Power lines and water vapors being released from a chimney are seen at the We Energies power plant in Oak Creek. The company’s parent company is buying Wisconsin Public Service’s parent company for $9.1 billion. Credit: Mike De Sisti

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Wisconsin Energy Corp. will buy Integrys Energy Group in a $9.1 billion deal, creating a four-state utility with 4.3 million customers, the utilities announced Monday.

A major acquisition that caught industry observers by surprise, the transaction has particular implications for Wisconsin. It combines the state's largest utility with the parent company of Green Bay-based Wisconsin Public Service Corp., which provides gas and electricity across northeastern Wisconsin.

Beyond the state's borders, the deal expands Wisconsin Energy's footprint, adding a natural gas utility business that serves greater Chicago and parts of Michigan and Minnesota.

The combined utility holds majority ownership of Pewaukee-based American Transmission Co., which owns area power lines, and would have a market capitalization of $15 billion.

One more wrinkle: The transaction may mean that downtown Milwaukee will lose a longtime corporate headquarters.

In statements released Monday, Wisconsin Energy pointedly said the headquarters for the expanded company, to be called WEC Energy Group, will be "in the metro Milwaukee area."

"Operating headquarters will be in Chicago, Milwaukee and Green Bay," the firm said.

Asked about the language, spokesman Brian Manthey said the corporate headquarters location is "an open question."

Aside from regulatory approvals, Manthey said, the company must analyze future staffing and space needs and decide whether its offices at 231 W. Michigan St. would be sufficient. He said a decision probably won't be known for about a year.

In buying Chicago-based Integrys, Wisconsin Energy would pay $5.8 billion in cash and stock, and take on $3.3 billion in debt.

The transaction would be amongthe largest involving a Wisconsin company in years. Bucyrus, a South Milwaukee mining equipment manufacturer, was acquired by Caterpillar Inc. in 2011 for $8.8 billion, including assumed debt. That same year, BMO Harris bought Marshall & Ilsley Corp. for $4.1 billion and paid off another $1.7 billion M&I owed the federal government.

The timing of the Integrys deal has a lot to do with what's going on, more broadly, in the utilities industry, said Gale Klappa, chairman and CEO of Wisconsin Energy.

"We are, without a doubt, in a consolidating industry," Klappa said in an interview.

Going forward, successful utilities will be broad in scope and large enough to handle the capital investments needed to maintain and improve the electric power grid and natural gas distribution system, according to Klappa.

"We are going to be a company of 4.3 million customers when this combination takes place, and that should really bode well for our customers because it will help us be as efficient and price-competitive as we can be," he said.

Regulatory OK needed

But industry observers and customers already were casting a wary eye on the proposed combination, which will require multiple regulatory approvals.

The Citizens Utility Board, a consumer watchdog group, voiced concerns and said it "will fight to ensure that customers' interests remain paramount."

"If approved, aggressive controls must be put in place to protect customer interests and ensure value to them," the group said in a statement.

Also watching closely are big energy users such as Wisconsin's paper mills.

"We're going to be concerned with how our future energy prices will be," said Jeffrey Landin, president of the Wisconsin Paper Council. "Will this benefit us? Will it not? Obviously it's too early to tell that. But we're going to have to follow it closely."

The stakes are high. Energy — both gas and electricity combined — can represent 20% or more of a paper mill's costs, Landin said.

"It's fairly common for (mills) to pay bills each month in seven figures — over a million dollars a month in their costs for energy," he said.

Regulatory review likely will take months, and Wisconsin Energy said it expects to complete the transaction next summer. The deal will require approval from the Federal Energy Regulatory Commission and the state commissions in Wisconsin, Michigan, Minnesota and Illinois.

It is state commissions that have taken the lead in watching out for customer interests in such deals, said Robert E. Burns, retired research specialist with the National Regulatory Research Institute at Ohio State University.

"The Federal Energy Regulatory Commission has been given by Congress the primary role of approving mergers and acquisitions, but they almost never say no," he said.

"The state commissions usually don't say no either," he added, "but the state commissions have been far more aggressive on trying to (place conditions on) the mergers and acquisitions."

Such conditions are meant to keep a greatly expanded utility from gaining too much market clout. That possibility will be a concern in Wisconsin, and should be, Burns said.

Burns said one way to offset increased market power for a utility is to require more transmission going out of the affected area — in this case eastern Wisconsin and Michigan's Upper Peninsula. That, as it happens, could actually benefit the expanded Wisconsin Energy because of what would be its majority ownership of American Transmission Co.

"They've got a win-win," Burns said.

Another major bid to consolidate utility assets — Wisconsin Energy's proposed merger with Minnesota-based Northern States Power Co. — collapsed in the '90s over concerns the combined company would have an unfair advantage in the regional electric market.

But today's utility world is different, Klappa said.

Since the failed merger, he said, the industry has added a mechanism known as an independent system operator, which ensures all parties have equal access to power.

The $71.47 for each Integrys share is 17% above the firm's closing price on Friday. Integrys stock jumped 12.1% Monday, while Wisconsin Energy stock fell 3.5%.

Klappa to lead company

Klappa will serve as chairman and CEO of the combined company, which will keep Wisconsin Energy's stock ticker, WEC. Charlie Schrock, chairman and chief executive officer of Integrys, will retire upon completion of the merger.

Integrys was created in 2007 when Wisconsin Public Service's parent company bought Peoples Energy Corp. and moved its headquarters from Green Bay to Chicago.

In a statement, Gov. Scott Walker praised Monday's deal.

"Today's announcement is good news for two great Wisconsin companies," he said. "This purchase will strengthen Wisconsin Energy overall and result in better service for their local ratepayers."

Under the deal, Integrys will divest its nonregulated energy marketing business that competes in states that have opened themselves up to competition.

It is that unregulated subsidiary, Integrys Energy Services, that became the electricity supplier last year to We Energies' largest customer — the operator of two iron-ore mines in Michigan's Upper Peninsula.

Wisconsin Energy's pursuit of a company with significant natural gas interests comes at a time when utilities across the country are seeing little or no growth in electricity sales. Integrys diversified aggressively into the natural gas distribution business in recent years.

Executives of both companies said the deal would benefit shareholders because the combined company would have a bigger long-term earnings growth rate than either firm has today.

The combined company would have about 9,300 employees. Wisconsin Energy said it's not planning layoffs.

"Except for certain senior leadership positions, no positions are being eliminated at this time and all labor contracts will be honored," the utility said in a regulatory filing. "Over the next few years, as the new organization begins to realize efficiencies from the combination of the two companies and the coordination of the utilities, we'll evaluate structure and staffing."

Wisconsin Energy's "strong preference" has been to cut jobs through attrition, retirements and voluntary severance programs, the filing said.

Lee Bergquist of the Journal Sentinel staff contributed to this report.