XNYS:TEG Integrys Energy Group Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 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

 

August 2, 2012

 

 

 



Table of Contents

 

INTEGRYS ENERGY GROUP, INC.

 

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended June 30, 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 – 34

 

 

 

 

 

 

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

19

 

 

Note 13

Employee Benefit Plans

20

 

 

Note 14

Stock-Based Compensation

20

 

 

Note 15

Common Equity

22

 

 

Note 16

Variable Interest Entities

25

 

 

Note 17

Fair Value

25

 

 

Note 18

Advertising Costs

29

 

 

Note 19

Regulatory Environment

30

 

 

Note 20

Segments of Business

32

 

 

Note 21

New Accounting Pronouncements

34

 

 

 

ITEM 2.

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

35 - 54

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

55

 

 

 

ITEM 4.

Controls and Procedures

56

 

 

 

PART II.

OTHER INFORMATION

57

 

 

 

ITEM 1.

Legal Proceedings

57

 

 

 

ITEM 1A.

Risk Factors

57

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

57

 

 

 

ITEM 5.

Other Information

58

 

 

 

ITEM 6.

Exhibits

58

 

 

 

Signature

 

59

 

 

 

EXHIBIT INDEX

 

60

 

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 (doing business as Trillium CNG)

 

 

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

 

Six Months Ended

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

June 30

 

June 30

 

(Millions, except per share data)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Utility revenues

 

$

563.6

 

$

670.8

 

$

1,534.6

 

$

1,839.5

 

Nonregulated revenues

 

278.3

 

340.0

 

558.6

 

798.4

 

Total revenues

 

841.9

 

1,010.8

 

2,093.2

 

2,637.9

 

 

 

 

 

 

 

 

 

 

 

Utility cost of fuel, natural gas, and purchased power

 

225.9

 

305.2

 

698.2

 

965.9

 

Nonregulated cost of sales

 

193.5

 

291.0

 

468.8

 

695.0

 

Operating and maintenance expense

 

252.2

 

261.1

 

513.2

 

525.7

 

Depreciation and amortization expense

 

63.2

 

62.2

 

125.9

 

124.5

 

Taxes other than income taxes

 

23.0

 

23.8

 

51.4

 

50.6

 

Operating income

 

84.1

 

67.5

 

235.7

 

276.2

 

 

 

 

 

 

 

 

 

 

 

Earnings from equity method investments

 

22.2

 

20.3

 

43.3

 

39.7

 

Miscellaneous income

 

1.7

 

1.3

 

4.1

 

3.1

 

Interest expense

 

(29.9

)

(32.2

)

(60.4

)

(67.0

)

Other expense

 

(6.0

)

(10.6

)

(13.0

)

(24.2

)

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

78.1

 

56.9

 

222.7

 

252.0

 

Provision for income taxes

 

28.4

 

26.1

 

75.2

 

97.8

 

Net income from continuing operations

 

49.7

 

30.8

 

147.5

 

154.2

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations, net of tax

 

(0.1

)

(0.9

)

1.8

 

(0.8

)

Net income

 

49.6

 

29.9

 

149.3

 

153.4

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends of subsidiary

 

(0.8

)

(0.8

)

(1.6

)

(1.6

)

Net income attributed to common shareholders

 

$

48.8

 

$

29.1

 

$

147.7

 

$

151.8

 

 

 

 

 

 

 

 

 

 

 

Average shares of common stock

 

 

 

 

 

 

 

 

 

Basic

 

78.5

 

78.7

 

78.5

 

78.5

 

Diluted

 

79.3

 

79.1

 

79.3

 

78.8

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share (basic)

 

 

 

 

 

 

 

 

 

Net income from continuing operations

 

$

0.62

 

$

0.38

 

$

1.86

 

$

1.94

 

Discontinued operations, net of tax

 

 

(0.01

)

0.02

 

(0.01

)

Earnings per common share (basic)

 

$

0.62

 

$

0.37

 

$

1.88

 

$

1.93

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share (diluted)

 

 

 

 

 

 

 

 

 

Net income from continuing operations

 

$

0.62

 

$

0.38

 

$

1.84

 

$

1.94

 

Discontinued operations, net of tax

 

 

(0.01

)

0.02

 

(0.01

)

Earnings per common share (diluted)

 

$

0.62

 

$

0.37

 

$

1.86

 

$

1.93

 

 

 

 

 

 

 

 

 

 

 

Dividends per common share declared

 

$

0.68

 

$

0.68

 

$

1.36

 

$

1.36

 

 

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

 

2



Table of Contents

 

INTEGRYS ENERGY GROUP, INC.

 

 

 

Three Months Ended

 

Six Months Ended

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 

June 30

 

June 30

 

(Millions)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

49.6

 

$

29.9

 

$

149.3

 

$

153.4

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

 

 

 

 

 

 

 

 

Unrealized net gains (losses) arising during period, net of tax of $ - million, $3.6 million, $(0.2) million, and $1.2 million, respectively

 

0.1

 

6.0

 

(0.2

)

1.9

 

Reclassification of net losses (gains) to net income, net of tax of $0.6 million, $(2.3) million, $1.6, million and $2.8 million, respectively

 

1.0

 

(4.3

)

2.5

 

4.1

 

Cash flow hedges, net

 

1.1

 

1.7

 

2.3

 

6.0

 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plans

 

 

 

 

 

 

 

 

 

Amortization of pension and other postretirement benefit costs included in net periodic benefit cost, net of tax of $0.2 million, $ - million, $0.5 million, and $0.2 million, respectively

 

0.4

 

0.3

 

0.7

 

0.5

 

Other comprehensive income, net of tax

 

1.5

 

2.0

 

3.0

 

6.5

 

Comprehensive income

 

51.1

 

31.9

 

152.3

 

159.9

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends of subsidiary

 

(0.8

)

(0.8

)

(1.6

)

(1.6

)

Comprehensive income attributed to common shareholders

 

$

50.3

 

$

31.1

 

$

150.7

 

$

158.3

 

 

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

 

3



Table of Contents

 

INTEGRYS ENERGY GROUP, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

 

June 30

 

December 31

 

(Millions)

 

2012

 

2011

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

$

25.7

 

$

28.1

 

Collateral on deposit

 

58.0

 

50.9

 

Accounts receivable and accrued unbilled revenues, net of reserves of $42.5 and $47.1, respectively

 

493.1

 

737.7

 

Inventories

 

141.8

 

252.3

 

Assets from risk management activities

 

195.4

 

227.2

 

Regulatory assets

 

112.8

 

125.1

 

Deferred income taxes

 

108.6

 

94.2

 

Prepaid taxes

 

152.9

 

209.6

 

Other current assets

 

90.6

 

78.2

 

Current assets

 

1,378.9

 

1,803.3

 

 

 

 

 

 

 

Property, plant, and equipment, net of accumulated depreciation of $3,092.9 and $3,018.7, respectively

 

5,358.6

 

5,199.1

 

Regulatory assets

 

1,635.8

 

1,658.5

 

Assets from risk management activities

 

53.1

 

64.4

 

Equity method investments

 

496.9

 

476.3

 

Goodwill

 

658.3

 

658.4

 

Other long-term assets

 

127.4

 

123.2

 

Total assets

 

$

9,709.0

 

$

9,983.2

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

Short-term debt

 

$

    279.0

 

$

    303.3

 

Current portion of long-term debt

 

387.0

 

250.0

 

Accounts payable

 

371.9

 

426.6

 

Liabilities from risk management activities

 

264.2

 

311.6

 

Accrued taxes

 

40.4

 

70.5

 

Regulatory liabilities

 

95.1

 

67.5

 

Other current liabilities

 

189.9

 

217.2

 

Current liabilities

 

1,627.5

 

1,646.7

 

 

 

 

 

 

 

Long-term debt

 

1,735.0

 

1,872.0

 

Deferred income taxes

 

1,153.3

 

1,070.7

 

Deferred investment tax credits

 

45.4

 

44.0

 

Regulatory liabilities

 

338.1

 

332.5

 

Environmental remediation liabilities

 

604.5

 

615.1

 

Pension and other postretirement benefit obligations

 

521.5

 

749.3

 

Liabilities from risk management activities

 

86.1

 

102.0

 

Asset retirement obligations

 

407.9

 

397.2

 

Other long-term liabilities

 

143.9

 

141.1

 

Long-term liabilities

 

5,035.7

 

5,323.9

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Common stock - $1 par value; 200,000,000 shares authorized; 78,287,906 shares issued; 77,912,113 shares outstanding

 

78.3

 

78.3

 

Additional paid-in capital

 

2,568.4

 

2,579.1

 

Retained earnings

 

404.6

 

363.6

 

Accumulated other comprehensive loss

 

(39.5

)

(42.5

)

Shares in deferred compensation trust

 

(17.2

)

(17.1

)

Total common shareholders’ equity

 

2,994.6

 

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

 

$

9,709.0

 

$

9,983.2

 

 

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

 

4



Table of Contents

 

INTEGRYS ENERGY GROUP, INC.

 

 

 

Six Months Ended

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

June 30

 

(Millions)

 

2012

 

2011

 

Operating Activities

 

 

 

 

 

Net income

 

$

 149.3

 

$

 153.4

 

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

 

 

 

 

 

Discontinued operations, net of tax

 

(1.8

)

0.8

 

Depreciation and amortization expense

 

125.9

 

124.5

 

Recoveries and refunds of regulatory assets and liabilities

 

14.9

 

23.9

 

Net unrealized gains on energy contracts

 

(1.3

)

(9.7

)

Nonregulated lower of cost or market inventory adjustments

 

4.2

 

0.3

 

Bad debt expense

 

15.1

 

20.3

 

Pension and other postretirement expense

 

35.4

 

36.1

 

Pension and other postretirement contributions

 

(247.3

)

(108.9

)

Deferred income taxes and investment tax credits

 

65.9

 

126.9

 

Gain on sale of assets

 

(2.1

)

(0.5

)

Equity income, net of dividends

 

(9.1

)

(7.8

)

Other

 

4.5

 

12.8

 

Changes in working capital

 

 

 

 

 

Collateral on deposit

 

(7.5

)

(3.0

)

Accounts receivable and accrued unbilled revenues

 

223.8

 

236.7

 

Inventories

 

116.3

 

86.0

 

Other current assets

 

45.5

 

(12.1

)

Accounts payable

 

(62.6

)

(54.1

)

Temporary LIFO liquidation credit

 

2.5

 

54.8

 

Other current liabilities

 

(37.9

)

(92.2

)

Net cash provided by operating activities

 

433.7

 

588.2

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Capital expenditures

 

(249.2

)

(114.5

)

Proceeds from the sale or disposal of assets

 

5.9

 

3.3

 

Capital contributions to equity method investments

 

(15.5

)

(11.0

)

Other

 

(3.7

)

(0.3

)

Net cash used for investing activities

 

(262.5

)

(122.5

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Short-term debt, net

 

(24.3

)

57.6

 

Redemption of notes payable

 

 

(10.0

)

Issuance of long-term debt

 

28.0

 

 

Repayment of long-term debt

 

(28.2

)

(355.2

)

Payment of dividends

 

 

 

 

 

Preferred stock of subsidiary

 

(1.6

)

(1.6

)

Common stock

 

(106.0

)

(100.4

)

Issuance of common stock

 

 

4.9

 

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

 

(19.8

)

(20.2

)

Other

 

(21.7

)

(8.4

)

Net cash used for financing activities

 

(173.6

)

(433.3

)

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(2.4

)

32.4

 

Cash and cash equivalents at beginning of period

 

28.1

 

179.0

 

Cash and cash equivalents at end of period

 

$

   25.7

 

$

 211.4

 

 

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

June 30, 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:

 

 

 

Six Months Ended June 30

 

(Millions)

 

2012

 

2011

 

Cash paid for interest

 

$

55.1

 

$

71.1

 

Cash (received) paid for income taxes

 

(35.7

)

3.2

 

 

Significant noncash transactions were:

 

 

 

Six Months Ended June 30

 

(Millions)

 

2012

 

2011

 

Construction costs funded through accounts payable

 

$

79.7

 

$

23.7

 

Equity issued for stock-based compensation plans

 

 

15.8

 

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:

 

 

 

 

 

June 30, 2012

 

(Millions)

 

Balance Sheet
Presentation *

 

Assets from
Risk Management
Activities

 

Liabilities from
Risk Management
Activities

 

Utility Segments

 

 

 

 

 

 

 

Non-hedge derivatives

 

 

 

 

 

 

 

Natural gas contracts

 

Current

 

$

10.6

 

$

26.1

 

Natural gas contracts

 

Long-term

 

0.9

 

4.9

 

Financial transmission rights (FTRs)

 

Current

 

5.0

 

0.2

 

Petroleum product contracts

 

Current

 

 

0.1

 

Coal contract

 

Current

 

 

5.7

 

Coal contract

 

Long-term

 

 

4.1

 

Cash flow hedges

 

 

 

 

 

 

 

Natural gas contracts

 

Current

 

 

0.9

 

Natural gas contracts

 

Long-term

 

 

 

 

 

 

 

 

 

 

 

Nonregulated Segments

 

 

 

 

 

 

 

Non-hedge derivatives

 

 

 

 

 

 

 

Natural gas contracts

 

Current

 

86.6

 

81.7

 

Natural gas contracts

 

Long-term

 

20.3

 

16.2

 

Electric contracts

 

Current

 

93.0

 

149.3

 

Electric contracts

 

Long-term

 

31.9

 

60.9

 

Foreign exchange contracts

 

Current

 

0.2

 

0.2

 

 

 

Current

 

195.4

 

264.2

 

 

 

Long-term

 

53.1

 

86.1

 

Total

 

 

 

$

248.5

 

$

350.3

 

 


*     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.

 

7



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)

 

June 30, 2012

 

December 31, 2011

 

Cash collateral provided to others

 

$

58.0

 

$

50.9

 

Cash collateral received from others *

 

1.1

 

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)

 

June 30, 2012

 

December 31, 2011

 

Integrys Energy Services

 

$

160.9

 

$

193.8

 

Utility segments

 

31.1

 

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)

 

June 30, 2012

 

December 31, 2011

 

Collateral that would have been required:

 

 

 

 

 

Integrys Energy Services

 

$

205.0

 

$

272.3

 

Utility segments

 

24.5

 

28.7

 

Collateral already satisfied:

 

 

 

 

 

Integrys Energy Services — Letters of credit

 

1.9

 

11.0

 

Collateral remaining:

 

 

 

 

 

Integrys Energy Services

 

203.1

 

261.3

 

Utility segments

 

24.5

 

28.7

 

 

8



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:

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

Purchases

 

Other
Transactions

 

Purchases

 

Other
Transactions

 

Natural gas (millions of therms)

 

754.6

 

N/A

 

1,122.7

 

N/A

 

FTRs (millions of kilowatt-hours)

 

N/A

 

8,977.2

 

N/A

 

5,077.5

 

Petroleum products (barrels)

 

42,911.0

 

N/A

 

46,872.0

 

N/A

 

Coal contract (millions of tons)

 

3.7

 

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 June 30

 

Six Months
Ended June 30

 

(Millions)

 

Financial Statement Presentation

 

2012

 

2011

 

2012

 

2011

 

Natural gas contracts

 

Balance Sheet — Regulatory assets (current)

 

$

19.1

 

$

2.2

 

$

12.7

 

$

13.4

 

Natural gas contracts

 

Balance Sheet — Regulatory assets (long-term)

 

4.7

 

(1.4

)

3.9

 

0.2

 

Natural gas contracts

 

Balance Sheet — Regulatory liabilities (current)

 

4.2

 

 

0.5

 

(0.1

)

Natural gas contracts

 

Balance Sheet — Regulatory liabilities (long-term)

 

0.4

 

(0.1

)

0.5

 

 

Natural gas contracts

 

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

 

 

 

0.1

 

0.1

 

FTRs

 

Balance Sheet — Regulatory assets (current)

 

(0.8

)

(1.6

)

(0.4

)

(1.5

)

FTRs

 

Balance Sheet — Regulatory liabilities (current)

 

1.0

 

1.1

 

0.7

 

(0.1

)

Petroleum product contracts

 

Balance Sheet — Regulatory assets (current)

 

(0.2

)

(0.1

)

(0.1

)

(0.1

)

Petroleum product contracts

 

Balance Sheet — Regulatory liabilities (current)

 

(0.1

)

(0.2

)

 

0.2

 

Petroleum product contracts

 

Income Statement — Operating and maintenance expense

 

(0.1

)

(0.3

)

 

0.2

 

Coal contract

 

Balance Sheet — Regulatory assets (current)

 

(0.1

)

0.3

 

(3.2

)

(0.2

)

Coal contract

 

Balance Sheet — Regulatory assets (long-term)

 

3.7

 

0.2

 

0.2

 

(3.0

)

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.

 

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

 

 

 

June 30, 2012

 

December 31, 2011

 

(Millions)

 

Purchases

 

Sales

 

Purchases

 

Sales

 

Commodity contracts

 

 

 

 

 

 

 

 

 

Natural gas (therms)

 

826.5

 

692.6

 

959.2

 

797.1

 

Electric (kilowatt-hours)

 

42,873.2

 

25,499.8

 

34,405.7

 

20,374.0

 

Foreign exchange contracts (Canadian dollars)

 

2.6

 

2.6

 

4.2

 

4.2

 

 

9



Table of Contents

 

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

 

 

 

 

 

Three Months
Ended June 30

 

Six Months
Ended June 30

 

(Millions)

 

Income Statement Presentation

 

2012

 

2011

 

2012

 

2011

 

Natural gas contracts

 

Nonregulated revenue

 

$

7.4

 

$

6.2

 

$

11.4

 

$

14.3

 

Natural gas contracts

 

Nonregulated revenue (reclassified from accumulated OCI) *

 

(0.3

)

(0.1

)

(1.5

)

(0.4

)

Electric contracts

 

Nonregulated revenue

 

9.0

 

(2.9

)

(59.6

)

(3.9

)

Electric contracts

 

Nonregulated revenue (reclassified from accumulated OCI) *

 

(0.7

)

 

(1.4

)

0.2

 

Total

 

 

 

$

15.4

 

$

3.2

 

$

(51.1

)

$

10.2

 

 


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

 

In the next 12 months, pre-tax losses of $0.7 million and $5.9 million related to 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.

 

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.

 

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 June 30, 2011

 

Six Months Ended June 30, 2011

 

Natural gas contracts

 

$

(3.5

)

$

(2.3

)

Electric contracts

 

8.4

 

3.8

 

Total

 

$

4.9

 

$

1.5

 

 

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

 

 

 

 

 

Three Months Ended
June 30

 

Six Months Ended
June 30

 

(Millions)

 

Income Statement Presentation

 

2012

 

2011

 

2012

 

2011

 

Settled/Realized

 

 

 

 

 

 

 

 

 

 

 

Natural gas contracts

 

Nonregulated revenue

 

$

 

$

(0.7

)

$

 

$

(9.3

)

Electric contracts

 

Nonregulated revenue

 

 

8.3

 

 

4.2

 

Interest rate swaps *

 

Interest expense

 

(0.3

)

(0.3

)

(0.6

)

(0.6

)

Hedge Designation Discontinued

 

 

 

 

 

 

 

 

 

 

 

Natural gas contracts

 

Nonregulated revenue

 

 

 

 

(0.3

)

Interest rate swaps

 

Interest expense

 

 

(0.2

)

 

(0.2

)

Total

 

 

 

$

(0.3

)

$

7.1

 

$

(0.6

)

$

(6.2

)

 


* 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.

 

Gain (Loss) Recognized in Income on Derivative Instruments (Ineffective Portion and Amount Excluded from Effectiveness Testing)

 

 

 

 

Three Months Ended June 30

 

Six Months Ended June 30

 

(Millions)

 

Income Statement Presentation

 

2011

 

2011

 

Natural gas contracts

 

Nonregulated revenue

 

$

(0.5

)

$

0.3

 

Electric contracts

 

Nonregulated revenue

 

(0.6

)

(0.3

)

Total

 

 

 

$

(1.1

)

$

 

 

10



Table of Contents

 

NOTE 4—DISCONTINUED OPERATIONS

 

Holding Company and Other Segment

 

Discontinued operations were recorded primarily at the holding company and other segment. Uncertain tax positions included in our liability for unrecognized tax benefits were remeasured to better reflect how the underlying positions are resolving themselves in various taxing jurisdictions. We also effectively settled certain state income tax examinations in 2012. During the three months ended June 30, 2012 and 2011, we recorded $0.1 million and $0.9 million, respectively, of after-tax losses in discontinued operations. During the six months ended June 30, 2012 and June 30, 2011, we recorded a $1.8 million after-tax gain and a $0.9 million after-tax loss, respectively, in discontinued operations.

 

Integrys Energy Services

 

During the six months ended June 30, 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 June 30, 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 June 30

 

Six Months Ended June 30

 

(Millions)

 

2012

 

2011

 

2012

 

2011

 

Balance at the beginning of period

 

$

446.9

 

$

422.7

 

$

439.4

 

$

416.3

 

Add: Equity in net income

 

21.3

 

19.9

 

42.1

 

39.1

 

Add: Capital contributions

 

5.1

 

2.5

 

8.5

 

5.9

 

Less: Dividends received

 

16.9

 

15.7

 

33.6

 

31.9

 

Balance at the end of period

 

$

456.4

 

$

429.4

 

$

456.4

 

$

429.4

 

 

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

 

 

 

Three Months Ended June 30

 

Six Months Ended June 30

 

(Millions)

 

2012

 

2011

 

2012

 

2011

 

Income statement data

 

 

 

 

 

 

 

 

 

Revenues

 

$

152.1

 

$

138.2

 

$

299.8

 

$

277.8

 

Operating expenses

 

71.7

 

63.0

 

141.3

 

126.1

 

Other expense

 

21.1

 

19.5

 

41.1

 

41.8

 

Net income *

 

$

59.3

 

$

55.7

 

$

117.4

 

$

109.9

 

 


*     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)

 

June 30, 2012

 

December 31, 2011

 

Balance sheet data

 

 

 

 

 

Current assets

 

$

60.9

 

$

58.7

 

Noncurrent assets

 

3,169.4

 

3,053.7

 

Total assets

 

$

3,230.3

 

$

3,112.4

 

 

 

 

 

 

 

Current liabilities

 

$

208.3

 

$

298.5

 

Long-term debt

 

1,550.0

 

1,400.0

 

Other noncurrent liabilities

 

90.7

 

82.6

 

Members’ equity

 

1,381.3

 

1,331.3

 

Total liabilities and members’ equity

 

$

3,230.3

 

$

3,112.4

 

 

11



Table of Contents

 

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 seasonal 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 six months ended June 30, 2012, and 2011. Annual impairment tests were completed at all of our reporting units that carried a goodwill balance in the second quarter of 2012, and no impairments resulted from these tests.

 

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

 

(Millions)

 

June 30, 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)

 

$

22.4

 

$

(13.9

)

$

8.5

 

$

34.5

 

$

(24.8

)

$

9.7

 

Electric contract assets (2)

 

 

 

 

7.8

 

(6.6

)

1.2

 

Patents (3)

 

7.2

 

(0.2

)

7.0

 

7.2

 

 

7.2

 

Compressed natural gas fueling contract assets (4)

 

5.6

 

(0.8

)

4.8

 

5.6

 

(0.3

)

5.3

 

Renewable energy credits (5)

 

2.4

 

 

2.4

 

2.8

 

 

2.8

 

Nonregulated easements (6)

 

3.8

 

(0.8

)

3.0

 

3.8

 

(0.7

)

3.1

 

Customer-owned equipment modifications (7)

 

3.8

 

(0.4

)

3.4

 

3.6

 

(0.2

)

3.4

 

Emission allowances (8)

 

1.5

 

(0.1

)

1.4

 

1.7

 

(0.2

)

1.5

 

Other

 

0.9

 

(0.2

)

0.7

 

1.4

 

(0.3

)

1.1

 

Total

 

$

47.6

 

$

(16.4

)

$

31.2

 

$

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

 

$

57.8

 

$

(16.4

)

$

41.4

 

$

78.6

 

$

(33.1

)

$

45.5

 

 


(1)    Represents 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 June 30, 2012, was approximately 10 years.

 

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

 

(3)    Represents 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 June 30, 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 June 30, 2012, was approximately 9 years.

 

(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 June 30, 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 June 30, 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.

 

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Amortization expense recorded as a component of nonregulated cost of sales in the statements of income was $0.4 million for both the three months ended June 30, 2012, and 2011. Amortization expense for the six months ended June 30, 2012, and 2011, was $2.0 million and $0.7 million, respectively.

 

Amortization expense recorded as a component of depreciation and amortization expense in the statements of income for the three months ended June 30, 2012, and 2011, was $0.8 million and $0.9 million, respectively. Amortization expense for the six months ended June 30, 2012, and 2011, was $1.5 million and $1.7 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

 

$

5.1

 

$

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)

 

June 30, 2012

 

December 31, 2011

 

Commercial paper outstanding

 

$

279.0

 

$

303.3