RISK MANAGEMENT ACTIVITIES

12 Months Ended

Dec. 31, 2011

RISK MANAGEMENT ACTIVITIES

RISK MANAGEMENT ACTIVITIES

NOTE 2—RISK MANAGEMENT ACTIVITIES

The following tables show our assets and liabilities from risk management activities:

		December 31, 2011
(Millions)	Balance Sheet Presentation *	Assets from Risk Management Activities		Liabilities from Risk Management Activities
Utility Segments
Non-hedge derivatives
Natural gas contracts	Current	$	9.1	$	35.4
Natural gas contracts	Long-term	0.1		8.2
Financial transmission rights (FTRs)	Current	2.3		0.1
Petroleum product contracts	Current	0.1		—
Coal contract	Current	—		2.5
Coal contract	Long-term	—		4.4
Cash flow hedges
Natural gas contracts	Current	—		0.9
Natural gas contracts	Long-term	—		0.2
Nonregulated Segments
Non-hedge derivatives
Natural gas contracts	Current	121.6		120.5
Natural gas contracts	Long-term	41.9		40.5
Electric contracts	Current	93.9		152.0
Electric contracts	Long-term	22.4		48.7
Foreign exchange contracts	Current	0.2		0.2
	Current	227.2		311.6
	Long-term	64.4		102.0
Total		$	291.6	$	413.6

*All derivatives are recognized on the balance sheet at their fair value unless they qualify for the normal purchases and sales exception. We continually assess our contracts designated as normal and will discontinue the treatment of these contracts as normal if the required criteria are no longer met. We classify assets and liabilities from risk management activities as current or long-term based on the maturities of the underlying contracts.

		December 31, 2010
(Millions)	Balance Sheet Presentation *	Assets from Risk Management Activities		Liabilities from Risk Management Activities
Utility Segments
Non-hedge derivatives
Natural gas contracts	Current	$	2.2	$	23.6
Natural gas contracts	Long-term	1.6		1.4
FTRs	Current	3.1		0.2
Petroleum product contracts	Current	0.6		—
Coal contract	Current	—		1.2
Coal contract	Long-term	3.7		—
Cash flow hedges
Natural gas contracts	Current	—		1.0
Nonregulated Segments
Non-hedge derivatives
Natural gas contracts	Current	132.0		113.8
Natural gas contracts	Long-term	62.3		57.7
Electric contracts	Current	85.7		122.0
Electric contracts	Long-term	16.5		30.3
Foreign exchange contracts	Current	1.2		1.2
Foreign exchange contracts	Long-term	0.3		0.3
Fair value hedges
Interest rate swaps	Current	0.9		—
Cash flow hedges
Natural gas contracts	Current	1.6		9.2
Natural gas contracts	Long-term	0.1		0.9
Electric contracts	Current	9.6		17.4
Electric contracts	Long-term	4.9		9.1
	Current	236.9		289.6
	Long-term	89.4		99.7
Total		$	326.3	$	389.3

*All derivatives are recognized on the balance sheet at their fair value unless they qualify for the normal purchases and sales exception. We continually assess our contracts designated as normal and will discontinue the treatment of these contracts as normal if the required criteria are no longer met. We classify assets and liabilities from risk management activities as current or long-term based on the maturities of the underlying contracts.

The following table shows our cash collateral positions:

(Millions)	December 31, 2011		December 31, 2010
Cash collateral provided to others	$	50.9	$	33.3
Cash collateral received from others *	2.3		4.5

* Reflected in other current liabilities on the Balance Sheets.

Certain of our derivative and nonderivative commodity instruments contain provisions that could require “adequate assurance” in the event of a material change in our creditworthiness, or the posting of additional collateral for instruments in net liability positions, if triggered by a decrease in credit ratings. The following table shows the aggregate fair value of all derivative instruments with specific credit risk related contingent features that were in a liability position:

(Millions)	December 31, 2011		December 31, 2010
Integrys Energy Services	$	193.8	$	219.5
Utility segments	39.1		22.1

If all of the credit risk related contingent features contained in commodity instruments (including derivatives, nonderivatives, normal purchase and normal sales contracts, and applicable payables and receivables) had been triggered, our collateral requirement would have been as follows:

(Millions)	December 31, 2011		December 31, 2010
Collateral that would have been required:
Integrys Energy Services	$	272.3	$	295.7
Utility segments	28.7		14.1
Collateral already satisfied:
Integrys Energy Services — Letters of credit	11.0		56.9
Collateral remaining:
Integrys Energy Services	261.3		238.8
Utility segments	28.7		14.1

Utility Segments

Non-Hedge Derivatives

Utility derivatives include natural gas purchase contracts, a coal purchase contract, financial derivative contracts (futures, options, and swaps), and FTRs used to manage electric transmission congestion costs. Both the electric and natural gas utility segments use futures, options, and swaps to manage 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 electric utility segment also uses oil futures and options to manage price risk related to coal transportation.

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

	December 31, 2011		December 31, 2010
	Purchases	Other Transactions	Purchases	Other Transactions
Natural gas (millions of therms)	1,122.7	N/A	979.9	N/A
FTRs (millions of kilowatt-hours)	N/A	5,077.5	N/A	5,882.5
Petroleum products (barrels)	46,872.0	N/A	71,827.0	N/A
Coal contract (millions of tons)	4.1	N/A	4.9	N/A

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

(Millions)	Financial Statement Presentation	2011			2010
Natural gas contracts	Balance Sheet — Regulatory assets (current)	$	(11.3	)	$	(1.7	)
Natural gas contracts	Balance Sheet — Regulatory assets (long-term)	(7.6		)	0.1
Natural gas contracts	Balance Sheet — Regulatory liabilities (current)	8.4			—
FTRs	Balance Sheet — Regulatory assets (current)	(0.4		)	1.0
FTRs	Balance Sheet — Regulatory liabilities (current)	(1.3		)	(2.1		)
Petroleum product contracts	Balance Sheet — Regulatory assets (current)	(0.1		)	—
Petroleum product contracts	Balance Sheet — Regulatory liabilities (current)	—			0.1
Petroleum product contracts	Income Statement — Operating and maintenance expense	(0.1		)	0.1
Coal contract	Balance Sheet — Regulatory assets (current)	(1.3		)	(1.2		)
Coal contract	Balance Sheet — Regulatory assets (long-term)	(4.4		)	—
Coal contract	Balance Sheet — Regulatory liabilities (long-term)	(3.7		)	3.7

(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	Income Statement — Utility cost of fuel, natural gas, and purchased power	0.1

Cash Flow Hedges

PGL uses natural gas contracts designated as cash flow hedges to hedge changes in the price of natural gas used to support operations. The cost of natural gas used to support operations is not a component of the natural gas costs recovered from customers on a one-for-one basis. These contracts extend through July 2013. PGL had the following notional volumes of outstanding contracts that were designated as cash flow hedges:

	Purchases
	December 31, 2011	December 31, 2010
Natural gas (millions of therms)	8.1	5.4

Changes in the fair values of the effective portions of these contracts are included in 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)	2011			2010			2009
Natural gas contracts	$	(1.3	)	$	(1.6	)	$	(1.4	)

Loss Reclassified from Accumulated OCI into Income (Effective Portion)
(Millions)	Income Statement Presentation	2011			2010			2009
Settled natural gas contracts	Operating and maintenance expense	$	(1.2	)	$	(0.9	)	$	(2.6	)

No amounts were reclassified from accumulated OCI into earnings as a result of the discontinuance of cash flow hedge accounting related to these natural gas contracts during 2011, 2010, and 2009. Cash flow hedge ineffectiveness related to these natural gas contracts also was not significant during 2011, 2010, and 2009. When testing for effectiveness, no portion of these derivative instruments was excluded. In the next 12 months, an insignificant loss is expected to be recognized in earnings as the hedged transactions occur.

Nonregulated Segments

Non-Hedge Derivatives

Integrys Energy Services enters into derivative contracts such as futures, forwards, options, and swaps that are not designated as accounting hedges under GAAP. These contracts are used to manage commodity price risk primarily associated with customer-related contracts.

As of July 1, 2011, Integrys Energy Services discontinued the use of cash flow hedge accounting. At December 31, 2011, the amount deferred in accumulated OCI related to cash flow hedges at Integrys Energy Services was a pre-tax loss of $9.9 million. This amount relates to natural gas futures, forwards, and swaps that extend through April 2014, and electric futures, forwards, and swaps that extend through May 2017. This amount will be recognized in earnings as the forecasted transactions occur, or if it becomes probable that the forecasted transactions will not occur.

In the next 12 months, pre-tax losses of $2.0 million and $4.3 million related to the discontinued cash flow hedges of natural gas contracts and electric contracts, respectively, are expected to be recognized in earnings as the forecasted transactions occur. These amounts are expected to be offset by the settlement of the related nonderivative contracts.

Integrys Energy Services had the following notional volumes of outstanding non-hedge derivative contracts:

	December 31, 2011		December 31, 2010
(Millions)	Purchases	Sales	Purchases	Sales
Commodity contracts
Natural gas (therms)	959.2	797.1	940.6	1,048.4
Electric (kilowatt-hours)	34,405.7	20,374.0	22,149.4	19,707.0
Foreign exchange contracts (Canadian dollars)	4.2	4.2	15.5	15.5

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

(Millions)	Income Statement Presentation	2011			2010
Natural gas contracts	Nonregulated revenue	$	14.0		$	30.9
Natural gas contracts	Nonregulated revenue (reclassified from accumulated OCI)	(2.3		)*	(1.6		)*
Electric contracts	Nonregulated revenue	(79.0		)	(92.7		)
Electric contracts	Nonregulated revenue (reclassified from accumulated OCI)	(1.7		)*	(3.7		)*
Interest rate swaps	Interest expense	—			0.4
Total		$	(69.0	)	$	(66.7	)

*Represents amounts reclassified from accumulated OCI related to cash flow hedges that were dedesignated in the current and/or prior periods.

(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 reclassified from accumulated OCI related to cash flow hedges that were dedesignated and retained in accumulated OCI in the current and/or prior periods.

Fair Value Hedges

At PELLC, an interest rate swap designated as a fair value hedge was used to hedge changes in the fair value of $50.0 million of the $325.0 million Series A 6.9% notes. The interest rate swap and the notes were settled in January 2011. The changes in the fair value of this hedge were recognized in earnings, as were 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	2011		2010			2009
Interest rate swap	Interest expense	$	—	$	(1.7	)	$	(0.6	)
Debt hedged by swap	Interest expense	—		1.7			0.6
Total		$	—	$	—		$	—

Fair value hedge ineffectiveness recorded in interest expense on the Statements of Income was not significant for 2011, 2010, and 2009. No amounts were excluded from effectiveness testing related to the interest rate swap during 2011, 2010, and 2009.

Cash Flow Hedges

Prior to July 1, 2011, Integrys Energy Services designated derivative contracts such as futures, forwards, and swaps as accounting hedges under GAAP. These contracts are used to manage commodity price risk associated with customer-related contracts.

In addition, we entered into interest rate swaps that were designated as cash flow hedges to hedge the variability in forecasted interest payments on debt issuance. The swaps were terminated when the related debt was issued.

Integrys Energy Services had the following notional volumes of outstanding contracts that were designated as cash flow hedges:

	December 31, 2011		December 31, 2010
(Millions)	Purchases	Sales	Purchases	Sales
Commodity contracts
Natural gas (therms)	—	—	265.6	—
Electric (kilowatt-hours)	—	—	11,569.0	29.8

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)	2011			2010
Natural gas contracts	$	(2.3	)	$	(15.2	)
Electric contracts	3.8			(13.6		)
Interest rate swaps	—			(6.0		)
Total	$	1.5		$	(34.8	)

Unrealized Gain (Loss) Recognized in OCI on Derivative Instruments (Effective Portion)
(Millions)	2009
Commodity contracts	$	(60.0	)
Interest rate swaps	3.2
Total	$	(56.8	)

Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
(Millions)	Income Statement Presentation	2011			2010
Settled/Realized
Natural gas contracts	Nonregulated revenue	$	(9.3	)	$	(16.4	)
Electric contracts	Nonregulated revenue	4.2			(21.6		)
Interest rate swaps	Interest expense	(1.1		)	0.2
Hedge Designation Discontinued
Natural gas contracts	Nonregulated revenue	(0.3		)	0.2
Electric contracts	Nonregulated revenue	—			(9.9		)
Interest rate swaps	Interest expense	(0.2		)	—
Total		$	(6.7	)	$	(47.5	)

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	)

Gain (Loss) Recognized in Income on Derivative Instruments(Ineffective Portion and Amount Excluded from Effectiveness Testing)
(Millions)	Income Statement Presentation	2011			2010
Natural gas contracts	Nonregulated revenue	$	0.3		$	(1.1	)
Electric contracts	Nonregulated revenue	(0.3		)	(0.5		)
Total		$	—		$	(1.6	)

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	)