WISCONSIN ELECTRIC POWER CO - FORM 10-Q

Attached files

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EX-32.1 - WISCONSIN ELECTRIC EXHIBIT 32.1 - WISCONSIN ELECTRIC POWER CO	wepco06302015ex321.htm
EX-31.1 - WISCONSIN ELECTRIC EXHIBIT 31.1 - WISCONSIN ELECTRIC POWER CO	wepco06302015ex311.htm
EX-32.2 - WISCONSIN ELECTRIC EXHIBIT 32.2 - WISCONSIN ELECTRIC POWER CO	wepco06302015ex322.htm
EX-31.2 - WISCONSIN ELECTRIC EXHIBIT 31.2 - WISCONSIN ELECTRIC POWER CO	wepco06302015ex312.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.



001-01245	WISCONSIN ELECTRIC POWER COMPANY	39-0476280
	(A Wisconsin Corporation)
	231 West Michigan Street
	P.O. Box 2046
	Milwaukee, WI 53201
	(414) 221-2345

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T

(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

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

Large accelerated filer [ ] Accelerated filer [ ]

Non-accelerated filer [X] (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, $10 Par Value,	33,289,327 shares outstanding.

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

Form 10-Q

WISCONSIN ELECTRIC POWER COMPANY

_________________________

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



	TABLE OF CONTENTS
Item		Page

	Introduction	7

	Part I -- Financial Information

1.	Financial Statements

	Consolidated Condensed Income Statements	8

	Consolidated Condensed Balance Sheets	9

	Consolidated Condensed Statements of Cash Flows	10

	Notes to Consolidated Condensed Financial Statements	11

2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22

3.	Quantitative and Qualitative Disclosures About Market Risk	35

4.	Controls and Procedures	35

	Part II -- Other Information

1.	Legal Proceedings	35

1A.	Risk Factors	36

6.	Exhibits	36

	Signatures	37



June 2015	2	Wisconsin Electric Power Company

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:

Primary Subsidiary and Affiliates
Bostco		Bostco LLC
We Power		W.E. Power, LLC
WEC Energy Group		WEC Energy Group, Inc.
Wisconsin Energy		Wisconsin Energy Corporation
Wisconsin Gas		Wisconsin Gas LLC

Significant Assets
PIPP		Presque Isle Power Plant
VAPP		Valley Power Plant

Other Affiliates
ATC		American Transmission Company LLC

Federal and State Regulatory Agencies
EPA		United States Environmental Protection Agency
FCC		Federal Communications Commission
FERC		Federal Energy Regulatory Commission
ICC		Illinois Commerce Commission
MDEQ		Michigan Department of Environmental Quality
MPSC		Michigan Public Service Commission
MPUC		Michigan 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
ARR		Auction Revenue Rights
Compensation Committee		Compensation Committee of the Board of Directors of WEC Energy Group
Exchange Act		Securities Exchange Act of 1934, as amended
FTRs		Financial Transmission Rights
HSR Act		Hart-Scott-Rodino Antitrust Improvements Act of 1976
Integrys		Integrys Energy Group, Inc. (now known as Integrys Holding, Inc.)



June 2015	3	Wisconsin Electric Power Company

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:

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
OTC		Over-the-Counter
PTF		Power the Future
SSR		System Support Resource
Treasury Grant		Section 1603 Renewable Energy Treasury Grant

Measurements
Btu		British Thermal Unit(s)
Dth		Dekatherm(s) (One Dth equals one million Btu)
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
OPEB		Other Post-Retirement Employee Benefits



June 2015	4	Wisconsin Electric Power Company

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, 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	Wisconsin Electric Power Company

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.


•	Internal restructuring options that may be pursued by WEC Energy Group, Inc. (WEC Energy Group).


•	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 or us; 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 WEC Energy Group's 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 regulatory approvals of the acquisition of Integrys Energy Group, Inc. (Integrys) that could reduce anticipated benefits, and the ability to successfully integrate.


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


•	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 Annual Report 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	Wisconsin Electric Power Company

Form 10-Q

INTRODUCTION

On June 22, 2014, our parent company, Wisconsin Energy Corporation (Wisconsin Energy), 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. 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 were incorporated in the state of Wisconsin in 1896, and maintain our principal executive offices in Milwaukee, Wisconsin. Unless qualified by their context when used in this document, the terms Wisconsin Electric, the Company, our, us or we refer to Wisconsin Electric Power Company and its subsidiary, Bostco LLC (Bostco).

We conduct our operations primarily in three reportable segments: an electric utility segment, a natural gas utility segment and a steam utility segment. We serve approximately 1,135,400 electric customers in Wisconsin and the Upper Peninsula of Michigan, approximately 475,700 gas customers in Wisconsin and approximately 430 steam customers in metropolitan Milwaukee, Wisconsin. For further financial information about our reportable segments, see Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 8 --Segment Information in the Notes to Consolidated Condensed Financial Statements in this report.

WEC Energy Group is also the parent company of Wisconsin Gas LLC (Wisconsin Gas), a natural gas distribution utility, which serves customers throughout Wisconsin; and W.E. Power, LLC (We Power), an unregulated company that owns and leases to us the generating capacity included in WEC Energy Group's Power the Future (PTF) strategy, which is described further in our 2014 Annual Report on Form 10-K. We have combined common functions with Wisconsin Gas and operate under the trade name of "We Energies."

Bostco is our non-utility subsidiary that develops and invests in real estate. As of June 30, 2015, Bostco had $28.0 million of assets.

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 Generally Accepted Accounting Principles 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	Wisconsin Electric Power Company

Form 10-Q

PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS



WISCONSIN ELECTRIC POWER COMPANY
CONSOLIDATED CONDENSED INCOME STATEMENTS
(Unaudited)

	Three Months Ended June 30				Six Months Ended June 30
	2015		2014		2015		2014
	(Millions of Dollars)

Operating Revenues	$	883.0	$	905.7	$	1,967.6	$	2,132.4

Operating Expenses
Fuel and purchased power	273.9		293.7		571.8		613.6
Cost of gas sold	32.2		50.4		167.7		300.1
Other operation and maintenance	343.2		318.8		685.6		656.4
Depreciation and amortization	77.8		73.3		155.0		146.0
Property and revenue taxes	29.4		28.4		58.8		56.9
Total Operating Expenses	756.5		764.6		1,638.9		1,773.0

Treasury Grant	2.2		3.1		4.7		6.6

Operating Income	128.7		144.2		333.4		366.0

Equity in Earnings of Transmission Affiliate	12.2		15.3		26.4		30.5
Other Income, net	4.0		5.8		6.5		6.6
Interest Expense, net	29.5		27.7		58.2		58.6

Income Before Income Taxes	115.4		137.6		308.1		344.5

Income Tax Expense	40.5		47.3		111.5		126.9

Net Income	74.9		90.3		196.6		217.6

Preferred Stock Dividend Requirement	0.3		0.3		0.6		0.6

Earnings Available for Common Stockholder	$	74.6	$	90.0	$	196.0	$	217.0

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



June 2015	8	Wisconsin Electric Power Company

Form 10-Q



WISCONSIN ELECTRIC POWER COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
	June 30, 2015			December 31, 2014
	(Millions of Dollars)
Assets
Property, Plant and Equipment
In service	$	10,684.5		$	10,544.4
Accumulated depreciation	(3,501.5		)	(3,406.1		)
	7,183.0			7,138.3
Construction work in progress	192.1			140.9
Leased facilities, net	2,176.9			2,215.0
Net Property, Plant and Equipment	9,552.0			9,494.2
Investments
Equity investment in transmission affiliate	382.9			372.9
Other	0.3			0.2
Total Investments	383.2			373.1
Current Assets
Cash and cash equivalents	11.2			24.0
Accounts receivable, net	255.1			265.3
Accounts receivable from related parties	40.9			8.1
Accrued revenues	166.6			223.1
Materials, supplies and inventories	291.9			320.5
Current deferred tax asset, net	49.4			46.7
Prepayments and other	136.7			158.5
Total Current Assets	951.8			1,046.2
Deferred Charges and Other Assets
Regulatory assets	1,676.6			1,626.9
Other	158.2			106.3
Total Deferred Charges and Other Assets	1,834.8			1,733.2
Total Assets	$	12,721.8		$	12,646.7
Capitalization and Liabilities
Capitalization
Common equity	$	3,495.8		$	3,412.8
Preferred stock	30.4			30.4
Long-term debt	2,414.6			2,165.5
Capital lease obligations	2,702.0			2,712.5
Total Capitalization	8,642.8			8,321.2
Current Liabilities
Long-term debt and capital lease obligations due currently	364.9			355.6
Short-term debt	60.0			306.8
Subsidiary note payable to WEC Energy Group	20.1			22.4
Accounts payable	276.9			287.2
Accounts payable to related parties	91.6			87.8
Accrued payroll and benefits	62.2			87.1
Other	161.4			113.7
Total Current Liabilities	1,037.1			1,260.6
Deferred Credits and Other Liabilities
Regulatory liabilities	618.3			615.9
Deferred income taxes - long-term	2,002.9			1,963.9
Pension and other benefit obligations	192.9			254.5
Other	227.8			230.6
Total Deferred Credits and Other Liabilities	3,041.9			3,064.9
Total Capitalization and Liabilities	$	12,721.8		$	12,646.7

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



June 2015	9	Wisconsin Electric Power Company

Form 10-Q



WISCONSIN ELECTRIC POWER COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

	Six Months Ended June 30
	2015			2014
	(Millions of Dollars)
Operating Activities
Net income	$	196.6		$	217.6
Reconciliation to cash
Depreciation and amortization	159.6			149.1
Deferred income taxes and investment tax credits, net	40.0			113.8
Contributions to qualified benefit plans	(100.0		)	—
Change in - Accounts receivable and accrued revenues	33.7			102.0
Inventories	28.5			35.5
Other current assets	13.5			12.1
Accounts payable	(11.2		)	(34.6		)
Accrued income taxes, net	52.9			(6.1		)
Other current liabilities	(33.2		)	(29.3		)
Other, net	(39.8		)	(41.6		)
Cash Provided by Operating Activities	340.6			518.5

Investing Activities
Capital expenditures	(225.4		)	(228.3		)
Cost of removal, net of salvage	(9.4		)	(9.4		)
Investment in transmission affiliate	(2.3		)	(6.9		)
Other, net	0.4			2.3
Cash Used in Investing Activities	(236.7		)	(242.3		)

Financing Activities
Dividends paid on common stock	(120.0		)	(220.0		)
Dividends paid on preferred stock	(0.6		)	(0.6		)
Issuance of long-term debt	250.0			250.0
Retirement of long-term debt	—			(300.0		)
Change in total short-term debt	(249.1		)	(14.1		)
Other, net	3.0			2.5
Cash Used in Financing Activities	(116.7		)	(282.2		)

Change in Cash and Cash Equivalents	(12.8		)	(6.0		)

Cash and Cash Equivalents at Beginning of Period	24.0			25.1

Cash and Cash Equivalents at End of Period	$	11.2		$	19.1

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



June 2015	10	Wisconsin Electric Power Company

Form 10-Q

WISCONSIN ELECTRIC POWER COMPANY

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1 -- GENERAL INFORMATION

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 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 seasonal and other factors.

2 -- ACQUISITION

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

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:


•	We 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.



June 2015	11	Wisconsin Electric Power Company

Form 10-Q

3 -- COMMON EQUITY

Stock Option Activity: The following table identifies non-qualified stock options granted by the Compensation Committee of the Board of Directors of WEC Energy Group (Compensation Committee) to our employees:



	2015			2014

Non-qualified stock options granted year to date	495,550			864,860

Estimated fair value per non-qualified stock option	$	5.29		$	4.18

Assumptions used to value the options using a binomial option pricing model:
Risk-free interest rate	0.1% - 2.1%			0.1% - 3.0%
Dividend yield	3.7		%	3.8		%
Expected volatility	18.0		%	18.0		%
Expected forfeiture rate	2.0		%	2.0		%
Expected life (years)	5.8			5.8

The risk-free interest rate is based on the U.S. Treasury interest rate 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 WEC Energy Group's historical experience.

The following is a summary of WEC Energy Group stock option activity by our employees during 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	6,607,682		$	32.11
Granted	—		$	—
Exercised	(174,369	)	$	21.07
Outstanding as of June 30, 2015	6,433,313		$	32.41

Outstanding as of January 1, 2015	6,450,277		$	30.07
Granted	495,550		$	52.90
Exercised	(512,514	)	$	22.82
Outstanding as of June 30, 2015	6,433,313		$	32.41	5.7	$	80.8

Exercisable as of June 30, 2015	3,800,683		$	26.10	4.0	$	71.7

The intrinsic value of WEC Energy Group options exercised by our employees was $4.7 million and $14.6 million for the three and six months ended June 30, 2015 and $2.0 million and $15.9 million for the same periods in 2014, respectively. Cash received by WEC Energy Group from exercises of its options by our employees was $11.7 million and $16.2 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 $5.9 million and $6.5 million, respectively.



June 2015	12	Wisconsin Electric Power Company

Form 10-Q

The following table summarizes information about WEC Energy Group stock options held by our employees and 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	1,169,925	$	20.99	3.3	1,169,925	$	20.99	3.3
$23.88 to $29.35	1,786,018	$	25.17	3.3	1,786,018	$	25.17	3.3
$34.88 to $52.90	3,477,370	$	39.96	7.8	844,740	$	35.15	6.6
	6,433,313	$	32.41	5.7	3,800,683	$	26.10	4.0

The following table summarizes information about our employees' non-vested WEC Energy Group stock 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	2,632,630		$	4.03
Granted	—		$	—
Vested	—		$	—
Forfeited	—		$	—
Non-vested as of June 30, 2015	2,632,630		$	4.03

Non-vested as of January 1, 2015	2,767,835		$	3.65
Granted	495,550		$	5.29
Vested	(630,755	)	$	3.34
Non-vested as of June 30, 2015	2,632,630		$	4.03

As of June 30, 2015, our total compensation costs related to non-vested WEC Energy Group stock options held by our employees and not yet recognized was approximately $3.1 million, which is expected to be recognized over the next 18 months on a weighted-average basis.

Restricted Shares: The following restricted stock activity related to our employees 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	93,639
Granted	—		$	—
Released	—		$	—
Outstanding as of June 30, 2015	93,639

Outstanding as of January 1, 2015	100,657
Granted	43,212		$	53.78
Released	(50,230	)	$	37.73
Outstanding as of June 30, 2015	93,639

WEC Energy Group records the market value of the restricted stock awards on the date of grant and then we amortize our share of allocated expense over the vesting period of the awards. The intrinsic value of WEC Energy Group restricted stock vesting and held by our employees was zero and $2.7 million for the three and six months ended June 30, 2015 and zero and $2.3 million for the same periods in 2014, respectively. The actual tax benefit



June 2015	13	Wisconsin Electric Power Company

Form 10-Q

realized for the tax deductions from released restricted shares was zero and $1.1 million for the three and six months ended June 30, 2015 and zero and $0.9 million for the same periods in 2014, respectively.

As of June 30, 2015, total compensation cost related to our share of WEC Energy Group restricted stock not yet recognized was approximately $3.3 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 awarded 187,450 and 224,735 WEC Energy Group performance units, respectively, to our officers and other key employees under the WEC Energy Group Performance Unit Plan. Performance units earned as of December 31, 2014 and 2013 vested and were settled during the first quarter of 2015 and 2014, and had a total intrinsic value of $11.6 million and

$13.1 million, respectively. The actual tax benefit realized for the tax deductions from the settlement of performance units was approximately $4.2 million and $4.7 million, respectively. As of June 30, 2015, total compensation cost related to our share of WEC Energy Group performance units not yet recognized was approximately $12.3 million, which is expected to be recognized over the next 23 months on a weighted-average basis.

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

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

4 -- LONG-TERM DEBT

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

5 -- 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.



June 2015	14	Wisconsin Electric Power Company

Form 10-Q

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 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	$	1.0	$	1.3	$	3.6	$	5.9
Total	$	1.0	$	1.3	$	3.6	$	5.9

Liabilities:
Derivatives	$	2.9	$	4.7	$	—	$	7.6
Total	$	2.9	$	4.7	$	—	$	7.6



Recurring Fair Value Measures	As of December 31, 2014
	Level 1		Level 2		Level 3		Total
	(Millions of Dollars)
Assets:
Derivatives	$	0.4	$	5.2	$	7.0	$	12.6
Total	$	0.4	$	5.2	$	7.0	$	12.6

Liabilities:
Derivatives	$	6.8	$	0.5	$	—	$	7.3
Total	$	6.8	$	0.5	$	—	$	7.3

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	15	Wisconsin Electric Power Company

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		)
Transfers in and/or out of Level 3	—			—			—			—
Balance as of June 30	$	3.6		$	14.1		$	3.6		$	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 6 -- Derivative Instruments 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	$	30.4	$	27.0	$	30.4	$	27.1
Long-term debt, including current portion	$	2,687.0	$	2,619.1	$	2,437.0	$	2,759.6

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.

6 -- 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. Our approach is non-speculative and designed to mitigate risk and protect against price volatility. Regulated hedging programs require prior approval by the PSCW.

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, the PSCW allows the effects of the fair market value accounting to be offset to regulatory assets and liabilities. As of June 30, 2015, we recognized $7.4 million in regulatory assets and $4.9 million in regulatory liabilities related to derivatives in comparison to $8.4 million in regulatory assets and $12.2 million in regulatory liabilities as of December 31, 2014.

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. We had no long-term portion of derivative assets as of June 30, 2015, and the long-term portion of our derivative liabilities of $0.2 million is recorded in other deferred



June 2015	16	Wisconsin Electric Power Company

Form 10-Q

credit and other 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	$	0.9	$	2.9	$	2.3	$	7.1
Fuel Oil	0.1		—		—		—
FTRs	3.6		—		7.0		—
Coal	1.3		4.7		3.3		0.2
Total	$	5.9	$	7.6	$	12.6	$	7.3

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	5.9 million Dth	$	(3.1	)	5.4 million Dth	$	1.5
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		$	(2.2	)		$	4.5



	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	12.3 million Dth	$	(6.9	)	12.6 million Dth	$	5.4
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		$	(4.0	)		$	15.6

As of June 30, 2015 and December 31, 2014, we posted collateral of $4.4 million and $6.9 million, respectively, in our margin accounts. These amounts are recorded on the balance sheets in 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.

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	$	5.9		$	7.6		$	12.6		$	7.3
Gross Amount Not Offset on Balance Sheet (a)	(0.9		)	(2.9		)	(0.4		)	(6.8		)
Net Amount	$	5.0		$	4.7		$	12.2		$	0.5


(a)	Gross Amount Not Offset on Balance Sheet includes cash collateral posted of $2.0 million and $6.4 million as of June 30, 2015 and December 31, 2014, respectively.



June 2015	17	Wisconsin Electric Power Company

Form 10-Q

7 -- 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	$	3.6		$	2.2		$	7.3		$	4.7
Interest cost	13.1			14.9			26.4			29.7
Expected return on plan assets	(20.8		)	(19.8		)	(41.8		)	(39.6		)
Amortization of:
Prior service cost	0.5			0.5			1.0			1.0
Actuarial loss	8.9			6.9			17.9			13.5
Net Periodic Benefit Cost	$	5.3		$	4.7		$	10.8		$	9.3



	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		$	1.9		$	4.5		$	4.0
Interest cost	3.3			3.6			6.7			7.2
Expected return on plan assets	(4.0		)	(4.1		)	(8.0		)	(8.1		)
Amortization of:
Prior service credit	(0.3		)	(0.4		)	(0.6		)	(0.8		)
Actuarial loss	0.3			0.1			0.6			0.1
Net Periodic Benefit Cost	$	1.4		$	1.1		$	3.2		$	2.4

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 $1.8 million as of both June 30, 2015 and December 31, 2014.



June 2015	18	Wisconsin Electric Power Company

Form 10-Q

8 -- SEGMENT INFORMATION

Summarized financial information concerning our reportable segments for the three and six months ended June 30, 2015 and 2014 is shown in the following table:



	Reportable Segments
	Electric		Gas		Steam			Total
	(Millions of Dollars)
Three Months Ended

June 30, 2015
Operating Revenues (a)	$	813.5	$	61.3	$	8.2		$	883.0
Operating Income	$	122.4	$	6.4	$	(0.1	)	$	128.7

June 30, 2014
Operating Revenues (a)	$	813.7	$	83.8	$	8.2		$	905.7
Operating Income	$	135.3	$	8.5	$	0.4		$	144.2

Six Months Ended

June 30, 2015
Operating Revenues (a)	$	1,682.4	$	259.2	$	26.0		$	1,967.6
Operating Income	$	281.2	$	45.1	$	7.1		$	333.4

June 30, 2014
Operating Revenues (a)	$	1,699.5	$	406.3	$	26.6		$	2,132.4
Operating Income	$	304.2	$	53.9	$	7.9		$	366.0


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

9 -- VARIABLE INTEREST ENTITIES

The primary beneficiary of a variable interest entity must consolidate the related assets and liabilities. Certain disclosures are required by sponsors, significant interest holders in variable interest entities and potential variable interest entities.

We assess our relationships with potential variable interest entities such as our coal suppliers, natural gas suppliers, coal and gas transporters, and other counterparties in power purchase agreements and joint ventures. In making this assessment, we consider the potential that our contracts or other arrangements provide subordinated financial support, the potential for us to absorb losses or rights to residual returns of the entity, the ability to directly or indirectly make decisions about the entities' activities and other factors.

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

We have approximately $152.2 million of required payments over the remaining term of this agreement. We believe that the required lease payments under this contract will continue to be recoverable in rates. Total capacity and lease payments under contracts considered variable interests for the six months ended June 30, 2015 and 2014



June 2015	19	Wisconsin Electric Power Company

Form 10-Q

were $26.8 million and $26.7 million, respectively. Our maximum exposure to loss is limited to the capacity payments under the contract.

10 -- COMMITMENTS AND CONTINGENCIES

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

We have a program of comprehensive environmental remediation planning for former manufactured gas plant sites and coal combustion product disposal sites. We perform ongoing assessments of our manufactured gas plant sites and related disposal sites, as well as our coal combustion product disposal/landfill sites. We are working with the Wisconsin Department of Natural Resources (WDNR) in our investigation and remediation planning. At this time, we cannot estimate future remediation costs associated with these sites beyond those described below.

Manufactured Gas Plant Sites: We have identified several sites at which we or a predecessor company historically owned or operated a manufactured gas plant. These sites have been substantially remediated or are at various stages of investigation, monitoring and remediation. We have also identified other sites that may have been impacted by historical manufactured gas plant activities. Based upon on-going analysis, we estimate that the future costs for detailed site investigation and future remediation costs may range from $6 million to $12 million over the next ten years. This estimate is dependent upon several variables including, among other things, the extent of remediation, changes in technology and changes in regulation. As of June 30, 2015, we have established reserves of $6.5 million related to future remediation costs.

Historically, the PSCW has allowed Wisconsin utilities, including us, to defer the costs spent on the remediation of manufactured gas plant sites, and has allowed for these costs to be recovered in rates over five years. Accordingly, we have recorded a regulatory asset for remediation costs.

11 -- SUPPLEMENTAL CASH FLOW INFORMATION

During the six months ended June 30, 2015, we paid $56.2 million in interest, net of amounts capitalized, and paid $20.9 million in income taxes, net of refunds. During the six months ended June 30, 2014, we paid $60.6 million in interest, net of amounts capitalized, and paid $12.0 million in income taxes, net of refunds.

As of June 30, 2015 and 2014, the amount of accounts payable related to capital expenditures was $3.4 million and $3.1 million, respectively.

During the six months ended June 30, 2015 and 2014, our equity in earnings from ATC was $26.4 million and $30.5 million, respectively. During the six months ended June 30, 2015 and 2014, distributions received from ATC were $18.6 million and $25.0 million, respectively.

12 -- MICHIGAN SETTLEMENT

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


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

•

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


•	Wisconsin Energy commits to invest either through an ownership interest or a purchased power agreement, or to have, if formed, a future Michigan jurisdictional utility invest, in this plant subject to the issuance of a



June 2015	20	Wisconsin Electric Power Company

Form 10-Q

Certificate of Necessity from the MPSC. The costs of this plant would be recovered from Michigan customers.

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

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

13 -- NEW ACCOUNTING PRONOUNCEMENTS

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

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



June 2015	21	Wisconsin Electric Power Company

Form 10-Q

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

AND RESULTS OF OPERATIONS

CORPORATE DEVELOPMENTS

Acquisition: On June 29, 2015, our parent company, Wisconsin Energy, completed its acquisition of Integrys and the combined company was renamed WEC Energy Group, Inc. The acquisition was subject to several conditions, including, among others, approval of the shareholders of both Wisconsin Energy and Integrys, the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 (HSR Act), and the receipt of approvals from various government agencies, including the FERC, FCC, PSCW, ICC, MPSC, and MPUC. The dates these matters were resolved are as follows:


•	On October 24, 2014, the United States Department of Justice closed its review of the transaction with no further action required. In addition, on the same day, the Federal Trade Commission granted early termination of the 30-day waiting period required by the HSR Act.

•

On November 21, 2014, the shareholders of Wisconsin Energy voted to approve the issuance of common stock as contemplated by the Merger Agreement, as well as to amend the restated articles of incorporation to change the name of Wisconsin Energy Corporation to WEC Energy Group, Inc. The shareholders of Integrys approved the adoption of the Merger Agreement at its shareholder meeting held on November 21, 2014.


•	On April 7, 2015, FERC issued an order approving the acquisition.


•	On April 13, 2015, the FCC approved the transfer of certain telecommunication licenses.


•	On April 23, 2015, the MPSC approved the acquisition.


•	On May 21, 2015, the PSCW issued a final written order approving the acquisition.


•	On June 12, 2015, the MPUC approved the acquisition. A final written order was issued on June 25, 2015.


•	On June 24, 2015, the ICC approved the acquisition and issued a final written order.

See Note 2 -- Acquisition in the Notes to Consolidated Condensed Financial Statements for additional information regarding the acquisition.



June 2015	22	Wisconsin Electric Power Company

Form 10-Q

RESULTS OF OPERATIONS -- THREE MONTHS ENDED JUNE 30, 2015

Electric Utility Revenues and Sales

The following table compares electric utility operating revenues and MWh sales by customer class during the second quarter of 2015 with the second quarter of 2014, including favorable (better (B)) or unfavorable (worse (W)) variances:



	Three Months Ended June 30
	Electric Revenues							MWh
Electric Utility Operations	2015		B (W)			2014		2015	B (W)		2014
	(Millions of Dollars)							(Thousands)
Customer Class
Residential	$	270.4	$	(4.6	)	$	275.0	1,691.9	(88.8	)	1,780.7
Small Commercial/Industrial	256.2		(0.4		)	256.6		2,132.6	47.4		2,085.2
Large Commercial/Industrial	189.3		26.4			162.9		2,352.9	498.2		1,854.7
Other - Retail	5.1		(0.3		)	5.4		33.8	(1.0	)	34.8
Total Retail	721.0		21.1			699.9		6,211.2	455.8		5,755.4
Wholesale - Other	21.7		(11.2		)	32.9		286.6	(184.7	)	471.3
Resale - Utilities	48.9		(7.6		)	56.5		1,887.8	404.0		1,483.8
Other Operating Revenues	21.4		(1.6		)	23.0		—	—		—
Total	813.0		0.7			812.3		8,385.6	675.1		7,710.5
Electric Customer Choice (a)	0.5		(0.9		)	1.4		66.7	(560.8	)	627.5
Total, including electric customer choice	$	813.5	$	(0.2	)	$	813.7

Weather -- Degree Days (b)
Heating (947 Normal)								934	(42	)	976
Cooling (165 Normal)								99	(9	)	108

(a) Represents distribution sales for customers who have purchased power from an alternative electric supplier in Michigan.

(b) As measured at Mitchell International Airport in Milwaukee, Wisconsin. Normal degree days are based upon a 20-year
moving average.

Our electric utility operating revenues decreased by $0.2 million when compared to the second quarter of 2014. The most significant factors affecting revenues were:


•	Weather - We estimate that our retail revenues for the second quarter of 2015 decreased by approximately $3.6 million due to weather. The second quarter of 2015 was 40.0% cooler than normal, as measured by cooling degree days, while the second quarter of 2014 was 37.6% cooler than normal.

•

Return of the two iron ore mines - On February 1, 2015, the two iron ore mines returned as retail customers. During 2014, these customers were served by an alternative electric supplier pursuant to the electric customer choice program in Michigan. The return of these customers increased retail revenues by approximately $32.1 million. These revenues will not significantly impact earnings because, under an agreement with the PSCW, we are deferring the net revenues (revenues, less fuel and transmission costs) from these customers for the benefit of our Wisconsin retail electric customers.


•	Wholesale revenues - An $11.2 million decrease in wholesale revenues, primarily due to volume and pricing decreases.

•

Resale Utilities - These sales are also known as opportunity sales. The net margin (revenues less fuel costs) on these sales flow to the benefit of our retail electric customers. Revenues decreased in the second quarter of 2015 by $7.6 million compared to the second quarter of 2014 due to lower prices for electricity in the MISO Energy and Operating Reserves Markets (MISO Energy Markets). This decrease was partially offset by increased volumes.



June 2015	23	Wisconsin Electric Power Company

Form 10-Q

Fuel and Purchased Power

Our fuel and purchased power costs decreased by $19.8 million, or 6.7%, when compared to the second quarter of 2014. This decrease was primarily caused by a decrease in natural gas prices as compared to the second quarter of 2014.

Gas Utility Revenues, Gross Margin and Therm Deliveries

A comparison follows of gas utility operating revenues, gross margin and gas deliveries during the second quarter of 2015 with the second quarter of 2014. We believe gross margin is a better performance indicator than revenues because changes in the cost of gas sold flow through to revenue under gas cost recovery mechanisms. Between the comparative periods, total gas operating revenues decreased by $22.5 million, or 26.8%. Cost of gas sold decreased by $18.2 million, or 36.1%. Our average cost of gas per retail therm decreased 15.1% as compared to the second quarter of 2014.



	Three Months Ended June 30
	2015		B (W)			2014
	(Millions of Dollars)

Gas Operating Revenues	$	61.3	$	(22.5	)	$	83.8
Cost of Gas Sold	32.2		18.2			50.4
Gross Margin	$	29.1	$	(4.3	)	$	33.4

The following table compares gas utility gross margin and natural gas therm deliveries by customer class during the second quarter of 2015 with the second quarter of 2014:



	Three Months Ended June 30
	Gross Margin							Therms
Gas Utility Operations	2015		B (W)			2014		2015	B (W)		2014
	(Millions of Dollars)							(Millions)
Customer Class
Residential	$	19.6	$	(2.8	)	$	22.4	42.8	(13.5	)	56.3
Commercial/Industrial	4.9		(1.6		)	6.5		24.3	(8.3	)	32.6
Interruptible	0.1		—			0.1		0.3	(0.4	)	0.7
Total Retail	24.6		(4.4		)	29.0		67.4	(22.2	)	89.6
Transported Gas	3.8		—			3.8		73.0	(4.6	)	77.6
Other Operating	0.7		0.1			0.6		—	—		—
Total	$	29.1	$	(4.3	)	$	33.4	140.4	(26.8	)	167.2

Weather -- Degree Days (a)
Heating (947 Normal)								934	(42	)	976

(a) As measured at Mitchell International Airport in Milwaukee, Wisconsin. Normal degree days are based upon a 20-year
moving average.

Our gas margin decreased by $4.3 million, or approximately 12.9%, when compared to the second quarter of 2014. This decrease primarily relates to a decrease in retail sales volumes as a result of warmer weather experienced in 2015. As measured by heating degree days, the second quarter of 2015 was 4.3% warmer than the same period in 2014 and 1.4% warmer than normal.

Other Operation and Maintenance Expense

Our other operation and maintenance expense increased by $24.4 million, or approximately 7.7%, when compared to the second quarter of 2014. Approximately $6.2 million of this increase relates to increased costs associated with the mines. The remaining balance of this increase is caused by the timing of projects and increased benefit costs.



June 2015	24	Wisconsin Electric Power Company

Form 10-Q

Depreciation and Amortization Expense

Our depreciation and amortization expense increased by $4.5 million, or approximately 6.1%, when compared to the second quarter of 2014, primarily because of an overall increase in utility plant in service.

Treasury Grant

During the second quarter of 2015, we recognized $2.2 million of income related to a Section 1603 Renewable Energy Treasury Grant (Treasury Grant) associated with the completion of our biomass plant in November 2013, compared to $3.1 million during the same period in 2014.

For additional information on the Treasury Grant, see Factors Affecting Results, Liquidity and Capital Resources -- Accounting Developments in Item 7 of our 2014 Annual Report on Form 10-K.

Other Income, net



	Three Months Ended June 30
Other Income, net	2015		B (W)			2014
	(Millions of Dollars)

AFUDC - Equity	$	1.4	$	0.4		$	1.0
Gain on Property Sales	—		(4.3		)	4.3
Other	2.6		2.0			0.6
Other Income, net	$	4.0	$	(1.9	)	$	5.9

Interest Expense, net



	Three Months Ended June 30
Interest Expense	2015		B (W)			2014
	(Millions of Dollars)

Gross Interest Costs	$	30.0	$	(1.9	)	$	28.1
Less: Capitalized Interest	0.5		0.1			0.4
Interest Expense, net	$	29.5	$	(1.8	)	$	27.7

Our net interest expense increased by $1.8 million, or 6.5%, as compared to the second quarter of 2014, primarily due to higher debt levels. In May 2015, we issued $250 million of long-term debt. The net proceeds were used to repay short-term debt and for general corporate purposes.

Income Tax Expense

For the second quarter of 2015, our effective tax rate was 35.1% compared to 34.4% for the second quarter of 2014. This increase in our effective tax rate was primarily due to to the favorable recognition of a prior year federal tax position during the second quarter of 2014. We expect our 2015 annual effective tax rate to be between 36.0% and 37.0%.



June 2015	25	Wisconsin Electric Power Company

Form 10-Q

RESULTS OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 2015

Electric Utility Revenues and Sales

The following table compares electric utility operating revenues and MWh sales by customer class during the first six months of 2015 with the first six months of 2014, including favorable (better (B)) or unfavorable (worse (W)) variances:



	Six Months Ended June 30
	Electric Revenues							MWh
Electric Utility Operations	2015		B (W)			2014		2015	B (W)		2014
	(Millions of Dollars)							(Thousands)
Customer Class
Residential	$	581.2	$	(13.0	)	$	594.2	3,700.2	(243.1	)	3,943.3
Small Commercial/Industrial	515.0		(1.6		)	516.6		4,357.8	19.4		4,338.4
Large Commercial/Industrial	364.3		50.2			314.1		4,512.0	864.4		3,647.6
Other - Retail	11.1		(0.4		)	11.5		72.8	(1.4	)	74.2
Total Retail	1,471.6		35.2			1,436.4		12,642.8	639.3		12,003.5
Wholesale - Other	52.6		(21.1		)	73.7		706.6	(369.5	)	1,076.1
Resale - Utilities	111.3		(37.0		)	148.3		3,992.5	1,065.2		2,927.3
Other Operating Revenues	45.7		7.4			38.3		—	—		—
Total	1,681.2		(15.5		)	1,696.7		17,341.9	1,335.0		16,006.9
Electric Customer Choice (a)	1.2		(1.6		)	2.8		316.7	(912.0	)	1,228.7
Total, including electric customer choice	$	1,682.4	$	(17.1	)	$	1,699.5

Weather -- Degree Days (b)
Heating (4,224 Normal)								4,590	(419	)	5,009
Cooling (166 Normal)								99	(9	)	108

(a) Represents distribution sales for customers who have purchased power from an alternative electric supplier in Michigan.

(b) As measured at Mitchell International Airport in Milwaukee, Wisconsin. Normal degree days are based upon a 20-year
moving average.

Our electric utility operating revenues decreased by $17.1 million, or 1.0%, when compared to the first six months of 2014. The most significant factors that caused a change in revenues were:

•

Weather - We estimate that our retail revenues during the first six months of 2015 decreased by approximately $15.0 million when compared to the first six months of 2014 because of weather. While the first six months of 2015 were 8.7% colder than normal, as measured by heating degree days, the first six months of 2014 were 19.3% colder than normal. Cooling degree days decreased 8.3% during the first six months of 2015 as compared to the same period in 2014.

•

Return of the two iron ore mines - On February 1, 2015, the two iron ore mines returned as retail customers. During 2014, these customers were served by an alternative electric supplier pursuant to the electric customer choice program in Michigan. The return of these customers increased retail revenues by approximately $55.5 million. These revenues will not significantly impact earnings because, under an agreement with the PSCW, we are deferring the net revenues (revenues, less fuel and transmission costs) from these customers for the benefit of our Wisconsin retail electric customers.

•

Resale Utilities - These sales are also known as opportunity sales. The net margin (revenues less fuel costs) on these sales flow to the benefit of our retail electric customers. During the first six months of 2014, the prices for electricity in the MISO Energy Markets were unusually high because of the extreme cold weather and the high cost of natural gas. During 2015, these prices returned to more normal levels. The revenue decrease associated with the decline in MISO Energy Markets prices was partially offset by increased sales due to increased availability of our generating units in 2015.


•	Wholesale Revenues - We experienced a $21.1 million decrease in wholesale revenues, primarily due to volume and pricing decreases.



June 2015	26	Wisconsin Electric Power Company

Form 10-Q

•

Other Revenues - Other revenues increased by $7.4 million primarily because of the escrow treatment of the SSR revenues in the most recent Wisconsin retail rate case. This was partially offset by the deferral of the net revenues from the mines as described above. We expect this trend to continue throughout 2015. For information on the escrow treatment of the SSR revenues allowed in the 2015 Wisconsin rate case, see Factors Affecting Results, Liquidity and Capital Resources -- Rates and Regulatory Matters.

Fuel and Purchased Power

Our fuel and purchased power costs decreased by $41.8 million, or 6.8%, when compared to the first six months of 2014. This decrease was primarily caused by a decrease in natural gas prices as compared to the first six months of 2014.

Gas Utility Revenues, Gross Margin and Therm Deliveries

A comparison follows of gas utility operating revenues, gross margin and gas deliveries during the first six months of 2015 with the first six months of 2014. We believe gross margin is a better performance indicator than revenues because changes in the cost of gas sold flow through to revenue under gas cost recovery mechanisms. Between the comparative periods, total gas operating revenues decreased by $147.1 million, or 36.2%, and cost of gas sold decreased by $132.4 million, or 44.1%, due to a decrease in the cost of delivered gas.



	Six Months Ended June 30
	2015		B (W)			2014
	(Millions of Dollars)

Gas Operating Revenues	$	259.2	$	(147.1	)	$	406.3
Cost of Gas Sold	167.7		132.4			300.1
Gross Margin	$	91.5	$	(14.7	)	$	106.2

The following table compares gas utility gross margin and natural gas therm deliveries by customer class during the first six months of 2015 with the first six months of 2014:



	Six Months Ended June 30
	Gross Margin							Therms
Gas Utility Operations	2015		B (W)			2014		2015	B (W)		2014
	(Millions of Dollars)							(Millions)
Customer Class
Residential	$	61.5	$	(9.3	)	$	70.8	232.8	(24.3	)	257.1
Commercial/Industrial	20.0		(5.1		)	25.1		127.2	(21.5	)	148.7
Interruptible	0.1		(0.1		)	0.2		1.7	(0.6	)	2.3
Total Retail	81.6		(14.5		)	96.1		361.7	(46.4	)	408.1
Transported Gas	8.9		(0.1		)	9.0		176.9	(10.9	)	187.8
Other	1.0		(0.1		)	1.1		—	—		—
Total	$	91.5	$	(14.7	)	$	106.2	538.6	(57.3	)	595.9

Weather -- Degree Days (a)
Heating (4,224 Normal)								4,590	(419	)	5,009

(a) As measured at Mitchell International Airport in Milwaukee, Wisconsin. Normal degree days are based upon a 20-year
moving average.

Our gas margin decreased by $14.7 million, or approximately 13.8%, when compared to the first six months of 2014. This decrease primarily relates to a decrease in retail sales volumes as a result of warmer weather during the first six months of 2015. We estimate that weather decreased gas margins by approximately $6.1 million. As measured by heating degree days, the first six months of 2015 were 8.4% warmer than the same period in 2014 and 8.7% colder than normal. Gas margins were reduced by approximately $6.9 million because of lower gas rates that became effective January 1, 2015. For more information on this rate order, see Factors Affecting Results, Liquidity and Capital Resources -- Rates and Regulatory Matters.



June 2015	27	Wisconsin Electric Power Company

Form 10-Q

Other Operation and Maintenance Expense

Our other operation and maintenance expense increased by $29.2 million, or approximately 4.4%, when compared to the first six months of 2014. Approximately $10.8 million of this increase relates to increased costs associated with the mines. The remaining balance of this increase was caused by the timing of projects and increased benefit costs.

Depreciation and Amortization Expense

Our depreciation and amortization expense increased by $9.0 million, or approximately 6.2%, when compared to the first six months of 2014, primarily because of an overall increase in utility plant in service.

Treasury Grant

During the first six months of 2015, we recognized $4.7 million of income related to the Treasury Grant, compared to $6.6 million in the first six months of 2014. For a discussion of the impact of the Treasury Grant on our results of operations, see Results of Operations -- Three Months Ended June 30, 2015 -- Treasury Grant.

Other Income, net



	Six Months Ended June 30
Other Income, net	2015		B (W)			2014
	(Millions of Dollars)

AFUDC - Equity	$	2.6	$	0.8		$	1.8
Gain on Property Sales	—		(4.3		)	4.3
Other	3.9		3.3			0.6
Other Income, net	$	6.5	$	(0.2	)	$	6.7

Interest Expense, net



	Six Months Ended June 30
Interest Expense	2015		B (W)		2014
	(Millions of Dollars)

Gross Interest Costs	$	59.2	$	0.1	$	59.3
Less: Capitalized Interest	1.0		0.3		0.7
Interest Expense, net	$	58.2	$	0.4	$	58.6

Our net interest expense decreased by $0.4 million, or 0.7%, when compared to the first six months of 2014. This decrease is primarily due to lower average interest rates on long-term debt, partially offset by higher debt levels. In May 2015, we issued $250 million of long-term debt. The net proceeds were used to repay short-term debt and for general corporate purposes.

Income Tax Expense

For the first six months of 2015, our effective tax rate was 36.2% compared to 36.8% for the first six months of 2014. For additional information, see Note G -- Income Taxes in our 2014 Annual Report on Form 10-K. We expect our 2015 annual effective tax rate to be between 36.0% and 37.0%.



June 2015	28	Wisconsin Electric Power Company

Form 10-Q

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS

The following summarizes our cash flows during the six months ended June 30:



	2015			2014
	(Millions of Dollars)
Cash Provided by (Used in)
Operating Activities	$	340.6		$	518.5
Investing Activities	$	(236.7	)	$	(242.3	)
Financing Activities	$	(116.7	)	$	(282.2	)

Operating Activities

Cash provided by operating activities decreased by $177.9 million during the first six months of 2015 as compared to the same period in 2014. The decrease is primarily because of a $100.0 million contribution to our qualified pension plan in January 2015. No such contributions were made during the first six months of 2014. A decrease in cash provided by deferred income taxes and investment tax credits also contributed to the decrease in cash provided by operating activities.

Investing Activities

Cash used in investing activities totaled $236.7 million for the first six months of 2015, which was $5.6 million lower than the same period in 2014. Our capital expenditures decreased by $2.9 million during the first six months of 2015 as compared to the same period in 2014.

Financing Activities

Cash used in financing activities was $116.7 million for the first six months of 2015, which was $165.5 million lower than the same period in 2014. We retired $300.0 million of long-term debt during the first six months of 2014. No such retirement was made in 2015. In addition, we paid $120.0 million of dividends on common stock in the first six months of 2015 as compared to $220.0 million during the same period in 2014. Partially offsetting these items was a decrease of our short-term debt levels by $249.1 million during the first six months of 2015, compared to a decrease of $14.1 million during the same period in 2014.

CAPITAL RESOURCES AND REQUIREMENTS

Working Capital

As of June 30, 2015, our current liabilities exceeded our current assets by approximately $85.3 million. We do not expect this to have any impact on our liquidity because we believe we have an adequate back-up line of credit in place for on-going operations. We also have access to the capital markets to finance our construction program and to refinance current maturities of long-term debt if necessary.

Liquidity

We anticipate meeting our capital requirements during the remainder of 2015 and beyond primarily through internally generated funds and short-term borrowings, supplemented by the issuance of intermediate or long-term debt securities, depending on market conditions and other factors, and equity contributions from our parent.

We currently have access to the capital markets and have been able to generate funds internally and externally to meet our capital requirements. Our ability to attract the necessary financial capital at reasonable terms is critical to our overall strategic plan. We currently believe that we have adequate capacity to fund our operations for the foreseeable future through our existing borrowing arrangement, access to capital markets and internally generated cash.



June 2015	29	Wisconsin Electric Power Company

Form 10-Q

We maintain a bank back-up credit facility that provides liquidity support for our obligations with respect to commercial paper and for general corporate purposes.

As of June 30, 2015, we had approximately $481.9 million of available, undrawn lines under our bank back-up credit facility, and approximately $60.0 million of commercial paper outstanding that was supported by the available lines of credit. During the first six months of 2015, our maximum commercial paper outstanding was $404.0 million with a weighted-average interest rate of 0.23%.

We review our bank back-up credit facility needs on an ongoing basis and expect to be able to maintain adequate credit facilities to support our operations. The following table summarizes such facility as of June 30, 2015:



Total Facility		Letters of Credit		Credit Available		Facility Expiration
(Millions of Dollars)

$	500.0	$	18.1	$	481.9	December 2019

This facility has a renewal provision for two one-year extensions, subject to lender approval.

We are the obligor under two series of tax-exempt pollution control refunding bonds in outstanding principal amount of $147 million. In August 2009, we terminated letters of credit that provided credit and liquidity support for the bonds, which resulted in a mandatory tender of the bonds. We issued commercial paper to fund the purchase of the bonds. As of June 30, 2015, the repurchased bonds were still outstanding, but were not reported as long-term debt because they are held by us. Depending on market conditions and other factors, we may change the method used to determine the interest rate on the bonds and have them remarketed to third parties.

Credit Rating Risk

Access to capital markets at a reasonable cost is determined in large part by credit quality. Any credit ratings downgrade could impact our ability to access capital markets.

In May 2015, Moody's Investors Service affirmed our ratings and stable outlook. In June 2015, Standards and Poor's Ratings Services and Fitch Ratings affirmed our ratings and stable outlook.

Subject to other factors affecting the credit markets as a whole, we believe our current ratings should provide a significant degree of flexibility in obtaining funds on competitive terms. However, these security ratings reflect the views of the rating agencies only. An explanation of the significance of these ratings may be obtained from each rating agency. Such ratings are not a recommendation to buy, sell or hold securities. Any rating can be revised upward or downward or withdrawn at any time by a rating agency.

See Capital Resources and Requirements -- Credit Rating Risk in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2014 Annual Report on Form 10-K for additional information related to our credit rating risk.

Capital Requirements

Capital Expenditures: Capital requirements during the remainder of 2015 are expected to be principally for upgrading our electric and gas distribution systems. We estimate that we will spend approximately $500 million on capital expenditures for all of 2015.

Off-Balance Sheet Arrangements: We are a party to various financial instruments with off-balance sheet risk as a part of our normal course of business, including financial guarantees and letters of credit which support construction projects, commodity contracts and other payment obligations. We believe that these agreements do not have, and are not reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our investors. For further information, see Note 9 -- Variable Interest Entities in the Notes to Consolidated Condensed Financial Statements in this report.



June 2015	30	Wisconsin Electric Power Company

Form 10-Q

Contractual Obligations/Commercial Commitments: Our total contractual obligations and other commercial commitments were approximately $26.3 billion as of June 30, 2015, compared with $26.8 billion as of December 31, 2014.

See Contractual Obligations/Commercial Commitments in Item 7 of our 2014 Annual Report on Form 10-K for additional information about our commitments.

FACTORS AFFECTING RESULTS, LIQUIDITY AND CAPITAL RESOURCES

The following is a discussion of certain factors that may affect our results of operations, liquidity and capital resources. The following discussion should be read together with the information under the heading "Factors Affecting Results, Liquidity and Capital Resources" in Item 7 of our 2014 Annual Report on Form 10-K, which provides a more complete discussion of factors affecting us, including market risks and other significant risks, WEC Energy Group's PTF strategy, rates and regulatory matters, electric system reliability, environmental matters, legal matters, industry restructuring and competition and other matters.

RATES AND REGULATORY MATTERS

2015 Wisconsin Rate Case: In May 2014, we applied to the PSCW for a biennial review of costs and rates. On December 23, 2014, the PSCW approved the following rate adjustments:

•

A net bill increase related to non-fuel costs for our Wisconsin retail electric customers of approximately $2.7 million (0.1%) in 2015. This amount reflects receipt of SSR payments from MISO that are higher than anticipated when we filed our rate request in May 2014, as well as an offset of $26.6 million related to a refund of prior fuel costs and the remainder of the proceeds from the Treasury Grant we received in connection with the biomass facility. This $26.6 million is being returned to customers in the form of bill credits.


•	An electric rate increase for our Wisconsin retail electric customers of $26.6 million (0.9%) for 2016, related to the expiration of the bill credits provided to customers in 2015.


•	A rate decrease of $13.9 million (-0.5%) in 2015 related to a forecasted decrease in fuel costs. We will make an annual fuel cost filing, as required, for 2016.


•	A rate decrease of $10.7 million (-2.4%) for our natural gas customers in 2015, with no rate adjustment in 2016.


•	An increase of approximately $0.5 million (2.0%) for our downtown Milwaukee steam utility customers for 2015, with no rate adjustment in 2016.


•	An increase of approximately $1.2 million (7.3%) for our Milwaukee County steam utility customers for 2015, with no rate adjustment in 2016.

These rate adjustments were effective January 1, 2015. The electric rates reflect an increased allocation to fixed charges from 7.8% to 13.6% of total electric revenue requirements to more closely reflect our cost structure. In addition, our authorized return on equity was set at 10.2%. The PSCW also authorized the financial common equity component to remain the same at an average of 51%.

The PSCW order also authorized escrow accounting for SSR revenues because of the uncertainty of the actual revenues we will receive under the PIPP SSR agreements. Under escrow accounting, we will record SSR revenues of $90.7 million a year. If actual SSR payments from MISO exceed $90.7 million a year, the difference will be deferred and returned to customers, with interest, in a future rate case. If actual SSR payments from MISO are less than $90.7 million a year, the difference will be deferred and recovered from customers with interest, in a future rate case. For additional discussion of SSR revenues, see Factors Affecting Results, Liquidity and Capital Resources -- Electric Transmission and Energy Markets -- Michigan Business.

In January 2015, certain parties appealed a portion of the PSCW's final decision adopting the Company's specific rate design changes, including new charges for customer owned generation within its service territory. We believe the appeal is without merit.

Earnings Sharing Agreement: In May 2015, the PSCW approved Wisconsin Energy's acquisition of Integrys subject to the condition of a three-year earnings sharing mechanism for us beginning in 2016. If we earn above our authorized return, 50% of the first 50 basis points of additional utility earnings will be shared with customers and



June 2015	31	Wisconsin Electric Power Company

Form 10-Q

used to pay down our transmission escrow. All utility earnings above the first 50 basis points will be used to pay down the transmission escrow.

See Factors Affecting Results, Liquidity and Capital Resources -- Rates and Regulatory Matters in Item 7 of our 2014 Annual Report on Form 10-K for additional information regarding our rates and other regulatory matters.

ELECTRIC TRANSMISSION AND ENERGY MARKETS

Financial Transmission Rights: As part of MISO, a market-based platform was developed for valuing transmission congestion premised upon the Locational Marginal Price (LMP) system that has been implemented in certain northeastern and mid-Atlantic states. The LMP system includes the ability to mitigate or eliminate congestion costs through Auction Revenue Rights (ARRs) and FTRs. ARRs are allocated to market participants by MISO and FTRs are purchased through auctions. A new allocation and auction were completed for the period of June 1, 2015 through May 31, 2016. The resulting ARR valuation and the secured FTRs are expected to mitigate our transmission congestion risk for that period.

Michigan Business

Michigan Settlement: On March 12, 2015, we, along with Wisconsin Energy, entered into the Amended Agreement with the Attorney General of the State of Michigan, the Staff of the MPSC, and Tilden Mining Company and Empire Iron Mining Partnership to resolve all objections these parties raised at the MPSC to Wisconsin Energy’s acquisition of Integrys. The Amended Agreement includes the following provisions:


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

•

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


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

In addition, on March 12, 2015, we entered into a special contract with each of the mines to provide full requirements electric service through December 31, 2019.

On April 23, 2015, the MPSC approved the acquisition of Integrys, the Amended Agreement and the special contracts with the two mines.

See Factors Affecting Results, Liquidity and Capital Resources - Industry Restructuring and Competition in Item 7 of our 2014 Annual Report on Form 10-K for additional information regarding the impact of industry restructuring in Michigan, as well as information regarding other restructuring matters and MISO.

ENVIRONMENTAL MATTERS

Air Quality

Sulfur Dioxide Standard: The United States Environmental Protection Agency (EPA) issued a new 1-Hour Sulfur Dioxide (SO₂) National Ambient Air Quality Standards (NAAQS) that became effective in August 2010. This standard represents a significant change from the previous SO₂ standard, and NAAQS in general, since attainment designations were to be based primarily on modeling rather than monitoring. Typically, attainment designations are based on monitored data. In May 2014, the EPA issued the proposed Data Requirements Rule that would establish procedures and timelines for implementation of the standard. The proposed rule describes the EPA's plans for allowing the states to use either monitoring or modeling to make designations.



June 2015	32	Wisconsin Electric Power Company

Form 10-Q

We filed comments on the proposed rule with the EPA in July 2014, and proposed a special reliability exclusion for PIPP that would recognize our request to retire the facility, and would exclude it from further modeling or monitoring requirements and subsequent emission reductions. As proposed, the rule affords state agencies latitude in rule implementation. States would have the option of modeling or monitoring to show attainment (subject to EPA approval for this selection). If the state chooses modeling and the sources in an area do not make reductions by 2017, and as a consequence the area is classified as non-attainment, then they would have to make emission reductions by 2023. Alternatively, if a state opted out of modeling and instead chose monitoring, and subsequently monitored non-attainment, then it would face a 2026 compliance date. A non-attainment designation could have negative impacts for a localized geographic area, including permitting constraints for the subject source and for other new or existing sources in the area.

On March 2, 2015, a Federal Court in the Northern District of California entered a consent decree relating to the implementation of the revised 1-Hour SO₂ standard that Sierra Club and EPA had agreed upon in May 2014. This consent decree has 1-Hour SO₂ implementation dates that are sooner than the proposed Data Requirements Rule. The EPA has not yet indicated how, in light of this consent decree, the Data Requirements Rule will be finalized.

We believe our fleet is well positioned to meet this regulation once it is finalized. If PIPP is still operating in the 2020-2022 timeframe, it may need additional SO₂ reductions or other operational limits in order to comply with the standard. We are currently working closely with the state of Michigan as they determine the attainment status of the Marquette area and the effect, if any, on PIPP.

Mercury and Other Hazardous Air Pollutants: In December 2011, the EPA issued the final Mercury and Air Toxics Standards (MATS) rule, which imposes stringent limitations on numerous hazardous air pollutants, including mercury, from coal and oil-fired electric generating units. Only PIPP will require modifications. We are currently working on the addition of a dry sorbent injection system for further control of mercury and acid gases at the plant to comply with MATS. In April 2013, we received a one year MATS compliance extension for PIPP through April 16, 2016 from the Michigan Department of Environmental Quality (MDEQ).

In addition, both Wisconsin and Michigan have mercury rules that require a 90% reduction of mercury, and compliance with those rules will no longer be required after the compliance date for MATS.

The Supreme Court recently ruled on a challenge to the MATS rule and remanded the case back to the DC Circuit Court of Appeals for further proceedings. At this time, it is too early to determine what effect, if any, this ruling will have on our compliance plans. If the rule is stayed or revoked, the Wisconsin and Michigan mercury rules will take effect again.

Climate Change: On August 3, 2015, the EPA issued final guidelines relating to greenhouse gas (GHG) emissions from existing generating units, and published final performance standards for modified and reconstructed generating units and new fossil fueled power plants. The final guidelines for existing fossil generating units seek to attain state-specific GHG rate limits by 2030, and require states to submit plans as early as September 2016. States requesting an extension would be required to submit final plans by September 2018, either alone or in cooperation with other states. States will be required to meet interim goals over the period from 2022 through 2029, and a final goal in 2030, with the goal of reducing nationwide GHG emissions by 32% from 2005 levels. The rule is seeking aggressive GHG reductions in Wisconsin and Michigan. The proposed program consists of building blocks that include a combination of power plant efficiency improvements, increased reliance on combined cycle gas units, and adding new renewable energy resources.

We are in the process of reviewing the final guidelines for existing generating units to determine the potential impacts to our operations, but these guidelines could result in significant additional compliance costs, including capital expenditures, impact how we operate our existing fossil fueled power plants and biomass facility, and could have a material adverse impact on our operating costs. In addition, several states have indicated that they intend to challenge these new rules, and any state compliance plans that are developed could be subject to change based upon the outcome of this litigation.



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Form 10-Q

Water Quality

Clean Water Act: Section 316(b) of the Clean Water Act requires that the location, design, construction and capacity of cooling water intake structures reflect the Best Technology Available (BTA) for minimizing adverse environmental impacts. The EPA finalized rules for new facilities (Phase I) in 2001. The EPA issued a final existing facilities rule that became effective in October 2014. The rule applies to all of our existing generating facilities with cooling water intake structures, except for the Oak Creek expansion units, which were permitted under the Phase I rules.

The existing facilities rule allows facility owners to select from seven options available to meet the impingement mortality (IM) reduction standard. BTA determinations will be made over the next several years by the WDNR and MDEQ, subject to EPA oversight, when facility permits are reissued. Based upon our assessment, we believe that existing technologies at our generating facilities, except for VAPP, satisfy the IM BTA standard. By late August 2015, fish protection screens are scheduled to be installed at VAPP Unit 2 that will meet the IM BTA standard. The same type of screens are scheduled to be installed on VAPP Unit 1 starting in September 2016.

The BTA determinations for entrainment mortality (EM) reduction will be made by the WDNR and MDEQ on a case-by-case basis. The new rule requires state permitting agencies to determine EM BTA on a site-specific basis taking into consideration several factors. We have received an EM BTA determination by the WDNR, with EPA concurrence, for our proposed intake modification at VAPP. BTA determinations for EM will be made in future permit reissuances for Port Washington Generating Station, Pleasant Prairie Power Plant, PIPP and Oak Creek Power Plant Units 5-8. With the exception of Pleasant Prairie, we cannot yet determine what, if any, intake structure or operational modifications will be required to meet the new EM BTA requirements for these facilities.

During 2015-2017, we plan to complete studies and evaluate options to address the EM BTA requirements at PIPP. We have evaluated the 316(b) rule requirements related to retirements. The new rule allows the EM BTA requirements to be waived in cases of pending facility retirements. Based on recent discussions with the MDEQ, if we submit a signed certification with our next National Pollutant Discharge Elimination System permit application that PIPP will be retired no later than the end of the next permit cycle (assumed to be October 1, 2022), then the EM BTA requirements will be waived. Therefore, because PIPP meets the IM BTA requirement, if these units are retired as described above, we believe no capital or operation and maintenance costs for 316(b) compliance will be required.

Paris Generating Station: In November 2014, the WDNR reissued the Wisconsin Pollutant Discharge Elimination System (WPDES) permit for the Paris Generating Station. We believe that the WDNR imposed unreasonable permit conditions with respect to temperature monitoring, the control of water treatment additive and phosphorus discharges.

To address these permit conditions, we filed a petition for a contested case hearing with the WDNR in January 2015. On the same day, we also filed a request to be covered by the statewide phosphorus variance to address one of our concerns with the permit.

We have since reached an agreement with the WDNR with respect to the permit conditions for temperature monitoring and for restrictions related to the use of a water treatment additive. In March 2015, the WDNR issued a final WPDES permit with agreed upon modifications and we withdrew our petition for a contested case hearing.

On July 7, 2015, the Milwaukee County Circuit Court entered a stipulation and Order for Judgment between the WDNR and Wisconsin Department of Justice. This order resolves the litigation by allowing us to maintain the ability to apply for and be covered by the statewide phosphorus variance.

Land Quality

New Coal Combustion Products Regulation: On April 17, 2015, the Hazardous and Solid Waste Management System; Disposal of Coal Combustion Residuals From Electric Utilities final rule was entered into the Federal Register. The final rule regulates the disposal of coal combustion residuals as a non-hazardous waste. We do not believe the final rule will have a significant impact on our financial position or operating results because we currently have a program of beneficial utilization for substantially all of our coal combustion products. If needed, we have landfill capacity that meets the rule requirements for our remaining coal combustion product sources.



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Form 10-Q

See Factors Affecting Results, Liquidity and Capital Resources -- Environmental Matters in Item 7 of our 2014 Annual Report on Form 10-K for additional information regarding environmental matters affecting our operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes related to market risk from the disclosures presented in our Annual Report on Form 10-K for the year ended December 31, 2014. For information concerning market risk exposures at Wisconsin Electric Power Company, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Factors Affecting Results, Liquidity and Capital Resources -- Market Risks and Other Significant Risks, in Part II of our 2014 Annual Report on Form 10-K, as well as Note 5 -- Fair Value Measurements and Note 6 -- Derivative Instruments in the Notes to Consolidated Condensed Financial Statements in this report.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures: Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon such evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective (i) in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and (ii) to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting: There has not been any change in our internal control over financial reporting (as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the fiscal quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The following should be read in conjunction with Item 3. Legal Proceedings in Part I of our 2014 Annual Report on Form 10-K.

In addition to those legal proceedings discussed in our reports to the SEC, we are currently, and from time to time, subject to claims and suits arising in the ordinary course of business. Although the results of these legal proceedings cannot be predicted with certainty, management believes, after consultation with legal counsel, that the ultimate resolution of these proceedings will not have a material effect on our financial statements.

RATES AND REGULATORY MATTERS

Rate Matters: See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Factors Affecting Results, Liquidity and Capital Resources -- Rates and Regulatory Matters in Part I of this report for information concerning rate matters in the jurisdictions where we do business.



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Form 10-Q

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors presented in our Annual Report on Form 10-K for the year ended December 31, 2014. See Item 1A. Risk Factors in our 2014 Annual Report on Form 10-K for a discussion of certain risk factors applicable to us.

ITEM 6. EXHIBITS



Exhibit No.

4		Instruments Defining the Rights of Security Holders

4.1		Securities Resolution No. 15 of Wisconsin Electric, dated as of May 14, 2015, under the Indenture for Debt Securities, dated as of December 1, 1995, between Wisconsin Electric and U.S. Bank National Association (as successor to Firstar Trust Company), as Trustee. (Exhibit 4.1 to Wisconsin Electric's 05/20/2015 Form 8-K.)

10		Material Contracts

10.1		Terms and Conditions for July 31, 2015 Special Restricted Stock Award. (Exhibit 10.1 to WEC Energy Group's 06/30/2015 Form 10-Q.)

31		Rule 13a-14(a) / 15d-14(a) Certifications

31.1		Certification Pursuant to Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification Pursuant to Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Section 1350 Certifications

32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		Interactive Data File



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Form 10-Q

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		WISCONSIN ELECTRIC POWER COMPANY
		(Registrant)

		/s/STEPHEN P. DICKSON
Date:	August 5, 2015	Stephen P. Dickson, Vice President and Controller, Principal Accounting Officer and duly authorized officer



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WISCONSIN ELECTRIC POWER CO - FORM 10-Q - August 5, 2015

Attached files

WISCONSIN ELECTRIC POWER CO Reports