Attached files

file filename
EX-12.1 - WISCONSIN ELECTRIC EXHIBIT 12.1 - WISCONSIN ELECTRIC POWER COwepco09302015ex121.htm
EX-32.2 - WISCONSIN ELECTRIC EXHIBIT 32.2 - WISCONSIN ELECTRIC POWER COwepco09302015ex322.htm
EX-31.1 - WISCONSIN ELECTRIC EXHIBIT 31.1 - WISCONSIN ELECTRIC POWER COwepco09302015ex311.htm
EX-32.1 - WISCONSIN ELECTRIC EXHIBIT 32.1 - WISCONSIN ELECTRIC POWER COwepco09302015ex321.htm
EX-31.2 - WISCONSIN ELECTRIC EXHIBIT 31.2 - WISCONSIN ELECTRIC POWER COwepco09302015ex312.htm

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2015

Commission
 
Registrant; State of Incorporation
 
IRS Employer
File Number
 
Address; and Telephone Number
 
Identification No.
001-01245
 
WISCONSIN ELECTRIC POWER COMPANY
 
39-0476280
 
 
(A Wisconsin Corporation)
 
 
 
 
231 West Michigan Street
 
 
 
 
P.O. Box 2046
 
 
 
 
Milwaukee, WI 53201
 
 
 
 
(414) 221-2345
 
 

Indicate by check mark whether the registrant (1) has 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) has been subject to such filing requirements for the past 90 days.
    
Yes [X]    No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X]     No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer [ ]  
 
Accelerated filer [  ]
 
 
Non-accelerated filer [ X ]
 
Smaller reporting company [  ]
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ]    No [X]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

Common Stock, $10 Par Value,
33,289,327 shares outstanding at
September 30, 2015

All of the common stock of Wisconsin Electric Power Company is owned by WEC Energy Group, Inc.

 



WISCONSIN ELECTRIC POWER COMPANY
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended September 30, 2015
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

 
 
 
 
 
 
 
 


i


GLOSSARY OF TERMS AND ABBREVIATIONS

The abbreviations and terms set forth below are used throughout this report and have the meanings assigned to them below:
Subsidiaries and Affiliates
ATC
 
American Transmission Company LLC
Bostco
 
Bostco LLC
Integrys
 
Integrys Holding, Inc. (previously known as Integrys Energy Group, Inc.)
WBS
 
WEC Business Services, LLC
WEC Energy Group
 
WEC Energy Group, Inc.
Wisconsin Energy
 
Wisconsin Energy Corporation
 
 
 
Federal and State Regulatory Agencies
EPA
 
United States Environmental Protection Agency
FERC
 
Federal Energy Regulatory Commission
ICC
 
Illinois Commerce Commission
MDEQ
 
Michigan Department of Environmental Quality
MPSC
 
Michigan Public Service Commission
MPUC
 
Minnesota Public Utilities Commission
PSCW
 
Public Service Commission of Wisconsin
SEC
 
United States Securities and Exchange Commission
WDNR
 
Wisconsin Department of Natural Resources
 
 
 
Accounting Terms
AFUDC
 
Allowance for Funds Used During Construction
ASU
 
Accounting Standards Update
FASB
 
Financial Accounting Standards Board
GAAP
 
United States Generally Accepted Accounting Principles
OPEB
 
Other Postretirement Employee Benefits
 
 
 
Environmental Terms
BTA
 
Best Technology Available
EM
 
Entrainment Mortality
GHG
 
Greenhouse Gas
IM
 
Impingement Mortality
MATS
 
Mercury and Air Toxics Standards
NAAQS
 
National Ambient Air Quality Standards
SO2
 
Sulfur Dioxide
WPDES
 
Wisconsin Pollutant Discharge Elimination System
 
 
 
Measurements
Btu
 
British Thermal Unit
Dth
 
Dekatherm (One Dth equals one million Btu)
MW
 
Megawatt (One MW equals one million Watts)
MWh
 
Megawatt-hour
 
 
 
 
 
 

ii


Other Terms and Abbreviations
Amended Agreement
 
Amended and Restated Settlement Agreement with the Attorney General of the State of Michigan, the Staff of the MPSC, and Tilden Mining Company and Empire Iron Mining Partnership
Compensation Committee
 
Compensation Committee of the Board of Directors of WEC Energy Group
Exchange Act
 
Securities Exchange Act of 1934, as amended
FTRs
 
Financial Transmission Rights
MISO
 
Midcontinent Independent System Operator, Inc.
MISO Energy Markets
 
MISO Energy and Operating Reserves Markets
PIPP
 
Presque Isle Power Plant
ROE
 
Return on Equity
SSR
 
System Support Resource
Treasury Grant
 
Section 1603 Renewable Energy Treasury Grant
VAPP
 
Valley Power Plant


iii


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

In this report, we make statements concerning our expectations, beliefs, plans, objectives, goals, strategies, and future events or performance. These statements are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). Readers are cautioned not to place undue reliance on these forward-looking statements. Forward-looking statements may be identified by reference to a future period or periods or by the use of terms such as "anticipates," "believes," "could," "estimates," "expects," "forecasts," "goals," "guidance," "intends," "may," "objectives," "plans," "possible," "potential," "projects," "seeks," "should," "targets," "will," or variations of these terms.

Forward-looking statements include, among other things, statements concerning management's expectations and projections regarding earnings, completion of capital projects, sales and customer growth, rate actions and related filings with regulatory authorities, environmental and other regulations and associated compliance costs, legal proceedings, dividend payout ratios, effective tax rate, projections related to the pension and other postretirement benefit plans, fuel costs, sources of electric energy supply, coal and natural gas deliveries, remediation costs, liquidity and capital resources, and other matters.

Forward-looking statements are subject to a number of risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in the statements. These risks and uncertainties include those described in risk factors as set forth in this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2014, and the following:

Factors affecting utility operations such as catastrophic weather-related damage, environmental incidents, unplanned facility outages and repairs and maintenance, changes in the cost or availability of materials needed to operate environmental controls at our electric generating facilities, and electric transmission or natural gas pipeline system constraints;

Factors affecting the demand for electricity and natural gas, including political developments, unusual weather, changes in economic conditions, customer growth and declines, commodity prices, energy conservation efforts, and continued adoption of distributed generation by customers;

The timing, resolution, and impact of rate cases and negotiations, including recovery of deferred and current costs and the ability to earn a reasonable return on investment, and other regulatory decisions impacting our regulated businesses;

The ability to obtain and retain customers, including wholesale customers, due to increased competition in our electric and natural gas markets from retail choice and alternative electric suppliers, and continued industry consolidation;

The timely completion of capital projects within budgets, as well as the recovery of those costs through rates;

The impact of federal, state, and local legislative and regulatory changes, including changes in rate-setting policies or procedures, tax law changes, including the extension of bonus depreciation, deregulation and restructuring of the electric and/or natural gas utility industries, transmission or distribution system operation, the approval process for new construction, reliability standards, pipeline integrity and safety standards, allocation of energy assistance, and energy efficiency mandates;

Federal and state legislative and regulatory changes relating to the environment, including climate change and other environmental regulations impacting generation facilities and renewable energy standards, the enforcement of these laws and regulations, changes in the interpretation of permit conditions by regulatory agencies, and the recovery of associated remediation and compliance costs;

The risks associated with changing commodity prices, particularly natural gas and electricity, and the availability of sources of fossil fuel, natural gas, purchased power, or water supply due to high demand, shortages, transportation problems, nonperformance by electric energy or natural gas suppliers under existing power purchase or natural gas supply contracts, or other developments;

Changes in credit ratings, interest rates, and our ability to access the capital markets, caused by volatility in the global credit markets, our capitalization structure, and market perceptions of the utility industry or us;

Costs and effects of litigation, administrative proceedings, investigations, settlements, claims, and inquiries;



1


The risk of financial loss, including increases in bad debt expense, associated with the inability of our customers and affiliates to meet their obligations;

Changes in the creditworthiness of the counterparties with whom we have contractual arrangements, including participants in the energy trading markets and fuel suppliers and transporters;

The direct or indirect effect on our business resulting from terrorist incidents, the threat of terrorist incidents, and cyber intrusion, including the failure to maintain the security of personally identifiable information, the associated costs to protect our assets and personal information, and the costs to notify affected persons to mitigate their information security concerns;

The financial performance of American Transmission Company LLC (ATC) and its corresponding contribution to our earnings, as well as the ability of ATC and the Duke-American Transmission Company to obtain the required approvals for their transmission projects;

The investment performance of WEC Energy Group, Inc.'s (WEC Energy Group) employee benefit plan assets, as well as unanticipated changes in related actuarial assumptions, which could impact future funding requirements;

Factors affecting the employee workforce, including loss of key personnel, internal restructuring, work stoppages, and collective bargaining agreements and negotiations with union employees;

Advances in technology that result in competitive disadvantages and create the potential for impairment of existing assets;

The terms and conditions of the governmental and regulatory approvals of WEC Energy Group's acquisition of Integrys Energy Group, Inc. (Integrys) that could reduce anticipated benefits and the ability to successfully integrate the operations of the combined company;

The timing and outcome of any audits, disputes, and other proceedings related to taxes;

The effect of accounting pronouncements issued periodically by standard-setting bodies; and

Other considerations disclosed elsewhere herein and in other reports we file with the United States Securities and Exchange Commission (SEC) or in other publicly disseminated written documents.

We expressly disclaim any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.


2


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WISCONSIN ELECTRIC POWER COMPANY

CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
 
September 30
 
September 30
(in millions)
 
2015
 
2014
 
2015
 
2014
Operating revenues
 
$
981.1

 
$
937.8

 
$
2,948.7

 
$
3,070.2

 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
Fuel and purchased power
 
329.2

 
338.2

 
901.0

 
951.8

Cost of natural gas sold
 
21.4

 
27.7

 
189.1

 
327.8

Other operation and maintenance
 
355.3

 
315.8

 
1,040.9

 
972.2

Depreciation and amortization
 
76.2

 
71.4

 
226.5

 
210.8

Property and revenue taxes
 
29.2

 
28.5

 
88.0

 
85.4

Total operating expenses
 
811.3

 
781.6

 
2,445.5

 
2,548.0

 
 
 
 
 
 
 
 
 
Operating income
 
169.8

 
156.2

 
503.2


522.2

 
 
 
 
 
 
 
 
 
Equity in earnings of transmission affiliate
 
15.7

 
15.9

 
42.1

 
46.4

Other income, net
 
2.2

 
1.4

 
8.7

 
8.0

Interest expense
 
30.4

 
29.0

 
88.6

 
87.6

Other expense
 
(12.5
)
 
(11.7
)
 
(37.8
)
 
(33.2
)
 
 
 
 
 
 
 
 
 
Income before income taxes
 
157.3

 
144.5

 
465.4

 
489.0

Income tax expense
 
56.9

 
54.4

 
168.4

 
181.3

Net income
 
100.4

 
90.1

 
297.0

 
307.7

 
 
 
 
 
 
 
 
 
Preferred stock dividend requirement
 
0.3

 
0.3

 
0.9

 
0.9

Earnings available for common stockholder
 
$
100.1

 
$
89.8

 
$
296.1

 
$
306.8


The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.


3


WISCONSIN ELECTRIC POWER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions, except share and per share amounts)
 
September 30, 2015
 
December 31, 2014
Assets
 
 
 
 
Property, plant and equipment
 
 
 
 
In service
 
$
10,801.1

 
$
10,544.4

Accumulated depreciation
 
(3,531.6
)
 
(3,406.1
)
 
 
7,269.5

 
7,138.3

Construction work in progress
 
169.2

 
140.9

Leased facilities, net
 
2,151.7

 
2,215.0

Net property, plant and equipment
 
9,590.4

 
9,494.2

Investments
 
 
 
 
Equity investment in transmission affiliate
 
387.7

 
372.9

Other
 
0.3

 
0.2

Total investments
 
388.0

 
373.1

Current assets
 
 
 
 
Cash and cash equivalents
 
10.7

 
24.0

Accounts receivable and unbilled revenues, net of reserves of $47.0 and $46.8, respectively
 
434.5

 
488.4

Accounts receivable from related parties
 
37.5

 
8.1

Materials, supplies and inventories
 
321.9

 
320.5

Prepayments
 
98.9

 
139.5

Deferred income taxes
 
61.0

 
46.7

Other
 
15.4

 
19.0

Total current assets
 
979.9

 
1,046.2

Deferred charges and other assets
 
 
 
 
Regulatory assets
 
1,711.2

 
1,626.9

Other
 
160.7

 
106.3

Total deferred charges and other assets
 
1,871.9

 
1,733.2

Total assets
 
$
12,830.2

 
$
12,646.7

Capitalization and Liabilities
 
 
 
 
Capitalization
 
 
 
 
Common stock - $10 par value; 65,000,000 shares authorized; 33,289,327 shares outstanding
 
$
332.9

 
$
332.9

Additional paid in capital
 
997.1

 
984.4

Retained earnings
 
2,211.8

 
2,095.5

Preferred stock
 
30.4

 
30.4

Long-term debt
 
2,415.1

 
2,165.5

Capital lease obligations
 
2,689.8

 
2,712.5

Total capitalization
 
8,677.1

 
8,321.2

Current liabilities
 
 
 
 
Current portion of long-term debt and capital lease obligations
 
369.1

 
355.6

Short-term debt
 
81.0

 
306.8

Subsidiary note payable to WEC Energy Group
 
19.7

 
22.4

Accounts payable
 
257.6

 
287.2

Accounts payable to related parties
 
95.6

 
87.8

Accrued payroll and benefits
 
77.5

 
87.1

Accrued income tax, net
 
55.8

 
6.0

Other
 
122.7

 
107.7

Total current liabilities
 
1,079.0

 
1,260.6

Deferred credits and other liabilities
 
 
 
 
Regulatory liabilities
 
616.6

 
615.9

Deferred income taxes
 
2,022.7

 
1,963.9

Pension and other postretirement benefit obligations
 
195.0

 
254.5

Other
 
239.8

 
230.6

Total deferred credits and other liabilities
 
3,074.1

 
3,064.9

 
 
 
 
 
Commitments and contingencies (Note 12)
 


 


 
 
 
 
 
Total capitalization and liabilities
 
$
12,830.2

 
$
12,646.7


The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.


4


WISCONSIN ELECTRIC POWER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Nine Months Ended
 
 
September 30
(in millions)
 
2015
 
2014
Operating Activities
 
 
 
 
Net income
 
$
297.0

 
$
307.7

Reconciliation to cash provided by operating activities
 
 
 
 
Depreciation and amortization
 
239.6

 
226.2

Deferred income taxes and investment tax credits, net
 
49.4

 
125.6

Contributions to pension and other postretirement plans
 
(105.9
)
 
(9.4
)
Change in –
 
 
 
 
Accounts receivable and unbilled revenues
 
27.5

 
136.0

Other current assets
 
36.6

 
36.0

Accounts payable
 
(28.1
)
 
(7.4
)
Accrued taxes, net
 
51.3

 
28.8

Other current liabilities
 
0.9

 
(24.1
)
Other, net
 
(59.4
)
 
(51.4
)
Net cash provided by operating activities
 
508.9

 
768.0

 
 
 
 
 
Investing Activities
 
 
 
 
Capital expenditures
 
(350.2
)
 
(377.7
)
Cost of removal, net of salvage
 
(18.6
)
 
(15.6
)
Investment in transmission affiliate
 
(3.5
)
 
(9.2
)
Other, net
 
1.6

 
3.1

Net cash used in investing activities
 
(370.7
)
 
(399.4
)
 
 
 
 
 
Financing Activities
 
 
 
 
Dividends paid on common stock
 
(180.0
)
 
(330.0
)
Dividends paid on preferred stock
 
(0.9
)
 
(0.9
)
Issuance of long-term debt
 
250.0

 
250.0

Retirement of long-term debt
 

 
(300.0
)
Change in total short-term debt
 
(225.8
)
 
(3.9
)
Other, net
 
5.2

 
6.5

Net cash used in financing activities
 
(151.5
)
 
(378.3
)
 
 
 
 
 
Net change in cash and cash equivalents
 
(13.3
)
 
(9.7
)
Cash and cash equivalents at beginning of period
 
24.0

 
25.1

Cash and cash equivalents at end of period
 
$
10.7

 
$
15.4


The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.


5


WISCONSIN ELECTRIC POWER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2015

NOTE 1—GENERAL INFORMATION

On June 29, 2015, our parent company, Wisconsin Energy Corporation (Wisconsin Energy), acquired Integrys, and the combined company was renamed WEC Energy Group, Inc. See Note 2, Acquisition, for more information on this acquisition.

As used in these notes, the term "financial statements" refers to the condensed consolidated financial statements. This includes the condensed consolidated income statements, condensed consolidated balance sheets, and condensed consolidated statements of cash flows, unless otherwise noted. In this report, when we refer to "the Company," "us," "we," "our," or "ours," we are referring to Wisconsin Electric Power Company and its subsidiary, Bostco LLC (Bostco).

We have prepared the unaudited interim financial statements presented in this Form 10-Q pursuant to the rules and regulations of the SEC and United States Generally Accepted Accounting Principles (GAAP). Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for annual financial statements. These financial statements should be read in conjunction with the consolidated financial statements and footnotes in our Annual Report on Form 10-K for the year ended December 31, 2014. Financial results for an interim period may not give a true indication of results for the year. In particular, the results of operations for the three and nine months ended September 30, 2015, are not necessarily indicative of expected results for 2015 due to seasonal variations and other factors.

In management's opinion, we have included all adjustments, normal and recurring in nature, necessary for a fair presentation of our financial results.

NOTE 2—ACQUISITION

On June 29, 2015, our parent company, Wisconsin Energy, acquired 100% of the outstanding common shares of Integrys, a provider of regulated natural gas and electricity, as well as nonregulated renewable energy and compressed natural gas products and services. The combined company was renamed WEC Energy Group, Inc. Our parent company now owns approximately 60% of ATC, a for-profit transmission company regulated by the Federal Energy Regulatory Commission (FERC). Our ownership interest in ATC did not change as a result of the acquisition.

The acquisition was subject to the approvals of various government agencies, including the Public Service Commission of Wisconsin (PSCW). Approvals were obtained from all agencies subject to several conditions. The PSCW order includes the following conditions:

We will be subject to an earnings sharing mechanism for three years beginning January 1, 2016. Under the earnings sharing mechanism, if we earn over our authorized rate of return, 50% of the first 50 basis points of additional utility earnings will be shared with customers and will reduce our transmission escrow. All utility earnings above the first 50 basis points will be solely used to reduce the transmission escrow.

Any future electric generation projects affecting Wisconsin ratepayers submitted by WEC Energy Group or its subsidiaries will first consider the extent to which existing intercompany resources can meet energy and capacity needs. In September 2015, we and Wisconsin Public Service Corporation filed a joint integrated resource plan with the PSCW for our combined loads, which indicated that no new generation is currently needed.

We do not believe that the conditions set forth in the various regulatory orders approving the acquisition will have a material impact on our operations or financial results.


6


NOTE 3—COMMON EQUITY

Stock Option Activity

The following table identifies non-qualified stock options granted by the Compensation Committee of the Board of Directors of WEC Energy Group (Compensation Committee) to our employees:
 
 
2015
 
2014
Non-qualified stock options granted year to date
 
495,550

 
864,860

 
 
 
 
 
Estimated fair value per non-qualified stock option
 
$
5.29

 
$
4.18

 
 
 
 
 
Assumptions used to value the options using a binomial option pricing model:
 
 
 
 
Risk-free interest rate
 
0.1% – 2.1%

 
0.1% – 3.0%

Dividend yield
 
3.7
%
 
3.8
%
Expected volatility
 
18.0
%
 
18.0
%
Expected forfeiture rate
 
2.0
%
 
2.0
%
Expected life (years)
 
5.8

 
5.8


The risk-free interest rate is based on the U.S. Treasury interest rate with a term consistent with the expected life of the stock options. Dividend yield, expected volatility, expected forfeiture rate, and expected life assumptions are based on WEC Energy Group's historical experience.

The following is a summary of our employees' WEC Energy Group stock option activity during the three and nine months ended September 30, 2015:
 
 
 
 
 
 
Weighted-Average
 
 
 
 
 
 
 
 
Remaining
 
Aggregate
 
 
Number of
 
Weighted-Average
 
Contractual Life
 
Intrinsic Value
Stock Options
 
Options
 
Exercise Price
 
(in years)
 
(in millions)
Outstanding as of July 1, 2015
 
6,433,313

 
$
32.41

 
 
 
 
Granted
 

 
$

 
 
 
 
Exercised
 
(593,230
)
 
$
23.77

 
 
 
 
Outstanding as of September 30, 2015
 
5,840,083

 
$
33.28

 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding as of January 1, 2015
 
6,450,277

 
$
30.07

 
 
 
 
Granted
 
495,550

 
$
52.90

 
 
 
 
Exercised
 
(1,105,744
)
 
$
23.33

 
 
 
 
Outstanding as of September 30, 2015
 
5,840,083

 
$
33.28

 
5.8
 
$
110.6

 
 
 
 
 
 
 
 
 
Exercisable as of September 30, 2015
 
3,212,468

 
$
26.56

 
4.1
 
$
82.4


The intrinsic value of WEC Energy Group options exercised by our employees was $15.6 million and $30.2 million for the three and nine months ended September 30, 2015, and $12.7 million and $28.6 million for the same periods in 2014, respectively. Cash received by WEC Energy Group from exercises of its options by our employees was $25.8 million and $30.4 million for the nine months ended September 30, 2015 and 2014, respectively. The actual tax benefit realized for the tax deductions from option exercises for the same periods was $12.1 million and $11.5 million, respectively.

As of September 30, 2015, total compensation cost related to non-vested WEC Energy Group stock options held by our employees and not yet recognized was approximately $2.3 million, which is expected to be recognized over the next 17 months on a weighted-average basis.


7


Restricted Shares

The following activity related to restricted stock held by our employees occurred during the three and nine months ended September 30, 2015:
 
 
 
 
Weighted-Average
Restricted Shares
 
Number of Shares
 
Grant Date Fair Value
Outstanding as of July 1, 2015
 
93,639

 
$
46.30

Granted
 
82,943

 
$
49.17

Released
 

 
$

Forfeited
 
(181
)
 
$
46.16

Outstanding as of September 30, 2015
 
176,401

 
$
47.65

 
 
 
 
 
Outstanding as of January 1, 2015
 
100,657

 
$
38.81

Granted
 
126,155

 
$
50.75

Released
 
(50,230
)
 
$
37.73

Forfeited
 
(181
)
 
$
46.16

Outstanding as of September 30, 2015
 
176,401

 
$
47.65


On July 31, 2015, the Compensation Committee awarded certain of our officers and other employees an aggregate of 82,943 shares of restricted stock for the key role each played in WEC Energy Group's acquisition of Integrys. The restricted stock vests in three equal installments on January 29, 2016, January 31, 2017, and July 31, 2018.

WEC Energy Group recognizes the grant date fair value of restricted stock awards in expense over the vesting period of the awards. The intrinsic value of WEC Energy Group restricted stock held by our employees that vested was zero and $2.7 million for the three and nine months ended September 30, 2015, and zero and $2.3 million for the same periods in 2014, respectively. The actual tax benefit realized for the tax deductions from released restricted shares was zero and $1.1 million for the three and nine months ended September 30, 2015, and zero and $0.9 million for the same periods in 2014, respectively.

As of September 30, 2015, total compensation cost related to our share of WEC Energy Group restricted stock not yet recognized was approximately $2.8 million, which is expected to be recognized over the next 22 months on a weighted-average basis.

Performance Units

In January 2015 and 2014, the Compensation Committee awarded 187,450 and 224,735 WEC Energy Group performance units, respectively, to our officers and other key employees under the WEC Energy Group Performance Unit Plan. Performance units earned as of December 31, 2014 and 2013 vested and were settled during the first quarter of 2015 and 2014, and had a total intrinsic value of $11.6 million and $13.1 million, respectively. The actual tax benefit realized for the tax deductions from the settlement of performance units was approximately $4.2 million and $4.7 million, respectively. As of September 30, 2015, total compensation cost related to our share of WEC Energy Group performance units not yet recognized was approximately $11.9 million, which is expected to be recognized over the next 21 months on a weighted-average basis.

Restrictions

Various financing arrangements and regulatory requirements impose certain restrictions on our ability to transfer funds to WEC Energy Group in the form of cash dividends, loans or advances. In addition, under Wisconsin law, we are prohibited from loaning funds, either directly or indirectly, to WEC Energy Group. See Note H—Common Equity in our 2014 Annual Report on Form 10-K for additional information on these and other restrictions.

We do not believe that these restrictions will materially affect our operations or limit any dividend payments in the foreseeable future.


8


NOTE 4—SHORT-TERM DEBT AND LINES OF CREDIT

Our outstanding short-term borrowings were as follows:
(in millions, except percentages)
 
September 30, 2015
 
December 31, 2014
Commercial paper
 
$
81.0

 
$
306.8

Weighted-average interest rate on commercial paper outstanding
 
0.21
%
 
0.25
%

Our average amount of commercial paper borrowings based on daily outstanding balances during the nine months ended September 30, 2015, was $187.6 million with a weighted-average interest rate during the period of 0.23%.

We manage our liquidity by maintaining what we believe to be adequate external financing commitments. The information in the table below relates to our revolving credit facility used to support our commercial paper borrowing program, including remaining available capacity under this facility:
(in millions)
 
Maturity
 
September 30, 2015
Revolving credit facility
 
December 2019
 
$
500.0

Less:
 
 
 
 

Letters of credit issued inside credit facility
 
 
 
$
18.0

Commercial paper outstanding
 
 
 
81.0

Available capacity under existing agreements
 
 
 
$
401.0


NOTE 5—LONG-TERM DEBT

In May 2015, we issued $250.0 million of 3.10% Debentures due June 1, 2025. The net proceeds were used to repay short-term debt and for general corporate purposes.

In May 2014, we issued $250.0 million of 4.25% Debentures due June 1, 2044. The net proceeds were used to repay short-term debt and for general corporate purposes.

On April 1, 2014, we used short-term borrowings to retire $300.0 million of long-term debt that matured.

NOTE 6—FAIR VALUE MEASUREMENTS

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).

Fair value accounting rules provide a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are defined as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 – Pricing inputs are observable, either directly or indirectly, but are not quoted prices included within Level 1. Level 2 includes those financial instruments that are valued using external inputs within models or other valuation methods.

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

Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. We use a mid-market pricing convention (the mid-point price between bid and ask prices) as a practical measure for valuing certain derivative assets and liabilities. We primarily use a market approach for recurring fair value measurements and attempt to use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.


9


When possible, we base the valuations of our risk management assets and liabilities on quoted prices for identical assets and liabilities in active markets. These valuations are classified in Level 1. The valuations of certain contracts not classified as Level 1 may be based on quoted market prices received from counterparties and/or observable inputs for similar instruments. Transactions valued using these inputs are classified in Level 2. Certain derivatives are categorized in Level 3 due to the significance of unobservable or internally developed inputs.

The following tables summarize our financial assets and liabilities that were accounted for at fair value on a recurring basis, categorized by level within the fair value hierarchy:
 
 
As of September 30, 2015
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Derivative Assets
 
 
Natural gas contracts
 
$
0.7

 
$

 
$

 
$
0.7

Financial transmission rights (FTRs)
 

 

 
2.5

 
2.5

   Petroleum products contracts
 
0.4

 

 

 
0.4

Coal contracts
 

 
0.8

 

 
0.8

Total Derivative Assets
 
$
1.1

 
$
0.8

 
$
2.5

 
$
4.4

 
 
 
 
 
 
 
 
 
Derivative Liabilities
 
 
 
 
 
 
 
 
Natural gas contracts
 
$
7.6

 
$
0.2

 
$

 
$
7.8

   Petroleum products contracts
 
1.4

 

 

 
1.4

Coal contracts
 

 
2.1

 

 
2.1

Total Derivative Liabilities
 
$
9.0

 
$
2.3

 
$

 
$
11.3


 
 
As of December 31, 2014
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Derivative Assets
 
 
 
 
 
 
 
 
Natural gas contracts
 
$
0.4

 
$
1.9

 
$

 
$
2.3

FTRs
 

 

 
7.0

 
7.0

Coal contracts
 

 
3.3

 

 
3.3

Total Derivative Assets
 
$
0.4

 
$
5.2

 
$
7.0

 
$
12.6

 
 
 
 
 
 
 
 
 
Derivative Liabilities
 
 
 
 
 
 
 

Natural gas contracts
 
$
6.8

 
$
0.3

 
$

 
$
7.1

Coal contracts
 

 
0.2

 

 
0.2

Total Derivative Liabilities
 
$
6.8

 
$
0.5

 
$

 
$
7.3


The derivative assets and liabilities listed in the tables above include options, swaps, futures, physical commodity contracts, and other instruments used to manage market risks related to changes in commodity prices. They also include FTRs, which are used to manage electric transmission congestion costs in the Midcontinent Independent System Operator, Inc. (MISO) market.

The following table summarizes the changes to derivatives classified as Level 3 in the fair value hierarchy:
 
 
Three Months Ended September 30
 
Nine Months Ended September 30
(in millions)
 
2015
 
2014
 
2015
 
2014
Balance at the beginning of the period
 
$
3.6

 
$
14.1

 
$
7.0

 
$
3.5

Purchases
 

 

 
3.9

 
15.6

Settlements
 
(1.1
)
 
(4.0
)
 
(8.4
)
 
(9.0
)
Balance at the end of the period
 
$
2.5

 
$
10.1

 
$
2.5

 
$
10.1


Unrealized gains and losses on Level 3 derivatives are deferred as regulatory assets or liabilities. Therefore, these fair value measurements have no impact on earnings. Realized gains and losses on these instruments flow through cost of sales on the condensed consolidated statements of income.


10


Fair Value of Financial Instruments

The following table shows the financial instruments included on our condensed consolidated balance sheets that are not recorded at fair value:
 
 
September 30, 2015
 
December 31, 2014
(in millions)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Preferred stock, no redemption required
 
$
30.4

 
$
27.1

 
$
30.4

 
$
27.1

Long-term debt, including current portion
 
$
2,687.0

 
$
2,626.8

 
$
2,437.0

 
$
2,759.6


Due to the short-term nature of cash and cash equivalents, net accounts receivable, accounts payable, and short-term borrowings, the carrying amount of each such item approximates fair value. The fair value of our preferred stock is estimated based upon the quoted market value for the same or similar issues. The fair value of our long-term debt, including the current portion of long-term debt, but excluding capitalized leases and unamortized discount on debt, is estimated based upon the quoted market value for the same or similar issues or upon the quoted market prices of U.S. Treasury issues having a similar term to maturity, adjusted for the issuing company's bond rating and the present value of future cash flows.

NOTE 7—DERIVATIVE INSTRUMENTS

We use derivatives as part of our risk management program to manage the risks associated with the price volatility of purchased power, generation, and natural gas costs for the benefit of our customers. Our approach is non-speculative and designed to mitigate risk. Regulated hedging programs are approved by the PSCW.

We record derivative instruments on the balance sheet as an asset or liability measured at its fair value. Changes in the derivative's fair value are recognized currently in earnings unless specific hedge accounting criteria are met or we receive regulatory treatment for the derivative. For most energy related physical and financial contracts in our regulated operations that qualify as derivatives, the PSCW allows the effects of fair value accounting to be offset to regulatory assets and liabilities.

The following table shows our derivative assets and derivative liabilities:
 
 
 
 
September 30, 2015
 
December 31, 2014
(in millions)
 
Balance Sheet Presentation
 
Derivative Assets
 
Derivative Liabilities
 
Derivative Assets
 
Derivative Liabilities
Natural gas
 
Other current
 
$
0.7

 
$
6.8

 
$
2.3

 
$
6.4

Natural gas
 
Other long-term
 

 
1.0

 

 
0.7

Petroleum products
 
Other current
 
0.2

 
1.0

 

 

Petroleum products
 
Other long-term
 
0.2

 
0.4

 

 

FTRs
 
Other current
 
2.5

 

 
7.0

 

Coal
 
Other current
 
0.8

 
1.8

 
2.7

 
0.2

Coal
 
Other long-term
 

 
0.3

 
0.6

 

 
 
Other current
 
4.2

 
9.6

 
12.0

 
6.6

 
 
Other long-term
 
0.2

 
1.7

 
0.6

 
0.7

Total
 
 
 
$
4.4

 
$
11.3

 
$
12.6

 
$
7.3


Our condensed consolidated income statements include gains (losses) on derivative instruments in fuel and purchased power for those commodities supporting our electric operations and in cost of natural gas sold for the natural gas sold to our customers. Our estimated notional volumes and gains (losses) were as follows:
 
 
Three Months Ended September 30, 2015
 
Three Months Ended September 30, 2014
(in millions)
 
Volume
 
Gains (Losses)
 
Volume
 
Gains (Losses)
Natural gas
 
4.2 Dth
 
$
(1.0
)
 
4.1 Dth
 
$
(0.5
)
Petroleum products
 
0.7 gallons
 

 
2.6 gallons
 

FTRs
 
6.1 MWh
 
1.5

 
6.6 MWh
 
2.0

Total
 
 
 
$
0.5

 
 
 
$
1.5



11


 
 
Nine Months Ended September 30, 2015
 
Nine Months Ended September 30, 2014
(in millions)
 
Volume
 
Gains (Losses)
 
Volume
 
Gains
Natural gas
 
16.5 Dth
 
$
(7.9
)
 
16.7 Dth
 
$
4.9

Petroleum products
 
2.4 gallons
 

 
7.0 gallons
 
0.6

FTRs
 
18.2 MWh
 
4.4

 
19.7 MWh
 
11.6

Total
 
 
 
$
(3.5
)
 
 
 
$
17.1


The amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral are not offset against the fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement. At September 30, 2015, and December 31, 2014, we had posted collateral of $11.0 million and $6.9 million, respectively, in our margin accounts. These amounts are recorded on the condensed consolidated balance sheets in other current assets.

The following table shows derivative assets and derivative liabilities if derivative instruments by counterparty were presented net on the balance sheet:
 
 
September 30, 2015
 
December 31, 2014
 
 
Derivative
 
Derivative
 
Derivative
 
Derivative
(in millions)
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Gross amount recognized on the balance sheet
 
$
4.4

 
$
11.3

 
$
12.6

 
$
7.3

Gross amount not offset on balance sheet *
 
(0.9
)
 
(8.9
)
 
(0.4
)
 
(6.8
)
Net Amount
 
$
3.5

 
$
2.4

 
$
12.2

 
$
0.5


*
Includes cash collateral posted of $8.0 million and $6.4 million as of September 30, 2015, and December 31, 2014, respectively.

NOTE 8—EMPLOYEE BENEFITS

The following table shows the components of net periodic pension and other postretirement employee benefits (OPEB) costs for our benefit plans:
 
 
Pension Costs
 
 
Three Months Ended September 30
 
Nine Months Ended September 30
(in millions)
 
2015
 
2014
 
2015
 
2014
Service cost
 
$
3.7

 
$
2.3

 
$
11.0

 
$
7.0

Interest cost
 
13.3

 
14.8

 
39.7

 
44.5

Expected return on plan assets
 
(20.9
)
 
(19.7
)
 
(62.7
)
 
(59.3
)
Amortization of:
 
 
 
 
 
 
 
 
Prior service cost
 
0.5

 
0.5

 
1.5

 
1.5

Actuarial loss
 
8.8

 
6.7

 
26.7

 
20.2

Net Periodic Benefit Cost
 
$
5.4

 
$
4.6

 
$
16.2

 
$
13.9


 
 
OPEB Costs
 
 
Three Months Ended September 30
 
Nine Months Ended September 30
(in millions)
 
2015
 
2014
 
2015
 
2014
Service cost
 
$
2.2

 
$
2.0

 
$
6.7

 
$
6.0

Interest cost
 
3.4

 
3.6

 
10.1

 
10.8

Expected return on plan assets
 
(4.0
)
 
(4.0
)
 
(12.0
)
 
(12.1
)
Amortization of:
 
 
 
 
 
 
 
 
Prior service credit
 
(0.2
)
 
(0.4
)
 
(0.8
)
 
(1.2
)
Actuarial loss
 
0.1

 

 
0.7

 
0.1

Net Periodic Benefit Cost
 
$
1.5

 
$
1.2

 
$
4.7

 
$
3.6


We contributed $100.0 million to our qualified pension plan during the first nine months of 2015. No such contribution was made during the first nine months of 2014.


12


NOTE 9—INVESTMENT IN ATC

We own approximately 23% of ATC, a for-profit, transmission-only company regulated by the FERC. The following table shows changes to our investment in ATC:
 
 
Three Months Ended September 30
 
Nine Months Ended September 30
(in millions)
 
2015
 
2014
 
2015
 
2014
Balance at beginning of period
 
$
382.9

 
$
366.5

 
$
372.9

 
$
354.1

Add: Earnings from equity method investment
 
15.7

 
15.9

 
42.1

 
46.4

Add: Capital contributions
 
1.1

 
2.2

 
3.3

 
9.1

Less: Distributions received
 
12.0

 
12.5

 
30.6

 
37.5

Balance at end of period
 
$
387.7

 
$
372.1

 
$
387.7

 
$
372.1


Summarized financial data for ATC is included in the following tables:
 
 
Three Months Ended September 30
 
Nine Months Ended September 30
(in millions)
 
2015
 
2014
 
2015
 
2014
Income statement data
 
 
 
 
 
 
 
 
Revenues
 
$
164.5

 
$
163.7

 
$
482.0

 
$
487.0

Operating expenses
 
78.0

 
76.6

 
238.3

 
229.6

Other expense
 
23.1

 
21.6

 
71.7

 
65.1

Net income
 
$
63.4

 
$
65.5

 
$
172.0

 
$
192.3


(in millions)
 
September 30, 2015
 
December 31, 2014
Balance sheet data
 
 
 
 
Current assets
 
$
80.8

 
$
66.4

Noncurrent assets
 
3,900.9

 
3,728.7

Total assets
 
$
3,981.7

 
$
3,795.1

 
 
 
 
 
Current liabilities
 
$
294.8

 
$
313.1

Long-term debt
 
1,800.0

 
1,701.0

Other noncurrent liabilities
 
207.1

 
163.8

Shareholders' equity
 
1,679.8

 
1,617.2

Total liabilities and shareholders' equity
 
$
3,981.7

 
$
3,795.1



13


NOTE 10—SEGMENT INFORMATION

Summarized financial information concerning our reportable segments for the three and nine months ended September 30, 2015 and 2014, is shown in the following table:
 
 
Reportable Segments
 
 
(in millions)
 
Electric
 
Natural Gas
 
Steam
 
Total
Three Months Ended September 30, 2015
 
 
 
 
 
 
 
 
Operating revenues *
 
$
929.7

 
$
45.3

 
$
6.1

 
$
981.1

Depreciation and amortization
 
$
67.7

 
$
7.4

 
$
1.1

 
$
76.2

Operating income (loss)
 
$
171.2

 
$

 
$
(1.4
)
 
$
169.8

 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2014
 
 
 
 
 
 
 
 
Operating revenues *
 
$
880.1

 
$
51.9

 
$
5.8

 
$
937.8

Depreciation and amortization
 
$
62.7

 
$
7.7

 
$
1.0

 
$
71.4

Operating income (loss)
 
$
158.5

 
$
(0.3
)
 
$
(2.0
)
 
$
156.2

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
Operating revenues *
 
$
2,612.1

 
$
304.5

 
$
32.1

 
$
2,948.7

Depreciation and amortization
 
$
201.5

 
$
21.6

 
$
3.4

 
$
226.5

Operating income
 
$
452.4

 
$
45.1

 
$
5.7

 
$
503.2

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2014
 
 
 
 
 
 
 
 
Operating revenues *
 
$
2,579.6

 
$
458.2

 
$
32.4

 
$
3,070.2

Depreciation and amortization
 
$
185.2

 
$
22.8

 
$
2.8

 
$
210.8

Operating income
 
$
462.7

 
$
53.6

 
$
5.9

 
$
522.2


*
We account for all intersegment revenues at rates established by the PSCW. Intersegment revenues were not material.

NOTE 11—VARIABLE INTEREST ENTITIES

The primary beneficiary of a variable interest entity must consolidate the entity's assets and liabilities. In addition, certain disclosures are required for significant interest holders in variable interest entities.

We assess our relationships with potential variable interest entities, such as our coal suppliers, natural gas suppliers, coal and natural gas transporters, and other counterparties related to power purchase agreements, investments, and joint ventures. In making this assessment, we consider, along with other factors, the potential that our contracts or other arrangements provide subordinated financial support, the obligation to absorb the entity's losses, the right to receive residual returns of the entity, and the power to direct the activities that most significantly impact the entity's economic performance.

ATC

We own approximately 23.0% of ATC, a for-profit, transmission-only company regulated by the FERC. We have determined that ATC is a variable interest entity but that consolidation is not required since we are not ATC's primary beneficiary. We do not have the power to direct the activities that most significantly impact ATC's economic performance. We instead account for ATC as an equity method investment. See Note 9, Investment in ATC, for more information on ATC.

The significant assets and liabilities related to ATC recorded on our balance sheet at September 30, 2015, included our equity investment in this affiliate and accounts payable. At September 30, 2015, our equity investment was $387.7 million, which approximates our maximum exposure to loss as a result of our involvement with ATC. In addition, we had $19.7 million of accounts payable due to ATC for network transmission services at September 30, 2015.

14



Purchased Power Agreement

We have identified a purchased power agreement that represents a variable interest. This agreement is for 236 MW of firm capacity from a natural gas-fired cogeneration facility, and we account for it as a capital lease. The agreement includes no minimum energy requirements over the remaining term of approximately 7 years. We have examined the risks of the entity, including operations and maintenance, dispatch, financing, fuel costs and other factors, and have determined that we are not the primary beneficiary of the entity. We do not hold an equity or debt interest in the entity, and there is no residual guarantee associated with the purchased power agreement.

We have approximately $141.3 million of required payments over the remaining term of this agreement. We believe that the required lease payments under this contract will continue to be recoverable in rates. Total capacity and lease payments under this contract for the nine months ended September 30, 2015 and 2014, were $40.2 million and $39.8 million, respectively. Our maximum exposure to loss is limited to the capacity payments under the contract.

NOTE 12—COMMITMENTS AND CONTINGENCIES

Unconditional Purchase Obligations

We routinely enter into long-term purchase and sale commitments for various quantities and lengths of time. We have obligations to distribute and sell electricity and natural gas to our customers and expect to recover costs related to these obligations in future customer rates. Our minimum future commitments related to these purchase obligations as of September 30, 2015, was $10,632.8 million.

Environmental Matters

We periodically review our exposure for environmental remediation costs as evidence becomes available indicating that our liability has changed. Given current information, including the following, we believe that future costs in excess of the amounts accrued and/or disclosed on all presently known and quantifiable environmental contingencies will not be material to our financial position or results of operations.

We have a program of comprehensive environmental remediation planning for former manufactured gas plant sites and coal combustion product disposal/landfill sites. We perform ongoing assessments of these sites.

Manufactured Gas Plant Remediation

We have identified sites at which we or a predecessor company owned or operated a manufactured gas plant or stored manufactured gas. We have also identified other sites that may have been impacted by historical manufactured gas plant activities. We are responsible for the environmental remediation of these sites. We are working with the Wisconsin Department of Natural Resources (WDNR) in our investigation and remediation planning. All sites are at various stages of investigation, monitoring, remediation, and closure. At this time, we cannot estimate future remediation costs associated with these sites beyond those described below.

The future costs for detailed site investigation, future remediation, and monitoring are dependent upon several variables including, among other things, the extent of remediation, changes in technology, and changes in regulation. Historically, the PSCW has allowed us to recover incurred costs, net of insurance recoveries and recoveries from potentially responsible parties, associated with the remediation of manufactured gas plant sites over five years. Accordingly, we have established regulatory assets for costs associated with these sites.

We have established the following regulatory assets and reserves related to manufactured gas plant sites:
(in millions)
 
September 30, 2015
 
December 31, 2014
Regulatory assets
 
$
18.3

 
$
18.7

Reserves for future remediation
 
6.5

 
6.5

 

15


NOTE 13—SUPPLEMENTAL CASH FLOW INFORMATION
 
 
Nine Months Ended September 30
(in millions)
 
2015
 
2014
Cash paid for interest, net of amount capitalized
 
$
60.6

 
$
65.6

Cash paid for income taxes, net of refunds
 
58.7

 
15.7

Significant noncash transactions:
 
 
 
 
Accounts payable related to construction costs
 
5.0

 
4.8


NOTE 14—RELATED PARTY TRANSACTIONS

We and our subsidiary, Bostco, routinely enter into transactions with related parties, including WEC Energy Group, its subsidiaries, and other entities in which we have material interests.

We provide and receive services, property, and other items of value to and from our parent, WEC Energy Group, and other subsidiaries of WEC Energy Group. Following the acquisition of Integrys by Wisconsin Energy on June 29, 2015, an affiliated interest agreement (Non-WBS AIA) went into effect. The Non-WBS AIA governs the provision and receipt of services by WEC Energy Group's subsidiaries, except that WEC Business Services, LLC (WBS) will continue to provide services to Integrys and its subsidiaries only under the existing WBS affiliated interest agreements (WBS AIAs). WBS will provide services to WEC Energy Group and the former Wisconsin Energy subsidiaries, including us, under new interim WBS affiliated interest agreements (interim WBS AIAs). The PSCW and two other state commissions have approved the Non-WBS AIA or granted appropriate waivers related to the Non-WBS AIA. Approval of the Non-WBS AIA is still needed from the Minnesota Public Utilities Commission (MPUC).

Services under the Non-WBS AIA are subject to various pricing methodologies. All services provided by any regulated subsidiary to another regulated subsidiary are priced at cost. All services provided by any regulated subsidiary to any nonregulated subsidiary are priced at the greater of cost or fair market value. All services provided by any nonregulated subsidiary to any regulated subsidiary are priced at the lesser of cost or fair market value. All services provided by any regulated or nonregulated subsidiary to WBS are priced at cost.

WBS provides 15 categories of services (including financial, human resource, and administrative services) to us pursuant to the interim WBS AIAs, which have been approved, or from which we have been granted appropriate waivers, by the appropriate regulators, including the PSCW. As required by FERC regulations for centralized service companies, WBS renders services at cost. The PSCW must be notified prior to making changes to the services offered under and the allocation methods specified in the interim WBS AIAs. Other modifications or amendments to the interim WBS AIAs would require PSCW approval. Recovery of allocated costs is addressed in our rate cases.

The PSCW orders approving the Non-WBS AIA and the interim WBS AIAs include an April 1, 2016, sunset date for WEC Energy Group and the former Wisconsin Energy subsidiaries, including us. We may request one extension of the sunset date. Prior to the sunset date, WEC Energy Group will need to file new or modified Non-WBS and WBS AIAs for approval with the PSCW and other state commissions.

We provide services to and receive services from ATC for its transmission facilities under several agreements approved by the PSCW. Services are billed to ATC under these agreements at our fully allocated cost.

The table below includes information summarizing other transactions entered into with related parties:
(in millions)
 
September 30, 2015
 
December 31, 2014
Notes payable *
 
 

 
 

WEC Energy Group
 
$
19.7

 
$
22.4

Accounts payable
 
 

 
 

Network transmission services from ATC
 
19.7

 
18.1


*
Bostco, our consolidated subsidiary, has a note payable to our parent company, WEC Energy Group.


16


The following table shows activity associated with related party transactions:
 
 
Three Months Ended September 30
 
Nine Months Ended September 30
(in millions)
 
2015
 
2014
 
2015
 
2014
Lease agreements
 
 

 
 

 
 

 
 

Lease payments to W.E. Power, LLC (1)
 
$
96.9

 
$
90.9

 
$
290.1

 
$
274.0

Natural gas transactions
 
 
 
 

 
 
 
 

Purchases from Wisconsin Public Service Corporation
 
0.3

 

 
0.3

 

Interest expense (2)
 
 

 
 

 
 
 
 

WEC Energy Group
 
0.3

 
0.4

 
1.0

 
1.1

Transactions with equity method investees
 
 

 
 

 
 
 
 

Charges from ATC for network transmission services
 
59.0

 
54.2

 
176.1

 
162.1

Charges to ATC for services and construction
 
2.6

 
1.9

 
7.6

 
5.5


(1) 
We make lease payments to W.E. Power, LLC, a subsidiary of WEC Energy Group, for Port Washington Generating Station Units 1 and 2 and Oak Creek expansion Units 1 and 2.

(2) 
Bostco, our consolidated subsidiary, has a note payable to our parent company, WEC Energy Group.

NOTE 15—MICHIGAN SETTLEMENT

In March 2015, we, along with Wisconsin Energy, entered into an Amended and Restated Settlement Agreement with the Attorney General of the State of Michigan, the Staff of the Michigan Public Service Commission (MPSC), and Tilden Mining Company and Empire Iron Mining Partnership (Amended Agreement) to resolve all objections to Wisconsin Energy's acquisition of Integrys these parties raised at the MPSC. The agreement includes the following provisions:

The parties to the Amended Agreement agree that the acquisition satisfies the applicable requirements under Michigan law and should be approved by the MPSC.

We will not enter into a System Support Resource (SSR) agreement for the operation of Presque Isle Power Plant (PIPP) so long as both mines, if operational, remain full requirements customers of ours until the earlier of (i) the date a new, clean generation plant located in the Upper Peninsula of Michigan commences commercial operation or (ii) December 31, 2019. The prior SSR agreement was terminated effective February 1, 2015 with the return of the mines as full requirements customers.

Wisconsin Energy commits to invest either through an ownership interest or a purchased power agreement, or to have, if formed, a future Michigan jurisdictional utility invest, in this plant subject to the issuance of a Certificate of Necessity from the MPSC. The costs of this plant would be recovered from Michigan customers.

In addition, in March 2015, we entered into a special contract with each of the mines to provide full requirements electric service through December 31, 2019.

In April 2015, the MPSC approved the acquisition of Integrys, the Amended Agreement and the special contracts with the two mines.

NOTE 16—NEW ACCOUNTING PRONOUNCEMENTS

Revenue Recognition

In May 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board issued their joint revenue recognition standard, Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. The guidance is based on the principle that revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This guidance is effective for fiscal years and interim periods beginning after December 15, 2017, with early adoption for fiscal years and interim periods beginning after December 15, 2016, permitted. The standard can either be applied retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently assessing the effects this guidance may have on our consolidated financial statements.


17


Debt Issuance Costs

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. The guidance requires debt issuance costs to be presented on the balance sheet as a reduction to the carrying value of the corresponding debt, rather than as an asset as it is currently presented. This guidance is effective for fiscal years and interim periods beginning after December 15, 2015. The standard requires retrospective application by restating each prior period presented in the financial statements. We are currently assessing the effects this guidance may have on our consolidated financial statements.


18


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Corporate Developments

Acquisition

On June 29, 2015, our parent company, Wisconsin Energy, completed its acquisition of Integrys and the combined company was renamed WEC Energy Group, Inc. The acquisition was subject to several conditions, including, among others, approval of the shareholders of both Wisconsin Energy and Integrys, the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and the receipt of approvals from various government agencies, including the FERC, Federal Communications Commission, PSCW, Illinois Commerce Commission (ICC), MPSC, and MPUC.

On July 24, 2015, the Citizens Utility Board, the City of Chicago, and the Illinois State Attorney General's office asked the ICC to rehear the order approving the acquisition. The parties sought additional conditions previously requested during the approval process. The ICC denied this request.

See Note 2, Acquisition, for more information regarding the acquisition.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2015

Earnings Summary

The following table compares our consolidated results for the third quarter of 2015 with the third quarter of 2014, including favorable or better, "B", and unfavorable or worse, "W", variances:
 
 
Three Months Ended September 30
(in millions)
 
2015
 
B (W)
 
2014
Electric operations
 
$
171.2

 
$
12.7

 
$
158.5

Gas operations
 

 
0.3

 
(0.3
)
Steam operations
 
(1.4
)
 
0.6

 
(2.0
)
Total operating income
 
169.8

 
13.6

 
156.2

Equity in earnings of transmission affiliate
 
15.7

 
(0.2
)
 
15.9

Other income, net
 
2.2

 
0.8

 
1.4

Interest expense
 
30.4

 
(1.4
)
 
29.0

Income before income taxes
 
157.3

 
12.8

 
144.5

Income tax expense
 
56.9

 
(2.5
)
 
54.4

Net income
 
$
100.4

 
$
10.3

 
$
90.1

 
 
 
 


 
 
Preferred stock dividend requirement
 
$
0.3