form10k.htm

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 this Annual Report on Form 10-K for the year ended December 31, 2009. 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;

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●	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.

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PART I

ITEM 1. BUSINESS

A. GENERAL

References to "Notes" are to the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

For financial information on Integrys Energy Group's foreign and domestic revenues, foreign and domestic long-lived assets, revenues from external customers, net income (loss) attributed to common shareholders and total assets by reportable segment, see Note 25, "Segments of Business." For financial information about Integrys Energy Group’s reportable segments, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations."

Integrys Energy Group, Inc.

Integrys Energy Group was incorporated in Wisconsin in 1993. Integrys Energy Group is a holding company for its regulated utility and nonregulated business units.

Natural Gas Utility Segment

The natural gas utility segment includes the regulated natural gas utility operations of WPS, MGU, MERC, PGL, and NSG. WPS, a Wisconsin corporation, began operations in 1883. MGU and MERC, both Delaware corporations, began operations upon the acquisition of their natural gas distribution operations in Michigan and Minnesota, respectively, from Aquila, Inc. in April 2006 and July 2006, respectively. PGL and NSG, both Illinois corporations, began operations in 1855 and 1900, respectively. Integrys Energy Group acquired PGL and NSG in February 2007 in the PEC merger. For the last three years, all of the natural gas utility segment's revenues were earned within the United States and all assets were located within the United States.

Electric Utility Segment

The electric utility segment includes the regulated electric utility operations of WPS and UPPCO. UPPCO, a Michigan corporation, began operations in 1884. For the last three years, all of the electric utility segment's revenues were earned within the United States and all assets were located within the United States.

Integrys Energy Services

Integrys Energy Services, a Wisconsin corporation, was established in 1994. Integrys Energy Services is a diversified nonregulated energy supply and services company serving retail customers (residential, commercial, and industrial). Integrys Energy Services provides energy supply solutions, products, and strategies that enable customers to manage energy needs while capitalizing on opportunities resulting from deregulated markets.

See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations – Introduction," for a discussion of the revised strategy for Integrys Energy Services going forward.

Electric Transmission Investment

The electric transmission investment segment consists of WPS Investments, LLC’s approximate 34% ownership interest in ATC. As of December 31, 2009, WPS Investments was owned 84.5% by Integrys Energy Group, 12.8% by WPS, and 2.7% by UPPCO. ATC is a federally regulated electric transmission

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company with operations in Wisconsin, Michigan, Minnesota, and Illinois. ATC began operations in 2001. See Note 9, "Investments in Affiliates, at Equity Method," for more information about ATC.

Holding Company and Other Segment

The holding company and other segment includes the operations of the Integrys Energy Group holding company and the PEC holding company, along with any nonutility activities at WPS, MGU, MERC, UPPCO, PGL, NSG, and IBS. Equity earnings from Integrys Energy Group’s investment in WRPC are included in the Holding Company and Other segment.

B. REGULATED NATURAL GAS UTILITY OPERATIONS

Integrys Energy Group provides regulated natural gas utility service to approximately 1,669,000 residential, commercial and industrial, transportation, and other customers located in Chicago and northern suburbs of Chicago, northeastern Wisconsin, adjacent portions of Michigan's Upper Peninsula, various cities and communities throughout Minnesota, and in the southern portion of lower Michigan.

Facilities

For information regarding the regulated natural gas facilities, see Item 2, "Properties." For Integrys Energy Group's utility plant asset book value, see Note 6, "Property, Plant, and Equipment."

Natural Gas Supply

Integrys Energy Group's natural gas utilities manage portfolios of natural gas supply contracts, storage services, and pipeline transportation services designed to meet their varying customer usage patterns at the lowest reasonable cost.

Integrys Energy Group's regulated natural gas subsidiaries contract for fixed-term firm natural gas supplies with various natural gas suppliers each year (in the United States and Canada) to meet the November through March winter period demand of firm system sales customers. Integrys Energy Group's regulated natural gas supply requirements are met through a combination of physical fixed price purchases, storage (contracted and owned), natural gas call options, and physical index price purchases. To supplement natural gas supplies and minimize risk, Integrys Energy Group purchases additional natural gas supplies on the monthly spot market through fixed-term firm contracts rather than on the daily spot market. During periods of colder than normal weather or when the opportunity arises, natural gas may be purchased in the daily spot market.

Integrys Energy Group's natural gas utilities contract with local distribution companies, interstate pipelines, and storage operators that own underground storage fields to purchase underground storage capacity and have two company-owned storage fields. Integrys Energy Group's natural gas utilities contract with local distribution companies and interstate pipelines to purchase firm transportation. Besides providing the ability to manage significant changes in daily natural gas demand, storage also provides Integrys Energy Group with the ability to purchase steady levels of natural gas on a year-round basis, thus lowering supply cost volatility.

For further information on Integrys Energy Group's regulated natural gas utility supply and transportation contracts, see Note 16, "Commitments and Contingencies."

Integrys Energy Group's natural gas utilities had adequate capacity to meet all firm natural gas load obligations during 2009 and expect to have adequate capacity to meet all firm obligations during 2010. Integrys Energy Group's natural gas utilities forecast design peak-day throughput of 3,897 thousands of dekatherms (MDth) for the 2009 through 2010 heating season.

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The deliveries to customers (including transportation customers) in MDth for Integrys Energy Group's regulated natural gas utility operations were as follows:

(MDth)	2009			2008			2007
Natural gas purchases		225,719			250,967			202,803
Customer-owned natural gas received		164,676			182,919			160,581
Underground storage, net		1,080			(3,469	)		(18,486	)
Hub fuel in kind		141			135			134
Liquefied petroleum gas		12			5			4
Owned storage cushion injection		(1,272	)		(1,280	)		(1,278	)
Contracted pipeline and storage compressor fuel, franchise requirements, and unaccounted-for natural gas		(9,692	)		(11,042	)		(13,451	)
Total		380,664			418,235			330,307

Regulatory Matters

Legislation and Regulation at State Level

The natural gas retail rates of Integrys Energy Group's regulated natural gas utilities are regulated by the ICC, PSCW, MPSC, and MPUC. These commissions have general supervisory and regulatory powers over public utilities in their respective jurisdictions.

Sales are made and services rendered by the regulated natural gas utilities pursuant to rate schedules on file with the respective commissions containing various service classifications largely reflecting customers' different uses and levels of consumption. In addition to the rates for distribution of natural gas, Integrys Energy Group's regulated natural gas utilities bill customers on a one-for-one basis through a purchased gas adjustment clause representing prudently incurred costs of delivered natural gas, transportation, and storage services purchased, as well as gains, losses, and costs incurred under hedging programs, the amount of which is also subject to applicable commission authority. Changes in the cost of natural gas are reflected in both natural gas revenues and natural gas purchases.

All of Integrys Energy Group's utility subsidiaries are required to provide service and grant credit (with applicable deposit requirements) to customers within their service territories. The utilities are generally precluded from discontinuing service to residential customers who do not pay their bills during winter moratorium months. Both federal and certain state governments have legislation that provides for a limited amount of additional funding for assistance to low-income energy users, including customers of the utilities.

See Note 24, "Regulatory Environment," for recent Illinois legislation affecting PGL and NSG regarding bad debt expense and new customer assistance programs, discussion of MGU's 2010 rate order which includes a new bad debt tracking mechanism, and decoupling mechanisms in place for certain natural gas utilities.

Legislation and Regulation at Federal Level

Most of the natural gas distributed by Integrys Energy Group is transported to its distribution systems by interstate pipelines. The pipelines' services (transportation and storage) are regulated by the FERC under the Natural Gas Act and the Natural Gas Policy Act of 1978.

Under United States Department of Transportation regulations, the state commissions are responsible for monitoring the regulated natural gas utilities' safety compliance programs for their pipelines under 49 Code of Federal Regulations (CFR) Part 192 (Transportation of Natural and Other Gas by Pipeline: Minimum Federal Safety Standards) and 49 CFR Part 195 (Transportation of Hazardous Liquids by Pipeline).

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PGL utilizes its storage and transmission assets as a natural gas hub. This activity is regulated by the FERC and consists of providing wholesale transportation and storage services in interstate commerce.

Other Matters

Seasonality

The natural gas throughput of Integrys Energy Group's regulated natural gas utilities follows a seasonal pattern because the heating requirements of customers are temperature driven. Specifically, customers typically use more natural gas during the winter months. During 2009, the regulated natural gas utility segment recorded approximately 70% of its revenues in January, February, March, November, and December.

Competition

Integrys Energy Group's regulated natural gas utility operations face competition from other entities and forms of energy in varying degrees, particularly for large commercial and industrial customers who have the ability to switch between natural gas and alternate fuels. Due to the volatility of energy commodity prices, Integrys Energy Group has seen customers with dual fuel capability switch to alternate fuels for short periods of time, then switch back to natural gas as market rates change.

Natural gas transportation service and interruptible natural gas sales are offered to enable customers to better manage their energy costs. Transportation customers purchase natural gas directly from third-party natural gas suppliers and contract with one of Integrys Energy Group's natural gas utility entities to transport the natural gas from pipelines to their facilities. Additionally, some customers have elected to purchase their natural gas commodity directly from one of Integrys Energy Group's natural gas utility entities on an interruptible basis, as a means to reduce their costs. Customers continue to switch between firm system supply, interruptible system supply, and transportation service each year as the economics and service options change.

Working Capital Requirements

The working capital needs of Integrys Energy Group's regulated natural gas utility operations vary significantly over time due to volatility in levels of natural gas inventories and the price of natural gas. Integrys Energy Group's regulated natural gas utilities' working capital needs are met by cash generated from operations and debt (both long-term and short-term). The seasonality of natural gas revenues causes the timing of cash collections to be concentrated from January through June. A portion of the winter natural gas supply needs is typically purchased and stored from April through November. Also, planned capital spending on the natural gas distribution facilities is concentrated in April through November. Because of these timing differences, the cash flow from customers is typically supplemented with temporary increases in short-term borrowings during the late summer and fall. Short-term debt is typically reduced over the January through June period.

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C. REGULATED ELECTRIC UTILITY OPERATIONS

Integrys Energy Group's regulated electric utility operations are provided through WPS and UPPCO to approximately 489,000 residential, commercial and industrial, wholesale, and other customers. WPS's regulated electric operations generate and distribute electric energy mainly to northeastern Wisconsin and a small portion of Michigan's Upper Peninsula. UPPCO provides electric energy in Michigan's Upper Peninsula. Wholesale electric service is provided to various customers, including municipal utilities, electric cooperatives, energy marketers, other investor-owned utilities, and municipal joint action agencies.

In 2009, WPS reached a firm net design peak of 2,264 megawatts (MW) on June 24. At the time of this summer peak, WPS's total firm resources (i.e., generation plus firm purchases) totaled 3,196 MW. As a result of continually reaching demand peaks in the summer months, primarily due to air conditioning load, the summer period is the most relevant for WPS's regulated electric utility capacity. The PSCW requires WPS to maintain a planning reserve margin above its projected annual peak demand forecast to help ensure reliability of electric service to its customers. WPS expects future supply reserves to meet the minimum planning reserve margin criteria through 2010. The PSCW established a 14.5% reserve margin requirement for long-term planning (planning years two through ten), and the short-term (planning year one) reserve margin for Wisconsin utilities follows the planning reserve margin established by MISO under Module E of its Open Access Transmission and Energy Markets Tariff. In 2009, UPPCO reached a firm net design peak of 139 MW on July 27. At the time of this peak, UPPCO's total firm resources totaled 150 MW. The MPSC has not established minimum guidelines for future supply reserves.

WPS and UPPCO had adequate capacity through company-owned generation units and purchased power contracts to meet all firm electric load obligations during 2009 and expect to have adequate capacity to meet all obligations during 2010.

Facilities

For a complete listing of Integrys Energy Group's regulated electric utility facilities, see Item 2, "Properties." For Integrys Energy Group's utility plant asset book value, see Note 6, "Property, Plant, and Equipment."

Electric Supply

Both WPS and UPPCO are members of MISO, a FERC-approved, independent, non-profit organization, which operates a financial and physical electric wholesale market in the Midwest. WPS and UPPCO offer their generation and bid their customer load into the MISO market. MISO evaluates WPS's, UPPCO's, and other market participants' energy injections into, and withdrawals from, the system to economically dispatch electricity within the system. MISO settles the participants' offers and bids based on locational marginal prices, which are market-driven values based on the specific time and location of the purchase and/or sale of energy.

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Electric Generation and Supply Mix

The sources of Integrys Energy Group's regulated electric utility supply were as follows:

(Millions)
Energy Source (kilowatt-hours)	2009			2008
Company-owned generation units
Coal		8,974.3			9,570.9
Natural gas, fuel oil, and tire derived		71.4			201.7
Hydroelectric		225.9			261.2
Wind		46.4			17.8
Total company-owned generation units		9,318.0			10,051.6
Purchased power contracts
Nuclear (Kewaunee Power Station)		2,663.9			2,656.8
Natural gas (Fox Energy Center, LLC and Combined Locks Energy Center, LLC)		673.7			699.5
Hydroelectric		569.5			369.4
Wind		136.9			109.0
Other		571.1			167.8
Total purchased power contracts		4,615.1			4,002.5
Purchased power from MISO		1,898.9			1,934.0
Purchased power from other		54.4			78.9
Total purchased power		6,568.4			6,015.4
Opportunity sales
Sales to MISO		(462.5	)		(539.8	)
Net sales to other		(450.5	)		(303.2	)
Total opportunity sales		(913.0	)		(843.0	)
Total Integrys Energy Group electric utility supply		14,973.4			15,224.0

Fuel Costs

The cost of fuel per generation of one million British thermal units (Btus) was as follows:

Fuel Type	2009		2008
Coal	$	1.94	$	1.78
Natural gas		6.73		9.74
Fuel oil		17.09		19.07

Coal Supply

Coal is the primary fuel source for WPS's regulated electric generation facilities, the majority of which is purchased from Powder River Basin mines located in Wyoming. This low sulfur coal has been WPS's lowest cost coal source from any of the subbituminous coal-producing regions in the United States. WPS's regulated fuel portfolio strategy is to maintain a 25- to 40-day supply of coal at each plant site.

Historically, WPS has purchased coal directly from the producer for its wholly owned plants. Wisconsin Power and Light purchases coal for the jointly owned Edgewater and Columbia plants and is reimbursed by WPS for its share of the coal costs. At December 31, 2009, WPS had coal transportation contracts in place for 90% of its 2010 coal transportation requirements. For more information on coal purchases and coal deliveries under contract, see Note 16, "Commitments and Contingencies."

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Power Purchase Agreements

Integrys Energy Group's regulated electric facilities enter into short-term and long-term power purchase agreements to meet a portion of electric energy supply needs. The most significant of these is an agreement through 2013 with Dominion Energy Kewaunee, LLC to purchase energy and capacity from the Kewaunee Power Station consistent with volumes available when WPS owned the facility. For more information on power purchase obligations, see Note 16, "Commitments and Contingencies."

Regulatory Matters

Integrys Energy Group's electric utility operations are regulated by the PSCW, MPSC, and FERC. WPS's retail electric rates are regulated by the PSCW and MPSC, and UPPCO's retail electric rates are regulated by the MPSC. The FERC regulates wholesale electric rates for WPS and UPPCO. In 2009, retail electric revenues accounted for 78.7% of total electric revenues, while wholesale electric revenues accounted for 21.3% of total electric revenues.

The PSCW sets rates through its ratemaking process, which is based upon recovery of operating costs and a return on invested capital. One of the cost recovery components is fuel and purchased power, which is governed by a fuel window mechanism, as described in Note 1(e), "Summary of Significant Accounting Policies – Revenue and Customer Receivables." The MPSC and FERC ratemaking processes are similar to those of the PSCW, with the exception of fuel and purchased power, which are recovered on a one-for-one basis.

See Note 24, "Regulatory Environment," for information regarding the rate cases and decoupling mechanisms of Integrys Energy Group's electric utilities.

Hydroelectric Licenses

WPS, UPPCO, and WRPC (a company in which WPS has 50% ownership) have long-term licenses from the FERC for all of their hydroelectric facilities.

Other Matters

Seasonality

Integrys Energy Group's regulated electric utility sales in Wisconsin generally follow a seasonal pattern due to the air conditioning requirements of customers that are primarily impacted by the variability of summer temperatures. Regulated electric utility sales in Michigan do not follow a significant seasonal trend due to cooler climate conditions in the Upper Peninsula of Michigan.

Generally, during the winter months, the purchase price of fuel (natural gas and fuel oil) for generation is heavily influenced by weather and the availability of baseload generation units within the MISO energy market. Sustained colder than normal weather and unexpected extended generation outages can influence fuel supply and demand, impacting the production costs at Integrys Energy Group's natural gas and oil-fired facilities, as well as natural gas supply commitments under power purchase agreements. For Integrys Energy Group's regulated electric utility segment, the impact on utility production costs is partially managed through the WPS Electric Risk Management Plan.

Competition

The retail electric utility market in Wisconsin is regulated by the PSCW. Retail electric customers currently do not have the ability to choose their electric supplier. However, in order to increase sales, utilities work to attract new commercial and industrial customers into their service territories. As a result, there is competition among utilities to keep energy rates low. Wisconsin utilities have continued to refine regulated tariffs in order to provide the true cost of electric energy to each class of customer by reducing or eliminating rate subsidies among different ratepayer classes. Although Wisconsin electric energy

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markets are regulated, utilities still face competition from other energy sources, such as self-generation by large industrial customers and alternative energy sources.

Michigan electric energy markets are open to competition; however, an active competitive market has not yet developed in the Upper Peninsula of Michigan, primarily due to a lack of excess generation and transmission system capacity.

D. INTEGRYS ENERGY SERVICES

Integrys Energy Services and its subsidiaries market energy and related products in the retail market serving commercial, industrial, direct, and "aggregated" small commercial and residential customers. Aggregated customers are municipalities, associations, or groups of customers that have joined together to negotiate purchases of electric or natural gas energy as a larger group.

Integrys Energy Services is investing in and promoting renewable energy, which it believes is important to the future of the energy industry. Clean, renewable, and efficient energy sources are developed, acquired, owned, and operated by Integrys Energy Services. Integrys Energy Services assists customers with selecting an energy solution that meets their needs and collaborates with energy developers of wholesale energy projects to overcome challenges with integrating the technical, regulatory, and financial aspects of their projects.

Integrys Energy Services utilizes derivative instruments, including forwards, futures, options, and swaps, to manage its exposure to market risks from its generation and energy supply portfolios in accordance with limits and approvals established in its risk management and credit policies.

For more information on the trading and risk management activities of Integrys Energy Services, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations – Market Price Risk Management Activities."

Recent Developments

Since the beginning of 2009, Integrys Energy Services has been in the process of reevaluating its strategy with a focus on reducing its scale and risk profile. The result of this evaluation was the decision to exit its wholesale natural gas and wholesale electric businesses, its Canadian energy marketing business, its energy management consulting business, certain retail markets, and a portion of its electric generation fleet. The remaining business lines will continue to invest in growing a portfolio of retail natural gas and electric customers as well as energy assets with renewable attributes.

See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations – Introduction," and Note 4, "Dispositions," for a discussion of the current strategy for Integrys Energy Services.

Facilities

Generation

For information regarding the energy asset facilities owned by Integrys Energy Services, see Item 2, "Properties." For Integrys Energy Group's nonregulated plant asset book value, see Note 6, "Property, Plant, and Equipment."

Renewable Energy

In response to customers' growing interest in sustainability and Integrys Energy Group's own concern for the environment, Integrys Energy Services is now focusing on delivering value-added energy services and renewable commodities to its retail customers. Product offerings include renewable natural gas and

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electric products and development of green power generation projects. See Item 2, "Properties," for more information on renewable energy projects.

Fuel Supply for Generation Facilities

Integrys Energy Services' fuel inventory policy varies for each generation facility depending on the type of fuel used and available natural gas storage facilities. The cost of the majority of the fuel used by the generation facilities is subject to market price volatility, and the facilities are run to produce energy when economical at current fuel prices. Integrys Energy Services' only coal-fired merchant generation facility is its Westwood facility located in Pennsylvania. Actual fuel needs in 2010 will depend on market conditions and operational capability of the Westwood facility. However, Integrys Energy Services' Westwood facility burns waste coal left behind by mining operations and has several years’ supply on site. All fuel is located within a seven-mile radius of the plant.

Energy Supply

Physical supply obligations are created when Integrys Energy Services executes forward customer sales contracts. Integrys Energy Services' electricity and natural gas supply requirements are primarily met through the procurement of natural gas and electricity in the wholesale markets. Integrys Energy Services does not own any reserves, so all natural gas supply is procured from producers and other suppliers in the wholesale markets.

Retail Electricity

The majority of Integrys Energy Services' obligations to provide physical electricity result from forward retail sales to commercial and industrial customers, many of which are through full-requirements contracts. Integrys Energy Services uses a combination of bilateral electricity purchase agreements from generation companies and other marketers as well as regional power pools to meet those obligations.

Retail Natural Gas

Physical natural gas supply obligations are created by the execution of forward retail sales contracts by Integrys Energy Services' retail marketing operation. Commercial and industrial customers, as well as some residential customers, make up the majority of its sales commitments. Natural gas is sourced in the wholesale markets at the customer load regions, or in some cases is transported to the customer load regions using natural gas transportation contracts.

Regulatory Matters

Integrys Energy Services is a FERC-authorized power marketer and has all of the licenses required to conduct business in the states in which it operates.

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Other Matters

Customer Segmentation

As of December 31, 2009, Integrys Energy Services was delivering electricity and natural gas supply to customers in 20 states. Integrys Energy Services periodically reviews and evaluates the profitability of its operations in each of these markets. Integrys Energy Services continues to concentrate on adding customers in existing markets and emphasizing business that provides the appropriate rate of return, but currently has no plans to expand into new geographic regions. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations – Introduction," for a discussion of the current strategy for Integrys Energy Services.

As of December 31, 2009, Integrys Energy Services was serving electric customers within 18 states, including its largest markets in Illinois, New York, Mid-Atlantic and New England regions. Integrys Energy Services was also serving natural gas customers within eight states, including its largest markets in Wisconsin, Illinois, Michigan, and Ohio.

Although Integrys Energy Services is not dependent on any one customer, a significant percentage of its retail sales volume is derived from industries related to paper and allied products, food and kindred products, chemicals and paint, and steel and foundries.

Seasonality

Integrys Energy Services believes that its business, in the aggregate, is not seasonal, even though certain products sell more heavily in some seasons than in others. Sales of natural gas generally peak in the winter months, while sales of electricity generally peak in the summer months. Generally in the summer months, the demand for electricity is high, which increases the price at which electricity can be sold. In periods of high residential natural gas and oil consumption (generally the winter months), the purchase price of oil and natural gas increases, which increases the production costs at Integrys Energy Services' natural gas- and oil-fired generation facilities. Integrys Energy Services' business can be volatile as a result of market conditions and the related market opportunities available to its customers.

Competition

Integrys Energy Services is a nonregulated retail energy marketer that competes against regulated utilities and other retail energy marketers. Integrys Energy Services competes with other energy providers on the basis of price, reliability, customer service, product offerings, financial strength, consumer convenience, performance, and reputation.

The competitive landscape differs in each regional area and within each targeted customer segment. For residential and small commercial customers, the primary competitive challenges come from the incumbent utility and affiliated utility marketing companies. The large commercial, institutional, and industrial segments are very competitive in most markets with nearly all natural gas customers having already switched away from utilities to an alternative provider. National affiliated marketers, energy producers, and other independent retail energy companies compete for customers in this segment.

The incumbent regulated utilities and the nationally-branded utility affiliates typically benefit from the economies of scale derived from the strength of substantial asset-based balance sheets and vertically integrated business models that combine production, transmission, and distribution assets. These advantages are offset by the lack of flexibility to offer multiple product choices to their customers, and the nationally-branded utility affiliates struggle with long-term focus and cultural adaptation to a nonregulated market environment.

The local utilities have the advantage of long-standing relationships with their customers, and they have longer operating histories, greater financial and other resources, and greater name recognition in their

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markets than Integrys Energy Services does. In addition, local utilities have been subject to many years of regulatory oversight and thus have a significant amount of experience regarding the policy preferences of their regulators. Local utilities may seek to decrease their tariff retail rates to limit or preclude the opportunities for competitive energy suppliers and may seek to establish rates, terms, and conditions to the disadvantage of competitive energy suppliers.

Working Capital

The working capital needs of Integrys Energy Services vary significantly over time due to volatility in commodity prices and related margin calls, and levels of natural gas storage inventories. Integrys Energy Services' working capital needs are met by cash generated from operations, equity infusions, and debt (both long-term and short-term). Integrys Energy Services has the ability to borrow up to $400 million through an intercompany loan agreement with Integrys Energy Group. Integrys Energy Group has provided total parental guarantees of $958.4 million on behalf of Integrys Energy Services.

E. ENVIRONMENTAL MATTERS

For information on environmental matters related to Integrys Energy Group and its subsidiaries, see Note 16, "Commitments and Contingencies."

F. CAPITAL REQUIREMENTS

For information on capital requirements related to Integrys Energy Group, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources."

G. EMPLOYEES

At December 31, 2009, Integrys Energy Group’s consolidated subsidiaries had the following employees:

	Total Number of Employees		Percentage of Employees Covered by Collective Bargaining Agreements
WPS		1,462		65	%
IBS		1,318		-
PGL		1,109		83	%
Integrys Energy Services		436		1	%
MERC		223		19	%
NSG		166		81	%
MGU		165		68	%
UPPCO		146		78	%
Total		5,025		45	%

Integrys Energy Group’s subsidiaries have collective bargaining agreements with various unions which are summarized in the table below.

Union	Subsidiary	Contract Expiration Date
Local 310 of the International Union of Operating Electricians	WPS	October 13, 2012
Local 18007 of the Utility Workers Union of America	PGL	April 30, 2013
Local 31 of the International Brotherhood of Electrical Workers, AFL CIO	MERC	May 31, 2011
Local 2285 of the International Brotherhood of Electrical Workers	NSG	June 30, 2013
Local 12295 of the United Steelworkers of America, AFL CIO CLC	MGU	January 15, 2015
Local 417 of the Utility Workers Union of America, AFL CIO	MGU	February 15, 2012
Local 510 of the International Brotherhood of Electrical Workers, AFL CIO	UPPCO	April 12, 2014

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H. AVAILABLE INFORMATION

Integrys Energy Group files the following reports with the SEC:

·	Annual Report on Form 10-K;
·	Quarterly Reports on Form 10-Q;
·	Proxy statements;
·	Registration statements, including prospectuses;
·	Current Reports on Form 8-K; and
·	Any amendments to these documents.

Integrys Energy Group makes these reports available, free of charge, on its Internet website, www.integrysgroup.com, as soon as reasonably practicable after they are filed with the SEC. Integrys Energy Group's Code of Conduct may also be accessed on Integrys Energy Group's website, and any amendments to or waivers from the Code of Conduct will be timely disclosed on Integrys Energy Group's website. Reports, statements, and amendments posted on Integrys Energy Group's website do not include access to exhibits and supplemental schedules electronically filed with the reports, statements, or amendments. Integrys Energy Group is not including the information contained on or available through its website as a part of, or incorporating such information by reference into, this Annual Report on Form 10-K.

You may obtain materials filed with the SEC by Integrys Energy Group at the SEC Public Reference Room at 100 F Street, NE, Washington, DC 20549. To obtain information on the operation of the Public Reference Room, you may call the SEC at 1-800-SEC-0330. You may also view Integrys Energy Group’s reports, proxy statements, and other information (including exhibits) filed electronically with the SEC, at the SEC's website at www.sec.gov.

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ITEM 1A. RISK FACTORS

You should carefully consider the following risk factors, as well as the other information included or incorporated by reference in this Annual Report on Form 10-K, when making an investment decision. The risks and uncertainties described below are not the only ones Integrys Energy Group faces. Additional risks and uncertainties not presently known or that Integrys Energy Group currently believes to be immaterial may also adversely affect Integrys Energy Group.

Integrys Energy Group is subject to changes in government regulation, which may have a negative impact on its businesses, financial position, and results of operations.

The rates that Integrys Energy Group's regulated utilities are allowed to charge for their retail and wholesale services are some of the most important items influencing its business, financial position, results of operations, and liquidity. While rate regulation is premised on providing an opportunity to earn a reasonable rate of return on invested capital, there is no assurance that the applicable regulatory commissions will judge all the costs of the regulated utilities to have been prudently incurred or that the regulatory process in which rates are determined will always result in rates that will produce full recovery of such costs or provide for a reasonable return on equity. Certain items that would otherwise be immediately recognized as revenues and expenses are deferred as regulatory assets and regulatory liabilities for future recovery or refund to customers, as authorized by regulators. Future recovery of regulatory assets is not assured, and is generally subject to review by regulators in rate proceedings for matters such as prudence and reasonableness. If recovery of costs is not approved or is no longer deemed probable, regulatory assets would be recognized in current period expense and could have a material impact on Integrys Energy Group's financial results.

Integrys Energy Group is subject to comprehensive regulation by several federal and state regulatory agencies and local governmental bodies, which significantly influences its operating environment and may affect Integrys Energy Group's ability to recover costs from utility customers. In particular, the PSCW, ICC, MPSC, MPUC, FERC, SEC, EPA, Minnesota Office of Pipeline Safety, United States Department of Transportation, WDNR, Michigan Department of Natural Resources and Environment, the city of Chicago, and Illinois Environmental Protection Agency regulate many aspects of Integrys Energy Group's utility operations, including, but not limited to, construction and operation of facilities, conditions of service, the issuance of securities, and the rates that it can charge customers. Integrys Energy Group is required to have numerous permits, approvals, and certificates from these agencies to operate its business. Failure to comply with any applicable rules or regulations may lead to penalties, customer refunds, or other amounts, which could have a material impact on the financial results of Integrys Energy Group.

Existing statutes and regulations may be revised or reinterpreted by these agencies, or these agencies may adopt new laws and regulations that apply to Integrys Energy Group. Integrys Energy Group is unable to predict the impact on its businesses and operating results of any such actions by these agencies. However, changes in regulations or the imposition of additional regulations may require Integrys Energy Group to incur additional expenses or change business operations, which may have an adverse impact on results of operations. In addition, federal regulatory reforms may produce unexpected changes and costs in the public utility industry.

Integrys Energy Group may face significant costs to comply with the regulation of greenhouse gas emissions.

Climate change and the effect of greenhouse gas emissions, most notably carbon dioxide, are increasingly becoming a concern for the energy industry. While there is currently no federal legislation in the United States that mandates the reduction of greenhouse gas emissions, it is possible that such legislation may be enacted in the future. In addition, the EPA may adopt regulations under the Clean Air Act. To that end, federal and state legislative proposals have been introduced to regulate the emission of greenhouse gases, including bills pending in the United States Congress that would regulate greenhouse gas emissions through a cap-and-trade system under which emitters would be required to buy allowances

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to offset greenhouse gas emissions. However, until legislation is passed at the federal or state level, it remains unclear as to (1) which industry sectors will be impacted, (2) when compliance will be required, (3) the magnitude of the greenhouse gas emissions reductions that will be required, and (4) the costs and opportunities associated with compliance. Integrys Energy Group is evaluating both the technical and cost implications which may result from future state, regional, or federal greenhouse gas regulatory programs, but at this time, it is uncertain as to the effect climate change regulation may have on Integrys Energy Group's future operations, capital expenditures, and financial results.

Based on the complexity and uncertainty of these issues, it is possible that future carbon regulation will increase the cost of electricity produced at coal-fired generation units and may affect the capital expenditures Integrys Energy Group would make at its generation units. At this time, there is no commercially available technology for removing carbon dioxide from a pulverized coal-fired plant. In addition, future legislation designed to reduce greenhouse gas emissions could make some of the generating units uneconomical to maintain or operate and could impact future results of operations, cash flows, and financial condition if such costs are not recoverable through regulated rates.

Integrys Energy Group's natural gas delivery systems may generate fugitive gas as a result of normal operations and as a result of excavation, construction, and repair of natural gas delivery systems. Fugitive gas typically vents to the atmosphere and consists primarily of methane, a greenhouse gas. Carbon dioxide is also a byproduct of natural gas consumption. As a result, future legislation to regulate the emission of greenhouse gases could increase the price of natural gas, restrict the use of natural gas, adversely affect the ability to operate our natural gas facilities, and/or reduce natural gas demand.

Costs of environmental compliance, liabilities, fines, penalties, and litigation could exceed Integrys Energy Group's estimates.

Compliance with current and future federal and state environmental laws and regulations may result in increased capital, operating, and other costs, including remediation and containment expenses and monitoring obligations. Integrys Energy Group cannot predict with certainty the amount and timing of all future expenditures (including the potential or magnitude of fines or penalties) related to environmental matters because of the difficulty of estimating cleanup and compliance costs and the possibility that changes will be made to the current environmental laws and regulations.

Integrys Energy Group's natural gas utility subsidiaries are accruing liabilities and deferring costs (recorded as regulatory assets) incurred in connection with their former manufactured gas plant sites, including related legal expenses, pending recovery through rates or from other entities. Regulatory assets reflect the net amount of (1) costs incurred to date, (2) carrying costs (excluding those for WPS, which are not recoverable), (3) amounts recovered from insurance companies, other entities and customers, and (4) management's best estimates of the costs Integrys Energy Group will spend in the future for investigating and remediating the manufactured gas plant sites. Integrys Energy Group believes that any of these costs that are not recoverable from other entities or from insurance carriers are recoverable through rates for utility services under approved mechanisms for the recovery of prudently incurred costs. A change in these rate recovery mechanisms, however, or a decision by the applicable state commission that some or all of these costs were not prudently incurred, could result in the present recognition as expense of some or all of these costs. For more information, see Note 16, "Commitments and Contingencies."

WPS owns coal-fired electric generating facilities at which it has performed maintenance activities that the EPA could determine were subject to Clean Air Act New Source Review permitting requirements. Depending on potential settlement terms or a court decision, WPS could be required to install environmental controls, change operations, shut down certain plants, undertake supplemental environmental projects, and/or pay fines.

In addition, impacts resulting from future federal or state regulation regarding mercury, sulfur dioxide, and nitrogen oxide emissions, as well as the management of coal combustion byproducts, are uncertain.

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There is also uncertainty in quantifying liabilities under environmental laws that impose joint and several liability on all potentially responsible parties.

Citizen groups that feel there are compliance issues not sufficiently enforced by environmental regulatory agencies may also bring citizen enforcement actions against Integrys Energy Group. Such actions could seek penalties, injunctive relief, and costs of litigation. Private citizens can also bring lawsuits to recover environmental damages they believe they have incurred.

Integrys Energy Group's operations are subject to risks beyond its control, including but not limited to customer usage, weather, terrorist attacks, or acts of war.

Integrys Energy Group's revenues are affected by the demand for electricity and natural gas. That demand can vary greatly based upon:

·	Fluctuations in economic activity and growth in Integrys Energy Group's regulated service areas, as well as areas in which its nonregulated subsidiaries operate;
·	Weather conditions, seasonality, and temperature extremes; and
·	The amount of additional energy available from current or new competitors.

General economic conditions and customers focusing on energy efficiency in Integrys Energy Group's service areas may result in a decrease in demand for electricity or natural gas, which could have an adverse impact on Integrys Energy Group's results of operations, financial condition, and cash flows.

Weather conditions directly influence the demand for electricity and natural gas and affect the price of energy commodities.

In addition, the cost of repairing damage to Integrys Energy Group's facilities due to storms, natural disasters, wars, terrorist acts, and other catastrophic events, in excess of insurance limits established for such repairs or excluded by insurance policies, may adversely impact Integrys Energy Group's results of operations, financial condition, and cash flows. The occurrence or risk of occurrence of future terrorist activity and the high cost or potential unavailability of insurance to cover such terrorist activity may impact Integrys Energy Group's results of operations and financial condition in unpredictable ways. These actions could also result in disruptions of power and fuel markets. In addition, Integrys Energy Group's natural gas distribution system and pipelines and electric generation units and distribution system could be directly or indirectly harmed by future terrorist activity.

Adverse capital and credit market conditions could negatively affect Integrys Energy Group's ability to meet liquidity needs, access capital, and/or grow or sustain its current businesses. Cost of capital and disruptions, uncertainty, and/or volatility in the financial markets could also adversely impact the results of operations and financial condition of Integrys Energy Group, as well as exert downward pressure on its stock price.

Having access to the credit and capital markets, at a reasonable cost, is necessary for Integrys Energy Group to fund its operations, including capital requirements. The capital and credit markets provide Integrys Energy Group with liquidity to operate and grow its businesses that is not otherwise provided from operating cash flows. The credit and capital markets also support the ability of Integrys Energy Group to provide credit support for the nonregulated operations of Integrys Energy Services. Disruptions, uncertainty, and/or volatility in those markets could increase Integrys Energy Group's cost of capital. If Integrys Energy Group or its subsidiaries are unable to access the credit and capital markets on terms that are reasonable, they may have to delay raising capital, issue shorter-term securities, and/or bear an increased cost of capital. This, in turn, could impact Integrys Energy Group's ability to grow or sustain its current businesses, cause a reduction in earnings, and/or limit Integrys Energy Group's ability to sustain its current common stock dividend level.

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A reduction in Integrys Energy Group's or its subsidiaries' credit ratings could materially and adversely affect their business, financial position, results of operations, and liquidity.

Integrys Energy Group cannot be sure that any of Integrys Energy Group's or its subsidiaries' credit ratings will remain in effect for any given period of time or that a credit rating will not be lowered by a rating agency if, in the rating agency’s judgment, circumstances in the future so warrant. Any downgrade could:

·	Require the payment of higher interest rates in future financings and possibly reduce the potential pool of creditors;
·	Increase borrowing costs under certain existing credit facilities;
·	Limit access to the commercial paper market;
·	Limit the availability of adequate credit support for Integrys Energy Services' operations; and
·	Require provision of additional credit assurance, including cash margin calls, to contract counterparties.

The failure to effectively operate Integrys Energy Services' scaled back nonregulated energy services business and/or the failure to execute the remaining transactions that are part of the process to significantly reduce the scope and size of Integrys Energy Services, could negatively impact the future results of operations and financial condition of Integrys Energy Group.

Integrys Energy Services’ change in focus from significant growth in nonregulated wholesale and retail energy markets across the United States and Canada, to a focus on selected nonregulated retail energy markets, could result in increased risks, including but not limited to:

·	Lower earnings capacity from this business segment going forward, which Integrys Energy Group may not be able to replace;

·	A reduction in the value of the nonregulated business segment, including a potential corresponding negative impact on Integrys Energy Group;

·	A reduction in operating efficiencies, as operating margins may decline at a faster rate than the associated operating expenses; and

·	Potential loss of key employees during periods of increased employment uncertainty.

Integrys Energy Group cannot be certain that it will be able to successfully execute the remaining transactions to complete the strategic initiative to reduce the scope and scale of the nonregulated business segment. Pending transactions and plans to sell assets and components of this business segment may not be completed, or these transactions could result in obtaining less economic benefit than projected.

Refer to Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations – Introduction,” for a further discussion of the current strategy for Integrys Energy Services.

The use of derivative instruments could result in financial losses and liquidity constraints.

Integrys Energy Group uses derivative instruments, including futures, forwards, options, and swaps, to manage its commodity and financial market risks. Significant volatility in energy prices could adversely impact Integrys Energy Group's cash collateral requirements due to counterparty margin calls related to these instruments.

In the absence of actively quoted market prices and pricing information from external sources, the valuation of derivative contracts involves management's judgment or use of estimates. As a result, changes in the underlying assumptions or use of alternative valuation methods could affect the reported fair value of these contracts. Furthermore, realized values could differ from values determined by management.

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For additional information concerning derivatives and commodity-based trading contracts, see Note 2, "Risk Management Activities."

Poor investment performance of retirement plan investments and other factors impacting retirement plan costs could unfavorably impact Integrys Energy Group’s liquidity and results of operations.

Integrys Energy Group has employee benefit plans that cover substantially all of its employees and retirees. Integrys Energy Group's cost of providing these benefit plans is dependent upon actual plan experience and assumptions concerning the future, such as earnings on and/or valuations of plan assets, discount rates, the level of interest rates used to measure the required minimum funding levels of the plans, future government regulation, and required or voluntary contributions to the plans. Depending upon the investment performance over time and other factors impacting its costs (as listed above), Integrys Energy Group could be required to make larger contributions in the future to fund these plans. These additional funding obligations could have a material adverse impact on Integrys Energy Group's cash flows, financial condition, and/or results of operations. Changes made to the plans may also impact current and future pension and other postretirement benefit costs.

Fluctuating commodity prices may reduce energy margins.

Integrys Energy Group’s regulated natural gas margins are sensitive to changes in natural gas commodity prices. Any changes could affect the prices the regulated natural gas utilities charge, their operating costs, and the competitive position of their products and services. Prudently incurred costs for purchased natural gas and pipeline transportation and storage services are fully recoverable through the annual reconciliation of revenues from the natural gas charge. However, increases in natural gas costs affect total retail prices and, therefore, the competitive position of Integrys Energy Group's natural gas businesses relative to other forms of energy. In addition, the timing and extent of higher natural gas prices can adversely affect accounts receivable, bad debts, fuel cost, and interest expense. Integrys Energy Group is also subject to margin requirements in connection with its use of forward contracts, and these requirements could escalate if prices move adversely relative to these positions.

Integrys Energy Group's regulated electric utility margins are directly affected by commodity costs related to coal, natural gas, and other fuels used in the electric generation process. Integrys Energy Group may experience increased expenses, including interest costs and bad debts, higher working capital requirements, and possibly reduction in demand as a result of any increase in the cost of fuel or purchased power.

Higher commodity prices result in increased energy prices that may impact customer demand for energy in the nonregulated market and increase counterparty and bad debt risk. This may stress margins at Integrys Energy Group's nonregulated subsidiaries. If market prices for electric energy decline below the cost of production at Integrys Energy Group's nonregulated generation facilities, these units may be temporarily shut down.

Counterparties and customers may not meet their obligations.

Integrys Energy Group is exposed to the risk that counterparties to various arrangements who owe Integrys Energy Group money, energy, natural gas, coal, or other commodities or services will not be able to perform their obligations. Should the counterparties to these arrangements fail to perform, Integrys Energy Group might be forced to replace or to sell the underlying commitment at then-current market prices. In such event, Integrys Energy Group might incur losses, or its results of operations, financial position, or liquidity could otherwise be adversely affected.

Some of Integrys Energy Group's customers are experiencing, or may experience, financial problems that could have a significant impact on their creditworthiness. Integrys Energy Group cannot provide assurance that its financially distressed customers will not default on their obligations to Integrys Energy Group and that such a default will not have a material adverse impact on Integrys Energy Group's

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business, financial position, results of operations, or cash flows. Furthermore, the bankruptcy of one or more of its customers, or some other similar proceeding or liquidity constraint, might make it unlikely that Integrys Energy Group would be able to collect all or a significant portion of amounts owed by distressed entities or residential customers. Such events could adversely impact Integrys Energy Group's receivable collections and additional allowances may be required, which could adversely affect its operating results. In addition, such events might force customers to reduce or curtail their future use of Integrys Energy Group's products and services, which could have a material adverse impact on Integrys Energy Group’s results of operations and financial condition.

Any change in Integrys Energy Group's ability to sell electricity generated from its facilities at market-based rates may impact earnings.

The FERC has authorized certain of Integrys Energy Group's subsidiaries to sell generation from certain of its facilities at market prices. The FERC retains the authority to modify or withdraw this market-based rate authority. If the FERC determines that the market is not workably competitive, that Integrys Energy Group or its subsidiaries possess market power, or that they are not charging just and reasonable rates, the FERC may require Integrys Energy Group's subsidiaries to sell power at a price based upon the costs incurred in producing the power. Integrys Energy Group's revenues and profit margins may be negatively affected by any reduction by the FERC of the rates it may receive.

Integrys Energy Group has recorded goodwill that could become impaired and adversely affect financial results.

The PEC merger and the acquisition of natural gas distribution operations in Minnesota and Michigan were accounted for as purchases by Integrys Energy Group in accordance with GAAP. Under the purchase method of accounting, the assets and liabilities acquired were recorded at their respective fair values at the date of acquisition and added to those of Integrys Energy Group. As a result of the application of purchase accounting, these transactions resulted in a significant amount of goodwill. To the extent the value of goodwill or intangibles becomes impaired, Integrys Energy Group may be required to incur material noncash charges relating to such impairments. Such impairment charges could have a material impact on the financial results of Integrys Energy Group.

Actual results could differ from estimates used to prepare Integrys Energy Group's financial statements.

In preparing the financial statements in accordance with GAAP, management must often make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements and during the reporting period. Some of those judgments can be subjective and complex, and actual results could differ from those estimates. For more information about significant estimates and assumptions, see Item 7, ''Management's Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies.''

Integrys Energy Group may not be able to utilize tax credit and/or net operating loss carryforwards.

Integrys Energy Group has significantly reduced its consolidated federal and state income tax liability in the past through tax credits and tax net operating losses available under the applicable tax codes. Integrys Energy Group has not fully utilized these tax credits and tax net operating losses in its previous tax filings, but expects to prior to their expiration in future filings. However, Integrys Energy Group may not be able to fully utilize the tax credits and tax net operating losses available as carryforwards if its future federal and state taxable income and related income tax liability is insufficient to permit the use of such credits and losses.

In addition, any future disallowance of some or all of those tax credits or tax net operating losses as a result of legislative change or adverse determination by one of the applicable taxing jurisdictions could materially affect Integrys Energy Group's tax obligations.

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Integrys Energy Group is subject to provisions that can limit merger and acquisition opportunities for its shareholders.

The Wisconsin Public Utility Holding Company Law precludes the acquisition of 10% or more of the voting shares of a holding company of a Wisconsin public utility unless the PSCW has first determined that the acquisition is in the best interests of utility consumers, investors and the public. Those interests may, to some extent, be mutually exclusive. This provision and other requirements of the Wisconsin Public Utility Holding Company Law may delay, or reduce the likelihood of, a sale or change of control thus reducing the likelihood that shareholders will receive a takeover premium for their shares.

Provisions of Integrys Energy Group's articles of incorporation and by-laws may delay or frustrate the removal of incumbent directors and may prevent or delay a merger, tender offer or proxy contest involving Integrys Energy Group that is not approved by its board of directors, even if the shareholders believe that such events may be beneficial to Integrys Energy Group's interests. In addition, the Wisconsin Business Corporation Law contains provisions that may have the effect of delaying or making more difficult attempts by others to obtain control of Integrys Energy Group without the approval of its board of directors.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

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ITEM 2. PROPERTIES

A. REGULATED

Electric Facilities

The following table summarizes information on the electric generation facilities of Integrys Energy Group, including owned and jointly owned facilities as of December 31, 2009:

Type	Name	Location	Fuel	Rated Capacity (MW) (1)

Steam	Columbia Units 1 and 2	Portage, WI	Coal	354.5	(2)
	Edgewater Unit 4	Sheboygan, WI	Coal	92.6	(2)
	Pulliam (4 units)	Green Bay, WI	Coal	320.3
	Weston Units 1, 2, and 3	Marathon County, WI	Coal	471.1
	Weston Unit 4	Marathon County, WI	Coal	373.4	(2)
Total Steam				1,611.9

Combustion	De Pere Energy Center	De Pere, WI	Natural Gas	166.6
Turbine and	Eagle River	Eagle River, WI	Distillate Fuel Oil	4.2
Diesel	Gladstone	Gladstone, MI	Oil	19.1
	Juneau #31	Adams County, WI	Distillate Fuel Oil	7.1	(2)
	Oneida Casino	Green Bay, WI	Distillate Fuel Oil	3.5
	Portage	Houghton, MI	Oil	18.1
	Pulliam #31	Green Bay, WI	Natural Gas	84.7
	West Marinette #31	Marinette, WI	Natural Gas	38.3
	West Marinette #32	Marinette, WI	Natural Gas	35.4
	West Marinette #33	Marinette, WI	Natural Gas	51.6	(2)
	Weston #31	Marathon County, WI	Natural Gas	15.3
	Weston #32	Marathon County, WI	Natural Gas	48.4
Total Combustion Turbine and Diesel				492.3

Hydroelectric	Various	Michigan	Hydro	20.3
	Various	Wisconsin	Hydro	67.9	(3)
Total Hydroelectric				88.2

Wind	Kewaunee County	Wisconsin	Wind	1.0
	Crane Creek	Iowa	Wind	21.7
Total Wind				22.7

Total System				2,215.1

(1)	Based on capacity ratings for July 2010, which can differ from nameplate capacity, especially on wind projects. As a result of continually reaching demand peaks in the summer months, primarily due to air conditioning demand, the summer period is the most relevant for capacity planning purposes at Integrys Energy Group’s electric segment.

(2)	These facilities are jointly owned by WPS and various other utilities. The capacity indicated for each of these units is equal to WPS’s portion of total plant capacity based on its percent of ownership.

	-	Wisconsin Power and Light Company operates the Columbia and Edgewater units, and WPS holds a 31.8% ownership interest in these facilities.

	-	WPS operates the Weston 4 facility and holds a 70% ownership in this facility, while Dairyland Power Cooperative holds the remaining 30%.

	-	WRPC owns and operates the Juneau unit. WPS holds a 50% ownership interest in WRPC.

	-	WPS operates the West Marinette 33 unit and holds a 68% ownership interest in the facility, while Marshfield Electric and Water Department holds the remaining 32% ownership.

(3)	WRPC owns and operates the Castle Rock and Petenwell units. WPS holds a 50% ownership interest in WRPC; however, WPS is entitled to 66.7% of total capacity at Petenwell and Castle Rock.

As of December 31, 2009, Integrys Energy Group’s electric utilities owned approximately 24,900 miles of electric distribution lines located in Michigan and Wisconsin and approximately 170 distribution substations.

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Natural Gas Facilities

At December 31, 2009, Integrys Energy Group’s natural gas properties were located in Illinois, Wisconsin, Minnesota, and Michigan, and consisted of the following:

●	Approximately 22,000 miles of natural gas distribution mains,
●	Approximately 1,010 miles of natural gas transmission mains,
●	Approximately 291 natural gas distribution and transmission gate stations,
●	Approximately 1.3 million natural gas lateral services,
●	A 3.6 billion-cubic-foot natural gas storage field located in Michigan, and
●	A 36.5 billion-cubic-foot underground natural gas storage reservoir and a liquefied natural gas plant at Manlove Field located in central Illinois.

General

Substantially all of Integrys Energy Group’s utility plant at WPS, UPPCO, PGL, and NSG is subject to first mortgage liens.

B. INTEGRYS ENERGY SERVICES

The following table summarizes information on the energy asset facilities owned by Integrys Energy Services as of December 31, 2009:

Type	Name	Location	Fuel	Rated Capacity (MW) (1)

Combined Cycle	Beaver Falls	Beaver Falls, NY	Gas/Oil	78.9
	Combined Locks	Combined Locks, WI	Gas	46.8	(2)
	Syracuse	Syracuse, NY	Gas/Oil	85.0
Total Combined Cycle				210.7

Steam	Westwood	Tremont, PA	Culm	30.0
	Caribou	Caribou, ME	Oil	21.7	(3)
Total Steam				51.7

Hydroelectric	Caribou	Caribou ME	Hydro	0.9	(3)
	Squa Pan	Ashland, ME	Hydro	1.4	(3)
	Tinker	New Brunswick, Canada	Hydro	34.5	(3)
Total Hydroelectric				36.8

Combustion Turbine and Diesel	Caribou	Caribou ME	Diesel	7.0	(3)
	Flo’s Inn	Presque Isle, ME	Diesel	4.2	(3)
	Loring	Limestone, ME	Diesel	5.2	(3)
	Tinker	New Brunswick, Canada	Diesel	1.0	(3)
Total Combustion Turbine and Diesel				17.4

Reciprocating Engine	Winnebago	Rockford, IL	Landfill Gas	6.4

Solar	Various	California		1.7
	Various	Connecticut		0.3
	Various	New Jersey		5.8
Total Solar				7.8

Total Energy Assets				330.8

				Length of Pipeline (Miles)

Landfill Gas Transportation	LGS	Brazoria County, TX	Landfill Gas	33 miles	(4)

(1)	Based on summer rated capacity.
(2)	Combined Locks has an additional five MW of capacity available at this facility through the lease of a steam turbine.
(3)	At December 31, 2009, these properties were classified as assets held for sale. For more information see Note 4, “Dispositions.”
(4)	LGS Renewables 1, LC, owns and operates the LGS facility. PDI, a wholly owned subsidiary of Integrys Energy Services, holds a 50% ownership interest in LGS.

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ITEM 3. LEGAL PROCEEDINGS

For information on material legal proceedings and matters related to Integrys Energy Group and its subsidiaries, see Note 16, "Commitments and Contingencies."

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

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ITEM 4A.

EXECUTIVE OFFICERS OF INTEGRYS ENERGY GROUP

Name and Age (1)			Position and Business Experience During Past Five Years	Effective Date

Larry L. Weyers		64	Executive Chairman	01-01-09
			Chairman, President and Chief Executive Officer	05-15-08
			President and Chief Executive Officer	02-21-07
			Chairman, President and Chief Executive Officer	02-12-98

Charles A. Schrock		56	President and Chief Executive Officer	01-01-09
			President and Chief Executive Officer of WPS	05-31-08
			President of WPS	02-21-07
			President and Chief Operating Officer – Generation – WPS	08-15-04

Thomas P. Meinz		63	Executive Vice President and Chief External Affairs Officer	05-15-08
			Executive Vice President – External Affairs	02-21-07
			Executive Vice President – Public Affairs	09-12-04

Phillip M. Mikulsky		61	Executive Vice President – Corporate Development and Shared Services	09-21-08
			Executive Vice President and Chief Development Officer	02-21-07
			Executive Vice President – Development	09-12-04

Joseph P. O'Leary		55	Senior Vice President and Chief Financial Officer	06-04-01

Diane L. Ford		56	Vice President and Corporate Controller	02-21-07
			Vice President – Controller and Chief Accounting Officer	07-11-99

Bradley A. Johnson		55	Vice President and Treasurer	07-18-04

Barth J. Wolf		52	Vice President, Chief Legal Officer and Secretary	07-31-07
			Vice President – Legal Services and Chief Compliance Officer – IBS	02-21-07
			Secretary and Manager – Legal Services	09-19-99

Lawrence T. Borgard		48	President and Chief Operating Officer – Utilities of Integrys Energy Group and President and Chief Executive Officer of WPS	04-05-09
			President and Chief Operating Officer – Integrys Gas Group (2)	02-21-07
			President and Chief Operating Officer – Energy Delivery – WPS	08-15-04

William D. Laakso (3)		47	Vice President – Human Resources	09-21-08
			Interim Vice President – Human Resources – IBS	05-15-08
			Director – Workforce Planning and Organizational Design – WPS	08-12-07
			Director Organizational Development – WPS	07-11-06
			Director of Organizational Development – WPS	12-12-05
			Vice President – Operations/Clinical Director – Employee Resource Center, Inc.	02-04-02

Mark A Radtke		48	President and Chief Executive Officer – Integrys Energy Services	06-01-08
			President – Integrys Energy Services (previously named WPS Energy Services, Inc.)	10-17-99

(1)	All ages are as of January 1, 2010. None of the executives listed above are related by blood, marriage, or adoption to any of the other officers listed or to any director of Integrys Energy Group. Each officer holds office until his or her successor has been duly elected and qualified, or until his or her death, resignation, disqualification, or removal.

(2)	The Integrys Gas Group includes PGL, NSG, MERC, and MGU.

(3)	Prior to joining Integrys Energy Group, William D. Laakso’s responsibilities at Employee Resource Center, Inc. (ERC) included leadership of ERC’s management team and duties of Clinical Director. ERC provides employee assistance programs to over 200 corporate customers in Northeast Wisconsin and covers 75,000 employees and their dependents.

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PART II

ITEM 5.

MARKET FOR INTEGRYS ENERGY GROUP'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Integrys Energy Group, Inc. Common Stock Two-Year Comparison

Share Data	Dividends Per Share	Price Range
Share Data	Dividends Per Share	High	Low
2009
1st Quarter	$ .680	$45.10	$19.44
2nd Quarter	.680	30.40	24.95
3rd Quarter	.680	36.75	28.31
4th Quarter	.680	42.99	34.20
Total	$2.720

2008
1st Quarter	$ .670	$53.26	$44.04
2nd Quarter	.670	52.74	46.89
3rd Quarter	.670	53.92	48.88
4th Quarter	.670	51.47	36.91
Total	$2.680

Integrys Energy Group’s common stock is traded on the New York Stock Exchange under the ticker symbol “TEG.” The transfer agent and registrar for Integrys Energy Group’s common stock is American Stock Transfer & Trust Company, LLC, 59 Maiden Lane, New York, NY 10038.

As of February 22, 2010, there were 32,608 common stock shareholders of record.

Dividend Restrictions

Integrys Energy Group is a holding company and its ability to pay dividends is largely dependant upon the ability of its subsidiaries to pay dividends.

The PSCW has restricted WPS to paying normal dividends on its common stock of no more than 103% of the previous year’s common stock dividend. Integrys Energy Group’s right to receive dividends on the common stock of WPS is also subject to the prior rights of WPS’s preferred shareholders and to provisions in WPS’s restated articles of incorporation, which limit the amount of common stock dividends that WPS may pay if its common stock and common stock surplus accounts constitute less than 25% of its total capitalization. These limitations are not expected to limit any dividend payments in the foreseeable future. At December 31, 2009, these limitations amounted to $1.4 million out of WPS’s total retained earnings of $392.2 million. Consequently, at December 31, 2009, WPS had $390.8 million of retained earnings available for the payment of dividends.

The PSCW also requires WPS to maintain a financial capital structure (i.e., the percentages by which each of common stock equity, preferred stock equity and debt constitute the total capital invested in a utility), that has a common equity range of 49% to 54%. The PSCW also established a targeted financial common equity ratio at 51% that results in a regulatory common equity ratio of 53.41%. The primary difference between the financial and the regulatory common equity ratio relates to certain off-balance sheet obligations, primarily purchased power obligations, considered by the PSCW in establishing the financial common equity target. These limitations may be modified by the PSCW.

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UPPCO's indentures relating to its first mortgage bonds contain certain limitations on the payment of cash dividends on its common stock, which is held solely by Integrys Energy Group. At December 31, 2009, these restrictions amounted to $10.7 million out of UPPCO's total retained earnings of $50.1 million. Consequently, at December 31, 2009, UPPCO had $39.4 million of retained earnings available for the payment of common stock cash dividends.

NSG's long-term debt obligations contain provisions and covenants restricting the payment of cash dividends and the purchase or redemption of capital stock. At December 31, 2009, these restrictions amounted to $6.9 million out of NSG's total retained earnings of $70.2 million. Consequently, at December 31, 2009, NSG had $63.3 million of retained earnings available for the payment of dividends.

At December 31, 2009, Integrys Energy Group had $326.6 million of retained earnings available for the payment of dividends. Except for the subsidiary restrictions described above, Integrys Energy Group does not have any dividend restrictions.

Equity Compensation Plans

See Item 11, "Executive Compensation," for information regarding Integrys Energy Group’s equity compensation plans.

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G. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Nature of Operations--Integrys Energy Group is a holding company whose primary wholly owned subsidiaries at December 31, 2009 included WPS, UPPCO, MGU, MERC, PGL, NSG, IBS, and Integrys Energy Services. Of these subsidiaries, six are regulated electric and/or natural gas utilities, one, IBS, is a wholly owned centralized service company, and one, Integrys Energy Services, is a nonregulated energy supply and services company. In addition, WPS Investments, LLC holds an approximate 34% interest in ATC.

The term "utility" refers to the regulated activities of the electric and natural gas utility segments, while the term "nonutility" refers to the activities of the electric and natural gas utility segments that are not regulated. The term "nonregulated" refers to activities at Integrys Energy Services, the Integrys Energy Group holding company, and the PEC holding company.

(b) Consolidated Basis of Presentation--The consolidated financial statements include the accounts of Integrys Energy Group and all majority owned subsidiaries, after eliminating intercompany transactions and balances. If a noncontrolling owner's equity is reduced to zero, Integrys Energy Group's policy is to record 100% of the subsidiary's losses until the noncontrolling owner makes capital contributions or commits to fund its share of the operating costs. The cost method of accounting is used for investments when Integrys Energy Group does not have significant influence over the operating and financial policies of the investee. Investments in businesses not controlled by Integrys Energy Group, but over which it has significant influence regarding the operating and financial policies of the investee, are accounted for using the equity method. For additional information on equity method investments, see Note 9, "Investments in Affiliates, at Equity Method." These consolidated financial statements also reflect Integrys Energy Group’s proportionate interests in certain jointly owned utility facilities.

(c) Use of Estimates--Integrys Energy Group prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Integrys Energy Group makes estimates and assumptions that affect assets, liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates.

(d) 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 Consolidated Statements of Cash Flows:

(Millions)	2009		2008		2007
Cash paid for interest	$	164.8	$	156.8	$	144.5
Cash paid for income taxes		19.1		100.9		198.1

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Significant non-cash transactions were:

(Millions)	2009		2008		2007

Construction costs funded through accounts payable	$	30.4	$	34.2	$	26.1
Intangible assets (customer contracts) received in exchange for risk management assets		17.0		-		-
Equity issued for net assets acquired in PEC merger		-		-		1,559.3
Realized gain on settlement of contracts due to PEC merger		-		-		4.0
PEP post-closing adjustments funded through other current liabilities		-		-		9.9

(e) Revenue and Customer Receivables--Revenues are recognized on the accrual basis and include estimated amounts for electric and natural gas services provided but not billed. At December 31, 2009, and 2008, Integrys Energy Group's unbilled revenues were $337.0 million and $525.5 million, respectively. At December 31, 2009, there were no customers or industries that accounted for more than 10% of Integrys Energy Group's revenues.

Prudent fuel and purchased power costs are recovered from customers under one-for-one recovery mechanisms by UPPCO and by the wholesale electric operations and Michigan retail electric operations of WPS, which provide for subsequent adjustments to rates for changes in commodity costs. There is a portion of WPS's wholesale electric business that limits cost recovery to no greater than the 2-year average rate charged to large industrial retail customers for that same period. The costs of natural gas prudently incurred by the natural gas utility subsidiaries are also recovered from customers under one-for-one recovery mechanisms.

WPS's Wisconsin retail electric operations do not have a one-for-one recovery mechanism. Instead, a "fuel window" mechanism is used to recover fuel and purchased power costs. Under the fuel window, if actual fuel and purchased power costs deviate by more than 2% from costs included in the rates charged to customers, a rate review can be triggered. Once a rate review is triggered, rates may be reset (subject to PSCW approval) for the remainder of the year to recover or refund, on an annualized basis, the projected increase or decrease in the cost of fuel and purchased power.

All of Integrys Energy Group's utility subsidiaries are required to provide service and grant credit (with applicable deposit requirements) to customers within their service territories. The companies continually review their customers' credit-worthiness and obtain or refund deposits accordingly. The utilities are generally precluded from discontinuing service to residential customers during winter moratorium months.

PGL credits proceeds from its interstate services against natural gas costs, resulting in a reduction to utility customers' natural gas charges.

WPS and UPPCO both sell and purchase power in the MISO market. If WPS or UPPCO is a net seller in a particular hour, the net amount is reported as revenue. If WPS or UPPCO is a net purchaser in a particular hour, the net amount is recorded as utility cost of fuel, natural gas, and purchased power on the Consolidated Statements of Income.

Integrys Energy Group presents revenues net of pass-through taxes on the Consolidated Statements of Income.

(f) Inventories--Inventories consist of natural gas in storage, liquid propane, and fossil fuels, including coal. Average cost is used to value fossil fuels, liquid propane, and natural gas in storage for the regulated utilities, excluding PGL and NSG. PGL and NSG price natural gas storage injections at the calendar year average of the costs of natural gas supply purchased. Withdrawals from storage are priced on the LIFO cost method. Inventories stated on a LIFO basis represented approximately 34% of total inventories at December 31, 2009, and 16% of total inventories at December 31, 2008. The estimated replacement cost of natural gas in inventory at December 31, 2009, and December 31, 2008, exceeded

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the LIFO cost by approximately $220.5 million and $212.2 million, respectively. In calculating these replacement amounts, PGL and NSG used a Chicago city-gate natural gas price per dekatherm of $6.14 at December 31, 2009, and $5.80 at December 31, 2008.

Inventories at Integrys Energy Services are valued at the lower of cost or market unless hedged pursuant to a fair value hedge, in which case changes in the fair value of inventory subsequent to the hedge designation are recorded directly to inventory. Integrys Energy Services recorded net write-downs of $44.2 million, $167.3 million, and $7.0 million in 2009, 2008, and 2007, respectively.

(g) Risk Management Activities--As part of its regular operations, Integrys Energy Group enters into contracts, including options, swaps, futures, forwards, and other contractual commitments, to manage market risks such as changes in commodity prices and interest rates, which are described more fully in Note 2, "Risk Management Activities." 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.

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. 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.

Integrys Energy Group classifies unrealized gains and losses on derivative instruments that do not qualify for hedge accounting or regulatory deferral as a component of margins or operating and maintenance expense, depending on the nature of the transactions. Unrealized gains and losses on fair value hedges are recognized currently in revenue, as are the changes in fair value of the hedged items. To the extent they are effective, the changes in the values of contracts designated as cash flow hedges are included in other comprehensive income, net of taxes. Fair value hedge ineffectiveness and cash flow hedge ineffectiveness are recorded in revenue or operating and maintenance expense on the Consolidated Statements of Income, based on the nature of the transactions. Cash flows from derivative activities are presented in the same category as the item being hedged within operating activities on the Consolidated Statements of Cash Flows unless the derivative contracts contain an other-than-insignificant financing element, in which case the cash flows are classified within financing activities.

FASB ASC 815-10-45 provides the option to present certain asset and liability derivative positions net on the balance sheet and to net the related cash collateral against these net derivative positions. Integrys Energy Group elected not to net these items. On the Consolidated Balance Sheets, cash collateral provided to others is shown separately as collateral on deposit, and cash collateral received from others is reflected in other current liabilities.

(h) Emission Allowances--Integrys Energy Services accounts for emission allowances as intangible assets, with cash inflows and outflows related to purchases and sales of emission allowances recorded as investing activities in the Consolidated Statements of Cash Flows. Integrys Energy Services uses the guidance under the Property, Plant, and Equipment Topic of the FASB ASC to test allowances for impairment. The utilities account for emission allowances as inventory at average cost by vintage year. Charges to income result when allowances are utilized in operating the utilities' generation plants. Gains on sales of allowances at the utilities are returned to ratepayers.

(i) Property, Plant, and Equipment--Utility plant is stated at original cost, including any associated AFUDC and asset retirement costs. The costs of renewals and betterments of units of property (as distinguished from minor items of property) are capitalized as additions to the utility plant accounts. Except for land, no gain or loss is recognized in connection with ordinary retirements of utility property

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units. Maintenance, repair, replacement, and renewal costs associated with items not qualifying as units of property are considered operating expenses. PGL and NSG charge the cost of units of property retired, sold, or otherwise disposed of to the accumulated provision for depreciation and record the cost of removal, less salvage value, associated with the retirement to depreciation expense. The other utilities charge the cost of units of property retired, sold, or otherwise disposed of, less salvage value, to the accumulated provision for depreciation and record a regulatory liability for removal costs included in rates, with actual removal costs charged against the liability as incurred. Consistent with the ICC rate order issued January 22, 2010, PGL and NSG changed their method for recognizing net dismantling costs from as incurred to allocating the cost over the life of the asset.

Integrys Energy Group records straight-line depreciation expense over the estimated useful life of utility property, using depreciation rates as approved by the applicable regulators. Annual utility composite depreciation rates are shown below.

Annual Utility Composite Depreciation Rates	2009			2008			2007
WPS – Electric		3.04	%		3.09	%		3.35	%
WPS – Natural gas		3.30	%		3.39	%		3.52	%
UPPCO		3.05	%		2.98	%		3.01	%
MGU		2.66	%		2.67	%		2.67	%
MERC		3.10	%		3.32	%		3.42	%
PGL		2.29	%		2.55	%		2.86	% *
NSG		1.66	%		1.80	%		1.85	% *

* Composite depreciation rate from the February 22, 2007 PEC merger date through the end of 2007.

Interest capitalization is applied to nonutility property during construction, and a gain or loss is recognized for retirements. At December 31, 2009, and 2008, nonutility property at the regulated utilities consisted primarily of land.

Nonregulated plant is stated at cost, which includes capitalized interest. The costs of renewals, betterments, and major overhauls are capitalized as additions to plant. The gains or losses associated with ordinary retirements are recorded in the period of retirement. Maintenance, repair, and minor replacement costs are expensed as incurred.

Depreciation is computed for the majority of the nonregulated subsidiaries' assets using the straight-line method over the assets' useful lives.

Integrys Energy Group capitalizes certain costs related to software developed or obtained for internal use and amortizes those costs to operating expense over the estimated useful life of the related software, which ranges from 3 to 15 years. If software is retired prior to being fully amortized, the difference is recorded as a loss on the Consolidated Statements of Income.

See Note 6, "Property, Plant, and Equipment," for details regarding Integrys Energy Group's property, plant, and equipment balances.

(j) Capitalized Interest and AFUDC--The nonregulated subsidiaries capitalize interest for construction projects, while the utilities capitalize the cost of funds used for construction using a calculation that includes both internal equity and external debt components. The internal equity component of capitalized AFUDC is accounted for as other income, and the external debt component is accounted for as a decrease to interest expense.

Approximately 50% of WPS's retail jurisdictional construction work in progress expenditures are subject to the AFUDC calculation. For 2009, WPS's average AFUDC retail rate was 8.61%, and its average AFUDC wholesale rate was 7.78%. WPS's allowance for equity funds used during construction for 2009, 2008, and 2007 was $5.1 million, $5.2 million, and $0.9 million, respectively. WPS's allowance for borrowed

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funds used during construction for 2009, 2008, and 2007 was $2.0 million, $1.8 million, and $0.3 million, respectively.

The AFUDC calculation for IBS and the other utilities is determined by the respective state commissions, each with specific requirements. Based on these requirements, IBS and the other utilities did not record significant AFUDC for 2009, 2008, or 2007.

Interest capitalized at the nonregulated subsidiaries was not significant during 2009, 2008, and 2007.

(k) Regulatory Assets and Liabilities--Regulatory assets represent probable future revenue associated with certain costs or liabilities that have been deferred and are expected to be recovered from customers through the ratemaking process. Regulatory liabilities represent amounts that are expected to be refunded to customers in future rates or amounts collected in rates for future costs. If at any reporting date a previously recorded regulatory asset is no longer probable of recovery, the regulatory asset is reduced to the amount considered probable of recovery with the reduction charged to expense in the year the determination is made. See Note 8, "Regulatory Assets and Liabilities," for more information.

(l) Asset Impairment--Goodwill and other intangible assets with indefinite lives are not amortized, but are subject to an annual impairment test. Other long-lived assets require an impairment review when events or circumstances indicate that the carrying amount may not be recoverable. Integrys Energy Group bases its evaluation of other long-lived assets on the presence of impairment indicators such as the future economic benefit of the assets, any historical or future profitability measurements, and other external market conditions or factors.

Integrys Energy Group's reporting units containing goodwill perform annual goodwill impairment tests during the second quarter of each year, and interim impairment tests are performed when impairment indicators are present. The carrying amount of the reporting unit's goodwill is considered not recoverable if the carrying amount of the reporting unit as a whole exceeds the reporting unit's fair value. An impairment charge is recorded for any excess of the carrying value of the goodwill over the implied fair value. For more information on Integrys Energy Group's goodwill and other intangible assets, see Note 10, "Goodwill and Other Intangible Assets."

The carrying amount of assets held and used is considered not recoverable if it exceeds the undiscounted sum of cash flows expected to result from the use and eventual disposition of the asset. If the carrying value is not recoverable, the impairment loss is measured as the excess of the asset's carrying value over its fair value.

The carrying value of assets held for sale is not recoverable if it exceeds the fair value less cost to sell the asset. An impairment charge is recorded for any excess of the carrying value over the fair value less estimated cost to sell.

The carrying values of cost and equity method investments are assessed for impairment by comparing the fair values of these investments to their carrying values, if a fair value assessment was completed, or by reviewing for the presence of impairment indicators. If an impairment exists and it is determined to be other-than-temporary, a charge is recognized equal to the amount the carrying value exceeds the investment's fair value.

(m) Retirement of Debt--Any call premiums or unamortized expenses associated with refinancing utility debt obligations are amortized consistent with regulatory treatment of those items. Any gains or losses resulting from the retirement of nonutility debt are recorded through earnings, while gains or losses resulting from the retirement of utility debt that is not refinanced are either amortized over the remaining life of the original debt or recorded through earnings.

(n) Asset Retirement Obligations--Integrys Energy Group recognizes legal obligations at fair value associated with the retirement of tangible long-lived assets that result from the acquisition, construction or development, and/or normal operation of the assets. A liability is recorded for these obligations as long as

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the fair value can be reasonably estimated, even if the timing or method of settling the obligation is unknown. The asset retirement obligations are accreted using a credit-adjusted risk-free interest rate commensurate with the expected settlement dates of the asset retirement obligations; this rate is determined at the date the obligation is incurred. The associated retirement costs are capitalized as part of the related long-lived assets and are depreciated over the useful lives of the assets. See Note 14, "Asset Retirement Obligations," for more information.

(o) Income Taxes--Deferred income taxes have been recorded to recognize the expected future tax consequences of events that have been included in the financial statements by using currently enacted tax rates for the differences between the tax basis of assets and liabilities and the basis reported in the financial statements. Integrys Energy Group records valuation allowances for deferred tax assets when it is uncertain if the benefit will be realized in the future. Integrys Energy Group's regulated utilities defer certain adjustments made to income taxes that will impact future rates and record regulatory assets or liabilities related to these adjustments.

Investment tax credits that reduce income taxes payable for the current year are recognized as a reduction of the provision for income taxes if the credits are generated in Integrys Energy Group's nonregulated operations unless it is likely that the related property that generated the tax credits will be sold after the end of the year with the tax credits transferred to the seller as permitted under tax law. For investment tax credits generated within regulated operations, regulators reduce Integrys Energy Group's future rates over the lives of the property to which the tax credits relate. Accordingly, Integrys Energy Group defers the investment tax credits in the year the taxes payable are reduced and reduces the provision for income taxes over the useful lives of the related property. Production tax credits generally reduce the provision for income taxes in the year that electricity from the qualifying facility is generated and sold. Investment tax credits and production tax credits that do not reduce income taxes payable for the current year are eligible for carryover and recognized as a deferred tax asset. A valuation allowance is established unless it is more likely than not that the credits will be realized during the carryforward period.

Integrys Energy Group files a consolidated United States income tax return that includes domestic subsidiaries of which its ownership is 80% or more. Integrys Energy Group and its consolidated subsidiaries are parties to a tax allocation arrangement under which each entity determines its provision for income taxes on a stand-alone basis. In several states, combined or consolidated filing is required for certain members of Integrys Energy Group doing business in that state. The tax allocation arrangement equitably allocates the state taxes associated with these combined or consolidated filings.

Integrys Energy Group reports interest and penalties accrued related to income taxes as a component of provision for income taxes in the Consolidated Statements of Income, as well as regulatory assets or regulatory liabilities in the Consolidated Balance Sheets.

For more information regarding Integrys Energy Group's accounting for income taxes, see Note 15, "Income Taxes."

(p) Guarantees--Integrys Energy Group follows the guidance of the Guarantees Topic of the FASB ASC, which requires that the guarantor recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. For additional information on guarantees, see Note 17, "Guarantees."

(q) Employee Benefits--The costs of pension and other postretirement benefits are expensed over the periods during which employees render service. The transition obligation related to other postretirement plans that existed at Integrys Energy Group prior to the PEC merger is being recognized over a 20-year period beginning in 1993. In computing the expected return on plan assets, Integrys Energy Group uses a market-related value of plan assets. Changes in fair value are recognized over the subsequent five years for plans sponsored by WPS, while differences between actual investment returns and the expected return on plan assets are recognized over a five-year period for pension plans sponsored by IBS and PEC. The benefit costs associated with employee benefit plans are allocated among Integrys Energy Group's subsidiaries based on employees' time reporting and actuarial

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calculations, as applicable. Integrys Energy Group's regulators allow recovery in rates for the regulated utilities' net periodic benefit cost calculated under GAAP.

Integrys Energy Group recognizes the funded status of defined benefit postretirement plans on the balance sheet, and recognizes changes in the plans' funded status in the year in which the changes occur. Integrys Energy Group's nonregulated segments record changes in the funded status in other comprehensive income, and the regulated utilities record these changes to regulatory asset or liability accounts.

Integrys Energy Group uses a December 31 measurement date for all of its pension and other postretirement benefit plans.

For additional information on Integrys Energy Group's employee benefits, see Note 18, "Employee Benefit Plans."

(r) Fair Value--Effective January 1, 2008, Integrys Energy Group adopted SFAS No. 157, "Fair Value Measurements" (now incorporated as part of the Fair Value Measurements and Disclosures Topic of the FASB ASC). This standard defined fair value and required enhanced disclosures about assets and liabilities carried at fair value. These disclosures can be found in Note 22, "Fair Value."

A fair value measurement is required to reflect the assumptions market participants would use in pricing an asset or liability based on the best available information. These assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and the risks inherent in the inputs to the model. Also, transaction costs should not be considered in the determination of fair value. On January 1, 2008, Integrys Energy Group recognized an increase in nonregulated revenues of $11.0 million due to the exclusion of transaction costs from Integrys Energy Services' fair value estimates.

SFAS No. 157 nullified a portion of Emerging Issues Task Force Issue No. 02-3, "Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities." Under Issue No. 02-3, inception gains or losses were deferred unless the fair value of the derivative was substantially based on quoted prices or other current market transactions. However, SFAS No. 157 provided a framework to consider, in evaluating a transaction, whether a transaction represents fair value at initial recognition. Integrys Energy Services recognized a pre-tax cumulative effect increase to retained earnings of $4.5 million on January 1, 2008, related to the nullification of the aforementioned portion of Issue No. 02-3.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Integrys Energy Group utilizes a mid-market pricing convention (the mid-point price between bid and ask prices) as a practical expedient for valuing certain derivative assets and liabilities.

SFAS No. 157 established a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are defined as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 – Pricing inputs are observable, either directly or indirectly, but are not quoted prices included within Level 1. Level 2 includes those financial instruments that are valued using external inputs within models or other valuation methodologies.

Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management's

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best estimate of fair value. Level 3 instruments include those that may be more structured or otherwise tailored to customers' needs.

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

(s) Subsequent Events--Subsequent events at Integrys Energy Group were evaluated for potential recognition or disclosure through February 25, 2010, which is the date the consolidated financial statements were issued.

(t) New Accounting Pronouncements--SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)" (now incorporated as part of the Consolidation Topic of the FASB ASC), was issued in June 2009. This statement introduces a requirement to perform ongoing assessments to determine whether an entity is a variable interest entity and whether an enterprise is the primary beneficiary of a variable interest entity. In addition, this statement clarifies that the enterprise that is required to consolidate a variable interest entity will have a controlling financial interest evidenced by (1) the power to direct the activities that most significantly affect the entity's economic performance, and (2) the obligation to absorb losses or the right to receive benefits that are potentially significant to the variable interest entity. Additional disclosures are required regarding involvement with variable interest entities, as well as the methodology used to determine the primary beneficiary of any variable interest entities. This standard was effective for Integrys Energy Group beginning January 1, 2010. Management is currently evaluating the impact that the adoption will have on Integrys Energy Group's first quarter 2010 consolidated financial statements.

NOTE 2--RISK MANAGEMENT ACTIVITIES

The following table shows Integrys Energy Group's assets and liabilities from risk management activities:

		Risk Management Assets				Risk Management Liabilities
(Millions)	Balance Sheet Presentation *	December 31 2009		December 31 2008		December 31 2009		December 31 2008
Utility Segments
Non-hedge derivatives
Commodity contracts	Current	$	10.8	$	28.6	$	24.7	$	161.6
Commodity contracts	Long-term		2.0		-		1.5		9.0
Cash flow hedges
Commodity contracts	Current		-		-		0.2		1.5
Commodity contracts	Long-term		-		-		0.1		-

Nonregulated Segments
Non-hedge derivatives
Commodity contracts	Current		1,503.9		2,080.9		1,548.4		1,944.2
Commodity contracts	Long-term		787.2		750.0		769.5		729.7
Interest rate swaps	Current		-		-		1.0		1.0
Interest rate swaps	Long-term		-		-		2.5		3.3
Foreign exchange contracts	Current		1.0		2.8		0.9		0.5
Foreign exchange contracts	Long-term		0.9		2.5		0.9		2.3
Fair value hedges
Commodity contracts	Current		-		14.2		-		-
Interest rate swaps	Current		1.8		1.1		-		-
Interest rate swaps	Long-term		0.8		2.1		-		-
Cash flow hedges
Commodity contracts	Current		4.6		81.3		30.1		79.4
Commodity contracts	Long-term		4.5		4.1		8.6		14.8
Interest rate swaps	Current		-		-		1.8		1.5
Interest rate swaps	Long-term		-		-		-		3.6
Foreign exchange contracts	Current		-		14.8		-		-
Total		$	2,317.5	$	2,982.4	$	2,390.2	$	2,952.4

Assets and liabilities from risk management activities are classified as current or long-term based upon the maturities of the underlying contracts.

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At December 31, 2008, $0.6 million of current non-hedge commodity derivative contracts were classified as liabilities held for sale in the nonregulated Integrys Energy Services segment. For more information see Note 4, "Dispositions."

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

(Millions)	December 31, 2009		December 31, 2008
Cash collateral provided to others	$	184.9	$	262.7
Cash collateral received from others		55.2		18.9

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 December 31, 2009, was $579.6 million. As of December 31, 2009, Integrys Energy Group had not posted any cash collateral related to the credit-risk related contingent features of these commodity instruments.

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 at December 31, 2009, Integrys Energy Group would have been required to post collateral of $566.3 million. Of this amount, Integrys Energy Group had already satisfied $51.9 million with letters of credit. Therefore, the remaining collateral requirement would have been $514.4 million.

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 (FTRs) 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.

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

(Millions)	Financial Statement Presentation	2009
Commodity contracts	Balance Sheet – Regulatory assets (current)	$	122.5
Commodity contracts	Balance Sheet – Regulatory assets (long-term)		7.3
Commodity contracts	Balance Sheet – Regulatory liabilities (current)		(1.0	)
Commodity contracts	Balance Sheet – Regulatory liabilities (long-term)		-
Commodity contracts	Income Statement – Utility cost of fuel, natural gas, and purchased power		0.1

At December 31, 2009, the utilities had the following notional volumes of outstanding non-hedge derivative contracts:

	Purchases		Other Transactions
Natural gas (millions of therms)		833.2		N/A
FTRs (millions of kilowatt-hours)		N/A		4,546.6
Petroleum products (barrels)		42,823		N/A

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Cash Flow Hedges

PGL uses commodity 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. At December 31, 2009, PGL had the following notional volumes of outstanding contracts that were designated as cash flow hedges:

		Purchases
Natural gas (millions of therms)			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)
(Millions)	2009
Commodity contracts	$	(1.4	)

		Loss Reclassified from Accumulated OCI into Income (Effective Portion)
(Millions)	Income Statement Presentation	2009
Settled commodity contracts	Operating and maintenance expense	$	(2.6	)

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 2009, was a pre-tax loss of $2.7 million during 2008, and was not significant during 2007. Cash flow hedge ineffectiveness related to these commodity contracts was not significant during 2009 and 2008, and was a pre-tax loss of $4.4 million in 2007. 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, interest rate risk associated with expected future natural gas purchases, and foreign currency exchange rate risk related to the wrap up of the Canadian marketing operations.

At December 31, 2009, the nonregulated segments had the following notional volumes of outstanding non-hedge derivative contracts:

(Millions)	Purchases		Sales		Other Transactions
Commodity contracts
Natural gas (therms)		2,990.4		2,917.1		N/A
Power (kilowatt-hours)		132,200.4		125,983.1		N/A
Interest rate swaps		N/A		N/A	$	219.2
Foreign exchange contracts	$	35.1	$	35.1		N/A

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

(Millions)	Income Statement Presentation	2009
Commodity contracts	Nonregulated revenue	$	(5.1	)
Commodity contracts	Nonregulated revenue (reclassified from accumulated OCI)		(3.2	) *
Interest rate swaps	Interest expense		(1.7	)
Foreign exchange contracts	Nonregulated revenue		(1.8	)
Total		$	(11.8	)

*	Represents amounts amortized out of accumulated OCI related to cash flow hedges that were dedesignated in prior quarters.

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.

(Millions)	Income Statement Presentation	2009
Interest rate swap	Interest expense	$	(0.6	)
Debt hedged by swap	Interest expense		0.6
Total		$	-

Fair value hedge ineffectiveness recorded in interest expense on the Consolidated Statements of Income was not significant in 2009, 2008, and 2007. No amounts were excluded from effectiveness testing related to the interest rate swap during 2009, 2008, and 2007.

During the year ended December 31, 2009, Integrys Energy Services did not have any commodity derivative contracts designated as fair value hedges. During the years ended December 31, 2008, and 2007, Integrys Energy Services had commodity derivative contracts designated as fair value hedges to mitigate the risk of changes in the price of natural gas held in storage. Fair value hedge ineffectiveness recorded in nonregulated revenue on the Consolidated Statements of Income was not significant in 2008 and 2007. Changes in the difference between the spot and forward prices of natural gas were excluded from the assessment of hedge effectiveness and reported directly in nonregulated revenue. The amount excluded was a pre-tax gain of $5.5 million during 2008 and was not significant during 2007.

Cash Flow Hedges

Commodity futures, forwards, and swaps that are designated as cash flow hedges extend through April 2014, and are used to mitigate the risk of cash flow variability associated with future purchases and sales of natural gas and electricity. 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. At

December 31, 2009, the nonregulated segments had the following notional volumes of outstanding contracts that were designated as cash flow hedges:

(Millions)

Purchases

Sales

Other Transactions

Commodity contracts

Natural gas (therms)

5.9

8.6

N/A

Power (kilowatt-hours)

7,116.2

N/A

Interest rate swaps

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

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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)	2009
Commodity contracts	$	(60.0	)
Interest rate swaps		3.2

		Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
(Millions)	Income Statement Presentation	2009
Settled/Realized
Commodity contracts	Nonregulated revenue	$	(107.3	)
Interest rate swaps	Interest expense		1.2
Hedge Designation Discontinued
Commodity contracts	Nonregulated revenue		2.7
Total		$	(103.4	)

		Loss Recognized in Income on Derivative Instruments (Ineffective Portion and Amount Excluded from Effectiveness Testing)
(Millions)	Income Statement Presentation	2009
Commodity contracts	Nonregulated revenue	$	(1.1	)

In the next 12 months, subject to changes in market prices of natural gas and electricity, a pre-tax loss of $34.0 million related to cash flow hedges of commodity contracts is expected to be recognized in earnings as the hedged transactions occur. This amount is expected to be substantially offset by the settlement of the related nonderivative hedged contracts.

NOTE 3--RESTRUCTURING EXPENSE

Reductions in Workforce

In an effort to permanently remove costs from its operations, Integrys Energy Group developed a plan at the end of 2009 that includes reductions in the workforce. In connection with this plan, $18.0 million of employee-related and consulting costs, including an insignificant curtailment loss for a nonqualified pension plan, were included in the restructuring expense line item on the Consolidated Statements of Income. An insignificant amount was paid out in 2009 for consulting fees. The restructuring costs were distributed across Integrys Energy Group's segments as follows:

(Millions)	2009
Electric utility	$	8.6
Natural gas utility		6.9
Integrys Energy Services		1.7
Holding company and other		0.8
Total restructuring expense	$	18.0

Integrys Energy Services Strategy Change

Integrys Energy Group is in the process of significantly reducing the size of its nonregulated energy services business segment to a smaller segment with significantly reduced credit and collateral support requirements. In connection with this strategy, the following restructuring costs were expensed:

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(Millions)	2009
Employee-related costs	$	10.1
Legal and consulting		9.2
Software write-offs and accelerated depreciation		5.9
Miscellaneous		0.3
Total restructuring expense	$	25.5

All of the above costs were related to the Integrys Energy Services segment and were included in the restructuring expense line item on the Consolidated Statements of Income.

The following table summarizes the activity related to employee-related restructuring expense:

(Millions)	2009
Accrued employee-related costs at beginning of period	$	-
Employee-related costs expensed		10.1
Cash payments		1.9
Accrued employee-related costs at end of period	$	8.2

Integrys Energy Group expects to incur total employee-related restructuring expense of approximately $12 million related to the Integrys Energy Services strategy change by the end of 2010, including the $10.1 million expensed as of December 31, 2009.

NOTE 4--DISPOSITIONS

Integrys Energy Services Strategy Change

As part of Integrys Energy Group's decision to significantly reduce the size of its nonregulated energy services business segment with significantly reduced credit and collateral support requirements, it entered into the following sale agreements during 2009.

Proposed Sale of United States Wholesale Electric Marketing and Trading Business

In December 2009, Integrys Energy Services entered into a definitive agreement to sell substantially all of its United States wholesale electric marketing and trading business. The closing of this sale is contingent upon obtaining certain customary contractual consents and necessary regulatory approvals. Effective February 1, 2010, Integrys Energy Services transferred substantially all of the market risk associated with this business by entering into trades with the buyer that mirror Integrys Energy Services' underlying wholesale electric contracts. Integrys Energy Services expects to transfer title to the underlying contracts and close the transaction by the end of the second quarter of 2010, at which time these mirror transactions will terminate.

The carrying values of the major classes of assets and liabilities included in the sale agreement were as follows at December 31, 2009:

(Millions)

Current assets from risk management activities	$	1,219.7
Long-term assets from risk management activities		629.4
Total assets	$	1,849.1

Current liabilities from risk management activities	$	1,229.8
Long-term liabilities from risk management activities		602.2
Total liabilities	$	1,832.0

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Based on the terms of the sale agreement and the carrying amount of the net assets being sold, had the sale transaction closed on December 31, 2009, Integrys Energy Services would have realized a non-cash loss on the sale of approximately $58 million pre-tax. Also included in the sale transaction are commodity contracts that do not meet the GAAP definition of derivative instruments, and therefore are not reflected on the Consolidated Balance Sheets. In accordance with GAAP, expected gains or losses related to nonderivative commodity contracts are not recognized until the contracts are settled. The gain or loss on the sale will be recorded in the period the contracts are transferred to the buyer as this transfer represents settlement. Furthermore, changes in forward electric prices will impact the ultimate gain or loss on the sale and could be different than the aforementioned loss that was computed assuming a December 31, 2009 closing date. In conjunction with the sale, Integrys Energy Services will enter into derivative contracts with the buyer to reestablish the economic hedges for the retained retail business at the same prices and other terms previously executed through Integrys Energy Services’ wholesale electric marketing business being sold. Had these new third-party derivative contracts been entered into at December 31, 2009, the amount of assets and liabilities from risk management activities would have been as follows:

(Millions)

Current assets from risk management activities	$	50.1
Long-term assets from risk management activities		30.5
Total assets	$	80.6

Current liabilities from risk management activities	$	78.9
Long-term liabilities from risk management activities		42.8
Total liabilities	$	121.7

Sale of Generation Assets in New Brunswick, Canada and Northern Maine, and Associated Retail Electric Contracts

In November 2009, Integrys Energy Services entered into definitive agreements that it subsequently closed in the first quarter of 2010, for the sale of two of its power generation companies, which own generation assets in New Brunswick, Canada and Northern Maine, along with the associated retail electric contracts and standard offer service contracts in Northern Maine. The proceeds from the sale of the generation companies and associated retail electric contracts were $38.5 million, and the estimated pre-tax gain on the sale to be recognized during the first quarter of 2010 is approximately $15 million, subject to certain post-closing adjustments.

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The carrying values of the major classes of assets and liabilities classified as held for sale on the Consolidated Balance Sheets were as follows:

(Millions)	December 31, 2009		December 31, 2008

Inventories	$	0.1	$	0.1
Property, plant, and equipment - net of accumulated depreciation of $9.7 and $9.0, respectively		25.1		24.8
Other long-term assets		1.3		1.4
Total assets	$	26.5	$	26.3

Current portion of long-term debt	$	-	$	4.3
Current liabilities from risk management activities		-		0.6
Other current liabilities		-		0.1
Long-term debt		-		2.3
Asset retirement obligations		0.3		0.2
Total liabilities	$	0.3	$	7.5

Sale of United States Wholesale Natural Gas Marketing and Trading Business

In October 2009, Integrys Energy Services entered into definitive agreements to sell the majority of its United States wholesale natural gas marketing and trading business in a two-part transaction. In December 2009, Integrys Energy Services completed the first part of the transaction by selling substantially all of its United States wholesale natural gas marketing and trading business. The second part of this transaction includes wholesale natural gas storage contracts. Integrys Energy Services will continue to pursue the sale of these contracts throughout the year. The pre-tax loss on the sale of the United States wholesale natural gas marketing and trading business reported during the fourth quarter of 2009 was $28.5 million and is reported as a component of loss on Integrys Energy Services dispositions related to strategy change in the Consolidated Statements of Income.

The following table shows the carrying values of the major classes of assets and liabilities included in the sale at the December 4, 2009 closing date.

(Millions)

Inventories	$	9.9
Current assets from risk management activities		261.2
Long-term assets from risk management activities		68.6
Total assets	$	339.7

Accounts payable	$	36.0
Current liabilities from risk management activities		311.7
Long-term liabilities from risk management activities		79.8
Total liabilities	$	427.5

In addition to the above recognized assets and liabilities, commodity contracts that are not accounted for as derivatives were also transferred to the buyer.

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In conjunction with the transaction, Integrys Energy Services entered into derivative contracts with the buyer to reestablish the economic hedges for the retained retail business, at the same prices and other terms previously executed through Integrys Energy Services’ wholesale natural gas marketing and trading business being sold. The execution of these new third-party derivative contracts resulted in assets and liabilities from risk management activities as follows at the date of the sale:

(Millions)

Current assets from risk management activities	$	62.6
Long-term assets from risk management activities		25.9
Total assets	$	88.5

Current liabilities from risk management activities	$	134.3
Long-term liabilities from risk management activities		53.8
Total liabilities	$	188.1

In January 2010, the buyer of the wholesale natural gas marketing and trading business exercised its option to purchase certain of the wholesale natural gas storage contracts from Integrys Energy Services in a subsequent sale. There is not anticipated to be a significant gain or loss on the sale of these natural gas storage contracts during the first quarter of 2010.

The carrying values of the major assets and liabilities included in this sale were as follows at December 31, 2009:

(Millions)

Inventories	$	16.1
Current assets from risk management activities		37.5
Long-term assets from risk management activities		8.9
Total assets	$	62.5

Accounts payable	$	24.8
Current liabilities from risk management activities		42.9
Long-term liabilities from risk management activities		7.5
Total liabilities	$	75.2

Sale of Canadian Natural Gas and Electric Power Portfolio

In September 2009, Integrys Energy Services of Canada, a subsidiary of Integrys Energy Services, sold nearly all of its Canadian natural gas and electric power contract portfolio. In a separate transaction, Integrys Energy Services of Canada sold a 2 billion cubic foot (bcf) natural gas storage contract to a counterparty. With these two transactions, Integrys Energy Services exited the majority of its electric and natural gas marketing business in Canada. The pre-tax loss on the sale of the Canadian portfolio was $0.4 million and is reported as a component of loss on Integrys Energy Services dispositions related to strategy change in the Consolidated Statements of Income.

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The following table shows the carrying values of the major classes of assets and liabilities included in the transactions at the closing dates.

(Millions)

Inventories	$	5.3
Current assets from risk management activities		134.7
Long-term assets from risk management activities		48.6
Total assets	$	188.6

Current liabilities from risk management activities	$	119.8
Long-term liabilities from risk management activities		32.3
Total liabilities	$	152.1

In conjunction with the transaction, Integrys Energy Services entered into derivative contracts with the buyer to reestablish the economic hedges for the retained United States retail business, at the same prices and other terms previously executed through Integrys Energy Services’ Canadian natural gas and electric power portfolio being sold. The execution of these new third-party derivative contracts resulted in assets and liabilities from risk management activities as follows at the date of sale:

(Millions)

Current assets from risk management activities	$	21.8
Long-term assets from risk management activities		8.8
Total assets	$	30.6

Current liabilities from risk management activities	$	14.2
Long-term liabilities from risk management activities		6.3
Total liabilities	$	20.5

Discontinued Operations Resulting from Integrys Energy Services Strategy Change

Energy Management Consulting Business

During 2009, Integrys Energy Services completed the sale of its energy management consulting business and received proceeds of $4.7 million. This business provided consulting services relating to long-term strategies for managing energy costs for its customers. The historical financial results of this business were not significant. The gain on sale of this business reported in discontinued operations was $3.9 million ($2.4 million after-tax).

Other Discontinued Operations

Stoneman

During the third quarter of 2008, Integrys Energy Services sold its subsidiary Mid-American Power, LLC, which owned the Stoneman generation facility, located in Wisconsin. The historical financial results of this business were not significant. In the fourth quarter of 2008, Integrys Energy Services recognized a $6.3 million ($3.8 million after-tax) gain on the sale of this business in discontinued operations when a previously contingent payment was earned and paid by the buyer. This contingent payment resulted from legislation that was passed in the fourth quarter of 2008, which extended the production tax credits available for certain biomass facilities.

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PEP

In September 2007, Integrys Energy Group completed the sale of PEP, an oil and natural gas production subsidiary acquired in the PEC merger, for $869.2 million, net of certain post-closing adjustments. These post-closing adjustments were funded through other current liabilities at December 31, 2007, and, therefore, are included in Note 1(d), "Summary of Significant Accounting Policies – Cash and Cash Equivalents," as a non-cash transaction for 2007. Including the impact of the post-closing adjustments, the pre-tax gain recorded for 2007 was $12.6 million ($7.6 million after-tax), and was included as a component of discontinued operations. In 2008, $0.8 million of tax adjustments related to the 2007 PEP sale was recorded as income from discontinued operations.

Components of discontinued operations reported in the Consolidated Statements of Income related to PEP were:

(Millions)	February 22, 2007 through December 31, 2007

Nonregulated revenues	$	114.2

Operating and maintenance expense		28.5
Gain on PEP sale		(12.6	)
Taxes other than income taxes		5.1
Other expense		0.1

Income before taxes		93.1
Provision for income taxes		34.6
Discontinued operations, net of tax	$	58.5

It is Integrys Energy Group's policy to not allocate interest to discontinued operations unless the asset group being sold has external debt obligations. PEP had no external debt obligations during the period shown above.

WPS Niagara Generation, LLC

In January 2007, Integrys Energy Services completed the sale of WPS Niagara Generation, LLC (Niagara) and received proceeds of approximately $31 million. This facility was a merchant generation facility and sold power on a wholesale basis. Integrys Energy Services recognized a $24.6 million ($14.7 million after-tax) gain on the sale of this business in discontinued operations.

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Components of discontinued operations reported in the Consolidated Statements of Income related to Niagara for the year ended December 31 were as follows:

(Millions)	2007

Nonregulated revenues	$	1.5

Nonregulated cost of fuel, natural gas, and purchased power		1.0
Operating and maintenance expense		0.5
Gain on Niagara sale		(24.6	)

Income before taxes		24.6
Provision for income taxes		9.8
Discontinued operations, net of tax	$	14.8

No interest expense was allocated to discontinued operations as Niagara had no external debt obligations during the periods shown above.

During 2008, Integrys Energy Services recorded a $0.1 million after-tax gain in discontinued operations related to amortization of an environmental indemnification guarantee included as part of the sale agreement.

During 2009, Integrys Energy Services recorded a $0.4 million after-tax gain in discontinued operations related to a refund received in connection with the overpayment of auxiliary power service in prior years.

NOTE 5--PEC MERGER

The PEC merger was completed on February 21, 2007 and was accounted for under the purchase method of accounting, with Integrys Energy Group as the acquirer. In the merger, shareholders of PEC received 0.825 shares of Integrys Energy Group common stock, $1 par value, for each share of PEC common stock, no par value, which they held immediately prior to the merger. The total purchase price was approximately $1.6 billion. The results of operations attributable to PEC are included in the consolidated financial statements for the years ended December 31, 2009, 2008, and for the period from February 22, 2007, through December 31, 2007.

In order to achieve Integrys Energy Group's anticipated merger synergies, a restructuring plan was implemented, which included a process to eliminate duplicative positions within Integrys Energy Group. Costs associated with the merger-related involuntary termination of employees at PEC (the acquired company) were recognized as a liability assumed in the merger and included in the purchase price allocation. The liability recognized at the date of the merger was not significant and was fully paid at December 31, 2008.

Costs related to the involuntary termination of the acquirer's employees were expensed. Costs associated with the relocation or voluntary terminations of both Integrys Energy Group and PEC employees were also expensed. The following table summarizes the activity related to these specific costs for the years ended December 31:

(Millions)	2009			2008			2007
Accrued employee severance costs at beginning of period	$	1.4		$	4.8		$	-
Severance expense recorded		0.1			2.5			7.2
Cash payments		(1.1	)		(5.9	)		(2.4	)
Accrued employee severance costs at end of period	$	0.4		$	1.4		$	4.8

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Supplemental Pro Forma Information

The following table shows pro forma results of operations for Integrys Energy Group for the year ended December 31, 2007, as if the acquisition of PEC had been completed at January 1, 2007. Pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results would have been had the acquisitions actually occurred on January 1, 2007.

(Millions, except per share amounts)	Year Ended December 31, 2007
Total revenues	$	10,997.7
Net income from continuing operations	$	211.2
Net income attributed to common shareholders	$	283.4
Basic earnings per share – continuing operations	$	2.73
Basic earnings per share	$	3.72
Diluted earnings per share – continuing operations	$	2.73
Diluted earnings per share	$	3.72

NOTE 6--PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment at December 31 consisted of the following utility, nonutility, and nonregulated assets:

(Millions)	2009		2008
Electric utility	$	3,066.7	$	2,777.5
Natural gas utility		4,338.3		4,190.1
Total utility plant		7,405.0		6,967.6
Less: Accumulated depreciation		2,726.0		2,599.3
Net		4,679.0		4,368.3
Construction work in progress		40.7		159.6
Net utility plant		4,719.7		4,527.9

Nonutility plant – utility segments		100.7		87.9
Less: Accumulated depreciation		59.1		51.0
Net		41.6		36.9
Construction work in progress		34.6		15.5
Net nonutility plant – utility segments		76.2		52.4

Electric nonregulated		166.8		161.5
Natural gas nonregulated		18.1		3.4
Other nonregulated		23.5		23.1
Total nonregulated property, plant, and equipment		208.4		188.0
Less: Accumulated depreciation		62.1		50.7
Net		146.3		137.3
Construction work in progress		2.9		30.9
Net nonregulated property, plant, and equipment		149.2		168.2

Total property, plant, and equipment	$	4,945.1	$	4,748.5

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NOTE 7--JOINTLY OWNED UTILITY FACILITIES

WPS holds a joint ownership interest in certain electric generating facilities. WPS is entitled to its share of generating capability and output of each facility equal to its respective ownership interest. WPS also pays its ownership share of additional construction costs, fuel inventory purchases, and operating expenses unless specific agreements have been executed to limit its maximum exposure to additional costs. WPS's share of significant jointly owned electric generating facilities as of December 31, 2009, was as follows:

(Millions, except for percentages and megawatts)	Weston 4			West Marinette Unit No. 33			Columbia Energy Center Units 1 and 2			Edgewater Unit No. 4
Ownership		70.0	%		68.0	%		31.8	%		31.8	%
WPS's share of rated capacity (megawatts)		374.5			56.8			335.2			105.0
Utility plant in service	$	609.8		$	18.2		$	165.9		$	37.8
Accumulated depreciation	$	53.5		$	9.7		$	102.4		$	23.5
In-service date	2008			1993			1975 and 1978			1969

WPS's share of direct expenses for these plants is recorded in operating expenses in the Consolidated Statements of Income. WPS has supplied its own financing for all jointly owned projects.

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NOTE 8--REGULATORY ASSETS AND LIABILITIES

The following regulatory assets and liabilities were reflected in Integrys Energy Group's Consolidated Balance Sheets as of December 31:

(Millions)	2009		2008

Regulatory assets
Environmental remediation costs (net of insurance recoveries)	$	674.9	$	681.1
Pension and other postretirement benefit related items		605.5		634.7
Asset retirement obligations		39.4		30.5
De Pere Energy Center		33.4		35.8
Derivatives		32.3		162.0
Income tax related items		29.0		23.2
Decoupling		28.9		4.4
Weston 3 lightning strike		18.1		22.3
Bad debt expense		17.7		4.8
Conservation program costs		17.4		4.8
Costs of previously owned nuclear plant		14.3		24.1
Unamortized loss on debt		12.5		13.2
Energy costs receivable through rate adjustments		12.3		23.1
Rate case costs		9.5		5.7
Costs to achieve merger synergies		6.1		12.1
Other		4.6		7.0
Total	$	1,556.0	$	1,688.8
Balance Sheet Presentation
Current	$	121.1	$	244.0
Long-term		1,434.9		1,444.8
Total	$	1,556.0	$	1,688.8

Regulatory liabilities
Cost of removal reserve	$	246.6	$	231.6
Energy costs refundable through rate adjustments		79.6		34.1
Pension and other postretirement benefit related items		23.5		26.1
Income tax related items		6.7		8.2
EEP		6.1		4.8
ATC and MISO refunds		4.6		9.6
Derivatives		4.3		4.9
Decoupling		1.4		9.4
Other		5.2		5.6
Total	$	378.0	$	334.3
Balance Sheet Presentation
Current	$	100.4	$	58.8
Long-term		277.6		275.5
Total	$	378.0	$	334.3

Integrys Energy Group's utility subsidiaries expect to recover their regulatory assets and incur future costs or refund their regulatory liabilities through rates charged to customers based on specific ratemaking decisions over periods specified by the regulators or over the normal operating period of the assets and liabilities to which they relate. Based on prior and current rate treatment for such costs, Integrys Energy Group believes it is probable that its utility subsidiaries will continue to recover from customers the regulatory assets described above.

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The regulatory assets listed in the table above related to WPS's environmental remediation costs, the Weston 3 lightning strike, rate case costs, and the unamortized loss on debt at PGL and NSG, are not earning a rate of return. The regulatory asset for WPS's environmental remediation costs was $74.2 million at December 31, 2009, and includes both liabilities and costs incurred to remediate the former manufactured gas plant sites that have not yet been recovered through rates. At December 31, 2009, environmental remediation costs that have been incurred but not yet recovered in rates were not significant. WPS is authorized recovery of the regulatory asset related to the Weston 3 lightning strike over a six-year period. The regulatory assets related to the unamortized loss on debt at PGL and NSG are not included in rate base, but are recovered over the term of the debt through the rate of return authorized by the ICC. The regulatory assets related to rate case costs for PGL and NSG are authorized recovery by the ICC over a five-year period for 2008 rates and a three-year period for 2010 rates. The regulatory assets related to rate case costs for MERC are authorized recovery by the MPUC over a five-year period for 2009 rates and a three-year period for 2010 rates. These regulatory assets are expected to be recovered from customers in future rates; however, the carrying costs of these assets are borne by Integrys Energy Group's shareholders.

Prior to WPS purchasing the De Pere Energy Center, WPS had a long-term power purchase contract with the De Pere Energy Center that was accounted for as a capital lease. As a result of the purchase, the capital lease obligation was reversed and the difference between the capital lease asset and the purchase price was recorded as a regulatory asset. WPS is authorized recovery of this regulatory asset over a 20-year period.

See Note 1(g), "Summary of Significant Accounting Policies – Risk Management Activities," Note 14, "Asset Retirement Obligations," Note 15, "Income Taxes," Note 16, "Commitments and Contingencies," Note 18, "Employee Benefit Plans," and Note 24, "Regulatory Environment," for more information on some of the more significant regulatory assets and liabilities listed in the above table.

NOTE 9--INVESTMENTS IN AFFILIATES, AT EQUITY METHOD

Investments in corporate joint ventures and other companies accounted for under the equity method at December 31, 2009, and 2008 were as follows:

(Millions)	2009		2008
ATC	$	395.9	$	346.9
WRPC		8.5		8.5
Other		1.4		3.1
Investments in affiliates, at equity method	$	405.8	$	358.5

Investments in affiliates accounted for under the equity method are included in other long-term assets on the Consolidated Balance Sheets, and the equity income (loss) is recorded in miscellaneous income on the Consolidated Statements of Income. Integrys Energy Group is taxed on ATC's equity income, rather than ATC, due to the tax flow-through nature of ATC's business structure. Accordingly, Integrys Energy Group's provision for income taxes includes taxes on ATC's equity income.

ATC

Integrys Energy Group’s electric transmission investment segment consists of WPS Investments LLC’s ownership interest in ATC, which was approximately 34% at December 31, 2009. ATC is a for-profit, transmission-only company. ATC owns, maintains, monitors, and operates electric transmission assets in portions of Wisconsin, Michigan, Minnesota, and Illinois.

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The following table shows changes to Integrys Energy Group's investment in ATC during the years ended December 31.

(Millions)	2009		2008		2007
Balance at the beginning of period	$	346.9	$	296.6	$	231.9
Add: equity in net income		75.3		66.1		50.5
Add: capital contributions		34.1		34.6		50.9
Less: dividends received		60.4		50.4		36.7
Balance at the end of period	$	395.9	$	346.9	$	296.6

The regulated electric utilities provide construction and other services to, and receive network transmission services from, ATC. The related party transactions recorded by the regulated electric utilities in the years ended December 31 were as follows:

(Millions)	2009		2008		2007
Total charges to ATC for services and construction	$	10.1	$	12.8	$	98.6
Total costs for network transmission service provided by ATC		90.7		87.8		78.1
Net amounts received from (advanced to) ATC for transmission interconnection		-		82.3		(23.9	)

WRPC

WPS owns 50% of the voting stock of WRPC, which operates two hydroelectric plants and an oil-fired combustion turbine. Two-thirds of the energy output of the hydroelectric plants is sold to WPS, and the remaining one-third is sold to Wisconsin Power and Light. The electric power from the combustion turbine is sold in equal parts to WPS and Wisconsin Power and Light.

WPS provides services to WRPC, purchases energy from WRPC, and receives net proceeds from sales of energy into the MISO market from WRPC. The related party transactions recorded and net proceeds and dividends received during the years ended December 31 were as follows:

(Millions)	2009		2008		2007
Revenues from services provided to WRPC	$	0.6	$	0.8	$	1.0
Purchases of energy from WRPC		4.6		4.7		4.7
Net proceeds from WRPC sales of energy to MISO		2.6		5.8		6.0
Dividends received from WRPC		0.9		3.5		0.9

Of Integrys Energy Group's equity in net income disclosed below, $1.0 million, $2.2 million, and $1.8 million is the pre-tax income related to WPS's investment in WRPC in 2009, 2008, and 2007, respectively.

Financial Data

Combined financial data of Integrys Energy Group's significant equity method investments, ATC and WRPC, is included in the table below.

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(Millions)	2009		2008		2007
Income statement data
Revenues	$	528.7	$	474.0	$	415.6
Operating expenses		235.7		214.6		203.9
Other expense		77.7		67.1		54.2
Net income	$	215.3	$	192.3	$	157.5

Integrys Energy Group's equity in net income	$	76.3	$	68.3	$	52.3

Balance sheet data
Current assets	$	54.0	$	52.5	$	52.3
Noncurrent assets		2,785.5		2,494.8		2,207.8
Total assets	$	2,839.5	$	2,547.3	$	2,260.1

Current liabilities	$	286.3	$	252.4	$	317.7
Long-term debt		1,259.6		1,109.4		899.1
Other noncurrent liabilities		80.1		119.3		111.1
Shareholders' equity		1,213.5		1,066.2		932.2
Total liabilities and shareholders' equity	$	2,839.5	$	2,547.3	$	2,260.1

NOTE 10--GOODWILL AND OTHER INTANGIBLE ASSETS

Integrys Energy Group had the following changes to the carrying amount of goodwill for the years ended December 31, 2008 and 2009:

(Millions)	Natural Gas Utility Segment			Integrys Energy Services			Total
Goodwill recorded at December 31, 2007 *	$	936.8		$	11.5		$	948.3
Adjustments to PEC purchase price allocation
related to income taxes		(3.3	)		(4.6	)		(7.9	)
Impairment loss		(6.5	)		-			(6.5	)
Goodwill recorded at December 31, 2008		927.0			6.9			933.9
Impairment loss		(291.1	)		-			(291.1	)
Goodwill allocated to businesses sold		-			(0.3	)		(0.3	)
Goodwill recorded at December 31, 2009	$	635.9		$	6.6		$	642.5

* The goodwill balance at December 31, 2007, did not include any accumulated impairment losses.

In the first quarter of 2009, the combination of the decline in equity markets as well as the increase in the expected weighted-average cost of capital indicated that a potential impairment of goodwill might exist, triggering an interim goodwill impairment analysis. Based upon the results of the interim goodwill impairment analysis, Integrys Energy Group recorded a non-cash goodwill impairment loss of $291.1 million ($248.8 million after-tax) in the first quarter of 2009, all within the natural gas utility segment. Key factors contributing to the impairment charge included disruptions in the global credit and equity markets and the resulting increase in the weighted-average cost of capital used to value the natural gas utility operations, and the negative impact that the global decline in equity markets had on the valuation of natural gas distribution companies in general.

A goodwill impairment loss in the amount of $6.5 million, after-tax, was recognized for NSG in the second quarter of 2008. A present value technique was utilized to estimate the fair value of NSG at April 1, 2008. The goodwill impairment recognized for NSG was due to a decline in the estimated fair value of NSG, caused primarily by a decrease in forecasted results as compared to the forecast at the time of the acquisition. Worsening economic factors also contributed to the decline in fair value.

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Identifiable intangible assets other than goodwill are included as a component of other current and long-term assets and other current and long-term liabilities within the Consolidated Balance Sheets as listed below.

(Millions)	December 31, 2009									December 31, 2008
	Gross Carrying Amount			Accumulated Amortization			Net			Gross Carrying Amount			Accumulated Amortization			Net
Amortized intangible assets (liabilities)
Customer-related (1)	$	32.6		$	(18.3	)	$	14.3		$	32.6		$	(14.2	)	$	18.4
Natural gas and electric contract assets (2) (3)		71.4			(60.5	)		10.9			60.1			(54.6	)		5.5
Natural gas and electric contract liabilities (2) (4)		(10.5	)		10.4			(0.1	)		(33.6	)		20.2			(13.4	)
Renewable energy credits (5)		3.4			(2.1	)		1.3			3.4			(2.1	)		1.3
Nonregulated easements (6)		3.6			(0.1	)		3.5			-			-			-
Emission allowances (7)		2.1			(0.2	)		1.9			2.3			(0.1	)		2.2
Other		2.5			(0.5	)		2.0			3.0			(1.0	)		2.0
Total	$	105.1		$	(71.3	)	$	33.8		$	67.8		$	(51.8	)	$	16.0

Unamortized intangible assets
MGU trade name		5.2			-			5.2			5.2			-			5.2
Total intangible assets	$	110.3		$	(71.3	)	$	39.0		$	73.0		$	(51.8	)	$	21.2

(1) Includes customer relationship assets associated with both PEC's former nonregulated retail natural gas and electric operations and MERC's nonutility ServiceChoice business. The remaining weighted-average amortization period for customer-related intangible assets at December 31, 2009, was approximately 7 years.

(2) Represents the fair value of certain PEC natural gas and electric customer contracts acquired in the merger that were not considered to be derivative instruments, as well as other electric customer contracts acquired in exchange for risk management assets.

(3) Includes both short-term and long-term intangible assets related to customer contracts in the amount of $6.2 million and $4.7 million, respectively, at December 31, 2009, and $3.1 million and $2.4 million, respectively, at December 31, 2008. The remaining weighted-average amortization period for these intangible assets at December 31, 2009, was 2.5 years.

(4) Includes both short-term and long-term intangible liabilities related to customer contracts in the amount of $6.0 million and $7.4 million, respectively at December 31, 2008.

(5) Used at Integrys Energy Services to comply with state Renewable Portfolio Standards and to support customer commitments.

(6) Relates to easements supporting a pipeline at Integrys Energy Services. The easements are amortized on a straight-line basis, with a remaining amortization period of 14.5 years.

(7) Emission allowances do not have a contractual term or expiration date.

Intangible asset amortization expense, excluding amortization related to natural gas and electric contracts, was recorded as a component of depreciation and amortization expense. Amortization for the years ended December 31, 2009, 2008, and 2007, was $6.3 million, $7.9 million, and $8.5 million, respectively.

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Amortization expense for the next five fiscal years is estimated to be:

(Millions)
For year ending December 31, 2010	$	4.2
For year ending December 31, 2011		3.3
For year ending December 31, 2012		2.4
For year ending December 31, 2013		1.6
For year ending December 31, 2014		1.4

Amortization of the natural gas and electric contract intangible assets and liabilities were recorded as a component of nonregulated cost of fuel, natural gas, and purchased power. Amortization of these contracts for the years ended December 31, 2009, 2008, and 2007, resulted in an increase to nonregulated fuel, natural gas, and purchased power in the amount of $8.9 million, $34.4 million, and $21.0 million, respectively.

Amortization expense of these contracts for the next five fiscal years is estimated to be:

(Millions)
For year ending December 31, 2010	$	6.1
For year ending December 31, 2011		2.8
For year ending December 31, 2012		1.1
For year ending December 31, 2013		0.5
For year ending December 31, 2014		0.3

NOTE 11--LEASES

Integrys Energy Group leases various property, plant, and equipment. Terms of the operating leases vary, but generally require Integrys Energy Group to pay property taxes, insurance premiums, and maintenance costs associated with the leased property. Many of Integrys Energy Group's leases contain one of the following options upon the end of the lease term: (a) purchase the property at the current fair market value or (b) exercise a renewal option, as set forth in the lease agreement. Rental expense attributable to operating leases was $16.9 million, $17.0 million, and $13.6 million in 2009, 2008, and 2007, respectively. Future minimum rental obligations under non-cancelable operating leases are payable as follows:

Year ending December 31 (Millions)
2010	$	11.6
2011		10.5
2012		9.1
2013		8.8
2014		4.8
Later years		23.6
Total payments	$	68.4

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NOTE 12--SHORT-TERM DEBT AND LINES OF CREDIT

Integrys Energy Group's short-term borrowings consist of sales of commercial paper, borrowings under revolving credit facilities, and short-term notes. Amounts shown are as of December 31:

(Millions, except percentages)	2009			2008			2007
Commercial paper outstanding	$	212.1		$	552.9		$	308.2
Average discount rate on outstanding commercial paper		0.52	%		4.78	%		5.51	%
Borrowings under revolving credit facilities		-		$	475.0		$	150.0
Average interest rate on outstanding borrowings under revolving credit facilities		-			2.41	%		3.56	%
Short-term notes payable outstanding	$	10.0		$	181.1		$	10.0
Average interest rate on short-term notes payable		0.18	%		3.40	%		5.20	%

The commercial paper outstanding at December 31, 2009, had varying maturity dates ranging from January 4, 2010, through February 17, 2010.

The table below presents Integrys Energy Group's average amount of short-term borrowings outstanding based on daily outstanding balances during the years ended December 31:

(Millions)	2009		2008		2007
Average amount of commercial paper outstanding	$	193.8	$	305.7	$	490.1
Average amount of borrowings under revolving credit facilities	$	114.5	$	166.8	$	116.4
Average amount of short-term notes payable outstanding	$	48.0	$	34.3	$	10.0

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Integrys Energy Group manages its liquidity by maintaining adequate external financing commitments. The information in the table below relates to Integrys Energy Group's short-term debt, lines of credit, and remaining available capacity as of December 31:

(Millions)	Maturity	2009		2008
Revolving credit facility (Integrys Energy Group) (1)	6/02/10	$	500.0	$	500.0
Revolving credit facility (Integrys Energy Group) (1)	6/09/11		500.0		500.0
Revolving credit facility (Integrys Energy Group) (2)	5/03/09		-		250.0
Revolving credit facility (Integrys Energy Group) (3)	5/26/10		425.0		-
Revolving credit facility (Integrys Energy Group) (4)	6/04/10		35.0		-
Revolving credit facility (WPS) (5)	6/02/10		115.0		115.0
Revolving credit facility (PEC) (1) (6)	6/13/11		400.0		400.0
Revolving credit facility (PGL) (7)	7/12/10		250.0		250.0
Revolving credit facility (Integrys Energy Services) (8)	6/29/09		-		175.0
Revolving short-term notes payable (WPS) (9)	5/13/10		10.0		10.0
Short-term notes payable (Integrys Energy Group) (10)	3/30/09		-		171.1
Total short-term credit capacity			2,235.0		2,371.1

Less:
Letters of credit issued inside credit facilities			130.4		414.6
Loans outstanding under credit agreements and notes payable			10.0		656.1
Commercial paper outstanding			212.1		552.9
Accrued interest or original discount on outstanding commercial paper			-		0.8
Available capacity under existing agreements		$	1,882.5	$	746.7

(1)	Provides support for Integrys Energy Group's commercial paper borrowing program.

(2)	This facility matured in May 2009, and the revolving credit agreement was terminated.

(3)	In May 2009, Integrys Energy Group entered into a revolving credit agreement to provide support for Integrys Energy Group's commercial paper borrowing program.

(4)	In June 2009, Integrys Energy Group entered into a revolving credit agreement to provide support for Integrys Energy Group's commercial paper borrowing program.

(5)	Provides support for WPS's commercial paper borrowing program.

(6)	Borrowings under this agreement are guaranteed by Integrys Energy Group.

(7)	Provides support for PGL's commercial paper borrowing program.

(8)	This facility matured in June 2009, at which time the borrowings were paid in full, and the revolving credit agreement was terminated. This facility was previously guaranteed by Integrys Energy Group.

(9)	This note is renewed every six months and is used for general corporate purposes.

(10)	This facility matured in March 2009, at which time the borrowings were paid in full, and the short-term debt agreement was terminated.

At December 31, 2009, Integrys Energy Group and its subsidiaries were in compliance with all financial covenants related to outstanding short-term debt. Integrys Energy Group and certain subsidiaries' revolving credit agreements contain financial and other covenants, including but not limited to, a requirement to maintain a debt to total capitalization ratio not to exceed 65%, excluding non-recourse debt. Failure to meet these covenants beyond applicable grace periods could result in accelerated due dates and/or termination of the agreements.

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NOTE 13--LONG-TERM DEBT

					December 31
(Millions)					2009		2008
WPS First Mortgage Bonds (1)
	Series			Year Due
		7.125	%	2023	$	0.1	$	0.1
WPS Senior Notes (1)
	Series			Year Due
		6.125	%	2011		150.0		150.0
		4.875	%	2012		150.0		150.0
		4.80	%	2013		125.0		125.0
		3.95	%	2013		22.0		22.0
		6.375	%	2015		125.0		125.0
		5.65	%	2017		125.0		125.0
		6.08	%	2028		50.0		50.0
		5.55	%	2036		125.0		125.0
UPPCO First Mortgage Bonds (2)
	Series			Year Due
		9.32	%	2021		10.8		11.7

PEC Unsecured Senior Note (3)
	Series			Year Due
		A, 6.90	%	2011	325.0	325.0
	Fair value hedge adjustment				2.6	3.2
PGL Fixed First and Refunding Mortgage Bonds (4) (5)

Series	Year Due
HH, 4.75%	2030	Adjustable after July 1, 2014	50.0	50.0
KK, 5.00%	2033		50.0	50.0
LL, 3.75%	2033	Adjustable after February 1, 2012	50.0	50.0
MM-2, 4.00%	2010		50.0	50.0
NN-2, 4.625%	2013		75.0	75.0
QQ, 4.875%	2038	Adjustable after November 1, 2018	75.0	75.0
RR, 4.30%	2035	Adjustable after June 1, 2016	50.0	50.0
SS, 7.00%	2013		45.0	45.0
TT, 8.00%	2018		5.0	5.0
UU, 4.63%	2019		75.0	-

PGL Adjustable First and Refunding Mortgage Bonds (5) (6)
	Series			Year Due
	OO			2037	51.0	51.0
NSG First Mortgage Bonds (7)
	Series			Year Due
		M, 5.00	%	2028	28.5	28.8
		N-2, 4.625	%	2013	40.0	40.0
		O, 7.00	%	2013	6.5	6.5
Integrys Energy Group Unsecured Senior Notes (8)
	Series			Year Due
		5.375	%	2012	100.0	100.0
		7.00	%	2009	-	150.0
		7.27	%	2014	100.0	-
		8.00	%	2016	55.0	-
Integrys Energy Group Unsecured Junior Subordinated Notes (9)
		Series		Year Due
		6.11	%	2066	300.0	300.0

Unsecured term loan due 2010 – Integrys Energy Group (10)		65.6			65.6
Other term loan (11)		27.0			27.0
Total		2,509.1			2,430.9
Unamortized discount and premium on bonds and debt		2.1			5.7
Total debt		2,511.2			2,436.6
Less current portion		(116.5	)		(150.9	)
Total long-term debt	$	2,394.7		$	2,285.7

(1)

WPS's First Mortgage Bonds and Senior Notes are subject to the terms and conditions of WPS's First Mortgage Indenture. Under the terms of the Indenture, substantially all property owned by WPS is pledged as collateral for these outstanding debt securities. All of these debt securities require semi-annual payments of interest. WPS Senior Notes become non-collateralized if WPS retires all of its outstanding First Mortgage Bonds and no new mortgage indenture is put in place.

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(2)

Under the terms of UPPCO's First Mortgage Indenture, substantially all property owned by UPPCO is pledged as collateral for this outstanding debt series. Interest payments are due semi-annually with a sinking fund payment of $0.9 million due each November 1. As a result, this payment is included in the current portion of long-term debt on Integrys Energy Group's Consolidated Balance Sheet at December 31, 2009. The final sinking fund payment due November 1, 2021, will completely retire the series.

(3)

Integrys Energy Group entered into a First Supplemental Indenture, which provides that Integrys Energy Group will fully and unconditionally guarantee, on a senior unsecured basis, PEC's obligations under its $325.0 million, 6.9% notes due January 15, 2011. See Note 2, "Risk Management Activities," for information on the PEC fair value hedge adjustment.

(4)	In March 2010, $50.0 million of PGL's First and Refunding Mortgage Bonds will mature. As a result, these notes are included in the current portion of long-term debt on Integrys Energy Group's Consolidated Balance Sheet at December 31, 2009.

In September 2009, PGL issued $75.0 million of Series UU, 4.63%, 10-year First and Refunding Mortgage Bonds due September 1, 2019. The net proceeds from the issuance of these bonds were used for general corporate utility purposes and to increase liquidity. The First and Refunding Mortgage Bonds were sold in a private placement and are not registered under the Securities Act of 1933.

(5)	PGL's First Mortgage Bonds are subject to the terms and conditions of PGL's First Mortgage Indenture dated January 2, 1926, as supplemented. Under the terms of the Indenture, substantially all property owned by PGL is pledged as collateral for these outstanding debt securities.

(6)

(PGL has outstanding $51.0 million of Adjustable Rate, Series OO bonds, due October 1, 2037, which are currently in a 35-day Auction Rate mode (the interest rate is reset every 35 days through an auction process). Recent auctions have failed to receive sufficient clearing bids. As a result, these bonds are priced each 35 days at the maximum auction rate, until such time a successful auction occurs. The maximum auction rate is determined based on the lesser of the London Interbank Offered Rate or the Securities Industry and Financial Markets Association Municipal Swap Index rate plus a defined premium. The year-to-date weighted-average interest rate was 0.8% for these bonds in 2009.

PGL has utilized certain First Mortgage Bonds to secure tax exempt interest rates. The Illinois Finance Authority and the City of Chicago have issued Tax Exempt Bonds, and the proceeds from the sale of these bonds were loaned to PGL. In return, PGL issued equal principal amounts of certain collateralized First Mortgage Bonds.

(7)	NSG's First Mortgage Bonds are subject to the terms and conditions of NSG's First Mortgage Indenture dated April 1, 1955, as supplemented. Under the terms of the Indenture, substantially all property owned by NSG is pledged as collateral for these outstanding debt securities.

NSG has utilized First Mortgage Bonds to secure tax exempt interest rates. The Illinois Finance Authority has issued Tax Exempt Bonds, and the proceeds from the sale of these bonds were loaned to NSG. In return, NSG issued equal principal amounts of certain collateralized First Mortgage Bonds.

(8)

In June 2009, Integrys Energy Group issued $100.0 million of 7.27%, 5-year Unsecured Senior Notes due June 1, 2014 and $55.0 million of 8.0%, 7-year Unsecured Senior Notes due June 1, 2016. The net proceeds from the issuance of the Senior Notes were used to refinance existing short-term debt and for general corporate purposes. The Senior Notes were sold in a private placement and are not registered under the Securities Act of 1933.

(9)

These Integrys Energy Group Junior Subordinated Notes are considered hybrid instruments with a combination of debt and equity characteristics. Integrys Energy Group has agreed in a replacement capital covenant with the holders of Integrys Energy Group's 5.375% Unsecured Senior Notes due December 1, 2012, that it will not redeem or repurchase the Junior Subordinated Notes on or prior to December 1, 2036 unless such repurchases or redemptions are made from the proceeds of the sale of specific securities considered by rating agencies to have equity characteristics equal to or greater than those of the Junior Subordinated Notes.

(10)	In June 2010, Integrys Energy Group's $65.6 million unsecured term loan will mature. As a result, this loan is included in the current portion of long-term debt on Integrys Energy Group's Consolidated Balance Sheet at December 31, 2009.

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(11)

In April 2001, the Schuylkill County Industrial Development Authority issued $27.0 million of Refunding Tax Exempt Bonds. The proceeds from the bonds were loaned to WPS Westwood Generation, LLC, a subsidiary of Integrys Energy Services. This loan is repaid by WPS Westwood Generation to Schuylkill County Industrial Development Authority with monthly interest only payments and has a floating interest rate that is reset weekly. At December 31, 2009, the interest rate was 4.24%. The loan is to be repaid by April 2021. Integrys Energy Group agreed to guarantee WPS Westwood Generation's obligation to provide sufficient funds to pay the loan and the related obligations and indemnities.

Long-term borrowings by Integrys Energy Services under term loans have been reclassified as liabilities held for sale in the amount of $6.6 million for the year ended December 31, 2008, related to the sale of generation assets of WPS New England Generation, Inc. and WPS Canada Generation, Inc that closed in January 2010. As of December 31, 2009, these term loans have been paid in full. For more information about the sale, see Note 4, "Dispositions."

At December 31, 2009, Integrys Energy Group and each of its subsidiaries were in compliance with all respective financial covenants related to outstanding long-term debt. Integrys Energy Group and certain subsidiaries' long-term debt obligations contain covenants related to payment of principal and interest when due and various financial reporting obligations. In addition, certain long-term debt obligations contain financial and other covenants, including but not limited to, a requirement to maintain a debt to total capitalization ratio not to exceed 65%. Failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of outstanding debt obligations.

A schedule of all principal debt payment amounts related to bond maturities is as follows:

Year ending December 31 (Millions)
2010	$	116.5
2011		478.5
2012		250.9
2013		314.4
2014		100.9
Later years		1,247.9
Total payments	$	2,509.1

NOTE 14--ASSET RETIREMENT OBLIGATIONS

The utility segments have asset retirement obligations primarily related to removal of natural gas distribution pipe (including asbestos and PCBs); asbestos abatement at certain generation facilities, office buildings, and service centers; disposal of PCB-contaminated transformers; and closure of fly-ash landfills at certain generation facilities. The utilities establish regulatory assets and liabilities to record the differences between ongoing expense recognition under the Asset Retirement and Environmental Obligations accounting rules, and the ratemaking practices for retirement costs authorized by the applicable regulators.

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Changes to Asset Retirement Obligation Liabilities

The following table shows changes to Integrys Energy Group's asset retirement obligations through December 31, 2009.

(Millions)	Utilities			Integrys Energy Services			Total
Asset retirement obligations at December 31, 2006	$	9.4		$	0.7		$	10.1
Accretion		6.8			-			6.8
Asset retirement obligations from merger with PEC		124.9			-			124.9
Asset retirement obligations transferred in sales		(0.2	)		-			(0.2	)
Settlements		(1.4	)		-			(1.4	)
Asset retirement obligations at December 31, 2007		139.5			0.7			140.2
Accretion		7.8			-			7.8
Additions and revisions to estimated cash flows		31.7			-			31.7
Asset retirement obligations transferred in sales		(0.1	)		(0.5	)		(0.6	)
Asset retirement obligations at December 31, 2008		178.9			0.2	(2)		179.1
Accretion		9.6			0.1			9.7
Additions and revisions to estimated cash flows		6.3	(1)		-			6.3
Asset retirement obligations at December 31, 2009	$	194.8		$	0.3	(2)	$	195.1

(1)	This amount includes a $6.3 million asset retirement obligation related to the WPS 99-megawatt Crane Creek wind generation project that became operational in the fourth quarter of 2009. All other adjustments netted to an insignificant amount.

(2)	These amounts were classified as held for sale, as they relate to the sale of generation assets in Northern Maine, which closed in the first quarter of 2010.

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NOTE 15--INCOME TAXES

Deferred Income Tax Assets and Liabilities

Certain temporary book to tax differences, for which the offsetting amount is recorded as a regulatory asset or liability, are presented in the table below as net amounts, consistent with regulatory treatment. The principal components of deferred income tax assets and liabilities recognized in the Consolidated Balance Sheets as of December 31 are as follows:

(Millions)	2009			2008

Deferred income tax assets:
Tax credit carryforwards	$	90.7		$	96.0
Employee benefits		96.0			88.9
Price risk management		55.4			-
State capital and operating loss carryforwards		16.0			15.9
Other		32.4			52.2
Total deferred income tax assets	$	290.5		$	253.0
Valuation allowance		(7.4	)		(2.3	)
Net deferred income tax assets	$	283.1		$	250.7

Deferred income tax liabilities:
Plant related	$	756.8		$	642.1
Regulatory deferrals		76.1			70.3
Deferred income		15.5			-
Price risk management		-			45.6
Total deferred income tax liabilities	$	848.4		$	758.0

Consolidated Balance Sheet presentation:
Current deferred income tax assets	$	92.9		$	-
Current deferred income tax liabilities		-			71.6
Long-term deferred income tax liabilities		658.2			435.7
Net deferred income tax liabilities	$	565.3		$	507.3

Deferred tax credit carryforwards at December 31, 2009, include $70.7 million of alternative minimum tax credits related to tax credits available under former Section 29/45K of the Internal Revenue Code. These alternative minimum tax credits can be carried forward indefinitely.

Carryforward periods for state capital and operating losses vary. In the majority of states in which Integrys Energy Group operates, the carryforward period is 15 years or more, with the majority of the state capital and operating losses beginning to expire in 2013. Valuation allowances are established for certain state operating and capital loss carryforwards based on the ability of Integrys Energy Group to realize the benefit of these losses in the future.

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Federal Income Tax Expense

The following table presents a reconciliation of federal income taxes to the provision for income taxes reported in the Consolidated Statements of Income for the periods ended December 31. The taxes are calculated by multiplying the statutory federal income tax rate by book income before federal income tax.

	2009						2008						2007
(Millions, except for percentages)	Rate			Amount			Rate			Amount			Rate			Amount

Statutory federal income tax		35.0	%	$	4.1			35.0	%	$	61.6			35.0	%	$	93.5
State income taxes, net		120.7			14.0			6.8			12.0			4.3			11.5
Goodwill		562.1			65.2			1.3			2.3			-			-
Investment tax credit - amortization		(13.8	)		(1.6	)		(1.0	)		(1.8	)		(0.6	)		(1.5	)
Federal tax credits		6.0			0.7			(6.0	)		(10.6	)		(5.4	)		(14.3	)
Plant related		(14.7	)		(1.7	)		-			-			-			-
Unrecognized tax benefits		14.7			1.7			0.1			0.1			1.2			3.3
Benefits and compensation		(31.0	)		(3.6	)		(2.8	)		(4.9	)		(2.5	)		(6.8	)
Other differences, net		38.2			4.4			(4.3	)		(7.5	)		0.2			0.3
Effective income tax		717.2	%	$	83.2			29.1	%	$	51.2			32.2	%	$	86.0

Current provision
Federal				$	1.9					$	(10.5	)				$	(6.8	)
State					14.1						(3.1	)					8.9
Foreign					7.1						1.9						4.7
Total current provision					23.1						(11.7	)					6.8

Deferred provision					52.5						65.7						77.7
Valuation allowance					5.1						-						0.5
Interest					3.7						(0.1	)					2.4
Net operating loss carryforwards					1.4						(1.8	)					(0.9	)
Investment tax credit - net					(0.6	)					(1.5	)					(1.4	)
Unrecognized tax benefits					(2.0	)					0.2						1.0
Penalties					-						0.4						(0.1	)
Total provision for income taxes				$	83.2					$	51.2					$	86.0

Foreign income before taxes was $0.3 million in 2009, $12.0 million in 2008, and $23.3 million in 2007.

As the related temporary differences reverse, the regulated utilities are prospectively refunding taxes to or collecting taxes from customers for which deferred taxes were recorded in prior years at rates different than current rates. The net regulatory asset for these and other regulatory tax effects totaled $19.3 million and $13.9 million as of December 31, 2009, and 2008, respectively.

Integrys Energy Group records accrued interest and penalties related to income taxes as a component of the provision for income taxes. Integrys Energy Group had accrued interest of $8.0 million and accrued penalties of $3.0 million related to unrecognized tax benefits at December 31, 2009. Integrys Energy Group had accrued interest of $2.9 million and accrued penalties of $3.1 million related to uncertain tax positions at December 31, 2008.

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Unrecognized Tax Benefits

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

(Millions)	2009			2008			2007

Balance at January 1	$	22.4		$	10.0		$	3.7
Increase related to tax positions acquired		-			-			13.9
Increase related to tax positions taken in prior years		10.2			23.8			0.5
Decrease related to tax positions taken in prior years		(0.2	)		(7.7	)		(0.3	)
Decrease related to tax positions taken in current year		(0.1	)		-			(3.9	)
Decrease related to settlements		(0.3	)		(3.7	)		(3.6	)
Decrease related to lapse of statutes		(0.2	)		-			(0.3	)
Balance at December 31	$	31.8		$	22.4		$	10.0

At December 31, 2009, recognition in subsequent periods of the unrecognized tax benefits related to continuing operations could affect Integrys Energy Group's net income by $6.2 million. Also, recognition in subsequent periods of the unrecognized tax benefits related to discontinued operations could affect Integrys Energy Group's net income by $9.5 million.

Subsidiaries of Integrys Energy Group file income tax returns in the United States federal jurisdiction, in various United States state and local jurisdictions, and in Canada. Subject to the major exceptions listed below, Integrys Energy Group is no longer subject to United States federal, state and local, or foreign income tax examinations by tax authorities for years prior to 2004.

●	Illinois Department of Revenue – PEC and consolidated subsidiaries have agreed to a statute extension for the September 30, 2003 tax year.
●		Oregon Department of Revenue – WPS Power Development has open examinations for the 2002 and 2003 tax years.

In 2009, Integrys Energy Group closed the following examinations:

●	Wisconsin Department of Revenue – WPS for the 2001 through 2006 tax years.

Integrys Energy Group has the following open examinations:

●	IRS – PEC and consolidated subsidiaries have open examinations for the September 30, 2004 through December 31, 2006 tax years.
●	IRS – Integrys Energy Group and consolidated subsidiaries have open examinations for the 2006 and 2007 tax years along with the February 21, 2007 PEC short year.
●	IRS – An Integrys Energy Services subsidiary, Synfuel Solutions, LLC, has open examinations for the 2005 and 2006 tax years.
●	Illinois Department of Revenue – PEC and consolidated subsidiaries have open examinations for the September 30, 2003 through December 31, 2006 tax years.
●	Kentucky Department of Revenue – Integrys Energy Group has open examinations for the 2005 through the 2008 tax years.
●	Mississippi Department of Revenue – PEC, PEP, and PEP Holdings LLC have open examinations for the September 30, 2006, December 31, 2006, and December 31, 2007 tax years.
●	New York State Department of Revenue – Integrys Energy Services and WPS Power Development have open examinations for the 2004 and 2005 tax years.
●	Oregon Department of Revenue – Integrys Energy Services has an open examination for the 2005 tax year; WPS Power Development has open examinations for the 2002, 2003, and 2004 tax years.
●	Pennsylvania Department of Revenue – Integrys Energy Services has open examinations for the 2006 and 2007 tax years.

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●	Quebec Department of Revenue – Integrys Energy Services has open examinations for the 2006 through 2008 tax years.

In the next 12 months, it is reasonably possible that Integrys Energy Group and its subsidiaries will settle their open examinations in multiple taxing jurisdictions related to tax years prior to 2007, resulting in a decrease in unrecognized tax benefits of as much as $10.9 million.

NOTE 16--COMMITMENTS AND CONTINGENCIES

Commodity Purchase Obligations and Purchase Order Commitments

Integrys Energy Group routinely enters into long-term purchase and sale commitments that have various quantity requirements and durations. The regulated natural gas utilities have obligations to distribute and sell natural gas to their customers, and the regulated electric utilities have obligations to distribute and sell electricity to their customers. The utilities expect to recover costs related to these obligations in future customer rates. Additionally, the majority of the energy supply contracts entered into by Integrys Energy Services are to meet its obligations to deliver energy to customers.

The obligations described below are as of December 31, 2009.

●	The electric utility segment has obligations related to coal supply and transportation that extend through 2016 and total $350.7 million, obligations of $1,192.1 million for either capacity or energy related to purchased power that extend through 2027, and obligations for other commodities totaling $13.5 million, which extend through 2013.
●	The natural gas utility segment has obligations related to natural gas supply and transportation contracts totaling $1,301.0 million, some of which extend through 2028.
●	Integrys Energy Services has obligations related to energy and natural gas supply contracts that extend through 2019 and total $2,878.3 million. The majority of these obligations end by 2012, with obligations totaling $113.0 million extending beyond 2012.
●	Integrys Energy Group also has commitments in the form of purchase orders issued to various vendors, which totaled $515.3 million and relate to normal business operations, including construction projects.

General

Amounts ultimately paid as penalties, or eventually determined to be paid in lieu of penalties, will not be deductible for income tax purposes.

Environmental

Clean Air Act New Source Review Issues

Weston and Pulliam Plants:

On November 18, 2009, the EPA issued a Notice of Violation (NOV) to WPS alleging violations of the New Source Review requirements of the Clean Air Act (CAA). Specifically, the allegations relate to requirements for certain projects undertaken at Pulliam and Weston from 1994 to 2009. WPS has evaluated the NOV, including an analysis of the allegations as well as options for resolution with the EPA and has met with the EPA to begin discussions on a possible resolution. Integrys Energy Group continues to review the allegations but is currently unable to predict the impact on its consolidated financial statements.

Columbia Plant:

On October 10, 2009, WPS, along with its co-owners, received from the Sierra Club a Notice of Intent (NOI) to file a civil lawsuit based on allegations that major modifications were made at the Columbia generation station without complying with the CAA. Specifically, the allegations suggest that Prevention of Significant Deterioration (PSD) permits that imposed Best Available Control Technology (BACT) limits on

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emissions should have been obtained for the Columbia generation station, which is jointly owned by Wisconsin Power and Light (WP&L), Madison Gas and Electric Company, and WPS, and operated by WP&L. The NOI also covers similar allegations related to another generation station solely owned by WP&L. Integrys Energy Group is reviewing the allegations but is currently unable to predict the impact on its consolidated financial statements.

WP&L, on behalf of itself and the joint owners, sent a Notice of Deficiency to the Sierra Club regarding the NOI. In response, the Sierra Club filed a Supplemental NOI on December 14, 2009, purporting to correct the deficiencies. WP&L is in the process of analyzing the allegations and has begun discussions with the Sierra Club.

Edgewater Plant:

On December 11, 2009, WPS, along with its co-owners, received from the Sierra Club a copy of an NOI to file a civil lawsuit against the EPA based on the EPA's failure to take actions against the co-owners and operator of the Edgewater generation station based upon allegations of failure to comply with the CAA. Specifically, the allegations suggest that PSD permits that imposed BACT limits on emissions from the facilities should have been obtained for Edgewater. Edgewater is jointly owned by WP&L, WE Energies (Unit 5) and WPS (Unit 4), and operated by WP&L. WP&L is in the process of analyzing the Sierra Club's actions. Integrys Energy Group is reviewing the allegations but is currently unable to predict the impact on its consolidated financial statements.

On December 21, 2009, WPS, along with its co-owners, received from the Sierra Club an NOI to file a civil lawsuit based on allegations that major modifications were made at the Edgewater generation station without complying with the PSD and Title V Operating Permit requirements of the CAA. Specifically, the allegations suggest that PSD permits that imposed BACT limits on emissions from the facilities should have been obtained for Edgewater. WP&L is in the process of analyzing the allegations and has begun discussions with the Sierra Club. Integrys Energy Group is reviewing the allegations but is currently unable to predict the impact on its consolidated financial statements.

Columbia and Edgewater Plants:

On December 14, 2009, the EPA issued an NOV to WP&L relative to its Nelson Dewey Plant and to WP&L and the other joint owners of the Columbia and Edgewater generation stations alleging violations of New Source Review requirements of the CAA for certain projects undertaken at those plants. WP&L is the operator of these plants and is in the process of analyzing the NOV. The joint owners met with the EPA to begin discussions on a possible resolution. Integrys Energy Group is also reviewing the allegations but is currently unable to predict the impact on its consolidated financial statements.

EPA Settlements with Other Utilities:

In response to the EPA's CAA enforcement initiative, several utilities elected to settle with the EPA, while others are in litigation. The fines and penalties (including the cost of supplemental environmental projects) associated with settlements involving comparably-sized facilities to Weston and Pulliam range between $7 million and $30 million. The regulatory interpretations upon which the lawsuits or settlements are based may change based on future court decisions made in the pending litigation.

If the EPA brings a claim against WPS, and if it were determined by a court that historic projects at WPS's Pulliam and Weston plants required either a state or federal CAA permit, WPS may, under the applicable statutes, be required, in order to resolve any such claim, to:

●	shut down any unit found to be operating in non-compliance,
●	install additional pollution control equipment,
●	pay a fine, and/or
●	conduct a supplemental environmental project.

In addition, under the CAA, citizen groups may pursue a claim. Except as noted above for the Columbia and Edgewater plants, WPS has no notice of such a claim.

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Weston Air Permits

In November 2004, the Sierra Club filed a petition with the WDNR under Section 285.61 of the Wisconsin Statutes seeking a contested case hearing on the construction permit issued for the Weston 4 generation station, which was a necessary predicate to plant construction under the pertinent air emission regulations (hereinafter referred to as the "Weston 4 air permit"). In February 2006, the administrative law judge affirmed the Weston 4 air permit with changes to the emission limits for sulfur dioxide and nitrogen oxide from the coal-fired boiler and particulate from the cooling tower. The changes, which were implemented by the WDNR in a revised permit issued on March 28, 2007, set limits that were more stringent than those originally set by the WDNR (hereinafter referred to as the "March 28, 2007 permit language").

On April 27, 2007, the Sierra Club filed a second petition requesting a contested case hearing regarding the March 28, 2007 permit language, which was granted by the WDNR. Both parties subsequently moved for summary judgment. In a decision issued on November 8, 2007, the administrative law judge granted WPS's motion for summary judgment in that proceeding, upholding the March 28, 2007 permit language. The Sierra Club filed petitions with the Dane County Circuit Court on April 27, 2007, and November 14, 2007, for judicial review of the Weston 4 air permit and the underlying proceedings before the administrative law judge. These two judicial review proceedings were consolidated by the court. On February 12, 2009, the court upheld the administrative law judge's final order, which affirmed the WDNR's actions. The Sierra Club appealed this decision and the parties have completed filing briefs and are awaiting the court's decision.

These activities did not stay the construction and startup of the Weston 4 facility or the administrative law judge's decision on the Weston 4 air permit. WPS believes that it has substantial defenses to the Sierra Club's challenges. Until the Sierra Club's challenges are finally resolved, Integrys Energy Group will not be able to make a final determination of the probable cost impact, if any, of compliance with any changes to the Weston 4 air permit on its future costs.

In December 2008, an NOV was issued to WPS by the WDNR alleging various violations of the air permits for Weston 4, as well as Weston 1 and 2. The alleged violations include an exceedance of the carbon monoxide and volatile organic compound limits at Weston 4, exceedances of the hourly sulfur dioxide limit in ten three-hour periods during startup/shutdown and during one separate event at Weston 4, and two that address baghouse operation at Weston 1 and 2. On July 22, 2009, an NOV was issued to WPS by the WDNR alleging violations of the opacity limits during two six-minute periods (one each at Weston 2 and 4) and of the sulfur dioxide average limit during one three-hour period at Weston 4. An NOV was issued to WPS in September 2009 relating to one event involving baghouse operation at Weston 1 and 2 that occurred in December 2008. A fourth NOV was issued on December 14, 2009, for a clerical error involving pages missing from a quarterly report. Corrective actions have been taken for the events in the four NOVs. An enforcement conference was held on January 7, 2009, for the December 2008 NOV and on August 26, 2009, for the July 2009 NOV. Discussions with the WDNR on the severity classification of the events continue. Management believes it is likely that the WDNR will refer the NOVs to the state Justice Department for enforcement. Management does not believe that these matters will have a material adverse impact on the consolidated financial statements of Integrys Energy Group.

In early November 2006, it came to the attention of WPS that previous ambient air quality computer modeling done by the WDNR for the Weston facility (and other nearby air sources) did not take into account the emissions from the existing Weston 3 facility for purposes of evaluating air quality increment consumption under the required PSD. WPS believes it has undertaken and completed corrective measures to address any identified modeling issues and anticipates issuance of a revised Title V permit that will resolve this issue. Integrys Energy Group currently is not able to make a final determination of the probable cost impact of this issue, if any.

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Columbia Air Permit

The renewal of the Title V air permit for the Columbia generation station, jointly owned by WP&L, MG&E, and WPS and operated by WP&L, was issued by the WDNR on September 2, 2008. On October 8, 2009, the EPA issued an order objecting to the Title V air permit. The order responds to a petition filed by the Sierra Club and determined that a project in 2006 to replace the economizer, final superheater, and related components on Unit 1 should have been permitted as a "major modification." The order directs the WDNR to resolve the EPA's objections within 90 days and "terminate, modify, or revoke and reissue" the Title V permit accordingly. It is not known how the WDNR will respond to the order.

Mercury and Interstate Air Quality Rules

Mercury

The State of Wisconsin's mercury rule, Chapter NR 446, requires a 40% reduction from the 2002 through 2004 baseline mercury emissions in Phase I, beginning January 1, 2010, through the end of 2014. In Phase II, which begins in 2015, electric generating units above 150 megawatts will be required to reduce mercury emissions by 90%. Reductions can be phased in and the 90% target can be delayed until 2021 if additional sulfur dioxide and nitrogen oxide reductions are implemented. By 2015, electric generating units above 25 megawatts but less than 150 megawatts must reduce their mercury emissions to a level defined by the BACT rule. WPS estimates capital costs of approximately $19 million for Phase I and Phase II, which includes estimates for both wholly owned and jointly owned plants, to achieve the required reductions. The capital costs are expected to be recovered in future rate cases. Because of the vacatur of the federal mercury control and monitoring rule in February 2008, the EPA is reviewing options for a new rulemaking and is expected to issue a draft rule in 2010.

Sulfur Dioxide and Nitrogen Oxide

The EPA issued the Clean Air Interstate Rule (CAIR) in 2005. CAIR was originally intended to reduce sulfur dioxide and nitrogen oxide emissions from utility boilers located in 29 states, including Wisconsin, Michigan, Pennsylvania, and New York. The first phase of CAIR required about a 50% reduction beginning in 2009 for nitrogen oxide and beginning in 2010 for sulfur dioxide. The second phase required about a 65% reduction in emissions of both pollutants by 2015. The State of Wisconsin's rule to implement CAIR, which incorporates the cap and trade approach, has been forwarded to the EPA for final review.

On July 11, 2008, the Court of Appeals issued a decision vacating CAIR, the EPA appealed, and in December 2008, the Court of Appeals reversed the CAIR vacatur and CAIR was reinstated. The Court of Appeals directed the EPA to address the deficiencies noted in its July 11, 2008 ruling, and the EPA has indicated they expect to issue a draft revised CAIR rule for comment in 2010. As a result of the Court of Appeals' decision, CAIR is in place for 2010. WPS has not acquired any nitrogen oxide allowances for vintage years beyond 2010 other than those allocated by the EPA, and does not expect any material impact as a result of the vacatur and subsequent reinstatement of CAIR.

The reinstatement of CAIR also affected the status of the Best Available Retrofit Technology (BART) rule, which is a rule that addresses regional haze and visibility. The WDNR is evaluating whether air quality improvements under CAIR will be adequate to demonstrate compliance with BART.

For planning purposes, it is still assumed that additional sulfur dioxide and nitrogen oxide controls will be needed on existing units. The installation of any controls will need to be scheduled as part of WPS's long-term maintenance plan for its existing units. As such, controls may need to be installed before 2015. On a preliminary basis, and assuming controls are still required, WPS estimates capital costs of $596 million, which includes estimates for both wholly owned and jointly owned plants, in order to meet an assumed 2015 compliance date. This estimate is based on costs of current control technology and current information regarding the final state and federal rules. The capital costs are anticipated to be recovered in future rate cases.

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Manufactured Gas Plant Remediation

Integrys Energy Group's natural gas utilities, their predecessors, and certain former affiliates operated facilities in the past at multiple sites for the purpose of manufacturing and storing manufactured gas. In connection with manufacturing and storing manufactured gas, waste materials were produced that may have resulted in soil and groundwater contamination at these sites. Under certain laws and regulations relating to the protection of the environment, Integrys Energy Group's natural gas utilities are required to undertake remedial action with respect to some of these materials.

Integrys Energy Group's natural gas utilities are responsible for the environmental impacts at 55 manufactured gas plant sites located in Wisconsin, Michigan, and Illinois. All are former regulated utility sites and are being remediated, with costs charged to existing ratepayers at WPS, MGU, PGL, and NSG. Twenty of these sites have been transferred to the EPA Superfund Alternative Sites Program. Under the EPA's program, the remedy decisions at these sites will be based on risk-based criteria typically used at Superfund sites. Integrys Energy Group estimated and accrued for $657.7 million of future undiscounted investigation and cleanup costs for all sites as of December 31, 2009. Integrys Energy Group may adjust these estimates in the future, contingent upon remedial technology, regulatory requirements, remedy determinations, and any claims of natural resource damages. Integrys Energy Group recorded a regulatory asset of $673.8 million, which is net of insurance recoveries received of $56.9 million, related to the expected recovery of both deferred expenditures and estimated future expenditures as of December 31, 2009.

Integrys Energy Group's natural gas utilities are coordinating the investigation and cleanup of the manufactured gas plant sites subject to EPA jurisdiction under what is called a "multi-site" program. This program involves prioritizing the work to be done at the sites, preparation and approval of documents common to all of the sites, and utilization of a consistent approach in selecting remedies.

The EPA identified NSG as a potentially responsible party (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA), at the Waukegan Coke Plant Site located in Waukegan, Illinois (Waukegan Site). The Waukegan Site is part of the Outboard Marine Corporation (OMC) Superfund Site. The EPA also identified OMC, General Motors Corporation (GM), and certain other parties as PRPs at the Waukegan Site. NSG and the other PRPs are parties to a consent decree that requires NSG and GM, jointly and severally, to perform the remedial action and establish and maintain financial assurance of $27.0 million. The EPA reduced the financial assurance requirement to $21.0 million to reflect completion of the soil component of the remedial action in August 2005. NSG has met its financial assurance requirement in the form of a net worth test while GM met the requirement by providing a performance and payment bond in favor of the EPA. As a result of the GM bankruptcy filing, the EPA has contacted the surety and the surety has stated that it will provide the EPA access to the surety bond funds which are expected to fund a significant portion of GM's liability. The potential exposure related to the GM bankruptcy that is not expected to be covered by the bond proceeds has been reflected in the accrual identified above.

Management believes that any costs incurred for environmental activities relating to former manufactured gas plant operations that are not recoverable through contributions from other entities or from insurance carriers have been prudently incurred and are, therefore, recoverable through rates for WPS, MGU, PGL, and NSG. Accordingly, management believes that the costs incurred in connection with former manufactured gas plant operations will not have a material adverse effect on the consolidated financial statements of Integrys Energy Group.

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Flood Damage

In May 2003, a fuse plug at the Silver Lake reservoir owned by UPPCO was breached, resulting in subsequent flooding downstream on the Dead River, located in the Upper Peninsula of Michigan. All litigation matters have been resolved. All environmental claims have been resolved with the State of Michigan, and a Consent Judgment on the environmental matters was filed and approved in June 2009.

As part of a settlement agreement with the MPSC staff and interveners in UPPCO's 2009 Power Supply Cost Recovery (PSCR) case, $0.6 million of replacement power costs was deemed not recoverable and was recorded in operating and maintenance expense in the first quarter of 2009. This settlement has been approved by the MPSC.

Greenhouse Gases

There is increasing concern over the issue of climate change and the effect of greenhouse gas emissions, in particular from the combustion of fossil fuels. Integrys Energy Group is evaluating both the technical and cost implications that may result from future state, regional, or federal greenhouse gas regulatory programs. This evaluation indicates it is probable that any regulatory program which caps emissions or imposes a carbon tax will increase costs for Integrys Energy Group and its customers. The greatest impact is likely to be on fossil fuel-fired generation, with a less significant impact on natural gas storage and distribution operations. Efforts are underway within the utility industry to find a feasible method for capturing carbon dioxide from pulverized coal-fired units and to develop cleaner ways to burn coal. The use of alternate fuels is also being explored by the industry, but there are many cost and availability issues. Recently, efforts have been initiated to develop state and regional greenhouse gas programs, to create federal legislation to limit carbon dioxide emissions, and to create national or state renewable portfolio standards. Some examples of these efforts are the Waxman-Markey bill, which passed the United States House of Representatives; the Kerry-Boxer draft bill, which was introduced in the United States Senate; and the Wisconsin Clean Energy Jobs Act, which has been introduced in the Wisconsin legislature to implement recommendations from the Governor’s Global Warming Task Force. The Wisconsin Clean Energy Jobs Act establishes statewide goals for the reduction of greenhouse gas emissions and requires certain actions, including an increased renewable portfolio standard, to meet those goals. In addition, in April 2009, the EPA declared carbon dioxide and several other greenhouse gases to be a danger to public health and welfare, which is the first step towards the EPA potentially regulating greenhouse gases under the CAA. A risk exists that such legislation or regulation will increase the cost of energy. However, Integrys Energy Group believes the capital expenditures being made at its generation units are appropriate under any reasonable mandatory greenhouse gas program and that future expenditures related to control of greenhouse gas emissions or renewable portfolio standards by its regulated electric utilities will be recoverable in rates. Integrys Energy Group will continue to monitor and manage potential risks and opportunities associated with future greenhouse gas legislative or regulatory actions.

Escanaba Water Permit Issues

UPPCO operates the Escanaba Generating Station (EGS) under contract with its owner, the City of Escanaba (City). While the City owns the water permits for EGS, UPPCO's personnel provide testing and certification of waste water discharges. In September 2008, UPPCO became aware of potential water discharge permit violations regarding reported pH and oil and grease readings at EGS. Corrective actions were implemented at the plant, notification was provided to the City, and UPPCO self reported the potential permit violations to the Michigan Department of Environmental Quality (MDEQ). UPPCO filed a final report with the MDEQ on November 25, 2008, and a copy was sent to the City.

In March 2009, MDEQ began its investigation into this matter. Depending upon the results of the MDEQ's review of the information provided by UPPCO, the MDEQ, in consultation with the Michigan Attorney General's Office, may assess a fine and/or seek criminal charges against UPPCO, assess a fine and/or seek criminal charges against the former manager who certified the reports, and/or close out the

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investigation. Although a specific date of resolution is unknown, UPPCO has responded to all information requests from the MDEQ.

Natural Gas Charge Reconciliation Proceedings and Related Matters

Natural Gas Charge Settlement and Pending Natural Gas Charge Cases

For PGL and NSG, the ICC conducts annual proceedings regarding the reconciliation of revenues from the natural gas charge and related natural gas costs. The natural gas charge represents the cost of natural gas and transportation and storage services purchased by PGL and NSG, as well as gains, losses, and costs incurred under PGL's and NSG's hedging program (Gas Charge). In these proceedings, interested parties review the accuracy of the reconciliation of revenues and costs and the prudence of natural gas costs recovered through the Gas Charge. If the ICC were to find that the reconciliation was inaccurate or any natural gas costs were imprudently incurred, the ICC would order PGL and NSG to refund the affected amount to customers through subsequent Gas Charge filings.

In March 28, 2006 orders, the ICC adopted a settlement agreement related to fiscal years 2001 through 2004 natural gas costs. Under certain provisions of the settlement agreement, PEC agreed to: (1) provide the Illinois Attorney General (AG) and the City of Chicago (Chicago) up to $30.0 million for conservation and weatherization programs for which PGL and NSG may not seek rate recovery; (2) implement a reconnection program for certain customers and; (3) internal audits and an external audit of natural gas supply practices.

With respect to the conservation and weatherization funding, as of December 31, 2009, $10.2 million remained unpaid, of which $5.2 million was included in other current liabilities, and $5.0 million was included in other long-term liabilities. Under the reconnection program, PGL and NSG took all steps they believed were required by the agreement. The AG and Chicago have indicated that they believe the terms of the reconnection program are broader. Management believes that PGL and NSG have fully complied with the reconnection program obligations of the settlement agreement; however, PGL, NSG, the AG and Chicago are discussing how to resolve this disagreement.

Four of the five annual internal audits required by the settlement agreement have been completed. An auditor hired by the ICC conducted the external audit, and filed its report on April 10, 2008. On March 31, 2009, PGL and NSG completed their responses to the auditor's recommendations.

The fiscal 2006 Gas Charge reconciliation cases were initiated on November 21, 2006. The ICC staff and interveners (the AG, the Citizens Utility Board, and Chicago, filing jointly) each filed testimony recommending disallowances for PGL and NSG for a bank natural gas adjustment similar to that addressed in the fiscal 2005 Gas Charge reconciliation cases, which PGL and NSG did not contest. In addition, the interveners recommended a disallowance for PGL of $13.9 million (reduced to $11.0 million in their brief) associated with PGL's provision of interstate hub services. The ICC staff does not support the interveners' proposal, and PGL does not believe the proposal has merit. A hearing for the PGL and NSG cases was held on December 11, 2008. For PGL, briefing concluded February 27, 2009, and the administrative law judge has not yet prepared a proposed order. For NSG, there were no contested issues, and the parties filed an agreed form of order in January 2009.

Class Action

In February 2004, a purported class action suit was filed in Cook County Circuit Court against PEC, PGL, and NSG by customers of PGL and NSG, alleging among other things, violation of the Illinois Consumer Fraud and Deceptive Business Practices Act related to matters at issue in the utilities' fiscal year 2001 Gas Charge reconciliation proceedings. In the suit, Alport et al. v. Peoples Energy Corporation, the plaintiffs seek disgorgement and punitive damages. PGL and NSG have been dismissed as defendants and the only remaining counts of the suit allege violations of the Consumer Fraud and Deceptive Business Practices Act by PEC and that PEC acted in concert with others to commit a tortious act. PEC denies the allegations and is vigorously defending the suit. On November 19, 2009, the court entered an order

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certifying a class composed of customers of PGL and NSG during the period April 26, 2000, through September 30, 2002. On December 17, 2009, PEC filed a Petition for Leave to Appeal to the Appellate Court challenging class certification and on February 19, 2010, this appeal was denied.

NOTE 17--GUARANTEES

As part of normal business, Integrys Energy Group and its subsidiaries enter into various guarantees providing financial or performance assurance to third parties on behalf of certain subsidiaries. These guarantees are entered into primarily to support or enhance the creditworthiness otherwise attributed to a subsidiary on a stand-alone basis, thereby facilitating the extension of sufficient credit to accomplish the subsidiaries' intended commercial purposes.

Most of the guarantees issued by Integrys Energy Group consist of inter-company guarantees of subsidiaries' obligations or performance by the subsidiaries under certain contractual commitments. As such, these guarantees are excluded from the recognition and measurement requirements of the Guarantees Topic of the FASB ASC.

The following table shows outstanding guarantees at Integrys Energy Group:


			Expiration
(Millions)	Total Amounts Committed at December 31, 2009		Less Than 1 Year		1 to 3 Years		4 to 5 Years		Over 5 Years
Guarantees supporting commodity transactions of subsidiaries (1)	$	981.4	$	773.8	$	74.5	$	31.0	$	102.1
Standby letters of credit (2)		130.8		119.4		11.3		0.1		-
Surety bonds (3)		3.1		3.1		-		-		-
Other guarantees (4)		7.6		1.4		-		-		6.2
Total guarantees	$	1,122.9	$	897.7	$	85.8	$	31.1	$	108.3

(1)

Consists of parental guarantees of $803.9 million to support the business operations of Integrys Energy Services; $92.7 million and $74.8 million, respectively, related to natural gas supply at MERC and MGU; and $5.0 million at both PEC and IBS to support business operations. These guarantees are not reflected on the Consolidated Balance Sheets.

(2)

Composed of $120.4 million issued to support Integrys Energy Services' operations; $4.8 million related to letters of credit at WPS; $4.3 million issued for workers compensation coverage in Illinois; and $1.3 million related to letters of credit at UPPCO, MGU, MERC, PGL, and NSG. These amounts are not reflected on the Consolidated Balance Sheets.

(3)	Primarily for workers compensation coverage and obtaining various licenses, permits, and rights of way. Surety bonds are not included on the Consolidated Balance Sheets.

(4)

Consists of a $5.0 million environmental indemnification provided by Integrys Energy Services related to the sale of the Stoneman generation facility, under which Integrys Energy Services expects that the likelihood of required performance is remote; and $2.6 million related to other indemnifications and workers compensation coverage.

Integrys Energy Group has provided total parental guarantees of $958.4 million on behalf of Integrys Energy Services as shown in the table below. Integrys Energy Group's exposure under these guarantees related to open transactions at December 31, 2009, was approximately $513 million.

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(Millions)	December 31, 2009
Guarantees supporting commodity transactions	$	803.9
Standby letters of credit		120.4
Guarantees of subsidiary debt		27.0	*
Surety bonds		1.5
Other		5.6
Total guarantees	$	958.4

*	Consists of outstanding debt at an Integrys Energy Services' subsidiary, which is not included in the total Integrys Energy Group guarantee amounts above, because the debt is reflected on the Consolidated Balance Sheets.

NOTE 18--EMPLOYEE BENEFIT PLANS

Defined Benefit Plans

On September 30, 2008, the PEC Service Annuity System was merged into the PEC Retirement Plan, which was then renamed the Integrys Energy Group Retirement Plan. On December 31, 2008, the WPS Retirement Plan was merged into the Integrys Energy Group Retirement Plan. The two plan mergers had no effect on the level of plan benefits provided to participants or the management of plan assets. Integrys Energy Group and its subsidiaries now maintain one non-contributory, qualified pension plan covering substantially all employees, as well as several unfunded nonqualified retirement plans. In addition, Integrys Energy Group and its subsidiaries offer multiple other postretirement benefit plans to employees. The benefits for a portion of these plans are funded through irrevocable trusts, as allowed for income tax purposes.

Integrys Energy Group also currently offers medical, dental, and life insurance benefits to active employees and their dependents. Integrys Energy Group expenses the costs of these benefits as incurred.

During the third quarter of 2007, Integrys Energy Group made a series of changes to certain of its retirement benefit plans. Specifically, the changes included:

●	Closure of the defined benefit pension plans to non-union new hires, effective January 1, 2008;
●	A freeze in defined benefit pension service accruals for non-union employees, effective January 1, 2013;
●	A freeze in compensation amounts used for determining defined benefit pension amounts for non-union employees, effective January 1, 2018;
●	Revised eligibility requirements for retiree medical benefits for employees hired on or after January 1, 2008, and the introduction of an annual premium reduction credit for employees eligible to retire after December 31, 2012; and
●	Closure of the retiree dental and life benefit programs to all new hires, effective January 1, 2008, and elimination of these benefits for any existing employees who are not eligible to retire before December 31, 2012.

As a result of the changes described above, Integrys Energy Group remeasured certain of its pension and other postretirement benefit obligations as of August 1, 2007. The curtailment gain recognized as a result of the plan design changes was not significant and is included in the net periodic benefit cost table below.

A second remeasurement occurred on October 1, 2007, because the ratification of a union contract resulted in changes to a postretirement medical plan. The changes did not result in a curtailment.

Effective May 1, 2008, and July 1, 2008, the defined benefit pension plans were closed to new union hires at PGL and NSG, respectively. Effective April 19, 2009, and December 18, 2009, the defined benefit pension plans were closed to new union hires at UPPCO and WPS, respectively. In addition, changes in

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the WPS union contract resulted in a plan amendment in December 2009. Effective January 15, 2010, the defined benefit pension plans were closed to new Local 12295 union hires at MGU.

The following tables provide a reconciliation of the changes in the plans' benefit obligations and fair value of assets during 2009 and 2008.

	Pension Benefits						Other Benefits
(Millions)	2009			2008			2009			2008
Reconciliation of benefit obligation
Obligation at January 1	$	1,230.5		$	1,210.2		$	432.7		$	408.6
Service cost		38.9			38.4			14.3			15.7
Interest cost		80.9			76.2			26.5			26.4
Plan amendments		3.0			-			-			-
Plan curtailment		0.2	*		-			-			-
Actuarial (gain) loss, net		78.6			12.1			23.2			(12.5	)
Participant contributions		-			-			-			1.8
Benefit payments		(94.7	)		(106.4	)		(23.2	)		(22.1	)
Federal subsidy on benefits paid		-			-			2.0			2.0
Other		-			-			-			12.8
Obligation at December 31	$	1,337.4		$	1,230.5		$	475.5		$	432.7

Reconciliation of fair value of plan assets
Fair value of plan assets at January 1	$	830.3		$	1,219.5		$	191.1		$	248.3
Actual return on plan assets		174.5			(310.6	)		33.1			(55.6	)
Employer contributions		23.5			27.8			29.8			13.0
Participant contributions		-			-			-			1.7
Benefit payments		(94.7	)		(106.4	)		(23.2	)		(22.1	)
Other		-			-			-			5.8
Fair value of plan assets at December 31	$	933.6		$	830.3		$	230.8		$	191.1

In connection with the reduction in workforce discussed in Note 3, "Restructuring Expense," an insignificant curtailment loss was recognized. The curtailment is included in the restructuring expense line item on the Consolidated Statement of Income, and is not included in the net periodic benefit expense table below.

Amounts recognized on Integrys Energy Group's Consolidated Balance Sheets at December 31 related to the funded status of the benefit plans consisted of:

	Pension Benefits				Other Benefits
(Millions)	2009		2008		2009		2008
Current liabilities	$	7.5	$	5.3	$	0.3	$	-
Noncurrent liabilities		396.3		394.9		244.4		241.6
Total liabilities	$	403.8	$	400.2	$	244.7	$	241.6

The accumulated benefit obligation for all defined benefit pension plans was $1.1 billion at both December 31, 2009, and December 31, 2008. Information for pension plans with an accumulated benefit obligation in excess of plan assets is presented in the following table.

	December 31
(Millions)	2009		2008
Projected benefit obligation	$	1,337.4	$	1,230.5
Accumulated benefit obligation		1,147.0		1,103.5
Fair value of plan assets		933.6		830.3

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The following table shows the amounts that had not yet been recognized in Integrys Energy Group's net periodic benefit cost as of December 31. Amounts related to the nonregulated entities are included in accumulated other comprehensive loss, while amounts related to the utilities are recorded as regulatory assets or liabilities.

	Pension Benefits				Other Benefits
(Millions)	2009		2008		2009			2008
Accumulated other comprehensive loss (pre-tax)
Net actuarial loss	$	36.2	$	25.7	$	-		$	0.7
Prior service costs (credits)		0.9		1.2		(1.8	)		(2.2	)
Total	$	37.1	$	26.9	$	(1.8	)	$	(1.5	)
Net regulatory assets
Net actuarial loss	$	368.6	$	384.3	$	66.2		$	56.1
Prior service costs (credits)		21.1		22.9		(23.4	)		(26.9	)
Transition obligation		-		-		0.8			1.1
Merger related regulatory adjustment		71.5		91.5		38.7			42.0
Regulatory deferral *		4.5		-		(1.3	)		-
Total	$	465.7	$	498.7	$	81.0		$	72.3

*	The PSCW authorized recovery for net increased 2009 WPS pension and other postretirement benefit costs related to plan asset losses that occurred in 2008. Amortization and recovery of these deferred costs will occur in 2010.

Integrys Energy Group recorded the PEC pension assets acquired and liabilities assumed at fair value at the February 2007 acquisition date. However, through 2009, PGL and NSG continued to have rates set based on their historical basis of accounting, including amortizations of prior service costs (credits), actuarial losses, and transition obligations, which were recognized on the consolidated financial statements as regulatory assets at the purchase date. The amount reflected in net periodic benefit cost in the table below is based on the amount used in the rate-setting process for PGL and NSG. The difference in the basis of accounting is shown as a merger related regulatory adjustment in the table above.

The estimated net losses and prior service costs for defined benefit pension plans that will be amortized as a component of net periodic benefit cost during 2010 are $11.5 million and $5.3 million, respectively. The estimated net losses, prior service credits, and transition obligation for other postretirement benefit plans that will be amortized as a component of net periodic benefit cost during 2010 are $2.8 million, $3.8 million, and $0.3 million, respectively.

The following table presents the components of the consolidated net periodic benefit costs for the plans:

	Pension Benefits									Other Benefits
(Millions)	2009			2008			2007			2009			2008			2007
Net periodic benefit cost
Service cost	$	38.9		$	38.4		$	39.7		$	14.3		$	15.7		$	15.4
Interest cost		80.9			76.2			70.4			26.5			26.4			24.5
Expected return on plan assets		(92.5	)		(101.0	)		(89.4	)		(17.7	)		(19.0	)		(17.5	)
Plan curtailment gain		-			-			-			-			-			(0.1	)
Amortization of transition obligation		-			-			-			0.3			0.3			0.4
Amortization of prior service cost (credit)		5.0			5.1			5.1			(3.8	)		(3.8	)		(2.6	)
Amortization of net actuarial (gain) loss		1.9			0.7			4.8			(1.5	)		-			1.8
Amortization of merger related regulatory adjustment		20.0			9.6			14.2			3.3			2.1			0.8
Regulatory deferral *		(4.5	)		-			-			1.3			-			-
Net periodic benefit cost	$	49.7		$	29.0		$	44.8		$	22.7		$	21.7		$	22.7

*	The PSCW authorized recovery for net increased 2009 WPS pension and other postretirement benefit costs related to plan asset losses that occurred in 2008. Amortization and recovery of these deferred costs will occur in 2010.

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Assumptions – Pension and Other Postretirement Benefit Plans

The weighted-average assumptions used at December 31 to determine benefit obligations for the plans were as follows:

	Pension Benefits						Other Benefits
	2009			2008			2009			2008
Discount rate		6.15	%		6.45	%		5.96	%		6.48	%
Rate of compensation increase		4.26	%		4.26	%		N/A			N/A
Assumed medical cost trend rate (under age 65)		N/A			N/A			8.0	%		9.0	%
Ultimate trend rate		N/A			N/A			5.0	%		5.0	%
Ultimate trend rate reached in		N/A			N/A		2013			2013
Assumed medical cost trend rate (over age 65)		N/A			N/A			8.5	%		9.5	%
Ultimate trend rate		N/A			N/A			5.5	%		5.5	%
Ultimate trend rate reached in		N/A			N/A		2013			2013
Assumed dental cost trend rate		N/A			N/A			5.0	%		5.0	%

The weighted-average assumptions used to determine net periodic benefit cost for the plans were as follows for the years ended December 31:

	Pension Benefits
	2009			2008			2007
Discount rate		6.45	%		6.40	%		5.88	%
Expected return on assets		8.50	%		8.50	%		8.50	%
Rate of compensation increase		4.26	%		4.27	%		5.50	%

	Other Benefits
	2009			2008			2007
Discount rate		6.48	%		6.40	%		5.79	%
Expected return on assets		8.50	%		8.50	%		8.50	%
Assumed medical cost trend rate (under age 65)		9.0	%		10.0	%		8.0	%
Ultimate trend rate		5.0	%		5.0	%		5.0	%
Ultimate trend rate reached in	2013			2013			2010
Assumed medical cost trend rate (over age 65)		9.5	%		10.5	%		8.0%-10.0	%
Ultimate trend rate		5.5	%		5.5	%		5.0%-6.5	%
Ultimate trend rate reached in	2013			2013				2010-2011
Assumed dental cost trend rate		5.0	%		5.0	%		5.0	%

Integrys Energy Group establishes its expected return on asset assumption based on consideration of historical and projected asset class returns, as well as the target allocations of the benefit trust portfolios.

Assumed health care cost trend rates have a significant effect on the amounts reported by Integrys Energy Group for the health care plans. For the year ended December 31, 2009, a one-percentage-point change in assumed health care cost trend rates would have had the following effects:

	One-Percentage-Point
(Millions)	Increase		Decrease
Effect on total of service and interest cost components of net periodic postretirement health care benefit cost	$	5.8	$	(4.8	)
Effect on the health care component of the accumulated postretirement benefit obligation		58.1		(48.4	)

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Pension and Other Postretirement Benefit Plan Assets

Integrys Energy Group's investment policy includes various guidelines and procedures designed to ensure assets are invested in an appropriate manner to meet expected future benefits to be earned by participants. The investment guidelines consider a broad range of economic conditions. Central to the policy are target allocation ranges by major asset categories. The policy is established and administered in a manner that is compliant at all times with applicable regulations.

The objectives of the target allocations are to maintain investment portfolios that diversify risk through prudent asset allocation parameters and to achieve asset returns that meet or exceed the plans' actuarial assumptions and that are competitive with like instruments employing similar investment strategies. The portfolio diversification provides protection against significant concentrations of risk in the plan assets. The target asset allocations for pension plans and other postretirement plans that have significant assets are: 70% equity securities and 30% fixed income securities. Equity securities primarily include investments in large-cap and small-cap companies. Fixed income securities primarily include corporate bonds of companies from diversified industries, United States government securities, and mortgage-backed securities.

The Board of Directors has established the Employee Benefits Administrator Committee (composed of members of management) to manage the operations and administration of all benefit plans and trusts. The committee periodically reviews the asset allocation, and the portfolio is rebalanced when necessary.

The investments recorded at fair value in the pension and other postretirement benefit plan assets at December 31, 2009, by asset category were as follows. See Note 1(r), "Summary of Significant Accounting Policies – Fair Value," for information on the fair value hierarchy and the inputs used to measure fair value.

	Pension Plan Assets												Other Benefit Plan Assets
(Millions)	Level 1			Level 2			Level 3			Total			Level 1		Level 2		Level 3		Total
Asset Category
Cash and cash equivalents	$	2.1		$	32.9		$	-		$	35.0		$	-	$	20.1	$	-	$	20.1
Equity securities:
United States equity		261.7			171.3			-			433.0			48.0		39.6		-		87.6
International equity		31.0			144.3			-			175.3			-		26.9		-		26.9
Fixed income securities:
United States government		-			109.6			-			109.6			-		32.4		-		32.4
Foreign government		-			12.4			0.4			12.8			-		1.5		-		1.5
Corporate debt		-			124.9			2.9			127.8			0.9		31.6		-		32.5
Asset-backed securities		-			39.3			-			39.3			-		9.0		-		9.0
Real estate securities		-			-			24.9			24.9			-		-		-		-
Other		-			-			1.1			1.1			-		2.3		-		2.3
		294.8			634.7			29.3			958.8			48.9		163.4		-		212.3
401(h) other benefit plan assets invested as pension assets *		(0.8	)		(17.6	)		(0.1	)		(18.5	)		0.8		17.6		0.1		18.5
Total	$	294.0		$	617.1		$	29.2		$	940.3		$	49.7	$	181.0	$	0.1	$	230.8

*	Pension trust assets are used to pay other postretirement benefits as allowed under Internal Revenue Code Section 401(h).

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The following table sets forth a reconciliation of changes in the fair value of pension plan assets categorized as Level 3 measurements:

(Millions)	Foreign Government Debt			Corporate Debt			Asset-Backed Securities			Real Estate Securities			Other			Total
Beginning balance at December 31, 2008	$	0.7		$	1.8		$	0.1		$	35.8		$	1.5		$	39.9
Actual return on plan assets:
Relating to assets still held at the reporting date		0.8			1.1			-			(12.2	)		1.2			(9.1	)
Relating to assets sold during the period		-			(0.4	)		-			-			(0.5	)		(0.9	)
Purchases, sales, and settlements		0.1			0.7			-			1.3			(1.1	)		1.0
Transfers in and/or out of Level 3		(1.2	)		(0.3	)		(0.1	)		-			-			(1.6	)
Ending balance at December 31, 2009	$	0.4		$	2.9		$	-		$	24.9		$	1.1		$	29.3

Cash Flows Related to Pension and Other Postretirement Benefit Plans

Integrys Energy Group's funding policy is to contribute at least the minimum amounts that are required to be funded under the Employee Retirement Income Security Act, but not more than the maximum amounts that are currently deductible for income tax purposes. Integrys Energy Group expects to contribute $67.6 million to pension plans and $35.7 million to other postretirement benefit plans in 2010.

The following table shows the payments, reflecting expected future service, that Integrys Energy Group expects to make for pension and other postretirement benefits. In addition, the table shows the expected federal subsidies, provided under the Medicare Prescription Drug, Improvement and Modernization Act of 2003, that will partially offset other postretirement benefits.

(Millions)	Pension Benefits		Other Benefits		Federal Subsidies
2010	$	87.6	$	27.8	$	(2.2	)
2011		91.9		29.9		(2.4	)
2012		97.6		31.3		(2.6	)
2013		105.3		32.8		(2.7	)
2014		105.8		34.2		(2.9	)
2015-2019		640.7		206.5		(17.0	)

Defined Contribution Benefit Plans

Integrys Energy Group maintains 401(k) Savings Plans for substantially all full-time employees and matches a percentage of employee contributions through an ESOP or cash contribution up to certain limits. Certain union employees receive a contribution to their ESOP account regardless of their participation in the 401(k) Savings Plan. The ESOP held 3.4 million shares of Integrys Energy Group's common stock (market value of $140.8 million) at December 31, 2009. Certain employees participate in a discretionary profit-sharing contribution and/or cash match. Certain employees who are not eligible to participate in the defined benefit pension plan participate in a defined contribution pension plan, in which Integrys Energy Group contributes certain amounts to an employee's account based on the employee's wages, age, and years of service. Total costs incurred under all of these plans were $16.8 million in 2009, $17.4 million in 2008, and $14.4 million in 2007.

Integrys Energy Group maintains deferred compensation plans that enable certain key employees and non-employee directors to defer a portion of their compensation or fees on a pre-tax basis. Non-employee directors can defer up to 100% of their director fees. Compensation is generally deferred in the form of cash, indexed to certain investment options or Integrys Energy Group common stock with deemed dividends paid on the common stock automatically reinvested.

The deferred compensation arrangements for which distributions are made solely in Integrys Energy Group's common stock are classified as an equity instrument. Changes in the fair value of the deferred compensation obligation are not recognized. The deferred compensation obligation associated with Integrys Energy Group common stock was $24.2 million at December 31, 2009, and $23.7 million at December 31, 2008.

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The portion of the deferred compensation obligation associated with deferrals that allow for distribution in cash is classified as a liability on the Consolidated Balance Sheets and adjusted, with a charge or credit to expense, to reflect changes in the fair value of the deferred compensation obligation. The obligation classified within other long-term liabilities was $32.1 million at December 31, 2009, and $28.2 million at December 31, 2008. The costs incurred under this arrangement were $4.0 million in 2009, $1.9 million in 2008, and $2.3 million in 2007.

The deferred compensation programs are partially funded through shares of Integrys Energy Group's common stock that is held in a rabbi trust. The common stock held in the rabbi trust is classified as a reduction of equity in a manner similar to accounting for treasury stock. The total cost of Integrys Energy Group's common stock held in the rabbi trust was $17.2 million at December 31, 2009, and $16.3 million at December 31, 2008.

NOTE 19--PREFERRED STOCK OF SUBSIDIARY

Integrys Energy Group's subsidiary, WPS, has 1,000,000 authorized shares of preferred stock with no mandatory redemption and a $100 par value. Outstanding shares were as follows at December 31:

(Millions, except share amounts)
			2009				2008
Series			Shares Outstanding		Carrying Value		Shares Outstanding		Carrying Value
	5.00	%		130,692	$	13.1		130,695	$	13.1
	5.04	%		29,898		3.0		29,898		3.0
	5.08	%		49,905		5.0		49,923		5.0
	6.76	%		150,000		15.0		150,000		15.0
	6.88	%		150,000		15.0		150,000		15.0
Total				510,495	$	51.1		510,516	$	51.1

All shares of preferred stock of all series are of equal rank except as to dividend rates and redemption terms. Payment of dividends from any earned surplus or other available surplus is not restricted by the terms of any indenture or other undertaking by WPS. Each series of outstanding preferred stock is redeemable in whole or in part at WPS's option at any time on 30 days' notice at the respective redemption prices. WPS may not redeem less than all, nor purchase any, of its preferred stock during the existence of any dividend default.

In the event of WPS's dissolution or liquidation, the holders of preferred stock are entitled to receive (a) the par value of their preferred stock out of the corporate assets other than profits before any of such assets are paid or distributed to the holders of common stock and (b) the amount of dividends accumulated and unpaid on their preferred stock out of the surplus or net profits before any of such surplus or net profits are paid to the holders of common stock. Thereafter, the remainder of the corporate assets, surplus, and net profits shall be paid to the holders of common stock.

The preferred stock has no pre-emptive, subscription, or conversion rights, and has no sinking fund provisions.

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NOTE 20--COMMON EQUITY

Integrys Energy Group's reconciliation of shares outstanding at December 31, 2009, and 2008, was as follows:

	2009					2008
	Shares		Average Cost			Shares		Average Cost
Common stock issued		76,418,843					76,430,037
Less:
Treasury shares		-	$	-			7,000	$	25.19
Deferred compensation rabbi trust		402,839	$	42.58	(1)		367,238	$	44.36	(1)
Restricted stock		35,861	$	55.33	(2)		63,031	$	54.81	(2)
Total shares outstanding		75,980,143					75,992,768

(1)

Based on Integrys Energy Group's stock price on the day the shares entered the deferred compensation rabbi trust

. Shares paid out of the trust are valued at the average cost of shares in the trust.

(2)	Based on the grant date fair value of the restricted stock.

During 2009 and 2008, Integrys Energy Group purchased shares of its common stock on the open market to meet the requirements of its Stock Investment Plan and certain stock-based employee benefit and compensation plans. Prior to 2008, Integrys Energy Group issued new shares of common stock under these plans. These stock issuances increased equity $45.6 million in 2007.

Pursuant to the PEC merger, shareholders of PEC received 0.825 shares of Integrys Energy Group (then known as WPS Resources) common stock, $1 par value, for each share of PEC common stock, no par value, that they held immediately prior to the merger. This resulted in an increase in common stock outstanding of 31,938,491 shares and increased equity $1.6 billion as of December 31, 2007.

Integrys Energy Group's common stock shares
Balance at December 31, 2006	43,387,460
Shares issued
Merger with PEC	31,938,491
Stock Investment Plan	529,935
Stock-based compensation	444,041
Restricted stock, net	93,339
Rabbi trust shares	40,829
Balance at December 31, 2007	76,434,095
Restricted stock shares cancelled	(4,058	)
Balance at December 31, 2008	76,430,037
Restricted stock shares cancelled	(11,194	)
Balance at December 31, 2009	76,418,843

Earnings Per Share

In the first quarter of 2009, Integrys Energy Group adopted FASB Staff Position (FSP) No. EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities," (now incorporated as part of FASB ASC 260-10). This FSP had no effect on previously reported basic earnings (loss) per share.

Basic earnings (loss) per share is computed by dividing net income (loss) attributed to common shareholders by the weighted average number of common stock shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (loss) attributed to common shareholders by the weighted average number of common stock shares outstanding during the period, adjusted for the exercise and/or conversion of all potentially dilutive securities. Such dilutive items include in-the-money stock options, performance stock rights, and restricted stock. The effects of an insignificant

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number of in-the-money securities were not included in the computation for 2009, because there was a net loss during the period, which would cause the impact to be anti-dilutive. The 2009 calculation of diluted earnings per share also excluded 2.7 million out-of-the-money stock options that had an anti-dilutive effect. The calculation of diluted earnings per share for 2008 excluded 2.2 million out-of-the-money stock options that had an anti-dilutive effect. The calculation of diluted earnings per share for 2007 excluded an insignificant number of stock options that had an anti-dilutive effect. The following table reconciles the computation of basic and diluted earnings (loss) per share:

(Millions, except per share amounts)	2009			2008			2007

Numerator:
Net income (loss) from continuing operations	$	(71.6	)	$	124.7		$	181.0
Discontinued operations, net of tax		2.8			4.7			73.3
Preferred stock dividends of subsidiary		(3.1	)		(3.1	)		(3.1	)
Noncontrolling interest in subsidiaries		1.0			0.1			0.1
Net income (loss) attributed to common shareholders	$	(70.9	)	$	126.4		$	251.3

Denominator:
Average shares of common stock – basic		76.8			76.7			71.6
Effect of dilutive securities
Stock-based compensation		-			0.3			0.2
Average shares of common stock – diluted		76.8			77.0			71.8

Earnings (loss) per common share
Basic	$	(0.92	)	$	1.65		$	3.51
Diluted		(0.92	)		1.64			3.50

Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive loss, net of tax at December 31, 2009, and 2008, were:

(Millions)	2009			2008
Cash flow hedges (1)	$	(24.9	)	$	(56.4	)
Unrecognized pension and other postretirement benefit costs (2)		(21.5	)		(14.8	)
Foreign currency translation		2.4			(1.7	)
Available-for-sale securities (3)		-			0.1
Total accumulated other comprehensive loss	$	(44.0	)	$	(72.8	)

(1)	Includes tax benefits of $18.6 million and $33.8 million at December 31, 2009, and 2008, respectively.

(2)	Includes tax benefits of $13.8 million and $10.6 million at December 31, 2009, and 2008, respectively.

(3)	Includes tax of $3.4 million at December 31, 2008.

NOTE 21--STOCK-BASED COMPENSATION

In May 2007, Integrys Energy Group's shareholders approved the 2007 Omnibus Incentive Compensation Plan (2007 Omnibus Plan). Under the provisions of the 2007 Omnibus Plan, the number of shares of stock that may be issued in satisfaction of plan awards may not exceed 3,500,000, and no more than 1,500,000 shares of stock can be granted as performance shares or restricted stock. No additional awards will be issued under prior plans, although the plans continue to exist for purposes of the existing outstanding stock-based compensation. At December 31, 2009, stock options, performance stock rights, restricted shares and restricted share units, and stock appreciation rights were outstanding under the various plans.

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Stock Options

Under the provisions of the 2007 Omnibus Plan, no single employee who is the chief executive officer of Integrys Energy Group or any of the other four highest compensated officers of Integrys Energy Group and its subsidiaries can be granted options for more than 1,000,000 shares during any calendar year. No stock options will have a term longer than ten years. The exercise price of each stock option is equal to the fair market value of the stock on the date the stock option is granted. Generally, one-fourth of the stock options granted vest and become exercisable each year on the anniversary of the grant date.

The fair values of stock option awards granted were 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 dividend rate as well as historical dividend increase patterns. Integrys Energy Group's expected stock price volatility was estimated using its 10-year historical volatility. The following table shows the weighted-average fair values per stock option along with the assumptions incorporated into the valuation models:

	2009			2008			2007
Weighted-average fair value per option	$	3.83		$	4.52		$	7.80
Expected term	8-9 years			7 years			7 years
Risk-free interest rate		2.50%-2.78	%		3.40	%		4.65	%
Expected dividend yield		5.50	%		5.00	%		4.50	%
Expected volatility		19	%		17	%		17	%

Compensation cost recognized for stock options during the years ended December 31, 2009, 2008, and 2007, was $2.0 million, $2.6 million, and $1.8 million, respectively. Compensation cost capitalized during these same years was not significant. As of December 31, 2009, $1.5 million of compensation cost related to unvested and outstanding stock options was expected to be recognized over a weighted-average period of 2.4 years.

Cash received from option exercises during the year ended December 31, 2009, was not significant, and was $3.3 million and $14.0 million during the years ended December 31, 2008, and 2007, respectively. The tax benefit realized from these option exercises was not significant in 2009 and 2008, and was $2.3 million in 2007.

A summary of stock option activity for the year ended December 31, 2009, and information related to outstanding and exercisable stock options at December 31, 2009, 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, 2008		2,700,139	$	47.90
Granted		511,484		42.12
Exercised		33,659		32.64			$	0.3
Forfeited		44,101		52.14				-
Expired		577		43.10
Outstanding at December 31, 2009		3,133,286	$	47.06		6.10	$	2.3
Exercisable at December 31, 2009		2,006,897	$	47.29		4.80	$	2.3

The intrinsic value of options exercised was not significant during the year ended December 31, 2008, and was $4.4 million during the year ended December 31, 2007.

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 December 31, 2009. This is calculated as the difference between Integrys Energy Group's

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closing stock price on December 31, 2009, and the option exercise price, multiplied by the number of in-the-money stock options.

Performance Stock Rights

Performance stock rights vest over a three-year performance period and are paid out in shares of Integrys Energy Group's common stock. No single employee who is the chief executive officer of Integrys Energy Group or any of the other four highest compensated officers of Integrys Energy Group and its subsidiaries can receive a payout in excess of 250,000 performance shares during any calendar year. The number of shares paid out is calculated by multiplying a performance percentage by the number of outstanding stock rights at the completion of the vesting period. The performance percentage is based on the total shareholder return of Integrys Energy Group's common stock relative to the total shareholder return of a peer group of companies. The payout may range from 0% to 200% of target.

The fair values of performance stock rights granted were estimated using a Monte Carlo valuation model, incorporating the assumptions in the table below. The risk-free interest rate is based on the United States Treasury yield curve. The expected dividend yield incorporates the current dividend rate as well as historical dividend increase patterns. The expected volatility was estimated using three years of historical data.

	2009			2008			2007
Expected term	3 years			3 years			3 years
Risk-free interest rate		1.38	%		2.18	%		4.71	%
Expected dividend yield		5.50	%		5.50	%		4.50	%
Expected volatility		26	%		17	%		15	%

Compensation cost recorded for performance stock rights for the years ended December 31, 2009, 2008, and 2007 was $4.6 million, $5.2 million, and $3.5 million, respectively. Compensation cost capitalized during these same years was not significant. As of December 31, 2009, $1.8 million of compensation cost related to unvested and outstanding performance stock rights was expected to be recognized over a weighted-average period of 1.6 years.

A summary of the activity related to performance stock rights for the year ended December 31, 2009, is presented below:

	Performance Stock Rights		Weighted-Average Grant Date Fair Value
Outstanding at December 31, 2008		263,109	$	50.13
Granted		121,220		37.11
Expired		79,574		48.37
Forfeited		3,665		52.15
Outstanding at December 31, 2009		301,090	$	45.33

No performance shares were distributed in 2009 because the performance percentage was below the threshold payout level for those rights that were vested and eligible to be distributed during the year ended December 31, 2009.

Restricted Shares and Restricted Share Units

A portion of the long-term incentive is awarded in the form of restricted shares and restricted share units. Most of these awards have a four-year vesting period, with 25% of each award vesting on each anniversary of the grant date. During the vesting period, restricted share recipients have voting rights and are entitled to dividends in the same manner as other common shareholders, whereas restricted share unit recipients receive dividend credits and do not have voting rights. Restricted shares and restricted share units have a value equal to the fair market value of Integrys Energy Group's common shares on the grant date. Compensation cost recognized for these awards was $4.9 million, $4.2 million, and

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$1.4 million during the years ended December 31, 2009, 2008, and 2007, respectively. Compensation cost capitalized during these same years was not significant. As of December 31, 2009, $7.4 million of compensation cost related to these awards was expected to be recognized over a weighted-average period of 2.5 years.

A summary of the activity related to restricted share and restricted share unit awards for the year ended December 31, 2009, is presented below:

	Restricted Shares and Restricted Share Unit Awards		Weighted-Average Grant Date Fair Value
Outstanding at December 31, 2008		228,615	$	50.19
Granted		206,357		42.12
Distributed		69,587		50.76
Forfeited		18,527		45.04
Outstanding at December 31, 2009		346,858	$	45.55

Stock Appreciation Rights

On February 21, 2007, all of PEC's then outstanding stock appreciation rights were converted into 14,021 Integrys Energy Group stock appreciation rights. The fair value of the stock appreciation rights is estimated with a Black-Scholes model and was not significant at December 31, 2009. No stock appreciation rights were issued during the year ended December 31, 2009.

NOTE 22--FAIR VALUE

Fair Value Measurements

In the fourth quarter of 2009, the WPS Crane Creek wind generation project became operational, and a $6.3 million asset retirement obligation was recorded. The initial determination of the amount of the asset retirement obligation was a fair value measurement calculated in accordance with the guidance of the Asset Retirement and Environmental Obligations Topic of the FASB ASC and was categorized within Level 3 of the fair value hierarchy. This classification resulted from the use of significant unobservable inputs, including the estimated costs of removing the wind turbines.

The following table shows Integrys Energy Group's financial assets and liabilities that were accounted for at fair value on a recurring basis, categorized by level within the fair value hierarchy.

	December 31, 2009
(Millions)	Level 1		Level 2		Level 3		Total
Assets
Risk management assets	$	284.9	$	439.6	$	1,593.0	$	2,317.5
Other		0.1		-		-		0.1
Liabilities
Risk management liabilities		336.4		582.2		1,471.6		2,390.2
Long-term debt hedged by fair value hedge		-		52.6		-		52.6

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	December 31, 2008
(Millions)	Level 1		Level 2		Level 3		Total
Assets
Risk management assets	$	703.0	$	1,524.0	$	755.4	$	2,982.4
Inventory hedged by fair value hedges		-		27.4		-		27.4
Other		0.5		-		-		0.5
Liabilities
Risk management liabilities		820.5		1,559.1		572.8		2,952.4
Liabilities held for sale		-		-		0.6		0.6
Long-term debt hedged by fair value hedge		-		53.2		-		53.2

The determination of the fair values above incorporates various factors required under the Fair Value Measurements and Disclosures Topic of the FASB ASC. These factors include not only the credit standing of the counterparties involved, but also the impact of Integrys Energy Group's nonperformance risk on its liabilities.

The risk management assets and liabilities listed in the tables include options, swaps, futures, physical commodity contracts, and other instruments used to manage market risks related to changes in commodity prices and interest rates. For more information on Integrys Energy Group's derivative instruments, see Note 2, "Risk Management Activities."

When possible, Integrys Energy Group bases the valuations of its risk management assets and liabilities on quoted prices for identical assets in active markets. These valuations are classified in Level 1. The valuations of certain contracts are based on NYMEX futures prices with an adjustment related to location differences, and certain derivative instruments are valued using broker quotes or prices for similar contracts at the reporting date. These valuations are classified in Level 2.

Certain derivatives are categorized in Level 3 due to the significance of unobservable or internally-developed inputs. The primary reasons for a Level 3 classification are as follows:

●	While price curves may have been based on observable information, significant assumptions may have been made regarding seasonal or monthly shaping and locational basis differentials.
●	Certain transactions were valued using price curves that extended beyond the quoted period. Assumptions were made to extrapolate prices from the last quoted period through the end of the transaction term.
●	The valuations of certain transactions were based on internal models, although external inputs were utilized in the valuations.

The following table sets forth a reconciliation of changes in the fair value of items categorized as Level 3 measurements:

	Year Ended December 31
(Millions)	2009			2008
Balance at the beginning of period	$	182.0	*	$	44.6
Net realized and unrealized gain (loss) included in earnings		32.0			(44.7	)
Net unrealized gain (loss) recorded as regulatory assets or liabilities		2.2			(8.7	)
Net unrealized gain (loss) included in other comprehensive loss		16.3			(35.0	)
Net purchases and settlements		(36.0	)		2.5
Net transfers in/out of Level 3		(75.1	)		223.3
Balance at the end of the period	$	121.4		$	182.0	*

Net unrealized gain (loss) included in earnings related toinstruments still held at the end of the period	$	35.4		$	(55.3	)

*	This amount includes $0.6 million of risk management liabilities classified as held for sale, related to the sale of generation assets and the associated sales and service contracts in Northern Maine, which closed in

the first quarter of 2010.

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Derivatives are transferred in or out of Level 3 primarily due to changes in the source of data used to construct price curves as a result of changes in market liquidity.

Unrealized gains and losses included in earnings related to Integrys Energy Services' risk management assets and liabilities are recorded through nonregulated revenue on the Consolidated Statements of Income. Realized gains and losses on these same instruments are recorded in nonregulated revenue or nonregulated cost of fuel, natural gas, and purchased power, depending on the nature of the instrument. Unrealized gains and losses on Level 3 derivatives at the utilities are deferred as regulatory assets or liabilities. Therefore, these fair value measurements have no impact on earnings. Realized gains and losses on these instruments flow through utility cost of fuel, natural gas, and purchased power on the Consolidated Statements of Income.

Fair Value of Financial Instruments

The following table shows the financial instruments included on the Consolidated Balance Sheets of Integrys Energy Group that are not recorded at fair value.

	2009				2008
(Millions)	Carrying Amount		Fair Value		Carrying Amount			Fair Value
Long-term debt	$	2,511.2	$	2,543.6	$	2,443.2	*	$	2,276.0
Preferred stock		51.1		44.3		51.1			46.0

*	This amount includes $6.6 million of long-term debt classified as held for sale, related to the sale of generation assets in Northern Maine, which closed in the first quarter of 2010.

The fair values of long-term debt instruments are estimated based on the quoted market price for the same or similar issues, or on the current rates offered to Integrys Energy Group for debt of the same remaining maturity, without considering the effect of third-party credit enhancements. The fair values of preferred stock are estimated based on quoted market prices when available, or by using a perpetual dividend discount model.

Due to the short maturity of cash and cash equivalents, accounts receivable, accounts payable, notes payable, and outstanding commercial paper, the carrying amount approximates fair value.

NOTE 23--MISCELLANEOUS INCOME

Integrys Energy Group's total miscellaneous income was as follows at December 31:

(Millions)	2009			2008			2007
Equity earnings on investments	$	76.1		$	67.8		$	34.6
Equity AFUDC		6.0			5.5			0.9
Interest and dividend income		5.6			5.0			12.7
Key executive life insurance income		2.3			2.7			2.2
Gain on sale of property		1.8			4.8			1.9
Weston 4 ATC interconnection agreement interest		-			2.5			3.9
(Loss) gain on investments		(0.1	)		(0.3	)		3.9
(Loss) gain on foreign currency exchange		(0.1	)		0.9			2.4
Other		(2.6	)		(1.6	)		1.6
Total miscellaneous income	$	89.0		$	87.3		$	64.1

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NOTE 24--REGULATORY ENVIRONMENT

Wisconsin

2010 Rates

On December 22, 2009, the PSCW issued a final written order for WPS authorizing no electric rate increase (net of 2009 and 2008 fuel refunds) and a retail natural gas rate increase of $13.5 million, effective January 1, 2010. The PSCW ordered that $18.2 million of the 2008 and 2009 electric fuel cost over-collections be used to offset the overall electric rate increase needed for 2010, and was recorded as a short-term regulatory liability as of December 31, 2009. The remaining $10.0 million of the 2009 fuel cost over-collections accrued in 2009 as a short-term regulatory liability, plus interest, will be refunded to customers during the first half of 2010. Fuel cost over/under recovery impacts related to the Weston 4 power plant exfoliation issue remain open for 2008 and 2009 and have been delayed to a future rate proceeding.

2009 Rates

On April 23, 2009, the PSCW made the 2009 fuel cost recovery subject to refund, effective April 25, 2009, as actual and projected fuel costs for the remainder of the year were estimated to be below the 2% fuel window. As of December 31, 2009, WPS recorded a liability of $27.1 million related to this refund.

On December 30, 2008, the PSCW issued a final written order for WPS authorizing no change in retail electric rates from the fuel surcharge adjusted rates authorized effective July 4, 2008, and a $3.0 million decrease in retail natural gas rates. The PSCW also approved a decoupling mechanism as a four-year pilot program. The mechanism allows WPS to defer and recover or refund in future rate proceedings all or a portion of the differences between the actual and authorized margin per customer impact of variations in volumes. The annual deferral or refund is limited to $14.0 million for electric service and $8.0 million for natural gas service. The mechanism does not adjust for changes in volume resulting from changes in customer count and also does not cover large commercial and industrial customers.

2008 Rates

On January 15, 2008, the PSCW issued a final written order for WPS authorizing a retail electric rate increase of $23.0 million (2.5%), which included recovery of deferred 2005 and 2006 MISO Day 2 costs over a one-year period and increased electric transmission costs, effective January 16, 2008. On February 11, 2008, WPS filed an application with the PSCW to adjust its 2008 rates for increased fuel and purchased power costs. The application requested an increase in retail electric rates due to a delay in the in-service date of the Weston 4 power plant, increased coal and coal transportation costs, and increased natural gas costs. The PSCW approved an interim annual fuel surcharge increase of $29.7 million on March 20, 2008, and an additional final fuel surcharge increase of $18.3 million, effective July 4, 2008.

On September 30, 2008, the PSCW reopened the 2008 fuel surcharge to review forecasted fuel costs, as WPS's current and anticipated annual fuel costs were below those projected in the fuel surcharge. As a result of the lower fuel and purchased power costs, WPS's rates from September 30, 2008, through December 31, 2008, were subject to refund. On February 9, 2009, WPS filed a request with the PSCW to refund approximately $5 million of 2008 fuel costs to Wisconsin electric retail customers. WPS had accrued this amount as a liability at December 31, 2008. This refund resulted in a credit to customers' bills in March and April 2009. An additional $1.1 million of the 2008 fuel cost over-recovery, including interest, was accrued in 2008 and 2009 and will be refunded as part of the 2010 rate case.

2007 Rates

On January 11, 2007, the PSCW issued a final written order for WPS authorizing a retail electric rate increase of $56.7 million (6.6%) and a retail natural gas rate increase of $18.9 million (3.8%), effective January 12, 2007. The new rates reflected a 10.9% return on common equity. The PSCW approved a

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common equity ratio of 57.4% in WPS's regulatory capital structure. The 2007 retail electric rate increase was required primarily because of increased costs associated with electric transmission, costs related to the construction of Weston 4 and the additional personnel to maintain and operate the plant, and costs to maintain the Weston 3 generation unit and the De Pere Energy Center. The 2007 retail natural gas rate increase was driven by infrastructure improvements necessary to ensure the reliability of the natural gas distribution system and costs associated with the remediation of former manufactured gas plant sites.

Weston 3 Outage

In October 2007, Weston 3, a coal-fired generating facility located near Wausau, Wisconsin, sustained damage from a major lightning strike that forced the facility out of service until January 14, 2008. The damage required the repair of the generator rotor, turbine rotors, and boiler feed pumps. WPS incurred $8.9 million of incremental pre-tax non-fuel operating and maintenance expenditures through January 14, 2008, to repair and return Weston 3 to service. WPS has insurance in place that covered all non-fuel operating and maintenance expenditures, less a $1.0 million deductible. WPS incurred a total of $26.6 million of incremental pre-tax fuel and purchased power costs during the 14-week outage. WPS was granted approval from the PSCW to defer the replacement fuel and purchased power costs for the Wisconsin retail portion of these costs retroactive to the date of the lightning strike. On December 30, 2008, the PSCW granted WPS recovery of $17.0 million of the requested $19.6 million of Weston 3 replacement fuel and power costs from the Wisconsin retail jurisdiction, over a six-year period and without carrying costs.

WPS was granted recovery of $0.4 million of the requested $0.5 million of replacement purchased power costs from the Michigan retail jurisdiction through the annual PSCR mechanism.

Kewaunee

On February 20, 2005, Kewaunee was temporarily removed from service after a potential design weakness was identified in its auxiliary feedwater system. In WPS's 2006 rate case, the PSCW determined that it was reasonable for WPS to recover all deferred costs related to the 2005 Kewaunee forced outage over a five-year period, beginning on January 1, 2006. At December 31, 2009, $9.6 million was left to be collected from ratepayers and remained recorded as a regulatory asset related to this outage.

Michigan

2010 UPPCO Rates

On December 16, 2009, the MPSC issued a final written order authorizing UPPCO a retail electric rate increase of $6.5 million, effective January 1, 2010. The new rates reflect a 10.90% return on common equity and a common equity ratio of 54.83% in its regulatory capital structure. The order includes approval of a decoupling mechanism, as well as an uncollectibles expense tracking mechanism, which allows for the deferral and subsequent recovery or refund of 80% of the difference between actual write-offs (net of recoveries) and bad debt expense included in utility rates, both effective January 1, 2010.

2010 MGU Rates

On November 23, 2009, the MPSC issued a partial settlement authorizing MGU a retail natural gas rate increase of $3.5 million, effective January 1, 2010. The filing includes a 10.75% return on common equity and a common equity ratio of 50.26% in its regulatory capital structure. The order includes approval of an uncollectibles expense tracking mechanism, which allows for the deferral and subsequent recovery or refund of 80% of the difference between actual write-offs (net of recoveries) and bad debt expense included in utility rates, effective January 1, 2010. The decoupling mechanism proposed in the rate case is being contested and was not part of the settlement. An MPSC decision on decoupling is expected in the second quarter of 2010.

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2009 MGU Rates

On January 13, 2009, the MPSC issued a final written order for MGU approving a settlement agreement authorizing an annual retail natural gas rate increase of $6.0 million, effective January 14, 2009. The new rates reflected a 10.45% return on common equity and a common equity ratio of 50.01% in its regulatory capital structure. The rate increase was required primarily due to general inflation, low margin revenue growth, increased costs of customer service functions, and increased environmental cleanup costs to remediate former manufactured gas plant sites.

2008 WPS Rates

On December 4, 2007, the MPSC issued a final written order authorizing WPS a retail electric rate increase of $0.6 million, effective December 5, 2007. WPS's last retail electric rate increase in Michigan was in July 2003. The new rates reflected a 10.6% return on common equity and a common equity ratio of 56.4% in its regulatory capital structure.

Illinois

2010 Rates

On January 21, 2010, the ICC issued a final written order authorizing a retail natural gas rate increase of $69.8 million for PGL and $13.9 million for NSG, effective January 28, 2010. The rates for PGL reflect a 10.23% return on common equity and a common equity ratio of 56% in its regulatory capital structure. The rates for NSG reflect a 10.33% return on common equity and a common equity ratio of 56% in its regulatory capital structure. The ICC approved a rider mechanism to recover the costs, above an annual baseline, of an accelerated natural gas main replacement program by PGL through a special charge on customers' bills, known as Rider ICR; in February 2010, PGL filed Rider ICR with a $51.85 million annual baseline. Recovery of costs for the accelerated gas main replacement program will begin in 2011 with the first Rider ICR charges being effective April 1, 2011. The rate order also approved the recovery of net dismantling costs of property, plant, and equipment over the life of the asset rather than when incurred. PGL and NSG, as well as Chicago, the AG, and the Citizens Utility Board, filed requests for rehearing in February 2010, all addressing Rider ICR.

Recent Illinois Legislation

In July 2009, Illinois Senate Bill (SB) 1918 was signed into law. SB 1918 contains a provision that allows PGL and NSG to file a rider to recover (or refund) the incremental difference between the rate case authorized uncollectible expense and the actual uncollectible expense reported to the ICC each year. PGL and NSG filed their respective riders with the ICC in September 2009, and began recording the effects of this provision at that time. The ICC approved the rider in February 2010. SB 1918 also requires a percentage of income payment plan for low-income utility customers that PGL and NSG are offering as a transition program in 2010 and 2011, with a permanent such program to begin no later than September 1, 2011, and an on-bill financing option that PGL and NSG filed in February 2010 and requested a June 2011 effective date. The on-bill financing program will allow certain residential customers of PGL and NSG to borrow funds from a third party lender to purchase natural gas energy efficiency measures and pay back the borrowed funds over time through a charge on their utility bill. No later than October 1, 2010, PGL and NSG must file an EEP to meet specified energy efficiency standards, with the first program year beginning June 2011.

2008 Rates

On February 5, 2008, the ICC issued a final written order authorizing a retail natural gas rate increase of $71.2 million for PGL and a retail natural gas rate decrease of $0.2 million for NSG, effective February 14, 2008. The rates for PGL reflected a 10.19% return on common equity and a common equity ratio of 56% in its regulatory capital structure. The rates for NSG reflected a 9.99% return on common

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equity and a common equity ratio of 56% in its regulatory capital structure. The order included approval of a decoupling mechanism, effective March 1, 2008, as a four-year pilot program, which allows PGL and NSG to adjust rates going forward to recover or refund the difference between the actual and authorized margin impact of variations in volumes. Legislation was introduced at the Illinois state legislature to roll back decoupling but never reached a vote. This legislation was introduced again in the first quarter of 2009. Integrys Energy Group actively supports the ICC's decision to approve this rate setting mechanism. The order also approved an EEP, which allows PGL and NSG to recover up to $6.4 million and $1.1 million per year, respectively, of energy efficiency costs. This EEP is separate from the SB 1918 required EEP.

On March 26, 2008, the ICC denied PGL's and NSG's request for rehearing of their rate orders, and all but one such request from interveners. The only rehearing request granted by the ICC related to a change in the way PGL allocates interstate hub services revenues among customer groups. On June 6, 2008, several parties filed a stipulation to resolve the way PGL allocates interstate hub services revenues among customer groups. The ICC approved the stipulation, effective November 1, 2008, as well as a rehearing order. Following the stipulation approval, PGL and NSG and four other parties filed appeals with the Illinois appellate court. Issues on appeal include the decoupling mechanism.

Minnesota

2010 Rates

On December 4, 2009, the MPUC approved a final written order authorizing MERC a retail natural gas rate increase of $15.4 million, effective January 1, 2010. The new rates reflect a 10.21% return on common equity and a common equity ratio of 48.77% in its regulatory capital structure. Since the final approved rate increase was lower than the interim rate increase that went into effect in October 2008, refunds will be made to customers in March 2010.

Federal

Through a series of orders issued by the FERC, Regional Through and Out Rates for transmission service between the MISO and the PJM Interconnection were eliminated effective December 1, 2004. To compensate transmission owners for the revenue they will no longer receive due to this rate elimination, the FERC ordered a transitional pricing mechanism called the Seams Elimination Charge Adjustment (SECA) be put into place. Load-serving entities paid these SECA charges during a 16-month transition period from December 1, 2004, through March 31, 2006.

For the 16-month transitional period, Integrys Energy Services received billings of $19.2 million (pre-tax) for these charges. Integrys Energy Services expensed $14.7 million of the $19.2 million, as it is probable that Integrys Energy Services' total exposure will be reduced by at least $4.5 million due to inconsistencies between the FERC's SECA order and the transmission owners' compliance filings. Integrys Energy Services has reached settlement agreements with three of its vendors for a combined $1.6 million.

In August 2006, the administrative law judge hearing the case issued an Initial Decision that was in agreement with all of Integrys Energy Services' positions. If the Final Order is consistent with the Initial Decision of the administrative law judge, Integrys Energy Services' pre-tax exposure of $19.2 million may be reduced by as much as $13 million. The Final FERC Order is subject to rehearing and then court challenges. Any refunds to Integrys Energy Services will include interest for the period from payment to refund. A FERC Order addressing these issues is expected to be received by June 2010.

NOTE 25--SEGMENTS OF BUSINESS

The Segment Reporting Topic of the FASB ASC requires that companies disclose segment information based on how management makes decisions about allocating resources to segments and measuring their performance.

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Integrys Energy Group manages its reportable segments separately due to their different operating and regulatory environments. At December 31, 2009, Integrys Energy Group reported five segments, which are described below.

●	The electric utility segment includes the regulated electric utility operations of WPS and UPPCO.
●	The natural gas utility segment includes the regulated natural gas utility operations of WPS, MGU, MERC, PGL, and NSG.
●	Integrys Energy Services is a diversified nonregulated natural gas and electric power supply and services company serving retail customers (residential, commercial, and industrial).
●	The electric transmission investment segment includes Integrys Energy Group's approximate 34% ownership interest in ATC. ATC is a federally regulated electric transmission company operating in Wisconsin, Michigan, Minnesota, and Illinois.
●	The holding company and other segment includes the operations of the Integrys Energy Group holding company and the PEC holding company, along with any nonutility activities at WPS, MGU, MERC, UPPCO, PGL, NSG, and IBS. Equity earnings from Integrys Energy Group's investment in WRPC are also included in the holding company and other segment.

The nonregulated oil and natural gas production segment includes the results of PEP, which were reported as discontinued operations in 2007. PEP engaged in the acquisition, development and production of oil and natural gas reserves in selected onshore basins in the United States through direct ownership in oil, natural gas, and mineral leases. Integrys Energy Group completed the sale of PEP in September 2007.

The tables below present information for the respective years pertaining to Integrys Energy Group's reportable segments:

	Regulated Operations											Nonutility and Nonregulated Operations
2009 (Millions)	Electric Utility			Natural Gas Utility			Electric Transmission Investment		Total Regulated Operations			Integrys Energy Services			Holding Company and Other			Reconciling Eliminations			Integrys Energy Group Consolidated

Income Statement
External revenues	$	1,258.9		$	2,236.9		$	-	$	3,495.8		$	3,992.5		$	11.5		$	-		$	7,499.8
Intersegment revenues		42.7			0.6			-		43.3			1.5			-			(44.8	)		-
Goodwill impairment loss		-			291.1			-		291.1			-			-			-			291.1
Restructuring expense		8.6			6.9			-		15.5			27.2			0.8			-			43.5
Loss on Integrys Energy Services dispositions related to strategy change		-			-			-		-			28.9			-			-			28.9
Depreciation and amortization expense		90.3			106.1			-		196.4			19.3			15.2			-			230.9
Miscellaneous income (expense)		4.8			3.1			75.3		83.2			6.0			46.5			(46.7	)		89.0
Interest expense (income)		41.6			52.2			-		93.8			13.1			104.6			(46.7	)		164.8
Provision (benefit) for income taxes		51.4			7.8			29.8		89.0			18.5			(24.3	)		-			83.2
Net income (loss) from continuing operations		91.4			(171.5	)		45.5		(34.6	)		(1.3	)		(35.7	)		-			(71.6	)
Discontinued operations		-			-			-		-			2.8			-			-			2.8
Preferred stock dividends of subsidiary		(2.5	)		(0.6	)		-		(3.1	)		-			-			-			(3.1	)
Net income (loss) attributed to common shareholders		88.9			(172.1	)		45.5		(37.7	)		2.5			(35.7	)		-			(70.9	)
Total assets		2,834.7			4,675.7			395.9		7,906.3			3,550.8			1,462.7			(1,071.9	)		11,847.9
Cash expenditures for long-lived assets		250.4			136.9			-		387.3			22.4			34.5			-			444.2

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	Regulated Operations											Nonutility and Nonregulated Operations
2008 (Millions)	Electric Utility			Natural Gas Utility			Electric Transmission Investment		Total Regulated Operations			Integrys Energy Services			Holding Company and Other			Reconciling Eliminations			Integrys Energy Group Consolidated

Income Statement
External revenues	$	1,284.6		$	3,025.3		$	-	$	4,309.9		$	9,726.5		$	11.4		$	-		$	14,047.8
Intersegment revenues		44.3			0.6			-		44.9			8.7			0.6			(54.2	)		-
Goodwill impairment loss		-			6.5			-		6.5			-			-			-			6.5
Depreciation and amortization expense		84.3			108.3			-		192.6			14.5			14.3			-			221.4
Miscellaneous income (expense)		6.0			7.0			66.1		79.1			8.7			45.4			(45.9	)		87.3
Interest expense (income)		36.7			56.6			-		93.3			12.1			98.6			(45.9	)		158.1
Provision (benefit) for income taxes		48.1			57.1			26.4		131.6			(56.2	)		(24.2	)		-			51.2
Net income (loss) from continuing operations		94.7			85.5			39.7		219.9			(65.5	)		(29.7	)		-			124.7
Discontinued operations		-			-			-		-			3.9			0.8			-			4.7
Preferred stock dividends of subsidiary		(2.1	)		(1.0	)		-		(3.1	)		-			-			-			(3.1	)
Net income (loss) attributed to common shareholders		92.6			84.5			39.7		216.8			(61.5	)		(28.9	)		-			126.4
Total assets		2,752.4			5,173.8			346.9		8,273.1			5,050.2			2,144.3			(1,195.1	)		14,272.5
Cash expenditures for long-lived assets		207.4			237.3			-		444.7			68.1			20.0			-			532.8

	Regulated Utilities											Nonutility and Nonregulated Operations
2007 (Millions)	Electric Utility			Natural Gas Utility			Electric Transmission Investment		Total Regulated Operations			Integrys Energy Services			Oil and Natural Gas Production			Holding Company and Other			Reconciling Eliminations			Integrys Energy Group Consolidated

Income Statement
External revenues	$	1,202.9		$	2,102.5		$	-	$	3,305.4		$	6,975.7		$	-		$	11.3		$	-		$	10,292.4
Intersegment revenues		43.2			1.2			-		44.4			4.0			-			1.2			(49.6	)		-
Depreciation and amortization expense		80.1			97.7			-		177.8			14.4			-			2.9			-			195.1
Miscellaneous income (expense)		8.3			5.5			50.5		64.3			(0.3	)		0.1			30.9			(30.9	)		64.1
Interest expense (income)		32.4			53.4			-		85.8			13.5			2.4			93.7			(30.9	)		164.5
Provision (benefit) for income taxes		51.5			14.5			20.2		86.2			26.3			(1.0	)		(25.5	)		-			86.0
Net income (loss) from continuing operations		89.6			29.6			30.3		149.5			83.1			(2.5	)		(49.1	)		-			181.0
Discontinued operations		-			-			-		-			14.8			58.5			-			-			73.3
Preferred stock dividends of subsidiary		(2.2	)		(0.9	)		-		(3.1	)		-			-			-			-			(3.1	)
Net income (loss) attributed to common shareholders		87.4			28.7			30.3		146.4			98.0			56.0			(49.1	)		-			251.3
Total assets		2,470.8			4,777.8			296.6		7,545.2			3,150.6			-			1,614.8			(1,076.2	)		11,234.4
Cash expenditures for long-lived assets		202.6			158.8			-		361.4			20.5			-			10.7			-			392.6


Geographic Information (Millions)	2009				2008				2007
Geographic Information (Millions)	Revenues		Long-Lived Assets		Revenues		Long-Lived Assets		Revenues		Long-Lived Assets
United States	$	6,628.5	$	7,540.3	$	11,639.3	$	7,576.8	$	8,343.8	$	7,028.2
Canada *		871.3		-		2,408.5		20.0		1,948.6		20.6
Total	$	7,499.8	$	7,540.3	$	14,047.8	$	7,596.8	$	10,292.4	$	7,048.8

* Revenues and assets of Canadian subsidiaries. Includes the impact in 2009 of the sale of Canadian operations at Integrys

Energy Services.

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NOTE 26--QUARTERLY FINANCIAL INFORMATION (Unaudited)

(Millions, except share amounts)	Three Months Ended
	2009
	March			June			September			December			Total
Total revenues	$	3,200.8		$	1,427.6		$	1,297.8		$	1,573.6		$	7,499.8
Operating income (loss)		(145.1	)		72.9			93.3			66.3			87.4
Net income (loss) from continuing operations		(179.5	)		35.0			49.1			23.8			(71.6	)
Discontinued operations, net of tax		-			0.3			2.3			0.2			2.8
Preferred stock dividends of subsidiary		(0.8	)		(0.8	)		(0.7	)		(0.8	)		(3.1	)
Net income (loss) attributed to common shareholders		(180.2	)		34.7			51.1			23.5			(70.9	)

Average shares of common stock (basic)		76.7			76.8			76.8			76.8			76.8
Average shares of common stock (diluted)		76.7			76.8			76.9			77.0			76.8

Earnings (loss) per common share (basic) *
Net income (loss) from continuing operations	$	(2.35	)	$	0.45		$	0.64		$	0.31		$	(0.96	)
Discontinued operations		-			-			0.03			-			0.04
Earnings (loss) per common share (basic)		(2.35	)		0.45			0.67			0.31			(0.92	)
Earnings (loss) per common share (diluted) *
Net income (loss) from continuing operations		(2.35	)		0.45			0.63			0.31			(0.96	)
Discontinued operations		-			-			0.03			-			0.04
Earnings (loss) per common share (diluted)		(2.35	)		0.45			0.66			0.31			(0.92	)

* Earnings (loss) per share for the individual quarters do not total the year ended earnings (loss) per share amount

because of changes to the average number of shares outstanding and changes in incremental issuable shares

throughout the year.

(Millions, except share amounts)	Three Months Ended
	2008
	March			June			September			December			Total
Total revenues	$	3,989.2		$	3,417.2		$	3,223.1		$	3,418.3		$	14,047.8
Operating income (loss)		234.7			53.1			(76.2	)		35.1			246.7
Net income (loss) from continuing operations		136.6			24.8			(58.4	)		21.7			124.7
Discontinued operations, net of tax		-			0.1			-			4.6			4.7
Preferred stock dividends of subsidiary		(0.8	)		(0.8	)		(0.7	)		(0.8	)		(3.1	)
Net income (loss) attributed to common shareholders		135.8			24.1			(59.1	)		25.6			126.4

Average shares of common stock (basic)		76.6			76.6			76.7			76.7			76.7
Average shares of common stock (diluted)		76.9			76.9			76.7			77.0			77.0

Earnings (loss) per common share (basic) *
Net income (loss) from continuing operations	$	1.77		$	0.31		$	(0.77	)	$	0.27		$	1.59
Discontinued operations		-			-			-			0.06			0.06
Earnings (loss) per common share (basic)		1.77			0.31			(0.77	)		0.33			1.65
Earnings (loss) per common share (diluted) *
Net income (loss) from continuing operations		1.77			0.31			(0.77	)		0.27			1.58
Discontinued operations		-			-			-			0.06			0.06
Earnings (loss) per common share (diluted)		1.77			0.31			(0.77	)		0.33			1.64

* Earnings (loss) per share for the individual quarters do not total the year ended earnings (loss) per share amount

because of changes to the average number of shares outstanding and changes in incremental issuable shares

throughout the year.

Because of various factors, the quarterly results of operations are not necessarily comparable.

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H. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENTS

To the Board of Directors and Shareholders of Integrys Energy Group, Inc:

We have audited the accompanying consolidated balance sheets of Integrys Energy Group, Inc. and subsidiaries (the "Company") as of December 31, 2009 and 2008, and the related consolidated statements of income, equity, and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Integrys Energy Group, Inc. and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

As discussed in Note 1(r) to the consolidated financial statements, at January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements.”

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2010 expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ Deloitte & Touche LLP

Milwaukee, WI

February 25, 2010

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ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Integrys Energy Group's management, with the participation of Integrys Energy Group's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of Integrys Energy Group's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report and has concluded that, as of the end of such period, Integrys Energy Group's disclosure controls and procedures were effective to ensure that information required to be disclosed by Integrys Energy Group in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to Integrys Energy Group's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There were no changes in Integrys Energy Group's internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during the quarter ended December 31, 2009, that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

Management Reports on Internal Control over Financial Reporting

For Integrys Energy Group's Management Report on Internal Control over Financial Reporting, see Section A of Item 8.

Reports of Independent Registered Public Accounting Firm

For Integrys Energy Group's Reports of Independent Registered Public Accounting Firm, see Sections B and H of Item 8.

ITEM 9B. OTHER INFORMATION

None.

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PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information required by this Item regarding the directors of Integrys Energy Group, Section 16 compliance and the members of the Audit Committee and the Audit Committee financial expert can be found in Integrys Energy Group's Proxy Statement for its Annual Meeting of Shareholders to be held May 13, 2010 (Proxy Statement), under the captions "Election of Directors," "Ownership of Voting Securities – Section 16(a) Beneficial Ownership Reporting Compliance" and "Board Committees," respectively. Such information is incorporated by reference as if fully set forth herein.

Information regarding the executive officers of Integrys Energy Group can be found in this Annual Report on Form 10-K in Item 4A.

Integrys Energy Group has adopted a Code of Conduct, which serves as our Code of Business Conduct and Ethics. The Code of Conduct applies to all of our directors, officers, and employees, including the Chief Executive Officer, Chief Financial Officer, Corporate Controller and any other persons performing similar functions. Integrys Energy Group has also adopted Corporate Governance Guidelines.

Integrys Energy Group's Code of Conduct, Corporate Governance Guidelines and charters of the board committees may be accessed on the Integrys Energy Group Web site, www.integrysgroup.com under "Investor" then select "Corporate Governance." Amendments to, or waivers from, our Code of Conduct will be disclosed on our Web site within the prescribed time period.

ITEM 11. EXECUTIVE COMPENSATION

Information required by this Item regarding compensation paid by Integrys Energy Group to its directors and its "named executive officers" in 2009 can be found in Integrys Energy Group's Proxy Statement under the captions "Director Compensation" and "Executive Compensation." Such information is incorporated by reference as if fully set forth herein.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information required by this Item regarding the principal securities holders of Integrys Energy Group and the security holdings of its directors and executive officers can be found in Integrys Energy Group's Proxy Statement under the caption "Ownership of Voting Securities – Beneficial Ownership." Such information is incorporated by reference as if fully set forth herein.

Information required by this Item regarding equity compensation plans of Integrys Energy Group can be found in Integrys Energy Group's Proxy Statement under the caption "Ownership of Voting Securities – Equity Compensation Plan Information." Such information is incorporated by reference as if fully set forth herein.

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ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information required by this Item regarding Integrys Energy Group's related person transactions and director independence can be found in Integrys Energy Group's Proxy Statement under the captions "Election of Directors – Related Person Transaction Policy" and "Election of Directors – Director Independence," respectively. Such information is incorporated by reference as if fully set forth herein.

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

For a summary of the fees billed to Integrys Energy Group (including its subsidiaries) by Deloitte & Touche LLP for professional services performed for 2009 and 2008 and the Audit Committee’s preapproval policies and procedures, please see Integrys Energy Group's Proxy Statement under the caption "Board Committees – Audit Committee." Such information is incorporated by reference as if fully set forth herein.

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PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Documents filed as part of this report:

(1)	Consolidated Financial Statements included in Part II at Item 8 above:

	Description		Pages in 10-K

	Consolidated Statements of Income for the three years ended December 31, 2009, 2008, and 2007		79

	Consolidated Balance Sheets as of December 31, 2009 and 2008		80

	Consolidated Statements of Common Shareholders' Equity for the three years ended December 31, 2009, 2008, and 2007		81

	Consolidated Statements of Cash Flows for the three years ended December 31, 2009, 2008, and 2007		82

	Notes to Consolidated Financial Statements		83

	Report of Independent Registered Public Accounting Firm		148

(2)	Financial Statement Schedules. The following financial statement schedules are included in Part IV of this report. Schedules not included herein have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

	Description		Pages in 10-K

	Schedule I - Condensed Parent Company Only Financial Statements

	A.	Statements of Income and Retained Earnings	154

	B.	Balance Sheets	155

	C.	Statements of Cash Flows	156

	D.	Notes to Parent Company Financial Statements	157

	Schedule II Integrys Energy Group, Inc. Valuation and Qualifying Accounts		160

(3)	Listing of all exhibits, including those incorporated by reference. See the attached Exhibit Index.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 25th day of February, 2010.

		INTEGRYS ENERGY GROUP, INC.

			(Registrant)

		By:	/s/ Charles A. Schrock
			Charles A. Schrock President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature	Title	Date

Keith E. Bailey *	Director
Richard A. Bemis *	Director
William J. Brodsky *	Director
Albert J. Budney, Jr. *	Director
Pastora San Juan Cafferty *	Director
Ellen Carnahan *	Director
Robert C. Gallagher *	Director
Kathryn M. Hasselblad-Pascale *	Director
John W. Higgins *	Director
James L. Kemerling *	Director
Michael E. Lavin *	Director
William F. Protz, Jr. *	Director
Charles A. Schrock *	Director
Larry L. Weyers *	Director and Executive Chairman

/s/ Charles A. Schrock	President and Chief Executive Officer (principal executive officer)	February 25, 2010
Charles A. Schrock

/s/ Joseph P. O'Leary	Senior Vice President and Chief Financial Officer (principal financial officer)	February 25, 2010
Joseph P. O'Leary

/s/ Diane L. Ford	Vice President and Corporate Controller (principal accounting officer)	February 25, 2010
Diane L. Ford


* By: /s/ Diane L. Ford
Diane L. Ford	Attorney-in-Fact	February 25, 2010

-153-


SCHEDULE I - CONDENSED
PARENT COMPANY FINANCIAL STATEMENTS
INTEGRYS ENERGY GROUP, INC. (PARENT COMPANY ONLY)

A. STATEMENTS OF INCOME AND RETAINED EARNINGS


Year Ended December 31
(Millions, except per share data)	2009			2008			2007

Equity earnings (loss) in excess of dividends from subsidiaries	$	(158.5	)	$	44.2		$	116.4
Dividends from subsidiaries		147.0			134.9			120.0
Income (loss) from subsidiaries		(11.5	)		179.1			236.4
Investment income and other		25.5			19.4			17.7
Total income		14.0			198.5			254.1

Operating expenses		6.3			3.4			18.5
Operating income		7.7			195.1			235.6

Interest expense		79.4			75.0			65.5

Income (loss) before taxes		(71.7	)		120.1			170.1
Provision (benefit) for income taxes		2.0			(1.6	)		(7.9	)
Income (loss) from continuing operations		(73.7	)		121.7			178.0

Discontinued operations, net of tax		2.8			4.7			73.3
Net income (loss)	$	(70.9	)	$	126.4		$	251.3

Retained earnings, beginning of year	$	624.6		$	701.9		$	628.2
Common stock dividends		(206.9	)		(203.9	)		(177.0	)
Other		(1.2	)		0.2			(0.6	)
Retained earnings, end of year	$	345.6		$	624.6		$	701.9

Average shares of common stock
Basic		76.8			76.7			71.6
Diluted		76.8			77.0			71.8


Earnings (loss) per common share (basic)
Net income (loss) from continuing operations	$	(0.96	)	$	1.59		$	2.49
Discontinued operations, net of tax		0.04			0.06			1.02
Earnings (loss) per common share (basic)	$	(0.92	)	$	1.65		$	3.51


Earnings (loss) per common share (diluted)
Net income (loss) from continuing operations	$	(0.96	)	$	1.58		$	2.48
Discontinued operations, net of tax		0.04			0.06			1.02
Earnings (loss) per common share (basic)	$	(0.92	)	$	1.64		$	3.50

Dividends per common share declared	$	2.72		$	2.68		$	2.56

The accompanying notes to Integrys Energy Group's parent company financial statements are an integral part of these statements.

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SCHEDULE I - CONDENSED
PARENT COMPANY FINANCIAL STATEMENTS
INTEGRYS ENERGY GROUP, INC. (PARENT COMPANY ONLY)

B. BALANCE SHEETS


At December 31
(Millions)	2009		2008
Assets

Cash and cash equivalents	$	19.0	$	190.9
Accounts receivable from related parties		38.7		33.9
Interest receivable from related parties		4.6		5.2
Deferred income taxes		-		0.2
Notes receivable from related parties		53.0		150.9
Assets from risk management activities		-		14.7
Other current assets		29.5		27.3
Current assets		144.8		423.1

Total investments in subsidiaries, at equity		3,962.6		4,206.1

Notes receivable from related parties		220.3		210.9
Property and equipment, net of accumulated depreciation of $0.7 and $0.5, respectively		5.2		5.3
Receivables from related parties		9.0		10.5
State deferred income taxes		27.9		16.5
Other		27.0		26.3
Total assets	$	4,396.8	$	4,898.7


Liabilities and Shareholders' Equity

Short-term debt to related parties	$	315.7	$	276.1
Short-term debt		205.1		473.9
Current portion of long-term debt		65.6		150.0
Accounts payable to related parties		3.9		49.7
Interest payable to related parties		4.7		5.9
Accounts payable		0.6		0.1
Liabilities from risk management activities		1.9		1.5
Deferred income taxes		7.3		-
Other current liabilities		4.4		12.6
Current liabilities		609.2		969.8

Long-term debt to related parties		346.0		346.0
Long-term debt		554.7		465.1
Federal deferred income taxes		23.2		8.8
Liabilities from risk management activities		-		3.5
Payables to related parties		2.4		2.0
Other		2.7		3.9
Long-term liabilities		929.0		829.3

Commitments and contingencies

Common stock equity		2,858.6		3,099.6
Total liabilities and shareholders' equity	$	4,396.8	$	4,898.7

The accompanying notes to Integrys Energy Group's parent company financial statements are an integral part of these statements.

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SCHEDULE I - CONDENSED
PARENT COMPANY FINANCIAL STATEMENTS
INTEGRYS ENERGY GROUP, INC. (PARENT COMPANY ONLY)

C. STATEMENTS OF CASH FLOWS


Year Ended December 31
(Millions)		2009			2008			2007
Operating Activities
Net income (loss)		$	(70.9	)	$	126.4		$	251.3
Adjustments to reconcile net income (loss) to net cash provided by operating activities
	Discontinued operations, net of tax		(2.8	)		(4.7	)		(73.3	)
	Equity loss (income) from subsidiaries, net of dividends		158.5			(44.2	)		(116.4	)
	Deferred income taxes		24.4			19.7			(8.0	)
	Gain on sale of investment		(0.4	)		-			(1.6	)
	Cumulative effect of change in accounting principles, net of tax		-			-			-
	Other		23.7			7.9			14.0
	Changes in working capital
	Acounts receivables		0.5			1.2			(2.0	)
	Accounts receivables from related parties		(4.2	)		20.3			(30.6	)
	Other current assets		(2.4	)		(25.2	)		-
	Accounts payable		0.5			(1.6	)		0.8
	Accounts payable to related parties		(44.6	)		41.7			2.9
	Other current liabilities		(7.4	)		(30.4	)		33.8
Net cash provided by operating activities			74.9			111.1			70.9

Investing Activities
Capital expenditures			-			-			(10.7	)
Short-term notes receivable from related parties			97.9			(84.6	)		57.2
Long-term notes receivable from related parties			(10.0	)		-			-
Receivables from related parties			1.5			1.6			1.8
Equity contributions to subsidiaries			(56.1	)		(163.0	)		(100.9	)
Return of capital from subsidiaries			155.5			83.4			34.1
Proceeds from sale of investment			0.5			-			2.0
Cash paid for transaction cost related to acquisitions			-			-			(14.4	)
Other			0.5			7.4			-
Net cash provided by (used for) investing activities			189.8			(155.2	)		(30.9	)

Financing Activities
Commercial paper, net			(47.7	)		182.5			(454.4	)
Notes payable to related parties			39.6			55.2			545.9
Issuance of notes payable			-			155.7			-
Issuance of short-term debt			-			50.0			-
Redemption of notes payable			(50.0	)
Redemption of short-term debt			(157.9	)		-			-
Issuance of long-term debt			155.0			-			-
Redemption of long-term debt			(150.0	)		-			-
Issuance of common stock			-			-			45.6
Dividends paid on common stock			(206.9	)		(203.9	)		(177.0	)
Other			(18.7	)		(4.5	)		(1.7	)
Net cash (used for) provided by financing activities			(436.6	)		235.0			(41.6	)

Change in cash and cash equivalents			(171.9	)		190.9			(1.6	)
Cash and cash equivalents at beginning of year			190.9			-			1.6
Cash and cash equivalents at end of year		$	19.0		$	190.9		$	-

The accompanying notes to Integrys Energy Group's parent company financial statements are an integral part of these statements.

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SCHEDULE I - CONDENSED

PARENT COMPANY FINANCIAL STATEMENTS

INTEGRYS ENERGY GROUP, INC. (PARENT COMPANY ONLY)

D. NOTES TO PARENT COMPANY FINANCIAL STATEMENTS

SUPPLEMENTAL NOTES

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Presentation--For Parent Company only presentation, investments in subsidiaries are accounted for using the equity method. The condensed Parent Company financial statements and notes should be read in conjunction with the consolidated financial statements and notes of Integrys Energy Group appearing in this Form 10-K. The consolidated financial statements of Integrys Energy Group reflect certain businesses as discontinued operations. In the Integrys Energy Group consolidated financial statements, $26.5 million and $26.3 million assets were reported as held for sale and $0.3 million and $7.5 million liabilities were reported as held for sale at year-end 2009 and 2008, respectively. For Parent Company only presentation, the investments in discontinued operations are recorded in Investments in Subsidiary Companies. The condensed Parent Company statements of income and statements of cash flows report the earnings and cash flows of these businesses as discontinued operations.

(b) 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 Parent Company Statements of Cash Flows:

(Millions)	2009			2008		2007
Cash paid for interest	$	57.3		$	46.1	$	55.1
Cash paid for interest – related parties		23.6			24.9		3.8
Cash paid (received) for income taxes		(15.4	)		27.2		-

Significant non-cash transactions were as follows:

(Millions)		2009				2008				2007
Equity issued for net assets acquired in PEC merger		$	-			$	-			$	1,559.3

NOTE 2--FAIR VALUE OF FINANCIAL INSTRUMENTS – RELATED PARTIES

The following table shows the financial instruments included on the Balance Sheets of Integrys Energy Group Parent Company that are not recorded at fair value.

(Millions)	2009				2008
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-term notes receivable from related parties	$	220.3	$	235.5	$	210.9	$	199.9
Long-term debt to related parties		346.0		361.3		346.0		345.8

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NOTE 3--SHORT-TERM NOTES RECEIVABLE – RELATED PARTIES

(Millions)	2009		2008
UPPCO	$	10.4	$	6.8
Integrys Energy Services		-		81.7
MERC		3.6		22.3
MGU		8.7		27.0
IBS		30.3		13.1
Total	$	53.0	$	150.9

NOTE 4--LONG-TERM NOTES RECEIVABLE – RELATED PARTIES

(Millions)					2009		2008
WPS
	Series		Year Due
	8.76	%	2015	$	3.8	$	4.0
	7.35	%	2016		5.5		5.9

UPPCO
	Series		Year Due
	5.25	%	2013		15.0		15.0
	6.06	%	2017		15.0		15.0

MERC
	Series		Year Due
	6.03	%	2013		29.0		29.0
	6.16	%	2016		29.0		29.0
	6.40	%	2021		29.0		29.0

MGU
Series			Year Due
	5.72	%	2013	28.0	28.0
	5.76	%	2016	28.0	28.0
	5.98	%	2021	28.0	28.0


IBS
	Series			Year Due
		6.86	%	2014		10.0		-

	Total				$	220.3	$	210.9

NOTE 5--SHORT-TERM NOTES PAYABLE – RELATED PARTIES

(Millions)	2009		2008
Integrys Energy Services	$	218.7	$	-
PEC		97.0		276.1
Total	$	315.7	$	276.1

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NOTE 6--LONG-TERM DEBT – RELATED PARTIES

(Millions)	2009		2008
Long-term notes to PEC due 2011 (1)	$	325.0	$	325.0
Long-term notes to Integrys Energy Services due 2021 (2)		21.0		21.0
Total	$	346.0	$	346.0

(1)	On September 28, 2007, Integrys Energy Group issued a $325.0 million long-term promissory note to PEC. The note bears interest at a rate of 5.25% and matures in January 2011. Proceeds of the note were used to reduce the balance of commercial paper outstanding.

(2)	Integrys Energy Group has a long-term note payable to Integrys Energy Services at December 31, 2009 and 2008 of $21.0 million. The note bears interest at a rate that approximates current market rates and is due in 2021.

At December 31, 2009, Integrys Energy Group (parent company) was in compliance with all covenants relating to outstanding debt to the related parties. A schedule of all principal debt payment amounts for Integrys Energy Group (parent company) is as follows:

Year ending December 31 (Millions)
2010	$	-
2011		325.0
2012		-
2013		-
2014		-
Later years		21.0
Total payments	$	346.0

NOTE 7--INCOME TAXES

The principal components of Integrys Energy Group’s deferred income tax assets and liabilities recognized in the balance sheet as of December 31 are as follows:

(Millions)	2009		2008

Deferred income tax assets:
Plant related	$	-	$	10.9
State capital and operating loss carryforwards		10.0		11.3
Employee benefits		6.1		6.8
Price risk management		-		1.8
Deferred deductions		0.5		-
Other		-		1.1
Total deferred income tax assets		16.6		31.9
Valuation allowance		-		(1.2	)
Net deferred income tax assets	$	16.6	$	30.7

Deferred income tax liabilities:
Plant related	$	12.9	$	21.7
Price risk management		0.2		-
Other		6.1		1.1
Total deferred income tax liabilities	$	19.2	$	22.8

Carryforward periods for state capital and operating loss carryforwards vary, but in the majority of states in which we do business, the period is 15 years or more. The balance of the carryforwards of state net operating losses is $195.2 million for all states. No valuation allowances have been established due to the reasonable certainty of the ability to realize the benefit of these losses in the future.

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SCHEDULE II
INTEGRYS ENERGY GROUP
VALUATION AND QUALIFYING ACCOUNTS


Allowance for Doubtful Accounts
Years Ended December 31, 2009, 2008, and 2007
(in Millions)

	Balance at		Acquisitions		Additions		Additions
	Beginning of		of		Charged to		Charged to				Balance at
Fiscal Year	Year		Businesses		Expense		Other Accounts (1)		Reductions (2)		End of Year

2007	$	17.0	$	42.9	$	39.1	$	2.8	$	45.8	$	56.0

2008	$	56.0	$	-	$	76.8	$	5.6	$	75.9	$	62.5

2009	$	62.5	$	-	$	54.6	$	15.1	$	74.7	$	57.5


(1) Represents additions charged to regulatory assets and amounts charged to tax liabilities related to revenue taxes and state
use taxes uncollectible from customers.
(2) Represents amounts written off to the reserve, including any adjustments.

-160-

EXHIBIT INDEX

Set forth below is a listing of all exhibits to this Annual Report on Form 10-K, including those incorporated by reference.

Certain other instruments, which would otherwise be required to be listed below, have not been so listed as such instruments do not authorize long-term debt securities in an amount which exceeds 10% of the total assets of Integrys Energy Group and its subsidiaries on a consolidated basis. Integrys Energy Group agrees to furnish a copy of any such instrument to the SEC upon request.

Explanatory Note: Many of the exhibits listed below were entered into when Integrys Energy Group, Inc. was known as WPS Resources Corporation but have been referred to below by reference to its current name.

Exhibit Number	Description of Documents

2.1*	Asset Contribution Agreement between ATC and Wisconsin Electric Power Company, Wisconsin Power and Light Company, WPS, Madison Gas & Electric Co., Edison Sault Electric Company, South Beloit Water, Gas and Electric Company, dated as of December 15, 2000. (Incorporated by reference to Exhibit 2A-3 to Integrys Energy Group's Form 10-K for the year ended December 31, 2000.)

2.2* #	Purchase and Sale Agreement between Integrys Energy Services, Inc., as Seller, and Macquarie Cook Power, Inc., as Purchaser, dated as of December 23, 2009.

2.3#	First Amendment to Purchase and Sale Agreement dated January 26, 2010, between Integrys Energy Services, Inc., as Seller, and Macquarie Cook Power, Inc., as Purchaser.

3.1	Restated Articles of Incorporation of Integrys Energy Group, as amended. (Incorporated by reference to Exhibit 3.2 to Integrys Energy Group's Form 8-K filed February 27, 2007.)

3.2	By-Laws of Integrys Energy Group, as amended through December 17, 2009. (Incorporated by reference to Exhibit 3.2 to Integrys Energy Group's Form 8-K filed December 22, 2009.)

4.1	Senior Indenture, dated as of October 1, 1999, between Integrys Energy Group and U.S. Bank National Association (successor to Firstar Bank Milwaukee, N.A., National Association) (Incorporated by reference to Exhibit 4(b) to Amendment No. 1 to Form S-3 filed October 21, 1999 [Reg. No. 333-88525]); First Supplemental Indenture, dated as of November 1, 1999 between Integrys Energy Group and Firstar Bank, National Association (Incorporated by reference to Exhibit 4A of Form 8-K filed November 12, 1999); Second Supplemental Indenture, dated as of November 1, 2002 between Integrys Energy Group and U.S. Bank National Association; Third Supplemental Indenture, dated as of June 1, 2009, by and between Integrys Energy Group and U.S. Bank National Association (Incorporated by reference to Exhibit 4.1 to Integrys Energy Group’s Form 8-K filed June 17, 2009); and Fourth Supplemental Indenture, dated as of June 1, 2009, by and between Integrys Energy Group and U.S. Bank National Association (Incorporated by reference to Exhibit 4.2 to Integrys Energy Group’s Form 8-K filed June 17, 2009). (Incorporated by reference to Exhibit 4A of Form 8-K filed November 25, 2002.) All references to filings are those of Integrys Energy Group (File No. 1-11337).

-161-

Exhibit 2.2

(Execution Copy)

CONFIDENTIAL TREATMENT REQUESTED FOR PORTIONS OF THIS DOCUMENT. PORTIONS FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ARE DENOTED BY [CONFIDENTIAL TREATMENT REQUESTED]. MATERIAL OMITTED HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

PURCHASE AND SALE AGREEMENT

BETWEEN AND AMONG

INTEGRYS ENERGY SERVICES, INC.,

as Seller,

AND

MACQUARIE COOK POWER INC.,

as Purchaser

DATED AS OF DECEMBER 23, 2009

Table of Contents

			Page
ARTICLE I DEFINITIONS AND USAGE			1

	Section 1.1	Definitions	1
	Section 1.2	Rules of Construction and Usage, and Other Definitional and Interpretive Matters	14

ARTICLE II SALE OF THE TRANSFERRED CONTRACTS AND TRADING AGREEMENTS; CLOSING			16

	Section 2.1	Purchase and Sale of Transferred Contracts, Trading Contracts and Other Assets	16
	Section 2.2	Payment of Purchase Price	17
	Section 2.3	Assumed Liabilities; Excluded Liabilities	17
	Section 2.4	Closing	17
	Section 2.5	Closing Obligations	18
	Section 2.6	Misbooking Adjustments	20
	Section 2.7	Transferred Contracts; Other Assets	20
	Section 2.8	Trading Contracts	23
	Section 2.9	Exchange Traded Transactions	25
	Section 2.10	Mirror Transactions	25
	Section 2.11	ISO Contracts	27
	Section 2.12	Purchaser’s Designee	27
	Section 2.13	Identified Transactions	28
	Section 2.14	Financial and Physical Settlement	28
	Section 2.15	ERCOT Trading Contracts	29
	Section 2.16	Flattening Trades and New Trades	29

ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SELLER			29

	Section 3.1	Scope	30
	Section 3.2	Corporate Organization and Authority of Seller	30
	Section 3.3	Enforceability	30
	Section 3.4	No Conflict	30
	Section 3.5	Third Party Consents	31
	Section 3.6	Transferred Assets	31
	Section 3.7	Contracts; No Default	31
	Section 3.8	Taxes	32

-i-

TABLE OF CONTENTS

(continued)

Section 3.9	Litigation	33
Section 3.10	No Commissions	33
Section 3.11	Reserved	33
Section 3.12	Compliance with Laws	33
Section 3.13	Ability to Perform	33
Section 3.14	Seller’s Knowledge	33
Section 3.15	Disclaimer	33

ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASER			34

	Section 4.1	Scope	34
	Section 4.2	Corporate Organization and Authority	34
	Section 4.3	Enforceability	34
	Section 4.4	No Conflict	35
	Section 4.5	Third Party Consents	35
	Section 4.6	Litigation	35
	Section 4.7	Purchaser’s Investigation	35
	Section 4.8	Ability to Perform	36
	Section 4.9	No Commissions	36
	Section 4.10	Purchaser’s Knowledge	36
	Section 4.11	No Other Representation or Warranty	37
	Section 4.12	Disclaimer	37

ARTICLE V CONDITIONS PRECEDENT TO THE PURCHASER’S OBLIGATION TO CLOSE			37

	Section 5.1	Purchaser Closing Conditions	37

ARTICLE VI CONDITIONS PRECEDENT TO THE SELLER’S OBLIGATION TO CLOSE			38

	Section 6.1	Seller Closing Conditions	38

ARTICLE VII ADDITIONAL COVENANTS			39

	Section 7.1	Conduct of Business	39
	Section 7.2	Information and Access	40
	Section 7.3	Filings; Commercially Reasonable Efforts to Close	41
	Section 7.4	Retention of and Access to Records	42
	Section 7.5	Further Assurances	43
	Section 7.6	Transition Plans	43
	Section 7.7	Confidentiality	44
	Section 7.8	Related Agreements	45

-ii-

TABLE OF CONTENTS

(continued)

	Section 7.9	Non-Competition	45
	Section 7.10	Notice of Material Developments	46
	Section 7.11	The Seller’s Employees	46

ARTICLE VIII TERMINATION			47

	Section 8.1	Termination	47
	Section 8.2	Termination Fee; Sole and Exclusive Remedy	48
	Section 8.3	Effect of Termination	48

ARTICLE IX INDEMNIFICATION			49

	Section 9.1	Survival	49
	Section 9.2	Indemnification by Seller	50
	Section 9.3	Indemnification by Purchaser	50
	Section 9.4	Indemnification Procedures	51
	Section 9.5	Settlement or Compromise of Third Party Action; Failure to Assume Defense	52
	Section 9.6	Adjustment to Purchase Price	52
	Section 9.7	General Limitations	52
	Section 9.8	Exclusive Remedies	54
	Section 9.9	Non-Recourse	54

ARTICLE X GENERAL PROVISIONS			54

	Section 10.1	Expenses	54
	Section 10.2	Public Announcements and Confidentiality	54
	Section 10.3	Tax Matters	55
	Section 10.4	Notices	56
	Section 10.5	Governing Law; Submission to Jurisdiction; Selection of Forum; Waiver of Trial by Jury	57
	Section 10.6	Amendment and Waiver	58
	Section 10.7	Entire Agreement	58
	Section 10.8	Assignments, Successors and No Third-Party Rights	58
	Section 10.9	Severability	59
	Section 10.10	Execution of Agreement	59
	Section 10.11	Specific Performance	59
	Section 10.12	Disclosures	59

Exhibits

Exhibit A Form of Assignment and Assumption Agreement

Exhibit B Form of Bill of Sale

Exhibit C-1 Form of Bangor Financial Trade Agreement

-iii-

Exhibit C-2 Form of Bangor Supply Trade Agreement

Exhibit D Form of Mirror Confirm

Exhibit E Form of Novation Agreement

Exhibit F Form of Purchaser Guarantee Agreement

Exhibit G Form of Seller Guaranty Agreement

Exhibit H Form of Indicated Transactions Letter of Credit

Exhibit I Form of PPL Financial Trade Agreement

Schedules

Schedule 1.1(a) Knowledge of Seller

Schedule 1.1(b) Knowledge of Purchaser

Schedule 1.1(c) Excluded Assets

Schedule 2.1(a)(i) Transferred Contracts

Schedule 2.1(a)(ii)(A) Master Agreements

Schedule 2.1(a)(ii)(B) Trading Contracts

Schedule 2.1(a)(ii)(C) Interbook Trades

Schedule 2.1(a)(iii) Other Assets

Schedule 2.1(a)(iv) Exchange Traded Transactions

Schedule 2.1(a)(v) ISO Contracts

Schedule 2.2(b) Initial Purchase Price Adjustment

Schedule 2.2(c) Final Purchase Price Adjustment

Schedule 2.9(a) Seller Commodity Futures Brokerage Accounts

Schedule 2.9(b) Purchaser Commodity Futures Brokerage Accounts

Schedule 2.13 Identified Transactions Counterparties

Schedule 3.4 Seller Permitted Breach

Schedule 3.5 Seller Required Consents

Schedule 3.6 Permitted Encumbrances

Schedule 4.5 Purchaser Required Consents

Schedule 5.1(d) [CONFIDENTIAL TREATMENT REQUESTED]

Schedule 7.1(b) Pre-closing Guidelines

Schedule 7.9 Regulated Public Utility Affiliates

-iv-

PURCHASE AND SALE AGREEMENT

This Purchase and Sale Agreement, dated December 23, 2009, is entered into between Integrys Energy Services, Inc., a Wisconsin corporation (the “Seller”), and Macquarie Cook Power Inc., a Delaware corporation (the “Purchaser”). Integrys Energy Group, Inc., a Wisconsin corporation (“IEG”), joins herein solely for purposes of manifesting its agreement with the terms and conditions set forth in Section 2.13, Section 7.9, and Section 10.11.

RECITALS

WHEREAS, the Seller, through the use of the Transferred Assets, is engaged in a commodities trading and marketing business involved in the wholesale electricity market in the United States (such use of the Transferred Assets, considered as a whole, the “Business”);

WHEREAS, in the course of the Business, the Seller has negotiated and managed the Trading Contracts, has received certain benefits and performed certain obligations under the Transferred Contracts, has entered into the Exchange Traded Transactions and owns the Other Assets;

WHEREAS, the Seller desires to sell to the Purchaser all of the Seller’s rights and obligations under the Transferred Assets, and the Purchaser desires to assume all of the Seller’s rights and obligations under the Transferred Assets, in each case, upon the terms and subject to the conditions contained in this Agreement;

WHEREAS, in connection with the consummation of the Contemplated Transactions, the Parties intend to enter into the Related Agreements on or prior to the Closing Date; and

WHEREAS, on the Mirror Effective Date, the Seller and the Purchaser will enter into the Mirror Transactions (documented pursuant to the Mirror Confirms), pursuant to which only the economic benefits of and risks under each of the Trading Contracts will be borne by the Purchaser from and after the Mirror Effective Date.

NOW, THEREFORE, the Parties, in consideration of the mutual promises contained herein and intending to be legally bound, agree as follows:

ARTICLE I

DEFINITIONS AND USAGE

Section 1.1 Definitions. For purposes of this Agreement, the following terms and variations thereof have the meanings specified or referred to in this Section 1.1:

“Affiliate” means, with respect to any Person, any Person directly or indirectly controlling, controlled by, or under common control with, such other Person as of the date on

which, or at any time during the period for which, the determination of affiliation is being made. For purposes of this definition, the term “control” (including the correlative meanings of the terms “controlled by” and “under common control with”), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management policies of such Person, whether through the ownership of shares or by contract or otherwise.

“Agreement” means this Purchase and Sale Agreement, as the same may be amended, restated, modified or supplemented from time to time in accordance with its terms, and the Exhibits and Schedules hereto.

“Assignment and Assumption Agreement, means the Assignment and Assumption Agreement substantially in the form attached hereto as Exhibit A.

“Assumed Liabilities” means collectively:

(i) all Liabilities relating to or arising out of any of the Trading Contracts on or after the Novation Date with respect to any such Trading Contracts, as the case may be;

(ii) all Liabilities relating to or arising out of any of the Transferred Contracts (other than the ISO Contracts) on or after the Transfer Date with respect to any such Transferred Contracts, as the case may be;

(iii) all Liabilities relating to or arising out of any of the Other Assets on or after the Transfer Date with respect to any such Other Assets, as the case may be;

(iv) all Liabilities relating to or arising out of any of the Exchange Traded Transactions on or after the Mirror Effective Date with respect to any such Exchange Traded Transactions, as the case may be; and

(v) all Liabilities relating to or arising out of any of the ISO Contracts on or after the Mirror Effective Date with respect to any such ISO Contracts, as the case may be, which for avoidance of doubt does not include any liability resulting from adjustments or resettlement with respect to such ISO Contracts for any period before the Mirror Effective Date.

“Bangor Agreement” means the Entitlement Agreement between Bangor-Hydro Electric Company and Seller, dated January 12, 2009.

“Bangor Financial Trade Agreement” means the financially-settled transaction transferring certain economic risks of the Bangor Agreement, to be entered into between the Seller and Purchaser on the Mirror Effective Date and confirmed via a confirmation substantially in the form attached hereto as Exhibit C-1, under an ISDA Master Agreement, as such confirmation may be amended, restated, modified or supplemented from time to time in accordance with its terms.

“Bangor Supply Trade Agreement” means the Bangor Supply Trade Agreement, substantially in the form attached hereto as Exhibit C-2, to be entered into between the Purchaser and the Seller on the Effective Date, and confirmed under the MCP-IES ISDA Master Agreement, as such confirmation may be amended, restated, modified or supplemented from time to time in accordance with its terms.

“Bill of Sale” means the Bill of Sale substantially in the form attached hereto as Exhibit B.

“Business” has the meaning provided in the recitals of this Agreement. For purposes of this Agreement, however, Business excludes any and all business conducted by the Seller through the use of any and all Excluded Assets.

“Business Day” means a day other than Saturday, Sunday and any day on which banks located in New York City are authorized or obligated by law or executive order to close.

“Cash” means all cash and cash equivalents computed in accordance with US GAAP or, as applied to Purchaser, in accordance with internationally accepted accounting principles.

“Chosen Courts” has the meaning provided in Section 10.5

“Closing” has the meaning provided in Section 2.4.

“Closing Date” has the meaning provided in Section 2.4.

“Code” means the Internal Revenue Code of 1986, as amended.

“Confidential Information” is defined in the Confidentiality Agreement and includes this Agreement (including the Schedules and Exhibits) and the Ancillary Agreements.

“Confidentiality Agreement” means the First Amended and Restated Confidentiality Agreement by and among IEG, and its subsidiaries, and Purchaser, and its affiliates, dated July 28, 2009, as the same may be amended, restated, modified or supplemented from time to time in accordance with its terms.

“Consent” means any approval, consent, ratification, filing, waiver or other authorization.

“Contemplated Transactions” means all of the transactions contemplated to be consummated under this Agreement and the Related Agreements.

“Contract” means any contract, lease, license, evidence of Indebtedness, mortgage, indenture, security agreement or other commitment, undertaking or agreement (whether written or oral) that is legally binding.

“Counterpart Trading Contract” means each Trading Contract that relates to the Business and not to any other business of the Seller or its Affiliates.

“Counterparty” means a counterparty with respect to a Trading Contract.

“Damages” means, with respect to any Indemnified Party, any and all losses, Liabilities, claims, obligations, penalties, actions, judgments, suits, Proceedings, damages or Taxes of any kind or nature whatsoever actually suffered or incurred by such Indemnified Party after Closing (together with all reasonably incurred cash disbursements, costs and expenses, including costs of investigation, defense and appeal and reasonable attorneys’ fees and expenses), whether or not involving a Third-Party Claim but not, for the avoidance of doubt, including any diminution of value of the Transferred Assets; provided, however, that the foregoing limitation shall not limit in any manner the determination or quantification of Damages arising out of or relating to any Misbooking. In no event shall Damages include Non-Reimbursable Damages.

“Defaulting Party” means, with respect to any termination of this Agreement, (i) the Party whose breach, default or other action gives rise to a termination right of the other Party pursuant to Section 8.1(c), (ii) the Party that suffers the occurrence of an Insolvency Event, or (iii) the Party whose obligations are guaranteed by a Person that suffers an Insolvency Event.

“Draft Allocation” has the meaning provided in Section 10.3(b).

“EEI” means the Edison Electric Institute.

“EEI Master Agreement” means the Master Power Purchase and Sale Agreement published by the EEI, together with the cover sheet, any annexes and confirmations thereto, as amended from time to time.

“Effective Date” means (i) if the Closing Date is the last day of a calendar month, the Closing Date, and (ii) if the Closing Date is not the last day of a calendar month, the last day of the calendar month in which the Closing Date occurs.

“Electricity” has the meaning provided in Section 2.16.

“Encumbrance” means any lien, option, pledge, charge, security interest, mortgage, easement, or similar restriction or limitation.

“ERCOT” means the Electric Reliability Council of Texas.

“Exchange Request” has the meaning provided in Section 2.9(a).

“Exchange Traded Transactions” means the trades listed in Schedule 2.1(a)(iv).

“Excluded Assets” means any assets of the Seller or its Affiliates of any kind other than the Transferred Assets, including those assets identified on Schedule 1.1(c).

“Excluded Liabilities” means all Liabilities of the Seller and its Affiliates other than the Assumed Liabilities.

“Excluded Transactions” means those Trading Contracts that the Purchaser does not acquire in connection with the Contemplated Transactions.

“FCM” has the meaning provided in Section 2.9(a).

“FERC” means the Federal Energy Regulatory Commission or any successor Governmental Body.

“Final Allocation” has the meaning provided in Section 10.3(b).

“Final Purchase Price Adjustment” means the adjustment (positive or negative) to the Initial Purchase Price set forth in Schedule 2.2(c) calculated as of February 3, 2010.

“Financial Assurances” means guarantees, letters of credit, comfort letters, “keep whole” agreements, bonds or other financial security arrangements or other credit support arrangements (including for the provision and maintenance of Cash collateral) of any type or kind whatsoever, whether or not accrued, absolute, contingent or otherwise.

“Governing Documents” means, with respect to any particular entity, (a) if a corporation or a limited company, the articles or certificate of incorporation and the articles of association or bylaws; (b) if a general partnership, the partnership agreement and any statement of partnership; (c) if a limited partnership, the limited partnership agreement and the certificate of limited partnership; and (d) if a limited liability company, the certificate of formation and limited liability company agreement.

“Governmental Authorization” means any consent, license, permit, certificate, clearance or other authorization or approval issued, granted, given or otherwise made available by or under the authority of any Governmental Body.

“Governmental Body” means any federal, state, local, municipal, or other governmental or quasi-governmental authority or self-regulatory organization of any nature (including any agency, branch, department, board, commission, court, tribunal or other entity exercising governmental or quasi-governmental powers) or exercising, or entitled to exercise, any administrative, executive, judicial, legislative, enforcement, regulatory or taxing authority or power.

“Guarantee Agreements” means, collectively, the Purchaser Guarantee Agreement and the Seller Guarantee Agreement.

“ICE” means the Intercontinental Exchange.

“Identified Transactions” has the meaning provided in Section 2.13.

“IEG” has the meaning provided in the preamble of this Agreement.

“Indebtedness” means, with respect to any Person, any obligations of such Person (a) for borrowed money, (b) evidenced by notes, bonds, debentures or similar instruments, (c) for the deferred purchase price of goods or services (other than payables or accruals incurred in the Ordinary Course of Business, including in connection with any trades, hedges or other transactions entered into in connection with the Business), (d) under capital leases and (e) in the nature of Financial Assurances of the obligations described in clauses (a) through (d) above of any other Person; provided, that “Indebtedness” shall not include any Cash collateral or any obligation under any credit support agreement to return any posted collateral (including Cash collateral) in each case relating to any Trading Contracts.

“Indemnified Party” has the meaning provided in Section 9.4(a).

“Indemnifying Party” has the meaning provided in Section 9.4(a).

“Initial Purchase Price” means [CONFIDENTIAL TREATMENT REQUESTED].

“Insolvency Event” means, with respect to any entity, such entity (i) files a petition or otherwise commences, authorizes, or acquiesces in the commencement of a proceeding or cause of action under any bankruptcy, insolvency, reorganization or similar law, or has any such petition filed or commenced against it (i.e., an involuntary proceeding) that is not dismissed within thirty (30) calendar days; (ii) makes an assignment or any general arrangement for the benefit of creditors; (iii) otherwise becomes bankrupt or insolvent (however evidenced); (iv) has a liquidator, administrator, receiver, trustee, conservator or similar official appointed with respect to it or any substantial portion of its property or assets; or (v) is generally unable to pay its debts as they fall due.

“Interbook Matching Trade” has the meaning provided in Section 2.8(f)(ii).

“Interbook Trades” means, subject to Section 7.1(b), any intracompany transactions or transactions between Seller and any Affiliates of Seller which are listed in Schedule 2.1(a)(ii)(C).

“Initial Purchase Price Adjustment” means the adjustment (positive or negative) to the Initial Purchase Price set forth in Schedule 2.2(b) and calculated as of January 29, 2010.

“ISDA” means the International Swaps and Derivatives Association, Inc.

“ISDA Master Agreement” means the 2002 master commodity trading agreement in the form promulgated by the ISDA, together with any schedules, annexes and confirmations thereto, as amended from time to time

“ISO Contracts” means those Contracts identified on Schedule 2.1(a)(v).

“ISO Request” has the meaning provided in Section 2.11(a).

“Knowledge” means (i) with respect to the Seller, the actual knowledge (as opposed to any constructive or imputed knowledge) of the individuals listed on Schedule 1.1(a) and (ii) with respect to Purchaser, the actual knowledge (as opposed to any constructive or imputed knowledge) of the individuals listed on Schedule 1.1(b); provided, however, that, notwithstanding the foregoing, a Person identified in Schedule 1.1(a) or Schedule 1.1(b) charged with responsibility for the aspect of the business relevant or related to the matter at issue shall be deemed to have actual knowledge of a particular matter if, in the prudent and reasonable exercise of his or her duties and responsibilities in the Ordinary Course of Business, such Person should have reasonably known of such matter.

“Law” means any binding laws, statutes, treaties, rules, regulations, ordinances, judgments, decrees, principles of common law, codes, Orders and other pronouncements having the effect of law of any Governmental Body, including all Governmental Authorizations.

“Letter of Credit” means an irrevocable, transferable, standby letter of credit, in form and substance reasonably acceptable to Purchaser, issued by (a) a major U.S. commercial bank or the U.S. branch office of a major foreign bank assigned, in either case, a Credit Rating of at least (i) “A-” by S&P and “A3” by Moody’s, if such entity is rated by both S&P and Moody’s or (ii) “A-” by S&P or “A3” by Moody’s, if such entity is rated by either S&P or Moody’s but not both, or (b) any other entity as may be acceptable to Purchaser in its discretion.

“Liability” means, with respect to any Person, any and all Indebtedness, liabilities and other obligations of any kind or nature of such Person, whether fixed, contingent or absolute, matured or unmatured or accrued or unaccrued, including those arising under any Contract, agreement, arrangement, commitment or undertaking.

“Loss” or “Losses” means losses, Liabilities, Damages, obligations, payments, costs, and expenses, including the costs and expenses of any and all related actions, suits, Proceedings, assessments, judgments, settlements, and compromises and all related reasonable attorneys’ fees and reasonable disbursements.

“Material Adverse Effect” means any effect, change, occurrence, development, condition or event that, individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect (financial or otherwise) on the Business or the Transferred Assets, taken as a whole; provided, however, that the following shall not be considered when determining

whether a Material Adverse Effect has occurred: any effect resulting from (a) any change in economic conditions generally or in the industry or geographic areas in which the Business is conducted or otherwise operated; (b) any change in currency rates; (c) any continuation of an adverse trend or condition; (d) any change in any Laws or accounting rules applicable to the Business or the Transferred Assets; (e) any change resulting from changes in the international, national, regional or local wholesale or retail power markets; (f) any changes, circumstances or effects directly attributable to the announcement or pendency of the Contemplated Transactions, or resulting from or relating to compliance with the terms of, or the taking of any action required by, this Agreement; (g) the commencement, occurrence or intensification of any war, sabotage or armed hostilities; (h) acts of terrorism; (i) any failure by the Seller to meet internal or published projections, forecasts or revenue or earnings predictions with respect to the Business; (j) any materially adverse change in the Business or the Transferred Assets which is cured (including by payment of money) before the Closing Date; (k) the performance of or compliance with any of the terms and conditions of this Agreement; (l) any matter disclosed in this Agreement, or any Schedule or Exhibit hereto; or (m) any actions taken at the request of Purchaser.

“MCP-IES ISDA Master Agreement” means the ISDA Master Agreement, and the related schedules thereto, dated as of October 7, 2009, between the Purchaser and the Seller.

“Mirror Confirm” means the confirmation and associated ISDA Master Agreement, with terms and conditions substantially similar to the terms contained in Exhibit D attached hereto, to be entered into between the Purchaser and the Seller on Mirror Effective Date and, if the Purchaser exercises its rights pursuant to Section 2.12, the date on which the Mirror Confirm is novated to the Purchaser in accordance with the requirements of Section 2.12.

“Mirror Effective Date” means January 29, 2010, as may be amended from time to time; provided, however, that in the case of Exchange Traded Transactions, Mirror Effective Date means either (i) such date or (ii) if such date is not a day on which the Relevant Exchange is open for trading, the next day on which the Relevant Exchange is open for trading.

“Mirror Transaction” the transaction pursuant to the Mirror Confirm effective as of the Mirror Effective Date.

“Misbooked Trading Contract” has the meaning provided in Section 2.6.

“Misbooking” means, with regard to any Trading Contract prior to the Novation Date with respect thereto, (i) any discrepancy between (A) the terms set forth on Schedule 1 to the Mirror Confirm (including the terms of any “New Transaction” (as defined in the Mirror Confirm) deemed to be added to Schedule 1 in accordance with “Portfolio Additions” in the Mirror Confirm) and (B) the actual terms and conditions of such Trading Contract, which discrepancy can be reasonably substantiated, and (ii) any Trading Contract identified on Schedule 2.1(a)(ii)(B) (Trading Contracts) for which the Seller cannot, prior to the Effective Date, provide the Purchaser with written documentation confirming or evidencing the

Counterparty’s assent to the material terms of such Trading Contract, which assent may be confirmed or evidenced by, among other things, the Counterparty executing a Novation Agreement any time prior to the Effective Date.

“Misbooking Trigger Date” has the meaning provided in Section 8.1(e).

“Moody’s” means Moody's Investor Services, Inc. or its successor.

“Non-Defaulting Party” means, with respect to any termination of this Agreement, the Party that is not the Defaulting Party.

“Non-Reimbursable Damages” has the meaning provided in Section 9.7(c).

“Novation Agreement” means a novation agreement substantially in the form attached hereto as Exhibit E.

“Novation Condition” has the meaning provided in Section 2.8(b)(ii).

“Novation Date” has the meaning provided in Section 2.8(d).

“NYMEX” means the New York Mercantile Exchange, Inc.

“Order” means any order, writ, injunction, judgment, decree, ruling, assessment or arbitration award of any Governmental Body or arbitrator (in each case whether preliminary or final).

“Ordinary Course of Business” means the conduct of the business of a Person in accordance with such Person’s normal day-to-day customs, practices and procedures consistent with past practice and which is commercially reasonable in light of the circumstances.

“Other Assets” means those assets that are identified on Schedule 2.1(a)(iii).

“Party” means each of the Seller and the Purchaser and, solely for purposes of Section 2.13, 7.9 and 10.11, IEG.

“Permitted Encumbrance” means those Encumbrances identified in Schedule 3.6.

“Person” means any natural person, corporation, general partnership, limited partnership, limited liability company, joint venture, trust, union, proprietorship, Governmental Body or other entity, association or organization of any nature, however and wherever organized or constituted (whether or not having a separate legal personality).

“Post-Mirror Trade” has the meaning assigned in Section 2.10(b).

“PPL Financial Trade Agreement” means the PPL Financial Trade Agreement, substantially in the form attached hereto as Exhibit I, to be entered into between the Purchaser and the Seller on Mirror Effective Date and confirmed under an ISDA Master Agreement, as such confirmation may be amended, restated, modified or supplemented from time to time in accordance with its terms.

“Pre-Closing Guidelines” means those guidelines enumerated in Schedule 7.1(b).

“Proceeding” means any action, arbitration, audit, hearing, investigation, litigation or suit (whether civil, criminal, administrative, judicial or investigative, whether public or private) commenced, brought, conducted or heard by or before any Governmental Body or arbitrator.

“Purchaser” has the meaning provided in the preamble of this Agreement.

“Purchaser Guarantee Agreement” means the Guarantee Agreement, substantially in the form attached hereto as Exhibit F, entered into between Purchaser Parent, as guarantor thereunder, and the Seller, as beneficiary thereunder, dated as of the date hereof, as the same may be amended, restated, modified or supplemented from time to time in accordance with its terms, guaranteeing the obligations of Purchaser under this Agreement and the Mirror Confirm.

“Purchaser Group” has the meaning provided in Section 9.2.

“Purchaser Key Employees” mean employees of the Purchaser and any Affiliate of Purchaser that uses the term “Macquarie” in its name, in each case, performing services in or for the Energy Markets Division of the Fixed Income, Currencies & Commodities Group of the Purchaser, in each case, with the position and title of Associate Director, Managing Director, Division Director or Executive Director.

“Purchaser Parent” means Macquarie Bank Limited.

“Purchase Price” means the Initial Purchase Price, as initially adjusted by the Initial Purchase Price Adjustment and then finally adjusted by the Final Purchase Price Adjustment

“Purchaser Required Consents” means the Consents and Governmental Authorizations that are required to be obtained and are listed in Schedule 4.5.

“Related Agreements” means, collectively, the Assignment and Assumption Agreement, the Bill of Sale, the Guarantee Agreements, the Supply Trade Agreements, the Mirror Confirm, and the Novation Agreements.

“Related Purchaser Parties” means each Affiliate of Purchaser that is a party to this Agreement or any Related Agreement.

“Related Seller Parties” means each Affiliate of Seller that is a party to this Agreement or any Related Agreement.

“Relevant Exchange” means the NYMEX or ICE, as applicable.

“Relevant ISO” means the PJM Interconnection, the Midwest ISO, the New York ISO, ISO New England, ERCOT, or the California ISO, as applicable.

“Representative” means, with respect to a particular Person, any director, officer, manager, employee, agent, consultant, advisor, accountant, financial advisor, legal counsel or other representative of that Person.

“Required Consents” means the Purchaser Required Consents and the Seller Required Consents.

“Restricted Business” has the meaning provided in Section 7.9(a).

“Restricted Period” has the meaning provided in Section 7.9(a).

“S&P” means the Standard & Poor's Rating Group (a division of McGraw Hill, Inc.) or its successor.

“Schedules” means, with respect to Seller or Purchaser, the schedules delivered by Seller or Purchaser, as the case may be, pursuant to Article III or Article IV, respectively.

“Seller” has the meaning provided in the preamble of this Agreement.

“Seller Guarantee Agreement” means the Guarantee Agreement, substantially in the form attached hereto as Exhibit G, entered into between IEG, as guarantor thereunder, and the Purchaser, as beneficiary thereunder, and to be delivered and enforceable as of the Mirror Effective Date, as the same may be amended, restated, modified or supplemented from time to time in accordance with its terms, guaranteeing the obligations of Seller under this Agreement.

“Seller Group” has the meaning provided in Section 9.3.

“Seller Required Consents” means the Consents and Governmental Authorizations that are required to be obtained and are listed in Schedule 3.5.

“Subsidiary” means any Person (i) whose securities or other ownership interests having by their terms the power to elect a majority of the board of directors or other persons performing similar functions, are owned or controlled, directly or indirectly, by the Seller and/or one or more Subsidiaries, or (ii) whose business and policies the Seller and/or one or more Subsidiaries have the power to direct.

“Substitute Exchange Traded Transaction” has the meaning provided in Section 2.9(b).

“Successor Liability Taxes” means any Taxes imposed on the Seller or any entity that has ever been a member of the Seller’s consolidated group in respect of the Transferred Assets and the Business for a period or portion thereof ending on or before the Closing Date, and for which Purchaser may become liable by operation of Law, by assessment, or pursuant to the terms of an agreement entered into by the Seller as a result of being treated as a transferee of or successor to the Seller due to the transfer of the Transferred Assets and the Business pursuant to this Agreement.

“Supply Trade Agreements” means, collectively, the Bangor Financial Trade Agreement, the Bangor Supply Trade Agreement and the PPL Financial Trade Agreement.

“Tax” means (a) any income, gross receipts, license, payroll, employment, excise, capital gains or corporation tax on capital gains, severance, stamp, stamp duty reserve tax, occupation, premium, property, environmental, windfall profit, customs, capital stock, franchise, employees’ income withholding, foreign or domestic withholding, social security, unemployment, disability, real property, personal property, sales, use, transfer, documentary, value added, alternative, add on minimum and other tax, fee, assessment, levy, tariff, charge or duty of any kind whatsoever and any interest, penalty, addition or additional amount thereon imposed, assessed or collected by or under the authority of any Governmental Body, (b) any liability for the payment of any amounts of the type described in the immediately preceding clause as a result of being (or ceasing to be) a member of an affiliated, consolidated, combined, unitary or aggregate group, under Treasury Regulation Section 1.1502-6 or any analogous or similar provision of state, local or foreign Law, or being included (or required to be included) in any Tax Return related thereto, and (c) all liabilities for the payment of amounts of the type described in clauses (a) or (b) as a result of being a transferee of or successor to any Person, by contract or otherwise.

“Tax Laws” means any Law of any Governmental Body relating to any Tax.

“Tax Return” means any return (including any information return), report, statement, schedule, notice, form, declaration, or claim for refund (including any amended return, report, statement, schedule, notice, form, declaration, or claim for refund) filed with or submitted to, or required to be filed with or submitted to, any Governmental Body with respect to Taxes.

“Termination Fee” means a fee payable pursuant to Section 8.2 in the amount of ten million dollars ($10,000,000.00).

“Third Party” means a Person other than the Seller or the Purchaser or any of their respective Affiliates.

“Third-Party Claim” has the meaning provided in Section 9.4(b).

“Trading Contracts” means, subject to Sections 2.6 and 7.1(b), those transactions and/or master trading agreements evidenced by written Contracts (i.e., not including any oral agreement or other undocumented transaction), including any Interbook Trades (whether or not documented on agreement such as the ISDA Master Agreement, WSPP Master Agreement, or EEI Master Agreement), to which the Seller is a party and that are identified on Schedule 2.1(a)(ii)(A) (Master Agreements), Schedule 2.1(a)(ii)(B) (Trading Contracts), and Schedule 2.1(a)(ii)(C) (Interbook Trades); provided, however, that, notwithstanding anything else to the contrary herein, “Trading Contract” shall for all purposes hereunder only refer to the rights and Liabilities under such Contracts to the extent relating to or constituting a Counterpart Trading Contract and not to any other rights or Liabilities under such Contracts.

[CONFIDENTIAL TREATMENT REQUESTED].

“Transfer Condition” means, collectively:

(i) the receipt of all Governmental Authorizations and all Consents (including any required Third Party consent) necessary to permit the transfer or conveyance of such Transferred Assets to the Purchaser; and

(ii) the applicable Third Party having (x) released the Seller and IEG from any and all obligations and Liabilities under such Transferred Contract or Other Asset and (y) released or agreed in writing, with the Seller and IEG as third party beneficiaries, to release within a reasonable period of time after the execution of such release the Seller and IEG from any and all obligations and Liabilities under any Financial Assurances related to such Transferred Contract and Other Asset, including the return by the applicable Third Party of any collateral held by such Third Party to the Seller or IEG.

“Transfer Date” means, with respect to any Transferred Contract or Other Asset, the later of (i) the last day of the calendar month in which the Transfer Condition has been satisfied and (ii) the Effective Date.

“Transfer Taxes” has the meaning provided in Section 10.3(a).

“Transferred Assets” means the Transferred Contracts, the Trading Contracts, the Exchange Traded Transactions, and the Other Assets, in each case, sold by the Seller to the Purchaser in accordance with, and subject to, the terms and conditions of, this Agreement.

“Transferred Contracts” means, subject to Section 7.1(b), those written Contracts (i.e., not including any oral agreement or other undocumented transaction) that are used by or in support of the Business and that are identified on Schedule 2.1(a)(i) (Transferred Contracts), including any ISO Contracts, but excluding any Trading Contracts.

“US GAAP” means US generally accepted accounting principles in effect from time to time.

“US” or “United States” means the United States of America.

“WSPP” means the Western Systems Power Pool.

“WSPP Master Agreement” means the Western Systems Power Pool Agreement, as such agreement may be amended by the WSPP from time-to-time, including any Master Confirmation Agreement (as defined in the WSPP Agreement) or other modifications made by the parties thereto.

Section 1.2 Rules of Construction and Usage, and Other Definitional and Interpretive Matters.

(a) Interpretation. In this Agreement, unless a clear contrary intention appears:

(i) Singular. The singular number includes the plural number and vice versa.

(ii) Successors. Reference to any Person includes such Person’s successors and assigns but, if applicable, only if such successors and assigns are not prohibited by this Agreement, and reference to a Person in a particular capacity excludes such Person in any other capacity or individually.

(iii) Gender and Number. Any reference in this Agreement to gender includes all genders, and the meaning of defined terms applies to both the singular and the plural of those terms.

(iv) Agreements as Amended. Reference to any agreement, document or instrument means such agreement, document or instrument as amended or modified and in effect from time to time in accordance with the terms thereof.

(v) Laws as Amended. Reference to any Law means such Law as amended, modified, codified, replaced or reenacted, in whole or in part, and in effect from time to time, including rules and regulations promulgated thereunder, and reference to any section or other provision of any Law means that provision of such Law from time to time in effect and constituting the substantive amendment, modification, codification, replacement or reenactment of such section or other provision, in each case except to the extent that this would increase or alter the Liability of the Seller under this Agreement.

(vi) Hereunder and Similar Words. “Hereunder,” “hereof,” “hereto,” and words of similar import shall be deemed references to this Agreement as a whole and not to any particular Article, Section or other provision hereof.

(vii) Headings. The division of this Agreement into Articles, Sections, and other subdivisions and the insertion of headings are for convenience of reference only and do not affect, and will not be utilized in construing or interpreting, this Agreement.

(viii) Section and Articles. All references in this Agreement to a particular “Section” or “Articles” refers to the corresponding Section or Article of this Agreement unless otherwise specified.

(ix) Dollars. Any reference in this Agreement to “dollars” or “$” means US dollars.

(x) Calculation of Time Period. With respect to the determination of any period of time, “from” means “from and including” and “to” means “to but excluding.” If the last day of any time period is a non-Business Day, the time period will be extended to the next Business Day. Unless otherwise specified, all times are New York City time.

(xi) Exhibits and Schedules. Unless otherwise expressly indicated, any reference in this Agreement to an “Exhibit” or a “Schedule” refers to an Exhibit or Schedule to this Agreement. The Exhibits and Schedules to this Agreement are incorporated and made a part of this Agreement as if set forth in full in this Agreement and are an integral part of this Agreement. Capitalized terms used but not otherwise defined in a Schedule or Exhibit have the meanings set forth in this Agreement.

(xii) Including. The word “including” or any variation thereof means “including without limitation” and does not limit any general statement that it follows to the specific or similar items or matters immediately following it.

(b) Equal Drafting. All Parties acknowledge that it and its attorneys have been given an equal opportunity to negotiate the terms and conditions of this Agreement and that any rule of construction to the effect that ambiguities are to be resolved against the drafting Party or any similar rule operating against the drafter of an agreement shall not be applicable to the construction or interpretation of this Agreement.

(c) Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with US GAAP, consistently applied or, with respect to Purchaser and its Affiliates, in accordance with internationally accepted accounting principles.

(d) Ejusdem Generis. General words shall not be given a restrictive meaning by reason of the fact that they are followed by particular examples intended to be embraced by the general words.

ARTICLE II

SALE OF THE TRANSFERRED CONTRACTS AND

TRADING AGREEMENTS; CLOSING

Section 2.1 Purchase and Sale of Transferred Contracts, Trading Contracts and Other Assets.

(a) Subject to the satisfaction or waiver of the conditions precedent set forth in Article V and Article VI, upon the terms and subject to the conditions set forth in this Agreement:

(i) Transferred Contracts: Subject to Section 2.7, the Seller agrees to sell to the Purchaser, free and clear of all Encumbrances (except Permitted Encumbrances), and the Purchaser agrees to purchase from the Seller, all of the rights, title and interests of the Seller in, and assume all of the Liabilities of the Seller under, each of the Transferred Contracts (other than the ISO Contracts), in each case, with effect from 11:59 p.m. New York City time on the Transfer Date with respect to each of such Transferred Contracts;

(ii) Trading Contracts: Subject to Section 2.8, the Seller agrees to sell to the Purchaser, free and clear of all Encumbrances (except Permitted Encumbrances), and the Purchaser agrees to purchase from the Seller, by way of novation, all of the rights, title and interests of the Seller in, and assume all of the Liabilities of the Seller under, each of the Trading Contracts, in each case, with effect from 11:59 p.m. New York City time on the Novation Date with respect to each of such Trading Contract;

(iii) Other Assets: The Seller agrees to sell to the Purchaser, free and clear of all Encumbrances (except Permitted Encumbrances), and the Purchaser agrees to purchase from the Seller, all of the rights, title and interests of the Seller in and to each of the Other Assets, with effect from 11:59 p.m. New York City time on the Transfer Date with respect to each of such Other Assets;

(iv) Exchange Traded Transactions: Subject to Section 2.9, the Seller agrees to sell to the Purchaser, free and clear of all Encumbrances (except Permitted Encumbrances), and the Purchaser agrees to purchase from the Seller, by way of novation, all of the rights, title and interests of the Seller in and to the Exchange Traded Transactions, with effect from 11:59 p.m. New York City time on the Mirror Effective Date; and

(v) ISO Contracts: Subject to Section 2.11, the Seller agrees to sell the Purchaser, free and clear of all Encumbrances (except Permitted Encumbrances), and the Purchaser agrees to purchase from the Seller, all of the rights, title and interest of the Seller in, and assume all the Liabilities of the Seller under, each of the ISO Contracts, with effect from 11:59 p.m. on the Mirror Effective Date.

(b) At all times, the Seller and its Affiliates shall retain all of their existing rights, title and interests in and to the Excluded Assets, and the Purchaser shall have no rights to the Excluded Assets.

Section 2.2 Payment of Purchase Price.

(a) Payment on the Mirror Effective Date. On the terms and subject to the terms and conditions hereof and in consideration of the Contemplated Transactions, on the Mirror Effective Date, the Purchaser shall pay to the Seller the Initial Purchase Price, plus Initial Purchase Price Adjustment; provided, that any amount due pursuant to this Section 2.2 shall be payable on a net basis with respect to any other amounts due under the Mirror Confirm or under the PPL Financial Trade Agreement, in each case on Mirror Effective Date. Such amount shall be delivered by wire transfer in immediately available funds to the account or accounts designated by Seller.

(b) Payment on February 3, 2010. On the terms and subject to the terms and conditions hereof and in consideration of the Contemplated Transactions, on February 3, 2010, the Final Purchase Price Adjustment shall be paid (i) if positive, by the Purchaser to the Seller, or (ii) if negative, by the Seller to the Purchaser. Such amount shall be delivered by wire transfer in immediately available funds to the account or accounts designated by Purchaser or Seller, as the case may be; provided, however, that should the Parties not agree on the amount of the Final Purchase Price Adjustment, the undisputed amount of such adjustment shall be paid by the February 3, 2010 deadline by the Purchaser or Seller (as the case may be), and thereafter the Parties shall use commercially reasonable efforts to resolve promptly their disagreement about the amount of the Final Purchase Price Adjustment in accordance with the dispute resolution process set forth in Schedule 2.2(c).

Section 2.3 Assumed Liabilities; Excluded Liabilities.

(a) In consideration of the transactions contemplated by Section 2.1(a), the Purchaser shall perform, discharge and satisfy, as and when due, all of the Assumed Liabilities from and after (i) with respect to any Transferred Contract (other than the ISO Contracts) or Other Asset, the Transfer Date with respect to such Transferred Contract (other than the ISO Contracts) and Other Asset, (ii) with respect to any Trading Contract, the Novation Date with respect to such Trading Contract, (iii) with respect to any Exchange Traded Transaction, the Mirror Effective Date; and (iv) with respect to the ISO Contracts, the Mirror Effective Date.

(b) At all times, the Seller and its Affiliates shall retain and be responsible for all Excluded Liabilities, and the Purchaser shall not have any Liability with respect to the Excluded Liabilities, the Excluded Assets and the Excluded Transactions.

Section 2.4 Closing. The consummation of the Contemplated Transactions (the “Closing”) shall take place at the offices of Foley & Lardner LLP, 321 North Clark Street, Suite

2800, Chicago, IL 60654-5313 (or such other place as the Parties may agree), three (3) Business Days following the satisfaction or waiver of the conditions set forth in Articles V and VI (other than those conditions that by their terms are to be satisfied at the Closing, but subject to the satisfaction or waiver of such conditions) or at such other place, time and date as the Parties may agree (the “Closing Date”). For the avoidance of doubt, certain components of the Contemplated Transactions will be undertaken prior to the Closing Date as required hereby.

Section 2.5 Closing Obligations. In addition to any other documents to be delivered under other provisions of this Agreement, at the Closing:

(a) Seller’s Deliveries. The Seller shall deliver or cause to be delivered to the Purchaser:

(i) the Novation Agreements for each of the Trading Contracts for which the Novation Condition has been satisfied, duly executed by Seller;

(ii) the Assignment and Assumption Agreement, duly executed by Seller;

(iii) the Bill of Sale, duly executed by Seller;

(iv) evidence of the filing with respect to and/or receipt of all the Seller Required Consents;

(v) a duly executed certification pursuant to Treasury Regulation Section 1.1445-2(b)(2) that the Seller is not a foreign Person within the meaning set forth in Section 1445(f)(3) of the Code;

(vi) a certificate duly executed by the Seller, dated as of the Closing Date, in accordance with Section 5.1(f);

(vii) all consents, waivers or approvals obtained by Seller from Third Parties in connection with this Agreement;

(viii) terminations or releases of Encumbrances on the Transferred Assets that are not Permitted Encumbrances;

(ix) a certificate of status with respect to the Seller (dated as of a recent date), issued by the Wisconsin Department of Financial Institutions;

(x) a copy, certified by an authorized officer of the Seller, of the resolutions authorizing the execution and delivery of this Agreement and the Related Agreements and instruments attached as exhibits to this Agreement and to the Related Agreements, and the consummation of the Contemplated Transactions, together with a certificate

by the Secretary of the Seller as to the incumbency of those officers authorized to execute and deliver this Agreement and the Related Agreements; and

(xi) such other customary instruments of transfer, assumptions, filings or documents, in form and substance reasonably satisfactory to the Purchaser, as may be required to give effect to the Contemplated Transactions.

(b) Purchaser’s Deliveries. The Purchaser shall deliver to the Seller:

(i) the Novation Agreements for each of the Trading Contracts for which the Novation Condition has been satisfied, duly executed by Purchaser;

(ii) the Assignment and Assumption Agreement, duly executed by Purchaser;

(iii) the Bill of Sale, duly executed by Purchaser;

(iv) evidence of the filing with respect to and/or receipt of all the Purchaser Required Consents;

(v) the releases of Financial Assurances with respect to any Trading Contracts, or the agreement of the Counterparty to do so, in either case obtained on or prior to the Closing Date pursuant to Section 2.8(b)(ii) and, to the extent applicable, for any Transferred Contract or Other Asset for which the Transfer Condition has been satisfied;

(vi) a certificate duly executed by the Purchaser, dated as of the Closing Date, in accordance with Section 6.1(e);

(vii) evidence reasonably acceptable to the Seller of the Purchaser’s existence and good standing (as of a recent date) under the laws of the State of Delaware;

(viii) a copy, certified by an authorized officer of the Purchaser, of the resolutions authorizing the execution and delivery of this Agreement and the Related Agreements and instruments attached as exhibits to this Agreement and to the Related Agreements, and the consummation of the Contemplated Transactions, together with a certificate by the Secretary of the Purchaser as to the incumbency of those officers authorized to execute and deliver this Agreement and the Related Agreements; and

(ix) such other customary instruments of transfer, assumptions, filings or documents, in form and substance reasonably satisfactory to the Seller, as may be required to give effect to the Contemplated Transactions.

(c) Without prejudice to any other rights of the Parties under this Agreement or to any other remedy they may have, if a Party has not complied in full with its obligations under

this Section 2.5 on or before the Closing Date, the non-breaching Party may, at its discretion, waive the requirement to fulfill the unsatisfied obligations in whole or in part and proceed to Closing to the extent reasonably practicable.

Section 2.6 Misbooking Adjustments. Until [CONFIDENTIAL TREATMENT REQUESTED], the Purchaser may provide, within a commercially reasonable time period, written notice to the Seller of any Misbooking identified or determined to exist at any time with respect to a Trading Contract (a “Misbooked Trading Contract”).

(a) Misbooked Trades Accepted. Within [CONFIDENTIAL TREATMENT REQUESTED] of the date upon which such notice is received by the Seller, the Purchaser shall determine the economic impact of the Misbooked Trading Contract by calculating (i) [CONFIDENTIAL TREATMENT REQUESTED], as of the date notice is given pursuant to this Section 2.6, as determined by reference to the actual characteristics of such Misbooked Trading Contract (giving effect to any errors discovered in connection therewith), less (ii) [CONFIDENTIAL TREATMENT REQUESTED]. Depending on the result of such calculation, (x) if negative, the Seller shall pay the absolute value of the amount resulting from such calculation to the Purchaser, or (y) if positive, the Purchaser shall pay the amount resulting from such calculation to the Seller, which payment shall, in either case, be paid within three (3) Business Days of such amount being determined.

(b) Misbooked Trades Rejected. Notwithstanding the foregoing, the Purchaser shall have the right to [CONFIDENTIAL TREATMENT REQUESTED] of the date of such notice of Misbooking is received by the Seller; provided, however, that if such Misbooked Trading Contract, after giving effect to the error with respect thereto, would nonetheless be substantially similar to the Transferred Assets (excluding Misbooked Trading Contracts), then the Purchaser shall not reject the acceptance of such Misbooked Trading Contract. If the Purchaser determines pursuant to this Section 2.6(b) [CONFIDENTIAL TREATMENT REQUESTED], of such amount being determined, and such Trading Contract shall become an Excluded Transaction and shall not be considered or otherwise deemed a Transferred Asset for any purpose hereunder from and after such date of rejection; provided, that, for purposes of determining the value of the economic impact of rejecting any such Misbooked Trading Contract, the Parties shall use the market value of such Misbooked Trading Contract as of the Mirror Effective Date, as determined by reference to Schedule 2.2(b). Upon rejection of a Misbooked Trading Contract pursuant to this Section 2.6(b), the term “Trading Contracts” shall thereafter not include any such rejected Trading Contract for any purpose hereunder.

(c) Misbooking Calculations. For any determination of the amount payable pursuant to Section 2.6(a) or 2.6(b), Purchaser will act in good faith and use commercially reasonable procedures in order to produce a commercially reasonable result. In determining such amount(s), Purchaser may consider (i) quotations (either firm or indicative) for replacement transactions supplied by one or more Third Parties that may take into account the creditworthiness of the Purchaser or the Seller at the time such quotation is provided and the terms of relevant

documentation, including credit support documentation; (ii) information consisting of relevant market data in the relevant market supplied by one or more Third Parties including relevant rates, prices, yields, yield curves, volatilities, spreads, correlations or other relevant market data in the relevant market; or (iii) information of the type described in clause (i) or (ii) from internal sources (including any Affiliates) if that information is of the same type used by the Purchaser in the regular course of business for the valuation of similar transactions. Third Parties that supply quotations pursuant to the foregoing clause (i) or market data pursuant to the foregoing clause (ii) may include dealers in the relevant markets, end-users of the relevant products or services, information vendors, brokers and other sources of market information.

(d) Disputes of Misbooking Calculations. Seller shall have the right acting in good faith in accordance with commercially reasonable standards to dispute any determination of the amount payable pursuant to Section 2.6(a) or 2.6(b), provided that payment of the undisputed amount shall first be paid by the Purchaser or Seller, as the case may be, to the other Party.

Section 2.7 Transferred Contracts; Other Assets.

(a) On the terms and subject to the conditions set forth herein, on the Transfer Date with respect to any Transferred Contracts (other than the ISO Contracts) or Other Assets, the Seller shall convey, assign and transfer to, and the Purchaser or one of its Affiliates (subject to Section 2.12) shall receive, undertake and assume, all such Transferred Contracts and Other Assets. To the extent that the transfer or conveyance of any such Transferred Contracts or Other Assets to the Purchaser requires the Consent of a Third Party or Governmental Authorization, the Seller and the Purchaser shall use commercially reasonable efforts, and cooperate with each other, to obtain promptly the relevant Consent or Governmental Authorization prior to the Closing Date.

(b) Notwithstanding anything to the contrary contained in this Agreement but subject to the requirements of Section 2.7(d), to the extent that the transfer or conveyance of any Transferred Contract or Other Asset to the Purchaser pursuant to this Section 2.7 requires the Consent of a Third Party or Governmental Authorization and such Consent or Governmental Authorization shall not have been obtained prior to the Closing Date:

(i) this Agreement shall not constitute an assignment or attempted assignment of such Transferred Contract or Other Asset on the Effective Date if such assignment or attempted assignment would constitute a breach or violation of such Transferred Contract or Other Asset;

(ii) such Transferred Contract or Other Asset shall not be deemed to be a Transferred Asset hereunder until the Transfer Date occurs with respect thereto; and

(iii) the Closing shall proceed without regard to the transfer or conveyance of such Transferred Contract or Other Asset.

(c) With respect to any Transferred Contracts or Other Assets which are the subject of Section 2.7(b), the Seller and the Purchaser shall use commercially reasonable efforts, and cooperate with each other, to obtain promptly the relevant Consent or Governmental Authorization required to transfer or convey any such Transferred Contracts or Other Assets from the Seller to the Purchaser after the Closing Date. Following Closing, if and when the relevant Consent or Governmental Authorization is thereafter obtained with respect to such Transferred Contracts or Other Assets:

(i) the Seller and the Purchaser shall use commercially reasonable efforts to cooperate with each other in any mutually agreeable, reasonable and lawful arrangements designed to allow the Purchaser to obtain all of the rights, title, interests in, and assume all Liabilities under, such relevant Transferred Contract or Other Assets, and such Transferred Contracts or Other Assets shall be deemed to be a Transferred Asset from and after the relevant Transfer Date for all purposes hereunder; and

(ii) the Seller shall transfer or convey such relevant Transferred Contract or Other Assets to the Purchaser at no additional cost.

(d) Notwithstanding anything to the contrary contained in this Agreement, with respect to any Transferred Contracts (other than the ISO Contracts) or Other Assets which are the subject of Section 2.7(b), pending the receipt of the applicable Consent or Governmental Authorization, the Parties shall cooperate with each other in any mutually agreeable, reasonable and lawful arrangements designed to provide to the Purchaser the benefits of use of such Transferred Contracts or Other Assets and to the Seller or its Affiliates the benefits, including any indemnities, that they would have obtained had the Transferred Contracts or Other Assets been conveyed to the Purchaser at the Effective Date. To the extent that any such Transferred Contracts or Other Assets cannot be transferred or conveyed or the full benefits of use of any such Transferred Contracts or Other Assets cannot be provided to the Purchaser following the Effective Date pursuant to this Section 2.7(d), then the Purchaser and the Seller shall enter into such arrangements (including subleasing, sublicensing or subcontracting) to provide to the Parties the economic (taking into account Tax costs and benefits) and operational equivalent, to the extent permitted by applicable Law, of obtaining such Consent or Governmental Authorization and the performance by the Purchaser of the obligations thereunder. The Seller shall hold in trust for and pay to the Purchaser promptly upon receipt thereof, all income, proceeds and other monies received by the Seller or any of its Affiliates in connection with its use of any Transferred Contracts or Other Assets (net of any Taxes and any other costs incurred by the Seller or any of its Affiliates) following the Effective Date in connection with the arrangements under this Section 2.7(d).

(e) To the extent any Other Assets constitute the intellectual property of Seller, Seller hereby acknowledges, grants, and confirms that Purchaser shall in perpetuity have all right, title, permission, license and interest to own and use such intellectual property from and after the

relevant Transfer Date as required for the use of such Other Assets without restriction or other limitation.

Section 2.8 Trading Contracts.

(a) On the terms and subject to the conditions set forth herein and subject to Section 2.8(f) with respect to Interbook Trades, on the Novation Date with respect to any Trading Contract, the Seller shall convey, assign and transfer to, and the Purchaser or one of its Affiliates shall receive from, undertake and assume, such Trading Contract, in each case, pursuant to a Novation Agreement by and among the Seller, the Purchaser and the Counterparty to each of such Trading Contracts. To the extent that the transfer of any of the Trading Contracts to the Purchaser requires the Consent of a Third Party or Governmental Authorization, the Seller and the Purchaser shall use commercially reasonable efforts, and cooperate with each other, to obtain promptly the relevant Consent or Governmental Authorization prior to the Closing Date.

(b) Subject to Sections 2.8(c) and (d), the sale, transfer and novation of any Trading Contract shall be conditional on:

(i) the receipt of all Governmental Authorizations and all Consents (including any required Counterparty consent) necessary to permit the novation of such Trading Contract to the Purchaser; and

(ii) the applicable Counterparty having (x) released the Seller, IEG and all of IEG’s other Affiliates from any and all obligations and Liabilities under such Trading Contract and (y) released or agreed in writing, with the Seller, IEG and all of IEG’s other Affiliates as Third Party beneficiaries, to release within a reasonable period of time after the execution of such release the Seller, IEG and all of IEG’s other Affiliates from any and all obligations and Liabilities under any Financial Assurances related to such Trading Contracts, including the return by the applicable Counterparty of any collateral held by such Counterparty to the Seller, IEG or IEG’s other Affiliates (clauses (i) and (ii), collectively, the “Novation Condition”).

(c) If the Purchaser has an existing master trading agreement with any Counterparty to a Trading Contract, [CONFIDENTIAL TREATMENT REQUESTED], the Purchaser and the Seller shall have the right to seek the consent of such Counterparty to make the Counterpart Trading Contracts under such Trading Contract subject to the existing master trading agreement between the Purchaser and such Counterparty or to negotiate changes to Seller’s existing master trading agreement or a new master trading agreement with such Counterparty. To the extent possible, the Parties shall use the form of Novation Agreement, with such amendments as may be necessary or advisable, to accommodate the particular circumstances relating to the relevant Counterpart Trading Contract. [CONFIDENTIAL TREATMENT REQUESTED]

(d) Subject to Section 2.8(f) with respect to Interbook Trades, the novation of any Trading Contract shall become effective on the later to occur of (i) the last day of the calendar month in which the Novation Condition with respect thereto is satisfied by each of the Seller and the Purchaser and (ii) the Effective Date (the “Novation Date”).

(e) To the extent that the Novation Date has not occurred with respect to any Trading Contract prior to or after the Closing Date:

(i) this Agreement shall not constitute a novation, assignment or attempted assignment with respect to such Trading Contract at or after the Effective Date;

(ii) the Seller and the Purchaser shall use commercially reasonable efforts (without the obligation on the part of either Party to pay any money, assume or incur any Liability or agree to any material changes of the Closing in the terms or conditions of such Trading Contract), and cooperate with each other, to obtain promptly the relevant Consent or Governmental Authorization after the Closing Date to the extent necessary to satisfy any Novation Condition; and

(iii) such Trading Contract shall not be deemed to be a Transferred Asset until the Novation Date with respect to such Trading Contract has occurred;

provided, that, upon the occurrence of the Novation Date with respect to such Trading Contract, such Trading Contract shall be deemed to be a Transferred Asset from and after such Novation Date for all purposes hereunder.

(f) With respect to each Interbook Trade, such Trading Contract will not be novated from Seller to Purchaser and is not subject to Section 2.8 (a) through (e) above, but rather:

(i) If the Interbook Trade is financially-settled, such Interbook Trade will be included as a Trading Contract under the Mirror Confirm and shall remain subject to the terms of such Mirror Confirm; and

(ii) If the Interbook Trade is physically-settled, such Interbook Trade will be included as a Trading Contract under the Mirror Confirm (and be financially-settled) and shall remain as a financially-settled transaction subject to the terms of such Mirror Confirm until the earlier of (y) the date the Interbook Trade expires or terminates in accordance with its terms, or (z) the occurrence of the Effective Date. Upon the occurrence of the Effective Date, any remaining Interbook Trades shall no longer be subject to the Mirror Confirm and the corresponding Mirror Transaction shall terminate without a Portfolio Deletion Payment (as such term is defined in the Mirror Confirm) coming due as a result of such termination, and in lieu thereof a new physically-settled transaction between Seller and Purchaser shall be deemed to be automatically entered into as of the Effective Date, which transaction shall be subject to, and

confirmed in accordance with, the MCP-IES ISDA Master Agreement (each such transaction, a “Interbook Matching Trade”). Each Interbook Matching Trade shall be between Purchaser and Seller only (and not with any Seller Affiliate) for the remaining term of the corresponding Interbook Trade, shall mirror the terms of the Interbook Trade, and shall terminate automatically upon the termination or expiration of the Interbook Trade.

Section 2.9 Exchange Traded Transactions.

(a) On the Mirror Effective Date, the Seller shall request of the Relevant Exchange (the “Exchange Request”) that the Exchange Traded Transactions be transferred to the Purchaser in accordance with the rules and procedures of the Relevant Exchange from the commodity futures brokerage accounts of the Seller listed on Schedule 2.9(a) attached hereto, carried by the futures commission merchants (each an “FCM”) listed thereon, to the account of the Purchaser via an ex-pit, ex-Ring or ex-order book transfer, and the Purchaser shall assume each Exchange Traded Transaction, by a novation effected pursuant to the applicable rules of the Relevant Exchange. Each such transfer shall be effected at the settlement price as of the close of trading on the Relevant Exchange on the Mirror Effective Date, and other than payment of the Purchase Price, the Parties intend that no consideration will be paid in respect of the Exchange Traded Transactions. The Exchange Request shall be in form and substance reasonably satisfactory to the Seller and the Purchaser. To the extent that the transfer or conveyance of any of the Exchange Traded Transactions to the Purchaser requires the Consent of a Third Party or Governmental Authorization, the Seller and the Purchaser shall use commercially reasonable efforts, and cooperate with each other, to obtain promptly the relevant Consent or Governmental Authorization prior to the Mirror Effective Date.

(b) If following the Mirror Effective Date this Agreement is terminated in accordance with the terms and conditions set forth in Article VIII, then on the Business Day immediately following the date that this Agreement is terminated, the Purchaser shall submit to the Relevant Exchange an Exchange Request that the Exchange Traded Transactions, or trades cleared on the Relevant Exchange that are substantially similar to the Exchange Traded Transactions (each a “Substitute Exchange Traded Transaction”) be transferred to the Seller in accordance with the rules and procedures of the Relevant Exchange from the commodity futures brokerage accounts of the Purchaser listed on Schedule 2.9(b) attached hereto, carried by each FCM listed thereon, to the account of the Seller via an ex-pit, ex-Ring or ex-order book transfer, and the Seller shall assume each Substitute Exchange Traded Transaction, by a novation effected pursuant to the applicable rules of the Relevant Exchange. Each such transfer pursuant to this Section 2.9(b) shall be effected at the settlement price as of the close of trading on the Relevant Exchange on the trading date immediately preceding the date of such transfer, and other than as provided in Article VIII, the Parties intend that no consideration will be paid in respect of the Substitute Exchange Traded Transactions. The Exchange Request shall be in same form and have the same substance as that which was provided to the Relevant Exchange under Section 2.9(a).

Section 2.10 Mirror Transactions.

(a) Upon the Mirror Effective Date, the Seller and the Purchaser shall enter into the Mirror Confirm whereby only the economic benefits of and risks under each of the Trading Contract will be borne by the Purchaser from and after the Mirror Effective Date, pursuant to the terms and subject to the conditions set forth in the Mirror Confirm.

(b) After the Mirror Effective Date until the Closing Date, and subject to Section 2.16, all trading agreements, interbook trades and other contracts that the Seller enters into, which are substantially similar to the Transferred Assets, in accordance with the Pre-Closing Guidelines or as otherwise consented to by Purchaser, in its sole discretion, shall be deemed “Trading Contracts”, “Interbook Trades”, “Transferred Contracts” or “ISO Contracts”, as the case may be (each a “Post-Mirror Trade”), and shall for all purposes hereunder be encompassed by the Mirror Confirm without any further action being taken by either the Purchaser or Seller. Thereafter, the sale, transfer and novation of each Post-Mirror Trade shall be conditional on:

(i) the receipt of all Governmental Authorizations and all Consents (including any required Third Party Consent) necessary to permit the transfer or conveyance of such Post-Mirror Trade to the Purchaser; and

(ii) the applicable Third Party having (x) released the Seller, IEG and all of IEG’s other Affiliates from any and all obligations and Liabilities under such Post-Mirror Trade and (y) released or agreed in writing, with the Seller, IEG and all of IEG’s other Affiliates as Third Party beneficiaries, to release within a reasonable period of time after the execution of such release the Seller, IEG and all of IEG’s other Affiliates from any and all obligations and Liabilities under any Financial Assurances related to such Post-Mirror Trade, including the return by the applicable Third Party of any collateral held by such Third Party to the Seller, IEG or all of IEG’s other Affiliates.

(c) If following the Mirror Effective Date this Agreement is terminated in accordance with the terms and conditions set forth in Article VIII, then following such termination, the Mirror Confirm shall be terminated and the Termination Payment (as such term is defined in the Mirror Confirm) paid pursuant to the Mirror Confirm and the ISDA Master Agreement governing the Mirror Confirm.

(d) For the avoidance of doubt, the Parties expressly acknowledge and agree that, while a Mirror Transaction is in effect, any potential or actual event of default or performance failure (except force majeure as specifically set forth in the Mirror Confirm) of whatever description and for whatever reason by a Counterparty with respect to a Trading Contract shall not affect or in any way diminish the respective obligations of the Purchaser and Seller under the Mirror Transaction that corresponds to such Trading Contract.

Section 2.11 ISO Contracts.

(a) On the Mirror Effective Date, the Seller shall request of the Relevant ISO (the “ISO Request”) that the ISO Contracts be transferred to the Purchaser in accordance with the rules and procedures of the Relevant ISO. Upon such transfer, all required collateral obligations to the Relevant ISO related to the ISO Contracts will become the responsibility of Purchaser. The Parties intend that, other than the Purchase Price, no consideration will be paid in respect of the ISO Contracts. The ISO Request shall be in form and substance reasonably satisfactory to the Seller and the Purchaser. To the extent that the transfer or conveyance of any of the ISO Contracts to the Purchaser requires the Consent of a Third Party or Governmental Authorization, the Seller and the Purchaser shall use commercially reasonable efforts, and cooperate with each other, to obtain promptly the relevant Consent or Governmental Authorization prior to the Mirror Effective Date.

(b) If following the Mirror Effective Date, this Agreement is terminated in accordance with the terms and conditions set forth in Article VIII, then following such termination, the Purchaser shall convey, assign and transfer to, and the Seller shall receive, undertake and assume, the ISO Contracts; provided, that if (x) the aggregate marked-to-market value for all such ISO Contracts on the termination date is greater than zero, then the Seller shall pay to the Purchaser an amount equal to such amount, and (y) the aggregate marked-to-market value for all such ISO Contracts on the termination date is less than zero, then the Purchaser shall pay to the Seller an amount equal to the absolute value of such amount. To the extent that the transfer or conveyance of any of the ISO Contracts requires the Consent of a Third Party or Governmental Authorization, the Purchaser and the Seller shall use commercially reasonable efforts, and cooperate with each other, to obtain promptly the relevant Consent or Governmental Authorization. The Parties shall cooperate in good faith and in a commercially reasonable manner to establish the values required by the foregoing calculation.

Section 2.12 Purchaser’s Designee. Notwithstanding anything to the contrary herein, the Purchaser may designate in writing an Affiliate of the Purchaser to exercise and perform the rights and obligations of Purchaser, as its designate, for purposes of Sections 2.5, 2.7, 2.8, 2.9, 2.10, 2.11, 2.13, 2.14, 2.15 and 2.16, in which event, the term “Purchaser” as set forth in any such section shall be deemed to mean and include “Purchaser’s Affiliate” as the context so requires; provided, that in the event that the Mirror Confirm and/or the PPL Financial Trade Agreement is entered into by an Affiliate of Purchaser pursuant to Sections 2.10 and 2.14 and this Section 2.12, then (i) the Purchaser agrees that such Mirror Confirm and/or PPL Financial Trade Agreement shall be novated to the Purchaser no later than the Effective Date such that the Mirror Confirm and/or PPL Financial Trade Agreement shall be under the MCP-IES ISDA Master Agreement and the Purchaser shall fulfill the rights and obligations set forth in Section 2.10 and/or Section 2.14 (as the case may be) from and after the Effective Date (without regard to this Section 2.12), and (ii) the Seller agrees that it shall consent or otherwise agree to such novation and shall execute and deliver any documents or agreements reasonably necessary to give effect thereto. Notwithstanding the foregoing, in no event will any such designation by the

Purchaser relieve or discharge the Purchaser from any of its obligations hereunder, nor shall any such designation be made without the Seller’s prior written consent if such designation would reasonably be expected to (a) prevent or materially impede, interfere with or delay the Contemplated Transactions, (b) cause the Seller reasonably to incur additional Third Party out of pocket costs and expenses in excess of $10,000, in the aggregate, in connection with the consummation of Contemplated Transactions or (c) result in the Seller or its Affiliates incurring a Tax Liability in excess of the Tax Liability Seller or its Affiliates would otherwise incur without such designation; provided, that with respect to any costs reasonably incurred by the Seller in excess of the dollar limitation of clause (b) above, the Purchaser may avail itself of the rights under this Section 2.12 so long as the Purchase reimburses the Seller promptly for any such costs in excess of that amount.

Section 2.13 Identified Transactions. For all transactions (the “Identified Transactions”) reflected in the Trading Contracts with the Counterparties identified on Schedule 2.13, Seller shall retain the risk of [CONFIDENTIAL TREATMENT REQUESTED] for each Identified Transaction as follows:

(a) With respect to each Identified Transaction, in the event that the Purchaser has the right to terminate such Identified Transaction as a result of a breach thereof by the Counterparty to such Identified Transaction and the Purchaser notifies such Counterparty in writing of the Purchaser’s election to terminate such Identified Transaction, the Seller shall provide the Purchaser within [CONFIDENTIAL TREATMENT REQUESTED] of the Seller’s receipt of written demand therefor [CONFIDENTIAL TREATMENT REQUESTED] under such Identified Transaction, which [CONFIDENTIAL TREATMENT REQUESTED]. Notwithstanding anything in the foregoing sentence to the contrary, with respect to each Counterparty with whom the Purchaser has agreed to a [CONFIDENTIAL TREATMENT REQUESTED] in no event shall the Seller be obligated to deliver any credit support in respect of any amounts owing from such Counterparty under any such Identified Transactions [CONFIDENTIAL TREATMENT REQUESTED].

(b) With regard to any Identified Transaction for which the Seller has provided a [CONFIDENTIAL TREATMENT REQUESTED] pursuant to Section 2.13(a), if the Purchaser determines (reasonably in accordance International Financial Reporting Standards, consistently applied), [CONFIDENTIAL TREATMENT REQUESTED] the Purchaser shall have the right, upon giving the Seller [CONFIDENTIAL TREATMENT REQUESTED] prior written notice, to [CONFIDENTIAL TREATMENT REQUESTED], provided, however, that the Seller shall have the right within such [CONFIDENTIAL TREATMENT REQUESTED] period to deliver to the Purchaser [CONFIDENTIAL TREATMENT REQUESTED] amount, in which case the Purchaser may not [CONFIDENTIAL TREATMENT REQUESTED].

(c) Until such time as the Purchaser exercises its rights pursuant to Section 2.13(b), the Purchaser shall exercise commercially reasonable efforts to collect on amounts owing in respect of non-payment by the relevant Counterparty to relevant Identified Transactions, and

Purchaser and the Seller shall coordinate and cooperate each other in their commercially reasonable discretion with respect to such collection efforts. Upon the Purchaser exercising its rights pursuant to Section 2.13(b), but prior to the Purchaser, [CONFIDENTIAL TREATMENT REQUESTED] in respect of the applicable the Identified Transaction(s) giving rise to such exercise by Purchaser [CONFIDENTIAL TREATMENT REQUESTED] to such Identified Transaction(s).

(d) In the event that the Purchaser exercises its rights under Section 2.13(a), prior to the Purchaser [CONFIDENTIAL TREATMENT REQUESTED], the Purchaser shall [CONFIDENTIAL TREATMENT REQUESTED] all of the Identified Transactions with the Counterparty that is the subject of the payment default giving rise to such exercise by the Purchaser.

Section 2.14 Financial and Physical Settlement. Not later than the Mirror Effective Date, the Seller and the Purchaser shall execute and deliver the PPL Financial Trade Agreement and the Bangor Financial Trade Agreement.

Section 2.15 ERCOT Trading Contracts. If requested by the Purchaser, in its discretion, from time to time until the first anniversary of the Effective Date, the Seller shall act for and on behalf of the Purchaser as its Qualified Scheduling Entity (as such term is defined by ERCOT) with respect to the Trading Contracts that provide for physically-delivered electric energy in ERCOT, in accordance with terms and conditions to be agreed by the Parties, acting reasonably and in good faith. The Purchaser shall compensate the Seller for any services Seller provided in accordance with this Section 2.15 by paying to Seller any Third Party out of pocket costs and expenses reasonably incurred by Seller in providing such services, plus ten thousand dollars ($10,000) for each month in which such services are provided.

Section 2.16 Flattening Trades and New Trades. On the Mirror Effective Date and from time-to-time thereafter until the Mirror Confirm terminates, Purchaser and Seller shall enter into one or more physically-settled transactions under the MCP-IES ISDA Master Agreement representing sales to Seller with respect to all requirements of the Seller to purchase additional physically-delivered electric energy, capacity, ancillary services, renewable energy certificates, or related products (“Electricity”) or representing purchases from Seller for any excess Electricity Seller may have in order to establish and maintain, to the extent reasonably practicable, a flattened position in Electricity for Seller (such transactions, the “Flattening Trades”). All Flattening Trades shall be priced using the same or equivalent index price, ISO-published price or mutually-agreed price as specified in the relevant Mirror Transaction or Post-Mirror Trade.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF THE SELLER

Section 3.1 Scope. As an inducement to the Purchaser to enter into this Agreement and to consummate the Contemplated Transactions, the Seller makes the representations and warranties to Purchaser set forth in this Article III on the date hereof and on the Closing Date (unless any such representation or warranty is made as of a specific date, in which case such representation and warranty is made as of only such date), except as set forth in, or as qualified by, the Schedules. References to specific, numbered Schedules in this Article III do not limit the general applicability of the exceptions, qualifications, and other matters set forth in all other Schedules to each and every representation and warranty set forth in this Article III.

Section 3.2 Corporate Organization and Authority of Seller. The Seller is corporation validly existing and in active status under the Laws of the State of Wisconsin and has all requisite company power and authority to own the Transferred Assets and to carry on the Business as now being conducted. Each of the Related Seller Parties is corporation, limited liability company or partnership validly existing and in active status under the laws of the jurisdiction of organization. The Seller and each of the Related Seller Parties, as the case may be, has all requisite corporate power and authority necessary to execute, deliver and perform this Agreement and each of the Related Agreements to which it is a party. The Seller is duly qualified or authorized to do business as a foreign entity and is in good standing under the Laws of each jurisdiction in which the conduct of the Business occurs, except where the failure to be so qualified, authorized or in good standing would not reasonably be expected to have a Material Adverse Effect. The execution and delivery by the Seller and each of the Related Seller Parties of this Agreement and each of the Related Agreements to which it is a party and the performance by Seller and each of the Related Seller Parties, as the case may be, of the Contemplated Transactions to which it is a party have been duly authorized by all necessary company action on the part of Seller and each of the Related Seller Parties, as the case may be.

Section 3.3 Enforceability. This Agreement is, and each Related Agreement to be executed and delivered by the Seller and each of the Related Seller Parties, as the case may be, at or prior to the Closing will be, duly and validly executed and delivered by the Seller and each of the Related Seller Parties, as the case may be, and this Agreement is and each Related Agreement to be executed and delivered by the Seller and each of the Related Seller Parties, as the case may be, will be when executed and delivered, a valid and legally binding obligation of the Seller and each of the Related Seller Parties, as the case may be, enforceable against the Seller and each of the Related Seller Parties, as the case may be, in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency or other similar Laws affecting or relating to enforcement of creditors’ rights generally or general principles of equity.

Section 3.4 No Conflict. Neither the execution and delivery of this Agreement or any Related Agreement by the Seller or any of the Related Seller Parties, as the case may be, nor the performance by Seller or any of the Related Seller Parties, as the case may be, of the provisions of this Agreement or any Related Agreement to which it is a party will (a) violate the Governing Documents of the Seller or any of the Related Seller Parties, as the case may be, (b) violate any

Law or Order by which Seller, any of the Related Seller Parties or any of the Transferred Assets is bound, or (c) except as set forth on Schedule 3.4, result in a breach or violation of any provision of, constitute a default under, or give rise to any right of termination or cancellation under, or result in or permit an acceleration of, any material indenture, mortgage, lease or other agreement or instrument to which the Seller or any of the Related Seller Parties is a party or by which the Seller, any of the Related Seller Parties or any of the Transferred Assets are bound, except in the case of the foregoing clauses (b) and (c), as would not reasonably be expected to have a Material Adverse Effect or a material adverse effect on the Seller’s or any of the Related Seller Parties’ ability to perform its obligations under this Agreement or any of the Related Agreements to which it is a party.

Section 3.5 Third Party Consents. Except as otherwise set forth on Schedule 3.5, no material authorization, consent, waiver or approval of or filing with or notification to any Third Party (including a Governmental Body) is required to be obtained by the Seller or any of the Related Seller Parties, as the case may be, in connection with (i) the Seller’s or any of the Related Seller Parties’ execution and delivery of this Agreement or any of the Related Agreements, as the case may be, (ii) the Seller’s sale and transfer of the Transferred Assets to Purchaser on the terms and conditions set forth in this Agreement, (iii) the Seller’s or any of the Related Seller Parties’ performance of their respective obligations under this Agreement and any Related Agreement to which it is a party other than, in each case, (a) the Seller Required Consents or (b) an authorization, consent, waiver, approval, filing or notification which, if not obtained or made, would not, individually or in the aggregate, be reasonably expected to have a Material Adverse Effect.

Section 3.6 Transferred Assets. Except as otherwise set forth on Schedule 3.6, the Seller has good and defensible title to all of the tangible and intangible personal property constituting part of the Transferred Assets, and subject to obtaining any necessary material Consents pursuant to this Agreement, at the Closing, the Purchaser shall receive the Transferred Assets free and clear of all Encumbrances other than the Permitted Encumbrances.

Section 3.7 Contracts; No Default.

(a) (i) Schedules 2.1(a)(ii)(A), (B) and (C) contain, as of the date hereof, an accurate and complete list of each Trading Contract (or in the case of forms described in clause (ii), a listing of such forms) and (ii) except for multiple agreements that are documented under a standard form ISDA Master Agreement, EEI Master Agreement or WSPP Master Agreement without amendments, in which case only such form need be made available, the Seller has made available to the Purchaser accurate and complete copies of each such Trading Contract, together with any and all material amendments or modifications thereto through and including the date hereof. Schedule 2.1(a)(i) contains, as of the date hereof, an accurate and complete list of each Transferred Contract and the Seller has made available to the Purchaser accurate and complete copies of each Transferred Contract, together with any and all material amendments or modifications thereto through and including the date hereof.

(b) As of the date hereof:

(i) each Trading Contract and Transferred Contract is in full force and effect and is a valid and enforceable obligation of the Seller except as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting the enforcement of creditors’ rights generally and general principles of equity (whether considered in a Proceeding at law or in equity);

(ii) no event or condition exists that constitutes or, after notice or a lapse of time or both, will constitute, a material default on the part of the Seller or, to Seller’s Knowledge, any Counterparty or other party under, in each case, any such Trading Contract or Transferred Contract; and

(iii) there is no contract, agreement or other arrangement granting any Person any preferential right to purchase any of the Transferred Assets.

Section 3.8 Taxes.

(a) All Taxes and Tax liabilities due with respect to the Transferred Assets (whether or not shown as due on a Tax Return) have been timely paid. Seller has timely filed or caused to be timely filed all Tax Returns that are required to be filed with respect to the Transferred Assets. All such Tax Returns have accurately and completely reflected, and will accurately reflect, all liability for Taxes relating to the Transferred Assets for the period covered thereby and was prepared and filed in accordance with all applicable Laws.

(b) There are no liens for Taxes upon any of the Transferred Assets nor, to the Knowledge of the Seller, is any taxing authority in the process of imposing any lien for Taxes on any of the Transferred Assets, other than liens for Taxes that are not yet due and payable.

(c) Seller has not, as of the Closing Date, entered into an agreement or waiver or requested to enter into an agreement or waiver extending any statute of limitations relating to the payment or collection of Taxes relating to the Transferred Assets. There is no dispute or claim concerning any Tax liability relating to the Transferred Assets either (A) claimed or raised by any Governmental Body or (B) to which the Seller has Knowledge.

(d) All Taxes which Seller is (or was) required to withhold or collect in connection with the Transferred Assets have been duly withheld or collected, and have been timely paid over the proper authorities to the extent due and payable, and all Forms W-2 and 1099 with respect thereto have been properly completed and timely filed.

(e) There are no tax sharing, allocation, indemnification or similar agreements in effect as between Seller and any other party under which Purchaser could be liable for any Taxes or other claims of any party.

(f) The Seller is not a party to any closing agreement as described in Code Section 7121 (or any corresponding or similar provision of state, local or foreign income Tax law) with respect to the Transferred Assets.

(g) No event has occurred that could reasonably be expected to impose upon Purchaser any transferee liability for any Taxes due or to become due from Seller.

Section 3.9 Litigation. There are no claims, actions, suits or Proceedings now pending or, to the Seller’s Knowledge, threatened against or affecting the Seller or the Transferred Assets, at law or in equity, or before or by any Governmental Body which (a) may impair the ability of the Seller or the Seller Related Parties to perform this Agreement or any Related Agreement, (b) questions the validity or propriety of this Agreement or any Related Agreement or of any action taken under this Agreement or any Related Agreement or (c) would reasonably be expected to result in a Material Adverse Effect.

Section 3.10 No Commissions. No commissions or brokers’ or finders’ fees are payable by, through or on account of any acts of the Seller in connection with this Agreement or the Contemplated Transaction for which the Purchaser could be liable or obligated.

Section 3.11 Reserved.

Section 3.12 Compliance with Laws. The Seller is in compliance with all Laws applicable to the Transferred Assets, except where any such non-compliance would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

Section 3.13 Ability to Perform. The Seller currently has or, as of the relevant time, will have available to it sufficient funding (in the form of Cash reflected on the Seller’s balance sheet, under existing credit facilities or otherwise) to enable the Seller to consummate the Contemplated Transactions on the terms set forth in this Agreement, to pay all expenses to be incurred by the Seller in connection with this Agreement and to perform all of its other obligations under this Agreement and any Related Agreement to which it is a party.

Section 3.14 Seller’s Knowledge. The Seller has informed Purchaser of any material mistakes or omissions on the Purchaser’s Schedules of which the Seller is aware or any breach by the Purchaser of any of the representations and warranties set forth in Article IV, including anything that the Seller is aware of that might give rise to a claim by the Seller against Purchaser under the terms of this Agreement or any Related Agreement.

Section 3.15 Disclaimer. EXCEPT AS EXPRESSLY SET FORTH IN THIS ARTICLE III, THE PURCHASER IS ACQUIRING THE TRANSFERRED ASSETS “AS IS, WHERE IS” AND THE SELLER HAS NOT MADE AND DOES NOT MAKE ANY REPRESENTATION OR WARRANTY OF ANY NATURE AS TO THE TRANSFERRED ASSETS (INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A

PARTICULAR PURPOSE OR ANY REPRESENTATION OR WARRANTY AS TO THE VALUE, CONDITION, NATURE, OR CAPABILITY OF ANY TRANSFERRED ASSET), AND THE PURCHASER BY THIS AGREEMENT EXPRESSLY ACKNOWLEDGES THAT NO SUCH OTHER REPRESENTATIONS OR WARRANTIES HAVE BEEN MADE BY THE SELLER OR RELIED UPON BY THE PURCHASER. THE SELLER IS NOT LIABLE OR BOUND IN ANY MANNER BY ANY EXPRESSED OR IMPLIED WARRANTIES, GUARANTIES, PROMISES, STATEMENTS, REPRESENTATIONS OR INFORMATION PERTAINING TO THE TRANSFERRED ASSETS MADE OR FURNISHED BY ANY AGENT, EMPLOYEE, SERVANT OR OTHER PERSON REPRESENTING OR PURPORTING TO REPRESENT THE SELLER, UNLESS THE WARRANTIES, GUARANTIES, PROMISES, STATEMENTS, REPRESENTATIONS OR INFORMATION ARE EXPRESSLY AND SPECIFICALLY SET FORTH IN THIS ARTICLE III.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF THE PURCHASER

Section 4.1 Scope. As an inducement to the Seller to enter this Agreement and to consummate the Contemplated Transactions, the Purchaser makes the representations and warranties to the Seller set forth in this Article IV on the date hereof and on the Closing Date (unless any such representation or warranty is made as of a specific date, in which case such representation and warranty is made as of only such date).

Section 4.2 Corporate Organization and Authority. The Purchaser is a corporation duly incorporated, validly existing and in good standing under the Laws of the State of Delaware and has full power and authority to execute, deliver and perform this Agreement and each of the Related Agreements to which it is a party. Each of the Related Purchaser Parties that are a party to this Agreement or any of the Related Agreements is a corporation, limited liability company or partnership validly existing and in active status under the Laws of the jurisdiction of organization. Each of the Purchaser and the Related Purchaser Parties has all requisite corporate power and authority necessary to execute, deliver and perform this Agreement and each of the Related Agreements to which it is a party. The Purchaser is duly qualified or authorized to do business as a foreign corporation and is in good standing under the Laws of each jurisdiction in which the conduct of its business or the ownership of its properties requires such qualification or authorization, except where the failure to be so qualified, authorized or in good standing would not reasonably be expected to have a Material Adverse Effect on the Purchaser’s ability to consummate the Contemplated Transactions. The execution and delivery by the Purchaser and each of each of the Related Purchaser Parties of this Agreement and each Related Agreement to which it is a party and the performance by the Purchaser and each of the Related Purchaser Parties, as the case may be, of the Contemplated Transactions have been duly authorized by all necessary corporate or other actions and Proceedings on the part of the Purchaser and such Related Purchaser Parties, as the case may be.

Section 4.3 Enforceability. This Agreement is, and each Related Agreement to be executed and delivered by the Purchaser and each of the Related Purchaser Parties, as the case may be, at or prior to the Closing will be, duly and validly executed and delivered by the Purchaser and each of the Related Purchaser Parties, as the case may be, and this Agreement is and each Related Agreement to be executed and delivered by the Purchaser and each of the Related Purchaser Parties, as the case may be, will be when executed and delivered, a valid and legally binding obligation of the Purchaser and each of the Related Purchaser Parties, as the case may be, enforceable against the Purchaser and each of the Related Purchaser Parties, as the case may be, in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency or other similar Laws affecting or relating to enforcement of creditors’ rights generally or general principles of equity.

Section 4.4 No Conflict. Neither the execution of this Agreement or any Related Agreement by the Purchaser or any of the Related Purchaser Parties, as the case may be, nor the performance by the Purchaser or any of the Related Purchaser Parties, as the case may be, of the provisions of this Agreement or any Related Agreement will (a) violate the Governing Documents of the Purchaser or any of the Related Purchaser Parties, as the case may be, (b) violate any Law or Order by which the Purchaser or any of the Related Purchaser Parties is bound, or (c) result in a breach or violation of any provision of, constitute a default under, or give rise to any right of termination or cancellation under, or result in or permit an acceleration of, any material indenture, mortgage, lease or other agreement or instrument to which the Purchaser or any of the Related Purchaser Parties is a party or by which the Purchaser or any of the Related Purchaser Parties is bound, except in the case of the foregoing clauses (b) and (c), as would not reasonably be expected to result in a Material Adverse Effect on the Purchaser’s or any of the Related Purchaser Parties’ ability to perform its obligations under this Agreement or any of the Related Agreements to which it is a party.

Section 4.5 Third Party Consents. Except as otherwise set forth on Schedule 4.5, no material authorization, consent, waiver or approval of or filing with or notification to any Third Party (including a Governmental Body) is required to be obtained by the Purchaser or any of the Related Purchaser Parties, as the case may be, in connection with the Purchaser’s purchase of the Transferred Assets from the Seller and any of the Related Purchaser Parties, as the case may be, on the terms and conditions set forth in this Agreement and to permit the Purchaser or any of the Related Purchaser Parties, as the case may be, to perform its other obligations under this Agreement and any Related Agreements to which it is a party other than (a) the Purchaser Required Consents or (b) an authorization, consent, waiver, approval, filing or notification which, if not obtained or made, would not, individually or in the aggregate, prevent or materially delay the consummation of the Contemplated Transactions.

Section 4.6 Litigation. There are no claims, actions, suits or Proceedings now pending or, to the Purchaser’s Knowledge, threatened against or affecting the Purchaser or the Purchaser Related Parties, at law or in equity, or before or by any Governmental Body which may impair the ability of the Purchaser or the Purchaser Related Parties to perform this

Agreement or any Related Agreement or which questions the validity or propriety of this Agreement or any Related Agreement or of any action taken under this Agreement or Related Agreement.

Section 4.7 Purchaser’s Investigation. The Purchaser is an informed and sophisticated purchaser of assets similar to the Transferred Assets and, in connection with the Contemplated Transactions, has sought the advice of experts who are experienced in the evaluation and purchase of assets similar to the Transferred Assets. The Purchaser has undertaken such investigation of the Transferred Assets as it has deemed necessary to enable it to make an informed decision with respect to this Agreement and the Contemplated Transactions. The Purchaser acknowledges that the Seller has provided the Purchaser with such access to the personnel, properties, leased premises and records (including copies of the material Trading Contracts) of the Seller and relating to the Business as the Purchaser has requested, subject to the limitations set forth in Section 7.2. In entering into this Agreement, in purchasing the Transferred Assets and in consummating the Contemplated Transactions, the Purchaser has relied solely upon its own investigation and the express representations and warranties of the Seller set forth in Article III, and neither the Seller nor any of its officers, directors, shareholders, employees, Affiliates, agents or Representatives has made any representation or warranty as to the Seller, the Transferred Assets, or this Agreement, except as expressly set forth in this Agreement. To the fullest extent permitted by Law, neither the Seller nor any of its officers, directors, shareholders, employees, Affiliates, agents or Representatives shall have any liability to the Purchaser for any information made available to, or statements made to, the Purchaser (or any of its agents, officers, directors, employees, Affiliates or Representatives), other than the representations and warranties of Seller expressly set forth in Article III and the express obligation of the Seller to indemnify the Purchaser following the Closing to the extent set forth in Article IX.

Section 4.8 Ability to Perform. The Purchaser currently has available to it sufficient funding (in the form of Cash reflected on the Purchaser’s balance sheet, under existing credit facilities or otherwise) to enable the Purchaser to consummate the purchase of the Transferred Assets on the terms set forth in this Agreement, to pay all expenses to be incurred by the Purchaser in connection with this Agreement and to perform all of its other obligations under this Agreement and any Related Agreement to which it is a party.

Section 4.9 No Commissions. No commissions or brokers’ or finders’ fees are payable by, through or on account of any acts of the Purchaser or its Representatives in connection with this Agreement or the Contemplated Transactions for which the Seller could be liable or obligated.

Section 4.10 Purchaser’s Knowledge. The Purchaser has informed Seller of any material mistakes or omissions on the Seller’s Schedules of which the Purchaser is aware or any breach by the Seller of any of the representations and warranties set forth in Article III, including

anything that the Purchaser is aware of that might give rise to a claim by the Purchaser against the Seller under the terms of this Agreement or any Related Agreement.

Section 4.11 No Other Representation or Warranty. Except for the representations and warranties contained in this Article IV, and as may be made by the Purchaser in any Related Agreement, neither the Purchaser nor any other Person acting on behalf of the Purchaser makes any representation or warranty, express or implied, regarding the Purchaser or the Contemplated Transactions.

Section 4.12 Disclaimer. THE PURCHASER IS NOT LIABLE OR BOUND IN ANY MANNER BY ANY EXPRESSED OR IMPLIED WARRANTIES, GUARANTIES, PROMISES, STATEMENTS, REPRESENTATIONS OR INFORMATION PERTAINING TO THE TRANSFERRED ASSETS MADE OR FURNISHED BY ANY AGENT, EMPLOYEE, SERVANT OR OTHER PERSON REPRESENTING OR PURPORTING TO REPRESENT THE PURCHASER, UNLESS THE WARRANTIES, GUARANTIES, PROMISES, STATEMENTS, REPRESENTATIONS OR INFORMATION ARE EXPRESSLY AND SPECIFICALLY SET FORTH IN THIS ARTICLE IV.

ARTICLE V

CONDITIONS PRECEDENT TO THE

PURCHASER’S OBLIGATION TO CLOSE

Section 5.1 Purchaser Closing Conditions. The obligation of the Purchaser to consummate the Contemplated Transactions is subject to the satisfaction, as of the Closing, of each of the following conditions (any of which may be waived in writing by the Purchaser, in whole or in part):

(a) all agreements and covenants required by this Agreement to be complied with or performed by the Seller at or prior to the Closing shall have been complied with or performed in all material respects;

(b) all representations and warranties of the Seller in this Agreement (i) that are qualified as to materiality or Material Adverse Effect shall be true and correct, in all respects, as of the Closing or other time stated as if made at and as of that time and (ii) that are not so qualified shall be true and correct, in all material respects, as of the Closing or other time stated as if made at and as of that time;

(d) the [CONFIDENTIAL TREATMENT REQUESTED] shall have been satisfied;

(e) no Order which prevents the consummation of any material aspect of the Contemplated Transactions shall have been issued and remain in effect (each Party agreeing to use its commercially reasonable efforts to have any such Order lifted) and no Law shall have been enacted which prohibits the consummation of the Contemplated Transactions;

(f) the Seller shall have delivered to the Purchaser a certificate of a duly authorized officer of the Seller, dated as of the Closing Date, certifying that, to the knowledge of such officer, the conditions set forth in Section 5.1(a) and (b) have been satisfied as of the Closing Date;

(g) the Seller Guarantee Agreement shall be in full force and effect and no material default or breach shall have occurred thereunder;

(h) the Mirror Confirm shall be in full force and effect and no material default or breach by Seller shall have occurred thereunder;

(i) the Supply Trade Agreements shall each be in full force and effect and no material default or breach by Seller shall have occurred thereunder; and

(j) the Purchaser shall have received those documents to be delivered to the Purchaser in accordance with Section 2.5(a).

ARTICLE VI

CONDITIONS PRECEDENT TO THE SELLER’S OBLIGATION TO CLOSE

Section 6.1 Seller Closing Conditions. The obligation of the Seller to consummate the Contemplated Transactions is subject to the satisfaction, as of the Closing, of each of the following conditions (any of which may be waived in writing by the Seller in whole or in part):

(a) all agreements and covenants required by this Agreement to be complied with or performed by Purchaser at or prior to the Closing shall have been complied with and performed in all material respects;

(b) all representations and warranties of the Purchaser in this Agreement (i) that are qualified as to materiality or material adverse effect shall be true and correct, in all respects, as of the Closing or other time stated as if made at and as of that time and (ii) that are not so qualified shall be true and correct, in all material respects, as of the Closing or other time stated as if made at and as of that time;

(c) the Seller Required Consents described in items 1 and 2 on Schedule 3.5 shall have been obtained or occurred, as applicable;

(d) no Order which prevents the consummation of any material aspect of the Contemplated Transactions shall have been issued and remain in effect (each Party agreeing to use

its commercially reasonable efforts to have any such Order lifted) and no Law shall have been enacted which prohibits the consummation of the Contemplated Transactions;

(e) the Purchaser shall have delivered to the Seller a certificate of a duly authorized officer of the Seller, dated as of the Closing Date, certifying that, to the knowledge of such officer, the conditions set forth in Section 6.1(a) and (b) have been satisfied as of the Closing Date;

(f) the Purchaser Guarantee Agreement shall be in full force and effect and no material default or breach shall have occurred thereunder;

(g) the Mirror Confirm shall be in full force and effect and no material default or breach by Purchaser shall have occurred thereunder;

(h) the Supply Trade Agreements shall be in full force and effect and no material default or breach by Purchaser shall have occurred thereunder; and

(i) the Seller shall have received those documents to be delivered to the Seller in accordance with Section 2.5(b).

ARTICLE VII

ADDITIONAL COVENANTS

Section 7.1 Conduct of Business.

(a) From and after the date hereof until the Effective Date (the “Interim Period”), the Seller shall not (and shall cause its Affiliates not to), with respect to the Transferred Assets:

(i) cease to provide any material services previously provided in support of the Business except in accordance with the Ordinary Course of Business;

(ii) make any sale, transfer or other disposition of any Transferred Asset that is material to the conduct and operations of the Business other than any such sale, transfer, or other disposition that is made in the Ordinary Course of Business;

(iii) with respect to the Seller and its controlled Affiliates, create or permit to be created any Encumbrance on any Transferred Asset, other than (i) in the Ordinary Course of Business to the extent that such Encumbrance does not materially and adversely affect the Business, (ii) Permitted Encumbrances to the extent that such Encumbrance does not materially and adversely affect the Business, (iii) that which would not materially and adversely affect such Transferred Asset after the Effective Date or (iv) as contemplated in this Agreement or any of the Related Agreements;

(iv) change any accounting methods, policies or practices applicable to the Business;

(v) amend, assign, terminate, cancel, or compromise any material claims of the Seller against any Counterparty other than any such amendment, assignment, termination, cancellation or compromise made in the Ordinary Course of Business;

(vi) make any material changes in the methods of operations of the Business except in the Ordinary Course of Business, including, without limitation, risk management practices and policies relating thereto;

(vii) enter into any agreement that is material to the Transferred Assets or the conduct of the Business, except as in accordance with Schedule 7.1(b), that the Purchaser would assume, or for which the Purchaser would otherwise become liable, as part of the Contemplated Transaction, or terminate, amend, or otherwise modify in any material respect or waive any material rights under any Transferred Asset that is material to the conduct of the Business other than any such termination, amendment, or modification that is made in the Ordinary Course of Business;

(viii) incur any Indebtedness in connection with the Business other than in the Ordinary Course of Business; or

(ix) take any action to do or engage (or commit to do or engage) in any of the foregoing.

(b) Notwithstanding anything herein to the contrary, the foregoing shall not apply to the taking of any action (i) that is required (including by virtue of being an express condition to Closing) or explicitly permitted by the terms of this Agreement or the Related Agreements, (ii) that is reasonably necessary in connection with the execution and implementation of the Contemplated Transactions, (iii) to which the Purchaser gives its prior written consent (such consent not to be unreasonably withheld or delayed), (iv) that is set forth in Schedule 7.1(b), or (v) that is required in order to comply with applicable Law or Orders.

Section 7.2 Information and Access. From the date hereof until the last Transfer Date or Novation Date, as the case may be, to occur with respect to the Transferred Assets hereunder, the Seller shall (and shall cause its controlled Affiliates to): (a) permit the Purchaser and its Representatives to have reasonable access during normal business hours, and in a manner so as not to interfere with the normal operations, to all premises, properties, personnel, accountants, books, records, contracts and documents of or pertaining to the Transferred Assets (subject to the Seller’s right to redact information unrelated to the Transferred Assets); and (b) furnish the Purchaser and its Representatives with all such information and data concerning the Transferred Assets as the Purchaser or its Representatives reasonably may request in connection with their review of information in accordance with clause (a), except to the extent that such

information is subject to attorney-client privilege or furnishing any such information or data would create any Liability under applicable Law, including antitrust Law, or would violate any Law, Order or Contract applicable to the Seller or any of its Affiliates or by which any of the Transferred Assets are bound. The Purchaser will indemnify and hold harmless the Seller and its Affiliates (separate and apart from the Purchaser’s obligations in Article IX and without regard to any basket, cap or other conditions or limitations contained in Article IX) from and against any Losses caused to the Seller or any of its Affiliates by the gross negligence or willful misconduct of the Purchaser or its Representatives in connection with such access. Notwithstanding anything in this Section 7.2 the Seller will not be required to permit access to or furnish Tax Returns, books, records, contracts, documents, information or data relating to Taxes to the extent that such Taxes do not relate exclusively to the Transferred Assets, and the Purchaser will not have access to personnel and medical records if such access could, in the Seller’s good faith judgment, subject the Seller to risk of liability or otherwise violate any applicable Law.

Section 7.3 Filings; Commercially Reasonable Efforts to Close.

(a) In addition to the obligations set forth in Sections 2.5, 2.6, 2.7, 2.8 and 2.11 from the date hereof until the Closing Date, the Seller and the Purchaser shall (and shall cause their respective Affiliates to, as applicable), as promptly as practicable, (i) use commercially reasonable efforts to obtain all Consents of, make all filings with and give all notices to any Governmental Body or any other Person required in order to consummate the Contemplated Transactions, including all Required Consents; (ii) provide such other information and communications to any such Governmental Body or other Persons as such Governmental Body or other Persons may reasonably request in connection with the activities listed in this Section 7.3; and (iii) reasonably cooperate with each other to perform their respective obligations under this Section 7.3. The Parties will provide prompt notification to each other when any such Consent, filing or notice referred to in clauses (i) and (ii) above is obtained, taken, made or given, as applicable, will keep each other reasonably informed as to the progress of any such actions and will advise each other of any communications (and, unless precluded by any Law, provide copies of any such communications that are in writing) with any Governmental Body or other Person regarding any of the Contemplated Transactions. In furtherance of the foregoing covenants, any filings with and notices to any Governmental Body or any other Person shall be submitted or made as soon as practicable, but in no event later than January 15, 2010 for filings with FERC, and the Parties shall request expedited treatment of such filings, shall promptly make any appropriate or necessary subsequent or supplemental filings and shall cooperate in the preparation of such filings as is reasonably necessary and appropriate.

(b) Notwithstanding anything else to the contrary herein, each of the Seller and the Purchaser shall (and shall cause their respective Affiliates to, as applicable) use commercially reasonable efforts (except to the extent a different standard is expressly provided for in this Agreement) to consummate the Contemplated Transactions.

(c) The Seller and the Purchaser shall each pay 50% of any consideration payable to Third Parties or filing, recordation or similar fees arising, in each case, in connection with the actions undertaken pursuant to Section 2.7, 2.8, 2.9, 2.11, or 7.6; provided, however, that the foregoing shall not apply to any Governmental Authorizations that are specifically required by Purchaser to consummate the Contemplated Transactions.

(d) Subject to the other terms and conditions hereof, the Purchaser acknowledges that certain Consents required in connection with certain Trading Contracts and/or Transferred Contracts may not have been obtained prior to the Closing Date. Except with respect to obligations of the Seller set forth in Sections 2.7, 2.8, 2.9, and this 7.3, the Purchaser agrees that the Seller shall otherwise not be subject to Liability hereunder for the failure to obtain any Consent or the termination of any Trading Contract or Transferred Contract as a result of the Contemplated Transactions.

(e) Notwithstanding anything else herein to the contrary, the Seller and the Purchaser agree that, in the event that any Consent or Governmental Authorization that is necessary or desirable to preserve for the Business any right or benefit under any Transferred Assets is not obtained prior to the Closing Date, the Seller will, subsequent to the Closing Date, use commercially reasonable efforts to obtain, or cooperate with the Purchaser in obtaining, such Consent or Governmental Authorization as promptly thereafter as practicable.

Section 7.4 Retention of and Access to Records.

(a) After the Closing Date, the Seller shall (and shall cause its Affiliates to) provide the Purchaser and its Representatives reasonable access to such books and records, or portions thereof, relating in any manner to the Transferred Assets during normal business hours and on reasonable notice, for any reasonable business purpose, including to enable them to prepare financial statements or Tax Returns, deal with Tax audits or as they may otherwise reasonably request. Notwithstanding anything in this Section 7.4(a), the Seller and its Affiliates will only be required to deliver to the Purchaser the portions of such books and records that relate primarily to the Transferred Assets and may redact any statements or other information on the portions of such books and records that do not relate to the Transferred Assets (subject to the Seller’s right to redact information unrelated to the Transferred Assets). Notwithstanding anything in this Section 7.4(a), the Seller will not be required to permit access to or furnish Tax Returns, books, records, contracts, documents, information or data relating to Taxes to the extent that such Taxes do not relate exclusively to the Transferred Assets. Such access will be afforded during normal business hours by the Party in possession of the books and records upon receipt of reasonable advance notice, but (a) any review of books and records will be conducted in such a manner as not to interfere unreasonably with the operation of the business of any Party or its Affiliates, (b) no Party will be required to take any action which would constitute a waiver of the attorney-client privilege, and (c) no Party need supply the other Party with any information which that Party is under a contractual or other legal obligation not to supply.

(b) After the seventh (7th) anniversary of the Closing Date (or such later date as may be required under Laws applicable to the Purchaser or Purchaser’s document retention policies), the Seller or its Affiliates may elect to destroy any books and records described in Section 7.4(a). The Purchaser shall, prior to the seventh (7th) anniversary of the Closing Date or thereafter during the effective term of the requirements under this Section 7.4(b), advise the Seller as to the Law referred to in the immediately preceding sentence.

Section 7.5 Further Assurances.

(a) The Parties shall (and shall cause their respective Affiliates to, as applicable) cooperate reasonably with each other and with their respective Representatives in connection with any steps required to be taken as part of their respective obligations under this Agreement, and, subject to any restrictions set forth in Section 7.2, shall furnish upon request to each other such further information as the other Party may reasonably request for the purpose of carrying out the intent of this Agreement and the Contemplated Transactions.

(b) Subject to the terms and conditions of this Agreement, at any time or from time to time after the date of this Agreement, at any Party’s reasonable request and without further consideration, each Party shall do all acts and things as may be necessary or desirable and are within its control to carry out the intent of this Agreement and the Related Agreements, including executing and delivering further instruments of sale, transfer, conveyance, assignment, novation, confirmation or other documents that may be reasonably required and providing additional materials and information.

(c) Both after the date hereof and after the Closing Date, each of the Seller and the Purchaser shall use commercially reasonable efforts to take, or cause to be taken, all appropriate action, do or cause to be done all things necessary, proper or advisable under applicable Law, and to execute and deliver such documents and other papers, as may be necessary or appropriate to carry out the terms and conditions of this Agreement and to consummate the Contemplated Transactions, including obtaining any and all outstanding Required Consents.

(d) The Parties shall (and shall cause their respective Affiliates to, as applicable) use commercially reasonable efforts in connection with the steps required to be taken to effectuate any leasing arrangements required hereby.

Section 7.6 Transition Plans.

(a) Within five (5) Business Days after the date of this Agreement, the Seller and the Purchaser shall form one or more joint transition teams to plan for and perform the various activities set forth in this Section 7.6, as well as other activities that are to be performed between the date of this Agreement and Closing.

(b) With respect to each Financial Assurance relating to any Transferred Asset, the Purchaser shall use commercially reasonable efforts, with the assistance of the Seller and its Affiliates as reasonably requested by the Purchaser, to (i) cause IEG and its Affiliates to be released from any such Financial Assurances, including obtaining waivers and Consents from any applicable Persons to replace any such Financial Assurances with appropriate Financial Assurances from the Purchaser and/or Purchaser Parent and (ii) to perform the actions required by Section 2.8(b).

Section 7.7 Confidentiality.

(a) Unless and until the Contemplated Transactions have been consummated, the Purchaser and Seller will abide by the Confidentiality Agreement. If the Contemplated Transactions are consummated, the Confidentiality Agreement will no longer apply to Confidential Information related solely to the Transferred Assets, but will continue in full force and effect with respect to all other Confidential Information.

(b) From and after the Closing, the Seller shall treat as confidential and shall safeguard any and all information, knowledge and data relating to the Transferred Assets in its possession by using the same degree of care, but no less than a reasonable standard of care, to prevent the unauthorized use, dissemination or disclosure of such information, knowledge and data as the Seller used with respect thereto prior to the date hereof, it being understood that the Seller may disclose such information (i) to the extent required to comply with Law, the rules of any exchange or pursuant to regulatory request; provided, that the Seller shall provide as much prior written notice to the Purchaser of such disclosure as is practical under the circumstances and shall seek to limit such disclosure, and (ii) to its representatives and advisors to the extent that such representatives and advisors have a reasonable basis to know such information in connection with any services or work to be performed for or on behalf of the Seller.

(c) From and after the Closing, the Purchaser shall treat as confidential and shall safeguard any and all information, knowledge or data included in any information relating to the business of the Seller and its Affiliates and the Transferred Assets that becomes known to the Purchaser as a result of the Contemplated Transactions except as otherwise agreed to by the Seller in writing by using the same degree of care, but no less than a reasonable standard of care, to prevent the unauthorized use, dissemination or disclosure of such information, knowledge and data as the Purchaser uses with respect to its own information, knowledge and data, it being understood that the Purchaser may disclose such information (i) to the extent required to comply with Law, the rules of any exchange or pursuant to regulatory request; provided, that the Purchaser shall provide as much prior written notice to the Seller of such disclosure as is practical under the circumstances and shall seek to limit such disclosure, and (ii) to its representatives and advisors to the extent that such representatives and advisors have a reasonable basis to know such information in connection with any services or work to be performed for or on behalf of the Purchaser.

(d) The Purchaser and the Seller acknowledge that the confidentiality obligations set forth in this Section 7.7 shall not extend to information, knowledge and data that is publicly available or becomes publicly available through no act or omission of the party owing a duty of confidentiality, or is or becomes available on a non-confidential basis from a source other than the party owing a duty of confidentiality so long as such source is not known by such party to be bound by a confidentiality agreement with, or other obligations of secrecy to, the other party.

(e) In the event of a breach of the obligations hereunder by the Purchaser or the Seller, the other party, in addition to all other available remedies, shall be entitled to injunctive relief to enforce the provisions of this Section 7.7 in any court of competent jurisdiction.

Section 7.8 Related Agreements. Each of the Seller and the Purchaser agrees that it shall, and shall cause their respective Affiliates to, as applicable, enter into and deliver, at or prior to the Mirror Effective Date or the Closing Date, as applicable, each of the Related Agreements, to which it or its Affiliates is intended to be a party.

Section 7.9 Non-Competition

(a) Each of the Seller and IEG agrees that for a period of thirty-six (36) calendar months beginning at the Closing (the “Restricted Period”), none of the Seller, IEG or any of their Affiliates, whether or not a party to this Agreement or any Related Agreement, shall offer, participate through ownership or engage, either directly or indirectly, in the sale or marketing of wholesale electricity in the United States, or otherwise operate, control or manage, either directly or indirectly, any business substantially similar to the Business (the “Restricted Business”).

(b) Notwithstanding the foregoing, this Section 7.9 shall not operate to prevent or restrict:

(i) the regulated public utility Affiliates of each of the Seller and IEG that are identified on Schedule 7.9;

(ii) the Seller, IEG or their Affiliates from managing, servicing, operating, using or otherwise transacting business with any of the Excluded Assets or Excluded Transactions;

(iii) any Person or Persons acquiring any of the Seller, IEG or their respective Affiliates by merger, consolidation, amalgamation, share purchase or purchase of substantially all of the assets of the Seller, IEG or any such Affiliates where such Person was not, prior to such acquisition, an Affiliate of the Seller or IEG, as the case may be;

(iv) the Seller, IEG and their Affiliates from purchasing or selling wholesale electricity, or related hedge positions, in connection with (A) the generation facilities owned by the Seller, IEG or their Affiliates, and (B) the retained retail electricity business

encompassed by the Excluded Assets; provided, that the primary purpose of the Seller, IEG or any of their Affiliates in conducting such activity is not to compete with the Restricted Business;

(v) the direct or indirect acquisition by the Seller, IEG or any of their Affiliates (through acquisition, merger or other strategic transaction) of an interest in any Person that engages in the Restricted Business; provided, that the primary purpose of the Seller, IEG or any of their Affiliates in conducting such activity is not to complete with the Restricted Business; and

(c) The Restricted Period shall be extended by the length of any period during which the Seller, IEG or its Affiliates are in breach of the terms of this Section 7.9.

(d) As a separate and independent covenant of each of the Seller and IEG, for a period of one (1) year following the Effective Date, each of the Seller and IEG shall, and shall cause their respective Affiliates not to, (i) employ or receive or accept the performance of services by any Purchaser Key Employee, or (ii) solicit for employment any Purchaser Key Employee; provided, that clause (i) or (ii) shall not limit the Seller’s, IEG’s or their respective Affiliates’ ability to engage in general solicitations of employment not targeted at Purchaser Key Employees or employing an individual who contacts Seller, IEG or their respective Affiliates on his or her own initiative.

(e) Each of the Seller and IEG acknowledges and agrees that its obligations set forth in this Section 7.9 are an essential element of this Agreement and that, but for the agreement of the Seller and IEG in this Section 7.9, the Purchaser would not have entered into this Agreement. Each of the Seller, IEG and the Purchaser acknowledges and agrees that the undertakings of the Seller and IEG in this Section 7.9 constitute an independent covenant of the Seller and IEG and shall not be affected by the performance or nonperformance by any Party hereto of any other term or provision of this Agreement. Each of the Seller, IEG and the Purchaser acknowledges that it has consulted with its own counsel with regard to this Section 7.9 and, after such consultation, agrees that the obligations of the Seller and IEG set forth in this Section 7.9 are reasonable and proper, have been negotiated fully and fairly and represent an agreement based on the totality of the Contemplated Transactions.

Section 7.10 Notice of Material Developments. Prior to the Closing Date, the Purchaser and the Seller shall use commercially reasonable efforts to communicate promptly with each other about material events, circumstances, facts and occurrences relating to the Transferred Assets and arising subsequent to the date hereof; provided, however, that no such notification shall otherwise affect in any manner the liability of such party hereunder, including with respect to indemnification.

Section 7.11 The Seller’s Employees.

(a) No later than thirty (30) Business Days prior to the Closing, the Purchaser will give a Qualifying Offer of employment to each of the employees of the Seller that Purchaser identifies on a Schedule to be provided to Seller by Purchaser not later than the Mirror Effective Date; provided, however, that each such Qualifying Offer shall be subject to the customary hiring policies and procedures of the Purchaser, including, but not limited to, appropriate screening procedures, as applicable. Each such person who becomes employed by the Purchaser pursuant to this Section 7.11 is referred to herein as a “Transferred Employee”. For purposes hereof, a “Qualifying Offer” means an offer that provides for employment with the Purchaser or one of its Affiliates commencing on the Closing Date. All of such Qualifying Offers shall be made in accordance with applicable Laws, and shall remain open for a period expiring no earlier than five (5) Business Days prior to the Closing Date. Any such offer which is accepted before it expires shall thereafter be irrevocable, except for good cause. Following acceptance of such offers, the Purchaser will provide written notice thereof to the Seller.

(b) The Purchaser, for a period of one (1) year following the Effective Date, shall, and shall cause its Affiliates not to, (i) employ or receive or accept the performance of services by any employee of the Seller or any of its Affiliates (other than the Transferred Employees), or (ii) solicit for employment any employee of the Seller or any of its Affiliates; provided, that clause (i) or (ii) shall not limit the Purchasers or it Affiliates’ ability to engage in general solicitations of employment not targeted at such employees of the Seller or any of its Affiliates or employing an individual who contacts the Purchaser or its Affiliates on his or her own initiative.

ARTICLE VIII

TERMINATION

Section 8.1 Termination. This Agreement may be terminated prior to the Closing solely as follows:

(a) by mutual written consent of the Seller and the Purchaser;

(b) [CONFIDENTIAL TREATMENT REQUESTED] by the Seller or the Purchaser by not less [CONFIDENTIAL TREATMENT REQUESTED] prior written notice to the other Party (if the terminating Party is not, at such time, in material breach of this Agreement which breach has caused the Closing not to occur prior to such date), if the Closing has not occurred on or before the date such notice is given; or

(c) if the Seller or the Purchaser fails in any material respect to perform or comply with any covenant hereunder or under any Related Agreement to be performed or complied with on or prior to the Closing Date or any representation or warranty made or deemed made by the Seller or the Purchaser proves to be incorrect or misleading in any material respect when made or deemed made and as a result thereof the non-defaulting Party would not under the terms of this Agreement be obligated to consummate the Closing, then, in each case, upon

[CONFIDENTIAL TREATMENT REQUESTED] written notice from the non-defaulting Party (unless the defaulting Party shall have cured, within such [CONFIDENTIAL TREATMENT REQUESTED] period, the condition giving rise to such notice in a manner that would cause the conditions to Closing of this Agreement to be satisfied, in which case, this Agreement shall continue in effect notwithstanding any such notice or,); or

(d) by either Party immediately upon the occurrence of an Insolvency Event with respect to the other Party or the Person guaranteeing the obligations of such Party; or

(e) by the Purchaser if on any date the sum of all payments made pursuant to Section 2.6 either to the Purchaser or to the Seller aggregate to (i) $ [CONFIDENTIAL TREATMENT REQUESTED] (in each instance, a “Misbooking Trigger Date”) upon written notice to the Seller within the earlier [CONFIDENTIAL TREATMENT REQUESTED] following the relevant Misbooking Trigger Date and [CONFIDENTIAL TREATMENT REQUESTED].

Section 8.2 Termination Fee; Sole and Exclusive Remedy. In the event this Agreement is terminated pursuant to Section 8.1(c) or (d), in addition to any amounts payable by either Party pursuant to Sections 2.9, 2.10 and 2.11, the Defaulting Party with respect to such termination shall pay to the Non-Defaulting Party, within five (5) Business Days of the date of termination of this Agreement, the Termination Fee by wire transfer in immediately available funds to the account or accounts designated by the Non-Defaulting Party. Each of the Seller and the Purchase hereby expressly acknowledge, agree and stipulate that (i) the Termination Fee represents compensation for costs and losses associated with the termination of this Agreement and the failure to consummate the Contemplated Transactions, which costs and losses are difficult or impossible to ascertain with any certainty, including costs and losses relating, but not limited, to hedging costs, attorneys fees, other professional services fees, costs of capital and opportunity costs related to the Transferred Assets, but particularly to the Transferred Contracts and Other Assets, (ii) the amount of the Termination Fee, in addition to any amounts payable by either Party pursuant to Sections 2.9, 2.10 and 2.11, constitutes a reasonable approximation of the costs and losses to the Non-Defaulting Party as a result of termination of this Agreement and the failure to consummate the Contemplated Transactions, (iii) it hereby waives its right to contest the payment or amount the Termination Fee, including on the grounds that the payment of the Termination Fee constitutes a penalty or otherwise, (iv) except in the case of fraud, willful breach or willful misconduct, the payment of the Termination Fee by the Defaulting Party constitutes, together with any amounts payable by either Party pursuant to Sections 2.9, 2.10 and 2.11, the sole and exclusive remedy available to the Non-Defaulting Party for any breach or default under this Agreement or any Related Agreement. For the avoidance of doubt, the remedy of specific performance set forth in Section 10.11 shall not be available to any Party upon termination of this Agreement and payment of the Termination Fee in accordance with this Section 8.2.

Section 8.3 Effect of Termination.

(a) In the event this Agreement is terminated pursuant to Section 8.1, all further obligations of the Parties hereunder shall terminate and this Agreement shall become null and void and of no further force and effect, except with respect to Section 2.9(b), Section 2.10(b), Section 2.11(b), Section 8.2, this Section 8.3 and Article X and except that nothing in this Section 8.3 shall relieve any Party from liability for any breach of this Agreement that arose prior to such termination, for which liability the provisions of Article IX shall remain in effect in accordance with the provisions and limitations of such Article. Such termination shall not relieve any Party of any Liability for any intentional breach of this Agreement or fraud prior to such termination. The provisions of the Confidentiality Agreement shall survive termination of this Agreement for a period of two (2) years from the date of termination.

(b) Any payments to be made between the Parties pursuant to (i) this Agreement, including any payments to be made pursuant to Sections 2.9(b), 2.10(c), 2.11(b), and 8.2, (ii) the Guarantee Agreements, (iii) the Supply Trade Agreements, (iv) the Mirror Confirm, and (v) the MCP-IES ISDA Master Agreement as it relates to Section 2.16, may be made on a net basis, with the Party owing the greater amount paying to the Party owing the lesser amount the difference between such amounts; provided, in calculating any such payment on a net basis, such calculation shall be performed by, first, calculating the payments to be made on a net basis with respect to each agreement individually and, second, by calculating the payment to be made on a net basis among all the foregoing agreements collectively; provided, however, that the foregoing provision shall not apply to any rights, claims or payments made, owing or relating to the terms and conditions set forth in Article IX.

ARTICLE IX

INDEMNIFICATION

Section 9.1 Survival.

(a) All covenants and other agreements in this Agreement to be performed after the Closing shall survive the Closing until so performed. All representations and warranties in this Agreement shall survive the Closing for a period of eighteen (18) months after the Closing Date; provided, however, that the representations and warranties set forth in Sections 3.2, 3.3, 3.4, 3.6 and 3.8 shall survive the Closing for a period of three (3) years after the Closing Date.

(b) Subject to Section 9.1(c), the Seller shall not be liable for the exacerbation of any Losses with respect to any claim, action or Proceeding in connection with this Agreement unless the Seller receives from the Purchaser written notice (i) as soon as reasonably practicable after the Purchaser becomes aware of such claim, action or Proceeding, and (ii) containing specific details of the claim, action or Proceeding, including the Purchaser’s estimate, or for a claim, action or Proceeding with respect to Taxes, the Purchaser’s estimate resulting from its best efforts, on a without prejudice basis, in each case, of the amount at issue with respect to such the claim, action or Proceeding.

(c) Notwithstanding anything to the contrary herein, the Seller shall not be liable for any Losses with respect to any claim, action or Proceeding in connection with this Agreement unless the Seller receives from the Purchaser written notice prior to the expiration of the applicable survival period set forth in Section 9.1(a) with respect to any claim for indemnification pursuant to Section 9.2(a).

Section 9.2 Indemnification by Seller

From and after the Closing Date, the Seller shall indemnify and hold the Purchaser and each of its Affiliates, directors, shareholders, officers and employees (collectively, the “Purchaser Group”), harmless from and against Losses imposed upon or incurred by any of them which arise out of:

(a) any misrepresentation or inaccuracy of a representation or warranty made by the Seller in this Agreement, pursuant to any certificate delivered by the Seller pursuant hereto or as may be made by the Seller in any Related Agreements;

(b) any breach or non-fulfillment of any covenant or agreement on the part of the Seller or its Affiliates in this Agreement or any Related Agreement to which it is a party, as the case may be;

(c) any (A) Liabilities for Successor Liability Taxes or any other Taxes with respect to any of the Transferred Assets or the Business, in each case related to a Tax period (or portion of any period) which ends, with respect to each Transferred Asset or the Business, on or before the earlier of (i) the date that such Transferred Asset or the Business is novated (if applicable), and (ii) the date that such Transferred Asset or the Business is treated by the Law imposing such Taxes as transferred from the Seller to the Purchaser, or (B) liability of the Seller for Transfer Taxes pursuant to Section 10.3(a); and

(d) the Excluded Assets, the Excluded Transactions and the Excluded Liabilities.

Section 9.3 Indemnification by Purchaser. From and after the Closing Date, the Purchaser shall indemnify and hold the Seller and each of its Affiliates, directors, shareholders, officers and employees (the “Seller Group”), harmless from and against Losses imposed upon or incurred by any of them which arise out of:

(a) any misrepresentation or inaccuracy of a representation or warranty made by the Purchaser in this Agreement, pursuant to any certificate delivered by the Purchaser pursuant hereto or as may be made by the Seller in any Related Agreements;

(b) any breach or non-fulfillment of any covenant or agreement on the part of the Purchaser in this Agreement;

(c) any (A) Liabilities for any Taxes with respect to the Transferred Assets or the Business, in each case related to a Tax period (or portion of any period) which begins, with respect to each Transferred Asset or the Business, after the earlier of (i) the date that such Transferred Asset or the Business is novated (if applicable), and (ii) the date that such Transferred Asset or the Business is treated by the Law imposing such Taxes as transferred from the Seller to the Purchaser, or (B) liability of the Purchaser for Transfer Taxes pursuant to Section 10.3(a); or

(d) the ownership, possession, use, maintenance, administration, or operation of the Transferred Assets after the Closing; and

(e) the Assumed Liabilities.

Section 9.4 Indemnification Procedures.

(a) Asserting a Claim. Without limiting the provisions of Section 9.1, if a Party (an “Indemnified Party”) wishes to assert a claim for indemnification against the other Party (the “Indemnifying Party”), the Indemnified Party shall give notice to the Indemnifying Party, setting forth with particularity the basis for the claim, promptly after the Indemnified Party becomes aware of any fact, condition, or event which gives rise to a Claim for which indemnification may be sought under this Article IX. Failure to notify the Indemnifying Party shall not relieve the Indemnifying Party of liability it may have to the Indemnified Party, except to the extent that the Indemnifying Party has been materially prejudiced by such failure and except that nothing in this Agreement shall be deemed to extend the time limits set forth in Section 9.1. Each Indemnified Party shall use commercially reasonable efforts to mitigate Losses for which it seeks indemnification under this Article IX.

(b) Third Party Claims. If any lawsuit, enforcement action, demand or claim is brought or made by any other Person (a “Third Party Claim”) against an Indemnified Party is the basis for an indemnification claim pursuant to Section 9.2 or Section 9.3, the Indemnifying Party shall be entitled, if it so elects, to take control of the defense and investigation of the Third Party Claim and to employ and engage attorneys of its own choice reasonably acceptable to the Indemnified Party to handle and defend the Third Party Claim, at the Indemnifying Party’s cost, risk and expense. Any election by the Indemnifying Party to take control of the defense and investigation of a Third Party Claim shall not be deemed a waiver of the Indemnifying Party’s right to determine at a later date that the Third Party Claim is not entitled to indemnification under this Agreement, in which case Indemnifying Party may, in the exercise of its sole discretion, determine not to continue to defend that Third Party Claim and any action taken by the Indemnifying Party in connection with that determination shall be undertaken in a manner so as not to materially prejudice the defense or the rights of the Indemnified Party. The Indemnified Party shall cooperate with the Indemnifying Party so as to minimize the risk of any such prejudice. The Indemnified Party shall cooperate in all reasonable respects with the Indemnifying Party and such attorneys in the investigation, trial and defense of any Third Party Claim and any resulting appeal, which shall include: (a) furnishing such records, information and testimony, and

attending such conferences, discovery proceedings, hearings, trials and appeals, as reasonably may be requested in connection with the Third Party Claim, (b) affording access during normal business hours to the Indemnifying Party to, and reasonable retention by the Indemnified Party of, records and information which are reasonably relevant to the Third Party Claim, and (c) making its employees available on a mutually convenient basis to provide additional information and explanation of any material provided to the Indemnifying Party under this Agreement. The Indemnified Party nevertheless may, at its own cost, participate in the investigation, trial and defense of such Third Party Claim or any resulting appeal.

Section 9.5 Settlement or Compromise of Third Party Action; Failure to Assume Defense. If the Indemnifying Party has assumed control of the defense of a Third Party Claim pursuant to Section 9.4, the Indemnifying Party may consent to a settlement or compromise of, or the entry of any monetary judgment arising from the Third Party Claim without the prior consent of the Indemnified Party if, and only if, the proposed settlement, compromise or entry (a) does not contain an admission of guilt or wrongdoing on the part of the Indemnified Party, and (b) does not provide for any remedy or sanction against the Indemnified Party other than the payment of money which the Indemnifying Party agrees to pay and does pay. If the Indemnifying Party does not assume the defense of the Third Party Claim in accordance with Section 9.4 within twenty (20) Business Days after the receipt of notice of the Third Party Claim, the Indemnified Party may, at the Indemnifying Party’s expense, defend the Third Party Claim, but may settle or compromise the Third Party Claim only with the consent of the Indemnifying Party.

Section 9.6 Adjustment to Purchase Price. Amounts paid with respect to indemnification pursuant to Section 9.2(a) or Section 9.3(a) shall be treated as an adjustment to the Purchase Price.

Section 9.7 General Limitations.

(a) Basket. Except in the case of (i) fraud, willful breach or willful misconduct, (ii) Liability for Taxes that are the responsibility of the Seller, and (iii) as provided in Section 10.11, the Seller shall not be liable to any member of the Purchaser Group under Section 9.2(a), and the Purchaser shall not be liable to any member of the Seller Group under Section 9.3(a) unless and until the aggregate cumulative amount of all such Losses exceeds one million dollars ($1,000,000.00), and then shall be liable only to the extent of such excess; provided, however, that the limitation pursuant to this Section 9.7(a) shall not apply (i) to any adjustment to the Purchase Price occurring pursuant to the terms and provisions of Article II, including without limitation with respect to any Misbooking and Identified Transactions, or (ii) to any claim for indemnification arising from a breach of Section 3.2, 3.3, 3.4 or 3.6.

(b) Cap. Except in the case of (i) fraud, willful breach or willful misconduct, (ii) Liability for Taxes that are the responsibility of the Seller, and (iii) as provided in Section 10.11, in no event shall the aggregate cumulative amount of the Seller’s Liabilities under Section 9.2(a),

or the Purchaser’s Liabilities under Section 9.3(a), exceed twenty-five million dollars ($25,000,000.00); provided, however, that the limitation pursuant to this Section 9.7(b) shall not apply (i) to any adjustment to the Purchase Price occurring pursuant to the terms and provisions of Article II, including without limitation with respect to any Misbooking and Identified Transactions, or (ii) to any claim for indemnification arising from a breach of Section 3.2, 3.3, 3.4, 3.6, 3.9, 3.12 or 3.13.

(c) Limitation. NOTWITHSTANDING ANYTHING TO THE CONTRARY ELSEWHERE IN THIS AGREEMENT OR PROVIDED FOR UNDER ANY APPLICABLE LAW, NO PARTY WILL, IN ANY EVENT, BE LIABLE, EITHER IN CONTRACT OR IN TORT, FOR ANY CONSEQUENTIAL, INCIDENTAL, INDIRECT, SPECIAL, OR PUNITIVE DAMAGES, INCLUDING LOSS OF FUTURE REVENUE, INCOME, OR PROFITS, DIMINUTION OF VALUE, OR LOSS OF BUSINESS REPUTATION OR OPPORTUNITY, RELATING TO THE BREACH OR ALLEGED BREACH OF THIS AGREEMENT OR OTHERWISE, WHETHER OR NOT THE POSSIBILITY OF SUCH DAMAGES HAS BEEN DISCLOSED IN ADVANCE OR COULD HAVE BEEN REASONABLY FORESEEN (“Non-Reimbursable Damages”).

(d) Collateral Sources. In calculating the amount of Losses for which an Indemnified Party is entitled to indemnification under Section 9.2(a) or Section 9.3(a), as applicable, the amount of Losses shall be reduced by (a) any insurance proceeds actually received by the Indemnified Party from an insurance carrier with respect to those Losses, provided that if the Indemnified Party fails to either diligently pursue any such insurance proceeds reasonably available to it or assign a valid right to the Indemnifying Party to pursue such insurance proceeds, the Indemnifying Party’s obligation shall be reduced by the amount of insurance proceeds that would have been reasonably available to and obtainable by the Indemnified Party, (b) any amounts actually received by the Indemnified Party from Third Parties with respect to Losses pursuant to indemnification, warranty or other similar rights, provided that if the Indemnified Party fails to diligently pursue such rights, the Indemnifying Party’s obligation shall be reduced by the amounts available to the Indemnified Party, and (c) Tax benefits. If any Losses for which indemnification is provided under Section 9.2(a) or Section 9.3(a), as applicable, subsequently are reduced by any insurance payment or recovery from a Third Party or loss of Tax benefits, the Indemnified Party promptly shall remit the amount of such reduction to the Indemnifying Party.

(e) Duty to Mitigate Losses. Each Indemnified person shall use its commercially reasonable efforts to mitigate any indemnifiable Losses.

(f) Additional Limitations. Neither Indemnifying Party shall have any indemnification obligations under this Article IX to the extent that, as a result of any gross negligence or willful misconduct of an Indemnified Party after the Closing Date, the amount of Losses subject to indemnification by such Indemnifying Party is exacerbated.

Section 9.8 Exclusive Remedies. Except in the case of fraud, willful breach and willful misconduct, and except as provided in Section 10.11, the Seller and the Purchaser acknowledge and agree that, from and after the Closing, the sole and exclusive remedy for any breach or inaccuracy, or alleged breach or inaccuracy, of any representation or warranty in this Agreement, any certificate delivered pursuant hereto, as the case may be, or any Related Agreement or any covenant or agreement to be performed under this Agreement or any Related Agreement on or prior to the Closing Date, will be indemnification in accordance with this Article IX. In furtherance of the foregoing, the Seller and the Purchaser waive, to the fullest extent permitted by applicable Law, any and all other rights, claims, and causes of action (including rights of contributions, if any) that may be based upon, arise out of, or relate to this Agreement or any such certificate or Related Agreement, or the negotiation, execution, or performance of this Agreement or any Related Agreement (including any tort or breach of contract claim or cause of action based upon, arising out of, or related to any representation or warranty made in or in connection with this Agreement or any Related Agreement or as an inducement to enter into this Agreement or any Related Agreement), known or unknown, foreseen or unforeseen, which exist or may arise in the future, that it may have against the other arising under or based upon any Law (including any such Law under or relating to environmental matters), common law, or otherwise.

Section 9.9 Non-Recourse. No past, present or future director, officer, employee, incorporator, member, partner, stockholder, affiliate, agent or Representative of the Seller or the Purchaser, respectively, or their respective Affiliates, shall have any Liability for any obligations or Liabilities of Seller under this Agreement or the other documents delivered by the Seller or the Purchaser in connection with this Agreement, of or for any claim based on, in respect of, or by reason of, the Contemplated Transactions.

ARTICLE X

GENERAL PROVISIONS

Section 10.1 Expenses. Except as otherwise expressly provided in this Agreement (including in Section 7.3(c)), whether or not the Contemplated Transactions are consummated, the Parties shall bear their own costs and expenses in connection with the preparation, negotiation and execution of this Agreement and the Related Agreements and the consummation of the Contemplated Transactions.

Section 10.2 Public Announcements and Confidentiality. None of the Parties nor their respective Subsidiaries or Affiliates, as the case may be, shall issue or cause the publication of this Agreement, any Related Agreement or any press release or other public announcement or communication with respect to the Contemplated Transactions without the prior written consent of the other Parties hereto, which consent shall not be unreasonably withheld or withdrawn, except to the extent a Party’s counsel deems necessary or advisable in order to comply with any Law or the regulations or policies of any securities exchange or other similar regulatory body (in which case the disclosing Party shall give the other Parties notice as is reasonably practicable of

any required disclosure, shall limit such disclosure to the information required to comply with such Law or regulations, and shall use commercially reasonable efforts to accommodate any suggested changes to such disclosure from the other Parties to the extent reasonably practicable).

Section 10.3 Tax Matters.

(a) Notwithstanding any provision of this Agreement to the contrary, the Purchaser and the Seller shall each pay one-half of all Transfer Taxes incurred in connection with this Agreement and the Contemplated Transactions. The Seller and the Purchaser shall cooperate in timely making all filings, Tax Returns, reports and forms as may be required to comply with the provisions of Tax Laws. For purposes of this Agreement, “Transfer Taxes” shall mean all transfer, sales and use, stamp duty, stamp duty reserve tax, documentary, registration and other such taxes (including all applicable real estate transfer taxes).

(b) Within sixty (60) days of the Closing Date, the Seller shall prepare a draft allocation of the consideration paid for the Transferred Assets among the Transferred Assets, which allocation will also include a determination as to the total gross value of all Transferred Assets that have a positive value, and a determination as to the total gross value of all Transferred Assets that have a negative value (the “Draft Allocation”). The Purchaser shall have sixty (60) days after receipt of the Draft Allocation to object in writing to the Draft Allocation. If the Purchaser does not object to the Draft Allocation within such 60-day period, the Draft Allocation shall become final (the “Final Allocation”). If the Purchaser objects to the Draft Allocation in writing within such 60-day period, the Seller and the Purchaser shall attempt in good faith to resolve the disputed items in the Draft Allocation, and any such resolution shall constitute the Final Allocation. If, within thirty (30) days after the Purchaser has objected in writing to the Draft Allocation, the Parties have not resolved all disputed items with respect to the Draft Allocation, the remaining disputed items shall be resolved by a nationally recognized accounting firm, and its resolution shall constitute the Final Allocation. The Seller and the Purchaser (1) shall be bound by the Final Allocation for purposes of determining any and all consequences with respect to Taxes of the Transferred Assets, (2) shall prepare and file all Tax Returns to be filed with any taxing authority in a manner consistent with the Final Allocation, and (3) shall take no position inconsistent with the Final Allocation in any Tax Return, in any discussion with or Proceeding before any taxing authority, or otherwise.

(c) To the extent necessary to determine the liability for Taxes for a portion of a taxable year or period that begins before and ends after the Closing Date, the determination of the Taxes for the portion of the year or period ending on, and the portion of the year or period beginning after, the Closing Date shall be determined by assuming that the taxable year or period ended as of the close of business on the Closing Date, except that those annual property taxes and exemptions, allowances or deductions that are calculated on an annual basis shall be prorated on a time basis.

Section 10.4 Notices. All notices, Consents, waivers and other communications required or permitted by this Agreement shall be in writing and shall be deemed given to a Party when (a) delivered to the appropriate address by hand or by nationally recognized overnight courier service (costs prepaid), (b) sent by facsimile or e-mail with confirmation of transmission by the transmitting equipment or (c) received or rejected by the addressee, if sent by certified mail, return receipt requested, in each case to the following addresses, facsimile numbers or e-mail addresses and marked to the attention of the person (by name or title) designated below (or to such other address, facsimile number, e-mail address or person as a Party may designate by notice to the other Parties):

If to the Seller:

Integrys Energy Services, Inc.

1716 Lawrence Drive

De Pere, WI 54115

Attention: Daniel J. Verbanac, COO

Facsimile: (920) 617-6070

With copies to:

Foley & Lardner LLP

777 East Wisconsin Avenue

Milwaukee, WI 53202

Attention: Allen W. Williams, Jr.

Jason W. Allen

Facsimile: (414) 297-4900

If to the Purchaser:

Macquarie Cook Power Inc.

One Allen Center

500 Dallas Street, Suite 3100

Houston, TX 77002

Attention: Benjamin Preston

Telephone: +1-713-275-6142

Facsimile: +1-713-275-6115

With a copy to:

Macquarie Cook Power Inc.

One Allen Center

500 Dallas Street, Suite 3100

Houston, TX 77002

Attention: Patricia Jones, Legal Risk Management

Telephone: +1-713-275-6107

Facsimile: +1-713-275-6115

If to IEG:

Integrys Energy Group, Inc.

700 North Adams Street

Green Bay, WI 54301

Attention: Barth J. Wolf, Vice President, Chief Legal Officer and Secretary

Facsimile: (920) 433-1526

With copies to:

Foley & Lardner LLP

777 East Wisconsin Avenue

Milwaukee, WI 53202

Attention: Allen W. Williams, Jr.

Jason W. Allen

Facsimile: (414) 297-4900

Section 10.5 Governing Law; Submission to Jurisdiction; Selection of Forum; Waiver of Trial by Jury. THE AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT SUCH PRINCIPLES WOULD PERMIT OR REQUIRE THE APPLICATION OF LAWS OF ANOTHER JURISDICTION. Each Party hereto agrees that it shall bring any action or Proceeding in respect of any claim arising out of or related to this Agreement or the transactions contained in or contemplated by this Agreement and the Related Agreements, exclusively in the United States District Court for the Southern District of New York (or if subject matter jurisdiction before the federal court does not exist, then before the New York State Supreme Court for the Borough of Manhattan, in New York, New York) (the “Chosen Courts”), and solely in connection with claims arising under this Agreement or the transactions that are the subject of this Agreement or any of the Related Agreements (i) irrevocably submits to the exclusive jurisdiction of the Chosen Courts, (ii) waives any objection to laying venue in any such action or Proceeding in the Chosen Courts, (iii) waives any objection that the Chosen Courts are an inconvenient forum or do not have jurisdiction over any Party hereto and (iv) agrees that service of process upon such Party in any such action or Proceeding shall be effective if notice is given in accordance with Section 10.4 of this Agreement. Each Party hereto irrevocably

designates C.T. Corporation as its agent and attorney in fact for the acceptance of service of process and making an appearance on its behalf in any such claim or Proceeding and for the taking of all such acts as may be necessary or appropriate in order to confer jurisdiction over it before the Chose Courts and each Party hereto stipulates that such consent and appointment is irrevocable and coupled with an interest. Each Party hereto irrevocably waives any and all right to trial by jury in any legal Proceeding arising out of or relating to this Agreement or the Contemplated Transactions.

Section 10.6 Amendment and Waiver. Any provision of this Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by the Purchaser and the Seller, or in the case of a waiver, by the Party against whom the waiver is to be effective. No failure or delay by any Party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law except as otherwise provided in Article IX hereof.

Section 10.7 Entire Agreement.

(a) This Agreement, together with the Related Agreements, supersedes all prior agreements, whether written or oral, between the Parties with respect to its subject matter (including any letter of intent between the Parties related to the subject matter of this Agreement) and constitutes (along with the Schedules, Exhibits and other documents delivered pursuant to this Agreement) the entire agreement between the Parties with respect to its subject matter except for the Confidentiality Agreement, which shall remain in full force and effect until the Closing.

(b) In the case of any conflict between this Agreement and any of the Related Agreements, the relevant Related Agreement shall prevail except as expressly set forth in such Related Agreement.

Section 10.8 Assignments, Successors and No Third-Party Rights. No Party may, in whole or in part, assign any of its rights or interests or delegate any of its obligations under this Agreement without the prior written consent of both the Purchaser and the Seller, and any attempt to do so will be void; provided, however, that without prior written consent either the Purchaser or the Seller may pursuant to a corporate reorganization assign any of its rights or interests under this Agreement to any Affiliate so long as (a) the assignee is bound by this Agreement, (b) the assignee remains an Affiliate of the Purchaser or the Seller, as the case may be, and (c) such assignment does not prevent or materially impede, interfere with, or delay the Contemplated Transaction, increase the costs to non-assigning Party of the consummation of Contemplated Transaction or result in any Seller or its Affiliates incurring a Tax Liability in excess of the Tax Liability Seller or its Affiliates would otherwise incur without such designation. Subject to the preceding sentence, and except as otherwise expressly provided in

Sections 9.2 and 9.3, this Agreement will apply to, be binding in all respects upon and inure to the benefit of the successors and permitted assigns of the Parties. Nothing expressed or referred to in this Agreement will be construed to give any Person other than the Parties to this Agreement any legal or equitable right, remedy or claim under or with respect to this Agreement or any provision of this Agreement, except such rights as shall inure to a successor or permitted assignee pursuant to this Section 10.8.

Section 10.9 Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. If any provision of this Agreement, or the application thereof to any Person or any circumstance, is invalid or unenforceable, (a) a suitable and equitable provision shall be substituted therefor in order to carry out, so far as may be valid and enforceable, the intent and purpose of such invalid or unenforceable provision, and (b) the remainder of this Agreement and the application of such provision to other Persons or circumstances shall not be affected by such invalidity or unenforceability, nor shall such invalidity or unenforceability affect the validity or enforceability of such provision, or the application thereof, in any other jurisdiction.

Section 10.10 Execution of Agreement. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. The exchange of copies of this Agreement and of signature pages by facsimile or e-mail transmission shall constitute effective execution and delivery of this Agreement as to the Parties and may be used in lieu of the original Agreement for all purposes. Signatures of the Parties transmitted by facsimile or e-mail shall be deemed to be their original signatures for all purposes.

Section 10.11 Specific Performance. Subject to Section 8.2, the Parties hereto, including IEG (solely with respect to Section 7.9), acknowledge and agree that irreparable harm for which monetary damages would not be an adequate remedy would occur in the event of a breach of any of the terms or provisions of this Agreement related to effecting the Closing or Section 2.7(a) and (d) (Transferred Contracts; Other Assets), Section 2.8(a) (Trading Contracts), Section 2.9 (Exchange Traded Transactions), Section 2.10 (Mirror Transactions), Section 2.11 (ISO Contracts), Section 7.3 (Filings; Commercially Reasonable Efforts to Close), Section 7.6 (Transition Plans), Section 7.7 (Confidentiality) and Section 7.9 (Non-Competition). Accordingly, the Parties hereto, including IEG, agree that, in addition to other remedies, each of the Parties shall be entitled to specific performance without the necessity of proving the inadequacy of monetary damages as a remedy and to obtain injunctive relief against any such breaches or threatened breaches of this Agreement.

Section 10.12 Disclosures. Prior to the Closing Date, the Seller may, at its option, supplement or amend the Schedules with items that are not material in order to avoid any misunderstanding; provided, however, that any such inclusion, or any references to dollar amounts, shall not be deemed to effectuate an acknowledgment or representation that such items

are material, to establish any standard of materiality, or to define further the meaning of such terms for purposes of this Agreement. Other than with respect to supplements and amendments made in accordance with Section 2.10(b), (i) in the event that the Purchaser reasonably believes that the changes to the Schedules resulting from such supplements and amendments, considered collectively, will cause a closing condition set forth in Section 5.1 to fail to be satisfied, the Purchaser shall have the right to terminate this Agreement upon fifteen (15) Business Days notice from the date of such relevant supplement or amendment pursuant to Article VIII, and (ii) if the Purchaser does not exercise its right pursuant to clause (i) above, any supplement or amendment made pursuant this Section 10.12 shall not diminish, limit or waive the Seller’s indemnification obligations under this Agreement.

[Remainder of page left blank intentionally]

IN WITNESS WHEREOF, the Parties have executed this Agreement, all as of the date first above written.

INTEGRYS ENERGY SERVICES, INC.

By:____________________________________

Name:

Title:

INTEGRYS ENERGY GROUP, INC. (solely with respect to Section 2.13, Section 7.9, and Section 10.11)

By: _____________________________________

Name:

Title:

MACQUARIE COOK POWER INC.

By: _____________________________________

Name: Benjamin Preston

Title: Executive Director

By: _____________________________________

Name: Patricia Jones

Title: Associate Director

[Signature Page to Purchase and Sale Agreement]

Exhibit A – Form of Assignment and Assumption Agreement

[X]Form Attached[X]

Exhibit B – Form of Bill of Sale

[X]Form Attached[X]

Exhibit C-1 – Form of Bangor Financial Trade Agreement

[X]Form Attached[X]

Exhibit C-2 Form of Bangor Supply Trade Agreement

[X]Form Attached[X]

Exhibit D – Form of Mirror Confirm

[X]Form Attached[X]

Exhibit E – Form of Novation Agreement

[X]Form Attached[X]

Exhibit F – Form of Purchaser Guarantee Agreement

[X]Form Attached[X]

Exhibit G – Form of Seller Guarantee Agreement

[X]Form Attached[X]

Exhibit H – Form of Indicated Transactions Letter of Credit

[X]Form Attached[X]

Exhibit I Form of PPL Financial Trade Agreement

[X]Form Attached[X]

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, IL 60601 (312) 228-5400	39-1775292

Title of each class	Name of each exchange on which registered

Common Stock, $1 par value	New York Stock Exchange

Large accelerated filer [X]	Accelerated filer [ ]
Non-accelerated filer [ ]	Smaller reporting company [ ]


	Year Ended December 31
	2009			2008			2007			Change in 2009 Over 2008			Change in 2008 Over 2007

Revenues	$	2,237.5		$	3,025.9		$	2,103.7			(26.1	)%		43.8	%
Purchased natural gas costs		1,382.0			2,147.7			1,453.5			(35.7	)%		47.8	%
Margins		855.5			878.2			650.2			(2.6	)%		35.1	%

Operating and maintenance expense		532.6			539.1			427.4			(1.2	)%		26.1	%
Goodwill impairment loss (1)		291.1			6.5			-			4,378.5	%		N/A
Restructuring expense (2)		6.9			-			-			N/A			N/A
Depreciation and amortization expense		106.1			108.3			97.7			(2.0	)%		10.8	%
Taxes other than income taxes		33.4			32.1			33.1			4.0	%		(3.0	)%

Operating income (loss)		(114.6	)		192.2			92.0			N/A			108.9	%

Miscellaneous income		3.1			7.0			5.5			(55.7	)%		27.3	%
Interest expense		(52.2	)		(56.6	)		(53.4	)		(7.8	)%		6.0	%
Other expense		(49.1	)		(49.6	)		(47.9	)		(1.0	)%		3.5	%

Income (loss) before taxes	$	(163.7	)	$	142.6		$	44.1			N/A			223.4	%

Throughput in therms
Residential		1,602.8			1,708.9			1,251.8			(6.2	)%		36.5	%
Commercial and industrial		501.4			550.8			439.2			(9.0	)%		25.4	%
Interruptible		51.3			60.1			59.4			(14.6	)%		1.2	%
Interdepartmental		9.5			28.6			47.1			(66.8	)%		(39.3	)%
Transport		1,641.6			1,834.0			1,505.6			(10.5	)%		21.8	%
Total sales in therms		3,806.6			4,182.4			3,303.1			(9.0	)%		26.6	%

Weather
Average heating degree days		7,061			7,257			N/M	(3)		(2.7	)%		N/A

·	An approximate $648 million decrease in revenue as a result of an approximate 30% decrease in the average per-unit cost of natural gas sold by the regulated natural gas utilities during 2009 compared with 2008. For all of Integrys Energy Group's regulated natural gas utilities, prudently incurred natural gas commodity costs are passed directly through to customers in current rates.

·	An approximate $166 million decrease in revenue as a result of lower year-over-year natural gas throughput volumes, driven by:

	-	An approximate $83 million decrease related to lower overall volumes, including residential customer volumes, resulting from customer conservation and efficiency efforts. Lower volumes were also driven by decreased commercial and industrial customer volumes resulting from reduced demand related to changes in customers' plant operations and a decline in customer base at PGL and MGU, both of which Integrys Energy Group attributed to the general economic slowdown.

	-	An approximate $70 million decrease as a result of warmer year-over-year weather during the heating season as indicated by the 2.7% decrease in average heating degree days.

	-	An approximate $19 million decrease related to a reduction in volumes sold to the electric utility segment driven by the availability of lower cost power from MISO, resulting in a decrease in the need for the electric utility to run its natural gas-fired peaking generation units.

	-	This decrease in revenue was partially offset by the $6 million positive impact of decoupling mechanisms that were first effective for PGL and NSG on March 1, 2008, and for WPS on January 1, 2009. Under decoupling, these utilities are allowed to defer the difference between the actual and rate case authorized delivery charge components of margin from certain customers and adjust future rates in accordance with rules applicable to each jurisdiction.

·	An approximate $20 million year-over-year net decrease in revenue from lower recovery of environmental cleanup expenditures at PGL and NSG related to former manufactured gas plant sites, partially offset by higher recovery of EEP expenses. The EEP program was established in the 2008 PGL and NSG rate cases and is designed to encourage energy efficiency initiatives.

·	The decrease in revenue was partially offset by the approximate $29 million year-over-year net positive impact of natural gas distribution rate cases and changes in rate design at the regulated natural gas utilities. See Note 24, "Regulatory Environment," for more information on these rate cases.

	-	Effective January 14, 2009, MGU received a final rate order from the MPSC for a natural gas distribution rate increase. On June 29, 2009, MERC received a final rate order granting a natural gas distribution rate increase. Prior to this final order, MERC had been granted interim rate relief effective October 1, 2008. Together, these rate increases had an approximate $19 million positive impact on revenue.

	-	In 2009, PGL and NSG received the full impact of their 2008 natural gas distribution rate orders, which were effective February 14, 2008, and drove an approximate $5 million increase in revenue year-over-year.

	-	Effective January 1, 2009, the PSCW required WPS to change its retail natural gas distribution rate design which incorporates higher volumetric rates and lower fixed customer charges. In 2009, revenue increased approximately $5 million related to this change in rate design.

Number of shares outstanding of each class of common stock, as of February 24, 2010

Common Stock, $1 par value, 76,522,377 shares


ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA				76

	A.	Management Report on Internal Control over Financial Reporting			76
	B.	Report of Independent Registered Public Accounting Firm			77
	C.	Consolidated Statements of Income			79
	D.	Consolidated Balance Sheets			80
	E.	Consolidated Statements of Equity			81
	F.	Consolidated Statements of Cash Flows			82
	G.	Notes to Consolidated Financial Statements			83
		Note 1	Summary of Significant Accounting Policies	83
		Note 2	Risk Management Activities	90
		Note 3	Restructuring Expense	94
		Note 4	Dispositions	95
		Note 5	PEC Merger	101
		Note 6	Property, Plant, and Equipment	102
		Note 7	Jointly Owned Utility Facilities	103
		Note 8	Regulatory Assets and Liabilities	104
		Note 9	Investments in Affiliates, at Equity Method	105
		Note 10	Goodwill and Other Intangible Assets	107
		Note 11	Leases	109
		Note 12	Short-Term Debt and Lines of Credit	110
		Note 13	Long-Term Debt	112
		Note 14	Asset Retirement Obligations	114
		Note 15	Income Taxes	116
		Note 16	Commitments and Contingencies	119
		Note 17	Guarantees	126
		Note 18	Employee Benefit Plans	127
		Note 19	Preferred Stock of Subsidiary	133
		Note 20	Common Equity	134
		Note 21	Stock-Based Compensation	135
		Note 22	Fair Value	138
		Note 23	Miscellaneous Income	140
		Note 24	Regulatory Environment	141
		Note 25	Segments of Business	144
		Note 26	Quarterly Financial Information (Unaudited)	147
	H.	Report of Independent Registered Public Accounting Firm on Financial Statements			148

ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE				149

ITEM 9A.	CONTROLS AND PROCEDURES				149

ITEM 9B.	OTHER INFORMATION				149

PART III					150

ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE				150

ITEM 11.	EXECUTIVE COMPENSATION				150

ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS				150

ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE				151

ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES				151

Acronyms Used in this Annual Report on Form 10-K

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
ESOP	Employee Stock Ownership Plan
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
PEP	Peoples Energy Production Company
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


ITEM 6. SELECTED FINANCIAL DATA

INTEGRYS ENERGY GROUP, INC.
COMPARATIVE FINANCIAL DATA AND
OTHER STATISTICS (2005 TO 2009)


As of or for Year Ended December 31
(Millions, except per share amounts, stock price, return on average equity
and number of shareholders and employees)	2009			2008			2007 (1)			2006 (2)			2005

Total revenues	$	7,499.8		$	14,047.8		$	10,292.4		$	6,890.7		$	6,825.5

Net income (loss) from continuing operations		(71.6	)		124.7			181.0			147.8			146.1

Net income (loss) attributed to common shareholders		(70.9	)		126.4			251.3			155.8			157.4

Total assets		11,847.9			14,272.5			11,234.4			6,861.7			5,462.5

Preferred stock of subsidiary		51.1			51.1			51.1			51.1			51.1

Long-term debt (excluding current portion)		2,394.7			2,285.7			2,265.1			1,287.2			867.1

Shares of common stock (less treasury stock and shares in deferred
compensation trust)
Outstanding		76.0			76.0			76.0			43.1			39.8
Average		76.8			76.7			71.6			42.3			38.3

Earnings (loss) per common share (basic)
Net income (loss) from continuing operations	$	(0.96	)	$	1.59		$	2.49		$	3.51		$	3.85
Earnings (loss) per common share		(0.92	)		1.65			3.51			3.68			4.11
Earnings (loss) per common share (diluted)
Net income (loss) from continuing operations		(0.96	)		1.58			2.48			3.50			3.81
Earnings (loss) per common share		(0.92	)		1.64			3.50			3.67			4.07
Dividends per common share declared		2.72			2.68			2.56			2.28			2.24

Stock price at year-end	$	41.99		$	42.98		$	51.69		$	54.03		$	55.31
Book value per share	$	37.62		$	40.78		$	42.58		$	35.61		$	32.76
Return on average equity		(2.5	)%		3.7	%		8.5	%		10.6	%		13.6	%
Number of common stock shareholders		32,755			34,016			35,212			19,837			20,701
Number of employees		5,025			5,191			5,231			3,326			2,945

(1) Includes the impact of the PEC merger on February 21, 2007.
(2) Includes the impact of the acquisition of natural gas distribution operations from Aquila by MGU on April 1, 2006 and MERC on July 1, 2006.

·	WPS's continued investment in environmental projects to improve air quality and meet the requirements set by environmental regulators. Capital projects to construct and/or upgrade equipment to meet or exceed required environmental standards are planned each year.

·	Integrys Energy Group's approximate 34% ownership interest in ATC, a transmission company that had over $2.8 billion of transmission assets at December 31, 2009. ATC plans to invest approximately $2.5 billion during the next ten years. Although ATC's equity requirements to fund its capital investments will primarily be met by earnings reinvestment, Integrys Energy Group plans to continue to fund its share of the equity portion of future ATC growth, as necessary.

·	An accelerated annual investment in natural gas distribution facilities (replacement of cast iron mains) at PGL.

·	WPS's purchase of the 99-megawatt Crane Creek wind generation project constructed in Howard County, Iowa, which became operational in 2009.

·	IBS, a wholly owned service company of Integrys Energy Group, was formed to achieve consolidation and efficient delivery of various support services, and to provide more consistent and transparent allocation of costs throughout Integrys Energy Group and its subsidiaries.

·	"Operational Excellence" initiatives were implemented to provide top performance in the areas of project management, process improvement, contract administration, and compliance in order to reduce costs and manage projects and activities within appropriate budgets, schedules, and regulations.

·	Managing operations to minimize the impact on the environment. WPS's Weston 4 facility, completed in 2008, is one of the most efficient pulverized coal-fired electric generation units in the country with state-of-the-art environmental controls, which allows reductions in the amount of emissions produced. Integrys Energy Group also expects to maintain or decrease the amount of greenhouse gases released over time and supports research and development initiatives that will enable further progress toward decreasing its carbon footprint.

·	Effectively operating a mixed portfolio of generation assets and investing in new generation and distribution assets, such as Weston 4, wind projects, and its natural gas connection to the Guardian II pipeline, ensures continued reliability for Integrys Energy Group's customers.

·	Earnings at the regulated natural gas utility segment decreased $256.6 million, driven by a $242.3 million increase in after-tax non-cash goodwill impairment losses period-over-period. A $16.2 million after-tax decrease in margin from lower period-over-period volumes, net of decoupling, also negatively impacted earnings. An $8.0 million after-tax increase in employee benefit costs, a $9.6 million after-tax increase in other operating and maintenance expenses related primarily to natural gas maintenance costs and workers compensation claims, and $4.1 million after-tax of restructuring costs related to workforce reductions also contributed to the decrease in earnings. These negative impacts were partially offset by a $17.4 million after-tax net positive impact that increased rates at certain natural gas utilities had on margin and a $10.6 million after-tax decrease in bad debt expense.

·	Earnings at the regulated electric utility segment decreased $3.7 million, driven by a $20.2 million after-tax increase in operating expenses, including restructuring costs, a $3.7 million after-tax increase in other expense primarily related to an increase in interest expense at WPS, and a $3.3 million increase in income taxes. Partially offsetting these increases in expenses was a $23.8 million after-tax increase in margin.

·	Earnings at Integrys Energy Services increased $64.0 million, driven by a $127.3 million after-tax increase in Integrys Energy Services' margin year-over-year, primarily related to the positive year-over-year impact of inventory valuation adjustments recorded in prior periods, partially offset by non-cash accounting losses due to derivative fair value adjustments. Partially offsetting the increase in Integrys Energy Services' margin were an increase in the provision for income taxes, primarily due to an $18.4 million year-over-year decrease in income tax credits recognized, after-tax restructuring expenses of $17.4 million, after-tax losses of $17.3 million related to dispositions completed in connection with the strategy change primarily driven by timing differences caused by the accounting treatment for derivative and non-derivative contracts, and an after-tax increase in operating and maintenance expenses of $5.5 million.

·	Earnings at the electric transmission investment segment increased $5.8 million year-over-year, due to an increase in income from Integrys Energy Group's approximate 34% ownership interest in ATC.

·	Net loss at the holding company and other segment increased $6.8 million, driven by an increase in interest expense.

·	Earnings at the regulated natural gas utility segment increased $55.8 million, driven by the inclusion of PGL and NSG for all of 2008 compared with only a partial year of operations in 2007 and by the positive impact of PGL's 2008 rate increase. From 2007 to 2008, earnings related to PGL and NSG increased $43.3 million. Also positively impacting earnings was an increase in natural gas sales volumes at WPS, MERC, and MGU, which drove a $6.6 million after-tax increase in margin.

·	Earnings at the regulated electric utility segment increased $5.2 million, driven by a $7.0 million after-tax decrease in electric maintenance expenses, an approximate $6 million after-tax positive impact related to retail electric rate increases, and an approximate $6 million after-tax increase in wholesale margins, partially offset by an $8.3 million after-tax increase in electric transmission expenses and an approximate $7 million after-tax decrease in margin due to lower residential and commercial and industrial sales volumes as a result of cooler weather during the cooling season and customer conservation efforts.

·	Earnings at Integrys Energy Services decreased $159.5 million, driven by a $131.0 million after-tax decrease in Integrys Energy Services' margin year-over-year, primarily related to non-cash accounting losses due to derivative fair value and inventory valuation adjustments, partially offset by an increase in retail electric margin. Also contributing to the decrease in Integrys Energy Services' earnings was a $13.4 million after-tax increase in operating and maintenance expenses, the year-over-year impact of the recognition of $17.1 million of after-tax earnings from Integrys Energy Services' investment in a synthetic fuel production facility in 2007, and a $10.9 million decrease in after-tax income from discontinued operations as a result of the sale of Niagara Generation, LLC in 2007. Partially offsetting the decrease in earnings was the recognition of $10.0 million of investment tax credits related to solar projects completed in the fourth quarter of 2008.

·	Earnings at the oil and natural gas operations segment decreased $56.0 million. In connection with the PEC merger, Integrys Energy Group announced its intent to divest of PEC's oil and natural gas production operations, PEP. PEP was sold in the third quarter of 2007. In 2007, PEP recognized earnings of $56.0 million, including $58.5 million of earnings reported as discontinued operations. The sale of PEP resulted in a $7.6 million after-tax gain in 2007.

·	Earnings at the electric transmission investment segment increased $9.4 million year-over-year, due to an increase in income from Integrys Energy Group's ownership interest in ATC.

·	Net loss at the holding company and other segment decreased $20.2 million, driven by lower operating expenses at the holding company, partially offset by the negative year-over-year impact on operating income of the reallocation of external costs to achieve merger synergies in 2007.

·	An approximate $27 million year-over-year decrease in margin resulting from the 9.0% decrease in natural gas throughput volumes attributed to the negative impact of the general economic slowdown, customer conservation and efficiency efforts, and warmer year-over-year weather. This decrease in margin includes the impact of decoupling mechanisms that were first effective for PGL and NSG on March 1, 2008, and for WPS on January 1, 2009. The decoupling mechanism for WPS's natural gas utility includes an annual $8.0 million cap for the deferral of any excess or shortfall from the rate case authorized margin. Approximately $7 million of additional margin was recognized at WPS due to a shortfall from the rate case authorized margin during 2009.

·	An approximate $20 million year-over-year net decrease in margin due to lower recovery of environmental cleanup expenditures at PGL and NSG related to former manufactured gas plant sites, partially offset by an increase in recovery of EEP expenses. This decrease in margin was offset by a net decrease in operating expense from both the amortization of the related regulatory asset and EEP expenses and, therefore, had no impact on earnings.

·	An approximate $2 million year-over-year decrease in margin at MGU related to an adjustment in the third quarter of 2008 for recovery of prior natural gas costs in a MPSC proceeding.

·	The decrease in margin was partially offset by the approximate $29 million net positive year-over-year impact of rate orders and impacts of rate design changes at the regulated natural gas utilities.

·	An approximate $20 million net decrease in amortization of the regulatory asset related to environmental cleanup expenditures of manufactured gas plant sites, partially offset by an increase in EEP expenses. Both of these costs were recovered from customers in rates.

·	A $17.7 million decrease in bad debt expense driven by the impact lower energy prices had on overall accounts receivable balances and the implementation of bad debt expense tracking mechanisms at PGL, NSG, and MGU. PGL and NSG elected during the third quarter of 2009, under a new Illinois state law, to file for recovery from or refund to customers the difference between actual bad debt expense reported as a component of earnings and the bad debt expense included in utility rates retroactive to January 1, 2008. Bad debt expense also decreased as a result of MGU's rate order effective January 1, 2010, which established a bad debt expense tracking mechanism that allows for the deferral and subsequent recovery or refund of 80% of the difference between actual bad debt write-offs (net of recoveries) and bad debt expense included in utility rates. The bad debt mechanism allowed recovery of a portion of the December 31, 2009 accounts receivable reserve representing future bad debt write-offs. The decrease in bad debt expense attributed to the implementation of bad debt expense tracking mechanisms at the natural gas utilities was $9.3 million.

·	These decreases were partially offset by:


	-	A $13.4 million increase in employee benefit costs, partially related to an increase in pension expense resulting from negative pension investment returns in 2008, as well as higher health care related expenses in 2009.

	-	Restructuring expenses of $6.9 million related to a reduction in workforce. See Note 3, "Restructuring Expense," for more information.

	-	A $5.5 million increase in natural gas maintenance costs, primarily related to increased system inspection and maintenance requirements.

	-	A $5.0 million increase in expenses related to workers compensation claims.

	-	A $3.0 million charge related to an expected settlement at PGL and NSG.

	-	A $2.5 million increase in amortization of a regulatory asset related to conservation program initiatives.

·	A combined increase in PGL and NSG natural gas utility revenue of $780.5 million, from $1,118.5 million during 2007, to $1,899.0 million during 2008. The increase in revenue at both of these natural gas utilities was driven primarily by the fact that they were not included in regulated natural gas utility results until after the PEC merger on February 21, 2007. Other factors that contributed to this combined increase include:

	-	PGL's annualized rate increase effective February 14, 2008, which increased revenue year-over-year by approximately $61 million. See Note 24, "Regulatory Environment," for more information on the PGL and NSG rate cases.

	-	Higher year-over-year natural gas prices. Increases in natural gas commodity costs are passed directly through to customers in rates.

	-	Colder weather during the 2008 heating season, partially offset by energy conservation efforts by natural gas utility customers and a larger number of customer disconnections, which Integrys Energy Group believes resulted from high energy prices and a general slowdown in the economy.

·	An increase in natural gas revenue of $141.7 million at the remaining natural gas utilities (WPS, MERC, and MGU) from $985.1 million during 2007, to $1,126.8 million during 2008, which resulted primarily from:

	-	A combined $112.2 million increase in revenue driven by the approximate 13% increase in the per-unit cost of natural gas in 2008 compared with 2007.

	-	A $43.4 million increase in revenue from colder weather during the 2008 heating season compared with 2007, evidenced by an approximate 11% year-over-year increase in heating degree days across these three utilities.

	-	An increase in revenue from MERC's interim rate increase, effective October 1, 2008, for retail natural gas customers.


	-	The combined increase in revenue at WPS, MGU, and MERC, was partially offset by a $17.9 million decrease in revenue driven by a decrease in year-over-year volumes normalized for the impact of weather, $15.6 million of which was driven by a 39.3% decrease in natural gas throughput volumes sold by WPS to its electric utility segment. The decrease in volumes sold to the electric utility segment was a result of a decrease in the need for the electric utility to run its peaking generation units during the 2008 summer cooling season because of cooler year-over-year weather. Additional electricity was also available within the electric utility segment from Weston 4, a coal-fired generating facility that became commercially operational in June 2008. The remaining decrease in weather normalized volumes was driven by energy conservation efforts of residential customers and a larger number of customer disconnections year-over-year, which Integrys Energy Group believes resulted from high energy prices and a general slowdown in the economy.

·	An increase in the combined margin at PGL and NSG of $208.6 million, from $387.2 million in 2007 to $595.8 million in 2008. The increase in combined margin was driven by:

	-	The acquisition of PGL and NSG on February 21, 2007. The combined operations for the entire heating season were included in the 2008 natural gas utility margin. However, only operations from the merger date through December 31, 2007, were included in the 2007 natural gas utility margin. Due to the seasonal nature of natural gas utilities, higher margins are generally derived during the heating season (first and fourth quarters).

	-	The 2008 rate increase for PGL which resulted in an approximate $61 million increase in margin.

	-	Colder than normal weather experienced by both PGL and NSG resulted in an approximate $7 million increase in 2008 margin before the decoupling mechanism went into effect on March 1, 2008.

·	An increase in natural gas margin of $19.4 million at the remaining natural gas utilities (WPS, MERC, and MGU), primarily driven by:

	-	A combined 5.2% increase in natural gas throughput volumes at WPS, MERC, and MGU, which had an approximate $11 million positive impact on natural gas utility margins. Colder year-over-year weather had an approximate $14 million positive impact on margins. Partially offsetting the positive impact of colder weather, were energy conservation efforts by residential customers and a larger number of customer disconnections year-over-year, which had an approximate $3 million negative impact on margins.

	-	The interim rate increase for MERC, effective October 1, 2008, which had a positive impact on natural gas margin.

	-	An approximate $2 million year-over-year increase in margin at MGU related to an adjustment for recovery of prior natural gas costs in an MPSC proceeding.

The increase in operating expenses related to PGL and NSG was primarily driven by:

·	The acquisition of these natural gas utilities on February 21, 2007. As a result, operating expenses for the period January 1, 2007 to the acquisition date were not included in the 2007 operating results.

·	A non-cash goodwill impairment charge of $6.5 million recognized in the second quarter of 2008 related to NSG.

·	A combined increase in bad debt expense, driven by the impact of high energy prices and worsening economic conditions on overall accounts receivable balances.

·	A $6.1 million increase in combined interest expense at PGL and NSG, from $30.3 million in 2007 to $36.4 million in 2008. The increase in interest expense at PGL and NSG is primarily due to the fact that these utilities were first acquired on February 21, 2007, and, therefore, did not recognize a full year of interest expense in 2007. The increase in interest expense was also due to additional long-term debt borrowings and higher interest rates on new and remarketed long-term debt.

·	The increase in other expense was offset by:

	-	A $2.6 million increase in AFUDC at WPS related to the construction of natural gas laterals for connection to the Guardian II pipeline.

	-	A decrease in interest expense resulting from a decrease in short-term borrowing levels and a decrease in interest rates for WPS's natural gas segment.

·	A 5.5% decrease in commercial and industrial sales volumes and a 0.7% decrease in residential sales volumes, which resulted in an approximate $23 million year-over-year decrease in revenue, after the impact of decoupling. The primary drivers of the decrease were:

	-	An approximate $31 million year-over-year decrease due to lower demand related to changes in commercial and industrial customers' plant operations, which Integrys Energy Group attributed mainly to the general economic slowdown.

	-	An approximate $6 million decrease primarily related to cooler year-over-year weather during the cooling season as evidenced by the decrease in cooling degree days at both WPS and UPPCO.


	-	These decreases in volumes were partially offset by the $14.0 million impact that decoupling, which went into effect on January 1, 2009, had on WPS's revenue. Under decoupling, WPS is allowed to defer the difference between its actual margin and the rate case authorized margin recognized from residential and small commercial and industrial customers. This four-year pilot program for electric decoupling has an annual $14.0 million cap for the deferral of any excess or shortfall from the rate case authorized margin. This cap was reached during the second quarter of 2009; therefore, no additional decoupling deferral was allowed for additional shortfalls from authorized margin for the second half of the year.

·	An approximate $22 million year-over-year reduction in revenue related to refunds due to customers in both 2009 and 2008 related to WPS's over-collection of fuel costs. On April 23, 2009, the PSCW made 2009 fuel cost recovery subject to refund, effective April 25, 2009, as actual and projected fuel costs for the remainder of the year were estimated to be below the 2% fuel window. See Note 24, "Regulatory Environment," for more information on WPS's fuel window.

·	An approximate $14 million year-over-year decrease in opportunity sales driven by lower demand and the availability of lower cost power from the MISO market.

·	These decreases in regulated electric utility segment revenue were partially offset by:

	-	An approximate $19 million increase driven by higher wholesale volumes due to an increase in contracted sales volumes to a large wholesale customer and an increase in the wholesale demand rate, effective January 1, 2009, to recover costs related to Weston 4.

	-	An approximate $15 million increase in revenue from the combined effect of the July 4, 2008 fuel surcharge, a portion of which was incorporated into WPS's 2009 non-fuel base retail electric rates, and the full year's benefit of the 2008 retail electric rate increase, effective January 16, 2008, for WPS.

·	An approximate $20 million year-over-year increase in margin from wholesale customers related to increases in contracted sales volumes with an existing customer and an increase in the wholesale demand rate, effective January 1, 2009, to recover costs related to Weston 4.

·	An approximate $14 million year-over-year increase in margin from the combined effect of the July 4, 2008 fuel surcharge, a portion of which was incorporated into WPS's 2009 non-fuel base retail electric rates, and the full year's benefit of the 2008 retail electric rate increase, effective January 16, 2008, for WPS.

·	An approximate $11 million year-over-year increase in WPS's regulated electric utility margin due to fuel and purchased power costs that were approximately $12 million lower than what was recovered in rates during 2009, compared with fuel and purchased power costs that were approximately $1 million lower than what was recovered in rates during 2008.

·	The increase in margin was partially offset by an approximate $4 million year-over-year decrease in margin, after the impact of the WPS decoupling mechanism, caused by a 4.3% year-over-year decrease in sales volumes to residential and commercial and industrial customers. The $14.0 million impact of decoupling partially offset the approximate $18 million decrease in margin due to lower sales volumes, which was attributed to the general economic slowdown and cooler year-over-year weather during the cooling season.

·	$8.6 million in restructuring expenses related to a reduction in workforce. See Note 3, "Restructuring Expense," for more information.

·	An $8.2 million increase in electric maintenance expenses at WPS, primarily related to a greater number of planned outages at the generation plants during 2009, compared with 2008.

·	An $8.1 million increase in employee benefit costs, primarily related to an increase in pension expense driven partially by negative pension investment returns in 2008, as well as higher health care related expenses in 2009.

·	A $5.6 million increase in depreciation and amortization expense at WPS, primarily related to Weston 4 being placed in service for accounting purposes in April 2008.

·	A $4.9 million increase in interest expense, primarily related to increased long-term borrowings at WPS in December 2008. The additional borrowings were utilized to fund various construction projects, most notably the Crane Creek wind generation project in Iowa.

·	A $2.5 million decrease in interest earned on the transmission facilities WPS funded on ATC's behalf. WPS was reimbursed by ATC for these transmission facilities in April 2008.

·	A 3.2% increase in electric sales volumes, which resulted in an approximate $26 million increase in revenue year-over-year, related to:

	-	An 18.4% increase in wholesale volumes year-over-year, which drove an approximate $48 million increase in revenue. There was an approximate $36 million increase in opportunity sales year-over-year as the electric utility had more low-cost generation with Weston 4 becoming commercially operational in 2008, combined with available capacity from lower sales volumes to residential customers. In addition, WPS experienced an approximate $12 million increase in wholesale revenue, driven by higher contracted sales volumes to a large wholesale customer year-over-year.


	-	The increase in revenue related to wholesale volumes was partially offset by a 3.4% decrease in residential sales volumes and a 1.3% decrease in commercial and industrial sales volumes year-over-year, which drove an approximate $22 million decrease in revenue. Of this decrease in revenue, approximately $13 million related to energy conservation efforts on the part of residential customers, which is believed to be the result of high energy prices and the general economic slowdown. Approximately $6 million related to decreased demand by commercial and industrial customers in the third and fourth quarters of 2008 as the economy weakened. In addition, cooler weather during the 2008 cooling season compared with 2007 contributed approximately $3 million to the decrease in revenue.

·	An interim fuel surcharge approved by the PSCW for WPS's retail electric customers effective March 22, 2008, related to higher fuel and purchased power costs. In addition, a surcharge increase was approved by the PSCW effective July 4, 2008. Both orders combined had an overall impact on revenue of approximately $25 million. Contributing factors in this rate change were increased purchased power costs due to lower-than-expected generation from the new Weston 4 power plant during the start-up phases, increased coal and coal transportation costs, and increased natural gas costs. On September 30, 2008, the PSCW reopened the 2008 fuel surcharge to review forecasted fuel costs as WPS's current and anticipated annual fuel costs were below those projected in the fuel surcharge. As a result of these lower costs, WPS accrued at December 31, 2008, a refund payable in 2009 to its electric customers of approximately $5 million, which is excluded from the $25 million noted above. See Note 24, "Regulatory Environment," for more information on WPS's interim fuel surcharges.

·	A retail electric rate increase, effective January 16, 2008, which contributed an approximate $23 million increase in revenue. The full benefit of the 2007 retail electric rate increase, effective January 12, 2007, also contributed to the increase in revenue year-over-year. Per the PSCW's order approving the PEC merger, WPS was not permitted to increase its base rates for natural gas or electric service prior to January 1, 2009. However, WPS was allowed to adjust rates for changes in purchased power costs as well as fuel costs related to electric generation due to changes in NYMEX natural gas futures prices, delivered coal prices, and transmission costs. The increase also included recovery of deferred 2005 and 2006 MISO Day 2 costs over a one-year period. See Note 24, "Regulatory Environment," for more information on WPS's rate increase.

·	An approximate $5 million increase in revenue at UPPCO related to increased energy and transmission costs in 2008 compared with 2007. Increases in fuel and purchased power costs at UPPCO are passed directly through to customers in rates.

·	A $54.0 million partial refund to Wisconsin retail customers in 2007 for their portion of proceeds from the liquidation of the Kewaunee nonqualified decommissioning trust fund. Pursuant to regulatory accounting, the decrease in the 2007 margin related to the refund was offset by a corresponding decrease in operating and maintenance expense in 2007 and, therefore, did not have an impact on earnings. WPS completed this refund in 2007.

·	An approximate $10 million increase in margin from the 2008 retail electric rate increase effective January 16, 2008, and the full benefit of the 2007 retail electric rate increase effective January 12, 2007.

·	An approximate $10 million increase in margin driven by higher contracted sales volumes to a large wholesale customer year-over-year.

·	An approximate $5 million increase in regulated electric utility margin year-over-year driven by fuel and purchased power costs that were approximately $1 million lower than what was recovered in rates during 2008, compared with fuel and purchased power costs that were approximately $4 million higher than what was recovered in rates during 2007. As a result of approximately $23 million of under-recovered fuel and purchased power costs in the first quarter of 2008, the PSCW approved an interim rate surcharge effective March 22, 2008, and subsequently approved a higher final surcharge effective July 4, 2008. The $5 million increase in electric margin includes lower fuel costs from the fuel window reset and the net impact of the refund accrued at December 31, 2008, payable in 2009 to electric customers from the reopening of the 2008 fuel surcharge on September 30, 2008, by the PSCW.

·	These increases in the electric margin were partially offset by an approximate $11 million decrease in margin due to a decline in residential and commercial and industrial sales volumes. Of this decrease, approximately $8 million related to energy conservation efforts on the part of residential customers, which is believed to be the result of high energy prices and the general economic slowdown. Approximately $1 million related to decreased demand by commercial and industrial customers in the third and fourth quarters of 2008 as the economy worsened. In addition, cooler weather during the 2008 cooling season compared with 2007 contributed approximately $2 million to the decrease in gross margin.

The increase in operating expenses was driven by:

·	A $54.0 million year-over-year increase related to the partial amortization in 2007 of the regulatory liability previously recorded for WPS's obligation to refund proceeds received from the liquidation of the Kewaunee nonqualified decommissioning trust fund to Wisconsin retail electric ratepayers.

·	A $13.8 million increase in electric transmission expenses, primarily related to higher rates charged by MISO and ATC due to additional transmission costs.

·	A $6.1 million increase in cost of capital and depreciation expense charged by IBS for assets transferred from WPS to IBS in the beginning of 2008 and reported as operating and maintenance expense in 2008. Similar costs were reported as depreciation and amortization expense in 2007, prior to the start-up of IBS.

·	A $4.2 million increase in depreciation and amortization expense, primarily related to $9.2 million of depreciation expense from Weston 4 being placed in service for accounting purposes in April 2008, partially offset by a decrease in depreciation related to assets transferred to IBS and reported in operating and maintenance expense in 2008.

These increases in operating expenses were partially offset by:

·	An $11.6 million decrease in electric maintenance expenses at WPS, primarily due to major planned outages at the Weston 2 and Weston 3 generation stations, the De Pere Energy Center, and the Pulliam generation station, as well as several unplanned outages at the Weston 3 generation station in 2007, compared with fewer outages in 2008.

·	A decrease in external costs to achieve merger synergies of $6.6 million related to the merger with PEC, from $12.3 million in 2007, to $5.7 million in 2008. This decrease occurred primarily because all external costs to achieve merger synergies incurred from July 2006 through March 2007 were reallocated in 2007 from the holding company segment to the other reportable segments, including the regulated electric segment. These reportable segments are the beneficiaries of the synergy savings resulting from the costs to achieve merger synergies. In addition, the reduction in 2008 external costs to achieve merger synergies was due to less integration work required in 2008 compared with 2007.

·	The increase in interest expense was due to higher long-term borrowings at WPS, primarily utilized to fund various construction projects and to retire short-term borrowing levels related to construction.

·	The decrease in miscellaneous income was driven by:

	-	A $1.4 million decrease in interest income recognized related to the construction of transmission facilities WPS funded on ATC's behalf related to Weston 4. WPS was reimbursed for these transmission facilities by ATC in April 2008.

	-	A $1.8 million gain on the sale of a generation facility by UPPCO in July 2007.

	-	The decrease in miscellaneous income was partially offset by an increase in AFUDC related to the wind generation project.