Edgar Filing: WEC ENERGY GROUP, INC.

Document

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 March 31, 2018



Commission File Number	Registrant; State of Incorporation; Address; and Telephone Number	IRS Employer Identification No.
001-09057	WEC ENERGY GROUP, INC.	39-1391525
	(A Wisconsin Corporation)
	231 West Michigan Street
	P.O. Box 1331
	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 website, 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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.



	Large accelerated filer [X]		Accelerated filer [ ]
	Non-accelerated filer [ ] (Do not check if a smaller reporting company)
			Smaller reporting company [ ]
			Emerging growth company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

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, $.01 Par Value,

315,538,808 shares outstanding at

March 31, 2018

Table of Contents

WEC ENERGY GROUP, INC.

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended March 31, 2018

TABLE OF CONTENTS



				Page
	CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION			1
PART I.	FINANCIAL INFORMATION			3
ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)			3
	Condensed Consolidated Income Statements			3
	Condensed Consolidated Statements of Comprehensive Income			4
	Condensed Consolidated Balance Sheets			5
	Condensed Consolidated Statements of Cash Flows			6
	Notes to Condensed Consolidated Financial Statements			7
			Page
	Note 1	General Information	7
	Note 2	Acquisitions	7
	Note 3	Disposition	8
	Note 4	Operating Revenues	8
	Note 5	Property, Plant, and Equipment	12
	Note 6	Common Equity	13
	Note 7	Short-Term Debt and Lines of Credit	13
	Note 8	Long-Term Debt	14
	Note 9	Materials, Supplies, and Inventories	14
	Note 10	Income Taxes	14
	Note 11	Fair Value Measurements	15
	Note 12	Derivative Instruments	17
	Note 13	Guarantees	18
	Note 14	Employee Benefits	19
	Note 15	Goodwill	20
	Note 16	Investment in Transmission Affiliates	20
	Note 17	Segment Information	21
	Note 18	Variable Interest Entities	22
	Note 19	Commitments and Contingencies	23
	Note 20	Supplemental Cash Flow Information	27
	Note 21	Regulatory Environment	29
	Note 22	New Accounting Pronouncements	32
ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			33
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			49
ITEM 4.	CONTROLS AND PROCEDURES			50
PART II.	OTHER INFORMATION			51
ITEM 1.	LEGAL PROCEEDINGS			51
ITEM 1A.	RISK FACTORS			52
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			52
ITEM 6.	EXHIBITS			53
SIGNATURE				54



03/31/2018 Form 10-Q	i	WEC Energy Group, Inc.

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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
ATC Holdco		ATC Holdco, LLC
Bluewater		Bluewater Natural Gas Holding, LLC
Bostco		Bostco LLC
Integrys		Integrys Holding, Inc.
MERC		Minnesota Energy Resources Corporation
MGU		Michigan Gas Utilities Corporation
NSG		North Shore Gas Company
PGL		The Peoples Gas Light and Coke Company
UMERC		Upper Michigan Energy Resources Corporation
WBS		WEC Business Services LLC
WE		Wisconsin Electric Power Company
We Power		W.E. Power, LLC
WG		Wisconsin Gas LLC
WPS		Wisconsin Public Service 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
LIFO		Last-In, First-Out
OPEB		Other Postretirement Employee Benefits

Environmental Terms
CAA		Clean Air Act
CO₂		Carbon Dioxide
CPP		Clean Power Plan
GHG		Greenhouse Gas
NAAQS		National Ambient Air Quality Standards
NOV		Notice of Violation
WPDES		Wisconsin Pollutant Discharge Elimination System

Measurements
Dth		Dekatherm
MW		Megawatt
MWh		Megawatt-hour



03/31/2018 Form 10-Q	ii	WEC Energy Group, Inc.

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Other Terms and Abbreviations
2007 Junior Notes		WEC Energy Group, Inc.'s 2007 Junior Subordinated Notes Due 2067
ALJ		Administrative Law Judge
D.C. Circuit Court of Appeals		United States Court of Appeals for the District of Columbia Circuit
ERGS		Elm Road Generating Station
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
OCPP		Oak Creek Power Plant
OC 5		Oak Creek Power Plant Unit 5
OC 6		Oak Creek Power Plant Unit 6
OC 7		Oak Creek Power Plant Unit 7
OC 8		Oak Creek Power Plant Unit 8
PIPP		Presque Isle Power Plant
QIP		Qualifying Infrastructure Plant
ROE		Return on Equity
SMP		Gas System Modernization Program
SMRP		System Modernization and Reliability Project
Supreme Court		United States Supreme Court
Tax Legislation		Tax Cuts and Jobs Act of 2017
VITA		Variable Income Tax Adjustment Rider



03/31/2018 Form 10-Q	iii	WEC Energy Group, Inc.

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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 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, pension and OPEB plans, fuel costs, sources of electric energy supply, coal and natural gas deliveries, remediation costs, environmental matters, 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 report and our Annual Report on Form 10-K for the year ended December 31, 2017, and those identified below:


•	Factors affecting utility operations such as catastrophic weather-related damage, environmental incidents, unplanned facility outages and repairs and maintenance, 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 operations;


•	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 the related costs through rates;

•

The impact of federal, state, and local legislative and regulatory changes, including changes in rate-setting policies or procedures, 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;


•	The uncertainty surrounding the recently enacted Tax Legislation, including implementing regulations and IRS interpretations, the amount to be returned to our ratepayers, and its impact, if any, on our or our subsidiaries’ credit ratings;


•	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;


•	Factors affecting the implementation of our generation reshaping plan, including related regulatory decisions, the cost of materials, supplies, and labor, and the feasibility of competing projects;


•	Increased pressure on us by investors and other stakeholder groups to take more aggressive action to reduce future GHG emissions in order to limit future global temperature increases;

•

The risks associated with changing commodity prices, particularly natural gas and electricity, and the availability of sources of fossil fuel, natural gas, purchased power, materials needed to operate environmental controls at our electric generating facilities, 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;



03/31/2018 Form 10-Q	1	WEC Energy Group, Inc.

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•	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, us, or any of our subsidiaries;


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


•	Restrictions imposed by various financing arrangements and regulatory requirements on the ability of our subsidiaries to transfer funds to us in the form of cash dividends, loans or advances, that could prevent us from paying our common stock dividends, taxes, and other expenses, and meeting our debt obligations;


•	The risk of financial loss, including increases in bad debt expense, associated with the inability of our customers, counterparties, 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 attacks and cyber security intrusions, as well as the threat of such incidents, including the failure to maintain the security of personally identifiable information, the associated costs to protect our utility assets, technology systems, and personal information, and the costs to notify affected persons to mitigate their information security concerns;


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


•	The investment performance of our 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 timing, costs, and anticipated benefits associated with the remaining integration efforts relating to the Integrys acquisition;


•	The risk associated with the values of goodwill and other intangible assets and their possible impairment;


•	Potential business strategies to acquire and dispose of assets or businesses, which cannot be assured to be completed timely or within budgets, and legislative or regulatory restrictions or caps on non-utility acquisitions, investments or projects, including the State of Wisconsin's public utility holding company law;


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


•	The ability to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act, while both integrating and continuing to consolidate our enterprise systems;


•	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 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.



03/31/2018 Form 10-Q	2	WEC Energy Group, Inc.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WEC ENERGY GROUP, INC.



CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited)	Three Months Ended
	March 31
(in millions, except per share amounts)	2018			2017
Operating revenues	$	2,286.5		$	2,304.5

Operating expenses
Cost of sales	972.1			941.1
Other operation and maintenance	511.9			504.5
Depreciation and amortization	208.6			194.6
Property and revenue taxes	48.8			49.6
Total operating expenses	1,741.4			1,689.8

Operating income	545.1			614.7

Equity in earnings of transmission affiliates	32.8			41.9
Other income, net	7.5			18.3
Interest expense	106.7			104.7
Other expense	(66.4		)	(44.5		)

Income before income taxes	478.7			570.2
Income tax expense	88.3			213.3
Net income	390.4			356.9

Preferred stock dividends of subsidiary	0.3			0.3
Net income attributed to common shareholders	$	390.1		$	356.6

Earnings per share
Basic	$	1.24		$	1.13
Diluted	$	1.23		$	1.12

Weighted average common shares outstanding
Basic	315.5			315.6
Diluted	316.9			317.2

Dividends per share of common stock	$	0.5525		$	0.5200

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



03/31/2018 Form 10-Q	3	WEC Energy Group, Inc.

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WEC ENERGY GROUP, INC.



CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)	Three Months Ended
	March 31
(in millions)	2018			2017
Net income	$	390.4		$	356.9

Other comprehensive income (loss), net of tax
Derivatives accounted for as cash flow hedges
Reclassification of gains to net income, net of tax	(0.2		)	(0.3		)

Defined benefit plans
Amortization of pension and OPEB costs included in net periodic benefit cost, net of tax	1.9			0.1

Other comprehensive income (loss), net of tax	1.7			(0.2		)

Comprehensive income	392.1			356.7

Preferred stock dividends of subsidiary	0.3			0.3
Comprehensive income attributed to common shareholders	$	391.8		$	356.4

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



03/31/2018 Form 10-Q	4	WEC Energy Group, Inc.

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WEC ENERGY GROUP, INC.



CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in millions, except share and per share amounts)	March 31, 2018		December 31, 2017
Assets
Current assets
Cash and cash equivalents	$	48.1	$	38.9
Accounts receivable and unbilled revenues, net of reserves of $160.5 and $143.2, respectively	1,356.8		1,350.7
Materials, supplies, and inventories	376.0		539.0
Prepayments	165.9		210.0
Other	34.0		74.9
Current assets	1,980.8		2,213.5

Long-term assets
Property, plant, and equipment, net of accumulated depreciation of $8,819.8 and $8,618.5, respectively	21,466.3		21,347.0
Regulatory assets	2,929.7		2,803.2
Equity investment in transmission affiliates	1,598.9		1,553.4
Goodwill	3,052.8		3,053.5
Other	757.1		619.9
Long-term assets	29,804.8		29,377.0
Total assets	$	31,785.6	$	31,590.5

Liabilities and Equity
Current liabilities
Short-term debt	$	1,200.3	$	1,444.6
Current portion of long-term debt	957.9		842.1
Accounts payable	592.8		859.9
Accrued payroll and benefits	107.4		169.1
Other	747.5		553.6
Current liabilities	3,605.9		3,869.3

Long-term liabilities
Long-term debt	8,617.5		8,746.6
Deferred income taxes	3,069.9		2,999.8
Deferred revenue, net	538.1		543.3
Regulatory liabilities	3,924.3		3,718.6
Environmental remediation liabilities	617.2		617.4
Pension and OPEB obligations	523.1		397.4
Other	1,191.4		1,206.3
Long-term liabilities	18,481.5		18,229.4

Commitments and contingencies (Note 19)

Common shareholders' equity
Common stock – $0.01 par value; 325,000,000 shares authorized; 315,538,808 and 315,574,624 shares outstanding, respectively	3.2		3.2
Additional paid in capital	4,267.3		4,278.5
Retained earnings	5,392.7		5,176.8
Accumulated other comprehensive income	4.6		2.9
Common shareholders' equity	9,667.8		9,461.4

Preferred stock of subsidiary	30.4		30.4
Total liabilities and equity	$	31,785.6	$	31,590.5

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



03/31/2018 Form 10-Q	5	WEC Energy Group, Inc.

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WEC ENERGY GROUP, INC.



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)	Three Months Ended
	March 31
(in millions)	2018			2017
Operating Activities
Net income	$	390.4		$	356.9
Reconciliation to cash provided by operating activities
Depreciation and amortization	208.6			194.6
Deferred income taxes and investment tax credits, net	17.0			150.2
Contributions and payments related to pension and OPEB plans	(5.3		)	(106.0		)
Equity income in transmission affiliates, net of distributions	7.1			(6.7		)
Change in –
Accounts receivable and unbilled revenues	(60.1		)	55.0
Materials, supplies, and inventories	163.0			170.5
Other current assets	81.3			41.2
Accounts payable	(170.9		)	(212.7		)
Other current liabilities	128.6			90.8
Other, net	134.3			(19.2		)
Net cash provided by operating activities	894.0			714.6

Investing Activities
Capital expenditures	(439.6		)	(329.7		)
Capital contributions to transmission affiliates	(12.8		)	(27.6		)
Proceeds from the sale of assets and businesses	0.8			13.1
Proceeds from the sale of investments held in rabbi trust	16.5			8.6
Other, net	(0.7		)	2.5
Net cash used in investing activities	(435.8		)	(333.1		)

Financing Activities
Exercise of stock options	2.1			5.9
Purchase of common stock	(15.8		)	(20.2		)
Dividends paid on common stock	(174.2		)	(164.1		)
Retirement of long-term debt	(12.6		)	(12.0		)
Change in short-term debt	(244.3		)	(189.8		)
Other, net	(0.3		)	(0.6		)
Net cash used in financing activities	(445.1		)	(380.8		)

Net change in cash, cash equivalents, and restricted cash	13.1			0.7
Cash, cash equivalents, and restricted cash at beginning of period	58.6			72.7
Cash, cash equivalents, and restricted cash at end of period	$	71.7		$	73.4

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



03/31/2018 Form 10-Q	6	WEC Energy Group, Inc.

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WEC ENERGY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2018

NOTE 1—GENERAL INFORMATION

WEC Energy Group serves approximately 1.6 million electric customers and 2.9 million natural gas customers, and owns approximately 60% of ATC.

As used in these notes, the term "financial statements" refers to the condensed consolidated financial statements. This includes the income statements, statements of comprehensive income, balance sheets, and 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 WEC Energy Group and all of its subsidiaries.

We have prepared the unaudited interim financial statements presented in this Form 10-Q pursuant to the rules and regulations of the SEC and 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, 2017. 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 months ended March 31, 2018, are not necessarily indicative of expected results for 2018 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—ACQUISITIONS

Acquisition of a Wind Energy Generation Facility in Wisconsin

On April 2, 2018, WPS, along with two other unaffiliated utilities, completed the purchase of Forward Wind Energy Center, which consists of 86 wind turbines located in Wisconsin with a total capacity of 129 MW. The aggregate purchase price was $173.9 million of which WPS’s proportionate share was 44.6%, or $77.6 million. Since 2008 and up until the acquisition, WPS purchased 44.6% of the facility’s energy output under a power purchase agreement.

WPS's proportionate share of the facility will be recorded as property, plant, and equipment on the balance sheet and will be included in rate base. Under a joint ownership agreement with the two other utilities, WPS is entitled to its share of generating capability and output of the facility equal to its ownership interest. WPS will also pay its ownership share of additional construction costs and operating expenses.

Acquisition of Natural Gas Storage Facilities in Michigan

On June 30, 2017, we completed the acquisition of Bluewater for $226.0 million. Bluewater owns natural gas storage facilities in Michigan that will provide approximately one-third of the current storage needs for our Wisconsin natural gas utilities. In addition, we incurred $4.9 million of acquisition related costs.

The table below shows the allocation of the purchase price to the assets acquired and liabilities assumed at the date of the acquisition. The excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed was recognized as goodwill. Bluewater is included in the non-utility energy infrastructure segment. See Note 17, Segment Information, for more information.



(in millions)
Current assets	$	2.0
Net property, plant, and equipment	218.3
Goodwill	6.6
Current liabilities	(0.9		)
Total purchase price	$	226.0



03/31/2018 Form 10-Q	7	WEC Energy Group, Inc.

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Acquisition of a Wind Energy Generation Facility in Nebraska

On April 30, 2018, we signed an agreement for the acquisition of an 80% membership interest in a 202.5 MW wind generating facility currently under construction known as Upstream Wind Energy Center (“Upstream”) for $276.0 million. Upstream is located in Antelope County, Nebraska and will supply energy to the Southwest Power Pool. The transaction is expected to close in the first quarter of 2019, after Upstream achieves commercial operation. Upstream has entered into an energy swap agreement pursuant to which Upstream will receive a fixed payment in exchange for substantially all of the energy output for a period of ten years. In addition, we anticipate Upstream will qualify for both Federal production tax credits at 100% of the published rate and bonus depreciation.

NOTE 3—DISPOSITION

Corporate and Other Segment—Sale of Bostco Real Estate Holdings

In March 2017, we sold the remaining real estate holdings of Bostco located in downtown Milwaukee, Wisconsin, which included retail, office, and residential space. During the first quarter of 2017, we recorded an insignificant gain on the sale, which was included in other income, net on our income statements. The assets included in the sale were not material and, therefore, were not presented as held for sale. The results of operations associated with these assets remained in continuing operations through the sale date as the sale did not represent a shift in our corporate strategy and did not have a major effect on our operations and financial results.

NOTE 4—OPERATING REVENUES

Adoption of ASU 2014-09, Revenues from Contracts with Customers

On January 1, 2018, we adopted ASU 2014-09, Revenues from Contracts with Customers, and the related amendments. In accordance with the guidance, revenues are recognized when control of the promised goods or services is transferred to our customers in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods or services.

We adopted this standard using the modified retrospective method. Results for reporting periods beginning after January 1, 2018, are presented under the new standard. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. Adoption of the standard did not result in an adjustment to our opening retained earnings balance as of January 1, 2018, and we do not expect the adoption of the standard to have a material impact on our net income in future periods.

We adopted the following practical expedients and optional exemptions for the implementation of this standard:


•	We elected to exclude from the transaction price any amounts collected from customers for all sales taxes and other similar taxes.


•	When applicable, we elected to apply the standard to a portfolio of contracts with similar characteristics, primarily our tariff-based contracts, as we reasonably expect that the effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts.


•	We elected to recognize revenue in the amount we have the right to invoice for performance obligations satisfied over time when the consideration received from a customer corresponds directly with the value provided to the customer during the same period.


•	We elected to not disclose the remaining performance obligations of a contract that has an original expected duration of one year or less.


•	We elected to apply this standard only to contracts that are not completed as of the date of initial application.



03/31/2018 Form 10-Q	8	WEC Energy Group, Inc.

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Disaggregation of Operating Revenues

The following tables present our operating revenues disaggregated by revenue source. Comparable amounts have not been presented for the three months ended March 31, 2017, due to our adoption of this standard under the modified retrospective method.



(in millions)	Wisconsin		Illinois			Other States			Total Utility Operations			Electric Transmission		Non-Utility Energy Infrastructure		Corporate and Other		Reconciling Eliminations			WEC Energy Group Consolidated
Three Months Ended March 31, 2018
Electric	$	1,067.7	$	—		$	—		$	1,067.7		$	—	$	—	$	—	$	—		$	1,067.7
Natural gas	518.0		507.6			172.7			1,198.3			—		14.9		—		(2.5		)	1,210.7
Total utility revenues	1,585.7		507.6			172.7			2,266.0			—		14.9		—		(2.5		)	2,278.4
Other non-utility revenues	—		—			3.9			3.9			—		7.1		1.3		(0.7		)	11.6
Total revenues from contracts with customers	1,585.7		507.6			176.6			2,269.9			—		22.0		1.3		(3.2		)	2,290.0
Other operating revenues	3.4		(0.3		)	(6.7		)	(3.6		)	—		96.1		0.1		(96.1		)	(3.5		)
Total operating revenues	$	1,589.1	$	507.3		$	169.9		$	2,266.3		$	—	$	118.1	$	1.4	$	(99.3	)	$	2,286.5

Revenues from Contracts with Customers

Electric Utility Operating Revenues

The following table disaggregates electric utility operating revenues into customer class for the current period:



(in millions)	Electric Utility Operating Revenues
Three Months Ended March 31, 2018
Residential	$	384.3
Small commercial and industrial	330.7
Large commercial and industrial	203.9
Other	7.7
Total retail revenues	926.6
Wholesale	54.9
Resale	73.8
Steam	9.7
Other utility revenues	2.7
Total electric utility operating revenues	$	1,067.7

Electricity sales to residential and commercial and industrial customers are generally accomplished through requirements contracts, which provide for the delivery of as much electricity as the customer needs. These contracts represent discrete deliveries of electricity and consist of one distinct performance obligation satisfied over time, as the electricity is delivered and consumed by the customer simultaneously. For our Wisconsin residential and commercial and industrial customers and the majority of our Michigan residential and commercial and industrial customers, our performance obligation is bundled and consists of both the sale and the delivery of the electric commodity. In our Michigan service territory, a limited number of residential and commercial and industrial customers can purchase the commodity from a third party. In this case, the delivery of the electricity represents our sole performance obligation. The rates, charges, terms, and conditions of service for sales to these customers are included in tariffs that have been approved by state regulators. These rates often have a fixed component customer charge and a usage-based variable component. We recognize revenue for the fixed component customer charge monthly using a time-based output method. We recognize revenue for the usage-based variable component using an output method based on the quantity of electricity delivered each month.



03/31/2018 Form 10-Q	9	WEC Energy Group, Inc.

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Wholesale customers who resell power can choose to either bundle capacity and electricity services together under one contract with a supplier or purchase capacity and electricity separately from multiple suppliers. Furthermore, wholesale customers can choose to have our utilities provide generation to match the customer's load, similar to requirements contracts, or they can purchase specified quantities of electricity and capacity. The rates, charges, terms and conditions of service for sales to wholesale customers are included in tariffs that have been approved by the FERC. Contracts with wholesale customers that include capacity bundled with the delivery of electricity contain two performance obligations, as capacity and electricity are often transacted separately in the marketplace at the wholesale level. When recognizing revenue associated with these contracts, the transaction price is allocated to each performance obligation based on its relative standalone selling price. Revenue is recognized as control of each individual component is transferred to the customer. Electricity is the primary product sold by our electric utilities and represents a single performance obligation satisfied over time through discrete deliveries to a customer. Revenue from electricity sales is generally recognized as units are produced and delivered to the customer within the production month. Capacity represents the reservation of an electric generating facility and conveys the ability to call on a plant to produce electricity when needed by the customer. The nature of our performance obligation as it relates to capacity is to stand ready to deliver power. This represents a single performance obligation transferred over time, which generally represents a monthly obligation. Accordingly, capacity revenue is recognized on a monthly basis.

We are an active participant in the MISO Energy Markets, where we bid our generation into the Day Ahead and Real Time markets and procure electricity for our retail and wholesale customers at prices determined by the MISO Energy Markets. Purchase and sale transactions are recorded using settlement information provided by MISO. These purchase and sale transactions are accounted for on a net hourly position. Net purchases in a single hour are recorded as purchased power in cost of sales and net sales in a single hour are recorded as resale revenues. For resale revenues, our performance obligation is created only when electricity is sold into the MISO Energy Markets.

For all of our customers, consistent with the timing of when we recognize revenue, customer billings generally occur on a monthly basis, with payments typically due in full within 30 days. For the majority of our wholesale customers, the price billed for energy and capacity is a formula-based rate. Formula-based rates initially set a customer's current year rates based on the previous year’s expenses. This is a predetermined formula derived from the utility's costs and a reasonable rate of return. Because these rates are eventually trued up to reflect actual current year costs, they represent a form of variable consideration in certain circumstances. The variable consideration is estimated and recognized over time as wholesale customers receive and consume the capacity and electricity services.

Natural Gas Utility Operating Revenues

The following table disaggregates natural gas utility operating revenues into customer class for the current period:



(in millions)	Wisconsin			Illinois			Other States			Total Natural Gas Utility Operations
Three Months Ended March 31, 2018
Residential	$	356.7		$	332.6		$	123.2		$	812.5
Commercial and industrial	187.9			109.4			64.7			362.0
Total retail revenues	544.6			442.0			187.9			1,174.5
Transport	21.0			77.7			9.9			108.6
Other utility revenues *	(47.6		)	(12.1		)	(25.1		)	(84.8		)
Total natural gas utility operating revenues	$	518.0		$	507.6		$	172.7		$	1,198.3


*	Includes amounts (refunded to) collected from customers for purchased gas adjustment costs.

We recognize natural gas utility operating revenues under requirements contracts with residential, commercial and industrial, and transportation customers served under the tariffs of our regulated utilities. Tariffs provide our customers with the standard terms and conditions, including rates, related to the services offered. Requirements contracts provide for the delivery of as much natural gas as the customer needs. These requirements contracts represent discrete deliveries of natural gas and constitute a single performance obligation satisfied over time. Our performance obligation is both created and satisfied with the transfer of control of natural gas upon delivery to the customer. For most of our customers, natural gas is delivered and consumed by the customer simultaneously. A performance obligation can be bundled to consist of both the sale and the delivery of the natural gas commodity. In certain of our service territories, customers can purchase the commodity from a third party. In this case, the performance obligation only includes the delivery of the natural gas to the customer.



03/31/2018 Form 10-Q	10	WEC Energy Group, Inc.

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The transaction price of the performance obligations is valued using rates in the tariffs of our regulated utilities, which have been approved by state regulators. These rates often have a fixed component customer charge and a usage-based variable component. We recognize revenue for the fixed component customer charge monthly using a time-based output method. We recognize revenue for the usage-based variable component using an output method based on natural gas delivered each month.

Consistent with the timing of when we recognize revenue, customer billings generally occur on a monthly basis, with payments typically due in full within 30 days.

Other Non-Utility Operating Revenues

Other non-utility operating revenues consist primarily of the following:



(in millions)	Three Months Ended March 31, 2018
We Power revenues	$	6.4
Appliance service revenues	3.9
Distributed renewable solar project revenues	1.3
Total other non-utility operating revenues	$	11.6

As part of the construction of the We Power electric generating units, we capitalized interest during construction, which is included in property, plant, and equipment. As allowed by the PSCW, we collected these carrying costs from WE's utility customers during construction. The equity portion of these carrying costs was recorded as deferred revenue, and we continually amortize the deferred carrying costs to revenues over the life of the plants to better match the costs of owning the plant while we are providing service to our customers. During the three months ended March 31, 2018, we recorded $6.4 million of revenue related to these deferred carrying costs, which were included in the contract liability balance at the beginning of the period. This contract liability is presented as deferred revenue, net on our balance sheets.

Non-utility operating revenues are derived primarily from servicing appliances for customers at MERC. These contracts customarily have a duration of one year or less and consist of a single performance obligation satisfied over time. We use a time-based output method to recognize revenues monthly for the service fee.

Revenues from distributed renewable solar projects consist primarily of sales of renewable energy and solar renewable energy certificates (SRECs) generated by WPS Power Development, LLC. The sale of SRECs is a distinct performance obligation as they are often sold separately from the renewable energy generated. Although the performance obligation for the sale of renewable energy is recognized over time and the performance obligation for SRECs is recognized at a point-in-time, the timing of revenue recognition is the same and occurs as renewable energy is generated.

Other Operating Revenues

Other operating revenues consist primarily of the following:



(in millions)	Three Months Ended March 31, 2018
Alternative revenues *	$	(16.1	)
Late payment charges	11.4
Leases	1.2
Total other operating revenues	$	(3.5	)


*	Negative amounts can result from alternative revenues being reversed to revenues from contracts with customers as the customer is billed for these alternative revenues. Negative amounts can also result from revenues to be refunded to customers subject to decoupling mechanisms and wholesale true-ups, as discussed below.



03/31/2018 Form 10-Q	11	WEC Energy Group, Inc.

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Alternative Revenues

Alternative revenues are created from programs authorized by regulators that allow our utilities to record additional revenues by adjusting rates in the future, usually as a surcharge applied to future billings, in response to past activities or completed events. Alternative revenue programs allow compensation for the effects of weather abnormalities, other external factors, or demand side management initiatives. Alternative revenue programs can also provide incentive awards if the utility achieves certain objectives and in other limited circumstances. We record alternative revenues when the regulator-specified conditions for recognition have been met. We reverse these alternative revenues as the customer is billed, at which time this revenue is presented as revenues from contracts with customers.

Below is a summary of the alternative revenue programs at our utilities:


•	The rates of PGL, NSG, and MERC include decoupling mechanisms. These mechanisms differ by state and allow the utilities to recover or refund the differences between actual and authorized margins for certain customers.


•	MERC’s rates include a conservation improvement program rider, which includes a financial incentive for meeting energy savings goals.

•

WE and WPS provide wholesale electric service to customers under market-based rates and FERC formula rates. The customer is charged a base rate each year based upon a formula using prior year actual costs and customer demand. A true-up is calculated based on the difference between the amount billed to customers for the demand component of their rates and what the actual cost of service was for the year. The true-up can result in an amount that we will recover or refund to the customer. We consider the true-up portion of the wholesale electric revenues to be alternative revenues.

NOTE 5—PROPERTY, PLANT, AND EQUIPMENT

Wisconsin Segment Plant to be Retired

We have evaluated future plans for our older and less efficient fossil fuel generating units and have announced the retirement of the plants identified below. The net book value of these plants was classified as plant to be retired within property, plant, and equipment on our balance sheet at March 31, 2018. In addition, severance expense in the amount of $29.4 million was recorded within the Wisconsin segment in 2017 related to these announced plant retirements.

Pleasant Prairie Power Plant

As a result of a MISO ruling in December 2017, the Pleasant Prairie power plant was retired effective April 10, 2018. Retirement of the Pleasant Prairie power plant was considered probable at March 31, 2018. The net book value of this generating unit was $674.1 million at March 31, 2018, and was classified as plant to be retired within property, plant, and equipment on our balance sheet. This unit is included in rate base, and WE continues to depreciate it on a straight-line basis using the composite depreciation rates approved by the PSCW. The physical dismantlement of the plant will not occur immediately. It may take several years to finalize long-term plans for the site. See Note 19, Commitments and Contingencies, for more information.

Presque Isle Power Plant

In October 2017, the MPSC approved UMERC’s application to construct and operate approximately 180 MW of natural gas-fired generation in the Upper Peninsula of Michigan. The new units are expected to begin commercial operation by mid-2019. Upon receiving the MPSC's approval, retirement of the PIPP generating units became probable. As a result of a MISO ruling received in April 2018, the PIPP units must be retired no later than May 31, 2019. The net book value of these units was $188.7 million at March 31, 2018, and was classified as plant to be retired within property, plant, and equipment on our balance sheet. These units are included in rate base, and WE continues to depreciate them on a straight-line basis using the composite depreciation rates approved by the PSCW. See Note 19, Commitments and Contingencies, and Note 21, Regulatory Environment, for more information.

Pulliam Power Plant

WPS anticipates retiring Pulliam generating units 7 and 8 near the end of 2018 when certain transmission lines are completed. Retirement of the Pulliam generating units was probable at March 31, 2018. The net book value of these generating units was $43.6 million at March 31, 2018, and was classified as plant to be retired within property, plant, and equipment on our balance



03/31/2018 Form 10-Q	12	WEC Energy Group, Inc.

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sheet. These units are included in rate base, and WPS continues to depreciate them on a straight-line basis using the composite depreciation rates approved by the PSCW. See Note 19, Commitments and Contingencies, for more information.

Edgewater Unit 4

As a result of the continued implementation of the Consent Decree related to the jointly owned Columbia and Edgewater plants, retirement of the Edgewater 4 generating unit was probable at March 31, 2018. The plant must be retired by September 30, 2018. The net book value of WPS's ownership share of this generating unit was $12.7 million at March 31, 2018, and was classified as plant to be retired within property, plant, and equipment on our balance sheet. This unit is included in rate base, and WPS continues to depreciate it on a straight-line basis using the composite depreciation rates approved by the PSCW. See Note 19, Commitments and Contingencies, for more information regarding the Consent Decree.

NOTE 6—COMMON EQUITY

Stock-Based Compensation

During the first quarter of 2018, the Compensation Committee of our Board of Directors awarded the following stock-based compensation awards to our directors, officers, and certain other key employees:



Award Type		Number of Awards
Stock options ⁽¹⁾		710,710
Restricted shares⁽²⁾		156,340
Performance units		217,560


⁽¹⁾	Stock options awarded had a weighted-average exercise price of $65.60 and a weighted-average grant date fair value of $7.71 per option.


⁽²⁾	Restricted shares awarded had a weighted-average grant date fair value of $64.20 per share.

Restrictions

Our ability as a holding company to pay common stock dividends primarily depends on the availability of funds received from our utility subsidiaries and our non-utility subsidiary, We Power. Various financing arrangements and regulatory requirements impose certain restrictions on the ability of our subsidiaries to transfer funds to us in the form of cash dividends, loans, or advances. All of our utility subsidiaries, with the exception of UMERC and MGU, are prohibited from loaning funds to us, either directly or indirectly.

See Note 9, Common Equity, in our 2017 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.

Common Stock Dividends

On April 19, 2018, our Board of Directors declared a quarterly cash dividend of $0.5525 per share, payable on June 1, 2018, to shareholders of record on May 14, 2018.

NOTE 7—SHORT-TERM DEBT AND LINES OF CREDIT

The following table shows our short-term borrowings and their corresponding weighted-average interest rates:



(in millions, except percentages)	March 31, 2018			December 31, 2017
Commercial paper
Amount outstanding	$	1,200.3		$	1,444.6
Weighted-average interest rate on amounts outstanding	2.24		%	1.77		%

Our average amount of commercial paper borrowings based on daily outstanding balances during the three months ended March 31, 2018, was $1,254.4 million with a weighted-average interest rate during the period of 1.90%.



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The information in the table below relates to our revolving credit facilities used to support our commercial paper borrowing programs, including available capacity under these facilities:



(in millions)	Maturity	March 31, 2018
WEC Energy Group	October 2022	$	1,200.0
WE	October 2022	500.0
WPS	October 2022	400.0
WG	October 2022	350.0
PGL	October 2022	350.0
Total short-term credit capacity		$	2,800.0
Less:
Letters of credit issued inside credit facilities		$	1.2
Commercial paper outstanding		1,200.3
Available capacity under existing agreements		$	1,598.5

NOTE 8—LONG-TERM DEBT

Integrys Holding, Inc.

In April 2018, Integrys issued a notice to redeem at par all $114.9 million outstanding of its 2006 Junior Subordinated Notes due December 1, 2066. The redemption will be effective May 14, 2018. As a result, the $114.9 million outstanding balance was included in the current portion of long-term debt on our balance sheet at March 31, 2018.

NOTE 9—MATERIALS, SUPPLIES, AND INVENTORIES

Our inventory consisted of:



(in millions)	March 31, 2018		December 31, 2017
Natural gas in storage	$	34.8	$	209.0
Materials and supplies	213.7		211.2
Fossil fuel	127.5		118.8
Total	$	376.0	$	539.0

PGL and NSG price natural gas storage injections at the calendar year average of the costs of natural gas supply purchased. Withdrawals from storage are priced on the LIFO cost method. For interim periods, the difference between current projected replacement cost and the LIFO cost for quantities of natural gas temporarily withdrawn from storage is recorded as a temporary LIFO liquidation debit or credit. At March 31, 2018, we had a temporary LIFO liquidation credit of $35.6 million recorded within other current liabilities on our balance sheet. Due to seasonality requirements, PGL and NSG expect these interim reductions in LIFO layers to be replenished by year end.

Substantially all other natural gas in storage, materials and supplies, and fossil fuel inventories are recorded using the weighted-average cost method of accounting.

NOTE 10—INCOME TAXES

The provision for income taxes for the quarter ended March 31, 2018, differs from the amount of income tax determined by applying the applicable United States statutory federal income tax rate to income before income taxes as a result of the following:



	Amount			Effective Tax Rate
Statutory federal income tax	$	100.5		21.0	%
State income taxes net of federal tax benefit	29.9			6.2	%
Federal tax reform	(15.5		)	(3.2	)%
Tax repairs	(25.5		)	(5.3	)%
Other	(1.1		)	(0.3	)%
Total income tax expense	$	88.3		18.4	%



03/31/2018 Form 10-Q	14	WEC Energy Group, Inc.

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The effective tax rate of 18.4% for the first quarter of 2018 differs from the United States statutory federal income tax rate of 21% primarily due to the impact of the Tax Legislation and the flow through of tax repairs in connection with the Wisconsin rate settlement, partially offset by state income taxes. The Tax Legislation, signed into law in December 2017, required our regulated utilities to remeasure their deferred income taxes and begin to amortize the resulting excess deferred income taxes beginning in 2018 in accordance with normalization requirements (see Federal tax reform line above). See Note 21, Regulatory Environment, for more information about the impact of the Tax Legislation and the Wisconsin rate settlement.

On December 22, 2017, the SEC staff issued guidance in Staff Accounting Bulletin 118 (SAB 118), Income Tax Accounting Implications of the Tax Cuts and Jobs Act, which provides for a measurement period of up to one year from the enactment date to complete accounting under GAAP for the tax effects of the legislation. Due to the complex and comprehensive nature of the enacted tax law changes, and their application under GAAP, certain amounts related to bonus depreciation and future tax benefit utilization recorded in the financial statements as a result of the Tax Legislation are to be considered "provisional" as discussed in SAB 118 and subject to revision. We are awaiting additional guidance from industry and income tax authorities in order to finalize our accounting.

NOTE 11—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 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.

When possible, we base the valuations of our financial 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.

We recognize transfers between levels of the fair value hierarchy at their value as of the end of the reporting period.



03/31/2018 Form 10-Q	15	WEC Energy Group, Inc.

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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:



	March 31, 2018
(in millions)	Level 1		Level 2		Level 3		Total
Derivative assets
Natural gas contracts	$	1.7	$	0.5	$	—	$	2.2
Petroleum products contracts	0.6		—		—		0.6
FTRs	—		—		1.5		1.5
Coal contracts	—		1.1		—		1.1
Total derivative assets	$	2.3	$	1.6	$	1.5	$	5.4

Investments held in rabbi trust	$	103.6	$	—	$	—	$	103.6

Derivative liabilities
Natural gas contracts	$	3.4	$	1.4	$	—	$	4.8
Coal contracts	—		0.3		—		0.3
Total derivative liabilities	$	3.4	$	1.7	$	—	$	5.1



	December 31, 2017
(in millions)	Level 1		Level 2		Level 3		Total
Derivative assets
Natural gas contracts	$	1.8	$	3.9	$	—	$	5.7
Petroleum products contracts	1.2		—		—		1.2
FTRs	—		—		4.4		4.4
Coal contracts	—		1.1		—		1.1
Total derivative assets	$	3.0	$	5.0	$	4.4	$	12.4

Investments held in rabbi trust	$	120.7	$	—	$	—	$	120.7

Derivative liabilities
Natural gas contracts	$	7.0	$	3.8	$	—	$	10.8
Coal contracts	—		0.8		—		0.8
Total derivative liabilities	$	7.0	$	4.6	$	—	$	11.6

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 MISO Energy Markets.

We hold investments in the Integrys rabbi trust. These investments are restricted as they can only be withdrawn from the trust to fund participants' benefits under the Integrys deferred compensation plan and certain Integrys non-qualified pension plans. As we do not intend to sell the investments in the near term, they are included in other long-term assets on our balance sheets. For the three months ended March 31, 2018 and 2017, the net unrealized (losses) and gains included in earnings related to the investments held at the end of the period were $(3.1) million and $5.2 million, respectively.

The following table summarizes the changes to derivatives classified as Level 3 in the fair value hierarchy:



	Three Months Ended March 31
(in millions)	2018			2017
Balance at the beginning of the period	$	4.4		$	5.1
Settlements	(2.9		)	(3.4		)
Balance at the end of the period	$	1.5		$	1.7



03/31/2018 Form 10-Q	16	WEC Energy Group, Inc.

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Fair Value of Financial Instruments

The following table shows the financial instruments included on our balance sheets that are not recorded at fair value:



	March 31, 2018				December 31, 2017
(in millions)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Preferred stock	$	30.4	$	29.1	$	30.4	$	30.5
Long-term debt, including current portion *	9,549.3		10,054.5		9,561.7		10,341.9


*	The carrying amount of long-term debt excludes capital lease obligations of $26.1 million and $27.0 million at March 31, 2018 and December 31, 2017, respectively.

The fair values of our long-term debt and preferred stock are categorized within Level 2 of the fair value hierarchy.

NOTE 12—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 and shareholders. Our approach is non-speculative and designed to mitigate risk. Regulated hedging programs are approved by our state regulators.

We record derivative instruments on our balance sheets as an asset or liability measured at fair value unless they qualify for the normal purchases and sales exception, and are so designated. We continually assess our contracts designated as normal and will discontinue the treatment of these contracts as normal if the required criteria are no longer met. 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, our regulators allow the effects of fair value accounting to be offset to regulatory assets and liabilities.

The following table shows our derivative assets and derivative liabilities:



	March 31, 2018				December 31, 2017
(in millions)	Derivative Assets		Derivative Liabilities		Derivative Assets		Derivative Liabilities
Other current
Natural gas contracts	$	2.2	$	3.7	$	5.6	$	9.4
Petroleum products contracts	0.6		—		1.2		—
FTRs	1.5		—		4.4		—
Coal contracts	0.8		0.3		0.6		0.6
Total other current *	$	5.1	$	4.0	$	11.8	$	10.0

Other long-term
Natural gas contracts	$	—	$	1.1	$	0.1	$	1.4
Coal contracts	0.3		—		0.5		0.2
Total other long-term *	$	0.3	$	1.1	$	0.6	$	1.6
Total	$	5.4	$	5.1	$	12.4	$	11.6


*	On our balance sheets, we classify derivative assets and liabilities as other current or other long-term based on the maturities of the underlying contracts.

Realized gains (losses) on derivative instruments are primarily recorded in cost of sales on the income statements. Our estimated notional sales volumes and realized gains (losses) were as follows:



	Three Months Ended March 31, 2018				Three Months Ended March 31, 2017
(in millions)	Volumes	Gains (Losses)			Volumes	Gains (Losses)
Natural gas contracts	48.1 Dth	$	(5.2	)	34.1 Dth	$	(0.3	)
Petroleum products contracts	2.1 gallons	0.5			4.9 gallons	(0.5		)
FTRs	8.2 MWh	3.7			9.2 MWh	3.0
Total		$	(1.0	)		$	2.2



03/31/2018 Form 10-Q	17	WEC Energy Group, Inc.

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On our balance sheets, 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 March 31, 2018 and December 31, 2017, we had posted cash collateral of $11.8 million and $16.2 million, respectively, in our margin accounts. These amounts were recorded on our balance sheets in other current assets.

The following table shows derivative assets and derivative liabilities if derivative instruments by counterparty were presented net on our balance sheets:



	March 31, 2018							December 31, 2017
(in millions)	Derivative Assets			Derivative Liabilities				Derivative Assets			Derivative Liabilities
Gross amount recognized on the balance sheet	$	5.4		$	5.1			$	12.4		$	11.6
Gross amount not offset on the balance sheet	(2.1		)	(3.7		)	⁽¹⁾	(4.9		)	(9.0		)	⁽²⁾
Net amount	$	3.3		$	1.4			$	7.5		$	2.6


⁽¹⁾	Includes cash collateral posted of $1.6 million.


⁽²⁾	Includes cash collateral posted of $4.1 million.

Certain of our derivative and nonderivative commodity instruments contain provisions that could require "adequate assurance" in the event of a material change in our creditworthiness, or the posting of additional collateral for instruments in net liability positions, if triggered by a decrease in credit ratings. The aggregate fair value of all derivative instruments with specific credit risk-related contingent features that were in a net liability position was $1.1 million and $3.7 million at March 31, 2018 and December 31, 2017, respectively. At March 31, 2018 and December 31, 2017, we had not posted any collateral related to the credit risk-related contingent features of these commodity instruments. If all of the credit risk-related contingent features contained in derivative instruments in a net liability position had been triggered at March 31, 2018 and December 31, 2017, we would have been required to post collateral of $1.5 million and $2.7 million, respectively.

NOTE 13—GUARANTEES

The following table shows our outstanding guarantees:



			Expiration
(in millions)	Total Amounts Committed at March 31, 2018		Less Than 1 Year		1 to 3 Years		Over 3 Years
Guarantees
Guarantees supporting commodity transactions of subsidiaries ⁽¹⁾	$	8.1	$	8.1	$	—	$	—
Standby letters of credit ⁽²⁾	71.4		46.0		25.4		—
Surety bonds⁽³⁾	9.8		9.7		0.1		—
Other guarantees⁽⁴⁾	11.1		0.5		—		10.6
Total guarantees	$	100.4	$	64.3	$	25.5	$	10.6


⁽¹⁾	Consists of $8.1 million to support the business operations of Bluewater.


⁽²⁾	At our request or the request of our subsidiaries, financial institutions have issued standby letters of credit for the benefit of third parties that have extended credit to our subsidiaries. These amounts are not reflected on our balance sheets.


⁽³⁾	Primarily for workers compensation self-insurance programs and obtaining various licenses, permits, and rights-of-way. These amounts are not reflected on our balance sheets.


⁽⁴⁾	Consists of $11.1 million related to other indemnifications, for which a liability of $10.6 million related to workers compensation coverage was recorded on our balance sheets.



03/31/2018 Form 10-Q	18	WEC Energy Group, Inc.

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NOTE 14—EMPLOYEE BENEFITS

The following tables show the components of net periodic pension and OPEB costs for our benefit plans.



	Pension Costs
	Three Months Ended March 31
(in millions)	2018			2017
Service cost	$	12.0		$	11.7
Interest cost	28.3			31.2
Expected return on plan assets	(49.6		)	(49.6		)
Loss on plan settlement	0.4			—
Amortization of prior service cost	0.7			0.7
Amortization of net actuarial loss	23.1			21.9
Net periodic benefit cost	$	14.9		$	15.9



	OPEB Costs
	Three Months Ended March 31
(in millions)	2018			2017
Service cost	$	6.2		$	6.3
Interest cost	7.5			8.5
Expected return on plan assets	(14.9		)	(13.7		)
Amortization of prior service credit	(3.8		)	(2.8		)
Amortization of net actuarial loss	0.3			1.5
Net periodic benefit credit	$	(4.7	)	$	(0.2	)

During the three months ended March 31, 2018, we made contributions and payments of $3.7 million related to our pension plans and $1.6 million related to our OPEB plans. We expect to make contributions and payments of $8.5 million related to our pension plans and $7.9 million related to our OPEB plans during the remainder of 2018, dependent upon various factors affecting us, including our liquidity position and the effects of the new Tax Legislation.

Effective January 1, 2018, we adopted ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which modifies certain aspects of the accounting for employee benefit costs. Under the new guidance, only the service cost component can be included in total operating expenses. The remaining components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component, outside of operating income. As required, this change was applied retrospectively to all prior periods presented. Accordingly, for the quarters ended March 31, 2018 and 2017, we have presented the service cost component of our retirement benefit plans in other operation and maintenance on the income statements, while presenting the non-service cost components in other income, net. For the quarters ended March 31, 2018 and 2017, the non-service cost components of net benefit cost were in a net credit position, in the amount of $(7.2) million and $(2.6) million, respectively. The $(2.6) million related to the first quarter of 2017 was reclassified from other operation and maintenance to other income, net on our income statements.

As required by ASU 2017-07, our income statements for the years ended December 31, 2017, 2016, and 2015 were retroactively restated from what was previously presented in our 2017 Annual Report on Form 10-K. The impacts to our income statements from adoption of this standard are reflected in the table below.



	Year Ended December 31, 2017						Year Ended December 31, 2016							Year Ended December 31, 2015
(in millions)	Form 10-K Income Statement		Impact of ASU 2017-07		Income Statement After Adoption		Form 10-K Income Statement		Impact of ASU 2017-07			Income Statement After Adoption		Form 10-K Income Statement		Impact of ASU 2017-07		Income Statement After Adoption
Operating expenses
Other operation and maintenance	$	2,047.0	$	9.1	$	2,056.1	$	2,185.5	$	(14.2	)	$	2,171.3	$	1,709.3	$	1.4	$	1,710.7

Other expense
Other income, net	64.6		9.1		73.7		80.8		(14.2		)	66.6		58.9		1.4		60.3



03/31/2018 Form 10-Q	19	WEC Energy Group, Inc.

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In addition, under ASU 2017-07, only the service cost component of net periodic benefit cost is eligible for capitalization to property, plant, and equipment. In prior periods, a portion of all net benefit cost components was capitalized to property, plant, and equipment. As required, this amendment was applied prospectively, beginning January 1, 2018. As a result of the application of accounting principles for rate regulated entities, the non-service cost components of the net benefit cost that are no longer eligible for capitalization under this standard, but are capitalized under the regulatory framework, will be presented as regulatory assets or liabilities rather than property, plant, and equipment.

NOTE 15—GOODWILL

Goodwill represents the excess of the cost of an acquisition over the fair value of the identifiable net assets acquired. The following table shows changes to our goodwill balances by segment during the three months ended March 31, 2018:



(in millions)	Wisconsin		Illinois		Other States		Non-Utility Energy Infrastructure			Total
Goodwill balance as of January 1, 2018	$	2,104.3	$	758.7	$	183.2	$	7.3		$	3,053.5
Adjustment to Bluewater purchase price allocation ⁽¹⁾	—		—		—		(0.7		)	(0.7		)
Goodwill balance as of March 31, 2018 ⁽²⁾	$	2,104.3	$	758.7	$	183.2	$	6.6		$	3,052.8


⁽¹⁾	See Note 2, Acquisitions, for more information on the acquisition of Bluewater.


⁽²⁾	We had no accumulated impairment losses related to our goodwill as of March 31, 2018.

NOTE 16—INVESTMENT IN TRANSMISSION AFFILIATES

We own approximately 60% of ATC, a for-profit, transmission-only company regulated by the FERC for cost of service and certain state regulatory commissions for routing and siting of transmission projects. We also own approximately 75% of ATC Holdco, a separate entity formed in December 2016 to invest in transmission-related projects outside of ATC's traditional footprint. The following tables provide a reconciliation of the changes in our investments in ATC and ATC Holdco:



	Three Months Ended March 31, 2018
(in millions)	ATC		ATC Holdco			Total
Balance at beginning of period *	$	1,515.8	$	37.6		$	1,553.4
Add: Earnings (loss) from equity method investment	33.4		(0.6		)	32.8
Add: Capital contributions	12.0		0.8			12.8
Less: Other	0.1		—			0.1
Balance at end of period	$	1,561.1	$	37.8		$	1,598.9


*	Distributions of $39.9 million, received in the first quarter of 2018, were approved and recorded as a receivable from ATC in other current assets at December 31, 2017.



	Three Months Ended March 31, 2017
(in millions)	ATC		ATC Holdco			Total
Balance at beginning of period *	$	1,443.9	$	—		$	1,443.9
Add: Earnings (loss) from equity method investment	47.7		(5.8		)	41.9
Add: Capital contributions	24.1		3.5			27.6
Less: Other	0.1		—			0.1
Balance at end of period	$	1,515.6	$	(2.3	)	$	1,513.3


*	Distributions of $35.2 million, received in the first quarter of 2017, were approved and recorded as a receivable from ATC in other current assets at December 31, 2016.

We pay ATC for network transmission and other related services it provides. In addition, we provide a variety of operational, maintenance, and project management work for ATC, which is reimbursed by ATC. We are required to pay the cost of needed transmission infrastructure upgrades for new generation projects while the projects are under construction. ATC reimburses us for these costs when the new generation is placed in service.



03/31/2018 Form 10-Q	20	WEC Energy Group, Inc.

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The following table summarizes our significant related party transactions with ATC:



	Three Months Ended March 31
(in millions)	2018		2017
Charges to ATC for services and construction	$	4.6	$	4.2
Charges from ATC for network transmission services	84.5		87.3
Refund from ATC per FERC ROE order	—		28.3

Our balance sheets included the following receivables and payables related to ATC:



(in millions)	March 31, 2018		December 31, 2017
Accounts receivable
Services provided to ATC	$	1.8	$	1.5
Other current assets