INTEGRYS
ENERGY GROUP, INC. AND SUBSIDIARIES
CONDENSED
NOTES TO FINANCIAL STATEMENTS
September 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 November 4, 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.
As
discussed in Note 4, “Integrys
Energy Services Strategy Change,” Integrys Energy Group has reclassified
the assets and liabilities related to its Canadian energy marketing operations
at December 31, 2008 to assets and liabilities held for
sale.
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:
|
|
Nine
Months Ended September 30
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
Cash paid for
interest
|
|
$ |
100.5 |
|
|
$ |
101.2 |
|
Cash paid for
income taxes
|
|
|
25.2 |
|
|
|
123.1 |
|
Significant
non-cash transactions were:
|
|
Nine
Months Ended September 30
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
Construction
costs funded through accounts payable
|
|
$ |
26.2 |
|
|
$ |
38.0 |
|
Intangible
assets (customer contracts) received in
exchange
for risk management assets
|
|
|
17.0 |
|
|
|
- |
|
NOTE 3--RISK
MANAGEMENT ACTIVITIES
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 *
|
|
September 30
2009
|
|
|
December 31 2008
|
|
|
September 30
2009
|
|
|
December 31 2008
|
|
Utility
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-hedge
derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Current
|
|
$ |
23.2 |
|
|
$ |
28.6 |
|
|
$ |
45.5 |
|
|
$ |
161.6 |
|
Commodity contracts
|
Long-term
|
|
|
3.9 |
|
|
|
- |
|
|
|
1.1 |
|
|
|
9.0 |
|
Cash flow
hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Current
|
|
|
0.2 |
|
|
|
- |
|
|
|
0.5 |
|
|
|
1.5 |
|
Commodity contracts
|
Long-term
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonregulated
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-hedge
derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Current
|
|
|
2,007.4 |
|
|
|
1,849.6 |
|
|
|
2,022.5 |
|
|
|
1,722.6 |
|
Commodity contracts
|
Long-term
|
|
|
1,008.2 |
|
|
|
721.6 |
|
|
|
981.7 |
|
|
|
699.8 |
|
Interest rate swaps
|
Current
|
|
|
- |
|
|
|
- |
|
|
|
1.3 |
|
|
|
1.0 |
|
Interest rate swaps
|
Long-term
|
|
|
- |
|
|
|
- |
|
|
|
2.9 |
|
|
|
3.3 |
|
Foreign exchange
contracts
|
Current
|
|
|
1.4 |
|
|
|
2.2 |
|
|
|
1.0 |
|
|
|
0.3 |
|
Foreign exchange
contracts
|
Long-term
|
|
|
1.3 |
|
|
|
2.4 |
|
|
|
1.2 |
|
|
|
0.8 |
|
Fair value
hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Current
|
|
|
- |
|
|
|
14.2 |
|
|
|
- |
|
|
|
- |
|
Interest rate swaps
|
Current
|
|
|
1.8 |
|
|
|
1.1 |
|
|
|
- |
|
|
|
- |
|
Interest rate swaps
|
Long-term
|
|
|
0.7 |
|
|
|
2.1 |
|
|
|
- |
|
|
|
- |
|
Cash flow
hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Current
|
|
|
11.3 |
|
|
|
81.3 |
|
|
|
51.8 |
|
|
|
79.4 |
|
Commodity contracts
|
Long-term
|
|
|
2.0 |
|
|
|
4.1 |
|
|
|
13.1 |
|
|
|
14.8 |
|
Interest rate swaps
|
Current
|
|
|
- |
|
|
|
- |
|
|
|
2.9 |
|
|
|
1.5 |
|
Interest rate swaps
|
Long-term
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3.6 |
|
Foreign exchange
contracts
|
Current
|
|
|
- |
|
|
|
14.8 |
|
|
|
- |
|
|
|
- |
|
Total
|
|
|
$ |
3,061.4 |
|
|
$ |
2,722.0 |
|
|
$ |
3,125.5 |
|
|
$ |
2,699.2 |
|
*
All derivatives are recognized on the balance sheet at their fair value unless
they qualify for the normal purchases and sales exception found in FASB ASC
815. Integrys Energy Group continually assesses its contracts
designated as normal and will discontinue the treatment of these contracts as
normal if the required criteria are no longer met. Assets and
liabilities from risk management activities are classified as current or
long-term based upon the maturities of the underlying contracts.
The following table
shows Integrys Energy Group's assets and liabilities from risk management
activities classified as held for sale at December 31, 2008. For more
information see Note 4, "Integrys Energy Services
Strategy
Change."
(Millions)
|
Balance
Sheet Presentation *
|
|
Assets
Held For Sale
|
|
|
Liabilities
Held For Sale
|
|
Nonregulated
Segments
|
|
|
|
|
|
|
|
Non-hedge
derivatives
|
|
|
|
|
|
|
|
Commodity contracts
|
Current
|
|
$ |
231.3 |
|
|
$ |
222.2 |
|
Commodity contracts
|
Long-term
|
|
|
28.4 |
|
|
|
29.9 |
|
Foreign exchange
contracts
|
Current
|
|
|
0.6 |
|
|
|
0.2 |
|
Foreign exchange
contracts
|
Long-term
|
|
|
0.1 |
|
|
|
1.5 |
|
Total
|
|
|
$ |
260.4 |
|
|
$ |
253.8 |
|
*
These risk management assets and liabilities were classified as current or
long-term at December 31, 2008. At September 30, 2009, they were
reclassified to assets and liabilities held for sale, all in the current section
of the balance sheet.
FASB ASC 815-10-45
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)
|
|
September 30,
2009
|
|
|
December 31,
2008
|
|
Cash
collateral provided to others
|
|
$ |
238.6 |
|
|
$ |
256.4 |
|
Cash
collateral received from others
|
|
|
90.9 |
|
|
|
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
September 30, 2009, was $1,918.0 million. As of
September 30, 2009, Integrys Energy Group had not posted any cash
collateral related to the credit-risk related contingent features of 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
September 30, 2009, Integrys Energy Group would have been required to post
collateral of $644.8 million. Of this $644.8 million,
Integrys Energy Group had already satisfied
$203.9 million with letters of credit. Therefore, the
remaining collateral requirement would have been
$440.9 million.
Utility
Segments
Non-Hedge
Derivatives
Utility derivatives
include a limited number of natural gas purchase contracts, financial derivative
contracts (futures, options, and swaps), and financial transmission rights
(FTRs) used to manage electric transmission congestion costs. The
futures, options, and swaps were used by both the electric and natural gas
utility segments to mitigate the risks associated with the market price
volatility of natural gas supply costs and the costs of gasoline and diesel fuel
used by utility vehicles.
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. These derivatives are marked to fair value; the 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 refunded to or collected from customers in
rates.
The table below
shows the unrealized gains (losses) recorded related to non-hedge derivatives at
the utilities.
(Millions)
|
Financial
Statement Presentation
|
|
Three
Months Ended September 30, 2009
|
|
|
Nine
Months Ended September 30, 2009
|
|
Commodity
contracts
|
Balance Sheet
– Regulatory assets (current)
|
|
$ |
54.5 |
|
|
$ |
109.1 |
|
Commodity
contracts
|
Balance Sheet
– Regulatory assets (long-term)
|
|
|
4.7 |
|
|
|
9.0 |
|
Commodity
contracts
|
Balance Sheet
– Regulatory liabilities (current)
|
|
|
(4.6 |
) |
|
|
3.1 |
|
Commodity
contracts
|
Balance Sheet
– Regulatory liabilities (long-term)
|
|
|
(0.8 |
) |
|
|
(0.7 |
) |
Commodity
contracts
|
Income
Statement – Utility cost of fuel, naturalgas, andpurchased
power
|
|
|
0.1 |
|
|
|
0.3 |
|
Commodity
contracts
|
Income
Statement – Operating and maintenanceexpense
|
|
|
(0.1 |
) |
|
|
0.1 |
|
At
September 30, 2009, the utilities had the following notional volumes of
outstanding non-hedge derivative contracts:
|
|
Purchases
|
|
|
Other
Transactions
|
|
Natural gas
(millions of therms)
|
|
|
615.1 |
|
|
|
N/A |
|
FTRs (millions
of kilowatt-hours)
|
|
|
N/A |
|
|
|
7,867.6 |
|
Petroleum
products (barrels)
|
|
|
24,896 |
|
|
|
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 2011. At September 30, 2009, PGL had the
following notional volumes of outstanding contracts that were designated as cash
flow hedges:
|
|
Purchases
|
|
Natural
gas (millions of therms)
|
|
|
10.8 |
|
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 (Loss) Recognized in OCI on Derivative Instrument (Effective
Portion)
|
|
|
|
Three
Months Ended September 30
|
|
|
Nine
Months Ended September 30
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Commodity
contracts
|
|
$ |
0.2 |
|
|
$ |
(2.9 |
) |
|
$ |
(1.0 |
) |
|
$ |
0.1 |
|
|
|
|
Gain
(Loss) Reclassified from Accumulated OCI into Income (Effective
Portion)
|
|
|
|
|
Three
Months Ended September 30
|
|
|
Nine
Months Ended September 30
|
|
(Millions)
|
Income
Statement Presentation
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Settled
commodity contracts
|
Operating and
maintenance expense
|
|
$ |
(0.8 |
) |
|
$ |
0.3 |
|
|
$ |
(2.2 |
) |
|
$ |
0.6 |
|
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 nine months ended September 30, 2009, and
2008. Cash flow hedge ineffectiveness related to these commodity
contracts was not significant for the three and nine months ended
September 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 the wrap up of the Canadian marketing
operations. In very 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
September 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)
|
|
|
4,510.9 |
|
|
|
4,548.6 |
|
|
|
N/A |
|
Power (kilowatt-hours)
|
|
|
145,162.9 |
|
|
|
139,173.2 |
|
|
|
N/A |
|
Interest rate
swaps
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
240.6 |
|
Foreign
exchange contracts
|
|
$ |
42.6 |
|
|
$ |
46.5 |
|
|
|
N/A |
|
Gains and losses
related to non-hedge derivatives are recognized currently in earnings, as shown
in the table below.
|
|
|
Gain
(Loss) During
|
|
(Millions)
|
Income
Statement Presentation
|
|
Three
Months Ended
September 30,
2009
|
|
|
Nine
Months Ended September 30, 2009
|
|
Commodity
contracts
|
Nonregulated revenue
|
|
$ |
19.0 |
|
|
$ |
(9.8 |
) |
Commodity
contracts
|
Nonregulated revenue
(reclassified from
accumulated OCI)
|
|
|
(0.3 |
) |
|
|
(2.3 |
) |
Interest rate
swaps
|
Interest expense
|
|
|
(0.8 |
) |
|
|
(0.5 |
) |
Foreign
exchange contracts
|
Nonregulated revenue
|
|
|
(0.7 |
) |
|
|
(1.8 |
) |
Total
|
|
|
$ |
17.2 |
|
|
$ |
(14.4 |
) |
Fair
Value Hedges
At
PEC, an interest rate swap designated as a fair value hedge is used to hedge
changes in the fair value of $50.0 million of PEC Series A 6.9% notes due
January 15, 2011. The changes in the fair value of this hedge
are recognized currently in earnings, as are the changes in fair value of the
hedged item. Unrealized gains (losses) related to the fair value
hedge and the related hedged item are shown in the table below.
(Millions)
|
Income
Statement Presentation
|
|
Three
Months Ended September 30, 2009
|
|
|
Nine
Months Ended September 30, 2009
|
|
Interest rate
swap
|
Interest
expense
|
|
$ |
(0.4 |
) |
|
$ |
(0.7 |
) |
Debt hedged by
swap
|
Interest
expense
|
|
|
0.4 |
|
|
|
0.7 |
|
Total
|
|
|
$ |
- |
|
|
$ |
- |
|
Fair value hedge
ineffectiveness recorded in interest expense on the Condensed Consolidated
Statements of Income was not significant for the three and nine months ended
September 30, 2009, and 2008. No amounts were excluded from
effectiveness testing related to the interest rate swap during the three and
nine months ended September 30, 2009, and 2008.
During the nine
months ended September 30, 2009, Integrys Energy Services did not have any
commodity derivative contracts designated as fair value
hedges. During the nine months ended September 30, 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 September 30, 2008, and was a pre-tax loss
of $2.8 million for the nine months ended September 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 a
pre-tax loss of $2.5 million during the three months ended September 30,
2008, and was not significant during the nine months ended September 30,
2008.
Cash
Flow Hedges
Commodity 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 also 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
September 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)
|
|
|
62.2 |
|
|
|
53.8 |
|
|
|
N/A |
|
Power
(kilowatt-hours)
|
|
|
6.8 |
|
|
|
- |
|
|
|
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 September 30
|
|
|
Nine
Months Ended September 30
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Commodity
contracts
|
|
$ |
(7.1 |
) * |
|
$ |
67.7 |
|
|
$ |
(57.6 |
) * |
|
$ |
33.8 |
|
Interest rate
swaps
|
|
|
0.7 |
|
|
|
0.2 |
|
|
|
2.2 |
|
|
|
0.5 |
|
|
*
|
In the second
and third quarters of 2009, cash flow hedge accounting was discontinued
for certain transactions, as management made the assessment that these
transactions were no longer probable of occurring. During the
three months ended September 30, 2009, unrealized gains of $6.7 million
were recognized in OCI related to these transactions, bringing the total
to $6.4 million for 2009. In accordance with FASB ASC 815, the
amount recorded in OCI is amortized to earnings over the term of the
contracts.
|
|
|
|
Gain
(Loss) Reclassified from Accumulated OCI into Income (Effective
Portion)
|
|
|
Income
Statement
|
|
Three
Months Ended September 30
|
|
|
Nine
Months Ended
September 30
|
|
(Millions)
|
Presentation
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Settled/Realized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Nonregulated
revenue
|
|
$ |
(42.2 |
) |
|
$ |
78.1 |
|
|
$ |
(79.3 |
) |
|
$ |
63.9 |
|
Interest rate swaps
|
Interest
expense
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.9 |
|
|
|
0.9 |
|
Hedge
Designation Discontinued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Nonregulated
revenue
|
|
|
0.1 |
|
|
|
0.3 |
|
|
|
(0.3 |
) |
|
|
(2.6 |
) |
Total
|
|
|
$ |
(41.8 |
) |
|
$ |
78.7 |
|
|
$ |
(78.7 |
) |
|
$ |
62.2 |
|
|
|
|
Gain
(Loss) Recognized in Income on Derivative Instruments (Ineffective Portion
and Amount Excluded from Effectiveness Testing)
|
|
|
|
|
Three
Months Ended September 30
|
|
|
Nine
Months Ended September 30
|
|
(Millions)
|
Income
Statement Presentation
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Commodity
contracts
|
Nonregulated
revenue
|
|
$ |
0.4 |
|
|
$ |
3.5 |
|
|
$ |
(0.9 |
) |
|
$ |
- |
|
In
the next 12 months, subject to changes in market prices of natural gas and
electricity, a pre-tax loss of $51.7 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 STRATEGY CHANGE
Restructuring
Costs
Integrys Energy
Group has decided to divest of or significantly reduce the size of its
nonregulated energy services business segment to a smaller segment with
significantly reduced credit and collateral support requirements. In
connection with this strategy, the following restructuring costs were
expensed:
(Millions)
|
|
Three
Months Ended
September
30, 2009
|
|
|
Nine
Months Ended
September 30,
2009
|
|
Employee-related
costs
|
|
$ |
0.3 |
|
|
$ |
11.1 |
|
Software
write-offs and accelerated depreciation
|
|
|
0.2 |
|
|
|
5.4 |
|
Legal and
consulting
|
|
|
1.7 |
|
|
|
4.7 |
|
Miscellaneous
|
|
|
0.2 |
|
|
|
0.3 |
|
Total
restructuring costs
|
|
$ |
2.4 |
|
|
$ |
21.5 |
|
All of the above
costs were related to the Integrys Energy Services segment and were included in
the restructuring expense line item on the Condensed Consolidated Statements of
Income.
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
$11.1 million accrued as of September 30, 2009. As of
September 30, 2009, none of these employee-related restructuring costs had
been paid.
Sale
of Canadian Natural Gas and Electric Power Portfolio
In
September 2009, Integrys Energy Services of Canada, a subsidiary of Integrys
Energy Services, sold nearly all of its Canadian natural gas and electric power
contract portfolio. In a separate transaction, Integrys Energy
Services of Canada transferred a 2-bcf natural gas storage contract to a
counterparty. With these two transactions, Integrys Energy Services
exited the majority of its electric and natural gas marketing business in
Canada.
The following table
shows the carrying values of the major classes of assets and liabilities
included in the transactions at the closing dates and classified as held for
sale at December 31, 2008.
(Millions)
|
|
As
of the
Closing
Dates
|
|
|
December
31, 2008
|
|
Inventories
|
|
$ |
5.3 |
|
|
$ |
10.1 |
|
Current risk
management assets
|
|
|
134.7 |
|
|
|
231.9 |
|
Long-term
risk management assets
|
|
|
48.6 |
|
|
|
28.5 |
|
Total
assets
|
|
$ |
188.6 |
|
|
$ |
270.5 |
|
|
|
|
|
|
|
|
|
|
Current risk
management liabilities
|
|
$ |
119.8 |
|
|
$ |
222.4 |
|
Long-term
risk management liabilities
|
|
|
32.3 |
|
|
|
31.4 |
|
Total
liabilities
|
|
$ |
152.1 |
|
|
$ |
253.8 |
|
Proposed
Sale of United States Wholesale Natural Gas Marketing Business
In
October 2009, Integrys Energy Services signed an agreement to sell its United
States wholesale natural gas marketing business in a two-part
transaction. The closing is contingent upon obtaining certain
customary contractual consents and necessary regulatory
approvals. The first part of this transaction involves substantially
all of Integrys Energy Services’ wholesale natural gas marketing business and is
anticipated to close in the fourth quarter of 2009. The second part
of this transaction includes wholesale natural gas storage
contracts. Certain of these storage contracts are expected to be sold
by the end of the first quarter of 2010. Integrys Energy Services
will provide fee-based services to the buyer of the wholesale natural gas
marketing business utilizing the remaining storage contracts through April 2011
and will sell those contracts upon completion of the services at that
time.
As
of September 30, 2009, the wholesale natural gas marketing business 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)
|
|
September 30,
2009
|
|
Inventories
|
|
$ |
27.0 |
|
Current risk
management assets
|
|
|
268.4 |
|
Long-term
risk management assets
|
|
|
59.9 |
|
Total
assets
|
|
$ |
355.3 |
|
|
|
|
|
|
Accounts
payable
|
|
$ |
73.6 |
|
Current risk
management liabilities
|
|
|
282.7 |
|
Long-term
risk management liabilities
|
|
|
66.2 |
|
Total
liabilities
|
|
$ |
422.5 |
|
NOTE
5--DISCONTINUED OPERATIONS
Energy
Management Consulting Business
In
July 2009, Integrys Energy Services completed the sale of its energy management
consulting business for $4.5 million. This business provided
consulting services relating to long-term strategies for managing energy costs
for its customers. The historical financial results of this business
were not significant. The gain on the sale of this business recorded
in discontinued operations during the third quarter of 2009 was $3.8 million
($2.3 million after tax).
WPS
Niagara Generation, LLC
During the nine
months ended September 30, 2009, Integrys Energy Services recorded a
$0.3 million after-tax gain in discontinued operations related to a refund
received in connection with the overpayment of auxiliary power service in prior
years.
During the nine
months ended September 30, 2008, Integrys Energy Services recorded a $0.1
million after-tax gain 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 September 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
nine months ended September 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 September 30, 2009
|
|
|
Nine
Months Ended September 30, 2009
|
|
Balance at
the beginning of period
|
|
$ |
369.2 |
|
|
$ |
346.9 |
|
Equity in net
income
|
|
|
19.3 |
|
|
|
55.7 |
|
Capital
contributions
|
|
|
8.5 |
|
|
|
23.9 |
|
Dividends
received
|
|
|
(15.2 |
) |
|
|
(44.7 |
) |
Balance
at the end of period
|
|
$ |
381.8 |
|
|
$ |
381.8 |
|
ATC's financial
data is included in the following tables:
|
|
Three
Months Ended September 30
|
|
|
Nine
Months Ended September 30
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Income
statement data
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
132.3 |
|
|
$ |
119.9 |
|
|
$ |
387.5 |
|
|
$ |
345.1 |
|
Operating
expenses
|
|
|
58.7 |
|
|
|
52.0 |
|
|
|
172.3 |
|
|
|
156.2 |
|
Other
expense
|
|
|
19.8 |
|
|
|
18.2 |
|
|
|
57.8 |
|
|
|
51.1 |
|
Net income
*
|
|
$ |
53.8 |
|
|
$ |
49.7 |
|
|
$ |
157.4 |
|
|
$ |
137.8 |
|
|
*
|
As most income
taxes are the responsibility of its members, ATC does not report a
provision for its members' income taxes in its income
statements.
|
(Millions)
|
|
September 30,
2009
|
|
|
December 31,
2008
|
|
Balance
sheet data
|
|
|
|
|
|
|
Current
assets
|
|
$ |
48.2 |
|
|
$ |
50.8 |
|
Noncurrent
assets
|
|
|
2,729.9 |
|
|
|
2,480.0 |
|
Total
assets
|
|
$ |
2,778.1 |
|
|
$ |
2,530.8 |
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$ |
286.2 |
|
|
$ |
252.0 |
|
Long-term
debt
|
|
|
1,259.6 |
|
|
|
1,109.4 |
|
Other
noncurrent liabilities
|
|
|
78.8 |
|
|
|
120.2 |
|
Members'
equity
|
|
|
1,153.5 |
|
|
|
1,049.2 |
|
Total
liabilities and members' equity
|
|
$ |
2,778.1 |
|
|
$ |
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 debit or credit. At September 30, 2009, all LIFO layers
were replenished and the LIFO liquidation balance was zero.
NOTE 8--GOODWILL
AND OTHER INTANGIBLE ASSETS
Integrys Energy
Group had the following changes to the carrying amount of goodwill for the nine
months ended September 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 September 30, 2009
|
|
$ |
635.9 |
|
|
$ |
6.9 |
|
|
$ |
642.8 |
|
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, triggering an interim goodwill impairment
analysis. 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.
|
|
September 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 |
|
|
$ |
(17.3 |
) |
|
$ |
15.3 |
|
|
$ |
32.6 |
|
|
$ |
(14.2 |
) |
|
$ |
18.4 |
|
Natural
gas and electric
contract
assets (2)
(3)
|
|
|
76.0 |
|
|
|
(60.6 |
) |
|
|
15.4 |
|
|
|
60.1 |
|
|
|
(54.6 |
) |
|
|
5.5 |
|
Natural
gas and electric
contract
liabilities (2)
(4)
|
|
|
(33.6 |
) |
|
|
25.2 |
|
|
|
(8.4 |
) |
|
|
(33.6 |
) |
|
|
20.2 |
|
|
|
(13.4 |
) |
Renewable
energy credits (5)
|
|
|
3.3 |
|
|
|
(2.0 |
) |
|
|
1.3 |
|
|
|
3.4 |
|
|
|
(2.1 |
) |
|
|
1.3 |
|
Nonregulated
easements (6)
|
|
|
3.5 |
|
|
|
(0.1 |
) |
|
|
3.4 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Emission
allowances (7)
|
|
|
2.1 |
|
|
|
(0.1 |
) |
|
|
2.0 |
|
|
|
2.3 |
|
|
|
(0.1 |
) |
|
|
2.2 |
|
Other
|
|
|
4.2 |
|
|
|
(1.1 |
) |
|
|
3.1 |
|
|
|
3.0 |
|
|
|
(1.0 |
) |
|
|
2.0 |
|
Total
|
|
|
88.1 |
|
|
|
(56.0 |
) |
|
|
32.1 |
|
|
|
67.8 |
|
|
|
(51.8 |
) |
|
|
16.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized
intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MGU trade
name
|
|
|
5.2 |
|
|
|
- |
|
|
|
5.2 |
|
|
|
5.2 |
|
|
|
- |
|
|
|
5.2 |
|
Total
intangible assets
|
|
$ |
93.3 |
|
|
$ |
(56.0 |
) |
|
$ |
37.3 |
|
|
$ |
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 ServiceChoice business. The remaining
weighted-average
|
|
amortization
period for customer-related intangible assets at September 30, 2009,
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 $7.3 million and $8.1 million, respectively, at
September 30, 2009, and $3.1 million and $2.4 million,
respectively, at December 31, 2008. The remaining
weighted-average amortization period for these intangible assets at
September 30, 2009, was 3.3
years.
|
(4)
|
Includes both
short-term and long-term intangible liabilities related to customer
contracts in the amount of $3.6 million and $4.8 million,
respectively, at September 30, 2009, and $6.0 million and
$7.4 million, respectively, at December 31, 2008. The
remaining weighted-average amortization period for these intangible
liabilities at September 30, 2009, was 3.1
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 14.75
years.
|
(7)
|
Emission
allowances do not have a contractual term or expiration
date.
|
Intangible asset
amortization, excluding amortization related to natural gas and electric
contracts, was recorded as a component of depreciation and amortization
expense. Amortization for the three months ended September 30,
2009, and 2008, was $1.5 million and $2.1 million,
respectively. Amortization for the nine months ended
September 30, 2009, and 2008, was $4.5 million and $5.8 million,
respectively.
Amortization
expense for the next five fiscal years is estimated to be:
(Millions)
|
|
|
|
For year
ending December 31, 2009
|
|
$ |
1.6 |
|
For year
ending December 31, 2010
|
|
|
4.0 |
|
For year
ending December 31, 2011
|
|
|
3.4 |
|
For year
ending December 31, 2012
|
|
|
2.4 |
|
For year
ending December 31, 2013
|
|
|
1.7 |
|
Amortization of the
natural gas and electric contract intangible assets and liabilities were
recorded as a component of nonregulated cost of fuel, natural gas, and purchased
power. Amortization of these contracts for the three months ended
September 30, 2009, and 2008, resulted in an increase to nonregulated cost
of fuel, natural gas, and purchased power of $2.4 million and
$0.2 million, respectively. Amortization of these contracts
resulted in an increase to nonregulated cost of fuel, natural gas, and purchased
power of $2.1 million for the nine months ended September 30, 2009,
and $10.3 million for the nine months ended September 30,
2008.
Amortization
expense of these contracts for the next five fiscal years is estimated to
be:
(Millions)
|
|
|
|
For year
ending December 31, 2009
|
|
$ |
1.4 |
|
For year
ending December 31, 2010
|
|
|
3.1 |
|
For year
ending December 31, 2011
|
|
|
0.8 |
|
For year
ending December 31, 2012
|
|
|
0.8 |
|
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.
(Millions,
except percentages)
|
|
September 30,
2009
|
|
|
December 31,
2008
|
|
Commercial
paper outstanding
|
|
$ |
76.0 |
|
|
$ |
552.9 |
|
Average
discount rate on outstanding commercial paper
|
|
|
0.44 |
% |
|
|
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
|
|
|
0.21 |
% |
|
|
3.40 |
% |
The commercial
paper at September 30, 2009, had varying maturity dates ranging from
October 1, 2009, through October 23, 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
|
|
September 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)
(2)
|
5/03/09
|
|
|
- |
|
|
|
250.0 |
|
Revolving
credit facility (Integrys Energy Group)
(3)
|
5/26/10
|
|
|
425.0 |
|
|
|
- |
|
Revolving
credit facility (Integrys Energy Group)
(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)
|
5/13/10
|
|
|
10.0 |
|
|
|
10.0 |
|
Short-term
notes payable (Integrys Energy Group)
(10)
|
3/30/09
|
|
|
- |
|
|
|
171.1 |
|
Total
short-term credit capacity
|
|
|
|
2,235.0 |
|
|
|
2,371.1 |
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Letters
of credit issued inside credit facilities
|
|
|
|
292.8 |
|
|
|
414.6 |
|
Loans
outstanding under credit agreements and notes payable
|
|
|
|
10.0 |
|
|
|
656.1 |
|
Commercial
paper outstanding
|
|
|
|
76.0 |
|
|
|
552.9 |
|
Accrued
interest or original discount on outstanding commercial
paper
|
|
|
|
- |
|
|
|
0.8 |
|
Available
capacity under existing agreements
|
|
|
$ |
1,856.2 |
|
|
$ |
746.7 |
|
(1)
|
Provides
support for Integrys Energy Group's commercial paper borrowing
program.
|
(2)
|
This facility
matured in May 2009, and the revolving credit agreement was
terminated.
|
(3)
|
In May 2009,
Integrys Energy Group entered into a revolving credit agreement to provide
support for Integrys Energy Group's commercial paper borrowing
program.
|
(4)
|
In
June 2009, Integrys Energy Group entered into a revolving credit
agreement to provide support for Integrys Energy Group's commercial paper
borrowing program.
|
(5)
|
Provides
support for WPS's commercial paper borrowing
program.
|
(6)
|
Borrowings
under this agreement are guaranteed by Integrys Energy
Group.
|
(7)
|
Provides
support for PGL's commercial paper borrowing
program.
|
(8)
|
This facility
matured in June 2009, at which time the borrowings were paid in full, and
the revolving credit agreement was terminated. 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
September 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)
|
|
September 30,
2009
|
|
|
December 31,
2008
|
|
WPS
|
|
$ |
872.1 |
|
|
$ |
872.1 |
|
UPPCO (1)
|
|
|
11.7 |
|
|
|
11.7 |
|
PEC
|
|
|
327.4 |
|
|
|
328.2 |
|
PGL (2)
|
|
|
576.0 |
|
|
|
501.0 |
|
NSG
|
|
|
75.3 |
|
|
|
75.3 |
|
Integrys
Energy Group (3)
|
|
|
705.0 |
|
|
|
550.0 |
|
Unsecured term
loan – Integrys Energy Group (4)
|
|
|
65.6 |
|
|
|
65.6 |
|
Term loans –
nonrecourse, collateralized by nonregulated assets (5)
|
|
|
4.6 |
|
|
|
6.6 |
|
Other term
loan (6)
|
|
|
27.0 |
|
|
|
27.0 |
|
Total
|
|
|
2,664.7 |
|
|
|
2,437.5 |
|
Unamortized
discount and premium on bonds and debt
|
|
|
3.0 |
|
|
|
5.7 |
|
Total
debt
|
|
|
2,667.7 |
|
|
|
2,443.2 |
|
Less current
portion
|
|
|
(271.0 |
) |
|
|
(155.2 |
) |
Total
long-term debt
|
|
$ |
2,396.7 |
|
|
$ |
2,288.0 |
|
(1)
|
Prior to November 1,
2009, UPPCO will make a $0.9 million sinking fund payment under the terms
of its First Mortgage Bonds. As a result, this payment is
included in the current portion of long-term debt on Integrys Energy
Group's Condensed Consolidated Balance Sheet at September 30,
2009.
|
(2)
|
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 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 September 30, 2009 was 0.9% 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 September 30,
2009.
|
|
In September
2009, PGL issued $75.0 million of Series UU, 4.63%, 10-year First and
Refunding Mortgage Bonds due September 1, 2019. The net
proceeds from the issuance of these bonds were used for general corporate
utility purposes and to increase liquidity. The first and
refunding mortgage Bonds were sold in a private placement and are not
registered under the Securities Act of
1933.
|
(3)
|
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.
|
|
On November 1,
2009, $150.0 million of Integrys Energy Group Unsecured Senior Notes
matured. 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 September 30,
2009.
|
(4)
|
In
June 2010, Integrys Energy Group’s $65.6 million unsecured term
loan will mature. As a result, this loan is included in the
current portion of long-term debt on Integrys Energy Group's
Condensed Consolidated Balance Sheet at September 30,
2009.
|
(5)
|
By May 2010,
$4.6 million of nonrecourse term loans will mature. As a
result, these amounts are included in the current portion of long-term
debt on Integrys Energy
Group's Condensed Consolidated Balance Sheet at September 30,
2009.
|
(6)
|
WPS Westwood
Generation, LLC, a subsidiary of Integrys Energy Services, has outstanding
$27.0 million of Refunding Tax Exempt Bonds. The interest
rate at September 30, 2009 was 4.32% for these
bonds.
|
At
September 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 September 30, 2009.
(Millions)
|
|
Regulated
Utilities
|
|
|
Integrys
Energy Services
|
|
|
Total
|
|
Asset
retirement obligations at December 31, 2008
|
|
$ |
178.9 |
|
|
$ |
0.2 |
|
|
$ |
179.1 |
|
Accretion
|
|
|
6.9 |
|
|
|
0.1 |
|
|
|
7.0 |
|
Additions and
revisions to estimated cash flows
|
|
|
1.3 |
|
|
|
- |
|
|
|
1.3 |
|
Asset
retirement obligations at September 30, 2009
|
|
$ |
187.1 |
|
|
$ |
0.3 |
|
|
$ |
187.4 |
|
NOTE 12--INCOME
TAXES
Integrys Energy
Group's effective tax rate for the three and nine months ended
September 30, 2009, was 36.1% and (167.5)%, respectively. The
effective tax rate for the three and nine months ended
September 30, 2008, was 36.5% and 37.7%, 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 nine months ended September 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.
For the three and
nine months ended September 30, 2009, the liability for uncertain tax
positions increased $9.4 million and $9.2 million, respectively, due primarily
to the results of IRS examinations.
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 the Income Taxes Topic of the
FASB ASC. This resulted in a credit adjustment to deferred taxes and
an increase in income tax expense of $1.7 million, which was recorded during
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 Services are to meet its obligations to deliver
energy to customers.
The obligations
described below are as of September 30, 2009.
●
|
The electric
utility segment has obligations related to coal supply and transportation
that extend through 2016 and total $373.2 million, obligations of
$1,239.9 million 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 $1,365.9 million, some of which
extend through 2028.
|
●
|
Integrys
Energy Services has obligations related to energy and natural gas supply
contracts that extend through 2019 and total $3,573.3 million. The
majority of these obligations end by 2011, with obligations totaling
$247.7 million extending beyond 2011.
|
●
|
Integrys
Energy Group also has commitments in the form of purchase orders issued to
various vendors, which totaled $543.4 million and relate to normal
business operations, including construction
projects.
|
Environmental
EPA Section 114
Request
Weston and Pulliam
Plants:
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.
To
date, the EPA has not responded to the 2001 and 2002 filings made by
WPS. 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 the response has been
submitted. In August 2009, WPS received a data request seeking
further information on two specific projects at Pulliam and four at
Weston. The response has been submitted.
Columbia
Plant:
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 (MG&E), 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 2002 filing made by
WP&L. In December 2008, WP&L received an additional data
request and has submitted its response. On October 10, 2009, WPS,
along with its co-owners, received from the Sierra Club, a Notice of Intent to
file a civil lawsuit based on allegations that major modifications were made at
the Columbia generation station without complying with the Prevention of
Significant Deterioration (PSD) and Title V operating permit requirements of the
Clean Air Act. The allegations suggest that PSD permits that imposed
Best Available Control Technology limits on emissions from the facilities should
have been obtained for both the Columbia generation station, which is jointly
owned by WP&L, MG&E and WPS and operated by WP&L, and another
generation station solely owned by WP&L. WPS is reviewing the
allegations but Integrys Energy Group is currently unable to predict the impact
of the allegations on its financial position or results of
operations.
Settlements with Other
Utilities:
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. Except as noted above for the Columbia plant, 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.
|
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. An NOV was issued to WPS in September 2009 relating to
one event involving baghouse operation at Weston 1 and 2 that occurred in
December 2008. Corrective actions have been taken for the events in
the three NOVs. An enforcement conference was held on January 7,
2009, for the December 2008 NOV and on August 26, 2009, for the July 2009
NOV. Discussions with the WDNR on the severity classification of the
events continue. 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 financial position or 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."
Columbia Air
Permit
The renewal of the
Title V air permit for the Columbia generation station, jointly owned by
WP&L, MG&E, and WPS and operated by WP&L, was issued by the WDNR on
September 2, 2008. On October 8, 2009, the EPA issued an order
objecting to the Title V air permit. The order responds to a petition
filed by the Sierra Club and determined that a project in 2006 to replace the
economizer, final superheater, and related components on Unit 1 should have been
permitted as a “major modification.” The order directs the WDNR to
resolve the EPA’s objections within 90 days and “terminate, modify, or revoke
and reissue” the Title V permit accordingly. It is not known how the
WDNR will respond to the order.
Mercury and Interstate Air
Quality Rules
Mercury
The State of
Wisconsin revised the state mercury rule, Chapter NR 446. Phase I of
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 by the Best Available Control Technology
rule. WPS estimates capital costs of approximately $25 million
for Phase I, 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 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 $607 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. Twenty of these sites have been transferred to the EPA Superfund
Alternative Sites Program. Integrys Energy Group estimated and
accrued for $642.3 million of future undiscounted investigation and cleanup
costs for all sites as of September 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 $663.0 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 September 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, the EPA has contacted
the surety and the surety has stated that it will provide the EPA access to the
surety bond funds which are expected to fund a significant portion of GM’s
liability. The potential exposure related to the GM bankruptcy that
is not expected to be covered by the bond proceeds has been reflected in the
accrual identified above. Operation of the groundwater treatment unit
began in September 2008 and was 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 September 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 September 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 the Kerry-Boxer draft bill
which is currently being debated in the U.S. 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 September 30, 2009,
$10.2 million remained unpaid, of which $5.0 million was included in
other current liabilities, and $5.2 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 20, 2009, the court held a hearing on
the plaintiffs’ motion for class certification and set November 18, 2009 as the
date for ruling on the motion.
Corrosion
Control Inspection Proceeding
Illinois state, as
well as federal laws require natural gas utilities to conduct periodic corrosion
control inspections on natural gas pipelines. On April 19, 2006,
the ICC initiated a citation proceeding related to such inspections that were
required to be performed by PGL during 2003 and 2004, but which were not
completed in the requisite timeframe. On December 20, 2006, the
ICC entered an order approving a stipulation between the parties to this
proceeding under which PGL agreed that it had not been in compliance with
applicable regulations, and further agreed to pay a penalty of
$1.0 million, pay for a
consultant to
conduct a comprehensive investigation of its compliance with ICC pipeline safety
regulations, remain compliant with those regulations, not seek recovery in
future rate cases of certain costs related to non-compliance, and hold meetings
with Chicago to exchange information. This order resolved only the
ICC proceeding and did not constitute a release of any other potential actions
outside of the ICC proceeding. With respect to the comprehensive
investigation, the ICC selected an auditor for this matter and the auditor
issued a final report on August 14, 2008, containing 65 recommendations and
an additional placeholder for a possible recommendation. The ICC
conducted a public hearing on October 8, 2008, at which time the auditor
presented the report to the ICC for its acceptance. PGL submitted a
draft plan to the ICC staff in which PGL accepted most of the recommendations
and offered an alternative proposal for the remainder. At a
subsequent meeting and in concurrence with the ICC staff and the consultant, PGL
has revised its implementation plan for some of the
recommendations. The auditor's agreement with the ICC provides for a
two-year monitoring phase to verify PGL's compliance with the prospective
implementation plan, which began in 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 has 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
September 30,
2009
|
|
|
Less
Than
1
Year
|
|
|
1
to 3
Years
|
|
|
4
to 5
Years
|
|
|
Over
5
Years
|
|
Guarantees
supporting commodity transactions of subsidiaries (1)
|
|
$ |
1,653.4 |
|
|
$ |
1,294.0 |
|
|
$ |
233.2 |
|
|
$ |
37.5 |
|
|
$ |
88.7 |
|
Guarantees of
subsidiary debt and revolving line of credit (2)
|
|
|
756.6 |
|
|
|
- |
|
|
|
725.0 |
|
|
|
- |
|
|
|
31.6 |
|
Standby
letters of credit (3)
|
|
|
288.1 |
|
|
|
287.0 |
|
|
|
1.1 |
|
|
|
- |
|
|
|
- |
|
Surety bonds
(4)
|
|
|
3.1 |
|
|
|
3.0 |
|
|
|
0.1 |
|
|
|
- |
|
|
|
- |
|
Other
guarantees (5)
|
|
|
2.2 |
|
|
|
1.6 |
|
|
|
- |
|
|
|
- |
|
|
|
0.6 |
|
Total
guarantees
|
|
$ |
2,703.4 |
|
|
$ |
1,585.6 |
|
|
$ |
959.4 |
|
|
$ |
37.5 |
|
|
$ |
120.9 |
|
(1)
|
Consists of
parental guarantees of $1,476.8 million to support the business
operations of Integrys Energy Services, which are subject to the guarantee
limit discussed below; $92.7 million and $73.9 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 on 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. Parental guarantees
|
|
related to
subsidiary debt and credit agreements outstanding are not included on the
Condensed Consolidated Balance
Sheets.
|
(3)
|
Comprised of
$282.9 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 on 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 on 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
September 30, 2009, WPS had paid $8.7 million to Dominion
Energy Kewaunee, Inc. related to this guarantee, reducing the liability to
$0.2 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 $1,792.8 million on behalf
of Integrys Energy Services. Integrys Energy Group's exposure under
these guarantees related to open transactions at September 30, 2009, was
approximately $604 million. At September 30, 2009,
management was authorized to issue corporate guarantees up to an aggregate
amount of $2.65 billion to support the business operations of Integrys Energy
Services. The following outstanding amounts were subject to this
limit:
(Millions)
|
|
September 30,
2009
|
|
Guarantees
supporting commodity transactions
|
|
$ |
1,476.8 |
|
Guarantees of
subsidiary debt
|
|
|
31.6 |
|
Standby
letters of credit
|
|
|
282.9 |
|
Surety
bonds
|
|
|
1.5 |
|
Total
guarantees subject to $2.65 billion limit
|
|
$ |
1,792.8 |
|
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 September 30
|
|
|
Nine
Months Ended September 30
|
|
|
Three
Months Ended September 30
|
|
|
Nine
Months Ended September 30
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Service
cost
|
|
$ |
9.7 |
|
|
$ |
9.6 |
|
|
$ |
29.1 |
|
|
$ |
28.8 |
|
|
$ |
3.6 |
|
|
$ |
4.0 |
|
|
$ |
10.7 |
|
|
$ |
11.8 |
|
Interest
cost
|
|
|
20.2 |
|
|
|
19.1 |
|
|
|
60.7 |
|
|
|
57.2 |
|
|
|
6.6 |
|
|
|
6.5 |
|
|
|
19.9 |
|
|
|
19.3 |
|
Expected
return on plan assets
|
|
|
(23.1 |
) |
|
|
(25.3 |
) |
|
|
(69.4 |
) |
|
|
(75.7 |
) |
|
|
(4.4 |
) |
|
|
(4.6 |
) |
|
|
(13.3 |
) |
|
|
(13.8 |
) |
Amortization
of transition obligation
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.2 |
|
Amortization
of prior service cost (credit)
|
|
|
1.3 |
|
|
|
1.3 |
|
|
|
3.8 |
|
|
|
3.8 |
|
|
|
(1.0 |
) |
|
|
(1.0 |
) |
|
|
(2.9 |
) |
|
|
(2.9 |
) |
Amortization
of net actuarial loss (gain)
|
|
|
0.5 |
|
|
|
0.1 |
|
|
|
1.4 |
|
|
|
0.5 |
|
|
|
(0.4 |
) |
|
|
(0.1 |
) |
|
|
(1.1 |
) |
|
|
(0.2 |
) |
Amortization
of merger-related regulatory
adjustment
|
|
|
3.1 |
|
|
|
1.9 |
|
|
|
9.4 |
|
|
|
6.0 |
|
|
|
0.8 |
|
|
|
0.5 |
|
|
|
2.5 |
|
|
|
1.6 |
|
Net
periodic benefit cost
|
|
$ |
11.7 |
|
|
$ |
6.7 |
|
|
$ |
35.0 |
|
|
$ |
20.6 |
|
|
$ |
5.3 |
|
|
$ |
5.4 |
|
|
$ |
16.0 |
|
|
$ |
16.0 |
|
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. 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 nine months
ended September 30, 2009, $23.1 million of contributions were made to
the pension plans, and $7.8 million of contributions were made to the other
postretirement benefit plans. Integrys Energy Group expects to
contribute $4.0 million to its pension plans and $20.7 million to its
other postretirement benefit plans 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 |
% |
Compensation cost
recognized for stock options during the three months ended September 30, 2009,
and 2008, was not significant. Compensation cost recognized for stock
options was not significant during the nine months ended September 30,
2009, and was $2.0 million for the nine months ended
September 30, 2008. Compensation cost capitalized during
the same periods was not significant. As of September 30, 2009,
$2.0 million of compensation cost related to unvested and outstanding stock
options was expected to be recognized over a weighted-average period of 2.7
years.
A
summary of stock option activity for the nine months ended September 30,
2009, and information related to outstanding and exercisable stock options at
September 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
|
|
|
40,774 |
|
|
$ |
52.61 |
|
|
|
|
|
$ |
- |
|
Outstanding
at September 30, 2009
|
|
|
3,167,849 |
|
|
$ |
46.93 |
|
|
|
6.31 |
|
|
$ |
0.3 |
|
Exercisable
at September 30, 2009
|
|
|
1,876,540 |
|
|
$ |
46.48 |
|
|
|
4.85 |
|
|
$ |
0.3 |
|
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 September 30,
2009. This is calculated as the difference between Integrys Energy
Group's closing stock price on September 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 |
% |
Compensation cost
recorded for performance stock rights during the three months ended
September 30, 2009, and 2008, was not
significant. Compensation cost recorded for performance stock rights
during the nine months ended September 30, 2009, and 2008, was
$3.2 million and $4.0 million, respectively. Compensation
cost capitalized during the same periods was not significant. As of
September 30, 2009, $3.2 million of compensation cost related to
unvested and outstanding performance stock rights was expected to be recognized
over a weighted-average period of 1.9 years.
A
summary of activity related to performance stock rights for the nine months
ended September 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 September 30, 2009
|
|
|
301,090 |
|
|
$ |
45.33 |
|
*
|
No performance shares were
distributed because the performance percentage was below the threshold
payout level for those rights that were vested and eligible to be
distributed during the nine months ended
September 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 September 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 $3.7 million and $3.2 million during
the nine months ended September 30, 2009, and 2008,
respectively. Compensation cost capitalized during the same periods
was not significant. As of September 30, 2009, $9.3 million
of compensation cost related to these awards was expected to be recognized over
a weighted-average period of 2.8 years.
A
summary of activity related to restricted share and restricted share unit awards
for the nine months ended September 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
|
|
|
53,247 |
|
|
$ |
50.17 |
|
Forfeited
|
|
|
7,248 |
|
|
$ |
46.19 |
|
Outstanding
at September 30, 2009
|
|
|
374,477 |
|
|
$ |
45.82 |
|
NOTE 17--COMPREHENSIVE
INCOME (LOSS)
Integrys Energy
Group's total comprehensive income (loss) was as follows:
|
|
Three
Months Ended September 30
|
|
|
Nine
Months
Ended
September 30
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net income
(loss) attributed to common shareholders
|
|
$ |
51.1 |
|
|
$ |
(59.1 |
) |
|
$ |
(94.4 |
) |
|
$ |
100.8 |
|
Cash flow
hedges, net of tax (1)
|
|
|
22.4 |
|
|
|
(8.6 |
) |
|
|
17.0 |
|
|
|
(17.6 |
) |
Foreign
currency translation, net of tax
(2)
|
|
|
1.9 |
|
|
|
0.1 |
|
|
|
3.2 |
|
|
|
(0.7 |
) |
Amortizations
of unrecognized pension and other
postretirement
benefit costs, net of tax
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
(0.1 |
) |
|
|
0.1 |
|
Unrealized
(loss) gain on available-for-sale securities,
net
of tax
|
|
|
- |
|
|
|
(0.3 |
) |
|
|
0.1 |
|
|
|
(0.4 |
) |
Total
comprehensive income (loss)
|
|
$ |
75.5 |
|
|
$ |
(67.8 |
) |
|
$ |
(74.2 |
) |
|
$ |
82.2 |
|
(1)
|
For the three
months ended September 30, 2009, the tax was $14.3 million, and
for the three months ended September 30, 2008, the tax benefit was
$5.4 million. For the nine months ended September 30,
2009, the tax was $9.7 million, and for the nine months ended September
30, 2008, the tax benefit was
$10.9 million.
|
(2)
|
For the nine
months ended September 30, 2009, the tax was $2.1 million. The
tax was not significant for the other periods
presented.
|
The following table
shows the changes to Integrys Energy Group's accumulated other comprehensive
loss from December 31, 2008, to September 30, 2009.
(Millions)
|
|
Nine
Months Ended September 30, 2009
|
|
December 31,
2008 balance
|
|
$ |
(72.8 |
) |
Cash flow
hedges
|
|
|
17.0 |
|
Foreign
currency translation
|
|
|
3.2 |
|
Amortizations
of unrecognized pension and other
postretirement
benefit costs
|
|
|
(0.1 |
) |
Unrealized
gain on available-for-sale securities
|
|
|
0.1 |
|
September 30,
2009 balance
|
|
$ |
(52.6 |
) |
NOTE 18--COMMON
EQUITY
Integrys Energy
Group's reconciliation of shares outstanding at September 30, 2009, and
December 31, 2008, was as follows:
|
|
September 30,
2009
|
|
|
December 31,
2008
|
|
|
|
Shares
|
|
|
Average
Cost
|
|
|
Shares
|
|
|
Average
Cost
|
|
Common stock
issued
|
|
|
76,424,213 |
|
|
|
|
|
|
76,430,037 |
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury
shares
|
|
|
4,000 |
|
|
$ |
25.19 |
|
|
|
7,000 |
|
|
$ |
25.19 |
|
Deferred
compensation rabbi trust
|
|
|
359,727 |
|
|
$ |
43.32 |
(1) |
|
|
367,238 |
|
|
$ |
44.36 |
(1) |
Restricted
stock
|
|
|
49,928 |
|
|
$ |
54.54 |
(2) |
|
|
63,031 |
|
|
$ |
54.81 |
(2) |
Total
shares outstanding
|
|
|
76,010,558 |
|
|
|
|
|
|
|
75,992,768 |
|
|
|
|
|
(1)
|
Based on
Integrys Energy Group’s stock price on the day the shares entered the
deferred compensation rabbi trust. Shares
paid out of the trust are valued at the average cost of shares in the
trust.
|
(2)
|
Based on the
grant date fair value of the restricted
stock.
|
Integrys Energy
Group had the following changes to common stock during the nine months ended
September 30, 2009:
Integrys
Energy Group's common stock shares
|
|
|
|
Common stock
at December 31, 2008
|
|
|
76,430,037 |
|
Restricted
stock shares retired
|
|
|
(5,824 |
) |
Common
stock at September 30, 2009
|
|
|
76,424,213 |
|
Earnings
(Loss) 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," (now
incorporated as part of FASB ASC 260-10). This FSP had no effect on
previously reported basic earnings (loss) per share.
Basic earnings
(loss) per share is 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 (loss) per share is computed by
dividing net income (loss) attributed to common shareholders by the weighted
average number of common stock shares outstanding during the period, adjusted
for the exercise and/or conversion of all potentially dilutive
securities. Such dilutive items include in-the-money stock options,
performance stock rights, and restricted stock. The effects of
dilutive securities were not included in the computation for the nine months
ended September 30, 2009, and the three months ended
September 30, 2008, because there was a net loss during these periods,
which would cause the impact to be anti-dilutive. The calculation of
diluted earnings per share for the three months ended September 30, 2009,
excluded 3.0 million out-of-the-money stock options that had an
anti-dilutive effect. The calculation of diluted earnings per share
for the nine months ended September 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 (loss)
per share:
|
|
Three
Months Ended September 30
|
|
|
Nine
Months Ended September 30
|
|
(Millions,
except per share amounts)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) from continuing operations
|
|
$ |
49.5 |
|
|
$ |
(58.4 |
) |
|
$ |
(94.7 |
) |
|
$ |
103.0 |
|
Discontinued
operations, net of tax
|
|
|
2.3 |
|
|
|
- |
|
|
|
2.6 |
|
|
|
0.1 |
|
Preferred
stock dividends of subsidiary
|
|
|
(0.7 |
) |
|
|
(0.7 |
) |
|
|
(2.3 |
) |
|
|
(2.3 |
) |
Net income
(loss) attributed to common shareholders
|
|
$ |
51.1 |
|
|
$ |
(59.1 |
) |
|
$ |
(94.4 |
) |
|
$ |
100.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares of common stock – basic
|
|
|
76.8 |
|
|
|
76.7 |
|
|
|
76.8 |
|
|
|
76.5 |
|
Effect of
dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
0.1 |
|
|
|
- |
|
|
|
- |
|
|
|
0.4 |
|
Average
shares of common stock – diluted
|
|
|
76.9 |
|
|
|
76.7 |
|
|
|
76.8 |
|
|
|
76.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.67 |
|
|
$ |
(0.77 |
) |
|
$ |
(1.23 |
) |
|
$ |
1.32 |
|
Diluted
|
|
|
0.66 |
|
|
|
(0.77 |
) |
|
|
(1.23 |
) |
|
|
1.31 |
|
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, categorized by level within the fair
value hierarchy.
|
|
September 30,
2009
|
|
(Millions)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk
management assets
|
|
$ |
588.3 |
|
|
$ |
1,548.4 |
|
|
$ |
924.7 |
|
|
$ |
3,061.4 |
|
Other
|
|
|
0.7 |
|
|
|
- |
|
|
|
- |
|
|
|
0.7 |
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk
management liabilities
|
|
|
730.0 |
|
|
|
1,566.3 |
|
|
|
829.2 |
|
|
|
3,125.5 |
|
Long-term debt hedged by fair value
hedge
|
|
|
- |
|
|
|
52.5 |
|
|
|
- |
|
|
|
52.5 |
|
|
|
December 31,
2008
|
|
(Millions)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk
management assets
|
|
$ |
698.4 |
|
|
$ |
1,276.7 |
|
|
$ |
746.9 |
|
|
$ |
2,722.0 |
|
Assets held for sale
|
|
|
4.6 |
|
|
|
247.3 |
|
|
|
8.5 |
|
|
|
260.4 |
|
Inventory hedged by fair value
hedges
|
|
|
- |
|
|
|
27.4 |
|
|
|
- |
|
|
|
27.4 |
|
Other
|
|
|
0.5 |
|
|
|
- |
|
|
|
- |
|
|
|
0.5 |
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk
management liabilities
|
|
|
819.5 |
|
|
|
1,311.3 |
|
|
|
568.4 |
|
|
|
2,699.2 |
|
Liabilities
held for sale
|
|
|
1.0 |
|
|
|
247.8 |
|
|
|
5.0 |
|
|
|
253.8 |
|
Long-term
debt hedged by fair value hedge
|
|
|
- |
|
|
|
53.2 |
|
|
|
- |
|
|
|
53.2 |
|
The determination
of the fair values above incorporates various factors required under
the Fair Value Measurements and Disclosures Topic of the FASB
ASC. 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 September 30
|
|
|
Nine
Months Ended September 30
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Balance at the
beginning of period
|
|
$ |
(42.6 |
) |
|
$ |
(104.0 |
) |
|
$ |
182.0 |
(1) |
|
$ |
44.6 |
|
Net realized
and unrealized gain (loss) included in earnings
|
|
|
27.7 |
|
|
|
(75.9 |
) |
|
|
(12.8 |
) |
|
|
(158.8 |
) |
Net unrealized
gain (loss) recorded as regulatory assets or liabilities
|
|
|
(1.8 |
) |
|
|
(1.7 |
) |
|
|
4.1 |
|
|
|
(7.1 |
) |
Net unrealized
gain (loss) included in other comprehensiveincome
(loss)
|
|
|
13.8 |
|
|
|
(41.2 |
) |
|
|
5.1 |
|
|
|
(15.2 |
) |
Net purchases
and settlements
|
|
|
(21.6 |
) |
|
|
29.9 |
|
|
|
(8.6 |
) |
|
|
9.4 |
|
Net transfers
in/out of Level 3
|
|
|
120.0 |
|
|
|
210.2 |
|
|
|
(74.3 |
) |
|
|
144.4 |
|
Balance
at the end of period
|
|
$ |
95.5 |
|
|
$ |
17.3 |
|
|
$ |
95.5 |
|
|
$ |
17.3 |
|
Net
unrealized gain (loss) included in earnings relatedtoinstrumentsstill held
at the end of period
|
|
$ |
27.8 |
|
|
$ |
(78.6 |
) |
|
$ |
(10.1 |
) |
|
$ |
(170.3 |
) |
(1)
|
The balance at
the beginning of the period includes $3.5 million of net risk management
assets classified as held for sale.
|
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. 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. 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.
|
|
September 30,
2009
|
|
|
December
31, 2008
|
|
(Millions)
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Long-term
debt
|
|
$ |
2,667.7 |
|
|
$ |
2,774.3 |
|
|
$ |
2,443.2 |
|
|
$ |
2,276.0 |
|
Preferred
stock
|
|
|
51.1 |
|
|
|
46.3 |
|
|
|
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 values of preferred stock
are estimated based on quoted market prices 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 September 30
|
|
|
Nine
Months Ended September 30
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Equity
earnings on investments
|
|
$ |
19.5 |
|
|
$ |
20.0 |
|
|
$ |
56.6 |
|
|
$ |
50.7 |
|
Interest and
dividend income
|
|
|
1.5 |
|
|
|
1.3 |
|
|
|
4.1 |
|
|
|
4.1 |
|
Equity
portion of AFUDC
|
|
|
1.7 |
|
|
|
2.0 |
|
|
|
4.5 |
|
|
|
3.3 |
|
Weston 4
ATC interconnection agreement
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2.5 |
|
Other
|
|
|
3.2 |
|
|
|
0.4 |
|
|
|
2.7 |
|
|
|
3.9 |
|
Total
miscellaneous income
|
|
$ |
25.9 |
|
|
$ |
23.7 |
|
|
$ |
67.9 |
|
|
$ |
64.5 |
|
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. On September 9, 2009,
the PSCW Staff recommended an electric rate increase of $22.1 million and a
natural gas rate increase of $11.1 million. On September 21, 2009,
WPS and the PSCW Staff proposed a refund to customers in 2010 of 2008 and 2009
electric fuel cost over-collections, which would offset the electric rate
increase requested for 2010. A final order is expected by the end of
2009.
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
September 30, 2009, WPS recorded a liability of $17.1 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 or refund 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.
WPS was granted
recovery of $0.4 million of the requested $0.5 million of replacement purchased
power costs from the Michigan retail jurisdiction through the annual PSCR
mechanism.
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 (Infrastructure Cost Recovery Rider, or Rider
ICR).
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. Based on the return on common equity and other adjustments, 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). Based on the return on common equity and other
adjustments, 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 withdrew their
requested bad debt recovery mechanisms when the Governor of Illinois signed
Illinois Senate Bill (SB) 1918 in July 2009. SB 1918 contains a
provision that allows PGL and NSG to file a rider to recover (or refund) the
incremental difference between the rate case authorized uncollectible expense
and the actual uncollectible expense per the income statement. As
management concluded it was probable of recovery, PGL and NSG began recording
the effects of this provision in the third quarter. PGL and NSG filed
this rider with the ICC in September 2009, and the ICC must act on the filing by
March 2010.
On
August 4, 2009, the ICC Staff and interveners filed rebuttal testimony in these
cases. Based on the return on common equity and other adjustments,
the ICC Staff’s rebuttal testimony (as amended) recommended increases of $53.5
million for PGL and $13.5 million for NSG. On August 17, 2009, PGL
and NSG filed surrebuttal testimony further reducing their requests to $113.2
million and $18.1 million, respectively, primarily to reflect additional updated
costs. Hearings were held August 24, 2009, through August 28,
2009. Briefs were filed September 29, 2009, in which the ICC Staff
adjusted their recommendation to $53.3 million for PGL and $12.2 million for
NSG. Chicago and the union representing
PGL employees both
filed briefs in support of the Rider ICR. Reply briefs were filed
October 9, 2009, and a proposed order is due from the Administrative Law Judges
on November 6, 2009.
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.
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
September 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. See Note 4, “Integrys Energy Services
Strategy Change,” for more information.
|
●
|
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
September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$ |
332.3 |
|
|
$ |
211.5 |
|
|
$ |
543.8 |
|
|
$ |
751.2 |
|
|
$ |
2.8 |
|
|
$ |
- |
|
|
$ |
1,297.8 |
|
Intersegment
revenues
|
|
|
10.0 |
|
|
|
0.1 |
|
|
|
10.1 |
|
|
|
- |
|
|
|
- |
|
|
|
(10.1 |
) |
|
|
- |
|
Restructuring
expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2.4 |
|
|
|
- |
|
|
|
- |
|
|
|
2.4 |
|
Depreciation
and
amortization
expense
|
|
|
22.4 |
|
|
|
26.4 |
|
|
|
48.8 |
|
|
|
4.9 |
|
|
|
3.8 |
|
|
|
- |
|
|
|
57.5 |
|
Miscellaneous
income
(expense)
|
|
|
1.7 |
|
|
|
1.0 |
|
|
|
2.7 |
|
|
|
3.6 |
|
|
|
30.6 |
|
|
|
(11.0 |
) |
|
|
25.9 |
|
Interest
expense (income)
|
|
|
10.1 |
|
|
|
12.6 |
|
|
|
22.7 |
|
|
|
4.2 |
|
|
|
25.8 |
|
|
|
(11.0 |
) |
|
|
41.7 |
|
Provision
(benefit) for income
taxes
|
|
|
21.8 |
|
|
|
(11.9 |
) |
|
|
9.9 |
|
|
|
22.3 |
|
|
|
(4.2 |
) |
|
|
- |
|
|
|
28.0 |
|
Net income
(loss) from
continuing
operations
|
|
|
38.8 |
|
|
|
(19.7 |
) |
|
|
19.1 |
|
|
|
21.5 |
|
|
|
8.9 |
|
|
|
- |
|
|
|
49.5 |
|
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2.3 |
|
|
|
- |
|
|
|
- |
|
|
|
2.3 |
|
Preferred
stock dividends
of subsidiary
|
|
|
0.5 |
|
|
|
0.2 |
|
|
|
0.7 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.7 |
|
Net income
(loss) attributed to
common
shareholders
|
|
|
38.3 |
|
|
|
(19.9 |
) |
|
|
18.4 |
|
|
|
23.8 |
|
|
|
8.9 |
|
|
|
- |
|
|
|
51.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$ |
365.1 |
|
|
$ |
315.0 |
|
|
$ |
680.1 |
|
|
$ |
2,540.2 |
|
|
$ |
2.8 |
|
|
$ |
- |
|
|
$ |
3,223.1 |
|
Intersegment
revenues
|
|
|
10.2 |
|
|
|
0.2 |
|
|
|
10.4 |
|
|
|
0.6 |
|
|
|
- |
|
|
|
(11.0 |
) |
|
|
- |
|
Depreciation
and
amortization
expense
|
|
|
21.6 |
|
|
|
28.1 |
|
|
|
49.7 |
|
|
|
3.6 |
|
|
|
3.4 |
|
|
|
- |
|
|
|
56.7 |
|
Miscellaneous
income
(expense)
|
|
|
1.8 |
|
|
|
1.0 |
|
|
|
2.8 |
|
|
|
1.5 |
|
|
|
29.4 |
|
|
|
(10.0 |
) |
|
|
23.7 |
|
Interest
expense (income)
|
|
|
8.5 |
|
|
|
14.7 |
|
|
|
23.2 |
|
|
|
3.4 |
|
|
|
22.9 |
|
|
|
(10.0 |
) |
|
|
39.5 |
|
Provision
(benefit) for income
taxes
|
|
|
30.7 |
|
|
|
(10.8 |
) |
|
|
19.9 |
|
|
|
(56.2 |
) |
|
|
2.7 |
|
|
|
- |
|
|
|
(33.6 |
) |
Net income
(loss) from
continuing
operations
|
|
|
52.2 |
|
|
|
(17.7 |
) |
|
|
34.5 |
|
|
|
(94.5 |
) |
|
|
1.6 |
|
|
|
- |
|
|
|
(58.4 |
) |
Preferred
stock dividends of
subsidiary
|
|
|
0.6 |
|
|
|
0.1 |
|
|
|
0.7 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.7 |
|
Net income
(loss) attributed to
common
shareholders
|
|
|
51.6 |
|
|
|
(17.8 |
) |
|
|
33.8 |
|
|
|
(94.5 |
) |
|
|
1.6 |
|
|
|
- |
|
|
|
(59.1 |
) |
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$ |
954.1 |
|
|
$ |
1,616.8 |
|
|
$ |
2,570.9 |
|
|
$ |
3,346.7 |
|
|
$ |
8.6 |
|
|
$ |
- |
|
|
$ |
5,926.2 |
|
Intersegment
revenues
|
|
|
32.2 |
|
|
|
0.4 |
|
|
|
32.6 |
|
|
|
1.1 |
|
|
|
- |
|
|
|
(33.7 |
) |
|
|
- |
|
Goodwill
impairment loss
|
|
|
- |
|
|
|
291.1 |
|
|
|
291.1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
291.1 |
|
Restructuring
expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
21.5 |
|
|
|
- |
|
|
|
- |
|
|
|
21.5 |
|
Depreciation
and
amortization
expense
|
|
|
67.4 |
|
|
|
78.8 |
|
|
|
146.2 |
|
|
|
14.7 |
|
|
|
11.1 |
|
|
|
- |
|
|
|
172.0 |
|
Miscellaneous
income
(expense)
|
|
|
3.9 |
|
|
|
2.8 |
|
|
|
6.7 |
|
|
|
5.9 |
|
|
|
91.0 |
|
|
|
(35.7 |
) |
|
|
67.9 |
|
Interest
expense (income)
|
|
|
31.1 |
|
|
|
38.8 |
|
|
|
69.9 |
|
|
|
9.9 |
|
|
|
80.3 |
|
|
|
(35.7 |
) |
|
|
124.4 |
|
Provision
(benefit) for income
taxes
|
|
|
48.2 |
|
|
|
(10.2 |
) |
|
|
38.0 |
|
|
|
15.9 |
|
|
|
5.4 |
|
|
|
- |
|
|
|
59.3 |
|
Net income
(loss) from
continuing
operations
|
|
|
90.1 |
|
|
|
(196.6 |
) |
|
|
(106.5 |
) |
|
|
3.5 |
|
|
|
8.3 |
|
|
|
- |
|
|
|
(94.7 |
) |
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2.6 |
|
|
|
- |
|
|
|
- |
|
|
|
2.6 |
|
Preferred
stock dividends
of
subsidiary
|
|
|
1.8 |
|
|
|
0.5 |
|
|
|
2.3 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2.3 |
|
Net income
(loss) attributed to
common
shareholders
|
|
|
88.3 |
|
|
|
(197.1 |
) |
|
|
(108.8 |
) |
|
|
6.1 |
|
|
|
8.3 |
|
|
|
- |
|
|
|
(94.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$ |
982.1 |
|
|
$ |
2,091.0 |
|
|
$ |
3,073.1 |
|
|
$ |
7,547.9 |
|
|
$ |
8.5 |
|
|
$ |
- |
|
|
$ |
10,629.5 |
|
Intersegment
revenues
|
|
|
33.5 |
|
|
|
0 .5 |
|
|
|
34.0 |
|
|
|
7.6 |
|
|
|
0.6 |
|
|
|
(42.2 |
) |
|
|
- |
|
Goodwill
impairment loss
|
|
|
- |
|
|
|
6.5 |
|
|
|
6.5 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6.5 |
|
Depreciation
and
amortization
expense
|
|
|
61.8 |
|
|
|
80.6 |
|
|
|
142.4 |
|
|
|
10.6 |
|
|
|
10.8 |
|
|
|
- |
|
|
|
163.8 |
|
Miscellaneous
income
(expense)
|
|
|
5.6 |
|
|
|
4.8 |
|
|
|
10.4 |
|
|
|
4.5 |
|
|
|
79.8 |
|
|
|
(30.2 |
) |
|
|
64.5 |
|
Interest
expense (income)
|
|
|
25.8 |
|
|
|
41.4 |
|
|
|
67.2 |
|
|
|
6.1 |
|
|
|
67.8 |
|
|
|
(30.2 |
) |
|
|
110.9 |
|
Provision
(benefit) for income
taxes
|
|
|
44.0 |
|
|
|
34.6 |
|
|
|
78.6 |
|
|
|
(21.6 |
) |
|
|
5.2 |
|
|
|
- |
|
|
|
62.2 |
|
Net income
(loss) from
continuing
operations
|
|
|
80.2 |
|
|
|
49.2 |
|
|
|
129.4 |
|
|
|
(34.0 |
) |
|
|
7.6 |
|
|
|
- |
|
|
|
103.0 |
|
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
Preferred
stock dividends
of
subsidiary
|
|
|
1.6 |
|
|
|
0.7 |
|
|
|
2.3 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2.3 |
|
Net income
(loss) attributed to
common
shareholders
|
|
|
78.6 |
|
|
|
48.5 |
|
|
|
127.1 |
|
|
|
(33.9 |
) |
|
|
7.6 |
|
|
|
- |
|
|
|
100.8 |
|
NOTE 23--NEW
ACCOUNTING PRONOUNCEMENTS
FASB Staff Position
(FSP) No. FAS 132(R)-1, "Employers' Disclosures about Postretirement
Benefit Plan Assets," (now incorporated as part of FASB ASC 715-20) was issued
in December 2008. This amendment to previously issued GAAP
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 guidance 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.
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 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 was effective for Integrys Energy Group for
the reporting period ending September 30, 2009. This standard
changed the way GAAP is referenced throughout Integrys Energy Group’s
disclosures but did not have an impact on its results of operations or financial
position.
Accounting
Standards Update (ASU) 2009-5, “Measuring Liabilities at Fair Value,” was issued
in August 2009. This amendment to the FASB Accounting Standards
CodificationTM
provides additional guidance for measuring the fair value of a liability under
FASB ASC 820, “Fair Value Measurements and Disclosures.” Under this
amendment, when there is a lack of observable market information the fair value
of a liability should be measured using a quoted price for an identical or
similar liability when traded as an asset, or another valuation technique
consistent with the principles found in FASB ASC 820. If a liability
is restricted from being traded, entities are not required to include separate
inputs or adjustments to inputs in the valuation related to the existence of
that restriction. This guidance is effective for Integrys Energy
Group for the reporting period ending December 31, 2009. Management
does not expect the adoption to have a significant impact on Integrys Energy
Group’s consolidated financial statements.
ASU 2009-12,
“Investments in Certain Entities That Calculate Net Asset Value per Share (or
Its Equivalent),” was issued in September 2009. This guidance permits
a reporting entity, as a practical expedient, to measure the fair value of
certain investments using the net asset value per share if that value is
calculated in accordance with the principles of FASB ASC 946, “Financial
Services – Investment Companies,“ as of the entity’s measurement
date. This guidance also requires additional disclosures about the
attributes of investments within the scope of the amendments. This
guidance is effective for the reporting period ending December 31,
2009. Management is currently evaluating the impact that the adoption
will have on Integrys Energy Group’s consolidated financial
statements.
|
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 approximate 34% equity ownership interest in ATC (a federally
regulated electric transmission company operating in Wisconsin, Michigan,
Minnesota, and Illinois).
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 or
significantly reduce the size of its nonregulated energy services business
segment to a smaller segment with significantly reduced credit and collateral
support requirements.
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 approximate 34% ownership interest in ATC, a transmission
company that has over $2.7 billion of transmission assets at
September 30, 2009. Integrys Energy Group will continue to
fund its share of the equity portion of future ATC growth. ATC
plans to invest approximately $2.5 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 and proposed 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
constructed in Howard County, Iowa, which is expected to be operational 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 of 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 divest of
or significantly reduce the size of its nonregulated energy services business
segment. In the event that a full divestiture of Integrys Energy
Services does not occur and a portion of the nonregulated energy services
business segment remains, it will be a smaller segment that requires
significantly less capital, parental guarantees, and overall financial liquidity
from Integrys Energy Group. Integrys Energy Group is committed to
significantly reducing credit and collateral support requirements, with
substantially all of this accomplished by the end of 2010. Integrys
Energy Group is seeking to deploy its capital to areas with more desirable
risk-adjusted rates of return. Although Integrys Energy Group
anticipates a reduction in future earnings capacity from this business segment
going forward, an improvement in the liquidity position, capital deployed, and
reduced business risk profile of Integrys Energy Group is expected.
Integrating
Resources to Provide Operational Excellence – Integrys Energy Group is
committed to integrating resources of all its businesses, while meeting all
applicable legal and regulatory requirements. This will provide the
best value to customers and shareholders by leveraging the individual
capabilities and expertise of each business and lowering
costs. Integrys Energy Group believes the following recent
developments have helped, or will help, integrate resources and provide
operational excellence:
·
|
IBS, a wholly
owned service company of Integrys Energy Group, became operational on
January 1, 2008. IBS was formed to achieve a
significant portion of the cost synergies anticipated from the PEC merger
through the consolidation and efficient delivery of various support
services, and to provide more consistent and transparent allocation of
costs throughout Integrys Energy Group and its
subsidiaries.
|
|
|
·
|
"Operational
Excellence" initiatives were implemented to provide top performance in the
areas of project management, process improvement, contract administration,
and compliance in order to reduce costs and manage projects and activities
within appropriate budgets, schedules, and
regulations.
|
Placing
Strong Emphasis on Asset and Risk Management – 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, 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 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
September 30
|
|
|
%
Increase
|
|
|
Nine
Months Ended
September 30
|
|
|
%
Increase
|
|
(Millions,
except per share amounts)
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas
utility operations
|
|
$ |
(19.9 |
) |
|
$ |
(17.8 |
) |
|
|
11.8 |
% |
|
$ |
(197.1 |
) |
|
$ |
48.5 |
|
|
|
N/A |
|
Electric
utility operations
|
|
|
38.3 |
|
|
|
51.6 |
|
|
|
(25.8 |
)% |
|
|
88.3 |
|
|
|
78.6 |
|
|
|
12.3 |
% |
Integrys
Energy Services’ operations
|
|
|
23.8 |
|
|
|
(94.5 |
) |
|
|
N/A |
|
|
|
6.1 |
|
|
|
(33.9 |
) |
|
|
N/A |
|
Holding
company and other operations
|
|
|
8.9 |
|
|
|
1.6 |
|
|
|
456.3 |
% |
|
|
8.3 |
|
|
|
7.6 |
|
|
|
9.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) attributed to
common
shareholders
|
|
$ |
51.1 |
|
|
$ |
(59.1 |
) |
|
|
N/A |
|
|
$ |
(94.4 |
) |
|
$ |
100.8 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
(loss) per share
|
|
$ |
0.67 |
|
|
$ |
(0.77 |
) |
|
|
N/A |
|
|
$ |
(1.23 |
) |
|
$ |
1.32 |
|
|
|
N/A |
|
Diluted
earnings (loss) per share
|
|
$ |
0.66 |
|
|
$ |
(0.77 |
) |
|
|
N/A |
|
|
$ |
(1.23 |
) |
|
$ |
1.31 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares
of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
76.8 |
|
|
|
76.7 |
|
|
|
0.1 |
% |
|
|
76.8 |
|
|
|
76.5 |
|
|
|
0.4 |
% |
Diluted
|
|
|
76.9 |
|
|
|
76.7 |
|
|
|
0.3 |
% |
|
|
76.8 |
|
|
|
76.9 |
|
|
|
(0.1 |
)% |
Financial Results – Third
Quarter 2009 Compared with Third Quarter 2008
Integrys Energy
Group recognized net income attributed to common shareholders of
$51.1 million ($0.66 diluted earnings per share) for the quarter ended
September 30, 2009, compared with a net loss attributed to common shareholders
of $59.1 million ($0.77 net loss per share) for the quarter ended September 30,
2008. Significant factors impacting the $110.2 million increase in
earnings were as follows (and are discussed in more detail
thereafter):
·
|
The net loss
attributed to common shareholders at the regulated natural gas utility
segment increased $2.1 million, from $17.8 million for the
quarter ended September 30, 2008, to $19.9 million for the same
quarter in 2009. The increase in the net loss was driven by a
positive adjustment recognized in the third quarter of 2008 at MGU related
to recovery of prior natural gas costs in an MPSC proceeding as well as
lower quarter-over-quarter volumes, net of decoupling, attributed
primarily to the general economic slowdown. The increase in the
net loss was partially offset by the net positive impact that rate
increases at MERC and MGU had on margin.
|
|
|
·
|
Net income
attributed to common shareholders at the regulated electric utility
segment decreased $13.3 million, from $51.6 million for the quarter
ended September 30, 2008, to $38.3 million for the same quarter
in 2009. The decrease was driven by fuel and purchased power
costs that were lower than what was recovered in rates during the third
quarter of 2008, a decrease in sales volumes primarily due to colder
quarter-over-quarter weather during the cooling season, and an increase in
operating and maintenance expense, partially offset by higher margin from
wholesale customers.
|
|
|
·
|
Earnings at
Integrys Energy Services increased $118.3 million, from a net loss
attributed to common shareholders of $94.5 million for the quarter
ended September 30, 2008, to net income attributed to common
shareholders of $23.8 million for the same quarter in
2009. This increase was driven by a $113.8 million
after-tax increase in Integrys Energy Services' margin
quarter-over-quarter. The increase in margin was primarily
related to the partial recovery of non-cash accounting losses related to
derivative fair value and inventory valuation adjustments recorded in
prior periods, an increase in realized wholesale electric margins, and an
increase in realized natural gas margins.
|
|
|
·
|
Earnings at
the holding company and other segment increased $7.3 million, from
$1.6 million for the quarter ended September 30, 2008, to
$8.9 million for the same quarter in 2009, largely due to adjustments
required by GAAP to the effective tax rate to ensure the year-to-date
interim effective tax rate reflects the projected annual effective tax
rate.
|
Financial Results – Nine
Months 2009 Compared with Nine Months 2008
Integrys Energy
Group recognized a net loss attributed to common shareholders of
$94.4 million ($1.23 net loss per share) for the nine months ended
September 30, 2009, compared with net income attributed to common shareholders
of $100.8 million ($1.31 diluted earnings per share) for the same period in
2008. Significant factors impacting the $195.2 million decrease in
earnings were as follows (and are discussed in more detail
thereafter):
·
|
Earnings at
the regulated natural gas utility segment decreased $245.6 million, from
net income attributed to common shareholders of $48.5 million for the
nine months ended September 30, 2008, to a net loss attributed to
common shareholders of $197.1 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, net of decoupling, attributed to the general economic slowdown
and warmer weather during the heating season, also negatively impacted
earnings period-over-period. The decrease in earnings was
partially offset by the net positive impact that increased rates at MERC,
MGU, and PGL had on margin.
|
|
|
·
|
Net income
attributed to common shareholders at the regulated electric utility
segment increased $9.7 million, from $78.6 million during the
nine months ended September 30, 2008, to $88.3 million for the
same period in 2009. The increase at the regulated electric
utility segment was driven by an increase in wholesale margins, fuel and
purchased power costs that were lower than what was recovered in rates
during the nine months ended September 30, 2009 (compared with fuel
and purchased power costs that were higher than what was recovered in
rates during the same period in 2008), and a fuel surcharge increase
effective July 4, 2008, a portion of which was incorporated into WPS’s
2009 non-fuel base retail electric rates. The higher electric
margins were partially offset by increases in maintenance expense,
employee benefit costs, depreciation expense related to Weston 4, and
interest expense.
|
|
|
·
|
Earnings at
Integrys Energy Services increased $40.0 million, from a net loss
attributed to common shareholders of $33.9 million for the nine
months ended September 30, 2008, to net income attributed to common
shareholders of $6.1 million for the same period in
2009. This increase was driven by a $73.9 million after-tax
increase in Integrys Energy Services' margin
period-over-period. This increase in margin was primarily
related to the partial recovery of non-cash accounting losses related to
derivative fair value and inventory valuation adjustments recorded in
prior periods and an increase in realized retail and wholesale electric
margins, partially offset by restructuring expenses related to the
previously announced strategy change, an increase in operating and
maintenance expense, and an increase in the provision for income taxes
related to discrete tax items.
|
|
|
Utility
Operations
For the three and
nine months ended September 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
|
|
|
%
|
|
|
Nine
Months Ended
|
|
|
%
|
|
|
|
September 30
|
|
|
Increase
|
|
|
September 30
|
|
|
Increase
|
|
(Millions, except heating
degree days)
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
211.6 |
|
|
$ |
315.2 |
|
|
|
(32.9 |
)% |
|
$ |
1,617.2 |
|
|
$ |
2,091.5 |
|
|
|
(22.7 |
)% |
Purchased
natural gas costs
|
|
|
84.1 |
|
|
|
182.0 |
|
|
|
(53.8 |
)% |
|
|
1,002.8 |
|
|
|
1,468.5 |
|
|
|
(31.7 |
)% |
Margins
|
|
|
127.5 |
|
|
|
133.2 |
|
|
|
(4.3 |
)% |
|
|
614.4 |
|
|
|
623.0 |
|
|
|
(1.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and
maintenance expense
|
|
|
112.2 |
|
|
|
112.1 |
|
|
|
0.1 |
% |
|
|
390.1 |
|
|
|
391.2 |
|
|
|
(0.3 |
)% |
Goodwill
impairment loss *
|
|
|
- |
|
|
|
- |
|
|
|
- |
% |
|
|
291.1 |
|
|
|
6.5 |
|
|
|
4,378.5 |
% |
Depreciation
and amortization expense
|
|
|
26.4 |
|
|
|
28.1 |
|
|
|
(6.0 |
)% |
|
|
78.8 |
|
|
|
80.6 |
|
|
|
(2.2 |
)% |
Taxes other
than income taxes
|
|
|
8.9 |
|
|
|
7.8 |
|
|
|
14.1 |
% |
|
|
25.2 |
|
|
|
24.3 |
|
|
|
3.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
(20.0 |
) |
|
|
(14.8 |
) |
|
|
35.1 |
% |
|
|
(170.8 |
) |
|
|
120.4 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
|
1.0 |
|
|
|
1.0 |
|
|
|
- |
% |
|
|
2.8 |
|
|
|
4.8 |
|
|
|
(41.7 |
)% |
Interest
expense
|
|
|
(12.6 |
) |
|
|
(14.7 |
) |
|
|
(14.3 |
)% |
|
|
(38.8 |
) |
|
|
(41.4 |
) |
|
|
(6.3 |
)% |
Other
expense
|
|
|
(11.6 |
) |
|
|
(13.7 |
) |
|
|
(15.3 |
)% |
|
|
(36.0 |
) |
|
|
(36.6 |
) |
|
|
(1.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before taxes
|
|
$ |
(31.6 |
) |
|
$ |
(28.5 |
) |
|
|
10.9 |
% |
|
$ |
(206.8 |
) |
|
$ |
83.8 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Throughput
in therms
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
94.7 |
|
|
|
91.5 |
|
|
|
3.5 |
% |
|
|
1,107.3 |
|
|
|
1,152.0 |
|
|
|
(3.9 |
)% |
Commercial
and industrial
|
|
|
35.6 |
|
|
|
38.5 |
|
|
|
(7.5 |
)% |
|
|
353.0 |
|
|
|
378.8 |
|
|
|
(6.8 |
)% |
Interruptible
|
|
|
3.9 |
|
|
|
6.0 |
|
|
|
(35.0 |
)% |
|
|
28.0 |
|
|
|
41.7 |
|
|
|
(32.9 |
)% |
Interdepartmental
|
|
|
3.5 |
|
|
|
5.8 |
|
|
|
(39.7 |
)% |
|
|
7.9 |
|
|
|
24.2 |
|
|
|
(67.4 |
)% |
Transport
|
|
|
248.1 |
|
|
|
296.2 |
|
|
|
(16.2 |
)% |
|
|
1,157.6 |
|
|
|
1,320.1 |
|
|
|
(12.3 |
)% |
Total
sales in therms
|
|
|
385.8 |
|
|
|
438.0 |
|
|
|
(11.9 |
)% |
|
|
2,653.8 |
|
|
|
2,916.8 |
|
|
|
(9.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
heating degree days
|
|
|
134 |
|
|
|
96 |
|
|
|
39.6 |
% |
|
|
4,573 |
|
|
|
4,597 |
|
|
|
(0.5 |
)% |
* See
Note 8, "Goodwill and
Other Intangible Assets," for more information.
Third
Quarter 2009 Compared with Third Quarter 2008
Revenues
Regulated natural
gas utility segment revenue decreased $103.6 million, driven
by:
·
|
An
approximate $92 million decrease in revenue as a result of an
approximate 53% decrease in the average per-unit cost of natural gas sold
by the regulated natural gas utilities in the third 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 passed directly through to customers in current
rates.
|
|
|
·
|
An
approximate $12 million decrease in revenue as a result of lower
quarter-over-quarter natural gas throughput volumes driven
by:
|
|
|
|
|
-
|
An
approximate $9 million decrease related to lower residential customer
volumes at WPS resulting from energy conservation efforts, and lower
commercial and industrial customer volumes across all the natural gas
utilities resulting from lower demand related to changes in plant
operations, both of which Integrys Energy Group attributed to the general
economic slowdown.
|
|
|
|
|
-
|
An
approximate $3 million decrease related to a reduction in volumes
sold to the electric utility segment driven by the availability of lower
cost power from MISO resulting in a decrease in the need for the electric
utility to run its natural gas-fired peaking generation
units.
|
|
|
|
·
|
An
approximate $2 million quarter-over-quarter decrease in revenue from
the recovery of environmental cleanup expenditures at PGL and NSG related
to former manufactured gas plant sites.
|
|
|
·
|
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. On 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.
|
Margins
The regulated
natural gas utility segment margin decreased $5.7 million, driven
by:
·
|
An
approximate $3 million quarter-over-quarter decrease in margin at MGU
related to an adjustment in the third quarter of 2008 for
recovery of prior natural gas costs in an MPSC
proceeding.
|
|
|
·
|
An 11.9%
decrease in natural gas throughput volumes attributed primarily 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 was
tempered by 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.
|
|
|
·
|
An
approximate $2 million quarter-over-quarter decrease in margin due to
lower recovery of environmental cleanup expenditures at PGL and NSG
related to former manufactured gas plant sites. This decrease
in margin 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 margin was partially offset by a $1 million net positive
quarter-over-quarter impact of rates, driven by rate increases at MERC and
MGU. Lower fixed customer charges resulting from an approximate
1% decrease in customer base at PGL and a new rate design at WPS
effective
January 1,
2009, which incorporates higher volumetric rates and lower fixed customer
charges, partially offset the rate
increases.
|
Operating
Loss
The operating loss
at the regulated natural gas utility segment increased $5.2 million, driven
by the $5.7 million decrease in natural gas margin, partially offset
by a $0.5 million decrease in operating expenses.
The decrease in
operating expenses quarter-over-quarter was the result of:
·
|
An
$8.0 million decrease in bad debt expense, primarily driven by PGL's
and NSG's election under a new Illinois state law to file to recover from
or refund to customers the difference between actual bad debt expense
reported as a component of earnings and the bad debt expense included in
utility rates retroactive to January 1, 2008.
|
|
|
·
|
The decrease
related to the reduction in bad debt expense was partially offset
by:
|
|
|
|
-
|
A combined
$4.3 million increase in general and administrative salaries and
employee benefit costs.
|
|
|
|
-
|
A
$1.9 million increase in natural gas maintenance costs, primarily
related to increased system inspection and maintenance
requirements.
|
|
|
|
-
|
A $1.0
million increase in customer account
expenses.
|
Other
Expense
Other expense at
the regulated natural gas utilities decreased $2.1 million, driven by a
decrease in interest expense from lower quarter-over-quarter interest rates and
lower average short-term borrowings, which resulted from lower natural gas
prices and a decrease in capital expenditures. A decrease in interest
expense paid on customer-related balances also contributed to the decrease in
interest expense.
Nine
Months 2009 Compared with Nine Months 2008
Revenues
Regulated natural
gas utility segment revenue decreased $474.3 million, driven
by:
·
|
An
approximate $392 million decrease in revenue as a result of an
approximate 25% decrease in the average per-unit cost of natural gas sold
by the regulated natural gas utilities during the nine months ended
September 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 passed
directly through to customers in current rates.
|
|
|
·
|
An
approximate $106 million decrease in revenue as a result of lower
period-over-period natural gas throughput volumes, driven
by:
|
|
|
|
|
-
|
An
approximate $62 million decrease related to lower residential
customer volumes resulting from energy conservation efforts, lower
commercial and industrial customer volumes resulting from lower demand
related to changes in plant operations, and a decrease in customer base at
PGL, all of which Integrys Energy Group attributed to the general economic
slowdown.
|
|
|
|
|
-
|
An
approximate $28 million decrease in revenue as a result of warmer
weather during the heating season for the nine months ended
September 30, 2009, compared with the same period in
2008.
|
|
|
|
|
-
|
An
approximate $16 million decrease related to a reduction in volumes
sold to the electric utility segment driven by the availability of lower
cost power from MISO resulting in a decrease in the need for the electric
utility to run its natural gas-fired peaking generation
units.
|
|
|
|
·
|
An
approximate $8 million period-over-period decrease in revenue from
lower recovery of environmental cleanup expenditures at PGL and NSG
related to former manufactured gas plant sites, partially offset by higher
recovery of EEP expenses.
|
|
|
·
|
The decrease
in revenue was partially offset by the approximate $28 million
period-over-period net 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. On 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 $18 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. Also, for the period ending September 30,
2009, revenue increased an approximate $3 million from other impacts of
rate design.
|
|
|
|
|
-
|
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 September 30, 2009, revenue increased approximately
$2 million related to this change in rate
design.
|
Margins
The regulated
natural gas utility segment margin decreased $8.6 million, driven
by:
·
|
A 9.0%
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 $24 million decrease in the
natural gas utility segment margin. This period-over-period
decrease in margin was tempered by 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 cap for the deferral of any
excess or shortfall from the rate case authorized
margin. Approximately $5 million of additional margin was
recognized at WPS due to a shortfall from the rate case authorized margin
during the nine months ended September 30, 2009.
|
|
|
·
|
An
approximate $8 million period-over-period decrease in margin due to
lower recovery of environmental cleanup expenditures at PGL and NSG
related to former manufactured gas plant sites, partially offset by an
increase in recovery of EEP expenses. This decrease in margin
was offset by a net decrease in operating expense from both the
amortization of the related regulatory asset and EEP expenses and,
therefore, had no impact on earnings.
|
|
|
·
|
An
approximate $3 million period-over-period decrease in margin at MGU
related to an adjustment in the third quarter of 2008 for recovery of
prior natural gas costs in an MPSC proceeding.
|
|
|
·
|
The decrease
in margin was partially offset by the approximate $28 million net
positive period-over-period impact of rate cases and impacts of rate
design at the regulated natural gas
utilities.
|
Operating Income
(Loss)
Operating income at
the regulated natural gas utility segment decreased $291.2 million, from
operating income of $120.4 million during the nine months ended September 30,
2008, to an operating loss of $170.8 million during the same period in
2009. This decrease was largely driven by a period-over-period
increase in non-cash goodwill impairment losses of $284.6 million and the
$8.6 million decrease in natural gas margin, partially offset by a
$2.0 million decrease in other operating expenses. 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
$2.0 million period-over-period decrease in other operating expenses
primarily related to:
·
|
A
$10.4 million decrease in bad debt expense, primarily driven by PGL's
and NSG's election during the third quarter of 2009, under a new Illinois
state law, to file to recover from or refund to customers the difference
between actual bad debt expense reported as a component of earnings and
the bad debt expenses included in utility rates retroactive to January 1,
2008. The decrease in bad debt expense is also attributable to
the impact lower energy prices had on overall accounts receivable
balances.
|
|
|
·
|
An
approximate $8 million decrease in amortization of the regulatory
asset related to environmental cleanup costs of manufactured gas plant
sites, partially offset by an increase in EEP expenses. Both of
these costs were recovered from customers in rates.
|
|
|
·
|
These
decreases in other operating expense period-over-period was partially
offset by:
|
|
|
|
-
|
A
$5.3 million increase in natural gas maintenance costs, primarily
related to increased system inspection and maintenance
requirements.
|
|
|
|
|
-
|
A
$4.6 million increase in employee benefit costs.
|
|
|
|
|
-
|
A
$3.7 million increase in expenses related to injuries and damages
expenses, including workers compensation claims.
|
|
|
|
|
-
|
A $3.4
million combined increase in operating expenses relating to customer
account expenses and amortization of rate case
costs.
|
Regulated
Electric Utility Segment Operations
|
|
Three
Months Ended
|
|
|
%
|
|
|
Nine
Months Ended
|
|
|
%
|
|
(Millions,
except heating degree days)
|
|
September 30
|
|
|
Increase
|
|
|
September 30
|
|
|
Increase
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
342.3 |
|
|
$ |
375.3 |
|
|
|
(8.8 |
)% |
|
$ |
986.3 |
|
|
$ |
1,015.6 |
|
|
|
(2.9 |
)% |
Fuel and
purchased power costs
|
|
|
147.2 |
|
|
|
167.4 |
|
|
|
(12.1 |
)% |
|
|
434.9 |
|
|
|
501.8 |
|
|
|
(13.3 |
)% |
Margins
|
|
|
195.1 |
|
|
|
207.9 |
|
|
|
(6.2 |
)% |
|
|
551.4 |
|
|
|
513.8 |
|
|
|
7.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and
maintenance expense
|
|
|
92.3 |
|
|
|
85.8 |
|
|
|
7.6 |
% |
|
|
283.7 |
|
|
|
274.5 |
|
|
|
3.4 |
% |
Depreciation
and amortization expense
|
|
|
22.4 |
|
|
|
21.6 |
|
|
|
3.7 |
% |
|
|
67.4 |
|
|
|
61.8 |
|
|
|
9.1 |
% |
Taxes other
than income taxes
|
|
|
11.4 |
|
|
|
10.9 |
|
|
|
4.6 |
% |
|
|
34.8 |
|
|
|
33.1 |
|
|
|
5.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
69.0 |
|
|
|
89.6 |
|
|
|
(23.0 |
)% |
|
|
165.5 |
|
|
|
144.4 |
|
|
|
14.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
|
1.7 |
|
|
|
1.8 |
|
|
|
(5.6 |
)% |
|
|
3.9 |
|
|
|
5.6 |
|
|
|
(30.4 |
)% |
Interest
expense
|
|
|
(10.1 |
) |
|
|
(8.5 |
) |
|
|
18.8 |
% |
|
|
(31.1 |
) |
|
|
(25.8 |
) |
|
|
20.5 |
% |
Other
expense
|
|
|
(8.4 |
) |
|
|
(6.7 |
) |
|
|
25.4 |
% |
|
|
(27.2 |
) |
|
|
(20.2 |
) |
|
|
34.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before
taxes
|
|
$ |
60.6 |
|
|
$ |
82.9 |
|
|
|
(26.9 |
)% |
|
$ |
138.3 |
|
|
$ |
124.2 |
|
|
|
11.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
in kilowatt-hours
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
765.7 |
|
|
|
789.4 |
|
|
|
(3.0 |
)% |
|
|
2,275.4 |
|
|
|
2,307.7 |
|
|
|
(1.4 |
)% |
Commercial
and industrial
|
|
|
2,138.7 |
|
|
|
2,240.4 |
|
|
|
(4.5 |
)% |
|
|
6,113.6 |
|
|
|
6,538.3 |
|
|
|
(6.5 |
)% |
Wholesale
|
|
|
1,376.2 |
|
|
|
1,331.7 |
|
|
|
3.3 |
% |
|
|
3,718.8 |
|
|
|
3,637.3 |
|
|
|
2.2 |
% |
Other
|
|
|
8.7 |
|
|
|
9.1 |
|
|
|
(4.4 |
)% |
|
|
28.3 |
|
|
|
30.4 |
|
|
|
(6.9 |
)% |
Total
sales in kilowatt-hours
|
|
|
4,289.3 |
|
|
|
4,370.6 |
|
|
|
(1.9 |
)% |
|
|
12,136.1 |
|
|
|
12,513.7 |
|
|
|
(3.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating
degree days
|
|
|
225 |
|
|
|
161 |
|
|
|
39.8 |
% |
|
|
5,261 |
|
|
|
5,036 |
|
|
|
4.5 |
% |
Cooling
degree days
|
|
|
163 |
|
|
|
356 |
|
|
|
(54.2 |
)% |
|
|
274 |
|
|
|
460 |
|
|
|
(40.4 |
)% |
UPPCO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating
degree days
|
|
|
458 |
|
|
|
405 |
|
|
|
13.1 |
% |
|
|
6,249 |
|
|
|
6,178 |
|
|
|
1.1 |
% |
Cooling
degree days
|
|
|
60 |
|
|
|
109 |
|
|
|
(45.0 |
)% |
|
|
99 |
|
|
|
138 |
|
|
|
(28.3 |
)% |
Third
Quarter 2009 Compared with Third Quarter 2008
Revenues
Regulated electric
utility segment revenue decreased $33.0 million, driven by:
·
|
An
approximate $15 million quarter-over-quarter reduction in revenue
primarily driven
by a
refund due to customers related to WPS’s over-collection of fuel
costs. 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 were estimated to be below the 2% fuel
window. See Note 21, "Regulatory
Environment," for more information on WPS's fuel
window.
|
|
|
·
|
A 4.5%
decrease in commercial and industrial sales volumes and a 3.0% decrease in
residential sales volumes, which resulted in an approximate
$11 million quarter-over-quarter net decrease in
revenue. The primary drivers of this decrease
were:
|
|
|
|
-
|
An
approximate $9 million decrease primarily related to colder
quarter-over-quarter weather during the cooling season as evidenced by the
decrease in cooling degree days at both WPS and UPPCO.
|
|
|
|
|
-
|
An
approximate $2 million decrease due to lower demand related to
changes in commercial and industrial customers’ plant operations, which
Integrys Energy Group attributed to the general economic
slowdown.
|
|
|
·
|
An
approximate $11 million quarter-over-quarter decrease in opportunity sales
driven by lower demand and the availability of lower cost power from the
MISO market.
|
|
|
·
|
These
decreases were partially offset by an approximate $6 million
quarter-over-quarter increase driven by higher wholesale volumes due to an
increase in 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.
|
Margins
The regulated
electric utility segment margin decreased $12.8 million, driven
by:
·
|
An
approximate $11 million quarter-over-quarter decrease in WPS's
regulated electric utility margin due to fuel and purchased power costs
that were approximately $3 million lower than what was recovered in
rates during the quarter ended September 30, 2009, compared with
fuel and purchased power costs that were approximately $14 million
lower than what was recovered in rates during the same quarter in
2008.
|
|
|
·
|
A 4.5%
decrease in commercial and industrial sales volumes and a 3.0% decrease in
residential sales volumes which resulted in an approximate $7 million
net decrease in the regulated electric utility segment margin, primarily
due to colder quarter-over-quarter weather during the cooling season as
evidenced by the decrease in cooling degree days at both WPS and
UPPCO. It is important to note that the rate order for the
four-year pilot program for electric decoupling has an annual $14.0
million cap for the deferral of any excess or shortfall from the rate case
authorized margin. This cap was reached during the second
quarter of 2009; therefore, no additional decoupling deferral was allowed
in the third quarter of 2009.
|
|
|
·
|
These
decreases were partially offset by an approximate $5 million
quarter-over-quarter increase in regulated 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,
effective January 1, 2009, to recover costs related to Weston
4.
|
Operating
Income
Operating income at
the regulated electric utility segment decreased $20.6 million
quarter-over-quarter, driven by the $12.8 million decrease in electric
margin and a $7.8 million increase in operating expenses.
The increase in
operating expenses quarter-over-quarter was the result of:
·
|
A
$3.2 million increase in employee benefit costs.
|
|
|
·
|
A
$2.4 million increase in electric maintenance expenses, primarily
related to a greater number of outages at the generation plants in the
third quarter of 2009, compared with the same quarter of
2008.
|
Other
Expense
Other expense at
the regulated electric utilities increased $1.7 million
quarter-over-quarter, driven by a $1.6 million increase in interest
expense, primarily related to an increase in long-term borrowings at
WPS. The additional borrowings were utilized to fund various
construction projects, most notably the Crane Creek wind generation project in
Iowa.
Nine
Months 2009 Compared with Nine Months 2008
Revenues
Regulated electric
utility segment revenue decreased $29.3 million, driven by:
·
|
A 6.5%
decrease in commercial and industrial sales volumes and a 1.4% decrease in
residential sales volumes, which resulted in an approximate
$20 million period-over-period net decrease in revenue, after the
impact of decoupling. The primary drivers of this decrease
were:
|
|
|
|
-
|
An
approximate $26 million period-over-period decrease due to lower
demand related to changes in commercial and industrial customers’ plant
operations, which Integrys Energy Group attributed to the general economic
slowdown.
|
|
|
|
|
-
|
An
approximate $11 million decrease related to colder period-over-period
weather during the cooling season as evidenced by the decrease in cooling
degree days at both WPS and UPPCO.
|
|
|
|
|
-
|
These
decreases in volumes were partially offset by the $14.0 million impact
that decoupling, which went into effect on 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. It is important to note that the rate order for this
four-year pilot program for electric decoupling has an annual $14.0
million cap for the deferral of any excess or shortfall from the rate case
authorized margin. This cap was reached during the second
quarter of 2009; therefore, no additional decoupling deferral is allowed
if there are any additional shortfalls from authorized margin for the
remainder of the year.
|
|
|
·
|
An
approximate $20 million period-over-period decrease in opportunity sales
driven by lower demand and the availability of lower cost power from the
MISO market.
|
|
|
·
|
These
decreases were partially offset by an approximate $13 million increase
driven by higher wholesale volumes due to an increase in 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.
|
Margins
The regulated
electric utility segment margin increased $37.6 million, driven
by:
·
|
An
approximate $15 million period-over-period increase in regulated
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, effective January 1, 2009, to recover costs related
to Weston 4.
|
|
|
·
|
An
approximate $14 million period-over-period increase in WPS's
regulated electric utility margin due to fuel and purchased power costs
that were approximately $12 million lower than what was recovered in
rates during the period ended September 30, 2009, compared with
fuel and purchased power costs that were approximately $2 million
higher than what was recovered in rates during the same period in
2008.
|
|
|
·
|
An
approximate $12 million period-over-period increase in regulated
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 year-to-date
benefit of the 2008 retail electric rate increase, effective
January 16, 2008, for WPS.
|
|
|
·
|
The increase
in regulated electric utility segment margin was partially offset by a
5.2% period-over-period decrease in sales volumes to residential and
commercial and industrial customers, which resulted in an approximate $3
million period-over-period net decrease in margin, after the impact of the
WPS decoupling mechanism. The $14.0 million impact of
decoupling partially offset the approximate $17 million decrease in margin
due to lower sales volumes, which was attributed to the general economic
slowdown and colder period-over-period weather during the cooling
season.
|
Operating
Income
Operating income at
the regulated electric utility segment increased $21.1 million
period-over-period, driven by the $37.6 million increase in electric
margin, partially offset by a $16.5 million increase in operating
expenses.
The increase in
operating expenses period-over-period was the result of:
·
|
A
$7.5 million increase in electric maintenance expenses, primarily
related to a greater number of outages at the generation plants during the
nine months ended September 30, 2009, compared with the same period
in 2008.
|
|
|
·
|
A
$5.4 million increase in employee benefit costs.
|
|
|
·
|
A
$5.2 million increase in depreciation and amortization expense at
WPS, primarily related to Weston 4 being placed in service for
accounting purposes in April 2008.
|
|
|
·
|
These
increases were partially offset by a $2.6 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 $7.0 million period-over-period,
driven by:
·
|
A
$5.3 million increase in interest expense, primarily related to
increased long-term borrowings at WPS. The additional
borrowings were utilized to fund various construction projects, most
notably the Crane Creek wind generation project 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.
|
Integrys Energy Services'
Operations
Integrys Energy
Services is a diversified nonregulated energy supply and services company
serving residential, commercial, industrial, and wholesale
customers.
Integrys Energy
Group is in the process of executing its previously announced strategy to divest
of or significantly reduce the size of its nonregulated energy services
operations to a smaller segment with significantly reduced credit and collateral
support requirements. Integrys Energy Services continues to enter
into new transactions with customers within certain defined parameters, in order
to preserve value while focusing on the execution of this strategy.
Integrys
Energy Services' Segment Results of Operations
|
|
Three
Months
Ended
|
|
|
%
|
|
|
Nine
Months
Ended
|
|
|
%
|
|
(Millions,
except natural gas sales volumes)
|
|
September 30
|
|
|
Increase
|
|
|
September 30
|
|
|
Increase
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
751.2 |
|
|
$ |
2,540.8 |
|
|
|
(70.4 |
)% |
|
$ |
3,347.8 |
|
|
$ |
7,555.5 |
|
|
|
(55.7 |
)% |
Cost of fuel,
natural gas, and purchased power
|
|
|
660.4 |
|
|
|
2,639.7 |
|
|
|
(75.0 |
)% |
|
|
3,136.2 |
|
|
|
7,467.1 |
|
|
|
(58.0 |
)% |
Margins
|
|
|
90.8 |
|
|
|
(98.9 |
) |
|
|
N/A |
|
|
|
211.6 |
|
|
|
88.4 |
|
|
|
139.4 |
% |
Margin
Detail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric
and other margins
|
|
|
80.5 |
|
|
|
(185.7 |
) |
|
|
N/A |
|
|
|
135.0 |
|
|
|
42.2 |
|
|
|
219.9 |
% |
Natural
gas margins
|
|
|
10.3 |
|
|
|
86.8 |
|
|
|
(88.1 |
)% |
|
|
76.6 |
|
|
|
46.2 |
|
|
|
65.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and
maintenance expense
|
|
|
37.4 |
|
|
|
45.7 |
|
|
|
(18.2 |
)% |
|
|
145.9 |
|
|
|
127.1 |
|
|
|
14.8 |
% |
Restructuring
expense
|
|
|
2.4 |
|
|
|
- |
|
|
|
N/A |
|
|
|
21.5 |
|
|
|
- |
|
|
|
N/A |
|
Depreciation
and amortization
|
|
|
4.9 |
|
|
|
3.6 |
|
|
|
36.1 |
% |
|
|
14.7 |
|
|
|
10.6 |
|
|
|
38.7 |
% |
Taxes other
than income taxes
|
|
|
1.7 |
|
|
|
0.6 |
|
|
|
183.3 |
% |
|
|
6.1 |
|
|
|
4.7 |
|
|
|
29.8 |
% |
Operating
income (loss)
|
|
|
44.4 |
|
|
|
(148.8 |
) |
|
|
N/A |
|
|
|
23.4 |
|
|
|
(54.0 |
) |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
|
3.2 |
|
|
|
1.5 |
|
|
|
113.3 |
% |
|
|
5.2 |
|
|
|
4.5 |
|
|
|
15.6 |
% |
Interest
expense
|
|
|
(4.2 |
) |
|
|
(3.4 |
) |
|
|
23.5 |
% |
|
|
(9.9 |
) |
|
|
(6.1 |
) |
|
|
62.3 |
% |
Minority
interest
|
|
|
0.4 |
|
|
|
- |
|
|
|
N/A |
|
|
|
0.7 |
|
|
|
- |
|
|
|
N/A |
|
Other
expense
|
|
|
(0.6 |
) |
|
|
(1.9 |
) |
|
|
(68.4 |
)% |
|
|
(4.0 |
) |
|
|
(1.6 |
) |
|
|
150.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before taxes
|
|
$ |
43.8 |
|
|
$ |
(150.7 |
) |
|
|
N/A |
|
|
$ |
19.4 |
|
|
$ |
(55.6 |
) |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
volumes (includes volumes both physically delivered and net
settled)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
electric sales volumes in kwh
|
|
|
63,828.8 |
|
|
|
53,169.2 |
|
|
|
20.0 |
% |
|
|
168,938.2 |
|
|
|
134,834.4 |
|
|
|
25.3 |
% |
Retail
electric sales volumes in kwh
|
|
|
4,068.3 |
|
|
|
4,582.3 |
|
|
|
(11.2 |
%) |
|
|
11,902.6 |
|
|
|
12,627.0 |
|
|
|
(5.7 |
%) |
Wholesale
natural gas sales volumes in bcf
|
|
|
99.3 |
|
|
|
166.0 |
|
|
|
(40.2 |
%) |
|
|
376.0 |
|
|
|
457.9 |
|
|
|
(17.9 |
%) |
Retail natural
gas sales volumes in bcf
|
|
|
46.4 |
|
|
|
72.9 |
|
|
|
(36.4 |
%) |
|
|
199.7 |
|
|
|
254.8 |
|
|
|
(21.6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Physical
volumes (includes only transactions settled physically for the periods
shown) *
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
electric sales volumes in kwh
|
|
|
925.3 |
|
|
|
1,416.9 |
|
|
|
(34.7 |
%) |
|
|
3,096.2 |
|
|
|
3,537.4 |
|
|
|
(12.5 |
%) |
Retail
electric sales volumes in kwh
|
|
|
3,967.0 |
|
|
|
4,552.9 |
|
|
|
(12.9 |
%) |
|
|
11,683.6 |
|
|
|
12,542.3 |
|
|
|
(6.8 |
%) |
Wholesale
natural gas sales volumes in bcf
|
|
|
95.8 |
|
|
|
156.0 |
|
|
|
(38.6 |
%) |
|
|
357.5 |
|
|
|
421.5 |
|
|
|
(15.2 |
%) |
Retail natural
gas sales volumes in bcf
|
|
|
45.6 |
|
|
|
71.1 |
|
|
|
(35.9 |
%) |
|
|
197.5 |
|
|
|
252.0 |
|
|
|
(21.6 |
%) |
*
Represents gross physical volumes.
kwh
– kilowatt-hours
bcf
– billion cubic feet
Revenues
·
|
Revenues
decreased $1,789.6 million quarter-over-quarter and
$4,207.7 million for the nine months ended September 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 41% and 39% quarter-over quarter,
respectively. For the nine months ended September 30,
2009, compared with the nine months ended September 30, 2008, the
average market price of natural gas and electricity decreased 51% and 45%,
respectively.
|
|
|
|
|
-
|
Lower natural
gas sales volumes resulting from Integrys Energy Services’ adjusted
product pricing strategy which reflects increased business risk and a
higher cost of capital. This pricing strategy was implemented
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
or significantly scale back 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
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 (such as certain customer contracts, as well as natural gas storage
and transportation contracts) do not impact margin until settlement, as these
instruments do not meet the GAAP definition of derivative
instruments.
Integrys Energy
Services' margins increased $189.7 million in the third quarter of 2009,
compared with the third quarter of 2008, and $123.2 million for the nine
months ended September 30, 2009, compared with the nine months ended
September 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 During
|
|
(Millions
except natural gas sales volumes)
|
|
Three
Months Ended September 30, 2009 Compared with Three Months Ended
September 30, 2008
|
|
|
Nine
Months Ended September 30, 2009 Compared with Nine Months Ended
September 30, 2008
|
|
|
|
|
|
|
|
|
Electric and other margins
|
|
|
|
|
|
|
Realized
gains on structured origination contracts
|
|
$ |
1.0 |
|
|
$ |
1.3 |
|
All
other realized wholesale electric margin
|
|
|
6.6 |
|
|
|
16.5 |
|
Realized
retail electric margin
|
|
|
(2.3 |
) |
|
|
19.4 |
|
|
|
|
|
|
|
|
|
|
Other
significant items:
|
|
|
|
|
|
|
|
|
Retail
and wholesale fair value adjustments *
|
|
|
260.9 |
|
|
|
55.6 |
|
Net increase
in electric and other margins
|
|
|
266.2 |
|
|
|
92.8 |
|
|
|
|
|
|
|
|
|
|
Natural gas margins
|
|
|
|
|
|
|
|
|
Lower-of-cost-or-market
inventory adjustments
|
|
|
193.2 |
|
|
|
253.5 |
|
Other
realized natural gas margins
|
|
|
5.7 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
Other
significant items:
|
|
|
|
|
|
|
|
|
Fair
value adjustments *
|
|
|
(275.4 |
) |
|
|
(223.4 |
) |
Net increase
(decrease) in natural gas margins
|
|
|
(76.5 |
) |
|
|
30.4 |
|
|
|
|
|
|
|
|
|
|
Net increase
in Integrys Energy Services' margin
|
|
$ |
189.7 |
|
|
$ |
123.2 |
|
|
*Combined, for
the nine months ended September 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.
|
Third
Quarter 2009 Compared with Third Quarter 2008
Electric
and Other Margins
Integrys Energy
Services' electric and other margins increased $266.2 million during the
third quarter of 2009, compared with the third quarter of 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 $1.0 million, from
$6.2 million in the third quarter of 2008, to $7.2 million in the
third quarter of 2009. Origination contracts are physical,
customer-based agreements with municipalities, merchant generators,
cooperatives, and regulated utilities. Many new customer contracts
were entered into prior to the announced strategy to divest of or significantly
reduce the scale of Integrys Energy Services, with the third 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 latter half of
2008 and the previously 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 $6.6 million, from $4.0 million
negative margin for the quarter ended September 30, 2008, to
$2.6 million positive margin for the quarter ended September 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 were scaled back in conjunction with the
global credit crisis in the latter half of 2008 and continue to be scaled back
with the previously 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 decreased $2.3 million, from $22.3 million in the
third quarter of 2008, to $20.0 million in the third quarter of
2009. The decrease was driven by:
●
|
A $5.9
million decrease in the Illinois market. This decrease was
caused by a 22% decrease in sales volumes, resulting from Integrys Energy
Services’ adjusted product pricing strategy which was implemented to
reflect a higher cost of capital and to reduce business
risk.
|
|
|
●
|
This decrease
was partially offset by a $3.3 million increase in the Texas
market. In 2008, ancillary service costs increased 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 third quarter of 2009, compared with the third
quarter of 2008, and Integrys Energy Services has priced appropriate
premiums related to ancillary costs into new or renewed
contracts. Also contributing to the increase was the positive
quarter-over-quarter impact of the effect of Hurricane Ike in
2008. Hurricane Ike disrupted the electric infrastructure in
Texas for a period of time, causing some of Integrys Energy Services'
customers to be without electricity or to buy only a fraction of their
normal energy usage during that
period.
|
Retail and wholesale fair
value adjustments
Integrys Energy
Services' margin from retail and wholesale fair value adjustments increased
$260.9 million, as it recognized $210.2 million of non-cash unrealized
losses related to derivative instruments in the third quarter of 2008, compared
with $50.7 million of non-cash unrealized gains during the same quarter in
2009.
The non-cash
unrealized gains and losses resulted from the application of GAAP derivative
accounting rules to Integrys Energy Services' portfolio of electric customer
supply contracts, requiring that these derivative instruments be adjusted to
fair market value. The derivative instruments are utilized to
mitigate the price, volume, and ancillary risks associated with related customer
sales contracts. These customer sales contracts are not adjusted to
fair value, as they do not meet the definition of derivative instruments
under GAAP,
creating an accounting mismatch. As such, the non-cash unrealized
gains and losses related to the customer supply contracts will vary each period,
with non-cash unrealized gains being recognized in periods of increasing energy
prices and non-cash unrealized losses being recognized in periods of declining
energy prices, and will ultimately reverse when the related customer sales
contracts settle. From July 1, 2009 to September 30, 2009,
electric commodity prices increased approximately 10%, which led to the
recognition of non-cash unrealized gains in the third quarter of 2009 on these
electric customer supply contracts. From July 1, 2008 to
September 30, 2008, energy prices declined approximately 35%, which led to
the recognition of large non-cash unrealized losses in the third quarter of 2008
on these electric customer supply contracts.
Natural
Gas Margins
Integrys Energy
Services' natural gas margins decreased $76.5 million in the third 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 average market
price of natural gas increased approximately 12% during the third quarter of
2009 and decreased approximately 40% during the same period in 2008, driving a
positive quarter-over-quarter change in natural gas margins of
$130.9 million related to lower-of-cost-or-market
adjustments. In 2008, lower-of-cost-or-market adjustments were
required to reflect natural gas in storage at the end of the period at its net
realizable value, as required by GAAP. In the third quarter of 2009,
a portion of lower-of-cost-or-market adjustments recorded in the first half of
the year was reversed in accordance with GAAP. Quarter-over-quarter,
the natural gas withdrawn from storage and sold to customers had a
$62.3 million lower cost basis as a result of lower-of-cost-or-market
adjustments recorded in prior periods. The combined effect of natural
gas storage withdrawals and the lower-of-cost-or-market adjustments was a
$193.2 million quarter-over-quarter increase in the natural gas
margin. At September 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 $41.2 million.
Other realized natural gas
margins
Other realized
natural gas margins increased $5.7 million, from $9.3 million in the
third quarter of 2008 to $15.0 million in the third quarter of 2009, driven
by higher quarter-over-quarter per-unit retail natural gas margins as more
recently contracted sales commitments reflect increased business risk and
financing costs in the pricing.
Fair value
adjustments
Fair value
adjustments required under derivative accounting rules primarily related 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), 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 $275.4 million decrease in the natural gas margins. From
July 1, 2009 to September 30, 2009, natural gas prices increased
approximately 12%, which led to the recognition of non-cash unrealized losses of
$73.7 million in the third quarter of 2009 on these instruments. From
July 1, 2008 to
September 30,
2008, natural gas prices declined approximately 40%, which led to the
recognition of non-cash unrealized gains of $201.7 million in the third quarter
of 2008 on these instruments.
Nine
Months 2009 Compared with Nine Months 2008
Electric
and Other Margins
Integrys Energy
Services' electric and other margins increased $92.8 million during the
nine months ended September 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 $1.3 million, from
$17.7 million for the nine months ended September 30, 2008, to
$19.0 million in the nine months ended September 30,
2009. Many new customer contracts were entered into prior to the
announced decision to divest of or significantly reduce the scale of Integrys
Energy Services, with the first nine months of 2009 continuing to benefit from
the realization of margin associated with the settlement of these
contracts. These increases were partially offset as Integrys Energy
Services reduced its participation in energy auctions in 2009, compared with
2008.
Structured
origination activity was scaled back in conjunction with the global credit
crisis in the latter half of 2008 and the previously 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 $16.5 million, from $18.2 million
for the nine months ended September 30, 2008, to $34.7 million for the
nine months ended September 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 were scaled back in conjunction with the
global credit crisis in the latter half of 2008 and continue to be scaled back
with the previously 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 $19.4 million, from $47.0 million during the
nine months ended September 30, 2008, to $66.4 million during the nine
months ended September 30, 2009. The increase was driven
by:
●
|
An
$11.0 million increase in the more mature markets such as Illinois
and New York as Integrys Energy Services realized the benefits of
including higher capital costs in its pricing in the first half of the
year.
|
|
|
●
|
A
$6.1 million increase from operations in the Texas
market. This increase is a result of the positive
period-over-period impact of higher ancillary service costs in the prior
year and the effects of Hurricane Ike in the third quarter of
2008. Hurricane Ike disrupted the electric infrastructure in
Texas for a period of time, causing some of Integrys Energy Services'
customers to be without electricity or buy only a fraction of their normal
energy usage during that period.
|
Retail and wholesale fair
value adjustments
Integrys Energy
Services' margin from retail and wholesale fair value adjustments required by
derivative accounting rules increased $55.6 million, as it recorded
$14.9 million of non-cash unrealized gains related to derivative
instruments during the nine months ended September 30, 2009, compared with
$40.7 million of non-cash unrealized losses 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
September 30, 2009, electric commodity prices declined approximately 13%,
which led to the recognition of additional non-cash unrealized losses in the
nine months ended September 30, 2009 on these electric customer supply
contracts. These unrealized losses were more than offset by realized
gains related to the reversal of previously recognized unrealized losses as
contracts were settled in 2009.
Natural
Gas Margins
Integrys Energy
Services' natural gas margins increased $30.4 million during the nine
months ended September 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 average market
price of natural gas decreased slightly during the nine months ended
September 30, 2009, and decreased significantly during the third quarter of
2008 (below the average cost of natural gas inventory Integrys Energy Services
had injected throughout the year), driving a period-over-period increase of
$89.6 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 the end of the period at its net realizable
value, as required by GAAP. Period-over-period, the natural gas
withdrawn from storage and sold to customers had a $163.9 million lower
cost basis as a result of lower-of-cost-or-market adjustments recorded in prior
periods. The combined effect of natural gas storage withdrawals and
the lower-of-cost-or-market adjustments drove a net $253.5 million
period-over-period increase in the natural gas margin.
Other realized natural gas
margins
Other realized
natural gas margins increased $0.3 million, from $87.2 million for the
nine months ended September 30, 2008, to $87.5 million for the nine
months ended September 30, 2009. The increase was due to
Integrys Energy Services’ withdrawal of a significant amount of natural gas
during the nine months ended September 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 more recently contracted sales commitments reflect
increased business risk and financing costs in the
pricing. Offsetting the increase was the decrease in Integrys Energy
Services’ natural gas sales volumes period-over-period. Integrys
Energy Services significantly reduced the number of structured natural gas and
storage transactions entered into in response to Integrys Energy Group’s
announced intent to significantly reduce the operations of Integrys Energy
Services.
Fair value
adjustments
Fair value
adjustments required under derivative accounting rules primarily related 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 $223.4 million decrease in the natural gas margins as unrealized
losses on these instruments were $144.9 million for the nine months ended
September 30, 2009, compared with unrealized gains of $78.5 million
for the same period in 2008.
Operating Income
(Loss)
Third
Quarter 2009 Compared with Third Quarter 2008
Third quarter
operating income at Integrys Energy Services increased $193.2 million, from
a $148.8 million operating loss in 2008 to $44.4 million of operating
income in 2009. This increase resulted from the $189.7 million
quarter-over-quarter increase in margin discussed above and an $8.3 million
decrease in operating and maintenance expense, partially offset by
$2.4 million of restructuring expenses, which included anticipated employee
related costs and consulting and legal costs. The decrease in
operating and maintenance expense was driven by a $9.3 million positive
quarter-over-quarter impact on bad debt expense resulting from the bankruptcy of
Lehman Brothers in the third quarter of 2008.
See Note 4, "Integrys Energy Services Strategy
Change," for a discussion of restructuring charges.
Nine
Months 2009 Compared with Nine Months 2008
Integrys Energy
Services' operating income for the nine months ended September 30, 2009
increased $77.4 million, from an operating loss of $54.0 million in
2008 to operating income of $23.4 million in 2009. This increase
resulted from the $123.2 million increase in margin discussed above,
partially offset by $21.5 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; an $18.8 million increase in
operating and maintenance expenses; and a $4.1 million increase in depreciation
and amortization expense related to asset additions. 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.
|
·
|
An $8.6
million increase in employee payroll and benefit related
expenses.
|
See Note 4, "Integrys Energy Services Strategy
Change," for a discussion of restructuring charges.
Holding Company and Other
Segment Operations
|
|
Three
Months Ended
|
|
|
%
|
|
|
Nine
Months Ended
|
|
|
%
|
|
|
|
September 30
|
|
|
Increase
|
|
|
September 30
|
|
|
Increase
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$ |
(0.1 |
) |
|
$ |
(2.2 |
) |
|
|
(95.5 |
)% |
|
$ |
3.0 |
|
|
$ |
0.8 |
|
|
|
275.0 |
% |
Other
income
|
|
|
4.8 |
|
|
|
6.5 |
|
|
|
(26.2 |
)% |
|
|
10.7 |
|
|
|
12.0 |
|
|
|
(10.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before
taxes
|
|
$ |
4.7 |
|
|
$ |
4.3 |
|
|
|
9.3 |
% |
|
$ |
13.7 |
|
|
$ |
12.8 |
|
|
|
7.0 |
% |
Third
Quarter 2009 Compared with Third Quarter 2008
Other
Income
Other income at the
holding company and other segment decreased $1.7 million during the quarter
ended September 30, 2009, compared with the same quarter in
2008. The decrease was driven by:
·
|
An increase
in interest expense of $2.8 million at the holding company, driven by
an increase in long-term borrowings in the second quarter of 2009 and an
increase in the amortization of deferred financing fees related to credit
facilities entered into in the second quarter of 2009, partially offset by
a decrease in interest expense on commercial paper.
|
|
|
|
·
|
A $1.0
million decrease in income from WPS’s ownership in WRPC due to fewer land
sales.
|
|
|
·
|
These
decreases were partially offset by:
|
|
|
|
-
|
A
$2.0 million increase in miscellaneous income at the holding company
as a result of higher revolving credit fees and intercompany interest
charges passed through to those subsidiaries that have outstanding
borrowings with the holding company.
|
|
|
|
|
-
|
A
$0.5 million increase in income from Integrys Energy Group's
approximate 34% ownership interest in ATC. Integrys Energy
Group recorded $19.3 million of pre-tax equity earnings from ATC
during the third quarter of 2009, compared with $18.8 million of
pre-tax equity earnings during the third quarter of
2008.
|
Nine
Months 2009 Compared with Nine Months 2008
Other
Income
Other income at the
holding company and other segment decreased $1.3 million during the nine
months ended September 30, 2009, compared with the same period in
2008. The decrease was driven by:
·
|
An increase
in interest expense of $10.5 million at the holding company primarily
due to an increase in long-term borrowings in the second quarter of 2009
and an increase in the amortization of deferred financing fees related to
credit facilities entered into in the second quarter of 2009 and the
fourth quarter of 2008, partially offset by a decrease in interest expense
on commercial paper.
|
|
|
|
·
|
An
approximate $3 million increase in legal and settlement expenses
related to resolution of a lawsuit.
|
·
|
These
decreases were partially offset by:
|
|
|
|
-
|
A
$6.7 million increase in miscellaneous income at the holding company
as a result of higher revolving credit fees and intercompany interest
charges passed through to those subsidiaries that have outstanding
borrowings with the holding company.
|
|
|
|
|
-
|
A
$6.3 million increase in income from Integrys Energy Group's
approximate 34% ownership interest in ATC. Integrys Energy
Group recorded $55.7 million of pre-tax equity earnings from ATC
during the nine months ended September 30, 2009, compared with
$49.4 million of pre-tax equity earnings during the same period in
2008.
|
Provision for Income
Taxes
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Tax
Rate
|
|
|
36.1 |
% |
|
|
36.5 |
% |
|
|
(167.5 |
)% |
|
|
37.7 |
% |
Third
Quarter 2009 Compared with Third Quarter 2008
The effective tax
rate did not change significantly for the quarter ended September 30, 2009,
compared with the same quarter in 2008.
Nine
Months 2009 Compared with Nine Months 2008
The change in the
effective tax rate for the nine months ended September 30, 2009, compared to the
same period in 2008, 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 $35.4 million loss
before income taxes for the nine months ended September 30, 2009, it still
recorded a $59.3 million provision for income taxes because
$186.2 million of the total pre-tax goodwill impairment loss was not
deductible for income tax purposes.
Discontinued
Operations
Third
Quarter 2009 Compared with Third Quarter 2008
Income from
discontinued operations, net of tax, increased $2.3 million in the third quarter
of 2009, compared with the same quarter in 2008. In July 2009,
Integrys Energy Services completed the sale of its energy management consulting
business. The historical financial results of this business were not
significant. The gain on the sale of this business recorded in
discontinued operations during the third quarter of 2009 was $3.8 million ($2.3
million after-tax).
Nine
Months 2009 Compared with Nine Months 2008
Income from
discontinued operations, net of tax, increased $2.5 million in the nine months
ended September 30, 2009, compared with the same quarter in 2008 and was
primarily driven by the after-tax gain on sale of Integrys Energy Services'
energy management consulting business.
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 higher 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
September 30, 2009.
The previously
announced strategy change at Integrys Energy Services and other operating
activities have resulted in the generation of positive cash flow from operations
during the first nine months of 2009. This activity, combined with the
issuance of $155.0 million of long-term debt by Integrys Energy Group and $75
million of long-term debt by PGL, resulted in an approximate $1.1 billion
reduction in consolidated short-term debt outstanding during the first nine
months of 2009, with an approximate $105.0 million reduction in cash
available to Integrys Energy Group.
Operating
Cash Flows
During the nine
months ended September 30, 2009, net cash provided by operating activities
was $1,494.6 million, compared with net cash used for operating activities
of $299.2 million for the same period in 2008. The
$1,793.8 million period-over-period increase in cash provided by operating
activities was mainly driven by a $1,708.6 million increase related to lower
working capital requirements, primarily due to a $347.5 million decrease in
inventories during the nine months ended September 30, 2009, compared with
a $696.3 million increase during the same period in 2008. This
difference was driven by an increase in natural gas withdrawn from storage due
to the previously announced strategy change at Integrys Energy Services, as well
as lower period-over-period natural gas prices. Also contributing to
the decrease in working capital requirements was a $1,170.5 million decrease in
accounts receivables and accrued unbilled revenues during the nine months ended
September 30, 2009, compared with a $169.8 million decrease during the same
period in 2008. This difference was driven by lower revenues during
the third quarter of 2009 compared with the third quarter of 2008, primarily the
result of lower natural gas prices. Partially offsetting this change
was a $678.5 million decrease in accounts payable during the nine months ended
September 30, 2009, compared with an $18.5 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 $338.2 million during the nine months ended
September 30, 2009, compared with $287.3 million for the
same period in 2008. The $50.9 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 nine months ended September 30
were:
Reportable
Segment (millions)
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
Electric
utility
|
|
$ |
202.0 |
|
|
$ |
142.3 |
|
|
$ |
59.7 |
|
Natural gas
utility
|
|
|
98.1 |
|
|
|
174.8 |
|
|
|
(76.7 |
) |
Integrys
Energy Services
|
|
|
18.5 |
|
|
|
26.3 |
|
|
|
(7.8 |
) |
Holding
company and other
|
|
|
23.7 |
|
|
|
11.8 |
|
|
|
11.9 |
|
Integrys
Energy Group consolidated
|
|
$ |
342.3 |
|
|
$ |
355.2 |
|
|
$ |
(12.9 |
) |
The increase in
capital expenditures at the electric utility segment for the nine months ended
September 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 decrease in capital expenditures associated with Weston
4. The decrease in capital expenditures at the natural gas utility
segment for the nine months ended September 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, which was completed in
February 2009.
Financing
Cash Flows
Net cash used for
financing activities was $1,265.6 million during the nine months ended
September 30, 2009, compared with net cash provided by financing activities
of $600.7 million for the same period in 2008. The
$1,866.3 million period-over-period change was driven by a
$1,584.0 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 long-term debt of $155.0 million at Integrys Energy Group in June
2009 and $75.0 million at PGL in September 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 $76.0 million and
$808.2 million at September 30, 2009, and 2008,
respectively. Integrys Energy Group had short-term notes payable
outstanding of $10.0 million at September 30, 2009, and
2008. Integrys Energy Group did not have borrowings under revolving
credit facilities at September 30, 2009, compared with $282.1 million of
borrowings under revolving credit facilities at September 30,
2008. See Note 9, "Short-Term Debt and Lines of
Credit," for more information.
In September 2009,
PGL issued $75 million of Series UU, 4.63%, 10-year First and Refunding Mortgage
Bonds due September 1, 2019. The net proceeds from the
issuance of these bonds were used for general corporate utility purposes,
including refinancing of existing short-term debt, and to increase
liquidity. The First and Refunding Mortgage Bonds were sold in a
private placement and are not registered under the Securities Act of
1933.
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
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 risk 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 September 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)
|
|
$ |
3,771.4 |
|
|
$ |
190.9 |
|
|
$ |
842.9 |
|
|
$ |
753.6 |
|
|
$ |
1,984.0 |
|
Operating
lease obligations
|
|
|
74.3 |
|
|
|
5.9 |
|
|
|
22.7 |
|
|
|
18.0 |
|
|
|
27.7 |
|
Commodity
purchase obligations (2)
|
|
|
6,575.6 |
|
|
|
886.0 |
|
|
|
3,652.9 |
|
|
|
992.0 |
|
|
|
1,044.7 |
|
Purchase
orders (3)
|
|
|
543.4 |
|
|
|
541.5 |
|
|
|
1.7 |
|
|
|
0.2 |
|
|
|
- |
|
Capital
contributions to equity method investment (4)
|
|
|
10.2 |
|
|
|
10.2 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Pension and
other postretirement
funding
obligations (5)
|
|
|
644.5 |
|
|
|
48.8 |
|
|
|
203.8 |
|
|
|
204.5 |
|
|
|
187.4 |
|
Total
contractual cash obligations
|
|
$ |
11,619.4 |
|
|
$ |
1,683.3 |
|
|
$ |
4,724.0 |
|
|
$ |
1,968.3 |
|
|
$ |
3,243.8 |
|
(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 $642.3 million at September 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 September 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
|
|
$ |
172.6 |
|
Electric
and natural gas distribution projects
|
|
|
124.8 |
|
Environmental
projects
|
|
|
92.8 |
|
Other
projects
|
|
|
144.1 |
|
|
|
|
|
|
UPPCO
|
|
|
|
|
Repairs
and safety measures at hydroelectric facilities
|
|
|
40.5 |
|
Electric
distribution and other projects
|
|
|
34.8 |
|
|
|
|
|
|
MGU
|
|
|
|
|
Natural
gas pipe distribution system, 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)
|
|
|
380.1 |
|
|
|
|
|
|
NSG
|
|
|
|
|
Natural
gas pipe distribution system and other projects
|
|
|
49.4 |
|
|
|
|
|
|
Integrys
Energy Services (2)
|
|
|
|
|
Solar
and other projects
|
|
|
35.0 |
|
|
|
|
|
|
IBS
|
|
|
|
|
Corporate
services infrastructure projects
|
|
|
69.9 |
|
Total capital
expenditures
|
|
$ |
1,214.2 |
|
(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 $37 million in 2009 and approximately
$7 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 September 30, 2009, Integrys Energy Group and each of its subsidiaries
were in compliance with all respective covenants related 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 it 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 September 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 during the
second half of 2008 and the first nine months of 2009 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.
Additionally, Integrys Energy Services completed the sale of its Canadian
natural gas and electric power contract portfolio, which significantly reduced
requirements to issue parental guarantees and letters of credit, as well as the
risk of potential future working capital requirements.
Management believes
that these efforts have significantly 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 volatility in
global capital markets during 2008 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.
Integrys Energy Services Business
Segment Strategy
Change
In
February 2009, Integrys Energy Group made a decision to divest of or
significantly reduce the size of its nonregulated energy services business
segment to a smaller segment with significantly reduced credit and collateral
support requirements, with substantially all of this expected to be accomplished
by the end of 2010. 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. This strategy change 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 expects to finalize the execution of
this process by the end of 2010 through a series of transactions or contractual
arrangements, some of which have already been accomplished and are described
below. Once finalized, 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, as well
as the return of invested capital, to reduce outstanding debt or invest in areas
with more desirable risk adjusted rates of return to achieve the highest value
for its shareholders.
To
date several transactions have been closed or are pending closing after
execution of definitive agreements. In July 2009, the energy
management consulting business was sold. In September 2009, a
subsidiary of Integrys Energy Services closed on the sale of nearly all of its
Canadian natural gas and electric power contract portfolio. The
transaction is expected to result in an estimated $350 million reduction of
Integrys Energy Group’s collateral support requirements, of which approximately
$140 million was recovered as of September 30, 2009. A total of $300
million is expected to be recovered by the end of 2009. In October
2009, a definitive agreement was entered into to sell the Integrys Energy
Services United States wholesale natural gas business. See Note 4,
"Integrys Energy Services
Strategy Change," for more information.
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.
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 rate case authorized uncollectible expense
and the actual uncollectible expense per the income statement. PGL
and NSG filed this rider with the ICC in September 2009 and began recording the
effects of this provision at that time. The ICC must act on the
filing by March 2010. See Note 21, "Regulatory Environment," for
more information.
Goodwill
Impairment Testing
Integrys Energy
Group performs its required annual goodwill impairment tests each April
1. Goodwill is required 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 September 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 submitted a request to the
Department of Energy requesting funds under ARRA to be used for smart grid
related projects within WPS’s and UPPCO’s service territories in the areas of
advanced metering
infrastructure,
advanced distribution system management, and meter data management. In
October 2009, Integrys Energy Group was informed that its projects were not
selected for ARRA funding.
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 2009, the
company recorded an 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 nine months ended September 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)
|
|
|
283.6 |
|
|
|
(171.7 |
) |
|
|
111.9 |
|
Plus: Changes
in fair value of contracts in existence at September 30, 2009 (3)
|
|
|
84.0 |
|
|
|
(176.4 |
) |
|
|
(92.4 |
) |
Fair
value of contracts at September 30, 2009 (1)
|
|
$ |
94.4 |
|
|
$ |
(140.1 |
) |
|
$ |
(45.7 |
) |
(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. The fair
value of contracts at December 31, 2008, includes $6.6 million of net
assets held for sale.
|
(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
September 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
September 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 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 September 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
|
|
$ |
(74.0 |
) |
|
$ |
(67.6 |
) |
|
$ |
(0.8 |
) |
|
$ |
- |
|
|
$ |
(142.4 |
) |
Level
2
|
|
|
(20.4 |
) |
|
|
23.1 |
|
|
|
3.1 |
|
|
|
1.6 |
|
|
|
7.4 |
|
Level
3
|
|
|
44.4 |
|
|
|
46.3 |
|
|
|
(2.0 |
) |
|
|
0.6 |
|
|
|
89.3 |
|
Total
fair value
|
|
$ |
(50.0 |
) |
|
$ |
1.8 |
|
|
$ |
0.3 |
|
|
$ |
2.2 |
|
|
$ |
(45.7 |
) |
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.