Integrys Energy Group (NYSE:TEG) 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. 96% of integrys' electricity is generated from coal, making rising prices a threat to its margins. 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.
Natural Gas Utility Segment: 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.
Integrys Energy Services: 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. Integrys Energy Services also contains an energy-trading unit which seeks to exploit volatility in energy markets by buying and selling energy options.
Holding Company and Other Segment: The Holding Company and Other segment is the legal entity which owns each subsidiary of Integrys Energy Group.
Energy 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.
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.
The 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.
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).
Both 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 96% of its total electricity (electricity generated by Integrys or purchased by another generator) from coal. For each megawatt hour of electricity generated, coal produces more CO2 than does oil, gas, or nuclear power. 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. Of the electricity that Integrys generates itself (rather than purchasing from other generators), only 2.5% comes from clean sources.
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.
Gas 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.
Utilities infrastructure is very expensive to install, so most utilities companies are natural monopolists allowed and perpetuated by government regulation.
In 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. 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.
Integrys' 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.
Energy 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). All three of these companies are electric and gas utilites which also offer energy services.