Wisconsin Energy buying Peoples Gas parent Integrys for $9.1 billion

Chicago-area Peoples Gas and North Shore Gas customers — who already pay more than their neighbors for natural gas — stand to get a dose of bad news from a big natural-gas utility deal announced Monday.

They will face a potential rate increase if Wisconsin Energy Corp. succeeds in its $5.8 billion cash and stock acquisition of Integrys Energy Group Inc., the parent company of Peoples and North Shore gas utilities, experts say.

The combined company, aimed at forming a more diverse Midwest electric and natural-gas delivery company, will be called WEC Energy Group Inc. and will serve more than 4.3 million total gas and electric customers across Wisconsin, Illinois, Michigan and Minnesota.

Integrys’ service area includes Chicago. Under a deal reached in 2012, Integrys Energy Services provides electricity in bulk to homes and businesses in the city unless they opt out.

However, Integrys is close to divesting itself of Integrys Energy Services, the retail energy supply unit that provides that electricity to the city, a company spokeswoman said Monday. Because Integrys anticipates that the divestiture will be completed soon, it is assumed that the unit will not be part of the Wisconsin deal, spokeswoman Jennifer Block said.

Integrys Energy Services projected that the average Chicago household would save up to $150 over the life of the agreement, with the biggest savings coming in the first five months. That deal expires in May 2015, and the acquisition is expected to close at roughly the same time. The companies on Monday announced it would be finalized in the summer of 2015.

But no one is stopping Integrys’ Peoples Gas unit from continuing to request a $129 million rate increase, already filed before the Illinois Commerce Commission.

The ICC is expected to rule on that request by January. If the ICC grants Peoples Gas the full amount, it would raise the consumers’ bills about $5 a month — to about $100 for an average residential monthly bill, Block said.

Peoples Gas customers already are paying an extra $2 a month, on average, after Gov. Pat Quinn signed a bill in July 2013 that tacked on a surcharge to pay for massive pipeline upgrades.

Integrys CEO Charlie Schrock said Monday that the pipeline upgrades will continue, including 1,600 to 1,700 miles of pipe still to be replaced in Chicago under the plan.

The combined company also will include North Shore Gas, which serves 159,000 customers in 54 communities in Lake County, including the suburbs of Antioch, Deerfield, Glencoe, Highland Park, Libertyville, Mundelein, Northbrook, Waukegan, Winnetka and Zion.

North Shore Gas customers’ bills would go up $2.50 a month, on average, if the ICC request is granted in full, Block said.

Schrock, 61, received total compensation of $4.22 million in 2013 — down from $6.269 million in 2011; the latter amount reflected a profitable year that put Schrock among the highest-paid executives at 500 of America’s largest companies, according to NerdWallet.

Schrock will retire when the deal closes, the companies announced. Schrock, a nuclear engineer, has been with the company for 35 years.

Wisconsin Energy Chairman and CEO Gale Klappa will take over the same positions in the combined company.

Integry’s other top executives and many of its headquarters employees at the Aon building look to be on their way out, too, because Wisconsin Energy officials will take over the top leadership roles of the combined company.

The new WEC Energy will be headquartered in metropolitan Milwaukee and will put “operating” headquarters in Chicago, Green Bay and Milwaukee. Wisconsin Energy is based in Milwaukee.

In all, Integrys has roughly 1,800 local employees: 1,250 at People’s Gas in Chicago; 80 at North Shore Gas; and 500 at Integrys Business Services, Block said. Analysts said the workers out in the field — most of them union employees — will be in a better position to keep their jobs. Block said all existing labor agreements will be honored under the deal.

Charles Fishman, an analyst at Chicago-based Morningstar, said Monday that utilities regulators try to make sure that a majority of any cost-saving measures from such deals are returned to the utility customers. But he also noted that the utility companies must spend a lot of money complying with new federal air-pollution rules, including a 30 percent reduction in emissions by 2030.

Citizens Utility Board Executive Director David Kolata issued a statement Monday vowing that the utility watchdog group will carefully review the deal.

“In mergers, there is always a concern that any deal will adversely impact how a company is able to serve its new customer base — especially for a utility in one of the biggest cities in the country,” Kolata said in a statement.

“CUB wants to make sure that this is a good move for Peoples Gas and North Shore Gas customers, so we will be quick to point out any shortcomings and propose improvements to make this a better deal for Chicago-area consumers,” Kolata’s statement continued. “CUB also wants to make sure any deal does not spark more frequent rate hikes. Since 2008, Peoples Gas has received about $250 million in rate hikes, and Peoples and North Shore are currently asking for a total increase of about $136 million.”

Under the deal announced Monday, Integrys stockholders will receive 1.128 Wisconsin Energy shares and $18.58 in cash for each share they own. Total consideration is worth $71.47 per Integrys share, a 17 percent premium to the company’s Friday closing stock price of $60.95. The consideration will be 74 percent stock and 26 percent cash.

Shareholders of Chicago-based Integrys will own about 28 percent of the combined company. The company’s shares surged $9.95, or 16.3 percent, to $70.90 in pre-market trading about two hours ahead of the market open. They closed the day up $7.40 — 12.14 percent — to $68.35. Shares of Wisconsin Energy closed down $1.62, or 3.45 percent, at $45.27.

Wisconsin Energy and Integrys put the transaction’s total value at $9.1 billion including the assumption of debt.

Integrys – Wisconsin Energy press briefing

Contributing: Fran Spielman, Stefano Esposito and the Associated Press