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EX-32.1 - WEC ENERGY GROUP EXHIBIT 32.1 - WEC ENERGY GROUP, INC.wec06302015ex321.htm
EX-32.2 - WEC ENERGY GROUP EXHIBIT 32.2 - WEC ENERGY GROUP, INC.wec06302015ex322.htm
EX-31.2 - WEC ENERGY GROUP EXHIBIT 31.2 - WEC ENERGY GROUP, INC.wec06302015ex312.htm
EX-31.1 - WEC ENERGY GROUP EXHIBIT 31.1 - WEC ENERGY GROUP, INC.wec06302015ex311.htm
EX-10.2 - WEC ENERGY GROUP EXHIBIT 10.2 - WEC ENERGY GROUP, INC.weceg06302015ex102.htm
EX-10.3 - WEC ENERGY GROUP EXHIBIT 10.3 - WEC ENERGY GROUP, INC.weceg06302015ex103.htm
EX-10.1 - WEC ENERGY GROUP EXHIBIT 10.1 - WEC ENERGY GROUP, INC.weceg06302015ex101.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 June 30, 2015

Commission
Registrant; State of Incorporation
IRS Employer
File Number
Address; and Telephone Number
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 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 [X]  
 
Accelerated filer [  ]
 
 
Non-accelerated filer [  ] (Do not
 
Smaller reporting company [  ]
 
 
check if a 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 (June 30, 2015):

Common Stock, $.01 Par Value,
315,684,458 shares outstanding.




June 2015
1
WEC Energy Group, Inc.

Form 10-Q


WEC ENERGY GROUP, INC.
_______________________

FORM 10-Q REPORT FOR THE QUARTER ENDED JUNE 30, 2015

 
TABLE OF CONTENTS
 
Item
 
Page
 
 
 
 
Introduction
 
 
 
 
Part I -- Financial Information
 
 
 
 
1.
Financial Statements
 
 
 
 
 
Consolidated Condensed Income Statements
 
 
 
 
Consolidated Condensed Statements of Comprehensive Income
 
 
 
 
Consolidated Condensed Balance Sheets
 
 
 
 
Consolidated Condensed Statements of Cash Flows
 
 
 
 
Notes to Consolidated Condensed Financial Statements
 
 
 
2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
4.
Controls and Procedures
 
 
 
 
Part II -- Other Information
 
 
 
 
1.
Legal Proceedings
 
 
 
1A.
Risk Factors
 
 
 
5.
Other Information
 
 
 




June 2015
2
WEC Energy Group, Inc.

Form 10-Q

DEFINITION OF ABBREVIATIONS AND INDUSTRY TERMS
 
 
 
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
ERGSS
 
Elm Road Generating Station Supercritical, LLC
Integrys
 
Integrys Energy Group, Inc.
ITF
 
Integrys Transportation Fuels, LLC
MERC
 
Minnesota Energy Resources Corporation
MGU
 
Michigan Gas Utilities Corporation
NSG
 
North Shore Gas Company
PGL
 
The Peoples Gas Light and Coke Company
WECC
 
Wisconsin Energy Capital Corporation
We Power
 
W.E. Power, LLC
Wisconsin Electric
 
Wisconsin Electric Power Company
Wisconsin Gas
 
Wisconsin Gas LLC
WPS
 
Wisconsin Public Service Corporation
PDL
 
WPS Power Development, LLC
 
 
 
Federal and State Regulatory Agencies
EPA
 
United States Environmental Protection Agency
FERC
 
Federal Energy Regulatory Commission
FCC
 
Federal Communications 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
 
Securities and Exchange Commission
WDNR
 
Wisconsin Department of Natural Resources
 
 
 
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
 
 
 
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
AMRP
 
Accelerated Natural Gas Main Replacement Program
ARRs
 
Auction Revenue Rights
Compensation Committee
 
Compensation Committee of the Board of Directors


June 2015
3
WEC Energy Group, Inc.

Form 10-Q

DEFINITION OF ABBREVIATIONS AND INDUSTRY TERMS
 
 
 
The abbreviations and terms set forth below are used throughout this report and have the meanings assigned to them below:
 
 
 
Exchange Act
 
Securities Exchange Act of 1934, as amended
FASB
 
Financial Accounting Standards Board
Fitch
 
Fitch Ratings
FTRs
 
Financial Transmission Rights
HSR Act
 
Hart-Scott-Rodino Antitrust Improvements Act of 1976
Junior Notes
 
WEC Energy Group's 2007 6.25% Series A Junior Subordinated Notes due 2067, Integrys' 2006 6.11% Junior Subordinated Notes due 2066,
and Integrys' 2013 6.00% Junior Subordinated Notes due 2073
LMP
 
Locational Marginal Price
Merger Agreement
 
Agreement and Plan of Merger, dated as of June 22, 2014, between Integrys and Wisconsin Energy Corporation
MISO
 
Midcontinent Independent System Operator, Inc.
MISO Energy Markets
 
MISO Energy and Operating Reserves Markets
Moody's
 
Moody's Investors Service
OTC
 
Over-the-Counter
PIPP
 
Presque Isle Power Plant
PTF
 
Power the Future
S&P
 
Standard and Poor's Ratings Services
SSR
 
System Support Resource
Treasury Grant
 
Section 1603 Renewable Energy Treasury Grant
VAPP
 
Valley Power Plant
 
 
 
Measurements
 
 
Btu
 
British Thermal Unit(s)
Dth
 
Dekatherm(s) (One Dth equals one million Btu)
GWh
 
Gigawatt-hour(s) (One GWh equals one thousand MWh)
MW
 
Megawatt(s) (One MW equals one million Watts)
MWh
 
Megawatt-hour(s)
Watt
 
A measure of power production or usage
 
 
 
Accounting Terms
 
 
AFUDC
 
Allowance for Funds Used During Construction
FASB
 
Financial Accounting Standards Board
GAAP
 
United States Generally Accepted Accounting Principles
OPEB
 
Other Post-Retirement Employee Benefits



June 2015
4
WEC Energy Group, Inc.

Form 10-Q

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements contained in this report 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). These statements are based upon management's current expectations and are subject to risks and uncertainties that could cause our actual results to differ materially from those contemplated in the statements. Readers are cautioned not to place undue reliance on these forward-looking statements. Forward-looking statements include, among other things, statements concerning management's expectations and projections regarding earnings, completion of construction projects, retail sales and customer growth, rate actions and related filings with the appropriate regulatory authorities, current and proposed environmental regulations and other regulatory matters and related estimated expenditures, on-going legal proceedings, dividend payout ratios, effective tax rate, projections related to the pension and other post-retirement benefit plans, fuel costs, sources of electric energy supply, coal and gas deliveries, remediation costs, capital expenditures, liquidity and capital resources and other matters. In some cases, forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology such as "anticipates," "believes," "could," "estimates," "expects," "forecasts," "goals," "guidance," "intends," "may," "objectives," "plans," "possible," "potential," "projects," "seeks," "should," "targets," "will" or similar terms or variations of these terms.

Actual results may differ materially from those set forth in forward-looking statements. In addition to the assumptions and other factors referred to specifically in connection with these statements, factors that could cause our actual results to differ materially from those contemplated in any forward-looking statements or otherwise affect our future results of operations and financial condition include, among others, the following:

Factors affecting utility operations such as catastrophic weather-related damage; availability of electric generating facilities; unscheduled generation outages, or unplanned maintenance or repairs; unanticipated events causing scheduled generation outages to last longer than expected; unanticipated changes in fossil fuel, purchased power, coal supply, gas supply or water supply costs or availability due to higher demand, shortages, transportation problems or other developments; unanticipated changes in the cost or availability of materials needed to operate environmental controls at our electric generating facilities or replace and/or repair our electric and gas distribution systems; nonperformance by electric energy or natural gas suppliers under existing power purchase or gas supply contracts; environmental incidents; electric transmission or gas pipeline system constraints; unanticipated organizational structure or key personnel changes; or collective bargaining agreements with union employees or work stoppages.

Factors affecting the demand for electricity and natural gas, including weather and other natural phenomena; general economic conditions and, in particular, the economic climate in our service territories; customer growth and declines; customer business conditions, including demand for their products and services; energy conservation efforts; and customers moving to self-generation.

Timing, resolution and impact of rate cases and negotiations.

The impact across our service territories of the continued adoption of distributed generation by our electric customers.

Increased competition in our electric and gas markets, including retail choice and alternative electric suppliers, and continued industry consolidation.

The ability to control costs and avoid construction delays during the development and construction of new electric and natural gas distribution systems, as well as upgrades to these systems and our electric generation fleet.

The impact of recent and future federal, state and local legislative and regulatory changes, including any changes in rate-setting policies or procedures; regulatory initiatives regarding deregulation and restructuring of the electric and/or gas utility industry; transmission or distribution system operation and/or administration initiatives; any required changes in facilities or operations to reduce the risks or impacts of potential terrorist activities or cyber security threats; the regulatory approval process for new generation and transmission facilities and new pipeline construction; adoption of new, or changes in existing, environmental, federal and state energy, tax and other laws and regulations to which we are, or may become, subject; changes in allocation of energy assistance, including state public benefits funds; changes in the application or enforcement


June 2015
5
WEC Energy Group, Inc.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION -- (CONT'D) Form 10-Q

of existing laws and regulations; and changes in the interpretation or enforcement of permit conditions by the permitting agencies.

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.

Current and future litigation, regulatory investigations, proceedings or inquiries.

Events in the global credit markets that may affect the availability and cost of capital.

Other factors affecting our ability to access the capital markets, including general capital market conditions; our capitalization structure; market perceptions of the utility industry, us or any of our subsidiaries; and our credit ratings.

The direct or indirect effect on our business resulting from terrorist incidents and the threat of terrorist incidents, including cyber intrusion.

Inflation rates.

The investment performance of our pension and other post-retirement benefit trusts.

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 effect of accounting pronouncements issued periodically by standard setting bodies.

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

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 ability to obtain and retain short- and long-term contracts with wholesale customers.

The terms and conditions of the governmental and regulatory approvals of the acquisition of Integrys that could reduce anticipated benefits, and the ability to successfully integrate the operations of Wisconsin Energy Corporation and Integrys Energy Group.
 
The risk associated with the value of goodwill and other intangible assets and their possible impairment.

Incidents affecting the U.S. electric grid or operation of generating facilities.

Changes to the legislative or regulatory restrictions or caps on non-utility acquisitions, investments or projects, including the State of Wisconsin's public utility holding company law.

Foreign governmental, economic, political and currency risks.

Other business or investment considerations that may be disclosed from time to time in our Securities and Exchange Commission (SEC) filings or in other publicly disseminated written documents, including the risk factors set forth in our and Integrys' Annual Reports on Form 10-K for the year ended December 31, 2014.

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.


June 2015
6
WEC Energy Group, Inc.

Form 10-Q

INTRODUCTION

On June 22, 2014, Wisconsin Energy Corporation entered into an agreement to acquire Integrys (Merger Agreement). The acquisition was completed on June 29, 2015, and the combined company was renamed WEC Energy Group, Inc. (WEC Energy Group). The combined company now serves approximately 1.6 million electric customers, 2.8 million gas customers, and owns approximately 60% of ATC. For additional information on this acquisition, see Note 2 -- Acquisition in the Notes to Consolidated Condensed Financial Statements and Corporate Developments in Item 2 in this report.

We have prepared the unaudited interim financial statements presented in this Form 10-Q pursuant to the rules and regulations of the SEC. We have condensed or omitted some information and note disclosures normally included in financial statements prepared in accordance with United States Generally Accepted Accounting Principles (GAAP) pursuant to these rules and regulations. This Form 10-Q, including the financial statements contained herein, should be read in conjunction with our 2014 Annual Report on Form 10-K, including the financial statements and notes therein.



June 2015
7
WEC Energy Group, Inc.

Form 10-Q

PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WEC ENERGY GROUP, INC.
CONSOLIDATED CONDENSED INCOME STATEMENTS
(Unaudited)
 
 
 
 
 
 
 
 
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2015

2014
 
2015
 
2014
 
(Millions of Dollars, Except Per Share Amounts)
 
 
 
 
 
 
 
 
Operating Revenues
$
991.2

 
$
1,043.7

 
$
2,379.1

 
$
2,738.7

 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
Fuel and purchased power
273.7

 
292.5

 
571.4

 
611.1

Cost of gas sold
79.3

 
125.9

 
395.5

 
717.4

Other operation and maintenance
337.0

 
256.0

 
617.7

 
531.4

Depreciation and amortization
105.7

 
101.4

 
210.8

 
202.0

Property and revenue taxes
31.9

 
30.3

 
63.8

 
60.9

Total Operating Expenses
827.6

 
806.1

 
1,859.2

 
2,122.8

 
 
 
 
 
 
 
 
Treasury Grant
2.2

 
3.1

 
4.7

 
6.6

 
 
 
 
 
 
 
 
Operating Income
165.8

 
240.7

 
524.6

 
622.5

 
 
 
 
 
 
 
 
Equity in Earnings of Transmission Affiliate
14.3

 
17.5

 
30.4

 
34.8

Other Income, net
26.1

 
8.1

 
29.1

 
9.2

Interest Expense, net
62.1

 
59.0

 
121.8

 
121.3

 
 
 
 
 
 
 
 
Income Before Income Taxes
144.1

 
207.3

 
462.3

 
545.2

 
 
 
 
 
 
 
 
Income Tax Expense
63.2

 
74.3

 
185.6

 
204.6

 
 
 
 
 
 
 
 
Net Income
$
80.9

 
$
133.0

 
$
276.7

 
$
340.6

 
 
 
 
 
 
 
 
Earnings Per Share
 
 
 
 
 
 
 
Basic
$
0.36

 
$
0.59

 
$
1.22

 
$
1.51

Diluted
$
0.35

 
$
0.58

 
$
1.21

 
$
1.50

 
 
 
 
 
 
 
 
Weighted Average Common Shares Outstanding (Millions)
 
 
 
 
 
 
 
Basic
227.5

 
225.5

 
226.5

 
225.6

Diluted
229.1

 
227.6

 
228.2

 
227.7

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


June 2015
8
WEC Energy Group, Inc.

Form 10-Q

WEC ENERGY GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
 
 
 
 
 
 
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2015
 
2014
 
2015
 
2014
 
(Millions of Dollars, Except Per Share Amounts)
 
 
 
 
 
 
 
 
Net Income
$
80.9

 
$
133.0

 
$
276.7

 
$
340.6

 
 
 
 
 
 
 
 
Other comprehensive income
 
 
 
 
 
 
 
Derivatives accounted for as hedges
 
 
 
 
 
 
 
Realized gains, net of tax of $7.6 million
11.4

 

 
11.4

 

Reclassification of net losses (gains) to net income
(0.1
)
 

 
(0.1
)
 

Total other comprehensive income
11.3

 

 
11.3

 

 
 
 
 
 
 
 
 
Comprehensive income
$
92.2

 
$
133.0

 
$
288.0

 
$
340.6

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


June 2015
9
WEC Energy Group, Inc.

Form 10-Q

WEC ENERGY GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
 
 
 
 
 
June 30, 2015
 
December 31, 2014
 
(Millions of Dollars)
Assets
 
 
 
Property, Plant and Equipment
 
 
 
In service
$
25,447.9

 
$
15,509.0

Accumulated depreciation
(7,857.4
)
 
(4,485.1
)
 
17,590.5

 
11,023.9

Construction work in progress
899.6

 
191.8

Leased facilities, net
39.3

 
42.0

Net Property, Plant and Equipment
18,529.4


11,257.7

Investments
 
 
 
Equity investment in transmission affiliate
987.8


424.1

Other
181.9


32.8

Total Investments
1,169.7

 
456.9

Current Assets
 
 
 
Cash and cash equivalents
214.4


61.9

Accounts receivable, net
667.5


352.1

Accrued revenues
289.1


291.3

Materials, supplies and inventories
562.5


400.6

Current deferred tax asset, net
236.4

 
242.7

Prepayments and other
306.9


186.8

Total Current Assets
2,276.8

 
1,535.4

Deferred Charges and Other Assets
 
 
 
Regulatory assets
2,796.4


1,271.2

Goodwill
3,386.5


441.9

Other long-term assets
455.7


200.3

Total Deferred Charges and Other Assets
6,638.6

 
1,913.4

Total Assets
$
28,614.5

 
$
15,163.4

 
 
 
 
Capitalization and Liabilities

 
 
Capitalization
 
 
 
Common equity
$
8,456.7


$
4,419.7

Preferred stock of subsidiaries
81.5


30.4

Long-term debt
8,547.6


4,186.4

Total Capitalization
17,085.8

 
8,636.5

Current Liabilities
 
 
 
Long-term debt due currently
608.4


424.1

Short-term debt
826.3


617.6

Accounts payable
777.1


363.3

Accrued payroll and benefits
135.7


95.1

Other
592.8


168.6

Total Current Liabilities
2,940.3

 
1,668.7

Deferred Credits and Other Liabilities
 
 
 
Regulatory liabilities
1,313.0


830.6

Deferred income taxes - long-term
4,624.3


2,906.7

Deferred revenue, net
596.2


614.1

Pension and other benefit obligations
428.0


203.8

Other long-term liabilities
1,626.9


303.0

Total Deferred Credits and Other Liabilities
8,588.4

 
4,858.2

Total Capitalization and Liabilities
$
28,614.5

 
$
15,163.4

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


June 2015
10
WEC Energy Group, Inc.

Form 10-Q

WEC ENERGY GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
 
 
 
Six Months Ended June 30
 
2015

2014
 
(Millions of Dollars)
Operating Activities
 
 
 
Net income
$
276.7


$
340.6

Reconciliation to cash
 
 
 
Depreciation and amortization
216.8


206.5

Deferred income taxes and investment tax credits, net
121.7


188.0

Contributions to qualified benefit plans
(100.0
)
 

Change in - Accounts receivable and accrued revenues
134.5

 
132.0

Inventories
72.2

 
25.1

Other current assets
16.7

 
11.8

Accounts payable
27.4

 
(52.6
)
Accrued income taxes, net
10.5

 
(10.6
)
Other current liabilities
(1.2
)
 
(21.6
)
Other, net
(59.4
)
 
(97.9
)
Cash Provided by Operating Activities
715.9

 
721.3

 
 
 
 
Investing Activities
 
 
 
Capital expenditures
(356.5
)

(305.5
)
Business acquisition, net of cash acquired of $156.3 million
(1,329.4
)
 

Investment in transmission affiliate
(2.6
)

(7.9
)
Other, net
9.3


0.5

Cash Used in Investing Activities
(1,679.2
)
 
(312.9
)
 
 
 
 
Financing Activities
 
 
 
Exercise of stock options
12.2

 
17.6

Purchase of common stock
(32.0
)
 
(57.3
)
Dividends paid on common stock
(190.5
)

(176.0
)
Issuance of long-term debt
1,450.0

 
250.0

Retirement of long-term debt
(11.6
)
 
(311.1
)
Change in short-term debt
(105.7
)
 
(127.3
)
Other, net
(6.6
)
 
3.1

Cash Provided by (Used in) Financing Activities
1,115.8

 
(401.0
)
 
 
 
 
Change in Cash and Cash Equivalents
152.5

 
7.4

 
 
 
 
Cash and Cash Equivalents at Beginning of Period
61.9


26.0

 
 
 
 
Cash and Cash Equivalents at End of Period
$
214.4

 
$
33.4

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


June 2015
11
WEC Energy Group, Inc.

Form 10-Q

WEC ENERGY GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)


1 -- GENERAL INFORMATION

On June 29, 2015, Wisconsin Energy Corporation acquired Integrys and the combined company was renamed WEC Energy Group, Inc. Our condensed consolidated balance sheet as of June 30, 2015 reflects the acquisition of Integrys. The condensed consolidated income statements, statements of comprehensive income, and statements of cash flows for the three and six-month periods ended June 30, 2015 do not include the results of the Integrys companies because they were immaterial due to the timing of the closing of the acquisition. We will include the Integrys companies in our operating results for periods subsequent to June 30, 2015.

Our accompanying unaudited consolidated condensed financial statements should be read in conjunction with Item 8. Financial Statements and Supplementary Data, in our 2014 Annual Report on Form 10-K. In the opinion of management, we have included all adjustments, normal and recurring in nature, necessary for a fair presentation of the results of operations, cash flows and financial position in the accompanying income statements, statements of comprehensive income, statements of cash flows and balance sheets. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results which may be expected for the entire fiscal year 2015 because of the acquisition of Integrys, seasonal and other factors.


2 -- ACQUISITION

On June 29, 2015, 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. Integrys also held a 34% interest in ATC, a for-profit transmission company regulated by the Federal Energy Regulatory Commission (FERC). The acquisition of Integrys provides increased access to scale, the potential for long-term cost savings through a combination of lower capital and operating costs, and the potential for operating efficiencies.

Pursuant to the Merger Agreement, Integrys’ shareholders received 1.128 shares of Wisconsin Energy common stock and $18.58 in cash per Integrys share of common stock. The total consideration transferred was based on the closing price of Wisconsin Energy common stock on June 29, 2015, and was calculated as follows:

 
Stock
 
Cash
 
Total
 
(Millions of Dollars, except per share amounts)
Integrys common shares outstanding at June 29, 2015
79,963,091

 
79,963,091

 
 
Exchange ratio
1.128

 
 
 
 
Wisconsin Energy shares issued for Integrys shares (a)
90,187,884

 
 
 
 
Closing price of Wisconsin Energy common shares on June 29, 2015
$45.16
 
 
 
 
Fair value of common stock issued
$
4,072.9

 
 
 
$
4,072.9

Cash paid per share of Integrys shares outstanding
 
 
$18.58
 
 
Fair value of cash paid for Integrys shares (a)
 
 
$
1,486.2

 
$
1,486.2

Consideration attributable to settlement of equity awards, net of tax
 
 
$
24.0

 
$
24.0

Total purchase price
$
4,072.9

 
$
1,510.2

 
$
5,583.1

 

 
 
 
 
(a) 10,483 fractional shares totaling $0.5 million were paid in cash.

All Integrys unvested stock-based compensation awards became fully vested upon the close of the transaction and were either paid to award recipients in cash, or the value of the awards was deferred into a deferred compensation plan. In addition, all vested but unexercised Integrys stock options were paid in cash. In accordance with accounting guidance for business combinations, the expense caused by the acceleration of the vesting was an expense related to the transaction.


June 2015
12
WEC Energy Group, Inc.

Form 10-Q


The Integrys assets acquired and the liabilities assumed were measured at estimated fair value as defined in the accounting guidance.

Substantially all of Integrys' operations are subject to the rate-setting authority of federal and state regulatory commissions. These operations are accounted for in accordance with GAAP accounting guidance for regulated operations. In addition, the underlying assets and liabilities of ATC are regulated by FERC. The fair values of Integrys' assets and liabilities subject to these rate-setting provisions approximate their carrying values, and the assets and liabilities acquired and pro forma financial information do not reflect any net adjustments related to these amounts.

The excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed was recognized as goodwill. The goodwill reflects the value paid for the increased access to scale and efficiencies as a result of the combination. The goodwill recognized is not deductible for income tax purposes, and as such no deferred taxes have been recorded related to goodwill. The preliminary purchase price allocation of the acquisition was as follows:

 
(Millions of Dollars)
Current assets
$
1,178.2

Net property, plant and equipment
7,098.2

Goodwill
2,944.6

Deferred charges and other assets, excluding goodwill
2,410.5

Current liabilities, including current maturities of long-term debt
(1,260.1
)
Deferred credits and other liabilities
(3,769.6
)
Long-term debt
(2,967.6
)
Preferred stock of subsidiary
(51.1
)
Total purchase price
$
5,583.1


The allocation of goodwill to the reporting segments has not yet been determined, due to the short time frame between the acquisition close date and the issuing date of this report.

The acquisition was subject to the approvals of various government agencies, including the FERC, Federal Communications Commission (FCC), Public Service Commission of Wisconsin (PSCW), Illinois Commerce Commission (ICC), Michigan Public Service Commission (MPSC), and Minnesota Public Utilities Commission (MPUC). Approvals were obtained from all agencies subject to several conditions. The PSCW order included the following conditions:

Wisconsin Electric and Wisconsin Gas will be subject to an earnings sharing mechanism for three years beginning January 1, 2016. Under the earnings sharing mechanism, any additional earnings over the authorized rate of return will be shared with ratepayers.

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.

Additionally, the ICC order included a base rate freeze for The Peoples Gas Light and Coke Company (PGL) and North Shore Gas Company (NSG) effective for two years after the close of the acquisition.

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

The following unaudited pro forma financial information reflects the consolidated results and amortization of purchase price adjustments as if the acquisition had taken place on January 1, 2014. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the consolidated results of operations that would have been achieved or the future consolidated results of WEC Energy Group.



June 2015
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WEC Energy Group, Inc.

Form 10-Q

The pro forma financial information does not reflect any potential cost savings from operating efficiencies resulting from the transaction and does not include transaction costs related to the acquisition. The information is preliminary in nature and subject to change. After-tax transaction costs incurred were $53.9 million ($0.24 per share) and $62.3 million ($0.28 per share) for the three and six months ended June 30, 2015, respectively, and $3.0 million ($0.01 per share) for both the three and six months ended June 30, 2014, which were recorded primarily in Other Operation and Maintenance expense.

Unaudited Pro Forma Financial Information
 
Three Months Ended June 30
 
Six Months Ended June 30
 
 
2015
 
2014
 
2015
 
2014
 
 
(Millions of Dollars, Except Per Share Amounts)
Operating Revenues
 
$
1,629.2

 
$
1,879.5

 
$
4,180.1

 
$
5,208.2

Net Income
 
$
159.1

 
$
143.2

 
$
488.7

 
$
499.5

Earnings per share (Basic)
 
$
0.50

 
$
0.46

 
$
1.55

 
$
1.54

Earnings per share (Diluted)
 
$
0.50

 
$
0.45

 
$
1.54

 
$
1.53


As a result of the acquisition, our ownership of ATC increased to approximately 60%. We have made commitments with respect to our voting rights of the combined ownership of ATC, which are included as enforceable conditions in the orders approving the transaction by the FERC and the PSCW. We also expect that ATC's governance documents will include these voting commitments. Under GAAP, these commitments do not allow for the consolidation of ATC in our financial statements and the 60% ownership is accounted for as an equity method investment subsequent to the close of the transaction. See Note 11 -- Investment in ATC in the Notes to Consolidated Condensed Financial Statements.


3 -- COMMON EQUITY

Stock Option Activity:   The following table identifies non-qualified stock options granted by the Compensation Committee of the Board of Directors (Compensation Committee):

 
2015
 
2014
 
 
 
 
Non-qualified stock options granted year to date
516,475

 
899,500

 
 
 
 
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 whose term is consistent with the expected life of the stock options. Dividend yield, expected volatility, expected forfeiture rate and expected life assumptions are based on our historical experience.



June 2015
14
WEC Energy Group, Inc.

Form 10-Q

The following is a summary of our stock option activity for the three and six months ended June 30, 2015:

 
 
 
 
 
 
Weighted-
 
 
 
 
 
 
 
 
Average
 
 
 
 
 
 
Weighted-
 
Remaining
 
Aggregate
 
 
Number of
 
Average
 
Contractual Life
 
Intrinsic Value
Stock Options
 
Options
 
Exercise Price
 
(Years)
 
(Millions)
Outstanding as of April 1, 2015
 
6,927,549

 
$
32.04

 
 
 
 
Granted
 

 
$

 
 
 
 
Exercised
 
(176,619
)
 
$
21.10

 
 
 
 
Forfeited
 

 
$

 
 
 
 
Outstanding as of June 30, 2015
 
6,750,930

 
$
32.32

 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding as of January 1, 2015
 
6,770,194

 
$
29.99

 
 
 
 
Granted
 
516,475

 
$
52.90

 
 
 
 
Exercised
 
(535,739
)
 
$
22.73

 
 
 
 
Forfeited
 

 
$

 
 
 
 
Outstanding as of June 30, 2015
 
6,750,930

 
$
32.32

 
5.7
 
$
85.4

 
 
 
 
 
 
 
 
 
Exercisable as of June 30, 2015
 
4,014,465

 
$
26.06

 
4.0
 
$
75.9


The intrinsic value of options exercised was $4.8 million and $15.4 million for the three and six months ended June 30, 2015 and $2.2 million and $17.5 million for the same periods in 2014, respectively. Cash received from options exercised was $12.2 million and $17.6 million for the six months ended June 30, 2015 and 2014, respectively. The actual tax benefit realized for the tax deductions from option exercises for the same periods was $6.2 million and $7.0 million, respectively.

Stock options to purchase 516,475 shares of common stock with an exercise price of $52.90 were outstanding during the second quarter of 2015, but were not included in the computation of diluted earnings per share because they were anti-dilutive.

The following table summarizes information about stock options outstanding as of June 30, 2015:

 
 
Options Outstanding
 
Options Exercisable
 
 
 
 
Weighted-Average
 
 
 
Weighted-Average
 
 
 
 
 
 
Remaining
 
 
 
 
 
Remaining
 
 
Number of
 
Exercise
 
Contractual
 
Number of
 
Exercise
 
Contractual
Range of Exercise Prices
 
Options
 
Price
 
Life (Years)
 
Options
 
Price
 
Life (Years)
$19.74 to $21.11
 
1,236,412

 
$
20.98

 
3.2
 
1,236,412

 
$
20.98

 
3.2
$23.88 to $29.35
 
1,897,488

 
$
25.15

 
3.3
 
1,897,488

 
$
25.15

 
3.3
$34.88 to $52.90
 
3,617,030

 
$
39.96

 
7.8
 
880,565

 
$
35.15

 
6.6
 
 
6,750,930

 
$
32.32

 
5.7
 
4,014,465

 
$
26.06

 
4.0



June 2015
15
WEC Energy Group, Inc.

Form 10-Q

The following table summarizes information about our non-vested options during the three and six months ended June 30, 2015:

 
 
 
 
Weighted-Average
Non-Vested Stock Options
 
Number of Options
 
Fair Value
Non-vested as of April 1, 2015
 
2,736,465

 
$
4.03

Granted
 

 
$

Vested
 

 
$

Forfeited
 

 
$

Non-vested as of June 30, 2015
 
2,736,465

 
$
4.03

 
 
 
 
 
Non-vested as of January 1, 2015
 
2,879,855

 
$
3.65

Granted
 
516,475

 
$
5.29

Vested
 
(659,865
)
 
$
3.34

Forfeited
 

 
$

Non-vested as of June 30, 2015
 
2,736,465

 
$
4.03


As of June 30, 2015, total compensation costs related to non-vested stock options not yet recognized was approximately $3.2 million, which is expected to be recognized over the next 18 months on a weighted-average basis.

Restricted Shares:   The following restricted stock activity occurred during the three and six months ended June 30, 2015:

 
 
 
 
Weighted-Average
Restricted Shares
 
Number of Shares
 
Grant Date Fair Value
Outstanding as of April 1, 2015
 
147,214

 
 
Granted
 

 
$

Released
 

 
$

Forfeited
 

 
$

Outstanding as of June 30, 2015
 
147,214

 
 
 
 
 
 
 
Outstanding as of January 1, 2015
 
155,479

 
 
Granted
 
60,164

 
$
53.83

Released
 
(68,429
)
 
$
36.95

Forfeited
 

 
$

Outstanding as of June 30, 2015
 
147,214

 
 

We record the market value of the restricted stock awards on the date of grant, and then we charge their value to expense over the vesting period of the awards. The intrinsic value of restricted stock vesting was zero and $3.7 million for the three and six months ended June 30, 2015, and zero and $2.7 million for the same periods in 2014, respectively. The actual tax benefit realized for the tax deductions from released restricted shares was zero and $1.3 million for the three and six months ended June 30, 2015, and zero and $1.0 million for the same periods in 2014, respectively.

As of June 30, 2015, total compensation cost related to restricted stock not yet recognized was approximately $4.6 million, which is expected to be recognized over the next 24 months on a weighted-average basis.

Performance Units:   In January 2015 and 2014, the Compensation Committee granted 195,365 and 233,735 performance units, respectively, to officers and other key employees under the Wisconsin Energy 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 $13.2 million and $14.8 million, respectively. The actual tax benefit realized for the tax deductions from the settlement of performance units was approximately $4.8 million and $5.3 million, respectively. As of June 30, 2015, total compensation cost related to performance units not yet


June 2015
16
WEC Energy Group, Inc.

Form 10-Q

recognized was approximately $14.2 million, which is expected to be recognized over the next 23 months on a weighted-average basis.

Restrictions:   Our ability as a holding company to pay common dividends primarily depends on the availability of funds received from our non-utility subsidiary, We Power, and our utility subsidiaries. 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 utility subsidiaries, with the exception of Michigan Gas Utilities Corporation (MGU), are prohibited from loaning funds to us, either directly or indirectly. The PSCW allows Wisconsin Public Service Corporation (WPS) to pay dividends on its common stock of no more than 103% of the previous year’s common stock dividend. WPS may return capital to us if its average financial common equity ratio is at least 51% on a calendar-year basis. WPS must obtain PSCW approval if a return of capital would cause its average financial common equity ratio to fall below this level. Our right to receive dividends on the common stock of WPS is also subject to the prior rights of WPS' preferred shareholders and to provisions in WPS' restated articles of incorporation, which limit the amount of common stock dividends that WPS may pay if its common stock and common stock surplus accounts constitute less than 25% of its total capitalization.

Integrys has short-term and long-term debt obligations that contain financial and other covenants, including but not limited to, a requirement to maintain a debt to total capitalization ratio not to exceed 65%.

NSG's long-term debt obligations contain provisions and covenants restricting the payment of cash dividends and the purchase or redemption of its capital stock.
PGL and WPS have short-term debt obligations containing financial and other covenants, including but not limited to, a requirement to maintain a debt to total capitalization ratio not to exceed 65%.

See Note H -- Common Equity in our 2014 Annual Report on Form 10-K for additional information on restrictions at our other subsidiaries. We do not believe that these restrictions will materially affect our operations or limit any dividend payments in the foreseeable future.

Share Repurchase Program:   In December 2013, our Board of Directors authorized a share repurchase program for the purchase of up to $300 million of our common stock through open market purchases or privately negotiated transactions from January 1, 2014 through the end of 2017. On June 22, 2014, in connection with the proposed acquisition of Integrys, the Board of Directors terminated this share repurchase program. In addition, we have instructed our independent agents to purchase shares on the open market to fulfill exercised stock options and restricted stock awards. The following table identifies shares purchased in the following periods:

 
Six Months Ended June 30
 
2015
 
2014
 
Shares
 
Cost
 
Shares
 
Cost
 
(In Millions)
 
 
 
 
 
 
 
 
Under share repurchase program

 
$

 
0.4

 
$
18.6

To fulfill exercised stock options and restricted stock awards
0.6

 
32.0

 
0.9

 
38.7

Total
0.6

 
$
32.0

 
1.3

 
$
57.3




June 2015
17
WEC Energy Group, Inc.

Form 10-Q

Integrys Acquisition: On June 29, 2015, we issued approximately 90.2 million common shares to acquire Integrys. All Integrys unvested stock-based compensation awards became fully vested upon the close of the transaction and were paid to award recipients in cash or deferred into deferred compensation plans. In addition, all vested but unexercised Integrys stock options were paid in cash. For additional information on this acquisition, see Note 2 -- Acquisition in the Notes to Consolidated Condensed Financial Statements and Corporate Developments in Item 2 in this report.

Common Stock Dividends: Under the Merger Agreement, our Board of Directors agreed to adopt and approve a new dividend policy to take effect upon completion of the acquisition. During the quarter ended June 30, 2015, our Board of Directors declared common stock dividends which are summarized below:

Date Declared
 
Date Payable
 
Per Share
 
Period
April 16, 2015
 
June 1, 2015
 
$0.4225
 
Second Quarter
June 12, 2015
 
July 6, 2015
 
$0.2067
 
45 days through June 28, 2015
June 12, 2015
 
September 1, 2015
 
$0.2337
 
47 days through Aug. 14, 2015

The dividend payable on July 6, 2015 was based on a quarterly rate of $0.4225 per share. The dividend payable on September 1, 2015 is based on our new quarterly rate of $0.4575 per share, which represents an 8.3% increase over the prior quarterly rate. The dividends declared by the Board of Directors in the quarter ended June 30, 2015 totaled $0.8629 per share. The Board of Directors expects to declare its next quarterly dividend in the fourth quarter of 2015.


4 -- LONG-TERM DEBT

Our outstanding long-term debt, including current maturities as of June 30, 2015, includes approximately $3.1 billion of Integrys debt assumed on June 29, 2015. This amount includes $45.7 million of fair value adjustments recorded in connection with purchase accounting, which will be amortized over the estimated remaining life of the debt and will not be a part of future principal payments. For additional information on the acquisition, see Note 2 -- Acquisition in the Notes to Consolidated Condensed Financial Statements.

In June 2015, WEC Energy Group issued $300 million of 1.65% Senior Notes due June 15, 2018, $400 million of 2.45% Senior Notes due June 15, 2020, and $500 million of 3.55% Senior Notes due June 15, 2025. The net proceeds were used to pay the cash consideration for the acquisition of Integrys and related transaction costs, and for general corporate purposes.

In July 2015, Integrys tendered an offer to repurchase all $55.0 million outstanding of its 8.00% Senior Notes due June 1, 2016. The $55.0 million balance of these notes was included in the current portion of long-term debt on our balance sheet at June 30, 2015.

In May 2015, Wisconsin Electric issued $250 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, Wisconsin Electric issued $250 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, Wisconsin Electric used short-term borrowings to retire $300 million of long-term debt that matured.




June 2015
18
WEC Energy Group, Inc.

Form 10-Q

5 -- MATERIALS, SUPPLIES AND INVENTORIES

Our inventory consists of:

Materials, Supplies and Inventories
 
June 30, 2015
 
December 31, 2014
 
 
(Millions of Dollars)
 
 
 
 
 
Fossil Fuel
 
$
182.4

 
$
125.6

Materials and Supplies
 
249.7

 
150.2

Natural Gas in Storage
 
130.4

 
124.8

Total
 
$
562.5

 
$
400.6


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

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 Last-in, First-out (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. The amounts as of June 30, 2015 were as follows:
 
 
 
As of June 30, 2015
 
Balance Sheet Presentation
 
PGL
 
NSG
 
 
 
(Millions of Dollars)
 
 
 
 
 
 
Temporary LIFO liquidation debit
Other current assets
 
$
21.0

 
$

Temporary LIFO liquidation credit
Other current Liabilities
 
$

 
$
5.2


Due to seasonality requirements, PGL and NSG expect these interim reductions in LIFO layers to be replenished by year end.


6 -- FAIR VALUE MEASUREMENTS

Fair value measurements require enhanced disclosures about assets and liabilities that are measured and reported at fair value and establish a hierarchal disclosure framework which prioritizes and ranks the level of observable inputs used in measuring fair value.

Fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We primarily apply the market approach for recurring fair value measurements and attempt to utilize the best available information. Accordingly, we also utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. We are able to classify fair value balances based on the observability of those inputs. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

Assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:

Level 1 -- Pricing inputs are unadjusted quoted prices 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. Instruments in this category consist of financial instruments such as exchange-traded derivatives, cash equivalents and restricted cash investments.

Level 2 -- Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation


June 2015
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WEC Energy Group, Inc.

Form 10-Q

methodologies. Instruments in this category include non-exchange-traded derivatives such as Over-the-Counter (OTC) forwards and options.

Level 3 -- Pricing inputs include significant inputs that are generally less observable from objective sources. The inputs in the determination of fair value require significant management judgment or estimation. At each balance sheet date, we perform an analysis of all instruments subject to fair value reporting and include in Level 3 all instruments whose fair value is based on significant unobservable inputs.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the instrument.

The following tables summarize our financial assets and liabilities by level within the fair value hierarchy:

Recurring Fair Value Measures
 
As of June 30, 2015
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(Millions of Dollars)
Assets:
 
 
 
 
 
 
 
 
Derivatives
 
$
3.5

 
$
4.1

 
$
7.7

 
$
15.3

Total
 
$
3.5

 
$
4.1

 
$
7.7

 
$
15.3

Liabilities:
 
 
 
 
 
 
 
 
Derivatives
 
$
6.7

 
$
26.6

 
$
5.4

 
$
38.7

Total
 
$
6.7

 
$
26.6

 
$
5.4

 
$
38.7


Recurring Fair Value Measures
 
As of December 31, 2014
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(Millions of Dollars)
Assets:
 
 
 
 
 
 
 
 
Derivatives
 
$
1.1

 
$
7.2

 
$
7.0

 
$
15.3

Total
 
$
1.1

 
$
7.2

 
$
7.0

 
$
15.3

Liabilities:
 
 
 
 
 
 
 
 
Derivatives
 
$
11.5

 
$
1.0

 
$

 
$
12.5

Total
 
$
11.5

 
$
1.0

 
$

 
$
12.5


Derivatives reflect positions we hold in exchange-traded derivative contracts and OTC derivative contracts. Exchange-traded derivative contracts, which include futures and exchange-traded options, are generally based on unadjusted quoted prices in active markets and are classified within Level 1. Some OTC derivative contracts are valued using broker or dealer quotations, or market transactions in either the listed or OTC markets utilizing a mid-market pricing convention (the mid-point between bid and ask prices), as appropriate. In such cases, these derivatives are classified within Level 2. Certain OTC derivatives may utilize models to measure fair value. Generally, we use a similar model to value similar instruments. Valuation models utilize various inputs which include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, other observable inputs for the asset or liability, and market-corroborated inputs (i.e., inputs derived principally from or corroborated by observable market data by correlation or other means). Where observable inputs are available for substantially the full term of the asset or liability, the instrument is categorized in Level 2. Certain OTC derivatives are in less active markets with a lower availability of pricing information which might not be observable in or corroborated by the market. When such inputs have a significant impact on the measurement of fair value, the instrument is categorized in Level 3.



June 2015
20
WEC Energy Group, Inc.

Form 10-Q

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

 
Three Months Ended June 30
 
Six Months Ended June 30
 
2015
 
2014
 
2015
 
2014
 
(Millions of Dollars)
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
3.3

 
$
1.7

 
$
7.0

 
$
3.5

Realized and unrealized gains (losses)

 

 

 

Purchases
3.9

 
15.6

 
3.9

 
15.6

Issuances

 

 

 

Settlements
(3.6
)
 
(3.2
)
 
(7.3
)
 
(5.0
)
Acquisition of Integrys
(1.3
)
 

 
(1.3
)
 

Transfers in and/or out of Level 3

 

 

 

Balance as of June 30
$
2.3

 
$
14.1

 
$
2.3

 
$
14.1


Derivative instruments reflected in Level 3 of the hierarchy include Midcontinent Independent System Operator, Inc. (MISO) Financial Transmission Rights (FTRs) that are measured at fair value each reporting period using monthly or annual auction shadow prices from relevant auctions. Changes in fair value for Level 3 recurring items are recorded on our balance sheet. See Note 7 -- Derivative Instruments in the Notes to Consolidated Condensed Financial Statements for further information on the offset to regulatory assets and liabilities.

The carrying amount and estimated fair value of certain of our recorded financial instruments are as follows:

 
 
June 30, 2015
 
December 31, 2014
Financial Instruments
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
 
(Millions of Dollars)
 
 
 
 
 
 
 
 
 
Preferred stock, no redemption required
 
$
81.5

 
$
80.1

 
$
30.4

 
$
27.1

Long-term debt, including current portion
 
$
9,118.4

 
$
9,181.1

 
$
4,552.4

 
$
5,126.0


The carrying value of net accounts receivable, accounts payable and short-term borrowings approximates fair value due to the short-term nature of these instruments. 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 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.


7 -- DERIVATIVE INSTRUMENTS

We utilize derivatives as part of our risk management program to manage the volatility and costs of purchased power, generation and natural gas purchases for the benefit of our customers and shareholders. Our approach is non-speculative and designed to mitigate risk and protect against price volatility. Regulated hedging programs are approved, if required, by our state regulators.

We record derivative instruments on the balance sheet as an asset or liability measured at its fair value, and 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 the fair market value accounting to be offset to regulatory assets and liabilities. As of June 30, 2015, we recognized $49.8 million in regulatory assets and $21.6 million in regulatory liabilities related to derivatives in comparison to $14.7 million in regulatory assets and $14.2 million in regulatory liabilities as of December 31, 2014.



June 2015
21
WEC Energy Group, Inc.

Form 10-Q

We record our current derivative assets on the balance sheet in Prepayments and other current assets and the current portion of the liabilities in Other current liabilities. The long-term portion of our derivative assets of $1.0 million is recorded in Other long-term assets as of June 30, 2015, and the long-term portion of our derivative liabilities of $5.2 million is recorded in Other long-term liabilities as of June 30, 2015. Our Consolidated Condensed Balance Sheets as of June 30, 2015 and December 31, 2014 include:

 
 
June 30, 2015
 
December 31, 2014
 
 
Derivative Asset
 
Derivative Liability
 
Derivative Asset
 
Derivative Liability
 
 
(Millions of Dollars)
 
 
 
 
 
 
 
 
 
Natural Gas
 
$
6.2

 
$
26.9

 
$
5.0

 
$
12.3

Fuel Oil
 
0.1

 
0.9

 

 

FTRs
 
7.7

 

 
7.0

 

Coal
 
1.3

 
10.9

 
3.3

 
0.2

Total
 
$
15.3

 
$
38.7

 
$
15.3

 
$
12.5


Our Consolidated Condensed Income Statements include gains (losses) on derivative instruments used in our risk management strategies under fuel and purchased power for those commodities supporting our electric operations and under cost of gas sold for the natural gas sold to our customers. Our estimated notional volumes and gains (losses) were as follows:

 
 
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2014
 
 
Volume
 
Gains (Losses)
 
Volume
 
Gains (Losses)
 
 
 
 
(Millions of Dollars)
 
 
 
(Millions of Dollars)
 
 
 
 
 
 
 
 
 
Natural Gas
 
10.0 million Dth
 
$
(5.9
)
 
9.9 million Dth
 
$
2.5

Fuel Oil
 
0.8 million gallons
 
0.1

 
2.4 million gallons
 
0.4

FTRs
 
5.9 million MWh
 
0.8

 
7.4 million MWh
 
2.6

Total
 
 
 
$
(5.0
)
 
 
 
$
5.5

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2015
 
Six Months Ended June 30, 2014
 
 
Volume
 
Gains (Losses)
 
Volume
 
Gains (Losses)
 
 
 
 
(Millions of Dollars)
 
 
 
(Millions of Dollars)
 
 
 
 
 
 
 
 
 
Natural Gas
 
23.3 million Dth
 
$
(13.0
)
 
24.8 million Dth
 
$
10.1

Fuel Oil
 
1.7 million gallons
 

 
4.4 million gallons
 
0.6

FTRs
 
12.1 million MWh
 
2.9

 
13.1 million MWh
 
9.6

Total
 
 
 
$
(10.1
)
 
 
 
$
20.3


The gains (losses) above do not include Integrys.

As of June 30, 2015 and December 31, 2014, we posted collateral of $26.3 million and $11.2 million, respectively, in our margin accounts. These amounts are recorded on the balance sheets in Prepayments and other current assets.

The fair value 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.



June 2015
22
WEC Energy Group, Inc.

Form 10-Q

The table below shows derivative assets and derivative liabilities if derivative instruments by counterparty were presented net on the balance sheet as of June 30, 2015 and December 31, 2014:

 
June 30, 2015
 
December 31, 2014
 
Derivative
 
Derivative
 
Derivative
 
Derivative
 
Asset
 
Liability
 
Asset
 
Liability
 
(Millions of Dollars)
 
 
 
 
 
 
 
 
Gross Amount Recognized on the Balance Sheet
$
15.3

 
$
38.7

 
$
15.3

 
$
12.5

Gross Amount Not Offset on Balance Sheet (a)
(4.9
)
 
(8.9
)
 
(0.4
)
 
(11.5
)
Net Amount
$
10.4

 
$
29.8

 
$
14.9

 
$
1.0


(a)
Gross Amount Not Offset on Balance Sheet includes cash collateral posted of $3.9 million and $10.3 million as of June 30, 2015 and December 31, 2014, respectively.

During the second quarter of 2015, we settled several forward interest rate swap agreements entered into earlier in the quarter to mitigate interest risk associated with the issuance of $1.2 billion of long-term debt related to the acquisition of Integrys. As these agreements qualified for cash flow hedging accounting treatment, the payments of $19.0 million received upon settlement of these agreements are deferred in Accumulated other comprehensive income and will be amortized as a decrease to interest expense over the periods in which the interest costs are recognized in earnings.

For the three months ended June 30, 2015, we reclassified $0.1 million in forward interest rate swap agreement settlements deferred in Accumulated other comprehensive income as a reduction to interest expense. We estimate that during the next twelve months, $1.3 million will be reclassified from Accumulated other comprehensive income as a reduction to interest expense.


8 -- GUARANTEES

The following table shows our outstanding guarantees:
 
 
Total Amounts
 
Expiration
 
 
Committed at
 
Less Than
 
1 to 3
 
Over 3
 
 
June 30, 2015
 
1 Year
 
Years
 
Years
 
 
(Millions of Dollars)
Guarantees:
 
 
 
 
 
 
 
 
Guarantees supporting commodity transactions of subsidiaries (a)
 
$
156.4

 
$
83.4

 
$

 
$
73.0

Standby letters of credit (b)
 
19.9

 
19.8

 
0.1

 

Surety bonds (c)
 
33.2

 
33.2

 

 

Other guarantees (d)
 
67.0

 
4.3

 
0.1

 
62.6

Total
 
$
276.5

 
$
140.7

 
$
0.2

 
$
135.6


(a)
Consists of (a) $5.0 million and $6.0 million to support the business operations of WEC Business Services, LLC and WPS Power Development, LLC (PDL), respectively, and (b) $1.1 million, $109.3 million, and $35.0 million related to natural gas supply at Integrys Transportation Fuels, LLC (ITF), Minnesota Energy Resources Corporation (MERC), and MGU, respectively. These guarantees are not reflected on our balance sheets.

(b)
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. This amount consists of standby letters of credit issued to primarily support ITF, MERC, MGU, NSG, PDL, PGL, WPS, and Wisconsin Electric. This amount is not reflected on our balance sheets.

(c)
Primarily for the construction and operation of compressed natural gas fueling stations by ITF, workers compensation self-insurance programs, and obtaining various licenses, permits, and rights-of-way. These guarantees are not reflected on our balance sheets.



June 2015
23
WEC Energy Group, Inc.

Form 10-Q

(d)
Consists of (a) $34.6 million to support PDL's future payment obligations related to its distributed solar generation projects; (b) $10.0 million related to the sale of a nonregulated retail marketing business previously owned by Integrys; (c) $11.2 million related to the performance of an operating and maintenance agreement by ITF; (d) $6.9 million related to other indemnifications primarily for workers compensation coverage; and (e) $3.7 million related to workers compensation obligations. The amounts discussed in items (a), (c), and (d) above are not reflected on our balance sheets. In addition, an insignificant liability was recorded for item (b) related to the possible imposition of additional miscellaneous gross receipts tax in the event of a change in law or interpretation of the law.


9 -- BENEFITS

The components of our net periodic pension and Other Post-Retirement Employee Benefits (OPEB) costs for the three and six months ended June 30 were as follows:

 
 
Pension Costs
 
 
Three Months Ended June 30
 
Six Months Ended June 30
Benefit Plan Cost Components
 
2015
 
2014
 
2015
 
2014
 
 
(Millions of Dollars)
Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
Service cost
 
$
3.9

 
$
2.3

 
$
7.8

 
$
5.0

Interest cost
 
15.1

 
17.0

 
30.3

 
34.1

Expected return on plan assets
 
(25.6
)
 
(24.6
)
 
(51.4
)
 
(49.3
)
Amortization of:
 
 
 
 
 
 
 
 
Prior service cost
 
0.5

 
0.5

 
1.0

 
1.0

Actuarial loss
 
11.4

 
9.3

 
23.0

 
18.4

Net Periodic Benefit Cost
 
$
5.3

 
$
4.5

 
$
10.7

 
$
9.2

 
 
OPEB Costs
 
 
Three Months Ended June 30
 
Six Months Ended June 30
Benefit Plan Cost Components
 
2015
 
2014
 
2015
 
2014
 
 
(Millions of Dollars)
Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
Service cost
 
$
2.1

 
$
2.1

 
$
4.7

 
$
4.3

Interest cost
 
3.9

 
4.4

 
8.1

 
8.9

Expected return on plan assets
 
(5.9
)
 
(6.0
)
 
(11.8
)
 
(11.9
)
Amortization of:
 
 
 
 
 
 
 
 
Transition obligation
 

 

 

 

Prior service (credit)
 
(0.3
)
 
(0.4
)
 
(0.6
)
 
(0.9
)
Actuarial loss
 
0.5

 
0.4

 
1.0

 
0.6

Net Periodic Benefit Cost
 
$
0.3

 
$
0.5

 
$
1.4

 
$
1.0

 
 
 
 
 
 
 
 
 

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

Postemployment Benefits:   Postemployment benefits provided to former or inactive employees are recognized when an event occurs. The estimated liability for such benefits was $7.0 million as of June 30, 2015 and $3.3 million as of December 31, 2014.




June 2015
24
WEC Energy Group, Inc.

Form 10-Q

10 -- GOODWILL

The following table shows the carrying amount of goodwill for WEC Energy Group. In regard to the acquisition of Integrys, the allocation of goodwill to business segments has not yet been determined due to the short timeframe between the acquisition close date and the filing date of this report.

 
(Millions of Dollars)
Balance at December 31, 2014:
$
441.9

Acquisition (a)
2,944.6

Balance at June 30, 2015:
$
3,386.5

 
 
(a) Represents goodwill resulting from the acquisition of Integrys. See Note 2 -- Acquisition for additional information.


11 -- INVESTMENT IN ATC

As a result of the acquisition, our ownership of ATC increased from 26.2% to approximately 60% as of June 30, 2015. ATC is a for-profit, transmission-only company regulated by FERC. The following table shows changes to our investment in ATC:

 
 
Three Months Ended June 30
 
Six Months Ended June 30
 
 
2015
 
2014
 
2015
 
2014
 
 
(Millions of Dollars)
 
(Millions of Dollars)
Balance at beginning of period:
 
$
431.1

 
$
409.6

 
$
424.1

 
$
402.7

Add: Earnings from equity method investment
 
14.3

 
17.5

 
30.4

 
34.8

Add: Capital contributions
 
1.2

 
3.9

 
2.5

 
7.8

Add: Acquisition of Integrys equity in ATC
 
552.0

 

 
552.0

 

Less: Distributions received
 
10.8

 
14.2

 
21.2

 
28.5

Balance at end of period:
 
$
987.8

 
$
416.8

 
$
987.8

 
$
416.8




June 2015
25
WEC Energy Group, Inc.

Form 10-Q

Summarized financial data for ATC is included in the following tables:

 
 
Three Months Ended June 30
 
Six Months Ended June 30
 
 
2015
 
2014
 
2015
 
2014
 
 
(Millions of Dollars)
Income Statement Data
 
 
 
 
 
 
 
 
Revenues
 
$
165.2

 
$
160.0

 
$
317.5

 
$
323.3

Operating expenses
 
80.3

 
74.4

 
160.3

 
153.0

Other expense
 
24.3

 
21.9

 
48.6

 
43.5

Net Income
 
$
60.6

 
$
63.7

 
$
108.6


$
126.8

 
 
June 30, 2015
 
December 31, 2014
 
 
(Millions of Dollars)
Balance Sheet Data
 
 
 
 
Current assets
 
$
78.1

 
$
66.4

Noncurrent assets
 
3,835.2

 
3,728.7

Total assets
 
$
3,913.3

 
$
3,795.1

 
 
 
 
 
Current liabilities
 
$
255.7

 
$
313.1

Long-term debt
 
1,800.0

 
1,701.0

Other noncurrent liabilities
 
197.7

 
163.8

Shareholders' equity
 
1,659.9

 
1,617.2

Total liabilities and shareholders' equity