BASIS OF PRESENTATION (Policies)

6 Months Ended

Jun. 30, 2015

As used in these notes, the term "financial statements" refers to the condensed consolidated financial statements. This includes the condensed consolidated statements of income, condensed consolidated statements of comprehensive income, condensed consolidated balance sheets, and condensed consolidated statements of cash flows, unless otherwise noted. In this report, when we refer to "us," "we," "our," or "ours," we are referring to Integrys Holding, Inc. When we refer to the "WEC Merger," we are referring to the acquisition of Integrys Energy Group, Inc. by Wisconsin Energy Corporation, which was completed on June 29, 2015.

Basis of accounting

We prepare our financial statements in conformity with the rules and regulations of the SEC for Quarterly Reports on Form 10-Q and in accordance with GAAP. Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for annual financial statements. These financial statements should be read in conjunction with the consolidated financial statements and footnotes in our Annual Report on Form 10-K for the year ended December 31, 2014. Financial results for an interim period may not give a true indication of results for the year.

Our balance sheet reflects the historical basis of our assets and liabilities as we did not elect pushdown accounting for the WEC Merger. This is consistent with how our financial statements are viewed by our regulators.

In management’s opinion, these unaudited financial statements include all adjustments necessary for a fair presentation of financial results. All adjustments are normal and recurring, unless otherwise noted. All intercompany transactions have been eliminated in consolidation.

Reclassifications

As a result of the WEC Merger, we adopted the financial statement presentation policies of our parent company. See Note 2, WEC Merger, for more information on the merger. The previously reported items below were reclassified to conform to the current period presentation. Only material reclassifications are quantified below.

Statements of Income:


•	Certain amortizations of regulatory deferrals were reclassified from operating and maintenance expense to cost of sales, depreciation and amortization expense, and miscellaneous income.


•	Payroll taxes of $7.0 million and $16.4 million for the three and six months ended June 30, 2014, respectively, were reclassified from taxes other than income taxes to operating and maintenance expense. The taxes other than income taxes line item was also renamed to property and revenue taxes.


•	Certain expenses in cost of sales were reclassified to operating revenues, operating and maintenance expense, and depreciation and amortization expense. The amounts reclassified to operating and maintenance expense were $3.4 million and $7.1 million for the three and six months ended June 30, 2014, respectively.


•	Equity in earnings of transmission affiliate is now shown separately on the statements of income. Earnings from our other equity method investments were reclassified to miscellaneous income.


•	Preferred stock dividends of subsidiary were reclassified to interest expense.


•	Noncontrolling interest in subsidiaries was reclassified to miscellaneous income.

Balance Sheets:


•	Current regulatory assets of $47.2 million and $71.7 million were reclassified to accounts receivable and long-term regulatory assets, respectively.


•	Equity investment in transmission affiliate is now shown separately on the balance sheets. Our other equity method investments of $13.9 million were reclassified to other long-term assets.


•	Current regulatory liabilities of $44.8 million and $108.9 million were reclassified to energy costs refundable through rate adjustments and long-term regulatory liabilities, respectively.


•	Noncontrolling interest in subsidiaries was reclassified to other long-term liabilities.

Statements of Cash Flows:


•	Preferred stock dividend payments were reclassified from financing activities to operating activities.


•	Various other line items within the operating, investing, and financing activities sections were reclassified; however, there was no impact on the total cash flows of these sections.

We also reorganized our business segments during the second quarter of 2015. All prior period amounts impacted by this change were reclassified to conform to the new presentation. See Note 20, Segments of Business, for more information on our business segments.

The assets associated with PDL's Combined Locks Energy Center were reclassified out of held for sale on our December 31, 2014 balance sheet.

Cash and cash equivalents

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

Inventories

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 Last-in, First-out (LIFO) cost method. For interim periods, the difference between current projected replacement cost and the LIFO cost for quantities of natural gas temporarily withdrawn from storage is recorded as a temporary LIFO liquidation debit or credit.

Income taxes

We calculate our interim period provision for, or benefit from income taxes based on our projected annual effective tax rate as adjusted for certain discrete items.

Fair value measurements

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.

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). We use a mid-market pricing convention (the mid-point price between bid and ask prices) as a practical measure for valuing certain derivative assets and liabilities.

Fair value accounting rules provide 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 methods.

Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methods that result in management's best estimate of fair value. Level 3 instruments include those that may be more structured or otherwise tailored to customers' needs.

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

When possible, we base the valuations of our 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 not classified as Level 1 may be based on quoted market prices received from counterparties and/or observable inputs for similar instruments. Transactions valued using these inputs 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:


•	Financial contracts used to manage transmission congestion costs in the MISO market are valued using historical prices.


•	The valuations for certain physical coal contracts are based on significant assumptions made to extrapolate prices from the last observable period through the end of the transaction term.


•	Certain natural gas contracts are valued using internally-developed inputs due to the absence of available market data for certain locations.

We have established risk oversight committees whose primary responsibility includes directly or indirectly ensuring that all valuation methods are applied in accordance with predefined policies. The development and maintenance of our forward price curves has been assigned to our risk management department. This department is separate and distinct from any of the supply functions within the organization. To validate the reasonableness of our fair value inputs, our risk management department compares changes in valuation and researches any significant differences in order to determine the underlying cause. Changes to the fair value inputs are made if necessary.

We conduct a thorough review of fair value hierarchy classifications on a quarterly basis.

New accounting pronouncements

In April 2015 the FASB issued ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs." The guidance requires debt issuance costs to be presented on the balance sheet as a reduction to the carrying value of the corresponding debt, rather than as an asset as it is currently presented. The standard requires retrospective application by restating each prior period presented in the financial statements. The guidance is effective for us for the reporting period ending March 31, 2016. We are currently evaluating the impact this guidance will have on our financial statements.

In May 2014 the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." This ASU supersedes the requirements in the Revenue Recognition Topic of the FASB ASC and most industry-specific guidance throughout the ASC. The guidance is based on the principle that revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows from customer contracts. The guidance was originally effective for us for the reporting period ending March 31, 2017; however, in July 2015 the FASB decided to delay the effective date for one year. Companies can still elect to adopt the standard as of the original effective date. The standard requires either retrospective application by restating each prior period presented in the financial statements, or modified retrospective application by recording the cumulative effect of prior reporting periods to beginning retained earnings in the year that the standard becomes effective. We are currently evaluating the impact that the adoption of this standard will have on our financial statements.

- Definition

Disclosure of accounting policy for cash and cash equivalents, including the policy for determining which items are treated as cash equivalents. Other information that may be disclosed includes (1) the nature of any restrictions on the entity's use of its cash and cash equivalents, (2) whether the entity's cash and cash equivalents are insured or expose the entity to credit risk, (3) the classification of any negative balance accounts (overdrafts), and (4) the carrying basis of cash equivalents (for example, at cost) and whether the carrying amount of cash equivalents approximates fair value.

+ References + Details

- Definition

Disclosure of accounting policy for income taxes, which may include its accounting policies for recognizing and measuring deferred tax assets and liabilities and related valuation allowances, recognizing investment tax credits, operating loss carryforwards, tax credit carryforwards, and other carryforwards, methodologies for determining its effective income tax rate and the characterization of interest and penalties in the financial statements.

+ References + Details

- Definition

Disclosure of accounting policy for major classes of inventories, bases of stating inventories (for example, lower of cost or market), methods by which amounts are added and removed from inventory classes (for example, FIFO, LIFO, or average cost), loss recognition on impairment of inventories, and situations in which inventories are stated above cost. If inventory is carried at cost, this disclosure includes the nature of the cost elements included in inventory.

+ References + Details