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Chicago Gas Pipe Replacement Revamped by WEC Energy Group

With the completion of a merger forming Milwaukee-based WEC Energy Group, a controversial multi-billion-dollar, multi-year effort to replace the aging natural gas pipeline system in Chicago is getting a fresh look, WEC's CEO told financial analysts during a quarterly earnings conference call last week.

As an offshoot of the acquisition of Integrys Energy and its Peoples Gas unit by Wisconsin Energy (WE) (see Daily GPI, June 23, 2014), WEC Energy inherited what CEO Gale Klappa calls "one of the largest infrastructure modernization programs in the country," a 20-year effort to eliminate any remnants of cast iron distribution pipe. Under previous management, the effort got off to a rocky start, causing the Illinois legislature and state regulators to intervene.

In response to state legislation mandating certain work and cost limits for the massive project, WEC has replaced an outside contractor for the effort with a new in-house team and outside consultant. A filing by the WEC gas utility will be made Nov. 30 to the Illinois Commerce Commission (ICC), detailing the new approach for replacing roughly 2,000 miles of distribution pipelines in Chicago, Klappa said.

"Some of those pipes literally date back to the days of Abraham Lincoln," said Klappa. One of the most immediate goals for the 20-year effort "is to improve the management and performance of the project." That has included establishing an entirely new senior leadership team from the WE executive ranks.

Calling it a "fresh start," Klappa said there is now an entirely new in-house construction management group with extensive project experience. They determined that the best approach was to start from scratch on a project that kicked off under Peoples Gas management several years ago, he said.

While the merged company becomes the eighth largest natural gas utility in the nation -- with more than 4 million customers spread over northern Illinois, Wisconsin, Minnesota and Upper Michigan -- Klappa said WEC has decided to sell a compressed natural gas (CNG) transportation fueling company, Trillium CNG, that was part of Integrys, and a new 85-mile, $130 million natural gas pipeline in west-central Wisconsin started operations Nov. 1.

The new pipeline represents "the largest expansion of our natural gas distribution network in company history, allowing significant customer growth from the switching of many propane-using customers," Klappa said. Regarding Trillium CNG, he said an assessment determined that the business "does not fit our core regulated business," and WEC is seeking a buyer for the company.

WEC reported 3Q2015 net income on a consolidated basis of $182 million (58 cents/share), compared with $126 million (56 cents) in 3Q2014. Klappa said closer analysis of the merged enterprise determined that capital expenditures will be higher than previously estimated, moving from $1.2-1.3 billion annually to $1.5 billion/year, and that the majority of the investments will be in natural gas infrastructure.

"In general, we are seeing additional capital spending for upgrades and expansions, particularly in natural gas in Wisconsin and Minnesota," Klappa said. "It's largely delivery networks, and a lot of it is natural gas."

Klappa said the Chicago distribution main replacements will amount to about $250-300 million annually in capital spending over the 20-year life of the project. "There are only so many streets in Chicago you can dig up in a year's time," he said. "In essence, we are physically limited in terms of how much progress we can make in any one year."

The upcoming, renewed effort in Chicago follows a critical audit by the ICC of early work on the project, and state legislation that restricts annual expenditures to $250-300 million and no more than a 4% annual increase in base utility rates for Peoples Gas customers.

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