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Integrys' Nonregulated Operations Sale Draws Interest

As energy companies continue to scale back their operations and focus on their core businesses in the face of the current global economic recession, Integrys Energy Group said its recent announcement to divest its riskier unregulated competitive natural gas and electric supplier segment has already produced interest from potential suitors.

During its 4Q2008 earnings conference call last week, the Chicago-based diversified energy holding company said it has made a decision to sell either entirely or partially its nonregulated energy services business segment, Integrys Energy Services, or significantly reduce the scope and scale of the business.

"In recent months the financial community has expressed concern relative to the potential liquidity requirement and business risks associated with energy marketing businesses," Joe O'Leary, senior vice president and CFO, said during the call. "The changes we are making will address those issues."

Integrys said its short-term strategy will be to reduce and refocus its capital on those aspects of Integrys Energy Services' business that yield the highest return. If a full divestiture of Integrys Energy Services does not occur and a portion of the nonregulated energy services business remains over the longer term, then it will be a smaller segment "that requires significantly less capital, parental guarantees and overall financial liquidity support" from Integrys.

"The current economic environment and credit crisis in the financial markets has caused us to reassess our strategic direction," Chairman Larry Weyers said during the call. "We are taking steps to reduce risk and preserve liquidity during current general market conditions that challenge all businesses, and we believe this is the best course of action to deliver value to our stakeholders."

According to Steve Eschbach, vice president of Investor Relations, the company is already talking with a number of companies regarding the assets. "The conference call itself generated quite a few players expressing interest," Eschbach told NGI."We are still very much in negotiations on a number of alternatives. We are confident that the end result will be something that will make sense for everyone." Eschbach acknowledged that the segment's natural gas and electricity trading book and power generating assets are all in play. JP Morgan is acting as a financial advisor to Integrys.

"Our preference is a full divestiture of this business segment, with alternatives including divestiture of portions of this business or scaling back by further modifying the scope of the products offered and/or the markets we serve," Weyers said during the conference call. "The goal is to reduce the demands on our balance sheet and the capital support obligations that are driven by commodity prices, which at this time have demonstrated unprecedented volatility. We are seeking to deploy our capital to areas with more desirable risk-adjusted rates of return. We expect to significantly reduce corporate guarantees and invested capital that have been required by our nonregulated energy services segment."

Weyers said the company's ultimate intent is to reduce its nonregulated business segment such that its demands on liquidity and capital are not significant by the end of the calendar year 2010. He added that Integrys began to scale back this business in late 2008 by modifying the products offered and hopes to have its full strategy implemented by Dec. 31. If Integrys remains in the business at a reduced level, Weyers said the contribution from Integrys Energy Services is expected to be no more than $30 million of core net income by the end of 2009.

Mark Radtke, president of Integrys Energy Services, said if Integrys does not divest the unit completely, its goals are to reduce the corporate guarantees to not exceed $1.1 billion from $2.6 billion at Dec. 31, 2008. "Additionally we have plans to reduce the capital deployed by at least $400 million, from about $1 billion to $600 million or less by the end of this year," Radtke said during the call. "While my comments do not provide you with an assurance that we will be in this business at all, nor the specifics as to how we are going to refocus this business segment, the targets have been defined, the strategic alternatives have been identified, some steps have already been taken, and the due diligence in exploring alternatives is under way."

Integrys last week posted 4Q2008 net income on a generally accepted accounting principles basis of $25.6 million, or 33 cents/share, compared with $85.1 million, or $1.11/share, during 4Q2007.

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