INTEGRYS
ENERGY GROUP, INC. AND SUBSIDIARIES
CONDENSED
NOTES TO FINANCIAL STATEMENTS
March 31,
2009
NOTE 1--FINANCIAL
INFORMATION
The Condensed
Consolidated Financial Statements of Integrys Energy Group, Inc. have been
prepared pursuant to the rules and regulations of the SEC for Quarterly Reports
on Form 10-Q and in accordance with GAAP. Accordingly, these
Condensed Consolidated Financial Statements do not include all of the
information and footnotes required by GAAP for annual financial
statements. These Condensed Consolidated Financial Statements should
be read in conjunction with the Consolidated Financial Statements and Notes in
the Integrys Energy Group Annual Report on Form 10-K for the year ended
December 31, 2008.
The Condensed
Consolidated Financial Statements are unaudited, but in management's opinion,
include all adjustments (which, unless otherwise noted, include only normal
recurring adjustments) necessary for a fair presentation of such financial
statements. Financial results for this interim period are not
necessarily indicative of results that may be expected for any other interim
period or for the year ending December 31, 2009.
NOTE 2--CASH
AND CASH EQUIVALENTS
Short-term
investments with an original maturity of three months or less are reported
as cash equivalents.
The following is
supplemental disclosure to the Integrys Energy Group Condensed Consolidated
Statements of Cash Flows:
|
|
Three
Months Ended March 31
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
Cash paid for
interest
|
|
$ |
29.7 |
|
|
$ |
29.3 |
|
Cash paid for
income taxes
|
|
|
0.9 |
|
|
|
31.1 |
|
Significant
non-cash transactions were:
|
|
Three
Months Ended March 31
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
Construction
costs funded through accounts payable
|
|
$ |
17.9 |
|
|
$ |
22.6 |
|
Intangible
asset received in exchange for risk
management
assets
|
|
|
9.2 |
|
|
|
- |
|
NOTE 3--RISK
MANAGEMENT ACTIVITIES
Integrys Energy
Group is exposed to certain risks relating to its ongoing business
operations. At the utility segments, Integrys Energy Group uses
derivative instruments to mitigate commodity price risk. At the
nonregulated segments, derivative instruments are used to mitigate commodity
price risk, volumetric risk, interest rate risk, and foreign currency exchange
rate risk.
The following table
shows Integrys Energy Group's assets and liabilities from risk management
activities:
|
|
|
Risk Management Assets
|
|
|
Risk Management Liabilities
|
|
(Millions)
|
Balance
Sheet Presentation
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
Utility
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-hedge
derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Current
|
|
$ |
9.2 |
|
|
$ |
28.6 |
|
|
$ |
134.6 |
|
|
$ |
161.6 |
|
Commodity contracts
|
Long-term
|
|
|
0.1 |
|
|
|
- |
|
|
|
8.8 |
|
|
|
9.0 |
|
Cash flow
hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Current
|
|
|
- |
|
|
|
- |
|
|
|
2.0 |
|
|
|
1.5 |
|
Commodity contracts
|
Long-term
|
|
|
- |
|
|
|
- |
|
|
|
0.2 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonregulated
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-hedge
derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Current
|
|
|
2,662.5 |
|
|
|
2,080.9 |
|
|
|
2,602.5 |
|
|
|
1,944.8 |
|
Commodity contracts
|
Long-term
|
|
|
1,125.4 |
|
|
|
750.0 |
|
|
|
1,144.2 |
|
|
|
729.7 |
|
Interest rate swaps
|
Current
|
|
|
- |
|
|
|
- |
|
|
|
2.9 |
|
|
|
1.0 |
|
Interest rate swaps
|
Long-term
|
|
|
- |
|
|
|
- |
|
|
|
1.2 |
|
|
|
3.3 |
|
Foreign exchange
contracts
|
Current
|
|
|
3.3 |
|
|
|
2.8 |
|
|
|
0.8 |
|
|
|
0.5 |
|
Foreign exchange
contracts
|
Long-term
|
|
|
2.7 |
|
|
|
2.5 |
|
|
|
2.8 |
|
|
|
2.3 |
|
Fair value
hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Current
|
|
|
- |
|
|
|
14.2 |
|
|
|
- |
|
|
|
- |
|
Commodity contracts
|
Long-term
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Interest rate swaps
|
Current
|
|
|
1.5 |
|
|
|
1.1 |
|
|
|
- |
|
|
|
- |
|
Interest rate swaps
|
Long-term
|
|
|
1.4 |
|
|
|
2.1 |
|
|
|
- |
|
|
|
- |
|
Cash flow
hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Current
|
|
|
55.2 |
|
|
|
81.3 |
|
|
|
103.4 |
|
|
|
79.4 |
|
Commodity contracts
|
Long-term
|
|
|
6.2 |
|
|
|
4.1 |
|
|
|
32.3 |
|
|
|
14.8 |
|
Interest rate swaps
|
Current
|
|
|
- |
|
|
|
- |
|
|
|
1.5 |
|
|
|
1.5 |
|
Interest rate swaps
|
Long-term
|
|
|
- |
|
|
|
- |
|
|
|
2.7 |
|
|
|
3.6 |
|
Foreign exchange
contracts
|
Current
|
|
|
- |
|
|
|
14.8 |
|
|
|
- |
|
|
|
- |
|
Total
|
|
|
$ |
3,867.5 |
|
|
$ |
2,982.4 |
|
|
$ |
4,039.9 |
|
|
$ |
2,953.0 |
|
Assets and
liabilities from risk management activities are classified as current or
long-term based upon the maturities of the underlying contracts.
FASB Interpretation
No. 39, "Offsetting of Amounts Related to Certain Contracts," as amended,
provides the option to present certain asset and liability derivative positions
net on the balance sheet and to net the related cash collateral against these
net derivative positions. Integrys Energy Group elected not to net
these items in its Condensed Consolidated Balance Sheets. The
following table shows Integrys Energy Group's cash collateral
positions:
(Millions)
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
Cash
collateral provided to others
|
|
$ |
461.8 |
|
|
$ |
256.4 |
|
Cash
collateral received from others
|
|
|
211.3 |
|
|
|
18.9 |
|
On the Condensed
Consolidated Balance Sheets, the cash collateral provided to others is reflected
in Accounts receivable, and the cash collateral received from others is
reflected in Other current liabilities.
Certain of Integrys
Energy Group's derivative and nonderivative commodity instruments contain
provisions that could require the posting of additional collateral for
instruments in net liability positions, if triggered by a decrease in credit
ratings. The aggregate fair value of all derivative instruments with
credit-risk related contingent features that were in a liability position at
March 31, 2009, was $1,522.5 million. As of March 31,
2009, Integrys Energy Group had posted cash collateral of $9.6 million in
the normal course of business related to all commodity instruments (including
derivatives, non-derivatives, normal purchase normal sales contracts, and
applicable payables and receivables) with credit-risk related contingent
features.
If
all of the credit-risk related contingent features contained in commodity
instruments (including derivatives, non-derivatives, normal purchase normal
sales contracts, and applicable payables and receivables) had been triggered at
March 31, 2009, Integrys Energy Group would have been required to post
collateral of $1,263.3 million. Of this $1,263.3 million,
Integrys Energy Group has already satisfied
$486.7 million with letters of credit. Therefore, the
remaining collateral requirement would have been $776.6
million.
Utility
Segments
Non-Hedge
Derivatives
The derivatives
listed in the above table as "commodity contracts" include a limited number of
natural gas purchase contracts, financial derivative contracts (NYMEX futures,
options, and swaps) used by both the electric and natural gas utility segments
to mitigate the risk associated with the market price volatility of natural gas,
and financial instruments used to manage electric transmission congestion costs
(financial transmission rights (FTRs)).
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. Most
energy-related physical and financial derivatives at the utilities 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, "Accounting for
Derivative Instruments and Hedging Activities," and the resulting risk
management asset or liability is offset with a corresponding regulatory
liability or asset, respectively. Management believes any gains or
losses resulting from the eventual settlement of these derivative instruments
will be collected from or refunded to customers. The tables below
show the gains (losses) recorded on the financial statements related to
non-hedge derivatives at the utilities.
|
|
|
Gain
(Loss) During
|
|
(Millions)
|
Financial
Statement Presentation
|
|
Three
Months Ended March 31, 2009
|
|
Commodity
contracts
|
Balance Sheet
– Regulatory assets - current
|
|
$ |
15.8 |
|
Commodity
contracts
|
Balance Sheet
– Regulatory assets - long-term
|
|
|
0.3 |
|
Commodity
contracts
|
Balance Sheet
– Regulatory liabilities - current
|
|
|
(2.7 |
) |
Commodity
contracts
|
Income
Statement – Utility cost of fuel, natural gas, andpurchased
power
|
|
|
0.2 |
|
At
March 31, 2009, the utilities had the following notional volumes of
outstanding non-hedge derivative contracts:
(Millions)
|
|
Purchases
|
|
|
Sales
|
|
|
Other
Transactions
|
|
Natural gas
(therms)
|
|
|
1,061.0 |
|
|
|
48.2 |
|
|
|
N/A |
|
FTRs
(kilowatt-hours)
|
|
|
N/A |
|
|
|
N/A |
|
|
|
2,147.5 |
|
Cash
Flow Hedges
PGL uses commodity
contracts designated as cash flow hedges to hedge changes in the price of
natural gas used to support operations. These contracts extend
through December 2010. At March 31, 2009, PGL had the
following notional volumes of outstanding contracts that were designated as cash
flow hedges:
(Millions)
|
|
Purchases
|
|
Commodity
contracts
|
|
|
|
Natural
gas (therms)
|
|
|
8.7 |
|
Changes in the fair
values of the effective portion of these contracts are included in other
comprehensive income (OCI), net of taxes. Amounts recorded in OCI
related to these cash flow hedges will be recognized in earnings when the hedged
transactions occur, which is typically as the forecasted natural gas purchases
occur, or if it is probable that the hedged transaction will not
occur. The tables below show the amounts related to cash flow hedges
recorded in OCI and in earnings for the three months ended March 31, 2009,
and 2008, respectively.
|
|
Unrealized
Gain (Loss) Recognized in OCI on Derivative Instrument (Effective
Portion)
|
|
(Millions)
|
|
Three
Months Ended March 31, 2009
|
|
|
Three
Months Ended March 31, 2008
|
|
Commodity
contracts
|
|
$ |
(0.6 |
) |
|
$ |
1.5 |
|
|
|
|
Loss
Reclassified from
Accumulated
OCI into Income
(Effective
Portion)
|
|
(Millions)
|
Income
Statement Presentation
|
|
Three
Months Ended March 31, 2009
|
|
|
Three
Months Ended March 31, 2008
|
|
Settled
|
|
|
|
|
|
|
|
Commodity contracts
|
Operating and
maintenance expense
|
|
$ |
(0.6 |
) |
|
$ |
(0.1 |
) |
The amount
reclassified from accumulated OCI into earnings as a result of the
discontinuance of cash flow hedge accounting for certain hedge transactions was
not significant for the three months ended March 31, 2009, and
2008. Cash flow hedge ineffectiveness related to these commodity
contracts was not significant for the three months ended March 31, 2009,
and 2008. When testing for effectiveness, no portion of the
derivative instruments was excluded. In the next 12 months, PGL
expects that a pre-tax loss of $2.0 million will be recognized in earnings
as the hedged transactions occur.
Nonregulated
Segments
Non-Hedge
Derivatives
Integrys Energy
Group's nonregulated segments enter into derivative contracts such as futures,
forwards, options, and swaps that are not designated as accounting hedges under
GAAP. In most cases, these contracts are used to manage commodity
price risk associated with customer related contracts, interest rate risk
associated with expected future natural gas purchases, and foreign currency
exchange rate risk related to Integrys Energy Services' Canadian
operations. In limited circumstances, Integrys Energy Services may
also enter into non-hedge derivative contracts to take advantage of
opportunities and inefficiencies in the natural gas and electric energy markets
unrelated to its customer positions to profit on price movements.
At
March 31, 2009, the nonregulated segments had the following notional
volumes of outstanding non-hedge derivative contracts:
(Millions)
|
|
Purchases
|
|
|
Sales
|
|
|
Other
Transactions
|
|
Commodity
contracts
|
|
|
|
|
|
|
|
|
|
Natural gas (therms)
|
|
|
8,459.2 |
|
|
|
8,167.1 |
|
|
|
N/A |
|
Power (kilowatt-hours)
|
|
|
123,131.2 |
|
|
|
115,897.4 |
|
|
|
N/A |
|
Interest rate
swaps (dollars)
|
|
|
N/A |
|
|
|
N/A |
|
|
|
253.7 |
|
Foreign
exchange contracts (dollars)
|
|
|
90.4 |
|
|
|
81.3 |
|
|
|
N/A |
|
Gains and losses
related to non-hedge derivatives are recognized currently in earnings, as shown
in the table below.
|
|
|
Gain
(Loss) During
|
|
(Millions)
|
Income
Statement Presentation
|
|
Three
Months Ended March 31, 2009
|
|
Commodity
contracts
|
Nonregulated
revenue
|
|
$ |
(39.6 |
) |
Interest rate
swaps
|
Interest
expense
|
|
|
0.1 |
|
Foreign
exchange contracts
|
Nonregulated
revenue
|
|
|
0.1 |
|
Total
|
|
|
$ |
(39.4 |
) |
Fair
Value Hedges
At
PEC, an interest rate swap designated as a fair value hedge is used to hedge
changes in the fair value of $50.0 million of PEC Series A 6.9% notes due
January 15, 2011. The changes in the fair value of this hedge
are recognized currently in earnings, as are the changes in fair value of the
hedged item. Unrealized gains (losses) related to the fair value
hedge and the related hedged item are shown in the table below.
(Millions)
|
Income
Statement Presentation
|
|
Three
Months Ended March 31, 2009
|
|
Derivative
instruments
|
|
|
|
|
Interest rate swaps
|
Interest
expense
|
|
$ |
2.9 |
|
Hedged
items
|
|
|
|
|
|
Interest on debt hedged by
swaps
|
Interest
expense
|
|
|
(2.9 |
) |
Total
|
|
|
$ |
- |
|
Fair value hedge
ineffectiveness recorded in interest expense on the Condensed Consolidated
Statements of Income was not significant for the three months ended
March 31, 2009, and 2008. No amounts were excluded from
effectiveness testing related to the interest rate swap during the three months
ended March 31, 2009, and 2008.
In
the first quarter of 2008, Integrys Energy Services had commodity derivative
contracts designated as 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 for the three months ended March 31,
2008. 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 $4.1 million during the three months ended March 31,
2008.
Cash
Flow Hedges
Futures, forwards,
and swaps 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. Integrys Energy Group has two interest rate swaps that
are designated as cash flow hedges to fix the interest rate on an unsecured term
loan through June 2010. At March 31, 2009, the nonregulated
segments had the following notional volumes of outstanding contracts that were
designated as cash flow hedges:
(Millions)
|
|
Purchases
|
|
|
Sales
|
|
|
Other
Transactions
|
|
Commodity
contracts
|
|
|
|
|
|
|
|
|
|
Natural
gas (therms)
|
|
|
176.4 |
|
|
|
208.7 |
|
|
|
N/A |
|
Power
(kilowatt-hours)
|
|
|
7,240.7 |
|
|
|
- |
|
|
|
N/A |
|
Interest rate
swaps (dollars)
|
|
|
N/A |
|
|
|
N/A |
|
|
|
65.6 |
|
Changes in the fair
values of the effective portion of contracts designated as cash flow hedges are
included in OCI, net of taxes. Amounts recorded in OCI related to
cash flow hedges will be recognized in earnings when the hedged transactions
occur, which is typically as the related hedged transactions occur,
or
if it is probable that the hedged transaction will not occur. On
March 30, 2009, Integrys Energy Group settled two forward foreign currency
exchange contracts that were designated as cash flow hedges to mitigate the
variability in the foreign currency exposure of a fixed rate Japanese yen
denominated term loan that matured on March 30, 2009. The tables
below show the amounts related to cash flow hedges recorded in OCI and in
earnings for the three months ended March 31, 2009, and 2008,
respectively.
|
|
Unrealized
Gain (Loss) Recognized in OCI on Derivative Instrument
(Effective
Portion)
|
|
(Millions)
|
|
Three
Months Ended March 31,
2009
|
|
|
Three
Months Ended March 31, 2008
|
|
Commodity
contracts
|
|
$ |
(50.0 |
) |
|
$ |
(21.0 |
) |
Interest rate
swaps
|
|
|
0.9 |
|
|
|
(1.7 |
) |
Total
|
|
$ |
(49.1 |
) |
|
$ |
(22.7 |
) |
|
|
|
Gain
or (Loss) Reclassified from Accumulated OCI into Income (Effective
Portion)
|
|
(Millions)
|
Income
Statement Presentation
|
|
Three
Months Ended March 31,
2009
|
|
|
Three
Months Ended March 31, 2008
|
|
Settled
|
|
|
|
|
|
|
|
Commodity contracts
|
Nonregulated
revenue
|
|
$ |
16.7 |
|
|
$ |
1.1 |
|
Interest rate swaps
|
Interest
expense
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
Foreign currency
|
Interest
expense
|
|
|
14.8 |
|
|
|
- |
|
Hedge
Designation Discontinued
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Nonregulated
revenue
|
|
|
(0.5 |
) |
|
|
0.2 |
|
Total
|
|
|
$ |
30.9 |
|
|
$ |
1.2 |
|
|
|
|
Loss
Recognized in Income on Derivative Instrument (Ineffective Portion
and Amount Excluded from Effectiveness Testing)
|
|
(Millions)
|
Income
Statement Presentation
|
|
Three
Months Ended March 31,
2009
|
|
|
Three
Months Ended March 31, 2008
|
|
Commodity
contracts
|
Nonregulated
revenue
|
|
$ |
(0.8 |
) |
|
$ |
(1.3 |
) |
In
the next 12 months, subject to changes in market prices of natural gas and
electricity, a pre-tax loss of $106.9 million related to cash flow hedges
of commodity contracts is expected to be recognized in earnings as the hedged
transactions occur. This amount is expected to be substantially
offset by the settlement of the related nonderivative hedged
contracts.
NOTE 4--INVESTMENT
IN ATC
Integrys Energy
Group had an approximate 34% ownership interest in ATC at March 31,
2009. 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 following table
shows changes to Integrys Energy Group's investment in ATC during the three
months ended March 31, 2009.
(Millions)
|
|
Three
Months Ended March 31, 2009
|
|
Investment at
December 31, 2008
|
|
$ |
346.9 |
|
Equity in net
income
|
|
|
18.0 |
|
Capital
contributions
|
|
|
8.5 |
|
Dividends
received
|
|
|
(14.6 |
) |
Investment at
March 31, 2009
|
|
$ |
358.8 |
|
ATC's financial
data is included in the following tables:
|
|
Three
Months Ended March 31
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
Income
statement data
|
|
|
|
|
|
|
Revenues
|
|
$ |
126.2 |
|
|
$ |
109.1 |
|
Operating
expenses
|
|
|
57.0 |
|
|
|
50.9 |
|
Other
expense
|
|
|
18.3 |
|
|
|
15.8 |
|
Net income
*
|
|
$ |
50.9 |
|
|
$ |
42.4 |
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
Balance
sheet data
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$ |
47.3 |
|
|
$ |
50.8 |
|
Noncurrent
assets
|
|
|
2,575.3 |
|
|
|
2,480.0 |
|
Total
assets
|
|
$ |
2,622.6 |
|
|
$ |
2,530.8 |
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$ |
191.4 |
|
|
$ |
252.0 |
|
Long-term
debt
|
|
|
1,224.4 |
|
|
|
1,109.4 |
|
Other
noncurrent liabilities
|
|
|
121.9 |
|
|
|
120.2 |
|
Members'
equity
|
|
|
1,084.9 |
|
|
|
1,049.2 |
|
Total
liabilities and members' equity
|
|
$ |
2,622.6 |
|
|
$ |
2,530.8 |
|
|
*
|
As most income
taxes are the responsibility of its members, ATC does not report a
provision for its members' income taxes in its income
statement.
|
NOTE 5--INVENTORIES
PGL and NSG price
natural gas storage injections at the calendar year average of the cost of
natural gas supply purchased. Withdrawals from storage are priced on
the LIFO cost method. For interim periods, the difference between
current projected replacement cost and the LIFO cost for quantities of natural
gas temporarily withdrawn from storage is recorded as a temporary LIFO
liquidation credit. Due to seasonality requirements, PGL and NSG
expect interim reductions in LIFO layers to be replenished by
year-end.
NOTE 6--GOODWILL
AND OTHER INTANGIBLE ASSETS
Integrys Energy
Group had the following changes to the carrying amount of goodwill for the three
months ended March 31, 2009:
(Millions)
|
|
Natural
Gas
Utility
Segment
|
|
|
Integrys
Energy
Services
|
|
|
Total
|
|
Goodwill
recorded at December 31, 2008
|
|
$ |
927.0 |
|
|
$ |
6.9 |
|
|
$ |
933.9 |
|
Impairment
loss
|
|
|
(291.1 |
) |
|
|
- |
|
|
|
(291.1 |
) |
Goodwill
recorded at March 31, 2009
|
|
$ |
635.9 |
|
|
$ |
6.9 |
|
|
$ |
642.8 |
|
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, which are Integrys Energy Group's 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. In the first quarter of 2009, the combination of the
decline in equity markets as well as the increase in the expected
weighted-average cost of capital, created an indication that a potential
impairment of goodwill might exist. In accordance with SFAS No. 142,
it was determined that the criteria requiring an interim goodwill impairment
analysis were triggered in the first quarter of 2009. Based upon the
results of the interim goodwill impairment analysis, Integrys Energy Group
recorded a non-cash
goodwill impairment
loss of $291.1 million ($248.8 million after-tax) in the first quarter
of 2009, all within the natural gas utility segment. This impairment
related to MGU, MERC, PGL, and NSG, all of which were acquired over the past few
years. Key factors contributing to the impairment charge included
disruptions in the global credit and equity markets and the resulting increase
in the weighted-average cost of capital used to value the natural gas utility
operations, and the negative impact that the global decline in equity markets
has had on the valuation of natural gas distribution companies in
general.
Identifiable
intangible assets other than goodwill are included as a component of other
assets within the Condensed Consolidated Balance Sheets as listed
below.
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
(Millions)
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Amortized
intangible assets
(liabilities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer-related
(1)
|
|
$ |
32.6 |
|
|
$ |
(15.2 |
) |
|
$ |
17.4 |
|
|
$ |
32.6 |
|
|
$ |
(14.2 |
) |
|
$ |
18.4 |
|
Natural
gas and electric
contract
assets (2),
(3)
|
|
|
69.3 |
|
|
|
(56.3 |
) |
|
|
13.0 |
|
|
|
60.1 |
|
|
|
(54.6 |
) |
|
|
5.5 |
|
Natural
gas and electric
contract
liabilities (2),
(4)
|
|
|
(33.6 |
) |
|
|
23.3 |
|
|
|
(10.3 |
) |
|
|
(33.6 |
) |
|
|
20.2 |
|
|
|
(13.4 |
) |
Emission
allowances (5)
|
|
|
2.1 |
|
|
|
- |
|
|
|
2.1 |
|
|
|
2.3 |
|
|
|
(0.1 |
) |
|
|
2.2 |
|
Renewable
energy credits (6)
|
|
|
5.0 |
|
|
|
(2.4 |
) |
|
|
2.6 |
|
|
|
3.4 |
|
|
|
(2.1 |
) |
|
|
1.3 |
|
Other
|
|
|
5.5 |
|
|
|
(1.1 |
) |
|
|
4.4 |
|
|
|
3.0 |
|
|
|
(1.0 |
) |
|
|
2.0 |
|
Total
|
|
|
80.9 |
|
|
|
(51.7 |
) |
|
|
29.2 |
|
|
|
67.8 |
|
|
|
(51.8 |
) |
|
|
16.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized
intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MGU trade
name
|
|
|
5.2 |
|
|
|
- |
|
|
|
5.2 |
|
|
|
5.2 |
|
|
|
- |
|
|
|
5.2 |
|
Total
intangible assets
|
|
$ |
86.1 |
|
|
$ |
(51.7 |
) |
|
$ |
34.4 |
|
|
$ |
73.0 |
|
|
$ |
(51.8 |
) |
|
$ |
21.2 |
|
(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 March 31, 2009, for
customer-related intangible assets was approximately seven
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, as well as other electric customer contracts acquired in
exchange for risk management
assets.
|
(3)
|
Includes both
short-term and long-term intangible assets related to customer contracts
in the amount of $1.9 million and $2.2 million, respectively, at
March 31, 2009, and $3.1 million and $2.4 million,
respectively, at December 31, 2008. The remaining
weighted-average amortization period at March 31, 2009, for these
intangible assets was 3.3 years. The remaining weighted-average
amortization period at March 31, 2009, for the other electric
customer contracts was 3.6 years.
|
(4)
|
Includes both
short-term and long-term intangible liabilities related to customer
contracts in the amount of $3.9 million and $6.4 million,
respectively, at March 31, 2009, and $6.0 million and
$7.4 million, respectively, at December 31, 2008. The
remaining weighted-average amortization period at March 31, 2009, for
these intangible liabilities was 3.5
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.
|
Intangible asset
amortization expense, excluding amortization related to natural gas and electric
contracts, was recorded as a component of depreciation and
amortization. Amortization expense for both the three months ended
March 31, 2009, and 2008, was $1.4 million.
Amortization
expense for the next five fiscal years is estimated to be:
(Millions)
|
|
|
|
For year
ending December 31, 2009
|
|
$ |
7.5 |
|
For year
ending December 31, 2010
|
|
|
3.8 |
|
For year
ending December 31, 2011
|
|
|
3.2 |
|
For year
ending December 31, 2012
|
|
|
2.3 |
|
For year
ending December 31, 2013
|
|
|
1.6 |
|
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 three months ended
March 31, 2009, resulted in a decrease to nonregulated cost of fuel,
natural gas, and purchased power of $1.4 million. Amortization
of these contracts for the three months ended March 31, 2008, resulted
in an increase to nonregulated cost of fuel, natural gas, and purchased power of
$5.2 million.
Amortization
expense of these contracts for the next five fiscal years is estimated to
be:
(Millions)
|
|
|
|
For year
ending December 31, 2009
|
|
$ |
0.2 |
|
For year
ending December 31, 2010
|
|
|
0.3 |
|
For year
ending December 31, 2011
|
|
|
0.2 |
|
For year
ending December 31, 2012
|
|
|
0.4 |
|
For year
ending December 31, 2013
|
|
|
0.2 |
|
NOTE 7--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:
(Millions,
except percentages)
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
Commercial
paper outstanding
|
|
$ |
143.6 |
|
|
$ |
552.9 |
|
Average
discount rate on outstanding commercial paper
|
|
|
1.83 |
% |
|
|
4.78 |
% |
Borrowings
under revolving credit facilities
|
|
$ |
345.0 |
|
|
$ |
475.0 |
|
Average
interest rate on outstanding borrowings under
revolving
credit facilities
|
|
|
2.28 |
% |
|
|
2.41 |
% |
Short-term
notes payable outstanding
|
|
$ |
10.0 |
|
|
$ |
181.1 |
|
Average
interest rate on outstanding short-term notes payable
|
|
|
0.45 |
% |
|
|
3.40 |
% |
The commercial
paper at March 31, 2009, had varying maturity dates ranging from
April 1, 2009, through May 20, 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:
(Millions)
|
Maturity
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
Revolving
credit facility (Integrys Energy Group)
(1)
|
6/02/10
|
|
$ |
500.0 |
|
|
$ |
500.0 |
|
Revolving
credit facility (Integrys Energy Group)
(1)
|
6/09/11
|
|
|
500.0 |
|
|
|
500.0 |
|
Revolving
credit facility (Integrys Energy Group) (1)
(8)
|
5/03/09
|
|
|
250.0 |
|
|
|
250.0 |
|
Revolving
credit facility (WPS) (2)
|
6/02/10
|
|
|
115.0 |
|
|
|
115.0 |
|
Revolving
credit facility (PEC) (1)
(4)
|
6/13/11
|
|
|
400.0 |
|
|
|
400.0 |
|
Revolving
credit facility (PGL) (3)
|
7/12/10
|
|
|
250.0 |
|
|
|
250.0 |
|
Revolving
credit facility (Integrys Energy Services) (4)
(5)
|
6/29/09
|
|
|
175.0 |
|
|
|
175.0 |
|
Revolving
short-term notes payable (WPS) (6)
|
11/13/09
|
|
|
10.0 |
|
|
|
10.0 |
|
Short-term
notes payable (Integrys Energy Group)
(7)
|
3/30/09
|
|
|
- |
|
|
|
171.1 |
|
Total
short-term credit capacity
|
|
|
|
2,200.0 |
|
|
|
2,371.1 |
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Letters
of credit issued inside credit facilities
|
|
|
|
632.1 |
|
|
|
414.6 |
|
Loans
outstanding under credit agreements and notes
payable
|
|
|
|
355.0 |
|
|
|
656.1 |
|
Commercial
paper outstanding
|
|
|
|
143.6 |
|
|
|
552.9 |
|
Accrued
interest or original discount on outstanding commercial
paper
|
|
|
|
0.1 |
|
|
|
0.8 |
|
Available
capacity under existing agreements
|
|
|
$ |
1,069.2 |
|
|
$ |
746.7 |
|
(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 2009, at which time the maturity date was extended until
June 29, 2009.
|
(6)
|
This note is
renewed every six months and is used for general corporate
purposes.
|
(7)
|
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
required 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. In March 2009, Integrys Energy Group
repaid the outstanding principal balance in the net amount of
$156.7 million.
|
(8)
|
In
November 2008, Integrys Energy Group entered into a revolving credit
agreement to finance its working capital requirements and for general
corporate purposes. This facility terminated in May
2009.
|
At
March 31, 2009, 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 8--LONG-TERM
DEBT
(Millions)
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
WPS
|
|
$ |
872.1 |
|
|
$ |
872.1 |
|
UPPCO
|
|
|
11.7 |
|
|
|
11.7 |
|
PEC
|
|
|
327.9 |
|
|
|
328.2 |
|
PGL (1)
|
|
|
501.0 |
|
|
|
501.0 |
|
NSG
|
|
|
75.3 |
|
|
|
75.3 |
|
Integrys
Energy Group (2)
|
|
|
550.0 |
|
|
|
550.0 |
|
Unsecured term
loan due 2010 – Integrys Energy Group
|
|
|
65.6 |
|
|
|
65.6 |
|
Term loans –
nonrecourse, collateralized by nonregulated assets
|
|
|
6.6 |
|
|
|
6.6 |
|
Other term
loan (3)
|
|
|
27.0 |
|
|
|
27.0 |
|
Total
|
|
|
2,437.2 |
|
|
|
2,437.5 |
|
Unamortized
discount and premium on bonds and debt
|
|
|
4.8 |
|
|
|
5.7 |
|
Total
debt
|
|
|
2,442.0 |
|
|
|
2,443.2 |
|
Less current
portion
|
|
|
(205.1 |
) |
|
|
(155.2 |
) |
Total
long-term debt
|
|
$ |
2,236.9 |
|
|
$ |
2,288.0 |
|
(1)
|
PGL has
outstanding $51.0 million of Adjustable Rate, Series OO bonds, due
October 1, 2037, which are currently in
a 35-day Auction Rate mode (the interest rate is reset every 35 days
through an auction process). The weighted-average interest rate
for March 31, 2009 was 1.234% for these
bonds.
|
|
In
March 2010, $50.0 million of PGL's First and Refunding Mortgage
Bonds will mature. As a result, these notes are presented as
current portion of long-term debt on Integrys Energy Group's Condensed
Consolidated Balance Sheet at March 31, 2009. Integrys
Energy Group is currently assessing potential remarketing or refinancing
opportunities.
|
(2)
|
In November
2009, $150.0 million of Integrys Energy Group Unsecured Senior Notes
will mature. As a result, these notes are presented as the
current portion of long-term debt on Integrys Energy Group's Condensed
Consolidated Balance Sheet at March 31, 2009. Integrys
Energy Group is currently assessing potential remarketing or refinancing
opportunities.
|
(3)
|
WPS Westwood
Generation, LLC, a subsidiary of Integrys Energy Services, has outstanding
$27.0 million of Refunding Tax Exempt Bonds. The interest
rate at March 31, 2009 was 4.97% for these
bonds.
|
At
March 31, 2009, 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.
NOTE 9--ASSET
RETIREMENT OBLIGATIONS
The following table
shows changes to the asset retirement obligations of Integrys Energy Group
through March 31, 2009.
(Millions)
|
|
Utilities
|
|
|
Integrys
Energy Services
|
|
|
Total
|
|
Asset
retirement obligations at December 31, 2008
|
|
$ |
178.9 |
|
|
$ |
0.2 |
|
|
$ |
179.1 |
|
Accretion
|
|
|
2.3 |
|
|
|
0.1 |
|
|
|
2.4 |
|
Asset
retirement obligations at March 31, 2009
|
|
$ |
181.2 |
|
|
$ |
0.3 |
|
|
$ |
181.5 |
|
NOTE 10--INCOME
TAXES
Integrys Energy
Group's effective tax rates for the three months ended March 31, 2009, and
March 31, 2008, were (7.7)% and 36.4%,
respectively. Integrys Energy Group calculates its provision for
income taxes based on an interim effective tax rate that reflects its projected
annual effective tax rate before certain discrete items such as the goodwill
impairment loss. The effective tax rate for the three months ended
March 31, 2009 differs from the federal tax rate of 35%, primarily as a
result of a large portion (approximately $186.2 million) of the
$291.1 million goodwill impairment loss recognized in the quarter not
resulting in either a current or deferred income tax benefit.
The effective tax
rate for the three months ended March 31, 2008, differed from the federal
tax rate of 35%, primarily due to state income taxes and the impact of certain
permanent book to tax differences related to employee benefits and certain
capital expenditures.
For the quarter
ended March 31, 2009, there were no significant changes in Integrys Energy
Group's liability for uncertain tax positions.
In
February 2009, Wisconsin Act 2 was signed into law. This Act requires
Integrys Energy Group and its subsidiaries to file its Wisconsin income tax
return as a combined group. As a result, all of Integrys Energy
Group's income will be subject to apportionment and taxation in Wisconsin,
requiring an adjustment to deferred taxes under SFAS No. 109, "Accounting for
Income Taxes." For the three months ended March 31, 2009, this
resulted in a one-time credit adjustment to deferred taxes and an increase in
income tax expense of $4.7 million.
NOTE 11--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 Integrys Energy Group's nonregulated segment, Integrys Energy
Services, are to meet its obligations to deliver energy to
customers.
The obligations
described below are as of March 31, 2009.
●
|
The electric
utility segment has obligations related to coal supply and transportation
that extend through 2016 and total $268.3 million, obligations of
$1.2 billion for either capacity or energy related to purchased power that
extend through 2027, and obligations for other commodities totaling
$13.5 million, which extend through 2013.
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The natural
gas utility segment has obligations related to natural gas supply and
transportation contracts totaling $1.4 billion, some of which extend
through 2028.
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Integrys
Energy Services has obligations related to energy and natural gas supply
contracts that extend through 2018 and total $3.1 billion. The
majority of these obligations end by 2011, with obligations totaling
$298.6 million extending beyond 2012.
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Integrys
Energy Group also has commitments in the form of purchase orders issued to
various vendors, which totaled $660.1 million, and relate to normal
business operations as well as large construction
projects.
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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 maintenance 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.
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 has submitted
its response.
In
response to the EPA's Clean Air Act enforcement initiative, several utilities
elected to settle with the EPA, while others are in litigation. The
fines and penalties (including the cost of supplemental environmental projects)
associated with settlements involving comparably-sized facilities range between
$7 million and $30 million. The regulatory interpretations
upon which the lawsuits or settlements are based may change based on future
court decisions of the pending litigations.
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:
●
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issue notices
of violation (NOV) asserting that a violation of the Clean Air Act
occurred,
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●
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seek
additional information from WPS, WP&L, and/or third parties who have
information relating to the boilers, and/or
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●
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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.
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:
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shut down any
unit found to be operating in non-compliance,
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install
additional pollution control equipment,
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pay a fine,
and/or
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pay a fine
and conduct a supplemental environmental project in order to resolve any
such claim.
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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 was 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 were
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 appealed 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 challenges are 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 revised the state mercury rule, Chapter NR 446. The revised
rule requires a 40% reduction from the 2002 through 2004 baseline mercury
emissions, 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 $29 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 by the EPA in
2005, the State of Wisconsin filed suit along with other states in opposition of
this rule. On February 8, 2008, the United States Court of
Appeals for the District of Columbia Circuit (Court of Appeals) 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 (CAIR), formerly known as the Interstate Air Quality
Rule, in 2005. CAIR 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. 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. CAIR 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 was forwarded to the
EPA for final review.
On
July 11, 2008, the Court of Appeals issued a decision vacating 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, thereby, CAIR was
reinstated. The Court of Appeals also directed the EPA to address the
deficiencies noted in its July 11, 2008 ruling.
Prior to the Court
of Appeals' 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
emission allowances since the reinstatement of CAIR. WPS does not
expect any material impact as a result of the vacatur and subsequent
reinstatement of CAIR with respect to nitrogen oxide emission
allowances. WPS has been authorized by the PSCW to defer purchases of
nitrogen oxide emission allowances in 2009, which are estimated to be
$8.8 million.
The reinstatement
of CAIR also affected the status of the Best Available Retrofit Technology
rule. The WDNR's position, as well as the status of WPS units, under
that rule are 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 $579 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. In connection with
manufacturing and storing manufactured gas, waste materials were produced that
may have resulted in soil and groundwater contamination at these
sites. Under certain laws and regulations relating to the protection
of the environment, Integrys Energy Group's natural gas utilities are required
to undertake remedial action with respect to some of these
materials.
Integrys Energy
Group's natural gas utilities 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. Nineteen of these sites have been transferred to the EPA
Superfund Alternative Sites Program. Integrys Energy Group estimated
and accrued for $641.2 million of future undiscounted investigation and
cleanup costs for all sites as of March 31, 2009. Integrys
Energy Group may adjust these estimates in the future, contingent upon
remedial technology, regulatory requirements, remedy determinations, and any
claims of natural resource damages. Integrys Energy Group recorded a
regulatory asset of $663.2 million, which is net of insurance recoveries
received of $56.6 million, related to the expected recovery of both
deferred expenditures and estimated future expenditures as of March 31,
2009.
Integrys Energy
Group's natural gas utilities are coordinating the investigation and cleanup of
the manufactured gas plant sites under what is called a "multi-site"
program. This program involves prioritizing the work to be done at
the sites, preparation and approval of documents common to all of the sites, and
utilization of a consistent approach in selecting remedies.
The EPA identified
NSG as a potentially responsible party (PRP) under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
(CERCLA), at the Waukegan Coke Plant Site located in Waukegan, Illinois
(Waukegan Site). The Waukegan Site is part of the Outboard Marine
Corporation (OMC) Superfund Site. The EPA also identified OMC,
General Motors Corporation, and certain other parties as PRPs at the Waukegan
Site. NSG and the other PRPs are parties to a consent decree that
requires NSG and General Motors, jointly and severally, to perform the remedial
action and establish and maintain financial assurance of $27.0 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. Operation of the groundwater treatment unit began
in September 2008 and is expected to be up to full capacity during the second
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. On February 5, 2009, the Seventh Circuit
Court of Appeals stayed the appeal. The parties have agreed in
principal to terms of a settlement and upon finalization and execution of the
settlement documents and implementation of the settlement terms, this matter
will be dismissed. The amount of the settlement is 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, resulting in subsequent flooding downstream on the Dead River, located
in the Upper Peninsula of 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 completed
significant environmental restoration activities and is working with the
Michigan Department of Environmental Quality (MDEQ) 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 (which includes UPPCO) that is believed to be
sufficient to cover the 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 (PSCR) filing with the
MPSC, UPPCO requested recovery of the remaining deferred replacement power costs
related to the Silver Lake incident. Through March 31,
2009, 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 $0.7 million. UPPCO offset 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 was $2.5 million.
As
part of a settlement agreement with the MPSC staff and interveners in the PSCR
case, UPPCO will offset $1.9 million of the remaining replacement power
costs with proceeds from the sale of the Warden plant. The proceeds
from the sale of the Warden plant had previously been recorded as a liability to
UPPCO customers. The remaining $0.6 million of replacement power
costs was not recoverable and was recorded in operating and maintenance expense
in the first quarter of 2009. This settlement must be approved by the
MPSC.
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 received FERC approval of a refill
and operations plan in February 2009. 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 greenhouse gas
emissions, 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 it is
probable that any regulatory program which 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, efforts have been initiated to
develop state and regional greenhouse gas programs, to create federal
legislation to limit carbon dioxide emissions, and to create national renewable
portfolio standards. In addition, in April 2009, the EPA declared
carbon dioxide and several other greenhouse gases to be a danger to public
health and welfare, which is the first step towards the EPA potentially
regulating greenhouse gases under the Clean Air Act. A risk exists
that such legislation or regulation will increase the cost of
energy. However, Integrys Energy Group believes the capital
expenditures being made at its generation units are appropriate under any
reasonable mandatory greenhouse gas program and that future expenditures related
to control of greenhouse gas emissions or renewable portfolio standards by its
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 were implemented at the plant,
notification was provided to the City, and UPPCO self reported the potential
permit violations to the MDEQ. UPPCO filed a final report with the
MDEQ on November 25, 2008, and a copy was sent to the
City.
In
March 2009, MDEQ began its investigation into this
matter. Depending upon the results of the MDEQ's review of the
information provided by UPPCO, the MDEQ, in consultation with the Michigan
Attorney General's Office, may perform any of the following:
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assess a fine
and/or seek criminal charges against UPPCO,
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assess a fine
and/or seek criminal charges against the former manager who certified the
reports,
and/or
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close out the
investigation.
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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 March 31, 2009,
$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 PGL
and NSG believed were 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 believes that
PGL and NSG have fully complied with the reconnection program obligations of the
settlement agreement.
Two of the five
annual internal audits required by the settlement agreement 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. On March 31,
2009, PGL and NSG completed their responses to the 25 recommendations they
agreed to implement in a June 30, 2008 response to the audit.
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 concluded February 27, 2009, and the administrative law judge has not
yet prepared 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 suit 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. The plaintiffs requested postponement of their
reply to PEC's class certification response until a decision is made on PEC's
motion for summary judgment. A hearing on the motion for summary
judgment is scheduled for June 3, 2009.
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
December 2008. On March 17, 2009, the auditor issued the
first quarterly interim report. The report acknowledged progress on
many initiatives and restated that continual monitoring will be performed to
verify sustained progress for the term of the verification phase.
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.
NOTE 12--GUARANTEES
The following table
shows outstanding guarantees at Integrys Energy Group:
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Expiration
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(Millions)
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Total
Amounts
Committed
at
March 31,
2009
|
|
|
|
Less
Than
1
Year
|
|
|
|
1
to 3
Years
|
|
|
|
4
to 5
Years
|
|
|
|
Over
5
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees
supporting commodity transactions of subsidiaries (1)
|
|
$ |
1,993.0 |
|
|
$ |
1,526.7 |
|
|
$ |
350.8 |
|
|
$ |
11.9 |
|
|
$ |
103.6 |
|
Guarantees of
subsidiary debt and revolving line of credit (2)
|
|
|
933.6 |
|
|
|
175.0 |
|
|
|
725.0 |
|
|
|
- |
|
|
|
33.6 |
|
Standby
letters of credit (3)
|
|
|
628.2 |
|
|
|
627.4 |
|
|
|
0.8 |
|
|
|
- |
|
|
|
- |
|
Surety bonds
(4)
|
|
|
3.6 |
|
|
|
3.4 |
|
|
|
0.2 |
|
|
|
- |
|
|
|
- |
|
Other
guarantees (5)
|
|
|
2.5 |
|
|
|
2.5 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
guarantees
|
|
$ |
3,560.9 |
|
|
$ |
2,335.0 |
|
|
$ |
1,076.8 |
|
|
$ |
11.9 |
|
|
$ |
137.2 |
|
(1)
|
Consists of
parental guarantees of $1,811.4 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;
$103.2 million and $73.4 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 Condensed
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) $33.6 million supporting
outstanding debt at Integrys Energy Services' subsidiaries, of which
$6.6 million is subject to Integrys Energy Services' parental
guarantee limit discussed below. Parental guarantees related to
subsidiary debt and credit agreements outstanding are not included in the
Condensed Consolidated Balance
Sheets.
|
(3)
|
Comprised of
$623.0 million issued to support Integrys Energy Services'
operations; $4.3 million issued for workers compensation coverage in
Illinois; and $0.9 million related to letters of credit at UPPCO,
MGU, and MERC. These amounts are not reflected in the Condensed
Consolidated Balance Sheets.
|
(4)
|
Primarily for
workers compensation coverage and obtaining various licenses, permits, and
rights of way. Surety bonds are not included in the Condensed
Consolidated Balance Sheets.
|
(5)
|
Includes (1) a
liability related to WPS's agreement to indemnify Dominion Energy
Kewaunee, Inc. for certain costs arising from the resolution of design
basis documentation issues incurred prior to the Kewaunee nuclear power
plant's scheduled maintenance period in 2009. As of
March 31, 2009, WPS had paid $7.8 million to Dominion
Energy Kewaunee, Inc. related to this guarantee, reducing the liability to
$1.1 million. WPS expects to make payments for the entire
remaining liability amount over the duration of the guarantee; and (2) a
$1.4 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 $2,644.5 million on behalf
of Integrys Energy Services. Integrys Energy Group's exposure under
these guarantees related to open transactions at March 31, 2009, was
approximately $987 million. At March 31, 2009, 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)
|
|
March 31,
2009
|
|
Guarantees
supporting commodity transactions
|
|
$ |
1,806.4 |
|
Guarantees of
subsidiary debt
|
|
|
181.6 |
|
Standby
letters of credit
|
|
|
623.0 |
|
Surety
bonds
|
|
|
1.5 |
|
Total
guarantees subject to $2.95 billion limit
|
|
$ |
2,612.5 |
|
NOTE 13--EMPLOYEE
BENEFIT PLANS
The following table
shows the components of net periodic benefit cost for Integrys Energy Group's
benefit plans.
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
Three
Months
Ended
March 31
|
|
|
Three
Months
Ended
March 31
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Service
cost
|
|
$ |
9.3 |
|
|
$ |
10.4 |
|
|
$ |
3.7 |
|
|
$ |
4.2 |
|
Interest
cost
|
|
|
19.8 |
|
|
|
18.8 |
|
|
|
7.1 |
|
|
|
6.4 |
|
Expected
return on plan assets
|
|
|
(23.2 |
) |
|
|
(25.3 |
) |
|
|
(4.4 |
) |
|
|
(4.7 |
) |
Amortization
of transition obligation
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
|
|
0.1 |
|
Amortization
of prior service cost (credit)
|
|
|
1.2 |
|
|
|
1.2 |
|
|
|
(1.0 |
) |
|
|
(1.0 |
) |
Amortization
of net actuarial loss
|
|
|
0.2 |
|
|
|
0.4 |
|
|
|
0.3 |
|
|
|
0.2 |
|
Amortization
of merger-related regulatory adjustment
|
|
|
2.8 |
|
|
|
2.6 |
|
|
|
0.5 |
|
|
|
0.8 |
|
Net
periodic benefit cost
|
|
$ |
10.1 |
|
|
$ |
8.1 |
|
|
$ |
6.3 |
|
|
$ |
6.0 |
|
Transition
obligations, prior service costs (credits), and net actuarial losses that have
not yet been recognized as a component of net periodic benefit cost are included
in accumulated OCI for Integrys Energy Group's nonregulated entities and are
recorded as net regulatory assets for the utilities, pursuant to SFAS
No. 71. All amounts amortized for merger-related regulatory
adjustments are from regulatory assets, as these relate to the
utilities.
Contributions to
the plans are made in accordance with legal and tax requirements and do not
necessarily occur evenly throughout the year. For the three months
ended March 31, 2009, $1.3 million and $2.1 million of
contributions were made to the pension and other postretirement benefit plans,
respectively. Integrys Energy Group expects to contribute
$24.8 million and $26.2 million to its pension and other
postretirement benefit plans, respectively, during the remainder of
2009.
NOTE 14--STOCK-BASED
COMPENSATION
Stock
Options
The fair value of
stock option awards granted in February 2009 was 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
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 value per stock option along
with the assumptions incorporated into the valuation model:
|
|
February 2009
Grant
|
|
Weighted-average
fair value
|
|
$ |
3.83 |
|
Expected
term
|
|
8-9
years
|
|
Risk-free
interest rate
|
|
|
2.50%-2.78 |
% |
Expected
dividend yield
|
|
|
5.50 |
% |
Expected
volatility
|
|
|
19 |
% |
Pre-tax
compensation cost recognized for stock options during the three months ended
March 31, 2009, and 2008, was not significant. As of
March 31, 2009, $3.0 million of pre-tax compensation cost related to
unvested and outstanding stock options was expected to be recognized over a
weighted-average period of 3.1 years.
A
summary of stock option activity for the three months ended March 31, 2009,
and information related to outstanding and exercisable stock options at
March 31, 2009, 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, 2008
|
|
|
2,700,139 |
|
|
$ |
47.90 |
|
|
|
|
|
|
|
Granted
|
|
|
511,484 |
|
|
$ |
42.12 |
|
|
|
|
|
|
|
Exercised
|
|
|
3,000 |
|
|
$ |
25.69 |
|
|
|
|
|
$ |
- |
|
Forfeited
|
|
|
27,731 |
|
|
$ |
50.03 |
|
|
|
|
|
$ |
- |
|
Outstanding
at March 31, 2009
|
|
|
3,180,892 |
|
|
$ |
46.98 |
|
|
|
6.63 |
|
|
$ |
- |
|
Exercisable
at March 31, 2009
|
|
|
1,844,626 |
|
|
$ |
46.27 |
|
|
|
4.99 |
|
|
$ |
- |
|
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 March 31,
2009. This is calculated as the difference between Integrys Energy
Group's closing stock price on March 31, 2009, and the option exercise
price, multiplied by the number of in-the-money stock options.
Performance
Stock Rights
The fair value of
performance stock rights granted in February 2009 was estimated using a
Monte Carlo valuation model, incorporating the assumptions in the table
below. The risk-free interest rate is based on the United States
Treasury yield curve. The expected dividend yield incorporates the
dividend rate at the measurement date. The expected volatility was
estimated using three years of historical data.
|
|
February 2009
Grant
|
|
Expected
term
|
|
3
years
|
|
Risk-free
interest rate
|
|
|
1.38 |
% |
Expected
dividend yield
|
|
|
5.50 |
% |
Expected
volatility
|
|
|
26 |
% |
Pre-tax
compensation cost recorded for performance stock rights for the three months
ended March 31, 2009, and 2008, was not significant. As of
March 31, 2009, $4.8 million of pre-tax compensation cost related to
unvested and outstanding performance stock rights was expected to be recognized
over a weighted-average period of 2.3 years.
A
summary of activity related to performance stock rights for the three months
ended March 31, 2009, is presented below:
|
|
Performance
Stock
Rights
|
|
|
Weighted-Average
Grant
Date Fair Value
|
|
Outstanding
at December 31, 2008
|
|
|
263,109 |
|
|
$ |
50.13 |
|
Granted
|
|
|
121,220 |
|
|
|
37.11 |
|
Expired
|
|
|
79,574 |
|
|
|
48.37 |
|
Forfeited
|
|
|
3,665 |
|
|
|
52.15 |
|
Outstanding
at March 31, 2009
|
|
|
301,090 |
|
|
$ |
45.33 |
|
No
performance shares were distributed during the three months ended March 31,
2009.
Restricted
Shares and Restricted Share Units
The fair value of
restricted share unit awards granted in February 2009 was based on Integrys
Energy Group's closing stock price on the day the awards were
granted.
During the three
months ended March 31, 2009, and 2008, compensation cost recorded related
to restricted share and restricted share unit awards was not
significant. As of March 31, 2009, $12.2 million of pre-tax
compensation cost related to these awards was expected to be recognized over a
weighted-average period of 3.1 years.
A
summary of activity related to restricted share and restricted share unit awards
for the three months ended March 31, 2009, is presented below:
|
|
Restricted
Share and
Restricted
Share Unit Awards
|
|
|
Weighted-Average
Grant
Date Fair Value
|
|
Outstanding
at December 31, 2008
|
|
|
228,615 |
|
|
$ |
50.19 |
|
Granted
|
|
|
206,357 |
|
|
|
42.12 |
|
Distributed
|
|
|
40,939 |
|
|
|
48.36 |
|
Forfeited
|
|
|
1,288 |
|
|
|
51.96 |
|
Outstanding
at March 31, 2009
|
|
|
392,745 |
|
|
$ |
46.14 |
|
NOTE 15--COMPREHENSIVE
INCOME (LOSS)
Integrys Energy
Group's total comprehensive income (loss) was as follows:
|
|
Three
Months
Ended
March 31
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
Net income
(loss) attributed to common shareholders
|
|
$ |
(180.2 |
) |
|
$ |
135.8 |
|
Cash flow
hedges, net of tax *
|
|
|
(30.7 |
) |
|
|
(6.9 |
) |
Foreign
currency translation, net of tax
|
|
|
(0.5 |
) |
|
|
(1.0 |
) |
SFAS
No. 158 amortizations, net of tax
|
|
|
(0.2 |
) |
|
|
- |
|
Unrealized
loss on available-for-sale securities, net of tax
|
|
|
- |
|
|
|
(0.4 |
) |
Total
comprehensive income (loss)
|
|
$ |
(211.6 |
) |
|
$ |
127.5 |
|
|
*
|
The tax
benefit related to cash flow hedges was $20.2 million and
$4.2 million for the three months ended March 31, 2009, and
2008, respectively.
|
The following table
shows the changes to Integrys Energy Group's accumulated other comprehensive
loss from December 31, 2008, to March 31, 2009.
(Millions)
|
|
Three
Months Ended March 31, 2009
|
|
December 31,
2008 balance
|
|
$ |
(72.8 |
) |
Cash flow
hedges
|
|
|
(30.7 |
) |
Foreign
currency translation
|
|
|
(0.5 |
) |
SFAS
No. 158 amortizations
|
|
|
(0.2 |
) |
March 31,
2009 balance
|
|
$ |
(104.2 |
) |
NOTE 16--COMMON
EQUITY
Integrys Energy
Group's reconciliation of shares outstanding at March 31, 2009, and
December 31, 2008, was as follows:
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
|
|
Shares
|
|
|
Average
Cost
|
|
|
Shares
|
|
|
Average
Cost
|
|
Common stock
issued
|
|
|
76,429,278 |
|
|
|
|
|
|
76,430,037 |
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury
shares
|
|
|
4,000 |
|
|
$ |
25.19 |
|
|
|
7,000 |
|
|
$ |
25.19 |
|
Deferred
compensation rabbi trust
|
|
|
345,105 |
|
|
$ |
43.78 |
|
|
|
367,238 |
|
|
$ |
44.36 |
|
Restricted
stock
|
|
|
63,163 |
|
|
$ |
54.82 |
|
|
|
63,031 |
|
|
$ |
54.81 |
|
Total shares
outstanding
|
|
|
76,017,010 |
|
|
|
|
|
|
|
75,992,768 |
|
|
|
|
|
Integrys Energy
Group had the following changes to common stock during the three months ended
March 31, 2008:
Integrys
Energy Group's common stock shares
|
|
|
|
Common stock
at December 31, 2008
|
|
|
76,430,037 |
|
Restricted
stock shares cancelled
|
|
|
(759 |
) |
Common
stock at March 31, 2009
|
|
|
76,429,278 |
|
Earnings
Per Share
In
the first quarter of 2009, Integrys Energy Group adopted FASB Staff Position
(FSP) No. EITF 03-6-1, "Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities." This
FSP was applied retrospectively, resulting in a 0.1 million share increase
in the average shares of common stock for the three months ended March 31,
2008. This had no effect on previously reported basic earnings per
share.
Basic earnings per
share are computed by dividing net income (loss) attributed to common
shareholders by the weighted average number of common stock shares outstanding
during the period. Diluted earnings per share are computed by
dividing net income (loss) attributed to 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 effects of an
insignificant number of these securities were not included for the three months
ended March 31, 2009, because there was a net loss, which would cause the
impact to be anti-dilutive. The calculation of diluted earnings per
share for the three months ended March 31, 2009, also excludes
3.2 million out-of-the-money stock options that had an anti-dilutive
effect. The calculation of diluted earnings per share for the three
months ended March 31, 2008, excludes an insignificant number of stock
options that had an anti-dilutive effect. The following table
reconciles the computation of basic and diluted earnings per share:
|
|
Three
Months Ended
March 31
|
|
(Millions,
except per share amounts)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
Net income
(loss)
|
|
$ |
(179.4 |
) |
|
$ |
136.6 |
|
Preferred
stock dividends of subsidiary
|
|
|
(0.8 |
) |
|
|
(0.8 |
) |
Net income
(loss) attributed to common shareholders
|
|
$ |
(180.2 |
) |
|
$ |
135.8 |
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Average
shares of common stock – basic
|
|
|
76.7 |
|
|
|
76.7 |
|
Effect of
dilutive securities
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
- |
|
|
|
0.2 |
|
Average
shares of common stock – diluted
|
|
|
76.7 |
|
|
|
76.9 |
|
|
|
|
|
|
|
|
|
|
Earnings per
common share
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(2.35 |
) |
|
$ |
1.77 |
|
Diluted
|
|
|
(2.35 |
) |
|
|
1.77 |
|
NOTE 17--FAIR
VALUE
The following
tables show Integrys Energy Group's assets and liabilities that were accounted
for at fair value on a recurring basis as of March 31, 2009, and
December 31, 2008, categorized by level within the fair value
hierarchy.
|
|
March 31,
2009
|
|
(Millions)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk
management assets
|
|
$ |
1,138.8 |
|
|
$ |
1,776.3 |
|
|
$ |
949.3 |
|
|
$ |
3,864.4 |
|
Other
|
|
|
0.4 |
|
|
|
- |
|
|
|
- |
|
|
|
0.4 |
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk
management liabilities
|
|
|
1,415.1 |
|
|
|
1,806.2 |
|
|
|
817.7 |
|
|
|
4,039.0 |
|
Long-term debt hedged by fair value
hedge
|
|
|
- |
|
|
|
52.9 |
|
|
|
- |
|
|
|
52.9 |
|
|
|
December 31,
2008
|
|
(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, "Fair Value Measurements." 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. Risk
management assets and liabilities of $3.1 million and $0.9 million,
respectively, relates to contracts that are no longer marked to fair value
pursuant to SFAS No. 133, and are therefore not included in the table
above. For more information on Integrys Energy Group's risk management
instruments, see Note 3, "Risk Management
Activities."
When possible,
Integrys Energy Group bases the valuations of its risk management assets and
liabilities on quoted prices for identical assets in active
markets. These valuations are classified in Level 1. The
valuations of certain contracts are based on NYMEX 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)
|
|
Three
Months Ended March 31, 2009
|
|
|
Three
Months Ended March 31, 2008
|
|
Balance at
the beginning of period
|
|
$ |
182.0 |
|
|
$ |
44.6 |
|
Net realized
and unrealized gain included in earnings
|
|
|
73.2 |
|
|
|
54.7 |
|
Net
unrealized loss recorded as regulatory assets
orliabilities
|
|
|
(0.1 |
) |
|
|
(7.5 |
) |
Net
unrealized (loss) gain included in othercomprehensive (loss)
income
|
|
|
(18.0 |
) |
|
|
6.9 |
|
Net purchases
and settlements
|
|
|
(18.0 |
) |
|
|
(16.1 |
) |
Net transfers
in/out of Level 3
|
|
|
(87.5 |
) |
|
|
4.1 |
|
Balance
at the end of period
|
|
$ |
131.6 |
|
|
$ |
86.7 |
|
|
|
|
|
|
|
|
|
|
Net
unrealized gain included in earnings relatedtoinstrumentsstill held at the
end of period
|
|
$ |
75.6 |
|
|
$ |
51.8 |
|
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 Condensed 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.
NOTE 18--MISCELLANEOUS
INCOME
Integrys Energy
Group's total miscellaneous income was as follows:
|
|
Three
Months Ended March 31
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
Equity
earnings on investments
|
|
$ |
18.4 |
|
|
$ |
14.6 |
|
Weston 4 ATC
interconnection agreement
|
|
|
- |
|
|
|
1.8 |
|
Gain on sale
of property
|
|
|
1.8 |
|
|
|
0.4 |
|
Other
|
|
|
1.0 |
|
|
|
1.3 |
|
Total
miscellaneous income
|
|
$ |
21.2 |
|
|
$ |
18.1 |
|
NOTE 19--REGULATORY
ENVIRONMENT
Wisconsin
2010 Rate Case
Re-opener
On
May 1, 2009, WPS filed an application with the PSCW to adjust its 2010 retail
electric and natural gas rates by $63.3 million for increased costs
primarily related to construction of the Crane Creek wind project, pension and
benefits, transmission, environmental control, and Wisconsin's Focus on Energy
program, offset by production tax credits from the Crane Creek wind project and
reductions in fuel and purchased power costs.
2009 Rate
Case
On
April 23, 2009, the PSCW made the 2009 fuel cost recovery subject to refund,
effective April 25, 2009, as actual and projected fuel costs for the remainder
of the year are estimated to be below the two percent fuel window.
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 effective
July 4, 2008. The rates authorized on July 4, 2008,
represent an annualized $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. The PSCW also approved a decoupling mechanism as a four-year
pilot program, which allows WPS to accrue and defer, for future recovery or
refund, the difference in authorized margin as compared to
actual. This decoupling mechanism does not cover large commercial and
industrial customers. The decoupling mechanism includes an annual
$14.0 million cap for electric service and an annual $8.0 million cap
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, 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 from September 30, 2008,
through
December 31,
2008, were subject to refund. On February 9, 2009, WPS filed a
request with the PSCW to refund approximately $5 million of 2008 fuel costs
to Wisconsin retail electric customers. WPS had accrued this amount
as a liability at December 31, 2008. This refund resulted in a
credit to customers' bills in March and April 2009.
Weston 3
Outage
In
October 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 PSCR
mechanism.
Michigan
2009 MGU Rate
Case
On
January 13, 2009, the MPSC issued a final written order for MGU approving a
settlement agreement authorizing an annual retail natural gas rate increase of
$6.0 million, effective January 14, 2009. The rate increase
was required primarily due to general inflation, low margin revenue growth,
increased costs of customer service functions, and increased environmental
cleanup costs to remediate former manufactured gas plant sites.
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
and a common equity ratio of 56.4% in its regulatory capital
structure.
Illinois
2010 Rate
Case
On
February 25, 2009, PGL and NSG filed requests with the ICC to increase natural
gas distribution rates by $161.9 million and $22.0 million,
respectively, for 2010. Both filings include a 12.0% return on common
equity and a common equity ratio of 56% in their regulatory capital
structures. The filings also include an overall return of 9.34% and
9.18% for PGL and NSG, respectively. The proposed rate increases are
required to allow PGL and NSG to recover their forecasted 2010 cost of service
and to earn a reasonable return on their investment. PGL and NSG
requested approval of a mechanism for cost recovery of the natural gas cost
component of bad debt expense. 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 a retail
natural gas rate increase of $71.2 million for PGL and a retail natural gas
rate decrease of $0.2 million for NSG, effective
February 14, 2008. The rates for PGL reflect a 10.19%
return on common equity and a common equity ratio of 56% in its regulatory
capital structure. The rates for NSG reflect 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 decoupling mechanism,
effective March 1, 2008, as a four-year pilot program, which 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. Legislation was introduced at the Illinois state legislature
to roll back decoupling but never reached a vote. This legislation
was introduced again in the first quarter of 2009. Integrys Energy
Group actively supports the ICC's decision to approve this rate setting
mechanism. The order also approved an Enhanced Efficiency Program,
which allows PGL and NSG to recover up to $6.4 million and
$1.1 million per year, respectively, of energy efficiency
costs.
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
only rehearing request granted by the ICC related to a change in the way PGL
allocates interstate hub services revenues among customer groups. On
June 6, 2008, several parties filed a stipulation to resolve the way
PGL allocates interstate hub services revenues among customer
groups. The ICC approved the stipulation, effective November 1, 2008,
as well as a rehearing order. Following the stipulation approval, PGL
and NSG filed appeals in the second district of the Illinois appellate court and
four other parties filed appeals in the first district of the Illinois appellate
court. PGL's and NSG's appeals were subsequently transferred to the
first district of the Illinois appellate court. On appeal, parties
may only raise issues on which they sought rehearing at the
ICC. These issues include the decoupling mechanism. No
decision on the appeal is expected until at least the second half of
2009.
Minnesota
On
July 31, 2008, MERC filed a request with the MPUC to increase retail natural gas
rates $22.0 million. The proposed natural gas rate increase is
required primarily due to 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. On April 17, 2009, the
administrative law judge recommended, subject to a final MPUC order, a
$15.5 million rate increase and a 10.2% return on common
equity.
Federal
Through a series of
orders issued by the FERC, Regional Through and Out Rates for transmission
service between the MISO and the PJM Interconnection were eliminated effective
December 1, 2004. To compensate transmission owners for the
revenue they will no longer receive due to this rate elimination, the FERC
ordered a transitional pricing mechanism called the Seams Elimination Charge
Adjustment (SECA) be put into place. Load-serving entities paid these
SECA charges during a 16-month transition period from December 1, 2004,
through March 31, 2006.
For the 16-month
transitional period, Integrys Energy Services received billings of
$19.2 million (pre-tax) for these charges. Integrys Energy
Services expensed $14.7 million of the $19.2 million, as it is
probable that Integrys Energy Services' total exposure will be reduced by at
least $4.5 million due to inconsistencies between the FERC's SECA order and
the transmission owners' compliance filings. Integrys Energy Services
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.
NOTE 20--SEGMENTS
OF BUSINESS
At
March 31, 2009, 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.
|
●
|
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.
|
●
|
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, MERC, UPPCO, PGL, NSG, and
IBS. Equity earnings from Integrys Energy Group's investments
in ATC and WRPC are also included in the Holding Company and Other
segment.
|
The table below
presents information for the respective periods pertaining to Integrys Energy
Group's operations segmented by lines of business:
|
|
Regulated Utilities
|
|
|
Nonutility and Nonregulated
Operations
|
|
|
|
|
Segments
of Business
(Millions)
|
|
Electric
Utility
|
|
|
Natural
Gas
Utility
|
|
|
Total
Utility
|
|
|
Integrys
Energy
Services
|
|
|
Holding
Company
and
Other
|
|
|
Reconciling
Eliminations
|
|
|
Integrys
Energy Group
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$ |
317.9 |
|
|
$ |
1,096.6 |
|
|
$ |
1,414.5 |
|
|
$ |
1,783.5 |
|
|
$ |
2.8 |
|
|
$ |
- |
|
|
$ |
3,200.8 |
|
Intersegment
revenues
|
|
|
11.8 |
|
|
|
0.2 |
|
|
|
12.0 |
|
|
|
0.6 |
|
|
|
- |
|
|
|
(12.6 |
) |
|
|
- |
|
Goodwill
impairment loss
|
|
|
- |
|
|
|
291.1 |
|
|
|
291.1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
291.1 |
|
Depreciation
and amortization expense
|
|
|
22.4 |
|
|
|
25.8 |
|
|
|
48.2 |
|
|
|
5.1 |
|
|
|
3.6 |
|
|
|
- |
|
|
|
56.9 |
|
Miscellaneous
income (expense)
|
|
|
0.9 |
|
|
|
1.2 |
|
|
|
2.1 |
|
|
|
1.0 |
|
|
|
31.7 |
|
|
|
(13.6 |
) |
|
|
21.2 |
|
Interest
expense (income)
|
|
|
10.5 |
|
|
|
13.6 |
|
|
|
24.1 |
|
|
|
3.1 |
|
|
|
29.1 |
|
|
|
(13.6 |
) |
|
|
42.7 |
|
Provision
(benefit) for income taxes
|
|
|
14.3 |
|
|
|
4.0 |
|
|
|
18.3 |
|
|
|
(14.5 |
) |
|
|
9.0 |
|
|
|
- |
|
|
|
12.8 |
|
Net income
(loss)
|
|
|
27.7 |
|
|
|
(172.9 |
) |
|
|
(145.2 |
) |
|
|
(29.1 |
) |
|
|
(5.1 |
) |
|
|
- |
|
|
|
(179.4 |
) |
Preferred
stock dividends of subsidiary
|
|
|
0.6 |
|
|
|
0.2 |
|
|
|
0.8 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.8 |
|
Net income
(loss) attributed to common shareholders
|
|
|
27.1 |
|
|
|
(173.1 |
) |
|
|
(146.0 |
) |
|
|
(29.1 |
) |
|
|
(5.1 |
) |
|
|
- |
|
|
|
(180.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$ |
316.5 |
|
|
$ |
1,260.4 |
|
|
$ |
1,576.9 |
|
|
$ |
2,409.4 |
|
|
$ |
2.9 |
|
|
$ |
- |
|
|
$ |
3,989.2 |
|
Intersegment
revenues
|
|
|
12.7 |
|
|
|
0.1 |
|
|
|
12.8 |
|
|
|
4.7 |
|
|
|
0.3 |
|
|
|
(17.8 |
) |
|
|
- |
|
Depreciation
and amortization expense
|
|
|
18.8 |
|
|
|
25.4 |
|
|
|
44.2 |
|
|
|
3.5 |
|
|
|
3.5 |
|
|
|
- |
|
|
|
51.2 |
|
Miscellaneous
income (expense)
|
|
|
2.2 |
|
|
|
1.6 |
|
|
|
3.8 |
|
|
|
0.2 |
|
|
|
24.4 |
|
|
|
(10.3 |
) |
|
|
18.1 |
|
Interest
expense (income)
|
|
|
8.8 |
|
|
|
14.3 |
|
|
|
23.1 |
|
|
|
2.8 |
|
|
|
22.3 |
|
|
|
(10.3 |
) |
|
|
37.9 |
|
Provision for
income taxes
|
|
|
2.9 |
|
|
|
43.2 |
|
|
|
46.1 |
|
|
|
30.2 |
|
|
|
2.0 |
|
|
|
- |
|
|
|
78.3 |
|
Net
income
|
|
|
7.3 |
|
|
|
75.9 |
|
|
|
83.2 |
|
|
|
51.6 |
|
|
|
1.8 |
|
|
|
- |
|
|
|
136.6 |
|
Preferred
stock dividends of subsidiary
|
|
|
0.5 |
|
|
|
0.3 |
|
|
|
0.8 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.8 |
|
Net income
attributed to common shareholders
|
|
|
6.8 |
|
|
|
75.6 |
|
|
|
82.4 |
|
|
|
51.6 |
|
|
|
1.8 |
|
|
|
- |
|
|
|
135.8 |
|
NOTE 21--NEW
ACCOUNTING PRONOUNCEMENTS
FASB Staff Position
(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.
FASB Staff Position
(FSP) No. FAS 157-4, "Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly," was issued in April 2009 and reaffirms what
SFAS No. 157 states is the objective of fair value measurement, which is to
reflect how much an asset would be sold for in an orderly transaction (as
opposed to a distressed or forced transaction) at the date of the financial
statements. Specifically, it reaffirms the need to use judgment to
ascertain if a formerly active market has become inactive and in determining
fair values when markets have become inactive. This guidance is
effective for Integrys Energy Group for the period ending June 30, 2009, and
Integrys Energy Group anticipates it will have no impact on its fair value
measurements.
FSP No. FAS 115-2
and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary
Impairments," was issued in April 2009 and is intended to bring greater
consistency to the timing of impairment recognition and provide greater clarity
to investors about the credit and noncredit components of impaired debt
securities that are not expected to be sold. The FSP also requires
increased disclosures regarding expected cash flows and credit losses, as well
as an aging of securities with unrealized losses. This FSP is
effective for Integrys Energy Group for the period ending June 30, 2009, and
Integrys Energy Group anticipates it will have no impact on its Condensed
Consolidated Financial Statements.
FSP No. FAS 107-1
and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments,"
was issued in April 2009. This FSP amends SFAS No. 107, "Disclosures
about Fair Value of Financial Instruments," to require fair value disclosures in
interim periods. Previously, these disclosures were only required
annually. This FSP is effective for Integrys Energy Group for the
reporting period ending June 30, 2009, and will result in additional
disclosures about the fair value of Integrys Energy Group's financial
instruments.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following
discussion should be read in conjunction with the accompanying Condensed
Consolidated Financial Statements and related Notes and our Annual Report on
Form 10-K for the year ended December 31, 2008.
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 through
growth in its core regulated businesses. The company has made a
decision to divest of its nonregulated energy services business segment,
Integrys Energy Services, or to reduce its scale, risk exposure, and liquidity
and credit commitments.
Integrys Energy
Group continues to focus on:
Maintaining and
Growing a Strong Regulated Utility Base – A strong regulated
utility base is essential to maintain a strong balance sheet,
predictable cash flows, a desired risk profile, attractive dividends, and
quality credit ratings. This is critical to our success as a
strategically focused regulated business. Integrys Energy Group
believes the following projects have helped, or will help, maintain and grow its
regulated utility base and meet its customers' needs:
·
|
WPS's
continued investment in environmental projects to improve air quality and
meet the requirements set by environmental regulators. Capital
projects to construct and/or upgrade equipment to meet or exceed required
environmental standards are planned each year.
|
|
|
·
|
Our ownership
interest in ATC, a transmission company that has over $2.6 billion of
transmission assets at March 31, 2009. Integrys Energy
Group will continue to fund its share of the equity portion of future ATC
growth. Integrys currently owns an approximate 34% interest in
ATC. ATC plans to invest approximately $2.7 billion during the
next ten years.
|
|
|
·
|
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 upon ICC approval of a cost
recovery mechanism.
|
|
|
·
|
The
investment of approximately $80 million to connect WPS's natural gas
distribution system to the Guardian II natural gas pipeline completed in
February 2009.
|
|
|
·
|
WPS's
purchase of the 99-megawatt Crane Creek wind generation project currently
under construction in Howard County,
Iowa.
|
For more detailed
information on Integrys Energy Group's capital expenditure program, see "Liquidity and Capital Resources,
Capital Requirements."
Divest or
Significantly 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 contract
portion of the 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 pursue a
divestiture of its nonregulated energy services business segment. In
the event that a full divestiture of Integrys Energy Services does not occur
and/or 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 committed to a full divestiture or a
nonregulated energy services operation with credit and collateral support
requirements that are insignificant by the end of 2010. 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, capital deployed, 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 businesses, while meeting all
applicable legal and regulatory 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:
·
|
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, 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 property, plant, and equipment 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 illustrates our asset management strategy.
Our risk management
strategy includes the management of market exposure, credit, and operational
risks 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 the risk profile related to these instruments
consistent with the company's risk management policy, which is approved by the
Board of Directors. The Corporate Risk Management Group, which
reports through the Chief Financial Officer, provides corporate
oversight.
Continuing
Emphasis on Safe, Reliable, Competitively Priced, and Environmentally Sound
Energy and Energy Related Services – Integrys Energy Group's
mission is to provide customers with the best value in energy and related
services. By effectively operating a mixed portfolio of generation
assets and investing in new generation and natural gas distribution assets,
while maintaining or exceeding environmental standards, we are able to provide a
safe, reliable, value-priced service to our customers. We concentrate
our efforts on improving and operating efficiently in order to reduce costs and
maintain a low risk profile. We actively evaluate opportunities for
adding more renewable generation to provide
additional
environmentally sound energy to our portfolio. Integrys Energy Group
believes the following activities have helped, and will continue to help,
integrate resources to provide safe, reliable, competitively priced, and
environmentally sound energy services:
·
|
Contract
administration and the use of formal project management tools to better
manage the costs of our construction programs. These cost
reduction initiatives will provide competitively priced energy and energy
related services.
|
|
|
·
|
Managing
operations to minimize the impact on the environment. Our
Weston 4 facility, completed in 2008, is one of the most efficient
pulverized coal-fired electric generation units in the country with
state-of-the-art environmental controls which allow us to reduce the
amount of emissions produced. We also expect to maintain or
decrease the amount of greenhouse gases released over time and support
research and development initiatives that will enable further progress
toward decreasing our carbon footprint.
|
|
|
·
|
Effectively
operating a mixed portfolio of generation assets and investing in new
generation and distribution assets, such as Weston 4, wind projects,
and our natural gas connection to the Guardian II pipeline, ensures
continued reliability for our
customers.
|
RESULTS
OF OPERATIONS
First
Quarter 2009 Compared with First Quarter 2008
(Millions,
except per share amounts)
|
|
2009
|
|
|
2008
|
|
|
%
Increase (Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas
utility operations
|
|
$ |
(173.1 |
) |
|
$ |
75.6 |
|
|
|
N/A |
|
Electric
utility operations
|
|
|
27.1 |
|
|
|
6.8 |
|
|
|
298.5 |
% |
Nonregulated
energy operations
|
|
|
(29.1 |
) |
|
|
51.6 |
|
|
|
N/A |
|
Holding
company and other operations
|
|
|
(5.1 |
) |
|
|
1.8 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) attributed to common shareholders
|
|
$ |
(180.2 |
) |
|
$ |
135.8 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
|
$ |
(2.35 |
) |
|
$ |
1.77 |
|
|
|
N/A |
|
Diluted
earnings (loss) per share
|
|
$ |
(2.35 |
) |
|
$ |
1.77 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
76.7 |
|
|
|
76.6 |
|
|
|
0.1 |
% |
Diluted
|
|
|
76.7 |
|
|
|
76.9 |
|
|
|
(0.3 |
)% |
Financial Results
Summary
Financial results
at Integrys Energy Group decreased $316.0 million, to a net loss attributed
to common shareholders of $180.2 million ($2.35 net loss per share)
for the quarter ended March 31, 2009, from net income attributed to common
shareholders of $135.8 million ($1.77 diluted earnings per share) for
the same quarter in 2008. Significant factors impacting the change in
earnings were as follows (and are discussed in more detail
thereafter):
·
|
Financial
results at the regulated natural gas utility segment decreased
$248.7 million, from earnings of $75.6 million for the quarter
ended March 31, 2008, to a net loss of $173.1 million for the
same quarter in 2009. The net loss at the natural gas utility
segment was driven by a non-cash goodwill impairment loss in the amount of
$248.8 million after tax. Lower quarter-over-quarter
volumes, driven by the general economic slowdown and warmer weather during
the heating season, contributed to a decrease in financial results at
the regulated natural gas utility segment and were primarily offset
by higher quarter-over-quarter earnings from rate increases at MERC
and MGU, the full year's benefit of PGL's 2008 rate increase, and a change
in the rate design at WPS.
|
|
|
·
|
Earnings at
the regulated electric utility segment increased $20.3 million, from
$6.8 million during the quarter ended March 31, 2008, to
$27.1 million for the same quarter in 2009, driven by an
$18.9 million increase in earnings at WPS. WPS's electric
utility segment earnings increased largely due to fuel and purchased power
costs that were lower than what was recovered in rates during the quarter
ended March 31, 2009, compared with fuel and purchased power costs that
were higher than what was recovered in rates for the same period in
2008. In the first quarter of 2009, electric utility earnings
at WPS were also favorably impacted by a fuel surcharge increase effective
July 4, 2008, a portion of which was incorporated into 2009 non-fuel base
retail electric rates, and an increase in wholesale demand
charges. The higher electric earnings were partially offset by
an increase in depreciation expense related to Weston
4.
|
|
|
·
|
Financial
results at Integrys Energy Services decreased $80.7 million, from
earnings of $51.6 million for the quarter ended March 31, 2008, to a
net loss of $29.1 million for the same quarter in 2009, driven
by:
|
|
|
|
|
-
|
A
$91.2 million after-tax decrease in Integrys Energy Services' margin
quarter-over-quarter related to non-cash activity, due to a
$94.9 million decrease related to non-cash activity associated with
electric operations, partially offset by a $3.7 million increase
related to non-cash activity associated with natural gas
operations. An overview of this non-cash activity is provided
below.
|
|
|
|
|
|
Non-cash
electric operations:
The
approximate 18% decline in electric commodity prices during the first
quarter of 2009 drove a $35.5 million net after-tax non-cash loss,
compared with a $59.4 million net after-tax non-cash gain recognized
in the first quarter of 2008 related to a 23% increase in electric
commodity prices during the first quarter of 2008. 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 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.
|
|
|
|
|
|
Non-cash
natural gas operations:
The market
price of natural gas continued its decline in the first quarter of 2009,
decreasing approximately 24% from December 31, 2008 to March 31, 2009,
driving additional after-tax non-cash lower-of-cost-or-market inventory
adjustments of $21.4 million for the quarter ended March 31,
2009. These lower-of-cost-or-market adjustments were required
to reflect natural gas still in storage at March 31, 2009 at its net
realizable value, as required by GAAP. As a result of the
current volatility and uncertainty in the global financial markets and in
order to improve its liquidity position, Integrys Energy Services placed
more emphasis on storage withdrawals in the first quarter of 2009,
compared with the first quarter of 2008. Quarter-over-quarter,
the natural gas withdrawn from storage and sold to customers had a
$29.1 million lower after-tax cost basis as a result of
lower-of-cost-or-market adjustments recorded in prior
periods. Quarter-over-quarter, the natural gas storage
withdrawals (net of the lower-of-cost-or-market adjustments) drove a
$7.7 million after-tax quarter-over-quarter increase in the non-cash
natural gas margin.
|
|
|
|
|
|
Integrys
Energy Services' non-cash natural gas margin was negatively impacted by a
$4.0 million after-tax quarter-over-quarter increase in non-cash
unrealized losses, driven by the settlement of derivative instruments
utilized to mitigate the price risk on natural gas inventory withdrawn
from storage. 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.
|
|
|
|
|
-
|
A
$9.4 million ($5.6 million after-tax) increase in operating and
maintenance expense, primarily due to an increase in payroll and benefits
expense, an increase in bad debt expense, and increased broker commissions
driven by higher transacted volumes.
|
|
|
|
|
-
|
Partially
offsetting the above items, realized natural gas margins increased
$17.7 million after-tax, from $22.0 million after-tax in the
first quarter of 2008, to $39.7 million after-tax in the first
quarter of 2009. As discussed above, as a result of the current
volatility and uncertainty in the financial markets and in order to
improve its liquidity position, Integrys Energy Services increased its
storage withdrawals and related delivery of the stored natural gas to
customers quarter-over-quarter. Also, per-unit retail natural
gas margins were higher quarter-over-quarter as Integrys Energy Services
restructured many of its retail natural gas sales contracts in 2008, in
order to reflect increased business risk and financing
costs. Together, these two items drove the increase in realized
natural gas margins.
|
|
|
|
·
|
Financial
results at the holding company and other segment decreased
$6.9 million, from earnings of $1.8 million during the quarter
ended March 31, 2008, to a net loss of $5.1 million for the same
quarter in 2009, largely due to an increase in the effective tax
rate. The effective tax rate of this segment includes the
effect of certain state income taxes at the consolidated level that are
not allocated to other segments. One specific item affecting
income tax expense for this segment during the quarter was the impact of a
February 2009 tax law change in Wisconsin. Increases in
interest expense at the holding company and other segment were partially
offset by higher earnings from Integrys Energy Group's investment in ATC
and gains from land sales.
|
Utility
Operations
For the quarters
ended March 31, 2009, and 2008, utility operations included the regulated
natural gas utility segment, consisting of the natural gas operations of PGL,
WPS, MERC, MGU, and NSG, and the regulated electric segment, consisting of the
regulated electric operations of WPS and UPPCO.
Regulated
Natural Gas Utility Segment Operations
|
|
Three
Months Ended
|
|
|
%
|
|
|
|
March 31
|
|
|
Increase
|
|
(Millions, except heating
degree days)
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
1,096.8 |
|
|
$ |
1,260.5 |
|
|
|
(13.0 |
)% |
Purchased
natural gas costs
|
|
|
776.3 |
|
|
|
938.8 |
|
|
|
(17.3 |
)% |
Margins
|
|
|
320.5 |
|
|
|
321.7 |
|
|
|
(0.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and
maintenance expense
|
|
|
151.1 |
|
|
|
155.6 |
|
|
|
(2.9 |
)% |
Goodwill
impairment loss *
|
|
|
291.1 |
|
|
|
- |
|
|
|
N/A |
|
Depreciation
and amortization expense
|
|
|
25.8 |
|
|
|
25.4 |
|
|
|
1.6 |
% |
Taxes other
than income taxes
|
|
|
9.0 |
|
|
|
8.9 |
|
|
|
1.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
(156.5 |
) |
|
|
131.8 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
|
1.2 |
|
|
|
1.6 |
|
|
|
(25.0 |
)% |
Interest
expense
|
|
|
(13.6 |
) |
|
|
(14.3 |
) |
|
|
(4.9 |
)% |
Other
expense
|
|
|
(12.4 |
) |
|
|
(12.7 |
) |
|
|
(2.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before taxes
|
|
$ |
(168.9 |
) |
|
$ |
119.1 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Throughput
in therms
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
795.9 |
|
|
|
842.8 |
|
|
|
(5.6 |
)% |
Commercial
and industrial
|
|
|
253.3 |
|
|
|
268.5 |
|
|
|
(5.7 |
)% |
Interruptible
|
|
|
18.0 |
|
|
|
23.2 |
|
|
|
(22.4 |
)% |
Interdepartmental
|
|
|
2.1 |
|
|
|
9.4 |
|
|
|
(77.7 |
)% |
Transport
|
|
|
613.4 |
|
|
|
669.3 |
|
|
|
(8.4 |
)% |
Total
sales in therms
|
|
|
1,682.7 |
|
|
|
1,813.2 |
|
|
|
(7.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
heating degree days
|
|
|
3,587 |
|
|
|
3,664 |
|
|
|
(2.1 |
)% |
* See
Note 6, "Goodwill and
Other Intangible Assets," for more information.
First
Quarter 2009 Compared with First Quarter 2008
Revenue
Regulated natural
gas utility segment revenue decreased $163.7 million, driven
by:
·
|
An
approximate $113 million decrease in revenue as a result of an
approximate 9% decrease in the per-unit cost of natural gas over all of
the regulated natural gas utilities in the first quarter of 2009, compared
with the same quarter in 2008. For all of Integrys Energy
Group's regulated natural gas utilities, natural gas commodity costs are
directly passed through to customers in current rates.
|
|
|
·
|
An
approximate $41 million decrease in revenue as a result of lower
quarter-over-quarter natural gas throughput volumes, excluding the impact
of weather, driven by:
|
|
|
|
|
-
|
An
approximate $35 million decrease related to lower volumes sold to
residential customers resulting from energy conservation efforts and a
decrease in volumes sold to commercial and industrial and transportation
customers resulting from lower demand, all of which we believe are related
to the general economic slowdown.
|
|
|
|
|
-
|
An
approximate $6 million decrease related to lower volumes sold to the
electric utility segment as a result of a decrease in the need for the
electric utility to run its peaking generation units because of lower
usage by residential and commercial and industrial customers, the
availability of lower cost power from MISO, and the availability of Weston
4, WPS's coal-fired generating facility that became commercially
operational in June 2008.
|
|
|
|
·
|
An
approximate $23 million decrease in revenue from warmer weather
during the heating season for the quarter ended March 31, 2009, compared
with the same quarter in 2008, evidenced by the 2.1% decrease in heating
degree days.
|
|
|
·
|
A
$5.5 million decrease in revenue from a quarter-over-quarter decrease
in the recovery of cleanup expenditures at PGL and NSG related to former
manufactured gas plant sites. This decrease in revenue was
offset by a decrease in operating expense due to the amortization of the
related regulatory asset and, therefore, had no impact on
earnings.
|
|
|
·
|
The decrease
in revenue was partially offset by the positive impact of natural gas
distribution rate cases and the change in rate design at the regulated
natural gas utilities:
|
|
|
|
-
|
Effective
January 14, 2009, MGU received a final rate order from the MPSC for a
natural gas distribution rate increase. Effective October 1,
2008, MERC received an interim natural gas distribution rate
increase. Together, these rate increases had an approximate
$8 million positive impact on revenue
quarter-over-quarter. See Note 19, "Regulatory
Environment," for more information on the rate increases at MGU and
MERC.
|
|
|
|
|
-
|
In 2009, PGL
and NSG received the full impact of the 2008 natural gas distribution rate
cases, effective February 14, 2008, which increased revenue
quarter-over-quarter by approximately $5 million,
net. NSG's new rate design incorporated both higher fixed
customer charges and, the driving factor for the quarter, lower volumetric
rates. See Note 19, "Regulatory
Environment," for more information on PGL's and NSG's
rates.
|
|
|
|
|
-
|
Effective
January 1, 2009, the PSCW required WPS to decrease retail natural gas
distribution rates through a new rate design which incorporates higher
volumetric rates and lower fixed customer charges. For the
quarter ended March 31, 2009, revenue increased approximately
$3 million related to this rate design change. See Note
19, "Regulatory
Environment," for more information on WPS's
rates.
|
Margin
The regulated
natural gas utility segment margin decreased $1.2 million, driven
by:
·
|
A 7.2%
decrease in natural gas throughput volumes related to the negative impact
of the general economic slowdown and warmer quarter-over-quarter weather,
which resulted in an approximate $15 million quarter-over-quarter
decrease in natural gas utility segment margin. This
quarter-over-quarter decrease in margin included the impact of decoupling
mechanisms that were first effective for PGL and NSG on March 1, 2008, and
for WPS on January 1, 2009. Under decoupling, these
utilities are allowed to adjust rates to recover or refund the difference
between the actual and authorized delivery charge components of margin
from certain customers.
|
|
|
·
|
A
$5.5 million decrease in revenue from lower quarter-over-quarter
recovery of cleanup expenditures at PGL and NSG related to former
manufactured gas plant sites.
|
|
|
·
|
The decreases
in margin were substantially offset by the $16 million net positive
impact quarter-over-quarter of rate cases and changes in rate design at
the regulated natural gas
utilities.
|
Operating Income
(Loss)
Operating income at
the regulated natural gas utility segment decreased $288.3 million, driven
by a $287.1 million increase in operating expenses and the
$1.2 million decrease in natural gas margin.
The increase in
operating expenses primarily related to a non-cash pre-tax goodwill impairment
charge of $291.1 million recognized in the first quarter of 2009 related to
PGL, NSG, MERC, and MGU. See Note 6, "Goodwill and Other Intangible
Assets," for more information. The increase in operating
expenses was partially offset by a $5.5 million decrease in amortization of
the regulatory asset related to cleanup costs of manufactured gas plant
sites. These costs were recovered from customers in
revenues.
Regulated
Electric Segment Operations
|
|
Three
Months Ended
|
|
|
%
|
|
(Millions,
except heating degree days)
|
|
March 31
|
|
|
Increase
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
329.7 |
|
|
$ |
329.2 |
|
|
|
0.2 |
% |
Fuel and
purchased power costs
|
|
|
147.4 |
|
|
|
185.4 |
|
|
|
(20.5 |
)% |
Margins
|
|
|
182.3 |
|
|
|
143.8 |
|
|
|
26.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and
maintenance expense
|
|
|
96.3 |
|
|
|
97.1 |
|
|
|
(0.8 |
)% |
Depreciation
and amortization expense
|
|
|
22.4 |
|
|
|
18.8 |
|
|
|
19.1 |
% |
Taxes other
than income taxes
|
|
|
12.0 |
|
|
|
11.1 |
|
|
|
8.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
51.6 |
|
|
|
16.8 |
|
|
|
207.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
|
0.9 |
|
|
|
2.2 |
|
|
|
(59.1 |
)% |
Interest
expense
|
|
|
(10.5 |
) |
|
|
(8.8 |
) |
|
|
19.3 |
% |
Other
expense
|
|
|
(9.6 |
) |
|
|
(6.6 |
) |
|
|
45.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before
taxes
|
|
$ |
42.0 |
|
|
$ |
10.2 |
|
|
|
311.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
in kilowatt-hours
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
843.1 |
|
|
|
850.1 |
|
|
|
(0.8 |
)% |
Commercial
and industrial
|
|
|
1,998.9 |
|
|
|
2,178.8 |
|
|
|
(8.3 |
)% |
Wholesale
|
|
|
1,135.4 |
|
|
|
1,130.5 |
|
|
|
0.4 |
% |
Other
|
|
|
11.5 |
|
|
|
13.0 |
|
|
|
(11.5 |
)% |
Total
sales in kilowatt-hours
|
|
|
3,988.9 |
|
|
|
4,172.4 |
|
|
|
(4.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather
|
|
|
|
|
|
|
|
|
|
|
|
|
WPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating
degree days
|
|
|
3,971 |
|
|
|
3,955 |
|
|
|
0.4 |
% |
UPPCO:
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating
degree days
|
|
|
4,249 |
|
|
|
4,255 |
|
|
|
(0.1 |
)% |
First
Quarter 2009 Compared with First Quarter 2008
Revenue
Regulated electric
utility segment revenue increased $0.5 million, driven by:
·
|
An
approximate $11 million increase in revenue from both the interim
fuel surcharge approved by the PSCW effective July 4, 2008, a
portion of which was incorporated into 2009 base retail electric rates,
and the full year's benefit of WPS's 2008 retail electric rate increase
that was effective January 16, 2008. On April 23, 2009,
the PSCW made 2009 fuel cost recovery subject to refund, effective
April 25, 2009, as actual and projected fuel costs for the remainder
of the year are estimated to be below the 2 percent fuel
window. See Note 19, "Regulatory
Environment," for more information on WPS's fuel window and rate
increase.
|
|
|
·
|
The increase
in revenue was partially offset by a 4.4% decrease in electric sales
volumes, which resulted in an approximate $8 million decrease in
revenue quarter-over-quarter, related to:
|
|
|
|
-
|
A 0.8%
decrease in residential sales volumes, an 8.3% decrease in commercial and
industrial sales volumes and a decrease in opportunity sales, partially
offset by an increase in wholesale revenues, which resulted in an
approximate $17 million net decrease in revenue. Of this
decrease in revenue, approximately $13 million related to lower
demand from changes in plant operations by certain commercial and
industrial customers, approximately $4 million related to decreased
demand for opportunity sales driven by the availability of lower-cost
power from the MISO market, and approximately $2 million related to
energy conservation efforts on the part of residential customers, all of
which we believe was the result of the general economic
slowdown. These items were partially offset by an approximate
$2 million increase in revenue driven by higher contracted sales
volumes to a large wholesale customer and an increase in the wholesale
demand rate to recover costs related to Weston 4.
|
|
|
|
|
-
|
A partially
offsetting approximate $6 million positive impact that decoupling,
which went into effect January 1, 2009, had on WPS's
revenue. Under decoupling, WPS is allowed to adjust future
rates for residential and small commercial and industrial customers to
recover or refund the difference between the actual and authorized margin
impact of variations in volumes.
|
|
|
|
|
-
|
A partially
offsetting $3 million positive impact on revenues
quarter-over-quarter related to colder weather during the heating season,
evidenced by the 0.4% increase in heating degree days at
WPS.
|
|
|
|
·
|
The increase
in revenue was also partially offset by an approximate $2 million
decrease in revenue at UPPCO related to decreased fuel and purchased power
costs and related amortization of a Power Supply Cost Recovery (PSCR)
regulatory asset. Decreases in fuel and purchased power costs
at UPPCO are passed directly through to customers in
rates.
|
Margin
The regulated
electric utility segment margin increased $38.5 million, driven
by:
·
|
An
approximate $28 million increase in WPS's regulated electric utility
margin from fuel and purchased power costs that were approximately
$5 million lower than what was recovered in rates during the quarter
ended March 31, 2009, compared with fuel and purchased power
costs that were approximately $23 million higher than what was
recovered in rates during the same quarter in 2008. On April
25, 2009, the PSCW made 2009 fuel cost recovery subject to refund as
actual and projected fuel costs for the remainder of the year are
estimated to be below the 2 percent fuel window.
|
|
|
·
|
An
approximate $5 million increase in electric utility margin from
wholesale customers related to increases in contracted sales volumes with
an existing customer and an increase in the wholesale demand rate to
recover costs related to Weston 4.
|
|
|
·
|
An
approximate $4 million increase in electric utility margin from the
combined effect of the July 4, 2008 fuel surcharge, a portion of
which was incorporated into WPS's 2009 non-fuel base retail electric
rates, and the full year's benefit of the 2008 retail electric rate
increase effective January 16, 2008, for
WPS.
|
Operating
Income
Operating income at
the regulated electric utility segment increased $34.8 million, driven by
the $38.5 million increase in electric margin, partially offset by a
$3.7 million increase in operating expenses. The increase in
operating expenses was the result of an increase in depreciation and
amortization expense at WPS, primarily related to Weston 4 being placed in
service for accounting purposes in April 2008.
Other
Expense
Other expense at
the regulated electric utilities increased $3.0 million
quarter-over-quarter, driven by a $1.7 million increase in interest expense
and a $1.3 million decrease in miscellaneous income.
The increase in
other expense was driven by:
·
|
An increase
in interest expense, primarily related to higher long-term borrowings at
WPS, utilized to fund various construction projects.
|
|
|
·
|
A
$1.8 million decrease in interest earned on the transmission
facilities WPS funded on ATC's behalf. WPS was reimbursed by
ATC for these transmission facilities in April 2008.
|
|
Integrys Energy Services'
Segment Operations
Integrys Energy
Services is a diversified nonregulated energy supply and services company
serving residential, commercial, industrial, and wholesale customers in
developed competitive markets in the United States and Canada.
Integrys Energy
Group is committed to a full divestiture or a nonregulated energy services
operation with credit and collateral support requirements that are insignificant
by the end of 2010. Integrys Energy Services continues to enter into
new transactions with customers within certain defined parameters, which is
essential to preserving value while focusing on a successful divestiture of all
or portions of its business.
|
|
Three
Months
Ended
|
|
|
%
|
|
(Millions,
except sales volumes)
|
|
March
31,
|
|
|
Increase
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
1,784.1 |
|
|
$ |
2,414.1 |
|
|
|
(26.1 |
%) |
Cost of fuel,
natural gas, and purchased power
|
|
|
1,767.8 |
|
|
|
2,283.3 |
|
|
|
(22.6 |
%) |
Margins
|
|
|
16.3 |
|
|
|
130.8 |
|
|
|
(87.5 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Margin
Detail
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric
margins
|
|
|
(23.1 |
) |
|
|
127.1 |
|
|
|
N/A |
|
Natural
gas margins
|
|
|
39.4 |
|
|
|
3.7 |
|
|
|
964.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and
maintenance expense
|
|
|
49.6 |
|
|
|
40.2 |
|
|
|
23.4 |
% |
Depreciation
and amortization
|
|
|
5.1 |
|
|
|
3.5 |
|
|
|
45.7 |
% |
Taxes other
than income taxes
|
|
|
3.1 |
|
|
|
2.7 |
|
|
|
14.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
(41.5 |
) |
|
|
84.4 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
|
0.9 |
|
|
|
0.2 |
|
|
|
350.0 |
% |
Interest
expense
|
|
|
(3.1 |
) |
|
|
(2.8 |
) |
|
|
10.7 |
% |
Minority
interest
|
|
|
0.1 |
|
|
|
- |
|
|
|
N/A |
|
Other
expense
|
|
|
(2.1 |
) |
|
|
(2.6 |
) |
|
|
(19.2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before taxes
|
|
$ |
(43.6 |
) |
|
$ |
81.8 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
volumes (includes volumes both physically delivered and net
settled)
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
electric sales volumes in kwh
|
|
|
52,648.0 |
|
|
|
40,540.0 |
|
|
|
29.9 |
% |
Retail
electric sales volumes in kwh
|
|
|
4,046.9 |
|
|
|
3,978.7 |
|
|
|
1.7 |
% |
Wholesale
natural gas sales volumes in bcf
|
|
|
170.1 |
|
|
|
143.3 |
|
|
|
18.7 |
% |
Retail natural
gas sales volumes in bcf
|
|
|
97.9 |
|
|
|
108.1 |
|
|
|
(9.4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Physical
volumes (includes only transactions settled physically for the periods
shown) *
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
electric sales volumes in kwh
|
|
|
1,035.9 |
|
|
|
1,047.7 |
|
|
|
(1.1 |
%) |
Retail
electric sales volumes in kwh
|
|
|
3,997.3 |
|
|
|
3,952.7 |
|
|
|
1.1 |
% |
Wholesale
natural gas sales volumes in bcf
|
|
|
160.9 |
|
|
|
128.1 |
|
|
|
25.6 |
% |
Retail natural
gas sales volumes in bcf
|
|
|
97.3 |
|
|
|
107.6 |
|
|
|
(9.6 |
%) |
*
Represents gross physical volumes.
kwh
– kilowatt-hours
bcf
– billion cubic feet
Revenue
Revenues decreased
$630.0 million, driven by an approximate 49% decrease in natural gas market
prices quarter-over-quarter, and an approximate 42% decrease in electric market
prices quarter-over-quarter. The decrease in prices was partially
offset by an increase in wholesale natural gas sales volumes delivered
quarter-over-quarter, which is discussed in more detail below.
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 essentially lock in margin on these transactions by
mitigating the impact of 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 nonderivative instruments that
economically hedge the derivative instruments do not impact margin until
settlement, as these instruments do not meet the GAAP definition of derivative
instruments.
Integrys Energy
Services' margins decreased $114.5 million in the first quarter of 2009,
compared with the same quarter in 2008. The table below provides a
summary of the significant items contributing to the change in
margin. "Other significant items" in the table below are generally
related to timing of gain and loss recognition of certain
transactions.
(Millions)
|
|
Increase
(Decrease) in Margin
for
the Quarter Ended
March 31,
2009
Compared
with Quarter Ended March 31, 2008
|
|
|
|
|
|
Electric margins
|
|
|
|
Realized
gains on structured origination contracts
|
|
$ |
1.1 |
|
All
other realized wholesale electric margin
|
|
|
0.5 |
|
Realized
retail electric margin
|
|
|
6.3 |
|
|
|
|
|
|
Other
significant items:
|
|
|
|
|
Retail
and wholesale fair value adjustments *
|
|
|
(158.1 |
) |
Net decrease
in electric and other margins
|
|
|
(150.2 |
) |
|
|
|
|
|
Natural gas margins
|
|
|
|
|
Lower
of cost or market inventory adjustments
|
|
|
12.9 |
|
Other
realized natural gas margins
|
|
|
29.6 |
|
|
|
|
|
|
Other
significant items:
|
|
|
|
|
Spot
to forward differential
|
|
|
(4.1 |
) |
Other
fair value adjustments *
|
|
|
(2.7 |
) |
Net increase
in natural gas margins
|
|
|
35.7 |
|
|
|
|
|
|
Net decrease
in Integrys Energy Services' margin
|
|
$ |
(114.5 |
) |
|
*
|
For the three
months ended March 31, 2008, these two line items included a total of
$11.5 million of gains resulting from the adoption of SFAS
No. 157 in the first quarter of 2008. See Note 17,
"Fair Value," for
more information.
|
First
Quarter 2009 Compared with First Quarter 2008
Electric
Margins
Integrys Energy
Services' electric margins decreased $150.2 million to a negative
$23.1 million in the first quarter of 2009, compared with a positive
$127.1 million for the same period in 2008. The first quarter
2009 and 2008 electric margins included the negative impact of $0.2 million
and $1.6 million, respectively, of amortization related to purchase
accounting adjustments required as a result of the PEC
merger. Significant contributors to the change in Integrys Energy
Services' electric margins are discussed below.
Realized gains on structured
origination contracts
Realized gains on
structured origination contracts increased $1.1 million, from
$5.5 million in the first quarter 2008, to $6.6 million in the same
period of 2009. Origination contracts are physical, customer-based
agreements with municipalities, merchant generators, cooperatives, and regulated
utilities. The increase was primarily due to growth in existing
markets, with an emphasis on structured transactions with small environmentally
friendly generators. Many of the new customer contracts were entered
into prior to the announced decision to divest or significantly reduce the scale
of Integrys Energy Services, with the first quarter of 2009 benefiting from the
realization of margin associated with the settlement of these
contracts.
All other realized wholesale
electric margin
All other realized
wholesale electric margin increased $0.5 million in the first quarter of
2009 compared to the same quarter in 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. Proprietary trading increased at the end of 2007 and
the beginning of 2008, as additional front office personnel were hired and a
portion of the trading supply operations was relocated to Chicago, which drove
the quarter-over-quarter increase in realized wholesale electric
margin. Trading operations were scaled back in conjunction with the
global credit crisis in the latter half of 2008. The lower volumes
will negatively impact realized margin in subsequent periods.
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 $6.3 million, from a $17.3 million positive
impact in the first quarter 2008, to a $23.6 million positive impact in the
same period of 2009, driven by:
●
|
An increase
of $2.1 million from operations in Texas as a result of higher
ancillary service costs in 2008 related to congestion caused by wind
generation that was added in this state. Because Integrys
Energy Services had fixed price contracts with many of its electric
customers, it was not able to pass on all of the increased charges for
ancillary services. However, in the first quarter of 2009,
compared to the same quarter in 2008, ancillary costs have decreased and
Integrys Energy Services has priced into new or renewed contracts what it
believes are appropriate premiums related to ancillary
costs.
|
|
|
●
|
A
$1.3 million increase in New York and the Mid-Atlantic
regions. Integrys Energy Services entered the Mid-Atlantic
markets in late 2007 and continues to realize growth in newly entered
markets.
|
|
|
●
|
A
$1.4 million increase in the Illinois market as Integrys Energy
Services focused on customer markets with higher margins in
2009.
|
Retail and wholesale fair
value adjustments
Integrys Energy
Services' margin from retail and wholesale fair value adjustments decreased
$158.1 million, as it recognized $99.0 million of non-cash unrealized
gains related to derivative instruments in the first quarter of 2008, compared
with $59.1 million of non-cash unrealized losses during the same period of
2009.
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. From January 1, 2009, to March 31, 2009,
electric commodity prices declined approximately 18%, which led to the
recognition of large non-cash unrealized losses in the first quarter of 2009 on
these electric customer supply contracts. Conversely, from
January 1, 2008, to March 31, 2008, electric commodity prices increased
approximately 23%, which led to the recognition of large non-cash unrealized
gains in the first quarter of 2008.
Natural Gas
Margins
Integrys Energy
Services' natural gas margins increased $35.7 million, from
$3.7 million in the first quarter of 2008, to $39.4 million in the
first quarter of 2009. The first quarter 2009 and 2008 natural gas
margins included the negative impact of $0.8 million and $8.0 million,
respectively, of amortization related to purchase accounting adjustments
required as a result of the merger with PEC. Significant contributors
to the change in Integrys Energy Services' natural gas margins are discussed
below.
Lower-of-cost-or-market
inventory adjustments
The price of
natural gas decreased 24% during the first quarter of 2009 (below the average
cost of natural gas in inventory which Integrys Energy Services had injected
into storage in 2008), which resulted in $35.7 million of
lower-of-cost-or-market adjustments to natural gas still in storage at March 31,
2009, as required by GAAP. However, as a result of the current
volatility and uncertainty in the financial markets and in order to improve its
liquidity position, Integrys Energy Services increased its storage withdrawals
in the first quarter of 2009 under existing contracts. When this
natural gas was withdrawn from storage, the negative impact of previously
recorded lower-of-cost-or market adjustments contributed an offsetting
$48.6 million quarter-over-quarter increase in margin. The
greater volume of withdrawals (net of the lower-of-cost-or-market adjustments)
drove a $12.9 million quarter-over-quarter increase in the
non-cash natural gas margin.
Other realized natural gas
margins
Other realized
natural gas margins increased $29.6 million, from $36.6 million in the
first quarter of 2008, to $66.2 million in the first quarter of 2009,
primarily related to realized gains on natural gas storage
withdrawals. As a result of the current volatility and uncertainty in
the financial markets and in order to improve its liquidity position, Integrys
Energy Services increased its storage withdrawals
quarter-over-quarter. Also, per-unit retail natural gas margins were
higher quarter-over-quarter as Integrys Energy Services restructured many of its
retail natural gas sales contracts in 2008, in order to reflect increased
business risk and financing costs. Together, these two items drove
the increase in realized natural gas margins.
Spot to forward
differential
Integrys Energy
Services experiences earnings volatility associated with the natural gas storage
cycle, which runs annually from April through March of the next
year. Generally, injections of natural gas into storage inventory
take place in the summer months and natural gas withdrawals take place in the
winter months. Integrys Energy Services' policy is to hedge the value
of natural gas storage with contracts in the over-the-counter and futures
markets, effectively locking in a margin on the natural gas in
storage. Integrys Energy Services applies fair value hedge accounting
to a portion of its derivative contracts used in this strategy. Fair
value hedge accounting rules require the natural gas in storage to be reflected
at fair market value using spot prices, while the future sales contracts are
reflected at fair value using forward prices. When the spot price of
natural gas changes disproportionately to the forward price of natural gas,
Integrys Energy Services experiences volatility in its
earnings. Consequently, earnings volatility may occur within the
contract period for natural gas in storage. The accounting treatment
does not affect the underlying cash flows or economics of these
transactions.
The natural gas
storage cycle had a $4.1 million negative quarter-over-quarter impact on
natural gas margins. For the first quarter of 2009, the natural gas
storage cycle had no material impact on margin, compared with a
$4.1 million positive impact on margin for the same period of
2008. At March 31, 2009,
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.
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 the first quarter of 2009), the transportation contracts, or the
customer sales contracts until physical settlement of these contracts
occurs.
The impact of these
fair value adjustments drove a $2.7 million decrease in the natural gas
margins as unrealized losses on these instruments were $45.8 million in the
first quarter of 2009, compared with unrealized losses of $43.1 million
during the same period of 2008.
Operating Income
(Loss)
First quarter
operating results at Integrys Energy Services decreased $125.9 million,
from operating income of $84.4 million in the first quarter of 2008 to a
$41.5 million operating loss for the same quarter in 2009. This
decrease was driven by the $114.5 million quarter-over-quarter decrease in
margin driven by non-cash unrealized losses as discussed above. In
addition, operating and maintenance expense increased $9.4 million, from
$40.2 million in the first quarter of 2008, to $49.6 million in the
first quarter of 2009. The increase in operating and maintenance was
a result of an approximate $5 million increase in payroll and benefit
costs, a $3.0 million increase in bad debt expense as a result of a
$2 million write-off related to the bankruptcy of one ethanol producer and
a general increase in reserves in light of the economic downturn, and
$1.6 million of increased broker commissions as a result of higher
delivered volumes.
Holding Company and Other
Segment Operations
|
|
Three
Months Ended
|
|
|
%
|
|
|
|
March 31
|
|
|
Increase
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$ |
1.3 |
|
|
$ |
1.7 |
|
|
|
(23.5 |
)% |
Other
income
|
|
|
2.6 |
|
|
|
2.1 |
|
|
|
23.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before
taxes
|
|
$ |
3.9 |
|
|
$ |
3.8 |
|
|
|
2.6 |
% |
First
Quarter 2009 Compared with First Quarter 2008
Other
Income
Other income
increased $0.5 million, driven by:
·
|
A
$3.3 million increase in income from Integrys Energy Group's
approximate 34% ownership interest in ATC. Integrys Energy
Group recorded $18.0 million of pre-tax equity earnings from ATC
during the first quarter of 2009, compared with $14.7 million of
pre-tax equity earnings during the same quarter in
2008.
|
·
|
A
$2.4 million increase in miscellaneous income as a result of
increased revolving credit fees and intercompany interest charges passed
through to those regulated utilities which have outstanding borrowings
with Integrys Energy Group's holding company.
|
|
|
·
|
A
$1.8 million increase in pre-tax gains recognized on land sales for
UPPCO.
|
|
|
·
|
The increase
in other income was partially offset by an increase in interest expense of
$5.9 million due to an increase in average short-term borrowings
required for working capital requirements quarter-over-quarter at Integrys
Energy Group, primarily related to the natural gas cycle and margin calls
at Integrys Energy
Services.
|
Provision for Income
Taxes
|
|
Three
Months Ended
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Effective Tax
Rate
|
|
|
(7.7 |
)% |
|
|
36.4 |
% |
The change in the
effective tax rate quarter-over-quarter was primarily related to the tax
treatment of Integrys Energy Group's $291.1 million non-cash pre-tax
goodwill impairment loss. Although Integrys Energy Group had a
$166.6 million loss before income taxes for the quarter ended
March 31, 2009, it still recorded a $12.8 million provision for income
taxes because $186.2 million of the total pre-tax goodwill impairment loss
was not currently deductible for income tax purposes and will not result in an
income tax benefit in another period.
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
$200.0 million of these borrowings were outstanding at March 31,
2009.
Operating
Cash Flows
During the three
months ended March 31, 2009, net cash provided by operating activities was
$852.6 million, compared with $488.8 million for the same period
in 2008. The $363.8 million quarter-over-quarter increase was
primarily due to an increase in natural gas taken out of storage by both
Integrys Energy Services and the regulated natural gas utilities in the first
quarter of 2009, compared with the first quarter of 2008. Due to the
current volatility and uncertainty in the global financial markets and in order
to improve its liquidity position, Integrys Energy Services used a higher
percentage of natural gas in storage to serve its customer
obligations.
Investing
Cash Flows
Net cash used for
investing activities was $93.5 million during the three months ended
March 31, 2009, compared with $90.9 million for the same
period in 2008. The $2.6 million quarter-over-quarter increase
in cash used for investing activities was primarily driven by a
$20.4 million increase in cash used for capital expenditures (discussed
below), partially offset by the positive quarter-over-quarter impact of a
$16.7 million payment in the first quarter of 2008 related to the
construction of the transmission facilities required to support Weston
4.
Capital
Expenditures
Capital
expenditures by business segment for the three months ended March 31
were:
Reportable
Segment (millions)
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
Electric
utility
|
|
$ |
43.2 |
|
|
$ |
31.5 |
|
|
$ |
11.7 |
|
Natural gas
utility
|
|
|
28.3 |
|
|
|
30.0 |
|
|
|
(1.7 |
) |
Integrys
Energy Services
|
|
|
11.2 |
|
|
|
4.5 |
|
|
|
6.7 |
|
Holding
company and other
|
|
|
6.6 |
|
|
|
2.9 |
|
|
|
3.7 |
|
Integrys
Energy Group consolidated
|
|
$ |
89.3 |
|
|
$ |
68.9 |
|
|
$ |
20.4 |
|
The increase in
capital expenditures at the electric utility for the three months ended
March 31, 2009, compared with the same period in 2008, was mainly due to
wind generation projects. The increase in capital expenditures at
Integrys Energy Services was primarily due to solar energy
projects.
Financing
Cash Flows
Net cash used for
financing activities was $681.5 million during the three months ended
March 31, 2009, compared with net cash used for financing activities of
$341.3 million for the same period in 2008. The
$340.2 million quarter-over-quarter increase in cash used for financing
activities was driven by a $355.7 million increase in repayments of
short-term debt borrowings in the first quarter of 2009, compared to the first
quarter of 2008, made possible by the increase in net cash provided by operating
activities.
Significant
Financing Activities
Dividends paid
increased in 2009 compared with 2008. The February 2009 quarterly
common stock dividend was increased to 68 cents per share from 67 cents per
share.
Integrys Energy
Group had outstanding commercial paper borrowings of $143.6 million and
$116.8 million at March 31, 2009, and 2008,
respectively. Integrys Energy Group had short-term notes payable
outstanding of $10.0 million at March 31, 2009, and
2008. Integrys Energy Group had borrowings under revolving credit
facilities of $345.0 million at March 31, 2009, and did not have
borrowings under revolving credit facilities at March 31,
2008. See Note 7, "Short-Term Debt and Lines of
Credit," for more information.
Credit Ratings
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
|
BBB+
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
|
BBB+
BBB
|
N/A
A3
|
PGL
Issuer
credit rating
Senior secured debt
Commercial paper
|
BBB+
A-
A-2
|
N/A
A1
P-1
|
NSG
Issuer
credit rating
Senior
secured debt
|
BBB+
A
|
N/A
A1
|
Credit ratings are
not recommendations to buy or sell securities and are subject to change, and
each rating should be evaluated independently of any other rating.
On
March 9, 2009, Moody's placed the ratings of Integrys Energy Group and all
of its subsidiaries under review for possible downgrade. This action
follows the review of Integrys Energy Group's consolidated 2008 financial
performance, as well as its strategic decision to divest or scale back Integrys
Energy Services.
On
March 5, 2009, Standard & Poor's lowered the following ratings of
Integrys Energy Group and its subsidiaries:
·
|
The issuer
credit ratings of Integrys Energy Group, PGL, NSG and PEC were lowered
from "A-" to "BBB+."
|
·
|
The issuer
credit rating of WPS was lowered from "A" to
"A-."
|
·
|
The senior
unsecured debt credit ratings of Integrys Energy Group and PEC were
lowered from "BBB+" to "BBB."
|
·
|
The junior
subordinated credit rating of Integrys Energy Group was lowered from "BBB"
to "BBB-."
|
·
|
The senior
secured debt rating of WPS was lowered from "A+" to
"A."
|
·
|
The preferred
stock rating of WPS was lowered from "BBB+" to
"BBB."
|
According to
Standard & Poor's, Integrys Energy Group's corporate credit downgrade
reflects weak financial measures that do not support an "A" category credit
profile. Standard & Poor's also stated that the downgrade
reflects the changes to Integrys Energy Group's business and financial risk
profiles. Standard & Poor's revised Integrys Energy Group's
business profile to excellent from strong and changed
its financial risk
profile to aggressive from intermediate. The change in the business
risk profile reflected the strategy change with respect to Integrys Energy
Services and helped to moderate the downgrade.
Future
Capital Requirements and Resources
Contractual
Obligations
The following table
shows the contractual obligations of Integrys Energy Group, including its
subsidiaries, as of March 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
Due By Period
|
(Millions)
|
|
Total
Amounts
Committed
|
|
|
2009
|
|
|
|
2010-2011 |
|
|
|
2012-2013 |
|
|
2014
and Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt principal and interest payments (1)
|
|
$ |
3,522.4 |
|
|
$ |
257.1 |
|
|
$ |
815.8 |
|
|
$ |
723.7 |
|
|
$ |
1,725.8 |
|
Operating
lease obligations
|
|
|
47.0 |
|
|
|
9.4 |
|
|
|
18.9 |
|
|
|
14.1 |
|
|
|
4.6 |
|
Commodity
purchase obligations (2)
|
|
|
6,035.9 |
|
|
|
2,068.7 |
|
|
|
2,080.2 |
|
|
|
925.2 |
|
|
|
961.8 |
|
Purchase
orders (3)
|
|
|
659.3 |
|
|
|
658.1 |
|
|
|
1.2 |
|
|
|
- |
|
|
|
- |
|
Capital
contributions to equity method investment
|
|
|
18.7 |
|
|
|
18.7 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Pension and
other postretirement
funding
obligations (4)
|
|
|
542.7 |
|
|
|
51.0 |
|
|
|
141.3 |
|
|
|
163.0 |
|
|
|
187.4 |
|
Total
contractual cash obligations
|
|
$ |
10,826.0 |
|
|
$ |
3,063.0 |
|
|
$ |
3,057.4 |
|
|
$ |
1,826.0 |
|
|
$ |
2,879.6 |
|
(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 $641.2 million at March 31, 2009, as the amount and
timing of payments are uncertain. See Note 11,"Commitments and
Contingencies," for more information about environmental
liabilities. In addition, the table does not reflect any payments for
the March 31, 2009 liability related to uncertain tax positions, as the
amount and timing of payments are uncertain. See Note 10, "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
|
|
|
138.7 |
|
Electric
and natural gas distribution projects
|
|
|
127.6 |
|
Other
projects
|
|
|
161.9 |
|
|
|
|
|
|
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
|
|
|
44.0 |
|
|
|
|
|
|
PGL
|
|
|
|
|
Natural
gas pipe distribution system and underground natural gas storage
facilities (1)
|
|
|
357.8 |
|
|
|
|
|
|
NSG
|
|
|
|
|
Natural
gas pipe distribution system
|
|
|
40.1 |
|
|
|
|
|
|
Integrys
Energy Services (2)
|
|
|
|
|
Landfill
methane gas project, infrastructure project, solar energy projects,
and
miscellaneous
projects
|
|
|
20.0 |
|
|
|
|
|
|
IBS
|
|
|
|
|
Corporate
services infrastructure projects
|
|
|
83.2 |
|
Total capital
expenditures
|
|
$ |
1,317.3 |
|
(1)
|
Includes
approximately $55 million of expenditures related to the accelerated
replacement of cast iron mains at PGL in 2011. PGL requested
recovery in a rider as part of the rate case filed on February 25,
2009. See Note 19, "Regulatory
Environment," for more
information.
|
(2)
|
Includes only
estimated construction expenditures for
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 may vary
significantly from the estimates depending on a number of factors, including,
but not limited to, industry restructuring, regulatory constraints, market
volatility, and economic trends.
Capital
Resources
As
of March 31, 2009, 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 2, "Management Discussion and Analysis
of Financial Conditions and Results of Operations, Other Future Considerations"
for additional information.
See Note 7, "Short-Term Debt and Lines of
Credit," for more information on our credit facilities and other
short-term credit agreements.
In
March 2009, Integrys Energy Group filed a new shelf registration statement
which allows Integrys Energy Group to publicly issue debt, equity, certain types
of hybrid securities, and other financial instruments. Specific terms
and conditions of securities issued will be determined prior to the actual
issuance of any specific security.
Under an existing
shelf registration statement, WPS may issue up to $250.0 million of senior
debt securities with amounts, prices, and terms to be determined at the time of
future offerings. In December 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 have impacted Integrys Energy Group in a
number of ways. Due to disruptions in the commercial paper markets
beginning in the second half of 2008, 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 $200.0 million
of these borrowings were
outstanding at March 31, 2009. In addition, Integrys Energy Group
believes 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 related to purchase contracts utilized by
Integrys Energy Group to economically hedge its supply obligations.
In
response to the factors discussed above, Integrys Energy Group has taken several
steps to improve its available liquidity. Integrys Energy Services has
significantly reduced its origination and customer renewal activity in order to
keep its potential capital requirements within the liquidity that is currently
available. For the business that continues to be transacted, Integrys
Energy Services has adjusted its product pricing strategy to account for the
increased 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.
At
the end of March, the natural gas storage cycle at both the regulated natural
gas utilities and Integrys Energy Services resulted in the generation of
positive cash flow, as inventory that had been built up in storage was sold to
customers. This resulted in an approximate $700 million reduction in
consolidated short-term debt outstanding during the first quarter, with similar
levels of cash available to Integrys Energy Group.
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
the economic downturn cannot be predicted, Integrys Energy Group currently
believes it has sufficient operating flexibility and access to funding sources
to maintain adequate liquidity.
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 the Nonregulated Business Segment
Integrys Energy
Group has made a decision to pursue divestiture of its nonregulated energy
services business segment. A divestiture may be completed through one
transaction or multiple transactions with various buyers. Integrys
Energy Group intends to redeploy the capital to areas with more desirable
risk-adjusted rates of return to achieve the greatest value for our
investors. The divestiture will yield proceeds and/or free up
invested capital that will be redeployed to support core utility businesses and
strengthen the company's balance sheet. This will reduce risk and
financial requirements at a time when global credit and financial markets are
constraining the availability and increasing the cost of
capital. Integrys Energy Group is targeting an announcement with
respect to Integrys Energy Services by the end of the third or early fourth
quarter of 2009 with possible completion of a full or partial divestiture by the
end of the year, subject to regulatory approvals.
In
the event that a full divestiture of Integrys Energy Services does not occur
and/or 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 committed to a full divestiture or a
nonregulated energy services operation with credit and collateral support
requirements that are insignificant by the end of 2010.
Subsequent to
completion of any such divestiture, Intergrys Energy Group expects its liquidity
needs to decrease by as much as $1 billion and would reduce its existing credit
facilities. Integrys Energy Group may also use any proceeds from the
divestiture, as well as the return of our invested capital to reduce outstanding
debt or invest in areas with more desirable risk adjusted rates of return to
achieve the greatest value for its shareholders.
Decoupling
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
going forward to recover or refund the difference between the actual and
authorized margin impact of variations in volumes. Decoupling for
residential and small commercial and industrial sales was approved by the ICC on
a four-year trial basis for PGL and NSG, 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. In the
recently completed WPS rate case, the PSCW approved the implementation of
decoupling on a four-year trial basis, effective January 1, 2009, for
natural gas and electric residential and small commercial sales. This
decoupling mechanism includes an annual $14.0 million cap for electric
service and an annual $8.0 million cap for natural gas
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.
For a discussion of
regulatory filings and decisions, see Note 19, "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 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 additional goodwill impairment losses. See Note 6,
"Goodwill and Other Intangible
Assets," for information on goodwill balances for Integrys Energy Group's
reporting units at March 31, 2009.
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. Included in ARRA are several tax provisions
that may affect the company. Most notably, a provision of ARRA
provides Integrys Energy Group with additional opportunities to claim tax
deductions for bonus depreciation for certain assets placed in service during
2009, extending the bonus depreciation period established by the Economic
Stimulus Act of 2008. The additional first year deduction for bonus
depreciation is estimated to be substantial, and depending on rules for
qualification of certain property, can vary significantly. Other
provisions of ARRA provide Integrys Energy Group with elections to select
between a production tax credit, an investment tax credit, or a federal grant
for wind generating facilities that will go into service later in
2009. Integrys Energy Group currently plans to take production tax
credits on power generated by these facilities, but is studying the other
alternatives mentioned above. Integrys Energy Group is also
investigating the possibility of obtaining funds under ARRA for certain specific
projects.
In
February 2009, Wisconsin Act 2 was signed into law. Act 2 contains
various tax provisions intended to reduce Wisconsin's current budget
gap. Most notably, this Act will require Integrys Energy Group and
its subsidiaries to file a Wisconsin income tax return as a combined
group. As a result, all of Integrys Energy Group's income will be
subject to apportionment and taxation in Wisconsin. In the first
quarter of 2009, the company recorded a one-time adjustment to deferred
taxes. See Note 10, "Income Taxes." In
the future, Integrys Energy Group may experience higher or lower Wisconsin
income taxes depending on the mix and type of income. In the
short-term, after the adjustment to deferred taxes, this law is expected to
generate a small benefit for Integrys Energy Group.
MARKET
PRICE RISK MANAGEMENT ACTIVITIES
Market price risk
management activities include the electric and natural gas marketing and related
risk management activities of Integrys Energy Services. Integrys
Energy Services' marketing and trading operations manage electricity and natural
gas procurement as an integrated portfolio with its retail and wholesale sales
commitments. Derivative instruments are utilized in these
operations.
Integrys Energy
Services measures the fair value of derivative instruments on a mark-to-market
basis. The fair value is included in assets or liabilities from risk
management activities on Integrys Energy Group's Condensed Consolidated Balance
Sheets, with an offsetting entry to other comprehensive income (for the
effective portion of cash flow hedges), also on Integrys Energy Group's
Condensed 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 three months ended March 31, 2009.
Integrys
Energy Services
Mark-to-Market
Roll Forward
(Millions)
|
|
Natural
Gas
|
|
|
Electric
|
|
|
Total
|
|
Fair value of
contracts at December 31, 2008 (1)
|
|
$ |
294.0 |
|
|
$ |
(135.4 |
) |
|
$ |
158.6 |
|
Less: Contracts
realized or settled during period (2)
|
|
|
144.1 |
|
|
|
(38.5 |
) |
|
|
105.6 |
|
Plus: Changes
in fair value of contracts in existence at March 31, 2009 (3)
|
|
|
61.2 |
|
|
|
(151.2 |
) |
|
|
(90.0 |
) |
Fair
value of contracts at March 31, 2009 (1)
|
|
$ |
211.1 |
|
|
$ |
(248.1 |
) |
|
$ |
(37.0 |
) |
(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, 2008, that were no
longer included in the net mark-to-market assets as of
March 31, 2009.
|
(3)
|
Includes
unrealized gains and losses on contracts that existed at December 31,
2008, and contracts that were entered into subsequent to December 31,
2008, which were included in Integrys Energy Services' portfolio at
March 31, 2009, 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 17, "Fair Value."
Integrys
Energy Services
Risk
Management Contract Aging at Fair Value
As
of March 31, 2009 (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
|
|
$ |
(191.7 |
) |
|
$ |
(71.8 |
) |
|
$ |
(1.4 |
) |
|
$ |
- |
|
|
$ |
(264.9 |
) |
Level
2
|
|
|
170.7 |
|
|
|
(71.0 |
) |
|
|
(0.7 |
) |
|
|
(1.3 |
) |
|
|
97.7 |
|
Level
3
|
|
|
31.9 |
|
|
|
86.6 |
|
|
|
6.5 |
|
|
|
5.2 |
|
|
|
130.2 |
|
Total
fair value
|
|
$ |
10.9 |
|
|
$ |
(56.2 |
) |
|
$ |
4.4 |
|
|
$ |
3.9 |
|
|
$ |
(37.0 |
) |
CRITICAL
ACCOUNTING POLICIES
Integrys Energy
Group has reviewed its critical accounting policies for new critical accounting
estimates and other significant changes and has found that the disclosures made
in its Annual Report on Form 10-K for the year ended December 31, 2008, are
still current and that there have been no significant
changes.