form10q.htm
______________________________________________________________________________
______________________________________________________________________________
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-Q
[x] QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE
ACT OF 1934
For the quarterly
period ended June 30, 2009
OR
[
] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE
ACT OF 1934
For the transition
period from __________ to __________
Commission
File Number
|
Registrant;
State of Incorporation;
Address; and Telephone
Number
|
IRS
Employer
Identification No.
|
|
|
|
1-11337
|
INTEGRYS
ENERGY GROUP, INC.
(A Wisconsin
Corporation)
130 East
Randolph Drive
Chicago,
Illinois 60601-6207
(312)
228-5400
|
39-1775292
|
Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Indicate by check
mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post
such files). (Registrant is not yet required to provide financial
disclosure in an Interactive Data File format.)
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the
definitions of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large
accelerated filer [X]
|
Accelerated
filer [ ]
|
Non-accelerated
filer [ ]
|
Smaller
reporting company [ ]
|
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Indicate the number
of shares outstanding of the issuer's classes of common stock, as of the latest
practicable date:
|
Common stock,
$1 par value,
76,422,505 shares
outstanding at
August 4,
2009
|
|
|
______________________________________________________________________________
______________________________________________________________________________
INTEGRYS
ENERGY GROUP, INC.
FORM
10-Q FOR THE QUARTER ENDED JUNE 30, 2009
TABLE
OF CONTENTS
|
|
|
Page
|
|
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|
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|
3
|
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|
|
4
|
|
|
|
PART
I.
|
FINANCIAL
INFORMATION
|
6
|
|
|
|
Item
1.
|
FINANCIAL
STATEMENTS (Unaudited)
|
6
|
|
|
|
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|
6
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|
7
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|
|
8
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|
9 -
44
|
|
Integrys
Energy Group, Inc. and Subsidiaries
|
|
|
|
Page
|
|
|
Note
1
|
Financial
Information
|
9
|
|
|
Note
2
|
Cash and Cash
Equivalents
|
9
|
|
|
Note
3
|
Risk
Management Activities
|
9
|
|
|
Note
4
|
Integrys
Energy Services Restructuring
|
14
|
|
|
Note
5
|
Discontinued
Operations
|
15
|
|
|
Note
6
|
Investment in
ATC
|
15
|
|
|
Note
7
|
Inventories
|
16
|
|
|
Note
8
|
Goodwill and
Other Intangible Assets
|
17
|
|
|
Note
9
|
Short-Term
Debt and Lines of Credit
|
19
|
|
|
Note
10
|
Long-Term
Debt
|
20
|
|
|
Note
11
|
Asset
Retirement Obligations
|
21
|
|
|
Note
12
|
Income
Taxes
|
21
|
|
|
Note
13
|
Commitments
and Contingencies
|
22
|
|
|
Note
14
|
Guarantees
|
30
|
|
|
Note
15
|
Employee
Benefit Plans
|
31
|
|
|
Note
16
|
Stock-Based
Compensation
|
31
|
|
|
Note
17
|
Comprehensive
Income (Loss)
|
33
|
|
|
Note
18
|
Common
Equity
|
34
|
|
|
Note
19
|
Fair
Value
|
35
|
|
|
Note
20
|
Miscellaneous
Income
|
37
|
|
|
Note
21
|
Regulatory
Environment
|
37
|
|
|
Note
22
|
Segments of
Business
|
41
|
|
|
Note
23
|
New
Accounting Pronouncements
|
44
|
|
|
|
|
Item
2.
|
|
45 -
80
|
|
|
|
Item
3.
|
|
81
|
|
|
|
Item
4.
|
|
82
|
|
|
|
|
OTHER
INFORMATION
|
83
|
|
|
|
Item
1.
|
Legal
Proceedings
|
83
|
|
|
|
Item
1A.
|
Risk
Factors
|
83
|
|
|
|
Item
4.
|
Submission of
Matters to a Vote of Security Holders
|
83
|
|
|
|
Item
6.
|
Exhibits
|
83
|
|
|
|
|
|
84
|
|
|
85
|
|
|
4.1
|
Third
Supplemental Indenture, dated as of June 1, 2009, by and between Integrys
Energy Group, Inc. and U.S. Bank National Association (successor to
Firstar Bank, National Association) (Incorporated by reference to Exhibit
4.1 to Integrys Energy Group's Form 8-K filed June 17,
2009.)
|
|
|
4.2
|
Fourth
Supplemental Indenture, dated as of June 1, 2009, by and between Integrys
Energy Group, Inc. and U.S. Bank National Association (successor to
Firstar Bank, National Association) (Incorporated by reference to Exhibit
4.2 to Integrys Energy Group's Form 8-K filed June 17,
2009.)
|
|
|
12
|
Computation
of Ratio of Earnings to Fixed Charges
|
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of
1934 for Integrys Energy Group, Inc.
|
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of
1934 for Integrys Energy Group, Inc.
|
|
|
32
|
Written
Statement of the Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350 for Integrys Energy Group,
Inc.
|
|
|
|
AFUDC
|
Allowance for
Funds Used During Construction
|
ATC
|
American
Transmission Company LLC
|
EPA
|
United States
Environmental Protection Agency
|
FASB
|
Financial
Accounting Standards Board
|
FERC
|
Federal
Energy Regulatory Commission
|
GAAP
|
United States
Generally Accepted Accounting Principles
|
IBS
|
Integrys
Business Support, LLC
|
ICC
|
Illinois
Commerce Commission
|
IRS
|
United States
Internal Revenue Service
|
LIFO
|
Last-in,
first-out
|
MERC
|
Minnesota
Energy Resources Corporation
|
MGU
|
Michigan Gas
Utilities Corporation
|
MISO
|
Midwest
Independent Transmission System Operator, Inc.
|
MPSC
|
Michigan
Public Service Commission
|
MPUC
|
Minnesota
Public Utility Commission
|
N/A
|
Not
Applicable
|
NSG
|
North Shore
Gas Company
|
NYMEX
|
New York
Mercantile Exchange
|
PEC
|
Peoples
Energy Corporation
|
PGL
|
The Peoples
Gas Light and Coke Company
|
PSCW
|
Public
Service Commission of Wisconsin
|
SEC
|
United States
Securities and Exchange Commission
|
SFAS
|
Statement of
Financial Accounting Standards
|
UPPCO
|
Upper
Peninsula Power Company
|
WDNR
|
Wisconsin
Department of Natural Resources
|
WPS
|
Wisconsin
Public Service Corporation
|
In
this report, Integrys Energy Group and its subsidiaries make statements
concerning expectations, beliefs, plans, objectives, goals, strategies, and
future events or performance. Such statements are "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Forward-looking statements are subject to
assumptions and uncertainties; therefore, actual results may differ materially
from those expressed or implied by such forward-looking
statements. Although Integrys Energy Group and its subsidiaries
believe that these forward-looking statements and the underlying assumptions are
reasonable, they cannot provide assurance that such statements will prove
correct.
Forward-looking
statements include, among other things, statements concerning management's
expectations and projections regarding earnings, regulatory matters, fuel costs,
sources of electric energy supply, coal and natural gas deliveries, remediation
costs, environmental and other capital expenditures, liquidity and capital
resources, trends, estimates, completion of construction projects, and other
matters.
Forward-looking
statements involve a number of risks and uncertainties. Some risk
factors that could cause results to differ from any forward-looking statement
include those described in Item 1A of Integrys Energy Group's Annual Report on
Form 10-K for the year ended December 31, 2008, as may be amended or
supplemented in Part II, Item 1A of this report. Other factors
include:
●
|
Resolution of
pending and future rate cases and negotiations (including the recovery of
deferred costs) and other regulatory decisions impacting Integrys Energy
Group's regulated businesses;
|
●
|
The impact of
recent and future federal and state regulatory changes, including
legislative and regulatory initiatives regarding deregulation and
restructuring of the electric and natural gas utility industries and
future initiatives to address concerns about global climate change,
changes in environmental, tax, and other laws and regulations to which
Integrys Energy Group and its subsidiaries are subject, as well as changes
in the application of existing laws and regulations;
|
●
|
Current and
future litigation, regulatory investigations, proceedings, or inquiries,
including but not limited to, manufactured gas plant site cleanup,
reconciliation of revenues from the Gas Charge (as defined in
Note 13, "Commitments
and Contingencies") and related natural gas costs, and the
proceeding regarding the Weston 4 air permit;
|
●
|
The impacts
of changing financial market conditions, credit ratings, and interest
rates on the liquidity and financing efforts of Integrys Energy
Group and its subsidiaries;
|
●
|
The risks
associated with executing Integrys Energy Group's plan to significantly
reduce the scope and scale of, or divest in its entirety, the nonregulated
energy services business;
|
●
|
The risks
associated with changing commodity prices (particularly natural gas and
electricity) and the available sources of fuel and purchased power,
including their impact on margins;
|
●
|
Resolution of
audits or other tax disputes with the IRS and various state, local, and
Canadian revenue agencies;
|
●
|
The effects,
extent, and timing of additional competition or regulation in the markets
in which Integrys Energy Group's subsidiaries operate;
|
●
|
The retention
of market-based rate authority;
|
●
|
The risk
associated with the value of goodwill or other intangibles and their
possible impairment;
|
●
|
Investment
performance of employee benefit plan assets;
|
●
|
Advances in
technology;
|
●
|
Effects of
and changes in political and legal developments, as well as economic
conditions and the related impact on customer demand;
|
●
|
Potential
business strategies, including mergers, acquisitions, and construction or
disposition of assets or businesses, which cannot be assured to be
completed timely or within budgets;
|
●
|
The direct or
indirect effects of terrorist incidents, natural disasters, or responses
to such events;
|
●
|
The
effectiveness of risk management strategies and the use of financial and
derivative instruments;
|
●
|
The risks
associated with the inability of Integrys Energy Group's and its
subsidiaries' counterparties, affiliates, and customers to meet their
obligations;
|
●
|
Weather and
other natural phenomena, in particular the effect of weather on natural
gas and electricity sales;
|
●
|
The
utilization of tax credit and loss carryforwards;
|
●
|
The effect of
accounting pronouncements issued periodically by standard-setting bodies;
and
|
●
|
Other factors
discussed elsewhere herein and in other reports filed by Integrys Energy
Group from time to time with the
SEC.
|
Except
to the extent required by the federal securities laws, Integrys Energy Group and
its subsidiaries undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
|
|
|
|
|
|
|
|
|
|
|
|
|
PART
1. FINANCIAL INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
1. Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEGRYS
ENERGY GROUP, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30
|
|
|
June
30
|
|
(Millions,
except per share data)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonregulated
revenue
|
|
$ |
815.0 |
|
|
$ |
2,601.1 |
|
|
$ |
2,601.3 |
|
|
$ |
5,013.4 |
|
Utility
revenue
|
|
|
612.6 |
|
|
|
816.1 |
|
|
|
2,027.1 |
|
|
|
2,393.0 |
|
Total
revenues
|
|
|
1,427.6 |
|
|
|
3,417.2 |
|
|
|
4,628.4 |
|
|
|
7,406.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonregulated
cost of fuel, natural gas, and purchased power
|
|
|
708.9 |
|
|
|
2,544.8 |
|
|
|
2,478.0 |
|
|
|
4,829.3 |
|
Utility cost
of fuel, natural gas, and purchased power
|
|
|
271.4 |
|
|
|
483.3 |
|
|
|
1,182.0 |
|
|
|
1,589.6 |
|
Operating and
maintenance expense
|
|
|
276.0 |
|
|
|
251.8 |
|
|
|
567.3 |
|
|
|
538.4 |
|
Goodwill
impairment loss
|
|
|
- |
|
|
|
6.5 |
|
|
|
291.1 |
|
|
|
6.5 |
|
Restructuring
expense
|
|
|
19.1 |
|
|
|
- |
|
|
|
19.1 |
|
|
|
- |
|
Depreciation
and amortization expense
|
|
|
57.6 |
|
|
|
55.9 |
|
|
|
114.5 |
|
|
|
107.1 |
|
Taxes other
than income taxes
|
|
|
21.7 |
|
|
|
21.8 |
|
|
|
48.6 |
|
|
|
47.7 |
|
Operating
income (loss)
|
|
|
72.9 |
|
|
|
53.1 |
|
|
|
(72.2 |
) |
|
|
287.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
|
20.8 |
|
|
|
22.7 |
|
|
|
42.0 |
|
|
|
40.8 |
|
Interest
expense
|
|
|
(40.0 |
) |
|
|
(33.5 |
) |
|
|
(82.7 |
) |
|
|
(71.4 |
) |
Other
expense
|
|
|
(19.2 |
) |
|
|
(10.8 |
) |
|
|
(40.7 |
) |
|
|
(30.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before taxes
|
|
|
53.7 |
|
|
|
42.3 |
|
|
|
(112.9 |
) |
|
|
257.2 |
|
Provision for
income taxes
|
|
|
18.5 |
|
|
|
17.5 |
|
|
|
31.3 |
|
|
|
95.8 |
|
Net
income (loss) from continuing operations
|
|
|
35.2 |
|
|
|
24.8 |
|
|
|
(144.2 |
) |
|
|
161.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations, net of tax
|
|
|
0.3 |
|
|
|
0.1 |
|
|
|
0.3 |
|
|
|
0.1 |
|
Net
income (loss)
|
|
|
35.5 |
|
|
|
24.9 |
|
|
|
(143.9 |
) |
|
|
161.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends of subsidiary
|
|
|
0.8 |
|
|
|
0.8 |
|
|
|
1.6 |
|
|
|
1.6 |
|
Net
income (loss) attributed to common shareholders
|
|
$ |
34.7 |
|
|
$ |
24.1 |
|
|
$ |
(145.5 |
) |
|
$ |
159.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
76.8 |
|
|
|
76.6 |
|
|
|
76.7 |
|
|
|
76.6 |
|
Diluted
|
|
|
76.8 |
|
|
|
76.9 |
|
|
|
76.7 |
|
|
|
76.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share (basic)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations
|
|
$ |
0.45 |
|
|
$ |
0.31 |
|
|
$ |
(1.90 |
) |
|
$ |
2.09 |
|
Discontinued
operations, net of tax
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Earnings
(loss) per common share (basic)
|
|
$ |
0.45 |
|
|
$ |
0.31 |
|
|
$ |
(1.90 |
) |
|
$ |
2.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share (diluted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations
|
|
$ |
0.45 |
|
|
$ |
0.31 |
|
|
$ |
(1.90 |
) |
|
$ |
2.08 |
|
Discontinued
operations, net of tax
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Earnings
(loss) per common share (diluted)
|
|
$ |
0.45 |
|
|
$ |
0.31 |
|
|
$ |
(1.90 |
) |
|
$ |
2.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per common share declared
|
|
$ |
0.68 |
|
|
$ |
0.67 |
|
|
$ |
1.36 |
|
|
$ |
1.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying condensed notes are an integral part of these
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEGRYS
ENERGY GROUP, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
June
30
|
|
|
December
31
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
206.4 |
|
|
$ |
254.1 |
|
Accounts
receivable and accrued unbilled revenues, net of reserves of $74.6 and
$62.5, respectively
|
|
|
1,285.8 |
|
|
|
2,155.3 |
|
Inventories
|
|
|
287.1 |
|
|
|
732.9 |
|
Assets from
risk management activities
|
|
|
2,860.2 |
|
|
|
2,223.7 |
|
Regulatory
assets
|
|
|
152.8 |
|
|
|
244.0 |
|
Deferred
income taxes
|
|
|
148.6 |
|
|
|
- |
|
Other current
assets
|
|
|
241.0 |
|
|
|
280.8 |
|
Current
assets
|
|
|
5,181.9 |
|
|
|
5,890.8 |
|
|
|
|
|
|
|
|
|
|
Property,
plant, and equipment, net of accumulated depreciation of $2,796.6 and
$2,710.0, respectively
|
|
|
4,844.4 |
|
|
|
4,773.3 |
|
Regulatory
assets
|
|
|
1,465.9 |
|
|
|
1,444.8 |
|
Assets from
risk management activities
|
|
|
1,225.8 |
|
|
|
758.7 |
|
Goodwill
|
|
|
642.8 |
|
|
|
933.9 |
|
Other
|
|
|
503.5 |
|
|
|
471.0 |
|
Total
assets
|
|
$ |
13,864.3 |
|
|
$ |
14,272.5 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
$ |
113.7 |
|
|
$ |
1,209.0 |
|
Current
portion of long-term debt
|
|
|
271.0 |
|
|
|
155.2 |
|
Accounts
payable
|
|
|
964.8 |
|
|
|
1,534.3 |
|
Liabilities
from risk management activities
|
|
|
2,952.9 |
|
|
|
2,190.3 |
|
Regulatory
liabilities
|
|
|
89.7 |
|
|
|
58.8 |
|
Deferred
income taxes
|
|
|
- |
|
|
|
71.6 |
|
Temporary LIFO
liquidation credit
|
|
|
34.1 |
|
|
|
- |
|
Other current
liabilities
|
|
|
408.7 |
|
|
|
494.8 |
|
Current
liabilities
|
|
|
4,834.9 |
|
|
|
5,714.0 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
2,323.1 |
|
|
|
2,288.0 |
|
Deferred
income taxes
|
|
|
626.1 |
|
|
|
435.7 |
|
Deferred
investment tax credits
|
|
|
36.2 |
|
|
|
36.9 |
|
Regulatory
liabilities
|
|
|
275.5 |
|
|
|
275.5 |
|
Environmental
remediation liabilities
|
|
|
657.4 |
|
|
|
640.6 |
|
Pension and
other postretirement benefit obligations
|
|
|
656.6 |
|
|
|
636.5 |
|
Liabilities
from risk management activities
|
|
|
1,223.7 |
|
|
|
762.7 |
|
Asset
retirement obligations
|
|
|
183.8 |
|
|
|
179.1 |
|
Other
|
|
|
148.1 |
|
|
|
152.8 |
|
Long-term
liabilities
|
|
|
6,130.5 |
|
|
|
5,407.8 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock of subsidiary - $100 par value; 1,000,000 shares
authorized;
511,882
shares issued; 510,516 shares outstanding
|
|
|
51.1 |
|
|
|
51.1 |
|
Common stock -
$1 par value; 200,000,000 shares authorized; 76,426,505 shares
issued;
76,013,872
shares outstanding
|
|
|
76.4 |
|
|
|
76.4 |
|
Additional
paid-in capital
|
|
|
2,490.8 |
|
|
|
2,487.9 |
|
Retained
earnings
|
|
|
373.1 |
|
|
|
624.6 |
|
Accumulated
other comprehensive loss
|
|
|
(77.0 |
) |
|
|
(72.8 |
) |
Treasury stock
and shares in deferred compensation trust
|
|
|
(15.5 |
) |
|
|
(16.5 |
) |
Total
liabilities and shareholders' equity
|
|
$ |
13,864.3 |
|
|
$ |
14,272.5 |
|
|
|
|
|
|
|
|
|
|
The
accompanying condensed notes are an integral part of these
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEGRYS
ENERGY GROUP, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Six
Months Ended
|
|
|
|
|
|
June
30
|
|
(Millions)
|
|
|
2009
|
|
|
2008
|
|
Operating
Activities
|
|
|
|
|
|
|
Net income
(loss)
|
|
$ |
(143.9 |
) |
|
$ |
161.5 |
|
Adjustments to
reconcile net income (loss) to net cash provided by operating
activities
|
|
|
|
|
|
|
|
|
|
Discontinued
operations, net of tax
|
|
|
(0.3 |
) |
|
|
(0.1 |
) |
|
Goodwill
impairment loss
|
|
|
291.1 |
|
|
|
6.5 |
|
|
Depreciation
and amortization expense
|
|
|
114.5 |
|
|
|
107.1 |
|
|
Recoveries and
refunds of regulatory assets and liabilities
|
|
|
25.4 |
|
|
|
35.1 |
|
|
Net unrealized
losses (gains) on nonregulated energy contracts
|
|
|
106.8 |
|
|
|
(45.9 |
) |
|
Nonregulated
lower of cost or market inventory adjustments
|
|
|
42.7 |
|
|
|
- |
|
|
Bad debt
expense
|
|
|
41.0 |
|
|
|
35.2 |
|
|
Pension and
other postretirement expense
|
|
|
34.0 |
|
|
|
24.5 |
|
|
Pension and
other postretirement contributions
|
|
|
(6.8 |
) |
|
|
(10.5 |
) |
|
Deferred
income taxes and investment tax credit
|
|
|
(36.7 |
) |
|
|
6.4 |
|
|
Loss on sale
of property, plant, and equipment
|
|
|
- |
|
|
|
2.1 |
|
|
Equity income,
net of dividends
|
|
|
(8.1 |
) |
|
|
(5.8 |
) |
|
Other
|
|
|
|
(9.4 |
) |
|
|
(19.3 |
) |
|
Changes in
working capital
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable and accrued unbilled revenues
|
|
|
820.1 |
|
|
|
(78.9 |
) |
|
|
Inventories
|
|
|
443.4 |
|
|
|
(294.3 |
) |
|
|
Other current
assets
|
|
|
67.7 |
|
|
|
16.3 |
|
|
|
Accounts
payable
|
|
|
(532.6 |
) |
|
|
475.7 |
|
|
|
Temporary LIFO
liquidation credit
|
|
|
34.1 |
|
|
|
98.8 |
|
|
|
Other current
liabilities
|
|
|
(34.5 |
) |
|
|
(79.0 |
) |
Net
cash provided by operating activities
|
|
|
1,248.5 |
|
|
|
435.4 |
|
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(187.6 |
) |
|
|
(198.5 |
) |
Proceeds from
the sale or disposal of property, plant, and equipment
|
|
|
17.6 |
|
|
|
- |
|
Purchase of
equity investments and other acquisitions
|
|
|
(15.5 |
) |
|
|
(17.5 |
) |
Cash paid for
transmission interconnection
|
|
|
- |
|
|
|
(17.4 |
) |
Proceeds
received from transmission interconnection
|
|
|
- |
|
|
|
99.7 |
|
Other
|
|
|
|
|
(3.0 |
) |
|
|
1.8 |
|
Net
cash used for investing activities
|
|
|
(188.5 |
) |
|
|
(131.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
Short-term
debt, net
|
|
|
(924.1 |
) |
|
|
(207.7 |
) |
Redemption of
notes payable
|
|
|
(157.9 |
) |
|
|
- |
|
Proceeds from
sale of borrowed natural gas
|
|
|
134.4 |
|
|
|
237.6 |
|
Purchase of
natural gas to repay natural gas loans
|
|
|
(204.0 |
) |
|
|
(168.7 |
) |
Issuance of
long-term debt
|
|
|
155.0 |
|
|
|
- |
|
Repayment of
long-term debt
|
|
|
(2.0 |
) |
|
|
(54.6 |
) |
Payment of
dividends
|
|
|
|
|
|
|
|
|
|
Preferred
stock of subsidiary
|
|
|
(1.6 |
) |
|
|
(1.6 |
) |
|
Common
stock
|
|
|
(103.5 |
) |
|
|
(101.9 |
) |
Other
|
|
|
|
|
(4.0 |
) |
|
|
(1.8 |
) |
Net
cash used for financing activities
|
|
|
(1,107.7 |
) |
|
|
(298.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
Change
in cash and cash equivalents
|
|
|
(47.7 |
) |
|
|
4.8 |
|
Cash and cash
equivalents at beginning of period
|
|
|
254.1 |
|
|
|
41.2 |
|
Cash
and cash equivalents at end of period
|
|
$ |
206.4 |
|
|
$ |
46.0 |
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying condensed notes are an integral part of these
statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEGRYS
ENERGY GROUP, INC. AND SUBSIDIARIES
CONDENSED
NOTES TO FINANCIAL STATEMENTS
June 30,
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. Subsequent events at Integrys Energy Group were evaluated
for potential recognition or disclosure through August 5, 2009, which is
the date the financial statements were issued. 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:
|
|
Six
Months Ended June 30
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
Cash paid for
interest
|
|
$ |
78.8 |
|
|
$ |
69.0 |
|
Cash paid for
income taxes
|
|
|
21.8 |
|
|
|
91.3 |
|
Significant
non-cash transactions were:
|
|
Six
Months Ended June 30
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
Construction
costs funded through accounts payable
|
|
$ |
51.8 |
|
|
$ |
20.2 |
|
Intangible
assets (customer contracts) received in exchange for
risk management assets
|
|
|
17.0 |
|
|
|
- |
|
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
|
|
June 30,
2009
|
|
|
December 31,
2008
|
|
|
June 30,
2009
|
|
|
December 31,
2008
|
|
Utility
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-hedge
derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Current
|
|
$ |
24.1 |
|
|
$ |
28.6 |
|
|
$ |
96.6 |
|
|
$ |
161.6 |
|
Commodity contracts
|
Long-term
|
|
|
1.5 |
|
|
|
- |
|
|
|
4.5 |
|
|
|
9.0 |
|
Cash flow
hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Current
|
|
|
- |
|
|
|
- |
|
|
|
1.3 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonregulated
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-hedge
derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Current
|
|
|
2,796.0 |
|
|
|
2,080.9 |
|
|
|
2,770.0 |
|
|
|
1,944.8 |
|
Commodity contracts
|
Long-term
|
|
|
1,215.6 |
|
|
|
750.0 |
|
|
|
1,197.2 |
|
|
|
729.7 |
|
Interest rate swaps
|
Current
|
|
|
- |
|
|
|
- |
|
|
|
2.6 |
|
|
|
1.0 |
|
Interest rate swaps
|
Long-term
|
|
|
- |
|
|
|
- |
|
|
|
1.3 |
|
|
|
3.3 |
|
Foreign exchange
contracts
|
Current
|
|
|
1.6 |
|
|
|
2.8 |
|
|
|
0.3 |
|
|
|
0.5 |
|
Foreign exchange
contracts
|
Long-term
|
|
|
1.3 |
|
|
|
2.5 |
|
|
|
1.9 |
|
|
|
2.3 |
|
Fair value
hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Current
|
|
|
- |
|
|
|
14.2 |
|
|
|
- |
|
|
|
- |
|
Interest rate swaps
|
Current
|
|
|
1.6 |
|
|
|
1.1 |
|
|
|
- |
|
|
|
- |
|
Interest rate swaps
|
Long-term
|
|
|
1.3 |
|
|
|
2.1 |
|
|
|
- |
|
|
|
- |
|
Cash flow
hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Current
|
|
|
36.9 |
|
|
|
81.3 |
|
|
|
78.5 |
|
|
|
79.4 |
|
Commodity contracts
|
Long-term
|
|
|
6.1 |
|
|
|
4.1 |
|
|
|
18.8 |
|
|
|
14.8 |
|
Interest rate swaps
|
Current
|
|
|
- |
|
|
|
- |
|
|
|
3.6 |
|
|
|
1.5 |
|
Interest rate swaps
|
Long-term
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3.6 |
|
Foreign exchange
contracts
|
Current
|
|
|
- |
|
|
|
14.8 |
|
|
|
- |
|
|
|
- |
|
Total
|
|
|
$ |
4,086.0 |
|
|
$ |
2,982.4 |
|
|
$ |
4,176.6 |
|
|
$ |
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)
|
|
June 30,
2009
|
|
|
December 31,
2008
|
|
Cash
collateral provided to others
|
|
$ |
334.2 |
|
|
$ |
256.4 |
|
Cash
collateral received from others
|
|
|
123.9 |
|
|
|
18.9 |
|
On the Condensed
Consolidated Balance Sheets, the cash collateral provided to others is reflected
in accounts receivable and accrued unbilled revenues, 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
June 30, 2009, was $2,479.6 million. As of June 30,
2009, Integrys Energy Group had not posted any cash collateral related to these
commodity instruments.
If
all of the credit-risk related contingent features contained in commodity
instruments (including derivatives, non-derivatives, normal purchase and normal
sales contracts, and applicable payables and receivables) had been triggered at
June 30, 2009, Integrys Energy Group would have been required
to
post collateral of
$887.1 million. Of this $887.1 million, Integrys Energy
Group had already satisfied $237.2 million with letters of
credit. Therefore, the remaining collateral requirement
would have been $649.9 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 (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
supply costs and gasoline and diesel fuel used by utility vehicles, 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 plans approved by their respective Boards of Directors and,
if applicable, by their 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." Resulting risk management assets
are offset with regulatory liabilities or decreases to regulatory assets, and
risk management liabilities are offset with regulatory assets or decreases to
regulatory liabilities. Management believes any gains or losses
resulting from the eventual settlement of these derivative instruments will be
collected from or refunded to customers.
The table below
shows the unrealized gains recorded related to non-hedge derivatives at the
utilities.
(Millions)
|
Financial
Statement Presentation
|
|
Three
Months Ended June 30, 2009
|
|
|
Six
Months Ended June 30, 2009
|
|
Commodity
contracts
|
Balance Sheet
– Regulatory assets – current
|
|
$ |
38.8 |
|
|
$ |
54.6 |
|
Commodity
contracts
|
Balance Sheet
– Regulatory assets – long-term
|
|
|
4.0 |
|
|
|
4.3 |
|
Commodity
contracts
|
Balance Sheet
– Regulatory liabilities – current
|
|
|
10.4 |
|
|
|
7.7 |
|
Commodity
contracts
|
Balance Sheet
– Regulatory liabilities – long-term
|
|
|
0.1 |
|
|
|
0.1 |
|
Commodity
contracts
|
Income
Statement – Utility cost of fuel, natural gas, and purchased
power
|
|
|
- |
|
|
|
0.2 |
|
Commodity
contracts
|
Income
Statement – Operating and maintenance expense
|
|
|
0.2 |
|
|
|
0.2 |
|
At
June 30, 2009, the utilities had the following notional volumes of
outstanding non-hedge derivative contracts:
|
|
Purchases
|
|
|
Other
Transactions
|
|
Natural gas
(millions of therms)
|
|
|
653.5 |
|
|
|
N/A |
|
FTRs (millions
of kilowatt-hours)
|
|
|
N/A |
|
|
|
9,832.9 |
|
Petroleum
products (barrels)
|
|
|
21,909 |
|
|
|
N/A |
|
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 June 30, 2009, PGL had the following
notional volumes of outstanding contracts that were designated as cash flow
hedges:
|
|
Purchases
|
|
Natural
gas (millions of therms)
|
|
|
7.2
|
|
Changes in the fair
values of the effective portions 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, 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.
|
|
Unrealized
Gain Recognized in OCI on Derivative Instrument (Effective
Portion)
|
|
|
|
Three
Months Ended June 30
|
|
|
Six
Months Ended June 30
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Commodity
contracts
|
|
$ |
0.8 |
|
|
$ |
1.2 |
|
|
$ |
0.2 |
|
|
$ |
2.7 |
|
|
|
|
Gain
(Loss) Reclassified from Accumulated OCI into Income (Effective
Portion)
|
|
|
|
|
Three
Months Ended June 30
|
|
|
Six
Months Ended June 30
|
|
(Millions)
|
Income
Statement Presentation
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Settled
commodity contracts
|
Operating and
maintenance expense
|
|
$ |
(0.8 |
) |
|
$ |
0.4 |
|
|
$ |
(1.4 |
) |
|
$ |
0.3 |
|
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 and six months ended June 30, 2009, and
2008. Cash flow hedge ineffectiveness related to these commodity
contracts was not significant for the three and six months ended June 30,
2009, and 2008. When testing for effectiveness, no portion of the
derivative instruments was excluded. In the next 12 months, PGL
expects that an insignificant pre-tax loss 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
June 30, 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)
|
|
|
6,835.6 |
|
|
|
6,860.3 |
|
|
|
N/A |
|
Power (kilowatt-hours)
|
|
|
168,028.1 |
|
|
|
161,517.0 |
|
|
|
N/A |
|
Interest rate
swaps
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
240.6 |
|
Foreign
exchange contracts
|
|
$ |
75.6 |
|
|
$ |
75.3 |
|
|
|
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)
|
Financial
Statement Presentation
|
|
Three
Months Ended June 30, 2009
|
|
|
Six
Months Ended June 30, 2009
|
|
Commodity
contracts
|
Nonregulated revenue
|
|
$ |
8.8 |
|
|
$ |
(30.8 |
) |
Interest rate
swaps
|
Interest expense
|
|
|
0.2 |
|
|
|
0.3 |
|
Foreign
exchange contracts
|
Nonregulated revenue
|
|
|
(1.2 |
) |
|
|
(1.1 |
) |
Total
|
|
|
$ |
7.8 |
|
|
$ |
(31.6 |
) |
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 June 30, 2009
|
|
|
Six
Months Ended June 30, 2009
|
|
Interest rate
swap
|
Interest
expense
|
|
$ |
- |
|
|
$ |
(0.3 |
) |
Debt hedged by
swap
|
Interest
expense
|
|
|
- |
|
|
|
0.3 |
|
Total
|
|
|
$ |
- |
|
|
$ |
- |
|
Fair value hedge
ineffectiveness recorded in interest expense on the Condensed Consolidated
Statements of Income was not significant for the three and six months ended
June 30, 2009, and 2008. No amounts were excluded from
effectiveness testing related to the interest rate swap during the three and six
months ended June 30, 2009, and 2008.
In
the first half of 2009, Integrys Energy Services did not have any commodity
derivative contracts designated as fair value hedges. In the first
half 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
recorded in nonregulated revenue on the Condensed Consolidated Statements of
Income was not significant for the three months ended June 30, 2008,
and was a pre-tax loss of $2.8 million for the six months ended
June 30, 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 not significant during the three months ended June 30,
2008, and was a pre-tax gain of $4.3 million during the six months ended
June 30, 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 June 30, 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)
|
|
|
147.0 |
|
|
|
168.6 |
|
|
|
N/A |
|
Power
(kilowatt-hours)
|
|
|
6,783.2 |
|
|
|
- |
|
|
|
N/A |
|
Interest rate
swaps
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
65.6 |
|
Changes in the fair
values of the effective portions 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, or if it is probable that the hedged transaction will
not
occur. In
March 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 in March 2009. The tables below show the amounts
related to cash flow hedges recorded in OCI and in earnings.
|
|
Unrealized
Gain (Loss) Recognized in OCI on Derivative Instrument (Effective
Portion)
|
|
|
|
Three
Months Ended June 30
|
|
|
Six
Months Ended June 30
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Commodity
contracts
|
|
$ |
1.2 |
|
|
$ |
(12.9 |
) |
|
$ |
(48.8 |
) |
|
$ |
(33.9 |
) |
Interest rate
swaps
|
|
|
0.6 |
|
|
|
2.0 |
|
|
|
1.5 |
|
|
|
0.3 |
|
|
|
|
Gain
(Loss) Reclassified from Accumulated OCI into Income (Effective
Portion)
|
|
|
Income
Statement
|
|
Three
Months Ended June 30
|
|
|
Six
Months Ended
June 30
|
|
(Millions)
|
Presentation
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Settled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Nonregulated
revenue
|
|
$ |
(21.1 |
) |
|
$ |
(12.7 |
) |
|
$ |
(4.4 |
) |
|
$ |
(13.8 |
) |
Interest rate swaps
|
Interest
expense
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
Foreign currency
|
Interest
expense
|
|
|
- |
|
|
|
- |
|
|
|
14.8 |
|
|
|
- |
|
Hedge
Designation Discontinued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Nonregulated
revenue
|
|
|
0.1 |
|
|
|
(3.0 |
) |
|
|
(0.4 |
) |
|
|
(2.9 |
) |
Total
|
|
|
$ |
(21.1 |
) |
|
$ |
(15.8 |
) |
|
$ |
9.8 |
|
|
$ |
(16.9 |
) |
|
|
|
Gain
(Loss) Recognized in Income on Derivative Instruments (Ineffective Portion
and Amount Excluded from Effectiveness Testing)
|
|
|
|
|
Three
Months Ended June 30
|
|
|
Six
Months Ended June 30
|
|
(Millions)
|
Income
Statement Presentation
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Commodity
contracts
|
Nonregulated
revenue
|
|
$ |
(0.5 |
) |
|
$ |
(2.2 |
) |
|
$ |
(1.3 |
) |
|
$ |
(3.5 |
) |
In
the next 12 months, subject to changes in market prices of natural gas and
electricity, a pre-tax loss of $82.0 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--INTEGRYS
ENERGY SERVICES RESTRUCTURING
Restructuring
Costs
Integrys Energy
Group has decided to divest of all or portions of its nonregulated subsidiary,
Integrys Energy Services, or significantly scale back this business in order to
reduce risk and decrease collateral and other financial requirements at a time
when global credit and financial markets are constraining the availability of
and increasing the cost of capital. In connection with this strategy,
restructuring costs were expensed in the second quarter of 2009, as shown in the
following table:
(Millions)
|
|
Six
Months Ended
June 30,
2009
|
|
Employee-related
costs
|
|
$ |
10.8 |
|
Software
write-offs
|
|
|
5.2 |
|
Legal and
consulting
|
|
|
3.0 |
|
Miscellaneous
|
|
|
0.1 |
|
Total
restructuring costs
|
|
$ |
19.1 |
|
All of the above
costs relate to the Integrys Energy Services segment and are included in the
Restructuring expense line item on the Condensed Consolidated Income
Statement.
Integrys Energy
Group expects to incur total employee-related restructuring costs of
approximately $20 million to $26 million by the end of 2010, including the
$10.8 million accrued as of June 30, 2009, and shown in the table
above. As of June 30, 2009, none of these employee-related
restructuring costs had been paid.
Proposed
Sale of Integrys Energy Services of Canada Corp.
In
July 2009, Integrys Energy Services of Canada, a subsidiary of Integrys Energy
Services, signed an agreement to sell nearly all of its Canadian natural gas and
electric power contract portfolio. The transaction, which requires
certain contractual consents and necessary regulatory approvals, is expected to
close in the third quarter of 2009.
As
of June 30, 2009, Integrys Energy Services of Canada did not meet the
criteria to be reported as held for sale. The carrying values of the
major classes of assets and liabilities included in the sale agreement were as
follows:
(Millions)
|
|
June 30,
2009
|
|
Current risk
management assets
|
|
$ |
134.3 |
|
Long-term
risk management assets
|
|
|
13.8 |
|
Total
assets
|
|
$ |
148.1 |
|
|
|
|
|
|
Current risk
management liabilities
|
|
$ |
128.1 |
|
Long-term
risk management liabilities
|
|
|
36.2 |
|
Total
liabilities
|
|
$ |
164.3 |
|
NOTE
5--DISCONTINUED OPERATIONS
Niagara
During the six
months ended June 30, 2009, Integrys Energy Services recorded
$0.3 million in discontinued operations related to a refund received in
connection with the overpayment of auxiliary power service in prior
years.
During the six
months ended June 30, 2008, Integrys Energy Services recorded
$0.1 million in discontinued operations related to amortization of an
environmental indemnification guarantee included as part of the sale
agreement.
NOTE 6--INVESTMENT
IN ATC
Integrys Energy
Group had an approximate 34% ownership interest in ATC at June 30,
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 and
six months ended June 30, 2009. Integrys Energy Group’s
investment in ATC is recorded in other long-term assets on the Condensed
Consolidated Balance Sheets.
(Millions)
|
|
Three
Months Ended June 30, 2009
|
|
|
Six
Months Ended June 30, 2009
|
|
Balance at
the beginning of period
|
|
$ |
358.8 |
|
|
$ |
346.9 |
|
Equity in net
income
|
|
|
18.4 |
|
|
|
36.4 |
|
Capital
contributions
|
|
|
6.9 |
|
|
|
15.4 |
|
Dividends
received
|
|
|
(14.9 |
) |
|
|
(29.5 |
) |
Balance
at the end of period
|
|
$ |
369.2 |
|
|
$ |
369.2 |
|
ATC's financial
data is included in the following tables:
|
|
Three
Months Ended June 30
|
|
|
Six
Months Ended June 30
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Income
statement data
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
129.0 |
|
|
$ |
116.1 |
|
|
$ |
255.2 |
|
|
$ |
225.2 |
|
Operating
expenses
|
|
|
56.6 |
|
|
|
53.3 |
|
|
|
113.6 |
|
|
|
104.2 |
|
Other
expense
|
|
|
19.7 |
|
|
|
17.1 |
|
|
|
38.0 |
|
|
|
32.9 |
|
Net income
*
|
|
$ |
52.7 |
|
|
$ |
45.7 |
|
|
$ |
103.6 |
|
|
$ |
88.1 |
|
|
*
|
As most income
taxes are the responsibility of its members, ATC does not report a
provision for its members' income taxes in its income
statements.
|
(Millions)
|
|
June 30,
2009
|
|
|
December 31,
2008
|
|
Balance
sheet data
|
|
|
|
|
|
|
Current
assets
|
|
$ |
49.8 |
|
|
$ |
50.8 |
|
Noncurrent
assets
|
|
|
2,663.7 |
|
|
|
2,480.0 |
|
Total
assets
|
|
$ |
2,713.5 |
|
|
$ |
2,530.8 |
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$ |
254.6 |
|
|
$ |
252.0 |
|
Long-term
debt
|
|
|
1,259.5 |
|
|
|
1,109.4 |
|
Other
noncurrent liabilities
|
|
|
82.6 |
|
|
|
120.2 |
|
Members'
equity
|
|
|
1,116.8 |
|
|
|
1,049.2 |
|
Total
liabilities and members' equity
|
|
$ |
2,713.5 |
|
|
$ |
2,530.8 |
|
NOTE 7--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 8--GOODWILL
AND OTHER INTANGIBLE ASSETS
Integrys Energy
Group had the following changes to the carrying amount of goodwill for the six
months ended June 30, 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 June 30, 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 containing 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, indicated 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
was 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 and MERC (acquired in 2006) and PGL and NSG (acquired in
2007). 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
had on the valuation of natural gas distribution companies in
general. No further goodwill impairments were identified during
annual testing procedures performed during the second quarter of
2009.
Identifiable
intangible assets other than goodwill are included as a component of other
assets within the Condensed Consolidated Balance Sheets as listed
below.
|
|
June 30,
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 |
|
|
$ |
(16.3 |
) |
|
$ |
16.3 |
|
|
$ |
32.6 |
|
|
$ |
(14.2 |
) |
|
$ |
18.4 |
|
Natural
gas and electric
contract
assets (2)
(3)
|
|
|
77.1 |
|
|
|
(58.3 |
) |
|
|
18.8 |
|
|
|
60.1 |
|
|
|
(54.6 |
) |
|
|
5.5 |
|
Natural
gas and electric
contract
liabilities (2)
(4)
|
|
|
(33.6 |
) |
|
|
24.2 |
|
|
|
(9.4 |
) |
|
|
(33.6 |
) |
|
|
20.2 |
|
|
|
(13.4 |
) |
Renewable
energy credits (5)
|
|
|
5.5 |
|
|
|
(0.9 |
) |
|
|
4.6 |
|
|
|
3.4 |
|
|
|
(2.1 |
) |
|
|
1.3 |
|
Nonregulated
easements (6)
|
|
|
4.0 |
|
|
|
- |
|
|
|
4.0 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Emission
allowances (7)
|
|
|
2.1 |
|
|
|
- |
|
|
|
2.1 |
|
|
|
2.3 |
|
|
|
(0.1 |
) |
|
|
2.2 |
|
Other
|
|
|
2.6 |
|
|
|
(1.0 |
) |
|
|
1.6 |
|
|
|
3.0 |
|
|
|
(1.0 |
) |
|
|
2.0 |
|
Total
|
|
|
90.3 |
|
|
|
(52.3 |
) |
|
|
38.0 |
|
|
|
67.8 |
|
|
|
(51.8 |
) |
|
|
16.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized
intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MGU trade
name
|
|
|
5.2 |
|
|
|
- |
|
|
|
5.2 |
|
|
|
5.2 |
|
|
|
- |
|
|
|
5.2 |
|
Total
intangible assets
|
|
$ |
95.5 |
|
|
$ |
(52.3 |
) |
|
$ |
43.2 |
|
|
$ |
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 June 30, 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 $8.9 million and $9.9 million, respectively, at
June 30, 2009, and $3.1 million and $2.4 million,
respectively, at December 31, 2008. The remaining
weighted-average amortization period at June 30, 2009, for these
intangible assets was 3.5 years.
|
(4)
|
Includes both
short-term and long-term intangible liabilities related to customer
contracts in the amount of $3.8 million and $5.6 million,
respectively, at June 30, 2009, and $6.0 million and
$7.4 million, respectively, at December 31, 2008. The
remaining weighted-average amortization period at June 30, 2009, for
these intangible liabilities was 3.3
years.
|
(5)
|
Used at
Integrys Energy Services to comply with state Renewable Portfolio
Standards, as well as for trading
purposes.
|
(6)
|
Relates to
easements supporting a pipeline at Integrys Energy
Services. The easements are amortized on a straight-line basis,
with a remaining amortization period of 15
years.
|
(7)
|
Emission
allowances do not have a contractual term or expiration
date.
|
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 the three months ended
June 30, 2009, and 2008, was $1.6 million and $2.3 million,
respectively. Amortization expense for the six months ended
June 30, 2009, and 2008, was $3.0 million and $3.7 million,
respectively.
Amortization
expense for the next five fiscal years is estimated to be:
(Millions)
|
|
|
|
For year
ending December 31, 2009
|
|
$ |
9.5 |
|
For year
ending December 31, 2010
|
|
|
3.9 |
|
For year
ending December 31, 2011
|
|
|
3.3 |
|
For year
ending December 31, 2012
|
|
|
2.4 |
|
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
June 30, 2009, and 2008, resulted in an increase to nonregulated cost of
fuel, natural gas, and purchased power of $1.1 million and
$4.9 million, respectively. Amortization of these contracts for
the six months ended June 30, 2009, resulted in a decrease to nonregulated
cost of fuel, natural gas, and purchased power of $0.3 million and an
increase to nonregulated cost of fuel, natural gas, and purchased power of
$10.1 million for the six months ended June 30, 2008.
Amortization
expense of these contracts for the next five fiscal years is estimated to
be:
(Millions)
|
|
|
|
For year
ending December 31, 2009
|
|
$ |
2.8 |
|
For year
ending December 31, 2010
|
|
|
3.4 |
|
For year
ending December 31, 2011
|
|
|
1.0 |
|
For year
ending December 31, 2012
|
|
|
0.9 |
|
For year
ending December 31, 2013
|
|
|
0.6 |
|
NOTE 9--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)
|
|
June 30,
2009
|
|
|
December 31,
2008
|
|
Commercial
paper outstanding
|
|
$ |
103.7 |
|
|
$ |
552.9 |
|
Average
discount rate on outstanding commercial paper
|
|
|
0.87 |
% |
|
|
4.78 |
% |
Borrowings
under revolving credit facilities
|
|
|
- |
|
|
$ |
475.0 |
|
Average
interest rate on outstanding borrowings under
revolving
credit facilities
|
|
|
- |
|
|
|
2.41 |
% |
Short-term
notes payable outstanding
|
|
$ |
10.0 |
|
|
$ |
181.1 |
|
Average
interest rate on outstanding short-term notes payable
|
|
|
0.27 |
% |
|
|
3.40 |
% |
The commercial
paper at June 30, 2009, had varying maturity dates ranging from
July 6, 2009, through July 14, 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
|
|
June 30,
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)
(2)
|
5/03/09
|
|
|
- |
|
|
|
250.0 |
|
Revolving
credit facility (Integrys Energy Group) (1)
(3)
|
5/26/10
|
|
|
425.0 |
|
|
|
- |
|
Revolving
credit facility (Integrys Energy Group) (1)
(4)
|
6/04/10
|
|
|
35.0 |
|
|
|
- |
|
Revolving
credit facility (WPS) (5)
|
6/02/10
|
|
|
115.0 |
|
|
|
115.0 |
|
Revolving
credit facility (PEC) (1)
(6)
|
6/13/11
|
|
|
400.0 |
|
|
|
400.0 |
|
Revolving
credit facility (PGL) (7)
|
7/12/10
|
|
|
250.0 |
|
|
|
250.0 |
|
Revolving
credit facility (Integrys Energy Services) (8)
|
6/29/09
|
|
|
- |
|
|
|
175.0 |
|
Revolving
short-term notes payable (WPS) (9)
|
11/13/09
|
|
|
10.0 |
|
|
|
10.0 |
|
Short-term
notes payable (Integrys Energy Group)
(10)
|
|
|
|
- |
|
|
|
171.1 |
|
Total
short-term credit capacity
|
|
|
|
2,235.0 |
|
|
|
2,371.1 |
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Letters
of credit issued inside credit facilities
|
|
|
|
347.5 |
|
|
|
414.6 |
|
Loans
outstanding under credit agreements and notes
payable
|
|
|
|
10.0 |
|
|
|
656.1 |
|
Commercial
paper outstanding
|
|
|
|
103.7 |
|
|
|
552.9 |
|
Accrued
interest or original discount on outstanding commercial
paper
|
|
|
|
- |
|
|
|
0.8 |
|
Available
capacity under existing agreements
|
|
|
$ |
1,773.8 |
|
|
$ |
746.7 |
|
(1)
|
Provides
support for Integrys Energy Group's commercial paper borrowing
program.
|
(2)
|
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.
|
(3)
|
In May 2009,
Integrys Energy Group entered into a revolving credit agreement to finance
its working capital requirements and for general corporate
purposes.
|
(4)
|
In
June 2009, Integrys Energy Group entered into a revolving credit
agreement to finance its working capital requirements and for general
corporate purposes.
|
(5)
|
Provides
support for WPS's commercial paper borrowing
program.
|
(6)
|
Borrowings
under these agreements are guaranteed by Integrys Energy
Group.
|
(7)
|
Provides
support for PGL's commercial paper borrowing
program.
|
(8)
|
This facility
matured in April 2009, at which time the maturity date was extended, and
subsequently expired in June 2009. This facility was
previously guaranteed by Integrys Energy
Group.
|
(9)
|
This note is
renewed every six months and is used for general corporate
purposes.
|
(10)
|
This facility
matured in March 2009, at which time the borrowings were paid in full, and
the short-term debt agreement was
terminated.
|
At
June 30, 2009, Integrys Energy Group and its subsidiaries were in
compliance with all financial covenants related to outstanding short-term
debt. 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.
NOTE 10--LONG-TERM
DEBT
(Millions)
|
|
June 30,
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)
|
|
|
705.0 |
|
|
|
550.0 |
|
Unsecured term
loan – Integrys Energy Group (3)
|
|
|
65.6 |
|
|
|
65.6 |
|
Term loans –
nonrecourse, collateralized by nonregulated assets (4)
|
|
|
4.6 |
|
|
|
6.6 |
|
Other term
loan (5)
|
|
|
27.0 |
|
|
|
27.0 |
|
Total
|
|
|
2,590.2 |
|
|
|
2,437.5 |
|
Unamortized
discount and premium on bonds and debt
|
|
|
3.9 |
|
|
|
5.7 |
|
Total
debt
|
|
|
2,594.1 |
|
|
|
2,443.2 |
|
Less current
portion
|
|
|
(271.0 |
) |
|
|
(155.2 |
) |
Total
long-term debt
|
|
$ |
2,323.1 |
|
|
$ |
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). Recent auctions have failed to
receive sufficient clearing bids. As a result, these bonds are
priced each 35 days at the maximum auction rate, until such time as a
successful auction occurs. The maximum auction rate is
determined based on the lesser of the London Interbank Offered Rate or the
Securities Industry and Financial Markets Association Municipal Swap Index
rate plus a defined premium. The year-to-date weighted-average
interest rate at June 30, 2009 was 1.0% 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 included in the
current portion of long-term debt on Integrys Energy Group's Condensed
Consolidated Balance Sheet at June 30,
2009.
|
(2)
|
In
June 2009, Integrys Energy Group issued $100.0 million of 7.27%,
5-year Unsecured Senior Notes due June 1,
2014 and $55.0 million of 8.0%, 7-year Unsecured Senior Notes due
June 1, 2016. The net proceeds from the issuance of the
Senior Notes were used to refinance existing short-term debt and for
general corporate purposes. The Senior Notes were sold in a
private placement and are not registered under the Securities Act of
1933.
|
|
In November
2009, $150.0 million of Integrys Energy Group Unsecured Senior Notes
will mature. As a result, these notes are included in the
current portion of long-term debt on Integrys Energy Group's Condensed
Consolidated Balance Sheet at June 30,
2009.
|
(3)
|
In
June 2010, Integrys Energy Group’s $65.6 million unsecured term
loan will mature. This term loan resulted from a restructuring
of Integrys Energy Services non-recourse debt from the sale of a
previously owned subsidiary’s allocated emission allowances. As
a result, these notes are included in the current portion of long-term
debt on Integrys Energy
Group's Condensed Consolidated Balance Sheet at June 30,
2009.
|
(4)
|
In May 2010,
$4.6 million of nonrecourse term loans will mature. As a
result, these notes are included in the current portion of long-term debt
on Integrys Energy
Group's Condensed Consolidated Balance Sheet at June 30,
2009.
|
(5)
|
WPS Westwood
Generation, LLC, a subsidiary of Integrys Energy Services, has outstanding
$27.0 million of Refunding Tax Exempt Bonds. The interest
rate at June 30, 2009 was 4.28% for these
bonds.
|
At
June 30, 2009, Integrys Energy Group and each of its subsidiaries were in
compliance with all respective financial covenants related to outstanding
long-term debt. 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. In
addition, certain long-term debt obligations contain financial and other
covenants, including, but not limited to a requirement to maintain a debt to
total capitalization ratio not to exceed 65%. 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 11--ASSET
RETIREMENT OBLIGATIONS
The following table
shows changes to the asset retirement obligations of Integrys Energy Group
through June 30, 2009.
(Millions)
|
|
Regulated
Utilities
|
|
|
Integrys
Energy Services
|
|
|
Total
|
|
Asset
retirement obligations at December 31, 2008
|
|
$ |
178.9 |
|
|
$ |
0.2 |
|
|
$ |
179.1 |
|
Accretion
|
|
|
4.6 |
|
|
|
0.1 |
|
|
|
4.7 |
|
Asset
retirement obligations at June 30, 2009
|
|
$ |
183.5 |
|
|
$ |
0.3 |
|
|
$ |
183.8 |
|
NOTE 12--INCOME
TAXES
Integrys Energy
Group's effective tax rates for the three and six months ended June 30,
2009, were 34.5% and (27.7)%, respectively. The effective tax rates
for the three and six months ended June 30, 2008, were 41.4% and
37.2%, 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 June 30, 2009, differs from the federal tax rate
of 35%, primarily due to the positive impact of certain permanent book to tax
differences partially off-set by state income taxes. The effective
tax rate for the six months ended June 30, 2009, differs from the federal tax
rate of 35%, primarily because a large portion (approximately
$186.2 million) of the $291.1 million goodwill impairment loss
recognized in the first quarter was not deductible for income tax
purposes.
The effective tax
rate for the three and six months ended June 30, 2008 differed from the
federal tax rate of 35%, primarily due to state income taxes and the impact of
certain permanent book to tax return differences.
For the three and
six months ended June 30, 2009, there was no significant change to the
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 their Wisconsin income tax
return as a combined group. As a result, all of Integrys Energy
Group's income is now subject to apportionment and taxation in Wisconsin,
requiring an adjustment to deferred taxes under SFAS No. 109, "Accounting for
Income Taxes." This resulted in a one-time credit adjustment to
deferred taxes and an increase in income tax expense of $4.7 million, which was
recorded in the first quarter of 2009.
NOTE 13--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 June 30, 2009.
●
|
The electric
utility segment has obligations related to coal supply and transportation
that extend through 2016 and total $310.9 million, obligations of
$1.3 billion for either capacity or energy related to purchased power that
extend through 2027, and obligations for other commodities totaling
$13.5 million, which extend through 2013.
|
●
|
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.
|
●
|
Integrys
Energy Services has obligations related to energy and natural gas supply
contracts that extend through 2018 and total $4.9 billion. The
majority of these obligations end by 2011, with obligations totaling
$313.7 million extending beyond 2011.
|
●
|
Integrys
Energy Group also has commitments in the form of purchase orders issued to
various vendors, which totaled $571.4 million, and relate to normal
business operations as well as large construction
projects.
|
Environmental
EPA Section 114
Request
In
2000, WPS received a request from the EPA under Section 114 of the Clean
Air Act, seeking information related to work performed on the coal-fired boilers
located at WPS's Pulliam and Weston electric generation
stations. WPS filed a response with the EPA in early
2001.
In
May 2002, WPS received a follow-up request from the EPA seeking additional
information regarding specific boiler-related work performed on Pulliam Units 3,
5, and 7, as well as information on WPS's 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 submitted its response in April 2008. In July
2009, WPS received an inquiry requesting clarification with respect to documents
provided in the April 2008 response and WPS is currently working to respond to
the inquiry. 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:
●
|
issue notices
of violation (NOV) asserting that a violation of the Clean Air Act
occurred,
|
●
|
seek
additional information from WPS, WP&L, and/or third parties who have
information relating to the boilers, and/or
|
●
|
close out the
investigation.
|
In
addition, under the Clean Air Act, citizen groups may pursue a
claim. WPS has no notice of such a claim based on the information
submitted to the EPA.
If
the federal government brings a claim against WPS and if it were determined by a
court that historic projects at WPS's Pulliam and Weston plants required
either a state or federal Clean Air Act permit, WPS may, under the applicable
statutes, be required to:
●
|
shut down any
unit found to be operating in non-compliance,
|
●
|
install
additional pollution control equipment,
|
●
|
pay a fine,
and/or
|
●
|
pay a fine
and conduct a supplemental environmental project in order to resolve any
such claim.
|
Pulliam Air Notice of
Violation
In
September 2007, an NOV was issued to WPS by the WDNR alleging various
violations of the Pulliam facility's Title V permit, primarily pertaining to
certain recordkeeping and monitoring requirements. WPS met with the
WDNR in November 2007 to discuss and attempt to resolve the matters
identified in the NOV, and subsequently submitted additional information
pursuant to the WDNR's request. On July 13, 2009, the WDNR
issued a letter stating that no further enforcement action will be
taken.
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 and the parties have completed filing
briefs.
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 three-hour periods during
startup/shutdown and during one separate event at Weston 4, and two that
address baghouse operation at Weston 1 and 2. On July 22, 2009, an
NOV was issued to WPS by the WDNR alleging violations of the opacity limits
during two six-minute periods (one each at Weston 2 and 4) and of the sulfur
dioxide average limit during one three-hour period at
Weston 4. Corrective actions have been taken for the events in
both NOVs. An enforcement conference was held on January 7,
2009, for the December 2008 NOV, and is scheduled for August 26, 2009, for
the July 2009 NOV. Management believes it is likely that the WDNR
will refer the NOVs to the state Justice Department for
enforcement. Management does not believe that these matters 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 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, and July 2009, NOVs were issued to WPS by the WDNR that
include alleged violations of the air permit at Weston 1 and 2. These
NOVs are 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 mercury 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 $28 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, putting the status of both CAIR nitrogen
oxide allowance programs in doubt. 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 and the EPA has indicated they
expect to issue a draft revised CAIR rule for comment in early
2010. As a result of the Court of Appeals’ decision, CAIR is in place
for 2009 and is expected to be in place for 2010. WPS has not
acquired any nitrogen oxide allowances for vintage years beyond 2010 other than
those allocated by the EPA, and does not expect any material impact as a result
of the vacatur and subsequent reinstatement of CAIR.
The reinstatement
of CAIR also affected the status of the Best Available Retrofit Technology
(BART) rule, which is a rule that addresses regional haze and
visibility. The WDNR is evaluating whether air quality improvements
under CAIR will be adequate to demonstrate compliance with BART.
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 $569 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 $655.8 million of future undiscounted investigation and
cleanup costs for all sites as of June 30, 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 $675.7 million, which is net of insurance recoveries received of
$56.8 million, related to the expected recovery of both deferred
expenditures and estimated future expenditures as of June 30,
2009.
Integrys Energy
Group's natural gas utilities are coordinating the investigation and cleanup of
the manufactured gas plant sites subject to EPA jurisdiction 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 (GM), 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 GM, jointly and severally, to perform the remedial action
and establish and maintain financial assurance of
$27.0 million. The EPA reduced the financial assurance
requirement to $21.0 million to reflect completion of the soil component of
the remedial action in August 2005. NSG has met its financial
assurance requirement in the form of a net worth test while GM met the
requirement by providing a performance and payment bond in favor of the
EPA. As a result of the GM bankruptcy filing, NSG is working with the
EPA to access the bond to fund a portion of GM’s liability. The
potential exposure related to the GM bankruptcy has been reflected in the
accrual identified above. Operation of the groundwater treatment unit
began in September 2008 and is operating at full capacity as of July
2009.
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 executed a
settlement agreement and this matter has been 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. All litigation matters have been
resolved. All environmental claims have been resolved with the State
of Michigan and a Consent Judgment on the environmental matters was filed and
approved in June 2009.
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 June 30, 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 at June 30, 2009.
As
part of a settlement agreement with the MPSC staff and interveners in the PSCR
case, UPPCO 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 has been 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
is the subject of a current 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 (such as the Waxman-Markey bill,
which passed the U.S. House of Representatives and is being reviewed in the
Senate), 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 legislative or 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 Michigan Department of Environmental Quality
(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:
●
|
assess a fine
and/or seek criminal charges against UPPCO,
|
●
|
assess a fine
and/or seek criminal charges against the former manager who certified the
reports, and/or
|
●
|
close out the
investigation.
|
Natural
Gas Charge Reconciliation Proceedings and Related Matters
Natural Gas Charge
Settlement and Pending Natural Gas Charge Cases
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 June 30, 2009,
$15.0 million remained unpaid, of which $5.0 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.
Four 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 filing of the plaintiffs’ reply to PEC's class
certification response was postponed pending a decision on PEC's motion for
summary judgment. On June 24, 2009, the court entered an order
denying PEC’s motion for summary judgment, and set a September 2, 2009 hearing
date on the plaintiffs’ motion for class certification.
Corrosion
Control Inspection Proceeding
Illinois state, as
well as federal laws require natural gas utilities to conduct periodic corrosion
control inspections on natural gas pipelines. On April 19, 2006,
the ICC initiated a citation proceeding related to such inspections that were
required to be performed by PGL during 2003 and 2004, but which were not
completed in the requisite timeframe. On December 20, 2006, the
ICC entered an order approving a stipulation between the parties to this
proceeding under which PGL agreed that it had not been in compliance with
applicable regulations, and further agreed to pay a penalty of
$1.0 million, pay for a consultant to conduct a comprehensive investigation
of its compliance with ICC pipeline safety regulations, remain compliant with
those regulations, not seek recovery in future rate cases of certain costs
related to non-compliance, and hold meetings with 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
June 22, 2009, the auditor issued its second quarterly interim
report. The report stated that verification work has started in all
but two major areas and that, while the auditors have completed verification
work for only a few recommendations, PGL and the auditors have made progress on
many of the recommendations.
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 14--GUARANTEES
The following table
shows outstanding guarantees at Integrys Energy Group:
|
|
|
|
|
|
Expiration
|
|
(Millions)
|
|
|
Total
Amounts
Committed
at
June 30,
2009
|
|
|
|
Less
Than
1
Year
|
|
|
|
1
to 3
Years
|
|
|
|
4
to 5
Years
|
|
|
|
Over
5
Years
|
|
Guarantees
supporting commodity transactions of subsidiaries (1)
|
|
$ |
1,808.1 |
|
|
$ |
1,527.5 |
|
|
$ |
150.6 |
|
|
$ |
38.4 |
|
|
$ |
91.6 |
|
Guarantees of
subsidiary debt and revolving line of credit (2)
|
|
|
756.6 |
|
|
|
- |
|
|
|
725.0 |
|
|
|
- |
|
|
|
31.6 |
|
Standby
letters of credit (3)
|
|
|
324.7 |
|
|
|
298.7 |
|
|
|
26.0 |
|
|
|
- |
|
|
|
- |
|
Surety bonds
(4)
|
|
|
3.1 |
|
|
|
1.9 |
|
|
|
1.2 |
|
|
|
- |
|
|
|
- |
|
Other
guarantees (5)
|
|
|
2.8 |
|
|
|
2.2 |
|
|
|
- |
|
|
|
- |
|
|
|
0.6 |
|
Total
guarantees
|
|
$ |
2,895.3 |
|
|
$ |
1,830.3 |
|
|
$ |
902.8 |
|
|
$ |
38.4 |
|
|
$ |
123.8 |
|
(1)
|
Consists of
parental guarantees of $1,644.0 million to support the business
operations of Integrys Energy Services, of which $5.0 million
received specific authorization from Integrys Energy Group's Board of
Directors and was not subject to the guarantee limit discussed below;
$90.7 million and $63.4 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 at both PEC
and IBS, of an authorized $125.0 million and $50.0 million,
respectively, to support business operations. 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; and (3) $31.6 million supporting
outstanding debt at Integrys Energy Services' subsidiaries, of which
$4.6 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
$319.5 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
June 30, 2009, WPS had paid $8.1 million to Dominion Energy
Kewaunee, Inc. related to this guarantee, reducing the liability to
$0.8 million. WPS expects to make payments for the entire
remaining liability amount by December 31, 2009; (2) a $1.4 million
indemnification provided by Integrys Energy Services related to the sale
of Niagara. This indemnification, which terminates on January
31, 2010, 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; and (3) $0.6 million issued for workers compensation
coverage in Michigan.
|
Integrys Energy
Group has provided total parental guarantees of $1,996.6 million on behalf
of Integrys Energy Services. Integrys Energy Group's exposure under
these guarantees related to open transactions at June 30, 2009, was
approximately $682 million. At June 30, 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)
|
|
June 30,
2009
|
|
Guarantees
supporting commodity transactions
|
|
$ |
1,639.0 |
|
Guarantees of
subsidiary debt
|
|
|
4.6 |
|
Standby
letters of credit
|
|
|
319.5 |
|
Surety
bonds
|
|
|
1.5 |
|
Total
guarantees subject to $2.95 billion limit
|
|
$ |
1,964.6 |
|
NOTE 15--EMPLOYEE
BENEFIT PLANS
The following table
shows the components of net periodic benefit cost for Integrys Energy Group's
benefit plans.
|
|
Pension Benefits
|
|
|
Other Postretirement
Benefits
|
|
|
|
Three
Months Ended June 30
|
|
|
Six
Months Ended June 30
|
|
|
Three
Months Ended June 30
|
|
|
Six
Months Ended June 30
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Service
cost
|
|
$ |
10.1 |
|
|
$ |
8.8 |
|
|
$ |
19.4 |
|
|
$ |
19.2 |
|
|
$ |
3.4 |
|
|
$ |
3.6 |
|
|
$ |
7.1 |
|
|
$ |
7.8 |
|
Interest
cost
|
|
|
20.7 |
|
|
|
19.3 |
|
|
|
40.5 |
|
|
|
38.1 |
|
|
|
6.2 |
|
|
|
6.4 |
|
|
|
13.3 |
|
|
|
12.8 |
|
Expected
return on plan assets
|
|
|
(23.1 |
) |
|
|
(25.1 |
) |
|
|
(46.3 |
) |
|
|
(50.4 |
) |
|
|
(4.5 |
) |
|
|
(4.5 |
) |
|
|
(8.9 |
) |
|
|
(9.2 |
) |
Amortization
of transition obligation
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
|
|
0.1 |
|
Amortization
of prior service cost (credit)
|
|
|
1.3 |
|
|
|
1.3 |
|
|
|
2.5 |
|
|
|
2.5 |
|
|
|
(0.9 |
) |
|
|
(0.9 |
) |
|
|
(1.9 |
) |
|
|
(1.9 |
) |
Amortization
of net actuarial loss (gain)
|
|
|
0.7 |
|
|
|
- |
|
|
|
0.9 |
|
|
|
0.4 |
|
|
|
(1.0 |
) |
|
|
(0.3 |
) |
|
|
(0.7 |
) |
|
|
(0.1 |
) |
Amortization
of merger-related regulatory
adjustment
|
|
|
3.5 |
|
|
|
1.5 |
|
|
|
6.3 |
|
|
|
4.1 |
|
|
|
1.2 |
|
|
|
0.3 |
|
|
|
1.7 |
|
|
|
1.1 |
|
Net
periodic benefit cost
|
|
$ |
13.2 |
|
|
$ |
5.8 |
|
|
$ |
23.3 |
|
|
$ |
13.9 |
|
|
$ |
4.4 |
|
|
$ |
4.6 |
|
|
$ |
10.7 |
|
|
$ |
10.6 |
|
Transition
obligations, prior service costs (credits), and net actuarial losses (gains)
that have not yet been recognized as a component of net periodic benefit cost
are included in accumulated 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 six months
ended June 30, 2009, $1.7 million and $5.1 million of
contributions were made to the pension and other postretirement benefit plans,
respectively. Integrys Energy Group expects to contribute
$25.4 million and $23.4 million to its pension and other
postretirement benefit plans, respectively, during the remainder of
2009.
NOTE 16--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 and six months
ended June 30, 2009, and 2008, was not significant. As of
June 30, 2009, $2.5 million of pre-tax compensation cost related to
unvested and outstanding stock options was expected to be recognized over a
weighted-average period of 3.0 years.
A
summary of stock option activity for the six months ended June 30, 2009,
and information related to outstanding and exercisable stock options at
June 30, 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
|
|
|
39,124 |
|
|
$ |
52.54 |
|
|
|
|
|
$ |
- |
|
Outstanding
at June 30, 2009
|
|
|
3,169,499 |
|
|
$ |
46.93 |
|
|
|
6.57 |
|
|
$ |
- |
|
Exercisable
at June 30, 2009
|
|
|
1,878,190 |
|
|
$ |
46.49 |
|
|
|
5.12 |
|
|
$ |
- |
|
The aggregate
intrinsic value for outstanding and exercisable options in the above table
represents the total pre-tax intrinsic value that would have been received by
the option holders had they all exercised their options at June 30,
2009. This is calculated as the difference between Integrys Energy
Group's closing stock price on June 30, 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
current dividend rate as well as historical dividend increase
patterns. 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 June 30, 2009, and 2008, was not significant. Pre-tax
compensation cost recorded for performance stock rights for the six months ended
June 30, 2009, and 2008, was $2.2 million and $2.8 million,
respectively. As of June 30, 2009, $3.8 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
2.1 years.
A
summary of activity related to performance stock rights for the six months ended
June 30, 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 June 30, 2009
|
|
|
301,090 |
|
|
$ |
45.33 |
|
*
|
No performance shares were
distributed as a result of the performance percentage being below the
threshold payout level for those rights that were vested and eligible to
be distributed during the six months ended
June 30, 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 June 30, 2009, and 2008, compensation cost recorded related to
restricted share and restricted share unit awards was not
significant. Compensation cost recorded for restricted share and
restricted share unit awards was $2.4 million and $2.2 million for the
six months ended June 30, 2009, and 2008, respectively. As of
June 30, 2009, $10.8 million of pre-tax compensation cost related to
these awards was expected to be recognized over a weighted-average period of 3.0
years.
A
summary of activity related to restricted share and restricted share unit awards
for the six months ended June 30, 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
|
|
|
48,596 |
|
|
$ |
49.98 |
|
Forfeited
|
|
|
1,731 |
|
|
$ |
49.62 |
|
Outstanding
at June 30, 2009
|
|
|
384,645 |
|
|
$ |
45.89 |
|
NOTE 17--COMPREHENSIVE
INCOME (LOSS)
Integrys Energy
Group's total comprehensive income (loss) was as follows:
|
|
Three
Months Ended June 30
|
|
|
Six
Months
Ended
June 30
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net income
(loss) attributed to common shareholders
|
|
$ |
34.7 |
|
|
$ |
24.1 |
|
|
$ |
(145.5 |
) |
|
$ |
159.9 |
|
Cash flow
hedges, net of tax *
|
|
|
25.3 |
|
|
|
(2.1 |
) |
|
|
(5.4 |
) |
|
|
(9.0 |
) |
Foreign
currency translation, net of tax
|
|
|
1.8 |
|
|
|
0.2 |
|
|
|
1.3 |
|
|
|
(0.8 |
) |
SFAS
No. 158 amortizations, net of tax
|
|
|
- |
|
|
|
- |
|
|
|
(0.2 |
) |
|
|
- |
|
Unrealized
loss on available-for-sale securities, net of tax
|
|
|
0.1 |
|
|
|
0.3 |
|
|
|
0.1 |
|
|
|
(0.1 |
) |
Total
comprehensive income (loss)
|
|
$ |
61.9 |
|
|
$ |
22.5 |
|
|
$ |
(149.7 |
) |
|
$ |
150.0 |
|
|
*
|
For the three
months ended June 30, 2009, the tax on cash flow hedges was
$15.6 million, and for the three months ended June 30, 2008, the
tax benefit was $1.3 million. The tax benefit was
$4.6 million and $5.5 million for the six months ended
June 30, 2009, and 2008,
respectively.
|
The following table
shows the changes to Integrys Energy Group's accumulated other comprehensive
loss from December 31, 2008, to June 30, 2009.
(Millions)
|
|
Six
Months Ended June 30, 2009
|
|
December 31,
2008 balance
|
|
$ |
(72.8 |
) |
Cash flow
hedges
|
|
|
(5.4 |
) |
Foreign
currency translation
|
|
|
1.3 |
|
SFAS
No. 158 amortizations
|
|
|
(0.2 |
) |
Unrealized
loss on available-for-sale securities
|
|
|
0.1 |
|
June 30,
2009 balance
|
|
$ |
(77.0 |
) |
NOTE 18--COMMON
EQUITY
Integrys Energy
Group's reconciliation of shares outstanding at June 30, 2009, and
December 31, 2008, was as follows:
|
|
June 30,
2009
|
|
|
December 31,
2008
|
|
|
|
Shares
|
|
|
Average
Cost
|
|
|
Shares
|
|
|
Average
Cost
|
|
Common stock
issued
|
|
|
76,426,505 |
|
|
|
|
|
|
76,430,037 |
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury
shares
|
|
|
4,000 |
|
|
$ |
25.19 |
|
|
|
7,000 |
|
|
$ |
25.19 |
|
Deferred
compensation rabbi trust
|
|
|
353,048 |
|
|
$ |
43.46 |
|
|
|
367,238 |
|
|
$ |
44.36 |
|
Restricted
stock
|
|
|
55,585 |
|
|
$ |
54.27 |
|
|
|
63,031 |
|
|
$ |
54.81 |
|
Total
shares outstanding
|
|
|
76,013,872 |
|
|
|
|
|
|
|
75,992,768 |
|
|
|
|
|
Integrys Energy
Group had the following changes to common stock during the six months ended
June 30, 2009:
Integrys
Energy Group's common stock shares
|
|
|
|
Common stock
at December 31, 2008
|
|
|
76,430,037 |
|
Restricted
stock shares retired
|
|
|
(3,532 |
) |
Common
stock at June 30, 2009
|
|
|
76,426,505 |
|
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 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 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
dilutive securities were not included for the six months ended June 30,
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 June 30, 2009, excluded 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 and six months ended
June 30, 2008, excluded 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 June 30
|
|
|
Six
Months Ended June 30
|
|
(Millions,
except per share amounts)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) from continuing operations
|
|
$ |
35.2 |
|
|
$ |
24.8 |
|
|
$ |
(144.2 |
) |
|
$ |
161.4 |
|
Discontinued
operations, net of tax
|
|
|
0.3 |
|
|
|
0.1 |
|
|
|
0.3 |
|
|
|
0.1 |
|
Preferred
stock dividends of subsidiary
|
|
|
(0.8 |
) |
|
|
(0.8 |
) |
|
|
(1.6 |
) |
|
|
(1.6 |
) |
Net income
(loss) attributed to common shareholders
|
|
$ |
34.7 |
|
|
$ |
24.1 |
|
|
$ |
(145.5 |
) |
|
$ |
159.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares of common stock – basic
|
|
|
76.8 |
|
|
|
76.6 |
|
|
|
76.7 |
|
|
|
76.6 |
|
Effect of
dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
- |
|
|
|
0.3 |
|
|
|
- |
|
|
|
0.3 |
|
Average
shares of common stock – diluted
|
|
|
76.8 |
|
|
|
76.9 |
|
|
|
76.7 |
|
|
|
76.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per
common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.45 |
|
|
$ |
0.31 |
|
|
$ |
(1.90 |
) |
|
$ |
2.09 |
|
Diluted
|
|
|
0.45 |
|
|
|
0.31 |
|
|
|
(1.90 |
) |
|
|
2.08 |
|
NOTE 19--FAIR
VALUE
Fair
Value Measurements
The following
tables show Integrys Energy Group's assets and liabilities that were accounted
for at fair value on a recurring basis as of June 30, 2009, and
December 31, 2008, categorized by level within the fair value
hierarchy.
|
|
June 30,
2009
|
|
(Millions)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk
management assets
|
|
$ |
804.0 |
|
|
$ |
2,168.2 |
|
|
$ |
1,113.8 |
|
|
$ |
4,086.0 |
|
Other
|
|
|
0.6 |
|
|
|
- |
|
|
|
- |
|
|
|
0.6 |
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk
management liabilities
|
|
|
965.6 |
|
|
|
2,054.6 |
|
|
|
1,156.4 |
|
|
|
4,176.6 |
|
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 |
|
|
$ |
1,524.0 |
|
|
$ |
755.4 |
|
|
$ |
2,982.4 |
|
Inventory hedged by fair value
hedges
|
|
|
- |
|
|
|
27.4 |
|
|
|
- |
|
|
|
27.4 |
|
Other
|
|
|
0.5 |
|
|
|
- |
|
|
|
- |
|
|
|
0.5 |
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk
management liabilities
|
|
|
820.5 |
|
|
|
1,559.1 |
|
|
|
573.4 |
|
|
|
2,953.0 |
|
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. 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:
|
|
Three
Months Ended June 30
|
|
|
Six
Months Ended June 30
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Balance at the
beginning of period
|
|
$ |
131.6 |
|
|
$ |
86.7 |
|
|
$ |
182.0 |
|
|
$ |
44.6 |
|
Net realized
and unrealized loss included in earnings
|
|
|
(113.7 |
) |
|
|
(137.7 |
) |
|
|
(40.5 |
) |
|
|
(83.0 |
) |
Net unrealized
gain (loss) recorded as regulatory assets orliabilities
|
|
|
6.1 |
|
|
|
2.0 |
|
|
|
6.0 |
|
|
|
(5.4 |
) |
Net unrealized
gain (loss) included in
other comprehensiveincome (loss)
|
|
|
9.3 |
|
|
|
19.1 |
|
|
|
(8.7 |
) |
|
|
26.0 |
|
Net purchases
and settlements
|
|
|
30.9 |
|
|
|
(4.4 |
) |
|
|
12.9 |
|
|
|
(20.5 |
) |
Net transfers
in/out of Level 3
|
|
|
(106.8 |
) |
|
|
(69.7 |
) |
|
|
(194.3 |
) |
|
|
(65.7 |
) |
Balance
at the end of period
|
|
$ |
(42.6 |
) |
|
$ |
(104.0 |
) |
|
$ |
(42.6 |
) |
|
$ |
(104.0 |
) |
Net
unrealized loss included in earnings relatedtoinstrumentsstill held at the
end of period
|
|
$ |
(113.5 |
) |
|
$ |
(143.5 |
) |
|
$ |
(37.9 |
) |
|
$ |
(91.7 |
) |
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.
Fair Value of Financial
Instruments
The following table
shows the financial instruments included on the Condensed Consolidated Balance
Sheets of Integrys Energy Group that are not recorded at fair
value.
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
(Millions)
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$ |
2,594.1 |
|
|
$ |
2,564.0 |
|
|
$ |
2,443.2 |
|
|
$ |
2,276.0 |
|
Preferred
stock
|
|
|
51.1 |
|
|
|
46.4 |
|
|
|
51.1 |
|
|
|
46.0 |
|
The fair values of
long-term debt instruments are estimated based on the quoted market price for
the same or similar issues, or on the current rates offered to Integrys Energy
Group for debt of the same remaining maturity, without considering the effect of
third-party credit enhancements. The fair value of preferred stock is
estimated based on quoted market price when available, or by using a perpetual
dividend discount model.
Due to the short
maturity of cash and cash equivalents, accounts receivable, accounts payable,
notes payable, and outstanding commercial paper, the carrying amount
approximates fair value.
NOTE 20--MISCELLANEOUS
INCOME
Integrys Energy
Group's total miscellaneous income was as follows:
|
|
Three
Months Ended June 30
|
|
|
Six
Months Ended June 30
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Equity
earnings on investments
|
|
$ |
18.7 |
|
|
$ |
16.1 |
|
|
$ |
37.1 |
|
|
$ |
30.7 |
|
Interest and
dividend income
|
|
|
2.2 |
|
|
|
2.9 |
|
|
|
2.6 |
|
|
|
4.4 |
|
Equity
portion of AFUDC
|
|
|
1.2 |
|
|
|
1.0 |
|
|
|
2.8 |
|
|
|
1.3 |
|
Weston 4
ATC interconnection agreement
|
|
|
- |
|
|
|
0.7 |
|
|
|
- |
|
|
|
2.5 |
|
Other
|
|
|
(1.3 |
) |
|
|
2.0 |
|
|
|
(0.5 |
) |
|
|
1.9 |
|
Total
miscellaneous income
|
|
$ |
20.8 |
|
|
$ |
22.7 |
|
|
$ |
42.0 |
|
|
$ |
40.8 |
|
NOTE 21--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
Rates
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 2% fuel window. As of June
30, 2009, WPS recorded a liability of $4.3 million related to this
refund.
On
December 30, 2008, the PSCW issued a final written order for WPS
authorizing no change in retail electric rates from the fuel surcharge adjusted
rates authorized effective July 4, 2008, and a $3.0 million
decrease in retail natural gas rates. The PSCW also approved a
decoupling mechanism as a four-year pilot program. The mechanism
allows WPS to defer and recover or refund in future rate proceedings all or a
portion of the differences between the actual and authorized margin per customer
impact of variations in volumes. The annual deferral is limited to
$14.0 million for electric service and $8.0 million for natural gas
service. The mechanism does not adjust for changes in volume
resulting from changes in customer count and also does not cover large
commercial and industrial customers.
2008
Rates
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. The final amount of
the refund is under review by the PSCW, and WPS expects a final order before
year-end.
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. The amount remaining to be recovered is not
significant.
Michigan
2010 UPPCO Rate
Case
On
June 26, 2009, UPPCO filed a request with the MPSC to increase retail
electric rates by $12.2 million (12.7%). The filing includes a
12.0% return on common equity and a common equity ratio of 54.8% in its
regulatory capital structure. The proposed rate increase is required
because of hydroelectric facility
replacement and
upgrades, increased costs of capital for financing, low sales growth, increased
costs for meter reading, and general inflation. UPPCO requested
approval of a decoupling mechanism, as well as the authority to implement an
uncollectible expense true-up mechanism, which would provide for recovery or
refund of 90% of the difference between actual and forecasted uncollectible
expense. UPPCO expects interim rates to begin January 1,
2010.
2010 MGU Rate
Case
On
July 1, 2009, MGU filed a request with the MPSC to increase retail natural gas
rates by $8.4 million (4.5%). The filing includes a 12.0% return
on common equity and a common equity ratio of 50.26% in its regulatory capital
structure. The proposed rate increase is required because of
increased cost of capital for financing, low margin revenue growth, increased
costs of customer service functions and employee benefits, and general
inflation. MGU requested approval of a decoupling mechanism, as well
as the authority to implement an uncollectible expense true-up mechanism,
similar to what UPPCO requested in its 2010 rate case discussed
above. MGU expects interim rates to begin January 1,
2010.
2009 MGU
Rates
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
Rates
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 included a 12.0% return on
common equity and a common equity ratio of 56% in their regulatory capital
structures. The filings also included an overall return of 9.34% and
9.18% for PGL and NSG, respectively. The proposed rate increases were
requested 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.
On
June 10, 2009, the ICC Staff and interveners filed direct testimony in
these cases. The ICC Staff recommended rate increases of
approximately $35 million for PGL and $10 million for
NSG. The ICC Staff’s recommendation includes an overall return of
7.6% for PGL (including a 9.69% return on common equity) and 7.49% for NSG
(including a 9.79% return on common equity). The interveners
recommended rate increases of
approximately $48.3 million for PGL and $11 million for
NSG. The interveners’ recommendation includes an overall return of
7.36% for PGL and 7.07% for NSG, each including an 8.255% to 8.58% return on
common equity. The ICC Staff and certain interveners opposed the
accelerated cast iron main replacement recovery mechanisms, and the ICC Staff
opposed the bad debt recovery mechanism.
On
July 8, 2009, PGL and NSG filed rebuttal testimony in these
cases. PGL reduced its requested increase to $122.4 million and
NSG reduced its requested increase to $20.0 million, based upon updating
certain data, agreeing not to contest certain ICC Staff and intervener
proposals, and revised overall returns of 9.27% for PGL and 9.06% for NSG, which
includes a revised return on common equity of 11.87% for both PGL and
NSG. PGL continued to support its requested accelerated cast iron
main replacement recovery mechanism. PGL and NSG stated that they
would withdraw their requested bad debt recovery mechanisms if the Governor of
Illinois were to sign pending legislation authorizing utilities to file such a
mechanism outside of a rate case. The Governor signed that
legislation on July 10, 2009.
On
August 4, 2009, the ICC Staff and interveners filed rebuttal testimony in these
cases. PGL and NSG are currently reviewing the testimony to determine
its impact on these cases.
PGL and NSG expect
receipt of a written order from the ICC by January 2010.
2008
Rates
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
June 29, 2009, the MPUC issued a final written order authorizing MERC a
retail natural gas rate increase of $15.4 million. The new rates
reflect a 10.21% return on common equity and a common equity ratio of 48.77% in
its regulatory capital structure. After approval of the required
compliance filings, MERC expects to implement final rates in the fourth quarter
of 2009.
Federal
Through a series of
orders issued by the FERC, Regional Through and Out Rates for transmission
service between the MISO and the PJM Interconnection were eliminated effective
December 1, 2004. To compensate transmission owners for the
revenue they will no longer receive due to this rate elimination, the FERC
ordered a transitional pricing mechanism called the Seams Elimination Charge
Adjustment (SECA) be put into place. Load-serving entities paid these
SECA charges during a 16-month transition period from December 1, 2004,
through March 31, 2006.
For the 16-month
transitional period, Integrys Energy Services received billings of
$19.2 million (pre-tax) for these charges. Integrys Energy
Services expensed $14.7 million of the $19.2 million, as it is
probable that Integrys Energy Services' total exposure will be reduced by at
least $4.5 million due to inconsistencies between the FERC's SECA order and
the transmission owners' compliance filings. Integrys Energy Services
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 22--SEGMENTS
OF BUSINESS
At
June 30, 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 tables below
present information for the respective periods pertaining to Integrys Energy
Group's reportable segments:
|
|
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
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$ |
303.9 |
|
|
$ |
308.7 |
|
|
$ |
612.6 |
|
|
$ |
812.0 |
|
|
$ |
3.0 |
|
|
$ |
- |
|
|
$ |
1,427.6 |
|
Intersegment
revenues
|
|
|
10.4 |
|
|
|
0.1 |
|
|
|
10.5 |
|
|
|
0.5 |
|
|
|
- |
|
|
|
(11.0 |
) |
|
|
- |
|
Restructuring
expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
19.1 |
|
|
|
- |
|
|
|
- |
|
|
|
19.1 |
|
Depreciation
and amortization expense
|
|
|
22.6 |
|
|
|
26.6 |
|
|
|
49.2 |
|
|
|
4.7 |
|
|
|
3.7 |
|
|
|
- |
|
|
|
57.6 |
|
Miscellaneous
income (expense)
|
|
|
1.3 |
|
|
|
0.6 |
|
|
|
1.9 |
|
|
|
1.3 |
|
|
|
28.7 |
|
|
|
(11.1 |
) |
|
|
20.8 |
|
Interest
expense (income)
|
|
|
10.5 |
|
|
|
12.6 |
|
|
|
23.1 |
|
|
|
2.6 |
|
|
|
25.4 |
|
|
|
(11.1 |
) |
|
|
40.0 |
|
Provision
(benefit) for income taxes
|
|
|
12.1 |
|
|
|
(2.3 |
) |
|
|
9.8 |
|
|
|
8.1 |
|
|
|
0.6 |
|
|
|
- |
|
|
|
18.5 |
|
Net income
(loss) from continuing operations
|
|
|
23.6 |
|
|
|
(4.0 |
) |
|
|
19.6 |
|
|
|
11.1 |
|
|
|
4.5 |
|
|
|
- |
|
|
|
35.2 |
|
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.3 |
|
|
|
- |
|
|
|
- |
|
|
|
0.3 |
|
Preferred
stock dividends of subsidiary
|
|
|
0.7 |
|
|
|
0.1 |
|
|
|
0.8 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.8 |
|
Net income
(loss) attributed to common shareholders
|
|
|
22.9 |
|
|
|
(4.1 |
) |
|
|
18.8 |
|
|
|
11.4 |
|
|
|
4.5 |
|
|
|
- |
|
|
|
34.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$ |
300.5 |
|
|
$ |
515.6 |
|
|
$ |
816.1 |
|
|
$ |
2,598.0 |
|
|
$ |
3.1 |
|
|
$ |
- |
|
|
$ |
3,417.2 |
|
Intersegment
revenues
|
|
|
10.6 |
|
|
|
0.2 |
|
|
|
10.8 |
|
|
|
2.6 |
|
|
|
- |
|
|
|
(13.4 |
) |
|
|
- |
|
Goodwill
impairment loss
|
|
|
- |
|
|
|
6.5 |
|
|
|
6.5 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6.5 |
|
Depreciation
and amortization expense
|
|
|
21.4 |
|
|
|
27.1 |
|
|
|
48.5 |
|
|
|
3.5 |
|
|
|
3.9 |
|
|
|
- |
|
|
|
55.9 |
|
Miscellaneous
income (expense)
|
|
|
1.6 |
|
|
|
2.2 |
|
|
|
3.8 |
|
|
|
2.8 |
|
|
|
26.0 |
|
|
|
(9.9 |
) |
|
|
22.7 |
|
Interest
expense (income)
|
|
|
8.5 |
|
|
|
12.4 |
|
|
|
20.9 |
|
|
|
(0.1 |
) |
|
|
22.6 |
|
|
|
(9.9 |
) |
|
|
33.5 |
|
Provision for
income taxes
|
|
|
10.4 |
|
|
|
2.2 |
|
|
|
12.6 |
|
|
|
4.4 |
|
|
|
0.5 |
|
|
|
- |
|
|
|
17.5 |
|
Net income
(loss) from continuing operations
|
|
|
20.7 |
|
|
|
(9.0 |
) |
|
|
11.7 |
|
|
|
8.9 |
|
|
|
4.2 |
|
|
|
- |
|
|
|
24.8 |
|
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
Preferred
stock dividends of subsidiary
|
|
|
0.5 |
|
|
|
0.3 |
|
|
|
0.8 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.8 |
|
Net income
(loss) attributed to common shareholders
|
|
|
20.2 |
|
|
|
(9.3 |
) |
|
|
10.9 |
|
|
|
9.0 |
|
|
|
4.2 |
|
|
|
- |
|
|
|
24.1 |
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$ |
621.8 |
|
|
$ |
1,405.3 |
|
|
$ |
2,027.1 |
|
|
$ |
2,595.5 |
|
|
$ |
5.8 |
|
|
$ |
- |
|
|
$ |
4,628.4 |
|
Intersegment
revenues
|
|
|
22.2 |
|
|
|
0 .3 |
|
|
|
22.5 |
|
|
|
1.1 |
|
|
|
- |
|
|
|
(23.6 |
) |
|
|
- |
|
Goodwill
impairment loss
|
|
|
- |
|
|
|
291.1 |
|
|
|
291.1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
291.1 |
|
Restructuring
expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
19.1 |
|
|
|
- |
|
|
|
- |
|
|
|
19.1 |
|
Depreciation
and
amortization
expense
|
|
|
45.0 |
|
|
|
52.4 |
|
|
|
97.4 |
|
|
|
9.8 |
|
|
|
7.3 |
|
|
|
- |
|
|
|
114.5 |
|
Miscellaneous
income
(expense)
|
|
|
2.2 |
|
|
|
1.8 |
|
|
|
4.0 |
|
|
|
2.3 |
|
|
|
60.4 |
|
|
|
(24.7 |
) |
|
|
42.0 |
|
Interest
expense (income)
|
|
|
21.0 |
|
|
|
26.2 |
|
|
|
47.2 |
|
|
|
5.7 |
|
|
|
54.5 |
|
|
|
(24.7 |
) |
|
|
82.7 |
|
Provision
(benefit) for income
taxes
|
|
|
26.4 |
|
|
|
1.7 |
|
|
|
28.1 |
|
|
|
(6.4 |
) |
|
|
9.6 |
|
|
|
- |
|
|
|
31.3 |
|
Net income
(loss) from
continuing
operations
|
|
|
51.3 |
|
|
|
(176.9 |
) |
|
|
(125.6 |
) |
|
|
(18.0 |
) |
|
|
(0.6 |
) |
|
|
- |
|
|
|
(144.2 |
) |
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.3 |
|
|
|
- |
|
|
|
- |
|
|
|
0.3 |
|
Preferred
stock dividends
of
subsidiary
|
|
|
1.3 |
|
|
|
0.3 |
|
|
|
1.6 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1.6 |
|
Net income
(loss) attributed to common shareholders
|
|
|
50.0 |
|
|
|
(177.2 |
) |
|
|
(127.2 |
) |
|
|
(17.7 |
) |
|
|
(0.6 |
) |
|
|
- |
|
|
|
(145.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$ |
617.0 |
|
|
$ |
1,776.0 |
|
|
$ |
2,393.0 |
|
|
$ |
5,007.0 |
|
|
$ |
6.4 |
|
|
$ |
- |
|
|
$ |
7,406.4 |
|
Intersegment
revenues
|
|
|
23.3 |
|
|
|
0 .3 |
|
|
|
23.6 |
|
|
|
7.7 |
|
|
|
(0.1 |
) |
|
|
(31.2 |
) |
|
|
- |
|
Goodwill
impairment loss
|
|
|
- |
|
|
|
6.5 |
|
|
|
6.5 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6.5 |
|
Depreciation
and
amortization
expense
|
|
|
40.2 |
|
|
|
52.5 |
|
|
|
92.7 |
|
|
|
7.0 |
|
|
|
7.4 |
|
|
|
- |
|
|
|
107.1 |
|
Miscellaneous
income
(expense)
|
|
|
3.8 |
|
|
|
3.8 |
|
|
|
7.6 |
|
|
|
3.0 |
|
|
|
50.4 |
|
|
|
(20.2 |
) |
|
|
40.8 |
|
Interest
expense (income)
|
|
|
17.3 |
|
|
|
26.7 |
|
|
|
44.0 |
|
|
|
2.7 |
|
|
|
44.9 |
|
|
|
(20.2 |
) |
|
|
71.4 |
|
Provision for
income taxes
|
|
|
13.3 |
|
|
|
45.4 |
|
|
|
58.7 |
|
|
|
34.6 |
|
|
|
2.5 |
|
|
|
- |
|
|
|
95.8 |
|
Net income
from
continuing
operations
|
|
|
28.0 |
|
|
|
66.9 |
|
|
|
94.9 |
|
|
|
60.5 |
|
|
|
6.0 |
|
|
|
- |
|
|
|
161.4 |
|
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
Preferred
stock dividends
of
subsidiary
|
|
|
1.0 |
|
|
|
0.6 |
|
|
|
1.6 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1.6 |
|
Net income
attributed to
common
shareholders
|
|
|
27.0 |
|
|
|
66.3 |
|
|
|
93.3 |
|
|
|
60.6 |
|
|
|
6.0 |
|
|
|
- |
|
|
|
159.9 |
|
NOTE 23--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.
In
May 2009, the FASB issued SFAS No. 165, “Subsequent Events,” which clarifies the
time period after the balance sheet date during which management should analyze
transactions and events for potential recognition or disclosure, explains when
to recognize these events in the financial statements, and describes the
necessary disclosures for subsequent events. In addition, this
statement requires disclosure of the date through which subsequent events have
been evaluated. This statement was effective for the reporting period
ending June 30, 2009, and had no impact on Integrys Energy Group’s results
of operations or financial position.
SFAS No. 167,
“Amendments to FASB Interpretation No 46(R),” was issued in
June 2009. This statement introduces a requirement to perform
ongoing assessments to determine whether an entity is a variable interest entity
and whether an enterprise is the primary beneficiary of a variable interest
entity. In addition, this statement clarifies that the enterprise
that is required to consolidate a variable interest entity will have a
controlling financial interest evidenced by (1) the power to direct the
activities that most significantly affect the entity’s economic performance, and
(2) the obligation to absorb losses or the right to receive benefits that are
potentially significant to the variable interest entity. Additional
disclosures are required regarding involvement with variable interest entities,
as well as the methodology used to determine the primary beneficiary of any
variable interest entities. This standard will be effective for
Integrys Energy Group beginning January 1, 2010. Management is
currently evaluating the impact that the adoption of SFAS No. 167 will have on
Integrys Energy Group’s consolidated financial statements.
SFAS No. 168, “The
FASB Accounting Standards CodificationTM and the
Hierarchy of Generally Accepted Accounting Principles – A Replacement of FASB
Statement No. 162,” was issued in June 2009. This statement
creates two levels of GAAP, authoritative and nonauthoritative, and replaces the
old GAAP hierarchy found in SFAS No. 162. In addition, this statement
establishes the FASB Accounting Standards CodificationTM as the
source of authoritative accounting principles for GAAP and clarifies that rules
and interpretations of the SEC are also authoritative GAAP for SEC
registrants. SFAS No. 168 is effective for Integrys Energy Group for
the reporting period ending September 30, 2009. This standard will
change the way GAAP is referenced throughout Integrys Energy Group’s disclosures
but will not have an impact on its results of operations or financial
position.
|
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 the 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. Integrys Energy Group is in
the process of executing its previously announced strategy to divest of its
nonregulated energy services operations or reduce the size of these operations
to one with credit and collateral support requirements that are insignificant by
the end of 2010.
The essential
components of Integrys Energy Group’s business strategy are:
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 Integrys Energy Group’s
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.
|
|
|
·
|
Integrys
Energy Group’s 34% ownership interest in ATC, a transmission company that
has over $2.6 billion of transmission assets at June 30,
2009. Integrys Energy Group will continue to fund its share of
the equity portion of future ATC growth. 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, which is expected to be
completed in the fourth quarter of
2009.
|
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. Through the
restructuring process, Integrys Energy Group is committed to reducing credit and
collateral support requirements by the end of 2010 to an insignificant
level. 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 – Integrys Energy Group’s asset
management strategy calls for the continuous assessment of existing
assets, the acquisition of assets, and contractual commitments to obtain
resources that complement its existing business and strategy. The
goal is to provide the most efficient use of 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. Integrys
Energy Group maintains a portfolio approach to risk and
earnings. Integrys Energy Group’s decision regarding the future of
Integrys Energy Services illustrates its asset management strategy.
Integrys Energy
Group’s risk management strategy includes the management of market exposure,
credit, and operational risks through the normal course of
business. Forward purchases and sales of electric capacity, energy,
natural gas, and other commodities allow for opportunities to secure prices in a
volatile energy market. Each business unit manages daily the risk
profile related to these instruments consistent with Integrys Energy Group's
risk management policies, which are 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 energy 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, Integrys Energy Group is
able to provide a safe, reliable,
value-priced
service to its customers. Integrys Energy Group concentrates its
efforts on improving and operating
efficiently in order to reduce costs and maintain a low risk
profile. Integrys Energy Group actively evaluates opportunities for
adding more renewable generation to provide additional environmentally sound
energy to its 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
and energy related services:
·
|
Managing
operations to minimize the impact on the environment. WPS’s
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 allows reductions in the
amount of emissions produced. Integrys Energy Group also
expects to maintain or decrease the amount of greenhouse gases released
over time and supports research and development initiatives that will
enable further progress toward decreasing its 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 its natural gas connection to the Guardian II pipeline, ensures
continued reliability for Integrys Energy Group’s
customers.
|
RESULTS
OF OPERATIONS
|
|
Three
Months Ended
June 30
|
|
|
%
Increase
|
|
|
Six
Months Ended
June 30
|
|
|
%
Increase
|
|
(Millions,
except per share amounts)
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas
utility operations
|
|
$ |
(4.1 |
) |
|
$ |
(9.3 |
) |
|
|
(55.9 |
)% |
|
$ |
(177.2 |
) |
|
$ |
66.3 |
|
|
|
N/A |
|
Electric
utility operations
|
|
|
22.9 |
|
|
|
20.2 |
|
|
|
13.4 |
% |
|
|
50.0 |
|
|
|
27.0 |
|
|
|
85.2 |
% |
Nonregulated
energy operations
|
|
|
11.4 |
|
|
|
9.0 |
|
|
|
26.7 |
% |
|
|
(17.7 |
) |
|
|
60.6 |
|
|
|
N/A |
|
Holding
company and other operations
|
|
|
4.5 |
|
|
|
4.2 |
|
|
|
7.1 |
% |
|
|
(0.6 |
) |
|
|
6.0 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) attributed to common shareholders
|
|
$ |
34.7 |
|
|
$ |
24.1 |
|
|
|
44.0 |
% |
|
$ |
(145.5 |
) |
|
$ |
159.9 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
(loss) per share
|
|
$ |
0.45 |
|
|
$ |
0.31 |
|
|
|
45.2 |
% |
|
$ |
(1.90 |
) |
|
$ |
2.09 |
|
|
|
N/A |
|
Diluted
earnings (loss) per share
|
|
$ |
0.45 |
|
|
$ |
0.31 |
|
|
|
45.2 |
% |
|
$ |
(1.90 |
) |
|
$ |
2.08 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares
of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
76.8 |
|
|
|
76.6 |
|
|
|
0.3 |
% |
|
|
76.7 |
|
|
|
76.6 |
|
|
|
0.1 |
% |
Diluted
|
|
|
76.8 |
|
|
|
76.9 |
|
|
|
(0.1 |
)% |
|
|
76.7 |
|
|
|
76.9 |
|
|
|
(0.3 |
)% |
Financial Results – Second
Quarter 2009 Compared with Second Quarter 2008
Earnings at
Integrys Energy Group increased $10.6 million, to net income attributed to
common shareholders of $34.7 million ($0.45 diluted earnings per
share) for the quarter ended June 30, 2009, compared with net income of
$24.1 million ($0.31 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):
·
|
The net loss
at the regulated natural gas utility segment decreased $5.2 million,
from $9.3 million for the quarter ended June 30, 2008, to
$4.1 million for the same quarter in 2009. The decrease in
net loss was driven by a goodwill impairment loss related to NSG recorded
in the second quarter of 2008.
|
|
|
·
|
Earnings at
the regulated electric utility segment increased $2.7 million, from
$20.2 million during the quarter ended June 30, 2008, to
$22.9 million for the same quarter in 2009. The increase
in earnings was driven by an increase in wholesale demand charges, higher
margins from residential and commercial and industrial
customers, and the favorable impact from a fuel surcharge increase that
was effective July 4, 2008, a portion of which was incorporated into WPS’s
2009 non-fuel base retail electric rates. The higher electric
earnings were partially offset by increases in maintenance expense,
pension and other postretirement benefit costs, and interest
expense.
|
|
|
·
|
Financial
results at Integrys Energy Services increased $2.4 million, from
earnings of $9.0 million for the quarter ended June 30, 2008, to
$11.4 million for the same period in 2009, driven
by:
|
|
|
|
-
|
A
$35.4 million after-tax non-cash increase in Integrys Energy
Services' margin quarter-over-quarter, due to a $63.7 million
after-tax increase related to non-cash activity associated with natural
gas operations, partially offset by a $28.3 million after-tax
decrease related to non-cash activity associated with electric
operations,
|
|
|
|
|
-
|
Combined,
realized retail and wholesale electric margin increased $14.4 million
after-tax:
|
|
|
|
|
|
Realized
retail electric margins increased $9.2 million
after-tax. Higher quarter-over-quarter realized retail per unit
electric margins were experienced in Illinois, New England, and
New York, as Integrys Energy Services begins to see the effects of
including higher capital costs in its pricing. Margins were
also higher in the Mid-Atlantic region, as Integrys Energy Services
continued to realize volume growth in this newer market and also realized
higher average per unit margins in 2009.
|
|
|
|
|
|
The realized
wholesale electric margin increased $5.2 million
after-tax. In general, realized margins are impacted by
transaction activity in prior periods. Wholesale transactions
increased at the end of 2007 and the beginning of 2008, but were scaled
back in conjunction with the global credit crisis in the latter half of
2008 and continue to be scaled back with the announced Integrys Energy
Services strategy change. The scaled back transaction activity
will negatively impact realized margin in subsequent
periods.
|
|
|
|
|
Partially
offsetting the above increases;
|
|
|
|
|
-
|
Realized
natural gas margins decreased $21.0 million after-tax, driven by a
reduction in wholesale transactions as a result of the strategy change
announced earlier in the year.
|
|
|
|
|
-
|
After-tax
restructuring expenses recorded at Integrys Energy Services of
$11.9 million, which included anticipated employee related costs, the
write-off of capitalized development costs related to software that will
not be utilized because of the restructuring, and consulting and legal
costs.
|
|
|
|
|
-
|
Operating and
maintenance expense increased $10.6 million after-tax, primarily
related to a $5.4 million after-tax novation fee paid to a counterparty to
consolidate certain wholesale financial and physical
transactions. The remaining increase in operating and
maintenance expense related to higher bad debt expense and a loss recorded
on the sale and leaseback of a solar equipment project in the second
quarter of 2009. Integrys Energy Services realized offsetting gains
on the sale and leaseback of other solar equipment projects that in
accordance with GAAP were deferred and will be recognized in income
over the 10-year life of the related leases.
|
|
|
|
|
-
|
A small
decrease in other income and an increase in interest expense also
negatively impacted Integrys Energy Services’ earnings by an after-tax
combined $2.6 million
quarter-over-quarter.
|
Financial Results – Six
Months 2009 Compared with Six Months 2008
Financial results
at Integrys Energy Group decreased $305.4 million, to a net loss attributed
to common shareholders of $145.5 million ($1.90 net loss per share)
for the six months ended June 30, 2009, from net income attributed to
common shareholders of $159.9 million ($2.08 diluted earnings per
share) for the same period 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
$243.5 million, from earnings of $66.3 million for the six
months ended June 30, 2008, to a net loss of $177.2 million for
the same period in 2009. The net loss at the natural gas
utility segment was driven by a $242.3 million increase in after-tax
non-cash goodwill impairment losses period-over-period. Lower
period-over-period volumes, attributed to the general economic slowdown,
warmer weather during the heating season, an increase in pension and other
postretirement costs, and higher injuries and damages expense, including
workers compensation, also contributed to the decrease in financial
results at the regulated natural gas utility segment. The
decrease in financial results was partially offset by higher
period-over-period earnings from rate increases at MERC and MGU, the full
year's benefit of PGL's 2008 rate increase, changes in rate design, and a
decrease in bad debt expense.
|
|
|
·
|
Earnings at
the regulated electric utility segment increased $23.0 million, from
$27.0 million during the six months ended June 30, 2008, to
$50.0 million for the same period in 2009, driven by a
$21.8 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 six
months ended June 30, 2009, compared with the same period in
2008. Electric utility earnings were also favorably impacted by
an increase in demand charges from wholesale customers, a fuel surcharge
increase effective July 4, 2008, a portion of which was incorporated into
WPS’s 2009 non-fuel base retail electric rates, and higher margins from
residential and commercial and industrial customers. The higher
electric earnings were partially offset by increases in pension and other
postretirement benefit costs, maintenance expenses, depreciation expense
related to Weston 4, and interest expense.
|
|
|
·
|
Financial
results at Integrys Energy Services decreased $78.3 million, from
earnings of $60.6 million for the six months ended June 30,
2008, to a net loss of $17.7 million for the same period in 2009,
driven by:
|
|
|
|
-
|
A
$55.8 million after-tax decrease in Integrys Energy Services' margin
period-over-period related to non-cash activity, due to a
$123.2 million after-tax decrease related to non-cash activity
associated with electric operations as market prices were lower in 2009
than in 2008, partially offset by a $67.4 million after-tax increase
related to non-cash activity associated with natural gas
operations.
|
|
|
|
|
-
|
Operating and
maintenance expense increased $16.3 million after-tax, primarily
related to a $5.4 million after-tax novation fee paid to a
counterparty in order to consolidate certain wholesale financial and
physical transactions. The remaining increase in operating and
maintenance expense related to higher employee benefit costs, higher bad
debt expense, and a loss recorded on the sale and leaseback of a solar
equipment project in the second quarter of 2009. Integrys Energy
Services realized offsetting gains on the sale and leaseback of other
solar equipment projects that in accordance with GAAP were deferred
and will be recognized in income over the 10-year life of the related
leases.
|
|
|
|
|
-
|
After-tax
restructuring expenses recorded at Integrys Energy Services of
$11.9 million, which included anticipated employee costs, the
write-off of capitalized development costs related to software that will
not be utilized because of the restructuring, and consulting and legal
costs.
|
|
|
|
|
-
|
Realized
natural gas margins decreased $3.2 million after-tax, driven by a
reduction in wholesale transactions as a result of the strategy change
announced earlier this year.
|
|
|
|
|
-
|
A small
decrease in other income and an increase in interest expense also
negatively impacted Integrys Energy Services’ earnings by an after-tax
combined $2.4 million
period-over-period.
|
|
|
|
|
-
|
Partially
offsetting the decrease, realized retail and wholesale electric margin
increased $19.1 million after-tax:
|
|
|
|
|
|
Realized
retail electric margin increased $13.0 million
after-tax. Higher period-over-period realized retail per unit
electric margins were experienced in Illinois, New England, and
New York, as a result of including higher capital costs in
pricing. Margins were also higher in the Mid-Atlantic region,
as Integrys Energy Services continued to realize volume growth in this
newer market and also realized higher average per unit margins in
2009.
|
|
|
|
|
|
The realized
wholesale electric margin increased $6.1 million
after-tax. In general, realized margins are impacted by
transaction activity in prior periods. Wholesale transactions
increased at the end of 2007 and the beginning of 2008, but were scaled
back in conjunction with the global credit crisis in the latter half of
2008 and continue to be scaled back with the announced Integrys Energy
Services strategy change. The scaled back transaction activity
will negatively impact realized margin in subsequent
periods.
|
|
|
|
·
|
Financial
results at the holding company and other segment decreased
$6.6 million, from net income of $6.0 million for the six months
ended June 30, 2008, to a net loss of $0.6 million for the same
period 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 period was the negative
impact of a February 2009 tax law change in Wisconsin that requires
combined income tax computations and reporting beginning in
2009. Increases in interest expense and legal and settlement
expenses at the holding company and other segment also decreased financial
results, but were partially offset by higher earnings from Integrys Energy
Group's investment in ATC, intercompany interest income, and gains from
land sales.
|
Utility
Operations
For the three and
six months ended June 30, 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
|
|
|
%
|
|
|
Six
Months Ended
|
|
|
%
|
|
|
|
June 30
|
|
|
Increase
|
|
|
June 30
|
|
|
Increase
|
|
(Millions, except heating
degree days)
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
308.8 |
|
|
$ |
515.8 |
|
|
|
(40.1 |
%) |
|
$ |
1,405.6 |
|
|
$ |
1,776.3 |
|
|
|
(20.9 |
%) |
Purchased
natural gas costs
|
|
|
142.4 |
|
|
|
347.7 |
|
|
|
(59.0 |
%) |
|
|
918.7 |
|
|
|
1,286.5 |
|
|
|
(28.6 |
%) |
Margins
|
|
|
166.4 |
|
|
|
168.1 |
|
|
|
(1.0 |
%) |
|
|
486.9 |
|
|
|
489.8 |
|
|
|
(0.6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and
maintenance expense
|
|
|
126.8 |
|
|
|
123.5 |
|
|
|
2.7 |
% |
|
|
277.9 |
|
|
|
279.1 |
|
|
|
(0.4 |
%) |
Goodwill
impairment loss *
|
|
|
- |
|
|
|
6.5 |
|
|
|
(100.0 |
%) |
|
|
291.1 |
|
|
|
6.5 |
|
|
|
4,378.5 |
% |
Depreciation
and amortization expense
|
|
|
26.6 |
|
|
|
27.1 |
|
|
|
(1.8 |
%) |
|
|
52.4 |
|
|
|
52.5 |
|
|
|
(0.2 |
%) |
Taxes other
than income taxes
|
|
|
7.3 |
|
|
|
7.6 |
|
|
|
(3.9 |
%) |
|
|
16.3 |
|
|
|
16.5 |
|
|
|
(1.2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
5.7 |
|
|
|
3.4 |
|
|
|
67.6 |
% |
|
|
(150.8 |
) |
|
|
135.2 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
|
0.6 |
|
|
|
2.2 |
|
|
|
(72.7 |
%) |
|
|
1.8 |
|
|
|
3.8 |
|
|
|
(52.6 |
%) |
Interest
expense
|
|
|
(12.6 |
) |
|
|
(12.4 |
) |
|
|
1.6 |
% |
|
|
(26.2 |
) |
|
|
(26.7 |
) |
|
|
(1.9 |
%) |
Other
expense
|
|
|
(12.0 |
) |
|
|
(10.2 |
) |
|
|
17.6 |
% |
|
|
(24.4 |
) |
|
|
(22.9 |
) |
|
|
6.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before taxes
|
|
$ |
(6.3 |
) |
|
$ |
(6.8 |
) |
|
|
(7.4 |
%) |
|
$ |
(175.2 |
) |
|
$ |
112.3 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Throughput
in therms
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
216.7 |
|
|
|
217.7 |
|
|
|
(0.5 |
%) |
|
|
1,012.6 |
|
|
|
1,060.5 |
|
|
|
(4.5 |
%) |
Commercial
and industrial
|
|
|
64.1 |
|
|
|
71.8 |
|
|
|
(10.7 |
%) |
|
|
317.4 |
|
|
|
340.3 |
|
|
|
(6.7 |
%) |
Interruptible
|
|
|
6.1 |
|
|
|
12.5 |
|
|
|
(51.2 |
%) |
|
|
24.1 |
|
|
|
35.7 |
|
|
|
(32.5 |
%) |
Interdepartmental
|
|
|
2.3 |
|
|
|
9.0 |
|
|
|
(74.4 |
%) |
|
|
4.4 |
|
|
|
18.4 |
|
|
|
(76.1 |
%) |
Transport
|
|
|
296.1 |
|
|
|
354.6 |
|
|
|
(16.5 |
%) |
|
|
909.5 |
|
|
|
1,023.9 |
|
|
|
(11.2 |
%) |
Total
sales in therms
|
|
|
585.3 |
|
|
|
665.6 |
|
|
|
(12.1 |
%) |
|
|
2,268.0 |
|
|
|
2,478.8 |
|
|
|
(8.5 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
heating degree days
|
|
|
852 |
|
|
|
836 |
|
|
|
1.9 |
% |
|
|
4,439 |
|
|
|
4,501 |
|
|
|
(1.4 |
%) |
* See
Note 8, "Goodwill and
Other Intangible Assets," for more information.
Second
Quarter 2009 Compared with Second Quarter 2008
Revenue
Regulated natural
gas utility segment revenue decreased $207.0 million, driven
by:
·
|
An
approximate $177 million decrease in revenue as a result of an
approximate 57% average decrease in the per-unit cost of natural gas sold
by the regulated natural gas utilities in the second quarter of 2009,
compared with the same quarter in 2008. For all of Integrys
Energy Group's regulated natural gas utilities, prudently incurred natural
gas commodity costs are directly passed through to customers in current
rates.
|
|
|
·
|
An
approximate $30 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 $22 million decrease related to lower volumes sold to
residential customers resulting from energy conservation efforts, lower
volumes sold to commercial and industrial and transportation customers
resulting from changes in plant operations, and a decrease in customer
base at PGL, which Integrys Energy Group attributed to the general
economic slowdown.
|
|
|
|
|
-
|
An
approximate $8 million decrease related to a quarter-over-quarter
reduction in volumes sold to the electric utility segment because of lower
electricity usage by residential and commercial and industrial customers,
the availability of lower cost power from MISO, and the availability of
WPS's Weston 4 coal-fired generating facility that became commercially
operational in June 2008, all of which resulted in a decrease in the
need for the electric utility to run its peaking generation
units.
|
|
|
|
·
|
An
approximate $2 million quarter-over-quarter decrease in revenue from
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 at MGU and MERC. Effective
January 14, 2009, MGU received a final rate order from the MPSC for a
natural gas distribution rate increase. Effective June 29,
2009, MERC received a final rate order granting a natural gas distribution
rate increase. Prior to this final order, MERC had been granted
interim rate relief effective October 1, 2008. Together, these
rate increases had an approximate $5 million positive impact on
revenue quarter-over-quarter. See Note 21, "Regulatory
Environment," for more information on the rate increases at MGU and
MERC.
|
Margin
The regulated
natural gas utility segment margin decreased $1.7 million, driven
by:
·
|
A 12.1%
decrease in natural gas throughput volumes attributed to the negative
impact of the general economic slowdown, which resulted in an approximate
$2 million 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 defer the difference between the actual and rate case
authorized delivery charge components of margin from certain customers and
adjust future rates in accordance with rules applicable to each
jurisdiction. The decoupling mechanism for WPS’s natural gas
utility includes an annual $8.0 million ceiling for the deferral of
any excess or shortfall from the rate-case authorized
margin.
|
|
|
·
|
An
approximate $2 million quarter-over-quarter decrease in margin due to
lower revenue from the recovery of cleanup expenditures at PGL and NSG
related to former manufactured gas plant sites.
|
|
|
·
|
The decrease
in margin was partially offset by the approximate $3 million net
positive quarter-over-quarter impact of rate increases, primarily related
to MGU and MERC.
|
Operating
Income
Operating income at
the regulated natural gas utility segment increased $2.3 million driven by
a $6.5 million non-cash goodwill impairment loss related to NSG in the
second quarter of 2008, partially offset by a $3.3 million increase in
operating and maintenance expense and the $1.7 million decrease in
natural gas margin.
The increase in
operating and maintenance expense quarter-over-quarter was the result
of:
·
|
A
$3.1 million increase in pension and other postretirement benefit
costs.
|
|
|
·
|
A
$3.0 million increase in injuries and damages expenses, including
workers compensation claims.
|
|
|
·
|
The increase
was partially offset by a $3.1 million decrease in bad debt expense,
driven by the impact lower energy prices had on overall accounts
receivable balances.
|
Other
Expense
Other expense at
the regulated natural gas utilities increased $1.8 million, driven by a
decrease in interest income from customer-related balances in addition to a
decrease in AFUDC recognized on the natural gas laterals for connection to the
Guardian II pipeline that were placed in service in February
2009.
Six
Months 2009 Compared with Six Months 2008
Revenue
Regulated natural
gas utility segment revenue decreased $370.7 million, driven
by:
·
|
An
approximate $296 million decrease in revenue as a result of an
approximate 22% average decrease in the per-unit cost of natural gas sold
by the regulated natural gas utilities during the six months ended
June 30, 2009, compared with the same period in 2008. For
all of Integrys Energy Group's regulated natural gas utilities, prudently
incurred natural gas commodity costs are directly passed through to
customers in current rates.
|
|
|
·
|
An
approximate $69 million decrease in revenue as a result of lower
period-over-period natural gas throughput volumes, excluding the impact of
weather, driven by:
|
|
|
|
|
-
|
An
approximate $55 million decrease related to lower volumes sold to
residential customers resulting from energy conservation efforts and lower
volumes sold to commercial and industrial and transportation customers
resulting from changes in plant operations, which Integrys Energy Group
attributed to the general economic slowdown.
|
|
|
|
|
-
|
An
approximate $14 million decrease related to a period-over-period
reduction in volumes sold to the electric utility segment because of lower
electricity usage by residential and commercial and industrial customers,
the availability of lower cost power from MISO, and the availability of
WPS's Weston 4 coal-fired generating facility that became commercially
operational in June 2008, all of which resulted in a decrease in the
need for the electric utility to run its peaking generation
units.
|
|
|
|
·
|
An
approximate $26 million decrease in revenue as a result of warmer
weather during the heating season for the six months ended June 30,
2009, compared with the same period in 2008, reflected by the 1.4%
decrease in heating degree days.
|
|
|
·
|
An
approximate $7 million period-over-period decrease in revenue from
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 approximate $22 million
period-over-period positive impact of natural gas distribution rate cases
and changes in rate design at the regulated natural gas
utilities. See Note 21, "Regulatory
Environment," for more information on these rate
cases.
|
|
|
|
-
|
Effective
January 14, 2009, MGU received a final rate order from the MPSC for a
natural gas distribution rate increase. Effective June 29,
2009, MERC received a final rate order granting a natural gas distribution
rate increase. Prior to this final order, MERC had been granted
interim rate relief effective October 1, 2008. Together, these
rate increases had an approximate $13 million positive impact on
revenue.
|
|
|
|
|
-
|
In 2009, PGL
and NSG received the full impact of their 2008 natural gas distribution
rate cases, which were effective February 14, 2008, and drove an
approximate $5 million increase in revenue
period-over-period.
|
|
|
|
|
-
|
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
period ended June 30, 2009, revenue increased approximately
$4 million related to this rate design
change.
|
Margin
The regulated
natural gas utility segment margin decreased $2.9 million, driven
by:
·
|
An 8.5%
decrease in natural gas throughput volumes attributed to the negative
impact of the general economic slowdown and warmer period-over-period
weather, which resulted in an approximate $20 million decrease in
natural gas utility segment margin. This period-over-period
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 defer the difference between the actual and rate case
authorized delivery charge components of margin from certain customers and
adjust future rates in accordance with rules applicable to each
jurisdiction. The decoupling mechanism for WPS’s natural gas
utility includes an annual $8.0 million ceiling for the deferral of
any excess or shortfall from the rate-case authorized
margin. Approximately $3 million of additional revenues
were recognized at WPS due to a shortfall from the rate-case authorized
margin during the six months ended June 30, 2009.
|
|
|
·
|
An
approximate $7 million period-over-period decrease in margin due to
lower revenue from the recovery of cleanup expenditures at PGL and NSG
related to former manufactured gas plant sites.
|
|
|
·
|
The decrease
in margin was partially offset by the approximate $24 million net
positive period-over-period impact 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 $286.0 million, driven
by a period-over-period increase in non-cash goodwill impairment losses of
$284.6 million and the $2.9 million decrease in natural gas
margin, partially offset by a $1.2 million decrease in operating and
maintenance expense. A non-cash goodwill impairment charge of
$291.1 million was recognized in the first quarter of 2009 related to PGL,
NSG, MERC, and MGU, compared to a non-cash goodwill impairment charge of
$6.5 million recognized during the second quarter of 2008 related to
NSG. See Note 8, "Goodwill and Other Intangible
Assets," for more information.
The
$1.2 million period-over-period decrease in operating and maintenance
expense primarily related to:
·
|
An
approximate $7 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.
|
|
|
·
|
A
$2.2 million decrease in bad debt expense, driven by the impact of
lower energy prices on overall accounts receivable
balances.
|
|
|
·
|
The decrease
in operating and maintenance expense period-over-period was partially
offset by:
|
|
|
|
-
|
A
$4.1 million increase in pension and other postretirement benefit
costs
|
|
|
|
-
|
A
$2.9 million increase in expenses related to injuries and damages
expenses, including workers compensation claims.
|
|
|
|
|
-
|
A
$1.2 million increase in expenses related to PGL and NSG’s enhanced
efficiency program, costs of which are recovered from customers in
revenues.
|
Other
Expense
Other expense at
the regulated natural gas utilities increased $1.5 million, driven by a
decrease in interest income from customer-related balances.
Regulated
Electric Utility Segment Operations
|
|
Three
Months Ended
|
|
|
%
|
|
|
Six
Months Ended
|
|
|
%
|
|
(Millions,
except heating degree days)
|
|
June 30
|
|
|
Increase
|
|
|
June 30
|
|
|
Increase
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
314.3 |
|
|
$ |
311.1 |
|
|
|
1.0 |
% |
|
$ |
644.0 |
|
|
$ |
640.3 |
|
|
|
0.6 |
% |
Fuel and
purchased power costs
|
|
|
140.3 |
|
|
|
149.0 |
|
|
|
(5.8 |
%) |
|
|
287.7 |
|
|
|
334.4 |
|
|
|
(14.0 |
%) |
Margins
|
|
|
174.0 |
|
|
|
162.1 |
|
|
|
7.3 |
% |
|
|
356.3 |
|
|
|
305.9 |
|
|
|
16.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and
maintenance expense
|
|
|
95.1 |
|
|
|
91.6 |
|
|
|
3.8 |
% |
|
|
191.4 |
|
|
|
188.7 |
|
|
|
1.4 |
% |
Depreciation
and amortization expense
|
|
|
22.6 |
|
|
|
21.4 |
|
|
|
5.6 |
% |
|
|
45.0 |
|
|
|
40.2 |
|
|
|
11.9 |
% |
Taxes other
than income taxes
|
|
|
11.4 |
|
|
|
11.1 |
|
|
|
2.7 |
% |
|
|
23.4 |
|
|
|
22.2 |
|
|
|
5.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
44.9 |
|
|
|
38.0 |
|
|
|
18.2 |
% |
|
|
96.5 |
|
|
|
54.8 |
|
|
|
76.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
|
1.3 |
|
|
|
1.6 |
|
|
|
(18.8 |
%) |
|
|
2.2 |
|
|
|
3.8 |
|
|
|
(42.1 |
%) |
Interest
expense
|
|
|
(10.5 |
) |
|
|
(8.5 |
) |
|
|
23.5 |
% |
|
|
(21.0 |
) |
|
|
(17.3 |
) |
|
|
21.4 |
% |
Other
expense
|
|
|
(9.2 |
) |
|
|
(6.9 |
) |
|
|
33.3 |
% |
|
|
(18.8 |
) |
|
|
(13.5 |
) |
|
|
39.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before
taxes
|
|
$ |
35.7 |
|
|
$ |
31.1 |
|
|
|
14.8 |
% |
|
$ |
77.7 |
|
|
$ |
41.3 |
|
|
|
88.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
in kilowatt-hours
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
666.6 |
|
|
|
668.2 |
|
|
|
(0.2 |
%) |
|
|
1,509.7 |
|
|
|
1,518.3 |
|
|
|
(0.6 |
%) |
Commercial
and industrial
|
|
|
1,976.0 |
|
|
|
2,119.1 |
|
|
|
(6.8 |
%) |
|
|
3,974.9 |
|
|
|
4,297.9 |
|
|
|
(7.5 |
%) |
Wholesale
|
|
|
1,207.2 |
|
|
|
1,175.1 |
|
|
|
2.7 |
% |
|
|
2,342.6 |
|
|
|
2,305.6 |
|
|
|
1.6 |
% |
Other
|
|
|
8.1 |
|
|
|
8.3 |
|
|
|
(2.4 |
%) |
|
|
19.6 |
|
|
|
21.3 |
|
|
|
(8.0 |
%) |
Total
sales in kilowatt-hours
|
|
|
3,857.9 |
|
|
|
3,970.7 |
|
|
|
(2.8 |
%) |
|
|
7,846.8 |
|
|
|
8,143.1 |
|
|
|
(3.6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating
degree days
|
|
|
1,065 |
|
|
|
920 |
|
|
|
15.8 |
% |
|
|
5,036 |
|
|
|
4,875 |
|
|
|
3.3 |
% |
Cooling
degree days
|
|
|
111 |
|
|
|
104 |
|
|
|
6.7 |
% |
|
|
111 |
|
|
|
104 |
|
|
|
6.7 |
% |
UPPCO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating
degree days
|
|
|
1,542 |
|
|
|
1,518 |
|
|
|
1.6 |
% |
|
|
5,791 |
|
|
|
5,773 |
|
|
|
0.3 |
% |
Cooling
degree days
|
|
|
39 |
|
|
|
29 |
|
|
|
34.5 |
% |
|
|
39 |
|
|
|
29 |
|
|
|
34.5 |
% |
Second
Quarter 2009 Compared with Second Quarter 2008
Revenue
Regulated electric
utility segment revenue increased $3.2 million, driven by:
·
|
An
approximate $4 million quarter-over-quarter increase in revenue from
the interim fuel surcharge approved by the PSCW effective
July 4, 2008, a portion of which was incorporated into WPS’s
2009 base retail electric rates. 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% fuel window. As a result of these
lower costs, WPS accrued a refund payable to its electric customers of
approximately $4 million as of June 30, 2009, which was excluded from
the $4 million increase in revenue noted above. See Note
21, "Regulatory
Environment," for more information on WPS's fuel window and rate
increase.
|
|
|
·
|
The increase
in revenue was partially offset by a 2.8% decrease in electric sales
volumes, which resulted in an approximate $1 million decrease in
revenue quarter-over-quarter, after the impact of decoupling, related
to:
|
|
|
|
-
|
A 6.8%
decrease in commercial and industrial sales volumes and a 0.2% decrease in
residential sales volumes, partially offset by a 2.7% increase in
wholesale volumes, which resulted in an approximate $9 million net
decrease in revenue. Of this decrease in revenue, approximately
$9 million resulted from lower demand from changes in plant
operations by certain commercial and industrial customers and
approximately $1 million resulted from energy conservation efforts on
the part of residential customers, which Integrys Energy Group attributed
to the general economic slowdown. These items were partially
offset by the approximate $1 million net increase in opportunity
sales driven by higher contracted sales volumes to a large wholesale
customer, an increase in the wholesale demand rate effective January 1,
2009 to recover costs related to Weston 4, and was partially offset by a
decrease in demand for other opportunity sales. This lower
demand resulted from the availability of lower-cost power from the MISO
market.
|
|
|
|
|
-
|
The decrease
in volumes was partially offset by the impact that decoupling, which went
into effect January 1, 2009, had on WPS's revenue. Under
decoupling, WPS is allowed to defer the difference between its actual
margin and the rate case authorized margin recognized from residential and
small commercial and industrial customers. In the second
quarter of 2009, the difference between the actual and authorized margin
was approximately $8 million; therefore, WPS recognized a regulatory asset
under decoupling for this difference. It is important to note
that the rate order for this four-year pilot program for electric
decoupling has an annual $14.0 million ceiling for the deferral of
any excess or shortfall from the rate-case authorized
margin. This ceiling was reached in the second quarter of 2009;
therefore, no additional decoupling deferral can be recorded if there are
any additional shortfalls from authorized margin for the remainder of the
year.
|
Margin
The regulated
electric utility segment margin increased $11.9 million, driven
by:
·
|
An
approximate $5 million quarter-over-quarter 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 quarter-over-quarter increase in electric
utility margin from the effect of the July 4, 2008 fuel
surcharge, a portion of which was incorporated into WPS's 2009 non-fuel
base retail electric rates.
|
|
|
·
|
An
approximate $4 million quarter-over-quarter increase related to
residential and commercial and industrial customers. This
quarter-over-quarter impact on the electric utility margin included the
impact of a decoupling mechanism that first became effective for WPS on
January 1, 2009. During the six months ended June 30, 2009, the
difference between the actual and authorized margin was approximately $8
million; therefore, WPS recognized a regulatory asset under decoupling for
this difference. Sales volumes related to all electric
residential and commercial and industrial customers declined 5.2%
quarter-over-quarter, resulting in an approximate $4 million negative
impact on margin, attributed to the general economic slowdown, partially
offset by colder quarter-over-quarter weather.
|
|
|
·
|
The increase
in electric utility segment margin was partially offset by an approximate
$1 million decrease 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
June 30, 2009, compared with fuel and purchased power costs that
were approximately $6 million lower than what was recovered in rates
during the same quarter in 2008.
|
Operating
Income
Operating income at
the regulated electric utility segment increased $6.9 million
quarter-over-quarter, driven by the $11.9 million increase in electric
margin, partially offset by a $5.0 million increase in operating
expenses.
The increase in
operating expenses quarter-over-quarter was the result of:
·
|
A
$3.4 million increase in electric maintenance expenses, primarily
related to major planned outages at the generation plants in the second
quarter of 2009, compared with fewer planned outages in the same quarter
in 2008.
|
|
|
·
|
A
$2.0 million increase in pension and other postretirement benefit
costs.
|
Other
Expense
Other expense at
the regulated electric utilities increased $2.3 million
quarter-over-quarter, driven by a $2.0 million increase in interest
expense, primarily related to increased long-term borrowings at WPS at higher
interest rates. The additional borrowings were utilized to fund
various construction projects, most notably the Crane Creek wind generation
project under construction in Iowa.
Six
Months 2009 Compared with Six Months 2008
Revenue
Regulated electric
utility segment revenue increased $3.7 million, driven by:
·
|
An
approximate $15 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 WPS’s 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.
|
|
|
·
|
The increase
in revenue was partially offset by a 3.6% decrease in electric sales
volumes, which resulted in an approximate $10 million decrease in
revenue period-over-period, after the impact of decoupling, related
to:
|
|
|
|
-
|
A 7.5%
decrease in commercial and industrial sales volumes and a 0.6% decrease in
residential sales volumes, and a change in wholesale volumes, which
resulted in an approximate $27 million net decrease in
revenue. Of this decrease in revenue, approximately
$23 million resulted from lower demand from changes in plant
operations by commercial and industrial customers and approximately
$2 million resulted from energy conservation efforts on the part of
residential customers, which Integrys Energy Group attributed to the
general economic slowdown. In addition, approximately
$2 million related to a net decrease in demand for opportunity sales
driven by the availability of lower-cost power from the MISO
market. This decrease was partially offset by higher contracted
sales volumes to a large wholesale customer and an increase in the
wholesale demand rate effective January 1, 2009 to recover costs related
to Weston 4.
|
|
|
|
|
-
|
A partially
offsetting $3 million positive impact on revenues related to colder
period-over-period weather during the heating season as evidenced by the
increase in heating degree days at both WPS and
UPPCO.
|
|
|
|
|
-
|
The net
decrease in volumes was partially offset by the impact that decoupling,
which went into effect January 1, 2009, had on WPS's
revenue. Under decoupling, WPS is allowed to defer the
difference between its actual margin and the rate case authorized margin
recognized from residential and small commercial and industrial
customers. During the six months ended June 30, 2009, the
difference between the actual and authorized margin was approximately
$14 million; therefore, WPS recognized a regulatory asset under
decoupling for this difference. It is important to note that
the rate order for this four-year pilot program for electric decoupling
has an annual $14.0 million ceiling for the deferral of any excess or
shortfall from the rate-case authorized margin. This ceiling
was reached during the six months ended June 30, 2009; therefore, no
additional decoupling deferral can be recorded if there are any additional
shortfalls from authorized margin for the remainder of the
year.
|
Margin
The regulated
electric utility segment margin increased $50.4 million, driven
by:
·
|
An
approximate $27 million increase in WPS's regulated electric utility
margin from fuel and purchased power costs that were approximately
$11 million lower than what was recovered in rates during the period
ended June 30, 2009, compared with fuel and purchased power
costs that were approximately $16 million higher than what was
recovered in rates during the same period in 2008.
|
|
|
·
|
An
approximate $10 million period-over-period 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 $8 million period-over-period 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.
|
|
|
·
|
An
approximate $6 million period-over-period increase related to residential
and commercial and industrial customers. This
period-over-period impact on the electric utility margin included the
impact of a decoupling mechanism that first became effective for WPS on
January 1, 2009. During the six months ended June 30, 2009, the
difference between the actual and authorized margin was approximately $14
million; therefore, WPS recognized a regulatory asset under decoupling for
this difference. Sales volumes related to all electric
residential and commercial and industrial customers declined 5.7%
period-over-period, resulting in an approximate $8 million negative impact
on margin, attributed to the general economic slowdown, partially offset
by colder period-over-period
weather.
|
Operating
Income
Operating income at
the regulated electric utility segment increased $41.7 million
period-over-period, driven by the $50.4 million increase in electric
margin, partially offset by an $8.7 million increase in operating
expenses.
The increase in
operating expenses period-over-period was the result of:
·
|
A
$5.1 million increase in electric maintenance expenses, primarily
related to major planned outages at the generation plants during the six
months ended June 30, 2009, compared with fewer planned outages in
the same period in 2008.
|
·
|
A
$4.8 million increase in depreciation and amortization expense at
WPS, primarily related to Weston 4 being placed in service for
accounting purposes in the middle of April 2008.
|
|
|
·
|
A
$3.8 million increase in pension and other postretirement benefit
costs.
|
|
|
·
|
The increase
in operating expenses was partially offset by a $2.3 million decrease
in costs to achieve merger synergies related to Integrys Energy Group's
merger with PEC. The decrease is a result of the majority of
the integration work being completed in 2007 and
2008.
|
Other
Expense
Other expense at
the regulated electric utilities increased $5.3 million period-over-period,
driven by:
·
|
A
$3.7 million increase in interest expense, primarily related to
increased long-term borrowings at WPS at higher interest
rates. The additional borrowings were utilized to fund various
construction projects, most notably the Crane Creek wind generation
project under construction in Iowa.
|
|
|
·
|
A
$2.5 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.
|
|
|
·
|
The increase
in other expenses was partially offset by a $1.3 million increase in
AFUDC related to the Crane Creek wind generation
project.
|
Integrys Energy Services'
Operations
Integrys Energy
Services is a diversified nonregulated energy supply and services company
serving residential, commercial, industrial, and wholesale customers in
developed competitive markets in the United States and Canada.
Integrys Energy
Group is in the process of executing its previously announced strategy to divest
its nonregulated energy services operations or reduce the size of these
operations to one 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,
in order to preserve value while focusing on a successful divestiture of all or
portions of its business.
Integrys
Energy Services' Segment Results of Operations
|
|
Three
Months
Ended
|
|
|
%
|
|
|
Six
Months
Ended
|
|
|
%
|
|
(Millions,
except natural gas sales volumes)
|
|
June 30
|
|
|
Increase
|
|
|
June 30
|
|
|
Increase
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
812.5 |
|
|
$ |
2,600.6 |
|
|
|
(68.8 |
%) |
|
$ |
2,596.6 |
|
|
$ |
5,014.7 |
|
|
|
(48.2 |
%) |
Cost of fuel,
natural gas, and purchased power
|
|
|
708.0 |
|
|
|
2,544.1 |
|
|
|
(72.2 |
%) |
|
|
2,475.8 |
|
|
|
4,827.4 |
|
|
|
(48.7 |
%) |
Margins
|
|
|
104.5 |
|
|
|
56.5 |
|
|
|
85.0 |
% |
|
|
120.8 |
|
|
|
187.3 |
|
|
|
(35.5 |
%) |
Margin
Detail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric
and other margins
|
|
|
77.6 |
|
|
|
100.8 |
|
|
|
(23.0 |
%) |
|
|
54.5 |
|
|
|
227.9 |
|
|
|
(76.1 |
%) |
Natural
gas margins
|
|
|
26.9 |
|
|
|
(44.3 |
) |
|
|
N/A |
|
|
|
66.3 |
|
|
|
(40.6 |
) |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and
maintenance expense
|
|
|
58.9 |
|
|
|
41.2 |
|
|
|
43.0 |
% |
|
|
108.5 |
|
|
|
81.4 |
|
|
|
33.3 |
% |
Restructuring
expense
|
|
|
19.1 |
|
|
|
- |
|
|
|
N/A |
|
|
|
19.1 |
|
|
|
- |
|
|
|
N/A |
|
Depreciation
and amortization
|
|
|
4.7 |
|
|
|
3.5 |
|
|
|
34.3 |
% |
|
|
9.8 |
|
|
|
7.0 |
|
|
|
40.0 |
% |
Taxes other
than income taxes
|
|
|
1.3 |
|
|
|
1.4 |
|
|
|
(7.1 |
%) |
|
|
4.4 |
|
|
|
4.1 |
|
|
|
7.3 |
% |
Operating
income(loss)
|
|
|
20.5 |
|
|
|
10.4 |
|
|
|
97.1 |
% |
|
|
(21.0 |
) |
|
|
94.8 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
|
1.1 |
|
|
|
2.8 |
|
|
|
(60.7 |
%) |
|
|
2.0 |
|
|
|
3.0 |
|
|
|
(33.3 |
%) |
Interest
expense
|
|
|
(2.6 |
) |
|
|
0.1 |
|
|
|
N/A |
|
|
|
(5.7 |
) |
|
|
(2.7 |
) |
|
|
111.1 |
% |
Minority
interest
|
|
|
0.2 |
|
|
|
- |
|
|
|
N/A |
|
|
|
0.3 |
|
|
|
- |
|
|
|
N/A |
|
Other
expense
|
|
|
(1.3 |
) |
|
|
2.9 |
|
|
|
N/A |
|
|
|
(3.4 |
) |
|
|
0.3 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before taxes
|
|
$ |
19.2 |
|
|
$ |
13.3 |
|
|
|
44.4 |
% |
|
$ |
(24.4 |
) |
|
$ |
95.1 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
volumes (includes volumes both physically delivered and net
settled)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
electric sales volumes in kwh
|
|
|
52,461.4 |
|
|
|
41,125.2 |
|
|
|
27.6 |
% |
|
|
105,109.4 |
|
|
|
81,665.2 |
|
|
|
28.7 |
% |
Retail
electric sales volumes in kwh
|
|
|
3,787.4 |
|
|
|
4,066.0 |
|
|
|
(6.9 |
%) |
|
|
7,834.3 |
|
|
|
8,044.7 |
|
|
|
(2.6 |
%) |
Wholesale
natural gas sales volumes in bcf
|
|
|
106.6 |
|
|
|
148.6 |
|
|
|
(28.3 |
%) |
|
|
276.7 |
|
|
|
291.9 |
|
|
|
(5.2 |
%) |
Retail natural
gas sales volumes in bcf
|
|
|
55.4 |
|
|
|
73.8 |
|
|
|
(24.9 |
%) |
|
|
153.3 |
|
|
|
181.9 |
|
|
|
(15.7 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Physical
volumes (includes only transactions settled physically for the periods
shown) *
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
electric sales volumes in kwh
|
|
|
1,135.0 |
|
|
|
1,072.8 |
|
|
|
5.8 |
% |
|
|
2,170.9 |
|
|
|
2,120.5 |
|
|
|
2.4 |
% |
Retail
electric sales volumes in kwh
|
|
|
3,719.3 |
|
|
|
4,036.7 |
|
|
|
(7.9 |
%) |
|
|
7,716.6 |
|
|
|
7,989.4 |
|
|
|
(3.4 |
%) |
Wholesale
natural gas sales volumes in bcf
|
|
|
100.8 |
|
|
|
137.4 |
|
|
|
(26.6 |
%) |
|
|
261.7 |
|
|
|
265.5 |
|
|
|
(1.4 |
%) |
Retail natural
gas sales volumes in bcf
|
|
|
54.6 |
|
|
|
73.3 |
|
|
|
(25.5 |
%) |
|
|
151.9 |
|
|
|
180.9 |
|
|
|
(16.0 |
%) |
*
Represents gross physical volumes.
kwh
– kilowatt-hours
bcf
– billion cubic feet
Revenue
·
|
Revenues
decreased $1,788.1 million quarter-over-quarter and
$2,418.1 million for the six months ended June 30, 2009,
compared with the same period in 2008. These decreases were
driven by:
|
|
|
|
-
|
Lower energy
prices, as the average market price of natural gas and electricity
decreased approximately 60% and 53% quarter-over quarter,
respectively. For the six months ended June 30, 2009,
compared to the six months ended June 30, 2008, the average market
price of natural gas and electricity decreased 55% and 48%,
respectively.
|
|
|
|
|
-
|
Lower natural
gas volumes as Integrys Energy Services significantly decreased the volume
of short-term structured natural gas transactions in order to improve
liquidity in response to the tightening of financial markets in the latter
half of 2008 and the announced strategy to divest of Integrys Energy
Services’ operations.
|
Margins
Changes in
commodity prices subject a portion of the 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 includes 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. 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 increased $48.0 million in the second quarter of 2009,
compared with the second quarter of 2008, and decreased $66.5 million for
the six months ended June 30, 2009, compared with the six months ended
June 30, 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 the timing of
gain and loss recognition of certain transactions.
|
|
Increase
(Decrease) in Margin for
|
|
(Millions
except natural gas sales volumes)
|
|
Three
Months Ended June 30, 2009 Compared with Three Months Ended
June 30, 2008
|
|
|
Six
Months Ended June 30, 2009 Compared with Six Months Ended
June 30, 2008
|
|
|
|
|
|
|
|
|
Electric and other margins
|
|
|
|
|
|
|
Realized
gains on structured origination contracts
|
|
$ |
(0.8 |
) |
|
$ |
0.3 |
|
All
other realized wholesale electric margin
|
|
|
9.4 |
|
|
|
9.9 |
|
Realized
retail electric margin
|
|
|
15.4 |
|
|
|
21.7 |
|
|
|
|
|
|
|
|
|
|
Other
significant items:
|
|
|
|
|
|
|
|
|
Retail
and wholesale fair value adjustments *
|
|
|
(47.2 |
) |
|
|
(205.3 |
) |
Net decrease
in electric and other margins
|
|
|
(23.2 |
) |
|
|
(173.4 |
) |
|
|
|
|
|
|
|
|
|
Natural gas margins
|
|
|
|
|
|
|
|
|
Lower-of-cost-or-market
inventory adjustments
|
|
|
47.4 |
|
|
|
60.3 |
|
Other
realized natural gas margins
|
|
|
(35.0 |
) |
|
|
(5.4 |
) |
|
|
|
|
|
|
|
|
|
Other
significant items:
|
|
|
|
|
|
|
|
|
Spot
to forward differential
|
|
|
(0.2 |
) |
|
|
(4.3 |
) |
Other
fair value adjustments *
|
|
|
59.0 |
|
|
|
56.3 |
|
Net increase
in natural gas margins
|
|
|
71.2 |
|
|
|
106.9 |
|
|
|
|
|
|
|
|
|
|
Net
increase(decrease) in Integrys Energy Services' margin
|
|
$ |
48.0 |
|
|
$ |
(66.5 |
) |
|
*Combined, for
the six months ended June 30, 2008, these two line items included a
total of $11.5 million of gains resulting from the adoption of SFAS
No. 157 in the first quarter of
2008.
|
Second
Quarter 2009 Compared with Second Quarter 2008
Electric and Other
Margins
Integrys Energy
Services' electric and other margins decreased $23.2 million in the second
quarter 2009, compared with the second quarter 2008. The following
items were the most significant contributors to the change in Integrys Energy
Services' electric and other margins.
Realized gains on structured
origination contracts
Realized gains on
structured origination contracts decreased $0.8 million, from
$6.0 million in the second quarter 2008, to $5.2 million in the second
quarter 2009. Origination contracts are physical, customer-based
agreements with municipalities, merchant generators, cooperatives, and regulated
utilities. The decrease was due to Integrys Energy Services’ reducing
its participation in energy auctions in 2009, compared with
2008. Otherwise, Integrys Energy Services continued experiencing
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 second
quarter of 2009 continuing to benefit from the realization of margin associated
with the settlement of these contracts. Structured origination
activity was scaled back in conjunction with the global credit crisis in the
first half of 2009 and the announced Integrys Energy Services strategy
change. The reduced activity will negatively impact realized margin
in subsequent periods.
All other realized wholesale
electric margin
All other realized
wholesale electric margin increased $9.4 million, from $16.9 million
for quarter ended June 30, 2008, to $26.3 million for the quarter
ended June 30, 2009. In general, realized margins are impacted
by transaction activity in prior periods. Integrys Energy Services
recognizes realized margin when the contracts actually settle, which typically
occurs over a 12- to 24-month time period from the time the contract was
actually entered into. Wholesale transactions increased at the end of
2007 and the beginning of 2008, which drove the quarter-over-quarter increase in
realized wholesale electric margin. Wholesale transactions were
scaled back in conjunction with the global credit crisis in the latter half of
2008 and continue to be scaled back with the announced Integrys Energy Services
strategy change. The scaled back transaction activity 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 $15.4 million, from $7.4 million in the
second quarter 2008, to $22.8 million in the second quarter
2009. The increase was driven by:
●
|
A
$15.0 million increase in the more mature markets such as Illinois,
New England, and New York as Integrys Energy Services realized
the benefits of including higher capital costs in its
pricing.
|
|
|
●
|
A
$1.7 million increase in the Mid-Atlantic market. This is
a newer market for Integrys Energy Services and continues to realize
growth. Realized average per unit margins in this market were
also higher in 2009 compared to 2008, contributing to the
increase.
|
Retail and wholesale fair
value adjustments
Integrys Energy
Services' margin from retail and wholesale fair value adjustments decreased
$47.2 million, as it recognized $70.5 million of non-cash unrealized
gains related to derivative instruments in the second quarter of 2008, compared
with $23.3 million of non-cash unrealized gains during the same quarter in
2009.
The non-cash
unrealized gains 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 April 1, 2009 to June 30, 2009,
electric commodity prices declined approximately 6%, which led to the
recognition of additional non-cash unrealized losses in the second quarter of
2009 on these electric customer supply contracts. However, these
losses were more than offset by gains related to the reversal of previously
recognized unrealized losses as contracts were settled in the second quarter of
2009. From April 1, 2008 to June 30, 2008, electric
commodity prices increased approximately 23%, which led to the recognition of
large non-cash unrealized gains in the second quarter of 2008.
Natural Gas
Margins
Integrys Energy
Services' natural gas margins increased $71.2 million in the second quarter
of 2009, compared with the second quarter of 2008. The following
items were the most significant contributors to the change in Integrys Energy
Services' natural gas margins.
Lower-of-cost-or-market
inventory adjustments
The market price of
natural gas declined modestly in the second quarter of 2009, decreasing
approximately 1% from April 1, 2009 to June 30, 2009 and rose sharply for
the same period in 2008, driving a negative quarter-over-quarter change in
natural gas margin of $7.0 million related to lower-of-cost-or-market
adjustments. These lower-of-cost-or-market adjustments were required
to reflect natural gas in storage at June 30, 2009 at its net realizable
value, as required by GAAP. Quarter-over-quarter, the natural gas
withdrawn from storage and sold to customers had a $54.4 million lower cost
basis as a result of lower-of-cost-or-market adjustments recorded in prior
periods. The natural gas storage withdrawals (net of additional
lower-of-cost-or-market adjustments recorded during the quarter) drove a net
$47.4 million quarter-over-quarter increase in the non-cash natural gas
margin. At June 30, 2009, natural gas inventory had a lower cost
basis as a result of lower-of-cost-or-market adjustments recorded in prior
periods of $110.2 million.
Other realized natural gas
margins
Other realized
natural gas margins decreased $35.0 million, from $41.3 million in the
second quarter of 2008 to $6.3 million in the second quarter of
2009. The decrease was primarily due to Integrys Energy Services’
wholesale natural gas operations, evidenced by the approximate 28% decrease in
gross wholesale natural gas volumes quarter-over-quarter. Integrys
Energy Services significantly reduced the number of structured natural gas
transactions entered into in response to the global credit crisis in the latter
half of 2008 and Integrys Energy Group’s announced intent to divest of or
significantly reduce the operations of Integrys Energy
Services.
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 take place in
the summer months and 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 $0.2 million negative quarter-over-quarter impact on
natural gas margins. For the second quarter of 2009, the natural gas
storage cycle had no impact on margin, compared with a $0.2 million
positive impact on margin for the same period of 2008. At
June 30, 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 associated
with 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 second 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 (excluding lower-of-cost-or-market inventory adjustments)
drove a $59.0 million increase in the natural gas margins as unrealized
losses on these instruments were $25.4 million in the second quarter of
2009, compared with unrealized losses of $84.4 million during the same
period of 2008.
Operating
Income
Second quarter
operating income at Integrys Energy Services increased $10.1 million, from
$10.4 million in 2008 to $20.5 million in 2009. This
increase resulted from the $48.0 million quarter-over-quarter increase in
margin discussed above, partially offset by $19.1 million of restructuring
expenses which included anticipated employee related costs, the write-off of
capitalized development costs related to software that will not be utilized
because of the restructuring, and consulting and legal costs recognized in the
second quarter of 2009, as well as a $17.7 million increase in operating
and maintenance expense. Operating and maintenance expense increased
from $41.2 million in the second quarter of 2008, to $58.9 million in
the second quarter of 2009, driven by:
·
|
A one-time
$9.0 million novation fee related to an agreement with a counterparty
that enabled Integrys Energy Services to consolidate certain wholesale
financial and physical contracts that were previously entered into with
multiple counterparties, allowing Integrys Energy Services to conserve
capital through reduced collateral
requirements.
|
·
|
A
$4.6 million increase in bad debt expense resulting primarily from
the current general poor economic environment and several small customer
bankruptcies.
|
·
|
A
$1.7 million loss recorded on the sale and leaseback of a solar
equipment project in the second quarter of 2009. Integrys Energy
Services realized offsetting gains on the sale and leaseback of other
solar equipment projects that in accordance with GAAP were deferred
and will be recognized in income over the 10-year life of the related
leases.
|
See Note 4, "Integrys Energy Services
Restructuring," for a discussion of restructuring charges.
Six
Months 2009 Compared with Six Months 2008
Electric and Other
Margins
Integrys Energy
Services' electric and other margins decreased $173.4 million during the
six months ended June 30, 2009, compared with the same period in
2008. The following items were the most significant contributors to
the change in Integrys Energy Services' electric and other margins.
Realized gains on structured
origination contracts
Realized gains on
structured origination contracts increased $0.3 million, from
$11.5 million for the six months ended June 30, 2008, to
$11.8 million in the six months ended June 30, 2009. The
increase was due to Integrys Energy Services’ continued 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 six months of 2009 continuing to
benefit from the realization of margin associated with the settlement of these
contracts. Structured origination activity was scaled back in
conjunction with the global credit crisis in the first half of 2009 and the
announced Integrys Energy Services strategy change. The reduced
activity will negatively impact realized margin in subsequent
periods. These increases were partially offset as Integrys Energy
Services reduced its participation in energy auctions in 2009, compared with
2008.
All other realized wholesale
electric margin
All other wholesale
electric margin increased $9.9 million, from $22.2 million for six
months ended June 30, 2008, to $32.1 million for the six months ended
June 30, 2009. In general, realized margins are impacted by
transaction activity in prior periods. Integrys Energy Services
recognizes realized margin when the contracts actually settle, which typically
occurs over a 12- to 24- month time period from the time the contract was
actually entered into. Wholesale transactions increased at the end of
2007 and the beginning of 2008, which drove the period-over-period increase in
realized wholesale electric margin. Wholesale transactions were
scaled back in conjunction with the global credit crisis in the latter half of
2008 and continue to be scaled back with the announced Integrys Energy Services
strategy change. The scaled back transaction activity will negatively
impact realized margin in subsequent periods.
Realized retail electric
margin
The realized retail
electric margin increased $21.7 million, from $24.7 million during the
six months ended June 30, 2008, to $46.4 million during the six months
ended June 30, 2009. The increase was driven by:
●
|
An
$18.3 million increase in the more mature markets such as Illinois,
New England, and New York as Integrys Energy Services realized
the benefits of including higher capital costs in its
pricing.
|
|
|
●
|
A
$2.3 million increase in the Mid-Atlantic market. This is
a newer market for Integrys Energy Services and continues to realize
volume growth. Realized average per unit margins in this market
were also higher in 2009 compared to 2008, contributing to the
increase.
|
●
|
A
$2.8 million increase 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 market. 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. Ancillary costs have decreased in the six
months ended June 30, 2009, compared with the same period in 2008,
and Integrys Energy Services has priced appropriate premiums related to
ancillary costs into these new or renewed
contracts.
|
Retail and wholesale fair
value adjustments
Integrys Energy
Services' margin from retail and wholesale derivative accounting required fair
value adjustments decreased $205.3 million, as it recorded
$35.8 million of non-cash unrealized losses related to derivative
instruments during the six months ended June 30, 2009, compared with
$169.5 million of non-cash unrealized gains during the same period in
2008.
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
June 30, 2009, electric commodity prices declined approximately 21%, which
led to the recognition of additional non-cash unrealized losses in the six
months ended June 30, 2009 on these electric customer supply
contracts. These unrealized losses were partially offset by realized
gains related to the reversal of previously recognized unrealized losses as
contracts were settled in the second quarter of 2009. From January 1,
2008 to June 30, 2008, electric commodity prices increased approximately
49%, which led to the recognition of large non-cash unrealized gains during the
six months ended June 30, 2008.
Natural Gas
Margins
Integrys Energy
Services' natural gas margins increased $106.9 million during the six
months ended June 30, 2009, compared with the same period of
2008. The following items were the most significant contributors to
the change in Integrys Energy Services' natural gas margins.
Lower-of-cost-or-market
inventory adjustments
The market price of
natural gas declined during the six months ended June 30, 2009, decreasing
approximately 17% from December 31, 2008, to June 30, 2009, and rose
sharply for the same period in 2008, driving a period-over-period increase of
$42.7 million of lower-of-cost-or-market adjustments. These
lower-of-cost-or-market adjustments were required to reflect natural gas in
storage at June 30, 2009 at its net realizable value, as required by
GAAP. Period-over-period, the natural gas withdrawn from storage and
sold to customers had a $103.0 million lower cost basis as a result of
lower-of-cost-or-market adjustments recorded in prior periods. The
natural gas storage withdrawals (net of additional lower-of-cost-or-market
adjustments recorded during the period) drove a net $60.3 million
period-over-period increase in the non-cash natural gas margin.
Other realized natural gas
margins
Other realized
natural gas margins decreased $5.4 million, from $77.9 million for the
six months ended June 30, 2008, to $72.5 million for the six months
ended June 30, 2009. The decrease was primarily due to Integrys
Energy Services’ wholesale natural gas operations, evidenced by the decrease in
wholesale natural gas volumes period-over-period. Integrys Energy
Services significantly reduced the number of structured natural gas transactions
entered into in response to Integrys Energy Group’s announced intent to divest
or reduce the operations of Integrys Energy Services. Partially
offsetting the decrease, Integrys Energy Services withdrew a significant amount
of natural gas during the six months ended June 30, 2009 in order to
improve its liquidity position, recognizing realized gains on these natural gas
storage withdrawals. Also, per-unit retail natural gas margins were
higher period-over-period as Integrys Energy Services restructured many of its
natural gas sales contracts at the end of 2008 in order to reflect increased
business risk and financing costs.
Spot to forward
differential
The natural gas
storage cycle had a $4.3 million negative impact on natural gas margins for
the six months ended June 30, 2009, compared with the same period in
2008. For the six months ended June 30, 2009, the natural gas
storage cycle had no material impact on margin, compared with a
$4.3 million positive impact on margin for the same period in
2008.
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 associated
with 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 2009), the transportation contracts, or the customer sales contracts
until physical settlement of these contracts occurs.
The impact of the
fair value adjustments (excluding lower-of-cost-or-market inventory adjustments)
drove a $56.3 million increase in the natural gas margins as unrealized
losses on these instruments were $71.2 million for the six months ended
June 30, 2009, compared with unrealized losses of $127.5 million for
the same period in 2008.
Operating Income
(Loss)
Integrys Energy
Services' operating income for the six months ended June 30, 2009 decreased
$115.8 million, from $94.8 million of operating income in 2008 to a
$21.0 million operating loss in 2009. This decrease resulted
from the $66.5 million decrease in margin discussed above,
$19.1 million related to restructuring expenses, which included anticipated
employee related costs, the write-off of capitalized development costs related
to software that will not be utilized because of the restructuring, and
consulting and legal costs recognized in the second quarter of 2009, as well as
a $27.1 million increase in operating and maintenance
expenses. Operating and maintenance expense increased from
$81.4 million during the six months ended June 30, 2008, to
$108.5 million during the six months ended June 30,
2009. The increase in operating and maintenance expense was driven
by:
·
|
A one-time
$9.0 million novation fee related to an agreement with a counterparty
that enabled Integrys Energy Services to consolidate certain wholesale
financial and physical contracts that were previously entered into with
multiple counterparties, allowing Integrys Energy Services to reduce
collateral support requirements.
|
|
|
·
|
A
$7.6 million increase in bad debt expense related to the current
general poor economic environment and several small customer
bankruptcies.
|
A
$1.7 million loss recorded on the sale and leaseback of a solar equipment
project in the second quarter of 2009. Integrys Energy Services realized
offsetting gains on the sale and leaseback of other solar equipment projects
that in accordance with GAAP were deferred and will be recognized in income
over the 10-year life of the related leases.
·
|
The remaining
increase in operating and maintenance expense was primarily related to
higher salaries and benefit
expenses.
|
See Note 4, "Integrys Energy Services
Restructuring," for a discussion of restructuring charges.
Holding Company and Other
Segment Operations
|
|
Three
Months Ended
|
|
|
%
|
|
|
Six
Months Ended
|
|
|
%
|
|
|
|
June 30
|
|
|
Increase
|
|
|
June 30
|
|
|
Increase
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$ |
1.8 |
|
|
$ |
1.3 |
|
|
|
38.5 |
% |
|
$ |
3.1 |
|
|
$ |
3.0 |
|
|
|
3.3 |
% |
Other
income
|
|
|
3.3 |
|
|
|
3.4 |
|
|
|
(2.9 |
)% |
|
|
5.9 |
|
|
|
5.5 |
|
|
|
7.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before
taxes
|
|
$ |
5.1 |
|
|
$ |
4.7 |
|
|
|
8.5 |
% |
|
$ |
9.0 |
|
|
$ |
8.5 |
|
|
|
5.9 |
% |
Second
Quarter 2009 Compared with Second Quarter 2008
Other
Income
Other income at the
Holding company and other segment decreased $0.1 million during the quarter
ended June 30, 2009, compared with the same quarter in 2008. The
decrease was driven by:
·
|
An increase
in interest expense of $3.7 million due to an increase in
amortization of deferred financing fees related to new credit facilities
entered into in the fourth quarter of 2008 in addition to an increase in
average short-term borrowings. The higher average short-term
borrowings were a result of carrying higher cash balances early in the
second quarter of 2009 in response to decreased availability of
credit related to general economic conditions and were used to fund
capital requirements for the regulated utilities and
IBS.
|
|
|
|
·
|
A
$1.7 million increase in legal and settlement expenses related to
resolution of a lawsuit.
|
|
|
·
|
These
decreases in other income were partially offset by:
|
|
|
|
-
|
A
$2.5 million increase in income from Integrys Energy Group's
approximate 34% ownership interest in ATC. Integrys Energy
Group recorded $18.4 million of pre-tax equity earnings from ATC
during the second quarter of 2009, compared with $15.9 million of
pre-tax equity earnings during the same quarter in
2008.
|
|
|
|
-
|
A
$1.9 million increase in miscellaneous income as a result of
increased revolving credit fees and intercompany interest charges passed
through to those subsidiaries which have outstanding borrowings with
Integrys Energy Group's holding
company.
|
Six
Months 2009 Compared with Six Months 2008
Other
Income
Other income at the
Holding company and other segment increased $0.4 million during the six
months ended June 30, 2009, compared with the same period in
2008. The increase was driven by:
·
|
A
$5.8 million increase in income from Integrys Energy Group's
approximate 34% ownership interest in ATC. Integrys Energy
Group recorded $36.4 million of pre-tax equity earnings from ATC
during the six months ended June 30, 2009, compared with
$30.6 million of pre-tax equity earnings during the same period in
2008.
|
|
|
·
|
A
$4.4 million increase in miscellaneous income as a result of
increased revolving credit fees and intercompany interest charges passed
through to those subsidiaries which have outstanding borrowings with
Integrys Energy Group's holding company.
|
|
|
·
|
A
$1.9 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 $9.7 million due to an increase in
amortization of deferred financing fees related to new credit facilities
entered into in the fourth quarter of 2008 in addition to an increase in
average short-term borrowings. The higher average short-term
borrowings were a result of carrying higher cash balances through the
early part of the second quarter of 2009 in response to decreased
availability of credit related to general economic conditions and were
used to fund capital requirements at the regulated utilities and
IBS.
|
|
|
|
-
|
A
$3.0 million increase in legal and settlement expenses related to
resolution of a lawsuit.
|
Provision for Income
Taxes
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30
|
|
|
June 30
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Tax
Rate
|
|
|
34.5 |
% |
|
|
41.4 |
% |
|
|
(27.7 |
%) |
|
|
37.2 |
% |
Second
Quarter 2009 Compared with Second Quarter 2008
The lower effective
tax rate for the second quarter of 2009, compared with the same quarter in 2008,
was a result of a $6.5 million non-deductible pre-tax goodwill impairment loss
in the second quarter of 2008.
Six
Months 2009 Compared with Six Months 2008
The change in the
effective tax rate period-over-period 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
$112.9 million loss before income taxes for the six months ended
June 30, 2009, it still recorded a $31.3 million provision for income
taxes because $186.2 million of the total pre-tax goodwill impairment loss
was not deductible for income tax purposes.
LIQUIDITY
AND CAPITAL RESOURCES
Integrys Energy
Group believes that its cash balances, liquid assets, operating cash flows,
access to equity and debt 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. Integrys Energy Group’s borrowing costs can be
impacted by short-term and long-term debt ratings assigned by independent credit
rating agencies. Integrys Energy Group’s operating cash flows and
access to capital markets can be impacted by macroeconomic factors outside of
its 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. None of these borrowings were outstanding at June 30,
2009.
Operating
Cash Flows
During the six
months ended June 30, 2009, net cash provided by operating activities was
$1,248.5 million, compared with $435.4 million for the same
period in 2008. The $813.1 million period-over-period increase
was mainly driven by a $659.6 million increase in cash, related to lower working
capital requirements, primarily due to an $820.1 million decrease in accounts
receivables and accrued unbilled revenues during the six months ended June 30,
2009, compared with a $78.9 million increase during the same period in
2008. This difference was driven by lower revenues during the second
quarter of 2009 compared with the second quarter of 2008, primarily the result
of lower natural gas prices. Also contributing to the decrease in
working capital requirements was a $477.5 million decrease in inventories,
including the impact of the temporary LIFO liquidation credit, during the six
months ended June 30, 2009, compared with a $195.5 million increase during the
same period in 2008. This difference was also driven by lower
period-over-period natural gas prices. Partially
offsetting this change was a $532.6 million decrease in accounts payable during
the six months ended June 30, 2009, compared with a $475.7 million increase over
the same period in 2008, also primarily the result of lower natural gas
prices.
Investing
Cash Flows
Net cash used for
investing activities was $188.5 million during the six months ended
June 30, 2009, compared with $131.9 million for the same
period in 2008. The $56.6 million period-over-period increase in
cash used for investing activities was primarily driven by the
period-over-period impact of the reimbursement of $99.7 million from ATC in
2008 related to the construction of the transmission facilities required to
support Weston 4, partially offset by payments of $17.4 million in 2008
related to the construction of these transmission facilities. Also
partially offsetting the increase in cash used for investing activities were
proceeds of $13.2 million from the sale and leaseback of certain solar
generation projects at Integrys Energy Services in the second quarter of
2009.
Capital
Expenditures
Capital
expenditures by business segment for the six months ended June 30
were:
Reportable
Segment (millions)
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
Electric
utility
|
|
$ |
92.9 |
|
|
$ |
75.2 |
|
|
$ |
17.7 |
|
Natural gas
utility
|
|
|
61.9 |
|
|
|
105.6 |
|
|
|
(43.7 |
) |
Integrys
Energy Services
|
|
|
15.8 |
|
|
|
9.8 |
|
|
|
6.0 |
|
Holding
company and other
|
|
|
17.0 |
|
|
|
7.9 |
|
|
|
9.1 |
|
Integrys
Energy Group consolidated
|
|
$ |
187.6 |
|
|
$ |
198.5 |
|
|
$ |
(10.9 |
) |
The increase in
capital expenditures at the electric utility segment for the six months ended
June 30, 2009, compared with the same period in 2008, was mainly due to
increased costs related to wind generation projects, partially offset by the
period-over-period impact of capital expenditures associated with Weston 4 in
2008. The decrease in capital expenditures at the natural gas utility
segment for the six months ended June 30, 2009, compared with the same period in
2008, was mainly due to a decrease in costs related to the construction of
natural gas laterals that connect WPS's natural gas distribution system to the
Guardian II natural gas pipeline.
Financing
Cash Flows
Net cash used for
financing activities was $1,107.7 million during the six months ended
June 30, 2009, compared with $298.7 million for the same period in
2008. The $809.0 million period-over-period increase in cash
used for financing activities was driven by an $874.3 million increase in
repayments of short-term debt borrowings, made possible by the increase in net
cash provided by operating activities and the issuance of $155.0 of long-term
debt at Integrys Energy Group in June 2009.
Significant
Financing Activities
Dividends paid
increased in 2009 compared with 2008. The quarterly common stock
dividend was increased, in February 2009, to 68 cents per share from 67 cents
per share.
Integrys Energy
Group had outstanding commercial paper borrowings of $103.7 million and
$105.9 million at June 30, 2009, and 2008,
respectively. Integrys Energy Group had short-term notes payable
outstanding of $10.0 million and $154.6 million at June 30, 2009,
and 2008, respectively. Integrys Energy Group did not have borrowings
under revolving credit facilities at June 30, 2009, and
2008. See Note 9, "Short-Term Debt and Lines of
Credit," for more information.
In
June 2009, Integrys Energy Group issued $100.0 million of 7.27%,
5-year Senior Notes due June 1, 2014 and $55.0 million of 8.0%, 7-year
Senior Notes due June 1, 2016. The net proceeds from the
issuance of the Senior Notes were used to refinance existing short-term debt and
for general corporate purposes. The Senior Notes were sold in a
private placement and are not registered under the Securities Act of
1933.
In
June 2009, Integrys Energy Group entered into a $35.0 million
revolving credit agreement that extends to June 2010 to finance its working
capital requirements and for general corporate purposes.
In
May 2009, Integrys Energy Group entered into a $425.0 million revolving
credit agreement that extends to May 2010 to finance its working capital
requirements and for general corporate purposes.
In
April 2008, PGL completed the purchase of $51.0 million of Illinois
Development Finance Authority Series 2003D Bonds,
due October 1, 2037, and backed by PGL Series PP bonds. Upon
repurchase, the Auction Rate Mode was converted from a 35-day mode to a weekly
mode. This transaction was treated as a repurchase of the Series PP
bonds by PGL. As a result, the liability related to the Series PP
bonds was extinguished. PGL intends to hold the bonds while it
continues to monitor the tax-exempt market and assess potential remarketing or
refinancing opportunities.
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
Baa1
P-2
Baa1
Baa2
|
WPS
Issuer
credit rating
First
mortgage bonds
Senior secured debt
Preferred stock
Commercial paper
Credit facility
|
A-
N/A
A
BBB
A-2
N/A
|
A2
A1
A1
Baa1
P-1
A2
|
PEC
Issuer credit rating
Senior
unsecured debt
|
BBB+
BBB
|
N/A
Baa1
|
PGL
Issuer
credit rating
Senior secured debt
Commercial paper
|
BBB+
A-
A-2
|
A3
A2
P-2
|
NSG
Issuer
credit rating
Senior
secured debt
|
BBB+
A
|
A3
A2
|
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
June 9, 2009, Moody’s assigned an "A3" issuer credit rating to PGL and NSG,
and lowered the following ratings of Integrys Energy Group and its
subsidiaries:
·
|
The senior
unsecured debt ratings of Integrys Energy Group and PEC were lowered from
"A3" to "Baa1."
|
·
|
The credit
facility rating of Integrys Energy Group was lowered from "A3" to
"Baa1."
|
·
|
The junior
subordinated notes rating of Integrys Energy Group was lowered from "Baa1"
to "Baa2."
|
·
|
The issuer
credit rating of WPS was lowered from "A1" to
"A2."
|
·
|
The senior
secured debt rating and first mortgage bonds rating of WPS were lowered
from "Aa3" to "A1."
|
·
|
The senior
secured debt ratings of PGL and NSG were lowered from "A1" to
"A2."
|
·
|
The preferred
stock rating of WPS was lowered from "A3" to
"Baa1."
|
·
|
The credit
facility rating of WPS was lowered from "A1" to
"A2."
|
·
|
The
commercial paper rating of PGL was lowered from "P-1" to
"P-2."
|
According to
Moody’s, the downgrade considers management’s decision to divest of its
nonregulated energy marketing business, and reflects the expected improvements
in Integrys Energy Group’s business risk and liquidity profiles after the
divestiture, as well as the expected challenge of replacing the earnings
generated by this nonregulated segment. Also according to Moody’s,
the downgrade reflects management’s decision to leave its dividend policy
unchanged despite expected near-term reduction in earnings and internal cash
flow generation.
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 ratings of Integrys Energy Group and PEC were lowered from
"BBB+" to "BBB."
|
·
|
The junior
subordinated notes 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 June 30, 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)
|
|
$ |
3,699.7 |
|
|
$ |
225.5 |
|
|
$ |
836.1 |
|
|
$ |
746.9 |
|
|
$ |
1,891.2 |
|
Operating
lease obligations
|
|
|
59.2 |
|
|
|
8.1 |
|
|
|
21.7 |
|
|
|
17.0 |
|
|
|
12.4 |
|
Commodity
purchase obligations (2)
|
|
|
7,964.4 |
|
|
|
1,989.0 |
|
|
|
3,950.6 |
|
|
|
1,018.0 |
|
|
|
1,006.8 |
|
Purchase
orders (3)
|
|
|
571.4 |
|
|
|
568.9 |
|
|
|
2.3 |
|
|
|
0.2 |
|
|
|
- |
|
Capital
contributions to equity method investment (4)
|
|
|
18.7 |
|
|
|
18.7 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Pension and
other postretirement
funding
obligations (5)
|
|
|
645.3 |
|
|
|
48.8 |
|
|
|
204.2 |
|
|
|
204.9 |
|
|
|
187.4 |
|
Total
contractual cash obligations
|
|
$ |
12,958.7 |
|
|
$ |
2,859.0 |
|
|
$ |
5,014.9 |
|
|
$ |
1,987.0 |
|
|
$ |
3,097.8 |
|
(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)
|
Currently no
amounts are committed beyond 2009; however, capital contributions are
likely in future years.
|
(5)
|
Obligations
for certain pension and other postretirement benefits plans cannot
reasonably be estimated beyond
2011.
|
The table above
does not reflect any payments related to the manufactured gas plant remediation
liability of $655.8 million at June 30, 2009, as the amount and timing
of payments are uncertain. See Note 13,"Commitments and
Contingencies," for more information about environmental
liabilities. In addition, the table does not reflect any payments for
the June 30, 2009, liability related to uncertain tax positions, as the
amount and timing of payments are uncertain. See Note 12, "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
|
|
$ |
181.5 |
|
Electric
and natural gas distribution projects
|
|
|
117.6 |
|
Environmental
projects
|
|
|
94.7 |
|
Other
projects
|
|
|
162.0 |
|
|
|
|
|
|
UPPCO
|
|
|
|
|
Repairs
and safety measures at hydroelectric facilities
|
|
|
43.8 |
|
Electric
distribution and other projects
|
|
|
40.9 |
|
|
|
|
|
|
MGU
|
|
|
|
|
Natural
gas pipe distribution system and underground natural gas storage
facilities
and
other projects
|
|
|
26.2 |
|
|
|
|
|
|
MERC
|
|
|
|
|
Natural
gas pipe distribution system and other projects
|
|
|
44.0 |
|
|
|
|
|
|
PGL
|
|
|
|
|
Natural
gas pipe distribution system, underground natural gas storage facilities,
and other projects (1)
|
|
|
380.3 |
|
|
|
|
|
|
NSG
|
|
|
|
|
Natural
gas pipe distribution system and other projects
|
|
|
49.4 |
|
|
|
|
|
|
Integrys
Energy Services (2)
|
|
|
|
|
Landfill
methane gas project and other projects
|
|
|
21.5 |
|
|
|
|
|
|
IBS
|
|
|
|
|
Corporate
services infrastructure projects
|
|
|
83.2 |
|
Total capital
expenditures
|
|
$ |
1,245.1 |
|
(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 21, "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 $34 million in 2009 and approximately
$5 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 June 30, 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.
See Note 9, "Short-Term Debt and Lines of
Credit," for more information on Integrys Energy Group’s credit
facilities and other short-term credit agreements, including short-term debt
covenants. See Note 10, "Long-Term Debt," for more
information on Integrys Energy Group’s long-term debt covenants.
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 "Other Future Considerations"
for additional information.
In
March 2009, Integrys Energy Group filed a 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. None
of these borrowings were
outstanding at June 30, 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. Integrys Energy
Services executed a novation agreement with a large financial institution
whereby a number of physical and financial contracts were consolidated with a
single counterparty in order to
achieve the netting
of collateral and credit support requirements. This novation had the
effect of reducing the current requirements of these contracts as well as any
fluctuations going forward. At the end of June, the natural gas storage
cycle at both the regulated natural gas utilities and Integrys Energy Services,
and other operating activities, resulted in the generation of positive cash
flow. This activity, combined with the issuance of $155.0 million of
long-term debt, resulted in an approximate $1.1 billion reduction in
consolidated short-term debt outstanding during the first six months of 2009,
with an approximate $50 million reduction in cash available to Integrys
Energy Group.
Management believes
that these efforts have reduced Integrys Energy Group’s 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 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 Integrys
Energy Services Business Segment
Integrys Energy
Group has made a decision to pursue divestiture of its nonregulated energy
services business segment. 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 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.
On
July 17, 2009, a subsidiary of Integrys Energy Services signed an agreement to
sell nearly all of its Canadian natural gas and electric power contract
portfolio. The transaction requires certain contractual consents and
necessary regulatory approvals and is expected to close in the third quarter of
2009. Upon close, the transaction is expected to result in an
estimated $300 million reduction of Integrys Energy Group’s collateral
support requirements. See Note 4, "Integrys Energy Services
Restructuring," for more information.
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. Through the restructuring process, Integrys Energy Group is
committed to substantially reducing credit and collateral support requirements
by the end of 2010 to an insignificant level.
Subsequent to
completion of any such divestiture, Integrys 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.
Customer
Usage
Due to the general
economic slowdown and the increased focus on energy efficiency, sales volumes
excluding the impact of weather have been decreasing at the
utilities. In certain jurisdictions, decoupling mechanisms have been
implemented, which allow utilities to adjust rates going forward to recover or
refund all or a portion of the differences between the actual and authorized
margin per customer impact of variations in volumes. The mechanisms
do not adjust for changes in volume resulting from changes in
customer
count. 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. The PSCW approved the implementation of
decoupling on a four-year trial basis, effective January 1, 2009, for WPS’s
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. The $14.0 million cap for electric service was reached in
the second quarter of 2009. Therefore, no additional decoupling
deferral can be recorded for electric service if there are any additional
shortfalls from authorized margin for the remainder of the year. In
the UPPCO and MGU rate cases filed in June 2009, both companies requested
decoupling. 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 21, "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 could
negatively impact Integrys Energy Group's results of operations and could result
in higher working capital requirements.
In
July 2009, Illinois Senate Bill (SB) 1918 was signed into law. SB 1918 contains
a provision that allows PGL and NSG to file a rider to recover (or refund) the
incremental difference between the uncollectible expense approved in the last
rate case and the actual uncollectible expense per the income
statement. This rider will be retroactive to 2008, and is expected to
mitigate the impacts of PGL’s and NSG’s uncollectible accounts on Integrys
Energy Group’s financial condition, results of operations, and cash flows from
operations.
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 8,
"Goodwill and Other Intangible
Assets," for information on goodwill balances for Integrys Energy Group's
reporting units at June 30, 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. Other provisions of ARRA
provide Integrys Energy Group with elections to select among 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 evaluating the other alternatives
mentioned. Integrys Energy Group is also investigating the
possibility of obtaining funds under ARRA to be used for smart grid related
projects within WPS’s and UPPCO’s service territories in the areas of automatic
metering infrastructure, distribution management, and Meter Data
Management.
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 12, "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 six months ended June 30, 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)
|
|
|
192.5 |
|
|
|
(93.3 |
) |
|
|
99.2 |
|
Plus: Changes
in fair value of contracts in existence at June 30, 2009 (3)
|
|
|
91.7 |
|
|
|
(165.5 |
) |
|
|
(73.8 |
) |
Fair
value of contracts at June 30, 2009 (1)
|
|
$ |
193.2 |
|
|
$ |
(207.6 |
) |
|
$ |
(14.4 |
) |
(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
June 30, 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
June 30, 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 assets and liabilities related to Integrys Energy Services’ risk
management instruments.
Integrys
Energy Services
|
|
|
|
|
|
|
|
|
|
Risk
Management Assets and Liabilities
|
|
|
|
|
|
|
|
(Millions)
|
|
June 30,
2009
|
|
|
December 31,
2008
|
|
|
Change
|
|
Current risk
management assets
|
|
$ |
2,831.6 |
|
|
$ |
2,190.2 |
|
|
|
29.3 |
% |
Long-term
risk management assets
|
|
|
1,222.6 |
|
|
|
755.8 |
|
|
|
61.8 |
% |
Total
risk management assets
|
|
$ |
4,054.2 |
|
|
$ |
2,946.0 |
|
|
|
37.6 |
% |
Current risk
management liabilities
|
|
$ |
2,849.4 |
|
|
$ |
2,037.4 |
|
|
|
39.9 |
% |
Long-term
risk management liabilities
|
|
|
1,219.2 |
|
|
|
750.0 |
|
|
|
62.6 |
% |
Total
risk management liabilities
|
|
$ |
4,068.6 |
|
|
$ |
2,787.4 |
|
|
|
46.0 |
% |
The increase in
risk management assets and liabilities from December 31, 2008, to June 30, 2009,
is primarily due to a 17% decrease in the average market price of natural gas
and a 21% decrease in the average market price of electricity during the period
from December 31, 2008 to June 30, 2009.
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 19, "Fair Value."
Integrys
Energy Services
Risk
Management Contract Aging at Fair Value
As
of June 30, 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
|
|
$ |
(122.5 |
) |
|
$ |
(32.5 |
) |
|
$ |
(0.8 |
) |
|
$ |
- |
|
|
$ |
(155.8 |
) |
Level
2
|
|
|
176.9 |
|
|
|
6.6 |
|
|
|
5.9 |
|
|
|
3.6 |
|
|
|
193.0 |
|
Level
3
|
|
|
(76.9 |
) |
|
|
25.3 |
|
|
|
(0.8 |
) |
|
|
0.8 |
|
|
|
(51.6 |
) |
Total
fair value
|
|
$ |
(22.5 |
) |
|
$ |
(0.6 |
) |
|
$ |
4.3 |
|
|
$ |
4.4 |
|
|
$ |
(14.4 |
) |
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.
Item 3. Quantitative and Qualitative
Disclosures About Market Risk
Integrys Energy
Group has potential market risk exposure related to commodity price risk
(including regulatory recovery risk), interest rate risk, equity return risk,
and principal preservation risk. Integrys Energy Group has risk
management policies in place to monitor and assist in controlling these market
risks and may use derivative and other instruments to manage some of these
exposures.
Interest
Rate Risk
Integrys Energy
Group is exposed to interest rate risk resulting from its variable rate
long-term debt and short-term borrowings. Exposure to interest rate
risk is managed by limiting the amount of variable rate obligations and
continually monitoring the effects of market changes on interest
rates. Integrys Energy Group enters into long-term fixed rate debt
when it is advantageous to do so. Integrys Energy Group may also
enter into derivative financial instruments, such as swaps, to mitigate interest
rate exposure.
Due to decreases in
short-term borrowings in the last year, Integrys Energy Group has decreased its
exposure to variable interest rates. Based on the variable rate debt
of Integrys Energy Group outstanding at June 30, 2009, a hypothetical increase
in market interest rates of 100 basis points would have increased annual
interest expense by $2.4 million. Comparatively, based on the
variable rate debt outstanding at June 30, 2008, an increase in interest rates
of 100 basis points would have increased interest expense by $3.9
million. This sensitivity analysis was performed assuming a constant
level of variable rate debt during the period and an immediate increase in
interest rates, with no other changes for the remainder of the
period.
Commodity
Price Risk
To
measure commodity price risk exposure, Integrys Energy Group employs a number of
controls and processes, including a value-at-risk (VaR) analysis of certain of
its exposures. Integrys Energy Services' VaR is calculated using
non-discounted positions with a delta-normal approximation based on a one-day
holding period and a 95% confidence level, as well as a ten-day holding period
and 99% confidence level. For further explanation of Integrys Energy
Group's VaR calculation, see the 2008 Annual Report on Form 10-K.
The VaR for
Integrys Energy Services' trading portfolio at a 95% confidence level with a
one-day holding period is presented in the following table:
(Millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
As of June
30
|
|
$ |
1.0 |
|
|
$ |
2.2 |
|
Average for
12 months ended June 30
|
|
|
1.1 |
|
|
|
1.3 |
|
High for 12
months ended June 30
|
|
|
1.3 |
|
|
|
2.2 |
|
Low for 12
months ended June 30
|
|
|
1.0 |
|
|
|
0.9 |
|
The VaR for
Integrys Energy Services' trading portfolio at a 99% confidence level with a
ten-day holding period is presented below:
(Millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
As of June
30
|
|
$ |
4.3 |
|
|
$ |
10.0 |
|
Average for
12 months ended June 30
|
|
|
4.9 |
|
|
|
6.0 |
|
High for 12
months ended June 30
|
|
|
5.6 |
|
|
|
10.0 |
|
Low for 12
months ended June 30
|
|
|
4.3 |
|
|
|
4.2 |
|
The average, high,
and low amounts were computed using the VaR amounts at each of the four quarter
ends.
Other than the
above-mentioned changes, Integrys Energy Group's market risks have not changed
materially from the market risks reported in the 2008 Annual Report on Form
10-K.
Item 4. Controls and
Procedures
Evaluation
of Disclosure Controls and Procedures
Integrys Energy
Group's management, with the participation of Integrys Energy Group's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the design and operation of Integrys Energy Group's disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of
the period covered by this report and has concluded that, as of the end of such
period, Integrys Energy Group's disclosure controls and procedures were
effective to ensure that information required to be disclosed by Integrys Energy
Group in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized, and reported within the time periods specified
in the SEC’s rules and forms and is accumulated and communicated to Integrys
Energy Group's management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
Changes
in Internal Control
There were no
changes in Integrys Energy Group's internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the quarter ended June 30, 2009, that have materially affected,
or are reasonably likely to materially affect, its internal control over
financial reporting.
Item
1. Legal Proceedings
For information on
material legal proceedings and matters related to Integrys Energy Group and its
subsidiaries, see Note 13, "Commitments and
Contingencies."
Item
1A. Risk Factors
There were no
material changes in the risk factors previously disclosed in Part I, Item 1A of
the 2008 Annual Report on Form 10-K for Integrys Energy Group filed on February
25, 2009.
Item
4. Submission of Matters to a Vote of Security
Holders
At
the May 13, 2009 Integrys Energy Group Annual Meeting of Shareholders, Mr. Keith
E. Bailey, Ms. Kathryn M. Hasselblad-Pascale, Mr. John W. Higgins, Mr.
James L. Kemerling, and Mr. Charles A. Schrock were
elected to one-year terms on the Board of
Directors. The vote was:
|
|
Class
C Directors - Term Expiring in 2010
|
|
|
|
Bailey
|
|
|
Hasselblad-Pascale
|
|
|
Higgins
|
|
|
Kemerling
|
|
|
Schrock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Votes
For
|
|
|
61,562,337 |
|
|
|
60,393,015 |
|
|
|
59,732,165 |
|
|
|
60,321,845 |
|
|
|
60,365,855 |
|
Votes
Withheld
|
|
|
3,963,013 |
|
|
|
5,132,335 |
|
|
|
5,793,185 |
|
|
|
5,203,505 |
|
|
|
5,195,495 |
|
Shares Not
Voted
|
|
|
10,900,387 |
|
|
|
10,900,387 |
|
|
|
10,900,387 |
|
|
|
10,900,387 |
|
|
|
10,864,387 |
|
Total Shares
Outstanding
|
|
|
76,425,737 |
|
|
|
76,425,737 |
|
|
|
76,425,737 |
|
|
|
76,425,737 |
|
|
|
76,425,737 |
|
Election of
Directors requires a plurality of the votes cast at a meeting of the common
shareholders at which a quorum is present.
The continuing
Board members are:
Class
A Directors
Term Expires in 2010
|
Class
B Directors
Term Expires in 2011
|
|
|
Pastora San
Juan Cafferty
Ellen
Carnahan
Michael E.
Lavin
William F.
Protz, Jr.
Larry L.
Weyers
|
Richard A.
Bemis
William J.
Brodsky
Albert J.
Budney, Jr.
Robert C.
Gallagher
|
In
addition, shareholders ratified the appointment of Deloitte & Touche LLP as
the independent registered public accounting firm for Integrys Energy Group and
its subsidiaries for 2009. The shareholders voted as
follows:
Voted
|
|
Shares
|
|
For
|
|
|
62,946,388 |
|
Against
|
|
|
728,918 |
|
Abstained
|
|
|
1,850,044 |
|
Shares Not
Voted
|
|
|
10,900,387 |
|
Total
|
|
|
76,425,737 |
|
Item
6. Exhibits
The documents
listed in the Exhibit Index are attached as exhibits or incorporated by
reference herein.
Pursuant to
the requirements of the Securities Exchange Act of 1934, the registrant,
Integrys Energy Group, Inc., has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
|
|
Integrys
Energy Group, Inc.
|
|
|
|
|
|
|
Date: August
5, 2009
|
/s/ Diane L.
Ford
Diane L.
Ford
Vice
President and Corporate Controller
(Duly
Authorized Officer and
Chief
Accounting Officer)
|
INTEGRYS
ENERGY GROUP
FOR
THE QUARTER ENDED JUNE 30, 2009
|
Exhibit No.
|
Description
|
|
|
4.1
|
Third
Supplemental Indenture, dated as of June 1, 2009, by and between Integrys
Energy Group, Inc. and U.S. Bank National Association (successor to
Firstar Bank, National Association) (Incorporated by reference to Exhibit
4.1 to Integrys Energy Group's Form 8-K filed June 17,
2009.)
|
|
|
4.2
|
Fourth
Supplemental Indenture, dated as of June 1, 2009, by and between Integrys
Energy Group, Inc. and U.S. Bank National Association (successor to
Firstar Bank, National Association) (Incorporated by reference to Exhibit
4.2 to Integrys Energy Group's Form 8-K filed June 17,
2009.)
|
|
|
12
|
Computation
of Ratio of Earnings to Fixed Charges
|
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of
1934 for Integrys Energy Group
|
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of
1934 for Integrys Energy Group
|
|
|
32
|
Written
Statement of the Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350 for Integrys Energy
Group
|
|
|