form10k.htm
UNITED
STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, D.
C. 20549
FORM
10-K
(Mark
One)
[X]
|
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the fiscal year
ended December 31, 2009
OR
[ ]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the transition
period from ________________ to ___________________
Commission
File Number
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Registrant;
State of Incorporation;
Address; and Telephone
Number
|
IRS
Employer
Identification No.
|
|
|
|
1-11337
|
INTEGRYS
ENERGY GROUP, INC.
(A Wisconsin
Corporation)
130 East
Randolph Drive
Chicago,
IL 60601
(312)
228-5400
|
39-1775292
|
Securities registered
pursuant to Section 12(b) of the Act:
Title of each class
|
Name of each
exchange
on which registered
|
|
|
Common Stock,
$1 par value
|
New York Stock
Exchange
|
Securities registered
pursuant to Section 12(g) of the Act:
None
Indicate by check
mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act.
Indicate by check
mark if the Registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act.
Indicate by check
mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Indicate by check
mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post
such files). (Registrant is not yet required to provide financial
disclosure in an Interactive Data File format.)
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [
]
Indicate by check
mark whether the Registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large
accelerated filer [X]
|
Accelerated
filer [ ]
|
Non-accelerated
filer [ ]
|
Smaller
reporting company [ ]
|
Indicate by check
mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
State the
aggregate market value of the voting and
non-voting common
equity held by non-affiliates of the Registrant.
|
|
$2,291,910,925
as of June 30, 2009
|
Number of
shares outstanding of each class
of common stock, as of February 24,
2010
|
|
|
Common Stock,
$1 par value, 76,522,377
shares
|
DOCUMENT
INCORPORATED BY REFERENCE
Definitive proxy
statement for the Integrys Energy Group, Inc. Annual Meeting of Shareholders to
be held on May 13, 2010 is incorporated by reference into Part
III.
INTEGRYS
ENERGY GROUP, INC.
ANNUAL
REPORT ON FORM 10-K
For
the Year Ended December 31, 2009
TABLE
OF CONTENTS
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Page
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1
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3
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ITEM
1.
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BUSINESS
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3
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A.
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GENERAL
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3
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B.
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REGULATED
NATURAL GAS UTILITY
OPERATIONS
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4
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C.
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REGULATED
ELECTRIC UTILITY
OPERATIONS
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7
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D.
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INTEGRYS
ENERGY
SERVICES
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10
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E.
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ENVIRONMENTAL
MATTERS
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13
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F.
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CAPITAL
REQUIREMENTS
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13
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G.
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EMPLOYEES
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13
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H.
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AVAILABLE
INFORMATION
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14
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RISK
FACTORS
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15
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UNRESOLVED
STAFF
COMMENTS
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21
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PROPERTIES
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22
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A.
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REGULATED
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22
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B.
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INTEGRYS
ENERGY
SERVICES
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23
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LEGAL
PROCEEDINGS
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24
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SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
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24
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EXECUTIVE
OFFICERS OF INTEGRYS ENERGY
GROUP
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25
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PART
II
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26
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MARKET FOR
INTEGRYS ENERGY GROUP'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
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26
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SELECTED
FINANCIAL DATA
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28
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MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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29
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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73
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY
DATA
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76
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A.
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Management
Report on Internal Control over Financial Reporting
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76
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B.
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Report of
Independent Registered Public Accounting Firm
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77
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C.
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79
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D.
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80
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E.
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81
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F.
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82
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G.
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83
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Note
1
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Summary of
Significant Accounting
Policies
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83
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Note
2
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Risk
Management
Activities
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90
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Note
3
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Restructuring
Expense
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94
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Note
4
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Dispositions
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95
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Note
5
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PEC
Merger
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101
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Note
6
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Property,
Plant, and
Equipment
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102
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Note
7
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Jointly Owned
Utility
Facilities
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103
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Note
8
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Regulatory
Assets and
Liabilities
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104
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Note
9
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Investments
in Affiliates, at Equity
Method
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105
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Note
10
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Goodwill and
Other Intangible
Assets
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107
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Note
11
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Leases
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109
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Note
12
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Short-Term
Debt and Lines of Credit
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110
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Note
13
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Long-Term
Debt
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112
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Note
14
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Asset
Retirement Obligations
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114
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Note
15
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Income
Taxes
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116
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Note
16
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Commitments
and Contingencies
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119
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Note
17
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Guarantees
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126
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Note
18
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Employee
Benefit Plans
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127
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Note
19
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Preferred
Stock of Subsidiary
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133
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Note
20
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Common
Equity
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134
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Note
21
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Stock-Based
Compensation
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135
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Note
22
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Fair
Value
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138
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Note
23
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Miscellaneous
Income
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140
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Note
24
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Regulatory
Environment
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141
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Note
25
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Segments of
Business
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144
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Note
26
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Quarterly
Financial Information
(Unaudited)
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147
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H.
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Report of
Independent Registered Public Accounting Firm on Financial
Statements
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148
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CHANGES IN
AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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149
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ITEM
9A.
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CONTROLS AND
PROCEDURES
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149
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ITEM
9B.
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OTHER
INFORMATION
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149
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PART
III
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150
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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150
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EXECUTIVE
COMPENSATION
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150
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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150
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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151
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PRINCIPAL
ACCOUNTING FEES AND
SERVICES
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151
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PART
IV
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152
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EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
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152
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153
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SCHEDULE I - CONDENSED PARENT COMPANY FINANCIAL
STATEMENTS INTEGRYS ENERGY GROUP, INC. (PARENT COMPANY
ONLY)
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154
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A.
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Statements of
Income and Retained Earnings
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154
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B.
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Balance
Sheets
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155
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C.
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Statements of
Cash Flows
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156
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D.
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157
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160
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161
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Acronyms
Used in this Annual Report on Form 10-K
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AFUDC
|
Allowance for
Funds Used During Construction
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ASC
|
Accounting
Standards Codification
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ATC
|
American
Transmission Company LLC
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EEP
|
Enhanced
Efficiency Program
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EPA
|
United States
Environmental Protection Agency
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ESOP
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Employee
Stock Ownership Plan
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FASB
|
Financial
Accounting Standards Board
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FERC
|
Federal
Energy Regulatory Commission
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GAAP
|
United States
Generally Accepted Accounting Principles
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IBS
|
Integrys
Business Support, LLC
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ICC
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Illinois
Commerce Commission
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IRS
|
United States
Internal Revenue Service
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LIFO
|
Last-in,
First-out
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MERC
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Minnesota
Energy Resources Corporation
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MGU
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Michigan Gas
Utilities Corporation
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MISO
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Midwest
Independent Transmission System Operator, Inc.
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MPSC
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Michigan
Public Service Commission
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MPUC
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Minnesota
Public Utility Commission
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N/A
|
Not
Applicable
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NSG
|
North Shore
Gas Company
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NYMEX
|
New York
Mercantile Exchange
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PEC
|
Peoples
Energy Corporation
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PEP
|
Peoples
Energy Production Company
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PGL
|
The Peoples
Gas Light and Coke Company
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PSCW
|
Public
Service Commission of Wisconsin
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SEC
|
United States
Securities and Exchange Commission
|
SFAS
|
Statement of
Financial Accounting Standards
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UPPCO
|
Upper
Peninsula Power Company
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WDNR
|
Wisconsin
Department of Natural Resources
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WPS
|
Wisconsin
Public Service Corporation
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WRPC
|
Wisconsin
River Power Company
|
In
this report, Integrys Energy Group and its subsidiaries make statements
concerning expectations, beliefs, plans, objectives, goals, strategies, and
future events or performance. Such statements are "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Forward-looking statements are subject to
assumptions and uncertainties; therefore, actual results may differ materially
from those expressed or implied by such forward-looking
statements. Although Integrys Energy Group and its subsidiaries
believe that these forward-looking statements and the underlying assumptions are
reasonable, they cannot provide assurance that such statements will prove
correct.
Forward-looking
statements include, among other things, statements concerning management's
expectations and projections regarding earnings, regulatory matters, fuel costs,
sources of electric energy supply, coal and natural gas deliveries, remediation
costs, environmental and other capital expenditures, liquidity and capital
resources, trends, estimates, completion of construction projects, and other
matters.
Forward-looking
statements involve a number of risks and uncertainties. Some risks
that could cause results to differ from any forward-looking statement include
those described in Item 1A of this Annual Report on Form 10-K for the year ended
December 31, 2009. Other factors include:
●
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Resolution of
pending and future rate cases and negotiations (including the recovery of
deferred costs) and other regulatory decisions impacting Integrys Energy
Group's regulated businesses;
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●
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The impact of
recent and future federal and state regulatory changes, including
legislative and regulatory initiatives regarding deregulation and
restructuring of the electric and natural gas utility industries, changes
in environmental and other regulations, including but not limited to,
greenhouse gas emissions, energy efficiency mandates, renewable energy
standards, and reliability standards, and changes in tax and other laws
and regulations to which Integrys Energy Group and its subsidiaries are
subject;
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●
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Current and
future litigation and regulatory investigations, enforcement actions or
inquiries, including but not limited to, manufactured gas plant site
cleanup, third-party intervention in permitting and licensing projects,
compliance with Clean Air Act requirements at generation plants, and
prudence and reconciliation of costs recovered in revenues through an
automatic gas cost recovery mechanism;
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●
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The impacts
of changing financial market conditions, credit ratings, and interest
rates on the liquidity and financing efforts of Integrys Energy
Group and its subsidiaries;
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●
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The risks
related to executing the strategy change associated with Integrys Energy
Group's nonregulated energy services business, including the restructuring
of its retail natural gas and retail electric marketing
business;
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●
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The risks
associated with changing commodity prices (particularly natural gas and
electricity) and the available sources of fuel and purchased power,
including their impact on margins;
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●
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Resolution of
audits or other tax disputes with the IRS and various state, local, and
Canadian revenue agencies;
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●
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The effects,
extent, and timing of additional competition or regulation in the markets
in which Integrys Energy Group's subsidiaries operate;
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●
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The retention
of market-based rate authority;
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●
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The risk
associated with the value of goodwill or other intangibles and their
possible impairment;
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●
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Investment
performance of employee benefit plan assets and the related impact on
future funding requirements;
|
●
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Changes in
technology, particularly with respect to new, developing, or alternative
sources of generation;
|
●
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Effects of
and changes in political and legal developments, as well as economic
conditions and the related impact on customer demand;
|
●
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Potential
business strategies, including mergers, acquisitions, and construction or
disposition of assets or businesses, which cannot be assured to be
completed timely or within budgets;
|
●
|
The direct or
indirect effects of terrorist incidents, natural disasters, or responses
to such
events;
|
●
|
The
effectiveness of risk management strategies, the use of financial and
derivative instruments, and the ability to recover costs from customers in
rates associated with the use of those strategies and financial
instruments;
|
●
|
The risk of
financial loss, including increases in bad debt expense, associated with
the inability of Integrys Energy Group's and its subsidiaries'
counterparties, affiliates, and customers to meet their
obligations;
|
●
|
Customer
usage, weather, and other natural phenomena;
|
●
|
The
utilization of tax credit and loss carryforwards;
|
●
|
Contributions
to earnings by non-consolidated equity method and other investments, which
may vary from projections;
|
●
|
The effect of
accounting pronouncements issued periodically by standard-setting bodies;
and
|
●
|
Other factors
discussed elsewhere herein and in other reports filed by Integrys Energy
Group from time to time with the
SEC.
|
Except
to the extent required by the federal securities laws, Integrys Energy Group and
its subsidiaries undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
ITEM 1. BUSINESS
A. GENERAL
References to
"Notes" are to the Notes to the Consolidated Financial Statements included in
this Annual Report on Form 10-K.
For financial
information on Integrys Energy Group's foreign and domestic revenues, foreign
and domestic long-lived assets, revenues from external customers, net income
(loss) attributed to common shareholders and total assets by reportable segment,
see Note 25, "Segments of
Business." For financial information about Integrys Energy
Group’s reportable segments, see Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations – Results of
Operations."
Integrys
Energy Group, Inc.
Integrys Energy
Group was incorporated in Wisconsin in 1993. Integrys Energy Group is
a holding company for its regulated utility and nonregulated business
units.
Natural
Gas Utility Segment
The natural gas
utility segment includes the regulated natural gas utility operations of WPS,
MGU, MERC, PGL, and NSG. WPS, a Wisconsin corporation, began
operations in 1883. MGU and MERC, both Delaware corporations, began
operations upon the acquisition of their natural gas distribution operations in
Michigan and Minnesota, respectively, from Aquila, Inc. in April 2006 and July
2006, respectively. PGL and NSG, both Illinois corporations, began
operations in 1855 and 1900, respectively. Integrys Energy Group
acquired PGL and NSG in February 2007 in the PEC merger. For the last
three years, all of the natural gas utility segment's revenues were earned
within the United States and all assets were located within the United
States.
Electric
Utility Segment
The electric
utility segment includes the regulated electric utility operations of WPS and
UPPCO. UPPCO, a Michigan corporation, began operations in
1884. For the last three years, all of the electric utility segment's
revenues were earned within the United States and all assets were located within
the United States.
Integrys
Energy Services
Integrys Energy
Services, a Wisconsin corporation, was established in 1994. Integrys
Energy Services is a diversified nonregulated energy supply and services company
serving retail customers (residential, commercial, and
industrial). Integrys Energy Services provides energy supply
solutions, products, and strategies that enable customers to manage energy needs
while capitalizing on opportunities resulting from deregulated
markets.
See Item 7,
"Management's Discussion and
Analysis of Financial Condition and Results of Operations –
Introduction," for a discussion of the
revised strategy for Integrys Energy Services going forward.
Electric
Transmission Investment
The electric
transmission investment segment consists of WPS Investments, LLC’s approximate
34% ownership interest in ATC. As of December 31, 2009, WPS
Investments was owned 84.5% by Integrys Energy Group, 12.8% by WPS, and 2.7% by
UPPCO. ATC is a federally regulated electric transmission
company with
operations in Wisconsin, Michigan, Minnesota, and Illinois. ATC began
operations in 2001. See Note 9, "Investments in Affiliates, at Equity
Method," for more information about ATC.
Holding
Company and Other Segment
The holding company
and other segment includes the operations of the Integrys Energy Group holding
company and the PEC holding company, along with any nonutility activities at
WPS, MGU, MERC, UPPCO, PGL, NSG, and IBS. Equity earnings from
Integrys Energy Group’s investment in WRPC are included in the Holding Company
and Other segment.
B. REGULATED NATURAL GAS UTILITY
OPERATIONS
Integrys Energy
Group provides regulated natural gas utility service to approximately 1,669,000
residential, commercial and industrial, transportation, and other customers
located in Chicago and northern suburbs of Chicago, northeastern Wisconsin,
adjacent portions of Michigan's Upper Peninsula, various cities and communities
throughout Minnesota, and in the southern portion of lower
Michigan.
Facilities
For information
regarding the regulated natural gas facilities, see Item 2, "Properties." For
Integrys Energy Group's utility plant asset book value, see Note 6, "Property, Plant, and
Equipment."
Natural
Gas Supply
Integrys Energy
Group's natural gas utilities manage portfolios of natural gas supply contracts,
storage services, and pipeline transportation services designed to meet their
varying customer usage patterns at the lowest reasonable cost.
Integrys Energy
Group's regulated natural gas subsidiaries contract for fixed-term firm natural
gas supplies with various natural gas suppliers each year (in the United States
and Canada) to meet the November through March winter period demand of firm
system sales customers. Integrys Energy Group's regulated natural gas
supply requirements are met through a combination of physical fixed price
purchases, storage (contracted and owned), natural gas call options, and
physical index price purchases. To supplement natural gas supplies
and minimize risk, Integrys Energy Group purchases additional natural gas
supplies on the monthly spot market through fixed-term firm contracts rather
than on the daily spot market. During periods of colder than normal
weather or when the opportunity arises, natural gas may be purchased in the
daily spot market.
Integrys Energy
Group's natural gas utilities contract with local distribution companies,
interstate pipelines, and storage operators that own underground storage fields
to purchase underground storage capacity and have two company-owned storage
fields. Integrys Energy Group's natural gas utilities contract with
local distribution companies and interstate pipelines to purchase firm
transportation. Besides providing the ability to manage significant
changes in daily natural gas demand, storage also provides Integrys Energy Group
with the ability to purchase steady levels of natural gas on a year-round basis,
thus lowering supply cost volatility.
For further
information on Integrys Energy Group's regulated natural gas utility supply and
transportation contracts, see Note 16, "Commitments and
Contingencies."
Integrys Energy
Group's natural gas utilities had adequate capacity to meet all firm natural gas
load obligations during 2009 and expect to have adequate capacity to meet all
firm obligations during 2010. Integrys Energy Group's natural gas
utilities forecast design peak-day throughput of 3,897 thousands of dekatherms
(MDth) for the 2009 through 2010 heating season.
The deliveries to
customers (including transportation customers) in MDth for Integrys Energy
Group's regulated natural gas utility operations were as follows:
(MDth)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Natural gas
purchases
|
|
|
225,719 |
|
|
|
250,967 |
|
|
|
202,803 |
|
Customer-owned
natural gas received
|
|
|
164,676 |
|
|
|
182,919 |
|
|
|
160,581 |
|
Underground
storage, net
|
|
|
1,080 |
|
|
|
(3,469 |
) |
|
|
(18,486 |
) |
Hub fuel in
kind
|
|
|
141 |
|
|
|
135 |
|
|
|
134 |
|
Liquefied
petroleum gas
|
|
|
12 |
|
|
|
5 |
|
|
|
4 |
|
Owned storage
cushion injection
|
|
|
(1,272 |
) |
|
|
(1,280 |
) |
|
|
(1,278 |
) |
Contracted
pipeline and storage compressor fuel, franchise
requirements,
and unaccounted-for natural gas
|
|
|
(9,692 |
) |
|
|
(11,042 |
) |
|
|
(13,451 |
) |
Total
|
|
|
380,664 |
|
|
|
418,235 |
|
|
|
330,307 |
|
Regulatory
Matters
Legislation
and Regulation at State Level
The natural gas
retail rates of Integrys Energy Group's regulated natural gas utilities are
regulated by the ICC, PSCW, MPSC, and MPUC. These commissions have
general supervisory and regulatory powers over public utilities in their
respective jurisdictions.
Sales are made and
services rendered by the regulated natural gas utilities pursuant to rate
schedules on file with the respective commissions containing various service
classifications largely reflecting customers' different uses and levels of
consumption. In addition to the rates for distribution of natural
gas, Integrys Energy Group's regulated natural gas utilities bill customers on a
one-for-one basis through a purchased gas adjustment clause representing
prudently incurred costs of delivered natural gas, transportation, and storage
services purchased, as well as gains, losses, and costs incurred under hedging
programs, the amount of which is also subject to applicable commission
authority. Changes in the cost of natural gas are reflected in both
natural gas revenues and natural gas purchases.
All of Integrys
Energy Group's utility subsidiaries are required to provide service and grant
credit (with applicable deposit requirements) to customers within their service
territories. The utilities are generally precluded from discontinuing
service to residential customers who do not pay their bills during winter
moratorium months. Both federal and certain state governments have
legislation that provides for a limited amount of additional funding for
assistance to low-income energy users, including customers of the
utilities.
See Note 24,
"Regulatory
Environment," for recent Illinois legislation affecting PGL and NSG
regarding bad debt expense and new customer assistance programs, discussion of
MGU's 2010 rate order which includes a new bad debt tracking mechanism, and
decoupling mechanisms in place for certain natural gas utilities.
Legislation
and Regulation at Federal Level
Most of the natural
gas distributed by Integrys Energy Group is transported to its distribution
systems by interstate pipelines. The pipelines' services
(transportation and storage) are regulated by the FERC under the Natural Gas Act
and the Natural Gas Policy Act of 1978.
Under United States
Department of Transportation regulations, the state commissions are responsible
for monitoring the regulated natural gas utilities' safety compliance
programs for their pipelines under 49 Code of Federal Regulations (CFR)
Part 192 (Transportation of Natural and Other Gas by Pipeline: Minimum Federal
Safety Standards) and 49 CFR Part 195 (Transportation of Hazardous Liquids by
Pipeline).
PGL utilizes its
storage and transmission assets as a natural gas hub. This activity
is regulated by the FERC and consists of providing wholesale transportation and
storage services in interstate commerce.
Other
Matters
Seasonality
The natural gas
throughput of Integrys Energy Group's regulated natural gas utilities follows a
seasonal pattern because the heating requirements of customers are temperature
driven. Specifically, customers typically use more natural gas during
the winter months. During 2009, the regulated natural gas utility
segment recorded approximately 70% of its revenues in January, February, March,
November, and December.
Competition
Integrys Energy
Group's regulated natural gas utility operations face competition from other
entities and forms of energy in varying degrees, particularly for large
commercial and industrial customers who have the ability to switch between
natural gas and alternate fuels. Due to the volatility of energy
commodity prices, Integrys Energy Group has seen customers with dual fuel
capability switch to alternate fuels for short periods of time, then switch back
to natural gas as market rates change.
Natural gas
transportation service and interruptible natural gas sales are offered to enable
customers to better manage their energy costs. Transportation
customers purchase natural gas directly from third-party natural gas suppliers
and contract with one of Integrys Energy Group's natural gas utility entities to
transport the natural gas from pipelines to their
facilities. Additionally, some customers have elected to purchase
their natural gas commodity directly from one of Integrys Energy Group's natural
gas utility entities on an interruptible basis, as a means to reduce their
costs. Customers continue to switch between firm system supply,
interruptible system supply, and transportation service each year as the
economics and service options change.
Working
Capital Requirements
The working capital
needs of Integrys Energy Group's regulated natural gas utility operations vary
significantly over time due to volatility in levels of natural gas inventories
and the price of natural gas. Integrys Energy Group's regulated
natural gas utilities' working capital needs are met by cash generated from
operations and debt (both long-term and short-term). The seasonality
of natural gas revenues causes the timing of cash collections to be concentrated
from January through June. A portion of the winter natural gas
supply needs is typically purchased and stored from April through
November. Also, planned capital spending on the natural gas
distribution facilities is concentrated in April through
November. Because of these timing differences, the cash flow from
customers is typically supplemented with temporary increases in short-term
borrowings during the late summer and fall. Short-term debt is
typically reduced over the January through June period.
C. REGULATED
ELECTRIC UTILITY OPERATIONS
Integrys Energy
Group's regulated electric utility operations are provided through WPS and UPPCO
to approximately 489,000 residential, commercial and industrial, wholesale, and
other customers. WPS's regulated electric operations generate and
distribute electric energy mainly to northeastern Wisconsin and a small portion
of Michigan's Upper Peninsula. UPPCO provides electric energy in
Michigan's Upper Peninsula. Wholesale electric service is provided to
various customers, including municipal utilities, electric cooperatives, energy
marketers, other investor-owned utilities, and municipal joint action
agencies.
In
2009, WPS reached a firm net design peak of 2,264 megawatts (MW) on June
24. At the time of this summer peak, WPS's total firm resources
(i.e., generation plus firm purchases) totaled 3,196 MW. As a result
of continually reaching demand peaks in the summer months, primarily due to air
conditioning load, the summer period is the most relevant for WPS's regulated
electric utility capacity. The PSCW requires WPS to maintain a
planning reserve margin above its projected annual peak demand forecast to help
ensure reliability of electric service to its customers. WPS expects
future supply reserves to meet the minimum planning reserve margin criteria
through 2010. The PSCW established a 14.5% reserve margin requirement
for long-term planning (planning years two through ten), and the short-term
(planning year one) reserve margin for Wisconsin utilities follows the planning
reserve margin established by MISO under Module E of its Open Access
Transmission and Energy Markets Tariff. In 2009, UPPCO reached a firm
net design peak of 139 MW on July 27. At the time of this peak,
UPPCO's total firm resources totaled 150 MW. The MPSC has not
established minimum guidelines for future supply reserves.
WPS and UPPCO had
adequate capacity through company-owned generation units and purchased power
contracts to meet all firm electric load obligations during 2009 and expect to
have adequate capacity to meet all obligations during 2010.
Facilities
For a complete
listing of Integrys Energy Group's regulated electric utility facilities, see
Item 2, "Properties." For
Integrys Energy Group's utility plant asset book value, see Note 6, "Property, Plant, and
Equipment."
Electric
Supply
Both WPS and UPPCO
are members of MISO, a FERC-approved, independent, non-profit organization,
which operates a financial and physical electric wholesale market in the
Midwest. WPS and UPPCO offer their generation and bid their customer
load into the MISO market. MISO evaluates WPS's, UPPCO's, and other
market participants' energy injections into, and withdrawals from, the system to
economically dispatch electricity within the system. MISO settles the
participants' offers and bids based on locational marginal prices, which are
market-driven values based on the specific time and location of the purchase
and/or sale of energy.
Electric
Generation and Supply Mix
The sources of
Integrys Energy Group's regulated electric utility supply were as
follows:
(Millions) |
|
|
|
|
|
|
Energy
Source (kilowatt-hours)
|
|
2009
|
|
|
2008
|
|
Company-owned
generation units
|
|
|
|
|
|
|
Coal
|
|
|
8,974.3 |
|
|
|
9,570.9 |
|
Natural
gas, fuel oil, and tire derived
|
|
|
71.4 |
|
|
|
201.7 |
|
Hydroelectric
|
|
|
225.9 |
|
|
|
261.2 |
|
Wind
|
|
|
46.4 |
|
|
|
17.8 |
|
Total
company-owned generation units
|
|
|
9,318.0 |
|
|
|
10,051.6 |
|
Purchased
power contracts
|
|
|
|
|
|
|
|
|
Nuclear
(Kewaunee Power Station)
|
|
|
2,663.9 |
|
|
|
2,656.8 |
|
Natural
gas (Fox Energy Center, LLC and Combined Locks Energy Center,
LLC)
|
|
|
673.7 |
|
|
|
699.5 |
|
Hydroelectric
|
|
|
569.5 |
|
|
|
369.4 |
|
Wind
|
|
|
136.9 |
|
|
|
109.0 |
|
Other
|
|
|
571.1 |
|
|
|
167.8 |
|
Total
purchased power contracts
|
|
|
4,615.1 |
|
|
|
4,002.5 |
|
Purchased
power from MISO
|
|
|
1,898.9 |
|
|
|
1,934.0 |
|
Purchased
power from other
|
|
|
54.4 |
|
|
|
78.9 |
|
Total
purchased power
|
|
|
6,568.4 |
|
|
|
6,015.4 |
|
Opportunity
sales
|
|
|
|
|
|
|
|
|
Sales
to MISO
|
|
|
(462.5 |
) |
|
|
(539.8 |
) |
Net
sales to other
|
|
|
(450.5 |
) |
|
|
(303.2 |
) |
Total
opportunity sales
|
|
|
(913.0 |
) |
|
|
(843.0 |
) |
Total
Integrys Energy Group electric utility supply
|
|
|
14,973.4 |
|
|
|
15,224.0 |
|
Fuel
Costs
The cost of fuel
per generation of one million British thermal units (Btus) was as
follows:
Fuel
Type
|
|
2009
|
|
|
2008
|
|
Coal
|
|
$ |
1.94 |
|
|
$ |
1.78 |
|
Natural gas
|
|
|
6.73 |
|
|
|
9.74 |
|
Fuel oil
|
|
|
17.09 |
|
|
|
19.07 |
|
Coal
Supply
Coal is the primary
fuel source for WPS's regulated electric generation facilities, the majority of
which is purchased from Powder River Basin mines located in
Wyoming. This low sulfur coal has been WPS's lowest cost coal source
from any of the subbituminous coal-producing regions in the
United States. WPS's regulated fuel portfolio strategy is to
maintain a 25- to 40-day supply of coal at each plant site.
Historically, WPS
has purchased coal directly from the producer for its wholly owned
plants. Wisconsin Power and Light purchases coal for the jointly
owned Edgewater and Columbia plants and is reimbursed by WPS for its share of
the coal costs. At December 31, 2009, WPS had coal
transportation contracts in place for 90% of its 2010 coal transportation
requirements. For more information on coal purchases and coal
deliveries under contract, see Note 16, "Commitments and
Contingencies."
Power
Purchase Agreements
Integrys Energy
Group's regulated electric facilities enter into short-term and long-term power
purchase agreements to meet a portion of electric energy supply
needs. The most significant of these is an agreement through 2013
with Dominion Energy Kewaunee, LLC to purchase energy and capacity from the
Kewaunee Power Station consistent with volumes available when WPS owned the
facility. For more information on power purchase obligations, see
Note 16, "Commitments and
Contingencies."
Regulatory
Matters
Integrys Energy
Group's electric utility operations are regulated by the PSCW, MPSC, and
FERC. WPS's retail electric rates are regulated by the PSCW and MPSC,
and UPPCO's retail electric rates are regulated by the MPSC. The FERC
regulates wholesale electric rates for WPS and UPPCO. In 2009, retail
electric revenues accounted for 78.7% of total electric revenues, while
wholesale electric revenues accounted for 21.3% of total electric
revenues.
The PSCW sets rates
through its ratemaking process, which is based upon recovery of operating costs
and a return on invested capital. One of the cost recovery components
is fuel and purchased power, which is governed by a fuel window mechanism, as
described in Note 1(e), "Summary of Significant Accounting
Policies – Revenue and Customer Receivables." The MPSC and
FERC ratemaking processes are similar to those of the PSCW, with the exception
of fuel and purchased power, which are recovered on a one-for-one
basis.
See Note 24,
"Regulatory
Environment," for information regarding the rate cases and decoupling
mechanisms of Integrys Energy Group's electric utilities.
Hydroelectric
Licenses
WPS, UPPCO, and
WRPC (a company in which WPS has 50% ownership) have long-term licenses from the
FERC for all of their hydroelectric facilities.
Other
Matters
Seasonality
Integrys Energy
Group's regulated electric utility sales in Wisconsin generally follow a
seasonal pattern due to the air conditioning requirements of customers that are
primarily impacted by the variability of summer
temperatures. Regulated electric utility sales in Michigan do not
follow a significant seasonal trend due to cooler climate conditions in the
Upper Peninsula of Michigan.
Generally, during
the winter months, the purchase price of fuel (natural gas and fuel oil) for
generation is heavily influenced by weather and the availability of baseload
generation units within the MISO energy market. Sustained colder than
normal weather and unexpected extended generation outages
can influence fuel supply and demand, impacting the production
costs at Integrys Energy Group's natural gas and oil-fired facilities, as well
as natural gas supply commitments under power purchase agreements. For Integrys
Energy Group's regulated electric utility segment, the impact on utility
production costs is partially managed through the WPS Electric Risk Management
Plan.
Competition
The retail electric
utility market in Wisconsin is regulated by the PSCW. Retail electric
customers currently do not have the ability to choose their electric
supplier. However, in order to increase sales, utilities work to
attract new commercial and industrial customers into their service
territories. As a result, there is competition among utilities to
keep energy rates low. Wisconsin utilities have continued to refine
regulated tariffs in order to provide the true cost of electric energy to each
class of customer by reducing or eliminating rate subsidies among different
ratepayer classes. Although Wisconsin electric energy
markets are
regulated, utilities still face competition from other energy sources, such as
self-generation by large industrial customers and alternative energy
sources.
Michigan electric
energy markets are open to competition; however, an active competitive market
has not yet developed in the Upper Peninsula of Michigan, primarily due to a
lack of excess generation and transmission system capacity.
D. INTEGRYS
ENERGY SERVICES
Integrys Energy
Services and its subsidiaries market energy and related products in the retail
market serving commercial, industrial, direct, and "aggregated" small commercial
and residential customers. Aggregated customers are municipalities,
associations, or groups of customers that have joined together to negotiate
purchases of electric or natural gas energy as a larger group.
Integrys Energy
Services is investing in and promoting renewable energy, which it believes is
important to the future of the energy industry. Clean, renewable, and
efficient energy sources are developed, acquired, owned, and operated by
Integrys Energy Services. Integrys Energy Services assists customers
with selecting an energy solution that meets their needs and collaborates with
energy developers of wholesale energy projects to overcome challenges with
integrating the technical, regulatory, and financial aspects of their
projects.
Integrys Energy
Services utilizes derivative instruments, including forwards, futures, options,
and swaps, to manage its exposure to market risks from its generation and energy
supply portfolios in accordance with limits and approvals established in its
risk management and credit policies.
For more
information on the trading and risk management activities of Integrys Energy
Services, see Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations – Market Price Risk Management
Activities."
Recent
Developments
Since the
beginning of 2009, Integrys Energy Services has been in the process of
reevaluating its strategy with a focus on reducing its scale and risk
profile. The result of this evaluation was the decision to exit its
wholesale natural gas and wholesale electric businesses, its Canadian energy
marketing business, its energy management consulting business, certain retail
markets, and a portion of its electric generation fleet.
The remaining business lines will continue to invest in growing a portfolio
of retail natural gas and electric customers as well as energy assets with
renewable attributes.
See Item 7,
"Management's Discussion and
Analysis of Financial Condition and Results of Operations –
Introduction," and Note 4, "Dispositions," for a discussion of the
current strategy for Integrys Energy Services.
Facilities
Generation
For information
regarding the energy asset facilities owned by Integrys Energy Services, see
Item 2, "Properties." For
Integrys Energy Group's nonregulated plant asset book value, see Note 6,
"Property, Plant, and
Equipment."
Renewable
Energy
In
response to customers' growing interest in sustainability and Integrys Energy
Group's own concern for the environment, Integrys Energy Services is now
focusing on delivering value-added energy services and renewable commodities to
its retail customers. Product offerings include renewable natural gas
and
electric products
and development of green power generation projects. See Item 2,
"Properties," for more
information on renewable energy projects.
Fuel
Supply for Generation Facilities
Integrys Energy
Services' fuel inventory policy varies for each generation facility depending on
the type of fuel used and available natural gas storage
facilities. The cost of the majority of the fuel used by the
generation facilities is subject to market price volatility, and the facilities
are run to produce energy when economical at current fuel
prices. Integrys Energy Services' only coal-fired merchant generation
facility is its Westwood facility located in Pennsylvania. Actual
fuel needs in 2010 will depend on market conditions and operational capability
of the Westwood facility. However, Integrys Energy Services' Westwood
facility burns waste coal left behind by mining operations and has several
years’ supply on site. All fuel is located within a seven-mile radius
of the plant.
Energy
Supply
Physical supply
obligations are created when Integrys Energy Services executes forward customer
sales contracts. Integrys Energy Services' electricity and natural
gas supply requirements are primarily met through the procurement of natural gas
and electricity in the wholesale markets. Integrys Energy Services
does not own any reserves, so all natural gas supply is procured from producers
and other suppliers in the wholesale markets.
Retail
Electricity
The majority of
Integrys Energy Services' obligations to provide physical electricity result
from forward retail sales to commercial and industrial customers, many of which
are through full-requirements contracts. Integrys Energy Services
uses a combination of bilateral electricity purchase agreements from generation
companies and other marketers as well as regional power pools to meet those
obligations.
Retail
Natural Gas
Physical natural
gas supply obligations are created by the execution of forward retail sales
contracts by Integrys Energy Services' retail marketing
operation. Commercial and industrial customers, as well as some
residential customers, make up the majority of its sales
commitments. Natural gas is sourced in the wholesale markets at the
customer load regions, or in some cases is transported to the customer load
regions using natural gas transportation contracts.
Regulatory
Matters
Integrys Energy
Services is a FERC-authorized power marketer and has all of the licenses
required to conduct business in the states in which it operates.
Other
Matters
Customer
Segmentation
As
of December 31, 2009, Integrys Energy Services was delivering electricity
and natural gas supply to customers in 20 states. Integrys Energy
Services periodically reviews and evaluates the profitability of its operations
in each of these markets. Integrys Energy Services continues to
concentrate on adding customers in existing markets and emphasizing business
that provides the appropriate rate of return, but currently has no plans to
expand into new geographic regions. See Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations – Introduction," for a discussion of the
current strategy for Integrys Energy Services.
As
of December 31, 2009, Integrys Energy Services was serving electric
customers within 18 states, including its largest markets in Illinois, New York,
Mid-Atlantic and New England regions. Integrys Energy Services was
also serving natural gas customers within eight states, including its largest
markets in Wisconsin, Illinois, Michigan, and Ohio.
Although Integrys
Energy Services is not dependent on any one customer, a significant percentage
of its retail sales volume is derived from industries related to paper and
allied products, food and kindred products, chemicals and paint, and steel and
foundries.
Seasonality
Integrys Energy
Services believes that its business, in the aggregate, is not seasonal, even
though certain products sell more heavily in some seasons than in
others. Sales of natural gas generally peak in the winter months,
while sales of electricity generally peak in the summer
months. Generally in the summer months, the demand for electricity is
high, which increases the price at which electricity can be sold. In
periods of high residential natural gas and oil consumption (generally the
winter months), the purchase price of oil and natural gas increases, which
increases the production costs at Integrys Energy Services' natural gas- and
oil-fired generation facilities. Integrys Energy Services' business
can be volatile as a result of market conditions and the related market
opportunities available to its customers.
Competition
Integrys Energy
Services is a nonregulated retail energy marketer that competes against
regulated utilities and other retail energy marketers. Integrys
Energy Services competes with other energy providers on the basis of price,
reliability, customer service, product offerings, financial strength, consumer
convenience, performance, and reputation.
The competitive
landscape differs in each regional area and within each targeted customer
segment. For residential and small commercial customers, the primary
competitive challenges come from the incumbent utility and affiliated utility
marketing companies. The large commercial, institutional, and
industrial segments are very competitive in most markets with nearly all natural
gas customers having already switched away from utilities to an alternative
provider. National affiliated marketers, energy producers, and other
independent retail energy companies compete for customers in this
segment.
The incumbent
regulated utilities and the nationally-branded utility affiliates typically
benefit from the economies of scale derived from the strength of substantial
asset-based balance sheets and vertically integrated business models that
combine production, transmission, and distribution assets. These
advantages are offset by the lack of flexibility to offer multiple product
choices to their customers, and the nationally-branded utility affiliates
struggle with long-term focus and cultural adaptation to a nonregulated market
environment.
The local utilities
have the advantage of long-standing relationships with their customers, and they
have longer operating histories, greater financial and other resources, and
greater name recognition in their
markets than
Integrys Energy Services does. In addition, local utilities have been
subject to many years of regulatory oversight and thus have a significant amount
of experience regarding the policy preferences of their
regulators. Local utilities may seek to decrease their tariff retail
rates to limit or preclude the opportunities for competitive energy suppliers
and may seek to establish rates, terms, and conditions to the disadvantage of
competitive energy suppliers.
Working
Capital
The working capital
needs of Integrys Energy Services vary significantly over time due to volatility
in commodity prices and related margin calls, and levels of natural gas storage
inventories. Integrys Energy Services' working capital needs are met
by cash generated from operations, equity infusions, and debt (both long-term
and short-term). Integrys Energy Services has the ability to borrow
up to $400 million through an intercompany loan agreement with Integrys
Energy Group. Integrys Energy Group has provided total parental
guarantees of $958.4 million on behalf of Integrys Energy
Services.
E. ENVIRONMENTAL
MATTERS
For information on
environmental matters related to Integrys Energy Group and its subsidiaries, see
Note 16, "Commitments and
Contingencies."
F. CAPITAL
REQUIREMENTS
For information on
capital requirements related to Integrys Energy Group, see Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations – Liquidity
and Capital Resources."
G. EMPLOYEES
At
December 31, 2009, Integrys Energy Group’s consolidated subsidiaries had
the following employees:
|
|
Total
Number of Employees
|
|
|
Percentage
of Employees Covered by Collective Bargaining
Agreements
|
|
WPS
|
|
|
1,462 |
|
|
|
65 |
% |
IBS
|
|
|
1,318 |
|
|
|
- |
|
PGL
|
|
|
1,109 |
|
|
|
83 |
% |
Integrys
Energy Services
|
|
|
436 |
|
|
|
1 |
% |
MERC
|
|
|
223 |
|
|
|
19 |
% |
NSG
|
|
|
166 |
|
|
|
81 |
% |
MGU
|
|
|
165 |
|
|
|
68 |
% |
UPPCO
|
|
|
146 |
|
|
|
78 |
% |
Total
|
|
|
5,025 |
|
|
|
45 |
% |
Integrys Energy
Group’s subsidiaries have collective bargaining agreements with various unions
which are summarized in the table below.
Union
|
Subsidiary
|
Contract
Expiration Date
|
Local 310 of
the International Union of Operating Electricians
|
WPS
|
October 13,
2012
|
Local 18007
of the Utility Workers Union of America
|
PGL
|
April 30,
2013
|
Local 31 of
the International Brotherhood of Electrical Workers, AFL
CIO
|
MERC
|
May 31,
2011
|
Local 2285 of
the International Brotherhood of Electrical Workers
|
NSG
|
June 30,
2013
|
Local 12295
of the United Steelworkers of America, AFL CIO CLC
|
MGU
|
January 15,
2015
|
Local 417 of
the Utility Workers Union of America, AFL CIO
|
MGU
|
February 15,
2012
|
Local 510 of
the International Brotherhood of Electrical Workers, AFL
CIO
|
UPPCO
|
April 12,
2014
|
H. AVAILABLE
INFORMATION
Integrys Energy
Group files the following reports with the SEC:
·
|
Annual Report
on Form 10-K;
|
·
|
Quarterly
Reports on Form 10-Q;
|
·
|
Proxy
statements;
|
·
|
Registration
statements, including prospectuses;
|
·
|
Current
Reports on Form 8-K; and
|
·
|
Any
amendments to these documents.
|
Integrys Energy
Group makes these reports available, free of charge, on its Internet website,
www.integrysgroup.com,
as soon as reasonably practicable after they are filed with the
SEC. Integrys Energy Group's Code of Conduct may also be accessed on
Integrys Energy Group's website, and any amendments to or waivers from the Code
of Conduct will be timely disclosed on Integrys Energy Group's
website. Reports, statements, and amendments posted on Integrys
Energy Group's website do not include access to exhibits and supplemental
schedules electronically filed with the reports, statements, or
amendments. Integrys Energy Group is not including the information
contained on or available through its website as a part of, or incorporating
such information by reference into, this Annual Report on Form
10-K.
You may obtain
materials filed with the SEC by Integrys Energy Group at the SEC Public
Reference Room at 100 F Street, NE, Washington,
DC 20549. To obtain information on the operation of the
Public Reference Room, you may call the SEC at
1-800-SEC-0330. You may also view Integrys Energy Group’s reports,
proxy statements, and other information (including exhibits) filed
electronically with the SEC, at the SEC's website at www.sec.gov.
You should
carefully consider the following risk factors, as well as the other information
included or incorporated by reference in this Annual Report on Form 10-K, when
making an investment decision. The risks and uncertainties described
below are not the only ones Integrys Energy Group faces. Additional
risks and uncertainties not presently known or that Integrys Energy Group
currently believes to be immaterial may also adversely affect Integrys Energy
Group.
Integrys
Energy Group is subject to changes in government regulation, which may have a
negative impact on its businesses, financial position, and results of
operations.
The rates that
Integrys Energy Group's regulated utilities are allowed to charge for their
retail and wholesale services are some of the most important items influencing
its business, financial position, results of operations, and
liquidity. While rate regulation is premised on providing an
opportunity to earn a reasonable rate of return on invested capital, there is no
assurance that the applicable regulatory commissions will judge all the costs of
the regulated utilities to have been prudently incurred or that the regulatory
process in which rates are determined will always result in rates that will
produce full recovery of such costs or provide for a reasonable return on
equity. Certain items that would otherwise be immediately recognized
as revenues and expenses are deferred as regulatory assets and regulatory
liabilities for future recovery or refund to customers, as authorized by
regulators. Future recovery of regulatory assets is not assured, and
is generally subject to review by regulators in rate proceedings for matters
such as prudence and reasonableness. If recovery of costs is not
approved or is no longer deemed probable, regulatory assets would be recognized
in current period expense and could have a material impact on Integrys Energy
Group's financial results.
Integrys Energy
Group is subject to comprehensive regulation by several federal and state
regulatory agencies and local governmental bodies, which significantly
influences its operating environment and may affect Integrys Energy Group's
ability to recover costs from utility customers. In particular, the
PSCW, ICC, MPSC, MPUC, FERC, SEC, EPA, Minnesota Office of Pipeline Safety,
United States Department of Transportation, WDNR, Michigan Department of Natural
Resources and Environment, the city of Chicago, and Illinois Environmental
Protection Agency regulate many aspects of Integrys Energy Group's utility
operations, including, but not limited to, construction and operation of
facilities, conditions of service, the issuance of securities, and the rates
that it can charge customers. Integrys Energy Group is required to
have numerous permits, approvals, and certificates from these agencies to
operate its business. Failure to comply with any applicable rules or
regulations may lead to penalties, customer refunds, or other amounts, which
could have a material impact on the financial results of Integrys Energy
Group.
Existing statutes
and regulations may be revised or reinterpreted by these agencies, or these
agencies may adopt new laws and regulations that apply to Integrys Energy
Group. Integrys Energy Group is unable to predict the impact on its
businesses and operating results of any such actions by these
agencies. However, changes in regulations or the imposition of
additional regulations may require Integrys Energy Group to incur additional
expenses or change business operations, which may have an adverse impact on
results of operations. In addition, federal regulatory reforms may
produce unexpected changes and costs in the public utility
industry.
Integrys
Energy Group may face significant costs to comply with the regulation of
greenhouse gas emissions.
Climate change and
the effect of greenhouse gas emissions, most notably carbon dioxide, are
increasingly becoming a concern for the energy industry. While there
is currently no federal legislation in the United States that mandates the
reduction of greenhouse gas emissions, it is possible that such legislation may
be enacted in the future. In addition, the EPA may adopt regulations
under the Clean Air Act. To that end, federal and state legislative
proposals have been introduced to regulate the emission of greenhouse gases,
including bills pending in the United States Congress that would regulate
greenhouse gas emissions through a cap-and-trade system under which emitters
would be required to buy allowances
to
offset greenhouse gas emissions. However, until legislation is passed
at the federal or state level, it remains unclear as to (1) which industry
sectors will be impacted, (2) when compliance will be required, (3) the
magnitude of the greenhouse gas emissions reductions that will be required, and
(4) the costs and opportunities associated with
compliance. Integrys Energy Group is evaluating both the technical
and cost implications which may result from future state, regional, or federal
greenhouse gas regulatory programs, but at this time, it is uncertain as to the
effect climate change regulation may have on Integrys Energy Group's future
operations, capital expenditures, and financial results.
Based on the
complexity and uncertainty of these issues, it is possible that future carbon
regulation will increase the cost of electricity produced at coal-fired
generation units and may affect the capital expenditures Integrys Energy Group
would make at its generation units. At this time, there is no
commercially available technology for removing carbon dioxide from a pulverized
coal-fired plant. In addition, future legislation designed to reduce
greenhouse gas emissions could make some of the generating units uneconomical to
maintain or operate and could impact future results of operations, cash flows,
and financial condition if such costs are not recoverable through regulated
rates.
Integrys Energy
Group's natural gas delivery systems may generate fugitive gas as a result of
normal operations and as a result of excavation, construction, and repair of
natural gas delivery systems. Fugitive gas typically vents to the
atmosphere and consists primarily of methane, a greenhouse
gas. Carbon dioxide is also a byproduct of natural gas
consumption. As a result, future legislation to regulate the
emission of greenhouse gases could increase the price of natural gas, restrict
the use of natural gas, adversely affect the ability to operate our natural gas
facilities, and/or reduce natural gas demand.
Costs
of environmental compliance, liabilities, fines, penalties, and litigation could
exceed Integrys Energy Group's estimates.
Compliance with
current and future federal and state environmental laws and regulations may
result in increased capital, operating, and other costs, including remediation
and containment expenses and monitoring obligations. Integrys Energy
Group cannot predict with certainty the amount and timing of all future
expenditures (including the potential or magnitude of fines or penalties)
related to environmental matters because of the difficulty of estimating cleanup
and compliance costs and the possibility that changes will be made to the
current environmental laws and regulations.
Integrys Energy
Group's natural gas utility subsidiaries are accruing liabilities and deferring
costs (recorded as regulatory assets) incurred in connection with their former
manufactured gas plant sites, including related legal expenses, pending recovery
through rates or from other entities. Regulatory assets reflect the
net amount of (1) costs incurred to date, (2) carrying costs (excluding those
for WPS, which are not recoverable), (3) amounts recovered from insurance
companies, other entities and customers, and (4) management's best estimates of
the costs Integrys Energy Group will spend in the future for investigating and
remediating the manufactured gas plant sites. Integrys Energy Group
believes that any of these costs that are not recoverable from other entities or
from insurance carriers are recoverable through rates for utility services under
approved mechanisms for the recovery of prudently incurred costs. A
change in these rate recovery mechanisms, however, or a decision by the
applicable state commission that some or all of these costs were not prudently
incurred, could result in the present recognition as expense of some or all of
these costs. For more information, see Note 16, "Commitments and
Contingencies."
WPS owns coal-fired
electric generating facilities at which it has performed maintenance activities
that the EPA could determine were subject to Clean Air Act New Source Review
permitting requirements. Depending on potential settlement terms or a
court decision, WPS could be required to install environmental controls, change
operations, shut down certain plants, undertake supplemental environmental
projects, and/or pay fines.
In
addition, impacts resulting from future federal or state regulation regarding
mercury, sulfur dioxide, and nitrogen oxide emissions, as well as the management
of coal combustion byproducts, are uncertain.
There is also
uncertainty in quantifying liabilities under environmental laws that impose
joint and several liability on all potentially responsible parties.
Citizen groups that
feel there are compliance issues not sufficiently enforced by environmental
regulatory agencies may also bring citizen enforcement actions against Integrys
Energy Group. Such actions could seek penalties, injunctive relief,
and costs of litigation. Private citizens can also bring lawsuits to
recover environmental damages they believe they have incurred.
Integrys
Energy Group's operations are subject to risks beyond its control, including but
not limited to customer usage, weather, terrorist attacks, or acts of
war.
Integrys Energy
Group's revenues are affected by the demand for electricity and natural
gas. That demand can vary greatly based upon:
·
|
Fluctuations
in economic activity and growth in Integrys Energy Group's regulated
service areas, as well as areas in which its nonregulated subsidiaries
operate;
|
·
|
Weather
conditions, seasonality, and temperature extremes; and
|
·
|
The amount of
additional energy available from current or new
competitors.
|
General economic
conditions and customers focusing on energy efficiency in Integrys Energy
Group's service areas may result in a decrease in demand for electricity or
natural gas, which could have an adverse impact on Integrys Energy Group's
results of operations, financial condition, and cash flows.
Weather conditions
directly influence the demand for electricity and natural gas and affect the
price of energy commodities.
In
addition, the cost of repairing damage to Integrys Energy Group's facilities due
to storms, natural disasters, wars, terrorist acts, and other catastrophic
events, in excess of insurance limits established for such repairs or excluded
by insurance policies, may adversely impact Integrys Energy Group's results of
operations, financial condition, and cash flows. The occurrence or
risk of occurrence of future terrorist activity and the high cost or potential
unavailability of insurance to cover such terrorist activity may impact Integrys
Energy Group's results of operations and financial condition in unpredictable
ways. These actions could also result in disruptions of power and
fuel markets. In addition, Integrys Energy Group's natural gas
distribution system and pipelines and electric generation units and distribution
system could be directly or indirectly harmed by future terrorist
activity.
Adverse
capital and credit market conditions could negatively affect Integrys Energy
Group's ability to meet liquidity needs, access capital, and/or grow or sustain
its current businesses. Cost of capital and disruptions, uncertainty,
and/or volatility in the financial markets could also adversely impact the
results of operations and financial condition of Integrys Energy Group, as well
as exert downward pressure on its stock price.
Having access to
the credit and capital markets, at a reasonable cost, is necessary for Integrys
Energy Group to fund its operations, including capital
requirements. The capital and credit markets provide Integrys Energy
Group with liquidity to operate and grow its businesses that is not otherwise
provided from operating cash flows. The credit and capital markets
also support the ability of Integrys Energy Group to provide credit support for
the nonregulated operations of Integrys Energy Services. Disruptions,
uncertainty, and/or volatility in those markets could increase Integrys Energy
Group's cost of capital. If Integrys Energy Group or its subsidiaries
are unable to access the credit and capital markets on terms that are
reasonable, they may have to delay raising capital, issue shorter-term
securities, and/or bear an increased cost of capital. This, in turn,
could impact Integrys Energy Group's ability to grow or sustain its current
businesses, cause a reduction in earnings, and/or limit Integrys Energy Group's
ability to sustain its current common stock dividend level.
A
reduction in Integrys Energy Group's or its subsidiaries' credit ratings could
materially and adversely affect their business, financial position, results of
operations, and liquidity.
Integrys Energy
Group cannot be sure that any of Integrys Energy Group's or its subsidiaries'
credit ratings will remain in effect for any given period of time or that a
credit rating will not be lowered by a rating agency if, in the rating agency’s
judgment, circumstances in the future so warrant. Any downgrade
could:
·
|
Require the
payment of higher interest rates in future financings and possibly reduce
the potential pool of creditors;
|
·
|
Increase
borrowing costs under certain existing credit
facilities;
|
·
|
Limit access
to the commercial paper market;
|
·
|
Limit the
availability of adequate credit support for Integrys Energy Services'
operations; and
|
·
|
Require
provision of additional credit assurance, including cash margin calls, to
contract counterparties.
|
The
failure to effectively operate Integrys Energy Services' scaled back
nonregulated energy services business and/or the failure to execute the
remaining transactions that are part of the process to significantly reduce the
scope and size of Integrys Energy Services, could negatively impact the future
results of operations and financial condition of Integrys Energy
Group.
Integrys Energy
Services’ change in focus from significant growth in nonregulated wholesale and
retail energy markets across the United States and Canada, to a focus on
selected nonregulated retail energy markets, could result in increased risks,
including but not limited to:
·
|
Lower
earnings capacity from this business segment going forward, which Integrys
Energy Group may not be able to
replace;
|
·
|
A reduction
in the value of the nonregulated business segment, including a potential
corresponding negative impact on Integrys Energy
Group;
|
·
|
A reduction
in operating efficiencies, as operating margins may decline at a faster
rate than the associated operating expenses;
and
|
·
|
Potential
loss of key employees during periods of increased employment
uncertainty.
|
Integrys Energy
Group cannot be certain that it will be able to successfully execute the
remaining transactions to complete the strategic initiative to reduce the scope
and scale of the nonregulated business segment. Pending transactions
and plans to sell assets and components of this business segment may not be
completed, or these transactions could result in obtaining less economic benefit
than projected.
Refer to
Item 7, “Management's Discussion and Analysis
of Financial Condition and Results of Operations – Introduction,” for a further
discussion of the current strategy for Integrys Energy Services.
The
use of derivative instruments could result in financial losses and liquidity
constraints.
Integrys Energy
Group uses derivative instruments, including futures, forwards, options, and
swaps, to manage its commodity and financial market
risks. Significant volatility in energy prices could adversely impact
Integrys Energy Group's cash collateral requirements due to counterparty margin
calls related to these instruments.
In
the absence of actively quoted market prices and pricing information from
external sources, the valuation of derivative contracts involves management's
judgment or use of estimates. As a result, changes in the underlying
assumptions or use of alternative valuation methods could affect the reported
fair value of these contracts. Furthermore, realized values could
differ from values determined by management.
For additional
information concerning derivatives and commodity-based trading contracts, see
Note 2, "Risk
Management Activities."
Poor
investment performance of retirement plan investments and other factors
impacting retirement plan costs could unfavorably impact Integrys Energy Group’s
liquidity and results of operations.
Integrys Energy
Group has employee benefit plans that cover substantially all of its employees
and retirees. Integrys Energy Group's cost of providing these benefit
plans is dependent upon actual plan experience and assumptions concerning the
future, such as earnings on and/or valuations of plan assets, discount rates,
the level of interest rates used to measure the required minimum funding levels
of the plans, future government regulation, and required or voluntary
contributions to the plans. Depending upon the investment performance
over time and other factors impacting its costs (as listed above), Integrys
Energy Group could be required to make larger contributions in the future to
fund these plans. These additional funding obligations could have a
material adverse impact on Integrys Energy Group's cash flows, financial
condition, and/or results of operations. Changes made to the plans
may also impact current and future pension and other postretirement benefit
costs.
Fluctuating
commodity prices may reduce energy margins.
Integrys Energy
Group’s regulated natural gas margins are sensitive to changes in natural gas
commodity prices. Any changes could affect the prices the regulated
natural gas utilities charge, their operating costs, and the competitive
position of their products and services. Prudently incurred costs for
purchased natural gas and pipeline transportation and storage services are fully
recoverable through the annual reconciliation of revenues from the natural gas
charge. However, increases in natural gas costs affect total retail
prices and, therefore, the competitive position of Integrys Energy Group's
natural gas businesses relative to other forms of energy. In
addition, the timing and extent of higher natural gas prices can adversely
affect accounts receivable, bad debts, fuel cost, and interest
expense. Integrys Energy Group is also subject to margin requirements
in connection with its use of forward contracts, and these requirements could
escalate if prices move adversely relative to these positions.
Integrys Energy
Group's regulated electric utility margins are directly affected by commodity
costs related to coal, natural gas, and other fuels used in the electric
generation process. Integrys Energy Group may experience increased
expenses, including interest costs and bad debts, higher working capital
requirements, and possibly reduction in demand as a result of any increase in
the cost of fuel or purchased power.
Higher commodity
prices result in increased energy prices that may impact customer demand for
energy in the nonregulated market and increase counterparty and bad debt
risk. This may stress margins at Integrys Energy Group's nonregulated
subsidiaries. If market prices for electric energy decline below the
cost of production at Integrys Energy Group's nonregulated generation
facilities, these units may be temporarily shut down.
Counterparties and customers may not
meet their obligations.
Integrys Energy
Group is exposed to the risk that counterparties to various arrangements who owe
Integrys Energy Group money, energy, natural gas, coal, or other commodities or
services will not be able to perform their obligations. Should the
counterparties to these arrangements fail to perform, Integrys Energy Group
might be forced to replace or to sell the underlying commitment at then-current
market prices. In such event, Integrys Energy Group might incur losses, or
its results of operations, financial position, or liquidity could otherwise be
adversely affected.
Some of Integrys
Energy Group's customers are experiencing, or may experience, financial problems
that could have a significant impact on their
creditworthiness. Integrys Energy Group cannot provide assurance that
its financially distressed customers will not default on their obligations to
Integrys Energy Group and that such a default will not have a material adverse
impact on Integrys Energy Group's
business, financial
position, results of operations, or cash flows. Furthermore, the
bankruptcy of one or more of its customers, or some other similar proceeding or
liquidity constraint, might make it unlikely that Integrys Energy Group would be
able to collect all or a significant portion of amounts owed by distressed
entities or residential customers. Such events could adversely impact
Integrys Energy Group's receivable collections and additional allowances may be
required, which could adversely affect its operating results. In
addition, such events might force customers to reduce or curtail their future
use of Integrys Energy Group's products and services, which could have a
material adverse impact on Integrys Energy Group’s results of operations and
financial condition.
Any
change in Integrys Energy Group's ability to sell electricity generated from its
facilities at market-based rates may impact earnings.
The FERC has
authorized certain of Integrys Energy Group's subsidiaries to sell generation
from certain of its facilities at market prices. The FERC retains the
authority to modify or withdraw this market-based rate authority. If
the FERC determines that the market is not workably competitive, that Integrys
Energy Group or its subsidiaries possess market power, or that they are not
charging just and reasonable rates, the FERC may require Integrys Energy Group's
subsidiaries to sell power at a price based upon the costs incurred in producing
the power. Integrys Energy Group's revenues and profit margins may be
negatively affected by any reduction by the FERC of the rates it may
receive.
Integrys
Energy Group has recorded goodwill that could become impaired and adversely
affect financial results.
The PEC merger and
the acquisition of natural gas distribution operations in Minnesota and Michigan
were accounted for as purchases by Integrys Energy Group in accordance with
GAAP. Under the purchase method of accounting, the assets and
liabilities acquired were recorded at their respective fair values at the date
of acquisition and added to those of Integrys Energy Group. As a
result of the application of purchase accounting, these transactions resulted in
a significant amount of goodwill. To the extent the value of goodwill
or intangibles becomes impaired, Integrys Energy Group may be required to incur
material noncash charges relating to such impairments. Such
impairment charges could have a material impact on the financial results of
Integrys Energy Group.
Actual
results could differ from estimates used to prepare Integrys Energy Group's
financial statements.
In
preparing the financial statements in accordance with GAAP, management must
often make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, expenses, and related disclosures at the date of the
financial statements and during the reporting period. Some of those
judgments can be subjective and complex, and actual results could differ from
those estimates. For more information about significant estimates and
assumptions, see Item 7, ''Management's Discussion and
Analysis of Financial Condition and Results of Operations – Critical Accounting
Policies.''
Integrys
Energy Group may not be able to utilize tax credit and/or net operating loss
carryforwards.
Integrys Energy
Group has significantly reduced its consolidated federal and state income tax
liability in the past through tax credits and tax net operating losses available
under the applicable tax codes. Integrys Energy Group has not fully
utilized these tax credits and tax net operating losses in its previous tax
filings, but expects to prior to their expiration in future
filings. However, Integrys Energy Group may not be able to fully
utilize the tax credits and tax net operating losses available as carryforwards
if its future federal and state taxable income and related income tax liability
is insufficient to permit the use of such credits and losses.
In
addition, any future disallowance of some or all of those tax credits or tax net
operating losses as a result of legislative change or adverse determination by
one of the applicable taxing jurisdictions could materially affect Integrys
Energy Group's tax obligations.
Integrys
Energy Group is subject to provisions that can limit merger and acquisition
opportunities for its shareholders.
The Wisconsin
Public Utility Holding Company Law precludes the acquisition of 10% or more of
the voting shares of a holding company of a Wisconsin public utility unless the
PSCW has first determined that the acquisition is in the best interests of
utility consumers, investors and the public. Those interests may, to
some extent, be mutually exclusive. This provision and other
requirements of the Wisconsin Public Utility Holding Company Law may delay, or
reduce the likelihood of, a sale or change of control thus reducing the
likelihood that shareholders will receive a takeover premium for their
shares.
Provisions of
Integrys Energy Group's articles of incorporation and by-laws may delay or
frustrate the removal of incumbent directors and may prevent or delay a merger,
tender offer or proxy contest involving Integrys Energy Group that is not
approved by its board of directors, even if the shareholders believe that such
events may be beneficial to Integrys Energy Group's interests. In
addition, the Wisconsin Business Corporation Law contains provisions that may
have the effect of delaying or making more difficult attempts by others to
obtain control of Integrys Energy Group without the approval of its board of
directors.
None.
A. REGULATED
Electric
Facilities
The following table
summarizes information on the electric generation facilities of Integrys Energy
Group, including owned and jointly owned facilities as of December 31,
2009:
Type
|
Name
|
Location
|
Fuel
|
Rated
Capacity
(MW)
(1)
|
|
|
|
|
|
|
|
Steam
|
Columbia
Units 1 and 2
|
Portage,
WI
|
Coal
|
354.5
|
(2)
|
|
Edgewater
Unit 4
|
Sheboygan,
WI
|
Coal
|
92.6
|
(2)
|
|
Pulliam (4
units)
|
Green Bay,
WI
|
Coal
|
320.3
|
|
|
Weston Units
1, 2, and 3
|
Marathon
County, WI
|
Coal
|
471.1
|
|
|
Weston Unit
4
|
Marathon
County, WI
|
Coal
|
373.4
|
(2)
|
Total
Steam
|
|
|
|
1,611.9
|
|
|
|
|
|
|
|
Combustion
|
De Pere Energy
Center
|
De Pere,
WI
|
Natural
Gas
|
166.6
|
|
Turbine
and
|
Eagle
River
|
Eagle River,
WI
|
Distillate
Fuel Oil
|
4.2
|
|
Diesel
|
Gladstone
|
Gladstone,
MI
|
Oil
|
19.1
|
|
|
Juneau
#31
|
Adams County,
WI
|
Distillate
Fuel Oil
|
7.1
|
(2)
|
|
Oneida
Casino
|
Green Bay,
WI
|
Distillate
Fuel Oil
|
3.5
|
|
|
Portage
|
Houghton,
MI
|
Oil
|
18.1
|
|
|
Pulliam
#31
|
Green Bay,
WI
|
Natural
Gas
|
84.7
|
|
|
West Marinette
#31
|
Marinette,
WI
|
Natural
Gas
|
38.3
|
|
|
West Marinette
#32
|
Marinette,
WI
|
Natural
Gas
|
35.4
|
|
|
West Marinette
#33
|
Marinette,
WI
|
Natural
Gas
|
51.6
|
(2)
|
|
Weston
#31
|
Marathon
County, WI
|
Natural
Gas
|
15.3
|
|
|
Weston
#32
|
Marathon
County, WI
|
Natural
Gas
|
48.4
|
|
Total
Combustion Turbine and Diesel
|
|
|
492.3
|
|
|
|
|
|
|
|
Hydroelectric
|
Various
|
Michigan
|
Hydro
|
20.3
|
|
|
Various
|
Wisconsin
|
Hydro
|
67.9
|
(3)
|
Total
Hydroelectric
|
|
|
|
88.2
|
|
|
|
|
|
|
|
Wind
|
Kewaunee
County
|
Wisconsin
|
Wind
|
1.0
|
|
|
Crane
Creek
|
Iowa
|
Wind
|
21.7
|
|
Total
Wind
|
|
|
|
22.7
|
|
|
|
|
|
|
|
Total
System
|
|
|
|
2,215.1
|
|
(1)
|
Based on
capacity ratings for July 2010, which can differ from nameplate
capacity, especially on wind projects. As a result of
continually reaching demand peaks in the summer months, primarily due to
air conditioning demand, the summer period is the most relevant for
capacity planning purposes at Integrys Energy Group’s electric
segment.
|
|
|
(2)
|
These
facilities are jointly owned by WPS and various other
utilities. The capacity indicated for each of these units is
equal to WPS’s portion of total plant capacity based on its percent of
ownership.
|
|
|
|
|
-
|
Wisconsin
Power and Light Company operates the Columbia and Edgewater units, and WPS
holds a 31.8% ownership interest in these facilities.
|
|
|
|
|
-
|
WPS operates
the Weston 4 facility and holds a 70% ownership in this facility, while
Dairyland Power Cooperative holds the remaining 30%.
|
|
|
|
|
-
|
WRPC owns and
operates the Juneau unit. WPS holds a 50% ownership interest in
WRPC.
|
|
|
|
|
-
|
WPS operates
the West Marinette 33 unit and holds a 68% ownership interest in the
facility, while Marshfield Electric and Water Department holds the
remaining 32% ownership.
|
|
|
|
(3)
|
WRPC owns and
operates the Castle Rock and Petenwell units. WPS holds a
50% ownership interest in WRPC; however, WPS is entitled to 66.7% of total
capacity at Petenwell and Castle Rock.
|
|
|
As
of December 31, 2009, Integrys Energy Group’s electric utilities owned
approximately 24,900 miles of electric distribution lines located in Michigan
and Wisconsin and approximately 170 distribution substations.
Natural
Gas Facilities
At
December 31, 2009, Integrys Energy Group’s natural gas properties were located
in Illinois, Wisconsin, Minnesota, and Michigan, and consisted of the
following:
●
|
Approximately
22,000 miles of natural gas distribution mains,
|
●
|
Approximately
1,010 miles of natural gas transmission mains,
|
●
|
Approximately
291 natural gas distribution and transmission gate
stations,
|
●
|
Approximately
1.3 million natural gas lateral services,
|
●
|
A
3.6 billion-cubic-foot natural gas storage field located in Michigan,
and
|
●
|
A 36.5
billion-cubic-foot underground natural gas storage reservoir and a
liquefied natural gas plant at Manlove Field located in central
Illinois.
|
General
Substantially all
of Integrys Energy Group’s utility plant at WPS, UPPCO, PGL, and NSG is subject
to first mortgage liens.
B. INTEGRYS
ENERGY SERVICES
The following table
summarizes information on the energy asset facilities owned by Integrys Energy
Services as of December 31, 2009:
Type
|
Name
|
Location
|
Fuel
|
Rated
Capacity
(MW) (1)
|
|
|
|
|
|
|
|
Combined
Cycle
|
Beaver
Falls
|
Beaver Falls,
NY
|
Gas/Oil
|
78.9
|
|
|
Combined
Locks
|
Combined
Locks, WI
|
Gas
|
46.8
|
(2)
|
|
Syracuse
|
Syracuse,
NY
|
Gas/Oil
|
85.0
|
|
Total Combined
Cycle
|
|
|
|
210.7
|
|
|
|
|
|
|
|
Steam
|
Westwood
|
Tremont,
PA
|
Culm
|
30.0
|
|
|
Caribou
|
Caribou,
ME
|
Oil
|
21.7
|
(3)
|
Total
Steam
|
|
|
|
51.7
|
|
|
|
|
|
|
|
Hydroelectric
|
Caribou
|
Caribou
ME
|
Hydro
|
0.9
|
(3)
|
|
Squa
Pan
|
Ashland,
ME
|
Hydro
|
1.4
|
(3)
|
|
Tinker
|
New Brunswick,
Canada
|
Hydro
|
34.5
|
(3)
|
Total
Hydroelectric
|
|
|
|
36.8
|
|
|
|
|
|
|
|
Combustion
Turbine and Diesel
|
Caribou
|
Caribou
ME
|
Diesel
|
7.0
|
(3)
|
|
Flo’s
Inn
|
Presque Isle,
ME
|
Diesel
|
4.2
|
(3)
|
|
Loring
|
Limestone,
ME
|
Diesel
|
5.2
|
(3)
|
|
Tinker
|
New Brunswick,
Canada
|
Diesel
|
1.0
|
(3)
|
Total
Combustion Turbine and Diesel
|
|
|
17.4
|
|
|
|
|
|
|
|
Reciprocating
Engine
|
Winnebago
|
Rockford,
IL
|
Landfill
Gas
|
6.4
|
|
|
|
|
|
|
|
Solar
|
Various
|
California
|
|
1.7
|
|
|
Various
|
Connecticut
|
|
0.3
|
|
|
Various
|
New
Jersey
|
|
5.8
|
|
Total
Solar
|
|
|
|
7.8
|
|
|
|
|
|
|
|
Total Energy
Assets
|
|
|
|
330.8
|
|
|
|
|
|
|
|
|
|
|
|
Length of Pipeline
(Miles)
|
|
|
|
|
|
|
|
Landfill Gas
Transportation
|
LGS
|
Brazoria
County, TX
|
Landfill
Gas
|
33 miles
|
(4)
|
|
|
|
|
|
|
(1)
|
Based on
summer rated capacity.
|
(2)
|
Combined Locks
has an additional five MW of capacity available at this facility
through the lease of a steam turbine.
|
(3)
|
At December
31, 2009, these properties were classified as assets held for
sale. For more information see Note 4, “Dispositions.”
|
(4)
|
LGS Renewables
1, LC, owns and operates the LGS facility. PDI, a wholly owned
subsidiary of Integrys Energy Services, holds a 50% ownership interest in
LGS.
|
For information on
material legal proceedings and matters related to Integrys Energy Group and its
subsidiaries, see Note 16, "Commitments and
Contingencies."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None
|
EXECUTIVE
OFFICERS OF INTEGRYS ENERGY GROUP
|
Name
and Age (1)
|
|
Position
and Business
Experience
During Past Five Years
|
Effective
Date
|
|
|
|
|
Larry L.
Weyers
|
64
|
Executive
Chairman
|
01-01-09
|
|
|
Chairman,
President and Chief Executive Officer
|
05-15-08
|
|
|
President and
Chief Executive Officer
|
02-21-07
|
|
|
Chairman,
President and Chief Executive Officer
|
02-12-98
|
|
|
|
|
Charles A.
Schrock
|
56
|
President and
Chief Executive Officer
|
01-01-09
|
|
|
President and
Chief Executive Officer of WPS
|
05-31-08
|
|
|
President of
WPS
|
02-21-07
|
|
|
President and
Chief Operating Officer – Generation – WPS
|
08-15-04
|
|
|
|
|
Thomas P.
Meinz
|
63
|
Executive Vice
President and Chief External Affairs Officer
|
05-15-08
|
|
|
Executive Vice
President – External Affairs
|
02-21-07
|
|
|
Executive Vice
President – Public Affairs
|
09-12-04
|
|
|
|
|
Phillip M.
Mikulsky
|
61
|
Executive Vice
President – Corporate Development and Shared Services
|
09-21-08
|
|
|
Executive Vice
President and Chief Development Officer
|
02-21-07
|
|
|
Executive Vice
President – Development
|
09-12-04
|
|
|
|
|
Joseph P.
O'Leary
|
55
|
Senior Vice
President and Chief Financial Officer
|
06-04-01
|
|
|
|
|
Diane L.
Ford
|
56
|
Vice President
and Corporate Controller
|
02-21-07
|
|
|
Vice President
– Controller and Chief Accounting Officer
|
07-11-99
|
|
|
|
|
Bradley A.
Johnson
|
55
|
Vice President
and Treasurer
|
07-18-04
|
|
|
|
|
Barth J.
Wolf
|
52
|
Vice
President, Chief Legal Officer and Secretary
|
07-31-07
|
|
|
Vice President
– Legal Services and Chief Compliance Officer – IBS
|
02-21-07
|
|
|
Secretary and
Manager – Legal Services
|
09-19-99
|
|
|
|
|
Lawrence T.
Borgard
|
48
|
President and
Chief Operating Officer – Utilities of Integrys Energy Group and President
and Chief Executive Officer of WPS
|
04-05-09
|
|
|
President and
Chief Operating Officer – Integrys Gas Group (2)
|
02-21-07
|
|
|
President and
Chief Operating Officer – Energy Delivery – WPS
|
08-15-04
|
|
|
|
|
William D.
Laakso (3)
|
47
|
Vice President
– Human Resources
|
09-21-08
|
|
|
Interim Vice
President – Human Resources – IBS
|
05-15-08
|
|
|
Director –
Workforce Planning and Organizational Design – WPS
|
08-12-07
|
|
|
Director
Organizational Development – WPS
|
07-11-06
|
|
|
Director of
Organizational Development – WPS
|
12-12-05
|
|
|
Vice President
– Operations/Clinical Director – Employee Resource Center,
Inc.
|
02-04-02
|
|
|
|
|
Mark A
Radtke
|
48
|
President and
Chief Executive Officer – Integrys Energy Services
|
06-01-08
|
|
|
President –
Integrys Energy Services (previously named WPS Energy Services,
Inc.)
|
10-17-99
|
|
|
(1)
|
All ages are
as of January 1, 2010. None of the executives listed above
are related by blood, marriage, or adoption to any of the other officers
listed or to any director of Integrys Energy Group. Each
officer holds office until his or her successor has been duly elected and
qualified, or until his or her death, resignation, disqualification, or
removal.
|
|
|
(2)
|
The Integrys
Gas Group includes PGL, NSG, MERC, and MGU.
|
|
|
(3)
|
Prior to
joining Integrys Energy Group, William D. Laakso’s responsibilities at
Employee Resource Center, Inc. (ERC) included leadership of ERC’s
management team and duties of Clinical Director. ERC provides
employee assistance programs to over 200 corporate customers in Northeast
Wisconsin and covers 75,000 employees and their
dependents.
|
PART
II
|
MARKET
FOR INTEGRYS ENERGY GROUP'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
|
Integrys
Energy Group, Inc. Common Stock Two-Year Comparison
Share
Data
|
Dividends
Per
Share
|
Price Range
|
High
|
Low
|
2009
|
|
|
|
1st
Quarter
|
$ .680
|
$45.10
|
$19.44
|
2nd
Quarter
|
.680
|
30.40
|
24.95
|
3rd
Quarter
|
.680
|
36.75
|
28.31
|
4th
Quarter
|
.680
|
42.99
|
34.20
|
Total
|
$2.720
|
|
|
|
|
|
|
2008
|
|
|
|
1st
Quarter
|
$ .670
|
$53.26
|
$44.04
|
2nd
Quarter
|
.670
|
52.74
|
46.89
|
3rd
Quarter
|
.670
|
53.92
|
48.88
|
4th
Quarter
|
.670
|
51.47
|
36.91
|
Total
|
$2.680
|
|
|
Integrys Energy
Group’s common stock is traded on the New York Stock Exchange under the ticker
symbol “TEG.” The transfer agent and registrar for Integrys Energy
Group’s common stock is American Stock Transfer & Trust Company, LLC, 59
Maiden Lane, New York, NY 10038.
As
of February 22, 2010, there were 32,608 common stock shareholders of
record.
Dividend
Restrictions
Integrys Energy
Group is a holding company and its ability to pay dividends is largely dependant
upon the ability of its subsidiaries to pay dividends.
The PSCW has
restricted WPS to paying normal dividends on its common stock of no more than
103% of the previous year’s common stock dividend. Integrys Energy
Group’s right to receive dividends on the common stock of WPS is also subject to
the prior rights of WPS’s preferred shareholders and to provisions in WPS’s
restated articles of incorporation, which limit the amount of common stock
dividends that WPS may pay if its common stock and common stock surplus accounts
constitute less than 25% of its total capitalization. These
limitations are not expected to limit any dividend payments in the foreseeable
future. At December 31, 2009, these limitations amounted to
$1.4 million out of WPS’s total retained earnings of
$392.2 million. Consequently, at December 31, 2009, WPS had
$390.8 million of retained earnings available for the payment of
dividends.
The PSCW also
requires WPS to maintain a financial capital structure (i.e., the percentages by
which each of common stock equity, preferred stock equity and debt constitute
the total capital invested in a utility), that has a common equity range of 49%
to 54%. The PSCW also established a targeted financial common equity
ratio at 51% that results in a regulatory common equity ratio of
53.41%. The primary difference between the financial and the
regulatory common equity ratio relates to certain off-balance sheet obligations,
primarily purchased power obligations, considered by the PSCW in establishing
the financial common equity target. These limitations may be modified
by the PSCW.
UPPCO's indentures
relating to its first mortgage bonds contain certain limitations on the payment
of cash dividends on its common stock, which is held solely by Integrys Energy
Group. At December 31, 2009, these restrictions amounted to
$10.7 million out of UPPCO's total retained earnings of
$50.1 million. Consequently, at December 31, 2009, UPPCO had
$39.4 million of retained earnings available for the payment of common
stock cash dividends.
NSG's long-term
debt obligations contain provisions and covenants restricting the payment of
cash dividends and the purchase or redemption of capital stock. At
December 31, 2009, these restrictions amounted to $6.9 million out of
NSG's total retained earnings of $70.2 million. Consequently, at
December 31, 2009, NSG had $63.3 million of retained earnings
available for the payment of dividends.
At
December 31, 2009, Integrys Energy Group had $326.6 million of
retained earnings available for the payment of dividends. Except for
the subsidiary restrictions described above, Integrys Energy Group does not have
any dividend restrictions.
Equity
Compensation Plans
See Item 11, "Executive Compensation," for
information regarding Integrys Energy Group’s equity compensation
plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 6. SELECTED FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEGRYS
ENERGY GROUP, INC.
|
|
COMPARATIVE
FINANCIAL DATA AND
|
|
OTHER
STATISTICS (2005 TO 2009)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of or for Year Ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions,
except per share amounts, stock price, return on average
equity
|
|
|
|
|
|
|
|
and
number of shareholders and employees)
|
|
2009
|
|
|
2008
|
|
|
2007
(1)
|
|
|
2006
(2)
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$ |
7,499.8 |
|
|
$ |
14,047.8 |
|
|
$ |
10,292.4 |
|
|
$ |
6,890.7 |
|
|
$ |
6,825.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) from continuing operations
|
|
|
(71.6 |
) |
|
|
124.7 |
|
|
|
181.0 |
|
|
|
147.8 |
|
|
|
146.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) attributed to common shareholders
|
|
|
(70.9 |
) |
|
|
126.4 |
|
|
|
251.3 |
|
|
|
155.8 |
|
|
|
157.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
11,847.9 |
|
|
|
14,272.5 |
|
|
|
11,234.4 |
|
|
|
6,861.7 |
|
|
|
5,462.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock of subsidiary
|
|
|
51.1 |
|
|
|
51.1 |
|
|
|
51.1 |
|
|
|
51.1 |
|
|
|
51.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt (excluding current portion)
|
|
|
2,394.7 |
|
|
|
2,285.7 |
|
|
|
2,265.1 |
|
|
|
1,287.2 |
|
|
|
867.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of
common stock (less treasury stock and shares in deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation
trust)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
76.0 |
|
|
|
76.0 |
|
|
|
76.0 |
|
|
|
43.1 |
|
|
|
39.8 |
|
Average
|
|
|
76.8 |
|
|
|
76.7 |
|
|
|
71.6 |
|
|
|
42.3 |
|
|
|
38.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share (basic)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations
|
|
$ |
(0.96 |
) |
|
$ |
1.59 |
|
|
$ |
2.49 |
|
|
$ |
3.51 |
|
|
$ |
3.85 |
|
Earnings
(loss) per common share
|
|
|
(0.92 |
) |
|
|
1.65 |
|
|
|
3.51 |
|
|
|
3.68 |
|
|
|
4.11 |
|
Earnings
(loss) per common share (diluted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations
|
|
|
(0.96 |
) |
|
|
1.58 |
|
|
|
2.48 |
|
|
|
3.50 |
|
|
|
3.81 |
|
Earnings
(loss) per common share
|
|
|
(0.92 |
) |
|
|
1.64 |
|
|
|
3.50 |
|
|
|
3.67 |
|
|
|
4.07 |
|
Dividends per
common share declared
|
|
|
2.72 |
|
|
|
2.68 |
|
|
|
2.56 |
|
|
|
2.28 |
|
|
|
2.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock price
at year-end
|
|
$ |
41.99 |
|
|
$ |
42.98 |
|
|
$ |
51.69 |
|
|
$ |
54.03 |
|
|
$ |
55.31 |
|
Book value
per share
|
|
$ |
37.62 |
|
|
$ |
40.78 |
|
|
$ |
42.58 |
|
|
$ |
35.61 |
|
|
$ |
32.76 |
|
Return on
average equity
|
|
|
(2.5 |
)% |
|
|
3.7 |
% |
|
|
8.5 |
% |
|
|
10.6 |
% |
|
|
13.6 |
% |
Number of
common stock shareholders
|
|
|
32,755 |
|
|
|
34,016 |
|
|
|
35,212 |
|
|
|
19,837 |
|
|
|
20,701 |
|
Number of
employees
|
|
|
5,025 |
|
|
|
5,191 |
|
|
|
5,231 |
|
|
|
3,326 |
|
|
|
2,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes the impact of the PEC merger on February 21,
2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
Includes the impact of the acquisition of natural gas distribution
operations from Aquila by MGU on April 1, 2006 and MERC on July 1,
2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
INTRODUCTION
Integrys Energy
Group is a diversified energy holding company with regulated electric and
natural gas utility operations (serving 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 has
substantially completed 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 had over $2.8 billion of transmission assets at
December 31, 2009. ATC plans to invest approximately
$2.5 billion during the next ten years. Although ATC's equity
requirements to fund its capital investments will primarily be met by
earnings reinvestment, Integrys Energy Group plans to continue to fund its
share of the equity portion of future ATC growth, as
necessary.
|
|
|
·
|
An
accelerated annual investment in natural gas distribution facilities
(replacement of cast iron mains) at PGL.
|
|
|
·
|
WPS's
purchase of the 99-megawatt Crane Creek wind generation project
constructed in Howard County, Iowa, which became operational in
2009.
|
For more detailed
information on Integrys Energy Group's capital expenditure program, see "Liquidity and Capital Resources,
Capital Requirements."
Operating a
Nonregulated Energy Services Business Segment with a Controlled Risk and Capital
Profile – Through its nonregulated Integrys Energy Services subsidiary,
Integrys Energy Group provides retail natural gas and electric products to
end-use customers in the upper Midwest and Northeastern regions of the United
States. Integrys Energy Group has repositioned this subsidiary from a
focus on significant growth in wholesale and retail markets across the United
States and Canada, to a focus on selected retail markets with the expectation
that recurring customer based business will result in dependable cash and
earnings contributions with a reduced risk and capital profile. In
addition, Integrys Energy Services will continue to invest in energy assets with
renewable attributes.
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, was formed to achieve
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 and the use of derivative financial instruments, including commodity
swaps and options, allow for
opportunities to reduce the risk associated with price movement 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 increasing its focus on energy efficiency and 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, 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
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
|
|
|
|
(Millions,
except per share amounts)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Change
in
2009
Over 2008
|
|
|
Change
in
2008
Over 2007
|
|
Natural gas
utility operations
|
|
$ |
(172.1 |
) |
|
$ |
84.5 |
|
|
$ |
28.7 |
|
|
|
N/A |
|
|
|
194.4 |
% |
Electric
utility operations
|
|
|
88.9 |
|
|
|
92.6 |
|
|
|
87.4 |
|
|
|
(4.0 |
)% |
|
|
5.9 |
% |
Integrys
Energy Services operations
|
|
|
2.5 |
|
|
|
(61.5 |
) |
|
|
98.0 |
|
|
|
N/A |
|
|
|
N/A |
|
Electric
transmission investment
|
|
|
45.5 |
|
|
|
39.7 |
|
|
|
30.3 |
|
|
|
14.6 |
% |
|
|
31.0 |
% |
Holding
company and other operations
|
|
|
(35.7 |
) |
|
|
(28.9 |
) |
|
|
(49.1 |
) |
|
|
23.5 |
% |
|
|
(41.1 |
)% |
Oil and
natural gas operations
|
|
|
- |
|
|
|
- |
|
|
|
56.0 |
|
|
|
N/A |
|
|
|
(100.0 |
)% |
Net income
(loss) attributed to common shareholders
|
|
$ |
(70.9 |
) |
|
$ |
126.4 |
|
|
$ |
251.3 |
|
|
|
N/A |
|
|
|
(49.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
(loss) per share
|
|
$ |
(0.92 |
) |
|
$ |
1.65 |
|
|
$ |
3.51 |
|
|
|
N/A |
|
|
|
(53.0 |
)% |
Diluted
earnings (loss) per share
|
|
$ |
(0.92 |
) |
|
$ |
1.64 |
|
|
$ |
3.50 |
|
|
|
N/A |
|
|
|
(53.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares
of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
76.8 |
|
|
|
76.7 |
|
|
|
71.6 |
|
|
|
0.1 |
% |
|
|
7.1 |
% |
Diluted
|
|
|
76.8 |
|
|
|
77.0 |
|
|
|
71.8 |
|
|
|
(0.3 |
)% |
|
|
7.2 |
% |
Financial Results – 2009
Compared with 2008
Integrys Energy
Group recognized a net loss attributed to common shareholders of
$70.9 million ($0.92 net loss per share) in 2009 compared with net
income attributed to common shareholders of $126.4 million ($1.64 diluted
earnings per share) in 2008. Significant factors impacting the
$197.3 million decrease in earnings were as follows (and are discussed in
more detail thereafter).
·
|
Earnings at
the regulated natural gas utility segment decreased $256.6 million,
driven by a $242.3 million increase in after-tax non-cash goodwill
impairment losses period-over-period. A $16.2 million
after-tax decrease in margin from lower period-over-period volumes, net of
decoupling, also negatively impacted earnings. An
$8.0 million after-tax increase in employee benefit costs, a
$9.6 million after-tax increase in other operating and maintenance
expenses related primarily to natural gas maintenance costs and workers
compensation claims, and $4.1 million after-tax of restructuring
costs related to workforce reductions also contributed to the decrease in
earnings. These negative impacts were partially offset by a
$17.4 million after-tax net positive impact that increased rates at
certain natural gas utilities had on margin and a $10.6 million
after-tax decrease in bad debt expense.
|
|
|
·
|
Earnings at
the regulated electric utility segment decreased $3.7 million, driven
by a $20.2 million after-tax increase in operating expenses,
including restructuring costs, a $3.7 million after-tax increase in
other expense primarily related to an increase in interest expense at WPS,
and a $3.3 million increase in income taxes. Partially
offsetting these increases in expenses was a $23.8 million after-tax
increase in margin.
|
|
|
·
|
Earnings at
Integrys Energy Services increased $64.0 million, driven by a
$127.3 million after-tax increase in Integrys Energy Services' margin
year-over-year, primarily related to the positive year-over-year impact of
inventory valuation adjustments recorded in prior periods, partially
offset by non-cash accounting losses due to derivative fair value
adjustments. Partially offsetting the increase in Integrys
Energy Services' margin were an increase in the provision for income
taxes, primarily due to an $18.4 million year-over-year decrease in
income tax credits recognized, after-tax restructuring expenses of
$17.4 million, after-tax losses of $17.3 million related to
dispositions completed in connection with the strategy change primarily
driven by timing differences caused by the accounting treatment for
derivative and non-derivative contracts, and an after-tax increase in
operating and maintenance expenses of
$5.5 million.
|
|
|
·
|
Earnings at
the electric transmission investment segment increased $5.8 million
year-over-year, due to an increase in income from Integrys Energy Group's
approximate 34% ownership interest in ATC.
|
|
|
·
|
Net loss at
the holding company and other segment increased $6.8 million, driven
by an increase in interest expense.
|
Financial Results – 2008
Compared with 2007
Integrys Energy
Group recognized net income attributed to common shareholders of
$126.4 million ($1.64 diluted earnings per share) in 2008 compared with
$251.3 million ($3.50 diluted earnings per share) in
2007. Significant factors impacting the $124.9 million decrease
in earnings were as follows (and are discussed in more detail
thereafter).
·
|
Earnings at
the regulated natural gas utility segment increased $55.8 million,
driven by the inclusion of PGL and NSG for all of 2008 compared with only
a partial year of operations in 2007 and by the positive impact of PGL's
2008 rate increase. From 2007 to 2008, earnings related to PGL
and NSG increased $43.3 million. Also positively impacting
earnings was an increase in natural gas sales volumes at WPS, MERC, and
MGU, which drove a $6.6 million after-tax increase in
margin.
|
|
|
·
|
Earnings at
the regulated electric utility segment increased $5.2 million, driven
by a $7.0 million after-tax decrease in electric maintenance
expenses, an approximate $6 million after-tax positive impact related
to retail electric rate increases, and an approximate $6 million
after-tax increase in wholesale margins, partially offset by an
$8.3 million after-tax increase in electric transmission expenses and
an approximate $7 million after-tax decrease in margin due to lower
residential and commercial and industrial sales volumes as a result of
cooler weather during the cooling season and customer conservation
efforts.
|
|
|
·
|
Earnings at
Integrys Energy Services decreased $159.5 million, driven by a
$131.0 million after-tax decrease in Integrys Energy Services' margin
year-over-year, primarily related to non-cash accounting losses due to
derivative fair value and inventory valuation adjustments, partially
offset by an increase in retail electric margin. Also
contributing to the decrease in Integrys Energy Services' earnings was a
$13.4 million after-tax increase in operating and maintenance
expenses, the year-over-year impact of the recognition of
$17.1 million of after-tax earnings from Integrys Energy Services'
investment in a synthetic fuel production facility in 2007, and a
$10.9 million decrease in after-tax income from discontinued
operations as a result of the sale of Niagara Generation, LLC in
2007. Partially offsetting the decrease in earnings was the
recognition of
$10.0 million
of investment tax credits related to solar projects completed in the
fourth quarter of 2008.
|
|
|
·
|
Earnings at
the oil and natural gas operations segment decreased
$56.0 million. In connection with the PEC merger, Integrys
Energy Group announced its intent to divest of PEC's oil and natural gas
production operations, PEP. PEP was sold in the third quarter
of 2007. In 2007, PEP recognized earnings of
$56.0 million, including $58.5 million of earnings reported as
discontinued operations. The sale of PEP resulted in a
$7.6 million after-tax gain in 2007.
|
|
|
·
|
Earnings at
the electric transmission investment segment increased $9.4 million
year-over-year, due to an increase in income from Integrys Energy Group's
ownership interest in ATC.
|
|
|
·
|
Net loss at
the holding company and other segment decreased $20.2 million, driven
by lower operating expenses at the holding company, partially offset by
the negative year-over-year impact on operating income of the reallocation
of external costs to achieve merger synergies in 2007.
|
|
|
·
|
Diluted
earnings per share was impacted by a 5.2 million share (7.2%)
increase in the weighted average number of outstanding shares of Integrys
Energy Group common stock from 2007 to 2008. Integrys Energy
Group issued 31.9 million shares of common stock on February 21,
2007, in conjunction with the PEC merger. Additional shares
were also issued under the Stock Investment Plan and certain stock-based
employee benefit plans in 2007.
|
Utility
Operations
For 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. The regulated natural gas operations of WPS, MERC,
and MGU were included in results of operations for all of 2007, while the
regulated natural gas operations of PGL and NSG were included in results of
operations beginning on
February 22,
2007.
Regulated
Natural Gas Utility Segment Operations
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Change
in
2009
Over 2008
|
|
|
Change
in
2008
Over 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
2,237.5 |
|
|
$ |
3,025.9 |
|
|
$ |
2,103.7 |
|
|
|
(26.1 |
)% |
|
|
43.8 |
% |
Purchased
natural gas costs
|
|
|
1,382.0 |
|
|
|
2,147.7 |
|
|
|
1,453.5 |
|
|
|
(35.7 |
)% |
|
|
47.8 |
% |
Margins
|
|
|
855.5 |
|
|
|
878.2 |
|
|
|
650.2 |
|
|
|
(2.6 |
)% |
|
|
35.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and
maintenance expense
|
|
|
532.6 |
|
|
|
539.1 |
|
|
|
427.4 |
|
|
|
(1.2 |
)% |
|
|
26.1 |
% |
Goodwill
impairment loss (1)
|
|
|
291.1 |
|
|
|
6.5 |
|
|
|
- |
|
|
|
4,378.5 |
% |
|
|
N/A |
|
Restructuring
expense (2)
|
|
|
6.9 |
|
|
|
- |
|
|
|
- |
|
|
|
N/A |
|
|
|
N/A |
|
Depreciation
and amortization expense
|
|
|
106.1 |
|
|
|
108.3 |
|
|
|
97.7 |
|
|
|
(2.0 |
)% |
|
|
10.8 |
% |
Taxes other
than income taxes
|
|
|
33.4 |
|
|
|
32.1 |
|
|
|
33.1 |
|
|
|
4.0 |
% |
|
|
(3.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
(114.6 |
) |
|
|
192.2 |
|
|
|
92.0 |
|
|
|
N/A |
|
|
|
108.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
|
3.1 |
|
|
|
7.0 |
|
|
|
5.5 |
|
|
|
(55.7 |
)% |
|
|
27.3 |
% |
Interest
expense
|
|
|
(52.2 |
) |
|
|
(56.6 |
) |
|
|
(53.4 |
) |
|
|
(7.8 |
)% |
|
|
6.0 |
% |
Other
expense
|
|
|
(49.1 |
) |
|
|
(49.6 |
) |
|
|
(47.9 |
) |
|
|
(1.0 |
)% |
|
|
3.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before taxes
|
|
$ |
(163.7 |
) |
|
$ |
142.6 |
|
|
$ |
44.1 |
|
|
|
N/A |
|
|
|
223.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Throughput
in therms
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
1,602.8 |
|
|
|
1,708.9 |
|
|
|
1,251.8 |
|
|
|
(6.2 |
)% |
|
|
36.5 |
% |
Commercial
and industrial
|
|
|
501.4 |
|
|
|
550.8 |
|
|
|
439.2 |
|
|
|
(9.0 |
)% |
|
|
25.4 |
% |
Interruptible
|
|
|
51.3 |
|
|
|
60.1 |
|
|
|
59.4 |
|
|
|
(14.6 |
)% |
|
|
1.2 |
% |
Interdepartmental
|
|
|
9.5 |
|
|
|
28.6 |
|
|
|
47.1 |
|
|
|
(66.8 |
)% |
|
|
(39.3 |
)% |
Transport
|
|
|
1,641.6 |
|
|
|
1,834.0 |
|
|
|
1,505.6 |
|
|
|
(10.5 |
)% |
|
|
21.8 |
% |
Total
sales in therms
|
|
|
3,806.6 |
|
|
|
4,182.4 |
|
|
|
3,303.1 |
|
|
|
(9.0 |
)% |
|
|
26.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
heating degree days
|
|
|
7,061 |
|
|
|
7,257 |
|
|
|
N/M |
(3) |
|
|
(2.7 |
)% |
|
|
N/A |
|
(1) See
Note 10, "Goodwill and
Other Intangible Assets," for more information.
(2) See
Note 3, "Restructuring
Expense," for more information.
(3) Not
meaningful as the PEC merger was completed on February 21, 2007.
2009
Compared with 2008
Revenues
Regulated natural
gas utility segment revenue decreased $788.4 million, driven
by:
·
|
An
approximate $648 million decrease in revenue as a result of an
approximate 30% decrease in the average per-unit cost of natural gas sold
by the regulated natural gas utilities during 2009 compared with
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 $166 million decrease in revenue as a result of lower
year-over-year natural gas throughput volumes, driven
by:
|
|
|
|
|
-
|
An
approximate $83 million decrease related to lower overall volumes,
including residential customer volumes, resulting from customer
conservation and efficiency efforts. Lower volumes were also
driven by decreased commercial and industrial customer volumes resulting
from reduced demand related to changes in customers' plant operations and
a decline in customer base at PGL and MGU, both of which Integrys Energy
Group attributed to the general economic slowdown.
|
|
|
|
|
-
|
An
approximate $70 million decrease as a result of warmer year-over-year
weather during the heating season as indicated by the 2.7% decrease in
average heating degree days.
|
|
|
|
|
-
|
An
approximate $19 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.
|
|
|
|
|
-
|
This decrease
in revenue was partially offset by the $6 million positive 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 $20 million year-over-year net 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 EEP program was established in
the 2008 PGL and NSG rate cases and is designed to encourage energy
efficiency initiatives.
|
|
|
·
|
The decrease
in revenue was partially offset by the approximate $29 million
year-over-year net positive impact of natural gas distribution rate cases
and changes in rate design at the regulated natural gas
utilities. See Note 24, "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 $19 million positive impact on
revenue.
|
|
|
|
|
-
|
In 2009, PGL
and NSG received the full impact of their 2008 natural gas distribution
rate orders, which were effective February 14, 2008, and drove
an approximate $5 million increase in revenue
year-over-year.
|
|
|
|
|
-
|
Effective
January 1, 2009, the PSCW required WPS to change its retail natural
gas distribution rate design which incorporates higher volumetric rates
and lower fixed customer charges. In 2009, revenue increased
approximately $5 million related to this change in rate
design.
|
Margins
Regulated natural
gas utility segment margin decreased $22.7 million, driven by:
·
|
An
approximate $27 million year-over-year decrease in margin resulting from
the 9.0% decrease in natural gas throughput volumes attributed to the
negative impact of the general economic slowdown, customer conservation
and efficiency efforts, and warmer year-over-year weather. This
decrease in margin includes the impact of decoupling mechanisms that were
first effective for PGL and NSG on March 1, 2008, and for WPS on
January 1, 2009. 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 $7 million of additional margin was
recognized at WPS due to a shortfall from the rate case authorized margin
during 2009.
|
|
|
·
|
An
approximate $20 million year-over-year net 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 $2 million year-over-year decrease in margin at MGU
related to an adjustment in the third quarter of 2008 for recovery of
prior natural gas costs in a MPSC proceeding.
|
|
|
·
|
The decrease
in margin was partially offset by the approximate $29 million net
positive year-over-year impact of rate orders and impacts of rate design
changes at the regulated natural gas
utilities.
|
Operating Income
(Loss)
Operating results
at the regulated natural gas utility segment decreased $306.8 million, from
operating income of $192.2 million in 2008, to an operating loss of
$114.6 million in 2009. This decrease was primarily driven by a
year-over-year increase in non-cash goodwill impairment losses of
$284.6 million and the $22.7 million decrease in natural gas margin,
partially offset by a $0.5 million decrease in other operating
expenses. See Note 10, "Goodwill and Other Intangible
Assets," for information related to the goodwill impairment losses
recorded in 2009 and 2008.
The year-over-year
decrease in other operating expenses primarily related to:
·
|
An
approximate $20 million net decrease in amortization of the
regulatory asset related to environmental cleanup expenditures of
manufactured gas plant sites, partially offset by an increase in EEP
expenses. Both of these costs were recovered from customers in
rates.
|
|
|
|
·
|
A
$17.7 million decrease in bad debt expense driven by the impact lower
energy prices had on overall accounts receivable balances and the
implementation of bad debt expense tracking mechanisms at PGL, NSG, and
MGU. PGL and NSG elected during the third quarter of 2009,
under a new Illinois state law, to file for recovery 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. Bad debt expense also
decreased as a result of MGU's rate order effective January 1, 2010,
which established a bad debt expense tracking mechanism that allows for
the deferral and subsequent recovery or refund of 80% of the difference
between actual bad debt write-offs (net of recoveries) and bad debt
expense included in utility rates. The bad debt
mechanism allowed recovery of a portion of the December 31, 2009
accounts receivable reserve representing future bad debt
write-offs. The decrease in bad debt expense attributed to the
implementation of bad debt expense tracking mechanisms at the natural gas
utilities was $9.3 million.
|
|
|
·
|
These
decreases were partially offset by:
|
|
|
|
-
|
A
$13.4 million increase in employee benefit costs, partially related
to an increase in pension expense resulting from negative pension
investment returns in 2008, as well as higher health care related expenses
in 2009.
|
|
|
|
-
|
Restructuring
expenses of $6.9 million related to a reduction in
workforce. See Note 3, "Restructuring Expense,"
for more information.
|
|
|
|
-
|
A
$5.5 million increase in natural gas maintenance costs, primarily
related to increased system inspection and maintenance
requirements.
|
|
|
|
-
|
A
$5.0 million increase in expenses related to workers compensation
claims.
|
|
|
|
-
|
A
$3.0 million charge related to an expected settlement at PGL and
NSG.
|
|
|
|
-
|
A
$2.5 million increase in amortization of a regulatory asset related
to conservation program
initiatives.
|
2008
Compared with 2007
Revenues
Regulated natural
gas utility segment revenue increased $922.2 million, driven
by:
·
|
A combined
increase in PGL and NSG natural gas utility revenue of
$780.5 million, from $1,118.5 million during 2007, to
$1,899.0 million during 2008. The increase in revenue at
both of these natural gas utilities was driven primarily by the fact that
they were not included in regulated natural gas utility results until
after the PEC merger on February 21, 2007. Other
factors that contributed to this combined increase
include:
|
|
|
|
-
|
PGL's
annualized rate increase effective February 14, 2008, which
increased revenue year-over-year by approximately
$61 million. See Note 24, "Regulatory
Environment," for more information on the PGL and NSG rate
cases.
|
|
|
|
|
-
|
Higher
year-over-year natural gas prices. Increases in natural gas
commodity costs are passed directly through to customers in
rates.
|
|
|
|
|
-
|
Colder
weather during the 2008 heating season, partially offset by energy
conservation efforts by natural gas utility customers and a larger number
of customer disconnections, which Integrys Energy Group believes resulted
from high energy prices and a general slowdown in the
economy.
|
|
|
·
|
An increase
in natural gas revenue of $141.7 million at the remaining natural gas
utilities (WPS, MERC, and MGU) from $985.1 million during 2007, to
$1,126.8 million during 2008, which resulted primarily
from:
|
|
|
|
-
|
A combined
$112.2 million increase in revenue driven by the approximate 13%
increase in the per-unit cost of natural gas in 2008 compared with
2007.
|
|
|
|
|
-
|
A
$43.4 million increase in revenue from colder weather during the 2008
heating season compared with 2007, evidenced by an approximate 11%
year-over-year increase in heating degree days across these three
utilities.
|
|
|
|
|
-
|
An increase
in revenue from MERC's interim rate increase, effective October 1, 2008,
for retail natural gas customers.
|
|
|
|
|
-
|
The combined
increase in revenue at WPS, MGU, and MERC, was partially offset by a
$17.9 million decrease in revenue driven by a decrease in
year-over-year volumes normalized for the impact of weather,
$15.6 million of which was driven by a 39.3% decrease in natural gas
throughput volumes sold by WPS to its electric utility
segment. The decrease in volumes sold to the electric utility
segment was a result of a decrease in the need for the electric utility to
run its peaking generation units during the 2008 summer cooling season
because of cooler year-over-year weather. Additional
electricity was also available within the electric utility segment from
Weston 4, a coal-fired generating facility that became commercially
operational in June 2008. The remaining decrease in weather
normalized volumes was driven by energy conservation efforts of
residential customers and a larger number of customer disconnections
year-over-year, which Integrys Energy Group believes resulted from high
energy prices and a general slowdown in the
economy.
|
Margins
Regulated natural
gas utility segment margin increased $228.0 million, primarily due
to:
·
|
An increase
in the combined margin at PGL and NSG of $208.6 million, from
$387.2 million in 2007 to $595.8 million in 2008. The
increase in combined margin was driven by:
|
|
|
|
-
|
The
acquisition of PGL and NSG on February 21, 2007. The
combined operations for the entire heating season were included in the
2008 natural gas utility margin. However, only operations from
the merger date through December 31, 2007, were included in the 2007
natural gas utility margin. Due to the seasonal nature of
natural gas utilities, higher margins are generally derived during the
heating season (first and fourth quarters).
|
|
|
|
-
|
The 2008 rate
increase for PGL which resulted in an approximate $61 million
increase in margin.
|
|
|
|
-
|
Colder than
normal weather experienced by both PGL and NSG resulted in an approximate
$7 million increase in 2008 margin before the decoupling mechanism
went into effect on March 1, 2008.
|
|
|
|
·
|
An increase
in natural gas margin of $19.4 million at the remaining natural gas
utilities (WPS, MERC, and MGU), primarily driven by:
|
|
|
|
|
-
|
A combined
5.2% increase in natural gas throughput volumes at WPS, MERC, and MGU,
which had an approximate $11 million positive impact on natural gas
utility margins. Colder year-over-year weather had an
approximate $14 million positive impact on
margins. Partially offsetting the positive impact of colder
weather, were energy conservation efforts by residential customers and a
larger number of customer disconnections year-over-year, which had an
approximate $3 million negative impact on margins.
|
|
|
|
|
-
|
The interim
rate increase for MERC, effective October 1, 2008, which had a positive
impact on natural gas margin.
|
|
|
|
|
-
|
An
approximate $2 million year-over-year increase in margin at MGU
related to an adjustment for recovery of prior natural gas costs in an
MPSC proceeding.
|
Operating
Income
Operating income at
the regulated natural gas utility segment increased $100.2 million, driven
by the $228.0 million increase in the natural gas utility margin, partially
offset by a $127.8 million increase in operating expenses.
The increase in
operating expenses was primarily related to an increase in combined operating
expenses at PGL and NSG of $125.8 million, from $368.7 million for
2007 to $494.5 million for 2008.
The increase
in operating expenses related to PGL and NSG was primarily driven
by:
|
|
|
·
|
The
acquisition of these natural gas utilities on February 21,
2007. As a result, operating expenses for the period
January 1, 2007 to the acquisition date were not included in the 2007
operating results.
|
|
|
·
|
A non-cash
goodwill impairment charge of $6.5 million recognized in the second
quarter of 2008 related to NSG.
|
|
|
·
|
A combined
increase in bad debt expense, driven by the impact of high energy prices
and worsening economic conditions on overall accounts receivable
balances.
|
Other
Expense
Other expense at
the regulated natural gas utilities increased $1.7 million, driven by a
$3.2 million increase in interest expense, partially offset by a
$1.5 million increase in miscellaneous income. The increase in
other expense was a result of:
·
|
A
$6.1 million increase in combined interest expense at PGL and NSG,
from $30.3 million in 2007 to $36.4 million in
2008. The increase in interest expense at PGL and NSG is
primarily due to the fact that these utilities were first acquired on
February 21, 2007, and, therefore, did not recognize a full year of
interest expense in 2007. The increase in interest expense was
also due to additional long-term debt borrowings and higher interest rates
on new and remarketed long-term debt.
|
|
|
·
|
The increase
in other expense was offset by:
|
|
|
|
-
|
A
$2.6 million increase in AFUDC at WPS related to the construction of
natural gas laterals for connection to the Guardian II
pipeline.
|
|
|
|
-
|
A decrease in
interest expense resulting from a decrease in short-term borrowing levels
and a decrease in interest rates for WPS's natural gas
segment.
|
Regulated
Electric Utility Segment Operations
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Change
in
2009
Over 2008
|
|
|
Change
in
2008
Over 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
1,301.6 |
|
|
$ |
1,328.9 |
|
|
$ |
1,246.1 |
|
|
|
(2.1 |
)% |
|
|
6.6 |
% |
Fuel and
purchased power costs
|
|
|
584.5 |
|
|
|
651.5 |
|
|
|
636.5 |
|
|
|
(10.3 |
)% |
|
|
2.4 |
% |
Margins
|
|
|
717.1 |
|
|
|
677.4 |
|
|
|
609.6 |
|
|
|
5.9 |
% |
|
|
11.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and
maintenance expense
|
|
|
392.0 |
|
|
|
375.3 |
|
|
|
321.1 |
|
|
|
4.4 |
% |
|
|
16.9 |
% |
Restructuring
expense
|
|
|
8.6 |
|
|
|
- |
|
|
|
- |
|
|
|
N/A |
|
|
|
N/A |
|
Depreciation
and amortization expense
|
|
|
90.3 |
|
|
|
84.3 |
|
|
|
80.1 |
|
|
|
7.1 |
% |
|
|
5.2 |
% |
Taxes other
than income taxes
|
|
|
46.6 |
|
|
|
44.3 |
|
|
|
43.2 |
|
|
|
5.2 |
% |
|
|
2.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
179.6 |
|
|
|
173.5 |
|
|
|
165.2 |
|
|
|
3.5 |
% |
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
|
4.8 |
|
|
|
6.0 |
|
|
|
8.3 |
|
|
|
(20.0 |
)% |
|
|
(27.7 |
)% |
Interest
expense
|
|
|
(41.6 |
) |
|
|
(36.7 |
) |
|
|
(32.4 |
) |
|
|
13.4 |
% |
|
|
13.3 |
% |
Other
expense
|
|
|
(36.8 |
) |
|
|
(30.7 |
) |
|
|
(24.1 |
) |
|
|
19.9 |
% |
|
|
27.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before
taxes
|
|
$ |
142.8 |
|
|
$ |
142.8 |
|
|
$ |
141.1 |
|
|
|
- |
% |
|
|
1.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
in kilowatt-hours
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
3,043.0 |
|
|
|
3,064.5 |
|
|
|
3,173.6 |
|
|
|
(0.7 |
)% |
|
|
(3.4 |
)% |
Commercial
and industrial
|
|
|
8,155.5 |
|
|
|
8,632.8 |
|
|
|
8,750.9 |
|
|
|
(5.5 |
)% |
|
|
(1.3 |
)% |
Wholesale
|
|
|
5,079.1 |
|
|
|
4,764.6 |
|
|
|
4,024.9 |
|
|
|
6.6 |
% |
|
|
18.4 |
% |
Other
|
|
|
40.0 |
|
|
|
42.6 |
|
|
|
42.4 |
|
|
|
(6.1 |
)% |
|
|
0.5 |
% |
Total
sales in kilowatt-hours
|
|
|
16,317.6 |
|
|
|
16,504.5 |
|
|
|
15,991.8 |
|
|
|
(1.1 |
)% |
|
|
3.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather
– WPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating
degree days
|
|
|
7,962 |
|
|
|
7,969 |
|
|
|
7,102 |
|
|
|
(0.1 |
)% |
|
|
12.2 |
% |
Cooling
degree days
|
|
|
274 |
|
|
|
464 |
|
|
|
634 |
|
|
|
(40.9 |
)% |
|
|
(26.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather
– UPPCO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating
degree days
|
|
|
9,317 |
|
|
|
9,348 |
|
|
|
8,625 |
|
|
|
(0.3 |
)% |
|
|
8.4 |
% |
Cooling
degree days
|
|
|
99 |
|
|
|
138 |
|
|
|
352 |
|
|
|
(28.3 |
)% |
|
|
(60.8 |
)% |
2009
Compared with 2008
Revenues
Regulated electric
utility segment revenues decreased $27.3 million, driven by:
·
|
A 5.5%
decrease in commercial and industrial sales volumes and a 0.7% decrease in
residential sales volumes, which resulted in an approximate
$23 million year-over-year decrease in revenue, after the impact of
decoupling. The primary drivers of the decrease
were:
|
|
|
|
-
|
An
approximate $31 million year-over-year decrease due to lower demand
related to changes in commercial and industrial customers' plant
operations, which Integrys Energy Group attributed mainly to the general
economic slowdown.
|
|
|
|
|
-
|
An
approximate $6 million decrease primarily related to cooler
year-over-year 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. 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 was allowed for additional shortfalls from authorized
margin for the second half of the year.
|
|
|
·
|
An
approximate $22 million year-over-year reduction in revenue related
to refunds due to customers in both 2009 and 2008 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 24, "Regulatory
Environment," for more information on WPS's fuel
window.
|
|
|
·
|
An
approximate $14 million year-over-year decrease in opportunity sales
driven by lower demand and the availability of lower cost power from the
MISO market.
|
|
|
·
|
These
decreases in regulated electric utility segment revenue were partially
offset by:
|
|
|
|
-
|
An
approximate $19 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.
|
|
|
|
|
-
|
An
approximate $15 million increase in revenue from the combined effect
of the July 4, 2008 fuel surcharge, a portion of which was incorporated
into WPS's 2009 non-fuel base retail electric rates, and the full year's
benefit of the 2008 retail electric rate increase, effective
January 16, 2008, for
WPS.
|
Margins
The regulated
electric utility segment margin increased $39.7 million, driven
by:
·
|
An
approximate $20 million year-over-year increase in 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 year-over-year increase in margin from the
combined effect of the July 4, 2008 fuel surcharge, a portion of
which was incorporated into WPS's 2009 non-fuel base retail electric
rates, and the full year's benefit of the 2008 retail electric rate
increase, effective January 16, 2008, for
WPS.
|
|
|
·
|
An
approximate $11 million year-over-year 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 2009, compared with fuel and purchased power costs that were
approximately $1 million lower than what was recovered in rates
during 2008.
|
|
|
·
|
The increase
in margin was partially offset by an approximate $4 million
year-over-year decrease in margin, after the impact of the WPS decoupling
mechanism, caused by a 4.3% year-over-year decrease in sales volumes to
residential and commercial and industrial customers. The
$14.0 million impact of decoupling partially offset the approximate
$18 million decrease in margin due to lower sales volumes, which was
attributed to the general economic slowdown and cooler year-over-year
weather during the cooling season.
|
Operating
Income
Operating income at
the regulated electric utility segment increased $6.1 million, driven by
the $39.7 million increase in margin, partially offset by a
$33.6 million increase in operating expenses.
The increase in
operating expenses was driven by:
·
|
$8.6 million
in restructuring expenses related to a reduction in
workforce. See Note 3, "Restructuring Expense,"
for more information.
|
|
|
·
|
An
$8.2 million increase in electric maintenance expenses at WPS,
primarily related to a greater number of planned outages at the generation
plants during 2009, compared with 2008.
|
|
|
·
|
An
$8.1 million increase in employee benefit costs, primarily related to
an increase in pension expense
driven
partially by negative pension investment returns in 2008, as well as
higher health care related expenses in 2009.
|
|
|
·
|
A
$5.6 million increase in depreciation and amortization expense at
WPS, primarily related to Weston 4 being placed in service for
accounting purposes in April 2008.
|
Other
Expense
Other expense at
the regulated electric utilities increased $6.1 million, driven
by:
·
|
A
$4.9 million increase in interest expense, primarily related to
increased long-term borrowings at WPS in December 2008. 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.
|
2008
Compared with 2007
Revenues
Regulated electric
utility segment revenue increased $82.8 million, driven by:
·
|
A 3.2%
increase in electric sales volumes, which resulted in an approximate
$26 million increase in revenue year-over-year, related
to:
|
|
|
|
-
|
An 18.4%
increase in wholesale volumes year-over-year, which drove an approximate
$48 million increase in revenue. There was an approximate
$36 million increase in opportunity sales year-over-year as the
electric utility had more low-cost generation with Weston 4 becoming
commercially operational in 2008, combined with available capacity from
lower sales volumes to residential customers. In addition, WPS
experienced an approximate $12 million increase in wholesale revenue,
driven by higher contracted sales volumes to a large wholesale customer
year-over-year.
|
|
|
|
-
|
The increase
in revenue related to wholesale volumes was partially offset by a 3.4%
decrease in residential sales volumes and a 1.3% decrease in commercial
and industrial sales volumes year-over-year, which drove an approximate
$22 million decrease in revenue. Of this decrease in
revenue, approximately $13 million related to energy conservation
efforts on the part of residential customers, which is believed to be the
result of high energy prices and the general economic
slowdown. Approximately $6 million related to decreased
demand by commercial and industrial customers in the third and fourth
quarters of 2008 as the economy weakened. In addition, cooler
weather during the 2008 cooling season compared with 2007 contributed
approximately $3 million to the decrease in
revenue.
|
|
|
·
|
An interim
fuel surcharge approved by the PSCW for WPS's retail electric customers
effective March 22, 2008, related to higher fuel and purchased
power costs. In addition, a surcharge increase was approved by
the PSCW effective July 4, 2008. Both orders combined had an
overall impact on revenue of approximately
$25 million. Contributing factors in this rate change were
increased purchased power costs due to lower-than-expected generation from
the new Weston 4 power plant during the start-up phases, increased
coal and coal transportation costs, and increased natural gas
costs. On September 30, 2008, the PSCW reopened the 2008 fuel
surcharge to review forecasted fuel costs as WPS's current and anticipated
annual fuel costs were below those projected in the fuel
surcharge. As a result of these lower costs, WPS accrued at
December 31, 2008, a refund payable in 2009 to its electric customers
of approximately $5 million, which is excluded from the
$25 million noted above. See Note 24, "Regulatory
Environment," for more information
on WPS's interim fuel surcharges.
|
|
|
·
|
A retail
electric rate increase, effective January 16, 2008, which contributed
an approximate $23 million increase in revenue. The full
benefit of the 2007 retail electric rate increase, effective
January 12, 2007, also contributed to the increase in revenue
year-over-year. Per the PSCW's order approving the PEC merger,
WPS was not permitted to increase its base rates for natural gas or
electric service prior to January 1, 2009. However, WPS
was allowed to adjust rates for changes in purchased power costs as well
as fuel costs related to electric generation due to changes in NYMEX
natural gas futures prices, delivered coal prices, and transmission
costs. The increase also included recovery of deferred 2005 and
2006 MISO Day 2 costs over a one-year period. See Note 24,
"Regulatory
Environment," for more information on WPS's rate
increase.
|
|
|
·
|
An
approximate $5 million increase in revenue at UPPCO related to
increased energy and transmission costs in 2008 compared with
2007. Increases in fuel and purchased power costs at UPPCO are
passed directly through to customers in
rates.
|
Margins
The regulated
electric utility segment margin increased $67.8 million, driven by an
increase in electric margin at WPS. The $68.4 million increase
in the electric margin at WPS was a result of:
·
|
A
$54.0 million partial refund to Wisconsin retail customers in 2007
for their portion of proceeds from the liquidation of the Kewaunee
nonqualified decommissioning trust fund. Pursuant to regulatory
accounting, the decrease in the 2007 margin related to the refund was
offset by a corresponding decrease in operating and maintenance expense in
2007 and, therefore, did not have an impact on earnings. WPS
completed this refund in 2007.
|
|
|
·
|
An
approximate $10 million increase in margin from the 2008 retail
electric rate increase effective January 16, 2008, and the full
benefit of the 2007 retail electric rate increase effective
January 12, 2007.
|
|
·
|
An
approximate $10 million increase in margin driven by higher
contracted sales volumes to a large wholesale customer
year-over-year.
|
·
|
An
approximate $5 million increase in regulated electric utility margin
year-over-year driven by fuel and purchased power costs that were
approximately $1 million lower than what was recovered in rates
during 2008, compared with fuel and purchased power costs that were
approximately $4 million higher than what was recovered in rates
during 2007. As a result of approximately $23 million of
under-recovered fuel and purchased power costs in the first quarter of
2008, the PSCW approved an interim rate surcharge effective
March 22, 2008, and subsequently approved a higher final
surcharge effective July 4, 2008. The $5 million increase
in electric margin includes lower fuel costs from the fuel window reset
and the net impact of the refund accrued at December 31, 2008,
payable in 2009 to electric customers from the reopening of the 2008 fuel
surcharge on September 30, 2008, by the PSCW.
|
|
·
|
These
increases in the electric margin were partially offset by an approximate
$11 million decrease in margin due to a decline in residential and
commercial and industrial sales volumes. Of this decrease,
approximately $8 million related to energy conservation efforts on
the part of residential customers, which is believed to be the result of
high energy prices and the general economic
slowdown. Approximately $1 million related to decreased
demand by commercial and industrial customers in the third and fourth
quarters of 2008 as the economy worsened. In addition, cooler
weather during the 2008 cooling season compared with 2007 contributed
approximately $2 million to the decrease in gross
margin.
|
Operating
Income
Operating income at
the regulated electric utility segment increased $8.3 million, driven by
the $67.8 million increase in the electric utility margin, partially offset
by a $59.5 million increase in operating expenses.
The increase
in operating expenses was driven by:
|
|
|
·
|
A
$54.0 million year-over-year increase related to the partial
amortization in 2007 of the regulatory liability previously recorded for
WPS's obligation to refund proceeds received from the liquidation of the
Kewaunee nonqualified decommissioning trust fund to Wisconsin retail
electric ratepayers.
|
|
|
·
|
A
$13.8 million increase in electric transmission expenses, primarily
related to higher rates charged by MISO and ATC due to additional
transmission costs.
|
|
|
·
|
A
$6.1 million increase in cost of capital and depreciation expense
charged by IBS for assets transferred from WPS to IBS in the beginning of
2008 and reported as operating and maintenance expense in
2008. Similar costs were reported as depreciation and
amortization expense in 2007, prior to the start-up of
IBS.
|
|
|
·
|
A
$4.2 million increase in depreciation and amortization expense,
primarily related to $9.2 million of depreciation expense from
Weston 4 being placed in service for accounting purposes in April
2008, partially offset by a decrease in depreciation related to assets
transferred to IBS and reported in operating and maintenance expense in
2008.
|
These
increases in operating expenses were partially offset
by:
|
|
|
·
|
An
$11.6 million decrease in electric maintenance expenses at WPS,
primarily due to major planned outages at the Weston 2 and
Weston 3 generation stations, the De Pere Energy Center, and the
Pulliam generation station, as well as several unplanned outages at the
Weston 3 generation station in 2007, compared with fewer outages in
2008.
|
|
|
·
|
A decrease in
external costs to achieve merger synergies of $6.6 million related to
the merger with PEC, from $12.3 million in 2007, to $5.7 million
in 2008. This decrease occurred primarily because all external
costs to achieve merger synergies incurred from July 2006 through
March 2007 were reallocated in 2007 from the holding company segment to
the other reportable segments, including the regulated electric
segment. These reportable segments are the beneficiaries of the
synergy savings resulting from the costs to achieve merger
synergies. In addition, the reduction in 2008 external costs to
achieve merger synergies was due to less integration work required in 2008
compared with 2007.
|
Other
Expense
Other expense at
the regulated electric utilities increased $6.6 million, driven by a
$4.3 million increase in interest expense and a $2.3 million decrease
in miscellaneous income.
·
|
The increase
in interest expense was due to higher long-term borrowings at WPS,
primarily utilized to fund various construction projects and to retire
short-term borrowing levels related to construction.
|
|
|
·
|
The decrease
in miscellaneous income was driven by:
|
|
|
|
-
|
A
$1.4 million decrease in interest income recognized related to the
construction of transmission facilities WPS funded on ATC's behalf related
to Weston 4. WPS was reimbursed for these transmission
facilities by ATC in April 2008.
|
|
|
|
-
|
A
$1.8 million gain on the sale of a generation facility by UPPCO in
July 2007.
|
|
|
|
-
|
The decrease
in miscellaneous income was partially offset by an increase in AFUDC
related to the wind generation
project.
|
Integrys
Energy Services' Operations
Integrys Energy
Services is a diversified nonregulated energy supply and services company
serving residential, commercial, and industrial customers. See "Introduction," for a discussion of the
revised strategy for Integrys Energy Services.
|
|
Year Ended December 31
|
|
|
|
|
|
|
|
(Millions,
except natural gas sales volumes)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Change
in 2009 Over 2008
|
|
|
Change
in 2008 Over 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
3,994.0 |
|
|
$ |
9,735.2 |
|
|
$ |
6,979.7 |
|
|
|
(59.0 |
)% |
|
|
39.5 |
% |
Cost of fuel,
natural gas, and purchased power
|
|
|
3,696.1 |
|
|
|
9,649.5 |
|
|
|
6,675.6 |
|
|
|
(61.7 |
)% |
|
|
44.5 |
% |
Margins
|
|
|
297.9 |
|
|
|
85.7 |
|
|
|
304.1 |
|
|
|
247.6 |
% |
|
|
(71.8 |
)% |
Margin
Detail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric
and other margins
|
|
|
190.1 |
|
|
|
(15.7 |
) |
|
|
164.9 |
|
|
|
N/A |
|
|
|
N/A |
|
Natural
gas margins
|
|
|
107.8 |
|
|
|
101.4 |
|
|
|
139.2 |
|
|
|
6.3 |
% |
|
|
(27.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and
maintenance expense
|
|
|
190.8 |
|
|
|
181.7 |
|
|
|
159.4 |
|
|
|
5.0 |
% |
|
|
14.0 |
% |
Restructuring
expense
|
|
|
27.2 |
|
|
|
- |
|
|
|
- |
|
|
|
N/A |
|
|
|
N/A |
|
Loss on
Integrys Energy Services dispositions related to
strategy change
|
|
|
28.9 |
|
|
|
- |
|
|
|
- |
|
|
|
N/A |
|
|
|
N/A |
|
Depreciation
and amortization
|
|
|
19.3 |
|
|
|
14.5 |
|
|
|
14.4 |
|
|
|
33.1 |
% |
|
|
0.7 |
% |
Taxes other
than income taxes
|
|
|
7.4 |
|
|
|
7.8 |
|
|
|
7.1 |
|
|
|
(5.1 |
)% |
|
|
9.9 |
% |
Operating
income (loss)
|
|
|
24.3 |
|
|
|
(118.3 |
) |
|
|
123.2 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income (expense)
|
|
|
6.0 |
|
|
|
8.7 |
|
|
|
(0.3 |
) |
|
|
(31.0 |
)% |
|
|
N/A |
|
Interest
expense
|
|
|
(13.1 |
) |
|
|
(12.1 |
) |
|
|
(13.5 |
) |
|
|
8.3 |
% |
|
|
(10.4 |
)% |
Other
expense
|
|
|
(7.1 |
) |
|
|
(3.4 |
) |
|
|
(13.8 |
) |
|
|
108.8 |
% |
|
|
(75.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before taxes
|
|
$ |
17.2 |
|
|
$ |
(121.7 |
) |
|
$ |
109.4 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
volumes (includes volumes both physically delivered and net
settled)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
electric sales volumes in kwh
|
|
|
222,178.5 |
|
|
|
184,446.3 |
|
|
|
132,623.6 |
|
|
|
20.5 |
% |
|
|
39.1 |
% |
Retail
electric sales volumes in kwh
|
|
|
15,264.3 |
|
|
|
16,680.9 |
|
|
|
14,849.7 |
|
|
|
(8.5 |
)% |
|
|
12.3 |
% |
Wholesale
natural gas sales volumes in bcf
|
|
|
424.0 |
|
|
|
642.8 |
|
|
|
483.1 |
|
|
|
(34.0 |
)% |
|
|
33.1 |
% |
Retail natural
gas sales volumes in bcf
|
|
|
239.3 |
|
|
|
339.2 |
|
|
|
368.8 |
|
|
|
(29.5 |
)% |
|
|
(8.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Physical
volumes (includes only transactions settled physically for the periods
shown)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
electric sales volumes in kwh *
|
|
|
3,965.2 |
|
|
|
4,634.1 |
|
|
|
3,599.7 |
|
|
|
(14.4 |
)% |
|
|
28.7 |
% |
Retail
electric sales volumes in kwh *
|
|
|
15,045.3 |
|
|
|
16,561.3 |
|
|
|
14,584.4 |
|
|
|
(9.2 |
)% |
|
|
13.6 |
% |
Wholesale
natural gas sales volumes in bcf *
|
|
|
402.5 |
|
|
|
594.9 |
|
|
|
445.6 |
|
|
|
(32.3 |
)% |
|
|
33.5 |
% |
Retail natural
gas sales volumes in bcf *
|
|
|
236.7 |
|
|
|
336.0 |
|
|
|
319.4 |
|
|
|
(29.6 |
)% |
|
|
5.2 |
% |
*
Represents gross physical volumes.
kwh
– kilowatt-hours
bcf
– billion cubic feet
2009
Compared with 2008
Revenues
·
|
Revenues
decreased $5,741.2 million in 2009, compared with 2008, primarily due
to:
|
|
|
|
-
|
Lower energy
prices, as the average market price of natural gas and electricity
decreased approximately 45% and 40% year-over-year,
respectively.
|
|
|
|
|
-
|
Lower sales
volumes, as 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 Integrys Energy Services' strategy change and ultimate
decision to exit its wholesale natural gas and electric
businesses. See "Introduction" above and
Note 4, "Dispositions," for a discussion
of the current strategy for Integrys Energy
Services.
|
Margins
Changes in
commodity prices subject a portion of the nonregulated operations to earnings
volatility, driven primarily by its wholesale trading and marketing
operations. 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 many of the derivative instruments utilized in these
transactions may not qualify, or are not designated, as hedges under GAAP,
reported earnings for the Integrys Energy Services segment includes changes in
the fair values of many 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 transactions do not meet the GAAP definition of derivative
instruments.
Integrys Energy
Services' margins increased $212.2 million in 2009, compared with
2008. The significant items contributing to the change in margin were
as follows:
Electric
and Other Margins
Integrys Energy
Services' electric and other margins increased $205.8 million during 2009,
compared with 2008. The following items were the most significant
contributors to the change in Integrys Energy Services' electric and other
margins.
Realized wholesale electric
margin
Realized wholesale
electric margin increased $18.8 million, from $59.4 million during
2008, to $78.2 million during 2009.
Wholesale
transactions and structured origination activity were scaled back in conjunction
with the global credit crisis in the latter half of 2008 and continue to be
scaled back with Integrys Energy Services' strategy change and ultimate decision
to exit its wholesale electric business. See "Introduction" above and Note
4, "Dispositions," for a discussion of the
current strategy for Integrys Energy Services.
In
general, realized margins are impacted by transaction activity in prior periods,
as Integrys Energy Services recognizes realized margin when the contracts
actually settle, which typically occurs over a 12- to 24-month period from
the time the contract was actually entered into. In 2009, realized
margins benefited from the settlement of contracts that were entered into prior
to the implementation of Integrys Energy Services' strategy change.
Realized retail electric
margin
The realized retail
electric margin increased $19.7 million, from $62.3 million in 2008,
to $82.0 million in 2009. The increase was driven
by:
●
|
A
$14.1 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
$6.5 million increase from operations in the Texas
market. This increase is a result of the positive
year-over-year impact of lower ancillary service costs compared to 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
electric fair value adjustments
Integrys Energy
Services' margin from retail and wholesale electric fair value adjustments
increased $167.3 million, as it recognized $137.4 million of non-cash
unrealized losses related to derivative instruments in 2008, compared with
$29.9 million of non-cash unrealized gains during 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 fair value adjustments recorded in 2009
include margin reductions of $2.0 million related to the settlement of
derivative contracts entered into with the purchaser of the Canadian electric
power portfolio, as discussed in Note 4, "Dispositions".
Natural
Gas Margins
Integrys Energy
Services' natural gas margins increased $6.4 million in 2009, compared with
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 combined effect
of lower-of-cost-or-market inventory write-downs and withdrawals from storage of
natural gas for which write-downs had previously been recorded resulted in a
$322.7 million year-over-year increase in the natural gas
margin. The average market price of natural gas decreased
approximately 5% during 2009 and decreased approximately 22% during 2008,
driving a positive year-over-year change in natural gas margins of
$129.2 million related to lower-of-cost-or-market inventory
write-downs. These lower-of-cost-or-market inventory write-downs were
required to reflect natural gas in storage at the end of the period at its net
realizable value, as required by GAAP. The natural gas withdrawn from
storage and sold to customers in 2009 had a $193.5 million lower cost basis
as a result of lower-of-cost-or-market inventory write-downs recorded in prior
periods. At December 31, 2009, natural gas inventory had a lower
cost basis as a result of lower-of-cost-or-market inventory write-downs
recorded in prior periods of $11.6 million.
Other realized retail
natural gas margins
Other realized
retail natural gas margins increased $17.2 million, from $51.5 million
in 2008, to $68.7 million in 2009. The increase was due to
Integrys Energy Services' withdrawal of a significant amount of natural gas
during 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 a decrease in Integrys Energy
Services' natural gas sales volumes year-over-year. Integrys Energy
Services significantly reduced the number of natural gas storage transactions
entered into as Integrys Energy Group implemented its strategy change for its
nonregulated energy services business segment.
Other realized wholesale
natural gas margins
Other realized
wholesale natural gas margins decreased $23.3 million, from
$64.1 million in 2008, to $40.8 million in 2009. In
conjunction with the global credit crisis in the latter half of 2008, wholesale
natural gas transactions were scaled back and continue to be scaled back with
Integrys Energy Services' strategy change and ultimate decision to exit its
wholesale natural gas business. The reduced activity had a negative
impact on realized margins in 2009. See "Introduction" above, and Note
4, "Dispositions," for a discussion of the
current strategy for 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.
The fair value
adjustments (excluding lower-of-cost-or-market inventory adjustments) drove a
$310.2 million decrease in natural gas margins as unrealized losses on
these instruments were
$157.1 million
during 2009, compared with unrealized gains of $153.1 million during
2008. The fair value adjustments recorded in 2009 include a net
increase in margin of $14.4 million related to the settlement of derivative
contracts entered into with the purchasers of the wholesale natural gas
marketing business and the Canadian natural gas portfolio, as discussed in Note
4, "Dispositions".
Operating Income
(Loss)
Integrys Energy
Services' operating income increased $142.6 million
year-over-year. This increase resulted from the $212.2 million
increase in margin discussed above, partially offset by losses of
$28.9 million related to dispositions completed in connection with the
strategy change; $27.2 million of restructuring expenses, which included
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 fees; a $9.1 million increase in operating and
maintenance expense; and a $4.8 million increase in depreciation and
amortization expense primarily related to renewable energy 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.
See Note 3, "Restructuring Expense," for a
discussion of restructuring charges.
2008
Compared with 2007
Revenues
Revenues increased
$2,755.5 million in 2008 compared with 2007, primarily due to increased
volumes (in part due to the PEC merger in 2007) and higher average sales prices
in 2008. Average sales prices rose in 2008 due to large market price
increases from January 1, 2008 through June 30,
2008. Market prices began to decline beginning in the third quarter
of 2008 and continued to decline through the end of the year to levels below
that of January 1, 2008. Integrys Energy Services recognizes
revenue at the time energy is delivered. As a result, revenues at the
end of the year were recognized based on the higher market prices from contracts
entered into earlier in the year.
Margins
Integrys Energy
Services' margin decreased $218.4 million from 2007 to 2008. The
significant items contributing to the change in margin were as
follows:
Electric
and Other Margins
Integrys Energy
Services' electric and other margins decreased $180.6 million from 2007 to
2008. The 2008 and 2007 electric and other margin included the
negative impact of $8.8 million and $15.2 million, respectively, of
amortization related to purchase accounting adjustments required as a result of
the PEC merger. The following items were the most significant
contributors to the change in Integrys Energy Services' electric and other
margins.
Realized gains on structured
origination contracts
Realized gains on
structured origination transactions increased $6.2 million, from
$18.1 million in 2007 to $24.3 million in 2008. Origination
transactions are physical, customer-based agreements with municipalities,
merchant generators, cooperatives, and regulated utilities. The
increase was primarily due to growth in existing markets with an emphasis on
structured transactions with small environmentally friendly
generators.
All other realized wholesale
electric margin
All other realized
wholesale electric margin decreased $19.4 million from 2007 to
2008. In general, realized margins are impacted by trading activity
in prior periods. Integrys Energy Services recognizes realized
margins when the contracts actually settle, which can lag as much as 12 to 24
months from the time the contract was actually entered into. The
reduced volume of proprietary trading that began in 2007 reduced realized
margins in 2008.
Realized retail electric
margin
The realized retail
electric margin increased $28.1 million from $34.2 million in 2007 to
$62.3 million in 2008. The change was primarily due to the
following:
●
|
An increase
of $19.5 million from operations in Illinois due to the addition of
new customers as a result of the PEC merger, as well as a reduced impact
from purchase accounting in 2008.
|
|
|
●
|
A
$12.7 million increase due to expansion in the Mid-Atlantic region
and the resolution of certain regulatory issues in Northern
Maine.
|
|
|
●
|
Partially
offsetting these increases was a $3.4 million decrease from
operations in Texas. This reduction was a result of higher
ancillary costs in Texas and the effects of Hurricane Ike, which disrupted
the electric infrastructure in Texas for a period of time, causing some of
Integrys Energy Services' customers to be without electricity or take only
a fraction of their normal load during that
period.
|
Retail and wholesale fair
value adjustments
From 2007 to 2008,
Integrys Energy Services' margin from electric retail and wholesale fair value
adjustments decreased $176.8 million, as it recognized $137.4 million
of non-cash unrealized losses related to derivative instruments in 2008,
compared with $39.4 million of non-cash unrealized gains during
2007.
Although energy
prices rose approximately 20% in the first half of 2008, they declined
approximately 45% in the second half of the year, which led to the recognition
of large non-cash unrealized losses in 2008 on these electric customer supply
contracts. These unrealized losses turn around in future years as the
contracts settle. The mark-to-market activity also reflects increases
in portfolio reserves in recognition of the increased risk of credit losses and
reduced market liquidity. Finally, the mark-to-market activity was also
negatively impacted as the short-term cost of borrowing increased. The
discount rate is a component of the fair value of Integrys Energy Services'
derivative portfolio and, therefore, increased interest rates resulted in a
reduction in the fair value presented on the balance sheet. In 2007,
energy prices increased, resulting in unrealized gains.
Oil option
activity
Oil option activity
drove a $19.6 million decrease in electric and other margins from 2007 to
2008. There was no activity related to these oil options in
2008. Prior to 2008, oil options were utilized to protect the value
of a portion of Integrys Energy Services' Section 29/45K federal tax
credits. However, companies can no longer generate tax credits from
the production of synthetic fuel as the provisions of Section 29/45K of the
Internal Revenue Code expired effective December 31, 2007. As a
result, Integrys Energy Services exercised substantially all of its remaining
oil options in 2007.
2005 liquidation of electric
supply contract
In
the fourth quarter of 2005, an electricity supplier exiting the wholesale market
in Maine requested that Integrys Energy Services liquidate a firm contract to
buy power in 2006 and 2007. At that time, Integrys Energy Services
recognized an $8.2 million gain related to the liquidation of the contract
and entered into
a
new contract with another supplier for firm power in 2006 and 2007 to supply its
customers in Maine. The cost to purchase power under the new contract
was more than the cost under the liquidated contract. The replacement
contract increased the cost of purchased power needed to serve customers in
Maine by $0.9 million in 2007. There was no impact on electric
margin in 2008, resulting in a $0.9 million increase in realized wholesale
electric margins from 2007 to 2008.
Natural
Gas Margins
Integrys Energy
Services' natural gas margins decreased $37.8 million from 2007 to
2008. The 2008 and 2007 natural gas margins included the negative
impact of $5.0 million and $6.1 million, respectively, of amortization
related to purchase accounting adjustments required as a result of the PEC
merger. The following items were the most significant contributors to
the change in Integrys Energy Services' natural gas margins.
Lower-of-cost-or-market
inventory adjustments
The spot price of
natural gas decreased significantly during the second half of 2008 (below the
average cost of natural gas in inventory which Integrys Energy Services had
acquired and injected earlier in 2008), which resulted in a lower of cost or
market inventory write-down, as required by GAAP. This write-down
resulted in a $160.3 million decrease in non-cash realized natural gas
margins from 2007 to 2008. The negative impact on realized margin
related to these inventory write-downs was offset by unrealized gains recognized
in 2008 and 2007 on derivative instruments utilized to mitigate the price risk
on natural gas inventory underlying natural gas storage transactions (See "Fair
value adjustments" below).
Other realized natural gas
margins
Other realized
natural gas margins increased $8.0 million, from $107.6 million in
2007, to $115.6 million in 2008, primarily related to realized gains on
wholesale natural gas storage transactions. In 2008, Integrys Energy
Services increased its storage withdrawals which drove the year-over-year
increase in other realized natural gas margins. In addition, Integrys
Energy Services placed greater emphasis on structured wholesale natural gas
transactions in 2008 in existing markets, which also contributed to the
increase. These structured transactions involve serving customers
such as regulated utilities, pipelines, retail marketers, and other large end
users of natural gas.
Spot to forward
differential
Integrys Energy
Services experiences earnings volatility associated with the natural gas storage
cycle, which runs annually from April through March of the next
year. Generally, injections of natural gas into storage inventory
take place in the summer months and natural gas is withdrawn from storage in the
winter months. Integrys Energy Services' policy is to hedge the value
of natural gas storage with contracts in the over-the-counter and futures
markets, effectively locking in a margin on the natural gas in
storage. However, hedge accounting rules require the natural gas in
storage to be marked-to-market using spot prices, while the future sales
contracts are marked-to-market using forward prices. When the spot
price of natural gas changes disproportionately to the forward price of natural
gas, Integrys Energy Services experiences volatility in its
earnings. Consequently, earnings volatility may occur within the
contract period for natural gas in storage. The accounting treatment
does not impact the underlying cash flows or economics of these
transactions.
The natural gas
storage cycle had a positive $5.5 million impact on natural gas margins
from 2007 to 2008. There was no material impact on margin as a result
of the natural gas storage cycle in 2007 compared with a $5.5 million
positive impact in 2008. At December 31, 2008, the market value
of natural gas in storage was not significantly different than the market value
of future sales contracts related to the 2008/2009 natural gas storage
cycle.
Fair value
adjustments
In
2008, fair value adjustments drove a $109.0 million increase in the natural
gas margins as unrealized gains on these instruments were $147.6 million in
2008, compared with unrealized gains of $38.6 million in 2007.
Operating Income
(Loss)
Operating income at
Integrys Energy Services decreased $241.5 million
year-over-year. This decrease resulted primarily from the
$218.4 million decrease in margin discussed above. In addition,
operating and maintenance expense increased $22.3 million, driven largely
by a $9.1 million increase in bad debt expense, $7.3 million of which
resulted from the bankruptcy of Lehman Brothers in the third quarter of 2008; a
$5.1 million increase in broker commissions as a result of higher
transaction volumes; and higher employee benefit costs.
Other
Expense
Other expense at
Integrys Energy Services decreased $10.4 million
year-over-year. This decrease resulted primarily from an increase in
miscellaneous income of $9.0 million, driven by a $13.8 million
decrease in pre-tax net losses related to Integrys Energy Services' former
investment in a synthetic fuel facility. This increase in
miscellaneous income was partially offset by a decrease of $1.5 million in
foreign currency gains related to Integrys Energy Services' Canadian
subsidiaries and a $3.7 million decrease in interest and dividend income on
margin deposits.
Electric Transmission
Investment Segment Operations
2009
Compared with 2008
Other
Income
Other income at the
electric transmission investment segment increased $9.2 million during 2009
compared with 2008, due to an increase in income from Integrys Energy Group's
approximate 34% ownership interest in ATC. The increase in income was
driven by ATC's continuing capital expenditure program, resulting in an increase
in its rate base.
2008
Compared with 2007
Other
Income
Other income at the
electric transmission investment segment increased $15.6 million during
2008 compared with 2007, due to an increase in income from Integrys Energy
Group's ownership interest in ATC. The increase in income was driven
by ATC's continuing capital expenditure program, resulting in an increase in its
rate base.
Holding Company and Other
Segment Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in
|
|
|
Change
in
|
|
|
|
Year Ended December 31
|
|
|
2009
Over
|
|
|
2008
Over
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
$ |
(1.9 |
) |
|
$ |
(0.7 |
) |
|
$ |
(11.8 |
) |
|
|
171.4 |
% |
|
|
(94.1 |
)% |
Other
expense
|
|
|
(58.1 |
) |
|
|
(53.2 |
) |
|
|
(62.8 |
) |
|
|
9.2 |
% |
|
|
(15.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before
taxes
|
|
$ |
(60.0 |
) |
|
$ |
(53.9 |
) |
|
$ |
(74.6 |
) |
|
|
11.3 |
% |
|
|
(27.7 |
)% |
2009
Compared with 2008
Operating
Loss
Operating loss at
the holding company and other segment increased $1.2 million during 2009
compared with 2008, driven by restructuring expenses related to Integrys Energy
Group’s reduction in workforce, and by a decrease in operating income from
MERC's nonutility home services business.
Other
Expense
Other expense at
the holding company and other segment increased $4.9 million during 2009
compared with 2008, driven by a $4.3 million increase in interest expense
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.
2008
Compared with 2007
Operating
Loss
Operating loss at
the holding company and other segment improved $11.1 million during 2008
compared with 2007. The decrease in the operating loss was driven
by:
·
|
Reductions in
operating expenses related to consulting fees, compensation and benefits,
and contractor costs at the holding company.
|
|
|
·
|
Operating
income of $1.9 million generated at IBS, which related to return on
capital included in its service charges beginning in
2008.
|
|
|
·
|
Partially
offsetting the decrease in operating loss, was a $6.5 million
increase in the year-over-year operating loss related to external costs to
achieve merger synergies associated with the PEC merger. This
increase occurred primarily because in March 2007 all external costs
to achieve merger synergies incurred from July 2006 through March 2007
were allocated from the Holding Company and Other segment (where they were
initially recorded) to the other reportable segments, which are the
beneficiaries of the synergy savings resulting from these
costs. This resulted in lower operating expenses at the Holding
Company and Other segment during
2007.
|
Other Income
(Expense)
Other income
increased $9.6 million, driven by a $10.5 million decrease in external
interest expense due to lower interest rates and lower average short-term
borrowings used for working capital requirements at Integrys Energy
Group. A portion of the proceeds received from the sale of PEP in
September 2007 was used to pay down the short-term debt.
Provision for Income
Taxes
|
|
Year Ended
December 31
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Effective Tax
Rate
|
|
|
717.2 |
% |
|
|
29.1 |
% |
|
|
32.2 |
% |
2009
Compared with 2008
The increase in the
effective tax rate for 2009 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 $11.6 million of income
before taxes for 2009, it recorded an $83.2 million provision for income
taxes because $186.2 million of the total pre-tax goodwill impairment loss
was not deductible for income tax purposes.
2008
Compared with 2007
The decrease in the
effective tax rate for 2008 was primarily driven by the impact of large
permanent tax deductions pertaining to items that exceeded the related book
expense being applied to the lower income before taxes in 2008, compared with
2007. In addition, in 2008 Integrys Energy Group recognized
$10.0 million of investment tax credits related to solar projects completed
in the fourth quarter of 2008. These were offset by the reduction in
Section 29/45K tax credits in 2008 due to the December 31, 2007, expiration
of Section 29/45K of the Internal Revenue Code that made tax credits available
from the production and sale of synthetic fuel. In 2007, Integrys
Energy Group's ownership in the synthetic fuel operation resulted in recognizing
the tax benefit of Section 29/45K federal tax credits of $13.6 million
compared with $0.8 million of Section 29/45K tax credits recognized in
2008.
Discontinued Operations, Net
of Tax
2009
Compared with 2008
Income from
discontinued operations, net of tax, decreased $1.9 million in 2009
compared with 2008.
During 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 $3.9 million
($2.4 million after-tax).
During 2008,
Integrys Energy Services recognized a $6.3 million ($3.8 million
after-tax) gain on the sale of its subsidiary, Mid-American Power, LLC, in
discontinued operations when a previously contingent payment was paid by the
buyer.
For more
information on the discontinued operations discussed above, see Note 4,
"Dispositions," and
Note 25, "Segments of
Business."
2008
Compared with 2007
Income from
discontinued operations, net of tax, decreased $68.6 million in 2008,
compared with 2007.
During 2008,
Integrys Energy Services sold its subsidiary Mid-American Power, LLC, which
owned the Stoneman generation facility, located in Wisconsin. The
historical financial results of this business were not
significant. In the fourth quarter of 2008, Integrys Energy Services
recognized a $6.3 million ($3.8 million after-tax) gain on the sale of
this business in discontinued operations when a previously contingent payment
was earned and paid by the buyer. This contingent payment resulted
from legislation that passed in the fourth quarter of 2008, which extended the
production tax credits available for certain biomass facilities.
During 2007,
Integrys Energy Group recognized $58.5 million of income from discontinued
operations related to the sale of PEP, which included an after-tax gain of
$7.6 million on the sale. In 2008, discontinued operations
reflect the $0.8 million positive impact of tax adjustments related to the
2007 PEP sale.
During 2007, WPS
Niagara Generation, LLC recognized after-tax income of $14.8 million from
discontinued operations, primarily related to the $14.7 million after-tax
gain on the sale of this business.
BALANCE
SHEET
Cash and cash
equivalents decreased $209.6 million, from $254.1 million at
December 31, 2008, to $44.5 million at December 31,
2009. For a detailed explanation of the change in the cash and cash
equivalents balance, see "Liquidity and Capital
Resources."
Net accounts
receivable and accrued unbilled revenues decreased $934.6 million (49.4%) from
$1,892.6 million at December 31, 2008, to $958.0 million at December 31,
2009. The decrease was driven by a reduction in Integrys Energy
Services’ wholesale transactions and natural gas storage transactions as a
result of the change in strategy for this business segment. Also
contributing to the decrease were lower revenues due to lower natural gas prices
and warmer weather during the fourth quarter of 2009, compared with the same
period in 2008.
Inventories
decreased $428.5 million (58.5%), from $732.8 million at
December 31, 2008, to $304.3 million at December 31,
2009. The inventory balance at Integrys Energy Services decreased
$326.2 million (79.4%), primarily due to lower natural gas prices
year-over-year and the sale of its wholesale natural gas marketing and trading
business in December 2009. See Note 4, "Dispositions," for more
information.
Goodwill decreased
$291.4 million (31.2%), from $933.9 million at December 31, 2008, to $642.5
million at December 31, 2009, driven by the impairment loss recorded in the
first quarter of 2009 within the natural gas utility segment. 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, as well as the
negative impact that the global decline in equity markets had on the valuation
of natural gas distribution companies in general.
Detailed
explanations for changes in the short-term and long-term debt balances
year-over-year are included in Note 12, "Short-Term Debt and Lines of
Credit," and Note 13, "Long-Term Debt."
Accounts payable
decreased $894.9 million (58.3%), from $1,534.3 million at
December 31, 2008, to $639.4 million at December 31,
2009. Accounts payable at Integrys Energy Services decreased
$813.0 million, primarily due to lower natural gas prices and the reduction
in natural gas payables and natural gas loans associated with its wholesale
natural gas marketing and trading business. See Note 4, "Dispositions," for more
information.
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.
The previously
announced strategy change at Integrys Energy Services and other operating
activities resulted in the generation of a significant amount of positive cash
flow from operations during 2009, which drove an approximate $1 billion
reduction in consolidated short-term debt outstanding during 2009.
Operating
Cash Flows
2009
Compared with 2008
Net cash provided
by operating activities was $1,606.3 million in 2009, compared with net
cash used for operating activities of $250.0 million in
2008. The $1,856.3 million year-over-year increase in cash
provided by operating activities was mainly driven by a $1,734.8 million
increase related to lower working capital requirements, partially due to a
$444.1 million decrease in inventories during 2009, compared with a $312.0
million increase in inventories in 2008. This change was primarily a
result of an increase in natural gas withdrawn from storage in 2009 due to the
previously announced strategy change at Integrys Energy Services, as well as
lower year-over-year natural gas prices. Also contributing to the
decrease in working capital requirements was an $864.8 million decrease in
accounts receivables and accrued unbilled revenues in 2009, compared with a
$207.7 million increase in accounts receivables and accrued unbilled revenues in
2008, primarily the result of lower natural gas prices and the Integrys Energy
Services strategy change. Additionally, during 2009, Integrys Energy
Services had a $45.5 million net return of margin posted to various exchanges,
compared with the net payment of $239.2 million of margin posted to various
exchanges in 2008, primarily due to the strategy change. Partially
offsetting these changes was a $604.7 million decrease in accounts payable
in 2009, compared with a $53.2 million decrease in accounts payable in 2008,
primarily the result of lower natural gas prices.
2008
Compared with 2007
Net cash used for
operating activities was $250.0 million in 2008, compared with net cash
provided by operating activities of $238.5 million in 2007. The
$488.5 million year-over-year increase in cash used for operating
activities was driven by:
·
|
A
$177.0 million decrease in cash provided by accounts receivable
collections, as colder weather conditions led to higher natural gas
throughput volumes in the fourth quarter 2008, compared with the same
quarter in 2007, contributing to higher accounts receivable
balances. Also contributing to the increase in cash used for
operating activities, Integrys Energy Group and its subsidiaries,
primarily Integrys Energy Services, had net cash collateral payments of
$239.2 million in 2008, compared with net cash collateral receipts of
$82.0 million in 2007. The net cash collateral payments made in
2008 were driven by large mark-to-market losses incurred by Integrys
Energy Services during the latter part of 2008, due to declining
prices.
|
|
|
·
|
A
$139.1 million increase in cash used for natural gas inventory
purchases due to an increase in the average price of natural gas during
the summer of 2008 (when natural gas is generally injected into
inventory), compared with the same period in 2007.
|
|
|
·
|
Partially
offset by an $88.7 million increase in cash related to net refunds of
regulatory assets and liabilities, driven by a decrease in the refund to
ratepayers in 2008, compared with 2007, of proceeds WPS received from the
liquidation of the nonqualified decommissioning trust fund upon the sale
of Kewaunee.
|
Investing
Cash Flows
2009
Compared with 2008
Net cash used for
investing activities was $440.7 million in 2009, compared with
$452.2 million in 2008. The $11.5 million year-over-year
decrease in cash used for investing activities was primarily driven by the $88.6
million decrease in cash used to fund capital expenditures (discussed below) and
the payment of $17.4 million in 2008 related to WPS’s funding of the
construction of the transmission facilities required to support Weston 4,
partially offset by the 2008 reimbursement of $99.7 million from ATC
related to WPS's construction of the transmission facilities required to support
Weston 4.
2008
Compared with 2007
Net cash used for
investing activities was $452.2 million in 2008, compared with
$451.5 million in 2007. The $0.7 million year-over-year
increase in cash used for investing activities was primarily driven by a
$140.2 million increase in cash used for capital expenditures (discussed
below), partially offset by the reimbursement of $99.7 million from ATC,
related to the construction of the transmission facilities required to support
Weston 4, and a $15.5 million year-over-year increase in cash proceeds
received from the sale of property, plant, and equipment.
Capital
Expenditures
Capital
expenditures by business segment for the years ended December 31 were as
follows:
Reportable
Segment
(millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Electric
utility
|
|
$ |
250.4 |
|
|
$ |
207.4 |
|
|
$ |
202.6 |
|
Natural gas
utility
|
|
|
136.9 |
|
|
|
237.3 |
|
|
|
158.8 |
|
Integrys
Energy Services
|
|
|
22.4 |
|
|
|
68.1 |
|
|
|
20.5 |
|
Holding
company and other
|
|
|
34.5 |
|
|
|
20.0 |
|
|
|
10.7 |
|
Integrys
Energy Group
|
|
$ |
444.2 |
|
|
$ |
532.8 |
|
|
$ |
392.6 |
|
The increase in
capital expenditures at the electric utility segment in 2009 compared with 2008
was primarily due to wind generation projects, partially offset by the
year-over-year decrease in capital expenditures associated with Weston
4. The decrease in capital expenditures at the natural gas utility
segment in 2009 compared with 2008 was primarily due to a decrease in costs
related to the construction of natural gas laterals that connected WPS's natural
gas distribution system to the Guardian II natural gas pipeline, which was
completed in February 2009. The decrease in capital expenditures at
Integrys Energy Services in 2009 compared with 2008 was primarily driven by
fewer expenditures related to renewable energy projects in 2009, compared with
2008.
The increase in
capital expenditures at the natural gas utility segment in 2008 compared with
2007 was primarily due to an increase in capital expenditures at PGL and NSG due
to the fact that they were not acquired until February 21, 2007, as well as
construction of the natural gas lateral infrastructure that connects WPS's
natural gas distribution system to the Guardian II natural gas
pipeline. The increase in capital expenditures at Integrys Energy
Services in 2008 compared with 2007 was primarily due to solar energy projects
as well as the construction of a pipeline that will transport methane gas
produced at a landfill for use at a chemical plant as a replacement for natural
gas.
Financing
Cash Flows
2009
Compared with 2008
Net cash used for
financing activities was $1,378.4 million in 2009, compared with net cash
provided by financing activities of $911.3 million in 2008. The
$2,289.7 million year-over-year increase in cash used for financing
activities was primarily driven by $973.6 million of net repayments of
short-term debt and notes payable in 2009, compared with $725.4 million of net
short-term and notes payable borrowings in 2008. The repayments in
2009 were made possible by the increase in net cash provided by operating
activities. Also, as a result of the previously announced strategy
change at Integrys Energy Services, fewer structured natural gas loan agreements
were entered into in 2009, compared with 2008, resulting in a
$368.4 million year-over-year decrease in proceeds from the sale of
borrowed natural gas. Additionally, Integrys Energy Services had a
$188.0 million year-over-year increase in the purchase of natural gas to
repay structured natural gas loan agreements, many of which were entered into in
2008.
2008
Compared with 2007
Net cash provided
by financing activities was $911.3 million in 2008, compared with net cash
used for financing activities of $459.2 million in 2007. In
2007, Integrys Energy Group was able to pay down short-term debt with a portion
of the proceeds received from the sale of PEP. In 2008, proceeds were
required to fund higher year-over-year working capital
requirements.
Significant
Financing Activities
Dividends paid
increased in 2009 compared with 2008. In February 2009, Integrys
Energy Group increased its quarterly common stock dividend to 68 cents per
share. The quarterly common stock dividend was increased from 66
cents per share to 67 cents per share in 2008.
Integrys Energy
Group had outstanding commercial paper borrowings of $212.1 million and
$552.9 million at December 31, 2009, and 2008,
respectively. Integrys Energy Group had short-term notes payable
outstanding of $10.0 million and $181.1 million at December 31,
2009, and 2008, respectively. Integrys Energy Group had no borrowings
under revolving credit facilities at December 31, 2009 and
$475.0 million as of December 31, 2008. See Note 12, "Short-Term Debt and Lines of
Credit" for more information.
For information on
the issuance and redemption of long-term debt at Integrys Energy Group and its
subsidiaries, see Note 13, "Long-Term Debt."
Prior to
January 1, 2008, Integrys Energy Group issued new shares of common stock
under its Stock Investment Plan and under certain stock-based employee benefit
and compensation plans. As a result of the plans, equity increased
$45.6 million in 2007. During 2009 and 2008, shares of Integrys
Energy Group's common stock were purchased on the open market to meet the
requirements of its Stock Investment Plan and certain stock-based employee
benefit and compensation plans. Integrys Energy Group did not
repurchase any existing common stock during 2007. Beginning in the
first quarter of 2010, Integrys Energy Group plans to issue new shares of common
stock to meet the requirements of its Stock Investment Plan and certain
stock-based employee benefit and compensation plans.
Credit
Ratings
Integrys Energy
Group uses internally generated funds, commercial paper borrowings, and other
short-term borrowings to satisfy most of its capital
requirements. Integrys Energy Group also periodically issues
long-term debt and common stock to reduce short-term debt, maintain desired
capitalization ratios, and fund future growth.
Integrys Energy
Group, WPS, and PGL have their own commercial paper borrowing
programs.
WPS periodically
issues long-term debt and receives equity contributions from Integrys Energy
Group to reduce short-term debt, fund future growth, and maintain capitalization
ratios as authorized by the PSCW.
PGL and NSG
periodically issue long-term debt in order to reduce short-term debt, refinance
maturing securities, maintain desired capitalization ratios, and fund future
growth. The specific forms of long-term financing, amounts, and
timing depend on business needs, market conditions, and other
factors.
The current credit
ratings for Integrys Energy Group, WPS, PEC, PGL, and NSG are listed in the
table below.
Credit
Ratings
|
Standard
& Poor's
|
Moody's
|
Integrys
Energy Group
Issuer credit rating
Senior
unsecured debt
Commercial paper
Credit facility
Junior
subordinated notes
|
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
January 26, 2010, Standard and Poor's revised the outlook for Integrys
Energy Group and all of its subsidiaries to stable from negative. The
revised outlook reflected Integrys Energy Group's decision to retain a selected
portion of its nonregulated operations, which resulted in a revision to Integrys
Energy Group's business risk profile to "strong" from
"excellent." The revised outlook also reflected Integrys Energy
Group’s improved financial measures and decreasing regulatory risk, which
resulted in a change in its financial risk profile to "significant" from
"aggressive."
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.
Discontinued
Operations
2009
Compared with 2008
Net cash provided
by discontinued operations was $3.2 million in 2009 compared with
$3.8 million in 2008.
2008
Compared with 2007
Net cash provided
by discontinued operations was $3.8 million in 2008 compared with
$690.2 million in 2007. The decrease in net cash provided by
discontinued operations was driven by the approximate $869.2 million of
proceeds received from the sale of PEP.
Future
Capital Requirements and Resources
Contractual
Obligations
The following table
shows the contractual obligations of Integrys Energy Group, including its
subsidiaries, as of December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
Due By Period
|
(Millions)
|
|
|
Total
Amounts
Committed
|
|
|
|
2010
|
|
|
|
2011
to 2012
|
|
|
|
2013
to 2014
|
|
|
|
2015
and Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt principal and interest payments (1)
|
|
$ |
3,580.2 |
|
|
$ |
254.4 |
|
|
$ |
942.3 |
|
|
$ |
571.8 |
|
|
$ |
1,811.7 |
|
Operating
lease obligations
|
|
|
68.4 |
|
|
|
11.6 |
|
|
|
19.6 |
|
|
|
13.6 |
|
|
|
23.6 |
|
Commodity
purchase obligations (2)
|
|
|
5,735.6 |
|
|
|
2,399.9 |
|
|
|
1,858.0 |
|
|
|
689.8 |
|
|
|
787.9 |
|
Purchase
orders (3)
|
|
|
515.3 |
|
|
|
514.1 |
|
|
|
1.2 |
|
|
|
- |
|
|
|
- |
|
Pension and
other postretirement
funding
obligations (4)
|
|
|
683.4 |
|
|
|
103.3 |
|
|
|
267.4 |
|
|
|
138.1 |
|
|
|
174.6 |
|
Total
contractual cash obligations
|
|
$ |
10,582.9 |
|
|
$ |
3,283.3 |
|
|
$ |
3,088.5 |
|
|
$ |
1,413.3 |
|
|
$ |
2,797.8 |
|
(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)
|
Obligations for pension and other
postretirement benefit plans, other than the Integrys Energy Group
Retirement Plan, cannot be estimated beyond
2012.
|
The table above
does not reflect any payments related to the manufactured gas plant remediation
liability of $657.7 million at December 31, 2009, as the amount and
timing of payments are uncertain. Integrys Energy Group anticipates
incurring costs annually to remediate these sites, but 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. See
Note 16, "Commitments and
Contingencies," for more information about environmental
liabilities. In addition, the table does not reflect any payments for
the December 31, 2009, liability related to uncertain tax positions, as the
amount and timing of payments are uncertain. See Note 15, "Income Taxes," for more
information about this liability.
Capital
Requirements
Estimated
construction expenditures by company for the three-year period 2010 through 2012
are listed below.
(Millions)
|
|
|
|
WPS
|
|
|
|
Environmental
projects
|
|
$ |
164.1 |
|
Electric
and natural gas distribution projects
|
|
|
150.9 |
|
Electric
and natural gas delivery and customer service projects
|
|
|
59.1 |
|
Other
projects
|
|
|
108.0 |
|
|
|
|
|
|
UPPCO
|
|
|
|
|
Repairs
and safety measures at hydroelectric facilities
|
|
|
37.3 |
|
Other
projects
|
|
|
28.4 |
|
|
|
|
|
|
MGU
|
|
|
|
|
Natural
gas pipe distribution system, underground natural gas storage facilities,
and
other
projects
|
|
|
29.8 |
|
|
|
|
|
|
MERC
|
|
|
|
|
Natural
gas pipe distribution system and other projects
|
|
|
48.5 |
|
|
|
|
|
|
PGL
|
|
|
|
|
Natural
gas pipe distribution system, underground natural gas storage facilities,
and other projects *
|
|
|
481.1 |
|
|
|
|
|
|
NSG
|
|
|
|
|
Natural
gas pipe distribution system and other projects
|
|
|
45.9 |
|
|
|
|
|
|
Integrys
Energy Services
|
|
|
|
|
Solar
and other projects
|
|
|
88.9 |
|
|
|
|
|
|
IBS
|
|
|
|
|
Corporate
services infrastructure projects
|
|
|
53.7 |
|
Total capital
expenditures
|
|
$ |
1,295.7 |
|
*
|
Includes
approximately $114 million of expenditures related to the accelerated
replacement of cast iron mains at PGL in 2011 and 2012. On
January 21, 2010, the ICC approved a rider mechanism to allow PGL to
recover the incremental cost of an accelerated natural gas main
replacement program. See Note 24, "Regulatory
Environment," for more
information.
|
Integrys Energy
Group expects to provide additional capital contributions to ATC (not included
in the above table) of approximately $7 million in 2010, $8 million in
2011, and $7 million in 2012.
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, acquisition
opportunities, market volatility, and economic trends.
Capital
Resources
As
of December 31, 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 12, "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 13, "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 2010 through 2012
primarily through internally generated funds (net of forecasted dividend
payments) and debt and equity financings. During 2010, over
$1.3 billion of Integrys Energy Group's revolving credit facilities will
mature. It is the intent of management to renew a substantial portion
of the maturing credit facilities by the end of the second quarter of
2010. 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.
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
Integrys Energy Services Business
Segment Strategy
Change
At
December 31, 2009, Integrys Energy Group had completed a substantial
portion of 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. One of the remaining parts of the strategy change is
the pending sale of the wholesale electric business, which is expected to close
in the first half of 2010.
Integrys Energy
Group has repositioned its nonregulated energy services business segment from a
focus on significant growth in wholesale and retail markets across the United
States and Canada, to a focus on selected retail markets in the United States
with the expectation that recurring customer based business will result in
dependable cash and earnings contributions with a reduced risk and capital
profile. In addition, Integrys Energy Services will continue to
invest in energy assets with renewable attributes.
Once fully
implemented, Integrys Energy Group expects its liquidity needs to decrease and
expects to reduce its existing credit facilities. Integrys Energy
Group may also use the proceeds from the sales of any portions of this business
segment, 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. See Note 4, "Dispositions," 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. On December 16, 2009, decoupling
for UPPCO was approved for all customer groups by the MPSC effective
January 1, 2010. MGU requested decoupling in its rate case filed
in July 2009. The partial settlement approved in that rate case
did not address the decoupling request. Therefore the request will be
addressed by the MPSC through the normal rate case process, which is expected to
conclude in the second quarter of 2010. 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
weak 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. Recoveries (or refunds) under
Illinois Senate Bill (SB) 1918 and an Uncollectible Expense Tracking Mechanism
(UETM) in Michigan will affect bad debt expense as described in Note 24, "Regulatory
Environment."
Goodwill
Impairment Testing
Integrys Energy
Group performs its required annual goodwill impairment tests each April
1. Interim impairment tests are performed between required annual
testing dates if certain conditions exist. One of these conditions is
a change in business climate, which may be evidenced by, among other things, a
prolonged decline in a company's market capitalization below book
value. Any annual or interim goodwill impairment test could result in
the recognition of a goodwill impairment loss. See Note 10, "Goodwill and Other Intangible
Assets," for more information on goodwill balances for Integrys Energy
Group's reporting units at December 31, 2009.
Climate
Change
Recently, efforts
have been initiated to develop state and regional greenhouse gas programs, to
create federal legislation to limit carbon dioxide emissions, and to create
national or state renewable portfolio standards. Some examples of
these efforts are the Waxman-Markey bill, which passed the United States House
of Representatives; the Kerry-Boxer draft bill, which was introduced in the
United States Senate; and the Wisconsin Clean Energy Jobs Act, which has been
introduced in the Wisconsin legislature to implement recommendations from the
Governor’s Global Warming Task Force. The Wisconsin Clean Energy Jobs
Act establishes statewide goals for the reduction of greenhouse gas emissions
and requires certain actions, including an increased renewable portfolio
standard, to meet those goals. 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.
The majority of
Integrys Energy Group’s generation and distribution facilities are located in
the upper Midwest region of the United States. The same is true for the
majority of our customers’ facilities. The physical risks posed by
climate change are not expected to be significant at this
time. Ongoing
evaluations will be
conducted as more information on the extent of such physical changes becomes
available.
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 approximately $200 million. 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
various renewable generating facilities that went into service in
2009. Integrys Energy Group currently plans to take production tax
credits on power generated by wind facilities, but is evaluating the other
alternatives mentioned.
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 became
subject to apportionment and taxation in Wisconsin beginning January 1,
2009. 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 at
the time of the law change, this law is expected to generate a small benefit for
Integrys Energy Group.
Property
Tax Assessment on Natural Gas
Integrys Energy
Group’s natural gas retailers, including its five natural gas utilities,
purchase storage services from pipeline companies on the pipelines’ interstate
natural gas storage and transmission systems. Once a shipper delivers
natural gas to the pipeline’s system, that specific natural gas cannot be
physically traced back to the shipper, and the physical location of that
specific natural gas is not ascertainable. Some states tax natural gas as
personal property and have recently sought to assess personal property tax
obligations against natural gas quantities held as working gas in facilities
located in their states. Because the pipeline does not have title to the
working gas inventory in these facilities, the state imposes the tax on the
shippers as of the assessment date, based on allocated quantities.
Shippers that are being assessed a tax are actively protesting these property
tax assessments. PGL and MERC are currently pursuing protests through
litigation in Texas and Kansas, respectively.
OFF
BALANCE SHEET ARRANGEMENTS
See Note 17, "Guarantees," for information
regarding guarantees.
MARKET
PRICE RISK MANAGEMENT ACTIVITIES
Market price risk
management activities include the electric and natural gas marketing and related
risk management activities of Integrys Energy Services.
Integrys Energy
Services measures the fair value of derivative instruments on a mark-to-market
basis. The fair value is included in assets or liabilities from risk
management activities on Integrys Energy Group's Consolidated Balance Sheets,
with an offsetting impact to other comprehensive income (for the effective
portion of cash flow hedges), also on Integrys Energy Group's Consolidated
Balance Sheets, or to earnings. The following table provides an
assessment of the factors impacting the change in the net value of Integrys
Energy Services' assets and liabilities from risk management activities for the
year ended December 31, 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)
|
|
|
317.0 |
|
|
|
(225.9 |
) |
|
|
91.1 |
|
Plus: Changes
in fair value of contracts in existence at December 31, 2009 (3)
|
|
|
60.0 |
|
|
|
(187.9 |
) |
|
|
(127.9 |
) |
Fair
value of contracts at December 31, 2009 (1)
|
|
$ |
37.0 |
|
|
$ |
(97.4 |
) |
|
$ |
(60.4 |
) |
(1)
|
Reflects the values reported on
the balance sheets for net mark-to-market current and long-term risk
management assets and liabilities as of those dates. The fair
value of contracts at December 31, 2008, includes $0.6 million
of liabilities held for sale, related to the sale of generation assets and
the associated sales and service contracts in Northern Maine, which closed
during the first quarter of 2010. The fair value of Integrys
Energy Services’ contracts at December 31, 2009, was impacted by the
reduction in wholesale trading and marketing activity associated with its
strategy change, as well as an overall decline in energy prices in
2009.
|
(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
December 31, 2009.
|
(3)
|
Includes
unrealized gains and losses on contracts that existed at December 31,
2008, and contracts that were entered into subsequent to December 31,
2008, which were included in Integrys Energy Services' portfolio at
December 31, 2009.
|
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, including definitions of Level 1, Level 2, and Level 3,
see Note 1(r), "Summary of
Significant Accounting Policies – Fair Value."
Integrys
Energy Services
Risk
Management Contract Aging at Fair Value
As
of December 31, 2009 (Millions)
Fair
Value Hierarchy Level
|
|
Maturity
Less
Than
1
Year
|
|
|
Maturity
1 to
3
Years
|
|
|
Maturity
4 to 5
Years
|
|
|
Maturity
in
Excess
of
5 years
|
|
|
Total
Fair
Value
|
|
Level
1
|
|
$ |
(52.2 |
) |
|
$ |
0.6 |
|
|
$ |
(0.3 |
) |
|
$ |
- |
|
|
$ |
(51.9 |
) |
Level
2
|
|
|
(56.4 |
) |
|
|
(75.7 |
) |
|
|
4.1 |
|
|
|
1.6 |
|
|
|
(126.4 |
) |
Level
3
|
|
|
37.1 |
|
|
|
80.8 |
|
|
|
(0.6 |
) |
|
|
0.6 |
|
|
|
117.9 |
|
Total
fair value
|
|
$ |
(71.5 |
) |
|
$ |
5.7 |
|
|
$ |
3.2 |
|
|
$ |
2.2 |
|
|
$ |
(60.4 |
) |
CRITICAL
ACCOUNTING POLICIES
Integrys Energy
Group has determined that the following accounting policies are critical to the
understanding of its financial statements because their application requires
significant judgment and reliance on estimations of matters that are inherently
uncertain. Integrys Energy Group's management has discussed these
critical accounting policies with the Audit Committee of the Board of
Directors.
Risk
Management Activities
Integrys Energy
Group has entered into contracts that are accounted for as
derivatives. All derivative contracts are recorded at fair value on
the Consolidated Balance Sheets, unless they qualify for the normal purchases
and sales exception, which provides that recognition of gains and losses in the
consolidated financial statements is not required until the settlement of the
contracts. Changes in fair value, except effective portions of
derivative instruments designated as hedges or qualifying for
regulatory
deferral, generally
affect income available for common shareholders at each financial reporting date
until the contracts are ultimately settled.
At
December 31, 2009, those derivatives not designated as hedges were
primarily commodity contracts used to manage price risk associated with natural
gas and electricity purchase and sale activities. Cash flow hedge
accounting treatment may be used when Integrys Energy Group enters into
contracts to buy or sell a commodity at a fixed price for future delivery to
protect future cash flows corresponding with anticipated physical sales or
purchases. In addition, Integrys Energy Group uses cash flow hedge
accounting to protect against changes in interest rates. Fair value
hedge accounting may be used when Integrys Energy Group holds assets,
liabilities, or firm commitments and enters into transactions that hedge the
risk of changes in commodity prices or interest rates. To the extent
that the hedging instrument is fully effective in offsetting the transaction
being hedged, there is no impact on income available for common shareholders
prior to settlement of the hedge.
In
conjunction with the implementation of SFAS No. 157, "Fair Value
Measurements" (now incorporated as part of the Fair Value Measurements and
Disclosures Topic of the FASB ASC), on January 1, 2008, Integrys Energy
Group categorized its fair value measurements into three levels within a fair
value hierarchy. See Note 1(r), "Summary of Significant Accounting
Policies – Fair Value," and Note 22, "Fair Value," for more
information.
Integrys Energy
Group has based its valuations on observable inputs whenever
possible. However, at times, the valuation of certain derivative
instruments requires the use of internally developed valuation techniques and/or
significant unobservable inputs. These valuations require a
significant amount of management judgment and are classified as Level 3
measurements. Of the total risk management assets on Integrys Energy
Group's Consolidated Balance Sheets, $1,593.0 million (68.7%) utilized
Level 3 measurements. Of the total risk management liabilities,
$1,471.6 million (61.6%) utilized Level 3
measurements. Integrys Energy Group believes these valuations
represent the fair values of these instruments as of the reporting date;
however, the actual amounts realized upon settlement of these instruments could
vary materially from the reported amounts due to movements in market prices and
changes in the liquidity of certain markets.
Beginning
January 1, 2008, Integrys Energy Services no longer includes transaction
costs in fair value determinations.
As
a component of fair value determinations, Integrys Energy Group considers
counterparty credit risk (including its own credit risk) and liquidity
risk. The liquidity component of the fair value determination may be
especially subjective when limited liquid market information is
available. Changes in the underlying assumptions for these components
of fair value at December 31, 2009, would have had the following
effects:
Change
in Components
|
Effect
on Fair Value of Net Risk Management Liabilities at December 31,
2009
(Millions)
|
100%
increase
|
$15.8
decrease
|
50%
decrease
|
$7.9
increase
|
These hypothetical
changes in fair value would be included in current and long-term assets and
liabilities from risk management activities on the Consolidated Balance Sheets
and as part of nonregulated revenue on the Consolidated Statements of Income,
unless the related contracts are designated as cash flow hedges, in which case
potential changes would be included in Other Comprehensive Income – Cash Flow
Hedges on the Consolidated Statements of Common Shareholders'
Equity.
Asset
Impairment
Integrys Energy
Group reviews certain assets for impairment as required by the Property, Plant,
and Equipment Topic and Intangibles – Goodwill and Other Topic of the FASB
ASC.
Goodwill
Goodwill is tested
for impairment using a two-step process that begins with an estimation of the
fair value of a reporting unit. A reporting unit can be an operating
segment, or one level below an operating segment, as defined by the Segment
Reporting Topic of the FASB ASC. At Integrys Energy Group, goodwill
has been assigned to each of the five reporting units that comprise the natural
gas utility segment and also to the Integrys Energy Services
segment. The carrying value of goodwill by reporting unit and
reportable segment for the year ended December 31, 2009 was:
(Millions)
|
|
Carrying
Value of Goodwill
|
|
WPS
|
|
$ |
36.4 |
|
PGL
|
|
|
401.2 |
|
NSG
|
|
|
36.1 |
|
MERC
|
|
|
127.7 |
|
MGU
|
|
|
34.5 |
|
Total
Natural Gas Utility Segment
|
|
$ |
635.9 |
|
Integrys
Energy Services
|
|
|
6.6 |
|
Balance
at December 31, 2009
|
|
$ |
642.5 |
|
The goodwill for
each of the reporting units is tested for impairment annually on April 1 or more
frequently when events or circumstances warrant. The fair market
value of each reporting unit is estimated using certain key assumptions that
require significant judgment. This judgment includes developing cash
flow projections (including the selection of appropriate returns on equity,
long-term growth rates, and capital expenditure levels), selecting appropriate
discount rates, and identifying relevant market comparables.
The fair value of
WPS currently exceeds the carrying amount by a significant amount, such that
Integrys Energy Group believes WPS is unlikely to fail step one of the goodwill
impairment test in the foreseeable future.
However, 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 for PGL, NSG, MERC, MGU, and
Integrys Energy Services, triggering an interim goodwill impairment analysis
effective February 28, 2009 for these reporting units. For this
analysis, the estimated fair value for the PGL, NSG, MERC, and MGU reporting
units was determined by utilizing a combination of the income approach and the
market approach methodologies. More weight was given to the income
approach as Integrys Energy Group believes that the income approach more
accurately captures the anticipated economics and related performance
expectations for each of these reporting units. In the first quarter
of 2009, Integrys Energy Group announced a strategy change for Integrys Energy
Services. Because it was likely that Integrys Energy Group would sell a
significant portion of Integrys Energy Services, the goodwill at Integrys Energy
Services was tested for impairment during each interim period in 2009 as well as
at the time of the April 1, 2009 annual testing date. At each testing
date, the fair value of Integrys Energy Services exceeded its carrying
amount. Based on the interim test performed at December 31, 2009, the fair
value of Integrys Energy Services exceeded its carrying amount by more than
10%.
The income approach
was based on discounted cash flows which were derived from internal forecasts
and economic expectations. The key assumptions used to determine fair
value under the income approach included the cash flow period, terminal values
based on a terminal growth rate, and the discount rate. The discount
rate represents the estimated cost of debt and equity financing weighted by
the percentage of
debt and equity in a company’s target capital structure. The discount
rates used in the income approach for PGL, NSG, MERC, and MGU ranged from 7.25%
to 7.5%. The discount rate used for Integrys Energy Services was
10.2%. The terminal growth rates used in the income approach ranged
from 2% to 3%.
The market approach
for PGL, NSG, MERC, and MGU utilized the guideline company method, which
calculates valuation multiples based on operating and valuation metrics from
publicly traded guideline companies in the regulated natural gas distribution
industry. Multiples derived from the guideline companies provided an
indication of how much a knowledgeable investor in the marketplace would be
willing to pay for an investment in a similar company. These
multiples were then applied to the appropriate operating metric for PGL, NSG,
MERC, and MGU to determine indications of fair value.
Aggregate fair
values of all of Integrys Energy Group’s operating segments were compared to its
market capitalization as an assessment of the appropriateness of the fair value
measurements. When assessing Integrys Energy Group’s market
capitalization, the average stock price 15 days before and after the interim
February 28, 2009, valuation date was used. The comparison between
the aggregate fair values of all reporting units of Integrys Energy Group and
the market capitalization indicated an implied control premium. A
control premium analysis indicated that the implied premium was within a range
of the overall premiums observed in the market place.
As
a result of applying the first step of goodwill impairment testing to determine
if potential goodwill impairment existed at the February 28, 2009 interim
testing date, Integrys Energy Services passed (fair value exceeded carrying
amount) and PGL, NSG, MERC, and MGU failed (carrying amount exceeded fair
value). As a result, a $291.1 million pre-tax impairment loss was
recorded in the first quarter of 2009, which included a $148.0 million goodwill
impairment loss related to PGL, a $38.2 million goodwill impairment loss related
to NSG, a $16.7 million goodwill impairment loss related to MERC, and
an
$88.2 million
goodwill impairment loss related to MGU. See Note 10, "Goodwill and Other Intangible
Assets," for
information.
On
the April 1, 2009 annual goodwill impairment testing date, an increase in equity
values for United States companies, as well as a decrease in the discount rate
since February 28, 2009, resulted in the fair values of PGL, NSG, MERC and MGU
exceeding their respective carrying amounts. The resulting fair
values exceeded the carrying amount by less than 10% for each of these four
reporting units.
Other
Integrys Energy
Group evaluates property, plant, and equipment for impairment whenever
indicators of impairment exist. These indicators include a
significant underperformance of the assets relative to historical or projected
future operating results, a significant change in the use of the assets or
business strategy related to such assets, and significant negative industry or
economic trends. If the sum of the undiscounted expected future cash
flows from an asset is less than the carrying value of the asset, an asset
impairment must be recognized in the income statement. For assets
held for sale, impairment charges are recorded if the carrying value of such
assets exceeds the estimated fair value less costs to sell. The
amount of impairment recognized is calculated by reducing the carrying value of
the asset to its fair value (or fair value less costs to sell if held for
sale). For Integrys Energy Group's regulated utilities, an asset
impairment requires further assessment to determine if a regulatory asset should
be recorded.
The review for
impairment of tangible assets is more critical to Integrys Energy Services than
to any other segment because of its lack of access to rate setting based on cost
of service that is available to the regulated segments. At
December 31, 2009, the carrying value of Integrys Energy Services'
property, plant, and equipment totaled
$143.9 million. Management's assumptions about future market
sales prices and generation volumes require significant judgment because actual
prices and generation volumes have fluctuated in the past as a result of
changing fuel costs and required plant maintenance and are expected to continue
to do so in the future.
The primary
assumptions used at Integrys Energy Services in the impairment analyses are
future revenue streams that depend on future commodity prices, capital
expenditures, environmental landscape, and operating costs. A
combination of inputs from both internal and external sources is used to project
revenue streams. Integrys Energy Services forecasts future operating
costs with input from external sources. These assumptions are modeled
over the projected remaining life of the asset.
Throughout 2009,
Integrys Energy Services tested various assets for impairment whenever events or
changes in circumstances indicated that a test was required. No
material impairment charges were recorded in 2009 as a result of the
recoverability tests. Results of past impairment tests may not
necessarily be an indicator of future results given the nature of the accounting
estimates involved, as discussed more fully above. Future results or
changes in assumptions could result in an impairment.
Receivables
and Reserves
The regulated
natural gas and electric utilities and Integrys Energy Services accrue estimated
amounts of revenues for services rendered but not yet billed. Estimated
unbilled revenues are calculated using a variety of factors based on customer
class or contracted rates. At December 31, 2009 and 2008,
Integrys Energy Group's unbilled revenues were $337.0 million and
$525.5 million, respectively. Any difference between actual
revenues and the estimates are recorded in revenue in the next
period. Differences historically have not been
significant.
The majority of the
bad debt expense at the utilities is recovered through
rates. Integrys Energy Services calculates the reserve for potential
uncollectible customer receivable balances by applying an estimated bad debt
experience rate to each past due aging category and reserving for 100% of
specific customer receivable balances deemed to be uncollectible. If
the assumption that historical uncollectible experience matches current customer
default is incorrect, or if a specific customer with a large account receivable
that has not previously been identified as a risk defaults, there could be
significant changes to bad debt expense and the uncollectible reserve
balance. At December 31, 2009 and 2008, Integrys Energy
Services' reserve for uncollectible accounts was $19.4 million and
$16.7 million, respectively.
Pension
and Other Postretirement Benefits
The costs of
providing non-contributory defined benefit pension benefits and other
postretirement benefits, described in Note 18, "Employee Benefit Plans," are
dependent upon numerous factors resulting from actual plan experience and
assumptions regarding future experience.
Pension and other
postretirement benefit costs are impacted by actual employee demographics
(including age, compensation levels, and employment periods), the level of
contributions made to the plans, and earnings on plan assets. Pension
and other postretirement benefit costs may be significantly affected by changes
in key actuarial assumptions, including anticipated rates of return on plan
assets, discount rates used in determining the projected pension and other
postretirement benefit obligations and costs, and health care cost
trends. Changes made to the plan provisions may also impact current
and future pension and other postretirement benefit costs.
Integrys Energy
Group's pension and other postretirement benefit plan assets are primarily made
up of equity and fixed income investments. Fluctuations in actual
equity and fixed income market returns, as well as changes in general interest
rates, may result in increased or decreased benefit costs in future
periods. Management believes that such changes in costs would be
recovered at the regulated segments through the ratemaking process.
The following table
shows how a given change in certain actuarial assumptions would impact the
projected benefit obligation and the reported net periodic pension
cost. Each factor below reflects an evaluation of the change based on
a change in that assumption only.
Actuarial
Assumption
(Millions,
except percentages)
|
|
Percentage-
Point
Change in
Assumption
|
|
|
Impact
on Projected Benefit
Obligation
|
|
|
Impact
on 2009
Pension
Cost
|
|
Discount
rate
|
|
|
(0.5 |
) |
|
$ |
75.5 |
|
|
$ |
7.5 |
|
Discount
rate
|
|
|
0.5 |
|
|
|
(64.1 |
) |
|
|
(4.2 |
) |
Rate of
return on plan assets
|
|
|
(0.5 |
) |
|
|
N/A |
|
|
|
5.4 |
|
Rate of
return on plan assets
|
|
|
0.5 |
|
|
|
N/A |
|
|
|
(5.4 |
) |
The following table
shows how a given change in certain actuarial assumptions would impact the
accumulated other postretirement benefit obligation and the reported net
periodic other postretirement benefit cost. Each factor below
reflects an evaluation of the change based on a change in that assumption
only.
Actuarial
Assumption
(Millions,
except percentages)
|
|
Percentage-Point
Change in Assumption
|
|
|
Impact
on Postretirement Benefit Obligation
|
|
|
Impact
on 2009 Postretirement Benefit Cost
|
|
Discount
rate
|
|
|
(0.5 |
) |
|
$ |
29.0 |
|
|
$ |
2.2 |
|
Discount
rate
|
|
|
0.5 |
|
|
|
(27.1 |
) |
|
|
(2.2 |
) |
Health care
cost trend rate
|
|
|
(1.0 |
) |
|
|
(48.4 |
) |
|
|
(6.8 |
) |
Health care
cost trend rate
|
|
|
1.0 |
|
|
|
58.1 |
|
|
|
8.3 |
|
Rate of
return on plan assets
|
|
|
(0.5 |
) |
|
|
N/A |
|
|
|
1.1 |
|
Rate of
return on plan assets
|
|
|
0.5 |
|
|
|
N/A |
|
|
|
(1.1 |
) |
Integrys Energy
Group uses an interest rate yield curve to enable it to make appropriate
judgments about discount rates. The yield curve is comprised of
non-callable (or callable with make-whole provisions), high-quality corporate
bonds with maturities between 0 and 30 years. The included bonds are
generally rated "Aa" with a minimum amount outstanding of
$50 million. The expected annual benefit cash flows are
discounted for each of Integrys Energy Group's pension and retiree welfare plans
using this yield curve, and a single-point discount rate is developed matching
each plan's expected payout structure.
Integrys Energy
Group establishes its expected return on asset assumption based on consideration
of historical and projected asset class returns, as well as the target
allocations of the benefit trust portfolios. The assumed long-term
rate of return was 8.5% in 2009, 2008, and 2007. For 2009, 2008, and
2007, the actual rates of return on pension plan assets, net of fees, were
22.0%, (25.9)%, and 6.2%, respectively.
The determination
of expected return on qualified plan assets is based on a market-related
valuation of assets, which reduces year-to-year
volatility. Cumulative gains and losses in excess of 10% of the
greater of the pension or other postretirement benefit obligation or
market-related value are amortized over the average remaining future service to
expected retirement ages. Changes in fair value are recognized over
the subsequent five years for plans sponsored by WPS, while differences between
actual investment returns and the expected return on plan assets are recognized
over a five-year period for pension plans sponsored by IBS and
PEC. Because of this method, the future value of assets will be
impacted as previously deferred gains or losses are included in market-related
value.
In
selecting assumed health care cost trend rates, past performance and forecasts
of health care costs are considered. For more information on health
care cost trend rates and a table showing future payments that Integrys Energy
Group expects to make for pension and other postretirement benefits, see Note
18, "Employee Benefit
Plans."
Regulatory
Accounting
The electric and
natural gas utility segments of Integrys Energy Group follow the guidance under
the Regulated Operations Topic of the FASB ASC, and the financial statements
reflect the effects of the different ratemaking principles followed by the
various jurisdictions regulating these segments. Certain items that
would otherwise be immediately recognized as revenues and expenses are deferred
as regulatory assets and regulatory liabilities for future recovery or refund to
customers, as authorized by
Integrys Energy
Group's regulators. Future recovery of regulatory assets is not
assured, and is generally subject to review by regulators in rate proceedings
for matters such as prudence and reasonableness. Management regularly
assesses whether these regulatory assets and liabilities are probable of future
recovery or refund by considering factors such as changes in the regulatory
environment, earnings at the utility segments, and the status of any pending or
potential deregulation legislation. Once approved, the regulatory
assets and liabilities are amortized into income over the rate recovery
period. If recovery or refund of costs is not approved or is no
longer deemed probable, these regulatory assets or liabilities are recognized in
current period income.
The application of
the Regulated Operations Topic of the FASB ASC would be discontinued if the
regulated electric and natural gas utility segments or a separable portion of
those segments would no longer meet the criteria for
application. Assets and liabilities recognized solely due to the
actions of rate regulation would no longer be recognized on the balance sheet,
but rather classified as an extraordinary item in income for the period in which
the discontinuation occurred. A write-off of all of Integrys Energy
Group's' regulatory assets and regulatory liabilities at December 31, 2009,
would result in a 13.1% decrease in total assets and a 4.2% decrease in total
liabilities. See Note 8, "Regulatory Assets and
Liabilities," for more information.
Environmental
Activities Relating to Former Manufactured Gas Operations
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. The utility subsidiaries
are accruing and deferring the costs incurred in connection with environmental
activities at the manufactured gas plant sites pending recovery through rates or
from other entities. The amounts deferred include costs incurred but
not yet recovered through rates and management's best estimates of the costs
that the utilities will incur in investigating and remediating the manufactured
gas sites. Management's estimates are based upon a probabilistic
model and an ongoing review by management of future investigative and remedial
costs.
Management
considers this policy critical due to the substantial uncertainty in the
estimation of future costs with respect to the amount and timing of costs, and
the extent of recovery from other potential responsible parties. See
Note 16, "Commitments and
Contingencies," for further discussion of environmental
matters.
Tax
Provision
Integrys Energy
Group is required to estimate income taxes for each of the jurisdictions in
which it operates as part of the process of preparing Integrys Energy Group's
consolidated financial statements. This process involves estimating
actual current tax liabilities together with assessing temporary differences
resulting from differing treatment of items, such as depreciation, for tax and
accounting purposes. These differences result in deferred tax assets
and liabilities, which are included within Integrys Energy Group's Consolidated
Balance Sheets. Integrys Energy Group must also assess the likelihood
that its deferred tax assets will be recovered through future taxable
income. To the extent Integrys Energy Group believes that recovery is
not likely, it must establish a valuation allowance, which is offset by an
adjustment to the provision for income taxes in the Consolidated Statements of
Income.
Uncertainty
associated with the application of tax statutes and regulations and the outcomes
of tax audits and appeals require that judgment and estimates be made in the
accrual process and in the calculation of effective tax
rates. Integrys Energy Group adopted the provisions of FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes – an
Interpretation of FAS 109" (now incorporated as part of the Income Taxes Topic
of the FASB ASC), which requires that only income tax benefits that meet the
"more likely than not" recognition threshold be recognized or continue to be
recognized. The change in the unrecognized tax benefits needs to be
reasonably estimated based on an evaluation of the nature of uncertainty, the
nature of event that could cause the change, and an estimate of the range of
reasonably possible changes. As allowed under Interpretation No. 48,
Integrys Energy Group also elected to change its method of accounting to record
interest and penalties paid on income tax obligations as a component of
provision for income taxes.
Significant
management judgment is required in determining Integrys Energy Group's provision
for income taxes, deferred tax assets and liabilities, and any valuation
allowance recorded against deferred tax assets. The assumptions
involved are supported by historical data, reasonable projections, and technical
interpretations of applicable tax laws and regulations across multiple taxing
jurisdictions. Significant changes in these assumptions could have a
material impact on Integrys Energy Group's financial condition and results of
operations. See Note 1(o), "Summary of Significant Accounting
Policies - Income Taxes," and Note 15,
"Income Taxes," for a
discussion of accounting for income taxes.
IMPACT
OF INFLATION
Integrys Energy
Group's financial statements are prepared in accordance with
GAAP. The statements provide a reasonable, objective, and
quantifiable statement of financial results, but generally do not evaluate the
impact of inflation. For Integrys Energy Group's regulated
operations, to the extent it is not recovering the effects of inflation, it will
file rate cases as necessary in the various jurisdictions in which it
operates. Integrys Energy Group's nonregulated businesses include
inflation in forecasted costs.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Market
Risks and Other Significant Risks
Integrys Energy
Group has potential market risk exposure related to commodity price risk
(including regulatory recovery risk), interest rate risk, and equity return and
principal preservation risk. Integrys Energy Group is also exposed to
other significant risks due to the nature of our subsidiaries' businesses and
the environment in which we operate. Integrys Energy Group has risk
management policies in place to monitor and assist in controlling these risks
and may use derivative and other instruments to manage some of these exposures,
as further described below.
Commodity
Price Risk and Regulatory Recovery Risk
Utilities
The electric
utilities of Integrys Energy Group purchase natural gas, fuel oil, and coal for
use in power generation. They also buy power from the MISO market at
a price that is often reflective of the underlying cost of natural gas used in
power generation. Prudent fuel and purchased power costs are
recovered from customers under one-for-one recovery mechanisms by UPPCO and by
the wholesale electric operations and Michigan retail electric operations of
WPS. The costs of natural gas used by the natural gas utility
subsidiaries are generally also recovered from customers under one-for-one
recovery mechanisms. These recovery mechanisms greatly reduce
commodity price risk for the utilities.
WPS's Wisconsin
retail electric operations do not have a one-for-one recovery mechanism for
price fluctuations. Instead, a "fuel window" mechanism has partially
mitigated the year-to-year price risk. See Note 1(e), "Summary of Significant Accounting
Policies – Revenue and Customer Receivables," for more
information.
To
manage commodity price risk, our regulated utilities enter into contracts of
various durations for the purchase and/or sale of natural gas, fuel for electric
generation, and electricity. In addition, the electric operations of
WPS and the natural gas operations of WPS, PGL, NSG, and MERC employ risk
management techniques, which include the use of derivative instruments such as
swaps, futures, and options.
Integrys Energy
Services
Integrys Energy
Services seeks to reduce market price risk from its generation and energy supply
portfolios through the use of various financial and physical
instruments.
To
measure commodity price risk exposure, Integrys Energy Group employs a number of
controls and processes, including a value-at-risk (VaR) analysis of its
exposures. Integrys Energy Services' VaR calculation is utilized to
quantify exposure to market risk associated with its marketing and trading
portfolio (primarily natural gas and power positions), which also includes
near-term positions managed under its asset management strategy through tolling
agreements with the merchant generating fleet. The VaR calculation
excludes the long-dated positions created by owning merchant generation and
associated coal, sulfur dioxide emission allowances, and other ancillary
fuels. Additionally, financial transmission rights, renewable energy
credits, and certain portions of long-dated natural gas storage and
transportation contracts are also excluded from the VaR
calculation. The capped downside nature of the risks and duration of
these positions would result in a VaR that would not be representative of the
actual exposure. Therefore, Integrys Energy Services evaluates the
exposures for these types of contracts by assessing the maximum potential loss
of the positions which would represent the cost of the physical asset or the
fixed demand charges for the contract.
VaR is used to
describe a probabilistic approach to quantifying the exposure to market
risk. The VaR amount represents an estimate of the potential change
in fair value that could occur from changes in market factors, within a given
confidence level, if an instrument or portfolio is held for a specified time
period. VaR models are relatively sophisticated. However,
the quantitative risk information is limited by the parameters established in
creating the model. The instruments being used may have features that
could trigger a potential loss in excess of the calculated amount if the changes
in the underlying commodity price exceed the confidence level of the model
used. VaR is not necessarily indicative of actual results that may
occur. In addition to VaR, Integrys Energy Services employs other
risk measurements including mark-to-market valuations, stress testing, and
scenario based testing. In conjunction with the VaR analysis, these
other risk measurements provide the risk management analysis for Integrys Energy
Services' risk exposure. Additionally, Integrys Energy Services also
uses volume limits and stop loss limits to limit its exposure to commodity price
movements.
VaR has a number of
limitations that are important to consider when evaluating the calculation
results. Most importantly, VaR does not represent the maximum
potential loss of the portfolio. Price movements outside of the
relevant confidence levels can and do occur and may result in losses exceeding
the reported VaR. Large short-term price moves can be caused by
catastrophic weather events or other drivers of short term supply and demand
disruptions. Also, the holding period may not always be an adequate
assessment of the timeframe to close out positions. Short-term
reductions in market liquidity could cause Integrys Energy Services to hold
positions open longer than anticipated, resulting in greater than predicted
losses. Additionally, there are other risks not captured by the VaR
metric including, but not limited to, the risk of customer and vendor
nonperformance and the risks associated with the liquidity in the markets in
which Integrys Energy Services transacts. Customer and vendor
nonperformance risk could result in bad debt losses, realized and unrealized
losses on commodity contracts, or increased supply costs in the event that
contractual obligations of our counterparties are not met. Market
liquidity risk refers to the risk that Integrys Energy Services will not be able
to efficiently enter or exit commodity positions.
Integrys Energy
Services' VaR is calculated using non-discounted positions with a delta-normal
approximation based on a one-day holding period and a 95% confidence level, as
well as a ten-day holding period and 99% confidence level. The
delta-normal approximation is based on the assumption that changes in the value
of the portfolio over short time periods, such as one day or ten days, are
normally distributed. Integrys Energy Services' VaR calculation
includes financial and physical commodity instruments, such as forwards,
futures, swaps, and options, as well as natural gas inventory, natural gas
storage, and transportation contracts, to the extent such positions are
significant, but excludes the positions mentioned above.
The VaR for
Integrys Energy Services' portfolio at a 95% confidence level and a one-day
holding period is presented in the following table:
(Millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
As of
December 31
|
|
$ |
0.6 |
|
|
$ |
1.3 |
|
Average for
12 months ended December 31
|
|
|
0.8 |
|
|
|
1.4 |
|
High for 12
months ended December 31
|
|
|
1.1 |
|
|
|
2.3 |
|
Low for 12
months ended December 31
|
|
|
0.6 |
|
|
|
0.9 |
|
The VaR for
Integrys Energy Services' portfolio at a 99% confidence level and a ten-day
holding period is presented below:
(Millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
As of
December 31
|
|
$ |
2.9 |
|
|
$ |
5.6 |
|
Average for
12 months ended December 31
|
|
|
3.8 |
|
|
|
6.2 |
|
High for 12
months ended December 31
|
|
|
4.7 |
|
|
|
10.2 |
|
Low for 12
months ended December 31
|
|
|
2.9 |
|
|
|
4.8 |
|
The average, high,
and low amounts were computed using the VaR amounts at each of the four quarter
ends.
The year-over-year
decrease in VaR was driven by a substantial reduction in trading activity, as a
result of Integrys Energy Services’ strategy change and ultimate decision to
exit its wholesale natural gas and electric businesses, and its Canadian energy
marketing business.
Interest
Rate Risk
Integrys Energy
Group is exposed to interest rate risk resulting from its variable rate
long-term debt and short-term borrowings. Exposure to interest rate
risk is managed by limiting the amount of variable rate obligations and
continually monitoring the effects of market changes on interest
rates. Integrys Energy Group enters into long-term fixed rate debt
when it is advantageous to do so. Integrys Energy Group may also
enter into derivative financial instruments, such as swaps, to mitigate interest
rate exposure.
Due to decreases in
short-term borrowings in the last year, Integrys Energy Group has decreased its
exposure to variable interest rates. Based on the variable rate debt
of Integrys Energy Group outstanding at December 31, 2009, a hypothetical
increase in market interest rates of 100 basis points would have increased
annual interest expense by $3.5 million. Comparatively, based on
the variable rate debt outstanding at December 31, 2008, an increase in
interest rates of 100 basis points would have increased interest expense by
approximately $11.7 million. This sensitivity analysis was performed
assuming a constant level of variable rate debt during the period and an
immediate increase in interest rates, with no other changes for the remainder of
the period.
Equity
Return and Principal Preservation Risk
Integrys Energy
Group currently funds liabilities related to employee benefits through various
external trust funds. The trust funds are managed by numerous
investment managers and hold investments in debt and equity
securities. Changes in the market value of these investments can
have an impact on the future expenses related to these
liabilities. Declines in the equity markets or declines in interest
rates may result in increased future costs for the plans and possible future
required contributions for the pension plans. Integrys Energy Group
monitors the trust fund portfolio by benchmarking the performance of the
investments against certain security indices. Most of the employee
benefit costs relate to Integrys Energy Group's regulated
utilities. As such, the majority of these costs are recovered in
customers' rates, mitigating the equity return and principal preservation risk
on these exposures. Effective May 1, 2008, and July 1, 2008, the
defined pension plans were closed to new union hires at PGL and NSG,
respectively. Effective April 19, 2009, and December 18, 2009, the
defined benefit pension plans were closed to new union hires at UPPCO and WPS,
respectively. Effective January 15, 2010, the defined pension plans
were closed to new Local 12295 union hires at MGU.
ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
A. MANAGEMENT
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of
Integrys Energy Group and its subsidiaries is responsible for establishing and
maintaining adequate internal control over financial
reporting. Integrys Energy Group's control systems were designed to
provide reasonable assurance to Integrys Energy Group's management and Board of
Directors regarding the preparation and fair presentation of published financial
statements.
All internal
control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.
Integrys Energy
Group's management assessed the effectiveness of its internal control over
financial reporting as of December 31, 2009. In making this
assessment, it used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control – Integrated
Framework. Based on this assessment, management believes that,
as of December 31, 2009, Integrys Energy Group's internal control over
financial reporting is effective based on those criteria.
Integrys Energy
Group, Inc.'s independent registered public accounting firm has issued an audit
report on the effectiveness of Integrys Energy Group's internal control over
financial reporting.
B. REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Shareholders of Integrys Energy Group,
Inc.:
We
have audited the internal control over financial reporting of Integrys Energy
Group, Inc. and subsidiaries (the "Company") as of December 31, 2009,
based on criteria established in Internal Control –Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying
Management Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company's internal control over
financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because of the
inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a timely
basis. Also, projections of any evaluation of the effectiveness of the
internal control over financial reporting to future periods are subject to the
risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
In
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009,
based on the criteria established in Internal Control –Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements and financial statement schedules as of and for the year ended
December 31, 2009 of the Company and our report dated February 25,
2010 expressed an unqualified opinion on those financial statements and
financial statement schedules.
/s/ Deloitte &
Touche LLP
Milwaukee,
Wisconsin
February 25,
2010
|
|
|
|
|
|
|
|
|
|
C. CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31
|
|
|
|
|
|
|
|
|
|
(Millions,
except per share data)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Nonregulated
revenues
|
|
$ |
4,004.0 |
|
|
$ |
9,737.9 |
|
|
$ |
6,987.0 |
|
Utility
revenues
|
|
|
3,495.8 |
|
|
|
4,309.9 |
|
|
|
3,305.4 |
|
Total
revenues
|
|
|
7,499.8 |
|
|
|
14,047.8 |
|
|
|
10,292.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonregulated
cost of fuel, natural gas, and purchased power
|
|
|
3,701.3 |
|
|
|
9,654.3 |
|
|
|
6,676.2 |
|
Utility cost
of fuel, natural gas, and purchased power
|
|
|
1,919.8 |
|
|
|
2,744.1 |
|
|
|
2,044.2 |
|
Operating and
maintenance expense
|
|
|
1,100.6 |
|
|
|
1,081.2 |
|
|
|
922.1 |
|
Goodwill
impairment loss
|
|
|
291.1 |
|
|
|
6.5 |
|
|
|
- |
|
Restructuring
expense
|
|
|
43.5 |
|
|
|
- |
|
|
|
- |
|
Loss on
Integrys Energy Services dispositions related to strategy
change
|
|
|
28.9 |
|
|
|
- |
|
|
|
- |
|
Depreciation
and amortization expense
|
|
|
230.9 |
|
|
|
221.4 |
|
|
|
195.1 |
|
Taxes other
than income taxes
|
|
|
96.3 |
|
|
|
93.6 |
|
|
|
87.4 |
|
Operating
income
|
|
|
87.4 |
|
|
|
246.7 |
|
|
|
367.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
|
89.0 |
|
|
|
87.3 |
|
|
|
64.1 |
|
Interest
expense
|
|
|
(164.8 |
) |
|
|
(158.1 |
) |
|
|
(164.5 |
) |
Other
expense
|
|
|
(75.8 |
) |
|
|
(70.8 |
) |
|
|
(100.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before
taxes
|
|
|
11.6 |
|
|
|
175.9 |
|
|
|
267.0 |
|
Provision for
income taxes
|
|
|
83.2 |
|
|
|
51.2 |
|
|
|
86.0 |
|
Net
income (loss) from continuing operations
|
|
|
(71.6 |
) |
|
|
124.7 |
|
|
|
181.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations, net of tax
|
|
|
2.8 |
|
|
|
4.7 |
|
|
|
73.3 |
|
Net
income (loss)
|
|
|
(68.8 |
) |
|
|
129.4 |
|
|
|
254.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends of subsidiary
|
|
|
(3.1 |
) |
|
|
(3.1 |
) |
|
|
(3.1 |
) |
Noncontrolling
interest in subsidiaries
|
|
|
1.0 |
|
|
|
0.1 |
|
|
|
0.1 |
|
Net
income (loss) attributed to common shareholders
|
|
$ |
(70.9 |
) |
|
$ |
126.4 |
|
|
$ |
251.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
76.8 |
|
|
|
76.7 |
|
|
|
71.6 |
|
Diluted
|
|
|
76.8 |
|
|
|
77.0 |
|
|
|
71.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share (basic)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations
|
|
$ |
(0.96 |
) |
|
$ |
1.59 |
|
|
$ |
2.49 |
|
Discontinued
operations, net of tax
|
|
|
0.04 |
|
|
|
0.06 |
|
|
|
1.02 |
|
Earnings
(loss) per common share (basic)
|
|
$ |
(0.92 |
) |
|
$ |
1.65 |
|
|
$ |
3.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share (diluted)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations
|
|
$ |
(0.96 |
) |
|
$ |
1.58 |
|
|
$ |
2.48 |
|
Discontinued
operations, net of tax
|
|
|
0.04 |
|
|
|
0.06 |
|
|
|
1.02 |
|
Earnings
(loss) per common share (diluted)
|
|
$ |
(0.92 |
) |
|
$ |
1.64 |
|
|
$ |
3.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per common share declared
|
|
$ |
2.72 |
|
|
$ |
2.68 |
|
|
$ |
2.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to Integrys Energy Group's consolidated financial
statements are an integral part of these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31
|
|
|
|
|
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
44.5 |
|
|
$ |
254.1 |
|
Collateral on
deposit
|
|
|
184.9 |
|
|
|
262.7 |
|
Accounts
receivable and accrued unbilled revenues, net of reserves of $57.5 and
$62.5, respectively
|
|
|
958.0 |
|
|
|
1,892.6 |
|
Inventories
|
|
|
304.3 |
|
|
|
732.8 |
|
Assets from
risk management activities
|
|
|
1,522.1 |
|
|
|
2,223.7 |
|
Regulatory
assets
|
|
|
121.1 |
|
|
|
244.0 |
|
Deferred
income taxes
|
|
|
92.9 |
|
|
|
- |
|
Assets held
for sale
|
|
|
26.5 |
|
|
|
26.3 |
|
Other current
assets
|
|
|
257.9 |
|
|
|
280.8 |
|
Current
assets
|
|
|
3,512.2 |
|
|
|
5,917.0 |
|
|
|
|
|
|
|
|
|
|
Property,
plant, and equipment, net of accumulated depreciation of $2,847.2 and
$2,701.0, respectively
|
|
|
4,945.1 |
|
|
|
4,748.5 |
|
Regulatory
assets
|
|
|
1,434.9 |
|
|
|
1,444.8 |
|
Assets from
risk management activities
|
|
|
795.4 |
|
|
|
758.7 |
|
Goodwill
|
|
|
642.5 |
|
|
|
933.9 |
|
Other
long-term assets
|
|
|
517.8 |
|
|
|
469.6 |
|
Total
assets
|
|
$ |
11,847.9 |
|
|
$ |
14,272.5 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Equity
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
$ |
222.1 |
|
|
$ |
1,209.0 |
|
Current
portion of long-term debt
|
|
|
116.5 |
|
|
|
150.9 |
|
Accounts
payable
|
|
|
639.4 |
|
|
|
1,534.3 |
|
Liabilities
from risk management activities
|
|
|
1,607.1 |
|
|
|
2,189.7 |
|
Regulatory
liabilities
|
|
|
100.4 |
|
|
|
58.8 |
|
Liabilities
held for sale
|
|
|
0.3 |
|
|
|
7.5 |
|
Deferred
income taxes
|
|
|
- |
|
|
|
71.6 |
|
Other current
liabilities
|
|
|
461.8 |
|
|
|
494.7 |
|
Current
liabilities
|
|
|
3,147.6 |
|
|
|
5,716.5 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
2,394.7 |
|
|
|
2,285.7 |
|
Deferred
income taxes
|
|
|
658.2 |
|
|
|
435.7 |
|
Deferred
investment tax credits
|
|
|
36.2 |
|
|
|
36.9 |
|
Regulatory
liabilities
|
|
|
277.6 |
|
|
|
275.5 |
|
Environmental
remediation liabilities
|
|
|
658.8 |
|
|
|
640.6 |
|
Pension and
other postretirement benefit obligations
|
|
|
640.7 |
|
|
|
636.5 |
|
Liabilities
from risk management activities
|
|
|
783.1 |
|
|
|
762.7 |
|
Asset
retirement obligations
|
|
|
194.8 |
|
|
|
178.9 |
|
Other
long-term liabilities
|
|
|
147.4 |
|
|
|
152.8 |
|
Long-term
liabilities
|
|
|
5,791.5 |
|
|
|
5,405.3 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock -
$1 par value; 200,000,000 shares authorized; 76,418,843 shares
issued;
|
|
|
|
|
|
75,980,143
shares outstanding
|
|
|
76.4 |
|
|
|
76.4 |
|
Additional
paid-in capital
|
|
|
2,497.8 |
|
|
|
2,487.9 |
|
Retained
earnings
|
|
|
345.6 |
|
|
|
624.6 |
|
Accumulated
other comprehensive loss
|
|
|
(44.0 |
) |
|
|
(72.8 |
) |
Treasury stock
and shares in deferred compensation trust
|
|
|
(17.2 |
) |
|
|
(16.5 |
) |
Total
common shareholders' equity
|
|
|
2,858.6 |
|
|
|
3,099.6 |
|
Preferred
stock of subsidiary - $100 par value; 1,000,000 shares
authorized;
511,882
shares issued; 510,495 shares outstanding
|
|
|
51.1 |
|
|
|
51.1 |
|
Noncontrolling
interest in subsidiaries
|
|
|
(0.9 |
) |
|
|
- |
|
Total
liabilities and equity
|
|
$ |
11,847.9 |
|
|
$ |
14,272.5 |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to Integrys Energy Group's consolidated financial
statements are an integral part of these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E. CONSOLIDATED
STATEMENTS OF EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrys
Energy Group Common Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Common
|
|
|
Preferred
|
|
|
|
|
|
|
|
|
|
Trust
and
|
|
|
Common
|
|
|
Paid
In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Shareholders'
|
|
|
Stock
of
|
|
|
Noncontrolling
|
|
|
Total
|
|
(Millions)
|
|
Treasury
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income
(Loss)
|
|
|
Equity
|
|
|
Subsidiary
|
|
|
Interest
|
|
|
Equity
|
|
Balance
at December 31, 2006
|
|
$ |
(13.5 |
) |
|
$ |
43.4 |
|
|
$ |
889.3 |
|
|
$ |
628.2 |
|
|
$ |
(13.8 |
) |
|
$ |
1,533.6 |
|
|
$ |
51.1 |
|
|
$ |
0.2 |
|
|
$ |
1,584.9 |
|
Net income
attributed to common shareholders
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
251.3 |
|
|
|
- |
|
|
|
251.3 |
|
|
|
- |
|
|
|
(0.1 |
) |
|
|
251.2 |
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow hedges (net of tax of $3.1)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4.9 |
|
|
|
4.9 |
|
|
|
- |
|
|
|
- |
|
|
|
4.9 |
|
Unrecognized pension and other postretirement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
costs (net of taxes of $3.0)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3.8 |
|
|
|
3.8 |
|
|
|
- |
|
|
|
- |
|
|
|
3.8 |
|
Available-for-sale securities (net of tax of $0.2)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.4 |
|
|
|
0.4 |
|
|
|
- |
|
|
|
- |
|
|
|
0.4 |
|
Foreign
currency translation (net of tax of $2.2)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3.6 |
|
|
|
3.6 |
|
|
|
- |
|
|
|
- |
|
|
|
3.6 |
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
264.0 |
|
|
|
|
|
|
|
|
|
|
|
263.9 |
|
Issuance of
common stock
|
|
|
- |
|
|
|
1.1 |
|
|
|
44.5 |
|
|
|
- |
|
|
|
- |
|
|
|
45.6 |
|
|
|
- |
|
|
|
- |
|
|
|
45.6 |
|
PEC
merger
|
|
|
- |
|
|
|
31.9 |
|
|
|
1,527.4 |
|
|
|
- |
|
|
|
- |
|
|
|
1,559.3 |
|
|
|
- |
|
|
|
- |
|
|
|
1,559.3 |
|
Stock based
compensation
|
|
|
- |
|
|
|
- |
|
|
|
8.7 |
|
|
|
- |
|
|
|
- |
|
|
|
8.7 |
|
|
|
- |
|
|
|
- |
|
|
|
8.7 |
|
Dividends on
common stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(177.0 |
) |
|
|
- |
|
|
|
(177.0 |
) |
|
|
- |
|
|
|
- |
|
|
|
(177.0 |
) |
Net
contributions from noncontrolling parties
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
|
|
0.1 |
|
Other
|
|
|
(1.5 |
) |
|
|
- |
|
|
|
3.9 |
|
|
|
(0.6 |
) |
|
|
(0.2 |
) |
|
|
1.6 |
|
|
|
- |
|
|
|
(0.2 |
) |
|
|
1.4 |
|
Balance
at December 31, 2007
|
|
$ |
(15.0 |
) |
|
$ |
76.4 |
|
|
$ |
2,473.8 |
|
|
$ |
701.9 |
|
|
$ |
(1.3 |
) |
|
$ |
3,235.8 |
|
|
$ |
51.1 |
|
|
$ |
- |
|
|
$ |
3,286.9 |
|
Net income
attributed to common shareholders
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
126.4 |
|
|
|
- |
|
|
|
126.4 |
|
|
|
- |
|
|
|
(0.1 |
) |
|
|
126.3 |
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow hedges (net of tax of $33.7)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(52.8 |
) |
|
|
(52.8 |
) |
|
|
- |
|
|
|
- |
|
|
|
(52.8 |
) |
Unrecognized pension and other postretirement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
costs (net of taxes of $8.1)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(12.7 |
) |
|
|
(12.7 |
) |
|
|
- |
|
|
|
- |
|
|
|
(12.7 |
) |
Available-for-sale securities (net of tax of $0.3)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(0.5 |
) |
|
|
(0.5 |
) |
|
|
- |
|
|
|
- |
|
|
|
(0.5 |
) |
Foreign
currency translation (net of tax of $3.4)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(5.5 |
) |
|
|
(5.5 |
) |
|
|
- |
|
|
|
- |
|
|
|
(5.5 |
) |
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54.9 |
|
|
|
|
|
|
|
|
|
|
|
54.8 |
|
Cumulative
effect of change in accounting principle
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4.5 |
|
|
|
- |
|
|
|
4.5 |
|
|
|
- |
|
|
|
- |
|
|
|
4.5 |
|
Effects of
changing pension plan measurement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
date pursuant to SFAS No. 158
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3.5 |
) |
|
|
- |
|
|
|
(3.5 |
) |
|
|
- |
|
|
|
- |
|
|
|
(3.5 |
) |
Purchase of
deferred compensation shares
|
|
|
(2.7 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2.7 |
) |
|
|
- |
|
|
|
- |
|
|
|
(2.7 |
) |
Stock based
compensation
|
|
|
0.1 |
|
|
|
- |
|
|
|
12.5 |
|
|
|
- |
|
|
|
- |
|
|
|
12.6 |
|
|
|
- |
|
|
|
- |
|
|
|
12.6 |
|
Dividends on
common stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(203.9 |
) |
|
|
- |
|
|
|
(203.9 |
) |
|
|
- |
|
|
|
- |
|
|
|
(203.9 |
) |
Net
contributions from noncontrolling parties
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
|
|
0.1 |
|
Other
|
|
|
1.1 |
|
|
|
- |
|
|
|
1.6 |
|
|
|
(0.8 |
) |
|
|
- |
|
|
|
1.9 |
|
|
|
- |
|
|
|
- |
|
|
|
1.9 |
|
Balance
at December 31, 2008
|
|
$ |
(16.5 |
) |
|
$ |
76.4 |
|
|
$ |
2,487.9 |
|
|
$ |
624.6 |
|
|
$ |
(72.8 |
) |
|
$ |
3,099.6 |
|
|
$ |
51.1 |
|
|
$ |
- |
|
|
$ |
3,150.7 |
|
Net loss
attributed to common shareholders
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(70.9 |
) |
|
|
- |
|
|
|
(70.9 |
) |
|
|
- |
|
|
|
(1.0 |
) |
|
|
(71.9 |
) |
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow hedges (net of tax of $17.0)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
31.5 |
|
|
|
31.5 |
|
|
|
- |
|
|
|
- |
|
|
|
31.5 |
|
Unrecognized pension and other postretirement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
costs (net of taxes of $3.2)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(6.7 |
) |
|
|
(6.7 |
) |
|
|
- |
|
|
|
- |
|
|
|
(6.7 |
) |
Available-for-sale securities (net of tax of $0.1)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
- |
|
|
|
- |
|
|
|
(0.1 |
) |
Foreign
currency translation (net of tax of $2.6)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4.1 |
|
|
|
4.1 |
|
|
|
- |
|
|
|
- |
|
|
|
4.1 |
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42.1 |
) |
|
|
|
|
|
|
|
|
|
|
(43.1 |
) |
Purchase of
deferred compensation shares
|
|
|
(3.1 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3.1 |
) |
|
|
- |
|
|
|
- |
|
|
|
(3.1 |
) |
Stock based
compensation
|
|
|
0.1 |
|
|
|
- |
|
|
|
11.3 |
|
|
|
- |
|
|
|
- |
|
|
|
11.4 |
|
|
|
- |
|
|
|
- |
|
|
|
11.4 |
|
Dividends on
common stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(206.9 |
) |
|
|
- |
|
|
|
(206.9 |
) |
|
|
- |
|
|
|
- |
|
|
|
(206.9 |
) |
Net
contributions from noncontrolling parties
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
|
|
0.1 |
|
Other
|
|
|
2.3 |
|
|
|
- |
|
|
|
(1.4 |
) |
|
|
(1.2 |
) |
|
|
- |
|
|
|
(0.3 |
) |
|
|
- |
|
|
|
- |
|
|
|
(0.3 |
) |
Balance
at December 31, 2009
|
|
$ |
(17.2 |
) |
|
$ |
76.4 |
|
|
$ |
2,497.8 |
|
|
$ |
345.6 |
|
|
$ |
(44.0 |
) |
|
$ |
2,858.6 |
|
|
$ |
51.1 |
|
|
$ |
(0.9 |
) |
|
$ |
2,908.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to Integrys Energy Group's consolidated financial
statements are an integral part of these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F. CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Operating
Activities
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$ |
(68.8 |
) |
|
$ |
129.4 |
|
|
$ |
254.3 |
|
Adjustments to
reconcile net income (loss) to net cash provided by (used for) operating
activities
|
|
|
|
|
|
|
|
|
|
Discontinued
operations, net of tax
|
|
|
(2.8 |
) |
|
|
(4.7 |
) |
|
|
(73.3 |
) |
Goodwill
impairment loss
|
|
|
291.1 |
|
|
|
6.5 |
|
|
|
- |
|
Depreciation
and amortization expense
|
|
|
230.9 |
|
|
|
221.4 |
|
|
|
195.1 |
|
Refund of
nonqualified decommissioning trust
|
|
|
(0.5 |
) |
|
|
(0.5 |
) |
|
|
(70.6 |
) |
Recoveries and
refunds of other regulatory assets and liabilities
|
|
|
41.3 |
|
|
|
51.2 |
|
|
|
32.6 |
|
Net unrealized
losses (gains) on nonregulated energy contracts
|
|
|
104.2 |
|
|
|
(15.8 |
) |
|
|
(59.5 |
) |
Nonregulated
lower of cost or market inventory adjustments
|
|
|
44.2 |
|
|
|
167.3 |
|
|
|
7.0 |
|
Bad debt
expense
|
|
|
54.6 |
|
|
|
76.8 |
|
|
|
39.1 |
|
Pension and
other postretirement expense
|
|
|
72.4 |
|
|
|
50.7 |
|
|
|
67.5 |
|
Pension and
other postretirement contributions
|
|
|
(53.3 |
) |
|
|
(40.8 |
) |
|
|
(35.3 |
) |
Deferred
income taxes and investment tax credit
|
|
|
57.8 |
|
|
|
62.4 |
|
|
|
66.8 |
|
(Gain) loss on
sale of assets
|
|
|
25.5 |
|
|
|
(1.2 |
) |
|
|
(1.6 |
) |
Equity income,
net of dividends
|
|
|
(16.1 |
) |
|
|
(15.1 |
) |
|
|
2.4 |
|
Other
|
|
|
38.5 |
|
|
|
9.9 |
|
|
|
(24.1 |
) |
Changes in
working capital
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral on
deposit
|
|
|
45.5 |
|
|
|
(239.2 |
) |
|
|
82.0 |
|
Accounts
receivable and accrued unbilled revenues
|
|
|
864.8 |
|
|
|
(207.7 |
) |
|
|
(30.7 |
) |
Inventories
|
|
|
444.1 |
|
|
|
(312.0 |
) |
|
|
(172.9 |
) |
Other current
assets
|
|
|
39.6 |
|
|
|
(124.6 |
) |
|
|
0.9 |
|
Accounts
payable
|
|
|
(604.7 |
) |
|
|
(53.2 |
) |
|
|
(96.5 |
) |
Other current
liabilities
|
|
|
(2.0 |
) |
|
|
(10.8 |
) |
|
|
55.3 |
|
Net
cash provided by (used for) operating activities
|
|
|
1,606.3 |
|
|
|
(250.0 |
) |
|
|
238.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(444.2 |
) |
|
|
(532.8 |
) |
|
|
(392.6 |
) |
Proceeds from
the sale or disposal of assets
|
|
|
44.6 |
|
|
|
31.1 |
|
|
|
15.6 |
|
Purchase of
equity investments
|
|
|
(34.1 |
) |
|
|
(37.8 |
) |
|
|
(66.5 |
) |
Cash paid for
transaction costs related to PEC merger
|
|
|
- |
|
|
|
- |
|
|
|
(14.4 |
) |
Restricted
cash for repayment of long-term debt
|
|
|
- |
|
|
|
- |
|
|
|
22.0 |
|
Cash paid for
transmission interconnection
|
|
|
- |
|
|
|
(17.4 |
) |
|
|
(23.9 |
) |
Proceeds
received from transmission interconnection
|
|
|
- |
|
|
|
99.7 |
|
|
|
- |
|
Other
|
|
|
(7.0 |
) |
|
|
5.0 |
|
|
|
8.3 |
|
Net
cash used for investing activities
|
|
|
(440.7 |
) |
|
|
(452.2 |
) |
|
|
(451.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt, net
|
|
|
(815.7 |
) |
|
|
569.7 |
|
|
|
(463.7 |
) |
Issuance of
notes payable
|
|
|
- |
|
|
|
155.7 |
|
|
|
- |
|
Redemption of
notes payable
|
|
|
(157.9 |
) |
|
|
- |
|
|
|
- |
|
Proceeds from
sale of borrowed natural gas
|
|
|
162.0 |
|
|
|
530.4 |
|
|
|
211.9 |
|
Purchase of
natural gas to repay natural gas loans
|
|
|
(445.2 |
) |
|
|
(257.2 |
) |
|
|
(177.5 |
) |
Issuance of
long-term debt
|
|
|
230.0 |
|
|
|
181.5 |
|
|
|
125.2 |
|
Repayment of
long-term debt
|
|
|
(157.8 |
) |
|
|
(58.1 |
) |
|
|
(26.5 |
) |
Payment of
dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
(3.1 |
) |
|
|
(3.1 |
) |
|
|
(3.1 |
) |
Common
stock
|
|
|
(206.9 |
) |
|
|
(203.9 |
) |
|
|
(177.0 |
) |
Issuance of
common stock
|
|
|
- |
|
|
|
- |
|
|
|
45.6 |
|
Proceeds from
derivative contracts related to divestitures classified as financing
activities
|
|
|
33.9 |
|
|
|
- |
|
|
|
- |
|
Other
|
|
|
(17.7 |
) |
|
|
(3.7 |
) |
|
|
5.9 |
|
Net
cash (used for) provided by financing activities
|
|
|
(1,378.4 |
) |
|
|
911.3 |
|
|
|
(459.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in cash and cash equivalents - continuing operations
|
|
|
(212.8 |
) |
|
|
209.1 |
|
|
|
(672.2 |
) |
Change in cash
and cash equivalents - discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used
for operating activities
|
|
|
- |
|
|
|
- |
|
|
|
(109.3 |
) |
Net cash
provided by investing activities
|
|
|
3.2 |
|
|
|
3.8 |
|
|
|
799.5 |
|
Change
in cash and cash equivalents
|
|
|
(209.6 |
) |
|
|
212.9 |
|
|
|
18.0 |
|
Cash and cash
equivalents at beginning of year
|
|
|
254.1 |
|
|
|
41.2 |
|
|
|
23.2 |
|
Cash
and cash equivalents at end of year
|
|
$ |
44.5 |
|
|
$ |
254.1 |
|
|
$ |
41.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to Integrys Energy Group's consolidated financial
statements are an integral part of these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Operations--Integrys
Energy Group is a holding company whose primary wholly owned subsidiaries at
December 31, 2009 included WPS, UPPCO, MGU, MERC, PGL, NSG, IBS, and
Integrys Energy Services. Of these subsidiaries, six are regulated
electric and/or natural gas utilities, one, IBS, is a wholly owned centralized
service company, and one, Integrys Energy Services, is a nonregulated energy
supply and services company. In addition, WPS Investments, LLC holds
an approximate 34% interest in ATC.
The term "utility"
refers to the regulated activities of the electric and natural gas utility
segments, while the term "nonutility" refers to the activities of the electric
and natural gas utility segments that are not regulated. The term
"nonregulated" refers to activities at Integrys Energy Services, the Integrys
Energy Group holding company, and the PEC holding company.
(b) Consolidated Basis of
Presentation--The consolidated financial statements include the accounts
of Integrys Energy Group and all majority owned subsidiaries, after eliminating
intercompany transactions and balances. If a noncontrolling owner's
equity is reduced to zero, Integrys Energy Group's policy is to record 100% of
the subsidiary's losses until the noncontrolling owner makes capital
contributions or commits to fund its share of the operating
costs. The cost method of accounting is used for investments when
Integrys Energy Group does not have significant influence over the operating and
financial policies of the investee. Investments in businesses not
controlled by Integrys Energy Group, but over which it has significant influence
regarding the operating and financial policies of the investee, are accounted
for using the equity method. For additional information on equity
method investments, see Note 9, "Investments in Affiliates, at Equity
Method." These consolidated financial statements also reflect
Integrys Energy Group’s proportionate interests in certain jointly owned utility
facilities.
(c) Use of Estimates--Integrys
Energy Group prepares its consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America. Integrys Energy Group makes estimates and assumptions that
affect assets, liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results may differ
from these estimates.
(d) Cash and Cash
Equivalents--Short-term investments with an original maturity of
three months or less are reported as cash equivalents.
The following is
supplemental disclosure to the Integrys Energy Group Consolidated Statements of
Cash Flows:
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Cash paid for
interest
|
|
$ |
164.8 |
|
|
$ |
156.8 |
|
|
$ |
144.5 |
|
Cash paid for
income taxes
|
|
|
19.1 |
|
|
|
100.9 |
|
|
|
198.1 |
|
Significant
non-cash transactions were:
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Construction
costs funded through accounts payable
|
|
$ |
30.4 |
|
|
$ |
34.2 |
|
|
$ |
26.1 |
|
Intangible
assets (customer contracts) received in exchange
for
risk management assets
|
|
|
17.0 |
|
|
|
- |
|
|
|
- |
|
Equity issued
for net assets acquired in PEC merger
|
|
|
- |
|
|
|
- |
|
|
|
1,559.3 |
|
Realized gain
on settlement of contracts due to PEC merger
|
|
|
- |
|
|
|
- |
|
|
|
4.0 |
|
PEP
post-closing adjustments funded through other current
liabilities
|
|
|
- |
|
|
|
- |
|
|
|
9.9 |
|
(e) Revenue and Customer
Receivables--Revenues are recognized on the accrual basis and include
estimated amounts for electric and natural gas services provided but not
billed. At December 31, 2009, and 2008, Integrys Energy Group's
unbilled revenues were $337.0 million and $525.5 million,
respectively. At December 31, 2009, there were no customers or
industries that accounted for more than 10% of Integrys Energy Group's
revenues.
Prudent fuel and
purchased power costs are recovered from customers under one-for-one recovery
mechanisms by UPPCO and by the wholesale electric operations and Michigan retail
electric operations of WPS, which provide for subsequent adjustments to rates
for changes in commodity costs. There is a portion of WPS's wholesale
electric business that limits cost recovery to no greater than the 2-year
average rate charged to large industrial retail customers for that same
period. The costs of natural gas prudently incurred by the natural
gas utility subsidiaries are also recovered from customers under one-for-one
recovery mechanisms.
WPS's Wisconsin
retail electric operations do not have a one-for-one recovery
mechanism. Instead, a "fuel window" mechanism is used to recover fuel
and purchased power costs. Under the fuel window, if actual fuel and
purchased power costs deviate by more than 2% from costs included in the rates
charged to customers, a rate review can be triggered. Once a rate
review is triggered, rates may be reset (subject to PSCW approval) for the
remainder of the year to recover or refund, on an annualized basis, the
projected increase or decrease in the cost of fuel and purchased
power.
All of Integrys
Energy Group's utility subsidiaries are required to provide service and grant
credit (with applicable deposit requirements) to customers within their service
territories. The companies continually review their customers'
credit-worthiness and obtain or refund deposits accordingly. The
utilities are generally precluded from discontinuing service to residential
customers during winter moratorium months.
PGL credits
proceeds from its interstate services against natural gas costs, resulting in a
reduction to utility customers' natural gas charges.
WPS and UPPCO both
sell and purchase power in the MISO market. If WPS or UPPCO is a net
seller in a particular hour, the net amount is reported as
revenue. If WPS or UPPCO is a net purchaser in a particular hour, the
net amount is recorded as utility cost of fuel, natural gas, and purchased power
on the Consolidated Statements of Income.
Integrys Energy
Group presents revenues net of pass-through taxes on the Consolidated Statements
of Income.
(f) Inventories--Inventories
consist of natural gas in storage, liquid propane, and fossil fuels, including
coal. Average cost is used to value fossil fuels, liquid propane, and
natural gas in storage for the regulated utilities, excluding PGL and
NSG. PGL and NSG price natural gas storage injections at the calendar
year average of the costs of natural gas supply
purchased. Withdrawals from storage are priced on the LIFO cost
method. Inventories stated on a LIFO basis represented approximately
34% of total inventories at December 31, 2009, and 16% of total inventories
at December 31, 2008. The estimated replacement cost of natural
gas in inventory at December 31, 2009, and December 31, 2008, exceeded
the LIFO cost by
approximately $220.5 million and $212.2 million,
respectively. In calculating these replacement amounts, PGL and NSG
used a Chicago city-gate natural gas price per dekatherm of $6.14 at
December 31, 2009, and $5.80 at December 31, 2008.
Inventories at
Integrys Energy Services are valued at the lower of cost or market unless hedged
pursuant to a fair value hedge, in which case changes in the fair value of
inventory subsequent to the hedge designation are recorded directly to
inventory. Integrys Energy Services recorded net write-downs of
$44.2 million, $167.3 million, and $7.0 million in 2009, 2008,
and 2007, respectively.
(g) Risk Management Activities--As
part of its regular operations, Integrys Energy Group enters into contracts,
including options, swaps, futures, forwards, and other contractual commitments,
to manage market risks such as changes in commodity prices and interest rates,
which are described more fully in Note 2, "Risk Management
Activities." Derivative instruments at the utilities are
entered into in accordance with the terms of the risk management plans approved
by their respective Boards of Directors and, if applicable, by their respective
regulators.
All derivatives are
recognized on the balance sheet at their fair value unless they qualify for the
normal purchases and sales exception. 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. 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.
Integrys Energy
Group classifies unrealized gains and losses on derivative instruments that do
not qualify for hedge accounting or regulatory deferral as a component of
margins or operating and maintenance expense, depending on the nature of the
transactions. Unrealized gains and losses on fair value hedges are
recognized currently in revenue, as are the changes in fair value of the hedged
items. To the extent they are effective, the changes in the values of
contracts designated as cash flow hedges are included in other comprehensive
income, net of taxes. Fair value hedge ineffectiveness and cash flow
hedge ineffectiveness are recorded in revenue or operating and maintenance
expense on the Consolidated Statements of Income, based on the nature of the
transactions. Cash flows from derivative activities are presented in
the same category as the item being hedged within operating activities on the
Consolidated Statements of Cash Flows unless the derivative contracts contain an
other-than-insignificant financing element, in which case the cash flows are
classified within financing activities.
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. On the
Consolidated Balance Sheets, cash collateral provided to others is shown
separately as collateral on deposit, and cash collateral received from others is
reflected in other current liabilities.
(h) Emission Allowances--Integrys
Energy Services accounts for emission allowances as intangible assets, with cash
inflows and outflows related to purchases and sales of emission allowances
recorded as investing activities in the Consolidated Statements of Cash
Flows. Integrys Energy Services uses the guidance under the Property,
Plant, and Equipment Topic of the FASB ASC to test allowances for
impairment. The utilities account for emission allowances as
inventory at average cost by vintage year. Charges to income result
when allowances are utilized in operating the utilities' generation
plants. Gains on sales of allowances at the utilities are returned to
ratepayers.
(i) Property, Plant, and
Equipment--Utility plant is stated at original cost, including any
associated AFUDC and asset retirement costs. The costs of renewals
and betterments of units of property (as distinguished from minor items of
property) are capitalized as additions to the utility plant
accounts. Except for land, no gain or loss is recognized in
connection with ordinary retirements of utility property
units. Maintenance,
repair, replacement, and renewal costs associated with items not qualifying as
units of property are considered operating expenses. PGL and NSG
charge the cost of units of property retired, sold, or otherwise disposed of to
the accumulated provision for depreciation and record the cost of removal, less
salvage value, associated with the retirement to depreciation
expense. The other utilities charge the cost of units of property
retired, sold, or otherwise disposed of, less salvage value, to the accumulated
provision for depreciation and record a regulatory liability for removal costs
included in rates, with actual removal costs charged against the liability as
incurred. Consistent with the ICC rate order issued January 22, 2010,
PGL and NSG changed their method for recognizing net dismantling costs from as
incurred to allocating the cost over the life of the asset.
Integrys Energy
Group records straight-line depreciation expense over the estimated useful life
of utility property, using depreciation rates as approved by the applicable
regulators. Annual utility composite depreciation rates are shown
below.
Annual
Utility Composite Depreciation Rates
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
WPS –
Electric
|
|
|
3.04 |
% |
|
|
3.09 |
% |
|
|
3.35 |
% |
WPS – Natural
gas
|
|
|
3.30 |
% |
|
|
3.39 |
% |
|
|
3.52 |
% |
UPPCO
|
|
|
3.05 |
% |
|
|
2.98 |
% |
|
|
3.01 |
% |
MGU
|
|
|
2.66 |
% |
|
|
2.67 |
% |
|
|
2.67 |
% |
MERC
|
|
|
3.10 |
% |
|
|
3.32 |
% |
|
|
3.42 |
% |
PGL
|
|
|
2.29 |
% |
|
|
2.55 |
% |
|
|
2.86 |
%
* |
NSG
|
|
|
1.66 |
% |
|
|
1.80 |
% |
|
|
1.85 |
%
* |
* Composite
depreciation rate
from the February 22, 2007 PEC merger date through the end of 2007.
Interest
capitalization is applied to nonutility property during construction, and a gain
or loss is recognized for retirements. At December 31, 2009, and
2008, nonutility property at the regulated utilities consisted primarily of
land.
Nonregulated plant
is stated at cost, which includes capitalized interest. The costs of
renewals, betterments, and major overhauls are capitalized as additions to
plant. The gains or losses associated with ordinary retirements are
recorded in the period of retirement. Maintenance, repair, and minor
replacement costs are expensed as incurred.
Depreciation is
computed for the majority of the nonregulated subsidiaries' assets using the
straight-line method over the assets' useful lives.
Integrys Energy
Group capitalizes certain costs related to software developed or obtained for
internal use and amortizes those costs to operating expense over the estimated
useful life of the related software, which ranges from 3 to 15
years. If software is retired prior to being fully amortized, the
difference is recorded as a loss on the Consolidated Statements of
Income.
See Note 6, "Property, Plant, and
Equipment," for details regarding Integrys Energy Group's property,
plant, and equipment balances.
(j) Capitalized Interest and
AFUDC--The nonregulated subsidiaries capitalize interest for construction
projects, while the utilities capitalize the cost of funds used for construction
using a calculation that includes both internal equity and external debt
components. The internal equity component of capitalized AFUDC is
accounted for as other income, and the external debt component is accounted for
as a decrease to interest expense.
Approximately 50%
of WPS's retail jurisdictional construction work in progress expenditures are
subject to the AFUDC calculation. For 2009, WPS's average AFUDC
retail rate was 8.61%, and its average AFUDC wholesale rate was
7.78%. WPS's allowance for equity funds used during construction for
2009, 2008, and 2007 was $5.1 million, $5.2 million, and
$0.9 million, respectively. WPS's allowance for borrowed
funds used during
construction for 2009, 2008, and 2007 was $2.0 million, $1.8 million,
and $0.3 million, respectively.
The AFUDC
calculation for IBS and the other utilities is determined by the respective
state commissions, each with specific requirements. Based on these
requirements, IBS and the other utilities did not record significant AFUDC for
2009, 2008, or 2007.
Interest
capitalized at the nonregulated subsidiaries was not significant during 2009,
2008, and 2007.
(k) Regulatory Assets and
Liabilities--Regulatory assets represent
probable future revenue associated with certain costs or liabilities that have
been deferred and are expected to be recovered from customers through the
ratemaking process. Regulatory liabilities represent amounts that are
expected to be refunded to customers in future rates or amounts collected in
rates for future costs. If at any reporting date a previously
recorded regulatory asset is no longer probable of recovery, the regulatory
asset is reduced to the amount considered probable of recovery with the
reduction charged to expense in the year the determination is
made. See Note 8, "Regulatory Assets and
Liabilities," for more information.
(l) Asset Impairment--Goodwill and other intangible
assets with indefinite lives are not amortized, but are subject to an annual
impairment test. Other long-lived assets require an impairment review
when events or circumstances indicate that the carrying amount may not be
recoverable. Integrys Energy Group bases its evaluation of other
long-lived assets on the presence of impairment indicators such as the future
economic benefit of the assets, any historical or future profitability
measurements, and other external market conditions or factors.
Integrys Energy
Group's reporting units containing goodwill perform annual goodwill impairment
tests during the second quarter of each year, and interim impairment tests are
performed when impairment indicators are present. The carrying amount
of the reporting unit's goodwill is considered not recoverable if the carrying
amount of the reporting unit as a whole exceeds the reporting unit's fair
value. An impairment charge is recorded for any excess of the
carrying value of the goodwill over the implied fair value. For more
information on Integrys Energy Group's goodwill and other intangible assets, see
Note 10, "Goodwill and
Other Intangible Assets."
The carrying amount
of assets held and used is considered not recoverable if it exceeds the
undiscounted sum of cash flows expected to result from the use and eventual
disposition of the asset. If the carrying value is not recoverable,
the impairment loss is measured as the excess of the asset's carrying value over
its fair value.
The carrying value
of assets held for sale is not recoverable if it exceeds the fair value less
cost to sell the asset. An impairment charge is recorded for any
excess of the carrying value over the fair value less estimated cost to
sell.
The carrying values
of cost and equity method investments are assessed for impairment by comparing
the fair values of these investments to their carrying values, if a fair value
assessment was completed, or by reviewing for the presence of impairment
indicators. If an impairment exists and it is determined to be
other-than-temporary, a charge is recognized equal to the amount the carrying
value exceeds the investment's fair value.
(m) Retirement of Debt--Any call
premiums or unamortized expenses associated with refinancing utility debt
obligations are amortized consistent with regulatory treatment of those
items. Any gains or losses resulting from the retirement of
nonutility debt are recorded through earnings, while gains or losses resulting
from the retirement of utility debt that is not refinanced are either amortized
over the remaining life of the original debt or recorded through
earnings.
(n) Asset Retirement
Obligations--Integrys Energy Group recognizes legal obligations at fair
value associated with the retirement of tangible long-lived assets that result
from the acquisition, construction or development, and/or normal operation of
the assets. A liability is recorded for these obligations as long as
the fair value can
be reasonably estimated, even if the timing or method of settling the obligation
is unknown. The asset retirement obligations are accreted using a
credit-adjusted risk-free interest rate commensurate with the expected
settlement dates of the asset retirement obligations; this rate is determined at
the date the obligation is incurred. The associated retirement costs
are capitalized as part of the related long-lived assets and are
depreciated over the useful lives of the assets. See Note 14, "Asset Retirement
Obligations," for more information.
(o) Income Taxes--Deferred income
taxes have been recorded to recognize the expected future tax consequences of
events that have been included in the financial statements by using currently
enacted tax rates for the differences between the tax basis of assets and
liabilities and the basis reported in the financial
statements. Integrys Energy Group records valuation allowances for
deferred tax assets when it is uncertain if the benefit will be realized in the
future. Integrys Energy Group's regulated utilities defer certain
adjustments made to income taxes that will impact future rates and record
regulatory assets or liabilities related to these adjustments.
Investment tax
credits that reduce income taxes payable for the current year are recognized as
a reduction of the provision for income taxes if the credits are generated in
Integrys Energy Group's nonregulated operations unless it is likely that the
related property that generated the tax credits will be sold after the end of
the year with the tax credits transferred to the seller as permitted under tax
law. For investment tax credits generated within regulated operations,
regulators reduce Integrys Energy Group's future rates over the lives of the
property to which the tax credits relate. Accordingly, Integrys
Energy Group defers the investment tax credits in the year the taxes payable are
reduced and reduces the provision for income taxes over the useful lives of the
related property. Production tax credits generally reduce the
provision for income taxes in the year that electricity from the qualifying
facility is generated and sold. Investment tax credits and production
tax credits that do not reduce income taxes payable for the current year are
eligible for carryover and recognized as a deferred tax asset. A
valuation allowance is established unless it is more likely than not that the
credits will be realized during the carryforward period.
Integrys Energy
Group files a consolidated United States income tax return that includes
domestic subsidiaries of which its ownership is 80% or more. Integrys
Energy Group and its consolidated subsidiaries are parties to a tax allocation
arrangement under which each entity determines its provision for income taxes on
a stand-alone basis. In several states, combined or consolidated
filing is required for certain members of Integrys Energy Group doing business
in that state. The tax allocation arrangement equitably allocates the
state taxes associated with these combined or consolidated filings.
Integrys Energy
Group reports interest and penalties accrued related to income taxes as a
component of provision for income taxes in the Consolidated Statements of
Income, as well as regulatory assets or regulatory liabilities in the
Consolidated Balance Sheets.
For more
information regarding Integrys Energy Group's accounting for income taxes, see
Note 15, "Income
Taxes."
(p) Guarantees--Integrys Energy
Group follows the guidance of the Guarantees Topic of the FASB ASC, which
requires that the guarantor recognize, at the inception of the guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. For additional information on guarantees, see
Note 17, "Guarantees."
(q) Employee Benefits--The costs
of pension and other postretirement benefits are expensed over the periods
during which employees render service. The transition obligation
related to other postretirement plans that existed at Integrys Energy Group
prior to the PEC merger is being recognized over a 20-year period beginning in
1993. In computing the expected return on plan assets, Integrys
Energy Group uses a market-related value of plan assets. Changes in
fair value are recognized over the subsequent five years for plans sponsored by
WPS, while differences between actual investment returns and the expected return
on plan assets are recognized over a five-year period for pension plans
sponsored by IBS and PEC. The benefit costs associated with employee
benefit plans are allocated among Integrys Energy Group's subsidiaries based on
employees' time reporting and actuarial
calculations, as
applicable. Integrys Energy Group's regulators allow recovery in
rates for the regulated utilities' net periodic benefit cost calculated under
GAAP.
Integrys Energy
Group recognizes the funded status of defined benefit postretirement plans on
the balance sheet, and recognizes changes in the plans' funded status in the
year in which the changes occur. Integrys Energy Group's nonregulated
segments record changes in the funded status in other comprehensive income, and
the regulated utilities record these changes to regulatory asset or liability
accounts.
Integrys Energy
Group uses a December 31 measurement date for all of its pension and other
postretirement benefit plans.
For additional
information on Integrys Energy Group's employee benefits, see Note 18, "Employee Benefit
Plans."
(r) Fair Value--Effective
January 1, 2008, Integrys Energy Group adopted SFAS No. 157,
"Fair Value Measurements" (now incorporated as part of the Fair Value
Measurements and Disclosures Topic of the FASB ASC). This standard
defined fair value and required enhanced disclosures about assets and
liabilities carried at fair value. These disclosures can be found in
Note 22, "Fair
Value."
A
fair value measurement is required to reflect the assumptions market
participants would use in pricing an asset or liability based on the best
available information. These assumptions include the risks inherent
in a particular valuation technique (such as a pricing model) and the risks
inherent in the inputs to the model. Also, transaction costs should
not be considered in the determination of fair value. On
January 1, 2008, Integrys Energy Group recognized an increase in
nonregulated revenues of $11.0 million due to the exclusion of transaction
costs from Integrys Energy Services' fair value estimates.
SFAS No. 157
nullified a portion of Emerging Issues Task Force Issue No. 02-3,
"Issues Involved in Accounting for Derivative Contracts Held for Trading
Purposes and Contracts Involved in Energy Trading and Risk Management
Activities." Under Issue No. 02-3, inception gains or losses
were deferred unless the fair value of the derivative was substantially based on
quoted prices or other current market transactions. However,
SFAS No. 157 provided a framework to consider, in evaluating a
transaction, whether a transaction represents fair value at initial
recognition. Integrys Energy Services recognized a pre-tax cumulative
effect increase to retained earnings of $4.5 million on January 1,
2008, related to the nullification of the aforementioned portion of Issue
No. 02-3.
Fair value is the
price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date (exit
price). Integrys Energy Group utilizes a mid-market pricing
convention (the mid-point price between bid and ask prices) as a practical
expedient for valuing certain derivative assets and liabilities.
SFAS No. 157
established a fair value hierarchy that prioritizes the inputs used to measure
fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1
measurement) and the lowest priority to unobservable inputs (Level 3
measurement). The three levels of the fair value hierarchy are
defined as follows:
Level 1 – Quoted
prices are available in active markets for identical assets or liabilities as of
the reporting date. Active markets are those in which transactions for the
asset or liability occur in sufficient frequency and volume to provide pricing
information on an ongoing basis.
Level 2 – Pricing
inputs are observable, either directly or indirectly, but are not quoted prices
included within Level 1. Level 2 includes those financial instruments
that are valued using external inputs within models or other valuation
methodologies.
Level 3 – Pricing
inputs include significant inputs that are generally less observable from
objective sources. These inputs may be used with internally developed
methodologies that result in management's
best estimate of
fair value. Level 3 instruments include those that may be more
structured or otherwise tailored to customers' needs.
Financial assets
and liabilities are classified in their entirety based on the lowest level of
input that is significant to the fair value measurement.
(s) Subsequent Events--Subsequent
events at Integrys Energy Group were evaluated for potential recognition or
disclosure through February 25, 2010, which is the date the consolidated
financial statements were issued.
(t) New Accounting
Pronouncements--SFAS No. 167, "Amendments to
FASB Interpretation No. 46(R)" (now
incorporated as part of the Consolidation Topic of the FASB ASC), 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 was 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 first quarter 2010 consolidated financial
statements.
NOTE 2--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 *
|
|
December 31
2009
|
|
|
December 31
2008
|
|
|
December 31
2009
|
|
|
December 31
2008
|
|
Utility
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-hedge
derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Current
|
|
$ |
10.8 |
|
|
$ |
28.6 |
|
|
$ |
24.7 |
|
|
$ |
161.6 |
|
Commodity contracts
|
Long-term
|
|
|
2.0 |
|
|
|
- |
|
|
|
1.5 |
|
|
|
9.0 |
|
Cash flow
hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Current
|
|
|
- |
|
|
|
- |
|
|
|
0.2 |
|
|
|
1.5 |
|
Commodity contracts
|
Long-term
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonregulated
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-hedge
derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Current
|
|
|
1,503.9 |
|
|
|
2,080.9 |
|
|
|
1,548.4 |
|
|
|
1,944.2 |
|
Commodity contracts
|
Long-term
|
|
|
787.2 |
|
|
|
750.0 |
|
|
|
769.5 |
|
|
|
729.7 |
|
Interest rate swaps
|
Current
|
|
|
- |
|
|
|
- |
|
|
|
1.0 |
|
|
|
1.0 |
|
Interest rate swaps
|
Long-term
|
|
|
- |
|
|
|
- |
|
|
|
2.5 |
|
|
|
3.3 |
|
Foreign exchange
contracts
|
Current
|
|
|
1.0 |
|
|
|
2.8 |
|
|
|
0.9 |
|
|
|
0.5 |
|
Foreign exchange
contracts
|
Long-term
|
|
|
0.9 |
|
|
|
2.5 |
|
|
|
0.9 |
|
|
|
2.3 |
|
Fair value
hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Current
|
|
|
- |
|
|
|
14.2 |
|
|
|
- |
|
|
|
- |
|
Interest rate swaps
|
Current
|
|
|
1.8 |
|
|
|
1.1 |
|
|
|
- |
|
|
|
- |
|
Interest rate swaps
|
Long-term
|
|
|
0.8 |
|
|
|
2.1 |
|
|
|
- |
|
|
|
- |
|
Cash flow
hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Current
|
|
|
4.6 |
|
|
|
81.3 |
|
|
|
30.1 |
|
|
|
79.4 |
|
Commodity contracts
|
Long-term
|
|
|
4.5 |
|
|
|
4.1 |
|
|
|
8.6 |
|
|
|
14.8 |
|
Interest rate swaps
|
Current
|
|
|
- |
|
|
|
- |
|
|
|
1.8 |
|
|
|
1.5 |
|
Interest rate swaps
|
Long-term
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3.6 |
|
Foreign exchange
contracts
|
Current
|
|
|
- |
|
|
|
14.8 |
|
|
|
- |
|
|
|
- |
|
Total
|
|
|
$ |
2,317.5 |
|
|
$ |
2,982.4 |
|
|
$ |
2,390.2 |
|
|
$ |
2,952.4 |
|
|
*
|
Assets and
liabilities from risk management activities are classified as current or
long-term based upon the maturities of the underlying
contracts.
|
At
December 31, 2008, $0.6 million of current non-hedge commodity
derivative contracts were classified as liabilities held for sale in the
nonregulated Integrys Energy Services segment. For more information
see Note 4, "Dispositions."
The following table
shows Integrys Energy Group's cash collateral positions:
(Millions)
|
|
December 31,
2009
|
|
|
December 31,
2008
|
|
Cash
collateral provided to others
|
|
$ |
184.9 |
|
|
$ |
262.7 |
|
Cash
collateral received from others
|
|
|
55.2 |
|
|
|
18.9 |
|
Certain of Integrys
Energy Group's derivative and nonderivative commodity instruments contain
provisions that could require "adequate assurance" in the event of a material
adverse change in Integrys Energy Group's creditworthiness, or 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 specific credit-risk related contingent features
that were in a liability position at December 31, 2009, was
$579.6 million. As of December 31, 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
December 31, 2009, Integrys Energy Group would have been required to post
collateral of $566.3 million. Of this amount, Integrys Energy
Group had already satisfied $51.9 million with letters of
credit. Therefore, the remaining collateral requirement
would have been $514.4 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.
The table below
shows the unrealized gains (losses) recorded related to non-hedge derivatives at
the utilities.
(Millions)
|
Financial
Statement Presentation
|
|
2009
|
|
Commodity
contracts
|
Balance Sheet
– Regulatory assets (current)
|
|
$ |
122.5 |
|
Commodity
contracts
|
Balance Sheet
– Regulatory assets (long-term)
|
|
|
7.3 |
|
Commodity
contracts
|
Balance Sheet
– Regulatory liabilities (current)
|
|
|
(1.0 |
) |
Commodity
contracts
|
Balance Sheet
– Regulatory liabilities (long-term)
|
|
|
- |
|
Commodity
contracts
|
Income
Statement – Utility cost of fuel, natural gas, and purchased
power
|
|
|
0.1 |
|
At
December 31, 2009, the utilities had the following notional volumes of
outstanding non-hedge derivative contracts:
|
|
Purchases
|
|
|
Other
Transactions
|
|
Natural gas
(millions of therms)
|
|
|
833.2 |
|
|
|
N/A |
|
FTRs (millions
of kilowatt-hours)
|
|
|
N/A |
|
|
|
4,546.6 |
|
Petroleum
products (barrels)
|
|
|
42,823 |
|
|
|
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 December 31, 2009, PGL had
the following notional volumes of outstanding contracts that were designated as
cash flow hedges:
|
|
Purchases
|
|
Natural
gas (millions of therms)
|
|
|
9.6 |
|
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
Loss Recognized in OCI on Derivative Instruments (Effective
Portion)
|
|
(Millions)
|
|
2009
|
|
Commodity
contracts
|
|
$ |
(1.4 |
) |
|
|
|
Loss
Reclassified from Accumulated OCI into Income (Effective
Portion)
|
|
(Millions)
|
Income
Statement Presentation
|
|
2009
|
|
Settled
commodity contracts
|
Operating and
maintenance expense
|
|
$ |
(2.6 |
) |
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 during 2009, was a pre-tax loss of $2.7 million during
2008, and was not significant during 2007. Cash flow hedge
ineffectiveness related to these commodity contracts was not significant during
2009 and 2008, and was a pre-tax loss of $4.4 million in
2007. 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.
At
December 31, 2009, the nonregulated segments had the following notional
volumes of outstanding non-hedge derivative contracts:
(Millions)
|
|
Purchases
|
|
|
Sales
|
|
|
Other
Transactions
|
|
Commodity
contracts
|
|
|
|
|
|
|
|
|
|
Natural gas (therms)
|
|
|
2,990.4 |
|
|
|
2,917.1 |
|
|
|
N/A |
|
Power (kilowatt-hours)
|
|
|
132,200.4 |
|
|
|
125,983.1 |
|
|
|
N/A |
|
Interest rate
swaps
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
219.2 |
|
Foreign
exchange contracts
|
|
$ |
35.1 |
|
|
$ |
35.1 |
|
|
|
N/A |
|
Gains (losses)
related to non-hedge derivatives are recognized currently in earnings, as shown
in the table below.
(Millions)
|
Income
Statement Presentation
|
|
2009
|
|
Commodity
contracts
|
Nonregulated revenue
|
|
$ |
(5.1 |
) |
Commodity
contracts
|
Nonregulated revenue (reclassified from
accumulated OCI)
|
|
|
(3.2 |
)
* |
Interest rate
swaps
|
Interest expense
|
|
|
(1.7 |
) |
Foreign
exchange contracts
|
Nonregulated revenue
|
|
|
(1.8 |
) |
Total
|
|
|
$ |
(11.8 |
) |
*
|
Represents
amounts amortized out of accumulated OCI related to cash flow hedges that
were dedesignated in prior
quarters.
|
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
|
|
2009
|
|
Interest rate
swap
|
Interest
expense
|
|
$ |
(0.6 |
) |
Debt hedged by
swap
|
Interest
expense
|
|
|
0.6 |
|
Total
|
|
|
$ |
- |
|
Fair value hedge
ineffectiveness recorded in interest expense on the Consolidated Statements of
Income was not significant in 2009, 2008, and 2007. No amounts were
excluded from effectiveness testing related to the interest rate swap during
2009, 2008, and 2007.
During the year
ended December 31, 2009, Integrys Energy Services did not have any
commodity derivative contracts designated as fair value
hedges. During the years ended December 31, 2008, and 2007,
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 Consolidated Statements of Income was not significant in 2008 and
2007. Changes in the difference between the spot and forward prices
of natural gas were excluded from the assessment of hedge effectiveness and
reported directly in nonregulated revenue. The amount excluded was a
pre-tax gain of $5.5 million during 2008 and was not significant during
2007.
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
December 31,
2009, the nonregulated segments had the following notional volumes of
outstanding contracts that were designated as cash flow hedges:
(Millions)
|
|
Purchases
|
|
|
Sales
|
|
|
Other
Transactions
|
|
Commodity
contracts
|
|
|
|
|
|
|
|
|
|
Natural
gas (therms)
|
|
|
5.9 |
|
|
|
8.6 |
|
|
|
N/A |
|
Power
(kilowatt-hours)
|
|
|
7,116.2 |
|
|
|
- |
|
|
|
N/A |
|
Interest rate
swaps
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
65.6 |
|
Changes in the fair
values of the effective portions of contracts designated as cash flow hedges are
included in OCI, net of taxes. Amounts recorded in OCI related to
cash flow hedges will be recognized in
earnings when the
hedged transactions occur, or if it is probable that the hedged transaction will
not occur. 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 Instruments (Effective
Portion)
|
|
(Millions)
|
|
2009
|
|
Commodity
contracts
|
|
$ |
(60.0 |
) |
Interest rate
swaps
|
|
|
3.2 |
|
|
|
|
Gain
(Loss) Reclassified from Accumulated OCI into Income (Effective
Portion)
|
|
(Millions)
|
Income
Statement Presentation
|
|
2009
|
|
Settled/Realized
|
|
|
|
|
Commodity contracts
|
Nonregulated
revenue
|
|
$ |
(107.3 |
) |
Interest rate swaps
|
Interest
expense
|
|
|
1.2 |
|
Hedge
Designation Discontinued
|
|
|
|
|
|
Commodity contracts
|
Nonregulated
revenue
|
|
|
2.7 |
|
Total
|
|
|
$ |
(103.4 |
) |
|
|
|
Loss
Recognized in Income on Derivative Instruments (Ineffective Portion and
Amount Excluded from Effectiveness Testing)
|
|
(Millions)
|
Income
Statement Presentation
|
|
2009
|
|
Commodity
contracts
|
Nonregulated
revenue
|
|
$ |
(1.1 |
) |
In
the next 12 months, subject to changes in market prices of natural gas and
electricity, a pre-tax loss of $34.0 million related to cash flow hedges of
commodity contracts is expected to be recognized in earnings as the hedged
transactions occur. This amount is expected to be substantially
offset by the settlement of the related nonderivative hedged
contracts.
NOTE 3--RESTRUCTURING
EXPENSE
Reductions
in Workforce
In
an effort to permanently remove costs from its operations, Integrys Energy Group
developed a plan at the end of 2009 that includes reductions in the
workforce. In connection with this plan, $18.0 million of
employee-related and consulting costs, including an insignificant curtailment
loss for a nonqualified pension plan, were included in the restructuring expense
line item on the Consolidated Statements of Income. An insignificant
amount was paid out in 2009 for consulting fees. The restructuring
costs were distributed across Integrys Energy Group's segments as
follows:
(Millions)
|
|
2009
|
|
Electric
utility
|
|
$ |
8.6 |
|
Natural gas
utility
|
|
|
6.9 |
|
Integrys
Energy Services
|
|
|
1.7 |
|
Holding
company and other
|
|
|
0.8 |
|
Total
restructuring expense
|
|
$ |
18.0 |
|
Integrys
Energy Services Strategy Change
Integrys Energy
Group is in the process of significantly reducing 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)
|
|
2009
|
|
Employee-related
costs
|
|
$ |
10.1 |
|
Legal and
consulting
|
|
|
9.2 |
|
Software
write-offs and accelerated depreciation
|
|
|
5.9 |
|
Miscellaneous
|
|
|
0.3 |
|
Total
restructuring expense
|
|
$ |
25.5 |
|
All of the above
costs were related to the Integrys Energy Services segment and were included in
the restructuring expense line item on the Consolidated Statements of
Income.
The following table
summarizes the activity related to employee-related restructuring
expense:
(Millions)
|
|
2009
|
|
Accrued
employee-related costs at beginning of period
|
|
$ |
- |
|
Employee-related
costs expensed
|
|
|
10.1 |
|
Cash
payments
|
|
|
1.9 |
|
Accrued
employee-related costs at end of period
|
|
$ |
8.2 |
|
Integrys Energy
Group expects to incur total employee-related restructuring expense of
approximately $12 million
related to the Integrys Energy Services strategy change by the end of 2010,
including the $10.1 million
expensed as of December 31, 2009.
NOTE 4--DISPOSITIONS
Integrys
Energy Services Strategy Change
As
part of Integrys Energy Group's decision to significantly reduce the size of its
nonregulated energy services business segment with significantly reduced credit
and collateral support requirements, it entered into the following sale
agreements during 2009.
Proposed
Sale of United States Wholesale Electric Marketing and Trading
Business
In
December 2009, Integrys Energy Services entered into a definitive agreement
to sell substantially all of its United States wholesale electric marketing and
trading business. The closing of this sale is contingent upon
obtaining certain customary contractual consents and necessary regulatory
approvals. Effective February 1, 2010, Integrys Energy Services
transferred substantially all of the market risk associated with this business
by entering into trades with the buyer that mirror Integrys Energy Services'
underlying wholesale electric contracts. Integrys Energy Services
expects to transfer title to the underlying contracts and close the transaction
by the end of the second quarter of 2010, at which time these mirror
transactions will terminate.
The carrying values
of the major classes of assets and liabilities included in the sale agreement
were as follows at December 31, 2009:
(Millions)
|
|
|
|
|
|
|
|
Current
assets from risk management activities
|
|
$ |
1,219.7 |
|
Long-term
assets from risk management activities
|
|
|
629.4 |
|
Total
assets
|
|
$ |
1,849.1 |
|
|
|
|
|
|
Current
liabilities from risk management activities
|
|
$ |
1,229.8 |
|
Long-term
liabilities from risk management activities
|
|
|
602.2 |
|
Total
liabilities
|
|
$ |
1,832.0 |
|
Based on the terms
of the sale agreement and the carrying amount of the net assets being sold, had
the sale transaction closed on December 31, 2009, Integrys Energy Services would
have realized a non-cash loss on the sale of approximately $58 million
pre-tax. Also included in the sale transaction are commodity
contracts that do not meet the GAAP definition of derivative instruments, and
therefore are not reflected on the Consolidated Balance Sheets. In
accordance with GAAP, expected gains or losses related to nonderivative
commodity contracts are not recognized until the contracts are
settled. The gain or loss on the sale will be recorded in the period
the contracts are transferred to the buyer as this transfer represents
settlement. Furthermore, changes in forward electric prices will
impact the ultimate gain or loss on the sale and could be different than the
aforementioned loss that was computed assuming a December 31, 2009 closing
date. In conjunction with the sale, Integrys Energy Services will
enter into derivative contracts with the buyer to reestablish the economic
hedges for the retained retail business at the same prices and other terms
previously executed through Integrys Energy Services’ wholesale electric
marketing business being sold. Had these new third-party derivative
contracts been entered into at December 31, 2009, the amount of assets and
liabilities from risk management activities would have been as
follows:
(Millions)
|
|
|
|
|
|
|
|
Current
assets from risk management activities
|
|
$ |
50.1 |
|
Long-term
assets from risk management activities
|
|
|
30.5 |
|
Total
assets
|
|
$ |
80.6 |
|
|
|
|
|
|
Current
liabilities from risk management activities
|
|
$ |
78.9 |
|
Long-term
liabilities from risk management activities
|
|
|
42.8 |
|
Total
liabilities
|
|
$ |
121.7 |
|
Sale
of Generation Assets in New Brunswick, Canada and Northern Maine, and Associated
Retail Electric Contracts
In
November 2009, Integrys Energy Services entered into definitive agreements that
it subsequently closed in the first quarter of 2010, for the sale of two of its
power generation companies, which own generation assets in New Brunswick,
Canada and Northern Maine, along with the associated retail electric contracts
and standard offer service contracts in Northern Maine. The proceeds
from the sale of the generation companies and associated retail electric
contracts were $38.5 million, and the estimated pre-tax gain on the sale to
be recognized during the first quarter of 2010 is approximately
$15 million, subject to certain post-closing adjustments.
The carrying values
of the major classes of assets and liabilities classified as held for sale on
the Consolidated Balance Sheets were as follows:
(Millions)
|
|
December 31,
2009
|
|
|
December 31,
2008
|
|
|
|
|
|
|
|
|
Inventories
|
|
$ |
0.1 |
|
|
$ |
0.1 |
|
Property,
plant, and equipment - net of
accumulated
depreciation
of $9.7 and $9.0, respectively
|
|
|
25.1 |
|
|
|
24.8 |
|
Other
long-term assets
|
|
|
1.3 |
|
|
|
1.4 |
|
Total
assets
|
|
$ |
26.5 |
|
|
$ |
26.3 |
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$ |
- |
|
|
$ |
4.3 |
|
Current
liabilities from risk management activities
|
|
|
- |
|
|
|
0.6 |
|
Other current
liabilities
|
|
|
- |
|
|
|
0.1 |
|
Long-term
debt
|
|
|
- |
|
|
|
2.3 |
|
Asset
retirement obligations
|
|
|
0.3 |
|
|
|
0.2 |
|
Total
liabilities
|
|
$ |
0.3 |
|
|
$ |
7.5 |
|
Sale
of United States Wholesale Natural Gas Marketing and Trading
Business
In
October 2009, Integrys Energy Services entered into definitive agreements to
sell the majority of its United States wholesale natural gas marketing and
trading business in a two-part transaction. In December 2009,
Integrys Energy Services completed the first part of the transaction by selling
substantially all of its United States wholesale natural gas marketing and
trading business. The second part of this transaction includes
wholesale natural gas storage contracts. Integrys Energy Services
will continue to pursue the sale of these contracts throughout the
year. The pre-tax loss on the sale of the United States wholesale
natural gas marketing and trading business reported during the fourth quarter of
2009 was $28.5 million and is reported as a component of loss on Integrys
Energy Services dispositions related to strategy change in the Consolidated
Statements of Income.
The following table
shows the carrying values of the major classes of assets and liabilities
included in the sale at the December 4, 2009 closing date.
(Millions)
|
|
|
|
|
|
|
|
Inventories
|
|
$ |
9.9 |
|
Current
assets from risk management activities
|
|
|
261.2 |
|
Long-term
assets from risk management activities
|
|
|
68.6 |
|
Total
assets
|
|
$ |
339.7 |
|
|
|
|
|
|
Accounts
payable
|
|
$ |
36.0 |
|
Current
liabilities from risk management activities
|
|
|
311.7 |
|
Long-term
liabilities from risk management activities
|
|
|
79.8 |
|
Total
liabilities
|
|
$ |
427.5 |
|
In
addition to the above recognized assets and liabilities, commodity contracts
that are not accounted for as derivatives were also transferred to the
buyer.
In
conjunction with the transaction, Integrys Energy Services entered into
derivative contracts with the buyer to reestablish the economic hedges for the
retained retail business, at the same prices and other terms previously executed
through Integrys Energy Services’ wholesale natural gas marketing and trading
business being sold. The execution of these new third-party
derivative contracts resulted in assets and liabilities from risk management
activities as follows at the date of the sale:
(Millions)
|
|
|
|
|
|
|
|
Current
assets from risk management activities
|
|
$ |
62.6 |
|
Long-term
assets from risk management activities
|
|
|
25.9 |
|
Total
assets
|
|
$ |
88.5 |
|
|
|
|
|
|
Current
liabilities from risk management activities
|
|
$ |
134.3 |
|
Long-term
liabilities from risk management activities
|
|
|
53.8 |
|
Total
liabilities
|
|
$ |
188.1 |
|
In
January 2010, the buyer of the wholesale natural gas marketing and trading
business exercised its option to purchase certain of the wholesale natural gas
storage contracts from Integrys Energy Services in a subsequent
sale. There is not anticipated to be a significant gain or loss on
the sale of these natural gas storage contracts during the first quarter of
2010.
The carrying values
of the major assets and liabilities included in this sale were as follows at
December 31, 2009:
(Millions)
|
|
|
|
|
|
|
|
Inventories
|
|
$ |
16.1 |
|
Current
assets from risk management activities
|
|
|
37.5 |
|
Long-term
assets from risk management activities
|
|
|
8.9 |
|
Total
assets
|
|
$ |
62.5 |
|
|
|
|
|
|
Accounts
payable
|
|
$ |
24.8 |
|
Current
liabilities from risk management activities
|
|
|
42.9 |
|
Long-term
liabilities from risk management activities
|
|
|
7.5 |
|
Total
liabilities
|
|
$ |
75.2 |
|
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 sold a 2 billion cubic foot (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 pre-tax loss on the sale of the
Canadian portfolio was $0.4 million and is reported as a component of loss
on Integrys Energy Services dispositions related to strategy change in the
Consolidated Statements of Income.
The following table
shows the carrying values of the major classes of assets and liabilities
included in the transactions at the closing dates.
(Millions)
|
|
|
|
|
|
|
|
Inventories
|
|
$ |
5.3 |
|
Current
assets from risk management activities
|
|
|
134.7 |
|
Long-term
assets from risk management activities
|
|
|
48.6 |
|
Total
assets
|
|
$ |
188.6 |
|
|
|
|
|
|
Current
liabilities from risk management activities
|
|
$ |
119.8 |
|
Long-term
liabilities from risk management activities
|
|
|
32.3 |
|
Total
liabilities
|
|
$ |
152.1 |
|
In
conjunction with the transaction, Integrys Energy Services entered into
derivative contracts with the buyer to reestablish the economic hedges for the
retained United States retail business, at the same prices and other terms
previously executed through Integrys Energy Services’ Canadian natural gas and
electric power portfolio being sold. The execution of these new
third-party derivative contracts resulted in assets and liabilities from risk
management activities as follows at the date of sale:
(Millions)
|
|
|
|
|
|
|
|
Current
assets from risk management activities
|
|
$ |
21.8 |
|
Long-term
assets from risk management activities
|
|
|
8.8 |
|
Total
assets
|
|
$ |
30.6 |
|
|
|
|
|
|
Current
liabilities from risk management activities
|
|
$ |
14.2 |
|
Long-term
liabilities from risk management activities
|
|
|
6.3 |
|
Total
liabilities
|
|
$ |
20.5 |
|
Discontinued
Operations Resulting from Integrys Energy Services Strategy Change
Energy
Management Consulting Business
During 2009,
Integrys Energy Services completed the sale of its energy management consulting
business and received proceeds of $4.7 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 sale of this business
reported in discontinued operations was $3.9 million ($2.4 million
after-tax).
Other
Discontinued Operations
Stoneman
During the third
quarter of 2008, Integrys Energy Services sold its subsidiary Mid-American
Power, LLC, which owned the Stoneman generation facility, located in
Wisconsin. The historical financial results of this business were not
significant. In the fourth quarter of 2008, Integrys Energy Services
recognized a $6.3 million ($3.8 million after-tax) gain on the sale of
this business in discontinued operations when a previously contingent payment
was earned and paid by the buyer. This contingent payment resulted
from legislation that was passed in the fourth quarter of 2008, which extended
the production tax credits available for certain biomass
facilities.
PEP
In
September 2007, Integrys Energy Group completed the sale of PEP, an oil and
natural gas production subsidiary acquired in the PEC merger, for
$869.2 million, net of certain post-closing adjustments. These
post-closing adjustments were funded through other current liabilities at
December 31, 2007, and, therefore, are included in Note 1(d), "Summary of Significant Accounting
Policies – Cash and Cash Equivalents," as a non-cash transaction for
2007. Including the impact of the post-closing adjustments, the
pre-tax gain recorded for 2007 was $12.6 million ($7.6 million
after-tax), and was included as a component of discontinued
operations. In 2008, $0.8 million of tax adjustments related to
the 2007 PEP sale was recorded as income from discontinued
operations.
Components of
discontinued operations reported in the Consolidated Statements of Income
related to PEP were:
(Millions)
|
|
February
22, 2007 through
December 31,
2007
|
|
|
|
|
|
Nonregulated
revenues
|
|
$ |
114.2 |
|
|
|
|
|
|
Operating and
maintenance expense
|
|
|
28.5 |
|
Gain on PEP
sale
|
|
|
(12.6 |
) |
Taxes other
than income taxes
|
|
|
5.1 |
|
Other
expense
|
|
|
0.1 |
|
|
|
|
|
|
Income before
taxes
|
|
|
93.1 |
|
Provision for
income taxes
|
|
|
34.6 |
|
Discontinued
operations, net of tax
|
|
$ |
58.5 |
|
It
is Integrys Energy Group's policy to not allocate interest to discontinued
operations unless the asset group being sold has external debt
obligations. PEP had no external debt obligations during the period
shown above.
WPS
Niagara Generation, LLC
In
January 2007, Integrys Energy Services completed the sale of WPS Niagara
Generation, LLC (Niagara) and received proceeds of approximately
$31 million. This facility was a merchant generation facility
and sold power on a wholesale basis. Integrys Energy Services
recognized a $24.6 million ($14.7 million after-tax) gain on the sale
of this business in discontinued operations.
Components of
discontinued operations reported in the Consolidated Statements of Income
related to Niagara for the year ended December 31 were as
follows:
(Millions)
|
|
2007
|
|
|
|
|
|
Nonregulated
revenues
|
|
$ |
1.5 |
|
|
|
|
|
|
Nonregulated
cost of fuel, natural gas, and purchased power
|
|
|
1.0 |
|
Operating and
maintenance expense
|
|
|
0.5 |
|
Gain on
Niagara sale
|
|
|
(24.6 |
) |
|
|
|
|
|
Income before
taxes
|
|
|
24.6 |
|
Provision for
income taxes
|
|
|
9.8 |
|
Discontinued
operations, net of tax
|
|
$ |
14.8 |
|
No
interest expense was allocated to discontinued operations as Niagara had no
external debt obligations during the periods shown above.
During 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.
During 2009,
Integrys Energy Services recorded a $0.4 million after-tax gain in
discontinued operations related to a refund received in connection with the
overpayment of auxiliary power service in prior years.
NOTE 5--PEC
MERGER
The PEC merger was
completed on February 21, 2007 and was accounted for under the purchase
method of accounting, with Integrys Energy Group as the acquirer. In
the merger, shareholders of PEC received 0.825 shares of Integrys Energy Group
common stock, $1 par value, for each share of PEC common stock, no par value,
which they held immediately prior to the merger. The total purchase
price was approximately $1.6 billion. The results of operations
attributable to PEC are included in the consolidated financial statements for
the years ended December 31, 2009, 2008, and for the period from
February 22, 2007, through December 31, 2007.
In
order to achieve Integrys Energy Group's anticipated merger synergies, a
restructuring plan was implemented, which included a process to eliminate
duplicative positions within Integrys Energy Group. Costs associated
with the merger-related involuntary termination of employees at PEC (the
acquired company) were recognized as a liability assumed in the merger and
included in the purchase price allocation. The liability recognized
at the date of the merger was not significant and was fully paid at
December 31, 2008.
Costs related to
the involuntary termination of the acquirer's employees were
expensed. Costs associated with the relocation or voluntary
terminations of both Integrys Energy Group and PEC employees were also
expensed. The following table summarizes the activity related to
these specific costs for the years ended December 31:
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Accrued
employee severance costs at beginning of period
|
|
$ |
1.4 |
|
|
$ |
4.8 |
|
|
$ |
- |
|
Severance
expense recorded
|
|
|
0.1 |
|
|
|
2.5 |
|
|
|
7.2 |
|
Cash
payments
|
|
|
(1.1 |
) |
|
|
(5.9 |
) |
|
|
(2.4 |
) |
Accrued
employee severance costs at end of period
|
|
$ |
0.4 |
|
|
$ |
1.4 |
|
|
$ |
4.8 |
|
Supplemental
Pro Forma Information
The following table
shows pro forma results of operations for Integrys Energy Group for the year
ended December 31, 2007, as if the acquisition of PEC had been completed at
January 1, 2007. Pro forma results are presented for
informational purposes only and are not necessarily indicative of what the
actual results would have been had the acquisitions actually occurred on
January 1, 2007.
(Millions,
except per share amounts)
|
|
Year
Ended December 31, 2007
|
|
Total
revenues
|
|
$ |
10,997.7 |
|
Net income
from continuing operations
|
|
$ |
211.2 |
|
Net income
attributed to common shareholders
|
|
$ |
283.4 |
|
Basic
earnings per share – continuing operations
|
|
$ |
2.73 |
|
Basic
earnings per share
|
|
$ |
3.72 |
|
Diluted
earnings per share – continuing operations
|
|
$ |
2.73 |
|
Diluted
earnings per share
|
|
$ |
3.72 |
|
NOTE 6--PROPERTY,
PLANT, AND EQUIPMENT
Property, plant,
and equipment at December 31 consisted of the following utility,
nonutility, and nonregulated assets:
(Millions)
|
|
2009
|
|
|
2008
|
|
Electric
utility
|
|
$ |
3,066.7 |
|
|
$ |
2,777.5 |
|
Natural gas
utility
|
|
|
4,338.3 |
|
|
|
4,190.1 |
|
Total utility
plant
|
|
|
7,405.0 |
|
|
|
6,967.6 |
|
Less:
Accumulated depreciation
|
|
|
2,726.0 |
|
|
|
2,599.3 |
|
Net
|
|
|
4,679.0 |
|
|
|
4,368.3 |
|
Construction
work in progress
|
|
|
40.7 |
|
|
|
159.6 |
|
Net utility
plant
|
|
|
4,719.7 |
|
|
|
4,527.9 |
|
|
|
|
|
|
|
|
|
|
Nonutility
plant – utility segments
|
|
|
100.7 |
|
|
|
87.9 |
|
Less:
Accumulated depreciation
|
|
|
59.1 |
|
|
|
51.0 |
|
Net
|
|
|
41.6 |
|
|
|
36.9 |
|
Construction
work in progress
|
|
|
34.6 |
|
|
|
15.5 |
|
Net
nonutility plant – utility segments
|
|
|
76.2 |
|
|
|
52.4 |
|
|
|
|
|
|
|
|
|
|
Electric
nonregulated
|
|
|
166.8 |
|
|
|
161.5 |
|
Natural gas
nonregulated
|
|
|
18.1 |
|
|
|
3.4 |
|
Other
nonregulated
|
|
|
23.5 |
|
|
|
23.1 |
|
Total
nonregulated property, plant, and equipment
|
|
|
208.4 |
|
|
|
188.0 |
|
Less:
Accumulated depreciation
|
|
|
62.1 |
|
|
|
50.7 |
|
Net
|
|
|
146.3 |
|
|
|
137.3 |
|
Construction
work in progress
|
|
|
2.9 |
|
|
|
30.9 |
|
Net
nonregulated property, plant, and equipment
|
|
|
149.2 |
|
|
|
168.2 |
|
|
|
|
|
|
|
|
|
|
Total
property, plant, and equipment
|
|
$ |
4,945.1 |
|
|
$ |
4,748.5 |
|
NOTE 7--JOINTLY
OWNED UTILITY FACILITIES
WPS holds a joint
ownership interest in certain electric generating facilities. WPS is
entitled to its share of generating capability and output of each facility equal
to its respective ownership interest. WPS also pays its ownership
share of additional construction costs, fuel inventory purchases, and operating
expenses unless specific agreements have been executed to limit its maximum
exposure to additional costs. WPS's share of significant jointly
owned electric generating facilities as of December 31, 2009, was as
follows:
(Millions,
except for percentages and megawatts)
|
|
Weston 4
|
|
|
West
Marinette
Unit
No. 33
|
|
|
Columbia
Energy
Center
Units
1 and 2
|
|
|
Edgewater
Unit
No. 4
|
|
Ownership
|
|
|
70.0 |
% |
|
|
68.0 |
% |
|
|
31.8 |
% |
|
|
31.8 |
% |
WPS's
share of rated capacity (megawatts)
|
|
|
374.5 |
|
|
|
56.8 |
|
|
|
335.2 |
|
|
|
105.0 |
|
Utility
plant in service
|
|
$ |
609.8 |
|
|
$ |
18.2 |
|
|
$ |
165.9 |
|
|
$ |
37.8 |
|
Accumulated
depreciation
|
|
$ |
53.5 |
|
|
$ |
9.7 |
|
|
$ |
102.4 |
|
|
$ |
23.5 |
|
In-service
date
|
|
2008
|
|
|
1993
|
|
|
1975
and 1978
|
|
|
1969
|
|
WPS's share of
direct expenses for these plants is recorded in operating expenses in the
Consolidated Statements of Income. WPS has supplied its own financing
for all jointly owned projects.
NOTE 8--REGULATORY
ASSETS AND LIABILITIES
The following
regulatory assets and liabilities were reflected in Integrys Energy Group's
Consolidated Balance Sheets as of December 31:
(Millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Regulatory
assets
|
|
|
|
|
|
|
Environmental
remediation costs (net of insurance recoveries)
|
|
$ |
674.9 |
|
|
$ |
681.1 |
|
Pension and
other postretirement benefit related items
|
|
|
605.5 |
|
|
|
634.7 |
|
Asset
retirement obligations
|
|
|
39.4 |
|
|
|
30.5 |
|
De Pere
Energy Center
|
|
|
33.4 |
|
|
|
35.8 |
|
Derivatives
|
|
|
32.3 |
|
|
|
162.0 |
|
Income tax
related items
|
|
|
29.0 |
|
|
|
23.2 |
|
Decoupling
|
|
|
28.9 |
|
|
|
4.4 |
|
Weston 3
lightning strike
|
|
|
18.1 |
|
|
|
22.3 |
|
Bad debt
expense
|
|
|
17.7 |
|
|
|
4.8 |
|
Conservation
program costs
|
|
|
17.4 |
|
|
|
4.8 |
|
Costs of
previously owned nuclear plant
|
|
|
14.3 |
|
|
|
24.1 |
|
Unamortized
loss on debt
|
|
|
12.5 |
|
|
|
13.2 |
|
Energy costs
receivable through rate adjustments
|
|
|
12.3 |
|
|
|
23.1 |
|
Rate case
costs
|
|
|
9.5 |
|
|
|
5.7 |
|
Costs to
achieve merger synergies
|
|
|
6.1 |
|
|
|
12.1 |
|
Other
|
|
|
4.6 |
|
|
|
7.0 |
|
Total
|
|
$ |
1,556.0 |
|
|
$ |
1,688.8 |
|
Balance
Sheet Presentation
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
121.1 |
|
|
$ |
244.0 |
|
Long-term
|
|
|
1,434.9 |
|
|
|
1,444.8 |
|
Total
|
|
$ |
1,556.0 |
|
|
$ |
1,688.8 |
|
|
|
|
|
|
|
|
|
|
Regulatory
liabilities
|
|
|
|
|
|
|
|
|
Cost of
removal reserve
|
|
$ |
246.6 |
|
|
$ |
231.6 |
|
Energy costs
refundable through rate adjustments
|
|
|
79.6 |
|
|
|
34.1 |
|
Pension and
other postretirement benefit related items
|
|
|
23.5 |
|
|
|
26.1 |
|
Income tax
related items
|
|
|
6.7 |
|
|
|
8.2 |
|
EEP
|
|
|
6.1 |
|
|
|
4.8 |
|
ATC and MISO
refunds
|
|
|
4.6 |
|
|
|
9.6 |
|
Derivatives
|
|
|
4.3 |
|
|
|
4.9 |
|
Decoupling
|
|
|
1.4 |
|
|
|
9.4 |
|
Other
|
|
|
5.2 |
|
|
|
5.6 |
|
Total
|
|
$ |
378.0 |
|
|
$ |
334.3 |
|
Balance
Sheet Presentation
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
100.4 |
|
|
$ |
58.8 |
|
Long-term
|
|
|
277.6 |
|
|
|
275.5 |
|
Total
|
|
$ |
378.0 |
|
|
$ |
334.3 |
|
Integrys Energy
Group's utility subsidiaries expect to recover their regulatory assets and incur
future costs or refund their regulatory liabilities through rates charged to
customers based on specific ratemaking decisions over periods specified by the
regulators or over the normal operating period of the assets and liabilities to
which they relate. Based on prior and current rate treatment for such
costs, Integrys Energy Group believes it is probable that its utility
subsidiaries will continue to recover from customers the regulatory assets
described above.
The regulatory
assets listed in the table above related to WPS's environmental remediation
costs, the Weston 3 lightning strike, rate case costs, and the unamortized
loss on debt at PGL and NSG, are not earning a rate of return. The
regulatory asset for WPS's environmental remediation costs was
$74.2 million at December 31, 2009, and includes both liabilities and
costs incurred to remediate the former manufactured gas plant sites that have
not yet been recovered through rates. At December 31, 2009,
environmental remediation costs that have been incurred but not yet recovered in
rates were not significant. WPS is authorized recovery of the
regulatory asset related to the Weston 3 lightning strike over a six-year
period. The regulatory assets related to the unamortized loss on debt
at PGL and NSG are not included in rate base, but are recovered over the term of
the debt through the rate of return authorized by the ICC. The
regulatory assets related to rate case costs for PGL and NSG are authorized
recovery by the ICC over a five-year period for 2008 rates and a three-year
period for 2010 rates. The regulatory assets related to rate case
costs for MERC are authorized recovery by the MPUC over a five-year period for
2009 rates and a three-year period for 2010 rates. These regulatory
assets are expected to be recovered from customers in future rates; however, the
carrying costs of these assets are borne by Integrys Energy Group's
shareholders.
Prior to WPS
purchasing the De Pere Energy Center, WPS had a long-term power purchase
contract with the De Pere Energy Center that was accounted for as a capital
lease. As a result of the purchase, the capital lease obligation was
reversed and the difference between the capital lease asset and the purchase
price was recorded as a regulatory asset. WPS is authorized recovery
of this regulatory asset over a 20-year period.
See Note 1(g),
"Summary of Significant
Accounting Policies – Risk Management Activities," Note 14, "Asset Retirement
Obligations," Note 15, "Income Taxes," Note 16,
"Commitments and
Contingencies," Note 18, "Employee Benefit Plans," and
Note 24, "Regulatory
Environment," for more information on some of the more significant
regulatory assets and liabilities listed in the above table.
NOTE 9--INVESTMENTS
IN AFFILIATES, AT EQUITY METHOD
Investments in
corporate joint ventures and other companies accounted for under the equity
method at December 31, 2009, and 2008 were as follows:
(Millions)
|
|
2009
|
|
|
2008
|
|
ATC
|
|
$ |
395.9 |
|
|
$ |
346.9 |
|
WRPC
|
|
|
8.5 |
|
|
|
8.5 |
|
Other
|
|
|
1.4 |
|
|
|
3.1 |
|
Investments
in affiliates, at equity method
|
|
$ |
405.8 |
|
|
$ |
358.5 |
|
Investments in
affiliates accounted for under the equity method are included in other long-term
assets on the Consolidated Balance Sheets, and the equity income (loss) is
recorded in miscellaneous income on the Consolidated Statements of
Income. Integrys Energy Group is taxed on ATC's equity income, rather
than ATC, due to the tax flow-through nature of ATC's business
structure. Accordingly, Integrys Energy Group's provision for income
taxes includes taxes on ATC's equity income.
ATC
Integrys Energy
Group’s electric transmission investment segment consists of WPS Investments
LLC’s ownership interest in ATC, which was approximately 34% at
December 31, 2009. ATC is a for-profit, transmission-only
company. ATC owns, maintains, monitors, and operates electric
transmission assets in portions of Wisconsin, Michigan, Minnesota, and
Illinois.
The following table
shows changes to Integrys Energy Group's investment in ATC during the years
ended December 31.
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Balance at
the beginning of period
|
|
$ |
346.9 |
|
|
$ |
296.6 |
|
|
$ |
231.9 |
|
Add: equity
in net income
|
|
|
75.3 |
|
|
|
66.1 |
|
|
|
50.5 |
|
Add: capital
contributions
|
|
|
34.1 |
|
|
|
34.6 |
|
|
|
50.9 |
|
Less:
dividends received
|
|
|
60.4 |
|
|
|
50.4 |
|
|
|
36.7 |
|
Balance
at the end of period
|
|
$ |
395.9 |
|
|
$ |
346.9 |
|
|
$ |
296.6 |
|
The regulated
electric utilities provide construction and other services to, and receive
network transmission services from, ATC. The related party
transactions recorded by the regulated electric utilities in the years ended
December 31 were as follows:
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Total charges
to ATC for services and construction
|
|
$ |
10.1 |
|
|
$ |
12.8 |
|
|
$ |
98.6 |
|
Total costs
for network transmission service provided by ATC
|
|
|
90.7 |
|
|
|
87.8 |
|
|
|
78.1 |
|
Net amounts
received from (advanced to) ATC for
transmission
interconnection
|
|
|
- |
|
|
|
82.3 |
|
|
|
(23.9 |
) |
WRPC
WPS owns 50% of the
voting stock of WRPC, which operates two hydroelectric plants and an oil-fired
combustion turbine. Two-thirds of the energy output of the
hydroelectric plants is sold to WPS, and the remaining one-third is sold to
Wisconsin Power and Light. The electric power from the combustion
turbine is sold in equal parts to WPS and Wisconsin Power and
Light.
WPS provides
services to WRPC, purchases energy from WRPC, and receives net proceeds from
sales of energy into the MISO market from WRPC. The related party
transactions recorded and net proceeds and dividends received during the years
ended December 31 were as follows:
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Revenues from
services provided to WRPC
|
|
$ |
0.6 |
|
|
$ |
0.8 |
|
|
$ |
1.0 |
|
Purchases of
energy from WRPC
|
|
|
4.6 |
|
|
|
4.7 |
|
|
|
4.7 |
|
Net proceeds
from WRPC sales of energy to MISO
|
|
|
2.6 |
|
|
|
5.8 |
|
|
|
6.0 |
|
Dividends
received from WRPC
|
|
|
0.9 |
|
|
|
3.5 |
|
|
|
0.9 |
|
Of
Integrys Energy Group's equity in net income disclosed below, $1.0 million,
$2.2 million, and $1.8 million is the pre-tax income related to WPS's
investment in WRPC in 2009, 2008, and 2007, respectively.
Financial
Data
Combined financial
data of Integrys Energy Group's significant equity method investments, ATC and
WRPC, is included in the table below.
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Income
statement data
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
528.7 |
|
|
$ |
474.0 |
|
|
$ |
415.6 |
|
Operating
expenses
|
|
|
235.7 |
|
|
|
214.6 |
|
|
|
203.9 |
|
Other
expense
|
|
|
77.7 |
|
|
|
67.1 |
|
|
|
54.2 |
|
Net
income
|
|
$ |
215.3 |
|
|
$ |
192.3 |
|
|
$ |
157.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrys
Energy Group's equity in net income
|
|
$ |
76.3 |
|
|
$ |
68.3 |
|
|
$ |
52.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
sheet data
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$ |
54.0 |
|
|
$ |
52.5 |
|
|
$ |
52.3 |
|
Noncurrent
assets
|
|
|
2,785.5 |
|
|
|
2,494.8 |
|
|
|
2,207.8 |
|
Total
assets
|
|
$ |
2,839.5 |
|
|
$ |
2,547.3 |
|
|
$ |
2,260.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$ |
286.3 |
|
|
$ |
252.4 |
|
|
$ |
317.7 |
|
Long-term
debt
|
|
|
1,259.6 |
|
|
|
1,109.4 |
|
|
|
899.1 |
|
Other
noncurrent liabilities
|
|
|
80.1 |
|
|
|
119.3 |
|
|
|
111.1 |
|
Shareholders'
equity
|
|
|
1,213.5 |
|
|
|
1,066.2 |
|
|
|
932.2 |
|
Total
liabilities and shareholders' equity
|
|
$ |
2,839.5 |
|
|
$ |
2,547.3 |
|
|
$ |
2,260.1 |
|
NOTE 10--GOODWILL
AND OTHER INTANGIBLE ASSETS
Integrys Energy
Group had the following changes to the carrying amount of goodwill for the years
ended December 31, 2008 and 2009:
(Millions)
|
|
Natural
Gas
Utility
Segment
|
|
|
Integrys
Energy
Services
|
|
|
Total
|
|
Goodwill
recorded at December 31, 2007 *
|
|
$ |
936.8 |
|
|
$ |
11.5 |
|
|
$ |
948.3 |
|
Adjustments
to PEC purchase price allocation
|
|
|
|
|
|
|
|
|
|
|
|
|
related
to income taxes
|
|
|
(3.3 |
) |
|
|
(4.6 |
) |
|
|
(7.9 |
) |
Impairment
loss
|
|
|
(6.5 |
) |
|
|
- |
|
|
|
(6.5 |
) |
Goodwill
recorded at December 31, 2008
|
|
|
927.0 |
|
|
|
6.9 |
|
|
|
933.9 |
|
Impairment
loss
|
|
|
(291.1 |
) |
|
|
- |
|
|
|
(291.1 |
) |
Goodwill
allocated to businesses sold
|
|
|
- |
|
|
|
(0.3 |
) |
|
|
(0.3 |
) |
Goodwill
recorded at December 31, 2009
|
|
$ |
635.9 |
|
|
$ |
6.6 |
|
|
$ |
642.5 |
|
* The goodwill balance at
December 31, 2007, did not include any accumulated impairment
losses.
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. 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.
A
goodwill impairment loss in the amount of $6.5 million, after-tax, was
recognized for NSG in the second quarter of 2008. A present value
technique was utilized to estimate the fair value of NSG at April 1, 2008.
The goodwill impairment recognized for NSG was due to a decline in the estimated
fair value of NSG, caused primarily by a decrease in forecasted results as
compared to the forecast at the time of the acquisition. Worsening
economic factors also contributed to the decline in fair value.
Identifiable
intangible assets other than goodwill are included as a component of other
current and long-term assets and other current and long-term liabilities within
the Consolidated Balance Sheets as listed below.
(Millions)
|
|
December 31,
2009
|
|
|
December 31,
2008
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Amortized
intangible assets
(liabilities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer-related
(1)
|
|
$ |
32.6 |
|
|
$ |
(18.3 |
) |
|
$ |
14.3 |
|
|
$ |
32.6 |
|
|
$ |
(14.2 |
) |
|
$ |
18.4 |
|
Natural
gas and electric
contract
assets (2)
(3)
|
|
|
71.4 |
|
|
|
(60.5 |
) |
|
|
10.9 |
|
|
|
60.1 |
|
|
|
(54.6 |
) |
|
|
5.5 |
|
Natural
gas and electric
contract
liabilities (2)
(4)
|
|
|
(10.5 |
) |
|
|
10.4 |
|
|
|
(0.1 |
) |
|
|
(33.6 |
) |
|
|
20.2 |
|
|
|
(13.4 |
) |
Renewable
energy credits (5)
|
|
|
3.4 |
|
|
|
(2.1 |
) |
|
|
1.3 |
|
|
|
3.4 |
|
|
|
(2.1 |
) |
|
|
1.3 |
|
Nonregulated
easements (6)
|
|
|
3.6 |
|
|
|
(0.1 |
) |
|
|
3.5 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Emission
allowances (7)
|
|
|
2.1 |
|
|
|
(0.2 |
) |
|
|
1.9 |
|
|
|
2.3 |
|
|
|
(0.1 |
) |
|
|
2.2 |
|
Other
|
|
|
2.5 |
|
|
|
(0.5 |
) |
|
|
2.0 |
|
|
|
3.0 |
|
|
|
(1.0 |
) |
|
|
2.0 |
|
Total
|
|
$ |
105.1 |
|
|
$ |
(71.3 |
) |
|
$ |
33.8 |
|
|
$ |
67.8 |
|
|
$ |
(51.8 |
) |
|
$ |
16.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized
intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MGU trade
name
|
|
|
5.2 |
|
|
|
- |
|
|
|
5.2 |
|
|
|
5.2 |
|
|
|
- |
|
|
|
5.2 |
|
Total
intangible assets
|
|
$ |
110.3 |
|
|
$ |
(71.3 |
) |
|
$ |
39.0 |
|
|
$ |
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 December 31, 2009, was approximately 7
years.
|
|
(2)
Represents the fair value of certain PEC natural gas and electric
customer contracts acquired in the merger that were not considered to be
derivative instruments, 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 $6.2 million and
$4.7 million, respectively, at December 31, 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 December 31, 2009,
was 2.5 years.
|
|
(4)
Includes both short-term and long-term intangible liabilities
related to customer contracts in the amount of $6.0 million and
$7.4 million, respectively at December 31,
2008.
|
|
(5)
Used at Integrys Energy Services to comply with state Renewable
Portfolio Standards and to support customer
commitments.
|
|
(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 14.5
years.
|
|
(7)
Emission allowances do not have a contractual term or expiration
date.
|
Intangible asset
amortization expense, excluding amortization related to natural gas and electric
contracts, was recorded as a component of depreciation and amortization
expense. Amortization for the years ended
December 31, 2009, 2008, and 2007, was $6.3 million,
$7.9 million, and $8.5 million, respectively.
Amortization
expense for the next five fiscal years is estimated to be:
(Millions)
|
|
|
|
For year
ending December 31, 2010
|
|
$ |
4.2 |
|
For year
ending December 31, 2011
|
|
|
3.3 |
|
For year
ending December 31, 2012
|
|
|
2.4 |
|
For year
ending December 31, 2013
|
|
|
1.6 |
|
For year
ending December 31, 2014
|
|
|
1.4 |
|
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 years ended
December 31, 2009, 2008, and 2007, resulted in an increase to nonregulated
fuel, natural gas, and purchased power in the amount of $8.9 million,
$34.4 million, and $21.0 million, respectively.
Amortization
expense of these contracts for the next five fiscal years is estimated to
be:
(Millions)
|
|
|
|
For year
ending December 31, 2010
|
|
$ |
6.1 |
|
For year
ending December 31, 2011
|
|
|
2.8 |
|
For year
ending December 31, 2012
|
|
|
1.1 |
|
For year
ending December 31, 2013
|
|
|
0.5 |
|
For year
ending December 31, 2014
|
|
|
0.3 |
|
NOTE 11--LEASES
Integrys Energy
Group leases various property, plant, and equipment. Terms of the
operating leases vary, but generally require Integrys Energy Group to pay
property taxes, insurance premiums, and maintenance costs associated with the
leased property. Many of Integrys Energy Group's leases contain one
of the following options upon the end of the lease term: (a) purchase the
property at the current fair market value or (b) exercise a renewal option, as
set forth in the lease agreement. Rental expense attributable to
operating leases was $16.9 million, $17.0 million, and
$13.6 million in 2009, 2008, and 2007, respectively. Future minimum rental
obligations under non-cancelable operating leases are payable as
follows:
Year
ending December 31
(Millions)
|
|
|
|
2010
|
|
$ |
11.6 |
|
2011
|
|
|
10.5 |
|
2012
|
|
|
9.1 |
|
2013
|
|
|
8.8 |
|
2014
|
|
|
4.8 |
|
Later
years
|
|
|
23.6 |
|
Total
payments
|
|
$ |
68.4 |
|
NOTE 12--SHORT-TERM
DEBT AND LINES OF CREDIT
Integrys Energy
Group's short-term borrowings consist of sales of commercial paper, borrowings
under revolving credit facilities, and short-term notes. Amounts
shown are as of December 31:
(Millions,
except percentages)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Commercial
paper outstanding
|
|
$ |
212.1 |
|
|
$ |
552.9 |
|
|
$ |
308.2 |
|
Average
discount rate on outstanding commercial paper
|
|
|
0.52 |
% |
|
|
4.78 |
% |
|
|
5.51 |
% |
Borrowings
under revolving credit facilities
|
|
|
- |
|
|
$ |
475.0 |
|
|
$ |
150.0 |
|
Average
interest rate on outstanding borrowings under
revolving
credit facilities
|
|
|
- |
|
|
|
2.41 |
% |
|
|
3.56 |
% |
Short-term
notes payable outstanding
|
|
$ |
10.0 |
|
|
$ |
181.1 |
|
|
$ |
10.0 |
|
Average
interest rate on short-term notes payable
|
|
|
0.18 |
% |
|
|
3.40 |
% |
|
|
5.20 |
% |
The commercial
paper outstanding at December 31, 2009, had varying maturity dates ranging
from January 4, 2010, through February 17, 2010.
The table below
presents Integrys Energy Group's average amount of short-term borrowings
outstanding based on daily outstanding balances during the years ended
December 31:
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Average amount
of commercial paper outstanding
|
|
$ |
193.8 |
|
|
$ |
305.7 |
|
|
$ |
490.1 |
|
Average amount
of borrowings under revolving credit facilities
|
|
$ |
114.5 |
|
|
$ |
166.8 |
|
|
$ |
116.4 |
|
Average amount
of short-term notes payable outstanding
|
|
$ |
48.0 |
|
|
$ |
34.3 |
|
|
$ |
10.0 |
|
Integrys Energy
Group manages its liquidity by maintaining adequate external financing
commitments. The information in the table below relates to Integrys
Energy Group's short-term debt, lines of credit, and remaining available
capacity as of December 31:
(Millions)
|
Maturity
|
|
2009
|
|
|
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
|
|
|
|
130.4 |
|
|
|
414.6 |
|
Loans
outstanding under credit agreements and notes payable
|
|
|
|
10.0 |
|
|
|
656.1 |
|
Commercial
paper outstanding
|
|
|
|
212.1 |
|
|
|
552.9 |
|
Accrued
interest or original discount on outstanding commercial
paper
|
|
|
|
- |
|
|
|
0.8 |
|
Available
capacity under existing agreements
|
|
|
$ |
1,882.5 |
|
|
$ |
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
December 31, 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.
|
|
December 31
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
WPS First
Mortgage Bonds (1)
|
|
|
|
|
|
|
|
Series
|
|
Year Due
|
|
|
|
|
|
|
|
|
7.125 |
% |
2023
|
|
$ |
0.1 |
|
|
$ |
0.1 |
|
WPS Senior
Notes (1)
|
|
|
|
|
|
|
|
|
|
|
|
Series
|
|
Year Due
|
|
|
|
|
|
|
|
|
|
|
6.125 |
% |
2011
|
|
|
150.0 |
|
|
|
150.0 |
|
|
|
4.875 |
% |
2012
|
|
|
150.0 |
|
|
|
150.0 |
|
|
|
4.80 |
% |
2013
|
|
|
125.0 |
|
|
|
125.0 |
|
|
|
3.95 |
% |
2013
|
|
|
22.0 |
|
|
|
22.0 |
|
|
|
6.375 |
% |
2015
|
|
|
125.0 |
|
|
|
125.0 |
|
|
|
5.65 |
% |
2017
|
|
|
125.0 |
|
|
|
125.0 |
|
|
|
6.08 |
% |
2028
|
|
|
50.0 |
|
|
|
50.0 |
|
|
|
5.55 |
% |
2036
|
|
|
125.0 |
|
|
|
125.0 |
|
UPPCO First
Mortgage Bonds (2)
|
|
|
|
|
|
|
|
|
|
Series
|
|
Year Due
|
|
|
|
|
|
|
|
|
|
|
9.32 |
% |
2021
|
|
|
10.8 |
|
|
|
11.7 |
|
PEC Unsecured
Senior Note (3)
|
|
|
|
|
|
|
|
Series
|
|
Year Due
|
|
|
|
|
|
|
|
|
A, 6.90 |
% |
2011
|
|
|
325.0 |
|
|
|
325.0 |
|
|
Fair value
hedge adjustment
|
|
|
2.6 |
|
|
|
3.2 |
|
PGL Fixed
First and Refunding Mortgage Bonds (4)
(5)
|
|
|
|
|
|
|
|
|
Series
|
Year Due
|
|
|
|
|
|
|
|
HH, 4.75%
|
2030
|
Adjustable
after July 1, 2014
|
|
|
50.0 |
|
|
|
50.0 |
|
KK, 5.00%
|
2033
|
|
|
|
50.0 |
|
|
|
50.0 |
|
LL, 3.75%
|
2033
|
Adjustable
after February 1, 2012
|
|
|
50.0 |
|
|
|
50.0 |
|
MM-2, 4.00%
|
2010
|
|
|
|
50.0 |
|
|
|
50.0 |
|
NN-2, 4.625%
|
2013
|
|
|
|
75.0 |
|
|
|
75.0 |
|
QQ, 4.875%
|
2038
|
Adjustable
after November 1, 2018
|
|
|
75.0 |
|
|
|
75.0 |
|
RR, 4.30%
|
2035
|
Adjustable
after June 1, 2016
|
|
|
50.0 |
|
|
|
50.0 |
|
SS,
7.00%
|
2013
|
|
|
|
45.0 |
|
|
|
45.0 |
|
TT,
8.00%
|
2018
|
|
|
|
5.0 |
|
|
|
5.0 |
|
UU,
4.63%
|
2019
|
|
|
|
75.0 |
|
|
|
- |
|
PGL Adjustable
First and Refunding Mortgage Bonds (5)
(6)
|
|
|
|
|
|
|
|
Series
|
|
Year Due
|
|
|
|
|
|
|
|
OO
|
|
2037
|
|
|
51.0 |
|
|
|
51.0 |
|
NSG First
Mortgage Bonds (7)
|
|
|
|
|
|
|
|
|
|
Series
|
|
Year Due
|
|
|
|
|
|
|
|
|
|
|
M, 5.00 |
% |
2028
|
|
|
28.5 |
|
|
|
28.8 |
|
|
|
N-2, 4.625 |
% |
2013
|
|
|
40.0 |
|
|
|
40.0 |
|
|
|
O,
7.00 |
% |
2013
|
|
|
6.5 |
|
|
|
6.5 |
|
Integrys
Energy Group Unsecured Senior Notes (8)
|
|
|
|
|
|
|
|
|
|
Series
|
|
Year Due
|
|
|
|
|
|
|
|
|
|
|
5.375 |
% |
2012
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
7.00 |
% |
2009
|
|
|
- |
|
|
|
150.0 |
|
|
|
7.27
|
% |
2014
|
|
|
100.0 |
|
|
|
- |
|
|
|
8.00 |
% |
2016
|
|
|
55.0 |
|
|
|
- |
|
Integrys
Energy Group Unsecured Junior Subordinated Notes (9)
|
|
|
|
|
|
|
|
|
|
|
Series
|
|
Year Due
|
|
|
|
|
|
|
|
|
|
|
6.11 |
% |
2066
|
|
|
300.0 |
|
|
|
300.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured term
loan due 2010 – Integrys Energy Group (10)
|
|
|
|
65.6 |
|
|
|
65.6 |
|
Other term
loan (11)
|
|
|
|
27.0 |
|
|
|
27.0 |
|
Total
|
|
|
|
2,509.1 |
|
|
|
2,430.9 |
|
Unamortized
discount and premium on bonds and debt
|
|
|
|
2.1 |
|
|
|
5.7 |
|
Total
debt
|
|
|
|
2,511.2 |
|
|
|
2,436.6 |
|
Less current
portion
|
|
|
|
(116.5 |
) |
|
|
(150.9 |
) |
Total
long-term debt
|
|
|
$ |
2,394.7 |
|
|
$ |
2,285.7 |
|
(1)
|
WPS's First
Mortgage Bonds and Senior Notes are subject to the terms and conditions of
WPS's First Mortgage Indenture. Under the terms of the Indenture,
substantially all property owned by WPS is pledged as collateral for these
outstanding debt securities. All of these debt securities require
semi-annual payments of interest. WPS Senior Notes become
non-collateralized if WPS retires all of its outstanding First
Mortgage Bonds and no new mortgage indenture is put in
place.
|
(2)
|
Under the
terms of UPPCO's First Mortgage Indenture, substantially all property
owned by UPPCO is pledged as collateral for this outstanding debt
series. Interest payments are due semi-annually with a sinking
fund payment of $0.9 million due each
November 1. As a result, this payment is
included in the current portion of long-term debt on Integrys Energy
Group's Consolidated Balance Sheet at December 31,
2009. The final sinking fund payment due
November 1, 2021, will completely retire the
series.
|
(3)
|
Integrys
Energy Group entered into a First Supplemental Indenture, which provides
that Integrys Energy Group will fully and unconditionally guarantee, on a
senior unsecured basis, PEC's obligations under its $325.0 million,
6.9% notes due January 15, 2011. See Note 2, "Risk Management
Activities," for information on the PEC fair value hedge
adjustment.
|
(4)
|
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 Consolidated
Balance Sheet at December 31,
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.
(5)
|
PGL's First Mortgage Bonds are
subject to the terms and conditions of PGL's First Mortgage
Indenture dated January 2, 1926, as supplemented. Under
the terms of the Indenture, substantially all property owned by PGL is
pledged as collateral for these outstanding debt
securities.
|
(6)
|
(PGL
has outstanding $51.0 million of Adjustable Rate, Series OO bonds,
due October 1, 2037, which are currently in
a 35-day Auction Rate mode (the interest rate is reset every 35 days
through an auction process). 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 was 0.8% for these bonds in
2009.
|
|
PGL has
utilized certain First Mortgage Bonds to secure tax exempt interest
rates. The Illinois Finance Authority and the City of Chicago
have issued Tax Exempt Bonds, and the proceeds from the sale of these
bonds were loaned to PGL. In return, PGL issued equal principal
amounts of certain collateralized First Mortgage
Bonds.
|
(7)
|
NSG's First Mortgage Bonds are
subject to the terms and conditions of NSG's First Mortgage
Indenture dated April 1, 1955, as supplemented. Under
the terms of the Indenture, substantially all property owned by NSG is
pledged as collateral for these outstanding debt
securities.
|
|
NSG has
utilized First Mortgage Bonds to secure tax exempt interest
rates. The Illinois Finance Authority has issued Tax Exempt
Bonds, and the proceeds from the sale of these bonds were loaned to
NSG. In return, NSG issued equal principal amounts of certain
collateralized First Mortgage
Bonds.
|
(8)
|
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.
|
(9)
|
These Integrys
Energy Group Junior Subordinated Notes are considered hybrid instruments
with a combination of debt and equity characteristics. Integrys
Energy Group has agreed in a replacement capital covenant with the holders
of Integrys Energy Group's 5.375% Unsecured Senior Notes due
December 1, 2012, that it will not redeem or repurchase the Junior
Subordinated Notes on or prior to December 1, 2036 unless such
repurchases or redemptions are made from the proceeds of the sale of
specific securities considered by rating agencies to have equity
characteristics equal to or greater than those of the Junior Subordinated
Notes.
|
(10)
|
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
Consolidated Balance Sheet at December 31,
2009.
|
(11)
|
In April 2001,
the Schuylkill County Industrial Development Authority issued
$27.0 million of Refunding Tax Exempt Bonds. The proceeds
from the bonds were loaned to WPS Westwood Generation, LLC, a
subsidiary of Integrys Energy Services. This loan is repaid by
WPS Westwood Generation to Schuylkill County Industrial Development
Authority with monthly interest only payments and has a floating interest
rate that is reset weekly. At December 31, 2009, the
interest rate was 4.24%. The loan is to be repaid by April
2021. Integrys Energy Group agreed to guarantee
WPS Westwood Generation's obligation to provide sufficient funds to
pay the loan and the related obligations and
indemnities.
|
Long-term
borrowings by Integrys Energy Services under term loans have been reclassified
as liabilities held for sale in the amount of $6.6 million for the year ended
December 31, 2008, related to the sale of generation assets of WPS New England
Generation, Inc. and WPS Canada Generation, Inc that closed in January
2010. As of December 31, 2009, these term loans have been paid in
full. For more information about the sale, see Note 4, "Dispositions."
At
December 31, 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.
A
schedule of all principal debt payment amounts related to bond maturities is as
follows:
Year
ending December 31
(Millions)
|
|
|
|
2010
|
|
$ |
116.5 |
|
2011
|
|
|
478.5 |
|
2012
|
|
|
250.9 |
|
2013
|
|
|
314.4 |
|
2014
|
|
|
100.9 |
|
Later
years
|
|
|
1,247.9 |
|
Total
payments
|
|
$ |
2,509.1 |
|
NOTE 14--ASSET
RETIREMENT OBLIGATIONS
The utility
segments have asset retirement obligations primarily related to removal of
natural gas distribution pipe (including asbestos and PCBs); asbestos abatement
at certain generation facilities, office buildings, and service centers;
disposal of PCB-contaminated transformers; and closure of fly-ash landfills at
certain generation facilities. The utilities establish regulatory
assets and liabilities to record the differences between ongoing expense
recognition under the Asset Retirement and Environmental Obligations accounting
rules, and the ratemaking practices for retirement costs authorized by the
applicable regulators.
Changes
to Asset Retirement Obligation Liabilities
The following table
shows changes to Integrys Energy Group's asset retirement obligations through
December 31, 2009.
(Millions)
|
|
Utilities
|
|
|
Integrys
Energy Services
|
|
|
Total
|
|
Asset
retirement obligations at December 31, 2006
|
|
$ |
9.4 |
|
|
$ |
0.7 |
|
|
$ |
10.1 |
|
Accretion
|
|
|
6.8 |
|
|
|
- |
|
|
|
6.8 |
|
Asset
retirement obligations from merger with PEC
|
|
|
124.9 |
|
|
|
- |
|
|
|
124.9 |
|
Asset
retirement obligations transferred in sales
|
|
|
(0.2 |
) |
|
|
- |
|
|
|
(0.2 |
) |
Settlements
|
|
|
(1.4 |
) |
|
|
- |
|
|
|
(1.4 |
) |
Asset
retirement obligations at December 31, 2007
|
|
|
139.5 |
|
|
|
0.7 |
|
|
|
140.2 |
|
Accretion
|
|
|
7.8 |
|
|
|
- |
|
|
|
7.8 |
|
Additions and
revisions to estimated cash flows
|
|
|
31.7 |
|
|
|
- |
|
|
|
31.7 |
|
Asset
retirement obligations transferred in sales
|
|
|
(0.1 |
) |
|
|
(0.5 |
) |
|
|
(0.6 |
) |
Asset
retirement obligations at December 31, 2008
|
|
|
178.9 |
|
|
|
0.2 |
(2) |
|
|
179.1 |
|
Accretion
|
|
|
9.6 |
|
|
|
0.1 |
|
|
|
9.7 |
|
Additions and
revisions to estimated cash flows
|
|
|
6.3 |
(1) |
|
|
- |
|
|
|
6.3 |
|
Asset
retirement obligations at December 31, 2009
|
|
$ |
194.8 |
|
|
$ |
0.3 |
(2) |
|
$ |
195.1 |
|
(1)
|
This amount
includes a $6.3 million asset retirement obligation related to the
WPS 99-megawatt Crane Creek wind generation project that became
operational in the fourth quarter of 2009. All other
adjustments netted to an insignificant
amount.
|
(2)
|
These amounts
were classified as held for sale, as they relate to the sale of generation
assets in Northern Maine, which closed in the first quarter of
2010.
|
NOTE 15--INCOME
TAXES
Deferred
Income Tax Assets and Liabilities
Certain temporary
book to tax differences, for which the offsetting amount is recorded as a
regulatory asset or liability, are presented in the table below as net amounts,
consistent with regulatory treatment. The principal components of
deferred income tax assets and liabilities recognized in the Consolidated
Balance Sheets as of December 31 are as follows:
(Millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Deferred
income tax assets:
|
|
|
|
|
|
|
Tax credit
carryforwards
|
|
$ |
90.7 |
|
|
$ |
96.0 |
|
Employee
benefits
|
|
|
96.0 |
|
|
|
88.9 |
|
Price risk
management
|
|
|
55.4 |
|
|
|
- |
|
State capital
and operating loss carryforwards
|
|
|
16.0 |
|
|
|
15.9 |
|
Other
|
|
|
32.4 |
|
|
|
52.2 |
|
Total
deferred income tax assets
|
|
$ |
290.5 |
|
|
$ |
253.0 |
|
Valuation
allowance
|
|
|
(7.4 |
) |
|
|
(2.3 |
) |
Net
deferred income tax assets
|
|
$ |
283.1 |
|
|
$ |
250.7 |
|
|
|
|
|
|
|
|
|
|
Deferred
income tax liabilities:
|
|
|
|
|
|
|
|
|
Plant
related
|
|
$ |
756.8 |
|
|
$ |
642.1 |
|
Regulatory
deferrals
|
|
|
76.1 |
|
|
|
70.3 |
|
Deferred
income
|
|
|
15.5 |
|
|
|
- |
|
Price risk
management
|
|
|
- |
|
|
|
45.6 |
|
Total
deferred income tax liabilities
|
|
$ |
848.4 |
|
|
$ |
758.0 |
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet presentation:
|
|
|
|
|
|
|
|
|
Current
deferred income tax assets
|
|
$ |
92.9 |
|
|
$ |
- |
|
Current
deferred income tax liabilities
|
|
|
- |
|
|
|
71.6 |
|
Long-term
deferred income tax liabilities
|
|
|
658.2 |
|
|
|
435.7 |
|
Net
deferred income tax liabilities
|
|
$ |
565.3 |
|
|
$ |
507.3 |
|
Deferred tax credit
carryforwards at December 31, 2009, include $70.7 million of
alternative minimum tax credits related to tax credits available under former
Section 29/45K of the Internal Revenue Code. These alternative
minimum tax credits can be carried forward indefinitely.
Carryforward
periods for state capital and operating losses vary. In the majority
of states in which Integrys Energy Group operates, the carryforward period is 15
years or more, with the majority of the state capital and operating losses
beginning to expire in 2013. Valuation allowances are established for
certain state operating and capital loss carryforwards based on the ability of
Integrys Energy Group to realize the benefit of these losses in the
future.
Federal
Income Tax Expense
The following table
presents a reconciliation of federal income taxes to the provision for income
taxes reported in the Consolidated Statements of Income for the periods ended
December 31. The taxes are calculated by multiplying the
statutory federal income tax rate by book income before federal income
tax.
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
(Millions,
except for percentages)
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory
federal income tax
|
|
|
35.0 |
% |
|
$ |
4.1 |
|
|
|
35.0 |
% |
|
$ |
61.6 |
|
|
|
35.0 |
% |
|
$ |
93.5 |
|
State income
taxes, net
|
|
|
120.7 |
|
|
|
14.0 |
|
|
|
6.8 |
|
|
|
12.0 |
|
|
|
4.3 |
|
|
|
11.5 |
|
Goodwill
|
|
|
562.1 |
|
|
|
65.2 |
|
|
|
1.3 |
|
|
|
2.3 |
|
|
|
- |
|
|
|
- |
|
Investment tax
credit - amortization
|
|
|
(13.8 |
) |
|
|
(1.6 |
) |
|
|
(1.0 |
) |
|
|
(1.8 |
) |
|
|
(0.6 |
) |
|
|
(1.5 |
) |
Federal tax
credits
|
|
|
6.0 |
|
|
|
0.7 |
|
|
|
(6.0 |
) |
|
|
(10.6 |
) |
|
|
(5.4 |
) |
|
|
(14.3 |
) |
Plant
related
|
|
|
(14.7 |
) |
|
|
(1.7 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Unrecognized
tax benefits
|
|
|
14.7 |
|
|
|
1.7 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
1.2 |
|
|
|
3.3 |
|
Benefits and
compensation
|
|
|
(31.0 |
) |
|
|
(3.6 |
) |
|
|
(2.8 |
) |
|
|
(4.9 |
) |
|
|
(2.5 |
) |
|
|
(6.8 |
) |
Other
differences, net
|
|
|
38.2 |
|
|
|
4.4 |
|
|
|
(4.3 |
) |
|
|
(7.5 |
) |
|
|
0.2 |
|
|
|
0.3 |
|
Effective
income tax
|
|
|
717.2 |
% |
|
$ |
83.2 |
|
|
|
29.1 |
% |
|
$ |
51.2 |
|
|
|
32.2 |
% |
|
$ |
86.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
$ |
1.9 |
|
|
|
|
|
|
$ |
(10.5 |
) |
|
|
|
|
|
$ |
(6.8 |
) |
State
|
|
|
|
|
|
|
14.1 |
|
|
|
|
|
|
|
(3.1 |
) |
|
|
|
|
|
|
8.9 |
|
Foreign
|
|
|
|
|
|
|
7.1 |
|
|
|
|
|
|
|
1.9 |
|
|
|
|
|
|
|
4.7 |
|
Total
current provision
|
|
|
|
|
|
|
23.1 |
|
|
|
|
|
|
|
(11.7 |
) |
|
|
|
|
|
|
6.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
provision
|
|
|
|
|
|
|
52.5 |
|
|
|
|
|
|
|
65.7 |
|
|
|
|
|
|
|
77.7 |
|
Valuation
allowance
|
|
|
|
|
|
|
5.1 |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
0.5 |
|
Interest
|
|
|
|
|
|
|
3.7 |
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
2.4 |
|
Net operating
loss carryforwards
|
|
|
|
|
|
|
1.4 |
|
|
|
|
|
|
|
(1.8 |
) |
|
|
|
|
|
|
(0.9 |
) |
Investment tax
credit - net
|
|
|
|
|
|
|
(0.6 |
) |
|
|
|
|
|
|
(1.5 |
) |
|
|
|
|
|
|
(1.4 |
) |
Unrecognized
tax benefits
|
|
|
|
|
|
|
(2.0 |
) |
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
1.0 |
|
Penalties
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
(0.1 |
) |
Total
provision for income taxes
|
|
|
|
|
|
$ |
83.2 |
|
|
|
|
|
|
$ |
51.2 |
|
|
|
|
|
|
$ |
86.0 |
|
Foreign income
before taxes was $0.3 million in 2009, $12.0 million in 2008, and
$23.3 million in 2007.
As
the related temporary differences reverse, the regulated utilities are
prospectively refunding taxes to or collecting taxes from customers for which
deferred taxes were recorded in prior years at rates different than current
rates. The net regulatory asset for these and other regulatory tax
effects totaled $19.3 million and $13.9 million as of
December 31, 2009, and 2008, respectively.
Integrys Energy
Group records accrued interest and penalties related to income taxes as a
component of the provision for income taxes. Integrys Energy Group
had accrued interest of $8.0 million and accrued penalties of $3.0 million
related to unrecognized tax benefits at December 31,
2009. Integrys Energy Group had accrued interest of $2.9 million
and accrued penalties of $3.1 million related to uncertain tax positions at
December 31, 2008.
Unrecognized
Tax Benefits
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1
|
|
$ |
22.4 |
|
|
$ |
10.0 |
|
|
$ |
3.7 |
|
Increase
related to tax positions acquired
|
|
|
- |
|
|
|
- |
|
|
|
13.9 |
|
Increase
related to tax positions taken in prior years
|
|
|
10.2 |
|
|
|
23.8 |
|
|
|
0.5 |
|
Decrease
related to tax positions taken in prior years
|
|
|
(0.2 |
) |
|
|
(7.7 |
) |
|
|
(0.3 |
) |
Decrease
related to tax positions taken in current year
|
|
|
(0.1 |
) |
|
|
- |
|
|
|
(3.9 |
) |
Decrease
related to settlements
|
|
|
(0.3 |
) |
|
|
(3.7 |
) |
|
|
(3.6 |
) |
Decrease
related to lapse of statutes
|
|
|
(0.2 |
) |
|
|
- |
|
|
|
(0.3 |
) |
Balance
at December 31
|
|
$ |
31.8 |
|
|
$ |
22.4 |
|
|
$ |
10.0 |
|
At
December 31, 2009, recognition in subsequent periods of the unrecognized
tax benefits related to continuing operations could affect Integrys Energy
Group's net income by $6.2 million. Also, recognition in subsequent
periods of the unrecognized tax benefits related to discontinued operations
could affect Integrys Energy Group's net income by
$9.5 million.
Subsidiaries of
Integrys Energy Group file income tax returns in the United States federal
jurisdiction, in various United States state and local jurisdictions, and in
Canada. Subject to the major exceptions listed below, Integrys Energy
Group is no longer subject to United States federal, state and local, or foreign
income tax examinations by tax authorities for years prior to 2004.
●
|
Illinois
Department of Revenue – PEC and consolidated subsidiaries have agreed to a
statute extension for the September 30, 2003 tax year.
|
●
|
Oregon
Department of Revenue – WPS Power Development has open examinations for
the 2002 and 2003 tax years.
|
In
2009, Integrys Energy Group closed the following examinations:
●
|
Wisconsin
Department of Revenue – WPS for the 2001 through 2006 tax
years.
|
Integrys Energy
Group has the following open examinations:
●
|
IRS – PEC and
consolidated subsidiaries have open examinations for the
September 30, 2004 through December 31, 2006 tax
years.
|
●
|
IRS –
Integrys Energy Group and consolidated subsidiaries have open examinations
for the 2006 and 2007 tax years along with the February 21, 2007 PEC
short year.
|
●
|
IRS – An
Integrys Energy Services subsidiary, Synfuel Solutions, LLC, has open
examinations for the 2005 and 2006 tax years.
|
●
|
Illinois
Department of Revenue – PEC and consolidated subsidiaries have open
examinations for the September 30, 2003 through December 31,
2006 tax years.
|
●
|
Kentucky
Department of Revenue – Integrys Energy Group has open examinations for
the 2005 through the 2008 tax years.
|
●
|
Mississippi
Department of Revenue – PEC, PEP, and PEP Holdings LLC have open
examinations for the September 30, 2006, December 31, 2006, and
December 31, 2007 tax years.
|
●
|
New York
State Department of Revenue – Integrys Energy Services and WPS Power
Development have open examinations for the 2004 and 2005 tax
years.
|
●
|
Oregon
Department of Revenue – Integrys Energy
Services has an open examination for the 2005 tax year; WPS Power
Development has open examinations for the 2002, 2003, and 2004 tax
years.
|
●
|
Pennsylvania
Department of Revenue – Integrys Energy Services has open examinations for
the 2006 and 2007 tax years.
|
●
|
Quebec
Department of Revenue – Integrys Energy Services has open examinations for
the 2006 through 2008 tax years.
|
In
the next 12 months, it is reasonably possible that Integrys Energy Group and its
subsidiaries will settle their open examinations in multiple taxing
jurisdictions related to tax years prior to 2007, resulting in a decrease
in unrecognized tax benefits of as much as
$10.9 million.
NOTE 16--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 December 31, 2009.
●
|
The electric
utility segment has obligations related to coal supply and transportation
that extend through 2016 and total $350.7 million, obligations of
$1,192.1 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 $1,301.0 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 $2,878.3 million. The
majority of these obligations end by 2012, with obligations totaling
$113.0 million extending beyond 2012.
|
●
|
Integrys
Energy Group also has commitments in the form of purchase orders issued to
various vendors, which totaled $515.3 million and relate to normal
business operations, including construction
projects.
|
General
Amounts ultimately
paid as penalties, or eventually determined to be paid in lieu of penalties,
will not be deductible for income tax purposes.
Environmental
Clean Air Act New Source
Review Issues
Weston and Pulliam
Plants:
On
November 18, 2009, the EPA issued a Notice of Violation (NOV) to WPS alleging
violations of the New Source Review requirements of the Clean Air Act
(CAA). Specifically, the allegations relate to requirements for
certain projects undertaken at Pulliam and Weston from 1994 to
2009. WPS has evaluated the NOV, including an analysis of the
allegations as well as options for resolution with the EPA and has met with the
EPA to begin discussions on a possible resolution. Integrys Energy
Group continues to review the allegations but is currently unable to predict the
impact on its consolidated financial statements.
Columbia
Plant:
On
October 10, 2009, WPS, along with its co-owners, received from the Sierra Club a
Notice of Intent (NOI) to file a civil lawsuit based on allegations that major
modifications were made at the Columbia generation station without complying
with the CAA. Specifically, the allegations suggest that Prevention
of Significant Deterioration (PSD) permits that imposed Best Available Control
Technology (BACT) limits on
emissions should
have been obtained for the Columbia generation station, which is jointly owned
by Wisconsin Power and Light (WP&L), Madison Gas and Electric Company, and
WPS, and operated by WP&L. The NOI also covers similar
allegations related to another generation station solely owned by
WP&L. Integrys Energy Group is reviewing the allegations but is
currently unable to predict the impact on its consolidated financial
statements.
WP&L, on behalf
of itself and the joint owners, sent a Notice of Deficiency to the Sierra Club
regarding the NOI. In response, the Sierra Club filed a Supplemental
NOI on December 14, 2009, purporting to correct the
deficiencies. WP&L is in the process of analyzing the allegations
and has begun discussions with the Sierra Club.
Edgewater
Plant:
On
December 11, 2009, WPS, along with its co-owners, received from the Sierra
Club a copy of an NOI to file a civil lawsuit against the EPA based on the EPA's
failure to take actions against the co-owners and operator of the Edgewater
generation station based upon allegations of failure to comply with the
CAA. Specifically, the allegations suggest that PSD permits that
imposed BACT limits on emissions from the facilities should have been obtained
for Edgewater. Edgewater is jointly owned by WP&L, WE Energies
(Unit 5) and WPS (Unit 4), and operated by WP&L. WP&L is in
the process of analyzing the Sierra Club's actions. Integrys Energy
Group is reviewing the allegations but is currently unable to predict the impact
on its consolidated financial statements.
On
December 21, 2009, WPS, along with its co-owners, received from the Sierra
Club an NOI to file a civil lawsuit based on allegations that major
modifications were made at the Edgewater generation station without complying
with the PSD and Title V Operating Permit requirements of the
CAA. Specifically, the allegations suggest that PSD permits that
imposed BACT limits on emissions from the facilities should have been obtained
for Edgewater. WP&L is in the process of analyzing the
allegations and has begun discussions with the Sierra Club. Integrys
Energy Group is reviewing the allegations but is currently unable to predict the
impact on its consolidated financial statements.
Columbia and Edgewater
Plants:
On
December 14, 2009, the EPA issued an NOV to WP&L relative to its Nelson
Dewey Plant and to WP&L and the other joint owners of the Columbia and
Edgewater generation stations alleging violations of New Source Review
requirements of the CAA for certain projects undertaken at those
plants. WP&L is the operator of these plants and is in the
process of analyzing the NOV. The joint owners met with the EPA to
begin discussions on a possible resolution. Integrys Energy Group is
also reviewing the allegations but is currently unable to predict the impact on
its consolidated financial statements.
EPA Settlements with Other
Utilities:
In
response to the EPA's CAA 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 to Weston and Pulliam
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 made in the pending litigation.
If
the EPA 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 CAA permit, WPS may, under the applicable statutes, be
required, in order to resolve any such claim, to:
●
|
shut down any
unit found to be operating in non-compliance,
|
●
|
install
additional pollution control equipment,
|
●
|
pay a fine,
and/or
|
●
|
conduct a
supplemental environmental project.
|
In
addition, under the CAA, citizen groups may pursue a claim. Except as
noted above for the Columbia and Edgewater plants, WPS has no notice of such a
claim.
Weston Air
Permits
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 and are
awaiting the court's decision.
These activities
did not stay the construction and startup of the Weston 4 facility or the
administrative law judge's decision on the Weston 4 air
permit. WPS believes that it has substantial defenses to the Sierra
Club's challenges. Until the Sierra Club's challenges are finally
resolved, Integrys Energy Group will not be able to make a final determination
of the probable cost impact, if any, of compliance with any changes to the
Weston 4 air permit on its future costs.
In
December 2008, an NOV was issued to WPS by the WDNR alleging various
violations of the air permits for Weston 4, as well as Weston 1 and
2. The alleged violations include an exceedance of the carbon
monoxide and volatile organic compound limits at Weston 4, exceedances of
the hourly sulfur dioxide limit in ten 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. A fourth NOV was issued on December 14,
2009, for a clerical error involving pages missing from a quarterly
report. Corrective actions have been taken for the events in the four
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 consolidated financial statements of Integrys
Energy Group.
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 PSD. 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.
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's mercury rule, Chapter NR 446, requires a 40% reduction from the 2002
through 2004 baseline mercury emissions in Phase I, beginning
January 1, 2010, through the end of 2014. In Phase II,
which begins 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 BACT
rule. WPS estimates capital costs of approximately $19 million
for Phase I and Phase II, 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. Because of
the vacatur of the federal mercury control and monitoring rule in February 2008,
the EPA is reviewing options for a new rulemaking and is expected to issue a
draft rule in 2010.
Sulfur
Dioxide and Nitrogen Oxide
The EPA issued the
Clean Air Interstate Rule (CAIR) 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. The first phase of CAIR required about a 50% reduction
beginning in 2009 for nitrogen oxide and beginning in 2010 for sulfur
dioxide. The second phase required about a 65% reduction in emissions
of both pollutants by 2015. The State of Wisconsin's rule to
implement CAIR, which incorporates the cap and trade approach, has been
forwarded to the EPA for final review.
On
July 11, 2008, the Court of Appeals issued a decision vacating CAIR, the
EPA appealed, and in December 2008, the Court of Appeals reversed the CAIR
vacatur and CAIR was reinstated. The Court of Appeals 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
2010. As a result of the Court of Appeals' decision, CAIR is in place
for 2010. WPS has not acquired any nitrogen oxide allowances for
vintage years beyond 2010 other than those allocated by the EPA, and does not
expect any material impact as a result of the vacatur and subsequent
reinstatement of CAIR.
The reinstatement
of CAIR also affected the status of the Best Available Retrofit Technology
(BART) rule, which is a rule that addresses regional haze and
visibility. The WDNR is evaluating whether air quality improvements
under CAIR will be adequate to demonstrate compliance with BART.
For planning
purposes, it is still assumed that additional sulfur dioxide and nitrogen oxide
controls will be needed on existing units. The installation of any
controls will need to be scheduled as part of WPS's long-term maintenance plan
for its existing units. As such, controls may need to be installed
before 2015. On a preliminary basis, and assuming controls are still required,
WPS estimates capital costs of $596 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. Under the EPA's program, the remedy
decisions at these sites will be based on risk-based criteria typically used at
Superfund sites. Integrys Energy Group estimated and accrued for
$657.7 million of future undiscounted investigation and cleanup costs for
all sites as of December 31, 2009. Integrys Energy Group
may adjust these estimates in the future, contingent upon remedial
technology, regulatory requirements, remedy determinations, and any claims of
natural resource damages. Integrys Energy Group recorded a regulatory
asset of $673.8 million, which is net of insurance recoveries received of
$56.9 million, related to the expected recovery of both deferred
expenditures and estimated future expenditures as of December 31,
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.
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 consolidated financial statements 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 a settlement agreement with the MPSC staff and interveners in UPPCO's
2009 Power Supply Cost Recovery (PSCR) case, $0.6 million of replacement
power costs was deemed not recoverable and was recorded in operating and
maintenance expense in the first quarter of 2009. This settlement has
been approved by the MPSC.
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 that may result from future state, regional, or federal
greenhouse gas regulatory programs. This evaluation indicates it is
probable that any regulatory program which caps emissions or imposes a carbon
tax will increase costs for Integrys Energy Group and its
customers. The greatest impact is likely to be on fossil fuel-fired
generation, with a less significant impact on natural gas storage and
distribution operations. Efforts are underway within the utility
industry to find a feasible method for capturing carbon dioxide from pulverized
coal-fired units and to develop cleaner ways to burn coal. The use of
alternate fuels is also being explored by the industry, but there are many cost
and availability issues. Recently, efforts have been initiated to
develop state and regional greenhouse gas programs, to create federal
legislation to limit carbon dioxide emissions, and to create national or state
renewable portfolio standards. Some examples of these efforts are the
Waxman-Markey bill, which passed the United States House of Representatives; the
Kerry-Boxer draft bill, which was introduced in the United States Senate; and
the Wisconsin Clean Energy Jobs Act, which has been introduced in the Wisconsin
legislature to implement recommendations from the Governor’s Global Warming Task
Force. The Wisconsin Clean Energy Jobs Act establishes statewide
goals for the reduction of greenhouse gas emissions and requires certain
actions, including an increased renewable portfolio standard, to meet those
goals. 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 CAA. 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 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. Although
a specific date of resolution is unknown, UPPCO has responded to all information
requests from the MDEQ.
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 PGL and NSG 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: (1) provide the Illinois
Attorney General (AG) and the City of Chicago (Chicago) up to $30.0 million
for conservation and weatherization programs for which PGL and NSG may not seek
rate recovery; (2) implement a reconnection program for certain customers and;
(3) internal audits and an external audit of natural gas supply
practices.
With respect to the
conservation and weatherization funding, as of December 31, 2009,
$10.2 million remained unpaid, of which $5.2 million was included in
other current liabilities, and $5.0 million was included in other long-term
liabilities. Under the reconnection program, PGL and NSG took all
steps they believed were required by the agreement. The AG and
Chicago have indicated that they believe the terms of the reconnection program
are broader. Management believes that PGL and NSG have fully complied
with the reconnection program obligations of the settlement agreement; however,
PGL, NSG, the AG and Chicago are discussing how to resolve this
disagreement.
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 filed its report on April 10, 2008. On March 31, 2009,
PGL and NSG completed their responses to the auditor's
recommendations.
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 November 19, 2009, the court
entered an order
certifying a class
composed of customers of PGL and NSG during the period April 26, 2000, through
September 30, 2002. On December 17, 2009, PEC filed a
Petition for Leave to Appeal to the Appellate Court challenging class
certification and on February 19, 2010, this appeal was denied.
NOTE 17--GUARANTEES
As
part of normal business, Integrys Energy Group and its subsidiaries enter into
various guarantees providing financial or performance assurance to third parties
on behalf of certain subsidiaries. These guarantees are entered into
primarily to support or enhance the creditworthiness otherwise attributed to a
subsidiary on a stand-alone basis, thereby facilitating the extension of
sufficient credit to accomplish the subsidiaries' intended commercial
purposes.
Most of the
guarantees issued by Integrys Energy Group consist of inter-company guarantees
of subsidiaries' obligations or performance by the subsidiaries under certain
contractual commitments. As such, these guarantees are excluded from
the recognition and measurement requirements of the Guarantees Topic of the FASB
ASC.
The following table
shows outstanding guarantees at Integrys Energy Group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration
|
|
(Millions)
|
|
Total
Amounts
Committed
at
December 31,
2009
|
|
|
Less
Than
1
Year
|
|
|
1
to 3
Years
|
|
|
4
to 5
Years
|
|
|
Over
5
Years
|
|
Guarantees
supporting commodity transactions of subsidiaries (1)
|
|
$ |
981.4 |
|
|
$ |
773.8 |
|
|
$ |
74.5 |
|
|
$ |
31.0 |
|
|
$ |
102.1 |
|
Standby
letters of credit (2)
|
|
|
130.8 |
|
|
|
119.4 |
|
|
|
11.3 |
|
|
|
0.1 |
|
|
|
- |
|
Surety bonds
(3)
|
|
|
3.1 |
|
|
|
3.1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
guarantees (4)
|
|
|
7.6 |
|
|
|
1.4 |
|
|
|
- |
|
|
|
- |
|
|
|
6.2 |
|
Total
guarantees
|
|
$ |
1,122.9 |
|
|
$ |
897.7 |
|
|
$ |
85.8 |
|
|
$ |
31.1 |
|
|
$ |
108.3 |
|
(1)
|
Consists of
parental guarantees of $803.9 million to support the business
operations of Integrys Energy Services; $92.7 million and
$74.8 million, respectively, related to natural gas supply at MERC
and MGU; and $5.0 million at both PEC and IBS to support business
operations. These guarantees are not reflected on the
Consolidated Balance Sheets.
|
(2)
|
Composed of
$120.4 million issued to support Integrys Energy Services'
operations; $4.8 million related to letters of credit at WPS;
$4.3 million issued for workers compensation coverage in Illinois;
and $1.3 million related to letters of credit at UPPCO, MGU, MERC,
PGL, and NSG. These amounts are not reflected on the
Consolidated Balance Sheets.
|
(3)
|
Primarily for
workers compensation coverage and obtaining various licenses, permits, and
rights of way. Surety bonds are not included on the
Consolidated Balance Sheets.
|
(4)
|
Consists of a
$5.0 million environmental indemnification provided by Integrys
Energy Services related to the sale of the Stoneman generation facility,
under which Integrys Energy Services expects that the likelihood of
required performance is remote; and $2.6 million related to other
indemnifications and workers compensation
coverage.
|
Integrys Energy
Group has provided total parental guarantees of $958.4 million on behalf of
Integrys Energy Services as shown in the table below. Integrys Energy
Group's exposure under these guarantees related to open transactions at
December 31, 2009, was approximately $513 million.
(Millions)
|
|
December 31,
2009
|
|
Guarantees
supporting commodity transactions
|
|
$ |
803.9 |
|
Standby
letters of credit
|
|
|
120.4 |
|
Guarantees of
subsidiary debt
|
|
|
27.0 |
* |
Surety
bonds
|
|
|
1.5 |
|
Other
|
|
|
5.6 |
|
Total
guarantees
|
|
$ |
958.4 |
|
*
|
Consists of
outstanding debt at an Integrys Energy Services' subsidiary, which is not
included in the total Integrys Energy Group guarantee amounts above,
because the debt is reflected on the Consolidated Balance
Sheets.
|
NOTE 18--EMPLOYEE
BENEFIT PLANS
Defined
Benefit Plans
On
September 30, 2008, the PEC Service Annuity System was merged into the PEC
Retirement Plan, which was then renamed the Integrys Energy Group Retirement
Plan. On December 31, 2008, the WPS Retirement Plan was merged
into the Integrys Energy Group Retirement Plan. The two plan mergers
had no effect on the level of plan benefits provided to participants or the
management of plan assets. Integrys Energy Group and its subsidiaries
now maintain one non-contributory, qualified pension plan covering substantially
all employees, as well as several unfunded nonqualified retirement
plans. In addition, Integrys Energy Group and its subsidiaries offer
multiple other postretirement benefit plans to employees. The benefits for a
portion of these plans are funded through irrevocable trusts, as allowed for
income tax purposes.
Integrys Energy
Group also currently offers medical, dental, and life insurance benefits to
active employees and their dependents. Integrys Energy Group expenses
the costs of these benefits as incurred.
During the third
quarter of 2007, Integrys Energy Group made a series of changes to certain of
its retirement benefit plans. Specifically, the changes
included:
●
|
Closure of
the defined benefit pension plans to non-union new hires, effective
January 1, 2008;
|
●
|
A freeze in
defined benefit pension service accruals for non-union employees,
effective January 1, 2013;
|
●
|
A freeze in
compensation amounts used for determining defined benefit pension amounts
for non-union employees, effective January 1,
2018;
|
●
|
Revised
eligibility requirements for retiree medical benefits for employees hired
on or after January 1, 2008, and the introduction of an annual
premium reduction credit for employees eligible to retire after
December 31, 2012; and
|
●
|
Closure of
the retiree dental and life benefit programs to all new hires, effective
January 1, 2008, and elimination of these benefits for any existing
employees who are not eligible to retire before December 31,
2012.
|
As
a result of the changes described above, Integrys Energy Group remeasured
certain of its pension and other postretirement benefit obligations as of August
1, 2007. The curtailment gain recognized as a result of the plan
design changes was not significant and is included in the net periodic benefit
cost table below.
A
second remeasurement occurred on October 1, 2007, because the ratification of a
union contract resulted in changes to a postretirement medical
plan. The changes did not result in a curtailment.
Effective May 1,
2008, and July 1, 2008, the defined benefit pension plans were closed to new
union hires at PGL and NSG, respectively. Effective April 19, 2009,
and December 18, 2009, the defined benefit pension plans were closed to new
union hires at UPPCO and WPS, respectively. In addition, changes in
the WPS union
contract resulted in a plan amendment in December 2009. Effective
January 15, 2010, the defined benefit pension plans were closed to new Local
12295 union hires at MGU.
The following
tables provide a reconciliation of the changes in the plans' benefit obligations
and fair value of assets during 2009 and 2008.
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Reconciliation
of benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation at
January 1
|
|
$ |
1,230.5 |
|
|
$ |
1,210.2 |
|
|
$ |
432.7 |
|
|
$ |
408.6 |
|
Service
cost
|
|
|
38.9 |
|
|
|
38.4 |
|
|
|
14.3 |
|
|
|
15.7 |
|
Interest
cost
|
|
|
80.9 |
|
|
|
76.2 |
|
|
|
26.5 |
|
|
|
26.4 |
|
Plan
amendments
|
|
|
3.0 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Plan
curtailment
|
|
|
0.2 |
* |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Actuarial
(gain) loss,
net
|
|
|
78.6 |
|
|
|
12.1 |
|
|
|
23.2 |
|
|
|
(12.5 |
) |
Participant
contributions
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1.8 |
|
Benefit
payments
|
|
|
(94.7 |
) |
|
|
(106.4 |
) |
|
|
(23.2 |
) |
|
|
(22.1 |
) |
Federal
subsidy on benefits paid
|
|
|
- |
|
|
|
- |
|
|
|
2.0 |
|
|
|
2.0 |
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
12.8 |
|
Obligation at
December 31
|
|
$ |
1,337.4 |
|
|
$ |
1,230.5 |
|
|
$ |
475.5 |
|
|
$ |
432.7 |
|
Reconciliation
of fair value of plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of
plan assets at January 1
|
|
$ |
830.3 |
|
|
$ |
1,219.5 |
|
|
$ |
191.1 |
|
|
$ |
248.3 |
|
Actual return
on plan assets
|
|
|
174.5 |
|
|
|
(310.6 |
) |
|
|
33.1 |
|
|
|
(55.6 |
) |
Employer
contributions
|
|
|
23.5 |
|
|
|
27.8 |
|
|
|
29.8 |
|
|
|
13.0 |
|
Participant
contributions
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1.7 |
|
Benefit
payments
|
|
|
(94.7 |
) |
|
|
(106.4 |
) |
|
|
(23.2 |
) |
|
|
(22.1 |
) |
Other
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5.8 |
|
Fair value of
plan assets at December 31
|
|
$ |
933.6 |
|
|
$ |
830.3 |
|
|
$ |
230.8 |
|
|
$ |
191.1 |
|
*
|
In connection
with the reduction in workforce discussed in Note 3, "Restructuring Expense,"
an insignificant curtailment loss was recognized. The
curtailment is included in the restructuring expense line item on the
Consolidated Statement of Income, and is not included in the net periodic
benefit expense table below.
|
Amounts recognized
on Integrys Energy Group's Consolidated Balance Sheets at December 31
related to the funded status of the benefit plans consisted of:
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Current
liabilities
|
|
$ |
7.5 |
|
|
$ |
5.3 |
|
|
$ |
0.3 |
|
|
$ |
- |
|
Noncurrent
liabilities
|
|
|
396.3 |
|
|
|
394.9 |
|
|
|
244.4 |
|
|
|
241.6 |
|
Total
liabilities
|
|
$ |
403.8 |
|
|
$ |
400.2 |
|
|
$ |
244.7 |
|
|
$ |
241.6 |
|
The accumulated
benefit obligation for all defined benefit pension plans was $1.1 billion at
both December 31, 2009, and December 31, 2008. Information
for pension plans with an accumulated benefit obligation in excess of plan
assets is presented in the following table.
|
|
December 31
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
Projected
benefit obligation
|
|
$ |
1,337.4 |
|
|
$ |
1,230.5 |
|
Accumulated
benefit obligation
|
|
|
1,147.0 |
|
|
|
1,103.5 |
|
Fair value of
plan assets
|
|
|
933.6 |
|
|
|
830.3 |
|
The following table
shows the amounts that had not yet been recognized in Integrys Energy Group's
net periodic benefit cost as of December 31. Amounts related to
the nonregulated entities are included in accumulated other comprehensive loss,
while amounts related to the utilities are recorded as regulatory assets or
liabilities.
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Accumulated
other comprehensive
loss
(pre-tax)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial
loss
|
|
$ |
36.2 |
|
|
$ |
25.7 |
|
|
$ |
- |
|
|
$ |
0.7 |
|
Prior service
costs (credits)
|
|
|
0.9 |
|
|
|
1.2 |
|
|
|
(1.8 |
) |
|
|
(2.2 |
) |
Total
|
|
$ |
37.1 |
|
|
$ |
26.9 |
|
|
$ |
(1.8 |
) |
|
$ |
(1.5 |
) |
Net
regulatory assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial
loss
|
|
$ |
368.6 |
|
|
$ |
384.3 |
|
|
$ |
66.2 |
|
|
$ |
56.1 |
|
Prior service
costs (credits)
|
|
|
21.1 |
|
|
|
22.9 |
|
|
|
(23.4 |
) |
|
|
(26.9 |
) |
Transition
obligation
|
|
|
- |
|
|
|
- |
|
|
|
0.8 |
|
|
|
1.1 |
|
Merger
related regulatory adjustment
|
|
|
71.5 |
|
|
|
91.5 |
|
|
|
38.7 |
|
|
|
42.0 |
|
Regulatory
deferral *
|
|
|
4.5 |
|
|
|
- |
|
|
|
(1.3 |
) |
|
|
- |
|
Total
|
|
$ |
465.7 |
|
|
$ |
498.7 |
|
|
$ |
81.0 |
|
|
$ |
72.3 |
|
*
|
The PSCW
authorized recovery for net increased 2009 WPS pension and other
postretirement benefit costs related to plan asset losses that occurred in
2008. Amortization and recovery of these deferred costs will
occur in 2010.
|
Integrys Energy
Group recorded the PEC pension assets acquired and liabilities assumed at fair
value at the February 2007 acquisition date. However, through 2009, PGL
and NSG continued to have rates set based on their historical basis of
accounting, including amortizations of prior service costs (credits), actuarial
losses, and transition obligations, which were recognized on the
consolidated financial statements as regulatory assets at the purchase
date. The amount reflected in net periodic benefit cost in the
table below is based on the amount used in the rate-setting process for PGL and
NSG. The difference in the basis of accounting is shown as a merger
related regulatory adjustment in the table above.
The estimated net
losses and prior service costs for defined benefit pension plans that will be
amortized as a component of net periodic benefit cost during 2010 are
$11.5 million and $5.3 million, respectively. The estimated
net losses, prior service credits, and transition obligation for other
postretirement benefit plans that will be amortized as a component of net
periodic benefit cost during 2010 are $2.8 million, $3.8 million, and
$0.3 million, respectively.
The following table
presents the components of the consolidated net periodic benefit costs for the
plans:
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Net
periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
38.9 |
|
|
$ |
38.4 |
|
|
$ |
39.7 |
|
|
$ |
14.3 |
|
|
$ |
15.7 |
|
|
$ |
15.4 |
|
Interest
cost
|
|
|
80.9 |
|
|
|
76.2 |
|
|
|
70.4 |
|
|
|
26.5 |
|
|
|
26.4 |
|
|
|
24.5 |
|
Expected
return on plan assets
|
|
|
(92.5 |
) |
|
|
(101.0 |
) |
|
|
(89.4 |
) |
|
|
(17.7 |
) |
|
|
(19.0 |
) |
|
|
(17.5 |
) |
Plan
curtailment gain
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(0.1 |
) |
Amortization
of transition obligation
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.4 |
|
Amortization
of prior service cost (credit)
|
|
|
5.0 |
|
|
|
5.1 |
|
|
|
5.1 |
|
|
|
(3.8 |
) |
|
|
(3.8 |
) |
|
|
(2.6 |
) |
Amortization
of net actuarial (gain) loss
|
|
|
1.9 |
|
|
|
0.7 |
|
|
|
4.8 |
|
|
|
(1.5 |
) |
|
|
- |
|
|
|
1.8 |
|
Amortization
of merger related regulatory adjustment
|
|
|
20.0 |
|
|
|
9.6 |
|
|
|
14.2 |
|
|
|
3.3 |
|
|
|
2.1 |
|
|
|
0.8 |
|
Regulatory
deferral *
|
|
|
(4.5 |
) |
|
|
- |
|
|
|
- |
|
|
|
1.3 |
|
|
|
- |
|
|
|
- |
|
Net periodic
benefit cost
|
|
$ |
49.7 |
|
|
$ |
29.0 |
|
|
$ |
44.8 |
|
|
$ |
22.7 |
|
|
$ |
21.7 |
|
|
$ |
22.7 |
|
*
|
The PSCW
authorized recovery for net increased 2009 WPS pension and other
postretirement benefit costs related to plan asset losses that occurred in
2008. Amortization and recovery of these deferred costs will
occur in 2010.
|
Assumptions
– Pension and Other Postretirement Benefit Plans
The
weighted-average assumptions used at December 31 to determine benefit
obligations for the plans were as follows:
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Discount
rate
|
|
|
6.15 |
% |
|
|
6.45 |
% |
|
|
5.96 |
% |
|
|
6.48 |
% |
Rate of
compensation increase
|
|
|
4.26 |
% |
|
|
4.26 |
% |
|
|
N/A |
|
|
|
N/A |
|
Assumed
medical cost trend rate (under age 65)
|
|
|
N/A |
|
|
|
N/A |
|
|
|
8.0 |
% |
|
|
9.0 |
% |
Ultimate
trend rate
|
|
|
N/A |
|
|
|
N/A |
|
|
|
5.0 |
% |
|
|
5.0 |
% |
Ultimate
trend rate reached in
|
|
|
N/A |
|
|
|
N/A |
|
|
2013
|
|
|
2013
|
|
Assumed
medical cost trend rate (over age 65)
|
|
|
N/A |
|
|
|
N/A |
|
|
|
8.5 |
% |
|
|
9.5 |
% |
Ultimate
trend rate
|
|
|
N/A |
|
|
|
N/A |
|
|
|
5.5 |
% |
|
|
5.5 |
% |
Ultimate
trend rate reached in
|
|
|
N/A |
|
|
|
N/A |
|
|
2013
|
|
|
2013
|
|
Assumed
dental cost trend rate
|
|
|
N/A |
|
|
|
N/A |
|
|
|
5.0 |
% |
|
|
5.0 |
% |
The
weighted-average assumptions used to determine net periodic benefit cost for the
plans were as follows for the years ended December 31:
|
|
Pension
Benefits
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Discount
rate
|
|
|
6.45 |
% |
|
|
6.40 |
% |
|
|
5.88 |
% |
Expected
return on assets
|
|
|
8.50 |
% |
|
|
8.50 |
% |
|
|
8.50 |
% |
Rate of
compensation increase
|
|
|
4.26 |
% |
|
|
4.27 |
% |
|
|
5.50 |
% |
|
|
Other
Benefits
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Discount
rate
|
|
|
6.48 |
% |
|
|
6.40 |
% |
|
|
5.79 |
% |
Expected
return on assets
|
|
|
8.50 |
% |
|
|
8.50 |
% |
|
|
8.50 |
% |
Assumed
medical cost trend rate (under age 65)
|
|
|
9.0 |
% |
|
|
10.0 |
% |
|
|
8.0 |
% |
Ultimate
trend rate
|
|
|
5.0 |
% |
|
|
5.0 |
% |
|
|
5.0 |
% |
Ultimate
trend rate reached in
|
|
2013
|
|
|
2013
|
|
|
2010
|
|
Assumed
medical cost trend rate (over age 65)
|
|
|
9.5 |
% |
|
|
10.5 |
% |
|
|
8.0%-10.0 |
% |
Ultimate
trend rate
|
|
|
5.5 |
% |
|
|
5.5 |
% |
|
|
5.0%-6.5 |
% |
Ultimate
trend rate reached in
|
|
2013
|
|
|
2013
|
|
|
|
2010-2011
|
|
Assumed
dental cost trend rate
|
|
|
5.0 |
% |
|
|
5.0 |
% |
|
|
5.0 |
% |
Integrys Energy
Group establishes its expected return on asset assumption based on consideration
of historical and projected asset class returns, as well as the target
allocations of the benefit trust portfolios.
Assumed health care
cost trend rates have a significant effect on the amounts reported by Integrys
Energy Group for the health care plans. For the year ended
December 31, 2009, a one-percentage-point change in assumed health care
cost trend rates would have had the following effects:
|
|
One-Percentage-Point
|
|
(Millions)
|
|
Increase
|
|
|
Decrease
|
|
Effect on
total of service and interest cost components of net periodic
postretirement health care benefit cost
|
|
$ |
5.8 |
|
|
$ |
(4.8 |
) |
Effect on the
health care component of the accumulated
postretirement benefit obligation
|
|
|
58.1 |
|
|
|
(48.4 |
) |
Pension
and Other Postretirement Benefit Plan Assets
Integrys Energy
Group's investment policy includes various guidelines and procedures designed to
ensure assets are invested in an appropriate manner to meet expected future
benefits to be earned by participants. The investment guidelines
consider a broad range of economic conditions. Central to the policy
are target allocation ranges by major asset categories. The policy is
established and administered in a manner that is compliant at all times with
applicable regulations.
The objectives of
the target allocations are to maintain investment portfolios that diversify risk
through prudent asset allocation parameters and to achieve asset returns that
meet or exceed the plans' actuarial assumptions and that are competitive with
like instruments employing similar investment strategies. The
portfolio diversification provides protection against significant concentrations
of risk in the plan assets. The target asset allocations for pension
plans and other postretirement plans that have significant assets are: 70%
equity securities and 30% fixed income securities. Equity securities primarily
include investments in large-cap and small-cap companies. Fixed
income securities primarily include corporate bonds of companies from
diversified industries, United States government securities, and mortgage-backed
securities.
The Board of
Directors has established the Employee Benefits Administrator Committee
(composed of members of management) to manage the operations and administration
of all benefit plans and trusts. The committee periodically reviews
the asset allocation, and the portfolio is rebalanced when
necessary.
The investments
recorded at fair value in the pension and other postretirement benefit plan
assets at December 31, 2009, by asset category were as
follows. See Note 1(r), "Summary of Significant Accounting
Policies – Fair Value," for information on the fair value hierarchy and
the inputs used to measure fair value.
|
|
Pension
Plan Assets
|
|
|
Other
Benefit Plan Assets
|
|
(Millions)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Asset
Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
2.1 |
|
|
$ |
32.9 |
|
|
$ |
- |
|
|
$ |
35.0 |
|
|
$ |
- |
|
|
$ |
20.1 |
|
|
$ |
- |
|
|
$ |
20.1 |
|
Equity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States equity
|
|
|
261.7 |
|
|
|
171.3 |
|
|
|
- |
|
|
|
433.0 |
|
|
|
48.0 |
|
|
|
39.6 |
|
|
|
- |
|
|
|
87.6 |
|
International
equity
|
|
|
31.0 |
|
|
|
144.3 |
|
|
|
- |
|
|
|
175.3 |
|
|
|
- |
|
|
|
26.9 |
|
|
|
- |
|
|
|
26.9 |
|
Fixed income
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States government
|
|
|
- |
|
|
|
109.6 |
|
|
|
- |
|
|
|
109.6 |
|
|
|
- |
|
|
|
32.4 |
|
|
|
- |
|
|
|
32.4 |
|
Foreign
government
|
|
|
- |
|
|
|
12.4 |
|
|
|
0.4 |
|
|
|
12.8 |
|
|
|
- |
|
|
|
1.5 |
|
|
|
- |
|
|
|
1.5 |
|
Corporate
debt
|
|
|
- |
|
|
|
124.9 |
|
|
|
2.9 |
|
|
|
127.8 |
|
|
|
0.9 |
|
|
|
31.6 |
|
|
|
- |
|
|
|
32.5 |
|
Asset-backed
securities
|
|
|
- |
|
|
|
39.3 |
|
|
|
- |
|
|
|
39.3 |
|
|
|
- |
|
|
|
9.0 |
|
|
|
- |
|
|
|
9.0 |
|
Real estate
securities
|
|
|
- |
|
|
|
- |
|
|
|
24.9 |
|
|
|
24.9 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
1.1 |
|
|
|
1.1 |
|
|
|
- |
|
|
|
2.3 |
|
|
|
- |
|
|
|
2.3 |
|
|
|
|
294.8 |
|
|
|
634.7 |
|
|
|
29.3 |
|
|
|
958.8 |
|
|
|
48.9 |
|
|
|
163.4 |
|
|
|
- |
|
|
|
212.3 |
|
401(h) other
benefit plan assets
invested
as pension assets *
|
|
|
(0.8 |
) |
|
|
(17.6 |
) |
|
|
(0.1 |
) |
|
|
(18.5 |
) |
|
|
0.8 |
|
|
|
17.6 |
|
|
|
0.1 |
|
|
|
18.5 |
|
Total
|
|
$ |
294.0 |
|
|
$ |
617.1 |
|
|
$ |
29.2 |
|
|
$ |
940.3 |
|
|
$ |
49.7 |
|
|
$ |
181.0 |
|
|
$ |
0.1 |
|
|
$ |
230.8 |
|
*
|
Pension trust
assets are used to pay other postretirement benefits as allowed under
Internal Revenue Code Section
401(h).
|
The following table
sets forth a reconciliation of changes in the fair value of pension plan assets
categorized as Level 3 measurements:
(Millions)
|
|
Foreign
Government Debt
|
|
|
Corporate
Debt
|
|
|
Asset-Backed
Securities
|
|
|
Real
Estate Securities
|
|
|
Other
|
|
|
Total
|
|
Beginning
balance at December 31, 2008
|
|
$ |
0.7 |
|
|
$ |
1.8 |
|
|
$ |
0.1 |
|
|
$ |
35.8 |
|
|
$ |
1.5 |
|
|
$ |
39.9 |
|
Actual return
on plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relating
to assets still held at the reporting date
|
|
|
0.8 |
|
|
|
1.1 |
|
|
|
- |
|
|
|
(12.2 |
) |
|
|
1.2 |
|
|
|
(9.1 |
) |
Relating
to assets sold during the period
|
|
|
- |
|
|
|
(0.4 |
) |
|
|
- |
|
|
|
- |
|
|
|
(0.5 |
) |
|
|
(0.9 |
) |
Purchases,
sales, and settlements
|
|
|
0.1 |
|
|
|
0.7 |
|
|
|
- |
|
|
|
1.3 |
|
|
|
(1.1 |
) |
|
|
1.0 |
|
Transfers in
and/or out of Level 3
|
|
|
(1.2 |
) |
|
|
(0.3 |
) |
|
|
(0.1 |
) |
|
|
- |
|
|
|
- |
|
|
|
(1.6 |
) |
Ending balance
at December 31, 2009
|
|
$ |
0.4 |
|
|
$ |
2.9 |
|
|
$ |
- |
|
|
$ |
24.9 |
|
|
$ |
1.1 |
|
|
$ |
29.3 |
|
Cash
Flows Related to Pension and Other Postretirement Benefit Plans
Integrys Energy
Group's funding policy is to contribute at least the minimum amounts that are
required to be funded under the Employee Retirement Income Security Act, but not
more than the maximum amounts that are currently deductible for income tax
purposes. Integrys Energy Group expects to contribute
$67.6 million to pension plans and $35.7 million to other
postretirement benefit plans in 2010.
The following table
shows the payments, reflecting expected future service, that Integrys Energy
Group expects to make for pension and other postretirement
benefits. In addition, the table shows the expected federal
subsidies, provided under the Medicare Prescription Drug, Improvement and
Modernization Act of 2003, that will partially offset other postretirement
benefits.
(Millions)
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
|
Federal
Subsidies
|
|
2010
|
|
$ |
87.6 |
|
|
$ |
27.8 |
|
|
$ |
(2.2 |
) |
2011
|
|
|
91.9 |
|
|
|
29.9 |
|
|
|
(2.4 |
) |
2012
|
|
|
97.6 |
|
|
|
31.3 |
|
|
|
(2.6 |
) |
2013
|
|
|
105.3 |
|
|
|
32.8 |
|
|
|
(2.7 |
) |
2014
|
|
|
105.8 |
|
|
|
34.2 |
|
|
|
(2.9 |
) |
2015-2019
|
|
|
640.7 |
|
|
|
206.5 |
|
|
|
(17.0 |
) |
Defined
Contribution Benefit Plans
Integrys Energy
Group maintains 401(k) Savings Plans for substantially all full-time employees
and matches a percentage of employee contributions through an ESOP or cash
contribution up to certain limits. Certain union employees receive a
contribution to their ESOP account regardless of their participation in the
401(k) Savings Plan. The ESOP held 3.4 million shares of
Integrys Energy Group's common stock (market value of $140.8 million) at
December 31, 2009. Certain employees participate in a
discretionary profit-sharing contribution and/or cash match. Certain
employees who are not eligible to participate in the defined benefit pension
plan participate in a defined contribution pension plan, in which Integrys
Energy Group contributes certain amounts to an employee's account based on the
employee's wages, age, and years of service. Total costs incurred
under all of these plans were $16.8 million in 2009, $17.4 million in
2008, and $14.4 million in 2007.
Integrys Energy
Group maintains deferred compensation plans that enable certain key employees
and non-employee directors to defer a portion of their compensation or fees on a
pre-tax basis. Non-employee directors can defer up to 100% of their
director fees. Compensation is generally deferred in the form of
cash, indexed to certain investment options or Integrys Energy Group common
stock with deemed dividends paid on the common stock automatically
reinvested.
The deferred
compensation arrangements for which distributions are made solely in Integrys
Energy Group's common stock are classified as an equity
instrument. Changes in the fair value of the deferred compensation
obligation are not recognized. The deferred compensation obligation
associated with Integrys Energy Group common stock was $24.2 million at
December 31, 2009, and $23.7 million at December 31,
2008.
The portion of the
deferred compensation obligation associated with deferrals that allow for
distribution in cash is classified as a liability on the Consolidated Balance
Sheets and adjusted, with a charge or credit to expense, to reflect changes in
the fair value of the deferred compensation obligation. The
obligation classified within other long-term liabilities was $32.1 million
at December 31, 2009, and $28.2 million at December 31,
2008. The costs incurred under this arrangement were
$4.0 million in 2009, $1.9 million in 2008, and $2.3 million in
2007.
The deferred
compensation programs are partially funded through shares of Integrys Energy
Group's common stock that is held in a rabbi trust. The common stock
held in the rabbi trust is classified as a reduction of equity in a manner
similar to accounting for treasury stock. The total cost of Integrys
Energy Group's common stock held in the rabbi trust was $17.2 million at
December 31, 2009, and $16.3 million at December 31,
2008.
NOTE 19--PREFERRED
STOCK OF SUBSIDIARY
Integrys Energy
Group's subsidiary, WPS, has 1,000,000 authorized shares of preferred stock with
no mandatory redemption and a $100 par value. Outstanding shares were
as follows at December 31:
(Millions,
except share amounts)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Series
|
|
|
Shares
Outstanding
|
|
|
Carrying
Value
|
|
|
Shares
Outstanding
|
|
|
Carrying
Value
|
|
|
5.00 |
% |
|
|
130,692 |
|
|
$ |
13.1 |
|
|
|
130,695 |
|
|
$ |
13.1 |
|
|
5.04 |
% |
|
|
29,898 |
|
|
|
3.0 |
|
|
|
29,898 |
|
|
|
3.0 |
|
|
5.08 |
% |
|
|
49,905 |
|
|
|
5.0 |
|
|
|
49,923 |
|
|
|
5.0 |
|
|
6.76 |
% |
|
|
150,000 |
|
|
|
15.0 |
|
|
|
150,000 |
|
|
|
15.0 |
|
|
6.88 |
% |
|
|
150,000 |
|
|
|
15.0 |
|
|
|
150,000 |
|
|
|
15.0 |
|
Total
|
|
|
|
510,495 |
|
|
$ |
51.1 |
|
|
|
510,516 |
|
|
$ |
51.1 |
|
All shares of
preferred stock of all series are of equal rank except as to dividend rates and
redemption terms. Payment of dividends from any earned surplus or
other available surplus is not restricted by the terms of any indenture or other
undertaking by WPS. Each series of outstanding preferred stock is
redeemable in whole or in part at WPS's option at any time on 30 days' notice at
the respective redemption prices. WPS may not redeem less than all,
nor purchase any, of its preferred stock during the existence of any dividend
default.
In
the event of WPS's dissolution or liquidation, the holders of preferred stock
are entitled to receive (a) the par value of their preferred stock out of
the corporate assets other than profits before any of such assets are paid or
distributed to the holders of common stock and (b) the amount of dividends
accumulated and unpaid on their preferred stock out of the surplus or net
profits before any of such surplus or net profits are paid to the holders of
common stock. Thereafter, the remainder of the corporate assets,
surplus, and net profits shall be paid to the holders of common
stock.
The preferred stock
has no pre-emptive, subscription, or conversion rights, and has no sinking fund
provisions.
NOTE 20--COMMON
EQUITY
Integrys Energy
Group's reconciliation of shares outstanding at December 31, 2009, and
2008, was as follows:
|
|
2009
|
|
|
2008
|
|
|
|
Shares
|
|
|
Average
Cost
|
|
|
Shares
|
|
|
Average
Cost
|
|
Common stock
issued
|
|
|
76,418,843 |
|
|
|
|
|
|
76,430,037 |
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury
shares
|
|
|
- |
|
|
$ |
- |
|
|
|
7,000 |
|
|
$ |
25.19 |
|
Deferred
compensation rabbi trust
|
|
|
402,839 |
|
|
$ |
42.58 |
(1) |
|
|
367,238 |
|
|
$ |
44.36 |
(1) |
Restricted
stock
|
|
|
35,861 |
|
|
$ |
55.33 |
(2) |
|
|
63,031 |
|
|
$ |
54.81 |
(2) |
Total shares
outstanding
|
|
|
75,980,143 |
|
|
|
|
|
|
|
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.
|
During 2009 and
2008, Integrys Energy Group purchased shares of its common stock on the open
market to meet the requirements of its Stock Investment Plan and certain
stock-based employee benefit and compensation plans. Prior to 2008,
Integrys Energy Group issued new shares of common stock under these
plans. These stock issuances increased equity $45.6 million in
2007.
Pursuant to the PEC
merger, shareholders of PEC received 0.825 shares of Integrys Energy Group (then
known as WPS Resources) common stock, $1 par value, for each share of PEC common
stock, no par value, that they held immediately prior to the
merger. This resulted in an increase in common stock outstanding of
31,938,491 shares and increased equity $1.6 billion as of December 31,
2007.
Integrys
Energy Group's common stock shares
|
|
|
|
Balance at
December 31, 2006
|
|
|
43,387,460 |
|
Shares
issued
|
|
|
|
|
Merger
with PEC
|
|
|
31,938,491 |
|
Stock
Investment Plan
|
|
|
529,935 |
|
Stock-based
compensation
|
|
|
444,041 |
|
Restricted
stock, net
|
|
|
93,339 |
|
Rabbi
trust shares
|
|
|
40,829 |
|
Balance at
December 31, 2007
|
|
|
76,434,095 |
|
Restricted
stock shares cancelled
|
|
|
(4,058 |
) |
Balance at
December 31, 2008
|
|
|
76,430,037 |
|
Restricted
stock shares cancelled
|
|
|
(11,194 |
) |
Balance
at December 31, 2009
|
|
|
76,418,843 |
|
Earnings
Per Share
In
the first quarter of 2009, Integrys Energy Group adopted FASB Staff Position
(FSP) No. EITF 03-6-1, "Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities," (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 an
insignificant
number of
in-the-money securities were not included in the computation for 2009, because
there was a net loss during the period, which would cause the impact to be
anti-dilutive. The 2009 calculation of diluted earnings per share
also excluded 2.7 million out-of-the-money stock options that had an
anti-dilutive effect. The calculation of diluted earnings per share
for 2008 excluded 2.2 million out-of-the-money stock options that had an
anti-dilutive effect. The calculation of diluted earnings per share
for 2007 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:
(Millions,
except per share amounts)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income
(loss) from continuing operations
|
|
$ |
(71.6 |
) |
|
$ |
124.7 |
|
|
$ |
181.0 |
|
Discontinued
operations, net of tax
|
|
|
2.8 |
|
|
|
4.7 |
|
|
|
73.3 |
|
Preferred
stock dividends of subsidiary
|
|
|
(3.1 |
) |
|
|
(3.1 |
) |
|
|
(3.1 |
) |
Noncontrolling
interest in subsidiaries
|
|
|
1.0 |
|
|
|
0.1 |
|
|
|
0.1 |
|
Net income
(loss) attributed to common shareholders
|
|
$ |
(70.9 |
) |
|
$ |
126.4 |
|
|
$ |
251.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares
of common stock – basic
|
|
|
76.8 |
|
|
|
76.7 |
|
|
|
71.6 |
|
Effect of
dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
- |
|
|
|
0.3 |
|
|
|
0.2 |
|
Average shares
of common stock – diluted
|
|
|
76.8 |
|
|
|
77.0 |
|
|
|
71.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.92 |
) |
|
$ |
1.65 |
|
|
$ |
3.51 |
|
Diluted
|
|
|
(0.92 |
) |
|
|
1.64 |
|
|
|
3.50 |
|
Accumulated
Other Comprehensive Income (Loss)
The components of
accumulated other comprehensive loss, net of tax at December 31, 2009, and
2008, were:
(Millions)
|
|
2009
|
|
|
2008
|
|
Cash flow
hedges (1)
|
|
$ |
(24.9 |
) |
|
$ |
(56.4 |
) |
Unrecognized
pension and other postretirement benefit costs (2)
|
|
|
(21.5 |
) |
|
|
(14.8 |
) |
Foreign
currency translation
|
|
|
2.4 |
|
|
|
(1.7 |
) |
Available-for-sale
securities (3)
|
|
|
- |
|
|
|
0.1 |
|
Total
accumulated other comprehensive loss
|
|
$ |
(44.0 |
) |
|
$ |
(72.8 |
) |
(1)
|
Includes tax benefits of
$18.6 million and $33.8 million at December 31, 2009, and
2008, respectively.
|
(2)
|
Includes tax benefits of
$13.8 million and $10.6 million at December 31, 2009, and
2008, respectively.
|
(3)
|
Includes
tax of $3.4 million at
December 31, 2008.
|
NOTE 21--STOCK-BASED
COMPENSATION
In
May 2007, Integrys Energy Group's shareholders approved the 2007 Omnibus
Incentive Compensation Plan (2007 Omnibus Plan). Under the provisions
of the 2007 Omnibus Plan, the number of shares of stock that may be issued in
satisfaction of plan awards may not exceed 3,500,000, and no more than 1,500,000
shares of stock can be granted as performance shares or restricted
stock. No additional awards will be issued under prior plans,
although the plans continue to exist for purposes of the existing outstanding
stock-based compensation. At December 31, 2009, stock options,
performance stock rights, restricted shares and restricted share units, and
stock appreciation rights were outstanding under the various plans.
Stock
Options
Under the
provisions of the 2007 Omnibus Plan, no single employee who is the chief
executive officer of Integrys Energy Group or any of the other four highest
compensated officers of Integrys Energy Group and its subsidiaries can be
granted options for more than 1,000,000 shares during any calendar
year. No stock options will have a term longer than ten
years. The exercise price of each stock option is equal to the fair
market value of the stock on the date the stock option is
granted. Generally, one-fourth of the stock options granted vest and
become exercisable each year on the anniversary of the grant date.
The fair values of
stock option awards granted were estimated using a binomial lattice
model. The expected term of option awards is calculated based on
historical exercise behavior and represents the period of time that options are
expected to be outstanding. The risk-free interest rate is based on
the United States Treasury yield curve. The expected dividend yield
incorporates the current dividend rate as well as historical dividend increase
patterns. Integrys Energy Group's expected stock price volatility was
estimated using its 10-year historical volatility. The following
table shows the weighted-average fair values per stock option along with the
assumptions incorporated into the valuation models:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Weighted-average
fair value per option
|
|
$ |
3.83 |
|
|
$ |
4.52 |
|
|
$ |
7.80 |
|
Expected
term
|
|
8-9
years
|
|
|
7 years
|
|
|
7 years
|
|
Risk-free
interest rate
|
|
|
2.50%-2.78 |
% |
|
|
3.40 |
% |
|
|
4.65 |
% |
Expected
dividend yield
|
|
|
5.50 |
% |
|
|
5.00 |
% |
|
|
4.50 |
% |
Expected
volatility
|
|
|
19 |
% |
|
|
17 |
% |
|
|
17 |
% |
Compensation cost
recognized for stock options during the years ended December 31, 2009,
2008, and 2007, was $2.0 million, $2.6 million, and $1.8 million,
respectively. Compensation cost capitalized during these same years
was not significant. As of December 31, 2009, $1.5 million
of compensation cost related to unvested and outstanding stock options was
expected to be recognized over a weighted-average period of 2.4
years.
Cash received from
option exercises during the year ended December 31, 2009, was not
significant, and was $3.3 million and $14.0 million during the years
ended December 31, 2008, and 2007, respectively. The tax benefit
realized from these option exercises was not significant in 2009 and 2008, and
was $2.3 million in 2007.
A
summary of stock option activity for the year ended December 31, 2009, and
information related to outstanding and exercisable stock options at
December 31, 2009, is presented below:
|
|
Stock
Options
|
|
|
Weighted-Average
Exercise Price Per Share
|
|
|
Weighted-Average
Remaining Contractual Life
(in
Years)
|
|
|
Aggregate
Intrinsic Value
(Millions)
|
|
Outstanding at
December 31, 2008
|
|
|
2,700,139 |
|
|
$ |
47.90 |
|
|
|
|
|
|
|
Granted
|
|
|
511,484 |
|
|
|
42.12 |
|
|
|
|
|
|
|
Exercised
|
|
|
33,659 |
|
|
|
32.64 |
|
|
|
|
|
$ |
0.3 |
|
Forfeited
|
|
|
44,101 |
|
|
|
52.14 |
|
|
|
|
|
|
- |
|
Expired
|
|
|
577 |
|
|
|
43.10 |
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2009
|
|
|
3,133,286 |
|
|
$ |
47.06 |
|
|
|
6.10 |
|
|
$ |
2.3 |
|
Exercisable
at December 31, 2009
|
|
|
2,006,897 |
|
|
$ |
47.29 |
|
|
|
4.80 |
|
|
$ |
2.3 |
|
The intrinsic value
of options exercised was not significant during the year ended December 31,
2008, and was $4.4 million during the year ended December 31,
2007.
The aggregate
intrinsic value for outstanding and exercisable options in the above table
represents the total pre-tax intrinsic value that would have been received by
the option holders had they all exercised their options at December 31,
2009. This is calculated as the difference between Integrys Energy
Group's
closing stock price
on December 31, 2009, and the option exercise price, multiplied by the
number of in-the-money stock options.
Performance
Stock Rights
Performance stock
rights vest over a three-year performance period and are paid out in shares of
Integrys Energy Group's common stock. No single employee who is the
chief executive officer of Integrys Energy Group or any of the other four
highest compensated officers of Integrys Energy Group and its subsidiaries can
receive a payout in excess of 250,000 performance shares during any calendar
year. The number of shares paid out is calculated by multiplying a
performance percentage by the number of outstanding stock rights at the
completion of the vesting period. The performance percentage is based
on the total shareholder return of Integrys Energy Group's common stock relative
to the total shareholder return of a peer group of companies. The
payout may range from 0% to 200% of target.
The fair values of
performance stock rights granted were estimated using a Monte Carlo valuation
model, incorporating the assumptions in the table below. The
risk-free interest rate is based on the United States Treasury yield
curve. The expected dividend yield incorporates the current dividend
rate as well as historical dividend increase patterns. The expected
volatility was estimated using three years of historical data.
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Expected
term
|
|
3 years
|
|
|
3 years
|
|
|
3 years
|
|
Risk-free
interest rate
|
|
|
1.38 |
% |
|
|
2.18 |
% |
|
|
4.71 |
% |
Expected
dividend yield
|
|
|
5.50 |
% |
|
|
5.50 |
% |
|
|
4.50 |
% |
Expected
volatility
|
|
|
26 |
% |
|
|
17 |
% |
|
|
15 |
% |
Compensation cost
recorded for performance stock rights for the years ended December 31,
2009, 2008, and 2007 was $4.6 million, $5.2 million, and
$3.5 million, respectively. Compensation cost capitalized during
these same years was not significant. As of December 31, 2009,
$1.8 million of compensation cost related to unvested and outstanding
performance stock rights was expected to be recognized over a weighted-average
period of 1.6 years.
A
summary of the activity related to performance stock rights for the year ended
December 31, 2009, is presented below:
|
|
Performance
Stock
Rights
|
|
|
Weighted-Average
Grant
Date Fair Value
|
|
Outstanding
at December 31, 2008
|
|
|
263,109 |
|
|
$ |
50.13 |
|
Granted
|
|
|
121,220 |
|
|
|
37.11 |
|
Expired
|
|
|
79,574 |
|
|
|
48.37 |
|
Forfeited
|
|
|
3,665 |
|
|
|
52.15 |
|
Outstanding
at December 31, 2009
|
|
|
301,090 |
|
|
$ |
45.33 |
|
No
performance shares were distributed in 2009 because the performance percentage
was below the threshold payout level for those rights that were vested and
eligible to be distributed during the year ended December 31,
2009.
Restricted
Shares and Restricted Share Units
A
portion of the long-term incentive is awarded in the form of restricted shares
and restricted share units. Most of these awards have a four-year
vesting period, with 25% of each award vesting on each anniversary of the grant
date. During the vesting period, restricted share recipients have
voting rights and are entitled to dividends in the same manner as other common
shareholders, whereas restricted share unit recipients receive dividend credits
and do not have voting rights. Restricted shares and restricted share
units have a value equal to the fair market value of Integrys Energy Group's
common shares on the grant date. Compensation cost recognized for
these awards was $4.9 million, $4.2 million, and
$1.4 million
during the years ended December 31, 2009, 2008, and 2007,
respectively. Compensation cost capitalized during these same years
was not significant. As of December 31, 2009, $7.4 million
of compensation cost related to these awards was expected to be recognized over
a weighted-average period of 2.5 years.
A
summary of the activity related to restricted share and restricted share unit
awards for the year ended December 31, 2009, is presented
below:
|
|
Restricted
Shares 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
|
|
|
69,587 |
|
|
|
50.76 |
|
Forfeited
|
|
|
18,527 |
|
|
|
45.04 |
|
Outstanding
at December 31, 2009
|
|
|
346,858 |
|
|
$ |
45.55 |
|
Stock
Appreciation Rights
On
February 21, 2007, all of PEC's then outstanding stock appreciation rights were
converted into 14,021 Integrys Energy Group stock appreciation
rights. The fair value of the stock appreciation rights is estimated
with a Black-Scholes model and was not significant at December 31,
2009. No stock appreciation rights were issued during the year ended
December 31, 2009.
NOTE 22--FAIR
VALUE
Fair
Value Measurements
In
the fourth quarter of 2009, the WPS Crane Creek wind generation project became
operational, and a $6.3 million asset retirement obligation was
recorded. The initial determination of the amount of the asset
retirement obligation was a fair value measurement calculated in accordance with
the guidance of the Asset Retirement and Environmental Obligations Topic of the
FASB ASC and was categorized within Level 3 of the fair value
hierarchy. This classification resulted from the use of significant
unobservable inputs, including the estimated costs of removing the wind
turbines.
The following table
shows Integrys Energy Group's financial assets and liabilities that were
accounted for at fair value on a recurring basis, categorized by level within
the fair value hierarchy.
|
|
December 31,
2009
|
|
(Millions)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk
management assets
|
|
$ |
284.9 |
|
|
$ |
439.6 |
|
|
$ |
1,593.0 |
|
|
$ |
2,317.5 |
|
Other
|
|
|
0.1 |
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk
management liabilities
|
|
|
336.4 |
|
|
|
582.2 |
|
|
|
1,471.6 |
|
|
|
2,390.2 |
|
Long-term debt hedged by fair value
hedge
|
|
|
- |
|
|
|
52.6 |
|
|
|
- |
|
|
|
52.6 |
|
|
|
December 31,
2008
|
|
(Millions)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk
management assets
|
|
$ |
703.0 |
|
|
$ |
1,524.0 |
|
|
$ |
755.4 |
|
|
$ |
2,982.4 |
|
Inventory hedged by fair value
hedges
|
|
|
- |
|
|
|
27.4 |
|
|
|
- |
|
|
|
27.4 |
|
Other
|
|
|
0.5 |
|
|
|
- |
|
|
|
- |
|
|
|
0.5 |
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk
management liabilities
|
|
|
820.5 |
|
|
|
1,559.1 |
|
|
|
572.8 |
|
|
|
2,952.4 |
|
Liabilities held for sale
|
|
|
- |
|
|
|
- |
|
|
|
0.6 |
|
|
|
0.6 |
|
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 tables include options, swaps, futures,
physical commodity contracts, and other instruments used to manage market risks
related to changes in commodity prices and interest rates. For more
information on Integrys Energy Group's derivative instruments, see Note 2,
"Risk Management
Activities."
When possible,
Integrys Energy Group bases the valuations of its risk management assets and
liabilities on quoted prices for identical assets in active
markets. These valuations are classified in Level 1. The
valuations of certain contracts are based on NYMEX futures prices with an
adjustment related to location differences, and certain derivative instruments
are valued using broker quotes or prices for similar contracts at the reporting
date. These valuations are classified in Level 2.
Certain derivatives
are categorized in Level 3 due to the significance of unobservable or
internally-developed inputs. The primary reasons for a Level 3
classification are as follows:
●
|
While price
curves may have been based on observable information, significant
assumptions may have been made regarding seasonal or monthly shaping and
locational basis differentials.
|
●
|
Certain
transactions were valued using price curves that extended beyond the
quoted period. Assumptions were made to extrapolate prices from
the last quoted period through the end of the transaction
term.
|
●
|
The
valuations of certain transactions were based on internal models, although
external inputs were utilized in the
valuations.
|
The following table
sets forth a reconciliation of changes in the fair value of items categorized as
Level 3 measurements:
|
|
Year
Ended December 31
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
Balance at
the beginning of period
|
|
$ |
182.0 |
* |
|
$ |
44.6 |
|
Net realized
and unrealized gain (loss) included in earnings
|
|
|
32.0 |
|
|
|
(44.7 |
) |
Net
unrealized gain (loss) recorded as regulatory assets or
liabilities
|
|
|
2.2 |
|
|
|
(8.7 |
) |
Net
unrealized gain (loss) included in other comprehensive
loss
|
|
|
16.3 |
|
|
|
(35.0 |
) |
Net purchases
and settlements
|
|
|
(36.0 |
) |
|
|
2.5 |
|
Net transfers
in/out of Level 3
|
|
|
(75.1 |
) |
|
|
223.3 |
|
Balance
at the end of the period
|
|
$ |
121.4 |
|
|
$ |
182.0 |
* |
|
|
|
|
|
|
|
|
|
Net
unrealized gain (loss) included in earnings related toinstruments still
held at the end of the period
|
|
$ |
35.4 |
|
|
$ |
(55.3 |
) |
*
|
This amount
includes $0.6 million of risk management liabilities classified as
held for sale, related to the sale of generation assets and the associated
sales and service contracts in Northern Maine, which closed
in
|
|
the first
quarter of 2010.
|
Derivatives are
transferred in or out of Level 3 primarily due to changes in the source of data
used to construct price curves as a result of changes in market
liquidity.
Unrealized gains
and losses included in earnings related to Integrys Energy Services' risk
management assets and liabilities are recorded through nonregulated revenue on
the Consolidated Statements of Income. 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 on the
Consolidated Statements of Income.
Fair Value of Financial
Instruments
The following table
shows the financial instruments included on the Consolidated Balance Sheets of
Integrys Energy Group that are not recorded at fair value.
|
|
2009
|
|
|
2008
|
|
(Millions)
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Long-term
debt
|
|
$ |
2,511.2 |
|
|
$ |
2,543.6 |
|
|
$ |
2,443.2 |
* |
|
$ |
2,276.0 |
|
Preferred
stock
|
|
|
51.1 |
|
|
|
44.3 |
|
|
|
51.1 |
|
|
|
46.0 |
|
*
|
This amount
includes $6.6 million of long-term debt classified as held for sale,
related to the sale of generation assets in Northern Maine, which closed
in the first quarter of 2010.
|
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 23--MISCELLANEOUS
INCOME
Integrys Energy
Group's total miscellaneous income was as follows at
December 31:
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Equity
earnings on investments
|
|
$ |
76.1 |
|
|
$ |
67.8 |
|
|
$ |
34.6 |
|
Equity
AFUDC
|
|
|
6.0 |
|
|
|
5.5 |
|
|
|
0.9 |
|
Interest and
dividend income
|
|
|
5.6 |
|
|
|
5.0 |
|
|
|
12.7 |
|
Key executive
life insurance income
|
|
|
2.3 |
|
|
|
2.7 |
|
|
|
2.2 |
|
Gain on sale
of property
|
|
|
1.8 |
|
|
|
4.8 |
|
|
|
1.9 |
|
Weston 4
ATC interconnection agreement interest
|
|
|
- |
|
|
|
2.5 |
|
|
|
3.9 |
|
(Loss) gain
on investments
|
|
|
(0.1 |
) |
|
|
(0.3 |
) |
|
|
3.9 |
|
(Loss) gain
on foreign currency exchange
|
|
|
(0.1 |
) |
|
|
0.9 |
|
|
|
2.4 |
|
Other
|
|
|
(2.6 |
) |
|
|
(1.6 |
) |
|
|
1.6 |
|
Total
miscellaneous income
|
|
$ |
89.0 |
|
|
$ |
87.3 |
|
|
$ |
64.1 |
|
NOTE 24--REGULATORY
ENVIRONMENT
Wisconsin
2010
Rates
On
December 22, 2009, the PSCW issued a final written order for WPS
authorizing no electric rate increase (net of 2009 and 2008 fuel refunds) and a
retail natural gas rate increase of $13.5 million, effective January 1,
2010. The PSCW ordered that $18.2 million of the 2008 and 2009
electric fuel cost over-collections be used to offset the overall electric rate
increase needed for 2010, and was recorded as a short-term regulatory liability
as of December 31, 2009. The remaining $10.0 million of the 2009
fuel cost over-collections accrued in 2009 as a short-term regulatory liability,
plus interest, will be refunded to customers during the first half of
2010. Fuel cost over/under recovery impacts related to the
Weston 4 power plant exfoliation issue remain open for 2008 and 2009 and
have been delayed to a future rate proceeding.
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 were estimated to be below the 2% fuel window. As of
December 31, 2009, WPS recorded a liability of $27.1 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 electric retail
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. An additional
$1.1 million of the 2008 fuel cost over-recovery, including interest, was
accrued in 2008 and 2009 and will be refunded as part of the 2010 rate
case.
2007
Rates
On
January 11, 2007, the PSCW issued a final written order for WPS authorizing
a retail electric rate increase of $56.7 million (6.6%) and a retail
natural gas rate increase of $18.9 million (3.8%), effective
January 12, 2007. The new rates reflected a 10.9% return on
common equity. The PSCW approved a
common equity ratio
of 57.4% in WPS's regulatory capital structure. The 2007 retail
electric rate increase was required primarily because of increased costs
associated with electric transmission, costs related to the construction of
Weston 4 and the additional personnel to maintain and operate the plant,
and costs to maintain the Weston 3 generation unit and the De Pere Energy
Center. The 2007 retail natural gas rate increase was driven by
infrastructure improvements necessary to ensure the reliability of the natural
gas distribution system and costs associated with the remediation of former
manufactured gas plant sites.
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.
Kewaunee
On
February 20, 2005, Kewaunee was temporarily removed from service after a
potential design weakness was identified in its auxiliary feedwater
system. In WPS's 2006 rate case, the PSCW determined that it was
reasonable for WPS to recover all deferred costs related to the 2005 Kewaunee
forced outage over a five-year period, beginning on January 1,
2006. At December 31, 2009, $9.6 million was left to be
collected from ratepayers and remained recorded as a regulatory asset related to
this outage.
Michigan
2010 UPPCO
Rates
On
December 16, 2009, the MPSC issued a final written order authorizing UPPCO
a retail electric rate increase of $6.5 million, effective January 1,
2010. The new rates reflect a 10.90% return on common equity and a
common equity ratio of 54.83% in its regulatory capital
structure. The order includes approval of a decoupling mechanism, as
well as an uncollectibles expense tracking mechanism, which allows for the
deferral and subsequent recovery or refund of 80% of the difference between
actual write-offs (net of recoveries) and bad debt expense included in utility
rates, both effective January 1, 2010.
2010 MGU
Rates
On
November 23, 2009, the MPSC issued a partial settlement authorizing MGU a retail
natural gas rate increase of $3.5 million, effective January 1,
2010. The filing includes a 10.75% return on common equity and a
common equity ratio of 50.26% in its regulatory capital
structure. The order includes approval of an uncollectibles expense
tracking mechanism, which allows for the deferral and subsequent recovery or
refund of 80% of the difference between actual write-offs (net of recoveries)
and bad debt expense included in utility rates, effective January 1,
2010. The decoupling mechanism proposed in the rate case is being
contested and was not part of the settlement. An MPSC decision on
decoupling is expected in the second quarter of 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 new rates
reflected a 10.45% return on common equity and a common equity ratio of 50.01%
in its regulatory capital structure. 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 reflected a 10.6% return on common
equity and a common equity ratio of 56.4% in its regulatory capital
structure.
Illinois
2010
Rates
On
January 21, 2010, the ICC issued a final written order authorizing a retail
natural gas rate increase of $69.8 million for PGL and $13.9 million
for NSG, effective January 28, 2010. The rates for PGL reflect a
10.23% return on common equity and a common equity ratio of 56% in its
regulatory capital structure. The rates for NSG reflect a 10.33%
return on common equity and a common equity ratio of 56% in its regulatory
capital structure. The ICC approved a rider mechanism to recover the
costs, above an annual baseline, of an accelerated natural gas main replacement
program by PGL through a special charge on customers' bills, known as Rider ICR;
in February 2010, PGL filed Rider ICR with a $51.85 million annual
baseline. Recovery of costs for the accelerated gas main replacement
program will begin in 2011 with the first Rider ICR charges being effective
April 1, 2011. The rate order also approved the recovery of net
dismantling costs of property, plant, and equipment over the life of the asset
rather than when incurred. PGL and NSG, as well as Chicago, the AG,
and the Citizens Utility Board, filed requests for rehearing in February 2010,
all addressing Rider ICR.
Recent Illinois
Legislation
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 reported to the ICC
each year. PGL and NSG filed their respective riders with the ICC in
September 2009, and began recording the effects of this provision at that
time. The ICC approved the rider in February 2010. SB 1918
also requires a percentage of income payment plan for low-income utility
customers that PGL and NSG are offering as a transition program in 2010 and
2011, with a permanent such program to begin no later than September 1,
2011, and an on-bill financing option that PGL and NSG filed in February 2010
and requested a June 2011 effective date. The on-bill financing
program will allow certain residential customers of PGL and NSG to borrow funds
from a third party lender to purchase natural gas energy efficiency measures and
pay back the borrowed funds over time through a charge on their utility
bill. No later than October 1, 2010, PGL and NSG must file an EEP to
meet specified energy efficiency standards, with the first program year
beginning June 2011.
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 reflected a 10.19%
return on common equity and a common equity ratio of 56% in its regulatory
capital structure. The rates for NSG reflected a 9.99% return on
common
equity and a common
equity ratio of 56% in its regulatory capital structure. The order
included approval of a 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 EEP, which
allows PGL and NSG to recover up to $6.4 million and $1.1 million per
year, respectively, of energy efficiency costs. This EEP is separate
from the SB 1918 required EEP.
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 and four other parties filed appeals with the Illinois appellate
court. Issues on appeal include the decoupling
mechanism.
Minnesota
2010
Rates
On
December 4, 2009, the MPUC approved a final written order authorizing MERC
a retail natural gas rate increase of $15.4 million, effective January 1,
2010. The new rates reflect a 10.21% return on common equity and a
common equity ratio of 48.77% in its regulatory capital
structure. Since the final approved rate increase was lower than the
interim rate increase that went into effect in October 2008, refunds will be
made to customers in March 2010.
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. A FERC Order
addressing these issues is expected to be received by June 2010.
NOTE 25--SEGMENTS
OF BUSINESS
The Segment
Reporting Topic of the FASB ASC requires that companies disclose segment
information based on how management makes decisions about allocating resources
to segments and measuring their performance.
Integrys Energy
Group manages its reportable segments separately due to their different
operating and regulatory environments. At December 31, 2009,
Integrys Energy Group reported five 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 retail customers (residential,
commercial, and industrial).
|
●
|
The electric
transmission investment segment includes Integrys Energy Group's
approximate 34% ownership interest in ATC. ATC is a federally
regulated electric transmission company operating in Wisconsin, Michigan,
Minnesota, and Illinois.
|
●
|
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 investment in
WRPC are also included in the holding company and other
segment.
|
The nonregulated
oil and natural gas production segment includes the results of PEP, which were
reported as discontinued operations in 2007. PEP engaged in the
acquisition, development and production of oil and natural gas reserves in
selected onshore basins in the United States through direct ownership in oil,
natural gas, and mineral leases. Integrys Energy Group completed the
sale of PEP in September 2007.
The tables below
present information for the respective years pertaining to Integrys Energy
Group's reportable segments:
|
|
Regulated Operations
|
|
|
Nonutility
and Nonregulated Operations
|
|
|
|
|
|
|
|
2009
(Millions)
|
|
Electric
Utility
|
|
|
Natural
Gas
Utility
|
|
|
Electric
Transmission Investment
|
|
|
Total
Regulated
Operations
|
|
|
Integrys
Energy Services
|
|
|
Holding
Company and Other
|
|
|
Reconciling
Eliminations
|
|
|
Integrys
Energy Group Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$ |
1,258.9 |
|
|
$ |
2,236.9 |
|
|
$ |
- |
|
|
$ |
3,495.8 |
|
|
$ |
3,992.5 |
|
|
$ |
11.5 |
|
|
$ |
- |
|
|
$ |
7,499.8 |
|
Intersegment
revenues
|
|
|
42.7 |
|
|
|
0.6 |
|
|
|
- |
|
|
|
43.3 |
|
|
|
1.5 |
|
|
|
- |
|
|
|
(44.8 |
) |
|
|
- |
|
Goodwill
impairment loss
|
|
|
- |
|
|
|
291.1 |
|
|
|
- |
|
|
|
291.1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
291.1 |
|
Restructuring
expense
|
|
|
8.6 |
|
|
|
6.9 |
|
|
|
- |
|
|
|
15.5 |
|
|
|
27.2 |
|
|
|
0.8 |
|
|
|
- |
|
|
|
43.5 |
|
Loss on
Integrys Energy Services dispositions related to strategy
change
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
28.9 |
|
|
|
- |
|
|
|
- |
|
|
|
28.9 |
|
Depreciation
and
amortization
expense
|
|
|
90.3 |
|
|
|
106.1 |
|
|
|
- |
|
|
|
196.4 |
|
|
|
19.3 |
|
|
|
15.2 |
|
|
|
- |
|
|
|
230.9 |
|
Miscellaneous
income
(expense)
|
|
|
4.8 |
|
|
|
3.1 |
|
|
|
75.3 |
|
|
|
83.2 |
|
|
|
6.0 |
|
|
|
46.5 |
|
|
|
(46.7 |
) |
|
|
89.0 |
|
Interest
expense (income)
|
|
|
41.6 |
|
|
|
52.2 |
|
|
|
- |
|
|
|
93.8 |
|
|
|
13.1 |
|
|
|
104.6 |
|
|
|
(46.7 |
) |
|
|
164.8 |
|
Provision
(benefit) for income taxes
|
|
|
51.4 |
|
|
|
7.8 |
|
|
|
29.8 |
|
|
|
89.0 |
|
|
|
18.5 |
|
|
|
(24.3 |
) |
|
|
- |
|
|
|
83.2 |
|
Net income
(loss) from continuing operations
|
|
|
91.4 |
|
|
|
(171.5 |
) |
|
|
45.5 |
|
|
|
(34.6 |
) |
|
|
(1.3 |
) |
|
|
(35.7 |
) |
|
|
- |
|
|
|
(71.6 |
) |
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2.8 |
|
|
|
- |
|
|
|
- |
|
|
|
2.8 |
|
Preferred
stock dividends of subsidiary
|
|
|
(2.5 |
) |
|
|
(0.6 |
) |
|
|
- |
|
|
|
(3.1 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3.1 |
) |
Net income
(loss) attributed to common shareholders
|
|
|
88.9 |
|
|
|
(172.1 |
) |
|
|
45.5 |
|
|
|
(37.7 |
) |
|
|
2.5 |
|
|
|
(35.7 |
) |
|
|
- |
|
|
|
(70.9 |
) |
Total
assets
|
|
|
2,834.7 |
|
|
|
4,675.7 |
|
|
|
395.9 |
|
|
|
7,906.3 |
|
|
|
3,550.8 |
|
|
|
1,462.7 |
|
|
|
(1,071.9 |
) |
|
|
11,847.9 |
|
Cash
expenditures for long-lived assets
|
|
|
250.4 |
|
|
|
136.9 |
|
|
|
- |
|
|
|
387.3 |
|
|
|
22.4 |
|
|
|
34.5 |
|
|
|
- |
|
|
|
444.2 |
|
|
|
Regulated Operations
|
|
|
Nonutility
and
Nonregulated
Operations
|
|
|
|
|
|
|
|
2008
(Millions)
|
|
Electric
Utility
|
|
|
Natural
Gas
Utility
|
|
|
Electric
Transmission Investment
|
|
|
Total
Regulated
Operations
|
|
|
Integrys
Energy Services
|
|
|
Holding
Company and Other
|
|
|
Reconciling
Eliminations
|
|
|
Integrys
Energy Group Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$ |
1,284.6 |
|
|
$ |
3,025.3 |
|
|
$ |
- |
|
|
$ |
4,309.9 |
|
|
$ |
9,726.5 |
|
|
$ |
11.4 |
|
|
$ |
- |
|
|
$ |
14,047.8 |
|
Intersegment
revenues
|
|
|
44.3 |
|
|
|
0.6 |
|
|
|
- |
|
|
|
44.9 |
|
|
|
8.7 |
|
|
|
0.6 |
|
|
|
(54.2 |
) |
|
|
- |
|
Goodwill
impairment loss
|
|
|
- |
|
|
|
6.5 |
|
|
|
- |
|
|
|
6.5 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6.5 |
|
Depreciation
and
amortization
expense
|
|
|
84.3 |
|
|
|
108.3 |
|
|
|
- |
|
|
|
192.6 |
|
|
|
14.5 |
|
|
|
14.3 |
|
|
|
- |
|
|
|
221.4 |
|
Miscellaneous
income
(expense)
|
|
|
6.0 |
|
|
|
7.0 |
|
|
|
66.1 |
|
|
|
79.1 |
|
|
|
8.7 |
|
|
|
45.4 |
|
|
|
(45.9 |
) |
|
|
87.3 |
|
Interest
expense (income)
|
|
|
36.7 |
|
|
|
56.6 |
|
|
|
- |
|
|
|
93.3 |
|
|
|
12.1 |
|
|
|
98.6 |
|
|
|
(45.9 |
) |
|
|
158.1 |
|
Provision
(benefit) for income taxes
|
|
|
48.1 |
|
|
|
57.1 |
|
|
|
26.4 |
|
|
|
131.6 |
|
|
|
(56.2 |
) |
|
|
(24.2 |
) |
|
|
- |
|
|
|
51.2 |
|
Net income
(loss) from continuing operations
|
|
|
94.7 |
|
|
|
85.5 |
|
|
|
39.7 |
|
|
|
219.9 |
|
|
|
(65.5 |
) |
|
|
(29.7 |
) |
|
|
- |
|
|
|
124.7 |
|
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3.9 |
|
|
|
0.8 |
|
|
|
- |
|
|
|
4.7 |
|
Preferred
stock dividends of subsidiary
|
|
|
(2.1 |
) |
|
|
(1.0 |
) |
|
|
- |
|
|
|
(3.1 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3.1 |
) |
Net income
(loss) attributed to common shareholders
|
|
|
92.6 |
|
|
|
84.5 |
|
|
|
39.7 |
|
|
|
216.8 |
|
|
|
(61.5 |
) |
|
|
(28.9 |
) |
|
|
- |
|
|
|
126.4 |
|
Total
assets
|
|
|
2,752.4 |
|
|
|
5,173.8 |
|
|
|
346.9 |
|
|
|
8,273.1 |
|
|
|
5,050.2 |
|
|
|
2,144.3 |
|
|
|
(1,195.1 |
) |
|
|
14,272.5 |
|
Cash
expenditures for long-lived assets
|
|
|
207.4 |
|
|
|
237.3 |
|
|
|
- |
|
|
|
444.7 |
|
|
|
68.1 |
|
|
|
20.0 |
|
|
|
- |
|
|
|
532.8 |
|
|
|
Regulated Utilities
|
|
|
Nonutility
and
Nonregulated Operations
|
|
|
|
|
|
|
|
2007
(Millions)
|
|
Electric
Utility
|
|
|
Natural
Gas
Utility
|
|
|
Electric
Transmission Investment
|
|
|
Total
Regulated
Operations
|
|
|
Integrys
Energy Services
|
|
|
Oil
and Natural Gas Production
|
|
|
Holding
Company and Other
|
|
|
Reconciling
Eliminations
|
|
|
Integrys
Energy Group Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$ |
1,202.9 |
|
|
$ |
2,102.5 |
|
|
$ |
- |
|
|
$ |
3,305.4 |
|
|
$ |
6,975.7 |
|
|
$ |
- |
|
|
$ |
11.3 |
|
|
$ |
- |
|
|
$ |
10,292.4 |
|
Intersegment
revenues
|
|
|
43.2 |
|
|
|
1.2 |
|
|
|
- |
|
|
|
44.4 |
|
|
|
4.0 |
|
|
|
- |
|
|
|
1.2 |
|
|
|
(49.6 |
) |
|
|
- |
|
Depreciation
and
amortization
expense
|
|
|
80.1 |
|
|
|
97.7 |
|
|
|
- |
|
|
|
177.8 |
|
|
|
14.4 |
|
|
|
- |
|
|
|
2.9 |
|
|
|
- |
|
|
|
195.1 |
|
Miscellaneous
income
(expense)
|
|
|
8.3 |
|
|
|
5.5 |
|
|
|
50.5 |
|
|
|
64.3 |
|
|
|
(0.3 |
) |
|
|
0.1 |
|
|
|
30.9 |
|
|
|
(30.9 |
) |
|
|
64.1 |
|
Interest
expense (income)
|
|
|
32.4 |
|
|
|
53.4 |
|
|
|
- |
|
|
|
85.8 |
|
|
|
13.5 |
|
|
|
2.4 |
|
|
|
93.7 |
|
|
|
(30.9 |
) |
|
|
164.5 |
|
Provision
(benefit) for income taxes
|
|
|
51.5 |
|
|
|
14.5 |
|
|
|
20.2 |
|
|
|
86.2 |
|
|
|
26.3 |
|
|
|
(1.0 |
) |
|
|
(25.5 |
) |
|
|
- |
|
|
|
86.0 |
|
Net income
(loss) from continuing operations
|
|
|
89.6 |
|
|
|
29.6 |
|
|
|
30.3 |
|
|
|
149.5 |
|
|
|
83.1 |
|
|
|
(2.5 |
) |
|
|
(49.1 |
) |
|
|
- |
|
|
|
181.0 |
|
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
14.8 |
|
|
|
58.5 |
|
|
|
- |
|
|
|
- |
|
|
|
73.3 |
|
Preferred
stock dividends of subsidiary
|
|
|
(2.2 |
) |
|
|
(0.9 |
) |
|
|
- |
|
|
|
(3.1 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3.1 |
) |
Net income
(loss) attributed to common shareholders
|
|
|
87.4 |
|
|
|
28.7 |
|
|
|
30.3 |
|
|
|
146.4 |
|
|
|
98.0 |
|
|
|
56.0 |
|
|
|
(49.1 |
) |
|
|
- |
|
|
|
251.3 |
|
Total
assets
|
|
|
2,470.8 |
|
|
|
4,777.8 |
|
|
|
296.6 |
|
|
|
7,545.2 |
|
|
|
3,150.6 |
|
|
|
- |
|
|
|
1,614.8 |
|
|
|
(1,076.2 |
) |
|
|
11,234.4 |
|
Cash
expenditures for long-lived assets
|
|
|
202.6 |
|
|
|
158.8 |
|
|
|
- |
|
|
|
361.4 |
|
|
|
20.5 |
|
|
|
- |
|
|
|
10.7 |
|
|
|
- |
|
|
|
392.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic
Information
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Revenues
|
|
|
Long-Lived
Assets
|
|
|
Revenues
|
|
|
Long-Lived
Assets
|
|
|
Revenues
|
|
|
Long-Lived
Assets
|
|
United States
|
|
$ |
6,628.5 |
|
|
$ |
7,540.3 |
|
|
$ |
11,639.3 |
|
|
$ |
7,576.8 |
|
|
$ |
8,343.8 |
|
|
$ |
7,028.2 |
|
Canada *
|
|
|
871.3 |
|
|
|
- |
|
|
|
2,408.5 |
|
|
|
20.0 |
|
|
|
1,948.6 |
|
|
|
20.6 |
|
Total
|
|
$ |
7,499.8 |
|
|
$ |
7,540.3 |
|
|
$ |
14,047.8 |
|
|
$ |
7,596.8 |
|
|
$ |
10,292.4 |
|
|
$ |
7,048.8 |
|
* Revenues
and assets of Canadian subsidiaries. Includes the impact in 2009 of
the sale of Canadian operations at Integrys
Energy
Services.
NOTE 26--QUARTERLY
FINANCIAL INFORMATION (Unaudited)
(Millions,
except share amounts)
|
|
Three
Months Ended
|
|
|
|
2009
|
|
|
|
March
|
|
|
June
|
|
|
September
|
|
|
December
|
|
|
Total
|
|
Total
revenues
|
|
$ |
3,200.8 |
|
|
$ |
1,427.6 |
|
|
$ |
1,297.8 |
|
|
$ |
1,573.6 |
|
|
$ |
7,499.8 |
|
Operating
income (loss)
|
|
|
(145.1 |
) |
|
|
72.9 |
|
|
|
93.3 |
|
|
|
66.3 |
|
|
|
87.4 |
|
Net income
(loss) from continuing operations
|
|
|
(179.5 |
) |
|
|
35.0 |
|
|
|
49.1 |
|
|
|
23.8 |
|
|
|
(71.6 |
) |
Discontinued
operations, net of tax
|
|
|
- |
|
|
|
0.3 |
|
|
|
2.3 |
|
|
|
0.2 |
|
|
|
2.8 |
|
Preferred
stock dividends of subsidiary
|
|
|
(0.8 |
) |
|
|
(0.8 |
) |
|
|
(0.7 |
) |
|
|
(0.8 |
) |
|
|
(3.1 |
) |
Net income
(loss) attributed to common shareholders
|
|
|
(180.2 |
) |
|
|
34.7 |
|
|
|
51.1 |
|
|
|
23.5 |
|
|
|
(70.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares
of common stock (basic)
|
|
|
76.7 |
|
|
|
76.8 |
|
|
|
76.8 |
|
|
|
76.8 |
|
|
|
76.8 |
|
Average shares
of common stock (diluted)
|
|
|
76.7 |
|
|
|
76.8 |
|
|
|
76.9 |
|
|
|
77.0 |
|
|
|
76.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share (basic) *
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations
|
|
$ |
(2.35 |
) |
|
$ |
0.45 |
|
|
$ |
0.64 |
|
|
$ |
0.31 |
|
|
$ |
(0.96 |
) |
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
0.03 |
|
|
|
- |
|
|
|
0.04 |
|
Earnings
(loss) per common share (basic)
|
|
|
(2.35 |
) |
|
|
0.45 |
|
|
|
0.67 |
|
|
|
0.31 |
|
|
|
(0.92 |
) |
Earnings
(loss) per common share (diluted) *
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations
|
|
|
(2.35 |
) |
|
|
0.45 |
|
|
|
0.63 |
|
|
|
0.31 |
|
|
|
(0.96 |
) |
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
0.03 |
|
|
|
- |
|
|
|
0.04 |
|
Earnings
(loss) per common share (diluted)
|
|
|
(2.35 |
) |
|
|
0.45 |
|
|
|
0.66 |
|
|
|
0.31 |
|
|
|
(0.92 |
) |
* Earnings (loss) per share
for the individual quarters do not total the year ended earnings (loss) per
share amount
because
of changes to the average number of shares outstanding and changes in
incremental issuable shares
throughout
the year.
(Millions,
except share amounts)
|
|
Three
Months Ended
|
|
|
|
2008
|
|
|
|
March
|
|
|
June
|
|
|
September
|
|
|
December
|
|
|
Total
|
|
Total
revenues
|
|
$ |
3,989.2 |
|
|
$ |
3,417.2 |
|
|
$ |
3,223.1 |
|
|
$ |
3,418.3 |
|
|
$ |
14,047.8 |
|
Operating
income (loss)
|
|
|
234.7 |
|
|
|
53.1 |
|
|
|
(76.2 |
) |
|
|
35.1 |
|
|
|
246.7 |
|
Net income
(loss) from continuing operations
|
|
|
136.6 |
|
|
|
24.8 |
|
|
|
(58.4 |
) |
|
|
21.7 |
|
|
|
124.7 |
|
Discontinued
operations, net of tax
|
|
|
- |
|
|
|
0.1 |
|
|
|
- |
|
|
|
4.6 |
|
|
|
4.7 |
|
Preferred
stock dividends of subsidiary
|
|
|
(0.8 |
) |
|
|
(0.8 |
) |
|
|
(0.7 |
) |
|
|
(0.8 |
) |
|
|
(3.1 |
) |
Net income
(loss) attributed to common shareholders
|
|
|
135.8 |
|
|
|
24.1 |
|
|
|
(59.1 |
) |
|
|
25.6 |
|
|
|
126.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares
of common stock (basic)
|
|
|
76.6 |
|
|
|
76.6 |
|
|
|
76.7 |
|
|
|
76.7 |
|
|
|
76.7 |
|
Average shares
of common stock (diluted)
|
|
|
76.9 |
|
|
|
76.9 |
|
|
|
76.7 |
|
|
|
77.0 |
|
|
|
77.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share (basic) *
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations
|
|
$ |
1.77 |
|
|
$ |
0.31 |
|
|
$ |
(0.77 |
) |
|
$ |
0.27 |
|
|
$ |
1.59 |
|
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.06 |
|
|
|
0.06 |
|
Earnings
(loss) per common share (basic)
|
|
|
1.77 |
|
|
|
0.31 |
|
|
|
(0.77 |
) |
|
|
0.33 |
|
|
|
1.65 |
|
Earnings
(loss) per common share (diluted) *
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations
|
|
|
1.77 |
|
|
|
0.31 |
|
|
|
(0.77 |
) |
|
|
0.27 |
|
|
|
1.58 |
|
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.06 |
|
|
|
0.06 |
|
Earnings
(loss) per common share (diluted)
|
|
|
1.77 |
|
|
|
0.31 |
|
|
|
(0.77 |
) |
|
|
0.33 |
|
|
|
1.64 |
|
* Earnings (loss) per share
for the individual quarters do not total the year ended earnings (loss) per
share amount
because
of changes to the average number of shares outstanding and changes in
incremental issuable shares
throughout
the year.
Because of various
factors, the quarterly results of operations are not necessarily
comparable.
H. REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL
STATEMENTS
To
the Board of Directors and Shareholders of Integrys Energy Group,
Inc:
We
have audited the accompanying consolidated balance sheets of Integrys Energy
Group, Inc. and subsidiaries (the "Company") as of December 31, 2009
and 2008, and the related consolidated statements of income, equity, and cash
flows for each of the three years in the period ended
December 31, 2009. Our audits also included the financial
statement schedules listed in the Index at Item 15. These financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedules based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In
our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Integrys Energy Group, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2009, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion,
such financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
As
discussed in Note 1(r) to the consolidated financial statements, at January 1,
2008, the Company adopted Statement of Financial Accounting Standards No. 157,
“Fair Value Measurements.”
We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Company's internal control over
financial reporting as of December 31, 2009, based on the criteria
established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 25, 2010
expressed an unqualified opinion on the Company's internal control over
financial reporting.
/s/ Deloitte &
Touche LLP
Milwaukee,
WI
February 25,
2010
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
ITEM
9A. CONTROLS AND
PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Integrys Energy
Group's management, with the participation of Integrys Energy Group's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the design and operation of Integrys Energy Group's disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of
the period covered by this report and has concluded that, as of the end of such
period, Integrys Energy Group's disclosure controls and procedures were
effective to ensure that information required to be disclosed by Integrys Energy
Group in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized, and reported within the time periods specified
in the SEC’s rules and forms and is accumulated and communicated to Integrys
Energy Group's management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
Changes
in Internal Controls
There were no
changes in Integrys Energy Group's internal controls over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934) that occurred during the quarter ended
December 31, 2009, that have materially affected, or are reasonably
likely to materially affect, its internal control over financial
reporting.
Management
Reports on Internal Control over Financial Reporting
For Integrys Energy
Group's Management Report on Internal Control over Financial Reporting, see
Section A of Item 8.
Reports
of Independent Registered Public Accounting Firm
For Integrys Energy
Group's Reports of Independent Registered Public Accounting Firm, see Sections B
and H of Item 8.
ITEM
9B. OTHER
INFORMATION
None.
PART
III
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
Information
required by this Item regarding the directors of Integrys Energy Group, Section
16 compliance and the members of the Audit Committee and the Audit
Committee financial expert can be found in Integrys Energy Group's Proxy
Statement for its Annual Meeting of Shareholders to be held
May 13, 2010 (Proxy Statement), under the captions "Election of
Directors," "Ownership of Voting Securities – Section 16(a) Beneficial
Ownership Reporting Compliance" and "Board Committees,"
respectively. Such information is incorporated by reference as if
fully set forth herein.
Information
regarding the executive officers of Integrys Energy Group can be found in this
Annual Report on Form 10-K in Item 4A.
Integrys Energy
Group has adopted a Code of Conduct, which serves as our Code of Business
Conduct and Ethics. The Code of Conduct applies to all of our
directors, officers, and employees, including the Chief Executive Officer, Chief
Financial Officer, Corporate Controller and any other persons performing similar
functions. Integrys Energy Group has also adopted Corporate
Governance Guidelines.
Integrys Energy
Group's Code of Conduct, Corporate Governance Guidelines and charters of the
board committees may be accessed on the Integrys Energy Group Web site,
www.integrysgroup.com under "Investor" then select "Corporate
Governance." Amendments to, or waivers from, our Code of Conduct will
be disclosed on our Web site within the prescribed time period.
Information
required by this Item regarding compensation paid by Integrys Energy Group to
its directors and its "named executive officers" in 2009 can be found in
Integrys Energy Group's Proxy Statement under the captions "Director
Compensation" and "Executive Compensation." Such information is
incorporated by reference as if fully set forth herein.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
Information
required by this Item regarding the principal securities holders of Integrys
Energy Group and the security holdings of its directors and executive officers
can be found in Integrys Energy Group's Proxy Statement under the caption
"Ownership of Voting Securities – Beneficial Ownership." Such
information is incorporated by reference as if fully set forth
herein.
Information
required by this Item regarding equity compensation plans of Integrys Energy
Group can be found in Integrys Energy Group's Proxy Statement under the caption
"Ownership of Voting Securities – Equity Compensation
Plan Information." Such information is incorporated by reference as
if fully set forth herein.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Information
required by this Item regarding Integrys Energy Group's related person
transactions and director independence can be found in Integrys Energy Group's
Proxy Statement under the captions "Election of Directors – Related Person
Transaction Policy" and "Election of Directors – Director Independence,"
respectively. Such information is incorporated by reference as if
fully set forth herein.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
For a summary of
the fees billed to Integrys Energy Group (including its subsidiaries) by
Deloitte & Touche LLP for professional services performed for 2009 and 2008
and the Audit Committee’s preapproval policies and procedures, please see
Integrys Energy Group's Proxy Statement under the caption "Board Committees –
Audit Committee." Such information is incorporated by reference as if
fully set forth herein.
PART
IV
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
Documents
filed as part of this report:
|
|
|
(1)
|
Consolidated
Financial Statements included in Part II at Item 8
above:
|
|
|
|
Description
|
Pages in 10-K
|
|
|
|
|
Consolidated
Statements of Income for the three years ended
December 31, 2009, 2008, and 2007
|
79
|
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
80
|
|
|
|
Consolidated
Statements of Common Shareholders' Equity for the three years ended
December 31, 2009, 2008, and 2007
|
81
|
|
|
|
Consolidated
Statements of Cash Flows for the three years ended
December 31, 2009, 2008, and 2007
|
82
|
|
|
|
|
Notes to
Consolidated Financial Statements
|
83
|
|
|
|
|
Report of
Independent Registered Public Accounting Firm
|
148
|
|
|
|
(2)
|
Financial
Statement Schedules.
The following
financial statement schedules are included in Part IV of this
report. Schedules not included herein have been omitted because
they are not applicable or the required information is shown in the
financial statements or notes thereto.
|
|
|
|
Description
|
Pages in 10-K
|
|
|
|
|
Schedule I -
Condensed Parent Company Only Financial Statements
|
|
|
|
|
|
A.
|
Statements of
Income and Retained Earnings
|
154
|
|
|
|
|
|
B.
|
Balance
Sheets
|
155
|
|
|
|
|
|
C.
|
Statements of
Cash Flows
|
156
|
|
|
|
|
|
D.
|
Notes to
Parent Company Financial Statements
|
157
|
|
|
|
|
|
Schedule II
Integrys Energy Group, Inc. Valuation and Qualifying
Accounts
|
160
|
|
|
|
(3)
|
Listing of
all exhibits, including those incorporated by reference.
See the
attached Exhibit Index.
|
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 25th day of February,
2010.
|
|
INTEGRYS
ENERGY GROUP, INC.
|
|
|
|
|
(Registrant)
|
|
|
|
|
|
|
By:
|
/s/ Charles
A. Schrock
|
|
|
|
Charles A.
Schrock
President and
Chief Executive Officer
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
Signature
|
Title
|
Date
|
|
|
|
Keith E.
Bailey *
|
Director
|
|
Richard A.
Bemis *
|
Director
|
|
William J.
Brodsky *
|
Director
|
|
Albert J.
Budney, Jr. *
|
Director
|
|
Pastora San
Juan Cafferty *
|
Director
|
|
Ellen
Carnahan *
|
Director
|
|
Robert C.
Gallagher *
|
Director
|
|
Kathryn M.
Hasselblad-Pascale *
|
Director
|
|
John W.
Higgins *
|
Director
|
|
James L.
Kemerling *
|
Director
|
|
Michael E.
Lavin *
|
Director
|
|
William F.
Protz, Jr. *
|
Director
|
|
Charles A.
Schrock *
|
Director
|
|
Larry L.
Weyers *
|
Director and
Executive Chairman
|
|
|
|
|
/s/ Charles
A. Schrock
|
President and
Chief Executive Officer (principal executive officer)
|
February 25,
2010
|
Charles A.
Schrock
|
|
|
|
|
|
/s/ Joseph P.
O'Leary
|
Senior Vice
President and Chief Financial Officer
(principal
financial officer)
|
February 25,
2010
|
Joseph P.
O'Leary
|
|
|
|
|
|
/s/ Diane L.
Ford
|
Vice
President and Corporate Controller
(principal
accounting officer)
|
February 25,
2010
|
Diane L.
Ford
|
|
|
|
|
|
|
|
|
* By: /s/ Diane L.
Ford
|
|
|
Diane
L. Ford
|
Attorney-in-Fact
|
February 25,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PARENT
COMPANY FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
INTEGRYS
ENERGY GROUP, INC. (PARENT COMPANY ONLY)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A. STATEMENTS
OF INCOME AND RETAINED EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31
|
|
|
|
|
|
|
|
|
|
(Millions,
except per share data)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Equity
earnings (loss) in excess of dividends from subsidiaries
|
|
$ |
(158.5 |
) |
|
$ |
44.2 |
|
|
$ |
116.4 |
|
Dividends from
subsidiaries
|
|
|
147.0 |
|
|
|
134.9 |
|
|
|
120.0 |
|
Income (loss)
from subsidiaries
|
|
|
(11.5 |
) |
|
|
179.1 |
|
|
|
236.4 |
|
Investment
income and other
|
|
|
25.5 |
|
|
|
19.4 |
|
|
|
17.7 |
|
Total
income
|
|
|
14.0 |
|
|
|
198.5 |
|
|
|
254.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
6.3 |
|
|
|
3.4 |
|
|
|
18.5 |
|
Operating
income
|
|
|
7.7 |
|
|
|
195.1 |
|
|
|
235.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
79.4 |
|
|
|
75.0 |
|
|
|
65.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before taxes
|
|
|
(71.7 |
) |
|
|
120.1 |
|
|
|
170.1 |
|
Provision
(benefit) for income taxes
|
|
|
2.0 |
|
|
|
(1.6 |
) |
|
|
(7.9 |
) |
Income
(loss) from continuing operations
|
|
|
(73.7 |
) |
|
|
121.7 |
|
|
|
178.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations, net of tax
|
|
|
2.8 |
|
|
|
4.7 |
|
|
|
73.3 |
|
Net
income (loss)
|
|
$ |
(70.9 |
) |
|
$ |
126.4 |
|
|
$ |
251.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
earnings, beginning of year
|
|
$ |
624.6 |
|
|
$ |
701.9 |
|
|
$ |
628.2 |
|
Common
stock dividends
|
|
|
(206.9 |
) |
|
|
(203.9 |
) |
|
|
(177.0 |
) |
Other
|
|
|
(1.2 |
) |
|
|
0.2 |
|
|
|
(0.6 |
) |
Retained
earnings, end of year
|
|
$ |
345.6 |
|
|
$ |
624.6 |
|
|
$ |
701.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
76.8 |
|
|
|
76.7 |
|
|
|
71.6 |
|
Diluted
|
|
|
76.8 |
|
|
|
77.0 |
|
|
|
71.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share (basic)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) from continuing operations
|
|
$ |
(0.96 |
) |
|
$ |
1.59 |
|
|
$ |
2.49 |
|
Discontinued
operations, net of tax
|
|
|
0.04 |
|
|
|
0.06 |
|
|
|
1.02 |
|
Earnings
(loss) per common share (basic)
|
|
$ |
(0.92 |
) |
|
$ |
1.65 |
|
|
$ |
3.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share (diluted)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) from continuing operations
|
|
$ |
(0.96 |
) |
|
$ |
1.58 |
|
|
$ |
2.48 |
|
Discontinued
operations, net of tax
|
|
|
0.04 |
|
|
|
0.06 |
|
|
|
1.02 |
|
Earnings
(loss) per common share (basic)
|
|
$ |
(0.92 |
) |
|
$ |
1.64 |
|
|
$ |
3.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per common share declared
|
|
$ |
2.72 |
|
|
$ |
2.68 |
|
|
$ |
2.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to Integrys Energy Group's parent company financial
statements are an integral part of these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SCHEDULE
I - CONDENSED
|
|
|
|
|
|
|
PARENT
COMPANY FINANCIAL STATEMENTS
|
|
|
|
|
|
|
INTEGRYS
ENERGY GROUP, INC. (PARENT COMPANY ONLY)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B. BALANCE
SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31
|
|
|
|
|
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
19.0 |
|
|
$ |
190.9 |
|
Accounts
receivable from related parties
|
|
|
38.7 |
|
|
|
33.9 |
|
Interest
receivable from related parties
|
|
|
4.6 |
|
|
|
5.2 |
|
Deferred
income taxes
|
|
|
- |
|
|
|
0.2 |
|
Notes
receivable from related parties
|
|
|
53.0 |
|
|
|
150.9 |
|
Assets from
risk management activities
|
|
|
- |
|
|
|
14.7 |
|
Other current
assets
|
|
|
29.5 |
|
|
|
27.3 |
|
Current
assets
|
|
|
144.8 |
|
|
|
423.1 |
|
|
|
|
|
|
|
|
|
|
Total
investments in subsidiaries, at equity
|
|
|
3,962.6 |
|
|
|
4,206.1 |
|
|
|
|
|
|
|
|
|
|
Notes
receivable from related parties
|
|
|
220.3 |
|
|
|
210.9 |
|
Property and
equipment, net of accumulated depreciation of $0.7 and $0.5,
respectively
|
|
|
5.2 |
|
|
|
5.3 |
|
Receivables
from related parties
|
|
|
9.0 |
|
|
|
10.5 |
|
State deferred
income taxes
|
|
|
27.9 |
|
|
|
16.5 |
|
Other
|
|
|
27.0 |
|
|
|
26.3 |
|
Total
assets
|
|
$ |
4,396.8 |
|
|
$ |
4,898.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt to related parties
|
|
$ |
315.7 |
|
|
$ |
276.1 |
|
Short-term
debt
|
|
|
205.1 |
|
|
|
473.9 |
|
Current
portion of long-term debt
|
|
|
65.6 |
|
|
|
150.0 |
|
Accounts
payable to related parties
|
|
|
3.9 |
|
|
|
49.7 |
|
Interest
payable to related parties
|
|
|
4.7 |
|
|
|
5.9 |
|
Accounts
payable
|
|
|
0.6 |
|
|
|
0.1 |
|
Liabilities
from risk management activities
|
|
|
1.9 |
|
|
|
1.5 |
|
Deferred
income taxes
|
|
|
7.3 |
|
|
|
- |
|
Other current
liabilities
|
|
|
4.4 |
|
|
|
12.6 |
|
Current
liabilities
|
|
|
609.2 |
|
|
|
969.8 |
|
|
|
|
|
|
|
|
|
|
Long-term debt
to related parties
|
|
|
346.0 |
|
|
|
346.0 |
|
Long-term
debt
|
|
|
554.7 |
|
|
|
465.1 |
|
Federal
deferred income taxes
|
|
|
23.2 |
|
|
|
8.8 |
|
Liabilities
from risk management activities
|
|
|
- |
|
|
|
3.5 |
|
Payables to
related parties
|
|
|
2.4 |
|
|
|
2.0 |
|
Other
|
|
|
2.7 |
|
|
|
3.9 |
|
Long-term
liabilities
|
|
|
929.0 |
|
|
|
829.3 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
equity
|
|
|
2,858.6 |
|
|
|
3,099.6 |
|
Total
liabilities and shareholders' equity
|
|
$ |
4,396.8 |
|
|
$ |
4,898.7 |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to Integrys Energy Group's parent company financial
statements are an integral part of these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SCHEDULE
I - CONDENSED
|
|
|
|
|
|
|
|
|
|
PARENT
COMPANY FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
INTEGRYS
ENERGY GROUP, INC. (PARENT COMPANY ONLY)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C. STATEMENTS
OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Operating
Activities
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$ |
(70.9 |
) |
|
$ |
126.4 |
|
|
$ |
251.3 |
|
Adjustments to
reconcile net income (loss) to net cash provided by operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations, net of tax
|
|
|
(2.8 |
) |
|
|
(4.7 |
) |
|
|
(73.3 |
) |
|
Equity loss
(income) from subsidiaries, net of dividends
|
|
|
158.5 |
|
|
|
(44.2 |
) |
|
|
(116.4 |
) |
|
Deferred
income taxes
|
|
|
24.4 |
|
|
|
19.7 |
|
|
|
(8.0 |
) |
|
Gain on sale
of investment
|
|
|
(0.4 |
) |
|
|
- |
|
|
|
(1.6 |
) |
|
Cumulative
effect of change in accounting principles, net of tax
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Other
|
|
|
23.7 |
|
|
|
7.9 |
|
|
|
14.0 |
|
|
Changes
in working capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acounts
receivables
|
|
|
0.5 |
|
|
|
1.2 |
|
|
|
(2.0 |
) |
|
Accounts
receivables from related parties
|
|
|
(4.2 |
) |
|
|
20.3 |
|
|
|
(30.6 |
) |
|
Other current
assets
|
|
|
(2.4 |
) |
|
|
(25.2 |
) |
|
|
- |
|
|
Accounts
payable
|
|
|
0.5 |
|
|
|
(1.6 |
) |
|
|
0.8 |
|
|
Accounts
payable to related parties
|
|
|
(44.6 |
) |
|
|
41.7 |
|
|
|
2.9 |
|
|
Other current
liabilities
|
|
|
(7.4 |
) |
|
|
(30.4 |
) |
|
|
33.8 |
|
Net
cash provided by operating activities
|
|
|
74.9 |
|
|
|
111.1 |
|
|
|
70.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
- |
|
|
|
- |
|
|
|
(10.7 |
) |
Short-term
notes receivable from related parties
|
|
|
97.9 |
|
|
|
(84.6 |
) |
|
|
57.2 |
|
Long-term
notes receivable from related parties
|
|
|
(10.0 |
) |
|
|
- |
|
|
|
- |
|
Receivables
from related parties
|
|
|
1.5 |
|
|
|
1.6 |
|
|
|
1.8 |
|
Equity
contributions to subsidiaries
|
|
|
(56.1 |
) |
|
|
(163.0 |
) |
|
|
(100.9 |
) |
Return of
capital from subsidiaries
|
|
|
155.5 |
|
|
|
83.4 |
|
|
|
34.1 |
|
Proceeds from
sale of investment
|
|
|
0.5 |
|
|
|
- |
|
|
|
2.0 |
|
Cash paid for
transaction cost related to acquisitions
|
|
|
- |
|
|
|
- |
|
|
|
(14.4 |
) |
Other
|
|
|
|
0.5 |
|
|
|
7.4 |
|
|
|
- |
|
Net
cash provided by (used for) investing activities
|
|
|
189.8 |
|
|
|
(155.2 |
) |
|
|
(30.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper, net
|
|
|
(47.7 |
) |
|
|
182.5 |
|
|
|
(454.4 |
) |
Notes payable
to related parties
|
|
|
39.6 |
|
|
|
55.2 |
|
|
|
545.9 |
|
Issuance of
notes payable
|
|
|
- |
|
|
|
155.7 |
|
|
|
- |
|
Issuance of
short-term debt
|
|
|
- |
|
|
|
50.0 |
|
|
|
- |
|
Redemption of
notes payable
|
|
|
(50.0 |
) |
|
|
|
|
|
|
|
|
Redemption of
short-term debt
|
|
|
(157.9 |
) |
|
|
- |
|
|
|
- |
|
Issuance of
long-term debt
|
|
|
155.0 |
|
|
|
- |
|
|
|
- |
|
Redemption of
long-term debt
|
|
|
(150.0 |
) |
|
|
- |
|
|
|
- |
|
Issuance of
common stock
|
|
|
- |
|
|
|
- |
|
|
|
45.6 |
|
Dividends paid
on common stock
|
|
|
(206.9 |
) |
|
|
(203.9 |
) |
|
|
(177.0 |
) |
Other
|
|
|
|
(18.7 |
) |
|
|
(4.5 |
) |
|
|
(1.7 |
) |
Net
cash (used for) provided by financing activities
|
|
|
(436.6 |
) |
|
|
235.0 |
|
|
|
(41.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in cash and cash equivalents
|
|
|
(171.9 |
) |
|
|
190.9 |
|
|
|
(1.6 |
) |
Cash and cash
equivalents at beginning of year
|
|
|
190.9 |
|
|
|
- |
|
|
|
1.6 |
|
Cash
and cash equivalents at end of year
|
|
$ |
19.0 |
|
|
$ |
190.9 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to Integrys Energy Group's parent company financial
statements are an integral part of these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SCHEDULE
I - CONDENSED
PARENT
COMPANY FINANCIAL STATEMENTS
INTEGRYS
ENERGY GROUP, INC. (PARENT COMPANY ONLY)
D. NOTES TO PARENT COMPANY FINANCIAL STATEMENTS
SUPPLEMENTAL
NOTES
NOTE
1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation--For
Parent Company only presentation, investments in subsidiaries are accounted for
using the equity method. The condensed Parent Company financial
statements and notes should be read in conjunction with the consolidated
financial statements and notes of Integrys Energy Group appearing in this Form
10-K. The consolidated financial statements of Integrys Energy Group
reflect certain businesses as discontinued operations. In the
Integrys Energy Group consolidated financial statements, $26.5 million and
$26.3 million assets were reported as held for sale and $0.3 million
and $7.5 million liabilities were reported as held for sale at year-end
2009 and 2008, respectively. For Parent Company only presentation,
the investments in discontinued operations are recorded in Investments in
Subsidiary Companies. The condensed Parent Company statements of
income and statements of cash flows report the earnings and cash flows of these
businesses as discontinued operations.
(b) Cash
and Cash Equivalents--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 Parent Company Statements
of Cash Flows:
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Cash paid for
interest
|
|
$ |
57.3 |
|
|
$ |
46.1 |
|
|
$ |
55.1 |
|
Cash paid for
interest – related parties
|
|
|
23.6 |
|
|
|
24.9 |
|
|
|
3.8 |
|
Cash paid
(received) for income taxes
|
|
|
(15.4 |
) |
|
|
27.2 |
|
|
|
- |
|
Significant
non-cash transactions were as follows:
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Equity issued
for net assets acquired in PEC merger
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,559.3 |
|
NOTE 2--FAIR
VALUE OF FINANCIAL INSTRUMENTS – RELATED PARTIES
The following table
shows the financial instruments included on the Balance Sheets of Integrys
Energy Group Parent Company that are not recorded at fair value.
(Millions)
|
|
2009
|
|
|
2008
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Long-term
notes receivable from related parties
|
|
$ |
220.3 |
|
|
$ |
235.5 |
|
|
$ |
210.9 |
|
|
$ |
199.9 |
|
Long-term
debt to related parties
|
|
|
346.0 |
|
|
|
361.3 |
|
|
|
346.0 |
|
|
|
345.8 |
|
NOTE
3--SHORT-TERM NOTES RECEIVABLE – RELATED PARTIES
(Millions)
|
|
2009
|
|
|
2008
|
|
UPPCO
|
|
$ |
10.4 |
|
|
$ |
6.8 |
|
Integrys
Energy Services
|
|
|
- |
|
|
|
81.7 |
|
MERC
|
|
|
3.6 |
|
|
|
22.3 |
|
MGU
|
|
|
8.7 |
|
|
|
27.0 |
|
IBS
|
|
|
30.3 |
|
|
|
13.1 |
|
Total
|
|
$ |
53.0 |
|
|
$ |
150.9 |
|
NOTE
4--LONG-TERM NOTES RECEIVABLE – RELATED PARTIES
(Millions) |
|
|
|
2009
|
|
|
2008
|
|
WPS |
|
|
|
|
|
|
|
|
|
Series |
|
Year Due
|
|
|
|
|
|
|
|
8.76 |
% |
2015
|
$ |
3.8 |
|
$ |
4.0 |
|
|
7.35 |
% |
2016
|
|
5.5 |
|
|
5.9 |
|
|
|
|
|
|
|
|
|
UPPCO
|
|
|
|
|
|
|
|
|
Series |
|
Year
Due
|
|
|
|
|
|
|
|
5.25 |
% |
2013
|
|
15.0 |
|
|
15.0 |
|
|
6.06 |
% |
2017
|
|
15.0 |
|
|
15.0 |
|
|
|
|
|
|
|
|
|
MERC
|
|
|
|
|
|
|
|
|
Series |
|
Year Due
|
|
|
|
|
|
|
|
6.03 |
% |
2013
|
|
29.0 |
|
|
29.0 |
|
|
6.16 |
% |
2016
|
|
29.0 |
|
|
29.0 |
|
|
6.40 |
% |
2021
|
|
29.0 |
|
|
29.0 |
|
MGU
|
|
|
|
|
|
Series
|
|
Year Due
|
|
|
|
|
|
|
5.72 |
% |
2013
|
|
28.0 |
|
|
28.0 |
|
|
5.76 |
% |
2016
|
|
28.0 |
|
|
28.0 |
|
|
5.98 |
% |
2021
|
|
28.0 |
|
|
28.0 |
|
|
|
|
|
|
|
|
IBS |
|
|
|
|
|
|
Series
|
|
Year Due
|
|
|
|
|
|
|
|
6.86 |
% |
2014
|
|
10.0 |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$ |
220.3 |
|
$ |
210.9 |
|
NOTE
5--SHORT-TERM NOTES PAYABLE – RELATED PARTIES
(Millions)
|
|
2009
|
|
|
2008
|
|
Integrys
Energy Services
|
|
$ |
218.7 |
|
|
$ |
- |
|
PEC
|
|
|
97.0 |
|
|
|
276.1 |
|
Total
|
|
$ |
315.7 |
|
|
$ |
276.1 |
|
NOTE
6--LONG-TERM DEBT – RELATED PARTIES
(Millions)
|
|
2009
|
|
|
2008
|
|
Long-term
notes to PEC due 2011 (1)
|
|
$ |
325.0 |
|
|
$ |
325.0 |
|
Long-term
notes to Integrys Energy Services due 2021 (2)
|
|
|
21.0 |
|
|
|
21.0 |
|
Total
|
|
$ |
346.0 |
|
|
$ |
346.0 |
|
(1)
|
On September
28, 2007, Integrys Energy Group issued a $325.0 million long-term
promissory note to PEC. The note bears interest at a rate of
5.25% and matures in January 2011. Proceeds of the note were
used to reduce the balance of commercial paper
outstanding.
|
(2)
|
Integrys
Energy Group has a long-term note payable to Integrys Energy Services at
December 31, 2009 and 2008 of $21.0 million. The note
bears interest at a rate that approximates current market rates and is due
in 2021.
|
At
December 31, 2009, Integrys Energy Group (parent company) was in compliance with
all covenants relating to outstanding debt to the related parties. A
schedule of all principal debt payment amounts for Integrys Energy Group (parent
company) is as follows:
Year
ending December 31
(Millions)
|
|
|
|
2010
|
|
$ |
- |
|
2011
|
|
|
325.0 |
|
2012
|
|
|
- |
|
2013
|
|
|
- |
|
2014
|
|
|
- |
|
Later
years
|
|
|
21.0 |
|
Total
payments
|
|
$ |
346.0 |
|
NOTE
7--INCOME TAXES
The principal
components of Integrys Energy Group’s deferred income tax assets and liabilities
recognized in the balance sheet as of December 31 are as follows:
(Millions)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Deferred
income tax assets:
|
|
|
|
|
|
|
Plant
related
|
|
$ |
- |
|
|
$ |
10.9 |
|
State capital
and operating loss carryforwards
|
|
|
10.0 |
|
|
|
11.3 |
|
Employee
benefits
|
|
|
6.1 |
|
|
|
6.8 |
|
Price risk
management
|
|
|
- |
|
|
|
1.8 |
|
Deferred
deductions
|
|
|
0.5 |
|
|
|
- |
|
Other
|
|
|
- |
|
|
|
1.1 |
|
Total
deferred income tax assets
|
|
|
16.6 |
|
|
|
31.9 |
|
Valuation
allowance
|
|
|
- |
|
|
|
(1.2 |
) |
Net deferred
income tax assets
|
|
$ |
16.6 |
|
|
$ |
30.7 |
|
|
|
|
|
|
|
|
|
|
Deferred
income tax liabilities:
|
|
|
|
|
|
|
|
|
Plant
related
|
|
$ |
12.9 |
|
|
$ |
21.7 |
|
Price risk
management
|
|
|
0.2 |
|
|
|
- |
|
Other
|
|
|
6.1 |
|
|
|
1.1 |
|
Total
deferred income tax liabilities
|
|
$ |
19.2 |
|
|
$ |
22.8 |
|
Carryforward
periods for state capital and operating loss carryforwards vary, but in the
majority of states in which we do business, the period is 15 years or
more. The balance of the carryforwards of state net operating losses
is $195.2 million for all states. No valuation allowances have
been established due to the reasonable certainty of the ability to realize the
benefit of these losses in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEGRYS
ENERGY GROUP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VALUATION
AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Doubtful Accounts
|
|
Years
Ended December 31, 2009, 2008, and 2007
|
|
(in
Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
|
|
|
Acquisitions
|
|
|
Additions
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Beginning
of
|
|
|
of
|
|
|
Charged
to
|
|
|
Charged
to
|
|
|
|
|
|
Balance
at
|
|
Fiscal
Year
|
|
Year
|
|
|
Businesses
|
|
|
Expense
|
|
|
Other
Accounts (1)
|
|
|
Reductions
(2)
|
|
|
End of
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$ |
17.0 |
|
|
$ |
42.9 |
|
|
$ |
39.1 |
|
|
$ |
2.8 |
|
|
$ |
45.8 |
|
|
$ |
56.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$ |
56.0 |
|
|
$ |
- |
|
|
$ |
76.8 |
|
|
$ |
5.6 |
|
|
$ |
75.9 |
|
|
$ |
62.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$ |
62.5 |
|
|
$ |
- |
|
|
$ |
54.6 |
|
|
$ |
15.1 |
|
|
$ |
74.7 |
|
|
$ |
57.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Represents
additions charged to regulatory assets and amounts charged to tax
liabilities related to revenue taxes and state
|
|
use taxes uncollectible from customers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
Represents amounts written off to the reserve, including any
adjustments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Set forth below is
a listing of all exhibits to this Annual Report on Form 10-K, including those
incorporated by reference.
Certain other
instruments, which would otherwise be required to be listed below, have not been
so listed as such instruments do not authorize long-term debt securities in an
amount which exceeds 10% of the total assets of Integrys Energy Group and its
subsidiaries on a consolidated basis. Integrys Energy Group agrees to
furnish a copy of any such instrument to the SEC upon request.
Explanatory
Note: Many of the exhibits listed below were entered into when
Integrys Energy Group, Inc. was known as WPS Resources Corporation but have
been referred to below by reference to its current name.
Exhibit
Number
|
Description of Documents
|
|
|
2.1*
|
Asset
Contribution Agreement between ATC and Wisconsin Electric Power Company,
Wisconsin Power and Light Company, WPS, Madison Gas & Electric Co.,
Edison Sault Electric Company, South Beloit Water, Gas and Electric
Company, dated as of December 15, 2000. (Incorporated by
reference to Exhibit 2A-3 to Integrys Energy Group's Form 10-K for the
year ended December 31, 2000.)
|
|
|
2.2*
#
|
Purchase and
Sale Agreement between Integrys Energy Services, Inc., as Seller, and
Macquarie Cook Power, Inc., as Purchaser, dated as of December 23,
2009.
|
|
|
2.3#
|
First
Amendment to Purchase and Sale Agreement dated January 26, 2010, between
Integrys Energy Services, Inc., as Seller, and Macquarie Cook Power, Inc.,
as Purchaser.
|
|
|
3.1
|
Restated
Articles of Incorporation of Integrys Energy Group, as
amended. (Incorporated by reference to Exhibit 3.2 to
Integrys Energy Group's Form 8-K filed February 27,
2007.)
|
|
|
3.2
|
By-Laws of
Integrys Energy Group, as amended through December 17,
2009. (Incorporated by reference to Exhibit 3.2 to Integrys
Energy Group's Form 8-K filed December 22, 2009.)
|
|
|
4.1
|
Senior
Indenture, dated as of October 1, 1999, between Integrys Energy Group
and U.S. Bank National Association (successor to Firstar Bank
Milwaukee, N.A., National Association) (Incorporated by reference to
Exhibit 4(b) to Amendment No. 1 to Form S-3 filed October 21, 1999 [Reg.
No. 333-88525]); First Supplemental Indenture, dated as of November 1,
1999 between Integrys Energy Group and Firstar Bank, National Association
(Incorporated by reference to Exhibit 4A of Form 8-K filed November 12,
1999); Second Supplemental Indenture, dated as of November 1, 2002 between
Integrys Energy Group and U.S. Bank National Association; Third
Supplemental Indenture, dated as of June 1, 2009, by and between Integrys
Energy Group and U.S. Bank National Association (Incorporated by reference
to Exhibit 4.1 to Integrys Energy Group’s Form 8-K filed June 17, 2009);
and Fourth Supplemental Indenture, dated as of June 1, 2009, by and
between Integrys Energy Group and U.S. Bank National Association
(Incorporated by reference to Exhibit 4.2 to Integrys Energy Group’s Form
8-K filed June 17, 2009). (Incorporated by reference to Exhibit
4A of Form 8-K filed November 25, 2002.) All references to
filings are those of Integrys Energy Group (File No.
1-11337).
|
4.2
|
Subordinated
Indenture, dated as of November 13, 2006, between Integrys Energy Group
and U.S. Bank National Association, as trustee (Incorporated by reference
to Exhibit 4(c) to Amendment No. 1 to Form S-3 filed December 4, 2006
[Reg. No. 333-133194]; and First Supplemental Indenture by and between
Integrys Energy Group, Inc. and U.S. Bank National Association, as
trustee, dated December 1, 2006. (Incorporated by reference to
Exhibit 4 to Integrys Energy Group's Form 8-K filed December 1,
2006.)
|
|
|
4.3
|
Replacement
Capital Covenant of Integrys Energy Group, Inc., dated December 1,
2006. (Incorporated by reference to Exhibit 99 to Integrys
Energy Group Form 8-K filed December 1, 2006.)
|
|
|
4.4
|
Credit
Agreement dated as of June 13, 2006, by and among PEC, the financial
institutions party hereto, and Bank of America, N.A., JPMorgan Chase Bank,
N.A., ABN AMRO Incorporated, US Bank National Association, and The Bank of
Tokyo-Mitsubishi, Ltd. Chicago Branch, as agents. (Incorporated
by reference to Exhibit 10(a) to PEC - Form 10-Q filed August 9, 2006
[File No. 1-05540].)
|
|
|
4.5
|
Guaranty,
dated May 18, 2007, by and among Integrys Energy Group, Inc. and Bank of
America, N.A. in its capacity as Administrative Agent. (Incorporated
by reference to Exhibit 10.1 to Integrys Energy Group's Form 8-K filed May
22, 2007.)
|
|
|
4.6
|
First
Amendment and Consent to Credit Agreement dated May 18, 2007 between PEC
and Bank of America N.A., as Administrative
Agent. (Incorporated by reference to Exhibit 10.2 to Integrys
Energy Group's Form 8-K filed May 22, 2007.)
|
|
|
4.7
|
First
Mortgage and Deed of Trust, dated as of January 1, 1941 from WPS to U.S.
Bank National Association (successor to First Wisconsin Trust Company),
Trustee (Incorporated by reference to Exhibit 7.01 - File No. 2-7229);
Supplemental Indenture, dated as of November 1, 1947 (Incorporated by
reference to Exhibit 7.02 - File No. 2-7602); Supplemental Indenture,
dated as of November 1, 1950 (Incorporated by reference to Exhibit 4.04 -
File No. 2-10174); Supplemental Indenture, dated as of May 1, 1953
(Incorporated by reference to Exhibit 4.03 - File No. 2-10716);
Supplemental Indenture, dated as of October 1, 1954 (Incorporated by
reference to Exhibit 4.03 - File No. 2-13572); Supplemental
Indenture, dated as of December 1, 1957 (Incorporated by reference to
Exhibit 4.03 - File No. 2-14527); Supplemental Indenture, dated as of
October 1, 1963 (Incorporated by reference to Exhibit 2.02B -
File No. 2-65710); Supplemental Indenture, dated as of June 1, 1964
(Incorporated by reference to Exhibit 2.02B - File No. 2-65710);
Supplemental Indenture, dated as of November 1, 1967 (Incorporated by
reference to Exhibit 2.02B - File No. 2-65710); Supplemental Indenture,
dated as of April 1, 1969 (Incorporated by reference to Exhibit 2.02B -
File No. 2-65710); Fifteenth Supplemental Indenture, dated as of May 1,
1971 (Incorporated by reference to Exhibit 2.02B - File No. 2-65710);
Sixteenth Supplemental Indenture, dated as of August 1, 1973
(Incorporated by reference to Exhibit 2.02B - File No. 2-65710);
Seventeenth Supplemental Indenture, dated as of September 1, 1973
(Incorporated by reference to Exhibit 2.02B - File No. 2-65710);
Eighteenth Supplemental Indenture, dated as of October 1, 1975
(Incorporated by reference to Exhibit 2.02B - File No. 2-65710);
Nineteenth Supplemental Indenture, dated as of February 1, 1977
(Incorporated by reference to Exhibit 2.02B - File No. 2-65710);
Twentieth Supplemental Indenture, dated as of July 15, 1980 (Incorporated
by reference to Exhibit 4B to Form 10-K for the year ended
December 31, 1980); Twenty-First Supplemental Indenture, dated as of
December 1, 1980 (Incorporated by reference to Exhibit 4B to
Form 10-K for the year ended December 31, 1980); Twenty-Second
Supplemental Indenture dated as of April 1, 1981 (Incorporated by
reference to Exhibit 4B to Form 10-K for the year ended December 31,
1981); Twenty-Third Supplemental Indenture, dated as of February 1, 1984
(Incorporated by reference to Exhibit 4B to Form 10-K for the year ended
December 31, 1983); Twenty-Fourth Supplemental Indenture, dated as of
March 15, 1984 (Incorporated by reference to Exhibit 1 to Form 10-Q for
the quarter ended June 30, 1984); Twenty-Fifth Supplemental
Indenture, dated as of
|
|
October 1,
1985 (Incorporated by reference to Exhibit 1 to Form 10-Q for the
quarter ended September 30, 1985); Twenty-Sixth Supplemental
Indenture, dated as of December 1, 1987 (Incorporated by reference to
Exhibit 4A-1 to Form 10-K for the year ended December 31, 1987);
Twenty-Seventh Supplemental Indenture, dated as of September 1, 1991
(Incorporated by reference to Exhibit 4 to Form 8-K filed September 18,
1991); Twenty-Eighth Supplemental Indenture, dated as of July 1, 1992
(Incorporated by reference to Exhibit 4B - File No. 33-51428);
Twenty-Ninth Supplemental Indenture, dated as of October 1, 1992
(Incorporated by reference to Exhibit 4 to Form 8-K filed October 22,
1992); Thirtieth Supplemental Indenture, dated as of February 1, 1993
(Incorporated by reference to Exhibit 4 to Form 8-K filed
January 27, 1993); Thirty-First Supplemental Indenture, dated as of
July 1, 1993 (Incorporated by reference to Exhibit 4 to Form 8-K filed
July 7, 1993); Thirty-Second Supplemental Indenture, dated as of
November 1, 1993 (Incorporated by reference to Exhibit 4 to
Form 10-Q for the quarter ended September 30, 1993); Thirty-Third
Supplemental Indenture, dated as of December 1, 1998 (Incorporated by
reference to Exhibit 4D to Form 8-K filed December 18, 1998);
Thirty-Fourth Supplemental Indenture, dated as of August 1, 2001
(Incorporated by reference to Exhibit 4D to Form 8-K filed August 24,
2001); Thirty-Fifth Supplemental Indenture, dated as of December 1,
2002 (Incorporated by reference to Exhibit 4D to Form 8-K filed
December 16, 2002); Thirty-Sixth Supplemental Indenture, dated as of
December 8, 2003 (Incorporated by reference to Exhibit 4.2 to Form
8-K filed December 9, 2003); Thirty-Seventh Supplemental Indenture,
dated as of December 1, 2006 (Incorporated by reference to Exhibit
4.2 to Form 8-K filed November 30, 2006); Thirty-Eighth Supplemental
Indenture, dated as of August 1, 2006 (Incorporated by reference to
Exhibit 4.1 to Form 10-K for the year ended December 31, 2006);
Thirty-Ninth Supplemental Indenture, dated as of November 1, 2007
(Incorporated by reference to Exhibit 4.2 to Form 8-K filed November 16,
2007); and Fortieth Supplemental Indenture, dated as of December 1, 2008
(Incorporated by reference to Exhibit 4.2 to Form 8-K filed December 4,
2008). All references to periodic reports are to those of WPS
(File No. 1-3016).
|
|
|
4.8
|
Indenture,
dated as of December 1, 1998, between WPS and U.S. Bank National
Association (successor to Firstar Bank Milwaukee, N.A., National
Association) (Incorporated by reference to Exhibit 4A to Form 8-K filed
December 18, 1998); First Supplemental Indenture, dated as of
December 1, 1998 between WPS and Firstar Bank Milwaukee, N.A.,
National Association (Incorporated by reference to Exhibit 4C to Form 8-K
filed December 18, 1998); Second Supplemental Indenture, dated as of
August 1, 2001 between WPS and Firstar Bank, National Association
(Incorporated by reference to Exhibit 4C of Form 8-K filed August 24,
2001); Third Supplemental Indenture, dated as of December 1, 2002
between WPS and U.S. Bank National Association (Incorporated by reference
to Exhibit 4C of Form 8-K filed December 16, 2002); Fourth
Supplemental Indenture, dated as of December 8, 2003, by and between
WPS and U.S. Bank National Association (successor to Firstar Bank,
National Association and Firstar Bank Milwaukee, N.A., National
Association) (Incorporated by reference to Exhibit 4.1 to Form
8-K filed December 9, 2003); Fifth Supplemental Indenture, dated as
of December 1, 2006, by and between WPS and U.S. Bank National
Association (successor to Firstar Bank, National Association and Firstar
Bank Milwaukee, N.A., National Association) (Incorporated by
reference to Exhibit 4.1 to Form 8-K filed November 30, 2006); Sixth
Supplemental Indenture, dated as of December 1, 2006, by and between
WPS and U.S. Bank National Association (successor to Firstar Bank,
National Association and Firstar Bank Milwaukee, N.A., National
Association) (Incorporated by reference to Exhibit 4.2 to Form 10-K for
the year ended December 31, 2006); Seventh Supplemental Indenture, dated
as of November 1, 2007, by and between WPS and U.S. Bank
National Association (successor to Firstar Bank, National Association and
Firstar Bank Milwaukee, N.A., National Association) (Incorporated by
reference to Exhibit 4.1 to Form 8-K filed November 16, 2007); and Eighth
Supplemental Indenture, dated as of December 1, 2008, by and between
WPS and U.S. Bank National Association (successor to Firstar Bank,
National Association and Firstar Bank Milwaukee, N.A., National
Association) (Incorporated by reference to Exhibit 4.1 to Form 8-K filed
December 4, 2008). References to periodic reports are to those
of WPS (File No. 1-3016).
|
|
|
4.9
|
Indenture,
dated as of January 18, 2001, between PEC and Bank One Trust Company
National Association. (Incorporated by reference to Exhibit
4(a) to PEC Form 10-Q filed May 15, 2001[File No.
1-05540].)
|
|
|
4.10
|
First
Supplemental Indenture, dated as of March 5, 2007, by and among PEC,
Integrys Energy Group, Inc. and The Bank of New York Trust Company, N.A.,
as Trustee including a Guaranty of Integrys Energy Group,
Inc. (Incorporated by reference to Exhibit 4.1 to Integrys
Energy Group's Form 8-K filed March 9, 2007.)
|
|
|
4.11
|
PGL First and
Refunding Mortgage, dated January 2, 1926, from Chicago By-Product Coke
Company to Illinois Merchants Trust Company, Trustee, assumed by PGL by
Indenture dated March 1, 1928 (PGL - May 17, 1935, Exhibit B-6a, Exhibit
B-6b A-2 File No. 2-2151, 1936); Supplemental Indenture dated as of
May 20, 1936, (PGL - Form 8-K for the year 1936, Exhibit B-6f);
Supplemental Indenture dated as of March 10, 1950 (PGL - Form 8-K for the
month of March 1950, Exhibit B-6i); Supplemental Indenture dated as of
June 1, 1951 (PGL - File No. 2-8989, Post-Effective, Exhibit 7-4(b));
Supplemental Indenture dated as of August 15, 1967 (PGL - File
No. 2-26983, Post-Effective, Exhibit 2-4); Supplemental Indenture
dated as of September 15, 1970 (PGL - File No. 2-38168,
Post-Effective Exhibit 2-2); Supplemental Indenture dated June 1,
1995 (PGL - Form 10-K for fiscal year ended September 30, 1995);
Supplemental Indenture, First and Refunding Mortgage Multi-Modal Bonds,
Series HH of PGL, effective March 1, 2000 (PGL - Form 10-K for fiscal year
ended September 30, 2000, Exhibit 4(b)); Supplemental Indenture dated as
of February 1, 2003, First and Refunding Mortgage 5% Bonds, Series KK
(PEC and PGL - Form 10-Q for the quarter ended March 31, 2003, Exhibit
4(a)); Supplemental Indenture dated as of February 1, 2003, First and
Refunding Mortgage Multi-Modal Bonds, Series LL (PEC and PGL - Form 10-Q
for the quarter ended March 31, 2003, Exhibit 4(b)); Supplemental
Indenture dated as of February 15, 2003, First and Refunding Mortgage
4.00% Bonds, Series MM-1 and Series MM-2 (PEC and PGL - Form 10-Q for the
quarter ended March 31, 2003, Exhibit 4(c)); Supplemental Indenture dated
as of April 15, 2003, First and Refunding Mortgage 4.625% Bonds, Series
NN-1 and Series NN-2 (PEC and PGL - Form 10-Q for the quarter ended March
31, 2003, Exhibit 4(e)); Supplemental Indenture dated as of October 1,
2003, First and Refunding Mortgage Bonds, Series OO (PEC and PGL - Form
10-Q for the quarter ended December 31, 2003, Exhibit 4(a)); PGL
Supplemental Indenture dated as of October 1, 2003, First and Refunding
Mortgage Bonds, Series PP (PEC and PGL - Form 10-Q for the quarter ended
December 31, 2003, Exhibit 4(b)); PGL Supplemental Indenture dated as of
November 1, 2003, First and Refunding Mortgage Multi-Modal Bonds, Series
QQ (PEC and PGL - Form 10-Q for the quarter ended December 31,
2003, Exhibit 4(c)); PGL Supplemental Indenture dated as of January 1,
2005, First and Refunding Mortgage Bonds, Series RR (PEC and PGL - Form
10-Q for the quarter ended December 31, 2004, Exhibit 4(b)); Loan
Agreement between PGL and Illinois Development Finance Authority dated
October 1, 2003, Gas Supply Refunding Revenue Bonds, Series 2003C (PEC and
PGL - Form 10-Q for the quarter ended December 31, 2003, Exhibit
4(d)); Loan Agreement between PGL and Illinois Development Finance
Authority dated October 1, 2003, Gas Supply Refunding Revenue Bonds,
Series 2003D (PEC and PGL - Form 10-Q for the quarter ended December 31,
2003, Exhibit 4(e)); Loan Agreement between PGL and Illinois Development
Finance Authority dated November 1, 2003, Gas Supply Refunding Revenue
Bonds, Series 2003E (PEC and PGL - Form 10-Q for the quarter ended
December 31, 2003, Exhibit 4(f)); Loan Agreement between PGL and
Illinois Finance Authority dated as of January 1,
2005. (Incorporated by reference to Exhibit 4(a) to PEC Form
10-Q filed February 9, 2005); Supplemental Indenture
dated as of November 1, 2008, First and Refunding Mortgage 7.00% Bonds,
Series SS; Supplemental Indenture dated as of November 1, 2008, First and
Refunding Mortgage 8.00% Bonds, Series TT; and Supplemental Indenture
dated as of September 1, 2009, First and Refunding Mortgage 4.63% Bonds,
Series UU.
|
|
|
4.12
|
NSG
Indenture, dated as of April 1, 1955, from NSG to Continental
Bank, National Association, as Trustee; Third Supplemental Indenture,
dated as of December 20, 1963 (NSG - File No. 2-35965, Exhibit 4-1);
Fourth Supplemental Indenture, dated as of May 1 1964 (NSG - File No.
2-35965, Exhibit 4-1); Fifth Supplemental Indenture dated as of
February 1, 1970 (NSG - File No. 2-35965, Exhibit 4-2);
Ninth Supplemental Indenture dated as of December 1, 1987 (NSG - Form 10-K
for the fiscal year ended September 30, 1987, Exhibit 4); Thirteenth
Supplemental Indenture dated December 1, 1998 (NSG Gas - Form 10-Q for the
quarter ended March 31, 1999, Exhibit 4); Fourteenth Supplemental
Indenture dated as of April 15, 2003, First Mortgage 4.625% Bonds, Series
N-1 and Series N-2 (Incorporated by reference to Exhibit 4(g) to PEC Form
10-Q filed May 13, 2003) and Fifteenth Supplemental Indenture dated as of
November 1, 2008, First Mortgage 7.00% Bonds, Series O.
|
|
|
10.1+
|
Form of Key
Executive Employment and Severance Agreement entered into between Integrys
Energy Group and each of the following: Phillip M. Mikulsky and
Larry L. Weyers. (Incorporated by reference to
Exhibit 10.1 to Integrys Energy Group’s Form 10-K filed February 25,
2009.)
|
|
|
10.2+
|
Form of Key
Executive Employment and Severance Agreement entered into between Integrys
Energy Group and each of the following: Lawrence T. Borgard,
Diane L. Ford, Bradley A. Johnson, Thomas P. Meinz, Joseph P. O'Leary,
Mark A. Radtke, Charles A. Schrock, and Barth J.
Wolf. (Incorporated by reference to Exhibit 10.2 to Integrys
Energy Group’s Form 10-K filed February 25, 2009.)
|
|
|
10.3+
|
Form of
Integrys Energy Group Performance Stock Right
Agreement. (Incorporated by reference to Exhibit 10.2 to
Integrys Energy Group's Form 8-K filed December 13,
2005.)
|
|
|
10.4+
|
Form of
Integrys Energy Group 2007 Omnibus Incentive Compensation Plan Performance
Stock Right Agreement approved May 17, 2007. (Incorporated by
reference to Exhibit 10.5 to Integrys Energy Group's Form 10-K filed
February 28, 2008.)
|
|
|
10.5+
|
Form of
Integrys Energy Group 2007 Omnibus Incentive Compensation Plan Performance
Stock Right Agreement approved February 14, 2008. (Incorporated
by reference to Exhibit 10.6 to Integrys Energy Group's Form 10-K filed
February 28, 2008.)
|
|
|
10.6+
|
Form of
Integrys Energy Group 2005 Omnibus Incentive Compensation Plan Restricted
Stock Award Agreement. (Incorporated by reference to Exhibit
10.1 to Integrys Energy Group Form 8-K filed December 13,
2006.)
|
|
|
10.7+
|
Form of
Integrys Energy Group 2007 Omnibus Incentive Compensation Plan Restricted
Stock Award Agreement approved May 17, 2007. (Incorporated by
reference to Exhibit 10.8 to Integrys Energy Group's Form 10-K filed
February 28, 2008.)
|
|
|
10.8+
|
Form of
Integrys Energy Group 2007 Omnibus Incentive Compensation Plan Restricted
Stock Unit Award Agreement approved February 14,
2008. (Incorporated by reference to Exhibit 10.9 to Integrys
Energy Group's Form 10-K filed February 28, 2008.)
|
|
|
10.9+
|
Form of
Integrys Energy Group 2007 Omnibus Incentive Compensation Plan
NonQualified Stock Option Agreement approved May 17,
2007. (Incorporated by reference to Exhibit 10.10 to Integrys
Energy Group's Form 10-K filed February 28, 2008.)
|
|
|
10.10+
|
Form of
Integrys Energy Group 2007 Omnibus Incentive Compensation Plan
NonQualified Stock Option Agreement approved February 14,
2008. (Incorporated by reference to Exhibit 10.11 to Integrys
Energy Group's Form 10-K filed February 28,
2008.)
|
|
|
10.11+
|
Integrys
Energy Group 1999 Stock Option Plan. (Incorporated by reference
to Exhibit 10-2 in Integrys Energy Group's Form 10-Q for the quarter ended
June 30, 1999, filed August 11, 1999.)
|
|
|
10.12+
|
Integrys
Energy Group 1999 Non-Employee Directors Stock Option
Plan. (Incorporated by reference to Exhibit 4.2 in Integrys
Energy Group's Form S-8, filed December 21, 1999. [Reg.
No. 333-93193].)
|
|
|
10.13+
|
Integrys
Energy Group Deferred Compensation Plan as Amended and Restated Effective
April 1, 2008. (Incorporated by reference to Exhibit 10.14 to
Integrys Energy Group's Form 10-K filed February 28,
2008.)
|
|
|
10.14+
|
Integrys
Energy Group Pension Restoration and Supplemental Retirement Plan, as
Amended and Restated Effective April 1, 2008. (Incorporated by
reference to Exhibit 10.1 to Integrys Energy Group's Form 8-K filed April
15, 2008.)
|
|
|
10.15+
|
Integrys
Energy Group 2001 Omnibus Incentive Compensation
Plan. (Incorporated by reference to Exhibit 10.16 to Integrys
Energy Group's Form 10-K for the year ended December 31, 2005, filed
February 28, 2006.)
|
|
|
10.16+
|
Integrys
Energy Group 2005 Omnibus Incentive Compensation
Plan. (Incorporated by reference to Exhibit 10.2 to Integrys
Energy Group's Form 10-Q filed August 4, 2005.)
|
|
|
10.17+
|
Integrys
Energy Group 2007 Omnibus Incentive Compensation
Plan. (Incorporated by reference to Exhibit 10.17 to Integrys
Energy Group's Form 10-K filed February 28, 2008.)
|
|
|
10.18+
|
PEC Directors
Stock and Option Plan as amended December 4,
2002. (Incorporated by reference to Exhibit 10(g) to PEC Form
10-Q, filed February 11, 2003 [File No. 1-05540].)
|
|
|
10.19+
|
PEC Directors
Deferred Compensation Plan as amended and restated April 7,
2004. (Incorporated by reference to Exhibit 10(a) to PEC Form
10-Q filed August 4, 2005.)
|
|
|
10.20+
|
PEC Executive
Deferred Compensation Plan amended as of December 4,
2002. (Incorporated by reference to Exhibit 10 © to PEC Form
10-Q filed February 11, 2003.)
|
|
|
10.21+
|
PEC 1990
Long-Term Incentive Compensation Plan as amended December 4,
2002. (Incorporated by reference to Exhibit 10(d) to
Quarterly Report on Form 10-Q of PEC for the quarterly period ended
December 31, 2002, filed February 11, 2003 [File No.
1-05540].)
|
|
|
10.22+
|
Amended and
Restated Trust under PEC Directors Deferred Compensation Plan, Directors
Stock and Option Plan, Executive Deferred Compensation Plan and
Supplemental Retirement Benefit Plan, dated as of August 13,
2003. (Incorporated by reference to Exhibit 10 (a) to PEC Form
10-K filed December 11, 2003.)
|
|
|
10.23+
|
Amendment
Number One to the Amended and Restated Trust under PEC Directors Deferred
Compensation Plan, Directors Stock and Option Plan, Executive Deferred
Compensation Plan and Supplemental Retirement Benefit Plan, dated as of
July 24, 2006. (Incorporated by reference to Exhibit 10(e) to
PEC Form 10-K filed December 14, 2006.)
|
|
|
10.24
|
Five Year
Credit Agreement among Integrys Energy Group, Inc. and the lenders
identified herein, Citibank, N.A., Wells Fargo Bank National Association,
J P Morgan Chase Bank, N.A., UBS Securities LLC, U.S. Bank
National Association, and U.S. Bank National Association and
Citigroup Global Markets Inc., dated as of June 2,
2005. (Incorporated by reference to Exhibit 10.1 to Integrys
Energy Group's and WPS's Form 10-Q for the quarter ended June 30,
2005, filed August 4, 2005.)
|
|
|
10.25
|
Five Year
Credit Agreement among Integrys Energy Group, Inc., as Borrower, the
Lenders Identified Therein, Citibank, N.A., as Syndication Agent, U.S.
Bank National Association, Bank of America, N.A., JPMorgan Chase Bank,
N.A., as Co-Documentation Agents, Wachovia Bank, National Association, as
Agent, and Wachovia Bank, National Association and Citigroup Global
Markets Inc, as Co-Lead Arrangers and Book Managers dated as of June 9,
2006. (Incorporated by reference to Exhibit 99.1 to Integrys
Energy Group's Form 8-K filed June 15, 2006.)
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|
|
10.26
|
Five Year
Credit Agreement among Wisconsin Public Service Corporation, as Borrower,
The Lenders Identified Herein, U.S. Bank National Association, as
Syndication Agent, Wells Fargo Bank National Association, as
Co-Documentation Agent, JPMorgan Chase Bank, N.A., as Co-Documentation
Agent, UBS Securities LLC, as Co-Documentation Agent, Citibank, N.A., as
Administrative Agent and Citigroup Global Markets, Inc. and U.S. Bank
National Association, as Co-Lead Arrangers and Book Managers dated as of
June 2, 2005. (Incorporated by reference to Exhibit 10.22 to
WPS's Form 10-K filed February 28, 2008 [File No.
1-3016].)
|
|
|
10.27
|
Credit
Agreement Dated as of July 12, 2005 among PGL, The Financial Institutions
Party Hereto, s Banks, ABN AMRO Bank N.V., as Administrative Agent,
JPMorgan Chase Bank, NA, as Syndication Agent, ABN AMRO Incorporated, as
Co-Lead Arranger and Joint Bookrunner, and J.P. Morgan Securities Inc., as
Co-Lead Arranger and Joint Bookrunner. (Incorporated by
reference to Exhibit 10(A) to PEC Form 10-K/A filed December 14,
2005.)
|
|
|
10.28*
#
|
Joint Plant
Agreement by and between WPS and Dairyland Power Cooperative, dated as of
November 23, 2004. (Incorporated by reference to Exhibit 10.19
to Integrys Energy Group's and WPS's Form 10-K for the year ended
December 31, 2004.)
|
|
|
10.29+
|
Incentive
Agreement, dated as of April 2, 2009, between Integrys Energy Group and
Mark A. Radtke.
|
|
|
12
|
Integrys
Energy Group Ratio of Earnings to Fixed Charges.
|
|
|
21
|
Subsidiaries
of Integrys Energy Group.
|
|
|
23.1
|
Consent of
Independent Registered Public Accounting Firm for Integrys Energy
Group.
|
|
|
23.2
|
Consent of
Independent Registered Public Accounting Firm for American Transmission
Company LLC.
|
|
|
24
|
Powers of
Attorney.
|
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of
1934 for Integrys Energy Group.
|
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of
1934 for Integrys Energy Group.
|
|
|
32
|
Written
Statement of the Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350 for Integrys Energy
Group.
|
|
|
99.1
|
Proxy
Statement for Integrys Energy Group's 2010 Annual Meeting of
Shareholders. [To be filed with the SEC under Regulation 14A
within 120 days after December 31, 2009; except to the
extent specifically incorporated by reference, the Proxy Statement for the
2010 Annual Meeting of Shareholders shall not be deemed to be filed with
the SEC as part of this Annual Report on Form 10-K.]
|
|
|
99.2
|
Financial
Statements of American Transmission Company LLC.
|
|
|
*
|
Schedules and
exhibits to this document are not filed therewith. The
registrant agrees to furnish supplementally a copy of any such schedule or
exhibit to the SEC upon request.
|
|
|
+
|
A management
contract or compensatory plan or arrangement.
|
|
|
#
|
Portions of
this exhibit have been redacted and are subject to a confidential
treatment request filed with the Secretary of SEC pursuant to Rule 24b-2
under the Securities and Exchange Act of 1934, as amended. The
redacted material was filed separately with the
SEC.
|