XNYS:TEG Integrys Energy Group Inc Quarterly Report 10-Q Filing - 3/31/2012

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Table of Contents

 

 

 

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, 2012

 

OR

 

o         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

 

Internal Revenue Service Employer
Identification No.

 

 

 

 

 

1-11337

 

INTEGRYS ENERGY GROUP, INC.

(A Wisconsin Corporation)
130 East Randolph Street
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.  Yes x  No o

 

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).  Yes x  No o

 

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 o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No x

 

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,

 

78,287,906 shares outstanding at

 

April 26, 2012

 

 

 



Table of Contents

 

INTEGRYS ENERGY GROUP, INC.

 

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended March 31, 2012

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

 

FORWARD-LOOKING STATEMENTS

1

 

 

 

PART I.

FINANCIAL INFORMATION

2

 

 

 

ITEM 1.

FINANCIAL STATEMENTS (Unaudited)

2

 

 

 

 

Condensed Consolidated Statements of Income

2

 

Condensed Consolidated Statements of Comprehensive Income

3

 

Condensed Consolidated Balance Sheets

4

 

Condensed Consolidated Statements of Cash Flows

5

 

 

 

 

CONDENSED NOTES TO FINANCIAL STATEMENTS OF
Integrys Energy Group, Inc. and Subsidiaries

6 – 32

 

 

 

 

 

 

 

 

Page

 

 

Note 1

Financial Information

6

 

 

Note 2

Cash and Cash Equivalents

6

 

 

Note 3

Risk Management Activities

7

 

 

Note 4

Discontinued Operations

11

 

 

Note 5

Investment in ATC

11

 

 

Note 6

Inventories

12

 

 

Note 7

Goodwill and Other Intangible Assets

12

 

 

Note 8

Short-Term Debt and Lines of Credit

13

 

 

Note 9

Long-Term Debt

14

 

 

Note 10

Income Taxes

14

 

 

Note 11

Commitments and Contingencies

15

 

 

Note 12

Guarantees

18

 

 

Note 13

Employee Benefit Plans

19

 

 

Note 14

Stock-Based Compensation

19

 

 

Note 15

Common Equity

22

 

 

Note 16

Variable Interest Entities

24

 

 

Note 17

Fair Value

24

 

 

Note 18

Advertising Costs

28

 

 

Note 19

Regulatory Environment

28

 

 

Note 20

Segments of Business

30

 

 

Note 21

New Accounting Pronouncements

31

 

 

 

 

 

 

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

33 - 46

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

47

 

 

 

ITEM 4.

Controls and Procedures

48

 

 

 

PART II.

OTHER INFORMATION

49

 

 

 

ITEM 1.

Legal Proceedings

49

 

 

 

ITEM 1A.

Risk Factors

49

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

49

 

 

 

ITEM 6.

Exhibits

49

 

 

 

Signature

 

50

 

 

 

EXHIBIT INDEX

 

51

 

i



Table of Contents

 

Commonly Used Acronyms in this Quarterly Report on Form 10-Q

 

AMRP

 

Accelerated Natural Gas Main Replacement Program

 

 

 

ASU

 

Accounting Standards Update

 

 

 

ATC

 

American Transmission Company LLC

 

 

 

EPA

 

United States Environmental Protection Agency

 

 

 

FERC

 

Federal Energy Regulatory Commission

 

 

 

GAAP

 

United States Generally Accepted Accounting Principles

 

 

 

IBS

 

Integrys Business Support, LLC

 

 

 

ICC

 

Illinois Commerce Commission

 

 

 

ICR

 

Infrastructure Cost Recovery

 

 

 

ITF

 

Integrys Transportation Fuels, LLC

 

 

 

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

 

 

 

OCI

 

Other Comprehensive Income

 

 

 

PELLC

 

Peoples Energy, LLC (formerly known as Peoples Energy Corporation)

 

 

 

PGL

 

The Peoples Gas Light and Coke Company

 

 

 

PSCW

 

Public Service Commission of Wisconsin

 

 

 

SEC

 

United States Securities and Exchange Commission

 

 

 

UPPCO

 

Upper Peninsula Power Company

 

 

 

WDNR

 

Wisconsin Department of Natural Resources

 

 

 

WPS

 

Wisconsin Public Service Corporation

 

ii



Table of Contents

 

Forward-Looking Statements

 

In this report, we make statements concerning our expectations, beliefs, plans, objectives, goals, strategies, and future events or performance. These statements are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of future results and conditions, but rather are subject to numerous management assumptions, risks, and uncertainties. Therefore, actual results may differ materially from those expressed or implied by these statements. Although we believe that these forward-looking statements and the underlying assumptions are reasonable, we cannot provide assurance that such statements will prove correct.

 

Forward-looking statements involve a number of risks and uncertainties. Some risks that could cause actual results to differ materially from those expressed or implied in forward-looking statements include those described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011, as may be amended or supplemented in Part II, Item 1A of our subsequently filed Quarterly Reports on Form 10-Q (including this report), and those identified below:

 

·

 

The timing and resolution of rate cases and related negotiations, including recovery of deferred and current costs and the ability to earn a reasonable return on investment, and other regulatory decisions impacting our regulated businesses;

·

 

Federal and state legislative and regulatory changes relating to the environment, including climate change and other environmental regulations impacting coal-fired generation facilities and renewable energy standards;

·

 

Other federal and state legislative and regulatory changes, including deregulation and restructuring of the electric and natural gas utility industries, financial reform, health care reform, energy efficiency mandates, reliability standards, pipeline integrity and safety standards, and changes in tax and other laws and regulations to which we and our subsidiaries are subject;

·

 

Costs and effects of litigation and administrative proceedings, settlements, investigations, and claims, including 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 automatic gas cost recovery mechanisms;

·

 

Changes in credit ratings and interest rates caused by volatility in the financial markets and actions of rating agencies and their impact on our and our subsidiaries’ liquidity and financing efforts;

·

 

The risks associated with changing commodity prices, particularly natural gas and electricity, and the available sources of fuel, natural gas, and purchased power, including their impact on margins, working capital, and liquidity requirements;

·

 

The timing and outcome of any audits, disputes, and other proceedings related to taxes;

·

 

The effects, extent, and timing of additional competition or regulation in the markets in which our subsidiaries operate;

·

 

The ability to retain market-based rate authority;

·

 

The risk associated with the value of goodwill or other intangible assets and their possible impairment;

·

 

The investment performance of employee benefit plan assets and related actuarial assumptions, which impact future funding requirements;

·

 

The impact of unplanned facility outages;

·

 

Changes in technology, particularly with respect to new, developing, or alternative sources of generation;

·

 

The effects of political developments, as well as changes in economic conditions and the related impact on customer use, customer growth, and our ability to adequately forecast energy use for all of our customers;

·

 

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 risk of terrorism or cyber security attacks, including the associated costs to protect our assets and respond to such events;

·

 

The risk of failure to maintain the security of personally identifiable information, including the associated costs to notify affected persons and to mitigate their information security concerns;

·

 

The effectiveness of risk management strategies, the use of financial and derivative instruments, and the related recovery of these costs from customers in rates;

·

 

The risk of financial loss, including increases in bad debt expense, associated with the inability of our and our subsidiaries’ counterparties, affiliates, and customers to meet their obligations;

·

 

Unusual weather and other natural phenomena, including related economic, operational, and/or other ancillary effects of any such events;

·

 

The ability to use tax credit and loss carryforwards;

·

 

The financial performance of ATC and its corresponding contribution to our earnings;

·

 

The effect of accounting pronouncements issued periodically by standard-setting bodies; and

·

 

Other factors discussed elsewhere herein and in other reports we file with the SEC.

 

Except to the extent required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

 

1



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.   Financial Statements

 

INTEGRYS ENERGY GROUP, INC.

 

 

 

Three Months Ended

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

March 31

 

(Millions, except per share data)

 

2012

 

2011

 

 

 

 

 

 

 

Utility revenues

 

$

971.0

 

$

1,168.7

 

Nonregulated revenues

 

280.3

 

458.4

 

Total revenues

 

1,251.3

 

1,627.1

 

 

 

 

 

 

 

Utility cost of fuel, natural gas, and purchased power

 

472.3

 

660.7

 

Nonregulated cost of sales

 

275.3

 

404.0

 

Operating and maintenance expense

 

261.0

 

264.6

 

Depreciation and amortization expense

 

62.7

 

62.3

 

Taxes other than income taxes

 

28.4

 

26.8

 

Operating income

 

151.6

 

208.7

 

 

 

 

 

 

 

Earnings in equity method investments

 

21.1

 

19.4

 

Miscellaneous income

 

2.4

 

1.8

 

Interest expense

 

(30.5

)

(34.8

)

Other expense

 

(7.0

)

(13.6

)

 

 

 

 

 

 

Income before taxes

 

144.6

 

195.1

 

Provision for income taxes

 

46.8

 

71.7

 

Net income from continuing operations

 

97.8

 

123.4

 

 

 

 

 

 

 

Discontinued operations, net of tax

 

1.9

 

0.1

 

Net income

 

99.7

 

123.5

 

 

 

 

 

 

 

Preferred stock dividends of subsidiary

 

(0.8

)

(0.8

)

Net income attributed to common shareholders

 

$

98.9

 

$

122.7

 

 

 

 

 

 

 

Average shares of common stock

 

 

 

 

 

Basic

 

78.6

 

78.3

 

Diluted

 

79.2

 

78.6

 

 

 

 

 

 

 

Earnings per common share (basic)

 

 

 

 

 

Net income from continuing operations

 

$

1.23

 

$

1.57

 

Discontinued operations, net of tax

 

0.03

 

 

Earnings per common share (basic)

 

$

1.26

 

$

1.57

 

 

 

 

 

 

 

Earnings per common share (diluted)

 

 

 

 

 

Net income from continuing operations

 

$

1.22

 

$

1.56

 

Discontinued operations, net of tax

 

0.03

 

 

Earnings per common share (diluted)

 

$

1.25

 

$

1.56

 

 

 

 

 

 

 

Dividends per common share declared

 

$

0.68

 

$

0.68

 

 

The accompanying condensed notes are an integral part of these statements.

 

2



Table of Contents

 

INTEGRYS ENERGY GROUP, INC.

 

 

 

Three Months Ended

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 

March 31

 

(Millions)

 

2012

 

2011

 

 

 

 

 

 

 

Net income

 

$

99.7

 

$

123.5

 

 

 

 

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

Cash flow hedges

 

 

 

 

 

Unrealized net losses arising during period, net of tax of $(0.2) million and $(2.4) million, respectively

 

(0.3

)

(4.1

)

Reclassification of net losses to net income, net of tax of $1.0 million and $5.1 million, respectively

 

1.5

 

8.4

 

Cash flow hedges, net

 

1.2

 

4.3

 

 

 

 

 

 

 

Defined benefit pension plans

 

 

 

 

 

Amortization of pension and other postretirement costs included in net periodic benefit cost, net of tax of $0.3 million and $0.2 million, respectively

 

0.3

 

0.2

 

Other comprehensive income, net of tax

 

1.5

 

4.5

 

Comprehensive income

 

101.2

 

128.0

 

 

 

 

 

 

 

Less: preferred stock dividends of subsidiary

 

(0.8

)

(0.8

)

Comprehensive income attributed to common shareholders

 

$

100.4

 

$

127.2

 

 

The accompanying condensed notes are an integral part of these statements.

 

3



Table of Contents

 

INTEGRYS ENERGY GROUP, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

 

March 31

 

December 31

 

(Millions)

 

2012

 

2011

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

$

42.3

 

$

28.1

 

Collateral on deposit

 

64.2

 

50.9

 

Accounts receivable and accrued unbilled revenues, net of reserves of $43.4 and $47.1, respectively

 

669.7

 

737.7

 

Inventories

 

125.1

 

252.3

 

Assets from risk management activities

 

266.2

 

227.2

 

Regulatory assets

 

132.8

 

125.1

 

Deferred income taxes

 

101.6

 

94.2

 

Prepaid taxes

 

144.3

 

209.6

 

Other current assets

 

87.5

 

78.2

 

Current assets

 

1,633.7

 

1,803.3

 

 

 

 

 

 

 

Property, plant, and equipment, net of accumulated depreciation of $3,057.7 and $3,018.7, respectively

 

5,259.0

 

5,199.1

 

Regulatory assets

 

1,655.4

 

1,658.5

 

Assets from risk management activities

 

56.6

 

64.4

 

Equity method investments

 

490.6

 

476.3

 

Goodwill

 

658.3

 

658.4

 

Other long-term assets

 

125.4

 

123.2

 

Total assets

 

$

9,879.0

 

$

9,983.2

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

Short-term debt

 

$

305.5

 

$

303.3

 

Current portion of long-term debt

 

272.0

 

250.0

 

Accounts payable

 

331.2

 

426.6

 

Liabilities from risk management activities

 

400.0

 

311.6

 

Accrued taxes

 

75.4

 

70.5

 

Regulatory liabilities

 

96.5

 

67.5

 

Temporary LIFO liquidation credit

 

36.7

 

 

Other current liabilities

 

198.1

 

217.2

 

Current liabilities

 

1,715.4

 

1,646.7

 

 

 

 

 

 

 

Long-term debt

 

1,850.1

 

1,872.0

 

Deferred income taxes

 

1,108.7

 

1,070.7

 

Deferred investment tax credits

 

43.7

 

44.0

 

Regulatory liabilities

 

334.2

 

332.5

 

Environmental remediation liabilities

 

609.5

 

615.1

 

Pension and other postretirement benefit obligations

 

514.0

 

749.3

 

Liabilities from risk management activities

 

109.9

 

102.0

 

Asset retirement obligations

 

402.3

 

397.2

 

Other long-term liabilities

 

144.0

 

141.1

 

Long-term liabilities

 

5,116.4

 

5,323.9

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Common stock - $1 par value; 200,000,000 shares authorized; 78,287,906 shares issued; 77,916,543 shares outstanding

 

78.3

 

78.3

 

Additional paid-in capital

 

2,566.5

 

2,579.1

 

Retained earnings

 

409.2

 

363.6

 

Accumulated other comprehensive loss

 

(41.0

)

(42.5

)

Shares in deferred compensation trust

 

(17.0

)

(17.1

)

Total common shareholders’ equity

 

2,996.0

 

2,961.4

 

 

 

 

 

 

 

Preferred stock of subsidiary - $100 par value; 1,000,000 shares authorized; 511,882 shares issued; 510,495 shares outstanding

 

51.1

 

51.1

 

Noncontrolling interest in subsidiaries

 

0.1

 

0.1

 

Total liabilities and equity

 

$

9,879.0

 

$

9,983.2

 

 

The accompanying condensed notes are an integral part of these statements.

 

4



Table of Contents

 

INTEGRYS ENERGY GROUP, INC.

 

 

 

Three Months Ended

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

March 31

 

(Millions)

 

2012

 

2011

 

Operating Activities

 

 

 

 

 

Net income

 

$

99.7

 

$

123.5

 

Adjustments to reconcile net income to net cash provided by operating activities

 

 

 

 

 

Discontinued operations, net of tax

 

(1.9

)

(0.1

)

Depreciation and amortization expense

 

62.7

 

62.3

 

Recoveries and refunds of regulatory assets and liabilities

 

9.5

 

13.5

 

Net unrealized losses on nonregulated energy contracts

 

44.7

 

0.7

 

Bad debt expense

 

10.1

 

11.5

 

Pension and other postretirement expense

 

17.6

 

21.1

 

Pension and other postretirement contributions

 

(246.6

)

(106.4

)

Deferred income taxes and investment tax credits

 

30.0

 

67.2

 

Gain on sale of assets

 

(0.2

)

(0.1

)

Equity income, net of dividends

 

(3.8

)

(3.0

)

Other

 

2.6

 

10.2

 

Changes in working capital

 

 

 

 

 

Collateral on deposit

 

(13.7

)

(5.2

)

Accounts receivable and accrued unbilled revenues

 

49.9

 

(50.1

)

Inventories

 

132.7

 

152.7

 

Other current assets

 

54.5

 

28.3

 

Accounts payable

 

(77.4

)

(23.8

)

Temporary LIFO liquidation credit

 

36.7

 

119.2

 

Other current liabilities

 

18.7

 

(26.0

)

Net cash provided by operating activities

 

225.8

 

395.5

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Capital expenditures

 

(123.0

)

(51.2

)

Proceeds from the sale or disposal of assets

 

1.4

 

1.1

 

Capital contributions to equity method investments

 

(10.4

)

(6.2

)

Other

 

(4.7

)

0.1

 

Net cash used for investing activities

 

(136.7

)

(56.2

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Short-term debt, net

 

2.2

 

57.9

 

Repayment of long-term debt

 

 

(325.0

)

Payment of dividends

 

 

 

 

 

Preferred stock of subsidiary

 

(0.8

)

(0.8

)

Common stock

 

(53.0

)

(47.4

)

Issuance of common stock

 

 

7.2

 

Payments made on derivative contracts related to divestitures classified as financing activities

 

(9.0

)

(11.1

)

Other

 

(14.3

)

(3.8

)

Net cash used for financing activities

 

(74.9

)

(323.0

)

 

 

 

 

 

 

Net change in cash and cash equivalents

 

14.2

 

16.3

 

Cash and cash equivalents at beginning of period

 

28.1

 

179.0

 

Cash and cash equivalents at end of period

 

$

42.3

 

$

195.3

 

 

The accompanying condensed notes are an integral part of these statements.

 

5



Table of Contents

 

INTEGRYS ENERGY GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO FINANCIAL STATEMENTS

March 31, 2012

 

NOTE 1—FINANCIAL INFORMATION

 

As used in these notes, the term “financial statements” refers to the condensed consolidated financial statements. This includes the condensed consolidated statements of income, condensed consolidated statements of comprehensive income, condensed consolidated balance sheets, and condensed consolidated statements of cash flows, unless otherwise noted. In this report, when we refer to “us,” “we,” “our,” or “ours,” we are referring to Integrys Energy Group, Inc.

 

We prepare our financial statements in conformity with the rules and regulations of the SEC for Quarterly Reports on Form 10-Q and in accordance with GAAP. Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for annual financial statements. These financial statements should be read in conjunction with the consolidated financial statements and footnotes in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

In management’s opinion, these unaudited financial statements include all adjustments considered necessary for a fair presentation of financial results. All adjustments are normal and recurring, unless otherwise noted. All intercompany transactions have been eliminated in consolidation. Financial results for an interim period may not give a true indication of results for the year.

 

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 our statements of cash flows:

 

 

 

Three Months Ended March 31

 

(Millions)

 

2012

 

2011

 

Cash paid for interest

 

$

8.9

 

$

20.1

 

Cash (received) paid for income taxes

 

(33.2

)

2.9

 

 

Significant noncash transactions were:

 

 

 

Three Months Ended March 31

 

(Millions)

 

2012

 

2011

 

Construction costs funded through accounts payable

 

$

50.2

 

$

9.4

 

Equity issued for stock-based compensation plans

 

 

6.6

 

Equity issued for reinvested dividends

 

 

5.4

 

 

6



Table of Contents

 

NOTE 3RISK MANAGEMENT ACTIVITIES

 

The following tables show our assets and liabilities from risk management activities:

 

 

 

March 31, 2012

 

(Millions)

 

Balance Sheet
Presentation *

 

Assets from
Risk Management
Activities

 

Liabilities from
Risk Management
Activities

 

Utility Segments

 

 

 

 

 

 

 

Non-hedge derivatives

 

 

 

 

 

 

 

Natural gas contracts

 

Current

 

$

5.2

 

$

43.9

 

Natural gas contracts

 

Long-term

 

0.3

 

9.2

 

Financial transmission rights (FTRs)

 

Current

 

1.0

 

0.1

 

Petroleum product contracts

 

Current

 

0.4

 

 

Coal contract

 

Current

 

 

5.6

 

Coal contract

 

Long-term

 

 

7.8

 

Cash flow hedges

 

 

 

 

 

 

 

Natural gas contracts

 

Current

 

 

1.2

 

Natural gas contracts

 

Long-term

 

 

0.2

 

 

 

 

 

 

 

 

 

Nonregulated Segments

 

 

 

 

 

 

 

Non-hedge derivatives

 

 

 

 

 

 

 

Natural gas contracts

 

Current

 

121.2

 

120.4

 

Natural gas contracts

 

Long-term

 

22.3

 

20.7

 

Electric contracts

 

Current

 

138.2

 

228.6

 

Electric contracts

 

Long-term

 

34.0

 

72.0

 

Foreign exchange contracts

 

Current

 

0.2

 

0.2

 

 

 

Current

 

266.2

 

400.0

 

 

 

Long-term

 

56.6

 

109.9

 

Total

 

 

 

$

322.8

 

$

509.9

 

 


*            All derivatives are recognized on the balance sheet at their fair value unless they qualify for the normal purchases and sales exception. We continually assess our contracts designated as normal and will discontinue the treatment of these contracts as normal if the required criteria are no longer met. We classify assets and liabilities from risk management activities as current or long-term based upon the maturities of the underlying contracts.

 

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Table of Contents

 

 

 

 

 

December 31, 2011

 

(Millions)

 

Balance Sheet
Presentation *

 

Assets from
Risk Management
Activities

 

Liabilities from
Risk Management
Activities

 

Utility Segments

 

 

 

 

 

 

 

Non-hedge derivatives

 

 

 

 

 

 

 

Natural gas contracts

 

Current

 

$

9.1

 

$

35.4

 

Natural gas contracts

 

Long-term

 

0.1

 

8.2

 

FTRs

 

Current

 

2.3

 

0.1

 

Petroleum product contracts

 

Current

 

0.1

 

 

Coal contract

 

Current

 

 

2.5

 

Coal contract

 

Long-term

 

 

4.4

 

Cash flow hedges

 

 

 

 

 

 

 

Natural gas contracts

 

Current

 

 

0.9

 

Natural gas contracts

 

Long-term

 

 

0.2

 

 

 

 

 

 

 

 

 

Nonregulated Segments

 

 

 

 

 

 

 

Non-hedge derivatives

 

 

 

 

 

 

 

Natural gas contracts

 

Current

 

121.6

 

120.5

 

Natural gas contracts

 

Long-term

 

41.9

 

40.5

 

Electric contracts

 

Current

 

93.9

 

152.0

 

Electric contracts

 

Long-term

 

22.4

 

48.7

 

Foreign exchange contracts

 

Current

 

0.2

 

0.2

 

 

 

Current

 

227.2

 

311.6

 

 

 

Long-term

 

64.4

 

102.0

 

Total

 

 

 

$

291.6

 

$

413.6

 

 


*            All derivatives are recognized on the balance sheet at their fair value unless they qualify for the normal purchases and sales exception. We continually assess our contracts designated as normal and will discontinue the treatment of these contracts as normal if the required criteria are no longer met. We classify assets and liabilities from risk management activities as current or long-term based upon the maturities of the underlying contracts.

 

The following table shows our cash collateral positions:

 

(Millions)

 

March 31, 2012

 

December 31, 2011

 

Cash collateral provided to others

 

$

64.2

 

$

50.9

 

Cash collateral received from others *

 

1.8

 

2.3

 

 


*            Reflected in other current liabilities on the balance sheets.

 

Certain of our derivative and nonderivative commodity instruments contain provisions that could require “adequate assurance” in the event of a material change in our creditworthiness, or the posting of additional collateral for instruments in net liability positions, if triggered by a decrease in credit ratings. The following table shows the aggregate fair value of all derivative instruments with specific credit risk related contingent features that were in a liability position:

 

(Millions)

 

March 31, 2012

 

December 31, 2011

 

Integrys Energy Services

 

$

231.4

 

$

193.8

 

Utility segments

 

52.9

 

39.1

 

 

If all of the credit risk related contingent features contained in commodity instruments (including derivatives, nonderivatives, normal purchase and normal sales contracts, and applicable payables and receivables) had been triggered, our collateral requirement would have been as follows:

 

(Millions)

 

March 31, 2012

 

December 31, 2011

 

Collateral that would have been required:

 

 

 

 

 

Integrys Energy Services

 

$

281.7

 

$

272.3

 

Utility segments

 

42.5

 

28.7

 

Collateral already satisfied:

 

 

 

 

 

Integrys Energy Services — Letters of credit

 

11.0

 

11.0

 

Collateral remaining:

 

 

 

 

 

Integrys Energy Services

 

270.7

 

261.3

 

Utility segments

 

42.5

 

28.7

 

 

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Table of Contents

 

Utility Segments

 

Non-Hedge Derivatives

 

Utility derivatives include natural gas purchase contracts, a coal purchase contract, financial derivative contracts (futures, options, and swaps), and FTRs used to manage electric transmission congestion costs. Both the electric and natural gas utility segments use futures, options, and swaps to manage the risks associated with the market price volatility of natural gas supply costs and the costs of gasoline and diesel fuel used by utility vehicles. The electric utility segment also uses oil futures and options to manage price risk related to coal transportation.

 

The utilities had the following notional volumes of outstanding non-hedge derivative contracts:

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

Purchases

 

Sales

 

Other
Transactions

 

Purchases

 

Other
Transactions

 

Natural gas (millions of therms)

 

755.5

 

0.3

 

N/A

 

1,122.7

 

N/A

 

FTRs (millions of kilowatt-hours)

 

N/A

 

N/A

 

1,911.0

 

N/A

 

5,077.5

 

Petroleum products (barrels)

 

51,872.0

 

N/A

 

N/A

 

46,872.0

 

N/A

 

Coal contract (millions of tons)

 

3.9

 

N/A

 

N/A

 

4.1

 

N/A

 

 

The tables below show the unrealized gains (losses) recorded related to non-hedge derivatives at the utilities:

 

 

 

 

 

Three Months
Ended
March 31

 

(Millions)

 

Financial Statement Presentation

 

2012

 

2011

 

Natural gas contracts

 

Balance Sheet — Regulatory assets (current)

 

$

(6.4

)

$

11.2

 

Natural gas contracts

 

Balance Sheet — Regulatory assets (long-term)

 

(0.8

)

1.6

 

Natural gas contracts

 

Balance Sheet — Regulatory liabilities (current)

 

(3.7

)

(0.1

)

Natural gas contracts

 

Balance Sheet — Regulatory liabilities (long-term)

 

0.1

 

0.1

 

Natural gas contracts

 

Income Statement — Utility cost of fuel, natural gas, and purchased power

 

0.1

 

0.1

 

FTRs

 

Balance Sheet — Regulatory assets (current)

 

0.4

 

0.1

 

FTRs

 

Balance Sheet — Regulatory liabilities (current)

 

(0.3

)

(1.2

)

Petroleum product contracts

 

Balance Sheet — Regulatory assets (current)

 

0.1

 

 

Petroleum product contracts

 

Balance Sheet — Regulatory liabilities (current)

 

0.1

 

0.4

 

Petroleum product contracts

 

Income Statement — Operating and maintenance expense

 

0.1

 

0.5

 

Coal contract

 

Balance Sheet — Regulatory assets (current)

 

(3.1

)

(0.5

)

Coal contract

 

Balance Sheet — Regulatory assets (long-term)

 

(3.5

)

(3.2

)

Coal contract

 

Balance Sheet — Regulatory liabilities (long-term)

 

 

(3.7

)

 

Nonregulated Segments

 

Non-Hedge Derivatives

 

Integrys Energy Services enters into derivative contracts such as futures, forwards, options, and swaps, that are used to manage commodity price risk primarily associated with retail electric and natural gas customer contracts.

 

In the next 12 months, pre-tax losses of $0.9 million and $4.5 million related to the discontinued cash flow hedges of natural gas contracts and electric contracts, respectively, are expected to be recognized in earnings as the forecasted transactions occur. These amounts are expected to be offset by the settlement of the related nonderivative customer contracts.

 

Integrys Energy Services had the following notional volumes of outstanding non-hedge derivative contracts:

 

 

 

March 31, 2012

 

December 31, 2011

 

(Millions)

 

Purchases

 

Sales

 

Purchases

 

Sales

 

Commodity contracts

 

 

 

 

 

 

 

 

 

Natural gas (therms)

 

885.3

 

713.3

 

959.2

 

797.1

 

Electric (kilowatt-hours)

 

38,083.7

 

23,063.4

 

34,405.7

 

20,374.0

 

Foreign exchange contracts (Canadian dollars)

 

2.6

 

2.6

 

4.2

 

4.2

 

 

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Table of Contents

 

Gains (losses) related to non-hedge derivatives are recognized currently in earnings, as shown in the tables below:

 

 

 

 

 

Three Months Ended March 31

 

(Millions)

 

Income Statement Presentation

 

2012

 

2011

 

Natural gas contracts

 

Nonregulated revenue

 

$

4.0

 

$

8.1

 

Natural gas contracts

 

Nonregulated revenue (reclassified from accumulated OCI) *

 

(1.2

)

(0.3

)

Electric contracts

 

Nonregulated revenue

 

(68.6

)

(1.0

)

Electric contracts

 

Nonregulated revenue (reclassified from accumulated OCI) *

 

(0.7

)

0.2

 

Total

 

 

 

$

(66.5

)

$

7.0

 

 


*          Represents amounts reclassified from accumulated OCI related to cash flow hedges that were dedesignated in prior periods.

 

Fair Value Hedges

 

At PELLC, an interest rate swap designated as a fair value hedge was used to hedge changes in the fair value of $50.0 million of the $325.0 million Series A 6.9% notes. The interest rate swap and the notes were settled in January 2011. The changes in the fair value of this hedge were recognized in earnings, as were 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

 

(Millions)

 

Income Statement Presentation

 

March 31, 2011

 

Interest rate swap

 

Interest expense

 

$

(0.9

)

Debt hedged by swap

 

Interest expense

 

0.9

 

Total

 

 

 

$

 

 

Cash Flow Hedges

 

Prior to July 1, 2011, Integrys Energy Services designated derivative contracts such as futures, forwards, and swaps as accounting hedges under GAAP. These contracts are used to manage commodity price risk associated with customer contracts.

 

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, 2011

 

Natural gas contracts

 

$

1.2

 

Electric contracts

 

(4.6

)

Total

 

$

(3.4

)

 

Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)

 

 

 

 

Three Months Ended March 31

 

(Millions)

 

Income Statement Presentation

 

2012

 

2011

 

Settled/Realized

 

 

 

 

 

 

 

Natural gas contracts

 

Nonregulated revenue

 

$

 

$

(8.6

)

Electric contracts

 

Nonregulated revenue

 

 

(4.1

)

Interest rate swaps *

 

Interest expense

 

(0.3

)

(0.3

)

Hedge Designation Discontinued

 

 

 

 

 

 

 

Natural gas contracts

 

Nonregulated revenue

 

 

(0.3

)

Total

 

 

 

$

(0.3

)

$

(13.3

)

 


*          In May 2010, we entered into interest rate swaps that were designated as cash flow hedges to hedge the variability in forecasted interest payments on a debt issuance. These swaps were terminated when the related debt was issued in November 2010. Amounts remaining in accumulated OCI are being reclassified to interest expense over the life of the related debt.

 

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Table of Contents

 

Gain Recognized in Income on Derivative Instruments

(Ineffective Portion and Amount Excluded from Effectiveness Testing)

(Millions)

 

Income Statement Presentation

 

Three Months Ended March 31, 2011

 

Natural gas contracts

 

Nonregulated revenue

 

$

0.8

 

Electric contracts

 

Nonregulated revenue

 

0.3

 

Total

 

 

 

$

1.1

 

 

NOTE 4—DISCONTINUED OPERATIONS

 

Holding Company and Other Segment

 

During the three-month period ended March 31, 2012, we recorded a $1.9 million after-tax gain in discontinued operations at the holding company and other segment when we remeasured an unrecognized tax benefit liability that better reflects how the underlying uncertain tax positions are resolving themselves in various taxing jurisdictions.

 

Integrys Energy Services

 

During the three-month period ended March 31, 2011, Integrys Energy Services recorded a $0.1 million after-tax gain in discontinued operations when contingent payments were earned related to the 2009 sale of its energy management consulting business.

 

NOTE 5—INVESTMENT IN ATC

 

Our electric transmission investment segment consists of WPS Investments LLC’s ownership interest in ATC, which was approximately 34% at March 31, 2012. ATC is a for-profit, transmission-only company regulated by FERC. ATC owns, maintains, monitors, and operates electric transmission assets in portions of Wisconsin, Michigan, Minnesota, and Illinois.

 

The following table shows changes to our investment in ATC.

 

 

 

Three Months Ended March 31

 

(Millions)

 

2012

 

2011

 

Balance at the beginning of period

 

$

439.4

 

$

416.3

 

Add: Equity in net income

 

20.8

 

19.2

 

Add: Capital contributions

 

3.4

 

3.4

 

Less: Dividends received

 

16.7

 

16.2

 

Balance at the end of period

 

$

446.9

 

$

422.7

 

 

Financial data for all of ATC is included in the following tables:

 

 

 

Three Months Ended March 31

 

(Millions)

 

2012

 

2011

 

Income statement data

 

 

 

 

 

Revenues

 

$

147.7

 

$

139.6

 

Operating expenses

 

69.6

 

63.1

 

Other expense

 

20.0

 

22.3

 

Net income *

 

$

58.1

 

$

54.2

 

 


*            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.

 

11



Table of Contents

 

(Millions)

 

March 31, 2012

 

December 31, 2011

 

Balance sheet data

 

 

 

 

 

Current assets

 

$

57.1

 

$

58.7

 

Noncurrent assets

 

3,099.0

 

3,053.7

 

Total assets

 

$

3,156.1

 

$

3,112.4

 

 

 

 

 

 

 

Current liabilities

 

$

314.5

 

$

298.5

 

Long-term debt

 

1,400.0

 

1,400.0

 

Other noncurrent liabilities

 

88.1

 

82.6

 

Members’ equity

 

1,353.5

 

1,331.3

 

Total liabilities and members’ equity

 

$

3,156.1

 

$

3,112.4

 

 

NOTE 6—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 7—GOODWILL AND OTHER INTANGIBLE ASSETS

 

We had no material changes to the carrying amount of goodwill during the three months ended March 31, 2012, and 2011.

 

The identifiable intangible assets other than goodwill listed below are part of other current and long-term assets on the Balance Sheets.

 

(Millions)

 

March 31, 2012

 

December 31, 2011

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Amortized intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer-related (1)

 

$

34.5

 

$

(25.4

)

$

9.1

 

$

34.5

 

$

(24.8

)

$

9.7

 

Electric contract assets (2)

 

 

 

 

7.8

 

(6.6

)

1.2

 

Patents (3)

 

7.2

 

(0.1

)

7.1

 

7.2

 

 

7.2

 

Compressed natural gas fueling contract assets (4)

 

5.6

 

(0.6

)

5.0

 

5.6

 

(0.3

)

5.3

 

Renewable energy credits (5)

 

3.3

 

 

3.3

 

2.8

 

 

2.8

 

Nonregulated easements (6) 

 

3.8

 

(0.7

)

3.1

 

3.8

 

(0.7

)

3.1

 

Customer-owned equipment modifications (7)

 

3.8

 

(0.3

)

3.5

 

3.6

 

(0.2

)

3.4

 

Emission allowances (8)

 

1.6

 

(0.1

)

1.5

 

1.7

 

(0.2

)

1.5

 

Other

 

0.8

 

(0.3

)

0.5

 

1.4

 

(0.3

)

1.1

 

Total

 

$

60.6

 

$

(27.5

)

$

33.1

 

$

68.4

 

$

(33.1

)

$

35.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unamortized intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

MGU trade name

 

$

5.2

 

 

$

5.2

 

$

5.2

 

 

$

5.2

 

Trillium trade name

 

3.5

 

 

3.5

 

3.5

 

 

3.5

 

Pinnacle trade name

 

1.5

 

 

1.5

 

1.5

 

 

1.5

 

Total intangible assets

 

$

70.8

 

$

(27.5

)

$

43.3

 

$

78.6

 

$

(33.1

)

$

45.5

 

 


(1)          Includes customer relationship assets associated with PELLC’s former nonregulated retail natural gas and electric operations, MERC’s nonutility ServiceChoice business, and Trillium USA (Trillium) and Pinnacle CNG Systems (Pinnacle) compressed natural gas fueling operations. The remaining weighted-average amortization period for customer-related intangible assets at March 31, 2012, was approximately 10 years.

 

(2)          Represents electric customer contracts acquired in exchange for risk management assets.

 

(3)          Includes the fair value of patents at Pinnacle related to a system for more efficiently compressing natural gas to allow for faster fueling. The remaining amortization period at March 31, 2012, was approximately 18 years.

 

(4)          Represents the fair value of Trillium and Pinnacle compressed natural gas customer fueling contracts acquired in September 2011. The remaining amortization period at March 31, 2012, was approximately 9 years.

 

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Table of Contents

 

(5)   Used at Integrys Energy Services to comply with state Renewable Portfolio Standards and to support customer commitments.

 

(6)   Relates to easements supporting a pipeline at Integrys Energy Services. The easements are amortized on a straight-line basis, with a remaining amortization period at March 31, 2012, of approximately 12 years.

 

(7)   Relates to modifications to customer-owned equipment that allow the end-use customer of a pipeline to accept landfill gas. These intangible assets are amortized on a straight-line basis, with a remaining weighted-average amortization period at March 31, 2012, of approximately 12 years.

 

(8)   Emission allowances do not have a contractual term or expiration date. If the EPA’s Cross State Air Pollution Rule, which was stayed in December 2011, is reinstated, it will affect our ability to use certain existing emission allowances in the future. See Note 11, “Commitments and Contingencies,” for more information.

 

Amortization expense recorded as a component of nonregulated cost of sales in the statements of income for the three months ended March 31, 2012, and 2011, was $1.6 million and $0.3 million, respectively.

 

Amortization expense recorded as a component of depreciation and amortization expense in the statements of income for the three months ended March 31, 2012, and 2011, was $0.7 million and $0.8 million, respectively.

 

Amortization expense for the next five fiscal years is estimated to be:

 

 

 

For the year ending December 31

 

(Millions)

 

2012

 

2013

 

2014

 

2015

 

2016

 

Amortization recorded in nonregulated cost of sales

 

$

5.9

 

$

1.8

 

$

1.4

 

$

1.3

 

$

1.1

 

Amortization recorded in depreciation and amortization expense

 

2.5

 

2.0

 

1.7

 

1.7

 

1.5

 

 

NOTE 8SHORT-TERM DEBT AND LINES OF CREDIT

 

Our short-term borrowings were as follows:

 

(Millions, except percentages)

 

March 31, 2012

 

December 31, 2011

 

Commercial paper outstanding

 

$

305.5

 

$

303.3

 

Average discount rate on outstanding commercial paper

 

0.34

%

0.31

%

 

The commercial paper outstanding at March 31, 2012, had maturity dates ranging from April 2, 2012, through April 30, 2012.

 

The table below presents our average amount of short-term borrowings outstanding based on daily outstanding balances during the three months ended March 31:

 

(Millions)

 

2012

 

2011

 

Average amount of commercial paper outstanding

 

$

357.5

 

$

102.7

 

Average amount of short-term notes payable outstanding

 

 

10.0

 

 

We manage our liquidity by maintaining adequate external financing commitments. The information in the table below relates to our revolving credit facilities used to support our commercial paper borrowing program, including remaining available capacity under these facilities:

 

(Millions)

 

Maturity

 

March 31, 2012

 

December 31, 2011

 

Revolving credit facility (Integrys Energy Group)

 

04/23/13

 

$

735.0

 

$

735.0

 

Revolving credit facility (Integrys Energy Group)

 

05/17/16

 

200.0

 

200.0

 

Revolving credit facility (Integrys Energy Group)

 

05/17/14

 

275.0

 

275.0

 

Revolving credit facility (WPS)

 

04/23/13

 

115.0

 

115.0

 

Revolving credit facility (WPS)

 

05/17/14

 

135.0

 

135.0

 

Revolving credit facility (PGL)

 

04/23/13

 

250.0

 

250.0

 

 

 

 

 

 

 

 

 

Total short-term credit capacity

 

 

 

$

1,710.0

 

$

1,710.0

 

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

 

 

Letters of credit issued inside credit facilities

 

 

 

$

33.9

 

$

33.7

 

Commercial paper outstanding

 

 

 

305.5

 

303.3

 

 

 

 

 

 

 

 

 

Available capacity under existing agreements

 

 

 

$

1,370.6

 

$

1,373.0

 

 

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Table of Contents

 

NOTE 9LONG-TERM DEBT

 

(Millions)

 

March 31, 2012

 

December 31, 2011

 

WPS (1)

 

$

722.1

 

$

722.1

 

PGL

 

525.0

 

525.0

 

NSG (2)

 

74.7

 

74.7

 

Integrys Energy Group (3)

 

774.8

 

774.8

 

Other term loan (4)

 

27.0

 

27.0

 

Total

 

2,123.6

 

2,123.6

 

Unamortized discount

 

(1.5

)

(1.6

)

Total debt

 

2,122.1

 

2,122.0

 

Less current portion

 

(272.0

)

(250.0

)

Total long-term debt

 

$

1,850.1

 

$

1,872.0

 

 


(1)          In December 2012, WPS’s 4.875% Senior Notes will mature. As a result, the $150.0 million balance of these notes was included in current portion of long-term debt on our balance sheets.

 

In February 2013, WPS’s 3.95% Senior Notes will mature. As a result, the $22.0 million balance of these notes was included in current portion of long-term debt on our March 31, 2012 balance sheet.

 

(2)          In April 2012, NSG bought back its $28.2 million of 5.00% Series M First Mortgage Bonds that were due December 1, 2028.

 

In the same month, NSG issued $28.0 million of 3.43% Series P First Mortgage Bonds. These bonds are due April 1, 2027.

 

(3)          In December 2012, our 5.375% Unsecured Senior Notes will mature. As a result, the $100.0 million balance of these notes was included in current portion of long-term debt on our balance sheets.

 

(4)          This loan has a floating interest rate that is reset weekly. At March 31, 2012, the interest rate was 0.20%. The loan is to be repaid by April 2021.

 

NOTE 10INCOME TAXES

 

We calculate our interim period provision for income taxes based on our projected annual effective tax rate as adjusted for certain discrete items.

 

The table below shows our effective tax rates:

 

 

 

Three Months Ended March 31

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Effective Tax Rate

 

32.4

%

36.8

%

 

Our effective tax rate for the three months ended March 31, 2012, was lower than the federal statutory tax rate of 35%. This difference primarily related to the federal income tax benefit of tax credits related to wind production and a remeasurement of an unrecognized tax benefit liability that better reflects how the underlying uncertain tax positions are resolving themselves in various taxing jurisdictions. Other state income tax obligations partially offset the lower effective tax rate.

 

Our effective tax rate for the three months ended March 31, 2011, was higher than the federal statutory tax rate of 35%. This difference primarily related to state income tax obligations, partially offset by tax credits related to wind production, along with other tax credits.

 

During the three months ended March 31, 2012, we remeasured and decreased our liability for unrecognized tax benefits by $2.7 million that  better reflects how the underlying uncertain tax positions are resolving themselves in various taxing jurisdictions. We reduced the provision for income taxes related to this remeasurement, of which a portion was reported as discontinued operations.

 

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NOTE 11—COMMITMENTS AND CONTINGENCIES

 

Commodity Purchase Obligations and Purchase Order Commitments

 

We and our subsidiaries routinely enter into long-term purchase and sale commitments for various quantities and lengths of time. 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 purchase obligations described below were as of March 31, 2012.

 

·

The electric utility segment had obligations of $186.3 million related to coal supply and transportation that extend through 2016, obligations of $1,213.9 million for either capacity or energy related to purchased power that extend through 2029, and obligations of $5.4 million for other commodities that extend through 2013.

·

The natural gas utility segment had obligations of $836.7 million related to natural gas supply and transportation contracts that extend through 2028.

·

Integrys Energy Services had obligations of $218.9 million, primarily related to electricity and natural gas supply contracts that extend through 2021.

·

We and our subsidiaries also had commitments of $536.1 million in the form of purchase orders issued to various vendors that relate to normal business operations, including construction projects.

 

Environmental

 

Clean Air Act (CAA) New Source Review Issues

 

Weston and Pulliam Plants:

 

In November 2009, the EPA issued a Notice of Violation (NOV) to WPS alleging violations of the CAA’s New Source Review requirements relating to certain projects completed at the Weston and Pulliam plants from 1994 to 2009. WPS continues to meet with the EPA and exchange proposals on a possible resolution. We are currently unable to estimate the possible loss or range of loss related to this matter.

 

In May 2010, WPS received from the Sierra Club a Notice of Intent (NOI) to file a civil lawsuit based on allegations that WPS violated the CAA at the Weston and Pulliam plants. WPS entered into a Standstill Agreement with the Sierra Club by which the parties agreed to negotiate as part of the EPA NOV process, rather than litigate. WPS is working on a possible resolution with the Sierra Club and the EPA. We are currently unable to estimate the possible loss or range of loss related to this matter.

 

Columbia and Edgewater Plants:

 

In December 2009, the EPA issued an NOV to Wisconsin Power and Light (WP&L), the operator of the Columbia and Edgewater plants, and the other joint owners of these plants (including WPS). The NOV alleges violations of the CAA’s New Source Review requirements related to certain projects completed at those plants. WP&L and the other joint owners exchanged proposals with the EPA on a possible resolution. We are currently unable to estimate the possible loss or range of loss related to this matter.

 

In September 2010, the Sierra Club filed a lawsuit against WP&L, which included allegations that modifications made at the Columbia plant did not comply with the CAA. While the previous stay has been lifted and the case is moving forward to a December 2012 trial, the Sierra Club continues to participate in settlement negotiations with the EPA and the joint owners of the Columbia plant to seek resolution. We are currently unable to estimate the possible loss or range of loss related to this matter.

 

In September 2010, the Sierra Club filed a lawsuit against WP&L, which included allegations that modifications made at the Edgewater plant did not comply with the CAA. The previous stay of this case has been extended until July 15, 2012, and settlement negotiations with the Sierra Club, the EPA, and the joint owners of the Edgewater plant continue. We are currently unable to estimate the possible loss or range of loss related to this matter.

 

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, penalties, and costs of supplemental beneficial environmental projects associated with settlements involving comparably-sized facilities to Weston and Pulliam combined ranged between $6 million and $30 million. The regulatory interpretations upon which the lawsuits or settlements are based may change depending on future court decisions made in the pending litigation.

 

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If it were settled or determined that historical projects at the Weston, Pulliam, Columbia, and Edgewater plants required either a state or federal CAA permit, WPS may, under the applicable statutes, be required to complete the following remedial steps:

 

·

shut down the facility,

·

install additional pollution control equipment and/or impose emission limitations, and/or

·

conduct a supplemental beneficial environmental project.

 

In addition, WPS may also be required to pay a fine. Finally, under the CAA, citizen groups may pursue a claim.

 

Weston Air Permits

 

Weston 4 Construction Permit:

 

From 2004 to 2009, the Sierra Club filed various petitions objecting to the construction permit issued for the Weston 4 plant. In June 2010, the Wisconsin Court of Appeals affirmed the Weston 4 construction permit, but directed the WDNR to reopen the permit to set specific visible emissions limits. In July 2010, the WDNR, WPS, and the Sierra Club filed Petitions for Review with the Wisconsin Supreme Court. In March 2011, the Wisconsin Supreme Court denied all Petitions for Review. Other than the specific visible emissions limits issue, all other challenges to the construction permit are now resolved. WPS is working with the WDNR and the Sierra Club to resolve this issue. We do not expect this matter to have a material impact on our financial statements.

 

Weston Title V Air Permit:

 

In November 2010, the WDNR provided a draft revised permit. WPS objected to proposed changes in mercury limits and requirements on the boilers as beyond the authority of the WDNR. WPS and the WDNR continue to meet to resolve these issues. In September 2011, the WDNR issued a draft revised permit and a request for public comments. WPS filed comments objecting to certain provisions in the draft permit. We do not expect this matter to have a material impact on our financial statements.

 

WDNR Issued NOVs:

 

Since 2008, WPS received four NOVs from the WDNR alleging various violations of the different air permits for the entire Weston plant, Weston 4, Weston 1, and Weston 2, as well as one NOV for a clerical error involving pages missing from a quarterly report for Weston. Corrective actions have been taken for the events in the five NOVs. In December 2011, the WDNR dismissed two of the NOVs and referred the other three NOVs to the state Justice Department for enforcement. We do not expect this matter to have a material impact on our financial statements.

 

Pulliam Title V Air Permit

 

The WDNR issued the renewal of the permit for the Pulliam plant in April 2009. In June 2010, the EPA issued an order directing the WDNR to respond to comments raised by the Sierra Club in its June 2009 Petition objecting to this permit.

 

WPS also challenged the permit in a contested case proceeding and Petition for Judicial Review. The Petition was dismissed in an order remanding the matter to the WDNR. In February 2011, the WDNR granted a contested case proceeding before an Administrative Law Judge on the issues raised by WPS, which included averaging times in the emission limits in the permit. WPS participated in the contested case proceeding in October 2011. In December 2011, the Administrative Law Judge did not require the WDNR to insert averaging times, for which WPS had argued. WPS has decided not to appeal.

 

In October 2010, WPS received from the Sierra Club a copy of an NOI to file a civil lawsuit against the EPA based on what the Sierra Club alleges to be the EPA’s unreasonable delay in performing its duties related to the grant or denial of the permit. WPS received notification that the Sierra Club filed suit against the EPA in April 2011. WPS intervened in the case as a necessary party to protect its interests. The WDNR sent the proposed permit to the EPA for a 45-day review, which allowed the parties to enter into a settlement agreement that has not yet been entered by the court.

 

We are reviewing all of these matters, but we do not expect them to have a material impact on our financial statements.

 

Columbia Title V Air Permit

 

In October 2009, the EPA issued an order objecting to the permit renewal issued by the WDNR for the Columbia plant. The order determined that the WDNR did not adequately analyze whether a project in 2006 constituted a “major modification that required a permit.”  The EPA’s order directed the WDNR to resolve the objections within 90 days and “terminate, modify, or revoke and reissue” the permit accordingly.

 

In July 2010, WPS, along with its co-owners, received from the Sierra Club a copy of an NOI to file a civil lawsuit against the EPA. The Sierra Club alleges that the EPA should assert jurisdiction over the permit because the WDNR failed to respond to the EPA’s objection within 90 days.

 

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In September 2010, the WDNR issued a draft construction permit and a draft revised Title V permit in response to the EPA’s order. In November 2010, the EPA notified the WDNR that the EPA “does not believe the WDNR’s proposal is responsive to the order.”  In January 2011, the WDNR issued a letter stating that upon review of the submitted public comments, the WDNR has determined not to issue the draft permits that were proposed to respond to the EPA’s order. In February 2011, the Sierra Club filed for a declaratory action, claiming that the EPA had to assert jurisdiction over the permits. In May 2011, the WDNR issued a second draft Title V permit in response to the EPA’s order. WPS is monitoring this situation with WP&L and meeting with the WDNR. We do not expect this matter to have a material impact on our financial statements.

 

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 delayed until 2021 if additional sulfur dioxide and nitrogen oxide reductions are implemented. By 2015, electric generating units above 25 megawatts but less than 150 megawatts must reduce their mercury emissions to a level defined by the Best Available Control Technology rule. As of March 31, 2012, WPS estimates capital costs of approximately $2 million, which includes estimates for both wholly owned and jointly owned plants, to achieve the required Phase I and Phase II reductions. The capital costs are expected to be recovered in future rate cases.

 

In December 2011, the EPA issued the final Utility Mercury and Air Toxics rule that will regulate emissions of mercury and other hazardous air pollutants. We are currently evaluating options for achieving the emission limits specified in this rule, but we do not anticipate the cost of compliance to be significant. We expect to recover future compliance costs in future rates.

 

Sulfur Dioxide and Nitrogen Oxide:

 

The EPA issued the Clean Air Interstate Rule (CAIR) in 2005 in order to reduce sulfur dioxide and nitrogen oxide emissions from utility boilers located in 29 states, including Wisconsin, Michigan, Pennsylvania, and New York. In July 2008, the United States Court of Appeals (Court of Appeals) issued a decision vacating CAIR, which the EPA appealed. In December 2008, the Court of Appeals reinstated CAIR and directed the EPA to address the deficiencies noted in its previous ruling to vacate CAIR. In July 2011, the EPA issued a final CAIR replacement rule known as the Cross State Air Pollution Rule (CSAPR). The new rule was to become effective January 1, 2012; however, on December 30, 2011, the D.C. Circuit Court (Court) issued a decision that stayed the rule pending the Court’s resolution of the petitions for review. The Court directed the EPA to implement CAIR during the stay period. In January 2012, a briefing and oral argument schedule was set. Oral arguments were held on April 13, 2012. In comparison to the CAIR rule, CSAPR, in the version that was stayed, significantly reduced the emission allowances allocated to our subsidiaries’ existing units for sulfur dioxide and nitrogen oxide in 2012, with a further reduction in 2014.

 

CSAPR also established new sulfur dioxide and nitrogen oxide emission allowances and did not allow carryover of the existing nitrogen oxide emission allowances allocated to WPS under CAIR. WPS did not acquire any CAIR nitrogen oxide emission allowances for 2012 and beyond other than those directly allocated to it, which were free. Sulfur dioxide emission allowances allocated under the Acid Rain Program will continue to be issued and surrendered independent of the stayed CSAPR emission allowance program. Thus, we do not expect any material impact on our financial statements as a result of being unable to carry over existing emission allowances.

 

Under CAIR, units affected by the Best Available Retrofit Technology (BART) rule are considered in compliance with BART for sulfur dioxide and nitrogen oxide emissions if they are in compliance with CAIR. Although particulate emissions also contribute to visibility impairment, the WDNR’s modeling has shown the impairment to be so insignificant that additional capital expenditures on controls are not warranted. The EPA has proposed that units in compliance with CSAPR, if the stay is lifted and CSAPR is reinstated, will also be considered in compliance with BART.

 

The Court may uphold CSAPR, invalidate CSAPR, or direct the EPA to make changes to CSAPR. In order to be in compliance with the stayed version of CSAPR, additional sulfur dioxide and nitrogen oxide controls would need to be installed, emission allowances would need to be purchased, and/or our subsidiaries would have to make other changes to how they operate their existing units. The installation of any necessary controls will be scheduled as part of WPS’s long-term maintenance plan for its existing units; however, WPS does not currently believe it could meet the stayed CSAPR’s sulfur dioxide and nitrogen oxide emission limits without purchasing additional emission allowances or changing how its existing units are operated. Due to the uncertainty surrounding the rule, we are currently unable to predict whether, or if, additional emission allowances would be available to purchase or how much it would cost to comply. We are also currently unable to predict whether CSAPR, or any future version of CSAPR, will cause WPS to idle or abandon certain units or impact the estimated useful lives of certain units. WPS expects to recover any future compliance costs in future rates. The impact on Integrys Energy Services is not expected to be material.

 

Manufactured Gas Plant Remediation

 

Our 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 these activities, waste materials were produced that may have resulted in soil

 

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and groundwater contamination at these sites. Under certain laws and regulations relating to the protection of the environment, our natural gas utilities are required to undertake remedial action with respect to some of these materials. They are coordinating the investigation and cleanup of the 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 use of a consistent approach in selecting remedies.

 

Our natural gas utilities are responsible for the environmental remediation of 53 sites, of which 20 have been transferred to the EPA Superfund Alternative Sites Program. Under the EPA’s program, the remedy decisions at these sites will be made using risk-based criteria typically used at Superfund sites. As of March 31, 2012, we estimated and accrued for $608.1 million of future undiscounted investigation and cleanup costs for all sites. We may adjust these estimates i