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NatGas Utility to Grow Faster Than Power in Integrys Merger, Wisconsin Energy CEO Says

The acquisition of Chicago-based Integrys Energy Group (see Daily GPI, June 23, 2014) by Milwaukee-based Wisconsin Energy Corp. (WE), which is on track to close late this summer, will result in the natural gas utility side of the merged companies growing a little faster than the power side over the next four to five years, according to WE CEO Gale Klappa.

All of the federal approvals for the merger have been obtained, and two of four state regulatory commissions have given their approvals, Klappa said during a recent quarterly earnings conference call with financial analysts. Michigan and Wisconsin regulators approved the deal last month. Minnesota's regulatory commission is scheduled to review the merger this month, and Illinois regulators by early July.

"I think we will see our gas business growing slightly faster than our electric side," Klappa said, noting that is based on two factors: continuing low natural gas prices and a large chunk of propane customers in Wisconsin that can switch fuels. "Based on the national statistics, Wisconsin is one of the five heaviest propane-using states, and I think there is a tremendous opportunity for customer growth there."

Klappa said WE is seeing a large number of propane customers wanting to switch to the utility's expanding gas network. Earlier this year, Klappa said that WE was anticipating more gas infrastructure growth with one of its drivers being the state's leading role as a sand supplier for proppant used in hydraulic fracturing (see Daily GPI, Feb. 12).

He said gas utility customer growth is in "double digits" this year, so "if I were a betting man, I would say gas grows faster than electric over the next four or five years." The company's natural gas sendout in February was the largest for that month in the company's history. Klappa said.

Wisconsin has some 220,000-250,000 customers still using propane, many in rural areas where the natural gas system will eventually have to be expanded, Klappa said. "I don't want to mislead you; there isn't the chance that a quarter-million propane customers can switch to natural gas tomorrow, but it gives a sense of what the long-term prospects look like," he said.

Reports of problems with an old distribution main replacement program by Integrys's Peoples Gas utility in Illinois will not delay final approval of the pending acquisition by WE, Klappa said. An Illinois state investigation of a 10-year program for eliminating cast iron pipe in the utility's Chicago system is on a separate track from the regulatory approval of the merger, he said.

A request by state investigators for a 90-day delay in the Illinois Commerce Commission (ICC) case ruling on the Integrys-WE marriage was denied by the case's administrative law judge (ALJ), and the proceeding is headed toward a July 6 final decision, Klappa.

"We expect in the next couple of weeks to see a draft order by the ALJ hearing the case, and all the parties will have a chance to comment on the draft order before it goes to the ICC commissioners for a final decision,” Klappa said.

At issue for Peoples Gas is an audit of its 10-year cast iron distribution pipe replacement program alleging it is behind schedule and over budget. Klappa said he is confident that the program can be effectively managed post-merger, and he said once the acquisition is closed he intends to transfer three top gas executives from WE to the Peoples organization.

"There are a lot of moving pieces in terms of what the eventual total cost [of the pipe replacement program] might be, but we believe from what we know that the work is needed and it can be done  professionally and in a long-term cost-effective way," Klappa said. "But at this point, I don't think it is appropriate for us to comment on what the exact budget number should be."

For 1Q2015, WE reported net income of $195.8 million (86 cents/share), compared to $207.6 million (91 cents) for the same period last year.

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