk management
activities as of December 31, 2008, and 2007:
|
|
Assets
|
|
|
Liabilities
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Utility
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
contracts
|
|
$ |
21.4 |
|
|
$ |
8.2 |
|
|
$ |
166.4 |
|
|
$ |
30.4 |
|
Financial
transmission rights
|
|
|
7.2 |
|
|
|
13.4 |
|
|
|
4.2 |
|
|
|
4.4 |
|
Cash flow
hedges – commodity contracts
|
|
|
- |
|
|
|
- |
|
|
|
1.5 |
|
|
|
0.3 |
|
Nonregulated
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
and foreign currency
contracts
|
|
|
2,836.2 |
|
|
|
1,241.4 |
|
|
|
2,681.6 |
|
|
|
1,125.7 |
|
Fair
value hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
|
14.2 |
|
|
|
7.4 |
|
|
|
- |
|
|
|
2.0 |
|
Interest rate swaps
|
|
|
3.2 |
|
|
|
- |
|
|
|
- |
|
|
|
0.3 |
|
Cash
flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
contracts
|
|
|
85.4 |
|
|
|
29.6 |
|
|
|
94.2 |
|
|
|
18.3 |
|
Interest
rate swaps
|
|
|
- |
|
|
|
- |
|
|
|
5.1 |
|
|
|
4.1 |
|
Foreign currency
|
|
|
14.8 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
|
|
$ |
2,982.4 |
|
|
$ |
1,300.0 |
|
|
$ |
2,953.0 |
|
|
$ |
1,185.5 |
|
Balance
Sheet Presentation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
2,223.7 |
|
|
$ |
840.7 |
|
|
$ |
2,190.3 |
|
|
$ |
813.5 |
|
Long-term
|
|
|
758.7 |
|
|
|
459.3 |
|
|
|
762.7 |
|
|
|
372.0 |
|
Total
|
|
$ |
2,982.4 |
|
|
$ |
1,300.0 |
|
|
$ |
2,953.0 |
|
|
$ |
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.
Utility
Segments
The derivatives
listed in the above table as "commodity contracts" include natural gas purchase
contracts as well as financial derivative contracts (NYMEX futures, options, and
swaps) used by both the electric and natural gas utility segments to mitigate
the risk associated with market price volatility of natural gas. The
electric utility segment also uses financial instruments to manage transmission
congestion costs, which are shown in the above table as "financial transmission
rights."
Nonregulated
Segments
The derivatives in
the nonregulated segments not designated as hedges under GAAP 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. Changes in the fair value of
non-hedge derivatives are recognized currently in earnings.
In
the second quarter of 2006, Integrys Energy Services began entering into a
limited number of derivative energy contracts with terms that extended as long
as 12 years. Observable market data was not available for the
longer-dated portion, generally periods greater than five years (the
unobservable periods), of these contracts at the time and, therefore, Integrys
Energy Services had valued the unobservable periods of these contracts at
zero. In the third quarter of 2007, Integrys Energy Services
determined that this approach was inappropriate under GAAP and began to use
internally developed pricing data to estimate
the fair value of
such unobservable periods. The cumulative effect related to prior
periods was an increase in income from continuing operations and income
available for common shareholders of $4.6 million, net of
taxes. Management determined that this amount was not material to
prior periods. The determination of fair value for these derivative
contracts is subjective and requires significant management
judgment.
Integrys Energy
Services also enters 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. Fair value hedge ineffectiveness was not significant
in 2008 and 2007, and was a pre-tax gain of $3.7 million in
2006. Changes in the difference between the spot and forward prices
of natural gas were excluded from the assessment of hedge effectiveness and
reported directly in nonregulated revenue. The amount excluded was a
pre-tax gain of $5.5 million during 2008, and was not significant during
2007 and 2006.
Commodity contracts
that are designated as cash flow hedges extend through April 2014, and are used
to mitigate the risk of cash flow variability associated with future purchases
and sales of natural gas and electricity. Cash flow hedge
ineffectiveness related to commodity contracts was not significant during 2008,
was a pre-tax loss of $4.4 million in 2007, and was a pre-tax gain of $8.6
million in 2006. When testing for effectiveness, no portion of the
derivative instruments was excluded. Amounts recorded in other
comprehensive income related to these cash flow hedges will be recognized in
earnings when the hedged transactions occur, which is typically as the related
contracts are settled, or if it is probable that the hedged transaction will not
occur. 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 $2.7 million during 2008,
was not significant during 2007, and was a pre-tax gain of $2.1 million in
2006. In the next 12 months, subject to changes in market prices
of natural gas and electricity, we expect that a pre-tax loss of
$72.8 million will be recognized in earnings as the hedged transactions
occur. We expect this amount to be substantially offset by settlement
of the related nonderivative contracts that are being hedged.
In
November 2008, Integrys Energy Group designated as cash flow hedges two
forward foreign currency exchange contracts entered into to hedge the
variability in the foreign currency exposure of a fixed rate Japanese yen
denominated term loan that matures on March 30, 2009. Cash flow
hedge ineffectiveness recorded in nonregulated revenue related to this
transaction was not significant during 2008.
Integrys
Energy Group's Cash Collateral Positions
(Millions)
|
|
December 31,
2008
|
|
|
December 31,
2007
|
|
Cash
collateral provided to others
|
|
$ |
256.4 |
|
|
$ |
23.5 |
|
Cash
collateral received from others
|
|
|
18.9 |
|
|
|
49.1 |
|
NOTE 3--DISCONTINUED
OPERATIONS
Stoneman
In
the third quarter of 2008, Integrys Energy Services sold its subsidiary
Mid-American Power, LLC, which owned the Stoneman generation facility, located
in Wisconsin. The historical revenue, expenses, and effects of
disposing of this facility were not significant. In the fourth
quarter of 2008, Integrys Energy Services recognized a $6.3 million pre-tax
gain ($3.8 million after-tax) on the sale of this facility when a previous
contingent payment was earned and paid by the buyer. This contingent
payment resulted from legislation that was passed in the fourth quarter of 2008,
which extended the production tax credits available for certain biomass
facilities. The $3.8 million after-tax gain was reported in
discontinued operations.
PEP
In
September 2007, Integrys Energy Group completed the sale of PEP, an oil and
natural gas production subsidiary acquired in the PEC merger, for
$869.2 million, net of certain post-closing adjustments. These
post-closing adjustments were funded through other current liabilities at
December 31, 2007 and, therefore, are included in Note 1(d), "Summary of Significant Accounting
Policies – Cash and Cash Equivalents," as a non-cash transaction for
2007. Including the impact of the post-closing adjustments, the
pre-tax gain recorded for 2007 was $12.6 million ($7.6 million after-tax), and
was included as a component of discontinued operations. In 2008, a
$0.8 million impact of tax adjustments related to the 2007 PEP sale was recorded
as income from discontinued operations.
Components of
discontinued operations recorded in the Consolidated Statements of Income
related to PEP were:
(Millions)
|
|
February
22, 2007 through
December 31,
2007
|
|
|
|
|
|
Nonregulated
revenue
|
|
$ |
114.2 |
|
|
|
|
|
|
Operating and
maintenance expense
|
|
|
28.5 |
|
Gain on PEP
sale
|
|
|
(12.6 |
) |
Taxes other
than income taxes
|
|
|
5.1 |
|
Other
expense
|
|
|
0.1 |
|
|
|
|
|
|
Income before
taxes
|
|
|
93.1 |
|
Provision for
income taxes
|
|
|
34.6 |
|
Discontinued
operations, net of tax
|
|
$ |
58.5 |
|
It
is Integrys Energy Group's policy to not allocate interest to discontinued
operations unless the asset group being sold has external debt
obligations. PEP had no external debt obligations during the period
shown above.
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. The gain
recorded in 2007 was $24.6 million pre-tax ($14.7 million after-tax)
and was included as a component of discontinued operations.
During 2008,
Integrys Energy Services recorded $0.1 million of income from discontinued
operations related to amortization of an environmental indemnification guarantee
included as part of the sale agreement.
Components of
discontinued operations recorded in the Consolidated Statements of Income
related to Niagara for the years ended December 31 were as
follows:
(Millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Nonregulated
revenue
|
|
$ |
1.5 |
|
|
$ |
19.3 |
|
|
|
|
|
|
|
|
|
|
Nonregulated
cost of fuel, natural gas, and purchased power
|
|
|
1.0 |
|
|
|
12.9 |
|
Operating and
maintenance expense
|
|
|
0.5 |
|
|
|
5.3 |
|
Gain on
Niagara sale
|
|
|
(24.6 |
) |
|
|
- |
|
Depreciation
and amortization expense
|
|
|
- |
|
|
|
0.4 |
|
Taxes other
than income taxes
|
|
|
- |
|
|
|
0.3 |
|
Other
income
|
|
|
- |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
Income before
taxes
|
|
|
24.6 |
|
|
|
0.6 |
|
Provision for
income taxes
|
|
|
9.8 |
|
|
|
0.2 |
|
Discontinued
operations, net of tax
|
|
$ |
14.8 |
|
|
$ |
0.4 |
|
No
interest expense was allocated to discontinued operations as Niagara had no
external debt obligations during the periods shown above.
Sunbury
In
July 2006, Integrys Energy Services completed the sale of
Sunbury. Sunbury's primary asset was the Sunbury generation plant
located in Pennsylvania. This facility sold power on a wholesale
basis when market conditions were economically favorable. The gain
recorded in 2006 was $20.2 million pre-tax ($12.5 million after-tax),
and was included as a component of discontinued operations.
Components of
discontinued operations recorded in the Consolidated Statements of Income for
the year ended December 31, 2006, related to Sunbury were as
follows:
(Millions)
|
|
2006
|
|
|
|
|
|
Nonregulated
revenue
|
|
$ |
69.2 |
|
|
|
|
|
|
Nonregulated
cost of fuel, natural gas, and purchased power
|
|
|
61.6 |
|
Operating and
maintenance expense
|
|
|
17.9 |
|
Gain on
Sunbury sale
|
|
|
(20.2 |
) |
Depreciation
and amortization expense
|
|
|
0.3 |
|
Taxes other
than income taxes
|
|
|
0.3 |
|
|
|
|
|
|
Income before
taxes
|
|
|
9.3 |
|
Provision for
income taxes
|
|
|
2.4 |
|
Discontinued
operations, net of tax
|
|
$ |
6.9 |
|
NOTE 4--PROPERTY,
PLANT, AND EQUIPMENT
Property, plant,
and equipment in service at December 31 consisted of the following utility,
nonutility, and nonregulated assets:
(Millions)
|
|
2008
|
|
|
2007
|
|
Electric
utility *
|
|
$ |
2,777.5 |
|
|
$ |
2,230.0 |
|
Natural gas
utility
|
|
|
4,203.2 |
|
|
|
4,058.1 |
|
Total utility
plant
|
|
|
6,980.7 |
|
|
|
6,288.1 |
|
Less:
Accumulated depreciation
|
|
|
2,607.8 |
|
|
|
2,533.1 |
|
Net
|
|
|
4,372.9 |
|
|
|
3,755.0 |
|
Construction
work in progress *
|
|
|
159.6 |
|
|
|
543.5 |
|
Net utility
plant
|
|
|
4,532.5 |
|
|
|
4,298.5 |
|
|
|
|
|
|
|
|
|
|
Nonutility
plant – utility segments
|
|
|
90.5 |
|
|
|
27.9 |
|
Less:
Accumulated depreciation
|
|
|
52.2 |
|
|
|
8.8 |
|
Net
|
|
|
38.3 |
|
|
|
19.1 |
|
Construction
work in progress
|
|
|
15.5 |
|
|
|
1.4 |
|
Net
nonutility plant – utility segments
|
|
|
53.8 |
|
|
|
20.5 |
|
|
|
|
|
|
|
|
|
|
Electric
nonregulated
|
|
|
195.2 |
|
|
|
168.0 |
|
Natural gas
nonregulated
|
|
|
3.4 |
|
|
|
12.6 |
|
Other
nonregulated
|
|
|
7.4 |
|
|
|
19.4 |
|
Total
nonregulated property, plant, and equipment
|
|
|
206.0 |
|
|
|
200.0 |
|
Less:
Accumulated depreciation
|
|
|
50.0 |
|
|
|
60.3 |
|
Net
|
|
|
156.0 |
|
|
|
139.7 |
|
Construction
work in progress
|
|
|
31.0 |
|
|
|
5.1 |
|
Net
nonregulated property, plant, and equipment
|
|
|
187.0 |
|
|
|
144.8 |
|
|
|
|
|
|
|
|
|
|
Total
property, plant, and equipment
|
|
$ |
4,773.3 |
|
|
$ |
4,463.8 |
|
*
Includes the impact of the Weston 4 power plant becoming commercially
operational in June 2008.
NOTE 5--ACQUISITIONS
AND DISPOSITIONS
Merger
with PEC
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 Consolidated Financial Statements for the year ended December 31,
2008, and for the period from February 22, 2007, through December 31,
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.
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 in accordance with Emerging Issues
Task Force Issue No. 95-3 "Recognition of Liabilities in
Connection with a
Purchase Business Combination." The following table summarizes the
activity related to these specific costs for the years ended
December 31:
(Millions)
|
|
2008
|
|
|
2007
|
|
Accrued
employee severance costs at beginning of period
|
|
$ |
1.3 |
|
|
$ |
- |
|
Adjustments
to purchase price
|
|
|
- |
|
|
|
1.7 |
|
Other
adjustments
|
|
|
(0.1 |
) |
|
|
- |
|
Cash
payments
|
|
|
(1.2 |
) |
|
|
(0.4 |
) |
Accrued
employee severance costs at end of period
|
|
$ |
- |
|
|
$ |
1.3 |
|
Costs related to
the involuntary termination of the acquirer's employees were 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 both Integrys Energy Group and PEC employees were
expensed in accordance with SFAS No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits." The following
table summarizes the activity related to these specific costs for the years
ended December 31:
(Millions)
|
|
2008
|
|
|
2007
|
|
Accrued
employee severance costs at beginning of period
|
|
$ |
4.8 |
|
|
$ |
- |
|
Severance
expense recorded
|
|
|
2.5 |
|
|
|
7.2 |
|
Cash
payments
|
|
|
(5.9 |
) |
|
|
(2.4 |
) |
Accrued
employee severance costs at end of period
|
|
$ |
1.4 |
|
|
$ |
4.8 |
|
Purchase
of Aquila, Inc.'s Michigan and Minnesota Natural Gas Distribution
Operations
On
April 1, 2006, Integrys Energy Group, through its wholly owned subsidiary MGU,
completed the acquisition of natural gas distribution operations in Michigan
from Aquila. On July 1, 2006, Integrys Energy Group, through its
wholly owned subsidiary MERC, completed the acquisition of natural gas
distribution operations in Minnesota from Aquila. Integrys Energy
Group paid total consideration of $341.7 million for the Michigan natural
gas distribution operations, and $315.7 million for the Minnesota natural
gas distribution operations. Both amounts include closing adjustments
related primarily to purchased working capital. Both transactions
were accounted for under the purchase method of accounting.
Supplemental
Pro Forma Information
The following table
shows pro forma results of operations for Integrys Energy Group for the year
ended December 31, 2007, as if the acquisition of PEC had been completed at
January 1, 2007, as well as pro forma results of operations for Integrys
Energy Group for the year ended December 31, 2006, as if the acquisitions
of PEC and the Michigan and Minnesota natural gas distribution operations from
Aquila had been completed at January 1, 2006. Pro forma results
are presented for informational purposes only, assume commercial paper was used
to finance the Michigan and Minnesota transactions, and are not necessarily
indicative of what the actual results would have been had the acquisitions
actually occurred on January 1, 2007, and
January 1, 2006.
|
|
Pro
Forma for the Year Ended December 31
|
|
(Millions,
except per share amounts)
|
|
2007
|
|
|
2006
|
|
Total
revenues
|
|
$ |
10,997.7 |
|
|
$ |
9,686.1 |
|
Income from
continuing operations
|
|
$ |
211.2 |
|
|
$ |
144.8 |
|
Income
available for common shareholders
|
|
$ |
283.4 |
|
|
$ |
178.4 |
|
Basic
earnings per share – continuing operations
|
|
$ |
2.73 |
|
|
$ |
1.91 |
|
Basic
earnings per share
|
|
$ |
3.72 |
|
|
$ |
2.40 |
|
Diluted
earnings per share – continuing operations
|
|
$ |
2.73 |
|
|
$ |
1.91 |
|
Diluted
earnings per share
|
|
$ |
3.72 |
|
|
$ |
2.40 |
|
The following
dispositions occurred in 2006 but are reported as continuing
operations.
Sale
of WPS ESI Gas Storage, LLC
In
April 2006, Integrys Energy Services sold WPS ESI Gas Storage, LLC,
which owned a natural gas storage field located in the Kimball Township, St.
Clair County, Michigan for $19.9 million. The transaction
resulted in the recognition of a pre-tax gain of $9.0 million.
Sale
of Guardian Pipeline
In
April 2006, WPS Investments, LLC, a consolidated subsidiary of Integrys
Energy Group, completed the sale of its one-third interest in
Guardian Pipeline, LLC for $38.5 million. The
transaction resulted in the recognition of a pre-tax gain of $6.2 million
in the second quarter of 2006.
NOTE 6--JOINTLY
OWNED UTILITY FACILITIES
WPS holds a joint
ownership interest in certain electric generating facilities. WPS is
entitled to receive generating capability and output of each facility equal to
its respective ownership interest. WPS also pays its ownership share
of additional construction costs, fuel inventory purchases, and operating
expenses unless specific agreements have been executed to limit its maximum
exposure to additional costs. WPS's share of significant jointly
owned electric generating facilities as of December 31, 2008, was as
follows:
(Millions,
except for percentages and megawatts)
|
|
Weston
4
|
|
|
West
Marinette
Unit
No. 33
|
|
|
Columbia
Energy
Center
Units
1 and 2
|
|
|
Edgewater
Unit
No. 4
|
|
Ownership
|
|
|
70.0 |
% |
|
|
68.0 |
% |
|
|
31.8 |
% |
|
|
31.8 |
% |
WPS's
share of rated capacity (megawatts)
|
|
|
374.8 |
|
|
|
51.7 |
|
|
|
355.6 |
|
|
|
101.9 |
|
Utility
plant in service
|
|
$ |
611.9 |
|
|
$ |
18.3 |
|
|
$ |
159.5 |
|
|
$ |
33.8 |
|
Accumulated
depreciation
|
|
$ |
40.4 |
|
|
$ |
9.3 |
|
|
$ |
99.5 |
|
|
$ |
22.4 |
|
In-service
date
|
|
2008
|
|
|
1993
|
|
|
1975
and 1978
|
|
|
1969
|
|
WPS's share of
direct expenses for these plants is recorded in operating expenses in the
Consolidated Statements of Income. WPS has supplied its own financing
for all jointly owned projects.
NOTE 7--REGULATORY
ASSETS AND LIABILITIES
The following
regulatory assets and liabilities were reflected in our Consolidated Balance
Sheets as of December 31:
(Millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Regulatory
assets
|
|
|
|
|
|
|
Environmental
remediation costs (net of insurance recoveries)
|
|
$ |
681.1 |
|
|
$ |
758.8 |
|
Pension and
other postretirement benefit related items
|
|
|
634.7 |
|
|
|
221.9 |
|
Derivatives
|
|
|
162.0 |
|
|
|
34.4 |
|
De Pere
Energy Center
|
|
|
35.8 |
|
|
|
38.2 |
|
Asset
retirement obligations
|
|
|
30.5 |
|
|
|
17.0 |
|
Nuclear
costs
|
|
|
24.1 |
|
|
|
34.7 |
|
Income tax
related items
|
|
|
23.2 |
|
|
|
23.3 |
|
Energy
recoveries
|
|
|
23.1 |
|
|
|
27.7 |
|
Weston 3
lightning strike
|
|
|
22.3 |
|
|
|
22.7 |
|
Unamortized
loss on debt
|
|
|
13.2 |
|
|
|
13.8 |
|
Costs to
achieve merger synergies
|
|
|
12.1 |
|
|
|
14.5 |
|
Rate case
costs
|
|
|
5.7 |
|
|
|
- |
|
Conservation
Improvement Program costs
|
|
|
4.8 |
|
|
|
3.8 |
|
MISO
costs
|
|
|
- |
|
|
|
19.1 |
|
Other
|
|
|
16.2 |
|
|
|
14.1 |
|
Total
|
|
$ |
1,688.8 |
|
|
$ |
1,244.0 |
|
Balance
Sheet Presentation
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
244.0 |
|
|
$ |
141.7 |
|
Long-term
|
|
|
1,444.8 |
|
|
|
1,102.3 |
|
Total
|
|
$ |
1,688.8 |
|
|
$ |
1,244.0 |
|
|
|
|
|
|
|
|
|
|
Regulatory
liabilities
|
|
|
|
|
|
|
|
|
Cost of
removal reserve
|
|
$ |
231.6 |
|
|
$ |
217.4 |
|
Energy
refunds
|
|
|
34.1 |
|
|
|
55.7 |
|
Pension and
other postretirement benefit related items
|
|
|
26.1 |
|
|
|
59.1 |
|
ATC and MISO
refunds
|
|
|
9.6 |
|
|
|
5.3 |
|
Decoupling
|
|
|
9.4 |
|
|
|
- |
|
Income tax
related items
|
|
|
8.2 |
|
|
|
10.8 |
|
Derivatives
|
|
|
4.9 |
|
|
|
13.9 |
|
Enhanced
Efficiency Program
|
|
|
4.8 |
|
|
|
- |
|
Other
|
|
|
5.6 |
|
|
|
8.1 |
|
Total
|
|
$ |
334.3 |
|
|
$ |
370.3 |
|
Balance
Sheet Presentation
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
58.8 |
|
|
$ |
77.9 |
|
Long-term
|
|
|
275.5 |
|
|
|
292.4 |
|
Total
|
|
$ |
334.3 |
|
|
$ |
370.3 |
|
Our utility
subsidiaries expect to recover their regulatory assets and incur future costs or
refund their regulatory liabilities through rates charged to customers based on
specific ratemaking decisions or precedent for each item over periods specified
by the regulators or over the normal operating period of the assets and
liabilities to which they relate. Based on prior and current rate
treatment for such costs, we believe it is probable that our utility
subsidiaries will continue to recover from customers the regulatory assets
described above.
The regulatory
assets listed in the table above related to WPS's environmental remediation
costs, the Weston 3 lightning strike, rate case costs, and debt and PGL and NSG,
are not earning a rate of return.
The regulatory
asset for WPS's environmental remediation costs was $74.1 million at December
31, 2008, and includes both liabilities and costs incurred to remediate the
former manufactured gas plant sites that have not yet been recovered through
rates. At December 31, 2008, environmental remediation costs that
have been incurred but not yet recovered in rates were not
significant. WPS is authorized recovery of the regulatory asset
related to the Weston 3 lightning strike over a six-year period. The
regulatory assets related to debt at PGL and NSG are not included in rate base,
but are recovered over the term of the debt through the rate of return
authorized by the ICC. The regulatory assets related to rate case
costs are authorized recovery over a five-year period. WPS’s
regulatory assets are expected to be recovered from customers in future rates;
however, the carrying costs of these assets are borne by Integrys Energy Group's
shareholders.
See Note 1(g),
"Summary of Significant
Accounting Policies – Risk Management Activities,"
Note 13, "Asset
Retirement Obligations," Note 14, "Income Taxes," Note 15,
"Commitments and
Contingencies," Note 17, "Employee Benefit Plans," and
Note 23, "Regulatory
Environment," for more information on some of the more significant
regulatory assets and liabilities listed in the above table.
NOTE 8--INVESTMENTS
IN AFFILIATES, AT EQUITY METHOD
Investments in
corporate joint ventures and other companies accounted for under the equity
method at December 31, 2008, and 2007 were as follows:
(Millions)
|
|
2008
|
|
|
2007
|
|
ATC
|
|
$ |
346.9 |
|
|
$ |
296.6 |
|
WRPC
|
|
|
8.5 |
|
|
|
9.8 |
|
Other
|
|
|
3.1 |
|
|
|
1.3 |
|
Investments
in affiliates, at equity method
|
|
$ |
358.5 |
|
|
$ |
307.7 |
|
Investments in
affiliates accounted for under the equity method are included in other assets on
the Consolidated Balance Sheets, and the equity income (loss) is recorded in
miscellaneous income on the Consolidated Statements of
Income. Integrys Energy Group is taxed on ATC's equity income, rather
than ATC, due to the tax flow-through nature of ATC's business
structure. Accordingly, Integrys Energy Group's provision for income
taxes includes taxes on ATC's equity income. Included in other
investments in the above table is Integrys Energy Services' ownership in ECO
Coal Pelletization #12, LLC. See below for further explanation of
this investment.
ATC
Integrys Energy
Group had an approximate 34% ownership interest in ATC at December 31,
2008. ATC is a for-profit, transmission-only company. ATC
owns, maintains, monitors, and operates electric transmission assets in portions
of Wisconsin, Michigan, Minnesota, and Illinois.
The regulated
electric utilities provide construction and other services to, and receive
network transmission services from, ATC. The related party
transactions recorded by the regulated electric utilities, capital contributions
to ATC, and dividends received from ATC in the years ended December 31 were
as follows:
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Total charges
to ATC for services and construction
|
|
$ |
12.8 |
|
|
$ |
98.6 |
|
|
$ |
126.5 |
|
Total costs
for network transmission service provided by ATC
|
|
|
87.8 |
|
|
|
78.1 |
|
|
|
63.3 |
|
Net amounts
received from (advanced to) ATC for
transmission
interconnection
|
|
|
82.3 |
|
|
|
(23.9 |
) |
|
|
(11.6 |
) |
Capital
contributions to ATC
|
|
|
34.6 |
|
|
|
50.9 |
|
|
|
36.5 |
|
Dividends
received from ATC
|
|
|
50.4 |
|
|
|
36.7 |
|
|
|
29.7 |
|
There were no
advances to ATC for transmission interconnections recorded at December 31,
2008. The amount related to these advances classified within accounts
receivable and accrued unbilled revenues was $82.3 million at
December 31, 2007.
Of
Integrys Energy Group's equity in net income disclosed below,
$66.1 million, $50.5 million, and $39.0 million is the pre-tax
income related to its investment in ATC in 2008, 2007, and 2006,
respectively.
WRPC
WPS owns 50% of the
voting stock of WRPC, which operates two hydroelectric plants and an oil-fired
combustion turbine. Two-thirds of the energy output of the
hydroelectric plants is sold to WPS, and the remaining one-third is sold to
Wisconsin Power and Light. The electric power from the combustion
turbine is sold in equal parts to WPS and Wisconsin Power and
Light.
WPS has sales to
and purchases from WRPC and receives net proceeds from sales of energy into the
MISO market from WRPC. The related party transactions recorded and
net proceeds and dividends received in the years ended December 31 were as
follows:
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Revenues from
services provided to WRPC
|
|
$ |
0.8 |
|
|
$ |
1.0 |
|
|
$ |
1.5 |
|
Purchases of
energy from WRPC
|
|
|
4.7 |
|
|
|
4.7 |
|
|
|
4.1 |
|
Net proceeds
from WRPC sales of energy to MISO
|
|
|
5.8 |
|
|
|
6.0 |
|
|
|
4.2 |
|
Dividends
received from WRPC
|
|
|
3.5 |
|
|
|
0.9 |
|
|
|
4.2 |
|
Of
Integrys Energy Group's equity in net income disclosed below, $2.2 million,
$1.8 million, and $3.2 million is the pre-tax income related to WPS's
investment in WRPC in 2008, 2007, and 2006, respectively.
ECO
Coal Pelletization #12
At
December 31, 2008, Integrys Energy Services held a 70% ownership interest
in ECO Coal Pelletization #12, LLC, which held an equity method investment
in an entity that produced synthetic fuel for tax credits under Section 29/45K
of the Internal Revenue Code. Integrys Energy Services' investment in
this facility was not significant at December 31, 2008, 2007, or
2006. By law, Section 29/45K federal tax credits for synthetic fuel
produced from coal expired on December 31, 2007; therefore, this facility
ceased operation effective January 1, 2008. Consequently, the
losses and royalty income received from this investment were not significant
during 2008. The losses and royalty income received from the equity
method investment Integrys Energy Services held through its ownership interest
in ECO Coal Pelletization #12, LLC during 2007 and 2006, were as
follows:
(Millions)
|
|
2007
|
|
|
2006
|
|
Losses
generated from operations of ECO Coal Pelletization #12
|
|
$ |
(18.2 |
) |
|
$ |
(23.9 |
) |
Integrys
Energy Services' partners' share of the losses (recorded as
minority interest)
|
|
|
0.1 |
|
|
|
3.8 |
|
Royalty
income recognized
|
|
|
1.7 |
|
|
|
- |
|
In
2007 and 2006, the operation of this facility generated positive earnings when
including the tax credits generated and the impact of gains on oil options
utilized to mitigate the risk that rising oil prices had on the value of the tax
credits.
Guardian
Pipeline
In
April 2006, Integrys Energy Group completed the sale of its one-third interest
in Guardian Pipeline. At the time of sale, Guardian Pipeline, LLC
owned a natural gas pipeline, which began operating in 2002, that stretched
about 140 miles from near Joliet, Illinois, into southern
Wisconsin. It could transport up to
750 million
cubic feet of natural gas daily. See Note 5, "Acquisitions and
Dispositions," for more information related to the sale.
Integrys Energy
Services recorded related party transactions for purchases from Guardian
Pipeline. These purchases amounted to $0.9 million in 2006
through the date of sale.
Financial
Data
Combined financial
data of Integrys Energy Group's significant equity method investments, ATC and
WRPC, are included in the table below. The financial data of Guardian
Pipeline is not included, as Integrys Energy Group sold this investment in April
2006 and the financial information from January 1, 2006 through the date of
sale was not significant.
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Income
statement data
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
474.0 |
|
|
$ |
415.6 |
|
|
$ |
347.5 |
|
Operating
expenses
|
|
|
214.6 |
|
|
|
203.9 |
|
|
|
184.3 |
|
Other
expense
|
|
|
67.1 |
|
|
|
54.2 |
|
|
|
34.9 |
|
Net
income
|
|
$ |
192.3 |
|
|
$ |
157.5 |
|
|
$ |
128.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrys
Energy Group's equity in net income
|
|
$ |
68.3 |
|
|
$ |
52.3 |
|
|
$ |
42.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
sheet data
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$ |
52.5 |
|
|
$ |
52.3 |
|
|
$ |
36.2 |
|
Noncurrent
assets
|
|
|
2,494.8 |
|
|
|
2,207.8 |
|
|
|
1,872.4 |
|
Total
assets
|
|
$ |
2,547.3 |
|
|
$ |
2,260.1 |
|
|
$ |
1,908.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$ |
252.4 |
|
|
$ |
317.7 |
|
|
$ |
306.4 |
|
Long-term
debt
|
|
|
1,109.4 |
|
|
|
899.1 |
|
|
|
648.9 |
|
Other
noncurrent liabilities
|
|
|
119.3 |
|
|
|
111.1 |
|
|
|
128.2 |
|
Shareholders'
equity
|
|
|
1,066.2 |
|
|
|
932.2 |
|
|
|
825.1 |
|
Total
liabilities and shareholders' equity
|
|
$ |
2,547.3 |
|
|
$ |
2,260.1 |
|
|
$ |
1,908.6 |
|
NOTE 9--GOODWILL
AND OTHER INTANGIBLE ASSETS
Integrys Energy
Group had the following changes to the carrying amount of goodwill for the year
ended December 31, 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
|
|
|
(3.3 |
) |
|
|
(4.6 |
) |
|
|
(7.9 |
) |
Impairment
loss *
|
|
|
(6.5 |
) |
|
|
- |
|
|
|
(6.5 |
) |
Goodwill
recorded at December 31, 2008
|
|
$ |
927.0 |
|
|
$ |
6.9 |
|
|
$ |
933.9 |
|
*
|
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 GAAP 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, MGU, MERC, WPS's natural gas utility, and Integrys Energy
Services. PGL, NSG, MGU, and MERC were recorded at their
approximate fair market values at the date of
acquisition. Since the acquisitions of PGL, NSG, MGU, 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 Consolidated Balance Sheets as listed below.
(Millions)
|
|
December 31,
2008
|
|
|
December 31,
2007
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Amortized
intangible assets
(liabilities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer-related
(1)
|
|
$ |
32.6 |
|
|
$ |
(14.2 |
) |
|
$ |
18.4 |
|
|
$ |
32.6 |
|
|
$ |
(9.3 |
) |
|
$ |
23.3 |
|
Natural
gas and electric
contract
assets (2),
(3)
|
|
|
60.1 |
|
|
|
(54.6 |
) |
|
|
5.5 |
|
|
|
60.1 |
|
|
|
(34.1 |
) |
|
|
26.0 |
|
Natural
gas and electric
contract
liabilities (2),
(4)
|
|
|
(33.6 |
) |
|
|
20.2 |
|
|
|
(13.4 |
) |
|
|
(33.6 |
) |
|
|
13.1 |
|
|
|
(20.5 |
) |
Emission
allowances (5)
|
|
|
2.3 |
|
|
|
(0.1 |
) |
|
|
2.2 |
|
|
|
2.4 |
|
|
|
(0.2 |
) |
|
|
2.2 |
|
Renewable
energy credits (6)
|
|
|
3.4 |
|
|
|
(2.1 |
) |
|
|
1.3 |
|
|
|
0.4 |
|
|
|
(0.4 |
) |
|
|
- |
|
Other
|
|
|
3.0 |
|
|
|
(1.0 |
) |
|
|
2.0 |
|
|
|
3.4 |
|
|
|
(0.8 |
) |
|
|
2.6 |
|
Total
|
|
$ |
67.8 |
|
|
$ |
(51.8 |
) |
|
$ |
16.0 |
|
|
$ |
65.3 |
|
|
$ |
(31.7 |
) |
|
$ |
33.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized
intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
(7)
|
|
|
5.2 |
|
|
|
- |
|
|
|
5.2 |
|
|
|
5.2 |
|
|
|
- |
|
|
|
5.2 |
|
Total
intangible assets
|
|
$ |
73.0 |
|
|
$ |
(51.8 |
) |
|
$ |
21.2 |
|
|
$ |
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
nonutility home services business. The remaining
weighted-average amortization period at December 31, 2008, for
customer-related intangible assets is approximately 7
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)
Includes both short-term and long-term intangible assets related to
customer contracts in the amount of $3.1 million and
$2.4 million, respectively, at December 31, 2008, and
$20.5 million and $5.5 million, respectively, at
December 31, 2007. The weighted-average amortization
period at December 31, 2008, for these intangible assets is 2.2
years.
|
|
(4)
Includes both short-term and long-term intangible liabilities
related to customer contracts in the amount of $6.0 million and
$7.4 million, respectively, at December 31, 2008, and
$7.1 million and $13.4 million, respectively at
December 31, 2007. The weighted-average amortization
period at December 31, 2008, for these intangible liabilities is 2.0
years.
|
|
(5)
Emission allowances do not have a contractual term or expiration
date.
|
|
(6)
Used at Integrys Energy Services to comply with state Renewable
Portfolio Standards, as well as for trading
purposes.
|
|
(7)
Represents the fair value of the MGU trade name acquired from
Aquila.
|
Intangible asset
amortization expense, excluding amortization related to natural gas and electric
contracts, was recorded as a component of depreciation and amortization
expense. Amortization for the years ended
December 31, 2008, 2007, and 2006, was $7.9 million,
$8.5 million, and $2.1 million, respectively.
Amortization
expense for the next five fiscal years is estimated to be:
(Millions)
|
|
|
|
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 |
|
For year
ending December 31, 2013
|
|
|
1.3 |
|
Amortization of the
natural gas and electric contract intangible assets was recorded as a component
of nonregulated cost of fuel, natural gas, and purchased
power. Amortization of these contracts for the years ended
December 31, 2008, and 2007, resulted in an increase to nonregulated fuel,
natural gas, and purchased power in the amount of $34.4 million and
$21.0 million, respectively.
Amortization of
these contracts for the next five fiscal years is estimated to be:
(Millions)
|
|
|
|
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 |
)
* |
For year
ending December 31, 2013
|
|
|
0.1
|
|
*
|
Amortization
of these contracts is anticipated to decrease nonregulated cost of fuel,
natural gas, and purchased power because the fair value of the portion of
the contracts that relates to these periods was negative (or
"out-of-the-money") at the date the respective businesses were
acquired.
|
NOTE 10--LEASES
Integrys Energy
Group leases various property, plant, and equipment. Terms of the
operating leases vary, but generally require Integrys Energy Group to pay
property taxes, insurance premiums, and maintenance costs associated with the
leased property. Many of Integrys Energy Group's leases contain one
of the following options upon the end of the lease term: (a) purchase the
property at the current fair market value or (b) exercise a renewal option, as
set forth in the lease agreement. Rental expense attributable to
operating leases was $17.0 million, $13.6 million, and
$7.0 million in 2008, 2007, and 2006, respectively. Future
minimum rental obligations under non-cancelable operating leases are payable as
follows:
Year
ending December 31
(Millions)
|
|
|
|
|
|
|
|
2009
|
|
$ |
11.1 |
|
2010
|
|
|
9.8 |
|
2011
|
|
|
8.7 |
|
2012
|
|
|
7.2 |
|
2013
|
|
|
6.0 |
|
Later
years
|
|
|
4.6 |
|
Total
payments
|
|
$ |
47.4 |
|
NOTE 11--SHORT-TERM
DEBT AND LINES OF CREDIT
Integrys Energy
Group's short-term borrowings consist of sales of commercial paper, borrowings
under revolving credit facilities, and short-term notes. Amounts
shown are as of December 31:
(Millions,
except percentages)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Commercial
paper outstanding
|
|
$ |
552.9 |
|
|
$ |
308.2 |
|
|
$ |
562.8 |
|
Average
discount rate on outstanding commercial paper
|
|
|
4.78 |
% |
|
|
5.51 |
% |
|
|
5.43 |
% |
Short-term
notes payable outstanding
|
|
$ |
181.1 |
|
|
$ |
10.0 |
|
|
$ |
10.0 |
|
Average
interest rate on short-term notes payable
|
|
|
3.40 |
% |
|
|
5.20 |
% |
|
|
5.30 |
% |
Borrowings
under revolving credit facilities
|
|
$ |
475.0 |
|
|
$ |
150.0 |
|
|
$ |
150.0 |
|
Average
interest rate on revolving credit facilities
|
|
|
2.41 |
% |
|
|
3.56 |
% |
|
|
5.58 |
% |
The commercial
paper at December 31, 2008, had varying maturity dates ranging from
January 2, 2009, through January 30, 2009.
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, lines of credit, and remaining available
capacity as of December 31:
(Millions)
|
Maturity
|
|
2008
|
|
|
2007
|
|
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 (Integrys Energy Group) (1)
(9)
|
05/03/09
|
|
|
250.0 |
|
|
|
- |
|
Revolving
credit facility (WPS) (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 (WPS) (6)
|
05/13/09
|
|
|
10.0 |
|
|
|
10.0 |
|
Short-term
notes payable (Integrys Energy Group)
(8)
|
03/30/09
|
|
|
171.1 |
|
|
|
- |
|
Uncommitted
secured cross-exchange agreement
(Integrys
Energy Services)
(7)
|
|
|
|
- |
|
|
|
25.0 |
|
Total
short-term credit capacity
|
|
|
|
2,371.1 |
|
|
|
1,950.0 |
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Uncollateralized
portion of gross margin
credit
agreement
|
|
|
|
- |
|
|
|
10.8 |
|
Letters
of credit issued inside credit facilities
|
|
|
|
414.6 |
|
|
|
138.9 |
|
Loans
outstanding under credit agreements and notes payable
|
|
|
|
656.1 |
|
|
|
160.0 |
|
Commercial
paper outstanding
|
|
|
|
552.9 |
|
|
|
308.2 |
|
Accrued
interest or original discount on outstanding commercial
paper
|
|
|
|
0.8 |
|
|
|
0.5 |
|
Available
capacity under existing agreements
|
|
|
$ |
746.7 |
|
|
$ |
1,331.6 |
|
(1)
|
Provides
support for Integrys Energy Group's commercial paper borrowing
program.
|
(2)
|
Provides
support for WPS's commercial paper borrowing
program.
|
(3)
|
Provides
support for PGL's 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)
|
This note 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. However, in October 2008,
borrowings under this facility were paid in full as the facility was
terminated. Borrowings under this facility are no longer
available.
|
(8)
|
In
November 2008, Integrys Energy Group entered into a short-term debt
agreement extending through March 2009 to finance its working capital
requirements and for general corporate purposes. The agreement
requires principal and interest payments to be made in
yen. Integrys Energy Services entered into two forward foreign
currency exchange contracts to hedge the variability of the foreign
currency exchange rate risk associated with the principal and fixed rate
interest payments, and Integrys Energy Group expects the principal amount
of repayment at maturity, combined with the settlement amount of the
forward contracts, to be $156.7 million. See Note 2,
"Risk Management
Activities" for more
information.
|
(9)
|
In
November 2008, Integrys Energy Group entered into a revolving credit
agreement to finance its working capital requirements and for general
corporate purposes which extends to May
2009.
|
At
December 31, 2008, Integrys Energy Group and its subsidiaries were in
compliance with all covenants relating to outstanding short-term debt and expect
to be in compliance with all such debt covenants for the foreseeable
future. Integrys Energy Group and certain subsidiaries' revolving
credit agreements contain financial and other covenants, including, but not
limited to a requirement to
maintain a debt to total capitalization ratio not to exceed 65%, excluding
non-recourse debt. Failure to meet these covenants beyond applicable
grace periods could result in accelerated due dates and/or termination of the
agreements. Termination of the agreements could permit lenders to
require immediate repayment of the outstanding borrowings
thereunder.
NOTE 12--LONG-TERM
DEBT
|
|
December 31
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
WPS First
Mortgage Bonds (1)
|
|
|
|
|
|
|
|
|
Series
|
|
Year Due
|
|
|
|
|
|
|
|
|
|
7.125 |
% |
2023
|
|
|
$ |
0.1 |
|
|
$ |
0.1 |
|
WPS Senior
Notes (1)
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
|
|
Year Due
|
|
|
|
|
|
|
|
|
|
|
|
6.125 |
% |
2011
|
|
|
|
150.0 |
|
|
|
150.0 |
|
|
|
4.875 |
% |
2012
|
|
|
|
150.0 |
|
|
|
150.0 |
|
|
|
4.80 |
% |
2013
|
|
|
|
125.0 |
|
|
|
125.0 |
|
|
|
3.95 |
% |
2013
|
|
|
|
22.0 |
|
|
|
22.0 |
|
|
|
6.375 |
% |
2015
|
|
|
|
125.0 |
|
|
|
- |
|
|
|
5.65 |
% |
2017
|
|
|
|
125.0 |
|
|
|
125.0 |
|
|
|
6.08 |
% |
2028
|
|
|
|
50.0 |
|
|
|
50.0 |
|
|
|
5.55 |
% |
2036
|
|
|
|
125.0 |
|
|
|
125.0 |
|
UPPCO First
Mortgage Bonds (3)
|
|
|
|
|
|
|
|
|
|
Series
|
|
Year Due
|
|
|
|
|
|
|
|
|
|
|
|
9.32 |
% |
2021
|
|
|
|
11.7 |
|
|
|
12.6 |
|
PEC Unsecured
Senior Note (4)
|
|
|
|
|
|
|
|
|
|
Series
|
|
Year Due
|
|
|
|
|
|
|
|
|
|
|
|
A, 6.90 |
% |
2011
|
|
|
|
325.0 |
|
|
|
325.0 |
|
|
Fair value
hedge adjustment
|
|
|
|
3.2 |
|
|
|
0.3 |
|
PGL Fixed
First and Refunding Mortgage Bonds (5)
|
|
|
|
|
|
|
|
|
|
Series
|
|
Year Due
|
|
|
|
|
|
|
|
|
|
|
HH, 4.75%
|
|
2030
|
Adjustable
after July 1, 2014
|
|
|
50.0 |
|
|
|
50.0 |
|
|
KK, 5.00%
|
|
2033
|
|
|
|
50.0 |
|
|
|
50.0 |
|
|
LL, 3.75%
|
|
2033
|
Adjustable
after February 1, 2012
|
|
|
50.0 |
|
|
|
50.0 |
|
|
MM-2, 4.00%
|
|
2010
|
|
|
|
50.0 |
|
|
|
50.0 |
|
|
NN-2, 4.625%
|
|
2013
|
|
|
|
75.0 |
|
|
|
75.0 |
|
|
QQ, 4.875%
|
|
2038
|
Adjustable
after November 1, 2018
|
|
|
75.0 |
|
|
|
75.0 |
|
|
RR, 4.30%
|
|
2035
|
Adjustable
after June 1, 2016
|
|
|
50.0 |
|
|
|
50.0 |
|
|
SS,
7.00%
|
|
2013
|
|
|
|
45.0 |
|
|
|
- |
|
|
TT,
8.00%
|
|
2018
|
|
|
|
5.0 |
|
|
|
- |
|
PGL Adjustable
First and Refunding Mortgage Bonds (6)
|
|
|
|
|
|
|
|
|
|
Series
|
|
Year Due
|
|
|
|
|
|
|
|
|
|
|
OO
|
|
2037
|
|
|
|
51.0 |
|
|
|
51.0 |
|
|
PP
|
|
2037
|
|
|
|
- |
|
|
|
51.0 |
|
NSG First
Mortgage Bonds (7)
|
|
|
|
|
|
|
|
|
|
Series
|
|
Year Due
|
|
|
|
|
|
|
|
|
|
|
|
M, 5.00 |
% |
2028
|
|
|
|
28.8 |
|
|
|
29.1 |
|
|
|
N-2, 4.625 |
% |
2013
|
|
|
|
40.0 |
|
|
|
40.0 |
|
|
|
O,
7.00 |
% |
2013
|
|
|
|
6.5 |
|
|
|
- |
|
Integrys
Energy Group Unsecured Senior Notes
|
|
|
|
|
|
|
|
|
|
Series
|
|
Year Due
|
|
|
|
|
|
|
|
|
|
|
|
5.375 |
% |
2012
|
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
7.00 |
% |
2009
|
|
|
|
150.0 |
|
|
|
150.0 |
|
Integrys
Energy Group Unsecured Junior Subordinated Notes (8)
|
|
|
|
|
|
|
|
|
|
Series
|
|
Year Due
|
|
|
|
|
|
|
|
|
|
|
|
6.11 |
% |
2066
|
|
|
|
300.0 |
|
|
|
300.0 |
|
Unsecured term
loan due 2010 – Integrys Energy Group
|
|
|
65.6 |
|
|
|
65.6 |
|
Term loans –
nonrecourse, collateralized by nonregulated assets (9)
|
|
|
6.6 |
|
|
|
10.5 |
|
Integrys
Energy Services' loan
|
|
|
- |
|
|
|
0.1 |
|
Other term
loan (10)
|
|
|
27.0 |
|
|
|
27.0 |
|
Senior secured
note (11)
|
|
|
- |
|
|
|
1.7 |
|
Total
|
|
|
2,437.5 |
|
|
|
2,311.0 |
|
Unamortized
discount and premium on bonds and debt
|
|
|
5.7 |
|
|
|
9.3 |
|
Total
debt
|
|
|
2,443.2 |
|
|
|
2,320.3 |
|
Less current
portion
|
|
|
(155.2 |
) |
|
|
(55.2 |
) |
Total
long-term debt
|
|
$ |
2,288.0 |
|
|
$ |
2,265.1 |
|
(1)
|
WPS's First
Mortgage Bonds and Senior Notes are subject to the terms and conditions of
WPS's First Mortgage Indenture. Under the terms of the Indenture,
substantially all property owned by WPS is pledged as collateral for these
outstanding debt securities. All of these debt securities require
semi-annual payments of interest. WPS Senior Notes become
non-collateralized if WPS retires all of its outstanding First
Mortgage Bonds and no new mortgage indenture is put in
place.
|
(2)
|
In
December 2008, WPS issued $125.0 million of Series 6.375% Senior
Notes due December 1, 2015. The net proceeds from the
issuance of the Senior Notes were used for funding construction costs and
other capital additions, retiring short-term debt related to construction,
and general corporate utility
purposes.
|
|
In
November 2007, WPS issued $125.0 million of Series 5.65% Senior
Notes due November 1, 2017. The net proceeds from the
issuance of the Senior Notes were used for funding construction costs and
other capital additions and general corporate utility
purposes.
|
(3)
|
Under the
terms of UPPCO's First Mortgage Indenture, substantially all property
owned by UPPCO is pledged as collateral for this outstanding debt
series. Interest payments are due semi-annually with a sinking
fund payment of $900,000 due each November 1. The final
sinking fund payment due November 1, 2021, will completely retire the
series.
|
(4)
|
On
March 6, 2007, Integrys Energy Group announced that it had entered
into a First Supplemental Indenture with PEC and The Bank of New York
Trust Company, N.A. The terms of the supplemental indenture
provide that Integrys Energy Group will fully and unconditionally
guarantee, on a senior unsecured basis, PEC's obligations under its
$325.0 million, 6.9% notes due January 15, 2011. See
Note 16, "Guarantees," for more
information related to this
guaranty.
|
(5)
|
In
November 2008, PGL issued $45 million of Series SS, 7.0%, 5-year
First and Refunding Mortgage Bonds due November 1, 2013 and
$5 million of Series TT, 8.0%, 10-year First and Refunding Mortgage
Bonds due November 1, 2018. The net proceeds from the issuance
of these bonds were used to reduce short-term debt and for other general
corporate utility purposes. The first and refunding mortgage
bonds were sold in a private placement and are not registered under the
Securities Act of 1933.
|
|
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 of 3.75% through
January 31, 2012, adjustable after
February 1, 2012. These bonds were subject to a
mandatory tender for purchase and were remarketed on
February 1, 2008. As a result, these bonds 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
December 31, 2008 Consolidated Balance
Sheet.
|
|
PGL's First Mortgage Bonds are
subject to the terms and conditions of PGL's First Mortgage
Indenture dated January 2, 1926, as supplemented. Under
the terms of the Indenture, substantially all property owned by PGL is
pledged as collateral for these outstanding debt
securities.
|
(6)
|
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 2008 was 5.391% 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 variable rate 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. PGL
intends to hold the bonds while it continues to monitor the tax-exempt
market and assess potential remarketing or refinancing
opportunities.
|
|
PGL's First Mortgage Bonds are
subject to the terms and conditions of PGL's First Mortgage
Indenture dated January 2, 1926, as supplemented. Under
the terms of the Indenture, substantially all property owned by PGL is
pledged as collateral for these outstanding debt
securities.
|
|
PGL has
utilized certain First Mortgage Bonds to secure tax exempt interest
rates. The Illinois Finance Authority and the City of Chicago
have issued Tax Exempt Bonds, and the proceeds from the sale of these
bonds were loaned to PGL. In return, PGL issued equal principal
amounts of certain collateralized First Mortgage
Bonds.
|
(7)
|
In
November 2008, NSG issued $6.5 million of Series O, 7.0%, 5-year
First Mortgage Bonds due November 1, 2013. The net proceeds
from the issuance of the First Mortgage Bonds was used for general
corporate utility purposes. The First Mortgage Bonds were sold
in a private placement and are not registered under the Securities
Act of 1933.
|
|
NSG's First Mortgage Bonds are
subject to the terms and conditions of NSG's First Mortgage
Indenture dated April 1, 1955, as supplemented. Under
the terms of the Indenture, substantially all property owned by NSG is
pledged
as collateral for these outstanding debt
securities.
|
|
NSG has
utilized First Mortgage Bonds to secure tax exempt interest
rates. The Illinois Finance Authority has issued Tax Exempt
Bonds, and the proceeds from the sale of these bonds were loaned to
NSG. In return, NSG issued equal principal amounts of certain
collateralized First Mortgage
Bonds.
|
(8)
|
On December 1,
2006, Integrys Energy Group issued $300.0 million of Junior Subordinated
Notes. Due to certain features of these notes, rating agencies
consider them to be hybrid instruments with a combination of debt and
equity characteristics. These notes have a 60-year term and
rank junior to all current and future indebtedness of Integrys Energy
Group, with the exception of trade accounts payable and other accrued
liabilities arising in the ordinary course of
business. Interest is payable semi-annually at the stated rate
of 6.11% for the first ten years, but the rate has been fixed at 6.22% for
this period through the use of forward-starting interest rate
swaps. The interest rate will float for the remainder of the
term. The notes can be prepaid without penalty after the first
ten years. Integrys Energy Group has agreed, however, in a
replacement capital covenant with the holders of Integrys Energy Group's
5.375% Unsecured Senior Notes due December 1, 2012, that it will not
redeem or repurchase the Junior Subordinated Notes on or prior to December
1, 2036 unless such repurchases or redemptions are made from the proceeds
of the sale of specific securities considered by rating agencies to have
equity characteristics equal to or greater than those of the Junior
Subordinated Notes.
|
(9)
|
Borrowings by
Integrys Energy Services under term loans and collateralized by
nonregulated assets totaled $6.6 million at December 31,
2008. The assets of WPS New England Generation, Inc.
and WPS Canada Generation, Inc., subsidiaries of Integrys Energy
Services, collateralize $1.9 million and $4.7 million,
respectively, of the total outstanding amount. Both loans have
semi-annual installment payments, interest rates of 8.75%, maturity dates
in May 2010, and are guaranteed by Integrys Energy Group starting January
2009.
|
(10)
|
In April 2001,
the Schuylkill County Industrial Development Authority issued
$27.0 million of Refunding Tax Exempt Bonds. The proceeds
from the Bonds were loaned to WPS Westwood Generation, LLC, a
subsidiary of Integrys Energy Services. This loan is repaid by
WPS Westwood Generation to Schuylkill County Industrial Development
Authority with monthly interest only payments and has a floating interest
rate that is reset weekly. At December 31, 2008, the
interest rate was 1.38%. The loan is to be repaid by April
2021. Integrys Energy Group agreed to guarantee
WPS Westwood Generation's obligation to provide sufficient funds to
pay the loan and the related obligations and
indemnities.
|
(11)
|
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 sold in July 2008 that was previously owned and leased to
UPPCO for use as their corporate
headquarters.
|
At
December 31, 2008, Integrys Energy Group and each of its subsidiaries were
in compliance with all respective covenants relating to outstanding long-term
debt and expect to be in compliance with all such debt covenants for the
foreseeable future. Integrys Energy Group and certain
subsidiaries' long-term debt
obligations contain covenants related to payment of principal and interest when
due and various financial reporting obligations. Failure to comply
with these covenants could result in an event of default which, if not cured or
waived, could result in the acceleration of outstanding debt
obligations.
A
schedule of all principal debt payment amounts, including bond maturities and
early retirements, for Integrys Energy Group is as follows:
Year
ending December 31
(Millions)
|
|
|
|
2009
|
|
$ |
155.2 |
|
2010
|
|
|
118.8 |
|
2011
|
|
|
479.1 |
|
2012
|
|
|
250.9 |
|
2013
|
|
|
314.4 |
|
Later
years
|
|
|
1,119.1 |
|
Total
payments
|
|
$ |
2,437.5 |
|
NOTE 13--ASSET
RETIREMENT OBLIGATIONS
The utility
segments have asset retirement obligations primarily related to removal of
natural gas distribution pipe (including asbestos and PCBs); asbestos abatement
at certain facilities, office buildings, and service centers; disposal of
PCB-contaminated transformers; and closure of fly-ash landfills at certain
generation facilities. In accordance with SFAS No. 71, the
utilities establish regulatory assets and liabilities to record the differences
between ongoing expense recognition under SFAS No. 143 and FASB
Interpretation No. 47, and the ratemaking practices for retirement costs
authorized by the applicable regulators. Asset retirement obligations
at Integrys Energy Services relate to asbestos abatement at certain generation
facilities.
As
discussed in Note 3, "Discontinued Operations,"
Integrys Energy Services completed the sale of Sunbury in July 2006, which
included the transfer of asset retirement obligations related to
Sunbury.
Changes
to Asset Retirement Obligation Liabilities
The following table
shows changes to Integrys Energy Group's asset retirement obligations through
December 31, 2008.
(Millions)
|
|
Utilities
|
|
|
Integrys
Energy Services
|
|
|
Total
|
|
Asset
retirement obligations at December 31, 2005
|
|
$ |
8.6 |
|
|
$ |
6.3 |
|
|
$ |
14.9 |
|
Accretion
|
|
|
0.5 |
|
|
|
0.2 |
|
|
|
0.7 |
|
Asset
retirement obligations from acquisition of naturalgas operations in
Michigan and Minnesota
|
|
|
0.3 |
|
|
|
- |
|
|
|
0.3 |
|
Asset
retirement obligations transferred in sales
|
|
|
- |
|
|
|
(5.8 |
) |
|
|
(5.8 |
) |
Asset
retirement obligations at December 31, 2006
|
|
|
9.4 |
|
|
|
0.7 |
|
|
|
10.1 |
|
Accretion
|
|
|
6.8 |
|
|
|
- |
|
|
|
6.8 |
|
Asset
retirement obligations from merger with PEC
|
|
|
124.9 |
|
|
|
- |
|
|
|
124.9 |
|
Asset
retirement obligations transferred in sales
|
|
|
(0.2 |
) |
|
|
- |
|
|
|
(0.2 |
) |
Settlements
|
|
|
(1.4 |
) |
|
|
- |
|
|
|
(1.4 |
) |
Asset
retirement obligations at December 31, 2007
|
|
|
139.5 |
|
|
|
0.7 |
|
|
|
140.2 |
|
Accretion
|
|
|
7.8 |
|
|
|
- |
|
|
|
7.8 |
|
Additions and
revisions to estimated cash flows
|
|
|
31.7 |
|
|
|
- |
|
|
|
31.7 |
|
Asset
retirement obligations transferred in sales
|
|
|
(0.1 |
) |
|
|
(0.5 |
) |
|
|
(0.6 |
) |
Asset
retirement obligations at December 31, 2008
|
|
$ |
178.9 |
|
|
$ |
0.2 |
|
|
$ |
179.1 |
|
NOTE 14--INCOME
TAXES
Deferred
Tax Assets and Liabilities
Certain temporary
book to tax differences, for which the offsetting amount is recorded as a
regulatory asset or liability, are presented in the table below as net amounts,
consistent with regulatory treatment. The principal components of our
deferred tax assets and liabilities recognized in the Consolidated Balance
Sheets as of December 31 are as follows:
(Millions)
|
|
2008
|
|
|
2007
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Tax credit
carryforwards
|
|
$ |
96.0 |
|
|
$ |
112.0 |
|
Employee
benefits
|
|
|
88.9 |
|
|
|
60.8 |
|
State capital
and operating loss carryforwards
|
|
|
15.9 |
|
|
|
14.5 |
|
Other
|
|
|
52.2 |
|
|
|
41.9 |
|
Total
deferred tax assets
|
|
|
253.0 |
|
|
|
229.2 |
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
(2.3 |
) |
|
|
(2.3 |
) |
Net deferred
tax assets
|
|
$ |
250.7 |
|
|
$ |
226.9 |
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Plant
related
|
|
$ |
642.1 |
|
|
$ |
568.8 |
|
Regulatory
deferrals
|
|
|
70.3 |
|
|
|
73.2 |
|
Price risk
management
|
|
|
45.6 |
|
|
|
93.2 |
|
Total
deferred tax liabilities
|
|
$ |
758.0 |
|
|
$ |
735.2 |
|
|
|
|
|
|
|
|
|
|
Consolidated
balance sheet presentation:
|
|
|
|
|
|
|
|
|
Current
deferred tax liabilities
|
|
$ |
71.6 |
|
|
$ |
13.9 |
|
Long-term
deferred tax liabilities
|
|
|
435.7 |
|
|
|
494.4 |
|
Net deferred
tax liabilities
|
|
$ |
507.3 |
|
|
$ |
508.3 |
|
Deferred tax credit
carryforwards at December 31, 2008, include $85.2 million of
alternative minimum tax credits related to tax credits available under former
Section 29/45K of the Internal Revenue Code. These alternative
minimum tax credits can be carried forward indefinitely. Carryforward
periods for state capital and operating losses vary. In the majority
of states in which Integrys Energy Group operates the period is 15 years or
more, with the majority beginning to expire in 2013. Valuation
allowances have been established for certain state operating and capital loss
carryforwards due to the uncertainty of the ability to realize the benefit of
these losses in the future.
Federal
Income Tax Expense
The following table
presents a reconciliation of federal income taxes to the provision for income
taxes reported in the Consolidated Statements of Income for the periods ended
December 31. The taxes are calculated by multiplying the
statutory federal income tax rate by book income before federal income
tax.
(Millions,
except for percentages)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
Statutory
federal income tax
|
|
|
35.0 |
% |
|
$ |
61.6 |
|
|
|
35.0 |
% |
|
$ |
93.4 |
|
|
|
35.0 |
% |
|
$ |
68.8 |
|
State income
taxes, net
|
|
|
6.8 |
|
|
|
12.0 |
|
|
|
4.3 |
|
|
|
11.5 |
|
|
|
6.5 |
|
|
|
12.8 |
|
Unrecognized
tax benefits
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.4 |
|
|
|
1.0 |
|
|
|
- |
|
|
|
- |
|
Benefits and
compensation
|
|
|
(2.8 |
) |
|
|
(4.8 |
) |
|
|
(2.5 |
) |
|
|
(6.8 |
) |
|
|
(2.5 |
) |
|
|
(4.8 |
) |
Investment tax
credit
|
|
|
(1.0 |
) |
|
|
(1.8 |
) |
|
|
(0.6 |
) |
|
|
(1.5 |
) |
|
|
(0.4 |
) |
|
|
(0.8 |
) |
Federal tax
credits
|
|
|
(6.0 |
) |
|
|
(10.6 |
) |
|
|
(5.4 |
) |
|
|
(14.3 |
) |
|
|
(15.8 |
) |
|
|
(30.2 |
) |
Other
differences, net
|
|
|
(3.0 |
) |
|
|
(5.4 |
) |
|
|
1.0 |
|
|
|
2.7 |
|
|
|
0.1 |
|
|
|
(0.8 |
) |
Effective
income tax
|
|
|
29.1 |
% |
|
$ |
51.2 |
|
|
|
32.2 |
% |
|
$ |
86.0 |
|
|
|
22.9 |
% |
|
$ |
45.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
$ |
(10.5 |
) |
|
|
|
|
|
$ |
(6.8 |
) |
|
|
|
|
|
$ |
21.1 |
|
State
|
|
|
|
|
|
|
(3.1 |
) |
|
|
|
|
|
|
8.9 |
|
|
|
|
|
|
|
6.2 |
|
Foreign
|
|
|
|
|
|
|
1.9 |
|
|
|
|
|
|
|
4.7 |
|
|
|
|
|
|
|
5.3 |
|
Total
current provision
|
|
|
|
|
|
$ |
(11.7 |
) |
|
|
|
|
|
$ |
6.8 |
|
|
|
|
|
|
$ |
32.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
provision
|
|
|
|
|
|
$ |
63.9 |
|
|
|
|
|
|
$ |
78.2 |
|
|
|
|
|
|
$ |
11.4 |
|
Net operating
loss carryforwards
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
(0.9 |
) |
|
|
|
|
|
|
1.8 |
|
Unrecognized
tax benefits
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
1.0 |
|
|
|
|
|
|
|
- |
|
Interest
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
2.4 |
|
|
|
|
|
|
|
- |
|
Penalties
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
- |
|
Investment tax
credit - amortization
|
|
|
|
|
|
|
(1.5 |
) |
|
|
|
|
|
|
(1.4 |
) |
|
|
|
|
|
|
(0.8 |
) |
Total
income tax expense
|
|
|
|
|
|
$ |
51.2 |
|
|
|
|
|
|
$ |
86.0 |
|
|
|
|
|
|
$ |
45.0 |
|
Foreign income
before taxes was $12.0 million in 2008, $23.3 million in 2007, and
$24.5 million in 2006.
As
the related temporary differences reverse, our regulated utilities are
prospectively refunding taxes to or collecting taxes from customers for which
deferred taxes were recorded in prior years at rates different than current
rates. The net regulatory asset for these and other regulatory tax
effects totaled $13.9 million and $11.3 million as of
December 31, 2008, and 2007, respectively.
Effective
January 1, 2007, Integrys Energy Group records penalties and accrued
interest related to income taxes as a component of income tax
expense. Prior to January 1, 2007, Integrys Energy Group
recorded interest and penalties as components of income before
taxes. Integrys Energy Group recognized interest and penalties of
$0.3 million in 2008, $2.3 million in 2007, and $0.3 million in
2006. Integrys Energy Group had accrued interest and penalties
related to uncertain tax positions of $6.0 million at December 31,
2008, $4.6 million at December 31, 2007, and $0.2 million at
January 1, 2007.
Unrecognized
Tax Benefits
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:
(Millions)
|
|
2008
|
|
|
2007
|
|
Balance at
January 1
|
|
$ |
10.0 |
|
|
$ |
3.7 |
|
Increase
related to tax positions acquired
|
|
|
- |
|
|
|
13.9 |
|
Increase
related to tax positions taken in prior years
|
|
|
23.8 |
|
|
|
0.5 |
|
Decrease
related to tax positions taken in prior years
|
|
|
(7.7 |
) |
|
|
(0.3 |
) |
Decrease
related to tax positions taken in current year
|
|
|
- |
|
|
|
(3.9 |
) |
Decrease
related to settlements
|
|
|
(3.7 |
) |
|
|
(3.6 |
) |
Decrease
related to lapse of statutes
|
|
|
- |
|
|
|
(0.3 |
) |
Balance at
December 31
|
|
$ |
22.4 |
|
|
$ |
10.0 |
|
In
2008, unrecognized tax benefits at Integrys Energy Group increased $12.4
million, primarily related to positions we expect to be taken by the IRS and the
State of Illinois during on-going examinations and appeals.
At
December 31, 2008, unrecognized tax benefits of $4.6 million could
affect Integrys Energy Group's effective tax rate for continuing operations if
recognized in subsequent periods. Also at December 31, 2008,
unrecognized tax benefits of $9.5 million related to discontinued
operations could affect Integrys Energy Group's effective tax rate if recognized
in subsequent periods.
Subsidiaries of
Integrys Energy Group file income tax returns in the United States federal
jurisdiction, in various United States state and local jurisdictions, and in
Canada. Subject to the following major exceptions listed below,
Integrys Energy Group is no longer subject to United States federal, state and
local, or foreign income tax examinations by tax authorities for years prior to
2003.
●
|
Wisconsin
Department of Revenue – WPS has agreed to statute extensions for tax years
covering 2001 and 2002.
|
●
|
New York
State Department of Revenue – Integrys Energy Services has the 2002 tax
year open for amended returns that were filed.
|
●
|
Oregon
Department of Revenue – WPS Power Development has an open examination for
the 2002 tax year.
|
In
2008, Integrys Energy Group closed the following examination:
●
|
Oregon
Department of Revenue – WPS Power Development, Inc. for the tax year
2001.
|
Integrys Energy
Group has the following open examinations:
●
|
IRS – PEC and
consolidated subsidiaries have an open examination for the
September 30, 2004 through December 31, 2006 tax
years.
|
●
|
IRS –
Integrys Energy Group and consolidated subsidiaries has an open
examination for the 2006 and 2007 tax years along with the
February 21, 2007 PEC short year.
|
●
|
Illinois
Department of Revenue – PEC and combined subsidiaries have an open
examination for the September 30, 2003 through December 31, 2006
tax years.
|
●
|
Wisconsin
Department of Revenue – WPS has an open examination for the 2001-2006 tax
years.
|
●
|
New York
State Department of Revenue – WPS Energy Services and WPS Power
Development have open examinations for the 2004 and 2005 tax
years. Also, Integrys Energy Services has the 2002 and 2003 tax
years open for amended returns that were filed.
|
●
|
Oregon
Department of Revenue – WPS Energy Services
has an open examination for the 2005 tax year; WPS Power Development has
an open examination for the 2002, 2003, and 2004 tax
years.
|
In
the next 12 months, it is reasonably possible that Integrys Energy Group and its
subsidiaries will settle their open examinations in multiple taxing
jurisdictions related to tax years prior to 2006, resulting in a decrease
in unrecognized tax benefits of as much as $11.6 million.
NOTE 15--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 distribute and 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 December 31, 2008.
●
|
The electric
utility segment has obligations related to coal supply and transportation
that extend through 2016 and total $598.2 million, obligations of
$1.3 billion for either capacity or energy related to purchased power
that extend through 2027, and obligations for other commodities totaling
$14.3 million, which extend through 2013.
|
●
|
The natural
gas utility segment has obligations related to natural gas supply and
transportation contracts totaling $1.3 billion, some of which extend
through 2028.
|
●
|
Integrys
Energy Services has obligations related to energy and natural gas supply
contracts that extend through 2018 and total $4.0 billion. The
majority of these obligations end by 2011, with obligations totaling
$269.4 million extending beyond 2012.
|
●
|
Integrys
Energy Group also has commitments in the form of purchase orders issued to
various vendors, which totaled $626.8 million and relate to normal
business operations, as well as large construction
projects.
|
Environmental
EPA Section 114
Request
In
2000, WPS 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 WPS's Pulliam and Weston electric generation
stations. WPS filed a response with the EPA in early
2001.
In
May 2002, WPS 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 WPS's life extension program for Pulliam
Units 3-8 and Weston Units 1 and 2. WPS 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 WPS). 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 WPS 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 WPS, 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. WPS 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 WPS 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. WPS has submitted its response. In
December 2008, WP&L received a similar data request and is preparing
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 WPS and if it were determined by a
court that historic projects at WPS's Pulliam and Weston plants required
either a state or federal Clean Air Act permit, WPS 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, an NOV was issued to WPS by the WDNR alleging various
violations of the Pulliam facility's Title V permit, primarily pertaining to
certain recordkeeping and monitoring requirements. WPS 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, WPS understands 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 WPS'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. On
February 12, 2009,
the Court upheld the administrative law judge's final order, which affirmed the
WDNR's actions. The Sierra Club has 30 days to appeal this
decision.
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. WPS
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.
In
December 2008, an NOV was issued to WPS by the WDNR alleging various
violations of the air permits for Weston 4, as well as Weston 1 and
2. The alleged violations include an exceedance of the carbon
monoxide and volatile organic compound limits at Weston 4, exceedances of the
hourly sulfur dioxide limit in ten 3-hour periods during startup/shutdown and
during one separate event at Weston 4, and two that address baghouse operation
at Weston 1 and 2. Corrective actions have been taken. An
enforcement conference was held on January 7, 2009. It is likely
that the WDNR will refer the NOV to the state Justice Department for
enforcement. Management does not believe that this will have a
material adverse impact on the results of operations of Integrys Energy
Group.
Weston Operating
Permits
In
early November 2006, it came to the attention of WPS 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. WPS 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.
In
December 2008, an NOV was issued to WPS by the WDNR that includes alleged
violations of the air permit at Weston 1 and 2 related to the operation of the
baghouses. This NOV is discussed above under "Weston 4 Air
Permit."
Mercury and Interstate Air
Quality Rules
Mercury
The State of
Wisconsin has recently revised the state mercury rule, Chapter NR
446. The revised rule 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 the Best Available Control Technology
rule. WPS estimates capital costs of approximately $26 million
for phase one, which includes estimates for both wholly owned and jointly owned
plants, to achieve the required reductions. The capital costs are
expected to be recovered in future rate cases.
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 United States 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
(CAIR), in 2005. The rule was originally intended to reduce sulfur
dioxide and nitrogen oxide emissions from utility boilers located in 29 states,
including Wisconsin, Michigan, Pennsylvania, and New York. The
CAIR
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 United States Court of Appeals for the District of
Columbia issued a decision vacating the CAIR and the associated Federal
Implementation Plan. The EPA requested a rehearing of the decision by
the Court of Appeals. On December 23, 2008, the Court of Appeals
reversed the CAIR vacatur and thus CAIR has been reinstated. The
court also directed the EPA to address the deficiencies noted in its July 11,
2008 ruling.
Prior to the
court's vacatur decision, WPS was evaluating a number of options, including
using the allowance cap and trade program and/or installing
controls. Following the vacatur, WPS put its allowance trading
activities on hold. Now with the reinstatement of CAIR, WPS has been
re-analyzing its options. WPS does not currently own any annual
nitrogen oxide emission allowances beyond those allocated by the state, but has
taken delivery of a small number of additional ozone season nitrogen oxide
allowances since the reinstatement of CAIR. WPS does not expect any
material impact as a result of the vacatur and subsequent reinstatement of the
CAIR with respect to nitrogen oxide emission allowances. WPS has been
authorized by the PSCW to defer in 2009 purchases of nitrogen oxide emission
allowances, which are estimated to be $20 million.
The reinstatement
of CAIR has also affected the status of the Best Available Retrofit Technology
rule. The WDNR position, as well as the status of WPS units, under
that rule is currently being evaluated.
For planning
purposes, it is still assumed that additional sulfur dioxide and nitrogen oxide
controls will be needed on existing units. The installation of any
controls will need to be scheduled as part of WPS's long-term maintenance plan
for its existing units. As such, controls may need to be installed
before 2015. On a preliminary basis, and assuming controls are still required,
WPS estimates capital costs of $523 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
are being remediated, with costs charged to existing ratepayers at WPS, MGU,
PGL, and NSG. Eight 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. On November 4, 2008, the 11 sites
were transferred to the EPA Superfund Alternative Sites
Program. Integrys Energy Group estimated and accrued for
$639.0 million of future undiscounted investigation and cleanup costs as of
December 31, 2008. Integrys Energy Group recorded a regulatory
asset of $679.9 million, which is net of insurance recoveries received of
$54.4 million, related to the recovery of both unrecovered expenditures and
estimated future expenditures as of December 31, 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 that 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 was completed in August 2008. Operation of the
groundwater treatment unit began in September 2008 and is expected to be up
to full capacity during the first quarter of 2009. 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
Removal 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 plaintiffs filed
a motion for reconsideration. The court reconsidered the stay and on
September 25, 2008, granted PGL's motion for a judgment on the pleadings
dismissing the suit. On October 24, 2008, the plaintiffs appealed the
district court's ruling. The parties have now agreed to terms of a
settlement and upon execution of the settlement documents and implementation of
the settlement terms, this matter will be dismissed. The amount of
the settlement was not material to Integrys Energy Group.
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 WPS, MGU, 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 and mitigation projects 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.
As
part of UPPCO's 2009 Power Supply Cost Recovery Plan filing with the MPSC on
September 30, 2008, UPPCO filed for recovery of the remaining deferred
replacement power costs related to the Silver Lake
incident. Through December 31, 2008, UPPCO deferred replacement
power costs of $3.2 million, non-fuel operating and maintenance costs of
$0.8 million, and estimated related carrying costs of
$0.6 million. UPPCO offset all of the non-fuel operating and
maintenance costs and related carrying costs, as well as a portion of the
replacement power costs, with a settlement of $2.2 million received from
third parties involved in the Silver Lake incident. The
remaining replacement power cost requested for recovery from Michigan retail
customers is $2.4 million.
The reconstruction
of the Silver Lake dam was completed in November 2008. This
included a new concrete spillway and a new earthen dam with monitoring
instrumentation. The FERC and Board of Consultants were on site and
certified the completion. UPPCO has submitted a refill and operations
plan for FERC approval. Once the refill plan is approved by the FERC,
the reservoir can be refilled. It is expected to take approximately
two years to return the reservoir to normal operation. Cost recovery
for rebuilding the Silver Lake facility will be the subject of a future
rate proceeding.
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 future state, regional, or federal
greenhouse gas regulatory programs. 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. Recently there have been efforts initiated
to develop state and regional greenhouse gas programs. There are also
renewed efforts to create federal legislation to limit carbon dioxide emissions
and to create national renewable portfolio standards. A risk exists
that such legislation will increase the cost of energy. 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.
Escanaba Water Permit
Issues
UPPCO operates the
Escanaba Generating Station (EGS) under contract with its owner, the City of
Escanaba (City). While the City owns the water permits for EGS,
UPPCO's personnel provide testing and certification of waste water
discharges. In September 2008, UPPCO became aware of potential
water
discharge permit
violations regarding reported pH and oil and grease readings at
EGS. Corrective actions have been implemented at the plant,
notification has been provided to the City, and UPPCO has self reported the
potential permit violations to the Michigan Department of Environmental Quality
(MDEQ). A final report was filed by UPPCO with the MDEQ on
November 25, 2008, and a copy was sent to the City.
Depending upon the
results of the MDEQ's review of the information provided by UPPCO, the MDEQ, in
consultation with the Michigan Attorney General Office, may perform any of the
following:
●
|
assess a fine
and/ or seek criminal charges against UPPCO,
|
●
|
assess a fine
and /or seek criminal charges against the former manager who certified the
reports,
and
/or
|
●
|
close out the
investigation.
|
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.
In
March 28, 2006 orders, the ICC adopted a settlement agreement related to fiscal
years 2001 through 2004 natural gas costs. Under certain provisions
of the settlement agreement, PEC agreed to provide the Illinois Attorney General
(AG) and Chicago up to $30.0 million for conservation and weatherization
programs for which PGL and NSG may not seek rate recovery. PGL and
NSG also agreed to implement a reconnection program for customers identified as
hardship cases on the date of the agreement. Finally, PGL and NSG
agreed to internal audits and an external audit of natural gas supply
practices.
With respect to the
conservation and weatherization funding, as of December 31, 2008,
$15.2 million remained unpaid, of which $5.2 million was included in
other current liabilities, and $10.0 million was included in other
long-term liabilities. Under the reconnection program, PGL and NSG
reconnected customers who participated in the program and took other steps
required by the agreement. The AG and Chicago have indicated that
they believe the terms of the reconnection program are broader than what PGL and
NSG implemented. Management continues to believe that it has fully
complied with the reconnection program obligations of the settlement
agreement.
Concerning the
audit requirements, two of the five required annual internal audits have been
completed. An auditor hired by the ICC conducted the external audit,
and the report was filed on April 10, 2008. The report included
32 recommendations, none of which quantified natural gas costs that the auditor
believed should not be recovered by PGL and NSG. By March 31,
2009, PGL and NSG expect to complete their responses to the 25 recommendations
they agreed to implement in a June 30, 2008 response to the audit. The ICC staff
has not filed 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. For
PGL and NSG, the ICC issued its orders on
January 16, 2008. The natural gas cost disallowance for PGL
was $20.5 million, and included 2005 hub revenues and an adjustment for
transportation customers' bank (storage) natural gas. The natural gas
cost disallowance for NSG was $1.0 million, and also related to a bank
natural gas adjustment. The customer refunds from the 2005 Gas Charge
reconciliation cases were
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 2008.
The fiscal 2006 Gas
Charge reconciliation cases were initiated on November 21,
2006. The ICC staff and interveners (the AG, the Citizens Utility
Board, and Chicago, filing jointly) each filed testimony recommending
disallowances for PGL and NSG for a bank natural gas adjustment similar to that
addressed in the fiscal 2005 Gas Charge reconciliation cases, which PGL and NSG
did not contest. In addition, the interveners recommended a
disallowance for PGL of $13.9 million (reduced to $11.0 million in their
brief) associated with PGL's provision of interstate hub
services. The ICC staff does not support the interveners’ proposal,
and PGL does not believe the proposal has merit. A hearing for the
PGL and NSG cases was held on December 11, 2008. For PGL, briefing is
scheduled to conclude February 27, 2009, after which the administrative law
judge will prepare a proposed order. For NSG, there were no contested
issues, and the parties filed an agreed form of order in
January 2009.
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 disgorgement 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 and PEC responded in opposition of this
motion. On October 31, 2008, PEC filed a motion for summary
judgment. At the plaintiffs' request, their reply to PEC's class
certification response was postponed pending a decision on PEC's summary
judgment motion.
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 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, issued a final report on
August 14, 2008, containing 65 recommendations and an additional
placeholder for a possible recommendation. The ICC conducted a public
hearing on October 8, 2008, at which time the auditor presented the report
to the ICC for its acceptance. PGL submitted a draft plan to the ICC
staff in which PGL accepted most of the recommendations and offered an
alternative proposal for the remainder. At a subsequent meeting and
in concurrence with the ICC staff and the consultant, PGL has revised its
implementation plan for some of the recommendations. The auditor's
agreement with the ICC provides for a two-year monitoring phase to verify PGL's
compliance with the prospective implementation plan, which began in
January 2009.
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, extensions
of distribution natural gas mains, and failing to return related customer
deposits. In November 2008, Integrys Energy Group, PEC, PGL, and NSG
(the companies) entered into a settlement agreement with the
plaintiffs. The settlement amount was not material to the
companies. The plaintiffs filed a motion to dismiss their appeal,
which was granted by the appellate court on December 5, 2008. This
matter is now resolved.
NOTE 16--GUARANTEES
As
part of normal business, Integrys Energy Group and its subsidiaries enter into
various guarantees providing financial or performance assurance to third parties
on behalf of certain subsidiaries. These guarantees are entered into
primarily to support or enhance the creditworthiness otherwise attributed to a
subsidiary on a stand-alone basis, thereby facilitating the extension of
sufficient credit to accomplish the subsidiaries' intended commercial
purposes.
Most of the
guarantees issued by Integrys Energy Group include inter-company guarantees
between parents and their subsidiaries, which are eliminated in consolidation,
and guarantees of the subsidiaries' own performance. As such, these
guarantees are excluded from the recognition and measurement requirements of
FASB Interpretation No. 45.
The following table
shows outstanding guarantees at Integrys Energy Group at December 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration
|
(Millions)
|
|
|
Total
Amounts
Committed
at
December 31,
2008
|
|
|
|
Less
Than
1
Year
|
|
|
|
1
to 3
Years
|
|
|
|
4
to 5
Years
|
|
|
|
Over
5
Years
|
|
Guarantees
supporting commodity transactions of subsidiaries (1)
|
|
$ |
2,156.5 |
|
|
$ |
1,607.1 |
|
|
$ |
448.9 |
|
|
$ |
19.2 |
|
|
$ |
81.3 |
|
Guarantees of
subsidiary debt and revolving line of credit (2)
|
|
|
928.1 |
|
|
|
175.0 |
|
|
|
725.0 |
|
|
|
- |
|
|
|
28.1 |
|
Standby
letters of credit (3)
|
|
|
403.6 |
|
|
|
389.7 |
|
|
|
13.9 |
|
|
|
- |
|
|
|
- |
|
Surety bonds
(4)
|
|
|
3.5 |
|
|
|
3.5 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
guarantees (5)
|
|
|
3.8 |
|
|
|
1.5 |
|
|
|
2.3 |
|
|
|
- |
|
|
|
- |
|
Total
guarantees
|
|
$ |
3,495.5 |
|
|
$ |
2,176.8 |
|
|
$ |
1,190.1 |
|
|
$ |
19.2 |
|
|
$ |
109.4 |
|
(1)
|
Consists of
parental guarantees of $1,981.3 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;
$88.4 million and $81.8 million, respectively, related to
natural gas supply at MERC and MGU, of an authorized $150.0 million
and $100.0 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 Consolidated
Balance Sheets.
|
(2)
|
Consists of
agreements to fully and unconditionally guarantee (1) PEC's
$400.0 million revolving line of credit; (2) on a senior unsecured
basis, PEC's obligations under its $325.0 million, 6.90% notes due
January 15, 2011; (3) Integrys Energy Services' $175.0 million
credit agreement used to finance natural gas in storage and margin
requirements related to natural gas and electric contracts traded on the
NYMEX and the Intercontinental Exchange,
as well as for general corporate purposes; and (4) $28.1 million
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
Consolidated Balance Sheets.
|
(3)
|
Comprised of
$398.4 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, MGU, MERC,
and PEC. These amounts are not reflected in the 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
Consolidated Balance Sheets.
|
(5)
|
Includes (1) a
liability related to WPS's agreement to indemnify Dominion for certain
costs arising from the resolution of design basis documentation issues
incurred prior to Kewaunee nuclear power plant's scheduled maintenance
period in 2009. As of December 31, 2008, WPS had paid
$7.4 million to Dominion related to this guarantee, reducing the
liability to $1.5 million. WPS expects to make payments
for the entire remaining liability amount over the duration of the
guarantee; and (2) a $2.3 million indemnification provided by
Integrys Energy Services related to the sale of Niagara. This
indemnification related to potential environmental contamination from ash
disposal at this facility. Integrys Energy Services expects
that the likelihood of required performance under this guarantee is
remote.
|
Integrys Energy
Group has provided total parental guarantees of $2,584.3 million on behalf
of Integrys Energy Services. Integrys Energy Group's exposure under
these guarantees related to open transactions at December 31, 2008 was
approximately $837 million. At December 31, 2008,
management was authorized to issue corporate guarantees up to an aggregate
amount of $2.95 billion to support the business operations of Integrys Energy
Services. The following outstanding amounts were subject to this
limit:
(Millions)
|
|
December 31,
2008
|
|
Guarantees
supporting commodity transactions of subsidiaries
|
|
$ |
1,976.3 |
|
Guarantees of
subsidiary debt
|
|
|
176.1 |
|
Standby
letters of credit
|
|
|
395.9 |
|
Surety
bonds
|
|
|
1.5 |
|
Total
guarantees subject to $2.95 billion limit
|
|
$ |
2,549.8 |
|
NOTE 17--EMPLOYEE
BENEFIT PLANS
Defined
Benefit Plans
On
September 30, 2008, the PEC Service Annuity System was merged into the PEC
Retirement Plan, which was then renamed the Integrys Energy Group Retirement
Plan. On December 31, 2008, the WPS Retirement Plan was merged
into the Integrys Energy Group Retirement Plan. The two plan mergers
had no effect on the level of plan benefits provided to participants or the
management of plan assets. Integrys Energy Group and its subsidiaries
now maintain one non-contributory, qualified pension plan covering substantially
all employees, as well as several unfunded nonqualified retirement
plans. In addition, Integrys Energy Group and its subsidiaries offer
multiple other postretirement benefit plans to employees. The benefits for a
portion of these plans are funded through irrevocable trusts, as allowed for
income tax purposes.
Integrys Energy
Group also currently offers medical, dental, and life insurance benefits to
employees and their dependents. Integrys Energy Group expenses the
costs of these benefits for active employees as incurred.
During the third
quarter of 2007, Integrys Energy Group made a series of changes to certain of
its retirement benefit plans. Specifically, the changes
included:
●
|
Closure of
the defined benefit pension plans to non-union new hires, effective
January 1, 2008;
|
●
|
A freeze in
defined benefit pension service accruals for non-union employees,
effective January 1, 2013;
|
●
|
A freeze in
compensation amounts used for determining defined benefit pension amounts
for non-union employees, effective January 1,
2018;
|
●
|
Revised
eligibility requirements for retiree medical benefits for employees hired
on or after January 1, 2008, and the introduction of an annual
premium reduction credit for employees eligible to retire after
December 31, 2012; and
|
●
|
Closure of
the retiree dental and life benefit programs to all new hires, effective
January 1, 2008, and elimination of these benefits for any existing
employees who are not eligible to retire before December 31,
2012.
|
As
a result of the changes described above, Integrys Energy Group remeasured
certain of its pension and other postretirement benefit obligations as of August
1, 2007. The curtailment gains and losses recognized as a result of
the plan design changes were not significant and are included in the table
below.
A
second remeasurement occurred on October 1, 2007, because the ratification of a
union contract resulted in changes to a postretirement medical
plan. The changes did not result in a curtailment.
Effective May 1,
2008, and July 1, 2008, the defined benefit pension plans were closed to new
union hires at PGL and NSG, respectively. Effective April 19, 2009,
the defined benefit pension plans will be closed to new union hires at
UPPCO.
The following
tables provide a reconciliation of the changes in the plans' benefit obligations
and fair value of assets during 2008 and 2007.
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Reconciliation
of benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation at
January 1
|
|
$ |
1,210.2 |
|
|
$ |
787.3 |
|
|
$ |
408.6 |
|
|
$ |
292.1 |
|
Service
cost
|
|
|
38.4 |
|
|
|
39.7 |
|
|
|
15.7 |
|
|
|
15.4 |
|
Interest
cost
|
|
|
76.2 |
|
|
|
70.4 |
|
|
|
26.4 |
|
|
|
24.5 |
|
Plan
amendments
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(21.4 |
) |
Plan
curtailments
|
|
|
- |
|
|
|
(0.7 |
) |
|
|
- |
|
|
|
(0.6 |
) |
Plan
acquisitions – PEC
|
|
|
- |
|
|
|
498.1 |
|
|
|
- |
|
|
|
156.7 |
|
Actuarial
(gain) loss,
net
|
|
|
12.1 |
|
|
|
(96.0 |
) |
|
|
(12.5 |
) |
|
|
(43.0 |
) |
Participant
contributions
|
|
|
- |
|
|
|
- |
|
|
|
1.8 |
|
|
|
6.0 |
|
Benefit
payments
|
|
|
(106.4 |
) |
|
|
(88.6 |
) |
|
|
(22.1 |
) |
|
|
(22.8 |
) |
Federal
subsidy on benefits paid
|
|
|
- |
|
|
|
- |
|
|
|
2.0 |
|
|
|
1.7 |
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
12.8 |
|
|
|
- |
|
Obligation at
December 31
|
|
$ |
1,230.5 |
|
|
$ |
1,210.2 |
|
|
$ |
432.7 |
|
|
$ |
408.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Reconciliation
of fair value of plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of
plan assets at January 1
|
|
$ |
1,219.5 |
|
|
$ |
674.0 |
|
|
$ |
248.3 |
|
|
$ |
212.8 |
|
Actual return
on plan assets
|
|
|
(310.6 |
) |
|
|
68.9 |
|
|
|
(55.6 |
) |
|
|
14.5 |
|
Employer
contributions
|
|
|
27.8 |
|
|
|
27.4 |
|
|
|
13.0 |
|
|
|
7.9 |
|
Participant
contributions
|
|
|
- |
|
|
|
- |
|
|
|
1.7 |
|
|
|
6.0 |
|
Plan
acquisitions – MGU and MERC
|
|
|
- |
|
|
|
0.2 |
|
|
|
- |
|
|
|
- |
|
Plan
acquisitions – PEC
|
|
|
- |
|
|
|
537.6 |
|
|
|
- |
|
|
|
29.7 |
|
Benefit
payments
|
|
|
(106.4 |
) |
|
|
(88.6 |
) |
|
|
(22.1 |
) |
|
|
(22.6 |
) |
Other
|
|
|
- |
|
|
|
- |
|
|
|
5.8 |
|
|
|
- |
|
Fair value of
plan assets at December 31
|
|
$ |
830.3 |
|
|
$ |
1,219.5 |
|
|
$ |
191.1 |
|
|
$ |
248.3 |
|
Amounts recognized
in Integrys Energy Group's Consolidated Balance Sheets at December 31
related to the funded status of the benefit plans consisted of:
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Noncurrent
assets
|
|
$ |
- |
|
|
$ |
98.7 |
|
|
$ |
- |
|
|
$ |
2.7 |
|
Current
liabilities
|
|
|
5.3 |
|
|
|
4.4 |
|
|
|
- |
|
|
|
0.1 |
|
Noncurrent
liabilities
|
|
|
394.9 |
|
|
|
85.0 |
|
|
|
241.6 |
|
|
|
162.9 |
|
Net liability
(asset)
|
|
$ |
400.2 |
|
|
$ |
(9.3 |
) |
|
$ |
241.6 |
|
|
$ |
160.3 |
|
The accumulated
benefit obligation for all defined benefit pension plans was $1.1 billion
at both December 31, 2008, and December 31, 2007. Information
for pension plans with an accumulated benefit obligation in excess of plan
assets is presented in the following table.
|
|
December 31,
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
Projected
benefit obligation
|
|
$ |
1,230.5 |
|
|
$ |
276.0 |
|
Accumulated
benefit obligation
|
|
|
1,103.5 |
|
|
|
240.4 |
|
Fair value of
plan assets
|
|
|
830.3 |
|
|
|
193.3 |
|
The following table
shows the amounts that had not yet been recognized in Integrys Energy Group's
net periodic benefit cost as of December 31. Amounts related to
the nonregulated entities are included in accumulated other comprehensive income
(loss), while amounts related to the utilities are recorded as regulatory assets
or liabilities.
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Accumulated
other comprehensive income (loss) (pre-tax)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial
loss
|
|
$ |
25.7 |
|
|
$ |
3.5 |
|
|
$ |
0.7 |
|
|
$ |
0.9 |
|
Prior service
costs (credits)
|
|
|
1.2 |
|
|
|
1.5 |
|
|
|
(2.2 |
) |
|
|
(2.6 |
) |
Total
|
|
$ |
26.9 |
|
|
$ |
5.0 |
|
|
$ |
(1.5 |
) |
|
$ |
(1.7 |
) |
Net
regulatory assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial
loss (gain)
|
|
$ |
384.3 |
|
|
$ |
(16.5 |
) |
|
$ |
56.1 |
|
|
$ |
(10.4 |
) |
Prior service
costs (credits)
|
|
|
22.9 |
|
|
|
27.7 |
|
|
|
(26.9 |
) |
|
|
(30.3 |
) |
Transition
obligation
|
|
|
- |
|
|
|
- |
|
|
|
1.1 |
|
|
|
1.3 |
|
Merger
related regulatory adjustment
|
|
|
91.5 |
|
|
|
89.4 |
|
|
|
42.0 |
|
|
|
44.6 |
|
Total
|
|
$ |
498.7 |
|
|
$ |
100.6 |
|
|
$ |
72.3 |
|
|
$ |
5.2 |
|
Integrys Energy
Group recorded the PEC pension assets acquired and liabilities assumed at fair
value at the February 2007 acquisition date. However, PGL and NSG continue
to have rates set based on their historical basis of accounting, including
amortizations of prior service cost (credits), actuarial losses, and transition
obligations, which were recognized in the Consolidated Financial Statements
as regulatory assets at the purchase date. The amount reflected in net
periodic benefit cost in the table below is based on the amount used
in the rate-setting process for PGL and NSG. The difference in the
basis of accounting is shown as a merger related regulatory adjustment in the
table above.
The estimated net
losses and prior service costs for defined benefit pension plans that will be
amortized as a component of net periodic benefit cost during 2009 are
$0.4 million and $5.0 million, respectively. The estimated
net losses, prior service costs, and transition obligation for other
postretirement benefit plans that will be amortized as a component of net
periodic benefit cost during 2009 are $1.2 million, $3.8 million, and
$0.3 million, respectively. The estimated merger related
regulatory adjustment that will be amortized as a component of net periodic
benefit cost for defined pension and other postretirement benefit plans during
2009 is $4.8 million and $2.0 million, respectively.
The following table
presents the components of the consolidated net periodic benefit cost for the
plans:
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Net
periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
38.4 |
|
|
$ |
39.7 |
|
|
$ |
24.2 |
|
|
$ |
15.7 |
|
|
$ |
15.4 |
|
|
$ |
7.1 |
|
Interest
cost
|
|
|
76.2 |
|
|
|
70.4 |
|
|
|
42.1 |
|
|
|
26.4 |
|
|
|
24.5 |
|
|
|
17.3 |
|
Expected
return on plan assets
|
|
|
(101.0 |
) |
|
|
(89.4 |
) |
|
|
(44.2 |
) |
|
|
(19.0 |
) |
|
|
(17.5 |
) |
|
|
(13.5 |
) |
Plan
curtailments (gain) loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(0.1 |
) |
|
|
- |
|
Amortization
of transition obligation
|
|
|
- |
|
|
|
- |
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
0.4 |
|
|
|
0.4 |
|
Amortization
of prior service cost (credit)
|
|
|
5.1 |
|
|
|
5.1 |
|
|
|
5.1 |
|
|
|
(3.8 |
) |
|
|
(2.6 |
) |
|
|
(2.2 |
) |
Amortization
of net loss
|
|
|
0.7 |
|
|
|
4.8 |
|
|
|
9.8 |
|
|
|
- |
|
|
|
1.8 |
|
|
|
5.3 |
|
Amortization
of merger related regulatory adjustment
|
|
|
9.6 |
|
|
|
14.2 |
|
|
|
- |
|
|
|
2.1 |
|
|
|
0.8 |
|
|
|
- |
|
Net periodic
benefit cost
|
|
$ |
29.0 |
|
|
$ |
44.8 |
|
|
$ |
37.2 |
|
|
$ |
21.7 |
|
|
$ |
22.7 |
|
|
$ |
14.4 |
|
Assumptions
– Pension and Other Postretirement Benefit Plans
The
weighted-average assumptions used at December 31 to determine benefit
obligations for the plans were as follows:
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Discount
rate
|
|
|
6.45 |
% |
|
|
6.40 |
% |
|
|
6.48 |
% |
|
|
6.40 |
% |
Rate of
compensation increase
|
|
|
4.26 |
% |
|
|
4.98 |
% |
|
|
N/A |
|
|
|
N/A |
|
Assumed
medical cost trend rate (under age 65)
|
|
|
N/A |
|
|
|
N/A |
|
|
|
9.0 |
% |
|
|
10.0 |
% |
Ultimate
trend rate
|
|
|
N/A |
|
|
|
N/A |
|
|
|
5.0 |
% |
|
|
5.0 |
% |
Ultimate
trend rate reached in
|
|
|
N/A |
|
|
|
N/A |
|
|
2013
|
|
|
2013
|
|
Assumed
medical cost trend rate (over age 65)
|
|
|
N/A |
|
|
|
N/A |
|
|
|
9.5 |
% |
|
|
10.5 |
% |
Ultimate
trend rate
|
|
|
N/A |
|
|
|
N/A |
|
|
|
5.5 |
% |
|
|
5.5 |
% |
Ultimate
trend rate reached in
|
|
|
N/A |
|
|
|
N/A |
|
|
2013
|
|
|
2013
|
|
Assumed
dental cost trend rate
|
|
|
N/A |
|
|
|
N/A |
|
|
|
5.0 |
% |
|
|
5.0 |
% |
The
weighted-average assumptions used to determine net periodic benefit cost for the
plans were as follows for the years ended December 31:
|
|
Pension
Benefits
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Discount
rate
|
|
|
6.40 |
% |
|
|
5.88 |
% |
|
|
5.65 |
% |
Expected
return on assets
|
|
|
8.50 |
% |
|
|
8.50 |
% |
|
|
8.50 |
% |
Rate of
compensation increase
|
|
|
4.27 |
% |
|
|
5.50 |
% |
|
|
5.50 |
% |
|
|
Other
Benefits
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Discount
rate
|
|
|
6.40 |
% |
|
|
5.79 |
% |
|
|
5.65 |
% |
Expected
return on assets
|
|
|
8.50 |
% |
|
|
8.50 |
% |
|
|
8.50 |
% |
Assumed
medical cost trend rate (under age 65)
|
|
|
10.0 |
% |
|
|
8.0 |
% |
|
|
9.0 |
% |
Ultimate
trend rate
|
|
|
5.0 |
% |
|
|
5.0 |
% |
|
|
5.0 |
% |
Ultimate
trend rate reached in
|
|
2013
|
|
|
2010
|
|
|
2010
|
|
Assumed
medical cost trend rate (over age 65)
|
|
|
10.5 |
% |
|
|
8.0%-10.0 |
% |
|
|
11.0 |
% |
Ultimate
trend rate
|
|
|
5.5 |
% |
|
|
5.0%-6.5 |
% |
|
|
6.5 |
% |
Ultimate
trend rate reached in
|
|
2013
|
|
|
|
2010-2011 |
|
|
2011
|
|
Assumed
dental cost trend rate
|
|
|
5.0 |
% |
|
|
5.0 |
% |
|
|
5.0 |
% |
Integrys Energy
Group establishes its expected return on asset assumption based on consideration
of historical and projected asset class returns, as well as the target
allocations of the benefit trust portfolios.
Assumed health care
cost trend rates have a significant effect on the amounts reported by Integrys
Energy Group for the health care plans. For the year ended
December 31, 2008, a one-percentage-point change in assumed health care
cost trend rates would have had the following effects:
|
|
One-Percentage-Point
|
|
(Millions)
|
|
Increase
|
|
|
Decrease
|
|
Effect on
total of service and interest cost components of net periodic
postretirement health care benefit cost
|
|
$ |
6.7 |
|
|
$ |
(5.4 |
) |
Effect on the
health care component of the accumulated
postretirement benefit obligation
|
|
|
55.5 |
|
|
|
(46.0 |
) |
Pension
and Other Postretirement Benefits Plan Assets
The
weighted-average asset allocations of the plans at December 31, 2008, and
2007, were as follows:
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
Percentage
of Plan Assets at December 31,
|
|
|
Percentage
of Plan Assets at December 31,
|
|
Asset
category
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Equity
securities
|
|
|
56 |
% |
|
|
63 |
% |
|
|
50 |
% |
|
|
61 |
% |
Debt
securities
|
|
|
40 |
% |
|
|
33 |
% |
|
|
50 |
% |
|
|
39 |
% |
Real
estate
|
|
|
4 |
% |
|
|
4 |
% |
|
|
- |
% |
|
|
- |
% |
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
The target asset
allocations for pension plans are as follows: 64% equity securities, 33% debt
securities, and 3% real estate. The target asset allocations for
other postretirement plans in place prior to the PEC merger for the above listed
asset classes are as follows: 65% equity securities and 35% debt
securities. The target asset allocations for other postretirement
plans acquired in the PEC merger are as follows: 60% equity securities and 40%
debt securities. The Board of Directors has established the Employee
Benefits Administrator Committee to manage the operations and administration of
all benefit plans and trusts. The Committee periodically reviews the
asset allocation, and the portfolio is rebalanced when necessary.
Cash
Flows Related to Pension and Other Postretirement Benefit Plans
Integrys Energy
Group's funding policy is to contribute at least the minimum amounts that are
required to be funded under the Employee Retirement Income Security Act, but not
more than the maximum amounts that are currently deductible for income tax
purposes. Integrys Energy Group expects to contribute
$26.1 million to pension plans and $28.3 million to other
postretirement benefit plans in 2009.
The following table
shows the payments, reflecting expected future service, which Integrys Energy
Group expects to make for pension and other postretirement
benefits. In addition, the table shows the expected federal
subsidies, provided under the Medicare Prescription Drug, Improvement and
Modernization Act of 2003, which will partially offset other postretirement
benefits.
(Millions)
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
|
Federal
Subsidies
|
|
2009
|
|
$ |
81.1 |
|
|
$ |
25.2 |
|
|
$ |
(1.9 |
) |
2010
|
|
|
91.4 |
|
|
|
27.4 |
|
|
|
(2.1 |
) |
2011
|
|
|
92.6 |
|
|
|
29.6 |
|
|
|
(2.3 |
) |
2012
|
|
|
99.3 |
|
|
|
31.6 |
|
|
|
(2.4 |
) |
2013
|
|
|
104.7 |
|
|
|
33.1 |
|
|
|
(2.5 |
) |
2014-2018
|
|
|
613.4 |
|
|
|
191.8 |
|
|
|
(14.7 |
) |
Defined
Contribution Benefit Plans
Integrys Energy
Group maintains 401(k) Savings Plans for substantially all full-time
employees. Integrys Energy Group matches a percentage of employee
contributions through an ESOP contribution up to certain
limits. Certain union employees receive a contribution to their ESOP
account regardless of their participation in the 401(k) Savings
Plan. The ESOP held 2.9 million shares of Integrys Energy
Group's common stock (market value of $124.7 million) at December 31,
2008. Certain employees participate in a discretionary profit-sharing
contribution and/or cash match. Non-union employees hired after
January 1, 2008, are no longer eligible to participate in the defined
benefit pension plan. Instead, these employees participate in a
defined contribution pension plan, in which Integrys contributes certain amounts
to an employee's account based on the employee's wages, age, and years of
service. Total costs incurred under all of these plans were
$17.4 million in 2008, $14.4 million in 2007, and $9.4 million in
2006.
Integrys Energy
Group maintains deferred compensation plans that enable certain key employees
and non-employee directors to defer a portion of their compensation or fees on a
pre-tax basis. Non-employee directors can defer up to 100% of their
director fees. Compensation is generally deferred in the form of
cash, indexed to certain investment options, or Integrys Energy Group common
stock with deemed dividends paid on the common stock automatically
reinvested. Effective March 31, 2008, the investment option of
indexing to Integrys Energy Group's return on equity was closed to new
contributions.
The deferred
compensation arrangements for which distributions are made solely in Integrys
Energy Group's common stock are classified as an equity
instrument. Changes in the fair value of the deferred compensation
obligation are not recognized. The deferred compensation obligation
associated with this arrangement was $23.7 million at December 31,
2008, and $24.6 million at December 31, 2007.
The portion of the
deferred compensation obligation associated with deferrals that allow for
distribution in cash is classified as a liability on the Consolidated Balance
Sheets and adjusted, with a charge or credit to expense, to reflect changes in
the fair value of the deferred compensation obligation. The
obligation classified within other long-term liabilities was $28.2 million
at December 31, 2008, and $30.2 million at December 31,
2007. The costs incurred under this arrangement were
$1.9 million in 2008, $2.3 million in 2007, and $3.0 million in
2006.
The deferred
compensation programs are partially funded through shares of Integrys Energy
Group's common stock that is held in a rabbi trust. The common stock
held in the rabbi trust is classified as a reduction of equity in a manner
similar to accounting for treasury stock. The total cost of Integrys
Energy Group's common stock held in the rabbi trust was $16.3 million at
December 31, 2008, and $14.7 million at December 31,
2007.
NOTE 18--PREFERRED
STOCK OF SUBSIDIARY
Integrys Energy
Group's subsidiary, WPS, has 1,000,000 authorized shares of preferred stock with
no mandatory redemption and a $100 par value. Outstanding shares were
as follows at December 31:
(Millions,
except share amounts)
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Series
|
|
|
Shares
Outstanding
|
|
|
Carrying
Value
|
|
|
Shares
Outstanding
|
|
|
Carrying
Value
|
|
|
5.00 |
% |
|
|
130,695 |
|
|
$ |
13.1 |
|
|
|
130,714 |
|
|
$ |
13.1 |
|
|
5.04 |
% |
|
|
29,898 |
|
|
|
3.0 |
|
|
|
29,898 |
|
|
|
3.0 |
|
|
5.08 |
% |
|
|
49,923 |
|
|
|
5.0 |
|
|
|
49,923 |
|
|
|
5.0 |
|
|
6.76 |
% |
|
|
150,000 |
|
|
|
15.0 |
|
|
|
150,000 |
|
|
|
15.0 |
|
|
6.88 |
% |
|
|
150,000 |
|
|
|
15.0 |
|
|
|
150,000 |
|
|
|
15.0 |
|
Total
|
|
|
|
510,516 |
|
|
$ |
51.1 |
|
|
|
510,535 |
|
|
$ |
51.1 |
|
All shares of
preferred stock of all series are of equal rank except as to dividend rates and
redemption terms. Payment of dividends from any earned surplus or
other available surplus is not restricted by the terms of any indenture or other
undertaking by WPS. Each series of outstanding preferred stock is
redeemable in whole or in part at WPS's option at any time on 30 days' notice at
the respective redemption prices. WPS may not redeem less than all,
nor purchase any, of its preferred stock during the existence of any dividend
default.
In
the event of WPS's dissolution or liquidation, the holders of preferred stock
are entitled to receive (a) the par value of their preferred stock out of
the corporate assets other than profits before any of such assets are paid or
distributed to the holders of common stock and (b) the amount of dividends
accumulated and unpaid on their preferred stock out of the surplus or net
profits before any of such surplus or net profits are paid to the holders of
common stock. Thereafter, the remainder of the corporate assets,
surplus, and net profits shall be paid to the holders of common
stock.
The preferred stock
has no pre-emptive, subscription, or conversion rights, and has no sinking fund
provisions.
NOTE 19--COMMON
EQUITY
Integrys Energy
Group's reconciliation of shares outstanding at December 31, 2008, and
2007, was as follows:
|
|
2008
|
|
|
2007
|
|
|
|
Shares
|
|
|
Average
Cost
|
|
|
Shares
|
|
|
Average
Cost
|
|
Common stock
issued
|
|
|
76,430,037 |
|
|
|
|
|
|
76,434,095 |
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury
shares *
|
|
|
7,000 |
|
|
$ |
25.19 |
|
|
|
10,000 |
|
|
$ |
25.19 |
|
Deferred
compensation rabbi trust
|
|
|
367,238 |
|
|
|
44.36 |
|
|
|
338,522 |
|
|
|
43.48 |
|
Restricted
stock
|
|
|
63,031 |
|
|
|
54.81 |
|
|
|
93,339 |
|
|
|
54.76 |
|
Total shares
outstanding
|
|
|
75,992,768 |
|
|
|
|
|
|
|
75,992,234 |
|
|
|
|
|
* Relates
to Integrys Energy Group's Non-Employee Directors Stock Option
Plan. All options under this plan have a ten-year life, but
may not be exercised until one year after the date of grant.
During 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. Prior to 2008, Integrys
Energy Group issued new shares of common stock under these
plans. These stock issuances increased equity $45.7 million and
$25.0 million in 2007 and 2006, respectively.
Pursuant to the PEC
merger, shareholders of PEC received 0.825 shares of Integrys Energy Group (then
known as WPS Resources) common stock, $1 par value, for each share of PEC common
stock, no par value, that they held immediately prior to the
merger. This resulted in an increase in common stock outstanding of
31,938,491 shares and increased equity $1.6 billion as of December 31,
2007.
Rollforward
of Integrys Energy Group's Common Stock Shares Issued
|
|
|
|
Balance at
December 31, 2005
|
|
|
40,089,898 |
|
Shares
issued
|
|
|
|
|
Stock
Investment Plan
|
|
|
406,878 |
|
Stock-based
compensation
|
|
|
134,392 |
|
Common
stock offering
|
|
|
2,700,000 |
|
Rabbi
trust shares
|
|
|
56,292 |
|
Balance at
December 31, 2006
|
|
|
43,387,460 |
|
Shares
issued
|
|
|
|
|
Merger
with PEC
|
|
|
31,938,491 |
|
Stock
Investment Plan
|
|
|
529,935 |
|
Stock-based
compensation
|
|
|
444,041 |
|
Restricted
stock, net
|
|
|
93,339 |
|
Rabbi
trust shares
|
|
|
40,829 |
|
Balance at
December 31, 2007
|
|
|
76,434,095 |
|
Restricted
stock shares cancelled
|
|
|
(4,058 |
) |
Balance
at December 31, 2008
|
|
|
76,430,037 |
|
Dividends
Integrys Energy
Group is a holding company and our ability to pay dividends is largely dependent
upon the ability of our subsidiaries to pay dividends to us. In the
2009 rate order, the PSCW has restricted our subsidiary, WPS, to paying normal
dividends on its common stock of no more than 103% of the previous year's common
stock dividend. The PSCW also requires WPS to maintain a financial
capital structure (i.e., the percentages by which each of common stock equity,
preferred stock equity and debt constitute the total capital invested in a
utility), which has a common equity range of 49% to 54%. The PSCW has
also established a targeted financial common equity ratio at 51% that results in
a regulatory common equity ratio of 53.41%. The primary difference
between the financial and the regulatory common equity ratio relates to certain
off-balance sheet obligations, primarily purchased power obligations, considered
by the PSCW in establishing the financial common equity target. Each
of these limitations may be modified by a future order of the
PSCW. Our right to receive dividends on the common stock of WPS is
also subject to the prior rights of WPS's preferred shareholders and to
provisions in WPS's restated articles of incorporation which limit the amount of
common stock dividends which WPS may pay if its common stock and common
stock surplus accounts constitute less than 25% of its total
capitalization. These limitations are not expected to limit any
dividend payments in the foreseeable future. At
December 31, 2008, these limitations amounted to $1.2 million out of
WPS's total retained earnings of $372.0 million. Consequently, at
December 31, 2008, WPS had $370.8 million of retained earnings available
for the payment of dividends.
UPPCO's indentures
relating to its first mortgage bonds contain certain limitations on the payment
of cash dividends on its common stock, which is held solely by Integrys Energy
Group. At December 31, 2008, these restrictions amounted to $30.5
million out of UPPCO's total retained earnings of $49.1
million. Consequently, at December 31, 2008, UPPCO had
$18.6 million of retained earnings available for the payment of common
stock cash dividends.
NSG's long-term
debt obligations contain provisions and covenants restricting the payment of
cash dividends and the purchase or redemption of capital stock. At
December 31, 2008, these restrictions amounted to $6.9 million out of NSG's
total retained earnings of $77.4 million. Consequently, at
December 31, 2008, NSG had $70.5 million of retained earnings available for the
payment of dividends.
For the year ended
December 31, 2008, PEC, PGL, MGU, MERC, and Integrys Energy Services did
not make any dividend payments.
At
December 31, 2008, Integrys Energy Group had $585.8 million of
retained earnings available for the payment of dividends. Except for
the subsidiary restrictions described above, Integrys Energy Group does not have
any dividend restrictions.
Earnings
Per Share
Basic earnings per
share are computed by dividing income available for common shareholders by the
weighted average number of 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
2008 excluded 2.2 million stock options that were outstanding at December 31,
2008, which had an anti-dilutive effect. The calculation of diluted
earnings per share for 2007 and 2006 excludes some insignificant stock options
that had an anti-dilutive effect. The following table reconciles the
computation of basic and diluted earnings per share:
(Millions,
except per share amounts)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Income from
continuing operations
|
|
$ |
124.8 |
|
|
$ |
181.1 |
|
|
$ |
151.6 |
|
Discontinued
operations, net of tax
|
|
|
4.7 |
|
|
|
73.3 |
|
|
|
7.3 |
|
Preferred
stock dividends of subsidiary
|
|
|
(3.1 |
) |
|
|
(3.1 |
) |
|
|
(3.1 |
) |
Income
available for common shareholders
|
|
$ |
126.4 |
|
|
$ |
251.3 |
|
|
$ |
155.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares
of common stock – basic
|
|
|
76.7 |
|
|
|
71.6 |
|
|
|
42.3 |
|
Effect of
dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
0.3 |
|
|
|
0.2 |
|
|
|
0.1 |
|
Average shares
of common stock – diluted
|
|
|
77.0 |
|
|
|
71.8 |
|
|
|
42.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per
common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.65 |
|
|
$ |
3.51 |
|
|
$ |
3.68 |
|
Diluted
|
|
|
1.64 |
|
|
|
3.50 |
|
|
|
3.67 |
|
NOTE 20--STOCK-BASED
COMPENSATION
In
May 2007, Integrys Energy Group's shareholders approved the 2007 Omnibus
Incentive Compensation Plan (2007 Omnibus Plan). Under the provisions
of the 2007 Omnibus Plan, the number of shares of stock that may be issued in
satisfaction of plan awards may not exceed 3,500,000, and no more than 1,500,000
shares of stock can be granted as performance shares or restricted
stock. No additional awards will be issued under prior plans,
although the plans will continue to exist for purposes of the existing
outstanding stock-based compensation. At December 31, 2008,
stock options, performance stock rights, restricted shares and restricted share
units, and stock appreciation rights were outstanding under the various
plans.
Stock
Options
Under the
provisions of the 2007 Omnibus Plan, no single employee who is the chief
executive officer of Integrys Energy Group or any of the other four highest
compensated officers of Integrys Energy Group and its subsidiaries can be
granted options for more than 1,000,000 shares during any calendar
year. No stock options will have a term longer than ten
years. The exercise price of each stock option is equal to the fair
market value of the stock on the date the stock option is
granted. Generally, one-fourth of the stock options granted vest and
become exercisable each year on the anniversary of the grant date.
The fair values of
stock option awards granted were estimated using a binomial lattice
model. The expected term of option awards is calculated based on
historical exercise behavior and represents the period of time that options
granted are expected to be outstanding. The risk-free interest rate
is based on the 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
values per stock option along with the assumptions incorporated into the
valuation models:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Weighted-average
fair value per option
|
|
$ |
4.52 |
|
|
$ |
7.80 |
|
|
$ |
6.04 |
|
Expected
term
|
|
7
years
|
|
|
7
years
|
|
|
6
years
|
|
Risk-free
interest rate
|
|
|
3.40 |
% |
|
|
4.65 |
% |
|
|
4.42 |
% |
Expected
dividend yield
|
|
|
5.00 |
% |
|
|
4.50 |
% |
|
|
4.90 |
% |
Expected
volatility
|
|
|
17 |
% |
|
|
17 |
% |
|
|
17 |
% |
Total pre-tax
compensation cost recognized for stock options during the years ended
December 31, 2008, 2007, and 2006, was $2.6 million,
$1.8 million, and $1.8 million, respectively. The total
compensation cost capitalized in 2008, 2007, and 2006 was not
significant. As of December 31, 2008, $1.7 million of total
pre-tax compensation cost related to unvested and outstanding stock options was
expected to be recognized over a weighted-average period of 2.6
years.
Cash received from
option exercises during the years ended December 31, 2008, 2007, and 2006,
was $3.3 million, $14.0 million, and $1.9 million,
respectively. The tax benefit realized from these option exercises
was not significant in 2008, $2.3 million in 2007, and not significant in
2006.
A
summary of stock option activity for the year ended December 31, 2008, and
the number of outstanding and exercisable stock options at December 31,
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
|
|
|
75,142 |
|
|
|
43.46 |
|
|
|
|
|
$ |
0.2 |
|
Forfeited
|
|
|
125,122 |
|
|
|
51.37 |
|
|
|
|
|
|
- |
|
Outstanding
at December 31, 2008
|
|
|
2,700,139 |
|
|
$ |
47.90 |
|
|
|
6.46 |
|
|
$ |
3.1 |
|
Exercisable
at December 31, 2008
|
|
|
1,709,887 |
|
|
$ |
46.05 |
|
|
|
5.21 |
|
|
$ |
3.1 |
|
During the years
ended December 31, 2007 and 2006, the intrinsic value of options exercised
totaled $4.4 million and $0.9 million, respectively.
The aggregate
intrinsic value for outstanding and exercisable options in the above table
represents the total pre-tax intrinsic value that would have been received by
the option holders had they all exercised their options at December 31,
2008. This is calculated as the difference between Integrys Energy
Group's closing stock price on December 31, 2008, and the option exercise
price, multiplied by the number of in-the-money stock options.
Performance
Stock Rights
Performance stock
rights vest over a three-year performance period and are paid out in shares of
Integrys Energy Group's common stock. No single employee who is the
chief executive officer of Integrys Energy Group or any of the other four
highest compensated officers of Integrys Energy Group and its subsidiaries can
receive a payout in excess of 250,000 performance shares during any calendar
year. The number of shares paid out is calculated by multiplying a
performance percentage by the number of outstanding stock rights at the
completion of the vesting period. The performance percentage is based
on the total shareholder return of Integrys Energy Group's common stock relative
to the total shareholder return of a peer group of companies. The
payout may range from 0% to 200% of target.
The fair values of
performance stock rights granted were 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.
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Expected
term
|
|
3
years
|
|
|
3
years
|
|
|
3
years
|
|
Risk-free
interest rate
|
|
|
2.18 |
% |
|
|
4.71 |
% |
|
|
4.74 |
% |
Expected
dividend yield
|
|
|
5.50 |
% |
|
|
4.50 |
% |
|
|
4.90 |
% |
Expected
volatility
|
|
|
17.3 |
% |
|
|
14.5 |
% |
|
|
14.4 |
% |
Pre-tax
compensation cost recorded for performance stock rights for the years ended
December 31, 2008, 2007, and 2006 was $5.2 million, $3.5 million,
and $2.8 million, respectively. The total compensation cost
capitalized during these same years was not significant. As of
December 31, 2008, $2.4 million of total pre-tax compensation cost
related to unvested and outstanding performance stock rights was expected to be
recognized over a weighted-average period of 1.8 years.
A
summary of the activity related to performance stock rights for the year ended
December 31, 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
|
|
|
25,742 |
|
|
|
51.67 |
|
Outstanding
at December 31, 2008
|
|
|
263,109 |
|
|
$ |
50.13 |
|
No
performance shares were distributed during the year ended December 31, 2008
as a result of the performance percentage being below the target payout level
for those rights that were vested and eligible to be distributed in
2008.
Restricted
Shares and Restricted Share Units
In
2008, 2007, and 2006, a portion of the long-term incentive was awarded in the
form of restricted shares and restricted share units. Most of these
awards have a four-year vesting period, with 25% of each award vesting on each
anniversary of the grant date. During the vesting period, restricted
share recipients have voting rights and are entitled to dividends in the same
manner as other common shareholders, whereas restricted share unit recipients
receive dividend credits and do not have voting rights. Restricted
shares and restricted share units have a value equal to the fair market value of
the shares on the grant date. Total pre-tax compensation cost
recognized for these awards was $4.2 million and $1.4 million during
the years ended December 31, 2008, and 2007, respectively, and was not
significant for the year ended December 31, 2006. The total
compensation cost capitalized in 2008, 2007, and 2006 was not significant. As of
December 31, 2008, $6.2 million of total pre-tax compensation cost
related to these awards was expected to be recognized over a weighted-average
period of 2.7 years.
A
summary of the activity related to restricted share and restricted share unit
awards for the year ended December 31, 2008, is presented
below:
|
|
Restricted
Shares and Restricted Share Units
|
|
|
Weighted-Average
Grant
Date Fair Value
|
|
Outstanding
at December 31, 2007
|
|
|
101,145 |
|
|
$ |
54.70 |
|
Granted
|
|
|
172,815 |
|
|
|
48.36 |
|
Vested
|
|
|
29,988 |
|
|
|
54.36 |
|
Forfeited
|
|
|
15,357 |
|
|
|
51.09 |
|
Outstanding
at December 31, 2008
|
|
|
228,615 |
|
|
$ |
50.19 |
|
Stock
Appreciation Rights
On
February 21, 2007, all of PEC's then outstanding stock appreciation rights were
converted into 14,021 Integrys Energy Group stock appreciation
rights. The fair value of the stock appreciation rights is estimated
with a Black-Scholes model and was not significant at December 31,
2008. No stock appreciation rights were issued during the year ended
December 31, 2008.
NOTE 21--FAIR
VALUE
Fair Value
Measurements
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 December 31, 2008, categorized by level within the fair value
hierarchy.
(Millions)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk
management assets
|
|
$ |
703.0 |
|
|
$ |
1,520.7 |
|
|
$ |
755.4 |
|
|
$ |
2,979.1 |
|
Inventory
hedged by fair value
hedges
|
|
|
- |
|
|
|
27.4 |
|
|
|
- |
|
|
|
27.4 |
|
Other
|
|
|
0.5 |
|
|
|
- |
|
|
|
- |
|
|
|
0.5 |
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk
management liabilities
|
|
|
820.5 |
|
|
|
1,557.2 |
|
|
|
573.4 |
|
|
|
2,951.1 |
|
Long-term
debt hedged by fair value hedge
|
|
|
- |
|
|
|
53.2 |
|
|
|
- |
|
|
|
53.2 |
|
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 Integrys Energy Group'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 2, "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 futures prices with an
adjustment related to location differences, 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 observable information, 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 following table sets forth a
reconciliation of changes in the fair value of items categorized as Level 3
measurements:
(Millions)
|
|
Year Ended December 31,
2008
|
|
Balance at the beginning of
period
|
|
$ |
44.6 |
|
Net realized and unrealized
loss included in
earnings
|
|
|
(44.7 |
) |
Net unrealized loss recorded as
regulatory assets or liabilities
|
|
|
(8.7 |
) |
Net unrealized loss included in
other comprehensive income (loss)
|
|
|
(35.0 |
) |
Net purchases and
settlements
|
|
|
2.5 |
|
Net transfers in/out of Level
3
|
|
|
223.3 |
|
Balance at December 31,
2008
|
|
$ |
182.0 |
|
|
|
|
|
|
Net unrealized loss included in
earnings related to instruments still held at December 31,
2008
|
|
$ |
(55.3 |
) |
Derivatives are transferred in or out of
Level 3 primarily due to changes in the source of data used to
construct price curves as a
result of changes in market liquidity.
Unrealized gains and losses included in
earnings related to Integrys Energy Services' risk management assets and
liabilities are recorded through nonregulated revenue on the Consolidated
Statements of Income
(Loss). 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.
Fair Value of
Financial Instruments
The following table
shows the financial instruments included on the Consolidated Balance Sheets of
Integrys Energy Group that are not recorded at fair value.
|
|
2008
|
|
|
2007
|
|
(Millions)
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$ |
2,443.2 |
|
|
$ |
2,276.0 |
|
|
$ |
2,320.3 |
|
|
$ |
2,334.2 |
|
Preferred
stock
|
|
|
51.1 |
|
|
|
46.0 |
|
|
|
51.1 |
|
|
|
49.6 |
|
The fair values of
long-term debt and preferred stock are estimated based on the quoted market
price for the same or similar issues or on the current rates offered to Integrys
Energy Group for debt of the same remaining maturity.
Due to the short
maturity of cash and cash equivalents, accounts receivable, accounts payable,
notes payable, and outstanding commercial paper, the carrying amount
approximates fair value.
NOTE 22--MISCELLANEOUS
INCOME
Integrys Energy
Group's total miscellaneous income was as follows at
December 31:
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Equity
earnings on investments
|
|
$ |
67.8 |
|
|
$ |
34.6 |
|
|
$ |
19.9 |
|
Interest and
dividend income
|
|
|
5.0 |
|
|
|
12.7 |
|
|
|
9.5 |
|
Weston 4 ATC
interconnection agreement interest
|
|
|
2.5 |
|
|
|
3.9 |
|
|
|
1.0 |
|
Equity
AFUDC
|
|
|
5.5 |
|
|
|
0.9 |
|
|
|
0.6 |
|
Gain (loss)
on sale of property
|
|
|
4.8 |
|
|
|
1.9 |
|
|
|
(0.3 |
) |
(Loss) gain
on investments
|
|
|
(0.3 |
) |
|
|
3.9 |
|
|
|
11.7 |
|
Gain (loss)
on foreign currency exchange
|
|
|
0.9 |
|
|
|
2.4 |
|
|
|
(1.5 |
) |
Key executive
life insurance income
|
|
|
2.7 |
|
|
|
2.2 |
|
|
|
2.1 |
|
Other
|
|
|
(1.6 |
) |
|
|
1.6 |
|
|
|
(0.2 |
) |
Total
miscellaneous income
|
|
$ |
87.3 |
|
|
$ |
64.1 |
|
|
$ |
42.8 |
|
NOTE 23--REGULATORY
ENVIRONMENT
Wisconsin
2009 Rate
Case
On
December 30, 2008, the PSCW issued a final written order for WPS authorizing no
annual rate increase for retail electric rates as compared with the fuel
surcharge adjusted rates authorized on July 4, 2008, or a $48.0 million increase
for retail electric rates as compared with the rates authorized on January 16,
2008. The PSCW required a $3.0 million decrease in retail natural gas
rates.
On
September 2, 2008, WPS and the Citizens Utility Board filed an agreement to
implement a decoupling mechanism as a four-year pilot program, which would allow
WPS to adjust rates to recover or refund the difference between the actual and
authorized margin impacts of variations in volumes. The PSCW approved
this decoupling mechanism, with certain conditions, in the December 30, 2008
final order discussed above. The decoupling conditions included an
annual $12.0 million cap for electric service and an annual $4.0 million cap for
natural gas service. On January 16, 2009, WPS requested rehearing to
remove or increase the decoupling caps. On February 24, 2009, in a
written order, the PSCW increased the caps to $14.0 million for electric
service and $8.0 million for natural gas service.
2008 Rate
Case
On
January 15, 2008, the PSCW issued a final written order for WPS 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 February 11, 2008, WPS filed an
application with the PSCW to adjust its 2008 rates for increased fuel and
purchased power costs. The application requested 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 fuel surcharge
increase of $29.7 million on March 20, 2008, and an additional final
fuel surcharge increase of $18.3 million, effective July 4,
2008.
On
September 30, 2008, the PSCW reopened the 2008 fuel surcharge to review
forecasted fuel costs, as WPS's current and anticipated annual fuel costs were
below those projected in the fuel surcharge. As a result of the lower
fuel and purchased power costs, WPS's rates were subject to refund, from
September 30, 2008, through December 31, 2008. On February 9,
2009, WPS filed a request with the PSCW to refund approximately $5 million
dollars of 2008 fuel costs to Wisconsin electric retail customers. This refund
was accrued at December 31, 2008, and is subject to review by the
PSCW.
2007 Rate
Case
On
January 11, 2007, the PSCW issued a final written order for WPS 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 new rates reflect a 10.9% return on
common equity. The PSCW approved a common equity ratio of 57.4% in
WPS's 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.
2006 Rate
Case
On
December 22, 2005, the PSCW issued a final written order authorizing a
retail electric rate increase of $79.9 million (10.1%) and a retail natural
gas increase of $7.2 million (1.1%), effective January 1,
2006. The 2006 rates reflect an 11.0% return on common
equity. The PSCW also approved a common equity ratio of 59.7% in its
regulatory capital structure. The 2006 retail electric rate increase
was required primarily because of higher fuel and purchased power costs
(including costs associated with the Fox Energy Center power purchase
agreement), and also for costs related to the construction of Weston 4, higher
transmission expenses, and recovery of a portion of the costs related to the
2005 Kewaunee outage. Partially offsetting the items discussed above,
retail electric rates were lowered to reflect a refund to customers of the
proceeds received from the liquidation of the nonqualified decommissioning trust
fund as a result of the sale of Kewaunee (discussed below). The 2006
retail natural gas rate increase was driven by infrastructure improvements
necessary to ensure the reliability of the natural gas distribution
system.
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. WPS incurred $8.9 million of incremental pre-tax
non-fuel operating and maintenance expenditures through January 14, 2008,
to repair and return Weston 3 to service. WPS has insurance in place
that covered all non-fuel operating and maintenance expenditures, less a
$1.0 million deductible. WPS incurred a total of
$26.6 million of incremental pre-tax fuel and purchased power costs during
the 14-week outage WPS was granted approval from the PSCW to defer
the replacement fuel and purchased power costs for the Wisconsin retail portion
of these costs retroactive to the date of the lightning strike. On
December 30, 2008, the PSCW granted WPS recovery of $17.0 million of the
requested $19.6 million of Weston 3 replacement fuel and power costs from the
Wisconsin retail jurisdiction, over a six-year period and without carrying
costs.
It
is anticipated that WPS will recover a similar portion of replacement purchased
power costs from the Michigan retail jurisdiction through the annual power
supply cost recovery mechanism.
PEC
Merger
The PSCW approved
the merger with PEC as of February 16, 2007. The merger approval
order contains the following conditions:
●
|
WPS will not
have a base rate increase for natural gas or electric service prior to
January 1, 2009. WPS was allowed to adjust rates for changes in
purchased power costs as well as fuel costs related to electric generation
due to changes in the NYMEX natural gas futures prices, coal prices, and
transportation costs for coal.
|
●
|
WPS was
required to seek approval for the formation of a service company within
120 days of the closing of the merger. All required regulatory
approvals were received and IBS became operational on January 1,
2008.
|
●
|
WPS will not
recover merger related transaction costs. Recovery of merger
related transition costs in 2009 and later years will be limited to the
verified synergy savings in those years.
|
●
|
WPS will hold
ratepayers harmless from any increase in interest and preferred stock
costs attributable to nonutility activities, provided that the authorized
capital structure is consistent with the authorized
costs.
|
●
|
WPS will not
pay dividends to Integrys Energy Group in an amount greater than 103% of
the prior year's dividend.
|
Kewaunee
WPS received
$127.1 million of proceeds from the liquidation of the Kewaunee
nonqualified decommissioning trust fund in 2005, which was refunded to customers
in the following manner:
●
|
The PSCW
ruled that WPS's Wisconsin customers were entitled to be refunded
approximately 85% of the proceeds over a two-year period beginning on
January 1, 2006.
|
●
|
The MPSC
ruled that WPS's Michigan customers were entitled to be refunded
approximately 2% of the proceeds over a 60-month period, beginning in the
third quarter of 2005. Subsequently, the MPSC issued an order
authorizing WPS to amortize the approximately $2 million remaining
balance of the refund simultaneously with the amortization of
approximately $2 million of the 2005 power supply under collections
from January 2007 through July 2010.
|
●
|
The FERC
ruled that WPS's wholesale customers were entitled to be refunded the
remaining 13% of the proceeds. A refund of approximately
$3 million was made to one customer in the second quarter of 2006,
which was offset by approximately $1 million related to both the loss
WPS recorded on the sale of Kewaunee and costs incurred related to the
2005 Kewaunee outage. Pursuant to the FERC order settlement
received on August 14, 2007, WPS completed lump-sum payments to the
remaining FERC customers of approximately $16 million (including
interest), representing their contributions to the nonqualified
decommissioning trust fund during the period in which they received
service from WPS. The settlement would also require these FERC
customers to make two separate lump-sum payments to WPS with respect to
the loss from the sale of Kewaunee and the 2005 Kewaunee power
outage. Payments made to WPS total approximately
$1 million and $8 million, respectively, and were netted against
the $16 million refund due to these
customers.
|
The PSCW disallowed
recovery of 50% of the 2005 loss on the sale of Kewaunee. The entire
loss had previously been approved for deferral, resulting in WPS writing off
$6.1 million in 2005 of the regulatory asset previously recorded.
On
February 20, 2005, Kewaunee was temporarily removed from service after a
potential design weakness was identified in its auxiliary feedwater
system. In WPS's 2006 rate case, the PSCW determined that it was
reasonable for WPS to recover all deferred costs related to the 2005 Kewaunee
forced outage over a five-year period, beginning on January 1,
2006. At December 31, 2008, $19.1 million was left to be
collected from ratepayers and remained recorded as a regulatory asset related to
this outage.
Michigan
2009 MGU Rate
Case
On
January 13, 2009, the MPSC issued a final written order approving a settlement
agreement authorizing a retail natural gas rate increase of $6.0 million,
effective January 14, 2009. The rate increase was required due
primarily to general inflation, low margin revenue growth, increased costs of
customer service functions, and increased costs to environmentally remediate
former manufactured gas plants.
2008 WPS Rate
Case
On
December 4, 2007, the MPSC issued a final written order authorizing WPS a
retail electric rate increase of $0.6 million, effective December 5,
2007. WPS'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 approved a common equity ratio of 56.4% in WPS's
regulatory capital structure.
Illinois
2010 Rate
Case
On
February 25, 2009, PGL and NSG each filed a request with the ICC to increase
natural gas distribution rates for 2010. PGL's requested increase is
$161.9 million and NSG's requested increase is $22.0 million. The proposed rate
increase is required to allow PGL and NSG to recover their forecasted 2010 cost
of service and to earn a reasonable return on their investment. Each
filing includes a proposed 12% rate of return on common equity and a common
equity ratio of 56% in its regulatory capital structure. The filing
includes a proposed overall return of 9.34% and 9.18% for PGL and NSG,
respectively. PGL also requested approval of a mechanism for cost
recovery, outside of the rate case, of an accelerated cast iron main replacement
program.
The Illinois rate
case process requires receipt of a written order from the ICC within 11 months
from the filing date, which would be January 2010.
2008 Rate
Case
On
February 5, 2008, the ICC issued a final written order authorizing PGL a
retail natural gas distribution rate increase of $71.2 million and
requiring a retail natural gas rate decrease of $0.2 million for
NSG. The new rates for PGL reflected a 10.19% return on common equity
and a common equity ratio of 56% in its regulatory capital
structure. The new rates for NSG reflected a 9.99% return on common
equity and a common equity ratio of 56% in its regulatory capital
structure. The order included approval of a VBA decoupling mechanism,
effective March 1, 2008, 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 margin impact of variations in
volumes. Legislation was introduced at the Illinois state legislature
to roll back decoupling but never reached a vote. This legislation
may be introduced again. Integrys Energy Group actively supports the
ICC's decision to approve this rate setting mechanism. The order also
approved an Enhanced Efficiency Program, 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 rehearing of
their rate orders, and all but one such request from interveners. The
ICC only granted rehearing on a request to change the way PGL allocates
interstate hub services revenues among customer groups. On
April 28, 2008, PGL and NSG filed a Notice of Appeal with the Illinois
appellate court regarding the ICC's order denying rehearing on certain
issues. On April 30, 2008, the ICC submitted a letter to the
Illinois appellate 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 interveners each separately filed
a Notice of Appeal. On June 6, 2008, several parties filed a
stipulation to resolve the way PGL allocates interstate hub services revenues
among customer groups. On July 30, 2008, the ICC approved the
stipulation, as well as a rehearing order. The approved stipulation
took effect on November 1, 2008. Subsequent to the approval of
the stipulation, PGL and NSG filed appeals in the second district of the
Illinois appellate court and after that, four other parties filed appeals in the
first district of the Illinois appellate court. On September 29,
2008, the ICC asked the Illinois Supreme Court to vacate the second district's
transfer of the appeal to the first district, and the Illinois Supreme Court
denied the ICC's motion. On appeal, parties may only raise issues on
which they sought rehearing at the ICC. These issues include the VBA
decoupling mechanism. No decision on the appeal is expected until at
least the second half of 2009.
PEC
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 natural gas storage inventory in
connection with closing the merger.
|
The Conditions of
Approval also included the following commitments with respect to the recently
completed rate cases of PGL and NSG:
●
|
inclusion of
merger synergy savings of $11.4 million at PGL and $1.6 million
at NSG in the proposed test year,
|
●
|
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 of costs at PGL and $4.2 million of costs at NSG
over 5 years),
|
●
|
proposing a
combined $7.5 million Enhanced Efficiency Program at PGL and NSG,
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. The order provides authority for PGL and NSG to recover from
ratepayers up to an additional $9.9 million of combined merger costs in a
future rate case, for a maximum potential recovery of
$44.9 million. PGL and NSG must demonstrate in the future that
the merger synergy savings realized have exceeded merger costs. As of
December 31, 2008, the regulatory asset balance representing merger costs
to be recovered totaled $10.7 million at PGL and $1.5 million at
NSG.
Minnesota
On
July 31, 2008, MERC filed a request with the MPUC 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. On
September 11, 2008, the MPUC issued an order approving an interim rate
increase of $19.8 million, effective October 1, 2008. This
interim rate increase is subject to refund pending the final rate order, which
is 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 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
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 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 WPS and UPPCO. It is anticipated that most of the SECA
charges incurred or refunds received by WPS 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 WPS or UPPCO.
NOTE 24--SEGMENTS
OF BUSINESS
SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," requires
that companies disclose segment information based on how management makes
decisions about allocating resources to segments and measuring their
performance.
Integrys Energy
Group manages its reportable segments separately due to their different
operating and regulatory environments. At December 31, 2008,
Integrys Energy Group reported four segments, which are described
below.
●
|
The electric
utility segment includes the regulated electric utility operations of WPS
and UPPCO.
|
●
|
The natural
gas utility segment includes the regulated natural gas utility operations
of WPS, MGU, 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 PEC
merger date), along with any nonutility activities at WPS, MGU, 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 WRPC
are also included in the Holding Company and Other
segment.
|
The nonregulated
oil and natural gas production segment includes the results of PEP, which were
reported as discontinued operations in 2007. PEP engaged in the
acquisition, development and production of oil and natural gas reserves in
selected onshore basins in the United States through direct ownership in oil,
natural gas, and mineral leases. Integrys Energy Group completed the
sale of PEP in September 2007.
The tables below
present information for the respective years pertaining to our operations
segmented by lines of business.
|
|
Regulated Utilities
|
|
|
Nonutility
and
Nonregulated Operations
|
|
|
|
|
|
|
|
2008
(Millions)
|
|
Electric
Utility
(1)
|
|
|
Natural
Gas
Utility
(1)
|
|
|
Total
Utility
(1)
|
|
|
Integrys
Energy Services
|
|
|
Holding
Company and Other (2)
|
|
|
Reconciling
Eliminations
|
|
|
Integrys
Energy Group Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$ |
1,284.6 |
|
|
$ |
3,025.3 |
|
|
$ |
4,309.9 |
|
|
$ |
9,726.5 |
|
|
$ |
11.4 |
|
|
$ |
- |
|
|
$ |
14,047.8 |
|
Intersegment
revenues
|
|
|
44.3 |
|
|
|
0.6 |
|
|
|
44.9 |
|
|
|
8.7 |
|
|
|
0.6 |
|
|
|
(54.2 |
) |
|
|
- |
|
Goodwill
impairment loss
|
|
|
- |
|
|
|
6.5 |
|
|
|
6.5 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6.5 |
|
Depreciation
and
amortization
expense
|
|
|
84.3 |
|
|
|
108.3 |
|
|
|
192.6 |
|
|
|
14.5 |
|
|
|
14.3 |
|
|
|
- |
|
|
|
221.4 |
|
Miscellaneous
income
(expense)
|
|
|
6.0 |
|
|
|
7.0 |
|
|
|
13.0 |
|
|
|
8.7 |
|
|
|
111.5 |
|
|
|
(45.9 |
) |
|
|
87.3 |
|
Interest
expense
|
|
|
36.7 |
|
|
|
56.6 |
|
|
|
93.3 |
|
|
|
12.1 |
|
|
|
98.6 |
|
|
|
(45.9 |
) |
|
|
158.1 |
|
Provision
(benefit) for income taxes
|
|
|
48.1 |
|
|
|
57.1 |
|
|
|
105.2 |
|
|
|
(56.2 |
) |
|
|
2.2 |
|
|
|
- |
|
|
|
51.2 |
|
Income (loss)
from continuing operations
|
|
|
94.7 |
|
|
|
85.5 |
|
|
|
180.2 |
|
|
|
(65.4 |
) |
|
|
10.0 |
|
|
|
- |
|
|
|
124.8 |
|
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3.9 |
|
|
|
0.8 |
|
|
|
- |
|
|
|
4.7 |
|
Preferred
stock dividends of subsidiary
|
|
|
2.1 |
|
|
|
1.0 |
|
|
|
3.1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3.1 |
|
Income (loss)
available for common shareholders
|
|
|
92.6 |
|
|
|
84.5 |
|
|
|
177.1 |
|
|
|
(61.5 |
) |
|
|
10.8 |
|
|
|
- |
|
|
|
126.4 |
|
Total
assets
|
|
|
2,752.4 |
|
|
|
5,173.8 |
|
|
|
7,926.2 |
|
|
|
5,050.2 |
|
|
|
2,491.2 |
|
|
|
(1,195.1 |
) |
|
|
14,272.5 |
|
Cash
expenditures for long-lived assets
|
|
|
207.4 |
|
|
|
237.3 |
|
|
|
444.7 |
|
|
|
68.1 |
|
|
|
20.0 |
|
|
|
- |
|
|
|
532.8 |
|
(1) Includes only utility
operations.
(2) Nonutility operations
are included in the Holding Company and Other column.
|
|
Regulated Utilities
|
|
|
Nonutility and Nonregulated
Operations
|
|
|
|
|
|
|
|
2007
(Millions)
|
|
Electric
Utility
(1)
|
|
|
Natural
Gas
Utility
(1)
|
|
|
Total
Utility
(1)
|
|
|
Integrys
Energy Services
|
|
|
Oil
and Natural Gas Production
|
|
|
Holding
Company and Other (2)
|
|
|
Reconciling
Eliminations
|
|
|
Integrys
Energy Group Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$ |
1,202.9 |
|
|
$ |
2,102.5 |
|
|
$ |
3,305.4 |
|
|
$ |
6,975.7 |
|
|
$ |
- |
|
|
$ |
11.3 |
|
|
$ |
- |
|
|
$ |
10,292.4 |
|
Intersegment
revenues
|
|
|
43.2 |
|
|
|
1.2 |
|
|
|
44.4 |
|
|
|
4.0 |
|
|
|
- |
|
|
|
1.2 |
|
|
|
(49.6 |
) |
|
|
- |
|
Depreciation
and
amortization
expense
|
|
|
80.1 |
|
|
|
97.7 |
|
|
|
177.8 |
|
|
|
14.4 |
|
|
|
- |
|
|
|
2.9 |
|
|
|
- |
|
|
|
195.1 |
|
Miscellaneous
income
(expense)
|
|
|
8.3 |
|
|
|
5.5 |
|
|
|
13.8 |
|
|
|
(0.3 |
) |
|
|
0.1 |
|
|
|
81.4 |
|
|
|
(30.9 |
) |
|
|
64.1 |
|
Interest
expense
|
|
|
32.4 |
|
|
|
53.4 |
|
|
|
85.8 |
|
|
|
13.5 |
|
|
|
2.4 |
|
|
|
93.7 |
|
|
|
(30.9 |
) |
|
|
164.5 |
|
Provision
(benefit) for income taxes
|
|
|
51.5 |
|
|
|
14.5 |
|
|
|
66.0 |
|
|
|
26.3 |
|
|
|
(1.0 |
) |
|
|
(5.3 |
) |
|
|
- |
|
|
|
86.0 |
|
Income (loss)
from continuing operations
|
|
|
89.6 |
|
|
|
29.6 |
|
|
|
119.2 |
|
|
|
83.2 |
|
|
|
(2.5 |
) |
|
|
(18.8 |
) |
|
|
- |
|
|
|
181.1 |
|
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
14.8 |
|
|
|
58.5 |
|
|
|
- |
|
|
|
- |
|
|
|
73.3 |
|
Preferred
stock dividends of subsidiary
|
|
|
2.2 |
|
|
|
0.9 |
|
|
|
3.1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3.1 |
|
Income (loss)
available for common shareholders
|
|
|
87.4 |
|
|
|
28.7 |
|
|
|
116.1 |
|
|
|
98.0 |
|
|
|
56.0 |
|
|
|
(18.8 |
) |
|
|
- |
|
|
|
251.3 |
|
Total
assets
|
|
|
2,470.8 |
|
|
|
4,777.8 |
|
|
|
7,248.6 |
|
|
|
3,150.6 |
|
|
|
- |
|
|
|
1,911.4 |
|
|
|
(1,076.2 |
) |
|
|
11,234.4 |
|
Cash
expenditures for long-lived assets
|
|
|
202.6 |
|
|
|
158.8 |
|
|
|
361.4 |
|
|
|
20.5 |
|
|
|
- |
|
|
|
10.7 |
|
|
|
- |
|
|
|
392.6 |
|
(1) Includes only utility
operations.
(2) Nonutility operations
are included in the Holding Company and Other column.
|
|
Regulated Utilities
|
|
|
Nonutility
and
Nonregulated Operations
|
|
|
|
|
|
|
|
2006
(Millions)
|
|
Electric
Utility
(1)
|
|
|
Natural
Gas
Utility
(1)
|
|
|
Total
Utility
(1)
|
|
|
Integrys
Energy Services
|
|
|
Holding
Company and Other (2)
|
|
|
Reconciling
Eliminations
|
|
|
Integrys
Energy Group Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$ |
1,057.9 |
|
|
$ |
676.1 |
|
|
$ |
1,734.0 |
|
|
$ |
5,151.8 |
|
|
$ |
4.9 |
|
|
$ |
- |
|
|
$ |
6,890.7 |
|
Intersegment
revenues
|
|
|
41.5 |
|
|
|
0.8 |
|
|
|
42.3 |
|
|
|
7.3 |
|
|
|
1.2 |
|
|
|
(50.8 |
) |
|
|
- |
|
Depreciation
and amortization expense
|
|
|
78.5 |
|
|
|
32.7 |
|
|
|
111.2 |
|
|
|
9.4 |
|
|
|
0.7 |
|
|
|
- |
|
|
|
121.3 |
|
Miscellaneous
income (expense)
|
|
|
3.2 |
|
|
|
1.0 |
|
|
|
4.2 |
|
|
|
(11.4 |
) |
|
|
66.0 |
|
|
|
(16.0 |
) |
|
|
42.8 |
|
Interest
expense
|
|
|
30.0 |
|
|
|
18.1 |
|
|
|
48.1 |
|
|
|
15.4 |
|
|
|
51.7 |
|
|
|
(16.0 |
) |
|
|
99.2 |
|
Provision
(benefit) for income taxes
|
|
|
48.6 |
|
|
|
1.5 |
|
|
|
50.1 |
|
|
|
(5.0 |
) |
|
|
(0.1 |
) |
|
|
- |
|
|
|
45.0 |
|
Income (loss)
from continuing operations
|
|
|
87.6 |
|
|
|
(1.3 |
) |
|
|
86.3 |
|
|
|
65.0 |
|
|
|
0.3 |
|
|
|
- |
|
|
|
151.6 |
|
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7.3 |
|
|
|
- |
|
|
|
- |
|
|
|
7.3 |
|
Preferred
stock dividends of subsidiary
|
|
|
2.1 |
|
|
|
1.0 |
|
|
|
3.1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3.1 |
|
Income (loss)
available for common shareholders
|
|
|
85.5 |
|
|
|
(2.3 |
) |
|
|
83.2 |
|
|
|
72.3 |
|
|
|
0.3 |
|
|
|
- |
|
|
|
155.8 |
|
Cash
expenditures for long-lived assets
|
|
|
282.1 |
|
|
|
54.6 |
|
|
|
336.7 |
|
|
|
5.5 |
|
|
|
(0.2 |
) |
|
|
- |
|
|
|
342.0 |
|
(1) Includes only utility
operations.
(2) Nonutility operations
are included in the Holding Company and Other column.
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Geographic
Information
(Millions)
|
|
Revenues
|
|
|
Long-Lived
Assets
|
|
|
Revenues
|
|
|
Long-Lived
Assets
|
|
|
Revenues
|
|
United States
|
|
$ |
11,639.3 |
|
|
$ |
7,603.0 |
|
|
$ |
8,343.8 |
|
|
$ |
7,028.2 |
|
|
$ |
4,908.6 |
|
Canada *
|
|
|
2,408.5 |
|
|
|
20.0 |
|
|
|
1,948.6 |
|
|
|
20.6 |
|
|
|
1,982.1 |
|
Total
|
|
$ |
14,047.8 |
|
|
$ |
7,623.0 |
|
|
$ |
10,292.4 |
|
|
$ |
7,048.8 |
|
|
$ |
6,890.7 |
|
* Revenues
and assets of Canadian subsidiaries.
NOTE 25--QUARTERLY
FINANCIAL INFORMATION (Unaudited)
(Millions,
except share amounts)
|
|
Three
Months Ended
|
|
|
|
2008
|
|
|
|
March
|
|
|
June
|
|
|
September
|
|
|
December
|
|
|
Total
|
|
Operating
revenues
|
|
$ |
3,989.2 |
|
|
$ |
3,417.2 |
|
|
$ |
3,223.1 |
|
|
$ |
3,418.3 |
|
|
$ |
14,047.8 |
|
Operating
income (loss)
|
|
|
234.7 |
|
|
|
53.1 |
|
|
|
(76.2 |
) |
|
|
35.1 |
|
|
|
246.7 |
|
Income (loss)
from continuing operations
|
|
|
136.6 |
|
|
|
24.8 |
|
|
|
(58.4 |
) |
|
|
21.8 |
|
|
|
124.8 |
|
Discontinued
operations, net of tax
|
|
|
- |
|
|
|
0.1 |
|
|
|
- |
|
|
|
4.6 |
|
|
|
4.7 |
|
Preferred
stock dividends of subsidiary
|
|
|
0.8 |
|
|
|
0.8 |
|
|
|
0.7 |
|
|
|
0.8 |
|
|
|
3.1 |
|
Income (loss)
available for common shareholders
|
|
$ |
135.8 |
|
|
$ |
24.1 |
|
|
$ |
(59.1 |
) |
|
$ |
25.6 |
|
|
$ |
126.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number
of shares of common stock (basic)
|
|
|
76.6 |
|
|
|
76.6 |
|
|
|
76.7 |
|
|
|
76.7 |
|
|
|
76.7 |
|
Average number
of shares of common stock (diluted)
|
|
|
76.8 |
|
|
|
76.9 |
|
|
|
76.7 |
|
|
|
77.0 |
|
|
|
77.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share (basic) *
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$ |
1.77 |
|
|
$ |
0.31 |
|
|
$ |
(0.77 |
) |
|
$ |
0.27 |
|
|
$ |
1.59 |
|
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.06 |
|
|
|
0.06 |
|
Earnings
(loss) per common share (basic)
|
|
|
1.77 |
|
|
|
0.31 |
|
|
|
(0.77 |
) |
|
|
0.33 |
|
|
|
1.65 |
|
Earnings
(loss) per common share (diluted) *
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
|
1.77 |
|
|
|
0.31 |
|
|
|
(0.77 |
) |
|
|
0.27 |
|
|
|
1.58 |
|
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.06 |
|
|
|
0.06 |
|
Earnings
(loss) per common share (diluted)
|
|
|
1.77 |
|
|
|
0.31 |
|
|
|
(0.77 |
) |
|
|
0.33 |
|
|
|
1.64 |
|
* Earnings per share for the
individual quarters do not total the year ended earnings per share amount
because of
changes
to the average number of shares outstanding and changes in incremental issuable
shares throughout
the
year.
(Millions,
except share amounts)
|
|
Three Months
Ended
|
|
|
|
2007
|
|
|
|
March
|
|
|
June
|
|
|
September
|
|
|
December
|
|
|
Total
|
|
Operating
revenues
|
|
$ |
2,746.6 |
|
|
$ |
2,361.7 |
|
|
$ |
2,122.5 |
|
|
$ |
3,061.6 |
|
|
$ |
10,292.4 |
|
Operating
income (loss)
|
|
|
183.1 |
|
|
|
(33.9 |
) |
|
|
54.1 |
|
|
|
164.1 |
|
|
|
367.4 |
|
Income (loss)
from continuing operations
|
|
|
117.2 |
|
|
|
(39.6 |
) |
|
|
11.6 |
|
|
|
91.9 |
|
|
|
181.1 |
|
Discontinued
operations, net of tax
|
|
|
23.0 |
|
|
|
24.0 |
|
|
|
32.3 |
|
|
|
(6.0 |
) |
|
|
73.3 |
|
Preferred
stock dividends of subsidiary
|
|
|
0.8 |
|
|
|
0.8 |
|
|
|
0.7 |
|
|
|
0.8 |
|
|
|
3.1 |
|
Income (loss)
available for common shareholders
|
|
$ |
139.4 |
|
|
$ |
(16.4 |
) |
|
$ |
43.2 |
|
|
$ |
85.1 |
|
|
$ |
251.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number
of shares of common stock (basic)
|
|
|
57.5 |
|
|
|
76.0 |
|
|
|
76.2 |
|
|
|
76.5 |
|
|
|
71.6 |
|
Average number
of shares of common stock (diluted)
|
|
|
57.8 |
|
|
|
76.0 |
|
|
|
76.5 |
|
|
|
76.6 |
|
|
|
71.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share (basic) *
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$ |
2.02 |
|
|
$ |
(0.53 |
) |
|
$ |
0.14 |
|
|
$ |
1.19 |
|
|
$ |
2.49 |
|
Discontinued
operations
|
|
|
0.40 |
|
|
|
0.31 |
|
|
|
0.43 |
|
|
|
(0.08 |
) |
|
|
1.02 |
|
Earnings
(loss) per common share (basic)
|
|
|
2.42 |
|
|
|
(0.22 |
) |
|
|
0.57 |
|
|
|
1.11 |
|
|
|
3.51 |
|
Earnings
(loss) per common share (diluted) *
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
|
2.01 |
|
|
|
(0.53 |
) |
|
|
0.14 |
|
|
|
1.19 |
|
|
|
2.48 |
|
Discontinued
operations
|
|
|
0.40 |
|
|
|
0.31 |
|
|
|
0.42 |
|
|
|
(0.08 |
) |
|
|
1.02 |
|
Earnings
(loss) per common share (diluted)
|
|
|
2.41 |
|
|
|
(0.22 |
) |
|
|
0.56 |
|
|
|
1.11 |
|
|
|
3.50 |
|
* Earnings per share for the
individual quarters may not total the year ended earnings per share amount
because of
changes
to the average number of shares outstanding and changes in incremental issuable
shares throughout
the
year.
Because of various
factors, the quarterly results of operations are not necessarily
comparable.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
H. REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL
STATEMENTS
To
the Board of Directors and Shareholders of Integrys Energy Group,
Inc:
We
have audited the accompanying consolidated balance sheets of Integrys Energy
Group, Inc. and subsidiaries (the "Company") as of December 31, 2008 and 2007,
and the related consolidated statements of income, common shareholders’ equity,
and cash flows for each of the three years in the period ended December 31,
2008. Our audits also included the financial statement schedules listed in
the Index at Item 15. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedules based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In
our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Integrys Energy Group, Inc and
subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2008, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
As
discussed in Note 1(t) to the consolidated financial statements, at January 1,
2008, the Company adopted Statement of Financial Accounting Standards No. 157,
“Fair Value Measurements.”
We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Company's internal control over
financial reporting as of December 31, 2008, based on the criteria established
in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 25, 2009 expressed an
unqualified opinion on the Company's internal control over financial
reporting.
/s/ Deloitte &
Touche LLP
Milwaukee,
WI
February 25,
2009
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
ITEM
9A. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
As
of the end of the period covered by this Annual Report on Form 10-K, Integrys
Energy Group'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 the Integrys Energy Group's
disclosure controls and procedures (as defined in the Securities Exchange Act of
1934 Rules 13a-15(e) and 15d-15(e)) and has concluded that, as of the date of
such evaluation, Integrys Energy Group's disclosure controls and procedures were
effective in accumulating and communicating 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 Annual Report
on Form 10-K 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) that occurred during the quarter ended December 31, 2008,
that have materially affected, or are reasonably likely to materially affect,
its internal control over financial reporting.
Management
Reports on Internal Control over Financial Reporting
For Integrys Energy
Group's Management Report on Internal Control over Financial Reporting, see
Section A of Item 8.
Reports
of Independent Registered Public Accounting Firm
For Integrys Energy
Group's Reports of Independent Registered Public Accounting Firm, see Sections B
and H of Item 8.
ITEM
9B. OTHER INFORMATION
None.
PART
III
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
Information
required by this Item regarding the directors of Integrys Energy Group, Section
16 compliance and the members of the Audit Committee and the Audit Committee
financial expert can be found in Integrys Energy Group's Proxy Statement for its
Annual Meeting of Shareholders to be held May 13, 2009 (Proxy
Statement), under the captions "Election of Directors," "Ownership of Voting
Securities – Section 16(a) Beneficial Ownership Reporting Compliance" and "Board
Committees," respectively. Such information is incorporated by
reference as if fully set forth herein.
Information
regarding the executive officers of Integrys Energy Group can be found in this
Annual Report on Form 10-K in Item 4A.
Integrys Energy
Group has adopted a Code of Conduct, which serves as our Code of Business
Conduct and Ethics. The Code of Conduct applies to all of our
directors, officers, and employees, including the Chief Executive Officer, Chief
Financial Officer, Chief Accounting Officer and Controller and any other persons
performing similar functions. Integrys Energy Group has also adopted corporate
governance guidelines.
Integrys Energy
Group's Code of Conduct, Corporate Governance Guidelines and charters of the
board committees may be accessed on the Integrys Energy Group Web site,
www.integrysgroup.com under "Investors" then select "Corporate
Governance." Copies of Integrys Energy Group's Code of Conduct,
Corporate Governance Guidelines and charters of the board committees can also be
obtained by writing to Integrys Energy Group, Inc., Attention: Barth
J. Wolf, Vice President, Chief Legal Officer and Secretary, 700 North Adams
Street, Green Bay, Wisconsin 54301. Amendments to, or waivers
from, our Code of Conduct will be disclosed on our Web site within the
prescribed time period.
ITEM
11. EXECUTIVE COMPENSATION
Information
required by this Item regarding compensation paid by Integrys Energy Group to
its directors and its "named executive officers" in 2008 can be found in
Integrys Energy Group's Proxy Statement under the captions "Director
Compensation" and "Executive Compensation." Such information is
incorporated by reference as if fully set forth herein.
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
Information
required by this Item regarding the principal securities holders of Integrys
Energy Group and the security holdings of its directors and executive officers
can be found in Integrys Energy Group's Proxy Statement under the caption
"Ownership of Voting Securities – Beneficial Ownership." Such
information is incorporated by reference as if fully set forth
herein.
Information
required by this Item regarding equity compensation plans of Integrys Energy
Group can be found in Integrys Energy Group's Proxy Statement under the caption
"Ownership of Voting Securities –
Equity Compensation
Plan Information." Such information is incorporated by reference as
if fully set forth herein.
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
WPS provides and
receives services, property, and other items of value to and from its parent,
Integrys Energy Group, and other subsidiaries of Integrys Energy
Group. All such transactions are made pursuant to a Master Affiliated
Interest Agreement approved by the PSCW. MGU, MERC, UPPCO, PGL, and
NSG (together with WPS, the “regulated subsidiaries”) have all been added as
parties to this agreement, and like WPS, can also provide and receive services,
property, and other items of value to and from their parent, Integrys Energy
Group, and other subsidiaries of Integrys Energy Group. The agreement
provides that the regulated subsidiaries must receive payment equal to the
higher of its cost or fair value for services, property, and other items of
value which the regulated subsidiaries provide to Integrys Energy Group or its
other nonregulated subsidiaries, and that the regulated subsidiaries must make
payments equal to the lower of the provider's cost or fair value for services,
property, and other items of value which Integrys Energy Group or its other
nonregulated subsidiaries provide to the regulated subsidiaries. The
agreement further provides that any services, property, or other items of value
provided to or from any of the regulated subsidiaries of Integrys Energy Group
be provided at cost. Modification or amendment to this agreement
requires the approval of the PSCW.
Under the ICC-approved Services and
Transfer Agreement, NSG and PGL can provide to and receive from each other;
their parent, PEC; and other wholly owned subsidiaries of PEC, certain
facilities, services and assets. If PGL or NSG receive facilities or
services, they are charged the prevailing market price but no more than fully
distributed cost. Costs are based on direct charges or an allocation
method. For asset transfers between PGL and NSG, the transferring
party charges its current net book value. For transactions involving
other parties, the charge is the fair market value. Asset transfers
by PGL or NSG to a nonutility are charged at the prevailing market
price. Asset transfers involving PGL or NSG may require prior ICC
approval. The ICC must approve changes or amendments to this
agreement.
Under the ICC-approved Affiliated
Interest Agreement, PGL and NSG can provide to and receive from Integrys Energy
Group and its regulated utility subsidiaries, certain services. All
services are provided at cost. The ICC must approve changes or
amendments to this agreement.
IBS provides 14 categories of services
(including financial, human resource, and administrative services) to all six
regulated utility companies of Integrys Energy Group pursuant to a Master
Regulated Affiliated Interest Agreement (Regulated AIA) which has been approved
by, or granted appropriate waivers from, the PSCW, MPSC, ICC, and
MPUC. IBS also provides services to its nonregulated affiliates
pursuant to a Master Non-Regulated Affiliated Interest Agreement (Non-Regulated
AIA). As required by FERC regulations for centralized service
companies, IBS renders services at cost. The PSCW, MPSC, ICC, and
MPUC must be notified prior to making changes to the Regulated and Non-Regulated
AIAs. Recovery of allocated costs is addressed in individual utility
rate cases.
In 2008, a new Affiliated Interest
Agreement that would govern the provision of intercompany services, other than
IBS services, within Integrys Energy Group, was submitted to the appropriate
regulators for approval. The new agreement was written primarily to
limit the scope of services that had been provided under current agreements that
are now being provided by IBS. The new agreement would replace the
current agreements (except for allocation of costs to achieve merger synergies)
referred to above, after proper approvals. The pricing methodologies
from the current agreements carry forward to the new
agreement.
Information
required by this Item regarding Integrys Energy Group's related person
transactions and director independence can be found in Integrys Energy Group's
Proxy Statement under the captions "Election of Directors – Related Person
Transaction Policy" and "Election of Directors – Director Independence,"
respectively. Such information is incorporated by reference as if
fully set forth herein.
ITEM
14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
For a summary of
the fees billed to Integrys Energy Group (including its subsidiaries) by
Deloitte & Touche LLP for professional services performed for 2008 and 2007,
please see Integrys Energy Group's Proxy Statement under the caption "Principal
Fees and Service Paid to Independent Registered Public Accounting
Firm."
PART
IV
ITEM
15.
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
Documents
filed as part of this report:
|
|
|
(1)
|
Consolidated
Financial Statements included in Part II at Item 8
above:
|
|
|
|
Description
|
Pages in 10-K
|
|
|
|
|
Consolidated
Statements of Income for the three years ended December 31, 2008,
2007, and 2006
|
89
|
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
90
|
|
|
|
Consolidated
Statements of Common Shareholders' Equity for the three years ended
December 31, 2008, 2007, and 2006
|
91
|
|
|
|
Consolidated
Statements of Cash Flows for the three years ended December 31, 2008,
2007, and 2006
|
92
|
|
|
|
|
Notes to
Consolidated Financial Statements
|
93
|
|
|
|
|
Report of
Independent Registered Public Accounting Firm
|
155
|
|
|
|
(2)
|
Financial
Statement Schedules.
The following
financial statement schedules are included in Part IV of this
report. Schedules not included herein have been omitted because
they are not applicable or the required information is shown in the
financial statements or notes thereto.
|
|
|
|
Description
|
Pages in 10-K
|
|
|
|
|
Schedule I -
Condensed Parent Company Only Financial Statements
|
|
|
|
|
|
A.
|
Statements of
Income and Retained Earnings
|
161
|
|
|
|
|
|
B.
|
Balance
Sheets
|
162
|
|
|
|
|
|
C.
|
Statements of
Cash Flows
|
163
|
|
|
|
|
|
D.
|
Notes to
Parent Company Financial Statements
|
164
|
|
|
|
|
|
Schedule II
Integrys Energy Group, Inc. Valuation and Qualifying
Accounts
|
171
|
|
|
|
(3)
|
Listing of
all exhibits, including those incorporated by reference.
See the
attached Exhibit Index.
|
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 25th day of February,
2009.
|
|
INTEGRYS
ENERGY GROUP, INC.
|
|
|
|
|
(Registrant)
|
|
|
|
|
|
|
By:
|
/s/ Charles
A. Schrock
|
|
|
|
Charles A.
Schrock
President
and
Chief
Executive Officer
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
Signature
|
Title
|
Date
|
|
|
|
Keith E.
Bailey *
|
Director
|
|
Richard A.
Bemis *
|
Director
|
|
William J.
Brodsky *
|
Director
|
|
Albert J.
Budney, Jr. *
|
Director
|
|
Pastora San
Juan Cafferty *
|
Director
|
|
Ellen
Carnahan *
|
Director
|
|
Robert C.
Gallagher *
|
Director
|
|
Kathryn M.
Hasselblad-Pascale *
|
Director
|
|
John W.
Higgins *
|
Director
|
|
James L.
Kemerling *
|
Director
|
|
Michael E.
Lavin *
|
Director
|
|
William F.
Protz, Jr. *
|
Director
|
|
Charles A.
Schrock *
|
Director
|
|
Larry L.
Weyers *
|
Executive
Chairman
|
|
|
|
|
/s/ Charles A.
Schrock
|
President and
Chief Executive Officer (principal executive officer)
|
February 25,
2009
|
Charles A.
Schrock
|
|
|
|
|
|
/s/ Joseph P.
O'Leary
|
Senior Vice
President and Chief Financial Officer
(principal
financial officer)
|
February 25,
2009
|
Joseph P.
O'Leary
|
|
|
|
|
|
/s/ Diane L.
Ford
|
Vice
President and Corporate Controller
(principal
accounting officer)
|
February 25,
2009
|
Diane L.
Ford
|
|
|
|
|
|
|
|
|
* By: /s/ Diane L.
Ford
|
|
|
Diane
L. Ford
|
Attorney-in-Fact
|
February 25,
2009
|
|
|
|
|
|
|
|
|
|
|
SCHEDULE I -
CONDENSED
|
|
|
|
|
|
|
|
|
|
PARENT COMPANY FINANCIAL
STATEMENTS
|
|
|
|
|
|
|
|
|
|
INTEGRYS ENERGY GROUP, INC.
(PARENT COMPANY ONLY)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A. STATEMENTS OF INCOME AND
RETAINED EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31
|
|
|
|
|
|
|
|
|
|
(Millions, except per share
data)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Equity earnings in excess of
dividends from subsidiaries
|
|
$ |
44.2 |
|
|
$ |
116.4 |
|
|
$ |
83.2 |
|
Dividends from
subsidiaries
|
|
|
134.9 |
|
|
|
120.0 |
|
|
|
110.2 |
|
Income from
subsidiaries
|
|
|
179.1 |
|
|
|
236.4 |
|
|
|
193.4 |
|
Investment income and
other
|
|
|
19.4 |
|
|
|
17.7 |
|
|
|
16.7 |
|
Total
income
|
|
|
198.5 |
|
|
|
254.1 |
|
|
|
210.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
(income)
|
|
|
3.4 |
|
|
|
18.5 |
|
|
|
17.1 |
|
Operating
Income
|
|
|
195.1 |
|
|
|
235.6 |
|
|
|
193.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
75.0 |
|
|
|
65.5 |
|
|
|
48.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before
taxes
|
|
|
120.1 |
|
|
|
170.1 |
|
|
|
144.6 |
|
Provision for income
taxes
|
|
|
(1.6 |
) |
|
|
(7.9 |
) |
|
|
(3.9 |
) |
Income from continuing
operations
|
|
|
121.7 |
|
|
|
178.0 |
|
|
|
148.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of
tax
|
|
|
4.7 |
|
|
|
73.3 |
|
|
|
7.3 |
|
Net Income
|
|
$ |
126.4 |
|
|
$ |
251.3 |
|
|
$ |
155.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings, beginning of
year
|
|
$ |
701.9 |
|
|
$ |
628.2 |
|
|
$ |
568.7 |
|
Common stock
dividends
|
|
|
(203.9 |
) |
|
|
(177.0 |
) |
|
|
(96.0 |
) |
Other
|
|
|
0.2 |
|
|
|
(0.6 |
) |
|
|
(0.3 |
) |
Retained earnings, end of
year
|
|
$ |
624.6 |
|
|
$ |
701.9 |
|
|
$ |
628.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares of common
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
76.7 |
|
|
|
71.6 |
|
|
|
42.3 |
|
Diluted
|
|
|
77.0 |
|
|
|
71.8 |
|
|
|
42.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share
(basic)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
$ |
1.59 |
|
|
$ |
2.49 |
|
|
$ |
3.51 |
|
Discontinued operations, net of
tax
|
|
|
0.06 |
|
|
|
1.02 |
|
|
|
0.17 |
|
Earnings per common share
(basic)
|
|
$ |
1.65 |
|
|
$ |
3.51 |
|
|
$ |
3.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share
(diluted)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
$ |
1.58 |
|
|
$ |
2.48 |
|
|
$ |
3.50 |
|
Discontinued operations, net of
tax
|
|
|
0.06 |
|
|
|
1.02 |
|
|
|
0.17 |
|
Earnings per common share
(diluted)
|
|
$ |
1.64 |
|
|
$ |
3.50 |
|
|
$ |
3.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per common
share
|
|
$ |
2.68 |
|
|
$ |
2.56 |
|
|
$ |
2.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to Integrys
Energy Group's parent company financial statements
|
|
|
|
|
|
|
|
|
|
are an integral part of these
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SCHEDULE I -
CONDENSED
|
|
|
|
|
|
|
PARENT COMPANY FINANCIAL
STATEMENTS
|
|
|
|
|
|
|
INTEGRYS ENERGY GROUP, INC.
(PARENT COMPANY ONLY)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B. BALANCE
SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December
31
|
|
|
|
|
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
190.9 |
|
|
$ |
- |
|
Accounts receivable from related
parties
|
|
|
33.9 |
|
|
|
46.2 |
|
Interest receivable from related
parties
|
|
|
5.2 |
|
|
|
4.5 |
|
Deferred income
taxes
|
|
|
0.2 |
|
|
|
0.2 |
|
Notes receivable from related
parties
|
|
|
150.9 |
|
|
|
66.4 |
|
Assets from risk management
activities
|
|
|
14.7 |
|
|
|
- |
|
Other current
assets
|
|
|
27.3 |
|
|
|
3.1 |
|
Current
assets
|
|
|
423.1 |
|
|
|
120.4 |
|
|
|
|
|
|
|
|
|
|
Total investments in subsidiaries,
at equity
|
|
|
4,206.1 |
|
|
|
4,142.7 |
|
|
|
|
|
|
|
|
|
|
Notes receivable from related
parties
|
|
|
210.9 |
|
|
|
211.5 |
|
Property and equipment,
net
|
|
|
5.3 |
|
|
|
12.2 |
|
Advances to related
parties
|
|
|
10.5 |
|
|
|
12.1 |
|
State deferred tax
assets
|
|
|
16.5 |
|
|
|
28.2 |
|
Other
|
|
|
26.3 |
|
|
|
28.2 |
|
Total
assets
|
|
$ |
4,898.7 |
|
|
$ |
4,555.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt to related
parties
|
|
$ |
276.1 |
|
|
$ |
220.9 |
|
Short-term
debt
|
|
|
473.9 |
|
|
|
70.4 |
|
Current portion of long-term
debt
|
|
|
150.0 |
|
|
|
- |
|
Accounts payable to related
parties
|
|
|
49.7 |
|
|
|
5.8 |
|
Interest payable to related
parties
|
|
|
5.9 |
|
|
|
4.5 |
|
Accounts
payable
|
|
|
0.1 |
|
|
|
1.7 |
|
Liabilities from risk management
activities
|
|
|
1.5 |
|
|
|
1.5 |
|
Other current
liabilities
|
|
|
12.6 |
|
|
|
43.2 |
|
Current
liabilities
|
|
|
969.8 |
|
|
|
348.0 |
|
|
|
|
|
|
|
|
|
|
Long-term debt to related
parties
|
|
|
346.0 |
|
|
|
346.0 |
|
Long-term
debt
|
|
|
465.1 |
|
|
|
615.0 |
|
Federal deferred tax
liability
|
|
|
8.8 |
|
|
|
2.6 |
|
Liabilities from risk management
activities
|
|
|
3.5 |
|
|
|
2.6 |
|
Advances from related
parties
|
|
|
2.0 |
|
|
|
3.2 |
|
Other
|
|
|
3.9 |
|
|
|
2.1 |
|
Long-term
liabilities
|
|
|
829.3 |
|
|
|
971.5 |
|
|
|
|
|
|
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
equity
|
|
|
3,099.6 |
|
|
|
3,235.8 |
|
Total liabilities and
shareholders' equity
|
|
$ |
4,898.7 |
|
|
$ |
4,555.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to Integrys
Energy Group's parent company financial statements
|
|
|
|
|
|
are an integral part of these
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SCHEDULE I -
CONDENSED
|
|
|
|
|
|
|
|
|
|
PARENT COMPANY FINANCIAL
STATEMENTS
|
|
|
|
|
|
|
|
|
|
INTEGRYS ENERGY GROUP, INC.
(PARENT COMPANY ONLY)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C. STATEMENTS OF CASH
FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$ |
126.4 |
|
|
$ |
251.3 |
|
|
$ |
155.8 |
|
Adjustments to reconcile net
income to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of
tax
|
|
|
(4.7 |
) |
|
|
(73.3 |
) |
|
|
(7.3 |
) |
|
Equity income from subsidiaries,
net of dividends
|
|
|
(44.2 |
) |
|
|
(116.4 |
) |
|
|
(83.2 |
) |
|
Deferred income
taxes
|
|
|
19.7 |
|
|
|
(8.0 |
) |
|
|
(2.0 |
) |
|
Gain on sale of
investment
|
|
|
- |
|
|
|
(1.6 |
) |
|
|
- |
|
|
Other
|
|
|
7.9 |
|
|
|
14.0 |
|
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in working
capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
1.2 |
|
|
|
(2.0 |
) |
|
|
0.1 |
|
|
Receivables from related
parties
|
|
|
20.3 |
|
|
|
(30.6 |
) |
|
|
(8.8 |
) |
|
Other current
assets
|
|
|
(25.2 |
) |
|
|
- |
|
|
|
- |
|
|
Accounts
payable
|
|
|
(1.6 |
) |
|
|
0.8 |
|
|
|
0.2 |
|
|
Accounts payable to related
parties
|
|
|
41.7 |
|
|
|
2.9 |
|
|
|
5.0 |
|
|
Other current
liabilities
|
|
|
(30.4 |
) |
|
|
33.8 |
|
|
|
3.0 |
|
Net cash (used for) provided by
operating activities
|
|
|
111.1 |
|
|
|
70.9 |
|
|
|
64.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
- |
|
|
|
(10.7 |
) |
|
|
(0.1 |
) |
Short-term notes receivable from
related parties
|
|
|
(84.6 |
) |
|
|
57.2 |
|
|
|
(222.9 |
) |
Advance to related
parties
|
|
|
1.6 |
|
|
|
1.8 |
|
|
|
2.2 |
|
Equity contributions to
subsidiaries
|
|
|
(163.0 |
) |
|
|
(100.9 |
) |
|
|
(593.9 |
) |
Return of capital from
subsidiaries
|
|
|
83.4 |
|
|
|
34.1 |
|
|
|
54.7 |
|
Proceeds from sale of
investment
|
|
|
- |
|
|
|
2.0 |
|
|
|
- |
|
Cash paid for transaction cost
related to acquisitions
|
|
|
- |
|
|
|
(14.4 |
) |
|
|
(11.8 |
) |
Other
|
|
|
|
7.4 |
|
|
|
- |
|
|
|
0.3 |
|
Net cash used for investing
activities
|
|
|
(155.2 |
) |
|
|
(30.9 |
) |
|
|
(771.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper,
net
|
|
|
182.5 |
|
|
|
(454.4 |
) |
|
|
345.0 |
|
Notes payable to related
parties
|
|
|
55.2 |
|
|
|
545.9 |
|
|
|
- |
|
Issuance of notes
payable
|
|
|
155.7 |
|
|
|
- |
|
|
|
- |
|
Issuance of short-term
debt
|
|
|
50.0 |
|
|
|
- |
|
|
|
- |
|
Issuance of long-term
debt
|
|
|
- |
|
|
|
- |
|
|
|
300.0 |
|
Issuance of common
stock
|
|
|
- |
|
|
|
45.6 |
|
|
|
164.6 |
|
Dividends paid on common
stock
|
|
|
(203.9 |
) |
|
|
(177.0 |
) |
|
|
(96.0 |
) |
Other
|
|
|
|
(4.5 |
) |
|
|
(1.7 |
) |
|
|
(5.1 |
) |
Net cash (used for) provided by
financing activities
|
|
|
235.0 |
|
|
|
(41.6 |
) |
|
|
708.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash
equivalents
|
|
|
190.9 |
|
|
|
(1.6 |
) |
|
|
1.5 |
|
Cash and cash equivalents at
beginning of year
|
|
|
- |
|
|
|
1.6 |
|
|
|
0.1 |
|
Cash and cash equivalents at end
of year
|
|
$ |
190.9 |
|
|
$ |
- |
|
|
$ |
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to Integrys
Energy Group's parent company financial statements
|
|
are an integral part of these
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SCHEDULE
I - CONDENSED
PARENT
COMPANY FINANCIAL STATEMENTS
INTEGRYS
ENERGY GROUP, INC. (PARENT COMPANY ONLY)
D. NOTES
TO PARENT COMPANY FINANCIAL STATEMENTS
SUPPLEMENTAL
NOTES
NOTE
1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
|
Basis of
Presentation--For Parent Company only presentation, investments in
subsidiaries are accounted for using the equity method. The condensed
Parent Company financial statements and notes should be read in
conjunction with the consolidated financial statements and notes of
Integrys Energy Group appearing in this Form 10-K. The consolidated
financial statements of Integrys Energy Group reflect certain businesses
as discontinued operations. In the Integrys Energy Group consolidated
financial statements, no assets were reported as held for sale at year-end
2008 and 2007. For Parent Company only presentation, the
investments in discontinued operations are recorded in Investments in
Subsidiary Companies. The condensed Parent Company statements of income
and statements of cash flows report the earnings and cash flows of these
businesses as discontinued
operations.
|
(b) Cash and Cash
Equivalents--We consider short-term investments with an original maturity
of three months or less to be cash
equivalents.
|
Cash paid for
taxes during 2008 and 2006 was $27.2 million and $1.1 million,
respectively. No taxes were paid in 2007. During
2008, 2007 and 2006, cash paid for interest totaled $46.1 million, $55.1
million and $44.9 million,
respectively.
|
|
Non-cash
transactions were as follows:
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Transaction
costs related to the merger with PEC funded through other current
liabilities
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
8.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity issued
for net assets acquired in PEC merger
|
|
|
- |
|
|
|
1,559.3 |
|
|
|
- |
|
NOTE 2--FAIR
VALUE OF FINANCIAL INSTRUMENTS
The following
methods and assumptions were used to estimate the fair value of each class of
financial instrument for which it is practicable to estimate such
value:
Cash, short-term
notes receivable, and outstanding commercial paper: The carrying
amount approximates fair value due to the short maturity of these investments
and obligations.
Long-term notes
receivable and long term debt: The fair value of long-term notes
receivable and long term debt are estimated based on the quoted market price for
the same or similar issues or on the current rates offered to Integrys Energy
Group for debt of the same remaining maturity.
Risk management
activities: Assets and liabilities from risk management activities
are recorded at fair value in accordance with SFAS No. 133.
The estimated fair
values of Integrys Energy Group’s financial instruments as of December 31
were:
(Millions)
|
|
2008
|
|
|
2007
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
notes receivable
|
|
$ |
150.9 |
|
|
$ |
150.9 |
|
|
$ |
66.4 |
|
|
$ |
66.4 |
|
Long-term
notes receivable
|
|
|
210.9 |
|
|
|
199.9 |
|
|
|
211.5 |
|
|
|
215.0 |
|
Short-term
notes payable
|
|
|
497.2 |
|
|
|
497.2 |
|
|
|
220.9 |
|
|
|
220.9 |
|
Current
portion of long-term debt
|
|
|
150.0 |
|
|
|
147.4 |
|
|
|
- |
|
|
|
- |
|
Long-term
debt
|
|
|
811.1 |
|
|
|
645.2 |
|
|
|
961.0 |
|
|
|
936.5 |
|
Commercial
paper
|
|
|
252.8 |
|
|
|
252.8 |
|
|
|
70.4 |
|
|
|
70.4 |
|
Risk
management activities – net
|
|
|
9.7 |
|
|
|
9.7 |
|
|
|
4.1 |
|
|
|
4.1 |
|
Cash and cash
equivalents
|
|
|
190.9 |
|
|
|
190.9 |
|
|
|
- |
|
|
|
- |
|
NOTE
3--SHORT-TERM NOTES RECEIVABLE – RELATED PARTIES
Integrys
Energy Group has short-term notes receivable from related parties
outstanding as of December 31, 2008 and 2007. Notes receivable bear
interest rates that approximate current market rates.
|
|
|
|
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
UPPCO
|
|
$ |
6.8 |
|
|
$ |
1.3 |
|
Integrys
Energy Services
|
|
|
81.7 |
|
|
|
- |
|
MERC
|
|
|
22.3 |
|
|
|
33.1 |
|
MGU
|
|
|
27.0 |
|
|
|
32.0 |
|
IBS
|
|
|
13.1 |
|
|
|
- |
|
Total
|
|
$ |
150.9 |
|
|
$ |
66.4 |
|
NOTE
4--LONG-TERM NOTES RECEIVABLE – RELATED PARTIES
|
|
Integrys
Energy Group has long-term notes receivable from related parties
outstanding as of December 31, 2008 and 2007.
|
|
|
|
(Millions)
|
2008
|
2007
|
|
WPSC
|
|
|
|
Series
|
Year Due
|
|
|
|
8.76%
|
2015
|
$ 4.0
|
$ 4.3
|
|
7.35%
|
2016
|
5.9
|
6.2
|
|
|
|
|
|
UPPCO
|
|
|
|
Series
|
Year Due
|
|
|
|
5.25%
|
2013
|
15.0
|
15.0
|
|
6.06%
|
2017
|
15.0
|
15.0
|
|
|
|
|
|
MERC
|
|
|
|
Series
|
Year Due
|
|
|
|
6.03%
|
2013
|
29.0
|
29.0
|
|
6.16%
|
2016
|
29.0
|
29.0
|
|
6.40%
|
2021
|
29.0
|
29.0
|
|
|
|
|
|
MGU
|
|
|
|
Series
|
Year Due
|
|
|
|
5.72%
|
2013
|
28.0
|
28.0
|
|
5.76%
|
2016
|
28.0
|
28.0
|
|
5.98%
|
2021
|
28.0
|
28.0
|
|
|
|
|
|
Total
|
$210.9
|
$211.5
|
NOTE
5--SHORT-TERM DEBT AND LINES OF CREDIT
The information in
the table below relates to short-term debt and lines of credit for the years
indicated:
(Millions,
except for percentages)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
As
of end of year
|
|
|
|
|
|
|
Commercial
paper outstanding
|
|
$ |
252.8 |
|
|
$ |
70.4 |
|
Average
effective rate on outstanding commercial paper
|
|
|
6.02 |
% |
|
|
5.54 |
% |
Short-term
notes payable outstanding *
|
|
$ |
171.1 |
|
|
$ |
- |
|
Average
interest rate on short-term notes payable
|
|
|
3.50 |
% |
|
|
- |
|
Borrowings
under revolving credit facilities
|
|
$ |
50.0 |
|
|
$ |
- |
|
Average
discount rate on revolving credit facilities
|
|
|
3.25 |
% |
|
|
- |
|
Available
(unused) lines of credit
|
|
$ |
685.5 |
|
|
$ |
794.5 |
|
*
|
In
November 2008, Integrys Energy Group entered into a short-term debt
agreement extending through
March 2009 to finance its working capital requirements and for
general corporate purposes. The agreement requires principal
and interest payments to be made in yen. Integrys Energy
Services entered into two forward foreign currency exchange contracts to
hedge the variability of the foreign currency exchange rate risk
associated with the principal and fixed rate interest payments, and
Integrys Energy Group expects the principal amount of repayment at
maturity, combined with the settlement amount of the forward contracts, to
be $156.7 million. See Integrys Energy Group Note 2,
"Risk Management
Activities" to the consolidated financial statements, for more
information.
|
|
The
commercial paper at December 31, 2008, had varying maturity dates ranging
from January 2, 2009 through January 30,
2009.
|
SHORT-TERM
NOTES PAYABLE – RELATED PARTIES
|
|
|
|
Integrys
Energy Group has short-term notes payable to related parties outstanding
as of December 31, 2008 and 2007. Notes payable bear interest rates
that approximate current market rates.
|
|
|
|
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
Integrys
Energy Services
|
|
$ |
- |
|
|
$ |
32.3 |
|
PEC
|
|
|
276.1 |
|
|
|
188.6 |
|
Total
|
|
$ |
276.1 |
|
|
$ |
220.9 |
|
|
|
NOTE
6--LONG-TERM DEBT
|
|
Integrys
Energy Group has long-term unsecured notes payable at December 31, 2008
and 2007. Interest is paid semiannually.
|
|
|
|
|
(Millions)
|
2008
|
2007
|
|
Unsecured
senior notes
|
|
|
|
Series
|
Year Due
|
|
|
|
7.00%
|
2009
|
$150.0
|
$150.0
|
|
5.375%
|
2012
|
100.0
|
100.0
|
|
|
|
|
|
Unsecured
junior subordinated notes (1)
|
|
|
|
Series
|
Year Due
|
|
|
|
6.11%
|
2066
|
300.0
|
300.0
|
|
|
|
|
|
Unsecured
term loan due 2010 (2)
|
65.6
|
65.6
|
|
Unsecured
term loan due 2011 (3)
|
325.0
|
325.0
|
|
Unsecured
term loan due 2021 (4)
|
21.0
|
21.0
|
|
Total
|
961.6
|
961.6
|
|
Unamortized
discount on notes
|
(0.5)
|
(0.6)
|
|
Total
debt
|
$961.1
|
$961.0
|
|
Less current
portion
|
(150.0)
|
-
|
|
Total
long-term debt
|
$811.1
|
$961.0
|
(1)
|
On December
1, 2006, Integrys Energy Group issued $300.0 million of Junior
Subordinated Notes. Due to certain features of these notes,
rating agencies consider them to be hybrid instruments with a combination
of debt and equity characteristics. These notes have a 60-year
term and rank junior to all current and future indebtedness of Integrys
Energy Group, with the exception of trade accounts payable and other
accrued liabilities arising in the ordinary course of
business. Interest is payable semi-annually at the stated rate
of 6.11% for the first ten years, but the rate has been fixed at 6.22% for
this period through the use of forward-starting interest rate
swaps. The interest rate will float for the remainder of the
term. The notes can be prepaid without penalty after the first
ten years. Integrys Energy Group has agreed, however, in a
replacement capital covenant with the holders of Integrys Energy Group's
5.375% Unsecured Senior Notes due December 1, 2012, that it will not
redeem or repurchase the Junior Subordinated Notes on or prior to December
1, 2036 unless such repurchases or redemptions are made from the proceeds
of the sale of specific securities considered by rating agencies to have
equity characteristics equal to or greater than those of the Junior
Subordinated Notes.
|
(2)
|
On June 17,
2005, $62.9 million of non-recourse debt at Integrys Energy Services
collateralized by nonregulated assets was restructured to a five-year
Integrys Energy Group obligation as a result of the sale of Sunbury’s
allocated emission allowances. In addition, $2.7 million drawn
on a line of credit at Integrys Energy Services was rolled into the
five-year Integrys Energy Group obligation. The floating
interest rate on the total five-year Integrys Energy Group’s obligation of
$65.6 million has been fixed at 4.595% through two interest rate
swaps. See Note 2, Integrys Energy Group "Risk Management
Activities" to consolidated financial statements, for additional
information.
|
(3)
|
On September
28, 2007, Integrys Energy Group issued a $325.0 million long-term
promissory note to PEC. The note bears interest at a rate of
5.25% and matures in January 2011. Proceeds of the note were
used to reduce the balance of commercial paper
outstanding.
|
(4)
|
Integrys
Energy Group has a long-term note payable to Integrys Energy Services at
December 31, 2008 and 2007 of $21.0 million. The note
bears interest at a rate that approximates current market rates and is due
in 2021. We also have guaranteed other long-term debt and
obligations of our subsidiaries arising in the normal course of business
for both years as described in Note 7,
Guarantees.
|
At December
31, 2008, Integrys Energy Group (parent company) was in compliance with
all covenants relating to outstanding debt. A schedule of all
principal debt payment amounts for Integrys Energy Group (parent company)
is as follows:
|
|
|
|
Year
ending December 31
(Millions)
|
|
|
|
|
|
|
|
2009
|
|
$ |
150.0 |
|
2010
|
|
|
65.6 |
|
2011
|
|
|
325.0 |
|
2012
|
|
|
100.0 |
|
2013
|
|
|
- |
|
Later
years
|
|
|
321.0 |
|
Total
payments
|
|
$ |
961.6 |
|
NOTE 7--GUARANTEES
As
part of normal business, Integrys Energy Group and its subsidiaries enter into
various guarantees providing financial or performance assurance to third parties
on behalf of certain subsidiaries. These guarantees are entered into
primarily to support or enhance the creditworthiness otherwise attributed to a
subsidiary on a stand-alone basis, thereby facilitating the extension of
sufficient credit to accomplish the subsidiaries' intended commercial
purposes.
Most of the
guarantees issued by Integrys Energy Group include inter-company guarantees
between parents and their subsidiaries, which are eliminated in consolidation,
and guarantees of the subsidiaries' own performance. As such, these
guarantees are excluded from the recognition and measurement requirements of
Interpretation No. 45.
The following table
shows outstanding guarantees at Integrys Energy Group at December 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration
|
(Millions)
|
|
|
Total
Amounts
Committed
at
December 31,
2008
|
|
|
|
Less
Than
1
Year
|
|
|
|
1
to 3
Years
|
|
|
|
4
to 5
Years
|
|
|
|
Over
5
Years
|
|
Guarantees
supporting commodity transactions of subsidiaries (1)
|
|
$ |
2,156.5 |
|
|
$ |
1,607.1 |
|
|
$ |
448.9 |
|
|
$ |
19.2 |
|
|
$ |
81.3 |
|
Guarantees of
subsidiary debt and revolving line of credit (2)
|
|
|
928.1 |
|
|
|
175.0 |
|
|
|
725.0 |
|
|
|
- |
|
|
|
28.1 |
|
Standby
letters of credit (3)
|
|
|
403.6 |
|
|
|
389.7 |
|
|
|
13.9 |
|
|
|
- |
|
|
|
- |
|
Surety bonds
(4)
|
|
|
3.5 |
|
|
|
3.5 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
guarantees
|
|
$ |
3,491.7 |
|
|
$ |
2,175.3 |
|
|
$ |
1,187.8 |
|
|
$ |
19.2 |
|
|
$ |
109.4 |
|
(1)
|
Consists of
parental guarantees of $1,981.3 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;
$88.4 million and $81.8 million, respectively, related to
natural gas supply at MERC and MGU, of an authorized $150.0 million
and $100.0 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 Consolidated
Balance Sheets.
|
(2)
|
Consists of
agreements to fully and unconditionally guarantee (1) PEC's
$400.0 million revolving line of credit; (2) on a senior unsecured
basis, PEC's obligations under its $325.0 million, 6.90% notes due
January 15, 2011; (3) Integrys Energy Services’ $175.0 million
credit agreement used to finance natural gas in storage and margin
requirements related to natural gas and electric contracts traded on the
NYMEX and the Intercontinental Exchange, as well as for general corporate
purposes; and (4) $28.1 million 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 Consolidated Balance
Sheets.
|
(3)
|
Comprised of
$398.4 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, MGU, MERC,
and PEC. These amounts are not reflected in the 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
Consolidated Balance Sheets.
|
Integrys Energy
Group has provided total parental guarantees of $2,584.3 million on behalf of
Integrys Energy Services. Integrys Energy Group's exposure under
these guarantees related to open transactions at December 31, 2008, was
approximately $837.0 million. At December 31, 2008,
management was authorized to issue corporate guarantees up to an aggregate
amount of $2.95 billion to support the business operations of Integrys Energy
Services. The following outstanding amounts were subject to this
limit:
(Millions)
|
|
December
31, 2008
|
|
Guarantees
supporting commodity transactions of subsidiaries
|
|
$ |
1,976.3 |
|
Guarantees of
subsidiary debt
|
|
|
176.1 |
|
Standby
letters of credit
|
|
|
395.9 |
|
Surety
bonds
|
|
|
1.5 |
|
Total
guarantees subject to $2.95 billion limit
|
|
$ |
2,549.8 |
|
NOTE
8--INCOME TAXES
The principal
components of Integrys Energy Group’s deferred tax assets and liabilities
recognized in the balance sheet as of December 31 are as follows:
(Millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Plant
related
|
|
$ |
10.9 |
|
|
$ |
7.7 |
|
State capital
and operating loss carryforwards
|
|
|
11.3 |
|
|
|
9.8 |
|
Employee
benefits
|
|
|
6.8 |
|
|
|
6.0 |
|
Price-risk
management
|
|
|
1.8 |
|
|
|
- |
|
Deferred
income and deductions
|
|
|
- |
|
|
|
2.8 |
|
Other
|
|
|
1.1 |
|
|
|
0.6 |
|
Total
deferred tax assets
|
|
|
31.9 |
|
|
|
26.9 |
|
Valuation
allowance
|
|
|
(1.2 |
) |
|
|
(1.1 |
) |
Net deferred
tax assets
|
|
$ |
30.7 |
|
|
$ |
25.8 |
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Plant
related
|
|
$ |
21.7 |
|
|
$ |
- |
|
Other
|
|
|
1.1 |
|
|
|
- |
|
Total
deferred tax liabilities
|
|
$ |
22.8 |
|
|
$ |
- |
|
Carryforward
periods for state capital and operating loss carryforwards vary, but in the
majority of states in which we do business, the period is 15 years or
more. The balance of the carryforwards of state net operating losses
is $218.5 million for all states. Valuation allowances have been
established for certain state operating and capital loss carryforwards due to
the uncertainty of the ability to realize the benefit of these losses in the
future.
SCHEDULE II
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEGRYS ENERGY
GROUP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VALUATION AND QUALIFYING
ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful
Accounts
|
|
Years Ended December 31, 2008,
2007, and 2006
|
|
(in
Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Acquisitions
|
|
|
Additions
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Beginning
of
|
|
|
of
|
|
|
Charged to
|
|
|
Charged to
|
|
|
|
|
|
Balance at
|
|
Fiscal Year
|
|
Year
|
|
|
Businesses
|
|
|
Expense
|
|
|
Other Accounts (1)
|
|
|
Reductions (2)
|
|
|
End of Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$ |
12.7 |
|
|
$ |
4.6 |
|
|
$ |
10.9 |
|
|
$ |
- |
|
|
$ |
11.2 |
|
|
$ |
17.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$ |
17.0 |
|
|
$ |
42.9 |
|
|
$ |
39.1 |
|
|
$ |
2.8 |
|
|
$ |
45.8 |
|
|
$ |
56.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$ |
56.0 |
|
|
$ |
- |
|
|
$ |
76.8 |
|
|
$ |
5.6 |
|
|
$ |
75.9 |
|
|
$ |
62.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Represents amounts charged to tax
liabilities related to revenue taxes uncollectible from
customers.
|
|
|
|
|
|
(2) Represents amounts written off to
the reserve, net of any adjustments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXHIBIT
INDEX
Set forth below is
a listing of all exhibits to this Annual Report on Form 10-K, including those
incorporated by reference.
Certain other
instruments, which would otherwise be required to be listed below, have not been
so listed as such instruments do not authorize long-term debt securities in an
amount which exceeds 10% of the total assets of Integrys Energy
Group and its subsidiaries on a consolidated
basis. Integrys Energy Group agrees to furnish a copy of any such
instrument to the SEC upon request.
Explanatory
Note: Many of the exhibits listed below were entered into when
Integrys Energy Group, Inc. was known as WPS Resources Corporation but have
been referred to below by reference to its current name.
Exhibit
Number
|
Description of Documents
|
|
|
2.1*
|
Asset
Contribution Agreement between ATC and Wisconsin Electric Power Company,
Wisconsin Power and Light Company, WPS, Madison Gas & Electric Co.,
Edison Sault Electric Company, South Beloit Water, Gas and Electric
Company, dated as of December 15, 2000. (Incorporated by
reference to Exhibit 2A-3 to Integrys Energy Group's Form 10-K for the
year ended December 31, 2000.)
|
|
|
2.3*
|
Stock
Purchase Agreement by and among PEC and El Paso E&P Company, L.P.
dated August 16, 2007. (Incorporated by reference to Exhibit
2.1 to Integrys Energy Group's Form 8-K filed August 20,
2007.)
|
|
|
3.1
|
Restated
Articles of Incorporation of Integrys Energy Group, as
amended. (Incorporated by reference to Exhibit 3.2 to
Integrys Energy Group's Form 8-K filed February 27,
2007.)
|
|
|
3.2
|
By-Laws of
Integrys Energy Group, as amended through February 12,
2009. (Incorporated by reference to Exhibit 3.2 to Integrys
Energy Group's Form 8-K filed February 19, 2009.)
|
|
|
4.1
|
Senior
Indenture, dated as of October 1, 1999, between Integrys Energy Group
and U.S. Bank National Association (successor to Firstar Bank
Milwaukee, N.A., National Association) (Incorporated by reference to
Exhibit 4(b) to Amendment No. 1 to Form S-3 filed October 21, 1999 [Reg.
No. 333-88525]); First Supplemental Indenture, dated as of November 1,
1999 between Integrys Energy Group and Firstar Bank, National Association
(Incorporated by reference to Exhibit 4A of Form 8-K filed November 12,
1999); and Second Supplemental Indenture, dated as of November 1, 2002
between Integrys Energy Group and U.S. Bank National
Association. (Incorporated by reference to Exhibit 4A of Form
8-K filed November 25, 2002.) All references to filings are
those of Integrys Energy Group (File No. 1-11337).
|
|
|
4.2
|
Subordinated
Indenture, dated as of November 13, 2006, between Integrys Energy Group
and U.S. Bank National Association, as trustee (Incorporated by reference
to Exhibit 4(c) to Amendment No. 1 to Form S-3 filed December 4, 2006
[Reg. No. 333-133194]; and First Supplemental Indenture by and between
Integrys Energy Group, Inc. and U.S. Bank National Association, as
trustee, dated December 1, 2006. (Incorporated by reference
to Exhibit 4 to Integrys Energy Group's Form 8-K filed December
1, 2006.)
|
4.3
|
Replacement
Capital Covenant of Integrys Energy Group, Inc., dated December 1,
2006. (Incorporated by reference to Exhibit 99 to Integrys
Energy Group Form 8-K filed December 1, 2006.)
|
|
|
4.4
|
Credit
Agreement dated as of June 13, 2006, by and among PEC, the financial
institutions party hereto, and Bank of America, N.A., JPMorgan Chase Bank,
N.A., ABN AMRO Incorporated, US Bank National Association, and The Bank of
Tokyo-Mitsubishi, Ltd. Chicago Branch, as agents. (Incorporated
by reference to Exhibit 10(a) to PEC - Form 10-Q filed August 9, 2006
[File No. 1-05540].)
|
|
|
4.5
|
Guaranty,
dated May 18, 2007, by and among Integrys Energy Group, Inc. and Bank of
America, N.A. in its capacity as Administrative Agent. (Incorporated
by reference to Exhibit 10.1 to Integrys Energy Group's Form 8-K filed May
22, 2007.)
|
|
|
4.6
|
First
Amendment and Consent to Credit Agreement dated May 18, 2007 between PEC
and Bank of America N.A., as Administrative
Agent. (Incorporated by reference to Exhibit 10.2 to Integrys
Energy Group's Form 8-K filed May 22, 2007.)
|
|
|
4.7
|
First
Mortgage and Deed of Trust, dated as of January 1, 1941 from WPS to U.S.
Bank National Association (successor to First Wisconsin Trust Company),
Trustee (Incorporated by reference to Exhibit 7.01 - File No. 2-7229);
Supplemental Indenture, dated as of November 1, 1947 (Incorporated by
reference to Exhibit 7.02 - File No. 2-7602); Supplemental Indenture,
dated as of November 1, 1950 (Incorporated by reference to Exhibit 4.04 -
File No. 2-10174); Supplemental Indenture, dated as of May 1, 1953
(Incorporated by reference to Exhibit 4.03 - File No. 2-10716);
Supplemental Indenture, dated as of October 1, 1954 (Incorporated by
reference to Exhibit 4.03 - File No. 2-13572); Supplemental
Indenture, dated as of December 1, 1957 (Incorporated by reference to
Exhibit 4.03 - File No. 2-14527); Supplemental Indenture, dated as of
October 1, 1963 (Incorporated by reference to Exhibit 2.02B -
File No. 2-65710); Supplemental Indenture, dated as of June 1, 1964
(Incorporated by reference to Exhibit 2.02B - File No. 2-65710);
Supplemental Indenture, dated as of November 1, 1967 (Incorporated by
reference to Exhibit 2.02B - File No. 2-65710); Supplemental Indenture,
dated as of April 1, 1969 (Incorporated by reference to Exhibit 2.02B -
File No. 2-65710); Fifteenth Supplemental Indenture, dated as of May 1,
1971 (Incorporated by reference to Exhibit 2.02B - File No. 2-65710);
Sixteenth Supplemental Indenture, dated as of August 1, 1973
(Incorporated by reference to Exhibit 2.02B - File No. 2-65710);
Seventeenth Supplemental Indenture, dated as of September 1, 1973
(Incorporated by reference to Exhibit 2.02B - File No. 2-65710);
Eighteenth Supplemental Indenture, dated as of October 1, 1975
(Incorporated by reference to Exhibit 2.02B - File No. 2-65710);
Nineteenth Supplemental Indenture, dated as of February 1, 1977
(Incorporated by reference to Exhibit 2.02B - File No. 2-65710);
Twentieth Supplemental Indenture, dated as of July 15, 1980 (Incorporated
by reference to Exhibit 4B to Form 10-K for the year ended
December 31, 1980); Twenty-First Supplemental Indenture, dated as of
December 1, 1980 (Incorporated by reference to Exhibit 4B to
Form 10-K for the year ended December 31, 1980); Twenty-Second
Supplemental Indenture dated as of April 1, 1981 (Incorporated by
reference to Exhibit 4B to Form 10-K for the year ended December 31,
1981); Twenty-Third Supplemental Indenture, dated as of February 1, 1984
(Incorporated by reference to Exhibit 4B to Form 10-K for the year ended
December 31, 1983); Twenty-Fourth Supplemental Indenture, dated as of
March 15, 1984 (Incorporated by reference to Exhibit 1 to Form 10-Q for
the quarter ended June 30, 1984); Twenty-Fifth Supplemental
Indenture, dated as of October 1, 1985 (Incorporated by reference to
Exhibit 1 to Form 10-Q for the quarter ended September 30,
1985); Twenty-Sixth Supplemental Indenture, dated as of December 1,
1987 (Incorporated by reference to Exhibit 4A-1 to Form 10-K for the year
ended December 31, 1987); Twenty-Seventh Supplemental Indenture,
dated as of September 1, 1991 (Incorporated by reference to Exhibit 4 to
Form 8-K filed September 18, 1991); Twenty-Eighth Supplemental Indenture,
dated as of July 1, 1992 (Incorporated by reference to Exhibit 4B - File
No. 33-51428); Twenty-Ninth Supplemental Indenture, dated as of
|
|
October 1,
1992 (Incorporated by reference to Exhibit 4 to Form 8-K filed October 22,
1992); Thirtieth Supplemental Indenture, dated as of February 1, 1993
(Incorporated by reference to Exhibit 4 to Form 8-K filed
January 27, 1993); Thirty-First Supplemental Indenture, dated as of
July 1, 1993 (Incorporated by reference to Exhibit 4 to Form 8-K filed
July 7, 1993); Thirty-Second Supplemental Indenture, dated as of
November 1, 1993 (Incorporated by reference to Exhibit 4 to
Form 10-Q for the quarter ended September 30, 1993); Thirty-Third
Supplemental Indenture, dated as of December 1, 1998 (Incorporated by
reference to Exhibit 4D to Form 8-K filed December 18, 1998);
Thirty-Fourth Supplemental Indenture, dated as of August 1, 2001
(Incorporated by reference to Exhibit 4D to Form 8-K filed August 24,
2001); Thirty-Fifth Supplemental Indenture, dated as of December 1,
2002 (Incorporated by reference to Exhibit 4D to Form 8-K filed
December 16, 2002); Thirty-Sixth Supplemental Indenture, dated as of
December 8, 2003 (Incorporated by reference to Exhibit 4.2 to Form
8-K filed December 9, 2003); Thirty-Seventh Supplemental Indenture,
dated as of December 1, 2006 (Incorporated by reference to Exhibit
4.2 to Form 8-K filed November 30, 2006); Thirty-Eighth Supplemental
Indenture, dated as of August 1, 2006 (Incorporated by reference to
Exhibit 4.1 to Form 10-K for the year ended December 31, 2006);
Thirty-Ninth Supplemental Indenture, dated as of November 1, 2007
(Incorporated by reference to Exhibit 4.2 to Form 8-K filed November 16,
2007); and Fortieth Supplemental Indenture, dated as of December 1, 2008
(Incorporated by reference to Exhibit 4.2 to Form 8-K filed December 4,
2008). All references to periodic reports are to those of WPS
(File No. 1-3016). |
|
|
4.8
|
Indenture,
dated as of December 1, 1998, between WPS and U.S. Bank National
Association (successor to Firstar Bank Milwaukee, N.A., National
Association) (Incorporated by reference to Exhibit 4A to Form 8-K filed
December 18, 1998); First Supplemental Indenture, dated as of
December 1, 1998 between WPS and Firstar Bank Milwaukee, N.A.,
National Association (Incorporated by reference to Exhibit 4C to Form 8-K
filed December 18, 1998); Second Supplemental Indenture, dated as of
August 1, 2001 between WPS and Firstar Bank, National Association
(Incorporated by reference to Exhibit 4C of Form 8-K filed August 24,
2001); Third Supplemental Indenture, dated as of December 1, 2002
between WPS and U.S. Bank National Association (Incorporated by reference
to Exhibit 4C of Form 8-K filed December 16, 2002); Fourth
Supplemental Indenture, dated as of December 8, 2003, by and between
WPS and U.S. Bank National Association (successor to Firstar Bank,
National Association and Firstar Bank Milwaukee, N.A., National
Association) (Incorporated by reference to Exhibit 4.1 to Form
8-K filed December 9, 2003); Fifth Supplemental Indenture, dated as
of December 1, 2006, by and between WPS and U.S. Bank National
Association (successor to Firstar Bank, National Association and Firstar
Bank Milwaukee, N.A., National Association) (Incorporated by
reference to Exhibit 4.1 to Form 8-K filed November 30, 2006); Sixth
Supplemental Indenture, dated as of December 1, 2006, by and between
WPS and U.S. Bank National Association (successor to Firstar Bank,
National Association and Firstar Bank Milwaukee, N.A., National
Association) (Incorporated by reference to Exhibit 4.2 to Form 10-K for
the year ended December 31, 2006); Seventh Supplemental Indenture, dated
as of November 1, 2007, by and between WPS and U.S. Bank
National Association (successor to Firstar Bank, National Association and
Firstar Bank Milwaukee, N.A., National Association) (Incorporated by
reference to Exhibit 4.1 to Form 8-K filed November 16, 2007); and Eighth
Supplemental Indenture, dated as of December 1, 2008, by and between
WPS and U.S. Bank National Association (successor to Firstar Bank,
National Association and Firstar Bank Milwaukee, N.A., National
Association) (Incorporated by reference to Exhibit 4.1 to Form 8-K filed
December 4, 2008). References to periodic reports are to those
of WPS (File No. 1-3016).
|
|
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4.9
|
Indenture,
dated as of January 18, 2001, between PEC and Bank One Trust Company
National Association. (Incorporated by reference to Exhibit
4(a) to PEC Form 10-Q filed May 15, 2001[File No.
1-05540].)
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4.10
|
First
Supplemental Indenture, dated as of March 5, 2007, by and among PEC,
Integrys Energy Group, Inc. and The Bank of New York Trust Company, N.A.,
as Trustee including a Guaranty of Integrys Energy Group,
Inc. (Incorporated by reference to Exhibit 4.1 to Integrys
Energy Group's Form 8-K filed March 9, 2007.)
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4.11
|
PGL First and
Refunding Mortgage, dated January 2, 1926, from Chicago By-Product Coke
Company to Illinois Merchants Trust Company, Trustee, assumed by PGL by
Indenture dated March 1, 1928 (PGL - May 17, 1935, Exhibit B-6a, Exhibit
B-6b A-2 File No. 2-2151, 1936); Supplemental Indenture dated as of
May 20, 1936, (PGL - Form 8-K for the year 1936, Exhibit B-6f);
Supplemental Indenture dated as of March 10, 1950 (PGL - Form 8-K for the
month of March 1950, Exhibit B-6i); Supplemental Indenture dated as of
June 1, 1951 (PGL - File No. 2-8989, Post-Effective, Exhibit 7-4(b));
Supplemental Indenture dated as of August 15, 1967 (PGL - File
No. 2-26983, Post-Effective, Exhibit 2-4); Supplemental Indenture
dated as of September 15, 1970 (PGL - File No. 2-38168,
Post-Effective Exhibit 2-2); Supplemental Indenture dated June 1,
1995 (PGL - Form 10-K for fiscal year ended September 30, 1995);
Supplemental Indenture, First and Refunding Mortgage Multi-Modal Bonds,
Series HH of PGL, effective March 1, 2000 (PGL - Form 10-K for fiscal year
ended September 30, 2000, Exhibit 4(b)); Supplemental Indenture dated as
of February 1, 2003, First and Refunding Mortgage 5% Bonds, Series KK
(PEC and PGL - Form 10-Q for the quarter ended March 31, 2003, Exhibit
4(a)); Supplemental Indenture dated as of February 1, 2003, First and
Refunding Mortgage Multi-Modal Bonds, Series LL (PEC and PGL - Form 10-Q
for the quarter ended March 31, 2003, Exhibit 4(b)); Supplemental
Indenture dated as of February 15, 2003, First and Refunding Mortgage
4.00% Bonds, Series MM-1 and Series MM-2 (PEC and PGL - Form 10-Q for the
quarter ended March 31, 2003, Exhibit 4(c)); Supplemental Indenture dated
as of April 15, 2003, First and Refunding Mortgage 4.625% Bonds, Series
NN-1 and Series NN-2 (PEC and PGL - Form 10-Q for the quarter ended March
31, 2003, Exhibit 4(e)); Supplemental Indenture dated as of October 1,
2003, First and Refunding Mortgage Bonds, Series OO (PEC and PGL - Form
10-Q for the quarter ended December 31, 2003, Exhibit 4(a)); PGL
Supplemental Indenture dated as of October 1, 2003, First and Refunding
Mortgage Bonds, Series PP (PEC and PGL - Form 10-Q for the quarter ended
December 31, 2003, Exhibit 4(b)); PGL Supplemental Indenture dated as of
November 1, 2003, First and Refunding Mortgage Multi-Modal Bonds, Series
QQ (PEC and PGL - Form 10-Q for the quarter ended December 31,
2003, Exhibit 4(c)); PGL Supplemental Indenture dated as of January 1,
2005, First and Refunding Mortgage Bonds, Series RR (PEC and PGL - Form
10-Q for the quarter ended December 31, 2004, Exhibit 4(b)); Loan
Agreement between PGL and Illinois Development Finance Authority dated
October 1, 2003, Gas Supply Refunding Revenue Bonds, Series 2003C (PEC and
PGL - Form 10-Q for the quarter ended December 31, 2003, Exhibit
4(d)); Loan Agreement between PGL and Illinois Development Finance
Authority dated October 1, 2003, Gas Supply Refunding Revenue Bonds,
Series 2003D (PEC and PGL - Form 10-Q for the quarter ended December 31,
2003, Exhibit 4(e)); Loan Agreement between PGL and Illinois Development
Finance Authority dated November 1, 2003, Gas Supply Refunding Revenue
Bonds, Series 2003E (PEC and PGL - Form 10-Q for the quarter ended
December 31, 2003, Exhibit 4(f)); Loan Agreement between PGL and
Illinois Finance Authority dated as of January 1,
2005. (Incorporated by reference to Exhibit 4(a) to PEC Form
10-Q filed February 9, 2005); Supplemental Indenture
dated as of November 1, 2008, First and Refunding Mortgage 7.00% Bonds,
Series SS; and Supplemental Indenture dated as of November 1, 2008, First
and Refunding Mortgage 8.00% Bonds, Series TT.
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4.12
|
NSG
Indenture, dated as of April 1, 1955, from NSG to Continental
Bank, National Association, as Trustee; Third Supplemental Indenture,
dated as of December 20, 1963 (NSG - File No. 2-35965, Exhibit 4-1);
Fourth Supplemental Indenture, dated as of May 1 1964 (NSG - File No.
2-35965, Exhibit 4-1); Fifth Supplemental Indenture dated as of
February 1, 1970 (NSG - File No. 2-35965, Exhibit 4-2);
Ninth Supplemental Indenture dated as of December 1, 1987 (NSG - Form 10-K
for the fiscal year ended September 30, 1987, Exhibit 4); Thirteenth
Supplemental Indenture dated December 1, 1998 (NSG Gas - Form
|
|
10-Q for the quarter ended March 31, 1999, Exhibit 4); Fourteenth
Supplemental Indenture dated as of April 15, 2003, First Mortgage 4.625%
Bonds, Series N-1 and Series N-2 (Incorporated by reference to Exhibit
4(g) to PEC Form 10-Q filed May 13, 2003) and Fifteenth Supplemental
Indenture dated as of November 1, 2008, First Mortgage 7.00% Bonds, Series
O. |
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10.1+
|
Form of Key
Executive Employment and Severance Agreement entered into between Integrys
Energy Group and each of the following: Phillip M. Mikulsky and
Larry L. Weyers.
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10.2+
|
Form of Key
Executive Employment and Severance Agreement entered into between Integrys
Energy Group and each of the following: Lawrence T. Borgard,
Diane L. Ford, Bradley A. Johnson, Thomas P. Meinz, Joseph P. O'Leary,
Mark A. Radtke, Charles A. Schrock, and Barth J.
Wolf.
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10.3+
|
Form of
Integrys Energy Group Performance Stock Right
Agreement. (Incorporated by reference to Exhibit 10.2 to
Integrys Energy Group's Form 8-K filed December 13,
2005.)
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10.4+
|
Form of
Integrys Energy Group 2007 Omnibus Incentive Compensation Plan Performance
Stock Right Agreement approved May 17, 2007. (Incorporated by
reference to Exhibit 10.5 to Integrys Energy Group's Form 10-K filed
February 28, 2008.)
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10.5+
|
Form of
Integrys Energy Group 2007 Omnibus Incentive Compensation Plan Performance
Stock Right Agreement approved February 14, 2008. (Incorporated
by reference to Exhibit 10.6 to Integrys Energy Group's Form 10-K filed
February 28, 2008.)
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10.6+
|
Form of
Integrys Energy Group 2005 Omnibus Incentive Compensation Plan Restricted
Stock Award Agreement. (Incorporated by reference to Exhibit
10.1 to Integrys Energy Group Form 8-K filed December 13,
2006.)
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10.7+
|
Form of
Integrys Energy Group 2007 Omnibus Incentive Compensation Plan Restricted
Stock Award Agreement approved May 17, 2007. (Incorporated by
reference to Exhibit 10.8 to Integrys Energy Group's Form 10-K filed
February 28, 2008.)
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10.8+
|
Form of
Integrys Energy Group 2007 Omnibus Incentive Compensation Plan Restricted
Stock Award Agreement approved February 14, 2008. (Incorporated
by reference to Exhibit 10.9 to Integrys Energy Group's Form 10-K filed
February 28, 2008.)
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10.9+
|
Form of
Integrys Energy Group 2007 Omnibus Incentive Compensation Plan
NonQualified Stock Option Agreement approved May 17,
2007. (Incorporated by reference to Exhibit 10.10 to Integrys
Energy Group's Form 10-K filed February 28, 2008.)
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10.10+
|
Form of
Integrys Energy Group 2007 Omnibus Incentive Compensation Plan
NonQualified Stock Option Agreement approved February 14,
2008. (Incorporated by reference to Exhibit 10.11 to Integrys
Energy Group's Form 10-K filed February 28, 2008.)
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10.11+
|
Integrys
Energy Group 1999 Stock Option Plan. (Incorporated by reference
to Exhibit 10-2 in Integrys Energy Group's Form 10-Q for the quarter ended
June 30, 1999, filed August 11, 1999.)
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10.12+
|
Integrys
Energy Group 1999 Non-Employee Directors Stock Option
Plan. (Incorporated by reference to Exhibit 4.2 in Integrys
Energy Group's Form S-8, filed December 21, 1999. [Reg.
No. 333-93193].)
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10.13+
|
Integrys
Energy Group Deferred Compensation Plan as Amended and Restated Effective
April 1, 2008. (Incorporated by reference to Exhibit 10.14 to
Integrys Energy Group's Form 10-K filed February 28,
2008.)
|
10.14+
|
Integrys
Energy Group 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 Form 8-K filed April
15, 2008.)
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10.15+
|
Integrys
Energy Group 2001 Omnibus Incentive Compensation
Plan. (Incorporated by reference to Exhibit 10.16 to Integrys
Energy Group's Form 10-K for the year ended December 31, 2005, filed
February 28, 2006.)
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|
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10.16+
|
Integrys
Energy Group 2005 Omnibus Incentive Compensation
Plan. (Incorporated by reference to Exhibit 10.2 to Integrys
Energy Group's Form 10-Q filed August 4, 2005.)
|
|
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10.17+
|
Integrys
Energy Group 2007 Omnibus Incentive Compensation
Plan. (Incorporated by reference to Exhibit 10.17 to Integrys
Energy Group's Form 10-K filed February 28, 2008.)
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10.18+
|
PEC Directors
Stock and Option Plan as amended December 4,
2002. (Incorporated by reference to Exhibit 10(g) to PEC Form
10-Q, filed February 11, 2003 [File No. 1-05540].)
|
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10.19+
|
PEC Directors
Deferred Compensation Plan as amended and restated April 7,
2004. (Incorporated by reference to Exhibit 10(a) to PEC Form
10-Q filed August 4, 2005.)
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10.20+
|
PEC Executive
Deferred Compensation Plan amended as of December 4,
2002. (Incorporated by reference to Exhibit 10 (c) to PEC Form
10-Q filed February 11, 2003.)
|
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10.21+
|
PEC 1990
Long-Term Incentive Compensation Plan as amended December 4,
2002. (Incorporated by reference to Exhibit 10(d) to
Quarterly Report on Form 10-Q of PEC for the quarterly period ended
December 31, 2002, filed February 11, 2003 [File No.
1-05540].)
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10.22+
|
Amended and
Restated Trust under PEC Directors Deferred Compensation Plan, Directors
Stock and Option Plan, Executive Deferred Compensation Plan and
Supplemental Retirement Benefit Plan, dated as of August 13,
2003. (Incorporated by reference to Exhibit 10 (a) to PEC Form
10-K filed December 11, 2003.)
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10.23+
|
Amendment
Number One to the Amended and Restated Trust under PEC Directors Deferred
Compensation Plan, Directors Stock and Option Plan, Executive Deferred
Compensation Plan and Supplemental Retirement Benefit Plan, dated as of
July 24, 2006. (Incorporated by reference to Exhibit 10(e) to
PEC Form 10-K filed December 14, 2006.)
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10.24
|
Term Loan
Agreement, dated as of November 5, 1999 among PDI New England, Inc.,
PDI Canada, Inc., and Bayerische Landesbank
Girozentrale. (Incorporated by reference to Exhibit 4H to
Integrys Energy Group's and WPS's Form 10-K for the year ended
December 31, 1999.)
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10.25
|
Five Year
Credit Agreement among Integrys Energy Group, Inc. and the lenders
identified herein, Citibank, N.A., Wells Fargo Bank National Association,
J P Morgan Chase Bank, N.A., UBS Securities LLC, U.S. Bank
National Association, and U.S. Bank National Association and
Citigroup Global Markets Inc., dated as of June 2,
2005. (Incorporated by reference to Exhibit 10.1 to Integrys
Energy Group's and WPS's Form 10-Q for the quarter ended June 30,
2005, filed August 4, 2005.)
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10.26
|
Five Year
Credit Agreement among Integrys Energy Group, Inc., as Borrower, the
Lenders Identified Therein, Citibank, N.A., as Syndication Agent, U.S.
Bank National Association, Bank of America, N.A., JPMorgan Chase Bank,
N.A., as Co-Documentation Agents, Wachovia Bank, National Association, as
Agent, and Wachovia Bank, National Association and Citigroup Global
Markets Inc, as Co-Lead Arrangers and Book Managers dated as of June 9,
2006. (Incorporated by reference to Exhibit 99.1 to Integrys
Energy Group's Form 8-K filed June 15, 2006.)
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10.27
|
Five Year
Credit Agreement among Wisconsin Public Service Corporation, as Borrower,
The Lenders Identified Herein, U.S. Bank National Association, as
Syndication Agent, Wells Fargo Bank National Association, as
Co-Documentation Agent, JPMorgan Chase Bank, N.A., as Co-Documentation
Agent, UBS Securities LLC, as Co-Documentation Agent, Citibank, N.A., as
Administrative Agent and Citigroup Global Markets, Inc. and U.S. Bank
National Association, as Co-Lead Arrangers and Book Managers dated as of
June 2, 2005. (Incorporated by reference to Exhibit 10.22 to
WPS's Form 10-K filed February 28, 2008 [File No.
1-3016].)
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10.28
|
Credit
Agreement Dated as of July 12, 2005 among PGL, The Financial Institutions
Party Hereto, s Banks, ABN AMRO Bank N.V., as Administrative Agent,
JPMorgan Chase Bank, NA, as Syndication Agent, ABN AMRO Incorporated, as
Co-Lead Arranger and Joint Bookrunner, and J.P. Morgan Securities Inc., as
Co-Lead Arranger and Joint Bookrunner. (Incorporated by
reference to Exhibit 10(A) to PEC Form 10-K/A filed December 14,
2005.)
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10.29*
#
|
Joint Plant
Agreement by and between WPS and Dairyland Power Cooperative, dated as of
November 23, 2004. (Incorporated by reference to Exhibit 10.19
to Integrys Energy Group's and WPS's Form 10-K for the year ended
December 31, 2004.)
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12
|
Integrys
Energy Group Ratio of Earnings to Fixed Charges.
|
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21
|
Subsidiaries
of Integrys Energy Group.
|
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23.1
|
Consent of
Independent Registered Public Accounting Firm for Integrys Energy
Group.
|
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23.2~
|
Consent of
Independent Registered Public Accounting Firm for American Transmission
Company LLC.
|
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24
|
Powers of
Attorney.
|
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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.
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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.
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32
|
Written
Statement of the Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350 for Integrys Energy
Group.
|
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99.1
|
Proxy
Statement for Integrys Energy Group's 2009 Annual Meeting of
Shareholders. [To be filed with the SEC under Regulation 14A
within 120 days after December 31, 2008; except to the extent
specifically incorporated by reference, the Proxy Statement for the 2009
Annual Meeting of Shareholders shall not be deemed to be filed with the
SEC as part of this Annual Report on Form 10-K.]
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99.2~
|
Financial
Statements of American Transmission Company LLC.
|
|
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*
|
Schedules and
exhibits to this document are not filed therewith. The
registrant agrees to furnish supplementally a copy of any such schedule or
exhibit to the SEC upon request.
|
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+
|
A management
contract or compensatory plan or arrangement.
|
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#
|
Portions of
this exhibit have been redacted and are subject to a confidential
treatment request filed with the Secretary of SEC pursuant to Rule 24b-2
under the Securities and Exchange Act of 1934, as amended. The
redacted material was filed separately with the SEC.
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~
|
In accordance
with Rule 3-09 of Regulation S-X, to be filed by amendment to this Annual
Report on Form 10-K.
|