The Public Service Commission of Wisconsin on May 21 approved the acquisition of Integrys Energy Group (NYSE: TEG) by Wisconsin Energy Corp. (NYSE: WEC), with various conditions put on the deal, including a couple related to power plant operations and development.
In August 2014, WEC filed an application for authority to acquire 100% of the outstanding common stock of Integrys Energy. Both companies have subsidiaries that serve mostly Wisconsin, with some spillover for both into the Upper Peninsula (UP) of Michigan.
WEC is a Wisconsin holding company with a number of wholly-owned subsidiaries, including Wisconsin Electric Power Co. (WEPCO) and Wisconsin Gas LLC. WEC also owns W.E. Power LLC, and has an ownership interest in American Transmission Co. LLC and ATC Management Inc. (ATCLLC and ATCMI, together ATC).
Integrys Energy is a Wisconsin holding company which presently owns and operates five regulated natural gas and electric utilities: Wisconsin Public Service Corp. (WPSC), Michigan Gas Utilities Corp., Minnesota Energy Resources Corp., Peoples Gas Light and Coke Co., and North Shore Gas Co. Integrys Energy’s subsidiary WPSC serves approximately 445,000 electric customers and 323,000 natural gas customers in northeastern and north central Wisconsin and an adjacent portion of the UP. Integrys Energy also has an ownership interest in ATC.
The proposed transaction is structured as a merger of Integrys Energy and a special purpose subsidiary of WEC. Upon merging, WEC will change its name to WEC Energy Group Inc. (WEC Energy). The overall Integrys Energy acquisition is valued at approximately $9.1 billion, with $3.3 billion of assumed Integrys Energy debt. In November 2014, both WEC and Integrys Energy held separate shareholder meetings, and the proposed acquisition was approved by each set of shareholders.
Said the approval order about one condition to the merger: “It is reasonable for WEPCO (including utility operations of WEPCO-Electric, Wisconsin Electric-Gas (WE-GO), Valley Steam (VA-Steam), Milwaukee County Steam (MC-Steam)), and WG to be subject to an earnings cap for three years, beginning with 2016, as described in this Final Decision.”
Said another condition in the order: “It is reasonable to impose conditions, as described in this Final Decision, relating to the recoverability of costs associated with approvals of the proposed transaction in other jurisdictions to ensure that any such costs are not passed on to Wisconsin ratepayers. It is further reasonable to impose conditions related to ongoing capital investments at the Presque Isle Power Plant (PIPP) to enable the Commission to monitor developments at the plant that may impact Wisconsin ratepayers.”
PIPP is a coal-fired plant in the Upper Peninsula that has been in danger of shutting due to age and clean-air requirements, but lately has gotten a life extension to later this decade while a gas-fired replacement is developed.
Said another condition: “It is reasonable to impose certain conditions, as described in this Final Decision, relating to the holding company structure, service company operations, and agreements between affiliates, service company allocators, and audit to ensure that the Commission’s regulation of the existing holding companies is not harmed by the proposed acquisition and that the holding company structure is not harmful to the rate-paying public.
Also approved as a condition by the PSC: “It is reasonable to restrict WEC Energy to voting only 34.07 percent of ATCMI’s shares, on matters requiring a vote of ATCMI’s owners—except WEC Energy may vote its full ownership interest on fundamental corporate matters—to moderate WEC Energy’s influence over ATC’s operations. or example, a rate freeze could actually create greater risks for ratepayers should there be substantial and unanticipated cost increases during the freeze or should there be decreases in costs that escape scrutiny and are not reflected in rate decreases.”
Commission wants new integrated resource plan showing the need for 400-MW gas unit
The commission said that for WPSC ratepayers, the commission will require the new holding company to fully consider the possibility of delaying or avoiding construction of the proposed Fox Energy Center Unit 3, a gas-fired new unit to be added at an existing power plant in Wrightstown, Wisconsin (Fox Unit 3). The commission wants the combined company to do a joint integrated resource plan (IRP) looking at the need for this new unit.
The commission noted: “According to the applicant, the larger generation portfolio and geographic footprint created by the acquisition may result in economic opportunities that are not available to the stand-alone companies. Commission staff’s EGEAS modeling of the combined utilities’ generation portfolios demonstrates that there is a potential to avoid approximately $600 million in net present value revenue requirement by delaying or canceling future electric generation projects if WPSC and WEPCO portfolios are combined for planning purposes. The applicant did not identify any specific capital projects that would be avoided or delayed as a result of the acquisition. However, WPSC submitted an application to the Commission on January 21, 2015, for a Certificate of Public Convenience and Necessity for a 400 megawatt combined-cycle natural gas plant, known as Fox Unit 3. Commission staff and other parties noted that while WPSC, as a standalone utility, may have a need for capacity in the near-term, this project may not be needed if the generation portfolios are combined because WEPCO has surplus generation capacity that may be available to meet WPSC’s needs.”
The commission said that it agrees that combining the generation portfolios of the operating utilities could result in economic benefits for ratepayers, including the avoidance or delay of new generation facilities. It added: “According to the applicant, the operating utilities are prohibited from conducting joint planning until after the acquisition is completed. As a result, the Commission finds that it is premature to consider WPSC’s proposal for Fox Unit 3 until the operating utilities have had an opportunity to conduct a joint IRP. Such planning will be helpful in determining whether existing resources could be used to avoid or delay the need for Fox Unit 3. To ensure that unnecessary capital costs related to new generation are avoided and that customers receive the benefits of the larger company’s combined generation portfolio, it is reasonable to require that WPSC withdraw its application for Fox Unit 3 within ten days of the effective date of this Final Decision.
“Further, neither WEC Energy nor its subsidiaries shall propose any new electric generation projects that would unnecessarily increase system capacity, and for which the cost would be allocated to Wisconsin ratepayers, unless: (1) WEC Energy submits a joint IRP for its combined generation portfolio to the Commission for review; and (2) such a plan demonstrates that any new generation project is beneficial to ratepayers and economical in meeting its operating utilities’ capacity and energy needs. The Commission encourages WEC Energy to coordinate with Commission staff on the content and modeling inputs for the IRP to ensure that the plan sufficiently meets the Commission’s directives. The Commission further directs that the IRP include an analysis of the extent to which future capacity or energy needs can be met with existing intercompany resources.”
If the WEC/Integrys merger fails to close, WPSC can re-start the Fox Unit 3 application process, the commission added.