Consolidation of Power: Wisconsin Energy’s Integrys acquisition creates massive utility firm

Gale Klappa

Last updated on July 2nd, 2019 at 09:16 pm

With six utilities serving 4.4 million electric and natural gas customers in four states, Milwaukee-based WEC Energy Group is now one of the largest utilities – and one of the largest corporations – in the country.

The company was formed through Milwaukee-based Wisconsin Energy Corp.’s recent $9 billion acquisition of Chicago-based Integrys Energy Group. It was the largest non-bank acquisition ever made by a Wisconsin company.

The Integrys acquisition will likely bring more jobs to the Milwaukee area and should slow the growth of utility rates for Wisconsin energy consumers.

But the yearlong process of gathering OKs from both companies’ shareholders, as well as federal and state regulators, was only the beginning. WEC is in the process of integrating two massive corporations and setting the course for its future, even as energy demand has plateaued and aging infrastructure demands to be replaced.
Head honcho
Gale Klappa will reprise his role, serving as chairman and chief executive officer of the new company. He’s one of the 58 executives from Wisconsin Energy who have stayed on in the new regime. Just 12 Integrys executives stayed in the leadership mix, with CEO Charles Schrock retiring.
Klappa, 64, led Wisconsin Energy as president, CEO and chairman for nine years and then as CEO and chairman for the past two. He directed the company in making nearly $11 billion in infrastructure investments that were aimed at meeting environmental standards and providing a reliable future power grid by upgrading aging utility lines and other equipment.
Some of the other leaders that Klappa has surrounded himself with have also taken on leadership roles at WEC. Allen Leverett, president of Wisconsin Energy since Klappa passed the role to him in 2013, now serves as president for Wisconsin, Michigan and Minnesota at WEC. Charles Matthews, who was senior vice president–Wholesale Energy and Fuels at Wisconsin Energy, now serves as WEC’s president for Illinois.
Klappa expects some cost savings immediately as the two companies become one, but doesn’t expect any major job reductions outside of the executive suite sweep WEC has already completed. He says he made sure that all 9,300 employees knew who they would be reporting to on day one of the new organization.

Since he joined Wisconsin Energy, Klappa and his team have had in place three criteria a company would need to meet or exceed to consider an acquisition: Accretive to earnings per share starting in the first full year of combined operations; largely credit neutral; and long-term growth prospects of combined entity equal to or greater than the standalone company. Integrys checked all the boxes, he said.
“Getting bigger and ‘di-worse-ifying’ is not the objective,” Klappa said. “Getting bigger and better is the objective.”
Nuts and bolts
WEC Energy today would be ranked at about 317 on the Fortune 500. It is the eighth-largest natural gas distribution company in the U.S., and the 15th-largest investor owned utility system in the country.
The new company will encompass six principal utility subsidiaries across portions of four states: We Energies and Wisconsin Public Service in Wisconsin; Peoples Gas and North Shore Gas in Illinois; Michigan Gas Utilities in Michigan; and Minnesota Energy Resources in Minnesota.
None of the utilities will be legally merged together, but common management practices and operating philosophies will be integrated across the footprint, Klappa said. Systems will be merged as it makes sense and is cost effective. Overall, the integration of Wisconsin Energy and Integrys Energy is expected to take between three and seven years.
There’s a potential for $1 billion in Wisconsin customer cost savings over the next decade as a result of the deal, Klappa said, between corporate and operating cost efficiencies.
WEC also has taken 60 percent ownership in Pewaukee-based American Transmission Co., which owns and operates high-voltage electric transmission systems across much of WEC’s coverage area. And the move vastly expanded Wisconsin Energy’s natural gas distribution network.
WEC has 9,300 employees. In seeking approvals for the acquisition, Wisconsin Energy agreed to keep about 2,000 full-time positions in Illinois for the next two years. But some of those jobs could later be moved to Milwaukee.

Gale Klappa, CEO and chairman of WEC Energy Group.

“Two years from now we will have an opportunity to see which jobs – accounting jobs, legal jobs, corporate headquarters-type positions – which of those it makes sense to move to Milwaukee,” Klappa said.
WEC is committed to keeping its corporate headquarters in the “Milwaukee area,” but has not committed to retaining its offices at Second Street and Michigan Street in downtown Milwaukee, or in the city limits at all. It will also have operating headquarters in Green Bay and Chicago.
It’s too soon to say where in the metro Milwaukee area the headquarters might end up, because the company is still evaluating its space needs, Klappa said. But that hasn’t kept the leaders of local municipalities from approaching him to pitch their cities “about every week.”
“For now, our focus is fully on making this acquisition a complete success,” Klappa said. “I am excited about the future of the company – this was a real transformational step for us.”
Wisconsin stands to benefit greatly from the integration of the companies, as both Wisconsin Energy Corp. and Green Bay-based Wisconsin Public Service were included in the deal, and the merger places a massive corporate headquarters in the state.
When the acquisition plan was announced in June 2014, Wisconsin Gov. Scott Walker hailed the development, saying: “Today’s announcement is good news for two great Wisconsin companies. This purchase will strengthen Wisconsin Energy overall and result in better service for their local ratepayers.”
The acquisition will also likely create more jobs in the state down the road, said David Parker, senior utility analyst at Milwaukee-based Robert W. Baird & Co. Inc.
“It makes a much bigger, stronger energy company headquartered in Milwaukee,” he said. “You want a strong company headquartered in your hometown, no doubt about it.”

Parker

Customer impact
In the race to keep up with rising energy consumption and replace aging equipment, utilities nationwide have been investing in infrastructure overhauls.
Wisconsin Energy has prided itself on staying ahead of the pack on those projects. But it didn’t expect what happened following the Great Recession: energy usage began to decrease, instead of rising at the expected pace of two percent per year, Parker said.
As a result, Wisconsin Energy was overbuilt – it wasn’t using the full capacity of some of its plants. The Integrys acquisition will allow it to better meet capacity, he said. The Wisconsin Energy executives who are members of the new WEC management team also will be putting to use their infrastructure buildout experience as they bring the merged utilities’ equipment up to speed.
“The Wisconsin Energy management team has shown they are very good at executing and not just waiting for the phone to ring,” Parker said. “This management team’s been there, done that.”
The company expects to execute roughly $6 billion in infrastructure investments through 2018, and has several other large projects now in the pipeline.
Wisconsin Public Service, for example, is beginning now to make some of the major investments Wisconsin Energy made over the past decade.
And Peoples Gas in Chicago, which also has been folded into WEC, is in the process of replacing about 2,000 miles of natural gas distribution lines, some of which date back to the 1880s. The project has had some troubles, but Klappa said Wisconsin Energy’s due diligence showed it could be put back on track and completed by about 2030.
“This is something we know how to do. We have done over the last decade in Wisconsin what is just beginning in Illinois,” he said.
Due to synergies between the companies and continued upgrade projects, customers can expect utility rates to grow at a slower pace than before, Klappa said. They might even be frozen for a couple of years, Parker said.

Loehr

Customers will continue to deal with the same local utilities, and customer service and community involvement will still be priorities, Klappa said.
“I think the benefit or harm of this acquisition (for customers) remains to be seen,” said Kira Loehr, executive director of Citizens Utility Board, a Madison-based consumer utility advocacy group. “Generally, utilities make money by building additional infrastructure, and the way they make money is by raising rates.”
Loehr expressed concern about the lack of information pre-acquisition regarding how the companies would be combined and how it would impact customers. CUB wanted promises and guarantees from the utilities about the merger benefits they have touted, she said.
“We intend to see that the savings that We Energies said could occur, actually do occur,” Loehr said. “What form they end up taking we don’t know, but rates in the state are already far too high. Simply slowing the rates isn’t enough; rates need to turn around.”
According to U.S. Energy Information Administration data, Wisconsin ranks 15th nationally in average residential electricity price, at about 14 cents per kilowatt hour from May 2014 to May 2015.
We Energies’ standard electricity rate for a major industrial customer was about 10 percent above the national average, Klappa said. He attributed the gap to the fact that other states have not undertaken the same large infrastructure investments Wisconsin Energy has over the past several years. He expects other states’ rates to catch up as they do.
“We’ve cleaned up faster, so the investments have already been made that have driven rates higher,” he said.
Wisconsin Energy projects just 0.5 percent demand growth going forward, so utilities need to spread their fixed costs over a broader customer base and become more efficient, Klappa said.
“The utilities that will not just survive, but thrive and be the most cost-effective for customers over the next 10 to 20 years will have scale, scope, technical depth and geographic reach,” he said.

Wisconsin Energy Corp. recently converted its Menononee Valley Power Plant in Milwaukee from coal to natural gas.

Investor impact
WEC Energy Group has about 60,000 shareholders, who stand to see a significant return from the Integrys transaction.
Standalone, Wisconsin Energy expected to grow its annual earnings per share by 4 to 6 percent, but combined with Integrys, EPS growth is projected to be at 5 to 7 percent long-term.
Some investors are surprised more utility industry mergers like the Wisconsin Energy-Integrys deal didn’t happen sooner, to take advantage of efficiencies that could lower rates, Parker said.
“It’s pretty clear that we’re in a consolidating industry,” Klappa said. The number of utilities nationally has decreased from about 100 in the mid-1990s to about 50 today, and many of those were in the past 24 months, he said.
Geographically, there was a strong fit and complementary operations between Wisconsin Energy and Integrys, Klappa said. And this combination was the only move that would give one entity majority ownership of American Transmission Company.
WEC now covers huge swaths of rural Minnesota and Wisconsin, as well as another densely populated city, with 828,000 natural gas customers in the City of Chicago alone. The combined company has 1.6 million electric and 2.8 million natural gas customers in total.
There are no immediate plans to fill in any of the gaps in coverage across the four-state footprint, mainly because many of the gaps are covered by municipal or cooperative utilities.
This acquisition makes a lot of sense, Parker said, because there are some assets in which Wisconsin Energy was long and Integrys was short, and vice versa, he said.
In the short-term, the merger will delay the construction of a new $500 million power generation plant, a project for which Wisconsin Public Service customers would have been on the hook.
“Since Wisconsin Energy has a generation unit that’s not being fully utilized, being able to fully utilize that asset and serve more customers means that cost is spread over a bigger customer base, which means Wisconsin Energy customers will also benefit over time,” Parker said.
With utility demand leveling out, the best way to drive shareholder value now is by investing in improvements, and WEC is set up to complete several major projects that are likely to drive attractive returns, he said.
The companies fit well together, since Wisconsin Energy just completed a decade of bulky capital investments and now has extra cash on hand, and Integrys is at the start of a number of large projects.
“Wisconsin Energy now has excess capital and Integrys really needs capital,” Parker said. “You’ve got one company that can provide the funds for capital investment (and) they provide the management expertise for project management.”

Mapping a plan
Once the acquisition was completed, WEC executives shared with employees their top initiatives, which focus on four tenets: world-class reliability, operating efficiency, financial discipline and exceptional customer care.
While acquisition costs and a cooler summer dinged WEC in its second quarter earnings report on July 29, its leaders have signaled optimism for the future.
Klappa cited best practices, cost efficiencies and financial discipline as tools that will be used to grow WEC, reduce customer rates and drive shareholder value going forward.
“A year from now, most likely we’ll start seeing some of the fruits of the merger, overall synergy savings,” Parker said. “By that time, the new company and the board will have a chance to look at strategic alternatives and come up with a 10-year plan for the company.”
“It will take a while to be able to identify exactly where you’re going to be able to drive this new bus for the long term.”
“These kind of opportunities don’t come along often,” Parker said. “If you … merge with a company or acquire a company, usually there are significant issues. I’ve got to hand it to both the Integrys team and the Wisconsin Energy team, for really coming up with a win-win scenario. I don’t think there’s a lot of things where they’re going to stub their toe coming out of the block here.”

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Molly Dill, former BizTimes Milwaukee managing editor.

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