form10q.htm
______________________________________________________________________________
______________________________________________________________________________
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-Q
[x] QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE
ACT OF 1934
For the quarterly
period ended March 31, 2010
OR
[
] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE
ACT OF 1934
For the transition
period from __________ to __________
Commission
File Number
|
Registrant;
State of Incorporation;
Address; and Telephone
Number
|
IRS
Employer
Identification No.
|
|
|
|
1-11337
|
INTEGRYS
ENERGY GROUP, INC.
(A Wisconsin
Corporation)
130 East
Randolph Drive
Chicago,
Illinois 60601-6207
(312)
228-5400
|
39-1775292
|
Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Indicate by check
mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post
such files).
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the
definitions of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large
accelerated filer [X]
|
Accelerated
filer [ ]
|
Non-accelerated
filer [ ]
|
Smaller
reporting company [ ]
|
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Indicate the number
of shares outstanding of each of the issuer's classes of common stock, as of the
latest practicable date:
|
Common stock,
$1 par value,
77,017,367 shares
outstanding at
May 5,
2010
|
|
|
______________________________________________________________________________
______________________________________________________________________________
INTEGRYS
ENERGY GROUP, INC.
FORM
10-Q FOR THE QUARTER ENDED MARCH 31, 2010
TABLE
OF CONTENTS
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Page
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3
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4
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PART
I.
|
FINANCIAL
INFORMATION
|
6
|
|
|
|
Item
1.
|
FINANCIAL
STATEMENTS (Unaudited)
|
6
|
|
|
|
|
Condensed
Consolidated Statements of Income
|
6
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|
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7
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8
|
|
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CONDENSED
NOTES TO FINANCIAL STATEMENTS OF
|
9 –
47
|
|
Integrys
Energy Group, Inc. and Subsidiaries
|
|
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|
Page
|
|
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Note
1
|
Financial
Information
|
9
|
|
|
Note
2
|
Cash and Cash
Equivalents
|
9
|
|
|
Note
3
|
Risk
Management Activities
|
10
|
|
|
Note
4
|
Restructuring
Expense
|
16
|
|
|
Note
5
|
Dispositions
|
17
|
|
|
Note
6
|
Investments
in Affiliates, at Equity Method
|
20
|
|
|
Note
7
|
Inventories
|
21
|
|
|
Note
8
|
Goodwill and
Other Intangible Assets
|
21
|
|
|
Note
9
|
Short-Term
Debt and Lines of Credit
|
23
|
|
|
Note
10
|
Long-Term
Debt
|
25
|
|
|
Note
11
|
Asset
Retirement Obligations
|
26
|
|
|
Note
12
|
Income
Taxes
|
26
|
|
|
Note
13
|
Commitments
and Contingencies
|
26
|
|
|
Note
14
|
Guarantees
|
33
|
|
|
Note
15
|
Employee
Benefit Plans
|
34
|
|
|
Note
16
|
Stock-Based
Compensation
|
35
|
|
|
Note
17
|
Comprehensive
Income (Loss)
|
36
|
|
|
Note
18
|
Common
Equity
|
37
|
|
|
Note
19
|
Variable
Interest Entities
|
38
|
|
|
Note
20
|
Fair
Value
|
39
|
|
|
Note
21
|
Miscellaneous
Income
|
42
|
|
|
Note
22
|
Regulatory
Environment
|
43
|
|
|
Note
23
|
Segments of
Business
|
46
|
|
|
|
|
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
48 –
66
|
|
|
|
|
Quantitative
and Qualitative Disclosures About Market Risk
|
67
|
|
|
|
|
Controls and
Procedures
|
69
|
|
|
Page
|
|
OTHER
INFORMATION
|
70
|
|
|
|
Item
1.
|
Legal
Proceedings
|
70
|
|
|
|
Item
1A.
|
Risk
Factors
|
70
|
|
|
|
Item
6.
|
Exhibits
|
70
|
|
|
|
Signature
|
|
71
|
|
|
72
|
|
|
3.1
|
Amendments to
the By-Laws of Integrys Energy Group, Inc. effective April 1, 2010
(Incorporated by reference to Exhibit 3.1 to Integrys Energy Group’s Form
8-K filed April 1, 2010)
|
|
|
3.2
|
Integrys
Energy Group, Inc. By-Laws as in effect at April 1, 2010 (Incorporated by
reference to Exhibit 3.2 to Integrys Energy Group’s Form 8-K filed April
1, 2010)
|
|
|
4.1
|
Forty-First
Supplemental Indenture of WPS, dated as of December 18, 2008 (Incorporated
by reference to Exhibit 4.1 to WPS’s Form 10-Q filed May 5,
2010)
|
|
|
4.2
|
42nd
Supplemental Indenture of WPS, dated as of April 25, 2010 (Incorporated by
reference to Exhibit 4.2 to WPS’s Form 10-Q filed May 5,
2010)
|
|
|
12
|
Computation
of Ratio of Earnings to Fixed Charges
|
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of
1934 for Integrys Energy Group, Inc.
|
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of
1934 for Integrys Energy Group, Inc.
|
|
|
32
|
Written
Statement of the Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350 for Integrys Energy Group,
Inc.
|
|
|
|
AFUDC
|
Allowance for
Funds Used During Construction
|
ASC
|
Accounting
Standards Codification
|
ATC
|
American
Transmission Company LLC
|
EEP
|
Enhanced
Efficiency Program
|
EPA
|
United States
Environmental Protection Agency
|
FASB
|
Financial
Accounting Standards Board
|
FERC
|
Federal
Energy Regulatory Commission
|
GAAP
|
United States
Generally Accepted Accounting Principles
|
IBS
|
Integrys
Business Support, LLC
|
ICC
|
Illinois
Commerce Commission
|
IRS
|
United States
Internal Revenue Service
|
LIFO
|
Last-in,
first-out
|
MERC
|
Minnesota
Energy Resources Corporation
|
MGU
|
Michigan Gas
Utilities Corporation
|
MISO
|
Midwest
Independent Transmission System Operator, Inc.
|
MPSC
|
Michigan
Public Service Commission
|
MPUC
|
Minnesota
Public Utility Commission
|
N/A
|
Not
Applicable
|
NSG
|
North Shore
Gas Company
|
NYMEX
|
New York
Mercantile Exchange
|
PEC
|
Peoples
Energy Corporation
|
PGL
|
The Peoples
Gas Light and Coke Company
|
PSCW
|
Public
Service Commission of Wisconsin
|
SEC
|
United States
Securities and Exchange Commission
|
SFAS
|
Statement of
Financial Accounting Standards
|
UPPCO
|
Upper
Peninsula Power Company
|
WDNR
|
Wisconsin
Department of Natural Resources
|
WPS
|
Wisconsin
Public Service Corporation
|
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 Integrys Energy Group's Annual Report on Form 10-K
for the year ended December 31, 2009, as may be amended or supplemented in Part
II, Item 1A of this report. Other factors include:
●
|
Resolution of
pending and future rate cases and negotiations (including the recovery of
deferred costs) and other regulatory decisions impacting Integrys Energy
Group's regulated businesses;
|
●
|
The impact of
recent and future federal and state regulatory changes, including
legislative and regulatory initiatives regarding deregulation and
restructuring of the electric and natural gas utility industries, 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;
|
●
|
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;
|
●
|
The impacts
of changing financial market conditions, credit ratings, and interest
rates on the liquidity and financing efforts of Integrys Energy
Group and its subsidiaries;
|
●
|
The risks
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;
|
●
|
The risks
associated with changing commodity prices (particularly natural gas and
electricity) and the available sources of fuel and purchased power,
including their impact on margins;
|
●
|
Resolution of
audits or other tax disputes with the IRS and various state, local, and
Canadian revenue agencies;
|
●
|
The effects,
extent, and timing of additional competition or regulation in the markets
in which Integrys Energy Group's subsidiaries operate;
|
●
|
The retention
of market-based rate authority;
|
●
|
The risk
associated with the value of goodwill or other intangibles and their
possible impairment;
|
●
|
Investment
performance of employee benefit plan assets and the related impact on
future funding requirements;
|
●
|
Changes in
technology, particularly with respect to new, developing, or alternative
sources of generation;
|
●
|
Effects of
and changes in political and legal developments, as well as economic
conditions and the related impact on customer demand;
|
●
|
Potential
business strategies, including mergers, acquisitions, and construction or
disposition of assets or businesses, which cannot be assured to be
completed timely or within budgets;
|
●
|
The direct or
indirect effects of terrorist incidents, natural disasters, or responses
to such
events;
|
●
|
The
effectiveness of risk management strategies, 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.
|
|
|
|
|
|
|
PART
1. FINANCIAL INFORMATION
|
|
|
|
|
|
|
|
|
Item
1. Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEGRYS
ENERGY GROUP, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
Three
Months Ended
|
|
|
|
March
31
|
|
(Millions,
except per share data)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Nonregulated
revenues
|
|
$ |
646.8 |
|
|
$ |
1,786.3 |
|
Utility
revenues
|
|
|
1,256.6 |
|
|
|
1,414.5 |
|
Total
revenues
|
|
|
1,903.4 |
|
|
|
3,200.8 |
|
|
|
|
|
|
|
|
|
|
Nonregulated
cost of fuel, natural gas, and purchased power
|
|
|
639.6 |
|
|
|
1,769.1 |
|
Utility cost
of fuel, natural gas, and purchased power
|
|
|
741.5 |
|
|
|
910.6 |
|
Operating and
maintenance expense
|
|
|
268.1 |
|
|
|
291.3 |
|
Goodwill
impairment loss
|
|
|
- |
|
|
|
291.1 |
|
Restructuring
expense
|
|
|
2.7 |
|
|
|
- |
|
Net loss on
Integrys Energy Services' dispositions related to strategy
change
|
|
|
39.8 |
|
|
|
- |
|
Depreciation
and amortization expense
|
|
|
64.2 |
|
|
|
56.9 |
|
Taxes other
than income taxes
|
|
|
28.2 |
|
|
|
26.9 |
|
Operating
income (loss)
|
|
|
119.3 |
|
|
|
(145.1 |
) |
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
|
20.4 |
|
|
|
21.1 |
|
Interest
expense
|
|
|
(39.4 |
) |
|
|
(42.7 |
) |
Other
expense
|
|
|
(19.0 |
) |
|
|
(21.6 |
) |
|
|
|
|
|
|
|
|
|
Income (loss)
before taxes
|
|
|
100.3 |
|
|
|
(166.7 |
) |
Provision for
income taxes
|
|
|
50.1 |
|
|
|
12.8 |
|
Net
income (loss) from continuing operations
|
|
|
50.2 |
|
|
|
(179.5 |
) |
|
|
|
|
|
|
|
|
|
Discontinued
operations, net of tax
|
|
|
0.1 |
|
|
|
- |
|
Net
income (loss)
|
|
|
50.3 |
|
|
|
(179.5 |
) |
|
|
|
|
|
|
|
|
|
Preferred
stock dividends of subsidiary
|
|
|
(0.8 |
) |
|
|
(0.8 |
) |
Noncontrolling
interest in subsidiaries
|
|
|
- |
|
|
|
0.1 |
|
Net
income (loss) attributed to common shareholders
|
|
$ |
49.5 |
|
|
$ |
(180.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares of common stock
|
|
|
|
|
|
|
|
|
Basic
|
|
|
76.9 |
|
|
|
76.7 |
|
Diluted
|
|
|
77.2 |
|
|
|
76.7 |
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share (basic)
|
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations
|
|
$ |
0.64 |
|
|
$ |
(2.35 |
) |
Discontinued
operations, net of tax
|
|
|
- |
|
|
|
- |
|
Earnings
(loss) per common share (basic)
|
|
$ |
0.64 |
|
|
$ |
(2.35 |
) |
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share (diluted)
|
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations
|
|
$ |
0.64 |
|
|
$ |
(2.35 |
) |
Discontinued
operations, net of tax
|
|
|
- |
|
|
|
- |
|
Earnings
(loss) per common share (diluted)
|
|
$ |
0.64 |
|
|
$ |
(2.35 |
) |
|
|
|
|
|
|
|
|
|
Dividends
per common share declared
|
|
$ |
0.68 |
|
|
$ |
0.68 |
|
|
|
|
|
|
|
|
|
|
The
accompanying condensed notes are an integral part of these
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEGRYS
ENERGY GROUP, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
March
31
|
|
|
December
31
|
|
(Millions)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
259.1 |
|
|
$ |
44.5 |
|
Collateral on
deposit
|
|
|
251.6 |
|
|
|
184.9 |
|
Accounts
receivable and accrued unbilled revenues, net of reserves of $60.3 and
$57.5, respectively
|
|
|
1,021.4 |
|
|
|
958.0 |
|
Inventories
|
|
|
94.9 |
|
|
|
304.3 |
|
Assets from
risk management activities
|
|
|
753.7 |
|
|
|
1,522.1 |
|
Regulatory
assets
|
|
|
119.9 |
|
|
|
121.1 |
|
Deferred
income taxes
|
|
|
98.6 |
|
|
|
92.9 |
|
Assets held
for sale
|
|
|
- |
|
|
|
26.5 |
|
Other current
assets
|
|
|
249.0 |
|
|
|
257.9 |
|
Current
assets
|
|
|
2,848.2 |
|
|
|
3,512.2 |
|
|
|
|
|
|
|
|
|
|
Property,
plant, and equipment, net of accumulated depreciation of $2,885.9 and
$2,847.2, respectively
|
|
|
4,929.0 |
|
|
|
4,945.1 |
|
Regulatory
assets
|
|
|
1,459.9 |
|
|
|
1,434.9 |
|
Assets from
risk management activities
|
|
|
179.5 |
|
|
|
795.4 |
|
Goodwill
|
|
|
642.5 |
|
|
|
642.5 |
|
Other
long-term assets
|
|
|
525.4 |
|
|
|
517.8 |
|
Total
assets
|
|
$ |
10,584.5 |
|
|
$ |
11,847.9 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Equity
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
$ |
172.7 |
|
|
$ |
222.1 |
|
Current
portion of long-term debt
|
|
|
393.4 |
|
|
|
116.5 |
|
Accounts
payable
|
|
|
536.9 |
|
|
|
639.4 |
|
Liabilities
from risk management activities
|
|
|
946.2 |
|
|
|
1,607.1 |
|
Regulatory
liabilities
|
|
|
114.3 |
|
|
|
100.4 |
|
Liabilities
held for sale
|
|
|
- |
|
|
|
0.3 |
|
Temporary LIFO
liquidation credit
|
|
|
131.3 |
|
|
|
- |
|
Other current
liabilities
|
|
|
386.4 |
|
|
|
461.8 |
|
Current
liabilities
|
|
|
2,681.2 |
|
|
|
3,147.6 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
2,066.2 |
|
|
|
2,394.7 |
|
Deferred
income taxes
|
|
|
692.3 |
|
|
|
658.2 |
|
Deferred
investment tax credits
|
|
|
36.2 |
|
|
|
36.2 |
|
Regulatory
liabilities
|
|
|
284.3 |
|
|
|
277.6 |
|
Environmental
remediation liabilities
|
|
|
657.0 |
|
|
|
658.8 |
|
Pension and
other postretirement benefit obligations
|
|
|
656.2 |
|
|
|
640.7 |
|
Liabilities
from risk management activities
|
|
|
258.7 |
|
|
|
783.1 |
|
Asset
retirement obligations
|
|
|
197.7 |
|
|
|
194.8 |
|
Other
long-term liabilities
|
|
|
144.3 |
|
|
|
147.4 |
|
Long-term
liabilities
|
|
|
4,992.9 |
|
|
|
5,791.5 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock -
$1 par value; 200,000,000 shares authorized; 76,806,208 shares
issued;
76,407,822
shares outstanding
|
|
|
76.8 |
|
|
|
76.4 |
|
Additional
paid-in capital
|
|
|
2,511.3 |
|
|
|
2,497.8 |
|
Retained
earnings
|
|
|
343.0 |
|
|
|
345.6 |
|
Accumulated
other comprehensive loss
|
|
|
(55.1 |
) |
|
|
(44.0 |
) |
Treasury stock
and shares in deferred compensation trust
|
|
|
(15.7 |
) |
|
|
(17.2 |
) |
Total
common shareholders' equity
|
|
|
2,860.3 |
|
|
|
2,858.6 |
|
|
|
|
|
|
|
|
|
|
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
|
|
|
(1.0 |
) |
|
|
(0.9 |
) |
Total
liabilities and equity
|
|
$ |
10,584.5 |
|
|
$ |
11,847.9 |
|
|
|
|
|
|
|
|
|
|
The
accompanying condensed notes are an integral part of these
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEGRYS
ENERGY GROUP, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Three
Months Ended
|
|
|
|
|
|
March
31
|
|
(Millions)
|
|
|
2010
|
|
|
2009
|
|
Operating
Activities
|
|
|
|
|
|
|
Net income
(loss)
|
|
$ |
50.3 |
|
|
$ |
(179.5 |
) |
Adjustments to
reconcile net income (loss) to net cash provided by operating
activities
|
|
|
|
|
|
|
|
|
|
Discontinued
operations, net of tax
|
|
|
(0.1 |
) |
|
|
- |
|
|
Goodwill
impairment loss
|
|
|
- |
|
|
|
291.1 |
|
|
Depreciation
and amortization expense
|
|
|
64.2 |
|
|
|
56.9 |
|
|
Recoveries and
refunds of regulatory assets and liabilities
|
|
|
14.6 |
|
|
|
19.6 |
|
|
Net unrealized
losses on nonregulated energy contracts
|
|
|
71.7 |
|
|
|
105.0 |
|
|
Nonregulated
lower of cost or market inventory adjustments
|
|
|
1.4 |
|
|
|
35.7 |
|
|
Bad debt
expense
|
|
|
14.4 |
|
|
|
26.6 |
|
|
Pension and
other postretirement expense
|
|
|
20.9 |
|
|
|
15.2 |
|
|
Pension and
other postretirement contributions
|
|
|
(1.2 |
) |
|
|
(3.4 |
) |
|
Deferred
income taxes and investment tax credit
|
|
|
27.5 |
|
|
|
(54.3 |
) |
|
(Gain) loss on
sale of assets
|
|
|
38.6 |
|
|
|
(1.8 |
) |
|
Equity income,
net of dividends
|
|
|
(3.2 |
) |
|
|
(3.9 |
) |
|
Other
|
|
|
|
(22.1 |
) |
|
|
10.0 |
|
|
Changes in
working capital
|
|
|
|
|
|
|
|
|
|
|
Collateral on
deposit
|
|
|
(54.7 |
) |
|
|
(205.1 |
) |
|
|
Accounts
receivable and accrued unbilled revenues
|
|
|
(71.5 |
) |
|
|
271.8 |
|
|
|
Inventories
|
|
|
200.8 |
|
|
|
467.4 |
|
|
|
Other current
assets
|
|
|
17.5 |
|
|
|
62.0 |
|
|
|
Accounts
payable
|
|
|
(24.4 |
) |
|
|
(319.3 |
) |
|
|
Temporary LIFO
liquidation credit
|
|
|
131.3 |
|
|
|
128.6 |
|
|
|
Other current
liabilities
|
|
|
(56.6 |
) |
|
|
130.0 |
|
Net
cash provided by operating activities
|
|
|
419.4 |
|
|
|
852.6 |
|
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(63.2 |
) |
|
|
(89.3 |
) |
Proceeds from
the sale or disposal of assets
|
|
|
55.7 |
|
|
|
3.2 |
|
Purchase of
equity investments
|
|
|
(5.1 |
) |
|
|
(8.6 |
) |
Other
|
|
|
|
|
(3.2 |
) |
|
|
1.2 |
|
Net
cash used for investing activities
|
|
|
(15.8 |
) |
|
|
(93.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
Short-term
debt, net
|
|
|
(49.4 |
) |
|
|
(539.2 |
) |
Redemption of
notes payable
|
|
|
- |
|
|
|
(157.9 |
) |
Proceeds from
sale of borrowed natural gas
|
|
|
20.7 |
|
|
|
107.5 |
|
Purchase of
natural gas to repay natural gas loans
|
|
|
(2.0 |
) |
|
|
(36.0 |
) |
Repayment of
long-term debt
|
|
|
(50.0 |
) |
|
|
- |
|
Payment of
dividends
|
|
|
|
|
|
|
|
|
|
Preferred
stock of subsidiary
|
|
|
(0.8 |
) |
|
|
(0.8 |
) |
|
Common
stock
|
|
|
(46.5 |
) |
|
|
(51.7 |
) |
Issuance of
common stock
|
|
|
7.7 |
|
|
|
- |
|
Payments made
on derivative contracts related to divestitures classified as financing
activities
|
|
|
(66.9 |
) |
|
|
- |
|
Other
|
|
|
|
|
(1.9 |
) |
|
|
(3.4 |
) |
Net
cash used for financing activities
|
|
|
(189.1 |
) |
|
|
(681.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
Change
in cash and cash equivalents - continuing operations
|
|
|
214.5 |
|
|
|
77.6 |
|
Change
in cash and cash equivalents - discontinued operations
|
|
|
|
|
|
|
|
|
|
Net cash
provided by investing activities
|
|
|
0.1 |
|
|
|
- |
|
Net
change in cash and cash equivalents
|
|
|
214.6 |
|
|
|
77.6 |
|
Cash and cash
equivalents at beginning of period
|
|
|
44.5 |
|
|
|
254.1 |
|
Cash
and cash equivalents at end of period
|
|
$ |
259.1 |
|
|
$ |
331.7 |
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying condensed notes are an integral part of these
statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEGRYS
ENERGY GROUP, INC. AND SUBSIDIARIES
CONDENSED
NOTES TO FINANCIAL STATEMENTS
March 31,
2010
NOTE 1--FINANCIAL
INFORMATION
The condensed
consolidated financial statements of Integrys Energy Group, Inc. have been
prepared pursuant to the rules and regulations of the SEC for Quarterly Reports
on Form 10-Q and in accordance with GAAP. Accordingly, these
condensed consolidated financial statements do not include all of the
information and footnotes required by GAAP for annual financial
statements. These condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes in
the Integrys Energy Group Annual Report on Form 10-K for the year ended
December 31, 2009.
The condensed
consolidated financial statements are unaudited, but, in management's opinion,
include all adjustments (which, unless otherwise noted, include only normal
recurring adjustments) necessary for a fair presentation of such financial
statements. Financial results for this interim period are not
necessarily indicative of results that may be expected for any other interim
period or for the year ending December 31, 2010.
NOTE 2--CASH
AND CASH EQUIVALENTS
Short-term
investments with an original maturity of three months or less are reported
as cash equivalents.
The following is
supplemental disclosure to the Integrys Energy Group Condensed Consolidated
Statements of Cash Flows:
|
|
Three Months Ended March 31
|
|
(Millions)
|
|
2010
|
|
|
2009
|
|
Cash paid for
interest
|
|
$ |
23.5 |
|
|
$ |
29.7 |
|
Cash paid for
income taxes
|
|
|
11.5 |
|
|
|
0.9 |
|
Significant
non-cash transactions were:
|
|
Three Months Ended March 31
|
|
(Millions)
|
|
2010
|
|
|
2009
|
|
Construction
costs funded through accounts payable
|
|
$ |
10.3 |
|
|
$ |
17.9 |
|
Equity issued
for reinvested dividends
|
|
|
5.5 |
|
|
|
- |
|
Equity issued
for stock-based compensation plans
|
|
|
3.0 |
|
|
|
- |
|
Intangible
assets (customer contracts) received in exchange
for
risk management assets
|
|
|
- |
|
|
|
9.2 |
|
NOTE 3--RISK
MANAGEMENT ACTIVITIES
In
the three months ended March 31, 2010, Integrys Energy Group identified
additional classes of risk management assets and liabilities as a result of the
implementation of FASB Accounting Standards Update (ASU) 2010-06, "Fair Value
Measurements and Disclosures (Topic 820), Improving Disclosures about Fair Value
Measurements." As required, this ASU was only applied for the quarter
ended
March 31, 2010, and
therefore, prior periods do not reflect the expanded disclosure
requirements.
The following
tables show Integrys Energy Group's assets and liabilities from risk management
activities.
|
|
|
March 31, 2010
|
|
(Millions)
|
Balance
Sheet Presentation *
|
|
Risk
Management Assets
|
|
|
Risk
Management Liabilities
|
|
Utility
Segments
|
|
|
|
|
|
|
|
Non-hedge
derivatives
|
|
|
|
|
|
|
|
Natural gas contracts
|
Current
|
|
$ |
0.5 |
|
|
$ |
47.7 |
|
Natural gas contracts
|
Long-term
|
|
|
0.8 |
|
|
|
5.3 |
|
Financial transmission
rights
|
Current
|
|
|
1.9 |
|
|
|
0.4 |
|
Petroleum product
contracts
|
Current
|
|
|
0.2 |
|
|
|
- |
|
Total commodity
contracts
|
Current
|
|
|
2.6 |
|
|
|
48.1 |
|
Total commodity
contracts
|
Long-term
|
|
|
0.8 |
|
|
|
5.3 |
|
|
|
|
|
|
|
|
|
|
|
Cash flow
hedges
|
|
|
|
|
|
|
|
|
|
Natural gas contracts
|
Current
|
|
|
- |
|
|
|
0.9 |
|
Natural gas contracts
|
Long-term
|
|
|
- |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
Nonregulated
Segments
|
|
|
|
|
|
|
|
|
|
Non-hedge
derivatives
|
|
|
|
|
|
|
|
|
|
Natural gas contracts
|
Current
|
|
|
189.4 |
|
|
|
186.4 |
|
Natural gas contracts
|
Long-term
|
|
|
92.2 |
|
|
|
90.6 |
|
Power contracts
|
Current
|
|
|
557.2 |
|
|
|
670.5 |
|
Power contracts
|
Long-term
|
|
|
83.4 |
|
|
|
142.1 |
|
Total commodity
contracts
|
Current
|
|
|
746.6 |
|
|
|
856.9 |
|
Total commodity
contracts
|
Long-term
|
|
|
175.6 |
|
|
|
232.7 |
|
Interest rate swaps
|
Current
|
|
|
- |
|
|
|
0.8 |
|
Interest rate swaps
|
Long-term
|
|
|
- |
|
|
|
2.6 |
|
Foreign exchange
contracts
|
Current
|
|
|
1.0 |
|
|
|
1.0 |
|
Foreign exchange
contracts
|
Long-term
|
|
|
0.8 |
|
|
|
0.8 |
|
Fair value
hedges
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
Current
|
|
|
1.9 |
|
|
|
- |
|
Cash flow
hedges
|
|
|
|
|
|
|
|
|
|
Natural gas contracts
|
Current
|
|
|
0.4 |
|
|
|
4.9 |
|
Natural gas contracts
|
Long-term
|
|
|
- |
|
|
|
0.1 |
|
Power contracts
|
Current
|
|
|
1.2 |
|
|
|
32.7 |
|
Power contracts
|
Long-term
|
|
|
2.3 |
|
|
|
16.8 |
|
Total commodity
contracts
|
Current
|
|
|
1.6 |
|
|
|
37.6 |
|
Total commodity
contracts
|
Long-term
|
|
|
2.3 |
|
|
|
16.9 |
|
Interest rate swaps
|
Current
|
|
|
- |
|
|
|
0.9 |
|
|
Current
|
|
|
753.7 |
|
|
|
946.2 |
|
|
Long-term
|
|
|
179.5 |
|
|
|
258.7 |
|
Total
|
|
|
$ |
933.2 |
|
|
$ |
1,204.9 |
|
* 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. Assets and liabilities from risk
management activities are classified as
current or long-term based upon the maturities of the underlying
contracts.
|
|
|
December 31, 2009
|
|
(Millions)
|
Balance
Sheet Presentation *
|
|
Risk
Management Assets
|
|
|
Risk
Management Liabilities
|
|
Utility
Segments
|
|
|
|
|
|
|
|
Non-hedge
derivatives
|
|
|
|
|
|
|
|
Commodity contracts
|
Current
|
|
$ |
10.8 |
|
|
$ |
24.7 |
|
Commodity contracts
|
Long-term
|
|
|
2.0 |
|
|
|
1.5 |
|
Cash flow
hedges
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Current
|
|
|
- |
|
|
|
0.2 |
|
Commodity contracts
|
Long-term
|
|
|
- |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
Nonregulated
Segments
|
|
|
|
|
|
|
|
|
|
Non-hedge
derivatives
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Current
|
|
|
1,503.9 |
|
|
|
1,548.4 |
|
Commodity contracts
|
Long-term
|
|
|
787.2 |
|
|
|
769.5 |
|
Interest rate swaps
|
Current
|
|
|
- |
|
|
|
1.0 |
|
Interest rate swaps
|
Long-term
|
|
|
- |
|
|
|
2.5 |
|
Foreign exchange
contracts
|
Current
|
|
|
1.0 |
|
|
|
0.9 |
|
Foreign exchange
contracts
|
Long-term
|
|
|
0.9 |
|
|
|
0.9 |
|
Fair value
hedges
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Current
|
|
|
- |
|
|
|
- |
|
Interest rate swaps
|
Current
|
|
|
1.8 |
|
|
|
- |
|
Interest rate swaps
|
Long-term
|
|
|
0.8 |
|
|
|
- |
|
Cash flow
hedges
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
Current
|
|
|
4.6 |
|
|
|
30.1 |
|
Commodity contracts
|
Long-term
|
|
|
4.5 |
|
|
|
8.6 |
|
Interest rate swaps
|
Current
|
|
|
- |
|
|
|
1.8 |
|
Interest rate swaps
|
Long-term
|
|
|
- |
|
|
|
- |
|
Foreign exchange
contracts
|
Current
|
|
|
- |
|
|
|
- |
|
|
Current
|
|
|
1,522.1 |
|
|
|
1,607.1 |
|
|
Long-term
|
|
|
795.4 |
|
|
|
783.1 |
|
Total
|
|
|
$ |
2,317.5 |
|
|
$ |
2,390.2 |
|
* 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. Assets and liabilities from risk
management activities are classified as
current or long-term based upon the maturities of the underlying
contracts.
The following table
shows Integrys Energy Group's cash collateral positions:
(Millions)
|
|
March 31,
2010
|
|
|
December 31,
2009
|
|
Cash
collateral provided to others
|
|
$ |
251.6 |
** |
|
$ |
184.9 |
|
Cash
collateral received from others
|
|
|
47.2 |
|
|
|
55.2 |
|
** On
April 1, 2010, $212.2 million of cash was recovered from a counterparty, and
replaced with a letter of credit.
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 March 31, 2010, and December 31, 2009,
was $900.6 million and $579.6 million, respectively.
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,
Integrys Energy Group would have been required to post collateral of $616.2
million and $566.3 million at March 31, 2010, and December 31, 2009,
respectively. Of these amounts, Integrys Energy Group had already
satisfied $335.9 million at March 31, 2010, of which $212.2 million was
satisfied with cash and the difference was satisfied with letters of credit, and
$51.9 million at December 31, 2009, all satisfied with letters of
credit. Therefore, the remaining collateral
requirement
would have been $280.3 million at March 31, 2010, and
$514.4 million at December 31, 2009.
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 used
to manage electric transmission congestion costs. The futures,
options, and swaps were used by both the electric and natural gas utility
segments to mitigate the risks associated with the market price volatility of
natural gas supply costs and the costs of gasoline and diesel fuel used by
utility vehicles.
Derivative
instruments at the utilities are entered into in accordance with the terms of
the risk management plans approved by their respective Boards of Directors and,
if applicable, by their respective regulators. Most energy-related
physical and financial derivatives at the utilities qualify for regulatory
deferral. These derivatives are marked to fair value; the resulting
risk management assets are offset with regulatory liabilities or decreases to
regulatory assets, and risk management liabilities are offset with regulatory
assets or decreases to regulatory liabilities. Management believes
any gains or losses resulting from the eventual settlement of these derivative
instruments will be refunded to or collected from customers in
rates.
The tables below
show the unrealized gains (losses) recorded related to non-hedge derivatives at
the utilities.
(Millions)
|
Financial
Statement Presentation
|
|
Three
Months Ended
March 31,
2010
|
|
Natural gas
contracts
|
Balance Sheet
– Regulatory assets (current)
|
|
$ |
(26.4 |
) |
Natural gas
contracts
|
Balance Sheet
– Regulatory assets (long-term)
|
|
|
(5.2 |
) |
Natural gas
contracts
|
Balance Sheet
– Regulatory liabilities (current)
|
|
|
(0.2 |
) |
Financial
transmission rights
|
Balance Sheet
– Regulatory assets (current)
|
|
|
0.9 |
|
Financial
transmission rights
|
Balance Sheet
– Regulatory liabilities (current)
|
|
|
(2.3 |
) |
Petroleum
product contracts
|
Income
Statement – Operating and maintenance expense
|
|
|
(0.1 |
) |
(Millions)
|
Financial
Statement Presentation
|
|
Three
Months Ended
March 31,
2009
|
|
Commodity
contracts
|
Balance Sheet
– Regulatory assets (current)
|
|
$ |
15.8 |
|
Commodity
contracts
|
Balance Sheet
– Regulatory assets (long-term)
|
|
|
0.3 |
|
Commodity
contracts
|
Balance Sheet
– Regulatory liabilities (current)
|
|
|
(2.7 |
) |
Commodity
contracts
|
Income
Statement – Utility cost of fuel, natural gas, and purchased
power
|
|
|
0.2 |
|
The utilities had
the following notional volumes of outstanding non-hedge derivative
contracts:
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Purchases
|
|
|
Other
Transactions
|
|
|
Purchases
|
|
|
Other
Transactions
|
|
Natural gas
(millions of therms)
|
|
|
567.4 |
|
|
|
N/A |
|
|
|
833.2 |
|
|
|
N/A |
|
Financial
transmission rights (millions of kilowatt-hours)
|
|
|
N/A |
|
|
|
2,287.9 |
|
|
|
N/A |
|
|
|
4,546.6 |
|
Petroleum
products (barrels)
|
|
|
31,869 |
|
|
|
N/A |
|
|
|
42,823 |
|
|
|
N/A |
|
Cash
Flow Hedges
PGL uses natural
gas 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. PGL had the following notional volumes of
outstanding contracts that were designated as cash flow hedges:
|
|
Purchases
|
|
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
Natural gas
(millions of therms)
|
|
|
9.0 |
|
|
|
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)
|
|
|
|
Three Months Ended March 31
|
|
(Millions)
|
|
2010
|
|
|
2009
|
|
Natural gas
contracts
|
|
$ |
(1.1 |
) |
|
$ |
(0.6 |
) |
Loss
Reclassified from Accumulated OCI into Income (Effective
Portion)
|
|
|
|
|
Three Months Ended March 31
|
|
(Millions)
|
Income
Statement Presentation
|
|
2010
|
|
|
2009
|
|
Settled
natural gas contracts
|
Operating and
maintenance expense
|
|
$ |
(0.1 |
) |
|
$ |
(0.1 |
) |
The amount
reclassified from accumulated OCI into earnings as a result of the
discontinuance of cash flow hedge accounting for certain hedge transactions was
not significant during the three months ended March 31, 2010, and
2009. Cash flow hedge ineffectiveness related to these natural gas
contracts was not significant during the three months ended March 31, 2010, and
2009. 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 and interest rate risk
associated with expected future natural gas purchases.
The nonregulated
segments had the following notional volumes of outstanding non-hedge derivative
contracts:
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
(Millions)
|
|
Purchases
|
|
|
Sales
|
|
|
Other
Transactions
|
|
|
Purchases
|
|
|
Sales
|
|
|
Other
Transactions
|
|
Commodity
contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas (therms)
|
|
|
1,704.5 |
|
|
|
1,479.4 |
|
|
|
N/A |
|
|
|
2,990.4 |
|
|
|
2,917.1 |
|
|
|
N/A |
|
Power (kilowatt-hours)
|
|
|
48,004.2 |
|
|
|
40,160.4 |
|
|
|
N/A |
|
|
|
132,200.4 |
|
|
|
125,983.1 |
|
|
|
N/A |
|
Interest rate
swaps
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
192.6 |
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
219.2 |
|
Foreign
exchange contracts
|
|
$ |
31.4 |
|
|
$ |
31.4 |
|
|
|
N/A |
|
|
$ |
35.1 |
|
|
$ |
35.1 |
|
|
|
N/A |
|
Gains (losses)
related to non-hedge derivatives are recognized currently in earnings, as shown
in the tables below.
(Millions)
|
Income
Statement Presentation
|
|
Three
Months Ended
March 31,
2010
|
|
Natural gas
contracts
|
Nonregulated revenue
|
|
$ |
3.2 |
|
Natural gas
contracts
|
Nonregulated revenue (reclassified
fromaccumulated OCI)
|
|
|
0.3 |
* |
Power
contracts
|
Nonregulated revenue
|
|
|
(80.7 |
) |
Interest rate
swaps
|
Interest expense
|
|
|
(0.4 |
) |
Total
|
|
|
$ |
(77.6 |
) |
*
|
Represents
amounts reclassified from accumulated OCI related to cash flow hedges that
were dedesignated in prior periods.
|
(Millions)
|
Income
Statement Presentation
|
|
Three
Months Ended
March 31,
2009
|
|
Commodity
contracts
|
Nonregulated revenue
|
|
$ |
(39.6 |
) |
Interest rate
swaps
|
Interest expense
|
|
|
0.1 |
|
Foreign
exchange contracts
|
Nonregulated revenue
|
|
|
0.1 |
|
Total
|
|
|
$ |
(39.4 |
) |
Fair
Value Hedges
At
PEC, an interest rate swap designated as a fair value hedge is used to hedge
changes in the fair value of $50.0 million of PEC Series A 6.9% notes due
January 15, 2011. The changes in the fair value of this hedge
are recognized currently in earnings, as are the changes in fair value of the
hedged item. Unrealized gains (losses) related to the fair value
hedge and the related hedged item are shown in the table below.
|
|
|
Three Months Ended March 31
|
|
(Millions)
|
Income
Statement Presentation
|
|
2010
|
|
|
2009
|
|
Interest rate
swap
|
Interest
expense
|
|
$ |
(0.7 |
) |
|
$ |
(0.3 |
) |
Debt hedged by
swap
|
Interest
expense
|
|
|
0.7 |
|
|
|
0.3 |
|
Total
|
|
|
$ |
- |
|
|
$ |
- |
|
Fair value hedge
ineffectiveness recorded in interest expense on the Condensed Consolidated
Statements of Income was not significant for the three months ended March 31,
2010, and 2009. No amounts were excluded from effectiveness testing
related to the interest rate swap during the three months ended March 31, 2010,
and 2009.
Cash
Flow Hedges
Natural gas
futures, forwards, and swaps that are designated as cash flow hedges extend
through January 2012, while power futures, forwards, and swaps designated as
cash flow hedges extend through May 2013. These contracts are used to
mitigate the risk of cash flow variability associated with future purchases and
sales of natural gas and power. 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. The
nonregulated segments had the following notional volumes of outstanding
contracts that were designated as cash flow hedges:
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
(Millions)
|
|
Purchases
|
|
|
Sales
|
|
|
Other
Transactions
|
|
|
Purchases
|
|
|
Sales
|
|
|
Other
Transactions
|
|
Commodity
contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas (therms)
|
|
|
65.9 |
|
|
|
10.1 |
|
|
|
N/A |
|
|
|
5.9 |
|
|
|
8.6 |
|
|
|
N/A |
|
Power
(kilowatt-hours)
|
|
|
6,982.7 |
|
|
|
- |
|
|
|
N/A |
|
|
|
7,116.2 |
|
|
|
- |
|
|
|
N/A |
|
Interest rate
swaps
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
65.6 |
|
|
|
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)
|
|
Three
Months Ended March 31, 2010
|
|
Natural gas
contracts
|
|
$ |
(4.2 |
) |
Power
contracts
|
|
|
(23.9 |
) |
Interest rate
swaps
|
|
|
1.0 |
|
Total
|
|
$ |
(27.1 |
) |
Unrealized
Gain (Loss) Recognized in OCI on Derivative Instruments (Effective
Portion)
|
|
(Millions)
|
|
Three
Months Ended March 31, 2009
|
|
Commodity
contracts
|
|
$ |
(50.0 |
) |
Interest rate
swaps
|
|
|
0.9 |
|
Total
|
|
$ |
(49.1 |
) |
Gain
(Loss) Reclassified from Accumulated OCI into Income (Effective
Portion)
|
|
(Millions)
|
Income
Statement Presentation
|
|
Three
Months Ended
March
31, 2010
|
|
Settled/Realized
|
|
|
|
|
Natural gas contracts
|
Nonregulated
revenue
|
|
$ |
(7.3 |
) |
Power contracts
|
Nonregulated
revenue
|
|
|
(4.9 |
) |
Interest rate swaps
|
Interest
expense
|
|
|
0.3 |
|
Hedge
Designation Discontinued
|
|
|
|
|
|
Natural gas contracts
|
Nonregulated
revenue
|
|
|
0.8 |
|
Power contracts
|
Nonregulated
revenue
|
|
|
(7.6 |
) |
Total
|
|
|
$ |
(18.7 |
) |
Gain
(Loss) Reclassified from Accumulated OCI into Income (Effective
Portion)
|
|
(Millions)
|
Income
Statement Presentation
|
|
Three
Months Ended
March
31, 2009
|
|
Settled/Realized
|
|
|
|
|
Commodity contracts
|
Nonregulated
revenue
|
|
$ |
16.7 |
|
Interest rate swaps
|
Interest
expense
|
|
|
0.3 |
|
Hedge
Designation Discontinued
|
|
|
|
|
|
Commodity contracts
|
Nonregulated
revenue
|
|
|
(0.5 |
) |
Total
|
|
|
$ |
16.5 |
|
Loss
Recognized in Income on Derivative Instruments (Ineffective Portion and
Amount Excluded from Effectiveness Testing
|
|
(Millions)
|
Income
Statement Presentation
|
|
Three
Months Ended
March
31, 2010
|
|
Power
contracts
|
Nonregulated
revenue
|
|
$ |
(0.7 |
) |
Loss
Recognized in Income on Derivative Instruments (Ineffective Portion and
Amount Excluded from Effectiveness Testing
|
|
(Millions)
|
Income
Statement Presentation
|
|
Three
Months Ended
March
31, 2009
|
|
Commodity
contracts
|
Nonregulated
revenue
|
|
$ |
(0.8 |
) |
In
the next 12 months, subject to changes in market prices of natural gas and
electricity, pre-tax losses of $7.4 million, and $34.7 million related to
cash flow hedges of natural gas contracts, and power contracts, respectively,
are expected to be recognized in earnings as the hedged transactions
occur. These amounts are expected to be substantially offset by the
settlement of the related nonderivative hedged contracts.
NOTE 4--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 included reductions in its
workforce. In connection with this plan, $0.2 million of
employee-related and consulting costs were included in the restructuring expense
line item on the Condensed Consolidated Statement of Income for the three months
ended March 31, 2010.
The following table
summarizes the activity related to these restructuring costs:
|
|
Three
Months Ended
|
|
(Millions)
|
|
March
31, 2010
|
|
Accrued
restructuring costs at beginning of period
|
|
$ |
18.0 |
|
Restructuring
costs accrued during the period
|
|
|
0.5 |
* |
Cash
payments
|
|
|
(8.5 |
) |
Accrued
restructuring costs at end of period
|
|
$ |
10.0 |
|
*
|
$0.3 million
of these restructuring costs are being billed to certain companies in
accordance with provisions in the operating agreements with these
companies that allow WPS to recover a portion of its administrative and
general expenses.
|
Integrys
Energy Services Strategy Change
Integrys Energy
Group has substantially completed the process of repositioning Integrys Energy
Services from focusing on significant growth in wholesale and retail markets
across the United States and Canada, to focusing on selected retail markets in
the United States and investments in energy assets with renewable
attributes. In connection with this strategy, the following
restructuring costs were expensed during the three months ended March 31,
2010:
(Millions)
|
|
|
|
Employee-related
costs
|
|
$ |
1.3 |
|
Legal and
consulting
|
|
|
0.9 |
|
Miscellaneous
|
|
|
0.3 |
|
Total
restructuring expense
|
|
$ |
2.5 |
|
All of the above
costs were related to the Integrys Energy Services segment and were included in
the restructuring expense line item on the Condensed Consolidated Statements of
Income.
The following table
summarizes the activity related to employee-related restructuring
expense:
|
|
Three
Months Ended
|
|
(Millions)
|
|
March
31, 2010
|
|
Accrued
employee-related costs at beginning of period
|
|
$ |
8.2 |
|
Add:
Employee-related costs expensed
|
|
|
1.3 |
|
Less: Cash
payments
|
|
|
5.1 |
|
Accrued
employee-related costs at end of period
|
|
$ |
4.4 |
|
Integrys Energy
Group expects to incur total employee-related restructuring expense of
approximately $13 million
related to the Integrys Energy Services strategy change by the end of 2010,
including the $11.4 million
expensed through March 31, 2010, of which $10.1 million was expensed in
2009.
NOTE 5--DISPOSITIONS
Integrys
Energy Services Strategy Change
As
part of Integrys Energy Group's decision to reposition its nonregulated energy
services business segment to focus on selected retail markets in the United
States and investments in energy assets with renewable attributes, Integrys
Energy Services completed the following sales in 2010.
Sale
of Renewable Energy Certificates Portfolio
On
March 12, 2010, Integrys Energy Services sold its environmental markets
business, which consisted of a portfolio of long-term renewable energy
certificate contracts with generators, wholesalers, municipalities,
cooperatives, and large industrial companies. The pre-tax gain on the
sale of the renewable energy certificate contracts was $2.8 million and was
reported as a component of net loss on Integrys Energy Services' dispositions
related to strategy change in the Condensed Consolidated Statements of
Income.
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. 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 mirrored Integrys
Energy Services' underlying wholesale electric contracts. On March
31, 2010, Integrys Energy Services closed on the sale and transferred title to
the majority of the underlying commodity contracts, upon which time the
corresponding mirror transactions terminated. The majority of the
remaining underlying commodity contracts that had not been novated as of March
31, 2010 are expected to be either transferred after they are ultimately
novated, or if never novated, will be settled through the normal course of
business in the second quarter of 2010, at which time the corresponding mirror
transactions will terminate.
In
connection with this sale, for a two-year period following the closing, Integrys
Energy Services will retain counterparty default risk with approximately 50% of
the counterparties to the commodity contracts transferred. The fair
value of the counterparty payment default risk is $0.8 million and was reported
as a component of other long-term liabilities.
The following table
shows the carrying values of the major classes of assets and liabilities
included in the sale at the March 31, 2010 closing date:
(Millions)
|
|
|
|
|
|
|
|
Current
assets from risk management activities
|
|
$ |
1,375.5 |
|
Long-term
assets from risk management activities
|
|
|
683.3 |
|
Total
assets
|
|
$ |
2,058.8 |
|
|
|
|
|
|
Current
liabilities from risk management activities
|
|
$ |
1,389.8 |
|
Long-term
liabilities from risk management activities
|
|
|
654.3 |
|
Total
liabilities
|
|
$ |
2,044.1 |
|
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 sale, Integrys Energy Services entered into derivative
contracts with the buyer to reestablish the economic hedges for the retained
United States retail electric business, at the same prices and other terms
previously executed through Integrys Energy Services' United States wholesale
electric marketing and trading business that was sold. The execution
of these new third-party derivative contracts resulted in assets and liabilities
from risk management activities at the closing date as follows:
(Millions)
|
|
|
|
|
|
|
|
Current
assets from risk management activities
|
|
$ |
20.3 |
|
Long-term
assets from risk management activities
|
|
|
10.3 |
|
Total
assets
|
|
$ |
30.6 |
|
|
|
|
|
|
Current
liabilities from risk management activities
|
|
$ |
65.6 |
|
Long-term
liabilities from risk management activities
|
|
|
23.9 |
|
Total
liabilities
|
|
$ |
89.5 |
|
The following table
shows the carrying values of the remaining underlying commodity contracts that
had not been novated at the March 31, 2010 closing date:
(Millions)
|
|
|
|
|
|
|
|
Current
assets from risk management activities
|
|
$ |
269.5 |
|
Current
liabilities from risk management activities
|
|
$ |
117.2 |
|
The following table
shows the carrying values of the remaining mirror transactions associated with
the underlying commodity contracts referenced above that had not been novated at
the March 31, 2010 closing date:
(Millions)
|
|
|
|
|
|
|
|
Current
assets from risk management activities
|
|
$ |
130.6 |
|
Current
liabilities from risk management activities
|
|
$ |
282.9 |
|
The pre-tax loss on
the sale of the United States wholesale electric marketing and trading business
was $64.9 million and was reported as a component of net loss on Integrys Energy
Services' dispositions related to strategy change in the Condensed Consolidated
Statements of Income.
Effective March 1,
2010, Integrys Energy Services closed on its remaining wholesale electric
commodity contract with another buyer. The pre-tax gain on the sale
of the commodity contract was $8.7 million and was reported as a component of
net loss on Integrys Energy Services' dispositions related to strategy change in
the Condensed Consolidated Statements of Income.
Sale
of Generation Businesses in New Brunswick, Canada and Northern Maine, and
Associated Retail Electric Contracts
During January
2010, Integrys Energy Services closed on the sale of two of its power generation
businesses, which owned generation assets in New Brunswick, Canada and
Northern Maine, and subsequently closed on the sale of the associated retail
electric contracts and standard offer service contracts in Northern Maine on
February 1, 2010. The proceeds from the sale of the generation
companies and associated retail electric contracts were
$38.5 million. The pre-tax gain on the sale was
$15.7 million and was reported as a component of net loss on Integrys
Energy Services' dispositions related to strategy change in the Condensed
Consolidated Statements of Income.
The carrying values
of the major classes of assets and liabilities included in the sale as of the
closing dates and classified as held for sale on the Condensed Consolidated
Balance Sheets at December 31, 2009 were as follows:
(Millions)
|
|
As
of the
Closing
Dates
|
|
|
December
31, 2009
|
|
|
|
|
|
|
|
|
Inventories
|
|
$ |
0.1 |
|
|
$ |
0.1 |
|
Property,
plant, and equipment, net
|
|
|
25.1 |
|
|
|
25.1 |
|
Other
long-term assets
|
|
|
1.3 |
|
|
|
1.3 |
|
Total
assets
|
|
$ |
26.5 |
|
|
$ |
26.5 |
|
|
|
|
|
|
|
|
|
|
Other current
liabilities
|
|
$ |
0.1 |
|
|
$ |
- |
|
Asset
retirement obligations
|
|
|
0.3 |
|
|
|
0.3 |
|
Total
liabilities
|
|
$ |
0.4 |
|
|
$ |
0.3 |
|
In
conjunction with the sale, Integrys Energy Services entered into derivative
contracts with the buyer of the Northern Maine retail electric sales contracts
to maintain the economic hedges associated with the customer contracts
sold. As of the closing date, the carrying values of the derivative
contracts were as follows:
(Millions)
|
|
|
|
|
|
|
|
Current
assets from risk management activities
|
|
$ |
3.6 |
|
Long-term
assets from risk management activities
|
|
|
0.2 |
|
Total
assets
|
|
$ |
3.8 |
|
|
|
|
|
|
Current
liabilities from risk management activities
|
|
$ |
0.4 |
|
Total
liabilities
|
|
$ |
0.4 |
|
Sale
of United States Wholesale Natural Gas Marketing and Trading Business &
Other Wholesale Natural Gas Storage Contracts
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
the transaction consisted of an option for the buyer to purchase certain natural
gas storage and related transportation contracts. In January 2010,
the buyer of the United States wholesale natural gas marketing and trading
business exercised its option to purchase these wholesale natural gas storage
and related transportation contracts from Integrys Energy Services in a
subsequent sale. The pre-tax loss on the sale of these natural gas
storage contracts was $1.3 million and was reported as a component of net loss
on Integrys Energy Services' dispositions related to strategy change in the
Condensed Consolidated Statements of Income.
Integrys Energy
Services continued to pursue the sale of its remaining United States wholesale
natural gas storage contracts as part of its strategy change, and in March 2010,
Integrys Energy Services closed on the sale of two of these remaining storage
contracts. The pre-tax loss on the sale of these natural gas storage
contracts was $0.8 million and was reported as a component of net loss on
Integrys Energy Services' dispositions related to strategy change in the
Condensed Consolidated Statements of Income. The carrying value of
inventories included in the sales was $1.8 million as of the closing
date. Integrys Energy Services closed on the remaining United
States wholesale natural gas storage contracts during the second quarter of
2010.
Discontinued
Operations Resulting from Integrys Energy Services Strategy Change
Energy
Management Consulting Business
During the three
months ended March 31, 2010, Integrys Energy Services recorded a $0.1 million
after-tax gain in discontinued operations when a contingent payment was earned
from the buyer. This contingent payment resulted from the ability of
the buyer to bill customers under assigned contracts related to the sale of
Integrys Energy Services' energy management consulting business, which occurred
in July 2009.
NOTE 6--INVESTMENTS
IN AFFILIATES, AT EQUITY METHOD
Integrys Energy
Group’s electric transmission investment segment consists of WPS Investments
LLC’s ownership interest in ATC, which was approximately 34% at March 31,
2010. ATC is a for-profit, transmission-only company. ATC
owns, maintains, monitors, and operates electric transmission assets in portions
of Wisconsin, Michigan, Minnesota, and Illinois.
The following table
shows changes to Integrys Energy Group's investment in ATC during the three
months ended March 31, 2010, and 2009.
(Millions)
|
|
Three
Months Ended March 31, 2010
|
|
|
Three
Months Ended March 31, 2009
|
|
Balance at
the beginning of period
|
|
$ |
395.9 |
|
|
$ |
346.9 |
|
Equity in net
income
|
|
|
19.5 |
|
|
|
18.0 |
|
Capital
contributions
|
|
|
5.1 |
|
|
|
8.5 |
|
Dividends
received
|
|
|
(16.3 |
) |
|
|
(14.6 |
) |
Balance
at the end of period
|
|
$ |
404.2 |
|
|
$ |
358.8 |
|
ATC total company
financial data is included in the following tables:
|
|
Three
Months Ended March 31
|
|
(Millions)
|
|
2010
|
|
|
2009
|
|
Income
statement data
|
|
|
|
|
|
|
Revenues
|
|
$ |
138.5 |
|
|
$ |
126.2 |
|
Operating
expenses
|
|
|
62.8 |
|
|
|
57.0 |
|
Other
expense
|
|
|
20.6 |
|
|
|
18.3 |
|
Net income
*
|
|
$ |
55.1 |
|
|
$ |
50.9 |
|
|
*
|
As most
income taxes are the responsibility of its members, ATC does not report a
provision for its members' income taxes in its income
statements.
|
(Millions)
|
|
March
31, 2010
|
|
|
December 31,
2009
|
|
Balance
sheet data
|
|
|
|
|
|
|
Current
assets
|
|
$ |
54.5 |
|
|
$ |
51.1 |
|
Noncurrent
assets
|
|
|
2,801.6 |
|
|
|
2,767.3 |
|
Total
assets
|
|
$ |
2,856.1 |
|
|
$ |
2,818.4 |
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$ |
495.7 |
|
|
$ |
285.5 |
|
Long-term
debt
|
|
|
1,059.7 |
|
|
|
1,259.7 |
|
Other
noncurrent liabilities
|
|
|
78.9 |
|
|
|
76.8 |
|
Members'
equity
|
|
|
1,221.8 |
|
|
|
1,196.4 |
|
Total
liabilities and members' equity
|
|
$ |
2,856.1 |
|
|
$ |
2,818.4 |
|
NOTE 7--INVENTORIES
PGL and NSG price
natural gas storage injections at the calendar year average of the cost of
natural gas supply purchased. Withdrawals from storage are priced on
the LIFO cost method. For interim periods, the difference between
current projected replacement cost and the LIFO cost for quantities of natural
gas temporarily withdrawn from storage is recorded as a temporary LIFO
liquidation debit or credit. Due to seasonality requirements, PGL and
NSG expect interim reductions in LIFO layers to be replenished by
year-end.
NOTE 8--GOODWILL
AND OTHER INTANGIBLE ASSETS
Integrys Energy
Group had no changes to the carrying amount of goodwill during the first quarter
of 2010. The goodwill recorded at Integrys Energy Group as of March 31, 2010,
was as follows:
(Millions)
|
|
Natural
Gas
Utility
Segment
|
|
|
Integrys
Energy
Services
|
|
|
Total
|
|
Total
goodwill
|
|
$ |
635.9 |
|
|
$ |
6.6 |
|
|
$ |
642.5 |
|
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.
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 Condensed Consolidated Balance Sheets as listed below.
(Millions)
|
|
March 31,
2010
|
|
|
December 31,
2009
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Amortized
intangible assets
(liabilities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer-related
(1)
|
|
$ |
32.6 |
|
|
$ |
(19.2 |
) |
|
$ |
13.4 |
|
|
$ |
32.6 |
|
|
$ |
(18.3 |
) |
|
$ |
14.3 |
|
Natural
gas and electric
contract
assets (2)
(3)
|
|
|
65.2 |
|
|
|
(55.8 |
) |
|
|
9.4 |
|
|
|
71.4 |
|
|
|
(60.5 |
) |
|
|
10.9 |
|
Natural
gas and electric
contract
liabilities (2)
|
|
|
(10.5 |
) |
|
|
10.5 |
|
|
|
- |
|
|
|
(10.5 |
) |
|
|
10.4 |
|
|
|
(0.1 |
) |
Renewable
energy credits (4)
|
|
|
3.0 |
|
|
|
(2.6 |
) |
|
|
0.4 |
|
|
|
3.4 |
|
|
|
(2.1 |
) |
|
|
1.3 |
|
Nonregulated
easements (5)
|
|
|
3.7 |
|
|
|
(0.2 |
) |
|
|
3.5 |
|
|
|
3.6 |
|
|
|
(0.1 |
) |
|
|
3.5 |
|
Emission
allowances (6)
|
|
|
1.9 |
|
|
|
(0.1 |
) |
|
|
1.8 |
|
|
|
2.1 |
|
|
|
(0.2 |
) |
|
|
1.9 |
|
Other
|
|
|
2.3 |
|
|
|
(0.3 |
) |
|
|
2.0 |
|
|
|
2.5 |
|
|
|
(0.5 |
) |
|
|
2.0 |
|
Total
|
|
$ |
98.2 |
|
|
$ |
(67.7 |
) |
|
$ |
30.5 |
|
|
$ |
105.1 |
|
|
$ |
(71.3 |
) |
|
$ |
33.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized
intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MGU trade
name
|
|
|
5.2 |
|
|
|
- |
|
|
|
5.2 |
|
|
|
5.2 |
|
|
|
- |
|
|
|
5.2 |
|
Total
intangible assets
|
|
$ |
103.4 |
|
|
$ |
(67.7 |
) |
|
$ |
35.7 |
|
|
$ |
110.3 |
|
|
$ |
(71.3 |
) |
|
$ |
39.0 |
|
(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 March 31, 2010, was approximately 7
years.
|
(2)
|
Represents the
fair value of certain PEC natural gas and electric customer contracts
acquired in the February 2007 PEC 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 $5.4 million and $4.0 million, respectively, at
March 31, 2010, and $6.2 million and $4.7 million, respectively,
at December 31, 2009. The remaining weighted-average
amortization period for these intangible assets at March 31, 2010,
was approximately 3 years.
|
(4)
|
Used at
Integrys Energy Services to comply with state Renewable Portfolio
Standards and to support customer
commitments.
|
(5)
|
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 approximately 14
years.
|
(6)
|
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 three months ended
March 31, 2010, and 2009, was $1.8 million and $1.4 million,
respectively.
Amortization
expense for the next five fiscal years is estimated to be:
(Millions)
|
|
|
|
For year
ending December 31, 2010
|
|
$ |
5.2 |
|
For year
ending December 31, 2011
|
|
|
3.5 |
|
For year
ending December 31, 2012
|
|
|
2.5 |
|
For year
ending December 31, 2013
|
|
|
1.8 |
|
For year
ending December 31, 2014
|
|
|
1.6 |
|
Amortization of the
natural gas and electric contract intangible assets and liabilities was recorded
as a component of nonregulated cost of fuel, natural gas, and purchased
power. Amortization of these contracts for the three months ended
March 31, 2010, resulted in an increase to nonregulated cost of fuel,
natural gas, and purchased power of $1.4 million. Amortization of
these contracts for the three months ended March 31, 2009, resulted in a
decrease to nonregulated fuel, natural gas, and purchased power of
$1.4 million.
Amortization
expense related to 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 9--SHORT-TERM
DEBT AND LINES OF CREDIT
Integrys Energy
Group's outstanding short-term borrowings consisted of sales of commercial paper
and short-term notes.
(Millions,
except percentages)
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
Commercial
paper outstanding
|
|
$ |
162.7 |
|
|
$ |
212.1 |
|
Average
discount rate on outstanding commercial paper
|
|
|
0.36 |
% |
|
|
0.52 |
% |
Short-term
notes payable outstanding
|
|
$ |
10.0 |
|
|
$ |
10.0 |
|
Average
interest rate on outstanding short-term notes payable
|
|
|
0.18 |
% |
|
|
0.18 |
% |
The commercial
paper outstanding at March 31, 2010, had varying maturity dates ranging from
April 1, 2010, through April 27, 2010.
The table below
presents Integrys Energy Group's average amount of short-term borrowings
outstanding based on daily outstanding balances during the quarters ended March
31:
(Millions)
|
|
2010
|
|
|
2009
|
|
Average amount
of commercial paper outstanding
|
|
$ |
183.9 |
|
|
$ |
352.1 |
|
Average amount
of borrowings under revolving credit facilities
|
|
|
- |
|
|
|
408.3 |
|
Average amount
of short-term notes payable outstanding
|
|
|
10.0 |
|
|
|
164.0 |
|
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:
(Millions)
|
Maturity
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
Revolving
credit facility (Integrys Energy Group)
(1)
|
6/02/10
|
|
$ |
500.0 |
|
|
$ |
500.0 |
|
Revolving
credit facility (Integrys Energy Group)
|
6/09/11
|
|
|
500.0 |
|
|
|
500.0 |
|
Revolving
credit facility (Integrys Energy Group)
(1)
|
5/26/10
|
|
|
425.0 |
|
|
|
425.0 |
|
Revolving
credit facility (Integrys Energy Group)
(1)
|
6/04/10
|
|
|
35.0 |
|
|
|
35.0 |
|
Revolving
credit facility (WPS) (2)
|
6/02/10
|
|
|
115.0 |
|
|
|
115.0 |
|
Revolving
credit facility (PEC)
|
6/13/11
|
|
|
400.0 |
|
|
|
400.0 |
|
Revolving
credit facility (PGL) (3)
|
7/12/10
|
|
|
250.0 |
|
|
|
250.0 |
|
Revolving
short-term notes payable (WPS) (4)
|
11/13/10
|
|
|
10.0 |
|
|
|
10.0 |
|
|
|
|
|
|
|
|
|
|
|
Total
short-term credit capacity
|
|
|
|
2,235.0 |
|
|
|
2,235.0 |
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Letters
of credit issued inside credit facilities
|
|
|
|
333.7 |
|
|
|
130.4 |
|
Loans
outstanding under credit agreements and notes payable
|
|
|
|
10.0 |
|
|
|
10.0 |
|
Commercial
paper outstanding
|
|
|
|
162.7 |
|
|
|
212.1 |
|
|
|
|
|
|
|
|
|
|
|
Available
capacity under existing agreements
|
|
|
$ |
1,728.6 |
|
|
$ |
1,882.5 |
|
(1)
|
These
facilities were replaced with a new revolving credit agreement in April
2010 and provide support for Integrys Energy Group's commercial paper
borrowing program. Upon entering into the new agreement, the
maturing facilities were terminated. The new revolving credit
agreement allows for borrowings up to $735.0 million and will mature on
April 23, 2013.
|
(2)
|
In April 2010,
WPS entered into a new revolving credit agreement to provide support for
its commercial paper borrowing program. Upon entering into the
new agreement, the maturing facility was terminated. The new
revolving credit agreement allows for borrowings up to $115.0 million and
will mature on April 23, 2011. WPS intends to request authority
to enter into a multi-year credit agreement from the PSCW, and if granted,
the credit facility will mature on April 23,
2013.
|
(3)
|
In April 2010,
PGL entered into a new revolving credit agreement to provide support for
its commercial paper borrowing program. Upon entering into the
new agreement, the maturing facility was terminated. The new
revolving credit agreement allows for borrowings up to $250.0 million and
will mature on April 23, 2013.
|
(4)
|
This note is
renewed every six months and is used for general corporate
purposes.
|
At
March 31, 2010, Integrys Energy Group and its subsidiaries were in
compliance with all financial covenants related to outstanding short-term
debt. Integrys Energy Group's and certain subsidiaries' revolving
credit agreements contain financial and other covenants, including but not
limited to, a requirement to maintain a debt to total capitalization ratio not
to exceed 65%, excluding non-recourse debt. Failure to meet these
covenants beyond applicable grace periods could result in accelerated due dates
and/or termination of the agreements.
NOTE 10--LONG-TERM
DEBT
(Millions)
|
|
March 31,
2010
|
|
|
December 31,
2009
|
|
WPS
|
|
$ |
872.1 |
|
|
$ |
872.1 |
|
UPPCO (1)
|
|
|
10.8 |
|
|
|
10.8 |
|
PEC (2)
|
|
|
326.9 |
|
|
|
327.6 |
|
PGL (3)
|
|
|
526.0 |
|
|
|
576.0 |
|
NSG
|
|
|
75.0 |
|
|
|
75.0 |
|
Integrys
Energy Group
|
|
|
555.0 |
|
|
|
555.0 |
|
Unsecured term
loan – Integrys Energy Group (4)
|
|
|
65.6 |
|
|
|
65.6 |
|
Other term
loan (5)
|
|
|
27.0 |
|
|
|
27.0 |
|
Total
|
|
|
2,458.4 |
|
|
|
2,509.1 |
|
Unamortized
discount and premium
|
|
|
1.2 |
|
|
|
2.1 |
|
Total
debt
|
|
|
2,459.6 |
|
|
|
2,511.2 |
|
Less current
portion
|
|
|
(393.4 |
) |
|
|
(116.5 |
) |
Total
long-term debt
|
|
$ |
2,066.2 |
|
|
$ |
2,394.7 |
|
|
(1) Prior
to November
1, 2010, UPPCO will make a $0.9 million sinking fund payment under the
terms of its First Mortgage Bonds. As a result, this payment is
included in the current portion of long-term debt on Integrys Energy
Group's Condensed Consolidated Balance Sheets at March 31,
2010.
|
|
(2)
In January 2011, PEC's $325.0 million, 6.9%
unsecured Senior Notes will mature. PEC also expects to settle
an interest rate swap designated as a fair value hedge associated with
$50.0 million of the senior notes in January 2011. At March 31,
2010, the value of the fair value hedge adjustment was $1.9
million. See Note 3, "Risk Management
Activities," for more information on the PEC fair value hedge
adjustment. As a result, the notes and fair value hedge
adjustment are included in the current portion of long-term debt on
Integrys Energy Group's Condensed Consolidated Balance Sheets at March 31,
2010.
|
|
(3)
PGL has outstanding $51.0 million of
Adjustable Rate, Series OO bonds, due October 1, 2037, which are
currently in
a 35-day Auction Rate mode (the interest rate is reset every 35 days
through an auction process). Recent auctions have failed to
receive sufficient clearing bids. As a result, these bonds are
priced each 35 days at the maximum auction rate, until such time a
successful auction occurs. The maximum auction rate is
determined based on the lesser of the London Interbank Offered Rate or the
Securities Industry and Financial Markets Association Municipal Swap Index
rate plus a defined premium. The year-to-date weighted-average
interest rate at March 31, 2010 was 0.46% for these
bonds.
|
|
On March 1,
2010, $50.0 million of PGL's Series MM-2 First and Refunding Mortgage
Bonds matured. PGL repaid the outstanding principal balance on
these 4.00% bonds, previously subject to terms and conditions of its 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.
|
(4)
|
In
June 2010, Integrys Energy Group’s $65.6 million unsecured term
loan will mature. As a result, this loan is included in the
current portion of long-term debt on Integrys Energy Group's
Condensed Consolidated Balance Sheets at March 31,
2010.
|
(5)
|
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 March 31, 2010, the interest rate
was 4.27%. 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.
|
At
March 31, 2010, 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's and certain subsidiaries'
long-term debt obligations contain covenants related to payment of principal and
interest when due and various financial reporting obligations. In
addition, certain long-term debt obligations contain financial and other
covenants, including but not limited to, a requirement to maintain a debt to
total capitalization ratio not to exceed 65%. Failure to comply with
these covenants could result in an event of default which, if not cured or
waived, could result in the acceleration of outstanding debt
obligations.
NOTE 11--ASSET
RETIREMENT OBLIGATIONS
The following table
shows changes to Integrys Energy Group's asset retirement obligations through
March 31, 2010.
(Millions)
|
|
Utilities
|
|
|
Integrys
Energy Services
|
|
|
Total
|
|
Asset
retirement obligations at December 31, 2009
|
|
$ |
194.8 |
|
|
$ |
0.3 |
* |
|
$ |
195.1 |
|
Accretion
|
|
|
2.9 |
|
|
|
- |
|
|
|
2.9 |
|
Asset
retirement obligations transferred in sale
|
|
|
- |
|
|
|
(0.3 |
) |
|
|
(0.3 |
) |
Asset
retirement obligations at March 31, 2010
|
|
$ |
197.7 |
|
|
$ |
- |
|
|
$ |
197.7 |
|
* This
amount was classified as held for sale at December 31, 2009, as it was related
to the sale of generation assets in Northern
Maine, which closed in the first quarter of 2010.
NOTE 12--INCOME
TAXES
Integrys Energy
Group's effective tax rate for the three months ended March 31, 2010, and
2009, was 50.0% and (7.7)%, respectively.
Integrys Energy
Group calculates its provision for income taxes based on an interim effective
tax rate that reflects its projected annual effective tax rate before certain
discrete items such as the goodwill impairment loss.
The effective tax
rate for the three months ended March 31, 2010 was higher than the federal
tax rate of 35%, primarily due to the elimination of the deductibility of
prescription drug payments to retirees, to the extent those payments will be
offset by the receipt of the Medicare Part D subsidy, as mandated in the federal
Patient Protection and Affordable Care Act and Health Care and Education
Reconciliation Act of 2010 (HCR). As a result of the legislation,
Integrys Energy Group expensed $11.8 million of deferred income tax benefits
during the quarter ended March 31, 2010, which were previously recognized as a
reduction of provision for income taxes. This additional provision
for income taxes will not reoccur in future periods. Also
contributing to the higher effective tax rate was the impact of state income
taxes.
The effective tax
rate for the three months ended March 31, 2009 was lower than the federal
tax rate of 35%, primarily because a large portion (approximately
$186.2 million) of the $291.1 million goodwill impairment loss
recognized in the first quarter of 2009 was not deductible for income tax
purposes.
For the three
months ended March 31, 2010, there was no significant change in Integrys Energy
Group's liability for unrecognized tax benefits.
NOTE 13--COMMITMENTS
AND CONTINGENCIES
General
Amounts ultimately
paid as penalties, or eventually determined to be paid in lieu of penalties, may
not be deductible for income tax purposes.
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 March 31, 2010.
●
|
The electric
utility segment has obligations related to coal supply and transportation
that extend through 2016 and total $246.6 million, obligations of
$1,122.7 million for either capacity or energy related to purchased
power that extend through 2027, and obligations for other commodities
totaling $9.8 million, which extend through 2013.
|
●
|
The natural
gas utility segment has obligations related to natural gas supply and
transportation contracts totaling $1,214.3 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 $653.7 million. The
majority of these obligations end by 2012, with obligations totaling
$88.1 million extending beyond 2012.
|
●
|
Integrys
Energy Group also has commitments in the form of purchase orders issued to
various vendors, which totaled $405.1 million and relate to normal
business operations, including construction
projects.
|
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 discuss a possible resolution. Integrys Energy Group continues
to review the allegations but is currently unable to predict the impact on its
condensed 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 (MG&E), 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 condensed 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 receipt of the Sierra Club’s initial
demand and is in the process of analyzing the allegations, as well as the
demand, 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 condensed 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 condensed 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. The joint owners met with the EPA to begin discussions on a
possible resolution and have received the EPA’s initial
demand. WP&L is the operator of these plants and, along with the
joint owners, is in the process of analyzing the NOV and the EPA’s initial
demand. Integrys Energy Group is also reviewing the allegations but
is currently unable to predict the impact on its condensed 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 and/or impose emission
limitations,
|
●
|
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 appellate 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 condensed 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. As of March 22, 2010,
the WDNR has reopened the permit to address the EPA’s order and, although final
resolution is unknown, potential outcomes could include a revised
permit.
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. As of March 31, 2010, 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 to address hazardous air pollutants, including mercury, and is
expected to issue a draft rule in 2011.
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 WPS’s share of 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
$655.5 million of future undiscounted investigation and cleanup costs for
all sites as of March 31, 2010. 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 $666.0 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 March 31,
2010.
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 condensed consolidated financial statements of
Integrys Energy Group.
Greenhouse
Gases
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, and the Kerry-Boxer draft bill, which was
introduced in the United States Senate. 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. In October 2009, the matter was referred to the Delta
County District Attorney’s office for potential criminal charges against the
former manager. No charges have been brought against UPPCO as of this
time, however it is unknown if a referral will be made relative to the
company. 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 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. The balance of the conservation and weatherization
funding that remained unpaid as of March 31, 2010, was $10.2 million, of
which $5.2 million
was included in other current liabilities, and $5.0 million was included in
other long-term liabilities. PEC also agreed to implement a
reconnection program for certain customers. PGL and NSG took all
steps required by the settlement agreement with respect to the reconnection
program. In April 2010, PGL, NSG, the AG, the Citizens Utility Board,
and Chicago resolved a disagreement concerning the scope of the reconnection
program. Finally, PEC agreed to internal audits and an external audit
of natural gas supply practices. 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 external 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.
Reconciliations of
subsequent periods have been opened but are being held in abeyance pending the
outcome of the fiscal 2006 Gas Charge reconciliation cases.
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 March
26, 2010, PEC filed a Petition for Leave to Appeal to the Illinois Supreme Court
challenging class certification and the petition is currently
pending.
NOTE 14--GUARANTEES
The following table
shows outstanding guarantees at Integrys Energy Group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration
|
|
(Millions)
|
|
Total
Amounts
Committed
at
March 31,
2010
|
|
|
Less
Than
1
Year
|
|
|
1
to 3
Years
|
|
|
4
to 5
Years
|
|
|
Over
5
Years
|
|
Guarantees
supporting commodity transactions of subsidiaries (1)
|
|
$ |
1,107.8 |
|
|
$ |
776.9 |
|
|
$ |
62.7 |
|
|
$ |
31.0 |
|
|
$ |
237.2 |
|
Standby
letters of credit (2)
|
|
|
332.9 |
|
|
|
331.0 |
|
|
|
1.8 |
|
|
|
0.1 |
|
|
|
- |
|
Surety bonds
(3)
|
|
|
3.3 |
|
|
|
3.1 |
|
|
|
0.2 |
|
|
|
- |
|
|
|
- |
|
Other
guarantees (4)
|
|
|
56.2 |
|
|
|
- |
|
|
|
50.0 |
|
|
|
- |
|
|
|
6.2 |
|
Total
guarantees
|
|
$ |
1,500.2 |
|
|
$ |
1,111.0 |
|
|
$ |
114.7 |
|
|
$ |
31.1 |
|
|
$ |
243.4 |
|
(1)
|
Consists of
parental guarantees of $927.2 million to support the business
operations of Integrys Energy Services; $100.2 million and
$70.4 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 Condensed Consolidated Balance
Sheets. |
|
|
(2)
|
Composed of
$322.4 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 $1.4 million related to letters of credit at UPPCO, MGU, MERC,
PGL, and NSG. These amounts are not reflected on the Condensed
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 Condensed
Consolidated Balance Sheets.
|
(4)
|
Consists of
(1) $50.0 million related to the sale agreement for Integrys Energy
Services' United States wholesale electric marketing and trading business,
which included a number of customary representations, warranties, and
indemnification provisions. In addition, for a two-year period,
counterparty payment default risk was retained with approximately 50% of
the counterparties associated with the commodity contracts transferred in
this transaction. A $0.8 million liability was recorded related
to the fair value of this counterparty payment default risk; (2) a
$5.0 million environmental indemnification provided by Integrys
Energy Services related to the sale of the Stoneman generation facility,
under which Integrys Energy Group expects that the likelihood of required
performance is remote; and (3) $1.2 million related to other
indemnifications and workers compensation
coverage.
|
Integrys Energy
Group has provided total parental guarantees of $1,334.0 million on behalf
of Integrys Energy Services as shown in the table below. Integrys
Energy Group's exposure under these guarantees (excluding exposure secured by
standby letters of credit) related to open transactions at March 31, 2010,
was approximately $548 million.
(Millions)
|
|
March 31,
2010
|
|
Guarantees
supporting commodity transactions
|
|
$ |
927.2 |
|
Standby
letters of credit
|
|
|
322.4 |
|
Guarantees of
subsidiary debt *
|
|
|
27.0 |
|
Surety
bonds
|
|
|
1.7 |
|
Other
|
|
|
55.7 |
|
Total
guarantees
|
|
$ |
1,334.0 |
|
*
|
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 Condensed Consolidated Balance
Sheets.
|
NOTE 15--EMPLOYEE
BENEFIT PLANS
The following table
shows the components of net periodic benefit cost for Integrys Energy Group's
benefit plans for the three months ended March 31:
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
(Millions)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Service
cost
|
|
$ |
10.9 |
|
|
$ |
9.3 |
|
|
$ |
4.5 |
|
|
$ |
3.7 |
|
Interest
cost
|
|
|
20.6 |
|
|
|
19.8 |
|
|
|
7.1 |
|
|
|
7.1 |
|
Expected
return on plan assets
|
|
|
(22.3 |
) |
|
|
(23.2 |
) |
|
|
(4.7 |
) |
|
|
(4.4 |
) |
Amortization
of transition obligation
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
|
|
0.1 |
|
Amortization
of prior service cost (credit)
|
|
|
1.3 |
|
|
|
1.2 |
|
|
|
(1.0 |
) |
|
|
(1.0 |
) |
Amortization
of net actuarial loss
|
|
|
2.9 |
|
|
|
0.2 |
|
|
|
0.7 |
|
|
|
0.3 |
|
Amortization
of merger related regulatory adjustment (1)
|
|
|
- |
|
|
|
2.8 |
|
|
|
- |
|
|
|
0.5 |
|
Regulatory
deferral (2)
|
|
|
1.1 |
|
|
|
(0.8 |
) |
|
|
(0.3 |
) |
|
|
(0.4 |
) |
Net periodic
benefit cost
|
|
$ |
14.5 |
|
|
$ |
9.3 |
|
|
$ |
6.4 |
|
|
$ |
5.9 |
|
(1)
|
Effective with
the 2010 rate order, PGL and NSG reflect pension and other postretirement
benefit costs in rates using Integrys Energy Group's accounting basis,
which was established at the time of the February 2007 PEC
merger. As a result, the merger related regulatory adjustment
was eliminated. Pursuant to the 2010 rate order,
|
|
a
new regulatory asset was established for the remaining cumulative
difference that existed between the accounting bases of PGL/NSG and
Integrys Energy Group in the pension and other postretirement benefit
obligations. The amortization of this regulatory asset over the
average remaining service lives of the participating employees is not
included as a component of net periodic benefit cost. |
|
|
(2)
|
The PSCW
authorized WPS to recover its net increased 2009 pension costs and to
refund its net decreased 2009 other postretirement benefit costs as part
of the limited rate case re-opener for 2010. Amortization and
recovery/refund of these costs will occur throughout
2010.
|
Transition
obligations, prior service costs (credits), and net actuarial losses that have
not yet been recognized as a component of net periodic benefit cost are included
in accumulated OCI for Integrys Energy Group's nonregulated entities and are
recorded as net regulatory assets for the utilities.
Contributions to
the plans are made in accordance with legal and tax requirements and do not
necessarily occur evenly throughout the year. For the three months
ended March 31, 2010, contributions made to the pension and other postretirement
benefit plans were not significant. Integrys Energy Group expects to
contribute $66.4 million to its pension plans and $35.7 million to its
other postretirement benefit plans during the remainder of 2010.
NOTE 16--STOCK-BASED
COMPENSATION
Stock
Options
Compensation cost
recognized for stock options during the three months ended March 31, 2010,
and 2009, was not significant. As of March 31, 2010,
$2.4 million of compensation cost related to unvested and outstanding stock
options was expected to be recognized over a weighted-average period of
3.2 years.
Cash received from
option exercises during the three months ended March 31, 2010, was $9.6
million. The tax benefit realized from these option exercises was
$3.9 million.
A
summary of stock option activity for the three months ended March 31, 2010,
and information related to outstanding and exercisable stock options at
March 31, 2010, 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, 2009
|
|
|
3,133,286 |
|
|
$ |
47.06 |
|
|
|
|
|
|
|
Granted
|
|
|
554,092 |
|
|
|
41.58 |
|
|
|
|
|
|
|
Exercised
|
|
|
259,926 |
|
|
|
36.93 |
|
|
|
|
|
$ |
2.7 |
|
Forfeited
|
|
|
39,906 |
|
|
|
47.03 |
|
|
|
|
|
|
0.1 |
|
Expired
|
|
|
58,249 |
|
|
|
49.68 |
|
|
|
|
|
|
- |
|
Outstanding
at March 31, 2010
|
|
|
3,329,297 |
|
|
$ |
46.90 |
|
|
|
6.72 |
|
|
$ |
8.7 |
|
Exercisable
at March 31, 2010
|
|
|
1,954,161 |
|
|
$ |
48.34 |
|
|
|
5.34 |
|
|
$ |
3.5 |
|
The aggregate
intrinsic value for outstanding and exercisable options in the above table
represents the total pre-tax intrinsic value that would have been received by
the option holders had they all exercised their options at March 31,
2010. This is calculated as the difference between Integrys Energy
Group's closing stock price on March 31, 2010, and the option exercise
price, multiplied by the number of in-the-money stock options.
Performance
Stock Rights
Compensation cost
recorded for performance stock rights during the three months ended
March 31, 2010, and 2009, was not significant. As of
March 31, 2010, $6.4 million of compensation cost related to unvested
and outstanding performance stock rights was expected to be recognized over a
weighted-average period of 2.5 years.
A
summary of the activity related to performance stock rights for the three months
ended March 31, 2010, is presented below:
|
|
Performance
Stock
Rights
|
|
|
Weighted-Average
Grant
Date Fair Value
|
|
Outstanding
at December 31, 2009
|
|
|
301,090 |
|
|
$ |
45.33 |
|
Granted
|
|
|
150,481 |
|
|
|
42.45 |
|
Distributed
|
|
|
45,847 |
|
|
|
53.29 |
|
Expired
|
|
|
26,009 |
|
|
|
53.45 |
|
Forfeited
|
|
|
37,849 |
|
|
|
42.54 |
|
Outstanding
at March 31, 2010
|
|
|
341,866 |
|
|
$ |
42.69 |
|
Restricted
Shares and Restricted Share Units
The fair value of
restricted share units granted in 2010 was based on Integrys Energy Group's
closing stock price on the grant date.
Compensation cost
recognized for these awards during the three months ended March 31, 2010,
and 2009, was not significant. As of March 31, 2010,
$11.8 million of compensation cost related to these awards was expected to
be recognized over a weighted-average period of 3.0 years.
A
summary of the activity related to restricted share and restricted share unit
awards for the three months ended March 31, 2010, is presented
below:
|
|
Restricted
Shares and Restricted Share Unit Awards
|
|
|
Weighted-Average
Grant
Date Fair Value
|
|
Outstanding
at December 31, 2009
|
|
|
346,858 |
|
|
$ |
45.55 |
|
Granted
|
|
|
209,252 |
|
|
|
41.64 |
|
Distributed
|
|
|
88,341 |
|
|
|
45.37 |
|
Forfeited
|
|
|
29,094 |
|
|
|
44.10 |
|
Outstanding
at March 31, 2010
|
|
|
438,675 |
|
|
$ |
43.82 |
|
NOTE 17--COMPREHENSIVE
INCOME (LOSS)
Integrys Energy
Group's total comprehensive income (loss) was as follows:
|
|
Three
Months Ended
March 31
|
|
(Millions)
|
|
2010
|
|
|
2009
|
|
Net income
(loss) attributed to common shareholders
|
|
$ |
49.5 |
|
|
$ |
(180.2 |
) |
Cash flow
hedges, net of tax *
|
|
|
(12.4 |
) |
|
|
(30.7 |
) |
Foreign
currency translation, net of tax
|
|
|
0.8 |
|
|
|
(0.5 |
) |
Amortizations
of unrecognized pension and other postretirement benefit
costs,
net of tax
|
|
|
0.5 |
|
|
|
(0.2 |
) |
Total
comprehensive income (loss)
|
|
$ |
38.4 |
|
|
$ |
(211.6 |
) |
|
*
|
For the three
months ended March 31, 2010, and 2009, the tax benefit was
$5.7 million and $20.2 million,
respectively.
|
The following table
shows the changes to Integrys Energy Group's accumulated other comprehensive
loss from December 31, 2009, to March 31, 2010.
(Millions)
|
|
Three
Months Ended
March 31,
2010
|
|
December 31,
2009 balance
|
|
$ |
(44.0 |
) |
Cash flow
hedges
|
|
|
(12.4 |
) |
Foreign
currency translation
|
|
|
0.8 |
|
Amortizations
of unrecognized pension and other postretirement benefit
costs
|
|
|
0.5 |
|
March 31,
2010 balance
|
|
$ |
(55.1 |
) |
NOTE 18--COMMON
EQUITY
Integrys Energy
Group's reconciliation of shares outstanding was as follows:
|
|
March
31, 2010
|
|
|
December 31,
2009
|
|
|
|
Shares
|
|
|
Average
Cost
|
|
|
Shares
|
|
|
Average
Cost
|
|
Common stock
issued
|
|
|
76,806,208 |
|
|
|
|
|
|
76,418,843 |
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
compensation rabbi trust
|
|
|
368,813 |
|
|
$ |
42.57 |
(1) |
|
|
402,839 |
|
|
$ |
42.58 |
(1) |
Restricted
stock
|
|
|
29,573 |
|
|
$ |
55.06 |
(2) |
|
|
35,861 |
|
|
$ |
55.33 |
(2) |
Total
shares outstanding
|
|
|
76,407,822 |
|
|
|
|
|
|
|
75,980,143 |
|
|
|
|
|
|
(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.
|
Beginning February
11, 2010, Integrys Energy Group issued new shares of common stock to meet the
requirements of its Stock Investment Plan and certain stock-based employee
benefit and compensation plans. From January 1, 2010 to February 11,
2010, and during 2009, Integrys Energy Group purchased shares of its common
stock on the open market to meet the requirements of these plans.
Integrys Energy
Group had the following changes to issued common stock during the three months
ended March 31, 2010:
Integrys
Energy Group's common stock shares
|
|
|
|
Common stock
at December 31, 2009
|
|
|
76,418,843 |
|
Shares
issued
|
|
|
|
|
Stock
Investment Plan
|
|
|
172,251 |
|
Stock-based
compensation
|
|
|
219,367 |
|
Restricted
stock shares retired
|
|
|
(4,253 |
) |
Common
stock at March 31, 2010
|
|
|
76,806,208 |
|
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 calculation of
diluted earnings per share for the three months ended March 31, 2010, excluded
1.8 million out-of-the-money stock options that had an anti-dilutive
effect. The effects of an insignificant number of in-the-money
securities were not included in the computation for the three months ended
March 31, 2009, because there was a net loss during the period, which would
cause the impact to be anti-dilutive. The calculation of
diluted earnings
per share for the three months ended March 31, 2009 also excluded
3.2 million out-of-the-money stock options that had an anti-dilutive
effect. The following table reconciles the computation of basic and
diluted earnings (loss) per share:
|
|
Three
Months Ended March 31
|
|
(Millions,
except per share amounts)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
Net income
(loss) from continuing operations
|
|
$ |
50.2 |
|
|
$ |
(179.5 |
) |
Discontinued
operations, net of tax
|
|
|
0.1 |
|
|
|
- |
|
Preferred
stock dividends of subsidiary
|
|
|
(0.8 |
) |
|
|
(0.8 |
) |
Noncontrolling
interest in subsidiaries
|
|
|
- |
|
|
|
0.1 |
|
Net income
(loss) attributed to common shareholders
|
|
$ |
49.5 |
|
|
$ |
(180.2 |
) |
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Average
shares of common stock – basic
|
|
|
76.9 |
|
|
|
76.7 |
|
Effect of
dilutive securities
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
0.3 |
|
|
|
- |
|
Average
shares of common stock – diluted
|
|
|
77.2 |
|
|
|
76.7 |
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.64 |
|
|
$ |
(2.35 |
) |
Diluted
|
|
|
0.64 |
|
|
|
(2.35 |
) |
NOTE 19--VARIABLE
INTEREST ENTITIES
Effective January
1, 2010, Integrys Energy Group implemented SFAS No. 167, "Amendments to FASB
Interpretation No. 46 (R)" (now incorporated as part of the Consolidation Topic
of the FASB ASC). Integrys Energy Group has variable interests in two
entities through power purchase agreements relating to the cost of
fuel. In these cases, Integrys Energy Group has considered which
interest holder has the power to direct the activities that most significantly
impact the economics of the variable interest entity; this interest holder is
considered the primary beneficiary of the entity and is required to consolidate
the entity. For a variety of reasons, including the length of the
remaining term of the contracts compared with the remaining lives of the plants
and the fact that Integrys Energy Group does not have the power to direct the
operations of the facilities, Integrys Energy Group has determined it is not the
primary beneficiary of these variable interest entities.
As
of March 31, 2010, the carrying amount of assets and liabilities on the
Condensed Consolidated Balance Sheets that relate to the involvement with these
variable interest entities are related to working capital accounts and represent
the amounts owed by Integrys Energy Group for the current deliveries of
power. Integrys Energy Group has not provided or guaranteed any debt
or equity support, liquidity arrangements, performance guarantees or other
commitments associated with these contracts. There is no significant
potential exposure to loss as a result of its involvement with the variable
interest entities.
In
2008, Integrys Energy Group contributed certain assets to LGS Renewables I, L.C.
in exchange for a 50% interest in the entity. Simultaneously,
Integrys Energy Group entered into a loan agreement with LGS Renewables I, L.C.
to finance the development and construction of a pipeline project to provide
landfill gas to a customer. Integrys Energy Group determined at the
time that the entity is a variable interest entity and that Integrys Energy
Group is the primary beneficiary of the entity. Integrys Energy Group
updated its conclusion upon implementation of the new standard and continued to
conclude that Integrys Energy Group is the primary
beneficiary. Therefore, Integrys Energy Group’s condensed
consolidated financial statements include the results of LGS Renewables I,
L.C.
At
March 31, 2010, Integrys Energy Group’s variable interests in LGS include its
equity investment and loans of $24.9 million. Integrys Energy Group’s
maximum exposure to loss as a result of this partnership is equal to advances
under the loan agreement. Its equity investment is
insignificant.
The carrying
amounts and classifications of the above consolidated variable interest entity
assets and liabilities included in Integrys Energy Group condensed consolidated
financial statements were:
(Millions)
|
|
March 31,
2010
|
|
|
December 31,
2009
|
|
Current
assets
|
|
$ |
1.5 |
|
|
$ |
0.8 |
|
Property,
plant and equipment
|
|
|
16.8 |
|
|
|
17.1 |
|
Other
long-term assets
|
|
|
4.9 |
|
|
|
4.8 |
|
Total
assets
|
|
$ |
23.2 |
|
|
$ |
22.7 |
|
Current notes
payable to affiliates
|
|
$ |
2.4 |
|
|
$ |
2.0 |
|
Other current
liabilities
|
|
|
0.4 |
|
|
|
0.5 |
|
Notes payable
to affiliates
|
|
|
22.5 |
|
|
|
22.2 |
|
Total
equity
|
|
|
(2.1 |
) |
|
|
(2.0 |
) |
Total
liabilities and equity
|
|
$ |
23.2 |
|
|
$ |
22.7 |
|
NOTE 20--FAIR
VALUE
Fair
Value Measurements
In
the three months ended March 31, 2010, Integrys Energy Group identified
additional classes of risk management assets and liabilities as a result of the
implementation of FASB Accounting Standards Update (ASU) 2010-06, "Fair Value
Measurements and Disclosures (Topic 820), Improving Disclosures about Fair Value
Measurements." As required, this ASU was only applied for the quarter
ended March 31, 2010, and
therefore, prior periods do not reflect the expanded disclosure
requirements.
The following
tables show Integrys Energy Group's assets and liabilities that were accounted
for at fair value on a recurring basis, categorized by level within the fair
value hierarchy.
|
|
March
31, 2010
|
|
(Millions)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Management
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial transmission
rights
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1.9 |
|
|
$ |
1.9 |
|
Natural gas contracts
|
|
|
0.1 |
|
|
|
1.2 |
|
|
|
- |
|
|
|
1.3 |
|
Petroleum product
contracts
|
|
|
0.2 |
|
|
|
- |
|
|
|
- |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonregulated
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas contracts
|
|
|
74.3 |
|
|
|
162.4 |
|
|
|
45.3 |
|
|
|
282.0 |
|
Power contracts
|
|
|
34.7 |
|
|
|
375.2 |
|
|
|
234.2 |
|
|
|
644.1 |
|
Interest rate swaps
|
|
|
- |
|
|
|
1.9 |
|
|
|
- |
|
|
|
1.9 |
|
Foreign exchange
contracts
|
|
|
0.1 |
|
|
|
1.7 |
|
|
|
- |
|
|
|
1.8 |
|
Total Risk Management
Assets
|
|
|
109.4 |
|
|
|
542.4 |
|
|
|
281.4 |
|
|
|
933.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
0.1 |
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Management
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial transmission
rights
|
|
|
- |
|
|
|
- |
|
|
|
0.4 |
|
|
|
0.4 |
|
Natural gas contracts
|
|
|
2.6 |
|
|
|
51.7 |
|
|
|
- |
|
|
|
54.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonregulated
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas contracts
|
|
|
74.8 |
|
|
|
198.7 |
|
|
|
8.5 |
|
|
|
282.0 |
|
Power contracts
|
|
|
60.0 |
|
|
|
435.6 |
|
|
|
366.5 |
|
|
|
862.1 |
|
Interest rate swaps
|
|
|
- |
|
|
|
4.3 |
|
|
|
- |
|
|
|
4.3 |
|
Foreign exchange
contracts
|
|
|
1.7 |
|
|
|
0.1 |
|
|
|
- |
|
|
|
1.8 |
|
Total Risk Management
Liabilities
|
|
|
139.1 |
|
|
|
690.4 |
|
|
|
375.4 |
|
|
|
1,204.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt hedged by
fairvalue hedge
|
|
|
- |
|
|
|
51.9 |
|
|
|
- |
|
|
|
51.9 |
|
|
|
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 |
|
Integrys Energy
Group determined the fair values above using a market based approach that
incorporates observable market inputs where available, and internally developed
inputs where observable market data is not readily available. For the
unobservable inputs, consideration is given to the assumptions that market
participants would use in valuing the asset or liability. 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 3,
"Risk Management
Activities."
When possible,
Integrys Energy Group bases the valuations of its risk management assets and
liabilities on quoted prices for identical assets in active
markets. These valuations are classified in Level 1. The
valuations of
certain contracts include inputs related to market price risk (commodity or
interest rate), price volatility (for option contracts), price correlation (for
cross commodity contracts), credit risk, and time value. These inputs
are available through multiple sources, including brokers and over-the-counter
and online exchanges. Transactions valued using these inputs 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, primarily
through use of historically settled data or using correlations to other
locations.
|
Integrys Energy
Group recognizes transfers between the levels of the fair value hierarchy at the
end of the reporting period.
The following table
shows the transfers between the levels of the fair value hierarchy during the
three months ended March 31, 2010. All the transfers that occurred
during the period related to power contracts in the nonregulated
segment.
(Millions)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Transfers
into Level 1 from
|
|
|
N/A |
|
|
$ |
(9.9 |
) |
|
$ |
(14.3 |
) |
Transfers
into Level 2 from
|
|
$ |
- |
|
|
|
N/A |
|
|
$ |
23.2 |
|
Transfers
into Level 3 from
|
|
$ |
- |
|
|
$ |
(4.4 |
) |
|
|
N/A |
|
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.
The following
tables set forth a reconciliation of changes in the fair value of items
categorized as Level 3 measurements:
Three Months Ended March 31,
2010
|
|
Nonregulated Segments
|
|
|
Utility Segments
|
|
|
|
|
(Millions)
|
|
Natural
gas
|
|
|
Power
|
|
|
Financial
transmission
rights
|
|
|
Total
|
|
Balance at the
beginning of the period
|
|
$ |
31.4 |
|
|
$ |
86.5 |
|
|
$ |
3.5 |
|
|
$ |
121.4 |
|
Net realized
and unrealized gain (loss) includedin earnings
|
|
|
17.2 |
|
|
|
(94.8 |
) |
|
|
(0.1 |
) |
|
|
(77.7 |
) |
Net realized
loss recorded as regulatoryassets or liabilities
|
|
|
- |
|
|
|
- |
|
|
|
(2.0 |
) |
|
|
(2.0 |
) |
Net unrealized
loss included in othercomprehensive loss
|
|
|
- |
|
|
|
(13.2 |
) |
|
|
- |
|
|
|
(13.2 |
) |
Net purchases
and settlements
|
|
|
(11.8 |
) |
|
|
(97.5 |
) |
|
|
0.1 |
|
|
|
(109.2 |
) |
Net transfers
into Level 3
|
|
|
- |
|
|
|
(4.4 |
) |
|
|
|
|
|
|
(4.4 |
) |
Net transfers
out of Level 3
|
|
|
- |
|
|
|
(8.9 |
) |
|
|
- |
|
|
|
(8.9 |
) |
Balance
at the end of the period
|
|
|
36.8 |
|
|
|
(132.3 |
) |
|
|
1.5 |
|
|
|
(94.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gain (loss) included inearnings related to instruments still
heldat the end of the period
|
|
|
17.2 |
|
|
|
(94.8 |
) |
|
|
- |
|
|
|
(77.6 |
) |
Three Months Ended March 31,
2009
|
|
|
|
(Millions)
|
|
|
|
Balance at the
beginning of period
|
|
$ |
182.0 |
|
Net realized
and unrealized gain included in earnings
|
|
|
73.2 |
|
Net unrealized
loss recorded as regulatory assets or liabilities
|
|
|
(0.1 |
) |
Net unrealized
loss included in other comprehensive loss
|
|
|
(18.0 |
) |
Net purchases
and settlements
|
|
|
(18.0 |
) |
Net transfers
in/out of Level 3
|
|
|
(87.5 |
) |
Balance
at the end of period
|
|
$ |
131.6 |
|
|
|
|
|
|
Net
unrealized gain included in earnings related toinstruments still held at
the end of period
|
|
|
75.6 |
|
Unrealized gains
and losses included in earnings related to Integrys Energy Services' risk
management assets and liabilities are recorded through nonregulated revenue on
the Condensed Consolidated Statements of Income. Realized gains and
losses on these same instruments are recorded in nonregulated revenue or
nonregulated cost of fuel, natural gas, and purchased power, depending on the
nature of the instrument. Unrealized gains and losses on Level 3
derivatives at the utilities are deferred as regulatory assets or
liabilities. Therefore, these fair value measurements have no impact
on earnings. Realized gains and losses on these instruments flow
through utility cost of fuel, natural gas, and purchased power on the Condensed
Consolidated Statements of Income.
Fair Value of Financial
Instruments
The following table
shows the financial instruments included on the Condensed Consolidated Balance
Sheets of Integrys Energy Group that are not recorded at fair
value.
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
(Millions)
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Long-term
debt
|
|
$ |
2,459.6 |
|
|
$ |
2,530.1 |
|
|
$ |
2,511.2 |
|
|
$ |
2,543.6 |
|
Preferred
stock
|
|
|
51.1 |
|
|
|
46.5 |
|
|
|
51.1 |
|
|
|
44.3 |
|
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-term nature of cash and cash equivalents, accounts receivable, accounts
payable, notes payable, and outstanding commercial paper, the carrying amount
approximates fair value.
NOTE 21--MISCELLANEOUS
INCOME
Integrys Energy
Group's total miscellaneous income was as follows:
|
|
Three Months Ended March 31
|
|
(Millions)
|
|
2010
|
|
|
2009
|
|
Equity
earnings on investments
|
|
$ |
19.7 |
|
|
$ |
18.4 |
|
Gain on sale
of property
|
|
|
- |
|
|
|
1.8 |
|
Other
|
|
|
0.7 |
|
|
|
0.9 |
|
Total
miscellaneous income
|
|
$ |
20.4 |
|
|
$ |
21.1 |
|
NOTE 22--REGULATORY
ENVIRONMENT
Wisconsin
2011 Rate
Case
On
April 1, 2010, WPS filed an application with the PSCW to increase retail
electric and natural gas rates $64.2 million (6.9%) and $5.0 million (1.2%),
respectively, with rates effective January 1, 2011. The filing
includes a request for an 11.25% return on common equity and a common equity
ratio of 53.62% in WPS’s regulatory capital structure. The proposed
retail electric and natural gas rate increases for 2011 are being driven by
decreased sales due primarily to the ongoing economic recession and increased
energy efficiency efforts by customers, the amortization in 2011 of deferred
amounts under WPS’s electric Revenue Stabilization Mechanism, and increased
payments to the Wisconsin Focus on Energy program.
2010
Rates
On
December 22, 2009, the PSCW issued a final written order for WPS
authorizing an electric rate increase of $18.2 million, offset by an $18.2
million refund of 2009 and 2008 fuel costs, and a retail natural gas rate
increase of $13.5 million, effective January 1, 2010. Based on
an order issued on April 1, 2010, the remaining $10.0 million of the 2008
and 2009 fuel cost over-collections, plus interest of $1.3 million, will be
refunded to customers based on April 2010 sales. As of March 31,
2010, the remaining balance of the 2008 and 2009 fuel cost over-collections to
be refunded to customers in 2010 was $24.4 million, which has been recorded as a
short-term regulatory liability. 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
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.
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 UPPCO’s 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
December 16, 2009, the MPSC issued a final written order 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 MGU’s 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 order. 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 MGU’s 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, prior to the ICC granting rehearing on this
issue, PGL filed Rider ICR with a $51.85 million annual baseline. On
rehearing, PGL proposed a baseline of $45.28 million with an annual escalation
factor. No party filed testimony opposing the
proposal. 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. On March 10, 2010, the ICC voted to grant
rehearing on the Rider ICR annual baseline determination and denied all other
rehearing requests, including requests about other aspects of Rider ICR with a
rehearing order expected in the summer of 2010. The AG, the Citizens
Utility Board, PGL, and NSG filed appeals with the Illinois appellate court of
the ICC's order denying rehearing on certain other issues.
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 program to begin no later than September 1, 2011, as
well as an on-bill financing program that PGL and NSG filed in February 2010
with a requested 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 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. The legislation did not have a significant
impact on PGL or NSG during the quarter ended March 31, 2010.
2008
Rates
On
February 5, 2008, the ICC issued a final written order authorizing a retail
natural gas rate increase of $71.2 million for PGL and a retail natural gas
rate decrease of $0.2 million for NSG, effective
February 14, 2008. The rates for PGL 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, but not
enacted, at the Illinois state legislature to roll back
decoupling. 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, and will be replaced by, 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, which only
affected PGL. The ICC approved a stipulation resolving the rehearing
issue. 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 were 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 23--SEGMENTS
OF BUSINESS
At
March 31, 2010, 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 tables below
present information for the respective periods pertaining to Integrys Energy
Group's reportable segments:
|
|
Regulated Operations
|
|
|
Nonutility
and Nonregulated Operations
|
|
|
|
|
|
|
|
(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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$ |
330.1 |
|
|
$ |
926.5 |
|
|
$ |
- |
|
|
$ |
1,256.6 |
|
|
$ |
643.8 |
|
|
$ |
3.0 |
|
|
$ |
- |
|
|
$ |
1,903.4 |
|
Intersegment
revenues
|
|
|
4.8 |
|
|
|
0.2 |
|
|
|
- |
|
|
|
5.0 |
|
|
|
0.8 |
|
|
|
- |
|
|
|
(5.8 |
) |
|
|
- |
|
Restructuring
expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2.5 |
|
|
|
0.2 |
|
|
|
- |
|
|
|
2.7 |
|
Net loss on
Integrys Energy Services’ dispositions related to strategy
change
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
39.8 |
|
|
|
- |
|
|
|
- |
|
|
|
39.8 |
|
Depreciation
and
amortization
expense
|
|
|
24.4 |
|
|
|
30.7 |
|
|
|
- |
|
|
|
55.1 |
|
|
|
4.7 |
|
|
|
4.4 |
|
|
|
- |
|
|
|
64.2 |
|
Miscellaneous
income
(expense)
|
|
|
0.2 |
|
|
|
0.5 |
|
|
|
19.5 |
|
|
|
20.2 |
|
|
|
0.5 |
|
|
|
10.5 |
|
|
|
(10.8 |
) |
|
|
20.4 |
|
Interest
expense (income)
|
|
|
10.8 |
|
|
|
13.1 |
|
|
|
- |
|
|
|
23.9 |
|
|
|
3.4 |
|
|
|
22.9 |
|
|
|
(10.8 |
) |
|
|
39.4 |
|
Provision
(benefit) for income taxes
|
|
|
18.1 |
|
|
|
56.6 |
|
|
|
7.9 |
|
|
|
82.6 |
|
|
|
(28.9 |
) |
|
|
(3.6 |
) |
|
|
- |
|
|
|
50.1 |
|
Net income
(loss) from continuing operations
|
|
|
26.7 |
|
|
|
69.9 |
|
|
|
11.6 |
|
|
|
108.2 |
|
|
|
(48.6 |
) |
|
|
(9.4 |
) |
|
|
- |
|
|
|
50.2 |
|
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
Preferred
stock dividends of subsidiary
|
|
|
(0.6 |
) |
|
|
(0.2 |
) |
|
|
- |
|
|
|
(0.8 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(0.8 |
) |
Net income
(loss) attributed to common shareholders
|
|
|
26.1 |
|
|
|
69.7 |
|
|
|
11.6 |
|
|
|
107.4 |
|
|
|
(48.5 |
) |
|
|
(9.4 |
) |
|
|
- |
|
|
|
49.5 |
|
|
|
Regulated Operations
|
|
|
Nonutility
and
Nonregulated
Operations
|
|
|
|
|
|
|
|
(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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$ |
317.9 |
|
|
$ |
1,096.6 |
|
|
$ |
- |
|
|
$ |
1,414.5 |
|
|
$ |
1,783.5 |
|
|
$ |
2.8 |
|
|
$ |
- |
|
|
$ |
3,200.8 |
|
Intersegment
revenues
|
|
|
11.8 |
|
|
|
0.2 |
|
|
|
- |
|
|
|
12.0 |
|
|
|
0.6 |
|
|
|
- |
|
|
|
(12.6 |
) |
|
|
- |
|
Goodwill
impairment loss
|
|
|
- |
|
|
|
291.1 |
|
|
|
- |
|
|
|
291.1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
291.1 |
|
Depreciation
and
amortization
expense
|
|
|
22.4 |
|
|
|
25.8 |
|
|
|
- |
|
|
|
48.2 |
|
|
|
5.1 |
|
|
|
3.6 |
|
|
|
- |
|
|
|
56.9 |
|
Miscellaneous
income
(expense)
|
|
|
0.9 |
|
|
|
1.2 |
|
|
|
18.0 |
|
|
|
20.1 |
|
|
|
0.9 |
|
|
|
13.7 |
|
|
|
(13.6 |
) |
|
|
21.1 |
|
Interest
expense (income)
|
|
|
10.5 |
|
|
|
13.6 |
|
|
|
- |
|
|
|
24.1 |
|
|
|
3.1 |
|
|
|
29.1 |
|
|
|
(13.6 |
) |
|
|
42.7 |
|
Provision
(benefit) for income taxes
|
|
|
14.3 |
|
|
|
4.0 |
|
|
|
7.2 |
|
|
|
25.5 |
|
|
|
(14.5 |
) |
|
|
1.8 |
|
|
|
- |
|
|
|
12.8 |
|
Net income
(loss)
|
|
|
27.7 |
|
|
|
(172.9 |
) |
|
|
10.8 |
|
|
|
(134.4 |
) |
|
|
(29.2 |
) |
|
|
(15.9 |
) |
|
|
- |
|
|
|
(179.5 |
) |
Preferred
stock dividends of subsidiary
|
|
|
(0.6 |
) |
|
|
(0.2 |
) |
|
|
- |
|
|
|
(0.8 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(0.8 |
) |
Net income
(loss) attributed to common shareholders
|
|
|
27.1 |
|
|
|
(173.1 |
) |
|
|
10.8 |
|
|
|
(135.2 |
) |
|
|
(29.1 |
) |
|
|
(15.9 |
) |
|
|
- |
|
|
|
(180.2 |
) |
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following
discussion should be read in conjunction with the accompanying condensed
consolidated financial statements and related notes and Integrys Energy Group’s
Annual Report on Form 10-K for the year ended December 31,
2009.
SUMMARY
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).
RESULTS
OF OPERATIONS
First
Quarter 2010 Compared with First Quarter 2009
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
|
Change
in 2010 Over
|
|
(Millions,
except per share amounts)
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas
utility operations
|
|
$ |
69.7 |
|
|
$ |
(173.1 |
) |
|
|
N/A |
|
Electric
utility operations
|
|
|
26.1 |
|
|
|
27.1 |
|
|
|
(3.7 |
)% |
Integrys
Energy Services’ operations
|
|
|
(48.5 |
) |
|
|
(29.1 |
) |
|
|
66.7 |
% |
Electric
transmission investment
|
|
|
11.6 |
|
|
|
10.8 |
|
|
|
7.4 |
% |
Holding
company and other operations
|
|
|
(9.4 |
) |
|
|
(15.9 |
) |
|
|
(40.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) attributed to common shareholders
|
|
$ |
49.5 |
|
|
$ |
(180.2 |
) |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
(loss) per share
|
|
$ |
0.64 |
|
|
$ |
(2.35 |
) |
|
|
N/A |
|
Diluted
earnings (loss) per share
|
|
$ |
0.64 |
|
|
$ |
(2.35 |
) |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares
of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
76.9 |
|
|
|
76.7 |
|
|
|
0.3 |
% |
Diluted
|
|
|
77.2 |
|
|
|
76.7 |
|
|
|
0.7 |
% |
Summary of Financial
Results
Integrys Energy
Group recognized net income attributed to common shareholders of
$49.5 million ($0.64 diluted earnings per share) for the quarter ended
March 31, 2010, compared with a net loss attributed to common shareholders of
$180.2 million ($2.35 net loss per share) for the quarter ended March 31,
2009. Significant factors impacting the $229.7 million increase in
earnings were as follows (and are discussed in more detail
thereafter):
·
|
Earnings at
the regulated natural gas utility segment increased $242.8 million,
driven by the positive quarter-over-quarter impact of a
$248.8 million after-tax non-cash goodwill impairment loss recorded
in the first quarter of 2009. Earnings also benefited $15.0
million from rate increases implemented at certain natural gas utilities
in the first quarter of 2010 and $4.0 million from an after-tax
decrease in bad debt expense. These
positive impacts were partially offset by a $6.6 million after-tax
decrease in margin related to lower quarter-over-quarter volumes, net of
decoupling, a non-recurring $6.5 million increase in provision for
income taxes related to new health care legislation, which eliminated the
deductibility of payments for retiree prescription drugs subject to a
federal subsidy, and higher operating expenses. Higher
operating expenses included a $4.4 million after-tax increase in
employee benefit costs, a $2.9 million after-tax increase in
depreciation and amortization expense related to recovery under a new rate
order, and a $1.9 million after-tax increase related to energy efficiency
initiatives.
|
|
|
·
|
Earnings at
the regulated electric utility segment decreased $1.0 million, driven by a
$5.0 million after-tax increase in operating expenses, primarily related
to increases in employee benefit costs, electric transmission expense, and
customer assistance expense. Federal health care legislation
enacted in March 2010 also had a non-recurring $4.5 million negative
impact on electric earnings as a result of an increase in provision for
income taxes, since payments for retiree prescription drugs subject to a
federal subsidy will no longer be deductible under the new
legislation. The decrease in regulated electric utility segment
earnings was partially offset by a $7.3 million after-tax increase in
margin, primarily related to lower fuel and purchased power costs incurred
in the first quarter of 2010, compared with fuel and purchased power cost
recovery rates set in 2009 (which WPS was allowed to retain as part of its
limited rate case re-opener for 2010), as well as retail rate increases at
WPS and UPPCO.
|
|
|
·
|
The net loss
at Integrys Energy Services increased $19.4 million, driven by
after-tax losses on dispositions of $23.9 million, primarily related to
the divestiture of the United States wholesale electric marketing and
trading business. These losses primarily resulted from the same
mark-to-market timing differences that have historically caused earnings
volatility within Integrys Energy Services. Also contributing
to the increase in Integrys Energy Services’ net loss was a $5.9 million
after-tax decrease in Integrys Energy Services’ margin
quarter-over-quarter, primarily related to lower realized natural gas and
electric margins driven by Integrys Energy Services’ strategy change, as
well as the negative quarter-over-quarter impact of withdrawals of natural
gas from storage for which inventory valuation adjustments were previously
recorded, partially offset by the positive quarter-over-quarter impact of
lower non-cash accounting losses due to derivative fair value
adjustments. The increase in Integrys Energy Services’ net loss
was partially offset by an after-tax decrease in operating and maintenance
expenses of $11.3 million.
|
|
|
·
|
Earnings at
the electric transmission investment segment increased $0.8 million, due
to an increase in income from Integrys Energy Group's ownership interest
in ATC.
|
|
|
·
|
The net loss
at the holding company and other segment decreased $6.5 million,
largely due to a quarter-over-quarter decrease in the effective tax rate
for this segment. The effective tax rate of this segment
includes the effect of certain state income taxes at the consolidated
level that are not allocated to other segments. One specific
item affecting income tax expense for this segment during the first
quarter of 2009 was the negative impact of a February 2009 tax law change
in Wisconsin. Also contributing to the decrease in net loss at
this segment was lower short-term external interest
expense.
|
Utility
Operations
For the quarters
ended March 31, 2010, and 2009, utility operations included the regulated
natural gas utility segment, consisting of the regulated natural gas operations
of PGL, WPS, MERC, MGU, and NSG, and the regulated electric segment, consisting
of the regulated electric operations of WPS and UPPCO.
Regulated
Natural Gas Utility Segment Operations
|
|
|
|
|
Change
in
|
|
|
|
Three Months Ended
March 31
|
|
|
2010
Over
|
|
(Millions, except heating
degree days)
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
926.7 |
|
|
$ |
1,096.8 |
|
|
|
(15.5 |
)% |
Purchased
natural gas costs
|
|
|
607.4 |
|
|
|
776.3 |
|
|
|
(21.8 |
)% |
Margins
|
|
|
319.3 |
|
|
|
320.5 |
|
|
|
(0.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and
maintenance expense
|
|
|
140.5 |
|
|
|
151.1 |
|
|
|
(7.0 |
)% |
Goodwill
impairment loss *
|
|
|
- |
|
|
|
291.1 |
|
|
|
(100.0 |
)% |
Depreciation
and amortization expense
|
|
|
30.7 |
|
|
|
25.8 |
|
|
|
19.0 |
% |
Taxes other
than income taxes
|
|
|
9.0 |
|
|
|
9.0 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
139.1 |
|
|
|
(156.5 |
) |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
|
0.5 |
|
|
|
1.2 |
|
|
|
(58.3 |
)% |
Interest
expense
|
|
|
(13.1 |
) |
|
|
(13.6 |
) |
|
|
(3.7 |
)% |
Other
expense
|
|
|
(12.6 |
) |
|
|
(12.4 |
) |
|
|
1.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before taxes
|
|
$ |
126.5 |
|
|
$ |
(168.9 |
) |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Throughput
in therms
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
736.5 |
|
|
|
795.9 |
|
|
|
(7.5 |
)% |
Commercial
and industrial
|
|
|
224.5 |
|
|
|
253.3 |
|
|
|
(11.4 |
)% |
Interruptible
|
|
|
16.1 |
|
|
|
18.0 |
|
|
|
(10.6 |
)% |
Interdepartmental
|
|
|
3.3 |
|
|
|
2.1 |
|
|
|
57.1 |
% |
Transport
|
|
|
601.4 |
|
|
|
613.4 |
|
|
|
(2.0 |
)% |
Total
sales in therms
|
|
|
1,581.8 |
|
|
|
1,682.7 |
|
|
|
(6.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
heating degree days
|
|
|
3,282 |
|
|
|
3,587 |
|
|
|
(8.5 |
)% |
* See
Note 8, "Goodwill and
Other Intangible Assets," for more information.
First
Quarter 2010 Compared with First Quarter 2009
Regulated natural
gas utility segment revenue decreased $170.1 million quarter-over-quarter,
driven by:
·
|
An
approximate $115 million decrease in revenue as a result of an
approximate 14% decrease in the average per-unit cost of natural gas sold
by the regulated natural gas utilities during the quarter ended March 31,
2010, compared with the same quarter in 2009. 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 $65 million decrease in revenue as a result of lower
natural gas throughput volumes, driven by:
|
|
|
|
|
-
|
An
approximate $54 million decrease as a result of warmer
quarter-over-quarter weather during the first quarter heating season,
evidenced by the 8.5% decrease in average heating degree
days.
|
|
|
|
|
-
|
An
approximate $17 million decrease related to lower volumes, including
residential customer volumes, resulting from customer conservation and
efficiency efforts. Lower volumes were also experienced by
commercial and industrial customers, resulting from reduced demand related
to changes in customers' plant operations and a decline in customer base
at PGL, NSG, and MGU, both of which Integrys Energy Group attributed to
the general economic slowdown.
|
|
|
|
|
-
|
A partially
offsetting approximate $6 million net positive quarter-over-quarter
impact of decoupling mechanisms for residential, small commercial and
industrial, and transportation customers at PGL, NSG, and
WPS. 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 $15 million decrease in revenue from lower recovery of
environmental cleanup expenditures related to former manufactured gas
plant sites.
|
|
|
·
|
The decrease
in revenue was partially offset by the approximate $25 million
positive impact of natural gas distribution rate orders at the regulated
natural gas utilities. See Note 22, "Regulatory
Environment," for more information on these rate
orders.
|
|
|
|
-
|
PGL and NSG
received final rate orders from the ICC for retail natural gas
distribution rate increases that were effective January 28, 2010, which
had an approximate $18 million positive impact on
revenue.
|
|
|
|
|
-
|
WPS received
a final rate order from the PSCW for a retail natural gas distribution
rate increase that was effective January 1, 2010, which had an approximate
$6 million positive impact on revenue.
|
|
|
|
|
-
|
MGU received
a final rate order from the MPSC for a retail natural gas distribution
rate increase that was effective January 1, 2010, which had an approximate
$1 million positive impact on
revenue.
|
Margins
Regulated natural
gas utility segment margin decreased $1.2 million quarter-over-quarter,
driven by:
·
|
An
approximate $15 million decrease in margin due to lower recovery of
environmental cleanup expenditures related to former manufactured gas
plant sites. This decrease in margin was offset by a decrease
in operating expense from the amortization of the related regulatory asset
and, therefore, had no impact on earnings.
|
|
|
·
|
An
approximate $11 million decrease in margin resulting from the 6.0%
decrease in natural gas throughput volumes attributed to warmer
quarter-over-quarter weather, customer conservation and efficiency
efforts, and the negative impact from the general economic
slowdown. This decrease in margin includes an approximate $6
million net positive impact from decoupling mechanisms in place at PGL,
NSG, and WPS. 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. This
cap was reached prior to the end of the first quarter of 2010, negatively
impacting WPS’s natural gas margin quarter-over-quarter by $1.1
million. Additionally, no decoupling deferral can be recorded
at WPS if there are any additional shortfalls from authorized margin for
the remainder of 2010.
|
|
|
·
|
The decrease
in margin was partially offset by the approximate $25 million
positive impact of rate orders at the regulated natural gas
utilities.
|
Operating Income
(Loss)
Operating income at
the regulated natural gas utility segment increased $295.6 million, from an
operating loss of $156.5 million in the first quarter of 2009, to operating
income of $139.1 million in the first quarter of 2010. This
increase was primarily driven by the positive impact of a $291.1 million
non-cash goodwill impairment loss that was recorded in the first quarter of
2009, and a quarter-over-quarter $5.7 million decrease in other operating
expenses, partially offset by the $1.2 million decrease in natural gas
margin. See Note 8, "Goodwill and Other Intangible
Assets," for information related to the goodwill impairment loss recorded
in 2009.
The $5.7 million
quarter-over-quarter decrease in other operating expenses primarily related
to:
·
|
An
approximate $15 million decrease in amortization of the regulatory
asset related to environmental cleanup expenditures of manufactured gas
plant sites. These costs were recovered from customers in
rates.
|
|
|
|
·
|
A
$6.7 million decrease in bad debt expense, primarily related to the
impact lower volumes and lower energy prices had on overall accounts
receivable balances.
|
|
|
·
|
These
decreases were partially offset by:
|
|
|
|
-
|
A
$7.3 million increase in employee benefit costs, partially related to
an increase in pension and post-retirement medical expenses, resulting
from the amortization of negative investment returns from 2008 and a
decrease in the discount rate utilized in the most recent
valuation.
|
|
|
|
-
|
A $4.9
million increase in depreciation and amortization expense, primarily
related to the ICC's rate order for PGL and NSG, effective January 28,
2010, which allows recovery of net dismantling costs by including it as a
component of depreciation rates applied to natural gas distribution
assets.
|
|
|
|
-
|
A
$3.2 million increase in operating expenses related to energy
conservation programs and enhanced efficiency
initiatives.
|
Regulated
Electric Utility Segment Operations
|
|
|
|
|
Change
in
|
|
(Millions,
except heating degree days)
|
|
Three Months Ended March 31
|
|
|
2010
Over
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
334.9 |
|
|
$ |
329.7 |
|
|
|
1.6 |
% |
Fuel and
purchased power costs
|
|
|
140.4 |
|
|
|
147.4 |
|
|
|
(4.7 |
)% |
Margins
|
|
|
194.5 |
|
|
|
182.3 |
|
|
|
6.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and
maintenance expense
|
|
|
102.5 |
|
|
|
96.3 |
|
|
|
6.4 |
% |
Depreciation
and amortization expense
|
|
|
24.4 |
|
|
|
22.4 |
|
|
|
8.9 |
% |
Taxes other
than income taxes
|
|
|
12.2 |
|
|
|
12.0 |
|
|
|
1.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
55.4 |
|
|
|
51.6 |
|
|
|
7.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
|
0.2 |
|
|
|
0.9 |
|
|
|
(77.8 |
)% |
Interest
expense
|
|
|
(10.8 |
) |
|
|
(10.5 |
) |
|
|
2.9 |
% |
Other
expense
|
|
|
(10.6 |
) |
|
|
(9.6 |
) |
|
|
10.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before
taxes
|
|
$ |
44.8 |
|
|
$ |
42.0 |
|
|
|
6.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
in kilowatt-hours
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
792.8 |
|
|
|
843.1 |
|
|
|
(6.0 |
)% |
Commercial
and industrial
|
|
|
2,027.0 |
|
|
|
1,998.9 |
|
|
|
1.4 |
% |
Wholesale
|
|
|
1,211.7 |
|
|
|
1,135.4 |
|
|
|
6.7 |
% |
Other
|
|
|
11.2 |
|
|
|
11.5 |
|
|
|
(2.6 |
)% |
Total
sales in kilowatt-hours
|
|
|
4,042.7 |
|
|
|
3,988.9 |
|
|
|
1.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather
|
|
|
|
|
|
|
|
|
|
|
|
|
WPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating
degree days
|
|
|
3,444 |
|
|
|
3,971 |
|
|
|
(13.3 |
)% |
UPPCO:
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating
degree days
|
|
|
3,592 |
|
|
|
4,249 |
|
|
|
(15.5 |
)% |
First
Quarter 2010 Compared with First Quarter 2009
Revenues
Regulated electric
utility segment revenues increased $5.2 million quarter-over-quarter,
driven by:
·
|
An
approximate $8 million increase in opportunity sales at WPS, made possible
by a combination of an increase in available capacity (which resulted from
lower residential, small commercial and industrial, and contracted
wholesale sales), and low-cost generation at Weston 4.
|
|
|
·
|
An
approximate $5 million increase due to a 6.1% increase in sales volumes to
large commercial and industrial customers related to changes in plant
operations, which Integrys Energy Group attributes mainly to improving
general economic conditions.
|
|
|
·
|
An
approximate $3 million increase in revenues related to retail electric
rate increases at both WPS and UPPCO, effective January 1,
2010.
|
|
|
·
|
These
increases in regulated electric utility segment revenues were partially
offset by:
|
|
|
|
-
|
An
approximate $8 million decrease in revenues from wholesale customers due
to a decrease in contracted sales volumes and fuel costs. The
decrease in fuel costs caused a decrease in per-unit revenues because
commodity costs are passed directly through to these customers in
rates.
|
|
|
|
|
-
|
An
approximate $3 million decrease in revenues, net of decoupling, due
to a 4.5% decrease in sales volumes to residential and small commercial
and industrial customers primarily related to warmer quarter-over-quarter
weather during the heating season as evidenced by the decrease in heating
degree days at both WPS and UPPCO. In the first quarter of
2010, WPS recorded an $11.3 million benefit from electric decoupling
(which is subject to an annual $14.0 million cap), compared with
$5.6 million in the first quarter of 2009. UPPCO did not
have a decoupling mechanism in 2009, but recorded a $1.1 million benefit
from decoupling in the first quarter of
2010.
|
Margins
Regulated electric
utility segment margins increased $12.2 million quarter-over-quarter,
driven by:
·
|
An
approximate $8 million increase related to lower fuel and purchased power
costs incurred in the first quarter of 2010 compared with fuel and
purchased power cost recovery rates set in 2009, which WPS was allowed to
retain as part of its limited rate case re-opener for
2010.
|
|
|
·
|
An
approximate $3 million increase related to retail electric rate increases
at both WPS and UPPCO, effective January 1,
2010.
|
Operating
Income
Operating income at
the regulated electric utility segment increased $3.8 million
quarter-over-quarter, driven by the $12.2 million increase in electric
margin, partially offset by an $8.4 million increase in operating
expenses.
The increase in
operating expenses was the result of:
·
|
A $4.0
million increase in employee benefit costs, primarily related to an
increase in pension and other postretirement benefit expenses, driven by
the amortization of negative investment returns from 2008, and a decrease
in the discount rate utilized in the most recent
valuation.
|
|
|
·
|
A $3.6
million increase in electric transmission
expense.
|
|
|
·
|
A $3.0
million increase in customer assistance expense related to payments made
to the Focus on Energy program, which aims to help residents and
businesses install cost-effective, energy efficient, and renewable energy
products.
|
|
|
·
|
A $1.9
million increase in depreciation and amortization expense at WPS,
primarily related to the Crane Creek Wind Farm being placed in service for
accounting purposes in December 2009.
|
|
|
·
|
These
increases were partially offset by a $3.0 million decrease in electric
maintenance expense at WPS, primarily related to a greater number of
planned outages at the generation plants during the first quarter of 2009,
compared with the first quarter of
2010.
|
Other
Expense
Other expense at
the regulated electric utilities increased $1.0 million, driven by a $1.0
million decrease in AFUDC related to the Crane Creek Wind Farm.
Integrys Energy Services'
Operations
Integrys Energy
Services is a diversified nonregulated energy supply and services company
serving residential, commercial, and industrial customers.
Integrys
Energy Services Segment Results of Operations
|
|
|
|
|
Change
in
|
|
(Millions,
except natural gas sales volumes)
|
|
Three Months Ended
March 31
|
|
|
2010
Over
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
644.6 |
|
|
$ |
1,784.1 |
|
|
|
(63.9 |
)% |
Cost of fuel,
natural gas, and purchased power
|
|
|
638.2 |
|
|
|
1,767.8 |
|
|
|
(63.9 |
)% |
Margins
|
|
|
6.4 |
|
|
|
16.3 |
|
|
|
(60.7 |
)% |
Margin
Detail
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric
and other margins
|
|
|
(16.7 |
)
(1) |
|
|
(23.1 |
) (1) |
|
|
(27.7 |
)% |
Natural
gas margins
|
|
|
23.1 |
(2) |
|
|
39.4 |
(2) |
|
|
(41.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and
maintenance expense
|
|
|
30.8 |
|
|
|
49.6 |
|
|
|
(37.9 |
)% |
Restructuring
expense
|
|
|
2.5 |
|
|
|
- |
|
|
|
N/A |
|
Net loss on
Integrys Energy Services’ dispositions related to strategy
change
|
|
|
39.8 |
|
|
|
- |
|
|
|
N/A |
|
Depreciation
and amortization
|
|
|
4.7 |
|
|
|
5.1 |
|
|
|
(7.8 |
)% |
Taxes other
than income taxes
|
|
|
3.2 |
|
|
|
3.1 |
|
|
|
3.2 |
% |
Operating
loss
|
|
|
(74.6 |
) |
|
|
(41.5 |
) |
|
|
79.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
|
0.5 |
|
|
|
0.9 |
|
|
|
(44.4 |
)% |
Interest
expense
|
|
|
(3.4 |
) |
|
|
(3.1 |
) |
|
|
9.7 |
% |
Other
expense
|
|
|
(2.9 |
) |
|
|
(2.2 |
) |
|
|
31.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
before taxes
|
|
$ |
(77.5 |
) |
|
$ |
(43.7 |
) |
|
|
77.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Physical
volumes (includes only transactions settled physically for the periods
shown)
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
electric sales volumes in kwh
|
|
|
477.1 |
|
|
|
1,035.9 |
|
|
|
(53.9 |
)% |
Retail
electric sales volumes in kwh
|
|
|
3,153.3 |
|
|
|
3,997.3 |
|
|
|
(21.1 |
)% |
Wholesale
natural gas sales volumes in bcf
|
|
|
21.9 |
|
|
|
160.9 |
|
|
|
(86.4 |
)% |
Retail natural
gas sales volumes in bcf
|
|
|
50.4 |
|
|
|
97.3 |
|
|
|
(48.2 |
)% |
kwh
– kilowatt-hours
bcf
– billion cubic feet
(1)
|
For the three
months ended March 31, 2010, and 2009, these amounts included negative
margin of $43.1 million
and $59.1 million, respectively, related to fair value
adjustments.
|
(2)
|
For the three
months ended March 31, 2010, and 2009, these amounts included negative
margin of $9.1 million and $45.8 million, respectively, related to fair
value adjustments, and positive margin of $4.6 million and
$19.0 million, respectively, related to lower-of-cost-or-market
inventory adjustments.
|
First
Quarter 2010 Compared with First Quarter 2009
Revenues
Revenues decreased
$1,139.5 million quarter-over-quarter, as a result of Integrys Energy
Group's decision to reposition Integrys Energy Services to focus on selected
retail markets and investments in energy assets with renewable
attributes. See Note 5, "Dispositions," for a
discussion of the dispositions completed in connection with Integrys Energy
Services’ strategy change.
Margins
Changes in
commodity prices subject a portion of the nonregulated operations to earnings
volatility. Integrys Energy Services uses financial instruments to
economically hedge risks associated with physical transactions. The
financial instruments essentially lock in margin on these transactions by
mitigating the impact of fluctuations in market conditions, changing commodity
prices, volumetric exposure, and other associated risks. Because 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 include 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 decreased $9.9 million
quarter-over-quarter. The significant items contributing to the
change in margins were as follows:
Electric
and Other Margins
Integrys Energy
Services' electric and other margins increased $6.4 million
quarter-over-quarter. 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 decreased $3.2 million, from $4.1 million during the
first quarter of 2009, to $0.9 million during the same quarter in
2010.
Wholesale
transactions and structured origination activity were significantly scaled back
in conjunction with Integrys Energy Services' sale of substantially all of its
United States wholesale electric marketing and trading business. See
Note 5, "Dispositions," for more information on
Integrys Energy Services' sale of its United States wholesale electric marketing
and trading business.
Realized margin from energy
assets
Realized margin
from energy assets decreased $0.2 million. The margin from generating
assets, other than assets with renewable attributes, decreased by $2.8 million,
from $7.3 million during the first quarter of 2009, to $4.5 million during the
same quarter in 2010. Contributing to the decrease was the January
2010 sale of the generation businesses in New Brunswick, Canada and Northern
Maine. See Note 5, "Dispositions," for more information on
the sale. Partially offsetting the decrease was an increase in margin
from energy assets with renewable attributes of $2.6 million, from $1.0 million
during the first quarter of 2009, to $3.6 million during the same quarter in
2010, driven by Integrys Energy Services’ continuing investments in energy
assets with renewable attributes, such as solar energy projects and landfill gas
projects.
Realized retail electric
margin
The realized retail
electric margin decreased $6.2 million, from $23.6 million during the
first quarter of 2009, to $17.4 million during the same quarter in
2010. The decrease was driven by:
●
|
A $3.7
million decrease in the Illinois market, caused by a 27% decrease in sales
volumes, resulting from Integrys Energy Services’ reduced marketing
efforts before the decision was made to continue business activity in this
market.
|
|
|
●
|
A $2.3
million decrease in the Texas market. The decrease was due to
Integrys Energy Services’ scaled back new business activity in this market
in the second half of 2009, as this market is not part of Integrys Energy
Services’ long-term strategy.
|
Retail and wholesale
electric fair value adjustments
Integrys Energy
Services' margin from retail and wholesale electric fair value adjustments
increased $16.0 million, as it recognized $59.1 million of non-cash
unrealized losses related to derivative instruments during the first quarter of
2009, compared with $43.1 million of non-cash unrealized losses during the
same quarter in 2010.
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.
Natural
Gas Margins
Integrys Energy
Services' natural gas margins decreased $16.3 million
quarter-over-quarter. 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 was a
$14.4 million quarter-over-quarter net decrease in the natural gas
margin. The average market price of natural gas decreased
approximately 22% during the first quarter of 2010 and decreased approximately
24% during the same quarter in 2009, driving lower-of-cost-or-market inventory
write-downs during both periods in order to reflect natural gas in storage at
the end of the period at its net realizable value, as required by
GAAP. Integrys Energy Group’s strategy change for Integrys Energy
Services led to lower inventory volumes in the first quarter of 2010 compared
with the same period in 2009; as a result, these write-downs had a positive
$34.3 million quarter-over-quarter impact on natural gas
margins. In addition, a lower volume of natural gas inventory
withdrawn from storage for which write-downs had previously been recorded
resulted in a $48.7 million quarter-over-quarter decrease in the natural gas
margin.
Realized retail natural gas
margins
Realized retail
natural gas margins decreased $10.3 million, from $39.5 million during
the first quarter of 2009, to $29.2 million during the same quarter in
2010. The decrease in realized retail natural gas margins was driven
by an $8.1 million decrease in the Illinois market caused by the
quarter-over-quarter negative impact of the withdrawal of a significant amount
of natural gas from storage in the first quarter of 2009, resulting in realized
gains during that period. Also contributing to the decrease in retail
natural gas margins was the sale of Integrys Energy Services’ Canadian natural
gas portfolio in September 2009, which led to no Canadian margins being realized
in 2010.
Realized wholesale natural
gas margins
Realized wholesale
natural gas margins decreased $28.3 million, from $26.7 million during
the first quarter of 2009, to a negative $1.6 million during the same
quarter in 2010. Wholesale transactions were significantly scaled
back in conjunction with Integrys Energy Services' sale of substantially all of
its wholesale natural gas business. See Note 5, "Dispositions," for more information on
Integrys Energy Services' sale of its wholesale natural gas
business.
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
$36.7 million increase in natural gas margins, as unrealized losses on
these instruments were $9.1 million during the first quarter of 2010,
compared with unrealized losses of $45.8 million during the same quarter in
2009.
Operating
Loss
Integrys Energy
Services' operating loss increased $33.1 million
quarter-over-quarter. This increase resulted from the
$9.9 million decrease in margin discussed above, and losses of
$39.8 million related to dispositions completed in connection with Integrys
Energy Services’ strategy change, partially offset by an $18.8 million
decrease in operating and maintenance expense.
The decrease in
operating and maintenance expense was driven by an $7.9 million decrease in
employee payroll and benefit related expenses, a $4.6 million decrease in bad
debt expense due to the recovery of a receivable fully reserved during the first
quarter of 2009, as well as a general decrease in reserves as a result of
reduced business activity, a $2.8 million decrease in broker commissions
resulting from reduced business activity, and a $2.0 million decrease in
contractor related expenses.
See Note 5, "Dispositions," for a
discussion of the dispositions completed in connection with Integrys Energy
Services’ strategy change.
Electric Transmission
Investment Segment Operations
First
Quarter 2010 Compared with First Quarter 2009
Miscellaneous
Income
Miscellaneous
income at the electric transmission investment segment increased
$1.5 million during the first quarter of 2010 compared with the same
quarter in 2009, 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.
Holding Company and Other
Segment Operations
|
|
|
|
|
Change
in
|
|
|
|
Three Months Ended
March 31
|
|
|
2010
Over
|
|
(Millions)
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$ |
(0.6 |
) |
|
$ |
1.3 |
|
|
|
N/A |
|
Other
expense
|
|
|
(12.4 |
) |
|
|
(15.4 |
) |
|
|
(19.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before
taxes
|
|
$ |
(13.0 |
) |
|
$ |
(14.1 |
) |
|
|
(7.8 |
)% |
First
Quarter 2010 Compared with First Quarter 2009
Other
Expense
Other expense at
the holding company and other segment decreased $3.0 million during the
first quarter of 2010 compared with the same quarter in 2009, driven by a
$2.4 million decrease in external short-term interest expense at the
holding company mainly due to lower interest expense on commercial
paper. Also contributing to the decrease in other expense at the
holding company and other segment was a
$1.9 million
decrease in external short-term interest expense at PEC, due to the positive
quarter-over-quarter impact of borrowings under a revolving credit agreement
repaid in May 2009.
Provision for Income
Taxes
|
|
Three Months Ended
March 31
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Effective Tax
Rate
|
|
|
50.0 |
% |
|
|
(7.7 |
)% |
First
Quarter 2010 Compared with First Quarter 2009
The change in the
effective tax rate for the quarter ended March 31, 2010, compared to the same
quarter in 2009, was primarily related to the tax treatment of Integrys Energy
Group's $291.1 million non-cash pre-tax goodwill impairment loss recorded
in 2009. Although Integrys Energy Group had a $166.7 million
loss before income taxes for the quarter ended March 31, 2009, it still recorded
a $12.8 million provision for income taxes because $186.2 million of
the total pre-tax goodwill impairment loss was not deductible for income tax
purposes.
Also contributing
to the increase in the quarter-over-quarter effective tax rate was the
elimination of the deductibility of prescription drug payments to retirees, to
the extent those payments will be offset by the receipt of the Medicare Part D
subsidy, as mandated in the recently passed federal health care
legislation. See "Other Future Considerations –
Federal Health Care Reform" for more information. As a result
of the legislation, Integrys Energy Group expensed $11.8 million of deferred
income tax benefits during the quarter ended March 31, 2010, which were
previously recognized as a reduction in provision for income
taxes. This additional provision for income taxes will not reoccur in
future periods. The 2010 effective tax rate has also been adjusted to
reflect an additional provision for income taxes of $1.9 million related to
current year expected retiree benefits.
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.
Operating
Cash Flows
During the quarter
ended March 31, 2010, net cash provided by operating activities was
$419.4 million, compared with $852.6 million for the same quarter
in 2009. The $433.2 million quarter-over-quarter decrease in net
cash provided by operating activities was largely driven by a $393.0 million
decrease in cash provided by working capital. Because natural gas
prices dropped significantly during the first quarter of 2009, accounts
receivable and accrued unbilled revenues also decreased during this period,
generating cash. However, the first quarter of 2010 did not see the
same change in prices, therefore accounts receivable and accrued unbilled
revenues increased from year-end as a result of high volumes experienced during
the heating season. Also contributing to the decrease in cash
provided by working capital was a $266.6 million quarter-over-quarter decrease
in cash generated by inventories, driven by a larger decrease in natural gas
prices over the first quarter of 2009, compared with the first quarter of 2010,
and the withdrawal of a significant amount of natural gas from storage at
Integrys Energy Services during the first quarter of 2009 in order to improve
its liquidity position. Partially offsetting these changes was a
$294.9 million quarter-over-quarter decrease in cash used to pay accounts
payable balances.
Investing
Cash Flows
Net cash used for
investing activities was $15.8 million during the quarter ended
March 31, 2010, compared with $93.5 million for the same
quarter in 2009. The $77.7 million quarter-over-quarter decrease
in cash used for investing activities was primarily driven by a $52.5 million
quarter-over-quarter increase in proceeds received from the sale or disposal of
assets (related to the Integrys Energy Services strategy change), as well as a
$26.1 million quarter-over-quarter decrease in cash used to fund capital
expenditures (discussed below).
Capital
Expenditures
Capital
expenditures by business segment for the quarter ended March 31 were as
follows:
Reportable
Segment (millions)
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
Electric
utility
|
|
$ |
23.7 |
|
|
$ |
43.2 |
|
|
$ |
(19.5 |
) |
Natural gas
utility
|
|
|
23.0 |
|
|
|
28.3 |
|
|
|
(5.3 |
) |
Integrys
Energy Services
|
|
|
7.6 |
|
|
|
11.2 |
|
|
|
(3.6 |
) |
Holding
company and other
|
|
|
8.9 |
|
|
|
6.6 |
|
|
|
2.3 |
|
Integrys
Energy Group consolidated
|
|
$ |
63.2 |
|
|
$ |
89.3 |
|
|
$ |
(26.1 |
) |
The decrease in
capital expenditures at the electric utility segment for the quarter ended
March 31, 2010, compared with the same quarter in 2009, was mainly due
to decreased expenditures related to the Crane Creek Wind Farm project, which
was placed in service for accounting purposes in December 2009.
Financing
Cash Flows
Net cash used for
financing activities was $189.1 million during the quarter ended
March 31, 2010, compared with $681.5 million for the same quarter
in 2009. The $492.4 million quarter-over-quarter decrease in
cash used for financing activities was driven by a $647.7 million
quarter-over-quarter decrease in the repayment of short-term borrowings, mainly
due to the generation of more cash from operating activities in 2009 compared
with 2010, partially offset by an $86.8 million quarter-over-quarter decrease in
proceeds from the sale of borrowed gas, as well as $66.9 million of payments
made during the first quarter of 2010 to buyers of the wholesale gas and power
businesses for out-of-the-money transactions executed at the time of
sale. These contracts were replacement supply trades for the retained
retail operations and were transacted at the original transfer price between the
wholesale and retail businesses.
Significant
Financing Activities
Integrys Energy
Group had outstanding commercial paper borrowings of $162.7 million and
$143.6 million at March 31, 2010, and 2009,
respectively. Integrys Energy Group had short-term notes payable
outstanding of $10.0 million at March 31, 2010, and
2009. Integrys Energy Group had no borrowings under revolving credit
facilities at March 31, 2010, and $345.0 million at March 31,
2009. See Note 9, "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 10, "Long-Term Debt."
Beginning February
11, 2010, Integrys Energy Group issued new shares of common stock to meet the
requirements of its Stock Investment Plan and certain stock-based employee
benefit and compensation plans. From January 1, 2010 to February 11,
2010, and during 2009, Integrys Energy Group purchased shares of its common
stock on the open market to meet the requirements of these plans.
Credit Ratings
The current credit
ratings for Integrys Energy Group, WPS, PEC, PGL, and NSG are listed in the
table below.
Credit
Ratings
|
Standard
& Poor's
|
Moody's
|
Integrys
Energy Group
Issuer credit rating
Senior
unsecured debt
Commercial paper
Credit facility
Junior
subordinated notes
|
BBB+
BBB
A-2
N/A
BBB-
|
N/A
Baa1
P-2
Baa1
Baa2
|
WPS
Issuer
credit rating
First
mortgage bonds
Senior secured debt
Preferred stock
Commercial paper
Credit facility
|
A-
N/A
A
BBB
A-2
N/A
|
A2
A1
A1
Baa1
P-1
A2
|
PEC
Issuer credit rating
Senior
unsecured debt
|
BBB+
BBB
|
N/A
Baa1
|
PGL
Issuer
credit rating
Senior secured debt
Commercial paper
|
BBB+
A-
A-2
|
A3
A2
P-2
|
NSG
Issuer
credit rating
Senior
secured debt
|
BBB+
A
|
A3
A2
|
Credit ratings are
not recommendations to buy or sell securities and are subject to change, and
each rating should be evaluated independently of any other rating.
On
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.
Future
Capital Requirements and Resources
Contractual
Obligations
The following table
shows the contractual obligations of Integrys Energy Group, including its
subsidiaries, as of March 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
$ |
3,490.7 |
|
|
$ |
167.6 |
|
|
$ |
941.5 |
|
|
$ |
571.6 |
|
|
$ |
1,810.0 |
|
Operating
lease obligations
|
|
|
67.4 |
|
|
|
9.8 |
|
|
|
20.0 |
|
|
|
13.6 |
|
|
|
24.0 |
|
Commodity
purchase obligations (2)
|
|
|
3,247.1 |
|
|
|
729.5 |
|
|
|
1,094.7 |
|
|
|
642.2 |
|
|
|
780.7 |
|
Purchase
orders (3)
|
|
|
405.1 |
|
|
|
398.7 |
|
|
|
5.1 |
|
|
|
1.3 |
|
|
|
- |
|
Pension and
other postretirement
funding
obligations (4)
|
|
|
682.6 |
|
|
|
102.1 |
|
|
|
267.8 |
|
|
|
138.1 |
|
|
|
174.6 |
|
Total
contractual cash obligations
|
|
$ |
7,892.9 |
|
|
$ |
1,407.7 |
|
|
$ |
2,329.1 |
|
|
$ |
1,366.8 |
|
|
$ |
2,789.3 |
|
(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 $655.5 million at March 31, 2010, 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 13, "Commitments and
Contingencies," for more information about environmental
liabilities. In addition, the table does not reflect any payments for
the March 31, 2010, liability related to uncertain tax positions, as the
amount and timing of payments are uncertain. See Note 12, "Income Taxes," for more
information about this liability.
Capital
Requirements
Estimated
construction expenditures by company for the three-year period 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
|
|
|
28.0 |
|
|
|
|
|
|
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
|
|
|
128.9 |
|
|
|
|
|
|
IBS
|
|
|
|
|
Corporate
services infrastructure projects
|
|
|
53.7 |
|
Total capital
expenditures
|
|
$ |
1,335.3 |
|
*
|
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 these incremental costs. See Note 22, "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 March 31, 2010, Integrys Energy Group and each of its subsidiaries were in
compliance with all respective covenants related to outstanding short-term and
long-term debt and expect to be in compliance with all such debt covenants for
the foreseeable future.
See Note 9, "Short-Term Debt and Lines of
Credit," for more information on Integrys Energy Group's credit
facilities and other short-term credit agreements, including short-term debt
covenants. See Note 10, "Long-Term Debt," for more
information on Integrys Energy Group's long-term debt and related
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. 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
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 cap for natural gas service was reached in the first
quarter of 2010, and WPS had $2.7 million remaining under the cap for electric
service at the end of the first quarter of 2010. 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 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. However, the majority of the bad debt expense at the
utilities is recovered through rates. Additionally, recoveries (or
refunds) under the bad debt riders authorized in Illinois and Michigan will
mitigate the effect of bad debt expense for PGL, NSG, MGU, and UPPCO as
described in Note 22, "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. Any annual or interim
goodwill impairment test could result in the recognition of a goodwill
impairment loss. See Note 8, "Goodwill and Other Intangible
Assets," for more information on goodwill balances for Integrys Energy
Group's reporting units at March 31, 2010.
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, and the Kerry-Boxer draft bill, which was introduced in the
United States Senate. 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 its customers’ facilities. The physical risks posed by
climate change for these areas 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.
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 natural gas in
facilities located in their states. Because the pipeline does not have
title to the working natural 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.
Federal
Health Care Reform
In
March 2010, the Patient Protection and Affordable Care Act and the Health Care
and Education Reconciliation Act of 2010 (HCR) were signed into law. HCR
contains various provisions that will affect the cost of providing health care
coverage to active and retired employees of Integrys Energy Group and their
dependents. Although these provisions become effective at various times
over the next 10 years, some provisions that affect the cost of providing
benefits to retirees will be reflected starting in 2010.
Most notably, there
is a provision of HCR that, beginning in 2013, eliminates the tax deduction for
employer-paid postretirement prescription drug charges to the extent those
charges will be offset by the receipt of a federal Medicare Part D
subsidy. As a result, Integrys Energy Group was required to eliminate
a portion of its deferred tax asset related to postretirement
benefits. The total amount of the deferred tax asset that was reduced
for the loss of the deduction was $11.8 million, all of which flowed through to
income as a component of income tax expense in the first quarter of
2010. This additional provision for income taxes will not reoccur in
future periods. Integrys Energy Group intends to seek recovery in
rates of the income impact of this tax law change related to regulated utility
operations in all applicable jurisdictions, but at this time is not able to
predict how much will ultimately be recovered in rates.
Other provisions of
HCR include the elimination of annual and lifetime maximum benefits, elimination
of pre-existing condition restrictions, an excise tax on high-cost health plans,
changes to the Medicare Part D prescription drug program, and numerous
other changes. Integrys Energy Group is currently evaluating what
other impacts the health care legislation may have on its future results of
operations, cash flows or financial positions, and if plan structure changes are
necessary for its health care programs.
Wisconsin
Fuel Rules
Assembly Bill (AB)
600 was introduced to streamline the current fuel rule administered by the
PSCW. This bill currently awaits action by the Governor of
Wisconsin. The current fuel rule results in regulatory lag and
hampers the ability of the PSCW to respond to rapid changes in fuel
costs. AB 600 provides for deferral of any change in approved fuel
costs in excess of 2% of the fuel costs. Prior to these new rules
becoming effective, the PSCW must initiate a rule-making to revise the current
fuel rule. As a result, the effective date of the new rules is
uncertain.
CRITICAL
ACCOUNTING POLICIES
Integrys Energy
Group has reviewed its critical accounting policies for new critical accounting
estimates and other significant changes and has found that the disclosures made
in its Annual Report on Form 10-K for the year ended December 31, 2009, are
still current and that there have been no significant changes.
Item 3. Quantitative and Qualitative
Disclosures About Market Risk
Integrys Energy
Group has potential market risk exposure related to commodity price risk
(including regulatory recovery risk), interest rate risk, and equity return and
principal preservation risk. Integrys Energy Group is also exposed to
other significant risks due to the nature of its subsidiaries' businesses and
the environment in which it operates. 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
To
measure commodity price risk exposure, Integrys Energy Group employs a number of
controls and processes, including a value-at-risk (VaR) analysis of certain of
its exposures. Integrys Energy Services' VaR is calculated using
non-discounted positions with a delta-normal approximation based on a one-day
holding period and a 95% confidence level, as well as a ten-day holding period
and 99% confidence level. For further explanation of Integrys Energy
Group's VaR calculation, see the 2009 Annual Report on Form 10-K.
The VaR for
Integrys Energy Services' trading portfolio at a 95% confidence level with a
one-day holding period is presented in the following table:
(Millions)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
As of
March 31
|
|
$ |
0.3 |
|
|
$ |
1.1 |
|
Average for
12 months ended March 31
|
|
|
0.7 |
|
|
|
1.4 |
|
High for 12
months ended March 31
|
|
|
1.0 |
|
|
|
2.3 |
|
Low for 12
months ended March 31
|
|
|
0.3 |
|
|
|
1.1 |
|
The VaR for
Integrys Energy Services' trading portfolio at a 99% confidence level with a
ten-day holding period is presented below:
(Millions)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
As of
March 31
|
|
$ |
1.4 |
|
|
$ |
4.7 |
|
Average for
12 months ended March 31
|
|
|
3.0 |
|
|
|
6.3 |
|
High for 12
months ended March 31
|
|
|
4.3 |
|
|
|
10.2 |
|
Low for 12
months ended March 31
|
|
|
1.4 |
|
|
|
4.7 |
|
The average, high,
and low amounts were computed using the VaR amounts at each of the four quarter
ends.
The
quarter-over-quarter decrease in VaR was driven by a substantial reduction in
trading activity, as a result of Integrys Energy Group's decision to reposition
Integrys Energy Services to focus on selected retail markets and investments in
energy assets with renewable attributes.
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 March 31, 2010, a hypothetical
increase in market interest rates of 100 basis points would have increased
annual interest expense by $3.0 million. Comparatively, based on
the variable rate debt outstanding at March 31, 2009, an increase in interest
rates of 100 basis points would have increased interest expense by
approximately $6.3 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.
Other than the
above-mentioned changes, Integrys Energy Group's market risks have not changed
materially from the market risks reported in its 2009 Annual Report on Form
10-K.
Item 4. Controls and
Procedures
Evaluation
of Disclosure Controls and Procedures
Integrys Energy
Group's management, with the participation of Integrys Energy Group's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the design and operation of Integrys Energy Group's disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of
the period covered by this report and has concluded that, as of the end of such
period, Integrys Energy Group's disclosure controls and procedures were
effective to ensure that information required to be disclosed by Integrys Energy
Group in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized, and reported within the time periods specified
in the SEC’s rules and forms and is accumulated and communicated to Integrys
Energy Group's management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
Changes
in Internal Control
There were no
changes in Integrys Energy Group's internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the quarter ended March 31, 2010,
that have materially affected, or are reasonably likely to materially affect,
its internal control over financial reporting.
Item
1. Legal Proceedings
For information on
material legal proceedings and matters related to Integrys Energy Group and its
subsidiaries, see Note 13, "Commitments and
Contingencies."
Item
1A. Risk Factors
There were no
material changes in the risk factors previously disclosed in Part I, Item 1A of
Integrys Energy Group’s 2009 Annual Report on Form 10-K, which was filed with
the SEC on February 26, 2010.
Item
6. Exhibits
The documents
listed in the Exhibit Index are attached as exhibits or incorporated by
reference herein.
Pursuant to
the requirements of the Securities Exchange Act of 1934, the registrant,
Integrys Energy Group, Inc., has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
|
|
Integrys
Energy Group, Inc.
|
|
|
|
|
|
|
Date: May
5, 2010
|
/s/ Diane L.
Ford
Diane L.
Ford
Vice
President and Corporate Controller
(Duly
Authorized Officer and Chief Accounting
Officer)
|
INTEGRYS
ENERGY GROUP
FOR
THE QUARTER ENDED MARCH 31, 2010
|
Exhibit No.
|
Description
|
|
|
3.1
|
Amendments to
the By-Laws of Integrys Energy Group, Inc. effective April 1, 2010
(Incorporated by reference to Exhibit 3.1 to Integrys Energy Group’s Form
8-K filed April 1, 2010)
|
|
|
3.2
|
Integrys
Energy Group, Inc. By-Laws as in effect at April 1, 2010 (Incorporated by
reference to Exhibit 3.2 to Integrys Energy Group’s Form 8-K filed April
1, 2010)
|
|
|
4.1
|
Forty-First
Supplemental Indenture of WPS, dated as of December 18, 2008 (Incorporated
by reference to Exhibit 4.1 to WPS’s Form 10-Q filed May 5,
2010)
|
|
|
4.2
|
42nd
Supplemental Indenture of WPS, dated as of April 25, 2010 (Incorporated by
reference to Exhibit 4.2 to WPS’s Form 10-Q filed May 5,
2010)
|
|
|
12
|
Computation
of Ratio of Earnings to Fixed Charges
|
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of
1934 for Integrys Energy Group
|
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of
1934 for Integrys Energy Group
|
|
|
32
|
Written
Statement of the Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350 for Integrys Energy
Group
|
|
|