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Integrys Energy Group 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-12
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32
  6. 10-Q
  7. 10-Q
form10q.htm
 
______________________________________________________________________________
______________________________________________________________________________


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.  20549

FORM 10-Q

[x]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission
File Number
Registrant; State of Incorporation;
Address; and Telephone Number
IRS Employer
Identification No.
     
1-11337
INTEGRYS ENERGY GROUP, INC.
(A Wisconsin Corporation)
130 East Randolph Drive
Chicago, Illinois  60601-6207
(312) 228-5400
39-1775292

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]   No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [  ]   No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer [X]
Accelerated filer [  ]
Non-accelerated filer [  ]
Smaller reporting company [  ]
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ]   No [X]


Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

 
Common stock, $1 par value,
77,017,367  shares outstanding at
May 5, 2010
   
______________________________________________________________________________
______________________________________________________________________________

 
 
 


INTEGRYS ENERGY GROUP, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2010
 
TABLE OF CONTENTS
   
Page
     
 
COMMONLY USED ACRONYMS
3
     
 
FORWARD-LOOKING STATEMENTS
4
     
PART I.
FINANCIAL INFORMATION
6
     
Item 1.
FINANCIAL STATEMENTS (Unaudited)
6
     
 
Condensed Consolidated Statements of Income
6
 
Condensed Consolidated Balance Sheets
7
 
Condensed Consolidated Statements of Cash Flows
8
     
 
CONDENSED NOTES TO FINANCIAL STATEMENTS OF
9 – 47
 
   Integrys Energy Group, Inc. and Subsidiaries
  
   
Page
  
 
Note 1
Financial Information
9
  
 
Note 2
Cash and Cash Equivalents
9
  
 
Note 3
Risk Management Activities
10
  
 
Note 4
Restructuring Expense
16
  
 
Note 5
Dispositions
17
  
 
Note 6
Investments in Affiliates, at Equity Method
20
  
 
Note 7
Inventories
21
  
 
Note 8
Goodwill and Other Intangible Assets
21
  
 
Note 9
Short-Term Debt and Lines of Credit
23
  
 
Note 10
Long-Term Debt
25
  
 
Note 11
Asset Retirement Obligations
26
  
 
Note 12
Income Taxes
26
  
 
Note 13
Commitments and Contingencies
26
  
 
Note 14
Guarantees
33
  
 
Note 15
Employee Benefit Plans
34
  
 
Note 16
Stock-Based Compensation
35
  
 
Note 17
Comprehensive Income (Loss)
36
  
 
Note 18
Common Equity
37
  
 
Note 19
Variable Interest Entities
38
  
 
Note 20
Fair Value
39
  
 
Note 21
Miscellaneous Income
42
  
 
Note 22
Regulatory Environment
43
  
 
Note 23
Segments of Business
46
  
     
Management's Discussion and Analysis of Financial Condition and Results of Operations
48 – 66
     
Quantitative and Qualitative Disclosures About Market Risk
67
     
Controls and Procedures
69


 
 
 


   
Page
OTHER INFORMATION
70
     
Item 1.
Legal Proceedings
70
     
Item 1A.
Risk Factors
70
     
Item 6.
Exhibits
70
     
Signature
  
71

 
72
   
3.1
Amendments to the By-Laws of Integrys Energy Group, Inc. effective April 1, 2010 (Incorporated by reference to Exhibit 3.1 to Integrys Energy Group’s Form 8-K filed April 1, 2010)
   
3.2
Integrys Energy Group, Inc. By-Laws as in effect at April 1, 2010 (Incorporated by reference to Exhibit 3.2 to Integrys Energy Group’s Form 8-K filed April 1, 2010)
   
4.1
Forty-First Supplemental Indenture of WPS, dated as of December 18, 2008 (Incorporated by reference to Exhibit 4.1 to WPS’s Form 10-Q filed May 5, 2010)
   
4.2
42nd Supplemental Indenture of WPS, dated as of April 25, 2010 (Incorporated by reference to Exhibit 4.2 to WPS’s Form 10-Q filed May 5, 2010)
   
12
Computation of Ratio of Earnings to Fixed Charges
   
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 for Integrys Energy Group, Inc.
   
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 for Integrys Energy Group, Inc.
   
32
Written Statement of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 for Integrys Energy Group, Inc.

-2-

Commonly Used Acronyms
   
AFUDC
Allowance for Funds Used During Construction
ASC
Accounting Standards Codification
ATC
American Transmission Company LLC
EEP
Enhanced Efficiency Program
EPA
United States Environmental Protection Agency
FASB
Financial Accounting Standards Board
FERC
Federal Energy Regulatory Commission
GAAP
United States Generally Accepted Accounting Principles
IBS
Integrys Business Support, LLC
ICC
Illinois Commerce Commission
IRS
United States Internal Revenue Service
LIFO
Last-in, first-out
MERC
Minnesota Energy Resources Corporation
MGU
Michigan Gas Utilities Corporation
MISO
Midwest Independent Transmission System Operator, Inc.
MPSC
Michigan Public Service Commission
MPUC
Minnesota Public Utility Commission
N/A
Not Applicable
NSG
North Shore Gas Company
NYMEX
New York Mercantile Exchange
PEC
Peoples Energy Corporation
PGL
The Peoples Gas Light and Coke Company
PSCW
Public Service Commission of Wisconsin
SEC
United States Securities and Exchange Commission
SFAS
Statement of Financial Accounting Standards
UPPCO
Upper Peninsula Power Company
WDNR
Wisconsin Department of Natural Resources
WPS
Wisconsin Public Service Corporation
WRPC
Wisconsin River Power Company


 
-3-
 

Forward-Looking Statements

In this report, Integrys Energy Group and its subsidiaries make statements concerning expectations, beliefs, plans, objectives, goals, strategies, and future events or performance.  Such statements are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.  Forward-looking statements are subject to assumptions and uncertainties; therefore, actual results may differ materially from those expressed or implied by such forward-looking statements.  Although Integrys Energy Group and its subsidiaries believe that these forward-looking statements and the underlying assumptions are reasonable, they cannot provide assurance that such statements will prove correct.

Forward-looking statements include, among other things, statements concerning management's expectations and projections regarding earnings, regulatory matters, fuel costs, sources of electric energy supply, coal and natural gas deliveries, remediation costs, environmental and other capital expenditures, liquidity and capital resources, trends, estimates, completion of construction projects, and other matters.

Forward-looking statements involve a number of risks and uncertainties.  Some risks that could cause results to differ from any forward-looking statement include those described in Item 1A of Integrys Energy Group's Annual Report on Form 10-K for the year ended December 31, 2009, as may be amended or supplemented in Part II, Item 1A of this report.  Other factors include:

●
Resolution of pending and future rate cases and negotiations (including the recovery of deferred costs) and other regulatory decisions impacting Integrys Energy Group's regulated businesses;
●
The impact of recent and future federal and state regulatory changes, including legislative and regulatory initiatives regarding deregulation and restructuring of the electric and natural gas utility industries, changes in environmental and other regulations, including but not limited to, greenhouse gas emissions, energy efficiency mandates, renewable energy standards, and reliability standards, and changes in tax and other laws and regulations to which Integrys Energy Group and its subsidiaries are subject;
●
Current and future litigation and regulatory investigations, enforcement actions or inquiries, including but not limited to, manufactured gas plant site cleanup, third-party intervention in permitting and licensing projects, compliance with Clean Air Act requirements at generation plants, and prudence and reconciliation of costs recovered in revenues through an automatic gas cost recovery mechanism;
●
The impacts of changing financial market conditions, credit ratings, and interest rates on the  liquidity and financing efforts of Integrys Energy Group and its subsidiaries;
●
The risks related to executing the strategy change associated with Integrys Energy Group's nonregulated energy services business, including the restructuring of its retail natural gas and retail electric marketing business;
●
The risks associated with changing commodity prices (particularly natural gas and electricity) and the available sources of fuel and purchased power, including their impact on margins;
●
Resolution of audits or other tax disputes with the IRS and various state, local, and Canadian revenue agencies;
●
The effects, extent, and timing of additional competition or regulation in the markets in which Integrys Energy Group's subsidiaries operate;
●
The retention of market-based rate authority;
●
The risk associated with the value of goodwill or other intangibles and their possible impairment;
●
Investment performance of employee benefit plan assets and the related impact on future funding requirements;
●
Changes in technology, particularly with respect to new, developing, or alternative sources of generation;
●
Effects of and changes in political and legal developments, as well as economic conditions and the related impact on customer demand;
●
Potential business strategies, including mergers, acquisitions, and construction or disposition of assets or businesses, which cannot be assured to be completed timely or within budgets;
●
The direct or indirect effects of terrorist incidents, natural disasters, or responses to such events;
 
-4-
 
●
The effectiveness of risk management strategies, the use of financial and derivative instruments, and the ability to recover costs from customers in rates associated with the use of those strategies and financial instruments;
●
The risk of financial loss, including increases in bad debt expense, associated with the inability of Integrys Energy Group's and its subsidiaries' counterparties, affiliates, and customers to meet their obligations;
●
Customer usage, weather, and other natural phenomena;
●
The utilization of tax credit and loss carryforwards;
●
Contributions to earnings by non-consolidated equity method and other investments, which may vary from projections;
●
The effect of accounting pronouncements issued periodically by standard-setting bodies; and
●
Other factors discussed elsewhere herein and in other reports filed by Integrys Energy Group from time to time with the SEC.

Except to the extent required by the federal securities laws, Integrys Energy Group and its subsidiaries undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
 
 
 
-5-
 
 

 
             
PART 1. FINANCIAL INFORMATION
  
             
Item 1.   Financial Statements
            
             
INTEGRYS ENERGY GROUP, INC.
  
             
             
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
  
Three Months Ended
  
   
March 31
  
(Millions, except per share data)
  
2010
    
2009
  
             
Nonregulated revenues
   $ 646.8     $ 1,786.3  
Utility revenues
     1,256.6       1,414.5  
Total revenues
     1,903.4       3,200.8  
                 
Nonregulated cost of fuel, natural gas, and purchased power
     639.6       1,769.1  
Utility cost of fuel, natural gas, and purchased power
     741.5       910.6  
Operating and maintenance expense
     268.1       291.3  
Goodwill impairment loss
     -       291.1  
Restructuring expense
     2.7       -  
Net loss on Integrys Energy Services' dispositions related to strategy change
     39.8       -  
Depreciation and amortization expense
     64.2       56.9  
Taxes other than income taxes
     28.2       26.9  
Operating income (loss)
     119.3       (145.1 )
                 
Miscellaneous income
     20.4       21.1  
Interest expense
     (39.4 )     (42.7 )
Other expense
     (19.0 )     (21.6 )
                 
Income (loss) before taxes
     100.3       (166.7 )
Provision for income taxes
     50.1       12.8  
Net income (loss) from continuing operations
     50.2       (179.5 )
                 
Discontinued operations, net of tax
     0.1       -  
Net income (loss)
     50.3       (179.5 )
                 
Preferred stock dividends of subsidiary
     (0.8 )     (0.8 )
Noncontrolling interest in subsidiaries
     -       0.1  
Net income (loss) attributed to common shareholders
   $ 49.5     $ (180.2 )
                 
                 
Average shares of common stock
                
    Basic
     76.9       76.7  
    Diluted
     77.2       76.7  
                 
Earnings (loss) per common share (basic)
                
    Net income (loss) from continuing operations
   $ 0.64     $ (2.35 )
    Discontinued operations, net of tax
     -       -  
    Earnings (loss) per common share (basic)
   $ 0.64     $ (2.35 )
                 
Earnings (loss) per common share (diluted)
                
    Net income (loss) from continuing operations
   $ 0.64     $ (2.35 )
    Discontinued operations, net of tax
     -       -  
    Earnings (loss) per common share (diluted)
   $ 0.64     $ (2.35 )
                 
Dividends per common share declared
   $ 0.68     $ 0.68  
                 
The accompanying condensed notes are an integral part of these statements.
                
                 

 
 
-6-
 


             
INTEGRYS ENERGY GROUP, INC.
  
             
             
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
  
March 31
    
December 31
  
(Millions)
  
2010
    
2009
  
             
Assets
            
Cash and cash equivalents
   $ 259.1     $ 44.5  
Collateral on deposit
     251.6       184.9  
Accounts receivable and accrued unbilled revenues, net of reserves of $60.3 and $57.5, respectively
     1,021.4       958.0  
Inventories
     94.9       304.3  
Assets from risk management activities
     753.7       1,522.1  
Regulatory assets
     119.9       121.1  
Deferred income taxes
     98.6       92.9  
Assets held for sale
     -       26.5  
Other current assets
     249.0       257.9  
Current assets
     2,848.2       3,512.2  
                 
Property, plant, and equipment, net of accumulated depreciation of $2,885.9 and $2,847.2, respectively
     4,929.0       4,945.1  
Regulatory assets
     1,459.9       1,434.9  
Assets from risk management activities
     179.5       795.4  
Goodwill
     642.5       642.5  
Other long-term assets
     525.4       517.8  
Total assets
   $ 10,584.5     $ 11,847.9  
                 
Liabilities and Equity
                
Short-term debt
   $ 172.7     $ 222.1  
Current portion of long-term debt
     393.4       116.5  
Accounts payable
     536.9       639.4  
Liabilities from risk management activities
     946.2       1,607.1  
Regulatory liabilities
     114.3       100.4  
Liabilities held for sale
     -       0.3  
Temporary LIFO liquidation credit
     131.3       -  
Other current liabilities
     386.4       461.8  
Current liabilities
     2,681.2       3,147.6  
                 
Long-term debt
     2,066.2       2,394.7  
Deferred income taxes
     692.3       658.2  
Deferred investment tax credits
     36.2       36.2  
Regulatory liabilities
     284.3       277.6  
Environmental remediation liabilities
     657.0       658.8  
Pension and other postretirement benefit obligations
     656.2       640.7  
Liabilities from risk management activities
     258.7       783.1  
Asset retirement obligations
     197.7       194.8  
Other long-term liabilities
     144.3       147.4  
Long-term liabilities
     4,992.9       5,791.5  
                 
Commitments and contingencies
                
                 
Common stock - $1 par value; 200,000,000 shares authorized; 76,806,208 shares issued;
     76,407,822 shares outstanding
     76.8       76.4  
Additional paid-in capital
     2,511.3       2,497.8  
Retained earnings
     343.0       345.6  
Accumulated other comprehensive loss
     (55.1 )     (44.0 )
Treasury stock and shares in deferred compensation trust
     (15.7 )     (17.2 )
Total common shareholders' equity
     2,860.3       2,858.6  
                 
Preferred stock of subsidiary - $100 par value; 1,000,000 shares authorized;
     511,882 shares issued; 510,495 shares outstanding
     51.1       51.1  
Noncontrolling interest in subsidiaries
     (1.0 )     (0.9 )
Total liabilities and equity
   $ 10,584.5     $ 11,847.9  
                 
The accompanying condensed notes are an integral part of these statements.
                
                 
 

 
 
-7-
 


                 
INTEGRYS ENERGY GROUP, INC.
  
                 
                 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
  
Three Months Ended
  
       
March 31
  
(Millions)
    
2010
    
2009
  
Operating Activities
            
Net income (loss)
   $ 50.3     $ (179.5 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities
                
 
Discontinued operations, net of tax
     (0.1 )     -  
 
Goodwill impairment loss
     -       291.1  
 
Depreciation and amortization expense
     64.2       56.9  
 
Recoveries and refunds of regulatory assets and liabilities
     14.6       19.6  
 
Net unrealized losses on nonregulated energy contracts
     71.7       105.0  
 
Nonregulated lower of cost or market inventory adjustments
     1.4       35.7  
 
Bad debt expense
     14.4       26.6  
 
Pension and other postretirement expense
     20.9       15.2  
 
Pension and other postretirement contributions
     (1.2 )     (3.4 )
 
Deferred income taxes and investment tax credit
     27.5       (54.3 )
 
(Gain) loss on sale of assets
     38.6       (1.8 )
 
Equity income, net of dividends
     (3.2 )     (3.9 )
 
Other
       (22.1 )     10.0  
 
Changes in working capital
                
   
Collateral on deposit
     (54.7 )     (205.1 )
   
Accounts receivable and accrued unbilled revenues
     (71.5 )     271.8  
   
Inventories
     200.8       467.4  
   
Other current assets
     17.5       62.0  
   
Accounts payable
     (24.4 )     (319.3 )
   
Temporary LIFO liquidation credit
     131.3       128.6  
   
Other current liabilities
     (56.6 )     130.0  
Net cash provided by operating activities
     419.4       852.6  
                     
Investing Activities
                
Capital expenditures
     (63.2 )     (89.3 )
Proceeds from the sale or disposal of assets
     55.7       3.2  
Purchase of equity investments
     (5.1 )     (8.6 )
Other
         (3.2 )     1.2  
Net cash used for investing activities
     (15.8 )     (93.5 )
                     
Financing Activities
                
Short-term debt, net
     (49.4 )     (539.2 )
Redemption of notes payable
     -       (157.9 )
Proceeds from sale of borrowed natural gas
     20.7       107.5  
Purchase of natural gas to repay natural gas loans
     (2.0 )     (36.0 )
Repayment of long-term debt
     (50.0 )     -  
Payment of dividends
                
 
Preferred stock of subsidiary
     (0.8 )     (0.8 )
 
Common stock
     (46.5 )     (51.7 )
Issuance of common stock
     7.7       -  
Payments made on derivative contracts related to divestitures classified as financing activities
     (66.9 )     -  
Other
         (1.9 )     (3.4 )
Net cash used for financing activities
     (189.1 )     (681.5 )
                     
Change in cash and cash equivalents - continuing operations
     214.5       77.6  
Change in cash and cash equivalents - discontinued operations
                
 
Net cash provided by investing activities
     0.1       -  
Net change in cash and cash equivalents
     214.6       77.6  
Cash and cash equivalents at beginning of period
     44.5       254.1  
Cash and cash equivalents at end of period
   $ 259.1     $ 331.7  
                     
The accompanying condensed notes are an integral part of these statements
                
                     
 

 
-8-
 

INTEGRYS ENERGY GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO FINANCIAL STATEMENTS
March 31, 2010

NOTE 1--FINANCIAL INFORMATION

The condensed consolidated financial statements of Integrys Energy Group, Inc. have been prepared pursuant to the rules and regulations of the SEC for Quarterly Reports on Form 10-Q and in accordance with GAAP.  Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for annual financial statements.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes in the Integrys Energy Group Annual Report on Form 10-K for the year ended December 31, 2009.

The condensed consolidated financial statements are unaudited, but, in management's opinion, include all adjustments (which, unless otherwise noted, include only normal recurring adjustments) necessary for a fair presentation of such financial statements.  Financial results for this interim period are not necessarily indicative of results that may be expected for any other interim period or for the year ending December 31, 2010.

NOTE 2--CASH AND CASH EQUIVALENTS

Short-term investments with an original maturity of three months or less are reported as cash equivalents.

The following is supplemental disclosure to the Integrys Energy Group Condensed Consolidated Statements of Cash Flows:

   
Three Months Ended March 31
  
(Millions)
  
2010
    
2009
  
Cash paid for interest
   $ 23.5     $ 29.7  
Cash paid for income taxes
     11.5       0.9  

Significant non-cash transactions were:

   
Three Months Ended March 31
  
(Millions)
  
2010
    
2009
  
Construction costs funded through accounts payable
   $ 10.3     $ 17.9  
Equity issued for reinvested dividends
     5.5       -  
Equity issued for stock-based compensation plans
     3.0       -  
Intangible assets (customer contracts) received in exchange
     for risk management assets
     -       9.2  
 
-9-

 
NOTE 3--RISK MANAGEMENT ACTIVITIES

In the three months ended March 31, 2010, Integrys Energy Group identified additional classes of risk management assets and liabilities as a result of the implementation of FASB Accounting Standards Update (ASU) 2010-06, "Fair Value Measurements and Disclosures (Topic 820), Improving Disclosures about Fair Value Measurements."  As required, this ASU was only applied for the quarter ended
March 31, 2010, and therefore, prior periods do not reflect the expanded disclosure requirements.

The following tables show Integrys Energy Group's assets and liabilities from risk management activities.

     
March 31, 2010
  
(Millions)
Balance Sheet Presentation *
  
Risk Management Assets
    
Risk Management Liabilities
  
Utility Segments
              
Non-hedge derivatives
              
Natural gas contracts
Current
   $ 0.5     $ 47.7  
Natural gas contracts
Long-term
     0.8       5.3  
Financial transmission rights
Current
     1.9       0.4  
Petroleum product contracts
Current
     0.2       -  
Total commodity contracts
Current
     2.6       48.1  
Total commodity contracts
Long-term
     0.8       5.3  
                   
Cash flow hedges
                  
Natural gas contracts
Current
     -       0.9  
Natural gas contracts
Long-term
     -       0.4  
                   
Nonregulated Segments
                  
Non-hedge derivatives
                  
Natural gas contracts
Current
     189.4       186.4  
Natural gas contracts
Long-term
     92.2       90.6  
Power contracts
Current
     557.2       670.5  
Power contracts
Long-term
     83.4       142.1  
Total commodity contracts
Current
     746.6       856.9  
Total commodity contracts
Long-term
     175.6       232.7  
Interest rate swaps
Current
     -       0.8  
Interest rate swaps
Long-term
     -       2.6  
Foreign exchange contracts
Current
     1.0       1.0  
Foreign exchange contracts
Long-term
     0.8       0.8  
Fair value hedges
                  
Interest rate swaps
Current
     1.9       -  
Cash flow hedges
                  
Natural gas contracts
Current
     0.4       4.9  
Natural gas contracts
Long-term
     -       0.1  
Power contracts
Current
     1.2       32.7  
Power contracts
Long-term
     2.3       16.8  
Total commodity contracts
Current
     1.6       37.6  
Total commodity contracts
Long-term
     2.3       16.9  
Interest rate swaps
Current
     -       0.9  
 
Current
     753.7       946.2  
 
Long-term
     179.5       258.7  
Total
     $ 933.2     $ 1,204.9  

*      All derivatives are recognized on the balance sheet at their fair value unless they qualify for the normal purchases and sales exception.  Integrys Energy Group continually assesses its contracts designated as normal and will discontinue the treatment of these contracts as normal if the required criteria are no longer met.  Assets and liabilities from risk management activities are classified as current or long-term based upon the maturities of the underlying contracts.
 
-10-

     
December 31, 2009
  
(Millions)
Balance Sheet Presentation *
  
Risk Management Assets
    
Risk Management Liabilities
  
Utility Segments
              
Non-hedge derivatives
              
Commodity contracts
Current
   $ 10.8     $ 24.7  
Commodity contracts
Long-term
     2.0       1.5  
Cash flow hedges
                  
Commodity contracts
Current
     -       0.2  
Commodity contracts
Long-term
     -       0.1  
                   
Nonregulated Segments
                  
Non-hedge derivatives
                  
Commodity contracts
Current
     1,503.9       1,548.4  
Commodity contracts
Long-term
     787.2       769.5  
Interest rate swaps
Current
     -       1.0  
Interest rate swaps
Long-term
     -       2.5  
Foreign exchange contracts
Current
     1.0       0.9  
Foreign exchange contracts
Long-term
     0.9       0.9  
Fair value hedges
                  
Commodity contracts
Current
     -       -  
Interest rate swaps
Current
     1.8       -  
Interest rate swaps
Long-term
     0.8       -  
Cash flow hedges
                  
Commodity contracts
Current
     4.6       30.1  
Commodity contracts
Long-term
     4.5       8.6  
Interest rate swaps
Current
     -       1.8  
Interest rate swaps
Long-term
     -       -  
Foreign exchange contracts
Current
     -       -  
 
Current
     1,522.1       1,607.1  
 
Long-term
     795.4       783.1  
Total
     $ 2,317.5     $ 2,390.2  

*      All derivatives are recognized on the balance sheet at their fair value unless they qualify for the normal purchases and sales exception.  Integrys Energy Group continually assesses its contracts designated as normal and will discontinue the treatment of these contracts as normal if the required criteria are no longer met.  Assets and liabilities from risk management activities are classified as current or long-term based upon the maturities of the underlying contracts.

The following table shows Integrys Energy Group's cash collateral positions:

(Millions)
  
March 31, 2010
    
December 31, 2009
  
Cash collateral provided to others
   $ 251.6 **   $ 184.9  
Cash collateral received from others
     47.2       55.2  

**      On April 1, 2010, $212.2 million of cash was recovered from a counterparty, and replaced with a letter of credit.

Certain of Integrys Energy Group's derivative and nonderivative commodity instruments contain provisions that could require "adequate assurance" in the event of a material adverse change in Integrys Energy Group's creditworthiness, or the posting of additional collateral for instruments in net liability positions, if triggered by a decrease in credit ratings.  The aggregate fair value of all derivative instruments with specific credit-risk related contingent features that were in a liability position at March 31, 2010, and December 31, 2009, was $900.6 million and $579.6 million, respectively.

If all of the credit-risk related contingent features contained in commodity instruments (including derivatives, non-derivatives, normal purchase and normal sales contracts, and applicable payables and receivables) had been triggered, Integrys Energy Group would have been required to post collateral of $616.2 million and $566.3 million at March 31, 2010, and December 31, 2009, respectively.  Of these amounts, Integrys Energy Group had already satisfied $335.9 million at March 31, 2010, of which $212.2 million was satisfied with cash and the difference was satisfied with letters of credit, and $51.9 million at December 31, 2009, all satisfied with letters of credit.  Therefore, the remaining collateral
 
-11-
 
requirement would have been $280.3 million at March 31, 2010, and $514.4 million at December 31, 2009. 

Utility Segments

Non-Hedge Derivatives

Utility derivatives include a limited number of natural gas purchase contracts, financial derivative contracts (futures, options, and swaps), and financial transmission rights used to manage electric transmission congestion costs.  The futures, options, and swaps were used by both the electric and natural gas utility segments to mitigate the risks associated with the market price volatility of natural gas supply costs and the costs of gasoline and diesel fuel used by utility vehicles.

Derivative instruments at the utilities are entered into in accordance with the terms of the risk management plans approved by their respective Boards of Directors and, if applicable, by their respective regulators.  Most energy-related physical and financial derivatives at the utilities qualify for regulatory deferral.  These derivatives are marked to fair value; the resulting risk management assets are offset with regulatory liabilities or decreases to regulatory assets, and risk management liabilities are offset with regulatory assets or decreases to regulatory liabilities.  Management believes any gains or losses resulting from the eventual settlement of these derivative instruments will be refunded to or collected from customers in rates.

The tables below show the unrealized gains (losses) recorded related to non-hedge derivatives at the utilities.

(Millions)
Financial Statement Presentation
  
Three Months Ended
March 31, 2010
  
Natural gas contracts
Balance Sheet – Regulatory assets (current)
   $ (26.4 )
Natural gas contracts
Balance Sheet – Regulatory assets (long-term)
     (5.2 )
Natural gas contracts
Balance Sheet – Regulatory liabilities (current)
     (0.2 )
Financial transmission rights
Balance Sheet – Regulatory assets (current)
     0.9  
Financial transmission rights
Balance Sheet – Regulatory liabilities (current)
     (2.3 )
Petroleum product contracts
Income Statement – Operating and maintenance expense
     (0.1 )

(Millions)
Financial Statement Presentation
  
Three Months Ended
March 31, 2009
  
Commodity contracts
Balance Sheet – Regulatory assets (current)
   $ 15.8  
Commodity contracts
Balance Sheet – Regulatory assets (long-term)
     0.3  
Commodity contracts
Balance Sheet – Regulatory liabilities (current)
     (2.7 )
Commodity contracts
Income Statement – Utility cost of fuel, natural gas, and purchased power
     0.2  

The utilities had the following notional volumes of outstanding non-hedge derivative contracts:

   
March 31, 2010
    
December 31, 2009
  
   
Purchases
    
Other Transactions
    
Purchases
    
Other Transactions
  
Natural gas (millions of therms)
     567.4       N/A       833.2       N/A  
Financial transmission rights (millions of kilowatt-hours)
     N/A       2,287.9       N/A       4,546.6  
Petroleum products (barrels)
     31,869       N/A       42,823       N/A  
 
-12-

 
Cash Flow Hedges

PGL uses natural gas contracts designated as cash flow hedges to hedge changes in the price of natural gas used to support operations.  These contracts extend through December 2011.  PGL had the following notional volumes of outstanding contracts that were designated as cash flow hedges:

   
Purchases
  
   
March 31, 2010
    
December 31, 2009
  
Natural gas (millions of therms)
     9.0       9.6  

Changes in the fair values of the effective portions of these contracts are included in other comprehensive income (OCI), net of taxes.  Amounts recorded in OCI related to these cash flow hedges will be recognized in earnings when the hedged transactions occur, or if it is probable that the hedged transaction will not occur.  The tables below show the amounts related to cash flow hedges recorded in OCI and in earnings.

Unrealized Loss Recognized in OCI on Derivative Instruments (Effective Portion)
  
   
Three Months Ended March 31
  
(Millions)
  
2010
    
2009
  
Natural gas contracts
   $ (1.1 )   $ (0.6 )

Loss Reclassified from Accumulated OCI into Income (Effective Portion)
  
     
Three Months Ended March 31
  
(Millions)
Income Statement Presentation
  
2010
    
2009
  
Settled natural gas contracts
Operating and maintenance expense
   $ (0.1 )   $ (0.1 )

The amount reclassified from accumulated OCI into earnings as a result of the discontinuance of cash flow hedge accounting for certain hedge transactions was not significant during the three months ended March 31, 2010, and 2009.  Cash flow hedge ineffectiveness related to these natural gas contracts was not significant during the three months ended March 31, 2010, and 2009.  When testing for effectiveness, no portion of the derivative instruments was excluded.  In the next 12 months, PGL expects that an insignificant pre-tax loss will be recognized in earnings as the hedged transactions occur.

Nonregulated Segments

Non-Hedge Derivatives

Integrys Energy Group's nonregulated segments enter into derivative contracts such as futures, forwards, options, and swaps that are not designated as accounting hedges under GAAP.  In most cases, these contracts are used to manage commodity price risk associated with customer-related contracts and interest rate risk associated with expected future natural gas purchases.

The nonregulated segments had the following notional volumes of outstanding non-hedge derivative contracts:

   
March 31, 2010
    
December 31, 2009
  
(Millions)
  
Purchases
    
Sales
    
Other Transactions
    
Purchases
    
Sales
    
Other Transactions
  
Commodity contracts
                                    
Natural gas (therms)
     1,704.5       1,479.4       N/A       2,990.4       2,917.1       N/A  
Power (kilowatt-hours)
     48,004.2       40,160.4       N/A       132,200.4       125,983.1       N/A  
Interest rate swaps
     N/A       N/A     $ 192.6       N/A       N/A     $ 219.2  
Foreign exchange contracts
   $ 31.4     $ 31.4       N/A     $ 35.1     $ 35.1       N/A  

 
-13-
 
Gains (losses) related to non-hedge derivatives are recognized currently in earnings, as shown in the tables below.

(Millions)
Income Statement Presentation
  
Three Months Ended
March 31, 2010
  
Natural gas contracts
Nonregulated revenue
   $ 3.2  
Natural gas contracts
Nonregulated revenue (reclassified fromaccumulated OCI)
     0.3 *
Power contracts
Nonregulated revenue
     (80.7 )
Interest rate swaps
Interest expense
     (0.4 )
Total
     $ (77.6 )

*
Represents amounts reclassified from accumulated OCI related to cash flow hedges that were dedesignated in prior periods.

(Millions)
Income Statement Presentation
  
Three Months Ended
March 31, 2009
  
Commodity contracts
Nonregulated revenue
   $ (39.6 )
Interest rate swaps
Interest expense
     0.1  
Foreign exchange contracts
Nonregulated revenue
     0.1  
Total
     $ (39.4 )

Fair Value Hedges

At PEC, an interest rate swap designated as a fair value hedge is used to hedge changes in the fair value of $50.0 million of PEC Series A 6.9% notes due January 15, 2011.  The changes in the fair value of this hedge are recognized currently in earnings, as are the changes in fair value of the hedged item.  Unrealized gains (losses) related to the fair value hedge and the related hedged item are shown in the table below.

     
Three Months Ended March 31
  
(Millions)
Income Statement Presentation
  
2010
    
2009
  
Interest rate swap
Interest expense
   $ (0.7 )   $ (0.3 )
Debt hedged by swap
Interest expense
     0.7       0.3  
Total
     $ -     $ -  

Fair value hedge ineffectiveness recorded in interest expense on the Condensed Consolidated Statements of Income was not significant for the three months ended March 31, 2010, and 2009.  No amounts were excluded from effectiveness testing related to the interest rate swap during the three months ended March 31, 2010, and 2009.

Cash Flow Hedges

Natural gas futures, forwards, and swaps that are designated as cash flow hedges extend through January 2012, while power futures, forwards, and swaps designated as cash flow hedges extend through May 2013.  These contracts are used to mitigate the risk of cash flow variability associated with future purchases and sales of natural gas and power.  Integrys Energy Group also has two interest rate swaps that are designated as cash flow hedges to fix the interest rate on an unsecured term loan through June 2010.  The nonregulated segments had the following notional volumes of outstanding contracts that were designated as cash flow hedges:
 
-14-

   
March 31, 2010
    
December 31, 2009
  
(Millions)
  
Purchases
    
Sales
    
Other Transactions
    
Purchases
    
Sales
    
Other Transactions
  
Commodity contracts
                                    
    Natural gas (therms)
     65.9       10.1       N/A       5.9       8.6       N/A  
    Power (kilowatt-hours)
     6,982.7       -       N/A       7,116.2       -       N/A  
Interest rate swaps
     N/A       N/A     $ 65.6       N/A       N/A     $ 65.6  

Changes in the fair values of the effective portions of contracts designated as cash flow hedges are included in OCI, net of taxes.  Amounts recorded in OCI related to cash flow hedges will be recognized in earnings when the hedged transactions occur, or if it is probable that the hedged transaction will not occur.  The tables below show the amounts related to cash flow hedges recorded in OCI and in earnings.

Unrealized Gain (Loss) Recognized in OCI on Derivative Instruments (Effective Portion)
  
(Millions)
  
Three Months Ended March 31, 2010
  
Natural gas contracts
   $ (4.2 )
Power contracts
     (23.9 )
Interest rate swaps
     1.0  
Total
   $ (27.1 )

Unrealized Gain (Loss) Recognized in OCI on Derivative Instruments (Effective Portion)
  
(Millions)
  
Three Months Ended March 31, 2009
  
Commodity contracts
   $ (50.0 )
Interest rate swaps
     0.9  
Total
   $ (49.1 )

Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
  
(Millions)
Income Statement Presentation
  
Three Months Ended
March 31, 2010
  
Settled/Realized
        
Natural gas contracts
Nonregulated revenue
   $ (7.3 )
Power contracts
Nonregulated revenue
     (4.9 )
Interest rate swaps
Interest expense
     0.3  
Hedge Designation Discontinued
          
Natural gas contracts
Nonregulated revenue
     0.8  
Power contracts
Nonregulated revenue
     (7.6 )
Total
     $ (18.7 )

Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
  
(Millions)
Income Statement Presentation
  
Three Months Ended
March 31, 2009
  
Settled/Realized
        
Commodity contracts
Nonregulated revenue
   $ 16.7  
Interest rate swaps
Interest expense
     0.3  
Hedge Designation Discontinued
          
Commodity contracts
Nonregulated revenue
     (0.5 )
Total
     $ 16.5  

Loss Recognized in Income on Derivative Instruments (Ineffective Portion and Amount Excluded from Effectiveness Testing
  
(Millions)
Income Statement Presentation
  
Three Months Ended
March 31, 2010
  
Power contracts
Nonregulated revenue
   $ (0.7 )
 
 
-15-

 
Loss Recognized in Income on Derivative Instruments (Ineffective Portion and Amount Excluded from Effectiveness Testing
  
(Millions)
Income Statement Presentation
  
Three M