10-Q 1 a12-20086_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2012

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                   to                 

 

Commission
File Number

 

Registrant; State of Incorporation;
Address; and Telephone Number

 

Internal Revenue Service
Employer
Identification No.

 

 

 

 

 

1-11337

 

INTEGRYS ENERGY GROUP, INC.
(A Wisconsin Corporation)
130 East Randolph Street
Chicago, Illinois 60601-6207
(312) 228-5400

 

39-1775292

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x   No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

 

 

Common stock, $1 par value,
78,287,906 shares outstanding at
October 30, 2012

 

 

 



Table of Contents

 

INTEGRYS ENERGY GROUP, INC.

 

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended September 30, 2012

 

TABLE OF CONTENTS

 

 

 

 

Page

 

 

 

 

 

FORWARD-LOOKING STATEMENTS

 

1

 

 

 

 

PART I.

FINANCIAL INFORMATION

 

2

 

 

 

 

ITEM 1.

FINANCIAL STATEMENTS (Unaudited)

 

2

 

 

 

 

 

Condensed Consolidated Statements of Income

 

2

 

Condensed Consolidated Statements of Comprehensive Income

 

3

 

Condensed Consolidated Balance Sheets

 

4

 

Condensed Consolidated Statements of Cash Flows

 

5

 

 

 

 

 

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

 

6 – 38

 

 

 

 

 

 

Page

 

 

 

 

Note 1

Financial Information

6

 

 

 

 

Note 2

Cash and Cash Equivalents

6

 

 

 

 

Note 3

Risk Management Activities

7

 

 

 

 

Note 4

Agreement to Purchase Fox Energy Center

11

 

 

 

 

Note 5

Discontinued Operations

11

 

 

 

 

Note 6

Investment in ATC

13

 

 

 

 

Note 7

Inventories

14

 

 

 

 

Note 8

Goodwill and Other Intangible Assets

14

 

 

 

 

Note 9

Short-Term Debt and Lines of Credit

16

 

 

 

 

Note 10

Long-Term Debt

17

 

 

 

 

Note 11

Income Taxes

17

 

 

 

 

Note 12

Commitments and Contingencies

18

 

 

 

 

Note 13

Guarantees

22

 

 

 

 

Note 14

Employee Benefit Plans

23

 

 

 

 

Note 15

Stock-Based Compensation

23

 

 

 

 

Note 16

Common Equity

26

 

 

 

 

Note 17

Variable Interest Entities

28

 

 

 

 

Note 18

Fair Value

29

 

 

 

 

Note 19

Advertising Costs

33

 

 

 

 

Note 20

Regulatory Environment

33

 

 

 

 

Note 21

Segments of Business

36

 

 

 

 

Note 22

New Accounting Pronouncements

38

 

 

 

 

 

 

 

 

 

 

ITEM 2.

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

 

39 – 58

 

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

 

59

 

 

 

 

ITEM 4.

Controls and Procedures

 

60

 

 

 

 

PART II.

OTHER INFORMATION

 

61

 

 

 

 

ITEM 1.

Legal Proceedings

 

61

 

 

 

 

ITEM 1A.

Risk Factors

 

61

 

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

61

 

 

 

 

ITEM 5.

Other Information

 

62

 

 

 

 

ITEM 6.

Exhibits

 

62

 

 

 

 

Signature

 

 

63

 

 

 

 

EXHIBIT INDEX

 

 

64

 

i



Table of Contents

 

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

 

AFUDC

Allowance for Funds Used During Construction

AMRP

Accelerated Natural Gas Main Replacement Program

ASU

Accounting Standards Update

ATC

American Transmission Company LLC

EPA

United States Environmental Protection Agency

FERC

Federal Energy Regulatory Commission

GAAP

United States Generally Accepted Accounting Principles

IBS

Integrys Business Support, LLC

ICC

Illinois Commerce Commission

ICR

Infrastructure Cost Recovery

ITF

Integrys Transportation Fuels, LLC (doing business as Trillium CNG)

LIFO

Last-in, First-out

MERC

Minnesota Energy Resources Corporation

MGU

Michigan Gas Utilities Corporation

MISO

Midwest Independent Transmission System Operator, Inc.

MPSC

Michigan Public Service Commission

MPUC

Minnesota Public Utilities Commission

N/A

Not Applicable

NSG

North Shore Gas Company

OCI

Other Comprehensive Income

PELLC

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

PGL

The Peoples Gas Light and Coke Company

PSCW

Public Service Commission of Wisconsin

SEC

United States Securities and Exchange Commission

UPPCO

Upper Peninsula Power Company

WDNR

Wisconsin Department of Natural Resources

WPS

Wisconsin Public Service Corporation

 

ii



Table of Contents

 

Forward-Looking Statements

 

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

 

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

 

 

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

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

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

·                  Costs and effects of litigation and administrative proceedings, settlements, investigations, and claims, including manufactured gas plant site cleanup, third-party intervention in permitting and licensing projects, compliance with Clean Air Act requirements at generation plants, and prudence and reconciliation of costs recovered in revenues through automatic gas cost recovery mechanisms;

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

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

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

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

·                  The ability to retain market-based rate authority;

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

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

·                  The impact of unplanned facility outages;

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

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

·                  Potential business strategies, including mergers, acquisitions, and construction or disposition of assets or businesses, which cannot be assured to be completed timely or within budgets;

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

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

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

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

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

·                  The ability to use tax credit and loss carryforwards;

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

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

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

 

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

 

1



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.   Financial Statements

 

INTEGRYS ENERGY GROUP, INC.

 

 

 

Three Months Ended

 

Nine Months Ended

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

September 30

 

September 30

 

(Millions, except per share data)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Utility revenues

 

$

582.3

 

$

596.2

 

$

2,116.9

 

$

2,435.7

 

Nonregulated revenues

 

345.3

 

338.2

 

898.6

 

1,130.1

 

Total revenues

 

927.6

 

934.4

 

3,015.5

 

3,565.8

 

 

 

 

 

 

 

 

 

 

 

Utility cost of fuel, natural gas, and purchased power

 

228.2

 

245.7

 

926.4

 

1,211.6

 

Nonregulated cost of sales

 

263.9

 

292.8

 

730.4

 

985.1

 

Operating and maintenance expense

 

240.6

 

240.3

 

749.1

 

760.4

 

Depreciation and amortization expense

 

62.9

 

61.8

 

187.7

 

185.3

 

Taxes other than income taxes

 

23.8

 

23.5

 

74.0

 

73.5

 

Operating income

 

108.2

 

70.3

 

347.9

 

349.9

 

 

 

 

 

 

 

 

 

 

 

Earnings from equity method investments

 

22.2

 

19.9

 

65.5

 

59.6

 

Miscellaneous income

 

3.1

 

1.0

 

7.2

 

4.1

 

Interest expense

 

(29.9

)

(31.3

)

(90.0

)

(98.0

)

Other expense

 

(4.6

)

(10.4

)

(17.3

)

(34.3

)

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

103.6

 

59.9

 

330.6

 

315.6

 

Provision for income taxes

 

29.4

 

22.5

 

106.3

 

121.7

 

Net income from continuing operations

 

74.2

 

37.4

 

224.3

 

193.9

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations, net of tax

 

(7.9

)

0.2

 

(8.7

)

(2.9

)

Net income

 

66.3

 

37.6

 

215.6

 

191.0

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends of subsidiary

 

(0.7

)

(0.7

)

(2.3

)

(2.3

)

Noncontrolling interest in subsidiaries

 

0.1

 

 

0.1

 

 

Net income attributed to common shareholders

 

$

65.7

 

$

36.9

 

$

213.4

 

$

188.7

 

 

 

 

 

 

 

 

 

 

 

Average shares of common stock

 

 

 

 

 

 

 

 

 

Basic

 

78.5

 

78.7

 

78.5

 

78.6

 

Diluted

 

79.3

 

79.2

 

79.3

 

78.9

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share (basic)

 

 

 

 

 

 

 

 

 

Net income from continuing operations

 

$

0.94

 

$

0.47

 

$

2.83

 

$

2.44

 

Discontinued operations, net of tax

 

(0.10

)

 

(0.11

)

(0.04

)

Earnings per common share (basic)

 

$

0.84

 

$

0.47

 

$

2.72

 

$

2.40

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share (diluted)

 

 

 

 

 

 

 

 

 

Net income from continuing operations

 

$

0.93

 

$

0.47

 

$

2.80

 

$

2.43

 

Discontinued operations, net of tax

 

(0.10

)

 

(0.11

)

(0.04

)

Earnings per common share (diluted)

 

$

0.83

 

$

0.47

 

$

2.69

 

$

2.39

 

 

 

 

 

 

 

 

 

 

 

Dividends per common share declared

 

$

0.68

 

$

0.68

 

$

2.04

 

$

2.04

 

 

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

 

2



Table of Contents

 

INTEGRYS ENERGY GROUP, INC.

 

 

 

Three Months Ended

 

Nine Months Ended

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 

September 30

 

September 30

 

(Millions)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

66.3

 

$

37.6

 

$

215.6

 

$

191.0

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

 

 

 

 

 

 

 

 

Unrealized net gains (losses) arising during period, net of tax of $0.1 million, $- million, $(0.1) million, and $1.2 million, respectively

 

0.1

 

(0.4

)

(0.1

)

1.5

 

Reclassification of net losses to net income, net of tax of $1.0 million, $0.6 million, $2.6 million, and $3.4 million, respectively

 

1.6

 

1.3

 

4.1

 

5.4

 

Cash flow hedges, net

 

1.7

 

0.9

 

4.0

 

6.9

 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plans

 

 

 

 

 

 

 

 

 

 Amortization of pension and other postretirement benefit costs included in net periodic benefit cost, net of tax of $0.2 million, $0.2 million, $0.7 million, and $0.4 million, respectively

 

0.4

 

0.2

 

1.1

 

0.7

 

Other comprehensive income, net of tax

 

2.1

 

1.1

 

5.1

 

7.6

 

Comprehensive income

 

68.4

 

38.7

 

220.7

 

198.6

 

Preferred stock dividends of subsidiary

 

(0.7

)

(0.7

)

(2.3

)

(2.3

)

Noncontrolling interest in subsidiaries

 

0.1

 

 

0.1

 

 

Comprehensive income attributed to common shareholders

 

$

67.8

 

$

38.0

 

$

218.5

 

$

196.3

 

 

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

 

3



Table of Contents

 

INTEGRYS ENERGY GROUP, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

 

September 30

 

December 31

 

(Millions)

 

2012

 

2011

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

$

18.1

 

$

28.1

 

Collateral on deposit

 

51.6

 

50.9

 

Accounts receivable and accrued unbilled revenues, net of reserves of $42.0 and $47.1, respectively

 

484.6

 

737.7

 

Inventories

 

320.7

 

298.0

 

Assets from risk management activities

 

158.3

 

227.2

 

Regulatory assets

 

117.6

 

125.1

 

Assets held for sale

 

13.0

 

26.1

 

Deferred income taxes

 

102.7

 

94.2

 

Prepaid taxes

 

129.9

 

209.6

 

Other current assets

 

23.1

 

29.0

 

Current assets

 

1,419.6

 

1,825.9

 

 

 

 

 

 

 

Property, plant, and equipment, net of accumulated depreciation of $3,120.0 and $3,006.9, respectively

 

5,473.0

 

5,177.8

 

Regulatory assets

 

1,621.2

 

1,658.5

 

Assets from risk management activities

 

42.7

 

64.4

 

Equity method investments

 

506.7

 

476.3

 

Goodwill

 

658.3

 

658.4

 

Other long-term assets

 

122.8

 

121.9

 

Total assets

 

$

9,844.3

 

$

9,983.2

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

Short-term debt

 

$

410.3

 

$

303.3

 

Current portion of long-term debt

 

387.0

 

250.0

 

Accounts payable

 

368.1

 

426.6

 

Liabilities from risk management activities

 

192.9

 

311.5

 

Accrued taxes

 

45.5

 

70.5

 

Regulatory liabilities

 

80.3

 

67.5

 

Liabilities held for sale

 

27.4

 

27.3

 

Other current liabilities

 

243.7

 

217.0

 

Current liabilities

 

1,755.2

 

1,673.7

 

 

 

 

 

 

 

Long-term debt

 

1,708.1

 

1,845.0

 

Deferred income taxes

 

1,176.9

 

1,070.7

 

Deferred investment tax credits

 

47.6

 

44.0

 

Regulatory liabilities

 

354.2

 

332.5

 

Environmental remediation liabilities

 

594.9

 

615.1

 

Pension and other postretirement benefit obligations

 

530.5

 

749.3

 

Liabilities from risk management activities

 

61.2

 

102.0

 

Asset retirement obligations

 

413.5

 

397.2

 

Other long-term liabilities

 

139.3

 

141.1

 

Long-term liabilities

 

5,026.2

 

5,296.9

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Common stock - $1 par value; 200,000,000 shares authorized; 78,287,906 shares issued; 77,907,270 shares outstanding

 

78.3

 

78.3

 

Additional paid-in capital

 

2,571.5

 

2,579.1

 

Retained earnings

 

417.0

 

363.6

 

Accumulated other comprehensive loss

 

(37.4

)

(42.5

)

Shares in deferred compensation trust

 

(17.6

)

(17.1

)

Total common shareholders’ equity

 

3,011.8

 

2,961.4

 

 

 

 

 

 

 

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

 

51.1

 

51.1

 

Noncontrolling interest in subsidiaries

 

 

0.1

 

Total liabilities and equity

 

$

9,844.3

 

$

9,983.2

 

 

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

 

4



Table of Contents

 

INTEGRYS ENERGY GROUP, INC.

 

 

 

Nine Months Ended

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

September 30

 

(Millions)

 

2012

 

2011

 

Operating Activities

 

 

 

 

 

Net income

 

$

215.6

 

$

191.0

 

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

 

 

 

 

 

Discontinued operations, net of tax

 

8.7

 

2.9

 

Depreciation and amortization expense

 

187.7

 

185.3

 

Recoveries and refunds of regulatory assets and liabilities

 

12.6

 

42.8

 

Net unrealized gains on energy contracts

 

(42.8

)

(18.9

)

Bad debt expense

 

19.3

 

27.3

 

Pension and other postretirement expense

 

46.7

 

54.1

 

Pension and other postretirement contributions

 

(247.8

)

(109.7

)

Deferred income taxes and investment tax credits

 

86.8

 

155.9

 

Equity income, net of dividends

 

(13.4

)

(11.2

)

Other

 

32.9

 

24.7

 

Changes in working capital

 

 

 

 

 

Collateral on deposit

 

(1.1

)

(9.8

)

Accounts receivable and accrued unbilled revenues

 

232.6

 

295.5

 

Inventories

 

(20.9

)

(71.4

)

Other current assets

 

66.9

 

16.3

 

Accounts payable

 

(45.1

)

(56.3

)

Other current liabilities

 

5.7

 

(83.8

)

Net cash provided by operating activities

 

544.4

 

634.7

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Capital expenditures

 

(437.8

)

(203.2

)

Capital contributions to equity method investments

 

(24.0

)

(25.6

)

Acquisition of compressed natural gas fueling companies, net of cash acquired

 

1.3

 

(42.6

)

Other

 

11.7

 

4.8

 

Net cash used for investing activities

 

(448.8

)

(266.6

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Short-term debt, net

 

107.0

 

240.2

 

Repayment of notes payable

 

 

(10.0

)

Issuance of long-term debt

 

28.0

 

 

Repayment of long-term debt

 

(28.2

)

(556.2

)

Proceeds from stock option exercises

 

54.9

 

8.0

 

Shares purchased for stock-based compensation

 

(85.1

)

(10.9

)

Payment of dividends

 

 

 

 

 

Preferred stock of subsidiary

 

(2.3

)

(2.3

)

Common stock

 

(159.0

)

(153.4

)

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

 

(27.9

)

(29.3

)

Other

 

0.5

 

(3.5

)

Net cash used for financing activities

 

(112.1

)

(517.4

)

 

 

 

 

 

 

Change in cash and cash equivalents - continuing operations

 

(16.5

)

(149.3

)

Change in cash and cash equivalents - discontinued operations

 

 

 

 

 

Net cash provided by (used for) operating activities

 

6.6

 

(1.2

)

Net cash used for investing activities

 

(0.1

)

(0.9

)

Net cash used for financing activities

 

 

(0.3

)

Net change in cash and cash equivalents

 

(10.0

)

(151.7

)

Cash and cash equivalents at beginning of period

 

28.1

 

179.0

 

Cash and cash equivalents at end of period

 

$

18.1

 

$

27.3

 

 

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

 

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Table of Contents

 

INTEGRYS ENERGY GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS

September 30, 2012

 

NOTE 1—FINANCIAL INFORMATION

 

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

 

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

 

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

 

Reclassification

 

We reclassified $49.0 million of materials and supplies reported in other current assets at December 31, 2011, to inventories to be consistent with the current period presentation on the balance sheets. We adjusted changes in working capital on the statements of cash flows by reclassifying $10.1 million related to materials and supplies at September 30, 2011, from the change in other current assets line item to the change in inventories line item. This reclassification had no impact on total cash flows from operating activities.

 

NOTE 2—CASH AND CASH EQUIVALENTS

 

Short-term investments with an original maturity of three months or less are reported as cash equivalents.

 

The following is a supplemental disclosure to our statements of cash flows:

 

 

 

Nine Months Ended September 30

 

(Millions)

 

2012

 

2011

 

Cash paid for interest

 

$

60.0

 

$

80.3

 

Cash received for income taxes

 

(45.7

)

(10.9

)

 

Significant noncash transactions were:

 

 

 

Nine Months Ended September 30

 

(Millions)

 

2012

 

2011

 

Construction costs funded through accounts payable

 

$

78.8

 

$

34.1

 

Equity issued for stock-based compensation plans

 

 

15.8

 

Equity issued for reinvested dividends

 

 

5.4

 

 

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Table of Contents

 

NOTE 3RISK MANAGEMENT ACTIVITIES

 

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

 

 

 

 

 

September 30, 2012

 

(Millions)

 

Balance Sheet
Presentation *

 

Assets from
Risk Management
Activities

 

Liabilities from
Risk Management
Activities

 

Utility Segments

 

 

 

 

 

 

 

Non-hedge derivatives

 

 

 

 

 

 

 

Natural gas contracts

 

Current

 

$

9.4

 

$

17.1

 

Natural gas contracts

 

Long-term

 

1.7

 

1.3

 

Financial transmission rights (FTRs)

 

Current

 

3.4

 

0.2

 

Petroleum product contracts

 

Current

 

0.3

 

 

Coal contract

 

Current

 

 

5.0

 

Coal contract

 

Long-term

 

 

4.3

 

Cash flow hedges

 

 

 

 

 

 

 

Natural gas contracts

 

Current

 

 

0.5

 

 

 

 

 

 

 

 

 

Nonregulated Segments

 

 

 

 

 

 

 

Non-hedge derivatives

 

 

 

 

 

 

 

Natural gas contracts

 

Current

 

70.7

 

67.0

 

Natural gas contracts

 

Long-term

 

15.6

 

11.6

 

Electric contracts

 

Current

 

74.5

 

103.0

 

Electric contracts

 

Long-term

 

25.4

 

44.1

 

Foreign exchange contracts

 

Current

 

0.1

 

0.1

 

 

 

Current

 

158.4

 

192.9

 

 

 

Long-term

 

42.7

 

61.3

 

Total

 

 

 

$

201.1

 

$

254.2

 

 


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

 

7



Table of Contents

 

 

 

 

 

December 31, 2011

 

(Millions)

 

Balance Sheet
Presentation *

 

Assets from
Risk Management
Activities

 

Liabilities from
Risk Management
Activities

 

Utility Segments

 

 

 

 

 

 

 

Non-hedge derivatives

 

 

 

 

 

 

 

Natural gas contracts

 

Current

 

$

9.1

 

$

35.4

 

Natural gas contracts

 

Long-term

 

0.1

 

8.2

 

FTRs

 

Current

 

2.3

 

0.1

 

Petroleum product contracts

 

Current

 

0.1

 

 

Coal contract

 

Current

 

 

2.5

 

Coal contract

 

Long-term

 

 

4.4

 

Cash flow hedges

 

 

 

 

 

 

 

Natural gas contracts

 

Current

 

 

0.9

 

Natural gas contracts

 

Long-term

 

 

0.2

 

 

 

 

 

 

 

 

 

Nonregulated Segments

 

 

 

 

 

 

 

Non-hedge derivatives

 

 

 

 

 

 

 

Natural gas contracts

 

Current

 

121.6

 

120.5

 

Natural gas contracts

 

Long-term

 

41.9

 

40.5

 

Electric contracts

 

Current

 

93.9

 

152.0

 

Electric contracts

 

Long-term

 

22.4

 

48.7

 

Foreign exchange contracts

 

Current

 

0.2

 

0.2

 

 

 

Current

 

227.2

 

311.6

 

 

 

Long-term

 

64.4

 

102.0

 

Total

 

 

 

$

291.6

 

$

413.6

 

 


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

 

The tables above include amounts that were classified as held for sale at Integrys Energy Services. The carrying values of our assets and liabilities from risk management activities that were classified as held for sale are shown in the table below. See Note 5, “Discontinued Operations,” for more information.

 

(Millions)

 

September 30, 2012

 

December 31, 2011

 

Nonregulated Segments

 

 

 

 

 

Non-hedge derivatives

 

 

 

 

 

Electric contracts

 

 

 

 

 

Current assets from risk management activities

 

$

0.1

 

$

 

Current liabilities from risk management activities

 

 

0.1

 

Long-term liabilities from risk management activities

 

0.1

 

 

 

The following table shows our cash collateral positions:

 

(Millions)

 

September 30, 2012

 

December 31, 2011

 

Cash collateral provided to others

 

$

51.6

 

$

50.9

 

Cash collateral received from others *

 

0.6

 

2.3

 

 


*     Reflected in other current liabilities on the balance sheets.

 

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

 

(Millions)

 

September 30, 2012

 

December 31, 2011

 

Integrys Energy Services

 

$

112.0

 

$

193.8

 

Utility segments

 

15.3

 

39.1

 

 

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Table of Contents

 

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

 

(Millions)

 

September 30, 2012

 

December 31, 2011

 

Collateral that would have been required:

 

 

 

 

 

Integrys Energy Services

 

$

171.5

 

$

272.3

 

Utility segments

 

9.9

 

28.7

 

Collateral already satisfied:

 

 

 

 

 

Integrys Energy Services — Letters of credit

 

2.2

 

11.0

 

Collateral remaining:

 

 

 

 

 

Integrys Energy Services

 

169.3

 

261.3

 

Utility segments

 

9.9

 

28.7

 

 

Utility Segments

 

Non-Hedge Derivatives

 

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

 

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

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

Purchases

 

Other
Transactions

 

Purchases

 

Other
Transactions

 

Natural gas (millions of therms)

 

1,044.1

 

N/A

 

1,122.7

 

N/A

 

FTRs (millions of kilowatt-hours)

 

N/A

 

6,507.6

 

N/A

 

5,077.5

 

Petroleum products (barrels)

 

61,814.0

 

N/A

 

46,872.0

 

N/A

 

Coal contract (millions of tons)

 

3.5

 

N/A

 

4.1

 

N/A

 

 

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

 

 

 

 

 

Three Months
Ended
September 30

 

Nine Months
Ended
September 30

 

(Millions)

 

Financial Statement Presentation

 

2012

 

2011

 

2012

 

2011

 

Natural gas contracts

 

Balance Sheet — Regulatory assets (current)

 

$

10.2

 

$

(9.3

)

$

22.9

 

$

4.1

 

Natural gas contracts

 

Balance Sheet — Regulatory assets (long-term)

 

3.8

 

(2.5

)

7.7

 

(2.3

)

Natural gas contracts

 

Balance Sheet — Regulatory liabilities (current)

 

(3.4

)

(0.1

)

(2.9

)

(0.2

)

Natural gas contracts

 

Balance Sheet — Regulatory liabilities (long-term)

 

0.8

 

 

1.3

 

 

Natural gas contracts

 

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

 

0.1

 

(0.1

)

0.2

 

 

Natural gas contracts

 

Income Statement — Operating and maintenance expense

 

0.1

 

 

0.1

 

 

FTRs

 

Balance Sheet — Regulatory assets (current)

 

 

0.5

 

(0.4

)

(1.0

)

FTRs

 

Balance Sheet — Regulatory liabilities (current)

 

(0.2

)

(0.6

)

0.5

 

(0.7

)

Petroleum product contracts

 

Balance Sheet — Regulatory assets (current)

 

0.2

 

 

0.1

 

(0.1

)

Petroleum product contracts

 

Balance Sheet — Regulatory liabilities (current)

 

0.1

 

(0.2

)

0.1

 

 

Petroleum product contracts

 

Income Statement — Operating and maintenance expense

 

0.1

 

(0.2

)

0.1

 

 

Coal contract

 

Balance Sheet — Regulatory assets (current)

 

0.7

 

1.1

 

(2.5

)

0.9

 

Coal contract

 

Balance Sheet — Regulatory assets (long-term)

 

(0.1

)

2.4

 

0.1

 

(0.6

)

Coal contract

 

Balance Sheet — Regulatory liabilities (long-term)

 

 

0.5

 

 

(3.2

)

 

Nonregulated Segments

 

Non-Hedge Derivatives

 

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

 

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Table of Contents

 

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

 

 

 

September 30, 2012

 

December 31, 2011

 

(Millions)

 

Purchases

 

Sales

 

Purchases

 

Sales

 

Commodity contracts

 

 

 

 

 

 

 

 

 

Natural gas (therms)

 

934.0

 

720.9

 

959.2

 

797.1

 

Electric (kilowatt-hours)

 

39,962.4

 

24,162.7

 

34,405.7

 

20,374.0

 

Foreign exchange contracts (Canadian dollars)

 

1.3

 

1.3

 

4.2

 

4.2

 

 

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

 

 

 

 

 

Three Months
Ended September 30

 

Nine Months
Ended September 30

 

(Millions)

 

Income Statement Presentation

 

2012

 

2011

 

2012

 

2011

 

Natural gas contracts

 

Nonregulated revenue

 

$

(4.4

)

$

4.9

 

$

7.0

 

$

19.2

 

Natural gas contracts

 

Nonregulated revenue (reclassified from accumulated OCI) *

 

(0.1

)

(0.2

)

(1.6

)

(0.6

)

Electric contracts

 

Nonregulated revenue

 

49.1

 

(1.6

)

(10.5

)

(5.5

)

Electric contracts

 

Nonregulated revenue (reclassified from accumulated OCI) *

 

(1.9

)

(1.2

)

(3.3

)

(1.0

)

Total

 

 

 

$

42.7

 

$

1.9

 

$

(8.4

)

$

12.1

 

 


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

 

In the next 12 months, pre-tax losses of $0.6 million and $4.1 million related to discontinued cash flow hedges of natural gas contracts and electric contracts, respectively, are expected to be recognized in earnings as the forecasted transactions occur. These amounts are expected to be offset by the settlement of the related nonderivative customer contracts.

 

Fair Value Hedges

 

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

 

Cash Flow Hedges

 

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

 

The tables below show the amounts related to cash flow hedges recorded in OCI and in earnings:

 

Unrealized Gain (Loss) Recognized in OCI on Derivative Instruments (Effective Portion)

(Millions)

 

Three Months Ended September 30, 2011

 

Nine Months Ended September 30, 2011

 

Natural gas contracts

 

$

 

$

(2.3

)

Electric contracts

 

 

3.8

 

Total

 

$

 

$

1.5

 

 

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

 

 

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

(Millions)

 

Income Statement Presentation

 

2012

 

2011

 

2012

 

2011

 

Settled/Realized

 

 

 

 

 

 

 

 

 

 

 

Natural gas contracts

 

Nonregulated revenue

 

$

 

$

 

$

 

$

(9.3

)

Electric contracts

 

Nonregulated revenue

 

 

 

 

4.2

 

Interest rate swaps *

 

Interest expense

 

(0.2

)

(0.2

)

(0.8

)

(0.8

)

Hedge Designation Discontinued

 

 

 

 

 

 

 

 

 

 

 

Natural gas contracts

 

Nonregulated revenue

 

 

 

 

(0.3

)

Interest rate swaps

 

Interest expense

 

 

 

 

(0.2

)

Total

 

 

 

$

(0.2

)

$

(0.2

)

$

(0.8

)

$

(6.4

)

 


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

 

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Table of Contents

 

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

 

 

 

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

(Millions)

 

Income Statement Presentation

 

2011

 

2011

 

Natural gas contracts

 

Nonregulated revenue

 

$

 

$

0.3

 

Electric contracts

 

Nonregulated revenue

 

 

(0.3

)

Total

 

 

 

$

 

$

 

 

NOTE 4—AGREEMENT TO PURCHASE FOX ENERGY CENTER

 

In September 2012, WPS entered into an agreement to acquire all of the equity interests in Fox Energy Company LLC. The purchase includes the Fox Energy Center, a 593-megawatt combined-cycle electric generating facility in Wisconsin, along with associated contracts. WPS currently supplies natural gas for the facility and purchases 500 megawatts of capacity and the associated energy output under a tolling arrangement.

 

WPS will pay $390.0 million to purchase Fox Energy Company LLC, subject to post-closing adjustments primarily related to working capital. In addition, WPS will pay $50.0 million to terminate the existing tolling arrangement immediately prior to the acquisition of the facility. The purchase will be financed initially with a combination of short-term debt and cash flow from operations. This short-term debt will be replaced later in 2013 with long-term financing.

 

Fox Energy Center is a dual-fuel facility, equipped to use fuel oil, but expected to run primarily on natural gas. This plant will give WPS a more balanced mix of electric generation, including coal, natural gas, hydroelectric, wind, and other renewable sources.

 

The transaction is subject to state regulatory approvals, including cost recovery, FERC approvals, and the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The transaction is expected to close on or around April 1, 2013.

 

NOTE 5—DISCONTINUED OPERATIONS

 

Integrys Energy Services Segment

 

Pending Sale of WPS Westwood Generation, LLC

 

In September 2012, Sunbury Holdings, LLC, a subsidiary of Integrys Energy Services, entered into a definitive agreement to sell all of the membership interests of WPS Westwood Generation, LLC (Westwood), owner of a waste coal generation plant located in Pennsylvania. The cash proceeds related to the sale are estimated to be $2.2 million, subject to certain post-closing adjustments primarily related to working capital. The agreement also includes a $4.0 million note receivable from the buyer with a seven and one-half year term. Integrys Energy Services recorded a pre-tax impairment loss of $8.4 million ($5.0 million after tax) related to Westwood during the third quarter of 2012 when the assets and liabilities were classified as held for sale. Other gains or losses may be recognized related to adjustments to selling costs at closing, as well as changes in the fair value of financial instruments included in the sale. Deferred financing costs of $0.4 million will also be written off to the gain or loss on sale when the related bonds are repaid, as discussed below. The transaction is expected to close in November 2012.

 

In connection with the sale, Integrys Energy Services repaid $27.0 million of Refunding Tax Exempt Bonds to Schuylkill County Industrial Development Authority in November 2012. The bonds were required to be repaid prior to the closing of the sale transaction because the Westwood assets were a substantial portion of the collateral on these borrowings. See Note 10, “Long-term Debt,” for more information regarding this repayment.

 

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Table of Contents

 

The carrying values of the major classes of assets and liabilities classified as held for sale on the balance sheets were as follows:

 

(Millions)

 

September 30, 2012

 

December 31, 2011

 

 

 

 

 

 

 

Inventories

 

$

1.0

 

$

1.1

 

Current assets from risk management activities

 

0.1

 

 

Property, plant, and equipment, net of accumulated depreciation of $ - and $10.9, respectively

 

5.5

 

14.1

 

Other long-term assets

 

1.1

 

1.2

 

Total assets

 

$

7.7

 

$

16.4

 

 

 

 

 

 

 

Current liabilities from risk management activities

 

$

 

$

0.1

 

Other current liabilities

 

0.1

 

0.2

 

Long-term debt

 

27.0

 

27.0

 

Long-term liabilities from risk management activities

 

0.1

 

 

Total liabilities

 

$

27.2

 

$

27.3

 

 

A summary of the components of discontinued operations related to Westwood recorded in the income statements for the three and nine months ended September 30 is as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

(Millions)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Nonregulated revenues

 

$

2.2

 

$

3.1

 

$

8.2

 

$

7.9

 

Nonregulated cost of sales

 

(1.2

)

(1.4

)

(3.6

)

(4.0

)

Operating and maintenance expense

 

(0.9

)

(0.9

)

(4.5

)

(4.8

)

Impairment losses

 

(8.4

)

 

(8.4

)

 

Depreciation and amortization expense

 

(0.3

)

(0.4

)

(1.0

)

(1.1

)

Taxes other than income taxes

 

(0.1

)

(0.1

)

(0.2

)

(0.2

)

Interest expense

 

(0.1

)

(0.1

)

(0.4

)

(0.4

)

Income (loss) before taxes

 

(8.8

)

0.2

 

(9.9

)

(2.6

)

(Provision) benefit for income taxes

 

3.5

 

(0.1

)

3.9

 

0.9

 

Discontinued operations, net of tax

 

$

(5.3

)

$

0.1

 

$

(6.0

)

$

(1.7

)

 

Integrys Energy Services will receive interest income for seven and one-half years related to the note receivable from the buyer. The sale will also generate immaterial cash flows from providing certain administrative transition services for up to a six-month period following the sale. However, Integrys Energy Services will not have the ability to significantly influence the operating or financial policies of Westwood and will also not have significant continuing involvement in the operations of Westwood after it is sold. Therefore, the continuing cash flows discussed above will not be considered direct cash flows of Westwood, and classification as a discontinued operation is appropriate.

 

Pending Sale of WPS Beaver Falls Generation, LLC and WPS Syracuse Generation, LLC

 

In October 2012, WPS Empire State, Inc, a subsidiary of Integrys Energy Services, entered into a definitive agreement to sell all of the membership interests of WPS Beaver Falls Generation, LLC (Beaver Falls) and WPS Syracuse Generation, LLC (Syracuse), both of which own natural gas-fired generation plants located in the state of New York. The closing of this sale is contingent upon obtaining certain customary contractual consents and necessary regulatory approvals. The proceeds from the sale are estimated to be $1.8 million, subject to certain post-closing adjustments primarily related to working capital. The sale agreement also includes a potential annual payment to Integrys Energy Services for a four-year period following the sale based on a certain level of earnings achieved by the buyer (an earn-out). Integrys Energy Services recorded a pre-tax impairment loss of $4.0 million ($2.4 million after tax) related to Beaver Falls and Syracuse during the third quarter of 2012 when the assets and liabilities were classified as held for sale. Other gains or losses may be recognized related to adjustments to selling costs at closing, as well as changes in the fair value of financial instruments included in the sale. The transaction is expected to close by the end of the first quarter of 2013.

 

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The carrying values of the major classes of assets and liabilities classified as held for sale on the balance sheets were as follows:

 

(Millions)

 

September 30, 2012

 

December 31, 2011

 

 

 

 

 

 

 

Inventories

 

$

2.2

 

$

2.2

 

Other current assets

 

0.2

 

0.2

 

Property, plant, and equipment, net of accumulated depreciation of $ - and $0.9, respectively

 

2.8

 

7.2

 

Other long-term assets

 

0.1

 

0.1

 

Total assets

 

$

5.3

 

$

9.7

 

 

 

 

 

 

 

Total liabilities — other current liabilities

 

$

0.2

 

$

 

 

A summary of the components of discontinued operations related to Beaver Falls and Syracuse recorded in the income statements for the three and nine months ended September 30 is as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

(Millions)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Nonregulated revenues

 

$

1.2

 

$

2.0

 

$

1.5

 

$

4.8

 

Nonregulated cost of sales

 

(0.7

)

(0.8

)

(1.6

)

(2.0

)

Operating and maintenance expense

 

(0.6

)

(0.6

)

(1.7

)

(2.3

)

Impairment losses

 

(4.0

)

 

(4.0

)

 

Depreciation and amortization expense

 

(0.2

)

(0.2

)

(0.6

)

(0.5

)

Taxes other than income taxes

 

 

(0.2

)

(1.1

)

(0.7

)

Income (loss) before taxes

 

(4.3

)

0.2

 

(7.5

)

(0.7

)

(Provision) benefit for income taxes

 

1.7

 

(0.1

)

3.0

 

0.3

 

Discontinued operations, net of tax

 

$

(2.6

)

$

0.1

 

$

(4.5

)

$

(0.4

)

 

The sale of Beaver Falls and Syracuse will generate immaterial cash flows from providing certain administrative transition services for up to a six-month period following the sale and from a potential four-year earn-out payment. However, Integrys Energy Services will not have the ability to significantly influence the operating or financial policies of Beaver Falls and Syracuse and will also not have significant continuing involvement in the operations of Beaver Falls and Syracuse after they are sold. Therefore, the continuing cash flows discussed above will not be considered direct cash flows of Beaver Falls and Syracuse, and classification as a discontinued operation is appropriate.

 

Sale of Energy Management Consulting Business

 

During the nine months ended September 30, 2011, Integrys Energy Services recorded a $0.1 million after-tax gain in discontinued operations when contingent payments were earned related to the 2009 sale of its energy management consulting business.

 

Holding Company and Other Segment

 

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

 

NOTE 6—INVESTMENT IN ATC

 

Our electric transmission investment segment consists of WPS Investments LLC’s ownership interest in ATC, which was approximately 34% at September 30, 2012. ATC is a for-profit, transmission-only company regulated by FERC. ATC owns, maintains, monitors, and operates electric transmission assets in portions of Wisconsin, Michigan, Minnesota, and Illinois.

 

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Table of Contents

 

The following table shows changes to our investment in ATC.

 

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

(Millions)

 

2012

 

2011

 

2012

 

2011

 

Balance at the beginning of period

 

$

456.4

 

$

429.4

 

$

439.4

 

$

416.3

 

Add: Equity in net income

 

21.7

 

19.9

 

63.8

 

59.0

 

Add: Capital contributions

 

8.5

 

2.6

 

17.0

 

8.5

 

Less: Dividends received

 

17.3

 

16.2

 

50.9

 

48.1

 

Balance at the end of period

 

$

469.3

 

$

435.7

 

$

469.3

 

$

435.7

 

 

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

 

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

(Millions)

 

2012

 

2011

 

2012

 

2011

 

Income statement data

 

 

 

 

 

 

 

 

 

Revenues

 

$

150.3

 

$

142.8

 

$

450.1

 

$

420.6

 

Operating expenses

 

68.8

 

66.4

 

210.1

 

192.5

 

Other expense

 

21.0

 

19.8

 

62.1

 

61.6

 

Net income *

 

$

60.5

 

$

56.6

 

$

177.9

 

$

166.5

 

 


*     As most income taxes are the responsibility of its members, ATC does not report a provision for its members’ income taxes in its income statements.

 

(Millions)

 

September 30, 2012

 

December 31, 2011

 

Balance sheet data

 

 

 

 

 

Current assets

 

$

58.2

 

$

58.7

 

Noncurrent assets

 

3,237.0

 

3,053.7

 

Total assets

 

$

3,295.2

 

$

3,112.4

 

 

 

 

 

 

 

Current liabilities

 

$

232.0

 

$

298.5

 

Long-term debt

 

1,550.0

 

1,400.0

 

Other noncurrent liabilities

 

93.9

 

82.6

 

Members’ equity

 

1,419.3

 

1,331.3

 

Total liabilities and members’ equity

 

$

3,295.2

 

$

3,112.4

 

 

NOTE 7—INVENTORIES

 

PGL and NSG price natural gas storage injections at the calendar year average of the cost of natural gas supply purchased. Withdrawals from storage are priced on the LIFO cost method. For interim periods, the difference between current projected replacement cost and the LIFO cost for quantities of natural gas temporarily withdrawn from storage is recorded as a temporary LIFO liquidation debit or credit. At September 30, 2012, all LIFO layers were replenished and the LIFO liquidation balance was zero.

 

NOTE 8—GOODWILL AND OTHER INTANGIBLE ASSETS

 

We had no material changes to the carrying amount of goodwill during the nine months ended September 30, 2012, and 2011. Annual impairment tests were completed at all of our reporting units that carried a goodwill balance in the second quarter of 2012, and no impairments resulted from these tests.

 

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The identifiable intangible assets other than goodwill listed below are part of other current and long-term assets on the Balance Sheets. An insignificant amount was recorded as assets held for sale on the Balance Sheets.

 

(Millions)

 

September 30, 2012

 

December 31, 2011

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Amortized intangible assets