CONDENSED NOTES TO FINANCIAL STATEMENTS (Unaudited)

September 30, 2014

Note 1— Basis of Presentation

As used in these notes, the term "financial statements" refers to the condensed consolidated financial statements. This includes the condensed consolidated statements of income, condensed consolidated statements of comprehensive income, condensed consolidated balance sheets, and condensed consolidated statements of cash flows, unless otherwise noted. In this report, when we refer to "us," "we," "our," or "ours," we are referring to Integrys Energy Group, Inc.

We prepare our financial statements in conformity with the rules and regulations of the SEC for Quarterly Reports on Form 10-Q and in accordance with GAAP. Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for annual financial statements. These financial statements should be read in conjunction with the consolidated financial statements and footnotes in our Annual Report on Form 10-K for the year ended December 31, 2013 . Financial results for an interim period may not give a true indication of results for the year.

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

Reclassification

Assets and liabilities associated with the sale of UPPCO and the sale of eight ITF compressed natural gas fueling stations were reclassified as held for sale on our December 31, 2013, balance sheet to be consistent with the current period presentation. See Note 4, Dispositions, for more information on these sales.

Note 2— Proposed Merger with Wisconsin Energy Corporation

In June 2014, we entered into an Agreement and Plan of Merger (Agreement) with Wisconsin Energy Corporation (Wisconsin Energy). Under this Agreement, upon the close of the transaction our shareholders will receive 1.128 shares of Wisconsin Energy common stock and $18.58 in cash for each share of our common stock then owned. In addition, under the Agreement all of our unvested stock-based compensation awards will fully vest upon the close of the transaction and will be paid out in cash to award recipients. Upon closing of the transaction, Integrys Energy Group shareholders will own approximately 28% of the combined company, and Wisconsin Energy shareholders will own approximately 72% .

The combined entity will be named WEC Energy Group, Inc. and will serve more than 4.3 million total natural gas and electric customers across Wisconsin, Illinois, Michigan, and Minnesota.

This transaction was approved unanimously by the Boards of Directors of both companies. It is subject to approvals from the FERC, Federal Communications Commission, PSCW, ICC, MPSC, and MPUC. In addition, this transaction is subject to the approval of the shareholders of both companies, for which special shareholder meetings will be held on November 21, 2014. On October 24, 2014, the Department of Justice closed its review of the transaction and the Federal Trade Commission granted early termination of the waiting period under the Hart-Scott-Rodino Act. This transaction is also subject to other customary closing conditions. We expect the transaction to close in the summer of 2015.

Note 3— Acquisitions

Agreement to Purchase Alliant Energy Corporation's Natural Gas Distribution Business in Southeast Minnesota

In September 2013, MERC entered into an agreement to purchase Alliant Energy Corporation's natural gas distribution business in southeast Minnesota. This transaction is subject to state and federal regulatory approvals. The purchase price will be based on book value as of the closing date, which is expected to approximate $14 million . We anticipate closing on this transaction by the end of the first quarter of 2015. It will not be material to us.

Acquisition of Fox Energy Center

In March 2013, WPS acquired all of the equity interests in Fox Energy Company LLC for $391.6 million . Fox Energy Company LLC was dissolved into WPS immediately after the purchase.

The purchase included the Fox Energy Center, a 593 -megawatt combined-cycle electric generating facility located in Wisconsin, along with associated contracts. Fox Energy Center is a dual-fuel facility, equipped to use fuel oil, but being run primarily on natural gas. This plant gives WPS a more balanced mix of owned electric generation, including coal, natural gas, hydroelectric, wind, and other renewable sources. In giving its approval for the purchase, the PSCW stated that the purchase price was reasonable and will benefit ratepayers.

The purchase price was allocated based on the estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition, as follows:

Prior to the purchase, WPS supplied natural gas for the facility and purchased 500 megawatts of capacity and the associated energy output under a tolling arrangement. WPS paid $50.0 million for the early termination of the tolling arrangement. This amount was recorded as a regulatory asset, as WPS is authorized recovery by the PSCW. The amount is being amortized over a nine -year period that began on January 1, 2014.

WPS received regulatory approval to defer incremental costs incurred in 2013 associated with the purchase of the facility. These costs are included in WPS's 2015 proposed retail electric rate increase. See Note 22, Regulatory Environment, for more information . WPS's rate order effective January 1, 2014, included the costs of operating the Fox Energy Center.

Pro forma adjustments to our revenues and earnings prior to the date of acquisition would not be meaningful or material. Prior to the acquisition, the Fox Energy Center was a nonregulated plant and sold all of its output to third parties, with most of the output purchased by WPS. The plant is now part of WPS's regulated fleet, used to serve its customers.

Note 4— Dispositions

Dispositions

IES Segment – Sale of IES Retail Energy Business

On November 1, 2014, we sold IES's retail energy business to Exelon Generation Company, LLC (Exelon) for $319.2 million . The purchase price is subject to adjustments for working capital. Based on the terms of the sale agreement and the carrying values of assets and liabilities being sold, had the transaction closed on September 30, 2014, we would have recorded a pre-tax loss on the sale of approximately $29 million . This amount is subject to change based on the values at the closing date, including values associated with forward energy prices. Included in the sale transaction are commodity contracts that do not meet the GAAP definition of derivative instruments, and therefore are not reflected on the balance sheets. In accordance with GAAP, expected gains or losses related to nonderivative commodity contracts are not recognized until the contracts are settled. As part of the purchase agreement, we will continue to hold guarantees supporting the IES retail energy business for up to six months following the sale. Exelon is obligated under the purchase agreement to replace these guarantees with its own credit support for the IES retail energy business. See Note 14, Guarantees, for more information . Following the sale, we are providing certain administrative and operational services to Exelon during a transition period of up to 15 months .

The retail energy business consisted of mostly financial assets and liabilities; therefore, it did not qualify as held for sale under the applicable accounting guidance. In the third quarter of 2014, we early adopted the guidance in FASB ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." Under this guidance, the results of operations of a component of a business that is sold are only accounted for as discontinued operations if the sale represents a shift in strategy for the entity. The sale of the retail energy business is a result of a previously announced shift in our strategy to focus on our regulated businesses. Therefore, its results of operations will be classified as discontinued operations beginning in the fourth quarter of 2014.

The June 2014 announcement of the potential sale triggered an interim goodwill impairment test. See Note 9, Goodwill and Other Intangible Assets, for more information .

Electric Utility Segment – Sale of UPPCO

In August 2014, we sold all of the stock of UPPCO to Balfour Beatty Infrastructure Partners LP (BBIP) for $332.2 million ( $199.3 million after-tax). The purchase price is still subject to potential adjustments for working capital. In the third quarter of 2014, we recorded a pre-tax gain of $86.5 million related to the sale of UPPCO. On the statements of income, the gain is presented net of transaction costs of $0.2 million and $1.1 million for the three and nine months ended September 30, 2014, respectively. Following the sale, we are providing certain administrative and operational services to UPPCO during a transition period of 18 to 30 months.

The sale of UPPCO did not meet the requirements under the applicable accounting guidance to qualify as discontinued operations as WPS has significant continuing cash flows related to certain power purchase transactions with UPPCO that are continuing after the sale. Therefore, UPPCO's results of operations through the sale date remain in continuing operations.

The following table shows the carrying values of the major classes of assets and liabilities related to UPPCO classified as held for sale on the balance sheets:

In addition to the amounts in the table above, intercompany payables of $1.6 million at December 31, 2013 related to certain power purchase transactions with WPS that are continuing after the sale were eliminated during consolidation. As of the closing date, these payables were included in the sale and disclosed in the table above as current liabilities.

Holding Company and Other Segment – Sale of Compressed Natural Gas (CNG) Fueling Stations

On November 1, 2014, ITF sold eight CNG fueling stations to AMP Trillium LLC, a joint venture between ITF and AMP Americas LLC. ITF owns 30% and AMP Americas LLC owns 70% of AMP Trillium LLC. The fair value of the CNG fueling stations was $13.8 million . ITF received cash proceeds of $7.6 million , a $3.1 million note receivable from the buyer with a seven year term, and a $3.1 million equity interest in the joint venture to maintain its current ownership interest. Since two of the CNG fueling stations only began operating in October 2014, the purchase price is subject to potential adjustments for construction costs. In November 2014, we recorded a gain of $2.6 million related to the sale of the CNG fueling stations.

In the third quarter of 2014, we early adopted the guidance in FASB ASU 2014-08, as stated previously. The sale of the CNG stations does not represent a shift in our strategy. Therefore, the results of operations of the CNG fueling stations prior to the sale will remain in continuing operations.

For the CNG fueling stations, net property, plant, and equipment of $9.7 million and $5.3 million was classified as held for sale on the balance sheets at September 30, 2014 , and December 31, 2013 , respectively. These amounts were net of accumulated depreciation of $0.7 million and $0.3 million at September 30, 2014, and December 31, 2013, respectively.

IES Segment – Winnebago Energy Center

In May 2014, a fire significantly damaged the Winnebago Energy Center, a landfill-gas-to-electric facility owned by IES. Due to uncertainty surrounding the amount of the insurance settlement, IES was unable to determine if it would rebuild or abandon the Winnebago Energy Center in the second quarter of 2014. In August 2014, an insurance settlement was reached, and IES decided to abandon the facility. In the third quarter of 2014, IES received insurance proceeds of $5.8 million for the damage caused by the fire and recorded a pre-tax gain of $4.1 million .

In the third quarter of 2014, we early adopted the guidance in FASB ASU 2014-08, as stated previously. Based on this new guidance, the Winnebago Energy Center did not qualify as discontinued operations since it did not represent a shift in our strategy. Therefore, its results of operations prior to the fire remain in continuing operations.

  

Discontinued Operations

See Note 5, Cash and Cash Equivalents , for cash flow information related to discontinued operations.