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WPS Resources (TEG)Stock (Diversified Utilities Industry, Energy Industry)
 Integrys Energy Group is an electric and gas utility in the Great Lakes Region. It owns an electric utility which generates and delivers electricity, a gas utility which delivers natural gas to consumers, and an electric services segment, which trades energy futures and provides consulting and supplies to other energy companies. Since utilities are regulated, putting a cap on earnings, most of Integrys' revenue comes from the energy services segment, though this makes the company vulnerable to fluctuations in the energy markets. Integrys benefits from rising demand for electricity, but it faces rising pressure on its costs due to an increase in the price of fuel, particularly coal. 52.4% of integrys' electricity is generated from coal, making rising prices a threat to its margins.[1] The regulation of the company's business does not help, as TEG cannot pass on costs to its customers without getting government approval, which takes time and leads to losses. TEG is also vulnerable to increasing environmental regulation in the U.S., as fears of climate change have led to legislation requiring the use of clean energy. The U.S. Congress, for example, passed a bill in 2007 requiring that 15% of all U.S. electricity come from renewables by 2020. Installing new renewable energy capacity will increase TEG's costs. Until 2007, Integrys went by the name of WPS Resources, with the stock ticker WPS.
[edit] Businesses and FinancialsIntegrys' revenues and operating income have both increased steadily over the past few years. Revenues have risen from $4.402 billion in 2003 to $10.292 billion in 2007; and operating income has risen from $114.2 million in 2003 to $367.4 million in 2007.[3] Integrys' has been acquiring smaller energy companies, fueling the growth in revenue and income. WPS Resources (now Integrys Energy Group) bought the Michigan and Minnesota natural gas distribution divisions in 2006 and The People's Energy Corporation (PEC) in 2007.[4] These recent acquisitions are still being integrated into the company. Integrys' dividend per share rose from $2.280 in 2006 to $2.563 in 2007.[5]
[edit] Business SegmentsElectric Utility Segment (12.1% of 2007 revenue) The electric utility segment generates electricity and delivers it to customers in Wisconsin and in the Upper Peninsula of Michigan.[6] In 2007, Integrys sold almost 16 million kilowatt-hours of electricity to 485,000 residential, commercial, industrial, and resale customers.[7] Integrys' electric Utility generates 66% of its own electricity and purchases 44% from other sources. This chart shows the breakdown of electricity which Integrys generates itself.[8]
Natural Gas Utility Segment (20.3% of 2007 revenue) Integrys Energy Group delivers natural gas to customers in Chicago and northeastern Illinois, northeastern Wisconsin, portions of Michigan's Upper Peninsula, scattered communities throughout Minnesota, and in the southern portion of lower Michigan.[10] In 2007, Integrys delivered about 330 billion cubic feet of natural gas to almost 1.7 million customers.[11] Integrys Energy Services (67.6% of 2007 revenue) Integrys Energy Services provides support for other utilities in the US and Canada, including engineering, management, operations and maintenance. Integrys supplies equipment for natural gas utilities and electric utilities, consulting on how and when to deliver electricity, and consulting on project development and management.[12] Integrys Energy Services also contains an energy-trading unit which seeks to exploit volatility in energy markets by buying and selling energy options.[13] Integrys Energy Services owns and operates coal, oil, and natural gas power plants, and natural gas facilities throughout the US and Canada which sell power to other regulated utilities.[14] Integrys Energy Services delivered about 18 million killowatt-hours of electricity in 2007, some of which was purchased from other generators.[15] Holding Company and Other Segment (0% of 2007 revenue) The Holding Company and Other segment is the legal entity which owns each subsidiary of Integrys Energy Group. The holding company had a loss of $18.8 million in 2007, largely due to a $42 million increase in interest expenses driven by additional borrowing to fund Integrys' acquisitions.[16] [edit] Market Trends[edit] Rising Energy DemandEnergy demand throughout the United States is growing rapidly. The Department of Energy predicts that energy use in the United States will rise 31% in the next 25 years. Utilities like Integrys benefit from this rising demand. Between 2005 and 2007, Integrys added 8,000 new industrial or commercial electricity customers. In that period, the amount of electricity sold increased by about 2.1% while revenues from electricity sales increased by about 20%[18] If plug-in electric cars become more popular or if hydrogen fuel-cell technology improves, electric utilities like Integrys will gain immensely because demand for oil to fuel cars will be replaced be demand for electricity. Some smaller companies like Tesla Motors and Fisker Automotive are currently producing high-end plug-in sports cars. Larger companies like GM and Toyota are working on mass-market plug-in vehicles, while Mercedes and Honda are working on developing hydrogen fuel-cell powered cars.[19] [edit] Rising Commodity PricesThe rising cost of coal, uranium, and natural gas increases generating costs for Integrys' electric utility. The booming overseas growth from industrializing counties such as China and India have pushed fuel demand and prices new to new heights. This trend appears to be continuing, but might be halted in case of an world-wide economic slowdown. On Mar 7, 2008, Merrill Lynch raised its forecasts for contract prices of coal for power plants and steel mills in 2008. Analysts at the financial services firm predict that prices will increase by as much as 200 percent due supply shocks resulting from a severe global shortage. Since the majority of Integrys' electricity is generated from coal, this will significantly effect costs.[20]  Integrys' natural gas utility is protected somewhat from having its profitability harmed by higher gas prices, because its regulator currently permits Integrys' natural gas utilities to pass the 'prudently incurred cost' of natural gas on to customers on a dollar-for-dollar basis. Changes in the cost of natural gas therefore have an equal impact on costs and revenues (if the amount of natural gas that consumers purchase remains constant).[21] [edit] Environmental RegulationBoth major presidential candidates are discussing tightening standards on carbon emissions, either through a carbon tax or a cap-and-trade system because of increased concern about global warming. This will significantly hurt Integrys' profitability. Integrys is particularly exposed through its electric utility segment which gets 52.4% of its total electricity (electricity generated by Integrys or purchased by another generator) from coal.[22] For each megawatt hour of electricity generated, coal produces more CO2 than does oil, gas, or nuclear power.[23] This makes Integrys one of the large utilities most exposed to risk from tighter carbon emission standards, though hardly the most exposed.
Additionally, Wisconsin (Integrys' largest electricity market) has a legal requirement that utilities generate 10% of their electricity from renewable sources by 2015.[31] Of the electricity that Integrys generates itself (rather than purchasing from other generators), only 2.5% comes from clean sources.[32] Integrys reports that it will spend $252 million developing wind power by 2010.[33] At the present moment, Integrys' electric utility is better situated in regards to renewable portfolio standards than are most utilities. Even though Integrys generates a small percentage of its electricity from clean sources, the Wisconsin requirement of 10% is below average (30 states have renewable portfolio standards ranging from 4%-25%, the median of these requirements is 17%). Michigan, the other service area of Integrys' electric utility, does not have a renewable portfolio requirment.[34] However, pending Federal legislation may change Integrys' favorable position. In August, the House of Representatives passed a bill requiring all utilities in the United States to generate at least 15% of their electricity from renewable sources (such as windmills and solar panels) by 2020.[35] Though this measure did not pass in the Senate, many similar bills are currently being considered by the Senate, including one co-sponsered by Mark Warner, a powerful Virginia Republican and Joe Lieberman, an influential independent.[36] [edit] Local Utility RegulationGas and electric utilities are heavily regulated by individual states. This provides advantages and disadvantages for utilities. Regulation guarantees returns, but it also caps the rates that utilities can charge, limiting those same returns. Because utilities have a very predictable source of income, they can use revenue from regulated activities to fund unregulated activities, such as energy services. However, if fuel costs for Integrys' electric utility rise rapidly, it may be prevented from passing those costs along to consumers. The Wisconsin, Illinois, and Michigan regulators permit Integrys to charge rates which currently reflect a return on equity of about 11% (10.6%-11.6%)[37] [edit] CompetitionUtilities infrastructure is very expensive to install, so most utilities companies are natural monopolists allowed and perpetuated by government regulation. [edit] Electric Utility SegmentIn Wisconsin, retail electric customers are legally prevented from choosing their electric supplier. Michigan's electricity markets are open to competition and customers get to choose their electricity provider; however, an active market has not yet developed in the Upper Peninsula of Michigan (Integrys' service area in that state) primarily due to a lack of infastructure.[38] Thus, Integrys' electric utility enjoys a natural monopoly in the Upper Peninsula and a government-granted monopoly in Wisconsin. However, Integrys faces some small measure of competition from other (off-grid) energy sources, such as solar panels on individual homes. [edit] Natural Gas UtilityIntegrys' natural gas utility is also protected by government regulations, but still faces slight competition, particularly for large commercial and industrial customers who have the ability to switch between natural gas and alternate fuels. Also, some customers purchase their natural gas directly from third-party natural gas suppliers at market prices and contract with Integrys Energy Group's entities to transport the natural gas from pipelines to their facilities.[39] [edit] Integrys Energy ServicesEnergy services is a largely unregulated field with many large competitors. Through its energy services segment, Integrys' largest source of revenue is vulnerable to competition, while its two smaller segments, the electric and natural gas utility are shielded from competition. Integrys' principle competitors in this field are Xcel Energy (XEL), Wisconsin Energy (WEC), and Alliant Energy (LNT).[40] All three of these companies are electric and gas utilites which also offer energy services.
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