STOCK-BASED COMPENSATION

Our employees may be granted awards under Integrys Energy Group’s stock-based compensation plans. Compensation cost associated with these awards is allocated to us based on the percentages used for allocation of the award recipients’ labor costs.

The following table reflects the stock-based compensation expense and the related deferred tax benefit recognized in income for the three and six months ended June 30:



	Three Months Ended June 30				Six Months Ended June 30
(Millions)	2013		2012		2013		2012
Stock options	$	0.2	$	0.3	$	0.3	$	0.4
Performance stock rights	0.5		1.2		1.3		1.7
Restricted share units	0.8		1.2		1.8		1.9
Total stock-based compensation expense	$	1.5	$	2.7	$	3.4	$	4.0
Deferred income tax benefit	$	0.6	$	1.1	$	1.4	$	1.6

No stock-based compensation cost was capitalized during the three and six months ended June 30, 2013, and 2012.

Stock Options

The fair value of stock option awards granted is estimated using a binomial lattice model. The expected term of option awards is calculated based on historical exercise behavior and represents the period of time that options are expected to be outstanding. The risk-free interest rate is based on the United States Treasury yield curve. The expected dividend yield incorporates the current and historical dividend rate of Integrys Energy Group. The expected stock price volatility is estimated using its 10-year historical volatility. The following table shows the weighted-average fair value per stock option granted during the six months ended June 30, 2013, along with the assumptions incorporated into the valuation model:



		February 2013 Grant
Weighted-average fair value per option		$6.03
Expected term		5 years
Risk-free interest rate		0.18% – 2.11%
Expected dividend yield		5.33%
Expected volatility		24%

A summary of stock option activity for the six months ended June 30, 2013, and information related to outstanding and exercisable stock options at June 30, 2013, is presented below:



	Stock Options		Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Contractual Life (in Years)	Aggregate Intrinsic Value (Millions)
Outstanding at December 31, 2012	66,852		$	49.95
Granted	19,364		56.00
Exercised	(32,223	)	49.46
Outstanding at June 30, 2013	53,993		52.41		7.3	$	0.3
Exercisable at June 30, 2013	16,541		$	50.98	3.9	$	0.1

The aggregate intrinsic value for outstanding and exercisable options in the above table represents the total pre-tax intrinsic value that would have been received by the option holders had they all exercised their options at June 30, 2013. This is calculated as the difference between Integrys Energy Group’s closing stock price on June 30, 2013, and the option exercise price, multiplied by the number of in-the-money stock options. The intrinsic value of options exercised during the six months ended June 30, 2013, and 2012, was not significant.

As of June 30, 2013, future compensation cost expected to be recognized for unvested and outstanding stock options was not significant.

Performance Stock Rights

The fair values of performance stock rights are estimated using a Monte Carlo valuation model. The risk-free interest rate is based on the United States Treasury yield curve. The expected dividend yield incorporates the current and historical dividend rate of Integrys Energy Group. The expected volatility is estimated using two to three years of historical data. The table below reflects the assumptions used in the valuation of the outstanding grants at June 30:



		2013
Risk-free interest rate		0.26% – 1.27%
Expected dividend yield		5.18% – 5.34%
Expected volatility		19% – 36%

A summary of the activity for the six months ended June 30, 2013, related to performance stock rights accounted for as equity awards is presented below:



	Performance Stock Rights		Weighted-Average Fair Value *
Outstanding at December 31, 2012	4,908		$	66.95
Granted	1,374		48.50
Distributed	(4,318	)	74.53
Adjustment for final payout	996		74.53
Outstanding at June 30, 2013	2,960		$	49.87


*	Reflects the weighted-average fair value used to measure equity awards. Equity awards are measured using the grant date fair value or the fair value on the modification date.

The weighted-average grant date fair value of performance stock rights awarded during the six months ended June 30, 2013, and 2012, was $48.50 and $52.70 per performance stock right, respectively.

A summary of the activity for the six months ended June 30, 2013, related to performance stock rights accounted for as liability awards is presented below:



	Performance Stock Rights
Outstanding at December 31, 2012	6,774
Granted	5,489
Distributed	(573	)
Adjustment for final payout	133
Outstanding at June 30, 2013	11,823

The weighted-average fair value of all outstanding performance stock rights accounted for as liability awards as of June 30, 2013, was $47.24 per performance stock right.

As of June 30, 2013, future compensation cost expected to be recognized for unvested and outstanding performance stock rights (equity and liability awards) was not significant.

The total intrinsic value of performance stock rights distributed during the six months ended June 30, 2013, and 2012, was not significant.

Restricted Share Units

A summary of the activity related to all restricted share unit awards (equity and liability awards) for the six months ended June 30, 2013, is presented below:



	Restricted Share Unit Awards		Weighted-Average Grant Date Fair Value
Outstanding at December 31, 2012	67,954		$	48.26
Granted	23,055		56.05
Dividend equivalents	1,521		52.01
Vested and released	(28,079	)	46.20
Outstanding at June 30, 2013	64,451		$	52.04

As of June 30, 2013, $1.7 million of compensation cost related to these awards was expected to be recognized over a weighted-average period of 2.4 years.

The total intrinsic value of restricted share unit awards vested and released during the six months ended June 30, 2013, and 2012, was $1.6 million and $1.5 million, respectively. The actual tax benefit realized for the tax deductions from the vesting and releasing of restricted share units during the six months ended June 30, 2013, and 2012, was not significant.

The weighted-average grant date fair value of restricted share units awarded during the six months ended June 30, 2013, and 2012, was $56.05 and $53.24 per share, respectively.