We are a diversified energy holding company with regulated natural gas and electric utility operations (serving customers in Illinois, Michigan, Minnesota, and Wisconsin), nonregulated energy operations, and an approximate 34% equity ownership interest in ATC (a federally regulated electric transmission company operating in Wisconsin, Michigan, Minnesota, and Illinois).

Strategic Overview

Our goal is to create long-term value for shareholders and customers through growth in our core regulated businesses. We also have a nonregulated energy services business segment that is focused on growth within a controlled risk profile.

The essential components of our business strategy are:

Maintaining and Growing a Strong Regulated Utility Base - A strong regulated utility base is essential to maintaining a strong balance sheet, predictable cash flows, the desired risk profile, attractive dividends, and quality credit ratings. We believe the following projects have helped, or will help, maintain and grow our regulated utility base and meet our customers' needs:

• WPS's pending purchase of the Fox Energy Center, a 593-megawatt combined-cycle electric generating facility located in Wisconsin, in 2013

• The System Modernization and Reliability Project that WPS plans to begin in 2014 to underground certain electric distribution lines in northern Wisconsin

• WPS's continued investment in environmental projects to improve air quality and meet or exceed the requirements set by environmental regulators

• Our approximate 34% ownership interest in ATC, a transmission company that had over $3.3 billion of transmission assets at December 31, 2012. ATC plans to invest approximately $3.9 billion to $4.8 billion during the next ten years. Although ATC's equity requirements to fund its capital investments will primarily be met by earnings reinvestment, we plan to continue to fund our share of the equity portion of future ATC growth as necessary

• An accelerated annual investment in natural gas distribution facilities (primarily replacement of cast iron mains) at PGL.

For more detailed information on our capital expenditure program, see "Liquidity and Capital Resources, Capital Requirements."

Providing Safe, Reliable, Competitively Priced, and Environmentally Sound Energy and Related Services - Our mission is to provide customers with the best value in energy and related services. We strive to effectively operate a mixed portfolio of generation assets and prudently invest in new generation and distribution assets, while maintaining or exceeding environmental standards. This allows us to provide a safe, reliable, value-priced service to our customers. Our recent entry into the compressed natural gas fueling marketplace, while not currently significant, is complementary to our existing businesses and is consistent with our mission.

Operating a Nonregulated Energy Services Business Segment with a Controlled Risk and Capital Profile - Through our nonregulated Integrys Energy Services subsidiary, we provide retail natural gas and electric products to end-use customers in the northeast quadrant of the United States. This subsidiary is focused on operating within select retail electric and natural gas markets in our current market footprint where we have experience and believe we will have the most success growing our recurring retail customer based business. In addition, Integrys Energy Services continues to develop, acquire, own, and operate renewable energy projects, primarily distributed solar generation, in the United States. This strategy is intended to result in dependable cash and earnings contributions with a controlled risk and capital profile.

Integrating Resources to Provide Operational Excellence - We are committed to integrating resources of all our businesses, while meeting all applicable legal and regulatory requirements. This will provide the best value to customers and shareholders by leveraging the individual capabilities and expertise of each business and lowering costs. "Operational Excellence" initiatives have been implemented to reduce costs and encourage top performance in the areas of project management, process improvement, contract administration, and compliance.

Placing Strong Emphasis on Asset and Risk Management - Our asset management strategy calls for the continuous assessment of existing assets, the acquisition of assets, and contractual commitments to obtain resources that complement our existing business and strategy. The goal is to provide the most efficient use of resources while maximizing return and maintaining an acceptable risk profile. This strategy focuses on acquiring assets consistent with strategic plans and disposing of assets, including property, plant, and equipment and entire business units, that are no longer strategic to ongoing operations, are not performing as intended, or have an unacceptable risk profile. We maintain a portfolio approach to risk and earnings.

Our risk management strategy includes the management of market, credit, liquidity, and operational risks through the normal course of business. Forward purchases and sales of electric capacity, energy, natural gas, and other commodities and the use of derivative financial instruments, including commodity swaps and options, provide tools to reduce the risk associated with price movement in a volatile energy market. Each business unit manages the risk profile related to these instruments consistent with our risk management policies, which are

approved by the Board of Directors. The Corporate Risk Management Group, which reports through the Chief Financial Officer, provides corporate oversight.

Earnings Summary
                                          Year Ended December 31
(Millions, except per share                                                    Change in         Change in
amounts)                             2012          2011          2010       2012 Over 2011    2011 Over 2010
Natural gas utility operations    $    93.4     $   103.3     $    84.0           (9.6 )%           23.0  %
Electric utility operations           107.9         100.5         109.8            7.4  %           (8.5 )%
Electric transmission                  52.4          47.8          46.2            9.6  %            3.5  %
investment
Integrys Energy Services               41.1          (6.1 )         3.3            N/A               N/A
operations
Holding company and other             (13.4 )       (18.1 )       (22.4 )        (26.0 )%          (19.2 )%
operations
Net income attributed to common
shareholders                      $   281.4     $   227.4     $   220.9           23.7  %            2.9  %

Basic earnings per share          $    3.58     $    2.89     $    2.85           23.9  %            1.4  %
Diluted earnings per share        $    3.55     $    2.87     $    2.83           23.7  %            1.4  %

Average shares of common stock
Basic                                  78.6          78.6          77.5              -  %            1.4  %
Diluted                                79.3          79.1          78.0            0.3  %            1.4  %

2012 Compared with 2011

Our earnings for 2012 were $281.4 million, compared with $227.4 million for 2011. The $54.0 million increase in earnings was driven by:

• A $60.1 million after-tax increase in Integrys Energy Services' margins from noncash derivative and inventory fair value adjustments.

• A $33.7 million after-tax positive impact related to rate orders at the natural gas utilities, excluding items directly offset in operating expenses.

These increases were partially offset by:

• A $26.2 million after-tax decrease in natural gas utility margins due to lower sales volumes driven by warmer weather, net of decoupling.

• A $12.5 million decrease in income from discontinued operations at Integrys Energy Services. See Note 4, "Dispositions," for more information.

2011 Compared with 2010

Our earnings for 2011 were $227.4 million, compared with $220.9 million for 2010. The $6.5 million increase in earnings was driven by:

• A $24.4 million after-tax net decrease in operating expenses across all segments, driven by a decrease in employee benefit costs and lower depreciation and amortization expense.

• A $22.5 million decrease in losses from discontinued operations at Integrys Energy Services, primarily due to the impairment losses recorded in 2010 related to three generation plants. See Note 4, "Dispositions," for more information.

• A $15.4 million after-tax increase in Integrys Energy Services' realized margins.

• The $15.0 million positive year-over-year impact of tax adjustments recorded in 2011 and 2010 in connection with federal health care reform.

These increases were partially offset by:

• A $61.3 million after-tax decrease in Integrys Energy Services' margins from noncash derivative and inventory fair value adjustments.

• An $8.4 million after-tax decrease in electric utility margins, mainly caused by differences in WPS's 2011 electric rate order compared with the previous rate order.

Regulated Natural Gas Utility Segment Operations
                                          Year Ended December 31               Change in         Change in
(Millions, except degree days)       2012          2011          2010       2012 Over 2011     2011 Over 2010
Revenues                          $ 1,672.0     $ 1,998.0     $ 2,057.2          (16.3 )%           (2.9 )%
Purchased natural gas costs           775.0       1,101.4       1,152.0          (29.6 )%           (4.4 )%
Margins                               897.0         896.6         905.2              -  %           (1.0 )%

Operating and maintenance             527.5         523.6         541.9            0.7  %           (3.4 )%
expense
Depreciation and amortization         131.8         126.1         130.9            4.5  %           (3.7 )%
expense
Taxes other than income taxes          35.6          35.6          34.4              -  %            3.5  %

Operating income                      202.1         211.3         198.0           (4.4 )%            6.7  %

Miscellaneous income                    0.6           2.2           1.6          (72.7 )%           37.5  %
Interest expense                      (47.3 )       (48.4 )       (49.7 )         (2.3 )%           (2.6 )%
Other expense                         (46.7 )       (46.2 )       (48.1 )          1.1  %           (4.0 )%

Income before taxes               $   155.4     $   165.1     $   149.9           (5.9 )%           10.1  %

Retail throughput in therms
Residential                         1,324.8       1,541.5       1,496.4          (14.1 )%            3.0  %
Commercial and industrial             406.0         469.5         455.5          (13.5 )%            3.1  %
Other                                  75.3          61.3          53.7           22.8  %           14.2  %
Total retail throughput in          1,806.1       2,072.3       2,005.6          (12.8 )%            3.3  %
therms

Transport throughput in therms
Residential                           204.0         237.4         224.4          (14.1 )%            5.8  %
Commercial and industrial           1,557.9       1,559.7       1,504.0           (0.1 )%            3.7  %
Total transport throughput in       1,761.9       1,797.1       1,728.4           (2.0 )%            4.0  %
therms

Total throughput in therms          3,568.0       3,869.4       3,734.0           (7.8 )%            3.6  %

Weather
Average heating degree days           5,601         6,675         6,440          (16.1 )%            3.6  %

2012 Compared with 2011

Margins

Natural gas utility margins are defined as natural gas utility operating revenues less purchased natural gas costs. Management believes that natural gas utility margins provide a more meaningful basis for evaluating natural gas utility operations than natural gas utility revenues since we pass through prudently incurred natural gas commodity costs to our customers in current rates. There was an approximate 20% decrease in the average per-unit cost of natural gas sold during 2012, which had no impact on margins.

Regulated natural gas utility segment margins increased $0.4 million, driven by:

• An approximate $42 million net increase in margins due to rate orders. See Note 25, "Regulatory Environment," for more information.

?         The rate increases at PGL and NSG, effective January 21, 2012, and
          other impacts of rate design, had an approximate $48 million positive
          impact on margins.



?         A reduction in rates at WPS, effective January 1, 2012, resulted in an
          approximate $5 million negative impact on margins. The rate decrease
          was driven by reduced contributions to the Focus on Energy Program,
          which promotes residential and small business energy efficiency and
          renewable energy products. The margin impact from the reduction in
          contributions is offset by lower operating expenses.

?         MERC had an approximate $1 million decrease in margins in 2012
          primarily driven by the impact of a rate order from the MPUC finalized
          in January 2013. A preliminary order was received in July 2012 that
          adjusted 2011 interim rates in effect since February 1, 2011.

• An approximate $4 million net increase in margins related to certain riders at PGL and NSG. This increase was offset by an equal increase in operating expenses, resulting in no impact on earnings.

? PGL and NSG billed approximately $7 million more to customers for energy efficiency programs in 2012.

? PGL and NSG refunded approximately $2 million more to customers under bad debt riders in 2012.

?         PGL and NSG recovered approximately $1 million less for environmental
          cleanup costs at their former manufactured gas plant sites in 2012. The
          lower recovery reflects a pass-through to customers in rates of an
          environmental settlement received by NSG from a potentially responsible
          party's performance and payment bond. The impact of the settlement was
          partially offset by an increase in remediation activity at PGL during
          2012. See Note 15, "Commitment and Contingencies," for more information
          about the manufactured gas plant sites.

The above increases in margins were partially offset by an approximate $43 million net decrease in margins, including the impact of decoupling, due to a 7.8% decrease in volumes sold.

• Substantially warmer weather during 2012 drove an approximate $55 million decrease in margins. Heating degree days decreased 16.1%.

• Lower sales volumes excluding the impact of weather resulted in an approximate $6 million decrease in margins. Sales volumes were slightly lower due to lower use per customer.

• Decoupling impacts at certain natural gas utilities drove an approximate $18 million increase in margins. Decoupling does not cover all jurisdictions or customer classes.

?         Decoupling accruals in 2012 had an approximate $9 million positive
          impact on the year-over-year variance. Decoupling lessened the negative
          impact from some of the decreased sales volumes at WPS and MGU through
          higher future recoveries from customers. This was limited by an $8.0
          million decoupling cap that was reached by WPS during the second
          quarter of 2012. In 2012, reserves were recorded against all decoupling
          accruals at PGL and NSG after an ICC order declared these amounts may
          be subject to refund. See Note 25, "Regulatory Environment," for more
          information.



?         Decoupling accruals in 2011 had an approximate $9 million positive
          impact on the year-over-year variance. Decoupling lessened the positive
          impact in 2011 from some of the higher sales volumes at PGL, NSG, WPS,
          and MGU through higher future refunds to customers.

Operating Income

Operating income at the regulated natural gas utility segment decreased $9.2 million. This decrease was driven by a $9.6 million increase in operating expenses.

The increase in operating expenses was primarily related to:

• A $24.6 million increase in natural gas distribution costs, primarily at PGL. The increase was partially due to increased labor costs driven by annual wage increases, as well as additional employees required for compliance work related to inside safety inspections and corrosion review. Additional contractors were also needed for street restoration and pipe maintenance to replace employees that were moved to the AMRP project.

• A $5.7 million increase in depreciation and amortization expense resulting from increased investment in property and equipment, primarily driven by the AMRP.

• An approximate $4 million net increase at PGL and NSG driven by an increase in regulatory liabilities related to energy efficiency programs, partially offset by higher amortization of regulatory liabilities related to bad debt riders and lower amortization of regulatory assets related to environmental cleanup costs for manufactured gas plant sites. Margins increased by an equal amount, resulting in no impact on earnings.

These increases were partially offset by:

• A $9.9 million decrease in energy efficiency program expenses related to WPS's participation in the Focus on Energy Program and MERC's conservation improvement program. Costs for both programs are recovered in rates.

• An $8.6 million decrease in bad debt expense, driven by a new cost of gas component included as part of PGL's and NSG's bad debt expense tracking mechanisms. The change in the bad debt mechanisms was approved in PGL's and NSG's rate orders, effective January 21, 2012. In those orders, the ICC required that a natural gas cost component of the bad debt mechanism be charged to customers based on actual volumes and natural gas prices. As a result of this component, bad debt expense was primarily impacted by lower natural gas costs in 2012 and, to a lesser extent, by the decrease in sales volumes. However, $6.8 million of the decrease in bad debt expense does not impact earnings as it is offset by lower rates, resulting in lower margins.

• A $2.7 million decrease in workers compensation expense related to both fewer incidents and less severe injuries during 2012, primarily at PGL.

• A $2.4 million decrease in asset usage charges from IBS driven by certain computer hardware that was fully depreciated in 2011.

2011 Compared with 2010

Margins

Natural gas utility margins are defined as natural gas utility operating revenues less purchased natural gas costs. Management believes that natural gas utility margins provide a more meaningful basis for evaluating natural gas utility operations than natural gas utility revenues since we pass through prudently incurred natural gas commodity costs to our customers in current rates. There was an approximate 7% decrease in the average per-unit cost of natural gas sold during 2011, which had no impact on margins.

Regulated natural gas utility segment margins decreased $8.6 million and was driven by the approximate $19 million negative year-over-year impact related to certain riders at PGL and NSG. This decrease in margins was offset by an equal decrease in operating expenses, resulting in no impact on earnings. We refunded approximately $13 million more to customers under bad debt riders in 2011. We also recovered approximately $6 million less for environmental cleanup costs at our former manufactured gas plant sites in 2011. See Note 15, "Commitment and Contingencies," for more information on our manufactured gas plant sites.

The decrease in margins was partially offset by:

• An approximate $4 million net increase in margins, including the impact of decoupling, due to a 3.6% increase in volumes sold.

?         Higher sales volumes excluding the impact of weather resulted in
          approximately $17 million of additional margins. We attribute this
          increase to a combination of higher use per customer, higher average
          customer counts, and improved economic conditions for certain
          customers.

? Colder weather during 2011 drove an approximate $6 million increase in margins. Heating degree days increased 3.6%.

?         Decoupling impacts at certain natural gas utilities drove an
          approximate $19 million decrease in margins. Decoupling does not cover
          all jurisdictions or customer classes.



?            Decoupling accruals in 2011 had an approximate $9 million negative
             impact on the year-over-year variance. Decoupling lessened the
             positive impact in 2011 from some of the increased sales volumes at
             PGL, NSG, WPS, and MGU through higher future refunds to customers.



?            Decoupling accruals in 2010 had an approximate $10 million negative
             impact on the year-over-year variance. Decoupling lessened the
             negative impact in 2010 from some of the decreased sales volumes at
             PGL, NSG, WPS, and MGU through higher future recoveries from
             customers.

• An approximate $4 million net increase in margins due to rate orders. See Note 25, "Regulatory Environment," for more information.

?         MERC's conservation improvement program (CIP) rate increase, effective
          November 1, 2010, and its interim natural gas distribution rate
          increase, effective February 1, 2011, had a combined approximate
          $13 million positive impact on margin. The CIP margins of approximately
          $7 million did not impact earnings as they were offset by an increase
          in operating and maintenance expense.



?         The rate increases at PGL and NSG, effective January 28, 2010, and
          other impacts of rate design, had an approximate $7 million net
          positive impact on margins.

? A reduction in rates at WPS, effective January 14, 2011, resulted in an approximate $16 million negative impact on margins.

• An approximate $2 million increase in margins due to a year-over-year positive impact from the 2010 amortization of a regulatory asset at WPS related to energy efficiency legislation implemented in a prior year.

• An approximate $2 million increase in margins due to a rider approved through September 30, 2011 for recovery of AMRP costs at PGL.

See Note 25, "Regulatory Environment," for more information.

Operating Income

Operating income at the regulated natural gas utility segment increased $13.3 million. This increase was primarily driven by a $21.9 million decrease in operating expenses, partially offset by the $8.6 million decrease in margins discussed above.

The decrease in operating expenses primarily related to:

• An approximate $19 million decrease due to higher amortization of regulatory liabilities related to bad debt riders and lower amortization of regulatory assets related to environmental cleanup costs for manufactured gas plant sites, all at PGL and NSG. Margins decreased by an equal amount, resulting in no impact on earnings.

• A $4.8 million decrease in depreciation and amortization expense. WPS received approval for lower depreciation rates from the PSCW, effective January 1, 2011. The decrease also reflects the impact of a $2.5 million write-off of certain MGU assets in 2010 based on an order from the MPSC that was subsequently reversed by the Michigan Court of Appeals in January 2013. See Note 25, "Regulatory Environment," for more information.

• A $7.8 million decrease in employee benefits expense, partially driven by lower employee health care costs.

• A $3.6 million decrease in customer accounts expense resulting from lower customer call volumes and a decrease in labor associated with fewer disconnections.

• A $2.6 million decrease in asset usage charges from IBS driven by certain computer hardware that was fully depreciated in 2011.

These decreases were partially offset by:

• A $10.0 million increase in natural gas distribution costs. The increase was partially due to additional labor related to distribution operations activities and additional consulting costs associated with a work asset management system and the AMRP. Transportation costs, building maintenance, meter maintenance projects, and other miscellaneous distribution costs also contributed to the increase.

• A $5.0 million increase in expenses related to energy conservation and efficiency programs. This net increase includes expenses related to the CIP that were recovered through the MERC rate increase discussed in margins above.

Other Expense

Other expense decreased $1.9 million, driven by a decrease in interest expense on long-term debt. PGL refinanced some of its long-term debt at lower interest rates in the second half of 2010. In addition, WPS did not replace certain senior notes that matured in the third quarter of 2011.

Regulated Electric Utility Segment Operations
                                          Year Ended December 31               Change in         Change in
(Millions, except degree days)       2012          2011          2010       2012 Over 2011    2011 Over 2010
Revenues                          $ 1,297.4     $ 1,307.3     $ 1,338.9           (0.8 )%           (2.4 )%
Fuel and purchased power costs        562.1         546.3         563.9            2.9  %           (3.1 )%
Margins                               735.3         761.0         775.0           (3.4 )%           (1.8 )%

Operating and maintenance             405.6         421.7         416.9           (3.8 )%            1.2  %
expense
Depreciation and amortization          89.0          88.5          94.7            0.6  %           (6.5 )%
expense
Taxes other than income taxes          47.6          47.6          45.6              -  %            4.4  %
Operating income                      193.1         203.2         217.8           (5.0 )%           (6.7 )%

Miscellaneous income                    2.6           0.8           1.5          225.0  %          (46.7 )%
Interest expense                      (35.9 )       (41.8 )       (43.9 )        (14.1 )%           (4.8 )%
Other expense                         (33.3 )       (41.0 )       (42.4 )        (18.8 )%           (3.3 )%

Income before taxes               $   159.8     $   162.2     $   175.4           (1.5 )%           (7.5 )%

Sales in kilowatt-hours
. . .