Form 10-K for year ended December 31, 2006 10-K 1 form10k.htm FORM 10-K FOR YEAR ENDED DECEMBER 31, 2006

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

FORM 10-K


(Mark One)

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

For the fiscal year ended December 31, 2006
OR

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

For the transition period from ________________ to ___________________

Commission
File Number
Registrants; State of Incorporation;
Address; and Telephone Number
IRS Employer
Identification No.
     
1-11337
INTEGRYS ENERGY GROUP, INC.
(A Wisconsin Corporation formerly known as
WPS Resources Corporation)
130 East Randolph Drive
Chicago, IL 60601
800-699-1269
39-1775292
     
1-3016
WISCONSIN PUBLIC SERVICE CORPORATION
(A Wisconsin Corporation)
700 North Adams Street
P. O. Box 19001
Green Bay, WI 54307-9001
800-450-7260
39-0715160

Securities registered pursuant to Section 12(b) of the Act:

 
 
Title of each class
Name of each exchange
on which registered
     
INTEGRYS ENERGY GROUP, INC.
Common Stock, $1 par value
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

WISCONSIN PUBLIC SERVICE CORPORATION
   
Preferred Stock, Cumulative, $100 par value
 
 
5.00% Series
5.04% Series
5.08% Series
6.76% Series




Indicate by check mark if the Registrants are well-known seasoned issuers, as defined in Rule 405 of the Securities Act.

Integrys Energy Group, Inc.
Yes [X] No [ ]
Wisconsin Public Service Corporation
Yes [ ] No [X]

Indicate by check mark if the Registrants are not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Integrys Energy Group, Inc.
Yes [ ] No [X]
Wisconsin Public Service Corporation
Yes [ ] No [X]

Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

Indicate by check mark whether the Registrants are large accelerated filers, accelerated filers, or non-accelerated filers. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

Integrys Energy Group, Inc.
Large accelerated filer [X]
Accelerated filer [ ]
Non-accelerated filer [ ]
 
Wisconsin Public Service Corporation
Large accelerated filer [ ]
Accelerated filer [ ]
Non-accelerated filer [X]

Indicate by check mark whether the Registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).

Integrys Energy Group, Inc.
Yes [ ] No [X]
Wisconsin Public Service Corporation
Yes [ ] No [X]

State the aggregate market value of the voting and
non-voting common equity held by non-affiliates of the Registrants.
 
INTEGRYS ENERGY GROUP, INC.
$2,138,273,162 as of June 30, 2006
   
WISCONSIN PUBLIC SERVICE CORPORATION
$0 as of June 30, 2006

Number of shares outstanding of each class
of common stock, as of February 22, 2007
   
INTEGRYS ENERGY GROUP, INC.
Common Stock, $1 par value, 75,456,230 shares
   
WISCONSIN PUBLIC SERVICE CORPORATION
Common Stock, $4 par value, 23,896,962 shares. Integrys Energy Group, Inc. is the sole holder of Wisconsin Public Service Corporation Common Stock.

DOCUMENT INCORPORATED BY REFERENCE

Definitive proxy statement for the Integrys Energy Group, Inc. Annual Meeting of Shareholders to be held on May 17, 2007 is incorporated by reference into Part III.
 
 

 

INTEGRYS ENERGY GROUP, INC.
and
WISCONSIN PUBLIC SERVICE CORPORATION

ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 2006

TABLE OF CONTENTS
   
     
Page
   
Forward-Looking Statements
1
   
3
       
ITEM 1.
BUSINESS
3
     
 
A.
GENERAL
3
         
 
B.
REGULATED ELECTRIC OPERATIONS
6
         
     
Facilities
 
     
Fuel Supply
 
     
Regulatory Matters
 
     
Other Matters
 
     
Regulated Electric Operating Statistics
 
         
 
C.
REGULATED NATURAL GAS OPERATIONS
13
         
     
Facilities
 
     
Natural Gas Supply
 
     
Regulatory Matters
 
     
Other Matters
 
     
Regulated Natural Gas Operating Statistics
 
         
 
D.
NONREGULATED ENERGY SERVICES
19
         
     
Facilities
 
     
Fuel Supply
 
     
Licenses
 
     
Other Matters
 
         
 
E.
ENVIRONMENTAL MATTERS
22
         
 
F.
CAPITAL REQUIREMENTS
22
         
 
G.
EMPLOYEES
23
       
 
H.
AVAILABLE INFORMATION
23
       
ITEM 1A.
RISK FACTORS
24
       
ITEM 1B
UNRESOLVED STAFF COMMENTS
29
       
ITEM 2.
PROPERTIES
30
       
 
A.
REGULATED
30
 
 
i

 
 
B.
NONREGULATED
32
         
ITEM 3.
LEGAL PROCEEDINGS
34
       
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
34
         
ITEM 4A.
EXECUTIVE OFFICERS OF THE REGISTRANTS
35
       
 
A.
Executive Officers of Integrys Energy Group as of January 1, 2007
35
 
B.
Executive Officers of WPSC as of January 1, 2007
36

37
         
ITEM 5.
MARKET FOR REGISTRANTS' COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
37
     
ITEM 6.
SELECTED FINANCIAL DATA
38
       
   
Integrys Energy Group, Inc. Comparative Financial Statements and Financial and Other Statistics (2002 to 2006)
38
   
Wisconsin Public Service Corporation Comparative Financial Statements and Financial Statistics (2002 to 2006)
38
         
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
39
       
   
Integrys Energy Group
39
     
Introduction
 
     
Results of Operations
 
     
Balance Sheet
 
     
Liquidity and Capital Resources
 
     
Guarantees and Off Balance Sheet Arrangements
 
     
Market Price Risk Management Activities
 
     
Critical Accounting Policies
 
     
Impact of Inflation
 
         
   
Wisconsin Public Service Corporation
86
     
Results of Operations
 
     
Balance Sheet
 
     
Liquidity and Capital Resources
 
     
Guarantees and Off Balance Sheet Arrangements
 
     
Critical Accounting Policies
 
     
Impact of Inflation
 
         
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
99
       
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
102
     
 
INTEGRYS ENERGY GROUP
102
 
A.
Management Report on Internal Control over Financial Reporting
102
 
B.
Report of Independent Registered Public Accounting Firm
103
 
C.
Consolidated Statements of Income
105
 
D.
Consolidated Balance Sheets
106
 
E.
Consolidated Statements of Common Shareholders' Equity
107
 
F.
Consolidated Statements of Cash Flows
108

ii


 
G.
Notes to Consolidated Financial Statements
109
   
Note 1
Summary Of Significant Accounting Policies
109
 
   
Note 2
Fair Value Of Financial Instruments
117
 
   
Note 3
Risk Management Activities
118
 
   
Note 4
Discontinued Operations
120
 
   
Note 5
Property, Plant, And Equipment
122
 
   
Note 6
Acquisitions And Sales Of Assets
123
 
   
Note 7
Jointly Owned Utility Facilities
128
 
   
Note 8
Nuclear Decommissioning Trust
129
 
   
Note 9
Regulatory Assets And Liabilities
129
 
   
Note 10
Investments In Affiliates, At Equity Method
130
 
   
Note 11
Goodwill And Other Intangible Assets
132
 
   
Note 12
Leases
133
 
   
Note 13
Short-Term Debt And Lines Of Credit
133
 
   
Note 14
Long-Term Debt
135
 
   
Note 15
Asset Retirement Obligations
137
 
   
Note 16
Income Taxes
138
 
   
Note 17
Commitments And Contingencies
139
 
   
Note 18
Guarantees
150
 
   
Note 19
Employee Benefit Plans
153
 
   
Note 20
Preferred Stock Of Subsidiary
158
 
   
Note 21
Common Equity
159
 
   
Note 22
Stock-Based Compensation
161
 
   
Note 23
Regulatory Environment 
165
 
   
Note 24
Variable Interest Entities
168
 
   
Note 25
Segments Of Business
169
 
   
Note 26
Quarterly Financial Information (Unaudited)
172
 
 
H.
Report of Independent Registered Public Accounting Firm
174
       
 
WISCONSIN PUBLIC SERVICE CORPORATION
175
 
I.
Management Report on Internal Control over Financial Reporting
175
 
J.
Report of Independent Registered Public Accounting Firm
176
 
K.
Consolidated Statements of Income
178
 
L.
Consolidated Balance Sheets
179
 
M.
Consolidated Statements of Capitalization
180
 
N.
Consolidated Statements of Common Shareholder's Equity
181
 
O.
Consolidated Statements of Cash Flows
182
 
P.
Notes to Consolidated Financial Statements
183
   
Note 1
Cash And Cash Equivalents
183
 
   
Note 2
Fair Value Of Financial Instruments
183
 
   
Note 3
Property, Plant and Equipment
184
 
   
Note 4
Regulatory Assets And Liabilities
185
 
   
Note 5
Leases
185
 
   
Note 6
Common Equity
186
 
   
Note 7
Short-Term Debt And Lines Of Credit
186
 
   
Note 8
Long-Term Debt
186
 
   
Note 9
Asset Retirement Obligations
187
 
   
Note 10
Income Taxes
188
 
   
Note 11
Employee Benefit Plans
189
 
   
Note 12
Stock-Based Compensation
192
 
   
Note 13
Segments of Business
193
 
   
Note 14
Quarterly Financial Information (Unaudited)
194
 
   
Note 15
Related Party Transactions
195
 
 
Q.
Report of Independent Registered Public Accounting Firm
196
       
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
197
 
iii


 
     
ITEM 9A.
CONTROLS AND PROCEDURES
197
     
ITEM 9B.
OTHER INFORMATION
197
     
197
     
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
197
     
ITEM 11.
EXECUTIVE COMPENSATION
198
       
   
Integrys Energy Group, Inc.
 
   
Wisconsin Public Service Corporation
 
       
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
206
       
   
Integrys Energy Group, Inc.
 
   
Wisconsin Public Service Corporation
 
   
Equity Compensation Plan Information
 
     
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
206
       
ITEM 14.
PRINCIPAL FEES AND SERVICES PAID TO INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
207
     
208
     
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
208
     
 
Documents Filed as Part of this Report
 
   
Consolidated Financial Statements
 
   
Financial Statement Schedules
 
   
Listing of Exhibits
 
   
SIGNATURES
215
     
SCHEDULE I - CONDENSED PARENT COMPANY FINANCIAL STATEMENTS INTEGRYS ENERGY GROUP, INC. (PARENT COMPANY ONLY)
217
 
A.
Statements of Income and Retained Earnings
217
 
B.
Balance Sheets
218
 
C.
Statements of Cash Flows
219
 
D.
Notes to Parent Company Financial Statements
220
       
SCHEDULE II - INTEGRYS ENERGY GROUP, INC. VALUATION AND QUALIFYING ACCOUNTS
226
     
SCHEDULE II - WISCONSIN PUBLIC SERVICE CORPORATION VALUATION AND QUALIFYING ACCOUNTS
227
   
EXHIBITS FILED HEREWITH
228


iv



Acronyms Used in this Annual Report on Form 10-K
   
ATC
American Transmission Company LLC
DOE
United States Department of Energy
DPC
Dairyland Power Cooperative
EPA
United States Environmental Protection Agency
ESOP
Employee Stock Ownership Plan
FASB
Financial Accounting Standards Board
FERC
Federal Energy Regulatory Commission
ICC
Illinois Commerce Commission
ICE
Intercontinental Exchange
MERC
Minnesota Energy Resources Corporation
MGUC
Michigan Gas Utilities Corporation
MISO
Midwest Independent Transmission System Operator
MPSC
Michigan Public Service Commission
MPUC
Minnesota Public Utility Commission
NYMEX
New York Mercantile Exchange
PSCW
Public Service Commission of Wisconsin
SEC
Securities and Exchange Commission
SFAS
Statement of Financial Accounting Standards
UPPCO
Upper Peninsula Power Company
WDNR
Wisconsin Department of Natural Resources
WPSC
Wisconsin Public Service Corporation

v

 

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 the Section 21E of the Securities Exchange Act of 1934, as amended. Although Integrys Energy Group and its subsidiaries believe that these forward-looking statements and the underlying assumptions are reasonable, it cannot provide assurance that they will prove correct. 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.

In addition to statements regarding trends or estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations forward-looking statements included or incorporated in this report include, but are not limited to, statements regarding future:

Revenues or expenses,
Capital expenditure projections, and
Financing sources.

Forward-looking statements involve a number of risks and uncertainties. There are many factors that could cause actual results to differ materially from those expressed or implied in this report. Some of those factors include:

Unexpected costs and/or unexpected liabilities related to the Peoples Energy merger, or the effects of purchase accounting that may be different from our expectations;
   
The successful combination of the operations of Integrys Energy Group and Peoples Energy;
   
Integrys Energy Group may be unable to achieve the forecasted synergies or it may take longer or cost more than expected to achieve these synergies;
   
The credit ratings of Integrys Energy Group or its subsidiaries could change in the future;
   
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, tax and other laws and regulations to which Integrys Energy Group and its subsidiaries are subject, as well as changes in application of existing laws and regulations;
   
Current and future litigation, regulatory investigations, proceedings or inquiries, including but not limited to, manufactured gas plant site cleanup, pending EPA investigations of WPSC generation facilities, and the appeal of the decision in the contested case proceeding regarding the Weston 4 air permit;
   
Resolution of audits by the Internal Revenue Service and various state and Canadian revenue agencies;
   
The effects, extent and timing of additional competition or regulation in the markets in which our subsidiaries operate;
   
The impact of fluctuations in commodity prices, interest rates and customer demand;
   
Available sources and costs of fuels and purchased power;
 
 
-1-

 

   
Investment performance of employee benefit plan assets;
   
Advances in technology;
   
Effects of and changes in political, legal and economic conditions and developments in the United States and Canada;
   
Potential business strategies, including mergers and acquisitions or dispositions of assets or businesses, which cannot be assured to be completed (such as construction of the Weston 4 power plant and additional investment in ATC related to construction of the Wausau, Wisconsin, to Duluth, Minnesota, transmission line);
   
The direct or indirect effects of terrorist incidents, natural disasters or responses to such events;
   
Financial market conditions and the results of financing efforts, including credit ratings, and risks associated with commodity prices (particularly natural gas and electricity), interest rates and counterparty credit;
   
Weather and other natural phenomena, in particular the effect of weather on natural gas and electricity sales;
   
The effect of accounting pronouncements issued periodically by standard-setting bodies; and
   
Other factors discussed elsewhere herein (such as in Item 1A - Risk Factors) and in other reports filed by the registrants from time to time with the SEC.
 
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.
 

-2-



ITEM 1. BUSINESS

A. GENERAL

For purposes of this Annual Report on Form 10-K, unless the context otherwise indicates, when we refer to "us," "we," "our" or "ours," we are describing Integrys Energy Group, Inc.

Merger with Peoples Energy Corporation

On July 8, 2006, WPS Resources entered into an agreement and plan of merger with Peoples Energy Corporation pursuant to which, among other things, Peoples Energy will become a wholly owned subsidiary of WPS Resources. On February 21, 2007 the merger was completed. Effective with the closing of the merger, WPS Resources changed its name to Integrys Energy Group, Inc. Our common stock is still listed on the New York Stock Exchange, but under the new symbol "TEG."

Peoples Energy is a diversified energy holding company that, through its subsidiaries, engages principally in natural gas utility operations and other diversified energy businesses. Peoples Energy's business operations are as follows:

∑  
The Natural Gas Distribution business is Peoples Energy's core business. Peoples Energy's two regulated utilities, The Peoples Gas Light and Coke Company and North Shore Gas Company, purchase, store, distribute, sell and transport natural gas.

∑  
The Oil and Natural Gas Production business, through Peoples Energy's subsidiary Peoples Energy Production Company, is active in the acquisition, development and production of oil and gas reserves in selected onshore basins in the United States through direct ownership in oil, gas and mineral leases. On February 21, 2007, Integrys Energy Group announced it had decided to proceed with the divestiture of Peoples Energy Production Company.

∑  
The Energy Marketing business provides, through Peoples Energy Services Corporation, gas, electricity and energy management services to industrial, commercial and residential customers regionally within Illinois, Ohio and Michigan. In addition, Peoples Energy Resources Company, LLC provides wholesale gas transportation, storage and supply services to marketers, utilities, pipelines and gas-fired power generation facilities. In connection with the merger, this business was combined with Integrys Energy Services.

This Annual Report on Form 10-K discloses the results of operations and discusses the businesses of WPS Resources (now known as Integrys Energy Group) in 2006, thereby excluding any activities related to Peoples Energy or its subsidiaries.

Integrys Energy Group, Inc.

Integrys Energy Group is domiciled in the United States and was incorporated in Wisconsin in 1993. Integrys Energy Group is a holding company for regulated utility and nonregulated business units. As of December 31, 2006, Integrys Energy Group served 480,989 regulated electric customers and 684,148 regulated natural gas customers. The approximate percentages of revenues and net income for the year ended December 31, 2006, and assets as of December 31, 2006, of Integrys Energy Group and each of its principal operating subsidiaries respecting the business as a whole are:
 
-3-

 
   
Percent of
Revenues *
 
Percent of Net Income *
 
Percent of
Assets *
 
               
Wisconsin Public Service Corporation
   
21
%
 
64
%
 
43
%
Michigan Gas Utilities Corporation
   
2
%
 
(5
)%
 
6
%
Minnesota Energy Resources Corporation
   
2
%
 
(3
)%
 
6
%
Upper Peninsula Power Company
   
2
%
 
3
%
 
3
%
Integrys Energy Services, Inc.
   
75
%
 
46
%
 
40
%
Integrys Energy Group, Inc.
   
(0
)%
 
(6
)%
 
2
%
 
*
The percentages above may not total 100% due to intercompany transactions. Intercompany transactions largely consist of energy sales and purchases between subsidiaries and related intercompany receivables and payables.

For the last three years, the majority of Integrys Energy Group's revenues were earned within the United States and the majority of long-lived assets were located within the United States. Foreign revenues and assets reported are derived from operations in Canada.

   
2006
 
2005
 
2004
 
Domestic Revenues (millions)
 
$
4,908.5
 
$
4,659.8
 
$
3,749.1
 
Foreign Revenues (millions)
   
1,982.2
   
2,165.7
   
1,127.0
 
Total Revenues (millions)
 
$
6,890.7
 
$
6,825.5
 
$
4,876.1
 
                     
Domestic Long-lived Assets (millions)
 
$
3,605.1
 
$
2,691.9
 
$
2,827.0
 
Foreign Long-lived Assets (millions)
   
21.0
   
21.7
   
22.9
 
Total Long-lived Assets (millions)
 
$
3,626.1
 
$
2,713.6
 
$
2,849.9
 

Wisconsin Public Service Corporation

WPSC, a Wisconsin corporation, is domiciled in the United States and began operations in 1883. WPSC is a regulated electric and natural gas utility serving an 11,000 square mile service territory in northeastern Wisconsin and an adjacent portion of the Upper Peninsula of Michigan. As of December 31, 2006, WPSC served 429,012 electric customers and 311,620 natural gas customers. Wholesale electric service is provided to various customers, including municipal utilities, electric cooperatives, energy marketers, other investor-owned utilities and municipal joint action agencies. For the last three years, all WPSC revenues were earned within the United States and all of its assets were located within the United States. In 2006, retail sales accounted for 87.1% of total revenues while wholesale sales accounted for 12.9% of total revenues.

For more information regarding revenues, net income and total assets for regulated electric and natural gas operations, see Note 26 to Consolidated Financial Statements - Segments of Business.

Michigan Gas Utilities Corporation

MGUC, a Delaware corporation, is domiciled in the United States and began operations upon its acquisition of natural gas distribution operations in Michigan from Aquila, Inc. in April 2006. As of December 31, 2006, the Michigan natural gas distribution operations provided natural gas distribution service to 165,690 customers mainly in southern Michigan in 147 cities and communities including Otsego, Grand Haven, and Monroe.

For more information regarding revenues, net income and total assets for regulated natural gas operations, see Note 26 to Consolidated Financial Statements - Segments of Business.

Minnesota Energy Resources Corporation

MERC, a Delaware corporation, is domiciled in the United Sates and began operations upon its acquisition of natural gas distribution operations in Minnesota from Aquila, Inc. in July 2006. As of December 31, 2006, the Minnesota natural gas distribution operations provided natural gas distribution service to
 
-4-

 
206,838 customers throughout the state in 165 cities and communities including Eagan, Rosemount, Rochester, Fairmount, Bemidji and Cloquet and Dakota County.

Also acquired in the purchase of assets from Aquila was MERCís Home Services, a business which provides repair and maintenance services for appliances and heating, ventilating and air conditioning equipment in Minnesota.

For more information regarding revenues, net income and total assets for regulated natural gas operations, see Note 26 to Consolidated Financial Statements - Segments of Business.

Upper Peninsula Power Company

UPPCO, a Michigan corporation, is domiciled in the United States and began operations in 1884. UPPCO is a regulated electric utility serving a 4,500 square mile area of Michigan's Upper Peninsula. As of December 31, 2006, UPPCO served 51,977 electric customers. Retail sales accounted for 81% of total revenues and wholesale sales accounted for 19% of total revenue.
 
For more information regarding revenues, net income and total assets for regulated electric operations, see Note 26 to Consolidated Financial Statements - Segments of Business.

Integrys Energy Services, Inc.

Integrys Energy Services (formerly known as WPS Energy Services), a Wisconsin corporation, is domiciled in the United States and was established in 1994. Effective with the merger of Peoples Energy, WPS Energy Services changed its name to Integrys Energy Services, Inc. Integrys Energy Services, a wholly owned indirect subsidiary of Integrys Energy Group, is a diversified nonregulated energy supply and services company that also owns and operates electric generation facilities. Integrys Energy Services offers retail and wholesale products in nonregulated energy markets in the United States and Canada. Integrys Energy Services concentrates its operations in the northeast quadrant of the United States and adjacent portions of Canada as well as Illinois, Texas, Colorado and Alberta, Canada. Integrys Energy Services revenues are primarily derived through sales of electricity and natural gas. Integrys Energy Services had 2006 revenues of $5.2 billion (excluding intercompany revenues) and assets of $2.7 billion at December 31, 2006.

Integrys Energy Services currently owns and operates, through its subsidiaries, electric generation facilities in Wisconsin, Maine, Pennsylvania and New York in the United States and New Brunswick in Canada, a 23.3% interest in a synthetic fuel processing facility located in Kentucky (which is expected to cease operations by the end of 2007) and steam production facilities located in Arkansas and Oregon.

For more information regarding revenues, net income and total assets for nonregulated operations see Note 26 to Consolidated Financial Statements - Segments of Business.

WPS Investments, LLC

WPS Investments, LLC, a Wisconsin limited liability company organized in 2000, is a nonutility company domiciled in the United States. On December 31, 2006, WPS Investments was owned 21.19% by WPSC, 5.89% by UPPCO and 72.92% by Integrys Energy Group. The principal business of WPS Investments is to hold the investment of Integrys Energy Group and its subsidiaries in ATC. At December 31, 2006, WPS Investments owned a 30.65% interest in ATC. ATC owns, maintains, monitors and operates electric transmission assets in portions of Wisconsin, Michigan and Illinois. In April 2006, WPS Investments completed the sale of its one-third interest in Guardian Pipeline, L.L.C., to Northern Border Partners, L.P. for approximately $38.5 million.
 

-5-


B. REGULATED ELECTRIC OPERATIONS

Integrys Energy Group's regulated electric utility operations are provided through WPSC and UPPCO. WPSC generates and distributes electric energy in northeastern Wisconsin. The cities of Green Bay, Oshkosh, Wausau and Stevens Point are the largest communities served by WPSC at the electric retail level. WPSC also provides retail electric energy to a small portion of Michigan's Upper Peninsula, primarily in the City of Menominee. UPPCO provides electric energy in Michigan's Upper Peninsula. The largest community served by UPPCO at the electric retail level is the Houghton/Hancock area.

Revenues, volumes, customers and plant assets for electric operations of WPSC and UPPCO were as follows:

 
2006
2005
2004
Electric Revenues (Millions)
     
Wisconsin
$ 930.8
$ 892.6
$769.3
Michigan
168.6
144.5
127.3
Total
$1,099.4
$1,037.1
$896.6
       
Electric Volumes (Million Megawatt-hours)
     
Wisconsin
13.4
13.4
12.9
Michigan
2.5
2.3
1.6
Total
15.9
15.7
14.5
       
Customers
     
Wisconsin
420,031
415,623
412,246
Michigan
60,958
61,159
60,935
Total
480,989
476,782
473,181
       
Plant Assets (Millions)
     
Wisconsin
$1,949.4
$1,882.5
$2,062.2
Michigan
222.2
215.7
204.5
Total
$2,171.6
$2,098.2
$2,266.7

In 2006, WPSC reached a firm net design peak of 2,360 megawatts on the afternoon of July 31. At the time of this summer peak, WPSC's total firm resources (i.e., generation plus firm purchases) totaled 2,936 megawatts. 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 WPSC capacity planning purposes. WPSC expects future supply reserves to meet the minimum 18% planning reserve margin criteria through 2007 as required by the PSCW.
 
In 2006, UPPCO reached a firm net actual peak of 151 megawatts on the afternoon of December 6. At the time of this winter peak, UPPCO's total firm resources totaled 170 megawatts. In 2006, UPPCO purchased 91% of its total energy requirements. Remaining energy requirements were supplied by hydroelectric and combustion turbine facilities owned by UPPCO. During 2006, UPPCO purchased 65 megawatts of firm power from WPSC and 17 megawatts of firm power from a nonaffiliated independent power producer. UPPCO also purchased non-firm power from WPSC and Alliant Energy Corporation, among others. The purchases from WPSC represented 80% of UPPCO's total energy requirements in 2006. UPPCO has contracted for 65 megawatts of capacity and energy from WPSC and 30 megawatts from a nonaffiliated independent power producer for 2007.

-6-


Facilities

Weston Generation Facility

The Weston Generation facility is located along the Wisconsin River seven miles south of the city of Wausau, in Marathon County, in central Wisconsin and consists of three base-load operating units and one 500-megawatt power plant now under construction. Unit 1 (completed in 1954) is 60 megawatts, Unit 2 (completed in 1960) is 75 megawatts, and Unit 3 (completed in 1981) is 330 megawatts. All Weston plants use low-sulfur coal.

In October 2004, WPSC began construction of Weston 4, a 500-megawatt coal-fired generation unit. The facility is estimated to cost approximately $779 million (including the acquisition of coal trains).

In November 2005, DPC acquired a 30% ownership share of the Weston 4 generation unit.

Weston 4 construction is progressing on schedule and the unit is expected to be operational by June 2008. At December 31, 2006, 98% of the project engineering costs were complete and 68% of project construction work was complete. At December 31, 2006, WPSC, as contractor for the project, had entered into agreements for approximately $675 million of project costs, which includes committed costs of approximately $611 million.

WPSC has announced plans to update some of Unit 3's systems and equipment and is requesting the PSCW to approve a $110 million flue gas desulfurization system (more commonly known as a scrubber). The new scrubber will significantly reduce sulfur dioxide emissions and provide reductions in mercury emissions. If approved, project construction on the scrubber will begin in March 2008 and the scrubber is expected to be in service in May 2010. In addition, a $7.5 million boiler modification to control nitrogen oxide emissions had already been approved by state regulators earlier this year. These boiler modifications will be installed in 2008 and will reduce nitrogen oxide emissions. The boiler modifications to reduce nitrogen oxide emissions will be scheduled for installation on Unit 3 in conjunction with the end of the Weston 4 construction schedule.

Pulliam Generation Facility

WPSC also owns and operates six coal-fired generation units at its Pulliam plant located in Green Bay, Wisconsin. The units at the Pulliam site have a combined nameplate capacity of 370 megawatts, with the largest unit having a nameplate capacity of 125 megawatts.

In 2006, WPSC announced that it reached a settlement with the Sierra Club on a lawsuit filed in 2005. As part of the settlement, WPSC agreed to evaluate options to shut down various units or to perform environmental upgrades at various units at the facility. WPSC opted to shut down units 3 and 4 (both are 30-megawatt units) at Pulliam on December 31, 2007. WPSC will implement environmental control upgrades on Pulliam Units 5, 6, 7, and 8 and continue to operate those units. Improvements to these units are expected to cost approximately $1.1 million and would be completed in 2007.

De Pere Generation Facility

WPSC also owns and operates a 180-megawatt, natural gas-fired peaking facility in De Pere, Wisconsin. In January 2007, WPSC announced that the turbine in the De Pere facility would be refurbished. The maintenance action is being taken according to the manufacturer's recommendations, WPSC's operating experience, and industry practice. Work began on January 8, 2007, and will take approximately six months to complete at an estimated cost of $5.6 million.

-7-


Other Generation Facilities

WPSC has a 31.8% ownership interest in Columbia Units 1 and 2, located in Portage, Wisconsin (each a 527-megawatt generation facility operated by Wisconsin Power and Light Company) and a 31.8% ownership interest in Edgewater Unit 4 located in Sheboygan, Wisconsin (a 330-megawatt generation facility operated by Wisconsin Power and Light Company). These facilities are jointly owned by WPSC, Wisconsin Power and Light and various other utilities.

In addition to the facilities described above, WPSC and UPPCO own 24 hydroelectric generation facilities and 11 combustion turbine generation units. WPSC also owns a 50% interest in Wisconsin River Power Company. Wisconsin River Power is the owner and operator of a combustion turbine and two hydroelectric plants on the Wisconsin River, which have a forecasted aggregate capacity rating of approximately 50 megawatts. For a complete listing of these facilities, see Item 2 - Properties in this Annual Report on Form 10-K.

Power Purchase Agreements

In 2005, WPSC sold its 59% interest in the Kewaunee nuclear plant and entered into a long-term power purchase agreement with Dominion Energy Kewaunee, a subsidiary of Dominion Resources, to purchase energy and capacity from the plant approximately equivalent to WPSC's share of forecasted production from the plant had WPSC retained its ownership interest. The power purchase agreement will extend through 2013 when the plant's current operating license expires. Monthly payments under the power purchase agreement are expected to approximate WPSC's costs of production had it continued to own the plant.

WPSC also entered into an exclusivity agreement with Dominion. Under the agreement, Dominion agreed to negotiate exclusively with WPSC through December 21, 2011 regarding an agreement for 59% of the power produced by the plant after 2013. Negotiations are currently underway.

WPSC currently has a power purchase agreement with Fox Energy Company LLC (a subsidiary of GE Capital) for capacity and energy from the Fox Energy Center project (a 580-megawatt natural gas-fired combined cycle generation facility located near Kaukauna, Wisconsin).  The agreement currently provides for WPSC to purchase 500 megawatts of capacity through May 31, 2015, when it decreases to 250 megawatts. The agreement terminates on May 31, 2016. WPSC is responsible for fuel supply to the facility for its portion of contracted generation over the life of the agreement.

Other Facilities

WPSC, Minnesota Power Company and ATC are currently constructing a 220-mile, 345-kilovolt transmission line from Wausau, Wisconsin, to Duluth, Minnesota. The transmission line will be owned and operated by ATC. A 145-mile section of the line was energized in 2006 and completion of the remainder of the line is expected in the first half of 2008. The project is expected to be completed within the PSCW approved cost. The PSCW approved a total cost for the project of $420 million plus additional costs not to exceed 5%.   

For additional information regarding the above and other facilities, see Item 2 - Properties in this Annual Report on Form 10-K.

-8-


Fuel Supply

Electric Supply Mix

WPSC's electric supply mix for 2006 and 2005 was:

Energy Source
 
2006
 
2005
 
Coal
         
57.3
%
       
59.2
%
Purchased power *
                         
Kewaunee nuclear power plant
   
17.6
%
       
9.6
%
     
Fox Energy Center
   
5.8
%
       
1.9
%
     
Midwest ISO
   
11.8
%
       
-
       
All other
   
4.5
%
       
21.3
%
     
Total purchased power *
         
39.7
%
       
32.8
%
Nuclear *
         
0.0
%
       
2.8
%
Natural gas/fuel oil
         
1.4
%
       
3.7
%
Hydro
         
1.5
%
       
1.4
%
Wind
         
0.1
%
       
0.1
%
* Purchased power has increased and nuclear generation has decreased as a result of the sale of the Kewaunee plant in 2005 and entering into the Kewaunee and Fox Energy Center power purchase agreements.

Fuel Costs

WPSC's fuel costs for 2006 and 2005 were:

Fuel Cost by Source (Per Million Btus)
 
2006
 
2005
 
Coal
 
$
1.30
 
$
1.31
 
Nuclear
   
-
   
0.56
 
Natural gas
   
7.19
   
8.18
 
Fuel oil
   
13.60
   
12.18
 

Coal Supply

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

Historically, WPSC has purchased coal directly from the producer. WPSC purchases coal for its wholly owned plants. Wisconsin Power and Light purchases coal for the jointly owned Edgewater and Columbia plants and is reimbursed by WPSC for its share of the coal costs.

Annual coal requirements for WPSC's wholly owned plants generally range between 3.5 to 4.0 million tons. With the addition of the Weston 4 unit, WPSC's annual coal needs will increase approximately 2.0 millions tons. WPSC's fuel portfolio strategy is to purchase coal through a mix of spot, short-term, mid-term and long-term contracts and maintain a broad base of suppliers and mine sources. The fuel portfolio for 2007 is as follows:

 
Target
Wholly Owned
Facilities
All Facilities
Spot (less than 1 year)
0 to 15%
11%
10%
Short-Term (1 to 2 years)
10 to 15%
20%
17%
Mid-Term (3 to 5 years)
50%
47%
47%
Long-Term (more than 5 years)
25%
22%
26%


-9-


WPSC currently contracts for coal transportation for its wholly owned plants under contracts of up to five years duration. WPSC has transportation contracts in place for 90% of its 2007 coal transportation requirements for its wholly owned plants.

WPSC has obligations related to coal supply and transportation extending through 2016 totaling $443.9 million for its wholly- and jointly-owned generation facilities.

For more information on coal supply see Management's Discussion and Analysis - Liquidity and Capital Resources - Integrys Energy Group, Other Future Considerations - Coal Supply.

Natural Gas Supply - Generation

WPSC is committed to provide fuel for 500 megawatts of the Fox Energy Center, a natural gas-fired combined cycle generation facility with a total combined electric capacity of approximately 580 megawatts. Natural gas supplies for the facility have been and are expected to continue to be purchased in the spot market. WPSC has a 10-year pipeline transportation contract with ANR Pipeline Company to deliver 50% of the forecasted natural gas needs for the 500 megawatts of contracted electric capacity. WPSC has contracted for a 10-day firm storage service to provide natural gas for supply interruptions during the winter months. The storage service can also provide additional supplies or access for real-time electric dispatches of the facility. Estimated 2007 fuel requirements for WPSC's contracted electric capacity are approximately 14.7 million MMBtus.

In addition, WPSC supplies natural gas through its natural gas distribution system to its 480 megawatts of gas-fired combustion turbine generation facilities, which includes the De Pere Energy Center.

In 2006, WPSC received approval to extend the previously approved Energy Market Risk Management Plan to govern its activities in the energy markets. The PSCW approval to extend the plan through December 31, 2007 was granted on November 9, 2006. The order permits activities to limit exposure to the volatility of natural gas prices affecting its electric generation, as well as the use of financial transmission rights for the use of managing energy congestion costs. The plan provides for the use of financial futures contracts for natural gas and the use of financial options that cap the price of natural gas for a portion of WPSC's forecasted natural gas fuel generation requirements and natural gas price sensitive purchased power contracts.

For additional information, see Note 17 to Integrys Energy Group's Consolidated Financial Statements - Commitments and Contingencies.

Regulatory Matters

Both the PSCW and MPSC regulate retail electric rates for WPSC. The MPSC also regulates retail electric rates for UPPCO. The FERC regulates wholesale electric rates of both utility companies.

WPSC and UPPCO are members of MISO which centrally dispatches wholesale electricity and provides transmission service to an area mainly in the Midwest. MISO determines prices in the market based on a locational marginal pricing system determined by the accepted generation bids and offers and the load to be served by all market participants. The MISO dispatching system provides for more efficient use of the transmission system to serve our load.

For additional information, see Note 23 to Integrys Energy Group's Consolidated Financial Statements - Regulatory Environment.

Hydroelectric Licenses

WPSC, UPPCO and Wisconsin River Power Company have long-term licenses from FERC for all of their hydroelectric facilities.

-10-


UPPCO has decided to restore Silver Lake as a reservoir for power generation pending approval of a license amendment and an economically feasible design by the FERC. The FERC has required that a board of consultants evaluate and oversee the design approval process. UPPCO is developing a timeline for the project, should the FERC approve an economically feasible design. Upon completion, Silver Lake is expected to take approximately two years to refill, based upon natural precipitation.

For more information on Silver Lake, see Note 17 - Commitments and Contingencies to our Notes to Consolidated Financial Statements.

Other Matters

Research and Development

The only business segment of Integrys Energy Group that incurred noteworthy levels of research and development costs in 2006 was WPSC's electric operations. Electric research and development expenditures for WPSC totaled $0.3 million for 2006, $0.7 million for 2005, and $0.7 million for 2004. These expenditures were primarily charged to electric operations as incurred.

Customer Segmentation

In 2006, paper production facilities and one wholesale customer (a private utility that primarily provides power to other paper mills) accounted for 17.1% of Integrys Energy Group's regulated electric revenues and 17.7% of the regulated electric revenues of WPSC. Paper companies made up 18 of the 100 largest electric customers of WPSC, with the largest single paper company providing less than 2% of WPSC's total electric revenues.

In 2006, residential sales accounted for 38.9% of the regulated electric revenues of Integrys Energy Group and 37.7% of the electric revenues of WPSC.

Seasonality

The electric sales of WPSC generally follow a seasonal pattern due to the air conditioning requirements of customers that are primarily impacted by the variability of summer temperatures. Electric sales at UPPCO follow no 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 heating load and generation production 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 WPSC's natural gas and oil-fired facilities, as well as natural gas supply commitments under power purchase agreements. For WPSC, the impact on production costs is managed through its Energy Market Risk Management Plan, described under Natural Gas Supply - Generation on the previous page.
 
Competition

The electric energy 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/industrial customers into their service territory. 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 customers with 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 markets are regulated, utilities still face competition from other energy sources.

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

-11-


Working Capital Requirements

For information on capital requirements related to Integrys Energy Groupís regulated electric operations see Management's Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources - WPSC.

Integrys Energy Group
 
Regulated Electric Segment Operations Statistics
 
   
2006
 
2005
 
2004
 
Operating revenues (Millions)
             
Residential
 
$
352.9
 
$
355.1
 
$
320.4
 
Small commercial and industrial
   
325.2
   
282.4
   
254.2
 
Large commercial and industrial
   
221.6
   
209.3
   
189.7
 
Resale and other
   
199.7
   
190.3
   
132.3
 
Total
 
$
1,099.4
 
$
1,037.1
 
$
896.6
 
Kilowatt-hour sales (Millions)
                   
Residential
   
3,144.8
   
3,127.4
   
3,273.4
 
Small commercial and industrial
   
4,146.2
   
4,170.0
   
3,771.3
 
Large commercial and industrial
   
4,499.0
   
4,471.8
   
4,457.1
 
Resale and other
   
4,135.3
   
3,890.9
   
2,963.9
 
Total
   
15,925.3
   
15,660.1
   
14,465.7
 
Customers served (End of period)
                   
Residential
   
421,021
   
424,099
   
420,915
 
Small commercial and industrial
   
58,810
   
51,155
   
50,752
 
Large commercial and industrial
   
268
   
282
   
276
 
Resale and other
   
890
   
1,246
   
1,238
 
Total
   
480,989
   
476,782
   
473,181
 
 

WPSC
 
Regulated Electric Segment Operations Statistics
 
   
2006
 
2005
 
2004
 
Operating revenues (Millions)
                   
Residential
 
$
315.2
 
$
319.4
 
$
286.0
 
Small commercial and industrial
   
296.9
   
255.2
   
227.8
 
Large commercial and industrial
   
203.8
   
193.3
   
174.7
 
Resale and other
   
174.7
   
165.0
   
112.7
 
Total
 
$
990.6
 
$
932.9
 
$
801.2
 
Kilowatt-hour sales (Millions)
                   
Residential
   
2,871.1
   
2,850.3
   
2,999.6
 
Small commercial and industrial
   
3,896.6
   
3,919.8
   
3,521.0
 
Large commercial and industrial
   
4,228.5
   
4,264.1
   
4,225.9
 
Resale and other
   
3,733.3
   
3,503.7
   
2,746.9
 
Total
   
14,729.5
   
14,537.9
   
13,493.4
 
Customers served (End of period)
                   
Residential
   
374,895
   
377,921
   
374,961
 
Small commercial and industrial
   
53,248
   
45,509
   
45,108
 
Large commercial and industrial
   
258
   
269
   
263
 
Resale and other
   
611
   
916
   
908
 
Total
   
429,012
   
424,615
   
421,240
 

-12-



C. REGULATED NATURAL GAS OPERATIONS

WPSC provides regulated natural gas service to nearly 300 municipalities in northeastern Wisconsin and adjacent portions of Michigan's Upper Peninsula. Beginning July 1, 2006, MERC began providing regulated natural gas distribution services in 165 cities and communities throughout Minnesota. Beginning April 1, 2006, MGUC began providing natural gas distribution services to 147 cities and communities in the southern portion of lower Michigan.

Revenues, volumes, customers and plant assets for regulated natural gas operations of Integrys Energy Group were as follows:

   
2006
 
2005
 
2004
 
Natural Gas Revenues (Millions)
                   
Wisconsin
 
$
443.8
 
$
514.6
 
$
414.7
 
Michigan
   
110.1
   
7.4
   
6.2
 
Minnesota
   
123.0
   
-
   
-
 
Total
 
$
676.9
 
$
522.0
 
$
420.9
 
                     
Natural Gas Volumes (Million Therms)
                   
Wisconsin
   
683.6
   
740.4
   
750.7
 
Michigan
   
207.6
   
16.0
   
16.6
 
Internal electric generation
   
27.6
   
70.8
   
34.0
 
Minnesota
   
348.5
   
-
   
-
 
Total
   
1,267.3
   
827.2
   
801.3
 
                     
Customers
                   
Wisconsin
   
306,293
   
302,191
   
300,297
 
Michigan
   
171,017
   
5,349
   
5,351
 
Minnesota
   
206,838
   
-
   
-
 
Total
   
684,148
   
307,540
   
305,648
 
                     
Plant Assets (Millions)
                   
Wisconsin
 
$
563.3
 
$
536.3
 
$
498.3
 
Michigan
   
281.4
   
6.4
   
6.1
 
Minnesota
   
278.9
   
-
   
-
 
Total
 
$
1,123.6
 
$
542.7
 
$
504.4
 

Facilities

For information regarding our natural gas facilities, see Item 2 - Properties in this Annual Report on Form 10-K.

Natural Gas Supply

WPSC, MERC and MGUC manage portfolios of natural gas supply contracts, storage services and pipeline transportation services designed to meet their varying load pattern at the lowest reasonable cost. Annual natural gas supply needs for WPSC, MERC and MGUC are estimated at approximately 900 million therms.

WPSC

WPSC contracts for fixed-term firm natural gas supplies with approximately ten natural gas suppliers each year (in the United States and Canada) to meet the November through March winter period demand of

-13-


firm system sales customers. To supplement natural gas supplies and minimize risk, WPSC purchases additional natural gas supplies on the monthly spot market through fixed-term firm contracts rather than on the daily spot market. As of December 31, 2006, WPSC's domestic natural gas supply contracts had remaining terms of up to two months and its Canadian natural gas supply contracts had remaining terms of up to three months. WPSC intends to contract for domestic natural gas supplies for terms of two years or less to minimize potential stranded natural gas supply contract costs in the event retail natural gas deregulation proceeds in Wisconsin.

Under current regulatory practice, the PSCW and the MPSC allow WPSC to pass the prudently incurred cost of natural gas on to customers on a dollar-for-dollar basis through a purchased gas adjustment clause. Changes in the cost of natural gas are reflected in both gas revenues and gas purchases, thus having little or no impact on net income.

WPSC contracts with ANR Pipeline Company for firm underground natural gas storage capacity located in Michigan and with Nexen and Peoples Energy Resources Corporation (following the recently completed merger, now a subsidiary of Integrys Energy Group) in Illinois. WPSC has approximately 116 million therms of firm natural gas storage capacity in Michigan and approximately 17 million therms of firm natural gas storage capacity in Illinois. Besides providing the ability to manage significant changes in daily natural gas demand, storage also provides WPSC with the ability to purchase natural gas at high load factors on a year-round basis, thus lowering supply cost volatility. In 2006, natural gas from storage provided approximately 63% of WPSC's supply on winter peak days, approximately 35%  of its winter sales volumes and approximately 26% of its total annual sales volumes under normal weather conditions. WPSC also contracts with third-party natural gas suppliers for high deliverability storage. This high deliverability storage capacity is designed to deliver natural gas when other supplies cannot be delivered during extremely cold weather in the producing areas, which can temporarily limit wellhead natural gas supplies.

WPSC holds firm long-term transportation capacity contracts on the ANR Pipeline. The majority of these contracts expire in 2010. WPSC also holds firm transportation capacity with Viking Gas Transmission Company to deliver natural gas from its interconnection with TransCanada Pipelines near Emerson, Manitoba to the interconnection of Viking Gas Transmission with ANR Pipeline near Marshfield, Wisconsin. The Canadian natural gas suppliers at Emerson hold firm capacity on TransCanada Pipelines from Emerson back into the Canadian production areas in Alberta, Canada. WPSC contracts with Viking Gas Transmission Company expire in 2010. These contracts provide WPSC sufficient contracted pipeline transportation capacity to fully meet the annual and daily requirements of its customers.

MGUC

MGUC contracts for natural gas supplies with approximately 11 natural gas suppliers each year. MGUC's supply requirements are met through a combination of storage (contracted and indigenous), fixed price purchases made prior to the start of the heating season and monthly natural gas index related purchases. During particularly cold periods, MGUC has contracted for and may purchase some supply based on daily pricing. This purchasing methodology reduces MGUC's exposure to the price volatility of the daily supply market. As of December 31, 2006, MGUC's fixed price and index related natural gas supply contracts had terms expiring in March 2007 and March 2008. Through the coming months, MGUC will contract for the remainder of next year's annual and winter fixed price supply requirements. MGUC generally limits its purchases to the current and ensuing year, thus minimizing potential stranded natural gas supply contract costs.

Under current regulatory practice, the MPSC allows MGUC to pass the prudently incurred cost of natural gas on to customers on a dollar-for-dollar basis through a purchased gas adjustment clause. Changes in the cost of natural gas are reflected in both natural gas revenues and natural gas purchases, thus having little or no impact on net income.

MGUC contracts with ANR Pipeline Company and Washington 10 Storage Corporation for firm underground natural gas storage capacity located in Michigan. Additionally, MGUC has company-owned storage located in the central part of its distribution system. MGUC has approximately 52 million therms of firm natural gas storage capacity under contract and 36 million therms of firm natural gas storage

-14-


capacity located on its distribution system. Besides providing the ability to manage significant changes in daily natural gas demand, storage also provides MGUC with the ability to purchase natural gas at high load factors on a year-round basis, thus lowering supply cost volatility. During 2006-2007, natural gas from storage represents approximately one-third of MGUC's portfolio.

MGUC has firm long-term transportation capacity contracts with ANR Pipeline, Panhandle Eastern Pipeline and Michigan Consolidated Gas Company. These contracts expire at staggered intervals of 2008, 2009 and 2012. The staggered expiration dates allow MGUC to adjust contracted transport volumes as dictated by customer and system needs. These contracts provide MGUC sufficient contracted pipeline transportation capacity to fully meet the annual, daily and peak requirements of its customers.

MERC

MERC contracts for fixed-term firm natural gas supplies with approximately eight 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. MERC's annual requirements are met through a combination of physical fixed price purchases and storage (40%), natural gas call options and physical index purchases. To supplement natural gas supplies and minimize risk, MERC purchases additional natural gas supplies on the monthly spot market through fixed-term firm contracts. During periods of colder than normal weather, purchasing natural gas in the daily spot market may be necessary. As of December 31, 2006, MERC's domestic and Canadian natural gas supply contracts had remaining terms of up to three months. MERC intends to contract for domestic natural gas supplies for terms of one year or less to minimize potential stranded natural gas supply contract costs.

Under current regulatory practice, the MPUC allows MERC to pass the prudently incurred cost of natural gas on to customers on a dollar-for-dollar basis through a purchased gas adjustment clause. Changes in the cost of natural gas are reflected in both natural gas revenues and natural gas purchases, thus having little or no impact on net income.

MERC contracts with NNG Pipeline Company for firm underground natural gas storage capacity located in Iowa. MERC also contracts with Nexen Marketing USA and Tenaska Marketing Ventures for storage services on Northern Natural Gas, Great Lakes Gas Transmission, Viking Gas Transmission and Centra pipelines. MERC has approximately 43 million therms of firm natural gas storage capacity in Iowa and approximately 11 million therms of firm natural gas storage capacity with Nexen and Tenaska. Besides providing the ability to manage significant changes in daily natural gas demand, storage also provides MERC with the ability to purchase natural gas at high load factors on a year-round basis, thus lowering supply cost volatility. In 2006, natural gas from storage provided approximately 30% of MERC's supply on winter peak days, approximately 23% of its winter sales volumes and approximately 21% of its total annual sales volumes under normal weather conditions.

MERC holds firm long-term transportation capacity contracts with Northern Natural Gas pipeline. The majority of these contracts expire in 2014. MERC also holds firm transportation capacity with Great Lakes Gas Transmission to deliver natural gas from its interconnection with TransCanada Pipelines near Emerson, Manitoba to MERC firm gas customers on Great Lakes Gas Transmission. MERC contracts with Great Lakes Gas Transmission expire in 2010. MERC also holds firm transportation capacity with Viking Gas Transmission to deliver natural gas from its interconnection with TransCanada Pipelines near Emerson, Manitoba to MERC firm natural gas customers on Viking Gas Transmission. MERC contracts with Viking Gas Transmission expire in 2014. MERC also holds firm transportation capacity with Centra Transmission Holdings to deliver natural gas from its interconnection with TransCanada Pipelines near Spruce, Manitoba to MERC firm natural gas customers on Centra Transmission Holdings. MERC contracts with Centra Transmission Holdings expire in 2008. The Canadian natural gas suppliers at Emerson hold firm capacity on TransCanada Pipelines from Emerson back into the Canadian production areas in Alberta, Canada. These contracts provide MERC sufficient contracted pipeline transportation capacity to fully meet the annual and daily requirements of its customers.

-15-


Regulatory Matters

The natural gas retail rates of WPSC are regulated by the PSCW and the MPSC. Natural gas rates of MGUC are regulated by the MPSC and rates of MERC are regulated by the MPUC.

For additional information, see Note 23 to Integrys Energy Group's Consolidated Financial Statements - Regulatory Environment.

Other Matters

Customer Segmentation

In 2006, the largest single industry natural gas customer of WPSC comprised less than 3% of natural gas revenues. WPSC residential customers accounted for approximately 76% of its natural gas revenues in 2006.

Seasonality

The gas throughput of WPSC, MERC and MGUC follows a seasonal pattern due to the heating requirements of customers that is primarily impacted by the variability in winter temperatures.

Competition

Integrys Energy Group's regulated natural gas operations face competition with 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 natural gas prices, WPSC, MERC and MGUC have 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. Interruptible natural gas sales and natural gas transportation service is offered for customers to enable them to reduce their energy costs. Transportation customers purchase their natural gas directly from third-party natural gas suppliers at market prices and contract with WPSC, MERC and MGUC to transport the natural gas from pipelines to their facilities. Additionally, some customers still purchase their natural gas commodity directly from WPSC, MERC and MGUC but have elected to do so 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

For information on capital requirements related to the regulated natural gas operations of Integrys Energy Group see Management's Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources - WPSC.
 
-16-

 
 
Integrys Energy Group
 
Regulated Natural Gas Segment Operations Statistics
 
 
 
2006
 
2005
 
2004
 
Operating Revenues (Millions)
 
 
 
 
 
 
 
Residential
 
$
401.4
 
$
291.9
 
$
244.9
 
Small commercial and industrial
   
104.0
   
79.3
   
51.3
 
Large commercial and industrial
   
114.3
   
58.4
   
60.7
 
Other
   
57.2
   
92.4
   
64.0
 
Total
 
$
676.9
 
$
522.0
 
$
420.9
 
Therms Delivered (Millions)
             
Residential
   
351.5
   
241.6
   
248.1
 
Small commercial and industrial
   
99.4
   
75.0
   
58.9
 
Large commercial and industrial
   
131.3
   
95.8
   
108.6
 
Other
   
27.6
   
70.8
   
34.0
 
Total therm sales
   
609.8
   
483.2
   
449.6
 
Transportation
   
657.5
   
344.0
   
351.7
 
Total
   
1,267.3
   
827.2
   
801.3
 
Customers Served (End of period)
             
Residential
   
620,502
   
279,288
   
277,484
 
Small commercial and industrial
   
49,024
   
25,617
   
23,914
 
Large commercial and industrial
   
13,723
   
2,034
   
3,655
 
Other
   
1
   
1
   
-
 
Transportation customers
   
898
   
600
   
595
 
Total
   
684,148
   
307,540
   
305,648
 
 
-17-

 
WPSC
 
Regulated Natural Gas Segment Operations Statistics
 
 
 
2006
 
2005
 
2004
 
Operating Revenues (Millions)
 
 
 
 
 
 
 
Residential
 
$
254.9
 
$
291.9
 
$
244.9
 
Small commercial and industrial
   
73.2
   
79.3
   
51.3
 
Large commercial and industrial
   
67.4
   
58.4
   
60.7
 
Other
   
48.3
   
92.4
   
64.0
 
Total
 
$
443.8
 
$
522.0
 
$
420.9
 
Therms Delivered (Millions)
             
Residential
   
217.0
   
241.6
   
248.1
 
Small commercial and industrial
   
71.0
   
75.0
   
58.9
 
Large commercial and industrial
   
78.1
   
95.8
   
108.6
 
Other
   
27.6
   
70.8
   
34.0
 
Total therm sales
   
393.7
   
483.2
   
449.6
 
Transportation
   
332.2
   
344.0
   
351.7
 
Total
   
725.9
   
827.2
   
801.3
 
Customers Served (End of period)
             
Residential
   
283,415
   
279,288
   
277,484
 
Small commercial and industrial
   
26,217
   
25,617
   
23,914
 
Large commercial and industrial
   
1,381
   
2,034
   
3,655
 
Other
   
1
   
1
   
-
 
Transportation customers
   
606
   
600
   
595
 
Total
   
311,620
   
307,540
   
305,648
 
Average Therm Price (Cents)
                   
Residential
   
117.44
   
120.50
   
98.73
 
Small commercial and industrial
   
103.17
   
105.79
   
87.11
 
Large commercial and industrial
   
88.61
   
97.82
   
78.24
 
                     
 

-18-



D. NONREGULATED ENERGY SERVICES

Integrys Energy Services, a subsidiary of Integrys Energy Group, offers retail and wholesale products, primarily natural gas and electric power, in nonregulated energy markets in the United States and Canada concentrating its operations in the northeast quadrant of the United States and adjacent portions of Canada as well as Texas and Alberta, Canada. Integrys Energy Services has recently opened an office in Denver Colorado that will support the offering of wholesale electric products in the Midwest and Western regions. Integrys Energy Services currently owns and operates, through its subsidiaries, electric generation facilities in Wisconsin, Maine, Pennsylvania and New York in the United States and New Brunswick in Canada, a 23.3% interest in a synthetic fuel processing facility located in Kentucky and steam production facilities located in Arkansas and Oregon.

Integrys Energy Services and its subsidiaries provide energy supply solutions, products and strategies that enable customers to manage energy needs while capitalizing on opportunities resulting from deregulated markets.

Integrys Energy Services and its subsidiaries market energy products in the retail market serving commercial and industrial customers, as well as "aggregated" small commercial and residential customers and standard offer service. Aggregated customers are associations or groups of customers, which have joined together to negotiate purchases of electric or natural gas energy as a larger group. Additionally, Integrys Energy Services markets energy products directly to small end users in deregulated markets.

Integrys Energy Services' operations in the wholesale market focus on the execution and optimization of structured transactions with large end-users, regulated local distribution companies, pipelines, storage companies and other nonregulated energy marketing and trading companies. Integrys Energy Services utilizes derivative instruments, including forwards, futures, options and swaps, to manage its exposures within defined risk limits.

Energy revenues, volumes and assets are as follows:

   
2006
 
2005
 
2004
 
Electric Revenues (Millions)
             
United States
 
$
448.3
 
$
625.5
 
$
570
 
Canada
   
0.3
   
0.1
   
1
 
Total
 
$
448.6
 
$
625.6
 
$
571
 
Gas Revenues (Millions)
                   
United States
 
$
2,847.3
 
$
2,715.8
 
$
1,977
 
Canada
   
1,863.2
   
1,973.5
   
1,052
 
Total
 
$
4,710.5
 
$
4,689.3
 
$
3,029
 
Electric Volumes (Million Megawatt Hours)
                   
United States
   
5.0
   
8.1
   
10.2
 
Canada
   
0.5
   
-
   
0.1
 
Total
   
5.5
   
8.1
   
10.3
 
Gas Volumes (Billion Cubic Feet)
                   
United States
   
359.1
   
298.7
   
321
 
Canada
   
278.4
   
256.8
   
191
 
Total
   
637.5
   
555.5
   
512
 
Assets (Millions)
                   
United States
 
$
2,189.2
 
$
1,749.5
 
$
967
 
Canada
   
547.5
   
693.4
   
424
 
Total
 
$
2,736.7
 
$
2,442.9
 
$
1,391
 

Integrys Energy Services manages its exposure to market risks in accordance with the limits and approvals established in its risk management and credit policies. The Market Risk Oversight Committee, comprised of cross-functional members of management and senior leadership, monitor compliance with these policies.

-19-


Integrys Energy Services' direct ownership of generation facilities allows for more efficient management of the market risk associated with its generation capabilities and related contracts to provide electric energy. Integrys Energy Services focuses on effective economic dispatch and risk management strategies in order to enhance the returns of its generation facilities.

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 Operation Introduction, Integrys Energy Group - Integrys Energy Services and Market Price Risk Management Activities - Integrys Energy Group.

Facilities

At December 31, 2006, Integrys Energy Services owned and operated electric generation facilities in the Midwest and Northeast regions of the United States with a total rated capacity of approximately 413 megawatts. In January 2007, Integrys Energy Services sold its subsidiary WPS Niagara Generation, LLC which owned the 50-megawatt Niagara Falls generation facility. The sale of this facility reduced the production capacity of Integrys Energy Services to approximately 363 megawatts.

As part of the asset management strategy of Integrys Energy Group, Integrys Energy Services continues to explore opportunities regarding the future of its electric generation facilities. Opportunities include, but are not limited to purchase, sales or development of certain facilities, joint ventures and long-term contracts. Opportunities change and develop with the dynamics of the markets in which Integrys Energy Services operates.

Integrys Energy Services' Beaver Falls generation facility is currently out of service as a result of damage to its turbine blades. Integrys Energy Services has begun repairs on the facility. Total cost of the repairs, net of insurance coverage, is expected to be approximately $5.8 million and the unit is expected to be back in service in June 2007.

For additional information regarding generation facilities of Integrys Energy Services, see Item 2 - Properties in this Annual Report on Form 10-K.

Fuel Supply

Integrys Energy Services' fuel inventory policy varies for each generation facility depending on the type of fuel used and available natural gas storage facilities. In 2007, Integrys Energy Services' merchant coal-fired generation facilities consisted of its Westwood and Stoneman facilities. These plants burned approximately 424,000 tons of coal and culm in 2006. Actual fuel needs in 2007 will depend on market conditions and operational capability of these facilities.

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.

The Stoneman facility currently has all of its 2007 coal needs under contract with options for 2008 fuel needs.

Integrys Energy Services provides all natural gas supply for the natural gas-fired facilities in Beaver Falls, Syracuse and Combined Locks and currently has adequate transport and supply arrangements for projected 2007 needs.

-20-


Licenses

Integrys Energy Services is a FERC licensed power marketer with import/export authorization through the DOE. Integrys Energy Services on its own, or through certain of its subsidiaries, is registered to sell retail electric service in the states of Connecticut, Delaware, Texas, New Hampshire, Illinois, Maine, Massachusetts, Michigan, New York, Ohio, Pennsylvania, Rhode Island and Virginia in the United States and the provinces of Ontario and Alberta in Canada.

Integrys Energy Services, on its own, or through certain of its subsidiaries, is registered to sell natural gas in the states of Illinois, Iowa, Michigan, Ohio, Pennsylvania, New York and Alberta, Canada. Integrys Energy Services also sells natural gas in Wisconsin where no license is required. Integrys Energy Services' subsidiary, Integrys Energy Services of Canada Corp., is registered to do business in the Canadian provinces of Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec and Saskatchewan.

Integrys Energy Services, or certain of its subsidiaries, are also members of the following regional transmission operators and North American Electric Reliability Council reliability regions:

Independent Electricity System Operator (located in Ontario);
Electric Reliability Council of Texas;
ISO New England;
MISO;
New Brunswick System Operator;
Northern Maine Independent System Administrator;
New York Independent System Operator; and
PJM Interconnection.

Integrys Energy Services consolidated its retail electric business in Michigan by taking assignment of the retail power sale agreements of its Michigan subsidiary, Quest Energy L.LC., effective January 1, 2007. Integrys Energy Services, as an authorized Alternate Electric Supplier, will continue to participate in the Electric Choice program in Michigan.

For more information on the legislative activity in Michigan and Ohio and its impact on Integrys Energy Services, see the discussion on Industry Restructuring in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operation.

All the FERC hydroelectric facility licenses held by Integrys Energy Services subsidiaries are current. The 33-megawatt hydroelectric facility owned in New Brunswick, Canada, is not subject to licensing.

Other Matters

Customer Segmentation

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.

Integrys Energy Services' concentration of sales in any single market sector is decreasing as it expands into the Illinois, Texas and northeast United States retail electric markets and eastern Canada retail natural gas markets.

-21-


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 electric energy generally peak in the summer months. Generally in the summer months, the demand for electric energy is high, which increases the price at which energy can be sold. In periods of high residential fuel consumption, (generally the winter months), the purchase price of oil and natural gas increases, which increases the production costs at Integrys Energy Services' gas- and oil-fired generation facilities. Integrys Energy Services' business is volatile as a result of market conditions and the related market opportunities available to its customers.

Competition

Integrys Energy Services is a nonregulated energy marketer that competes against regulated utilities, large energy trading companies and other energy marketers. Integrys Energy Services competes with other energy providers on the basis of price, reliability, service, financial strength, consumer convenience, performance and reputation. The nonregulated energy market has seen a decrease in the number of large energy providers and there continues to be consolidation of small energy marketers. The liquidity in the nonregulated energy market continues to improve with the increase of well-capitalized wholesale market participants. Although this increases competition, it creates a more efficient market, creating more opportunities for Integrys Energy Services in the nonregulated markets.

Working Capital

Currently, capital requirements of Integrys Energy Services are provided through equity infusions, long-term debt and short-term debt by its parent company, Integrys Energy Group. The working capital needs of Integrys Energy Services vary significantly over time due to volatility in commodity prices (including margin calls), levels of natural gas inventories, the structure of wholesale transactions, the price of natural gas and alternative energy opportunities available to its customers. Integrys Energy Group provides guarantees for Integrys Energy Services' supply contracts. These guarantees provide the credit support needed to participate in the nonregulated energy market.

See Management's Discussion and Analysis of Financial Condition and Results of Operation for additional information regarding working capital needs of nonregulated operations.

E. ENVIRONMENTAL MATTERS

For information on environmental matters related to Integrys Energy Group and any of its subsidiaries, see Note 17 - Commitments and Contingencies to our Notes to Consolidated Financial Statements.

F. CAPITAL REQUIREMENTS

For information on capital requirements related to Integrys Energy Group, see Management's Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources - Integrys Energy Group.

For information on capital requirements related to WPSC, see Management's Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources - WPSC.

-22-


G. EMPLOYEES

At December 31, 2006, Integrys Energy Group and its subsidiaries had the following employees:

 
Electric
Utility
Natural
Gas Utility
Common
Utility
Nonregulated
Total
WPSC
219
131
1,962
 
2,312
MERC
 
221
   
221
MGUC
 
181
   
181
UPPCO
170
     
170
Integrys Energy Services
     
387
387
Integrys Energy Group
     
55
55
Total
389
533
1,962
442
3,326

Local 310 of the International Union of Operating Engineers represents 1,087 WPSC employees. The current Local 310 collective bargaining agreement expired on October 21, 2006. A new tentative agreement has been negotiated. A vote on ratification is expected in the first quarter of 2007. WPSC and Local 310 continue to operate under the expired labor agreement.

Local 510 of the International Brotherhood of Electrical Workers, AFL CIO, represents approximately 130 employees at UPPCO. The current collective bargaining agreement expires on April 19, 2008.

MGUC has labor contracts with two unions; Local 12295 of the United Steelworkers of America, AFL CIO CLC, and Local 417 of the Utility Workers Union of America, AFL CIO. Local 12295 of the United Steelworkers of America, AFL CIO CLC, represents approximately 83 employees at MGUC. In January 2007, MGUC and Local 12295 agreed to a three-year contract, which will expire on January 15, 2010. Local 417 of the Utility Workers Union of America, AFL CIO, represents approximately 35 employees at MGUC. Their current collective bargaining agreement expires on February 15, 2008.

Local 31 of the International Brotherhood of Electrical Workers, AFL CIO, represents approximately 44 employees at MERC. The current collective bargaining agreement expires on May 31, 2007.

H. AVAILABLE INFORMATION

Integrys Energy Group and WPSC file with the SEC:

Annual Reports on Form 10-K;
Quarterly Reports on Form 10-Q;
Integrys Energy Group proxy statements;
Registration statements, including prospectuses;
Current Reports on Form 8-K; and
Any amendments to these documents.

Integrys Energy Group and WPSC make these reports available free of charge, on Integrys Energy Group's Internet web site, as soon as reasonably practicable after they are filed with the SEC. Integrys Energy Group's Internet address is www.integrysgroup.com. Statements and amendments posted on Integrys Energy Group's web site do not include access to exhibits and supplemental schedules electronically filed with the reports or amendments. Integrys Energy Group and WPSC are not including the information contained on or available through their web sites as a part of, or incorporating such information by reference into, this Annual Report on Form 10-K.

You may also obtain materials filed with the SEC by Integrys Energy Group and WPSC at the SEC Public Reference Room at 100 F Street, N.E., Washington, DC 20549. To obtain information on the operation of the Public Reference Room, you may call 1-800-SEC-0330. You may also view reports, proxy statements and other information regarding Integrys Energy Group and WPSC (including exhibits), filed with the SEC, at their web site at www.sec.gov.

-23-


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 we face. Additional risks and uncertainties not presently known or that we currently believe to be immaterial may also adversely affect us.

We may not successfully integrate pending or future acquisitions into our operations or otherwise achieve the anticipated benefits of those acquisitions.

As part of our growth strategy, we continue to pursue a disciplined acquisition strategy. While we expect to identify cost savings and growth opportunities before we acquire companies or assets, we may not be able to achieve these anticipated benefits due to, among other things:

Delays or difficulties in completing the integration of acquired companies or assets;
Higher than expected costs or a need to allocate additional resources to manage unexpected operating difficulties;
Parameters imposed or delays caused by regulatory agencies;
Reliance on inaccurate assumptions in evaluating the expected benefits of a given acquisition;
Inability to retain key employees or customers of acquired companies; and
Assumption of liabilities not identified in the due diligence process.

These risks apply to our recently completed acquisition of Aquila's Michigan and Minnesota natural gas distribution operations as well as our merger with Peoples Energy which closed on February 21, 2007.

Integrys Energy Group and Peoples Energy entered into the merger agreement with the expectation that the merger would result in various benefits, including, among other things, synergies, cost savings and operating efficiencies. Although we expect to achieve these anticipated benefits of the merger, achieving them is subject to a number of uncertainties, including:

the extent to which regulatory authorities will require the combined company to share a disproportionate amount of the expected or achieved synergies of the merger with customers, any of which may have an adverse effect on the combined company;
resolution of pending and future rate cases and negotiations (including the recovery of deferred costs) and other regulatory decisions impacting Integrys Energy Groupís regulated businesses, including the rate treatment of synergies and the cost to achieve those synergies;
the ability of the two companies to combine certain of their operations or take advantage of expected growth opportunities;
general market and economic conditions;
general competitive factors in the marketplace; and
higher than expected costs required to achieve the expected synergies.

No assurance can be given that these benefits will be achieved or, if achieved, the timing of their achievement. Failure to achieve these anticipated benefits could result in increased costs and decreases in the amount of expected revenues or net income of the combined company.

The integration of Peoples Energy following the merger will present significant challenges that may result in a decline in the anticipated potential benefits of the merger.

The merger involves the combination of two companies that previously operated independently. The difficulties of combining the companies' operations include, but are not limited to:

combining the best practices of two companies, including utility operations, non-regulated energy marketing operations and staff functions;
the necessity of coordinating geographically separated organizations, systems and facilities;
integrating personnel with diverse business backgrounds and organizational cultures;
 
-24-


 
reducing the costs associated with each company's operations; and
preserving important relationships of both companies and resolving potential conflicts that may arise.
 
The process of combining operations could cause an interruption of, or loss of momentum in, the activities of one or more of the combined company's businesses and the possible loss of key personnel. The diversion of management's attention and any delays or difficulties encountered in connection with the integration of the two companies' operations could have an adverse effect on the business, results of operations, financial condition or prospects of the now combined company.

Integrys Energy Group expects the merger to generate potential pre-tax cost synergy savings of $94 million for the combined company on an annualized basis by the end of the fifth full year of operations following completion of the merger (excluding costs of integration). These savings may not be realized within the time periods contemplated, or at all.

Integrys Energy Group will incur significant transaction, merger-related and restructuring costs in connection with the merger with Peoples Energy.

Integrys Energy Group expects to incur costs associated with combining the operations of two companies, as well as transaction fees and other costs related to the merger. Integrys Energy Group will also incur restructuring and integration costs in connection with the merger. The estimated total cost of accomplishing the merger and achieving synergies and cost savings is approximately $186 million in transaction and integration costs (excluding internal labor costs), most of which will be incurred through 2010. The costs related to restructuring will be treated as a liability and will be included in the total purchase price or expensed as a cost of the ongoing results of operations, depending on the nature of the restructuring activity. Although Integrys Energy Group expects the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, to offset incremental transaction, merger-related and restructuring costs over time, any net benefit may not be achieved in the near term, or at all.

Integrys Energy Group has recorded goodwill that could become impaired and adversely affect the company's operating results.

The merger with Peoples Energy and the acquisition of gas distribution assets from Aquila are accounted for as purchases by Integrys Energy Group in accordance with generally accepted accounting principles. Under the purchase method of accounting, the assets and liabilities will be recorded at their respective fair values at the date of acquisition and added to those of Integrys Energy Group. The reported financial condition and results of operations of Integrys Energy Group issued after completion of the merger will reflect Peoples Energy balances and results after completion of the merger, but will not be restated retroactively to reflect the historical financial position or results of operations of Peoples Energy for periods prior to the merger. Following completion of the merger, the earnings of the combined company will reflect purchase accounting adjustments.
 
Under the purchase method of accounting, the total purchase price will be allocated to Peoples Energy's tangible assets and liabilities and identifiable intangible assets based on their fair values as of the date the merger was completed. The excess of the purchase price over those fair values will be recorded as goodwill. We expect that the merger will result in a significant amount of goodwill based upon the application of purchase accounting. To the extent the value of goodwill or intangibles becomes impaired, Integrys Energy Group may be required to incur material charges relating to such impairment. Such a potential impairment charge could have a material impact on the combined company's operating results.

Integrys Energy Groupís oil and natural gas producing operations involve many risks associated with estimates and assumptions used in making capital expenditure decisions.

In addition to the operational risks described above, the oil and natural gas drilling operations are also subject to the risk of not encountering commercially productive reservoirs and Integrys Energy Group may

-25-


not recover all or any portion of its investment in those wells. Drilling for natural gas and oil can be unprofitable, not only because of dry holes but also due to wells that are productive but do not produce sufficient net reserves to return a profit at then realized prices after deducting drilling, operating, production taxes and other costs.

In addition, estimating quantities of proved natural gas and oil reserves is a complex process that involves significant interpretations of technical data and assumptions that result in reserve estimates being inherently imprecise. Integrys Energy Group utilizes a 10% discount factor when estimating the value of its reserves, as prescribed by the SEC, and this may not necessarily represent the most appropriate discount factor, given actual interest rates and risks to which the production business or the natural gas and oil industry, in general, are subject. Any significant variations from the interpretations or assumptions used in the estimates or changes of conditions could cause the estimated quantities and net present value of the Integrys Energy Groupís reserves to differ materially from amounts disclosed in this document.

We are subject to changes in government regulation, which may have a negative impact on our business, financial position and results of operations.

We are subject to comprehensive regulation by several federal and state regulatory agencies, which significantly influences our operating environment and may affect our ability to recover costs from utility customers. In particular, the PSCW, MPSC, MPUC, FERC, SEC, EPA, Minnesota Office of Pipeline Safety and the WDNR regulate many aspects of our utility operations, including siting and construction of facilities, conditions of service, the issuance of securities and the rates that we can charge customers. We are required to have numerous permits, approvals and certificates from these agencies to operate our business. On February 21, 2007, the merger with Peoples Energy was closed. Peoples Energy's primary regulated natural gas distribution subsidiaries are subject to regulation by the ICC.

The rates our regulated utilities are allowed to charge for their retail and wholesale services are some of the most important items influencing our business, financial position, results of operations and liquidity.

We are unable to predict the impact on our business and operating results from the future regulatory activities of any of these agencies. Changes in regulations or the imposition of additional regulations may require us to incur additional expenses or change business operations, which may have an adverse impact on our results of operations. In addition, federal regulatory reforms may produce unexpected changes and costs in the public utility industry.

We may not complete construction projects within estimated project costs.

WPSC is currently in the process of constructing the 500-megawatt Weston 4 base-load generation facility at an estimated cost of $779 million (including the coal trains). WPSC is responsible for 70% of these costs. This and other projects also may be subject to joint ownership or operation agreements, completion of which will impact estimated project costs.

This a very large and complex construction project, subject to numerous unpredictable events that could affect our ability to timely complete construction within estimated costs. We may not be able to meet these construction estimates due to, among other things:

Fluctuating or unanticipated construction costs;
Supply delays;
Legal claims; and
Environmental regulation.

We may not utilize Section 29/45K synthetic fuel production tax credits.

We have significantly reduced our consolidated federal income tax liability for the past several years through tax credits available to us under Section 29/45K of the Internal Revenue Code for the production and sale of solid synthetic fuel from coal. We have not fully utilized Section 29/45K tax credits previously

-26-


available to us. Our ability to fully utilize the Section 29/45K tax credits available to us in connection with our interest in the production facility will depend on whether the amount of our federal taxable income and related income tax liability is sufficient to permit the use of such credits. The Internal Revenue Service strictly enforces compliance with all of the technical requirements of Section 29/45K. Section 29/45K tax credits are currently scheduled to expire at the end of 2007.

Any disallowance of some or all of those tax credits could materially affect our tax obligations and may also result in a reduction of the level of synthetic fuel production at the facility, thus reducing the likelihood and amount of future payments from other participants in the project. Future tax legislation and Internal Revenue Service review may also affect the value of the credits and of our share of the facility. At this time, we cannot predict the potential for or the outcome of any Internal Revenue Service review.

Our operations are subject to risks beyond our control, including but not limited to weather, terrorist attacks or related acts of war.

Our revenues are affected by the demand for electricity and natural gas. That demand can vary greatly based upon:

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

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 our facilities due to storms, natural disasters, wars, terrorist acts and other catastrophic events, in excess of reserves established for such repairs, may adversely impact our 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 our results of operations and financial condition in unpredictable ways. These actions could also result in disruptions of power and fuel markets. In addition, our natural gas distribution system and pipelines could be directly or indirectly harmed by future terrorist activity.

Costs of environmental compliance, liabilities, fines, penalties and litigation could exceed our 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 clean-up and compliance costs and the possibility that changes will be made to the current environmental laws and regulations. Any future changes in the interpretation of the Clean Air Act's New Source Review provisions could potentially increase operating and maintenance costs substantially.
 
On March 15, 2005, the EPA, adopted the Clean Air Mercury Rule, which is intended to reduce mercury emissions from coal-fired generation plants. The EPA has also issued the Clean Air Interstate Rule requiring reductions of sulfur dioxide and nitrogen oxide emissions. In addition, the possibility exists of future regulation of greenhouse gases emitted from generation facilities. Integrys Energy Group cannot be certain how these rules will affect it. There is also uncertainty in quantifying liabilities under environmental laws that impose joint and several liabilities on all potentially responsible parties.
 
Citizen groups that feel there are compliance issues not sufficiently enforced by environmental regulatory agencies may bring citizen enforcement actions against us. Such actions could seek penalties, injunctive relief and costs of litigation.
 

-27-


Any change in our ability to sell electricity generated from our nonregulated facilities at market-based rates may impact earnings.
 
The FERC has authorized us to sell generation from our nonregulated facilities at market prices. The FERC retains the authority to modify or withdraw our market based rate authority. If the FERC determines that the market is not workably competitive, that we possess market power or that we are not charging just and reasonable rates, it may require our nonregulated subsidiaries to sell power at a price based upon the costs incurred in producing the power. Our revenues and profit margins may be negatively affected by any reduction by the FERC of the rates we may receive.

Fluctuating commodity prices may reduce regulated and nonregulated energy margins.

Our regulated energy margins are directly affected by commodity costs related to coal, natural gas and other fuels used in the electric generation process. The commodity price of market purchases of electricity also directly affects our regulated energy margins.

Higher commodity prices increase energy prices and may impact customer demand for energy in the nonregulated market and increase counterparty risk. This may stress margins at our nonregulated subsidiaries.

Integrys Energy Services may experience increased expenses, including interest costs and uncollectibles, higher working capital requirements and possibly some reduction in volumes sold as a result of any increase in the cost of fuel or purchased power. If market prices for electric energy decline below the cost of production at our nonregulated facilities, these units may be temporarily shut down and alternative sources of energy would need to be found to meet energy commitments economically.

A reduction in our credit ratings could materially and adversely affect our business, financial position, results of operations and liquidity.

We cannot be sure that any of our 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 its judgment, circumstances in the future so warrant. Any downgrade could:

Increase our borrowing costs;
Require us to pay a higher interest rate in future financings and possibly reduce the potential pool of creditors;
Increase our borrowing costs under certain of our existing credit facilities;
Limit our access to the commercial paper market; and
Limit the availability of adequate credit support for Integrys Energy Services' operations.

Actual results could differ from estimates used to prepare our financial statements.

In preparing the financial statements in accordance with generally accepted accounting principles, 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 these estimates and assumptions, see ''Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies'' in this Annual Report on Form 10-K.

-28-


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

We use derivative instruments, including futures, forwards, options and swaps, to manage our commodity and financial market risks. In addition, we purchase and sell commodity-based contracts in the natural gas and electric energy markets for trading purposes. In the future, we could recognize financial losses on these contracts as a result of volatility in the market values of the underlying commodities or if a counterparty fails to perform under a contract. In the absence of actively quoted market prices and pricing information from external sources, the valuation of these 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. Additionally, realized values could differ from values determined by management.

For additional information concerning derivatives and commodity-based trading contracts, see Note 3 - Risk Management Activities in this Annual Report on Form 10-K.

We are subject to provisions that can limit merger and acquisition opportunities for our 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 our articles of incorporation and bylaws may delay or frustrate the removal of incumbent directors and may prevent or delay a merger, tender offer or proxy contest involving our company that is not approved by our board of directors, even if the shareholders believe that such events may be beneficial to their 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 our company without the approval of our board of directors.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.


-29-


ITEM 2. PROPERTIES

A. REGULATED

WPSC Facilities

The following table summarizes information on the electric generation facilities of WPSC, including owned or jointly owned facilities as of December 31, 2006:
 
Type
Name
Location
Fuel
Rated
Capacity
(Megawatts)
(a)
           
Steam
Pulliam (6 units)
Green Bay, WI
Coal
378.5
 
 
Weston (3 units)
Wausau, WI
Coal
475.8
 
 
Columbia Units 1 and 2
Portage, WI
Coal
354.1
(b)
 
Edgewater Unit 4
Sheboygan, WI
Coal
   100.9
(b)
Total Steam
     
1,309.3
 
           
Hydroelectric
Alexander
Lincoln County, WI
Hydro
2.2
 
 
Caldron Falls
Marinette County, WI
Hydro
6.8
 
 
Castle Rock
Adams County, WI
Hydro
12.9
(b)
 
Grand Rapids
Menominee County, WI
Hydro
3.3
 
 
Grandfather Falls
Lincoln County, WI
Hydro
17.2
 
 
Hat Rapids
Oneida County, WI
Hydro
0.6
 
 
High Falls
Marinette County, WI
Hydro
1.1
 
 
Jersey
Lincoln County, WI
Hydro
0.2
 
 
Johnson Falls
Marinette County, WI
Hydro
0.9
 
 
Merrill
Lincoln County, WI
Hydro
1.0
 
 
Otter Rapids
Vilas County, WI
Hydro
0.3
 
 
Peshtigo
Marinette County, WI
Hydro
0.2
 
 
Petenwell
Adams County, WI
Hydro
8.2
(b)
 
Potato Rapids
Marinette County, WI
Hydro
0.4
 
 
Sandstone Rapids
Marinette County, WI
Hydro
0.8
 
 
Tomahawk
Lincoln County, WI
Hydro
2.3
 
 
Wausau
Marathon County, WI
Hydro
      2.9
 
Total Hydroelectric
     
61.3
 
           
Combustion
De Pere Energy Center
De Pere, WI
Natural Gas
184.2
 
Turbine and
Eagle River
Eagle River, WI
Distillate Fuel Oil
4.1
 
Diesel
Oneida Casino
Green Bay, WI
Distillate Fuel Oil
3.9
 
 
Juneau #31
Adams County, WI
Distillate Fuel Oil
7.3
(b)
 
West Marinette #31
Marinette, WI
Natural Gas
39.5
 
 
West Marinette #32
Marinette, WI
Natural Gas
39.0
 
 
West Marinette #33
Marinette, WI
Natural Gas
52.2
(b)
 
Weston #31
Marathon County, WI
Natural Gas
16.1
 
 
Weston #32
Marathon County, WI
Natural Gas
49.5
 
 
Pulliam #31
Green Bay, WI
Natural Gas
     75.4
 
Total Combustion Turbine and Diesel
   
471.2
 
           
Wind
Lincoln
Kewaunee County, WI
Wind
1.7
 
 
Glenmore (2 units)
Brown County, WI
Wind
           -
 
Total Wind
     
       1.7
 
           
Total System
     
1,843.5
 

(a)
Based on capacity ratings for July 2007. 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.
 
(b)
These facilities are jointly owned by WPSC and various other utilities. Wisconsin Power and Light Company operates the Columbia and Edgewater units. Wisconsin River Power Company operates the Castle Rock, Petenwell and Juneau units. WPSC and Marshfield Electric and Water Department jointly own West Marinette 33, which WPSC operates. The capacity indicated is our portion of total plant capacity based on the percent of ownership.
 
As of December 31, 2006, WPSC owned 120 distribution substations and 21,323 miles of electric distribution lines.

-30-



Natural gas properties include approximately 7,694 miles of main, 86 gate and city regulator stations and 289,651 lateral services. All natural gas facilities are located in Wisconsin except for distribution facilities in and near the City of Menominee, Michigan.

Substantially all of WPSC's utility plant is subject to a first mortgage lien.

UPPCO Facilities

The following table summarizes information on the electric generation facilities of UPPCO as of December 31, 2006:
Type
Name
Location
Fuel
Rated
Capacity (Megawatts)
(a)
           
Steam
Warden
L'Anse, MI
Gas
18.8
(b)
Total Steam
     
18.8
 
           
Hydroelectric
Victoria (2 units)
Ontonagon County, MI
Hydro
10.6
 
 
Hoist (3 units)
Marquette County, MI
Hydro
1.2
 
 
McClure (2 units)
Marquette County, MI
Hydro
3.8
 
 
Prickett (2 units)
Houghton County, MI
Hydro
0.4
 
 
Autrain (2 units)
Alger County, MI
Hydro
0.5
 
 
Cataract
Marquette County, MI
Hydro
0.3
 
 
Escanaba #1
Delta County, MI
Hydro
1.0
 
 
Escanaba #3
Delta County, MI
Hydro
1.2
 
 
Boney Falls
Delta County, MI
Hydro
  1.3
 
Total Hydroelectric
     
20.3
 
           
Combustion Turbine
Portage
Houghton, MI
Oil
19.7
 
 
Gladstone
Gladstone, MI
Oil
20.3
 
Total Combustion Turbine
     
40.0
 
           
Total System
     
79.1
 

(a)
Based on July 2007 rated capacity.
 
(b)
The J. H. Warden station was taken out of service on January 1, 1994. The facility was put into service for a short period after the Dead River Flood in 2004 and is now once again in standby or inactive reserve status.

UPPCO owns 3,070 miles of electric distribution lines.

Substantially all of UPPCO's utility plant is subject to a first mortgage lien.

MERC

Natural gas properties include approximately 4,323 miles of main. Substantially all natural gas facilities are located in Minnesota.

MGUC

Natural gas properties include approximately 3,562 miles of distribution main, 159 miles of transmission main and 27 gate and city regulator stations. MGUC also owns a 3.6 billion cubic foot natural gas storage field. All natural gas facilities are located in Michigan.

-31-



B. NONREGULATED

Integrys Energy Group, Inc.

Asset Management Strategy

Integrys Energy Group's asset management strategy includes the continual evaluation of all properties and businesses held by Integrys Energy Group to identify their best use. Integrys Energy Group will evaluate whether the best use of the property or business is in current operations or if sale and reinvestment of proceeds is in the best interest of Integrys Energy Group, its shareholders and customers.

As part of this strategy, in April 2006, Integrys Energy Group completed the sale of its one-third interest in Guardian Pipeline, L.L.C., to Northern Border Partners, L.P. for approximately $38.5 million with an after-tax gain of $3.7 million.

In 2005, UPPCO identified approximately 7,300 acres of excess land associated with its hydroelectric facilities. In December 2005, UPPCO sold 1,366 acres of land along the Bond Falls Reservoir, Boney Falls Basin and Cataract Basin, which were no longer needed for operations of UPPCO. UPPCO is currently working with various interested parties to develop a sales strategy for the remainder of these properties.

In 2006, Integrys Energy Services sold its 81.5% interest in a 3 billion cubic foot natural gas storage field in Kimball, Michigan for $19.9 million and recognized a $5.4 million after-tax gain from the sale.

In July 2006, Integrys Energy Services sold its subsidiary Sunbury Generation, LLC to Corona Power, LLC. Sunbury Generation's primary asset was the Sunbury generation plant, located in Shamokin Dam, Pennsylvania. The gross proceeds received from the plant were approximately $34 million with a total after-tax gain of $12.5 million.

In January 2007, Integrys Energy Services completed the sale of WPS Niagara Generation, LLC, for approximately $31 million, subject to post closing adjustments. The after-tax gain on this transaction is approximately $15 million.

-32-


Integrys Energy Services Generation Facilities
 
The following table summarizes information on the electric generation facilities owned by Integrys Energy Services, including jointly owned facilities as of December 31, 2006:

Type
Name
Location
Fuel
Rated
Capacity
(Megawatts)
(a)
           
Steam
Caribou
Caribou, ME
Oil
21.7
(b)
 
Niagara Falls
Niagara Falls, NY
Coal
50.1
(c)
 
Stoneman
Cassville, WI
Coal
45.4
 
 
Westwood
Tremont, PA
Culm
  30.0
 
Total Steam
     
147.2
 
           
Combined Cycle
Syracuse
Syracuse, NY
Gas/Oil
86.4
 
 
Beaver Falls
Beaver Falls, NY
Gas/Oil
78.9
 
 
Combined Locks
Combined Locks, WI
Gas
  46.8
(d)
Total Combined Cycle
     
212.1
 
           
Hydroelectric
Tinker
New Brunswick, Canada
Hydro
34.5
 
 
Squa Pan
Ashland, ME
Hydro
1.2
 
 
Caribou
Caribou, ME
Hydro
   0.9
 
Total Hydroelectric
 
 
 
36.6
 
           
Combustion Turbine
Caribou
Caribou, ME
Diesel
7.0
 
and Diesel
Tinker
New Brunswick, Canada
Diesel
1.0
 
 
Flo's Inn
Presque Isle, ME
Diesel
4.2
 
 
Loring
Limestone, ME
Diesel
    5.1
 
Total Combustion
Turbine and Diesel
     
  17.3
 
           
Total System
     
413.2
 
 
(a)
Based on summer rated capacity.
   
(b)
Caribou Steam Unit 1 was reactivated on December 12, 2006 at 9 megawatts. Caribou Steam Unit 2 was reactivated on January 6, 2006 for a total (Units 1 and 2) of 21.7 megawatts.
   
(c)
The Niagara Falls facility was sold on January 31, 2007.
   
(d)
Integrys Energy Services also has an additional five megawatts of capacity available at this facility through the lease of an additional steam turbine.


-33-


ITEM 3. LEGAL PROCEEDINGS

For information on material legal proceedings and matters related to Integrys Energy Group and its subsidiaries, see Note 17 - Commitments and Contingencies to Integrys Energy Group's Notes to Consolidated Financial Statements.


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

At a special meeting of shareholders on December 6, 2006, the shareholders of Integrys Energy Group approved the issuance of shares of its common stock (approximately 32 million shares) as contemplated by the Agreement and Plan of Merger, dated as of July 8, 2006 among WPS Resources Corporation, Wedge Acquisition Corp. and Peoples Energy Corporation. Also on December 6, 2006, the shareholders approved an amendment to Integrys Energy Groupís restated articles of incorporation to change its name from WPS Resources to Integrys Energy Group, Inc. The final vote was:

Votes
Approve the
Issuance of Shares
Approve Amendment to Articles of Incorporation
For
28,909,885
28,135,047
Against
1,018,890
1,758,283
Abstain
13,319,597
13,355,042
Total
43,248,372
43,248,372


-34-


ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANTS

A. Executive Officers of Integrys Energy Group
as of January 1, 2007
       
Name and Age
 
Position and Business
Experience During Past Five Years
Effective
Date
       
Larry L. Weyers
61
Chairman, President and Chief Executive Officer
02-12-98
       
Thomas P. Meinz
60
Executive Vice President - Public Affairs
09-12-04
   
Senior Vice President - Public Affairs
12-24-00
       
Phillip M. Mikulsky
58
Executive Vice President - Development
09-12-04
   
Senior Vice President - Development
02-12-98
       
Joseph P. O'Leary
52
Senior Vice President and Chief Financial Officer
06-04-01
       
Bernard J. Treml
57
Senior Vice President - Human Resources
12-19-04
   
Vice President - Human Resources
02-12-98
       
Diane L. Ford
53
Vice President - Controller and Chief Accounting Officer
07-11-99
       
Barbara A. Nick
48
Vice President - Corporate Services
07-18-04
   
Assistant Vice President - Corporate Services
04-14-02
   
Manager - Corporate Services
11-20-00
       
Bradley A. Johnson
52
Vice President and Treasurer
07-18-04
   
Treasurer
06-23-02
   
Assistant Treasurer
04-01-01
       
Barth J. Wolf
49
Secretary and Manager - Legal Services
09-19-99

   
NOTE:
All ages are as of December 31, 2006. 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 the Registrants. 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.


-35-



B. Executive Officers of WPSC
as of January 1, 2007
       
Name and Age
Position and Business
Experience During Past Five Years
Effective
Date
       
Larry L. Weyers
61
Chairman and Chief Executive Officer
08-15-04
   
Chairman, President and Chief Executive Officer
04-14-02
   
Chairman and Chief Executive Officer
02-12-98
       
Lawrence T. Borgard
45
President and Chief Operating Officer - Energy Delivery
08-15-04
   
Vice President - Distribution and Customer Service
11-25-01
       
Charles A. Schrock
53
President and Chief Operating Officer - Generation
08-15-04
   
Senior Vice President of WPS Resources Corporation
09-14-03
   
President of WPS Power Development, Inc.
11-11-01
       
Thomas P. Meinz
60
Executive Vice President - Public Affairs
09-12-04
   
Senior Vice President - Public Affairs
12-24-00
       
Joseph P. O'Leary
52
Senior Vice President and Chief Financial Officer
06-04-01
       
Bernard J. Treml
57
Senior Vice President - Human Resources
12-19-04
   
Vice President - Human Resources
05-09-94
       
David W. Harpole
51
Vice President - Energy Supply - Projects
02-14-04
   
Vice President - Energy Supply
04-14-02
   
Assistant Vice President Energy Supply
11-12-00
       
Diane L. Ford
53
Vice President - Controller and Chief Accounting Officer
07-11-99
       
Bradley A. Johnson
52
Vice President and Treasurer
07-18-04
   
Treasurer
06-23-02
   
Assistant Treasurer
04-01-01
       
Barth J. Wolf
49
Secretary and Manager - Legal Services
09-19-99
       
NOTE:
All ages are as of December 31, 2006. 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 the Registrants. 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.


-36-



ITEM 5.
MARKET FOR REGISTRANTS' 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
High
Low
       
2006
     
1st Quarter
$ .565
$57.75
$49.02
2nd Quarter
.565
51.60
47.39
3rd Quarter
.575
52.88
47.67
4th Quarter
.575
54.83
49.18
Total
$2.280
   
       
2005
     
1st Quarter
$ .555
$54.90
$47.67
2nd Quarter
.555
56.90
51.11
3rd Quarter
.565
60.00
54.50
4th Quarter
.565
58.95
51.50
Total
$2.240
   

Integrys Energy Group common stock is traded on the New York Stock Exchange under the ticker symbol "TEG." Integrys Energy Group is the sole holder of WPSC's common stock.

Dividend Restrictions

For information on dividend restrictions related to Integrys Energy Group and any of its subsidiaries, see Note 21 - Common Equity to Integrys Energy Group's Notes to Consolidated Financial Statements.

Common Stock
 
Listed:
New York Stock Exchange
   
Ticker Symbol:
TEG
   
Transfer Agent and Registrar:
American Stock Transfer & Trust Company
59 Maiden Lane
New York, NY 10038
 
As of February 22, 2006, there were 37,683 common stock shareholders of record.

See Item 11 of this Annual Report on Form 10-K for information regarding our equity compensation plans.
 
-37-

 
 
                       
ITEM 6. SELECTED FINANCIAL DATA
                     
                       
INTEGRYS ENERGY GROUP, INC.
 
COMPARATIVE FINANCIAL STATEMENTS AND
 
FINANCIAL AND OTHER STATISTICS (2002 TO 2006)
 
                       
                       
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)
 
2006 (3)
 
2005
 
2004
 
2003
 
2002
 
                                 
Total revenues (1)
 
$
6,890.7
 
$
6,825.5
 
$
4,876.1
 
$
4,309.8
 
$
1,456.6
 
                                 
Income from continuing operations
   
151.6
   
150.6
   
156.6
   
110.7
   
119.1
 
                                 
Income available for common shareholders
   
155.8
   
157.4
   
139.7
   
94.7
   
109.4
 
                                 
Total assets
   
6,861.7
   
5,462.5
 <