When a holding company has regulated and non-regulated businesses, its opportunities are more diverse; so are its challenges. On the regulated side, Integrys Energy Group CEO Charlie Schrock is fighting rising costs in an era of slow customer growth. However, the nation's shale gas abundance is convincing customers -- both regulated and non -- to rely more heavily on gas.
The era of natural gas prices in the $4 area seems to have happened almost overnight to those who have been in the industry over the last decade or longer. It wasn't that long ago when gas was $10-12/Mcf, Schrock noted. "It just makes you wonder how long it will take for customers, consumers of gas, to get comfortable enough that these are real trends, that they're going to stay...We think there are opportunities...To me it's the pace of change that's been real interesting."
At the nonregulated Integrys Energy Services, commercial and industrial customers are stepping up for longer-term contracts, Schrock said. "We are seeing more customers write longer contracts, which is a good sign. That shows a sign of confidence in terms of where the market's going." Integrys Energy Services' comfort zone is in the neighborhood of four years or so, Schrock said, noting that the company will not go out as long as 10 years on contracts.
Integrys Energy Services President Dan Verbanac told NGI the firm has seen commercial and industrial customers willing to term up a little longer over the last six months or so with customer contracts increasing in length by about three to six months. "Our typical gas customers will lock in 12-24 months," he said.
To manage its risk, the nonregulated business lines up its hedges right away after contracting to supply a customer.
On the regulated utility side of the business Integrys serves customers in Wisconsin, Minnesota, Illinois and Michigan. All of them were hit hard by the economy's collapse but are starting to come back.
"Probably even before the economy went south Michigan was already heading in that direction," Schrock said. "Their unemployment rates have been significantly higher than the national average; now they're slightly above the national average." Unemployment in Illinois has been about average, he said, while Wisconsin and Minnesota have been about average or a little worse but have been coming back in the last several years and now are slightly better than the national average.
"We see signs of optimism as just about everybody does these days," Schrock said. "The numbers that people look at suggest that we are on a recovery slope. It's just going to be a long, slow recovery."
And Integrys utilities face slow customer growth as the economy slowly recovers, Schrock said. "In a slow economy what we're seeing is that our customer counts are not growing very much, pretty stagnant or a very slight increase," he said. "But on the other hand of the equation our costs continue to go up...What that means is we're in an environment where unemployment is high, costs are going up, customers are having a hard time paying, and rate pressure is going to be a big deal. We just have to do everything we can to manage our costs the best we can.
"It creates a difficult time when you're in a rising cost period because we do need to go in for rate cases...That's a big deal for us."
But here again the shale gas bounty is creating opportunities. Given the blowout of the natural gas-oil price link, natural gas is an increasingly attractive option for home heating and other residential needs, not to mention power generation, Schrock pointed out.
"We think that creates opportunities in terms of customers who may want to switch" to gas, he said.
"There's going to be a lot of pressure on coal plants over the next 10 years, a lot of cost pressure for environmental retrofits. Some analyses suggest that there will be something like 70,000 MW of coal plant retirements in the next 10-12 years because of the cost pressure from the environmental retrofits. If you think about that, what's going to replace that capacity? Natural gas is the obvious answer. I think you'll see more and more companies being comfortable creating electricity from natural gas."
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