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Wisconsin Electric Power (WELPM)

Filed: 28 Mar 19, 9:25am
SCHEDULE 14C INFORMATION
INFORMATION STATEMENT PURSUANT TO SECTION 14(C) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO.)
 
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Wisconsin Electric Power Company
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
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J. Kevin Fletcher
Chairman and
Chief Executive Officer
231 W. Michigan Street
Milwaukee, WI 53203

 
March 28, 2019
 
Dear Preferred Stockholder:
 
Wisconsin Electric Power Company, which does business under the trade name of We Energies, will hold its Annual Meeting of Stockholders on Thursday, April 25, 2019, at 10:00 a.m., Central time, in the Resource Center on the first floor of the Public Service Building, 231 W. Michigan Street, Milwaukee, Wisconsin 53203.
 
We are not soliciting proxies for this meeting, as more than 99% of the voting stock is owned, and will be voted, by Wisconsin Electric’s parent, WEC Energy Group, Inc. If you wish, you may vote your shares of preferred stock in person at the meeting; however, the business session will be very brief.
 
As an alternative, you might consider attending WEC Energy Group’s Annual Meeting of Stockholders to be held Thursday, May 2, 2019, at 10:00 a.m., Central time, at Concordia University Wisconsin in the R. John Buuck Field House located at 12800 North Lake Shore Drive, Mequon, Wisconsin 53097.
 
By attending this meeting, you would have the opportunity to meet many of the Wisconsin Electric officers and directors. Although you cannot vote your shares of Wisconsin Electric preferred stock at the WEC Energy Group meeting, you may find the activities worthwhile.
 
You must pre-register and present photo identification at the door to attend WEC Energy Group’s Annual Meeting. To pre-register for the meeting, please contact WEC Energy Group’s Stockholder Services, 231 W. Michigan Street, Milwaukee, Wisconsin 53203; call 800-881-5882; or email WEC.Stockholder-Services.Contact@wecenergygroup.com and provide proof of your ownership of preferred stock, including, if applicable, a bank or brokerage firm account statement or a letter from the broker, trustee, bank, or nominee holding your shares.
 
The annual report of Wisconsin Electric is attached as Appendix B to this information statement. If you have any questions or would like a copy of the WEC Energy Group annual report, please call our toll-free stockholder hotline at 800-881-5882.
 
Thank you for your support.
 
Sincerely,
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
 

March 28, 2019
 
To the Stockholders of Wisconsin Electric Power Company:
 
The 2019 Annual Meeting of Stockholders of Wisconsin Electric Power Company will be held on Thursday, April 25, 2019, at 10:00 a.m., Central time, in the Resource Center on the first floor of the Public Service Building, 231 W. Michigan Street, Milwaukee, Wisconsin 53203, for the following purposes:

1.To elect the five members of the Board of Directors to hold office until the 2020 Annual Meeting of Stockholders; and

2.To consider any other matters that may properly come before the meeting.
 
Stockholders of record at the close of business on February 21, 2019, are entitled to vote. The following pages provide additional details about the meeting as well as other useful information.
 
Important Notice Regarding the Availability of Materials Related to the Stockholder Meeting to Be Held on April 25, 2019 – The Information Statement and 2018 Annual Report to Stockholders are available at:
 
www.wisconsinelectric.com
 

By Order of the Board of Directors,
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Margaret C. Kelsey
Executive Vice President, General Counsel and Corporate Secretary





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We Energies
231 W. Michigan Street
Milwaukee, WI 53203
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INFORMATION STATEMENT
 
This information statement is being furnished to stockholders beginning on or about March 28, 2019, in connection with the annual meeting of stockholders of Wisconsin Electric Power Company (“WE” or the “Company”), which does business under the trade name of We Energies, and all adjournments or postponements of the annual meeting, for the purposes listed in the preceding Notice of Annual Meeting of Stockholders. The annual meeting of stockholders will be held on Thursday, April 25, 2019 (the “Meeting”), at 10:00 a.m., Central time, in the Resource Center on the first floor of the Public Service Building, 231 W. Michigan Street, Milwaukee, Wisconsin 53203. The WE annual report to stockholders is attached as Appendix B to this information statement.
 
We are not asking you for a proxy and you are requested not to send us a proxy. However, you may vote your shares of preferred stock at the Meeting. If you would like to attend the Meeting, please contact Stockholder Services by email at wec.stockholder-services.contact@wecenergygroup.com or by telephone at 800-881-5882.

VOTING SECURITIES
 
As of February 21, 2019, WE had outstanding 44,498 shares of $100 par value Six Per Cent. Preferred Stock; 260,000 shares of $100 par value 3.60% Serial Preferred Stock; and 33,289,327 shares of common stock. Each outstanding share of each class is entitled to one vote. Stockholders of record at the close of business on February 21, 2019 will be entitled to vote at the Meeting. In order to conduct the Meeting, a majority of the outstanding shares entitled to vote must be represented at the Meeting. This is known as a “quorum.” All of WE’s outstanding common stock, representing more than 99% of its voting securities, is owned by its parent company, WEC Energy Group, Inc. (“WEC Energy Group”), and will be represented at the Meeting. The principal business address of WEC Energy Group is 231 W. Michigan Street, Milwaukee, Wisconsin 53203. A list of stockholders of record entitled to vote at the Meeting will be available for inspection by stockholders at WE’s principal business office at 231 W. Michigan Street, Milwaukee, Wisconsin 53203, prior to and at the Meeting.

INTERNET AVAILABILITY OF INFORMATION
 
The following documents can be found at wisconsinelectric.com:
 
Notice of Annual Meeting;
Information Statement; and
2018 Annual Report to Stockholders.

ELECTION OF DIRECTORS
 
At the Meeting, there will be an election of five directors. Based upon the recommendation of the Corporate Governance Committee of WEC Energy Group’s Board of Directors (the "Corporate Governance Committee"), the individuals named below have been nominated by the WE Board of Directors (the “Board”) to serve a one-year term expiring at the 2020 Annual Meeting of Stockholders and until they are re-elected or until their respective successors are duly elected and qualified.
 
Directors will be elected by a plurality of the votes cast by the shares entitled to vote, as long as a quorum is present. “Plurality” means that the individuals who receive the largest number of votes are elected as directors up to the maximum number of directors to be chosen. Therefore, shares not voted, whether by withheld authority or otherwise, have no effect in the election of directors.
 
Each nominee has consented to being nominated and to serve if elected. In the unlikely event that any nominee becomes unable to serve for any reason, the Board will select a substitute nominee based upon the recommendation of the Corporate Governance Committee.


Wisconsin Electric Power Company12019 Annual Meeting Information Statement



Director Nominees  
The Company does not have a nominating committee. The Corporate Governance Committee provides oversight for the nominating process on behalf of the Board.

Director nominees for the Board are evaluated as a whole with the goal of recommending nominees with diverse backgrounds and experience that, together, can best perpetuate the success of WE’s business and represent stockholder interests. In addition to the specific experiences and skills of the individual director nominees identified below, the Corporate Governance Committee believes that director nominees should generally possess certain minimum characteristics and skills including: proven integrity; mature and independent judgment; vision and imagination; ability to objectively appraise problems; ability to evaluate strategic options and risks; sound business experience and acumen; relevant technological, political, economic, or social/cultural expertise; social consciousness; achievement of prominence in career; and familiarity with national and international issues affecting the Company’s business. After considering the recommendations of the Corporate Governance Committee, the Board selected the nominees listed below.
 
Board Diversity 
The Corporate Governance Committee does not have a specific policy with regards to the consideration of diversity in identifying director nominees. However, the Corporate Governance Committee strives to recommend candidates who each bring a unique perspective to the Board in order to contribute to the collective diversity of the Board. As part of its process, in connection with the nomination of new directors to the Board, the Corporate Governance Committee considers several factors to ensure the entire Board collectively embraces a wide variety of characteristics, including professional background, experience, skills, and knowledge, as well as the criteria listed above. Each candidate will generally exhibit different and varying degrees of these characteristics.
 
Nominees for Election to the Board of Directors 
Biographical information regarding each nominee is shown below. Ages are as of December 31, 2018. All nominees are current or former officers of the Company and are not independent.
 
J. Kevin Fletcher. Age 60.
WEC Energy Group, Inc. - Chief Executive Officer ("CEO") since February 1, 2019; President since October 2018.
Wisconsin Electric Power Company – Chairman of the Board and CEO since February 1, 2019; President from May 2016 to November 2018; Executive Vice President-Customer Service and Operations from June 2015 to May 2016; Senior Vice President-Customer Operations from October 2011 through June 2015.
Director of WEC Energy Group since February 2019; Director of Wisconsin Electric Power Company since June 2015.
Mr. Fletcher also serves as an executive officer and/or director of several other major subsidiaries of WEC Energy Group.

Mr. Fletcher has more than 40 years of experience working in the public utility sector, including nearly 25 years at a senior leadership level. With his extensive experience in strategic initiatives, business operations, customer service, planning, engineering and construction and his senior leadership of publicly-regulated utilities, Mr. Fletcher contributes significant insight into the Company's industry and customers to the management team and to the Board. Based on his knowledge of operations at WEC Energy Group and its utility affiliates and at other publicly-regulated utilities, the Board concluded that Mr. Fletcher should serve as a director of the Company.

Margaret C. Kelsey. Age 53.
WEC Energy Group, Inc. – Executive Vice President, Corporate Secretary and General Counsel since January 2018; Executive Vice President from September 2017 to January 2018.
Wisconsin Electric Power Company – Executive Vice President, Corporate Secretary and General Counsel since January 2018.
Modine Manufacturing Company - General Counsel, Corporate Secretary, and Vice President-Legal from April 2008 to August 2017; Vice President-Corporate Communications from April 2014 to August 2017.
Director of Wisconsin Electric Power Company since January 2018.
Ms. Kelsey also serves as an executive officer and/or director of several other major subsidiaries of WEC Energy Group.

Wisconsin Electric Power Company22019 Annual Meeting Information Statement



Based primarily on Ms. Kelsey's position and qualifications as (i) Executive Vice President, General Counsel, and Corporate Secretary of WEC Energy Group and its utility subsidiaries, (ii) her extensive experience in legal, governance, compliance, and regulatory matters as General Counsel and Corporate Secretary of Modine Manufacturing, and (iii) her experience in managing corporate communications, strategic initiatives, business/corporate development, and treasury/risk management functions at Modine, the Board concluded that Ms. Kelsey should serve as a director of the Company.
  
Gale E. Klappa. Age 68.
WEC Energy Group, Inc. – Executive Chairman since February 1, 2019; Chairman of the Board and CEO from 2004 to May 2016 and October 2017 to January 31, 2019; Non-Executive Chairman of the Board from May 2016 to October 2017; President from 2003 to August 2013.
Wisconsin Electric Power Company – Chairman of the Board from 2004 to May 2016 and January 2018 to January 31, 2019; CEO from 2003 to May 2016 and January 2018 to January 31, 2019; President from 2003 to June 2015.
Director of Associated Banc-Corp since 2016 and Director of Badger Meter, Inc. since 2010, both headquartered in Wisconsin; Director of Joy Global Inc. from 2006 to 2017.
Director of WEC Energy Group since 2003; Director of Wisconsin Electric Power Company from 2003 to May 2016 and January 2018 to present.
Mr. Klappa also serves as a director of several other major subsidiaries of WEC Energy Group.

Mr. Klappa has more than 40 years of experience working in the public utility industry, including more than 25 at a senior executive level. He has served as Chairman and CEO of WEC Energy Group and Wisconsin Electric and presently serves as Executive Chairman of WEC Energy Group's Board of Directors. Mr. Klappa's deep knowledge of the Company's industry, operations, customers, stockholders, and management team is of great value to the Board. Based upon Mr. Klappa’s extensive executive management, financial, and strategic experience as a senior executive in the utility industry, the Board concluded that Mr. Klappa should serve as director of the Company.
 
Scott J. Lauber. Age 53.
WEC Energy Group, Inc. – Senior Executive Vice President, Chief Financial Officer ("CFO") and Treasurer since February 1, 2019; Executive Vice President, CFO and Treasurer from October 2018 to January 31, 2019; Executive Vice President and CFO from April 2016 to October 2018; Vice President and Treasurer from February 2013 to March 2016.
Wisconsin Electric Power Company – Executive Vice President, CFO and Treasurer since October 2018; Executive Vice President and CFO from April 2016 to October 2018; Vice President and Treasurer from February 2013 to March 2016.
Director of Wisconsin Electric Power Company since April 2016.
Mr. Lauber also serves as an executive officer and/or director of several other major subsidiaries of WEC Energy Group.

Based primarily upon Mr. Lauber’s more than 28 years of service at WEC Energy Group, including executive and financial management responsibility of its utility affiliates, with a focus on long-range financial planning and oversight of the treasury function, as well as his experience in risk and insurance matters and knowledge of the financial community, the Board concluded that Mr. Lauber should serve as director of the Company.
 
Tom Metcalfe. Age 51.
Wisconsin Electric Power Company – President since November 2018; Executive Vice President-Generation from April 2016 to November 2018; Senior Vice President-Power Generation from January 2014 to March 2016.
Director of Wisconsin Electric Power Company since January 2018.
Mr. Metcalfe also serves as President and a director of Wisconsin Public Service Corporation and Wisconsin Gas LLC, utility subsidiaries of WEC Energy Group.

Based primarily upon Mr. Metcalfe’s strong executive experience, considerable knowledge of the Company's industry, customers and strategic initiatives, and responsibilities with respect to the Company's operations, the Board concluded that Mr. Metcalfe should serve as a director of the Company.


Wisconsin Electric Power Company32019 Annual Meeting Information Statement


COMMITTEES OF THE WEC ENERGY GROUP BOARD OF DIRECTORS
 
WE is a wholly-owned subsidiary of WEC Energy Group, and the WE Board does not have any committees. The WEC Energy Group Board maintains the following committees, which oversee certain responsibilities on behalf of the WE Board: Audit and Oversight, Compensation, Corporate Governance, and Finance. All committees operate under a charter approved by WEC Energy Group’s Board of Directors. A copy of each committee charter is posted in the “Governance” section of WEC Energy Group’s Website at wecenergygroup.com and is available in print to any stockholder who requests it in writing from the Corporate Secretary. Members and principal responsibilities of the WEC Energy Group Board committees are provided below.
 
Members Principal Responsibilities; Meetings
   
Audit and Oversight
Thomas J. Fischer, Chair
John F. Bergstrom
Barbara L. Bowles
Patricia W. Chadwick
Danny L. Cunningham
Henry W. Knueppel
 
 
•      Oversee the integrity of the financial statements.
•      Oversee management compliance with legal and regulatory requirements.
•      Review environmental and compliance programs.
•      Review, approve, and evaluate the independent auditors’ services.
•      Oversee the performance of the internal audit function and independent auditors.
•      Discuss risk management and major risk exposures and steps taken to monitor and control such exposures.
•      Prepare the report required by the Securities and Exchange Commission (“SEC”) for inclusion in the proxy and information statements.
•      Establish procedures for the submission and treatment of complaints and concerns regarding WEC Energy Group's and its subsidiaries' accounting or auditing matters.
•      The Audit and Oversight Committee conducted six meetings in 2018.
   
Compensation
John F. Bergstrom, Chair
Thomas J. Fischer
Ulice Payne, Jr.
 
 
•      Determine and annually review the Compensation Committee's compensation philosophy.
•      Oversee the development of competitive, performance-based executive and director compensation programs.
•      Review and approve the compensation paid to select employees, including certain senior officers and executive officers (including base salaries, incentive compensation, and benefits).
•      Establish and administer the CEO compensation package.
•      Set performance goals relevant to the CEO's compensation.
•      Annually evaluate CEO performance and determine compensation adjustments.
•      Oversee succession planning and assignments to key executive officers.
•      Prepare the report required by the SEC for inclusion in the proxy and information statements.
•      The Compensation Committee conducted six meetings in 2018.
   
Corporate Governance
Barbara L. Bowles, Chair
Albert J. Budney, Jr.
Curt S. Culver
Henry W. Knueppel
 
 
•      Establish and annually review the Corporate Governance Guidelines to verify that the WEC Energy Group Board of Directors and the Company's Board are effectively performing their fiduciary responsibilities to stockholders.
•      Establish and annually review director candidate selection criteria.
•      Identify and recommend candidates to be named as nominees of WEC Energy Group’s Board of Directors and the Company’s Board for election as directors.
•      Lead the WEC Energy Group Board in its annual performance review.
•      The Corporate Governance Committee conducted three meetings in 2018.
   
Finance
Curt S. Culver, Chair
William J. Brodsky
Patricia W. Chadwick William M. Farrow III
Ulice Payne, Jr.
Mary Ellen Stanek
 
 
•      Review and monitor WEC Energy Group’s and its subsidiaries’ current and long-range financial policies and strategies, including each company’s capital structure and dividend policy.
•      Authorize the issuance of corporate debt within limits set by WEC Energy Group’s Board.
•      Discuss policies and financial programs with respect to financial risk management.
•      Approve WEC Energy Group's and its subsidiaries' consolidated financial plans, including the capital budget.
•      The Finance Committee conducted four meetings in 2018.
 
The WE Board met five times during calendar year 2018. All WE Board members attended 100% of the total number of WE Board meetings during 2018.

Wisconsin Electric Power Company42019 Annual Meeting Information Statement


DIRECTOR COMPENSATION

All of the Company's Board members are executive officers of WE and/or WEC Energy Group, and were not separately compensated as directors. Messrs. Klappa, Lauber and Fletcher, and Ms. Kelsey are named executive officers of WE, and any compensation received by these individuals for service as named executive officers may be found in the “Summary Compensation Table” on page 28 of this information statement.

OTHER MATTERS

The WE Board of Directors is not aware of any other matters that may properly come before the Meeting. The WE bylaws set forth the requirements that must be followed should a stockholder wish to propose any floor nominations for director or floor proposals at annual or special meetings of stockholders. In the case of annual meetings, the bylaws state, among other things, that notice and certain other documentation must be provided to WE at least 70 days and not more than 100 days before the scheduled date of the annual meeting. No such notices have been received by WE.

CORPORATE GOVERNANCE – FREQUENTLY ASKED QUESTIONS
 
Does WE have Corporate Governance Guidelines?
The Board follows WEC Energy Group’s Corporate Governance Guidelines that WEC Energy Group has maintained since 1996. WEC Energy Group was one of the earliest adopters of a formal set of Corporate Governance Guidelines, which have been modified over the years in response to evolving governance best practices and stakeholder expectations. These Guidelines provide a framework under which the WEC Energy Group and WE Boards conduct their business.
 
To maintain effective Corporate Governance Guidelines, WEC Energy Group’s Corporate Governance Committee annually reviews WEC Energy Group’s and the Company’s governance practices, taking into consideration discussions with WEC Energy Group stockholders as part of the investor outreach and engagement program, industry surveys, and benchmarking studies, as well as governance guidelines published by proxy advisors.
 
The Corporate Governance Guidelines are available in the “Governance” section of WEC Energy Group’s Website at wecenergygroup.com/govern/governance.htm and are available in print to any stockholder who requests them in writing from the Corporate Secretary.
 
How are directors determined to be independent?
No director qualifies as independent unless the Board affirmatively determines that the director has no material relationship with the Company.
 
What are the WEC Energy Group Board’s standards of independence?
The guidelines the WEC Energy Group and WE Boards of Directors use in determining director independence are located in Appendix A of the WEC Energy Group Corporate Governance Guidelines. The Guidelines are available in the “Governance” section of WEC Energy Group’s Website at wecenergygroup.com. These standards of independence include a provision that a director will not be considered independent if he or she has been an employee of the Company for the last five years.

Who are the independent directors?
All of WE’s Board members are employees of the Company and/or WEC Energy Group and are not independent.
 
Are the WEC Energy Group Audit and Oversight and Compensation Committees comprised solely of independent directors?
Yes. These committees are comprised solely of independent directors who meet the independence requirements of the SEC, New York Stock Exchange and the WEC Energy Group Corporate Governance Guidelines.
 
In addition, the WEC Energy Group Audit and Oversight Committee is a separately designated committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended.
 
Is the office of CEO combined with the office of Chairman of the Board?
Yes. The office of CEO is combined with the office of Chairman of the Board at WE. Consistent with WE’s bylaws and WEC Energy Group’s Corporate Governance Guidelines, the Board retains the right to exercise its discretion in combining or separating the offices of CEO and Chairman of the Board.

Wisconsin Electric Power Company52019 Annual Meeting Information Statement


 
What is the Board’s role in risk oversight?
The Board has overall responsibility for risk oversight and oversees the Company’s risk environment and associated management practices as part of its evaluation of the Company's ongoing operations and strategic direction. In addition, while it has retained oversight of certain broad risks that could impact the Company's long-term strategy, including, for example, climate change risk, the WEC Energy Group board has delegated certain risk monitoring responsibilities to its committees. These committees regularly report to the WEC Energy Group board on risks that fall within designated areas of responsibility, as described in each committee’s charter.

The Board receives regular briefings from management on specific areas of risk as well as emerging risks to the enterprise.
Over the course of the year, the WEC Energy Group Audit and Oversight Committee hears reports from management on the Company’s major risk exposures in such areas as regulatory compliance, environmental, legal/litigation, technology security (cybersecurity), and ethical conduct, as well as steps taken to monitor and control such exposures. The WEC Energy Group Finance Committee discusses the Company’s financial risk assessment and risk management policies; it also provides oversight of insurance matters to support the proper function of the risk management program. All of the committees have direct access to, and meet as needed with, Company representatives without other management present to discuss matters related to risk management.
 
In addition, WEC Energy Group has established an Enterprise Risk Steering Committee, comprised of senior level management employees, whose purpose is to foster an enterprise-wide approach to managing risk and compliance. The Audit Services department conducts a semiannual enterprise risk assessment, and as part of this process, business leaders identify existing, new, or emerging issues or changes within their business areas that could have enterprise implications. Senior management is tasked with ensuring that these risks and opportunities are appropriately addressed. The results of each of these risk-management efforts are reported to the executive leadership team and are the subject of regular reports to the Board.
 
The Board believes that its leadership structure and WEC Energy Group’s enterprise risk management program support the risk oversight function of the Board.
 
How can interested parties contact the members of the Board?
Correspondence may be sent to the directors in care of the Corporate Secretary, Margaret C. Kelsey, at the Company’s principal business office, 231 W. Michigan Street, P.O. Box 2046, Milwaukee, Wisconsin 53201.
 
All communications received as set forth above will be opened by the Corporate Secretary for the sole purpose of confirming the contents represent a message to the Company’s directors. All communication, other than advertising, promotion of a product or service, or patently offensive material, will be forwarded promptly to the addressee.
 
Does the Company have a written code of ethics?
Yes. All WE and WEC Energy Group directors, executive officers, and employees, including the principal executive, financial, and accounting officers, have a responsibility to comply with WEC Energy Group’s Code of Business Conduct, to seek advice in doubtful situations, and to report suspected violations.
 
WEC Energy Group’s Code of Business Conduct, which was benchmarked and updated in 2017 to comport with best practices, addresses, among other things: conflicts of interest; confidentiality; fair dealing; protection and proper use of Company assets; and compliance with laws, rules, and regulations (including insider trading laws). Neither WEC Energy Group nor the Company have provided any waiver to the Code for any director, executive officer, or other employee.
 
The Code of Business Conduct is posted in the “Governance” section of WEC Energy Group’s Website at wecenergygroup.com. It is also available in print to any stockholder upon request in writing to the Corporate Secretary.
 
The Company has several ways individuals can raise questions concerning WEC Energy Group’s Code of Business Conduct and other corporate policies. As one reporting mechanism, WEC Energy Group has contracted with an independent service so that individuals can confidentially and anonymously report suspected violations of the Code of Business Conduct or other concerns, including those regarding accounting, internal accounting controls, or auditing matters.
 
Does the Company have policies and procedures in place to review and approve related party transactions?
Yes. All employees of WE and WEC Energy Group, including executive officers and members of the Board, are required to comply with WEC Energy Group’s Code of Business Conduct. The Code of Business Conduct addresses, among other things, what actions are required when potential conflicts of interest may arise, including those from related party transactions. Specifically, executive officers and members of the Board are required to obtain approval of WEC Energy Group’s Audit and

Wisconsin Electric Power Company62019 Annual Meeting Information Statement


Oversight Committee Chair before (1) obtaining any financial interest in or participating in any business relationship with any company, individual, or concern doing business with WEC Energy Group or any of its subsidiaries, including WE, that might influence the individual's decisions or job performance; (2) participating in any joint venture, partnership, or other business relationship with WEC Energy Group or any of its subsidiaries, including WE; and (3) serving as an officer or member of the board of any substantial outside for-profit organization. Furthermore, before serving as an officer or member of the board of any substantial outside for-profit organization, the CEO must obtain the approval of WEC Energy Group’s full Board of Directors. In addition, executive officers must obtain the prior approval of the CEO before accepting a position with a substantial non-profit organization.
 
WEC Energy Group’s Code of Business Conduct also requires employees and directors to notify the Compliance Officer of situations where family members are a supplier or significant customer of WEC Energy Group or the Company or employed by one. To the extent the Compliance Officer deems it appropriate, the officer will consult with WEC Energy Group’s Audit and Oversight Committee Chair in situations involving executive officers and members of the Board.
 
Are all the members of the WEC Energy Group Audit Committee financially literate and does the committee have an “audit committee financial expert”?
Yes. The WEC Energy Group Board of Directors has determined that all of the members of WEC Energy Group’s Audit and Oversight Committee are financially literate as required by New York Stock Exchange rules and qualify as audit committee financial experts within the meaning of SEC rules.
 
How does WEC Energy Group’s Compensation Committee administer the executive and director compensation programs?
One of the principal responsibilities of WEC Energy Group’s Compensation Committee (the "Compensation Committee") is to provide competitive, performance-based executive and director compensation programs.
 
With respect to the executive compensation program, the Compensation Committee’s responsibilities include:
 
determining and annually reviewing the Compensation Committee’s compensation philosophy;
reviewing and approving the compensation paid to select employees, including certain senior officers and executive officers (including base salaries, incentive compensation, and benefits);
establishing and administering the Chief Executive Officer compensation package; and
reviewing the results of the most recent WEC Energy Group stockholder advisory vote on compensation of WEC Energy Group's named executive officers.

The Compensation Committee is also charged with administering the compensation package of WEC Energy Group’s non-management directors. The Compensation Committee meets with the WEC Energy Group Corporate Governance Committee annually to review the compensation package of WEC Energy Group’s non-management directors and to determine the appropriate amount of such compensation. All of the Company’s current Board members are executive officers of WE and/or WEC Energy Group and are not separately compensated as directors.

The Compensation Committee, which has authority to retain advisers, including compensation consultants, at WEC Energy Group’s expense, retained Frederic W. Cook & Co., Inc. (“FW Cook”) to analyze and help develop the executive compensation program, and to assess whether the compensation program is competitive and supports the Committee’s objectives. FW Cook also assesses and provides recommendations on non-management director compensation.
 
FW Cook is engaged solely by the Compensation Committee to provide executive compensation consulting services, and does not provide any additional services to WEC Energy Group or the Company. In connection with its retention of FW Cook, the Compensation Committee reviewed FW Cook’s independence including: (1) the amount of fees received by FW Cook from WEC Energy Group as a percentage of FW Cook’s total revenue; (2) FW Cook’s policies and procedures designed to prevent conflicts of interest; and (3) the existence of any business or personal relationships that could impact independence. After reviewing these and other factors, the Compensation Committee determined that FW Cook is independent and the engagement did not present any conflicts of interest. FW Cook also determined that it was independent from WEC Energy Group’s and its subsidiaries’ management, which was confirmed in a written statement delivered to the Compensation Committee.
 
For more information regarding the executive compensation processes and procedures, please refer to the “Compensation Discussion and Analysis” later in this information statement.
 

Wisconsin Electric Power Company72019 Annual Meeting Information Statement


Does the Board have a nominating committee?
No. Instead, as discussed under “Director Nominees” above, WE relies upon WEC Energy Group’s Corporate Governance Committee for, among other things, identifying and evaluating director nominees.
 
What is the process used to identify director nominees and how do I recommend a nominee to WEC Energy Group’s Corporate Governance Committee?
Please refer to the discussion under the headings “Director Nominees” and "Other Matters" earlier in this information statement.
 
WEC Energy Group owns all of the Company’s common stock and, as a result, WEC Energy Group’s affirmative vote is sufficient to elect director nominees. Consequently, the Board does not accept proposals from preferred stockholders regarding potential candidates for director nominees.
 
What is WE’s policy regarding director attendance at annual meetings?
Directors are not expected to attend the Company’s annual meetings of stockholders, as they are only short business meetings.

INDEPENDENT AUDITORS’ FEES AND SERVICES
 
Deloitte & Touche LLP served as the independent auditors for the Company for the last 17 fiscal years beginning with the fiscal year ended December 31, 2002. They have been selected by WEC Energy Group’s Audit and Oversight Committee (the “Audit and Oversight Committee”) as independent auditors for WEC Energy Group and its subsidiaries, including the Company, for the fiscal year ending December 31, 2019, subject to ratification by the stockholders of WEC Energy Group at WEC Energy Group’s Annual Meeting of Stockholders on May 2, 2019.
 
Representatives of Deloitte & Touche LLP are not expected to be present at the Company’s Annual Meeting, but are expected to attend WEC Energy Group’s Annual Meeting of Stockholders on May 2, 2019. They will have an opportunity to make a statement at WEC Energy Group’s Annual Meeting, if they so desire, and are expected to respond to appropriate questions that may be directed to them.
 
Pre-Approval Policy. The Audit and Oversight Committee has a formal policy delineating its responsibilities for reviewing and approving, in advance, all audit, audit-related, tax, and other services of the independent auditors. As such, the Audit and Oversight Committee is responsible for the audit fee negotiations associated with WEC Energy Group's and the Company’s retention of independent auditors.
 
The Audit and Oversight Committee is committed to ensuring the independence of the auditors, both in appearance as well as in fact. In order to assure continuing auditor independence, the Audit and Oversight Committee periodically considers whether there should be a regular rotation of the independent external audit firm. In addition, the Audit and Oversight Committee is directly involved in the selection of Deloitte & Touche LLP’s lead engagement partner.
 
Under the pre-approval policy, before engagement of the independent auditors for the next year’s audit, the independent auditors will submit: (1) a description of all services anticipated to be rendered, as well as an estimate of the fees for each of the services, for the Audit and Oversight Committee to approve, and (2) written confirmation that the performance of any non-audit services is permissible and will not impact the firm’s independence. Annual pre-approval will be deemed effective for a period of twelve months from the date of pre-approval, unless the Audit and Oversight Committee specifically provides for a different period. A fee level will be established for all permissible, pre-approved non-audit services. Any additional audit service, audit-related service, tax service, and other service must also be pre-approved.
 
The Audit and Oversight Committee delegated pre-approval authority to the Committee’s Chair. The Audit and Oversight Committee Chair is required to report any pre-approval decisions at the next scheduled Audit and Oversight Committee meeting. Under the pre-approval policy, the Audit and Oversight Committee may not delegate to management its responsibilities to pre-approve services performed by the independent auditors.
 
Under the pre-approval policy, prohibited non-audit services are services prohibited by the Securities and Exchange Commission or by the Public Company Accounting Oversight Board (United States) to be performed by the Company’s independent auditors. These services include: bookkeeping or other services related to the accounting records or financial statements of the Company; financial information systems design and implementation; appraisal or valuation services, fairness opinions or contribution-in-kind reports; actuarial services; internal audit outsourcing services; management functions or human resources; broker-dealer, investment advisor or investment banking services; legal services and expert services unrelated to the audit; services provided for a contingent fee or commission; and services related to planning, marketing or opining in favor of the tax treatment of a confidential transaction or an aggressive tax position transaction that was initially recommended, directly or

Wisconsin Electric Power Company82019 Annual Meeting Information Statement


indirectly, by the independent auditors. In addition, the Audit and Oversight Committee has determined that the independent auditors may not provide any services, including personal financial counseling and tax services, to any officer or other employee of the Company who serves in a financial reporting oversight role or to the Chair of the Audit and Oversight Committee or to an immediate family member of these individuals, including spouses, spousal equivalents, and dependents.
 
Fee Table. The following table shows the fees, all of which were approved by the Audit and Oversight Committee, for professional audit services provided by Deloitte & Touche LLP for the audit of the annual financial statements of the Company for fiscal years 2018 and 2017 and fees for other services rendered during those periods. No fees were paid to Deloitte & Touche LLP pursuant to the “de minimus” exception to the pre-approval policy permitted under the Securities Exchange Act of 1934, as amended.
  2018 2017
Audit Fees (1)
 $2,266,665
 $2,206,306
Audit-Related Fees (2)
 
 
Tax Fees (3)
 62,949
 8,902
All Other Fees (4)
 3,248
 2,319
Total $2,332,862
 $2,217,527
 
(1)Audit Fees consist of fees for professional services rendered in connection with the audits of the annual financial statements of the Company and its former subsidiary, and other non-recurring audit work. This category also includes reviews of financial statements included in Form 10-Q filings of the Company, and services normally provided in connection with statutory and regulatory filings or engagements.
(2)Audit-Related Fees consist of fees for professional services that are reasonably related to the performance of the audit or review of the Company’s financial statements and are not reported under “Audit Fees.” No such services were received from Deloitte & Touche LLP in 2018 or 2017.
(3)Tax Fees consist of fees for professional services rendered with respect to federal and state tax compliance and tax advice. This can include preparation of tax returns, claims for refunds, payment planning, and tax law interpretation.
(4)All Other Fees consist of costs for certain employees to attend accounting/tax seminars hosted by Deloitte & Touche LLP plus the subscription cost for the use of a Deloitte & Touche LLP accounting research tool.

AUDIT AND OVERSIGHT COMMITTEE REPORT
 
The Audit and Oversight Committee, which is comprised solely of independent directors, oversees the integrity of the financial reporting process on behalf of the Company’s Board of Directors. In addition, the Audit and Oversight Committee oversees compliance with the Company’s legal and regulatory requirements. The Audit and Oversight Committee operates under a written charter approved by the Board of Directors of WEC Energy Group, which can be found in the “Governance” section of WEC Energy Group’s Website at wecenergygroup.com.
 
The Audit and Oversight Committee is also directly responsible for the appointment, compensation, retention, and oversight of the Company’s independent auditors, as well as the oversight of the Company’s internal audit function.

In order to assure continuing auditor independence, the Audit and Oversight Committee periodically considers whether there should be a regular rotation of the independent external audit firm. For 2019, the Audit and Oversight Committee has appointed Deloitte & Touche LLP to remain as the Company’s independent auditors, subject to ratification by WEC Energy Group’s stockholders. The members of the Audit and Oversight Committee and other members of WEC Energy Group’s Board believe that the continued retention of Deloitte & Touche LLP to serve as the Company’s independent external auditor is in the best interests of the Company and its stockholders.
 
The Audit and Oversight Committee is directly involved in the selection of Deloitte & Touche LLP’s lead engagement partner in conjunction with a mandated rotation policy and is also responsible for audit fee negotiations with Deloitte & Touche LLP.
 
Management is responsible for the Company’s financial reporting process, the preparation of consolidated financial statements in accordance with generally accepted accounting principles, and the system of internal controls and procedures designed to provide reasonable assurance regarding compliance with accounting standards and applicable laws and regulations. The Company’s independent auditors are responsible for performing an independent audit of the Company’s consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”) and issuing a report thereon.
 
The Audit and Oversight Committee held six meetings during 2018. Meetings are designed to facilitate and encourage open communication among the members of the Audit and Oversight Committee, management, the internal auditors, and the

Wisconsin Electric Power Company92019 Annual Meeting Information Statement


Company’s independent auditors, Deloitte & Touche LLP. During these meetings, we reviewed and discussed with management, among other items, the Company’s unaudited quarterly and audited annual financial statements and the system of internal controls designed to provide reasonable assurance regarding compliance with accounting standards and applicable laws.
 
We have reviewed and discussed with management and the Company’s independent auditors the Company’s audited consolidated financial statements and related footnotes for the fiscal year ended December 31, 2018, and the independent auditor’s report on those financial statements. Management represented to us that the Company’s financial statements were prepared in accordance with generally accepted accounting principles. Deloitte & Touche LLP presented the matters required to be discussed with the Audit and Oversight Committee by PCAOB Auditing Standard No. 1301, Communications with Audit Committees. This review included a discussion with management and the independent auditors about the quality of the Company’s accounting principles, the reasonableness of significant estimates and judgments, and the disclosures in the Company’s financial statements, as well as the disclosures relating to critical accounting policies.
 
In addition, we received the written disclosures and the correspondence relative to the auditors’ independence from Deloitte & Touche LLP, as required by applicable requirements of the PCAOB regarding Deloitte & Touche LLP’s communications with the Audit and Oversight Committee concerning independence. The Audit and Oversight Committee discussed with Deloitte & Touche LLP its independence and also considered the compatibility of non-audit services provided by Deloitte & Touche LLP with maintaining its independence.
 
Based on these reviews and discussions, the Audit and Oversight Committee recommended to the Company’s Board that the audited financial statements be included in Wisconsin Electric Power Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and filed with the Securities and Exchange Commission.

Respectfully submitted to Wisconsin Electric Power Company’s stockholders by the Audit and Oversight Committee, 
 
 The Audit and Oversight Committee
 of WEC Energy Group, Inc.
  
 
Thomas J. Fischer, Committee Chair
John F. Bergstrom
Barbara L. Bowles
Patricia W. Chadwick
Danny L Cunningham
Henry W. Knueppel


Wisconsin Electric Power Company102019 Annual Meeting Information Statement


COMPENSATION DISCUSSION AND ANALYSIS
 
The following discussion provides an overview and analysis of our executive compensation program, including the role of WEC Energy Group’s Compensation Committee (the “Compensation Committee”), the elements of our executive compensation program, the purposes and objectives of these elements, and the manner in which we established the compensation of our named executive officers ("NEOs") for fiscal year 2018.

References to “we,” “us,” “our,” and the "Company," in this discussion and analysis mean Wisconsin Electric Power Company and its management, as applicable, and references to “WEC Energy Group” mean WEC Energy Group, Inc.

The Compensation Committee oversees the compensation program of WEC Energy Group and its subsidiaries, including the Company, on behalf of WEC Energy Group’s Board of Directors. Therefore, the Compensation Committee has responsibility for making compensation decisions regarding the NEOs of the Company. There is significant overlap between the NEOs of the Company and the NEOs of WEC Energy Group.

EXECUTIVE SUMMARY
 
Overview
The primary objective of our executive compensation program is to provide a competitive, performance-based plan that enables WEC Energy Group and the Company to attract and retain key individuals and to reward them for achieving both WEC Energy Group’s and the Company’s short-term and long-term goals without creating an incentive for our NEOs to take excessive risks. Our program has been designed to provide a level of compensation that is strongly dependent upon the achievement of short-term and long-term goals that are aligned with the interests of WEC Energy Group’s stockholders and the Company’s stockholders and customers. To that end, a substantial portion of pay is at risk, and generally, the value will only be realized upon strong corporate performance.

2018 Business Highlights
During 2018, WEC Energy Group continued to make excellent progress in its efforts to integrate employees, merge and improve business processes, and consolidate IT infrastructure following its acquisition of Integrys Energy Group in June 2015. At the same time, WEC Energy Group and its utilities achieved solid results and continued to create long-term value for stockholders and customers by focusing on the following:
 
 •     World-class reliability•     Operating efficiency•     Employee safety
    
 •     Financial discipline•     Exceptional customer care 
 
In addition, the significant level of leadership stability provided by WEC Energy Group’s and the Company’s senior executive management teams following Allen Leverett’s sudden and unexpected departure in October 2017 resulted in solid earnings and cash flow generation in 2018.

Commitment to Stockholder Value Creation. Financially, WEC Energy Group again delivered solid earnings growth, generated strong cash flow, and increased the dividend for the 15th consecutive year. In January 2018, the WEC Energy Group Board raised the quarterly dividend 6.25% to $0.5525 per share, equivalent to an annual rate of $2.21 per share. In January 2019, the WEC Energy Group Board increased the quarterly dividend 6.8% to $0.59 per share, which is equivalent to an annual rate of $2.36 per share, in line with WEC Energy Group’s plan to maintain a dividend payout ratio of 65% to 70% of earnings. Overall, WEC Energy Group and the Company also turned in strong performances in customer satisfaction and network reliability during 2018.


Wisconsin Electric Power Company112019 Annual Meeting Information Statement


Specific achievements during 2018 of WEC Energy Group and the Company include:
2018 Financial Highlights WEC Energy Group Diluted Earnings Per Share
• WEC Energy Group delivered solid earnings growth again, generated strong cash flow, and increased the dividend for the 15th consecutive year.

• WEC Energy Group achieved fully diluted earnings per share of $3.34. (2)

• Each of WEC Energy Group’s regulated utility subsidiaries, including the Company, earned its allowed rate of return.

• WEC Energy Group returned approximately $697.3 million to stockholders through dividends.

• WEC Energy Group’s common stock traded at a then all-time high of $75.48 on December 12, 2018.

• In January 2019, the WEC Energy Group Board raised the quarterly dividend to $0.59 per share, which is equivalent to an annual dividend rate of $2.36 per share.

 
we18dilutedeps.jpg

 
(1) For 2017, excludes a one-time $0.65 per share gain related to a revaluation of WEC Energy Group deferred taxes as a result of the Tax Cuts and Jobs Act of 2017. For 2016, 2015, and 2014, excludes costs of $0.01, $0.30, and $0.06 per share, respectively, related to WEC Energy Group’s acquisition of Integrys. See Appendix A on page A-1 for a full GAAP reconciliation and an explanation of why WEC Energy Group believes the presentation of adjusted earnings per share is relevant and useful to investors.
2018 Performance Highlights 
WEC Energy Group was again recognized in 2018 by Corporate Responsibility Magazine as one of the 100 best corporate citizens in America.
PA Consulting Group named We Energies (the trade name of the Company and Wisconsin Gas LLC) the most reliable utility in the Midwest for the eighth year in a row.
WEC Energy Group set a new long-term goal to reduce carbon dioxide emissions below 2005 levels by 80% by 2050.
WEC Energy Group’s electric utility subsidiaries, including the Company, closed nearly 1,500 megawatts of older, less efficient coal-fired generation.
WEC Energy Group and its subsidiaries, including the Company, spent an aggregate of $263.1 million with qualified women-, minority-, and veteran- or service disabled- owned businesses, the highest spending with diverse suppliers in WEC Energy Group’s history.(2) 
Wisconsin Public Service Corporation (“WPSC”), another utility subsidiary of WEC Energy Group, was named as a 2018 Most Trusted Utility Brand by Market Strategies International.
All of WEC Energy Group’s major utility subsidiaries, including the Company, either met or exceeded their overall customer satisfaction targets.(2) 
WEC Energy Group continued to grow its non-utility energy infrastructure segment, acquiring majority interests in three different wind farms with a total investment of approximately $587 million. Filed with the Public Service Commission of Wisconsin for approval for WPSC to partner with Madison Gas & Electric on two major solar projects in Wisconsin, where WPSC would own 100 megawatts of each project.
(2) This measure is a component of our short-term incentive compensation program.

Wisconsin Electric Power Company122019 Annual Meeting Information Statement


Long-Term Stockholder Returns
Over the past decade, WEC Energy Group has consistently delivered among the best total returns in the industry and did so again in 2018.
WEC Energy Group
Five-Year Cumulative Return (1)
WEC Energy Group
Industry Leading Total Shareholder Returns
we18fiveyearreturn.jpg
we18tenyearreturn.jpg
(1)    The Five-Year Cumulative Return Chart shows a comparison of WEC Energy Group's cumulative total return, assuming reinvestment of dividends, over the last five years had $100 been invested at the close of business on December 31, 2013. For information about the Custom Peer Index Group, see page 23 of this information statement.
Source: Bloomberg; assumes all dividends are reinvested and returns are compounded daily.
 
Consideration of 2018 WEC Energy Group Stockholder Advisory Vote and Stockholder Outreach
At the 2018 WEC Energy Group Annual Meeting of Stockholders, stockholders approved the compensation of the 2017 named executive officers with 94% of the votes cast. The Compensation Committee considered this outcome as well as the feedback received during meetings WEC Energy Group again held with several of its institutional stockholders. During 2018, WEC Energy Group held dedicated sessions with stockholders representing approximately 27.1% of WEC Energy Group’s outstanding common stock about its governance and compensation practices. The Compensation Committee is always looking for ways to refine the compensation program. However, in light of the significant stockholder support the executive compensation program received in 2018 and the payout levels under the performance-based program for 2018, the Compensation Committee believes that the current compensation program is competitive, aligned with WEC Energy Group’s and our financial and operational performance, and in the best interests of WEC Energy Group and the Company, stockholders, and customers.

 


Wisconsin Electric Power Company132019 Annual Meeting Information Statement


COMPONENTS OF OUR EXECUTIVE COMPENSATION PROGRAM
We have three primary elements of total direct compensation: (1) base salary; (2) annual incentive awards; and (3) long-term incentive awards consisting of a mix of WEC Energy Group performance units, stock options, and restricted stock. The Compensation Committee again retained Frederic W. Cook & Co., Inc. ("FW Cook") as its independent compensation consultant to advise the Compensation Committee with respect to the executive compensation program. The Compensation Committee generally relied on the recommendations of FW Cook as it developed the 2018 program.

As shown in the charts below, 85% of Mr. Klappa’s 2018 total direct compensation and an average of 75% of the other NEOs’ 2018 total direct compensation is tied to WEC Energy Group performance and is not guaranteed.
 

CEO 2018 TOTAL DIRECT COMPENSATION MIX OTHER NEOs 2018 TOTAL DIRECT COMPENSATION MIX
weinfoceo.jpg
 
weinfoneo.jpg

In addition to the components of total direct compensation identified above, retirement programs are another important component of our compensation program.

To the extent feasible, WEC Energy Group believes it is important that the compensation program not dilute the interests of WEC Energy Group’s current stockholders. Therefore, WEC Energy Group currently uses open-market purchases to satisfy benefit plan obligations, including the exercise of stock options and vesting of restricted stock.

This Compensation Discussion and Analysis contains a more detailed discussion of each of the above components for 2018, including FW Cook's recommendations with respect to each component.


Wisconsin Electric Power Company142019 Annual Meeting Information Statement


Compensation Governance and Practices
The Compensation Committee annually reviews and considers the Company’s compensation policies and practices to ensure our executive compensation program aligns with our compensation philosophy. Highlighted below is an overview of our current compensation practices.
What We Do
 
• Our compensation program focuses on key Company results (financial, safety, customer satisfaction, diversity) that are aligned with WEC Energy Group’s and our strategic goals.

• A substantial portion of compensation is at risk and tied to WEC Energy Group and Company performance.

• The compensation program has a long-term orientation aligned with WEC Energy Group stockholder interests.

• The Compensation Committee retains an independent compensation consultant to help design the compensation program and determine competitive levels of pay.

• The Compensation Committee's independent compensation consultant reviews competitive employment market data from two general industry surveys and a comparison group of companies similar to WEC Energy Group.

• We have implemented a clawback policy that provides for the recoupment of incentive-based compensation. (page 24)
 
• Annual incentive-based compensation contains multiple, pre-established performance metrics aligned with WEC Energy Group’s and the Company’s stockholder and customer interests. (page 17)
 
• The WEC Energy Group Performance Unit Plan award payouts (including dividend equivalents) are based on WEC Energy Group stockholder return as compared to an appropriate peer group and Additional Performance Measure(s), selected by the Compensation Committee. (page 21)

• The WEC Energy Group Performance Unit Plan requires a separation from service following a change in control for award vesting to occur. (page 24)

• Equity award and other benefit plan obligations are satisfied through open market purchases of WEC Energy Group common stock.

• Meaningful WEC Energy Group stock ownership levels are required for senior executives. (page 25)

• Ongoing engagement with investors takes place to ensure that compensation practices are responsive to WEC Energy Group stockholder interests.

• We prohibit hedging and pledging of WEC Energy Group common stock. (page 25)

• We prohibit entry into any new arrangements that obligate WEC Energy Group or the Company to pay directly or reimburse individual tax liability for benefits provided. (page 26)

• We prohibit repricing of WEC Energy Group stock options without WEC Energy Group stockholder approval.



Competitive Benchmarking
As a general matter, we believe the labor market for WEC Energy Group executive officers is consistent with that of general industry. Although we recognize our business is focused on the energy services industry, our goal is to have an executive compensation program that will allow us to be competitive in recruiting the most qualified candidates to serve as executive officers of WEC Energy Group and the Company, including individuals who may be employed outside of the energy services industry. Further, in order to retain top performing executive officers, we believe our compensation practices must be competitive with those of general industry.

To confirm that our annual executive compensation is competitive with the market, FW Cook reviewed the compensation data obtained from Willis Towers Watson’s 2018 Executive Compensation Data Bank as well as similar data from Aon Hewitt.
FW Cook also analyzed the compensation data from a peer group of 18 companies similar to WEC Energy Group in size and business model. The methodology used by FW Cook to determine the peer group of companies is described below.

FW Cook started with U.S. companies in the Standard & Poor’s database, and then limited those companies to the same line of business as WEC Energy Group as indicated by the Global Industry Classification Standards. This list of companies was then further limited to companies with revenues between $2.5 billion and $22.8 billion (approximately one- third to three times the size of WEC Energy Group’s revenues), and that were within a reasonable size range in various other measures such as operating income, total assets, total employees, and market capitalization. From this list, FW Cook selected companies similar in overall size to WEC Energy Group with consideration given to companies that met one or more of the following criteria:


Wisconsin Electric Power Company152019 Annual Meeting Information Statement



Diversified, technically sophisticated utility operations (e.g., multiple utilities, electric utilities);
Minimal non-regulated business; and/or
Operates in the Midwest.

These criteria resulted in a comparison group of 18 companies with median revenues and market capitalization of approximately $9.6 billion and $17 billion, respectively.

The comparison group utilized for purposes of 2018 compensation includes the same companies as the previous year’s comparison group, and was comprised of the 18 companies listed below.

•    Alliant Energy Corporation
•    Ameren Corporation
•    American Electric Power Company
•    CMS Energy Corporation
•    CenterPoint Energy
•    Consolidated Edison, Inc.
•    DTE Energy Co.
•    Edison International
•    Entergy Inc.
•    Eversource Energy
•    FirstEnergy Corp.
•    NiSource Inc.
•    PG&E Corporation
•    PPL Corp.
•    Pinnacle West Capital Corp.
•    SCANA Corporation
•    The Southern Company
•    Xcel Energy Inc.
 
The Compensation Committee approved this comparison group.

DETERMINATION OF MARKET MEDIAN
In order to determine the “market median” for our NEOs, FW Cook recommended that the survey data from Willis Towers Watson and Aon Hewitt receive a 75% weighting and the comparison group of 18 companies receive a 25% weighting. The Compensation Committee agreed with this recommendation. The survey data received a higher weighting because we consider the labor market for our executives to be consistent with that of general industry. Using this methodology, FW Cook recommended, and the Compensation Committee approved, the appropriate market median for each of our NEOs.

The comparison of each component of compensation with the appropriate market median when setting the compensation levels of our NEOs generally drives the allocation of cash versus non-cash compensation and short-term versus long-term incentive compensation.

DETERMINATION OF MR. KLAPPA’S 2018 COMPENSATION
As we previously reported, Mr. Klappa agreed to resume the role of CEO of WEC Energy Group after Allen Leverett suffered a stroke in October 2017. At that time, Mr. Leverett was the Chief Executive Officer of WEC Energy Group and the Chairman and CEO of the Company. In recognition of his continued service and leadership while Mr. Leverett continued to recover from his stroke, the Compensation Committee, in consultation with FW Cook regarding the appropriate pay level for Mr. Klappa under the circumstances, determined that the aggregate amount of Mr. Klappa’s direct compensation (as opposed to each individual component of direct compensation) should be substantially the same as it was at the time of his retirement from WEC Energy Group and the Company in 2016. Therefore, the Compensation Committee set Mr. Klappa’s 2018 annual base salary at $1,425,000 and his annual incentive plan target at 120% of base salary, the same target he was receiving at the time of his retirement in 2016. The Committee then awarded Mr. Klappa long-term incentive compensation at a level that was lower than he was receiving in 2016, so that the total value of direct compensation Mr. Klappa received would be substantially equal to his 2016 compensation levels and at or near the 2018 median for overall compensation.

ANNUAL BASE SALARY
The annual base salary component of our executive compensation program provides each executive officer with a fixed level of annual cash compensation. We believe that providing annual cash compensation through a base salary is an established market practice and is a necessary component of a competitive compensation program.

Based upon the market data analyzed by FW Cook, we generally target base salaries to be at or near the market median for each NEO. However, the Compensation Committee may, in its discretion, set base salaries at a different amount when the Compensation Committee deems it appropriate.

Actual salary determinations are made taking into consideration factors such as the relative levels of individual experience, performance, responsibility, and contribution to the results of WEC Energy Group’s and the Company’s operations. At the beginning of each year, the WEC Energy Group CEO develops a list of goals for WEC Energy Group and its subsidiaries, including the Company, and their employees to achieve during the upcoming year. At the end of the year, the CEO measures the performance of WEC Energy Group and the Company against each stated goal and reports the results to the WEC Energy Group Board. The Compensation Committee then takes WEC Energy Group’s and the Company’s performance into consideration when establishing the CEO’s compensation for the upcoming year. The CEO undertakes a similar process with the

Wisconsin Electric Power Company162019 Annual Meeting Information Statement


NEOs, who develop individual goals related to the achievement of WEC Energy Group’s and the Company’s goals developed by the CEO. At the end of the year, each officer’s performance is measured against these goals. Compensation recommendations and determinations for the upcoming year for each executive officer also take into consideration the level of such performance.

For information about Mr. Klappa’s base salary, see the discussion about his compensation above.
 
With respect to the remaining NEOs, in December 2017, Mr. Klappa recommended an annual base salary to the Compensation Committee based upon a review of the market compensation data provided by FW Cook and the factors described above. The Compensation Committee approved the recommendations, which represented an average increase in annual base salary of approximately 3% for Messrs. Fletcher and Garvin, and Ms. Kelsey, and an increase in annual base salary of approximately 12% for Mr. Lauber.

In recognition of Mr. Fletcher’s appointment to President of WEC Energy Group in October 2018, the Compensation Committee increased his annual base salary to $700,000.

Upon his appointment as Executive Vice President and Chief Financial Officer in April 2016, Mr. Lauber’s base salary was initially set below market median because of how significant such an increase would have been in order to bring his salary at or near median. As we previously reported, the Compensation Committee’s intent was to increase Mr. Lauber’s salary in multiple steps to eventually move it to market median. In line with this intent, the Compensation Committee increased Mr. Lauber’s base salary by 12% effective January 1, 2018, and again by 7.9% effective July 29, 2018, to provide an aggregate base salary of $600,000 in 2018, putting his salary at market median. The annual base salary of each NEO (other than Mr. Klappa, whose total direct compensation was determined as described above) was at or near the market median.

ANNUAL CASH INCENTIVE COMPENSATION
We provide annual cash incentive compensation through WEC Energy Group’s Short-Term Performance Plan (“STPP”). The STPP provides for annual cash awards to NEOs based upon the achievement of pre-established stockholder-, customer-, and employee- focused objectives. All payments under the STPP are at risk. Payments are made only if performance goals are achieved, and awards may be less or greater than targeted amounts based upon actual performance. Payments under the STPP are intended to reward achievement of short-term goals that contribute to WEC Energy Group stockholder and customer (including our customers) value, as well as individual contributions to successful operations.

2018 Target Awards. Each year, the Compensation Committee approves a target level of compensation under the STPP for each of our NEOs. This target level of compensation is expressed as a percentage of base salary.

In October 2018, the target award level for Mr. Fletcher was increased to 90% of base salary in recognition of his appointment to President of WEC Energy Group. Therefore, Mr. Fletcher’s STPP payout level reflects a 70% target level for nine months and a 90% target level for three months.
 
The year-end 2018 target awards for each NEO (other than Mr. Klappa, who is discussed above) are set forth in the chart below.

Executive OfficerTarget STPP Award as a Percentage of Base Salary
Mr. Lauber80%
Mr. Fletcher90%
Ms. Kelsey70%
Mr. Garvin65%

The target award levels of each officer named in the table above reflect median incentive compensation practices as indicated by the market data.

For 2018, the possible payout for any NEO ranged from 0% of the target award to 210% of the target award, based upon performance.
 
2018 Financial Goals under the STPP. The Compensation Committee adopted the 2018 STPP with a continued principal focus on financial results. In December 2017, the Compensation Committee approved WEC Energy Group’s earnings per share (75% weight) and cash flow (25% weight) as the primary performance measures to be used in 2018. For those officers whose positions primarily relate to utility operations in Wisconsin (including Mr. Fletcher until he was appointed President of WEC Energy Group in October 2018) the Compensation Committee approved WEC Energy Group’s earnings per share (25% weight) and cash flow (25% weight), as well as aggregate net income of WEC Energy Group’s Wisconsin utility operations (50% weight), as the primary performance measures to be used in 2018. We believe earnings per share and cash flow are key indicators of

Wisconsin Electric Power Company172019 Annual Meeting Information Statement


financial strength and performance, and are recognized as such by the investment community. Utility net income is an important financial measure as it is an indicator of the return on equity earned by WEC Energy Group’s utilities, including us, and in order to meet WEC Energy Group’s earnings per share targets it is important that the utilities earn at or close to their allowed rates of return.

In October 2018, the target award level for Mr. Fletcher was increased from 70% to 90% of base salary in recognition of his appointment to President of WEC Energy Group. Therefore, Mr. Fletcher’s STPP payout level is based upon a combination of (i) WEC Energy Group’s Wisconsin utility operations’ performance against their 2018 performance goals and (ii) WEC Energy Group’s performance against its 2018 performance goals.

In January 2018, the Compensation Committee approved the performance goals under the STPP for WEC Energy Group’s earnings per share as set forth in the chart below.
Earnings Per Share Performance GoalEarnings Per Share CAGRPayout Level
$3.193.2%25%
$3.213.9%50%
$3.245.0%100%
$3.265.5%135%
$3.306.8%200%

If WEC Energy Group’s performance falls between these levels, the payout level with respect to earnings per share is determined by interpolating on a straight line basis the appropriate payout level.

Although WEC Energy Group achieved earnings per share of $3.79 based on generally accepted accounting principles (“GAAP”) in 2017, because this result included a one-time adjustment of $0.65 per share related to the impact of the Tax Cuts and Jobs Act of 2017 (the “Tax Legislation”), the Compensation Committee determined that the appropriate earnings per share measure to base the 2018 performance goals on was WEC Energy Group’s 2017 adjusted earnings per share of $3.14.

WEC Energy Group’s growth plan, which has been communicated to the public, calls for a long-term compound annual growth rate (“CAGR”) in earnings per share of 5.0% to 7.0%. At the time the Compensation Committee was establishing targets for 2018, this CAGR was measured off a 2017 base of $3.09 per share, which represented the mid-point of the 2017 annual earnings guidance. We believe that this CAGR, plus WEC Energy Group’s continued growth in dividends, supports a premium valuation as compared to WEC Energy Group’s peers. Therefore, the Compensation Committee tied the target (100%) payout level to achievement of the low end of the target CAGR range (5.0%), and the above-target payout level to achievement of a 5.5% CAGR. The Compensation Committee tied the maximum payout level (200%) to achievement of a 6.8% CAGR.

In January 2018, the Compensation Committee approved the initial performance goals under the STPP for WEC Energy Group’s cash flow. At that time, management informed the Compensation Committee that it might recommend new cash flow performance goals for consideration later in the year based upon the impact of the Tax Legislation and voluntary contributions to pension plans of WEC Energy Group’s subsidiaries. During 2018, WEC Energy Group returned $100 million to customers related to the impacts of the Tax Legislation and one of WEC Energy Group’s utility subsidiaries made a voluntary contribution of $60 million to its pension plan. As a result, in October 2018, the Compensation Committee revised the cash flow performance goals, which are set forth in the chart below ($ in millions).

Cash FlowPayout Level
$1,70025%
$1,75050%
$1,800100%
$1,850135%
$1,950200%

If WEC Energy Group’s performance falls between these levels, the payout level with respect to cash flow is determined by interpolating on a straight-line basis the appropriate payout level.

The Compensation Committee based the cash flow performance level goals on WEC Energy Group’s funds from operations (“FFO”). FFO is calculated by taking “cash provided by operating activities” and eliminating certain accruals and other items related to capital spending. GAAP requires these items to be recorded as part of cash from operations, but management views them as related to WEC Energy Group’s capital expenditure program. The Compensation Committee believes that basing the cash flow performance goals on FFO provides a more accurate measurement of the cash generated by WEC Energy Group’s operations that is available for capital investment, which is WEC Energy Group’s and the Company’s primary driver for earnings

Wisconsin Electric Power Company182019 Annual Meeting Information Statement


growth. FFO is not a measure of financial performance under GAAP, and our calculation may differ from similarly titled measures used by other companies or securities rating agencies.

In January 2018, the Compensation Committee approved the performance goals under the STPP for the Wisconsin utilities’ net income (based upon WEC Energy Group’s earnings per share performance goals) as set forth in the chart below ($ in millions).

Net IncomeWeighted Return on EquityPayout Level
$5889.92%25%
$59310.00%50%
$59810.08%100%
$60310.16%135%
$61310.32%200%

2018 Financial Performance under the STPP. In January 2019, the Compensation Committee reviewed actual performance for 2018 against the financial and operational performance goals established under the STPP, subject to final audit.

WEC Energy Group’s 2018 financial performance satisfied the maximum payout level established for earnings per share, cash flow, and net income for the Wisconsin utilities. WEC Energy Group’s earnings per share were $3.34 for 2018. WEC Energy Group’s cash flow, based on FFO, was $2,372 million, and the Wisconsin utilities’ net income was $617 million for 2018. WEC Energy Group’s cash flow result is not a measure of financial performance under GAAP.

By satisfying the maximum payout level with respect to these financial measures, the NEOs earned 200% of the target award from the financial goal component of the STPP.
 
2018 WEC Energy Group Operational Goals and Performance under the STPP. Similar to prior years, in December 2017 and January 2018, the Compensation Committee also approved operational performance measures and targets under the STPP. Annual incentive awards could be increased or decreased by up to 10% of the actual award based upon WEC Energy Group’s performance in the operational areas of customer satisfaction (5% weight), safety (2.5% weight), and supplier and workforce diversity (2.5% weight). The Compensation Committee recognizes the importance of strong operational results to the success of WEC Energy Group and the Company and has identified these three operational areas in particular as being critical to that success.

The Compensation Committee measures customer satisfaction levels for WEC Energy Group based upon the results of surveys that an independent third party conducts of customers who had direct contact with WEC Energy Group’s utilities during the year, which measure (1) customers’ satisfaction with the respective utility overall, and (2) customers’ satisfaction with respect to the particular transactions with the applicable utility. Safety is measured based upon WEC Energy Group’s performance against the number of lost time injuries and OSHA recordable incidents, as well as the number of Near Miss/Unsafe Condition (“NMUC”) Reports filed. NMUC reporting is designed to proactively identify and take action on potential safety risks before an incident occurs (unsafe conditions); and to learn from near-miss incidents that have occurred, but did not result in an injury or damage.

The operational performance measures are based upon recommendations from management and take into consideration both current year performance and WEC Energy Group’s longer-term objective of achieving top quartile performance of all of its principal utilities, including us. The Compensation Committee reviews management's recommendations and may make adjustments to the performance measures if it feels changes are necessary. The following table provides the operational goals approved by the Compensation Committee for 2018, as well as WEC Energy Group’s performance (which includes the Company’s performance) against these goals:

Operational MeasureBelow GoalGoalAbove GoalFinal Result
Customer Satisfaction Percentage of "Highly Satisfied":-5.00%0.00%+5.00% 
Company<75.7%75.7% - 78.8%>78.8%79.2%
Transaction<79.2%79.2% - 82.2%>82.2%82.4%
Safety:-2.50%0.00%+2.50% 
Lost Time Injury - Incidents>6739 - 67<3955
OSHA Recordable Incidents>206135 - 206<135193
Near Miss / Unsafe Condition Reports<20,10020,100 - 23,992>23,99225,146
Diversity:-2.50%0.00%+2.50% 
Supplier ($ in Millions)<196.1196.1 - 231.7>231.7263.1
Workforce - AssessmentNot MetMetExceededMet

Wisconsin Electric Power Company192019 Annual Meeting Information Statement



Based on the operational results listed in the table above, WEC Energy Group’s performance with respect to operational goals generated a 7.08% increase to the compensation awarded under the STPP for 2018.
 
2018 Wisconsin Utilities Operational Goals and Performance under the STPP. For those officers whose positions in 2018 primarily related to utility operations in Wisconsin, STPP awards could be increased or decreased by up to 10% based upon performance in the operational areas of customer satisfaction (5% weight), safety (2.5% weight), and supplier diversity (1.25% weight) for WEC Energy Group’s Wisconsin utility operations (including the Company), as well as WEC Energy Group’s performance in the operational area of workforce diversity (1.25% weight).

The Compensation Committee measures customer satisfaction levels based upon the results of surveys that an independent third party conducts of customers who had direct contact with WEC Energy Group’s Wisconsin utilities, including us, during the year, which measure (1) customers’ satisfaction with the specific Wisconsin utility overall, and (2) customers’ satisfaction with respect to their particular transactions with their specific utility. Safety is measured based upon performance against the number of lost time injuries and OSHA recordable incidents, as well as the number of NMUC Reports filed.

The following table provides the operational goals approved by the Compensation Committee for 2018 for WEC Energy Group’s Wisconsin utility operations, as well as the performance against these goals:

Operational MeasureBelow GoalGoalAbove GoalFinal Result
Customer Satisfaction Percentage of "Highly Satisfied":-5.00%0.00%+5.00% 
Company<78.8%78.8% - 81.7%>81.7%81.8%
Transaction<82.0%82.0% - 85.1%>85.1%84.7%
Safety:-2.50%0.00%+2.50% 
Lost Time Injury - Incidents>2513 - 25<1331
OSHA Recordable Incidents>10565 - 105<65109
Near Miss / Unsafe Condition Reports<14,53814,538 - 17,792>17,79215,012
Diversity:-2.50%0.00%+2.50% 
Supplier ($ in Millions)<105.0105.0 - 120.0>120.0138.2
Workforce - AssessmentNot MetMetExceededMet

Based upon the operational results listed in the table above, the Wisconsin utilities’ performance with respect to operational goals generated a 2.08% increase to the compensation awarded under the STPP for 2018.

The Compensation Committee retains the right to exercise discretion in adjusting awards under the STPP when it deems appropriate, but did not factor individual contributions into determining the amount of the awards for the NEOs for 2018. Because WEC Energy Group’s performance (which includes the Company’s performance) against the financial and operational goals resulted in significant STPP awards in 2018, the Compensation Committee determined that no further adjustments based upon individual contributions or otherwise were appropriate.

Based upon performance against the financial and operational goals established by the Compensation Committee, Mr. Klappa received annual incentive cash compensation under the STPP of $3,541,124 for 2018. This represented 248% of his annual base salary. Messrs. Lauber, Fletcher, and Garvin, and Ms. Kelsey, each received annual cash incentive compensation for 2018 under the STPP equal to 166%, 157%, 135%, and 145% of their respective annual base salaries, representing 207.08% of the target award for each officer, other than Mr. Fletcher, whose incentive compensation payout was 204.05% of his target award. Mr. Fletcher’s STPP payout is based upon a combination of (i) the number of days he served as President of WEC Energy Group with a target award of 90% of base pay multiplied by WEC Energy Group’s payout level of 207.08% of his target award and (ii) the number of days he served as President of WEC Energy Group’s Wisconsin utility operations with a target award of 70% of base salary multiplied by WEC Energy Group’s Wisconsin utility operations’ payout level of 202.08% of his target award. For additional information about Mr. Klappa’s receipt of incentive compensation under the STPP, see “Determination of Mr. Klappa’s 2018 Compensation” on page 16.

LONG-TERM INCENTIVE COMPENSATION
The Compensation Committee administers WEC Energy Group’s 1993 Omnibus Stock Incentive Plan, amended and restated effective January 1, 2016, which is a WEC Energy Group stockholder-approved, long-term incentive plan designed to link the interests of our executives and other key employees of WEC Energy Group and the Company to creating long-term stockholder value. It allows for various types of awards tied to the performance of WEC Energy Group’s common stock, including WEC Energy Group stock options, stock appreciation rights, and restricted stock. The Compensation Committee also administers the

Wisconsin Electric Power Company202019 Annual Meeting Information Statement


WEC Energy Group Performance Unit Plan, under which the Compensation Committee may award performance units. The Compensation Committee primarily uses WEC Energy Group (1) performance units, including dividend-equivalents, (2) stock options, and (3) restricted stock to deliver long-term incentive opportunities.

Performance Units. Each year, the Compensation Committee makes annual grants of WEC Energy Group performance units under the Performance Unit Plan. The performance units are designed to provide a form of long-term incentive compensation that aligns the interests of management with those of a typical utility stockholder who is focused not only on stock price appreciation but also on dividends. Payouts are based upon WEC Energy Group’s level of “total stockholder return” (stock price appreciation plus reinvested dividends) in comparison to a peer group of companies over a three-year performance period, and may be adjusted based upon WEC Energy Group’s performance against one or more Additional Performance Measures. The performance units are settled in cash.

Selection of Additional Performance Measure(s). “Additional Performance Measure” is defined as the performance criterion or criteria (if any) that the Compensation Committee selects, in its sole discretion, based upon the attainment of specific levels of performance by WEC Energy Group. Performance units vest in an amount between 0% and 175% of the target award based upon WEC Energy Group’s comparative total stockholder return over a three-year performance period. However, the vesting percentage may be adjusted based upon WEC Energy’s performance against the Additional Performance Measure(s). The Additional Performance Measure(s), if any, must be selected by the Compensation Committee at the beginning of the three-year performance period. For each year during the performance period, the Compensation Committee will select the target(s) for the Additional Performance Measure(s) and the potential adjustment to the vesting percentage for that year based upon achievement of the Additional Performance Measure(s) relative to the selected target(s). The actual adjustment, if any, to the vesting percentage based upon the Additional Performance Measure(s) will be determined annually. In no event will any adjustment cause the vesting percentage over the three-year performance period to be less than zero.

Short-Term Dividend Equivalents. We increase the number of unvested performance units as of any date that WEC Energy Group declares a cash dividend on its common stock by the amount of short-term dividend equivalents a participant is entitled to receive. Short-term dividend equivalents are calculated by multiplying (a) the number of unvested performance units held by a plan participant as of the related dividend record date by (b) the amount of cash dividend payable by WEC Energy Group on a share of its common stock; and (c) dividing the result by the closing price for a share of WEC Energy Group’s common stock on the dividend payment date. In effect, short-term dividend equivalents are credited and accumulated as reinvested dividends on each performance unit so that the performance units and accumulated dividends will be paid out at the end of the three-year performance period, rather than paying out the dividend equivalents annually on unearned performance units.

Short-term dividend equivalents are treated as additional unvested performance units and are subject to the same vesting, forfeiture, payment, termination, and other terms and conditions as the original performance units to which they relate. In addition, outstanding short-term dividend equivalents are treated as unvested performance units for purposes of calculating future short-term dividend equivalents.

Stock Options. Each year, the Compensation Committee also makes annual WEC Energy Group stock option grants as part of the long-term incentive program. These stock options have an exercise price equal to the fair market value of WEC Energy Group’s common stock on the date of grant and expire on the 10th anniversary of the grant date. Since management benefits from a stock option award only to the extent WEC Energy Group’s stock price appreciates above the exercise price of the stock option, stock options align the interests of management with those of WEC Energy Group stockholders in attaining long-term stock price appreciation.

Restricted Stock. The Compensation Committee also awards WEC Energy Group restricted stock as part of the long-term incentive plan, consistent with market practice. Similar to performance units, restricted stock aligns the interests of management with a typical utility stockholder who is focused on stock price appreciation and dividends.

Aggregate 2018 Long-Term Incentive Awards. Generally, when establishing the target value of long-term incentive awards and the appropriate mix of WEC Energy Group performance units, stock options, and restricted stock for each NEO, the Compensation Committee reviews the market compensation data and analysis provided by FW Cook. Based upon FW Cook’s analysis, for 2018 the Compensation Committee determined that the long-term incentive awards would be weighted 65% performance units, 20% stock options, and 15% restricted stock for Messrs. Lauber, Fletcher, and Garvin, and Ms. Kelsey. Target values also were presented to and approved by the Compensation Committee in December 2017.

With respect to Mr. Klappa, after consultation with FW Cook, the Compensation Committee determined that his long-term incentive award would be weighted 80% restricted stock and 20% stock options. At the time, the Committee recognized that Mr.

Wisconsin Electric Power Company212019 Annual Meeting Information Statement


Klappa’s tenure with WEC Energy Group and the Company would be significantly shorter than the other executive officers. Since the vesting percentage of performance units is based upon WEC Energy Group’s total stockholder return over a three-year period, the Compensation Committee did not believe that performance units would accurately reflect the contributions of Mr. Klappa to the success of WEC Energy Group and the Company over a shorter period of time.

Based upon the market data provided by FW Cook, we target the long-term incentive award to be at or near the market median value of long-term incentive compensation for each executive officer’s position. All of the NEOs’ long-term incentive awards were within this target range for 2018. For additional information on Mr. Klappa’s award, see “Determination of Mr. Klappa’s 2018 Compensation” on page 16.

2018 Stock Option Grants. In December 2017, the Compensation Committee approved the grant of WEC Energy Group stock options to each of our NEOs and established an overall pool of options that were granted to approximately 200 other employees. The option grants to the NEOs were made effective January 2, 2018, the first trading day of 2018. The options were granted with an exercise price equal to the average of the high and low prices reported on the New York Stock Exchange for shares of WEC Energy Group common stock on the grant date. The options were granted in accordance with WEC Energy Group’s standard practice of making annual stock option grants effective on the first trading day of each year, and the timing of the grants was not tied to the timing of any release of material information.

These stock options have a term of 10 years and vest 100% on the third anniversary of the date of grant. The vesting of the stock options may be accelerated in connection with a change in control of WEC Energy Group or an executive officer’s termination of employment under certain circumstances. See “Potential Payments upon Termination or Change in Control” beginning on page 37 for additional information. Subject to the limitations of WEC Energy Group’s 1993 Omnibus Stock Incentive Plan, the Compensation Committee has the power to amend the terms of any option (with the participant’s consent). However, the Committee may not reduce the exercise price of existing options or cancel outstanding options and grant replacement options having a lower exercise price without WEC Energy Group stockholder approval.

For purposes of determining the appropriate number of options to grant to a particular NEO, the value of an option was determined based upon the Black-Scholes option pricing model. We use the Black-Scholes option pricing model for purposes of the compensation valuation. The following table provides the number of options granted to each NEO in 2018:
Executive OfficerOptions Granted
Mr. Klappa115,960
Mr. Lauber26,465
Mr. Fletcher16,055
Ms. Kelsey18,380
Mr. Garvin14,705

For financial reporting purposes, the stock options granted on January 2, 2018 had a grant date fair value of $8.68 per option for Messrs. Lauber and Garvin, and Ms. Kelsey, and a grant date fair value of $6.84 for Messrs. Klappa and Fletcher, who are considered to be “retirement eligible.” The options granted to Messrs. Klappa and Fletcher are presumed to have a shorter expected life, which results in a lower option value.

2018 Restricted Stock Awards. In December 2017, the Compensation Committee also approved the grant of restricted stock to each of our NEOs and established an overall pool of restricted stock that was granted to approximately 200 other employees. The grants to the NEOs were also made effective January 2, 2018. Other than the shares granted to Mr. Klappa, the restricted stock vests in three equal annual installments beginning on January 2, 2019. The shares of restricted stock granted to Mr. Klappa vest in full on the one year anniversary of the grant date, reflecting the shorter tenure the Committee expected for Mr. Klappa.

The vesting of the restricted stock may be accelerated in connection with a termination of employment due to a change in control of WEC Energy Group, death or disability, or by action of the Compensation Committee. Mr. Klappa’s restricted stock also fully vested if he resigned for “good reason,” defined as a material diminution in his authority, duties or responsibilities, including, but not limited to, WEC Energy Group’s appointment of a successor Chief Executive Officer. The Compensation Committee wanted to appropriately incentivize Mr. Klappa to return to WEC Energy Group and the Company while Mr. Leverett recovered from his stroke. See “Potential Payments upon Termination or Change in Control” beginning on page 37 for additional information. Tax withholding obligations related to vesting may be satisfied, at the option of the executive officer, by withholding shares otherwise deliverable upon vesting or by cash. The NEOs have the right to vote the restricted stock and to receive cash dividends when WEC Energy Group pays a dividend to its stockholders.


Wisconsin Electric Power Company222019 Annual Meeting Information Statement


For purposes of determining the appropriate number of shares of restricted stock to grant to a particular NEO, the Compensation Committee used a value of $68.39 per share. This value was based upon the volume weighted price of WEC Energy Group’s common stock for the ten trading days beginning on December 4, 2017, and ending on December 15, 2017. The Compensation Committee uses the volume-weighted price in order to minimize the impact of day-to-day volatility in the stock market.

The measurement period is customarily close to the grant date in order to shorten the timeframe between the calculation of the awards and the actual grant date. The following table provides the number of shares of restricted stock granted to each NEO in 2018:
Executive OfficerRestricted Stock Granted
Mr. Klappa57,008
Mr. Lauber2,439
Mr. Fletcher1,479
Ms. Kelsey1,695
Mr. Garvin1,356

2018 Performance Units. In 2018, the Compensation Committee granted WEC Energy Group performance units to each of our NEOs (other than Mr. Klappa) and approved a pool of performance units that were granted to approximately 200 other employees. With respect to the 2018 performance units, the amount of the benefit that ultimately vests will be dependent upon WEC Energy Group’s total stockholder return over a three-year period ending December 31, 2020, as compared to the total stockholder return of the custom peer group described below. Total stockholder return is the calculation of total return (stock price appreciation plus reinvestment of dividends) based upon an initial investment of $100 and subsequent $100 investments at the end of each quarter during the three-year performance period. However, the vesting percentage may be adjusted based upon WEC Energy Group’s performance against the Additional Performance Measure. For the 2018 performance unit awards, the Compensation Committee selected performance against the weighted average authorized return on equity of all WEC Energy Group’s utility subsidiaries, including us, as the Additional Performance Measure.

Upon vesting, the performance units will be settled in cash in an amount determined by multiplying the number of performance units that have vested by the closing price of WEC Energy Group’s common stock on the last trading day of the performance period.

The 2018 performance unit peer group against which WEC Energy Group's performance will be measured includes:
•   Alliant Energy Corporation•   DTE Energy Co.•   FirstEnergy Corp.•   SCANA Corporation
•   Ameren Corporation•   Duke Energy Corp.•   NiSource Inc.•   The Southern Company
•   American Electric Power Company•   Edison International•   OGE Energy Corp.•   Xcel Energy Inc.
•   CMS Energy Corporation•   Eversource Energy•   PG&E Corporation 
•   Consolidated Edison, Inc.•   Evergy, Inc.•   Pinnacle West Capital Corp. 
 
The peer group is chosen by the Compensation Committee, based upon management’s recommendation and with the concurrence of FW Cook. This peer group was chosen because we believe these companies are similar to WEC Energy Group in terms of business model and long-term strategies, with a primary focus on regulated utility operations rather than a non-regulated business model. There is significant overlap between the performance unit peer group and the comparison group developed by FW Cook for purposes of benchmarking compensation levels. However, there are several companies that are different among the two groups because FW Cook places significant weight on the financial metrics of the companies included in its comparison group, whereas we focus more on operational measures for the performance unit peer group.

The required percentile ranking for total stockholder return and the applicable vesting percentage are set forth in the chart below.
Performance Percentile RankVesting Percent
< 25th Percentile0%
25th Percentile25%
Target (50th Percentile)100%
75th Percentile125%
90th Percentile175%

If WEC Energy Group’s rank is between the benchmarks identified above, the vesting percentage will be determined by interpolating on a straight line basis the appropriate vesting percentage. Unvested performance units generally are immediately forfeited upon a NEO’s cessation of employment with WEC Energy Group prior to completion of the three-year performance

Wisconsin Electric Power Company232019 Annual Meeting Information Statement


period. However, the performance units will vest immediately at the target 100% rate upon the termination of the NEO’s employment (1) by reason of disability or death or (2) after a change in control of WEC Energy Group. In addition, a prorated number of performance units (based upon the target 100% rate) will vest upon the termination of employment of the NEO by reason of retirement prior to the end of the three-year performance period.

In response to feedback WEC Energy Group received from stockholders, the Compensation Committee amended the Performance Unit Plan, effective January 1, 2017, to provide for an Additional Performance Measure. For the 2018 performance unit awards, the Additional Performance Measure is the weighted average authorized return on equity (“ROE”) of all WEC Energy Group’s utility subsidiaries, including us. In order for WEC Energy Group to meet its earnings per share targets, it is important that WEC Energy Group’s utilities (including the Company) earn at or close to their allowed rates of return. WEC Energy Group’s performance against this measure may increase or decrease the vesting percentage of the performance units up to 10% over the three-year performance period. For 2018, the ROE targets and potential adjustments were set as follows:

If Actual Annual ROE isThe Annual Adjustment isROE Ranges
≤ 20 bp below the Authorized ROE+ 3.33%≥ 9.76%
21 - 30 bp below the Authorized ROE0%9.66% - 9.75%
> 30 bp below the Authorized ROE(3.33)%< 9.66%

These are the same ROE targets and potential adjustments that we used in connection with the Additional Performance Measure for the 2017 performance unit awards, which was the first year an Additional Performance Measure was included. WEC Energy Group's utility subsidiaries achieved a weighted average authorized ROE of 10.38% for 2018. This resulted in a 3.33% increase in the vesting percentage of the performance units awarded in January 2018 and January 2017. For purposes of determining the appropriate number of performance units to grant to a particular NEO, the Compensation Committee used a value of $68.39 per unit, the same value used for the restricted stock granted in January 2018.

The following table provides the number of performance units granted to each NEO effective January 2, 2018, at the 100% target level:
Executive OfficerPerformance Units Granted
Mr. Klappa
Mr. Lauber10,570
Mr. Fletcher6,415
Ms. Kelsey7,340
Mr. Garvin5,875

2018 Payouts under Previously Granted Long-Term Incentive Awards. In 2016, the Compensation Committee granted WEC Energy Group performance unit awards to participants in the Performance Unit Plan. The terms of the performance units granted in 2016 were substantially similar to those of the performance units granted in 2018 described above, except that the 2016 performance units did not have an Additional Performance Measure. The required percentile ranks for total stockholder return and related vesting schedule were identical to that of the 2018 performance units.

Payouts under the 2016 performance units were based upon WEC Energy Group’s total stockholder return for the three-year performance period ended December 31, 2018 against the same group of peer companies used for the 2018 performance unit awards.

WEC Energy Group’s total stockholder return was at the 78th percentile of the peer group for the three-year performance period ended December 31, 2018, resulting in the performance units vesting at a level of 134.3%. The actual payouts were determined by multiplying the number of vested performance units by the closing price of WEC Energy Group common stock ($69.26) on December 31, 2018, the last trading day of the performance period. The actual payout to each NEO (other than Mr. Klappa and Ms. Kelsey, who did not have any 2016 performance units outstanding) is reflected in the “Option Exercises and Stock Vested for Fiscal Year 2018” table.

COMPENSATION RECOUPMENT POLICY
Accountability is a fundamental value of WEC Energy Group and the Company. To reinforce this value through the executive compensation program, the Compensation Committee has adopted a clawback policy that provides for the recoupment of incentive-based compensation in the event WEC Energy Group is required to prepare an accounting restatement due to material noncompliance with any financial reporting requirement under the securities laws (other than restatements permitted as a result of changes in accounting principles or interpretation). Pursuant to the policy, the Compensation Committee will recover from any

Wisconsin Electric Power Company242019 Annual Meeting Information Statement


current or former executive officer who has received incentive-based compensation during the three-year period preceding the date on which WEC Energy Group is required to prepare the accounting restatement, any portion of the incentive-based compensation paid in excess of what would have been paid to the executive officer under the restated financial results. WEC Energy Group may also recover incentive-based compensation if an executive officer’s employment is terminated for cause, or the executive officer violates a noncompetition or other restrictive covenant.

STOCK OWNERSHIP GUIDELINES
The Compensation Committee believes that an important adjunct to the long-term incentive program is significant stock ownership by officers who participate in the program, including the NEOs. Accordingly, the Compensation Committee has implemented stock ownership guidelines requiring officers who participate in the long-term incentive program to hold an amount of WEC Energy Group common stock and other equity-related WEC Energy Group securities that varies depending upon such officer's level.

In addition to shares owned outright, holdings of each of the following are included in determining compliance with the stock ownership guidelines: restricted stock; WEC Energy Group phantom stock units held in the Executive Deferred Compensation Plan; WEC Energy Group stock held in WEC Energy Group’s 401(k) plans; performance units at target; and shares held in a brokerage account, jointly with an immediate family member or in a trust.

The guidelines require each executive officer, including the NEOs, to acquire (generally within five years of appointment as an executive officer) and hold common stock and other equity-related securities of WEC Energy Group having a minimum fair market value ranging from 250% to 600% of base salary. The Compensation Committee believes these stock ownership guidelines discourage unreasonable risk taking by officers.

The Compensation Committee annually reviews whether executive officers are in compliance with these guidelines. The last review was completed in October 2018. The Compensation Committee determined that all NEOs are in compliance, or making sufficient progress towards compliance, with these guidelines.

PROHIBITION ON HEDGING AND PLEDGING
WEC Energy Group’s Corporate Securities Trading Policy prohibits the use of any strategies or products, including derivatives and short-selling techniques, to hedge against potential changes in the value of WEC Energy Group’s common stock. The policy, which is applicable to all directors and employees of WEC Energy Group and the Company, including the NEOs, also prohibits the holding of WEC Energy Group securities in a margin account, as well as the pledging of WEC Energy Group securities as collateral for a loan.

LIMITED TRADING WINDOWS
Officers, including the NEOs, other key employees, and WEC Energy Group directors may only transact in WEC Energy Group securities during approved trading windows after satisfying mandatory pre-clearance requirements.

RETIREMENT PROGRAMS
WEC Energy Group also maintains retirement plans in which our NEOs participate: a defined benefit pension plan of the cash balance type, a supplemental pension plan, individual letter agreements with some of the NEOs, and a 401(k) plan. We believe these retirement plans are a valuable benefit in the attraction and retention of our employees, including the NEOs. We believe that providing a foundation for long-term financial security for our employees, beyond their employment with the Company, is a valuable component of our overall compensation program which will inspire increased loyalty and improved performance. For more information about the retirement plans, see “Pension Benefits at Fiscal Year-End 2018” and “Retirement Plans.”

Mr. Klappa had previously retired from the Company. For information regarding certain payments made to Mr. Klappa in connection with such retirement, see “Pension Benefits at Fiscal Year-End 2018.”

OTHER BENEFITS, INCLUDING PERQUISITES
We provide our executive officers, including the NEOs, with employee benefits and a limited number of perquisites. Except as specifically noted elsewhere in this information statement, the employee benefits programs in which executive officers participate (which provide benefits such as medical coverage, retirement benefits, annual contributions to a qualified savings plan, and moving and relocation costs) are generally the same programs offered to substantially all of the Company’s management employees.

The perquisites made available to executive officers include financial planning, membership in a service that provides health care and safety management when traveling outside the United States, reimbursement for expenses related to annual physical

Wisconsin Electric Power Company252019 Annual Meeting Information Statement


exam costs not covered by insurance, and limited spousal travel for business purposes. The Company also pays periodic dues and fees for club memberships for certain of the NEOs and other designated officers.

We customarily review market data regarding executive perquisite practices on an annual basis. Following WEC Energy Group’s acquisition of Integrys Energy Group, the Compensation Committee undertook a thorough review of WEC Energy Group’s perquisite practices with FW Cook. At that time, FW Cook recommended to the Compensation Committee that the current package of perquisites be retained. For 2018, the Compensation Committee again reviewed the package of perquisites with FW Cook and decided not to make any changes. WEC Energy Group and the Company have a legacy group of executives who are still eligible for gross-ups. We reimburse those executives for taxes paid on income attributable to the financial planning benefits provided to the executives only if the executive uses the Company’s identified preferred provider, AYCO. We believe the use of the preferred financial adviser provides administrative benefits and eases communication between Company personnel and the financial adviser.

We pay periodic dues and fees for certain club memberships as we have found that the use of these facilities helps foster better customer and community relationships. Officers, including the NEOs, are expected to use clubs for which the Company pays dues primarily for business purposes. We do not pay any additional expenses incurred for personal use of these facilities, and officers are required to reimburse the Company to the extent that it pays for any such personal use. The total annual club dues are included in the "Summary Compensation Table." We do not permit personal use of the airplane leased by WEC Energy Group. We do allow spousal travel if an executive’s spouse is accompanying the executive on business travel and the airplane is not fully utilized by WEC Energy Group personnel. There is no incremental cost to WEC Energy Group or the Company for this travel, other than the reimbursement for taxes paid on imputed income attributable to the executives for this perquisite, as the airplane cost is the same regardless of whether or not an executive’s spouse travels. Any tax reimbursement is subject to the Company’s Tax Gross-Up Policy discussed below.

In addition, each of our executive officers is eligible to participate in an officer life insurance benefit. If an executive officer chooses to participate, upon such officer’s death while employed by WEC Energy Group and/or the Company, a benefit is paid to his or her designated beneficiary in an amount equal to the value of three times the officer’s base salary at the time of death.

TAX GROSS-UP POLICY
The Compensation Committee adopted a formal policy that prohibits entry into any contract, agreement, or arrangement with any officer of WEC Energy Group or its subsidiaries, including the Company that obligates the Company to pay directly or reimburse the officer for any portion of the officer’s individual tax liability for benefits provided by the Company. Excluded from this policy are (1) agreements or arrangements entered into prior to December 2014 when the policy was adopted, (2) agreements or arrangements entered into prior to, and assumed by WEC Energy Group or the Company in connection with, any merger or acquisition, or (3) plans or policies applicable to Company employees generally.

This policy formalized the Compensation Committee’s policy that had been in place since July 2011 to eliminate tax gross-ups on perquisites provided by WEC Energy Group and the Company to their officers (except to officers who were already receiving gross-ups as of July 2011). Of the NEOs, Messrs. Lauber and Garvin were receiving gross-ups from the Company prior to July 2011.

In light of Mr. Klappa’s retirement in May 2016, and subsequent re-appointment as CEO in 2017, Mr. Klappa is deemed to be a new employee for benefits purposes and is not eligible to receive gross-ups.

SEVERANCE BENEFITS AND CHANGE IN CONTROL
Several years ago, the Compensation Committee determined that it would no longer offer severance and change in control benefits in employment agreements. Therefore, Messrs. Klappa, Lauber, and Garvin, and Ms. Kelsey, have not entered into an employment agreement that provides for these benefits. However, they are eligible to participate in the Company’s Severance Pay Plan. Prior to that time, Mr. Fletcher entered into an employment agreement with WEC Energy Group, which includes severance and change in control provisions. For a discussion of the severance and change in control benefits available under this agreement, and to our executive officers generally, see “Potential Payments upon Termination or Change in Control.”
In addition, WEC Energy Group’s supplemental pension plan provides that in the event of a change in control, participants will be entitled to a lump sum payment of amounts due under the plan if employment is terminated within 18 months of the change in control.

IMPACT OF PRIOR COMPENSATION
The Compensation Committee does not believe it is appropriate to consider the amounts realized or realizable from prior incentive compensation awards when establishing future levels of short-term and long-term incentive compensation.


Wisconsin Electric Power Company262019 Annual Meeting Information Statement


SECTION 162(m) OF THE INTERNAL REVENUE CODE
Certain components of the Company’s compensation program were designed to ensure the deductibility of compensation based on tax regulations in effect at the time the compensation was awarded, including Section 162(m). Section 162(m) of the Internal Revenue Code limits the deductibility of certain executives’ compensation that exceeds $1,000,000 per year. For tax years prior to 2018, compensation over $1,000,000 per year could be deducted if such compensation was performance-based under Section 162(m) and issued through a plan that had been approved by WEC Energy Group’s stockholders. Starting with compensation awarded in 2018, the Tax Cuts and Jobs Act of 2017 eliminated the performance-based compensation exception under 162(m) for compensation over $1,000,000.



COMPENSATION COMMITTEE REPORT 

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this information statement.
 
 The Compensation Committee
 of WEC Energy Group, Inc.
  
 
John F. Bergstrom, Committee Chair
Thomas J. Fischer
Ulice Payne, Jr.


Wisconsin Electric Power Company272019 Annual Meeting Information Statement


EXECUTIVE COMPENSATION

The following table summarizes total compensation awarded to, earned by, or paid to the Company's Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”), and each of the other individuals identified in the table below (the “NEOs”). The amounts shown in this and all subsequent tables in this information statement are WEC Energy Group consolidated compensation data.

SUMMARY COMPENSATION TABLE
    (3)(4)(5)(6)(7)(8)  
Name and
Principal Position
YearSalaryBonus
Stock
Awards
Option
Awards
Non-Equity
Incentive Plan
Compensation
Change in Pension Value and Nonqualified Deferred Compensation Earnings
All Other
Compensation
TotalTotal Without Change in Pension Value
  ($)($)($)($)($)($)($)($)($)
Gale E. Klappa(1)
Former Chairman and Chief Executive Officer
20181,425,000
3,763,383
793,166
3,541,124
158,568
181,752
9,862,993
9,862,993
20172,225,000
250,012


2,529,057
27,102
5,031,171
2,593,579
2016589,043
7,427,755
816,752
1,179,632
925,719
210,435
11,149,336
10,250,269
Scott J. Lauber 
Executive Vice President, CFO and Treasurer
2018574,711
858,790
229,716
952,418
22,857
76,186
2,714,678
2,714,678
2017467,321
534,890
137,001
764,441
93,343
66,124
2,063,120
1,977,525
2016351,784
158,886
38,371
513,010
65,818
38,116
1,165,985
1,103,685
J. Kevin Fletcher(1)
Chairman and Chief Executive Officer
2018504,733
521,122
109,816
792,078
739,652
52,100
2,719,501
2,023,895
2017436,800
535,648
137,199
633,095
1,198,310
44,062
2,985,114
1,800,225
2016411,345
336,818
81,425
606,866
671,274
39,869
2,147,597
1,482,133
Margaret C. Kelsey(2)
Executive Vice President, General Counsel and Corporate Secretary
2018515,000
596,445
159,538
746,535
41
88,223
2,105,782
2,105,782
        

 
        

 
Robert M. Garvin
Executive Vice President - External Affairs
2018441,462
477,354
127,639
594,226
75,976
74,203
1,790,860
1,717,450
2017428,604
437,987
112,203
578,855
80,450
66,394
1,704,493
1,624,043
2016416,120
406,738
98,269
541,443
75,596
65,541
1,603,707
1,528,639
Note: In order to show the effect that the year-over-year change in pension value had on total compensation, as determined under applicable SEC rules, we have included an additional column to show total compensation minus the change in pension value. The amounts reported in the Total Without Change in Pension Value column may differ substantially from the amounts reported in the Total column required under SEC rules and are not a substitute for total compensation. Total Without Change in Pension Value represents total compensation, as determined under applicable SEC rules, minus the change in pension value reported in the Change in Pension Value and Nonqualified Deferred Compensation Earnings column. The change in pension value is subject to many external variables, such as interest rates, that are not related WEC Energy Group or Company performance. Therefore, we do not believe a year-over-year change in pension value is helpful in evaluating compensation for comparative purposes.

(1)After Allen Leverett suffered a stroke in October 2017, the Company’s Board appointed Mr. Klappa Chairman and CEO effective January 2, 2018, while Mr. Leverett recovered from his stroke. Mr. Klappa served in these roles until February 1, 2019, at which time he was succeeded by Mr. Fletcher. Mr. Fletcher was also appointed President and CEO of WEC Energy Group effective February 1, 2019. Prior to these appointments, Mr. Fletcher was serving as President of WEC Energy Group with responsibility for the operations of WEC Energy Group’s utilities, including the Company. Mr. Klappa remains a director of the Company.
(2)Ms. Kelsey, who was named Executive Vice President, General Counsel and Corporate Secretary effective January 1, 2018, became a named executive officer in 2018. Therefore, no information has been provided for 2016 or 2017 for Ms. Kelsey.
(3)The amounts reported reflect the aggregate grant date fair value, as computed in accordance with FASB ASC Topic 718 excluding estimated forfeitures, of performance units and/or restricted stock awarded to each NEO in the respective year for which such amounts are reported. The amounts reported for the performance units are based upon the probable outcome as of the grant date of associated performance and market conditions, and are consistent with our estimate, as of the grant date, of aggregate compensation cost to be recognized over the three-year performance period. The actual value received by the executives from these awards may range from $0 to greater than the reported amounts, depending upon WEC Energy Group’s performance and the executive’s number of additional years of service with the Company.
The value of the performance unit awards as of the grant date, assuming achievement of the highest level of performance and excluding any performance units resulting from short-term dividend equivalents and the Additional Performance Measure, for each of Messrs. Lauber, Fletcher, and Garvin, and Ms. Kelsey, is $1,221,145, $741,084, $678,700, and $847,963, respectively, for the 2018 awards. The value of the performance unit awards as of the grant date, assuming achievement of the highest level of performance and excluding any performance units resulting from short-term dividend equivalents and the Additional Performance Measure, for each of Messrs. Lauber, Fletcher, and Garvin, is $760,647, $761,697, and $622,931, respectively, for the 2017 awards. See “Option Exercises and Stock Vested For Fiscal Year 2018” for the amount of the actual payout with respect to the 2016 award of performance units. Mr. Klappa’s 2016 grant of performance units vested pursuant to the terms of WEC Energy Group’s Performance Unit Plan upon his retirement on May 1, 2016. Not included are the performance unit awards resulting from short-term

Wisconsin Electric Power Company282019 Annual Meeting Information Statement


dividend equivalents and/or the Additional Performance Measure that may increase or, in the case of the Additional Performance Measure, decrease these amounts.
(4)The amounts reported reflect the aggregate grant date fair value, as computed in accordance with FASB ASC Topic 718 excluding estimated forfeitures, of options awarded to each NEO in the respective year for which such amounts are reported. The actual value received by the executives from these awards may range from $0 to greater than the reported amounts, depending upon WEC Energy Group's performance. In accordance with FASB ASC Topic 718, we made certain assumptions in our calculation of the grant date fair value of the stock options. See “Stock Options” in Note 1(k) -- Stock-Based Compensation, in the Notes to Consolidated Financial Statements in our 2018 Annual Report on Form 10-K for a description of these assumptions. For 2018, the assumptions made in connection with the valuation of the stock options are the same as described in Note 1(k), except that the expected life of the options is 7.7 years for Messrs. Lauber and Garvin, and Ms. Kelsey, and 4.3 years for Messrs. Klappa and Fletcher. The change in the expected life of the options as set forth in Note 1(k) resulted from the fact that Messrs. Klappa and Fletcher are “retirement eligible” as of the grant date, and Messrs. Lauber and Garvin, and Ms. Kelsey, were not, whereas the assumption described in Note 1(k) is a weighted average of all option holders.
(5)Consists of the annual incentive compensation earned under WEC Energy Group’s STPP.
(6)The amounts reported for 2018, 2017, and 2016 reflect the aggregate change in the actuarial present value of each applicable NEO’s accumulated benefit under all defined benefit plans from December 31, 2017 to December 31, 2018, December 31, 2016 to December 31, 2017, and December 31, 2015 to December 31, 2016, respectively. The amounts reported for all three years also include above-market earnings on compensation that is deferred by the NEOs into the Prime Rate Fund under WEC Energy Group’s Executive Deferred Compensation Plan. Above-market earnings represent the difference between the interest rate used to calculate earnings under the Plan and 120% of the applicable federal long-term rate prescribed by the Internal Revenue Code. The amounts earned for 2018 are shown below.

NameChange in Pension Value ($)Non-Qualified Deferred Compensation Earnings ($)Total ($)
Gale E. Klappa
158,568
158,568
Scott J. Lauber
22,857
22,857
J. Kevin Fletcher695,606
44,046
739,652
Margaret C. Kelsey
41
41
Robert M. Garvin73,410
2,566
75,976

For 2018, 2017, and 2016, the applicable discount rate used to value pension plan liabilities moved from 3.65% to 4.30%, 4.15% to 3.65%, and 4.45% to 4.15%, respectively. As the discount rate decreases, the Company’s pension funding obligation increases, and vice versa. The changes in the actuarial present values of the NEOs’ pension benefits do not constitute cash payments to the NEOs.
The pension values reported represent only WEC Energy Group’s obligation of the aggregate change in the actuarial present value of each NEO’s accumulated benefit under all defined benefit plans. Messrs. Klappa and Fletcher are entitled to receive pension benefits from prior employers. To the extent such prior employers are unable to pay their pension obligations, WEC Energy Group may be obligated to pay the total amount.
(7)During 2018, each NEO received financial planning services and the cost of an annual physical exam; Messrs. Klappa, Lauber, and Fletcher were provided with membership in a service that provides healthcare and safety management when traveling outside the United States; Mr. Garvin received reimbursement for club dues. Although Mr. Klappa utilized the benefit of spousal travel for business purposes in 2018, there was no associated cost to the Company as Mr. Klappa was not eligible to receive reimbursement for taxes paid on imputed income attributable to him for such travel.
(8)
For Mr. Klappa, the amount reported in All Other Compensation for 2018 includes $23,453 attributable to WEC Energy Group’s Directors’ Charitable Awards Program in connection with Mr. Klappa’s service on WEC Energy Group's Board. Under this program, WEC Energy Group intends to contribute up to $100,000 per year for 10 years to one or more charitable organizations chosen by Mr. Klappa, following his death. Charitable donations under the program will be paid out of general corporate assets.
All Other Compensation for Messrs. Klappa, Lauber, Fletcher, and Garvin, and Ms. Kelsey, for 2018 also consists of:
Employer matching of contributions into the WEC Energy Group 401(k) plan in the amount of $11,000 for Messrs. Klappa, Lauber, and Fletcher; $10,625 for Mr. Garvin; and $10,434 for Ms. Kelsey;
Employer contributions into the WEC Energy Group 401(k) plan in the amount of $16,500 for Mr. Klappa and Ms. Kelsey, and into the WEC Energy Group Non-Qualified Retirement Savings Plan in the amount of $69,000 for Mr. Klappa and $26,674 for Ms. Kelsey. These payments are in lieu of participation in WEC Energy Group's pension plan;
“Make-whole” payments under the Executive Deferred Compensation Plan that provides a match at the same level as the WEC Energy Group 401(k) plan (4% for up to 7% of wages) for all deferred salary and bonus not otherwise eligible for a match in the amounts of $46,000 for Mr. Klappa, $42,239 for Mr. Lauber, $33,700 for Mr. Fletcher, $16,914 for Ms. Kelsey, and $29,340 for Mr. Garvin;
Tax reimbursements or “gross-ups” for all applicable perquisites in the amounts of $7,202 and $16,092 for Messrs. Lauber and Garvin, respectively.

Other Information
In recognition of his appointment as President and Chief Executive Officer of WEC Energy Group in February 2019, Mr. Fletcher’s 2019 annual base salary was increased to $1,004,000 and his target award under the STPP was increased to 125% of base salary. Additionally, in connection with Mr. Klappa’s appointment as Executive Chairman of WEC Energy Group in February 2019, his 2019 annual base salary and STPP target were set at $1,000,000 and 100% of base salary, respectively.

Wisconsin Electric Power Company292019 Annual Meeting Information Statement


GRANTS OF PLAN-BASED AWARDS FOR FISCAL YEAR 2018
The following table shows additional data regarding incentive plan awards to the NEOs in 2018.
NameGrant Date




Action Date (1)
Estimated Future Payouts
Under Non-Equity
Incentive Plan Awards (2)
Estimated Future Payouts Under Equity
Incentive Plan Awards (3)
All Other Stock Awards: Number of Shares of Stock or Units (4)
(#)

All Other Option Awards (5)

Grant Date Fair Value of Stock and Option Awards
($)
Threshold
($)
Target
($)
Maximum
($)
Threshold
(#)
Target
(#)
Maximum
(#)
Number of Securities Underlying Options
(#)
Exercise or Base Price (6)
($/Sh)
Closing Market Price
($/Sh)
Gale E. Klappa1/18/18427,5001,710,0003,591,000
1/2/1812/7/1757,0083,763,383
1/2/1812/7/17115,96066.01565.77793,166
Scott J. Lauber1/18/18114,980459,920965,832
1/2/1812/7/172,64310,57018,498697,779
1/2/1812/7/172,439161,011
1/2/1812/7/1726,46566.01565.77229,716
J. Kevin Fletcher1/18/1897,045388,180815,178
1/2/1812/7/171,6046,41511,226423,486
1/2/1812/7/171,47997,636
1/2/1812/7/1716,05566.01565.77109,816
Margaret C. Kelsey1/18/1890,125360,500
757,050
1/2/1812/7/171,8357,34012,845484,550
1/2/1812/7/171,695111,895
1/2/1812/7/1718,38066.01565.77159,538
Robert M. Garvin1/18/1871,738286,950
602,595
1/2/1812/7/171,4695,87510,281387,838
1/2/1812/7/171,35689,516
1/2/1812/7/1714,70566.01565.77127,639

(1)On December 7, 2017, the Compensation Committee awarded the 2018 option, restricted stock, and performance unit grants effective the first trading day of 2018 (January 2, 2018).
(2)Non-equity incentive plan awards consist of annual incentive awards under WEC Energy Group’s STPP. For a more detailed description of the STPP, see the Compensation Discussion and Analysis.
(3)Consists of performance units awarded under the WEC Energy Group Performance Unit Plan. WEC Energy Group’s Performance Unit Plan provides for short-term dividend equivalents. The number of performance units awarded will be increased as of any date that WEC Energy Group declares a cash dividend on its common stock by the amount of short-term dividend equivalents awarded. In effect, short-term dividend equivalents will be credited and accumulated as reinvested dividends on each performance unit so that the performance units and accumulated dividends will be paid out at the end of the performance units’ three-year performance period, contingent upon WEC Energy Group's performance. Therefore, the number of performance units reported at each of the threshold, target, and maximum levels in this table will increase by the number of short-term dividend equivalents earned. In addition, these amounts do not reflect any potential impact of WEC Energy Group's performance against the Additional Performance Measure. For a more detailed description of the performance units, short-term dividend equivalents and Additional Performance Measure, see the Compensation Discussion and Analysis.
(4)Consists of restricted stock awarded under WEC Energy Group’s 1993 Omnibus Stock Incentive Plan. For a more detailed description of the terms of the restricted stock, see the Compensation Discussion and Analysis.
(5)Consists of non-qualified stock options to purchase shares of WEC Energy Group common stock pursuant to WEC Energy Group’s 1993 Omnibus Stock Incentive Plan. For a more detailed description of the terms of the options, see the Compensation Discussion and Analysis.
(6)The exercise price of the option awards is equal to the fair market value of WEC Energy Group’s common stock on the date of grant. Fair market value is the average of the high and low prices of WEC Energy Group common stock, which is listed on the New York Stock Exchange, reported by Bloomberg, LLP on the grant date.


Wisconsin Electric Power Company302019 Annual Meeting Information Statement


OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2018
The following table reflects the number and value of exercisable and unexercisable options as well as the number and value of other equity awards held by the NEOs at fiscal year-end 2018.
NameOption AwardsStock Awards
Number of Securities Underlying Unexercised Options: Exercisable
(#)
Number of Securities Underlying Unexercised Options: Unexercisable (1)
(#)
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options
(#)
Option Exercise Price
($)
Option Expiration Date
Number of Shares or Units of Stock that Have Not Vested (2)
(#)
Market Value of Shares or Units of Stock that Have Not Vested
($)
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights that Have Not Vested
(#)
Equity Incentive Plan Awards: Market or Payout Value of Unearned
Shares, Units or Other Rights that Have Not Vested (3)
($)
Gale E. Klappa180,31037.461/2/23
302,53541.0251/2/24
176,01052.8951/2/25
190,83050.9251/4/26
115,96066.0151/2/28
59,8664,146,319
Scott J. Lauber3,65034.8751/3/22
6,36037.461/2/23
9,56041.0251/2/24
5,33052.8951/2/25
6,72050.9251/4/26
17,32058.3051/3/27
26,46566.0151/2/28
3,780261,803
14,202983,631
19,4971,350,362
J. Kevin Fletcher12,84552.8951/2/25
14,26050.9251/4/26
17,34558.3051/3/27
16,05566.0151/2/28
3,040210,550
14,222985,016
11,832819,484
Margaret C. Kelsey18,38066.0151/2/28
1,695117,396
13,539937,711
Robert M. Garvin33,91037.461/2/23
24,66541.0251/2/24
14,27052.8951/2/25
17,21050.9251/4/26
14,18558.3051/3/27
14,70566.0151/2/28
2,793193,443
11,631805,563
10,837750,571

(1)All options reported in this column were granted ten years prior to their respective expiration date and vest 100% on the third anniversary of the grant date.
(2)Effective January 4, 2016, Messrs. Lauber, Fletcher, and Garvin were granted restricted stock awards of 585; 1,239; and 1,497 shares, respectively, which began vesting in three equal annual installments on January 4, 2017. Effective May 2, 2016, Mr. Klappa was granted a restricted stock award of 2,858 shares for his service as Non-Executive Chairman of the Company’s Board of Directors, which will vest 100% on May 2, 2019. Effective January 3, 2017, Messrs. Lauber, Fletcher, and Garvin were granted restricted stock awards of 1,719; 1,722; and 1,407 shares, respectively, which began vesting in three equal annual installments on January 3, 2018. Effective January 2, 2018, Messrs. Lauber, Fletcher, and Garvin, and Ms. Kelsey, were granted restricted stock awards of 2,439; 1,479; 1,356; and 1,695 shares, respectively, which began vesting in three equal annual installments on January 2, 2019. Effective January 2, 2018, Mr. Klappa was granted a restricted stock award of 57,008 shares, which vested 100% on January 2, 2019. The vesting of the restricted stock granted to Messrs. Lauber, Fletcher, and Gavin, and Ms. Kelsey, may be accelerated in connection with a termination of employment due to a change in control, death or disability, or by action of the Compensation Committee.

Wisconsin Electric Power Company312019 Annual Meeting Information Statement


(3)The number of performance units reported were awarded in 2017 (first line) and 2018 (second line) and vest at the end of the three-year performance period ending December 31, 2019 and December 31, 2020, respectively. The number of performance units reported and their corresponding value are based upon a payout at the maximum amount for both 2017 and 2018. The number and value of the 2017 performance units includes performance units resulting from the grant of short-term dividend equivalents and Achievement of the Additional Performance Measure in 2017 and 2018. The number and value of the 2018 performance units includes performance units resulting from the grant of short-term dividend equivalents and achievement of the Additional Performance Measure in 2018.

OPTION EXERCISES AND STOCK VESTED FOR FISCAL YEAR 2018
This table shows the number and value of (1) stock options that were exercised by the NEOs, (2) restricted stock awards that vested, and (3) performance units that vested in 2018.

NameOption AwardsStock Awards
Number of Shares Acquired on Exercise
(#)
Value Realized on Exercise (1)
($)
Number of Shares Acquired on Vesting (2)
(#)
Value Realized on Vesting (3)(4)
($)
Gale E. Klappa246,6188,560,9384,429281,668
Scott J. Lauber92360,640
3,763260,624
J. Kevin Fletcher72,4552,378,4641,36089,371
7,979552,604
Margaret C. Kelsey
Robert M. Garvin1,38390,878
9,634667,237

(1)Value realized upon the exercise of options is determined by multiplying the number of shares received upon exercise by the difference between the market price of WEC Energy Group common stock at the time of exercise and the exercise price.
(2)Reflects the number of shares of restricted stock that vested in 2018 (first line) and, the number of performance units that vested as of December 31, 2018, the end of the applicable three-year performance period (second line). The performance units were settled in cash.
(3)Restricted stock value realized is determined by multiplying the number of shares of restricted stock that vested by the fair market value of WEC Energy Group common stock on the date of vesting. We compute fair market value as the average of the high and low prices of WEC Energy Group common stock reported by Bloomberg, LLP on the vesting date.
(4)Performance units value realized is determined by multiplying the number of performance units that vested by the closing market price of WEC Energy Group common stock on December 31, 2018, the last trading day of the year.


Wisconsin Electric Power Company322019 Annual Meeting Information Statement


PENSION BENEFITS AT FISCAL YEAR-END 2018
The following table sets forth information for each NEO regarding their pension benefits at fiscal year-end 2018 under WEC Energy Group’s three different retirement plans discussed below.
NamePlan Name
Number of Years Credited Service (1)
(#)
Present Value of Accumulated Benefit (4)(5)
($)
Payments During Last Fiscal Year (6)
($)
Gale E. Klappa(2)
WEC Energy Group Plan13
274,933

SERP13
3,269,974
263,731
Individual Letter Agreement38.67
22,933,487
1,849,639
Scott J. LauberWEC Energy Group Plan28.5
505,856

SERP28.5
165,017

Individual Letter Agreement


J. Kevin FletcherWEC Energy Group Plan7.17
139,950

SERP7.17
289,379

Individual Letter Agreement41.75
5,347,216

Margaret C. Kelsey(3)
WEC Energy Group Plan


SERP


Individual Letter Agreement


Robert M. GarvinWEC Energy Group Plan7.67
154,632

SERP7.67
303,683

Individual Letter Agreement7.67
75,596


(1)Years of service are computed as of December 31, 2018, the pension plan measurement date used for financial statement reporting purposes. Mr. Fletcher has been credited with 34.58 years of service, pursuant to the terms of his Individual Letter Agreement ("ILA"). Prior to his retirement in May 2016, Mr. Klappa was credited with 25.67 years of service pursuant to the terms of his ILA. The increase in the aggregate amount of each of Messrs. Klappa’s and Fletcher’s accumulated benefit under all of WEC Energy Group’s retirement plans resulting from the additional years of credited service is $20,981,171 and $4,460,712, respectively.
(2)Upon his retirement in May 2016, Mr. Klappa’s ILA terminated. At that time, the number of years of credited service and the accumulated benefit effectively transferred to the WEC Energy Group Plan and the SERP. Payments related to the ILA were actually paid under the WEC SERP. Mr. Klappa is not accruing additional benefits under these plans in connection with his current service.
(3)Ms. Kelsey is not eligible to receive pension benefits under the WEC Energy Group Plan.
(4)The key assumptions used in calculating the actuarial present values reflected in this column are:
First projected unreduced retirement age based on current service:
For Mr. Klappa, age 65.67 (actual age at retirement).
For Mr. Lauber, age 60.
For Mr. Fletcher, age 65.
For Mr. Garvin, age 54.75.
Discount rate of 4.30%.
Cash balance interest crediting rate of 5.00%.
Form of payment:
Mr. Klappa’s actual form of payment elected at retirement: WEC Energy Group Plan, SERP, and ILA - Single Life annuity.
Mr. Lauber: WEC Energy Group Plan 50% lump sum / 50% life annuity; SERP - Life annuity.
Mr. Fletcher: WEC Energy Group Plan 50% lump sum / 50% life annuity; SERP and ILA - Life annuity.
Mr. Garvin: WEC Energy Group Plan, SERP, and ILA - Lump sum.
Mortality Table, for Messrs. Klappa’s, Fletcher’s, and Lauber’s life annuity – RP2014/Male/White Collar with modified MP2017 projection.
(5)WEC Energy Group’s pension benefit obligations to Messrs. Klappa and Fletcher will be partially offset by pension benefits Messrs. Klappa and Fletcher are entitled to receive from their former employers. The amounts reported for Messrs. Klappa and Fletcher represent only WEC Energy Group’s obligation of the aggregate actuarial present value of each of their accumulated benefit under all of the plans. The total aggregate actuarial present value of each of Messrs. Klappa’s and Fletcher’s accumulated benefit under all of the plans is $31,010,886 and $8,054,982, respectively, $4,532,492 and $2,278,437 of which we estimate the prior employer is obligated to pay. If Messrs. Klappa and Fletcher’s former employer becomes unable to pay its portion of his respective accumulated pension benefit, WEC Energy Group may be obligated to pay the total amount.
(6)Mr. Klappa continued to receive retirement benefits under the SERP; however, payments under the WEC Energy Group Plan were suspended for Mr. Klappa at the time he resumed his role as an executive officer with WEC Energy Group and the Company.


Wisconsin Electric Power Company332019 Annual Meeting Information Statement


RETIREMENT PLANS
WEC Energy Group maintains four different plans providing for retirement payments and benefits for the NEOs: a defined benefit pension plan of the cash balance type (“WEC Energy Group Plan”); a supplemental executive retirement plan (“SERP”); ILAs; and the WEC Energy Group Retirement Savings Plan, which is a 401(k) plan. The compensation currently considered for purposes of the retirement plans (other than the WEC Energy Group Plan and SERP) for Mr. Fletcher is $1,022,337. This amount represents the average compensation (consisting of base salary and annual incentive compensation) for the 36 highest consecutive months. For Messrs. Lauber and Garvin, the compensation considered for purposes of the retirement plans (other than the WEC Energy Group Plan) is $1,334,961 and $1,009,095, respectively. These amounts represent their 2018 base salary, plus their 2017 STPP award paid in 2018. As of December 31, 2018, Messrs. Lauber, Fletcher, and Garvin currently have or are considered to have 28.5, 41.75, and 7.67 credited years of service, respectively, under the various plans described below. Messrs. Lauber and Garvin were not granted additional years of credited service.

See below for a discussion of the contributions made to the WEC Energy Group Retirement Savings Plan on behalf of Mr.
Klappa and Ms. Kelsey, who do not participate in the WEC Energy Group Plan.
 
The WEC Energy Group Plan 
Most regular full-time and part-time employees, including several of the NEOs, participate in the WEC Energy Group Plan. The WEC Energy Group Plan bases a participant’s defined benefit pension on the value of a hypothetical account balance. For individuals participating in the WEC Energy Group Plan as of December 31, 1995, a starting account balance was created equal to the present value of the benefit accrued as of December 31, 1994, under the plan benefit formula prior to the change to a cash balance approach. That formula provided a retirement income based on years of credited service and average compensation (consisting of base salary and annual incentive compensation) for the 36 highest consecutive months, with an adjustment to reflect the Social Security integrated benefit. In addition, individuals participating in the WEC Energy Group Plan as of December 31, 1995, received a special one-time transition credit amount equal to a specified percentage varying with age multiplied by credited service and 1994 base pay.

The present value of the accrued benefit as of December 31, 1994, plus the transition credit, was also credited with interest at a stated rate. For 1996 through 2007, a participant received annual credits to the account equal to 5% of base pay (including WEC Energy Group 401(k) plan pre-tax deferrals and other items), plus an interest credit on all prior accruals equal to 4% plus 75% of the annual time-weighted trust investment return for the year in excess of 4%. From 2008 through 2013, the interest credit percentage was set at either the long-term corporate bond third segment rate, published by the Internal Revenue Service, or 4%, whichever was greater.

Effective January 1, 2014, participants receive an annual credit to the account equal to 6% of base pay (including WEC Energy Group 401(k) plan pre-tax deferrals and other items), plus an interest credit on all prior accruals equal to a 5% fixed rate. For participants in the WEC Energy Group Plan on December 31, 2007 and December 31, 2013, their WEC Energy Group Plan benefit will never be less than the benefit accrued as of December 31, 2007 and December 31, 2013, respectively. The WEC Energy Group Plan benefit will be calculated under all three formulas to provide participants with the greater benefit; however, in calculating a participant’s benefit accrued as of December 31, 2007 and December 31, 2013, interest credits as defined under each of the prior WEC Energy Group Plan formulas will be taken into account but not any additional pay credits.

Participants who were “grandfathered” as of December 31, 1995, as discussed below, will still receive the greater of the grandfathered benefit or the cash balance benefit.

The life annuity payable under the WEC Energy Group Plan is determined by converting the hypothetical account balance credits into annuity form.

Individuals who were participants in the WEC Energy Group Plan on December 31, 1995 were “grandfathered” so that they will not receive any lower retirement benefit than would have been provided under the formula in effect through December 31, 1995, had it continued. This amount continued to increase until December 31, 2010, at which time it was frozen. Upon retirement, participants will receive the greater of this frozen amount or the accumulated cash balance.

For Mr. Lauber, estimated benefits under the grandfathered formula are higher than under the cash balance plan formula. Messrs. Fletcher and Garvin do not participate in the grandfathered formula.

Under the WEC Energy Group Plan, participants receive unreduced pension benefits upon reaching one of the following three thresholds: (1) age 65; (2) age 62 with 30 years of service; or (3) age 60 with 35 years of service.

Pursuant to the Internal Revenue Code, only $275,000 of pension eligible earnings (base pay and annual incentive compensation) may be considered for purposes of the WEC Energy Group Plan.

Wisconsin Electric Power Company342019 Annual Meeting Information Statement


 
Supplemental Executive Retirement Plans and Individual Letter Agreements
Designated officers of WEC Energy Group, including all of the NEOs (other than Ms. Kelsey) participate in the SERP, which is part of the Supplemental Pension Plan (the “SPP”) adopted to comply with Section 409A of the Internal Revenue Code. The SERP provides monthly supplemental pension benefits to participants, which will be paid out of unsecured corporate assets, or the grantor trust described below, in an amount equal to the difference between the actual pension benefit payable under the WEC Energy Group Plan and what such pension benefit would be if calculated without regard to any limitation imposed by the Internal Revenue Code on pension benefits or covered compensation, including amounts deferred to the WEC Energy Group Executive Deferred Compensation Plan. Except for a “change in control” of WEC Energy Group, as defined in the SPP, and pursuant to the terms of the ILAs discussed below, no payments are made until after the participant’s retirement at or after age 60 or death. If a participant in the SERP dies prior to age 60, his or her beneficiary is entitled to receive retirement benefits under the SERP. Although Mr. Klappa remains a participant in the SPP, he no longer accrues any benefits under the plan as a result of his earlier retirement.

WEC Energy Group entered into an individual letter agreement with Mr. Klappa when he first commenced employment in 2003 to provide him with supplemental retirement benefits upon retirement at or after age 60. The supplemental retirement payments are intended to make the total retirement benefits payable to Mr. Klappa comparable to that which would have been received under the WEC Energy Group Plan as in effect on December 31, 1995, had the defined benefit formula then in effect continued until his retirement, calculated without regard to Internal Revenue Code limits, and as if Mr. Klappa had started participation in the WEC Energy Group Plan. Pursuant to the terms of the agreement, which terminated upon Mr. Klappa’s retirement in May 2016, Mr. Klappa’s benefits under the WEC Energy Group Plan and the SERP are being paid under the prior plan benefit formula as in effect on December 1, 1995, and as if Mr. Klappa had started with WEC Energy Group at age 27. As a result, Mr. Klappa had 38.67 years of credited service under the WEC Energy Group Plan and the SERP upon his retirement in May 2016.

WEC Energy Group entered into an agreement with Mr. Fletcher to provide him with supplemental retirement benefits upon his retirement, provided he completed one year of service with the Company. The supplemental retirement payments are intended to make the total retirement benefits payable to Mr. Fletcher comparable to that which would have been received under his prior employer’s defined benefit pension plan, calculated without regard to Internal Revenue Code limits, and as if Mr. Fletcher’s employment continued with the prior employer and the defined benefit formula then in effect under the prior employer’s plan continued to his retirement. The retirement benefits payable as a result of this agreement will be offset by the value of any qualified and non-qualified defined benefit pension plan of the prior employer.

WEC Energy Group entered into an agreement with Mr. Garvin when he was hired in April 2011 that provides for a supplemental pension benefit account, which was credited with $50,000. This account is credited with interest annually at the same rate as the WEC Energy Group Plan. The account balance will vest at the earliest to occur of Mr. Garvin attaining age 60 or completion of 10 years of service.

The purpose of these agreements was to ensure that Messrs. Klappa, Fletcher, and Garvin did not lose pension earnings by joining the executive management team at WEC Energy Group they otherwise would have received from their former employers. Without providing a means to retain these pension benefits, it would have been difficult for WEC Energy Group to attract these officers.

The SPP provides for a mandatory lump sum payment upon a change in control if the executive’s employment is terminated within 18 months after the change in control. The Wisconsin Energy Corporation 2014 Rabbi Trust, a grantor trust, funds certain non-qualified benefits, including the SPP and the ILAs, as well as the Executive Deferred Compensation Plan. See “Potential Payments upon Termination or Change in Control” later in this information statement for additional information.
 
WEC Energy Group Retirement Savings Plan
Effective January 1, 2015, all newly hired management employees, including executive officers, will receive an annual contribution equal to 6% of pension eligible wages into WEC Energy Group’s 401(k) plan rather than participate in the WEC Energy Group Plan. Pension eligible wages consist of annual base salary and STPP payouts. In connection with this plan, the Compensation Committee adopted the WEC Energy Group Non-Qualified Retirement Savings Plan which provides “make-whole” benefits to address Internal Revenue Code limits on the amount of money that can be contributed to a 401(k) plan.

Since Mr. Klappa is considered a new employee, he will no longer accrue additional benefits under the WEC Energy Group Plan; however, Mr. Klappa, along with Ms. Kelsey, are entitled to receive Company contributions to the 401(k) plan and Non-Qualified Retirement Savings Plan.




Wisconsin Electric Power Company352019 Annual Meeting Information Statement


NONQUALIFIED DEFERRED COMPENSATION FOR FISCAL YEAR 2018
The following table reflects activity by the NEOs during 2018 in WEC Energy Group’s Executive Deferred Compensation Plan discussed below.

Name
Executive Contributions
in Last Fiscal Year (1)
Registrant Contributions
in Last Fiscal Year (1)
Aggregate Earnings
In Last Fiscal Year
Aggregate Withdrawals /
Distributions
Aggregate Balance at Last Fiscal Year-End (2)
($)($)($)($)($)
Gale E. Klappa84,404
46,000
353,452
947,996
6,722,197
Scott J. Lauber189,344
42,239
58,628

1,693,064
J. Kevin Fletcher531,410
33,700
125,979

2,803,514
Margaret C. Kelsey36,010
16,914
16,082

222,326
Robert M. Garvin70,596
29,340
45,225

727,014
 
(1)All of the amounts are reported as compensation in the “Summary Compensation Table” of this information statement.
(2)$227,270, $693,245, and $471,604 of the reported amounts were reported as compensation in the Summary Compensation Tables in prior information statements for Messrs. Lauber, Fletcher, and Garvin, respectively. Mr. Klappa reported $6,851,816, in the Summary Compensation Tables in prior information statements. The amount reported in this column for Mr. Klappa is lower than this previously reported amount because Mr. Klappa has been receiving distributions under the WEC Energy Group Executive Deferred Compensation Plan. Ms. Kelsey became a named executive officer in 2018; therefore, no amounts were previously reported in prior information statements for her. The amount for Ms. Kelsey includes a $150,000 contribution from WEC Energy Group in 2017 that vests upon Ms. Kelsey’s third anniversary with WEC Energy Group.

Executive Deferred Compensation Plan
WEC Energy Group maintains two executive deferred compensation plans in which the NEOs participate: the Legacy WEC Energy Group Executive Deferred Compensation Plan (the “Legacy EDCP”), and the WEC Energy Group Executive Deferred Compensation Plan (the “EDCP”) adopted effective January 1, 2005 to comply with Section 409A of the Internal Revenue Code. The Legacy EDCP provides that (1) amounts earned, deferred, vested, credited, and/or accrued as of December 31, 2004 are preserved and frozen so that these amounts are exempt from Section 409A and (2) no new employees may participate in the Legacy EDCP as of January 1, 2005. Since January 1, 2005, all deferrals have been made to the EDCP. The provisions of the EDCP as in effect on December 31, 2017 are described below, as are the payout provisions of the Legacy EDCP.

The EDCP. Under the plan, a participant may defer up to 50% of his or her base salary, annual incentive compensation and vested awards of performance units. Stock option gains and vested restricted stock may not be deferred into the EDCP. Generally, deferral elections are made annually by each participant for the upcoming plan year. WEC Energy Group maintains detailed records tracking each participant’s “account balance.” In addition to deferrals made by the participants, WEC Energy Group may also credit each participant’s account balance by matching a certain portion of each participant’s deferral. Such deferral matching is determined by a formula taking into account the matching rate applicable under WEC Energy Group’s 401(k) plan, the percentage of compensation subject to such matching rate, the participant’s gross compensation eligible for matching, and the amount of eligible compensation actually deferred. Also, in our discretion, WEC Energy Group may credit any other amounts, as appropriate, to each participant’s account.

Participants may elect to participate in WEC Energy Group’s stock measurement fund and/or the Prime Rate Fund. WEC Energy Group tracks each participant’s account balance as though the balance was actually invested in these funds. Fund elections are not actual investments, but are elections chosen only for purposes of calculating market gain or loss on deferred amounts for the duration of the deferral period. Each participant may select the amount of deferred compensation to be allocated among the two measurement funds. Contributions and deductions may be made to each participant’s account based on the performance of the measurement fund(s) elected.

The annual rate of return for the calendar year ended December 31, 2018 for the WEC Energy Group Common Stock Fund and the Prime Rate Fund was 4.3% and 4.88%, respectively.

Each participant’s account balance is debited or credited periodically based on the performance of the measurement fund(s) elected by the participant. Subject to certain restrictions, participants may make changes to their measurement fund elections by notice to the committee administering the plan.


Wisconsin Electric Power Company362019 Annual Meeting Information Statement


At the time of his or her deferral election, each participant may designate a prospective payout election for any or the entire amount deferred, plus any amounts debited or credited to the deferred amount as of the designated payout. Amounts deferred into the EDCP may not be withdrawn at the discretion of the participant and a change to the designated payout delays the initial payment five years beyond the originally designated payout date. In addition, WEC Energy Group may not limit payout amounts in order to deduct such amounts under Section 162(m) of the Internal Revenue Code.

The balance of a participant’s account is payable on his or her retirement in either a lump sum payout or in annual installments, at the election of the participant. Upon the death of a participant after retirement, payouts are made to the deceased participant’s beneficiary in the same manner as though such payout would have been made to the participant had the participant survived. In the event of a participant’s termination of employment prior to retirement, the participant may elect to receive a payout beginning the year after termination in the amount of his or her account balance as of the termination date either in a lump sum or in annual installments over a period of five years. Disability is not itself a payment event until the participant terminates employment with WEC Energy Group or its subsidiaries, including the Company. A participant’s account balance will be paid out in a lump sum if the participant separates from service with WEC Energy Group or its subsidiaries within 18 months after a change in control of WEC Energy Group, as defined in the plan. The deferred amounts will be paid out of the general corporate assets or the assets of the Wisconsin Energy Corporation 2014 Rabbi Trust.

The Legacy EDCP. At the time of his or her deferral election, each participant designated a prospective payout election for any or the entire amount deferred, plus any amounts debited or credited to the deferred amount as of the designated payout. A participant may elect, at any time, to withdraw part (a minimum of $25,000) or all of his or her account balance, subject to a withdrawal penalty of 10%. Payout amounts may be limited to the extent to which they are deductible by WEC Energy Group under Section 162(m) of the Internal Revenue Code.

The balance of a participant’s account is payable on his or her retirement in either a lump sum payout or in annual installments, at the election of the participant. Upon the death of a participant after retirement, payouts are made to the deceased participant’s beneficiary in the same manner as though such payout would have been made to the participant had the participant survived. In the event of a participant’s termination of employment prior to retirement, the participant may elect to receive a payout beginning the year after termination in the amount of his or her account balance as of the termination date either in a lump sum or in annual installments over a period of five years. Any participant who suffers from a continued disability will be entitled to the benefits of plan participation unless and until the committee administering the plan determines that the participant has been terminated for purposes of continued participation in the plan. Upon any such determination, the disabled participant is paid out as though the participant had retired. Except in certain limited circumstances, participants’ account balances will be paid out in a lump sum (1) upon the occurrence of a change in control, as defined in the plan, or (2) upon any downgrade of WEC Energy Group’s senior debt obligations to less than “investment grade.” The deferred amounts will be paid out of the general corporate assets or the assets of the Wisconsin Energy Corporation 2014 Rabbi Trust.

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
The tables below reflect the amount of compensation payable to each of our NEOs in the event of termination of each executive’s employment. These amounts are in addition to each NEO’s aggregate balance in the EDCP at fiscal year-end 2018, as reported in the “Aggregate Balance at Last Fiscal Year-End” column under “Nonqualified Deferred Compensation for Fiscal Year 2018.” The amount of compensation payable to each NEO upon voluntary termination, normal retirement, for-cause termination, involuntary termination (by WEC Energy Group or the Company for any reason other than cause, death or disability or by the executive for “good reason”), termination following a “change in control,” disability, and death are set forth below. The amounts shown assume that such termination was effective as of December 31, 2018 and include amounts earned through that date, and are estimates of the amounts which would be paid out to the NEOs upon termination. The amounts shown under “Normal Retirement” assume the NEOs were retirement eligible with no reduction of retirement benefits. The amounts shown under “Termination Upon a Change in Control” assume the NEOs terminated employment as of December 31, 2018, which was within 18 months of a change in control of WEC Energy Group. The amounts reported in the row titled “Retirement Plans” in each table below are not in addition to the amounts reflected under “Pension Benefits at Fiscal Year-End 2018.” The actual amounts to be paid out can only be determined at the time of an officer’s termination of employment.

Payments Made Upon Voluntary Termination or Termination for Cause, Death or Disability
In the event a NEO voluntarily terminates employment or is terminated for cause, death, or disability, the officer will receive:

accrued but unpaid base salary and, for termination by death or disability, prorated annual incentive compensation;
WEC Energy Group 401(k) plan and EDCP account balances;
the WEC Energy Group Plan cash balance;
in the case of death or disability, full vesting in all outstanding stock options, restricted stock, and performance units (otherwise, the ability to exercise already vested options within three months of termination) as well as vesting in the SERP and ILAs; and

Wisconsin Electric Power Company372019 Annual Meeting Information Statement


if voluntary termination occurs after age 60, such termination is treated as a normal retirement.

NEOs are also entitled to the value of unused vacation days, if any, and for termination by death, benefits payable under the officer life insurance benefit if the NEO participates in such benefit.

Payments Made Upon Normal Retirement
In the event of the retirement of a NEO, the officer will receive:

accrued but unpaid base salary and prorated annual incentive compensation;
full vesting in all outstanding stock options and a prorated amount of performance units;
full vesting in all retirement plans, including the WEC Energy Group Plan, SERP, and ILAs; and
WEC Energy Group 401(k) plan and EDCP account balances.

NEOs are also entitled to the value of unused vacation days, if any.

Payments Made Under Employment Agreements Upon a Change in Control of WEC Energy Group, Involuntary Termination, or Termination for Good Reason
WEC Energy Group entered into a written employment agreement with Mr. Fletcher effective October 31, 2011. The Compensation Committee did not amend or otherwise modify Mr. Fletcher’s employment agreement in any way in connection with his appointment as President and CEO of WEC Energy Group or his appointment as Chairman and CEO of the Company. Pursuant to the terms of this agreement, Mr. Fletcher is entitled to severance benefits if his employment is terminated (1) by WEC Energy Group for any reason other than cause, death, or disability, or (2) by Mr. Fletcher for good reason. Upon termination, Mr. Fletcher’s agreement provides for (1) a lump sum payment equal to 2.99 times his annual base salary for the fiscal year in which termination occurs, and (2) health, life and other welfare benefits (excluding disability benefits) for a period of three years following termination.

Generally, pursuant to Mr. Fletcher's ILA, good reason means:
(1) a material reduction in the executive’s base compensation;
(2) a material change in the geographic location at which the executive must perform services; or
(3) a material breach of the agreement by WEC Energy Group.

The employment agreement Mr. Klappa entered into upon commencement of his employment with WEC Energy Group in 2003 terminated upon his retirement in May 2016.

Pursuant to the terms of the SPP and ILAs, retirement benefits are paid to the NEOs upon termination of employment within 18 months of a change in control. Participants appointed by WEC Energy Group or the Company, including the NEOs, are also eligible to receive a supplemental disability benefit pursuant to the terms of the WEC Energy Group Supplemental Long Term Disability Plan, in an amount equal to the difference between the actual amount of the benefit payable under the long term disability plan applicable to all employees and what such disability benefit would have been if calculated without regard to any limitation imposed by the broad-based plan on annual compensation recognized thereunder.

Payments under the Severance Pay Plan
Messrs. Klappa, Lauber, and Garvin, and Ms. Kelsey, have not entered into any agreement that currently provides for severance benefits upon a change in control or otherwise. These officers are eligible to participate in the Company’s Severance Pay Plan, in which all management employees are eligible to participate. In the event a participant is involuntarily terminated, other than for cause, death, disability, retirement, or resignation, the participant is entitled to receive severance pay in an amount equal to the sum of: (1) 4% of the participant’s annual base salary and target bonus, plus (2) 4% of the participant’s annual base salary and target bonus multiplied by his or her completed years of service with the Company. The maximum amount of severance pay that can be received under the plan is twelve months of a participant’s annual base salary and target bonus.


Wisconsin Electric Power Company382019 Annual Meeting Information Statement


Potential Payments to Named Executive Officers Upon Termination or Change in Control of WEC Energy Group

The following tables show the potential payments upon termination or a change in control of WEC Energy Group.
Executive Benefits and
Payments Upon Separation
 
Voluntary Termination
($)
Normal
Retirement
($)
For Cause
Termination
($)
Involuntary
Termination
($)
Termination
Upon Change
in Control
($)
Disability
($)
Death
($)
Gale E. Klappa
Compensation:       
Cash Severance1,881,000
1,881,000
Additional Pension Credited Service
Additional 401(k) and EDCP Match
Long-Term Incentive Compensation:       
Performance Units
Restricted Stock3,948,374
3,948,374
3,948,374
Options376,290
376,290
376,290
376,290
Benefits & Perquisites:       
Retirement Plans26,478,394
26,478,394
26,478,394
26,478,394
26,478,394
26,478,394
Health and Welfare Benefits9,497
9,497
Excise Tax Gross-Up
Financial Planning
Outplacement
Death Benefit
Total26,478,394
26,854,684
26,478,394
28,368,891
32,693,555
30,803,058
4,324,664
 
Scott J. Lauber
Compensation:       
Cash Severance1,059,920
1,059,920
Additional Pension Credited Service
Additional 401(k) and EDCP Match
Long-Term Incentive Compensation:       
Performance Units620,085
1,308,806
1,308,806
1,308,806
Restricted Stock261,803
261,803
261,803
Options398,831
398,831
398,831
398,831
Benefits & Perquisites:       
Retirement Plans670,873
670,873
670,873
670,873
670,873
670,873
628,135
Health and Welfare Benefits9,497
9,497
Excise Tax Gross-Up
Financial Planning
Outplacement
Death Benefit
Total670,873
1,689,789
670,873
1,740,290
3,709,730
2,640,313
2,597,575
 
J. Kevin Fletcher
Compensation:       
Cash Severance2,093,000
2,093,000
Additional Pension Credited Service
Additional 401(k) and EDCP Match
Long-Term Incentive Compensation:       
Performance Units521,459
1,011,889
1,011,889
1,011,889
Restricted Stock210,550
210,550
210,550
Options503,570
503,570
503,570
503,570
Benefits & Perquisites:       
Retirement Plans5,776,545
5,776,545
5,776,545
5,776,545
5,776,545
5,776,545
3,465,042
Health and Welfare Benefits56,984
56,984
Excise Tax Gross-Up
Financial Planning
Outplacement
Death Benefit2,100,000
Total5,776,545
6,801,574
5,776,545
7,926,529
9,652,538
7,502,554
7,291,051

Wisconsin Electric Power Company392019 Annual Meeting Information Statement


Executive Benefits and
Payments Upon Separation
 
Voluntary Termination
($)
Normal
Retirement
($)
For Cause
Termination
($)
Involuntary
Termination
($)
Termination
Upon Change
in Control
($)
Disability
($)
Death
($)
Margaret C. Kelsey
Compensation:       
Cash Severance70,040
70,040
Additional Pension Credited Service
Additional 401(k) and EDCP Match
Long-Term Incentive Compensation:       
Performance Units175,297
525,822
525,822
525,822
Restricted Stock117,396
117,396
117,396
Options59,643
59,643
59,643
59,643
Benefits & Perquisites:       
Retirement Plans
Health and Welfare Benefits9,497
9,497
Excise Tax Gross-Up
Financial Planning
Outplacement
Death Benefit1,545,000
Total
234,940

79,537
782,398
702,861
2,247,861
 
Robert M. Garvin
Compensation:       
Cash Severance233,092
233,092
Additional Pension Credited Service
Additional 401(k) and EDCP Match
Long-Term Incentive Compensation:       
Performance Units441,463
872,607
872,607
872,607
Restricted Stock193,443
193,443
193,443
Options518,660
518,660
518,660
518,660
Benefits & Perquisites:       
Retirement Plans154,632
533,911
154,632
533,911
533,911
533,911
523,621
Health and Welfare Benefits9,497
9,497
Excise Tax Gross-Up
Financial Planning
Outplacement
Death Benefit1,324,386
Total154,632
1,494,034
154,632
776,500
2,361,210
2,118,621
3,432,717


Wisconsin Electric Power Company402019 Annual Meeting Information Statement


PAY RATIO DISCLOSURE

The primary objective of our executive compensation program is to provide a competitive, performance-based plan that enables WEC Energy Group and the Company to attract and retain key individuals and to reward them for achieving both WEC Energy Group’s and the Company’s short-term and long-term goals without creating an incentive for our NEOs to take excessive risks.

For 2018, the annual total compensation of Mr. Klappa, our principal executive officer serving in that position on December 31, 2018, of $9,862,993, as shown in the Summary Compensation Table above (“CEO Compensation”), was approximately 91 times the annual total compensation of the median employee of $107,894.

We identified the median employee as of October 7, 2017, using total wages and earnings paid during the rolling 12-month period ended October 7, 2017, as reflected in WEC Energy Group's internal payroll records (including, without limitation, base salary, wages plus overtime, and annual cash incentive payments, as applicable), for all individuals, excluding Allen Leverett (then CEO of WEC Energy Group and the Company), who were employed by WEC Energy Group or any of its consolidated subsidiaries on October 7, 2017 (whether employed on a full-time, part-time, seasonal or temporary basis and including union and non-union employees). After identifying the median employee, we calculated annual total compensation for such employee using the same methodology we use for our CEO Compensation, which includes annual salary, bonus, change in pension value and 401(k) matching by WEC Energy Group. As defined under the pay ratio disclosure rules, the median employee remained the same since there has been no change in WEC Energy Group's or the Company's employee population or employee compensation that would significantly affect the pay ratio.

To provide further context to our pay practices, due to the complexity of the work associated with operating public utilities, WEC Energy Group’s workforce tends to be more highly skilled than workforces at companies in other industries. Additionally, its employees often work for WEC Energy Group for long periods of time; average employee tenure is 15 years.

We are providing the pay ratio of Mr. Klappa to a median employee based upon his aggregate WEC Energy Group compensation because we believe doing otherwise would not be representative of the manner in which Mr. Klappa’s compensation is determined. A significant number of employees of a WEC Energy Group owned centralized service company who provide a substantial amount of administrative and support services to the Company would otherwise be excluded from the pay ratio calculation if it were calculated on a basis other than the consolidated WEC Energy Group level. There are also employees of several of WEC Energy Group’s other utility subsidiaries who provide services to the Company and would otherwise be excluded from the calculation.

In addition to WEC Energy Group and the Company, Mr. Klappa was also the Chairman and CEO of several other major subsidiaries of WEC Energy Group during 2018. The Compensation Committee determines Mr. Klappa’s annual compensation based upon his service to WEC Energy Group and its subsidiaries, taken as a whole, as opposed to allocating compensation based upon Mr. Klappa’s service to each individual company.

RISK ANALYSIS OF COMPENSATION POLICIES AND PRACTICES

As part of its process to determine the 2018 compensation of the NEOs, the Compensation Committee analyzed whether the compensation program of WEC Energy Group and its subsidiaries taken as a whole creates risks that are reasonably likely to have a material adverse effect on WEC Energy Group and its subsidiaries, including the Company. The Compensation Committee concluded it does not. This analysis applies generally to the compensation program for WEC Energy Group’s and the Company’s employees since all management employees (both officers and non-officers) above a certain level are provided with substantially the same mix of compensation as the NEOs. The compensation package provided to employees below this level is not applicable to this analysis as such compensation package does not provide sufficient incentive to take risks that could materially affect WEC Energy Group or the Company.

There is no objective way to measure risk resulting from a corporation’s compensation program; therefore, this analysis is subjective in nature. We believe that the only elements of the compensation program that could incentivize risk-taking by the employees of WEC Energy Group or the Company, and therefore have a reasonable likelihood of materially adversely affecting WEC Energy Group or the Company, are the annual cash incentive compensation and the long-term incentive compensation, the payout of which is dependent on the achievement of certain performance levels by WEC Energy Group and its subsidiaries, including the Company. Based upon the value of each of these elements to the overall compensation mix and the relative value each has to the other, we believe the compensation program is appropriately balanced. We believe that the mix of short- and long-term awards minimizes risks that may be taken, as any risks taken for short-term gains could ultimately jeopardize WEC Energy Group’s or the Company’s ability to meet the long-term performance objectives. Given the current balance of compensation elements, we do not believe the compensation program incentivizes unreasonable risk-taking by management.


Wisconsin Electric Power Company412019 Annual Meeting Information Statement


The Compensation Committee’s stock ownership guidelines require officers who participate in the long-term incentive compensation program to hold an amount of WEC Energy Group common stock and other equity-related WEC Energy Group securities that varies depending upon such officers’ level. The guidelines require executive officers to hold common stock and other equity-related securities of WEC Energy Group having a minimum fair market value ranging from 250% to 600% of base salary. The Compensation Committee believes these stock ownership guidelines further discourage unreasonable risk taking by the officers of WEC Energy Group or the Company.

As part of this analysis, we also considered the nature of WEC Energy Group’s business as a public utility holding company and the fact that substantially all of its earnings and other financial results are generated by, or relate to, regulated public utilities, including the Company. The highly regulated nature of WEC Energy Group’s business, including limits on the amount of profit WEC Energy Group’s public utility subsidiaries (and therefore, WEC Energy Group) may earn, significantly reduces any incentive to engage in conduct that would be reasonably likely to have a material adverse effect on WEC Energy Group or the Company.

STOCK OWNERSHIP OF DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS

None of the Company’s directors, nominees, or executive officers own any WE stock but do beneficially own shares of its parent company, WEC Energy Group, Inc.

The following table lists the beneficial ownership of WEC Energy Group common stock of each WE director, nominee, NEO, and of all of the directors and executive officers as a group as of January 31, 2019. In general, “beneficial ownership” includes those shares for which the indicated persons have voting power or investment power and WEC Energy Group stock options that are exercisable currently or within 60 days of January 31, 2019. Included are shares owned by each individual’s spouse, minor children, or any other relative sharing the same residence, as well as shares held in a fiduciary capacity or held in WEC Energy Group’s Stock Plus Investment Plan and WEC Energy Group’s 401(k) plans. The shares beneficially owned by all directors, nominees and executive officers as a group consist of less than 1% of WEC Energy Group’s outstanding common stock.
 
Name
Shares Beneficially Owned (1)
Shares Owned (2) (3) (4)
Option Shares Exercisable Within 60 DaysTotal
J. Kevin Fletcher12,395
 27,105
39,500
 
Robert M. Garvin8,896
 90,055
98,951
 
Margaret C. Kelsey3,926
 
3,926
 
Gale E. Klappa204,870
 849,685
1,054,555
 
Scott J. Lauber19,759
 31,620
51,379
 
Tom Metcalfe9,265
 32,035
41,300
 
All directors and executive
officers as a group (7 persons)
270,999
(5) 
1,037,505
1,308,504
 

(1)Information on beneficially owned shares is based on data furnished by the specified persons and is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended, as required for purposes of this information statement. It is not necessarily to be construed as an admission of beneficial ownership for other purposes.
(2)Certain directors, nominees, NEOs, and other executive officers also hold share units in the WEC Energy Group phantom common stock account under WEC Energy Group’s EDCP as indicated: Mr. Garvin (7,095), Ms. Kelsey (3,083), Mr. Lauber (1,223), Mr. Metcalfe (23,604), and all directors and executive officers as a group (35,833). Share units are intended to reflect the performance of WEC Energy Group common stock and are payable in cash. While these units do not represent a right to acquire WEC Energy Group common stock, have no voting rights, and are not included in the number of shares reflected in the “Shares Owned” column in the table above, the Company listed them in this footnote because they represent an additional economic interest of the directors, nominees, NEOs, and other executive officers that is tied to the performance of WEC Energy Group common stock.
(3)Each individual has sole voting and investment power as to all shares listed for such individual, except that Mr. Klappa has shared voting and/or investment power of 5,000 shares.
(4)The directors, nominees, NEOs, and other executive officers hold shares of restricted stock (included in the table above) over which the holders have sole voting but no investment power: Mr. Fletcher (5,469), Mr. Garvin (2,675), Ms. Kelsey (2,887), Mr. Klappa (18,565), Mr. Lauber (4,864), Mr. Metcalfe (1,906), and all directors and executive officers as a group (37,597).
(5)None of the shares beneficially owned by the directors, nominees, NEOs, or all directors and executive officers as a group are pledged as security.


Wisconsin Electric Power Company422019 Annual Meeting Information Statement


OWNERS OF MORE THAN 5% OF PREFERRED STOCK

The following table shows stockholders who reported beneficial ownership of more than 5% of WE 3.60% Serial Preferred Stock, based on the information they have reported. This information is based upon Schedule 13G filed with the SEC and reflects stock holdings as of December 31, 2018. These holdings have not been otherwise adjusted for stock activity that may have occurred since December 31, 2018, if any.
Name and AddressVoting AuthorityDispositive Authority
Total Shares
Beneficially Owned
Percent of WE 3.60% Serial Preferred Stock
SoleSharedSoleShared
Robert W. Baird & Co. Incorporated
777 East Wisconsin Avenue
Milwaukee, WI 53202
14,006
_

_

14,00614,0065.4%


SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s executive officers, directors, and persons owning more than 10% of a registered class of the Company’s equity securities to file reports of ownership and changes in ownership of equity and derivative securities of WE with the SEC. Specific due dates for those reports have been established by the SEC, and the Company is required to disclose in this information statement any failure to file by those dates during the 2018 fiscal year. To the Company’s knowledge, based on information provided by the reporting persons, all applicable reporting requirements for fiscal year 2018 were complied with in a timely manner.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
The Company provides to and receives from WEC Energy Group and its other subsidiaries, including WEC Business Services LLC (“WBS”), a centralized service company, services, property and other items of value.
 
An affiliated interest agreement (the "AIA"), that became effective January 1, 2017, governs the provision and receipt of services by WEC Energy Group and its subsidiaries, including the Company. This AIA was subsequently modified to incorporate WEC Energy Group's acquisition of Bluewater Natural Gas Holding, LLC in June 2017. Services under the AIA are subject to various pricing methodologies. All services provided by any regulated subsidiary to another regulated subsidiary are priced at cost. All services provided by any regulated subsidiary to any nonregulated subsidiary are priced at the greater of cost or fair market value. All services provided by any nonregulated subsidiary to any regulated subsidiary are priced at the lesser of cost or fair market value. All services provided by any regulated or nonregulated subsidiary to WBS are priced at cost. WBS renders its services at cost.
  
Compensation Committee Interlocks and Insider Participation. None of the persons who served as members of the WEC Energy Group Compensation Committee during 2018 was an officer or employee of WEC Energy Group or the Company during 2018 or at any time in the past nor had reportable transactions with WEC Energy Group or the Company.
 
During 2018, none of our executive officers served as a member of the compensation committee or as a director of another entity, one of whose executive officers served on the Compensation Committee or as a director of WEC Energy Group or the Company.

AVAILABILITY OF FORM 10-K
 
A copy (without exhibits) of Wisconsin Electric Power Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as filed with the SEC, is available without charge to any stockholder of record or beneficial owner of Wisconsin Electric preferred stock by writing to the Corporate Secretary, Margaret C. Kelsey, at the Company’s principal business office, 231 W. Michigan Street, PO Box 2046, Milwaukee, Wisconsin 53201. The Wisconsin Electric consolidated financial statements and certain other information found in the Form 10-K are included in the Wisconsin Electric Power Company 2018 Annual Financial Statements and Review of Operations, attached hereto as Appendix B.

Wisconsin Electric Power Company432019 Annual Meeting Information Statement


APPENDIX A – EARNINGS PER SHARE GAAP RECONCILIATION

Diluted Earnings Per Share 2017 2016 2015 2014
WEC Energy Group GAAP EPS $3.79
 $2.96
 $2.34
 $2.59
Tax benefit related to Tax Cuts and Jobs Act of 2017 (0.65) 
 
 
Acquisition costs 
 0.01
 0.30
 0.06
WEC Energy Group adjusted EPS $3.14
 $2.97
 $2.64
 $2.65

WEC Energy Group provided adjusted earnings per share (non-GAAP earnings) as a complement to, and not as an alternative to, reported earnings per share presented in accordance with GAAP. For 2017, adjusted earnings per share exclude a one-time reduction in income tax expense related to a revaluation of WEC Energy Group's deferred tax assets as a result of the Tax Cuts and Jobs Act of 2017. For 2014 through 2016, adjusted earnings exclude costs related to WEC Energy Group's acquisition of Integrys. Neither of these items is indicative of WEC Energy Group's ongoing operating performance. Therefore, WEC Energy Group believes that the presentation of adjusted earnings per share is relevant and useful to investors to understand WEC Energy Group's operating performance. WEC Energy Group management uses such measures internally to evaluate WEC Energy Group’s performance and manage its operations.
 

Wisconsin Electric Power CompanyA-12019 Annual Meeting Information Statement








APPENDIX B



 WISCONSIN ELECTRIC POWER COMPANY 
   
 2018 ANNUAL REPORT TO STOCKHOLDERS 
   
   
   
   
 2018 ANNUAL FINANCIAL STATEMENTS 
   
 AND 
   
 REVIEW OF OPERATIONS 


Wisconsin Electric Power CompanyB-1
2018 Annual Financial Statements



GLOSSARY OF TERMS AND ABBREVIATIONS


The abbreviations and terms set forth below are used throughout this report and have the meanings assigned to them below:
Subsidiaries and Affiliates  
ATC American Transmission Company LLC
Bluewater Bluewater Natural Gas Holding, LLC
Bostco Bostco LLC
Integrys Integrys Holding, Inc.
UMERC Upper Michigan Energy Resources Corporation
WBS WEC Business Services LLC
WE Wisconsin Electric Power Company
We Power W.E. Power, LLC
WEC Energy Group WEC Energy Group, Inc.
WG Wisconsin Gas LLC
Wispark Wispark LLC
WPS Wisconsin Public Service Corporation
   
Federal and State Regulatory Agencies
EPA United States Environmental Protection Agency
FERC Federal Energy Regulatory Commission
IRS United States Internal Revenue Service
MDEQ Michigan Department of Environmental Quality
MPSC Michigan Public Service Commission
PSCW Public Service Commission of Wisconsin
SEC Securities and Exchange Commission
WDNR Wisconsin Department of Natural Resources
   
Accounting Terms
AFUDC Allowance for Funds Used During Construction
ARO Asset Retirement Obligation
ASC Accounting Standards Codification
ASU Accounting Standards Update
CWIP Construction Work in Progress
FASB Financial Accounting Standards Board
GAAP Generally Accepted Accounting Principles
OPEB Other Postretirement Employee Benefits
   
Environmental Terms
ACE Affordable Clean Energy
Act 141 2005 Wisconsin Act 141
CAA Clean Air Act
CO2
 Carbon Dioxide
CPP Clean Power Plan
GHG Greenhouse Gas
NAAQS National Ambient Air Quality Standards
NOx Nitrogen Oxide
SO2
 Sulfur Dioxide
   
Measurements  
Dth Dekatherm
MW Megawatt
MWh Megawatt-hour
   

Wisconsin Electric Power CompanyB-2
2018 Annual Financial Statements



Other Terms and Abbreviations
AIA Affiliated Interest Agreement
ARR Auction Revenue Right
Compensation Committee Compensation Committee of the Board of Directors of WEC Energy Group, Inc.
D.C. Circuit Court of Appeals United States Court of Appeals for the District of Columbia Circuit
ERGS Elm Road Generating Station
ER 1 Elm Road Generating Station Unit 1
ER 2 Elm Road Generating Station Unit 2
Exchange Act Securities Exchange Act of 1934, as amended
FTR Financial Transmission Right
GCRM Gas Cost Recovery Mechanism
LMP Locational Marginal Price
MCPP Milwaukee County Power Plant
MISO Midcontinent Independent System Operator, Inc.
MISO Energy Markets MISO Energy and Operating Reserves Market
NYMEX New York Mercantile Exchange
OCPP Oak Creek Power Plant
OC 5 Oak Creek Power Plant Unit 5
OC 6 Oak Creek Power Plant Unit 6
OC 7 Oak Creek Power Plant Unit 7
OC 8 Oak Creek Power Plant Unit 8
Omnibus Stock Incentive Plan WEC Energy Group 1993 Omnibus Stock Incentive Plan, Amended and Restated Effective as of January 1, 2016
PIPP Presque Isle Power Plant
Point Beach Point Beach Nuclear Power Plant
PWGS Port Washington Generating Station
PWGS 1 Port Washington Generating Station Unit 1
PWGS 2 Port Washington Generating Station Unit 2
ROE Return on Equity
RTO Regional Transmission Organization
SSR System Support Resource
Supreme Court United States Supreme Court
Tax Legislation Tax Cuts and Jobs Act of 2017
Tilden Tilden Mining Company
VAPP Valley Power Plant


Wisconsin Electric Power CompanyB-3
2018 Annual Financial Statements



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION


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

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

Forward-looking statements are subject to a number of risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in the statements. These risks and uncertainties include those described below:

Factors affecting utility operations such as catastrophic weather-related damage, environmental incidents, unplanned facility outages and repairs and maintenance, and electric transmission or natural gas pipeline system constraints;
Factors affecting the demand for electricity and natural gas, including political developments, unusual weather, changes in economic conditions, customer growth and declines, commodity prices, energy conservation efforts, and continued adoption of distributed generation by customers;
The timing, resolution, and impact of rate cases and negotiations, including recovery of deferred and current costs and the ability to earn a reasonable return on investment, and other regulatory decisions impacting our regulated operations;
The ability to obtain and retain customers, including wholesale customers, due to increased competition in our electric and natural gas markets from retail choice and alternative electric suppliers, and continued industry consolidation;
The timely completion of capital projects within budgets, as well as the recovery of the related costs through rates;
The impact of federal, state, and local legislative and/or regulatory changes, including changes in rate-setting policies or procedures, deregulation and restructuring of the electric and/or natural gas utility industries, transmission or distribution system operation, the approval process for new construction, reliability standards, pipeline integrity and safety standards, allocation of energy assistance, energy efficiency mandates, and tax laws that affect our ability to use production tax credits and investment tax credits;
The remaining uncertainty surrounding the Tax Legislation enacted in December 2017, including implementing regulations and IRS interpretations, the amount to be returned to our ratepayers, and its impact, if any, on our credit ratings;
Federal and state legislative and regulatory changes relating to the environment, including climate change and other environmental regulations impacting generation facilities and renewable energy standards, the enforcement of these laws and regulations, changes in the interpretation of regulations or permit conditions by regulatory agencies, and the recovery of associated remediation and compliance costs;
Factors affecting the implementation of WEC Energy Group's generation reshaping plan, including related regulatory decisions, the cost of materials, supplies, and labor, and the feasibility of competing projects;
Increased pressure on us by investors and other stakeholder groups to take more aggressive action to reduce future GHG emissions in order to limit future global temperature increases;
The risks associated with changing commodity prices, particularly natural gas and electricity, and the availability of sources of fossil fuel, natural gas, purchased power, materials needed to operate environmental controls at our electric generating facilities, or water supply due to high demand, shortages, transportation problems, nonperformance by electric energy or natural gas suppliers under existing power purchase or natural gas supply contracts, or other developments;
Changes in credit ratings, interest rates, and our ability to access the capital markets, caused by volatility in the global credit markets, our capitalization structure, and market perceptions of the utility industry or us;
Costs and effects of litigation, administrative proceedings, investigations, settlements, claims, and inquiries;
The risk of financial loss, including increases in bad debt expense, associated with the inability of our customers, counterparties, and affiliates to meet their obligations;
Changes in the creditworthiness of the counterparties with whom we have contractual arrangements, including participants in the energy trading markets and fuel suppliers and transporters;

Wisconsin Electric Power CompanyB-4
2018 Annual Financial Statements



The direct or indirect effect on our business resulting from terrorist attacks and cyber security intrusions, as well as the threat of such incidents, including the failure to maintain the security of personally identifiable information, the associated costs to protect our utility assets, technology systems, and personal information, and the costs to notify affected persons to mitigate their information security concerns and to comply with state notification laws;
The investment performance of our employee benefit plan assets, as well as unanticipated changes in related actuarial assumptions, which could impact future funding requirements;
Factors affecting the employee workforce, including loss of key personnel, internal restructuring, work stoppages, and collective bargaining agreements and negotiations with union employees;
Advances in technology, and related legislation or regulation supporting the use of that technology, that result in competitive disadvantages and create the potential for impairment of existing assets;
Potential business strategies to acquire and dispose of assets or businesses, which cannot be assured to be completed timely or within budgets;
The timing and outcome of any audits, disputes, and other proceedings related to taxes;
The ability to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act, while both integrating and continuing to consolidate WEC Energy Group's enterprise systems with those of its other utilities;
The effect of accounting pronouncements issued periodically by standard-setting bodies; and
Other considerations disclosed elsewhere herein and in other reports we file with the SEC or in other publicly disseminated written documents.

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


Wisconsin Electric Power CompanyB-5
2018 Annual Financial Statements



BUSINESS OF THE COMPANY


In this report, when we refer to "us," "we," "our," or "ours," we are referring to Wisconsin Electric Power Company. References to "Notes" are to the Notes to the Consolidated Financial Statements included in this report.

We are a subsidiary of WEC Energy Group and were incorporated in the state of Wisconsin in 1896. We maintain our principal executive offices in Milwaukee, Wisconsin and serve customers in Wisconsin and served customers in the Upper Peninsula of Michigan through December 31, 2016. Effective January 1, 2017, we transferred our electric customers (other than Tilden, an iron ore mine customer) and distribution assets located in the Upper Peninsula of Michigan to UMERC, a stand-alone utility owned by WEC Energy Group. UMERC became operational effective January 1, 2017. We will continue to provide service to Tilden, located in the Upper Peninsula of Michigan, pursuant to a contract between Tilden and us until UMERC’s new generation units begin commercial operation, which is expected to occur during the second quarter of 2019. See Note 3, Related Parties, and Note 21, Regulatory Environment, for more information.

At December 31, 2018, we conducted our operations in the two reportable segments discussed below.


UTILITY SEGMENT
We are the largest electric utility in the state of Wisconsin. We generate and distribute electric energy to approximately 1,134,800 customers located in southeastern Wisconsin (including the metropolitan Milwaukee area), east central Wisconsin, and northern Wisconsin. We also continue, on an interim basis, to serve the iron ore mine in the Upper Peninsula of Michigan.

We are authorized to provide retail natural gas distribution service in designated territories in the state of Wisconsin, as established by indeterminate permits and boundary agreements with other utilities. We also transport customer-owned natural gas. We serve approximately 490,100 customers in three distinct service areas in Wisconsin, including areas west and south of the City of Milwaukee, the Appleton area, and areas within Iron and Vilas Counties.

We have a steam utility that generates, distributes, and sells steam supplied by VAPP to customers in metropolitan Milwaukee, Wisconsin. Steam is used by approximately 400 customers for processing, space heating, domestic hot water, and humidification. Annual sales of steam fluctuate from year to year based on system growth and variations in weather conditions. In April 2016, we sold our MCPP steam generation and distribution assets, located in Wauwatosa, Wisconsin. MCPP primarily provided steam to the Milwaukee Regional Medical Center hospitals and other campus buildings. See Note 2, Dispositions, for more information.


OTHER SEGMENT
Our other segment included Bostco, our non-utility subsidiary that was originally formed to develop and invest in real estate. In March 2017, we sold substantially all of the remaining assets of Bostco, and, in October 2018, Bostco was dissolved. See Note 2, Dispositions, for more information.

Prior to January 1, 2017, our other segment also included our approximate 23% ownership interest in ATC, a for-profit, transmission-only company regulated by the FERC and certain state regulatory commissions. Effective January 1, 2017, we transferred our investment in ATC to another subsidiary of WEC Energy Group. See Note 16, Investment in American Transmission Company, for more information.

For additional financial information about our business segments, see Results of Operations in Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 17, Segment Information.


Wisconsin Electric Power CompanyB-6
2018 Annual Financial Statements



MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


CORPORATE DEVELOPMENTS

INTRODUCTION
We are a wholly owned subsidiary of WEC Energy Group, and derive revenues primarily from the distribution and sale of electricity and natural gas to retail customers in Wisconsin. We have combined common functions with WG and operate under the trade name of "We Energies." We conduct our business primarily through our utility reportable segment. See Note 17, Segment Information, for more information on our reportable business segments.

Effective January 1, 2017, our customers (other than Tilden) and electric distribution assets located in the Upper Peninsula of Michigan were transferred to UMERC, a new stand-alone utility owned by WEC Energy Group. See Note 3, Related Parties, and Note 21, Regulatory Environment, for more information.

Effective January 1, 2017, we transferred our investment in ATC to another subsidiary of WEC Energy Group. See Note 16, Investment in American Transmission Company, for more information. In March 2017, we sold the remaining real estate holdings of Bostco, and, in October 2018, Bostco was dissolved. See Note 2, Dispositions, for more information.


CORPORATE STRATEGY
Our goal is to continue to build and sustain long-term value for customers and shareholders by focusing on the fundamentals of our business: reliability; operating efficiency; financial discipline; customer care; and safety.

Reshaping Our Generation Fleet
WEC Energy Group has developed and is executing a plan to reshape its generation portfolio. This plan will balance reliability and customer cost with environmental stewardship. Taken as a whole, this plan should reduce costs to customers, preserve fuel diversity, and lower carbon emissions. Generation reshaping includes retiring older fossil fuel generation units, building state-of-the-art natural gas generation, and investing in cost-effective zero-carbon generation with a goal of reducing CO2 emissions by approximately 40% below 2005 levels by 2030. In addition, WEC Energy Group set a new long-term goal of reducing CO2 emissions by approximately 80% below 2005 levels by 2050. WEC Energy Group expects to retire a total of approximately 1,800 MW of coal-fired generation by 2020 across its electric utilities, and add additional natural gas-fired generating units and renewable generation, including utility-scale solar projects. As part of this effort, we retired our 1,190 MW Pleasant Prairie power plant in April 2018. The physical dismantlement of the Pleasant Prairie power plant will not occur immediately. It may take several years to finalize long-term plans for the site. See Note 6, Property, Plant, and Equipment, for information related to the Pleasant Prairie power plant retirement and the planned retirement of the 350 MW Presque Isle power plant as part of WEC Energy Group's plan.

In December 2018, we received approval from the PSCW for two renewable energy pilot programs. The Solar Now pilot is expected to add 35 MW of solar to our portfolio, allowing commercial and industrial customers to site solar arrays on their property. The second program, the Dedicated Renewable Energy Resource pilot, would allow large commercial and industrial customers to access renewable resources that we would operate, adding up to 150 MW of renewables to our portfolio, and allowing these larger customers to meet their sustainability and renewable energy goals. As the cost of renewable energy generation installations continues to decline, these pilots have become cost effective opportunities for us and our customers to participate in renewable energy.

Reliability
We have made significant reliability-related investments in recent years, and plan to continue strengthening and modernizing our generation fleet and distribution networks to further improve reliability. Our investments, coupled with our commitment to operating efficiency and customer care, resulted in We Energies being recognized by PA Consulting Group, an independent consulting firm, as the most reliable utility in the Midwest for the eighth year in a row.


Wisconsin Electric Power CompanyB-7
2018 Annual Financial Statements



Operating Efficiency
We continually look for ways to optimize the operating efficiency of our company. For example, we are making progress on our Advanced Metering Infrastructure program, replacing aging meter-reading equipment on both our network and customer property. An integrated system of smart meters, communication networks, and data management programs enables two-way communication between us and our customers. This program reduces the manual effort for disconnects and reconnects and enhances outage management capabilities.

WEC Energy Group continues to focus on integrating and improving business processes and consolidating its IT infrastructure across all of its companies. We expect these efforts to continue to drive operational efficiency and to put us in position to effectively support plans for future growth.

Financial Discipline
A strong adherence to financial discipline is essential to earning our authorized ROE and maintaining a strong balance sheet, stable cash flows, and quality credit ratings.

We follow an asset management strategy that focuses on investing in and acquiring assets consistent with our strategic plans, as well as disposing of assets, including property, plants, and equipment, that are no longer performing as intended, or have an unacceptable risk profile. See Note 3, Related Parties, for information on WEC Energy Group's acquisition of Bluewater. See Note 2, Dispositions, for information on the sale of the MCPP steam generation and distribution assets and Bostco's remaining real estate holdings.

Exceptional Customer Care
Our approach is driven by an intense focus on delivering exceptional customer care every day. We strive to provide the best value for our customers by embracing constructive change, demonstrating personal responsibility for results, leveraging our capabilities and expertise, and using creative solutions to meet or exceed our customers’ expectations.

One example of how we obtain feedback from our customers is through our "We Care" calls, where our employees contact customers after a completed service call. Customer satisfaction is a priority, and making "We Care" calls is one of the main methods we use to gauge our performance to improve customer satisfaction.

Safety
We have a long-standing commitment to both workplace and public safety, and under our "Target Zero" mission, we have an ultimate goal of zero incidents, accidents, and injuries. We also set goals around injury-prevention activities that raise awareness and facilitate conversations about employee safety. Our corporate safety program provides a forum for addressing employee concerns, training employees and contractors on current safety standards, and recognizing those who demonstrate a safety focus.



Wisconsin Electric Power CompanyB-8
2018 Annual Financial Statements



RESULTS OF OPERATIONS

CONSOLIDATED EARNINGS
The following table compares our consolidated results:
  Year Ended December 31
(in millions) 2018 2017 2016
Operating revenues $3,625.0
 $3,711.7
 $3,792.8
Cost of sales 1,262.1
 1,286.4
 1,292.1
Other operation and maintenance 1,502.4
 1,352.0
 1,425.5
Depreciation and amortization 348.1
 331.6
 325.4
Property and revenue taxes 109.9
 109.6
 115.6
Operating income 402.5
 632.1
 634.2
Equity in earnings of transmission affiliate 
 
 55.5
Other income, net 20.2
 13.2
 4.4
Interest expense 120.1
 117.3
 117.6
Income before income taxes 302.6
 528.0
 576.5
Income tax (benefit) expense (56.9) 191.2
 211.0
Preferred stock dividend requirements 1.2
 1.2
 1.2
Net income attributed to common shareholder $358.3
 $335.6
 $364.3

The table below shows the year-over-year income statement impacts associated with the flow through of tax repairs beginning January 1, 2018 and the Tax Legislation signed into law in December 2017. As shown in the table below, the changes related to these items had no impact on net income attributed to common shareholder. See Note 12, Income Taxes, and Note 21, Regulatory Environment, for more information.
(in millions) 
2018 Compared with 2017
B (W)
 Change Related to Flow Through of Tax Repairs Change Related to Tax Legislation Remaining Change
B (W)
Operating revenues $(86.7) $(88.1) $(25.6) $27.0
Cost of sales 24.3
 
 
 24.3
Other operation and maintenance (150.4) (77.8) (67.7) (4.9)
Depreciation and amortization (16.5) 
 
 (16.5)
Property and revenue taxes (0.3) 
 
 (0.3)
Operating income (229.6) (165.9) (93.3) 29.6
Other income, net 7.0
 
 
 7.0
Interest expense (2.8) 
 
 (2.8)
Income before income taxes (225.4) (165.9) (93.3) 33.8
Income tax (benefit) expense 248.1
 165.9
 93.3
 (11.1)
Preferred stock dividend requirements 
 
 
 
Net income attributed to common shareholder $22.7
 $
 $
 $22.7

See below for additional information on the year-over year changes in our consolidated earnings.

Non-GAAP Financial Measures
The discussion below addresses the operating income contribution of our utility segment and includes financial information prepared in accordance with GAAP, as well as electric margins and natural gas margins, which are not measures of financial performance under GAAP. Electric margin (electric revenues less fuel and purchased power costs) and natural gas margin (natural gas revenues less cost of natural gas sold) are non-GAAP financial measures because they exclude other operation and maintenance expense, depreciation and amortization, and property and revenue taxes.

We believe that electric and natural gas margins provide a useful basis for evaluating utility operations since the majority of prudently incurred fuel and purchased power costs, as well as prudently incurred natural gas costs, are passed through to customers in current rates. As a result, management uses electric and natural gas margins internally when assessing the operating performance of our utility segment as these measures exclude the majority of revenue fluctuations caused by changes in these expenses. Similarly, the presentation of electric and natural gas margins herein is intended to provide supplemental information for investors regarding our operating performance.


Wisconsin Electric Power CompanyB-9
2018 Annual Financial Statements



Our electric margins and natural gas margins may not be comparable to similar measures presented by other companies.  Furthermore, these measures are not intended to replace operating income as determined in accordance with GAAP as an indicator of our utility segment operating performance. Our utility segment operating income for the years ended December 31, 2018, 2017, and 2016 was $402.5 million, $632.1 million, and $634.2 million, respectively. The operating income discussion below includes a table that provides the calculation of electric margins and natural gas margins, along with a reconciliation to utility segment operating income.


UTILITY SEGMENT CONTRIBUTION TO OPERATING INCOME
Effective January 1, 2017, we transferred our electric customers (other than Tilden) located in the Upper Peninsula of Michigan to UMERC. See Note 3, Related Parties, for more information.
  Year Ended December 31
(in millions) 2018 2017 2016
Electric revenues $3,218.8
 $3,336.2
 $3,440.6
Fuel and purchased power 1,010.1
 1,064.3
 1,091.8
Total electric margins 2,208.7
 2,271.9
 2,348.8
       
Natural gas revenues 406.2
 375.5
 352.2
Cost of natural gas sold 252.0
 222.1
 200.3
Total natural gas margins 154.2
 153.4
 151.9
       
Total electric and natural gas margins 2,362.9
 2,425.3
 2,500.7
       
Other operation and maintenance 1,502.4
 1,352.0
 1,425.5
Depreciation and amortization 348.1
 331.6
 325.4
Property and revenue taxes 109.9
 109.6
 115.6
Operating income $402.5
 $632.1
 $634.2

The following table shows a breakdown of other operation and maintenance:
  Year Ended December 31
(in millions) 2018 2017 2016
Operation and maintenance not included in line items below $442.7
 $481.8
 $495.5
We Power (1)
 506.9
 513.0
 513.2
Transmission (2)
 265.1
 251.9
 273.8
Transmission expense related to the flow through of tax repairs (3)
 77.8
 
 
Transmission expense related to Tax Legislation (4)
 67.7
 
 
Regulatory amortizations and other pass through expenses (5)
 98.1
 96.7
 96.6
Earnings sharing mechanism (6)
 37.2
 0.1
 21.1
Other 6.9
 8.5
 25.3
Total other operation and maintenance $1,502.4
 $1,352.0
 $1,425.5
(1) 
Represents costs associated with the We Power generation units, including operating and maintenance costs, as well as the lease payments that are billed from We Power to us and then recovered in our rates. During 2018, 2017, and 2016, $485.3 million, $535.1 million, and $528.4 million, respectively, of both lease and operating and maintenance costs were billed to us, with the difference in costs billed or incurred and expenses recognized, either deferred or deducted from the regulatory asset.
(2) 
The PSCW has approved escrow accounting for our ATC and MISO network transmission expenses. As a result, we defer as a regulatory asset or liability the differences between actual transmission costs and those included in rates until recovery or refund is authorized in a future rate proceeding. During 2018, 2017, and 2016, $286.3 million, $303.8 million, and $335.3 million, respectively, of costs were billed to us by transmission providers.
(3) 
Represents additional transmission expense associated with the flow through of tax benefits of our repair-related deferred tax liabilities starting in 2018, in accordance with a settlement agreement with the PSCW, to maintain certain regulatory asset balances at their December 31, 2017 levels. See Note 21, Regulatory Environment, for more information.
(4) 
Represents additional transmission expense associated with the May 2018 PSCW order requiring us to use 80% of our current 2018 tax benefit, including the amortization associated with the revaluation of deferred taxes, to reduce our transmission regulatory asset balance. See Note 21, Regulatory Environment, for more information.
(5) 
Regulatory amortizations and other pass through expenses are substantially offset in margins and therefore do not have a significant impact on operating income.
(6) 
See Note 21, Regulatory Environment, for more information about our earnings sharing mechanism.


Wisconsin Electric Power CompanyB-10
2018 Annual Financial Statements



The following tables provide information on delivered volumes by customer class and weather statistics:
  Year Ended December 31
  
MWh (in thousands)
Electric Sales Volumes 2018 2017 2016
Customer class      
Residential 8,025.1
 7,648.5
 8,136.6
Small commercial and industrial 8,920.6
 8,768.4
 9,061.1
Large commercial and industrial 8,457.9
 8,340.3
 9,217.6
Other 138.7
 144.9
 143.4
Total retail 25,542.3
 24,902.1
 26,558.7
Wholesale 1,688.5
 1,600.2
 1,134.2
Resale 4,931.9
 8,144.5
 8,282.1
Total sales in MWh 32,162.7
 34,646.8
 35,975.0

  Year Ended December 31
  
Therms (in millions)
Natural Gas Sales Volumes 2018 2017 2016
Customer class      
Residential 383.2
 344.3
 341.7
Commercial and industrial 217.9
 193.4
 186.3
Total retail 601.1
 537.7
 528.0
Transport 339.2
 314.2
 323.8
Total sales in therms 940.3
 851.9
 851.8

  Year Ended December 31
  Degree Days
Weather * 2018 2017 2016
Heating (6,515 normal) 6,685
 5,908
 6,068
Cooling (731 normal) 929
 772
 991
*Normal degree days are based on a 20-year moving average of monthly temperatures from Mitchell International Airport in Milwaukee, Wisconsin.

2018 Compared with 2017
Electric Utility Margins
Electric utility margins decreased $63.2 million during 2018, compared with 2017. The significant factors impacting the lower electric utility margins were:

An $88.1 million decrease in margins associated with the flow through of tax benefits of our repair-related deferred tax liabilities starting in 2018, in accordance with a settlement agreement with the PSCW to maintain certain regulatory assets at their December 31, 2017 levels. See Note 21, Regulatory Environment, for more information.
A $15.9 million decrease in wholesale margins driven by reduced capacity rates due in part to the Tax Legislation.
A $13.4 million year-over-year negative impact from collections of fuel and purchased power costs compared with costs approved in rates. Under the Wisconsin fuel rules, our electric utility margins are impacted by under- or over-collections of certain fuel and purchased power costs that are less than a 2% price variance from the costs included in rates, and the remaining variance that exceeds the 2% variance is deferred.
A $10.2 million decrease in margins related to savings from the Tax Legislation that we are required to return to customers through bill credits or reductions in other regulatory assets. See Note 12, Income Taxes, and Note 21, Regulatory Environment, for more information.

These decreases in electric utility margins were partially offset by:

A $44.6 million increase related to higher retail sales volumes during 2018, primarily driven by favorable weather and higher overall use per retail customer due in part to a stronger economy. Colder winter weather and a warmer summer in 2018 contributed to the increase. As measured by heating degree days, 2018 was 13.2% colder than 2017. As measured by cooling degree days, 2018 was 20.3% warmer than 2017.

Wisconsin Electric Power CompanyB-11
2018 Annual Financial Statements



A $25.9 million increase related to SSR payments we refunded to MISO in 2017 as directed by a FERC order received in October 2017. The FERC order reduced the costs eligible for reimbursement to us for the operation and maintenance of our PIPP units under an SSR agreement we have with MISO. A portion of these payments was returned to us through the MISO allocation process and reduced transmission expense in 2017 as discussed below.

Natural Gas Utility Margins
Natural gas utility margins increased $0.8 million during 2018, compared with 2017. The most significant factor impacting the higher natural gas utility margins was a $10.6 million increase related to higher sales volumes, primarily driven by colder winter weather, customer growth, and higher use per retail customer due in part to a stronger economy. This increase in natural gas utility margins was partially offset by $9.9 million of savings from the Tax Legislation that we are required to return to customers through bill credits. See Note 12, Income Taxes, and Note 21, Regulatory Environment, for more information.

Operating Income
Operating income at the utility segment decreased $229.6 million during 2018, compared with 2017. This decrease was driven by $167.2 million of higher operating expenses (which include other operation and maintenance, depreciation and amortization, and property and revenues taxes) and the $62.4 million net decrease in margins discussed above.

The significant factors impacting the increase in operating expenses during 2018, compared with 2017, were:

A $77.8 million increase in transmission expense related to the flow through of tax repairs, as discussed in the other operation and maintenance table above.
A $67.7 million increase in transmission expense associated with the May 2018 order from the PSCW related to our required treatment of the benefits associated with the Tax Legislation, as discussed in the other operation and maintenance table above.
A $37.1 million increase in expense related to our earnings sharing mechanism. See Note 21, Regulatory Environment, for more information.
A $16.5 million increase in depreciation and amortization, driven by an increase in capital expenditures as we continue to execute on our capital plan.
A $13.2 million increase in transmission expense in 2018, driven by lower expense in 2017 related to a FERC order received in October 2017 to reduce SSR costs related to PIPP. A portion of the payments we initially refunded to MISO were returned to us, as discussed under electric utility margins.

These increases in operating expenses were partially offset by a $56.4 million decrease in expenses across all of our plants, in part due to the retirement of the Pleasant Prairie power plant in April 2018 and the winding down of operations in anticipation of the retirement of the PIPP on or before May 31, 2019. This resulted in lower maintenance and labor costs during 2018. See Note 6, Property, Plant, and Equipment, for more information on the plant retirements.

2017 Compared with 2016
Electric Utility Margins
Electric utility margins decreased $76.9 million during 2017, compared with 2016. The significant factors impacting the lower electric utility margins were:

A $74.1 million decrease related to lower sales volumes during 2017, primarily driven by unfavorable weather, lower overall retail use per customer, and the transfer of customers and their related sales to UMERC. Cooler summer and warmer winter weather in 2017, and an additional day of sales during 2016 due to leap year, contributed to the decrease. As measured by cooling degree days, 2017 was 22.1% cooler than 2016. As measured by heating degree days, 2017 was 2.6% warmer than 2016.
A $25.9 million decrease related to SSR payments we refunded to MISO as directed by a FERC order received in October 2017. The FERC order reduced the costs eligible for reimbursement to us for the operation and maintenance of our PIPP units under an SSR agreement we have with MISO. A portion of these payments was returned to us through the MISO allocation process and reduced transmission expense as discussed below. See Note 21, Regulatory Environment, for more information.
A $3.5 million decrease in steam margins driven by the sale of the MCPP in April 2016. See Note 2, Dispositions, for more information.
 
These decreases in electric utility margins were partially offset by $36.5 million of lower capacity payments to a counterparty during 2017, related to improved contract terms.

Wisconsin Electric Power CompanyB-12
2018 Annual Financial Statements




Natural Gas Utility Margins
Natural gas utility margins increased $1.5 million during 2017, compared with 2016. The most significant factor impacting the higher natural gas utility margins was higher retail sales volumes, primarily driven by higher overall retail use per customer and customer growth. The higher retail sales volumes in 2017 were partially offset by an additional day of sales during 2016 due to leap year.

Operating Income
Operating income at the utility segment decreased $2.1 million during 2017, compared with 2016. This decrease was driven by the $75.4 million net decrease in margins discussed above, partially offset by $73.3 million of lower operating expenses (which include other operation and maintenance, depreciation and amortization, and property and revenues taxes).

We experienced lower overall operating expenses related to synergy savings resulting from WEC Energy Group's acquisition of Integrys. The significant factors impacting the decrease in operating expenses during 2017, compared with 2016, which were due in part to synergy savings, were:

A $21.9 million decrease in transmission expenses, driven by a FERC order received in October 2017 to reduce SSR costs related to PIPP. A portion of the payments we initially refunded to MISO were returned to us, as discussed under electric utility margins.
A $21.0 million decrease in expenses related to our earnings sharing mechanism. See Note 21, Regulatory Environment, for more information.
A $19.1 million decrease in electric and natural gas distribution expenses, primarily related to the transfer of electric customers and their related sales to UMERC, lower metering costs, and other cost savings.
A $16.8 million decrease in expenses related to charitable projects supporting our customers and the communities within our service territories.

These decreases in operating expenses were partially offset by a $10.9 million gain recorded in April 2016 related to the sale of the MCPP. See Note 2, Dispositions, for more information.


EQUITY IN EARNINGS OF TRANSMISSION AFFILIATE
  Year Ended December 31
(in millions) 2018 2017 2016
Equity in earnings of transmission affiliate $
 $
 $55.5

2017 Compared with 2016
At December 31, 2016, we owned approximately 23% of ATC. Effective January 1, 2017, we transferred our investment in ATC to another subsidiary of WEC Energy Group. See Note 16, Investment in American Transmission Company, for more information.


CONSOLIDATED OTHER INCOME, NET
  Year Ended December 31
(in millions) 2018 2017 2016
AFUDC – Equity $3.9
 $3.1
 $4.2
Non-service credit (cost) components of net periodic benefit costs 5.7
 (6.5) (4.7)
Interest income 2.2
 2.3
 2.2
Other, net 8.4
 14.3
 2.7
Other income, net $20.2
 $13.2
 $4.4

2018 Compared with 2017
Other income, net increased $7.0 million during 2018, compared with 2017, driven by the year-over-year increase in income from the non-service components of our net periodic pension and OPEB costs. See Note 15, Employee Benefits, for more information on our benefit costs.

Wisconsin Electric Power CompanyB-13
2018 Annual Financial Statements




2017 Compared with 2016
Other income, net increased $8.8 million during 2017, compared with 2016. The increase was driven by higher gains on property sales during 2017, compared to 2016, and the expenses we incurred in 2016 related to the disposition of certain non-utility real estate assets. These increases were partially offset by lower AFUDC during 2017 and higher costs from the non-service components of our net periodic pension and OPEB costs.


CONSOLIDATED INTEREST EXPENSE
  Year Ended December 31
(in millions) 2018
2017
2016
Interest expense $120.1
 $117.3
 $117.6


CONSOLIDATED INCOME TAX EXPENSE
  Year Ended December 31
  2018
2017
2016
Effective tax rate (18.8)% 36.2% 36.6%

2018 Compared with 2017
Our effective tax rate was (18.8)% in 2018 compared to 36.2% in 2017. This decrease was primarily due to a 39.9% effective tax rate benefit from the flow through of tax repairs in connection with the Wisconsin rate settlement. Also contributing to the decrease in the effective tax rate was the impact of the Tax Legislation. See Note 12, Income Taxes, and Note 21, Regulatory Environment for more information.

We expect our 2019 annual effective tax rate to be between (17)% and (16)%, which includes an estimated 38.5% effective tax rate benefit due to the flow through of tax repairs in connection with the Wisconsin rate settlement. Excluding the impact of the tax repairs, the expected 2019 range would be between 21.5% and 22.5%.

2017 Compared with 2016
Our effective tax rate was 36.2% in 2017 compared to 36.6% in 2016. This decrease in our effective tax rate was primarily due to increased renewable energy credits related to wind projects and favorable compensation expense.


LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS
The following table summarizes our cash flows during the years ended December 31:
(in millions) 2018 2017 2016 Change in 2018 Over 2017 Change in 2017 Over 2016
Cash provided by (used in):          
Operating activities $962.2
 $698.0
 $848.4
 $264.2
 $(150.4)
Investing activities (640.4) (568.2) (436.8) (72.2) (131.4)
Financing activities (313.9) (132.9) (423.3) (181.0) 290.4

Operating Activities
2018 Compared with 2017
Net cash provided by operating activities increased $264.2 million during 2018, compared with 2017, driven by:

A $99.2 million increase in cash related to higher overall collections from customers, primarily due to favorable weather during 2018, compared with 2017.

Wisconsin Electric Power CompanyB-14
2018 Annual Financial Statements



An $85.0 million increase in cash from lower payments for operating and maintenance expenses. During 2018, our payments were lower for accounts payable to related parties as well as for plant maintenance and labor costs, due in part to the retirement in 2018 of the Pleasant Prairie power plant and winding down of operations at the PIPP in anticipation of a 2019 retirement. See Note 6, Property, Plant, and Equipment, for more information about the retirement of our plants. In addition, our lease payments to We Power decreased as a result of the Tax legislation, and our payments for transmission costs decreased in 2018.
A $54.0 million net increase in cash related to a decrease in cash paid for income taxes during 2018, compared with 2017. This increase in cash was primarily the result of the utilization of certain tax benefit carryforwards.
A $28.9 million increase in cash due to realized gains from the settlement of our natural gas and petroleum products contracts, combined with lower cash collateral requirements related to open natural gas contracts in 2018, compared with 2017. See Note 14, Derivative Instruments, for more information.

2017 Compared with 2016
Net cash provided by operating activities decreased $150.4 million during 2017, compared with 2016, driven by:

A $171.9 million net decrease in cash related to $71.7 million of cash paid for income taxes during 2017, compared with $100.2 million of cash received during 2016. This decrease in cash was primarily due to the extension of bonus depreciation in December 2015, which resulted in the receipt of an income tax refund during 2016.
A $149.8 million decrease in cash related to lower overall collections from customers during 2017, compared with 2016. Collections from customers decreased primarily because of unfavorable weather and the loss of sales from the transfer of customers to UMERC in 2017.
Cash distributions provided by ATC of $38.4 million during 2016. Effective January 1, 2017, we transferred our investment in ATC to another subsidiary of WEC Energy Group. See Note 16, Investment in American Transmission Company, for more information.

These decreases in net cash provided by operating activities were partially offset by:

A $115.7 million increase in cash from lower payments for transfers of certain benefit-related liabilities to WBS during 2017, compared with 2016.
A $56.9 million increase in cash from lower payments for operating and maintenance expenses. During 2017, our payments related to transmission, electric and natural gas distribution, and charitable projects decreased.
A $32.5 million net increase in cash resulting from lower payments for fuel and purchased power due to the transfer of electric customers to UMERC effective January 1, 2017. This increase in cash was partially offset by higher payments for natural gas, primarily due to higher commodity prices. The average per-unit cost of natural gas sold increased 8.9% during 2017, compared with 2016.

Investing Activities
2018 Compared with 2017
Net cash used in investing activities increased $72.2 million during 2018, compared with 2017, driven by:

Net payments of $51.0 million to affiliates during 2018, related to transfers of an enterprise resource planning system, other software, and equipment. There were no similar transfers in 2017.
A $21.2 million decrease in the proceeds received from the sale of assets during 2018, compared with 2017. See Note 2, Dispositions, for more information.
A $7.1 million increase in cash paid for capital expenditures during 2018, compared with 2017, which is discussed in more detail below.

2017 Compared with 2016
Net cash used in investing activities increased $131.4 million during 2017, compared with 2016, driven by:

A $126.6 million increase in cash paid for capital expenditures during 2017, compared with 2016, which is discussed in more detail below.
Cash of $13.1 million received during 2016 related to transfers of certain software to WBS. There were no similar transfers in 2017.
An $8.8 million decrease in the proceeds received from the sale of assets during 2017, compared with 2016. See Note 2, Dispositions, for more information.

Wisconsin Electric Power CompanyB-15
2018 Annual Financial Statements




These increases in net cash used in investing activities were partially offset by $16.1 million of capital contributions paid to ATC during 2016. Effective January 1, 2017, we transferred our investment in ATC to another subsidiary of WEC Energy Group.

Capital Expenditures
Capital expenditures for the years ended December 31 were as follows:
(in millions) 2018 2017 2016 Change in 2018 Over 2017 Change in 2017 Over 2016
Capital expenditures $603.2
 $596.1
 $469.5
 $7.1
 $126.6

2018 Compared with 2017
The increase in cash paid for capital expenditures during 2018, compared with 2017, was driven by upgrades to our natural gas and electric distribution systems, including main replacement projects, an information technology project created to improve our billing, call center and credit collection functions, and various other software projects.

See Capital Resources and Requirements – Capital Requirements – Capital Expenditures and Significant Capital Projects below for more information.

2017 Compared with 2016
The increase in cash paid for capital expenditures during 2017, compared with 2016, was driven by upgrades to our electric and natural gas distribution systems, including main replacement projects and an advanced metering infrastructure program, as well as various projects at the OCPP.

Financing Activities
2018 Compared with 2017
Net cash used in financing activities increased $181.0 million during 2018, compared with 2017, driven by:

A $250.0 million repayment of long-term debt during 2018.
A $127.9 million net decrease in cash due to $76.0 million of net repayments of commercial paper during 2018, compared with $51.9 million of net borrowings of commercial paper during 2017.
A $70.0 million increase in dividends paid to our parent during 2018, compared with 2017.
A $47.0 million decrease in equity contributions received from our parent to balance our capital structure in 2018, compared with 2017.

These increases in net cash used in financing activities were partially offset by:

A $300.0 million increase in cash due to the issuance of long-term debt during 2018.
An $18.5 million repayment to our parent during 2017 related to our former subsidiary's note payable.

2017 Compared with 2016
Net cash used in financing activities decreased $290.4 million during 2017, compared with 2016, driven by:

A $215.0 million decrease in dividends paid to our parent during 2017 compared with 2016. During 2016, we paid special dividends to our parent to balance our capital structure.
A $75.0 million equity contribution received from our parent to balance our capital structure in 2017.
A $36.9 million increase in net borrowings of commercial paper during 2017, compared with 2016.

These decreases in net cash used for financing activities were partially offset by a $17.4 million increase in repayments to our parent during 2017 related to our former subsidiary's note payable, compared with 2016.

Significant Financing Activities
For more information on our financing activities, see Note 10, Short-Term Debt and Lines of Credit, and Note 11, Long-Term Debt and Capital Lease Obligations.



Wisconsin Electric Power CompanyB-16
2018 Annual Financial Statements



CAPITAL RESOURCES AND REQUIREMENTS
Capital Resources
Liquidity
We anticipate meeting our capital requirements for our existing operations 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 arrangements, access to capital markets, and internally generated cash.

We maintain a bank back-up credit facility, which provides liquidity support for our obligations with respect to commercial paper and for general corporate purposes. 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. See Note 10, Short-Term Debt and Lines of Credit, for more information on our credit facility.

At December 31, 2018, we were in compliance with all covenants related to outstanding short-term and long-term debt. We expect to be in compliance with all such debt covenants for the foreseeable future. See Note 11, Long-Term Debt and Capital Lease Obligations, for more information about our long-term debt.

Working Capital
As of December 31, 2018, our current liabilities exceeded our current assets by $60.6 million. We do not expect this to have any impact on our liquidity since we believe we have an adequate back-up line of credit in place for our ongoing operations. We also believe that we can access the capital markets to finance our construction programs and to refinance current maturities of long-term debt, if necessary.

Credit Rating Risk
We do not have any credit agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. However, we have certain agreements in the form of commodity contracts and employee benefit plans that could require collateral or a termination payment in the event of a credit rating change to below BBB- at S&P Global Ratings and/or Baa3 at Moody's Investors Service. We also have other commodity contracts that, in the event of a credit rating downgrade, could result in a reduction of our unsecured credit granted by counterparties.

In addition, 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.

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 agency only. An explanation of the significance of these ratings may be obtained from the 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.

If we are unable to successfully take actions to manage any adverse impacts of the Tax Legislation, or if additional interpretations, regulations, amendments or technical corrections exacerbate the adverse impacts of the Tax Legislation, the legislation could result in credit rating agencies placing our credit ratings on negative outlook or downgrading our credit ratings. Any such actions by credit rating agencies may make it more difficult and costly for us to issue future debt securities and certain other types of financing and could increase borrowing costs under our credit facility.


Wisconsin Electric Power CompanyB-17
2018 Annual Financial Statements



Capital Requirements
Contractual Obligations
We have the following contractual obligations and other commercial commitments as of December 31, 2018:
  
Payments Due by Period (1)
(in millions) Total Less than 1 year 1-3 years 3-5 years More than 5 years
Long-term debt obligations (2)
 $5,288.3
 $372.7
 $522.5
 $207.5
 $4,185.6
Capital lease obligations (3)
 7,564.5
 403.9
 810.5
 783.8
 5,566.3
Operating lease obligations (4)
 21.7
 2.9
 3.5
 1.4
 13.9
Energy and transportation purchase obligations (5)
 10,160.6
 761.9
 1,385.2
 1,429.0
 6,584.5
Purchase orders (6)
 300.4
 101.8
 134.9
 38.9
 24.8
Pension and OPEB funding obligations (7)
 11.5
 3.9
 7.6
 
 
Total contractual obligations $23,347.0
 $1,647.1
 $2,864.2
 $2,460.6
 $16,375.1
(1) 
The amounts included in the table are calculated using current market prices, forward curves, and other estimates.
(2) 
Principal and interest payments on long-term debt (excluding capital lease obligations).
(3) 
Capital lease obligations for power purchase commitments and the leases with We Power.
(4) 
Operating lease obligations for land and rail car leases.
(5) 
Energy and transportation purchase obligations under various contracts for the procurement of fuel, power, gas supply, and associated transportation related to utility operations.
(6) 
Purchase obligations related to normal business operations, information technology, and other services.
(7) 
Obligations for pension and OPEB plans cannot reasonably be estimated beyond 2021.

The table above does not reflect estimated future payments related to the manufactured gas plant remediation liability of $13.2 million at December 31, 2018, as the amount and timing of payments are uncertain. We expect to incur costs annually to remediate these sites. See Note 19, Commitments and Contingencies, for more information about environmental liabilities.

AROs in the amount of $70.7 million are not included in the above table. Settlement of these liabilities cannot be determined with certainty, but we believe the majority of these liabilities will be settled in more than five years. See Note 7, Asset Retirement Obligations, for more information.

Obligations for utility operations have historically been included as part of the rate-making process and therefore are generally recoverable from customers.

Capital Expenditures and Significant Capital Projects
We have several capital projects that will require significant capital expenditures over the next three years and beyond. All projected capital requirements are subject to periodic review and may vary significantly from estimates, depending on a number of factors. These factors include environmental requirements, regulatory restraints and requirements, impacts from the Tax Legislation, additional changes in tax laws and regulations, acquisition and development opportunities, market volatility, and economic trends. Our estimated capital expenditures for the next three years are as follows:
(in millions)  
2019 $636.7
2020 876.3
2021 979.0
Total $2,492.0

The majority of spending consists of upgrading our electric and natural gas distribution systems to enhance reliability. These upgrades include the advanced metering infrastructure (AMI) program. AMI is an integrated system of smart meters, communication networks and data management systems that enable two-way communication between utilities and customers.

Additionally, as part of our commitment to invest in zero-carbon generation, we plan to invest in utility scale solar. Solar generation technology has greatly improved, has become more cost-effective, and it complements our summer demand curve.

Common Stock Matters
For information related to our common stock matters, see Note 8, Common Equity.


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2018 Annual Financial Statements



Investments in Outside Trusts
We use outside trusts to fund our pension and certain OPEB obligations. These trusts had investments of approximately $1.2 billion as of December 31, 2018. These trusts hold investments that are subject to the volatility of the stock market and interest rates. We contributed $6.3 million, $8.3 million, and $8.0 million to our pension and OPEB plans in 2018, 2017, and 2016, respectively. Future contributions to the plans will be dependent upon many factors, including the performance of existing plan assets and long-term discount rates. For additional information, see Note 15, Employee Benefits.

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 letters of credit that primarily support our commodity contracts. We believe that these agreements do not have, and are not reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. See Note 1(o), Guarantees, Note 10, Short-Term Debt and Lines of Credit, and Note 18, Variable Interest Entities, for more information.


FACTORS AFFECTING RESULTS, LIQUIDITY, AND CAPITAL RESOURCES

MARKET RISKS AND OTHER SIGNIFICANT RISKS
We are exposed to market and other significant risks as a result of the nature of our businesses and the environments in which those businesses operate. These risks, described in further detail below, include but are not limited to:

Regulatory Recovery
We account for our regulated operations in accordance with accounting guidance under the Regulated Operations Topic of the FASB ASC. Our rates are determined by various regulatory commissions. Our primary regulator is the PSCW. See Note 21, Regulatory Environment, for additional information regarding recent rate proceedings and orders.

Regulated entities are allowed to defer certain costs that would otherwise be charged to expense if the regulated entity believes the recovery of those costs is probable. We record regulatory assets pursuant to specific orders or by a generic order issued by our regulators. Recovery of the deferred costs in future rates is subject to the review and approval by those regulators. We assume the risks and benefits of ultimate recovery of these items in future rates. If the recovery of the deferred costs is not approved by our regulators, the costs would be charged to income in the current period. In general, our regulatory assets are recovered over a period of between one to six years. Regulators can impose liabilities on a prospective basis for amounts previously collected from customers and for amounts that are expected to be refunded to customers. We record these items as regulatory liabilities. As of December 31, 2018, our regulatory assets were $2,902.3 million, and our regulatory liabilities were $2,014.2 million.

Due to the Tax Legislation signed into law in December 2017, we remeasured our deferred taxes and recorded a tax benefit of $1,065 million. We have been returning this tax benefit to ratepayers through bill credits and reductions to other regulatory assets, which we expect to continue. See Note 12, Income Taxes, and Note 21, Regulatory Environment, for more information.

Commodity Costs
In the normal course of providing energy, we are subject to market fluctuations in the costs of coal, natural gas, purchased power, and fuel oil used in the delivery of coal. We manage our fuel and natural gas supply costs through a portfolio of short and long-term procurement contracts with various suppliers for the purchase of coal, natural gas, and fuel oil. In addition, we manage the risk of price volatility through natural gas and electric hedging programs.

Embedded within our rates are amounts to recover fuel, natural gas, and purchased power costs. We have recovery mechanisms in place that allow us to recover or refund all or a portion of the changes in prudently incurred fuel, natural gas, and purchased power costs from rate case-approved amounts.

Higher commodity costs can increase our working capital requirements, result in higher gross receipts taxes, and lead to increased energy efficiency investments by our customers to reduce utility usage and/or fuel substitution. Higher commodity costs combined with slower economic conditions also expose us to greater risks of accounts receivable write-offs as more customers are unable to pay their bills. See Note 1(d), Operating Revenues, for more information on our mechanism that allows for cost recovery or refund of uncollectible expense.


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2018 Annual Financial Statements



Weather
Our utility rates are based upon estimated normal temperatures. Our electric utility margins are unfavorably sensitive to below normal temperatures during the summer cooling season and, to some extent, to above normal temperatures during the winter heating season. Our natural gas utility margins are unfavorably sensitive to above normal temperatures during the winter heating season. A summary of actual weather information in our service territory during 2018, 2017, and 2016, as measured by degree days, may be found in Results of Operations.

Interest Rates
We are exposed to interest rate risk resulting from our short-term borrowings and projected near-term debt financing needs. We manage exposure to interest rate risk by limiting the amount of our variable rate obligations and continually monitoring the effects of market changes on interest rates. When it is advantageous to do so, we enter into long-term fixed rate debt.

Based on our variable rate debt outstanding at December 31, 2018, and December 31, 2017, a hypothetical increase in market interest rates of one percentage point would have increased annual interest expense by $1.4 million and $2.1 million in 2018 and 2017, respectively. This sensitivity analysis was performed assuming a constant level of variable rate debt during the period and an immediate increase in interest rates, with no other changes for the remainder of the period.

Marketable Securities Return
We use various trusts to fund our pension and OPEB obligations. These trusts invest in debt and equity securities. Changes in the market prices of these assets can affect future pension and OPEB expenses. Additionally, future contributions can also be affected by the investment returns on trust fund assets. We believe that the financial risks associated with investment returns would be partially mitigated through future rate actions by the PSCW.

The fair value of our trust fund assets and expected long-term returns were approximately:
(in millions) As of December 31, 2018 Expected Return on Assets in 2019
Pension trust funds $1,019.8
 7.00%
OPEB trust funds $201.5
 7.25%

Fiduciary oversight of the pension and OPEB trust fund investments is the responsibility of an Investment Trust Policy Committee. The Committee works with external actuaries and investment consultants on an ongoing basis to establish and monitor investment strategies and target asset allocations. Forecasted cash flows for plan liabilities are regularly updated based on annual valuation results. Target asset allocations are determined utilizing projected benefit payment cash flows and risk analyses of appropriate investments. The targeted asset allocations are intended to reduce risk, provide long-term financial stability for the plans, and maintain funded levels which meet long-term plan obligations while preserving sufficient liquidity for near-term benefit payments. Investment strategies utilize a wide diversification of asset types and qualified external investment managers.

WEC Energy Group consults with its investment advisors on an annual basis to help it forecast expected long-term returns on plan assets by reviewing actual historical returns and calculating expected total trust returns using the weighted-average of long-term market returns for each of the major target asset categories utilized in the funds.

Economic Conditions
Our service territories are primarily within the state of Wisconsin. As such, we are exposed to market risks in the regional Midwest economy. In addition, any economic downturn or disruption of national or international markets could adversely affect the financial condition of our customers and demand for their products, which could affect their demand for our products.

Inflation
We continue to monitor the impact of inflation, especially with respect to the costs of medical plans, fuel, transmission access, construction costs, and regulatory and environmental compliance in order to minimize its effects in future years through pricing strategies, productivity improvements, and cost reductions. We do not believe the impact of general inflation will have a material impact on our future results of operations.

For additional information concerning risk factors, including market risks, see the Cautionary Statement Regarding Forward-Looking Information at the beginning of this report.



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2018 Annual Financial Statements



COMPETITIVE MARKETS
Electric Utility Industry
The regulated energy industry continues to experience significant changes. The FERC continues to support large RTOs, which affects the structure of the wholesale market. To this end, MISO implemented the MISO Energy Markets, including the use of LMP to value electric transmission congestion and losses. Increased competition in the retail and wholesale markets, which may result from restructuring efforts, could have a significant and adverse financial impact on us.

Electric utility revenues in Wisconsin are regulated by the PSCW. The PSCW continues to maintain the position that the question of whether to implement electric retail competition in Wisconsin should ultimately be decided by the Wisconsin legislature. No such legislation has been introduced in Wisconsin to date, and it is uncertain when, if at all, retail choice might be implemented in Wisconsin.

Natural Gas Utility Industry
The PSCW previously instituted generic proceedings to consider how its regulation of natural gas distribution utilities should change to reflect a competitive environment in the natural gas industry. To date, the PSCW has made a policy decision to provide customer classes with competitive markets the option to choose an alternative retail natural gas supplier. The PSCW has also adopted standards for transactions between a utility and its natural gas marketing affiliates. All of our Wisconsin customer classes have competitive market choices and, therefore, can purchase natural gas directly from either an alternative retail natural gas supplier or their local natural gas utility.

We offer natural gas transportation services to our customers that elect to purchase natural gas from an alternative retail natural gas supplier. Since these transportation customers continue to use our distribution systems to transport natural gas to their facilities, we earn distribution revenues from them. As such, there is little impact on our net income from customers purchasing natural gas from an alternative retail natural gas supplier as natural gas costs are passed through to customers in rates on a one-for-one basis. We are currently unable to predict the impact of potential future industry restructuring on our results of operations or financial position.


ENVIRONMENTAL MATTERS
See Note 19, Commitments and Contingencies, for a discussion of certain environmental matters affecting us, including rules and regulations relating to air quality, water quality, land quality, and climate change.


OTHER MATTERS
Tax Cuts and Jobs Act of 2017
In December 2017, the Tax Legislation was signed into law. The PSCW issued a written order in May 2018 regarding how to refund certain tax savings from the Tax Legislation to our ratepayers in Wisconsin. In addition, in May 2018, the MPSC approved a settlement with our one retail electric customer in Michigan that addresses all base rate impacts of the Tax Legislation. We are also working with the FERC to modify our formula rate tariffs for the impacts of the Tax Legislation, and we expect to receive FERC approval for the modified tariffs in 2019. See Note 21, Regulatory Environment, for more information.

Bonus Depreciation Provisions
Bonus depreciation is an additional amount of first-year tax deductible depreciation that is awarded above what would normally be available. The bonus depreciation deduction available for public utility property subject to rate-making by a government entity or public utility commission was modified by the Tax Legislation signed into law on December 22, 2017. Based on the provisions of the Tax Legislation, bonus depreciation can no longer be deducted for public utility property acquired and placed in service after December 31, 2017.
 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Preparation of financial statements and related disclosures in compliance with GAAP requires the application of appropriate technical accounting rules and guidance, as well as the use of estimates. The application of these policies necessarily involves judgments regarding future events, including the likelihood of success of particular projects, legal and regulatory challenges and anticipated recovery of costs. These judgments, in and of themselves, could materially impact the financial statements and disclosures based on varying assumptions. In addition, the financial and operating environment may also have a significant effect, not only on the operation of our business, but on our results reported through the application of accounting measures

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2018 Annual Financial Statements



used in preparing the financial statements and related disclosures, even if the nature of the accounting policies applied have not changed.

The following is a list of accounting policies that are most significant to the portrayal of our financial condition and results of operations and that require management's most difficult, subjective or complex judgments:

Long-Lived Assets
In accordance with ASC 360, Property, Plant, and Equipment, we periodically assess the recoverability of certain long-lived assets when events or changes in circumstances indicate that the carrying amount of those long-lived assets may not be recoverable. Examples of events or changes in circumstances include, but are not limited to, a significant decrease in the market price, a significant change in use, adverse legal factors or a change in business climate, operating or cash flow losses, or an expectation that the asset might be sold. These assessments require significant assumptions and judgments by management. The long-lived assets assessed for impairment generally include certain assets within regulated operations that may not be fully recovered from our customers as a result of regulatory decisions that will be made in the future.

We have evaluated future plans for our older and less efficient fossil fuel generating units and have either retired or announced the retirement of certain generating units. In accordance with ASC 980-360, Regulated Operations – Property, Plant, and Equipment, when it becomes probable that a generating unit will be retired before the end of its useful life, we assess whether the generating unit meets the criteria for abandonment accounting. Generating units that are considered probable of abandonment are expected to cease operations in the near term, significantly before the end of their original estimated useful lives. As a result, the remaining net book value of these assets can be significant. If a generating unit meets applicable criteria to be considered probable of abandonment, and the unit has been abandoned, we assess the likelihood of recovery of the remaining carrying value of that generating unit at the end of each reporting period. If it becomes probable that regulators will disallow full recovery as well as a return on the remaining net book value of a generating unit that is either abandoned or probable of being abandoned, an impairment loss may be required. An impairment loss would be recorded if the remaining carrying value of the generating unit is greater than the present value of the amount expected to be recovered from ratepayers.

Pleasant Prairie power plant was retired during 2018. PIPP continued to meet the criteria to be considered probable of abandonment as of December 31, 2018. We plan to ask for full cost recovery of and a full return on the remaining book value of these generating units and have concluded that no impairment was required related to these assets as of December 31, 2018. See Note 6, Property, Plant, and Equipment, for more information on our generating units, including various approvals we have received from the FERC.

Pension and Other Postretirement Employee Benefits
The costs of providing non-contributory defined pension benefits and OPEB, described in Note 15, Employee Benefits, are dependent upon numerous factors resulting from actual plan experience and assumptions of future experience.

Pension and OPEB costs are impacted by actual employee demographics (including age, compensation levels, and employment periods), the level of contributions made to the plans, and earnings on plan assets. Pension and OPEB costs may also be significantly affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets, mortality and discount rates, and expected health care cost trends. Changes made to the plan provisions may also impact current and future pension and OPEB costs.

Pension and OPEB plan assets are primarily made up of equity and fixed income investments. Fluctuations in actual equity and fixed income market returns, as well as changes in general interest rates, may result in increased or decreased benefit costs in future periods. We believe that such changes in costs would be recovered or refunded through the ratemaking process.

The following table shows how a given change in certain actuarial assumptions would impact the projected benefit obligation and the reported net periodic pension cost. Each factor below reflects an evaluation of the change based on a change in that assumption only.
Actuarial Assumption
(in millions, except percentages)
 Percentage-Point Change in Assumption Impact on Projected Benefit Obligation 
Impact on 2018
Pension Cost
Discount rate (0.5) $55.5
 $4.6
Discount rate 0.5 (49.8) (3.6)
Rate of return on plan assets (0.5) N/A
 5.3
Rate of return on plan assets 0.5 N/A
 (5.3)


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2018 Annual Financial Statements



The following table shows how a given change in certain actuarial assumptions would impact the accumulated OPEB obligation and the reported net periodic OPEB cost. Each factor below reflects an evaluation of the change based on a change in that assumption only.
Actuarial Assumption
(in millions, except percentages)
 Percentage-Point Change in Assumption 
Impact on Postretirement
Benefit Obligation
 
Impact on 2018 Postretirement
Benefit Cost
Discount rate (0.5) $14.6
 $0.7
Discount rate 0.5 (13.1) 
Health care cost trend rate (0.5) (7.1) (1.2)
Health care cost trend rate 0.5 8.2
 1.4
Rate of return on plan assets (0.5) N/A
 1.1
Rate of return on plan assets 0.5 N/A
 (1.1)

The discount rates are selected based on hypothetical bond portfolios consisting of noncallable (or callable with make-whole provisions), noncollateralized, high-quality corporate bonds across the full maturity spectrum. The bonds are generally rated "Aa" with a minimum amount outstanding of $50.0 million. From the hypothetical bond portfolios, a single rate is determined that equates the market value of the bonds purchased to the discounted value of the plans' expected future benefit payments.

We establish our expected return on asset assumption based on consideration of historical and projected asset class returns, as well as the target allocations of the benefit trust portfolios. The assumed long-term rate of return on pension plan assets was 7.00% in 2018, 2017, and 2016. The actual rate of return on pension plan assets, net of fees, was (2.91)%, 11.48%, and 6.91%, in 2018, 2017, and 2016, respectively.

In selecting assumed health care cost trend rates, past performance and forecasts of health care costs are considered. For more information on health care cost trend rates and a table showing future payments that we expect to make for our pension and OPEB, see Note 15, Employee Benefits.

Regulatory Accounting
Our utility operations follow the guidance under the Regulated Operations Topic of the FASB ASC. Our financial statements reflect the effects of the ratemaking principles followed by the jurisdictions regulating us. Certain items that would otherwise be immediately recognized as revenues and expenses are deferred as regulatory assets and regulatory liabilities for future recovery or refund to customers, as authorized by our regulators.

Future recovery of regulatory assets is not assured and is generally subject to review by regulators in rate proceedings for matters such as prudence and reasonableness. Once approved, the regulatory assets and liabilities are amortized into earnings over the rate recovery period. If recovery or refund of costs is not approved or is no longer considered probable, these regulatory assets or liabilities are recognized in current period earnings. Management regularly assesses whether these regulatory assets and liabilities are probable of future recovery or refund by considering factors such as changes in the regulatory environment, earnings from our electric and natural gas utility operations, and the status of any pending or potential deregulation legislation.

The application of the Regulated Operations Topic of the FASB ASC would be discontinued if all or a separable portion of our utility operations no longer met the criteria for application. Our regulatory assets and liabilities would be written off to income as an unusual or infrequently occurring item in the period in which discontinuation occurred. As of December 31, 2018, we had $2,902.3 million in regulatory assets and $2,014.2 million in regulatory liabilities. See Note 5, Regulatory Assets and Liabilities, for more information.

Unbilled Revenues
We record utility operating revenues when energy is delivered to our customers. However, the determination of energy sales to individual customers is based upon the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each month, amounts of energy delivered to customers since the date of their last meter reading are estimated and corresponding unbilled revenues are calculated. This unbilled revenue is estimated each month based upon actual generation and throughput volumes, recorded sales, estimated customer usage by class, weather factors, estimated line losses, and applicable customer rates. Significant fluctuations in energy demand for the unbilled period or changes in the composition of customer classes could impact the accuracy of the unbilled revenue estimate. Total utility operating revenues during 2018 of approximately $3.6 billion included accrued utility revenues of $215.6 million as of December 31, 2018.


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2018 Annual Financial Statements



Income Tax Expense
We are required to estimate income taxes for each of the jurisdictions in which we operate as part of the process of preparing consolidated financial statements. This process involves estimating current income tax liabilities together with assessing temporary differences resulting from differing treatment of items, such as depreciation, for income tax and accounting purposes. These differences result in deferred income tax assets and liabilities, which are included within our balance sheets. We also assess the likelihood that our deferred income tax assets will be recovered through future taxable income. To the extent we believe that realization is not likely, we establish a valuation allowance, which is offset by an adjustment to income tax expense in our income statements.

Uncertainty associated with the application of tax statutes and regulations and the outcomes of tax audits and appeals requires that judgments and estimates be made in the accrual process and in the calculation of effective tax rates. Only income tax benefits that meet the "more likely than not" recognition threshold may be recognized or continue to be recognized. Unrecognized tax benefits are re-evaluated quarterly and changes are recorded based on new information, including the issuance of relevant guidance by the courts or tax authorities and developments occurring in the examinations of our tax returns.

Significant management judgment is required in determining our provision for income taxes, deferred income tax assets and liabilities, the liability for unrecognized tax benefits, and any valuation allowance recorded against deferred income tax assets. The assumptions involved are supported by historical data, reasonable projections, and interpretations of applicable tax laws and regulations across multiple taxing jurisdictions. Significant changes in these assumptions could have a material impact on our financial condition and results of operations. See Note 1(l), Income Taxes, and Note 12, Income Taxes, for a discussion of accounting for income taxes.


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See 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, as well as Note 1(m), Fair Value Measurements, Note 1(n), Derivative Instruments, and Note 1(o), Guarantees, for information concerning potential market risks to which we are exposed.


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2018 Annual Financial Statements



WISCONSIN ELECTRIC POWER COMPANY
CONSOLIDATED INCOME STATEMENTS

Year Ended December 31      
(in millions) 2018 2017 2016
Operating revenues $3,625.0
 $3,711.7
 $3,792.8
       
Operating expenses      
Cost of sales 1,262.1
 1,286.4
 1,292.1
Other operation and maintenance 1,502.4
 1,352.0
 1,425.5
Depreciation and amortization 348.1
 331.6
 325.4
Property and revenue taxes 109.9
 109.6
 115.6
Total operating expenses 3,222.5
 3,079.6
 3,158.6
       
Operating income 402.5
 632.1
 634.2
       
Equity in earnings of transmission affiliate 
 
 55.5
Other income, net 20.2
 13.2
 4.4
Interest expense 120.1
 117.3
 117.6
Other expense (99.9) (104.1) (57.7)
       
Income before income taxes 302.6
 528.0
 576.5
Income tax (benefit) expense (56.9) 191.2
 211.0
Net income 359.5
 336.8
 365.5
       
Preferred stock dividend requirements 1.2
 1.2
 1.2
Net income attributed to common shareholder $358.3
 $335.6
 $364.3

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


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2018 Annual Financial Statements



WISCONSIN ELECTRIC POWER COMPANY
CONSOLIDATED BALANCE SHEETS

At December 31    
(in millions, except share and per share amounts) 2018 2017
Assets    
Current assets    
Cash and cash equivalents $20.2
 $12.3
Accounts receivable and unbilled revenues, net of reserves of $40.9 and $39.5, respectively 472.3
 513.8
Accounts receivable from related parties 112.4
 109.1
Materials, supplies, and inventories 241.4
 250.7
Prepayments 163.7
 144.3
Other 6.3
 9.4
Current assets 1,016.3
 1,039.6
     
Long-term assets    
Property, plant, and equipment, net of accumulated depreciation of $3,450.1 and $3,741.8, respectively 9,528.9
 10,007.7
Regulatory assets 2,902.2
 1,984.9
Other 90.9
 89.4
Long-term assets 12,522.0
 12,082.0
Total assets $13,538.3
 $13,121.6
     
Liabilities and Equity    
Current liabilities    
Short-term debt $134.9
 $210.9
Current portion of long-term debt 250.0
 250.0
Current portion of capital lease obligations 49.9
 42.5
Accounts payable 248.9
 329.3
Accounts payable to related parties 226.0
 131.5
Accrued payroll and benefits 50.4
 53.4
Other 116.8
 170.0
Current liabilities 1,076.9
 1,187.6
     
Long-term liabilities    
Long-term debt 2,459.6
 2,412.3
Capital lease obligations 2,807.2
 2,823.8
Deferred income taxes 1,298.3
 1,155.5
Regulatory liabilities 2,002.3
 1,708.0
Pension and OPEB obligations 118.5
 143.2
Other 284.3
 276.9
Long-term liabilities 8,970.2
 8,519.7
     
Commitments and contingencies (Note 19) 
 
     
Common shareholder's equity    
Common stock – $10 par value; 65,000,000 shares authorized; 33,289,327 shares outstanding 332.9
 332.9
Additional paid in capital 831.3
 802.7
Retained earnings 2,296.6
 2,248.3
Common shareholder's equity 3,460.8
 3,383.9
     
Preferred stock 30.4
 30.4
Total liabilities and equity $13,538.3
 $13,121.6

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


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2018 Annual Financial Statements



WISCONSIN ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31      
(in millions) 2018 2017 2016
Operating activities      
Net income $359.5
 $336.8
 $365.5
Reconciliation to cash provided by operating activities      
Depreciation and amortization 348.1
 331.6
 325.4
Deferred income taxes and investment tax credits, net (0.7) 109.7
 206.2
Contributions and payments related to pension and OPEB plans (6.3) (8.3) (8.0)
Equity income in transmission affiliate, net of distributions 
 
 (17.2)
Payments for liabilities transferred to affiliates (10.1) (0.3) (116.0)
Change in –      
Accounts receivable and unbilled revenues 34.8
 (64.9) (59.0)
Materials, supplies, and inventories 9.3
 20.3
 30.6
Prepaid taxes (28.3) 0.5
 39.4
Other current assets 13.5
 (11.8) 9.3
Accounts payable 13.2
 45.8
 31.3
Accrued taxes (41.1) 12.8
 30.4
Other current liabilities (5.2) 12.2
 10.7
Other, net 275.5
 (86.4) (0.2)
Net cash provided by operating activities 962.2
 698.0
 848.4
       
Investing activities      
Capital expenditures (603.2) (596.1) (469.5)
Capital contributions to transmission affiliate 
 
 (16.1)
Proceeds from the sale of assets 1.7
 22.9
 31.7
Proceeds from assets transferred to affiliates 8.8
 
 13.1
Payments for assets transferred from affiliates (59.8) 
 
Other, net 12.1
 5.0
 4.0
Net cash used in investing activities (640.4) (568.2) (436.8)
       
Financing activities      
Change in short-term debt (76.0) 51.9
 15.0
Repayment of subsidiary note to parent 
 (18.5) (1.1)
Issuance of long-term debt 300.0
 
 
Retirement of long-term debt (250.0) 
 
Equity contribution from parent 28.0
 75.0
 
Payment of dividends to parent (310.0) (240.0) (455.0)
Payment of preferred stock dividends (1.2) (1.2) (1.2)
Other, net (4.7) (0.1) 19.0
Net cash used in financing activities (313.9) (132.9) (423.3)
       
Net change in cash and cash equivalents 7.9
 (3.1) (11.7)
Cash and cash equivalents at beginning of year 12.3
 15.4
 27.1
Cash and cash equivalents at end of year $20.2
 $12.3
 $15.4

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


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2018 Annual Financial Statements



WISCONSIN ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF EQUITY

  Wisconsin Electric Power Company Common Shareholder's Equity    
  Common Stock Additional Paid-In Capital Retained Earnings Total Common Shareholder's Equity Preferred Stock Total Equity
(in millions)      
Balance at December 31, 2015 $332.9
 $999.7
 $2,231.4
 $3,564.0
 $30.4
 $3,594.4
Net income 
 
 365.5
 365.5
 
 365.5
Dividends            
Common stock 
 
 (455.0) (455.0) 
 (455.0)
Preferred stock 
 
 (1.2) (1.2) 
 (1.2)
Tax benefit of exercised stock options allocated from parent 
 19.3
 
 19.3
 
 19.3
Stock-based compensation and other 
 1.1
 0.1
 1.2
 
 1.2
Balance at December 31, 2016 $332.9
 $1,020.1
 $2,140.8
 $3,493.8
 $30.4
 $3,524.2
Net income 
 
 336.8
 336.8
 
 336.8
Dividends            
Common stock 
 
 (240.0) (240.0) 
 (240.0)
Preferred stock 
 
 (1.2) (1.2) 
 (1.2)
Cumulative effect adjustment from adoption of ASU 2016-09 
 
 11.9
 11.9
 
 11.9
Equity contribution from parent 
 75.0
 
 75.0
 
 75.0
Transfer of net assets to UMERC 
 (61.1) 
 (61.1) 
 (61.1)
Transfer of ATC ownership interest and related taxes 
 (228.6) 
 (228.6) 
 (228.6)
Settlement of a short-term note receivable between Bostco and our parent company 
 (4.8) 
 (4.8) 
 (4.8)
Stock-based compensation and other 
 2.1
 
 2.1
 
 2.1
Balance at December 31, 2017 $332.9
 $802.7
 $2,248.3
 $3,383.9
 $30.4
 $3,414.3
Net income 
 
 359.5
 359.5
 
 359.5
Dividends            
Common stock 
 
 (310.0) (310.0) 
 (310.0)
Preferred stock 
 
 (1.2) (1.2) 
 (1.2)
Equity contribution from parent 
 28.0
 
 28.0
 
 28.0
Stock-based compensation and other 
 0.6
 
 0.6
 
 0.6
Balance at December 31, 2018 $332.9
 $831.3
 $2,296.6
 $3,460.8
 $30.4
 $3,491.2

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


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2018 Annual Financial Statements



WISCONSIN ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION

At December 31
(in millions)
     2018 2017
Common shareholder's equity (see accompanying statement) 3,460.8
 3,383.9
Preferred stock (Note 9) 30.4
 30.4
Long-term debt Interest Rate Year Due    
Debentures (unsecured) 1.70% 2018 
 250.0
  4.25% 2019 250.0
 250.0
  2.95% 2021 300.0
 300.0
  3.10% 2025 250.0
 250.0
  6.50% 2028 150.0
 150.0
  5.625% 2033 335.0
 335.0
  5.70% 2036 300.0
 300.0
  3.65% 2042 250.0
 250.0
  4.25% 2044 250.0
 250.0
  4.30% 2045 250.0
 250.0
  4.30% 2048 300.0
 
  6.875% 2095 100.0
 100.0
Obligations under capital leases     2,857.1
 2,866.3
Total     5,592.1
 5,551.3
Unamortized debt issuance costs     (6.0) (3.2)
Unamortized discount, net     (19.4) (19.5)
Total long-term debt and capital lease obligations, including current portion     5,566.7
 5,528.6
Current portion of long-term debt and capital lease obligations     (299.9) (292.5)
Total long-term debt and capital lease obligations     5,266.8
 5,236.1
Total long-term capitalization     $8,758.0
 $8,650.4

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


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2018 Annual Financial Statements



WISCONSIN ELECTRIC POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Operations—We are an electric, natural gas, and steam utility company that serves electric customers in Wisconsin, an iron ore mine owned by Tilden in the Upper Peninsula of Michigan, natural gas customers in Wisconsin, and steam customers in metropolitan Milwaukee, Wisconsin. WEC Energy Group owns all of our outstanding common stock.

In December 2016, both the MPSC and the PSCW approved the operation of UMERC as a stand-alone utility in the Upper Peninsula of Michigan, and UMERC became operational effective January 1, 2017. This utility holds the electric assets previously held by us, and the electric and natural gas distribution assets previously held by WPS, located in the Upper Peninsula of Michigan. The existing contract between Tilden and us will remain in place until a new power generation solution for the region is commercially operational, which is expected to occur during the second quarter of 2019.

As used in these notes, the term "financial statements" refers to the consolidated financial statements. This includes the income statements, balance sheets, statements of cash flows, statements of equity, and statements of capitalization, unless otherwise noted.

Through October 2018, we had one wholly owned subsidiary, Bostco. At December 31, 2016, Bostco had total assets of $24.4 million. In March 2017, we sold substantially all of the remaining assets of Bostco, and, in October 2018, Bostco was dissolved. See Note 2, Dispositions, for more information. The financial statements include our accounts and the accounts of our former wholly owned subsidiary. Investments in companies not controlled by us, but over which we have significant influence regarding the operating and financial policies of the investee, are accounted for using the equity method.

(b) Basis of Presentation—We prepare our financial statements in conformity with GAAP. We make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates.

(c) Cash and Cash Equivalents—Cash and cash equivalents include marketable debt securities with an original maturity of three months or less.

(d) Operating Revenues—The following discussion includes our significant accounting policies related to operating revenues, including our adoption of ASU 2014-09, Revenues from Contracts with Customers. For additional required disclosures on disaggregation of operating revenues as required by this ASU, see Note 4, Operating Revenues.

Adoption of ASU 2014-09, Revenues from Contracts with Customers
On January 1, 2018, we adopted ASU 2014-09, Revenues from Contracts with Customers, and the related amendments. In accordance with the guidance, we recognize revenues when control of the promised goods or services is transferred to our customers in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods or services. These revenues include unbilled revenues, which are estimated using the amount of energy delivered to our customers but not billed until after the end of the period.

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

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

We elected to exclude from the transaction price any amounts collected from customers for all sales taxes and other similar taxes.
When applicable, we elected to apply the standard to a portfolio of contracts with similar characteristics, primarily our tariff-based contracts, as we reasonably expect that the effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts.

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We elected to recognize revenue in the amount we have the right to invoice for performance obligations satisfied over time when the consideration received from a customer corresponds directly with the value provided to the customer during the same period.
We elected to not disclose the remaining performance obligations of a contract that has an original expected duration of one year or less.
We elected to apply this standard only to contracts that are not completed as of the date of initial application.

Revenues from Contracts with Customers
Electric Utility Operating Revenues – Electricity sales to residential and commercial and industrial customers are generally accomplished through requirements contracts, which provide for the delivery of as much electricity as the customer needs. These contracts represent discrete deliveries of electricity and consist of one distinct performance obligation satisfied over time, as the electricity is delivered and consumed by the customer simultaneously. For our residential and commercial and industrial customers, our performance obligation is bundled to consist of both the sale and the delivery of the electric commodity.

The transaction price of the performance obligations for residential and commercial and industrial customers is valued using the rates, charges, terms, and conditions of service included in our tariffs, which have been approved by state regulators. These rates often have a fixed component customer charge and a usage-based variable component charge. We recognize revenue for the fixed component customer charge monthly using a time-based output method. We recognize revenue for the usage-based variable component charge using an output method based on the quantity of electricity delivered each month. Our retail electric rates in Wisconsin include base amounts for fuel and purchased power costs, which also impact our revenues. The electric fuel rules set by the PSCW allow us to defer, for subsequent rate recovery or refund, under- or over-collections of actual fuel and purchased power costs that exceed a 2% price variance from the costs included in the rates charged to customers. We monitor the deferral of under-collected costs to ensure that it does not cause us to earn a greater ROE than authorized by the PSCW. In contrast, the rates of our Michigan retail electric customer include recovery of fuel and purchased power costs on a one-for-one basis. In addition, our Wisconsin residential tariffs include a mechanism for cost recovery or refund of uncollectible expense based on the difference between actual uncollectible write-offs and the amounts recovered in rates.

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

The transaction price of the performance obligations for wholesale customers is valued using the rates, charges, terms, and conditions of service for sales included in our tariffs, which have been approved by the FERC. These wholesale rates include recovery of fuel and purchased power costs from customers on a one-for-one basis. For the majority of our wholesale customers, the price billed for energy and capacity is a formula-based rate. Formula-based rates initially set a customer's current year rates based on the previous year’s expenses. This is a predetermined formula derived from the utility’s costs and a reasonable rate of return. Because these rates are eventually trued up to reflect actual, current-year costs, they represent a form of variable consideration in certain circumstances. The variable consideration is estimated and recognized over time as wholesale customers receive and consume the capacity and electricity services.

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

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

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2018 Annual Financial Statements




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

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

Our tariffs include various rate mechanisms that allow us to recover or refund changes in prudently incurred costs from rate case-approved amounts. Our rates include one-for-one recovery mechanisms for natural gas commodity costs. We defer any difference between actual natural gas costs incurred and costs recovered through rates as a current asset or liability. The deferred balance is returned to or recovered from customers at intervals throughout the year. In addition, our Wisconsin residential tariffs include a mechanism for cost recovery or refund of uncollectible expense based on the difference between actual uncollectible write-offs and the amounts recovered in rates.

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

Other Operating Revenues
Alternative Revenues – Alternative revenues are created from programs authorized by regulators that allow us to record additional revenues by adjusting rates in the future, usually as a surcharge applied to future billings, in response to past activities or completed events. We record alternative revenues when the regulator-specified conditions for recognition have been met. We reverse these alternative revenues as the customer is billed, at which time this revenue is presented as revenues from contracts with customers.

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

(e) Materials, Supplies, and Inventories—Our inventory as of December 31 consisted of:
(in millions) 2018 2017
Materials and supplies $146.1
 $140.7
Fossil fuel 58.7
 74.8
Natural gas in storage 36.6
 35.2
Total $241.4
 $250.7

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

(f) Regulatory Assets and Liabilities—The economic effects of regulation can result in regulated companies recording costs and revenues that have been or are expected to be allowed in the rate-making process in a period different from the period in which the costs or revenues would be recognized by a nonregulated company. When this occurs, regulatory assets and regulatory liabilities are recorded on the balance sheet. Regulatory assets represent probable future revenues associated with certain costs or liabilities that have been deferred and are expected to be recovered through rates charged to customers. Regulatory liabilities represent amounts that are expected to be refunded to customers in future rates or amounts that are collected in rates for future costs.


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2018 Annual Financial Statements



Recovery or refund of regulatory assets and liabilities is based on specific periods determined by the regulators or occurs over the normal operating period of the assets and liabilities to which they relate. If at any reporting date a previously recorded regulatory asset is no longer probable of recovery, the regulatory asset is reduced to the amount considered probable of recovery with the reduction charged to expense in the reporting period the determination is made. See Note 5, Regulatory Assets and Liabilities, for more information.

(g) Property, Plant, and Equipment—We record property, plant, and equipment at cost. Cost includes material, labor, overhead, and both debt and equity components of AFUDC. Additions to and significant replacements of property are charged to property, plant, and equipment at cost; minor items are charged to other operation and maintenance expense. The cost of depreciable utility property less salvage value is charged to accumulated depreciation when property is retired.

We record straight-line depreciation expense over the estimated useful life of utility property using depreciation rates approved by the PSCW and MPSC that include estimates for salvage value and removal costs. Depreciation as a percent of average depreciable utility plant was 3.18%, 2.95%, and 3.00% in 2018, 2017, and 2016, respectively.

We capitalize certain costs related to software developed or obtained for internal use and record these costs to amortization expense over the estimated useful life of the related software, which ranges from 5 to 15 years. If software is retired prior to being fully amortized, the difference is recorded as a loss on the income statement.

For assets other than our regulated assets and leased equipment, we accrue depreciation expense at straight-line rates over the estimated useful lives of the assets, or over the non-cancellable lease term for leased equipment.

Third parties reimburse us for all or a portion of expenditures for certain capital projects. Such contributions in aid of construction costs are recorded as a reduction to property, plant, and equipment.

See Note 6, Property, Plant, and Equipment, for more information.

(h) Allowance for Funds Used During Construction—AFUDC is included in utility plant accounts and represents the cost of borrowed funds (AFUDC – Debt) used during plant construction, and a return on shareholders' capital (AFUDC – Equity) used for construction purposes. AFUDC – Debt is recorded as a reduction of interest expense, and AFUDC – Equity is recorded in other income, net.

Approximately 50% of our retail jurisdictional CWIP expenditures are subject to the AFUDC calculation. Our average AFUDC retail rates were 8.45% for 2018, 2017, and 2016. Our average AFUDC wholesale rates were 3.63%, 5.94%, and 2.73% for 2018, 2017, and 2016, respectively.

We recorded the following AFUDC for the years ended December 31:
(in millions) 2018 2017 2016
AFUDC – Debt $1.5
 $1.2
 $1.7
AFUDC – Equity $3.9
 $3.1
 $4.2

(i) Asset Retirement Obligations—We recognize, at fair value, legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and normal operation of the assets. An ARO liability is recorded, when incurred, for these obligations as long as the fair value can be reasonably estimated, even if the timing or method of settling the obligation is unknown. The associated retirement costs are capitalized as part of the related long-lived asset and are depreciated over the useful life of the asset. The ARO liabilities are accreted each period using the credit-adjusted risk-free interest rates associated with the expected settlement dates of the AROs. These rates are determined when the obligations are incurred. Subsequent changes resulting from revisions to the timing or the amount of the original estimate of undiscounted cash flows are recognized as an increase or a decrease to the carrying amount of the liability and the associated capitalized retirement costs. We recognize regulatory assets or liabilities for the timing differences between when we recover an ARO in rates and when we recognize the associated retirement costs. See Note 7, Asset Retirement Obligations, for more information.

(j) Asset Impairment—We periodically assess the recoverability of certain long-lived assets when factors indicate the carrying value of such assets may be impaired or such assets are planned to be sold. These assessments require significant assumptions and judgments by management. The long-lived assets assessed for impairment generally include certain assets within regulated operations that may not be fully recovered from our customers as a result of regulatory decisions that will be made in the future. An impairment loss is recognized when the carrying amount of an asset is not recoverable and exceeds the fair value of the asset. The carrying amount of an asset is not recoverable if it exceeds the sum of the undiscounted cash flows

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2018 Annual Financial Statements



expected to result from the use and eventual disposition of the asset. An impairment loss is measured as the excess of the carrying amount of the asset in comparison to the fair value of the asset.

When it becomes probable that a generating unit will be retired before the end of its useful life, we assess whether the generating unit meets the criteria for abandonment accounting. Generating units that are considered probable of abandonment are expected to cease operations in the near term, significantly before the end of their original estimated useful lives. If a generating unit meets the applicable criteria to be considered probable of abandonment, and the unit has been abandoned, we assess the likelihood of recovery of the remaining carrying value of that generating unit at the end of each reporting period. If it becomes probable that regulators will disallow full recovery as well as a return on the remaining net book value of a generating unit that is either abandoned or probable of being abandoned, an impairment loss may be required. An impairment loss would be recorded if the remaining carrying value of the generating unit is greater than the present value of the amount expected to be recovered from ratepayers. See Note 6, Property, Plant, and Equipment, for more information.

(k) Stock-Based Compensation—Our employees participate in the WEC Energy Group stock-based compensation plans. In accordance with the WEC Energy Group shareholder approved Omnibus Stock Incentive Plan, WEC Energy Group provides long-term incentives through its equity interests to its non-employee directors, selected officers, and other key employees. The plan provides for the granting of stock options, restricted stock, performance shares, and other stock-based awards. Awards may be paid in WEC Energy Group common stock, cash, or a combination thereof. The number of shares of WEC Energy Group common stock authorized for issuance under the plan is 34.3 million.

Stock-based compensation expense is allocated to us based on the outstanding awards held by our employees and our allocation of labor costs. Awards classified as equity awards are measured based on their grant-date fair value. Awards classified as liability awards are recorded at fair value each reporting period.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which modified certain aspects of the accounting for stock-based compensation awards. This ASU became effective for us on January 1, 2017. Under the new guidance, all excess tax benefits and tax deficiencies are recognized as income tax expense or benefit in the income statement on a prospective basis. Prior to January 1, 2017, these amounts were recorded in additional paid in capital on the balance sheet, and excess tax benefits could only be recognized to the extent they reduced taxes payable. In the first quarter of 2017, we recorded an $11.9 million cumulative-effect adjustment to increase retained earnings for excess tax benefits that had not been recognized in prior years as they did not reduce taxes payable.

ASU 2016-09 also requires excess tax benefits to be classified as an operating activity on the statement of cash flows. As we elected to apply this provision on a prospective basis, the 2016 excess tax benefits continue to be reflected as a financing activity. As allowed under this ASU, we also elected to account for forfeitures as they occur, rather than estimating potential future forfeitures and recording them over the vesting period.

Stock Options
Our employees are granted WEC Energy Group non-qualified stock options that generally vest on a cliff-basis after a three-year period. The exercise price of a stock option under the plan cannot be less than 100% of the fair market value of WEC Energy Group common stock on the grant date. Historically, all stock options have been granted with an exercise price equal to the fair market value of WEC Energy Group common stock on the date of the grant. Options may not be exercised within six months of the grant date except in the event of a change in control. Options expire no later than 10 years from the date of grant.

WEC Energy Group stock options are classified as equity awards. The fair value of each stock option was calculated using a binomial option-pricing model. The following table shows the estimated weighted-average fair value per stock option granted to our employees along with the weighted-average assumptions used in the valuation models:
  2018
2017
2016
Stock options granted 81,730
 80,770
 92,880
       
Estimated weighted-average fair value per stock option $7.26
 $7.12
 $4.92
       
Assumptions used to value the options:      
Risk-free interest rate 1.6% – 2.5%
 0.7% – 2.5%
 0.5% – 2.2%
Dividend yield 3.5% 3.5% 4.0%
Expected volatility 18.0% 19.0% 18.0%
Expected life (years) 5.1
 6.2
 5.8

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2018 Annual Financial Statements



 
The risk-free interest rate was based on the United States Treasury interest rate with a term consistent with the expected life of the stock options. The dividend yield was based on WEC Energy Group's dividend rate at the time of the grant and historical stock prices. Expected volatility and expected life assumptions were based on WEC Energy Group's historical experience.

Restricted Shares
WEC Energy Group restricted shares granted to our employees have a three-year vesting period with one-third of the award vesting on each anniversary of the grant date. The restricted shares are classified as equity awards.

Performance Units
Officers and other key employees are granted performance units under the WEC Energy Group Performance Unit Plan. Under the plan, the ultimate number of units that will be awarded is dependent on WEC Energy Group's total shareholder return (stock price appreciation plus dividends) as compared to the total shareholder return of a peer group of companies over a three-year period, and beginning in 2017, other performance metrics as determined by the Compensation Committee. Participants may earn between 0% and 175% of the base performance unit award, as adjusted pursuant to the terms of the plan. Performance units also accrue forfeitable dividend equivalents in the form of additional performance units.

All grants of performance units are settled in cash and are accounted for as liability awards accordingly. The fair value of the performance units reflects our estimate of the final expected value of the awards, which is based on WEC Energy Group's stock price and performance achievement under the terms of the award. Stock-based compensation costs are recorded over the three-year performance period.

See Note 8, Common Equity, for more information on WEC Energy Group's stock-based compensation plans.

(l) Income Taxes—We follow the liability method in accounting for income taxes. Accounting guidance for income taxes requires the recording of deferred assets and liabilities to recognize the expected future tax consequences of events that have been reflected in our financial statements or tax returns and the adjustment of deferred tax balances to reflect tax rate changes. We are required to assess the likelihood that our deferred tax assets would expire before being realized. If we conclude that certain deferred tax assets are likely to expire before being realized, a valuation allowance would be established against those assets. GAAP requires that, if we conclude in a future period that it is more likely than not that some or all of the deferred tax assets would be realized before expiration, we reverse the related valuation allowance in that period. Any change to the allowance, as a result of a change in judgment about the realization of deferred tax assets, is reported in income tax expense.

Investment tax credits associated with regulated operations are deferred and amortized over the life of the assets. We are included in WEC Energy Group's consolidated Federal and state income tax returns. In accordance with our tax allocation agreement with WEC Energy Group, we are allocated income tax payments and refunds based upon our separate tax computation. See Note 12, Income Taxes, for more information.

We recognize interest and penalties accrued related to unrecognized tax benefits in income tax expense in our income statements.

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

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

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

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

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


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

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

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

See Note 13, Fair Value Measurements, for more information.

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

We record derivative instruments on our balance sheets as assets or liabilities measured at fair value, unless they qualify for the normal purchases and sales exception, and are so designated. We continually assess our contracts designated as normal and will discontinue the treatment of these contracts as normal if the required criteria are no longer met. Changes in the derivative's fair value are recognized currently in earnings unless specific hedge accounting criteria are met or we receive regulatory treatment for the derivative. For most energy related physical and financial contracts in our regulated operations that qualify as derivatives, the PSCW allows the effects of fair value accounting to be offset to regulatory assets and liabilities.

We classify derivative assets and liabilities as current or long-term on our balance sheets based on the maturities of the underlying contracts. Cash flows from derivative activities are presented in the same category as the item being hedged within operating activities on our statements of cash flows.

Derivative accounting rules provide the option to present certain asset and liability derivative positions net on the balance sheets and to net the related cash collateral against these net derivative positions. We elected not to net these items. On our balance sheets, cash collateral provided to others is reflected in other current assets. See Note 14, Derivative Instruments, for more information.

(o) Guarantees—We follow the guidance of the Guarantees Topic of the FASB ASC, which requires, under certain circumstances, that the guarantor recognize a liability for the fair value of the obligation undertaken in issuing the guarantee at its inception. As of December 31, 2018, we had $26.2 million of standby letters of credit issued by financial institutions for the benefit of third parties that extended credit to us which automatically renew each year unless proper termination notice is given. These amounts are not reflected on our balance sheets.

(p) Employee Benefits—The costs of pension and OPEB plans are expensed over the periods during which employees render service. These costs are distributed among WEC Energy Group's subsidiaries based on current employment status and actuarial calculations, as applicable. Our regulators allow recovery in rates for our net periodic benefit cost calculated under GAAP. See Note 15, Employee Benefits, for more information.

(q) Customer Deposits and Credit Balances—When utility customers apply for new service, they may be required to provide a deposit for the service. Customer deposits are recorded within other current liabilities on our balance sheets.

Utility customers can elect to be on a budget plan. Under this type of plan, a monthly installment amount is calculated based on estimated annual usage. During the year, the monthly installment amount is reviewed by comparing it to actual usage. If necessary, an adjustment is made to the monthly amount. Annually, the budget plan is reconciled to actual annual usage. Payments in excess of actual customer usage are recorded within other current liabilities on our balance sheets.

(r) Environmental Remediation Costs—We are subject to federal and state environmental laws and regulations that in the future may require us to pay for environmental remediation at sites where we have been, or may be, identified as a potentially responsible party. Loss contingencies may exist for the remediation of hazardous substances at various potential sites, including coal combustion product landfill sites and manufactured gas plant sites. See Note 7, Asset Retirement Obligations, for more information regarding coal combustion product landfill sites and Note 19, Commitments and Contingencies, for more information regarding manufactured gas plant sites.

Wisconsin Electric Power CompanyB-36
2018 Annual Financial Statements




We record environmental remediation liabilities when site assessments indicate remediation is probable and we can reasonably estimate the loss or a range of losses. The estimate includes both our share of the liability and any additional amounts that will not be paid by other potentially responsible parties or the government. When possible, we estimate costs using site-specific information but also consider historical experience for costs incurred at similar sites. Remediation efforts for a particular site generally extend over a period of several years. During this period, the laws governing the remediation process may change, as well as site conditions, potentially affecting the cost of remediation.

We have received approval to defer certain environmental remediation costs, as well as estimated future costs, through a regulatory asset. The recovery of deferred costs is subject to the PSCW's approval.

We review our estimated costs of remediation annually for our manufactured gas plant sites and coal combustion product landfill sites. We adjust the liabilities and related regulatory assets, as appropriate, to reflect the new cost estimates. Any material changes in cost estimates are adjusted throughout the year.

(s) Customer Concentrations of Credit Risk—We provide regulated electric, natural gas, and steam service to customers in Wisconsin and to Tilden located in the Upper Peninsula of Michigan. See Note 3, Related Parties, and Note 21, Regulatory Environment, for information regarding the transfer of our customers located in the Upper Peninsula of Michigan to UMERC as of January 1, 2017. The geographic concentration of our customers did not contribute significantly to our overall exposure to credit risk. We periodically review customers' credit ratings, financial statements, and historical payment performance and require them to provide collateral or other security as needed. Our credit risk exposure is mitigated by our recovery mechanism for uncollectible expense discussed in Note 1(d), Operating Revenues. As a result, we did not have any significant concentrations of credit risk at December 31, 2018. In addition, there were no customers that accounted for more than 10% of our revenues for the year ended December 31, 2018.


NOTE 2—DISPOSITIONS
Utility Segment
Sale of Milwaukee County Power Plant
In April 2016, we sold the MCPP steam generation and distribution assets, located in Wauwatosa, Wisconsin. MCPP primarily provided steam to the Milwaukee Regional Medical Center hospitals and other campus buildings. During the second quarter of 2016, we recorded a pre-tax gain on the sale of $10.9 million ($6.5 million after tax), which was included in other operation and maintenance on our income statements. The assets included in the sale were not material and, therefore, were not presented as held for sale. The results of operations of this plant remained in continuing operations through the sale date as the sale did not represent a shift in our corporate strategy and did not have a major effect on our operations and financial results.

Other Segment
Sale of Bostco LLC Real Estate Holdings
In March 2017, we sold the remaining real estate holdings of Bostco located in downtown Milwaukee, Wisconsin, which included retail, office, and residential space, and in October 2018, Bostco was dissolved. During the first quarter of 2017, we recorded an insignificant gain on the sale, which was included in other income, net on our income statements. The assets included in the sale were not material and, therefore, were not presented as held for sale. The results of operations associated with these assets remained in continuing operations through the sale date as the sale did not represent a shift in our corporate strategy and did not have a major effect on our operations and financial results.


NOTE 3—RELATED PARTIES
We routinely enter into transactions with related parties, including WEC Energy Group, its other subsidiaries, ATC, and other affiliated entities.

We provide and receive services, property, and other items of value to and from our parent, WEC Energy Group, and other subsidiaries of WEC Energy Group.

Following our parent company's acquisition of Integrys on June 29, 2015, an AIA (Non-WBS AIA) went into effect. The Non-WBS AIA governed the provision and receipt of services by WEC Energy Group's subsidiaries, except that WBS continued to provide services to Integrys and its subsidiaries only under the existing WBS AIAs. WBS provided services to WEC Energy Group and the former Wisconsin Energy Corporation subsidiaries, including us, under interim WBS AIAs. The PSCW and all other relevant state commissions approved the Non-WBS AIA or granted appropriate waivers related to the Non-WBS AIA.

Wisconsin Electric Power CompanyB-37
2018 Annual Financial Statements




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

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

A new AIA took effect January 1, 2017. The new agreement replaced the previous agreements. The pricing methodology and services under this new agreement are substantially identical to those under the agreements that were replaced. All of the applicable state commissions approved modifications to the new AIA to incorporate WEC Energy Group's acquisition of Bluewater. See below for more information on the acquisition.

In connection with the sale of Bostco’s remaining real estate holdings, Wispark, a subsidiary of WEC Energy Group, provided $7.0 million of financing to the buyer and established a corresponding note receivable. Bostco had a $7.0 million related party receivable from Wispark that was paid in April 2017. See Note 2, Dispositions, for more information on the real estate sale.

On January 1, 2017, based upon input we received from the PSCW, we transferred our $415.4 million investment in ATC, and the related receivable for distributions approved and recorded in December 2016, to another subsidiary of WEC Energy Group. In addition, during 2017 we transferred $186.8 million of related deferred income tax liabilities. These transactions were non-cash equity transfers recorded to additional paid in capital between entities under common control, and therefore, did not result in the recognition of a gain or loss.

We pay ATC for transmission and other related services it provides. In addition, we provide a variety of operational, maintenance, and project management work for ATC, which is reimbursed by ATC. Services are billed to and from ATC under agreements approved by the PSCW, at each of our fully allocated costs.

Our balance sheets included the following receivables and payables related to transactions entered into with ATC:
(in millions) 2018 2017
Accounts receivable    
Services provided to ATC $2.2
 $0.8
Accounts payable    
Services received from ATC 19.4
 22.2


Wisconsin Electric Power CompanyB-38
2018 Annual Financial Statements



The following table shows activity associated with our related party transactions for the years ended December 31:
(in millions) 2018 2017 2016 
Lease agreements  
  
  
 
Lease payments to We Power (1)
 $373.7
 $420.5
 $412.2
 
CWIP billed to We Power 39.5
 57.3
 37.9
 
Transactions with WBS (2)
       
Billings to WBS 61.5
 255.7
(3) 
213.8
(3) 
Billings from WBS (4)
 243.4
 215.4
 310.6
 
Transactions with WPS       
Natural gas purchases from WPS 1.9
 1.6
 1.9
 
Billings to WPS (2)
 17.8
(3) 
28.2
 9.0
 
Billings from WPS (2)
 10.9
 4.5
 4.2
 
Transactions with WG       
Natural gas purchases from WG 5.3
 5.3
 5.3
 
Billings to WG (2)
 59.0
(3) 
64.0
 60.6
 
Billings from WG (2)
 32.6
 23.1
 21.5
 
Transactions with UMERC (5)
       
Electric sales to UMERC 29.6
 30.8
 
 
Billings to UMERC (2)
 15.8
(3) 
125.5
 
 
Transactions with Bluewater (6)
       
Storage service fees 15.0
 2.7
 
 
Transactions with ATC       
Charges to ATC for services and construction 13.9
 10.9
 10.0
 
Charges from ATC for network transmission services 232.0
 241.4
 247.8
 
Refund from ATC related to a FERC audit 15.4
 
 
 
Refund from ATC per FERC ROE order 
 19.4
 
 
(1) 
We make lease payments to We Power, another subsidiary of WEC Energy Group, for PWGS Units 1 and 2 and ERGS Units 1 and 2. Lease payments were reduced in 2018 as a result of tax savings related to the Tax Legislation.
(2) 
Includes amounts billed for services, pass through costs, and other items in accordance with the approved AIAs.
(3) 
Includes $8.8 million for the transfer of certain software assets to affiliates for the year ended December 31, 2018, and $13.1 million for the transfer of certain software assets to WBS for the year ended December 31, 2016. Also includes $1.2 million for the transfer of certain benefit-related liabilities from WBS for the year ended December 31, 2017.
(4) 
For the years ended December 31, 2018, 2017, and 2016, includes $10.0 million, $1.5 million, and $116.0 million, respectively, for the transfer of certain benefit-related liabilities to WBS. Also includes $59.8 million for the transfer of certain software assets from WBS for the year ended December 31, 2018.
(5) 
UMERC became operational effective January 1, 2017. See below for more information.
(6) 
WEC Energy Group's acquisition of Bluewater was completed on June 30, 2017. See below for more information.

Parent Company's Acquisition of Natural Gas Storage Facilities in Michigan
In June 2017, our parent company completed its acquisition of Bluewater for $226.0 million. Bluewater owns natural gas storage facilities in Michigan that provide a portion of the current storage needs for our natural gas utility operations. In September 2017, we entered into a long-term service agreement with a wholly owned subsidiary of Bluewater to take a portion of the storage, which was then approved by the PSCW in November 2017. See Note 21, Regulatory Environment, for more information.

Upper Michigan Energy Resources Corporation
In December 2016, both the MPSC and the PSCW approved the operation of UMERC as a stand-alone utility in the Upper Peninsula of Michigan. UMERC, a subsidiary of WEC Energy Group, became operational effective January 1, 2017, and we transferred customers and property, plant, and equipment as of that date. See Note 21, Regulatory Environment, for more information. We transferred approximately 27,500 retail electric customers and 50 electric distribution-only customers to UMERC, along with approximately 2,500 miles of electric distribution lines. We also transferred related electric distribution substations in the Upper Peninsula of Michigan and all property rights for the distribution assets to UMERC. The book value of net assets, including the related deferred income tax liabilities, transferred to UMERC from us in 2017, was $61.1 million. This transaction was a non-cash equity transfer recorded to additional paid in capital between entities under common control, and therefore, did not result in the recognition of a gain or loss. UMERC currently meets its market obligations through power purchase agreements with us and WPS.



Wisconsin Electric Power CompanyB-39
2018 Annual Financial Statements



NOTE 4—OPERATING REVENUES
Disaggregation of Operating Revenues
The following tables present our operating revenues disaggregated by revenue source. We only have revenues associated with our utility segment. We do not have any revenues associated with our other segment. We disaggregate revenues into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. For our utility segment, revenues are further disaggregated by electric and natural gas operations and then by customer class. Each customer class within our electric and natural gas operations have different expectations of service, energy and demand requirements, and are impacted by regulatory activities within their jurisdictions.

Comparable amounts have not been presented for the years ended December 31, 2017 and 2016, due to our adoption of ASU 2014-09, Revenues from Contracts with Customers, under the modified retrospective method. See Note 1(d), Operating Revenues, for more information about our significant accounting policies related to operating revenues.
  Wisconsin Electric Power Company Consolidated
(in millions) Year ended December 31, 2018
Electric utility $3,212.7
Natural gas utility 405.1
Total revenues from contracts with customers 3,617.8
Other operating revenues 7.2
Total operating revenues $3,625.0

Revenues from Contracts with Customers
Electric Utility Operating Revenues
The following table disaggregates electric utility operating revenues into customer class:
  Electric Utility Operating Revenues
(in millions) Year ended December 31, 2018
Residential $1,220.8
Small commercial and industrial 1,020.0
Large commercial and industrial 656.6
Other 20.7
Total retail revenues 2,918.1
Wholesale 108.5
Resale 153.7
Steam 24.1
Other utility revenues 8.3
Total electric utility operating revenues $3,212.7

Natural Gas Utility Operating Revenues
The following table disaggregates natural gas utility operating revenues into customer class:
  Natural Gas Utility Operating Revenues
(in millions) Year ended December 31, 2018
Residential $264.3
Commercial and industrial 126.3
Total retail revenues 390.6
Transport 13.4
Other utility revenues 1.1
Total natural gas utility operating revenues $405.1


Wisconsin Electric Power CompanyB-40
2018 Annual Financial Statements



Other Operating Revenues
Other operating revenues consist primarily of the following:
(in millions) Year ended December 31, 2018
Late payment charges $8.2
Leases 2.9
Alternative revenues * (3.9)
Total other operating revenues $7.2
*Negative amounts can result from alternative revenues being reversed to revenues from contracts with customers as the customer is billed for these alternative revenues. Negative amounts can also result from revenues to be refunded to customers subject to wholesale true-ups, as discussed in Note 1(d), Operating Revenues.


NOTE 5—REGULATORY ASSETS AND LIABILITIES
The following regulatory assets were reflected on our balance sheets as of December 31:
(in millions) 2018 2017 See Note
Regulatory assets (1) (2)
      
Capital leases $869.3
 $801.3
 11
Plant retirements 754.1
 6.6
 6
Pension and OPEB costs (3)
 490.6
 484.4
 15
Income tax related items (4)
 317.9
 
 12
SSR 316.7
 298.9
 21
Electric transmission costs 57.8
 220.7
 21
We Power generation (5)
 43.0
 71.3
  
AROs 28.7
 41.4
 7
Other, net 24.2
 60.3
  
Total regulatory assets $2,902.3
 $1,984.9
  
       
Balance Sheet Presentation      
Current assets $0.1
 $
  
Regulatory assets 2,902.2
 1,984.9
  
Total regulatory assets $2,902.3
 $1,984.9
  
(1) 
Based on prior and current rate treatment, we believe it is probable that we will continue to recover from customers the regulatory assets in this table.
(2) 
As of December 31, 2018, we had $10.9 million of regulatory assets not earning a return, $98.7 million of regulatory assets earning a return based on short-term interest rates, and $316.7 million of regulatory assets earning a return based on long-term interest rates. The regulatory assets not earning a return relate to certain environmental remediation costs, the recovery of which depends on the timing of the actual expenditures. The other regulatory assets in the table either earn a return or the cash has not yet been expended, in which case the regulatory assets are offset by liabilities.
(3) 
Primarily represents the unrecognized future pension and OPEB costs related to our defined benefit pension and OPEB plans. We are authorized recovery of these regulatory assets over the average remaining service life of each plan.
(4) 
For information on the flow through of tax repairs and the regulatory treatment of the impacts of the Tax Legislation, see Note 21, Regulatory Environment.
(5) 
Represents amounts recoverable from customers related to our costs of the generating units leased from We Power, including subsequent capital additions. See Note 11, Long-Term Debt and Capital Lease Obligations, for information on the Tax Legislation impacts on the lease payments.


Wisconsin Electric Power CompanyB-41
2018 Annual Financial Statements



The following regulatory liabilities were reflected on our balance sheets as of December 31:
(in millions) 2018 2017 See Note
Regulatory liabilities      
Income tax related items (1)
 $1,024.8
 $849.1
 12
Removal costs (2)
 748.1
 730.0
  
Mines deferral (3)
 120.8
 95.1
  
Pension and OPEB costs (4)
 74.7
 10.0
 15
Uncollectible expense (5)
 16.4
 6.4
 1(d)
Energy efficiency programs (6)
 13.5
 11.1
  
Other, net 15.9
 19.4
  
Total regulatory liabilities $2,014.2
 $1,721.1
  
       
Balance Sheet Presentation      
Current liabilities $11.9
 $13.1
  
Regulatory liabilities 2,002.3
 1,708.0
  
Total regulatory liabilities $2,014.2
 $1,721.1
  
(1) 
For information on the regulatory treatment of the impacts of the Tax Legislation, see Note 21, Regulatory Environment.
(2) 
Represents amounts collected from customers to cover the future cost of property, plant, and equipment removals that are not legally required. Legal obligations related to the removal of property, plant, and equipment are recorded as AROs.
(3) 
Represents the deferral of revenues less the associated cost of sales related to Tilden, which were not included in the PSCW's 2015 rate order. We intend to request that this deferral be applied for the benefit of Wisconsin retail electric customers in a future rate proceeding.
(4) 
Primarily represents the unrecognized future pension and OPEB benefits related to our defined benefit pension and OPEB plans. We will amortize these regulatory liabilities into net periodic benefit cost over the average remaining service life of each plan.
(5) 
Represents amounts refundable to customers related to our uncollectible expense tracking mechanism. This mechanism allows us to recover or refund the difference between actual uncollectible write-offs and the amounts recovered in rates.
(6) 
Represents amounts refundable to customers related to programs designed to meet energy efficiency standards.


NOTE 6—PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consisted of the following utility and non-utility and other assets at December 31:
(in millions) 2018 2017
Electric – generation $3,560.0
 $3,447.7
Electric – distribution 4,837.9
 4,600.2
Natural gas – distribution, storage, and transmission 1,269.6
 1,166.8
Property, plant, and equipment to be retired 174.8
 872.7
Other 801.8
 656.0
Less: Accumulated depreciation 3,239.4
 2,970.3
Net 7,404.7
 7,773.1
CWIP 124.7
 159.5
Net utility property, plant, and equipment 7,529.4
 7,932.6
     
Property under capital leases 3,043.5
 3,009.1
Less: Accumulated amortization 1,055.6
 945.9
Net leased facilities 1,987.9
 2,063.2
     
Non-utility and other property, plant, and equipment 11.6
 11.9
     
Total property, plant, and equipment $9,528.9
 $10,007.7


Wisconsin Electric Power CompanyB-42
2018 Annual Financial Statements



Utility Segment Plant to be Retired
We have evaluated future plans for our older and less efficient fossil fuel generating units and have either retired or announced the retirement of the plants identified below. In December 2017, a severance liability in the amount of $25.8 million was recorded in other current liabilities related to these plant retirements.
(in millions)  
Severance liability at December 31, 2017 $25.8
Severance payments (9.9)
Other (3.0)
Total severance liability at December 31, 2018 $12.9

Pleasant Prairie Power Plant
The Pleasant Prairie power plant was retired effective April 10, 2018. The carrying value of this plant was $645.9 million at December 31, 2018. This amount included the net book value of $749.5 million, which was classified as a regulatory asset on our balance sheet. In addition, a $103.6 million cost of removal reserve related to the Pleasant Prairie power plant was classified as a regulatory liability at December 31, 2018. We continue to amortize this regulatory asset on a straight-line basis using the composite depreciation rates approved by the PSCW before this plant was retired. Amortization is included in depreciation and amortization in the income statement. We have FERC approval to continue to collect the carrying value of the Pleasant Prairie power plant using the approved composite depreciation rates, in addition to a return on the remaining carrying value. However, this approval is subject to refund while the FERC completes its prudency review. We will address the accounting and regulatory treatment related to the retirement of Pleasant Prairie with the PSCW in conjunction with our anticipated 2019 rate case. The physical dismantlement of the plant will not occur immediately. It may take several years to finalize long-term plans for the site. See Note 19, Commitments and Contingencies, for more information.

Presque Isle Power Plant
In October 2017, the MPSC approved UMERC’s application to construct and operate approximately 180 MW of natural gas-fired generation in the Upper Peninsula of Michigan. Upon receiving this approval, retirement of the PIPP generating units became probable. Pursuant to MISO's April 2018 approval of the retirement of the plant, the PIPP units are required to be retired on or before May 31, 2019. The carrying value of the PIPP units was $174.8 million at December 31, 2018. This amount included net book value of $185.4 million, which was classified as plant to be retired within property, plant, and equipment on our balance sheet. In addition, a $10.6 million cost of removal reserve related to the PIPP units was classified as a regulatory liability at December 31, 2018. These units are included in rate base, and we continue to depreciate them on a straight-line basis using the composite depreciation rates approved by the PSCW. Upon retirement of PIPP, we will file with the FERC for approval to continue to collect the carrying value of the PIPP using the current approved composite depreciation rates, in addition to a return on the remaining carrying value. We will address the accounting and regulatory treatment related to the retirement of the PIPP with the PSCW in conjunction with our anticipated 2019 Wisconsin rate case, and also expect that the retirement will be addressed by the MPSC. See Note 21, Regulatory Environment, for more information.


NOTE 7—ASSET RETIREMENT OBLIGATIONS
We have recorded AROs primarily for asbestos abatement at certain generation and substation facilities, the removal and dismantlement of biomass and hydro generation facilities, and the closure of fly-ash landfills at our generation facilities. We establish regulatory assets and liabilities to record the differences between ongoing expense recognition under the ARO accounting rules and the rate-making practices for retirement costs authorized by the applicable regulators. On our balance sheets, AROs are recorded within other long-term liabilities.

The following table shows changes to our AROs during the years ended December 31:
(in millions) 2018 2017 2016
Balance as of January 1 $68.3
 $61.5
 $58.7
Accretion 3.3
 3.2
 3.0
Additions and revisions to estimated cash flows 1.0
 5.5
 
Liabilities settled (1.9) (1.9) (0.2)
Balance as of December 31 $70.7
 $68.3
 $61.5



Wisconsin Electric Power CompanyB-43
2018 Annual Financial Statements



NOTE 8—COMMON EQUITY
Stock-Based Compensation Plans
The following table summarizes our pre-tax stock-based compensation expense and the related tax benefit recognized in income for the years ended December 31:
(in millions) 2018 2017 2016
Stock options $2.0
 $1.3
 $1.8
Restricted stock 3.0
 0.8
 1.8
Performance units 9.6
 9.9
 3.9
Stock-based compensation expense $14.6
 $12.0
 $7.5
Related tax benefit $4.0
 $4.8
 $3.0

Stock-based compensation costs capitalized during 2018, 2017, and 2016 were not significant.

Stock Options
The following is a summary of our employees' WEC Energy Group stock option activity during 2018:
Stock Options Number of Options Weighted-Average Exercise Price 
Weighted-Average Remaining Contractual Life
(in years)
 
Aggregate Intrinsic Value
(in millions)
Outstanding as of January 1, 2018 1,196,147
 $37.29
    
Granted 81,730
 $66.02
    
Exercised (340,563) $29.45
    
Transferred (238,500) $39.71
    
Outstanding as of December 31, 2018 698,814
 $43.64
 5.0 $17.9
Exercisable as of December 31, 2018 538,764
 $39.30
 4.1 $16.1

The aggregate intrinsic value of outstanding and exercisable options in the above table represents the total pre-tax intrinsic value that would have been received by the option holders had they exercised all of their options on December 31, 2018. This is calculated as the difference between WEC Energy Group's closing stock price on December 31, 2018, and the option exercise price, multiplied by the number of in-the-money stock options. The intrinsic value of options exercised during the years ended December 31, 2018, 2017, and 2016 was $12.9 million, $11.2 million, and $14.1 million, respectively. Cash received by WEC Energy Group from exercises of its options by our employees was $10.0 million, $7.7 million, and $12.1 million during the years ended December 31, 2018, 2017, and 2016, respectively. The actual tax benefit from option exercises for the same periods was approximately $2.7 million, $4.5 million, and $5.6 million, respectively.

As of December 31, 2018, we expected to recognize approximately $1.0 million of unrecognized compensation cost related to unvested and outstanding WEC Energy Group stock options over the next 1.7 years on a weighted-average basis.

During the first quarter of 2019, the Compensation Committee awarded 59,404 non-qualified WEC Energy Group stock options with an exercise price of $68.18 and a weighted-average grant date fair value of $8.60 per option to certain of our officers and other key employees under its normal schedule of awarding long-term incentive compensation.

Restricted Shares
The following is a summary of our employees' WEC Energy Group restricted stock activity during 2018:
Restricted Shares Number of Shares Weighted-Average Grant Date Fair Value
Outstanding and unvested as of January 1, 2018 15,283
 $54.96
Granted 7,518
 $64.99
Released (5,380) $54.58
Transferred (5,823) $57.17
Forfeited (1,747) $60.50
Outstanding and unvested as of December 31, 2018 9,851
 $60.53

The intrinsic value of WEC Energy Group restricted stock held by our employees that was released was $0.4 million, $0.5 million, and $0.4 million for the years ended December 31, 2018, 2017, and 2016, respectively. The actual tax benefit from released restricted shares for the same years was $0.1 million, $0.2 million, and $0.2 million, respectively.

Wisconsin Electric Power CompanyB-44
2018 Annual Financial Statements




As of December 31, 2018, we expected to recognize approximately $1.3 million of unrecognized compensation cost related to unvested and outstanding WEC Energy Group restricted stock over the next 1.6 years on a weighted-average basis.

During the first quarter of 2019, the Compensation Committee awarded 5,181 WEC Energy Group restricted shares to our officers and other key employees under its normal schedule of awarding long-term incentive compensation. The grant date fair value of these awards was $68.18 per share.

Performance Units
During 2018, 2017, and 2016, the Compensation Committee awarded 32,650; 34,765; and 35,700 WEC Energy Group performance units, respectively, to our officers and other key employees under the WEC Energy Group Performance Unit Plan.

Performance units with an intrinsic value of $2.0 million, $1.4 million, and $3.4 million were settled during 2018, 2017, and 2016, respectively. The actual tax benefit from the distribution of performance units for the same years was approximately $0.4 million, $0.4 million, and $0.5 million, respectively.

At December 31, 2018, our employees held 68,583 of outstanding WEC Energy Group performance units, including dividend equivalents. A liability of $4.3 million was recorded on our balance sheet at December 31, 2018 related to these outstanding units. As of December 31, 2018, we expected to recognize approximately $8.6 million of unrecognized compensation cost related to unvested and outstanding WEC Energy Group performance units over the next 1.3 years on a weighted-average basis.

During the first quarter of 2019, performance units held by our employees with an intrinsic value of $2.2 million were settled. The actual tax benefit from the distribution of these awards was $0.5 million. In January 2019, the Compensation Committee also awarded 22,452 WEC Energy Group performance units to our officers and other key employees under its normal schedule of awarding long-term incentive compensation.

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, Wisconsin law prohibits us from making loans to or guaranteeing obligations of WEC Energy Group or its subsidiaries.

In accordance with our most recent rate order, we may not pay common dividends above the test year forecasted amount reflected in our rate case, if it would cause our average common equity ratio, on a financial basis, to fall below our authorized level of 51%. A return of capital in excess of the test year amount can be paid by us at the end of the year provided that our average common equity ratio does not fall below the authorized level.

We may not pay common dividends to WEC Energy Group under our Restated Articles of Incorporation if any dividends on our outstanding preferred stock have not been paid. In addition, pursuant to the terms of our 3.60% Serial Preferred Stock, our ability to declare common dividends would be limited to 75% or 50% of net income during a twelve month period if our common stock equity to total capitalization, as defined in the preferred stock designation, is less than 25% and 20%, respectively.

See Note 10, Short-Term Debt and Lines of Credit, for discussion of certain financial covenants related to short-term debt obligations.

As of December 31, 2018, our restricted retained earnings totaled $2.2 billion.

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



Wisconsin Electric Power CompanyB-45
2018 Annual Financial Statements



NOTE 9—PREFERRED STOCK
The following table shows preferred stock authorized and outstanding at December 31, 2018 and 2017:
(in millions, except share and per share amounts) Shares Authorized Shares Outstanding Redemption Price Per Share Total
$100 par value, Six Per Cent. Preferred Stock 45,000
 44,498
 
 $4.4
$100 par value, Serial Preferred Stock 2,286,500
      
3.60% Series   260,000
 $101
 26.0
$25 par value, Serial Preferred Stock 5,000,000
 
 
 
Total       $30.4


NOTE 10—SHORT-TERM DEBT AND LINES OF CREDIT
The following table shows our short-term borrowings and their corresponding weighted-average interest rates as of December 31:
(in millions, except percentages) 2018 2017
Commercial paper    
Amount outstanding at December 31 $134.9
 $210.9
Average interest rate on amounts outstanding at December 31 2.96% 1.81%

Our average amount of commercial paper borrowings based on daily outstanding balances during 2018 was $132.6 million, with a weighted-average interest rate during the period of 2.26%.

We have entered into a bank back-up credit facility to maintain short-term credit liquidity which, among other terms, requires us to maintain, subject to certain exclusions, a total funded debt to capitalization ratio of 65% or less. As of December 31, 2018, we were in compliance with this ratio.

The information in the table below relates to our revolving credit facility used to support our commercial paper borrowing program, including remaining available capacity under this facility as of December 31:
(in millions) Maturity 2018
Revolving credit facility October 2022 $500.0
     
Less:    
Letters of credit issued inside credit facility   $1.2
Commercial paper outstanding   134.9
     
Available capacity under existing agreement   $363.9

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

Our bank back-up credit facility contains customary covenants, including certain limitations on our ability to sell assets. The credit facility also contains customary events of default, including payment defaults, material inaccuracy of representations and warranties, covenant defaults, bankruptcy proceedings, certain judgments, Employee Retirement Income Security Act of 1974 defaults and change of control.


NOTE 11—LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
See our statements of capitalization for details on our long-term debt.

Debentures and Notes
In October 2018, we issued $300.0 million of 4.30% Debentures due October 15, 2048, and used the net proceeds to repay short-term debt and for working capital and other corporate purposes.

In July 2018, we redeemed all $80.0 million of our series of tax-exempt pollution control refunding bonds. From August 2009 until they were called, the bonds were not reported in our long-term debt because they were previously repurchased by us.


Wisconsin Electric Power CompanyB-46
2018 Annual Financial Statements



In June 2018, our $250.0 million of 1.70% Debentures matured, and the outstanding principal was paid with proceeds received from issuing commercial paper.

The following table shows the future maturities of our long-term debt outstanding (excluding obligations under capital leases) as of December 31, 2018:
(in millions)  
2019 $250.0
2020 
2021 300.0
2022 
2023 
Thereafter 2,185.0
Total $2,735.0

We amortize debt premiums, discounts, and debt issuance costs over the life of the debt and we include the costs in interest expense.

Obligations Under Capital Leases
We are the obligor under a power purchase contract with an unaffiliated third party and we lease power plants from We Power. Under capital lease accounting, we have recorded the leased plants and corresponding obligations under the capital leases on our balance sheets. We treat these agreements as operating leases for rate-making purposes. We record our minimum lease payments under the power purchase contract as purchased power expense on our income statements. We record the lease payments under our leases with We Power as rent expense in other operation and maintenance in our income statements. We record the difference between the minimum lease payments and the sum of imputed interest and amortization costs calculated under capital lease accounting as a deferred regulatory asset on our balance sheets. See Note 5, Regulatory Assets and Liabilities, for more information on our plant related capital leases.

Power Purchase Commitment
In 1997, we entered into a 25-year power purchase contract with an unaffiliated independent power producer. The contract, for 236 MW of firm capacity from a natural gas-fired cogeneration facility, includes zero minimum energy requirements. When the contract expires in 2022, we may, at our option and with proper notice, renew for another 10 years or purchase the generating facility at fair market value or allow the contract to expire. We account for this contract as a capital lease and recorded the leased facility and corresponding obligation under the capital lease at the estimated fair value of the plant's electric generating facilities. We are amortizing the leased facility on a straight-line basis over the original 25-year term of the contract.

We treat the long-term power purchase contract as an operating lease for rate-making purposes and we record our minimum lease payments as cost of sales on our income statements. We record the difference between the minimum lease payments and the sum of imputed interest and amortization costs calculated under capital lease accounting as a deferred regulatory asset on our balance sheets. Due to the timing and the amounts of the minimum lease payments, the regulatory asset increased to approximately $78.5 million during 2009, at which time the regulatory asset began to be reduced to zero over the remaining life of the contract. The total obligation under the capital lease was $23.3 million as of December 31, 2018, and will decrease to zero over the remaining life of the contract.

Port Washington Generating Station
We are leasing PWGS 1 and PWGS 2, two 545 MW natural gas-fired generation units which were placed in service in July 2005 and May 2008, respectively, from We Power under PSCW approved leases. The leased units and corresponding obligations for the units have been recorded at the estimated fair value of $736.9 million. We are amortizing the leased units on a straight-line basis over the original 25-year term of the leases. The lease payments are expected to be recovered through our rates, as supported by the 2001 leased generation law. Due to the timing and the amounts of the minimum lease payments, we expect the regulatory asset to increase to approximately $129.2 million in the year 2021 for PWGS 1 and to approximately $125.9 million in the year 2023 for PWGS 2, at which time the regulatory assets will be reduced to zero over the remaining lives of the contracts. The total obligation under the capital leases for the units was $634.5 million as of December 31, 2018, and will decrease to zero over the remaining lives of the contracts.

When the PWGS 1 and PWGS 2 contracts expire in 2030 and 2033, respectively, we may, at our option and with proper notice, choose to renew one or both contracts for up to three consecutive renewal terms (each renewal term would approximate 80% of the then remaining economic useful life of the respective generation unit), purchase one or both generating facilities at fair market value, or allow the contracts to expire.

Wisconsin Electric Power CompanyB-47
2018 Annual Financial Statements




Elm Road Generating Station
We are leasing ER 1, ER 2, and the common facilities, which are also utilized by our OC 5 through OC 8, from We Power under PSCW approved leases. We are amortizing the leased units on a straight-line basis over the 30-year term of the leases. ER 1 and ER 2 were placed in service in February 2010 and January 2011, respectively. The leased units and corresponding capital lease obligations have been recorded at the estimated fair value of $2,166.3 million. The lease payments are expected to be recovered through our rates, as supported by the 2001 leased generation law. Due to the timing and the amounts of the minimum lease payments, we expect the regulatory asset to increase to approximately $521.8 million in the year 2028 for ER 1 and to approximately $427.9 million in the year 2029 for ER 2, at which time the regulatory assets will be reduced to zero over the remaining lives of the contracts. The total obligation under the capital leases was $2,199.3 million as of December 31, 2018, and will decrease to zero over the remaining lives of the contracts.

When the ER 1 and ER 2 contracts expire in 2040 and 2041, respectively, we may, at our option and with proper notice, choose to renew one or both contracts for up to three consecutive renewal terms (each renewal term would approximate 80% of the then remaining economic useful life of the respective generation unit), purchase one or both generating facilities at fair market value, or allow the contracts to expire.

We paid the following lease payments during 2018, 2017, and 2016:
(in millions) 2018 2017 2016
Long-term power purchase commitment $7.7
 $7.2
 $37.6
PWGS  76.6
 85.0
 82.4
ERGS 297.1
 335.5
 329.8
Total $381.4
 $427.7
 $449.8

The rates charged to our customers related to the We Power leases have remained level for each of the three years ended December 31, 2018, 2017, and 2016, at $398.6 million. Because this is also the amount that was charged to operating and maintenance expense during these years, the lease payments made to We Power over this three-year period did not match the amounts we recorded as lease expense. As disclosed in the table above, lease payments related to the PWGS and ERGS leases were $373.7 million, $420.5 million, and $412.2 million in 2018, 2017, and 2016, respectively. As a result of the Tax Legislation, the lease payments were recalculated and decreased by approximately $50 million in 2018, resulting in lower lease payments when compared to lease expense recorded in 2018. Partially offsetting the lower lease payments made in 2018, and also the driving factor behind the higher lease payments in 2017 and 2016, compared to lease expense, were capital additions placed in service or that are in process since our last rate case. These capital additions are factored into our bill from We Power, but have not yet been factored into the rates we are collecting from customers. The difference between the payments we have made to We Power and the amounts collected in rates and recorded as lease expense is not expected to impact earnings as we are allowed to record the difference as an increase or reduction to the We Power generation regulatory asset until our next rate case. See Note 5, Regulatory Assets and Liabilities, for more information on the regulatory asset related to the We Power leases, and also Note 12, Income Taxes, and Note 21, Regulatory Environment, for more information on the Tax Legislation and our rates.

The following table summarizes our capitalized leased facilities as of December 31:
(in millions) 2018 2017
Long-term power purchase commitment    
Under capital lease $140.3
 $140.3
Accumulated amortization (120.9) (115.2)
Total long-term power purchase commitment 19.4
 25.1
     
PWGS     
Under capital lease 736.9
 727.4
Accumulated amortization (335.9) (305.1)
Total PWGS  401.0
 422.3
     
ERGS    
Under capital lease 2,166.3
 2,141.4
Accumulated amortization (598.8) (525.6)
Total ERGS 1,567.5
 1,615.8
     
Total leased facilities $1,987.9
 $2,063.2

Wisconsin Electric Power CompanyB-48
2018 Annual Financial Statements




Future minimum lease payments under our capital leases and the present value of our net minimum lease payments as of December 31, 2018 are as follows:
(in millions) Power Purchase Commitment PWGS ERGS Total
2019 $15.5
 $97.6
 $290.8
 $403.9
2020 16.4
 97.6
 290.8
 404.8
2021 17.2
 97.6
 290.8
 405.6
2022 7.6
 97.6
 290.6
 395.8
2023 
 97.6
 290.5
 388.1
Thereafter 
 773.5
 4,792.8
 5,566.3
Total minimum lease payments 56.7
 1,261.5
 6,246.3
 7,564.5
Less: Estimated executory costs (26.1) 
 
 (26.1)
Net minimum lease payments 30.6
 1,261.5
 6,246.3
 7,538.4
Less: Interest (7.3) (627.0) (4,047.0) (4,681.3)
Present value of minimum lease payments 23.3
 634.5
 2,199.3
 2,857.1
Less: Due currently (4.9) (22.3) (22.7) (49.9)
Long-term obligations under capital lease $18.4
 $612.2
 $2,176.6
 $2,807.2


NOTE 12—INCOME TAXES
Income Tax Expense
The following table is a summary of income tax expense for each of the years ended December 31:
(in millions) 2018 2017 2016
Current tax (benefit) expense $(56.2) $81.5
 $4.8
Deferred income taxes, net 0.1
 110.6
 207.3
Investment tax credit, net (0.8) (0.9) (1.1)
Total income tax (benefit) expense $(56.9) $191.2
 $211.0

Statutory Rate Reconciliation
The provision for income taxes for each of the years ended December 31 differs from the amount of income tax determined by applying the applicable United States statutory federal income tax rate to income before income taxes as a result of the following:
  2018 2017 2016
(in millions) Amount Effective Tax Rate Amount Effective Tax Rate Amount Effective Tax Rate
Expected tax at statutory federal tax rates $63.3
 21.0 % $184.4
 35.0 % $201.4
 35.0 %
State income taxes net of federal tax benefit 19.6
 6.5 % 27.9
 5.3 % 31.8
 5.5 %
Tax repairs * (120.7) (39.9)% 
  % 
  %
Federal excess amortization (15.5) (5.1)% 
  % 
  %
Production tax credits (9.4) (3.1)% (17.6) (3.3)% (16.5) (2.8)%
Investment tax credit restored (0.8) (0.3)% (0.9) (0.2)% (1.1) (0.2)%
AFUDC – Equity (0.8) (0.3)% (1.1) (0.2)% (1.5) (0.3)%
Domestic production activities deferral (deduction) 6.1
 2.0 % (7.8) (1.5)% (7.8) (1.4)%
Other, net 1.3
 0.4 % 6.3
 1.1 % 4.7
 0.8 %
Total income tax (benefit) expense $(56.9) (18.8)% $191.2
 36.2 % $211.0
 36.6 %
*
In accordance with a settlement agreement with the PSCW, we will flow through the tax benefit of our repair related deferred tax liabilities in 2018 and 2019, to maintain certain regulatory asset balances at their December 31, 2017 levels. The flow through treatment of the repair related deferred tax liabilities offsets the negative income statement impact of holding the regulatory assets level, resulting in no change to net income. See Note 21, Regulatory Environment, for more information about the impact of the Tax Legislation and the Wisconsin rate settlement.

Deferred Income Tax Assets and Liabilities
On December 22, 2017, the Tax Legislation was signed into law. For businesses, the Tax Legislation reduced the corporate federal tax rate from a maximum of 35% to a 21% rate effective January 1, 2018. In December 2017, we recorded a tax benefit related to the re-measurement of our deferred taxes in the amount of approximately $1,065 million. Accordingly, this amount was

Wisconsin Electric Power CompanyB-49
2018 Annual Financial Statements



recorded as both an increase to regulatory liabilities as well as a decrease to certain existing regulatory assets as of December 31, 2017.

On December 22, 2017, the SEC staff issued guidance in Staff Accounting Bulletin 118 (SAB 118), Income Tax Accounting Implications of the Tax Cuts and Jobs Act, which provided for a measurement period of up to one year from the enactment date to complete accounting under GAAP for the tax effects of the legislation. Due to the complex and comprehensive nature of the enacted tax law changes, and their application under GAAP, certain amounts related to bonus depreciation and future tax benefit utilization recorded in the financial statements as a result of the Tax Legislation were considered "provisional" and subject to revision at December 31, 2017, and through 2018, as discussed in SAB 118.

In 2018, we considered all available guidance from industry and income tax authorities related to these tax items, analyzed the impact on Alternative Minimum Tax Credit carryforwards, and revised our estimates for re-measurement of deferred income taxes related to guidance on bonus depreciation. At December 31, 2018, we no longer considered any amounts related to bonus depreciation and future tax benefit utilization "provisional." However, any further amendments or technical corrections to the Tax Legislation could subject these tax items to revision.

The components of deferred income taxes as of December 31 were as follows:
(in millions) 2018 2017
Deferred tax assets    
Tax gross up – regulatory items $203.0
 $240.1
Deferred revenues 129.3
 128.8
Future tax benefits 15.9
 133.1
Employee benefits and compensation 
 50.2
Other 156.6
 82.4
Total deferred tax assets $504.8
 $634.6
     
Deferred tax liabilities    
Property-related $1,365.9
 $1,487.0
Deferred costs – Pleasant Prairie 176.0
 
Deferred costs – SSR 110.7
 81.4
Employee benefits and compensation 55.9
 117.4
Deferred transmission costs 55.4
 60.1
Other 39.2
 44.2
Total deferred tax liabilities 1,803.1
 1,790.1
Deferred tax liability, net $1,298.3
 $1,155.5

Consistent with rate-making treatment, deferred taxes in the table above are offset for temporary differences that have related regulatory assets and liabilities.

At December 31, 2018, we had $11.6 million of tax credit carryforwards resulting in deferred tax assets of $11.6 million. Tax credit carryforwards begin to expire in 2038. We expect to have future taxable income sufficient to utilize these deferred tax assets. At December 31, 2017, we had $4.0 million and $125.6 million of federal charitable contribution and tax credit carryforwards resulting in deferred tax assets of $0.8 million and $125.6 million, respectively. At December 31, 2018, we had $68.7 million of state net operating losses resulting in deferred tax assets of $4.3 million. These state net operating loss carryforwards begin to expire in 2035. We expect to have future taxable income sufficient to utilize these deferred tax assets. At December 31, 2017, we had $74.7 million and $31.9 million of state net operating loss and state charitable contribution carryforwards resulting in deferred tax assets of $4.7 million and $2.0 million, respectively.

Unrecognized Tax Benefits
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(in millions) 2018 2017
Balance as of January 1 $
 $5.1
Reductions for tax positions of prior years 
 (5.1)
Balance as of December 31 $
 $

We do not expect any unrecognized tax benefits to affect our effective tax rate in periods after December 31, 2018.


Wisconsin Electric Power CompanyB-50
2018 Annual Financial Statements



For the years ended December 31, 2018, 2017, and 2016, we recognized no interest, $0.7 million of interest income, and $0.2 million of interest expense, respectively, related to unrecognized tax benefits in our income statements. For the years ended December 31, 2018, 2017, and 2016, we recognized no penalties related to unrecognized tax benefits in our income statements. For the years ended December 31, 2018 and 2017, we had no interest accrued and no penalties accrued related to unrecognized tax benefits on our balance sheets.

We do not anticipate any significant increases in the total amount of unrecognized tax benefits within the next 12 months.

Our primary tax jurisdictions include Federal and the state of Wisconsin. With a few exceptions we are no longer subject to Federal income tax examinations by the IRS for years prior to 2015. As of December 31, 2018, we were subject to examination by the Wisconsin taxing authority for tax years 2014 through 2018.


NOTE 13—FAIR VALUE MEASUREMENTS
The following tables summarize our financial assets and liabilities that were accounted for at fair value on a recurring basis, categorized by level within the fair value hierarchy:
  December 31, 2018
(in millions) Level 1 Level 2 Level 3 Total
Derivative assets        
Natural gas contracts $0.7
 $
 $
 $0.7
FTRs 
 
 4.4
 4.4
Total derivative assets $0.7
 $
 $4.4
 $5.1
         
Derivative liabilities        
Natural gas contracts $1.2
 $
 $
 $1.2
Coal contracts 
 0.1
 
 0.1
Total derivative liabilities $1.2
 $0.1
 $
 $1.3

  December 31, 2017
(in millions) Level 1 Level 2 Level 3 Total
Derivative assets        
Natural gas contracts $0.5
 $0.1
 $
 $0.6
   Petroleum products contracts 0.9
 
 
 0.9
FTRs 
 
 2.4
 2.4
Coal contracts 
 0.7
 
 0.7
Total derivative assets $1.4
 $0.8
 $2.4
 $4.6
         
Derivative liabilities        
Natural gas contracts $2.0
 $0.1
 $
 $2.1
Coal contracts 
 0.3
 
 0.3
Total derivative liabilities $2.0
 $0.4
 $
 $2.4

The derivative assets and liabilities listed in the tables above include options, futures, physical commodity contracts, and other instruments used to manage market risks related to changes in commodity prices. They also include FTRs, which are used to manage electric transmission congestion costs in the MISO Energy Markets.

The following table summarizes the changes to derivatives classified as Level 3 in the fair value hierarchy:
(in millions) 2018 2017 2016
Balance at the beginning of the period $2.4
 $3.1
 $1.6
Purchases 9.4
 6.9
 8.1
Settlements (7.4) (7.6) (6.6)
Balance at the end of the period $4.4
 $2.4
 $3.1


Wisconsin Electric Power CompanyB-51
2018 Annual Financial Statements



Fair Value of Financial Instruments
The following table shows the financial instruments included on our balance sheets that are not recorded at fair value:
  December 31, 2018 December 31, 2017
(in millions) Carrying Amount Fair Value Carrying Amount Fair Value
Preferred stock $30.4
 $28.3
 $30.4
 $30.5
Long-term debt, including current portion 2,709.6
 2,881.6
 2,662.3
 2,976.3

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


NOTE 14—DERIVATIVE INSTRUMENTS
The following table shows our derivative assets and derivative liabilities, none of which are designated as hedging instruments.
  December 31, 2018 December 31, 2017
(in millions) Derivative Assets Derivative Liabilities Derivative Assets Derivative Liabilities
Other current        
   Natural gas contracts $0.7
 $1.2
 $0.6
 $1.9
   Petroleum products contracts 
 
 0.9
 
   FTRs 4.4
 
 2.4
 
   Coal contracts 
 0.1
 0.6
 0.1
   Total other current $5.1
 $1.3
 $4.5
 $2.0
         
Other long-term        
   Natural gas contracts $
 $
 $
 $0.2
   Coal contracts 
 
 0.1
 0.2
   Total other long-term $
 $
 $0.1
 $0.4
Total $5.1
 $1.3
 $4.6
 $2.4

Realized gains (losses) on derivatives are primarily recorded in cost of sales on the income statements. Our estimated notional sales volumes and realized gains (losses) were as follows:
  December 31, 2018 December 31, 2017 December 31, 2016
(in millions) Volume Gains Volume Gains (Losses) Volume Gains (Losses)
Natural gas contracts 53.4 Dth $9.7
 26.9 Dth $(1.0) 35.3 Dth $(12.3)
Petroleum products contracts 4.2 gallons 1.2
 16.7 gallons (1.4) 10.3 gallons (2.6)
FTRs 21.2 MWh 3.4
 27.1 MWh 7.6
 25.3 MWh 7.3
Total   $14.3
   $5.2
   $(7.6)

At December 31, 2018 and 2017, we had posted cash collateral of $1.1 million and $4.9 million, respectively, in our margin accounts.

The following table shows derivative assets and derivative liabilities if derivative instruments by counterparty were presented net on our balance sheets:
  December 31, 2018 December 31, 2017 
(in millions) 
Derivative
Assets
 Derivative Liabilities 
Derivative
Assets
 Derivative Liabilities 
Gross amount recognized on the balance sheet $5.1
 $1.3
 $4.6
 $2.4
 
Gross amount not offset on the balance sheet (0.6) (1.3)*(1.3) (2.0)*
Net amount $4.5
 $
 $3.3
 $0.4
 
*Includes cash collateral posted of $0.7 million at both December 31, 2018 and 2017.



Wisconsin Electric Power CompanyB-52
2018 Annual Financial Statements



NOTE 15—EMPLOYEE BENEFITS
Pension and Other Postretirement Employee Benefits
We participate in WEC Energy Group's defined benefit pension plans and OPEB plans that cover substantially all of our employees. We are responsible for our share of the plan assets and obligations. The benefits for a portion of these plans are funded through irrevocable trusts, as allowed for income tax purposes. Our balance sheets reflect only the liabilities associated with our past and current employees and our share of the plan assets and obligations. We also offer medical, dental, and life insurance benefits to active employees and their dependents. We expense the costs of these benefits as incurred.

Generally, employees who started with us after 1995 receive a benefit based on a percentage of their annual salary plus an interest credit, while employees who started before 1996 receive a benefit based upon years of service and final average salary. New management employees hired after December 31, 2014, and certain new represented employees hired after May 1, 2017, receive an annual company contribution to their 401(k) savings plan instead of being enrolled in the defined benefit plans.

We use a year-end measurement date to measure the funded status of all of the pension and OPEB plans. Due to the regulated nature of our business, we have concluded that substantially all of the unrecognized costs resulting from the recognition of the funded status of the pension and OPEB plans qualify as a regulatory asset.

The following tables provide a reconciliation of the changes in our share of the plans' benefit obligations and fair value of assets:
  Pension Costs OPEB Costs 
(in millions) 2018 2017 2018 2017 
Change in benefit obligation         
Obligation at January 1 $1,193.9
 $1,177.0
 $303.5
 $298.5
 
Service cost 13.2
 12.2
 6.9
 7.0
 
Interest cost 42.3
 47.0
 11.1
 12.1
 
Participant contributions 
 
 7.6
 5.7
 
Plan amendments 
 
 
 (6.8) 
Net transfer to/from affiliates (4.5)
(1) 
(13.4)
(2) 

 (3.3)
(2) 
Actuarial loss (gain) (62.7) 53.1
 (86.2) 5.1
 
Benefit payments (82.8) (82.0) (22.8) (16.5) 
Federal subsidy on benefits paid N/A
 N/A
 0.9
 1.7
 
Transfer 
 
 6.7
(3) 

 
Obligation at December 31 $1,099.4
 $1,193.9
 $227.7
 $303.5
 
          
Change in fair value of plan assets         
Fair value at January 1 $1,134.1
 $1,102.8
 $220.1
 $205.1
 
Actual return on plan assets (31.0) 121.9
 (5.7) 25.9
 
Employer contributions 4.0
 5.1
 2.3
 3.2
 
Participant contributions 
 
 7.6
 5.7
 
Net transfer to/from affiliates (4.5)
(1) 
(13.7)
(2) 

 (3.3)
(2) 
Benefit payments (82.8) (82.0) (22.8) (16.5) 
Fair value at December 31 $1,019.8
 $1,134.1
 $201.5
 $220.1
 
Funded status at December 31 $(79.6) $(59.8) $(26.2) $(83.4) 
(1) 
Benefit obligations and plan assets were moved along with our employees who were transferred to/from affiliated entities. See Note 3, Related Parties, for more information.
(2) 
Benefit obligations and plan assets were moved along with our employees who were transferred to/from affiliated entities, primarily a result of our customer service employees being transferred to WBS.
(3) 
Represents a premium medical account that was transferred into the OPEB benefit obligation.

The amounts recognized on our balance sheets at December 31 related to the funded status of the benefit plans were as follows:
  Pension Costs OPEB Costs
(in millions) 2018 2017 2018 2017
Other long-term assets $12.7
 $
 $
 $
Pension and OPEB obligations 92.3
 59.8
 26.2
 83.4
Total net liabilities $(79.6) $(59.8) $(26.2) $(83.4)


Wisconsin Electric Power CompanyB-53
2018 Annual Financial Statements



The accumulated benefit obligation for all defined benefit pension plans was $1,097.9 million and $1,192.4 million as of December 31, 2018 and 2017, respectively.

The following table shows information for the pension plans for which we have an accumulated benefit obligation in excess of plan assets. Amounts presented are as of December 31:
(in millions) 2018 2017
Projected benefit obligation $997.0
 $1,193.9
Accumulated benefit obligation 995.5
 1,192.4
Fair value of plan assets 904.7
 1,134.1

The following table shows the amounts that have not yet been recognized in our net periodic benefit cost as of December 31:
  Pension Costs OPEB Costs
(in millions) 2018 2017 2018 2017
Net regulatory assets (liabilities)        
Net actuarial loss (gain) $491.0
 $485.4
 $(66.6) $(1.6)
Prior service credits (1.8) (1.0) (6.1) (8.4)
Total $489.2
 $484.4
 $(72.7) $(10.0)

The following table shows the estimated amounts that will be amortized into net periodic benefit cost during 2019:
(in millions) Pension Costs OPEB Costs
Net actuarial loss (gain) $28.7
 $(1.6)
Prior service costs (credits) 0.4
 (1.9)
Total 2019 – estimated amortization $29.1
 $(3.5)

The components of net periodic benefit cost (including amounts capitalized to our balance sheets) for the years ended December 31 were as follows:
  Pension Costs OPEB Costs
(in millions) 2018 2017 2016 2018 2017 2016
Service cost $13.2
 $12.2
 $10.5
 $6.9
 $7.0
 $7.3
Interest cost 42.3
 47.0
 49.7
 11.1
 12.1
 13.2
Expected return on plan assets (75.2) (76.6) (77.7) (15.5) (14.7) (14.0)
Plan settlement 
 4.1
 
 
 
 
Amortization of prior service cost (credit) 0.8
 1.1
 1.6
 (2.2) (1.4) (1.1)
Amortization of net actuarial loss 38.0
 35.4
 32.4
 
 
 1.0
Net periodic benefit cost $19.1
 $23.2
 $16.5
 $0.3
 $3.0
 $6.4

Effective January 1, 2018, we adopted ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which modifies certain aspects of the accounting for employee benefit costs. Under the new guidance, only the service cost component can be included in total operating expenses. The remaining components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component, outside of operating income. As required, this change was applied retrospectively to all prior periods presented. Accordingly, for the years ended December 31, 2018, 2017, and 2016, we have presented the service cost component of our retirement benefit plans in other operation and maintenance on the income statements, while presenting the non-service cost components in other income, net.


Wisconsin Electric Power CompanyB-54
2018 Annual Financial Statements



As required by ASU 2017-07, our income statements for the years ended December 31, 2017 and 2016, were retroactively restated from what was previously presented in our 2017 Annual Report on Form 10-K. The impacts to our income statements from adoption of this standard are reflected in the table below.
  Year Ended December 31, 2017 Year Ended December 31, 2016
(in millions) Form 10-K Income Statement Impact of ASU 2017-07 Income Statement After Adoption Form 10-K Income Statement Impact of ASU 2017-07 Income Statement After Adoption
Operating expenses            
Other operation and maintenance $1,358.5
 $(6.5) $1,352.0
 $1,430.2
 $(4.7) $1,425.5
             
Other expense            
Other income, net 19.7
 (6.5) 13.2
 9.1
 (4.7) 4.4

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

The weighted-average assumptions used to determine the benefit obligations for the plans were as follows for the years ended December 31:
  Pension OPEB
  2018 2017 2018 2017
Discount rate 4.30% 3.65% 4.30% 3.65%
Rate of compensation increase 3.40% 3.20% N/A N/A
Assumed medical cost trend rate (Pre 65) N/A N/A 6.25% 6.50%
Ultimate trend rate (Pre 65) N/A N/A 5.00% 5.00%
Year ultimate trend rate is reached (Pre 65) N/A N/A 2024 2024
Assumed medical cost trend rate (Post 65) N/A N/A 6.12% 6.18%
Ultimate trend rate (Post 65) N/A N/A 5.00% 5.00%
Year ultimate trend rate is reached (Post 65) N/A N/A 2028 2028

The weighted-average assumptions used to determine the net periodic benefit cost for the plans were as follows for the years ended December 31:
  Pension Costs
  2018 2017 2016
Discount rate 3.65% 4.12% 4.45%
Expected return on plan assets 7.00% 7.00% 7.00%
Rate of compensation increase 3.40% 3.20% 3.50%

  OPEB Costs
  2018 2017 2016
Discount rate 3.65% 4.10% 4.45%
Expected return on plan assets 7.25% 7.25% 7.25%
Assumed medical cost trend rate (Pre 65) 6.50% 7.00% 7.50%
Ultimate trend rate (Pre 65) 5.00% 5.00% 5.00%
Year ultimate trend rate is reached (Pre 65) 2024 2021 2021
Assumed medical cost trend rate (Post 65) 6.18% 7.00% 7.50%
Ultimate trend rate (Post 65) 5.00% 5.00% 5.00%
Year ultimate trend rate is reached (Post 65) 2028 2021 2021

WEC Energy Group consults with its investment advisors on an annual basis to help forecast expected long-term returns on plan assets by reviewing historical returns as well as calculating expected total trust returns using the weighted-average of long-term market returns for each of the major target asset categories utilized in the fund. For 2019, the expected return on asset assumption is 7.00% for the pension plan and 7.25% for the OPEB plan.

Wisconsin Electric Power CompanyB-55
2018 Annual Financial Statements




Assumed health care cost trend rates have a significant effect on the amounts reported by us for the health care plans. For the year ended December 31, 2018, a one-percentage-point change in assumed health care cost trend rates would have had the following effects:
(in millions) 1% Increase 1% Decrease
Effect on total of service and interest cost components of net periodic postretirement health care benefit cost $2.8
 $(2.2)
Effect on the health care component of the accumulated postretirement benefit obligation 16.8
 (14.0)

Plan Assets
Current pension trust assets and amounts which are expected to be contributed to the trusts in the future are expected to be adequate to meet pension payment obligations to current and future retirees.

The Investment Trust Policy Committee oversees investment matters related to all of our funded benefit plans. The Committee works with external actuaries and investment consultants on an on-going basis to establish and monitor investment strategies and target asset allocations. Forecasted cash flows for plan liabilities are regularly updated based on annual valuation results. Target allocations are determined utilizing projected benefit payment cash flows and risk analyses of appropriate investments. They are intended to reduce risk, provide long-term financial stability for the plans and maintain funded levels which meet long-term plan obligations while preserving sufficient liquidity for near-term benefit payments.

Our pension trust target asset allocation is 35% equity investments, 55% fixed income investments, and 10% private equity and real estate investments. The two OPEB trusts' target asset allocations are 50% equity investments and 50% fixed income investments, and 70% equity investments and 30% fixed income investments, respectively. Equity securities include investments in large-cap, mid-cap, and small-cap companies. Fixed income securities include corporate bonds of companies from diversified industries, mortgage and other asset backed securities, commercial paper, and United States Treasuries.

Pension and OPEB plan investments are recorded at fair value. See Note 1(m), Fair Value Measurements, for more information regarding the fair value hierarchy and the classification of fair value measurements based on the types of inputs used.

The following tables summarize the fair values of our investments by asset class:
  December 31, 2018
  Pension Plan Assets OPEB Assets
(in millions) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Asset Class                
Equity securities:                
Unites States Equity $89.0
 $
 $
 $89.0
 $24.6
 $
 $
 $24.6
International Equity 85.8
 
 
 85.8
 24.0
 
 
 24.0
Fixed income securities: *                
United States Bonds 66.2
 436.5
 
 502.7
 24.0
 48.2
 
 72.2
International Bonds 8.3
 31.4
 
 39.7
 1.6
 3.0
 
 4.6
  $249.3
 $467.9
 $
 $717.2
 $74.2
 $51.2
 $
 $125.4
Investments measured at net asset value       $302.6
       $76.1
Total $249.3
 $467.9
 $
 $1,019.8
 $74.2
 $51.2
 $
 $201.5
*This category represents investment grade bonds of United States and foreign issuers denominated in United States dollars from diverse industries.

Wisconsin Electric Power CompanyB-56
2018 Annual Financial Statements



  December 31, 2017
  Pension Plan Assets OPEB Assets
(in millions) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Asset Class                
Cash and cash equivalents $
 $6.6
 $
 $6.6
 $2.1
 $0.5
 $
 $2.6
Equity securities:                
United States equity 109.4
 0.1
 
 109.5
 29.0
 
 
 29.0
International equity 114.4
 
 
 114.4
 32.2
 
 
 32.2
Fixed income securities: *                
United States bonds 75.9
 467.8
 
 543.7
 24.4
 46.3
 
 70.7
International bonds 9.7
 32.8
 
 42.5
 1.7
 2.9
 
 4.6
Private Equity and Real Estate 
 20.6
 55.3
 75.9
 
 1.4
 3.8
 5.2
  $309.4
 $527.9
 $55.3
 $892.6
 $89.4
 $51.1
 $3.8
 $144.3
Investments measured at net asset value       $241.5
       $75.8
Total $309.4
 $527.9
 $55.3
 $1,134.1
 $89.4
 $51.1
 $3.8
 $220.1
*This category represents investment grade bonds of United States and foreign issuers denominated in United States dollars from diverse industries.

The following tables set forth a reconciliation of changes in the fair value of pension and OPEB plan assets categorized as Level 3 in the fair value hierarchy:
  Private Equity and Real Estate
(in millions) Pension OPEB
Beginning balance at January 1, 2018 $55.3
 $3.8
Realized and unrealized gains 4.1
 0.8
Purchases 9.8
 0.7
Liquidations (1.2) (0.1)
Transfers out of level 3 (68.0) (5.2)
Ending balance at December 31, 2018 $
 $

  Private Equity and Real Estate
(in millions) Pension OPEB
Beginning balance at January 1, 2017 $11.0
 $0.7
Realized and unrealized gains 1.9
 0.2
Purchases 22.3
 1.5
Transfers into level 3 20.1
 1.4
Ending balance at December 31, 2017 $55.3
 $3.8

Cash Flows
We expect to contribute $3.8 million to the pension plans and $0.1 million to the OPEB plans in 2019, dependent upon various factors affecting us, including our liquidity position and the effects of the new Tax Legislation.

The following table shows the payments, reflecting expected future service, that we expect to make for pension and OPEB:
(in millions) Pension Costs OPEB Costs
2019 $91.8
 $11.5
2020 91.7
 12.7
2021 86.7
 13.3
2022 84.5
 13.7
2023 81.7
 14.0
2024-2028 360.5
 70.2


Wisconsin Electric Power CompanyB-57
2018 Annual Financial Statements



Savings Plans
WEC Energy Group sponsors 401(k) savings plans that allow substantially all of our full-time employees to contribute a portion of their pre-tax and/or after-tax income in accordance with plan-specified guidelines. A percentage of employee contributions are matched by us through a contribution into the employee's savings plan account, up to certain limits. The 401(k) savings plans include an Employee Stock Ownership Plan. Certain employees receive an employer retirement contribution, which amounts are contributed to an employee's savings plan account. Total costs incurred under all of these plans were $11.9 million in 2018, $11.7 million in 2017, and $10.4 million in 2016.


NOTE 16—INVESTMENT IN AMERICAN TRANSMISSION COMPANY
At December 31, 2016, we owned approximately 23% of ATC, a for-profit, transmission-only company regulated by the FERC for cost of service and certain state regulatory commissions for routing and siting of transmission projects. Effective January 1, 2017, based upon input we received from the PSCW, we transferred our investment in ATC to another subsidiary of WEC Energy Group. This transaction was a non-cash equity transfer between entities under common control, and therefore, did not result in the recognition of a gain or loss. The following table provides a reconciliation of our investment in ATC during the years ended December 31:
(in millions) 2017 2016 
Balance at January 1 $402.0
 $382.2
 
Less: Transfer of ownership interest 402.0
 
 
Add: Earnings from equity method investment 
 55.5
 
Add: Capital contributions 
 16.1
 
Less: Distributions 
 51.7
*
Less: Other 
 0.1
 
Balance at December 31 $
 $402.0
 
*Of this amount, $13.4 million was recorded as a receivable from ATC at December 31, 2016.

See Note 3, Related Parties, for more information on transactions with ATC.


NOTE 17—SEGMENT INFORMATION
We use operating income to measure segment profitability and to allocate resources to our businesses. At December 31, 2018, we reported two segments, which are described below.

Our utility segment includes both our electric and natural gas utility operations. Our electric utility operations are engaged in the generation, distribution, and sale of electricity to customers in southeastern Wisconsin (including metropolitan Milwaukee), east central Wisconsin, and northern Wisconsin, and to one customer in the Upper Peninsula of Michigan. Effective January 1, 2017, we transferred all of our electric distribution assets and customers located in the Upper Peninsula of Michigan to UMERC, with the exception of Tilden. See Note 3, Related Parties, and Note 21, Regulatory Environment, for additional information. Our electric utility operations also include our steam operations, which produce, distribute, and sell steam to customers in metropolitan Milwaukee, Wisconsin. Our natural gas utility operations are engaged in the purchase, distribution, and sale of natural gas to retail customers and the transportation of customer-owned natural gas in our three service areas within southeastern, east central, and northern Wisconsin.

Our other segment included Bostco, our non-utility subsidiary that was originally formed to develop and invest in real estate. In March 2017, we sold substantially all of the remaining assets of Bostco, and, in October 2018, Bostco was dissolved. See Note 2, Dispositions, for more information. Prior to January 1, 2017, our other segment also included our approximate 23% ownership interest in ATC, a for-profit, electric transmission company regulated by the FERC and certain state regulatory commissions. Effective January 1, 2017, we transferred our investment in ATC to another subsidiary of WEC Energy Group. See Note 16, Investment in American Transmission Company, for more information.


Wisconsin Electric Power CompanyB-58
2018 Annual Financial Statements



All of our operations and assets are located within the United States. The following tables show summarized financial information related to our reportable segments for the years ended December 31, 2018, 2017, and 2016.
2018 (in millions)
 Utility Other Wisconsin Electric Power Company Consolidated
Operating revenues $3,625.0
 $
 $3,625.0
Other operation and maintenance 1,502.4
 
 1,502.4
Depreciation and amortization 348.1
 
 348.1
Operating income 402.5
 
 402.5
Interest expense 120.1
 
 120.1
Capital expenditures 603.2
 
 603.2
Total assets 13,538.3
 
 13,538.3

2017 (in millions)
 Utility Other Wisconsin Electric Power Company Consolidated
Operating revenues $3,711.7
 $
 $3,711.7
Other operation and maintenance * 1,352.0
 
 1,352.0
Depreciation and amortization 331.6
 
 331.6
Operating income * 632.1
 
 632.1
Interest expense 117.0
 0.3
 117.3
Capital expenditures 596.1
 
 596.1
Total assets 13,121.6
 
 13,121.6
*Includes the retroactive restatement impacts of the implementation of ASU 2017-07. See Note 15, Employee Benefits, for more information on this new standard.
2016 (in millions)
 Utility Other Wisconsin Electric Power Company Consolidated
Operating revenues $3,792.8
 $
 $3,792.8
Other operation and maintenance * 1,425.5
 
 1,425.5
Depreciation and amortization 325.4
 
 325.4
Operating income * 634.2
 
 634.2
Equity in earnings of transmission affiliate 
 55.5
 55.5
Interest expense 116.6
 1.0
 117.6
Capital expenditures 468.9
 0.6
 469.5
Total assets 12,945.1
 426.4
 13,371.5
*Includes the retroactive restatement impacts of the implementation of ASU 2017-07. See Note 15, Employee Benefits, for more information on this new standard.


NOTE 18—VARIABLE INTEREST ENTITIES
The primary beneficiary of a variable interest entity must consolidate the entity's assets and liabilities. In addition, certain disclosures are required for significant interest holders in variable interest entities.

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

American Transmission Company LLC
As of December 31, 2016, we owned approximately 23% of ATC, a for-profit, electric transmission company regulated by the FERC and certain state regulatory commissions. However, effective January 1, 2017, we transferred our investment in ATC to another subsidiary of WEC Energy Group. ATC was a variable interest entity, but consolidation was not required since we were not ATC's primary beneficiary. We did not have the power to direct the activities that most significantly impacted ATC's economic performance. At December 31, 2016, we accounted for ATC as an equity method investment. See Note 16, Investment in American Transmission Company, for more information.

Wisconsin Electric Power CompanyB-59
2018 Annual Financial Statements




Purchased Power Agreement
We have a purchased power agreement that represents a variable interest. This agreement is for 236 MW of firm capacity from a natural gas-fired cogeneration facility, and we account for it as a capital lease. The agreement includes no minimum energy requirements over the remaining term of approximately three years. We have examined the risks of the entity, including operations, 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 $56.7 million of required capacity payments over the remaining term of this agreement. We believe that the required capacity payments under this contract will continue to be recoverable in rates, and our maximum exposure to loss is limited to the capacity payments under the contract.


NOTE 19—COMMITMENTS AND CONTINGENCIES
We have significant commitments and contingencies arising from our operations, including those related to unconditional purchase obligations, operating leases, environmental matters, and enforcement and litigation matters.

Unconditional Purchase Obligations
We have obligations to distribute and sell electricity and natural gas to our customers and expect to recover costs related to these obligations in future customer rates. In order to meet these obligations, we routinely enter into long-term purchase and sale commitments for various quantities and lengths of time.

The following table shows our minimum future commitments related to these purchase obligations as of December 31, 2018.
      Payments Due By Period
(in millions) Date Contracts Extend Through Total Amounts Committed 2019 2020 2021 2022 2023 Later Years
Electric utility:                
Nuclear 2033 $8,764.4
 $445.4
 $475.1
 $501.1
 $531.2
 $563.0
 $6,248.6
Coal supply and transportation 2023 798.4
 233.6
 165.4
 129.6
 134.8
 135.0
 
Purchased power 2043 101.6
 22.7
 19.4
 12.3
 10.4
 7.6
 29.2
Natural gas utility supply and transportation 2048 496.2
 60.2
 47.7
 34.6
 25.9
 21.1
 306.7
Total   $10,160.6
 $761.9
 $707.6
 $677.6
 $702.3
 $726.7
 $6,584.5

Operating Leases
We lease property, plant, and equipment under various terms. The operating leases generally require us to pay property taxes, insurance premiums, and maintenance costs associated with the leased property. Many of our leases contain one of the following options upon the end of the lease term: (a) purchase the property at the current fair market value, or (b) exercise a renewal option, as set forth in the lease agreement.

Rental expense attributable to operating leases was $3.0 million, $4.0 million, and $5.0 million in 2018, 2017, and 2016, respectively.

Future minimum payments under noncancelable operating leases are payable as follows:

Year Ending December 31
 
Payments
(in millions)
2019 $2.9
2020 2.8
2021 0.7
2022 0.7
2023 0.7
Later years