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Integrys Selling U.S. Gas Marketing Business

Integrys Energy Group Inc. has agreed with an unidentified buyer to sell the bulk of its unregulated marketing arm, the U.S. operations of Integrys Energy Services Inc. in a two-part transaction, the company said last Thursday. The agreement appeared to be the final step in Integrys' strategy of divesting more risky enterprises to focus on its core natural gas and electric utility businesses.

Integrys earlier had sold its Canadian marketing business to the Canadian trading arm of Shell Energy North America LP, and the unregulated subsidiary's consulting and risk management business to U.S. Energy Services.

The first part of the latest transaction involves substantially all of Integrys Energy Services' U.S. wholesale natural gas marketing business, which generated physical volumes of 445.6 Bcf in 2007 and 594.9 Bcf in 2008. Closing for this part of the deal is anticipated by the end of the year and is expected to reduce the company's collateral support requirements by $290 million.

The second part of the transaction includes 11.5 Bcf of storage contracts. Between now and April 2011, Integrys Energy Services will provide the buyer with fee-based services related to approximately 8 Bcf of the 11.5 Bcf total retained storage contracts. The remaining 3.5 Bcf of the retained storage will be divested in the normal course of business and is expected to be completed in the first quarter 2010.

Following the completion of the provision of such services to the buyer in April 2011 and the Integrys Energy Services' sale of the remaining 8 Bcf of the retained storage contracts at that time, collateral support requirements are expected to be reduced by an additional $150 million.

"These transactions are consistent with the ultimate goals of our strategy change we set forth earlier this year, namely to reduce our capital investment and collateral support requirements for Integrys Energy Services," said Integrys CEO Charles A. Schrock. "Terms for the sale of the wholesale natural gas business are in line with our expectations for the nonregulated segment strategy change."

Other financial terms and conditions have not been disclosed. The two-part transaction requires certain customary contractual consents and regulatory approvals.

This past summer Integrys sold nearly all of the natural gas and power customer contracts of Integrys Energy Services of Canada Corp. to the Canadian trading arm of Shell Energy North America LP. At the time of that sale the company said the Integrys Energy Group's collateral requirements would be reduced by an estimated $300 million. (See NGI, July 20).

At about the same time Minneapolis-based U.S. Energy Services acquired the energy management business of the Integrys marketing arm (see NGI, July 27). That purchase included energy consulting and information services for facility and corporate customers in the areas of risk management, strategic sourcing, utility data management and demand-side energy management. With more than $1.5 billion of annual energy spending under management, U.S. Energy Services lays claim to the title of one of the nation's largest energy management firms.

Integrys was formed by the merger of Peoples Energy and WPS Resources Corp. (see NGI, Feb. 26, 2007). The Integrys regulated gas utilities are Peoples Gas and North Shore Gas in Illinois as well as Minnesota Energy Resources and Michigan Gas Utilities. Regulated electric utilities are Upper Peninsula Power Co. in Michigan and Wisconsin Public Service.

At Intelligence Press Inc.'s GasMart 2009 in Chicago last spring Larry Borgard, president of the Integrys utilities business, said the company was pursuing a back-to-basics strategy. "Many of our shareholders appreciate the fact that we pay big dividends," Borgard said. "You know the old story about utilities being the stock of widows and orphans. I think that's largely true today as we all kind of get back to basics and back to our core utility operations" (see NGI, May 21).

The divestiture is not because the business hasn't been a success, Borgard said, but because the Integrys corporate balance sheet is not big enough to handle the business' risk management exposure. He noted the recession has hit hard in the utility's Midwest area, as the companies have been forced to disconnect record numbers of customers across their service territories due to nonpayment of bills.

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