G. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Operations--Integrys Energy Group is a holding company whose primary wholly owned subsidiaries at December 31, 2010, included WPS, UPPCO, MGU, MERC, PGL, NSG, IBS, and Integrys Energy Services. Of these subsidiaries, six are regulated electric and/or natural gas utilities, one, IBS, is a centralized service company, and one, Integrys Energy Services, is a nonregulated retail energy supply and services company. In addition, Integrys Energy Group has an approximate 34% interest in ATC.
The term "utility" refers to the regulated activities of the electric and natural gas utility segments, while the term "nonutility" refers to the activities of the electric and natural gas utility segments that are not regulated. The term "nonregulated" refers to activities at Integrys Energy Services, the Integrys Energy Group holding company, and the PEC holding company.
(b) Consolidated Basis of Presentation--The consolidated financial statements include the accounts of Integrys Energy Group and all majority owned subsidiaries, after eliminating intercompany transactions and balances. The cost method of accounting is used for investments when Integrys Energy Group does not have significant influence over the operating and financial policies of the investee. Investments in businesses not controlled by Integrys Energy Group, but over which it has significant influence regarding the operating and financial policies of the investee, are accounted for using the equity method. For additional information on equity method investments, see Note 8, "Investments in Affiliates, at Equity Method." These consolidated financial statements also reflect Integrys Energy Group's proportionate interests in certain jointly owned utility facilities.
(c) Use of Estimates--Integrys Energy Group prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Integrys Energy Group makes estimates and assumptions that affect assets, liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates.
(d) Change in Accounting Policy--During the fourth quarter of 2010, Integrys Energy Group changed its method of accounting for ITCs from the flow-through method to the deferral method. Under the flow-through method used prior to this change in accounting, Integrys Energy Group reduced the provision for income taxes by the amount of the ITC in the year in which the credit was received. Under the deferral method, Integrys Energy Group records the ITCs as a deferred credit and amortizes such credit as a reduction to the provision for income taxes over the life of the asset that generated the ITC.
Consistent with its nonregulated operations, Integrys Energy Group's regulated natural gas and electric utilities historically used the flow-through method of accounting for ITCs. However, after also applying the Regulated Operations Topic of the FASB ASC, accounting for ITCs for regulated operations effectively resulted in the deferral of such credits because the benefit reduces customer rates and the provision for income taxes over the life of the asset that generated the ITC. As a result, the change in accounting method in 2010 only impacted financial statement line items for the nonregulated energy services operations.
Although both the flow-through and deferral methods are acceptable for recording ITCs, the guidance in the Income Tax Topic of the FASB ASC states that the deferral method is the preferred method. Integrys Energy Group also believes the deferral method is preferable in these circumstances because it results in better matching of the benefit of the ITC with the cost of the investment over its useful life, reflecting more meaningful information about a project's return.
The change in accounting policy to adopt the deferral method for ITCs was completed in accordance with the Accounting Changes and Error Corrections Topic of the FASB ASC. Accordingly, the change in accounting policy has been applied retrospectively by adjusting the financial statement amounts for the prior periods presented. The change in accounting policy had no impact on Integrys Energy Group's consolidated financial statements prior to 2008 and, therefore, there was no cumulative effect on retained earnings as of January 1, 2008, because no ITCs were received related to the nonregulated operations prior to 2008.
The following table reflects the impacts of the change in accounting policy on Integrys Energy Group's consolidated financial statements:
| | | | | | | | | | |
| | | As of and for the Year Ended December 31, 2010 | |
| (Millions, except per share data) | | As Computed Under Flow-Through Method | | | Effect of Change | | | As Computed Under Deferral Method | |
| | | | | | | | | | |
| Consolidated Balance Sheets | | | | | | | | | |
| Property, plant, and equipment | | $ | 5,016.4 | | | $ | (3.0 | ) | | $ | 5,013.4 | |
| Other current liabilities | | | 262.3 | | | | 0.1 | | �� | | 262.4 | |
| Long-term deferred income taxes | | | 865.3 | | | | (4.8 | ) | | | 860.5 | |
| Long-term deferred investment tax credits | | | 36.4 | | | | 8.8 | | | | 45.2 | |
| Other long-term liabilities | | | 150.0 | | | | 0.6 | | | | 150.6 | |
| Retained earnings | | | 358.5 | | | | (7.7 | ) | | | 350.8 | |
| | | | | | | | | | | | | |
| Consolidated Statements of Income | | | | | | | | | | | | |
| Operating and maintenance expense | | $ | 1,045.7 | | | $ | (0.1 | ) | | $ | 1,045.6 | |
| Depreciation and amortization expense | | | 266.1 | | | | (0.3 | ) | | | 265.8 | |
| Provision for income taxes | | | 148.7 | | | | (0.5 | ) | | | 148.2 | |
| Net income (loss) from continuing operations | | | 222.6 | | | | 0.9 | | | | 223.5 | |
| Net income (loss) | | | 222.8 | | | | 0.9 | | | | 223.7 | |
| Net income (loss) attributed to common shareholders | | | 220.0 | | | | 0.9 | | | | 220.9 | |
| | | | | | | | | | | | | |
| Earnings (loss) per common share (basic) | | | | | | | | | | | | |
| Net income (loss) from continuing operations | | $ | 2.84 | | | $ | 0.01 | | | $ | 2.85 | |
| Earnings (loss) per common share (basic) | | | 2.84 | | | | 0.01 | | | | 2.85 | |
| | | | | | | | | | | | | |
| Earnings (loss) per common share (diluted) | | | | | | | | | | | | |
| Net income (loss) from continuing operations | | $ | 2.82 | | | $ | 0.01 | | | $ | 2.83 | |
| Earnings (loss) per common share (diluted) | | | 2.82 | | | | 0.01 | | | | 2.83 | |
| | | As of and for the Year Ended December 31, 2009 | |
| (Millions, except per share data) | | As Originally Reported | | | Adjustments | | | Retrospectively Adjusted | |
| | | | | | | | | | |
| Consolidated Balance Sheets | | | | | | | | | |
| Property, plant, and equipment | | $ | 4,945.1 | | | $ | (3.3 | ) | | $ | 4,941.8 | |
| Other current liabilities | | | 379.9 | (1) | | | 0.1 | | | | 380.0 | |
| Long-term deferred income taxes | | | 658.2 | | | | (5.3 | ) | | | 652.9 | |
| Long-term deferred investment tax credits | | | 36.2 | | | | 9.8 | | | | 46.0 | |
| Other long-term liabilities | | | 147.4 | | | | 0.7 | | | | 148.1 | |
| Retained earnings | | | 345.6 | | | | (8.6 | ) | | | 337.0 | |
| | | | | | | | | | | | | |
| Consolidated Statements of Income | | | | | | | | | | | | |
| Operating and maintenance expense | | $ | 1,099.9 | (2) | | $ | (1.5 | ) | | $ | 1,098.4 | |
| Depreciation and amortization expense | | | 230.9 | | | | (0.3 | ) | | | 230.6 | |
| Provision for income taxes | | | 83.2 | | | | 0.5 | | | | 83.7 | |
| Net income (loss) from continuing operations | | | (71.6 | ) | | | 1.3 | | | | (70.3 | ) |
| Net income (loss) | | | (68.8 | ) | | | 1.3 | | | | (67.5 | ) |
| Net income (loss) attributed to common shareholders | | | (70.9 | ) | | | 1.3 | | | | (69.6 | ) |
| | | | | | | | | | | | | |
| Earnings (loss) per common share (basic) | | | | | | | | | | | | |
| Net income (loss) from continuing operations | | $ | (0.96 | ) | | $ | 0.01 | | | $ | (0.95 | ) |
| Earnings (loss) per common share (basic) | | | (0.92 | ) | | | 0.01 | | | | (0.91 | ) |
| | | | | | | | | | | | | |
| Earnings (loss) per common share (diluted) | | | | | | | | | | | | |
| Net income (loss) from continuing operations | | $ | (0.96 | ) | | $ | 0.01 | | | $ | (0.95 | ) |
| Earnings (loss) per common share (diluted) | | | (0.92 | ) | | | 0.01 | | | | (0.91 | ) |
| | | | | | | | | | | | | |
| | | As of and for the Year Ended December 31, 2008 | |
| (Millions, except per share data) | | As Originally Reported | | | Adjustments | | | Retrospectively Adjusted | |
| | | | | | | | | | |
| Consolidated Statements of Income | | | | | | | | | |
| Provision for income taxes | | $ | 51.2 | | | $ | 9.9 | | | $ | 61.1 | |
| Net income (loss) from continuing operations | | | 124.7 | | | | (9.9 | ) | | | 114.8 | |
| Net income (loss) | | | 129.4 | | | | (9.9 | ) | | | 119.5 | |
| Net income (loss) attributed to common shareholders | | | 126.4 | | | | (9.9 | ) | | | 116.5 | |
| | | | | | | | | | | | | |
| Earnings (loss) per common share (basic) | | | | | | | | | | | | |
| Net income (loss) from continuing operations | | $ | 1.59 | | | $ | (0.13 | ) | | $ | 1.46 | |
| Earnings (loss) per common share (basic) | | | 1.65 | | | | (0.13 | ) | | | 1.52 | |
| | | | | | | | | | | | | |
| Earnings (loss) per common share (diluted) | | | | | | | | | | | | |
| Net income (loss) from continuing operations | | $ | 1.58 | | | $ | (0.13 | ) | | $ | 1.45 | |
| Earnings (loss) per common share (diluted) | | | 1.64 | | | | (0.13 | ) | | | 1.51 | |
| (1) | On the Consolidated Balance Sheet for the December 31, 2009 Annual Report on Form 10-K, accrued taxes of $81.9 million were included in the other current liabilities line item, which was originally reported as $461.8 million. Accrued taxes have been separately presented on the Consolidated Balance Sheet for the December 31, 2010 Annual Report on Form 10-K. |
| (2) | On the Consolidated Statement of Income for the December 31, 2009 Annual Report on Form 10-K, impairment losses on property, plant, and equipment of $0.7 million were included in the operating and maintenance expense line item, which was originally reported as $1,100.6 million. Impairment losses on property, plant, and equipment have been separately presented on the Consolidated Statement of Income for the December 31, 2010 Annual Report on Form 10-K. |
In the 2009 table above, the adjustments to "Other long-term liabilities" and "Operating and maintenance expense" relate to a solar project that generated an ITC in 2008, but was sold and leased back in 2009.
Prior to the change in accounting, Integrys Energy Group recognized a loss on the sale in 2009 in operating and maintenance expense. If the deferral method had been applied since 2008, the carrying amount of the project would have been reduced by the amount of the ITC received in 2008, and the sale would have instead resulted in a gain in 2009. According to the sale-leaseback guidance in the Leases Topic of the FASB ASC, this gain would have been deferred in 2009 in other long-term liabilities and recognized as a reduction of operating and maintenance expense over the lease term.
The change in accounting policy to adopt the deferral method for ITCs also impacted previously reported amounts within the Consolidated Statements of Equity and Consolidated Statements of Cash Flows. Net income (loss) attributed to common shareholders was adjusted in the Consolidated Statements of Equity to reflect the retrospectively adjusted amounts included in the table above. Although there was no overall impact on net cash provided by (used for) operating activities within the Consolidated Statements of Cash Flows, certain line items classified within this category were adjusted to reflect the retrospectively adjusted amounts included in the table above. These line items were: depreciation and amortization expense, deferred income taxes and investment tax credits, gain (loss) on sale of assets, and other.
(e) Cash and Cash Equivalents--Short-term investments with an original maturity of three months or less are reported as cash equivalents.
The following is supplemental disclosure to the Integrys Energy Group Consolidated Statements of Cash Flows:
| (Millions) | | 2010 | | | 2009 | | | 2008 | |
| Cash paid for interest | | $ | 138.7 | | | $ | 164.8 | | | $ | 156.8 | |
| Cash (received) paid for income taxes | | | (2.2 | ) | | | 19.1 | | | | 100.9 | |
Significant noncash transactions were:
| (Millions) | | 2010 | | | 2009 | | | 2008 | |
| Construction costs funded through accounts payable | | $ | 18.3 | | | $ | 30.4 | | | $ | 34.2 | |
| Equity issued for reinvested dividends | | | 22.6 | | | | - | | | | - | |
| Equity issued for stock-based compensation plans | | | 3.0 | | | | - | | | | - | |
| Intangible assets (customer contracts) received in exchange for risk management assets | | | - | | | | 17.0 | | | | - | |
(f) Revenue and Customer Receivables--Revenues are recognized on the accrual basis and include estimated amounts for electric and natural gas services provided but not billed. At December 31, 2010, and 2009, Integrys Energy Group's unbilled revenues were $339.1 million and $337.0 million, respectively. At December 31, 2010, there were no customers or industries that accounted for more than 10% of Integrys Energy Group's revenues.
Prudent fuel and purchased power costs are recovered from customers under one-for-one recovery mechanisms by UPPCO and by the wholesale electric operations and Michigan retail electric operations of WPS, which provide for subsequent adjustments to rates for changes in commodity costs. There is a portion of WPS's wholesale electric business that limits cost recovery to no greater than the 2-year average rate charged to large industrial retail customers for that same period. The costs of natural gas prudently incurred by the natural gas utility subsidiaries are also recovered from customers under one-for-one recovery mechanisms.
WPS's Wisconsin retail electric operations do not have a one-for-one mechanism to recover fuel and purchased power costs. Instead, a "fuel window" mechanism is used to recover these costs. Under the fuel window, if actual fuel and purchased power costs deviate by more than 2% from costs included in the rates charged to customers, a rate review can be triggered. Once a rate review is triggered, rates may be reset (subject to PSCW approval) for the remainder of the year to recover or refund, on an annualized basis, the projected increase or decrease in the cost of fuel and purchased power.
All of Integrys Energy Group's utility subsidiaries are required to provide service and grant credit (with applicable deposit requirements) to customers within their service territories. The companies continually review their customers' credit-worthiness and obtain or refund deposits accordingly. The utilities are generally precluded from discontinuing service to residential customers during winter moratorium months.
PGL credits proceeds from its interstate services provided by its natural gas hub against natural gas costs, resulting in a reduction to utility customers' natural gas charges.
WPS and UPPCO both sell and purchase power in the MISO market. If WPS or UPPCO is a net seller in a particular hour, the net amount is reported as revenue. If WPS or UPPCO is a net purchaser in a particular hour, the net amount is recorded as utility cost of fuel, natural gas, and purchased power on the Consolidated Statements of Income.
Integrys Energy Group presents revenues net of pass-through taxes on the Consolidated Statements of Income.
(g) Inventories--Inventories consist of natural gas in storage, liquid propane, and fossil fuels, including coal. Average cost is used to value fossil fuels, liquid propane, and natural gas in storage for the regulated utilities, excluding PGL and NSG. PGL and NSG price natural gas storage injections at the calendar year average of the costs of natural gas supply purchased. Withdrawals from storage are priced on the LIFO cost method. Inventories stated on a LIFO basis represented approximately 34% of total inventories at December 31, 2010, and 34% of total inventories at December 31, 2009. The estimated replace ment cost of natural gas in inventory at December 31, 2010, and December 31, 2009, exceeded the LIFO cost by approximately $136.7 million and $220.5 million, respectively. In calculating these replacement amounts, PGL and NSG used a Chicago city-gate natural gas price per dekatherm of $4.42 at December 31, 2010, and $6.14 at December 31, 2009.
Inventories at Integrys Energy Services are valued at the lower of cost or market unless hedged pursuant to a fair value hedge, in which case changes in the fair value of inventory subsequent to the hedge designation are recorded directly to inventory. Integrys Energy Services recorded net write-downs of $0.9 million, $44.2 million, and $167.3 million in 2010, 2009, and 2008, respectively.
(h) Risk Management Activities--As part of its regular operations, Integrys Energy Group enters into contracts, including options, swaps, futures, forwards, and other contractual commitments, to manage market risks such as changes in commodity prices and interest rates, which are described more fully in Note 2, "Risk Management Activities." Derivative instruments at the utilities are entered into in accordance with the terms of the risk management plans approved by their respective Boards of Directors and, if applicable, by their respective regulators.
All derivatives are recognized on the balance sheet at their fair value unless they are designated as and qualify for the normal purchases and sales exception. Integrys Energy Group continually assesses its contracts designated as normal and will discontinue the treatment of these contracts as normal if the required criteria are no longer met. Most energy-related physical and financial derivatives at the utilities qualify for regulatory deferral. These derivatives are marked to fair value; the resulting risk management assets are offset with regulatory liabilities or decreases to regulatory assets, and risk management liabilities are offset with regulatory assets or decreases to regulatory liabilities. Management believes any gains or losses resulting from the eventual settlement of these derivative instr uments will be refunded to or collected from customers in rates.
Integrys Energy Group classifies unrealized gains and losses on derivative instruments that do not qualify for hedge accounting or regulatory deferral as a component of margins or operating and maintenance expense, depending on the nature of the transactions. Unrealized gains and losses on fair value hedges are recognized currently in revenues, as are the changes in fair value of the hedged items. To the extent they are effective, the changes in the values of contracts designated as cash flow hedges are included in other comprehensive income, net of taxes. Fair value hedge ineffectiveness and cash flow hedge
ineffectiveness are recorded in revenue, operating and maintenance expense, or interest expense on the Consolidated Statements of Income, based on the nature of the transactions. Cash flows from derivative activities are presented in the same category as the item being hedged within operating activities on the Consolidated Statements of Cash Flows unless the derivative contracts contain an other-than-insignificant financing element, in which case the cash flows are classified within financing activities.
Derivative accounting rules provide the option to present certain asset and liability derivative positions net on the balance sheet and to net the related cash collateral against these net derivative positions. Integrys Energy Group elected not to net these items. On the Consolidated Balance Sheets, cash collateral provided to others is shown separately as collateral on deposit, and cash collateral received from others is reflected in other current liabilities.
(i) Emission Allowances--Integrys Energy Services accounts for emission allowances as intangible assets, with cash inflows and outflows related to purchases and sales of emission allowances recorded as investing activities in the Consolidated Statements of Cash Flows. The utilities account for emission allowances as inventory at average cost by vintage year. Charges to income result when allowances are utilized in operating the utilities' generation plants. Gains on sales of allowances at the utilities are returned to ratepayers.
(j) Property, Plant, and Equipment--Utility plant is stated at original cost, including any associated AFUDC and asset retirement costs. The costs of renewals and betterments of units of property (as distinguished from minor items of property) are capitalized as additions to the utility plant accounts. Except for land, no gain or loss is recognized in connection with ordinary retirements of utility property units. The utilities charge the cost of units of property retired, sold, or otherwise disposed of to the accumulated provision for depreciation. In addition, the utilities record a regulatory liability for removal costs included in rates, with actual removal costs charged against the liability as incurred. Prior to the ICC rate orders issued January 21, 2010, PGL and NSG recorded costs of removal associated with the retirement of assets to depreciation expense as incurred. Maintenance, repair, replacement, and renewal costs associated with items not qualifying as units of property are considered operating expenses.
Integrys Energy Group records straight-line depreciation expense over the estimated useful life of utility property, using depreciation rates as approved by the applicable regulators. Annual utility composite depreciation rates are shown below.
| Annual Utility Composite Depreciation Rates | | 2010 | | | 2009 | | | 2008 | |
| WPS – Electric | | | 3.05 | % | | | 3.04 | % | | | 3.09 | % |
| WPS – Natural gas | | | 3.28 | % | | | 3.30 | % | | | 3.39 | % |
| UPPCO | | | 3.18 | % | | | 3.05 | % | | | 2.98 | % |
| MGU | | | 3.55 | % | | | 2.66 | % | | | 2.67 | % |
| MERC | | | 3.08 | % | | | 3.10 | % | | | 3.32 | % |
| PGL | | | 3.10 | % | | | 2.29 | % | | | 2.55 | % |
| NSG | | | 2.35 | % | | | 1.66 | % | | | 1.80 | % |
Nonregulated plant is stated at cost, which includes capitalized interest. The costs of renewals, betterments, and major overhauls are capitalized as additions to plant. The gains or losses associated with ordinary retirements are recorded in the period of retirement. Maintenance, repair, and minor replacement costs are expensed as incurred.
Depreciation is computed for the majority of the nonregulated subsidiaries' assets using the straight-line method over the assets' useful lives.
Integrys Energy Group capitalizes certain costs related to software developed or obtained for internal use and amortizes those costs to operating expense over the estimated useful life of the related software, which ranges from 3 to 15 years. If software is retired prior to being fully amortized, the difference is recorded as a loss on the Consolidated Statements of Income.
See Note 5, "Property, Plant, and Equipment," for details regarding Integrys Energy Group's property, plant, and equipment balances.
(k) Capitalized Interest and AFUDC--The nonregulated subsidiaries capitalize interest for construction projects, while the utilities capitalize the cost of funds used for construction using a calculation that includes both internal equity and external debt components. The internal equity component of capitalized AFUDC is accounted for as other income, and the external debt component is accounted for as a decrease to interest expense.
Approximately 50% of WPS's retail jurisdictional construction work in progress expenditures are subject to the AFUDC calculation. For 2010, WPS's average AFUDC retail rate was 8.61%, and its average AFUDC wholesale rate was 4.73%. WPS's allowance for equity funds used during construction for 2010, 2009, and 2008 was $0.7 million, $5.1 million, and $5.2 million, respectively. WPS's allowance for borrowed funds used during construction for 2010, 2009, and 2008 was $0.3 million, $2.0 million, and $1.8 million, respectively.
The AFUDC calculation for IBS and the other utilities is determined by the respective state commissions, each with specific requirements. Based on these requirements, IBS and the other utilities did not record significant AFUDC for 2010, 2009, or 2008.
Interest capitalized at the nonregulated subsidiaries was not significant during 2010, 2009, and 2008.
(l) Regulatory Assets and Liabilities--Regulatory assets represent probable future revenue associated with certain costs or liabilities that have been deferred and are expected to be recovered from customers through the ratemaking process. Regulatory liabilities represent amounts that are expected to be refunded to customers in future rates or amounts collected in rates for future costs. If at any reporting date a previously recorded regulatory asset is no longer probable of recovery, the regulatory asset is reduced to the amount considered probable of recovery with the reduction charged to expense in the year the determination is made. See N ote 7, "Regulatory Assets and Liabilities," for more information.
(m) Asset Impairment--Goodwill and other intangible assets with indefinite lives are not amortized, but are subject to an annual impairment test. Other long-lived assets require an impairment review when events or circumstances indicate that the carrying amount may not be recoverable. Integrys Energy Group bases its evaluation of other long-lived assets on the presence of impairment indicators such as the future economic benefit of the assets, any historical or future profitability measurements, and other external market conditions or factors.
Integrys Energy Group's reporting units containing goodwill perform annual goodwill impairment tests during the second quarter of each year, and interim impairment tests when impairment indicators are present. The carrying amount of the reporting unit's goodwill is considered not recoverable if it exceeds the reporting unit's fair value. An impairment loss is recorded for the excess of the carrying value of the goodwill over its implied fair value. For more information on Integrys Energy Group's goodwill and other intangible assets, see Note 9, "Goodwill and Other Intangible Assets."
The carrying amount of tangible long-lived assets held and used is considered not recoverable if it exceeds the undiscounted sum of cash flows expected to result from the use and eventual disposition of the asset. If the carrying value is not recoverable, the impairment loss is measured as the excess of the asset's carrying value over its fair value.
The carrying value of assets held for sale is not recoverable if it exceeds the fair value less estimated costs to sell the asset. An impairment loss is recorded for the excess of the asset’s carrying value over the fair value less estimated costs to sell.
The carrying values of cost and equity method investments are assessed for impairment by comparing the fair values of these investments to their carrying values, if a fair value assessment was completed, or
by reviewing for the presence of impairment indicators. If an impairment exists and it is determined to be other-than-temporary, a loss is recognized equal to the amount the carrying value exceeds the investment's fair value.
Integrys Energy Services evaluates emission allowances for impairment by comparing the expected undiscounted future cash flows to the carrying amount. When allowances are expected to be utilized for generation, the allowances are grouped with the related power plant in the impairment evaluation.
(n) Retirement of Debt--Any call premiums or unamortized expenses associated with refinancing utility debt obligations are amortized consistent with regulatory treatment of those items. Any gains or losses resulting from the retirement of nonutility debt are recorded through earnings, while gains or losses resulting from the retirement of utility debt that is not refinanced are either amortized over the remaining life of the original debt or recorded through earnings.
(o) Asset Retirement Obligations--Integrys Energy Group recognizes legal obligations at fair value associated with the retirement of tangible long-lived assets that result from the acquisition, construction or development, and/or normal operation of the assets. A liability is recorded for these obligations as long as the fair value can be reasonably estimated, even if the timing or method of settling the obligation is unknown. The asset retirement obligations are accreted using a credit-adjusted risk-free interest rate commensurate with the expected settlement dates of the asset retirement obligations; this rate is determined at the date the obligation is incurred. The associated retirement costs are capitalized as part of the related long-lived assets and are depreciated over the useful lives of the assets. Subsequent changes resulting from revisions to the timing or the amount of the original estimate of undiscounted cash flows are recognized as an increase or a decrease in the carrying amount of the liability and the associated retirement cost. See Note 13, "Asset Retirement Obligations," for more information.
(p) Income Taxes--Deferred income taxes have been recorded to recognize the expected future tax consequences of events that have been included in the financial statements by using currently enacted tax rates for the differences between the tax basis of assets and liabilities and the basis reported in the financial statements. Integrys Energy Group records valuation allowances for deferred tax assets when it is uncertain if the benefit will be realized in the future. Integrys Energy Group's regulated utilities defer certain adjustments made to income taxes that will impact future rates and record regulatory assets or liabilities related to these adjustme nts.
In 2010, Integrys Energy Group changed its method of accounting for ITCs from the flow-through method to the deferral method. Under the deferral method, Integrys Energy Group defers the ITCs in the year the credit is received and reduces the provision for income taxes over the useful life of the related property. See Note 1 (d), "Change in Accounting Policy," for additional information on this change in accounting policy.
Production tax credits generally reduce the provision for income taxes in the year that electricity from the qualifying facility is generated and sold. Investment tax credits and production tax credits that do not reduce income taxes payable for the current year are eligible for carryover and recognized as a deferred tax asset. A valuation allowance is established unless it is more likely than not that the credits will be realized during the carryforward period.
Integrys Energy Group files a consolidated United States income tax return that includes domestic subsidiaries of which its ownership is 80% or more. Integrys Energy Group and its consolidated subsidiaries are parties to a federal and state tax allocation arrangement under which each entity determines its provision for income taxes on a stand-alone basis. In several states, combined or consolidated filing is required for certain members of Integrys Energy Group doing business in that state. The tax allocation arrangement equitably allocates the state taxes associated with these combined or consolidated filings.
Integrys Energy Group reports interest and penalties accrued related to income taxes as a component of provision for income taxes in the Consolidated Statements of Income, as well as regulatory assets or regulatory liabilities in the Consolidated Balance Sheets.
For more information regarding Integrys Energy Group's accounting for income taxes, see Note 14, "Income Taxes."
(q) Guarantees--Integrys Energy Group follows the guidance of the Guarantees Topic of the FASB ASC, which requires that the guarantor recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. For additional information on guarantees, see Note 16, "Guarantees."
(r) Employee Benefits--The costs of pension and other postretirement benefits are expensed over the periods during which employees render service. The transition obligation related to other postretirement benefit plans that existed at Integrys Energy Group prior to the PEC merger is being recognized over a 20-year period beginning in 1993. In computing the expected return on plan assets, Integrys Energy Group uses a market-related value of plan assets. Changes in fair value are recognized over the subsequent five years for plans sponsored by WPS, while differences between actual investment returns and the expected return on plan assets are re cognized over a five-year period for pension plans sponsored by IBS and PEC. The benefit costs associated with employee benefit plans are allocated among Integrys Energy Group's subsidiaries based on employees' time reporting and actuarial calculations, as applicable. Integrys Energy Group's regulators allow recovery in rates for the regulated utilities' net periodic benefit cost calculated under GAAP.
Integrys Energy Group recognizes the funded status of defined benefit postretirement plans on the balance sheet, and recognizes changes in the plans' funded status in the year in which the changes occur. Integrys Energy Group's nonregulated segments record changes in the funded status in other comprehensive income, and the regulated utilities record these changes to regulatory asset or liability accounts.
For additional information on Integrys Energy Group's employee benefits, see Note 17, "Employee Benefit Plans."
(s) Fair Value--A fair value measurement is required to reflect the assumptions market participants would use in pricing an asset or liability based on the best available information. These assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and the risks inherent in the inputs to the model. Also, transaction costs should not be considered in the determination of fair value. On January 1, 2008, Integrys Energy Group recognized an increase in nonregulated revenues of $11.0 million due to the exclusion of transaction costs from Integrys Energy Services' fair value estimates.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Integrys Energy Group utilizes a mid-market pricing convention (the mid-point price between bid and ask prices) as a practical expedient for valuing certain derivative assets and liabilities.
Fair value accounting rules provide a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are defined as follows:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 – Pricing inputs are observable, either directly or indirectly, but are not quoted prices included within Level 1. Level 2 includes those financial instruments that are valued using external inputs within models or other valuation methodologies.
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management's best estimate of fair value. Level 3 instruments include those that may be more structured or otherwise tailored to customers' needs.
Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
Integrys Energy Group determines fair value using a market based approach that incorporates observable market inputs where available, and internally developed inputs where observable market data is not readily available. For the unobservable inputs, consideration is given to the assumptions that market participants would use in valuing the asset or liability. These factors include not only the credit standing of the counterparties involved, but also the impact of Integrys Energy Group's nonperformance risk on its liabilities.
When possible, Integrys Energy Group bases the valuations of its risk management assets and liabilities on quoted prices for identical assets in active markets. These valuations are classified in Level 1. The valuations of certain contracts include inputs related to market price risk (commodity or interest rate), price volatility (for option contracts), price correlation (for cross commodity contracts), credit risk, and time value. These inputs are available through multiple sources, including brokers and over-the-counter and online exchanges. Transactions valued using these inputs are classified in Level 2.
Certain derivatives are categorized in Level 3 due to the significance of unobservable or internally-developed inputs. The primary reasons for a Level 3 classification are as follows:
| ● | While price curves may have been based on observable information, significant assumptions may have been made regarding seasonal or monthly shaping and locational basis differentials. |
| ● | Certain transactions were valued using price curves that extended beyond the quoted period. Assumptions were made to extrapolate prices from the last quoted period through the end of the transaction term, primarily through the use of historically settled data or correlations to other locations. |
Integrys Energy Group recognizes transfers between the levels of the fair value hierarchy at the value as of the end of the reporting period.
See Note 22, "Fair Value," for additional information.
NOTE 2--RISK MANAGEMENT ACTIVITIES
The following table shows Integrys Energy Group's assets and liabilities from risk management activities:
| | | | December 31, 2010 | |
| (Millions) | Balance Sheet Presentation * | | Risk Management Assets | | | Risk Management Liabilities | |
| Utility Segments | | | | | | | |
| Non-hedge derivatives | | | | | | | |
Natural gas contracts | Current | | $ | 2.2 | | | $ | 23.6 | |
Natural gas contracts | Long-term | | | 1.6 | | | | 1.4 | |
Financial transmission rights (FTRs) | Current | | | 3.1 | | | | 0.2 | |
Petroleum product contracts | Current | | | 0.6 | | | | - | |
Coal contract | Current | | | - | | | | 1.2 | |
Coal contract | Long-term | | | 3.7 | | | | - | |
Total commodity contracts | Current | | | 5.9 | | | | 25.0 | |
Total commodity contracts | Long-term | | | 5.3 | | | | 1.4 | |
| Cash flow hedges | | | | | | | | | |
Natural gas contracts | Current | | | - | | | | 1.0 | |
| | | | | | | | | | |
| Nonregulated Segments | | | | | | | | | |
| Non-hedge derivatives | | | | | | | | | |
Natural gas contracts | Current | | | 132.0 | | | | 113.8 | |
Natural gas contracts | Long-term | | | 62.3 | | | | 57.7 | |
Electric contracts | Current | | | 85.7 | | | | 122.0 | |
Electric contracts | Long-term | | | 16.5 | | | | 30.3 | |
Total commodity contracts | Current | | | 217.7 | | | | 235.8 | |
Total commodity contracts | Long-term | | | 78.8 | | | | 88.0 | |
Foreign exchange contracts | Current | | | 1.2 | | | | 1.2 | |
Foreign exchange contracts | Long-term | | | 0.3 | | | | 0.3 | |
| Fair value hedges | | | | | | | | | |
Interest rate swaps | Current | | | 0.9 | | | | - | |
| Cash flow hedges | | | | | | | | | |
Natural gas contracts | Current | | | 1.6 | | | | 9.2 | |
Natural gas contracts | Long-term | | | 0.1 | | | | 0.9 | |
Electric contracts | Current | | | 9.6 | | | | 17.4 | |
Electric contracts | Long-term | | | 4.9 | | | | 9.1 | |
Total commodity contracts | Current | | | 11.2 | | | | 26.6 | |
Total commodity contracts | Long-term | | | 5.0 | | | | 10.0 | |
| | Current | | | 236.9 | | | | 289.6 | |
| | Long-term | | | 89.4 | | | | 99.7 | |
| Total | | | $ | 326.3 | | | $ | 389.3 | |
| * | Assets and liabilities from risk management activities are classified as current or long-term based upon the maturities of the underlying contracts. |
| | | | December 31, 2009 | |
| (Millions) | Balance Sheet Presentation * | | Risk Management Assets | | | Risk Management Liabilities | |
| Utility Segments | | | | | | | |
| Non-hedge derivatives | | | | | | | |
Commodity contracts | Current | | $ | 10.8 | | | $ | 24.7 | |
Commodity contracts | Long-term | | | 2.0 | | | | 1.5 | |
| Cash flow hedges | | | | | | | | | |
Commodity contracts | Current | | | - | | | | 0.2 | |
Commodity contracts | Long-term | | | - | | | | 0.1 | |
| | | | | | | | | | |
| Nonregulated Segments | | | | | | | | | |
| Non-hedge derivatives | | | | | | | | | |
Commodity contracts | Current | | | 1,503.9 | | | | 1,548.4 | |
Commodity contracts | Long-term | | | 787.2 | | | | 769.5 | |
Interest rate swaps | Current | | | - | | | | 1.0 | |
Interest rate swaps | Long-term | | | - | | | | 2.5 | |
Foreign exchange contracts | Current | | | 1.0 | | | | 0.9 | |
Foreign exchange contracts | Long-term | | | 0.9 | | | | 0.9 | |
| Fair value hedges | | | | | | | | | |
Interest rate swaps | Current | | | 1.8 | | | | - | |
Interest rate swaps | Long-term | | | 0.8 | | | | - | |
| Cash flow hedges | | | | | | | | | |
Commodity contracts | Current | | | 4.6 | | | | 30.1 | |
Commodity contracts | Long-term | | | 4.5 | | | | 8.6 | |
Interest rate swaps | Current | | | - | | | | 1.8 | |
| | Current | | | 1,522.1 | | | | 1,607.1 | |
| | Long-term | | | 795.4 | | | | 783.1 | |
| Total | | | $ | 2,317.5 | | | $ | 2,390.2 | |
| * | Assets and liabilities from risk management activities are classified as current or long-term based upon the maturities of the underlying contracts. |
The following table shows Integrys Energy Group's cash collateral positions:
| (Millions) | | December 31, 2010 | | | December 31, 2009 | |
| Cash collateral provided to others | | $ | 33.3 | | | $ | 184.9 | |
| Cash collateral received from others | | | 4.5 | | | | 55.2 | |
Certain of Integrys Energy Group's derivative and nonderivative commodity instruments contain provisions that could require "adequate assurance" in the event of a material adverse change in Integrys Energy Group's creditworthiness, or the posting of additional collateral for instruments in net liability positions, if triggered by a decrease in credit ratings. The 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) | | December 31, 2010 | | | December 31, 2009 | |
| Integrys Energy Services | | $ | 219.5 | | | $ | 555.6 | |
| Utility segments | | | 22.1 | | | | 24.0 | |
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, Integrys Energy Group’s collateral requirement would have been as follows:
| (Millions) | | December 31, 2010 | | | December 31, 2009 | |
| Collateral that would have been required: | | | | | | |
| Integrys Energy Services | | $ | 295.7 | | | $ | 549.3 | |
| Utility segments | | | 14.1 | | | | 17.0 | |
| Collateral already satisfied: | | | | | | | | |
| Integrys Energy Services | | | | | | | | |
| Letters of credit | | | 56.9 | | | | 51.9 | |
| Cash | | | - | | | | - | |
| Utility segments | | | | | | | | |
| Letters of credit | | | - | | | | - | |
| Cash | | | - | | | | - | |
| Collateral remaining: | | | | | | | | |
| Integrys Energy Services | | | 238.8 | | | | 497.4 | |
| Utility segments | | | 14.1 | | | | 17.0 | |
Utility Segments
Non-Hedge Derivatives
Utility derivatives include a limited number of natural gas purchase contracts, a coal purchase contract, financial derivative contracts (futures, options, and swaps), and FTRs used to manage electric transmission congestion costs. The futures, options, and swaps were used by both the electric and natural gas utility segments to mitigate the risks associated with the market price volatility of natural gas supply costs, the costs of gasoline and diesel fuel used by utility vehicles, and the cost of coal transportation.
The tables below show the unrealized gains (losses) recorded related to non-hedge derivatives at the utilities.
| (Millions) | Financial Statement Presentation | | 2010 | |
| Natural gas contracts | Balance Sheet – Regulatory assets (current) | | $ | (1.7 | ) |
| Natural gas contracts | Balance Sheet – Regulatory assets (long-term) | | | 0.1 | |
| FTRs | Balance Sheet – Regulatory assets (current) | | | 1.0 | |
| FTRs | Balance Sheet – Regulatory liabilities (current) | | | (2.1 | ) |
| Petroleum product contracts | Balance Sheet – Regulatory liabilities (current) | | | 0.1 | |
| Petroleum product contracts | Income Statement – Operating and maintenance expense | | | 0.1 | |
| Coal contract | Balance Sheet – Regulatory assets (current) | | | (1.2 | ) |
| Coal contract | Balance Sheet – Regulatory liabilities (long-term) | | | 3.7 | |
| (Millions) | Financial Statement Presentation | | 2009 | |
| Commodity contracts | Balance Sheet – Regulatory assets (current) | | $ | 122.5 | |
| Commodity contracts | Balance Sheet – Regulatory assets (long-term) | | | 7.3 | |
| Commodity contracts | Balance Sheet – Regulatory liabilities (current) | | | (1.0 | ) |
| Commodity contracts | Balance Sheet – Regulatory liabilities (long-term) | | | - | |
| Commodity contracts | Income Statement – Utility cost of fuel, natural gas, and purchased power | | | 0.1 | |
The utilities had the following notional volumes of outstanding non-hedge derivative contracts:
| | | December 31, 2010 | | | December 31, 2009 | |
| | | Purchases | | | Other Transactions | | | Purchases | | | Other Transactions | |
| Natural gas (millions of therms) | | | 979.9 | | | | N/A | | | | 833.2 | | | | N/A | |
| FTRs (millions of kilowatt-hours) | | | N/A | | | | 5,882.5 | | | | N/A | | | | 4,546.6 | |
| Petroleum products (barrels) | | | 71,827.0 | | | | N/A | | | | 42,823.0 | | | | N/A | |
| Coal contract (millions of tons) | | | 4.9 | | | | N/A | | | | N/A | | | | N/A | |
Cash Flow Hedges
PGL uses natural gas contracts designated as cash flow hedges to hedge changes in the price of natural gas used to support operations. The natural gas used to support operations is not a component of the natural gas recovered from customers on a one-for-one basis. These contracts extend through January 2012. PGL had the following notional volumes of outstanding contracts that were designated as cash flow hedges:
| | | Purchases | |
| | | December 31, 2010 | | | December 31, 2009 | |
| Natural gas (millions of therms) | | | 5.4 | | | | 9.6 | |
Changes in the fair values of the effective portions of these contracts are included in OCI, net of taxes. Amounts recorded in OCI related to these cash flow hedges will be recognized in earnings when the hedged transactions occur, or if it is probable that the hedged transaction will not occur. The tables below show the amounts related to cash flow hedges recorded in OCI and in earnings.
| Unrealized Loss Recognized in OCI on Derivative Instruments (Effective Portion) | |
| (Millions) | | 2010 | | | 2009 | |
| Natural gas contracts | | $ | (1.6 | ) | | $ | (1.4 | ) |
| Loss Reclassified from Accumulated OCI into Income (Effective Portion) | |
| (Millions) | Income Statement Presentation | | 2010 | | | 2009 | |
| Settled natural gas contracts | Operating and maintenance expense | | $ | (0.9 | ) | | $ | (2.6 | ) |
The amount reclassified from accumulated OCI into earnings as a result of the discontinuance of cash flow hedge accounting related to these natural gas contracts was not significant during 2010 and 2009, and was a pre-tax loss of $2.7 million during 2008. Cash flow hedge ineffectiveness related to these natural gas contracts was not significant during 2010, 2009 and 2008. When testing for effectiveness, no portion of these derivative instruments was excluded. In the next 12 months, an insignificant pre-tax loss is expected to be recognized in earnings as the hedged transactions occur.
Nonregulated Segments
Non-Hedge Derivatives
Integrys Energy Group's nonregulated segments enter into derivative contracts such as futures, forwards, options, and swaps that are not designated as accounting hedges under GAAP. These contracts are used to manage commodity price risk associated with customer-related contracts.
The nonregulated segments had the following notional volumes of outstanding non-hedge derivative contracts:
| | | December 31, 2010 | | | December 31, 2009 | |
| (Millions) | | Purchases | | | Sales | | | Other Transactions | | | Purchases | | | Sales | | | Other Transactions | |
| Commodity contracts | | | | | | | | | | | | | | | | | | |
Natural gas (therms) | | | 940.6 | | | | 1,048.4 | | | | N/A | | | | 2,990.4 | | | | 2,917.1 | | | | N/A | |
Electric (kilowatt-hours) | | | 22,149.4 | | | | 19,707.0 | | | | N/A | | | | 132,200.4 | | | | 125,983.1 | | | | N/A | |
| Interest rate swaps | | | N/A | | | | N/A | | | $ | - | | | | N/A | | | | N/A | | | $ | 219.2 | |
| Foreign exchange contracts | | $ | 15.5 | | | $ | 15.5 | | | | N/A | | | $ | 35.1 | | | $ | 35.1 | | | | N/A | |
Gains (losses) related to non-hedge derivatives are recognized currently in earnings, as shown in the tables below.
| (Millions) | Income Statement Presentation | | 2010 | |
| Natural gas contracts | Nonregulated revenue | | $ | 30.9 | |
| Natural gas contracts | Nonregulated revenue (reclassified from accumulated OCI) | | | (1.6 | ) * |
| Electric contracts | Nonregulated revenue | | | (92.7 | ) |
| Electric contracts | Nonregulated revenue (reclassified from accumulated OCI) | | | (3.7 | ) * |
| Interest rate swaps | Interest expense | | | 0.4 | |
| Total | | | $ | (66.7 | ) |
| * | Represents amounts reclassified from accumulated OCI related to cash flow hedges that were dedesignated and retained in accumulated OCI in the current and/or prior periods. |
| (Millions) | Income Statement Presentation | | 2009 | |
| Commodity contracts | Nonregulated revenue | | $ | (5.1 | ) |
| Commodity contracts | Nonregulated revenue (reclassified from accumulated OCI) | | | (3.2 | ) * |
| Interest rate swaps | Interest expense | | | (1.7 | ) |
| Foreign exchange contracts | Nonregulated revenue | | | (1.8 | ) |
| Total | | | $ | (11.8 | ) |
| * | Represents amounts reclassified from accumulated OCI related to cash flow hedges that were dedesignated and retained in accumulated OCI in the current and/or prior periods. |
Fair Value Hedges
At PEC, 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 PEC Series A 6.9% notes due January 15, 2011. The interest rate swap and related debt 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.
| (Millions) | Income Statement Presentation | | 2010 | | | 2009 | |
| Interest rate swap | Interest expense | | $ | (1.7 | ) | | $ | (0.6 | ) |
| Debt hedged by swap | Interest expense | | | 1.7 | | | | 0.6 | |
| Total | | | $ | - | | | $ | - | |
Fair value hedge ineffectiveness recorded in interest expense on the Consolidated Statements of Income was not significant in 2010, 2009, and 2008. No amounts were excluded from effectiveness testing related to the interest rate swap during 2010, 2009, and 2008.
During the years ended December 31, 2010 and 2009, Integrys Energy Services did not have any commodity derivative contracts designated as fair value hedges. During the year ended December 31, 2008, Integrys Energy Services had commodity derivative contracts designated as fair value hedges to mitigate the risk of changes in the price of natural gas held in storage. Fair value hedge ineffectiveness recorded in nonregulated revenue on the Consolidated Statements of Income was not significant in 2008. Changes in the difference between the spot and forward prices of natural gas were excluded from the assessment of hedge effectiveness and reported directly in nonregulated revenue. The amount excluded was a pre-tax gain of $5.5 million during 2008.
Cash Flow Hedges
Natural gas futures, forwards, and swaps that are designated as cash flow hedges extend through December 2013, while electric futures, forwards, and swaps designated as cash flow hedges extend through May 2017. These contracts are used to mitigate the risk of cash flow variability associated with future purchases and sales of natural gas and electricity. In the second quarter of 2010, Integrys Energy Group entered into two interest rate swaps designated as cash flow hedges to hedge the variability in forecasted interest payments associated with the first $100 million of a planned debt issuance in the fourth quarter of 2010. In November 2010, both swaps were terminated in conjunction with the issuance
of the $250.0 million Series 4.170% senior notes due November 2020. Amounts remaining in accumulated OCI are being reclassified to interest expense over a ten-year period beginning in November 2010 to correspond with the ten years of interest expense on the related debt.
The nonregulated segments had the following notional volumes of outstanding contracts that were designated as cash flow hedges:
| | | December 31, 2010 | | | December 31, 2009 | |
| (Millions) | | Purchases | | | Sales | | | Other Transactions | | | Purchases | | | Sales | | | Other Transactions | |
| Commodity contracts | | | | | | | | | | | | | | | | | | |
| Natural gas (therms) | | | 265.6 | | | | - | | | | N/A | | | | 5.9 | | | | 8.6 | | | | N/A | |
| Electric (kilowatt-hours) | | | 11,569.0 | | | | 29.8 | | | | N/A | | | | 7,116.2 | | | | - | | | | N/A | |
| Interest rate swaps | | | N/A | | | | N/A | | | $ | - | | | | N/A | | | | N/A | | | $ | 65.6 | * |
| * | Notional amount of two interest rate swaps designated as cash flow hedges to hedge the variability in interest payments on an unsecured term loan through June 2010. These interest rate swaps settled in the second quarter of 2010. |
Changes in the fair values of the effective portions of contracts designated as cash flow hedges are included in OCI, net of taxes. Amounts recorded in OCI related to cash flow hedges will be recognized in earnings when the hedged transactions occur, or when it is probable that the hedged transaction will not occur. The tables below show the amounts related to cash flow hedges recorded in OCI and in earnings.
| Unrealized Loss Recognized in OCI on Derivative Instruments (Effective Portion) | |
| (Millions) | | 2010 | |
| Natural gas contracts | | $ | (15.2 | ) |
| Electric contracts | | | (13.6 | ) |
| Interest rate swaps | | | (6.0 | ) |
| Total | | $ | (34.8 | ) |
| Unrealized Gain (Loss) Recognized in OCI on Derivative Instruments (Effective Portion) | |
| (Millions) | | 2009 | |
| Commodity contracts | | $ | (60.0 | ) |
| Interest rate swaps | | | 3.2 | |
| Total | | $ | (56.8 | ) |
| Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | |
| (Millions) | Income Statement Presentation | | 2010 | |
| Settled/Realized | | | | |
Natural gas contracts | Nonregulated revenue | | $ | (16.4 | ) |
Electric contracts | Nonregulated revenue | | | (21.6 | ) |
Interest rate swaps | Interest expense | | | 0.2 | |
| Hedge Designation Discontinued | | | | | |
Natural gas contracts | Nonregulated revenue | | | 0.2 | |
Electric contracts | Nonregulated revenue | | | (9.9 | ) |
| Total | | | $ | (47.5 | ) |
| Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | |
| (Millions) | Income Statement Presentation | | 2009 | |
| Settled/Realized | | | | |
Commodity contracts | Nonregulated revenue | | $ | (107.3 | ) |
Interest rate swaps | Interest expense | | | 1.2 | |
| Hedge Designation Discontinued | | | | | |
Commodity contracts | Nonregulated revenue | | | 2.7 | |
| Total | | | $ | (103.4 | ) |
| Loss Recognized in Income on Derivative Instruments (Ineffective Portion and Amount Excluded from Effectiveness Testing) | |
| (Millions) | Income Statement Presentation | | 2010 | |
| Natural gas contracts | Nonregulated revenue | | $ | (1.1 | ) |
| Electric contracts | Nonregulated revenue | | | (0.5 | ) |
| Total | | | $ | (1.6 | ) |
| Loss Recognized in Income on Derivative Instruments (Ineffective Portion and Amount Excluded from Effectiveness Testing) | |
| (Millions) | Income Statement Presentation | | 2009 | |
| Commodity contracts | Nonregulated revenue | | $ | (1.1 | ) |
In the next 12 months, subject to changes in market prices of natural gas and electricity, pre-tax losses of $8.0 million and $7.9 million related to cash flow hedges of natural gas contracts and electric contracts, respectively, are expected to be recognized in earnings as the hedged transactions occur. This amount is expected to be substantially offset by the settlement of the related nonderivative hedged contracts.
NOTE 3--RESTRUCTURING EXPENSE
Reductions in Workforce
In an effort to permanently remove costs from its operations, Integrys Energy Group developed a plan at the end of 2009 that included reductions in its workforce. In connection with this plan, employee-related and consulting costs were included in the restructuring expense line item on the Consolidated Statements of Income. The restructuring costs were distributed across Integrys Energy Group's segments as follows:
| (Millions) | | 2010 | | | 2009 | |
| Electric utility | | $ | (0.3 | ) | | $ | 8.6 | |
| Natural gas utility | | | (0.2 | ) | | | 6.9 | |
| Integrys Energy Services | | | - | | | | 1.7 | |
| Holding company and other | | | 0.1 | | | | 0.8 | |
| Total restructuring expense | | $ | (0.4 | ) | | $ | 18.0 | |
The following table summarizes the activity related to these restructuring costs:
| (Millions) | | 2010 | | | 2009 | |
| Accrued restructuring costs at beginning of period | | $ | 18.0 | | | $ | - | |
| Add: Adjustments to accrual during the period | | | (0.1 | ) * | | | 18.0 | |
| Deduct: Cash payments | | | 17.7 | | | | - | |
| Accrued restructuring costs at end of period | | $ | 0.2 | | | $ | 18.0 | |
| * | Restructuring costs of $0.3 million were billed to certain companies in accordance with provisions in the operating agreements with these companies that allow Integrys Energy Group to recover a portion of its administrative and general expenses. |
Integrys Energy Services Strategy Change
As part of Integrys Energy Group's decision to reposition its nonregulated energy services business to focus on selected retail markets in the northeast quadrant of the United States and investments in energy assets with renewable attributes, the following restructuring costs were expensed:
| (Millions) | | 2010 | | | 2009 | |
| Employee-related costs | | $ | 1.1 | | | $ | 10.1 | |
| Professional fees | | | 6.4 | | | | 9.2 | |
| Software write-offs and accelerated depreciation | | | 0.4 | | | | 5.9 | |
| Miscellaneous | | | 0.4 | | | | 0.3 | |
| Total restructuring expense | | $ | 8.3 | | | $ | 25.5 | |
All of the above costs were related to the Integrys Energy Services segment and were included in the restructuring expense line item on the Consolidated Statements of Income.
The following table summarizes the activity related to employee-related restructuring expense:
| (Millions) | | 2010 | | | 2009 | |
| Accrued employee-related costs at beginning of period | | $ | 8.2 | | | $ | - | |
| Add: Employee-related costs expensed | | | 1.1 | | | | 10.1 | |
| Deduct: Cash payments | | | 9.0 | | | | 1.9 | |
| Accrued employee-related costs at end of period | | $ | 0.3 | | | $ | 8.2 | |
Integrys Energy Group expects to recognize an insignificant amount of additional employee-related restructuring expense related to the Integrys Energy Services strategy change in the first half of 2011.
NOTE 4--DISPOSITIONS
Integrys Energy Services Strategy Change
As part of Integrys Energy Group's decision to reposition its nonregulated energy services business to focus on selected retail markets in the northeast quadrant of the United States and investments in energy assets with renewable attributes, Integrys Energy Services completed the following sales.
Sale of Integrys Energy Services of Texas, LP
In June 2010, Integrys Energy Services sold its Texas retail electric marketing business. The pre-tax gain on the sale of Integrys Energy Services of Texas, LP was $25.5 million and was reported as a component of net loss on Integrys Energy Services' dispositions related to strategy change in the Consolidated Statements of Income.
The following table shows the carrying values of the major classes of assets and liabilities included in the sale at the closing date:
| (Millions) | | | |
| | | | |
| Current assets from risk management activities | | $ | 14.0 | |
| Other current assets | | | 2.2 | |
| Long-term assets from risk management activities | | | 13.8 | |
| Other long-term assets | | | 1.9 | |
| Total assets | | $ | 31.9 | |
| | | | | |
| Current liabilities from risk management activities | | $ | 35.2 | |
| Long-term liabilities from risk management activities | | | 27.3 | |
| Total liabilities | | $ | 62.5 | |
In addition to the above recognized assets and liabilities, commodity contracts not accounted for as derivative instruments were also transferred to the buyer.
Sale of Canadian Natural Gas and Wholesale Electric Marketing and Trading Portfolio
In September 2009, Integrys Energy Services of Canada, a subsidiary of Integrys Energy Services, sold nearly all of its Canadian natural gas and electric power contract portfolio. In a separate transaction, Integrys Energy Services of Canada sold a 2 billion cubic foot (bcf) natural gas storage contract. With these two transactions, Integrys Energy Services exited the majority of its electric and natural gas marketing business in Canada.
The following table shows the carrying values of the major classes of assets and liabilities included in the transactions at the closing dates.
| (Millions) | | | |
| | | | |
| Inventories | | $ | 5.3 | |
| Current assets from risk management activities | | | 134.7 | |
| Long-term assets from risk management activities | | | 48.6 | |
| Total assets | | $ | 188.6 | |
| | | | | |
| Current liabilities from risk management activities | | $ | 119.8 | |
| Long-term liabilities from risk management activities | | | 32.3 | |
| Total liabilities | | $ | 152.1 | |
In conjunction with the first transaction, Integrys Energy Services entered into derivative contracts with the buyer to reestablish the economic hedges for the retained United States retail business, at the same prices and other terms originally executed through Integrys Energy Services’ Canadian natural gas and electric power portfolio. The execution of these third-party derivative contracts resulted in assets and liabilities from risk management activities as follows at the closing date:
| (Millions) | | | |
| | | | |
| Current assets from risk management activities | | $ | 21.8 | |
| Long-term assets from risk management activities | | | 8.8 | |
| Total assets | | $ | 30.6 | |
| | | | | |
| Current liabilities from risk management activities | | $ | 14.2 | |
| Long-term liabilities from risk management activities | | | 6.3 | |
| Total liabilities | | $ | 20.5 | |
In May 2010, Integrys Energy Services completed the sale of its remaining Canadian wholesale electric marketing and trading portfolio. The following table shows the carrying values of the major classes of assets and liabilities included in the sale at the May 2010 closing date:
| (Millions) | | | |
| | | | |
| Current assets from risk management activities | | $ | 13.8 | |
| Long-term assets from risk management activities | | | 10.5 | |
| Total assets | | $ | 24.3 | |
| | | | | |
| Current liabilities from risk management activities | | $ | 15.2 | |
| Long-term liabilities from risk management activities | | | 9.5 | |
| Total liabilities | | $ | 24.7 | |
The pre-tax losses on the sales of the Canadian natural gas and wholesale electric marketing and trading portfolio were $0.4 million in both 2010 and 2009 and were reported as a component of net loss on
Integrys Energy Services' dispositions related to strategy change in the Consolidated Statements of Income.
Sale of Renewable Energy Certificates Portfolio
In March 2010, Integrys Energy Services sold its environmental markets business, which consisted of a portfolio of long-term renewable energy certificate contracts with generators, wholesalers, municipalities, cooperatives, and large industrial companies. The pre-tax gain on the sale of the renewable energy certificate contracts was $2.8 million and was reported as a component of net loss on Integrys Energy Services' dispositions related to strategy change in the Consolidated Statements of Income.
Sale of United States Wholesale Electric Marketing and Trading Business
In March 2010, Integrys Energy Services closed on the sale of substantially all of its United States wholesale electric marketing and trading business.
The following table shows the carrying values of the major classes of assets and liabilities included in the sale at the closing date:
| (Millions) | | | |
| | | | |
| Current assets from risk management activities | | $ | 1,375.5 | |
| Long-term assets from risk management activities | | | 683.3 | |
| Total assets | | $ | 2,058.8 | |
| | | | | |
| Current liabilities from risk management activities | | $ | 1,389.8 | |
| Long-term liabilities from risk management activities | | | 654.3 | |
| Total liabilities | | $ | 2,044.1 | |
In addition to the above recognized assets and liabilities, commodity contracts not accounted for as derivative instruments were also transferred to the buyer.
In conjunction with the sale, Integrys Energy Services entered into derivative contracts with the buyer to reestablish the economic hedges for the retained United States retail electric business, with the same prices and terms originally executed through Integrys Energy Services' United States wholesale electric marketing and trading business. For a two-year period following the closing, Integrys Energy Services will retain counterparty default risk with approximately 50% of the counterparties to the commodity contracts novated. The fair value of the counterparty payment default risk at the date of the sale was $0.8 million and was reported as a component of other long-term liabilities. As of December 31, 2010, the carrying value of the default risk decreased to $0.3 million, resulting in a $0.5 million pre-tax positive impact on net income.
On February 1, 2010, Integrys Energy Services transferred substantially all of the market risk associated with this business by entering into trades with the buyer that mirrored Integrys Energy Services' underlying wholesale electric contracts. On March 31, 2010, Integrys Energy Services transferred title to the majority of the underlying commodity contracts, upon which time the corresponding mirror transactions terminated. As of December 31, 2010, approximately 95% of the commodity contracts had been novated, and the corresponding mirror transactions had been terminated. The remaining underlying commodity contracts that had not been novated as of December 31, 2010 will be settled through the normal course of business, at which time the corresponding mirror transactions will terminate.
The following table shows the carrying values of the remaining underlying commodity contracts that had not been novated at December 31, 2010:
| (Millions) | | | |
| | | | |
| Current assets from risk management activities | | $ | 22.3 | |
| Current liabilities from risk management activities | | | 7.9 | |
The following table shows the carrying values of the remaining mirror transactions associated with the underlying commodity contracts referenced above that had not been novated at December 31, 2010:
| (Millions) | | | |
| | | | |
| Current assets from risk management activities | | $ | 7.9 | |
| Current liabilities from risk management activities | | | 22.3 | |
Integrys Energy Services closed on the sale of its only remaining significant wholesale electric commodity contract with another buyer in March 2010.
The total of the pre-tax net loss on the sale of the United States wholesale electric marketing and trading business and the remaining commodity contract, net of the gain resulting from the fair value adjustment, was $55.7 million for 2010 and was reported as a component of net loss on Integrys Energy Services' dispositions related to strategy change in the Consolidated Statements of Income.
Sale of Generation Businesses in New Brunswick, Canada and Northern Maine, and Associated Retail Electric Contracts
In January 2010, Integrys Energy Services closed on the sale of two of its power generation businesses, which owned generation assets in New Brunswick, Canada and Northern Maine, and subsequently closed on the sale of the associated retail electric contracts and standard offer service contracts in Northern Maine in February 2010. The proceeds from the sale of the generation companies and associated retail electric contracts were $38.5 million. The pre-tax gain on the sales was $15.7 million for 2010 and was reported as a component of net loss on Integrys Energy Services' dispositions related to strategy change in the Consolidated Statements of Income.
The carrying values of the major classes of assets and liabilities included in the sales as of the closing dates and classified as held for sale on the Consolidated Balance Sheets at December 31, 2009, were as follows:
| (Millions) | | As of the Closing Dates in 2010 | | | December 31, 2009 | |
| | | | | | | |
| Inventories | | $ | 0.1 | | | $ | 0.1 | |
| Property, plant, and equipment, net | | | 25.1 | | | | 25.1 | |
| Other long-term assets | | | 1.3 | | | | 1.3 | |
| Total assets | | $ | 26.5 | | | $ | 26.5 | |
| | | | | | | | | |
| Other current liabilities | | $ | 0.1 | | | $ | - | |
| Asset retirement obligations | | | 0.3 | | | | 0.3 | |
| Total liabilities | | $ | 0.4 | | | $ | 0.3 | |
In conjunction with the sale, Integrys Energy Services entered into derivative contracts with the buyer of the Northern Maine retail electric sales contracts to offset the retained economic hedges associated with the customer contracts sold.
Sale of United States Wholesale Natural Gas Marketing and Trading Business and Other Wholesale Natural Gas Storage Contracts
In October 2009, Integrys Energy Services entered into definitive agreements to sell the majority of its United States wholesale natural gas marketing and trading business in a two-part transaction. In December 2009, Integrys Energy Services closed the first part of the transaction by selling substantially all of its United States wholesale natural gas marketing and trading business. The second part of the transaction included the sale of its remaining natural gas storage and related transportation contracts through multiple transactions which closed during the first half of 2010. The carrying value of inventories included in the 2010 sales was $1.8 million as of the closing date.
The pre-tax losses on the sale of the United States wholesale natural gas marketing and trading business and natural gas storage and related transportation contracts as of 2010 and 2009 was $2.0 million and $28.5 million, respectively, and were reported as a component of net loss on Integrys Energy Services' dispositions related to strategy change in the Consolidated Statements of Income.
Discontinued Operations Resulting from Integrys Energy Services’ Strategy Change
Energy Management Consulting Business
During 2010, Integrys Energy Services recorded a $0.2 million after-tax gain in discontinued operations when contingent payments were earned related to the sale of its energy management consulting business.
During 2009, Integrys Energy Services completed the sale of its energy management consulting business and received proceeds of $4.7 million. This business provided consulting services relating to long-term strategies for managing energy costs for its customers. The historical results of this business were not significant. The gain on the sale of this business reported in discontinued operations during the third quarter of 2009 was $3.9 million ($2.4 million after tax).
Other Discontinued Operations
WPS Niagara Generation, LLC
During 2009, Integrys Energy Services recorded a $0.4 million after-tax gain in discontinued operations related to a refund received in connection with the overpayment for auxiliary power service in prior years.
During 2008, Integrys Energy Services recorded a $0.1 million after-tax gain in discontinued operations related to amortization of an environmental indemnification guarantee included as part of the 2007 sale agreement of WPS Niagara Generation.
Stoneman
During 2008, Integrys Energy Services sold its subsidiary Mid-American Power, LLC, which owned the Stoneman generation facility, located in Wisconsin. The historical financial results of this business were not significant. In the fourth quarter of 2008, Integrys Energy Services recognized a $6.3 million ($3.8 million after tax) gain on the sale of this business in discontinued operations when a contingent payment was earned.
PEP
In 2008, $0.8 million of tax adjustments related to the sale of PEP in 2007 was recorded as income from discontinued operations.
NOTE 5--PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at December 31 consisted of the following utility, nonutility, and nonregulated assets:
| (Millions) | | 2010 | | | 2009 | |
| Electric utility | | $ | 3,095.5 | | | $ | 3,066.7 | |
| Natural gas utility | | | 4,506.3 | | | | 4,338.3 | |
| Total utility plant | | | 7,601.8 | | | | 7,405.0 | |
| Less: Accumulated depreciation | | | 2,794.2 | | | | 2,726.0 | |
| Net | | | 4,807.6 | | | | 4,679.0 | |
| Construction work in progress | | | 39.5 | | | | 40.7 | |
| Net utility plant | | | 4,847.1 | | | | 4,719.7 | |
| | | | | | | | | |
| Nonutility plant – utility segments | | | 143.9 | | | | 100.7 | |
| Less: Accumulated depreciation | | | 70.2 | | | | 59.1 | |
| Net | | | 73.7 | | | | 41.6 | |
| Construction work in progress | | | 1.6 | | | | 34.6 | |
| Net nonutility plant – utility segments | | | 75.3 | | | | 76.2 | |
| | | | | | | | | |
| Electric nonregulated | | | 87.5 | | | | 163.2 | |
| Natural gas nonregulated | | | 18.0 | | | | 18.1 | |
| Other nonregulated | | | 20.5 | | | | 23.5 | |
| Total nonregulated property, plant, and equipment | | | 126.0 | | | | 204.8 | |
| Less: Accumulated depreciation | | | 35.8 | | | | 61.8 | |
| Net | | | 90.2 | | | | 143.0 | |
| Construction work in progress | | | 0.8 | | | | 2.9 | |
| Net nonregulated property, plant, and equipment | | | 91.0 | | | | 145.9 | |
| | | | | | | | | |
| Total property, plant, and equipment | | $ | 5,013.4 | | | $ | 4,941.8 | |
Integrys Energy Group evaluates property, plant, and equipment for impairment whenever indicators of impairment exist. During the third quarter of 2010, Integrys Energy Services recorded a pre-tax noncash impairment loss of $43.2 million related to its three natural gas-fired generation plants (Beaver Falls Generation, Syracuse Generation, and Combined Locks Energy Center). The impairment charge resulted from lower estimated future cash flows for these plants and was primarily driven by reduced expectations for forward capacity prices. The impairment charge is shown under impairment losses in property, plant, and equipment in the Consolidated Statements of Income.
The fair value of the natural gas plants was determined primarily using the income approach, which was based on discounted cash flows that were derived from internal forecasts and economic expectations. The key assumptions used to determine fair value under the income approach over the cash flow period were forward energy and capacity curves. Other assumptions included forecasted operating expenses, forecasted capital additions, anticipated working capital requirements, and the discount rate. The discount rate represents the estimated cost of capital appropriate for the nonregulated generation plants. The discount rate used for the impairment analysis was 10%.
NOTE 6--JOINTLY OWNED UTILITY FACILITIES
WPS holds a joint ownership interest in certain electric generating facilities. WPS is entitled to its share of generating capability and output of each facility equal to its respective ownership interest. WPS also pays its ownership share of additional construction costs, fuel inventory purchases, and operating expenses, unless specific agreements have been executed to limit its maximum exposure to additional costs. WPS's share of significant jointly owned electric generating facilities as of December 31, 2010, was as follows:
| (Millions, except for percentages and megawatts) | | Weston 4 | | | West Marinette Unit No. 33 * | | | Columbia Energy Center Units 1 and 2 | | | Edgewater Unit No. 4 | |
| Ownership | | | 70.0 | % | | | 68.0 | % | | | 31.8 | % | | | 31.8 | % |
| WPS's share of rated capacity (megawatts) | | | 374.5 | | | | 65.8 | | | | 335.2 | | | | 105.0 | |
| Utility plant in service | | $ | 614.7 | | | $ | 18.3 | | | $ | 165.3 | | | $ | 38.5 | |
| Accumulated depreciation | | $ | 75.9 | | | $ | 10.2 | | | $ | 103.4 | | | $ | 24.4 | |
| In-service date | | | 2008 | | | | 1993 | | | 1975 and 1978 | | | | 1969 | |
| * | On February 1, 2011, the joint owner of this facility sold all of its ownership interest to WPS, making WPS the sole owner. |
WPS's share of direct expenses for these plants is recorded in operating expenses in the Consolidated Statements of Income. WPS has supplied its own financing for all jointly owned projects.
NOTE 7--REGULATORY ASSETS AND LIABILITIES
Integrys Energy Group's utility subsidiaries expect to recover their regulatory assets and incur future costs or refund their regulatory liabilities through rates charged to customers based on specific ratemaking decisions over periods specified by the regulators or over the normal operating period of the assets and liabilities to which they relate. Based on prior and current rate treatment for such costs, Integrys Energy Group believes it is probable that its utility subsidiaries will continue to recover from customers the regulatory assets described below.
The following regulatory assets and liabilities were reflected in Integrys Energy Group's Consolidated Balance Sheets as of December 31:
| (Millions) | | 2010 | | | 2009 | | | See Note | |
| | | | | | | | | | |
| Regulatory assets | | | | | | | | | |
Environmental remediation costs (net of insurance recoveries) (1) (2) | | $ | 653.0 | | | $ | 674.9 | | | | 15 | |
| Unrecognized pension and other postretirement benefit costs | | | 544.5 | | | | 570.2 | | | | 17 | |
Merger and acquisition related pension and other postretirement benefit costs (3) | | | 133.8 | | | | 35.3 | | | | | |
| Decoupling | | | 50.5 | | | | 28.9 | | | | 24 | |
| Asset retirement obligations | | | 47.6 | | | | 39.4 | | | | 13 | |
| Derivatives | | | 34.1 | | | | 32.3 | | | | 1 | (h) |
De Pere Energy Center (4) | | | 31.0 | | | | 33.4 | | | | | |
| Income tax related items | | | 28.1 | | | | 29.0 | | | | 14 | |
| Energy costs receivable through rate adjustments | | | 15.5 | | | | 12.3 | | | | 24 | |
Conservation program costs (5) | | | 15.3 | | | | 17.4 | | | | | |
Unamortized loss on reacquired debt (1) (6) | | | 14.6 | | | | 12.5 | | | | | |
Weston 3 lightning strike (1) (7) | | | 14.5 | | | | 18.1 | | | | | |
| Other | | | 30.5 | | | | 52.3 | | | | | |
| Total | | $ | 1,613.0 | | | $ | 1,556.0 | | | | | |
| Balance Sheet Presentation | | | | | | | | | | | | |
| Current | | $ | 117.9 | | | $ | 121.1 | | | | | |
| Long-term | | | 1,495.1 | | | | 1,434.9 | | | | | |
| Total | | $ | 1,613.0 | | | $ | 1,556.0 | | | | | |
| | | | | | | | | | | | | |
| Regulatory liabilities | | | | | | | | | | | | |
Removal costs (8) | | $ | 278.1 | | | $ | 246.6 | | | | | |
| Energy costs refundable through rate adjustments | | | 51.8 | | | | 79.6 | | | | 24 | |
| Unrecognized pension and other postretirement benefit costs | | | 20.0 | | | | 23.5 | | | | 17 | |
| Uncollectible expense | | | 8.3 | | | | 3.2 | | | | 24 | |
| Decoupling | | | 8.1 | | | | 1.4 | | | | 24 | |
EEP (5) | | | 7.2 | | | | 6.1 | | | | | |
| Derivatives | | | 6.0 | | | | 4.3 | | | | 1 | (h) |
| Other | | | 12.4 | | | | 13.3 | | | | | |
| Total | | $ | 391.9 | | | $ | 378.0 | | | | | |
| Balance Sheet Presentation | | | | | | | | | | | | |
| Current | | $ | 75.7 | | | $ | 100.4 | | | | | |
| Long-term | | | 316.2 | | | | 277.6 | | | | | |
| Total | | $ | 391.9 | | | $ | 378.0 | | | | | |
| (1) | Amounts related to the Weston 3 lightning strike, WPS environmental remediation, and unamortized loss on reacquired debt at PGL and NSG are not earning a return. The carrying costs of these regulatory assets are borne by Integrys Energy Group's shareholders. |
| (2) | As of December 31, 2010, Integrys Energy Group had not yet made cash expenditures for $643.9 million of these environmental remediation costs. |
| (3) | Composed of unrecognized benefit costs that existed prior to the PEC merger and the MERC and MGU acquisitions. |
| (4) | Prior to WPS purchasing the De Pere Energy Center, WPS had a long-term power purchase contract with the De Pere Energy Center that was accounted for as a capital lease. As a result of the purchase, the capital lease obligation was reversed and the difference between the capital lease asset and the purchase price was recorded as a regulatory asset. WPS is authorized recovery of this regulatory asset over a 20-year period. |
| (5) | Represents amounts recoverable from and/or refundable to customers related to programs designed to meet energy efficiency standards. |
| (6) | Amounts for PGL and NSG are recovered over the term of the replacement debt as authorized by the ICC. |
| (7) | In 2007, a lightning strike caused significant damage to the Weston 3 generating facility. The PSCW approved the deferral of the incremental fuel and purchased power expenses, as well as the non-fuel operating and maintenance expenditures incurred as a result of the outage that were not covered by insurance. WPS is authorized recovery of this regulatory asset over a six-year period. |
| (8) | Represents amounts collected from customers to cover the future removal of property, plant, and equipment. |
NOTE 8--INVESTMENTS IN AFFILIATES, AT EQUITY METHOD
Investments in corporate joint ventures and other companies accounted for under the equity method at December 31, 2010, and 2009 were as follows:
| (Millions) | | 2010 | | | 2009 | |
| ATC | | $ | 416.3 | | | $ | 395.9 | |
| WRPC | | | 8.1 | | | | 8.5 | |
| Other | | | 1.1 | | | | 1.4 | |
| Investments in affiliates, at equity method | | $ | 425.5 | | | $ | 405.8 | |
Investments in affiliates accounted for under the equity method are included in other long-term assets on the Consolidated Balance Sheets, and the equity income is recorded in miscellaneous income on the Consolidated Statements of Income. Integrys Energy Group is taxed on ATC's equity income, due to the tax flow-through nature of ATC's business structure. Accordingly, Integrys Energy Group's provision for income taxes includes taxes on ATC's equity income.
ATC
Integrys Energy Group’s electric transmission investment segment consists of WPS Investments LLC’s ownership interest in ATC, which was approximately 34% at December 31, 2010. 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 Integrys Energy Group's investment in ATC during the years ended December 31.
| (Millions) | | 2010 | | | 2009 | | | 2008 | |
| Balance at the beginning of period | | $ | 395.9 | | | $ | 346.9 | | | $ | 296.6 | |
| Add: equity in net income | | | 77.6 | | | | 75.3 | | | | 66.1 | |
| Add: capital contributions | | | 6.8 | | | | 34.1 | | | | 34.6 | |
| Less: dividends received | | | 64.0 | | | | 60.4 | | | | 50.4 | |
| Balance at the end of period | | $ | 416.3 | | | $ | 395.9 | | | $ | 346.9 | |
The regulated electric utilities provide construction and other services to, and receive network transmission services from, ATC. The related party transactions recorded by the regulated electric utilities in the years ended December 31 were as follows:
| (Millions) | | 2010 | | | 2009 | | | 2008 | |
| Total charges to ATC for services and construction | | $ | 14.0 | | | $ | 10.1 | | | $ | 12.8 | |
| Total costs for network transmission service provided by ATC | | | 103.0 | | | | 90.7 | | | | 87.8 | |
Net amounts received from (advanced to) ATC for transmission interconnection | | | - | | | | - | | | | 82.3 | |
WRPC
WPS owns 50% of the stock of WRPC, which operates two hydroelectric plants and an oil-fired combustion turbine. Two-thirds of the energy output of the hydroelectric plants is sold to WPS, and the remaining one-third is sold to Wisconsin Power and Light. The electric power from the combustion turbine is sold in equal parts to WPS and Wisconsin Power and Light.
WPS provides services to WRPC, purchases energy from WRPC, and receives net proceeds from sales of energy into the MISO market from WRPC. The related party transactions recorded and net proceeds and dividends received during the years ended December 31 were as follows:
| (Millions) | | 2010 | | | 2009 | | | 2008 | |
| Revenues from services provided to WRPC | | $ | 0.6 | | | $ | 0.6 | | | $ | 0.8 | |
| Purchases of energy from WRPC | | | 4.7 | | | | 4.6 | | | | 4.7 | |
| Net proceeds from WRPC sales of energy to MISO | | | 4.5 | | | | 2.6 | | | | 5.8 | |
| Dividends received from WRPC | | | 1.4 | | | | 0.9 | | | | 3.5 | |
Of Integrys Energy Group's equity in net income disclosed below, $1.0 million, $1.0 million, and $2.2 million is the pre-tax income related to WPS's investment in WRPC in 2010, 2009, and 2008, respectively.
Financial Data
Combined financial data of Integrys Energy Group's significant equity method investments, ATC and WRPC, is included in the table below.
| (Millions) | | 2010 | | | 2009 | | | 2008 | |
| Income statement data | | | | | | | | | |
| Revenues | | $ | 564.1 | | | $ | 528.7 | | | $ | 474.0 | |
| Operating expenses | | | 256.8 | | | | 235.7 | | | | 214.6 | |
| Other expense | | | 85.7 | | | | 77.7 | | | | 67.1 | |
| Net income | | $ | 221.6 | | | $ | 215.3 | | | $ | 192.3 | |
| | | | | | | | | | | | | |
| Integrys Energy Group's equity in net income | | $ | 78.6 | | | $ | 76.3 | | | $ | 68.3 | |
| | | | | | | | | | | | | |
| Balance sheet data | | | | | | | | | | | | |
| Current assets | | $ | 62.5 | | | $ | 54.0 | | | $ | 52.5 | |
| Noncurrent assets | | | 2,906.2 | | | | 2,785.5 | | | | 2,494.8 | |
| Total assets | | $ | 2,968.7 | | | $ | 2,839.5 | | | $ | 2,547.3 | |
| | | | | | | | | | | | | |
| Current liabilities | | $ | 429.0 | | | $ | 286.3 | | | $ | 252.4 | |
| Long-term debt | | | 1,175.0 | | | | 1,259.6 | | | | 1,109.4 | |
| Other noncurrent liabilities | | | 88.5 | | | | 80.1 | | | | 119.3 | |
| Shareholders' equity | | | 1,276.2 | | | | 1,213.5 | | | | 1,066.2 | |
| Total liabilities and shareholders' equity | | $ | 2,968.7 | | | $ | 2,839.5 | | | $ | 2,547.3 | |
NOTE 9--GOODWILL AND OTHER INTANGIBLE ASSETS
Integrys Energy Group had no changes to the carrying amount of goodwill for the year ended
December 31, 2010. Annual impairment tests were completed at all of Integrys Energy Group’s reporting units that carry a goodwill balance in the second quarter of 2010, and no impairments resulted from these tests.
The following table shows goodwill by business segment as of January 1, 2009:
| (Millions) | | Natural Gas Utility Segment | | | Integrys Energy Services | | | Total | |
| Gross goodwill balance | | $ | 933.5 | | | $ | 6.9 | | | $ | 940.4 | |
| Accumulated impairment loss | | | (6.5 | ) | | | - | | | | (6.5 | ) |
| Net goodwill balance | | $ | 927.0 | | | $ | 6.9 | | | $ | 933.9 | |
Integrys Energy Group had the following changes to the carrying amount of goodwill for the year ended December 31, 2009:
| (Millions) | | Natural Gas Utility Segment | | | Integrys Energy Services | | | Total | |
| Net goodwill recorded at December 31, 2008 | | $ | 927.0 | | | $ | 6.9 | | | $ | 933.9 | |
| Impairment loss | | | (291.1 | ) | | | - | | | | (291.1 | ) |
| Goodwill allocated to businesses sold | | | - | | | | (0.3 | ) | | | (0.3 | ) |
| Net goodwill recorded at December 31, 2009 | | $ | 635.9 | | | $ | 6.6 | | | $ | 642.5 | |
The following table shows goodwill by business segment as of December 31:
| | | 2010 | | | 2009 | |
(Millions) | | Natural Gas Utility Segment | | | Integrys Energy Services | | | Total | | | Natural Gas Utility Segment | | | Integrys Energy Services | | | Total | |
| Gross goodwill balance | | $ | 933.5 | | | $ | 6.6 | | | $ | 940.1 | | | $ | 933.5 | | | $ | 6.6 | | | $ | 940.1 | |
| Accumulated impairment loss | | | (297.6 | ) | | | - | | | | (297.6 | ) | | | (297.6 | ) | | | - | | | | (297.6 | ) |
| Net goodwill balance | | $ | 635.9 | | | $ | 6.6 | | | $ | 642.5 | | | $ | 635.9 | | | $ | 6.6 | | | $ | 642.5 | |
In the first quarter of 2009, the combination of the decline in equity markets as well as the increase in the expected weighted-average cost of capital triggered an interim goodwill impairment analysis. Based upon the results of this analysis, Integrys Energy Group recorded a noncash goodwill impairment loss of $291.1 million ($248.8 million after tax) in the first quarter of 2009, all within the natural gas utility segment. A combination of the income approach and the market approach were used to estimate the fair values of PGL, NSG, MERC, and MGU. The income approach was used to estimate the fair value of Integrys Energy Services. Key factors contributing to the impairment charge included disruptions in the global credit and equity markets and the resulting increase in the weighted-average cos t of capital used to value the natural gas utility operations, and the negative impact that the global decline in equity markets had on the valuation of natural gas distribution companies in general.
A goodwill impairment loss in the amount of $6.5 million, after tax, was recognized for NSG in the second quarter of 2008. The income approach was used to estimate the fair value of NSG at April 1, 2008. The goodwill impairment recognized for NSG was due to a decline in the estimated fair value of NSG, caused primarily by a decrease in forecasted results as compared to the forecast at the time of the acquisition. Worsening economic factors also contributed to the decline in fair value.
Identifiable intangible assets other than goodwill are included as a component of other current and long-term assets and other current and long-term liabilities within the Consolidated Balance Sheets as listed below.
| (Millions) | | December 31, 2010 | | | December 31, 2009 | |
| | | Gross Carrying Amount | | | Accumulated Amortization | | | Net | | | Gross Carrying Amount | | | Accumulated Amortization | | | Net | |
Amortized intangible assets (liabilities) | | | | | | | | | | | | | | | | | | |
Customer-related (1) | | $ | 32.6 | | | $ | (21.8 | ) | | $ | 10.8 | | | $ | 32.6 | | | $ | (18.3 | ) | | $ | 14.3 | |
Natural gas and electric contract assets (2) (3) | | | 57.1 | | | | (55.0 | ) | | | 2.1 | | | | 71.4 | | | | (60.5 | ) | | | 10.9 | |
Natural gas and electric contract liabilities (2) | | | (10.5 | ) | | | 10.5 | | | | - | | | | (10.5 | ) | | | 10.4 | | | | (0.1 | ) |
Renewable energy credits (4) | | | 2.5 | | | | - | | | | 2.5 | | | | 3.4 | | | | (2.1 | ) | | | 1.3 | |
Nonregulated easements (5) | | | 3.8 | | | | (0.4 | ) | | | 3.4 | | | | 3.6 | | | | (0.1 | ) | | | 3.5 | |
Emission allowances (6) | | | 1.9 | | | | (0.2 | ) | | | 1.7 | | | | 2.1 | | | | (0.2 | ) | | | 1.9 | |
| Other | | | 2.4 | | | | (0.4 | ) | | | 2.0 | | | | 2.5 | | | | (0.5 | ) | | | 2.0 | |
| Total | | $ | 89.8 | | | $ | (67.3 | ) | | $ | 22.5 | | | $ | 105.1 | | | $ | (71.3 | ) | | $ | 33.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Unamortized intangible assets | | | | | | | | | | | | | | | | | | | | | | | | |
MGU trade name | | | 5.2 | | | | - | | | | 5.2 | | | | 5.2 | | | | - | | | | 5.2 | |
| Total intangible assets | | $ | 95.0 | | | $ | (67.3 | ) | | $ | 27.7 | | | $ | 110.3 | | | $ | (71.3 | ) | | $ | 39.0 | |
| (1) | Includes customer relationship assets associated with both PEC's former nonregulated retail natural gas and electric operations and MERC's nonutility ServiceChoice business. The remaining weighted-average amortization period for customer-related intangible assets at December 31, 2010, was approximately 7 years. |
| (2) | Represents the fair value of certain PEC natural gas and electric customer contracts acquired in the February 2007 PEC merger that were not considered to be derivative instruments, as well as other electric customer contracts acquired in exchange for risk management assets. |
| (3) | Includes both short-term and long-term intangible assets related to customer contracts in the amount of $0.9 million and $1.2 million, respectively, at December 31, 2010, and $6.2 million and $4.7 million, respectively, at December 31, 2009. The remaining weighted-average amortization period for these intangible assets at December 31, 2010, was approximately 3 years. |
| (4) | Used at Integrys Energy Services to comply with state Renewable Portfolio Standards and to support customer commitments. |
| (5) | Relates to easements supporting a natural gas pipeline at Integrys Energy Services. The easements are amortized on a straight-line basis, with a remaining amortization period of approximately 13 years. |
| (6) | Emission allowances do not have a contractual term or expiration date. |
Intangible asset amortization expense was recorded as a component of depreciation and amortization expense in the Consolidated Statements of Income. This intangible asset amortization expense excludes amortization related to natural gas contracts, electric contracts, renewable energy credits, and emission allowances, which are recorded as a component of nonregulated cost of fuel, natural gas, and purchased power in the Consolidated Statements of Income. Amortization for the years ended December 31, 2010, 2009, and 2008, was $3.9 million, $6.3 million, and $7.9 million, respectively.
Amortization expense for the next five fiscal years is estimated to be:
| (Millions) | | | |
| For year ending December 31, 2011 | | $ | 3.3 | |
| For year ending December 31, 2012 | | | 2.4 | |
| For year ending December 31, 2013 | | | 1.6 | |
| For year ending December 31, 2014 | | | 1.4 | |
| For year ending December 31, 2015 | | | 1.3 | |
Amortization related to the natural gas and electric contract intangible assets and liabilities, renewable energy credits, and emission allowances for the years ended December 31, 2010, 2009, and 2008, was $4.9 million, $8.9 million, and $34.4 million, respectively.
Amortization expense related to these contracts for the next five fiscal years is estimated to be:
| (Millions) | | | |
| For year ending December 31, 2011 | | $ | 3.6 | |
| For year ending December 31, 2012 | | | 0.7 | |
| For year ending December 31, 2013 | | | 0.6 | |
| For year ending December 31, 2014 | | | 0.5 | |
| For year ending December 31, 2015 | | | 0.2 | |
NOTE 10--LEASES
Integrys Energy Group leases various property, plant, and equipment. Terms of the operating leases vary, but generally require Integrys Energy Group to pay property taxes, insurance premiums, and maintenance costs associated with the leased property. Many of Integrys Energy Group's leases contain one of the following options upon the end of the lease term: (a) purchase the property at the current fair market value or (b) exercise a renewal option, as set forth in the lease agreement. Rental expense attributable to operating leases was $15.2 million, $16.9 million, and $17.0 million in 2010, 2009 and 2008, respectively. Future minimum rental obligations under non-cancelable operating leases are payable as follows:
Year ending December 31 (Millions) | | | |
| 2011 | | $ | 9.8 | |
| 2012 | | | 8.9 | |
| 2013 | | | 8.8 | |
| 2014 | | | 4.9 | |
| 2015 | | | 2.9 | |
| Later years | | | 21.1 | |
| Total payments | | $ | 56.4 | |
NOTE 11--SHORT-TERM DEBT AND LINES OF CREDIT
Integrys Energy Group's short-term borrowings consist of sales of commercial paper, borrowings under revolving credit facilities, and short-term notes. Amounts shown are as of December 31:
| (Millions, except percentages) | | 2010 | | | 2009 | | | 2008 | |
| Commercial paper outstanding | | | - | | | $ | 212.1 | | | $ | 552.9 | |
| Average discount rate on outstanding commercial paper | | | - | | | | 0.52 | % | | | 4.78 | % |
| Borrowings outstanding under revolving credit facilities | | | - | | | | - | | | $ | 475.0 | |
Average interest rate on borrowings outstanding under revolving credit facilities | | | - | | | | - | | | | 2.41 | % |
| Short-term notes payable outstanding | | $ | 10.0 | | | $ | 10.0 | | | $ | 181.1 | |
| Average interest rate on short-term notes payable outstanding | | | 0.32 | % | | | 0.18 | % | | | 3.40 | % |
The table below presents Integrys Energy Group's average amount of short-term borrowings outstanding based on daily outstanding balances during the years ended December 31:
| (Millions) | | 2010 | | | 2009 | | | 2008 | |
| Average amount of commercial paper outstanding | | $ | 66.9 | | | $ | 193.8 | | | $ | 305.7 | |
Average amount of borrowings outstanding under revolving credit facilities | | | - | | | | 114.5 | | | | 166.8 | |
| Average amount of short-term notes payable outstanding | | | 10.0 | | | | 48.0 | | | | 34.3 | |
Integrys Energy Group manages its liquidity by maintaining adequate external financing commitments. The information in the table below relates to Integrys Energy Group's short-term debt, lines of credit, and remaining available capacity as of December 31:
| (Millions) | Maturity | | 2010 | | | 2009 | |
Revolving credit facility (Integrys Energy Group) (1) | 04/23/13 | | $ | 735.0 | | | $ | - | |
Revolving credit facility (Integrys Energy Group) (2) | 06/09/11 | | | 500.0 | | | | 500.0 | |
Revolving credit facility (Integrys Energy Group) (3) | 06/02/10 | | | - | | | | 500.0 | |
Revolving credit facility (Integrys Energy Group) (3) | 05/26/10 | | | - | | | | 425.0 | |
Revolving credit facility (Integrys Energy Group) (3) | 06/04/10 | | | - | | | | 35.0 | |
Revolving credit facility (WPS) (4) | 04/23/13 | | | 115.0 | | | | - | |
Revolving credit facility (WPS) (3) | 06/02/10 | | | - | | | | 115.0 | |
Revolving credit facility (PEC) (2) (5) | 06/13/11 | | | 400.0 | | | | 400.0 | |
Revolving credit facility (PGL) (6) | 04/23/13 | | | 250.0 | | | | - | |
Revolving credit facility (PGL) (3) | 07/12/10 | | | - | | | | 250.0 | |
Revolving short-term notes payable (WPS) (7) | 05/13/11 | | | 10.0 | | | | 10.0 | |
| | | | | | | | | | |
| Total short-term credit capacity | | | | 2,010.0 | | | | 2,235.0 | |
| | | | | | | | | | |
| Less: | | | | | | | | | |
| Letters of credit issued inside credit facilities | | | | 64.9 | | | | 130.4 | |
| Loans outstanding under credit agreements and notes payable | | | | 10.0 | | | | 10.0 | |
| Commercial paper outstanding | | | | - | | | | 212.1 | |
| | | | | | | | | | |
| Available capacity under existing agreements | | | $ | 1,935.1 | | | $ | 1,882.5 | |
| (1) | In April 2010, Integrys Energy Group entered into a new revolving credit agreement to provide support for its commercial paper borrowing program. |
| (2) | Provides support for Integrys Energy Group's commercial paper borrowing program. |
| (3) | These facilities were replaced with new revolving credit agreements in April 2010. Upon entering into the new agreements, the maturing facilities were terminated. |
| (4) | In April 2010, WPS entered into a new revolving credit agreement to provide support for its commercial paper borrowing program. |
| (5) | Borrowings under this agreement are guaranteed by Integrys Energy Group. |
| (6) | In April 2010, PGL entered into a new revolving credit agreement to provide support for its commercial paper borrowing program. |
| (7) | This Note is renewed every six months and is used for general corporate purposes. |
At December 31, 2010, Integrys Energy Group and its subsidiaries were in compliance with all financial covenants related to outstanding short-term debt. Integrys Energy Group's and certain subsidiaries' revolving credit agreements contain financial and other covenants, including but not limited to, a requirement to maintain a debt to total capitalization ratio not to exceed 65%, excluding non-recourse debt. Failure to meet these covenants beyond applicable grace periods could result in accelerated due dates and/or termination of the agreements.
NOTE 12--LONG-TERM DEBT
| | | | | | | | | | | | | |
| | | | | | | | | December 31 | |
| (Millions) | | | | | | | 2010 | | | 2009 | |
WPS First Mortgage Bonds (1) | | | | | | | | |
| | Series | | | Year Due | | | | | | | | |
| | | 7.125 | % | | | 2023 | | | | $ | 0.1 | | | $ | 0.1 | |
| | | | | | | | | | | | | | | | | |
WPS Senior Notes (1) | | | | | | | | | | | | | | |
| | Series | | | Year Due | | | | | | | | | | |
| | | 6.125 | % | | | 2011 | | | | | 150.0 | | | | 150.0 | |
| | | 4.875 | % | | | 2012 | | | | | 150.0 | | | | 150.0 | |
| | | 4.80 | % | | | 2013 | | | | | 125.0 | | | | 125.0 | |
| | | 3.95 | % | | | 2013 | | | | | 22.0 | | | | 22.0 | |
| | | 6.375 | % | | | 2015 | | | | | 125.0 | | | | 125.0 | |
| | | 5.65 | % | | | 2017 | | | | | 125.0 | | | | 125.0 | |
| | | 6.08 | % | | | 2028 | | | | | 50.0 | | | | 50.0 | |
| | | 5.55 | % | | | 2036 | | | | | 125.0 | | | | 125.0 | |
| | | | | | | | | | | | | | | | | |
UPPCO First Mortgage Bonds (2) | | | | | | | | | | |
| | Series | | | Year Due | | | | | | | | | | |
| | | 9.32 | % | | | 2021 | | | | | 9.4 | | | | 10.8 | |
| | | | | | | | | | | | | | | | | |
PEC Unsecured Senior Note (3) | | | | | | | | | |
| | Series | | | Year Due | | | | | | | | | | |
| | | A, 6.90 | % | | | 2011 | | | | | 325.0 | | | | 325.0 | |
| | Fair value hedge adjustment | | | | | 0.9 | | | | 2.6 | |
| | | | | | | | | | | | | | | | | |
PGL Fixed First and Refunding Mortgage Bonds (4) (5) | | | | | | | | |
| | Series | | | Year Due | | | | | | | | | | |
| | HH, 4.75% | | | | 2030 | | | | | - | | | | 50.0 | |
| | KK, 5.00% | | | | 2033 | | | | | 50.0 | | | | 50.0 | |
| | LL, 3.75% | | | | 2033 | | | | | - | | | | 50.0 | |
| | MM-2, 4.00% | | | | 2010 | | | | | - | | | | 50.0 | |
| | NN-2, 4.625% | | | | 2013 | | | | | 75.0 | | | | 75.0 | |
| | QQ, 4.875% | | | | 2038 | | Adjustable after November 1, 2018 | | | 75.0 | | | | 75.0 | |
| | RR, 4.30% | | | | 2035 | | Adjustable after June 1, 2016 | | | 50.0 | | | | 50.0 | |
| | SS, 7.00% | | | | 2013 | | | | | 45.0 | | | | 45.0 | |
| | TT, 8.00% | | | | 2018 | | | | | 5.0 | | | | 5.0 | |
| | UU, 4.63% | | | | 2019 | | | | | 75.0 | | | | 75.0 | |
| | VV, 2.125% | | | | 2030 | | Mandatory interest reset date on July 1, 2014 | | | 50.0 | | | | - | |
| | WW, 2.625% | | | | 2033 | | Mandatory interest reset date on August 1, 2015 | | | 50.0 | | | | - | |
| | | | | | | | | | | | | | | | | |
PGL Adjustable First and Refunding Mortgage Bonds (5) (6) | | | | | | | | |
| | Series | | | Year Due | | | | | | | | | | |
| | OO | | | | 2037 | | | | | 51.0 | | | | 51.0 | |
| | | | | | | | | | | | | | | | | |
NSG First Mortgage Bonds (7) | | | | | | | | | | |
| | Series | | | Year Due | | | | | 28.3 | | | | 28.5 | |
| | | M, 5.00 | % | | | 2028 | | | | | 40.0 | | | | 40.0 | |
| | | N-2, 4.625 | % | | | 2013 | | | | | 6.5 | | | | 6.5 | |
| | | O, 7.00 | % | | | 2013 | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Integrys Energy Group Unsecured Senior Notes (8) | | | | | | | | |
| | Series | | | Year Due | | | | | | | | | | |
| | | 5.375 | % | | | 2012 | | | | | 100.0 | | | | 100.0 | |
| | | 7.27 | % | | | 2014 | | | | | 100.0 | | | | 100.0 | |
| | | 8.00 | % | | | 2016 | | | | | 55.0 | | | | 55.0 | |
| | | 4.17 | % | | | 2020 | | | | | 250.0 | | | | - | |
| | | | | | | | | | | | | | | | | |
Integrys Energy Group Unsecured Junior Subordinated Notes (9) | | | | | | | | |
| | Series | | | Year Due | | | | | | | | | | |
| | | 6.11 | % | | | 2066 | | | | | 300.0 | | | | 300.0 | |
Unsecured term loan due 2010 – Integrys Energy Group (10) | | | - | | | | 65.6 | |
Other term loan (11) | | | 27.0 | | | | 27.0 | |
| Total | | | 2,640.2 | | | | 2,509.1 | |
| Unamortized discount and premium on bonds and debt | | | (1.7 | ) | | | 2.1 | |
| Total debt | | | 2,638.5 | | | | 2,511.2 | |
| Less current portion | | | (476.9 | ) | | | (116.5 | ) |
| Total long-term debt | | $ | 2,161.6 | | | $ | 2,394.7 | |
| (1) | In August 2011, WPS's 6.125% 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 Integrys Energy Group's Consolidated Balance Sheets at December 31, 2010. |
| | WPS's First Mortgage Bonds and Senior Notes are subject to the terms and conditions of WPS's First Mortgage Indenture. Under the terms of the Indenture, substantially all property owned by WPS is pledged as collateral for these outstanding debt securities. All of these debt securities require semi-annual payments of interest. WPS Senior Notes become non-collateralized if WPS retires all of its outstanding First Mortgage Bonds and no new mortgage indenture is put in place. |
| (2) | Under the terms of UPPCO's First Mortgage Indenture, substantially all property owned by UPPCO is pledged as collateral for its 9.32% First Mortgage Bonds. Interest payments are due semi-annually with a sinking fund payment of $0.9 million due each November 1. As a result, this payment is included in the current portion of long-term debt on Integrys Energy Group's Consolidated Balance Sheet at December 31, 2010. On May 3, 2010, UPPCO repaid an additional $0.5 million of this debt. The final sinking fund payment due November 1, 2021, will completely retire the series. |
| (3) | In January 2011, PEC's 6.9% unsecured Senior Notes matured, and the outstanding principal balance was repaid. As a result, the $325.0 million balance of these notes and the related fair value adjustment and unamortized premium of $1.0 million were included in current portion of long-term debt on Integrys Energy Group's Consolidated Balance Sheets at December 31, 2010. Under a First Supplemental Indenture, Integrys Energy Group fully and unconditionally guaranteed, on a senior unsecured basis, PEC's obligations under these notes. In January 2011, Integrys Energy Group settled the interest rate swap designated as a fair value hedge associated with $50.0 million of the senior notes. See Note 2, "Risk Management Activities," for more information. |
| (4) | In October 2010, PGL issued $50.0 million of Series WW, 2.625%, First Mortgage Bonds due February 1, 2033. The bonds are subject to a mandatory interest reset date on August 1, 2015. The net proceeds from the issuance of these bonds were used to redeem PGL’s $50 million, 3.75%, Series LL, First and Refunding Mortgage Bonds. |
| | In August 2010, PGL issued $50.0 million of Series VV, 2.125%, First Mortgage Bonds due March 1, 2030. The bonds are subject to a mandatory interest reset date on July 1, 2014. The net proceeds from the issuance of these bonds were used to redeem PGL’s $50 million, 4.75%, Series HH, First and Refunding Mortgage Bonds. |
| | On March 1, 2010, $50.0 million of PGL's Series MM-2 First and Refunding Mortgage Bonds matured. PGL repaid the outstanding principal balance on these 4.00% bonds. |
| (5) | PGL's First Mortgage Bonds are subject to the terms and conditions of PGL's First Mortgage Indenture dated January 2, 1926, as supplemented. Under the terms of the Indenture, substantially all property owned by PGL is pledged as collateral for these outstanding debt securities. |
| | PGL has utilized certain First Mortgage Bonds to secure tax exempt interest rates. The Illinois Finance Authority and the City of Chicago have issued Tax Exempt Bonds, and the proceeds from the sale of these bonds were loaned to PGL. In return, PGL issued equal principal amounts of certain collateralized First Mortgage Bonds. |
| (6) | PGL has outstanding $51.0 million of Adjustable Rate, Series OO bonds, due October 1, 2037, which are currently in a 35-day Auction Rate mode (the interest rate is reset every 35 days through an auction process). Since 2008, auctions have failed to receive sufficient clearing bids. As a result, these bonds are priced each 35 days at the maximum auction rate, until such time a successful auction occurs. The maximum auction rate is determined based on the lesser of the London Interbank Offered Rate or the Securities Industry and Financial Markets Association Municipal Swap Index rate plus a defined premium. The year-to-date weighted-average interest rate at December 31, 2010, was 0.501% for these bonds. |
| (7) | NSG's First Mortgage Bonds are subject to the terms and conditions of NSG's First Mortgage Indenture dated April 1, 1955, as supplemented. Under the terms of the Indenture, substantially all property owned by NSG is pledged as collateral for these outstanding debt securities. |
| | NSG has utilized First Mortgage Bonds to secure tax exempt interest rates. The Illinois Finance Authority has issued Tax Exempt Bonds, and the proceeds from the sale of these bonds were loaned to NSG. In return, NSG issued equal principal amounts of certain collateralized First Mortgage Bonds. |
| (8) | In November 2010, Integrys Energy Group issued $250.0 million of 4.17%, 10-year Unsecured Senior Notes due November 1, 2020. The net proceeds from the issuance of the Senior Notes were used to repay short-term debt and a portion of long-term debt maturing in January 2011, as well as for general corporate purposes. Integrys Energy Group also terminated two interest rate swaps that had been designated as cash flow hedges associated with the anticipated issuance of $100.0 million of the senior notes that were issued in November 2010. See Note 2, "Risk Management Activities," for more information. |
| (9) | These Integrys Energy Group Junior Subordinated Notes are considered hybrid instruments with a combination of debt and equity characteristics. Integrys Energy Group has agreed in a replacement capital covenant, dated as of December 1, 2010, with the holders of Integrys Energy Group's 4.17% Unsecured Senior Notes due November 1, 2020, that it will not redeem or repurchase more than 10% of the Junior Subordinated Notes on or prior to December 1, 2036, unless, subject to certain limitations, during the 360 days prior to the date of that redemption or repurchase, Integrys Energy Group has received a specified amount of proceeds from the sale of qualifying securities that have equity-like characteristics that are the same as, or more equity-like than, the applicable characteristics of the Junior Subordinated Notes. |
| (10) | On May 13, 2010, Integrys Energy Group repaid the outstanding principal balance of its maturing $65.6 million unsecured term loan. |
| (11) | In April 2001, the Schuylkill County Industrial Development Authority issued $27.0 million of Refunding Tax Exempt Bonds. The proceeds from the bonds were loaned to WPS Westwood Generation, LLC, a subsidiary of Integrys Energy Services. This loan is repaid by WPS Westwood Generation to Schuylkill County Industrial Development Authority with monthly interest only payments and has a floating interest rate that is reset weekly. At December 31, 2010, the interest rate was 4.33%. The loan is to be repaid by April 2021. In January 2011, Integrys Energy Group replaced its guarantee to provide sufficient funds to pay the loan and the related obligations and indemnities on WPS Westwood Generation's obligation with a new standby letter of credit. See Note 16, "Guarantees," for additional information. |
At December 31, 2010, Integrys Energy Group and each of its subsidiaries were in compliance with all respective financial covenants related to outstanding long-term debt. Integrys Energy Group's and certain subsidiaries' long-term debt obligations contain covenants related to payment of principal and interest when due and various financial reporting obligations. In addition, certain long-term debt obligations contain financial and other covenants, including but not limited to, a requirement to maintain a debt to total capitalization ratio not to exceed 65%. Failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of outstanding debt obligations.
A schedule of all principal debt payment amounts related to bond maturities is as follows:
Year ending December 31 (Millions) | | | |
| 2011 | | $ | 476.9 | |
| 2012 | | | 250.9 | |
| 2013 | | | 314.4 | |
| 2014 | | | 100.9 | |
| 2015 | | | 125.9 | |
| Later years | | | 1,371.2 | |
| Total payments | | $ | 2,640.2 | |
NOTE 13--ASSET RETIREMENT OBLIGATIONS
The utility segments have asset retirement obligations primarily related to removal of natural gas distribution pipe (including asbestos and PCBs); asbestos abatement at certain generation facilities, office buildings, and service centers; dismantling wind generation projects; disposal of PCB-contaminated transformers; and closure of fly-ash landfills at certain generation facilities. The utilities establish regulatory assets and liabilities to record the differences between ongoing expense recognition under the Asset Retirement and Environmental Obligations accounting rules, and the ratemaking practices for retirement costs authorized by the applicable regulators.
The following table shows changes to Integrys Energy Group's asset retirement obligations through December 31, 2010.
| (Millions) | | Utilities | | | Integrys Energy Services | | | Total | |
| Asset retirement obligations at December 31, 2007 | | $ | 139.5 | | | $ | 0.7 | | | $ | 140.2 | |
| Accretion | | | 7.8 | | | | - | | | | 7.8 | |
| Additions and revisions to estimated cash flows | | | 31.7 | | | | - | | | | 31.7 | |
| Asset retirement obligations transferred in sales | | | (0.1 | ) | | | (0.5 | ) | | | (0.6 | ) |
| Asset retirement obligations at December 31, 2008 | | | 178.9 | | | | 0.2 | (2) | | | 179.1 | |
| Accretion | | | 9.6 | | | | 0.1 | | | | 9.7 | |
| Additions and revisions to estimated cash flows | | | 6.3 | (1) | | | - | | | | 6.3 | |
| Asset retirement obligations at December 31, 2009 | | | 194.8 | | | | 0.3 | (2) | | | 195.1 | |
| Accretion | | | 11.7 | | | | - | | | | 11.7 | |
| Asset retirement obligations transferred in sale | | | - | | | | (0.3 | ) | | | (0.3 | ) |
| Revisions to estimated cash flows | | | 120.5 | (3) | | | - | | | | 120.5 | |
| Settlements | | | (6.1 | ) | | | - | | | | (6.1 | ) |
| Asset retirement obligations at December 31, 2010 | | $ | 320.9 | | | $ | - | | | $ | 320.9 | |
| (1) | This amount includes a $6.3 million asset retirement obligation related to the WPS 99-megawatt Crane Creek wind generation project that became operational in the fourth quarter of 2009. All other adjustments netted to an insignificant amount. |
| (2) | These amounts were classified as held for sale, as they related to the sale of generation assets in Northern Maine, which closed in the first quarter of 2010. |
| (3) | Revisions were made to estimated cash flows related to asset retirement obligations for natural gas distribution pipes at PGL due to changes in the average remaining service life of distribution pipe based upon an updated depreciation study, as well as an increase in estimated costs. |
NOTE 14--INCOME TAXES
Deferred Income Tax Assets and Liabilities
Certain temporary book to tax differences, for which the offsetting amount is recorded as a regulatory asset or liability, are presented in the table below as net amounts, consistent with regulatory treatment. The principal components of deferred income tax assets and liabilities recognized in the Consolidated Balance Sheets as of December 31 were as follows:
| (Millions) | | 2010 | | | | 2009* | |
| | | | | | | | |
| Deferred income tax assets | | | | | | | |
| Tax credit carryforwards | | $ | 108.6 | | | $ | 90.7 | |
| Employee benefits | | | 40.2 | | | | 96.0 | |
| Price risk management | | | 32.3 | | | | 55.4 | |
| State capital and operating loss carryforwards | | | 14.7 | | | | 16.0 | |
| Other | | | 54.5 | | | | 32.4 | |
| Total deferred income tax assets | | $ | 250.3 | | | $ | 290.5 | |
| Valuation allowance | | | (8.2 | ) | | | (7.4 | ) |
| Net deferred income tax assets | | $ | 242.1 | | | $ | 283.1 | |
| | | | | | | | | |
| Deferred income tax liabilities | | | | | | | | |
| Plant-related | | $ | 955.0 | | | $ | 751.4 | |
| Regulatory deferrals | | | 64.3 | | | | 76.1 | |
| Deferred income | | | 15.6 | | | | 15.6 | |
| Total deferred income tax liabilities | | $ | 1,034.9 | | | $ | 843.1 | |
| | | | | | | | | |
| Consolidated Balance Sheet presentation | | | | | | | | |
| Current deferred income tax assets | | $ | 67.7 | | | $ | 92.9 | |
| Long-term deferred income tax liabilities | | | 860.5 | | | | 652.9 | |
| Net deferred income tax liabilities | | $ | 792.8 | | | $ | 560.0 | |
| | * | Certain amounts have been retrospectively adjusted due to a change in accounting policy in 2010. See Note 1(d), "Change in Accounting Policy," for more information. |
In December 2010, Integrys Energy Group received consent from the IRS to change its tax accounting method related to capitalization of overhead costs. This allows Integrys Energy Group to currently deduct overhead costs that were previously capitalized to the basis of certain assets for tax purposes. Also during 2010, the federal government passed legislation providing for bonus tax depreciation. Both of these items generated significant additional tax deductions, which drove the $232.8 million increase in net deferred income tax liabilities.
Deferred tax credit carryforwards at December 31, 2010, included $77.3 million of alternative minimum tax credits related to tax credits available under Section 45K (formerly Section 29) of the Internal Revenue Code, which can be carried forward indefinitely. Other deferred tax credit carryforwards include $17.1 million of general business credits, which have a carryforward period of 20 years, with the majority of the general business credits to expire in 2028, and $14.2 million of foreign tax credits, which have a carryforward period of 10 years, with the majority of the foreign tax credits to expire in 2020.
Carryforward periods for state capital and operating losses vary. In the majority of states in which Integrys Energy Group operates, the carryforward period is 15 years or more, with the majority of the state capital and operating losses beginning to expire in 2013. Valuation allowances are established for
certain state operating losses, capital loss carryforwards, and federal tax credits based on the projected ability of Integrys Energy Group to realize the benefit of these losses in the future.
Federal Income Tax Expense
The following table presents a reconciliation of federal income taxes to the provision for income taxes reported in the Consolidated Statements of Income for the periods ended December 31, which is calculated by multiplying the statutory federal income tax rate by book income before federal income tax.
| | | 2010 | | | 2009* | | | 2008* | |
| (Millions, except for percentages) | | Rate | | | Amount | | | Rate | | | Amount | | | Rate | | | Amount | |
| | | | | | | | | | | | | | | | | | | | | |
| Statutory federal income tax | | | 35.0 | % | | $ | 130.1 | | | | 35.0 | % | | $ | 4.7 | | | | 35.0 | % | | $ | 61.6 | |
| State income taxes, net | | | 5.1 | | | | 19.1 | | | | 105.2 | | | | 14.1 | | | | 6.8 | | | | 12.0 | |
| Benefits and compensation | | | 1.3 | | | | 5.0 | | | | (26.9 | ) | | | (3.6 | ) | | | (2.8 | ) | | | (4.9 | ) |
| Plant-related | | | - | | | | 0.1 | | | | (12.7 | ) | | | (1.7 | ) | | | - | | | | - | |
| Goodwill | | | - | | | | - | | | | 486.6 | | | | 65.2 | | | | 1.3 | | | | 2.3 | |
| Unrecognized tax benefits and interest | | | (0.2 | ) | | | (0.9 | ) | | | 12.7 | | | | 1.7 | | | | - | | | | 0.1 | |
| Investment tax credit – amortization | | | (0.5 | ) | | | (1.8 | ) | | | (19.4 | ) | | | (2.6 | ) | | | (1.0 | ) | | | (1.8 | ) |
| Federal tax credits | | | (1.8 | ) | | | (6.7 | ) | | | 8.2 | | | | 1.1 | | | | (0.3 | ) | | | (0.6 | ) |
| Other differences, net | | | 1.0 | | | | 3.3 | | | | 35.9 | | | | 4.8 | | | | (4.3 | ) | | | (7.6 | ) |
| Effective income tax | | | 39.9 | % | | $ | 148.2 | | | | 624.6 | % | | $ | 83.7 | | | | 34.7 | % | | $ | 61.1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Current provision | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal | | | | | | $ | (83.7 | ) | | | | | | $ | 1.9 | | | | | | | $ | (10.5 | ) |
| State | | | | | | | (10.8 | ) | | | | | | | 14.1 | | | | | | | | (3.1 | ) |
| Foreign | | | | | | | 6.8 | | | | | | | | 7.1 | | | | | | | | 1.9 | |
| Total current provision | | | | | | | (87.7 | ) | | | | | | | 23.1 | | | | | | | | (11.7 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Deferred provision | | | | | | | 237.1 | | | | | | | | 53.5 | | | | | | | | 63.6 | |
| Valuation allowance | | | | | | | 0.8 | | | | | | | | 5.1 | | | | | | | | - | |
| Net operating loss carryforwards | | | | | | | (0.2 | ) | | | | | | | 1.4 | | | | | | | | (1.8 | ) |
| Interest | | | | | | | (0.3 | ) | | | | | | | 3.7 | | | | | | | | (0.1 | ) |
| Unrecognized tax benefits | | | | | | | (0.6 | ) | | | | | | | (2.0 | ) | | | | | | | 0.2 | |
| Investment tax credit, net | | | | | | | (0.9 | ) | | | | | | | (1.1 | ) | | | | | | | 10.5 | |
| Penalties | | | | | | | - | | | | | | | | - | | | | | | | | 0.4 | |
| Total provision for income taxes | | | | | | $ | 148.2 | | | | | | | $ | 83.7 | | | | | | | $ | 61.1 | |
| | * | Certain amounts have been retrospectively adjusted due to a change in accounting policy in 2010. See Note 1(d), "Change in Accounting Policy," for more information. |
Foreign income before taxes was $10.6 million in 2010, $0.3 million in 2009, and $12.0 million in 2008.
As the related temporary differences reverse, the regulated utilities are prospectively refunding taxes to or collecting taxes from customers for which deferred taxes were recorded in prior years at rates different than current rates. The net regulatory asset for these and other regulatory tax effects totaled $16.2 million and $19.3 million at December 31, 2010, and 2009, respectively.
Integrys Energy Group had accrued interest of $6.9 million and accrued penalties of $3.0 million related to unrecognized tax benefits at December 31, 2010. Integrys Energy Group had accrued interest of $8.0 million and accrued penalties of $3.0 million related to unrecognized tax benefits at December 31, 2009.
Unrecognized Tax Benefits
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| (Millions) | | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | | |
| Balance at January 1 | | $ | 31.8 | | | $ | 22.4 | | | $ | 10.0 | |
| Increase related to tax positions taken in prior years | | | 9.2 | | | | 10.2 | | | | 23.8 | |
| Decrease related to tax positions taken in prior years | | | (10.6 | ) | | | (0.2 | ) | | | (7.7 | ) |
| Increase related to tax positions taken in current year | | | - | | | | - | | | | - | |
| Decrease related to tax positions taken in current year | | | - | | | | (0.1 | ) | | | - | |
| Decrease related to settlements | | | - | | | | (0.3 | ) | | | (3.7 | ) |
| Decrease related to lapse of statutes | | | - | | | | (0.2 | ) | | | - | |
| Balance at December 31 | | $ | 30.4 | | | $ | 31.8 | | | $ | 22.4 | |
At December 31, 2010, recognition in subsequent periods of $6.9 million of unrecognized tax benefits related to continuing operations could affect Integrys Energy Group's effective tax rate. Also, recognition in subsequent periods of $9.5 million of unrecognized tax benefits related to discontinued operations could affect Integrys Energy Group's effective tax rate.
Subsidiaries of Integrys Energy Group file income tax returns in the United States federal jurisdiction, in various United States state and local jurisdictions, and in Canada. Subject to the major exceptions listed below, Integrys Energy Group is no longer subject to United States federal, state and local, or foreign income tax examinations by tax authorities for years prior to 2005.
| ● | IRS – PEC and consolidated subsidiaries have open examinations for the September 30, 2004 tax year. |
| ● | Illinois Department of Revenue – PEC and consolidated subsidiaries have open examinations for the September 30, 2003 and September 30, 2004 tax years. |
| ● | Oregon Department of Revenue – WPS Power Development has open examinations for the 2002, 2003, and 2004 tax years. |
In 2010, Integrys Energy Group closed the following examinations:
| ● | IRS – Integrys Energy Services' subsidiary Synfuel Solutions, LLC for the tax years 2005 and 2006. |
Integrys Energy Group has the following open examinations:
| ● | IRS – PEC and consolidated subsidiaries have open examinations for the September 30, 2004 through December 31, 2006 tax years. |
| ● | IRS – Integrys Energy Group and consolidated subsidiaries have open examinations for the 2006 through 2008 tax years along with the February 21, 2007 PEC short year. |
| ● | IRS – An Integrys Energy Services' subsidiary, Soltage-ADC 360 Jamesburg LLC has an open examination for the 2008 tax year. |
| ● | Illinois Department of Revenue – PEC and consolidated subsidiaries have open examinations for the September 30, 2003 through December 31, 2006 tax years. |
| ● | Illinois Department of Revenue – Integrys Energy Group and consolidated subsidiaries have an open examination for the 2007 tax year. |
| ● | Kentucky Department of Revenue – Integrys Energy Group has open examinations for the 2005 through 2008 tax years. |
| ● | Mississippi Department of Revenue – PEC, PEP, and PEP Holdings LLC have open examinations for the September 30, 2006, December 31, 2006, and December 31, 2007 tax years. |
| ● | New Hampshire Department of Revenue – Integrys Energy Group has open examinations for the 2007 and 2008 tax years. |
| ● | New York State Department of Revenue – Integrys Energy Services and WPS Power Development have open examinations for the 2004 and 2005 tax years; Integrys Energy Group and Integrys Energy Services have open examinations for the 2007 and 2008 tax years. |
| ● | Oregon Department of Revenue – Integrys Energy Services has an open examination for the 2005 tax year; WPS Power Development has open examinations for the 2002, 2003, and 2004 tax years. |
| ● | Pennsylvania Department of Revenue – Integrys Energy Services has open examinations for the 2006 and 2007 tax years. |
| ● | Texas Comptroller – Integrys Energy Group has an open examination for the 2008 tax year. |
In the next 12 months, it is reasonably possible that Integrys Energy Group and its subsidiaries will settle their open examinations in multiple taxing jurisdictions related to tax years prior to 2009, resulting in a decrease in unrecognized tax benefits of as much as $17.5 million.
NOTE 15--COMMITMENTS AND CONTINGENCIES
Commodity Purchase Obligations and Purchase Order Commitments
Integrys Energy Group routinely enters into long-term purchase and sale commitments that have various quantity requirements and durations. The regulated natural gas utilities have obligations to distribute and sell natural gas to their customers, and the regulated electric utilities have obligations to distribute and sell electricity to their customers. The utilities expect to recover costs related to these obligations in future customer rates. Additionally, the majority of the energy supply contracts entered into by Integrys Energy Services are to meet its obligations to deliver energy to customers.
The obligations described below were as of December 31, 2010.
| ● | The electric utility segment had obligations of $185.0 million related to coal supply and transportation that extend through 2016, obligations of $1,166.8 million for either capacity or energy related to purchased power that extend through 2030, and obligations of $9.8 million for other commodities that extend through 2013. |
| ● | The natural gas utility segment had obligations of $1,110.9 million related to natural gas supply and transportation contracts that extend through 2028. |
| ● | Integrys Energy Services had obligations of $356.3 million related to energy and natural gas supply contracts that extend through 2019. The majority of these obligations end by 2013, with obligations of $10.4 million extending beyond 2013. |
| ● | Integrys Energy Group also had commitments of $233.1 million in the form of purchase orders issued to various vendors that relate to normal business operations, including construction projects. |
Environmental
Clean Air Act New Source Review Issues
Weston and Pulliam Plants:
In 2009, the EPA issued a Notice of Violation (NOV) to WPS alleging violations of the CAA’s New Source Review requirements pertaining to certain projects undertaken at the Weston and Pulliam generation stations from 1994 to 2009. WPS met with the EPA and exchanged proposals related to a possible resolution. Integrys Energy Group continues to review the allegations but is currently unable to predict the impact on its consolidated financial statements.
On May 20, 2010, WPS received from the Sierra Club a Notice of Intent (NOI) to file a civil lawsuit based on allegations and violations of the CAA at Weston and Pulliam. WPS entered into a Standstill Agreement with the Sierra Club and has had discussions related to a possible resolution with the Sierra Club in conjunction with the EPA. However, Integrys Energy Group is currently unable to predict the impact on its consolidated financial statements.
Columbia Plant:
In 2009, WPS, along with its co-owners, received from the Sierra Club an NOI to file a civil lawsuit based on allegations that major modifications were made at the Columbia generation station without complying with the CAA. The allegations suggest that Prevention of Significant Deterioration (PSD) permits that imposed BACT limits on emissions from the facility should have been obtained for Columbia.
In September 2010, the Sierra Club filed suit against Wisconsin Power and Light (WP&L), the operator of the Columbia plant, in the Federal District Court for the Western District of Wisconsin, alleging that WP&L violated the CAA with respect to its operation of the Columbia generation station and the Nelson E. Dewey generation station. The parties have entered into a confidentiality agreement to allow the Sierra Club to participate in settlement negotiations with the EPA, WP&L, and the other co-owners of the Columbia and Edgewater plants, as discussed below. Integrys Energy Group is currently unable to predict the impact on its consolidated financial statements.
Edgewater Plant:
In 2009, WPS, along with its co-owners, received from the Sierra Club a copy of an NOI to file a civil lawsuit against the EPA due to the EPA's failure to take actions against the co-owners and operator of the Edgewater generation station based upon allegations of failure to comply with the CAA. The allegations suggest that PSD permits that imposed BACT limits on emissions from the facility should have been obtained for Edgewater. WP&L is the operator of Edgewater. Integrys Energy Group is currently unable to predict the impact on its consolidated financial statements.
Also in 2009, WPS, along with its co-owners, received from the Sierra Club an NOI to file a civil lawsuit based on allegations that major modifications were made at the Edgewater generation station without complying with the CAA. The allegations suggest that PSD permits that imposed BACT limits on emissions from the facility should have been obtained for Edgewater.
In September 2010, the Sierra Club filed suit against WP&L in the Federal District Court for the Eastern District of Wisconsin, alleging that WP&L violated the CAA with respect to its operation of the Edgewater generation station. The complaint was not served on WP&L until December 2010. The parties have entered into a confidentiality agreement to allow Sierra Club to participate in settlement negotiations with the EPA, WP&L, and the other co-owners of the Columbia and Edgewater plants, as discussed below. Integrys Energy Group is currently unable to predict the impact on its consolidated financial statements.
Columbia and Edgewater Plants:
In 2009, the EPA issued an NOV to WP&L relative to its Nelson E. Dewey Plant and to WP&L and the other joint owners of the Columbia and Edgewater generation stations alleging violations of the CAA’s New Source Review requirements pertaining to certain projects undertaken at those plants. WP&L is the operator of these plants and, along with the joint owners, exchanged proposals with the EPA related to a possible resolution. Integrys Energy Group is currently unable to predict the impact on its consolidated financial statements.
EPA Settlements with Other Utilities:
In response to the EPA's CAA enforcement initiative, several utilities elected to settle with the EPA, while others are in litigation. The fines and penalties (including the cost of supplemental environmental projects) associated with settlements involving comparably-sized facilities to Weston and Pulliam range between $7 million and $30 million. The regulatory interpretations upon which the lawsuits or settlements are based may change depending on future court decisions made in the pending litigation.
If it were determined that historic projects at the Weston, Pulliam, Columbia, and Edgewater generation stations required either a state or federal CAA permit, WPS may, under the applicable statutes, be required to:
| ● | shut down any unit found to be operating in non-compliance, |
| ● | install additional pollution control equipment and/or impose emission limitations, |
| ● | pay a fine, and/or |
| ● | conduct a supplemental environmental project. |
In addition, under the CAA, citizen groups may pursue a claim.
Weston Air Permits
Sierra Club Weston 4 Construction Permit Petitions:
From 2004 to 2009, the Sierra Club filed various petitions related to the construction permit issued for the Weston 4 generation station, all of which were denied. On June 24, 2010, the Wisconsin Court of Appeals affirmed the Weston 4 air permit, but directed the WDNR to reopen the permit to establish specific visibility limits. In July 2010, the WDNR, WPS, and the Sierra Club filed Petitions for Review with the Wisconsin Supreme Court. WPS and the WDNR objected to the Sierra Club’s Petition. To date, no action has been taken by the Wisconsin Supreme Court. Integrys Energy Group is currently unsure how the Wisconsin Supreme Court will respond. WPS believes that it has substantial defenses to the Sierra Club's challenges. Until the Sierra Club's challenges are resolved and the re vised permit is finalized, Integrys Energy Group will not be able to make a final determination of the probable impact on future costs, if any, of compliance with any changes to the air permit.
Weston Title V Permit:
On November 29, 2010, the WDNR provided a draft revised permit. WPS objected to proposed changes in the mercury limits and the requirements on the boiler as beyond the authority of the WDNR, and provided technical comments. WPS and the WDNR continue to meet to resolve these issues.
WDNR Issued NOV’s:
Since 2008, WPS has received three NOVs from the WDNR alleging various violations of the air permits for Weston 4, Weston 1 and Weston 2, and 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 four NOVs. Discussions with the WDNR on the severity classification of the events continue. While management believes it is likely that the WDNR will refer the NOVs to the state Justice Department for enforcement, management does not believe that these matters will have a material adverse impact on the consolidated financial statements of Integrys Energy Group.
Other:
In 2006, it came to the attention of WPS that previous ambient air quality computer modeling done by the WDNR for the Weston facility (and other nearby air sources) did not take into account the emissions from the existing Weston 3 facility for purposes of evaluating air quality increment consumption under the required PSD. WPS believes it completed corrective measures to address any identified modeling issues and anticipates issuance of a revised Title V permit that will resolve this issue. Integrys Energy Group currently is not able to make a final determination of the probable cost impact of this issue, if any.
Pulliam Air Permit
The renewal of the Title V air permit for the Pulliam generation station was issued by the WDNR in April 2009. On June 28, 2010, the EPA issued an order directing the WDNR to respond to the comments raised by the Sierra Club in its Petition objecting to the Title V permit, which was filed in June 2009. Integrys Energy Group has been working with the WDNR to address the order.
WPS also challenged the Title V permit in a contested case proceeding and Petition for Judicial Review. The Petition was dismissed in an order remanding the matter to the WDNR and on February 11, 2011, the WDNR granted a contested case proceeding on the issues raised by WPS, which included averaging times in the emission limits in the permit. WPS will participate in the contested case proceeding.
On October 22, 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 Title V permit. Integrys Energy Group is reviewing all these allegations but is currently unable to predict the impact on its consolidated financial statements.
Columbia Air Permit
In 2009, the EPA issued an order objecting to the Title V air permit renewal issued by the WDNR for the Columbia generation station. The order determined that a project in 2006 should have been permitted as a "major modification." The order directed the WDNR to resolve the EPA's objections within 90 days and "terminate, modify, or revoke and reissue" the Title V permit accordingly.
On July 14, 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 based on what the Sierra Club alleges to be the EPA's unreasonable delay in performing its duties related to the granting or denial of the Title V permit. The Sierra Club alleges that the EPA failed to take actions against the WDNR for its failure to take action regarding the Title V permit as ordered by the EPA.
On September 22, 2010, the WDNR issued a draft construction permit and a draft revised Title V permit. The co-owners submitted comments on these draft permits. In correspondence dated November 24, 2010, the EPA notified the WDNR that the EPA does not believe the WDNR's proposal is responsive to the order. The letter requested a response from the WDNR. On January 24, 2011, the WDNR issued a letter stating that upon review of the submitted public comments, the WDNR has determined not to issue the draft construction permit and draft revised Title V permit that were proposed to respond to the EPA’s order. WPS is currently discussing potential responses to the WDNR’s action with WP&L. While WPS believes the previously issued air permit is still valid, WPS is currently unable to predict the outcome of this matter and the impact on its consolidated 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 BACT rule. As of December 31, 2010, WPS estimates capital costs of approximately $19.0 million, which includes estimates for both wholly owned and jointly owned pl ants, to achieve the required Phase I and Phase II reductions. The capital costs are expected to be recovered in future rate cases. Because of the vacatur of the federal mercury control and monitoring rule in 2008, the EPA is reviewing options for a new rulemaking to address hazardous air pollutants, including mercury, and is expected to issue a draft rule in 2011.
Sulfur Dioxide and Nitrogen Oxide
The EPA issued the Clean Air Interstate Rule (CAIR) in 2005 in order to reduce sulfur dioxide and nitrogen oxide emissions from utility boilers located in 29 states, including Wisconsin, Michigan, Pennsylvania, and New York. Subsequently, the United States Court of Appeals (Court of Appeals) issued a decision vacating CAIR, which the EPA appealed, and in 2008, the Court of Appeals reinstated CAIR. The Court of Appeals directed the EPA to address the deficiencies noted in its ruling to vacate CAIR, and the EPA issued a draft CAIR replacement rule for comment on July 6, 2010. The State of Wisconsin's rule to implement CAIR, which incorporates the cap and trade approach, was forwarded to the EPA for final review.
As a result of the Court of Appeals' decision, CAIR was in place for 2010. WPS has not acquired any nitrogen oxide allowances for vintage years beyond 2010 other than those allocated by the EPA and does not expect any material impact as a result of the vacatur and subsequent reinstatement of CAIR. Integrys Energy Group will continue to evaluate the impacts of any subsequent rulemaking.
Due to the reinstatement of CAIR, units affected by the Best Available Retrofit Technology (BART) rule are considered in compliance with BART for sulfur dioxide and nitrogen oxide emissions. 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.
For planning purposes, it is still assumed that additional sulfur dioxide and nitrogen oxide controls will be needed on existing units. The installation of any controls will need to be scheduled as part of WPS's long-term maintenance plan for its existing units. As such, controls may need to be installed before 2015. On a preliminary basis, and assuming controls are still required, WPS estimates capital costs of $437.5 million, which includes estimates for both wholly owned and WPS's share of jointly owned plants, in order to meet an assumed 2015 compliance date. This estimate is based on costs of current control technology and current information regarding the final state and federal rules. The capital costs are anticipated to be recovered in future rate cases.
Manufactured Gas Plant Remediation
Integrys Energy Group's natural gas utilities, their predecessors, and certain former affiliates operated facilities in the past at multiple sites for the purpose of manufacturing and storing manufactured gas. In connection with manufacturing and storing manufactured gas, waste materials were produced that may have resulted in soil and groundwater contamination at these sites. Under certain laws and regulations relating to the protection of the environment, Integrys Energy Group's natural gas utilities are required to undertake remedial action with respect to some of these materials and 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 o f documents common to all of the sites, and utilization of a consistent approach in selecting remedies.
Integrys Energy Group's natural gas utilities are responsible for the environmental remediation of 54 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 based on risk-based criteria typically used at Superfund sites. As of December 31, 2010, Integrys Energy Group estimated and accrued for $642.5 million of future undiscounted investigation and cleanup costs for all sites. Integrys Energy Group may adjust these estimates in the future, contingent upon remedial technology, regulatory requirements, remedy determinations, and any claims of natural resource damages. As of December 31, 2010, Integrys Energy Group recorded a regulatory asset of $651.9 million (net of insurance recov eries received of $59.9 million) related to the expected recovery of both cash expenditures and estimated future expenditures. As of December 31, 2010, cash expenditures for environmental remediation not yet recovered in rates were $9.4 million.
The EPA identified NSG, the Outboard Marine Corporation, General Motors Corporation (GM), and certain other parties as potentially responsible parties (PRPs) at the Waukegan Coke Plant Site located in Waukegan, Illinois. NSG and the other PRPs are parties to a consent decree that requires NSG and GM, jointly and severally, to perform the remedial action and establish and maintain financial assurance of $21.0 million. NSG met its financial assurance requirement in the form of a net worth test, while GM met the requirement by providing a performance and payment bond in favor of the EPA. As a result of the GM bankruptcy, the EPA was granted access to the bond funds, which are expected to support a significant portion of GM's liability. The potential exposure related to the GM bankruptcy that is not expe cted to be covered by the bond proceeds has been reflected in the accrual identified above.
Management believes that any costs incurred for environmental activities relating to former manufactured gas plant operations that are not recoverable through contributions from other entities or from insurance carriers have been prudently incurred and are, therefore, recoverable through rates for WPS, MGU, PGL, and NSG. Accordingly, management believes that these costs will not have a material adverse effect on the consolidated financial statements of Integrys Energy Group. However, any changes in the approved rate mechanisms for recovery of these costs, or any adverse conclusions by the various regulatory commissions’ with respect to the prudence of costs actually incurred, could materially adversely affect rate recovery of such costs.
Greenhouse Gases
Integrys Energy Group is evaluating both the technical and cost implications that may result from future state, regional, or federal greenhouse gas regulatory programs. This evaluation indicates it is probable that any regulatory program which caps emissions or imposes a carbon tax will increase costs for Integrys Energy Group and its customers. The greatest impact is likely to be on fossil fuel-fired generation, with a less significant impact on natural gas storage and distribution operations. Efforts are underway within the utility industry to find a feasible method for capturing carbon dioxide from pulverized coal-fired units and to develop cleaner ways to burn coal. The use of alternate fuels is also being explored by the industry, but there are many cost and availability issues.
The EPA began regulating greenhouse gas emissions under the CAA in January 2011, by applying the BACT requirements associated with the New Source Review program to new and modified larger greenhouse gas emitters. Technology to remove and sequester greenhouse gas emissions is not commercially available at scale; hence, the EPA issued guidance that defines BACT in terms of improvements in energy efficiency as opposed to relying on pollution control equipment. In December 2010, the EPA announced its intent to develop new source performance standards for greenhouse gas emissions for new and modified, as well as existing, electric utility steam generating units. The EPA plans to propose standards in 2011 and finalize standards in 2012. Efforts have been initiated to develop state and regional greenhouse g as programs, to create federal legislation to limit carbon dioxide emissions, and to create national or state renewable portfolio standards. Currently there is no applicable federal or state legislation pending that specifically addresses greenhouse gas emissions.
A risk exists that such legislation or regulation will increase the cost of energy. However, Integrys Energy Group believes the capital expenditures being made at its generation units are appropriate under any reasonable mandatory greenhouse gas program and that future expenditures related to control of greenhouse gas emissions or renewable portfolio standards by its regulated electric utilities will be recoverable in rates. Integrys Energy Group will continue to monitor and manage potential risks and opportunities associated with future greenhouse gas legislative or regulatory actions.
Natural Gas Charge Reconciliation Proceedings and Related Matters
The ICC conducts annual proceedings regarding the reconciliation of revenues from the natural gas charge and related natural gas costs (Gas Charge) in which interested parties review the accuracy of the reconciliation of revenues and costs and the prudence of natural gas costs recovered through the Gas Charge. If the ICC finds that the reconciliation was inaccurate or any natural gas costs were imprudently incurred, the ICC will order PGL and NSG to refund the affected amount to customers through subsequent Gas Charge filings.
In 2006, the ICC adopted a settlement agreement for PGL's 2001 through 2004 Gas Charge reconciliation proceedings in which PEC agreed to provide the Illinois Attorney General (AG) and the City of Chicago up to $30.0 million for conservation and weatherization programs for which PGL and NSG may not seek rate recovery. The balance that remained unpaid as of December 31, 2010, was $5.2 million and was recorded in other current liabilities.
The ICC issued an order on November 21, 2010, for PGL's 2006 Gas Charge reconciliation proceeding, adopting an uncontested disallowance of $0.6 million.
PGL and NSG are not aware of any significant issues related to their open Gas Charge reconciliation proceedings for the periods 2007, 2008, 2009, and 2010.
Class Action
In 2004, a class action suit (based on alleged facts underlying PGL and NSG's 2001 through 2004 Gas Charge cases settled in 2006) was filed against PEC, PGL, and NSG by customers of PGL and NSG (PGL and NSG were subsequently dismissed as defendants) for alleged violations of the Consumer Fraud and Deceptive Business Practices Act, claiming that PEC acted in concert with others to commit a tortious act. The plaintiffs sought disgorgement and punitive damages. The parties entered into a settlement agreement that became final as of December 31, 2010, and the class releases are now effective. The full effect of the settlement has been reflected in the consolidated financial statements as of December 31, 2010.
NOTE 16--GUARANTEES
As part of normal business, Integrys Energy Group and its subsidiaries enter into various guarantees providing financial or performance assurance to third parties on behalf of certain subsidiaries. These guarantees are entered into primarily to support or enhance the creditworthiness otherwise attributed to a subsidiary on a stand-alone basis, thereby facilitating the extension of sufficient credit to accomplish the subsidiaries' intended commercial purposes.
Most of the guarantees issued by Integrys Energy Group consist of guarantees of subsidiaries' obligations or performance by the subsidiaries under certain contractual commitments. As such, these guarantees are excluded from the recognition and measurement requirements, but are subject to the disclosure requirements, of the Guarantees Topic of the FASB ASC.
The following table shows outstanding guarantees at Integrys Energy Group:
| | | | | | Expiration | |
| (Millions) | | Total Amounts Committed at December 31, 2010 | | | Less Than 1 Year | | | 1 to 3 Years | | | Over 3 Years | |
Guarantees supporting commodity transactions of subsidiaries (1) | | $ | 654.9 | | | $ | 410.9 | | | $ | 21.1 | | | $ | 222.9 | |
Standby letters of credit (2) | | | 66.2 | | | | 63.4 | | | | 2.8 | | | | - | |
Surety bonds (3) | | | 12.7 | | | | 12.2 | | | | 0.5 | | | | - | |
Other guarantees (4) | | | 57.3 | | | | - | | | | 35.0 | | | | 22.3 | |
| Total guarantees | | $ | 791.1 | | | $ | 486.5 | | | $ | 59.4 | | | $ | 245.2 | |
| (1) | Consists of parental guarantees of $423.9 million to support the business operations of Integrys Energy Services; $152.2 million and $66.8 million, respectively, related to natural gas supply at MERC and MGU; and $5.0 million at both PEC and IBS, and $2.0 million at UPPCO to support business operations. These guarantees are not reflected on the Consolidated Balance Sheets. |
| (2) | At Integrys Energy Group's request, financial institutions have issued standby letters of credit for the benefit of third parties that have extended credit to Integrys Energy Group. This amount consists of $63.5 million issued to support Integrys Energy Services' operations; and $2.7 million related to letters of credit issued to support UPPCO, WPS, MGU, NSG, MERC, and PGL operations. These amounts are not reflected on the Consolidated Balance Sheets. |
| (3) | Primarily for workers compensation coverage and obtaining various licenses, permits, and rights of way. Surety bonds are not included on the Consolidated Balance Sheets. |
| (4) | Consists of (a) $35.0 million related to the sale agreement for Integrys Energy Services' United States wholesale electric marketing and trading business, which included a number of customary representations, warranties, and indemnification provisions. In addition, for a two-year period, counterparty payment default risk was retained with approximately 50% of the counterparties associated with the commodity contracts transferred in this transaction. An insignificant liability was recorded related to the fair value of this counterparty payment default risk; (b) $10.0 million related to the sale agreement for Integrys Energy Services' Texas retail marketing business, which included a number of customary representations, warranties, and indemnification provisions. An |
| | insignificant liability was recorded related to the possible imposition of additional miscellaneous gross receipts tax in the event of a change in law or interpretation of the tax law; (c) $5.0 million related to an environmental indemnification provided by Integrys Energy Services as part of the sale of the Stoneman generation facility, under which Integrys Energy Group expects that the likelihood of required performance is remote. This amount is not reflected on the Consolidated Balance Sheets; and (d) $7.3 million related to other indemnifications and workers compensation coverage. This amount is not reflected on the Consolidated Balance Sheets. |
Integrys Energy Group has provided total parental guarantees of $566.6 million on behalf of Integrys Energy Services as shown in the table below. Integrys Energy Group's exposure under these guarantees related to open transactions at December 31, 2010, was approximately $334 million.
| (Millions) | | December 31, 2010 | |
| Guarantees supporting commodity transactions | | $ | 423.9 | |
| Standby letters of credit | | | 63.5 | |
Guarantee of subsidiary debt * | | | 27.0 | |
| Surety bonds | | | 1.7 | |
| Other | | | 50.5 | |
| Total guarantees | | $ | 566.6 | |
| * | Consists of outstanding debt at an Integrys Energy Services subsidiary, which is not included in the total Integrys Energy Group guarantee amounts above, because the debt is reflected on the Consolidated Balance Sheets. In January 2011, this guarantee was replaced with a standby letter of credit, as part of refinancing the underlying debt instrument. |
NOTE 17--EMPLOYEE BENEFIT PLANS
Defined Benefit Plans
Integrys Energy Group and its subsidiaries maintain one non-contributory, qualified pension plan covering substantially all employees, as well as several unfunded nonqualified retirement plans. In addition, Integrys Energy Group and its subsidiaries offer multiple other postretirement benefit plans to employees. The benefits for a portion of these plans are funded through irrevocable trusts, as allowed for income tax purposes.
Integrys Energy Group also currently offers medical, dental, and life insurance benefits to active employees and their dependents. Integrys Energy Group expenses the costs of these benefits as incurred.
Effective January 1, 2008, the defined benefit pension plans were closed to all Integrys Energy Group non-union new hires. Effective May 1, 2008, and July 1, 2008, the defined benefit pension plans were closed to new union hires at PGL and NSG, respectively. Effective April 19, 2009, and December 18, 2009, the defined benefit pension plans were closed to new union hires at UPPCO and WPS, respectively. In addition, changes in the WPS union contract resulted in a plan amendment in December 2009. Effective January 15, 2010, the defined benefit pension plans were closed to new Local 12295 union hires at MGU.
The following tables provide a reconciliation of the changes in the plans' benefit obligations and fair value of assets during 2010 and 2009.
| | | Pension Benefits | | | Other Benefits | |
| (Millions) | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| Reconciliation of benefit obligation | | | | | | | | | | | | |
| Obligation at January 1 | | $ | 1,337.4 | | | $ | 1,230.5 | | | $ | 475.5 | | | $ | 432.7 | |
| Service cost | | | 40.1 | | | | 38.9 | | | | 16.3 | | | | 14.3 | |
| Interest cost | | | 80.0 | | | | 80.9 | | | | 27.5 | | | | 26.5 | |
| Plan amendments | | | - | | | | 3.0 | | | | - | | | | - | |
| Plan curtailment | | | - | | | | 0.2 | * | | | - | | | | - | |
| Actuarial loss, net | | | 98.4 | | | | 78.6 | | | | 41.1 | | | | 23.2 | |
| Participant contributions | | | - | | | | - | | | | 10.7 | | | | 9.8 | |
| Benefit payments | | | (137.4 | ) | | | (94.7 | ) | | | (34.9 | ) | | | (33.0 | ) |
| Federal subsidy on benefits paid | | | - | | | | - | | | | 2.3 | | | | 2.0 | |
| Obligation at December 31 | | $ | 1,418.5 | | | $ | 1,337.4 | | | $ | 538.5 | | | $ | 475.5 | |
| Reconciliation of fair value of plan assets | | | | | | | | | | | | |
| Fair value of plan assets at January 1 | | $ | 933.6 | | | $ | 830.3 | | | $ | 230.8 | | | $ | 191.1 | |
| Actual return on plan assets | | | 119.1 | | | | 174.5 | | | | 23.8 | | | | 33.1 | |
| Employer contributions | | | 166.0 | | | | 23.5 | | | | 35.8 | | | | 29.8 | |
| Participant contributions | | | - | | | | - | | | | 10.7 | | | | 9.8 | |
| Benefit payments | | | (137.4 | ) | | | (94.7 | ) | | | (34.9 | ) | | | (33.0 | ) |
| Fair value of plan assets at December 31 | | $ | 1,081.3 | | | $ | 933.6 | | | $ | 266.2 | | | $ | 230.8 | |
| * | In connection with the reduction in workforce discussed in Note 3, "Restructuring Expense," an insignificant curtailment loss was recognized. |
Amounts recognized on Integrys Energy Group's Consolidated Balance Sheets at December 31 related to the funded status of the benefit plans consisted of:
| | | Pension Benefits | | | Other Benefits | |
| (Millions) | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| Current liabilities | | $ | 5.8 | | | $ | 7.5 | | | $ | 0.3 | | | $ | 0.3 | |
| Noncurrent liabilities | | | 331.4 | | | | 396.3 | | | | 272.0 | | | | 244.4 | |
| Total liabilities | | $ | 337.2 | | | $ | 403.8 | | | $ | 272.3 | | | $ | 244.7 | |
The accumulated benefit obligation for all defined benefit pension plans was $1.2 billion and $1.1 billion at December 31, 2010, and 2009, respectively. Information for pension plans with an accumulated benefit obligation in excess of plan assets is presented in the following table.
| | | December 31 | |
| (Millions) | | 2010 | | | 2009 | |
| Projected benefit obligation | | $ | 1,418.5 | | | $ | 1,337.4 | |
| Accumulated benefit obligation | | | 1,225.9 | | | | 1,147.0 | |
| Fair value of plan assets | | | 1,081.3 | | | | 933.6 | |
The following table shows the amounts that had not yet been recognized in Integrys Energy Group's net periodic benefit cost as of December 31. Amounts related to the nonregulated entities are included in accumulated other comprehensive loss, while amounts related to the utilities are recorded as regulatory assets or liabilities.
| | | Pension Benefits | | | Other Benefits | |
| (Millions) | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| Accumulated other comprehensive loss (pre-tax) | | | | | | | | | | | | |
| Net actuarial loss | | $ | 38.8 | | | $ | 36.2 | | | $ | 2.0 | | | $ | - | |
| Prior service costs (credits) | | | 0.7 | | | | 0.9 | | | | (1.4 | ) | | | (1.8 | ) |
| Total | | $ | 39.5 | | | $ | 37.1 | | | $ | 0.6 | | | $ | (1.8 | ) |
| Net regulatory assets | | | | | | | | | | | | | | | | |
| Net actuarial loss | | $ | 429.3 | | | $ | 368.6 | | | $ | 98.6 | | | $ | 66.2 | |
| Prior service costs (credits) | | | 16.1 | | | | 21.1 | | | | (20.0 | ) | | | (23.4 | ) |
| Transition obligation | | | - | | | | - | | | | 0.5 | | | | 0.8 | |
| Merger related regulatory adjustment | | | - | | | | 71.5 | | | | - | | | | 38.7 | |
Regulatory deferral * | | | - | | | | 4.5 | | | | - | | | | (1.3 | ) |
| Total | | $ | 445.4 | | | $ | 465.7 | | | $ | 79.1 | | | $ | 81.0 | |
| * | The PSCW authorized recovery for net increased 2009 WPS pension and other postretirement benefit costs related to plan asset losses that occurred in 2008. Amortization and recovery of these deferred costs occurred in 2010. |
Integrys Energy Group recorded the PEC pension assets acquired and liabilities assumed at fair value at the February 2007 acquisition date. However, through 2009, PGL and NSG continued to have rates set based on their historical basis of accounting, including amortizations of prior service costs (credits), actuarial losses, and transition obligations, which were recognized on the consolidated financial statements as regulatory assets at the purchase date. Therefore, the amounts reflected in net periodic benefit cost through 2009 were based on the amount used in the rate-setting process for PGL and NSG. The difference in the basis of accounting is shown as a merger related regulatory adjustment for 2009 in the table above. Effective with the 2010 rate order, PGL and NSG reflect pension and other postretirement benefit costs in rates using Integrys Energy Group's accounting basis, which was established at the time of the February 2007 PEC merger. As a result, the merger related regulatory adjustment was eliminated. Pursuant to the 2010 rate order, a new regulatory asset was established for the remaining cumulative difference that existed between the accounting bases of PGL/NSG and Integrys Energy Group in the pension and other postretirement benefit obligations. This regulatory asset, comprised of unrecognized benefit costs that existed prior to the PEC merger, is not included in the 2010 amounts in the table above. Also, the amortization of this regulatory asset over the average remaining service lives of the participating employees is not included as a component of net periodic benefit cost.
The estimated net actuarial losses and prior service costs for defined benefit pension plans that will be amortized as a component of net periodic benefit cost during 2011 are $19.0 million and $5.3 million, respectively. The estimated net actuarial losses, prior service credits, and transition obligation for other postretirement benefit plans that will be amortized as a component of net periodic benefit cost during 2011 are $4.6 million, $3.8 million, and $0.3 million, respectively.
The following table presents the components of the consolidated net periodic benefit costs for the plans:
| | | Pension Benefits | | | Other Benefits | |
| (Millions) | | 2010 | | | 2009 | | | 2008 | | | 2010 | | | 2009 | | | 2008 | |
| Net periodic benefit cost | | | | | | | | | | | | | | | | | | |
| Service cost | | $ | 40.1 | | | $ | 38.9 | | | $ | 38.4 | | | $ | 16.3 | | | $ | 14.3 | | | $ | 15.7 | |
| Interest cost | | | 80.0 | | | | 80.9 | | | | 76.2 | | | | 27.5 | | | | 26.5 | | | | 26.4 | |
| Expected return on plan assets | | | (92.3 | ) | | | (92.5 | ) | | | (101.0 | ) | | | (19.0 | ) | | | (17.7 | ) | | | (19.0 | ) |
| Amortization of transition obligation | | | - | | | | - | | | | - | | | | 0.3 | | | | 0.3 | | | | 0.3 | |
| Amortization of prior service cost (credit) | | | 5.3 | | | | 5.0 | | | | 5.1 | | | | (3.8 | ) | | | (3.8 | ) | | | (3.8 | ) |
| Amortization of net actuarial loss (gain) | | | 8.1 | | | | 1.9 | | | | 0.7 | | | | 1.9 | | | | (1.5 | ) | | | - | |
| Amortization of merger related regulatory adjustment | | | - | | | | 20.0 | | | | 9.6 | | | | - | | | | 3.3 | | | | 2.1 | |
Regulatory deferral * | | | 4.5 | | | | (4.5 | ) | | | - | | | | (1.3 | ) | | | 1.3 | | | | - | |
| Net periodic benefit cost | | $ | 45.7 | | | $ | 49.7 | | | $ | 29.0 | | | $ | 21.9 | | | $ | 22.7 | | | $ | 21.7 | |
| * | The PSCW authorized recovery for net increased 2009 WPS pension and other postretirement benefit costs related to plan asset losses that occurred in 2008. Amortization and recovery of these deferred costs occurred in 2010. |
Assumptions – Pension and Other Postretirement Benefit Plans
The weighted-average assumptions used at December 31 to determine benefit obligations for the plans were as follows:
| | | Pension Benefits | | | Other Benefits | |
| | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| Discount rate | | | 5.80 | % | | | 6.15 | % | | | 5.66 | % | | | 5.96 | % |
| Rate of compensation increase | | | 4.29 | % | | | 4.26 | % | | | N/A | | | | N/A | |
| Assumed medical cost trend rate (under age 65) | | | N/A | | | | N/A | | | | 7.5 | % | | | 8.0 | % |
| Ultimate trend rate | | | N/A | | | | N/A | | | | 5.0 | % | | | 5.0 | % |
| Ultimate trend rate reached in | | | N/A | | | | N/A | | | | 2016 | | | | 2013 | |
| Assumed medical cost trend rate (over age 65) | | | N/A | | | | N/A | | | | 8.0 | % | | | 8.5 | % |
| Ultimate trend rate | | | N/A | | | | N/A | | | | 5.5 | % | | | 5.5 | % |
| Ultimate trend rate reached in | | | N/A | | | | N/A | | | | 2016 | | | | 2013 | |
| Assumed dental cost trend rate | | | N/A | | | | N/A | | | | 5.0 | % | | | 5.0 | % |
The weighted-average assumptions used to determine net periodic benefit cost for the plans were as follows for the years ended December 31:
| | | Pension Benefits | |
| | | 2010 | | | 2009 | | | 2008 | |
| Discount rate | | | 6.15 | % | | | 6.45 | % | | | 6.40 | % |
| Expected return on assets | | | 8.50 | % | | | 8.50 | % | | | 8.50 | % |
| Rate of compensation increase | | | 4.26 | % | | | 4.26 | % | | | 4.27 | % |
| | | Other Benefits | |
| | | 2010 | | | 2009 | | | 2008 | |
| Discount rate | | | 5.95 | % | | | 6.48 | % | | | 6.40 | % |
| Expected return on assets | | | 8.50 | % | | | 8.50 | % | | | 8.50 | % |
| Assumed medical cost trend rate (under age 65) | | | 8.0 | % | | | 9.0 | % | | | 10.0 | % |
| Ultimate trend rate | | | 5.0 | % | | | 5.0 | % | | | 5.0 | % |
| Ultimate trend rate reached in | | | 2013 | | | | 2013 | | | | 2013 | |
| Assumed medical cost trend rate (over age 65) | | | 8.5 | % | | | 9.5 | % | | | 10.5 | % |
| Ultimate trend rate | | | 5.5 | % | | | 5.5 | % | | | 5.5 | % |
| Ultimate trend rate reached in | | | 2013 | | | | 2013 | | | | 2013 | |
| Assumed dental cost trend rate | | | 5.0 | % | | | 5.0 | % | | | 5.0 | % |
Integrys Energy Group establishes its expected return on assets assumption based on consideration of historical and projected asset class returns, as well as the target allocations of the benefit trust portfolios. Beginning in 2011, the expected return on assets assumption for the plans is 8.25%.
Assumed health care cost trend rates have a significant effect on the amounts reported by Integrys Energy Group for the health care plans. For the year ended December 31, 2010, a one-percentage-point change in assumed health care cost trend rates would have had the following effects:
| | | One-Percentage-Point | |
| (Millions) | | Increase | | | Decrease | |
| Effect on total of service and interest cost components of net periodic postretirement health care benefit cost | | $ | 6.4 | | | $ | (5.2 | ) |
Effect on the health care component of the accumulated postretirement benefit obligation | | | 68.2 | | | | (56.6 | ) |
Pension and Other Postretirement Benefit Plan Assets
Integrys Energy Group's investment policy includes various guidelines and procedures designed to ensure assets are invested in an appropriate manner to meet expected future benefits to be earned by participants. The investment guidelines consider a broad range of economic conditions. Central to the policy are target allocation ranges by major asset categories. The policy is established and administered in a manner that is compliant at all times with applicable regulations.
The objectives of the target allocations are to maintain investment portfolios that diversify risk through prudent asset allocation parameters and to achieve asset returns that meet or exceed the plans' actuarial assumptions and that are competitive with like instruments employing similar investment strategies. The portfolio diversification provides protection against significant concentrations of risk in the plan assets. The target asset allocations for pension and other postretirement benefit plans that have significant assets are: 70% equity securities and 30% fixed income securities. Equity securities primarily include investments in large-cap and small-cap companies. Fixed income securities primarily include corporate bonds of companies from diversified industries, United States government securities , and mortgage-backed securities.
The Board of Directors established the Employee Benefits Administrator Committee (composed of members of management) to manage the operations and administration of all benefit plans and trusts. The committee periodically reviews the asset allocation, and the portfolio is rebalanced when necessary.
Pension and other postretirement benefit plan investments recorded at fair value were as follows, by asset class. See Note 1(s), "Summary of Significant Accounting Policies – Fair Value," for information on the fair value hierarchy and the inputs used to measure fair value.
| | | December 31, 2010 | |
| | | Pension Plan Assets | | | Other Benefit Plan Assets | |
| (Millions) | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Asset Class | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 3.4 | | | $ | 34.0 | | | $ | - | | | $ | 37.4 | | | $ | - | | | $ | 9.8 | | | $ | - | | | $ | 9.8 | |
| Equity securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| United States equity | | | 125.3 | | | | 299.1 | | | | - | | | | 424.4 | | | | 28.3 | | | | 73.8 | | | | - | | | | 102.1 | |
| International equity | | | 75.9 | | | | 247.6 | | | | - | | | | 323.5 | | | | 14.6 | | | | 48.7 | | | | - | | | | 63.3 | |
| Fixed income securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| United States government | | | - | | | | 73.1 | | | | - | | | | 73.1 | | | | 9.4 | | | | 33.9 | | | | - | | | | 43.3 | |
| Foreign government | | | - | | | | 13.1 | | | | 7.8 | | | | 20.9 | | | | - | | | | - | | | | - | | | | - | |
| Corporate debt | | | - | | | | 143.2 | | | | 2.0 | | | | 145.2 | | | | - | | | | 21.9 | | | | - | | | | 21.9 | |
| Asset-backed securities | | | - | | | | 52.8 | | | | 0.2 | | | | 53.0 | | | | - | | | | 0.4 | | | | - | | | | 0.4 | |
| Other | | | - | | | | 5.1 | | | | - | | | | 5.1 | | | | 3.0 | | | | - | | | | - | | | | 3.0 | |
| Real estate securities | | | - | | | | - | | | | 30.0 | | | | 30.0 | | | | - | | | | - | | | | - | | | | - | |
| | | | 204.6 | | | | 868.0 | | | | 40.0 | | | $ | 1,112.6 | | | | 55.3 | | | | 188.5 | | | | - | | | | 243.8 | |
401(h) other benefit plan assets invested as pension assets * | | | (4.3 | ) | | | (18.2 | ) | | | (0.8 | ) | | | (23.3 | ) | | | 4.3 | | | | 18.2 | | | | 0.8 | | | | 23.3 | |
| Total | | $ | 200.3 | | | $ | 849.8 | | | $ | 39.2 | | | $ | 1,089.3 | | | $ | 59.6 | | | $ | 206.7 | | | $ | 0.8 | | | $ | 267.1 | |
| * | Pension trust assets are used to pay other postretirement benefits as allowed under Internal Revenue Code Section 401(h). |
| | | December 31, 2009 | |
| | | Pension Plan Assets | | | Other Benefit Plan Assets | |
| (Millions) | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Asset Class | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 2.1 | | | $ | 32.9 | | | $ | - | | | $ | 35.0 | | | $ | - | | | $ | 20.1 | | | $ | - | | | $ | 20.1 | |
| Equity securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| United States equity | | | 261.7 | | | | 171.3 | | | | - | | | | 433.0 | | | | 48.0 | | | | 39.6 | | | | - | | | | 87.6 | |
| International equity | | | 31.0 | | | | 144.3 | | | | - | | | | 175.3 | | | | - | | | | 26.9 | | | | - | | | | 26.9 | |
| Fixed income securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| United States government | | | - | | | | 109.6 | | | | - | | | | 109.6 | | | | - | | | | 32.4 | | | | - | | | | 32.4 | |
| Foreign government | | | - | | | | 12.4 | | | | 0.4 | | | | 12.8 | | | | - | | | | 1.5 | | | | - | | | | 1.5 | |
| Corporate debt | | | - | | | | 124.9 | | | | 2.9 | | | | 127.8 | | | | 0.9 | | | | 31.6 | | | | - | | | | 32.5 | |
| Asset-backed securities | | | - | | | | 39.3 | | | | - | | | | 39.3 | | | | - | | | | 9.0 | | | | - | | | | 9.0 | |
| Other | | | - | | | | - | | | | 1.1 | | | | 1.1 | | | | - | | | | 2.3 | | | | - | | | | 2.3 | |
| Real estate securities | | | - | | | | - | | | | 24.9 | | | | 24.9 | | | | - | | | | - | | | | - | | | | - | |
| | | | 294.8 | | | | 634.7 | | | | 29.3 | | | | 958.8 | | | | 48.9 | | | | 163.4 | | | | - | | | | 212.3 | |
401(h) other benefit plan assets invested as pension assets * | | | (0.8 | ) | | | (17.6 | ) | | | (0.1 | ) | | | (18.5 | ) | | | 0.8 | | | | 17.6 | | | | 0.1 | | | | 18.5 | |
| Total | | $ | 294.0 | | | $ | 617.1 | | | $ | 29.2 | | | $ | 940.3 | | | $ | 49.7 | | | $ | 181.0 | | | $ | 0.1 | | | $ | 230.8 | |
| * | Pension trust assets are used to pay other postretirement benefits as allowed under Internal Revenue Code Section 401(h). |
The following table sets forth a reconciliation of changes in the fair value of pension plan assets categorized as Level 3 measurements:
| (Millions) | | Foreign Government Debt | | | Corporate Debt | | | Asset-Backed Securities | | | Other Fixed Income Securities | | | Real Estate Securities | | | Total | |
| Beginning balance at December 31, 2008 | | $ | 0.7 | | | $ | 1.8 | | | $ | 0.1 | | | $ | 1.5 | | | $ | 35.8 | | | $ | 39.9 | |
| Actual return on plan assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Relating to assets still held at the reporting date | | | 0.8 | | | | 1.1 | | | | - | | | | 1.2 | | | | (12.2 | ) | | | (9.1 | ) |
| Relating to assets sold during the period | | | - | | | | (0.4 | ) | | | - | | | | (0.5 | ) | | | - | | | | (0.9 | ) |
| Purchases, sales, and settlements | | | 0.1 | | | | 0.7 | | | | - | | | | (1.1 | ) | | | 1.3 | | | | 1.0 | |
| Transfers in and/or out of Level 3 | | | (1.2 | ) | | | (0.3 | ) | | | (0.1 | ) | | | - | | | | - | | | | (1.6 | ) |
| Ending balance at December 31, 2009 | | $ | 0.4 | | | $ | 2.9 | | | $ | - | | | $ | 1.1 | | | $ | 24.9 | | | $ | 29.3 | |
| Actual return on plan assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Relating to assets still held at the reporting date | | | (0.2 | ) | | | 0.3 | | | | - | | | | - | | | | 3.8 | | | | 3.9 | |
| Relating to assets sold during the period | | | - | | | | - | | | | - | | | | (0.1 | ) | | | - | | | | (0.1 | ) |
| Purchases, sales, and settlements | | | 7.6 | | | | (1.2 | ) | | | 0.2 | | | | (1.0 | ) | | | 1.3 | | | | 6.9 | |
| Ending balance at December 31, 2010 | | $ | 7.8 | | | $ | 2.0 | | | $ | 0.2 | | | $ | - | | | $ | 30.0 | | | $ | 40.0 | |
Cash Flows Related to Pension and Other Postretirement Benefit Plans
Integrys Energy Group's funding policy is to contribute at least the minimum amounts that are required to be funded under the Employee Retirement Income Security Act, but not more than the maximum amounts that are currently deductible for income tax purposes. Integrys Energy Group expects to contribute $90.9 million to pension plans and $41.2 million to other postretirement benefit plans in 2011, dependent upon various factors affecting Integrys Energy Group, including its liquidity position and tax law changes.
The following table shows the payments, reflecting expected future service, that Integrys Energy Group expects to make for pension and other postretirement benefits. In addition, the table shows the expected federal subsidies, provided under the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which will partially offset other postretirement benefits.
| (Millions) | | Pension Benefits | | | Other Benefits | | | Federal Subsidies | |
| 2011 | | $ | 107.9 | | | $ | 29.7 | | | $ | (2.4 | ) |
| 2012 | | | 113.0 | | | | 31.6 | | | | (2.6 | ) |
| 2013 | | | 115.7 | | | | 33.6 | | | | (2.8 | ) |
| 2014 | | | 109.0 | | | | 35.6 | | | | (3.0 | ) |
| 2015 | | | 114.2 | | | | 38.1 | | | | (3.2 | ) |
| 2016-2020 | | | 619.1 | | | | 229.7 | | | | (18.6 | ) |
Defined Contribution Benefit Plans
Integrys Energy Group maintains 401(k) Savings Plans for substantially all full-time employees and matches a percentage of employee contributions through an employee stock ownership plan (ESOP) or cash contribution up to certain limits. Certain union employees receive a contribution to their ESOP account regardless of their participation in the 401(k) Savings Plan. The ESOP held 3.3 million shares of Integrys Energy Group's common stock (market value of $158.6 million) at December 31, 2010. Certain employees participate in a discretionary profit-sharing contribution and/or cash match. Certain employees who are not eligible to participate in the defined benefit pension plan participate in a defined contribution pension plan, in which Integrys Energy Group contributes certain amounts to an em ployee's account based on the employee's wages, age, and years of service. Total costs incurred under all of these plans were $16.9 million in 2010, $16.8 million in 2009, and $17.4 million in 2008.
Integrys Energy Group maintains deferred compensation plans that enable certain key employees and non-employee directors to defer payment of a portion of their compensation or fees on a pre-tax basis. Non-employee directors can defer up to 100% of their director fees. Compensation is generally deferred in the form of cash, indexed to certain investment options or Integrys Energy Group common stock with deemed dividends paid on the common stock automatically reinvested.
The deferred compensation arrangements for which distributions are made solely in Integrys Energy Group's common stock are classified as an equity instrument. Changes in the fair value of the deferred compensation obligation are not recognized. The deferred compensation obligation associated with Integrys Energy Group common stock was $26.3 million at December 31, 2010, and $24.2 million at December 31, 2009.
The portion of the deferred compensation obligation associated with deferrals that allow for distribution in cash is classified as a liability on the Consolidated Balance Sheets and adjusted, with a charge or credit to expense, to reflect changes in the fair value of the deferred compensation obligation. The obligation classified within other long-term liabilities was $36.2 million at December 31, 2010, and $32.1 million at December 31, 2009. The costs incurred under this arrangement were $3.5 million in 2010, $4.0 million in 2009, and $1.9 million in 2008.
The deferred compensation programs are partially funded through shares of Integrys Energy Group's common stock that are held in a rabbi trust. The common stock held in the rabbi trust is classified as a
reduction of equity in a manner similar to accounting for treasury stock. The total cost of Integrys Energy Group's common stock held in the rabbi trust was $18.5 million at December 31, 2010, and $17.2 million at December 31, 2009.
NOTE 18--PREFERRED STOCK OF SUBSIDIARY
Integrys Energy Group's subsidiary, WPS, has 1,000,000 authorized shares of preferred stock with no mandatory redemption and a $100 par value. Outstanding shares were as follows at December 31:
| (Millions, except share amounts) | | | | |
| | | | 2010 | | | 2009 | |
| Series | | | Shares Outstanding | | | Carrying Value | | | Shares Outstanding | | | Carrying Value | |
| | 5.00 | % | | | 130,692 | | | $ | 13.1 | | | | 130,692 | | | $ | 13.1 | |
| | 5.04 | % | | | 29,898 | | | | 3.0 | | | | 29,898 | | | | 3.0 | |
| | 5.08 | % | | | 49,905 | | | | 5.0 | | | | 49,905 | | | | 5.0 | |
| | 6.76 | % | | | 150,000 | | | | 15.0 | | | | 150,000 | | | | 15.0 | |
| | 6.88 | % | | | 150,000 | | | | 15.0 | | | | 150,000 | | | | 15.0 | |
| Total | | | | 510,495 | | | $ | 51.1 | | | | 510,495 | | | $ | 51.1 | |
All shares of preferred stock of all series are of equal rank except as to dividend rates and redemption terms. Payment of dividends from any earned surplus or other available surplus is not restricted by the terms of any indenture or other undertaking by WPS. Each series of outstanding preferred stock is redeemable in whole or in part at WPS's option at any time on 30 days' notice at the respective redemption prices. WPS may not redeem less than all, nor purchase any, of its preferred stock during the existence of any dividend default.
In the event of WPS's dissolution or liquidation, the holders of preferred stock are entitled to receive (a) the par value of their preferred stock out of the corporate assets other than profits before any of such assets are paid or distributed to the holders of common stock and (b) the amount of dividends accumulated and unpaid on their preferred stock out of the surplus or net profits before any of such surplus or net profits are paid to the holders of common stock. Thereafter, the remainder of the corporate assets, surplus, and net profits shall be paid to the holders of common stock.
The preferred stock has no pre-emptive, subscription, or conversion rights, and has no sinking fund provisions.
NOTE 19--COMMON EQUITY
Integrys Energy Group's reconciliation of shares outstanding at December 31, 2010, and 2009, was as follows:
| | | 2010 | | | 2009 | |
| | | Shares | | | Average Cost | | | Shares | | | Average Cost | |
| Common stock issued | | | 77,781,685 | | | | | | | 76,418,843 | | | | |
| Less: | | | | | | | | | | | | | | |
| Deferred compensation rabbi trust | | | 425,273 | | | $ | 43.55 | (1) | | | 402,839 | | | $ | 42.58 | (1) |
| Restricted stock | | | 6,333 | | | $ | 58.65 | (2) | | | 35,861 | | | $ | 55.33 | (2) |
| Total shares outstanding | | | 77,350,079 | | | | | | | | 75,980,143 | | | | | |
| (1) | Based on Integrys Energy Group's stock price on the day the shares entered the deferred compensation rabbi trust. Shares paid out of the trust are valued at the average cost of shares in the trust. | |
| (2) | Based on the grant date fair value of the restricted stock. |
Beginning February 11, 2010, Integrys Energy Group issued new shares of common stock to meet the requirements of its Stock Investment Plan and certain stock-based employee benefit and compensation plans. These stock issuances increased equity $55.8 million in 2010. From January 1, 2010, to February 10, 2010, and during 2009 and 2008, Integrys Energy Group purchased shares of its common stock on the open market to meet the requirements of these plans.
| Integrys Energy Group's common stock shares | | | |
| Balance at December 31, 2007 | | | 76,434,095 | |
| Restricted stock shares cancelled | | | (4,058 | ) |
| Balance at December 31, 2008 | | | 76,430,037 | |
| Restricted stock shares cancelled | | | (11,194 | ) |
| Balance at December 31, 2009 | | | 76,418,843 | |
| Shares issued | | | | |
| Stock Investment Plan | | | 752,360 | |
| Stock-based compensation | | | 592,237 | |
| Rabbi trust shares | | | 35,000 | |
| Restricted stock shares cancelled | | | (16,755 | ) |
| Balance at December 31, 2010 | | | 77,781,685 | |
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) attributed to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (loss) attributed to common shareholders by the weighted average number of common shares outstanding during the period, adjusted for the exercise and/or conversion of all potentially dilutive securities. Such dilutive items include in-the-money stock options, performance stock rights, and restricted stock. The calculation of diluted earnings per share for 2010 excluded 1.4 million out-of-the-money stock options that had an anti-dilutive effect. The effects of an insignificant number of in-the-money securities were not included in the computation for 2009 , because there was a net loss during the period, which would have caused the impact to be anti-dilutive. The 2009 calculation of diluted earnings per share also excluded 2.7 million out-of-the-money stock options that had an anti-dilutive effect. The calculation of diluted earnings per share for 2008 excluded 2.2 million out-of-the-money stock options that had an anti-dilutive effect. The following table reconciles the computation of basic and diluted earnings (loss) per share:
| (Millions, except per share amounts) | | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | | |
| Numerator: | | | | | | | | | |
| Net income (loss) from continuing operations | | $ | 223.5 | | | $ | (70.3 | ) | | $ | 114.8 | |
| Discontinued operations, net of tax | | | 0.2 | | | | 2.8 | | | | 4.7 | |
| Preferred stock dividends of subsidiary | | | (3.1 | ) | | | (3.1 | ) | | | (3.1 | ) |
| Noncontrolling interest in subsidiaries | | | 0.3 | | | | 1.0 | | | | 0.1 | |
| Net income (loss) attributed to common shareholders | | $ | 220.9 | | | $ | (69.6 | ) | | $ | 116.5 | |
| | | | | | | | | | | | | |
| Denominator: | | | | | | | | | | | | |
| Average shares of common stock – basic | | | 77.5 | | | | 76.8 | | | | 76.7 | |
| Effect of dilutive securities | | | | | | | | | | | | |
| Stock-based compensation | | | 0.5 | | | | - | | | | 0.3 | |
| Average shares of common stock – diluted | | | 78.0 | | | | 76.8 | | | | 77.0 | |
| | | | | | | | | | | | | |
| Earnings (loss) per common share | | | | | | | | | | | | |
| Basic | | $ | 2.85 | | | $ | (0.91 | ) | | $ | 1.52 | |
| Diluted | | | 2.83 | | | | (0.91 | ) | | | 1.51 | |
| | | | | | | | | | | | | |
| Dividends per common share declared | | $ | 2.72 | | | $ | 2.72 | | | $ | 2.68 | |
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss, net of tax, at December 31, 2010, and 2009, were:
| (Millions) | | 2010 | | | 2009 | |
Cash flow hedges (1) | | $ | (20.4 | ) | | $ | (24.9 | ) |
Unrecognized pension and other postretirement benefit costs (2) | | | (24.3 | ) | | | (21.5 | ) |
| Foreign currency translation | | | - | | | | 2.4 | |
| Total accumulated other comprehensive loss | | $ | (44.7 | ) | | $ | (44.0 | ) |
| (1) | Includes tax benefits of $13.9 million and $18.6 million at December 31, 2010, and 2009, respectively. |
| (2) | Includes tax benefits of $15.8 million and $13.8 million at December 31, 2010, and 2009, respectively. |
NOTE 20--STOCK-BASED COMPENSATION
In May 2010, Integrys Energy Group's shareholders approved the 2010 Omnibus Incentive Compensation Plan (2010 Omnibus Plan). Under the provisions of the 2010 Omnibus Plan, the number of shares of stock that may be issued in satisfaction of plan awards may not exceed 3,000,000 shares, plus any shares remaining or forfeited under prior plans, and no more than 900,000 shares of stock, plus shares remaining or forfeited under prior plans, can be granted as full value shares in the form of performance shares or restricted stock. No additional awards will be issued under prior plans, although the plans continue to exist for purposes of the existing outstanding stock-based compensation awards. At December 31, 2010, stock options, performance stock rights, and restricted shares and restricted share units were outstandi ng under the various plans.
Performance stock rights, restricted shares, and restricted share units were accounted for as equity awards through June 30, 2010. However, in the third quarter of 2010, Integrys Energy Group determined that these awards should have been accounted for as liability awards due to certain changes to the deferred compensation plan approved by Integrys Energy Group's Board of Directors in the fourth quarter of 2007. In the third quarter of 2010, consistent with the guidance in the Stock Compensation Topic of the FASB ASC, Integrys Energy Group began accounting for performance stock rights, restricted shares, and restricted share units as liability awards, which are required to be recorded at fair value each reporting period. The cumulative effect of this change related to periods prior to the third quarter of 2010 was a decrease in net income from continuing operations and net income attributed to common shareholders of $2.4 million. Management determined that this amount was not material to prior periods and recorded the cumulative effect in earnings in the third quarter of 2010.
Stock Options
Under the provisions of the 2010 Omnibus Plan, no single employee who is the chief executive officer of Integrys Energy Group or any of the other three highest compensated officers of Integrys Energy Group and its subsidiaries can be granted options for more than 1,000,000 shares during any calendar year. No stock options will have a term longer than ten years. The exercise price of each stock option is equal to the fair market value of the stock on the date the stock option is granted. Generally, one-fourth of the stock options granted vest and become exercisable each year on the anniversary of the grant date.
The fair values of stock option awards granted were estimated using a binomial lattice model. The expected term of option awards is calculated based on historical exercise behavior and represents the period of time that options are expected to be outstanding. The risk-free interest rate is based on the United States Treasury yield curve. The expected dividend yield incorporates the current and historical dividend rate. Integrys Energy Group's expected stock price volatility was estimated using its 10-year historical volatility. The following table shows the weighted-average fair values per stock option along with the assumptions incorporated into the valuation models:
| | | 2010 | | | 2009 | | | 2008 | |
| Weighted-average fair value per option | | $ | 5.30 | | | $ | 3.83 | | | $ | 4.52 | |
| Expected term | | 6 years | | | 8 - 9 years | | | 7 years | |
| Risk-free interest rate | | | 2.38 | % | | | 2.50% - 2.78 | % | | | 3.40 | % |
| Expected dividend yield | | | 5.46 | % | | | 5.50 | % | | | 5.00 | % |
| Expected volatility | | | 25 | % | | | 19 | % | | | 17 | % |
Compensation cost recognized for stock options during 2010, 2009, and 2008, was $2.3 million, $2.0 million, and $2.6 million, respectively. Compensation cost capitalized during these same years was not significant. As of December 31, 2010, $1.3 million of compensation cost related to unvested and outstanding stock options was expected to be recognized over a weighted-average period of 2.6 years.
Cash received from option exercises was $18.8 million during 2010. Cash received from option exercises during 2009 was not significant and was $3.3 million during 2008. The tax benefit realized from these option exercises was not significant in 2010, 2009, and 2008.
A summary of stock option activity for 2010, and information related to outstanding and exercisable stock options at December 31, 2010, is presented below:
| | | Stock Options | | | Weighted-Average Exercise Price Per Share | | | Weighted-Average Remaining Contractual Life (in Years) | | | Aggregate Intrinsic Value (Millions) | |
| Outstanding at December 31, 2009 | | | 3,133,286 | | | $ | 47.06 | | | | | | | |
| Granted | | | 554,092 | | | | 41.58 | | | | | | | |
| Exercised | | | (486,624 | ) | | | 38.56 | | | | | | $ | 4.9 | |
| Forfeited | | | (110,808 | ) | | | 41.58 | | | | | | | 0.8 | |
| Expired | | | (97,247 | ) | | | 48.55 | | | | | | | 0.1 | |
| Outstanding at December 31, 2010 | | | 2,992,699 | | | $ | 47.59 | | | | 6.27 | | | $ | 8.0 | |
| Exercisable at December 31, 2010 | | | 1,852,573 | | | $ | 49.75 | | | | 5.09 | | | $ | 2.2 | |
The aggregate intrinsic value for outstanding and exercisable options in the above table represents the total pre-tax intrinsic value that would have been received by the option holders had they all exercised their options at December 31, 2010. This is calculated as the difference between Integrys Energy Group's closing stock price on December 31, 2010, and the option exercise price, multiplied by the number of in-the-money stock options. The intrinsic value of options exercised was not significant during 2009 and 2008.
Performance Stock Rights
Performance stock rights vest over a three-year performance period and are paid out in shares of Integrys Energy Group's common stock or an employee may elect to defer the value of the award into the deferred compensation plan. No single employee who is the chief executive officer of Integrys Energy Group or any of the other three highest compensated officers of Integrys Energy Group and its subsidiaries can receive a payout in excess of 250,000 performance shares during any calendar year. The number of shares paid out is calculated by multiplying a performance percentage by the number of outstanding stock rights at the completion of the vesting period. The performance percentage is based on the total shareholder return of Integrys Energy Group's common stock relative to the total shareholder return of a peer group of companies. The payout may range from 0% to 200% of target.
Performance stock rights are accounted for as liability awards and are remeasured each reporting period throughout the requisite service period. The fair values of performance stock rights were estimated using a Monte Carlo valuation model, incorporating the assumptions in the table below. The risk-free interest rate is based on the United States Treasury yield curve. The expected dividend yield incorporates the current and historical dividend rate. The expected volatility was estimated using three years of historical data.
| | | 2010 | | | 2009 | | | 2008 | |
| Risk-free interest rate | | | 0.21% - 0.56 | % | | | 1.38 | % | | | 2.18 | % |
| Expected dividend yield | | | 5.34 | % | | | 5.50 | % | | | 5.50 | % |
| Expected volatility | | | 20% - 34 | % | | | 26 | % | | | 17 | % |
Compensation cost recorded for performance stock rights for 2010, 2009, and 2008 was $10.0 million, $4.6 million, and $5.2 million, respectively. Compensation cost capitalized during these same years was not significant. As of December 31, 2010, $3.1 million of compensation cost related to unvested and outstanding performance stock rights was expected (based on the value of these awards at the reporting date) to be recognized over a weighted-average period of 1.8 years.
A summary of the activity related to performance stock rights for the year ended December 31, 2010, is presented below:
| | | Performance Stock Rights | |
| Outstanding at December 31, 2009 | | | 301,090 | |
| Granted | | | 150,481 | |
| Distributed | | | (45,847 | ) |
| Adjustment for final payout | | | (26,009 | ) |
| Forfeited | | | (38,077 | ) |
| Outstanding at December 31, 2010 | | | 341,638 | |
Restricted Shares and Restricted Share Units
A portion of the long-term incentive is awarded in the form of restricted shares and restricted share units. Most of these awards have a four-year vesting period, with 25% of each award vesting on each anniversary of the grant date. During the vesting period, restricted share recipients have voting rights and are entitled to dividends in the same manner as other common shareholders, whereas restricted share unit recipients receive dividend credits and do not have voting rights. Restricted shares and restricted share units are accounted for as liability awards and are remeasured each period based on Integrys Energy Group's closing stock price at the reporting date. Compensation cost recognized for these awards was $10.1 million, $4.9 million, and $4.2 million during 2010, 2009, and 2008, res pectively. Compensation cost capitalized during these same years was not significant. As of December 31, 2010, $11.7 million of compensation cost related to these awards was expected (based on the value of these awards at the reporting date) to be recognized over a weighted-average period of 2.5 years.
A summary of the activity related to restricted share and restricted share unit awards for the year ended December 31, 2010, is presented below:
| | | Restricted Shares and Restricted Share Unit Awards | |
| Outstanding at December 31, 2009 | | | 346,858 | |
| Granted | | | 210,922 | |
| Vested | | | (106,153 | ) |
| Forfeited | | | (46,265 | ) |
| Outstanding at December 31, 2010 | | | 405,362 | |
NOTE 21--VARIABLE INTEREST ENTITIES
Effective January 1, 2010, Integrys Energy Group implemented SFAS No. 167, "Amendments to FASB Interpretation No. 46 (R)" (now incorporated as part of the Consolidation Topic of the FASB ASC). Integrys Energy Group has variable interests in two entities through power purchase agreements relating to the cost of fuel. One of these purchased power agreements reimburses an independent power producing entity for coal costs relating to purchased energy. There is no obligation to purchase energy under the agreement. This contract expires in 2016. The other agreement contains a tolling arrangement in which Integrys Energy Group supplies the scheduled fuel and purchases capacity and energy from the facility. This contract also expires in 2016. As of December 31, 2010, and December 31, 2009, Integrys Energy Group had approximately 535 megawatts of capacity available under these agreements.
Integrys Energy Group has evaluated each of these variable interest entities for possible consolidation. In these cases, Integrys Energy Group considered which interest holder has the power to direct the activities that most significantly impact the economics of the variable interest entity; this interest holder is considered the primary beneficiary of the entity and is required to consolidate the entity. For a variety of reasons, including qualitative factors such as the length of the remaining term of the contracts compared with the remaining lives of the plants and the fact that Integrys Energy Group does not have the power to direct the operations and maintenance of the facilities. Integrys Energy Group determined it is not the primary beneficiary of these variable interest entities.
At December 31, 2010, the assets and liabilities on the Consolidated Balance Sheets that related to the involvement with these variable interest entities pertained to working capital accounts and represented the amounts owed by Integrys Energy Group for current deliveries of power. Integrys Energy Group has not provided or guaranteed any debt or equity support, liquidity arrangements, performance guarantees, or other commitments associated with these contracts. There is no significant potential exposure to loss as a result of its involvement with the variable interest entities.
In 2008, Integrys Energy Group's subsidiary, Integrys Energy Services, contributed certain assets to LGS Renewables I, L.C. (LGS) in exchange for a 50% interest in the entity. Simultaneously, Integrys Energy Services entered into a loan agreement with LGS to finance the development and construction of a pipeline project to provide landfill gas to a customer. Integrys Energy Group determined at the time that the entity was a variable interest entity and that Integrys Energy Services was the primary beneficiary of the entity. Integrys Energy Group updated its conclusion upon implementation of the new standard and continued to conclude that Integrys Energy Services was the primary beneficiary. In July 2010, Integrys Energy Services purchased the remaining 50% ownership interest in LGS from LGS Deve lopment, L.P. and became the sole owner.
NOTE 22--FAIR VALUE
Fair Value Measurements
The following tables show Integrys Energy Group's financial assets and liabilities that were accounted for at fair value on a recurring basis, categorized by level within the fair value hierarchy.
| | | December 31, 2010 | |
| (Millions) | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Risk Management Assets | | | | | | | | | | | | |
Utility Segments | | | | | | | | | | | | |
FTRs | | $ | - | | | $ | - | | | $ | 3.1 | | | $ | 3.1 | |
Natural gas contracts | | | 0.6 | | | | 3.2 | | | | - | | | | 3.8 | |
Petroleum product contracts | | | 0.6 | | | | - | | | | - | | | | 0.6 | |
Coal contract | | | - | | | | - | | | | 3.7 | | | | 3.7 | |
Nonregulated Segments | | | | | | | | | | | | | | | | |
Natural gas contracts | | | 60.7 | | | | 100.7 | | | | 34.6 | | | | 196.0 | |
Electric contracts | | | 29.5 | | | | 69.8 | | | | 17.4 | | | | 116.7 | |
Interest rate swaps | | | - | | | | 0.9 | | | | - | | | | 0.9 | |
Foreign exchange contracts | | | 0.1 | | | | 1.4 | | | | - | | | | 1.5 | |
| Total Risk Management Assets | | $ | 91.5 | | | $ | 176.0 | | | $ | 58.8 | | | $ | 326.3 | |
| | | | | | | | | | | | | | | | | |
| Risk Management Liabilities | | | | | | | | | | | | | | | | |
Utility Segments | | | | | | | | | | | | | | | | |
FTRs | | $ | - | | | $ | - | | | $ | 0.2 | | | $ | 0.2 | |
Natural gas contracts | | | 3.7 | | | | 22.3 | | | | - | | | | 26.0 | |
Coal contract | | | - | | | | - | | | | 1.2 | | | | 1.2 | |
Nonregulated Segments | | | | | | | | | | | | | | | | |
Natural gas contracts | | | 66.8 | | | | 110.4 | | | | 4.4 | | | | 181.6 | |
Electric contracts | | | 45.0 | | | | 101.5 | | | | 32.3 | | | | 178.8 | |
Foreign exchange contracts | | | 1.4 | | | | 0.1 | | | | - | | | | 1.5 | |
| Total Risk Management Liabilities | | $ | 116.9 | | | $ | 234.3 | | | $ | 38.1 | | | $ | 389.3 | |
| | | | | | | | | | | | | | | | | |
Long-term debt hedged by fairvalue hedge | | $ | - | | | $ | 50.9 | | | $ | - | | | $ | 50.9 | |
| | | December 31, 2009 | |
| (Millions) | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Assets | | | | | | | | | | | | |
| Risk management assets | | $ | 284.9 | | | $ | 439.6 | | | $ | 1,593.0 | | | $ | 2,317.5 | |
| Other | | | 0.1 | | | | - | | | | - | | | | 0.1 | |
| Liabilities | | | | | | | | | | | | | | | | |
| Risk management liabilities | | | 336.4 | | | | 582.2 | | | | 1,471.6 | | | | 2,390.2 | |
Long-term debt hedged by fair value hedge | | | - | | | | 52.6 | | | | - | | | | 52.6 | |
The risk management assets and liabilities listed in the tables above include options, swaps, futures, physical commodity contracts, and other instruments used to manage market risks related to changes in commodity prices and interest rates. For more information on Integrys Energy Group's derivative instruments, see Note 2, "Risk Management Activities."
The following tables show net risk management assets (liabilities) transferred between the levels of the fair value hierarchy during 2010.
| Nonregulated Segments – Electric Contracts | |
| (Millions) | | Level 1 | | | Level 2 | | | Level 3 | |
| Transfers into Level 1 from | | | N/A | | | $ | (10.1 | ) | | $ | (18.0 | ) |
| Transfers into Level 2 from | | $ | (0.2 | ) | | | N/A | | | | 2.6 | |
| Transfers into Level 3 from | | | - | | | | (4.9 | ) | | | N/A | |
| Nonregulated Segments – Natural Gas Contracts | |
| (Millions) | | Level 1 | | | Level 2 | | | Level 3 | |
| Transfers into Level 1 from | | | N/A | | | $ | 0.1 | | | $ | - | |
| Transfers into Level 2 from | | $ | - | | | | N/A | | | | 0.8 | |
| Transfers into Level 3 from | | | - | | | | 1.7 | | | | N/A | |
Derivatives are transferred between the levels of the fair value hierarchy primarily due to changes in the source of data used to construct price curves as a result of changes in market liquidity.
The following tables set forth a reconciliation of changes in the fair value of items categorized as Level 3 measurements:
| 2010 | | Nonregulated Segments | | | Utility Segments | | | | |
| (Millions) | | Natural Gas | | | Electric | | | FTRs | | | Coal Contract | | | Total | |
| Balance at the beginning of the period | | $ | 31.4 | | | $ | 86.5 | | | $ | 3.5 | | | $ | - | | | $ | 121.4 | |
Net realized and unrealized gains (losses) included in earnings | | | 38.9 | | | | (65.1 | ) | | | 5.3 | | | | - | | | | (20.9 | ) |
Net unrealized (losses) gains recorded as regulatory assets or liabilities | | | - | | | | - | | | | (1.1 | ) | | | 2.5 | | | | 1.4 | |
Net unrealized losses included in other comprehensive loss | | | - | | | | (3.1 | ) | | | - | | | | - | | | | (3.1 | ) |
| Net purchases and settlements | | | (41.0 | ) | | | (43.7 | ) | | | (4.8 | ) | | | - | | | | (89.5 | ) |
| Net transfers into Level 3 | | | 1.7 | | | | (4.9 | ) | | | - | | | | - | | | | (3.2 | ) |
| Net transfers out of Level 3 | | | (0.8 | ) | | | 15.4 | | | | - | | | | - | | | | 14.6 | |
| Balance at the end of the period | | $ | 30.2 | | | $ | (14.9 | ) | | $ | 2.9 | | | $ | 2.5 | | | $ | 20.7 | |
| | | | | | | | | | | | | | | | | | | | | |
Net unrealized gains (losses) included in earnings related to instruments still held at the end of the period | | $ | 38.9 | | | $ | (65.1 | ) | | $ | - | | | $ | - | | | $ | (26.2 | ) |
| (Millions) | | 2009 | | | 2008 | |
| Balance at the beginning of period | | $ | 182.0 | | | $ | 44.6 | |
| Net realized and unrealized gain (loss) included in earnings | | | 32.0 | | | | (44.7 | ) |
| Net unrealized gain (loss) recorded as regulatory assets or liabilities | | | 2.2 | | | | (8.7 | ) |
| Net unrealized gain (loss) included in other comprehensive loss | | | 16.3 | | | | (35.0 | ) |
| Net purchases and settlements | | | (36.0 | ) | | | 2.5 | |
| Net transfers in/out of Level 3 | | | (75.1 | ) | | | 223.3 | |
| Balance at the end of the period | | $ | 121.4 | | | $ | 182.0 | |
| | | | | | | | | |
Net unrealized gain (loss) included in earnings related to instruments still held at the end of the period | | $ | 35.4 | | | $ | (55.3 | ) |
Unrealized gains and losses included in earnings related to Integrys Energy Services' risk management assets and liabilities are recorded through nonregulated revenue on the Consolidated Statements of Income. Realized gains and losses on these same instruments are recorded in nonregulated revenue or nonregulated cost of fuel, natural gas, and purchased power, depending on the nature of the instrument. Unrealized gains and losses on Level 3 derivatives at the utilities are deferred as regulatory assets or liabilities. Therefore, these fair value measurements have no impact on earnings. Realized gains and losses on these instruments flow through utility cost of fuel, natural gas, and purchased power on the Consolidated Statements of Income.
Fair Value of Financial Instruments
The following table shows the financial instruments included on the Consolidated Balance Sheets of Integrys Energy Group that are not recorded at fair value.
| | | 2010 | | | 2009 | |
| (Millions) | | Carrying Amount | | | Fair Value | | | Carrying Amount | | | Fair Value | |
| Long-term debt | | $ | 2,638.5 | | | $ | 2,687.8 | | | $ | 2,511.2 | | | $ | 2,543.6 | |
| Preferred stock of subsidiary | | | 51.1 | | | | 46.8 | | | | 51.1 | | | | 44.3 | |
The fair values of long-term debt instruments are estimated based on the quoted market price for the same or similar issues, or on the current rates offered to Integrys Energy Group for debt of the same remaining maturity, without considering the effect of third-party credit enhancements. The fair values of preferred stock of subsidiary are estimated based on quoted market prices when available, or by using a perpetual dividend discount model.
Due to the short maturity of cash and cash equivalents, accounts receivable, accounts payable, notes payable, and outstanding commercial paper, the carrying amount approximates fair value.
NOTE 23--MISCELLANEOUS INCOME
Integrys Energy Group's total miscellaneous income was as follows at December 31:
| (Millions) | | 2010 | | | 2009 | | | 2008 | |
| Equity earnings on investments | | $ | 78.3 | | | $ | 76.1 | | | $ | 67.8 | |
| Gain (loss) on foreign currency translation * | | | 4.7 | | | | (0.1 | ) | | | 0.9 | |
| Interest and dividend income | | | 3.7 | | | | 5.6 | | | | 5.0 | |
| Key executive life insurance income | | | 3.1 | | | | 2.3 | | | | 2.7 | |
| Equity portion of AFUDC | | | 1.6 | | | | 6.0 | | | | 5.5 | |
| Weston 4 ATC interconnection agreement interest | | | - | | | | - | | | | 2.5 | |
| (Loss) gain on sale of property | | | (0.1 | ) | | | 1.8 | | | | 4.8 | |
| Other | | | 0.2 | | | | (2.7 | ) | | | (1.9 | ) |
| Total miscellaneous income | | $ | 91.5 | | | $ | 89.0 | | | $ | 87.3 | |
| * | The foreign currency translation gains that had accumulated in OCI were reclassified from OCI to miscellaneous income when Integrys Energy Services substantially completed the liquidation of its Canadian subsidiaries during 2010. At December 31, 2010, no amounts remained in accumulated OCI related to foreign currency translation. |
NOTE 24--REGULATORY ENVIRONMENT
Wisconsin
2011 Rates
On January 13, 2011, the PSCW issued a final written order for WPS authorizing an electric rate increase of $21.0 million, excluding the impact of a $15.2 million estimated fuel refund (including carrying costs) from 2010, and requiring an $8.3 million decrease in natural gas rates, effective January 14, 2011. The new rates reflect a 10.30% return on common equity and a common equity ratio of 51.65% in WPS's regulatory capital structure. The order also adopted new electric fuel rules effective January 1, 2011. The rulemaking process to implement the new fuel rules is expected to be complete in March 2011.
2010 Rates
On December 22, 2009, the PSCW issued a final written order for WPS authorizing an electric rate increase of $18.2 million, offset by an $18.2 million refund of 2009 and 2008 fuel cost over-collections, and a retail natural gas rate increase of $13.5 million, effective January 1, 2010. Based on an order issued on April 1, 2010, the remaining $10.0 million of the total 2008 and 2009 fuel cost over-collections, plus interest of $1.3 million, were refunded to customers in April and May 2010, and the 2010 fuel cost
over-collections were made subject to refund as of that date. As of December 31, 2010, the balance of the 2010 fuel cost over-collections to be refunded to customers throughout 2011 was $15.2 million, which was recorded as a short-term regulatory liability.
2009 Rates
On December 30, 2008, the PSCW issued a final written order for WPS authorizing no change in retail electric rates from the fuel surcharge adjusted rates authorized effective July 4, 2008, and a $3.0 million decrease in retail natural gas rates. The PSCW also approved a decoupling mechanism as a four-year pilot program, which allows WPS to defer and recover or refund in future rate proceedings all or a portion of the differences between the actual and authorized margin per customer impact of variations in volumes. The annual deferral or refund is limited to $14.0 million for electric service and $8.0 million for natural gas service. The mechanism does not adjust for changes in volume resulting from changes in customer count and does not cover large commercial and industrial customers.
2008 Rates
On January 15, 2008, the PSCW issued a final written order for WPS authorizing a retail electric rate increase of $23.0 million, and on February 11, 2008, WPS filed an application with the PSCW to adjust its 2008 electric rates for increased fuel and purchased power costs. The PSCW approved an interim annual fuel surcharge increase of $29.7 million on March 20, 2008, and an additional final fuel surcharge increase of $18.3 million, effective July 4, 2008.
On September 30, 2008, the PSCW reopened the 2008 fuel surcharge to review forecasted fuel costs, as WPS's current and anticipated annual fuel costs were below those projected in the fuel surcharge. As a result of the lower fuel and purchased power costs, WPS's rates from September 30, 2008, through December 31, 2008, were subject to refund. On February 9, 2009, WPS filed a request with the PSCW to refund approximately $5 million of 2008 fuel costs to Wisconsin electric retail customers, which resulted in a credit to customers' bills in March and April 2009.
Michigan
2011 UPPCO Rates
On December 21, 2010, the MPSC issued an order approving a settlement agreement for UPPCO authorizing a retail electric rate increase of $8.9 million, effective January 1, 2011. The new rates reflect a 10.30% return on common equity and a common equity ratio of 54.86% in UPPCO's regulatory capital structure. The order requires that UPPCO terminate its uncollectibles expense tracking mechanism (discussed below) after the close of December 2010 business, but retains the decoupling mechanism.
2010 UPPCO Rates
On December 16, 2009, the MPSC issued a final written order for UPPCO authorizing a retail electric rate increase of $6.5 million, effective January 1, 2010. The new rates reflected a 10.90% return on common equity and a common equity ratio of 54.83% in UPPCO's regulatory capital structure. The order included approval of a decoupling mechanism, as well as an uncollectibles expense tracking mechanism, which allows for the deferral and subsequent recovery or refund of 80% of the difference between actual write-offs (net of recoveries) and bad debt expense included in utility rates, both effective January 1, 2010.
2010 MGU Rates
On December 16, 2009, the MPSC issued a final written order authorizing MGU a retail natural gas rate increase of $3.5 million, effective January 1, 2010. The new rates reflect a 10.75% return on common equity and a common equity ratio of 50.26% in MGU's regulatory capital structure. The order included approval of an uncollectibles expense tracking mechanism, which allows for the deferral and subsequent
recovery or refund of 80% of the difference between actual write-offs (net of recoveries) and bad debt expense included in utility rates, effective January 1, 2010. The MPSC also granted a decoupling mechanism for MGU, which adjusts for the impact on revenues of changes in weather-normalized use per customer for residential and small commercial customers, effective January 1, 2010.
2009 MGU Rates
On January 13, 2009, the MPSC issued a final written order for MGU approving a settlement agreement authorizing an annual retail natural gas rate increase of $6.0 million, effective January 14, 2009. The new rates reflected a 10.45% return on common equity and a common equity ratio of 50.01% in MGU's regulatory capital structure.
2008 WPS Rates
On December 4, 2007, the MPSC issued a final written order for WPS authorizing a retail electric rate increase of $0.6 million, effective December 5, 2007. The new rates reflected a 10.60% return on common equity and a common equity ratio of 56.39% in WPS's regulatory capital structure.
Illinois
2011 Rate Cases
On February 15, 2011, PGL and NSG filed applications with the ICC to increase retail natural gas rates $125.4 million and $8.7 million, respectively, with rates expected to be effective in January 2012. The filings for both PGL and NSG include requests for an 11.25% return on common equity and a common equity ratio of 56.00% in their regulatory capital structures. PGL and NSG each requested that the ICC make their decoupling mechanisms permanent.
2010 Rates
On January 21, 2010, the ICC issued a final order authorizing a retail natural gas rate increase of $69.8 million for PGL and $13.9 million for NSG, effective January 28, 2010. The rates for PGL reflect a 10.23% return on common equity and a common equity ratio of 56.00% in PGL's regulatory capital structure. The rates for NSG reflect a 10.33% return on common equity and a common equity ratio of 56.00% in NSG's regulatory capital structure. The ICC approved a rider mechanism to recover the costs, above an annual baseline, of an accelerated natural gas main replacement program by PGL through a special charge on customers' bills, known as Rider ICR. The rate order also approved the recovery of net dismantling costs of property, plant, and equipment over the life of the asset rather than when incurred. In June 2010, the ICC issued a rehearing order approving PGL's proposed baseline of $45.28 million with an annual escalation factor. Recovery of costs for the accelerated gas main replacement program will begin in 2011 with the first Rider ICR charges being effective April 1, 2011. The AG, the Citizens Utility Board, PGL, and NSG filed appeals with the Illinois Appellate Court, First District.
On September 30, 2010, the Illinois Appellate Court, Second District, issued a decision which, among other things, rejected the ICC's approval of a Commonwealth Edison Company (ComEd) cost recovery mechanism for system modernization in the form of advanced metering technology (also called "smart grid") because it was improper single issue ratemaking. Single issue ratemaking is one of the arguments raised in the pending appeal of NSG's and PGL's decoupling mechanism approved in the 2008 rate case, and the pending appeal of Rider ICR. Integrys Energy Group is evaluating the decision of the Illinois Appellate Court, Second District, in light of other, contrary precedents, and whether differences in the decoupling mechanism and Rider ICR distinguish them from ComEd's rider. The appeal involving the decoupling mechanism is pending before the Illinois Appellate Court, Second District. The appeal involving Rider ICR is pending before the Illinois Appellate Court, First District.
2009 Illinois Legislation
In July 2009, Illinois Senate Bill (SB) 1918 was signed into law. Under SB 1918, PGL and NSG filed a rider with the ICC in September 2009 to recover (or refund) the incremental difference between the rate case authorized uncollectible expense and the actual uncollectible expense reported to the ICC each year. The ICC approved the rider in February 2010. SB 1918 also requires a percentage of income payment plan for low-income utility customers, which PGL and NSG began offering as a transition program in 2010, with a permanent program to begin no later than September 1, 2011. Additionally, SB 1918 requires an on-bill financing program that PGL and NSG will begin in June 2011, which allows certain residential customers of PGL and NSG to borrow funds from a th ird party lender to purchase energy efficiency measures and pay back over time through a charge on their utility bill. Finally, SB 1918 requires an EEP to meet specified energy efficiency standards, which is pending before the ICC, with the first program year beginning June 2011.
2008 Rates
On February 5, 2008, the ICC issued a final order authorizing a retail natural gas rate increase of $71.2 million for PGL, and requiring a retail natural gas rate decrease of $0.2 million for NSG, both effective February 14, 2008. The rates for PGL reflected a 10.19% return on common equity and a common equity ratio of 56.00% in PGL's regulatory capital structure. The rates for NSG reflected a 9.99% return on common equity and a common equity ratio of 56.00% in NSG's regulatory capital structure. The order included approval of a decoupling mechanism, effective March 1, 2008, as a four-year pilot program, which allows PGL and NSG to adjust rates going forward to recover or refund the difference between the actual and authorized margin impact of variations in volumes.
The ICC denied PGL's and NSG's request for rehearing of their rate orders, and all but one such request from interveners, which only affected PGL. The ICC approved a stipulation resolving the rehearing issue. Following the stipulation approval, PGL, NSG and four other parties filed appeals with the Illinois Appellate Court regarding the decoupling mechanism. In December 2010, the Illinois Appellate Court, First District, concluded it lacked jurisdiction over the appeals and transferred the matter to the Illinois Appellate Court, Second District.
Minnesota
2011 Rates
On November 30, 2010, MERC filed an application with the MPUC to increase retail natural gas rates by $15.2 million, with interim rates effective February 2011, and final rates effective during the first quarter of 2012. The filing includes a request for an 11.25% return on common equity and a common equity ratio of 50.20% in MERC's regulatory capital structure. On January 28, 2011, the MPUC approved an interim rate order authorizing MERC a retail natural gas rate increase of $7.5 million, effective February 1, 2011. The interim rates reflect a 10.21% return on common equity and a common equity ratio of 50.20% in MERC's regulatory capital structure.
2010 Rates
On December 4, 2009, the MPUC approved a final written order authorizing MERC a retail natural gas rate increase of $15.4 million, effective January 1, 2010. The new rates reflected a 10.21% return on common equity and a common equity ratio of 48.77% in MERC's regulatory capital structure. Since the final approved rate increase was lower than the interim rate increase that went into effect in October 2008, refunds of $5.5 million were made to customers in March 2010. MERC also received MPUC approval in 2010 to increase its per therm cost recovery charges related to its conservation improvement program.
Federal
Through a series of orders issued by the FERC, Regional Through and Out Rates for transmission service between the MISO and the PJM Interconnection were eliminated effective December 1, 2004. To compensate transmission owners for the revenue they would no longer receive due to this rate elimination, the FERC ordered a transitional pricing mechanism called the Seams Elimination Charge Adjustment (SECA) be put into place. Load-serving entities paid these SECA charges during a 16-month transition period from December 1, 2004, through March 31, 2006.
Integrys Energy Services initially expensed all but $4.5 million of the total $19.2 million of billings received for the 16-month transitional period, as it was considered probable that at least $4.5 million of the billings would be recovered due to inconsistencies between the FERC's SECA order and the transmission owners' compliance filings. Subsequent to receiving the billings, Integrys Energy Services reached settlement agreements with vendors for a combined $1.6 million, reducing the $4.5 million receivable balance to approximately $3 million.
In August 2006, the administrative law judge hearing the case issued an Initial Decision that was in substantial agreement with all of Integrys Energy Services' positions, and on May 21, 2010, the FERC issued its Final Order on the Initial Decision. In the Final Order, the FERC ruled favorably for Integrys Energy Services on two issues, which are anticipated to result in additional refunds of approximately $2 million, but reversed the rulings of the Initial Decision on nearly every other substantive issue. As a result of this ruling, Integrys Energy Services expensed, as a component of margin, approximately $1 million in the second quarter of 2010, as only about $2 million of the approximate $3 million receivable balance remained probable of collection from counterparties. Integrys Ener gy Services and numerous other parties filed for rehearing of the FERC's Final Order. A number of related orders will be considered for judicial review. Any refunds to Integrys Energy Services will include interest for the period from payment to refund.
NOTE 25--SEGMENTS OF BUSINESS
The Segment Reporting Topic of the FASB ASC requires that companies disclose segment information based on how management makes decisions about allocating resources to segments and measuring their performance.
During the fourth quarter of 2010, Integrys Energy Group changed its method of accounting for ITCs from the flow-through method to the deferral method. As such, certain previously reported amounts have been retrospectively adjusted. See Note 1(d), "Change in Accounting Policy," for more information.
Integrys Energy Group manages its reportable segments separately due to their different operating and regulatory environments. At December 31, 2010, Integrys Energy Group reported five segments, which are described below.
| ● | The natural gas utility segment includes the regulated natural gas utility operations of WPS, MGU, MERC, PGL, and NSG. |
| ● | The electric utility segment includes the regulated electric utility operations of WPS and UPPCO. |
| ● | The electric transmission investment segment includes Integrys Energy Group's approximate 34% ownership interest in ATC. ATC is a federally regulated electric transmission company with operations in Wisconsin, Michigan, Minnesota, and Illinois. |
| ● | Integrys Energy Services is a diversified nonregulated retail energy supply and services company that primarily sells electricity and natural gas to commercial, industrial, and residential customers in deregulated markets. In addition, Integrys Energy Services invests in energy assets with renewable attributes. |
| ● | The holding company and other segment includes the operations of the Integrys Energy Group holding company and the PEC holding company, along with any nonutility activities at WPS, MGU, MERC, UPPCO, PGL, NSG, and IBS. Equity earnings from Integrys Energy Group's investment in WRPC are also included in the holding company and other segment. |
The tables below present information for the respective years pertaining to Integrys Energy Group's reportable segments:
| | | Regulated Operations | | | Nonutility and Nonregulated Operations | | | | | | | |
2010 (Millions) | | Natural Gas Utility | | | Electric Utility | | | Electric Transmission Investment | | | Total Regulated Operations | | | Integrys Energy Services | | | Holding Company and Other | | | Reconciling Eliminations | | | Integrys Energy Group Consolidated | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Income Statement | | | | | | | | | | | | | | | | | | | | | | | | |
| External revenues | | $ | 2,056.4 | | | $ | 1,312.1 | | | $ | - | | | $ | 3,368.5 | | | $ | 1,822.5 | | | $ | 12.2 | | | $ | - | | | $ | 5,203.2 | |
| Intersegment revenues | | | 0.8 | | | | 26.8 | | | | - | | | | 27.6 | | | | 1.2 | | | | - | | | | (28.8 | ) | | | - | |
| Impairment losses on property, plant, and equipment | | | - | | | | - | | | | - | | | | - | | | | 43.2 | | | | - | | | | - | | | | 43.2 | |
| Net loss on Integrys Energy Services’ dispositions related to strategy change | | | - | | | | - | | | | - | | | | - | | | | 14.1 | | | | - | | | | - | | | | 14.1 | |
| Restructuring expense | | | (0.2 | ) | | | (0.3 | ) | | | - | | | | (0.5 | ) | | | 8.3 | | | | 0.1 | | | | - | | | | 7.9 | |
Depreciation and amortization expense | | | 130.9 | | | | 94.7 | | | | - | | | | 225.6 | | | | 17.2 | | | | 23.0 | | | | - | | | | 265.8 | |
Miscellaneous income (expense) | | | 1.6 | | | | 1.5 | | | | 77.6 | | | | 80.7 | | | | 9.1 | | | | 41.9 | | | | (40.2 | ) | | | 91.5 | |
| Interest expense (income) | | | 49.7 | | | | 43.9 | | | | - | | | | 93.6 | | | | 6.7 | | | | 87.8 | | | | (40.2 | ) | | | 147.9 | |
| Provision (benefit) for income taxes | | | 65.3 | | | | 63.1 | | | | 31.4 | | | | 159.8 | | | | 3.6 | | | | (15.2 | ) | | | - | | | | 148.2 | |
| Net income (loss) from continuing operations | | | 84.6 | | | | 112.3 | | | | 46.2 | | | | 243.1 | | | | 2.8 | | | | (22.4 | ) | | | - | | | | 223.5 | |
| Discontinued operations | | | - | | | | - | | | | - | | | | - | | | | 0.2 | | | | - | | | | - | | | | 0.2 | |
| Preferred stock dividends of subsidiary | | | (0.6 | ) | | | (2.5 | ) | | | - | | | | (3.1 | ) | | | - | | | | - | | | | - | | | | (3.1 | ) |
| Noncontrolling interest in subsidiaries | | | - | | | | - | | | | - | | | | - | | | | 0.3 | | | | - | | | | - | | | | 0.3 | |
| Net income (loss) attributed to common shareholders | | | 84.0 | | | | 109.8 | | | | 46.2 | | | | 240.0 | | | | 3.3 | | | | (22.4 | ) | | | - | | | | 220.9 | |
| Total assets | | | 4,828.1 | | | | 2,929.8 | | | | 416.3 | | | | 8,174.2 | | | | 1,234.8 | | | | 1,666.7 | | | | (1,258.9 | ) | | | 9,816.8 | |
| Cash expenditures for long-lived assets | | | 133.6 | | | | 87.2 | | | | - | | | | 220.8 | | | | 15.2 | | | | 22.8 | | | | - | | | | 258.8 | |
| | | Regulated Operations | | | Nonutility and Nonregulated Operations | | | | | | | |
2009 (Millions) | | Natural Gas Utility | | | Electric Utility | | | Electric Transmission Investment | | | Total Regulated Operations | | | Integrys Energy Services | | | Holding Company and Other | | | Reconciling Eliminations | | | Integrys Energy Group Consolidated | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Income Statement | | | | | | | | | | | | | | | | | | | | | | | | |
| External revenues | | $ | 2,236.9 | | | $ | 1,258.9 | | | $ | - | | | $ | 3,495.8 | | | $ | 3,992.5 | | | $ | 11.5 | | | $ | - | | | $ | 7,499.8 | |
| Intersegment revenues | | | 0.6 | | | | 42.7 | | | | - | | | | 43.3 | | | | 1.5 | | | | - | | | | (44.8 | ) | | | - | |
| Impairment losses on property, plant, and equipment | | | - | | | | - | | | | - | | | | - | | | | 0.7 | | | | - | | | | - | | | | 0.7 | |
| Net loss on Integrys Energy Services dispositions related to strategy change | | | - | | | | - | | | | - | | | | - | | | | 28.9 | | | | - | | | | - | | | | 28.9 | |
| Restructuring expense | | | 6.9 | | | | 8.6 | | | | - | | | | 15.5 | | | | 27.2 | | | | 0.8 | | | | - | | | | 43.5 | |
| Goodwill impairment loss | | | 291.1 | | | | - | | | | - | | | | 291.1 | | | | - | | | | - | | | | - | | | | 291.1 | |
Depreciation and amortization expense | | | 106.1 | | | | 90.3 | | | | - | | | | 196.4 | | | | 19.0 | | | | 15.2 | | | | - | | | | 230.6 | |
Miscellaneous income (expense) | | | 3.1 | | | | 4.8 | | | | 75.3 | | | | 83.2 | | | | 6.0 | | | | 46.5 | | | | (46.7 | ) | | | 89.0 | |
| Interest expense (income) | | | 52.2 | | | | 41.6 | | | | - | | | | 93.8 | | | | 13.1 | | | | 104.6 | | | | (46.7 | ) | | | 164.8 | |
| Provision (benefit) for income taxes | | | 7.8 | | | | 51.4 | | | | 29.8 | | | | 89.0 | | | | 19.0 | | | | (24.3 | ) | | | - | | | | 83.7 | |
| Net income (loss) from continuing operations | | | (171.5 | ) | | | 91.4 | | | | 45.5 | | | | (34.6 | ) | | | - | | | | (35.7 | ) | | | - | | | | (70.3 | ) |
| Discontinued operations | | | - | | | | - | | | | - | | | | - | | | | 2.8 | | | | - | | | | - | | | | 2.8 | |
| Preferred stock dividends of subsidiary | | | (0.6 | ) | | | (2.5 | ) | | | - | | | | (3.1 | ) | | | - | | | | - | | | | - | | | | (3.1 | ) |
| Noncontrolling interest in subsidiaries | | | - | | | | - | | | | - | | | | - | | | | 1.0 | | | | - | | | | - | | | | 1.0 | |
| Net income (loss) attributed to common shareholders | | | (172.1 | ) | | | 88.9 | | | | 45.5 | | | | (37.7 | ) | | | 3.8 | | | | (35.7 | ) | | | - | | | | (69.6 | ) |
| Total assets | | | 4,675.7 | | | | 2,834.7 | | | | 395.9 | | | | 7,906.3 | | | | 3,547.5 | | | | 1,462.7 | | | | (1,071.9 | ) | | | 11,844.6 | |
| Cash expenditures for long-lived assets | | | 136.9 | | | | 250.4 | | | | - | | | | 387.3 | | | | 22.4 | | | | 34.5 | | | | - | | | | 444.2 | |
| | | Regulated Operations | | | Nonutility and Nonregulated Operations | | | | | | | |
2008 (Millions) | | Natural Gas Utility | | | Electric Utility | | | Electric Transmission Investment | | | Total Regulated Operations | | | Integrys Energy Services | | | Holding Company and Other | | | Reconciling Eliminations | | | Integrys Energy Group Consolidated | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Income Statement | | | | | | | | | | | | | | | | | | | | | | | | |
| External revenues | | $ | 3,025.3 | | | $ | 1,284.6 | | | $ | - | | | $ | 4,309.9 | | | $ | 9,726.5 | | | $ | 11.4 | | | $ | - | | | $ | 14,047.8 | |
| Intersegment revenues | | | 0.6 | | | | 44.3 | | | | - | | | | 44.9 | | | | 8.7 | | | | 0.6 | | | | (54.2 | ) | | | - | |
| Impairment losses on property, plant, and equipment | | | - | | | | - | | | | - | | | | - | | | | 0.5 | | | | - | | | | - | | | | 0.5 | |
| Goodwill impairment loss | | | 6.5 | | | | - | | | | - | | | | 6.5 | | | | - | | | | - | | | | - | | | | 6.5 | |
Depreciation and amortization expense | | | 108.3 | | | | 84.3 | | | | - | | | | 192.6 | | | | 14.5 | | | | 14.3 | | | | - | | | | 221.4 | |
Miscellaneous income (expense) | | | 7.0 | | | | 6.0 | | | | 66.1 | | | | 79.1 | | | | 8.7 | | | | 45.4 | | | | (45.9 | ) | | | 87.3 | |
| Interest expense (income) | | | 56.6 | | | | 36.7 | | | | - | | | | 93.3 | | | | 12.1 | | | | 98.6 | | | | (45.9 | ) | | | 158.1 | |
| Provision (benefit) for income taxes | | | 57.1 | | | | 48.1 | | | | 26.4 | | | | 131.6 | | | | (46.3 | ) | | | (24.2 | ) | | | - | | | | 61.1 | |
| Net income (loss) from continuing operations | | | 85.5 | | | | 94.7 | | | | 39.7 | | | | 219.9 | | | | (75.4 | ) | | | (29.7 | ) | | | - | | | | 114.8 | |
| Discontinued operations | | | - | | | | - | | | | - | | | | - | | | | 3.9 | | | | 0.8 | | | | - | | | | 4.7 | |
| Preferred stock dividends of subsidiary | | | (1.0 | ) | | | (2.1 | ) | | | - | | | | (3.1 | ) | | | - | | | | - | | | | - | | | | (3.1 | ) |
| Noncontrolling interest in subsidiaries | | | - | | | | - | | | | - | | | | - | | | | 0.1 | | | | - | | | | - | | | | 0.1 | |
| Net income (loss) attributed to common shareholders | | | 84.5 | | | | 92.6 | | | | 39.7 | | | | 216.8 | | | | (71.4 | ) | | | (28.9 | ) | | | - | | | | 116.5 | |
| Total assets | | | 5,173.8 | | | | 2,752.4 | | | | 346.9 | | | | 8,273.1 | | | | 5,046.4 | | | | 2,144.3 | | | | (1,195.1 | ) | | | 14,268.7 | |
| Cash expenditures for long-lived assets | | | 237.3 | | | | 207.4 | | | | - | | | | 444.7 | | | | 68.1 | | | | 20.0 | | | | - | | | | 532.8 | |
| | | | | | | | | | | | | | | | | | | |
Geographic Information (Millions) | | 2010 | | | 2009 | | | 2008 | |
| | Revenues | | | Long-Lived Assets | | | Revenues | | | Long-Lived Assets | | | Revenues | | | Long-Lived Assets | |
| United States | | $ | 5,199.7 | | | $ | 7,677.0 | | | $ | 6,628.5 | | | $ | 7,537.0 | | | $ | 11,639.3 | | | $ | 7,572.6 | |
Canada * | | | 3.5 | | | | - | | | | 871.3 | | | | - | | | | 2,408.5 | | | | 20.0 | |
| Total | | $ | 5,203.2 | | | $ | 7,677.0 | | | $ | 7,499.8 | | | $ | 7,537.0 | | | $ | 14,047.8 | | | $ | 7,592.6 | |
| * | Revenues and assets of Canadian subsidiaries. Includes the impact in 2009 of the sale of Canadian operations at Integrys Energy Services. |
NOTE 26--QUARTERLY FINANCIAL INFORMATION (Unaudited)
During the fourth quarter of 2010, Integrys Energy Group changed its method of accounting for ITCs from the flow-through method to the deferral method. As such, certain previously reported amounts have been retrospectively adjusted. See Note 1(d), "Change in Accounting Policy," for more information.
| As Computed Under Deferral Method | | | | | | | | | | | | | | | |
| (Millions, except share amounts) | | First Quarter | | | Second Quarter | | | Third Quarter | | | Fourth Quarter | | | Total | |
| 2010 | | | | | | | | | | | | | | | |
| Total revenues | | $ | 1,903.4 | | | $ | 1,014.8 | | | $ | 997.9 | | | $ | 1,287.1 | | | $ | 5,203.2 | |
| Operating income | | | 119.4 | | | | 136.2 | | | | 39.2 | | | | 133.3 | | | | 428.1 | |
| Net income (loss) from continuing operations | | | 50.4 | | | | 79.6 | | | | 21.1 | | | | 72.4 | | | | 223.5 | |
| Net income (loss) | | | 50.5 | | | | 79.6 | | | | 21.1 | | | | 72.5 | | | | 223.7 | |
| Net income attributed to common shareholders | | | 49.7 | | | | 79.1 | | | | 20.4 | | | | 71.7 | | | | 220.9 | |
Earnings per common share (basic) * | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) from continuing operations | | | 0.65 | | | | 1.02 | | | | 0.26 | | | | 0.92 | | | | 2.85 | |
| Earnings (loss) per common share (basic) | | | 0.65 | | | | 1.02 | | | | 0.26 | | | | 0.92 | | | | 2.85 | |
Earnings per common share (diluted) * | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) from continuing operations | | | 0.64 | | | | 1.02 | | | | 0.26 | | | | 0.91 | | | | 2.83 | |
| Earnings (loss) per common share (basic) | | | 0.64 | | | | 1.02 | | | | 0.26 | | | | 0.91 | | | | 2.83 | |
| | | | | | | | | | | | | | | | | | | | | |
| 2009 | | | | | | | | | | | | | | | | | | | | |
| Total revenues | | $ | 3,200.8 | | | $ | 1,427.6 | | | $ | 1,297.8 | | | $ | 1,573.6 | | | $ | 7,499.8 | |
| Operating income (loss) | | | (145.0 | ) | | | 74.5 | | | | 93.4 | | | | 66.3 | | | | 89.2 | |
| Net income (loss) from continuing operations | | | (179.3 | ) | | | 36.2 | | | | 49.3 | | | | 23.5 | | | | (70.3 | ) |
| Net income (loss) | | | (179.3 | ) | | | 36.5 | | | | 51.6 | | | | 23.7 | | | | (67.5 | ) |
| Net income (loss) attributed to common shareholders | | | (180.0 | ) | | | 35.9 | | | | 51.3 | | | | 23.2 | | | | (69.6 | ) |
Earnings per common share (basic) * | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) from continuing operations | | | (2.35 | ) | | | 0.47 | | | | 0.64 | | | | 0.30 | | | | (0.95 | ) |
| Earnings (loss) per common share (basic) | | | (2.35 | ) | | | 0.47 | | | | 0.67 | | | | 0.30 | | | | (0.91 | ) |
Earnings per common share (diluted) * | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) from continuing operations | | | (2.35 | ) | | | 0.47 | | | | 0.64 | | | | 0.30 | | | | (0.95 | ) |
| Earnings (loss) per common share (basic) | | | (2.35 | ) | | | 0.47 | | | | 0.67 | | | | 0.30 | | | | (0.91 | ) |
| * | Earnings per share for the individual quarters do not total the year ended earnings per share amount because of changes to the average number of shares outstanding and changes in incremental issuable shares throughout the year. |
| As Computed Under Flow-Through Method | | | | | | | | | | | | | | | |
| (Millions, except share amounts) | | First Quarter | | | Second Quarter | | | Third Quarter | | | Fourth Quarter | | | Total | |
| 2010 | | | | | | | | | | | | | | | |
| Total revenues | | $ | 1,903.4 | | | $ | 1,014.8 | | | $ | 997.9 | | | $ | 1,287.1 | | | $ | 5,203.2 | |
| Operating income | | | 119.3 | | | | 136.1 | | | | 39.1 | | | | 133.2 | | | | 427.7 | |
| Net income (loss) from continuing operations | | | 50.2 | | | | 79.4 | | | | 20.9 | | | | 72.1 | | | | 222.6 | |
| Net income (loss) | | | 50.3 | | | | 79.4 | | | | 20.9 | | | | 72.2 | | | | 222.8 | |
| Net income attributed to common shareholders | | | 49.5 | | | | 78.9 | | | | 20.2 | | | | 71.4 | | | | 220.0 | |
Earnings per common share (basic) * | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) from continuing operations | | | 0.64 | | | | 1.02 | | | | 0.26 | | | | 0.92 | | | | 2.84 | |
| Earnings (loss) per common share (basic) | | | 0.64 | | | | 1.02 | | | | 0.26 | | | | 0.92 | | | | 2.84 | |
Earnings per common share (diluted) * | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) from continuing operations | | | 0.64 | | | | 1.01 | | | | 0.26 | | | | 0.91 | | | | 2.82 | |
| Earnings (loss) per common share (basic) | | | 0.64 | | | | 1.01 | | | | 0.26 | | | | 0.91 | | | | 2.82 | |
| | | | | | | | | | | | | | | | | | | | | |
| 2009 | | | | | | | | | | | | | | | | | | | | |
| Total revenues | | $ | 3,200.8 | | | $ | 1,427.6 | | | $ | 1,297.8 | | | $ | 1,573.6 | | | $ | 7,499.8 | |
| Operating income (loss) | | | (145.1 | ) | | | 72.9 | | | | 93.3 | | | | 66.3 | | | | 87.4 | |
| Net income (loss) from continuing operations | | | (179.5 | ) | | | 35.0 | | | | 49.1 | | | | 23.8 | | | | (71.6 | ) |
| Net income (loss) | | | (179.5 | ) | | | 35.3 | | | | 51.4 | | | | 24.0 | | | | (68.8 | ) |
| Net income (loss) attributed to common shareholders | | | (180.2 | ) | | | 34.7 | | | | 51.1 | | | | 23.5 | | | | (70.9 | ) |
Earnings per common share (basic) * | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) from continuing operations | | | (2.35 | ) | | | 0.45 | | | | 0.64 | | | | 0.31 | | | | (0.96 | ) |
| Earnings (loss) per common share (basic) | | | (2.35 | ) | | | 0.45 | | | | 0.67 | | | | 0.31 | | | | (0.92 | ) |
Earnings per common share (diluted) * | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) from continuing operations | | | (2.35 | ) | | | 0.45 | | | | 0.63 | | | | 0.31 | | | | (0.96 | ) |
| Earnings (loss) per common share (basic) | | | (2.35 | ) | | | 0.45 | | | | 0.66 | | | | 0.31 | | | | (0.92 | ) |
| * | Earnings (loss) per share for the individual quarters do not total the year ended earnings (loss) per share amount because of changes to the average number of shares outstanding and changes in incremental issuable shares throughout the year. |
Because of various factors, the quarterly results of operations are not necessarily comparable.
H. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENTSINTEGRYS ENERGY GROUP, INC. (PARENT COMPANY ONLY)
The following is supplemental disclosure to the Integrys Energy Group Parent Company Statements of Cash Flows:
The following table shows the financial instruments included on the Balance Sheets of Integrys Energy Group Parent Company that are not recorded at fair value.
At December 31, 2010, Integrys Energy Group (Parent Company) was in compliance with all covenants relating to outstanding debt to the related parties. A schedule of all principal debt payment amounts for Integrys Energy Group (Parent Company) is as follows:
The principal components of Integrys Energy Group’s deferred income tax assets and liabilities recognized in the balance sheet as of December 31 are as follows:
Carryforward periods for state capital and operating loss carryforwards vary, but in the majority of states in which we do business, the period is 15 years or more. The balance of the carryforwards of state net operating losses is $192.4 million for all states. No valuation allowances have been established due to the reasonable certainty of the ability to realize the benefit of these losses in the future.
Set forth below is a listing of all exhibits to this Annual Report on Form 10-K, including those incorporated by reference.
Certain other instruments, which would otherwise be required to be listed below, have not been so listed as such instruments do not authorize long-term debt securities in an amount that exceeds 10% of the total assets of Integrys Energy Group and its subsidiaries on a consolidated basis. Integrys Energy Group agrees to furnish a copy of any such instrument to the SEC upon request.
Explanatory Note: Many of the exhibits listed below were entered into when Integrys Energy Group, Inc. was known as WPS Resources Corporation but have been referred to below by reference to its current name.
