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WPS, Peoples Complete Merger; New Company Selling E&P

The merger of Green Bay, WI-based WPS Resources Corp. and Chicago-based Peoples Energy Corp. was completed Wednesday, forming Integrys Energy Group Inc. The new company serves four Midwest states through regulated utilities.

Integrys also operates nonregulated energy-related businesses in various U.S. and Canadian markets. The company said it is selling the gas exploration and production (E&P) operations of the former Peoples Energy. Talk of the merger came to light in July last year (see Daily GPI, July 11, 2006; July 7, 2006).

Shareholders of Peoples will receive 0.825 shares of WPS Resources common stock for each common share of Peoples. Simultaneous with the completion of the merger, WPS Resources changed its name to Integrys Energy Group Inc. and its ticker symbol will change to TEG at the start of trading Thursday.

Integrys CEO Larry Weyers said the company has decided to divest Peoples Energy Production Co. "The divestiture will allow Integrys Energy Group to focus on our core competencies, reduce or eliminate external financing requirements, and reduce Integrys Energy Group's risk profile," Weyers said. "We anticipate the divestiture should be completed by the end of 2007."

Wednesday Moody's Investors Service upgraded Peoples Energy Corp. senior unsecured debt to A3 from Baa2 with a stable outlook.

"The two-notch upgrade for Peoples reflects its new ownership and support by a solid utility parent company," said Moody's Vice President Mihoko Manabe. "Over the course of this year, we expect Peoples' business risk to improve with the announced sale of its E&P business."

The Peoples E&P business had year-end 2006 production of 67.7 MMcfe/d and reserves of 232.8 Bcfe. The business is active in the Rockies, San Juan Basin, Arkoma Basin, South Texas, East Texas/North Louisiana, Upper Gulf Coast and Mississippi.

Moody's said it remains to be seen how much the E&P sale will affect Integrys or how the company will apply sale proceeds.

"Risks related to E&P were a catalyst for Peoples' two-notch downgrade last year," Moody's said, so the sale would be positive for credit. "On the other hand, the divestiture will focus the ratings more on the challenges facing Peoples' core LDC business."

During a conference call with analysts Wednesday, Integrys CEO Larry Weyers said that in the longer term nonregulated businesses should account for 20-30% of consolidated earnings for the combined companies.

Integrys said it expects potential annual synergies of $94 million from the merger, estimated to be achieved over five years. One-time costs are expected to be about $186 million over the same period.

Moody's downgraded the senior unsecured rating of Integrys (formerly WPS Resources) to A3 from A1. Moody's also downgraded the ratings of its largest utility subsidiary, Wisconsin Public Service to Aa3 from Aa2. Moody's also downgraded the commercial paper rating for Integrys to Prime-2 from Prime-1 and confirmed the commercial paper rating on Wisconsin Public Service at Prime-1.

"The merger increases Integrys' consolidated debt levels and business risk profile," said Scott Solomon, a Moody's senior analyst. "Integrys also faces a challenge in improving its consolidated financial metrics, which have trended downward."

Integrys' six regulated utilities are:

Nonregulated subsidiaries are:

Trading in Peoples common stock will be suspended as of the close of trading Wednesday, and Peoples will withdraw the listing of its common stock from the New York Stock Exchange and the Chicago Stock Exchange as soon as practicable. Peoples will now be a wholly owned subsidiary of Integrys Energy Group.

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