UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended quarterly period ended March 31, 20182019

OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ___________________

Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
001-01245 WISCONSIN ELECTRIC POWER COMPANY 39-0476280
  (A Wisconsin Corporation)

231 West Michigan Street
P.O.
P. O. Box 2046

Milwaukee, WI 53201
(414) 221-2345
414-221-2345		  

Securities registered pursuant to Section 12(b) of the Act:

None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
    
Yes [X]    No [ ]

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

Yes [X]     No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 Large accelerated filer [  ] Accelerated filer [  ]
 Non-accelerated filer [X] (Do not check if a smaller reporting company)
 Smaller reporting company [  ]
   Emerging growth company [  ]


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

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

Yes [ ]    No [X]

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

Common Stock, $10 Par Value,
33,289,327 shares outstanding at
March 31, 2018
Common Stock, $10 Par Value,
33,289,327 shares outstanding at
March 31, 2019

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

WISCONSIN ELECTRIC POWER COMPANY
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended March 31, 20182019
TABLE OF CONTENTS
   Page
 
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
 
1
PART I.
FINANCIAL INFORMATION
 
3
ITEM 1.
FINANCIAL STATEMENTS (UNAUDITED)
 
3
 
Condensed Consolidated Income Statements
 
3
 
Condensed Consolidated Balance Sheets
 
4
 
Condensed Consolidated Statements of Cash Flows
 
5
 
Condensed Consolidated Statements of Equity
6
Notes to Condensed Consolidated Financial Statements
 
67
   Page 
 
Note 1
General Information
67
 
 
Note 2
DispositionOperating Revenues
67
 
 
Note 3
Operating RevenuesRegulatory Assets and Liabilities
69
 
 
Note 4
Property, Plant, and Equipment
9
 
 
Note 5
Common Equity
10
 
 
Note 6
Short-Term Debt and Lines of Credit
10
 
 
Note 7
Materials, Supplies, and InventoriesLeases
10
 
 
Note 8
Income TaxesMaterials, Supplies, and Inventories
1115
 
 
Note 9
Fair Value MeasurementsIncome Taxes
1115
 
 
Note 10
Derivative InstrumentsFair Value Measurements
1315
 
 
Note 11
Employee BenefitsDerivative Instruments
1417
 
 
Note 12
Segment InformationGuarantees
1518
 
 
Note 13
Variable Interest EntitiesEmployee Benefits
1618
 
 
Note 14
Related PartiesSegment Information
1619
 
 
Note 15
Commitments and ContingenciesVariable Interest Entities
1819
 
 
Note 16
Supplemental Cash Flow InformationCommitments and Contingencies
2119
 
 
Note 17
Regulatory EnvironmentSupplemental Cash Flow Information
2122
 
 
Note 18
Regulatory Environment
22
Note 19
New Accounting Pronouncements
2223
 
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
2325
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
3236
ITEM 4.
CONTROLS AND PROCEDURES
 
3336
PART II.
OTHER INFORMATION
 
3437
ITEM 1.
LEGAL PROCEEDINGS
 
3437
ITEM 1A.
RISK FACTORS
 
3437
ITEM 6.
EXHIBITS
 
3537
SIGNATURE
  
3638


03/31/20182019 Form 10-QiWisconsin Electric Power Company
Table of Contents

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
ATCAmerican Transmission Company LLC
BluewaterBluewater Natural Gas Holding, LLC
Bostco Bostco LLC
UMERC Upper Michigan Energy Resources Corporation
WBSWEC Business Services LLC
We Power W.E. Power, LLC
WEC Energy Group WEC Energy Group, Inc.
WG Wisconsin Gas LLC
WPSWisconsin Public Service Corporation
   
Federal and State Regulatory Agencies
EPA United States Environmental Protection Agency
FERC Federal Energy Regulatory Commission
IRSUnited States Internal Revenue Service
MDEQ Michigan Department of Environmental Quality
MPSCMichigan Public Service Commission
PSCW Public Service Commission of Wisconsin
SEC United States Securities and Exchange Commission
WDNR Wisconsin Department of Natural Resources
   
Accounting Terms
AIAAffiliated Interest Agreement
ASU Accounting Standards Update
FASB Financial Accounting Standards Board
GAAP United States Generally Accepted Accounting Principles
OPEB Other Postretirement Employee Benefits
   
Environmental Terms
CAAClean Air Act
CO2
 Carbon Dioxide
CPPClean Power Plan
GHG Greenhouse Gas
NAAQSNational Ambient Air Quality Standards
   
Measurements
Dth Dekatherm
MW Megawatt
MWh Megawatt-hour
   
Other Terms and Abbreviations
D.C. Circuit Court of AppealsUnited States Court of Appeals for the District of Columbia Circuit
ERGS Elm Road Generating Station
ER 1Elm Road Generating Station Unit 1
ER 2Elm Road Generating Station Unit 2
Exchange Act Securities Exchange Act of 1934, as amended
FTRsFTR Financial Transmission RightsRight
MISO Midcontinent Independent System Operator, Inc.
MISO Energy MarketsMISO Energy and Operating Reserves Markets
OCPP Oak Creek Power Plant
OC 5 Oak Creek Power Plant Unit 5
OC 6 Oak Creek Power Plant Unit 6
OC 7 Oak Creek Power Plant Unit 7

03/31/2018 Form 10-QiiWisconsin Electric Power Company
Table of Contents

OC 8 Oak Creek Power Plant Unit 8
PIPP Presque Isle Power Plant
PWGS Port Washington Generating Station
PWGS 1Port Washington Generating Station Unit 1
PWGS 2Port Washington Generating Station Unit 2
ROE Return on Equity
Supreme CourtSSR United States Supreme CourtSystem Support Resource
Tax Legislation Tax Cuts and Jobs Act of 2017


03/31/20182019 Form 10-QiiiiiWisconsin Electric Power Company
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

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

Forward-looking statements include, among other things, statements concerning management's expectations and projections regarding earnings, completion of capital projects, sales and customer growth, rate actions and related filings with regulatory authorities, environmental and other regulations and associated compliance costs, legal proceedings, effective tax rate,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 in risk factors as set forth in this report and our 2018 Annual Report on Form 10-K, for the year ended December 31, 2017, and those identified below:

Factors affecting utility operations such as catastrophic weather-related damage, environmental incidents, unplanned facility outages and repairs and maintenance, and electric transmission or natural gas pipeline system constraints;

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

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

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

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

The impact of federal, state, and local legislative andand/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, and energy efficiency mandates;mandates, and tax laws that affect our ability to use production tax credits and investment tax credits;

The remaining uncertainty surrounding the recentlyTax Legislation enacted Tax Legislation,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 WEC Energy Group and 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,

03/31/2019 Form 10-Q1Wisconsin Electric Power Company
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or water supply due to high demand, shortages, transportation problems, nonperformance by electric energy or natural gas suppliers under existing power purchase or natural gas supply contracts, or other developments;

03/31/2018 Form 10-Q1Wisconsin Electric Power Company
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Changes in credit ratings, interest rates, and our ability to access the capital markets, caused by volatility in the global credit markets, our capitalization structure, and market perceptions of the utility industry 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;

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;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;

The timing, costs, and anticipated benefits associated with the remaining integration efforts relating to WEC Energy Group's acquisition of Integrys Holding, Inc.;

Potential business strategies to acquire and dispose of assets or businesses, which cannot be assured to be completed timely, if at all, 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.


03/31/20182019 Form 10-Q2Wisconsin Electric Power Company
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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WISCONSIN ELECTRIC POWER COMPANY

CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited) Three Months Ended Three Months Ended
 March 31 March 31
(in millions) 2018 2017 2019 2018
Operating revenues $941.5
 $972.0
 $960.8
 $941.5
        
Operating expenses        
Cost of sales 357.0
 348.6
 357.2
 357.0
Other operation and maintenance 335.6
 326.6
 258.9
 335.6
Depreciation and amortization 85.3
 82.1
 96.0
 85.3
Property and revenue taxes 27.2
 28.4
 25.8
 27.2
Total operating expenses 805.1
 785.7
 737.9
 805.1
        
Operating income 136.4
 186.3
 222.9
 136.4
        
Other (expense) income, net (4.2) 3.2
Other income (expense), net 5.5
 (4.2)
Interest expense 29.7
 29.6
 119.9
 29.7
Other expense (33.9) (26.4) (114.4) (33.9)
        
Income before income taxes 102.5
 159.9
 108.5
 102.5
Income tax (benefit) expense (3.6) 57.8
Income tax benefit (6.5) (3.6)
Net income 106.1
 102.1
 115.0
 106.1
        
Preferred stock dividend requirements 0.3
 0.3
 0.3
 0.3
Net income attributed to common shareholder $105.8
 $101.8
 $114.7
 $105.8

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


03/31/20182019 Form 10-Q3Wisconsin Electric Power Company
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WISCONSIN ELECTRIC POWER COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions, except share and per share amounts)
 March 31, 2018 December 31, 2017 March 31, 2019 December 31, 2018
Assets        
Current assets        
Cash and cash equivalents $10.4
 $12.3
 $4.6
 $20.2
Accounts receivable and unbilled revenues, net of reserves of $43.5 and $39.5, respectively 489.1
 513.8
Accounts receivable and unbilled revenues, net of reserves of $42.4 and $40.9, respectively 481.6
 472.3
Accounts receivable from related parties 146.3
 109.1
 83.3
 112.4
Materials, supplies, and inventories 214.7
 250.7
 191.8
 241.4
Prepayments 114.3
 144.3
 107.6
 163.7
Other 7.1
 9.4
 4.8
 6.3
Current assets 981.9
 1,039.6
 873.7
 1,016.3
        
Long-term assets        
Property, plant, and equipment, net of accumulated depreciation of $3,798.9 and $3,741.8, respectively 10,086.2
 10,007.7
Property, plant, and equipment, net of accumulated depreciation and amortization of $4,385.2 and $4,505.5, respectively 9,360.4
 9,528.9
Regulatory assets 2,122.4
 1,984.9
 3,100.6
 2,902.2
Other 104.9
 89.4
 108.1
 90.9
Long-term assets 12,313.5
 12,082.0
 12,569.1
 12,522.0
Total assets $13,295.4
 $13,121.6
 $13,442.8
 $13,538.3
        
Liabilities and Equity        
Current liabilities        
Short-term debt $60.0
 $210.9
 $75.5
 $134.9
Current portion of long-term debt 250.0
 250.0
 250.0
 250.0
Current portion of capital lease obligations 44.6
 42.5
Current portion of finance and capital lease obligations 52.0
 49.9
Accounts payable 217.6
 329.3
 181.0
 248.9
Accounts payable to related parties 249.5
 131.5
 240.5
 226.0
Accrued payroll and benefits 37.5
 53.4
 37.0
 50.4
Accrued taxes 65.7
 58.2
Other 142.1
 111.8
 161.7
 116.8
Current liabilities 1,067.0
 1,187.6
 997.7
 1,076.9
        
Long-term liabilities        
Long-term debt 2,412.8
 2,412.3
 2,460.1
 2,459.6
Capital lease obligations 2,811.5
 2,823.8
Finance and capital lease obligations 2,813.8
 2,807.2
Deferred income taxes 1,179.7
 1,155.5
 1,292.4
 1,298.3
Regulatory liabilities 1,891.1
 1,708.0
 2,013.8
 2,002.3
Pension and OPEB obligations 156.9
 143.2
 115.6
 118.5
Other 288.1
 276.9
 293.3
 284.3
Long-term liabilities 8,740.1
 8,519.7
 8,989.0
 8,970.2
        
Commitments and contingencies (Note 15) 
 
Commitments and contingencies (Note 16) 
 
        
Common shareholder's equity        
Common stock – $10 par value; 65,000,000 shares authorized; 33,289,327 shares outstanding 332.9
 332.9
 332.9
 332.9
Additional paid in capital 830.9
 802.7
 831.5
 831.3
Retained earnings 2,294.1
 2,248.3
 2,261.3
 2,296.6
Common shareholder's equity 3,457.9
 3,383.9
 3,425.7
 3,460.8
        
Preferred stock 30.4
 30.4
 30.4
 30.4
Total liabilities and equity $13,295.4
 $13,121.6
 $13,442.8
 $13,538.3
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

03/31/20182019 Form 10-Q4Wisconsin Electric Power Company
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WISCONSIN ELECTRIC POWER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended Three Months Ended
 March 31 March 31
(in millions) 2018 2017 2019 2018
Operating Activities        
Net income $106.1
 $102.1
 $115.0
 $106.1
Reconciliation to cash provided by operating activities        
Depreciation and amortization 85.3
 82.1
 96.0
 85.3
Deferred income taxes and investment tax credits, net (15.4) 20.7
 (52.6) (15.4)
Contributions and payments related to pension and OPEB plans (2.1) (3.3) (1.9) (2.1)
(Payments for) proceeds from liabilities transferred (to) from WBS (1.4) 0.9
Change in –        
Accounts receivable and unbilled revenues (12.5) 42.1
 16.5
 (12.5)
Materials, supplies, and inventories 36.0
 19.4
 49.6
 36.0
Prepaid taxes 24.2
 25.1
 55.4
 24.2
Other current assets 6.0
 3.2
 0.9
 6.0
Accounts payable 12.3
 (63.5) (54.0) 12.3
Accrued taxes 10.9
 (15.9) 13.0
 10.9
Amounts refundable to customers 15.7
 10.0
 15.1
 15.7
Other current liabilities (1.8) (21.0) 2.8
 (1.8)
Other, net 106.6
 7.9
 45.4
 105.2
Net cash provided by operating activities 369.9
 209.8
 301.2
 369.9
        
Investing Activities        
Capital expenditures (141.9) (105.5) (102.4) (141.9)
Proceeds from the sale of assets 0.5
 12.9
Payment for assets received from WBS (48.9) —
Payments for assets transferred from affiliates —
 (48.9)
Other, net 1.7
 0.4
 1.1
 2.2
Net cash used in investing activities (188.6) (92.2) (101.3) (188.6)
        
Financing Activities        
Change in short-term debt (150.9) (124.0) (59.4) (150.9)
Repayment of subsidiary note to parent —
 (12.8)
Payments for finance lease obligations (5.7) —
Equity contribution from parent 28.0
 75.0
 —
 28.0
Payment of dividends to parent (60.0) (60.0) (150.0) (60.0)
Payment of preferred stock dividends (0.3) (0.3) (0.3) (0.3)
Other, net (0.1) —
Net cash used in financing activities (183.2) (122.1) (215.5) (183.2)
        
Net change in cash and cash equivalents (1.9) (4.5) (15.6) (1.9)
Cash and cash equivalents at beginning of period 12.3
 15.4
 20.2
 12.3
Cash and cash equivalents at end of period $10.4
 $10.9
 $4.6
 $10.4

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


03/31/20182019 Form 10-Q5Wisconsin Electric Power Company
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WISCONSIN ELECTRIC POWER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)      
             
  Wisconsin Electric Power Company Common Shareholder's Equity    
(in millions) Common Stock Additional Paid In Capital Retained Earnings Total Common Shareholder's Equity Preferred Stock Total Equity
Balance at December 31, 2018 $332.9
 $831.3
 $2,296.6
 $3,460.8
 $30.4
 $3,491.2
Net income —
 —
 115.0
 115.0
 —
 115.0
Dividends       

   

Common stock —
 —
 (150.0) (150.0) —
 (150.0)
Preferred stock —
 —
 (0.3) (0.3) —
 (0.3)
Stock-based compensation and other —
 0.2
 —
 0.2
 —
 0.2
Balance at March 31, 2019 $332.9
 $831.5
 $2,261.3
 $3,425.7
 $30.4
 $3,456.1

  Wisconsin Electric Power Company Common Shareholder's Equity    
(in millions) Common Stock Additional Paid In Capital Retained Earnings Total Common Shareholder's Equity Preferred Stock Total Equity
Balance at December 31, 2017 $332.9
 $802.7
 $2,248.3
 $3,383.9
 $30.4
 $3,414.3
Net income —
 —
 106.1
 106.1
 —
 106.1
Dividends       

   

Common stock —
 —
 (60.0) (60.0) —
 (60.0)
Preferred stock —
 —
 (0.3) (0.3) —
 (0.3)
Equity contribution from parent —
 28.0
 —
 28.0
 —
 28.0
Stock-based compensation and other —
 0.2
 —
 0.2
 —
 0.2
Balance at March 31, 2018 $332.9
 $830.9
 $2,294.1
 $3,457.9
 $30.4
 $3,488.3

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


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WISCONSIN ELECTRIC POWER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 20182019

NOTE 1—GENERAL INFORMATION

As used in these notes, the term "financial statements" refers to the condensed consolidated financial statements. This includes the income statements, balance sheets, and statements of cash flows, and statements of equity, unless otherwise noted. In this report, when we refer to "the Company," "us," "we," "our," or "ours," we are referring to Wisconsin Electric Power Company and its subsidiary, Bostco.Bostco, which was dissolved in October 2018.

We have prepared the unaudited interim financial statements presented in this Form 10-Q pursuant to the rules and regulations of the SEC and GAAP. Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for annual financial statements. These financial statements should be read in conjunction with the consolidated financial statements and footnotes in our Annual Report on Form 10-K for the year ended December 31, 2017.2018. Financial results for an interim period may not give a true indication of results for the year. In particular, the results of operations for the three months ended March 31, 2018,2019 are not necessarily indicative of expected results for 20182019 due to seasonal variations and other factors.

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

NOTE 2—DISPOSITION

Other Segment–Sale of Bostco Real Estate Holdings

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

NOTE 3—OPERATING REVENUES

Adoption of ASU 2014-09,For more information about our significant accounting policies related to operating revenues, see Note 1(d), Operating Revenues, from Contracts with Customers

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

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

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

We elected to exclude from the transaction price any amounts collected from customers for all sales taxes and other similar taxes.
When applicable, we elected to apply the standard to a portfolio of contracts with similar characteristics, primarily our tariff-based contracts, as we reasonably expect that the effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts.
We elected to recognize revenue in the amount we have the right to invoice for performance obligations satisfied over time when the consideration received from a customer corresponds directly with the value provided to the customer during the same period.
We elected to not disclose the remaining performance obligations of a contract that has an original expected duration of one year or less.
We elected to apply this standard only to contracts that are not completed as of the date of initial application.

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Form 10-K.

Disaggregation of Operating Revenues

The following tables presenttable presents our operating revenues disaggregated by revenue source. We only have revenues associated with our utility segment. There are noWe do not have any revenues associated with our other segment. Comparable amountsWe disaggregate revenues into categories that depict how the nature, amount, timing, and uncertainty of revenues 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 not been presented for the three months ended March 31, 2017, due to our adoptiondifferent expectations of this standard under the modified retrospective method.service, energy and demand requirements, and are impacted by regulatory activities within their jurisdictions.
 Wisconsin Electric Power Company Consolidated
 Three Months Ended March 31
(in millions) Wisconsin Electric Power Company Consolidated 2019 2018
Three Months Ended March 31, 2018  
Electric utility $779.6
 $778.8
 $779.6
Natural gas utility 160.8
 177.9
 160.8
Total revenues from contracts with customers 940.4
 956.7
 940.4
Other operating revenues 1.1
 4.1
 1.1
Total operating revenues $941.5
 $960.8
 $941.5


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Revenues from Contracts with Customers
 
Electric Utility Operating Revenues

The following table disaggregates electric utility operating revenues into customer class for the current period:class:
 Electric Utility Operating Revenues
 Three Months Ended March 31
(in millions) Electric Utility Operating Revenues 2019 2018
Three Months Ended March 31, 2018  
Residential $281.4
 $302.6
 $281.4
Small commercial and industrial 237.7
 245.1
 237.7
Large commercial and industrial 148.9
 156.0
 148.9
Other 5.4
 5.6
 5.4
Total retail revenues 673.4
 709.3
 673.4
Wholesale 28.5
 28.9
 28.5
Resale 63.7
 31.3
 63.7
Steam 9.7
 10.1
 9.7
Other utility revenues 4.3
Other utility revenues * (0.8) 4.3
Total electric utility operating revenues $779.6
 $778.8
 $779.6

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 and consists of both the sale and the delivery of the electric commodity. The rates, charges, terms, and conditions of service for sales to these customers are included in tariffs that have been approved by state regulators. These rates often have a fixed component customer charge and a usage-based variable component. We recognize revenue for the fixed component customer charge monthly using a time-based output method. We recognize revenue for the usage-based variable component using an output method based on the quantity of electricity delivered each month.

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. The rates, charges, terms and conditions of service for sales to wholesale customers are included in tariffs that have been approved by the FERC. Contracts with wholesale customers that include capacity bundled with the delivery of electricity contain two performance obligations, as capacity and electricity are often transacted separately in the marketplace at the wholesale level. When recognizing revenue associated with these contracts, the transaction price is allocated to each performance obligation based on its relative standalone selling price. Revenue is recognized as control of each individual component is transferred to the customer. Electricity is the primary product sold by our electric utilities and represents a single performance obligation satisfied over time through discrete deliveries to a customer. Revenue from electricity sales is generally

03/31/*Negative amounts are driven by the reduction in revenues related to tax repairs. In accordance with a settlement agreement with the PSCW in May 2018, Form 10-Q7Wisconsin Electric Power Companywe flowed through the tax benefits of our repair-related deferred tax liabilities to maintain certain regulatory assets at their December 31, 2017 levels.
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recognized as units are produced and delivered to the customer within the production month. Capacity represents the reservation of an electric generating facility and conveys the ability to call on a plant to produce electricity when needed by the customer. The nature of our performance obligation as it relates to capacity is to stand ready to deliver power. This represents a single performance obligation transferred over time, which generally represents a monthly obligation. Accordingly, capacity revenue is recognized on a monthly basis.

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

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

Natural Gas Utility Operating Revenues

The following table disaggregates natural gas utility operating revenues into customer class for the current period:class:
 Natural Gas Utility Operating Revenues
 Three Months Ended March 31
(in millions) Natural Gas Utility Operations 2019 2018
Three Months Ended March 31, 2018  
Residential $114.7
 $125.6
 $114.7
Commercial and industrial 55.6
 60.9
 55.6
Total retail revenues 170.3
 186.5
 170.3
Transport 4.4
 4.2
 4.4
Other utility revenues * (13.9) (12.8) (13.9)
Total natural gas utility operating revenues $160.8
 $177.9
 $160.8

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

We recognize natural gas utility operating revenues under requirements contracts with residential, commercial and industrial, and transportation customers served under 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. Certain of our 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 is valued using rates 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. We recognize revenue for the fixed component customer charge monthly using a time-based output method. We recognize revenue for the usage-based variable component using an output method based on natural gas delivered each month.

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


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Other Operating Revenues

Other operating revenues consist primarily of the following:
 Three Months Ended March 31
(in millions) Three Months Ended March 31, 2018 2019 2018
Late payment charges $2.8
 $2.7
 $2.8
Leases 0.8
Rental revenues 0.7
 0.8
Alternative revenues * (2.5) 0.7
 (2.5)
Total other operating revenues $1.1
 $4.1
 $1.1

*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 below.true-ups.

Alternative Revenues
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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 reverse these alternative revenues as the customer is billed, at which time this revenue is presented as revenues from contracts with customers.NOTE 3—REGULATORY ASSETS AND LIABILITIES

Our only alternative revenue program relates to the wholesale electric service that we provide to customers under market-based ratesThe following regulatory assets and FERC formula rates. The customer is charged a base rate each year based upon a formula using prior year actual costsliabilities were reflected on our balance sheets at March 31, 2019 and customer demand. A true-up is calculated basedDecember 31, 2018. For more information on the difference between the amount billed to customers for the demand component of their ratesour regulatory assets and what the actual cost of service was for the year. The true-up can resultliabilities, see Note 5, Regulatory Assets and Liabilities, in an amount that we will recover or refund to the customer. We consider the true-up portion of the wholesale electric revenues to be alternative revenues.our 2018 Annual Report on Form 10-K.
(in millions) March 31, 2019 December 31, 2018
Regulatory assets    
Plant retirements * $953.2
 $754.1
Finance and capital leases 885.1
 869.3
Pension and OPEB costs 483.3
 490.6
Income tax related items 332.9
 317.9
SSR 317.8
 316.7
Electric transmission costs 41.4
 57.8
We Power generation 36.1
 43.0
Asset retirement obligations 30.5
 28.7
Other, net 20.3
 24.2
Total regulatory assets $3,100.6
 $2,902.3
     
Balance sheet presentation    
Other current assets $—
 $0.1
Regulatory assets 3,100.6
 2,902.2
Total regulatory assets $3,100.6
 $2,902.3

*On March 31, 2019, we retired the PIPP generating units. See Note 4, Property, Plant, and Equipment, for more information on the retirement of the PIPP units.
(in millions) March 31, 2019 December 31, 2018
Regulatory liabilities    
Income tax related items $1,021.1
 $1,024.8
Removal costs 757.3
 748.1
Mines deferral 129.1
 120.8
Pension and OPEB costs 74.8
 74.7
Uncollectible expense 15.6
 16.4
Energy efficiency programs 14.1
 13.5
Other, net 28.8
 15.9
Total regulatory liabilities $2,040.8
 $2,014.2
     
Balance sheet presentation    
Other current liabilities $27.0
 $11.9
Regulatory liabilities 2,013.8
 2,002.3
Total regulatory liabilities $2,040.8
 $2,014.2

NOTE 4—PROPERTY, PLANT, AND EQUIPMENT

Utility Segment Plant to be Retired

We have evaluated future plans for our older and less efficient fossil fuel generating units and have announcedretired the retirement ofPIPP and the plants identified below. The net book value of these plantsPleasant Prairie power plant. In addition, a severance liability was classified as plant to be retired within property, plant, and equipmentrecorded in other current liabilities on our balance sheet at March 31, 2018. In addition, severance expense in the amount of $25.8 million was recordedsheets within the utility segment in 2017 related to these announced plant retirements.

Pleasant Prairie Power Plant
(in millions)  
Severance liability at December 31, 2018 $12.9
Severance payments (0.2)
Total severance liability at March 31, 2019 $12.7

As a result of a MISO ruling in December 2017, the Pleasant Prairie power plant was retired effective April 10, 2018. Retirement of the Pleasant Prairie power plant was considered probable at March 31, 2018. The net book value of this generating unit was $674.1 million at March 31, 2018, and was classified as plant to be retired within property, plant, and equipment on our balance sheet. This unit is included in rate base, and we continue to depreciate it on a straight-line basis using the composite depreciation rates approved by the PSCW. The physical dismantlement of the plant will not occur immediately. It may take several years to finalize long-term plans for the site. See Note 15, Commitments and Contingencies, for more information regarding the new natural gas-fired generation.

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. These new units are expected to begin commercial operation by mid-2019. Upon receiving the MPSC's approval, retirement of the PIPP generating units became probable. As a result of a MISO ruling received in April 2018, the PIPP units must be retired no later than May 31, 2019. The net book value of these units was $188.7 million at March 31, 2018, and was classified as plant to be retired within property, plant, and equipment on our balance sheet. These units are included in rate base, and we continue to depreciate them on a straight-line basis using the composite depreciation rates approved by the PSCW. See Note 15, Commitments and Contingencies, for more information.

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Presque Isle Power Plant

Pursuant to MISO's April 2018 approval of the retirement of the PIPP, these units were retired on March 31, 2019. The carrying value of the PIPP units was $172.1 million at March 31, 2019. This amount included the net book value of $183.1 million, which was classified as a regulatory asset on our balance sheet. In addition, an $11.0 million cost of removal reserve related to the PIPP units remained classified as a regulatory liability at March 31, 2019. We will amortize this regulatory asset on a straight-line basis using the composite depreciation rates approved by the PSCW before the units were retired.

NOTE 5—COMMON EQUITY

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. See Note 8, Common Equity, in our 20172018 Annual Report on Form 10-K for additional information on these and other restrictions.

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

NOTE 6—SHORT-TERM DEBT AND LINES OF CREDIT

The following table shows our short-term borrowings and their corresponding weighted-average interest rates:
(in millions, except percentages) March 31, 2018 December 31, 2017 March 31, 2019 December 31, 2018
Commercial paper        
Amount outstanding $60.0
 $210.9
 $75.5
 $134.9
Weighted-average interest rate on amounts outstanding 2.05% 1.81% 2.64% 2.96%

Our average amount of commercial paper borrowings based on daily outstanding balances during the three months ended March 31, 2018,2019, was $96.2$64.4 million with a weighted-average interest rate during the period of 1.86%2.80%.

The information in the table below relates to our revolving credit facility used to support our commercial paper borrowing program, including available capacity under this facility:
(in millions) Maturity March 31, 2018 Maturity March 31, 2019
Revolving credit facility October 2022 $500.0
 October 2022 $500.0
    
Less:    
    
Letters of credit issued inside credit facility $1.2
 $1.2
Commercial paper outstanding   60.0
   75.5
Available capacity under existing agreement   $438.8
   $423.3

NOTE 7—LEASES

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which revised the previous guidance (Topic 840) regarding accounting for leases. Revisions include requiring a lessee to recognize a lease asset and a lease liability on its balance sheet for each lease, including operating leases with an initial term greater than 12 months. In addition, required quantitative and qualitative disclosures related to lease agreements were expanded.

As required, we adopted Topic 842 effective January 1, 2019. We utilized the following practical expedients, which were available under ASU 2016-02, in our adoption of the new lease guidance.

We did not reassess whether any expired or existing contracts were leases or contained leases.
We did not reassess the lease classification for any expired or existing leases (that is, all leases that were classified as operating leases in accordance with Topic 840 continue to be classified as operating leases, and all leases that were classified as capital leases in accordance with Topic 840 are classified as finance leases).
We did not reassess the accounting for initial direct costs for any existing leases.

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We did not elect the practical expedient allowing entities to account for the nonlease components in lease contracts as part of the single lease component to which they were related. Instead, in accordance with Accounting Standards Codification 842-10-15-31, our policy is to account for each lease component separately from the nonlease components of the contract.

We did not elect the practical expedient to use hindsight in determining the lease term and in assessing impairment of our right of use assets. No impairment losses were included in the measurement of our right of use assets upon our adoption of Topic 842.

In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842, which is an amendment to ASU 2016-02. Land easements (also commonly referred to as rights of way) represent the right to use, access or cross another entity's land for a specified purpose. This new guidance permits an entity to elect a transitional practical expedient, to be applied consistently, to not evaluate under Topic 842 land easements that were already in existence or had expired at the time of the entity's adoption of Topic 842. Once Topic 842 is adopted, an entity is required to apply Topic 842 prospectively to all new (or modified) land easements to determine whether the arrangement should be accounted for as a lease. We elected this practical expedient, resulting in none of our land easements being treated as leases upon our adoption of Topic 842.

In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which amends ASU 2016-02 and allows entities the option to initially apply Topic 842 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, if required. We used the optional transition method to apply the new guidance as of January 1, 2019, rather than as of the earliest period presented. We did not require a cumulative-effect adjustment upon adoption of Topic 842.

Both the right of use assets and related lease liabilities related to our operating leases that were recorded upon adoption of Topic 842 were $13.0 million. Regarding our finance leases, while the adoption of Topic 842 changed the classification of expense related to these leases on a prospective basis, it had no impact on the total amount of lease expense recorded, and did not impact the finance lease assets and related liability amounts recorded on our balance sheets.

Obligations Under Operating Leases

We have recorded right of use assets and lease liabilities associated with the following operating leases.

Land we are leasing related to our Rothschild biomass plant through June 2051.
Rail cars we are leasing to transport coal to various generating facilities through February 2021.
Various office space leases.

The operating leases generally require us to pay property taxes, insurance premiums, and operating and maintenance costs associated with the leased property. Many of our leases contain options to renew past the initial term, as set forth in the lease agreement.

Obligations Under Finance Leases

We are the obligor under a power purchase contract with an unaffiliated third party and we lease power plants from We Power. Under finance lease accounting, we have recorded the leased plants and corresponding obligations as right of use assets and lease liabilities on our balance sheets. We treat these agreements as operating leases for rate-making purposes.

Prior to our adoption of Topic 842 on January 1, 2019, we accounted for these finance leases under Topic 980-840, Regulated Operations – Leases, as follows:

We recorded our minimum lease payments under the power purchase contract as purchased power expense on our income statement.
We recorded our minimum lease payments under our leases with We Power as rent expense in other operation and maintenance in our income statements.
We recorded the difference between the minimum lease payments and the sum of imputed interest and amortization costs calculated under finance lease accounting rules as a deferred regulatory asset on our balance sheets.


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In conjunction with our adoption of Topic 842, while the timing of expense recognition related to our finance leases did not change, the classification of the lease expense changed as follows:

Effective January 1, 2019, the minimum lease payments under the power purchase contract were no longer classified within purchased power expense, but were instead recorded as a component of depreciation and amortization and interest expense in accordance with Topic 980-842, Regulated Operations – Leases.
Similarly, the lease payments related to our leases with We Power were no longer classified as rent expense within other operation and maintenance in our income statements, but were also divided between amortization expense and interest expense in accordance with Topic 980-842.
In order to ensure the timing of lease expense did not change for these finance leases upon adoption of Topic 842, and still resembled the expense recognition pattern of an operating lease, the amortization of the right of use assets was modified from what would typically be recorded for a finance lease under Topic 842.
We continue to record the difference between the minimum lease payments and the sum of imputed interest and unadjusted amortization costs calculated under the finance lease accounting rules as a deferred regulatory asset on our balance sheets.

Power Purchase Commitment

In 1997, we entered into a 25-year power purchase contract with an unaffiliated independent power producer. The contract, for 236 MWs 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 ten years, purchase the generating facility at fair market value, or allow the contract to expire. We originally recorded this leased facility and corresponding obligation on our balance sheets at the estimated fair value of the plant's electric generating facilities.

As previously discussed, we treat the long-term power purchase contract as an operating lease for rate-making purposes. We record the difference between the minimum lease payments and the sum of imputed interest and amortization costs calculated under finance lease accounting rules as a deferred regulatory asset on our balance sheets. Minimum lease payments are a function of the 236 MWs of firm capacity we receive from the plant and the fixed monthly capacity rate published in the lease. Due to the timing and the amounts of the minimum lease payments, the regulatory asset increased to $78.5 million in 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 finance lease was $22.1 million at March 31, 2019, 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. 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 Wisconsin's 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 $129.3 million in the year 2021 for PWGS 1 and to approximately $126.0 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 finance leases for the units was $631.5 million as of March 31, 2019, and will decrease to zero over the remaining lives of the contracts.

The only variability associated with the PWGS lease payments relates to the potential for future changes in We Power's tax or interest rates, as the positive or negative impact of these changes are generally passed along to us, and subsequently to our customers. Because variability in the lease payments is dependent upon a rate (interest rate or tax rate), the lease payments are considered unavoidable under Topic 842, and are included in the measurement of the right of use asset and lease liability, consistent with how they were treated under Topic 840.

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.


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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 generating units, 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 lease payments are expected to be recovered through our rates, as supported by Wisconsin's 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 $524.1 million in the year 2028 for ER 1 and to approximately $430.6 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 finance leases was $2,212.2 million as of March 31, 2019, and will decrease to zero over the remaining lives of the contracts.

The only variability associated with the ER lease payments relates to the potential for future changes in We Power's tax or interest rates, as the positive or negative impact of these changes are generally passed along to us, and subsequently to our customers. Because variability in the lease payments is dependent upon a rate (interest rate or tax rate), the lease payments are considered unavoidable under Topic 842, and are included in the measurement of the right of use asset and lease liability, consistent with how they were treated under Topic 840.

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.

Amounts Recognized in the Financial Statements

The components of lease expense and supplemental cash flow information related to our leases for the quarters ended March 31 are as follows:
(in millions) 2019 2018
Long-term power purchase commitment $2.0
 $1.9
We Power leases 91.8
 91.8
Total finance/capital lease expense (1)
 $93.8
 $93.7
     
Operating lease expense (2)
 0.7
 0.7
Total lease expense $94.5
 $94.4
     
Other information    
     
Cash paid for amounts included in the measurement of lease liabilities    
   Operating cash flows from finance/capital leases (3)
 $89.8
 $94.2
   Operating cash flows from operating leases $0.7
 $0.7
   Financing cash flows from finance leases (3)
 $5.7
 $—
     
Non-cash activity - right of use assets obtained in exchange for operating lease liabilities $13.0
  
     
Weighted-average remaining lease term – finance leases 19.3 years
  
Weighted-average remaining lease term – operating leases 22.4 years
  
     
Weighted-average discount rate – finance leases (4)
 13.9%  
Weighted average discount rate – operating leases (4)
 4.6%  

(1)
For the quarter ended March 31, 2019, total finance lease expense included amortization of right of use assets in the amount of $5.7 million (included in depreciation and amortization expense) and interest on lease liabilities of $88.1 million (included in interest expense). For the quarter ended March 31, 2018, total finance lease cost related to the long-term power purchase agreement was included in cost of sales and total finance lease cost related to the PWGS and ERGS units was included in other operation and maintenance.

(2)
Operating lease expense was included as a component of operation and maintenance for the quarters ended March 31, 2019 and 2018.


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(3)
Prior to our adoption of Topic 842 on January 1, 2019, all cash flows related to finance leases were recorded as a component of operating cash flows.

(4)
Because our operating leases do not provide an implicit rate of return, we used the fully collateralized incremental borrowing rates based upon information available for similarly rated companies in determining the present value of lease payments for our operating leases. For our financing leases, the rate implicit in each lease was readily determinable.

The following table summarizes our finance lease right of use assets, which were included in property, plant and equipment on our balance sheets:
(in millions) March 31, 2019 December 31, 2018
Long-term power purchase commitment    
Under finance/capital lease $140.3
 $140.3
Accumulated amortization (122.3) (120.9)
Total long-term power purchase commitment $18.0
 $19.4
     
PWGS    
Under finance/capital lease $739.2
 $736.9
Accumulated amortization (343.9) (335.9)
Total PWGS $395.3
 $401.0
     
ERGS    
Under finance/capital lease $2,184.5
 $2,166.3
Accumulated amortization (617.2) (598.8)
Total ERGS $1,567.3
 $1,567.5
     
Total finance lease right of use assets/capital lease assets $1,980.6
 $1,987.9

Right of use assets related to operating leases were $12.5 million at March 31, 2019, and were included in other long-term assets on our balance sheets.

Future minimum lease payments under our finance and operating leases and the present value of our net minimum lease payments as of March 31, 2019 were as follows:
(in millions) Total Operating Leases Power Purchase Commitment PWGS ERGS Total Finance Leases
Nine months ended December 31, 2019 $2.0
 $6.2
 $73.5
 $219.8
 $299.5
2020 2.7
 8.8
 98.0
 293.1
 399.9
2021 0.7
 9.4
 98.0
 293.1
 400.5
2022 0.6
 4.2
 98.0
 292.9
 395.1
2023 0.5
 —
 98.0
 292.8
 390.8
2024 0.5
 —
 97.9
 292.7
 390.6
Thereafter 13.5
 —
 677.8
 4,538.5
 5,216.3
Total minimum lease payments 20.5
 28.6
 1,241.2
 6,222.9
 7,492.7
Less: Interest (8.0) (6.5) (609.7) (4,010.7) (4,626.9)
Present value of minimum lease payments 12.5
 22.1
 631.5
 2,212.2
 2,865.8
Less: Short-term lease liabilities (2.2) (5.2) (23.1) (23.7) (52.0)
Long-term lease liabilities $10.3
 $16.9
 $608.4
 $2,188.5
 $2,813.8

Short-term and long-term lease liabilities related to operating leases were included in other current liabilities and other long-term liabilities on the balance sheets, respectively.

Significant Judgments and Other Information

We are currently party to several easement agreements that allow us access to land we do not own for the purpose of constructing and maintaining certain electric power and natural gas equipment. The majority of payments we make related to easements relate to our wind farms. We have not classified our easements as leases because we view the entire parcel of land specified in our easement

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agreements to be the identified asset, not just that portion of the parcel that contains our easement. As such, we have concluded that we do not control the use of an identified asset related to our easement agreements, nor do we obtain substantially all of the economic benefits associated with these shared-use assets.

As of May 3, 2019, we have not entered into any material operating leases that have not yet commenced.

NOTE 8—MATERIALS, SUPPLIES, AND INVENTORIES

Our inventory consisted of:
(in millions) March 31, 2018 December 31, 2017 March 31, 2019 December 31, 2018
Materials and supplies $136.2
 $140.7
 $143.7
 $146.1
Fossil fuel 73.9
 74.8
 41.2
 58.7
Natural gas in storage 4.6
 35.2
 6.9
 36.6
Total $214.7
 $250.7
 $191.8
 $241.4

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


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NOTE 8—9—INCOME TAXES

The provision for income taxes for the quarter ended March 31, 2018, differs from the amount of income tax determined by applying the applicable United States statutory federal income tax rate to income before income taxes as a result of the following:
 Amount Effective Tax Rate Three Months Ended March 31, 2019 Three Months Ended March 31, 2018
(in millions) Amount Effective Tax Rate Amount Effective Tax Rate
Statutory federal income tax $21.5
 21.0 % $22.7
 21.0 % $21.5
 21.0 %
State income taxes net of federal tax benefit 6.7
 6.5 % 7.1
 6.6 % 6.7
 6.5 %
Federal tax reform (5.4) (5.2)%
Tax repairs (25.5) (24.9)% (29.6) (27.3)% (25.5) (24.9)%
Federal excess deferred tax amortization (6.2) (5.7)% (5.4) (5.2)%
Wind production tax credits (2.8) (2.6)% (3.2) (3.1)%
Other (0.9) (0.9)% 2.3
 2.0 % 2.3
 2.2 %
Total income tax benefit $(3.6) (3.5)% $(6.5) (6.0)% $(3.6) (3.5)%

The effective tax raterates of (6.0)% and (3.5)% for the first quarter of 2019 and 2018, differsrespectively, differ from the United States statutory federal income tax rate of 21%, primarily due to the flow through of tax repairs in connection with the Wisconsin rate settlement, and the impact of the Tax Legislation, and wind production tax credits, partially offset by state income taxes.

The Tax Legislation, signed into law in December 2017, required usour regulated utilities to remeasure ourtheir deferred income taxes and beginwe began to amortize the resulting excess deferred income taxes beginning in 2018 in accordance with normalization requirements (see Federalfederal excess deferred tax reformamortization line above). See Note 17,18, Regulatory Environment, for more information on the Tax Legislation andabout the Wisconsin rate settlement.

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

NOTE 9—10—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.


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

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

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

When possible, we base the valuations of our 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

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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.

The following tables summarize our financial assets and liabilities that were accounted for at fair value on a recurring basis, categorized by level within the fair value hierarchy:
 March 31, 2018 March 31, 2019
(in millions) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Derivative assets                
Natural gas contracts $0.4
 $—
 $—
 $0.4
 $1.3
 $—
 $—
 $1.3
Petroleum products contracts 0.5
 —
 —
 0.5
FTRs —
 —
 0.8
 0.8
 —
 —
 2.0
 2.0
Coal contracts —
 0.7
 —
 0.7
 —
 0.5
 —
 0.5
Total derivative assets $0.9
 $0.7
 $0.8
 $2.4
 $1.3
 $0.5
 $2.0
 $3.8
                
Derivative liabilities                
Natural gas contracts $0.5
 $0.1
 $—
 $0.6
Coal contracts $—
 $0.1
 $—
 $0.1

 December 31, 2017 December 31, 2018
(in millions) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Derivative assets                
Natural gas contracts $0.5
 $0.1
 $—
 $0.6
 $0.7
 $—
 $—
 $0.7
Petroleum products contracts 0.9
 —
 —
 0.9
FTRs —
 —
 2.4
 2.4
 —
 —
 4.4
 4.4
Coal contracts —
 0.7
 —
 0.7
Total derivative assets $1.4
 $0.8
 $2.4
 $4.6
 $0.7
 $—
 $4.4
 $5.1
                
Derivative liabilities       
       
Natural gas contracts $2.0
 $0.1
 $—
 $2.1
 $1.2
 $—
 $—
 $1.2
Coal contracts —
 0.3
 —
 0.3
 —
 0.1
 —
 0.1
Total derivative liabilities $2.0
 $0.4
 $—
 $2.4
 $1.2
 $0.1
 $—
 $1.3

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 and Operating Reserves Markets.


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The following table summarizes the changes to derivatives classified as Level 3 in the fair value hierarchy:
 Three Months Ended March 31 Three Months Ended March 31
(in millions) 2018 2017 2019 2018
Balance at the beginning of the period $2.4
 $3.1
 $4.4
 $2.4
Settlements (1.6) (2.0) (2.4) (1.6)
Balance at the end of the period $0.8
 $1.1
 $2.0
 $0.8

Fair Value of Financial Instruments

The following table shows the financial instruments included on our balance sheets that arewere not recorded at fair value:
 March 31, 2018 December 31, 2017 March 31, 2019 December 31, 2018
(in millions) Carrying Amount Fair Value Carrying Amount Fair Value Carrying Amount Fair Value Carrying Amount Fair Value
Preferred stock $30.4
 $29.1
 $30.4
 $30.5
 $30.4
 $28.3
 $30.4
 $28.3
Long-term debt, including current portion 2,662.8
 2,903.7
 2,662.3
 2,976.3
 2,710.1
 2,981.2
 2,709.6
 2,881.6

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

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NOTE 10—11—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 an asset or liability measured at fair value unless they qualify for the normal purchases and sales exception, and are so designated. We continually assess our contracts designated as normal and will discontinue the treatment of these contracts as normal if the required criteria are no longer met. Changes in the derivative's fair value are recognized currently in earnings unless specific hedge accounting criteria are met or we receive regulatory treatment for the derivative. For most energy-related physical and financial contracts in our regulated operations that qualify as derivatives, the PSCW allows the effects of fair value accounting to be offset to regulatory assets and liabilities.

The following table shows our derivative assets and derivative liabilities:liabilities, none of which are designated as hedging instruments.
 March 31, 2018 December 31, 2017 March 31, 2019 December 31, 2018
(in millions) Derivative Assets Derivative Liabilities Derivative Assets Derivative Liabilities Derivative Assets Derivative Liabilities Derivative Assets Derivative Liabilities
Other current                
Natural gas contracts $0.4
 $0.3
 $0.6
 $1.9
 $1.1
 $—
 $0.7
 $1.2
Petroleum products contracts 0.5
 —
 0.9
 —
FTRs 0.8
 —
 2.4
 —
 2.0
 —
 4.4
 —
Coal contracts 0.7
 —
 0.6
 0.1
 0.5
 0.1
 —
 0.1
Total other current * $2.4
 $0.3
 $4.5
 $2.0
 $3.6
 $0.1
 $5.1
 $1.3
                
Other long-term        
Other long-term *        
Natural gas contracts $—
 $0.3
 $—
 $0.2
 $0.2
 $—
 $—
 $—
Coal contracts —
 —
 0.1
 0.2
Total other long-term * —
 0.3
 0.1
 0.4
Total $2.4
 $0.6
 $4.6
 $2.4
 $3.8
 $0.1
 $5.1
 $1.3

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


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


Three Months Ended March 31, 2018
Three Months Ended March 31, 2017 Three Months Ended March 31, 2019
Three Months Ended March 31, 2018
(in millions)
Volumes
Gains (Losses)
Volumes
Gains (Losses) Volumes
Gains (Losses)
Volumes
Gains (Losses)
Natural gas contracts
11.7 Dth
$(1.8)
8.2 Dth
$0.5
 18.1 Dth
$(1.4)
11.7 Dth
$(1.8)
Petroleum products contracts
1.4 gallons
0.4

4.9 gallons
(0.5) — gallons
—

1.4 gallons
0.4
FTRs
5.8 MWh
0.8

7.0 MWh
2.5
 5.5 MWh
1.6

5.8 MWh
0.8
Total
 
$(0.6)
 
$2.5
  
$0.2

 
$(0.6)

On our balance sheets, the amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral are not offset against the fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement. At both March 31, 20182019 and December 31, 2017,2018, we had posted cash collateral of $3.8$1.1 million and $4.9 million, respectively, in our margin accounts. These amounts were recorded on our balance sheets in other current assets.

The following table shows derivative assets and derivative liabilities if derivative instruments by counterparty were presented net on our balance sheets:
 March 31, 2018 December 31, 2017  March 31, 2019 December 31, 2018
(in millions) Derivative Assets Derivative Liabilities Derivative Assets Derivative Liabilities  Derivative Assets Derivative Liabilities Derivative Assets Derivative Liabilities
Gross amount recognized on the balance sheet $2.4
 $0.6
 $4.6
 $2.4
  $3.8
 $0.1
 $5.1
 $1.3
 
Gross amount not offset on the balance sheet (0.4) (0.5)
(1 
) 
(1.3)
(2.0)
(2 
) 
 —
 —
 (0.6) (1.3)*
Net amount $2.0
 $0.1
 $3.3
 $0.4
  $3.8
 $0.1
 $4.5
 $—
 

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(1) Includes cash collateral posted of $0.1 million.NOTE 12—GUARANTEES

(2) Includes cash collateral postedAs of $0.7 million.March 31, 2019, 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.

NOTE 11—13—EMPLOYEE BENEFITS

The following tables show the components of net periodic pension and OPEB costs for our benefit plans:
 Pension Costs Pension Costs
 Three Months Ended March 31 Three Months Ended March 31
(in millions) 2018 2017 2019 2018
Service cost $3.3
 $3.0
 $3.8
 $3.3
Interest cost 10.6
 11.9
 11.5
 10.6
Expected return on plan assets (19.0) (19.2) (18.2) (19.0)
Amortization of prior service cost 0.2
 0.3
 0.1
 0.2
Amortization of net actuarial loss 9.4
 8.8
 7.2
 9.4
Net periodic benefit cost $4.5
 $4.8
 $4.4
 $4.5

 OPEB Costs OPEB Costs
 Three Months Ended March 31 Three Months Ended March 31
(in millions) 2018 2017 2019 2018
Service cost $1.8
 $1.9
 $1.2
 $1.8
Interest cost 2.8
 3.1
 2.4
 2.8
Expected return on plan assets (3.9) (3.6) (3.5) (3.9)
Amortization of prior service credit (0.6) (0.3) (0.5) (0.6)
Amortization of net actuarial loss —
 0.3
Net periodic benefit cost $0.1
 $1.4
Amortization of net actuarial gain (0.4) —
Net periodic benefit (credit) cost $(0.8) $0.1

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During the three months ended March 31, 2018,2019, we made contributions and payments of $1.5$1.7 million related to our pension plans and $0.6$0.2 million related to our OPEB plans. We expect to make contributions and payments of $2.4$2.1 million related to our pension plans and $4.3$3.5 million related to our OPEB plans during the remainder of 2018,2019, dependent upon various factors affecting us, including our liquidity position and the effects of the new Tax Legislation.

Effective January 1, 2018, we adopted ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which modifies certain aspects of the accounting for employee benefit costs. Under the new guidance, only the service cost component can be included in total operating expenses. The remaining components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component, outside of operating income. As required, this change was applied retrospectively to all prior periods presented. Accordingly, for the quarters ended March 31, 2018 and 2017, we have presented the service cost component of our retirement benefit plans in other operation and maintenance on the income statements, while presenting the non-service cost components in other income, net. For the quarter ended March 31, 2018, the non-service cost components of net benefit cost were in a net credit position, in the amount of $(1.7) million. For the quarter ended March 31, 2017, the non-service cost components of net benefit cost were in a net debit position, in the amount of $1.2 million, and were reclassified from other operation and maintenance to other income, net, on our income statements.


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As required by ASU 2017-07, our income statements for the years ended December 31, 2017, 2016, and 2015 were retroactively restated from what was previously presented in our 2017 Annual Report on Form 10-K. The impacts to our income statements from adoption of this standard are reflected in the table below.
  Year Ended December 31, 2017 Year Ended December 31, 2016 Year Ended December 31, 2015
(in millions) 
Form
10-K Income Statement
 Impact of ASU 2017-07 Income Statement After Adoption 
Form
10-K Income Statement
 Impact of ASU 2017-07 Income Statement After Adoption 
Form
10-K Income Statement
 Impact of ASU 2017-07 Income Statement After Adoption
Operating expenses                  
Other operation and maintenance $1,358.5
 $(6.5) $1,352.0
 $1,430.2
 $(4.7) $1,425.5
 $1,384.9
 $(4.3) $1,380.6
                   
Other expense                  
Other income, net 19.7
 (6.5) 13.2
 9.1
 (4.7) 4.4
 11.2
 (4.3) 6.9

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

NOTE 12—14—SEGMENT INFORMATION

We use operating income to measure segment profitability and to allocate resources to our businesses. At March 31, 2018,2019, 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, andWisconsin. Prior to one customerApril 1, 2019, we also provided electric service to an iron ore mine in the Upper Peninsula of Michigan. OurThis customer was transferred to UMERC on April 1, 2019 as UMERC's new generation in the Upper Peninsula of Michigan is now operational. In addition, our electric utility operations also include our steam operations, which produce, distribute, and sell steam to customers in metropolitan Milwaukee, Wisconsin.Milwaukee. 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.

OurPrior to October 2018, our other segment includesincluded 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. See Note 2, Disposition, for more information.

The following tables show summarized financial information forBostco, and, in October 2018, Bostco was dissolved. No significant items were reported in the other segment during the three months ended March 31, 20182019 and 2017, related to our reportable segments:2018.
(in millions) Utility Other Wisconsin Electric Power Company Consolidated
Three Months Ended March 31, 2018      
Operating revenues $941.5
 $—
 $941.5
Other operation and maintenance 335.6
 —
 335.6
Depreciation and amortization 85.3
 —
 85.3
Operating income 136.4
 —
 136.4
Interest expense 29.7
 —
 29.7


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(in millions) Utility Other Wisconsin Electric Power Company Consolidated
Three Months Ended March 31, 2017      
Operating revenues $972.0
 $—
 $972.0
Other operation and maintenance * 326.6
 —
 326.6
Depreciation and amortization 82.1
 —
 82.1
Operating income * 186.3
 —
 186.3
Interest expense 29.3
 0.3
 29.6

*Includes the retroactive restatement impacts of the implementation of ASU 2017-07. See Note 11, Employee Benefits, for more information on this new standard.

NOTE 13—15—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.

Purchased Power Purchase Agreement

We have a purchased power purchase agreement that represents a variable interest. This agreement is for 236 MWMWs of firm capacity from a natural gas-fired cogeneration facility, and we account for it as a capitalfinance lease. The agreement includes no minimum energy requirements over the remaining term of approximately fourthree 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 purchase agreement.

We have approximately $67.7$28.6 million of required capacity payments over the remaining term of this agreement. We believe that the required leasecapacity payments under this contract will continue to be recoverable in rates. Total capacityrates, and lease payments under this contract for the three months ended March 31, 2018 and 2017 were $4.7 million and $4.5 million, respectively. Ourour maximum exposure to loss is limited to thethese capacity payments under the contract.

NOTE 14—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.

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, 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.

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Our balance sheets included the following receivables and payables related to transactions entered into with ATC:
(in millions) March 31, 2018 December 31, 2017
Accounts receivable    
Services provided to ATC $1.3
 $0.8
Accounts payable    
Services received from ATC 16.4
 22.2

The following table shows activity associated with our related party transactions:
  Three Months Ended March 31
(in millions) 2018 2017
Lease agreements  
  
Lease payments to We Power (1)
 $92.2
 $104.4
Construction work in progress billed to We Power 3.8
 16.3
Transactions with WBS (2)
    
Billings to WBS (3)
 5.9
 56.5
Billings from WBS (4)
 108.1
 49.8
Transactions with WPS (2)
    
Billings to WPS 3.0
 2.5
Billings from WPS 3.2
 1.1
Transactions with WG    
Natural gas purchases from WG 1.3
 1.3
Billings to WG 13.9
 15.8
Billings from WG 4.7
 5.5
Transactions with UMERC    
Electric sales to UMERC 8.1
 7.7
Billings to UMERC (2)
 4.2
 4.7
Transactions with Bluewater (5)
    
Storage service fees 1.3
 —
Transactions with ATC    
Charges to ATC for services and construction 3.0
 2.8
Charges from ATC for network transmission services 58.0
 60.3
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.

(2)
Includes amounts billed for services, pass through costs, and other items in accordance with approved AIAs.

(3)
Includes $0.9 million for the transfer of certain benefit-related liabilities from WBS for the three months ended March 31, 2017. There were no benefit-related liabilities transferred from WBS for the three months ended March 31, 2018.

(4)
Includes $1.4 million for the transfer of certain benefit-related liabilities to WBS for the three months ended March 31, 2018. Also includes $48.9 million for the transfer of certain software assets from WBS for the three months ended March 31, 2018. There were no benefit-related liabilities transferred to WBS or assets transferred from WBS for the three months ended March 31, 2017.

(5)
WEC Energy Group's acquisition of Bluewater was completed June 30, 2017. See below 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. 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

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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.

WEC Energy Group's Acquisition of Natural Gas Storage Facilities in Michigan

On June 30, 2017, WEC Energy Group completed the acquisition of Bluewater for $226.0 million. Bluewater owns natural gas storage facilities in Michigan that will provide a portion of the current storage needs for our natural gas utility operations. In September 2017, we finalized a long-term service agreement with a wholly owned subsidiary of Bluewater to take the allocated storage, which was then approved by the PSCW in November 2017. See Note 17, Regulatory Environment, for more information.payments.

NOTE 15—16—COMMITMENTS AND CONTINGENCIES

We have significant commitments and contingencies arising from our operations, including those related to unconditional purchase obligations, environmental matters, and enforcement and litigation matters.


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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. Our minimum future commitments related to these purchase obligations as of March 31, 2018,2019, were $9,890.7$10,016.7 million.

Environmental Matters

Consistent with other companies in the energy industry, we face significant ongoing environmental compliance and remediation obligations related to current and past operations. Specific environmental issues affecting us include, but are not limited to, current and future regulation of air emissions such as sulfur dioxide, nitrogen oxide, fine particulates, mercury, and GHGs; water intake and discharges; disposal of coal combustion products such as fly ash; and remediation of impacted properties, including former manufactured gas plant sites.

Air Quality

8-Hour Ozone National Ambient Air Quality Standards

After completing its review of the 2008 ozone standard, the EPA released a final rule in October 2015, which lowered the limit for ground-level ozone, creating a more stringent standard than the 2008 NAAQS. In December 2017, the EPA informed Wisconsin of its intended area designations of all the counties along Wisconsin's Lake Michigan shoreline, except Brown, Kewaunee, Marinette, and Oconto Counties, as either partial or full nonattainment. Waukesha and Washington counties were also included due to the counties being in the Milwaukee combined statistical area.National Ambient Air Quality Standards. The EPA issued final nonattainment area designations on May 1, 2018. The final designations differ significantly from the intended nonattainment areas EPA proposed late in December 2017. The following counties within our service area were designated as partial nonattainment: Kenosha, Manitowoc, Sheboygan, Northern Milwaukee/Ozaukee, shoreline, and Kenosha. Racine, Waukesha, and Washington counties will be designated attainment/unclassifiable. For nonattainment areas, theSheboygan shorelines. The state of Wisconsin will haveneed to develop a state implementation plan to bring thethese areas back into attainment. We will be required to comply with this state implementation plan no earlier than 2020. We believe we are well positioned to meet the requirements associated with the ozone standard and do not expect to incur significant costs to comply.

Mercury and Air Toxics Standards

In December 2018, the EPA proposed to revise the Supplemental Cost Finding for the mercury and air toxics standards (MATS) rule as well as the CAA required risk and technology review (RTR). The EPA was required by the United States Supreme Court to review both costs and benefits of complying with the MATS rule. After its review of costs, the EPA determined that it is not appropriate and necessary to regulate hazardous air pollutant emissions from power plants under Section 112 of the CAA. As a result, under the proposed rule, the emission standards and other requirements of the MATS rule first enacted in 2012 would remain in place. The EPA is not proposing to remove coal-and oil-fired power plants from the list of sources that are regulated under Section 112. The EPA also proposes that no revisions to MATS are warranted based on the results of the RTR. As a result, we do not expect the proposed rule to have a material impact on our financial condition or operations.

Climate Change

In 2015,August 2018, the EPA issued a finalproposed replacement rule regulating GHG emissions from existing generating units, referred to asfor the Clean Power Plan, athe Affordable Clean Energy (ACE) rule. The proposed federal plan and model trading rules as alternatives or guidesACE rule would require the EPA to develop emission guidelines for states to use to develop their individual state complianceplans. The state plans and final performance standardswould focus on reducing GHG emissions by improving the efficiency of fossil-fueled power plants.

In December 2018, the EPA proposed to revise the New Source Performance Standards for GHG emissions from new, modified, and reconstructed generating units and new fossil-fueled power plants. The EPA determined that the best system of emission reduction (BSER) for new, modified, and reconstructed coal units is highly efficient generation that would be equivalent to supercritical steam conditions for larger units and subcritical steam conditions for smaller units. This proposed BSER would replace the determination from the previous rule, which identified BSER as partial carbon capture and storage.

In October 2015, following publication of the CPP, numerous states (including WisconsinApril 2019, WEC Energy Group issued a climate report, which analyzes its GHG reduction goals with respect to international efforts to limit future global temperature increases to less than two degrees Celsius. WEC Energy Group will continue to update this analysis as climate-change policies and Michigan)relevant technologies evolve over time with a focus on preserving fuel diversity, lowering costs for customers, and other parties, filed lawsuits challenging the final rule, including a request to stay the implementation of the final rule pending the outcome of these legal challenges. The D.C. Circuit Court of Appeals denied the stay request, but in February 2016, the Supreme Court stayed the effectiveness of the CPP until disposition of the litigation in the D.C. Circuit Court of Appeals and, to the extent that further appellate review is sought, at the Supreme Court. Thereducing long-term GHG emissions.


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D.C. Circuit Court of Appeals heard one case in September 2016, and the other case is still pending. In April 2017, pursuant to motions made by the EPA, the D.C. Circuit Court of Appeals ordered the cases to be held in abeyance. Supplemental briefs were provided addressing whether the cases should be remanded to the EPA rather than held in abeyance. The EPA argued that the cases should continue to be held in abeyance pending the conclusion of the EPA's review of the CPP and any resulting rulemaking.

The CPP seeks to achieve state-specific GHG emission reduction goals by 2030, and would have required states to submit plans by September 2016. The goal of the final rule is to reduce nationwide GHG emissions by 32% from 2005 levels. The rule is seeking GHG emission reductions in Wisconsin and Michigan of 41% and 39%, respectively, below 2012 levels by 2030. Interim goals starting in 2022 would require states to achieve about two-thirds of the 2030 required reduction.

In March 2017, President Trump issued an executive order that, among other things, specifically directs the EPA to review, and if appropriate, initiate proceedings to suspend, revise, or rescind the CPP and related GHG regulations for new, reconstructed, or modified fossil-fueled power plants. As a result of this order and related EPA review, as well as the ongoing legal proceedings, the timelines for the GHG emission reduction goals and all other aspects of the CPP are uncertain. In April 2017, the EPA withdrew the proposed rule for a federal plan and model trading rules that were published in October 2015 for use in developing state plans to implement the CPP or for use in states where a plan is not submitted or approved. In October 2017, the EPA issued a proposed rulemaking to repeal the CPP. In December 2017, the EPA issued an advanced notice of proposed rulemaking to solicit input on whether it is appropriate to replace the CPP. In addition, the Governor of Wisconsin issued an executive order in February 2016, which prohibits state agencies, departments, boards, commissions, or other state entities from developing or promoting the development of a state plan to implement the CPP.

Notwithstanding the uncertain future of the CPP, and given current fuel and technology markets, we continue to evaluate opportunities and actions that preserve fuel diversity, lower costs for our customers, and contribute towards long-term GHG reductions. WEC Energy Group's plan, which includes us, is to work with its industry partners,peers, environmental groups, public policy makers, and the State of Wisconsin,customers, with a goalgoals of reducing CO2 emissions by approximately 40% and 80% below 2005 levels by 2030. We have implemented2030 and continue to evaluate numerous options in order to meet WEC Energy Group's CO2 reduction goal, such as increased use of existing natural gas combined cycle units, co-firing or switching to natural gas in existing coal-fired units, reduced operation or retirement of existing coal-fired units, addition of new renewable energy resources (wind, solar), and consideration of supply and demand-side energy efficiency and distributed generation.2050, respectively. As a result of WEC Energy Group's generation reshaping plan, we expect to retire 1,547have retired approximately 1,500 MW of coal generation by 2020, includingsince the beginning of 2018, consisting of the PIPP, which we retired on March 31, 2019, and the Pleasant Prairie power plant, (now retired) and PIPP.which was retired in April 2018. See Note 4, Property, Plant, and Equipment, for more information. In addition, we are evaluating our goal, and possible subsequent actions, with respect to national and international efforts to reduce future GHG emissions in order to limit future global temperature increases to less than two degrees Celsius.information on the retirement of the PIPP.

We are required to report our CO2 equivalent emissions from our electric generating facilities under the EPA Greenhouse Gases Reporting Program. For 2017,2018, we reported aggregated CO2 equivalent emissions of 23.520.0 million metric tonnes to the EPA. The level of CO2 and other GHG emissions varies from year to year and is dependent on the level of electric generation and mix of fuel sources, which is determined primarily by demand, the availability of the generating units, the unit cost of fuel consumed, and how our units are dispatched by MISO.

We are also required to report CO2 equivalent amountsemissions related to the natural gas that our natural gas operations distribute and sell. For 2017,2018, we reported aggregated CO2 equivalent emissions of 3.74.1 million metric tonnes to the EPA.

Water Quality

Clean Water Act Cooling Water Intake Structure Rule

In August 2014, the EPA issued a final regulation under Section 316(b) of the Clean Water Act whichthat requires that the location, design, construction, and capacity of cooling water intake structures at existing power plants to reflect the Best Technology Available (BTA) for minimizing adverse environmental impacts from both impingement (entrapping organisms on water intake screens) and entrainment (drawing organisms into water intake).impacts. The rule became effective in October 2014 and applies to all of our existing generating facilities with cooling water intake structures, except for the ERGS units, which were permitted under the rules governing new facilities.

Facility owners must select from seven compliance options available to meet the impingement mortality (IM) reduction standard. The rule requires state permitting agencies to make BTA determinations, subject to EPA oversight, for IM reduction over the next

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several years as facility permits are reissued. Based on our assessment, we believe that existing technologies at our generatingoperating facilities satisfy the IM BTA requirements.

BTA determinations must also be made by the WDNR and MDEQ to address entrainment mortality (EM) reduction on a site-specific basis taking into consideration several factors. We have received an EMa BTA determination by the WDNR, with EPA concurrence, for our intake modification at the Valley Power Plant. Due to our plans to retire PIPP and Pleasant Prairie power plant (now retired), we do not believe that BTA determinations for EM will be necessary for these units. Although we currently believe that existing technologies at PWGS and OC 5 through OC 8 satisfy the EM BTA requirements, BTAfinal determinations to address EM reduction requirements will not be made until discharge permits are renewed for these units. Until that time, we cannot yet determine what, if any, intake structure or operational modifications will be required to meet the new EM BTA requirements for these units. During 2018, we will continue to evaluate options to address the EM BTA requirements for these units.

We also have also provided information to the WDNR and the MDEQ about planned unit retirements. Based onFollowing discussions with the MDEQ, ifin January 2019, we submitsubmitted a signed certification stating that the PIPP willwould be retired no later than the end of the next permit cycle (assumed to be OctoberJune 1, 2023), the EM BTA requirements will be waived. We expect to submit the letter identifying the last operating date for2019. The PIPP to the MDEQ during 2018, ahead of when the agency begins processing our pending application for the National Pollutant Discharge Elimination System permit reissuance.was retired on March 31, 2019.

WeAs a result of past capital investments completed to address 316(b) compliance, we believe our fleet overall is well positioned to meet the new regulation and do not expect to incur significant costs to comply with this regulation.

Steam Electric Effluent Limitation Guidelines

The EPA's final steam electric effluent limitation guidelines (ELG) rule took effect in January 2016. VariousThis rule created new requirements for several types of power plant wastewaters. The two new requirements that affect us relate to discharge limits for bottom ash transport water (BATW) and wet flue gas desulfurization (FGD) wastewater.

This rule is being litigated and various petitions challenging the ruleit were consolidated and are pending in the United States Court of Appeals for the Fifth Circuit Court of Appeals.(Fifth Circuit). In April 2017, the EPA issued an administrative stay of certain compliance deadlines while further reviewing the rule. In September 2017, the EPA issued a final rule ("Postponement Rule")(Postponement Rule) to postpone the earliest compliance datesdate to November 1, 2020 for the bottom ash transport waterBATW and wet flue gas desulfurization FGD wastewater requirements. Thisrequirements. The latest ELG rule applies tocompliance date remains December 31, 2023 for any new wastewater discharges from ourtreatment requirements contained in power plant processes in Wisconsin and Michigan. While thedischarge permits.

As a result of past capital investments completed to address ELG compliance, deadlines are postponed,we believe our fleet overall is well positioned to meet the WDNR and the MDEQ have indicated that they will refrain from incorporating certain new requirements into any reissued discharge permits between 2018 and 2023.

After a final rule is back in effect, the WDNR and MDEQ have indicated that they will modify the state rules as necessary and incorporate the new requirements into our facility permits, which are renewed every five years.regulations. Our power plant facilities already have advanced wastewater treatment technologies installed that meet many of the discharge limits established by this rule. However, as currently constructed, the ELG rule will require additional wastewater treatment retrofits as well as installation of other equipment to minimize process water use. Due to completed generating unit retirements, we believe the only facilities that will require bottom ash system modifications are Oak Creek Units 7 and 8. One

The final rule would phase in new or more stringent requirements related to limits
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Table of arsenic, mercury, selenium, and nitrogen in wastewater discharged from wet scrubber systems. New requirements for wet scrubber Contents

wastewater treatment would require additional zero liquid discharge or other advanced treatment capital improvementssystem modification may be required for the wet FGD discharges from the six units that make up the OCPP and ERGS. The rule also would require dry fly ash handling, which is already in place at all of our power plants. Dry bottom ash transport systems are required by the new rule, and modifications would be required at OC 7 and OC 8. We are beginningBased on preliminary engineering, forthe estimated rule compliance withcost is approximately $50 million.

The Fifth Circuit issued a ruling in April 2019, striking down several portions of the ELG rule. The Fifth Circuit held that the legacy wastewater and combustion residual leachate provisions in the rule failed to meet the requirements of the Clean Water Act and estimate approximately $50 million would be required to design and install these advanced treatment and bottom ash transport systems. This estimate reflects the planned retirements of certain of our generation plants as a result of WEC Energy Group's generation reshaping plan discussed in Climate Change above.Administrative Procedure Act.

Land Quality

Manufactured Gas Plant Remediation

We have identified sites at which we or a predecessor company owned or operated a manufactured gas plant or stored manufactured gas. We have also identified other sites that may have been impacted by historical manufactured gas plant activities. We are responsible for the environmental remediation of these sites. We are also working with various state jurisdictions in our investigation and remediation planning. These sites are at various stages of investigation, monitoring, remediation, and closure.


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

We have established the following regulatory assets and reserves related to manufactured gas plant sites:
(in millions) March 31, 2018 December 31, 2017 March 31, 2019 December 31, 2018
Regulatory assets $30.1
 $30.4
 $24.0
 $24.2
Reserves for future remediation * 18.5
 18.5
 13.2
 13.2

*Recorded within other long-term liabilities on our balance sheets.

Enforcement and Litigation Matters

We are involved in legal and administrative proceedings before various courts and agencies with respect to matters arising in the ordinary course of business. Although we are unable to predict the outcome of these matters, management believes that appropriate reserves have been established and that final settlement of these actions will not have a material effect on our financial condition or results of operations.

NOTE 16—17—SUPPLEMENTAL CASH FLOW INFORMATION
  Three Months Ended March 31
(in millions) 2018 2017
Cash (paid) for interest, net of amount capitalized $(4.7) $(4.8)
Cash (paid) for income taxes, net —
 (52.1)
Significant noncash transactions:    
Accounts payable related to construction costs 7.3
 11.0
Transfer of investment in ATC to another subsidiary of WEC Energy Group (1) (2)
 —
 415.4
Transfer of net assets to UMERC (1)
 —
 68.9
Accounts receivable related to the sale of Bostco real estate holdings (3)
 —
 7.0
  Three Months Ended March 31
(in millions) 2019 2018
Cash (paid) for interest, net of amount capitalized * $(94.9) $(4.7)
Significant non-cash transactions:    
Accounts payable related to construction costs 14.7
 7.3

(1)
*		On January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842). This ASU required us to prospectively change the classification of our finance lease payments on the income statement. As a result, during the first quarter of 2019, we classified the interest component of our finance lease payments as cash paid for interest since it was included in interest expense on the income statement. However, prior to our adoption of Topic 842, the interest component was not considered cash paid for interest since it was not included in interest expense on the income statement. See Note 14, Related Parties,7, Leases, for more information on these transactions.

(2)
The amount transferred included a $13.4 million receivable for distributions approvedTopic 842 and recorded in December 2016.

(3)
See Note 2, Disposition, for more information on this transaction.our finance leases.

NOTE 17—18—REGULATORY ENVIRONMENT

Tax Cuts2020 and Jobs Act of 20172021 Rates

We deferred for returnIn March 2019, we filed an application with the PSCW to ratepayers, through future refunds, bill credits, or reductions in other regulatory assets, the estimated tax benefit of $1,065 million related to the Tax Legislation that was signed into law in December 2017. This tax benefit resulted from the revaluation of deferred taxes in December 2017. The current 2018 tax benefit related to the Tax Legislation, which reduced the corporate federal tax rate from a maximum of 35% to a 21% rate,increase our retail electric, natural gas, and steam rates, effective January 1, 2018,2020. Our proposal is also being deferred for return to ratepayers.

In April 2018, the PSCW issued a preliminary determination regarding the benefits associated with the Tax Legislation. For ourtargeting an effective electric utility operations, the PSCW indicated that 80%rate increase of the current 2018approximately $83 million (2.9%) in 2020 and 2019 tax benefits should be used to reduce our transmission regulatory asset, with the remaining 20% returned to our electric customers in the form of bill credits. For our natural gas utility operations, the PSCW indicated that 100% of current 2018 and 2019 tax benefits should be returned to our natural gas customers in the form of bill credits. Regarding the net tax benefit associated with the revaluation of deferred taxes, amortization required in accordance with normalization accounting for our electric operations should be used to reduce our transmission regulatory asset, while the timing and method of returning the remaining net tax benefit associated with the revaluation of deferredan additional

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taxesincrease of $83 million (2.9%) in 2021. For our natural gas and steam customers, our proposal is targeting effective rate increases of approximately $15 million (3.9%) and $1 million (4.5%), respectively, in 2020, with no additional increases in 2021. Our proposal reflects a ROE of 10.35% and a common equity component average of 52.0% on a financial basis. We also proposed to continue having an earnings sharing mechanism through 2021.

Our proposed increase in electric rates was driven by higher transmission charges, recovery of SSR revenues that were assumed in our 2015 rate order but were not addressedreceived, and will be determinedan increase in costs associated with a future rate proceeding. Until we receivepurchased power agreement previously approved by the final written order,PSCW. Our proposed electric rates reflect our request to partially offset these increases with approximately $111 million of previously deferred tax benefits from the specific terms are subjectTax Legislation. Our proposal also includes our request for approval to change.
We currently serve one retail electric customer in Michigan, and have reached a settlement with that customer. That settlement was filed withcontinue collecting the MPSC in March 2018 and addresses all base rate impactscarrying value of the Tax Legislation.Pleasant Prairie power plant and the PIPP using the current approved composite depreciation rates, in addition to a return on the remaining carrying value of the plants.

The proposed increase at our natural gas utility was driven by continued investment in our natural gas distribution system.

A final order is expected from the PSCW by the end of 2019, with rates effective January 1, 2020.

2018 and 2019 Rates

During April 2017, we, along with WG and WPS,Wisconsin Public Service Corporation, filed an application with the PSCW for approval of a settlement agreement we made with several of our commercial and industrial customers regarding 2018 and 2019 base rates. In September 2017, the PSCW issued an order that approved the settlement agreement, which will freezefreezes base rates through 2019 for our electric, and natural gas, and steam customers. Based on the PSCW order, our authorized ROE remains at 10.2%, and our current capital cost structure will remain unchanged through 2019. Various intervenors had filed requests for rehearing, all of which have been denied.

In addition to freezing base rates, the settlement agreement extends and expands the electric real-time market pricing program options for large commercial and industrial customers and mitigates the continued growth of certain escrowed costs during the base rate freeze period by accelerating the recognition of certain tax benefits. 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 ourtheir December 31, 2017 levels. While we would typically follow the normalization accounting method and utilize the tax benefits of the deferred tax liabilities in rate making as an offset to rate base, benefiting customers over time, the federal tax code does allow for passing these tax repair-related benefits to ratepayers much sooner using the flow through accounting method. The flow through treatment of the repair relatedrepair-related deferred tax liabilities offsets the negative income statement impact of holding the regulatory assets level, resulting in no change to net income.

Pursuant to the settlement agreement, we also agreed to keep our earnings sharing mechanism in place through 2019. Under this earnings sharing mechanism, if we earn above our authorized ROE, 50% of the first 50 basis points of additional utility earnings must be shared with customers. All utility earnings above the first 50 basis points must also be shared with customers.

Natural Gas Storage Facilities in Michigan

In January 2017, WEC Energy Group signed an agreement for the acquisition of Bluewater. Bluewater owns natural gas storage facilities in Michigan that are providing a portion of the current storage needs for our natural gas operations. As a result of this agreement, we, along with WG and WPS, filed a request with the PSCW in February 2017 for a declaratory ruling on various items associated with the storage facilities. In the filing, we requested that the PSCW review and confirm the reasonableness and prudency of our potential long-term storage service agreement and interstate natural gas transportation contracts related to the storage facilities. We also requested approval to amend WEC Energy Group's AIA to ensure WBS and WEC Energy Group's other subsidiaries could provide services to the storage facilities. The PSCW granted, subject to various conditions, these declarations and approvals, and WEC Energy Group acquired Bluewater on June 30, 2017. In September 2017, we finalized the long-term service agreement for the natural gas storage, which was approved by the PSCW in November 2017. See Note 14, Related Parties, for more information.

NOTE 18—19—NEW ACCOUNTING PRONOUNCEMENTS

Leases

In February 2016, the FASB issued ASU 2016-02, Leases. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, and will be applied using a modified retrospective approach. The main provision of this ASU is that lessees will be required to recognize lease assets and lease liabilities for most leases, including those classified as operating leases under GAAP. We are currently assessing the effects this guidance may have on our financial statements.

Financial Instruments Credit Losses

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This ASU introduces a new impairment model known as the current expected credit loss model. The ASU requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected. Previously, recognition of the full amount of credit losses was generally delayed until the loss was probable of occurring. We are currently assessing the effects this guidance may have on our financial statements.


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Cloud Computing

In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The standard allows entities who are customers in hosting arrangements that are service contracts to apply the existing internal-use software guidance to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The guidance specifies classification for capitalizing implementation costs and related amortization expense within the financial statements and requires additional disclosures. The guidance will be effective for annual reporting periods, including interim reporting within those periods, beginning after December 15, 2019. Early adoption is permitted and can be applied either retrospectively or prospectively. We are currently evaluating the transition methods and the impact the adoption of this standard may have on our financial statements.

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

CORPORATE DEVELOPMENTS

The following discussion should be read in conjunction with the accompanying financial statements and related notes and our 2018 Annual Report on Form 10-K for the year ended December 31, 2017.10-K.

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 12,14, Segment Information, for more information on our reportable business segments.

In March 2017, we sold the remaining real estate holdings of Bostco located in downtown Milwaukee, Wisconsin, which included retail, office, and residential space. See Note 2, Disposition, 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 2030.2030 and by approximately 80% below 2005 levels by 2050. WEC Energy Group expects to retirehas retired approximately 1,800 MW of coal generation by 2020since the beginning of 2018 across its electric utilities, and expects to add additional natural gas-fired generating units and renewable generation, including utility-scale solar projects. OurWe retired our 1,190 MW Pleasant Prairie power plant was retired 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. We retired the Presque Isle power plant (PIPP) in March 2019. See Note 4, Property, Plant, and Equipment, for information related to the Pleasant Prairie power plant retirement and the planned retirement of PIPP asretirement.

As part of its commitment to invest in zero-carbon generation, WEC Energy Group's plan.Group plans to invest in utility scale solar of up to 350 MW within its Wisconsin segment, which includes us. 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 utility owned 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 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 in 2018 by PA Consulting Group, an independent consulting firm, as the most reliable utility in the United States in 2017 and,Midwest for the seventheighth year in a row, as the most reliable utility in the Midwest.row.

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.

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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.


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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 2, Disposition, for information on the sale of 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. WEC Energy Group'sOur 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.


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RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 20182019

Consolidated Earnings

OurThe following table compares our consolidated earningsresults for the first quarter of 2019 with the first quarter of 2018, were $105.8including favorable or better, "B", and unfavorable or worse, "W", variances:
  Three Months Ended March 31
(in millions) 2019 2018 B (W) Change Related to Flow Through of Tax Repairs Change Related to Adoption of New Lease Guidance (Topic 842) Remaining Change
B (W)
Operating revenues $960.8
 $941.5
 $19.3
 $(5.0) $—
 $24.3
Cost of sales 357.2
 357.0
 (0.2) —
 2.0
 (2.2)
Other operation and maintenance 258.9
 335.6
 76.7
 (0.6) 91.8
 (14.5)
Depreciation and amortization 96.0
 85.3
 (10.7) —
 (5.7) (5.0)
Property and revenue taxes 25.8
 27.2
 1.4
 —
 —
 1.4
Operating income 222.9
 136.4
 86.5
 (5.6) 88.1
 4.0
Other income (expense), net 5.5
 (4.2) 9.7
 —
 —
 9.7
Interest expense 119.9
 29.7
 (90.2) —
 (88.1) (2.1)
Income before income taxes 108.5
 102.5
 6.0
 (5.6) —
 11.6
Income tax benefit (6.5) (3.6) 2.9
 5.6
 —
 (2.7)
Preferred stock dividend requirements 0.3
 0.3
 —
 —
 —
 —
Net income attributed to common shareholder $114.7
 $105.8
 $8.9
 $—
 $—
 $8.9

Our consolidated earnings increased $8.9 million during the first quarter of 2019, compared to $101.8 million forwith the same quarter in 2017.2018. The table above shows the income statement impacts associated with the flow through of tax repairs beginning January 1, 2018 and the adoption of ASU 2016-02, Leases (Topic 842), effective January 1, 2019. As shown in the table above, the changes related to these items had no impact on net income attributed to common shareholder, but did significantly impact our operating income. See Note 18, Regulatory Environment, for more information on the flow through of tax repairs and Note 7, Leases, for more information on the adoption of Topic 842. See below for additional information on the $4.0$8.9 million increase in consolidated earnings.

Non-GAAP Financial Measures

The discussiondiscussions below addressesaddress the operating income contribution of each of our utility segmentsegments and includesinclude 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 more meaningfuluseful basis for evaluating utility operations than operating revenues 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 segmentsegments 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.

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 first quarter ofthree months ended March 31, 2019 and 2018 and 2017 was $136.4$222.9 million and $186.3$136.4 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.


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Utility Segment Contribution to Operating Income

The following table compares our utility segment's contribution to operating income for the first quarter of 2018 with the same quarter of 2017, including favorable or better, "B", and unfavorable or worse, "W", variances.
 Three Months Ended March 31 Three Months Ended March 31
(in millions) 2018 2017 B (W) 2019 2018 B (W)
Electric revenues $780.3
 $821.8
 $(41.5) $782.5
 $780.3
 $2.2
Fuel and purchased power 252.1
 252.7
 0.6
 239.3
 252.1
 12.8
Total electric margins 528.2
 569.1
 (40.9) 543.2
 528.2
 15.0
            
Natural gas revenues 161.2
 150.2
 11.0
 178.3
 161.2
 17.1
Cost of natural gas sold 104.9
 95.9
 (9.0) 117.9
 104.9
 (13.0)
Total natural gas margins 56.3
 54.3
 2.0
 60.4
 56.3
 4.1
            
Total electric and natural gas margins 584.5
 623.4
 (38.9) 603.6
 584.5
 19.1
            
Other operation and maintenance 335.6
 326.6
 (9.0) 258.9
 335.6
 76.7
Depreciation and amortization 85.3
 82.1
 (3.2) 96.0
 85.3
 (10.7)
Property and revenue taxes 27.2
 28.4
 1.2
 25.8
 27.2
 1.4
Operating income $136.4
 $186.3
 $(49.9) $222.9
 $136.4
 $86.5

The following table shows a breakdown of other operation and maintenance:
 Three Months Ended March 31 Three Months Ended March 31
(in millions) 2018 2017 B (W) 2019 2018 B (W)
Operation and maintenance not included in line items below $102.0
 $107.6
 $5.6
 $101.0
 $102.0
 $1.0
We Power (1)
 127.2
 127.6
 0.4
 35.9
 127.2
 91.3
Transmission (2)
 66.1
 67.0
 0.9
 66.7
 66.1
 (0.6)
Transmission expense related to the flow through of tax repairs (3)
 14.7
 —
 (14.7) 15.3
 14.7
 (0.6)
Regulatory amortizations and other pass through expenses (4)
 25.6
 24.4
 (1.2)
Transmission expense related to Tax Legislation (4)
 15.2
 —
 (15.2)
Regulatory amortizations and other pass through expenses (5)
 24.8
 25.6
 0.8
Total other operation and maintenance $335.6
 $326.6
 $(9.0) $258.9
 $335.6
 $76.7

(1) 
Represents costs associated with the We Power generation units, including operating and maintenance costs incurred, as well aswe incurred. For the first quarter of 2018, the amount also included the lease payments that arewere billed from We Power to us and then recovered in our rates. We adopted ASU 2016-02, Leases (Topic 842) effective January 1, 2019, which revised the previous guidance regarding the accounting for leases. As a result of this adoption, for the first quarter of 2019, the $91.8 million of lease expense related to the We Power leases was no longer classified within operation and maintenance, but was instead recorded as $4.6 million and $87.2 million of depreciation and amortization and interest expense, respectively, in accordance with Topic 842.

During the three months ended March 31,first quarter of 2019, $30.8 million of operating and maintenance costs were billed to or incurred by us related to the We Power generation units, with the difference in costs billed or incurred and expenses recognized, either deferred or deducted from the regulatory asset. During the first quarter of 2018, and 2017, $110.5 million and $124.7 million, respectively, of both lease and operating and maintenance costs were billed to or incurred by 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 ATCAmerican Transmission Company LLC and MISO network transmission expenses. As a result, we defer as a regulatory asset or liability, the differencesdifference between actual transmission costs and those included in rates until recovery or refund is authorized in a future rate proceeding. During the three months ended March 31,first quarter of 2019 and 2018, and 2017, $56.3$80.8 million and $55.0$56.3 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 ourtheir December 31, 2017 levels. See Note 17,18, 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.

(5) 
Regulatory amortizations and other pass through expenses are substantially offset in margins and therefore do not have a significant impact on operating income.


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The following tables provide information on delivered sales volumes by customer class and weather statistics:
 Three Months Ended March 31 Three Months Ended March 31
 
MWh (in thousands)
 
MWh (in thousands)
Electric Sales Volumes 2018 2017 B (W) 2019 2018 B (W)
Customer Class        
Residential 1,911.9
 1,825.0
 86.9
 1,989.5
 1,911.9
 77.6
Small commercial and industrial 2,181.6
 2,197.6
 (16.0) 2,163.3
 2,181.6
 (18.3)
Large commercial and industrial 2,025.8
 1,985.6
 40.2
 2,019.8
 2,025.8
 (6.0)
Other 37.6
 38.6
 (1.0) 36.4
 37.6
 (1.2)
Total retail 6,156.9
 6,046.8
 110.1
 6,209.0
 6,156.9
 52.1
Wholesale 425.9
 447.1
 (21.2) 446.6
 425.9
 20.7
Resale 2,191.4
 2,132.4
 59.0
 1,094.3
 2,191.4
 (1,097.1)
Total sales in MWh 8,774.2
 8,626.3
 147.9
 7,749.9
 8,774.2
 (1,024.3)

 Three Months Ended March 31 Three Months Ended March 31
 
Therms (in millions)
 
Therms (in millions)
Natural Gas Sales Volumes 2018 2017 B (W) 2019 2018 B (W)
Customer Class        
Residential 177.4
 155.6
 21.8
 196.7
 177.4
 19.3
Commercial and industrial 96.1
 85.8
 10.3
 104.6
 96.1
 8.5
Total retail 273.5
 241.4
 32.1
 301.3
 273.5
 27.8
Transport 95.1
 89.0
 6.1
 101.7
 95.1
 6.6
Total sales in therms 368.6
 330.4
 38.2
 403.0
 368.6
 34.4

 Three Months Ended March 31 Three Months Ended March 31
 Degree Days Degree Days
Weather * 2018 2017 B(W) 2019 2018 B(W)
Heating (3,255 normal) 3,225
 2,849
 376
Heating (3,271 normal) 3,483
 3,225
 8.0%

*Normal degree days are based on a 20-year moving average of monthly temperatures from Mitchell International Airport in Milwaukee, Wisconsin.

Electric Utility Margins

Electric utility margins decreased $40.9increased $15.0 million during the first quarter of 2018,2019, compared with the same quarter in 2017.2018. The significant factors impacting the lowerhigher electric utility margins were:

A $25.1$15.2 million decreaseincrease in margins related to amounts expectedsavings from the Tax Legislation that we are required to be returnedreturn to customers through refunds, bill credits or reductions in other regulatory assets, driven byassets. We received the PSCW order in May 2018, which required us to use 80% of the current 2018 and 2019 tax benefits to reduce certain regulatory assets. Prior to receiving the order, we recorded all of the expected benefits related to the Tax Legislation signed into lawas if they would be returned to customers through bill credits. This increase in December 2017. See Note 8, Income Taxes, and Note 17, Regulatory Environment, for more information.
margins was offset by a corresponding increase in transmission expense, resulting in no impact on net income.

A $20.4 million decrease in margins related to a settlement agreement with the PSCW to flow through the tax benefit of our repair-related deferred tax liabilities through reductions in certain regulatory assets, as discussed in the table above and in Note 17, Regulatory Environment.

A $1.9 million decrease in wholesale margins driven by reduced capacity rates reflecting the Tax Legislation signed into law in December 2017.

These decreases in margins were partially offset by a $9.8$7.4 million increase related to higher retail sales volumes during the first quarter of 2018,2019, primarily driven by colder winter weather.favorable weather and higher use per residential customer. As measured by heating degree days, the first quarter of 20182019 was 13.2%8.0% colder than the same quarter in 2017.2018.

These increases in margins were partially offset by:

A $5.9 million quarter-over-quarter negative impact from collections of fuel and purchased power costs compared with costs approved in rates. Under the Wisconsin fuel rules, our 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.


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A $5.0 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.

Natural Gas Utility Margins

Natural gas utility margins increased $2.0$4.1 million during the first quarter of 2018,2019, compared with the same quarter in 2017.2018. The most significant factor impacting the higher natural gas utility margins was a $5.2 million increase inhigher sales volumes, primarily driven by colder winter weather, customer growth, and higher overall retail use per customer, and customer growth. This increase in margins was partially offset by $3.1 million of amounts expected to be returned to customers through refunds, bill credits, or reductions in other regulatory assets, driven by the Tax Legislation signed into law in December 2017.retail customer.

Operating Income

Operating income at the utility segment decreased $49.9increased $86.5 million during the first quarter of 2018,2019, compared with the same quarter in 2017.2018. This decreaseincrease was driven by the $38.9 million decrease in net margins discussed above and $11.0$67.4 million of higherlower operating expenses (which include other operation and maintenance, depreciation and amortization, and property and revenuesrevenue taxes)., and the $19.1 million of higher margins discussed above.

The significant factors impacting the increasedecrease in operating expenses during the first quarter of 2018,2019, compared with the same quarter in 2017,2018, were:

A $14.7$91.8 million increasedecrease in transmission expensesother operation and maintenance resulting from the adoption of the new lease guidance. As discussed in the other operation and maintenance table above, the adoption of Topic 842, effective January 1, 2019, required us to change the income statement classification of our lease payments related to the flow throughWe Power leases. For the first quarter of tax repairs,2019, the lease expense related to the We Power leases was no longer classified within other operation and maintenance, but was instead recorded as discusseda component of depreciation and amortization and interest expense in the table above.accordance with Topic 842.

A $3.2 million increase in depreciation and amortization driven by an overall increase in utility plant in service and the implementation of an enterprise resource planning system in January 2018.

These increases in operating expenses were partially offset by:

A $4.6 million decrease in benefit costs.

A $3.9An $11.4 million decrease in expenses atacross all of our plants, primarily relatedin part due to the retirement of the Pleasant Prairie power plant in April 2018 and the winding down of operations in anticipation of expected plant retirements.the retirement of the PIPP, which occurred on March 31, 2019. This resulted in lower maintenance and labor costs during the first quarter of 2018.2019. See Note 4, Property, Plant, and Equipment, for more information on the plant retirements.retirement of the PIPP.

These decreases in operating expenses were partially offset by:

A $15.2 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. This increase in transmission expense was offset by a corresponding increase in margins, as previously discussed.

A $12.0 million increase in benefit costs, primarily related to deferred compensation.

A $10.7 million increase in depreciation and amortization driven by an increase in capital expenditures as we continue to execute on our capital plan, as well as additional expense recognized related to the adoption of Topic 842, as discussed above.

Consolidated Other Income (Expense) Income,, Net
 Three Months Ended March 31 Three Months Ended March 31
(in millions) 2018 2017 B (W) 2019 2018 B (W)
Allowance for funds used during construction – Equity $1.0
 $0.7
 $0.3
 $0.6
 $1.0
 $(0.4)
Other (5.2) 2.5
 (7.7)
Other (expense) income, net $(4.2) $3.2
 $(7.4)
Non-service components of net periodic benefit costs 1.7
 1.7
 —
Other, net 3.2
 (6.9) 10.1
Other income (expense), net $5.5
 $(4.2) $9.7

Other income (expense), net decreased $7.4increased $9.7 million when compared toduring the first quarter of 2017, due2019, compared with the same quarter in part to2018. The increase was primarily driven by the timing of the recognition of returns related to certain regulatory assets induring the first quarter of 2018.


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Consolidated Interest Expense
 Three Months Ended March 31 Three Months Ended March 31
(in millions) 2018 2017 B (W) 2019 2018 B (W)
Interest expense $29.7
 $29.6
 $(0.1) $119.9
 $29.7
 $(90.2)

Interest expense increased $90.2 million during the first quarter of 2019, compared with the same quarter in 2018, primarily due to the adoption of ASU 2016-02, Leases (Topic 842). Effective January 1, 2019, minimum lease payments billed from We Power to us were no longer classified within operation and maintenance, but were instead recorded as a component of depreciation and amortization and interest expense in accordance with Topic 842. As a result of the adoption, for the three months ended March 31, 2019, $88.1 million of minimum lease payments were recorded as interest on finance lease liabilities. See Note 7, Leases, for more information.

Consolidated Income Tax (Benefit) ExpenseBenefit
  Three Months Ended March 31
  2018 2017 B (W)
Effective tax rate (3.5)% 36.1% 39.6%
  Three Months Ended March 31
  2019 2018 B (W)
Effective tax rate (6.0)% (3.5)% 2.5%

Our effective tax rate decreased by 39.6% when compared withwas (6.0)% for the first quarter of 2017,2019, compared to (3.5)% for the first quarter of 2018. This decrease was primarily due to a 25%2.4% quarter-over-quarter increase in the effective tax rate benefit from the flow through of tax repairs in connection with the Wisconsin rate settlement. Also contributing to the decrease in

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the effective tax rate was the impact of the Tax Legislation. See Note 8,9, Income Taxes, and Note 17,18, Regulatory Environment, for more information.

We expect our 20182019 annual effective tax rate to be between (11)(17)% and (10)(16)%, which includes an estimated 32%38.5% effective tax rate benefit due to the flow through of tax repairs.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%.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

The following table summarizes our cash flows during the three months ended March 31:
(in millions) 2018 2017 
Change in 2018
Over 2017
 2019 2018 Change in 2019 Over 2018
Cash provided by (used in):            
Operating activities $369.9
 $209.8
 $160.1
 $301.2
 $369.9
 $(68.7)
Investing activities (188.6) (92.2) (96.4) (101.3) (188.6) 87.3
Financing activities (183.2) (122.1) (61.1) (215.5) (183.2) (32.3)

Operating Activities

Net cash provided by operating activities increased $160.1decreased $68.7 million during the first quarter of 2018,2019, compared with the same periodquarter in 2017, driven by:

A $155.42018. Our adoption of ASU 2016-02, Leases (Topic 842), on January 1, 2019 did not have a significant impact on our cash flows from operating activities as the $90.2 million increase in cash from lower paymentspaid for operating and maintenance costsinterest was primarily due to lower payments of accounts payable to related parties for the first quarter of 2018, compared with the same period in 2017. In addition, our lease payments to We Power as well as payments for employee benefits and plant operating and maintenance costs also decreased.

A $52.1 million net increase in cash related tooffset by a corresponding decrease in cash paid for income taxesother operation and maintenance. As a result, this classification change is not reflected in our discussion below. See Note 7, Leases, for more information. The $68.7 million decrease in net cash provided by operating activities was driven by:

A $61.3 million decrease in cash from higher payments for other operation and maintenance expenses. During the first quarter of 2019, our payments related to transmission and benefit costs increased. These higher payments were partially offset by lower payments for plant maintenance and labor costs, due in part to the retirement of the Pleasant Prairie power plant in April 2018 and the winding down of operations in anticipation of the March 31, 2019 retirement of the PIPP.

A $32.4 million decrease in cash primarily related to the impact of the Tax Legislation, which resulted in lower overall collections from customers during the first quarter of 2018,2019, compared with the same periodquarter in 2017. This increase in cash was primarily the result2018.

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These increasesdecreases in net cash provided by operating activities were partially offset by a $56.8$42.5 million decreaseincrease in cash, resulting from higherdriven by the timing of payments for natural gas, which were lower in the first quarter of 2018 for natural gas we purchased at2019, compared with the endsame quarter in 2018. This increase in cash was also driven by higher amounts of 2017 andinventory consumed during the first quarter of 2019, compared with the same quarter in 2018, to meet the requirements of our customers during the colder winter weather.

Investing Activities

Net cash used in investing activities increased $96.4decreased $87.3 million during the first quarter of 2018,2019, compared with the same periodquarter in 2017,2018, driven by:

A payment of $48.9 million to WBSWEC Business Services LLC during the first quarter of 2018, related to transfers for its transfer of an enterprise resource planning system and other software from WBS.to us. There were no similar transfers during the first quarter in 20172019.

A $36.439.5 million increasedecrease in cash paid for capital expenditures during the first quarter of 2018,2019, compared with the same periodquarter in 20172018, which is discussed in more detail below.

A $12.4 million decrease in the proceeds received from the sale of assets during the first quarter of 2018, compared with the same period in 2017. See Note 2, Disposition, for more information.


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Capital Expenditures

Capital expenditures for the three months ended March 31 were as follows:
(in millions) 2018 2017 
Change in 2018
Over 2017
 2019 2018 Change in 2019 Over 2018
Capital expenditures $141.9
 $105.5
 $36.4
 $102.4
 $141.9
 $(39.5)

The increasedecrease in cash paid for capital expenditures during the first quarter of 2019, compared with the same quarter in 2018, was primarily driven by upgrades ofto our natural gas and electric distribution systems, including main replacementsystem, projects at the OCPP, and the implementation of an enterprise resource planning system and various other software projects.projects during the first quarter of 2018. These decreases in cash paid for capital expenditures were partially offset by increased capital expenditures during the first quarter of 2019 for an information technology project created to improve our billing, call center, and credit collection functions.

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

Financing Activities

Net cash used in financing activities increased $61.1$32.3 million during the first quarter of 2018,2019, compared with the same periodquarter in 2017, primarily2018, driven by:

A $47.090.0 million decrease in cash due to higher dividends paid to our parent during the first quarter of 2019, compared with the same quarter in 2018, to balance our capital structure.

A $28.0 million decrease in cash related to an equity contributionscontribution received from our parent during the first quarter of 2018 to balance our capital structurestructure. We received no equity contributions during the first quarter of 2018, compared with the same period in 20172019.

A $26.95.7 million decrease in cash related to a change in the cash flow classification of our principal payments for finance lease obligations due to our adoption of Topic 842. Under Topic 842, our principal payments for finance lease obligations were no longer classified as cash flows from operating activities during the first quarter of 2019 but were instead classified as cash flows from financing activities. See Note 7, Leases, for more information on Topic 842 and our finance lease obligations.

These decreases in cash were partially offset by a $91.5 million increase in cash due to lower net repayments of commercial paper during the first quarter of 2018,2019, compared with the same periodquarter in 2017.
2018.

These increases in net cash used in financing activities were partially offset by a $12.8 million net repayment of our subsidiary's note to our parent during the first quarter of 2017.Significant Financing Activities

For more information on our short-term financing activities, see Note 6, Short-Term Debt and Lines of Credit.


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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 arrangement, 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 6, Short-Term Debt and Lines of Credit, for more information on our credit facility.

As of March 31, 2018, we were the obligor under a series of tax-exempt pollution control refunding bonds with an outstanding principal amount of $80.0 million. In August 2009, we terminated a letter of credit that provided credit and liquidity support for the bonds, which resulted in a mandatory tender of the bonds. We purchased the bonds at par plus accrued interest to the date of purchase. As of March 31, 2018, the repurchased bonds were still outstanding but are not reported in our long-term debt since they are held by us.


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Working Capital

As of March 31, 2018,2019, our current liabilities exceeded our current assets by $85.1$124.0 million. We do not expect this to have any impact on our liquidity since we believe we have adequate back-up lines 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.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.


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Capital Requirements

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)    
2018 $598.5
2019 552.5
 $636.7
2020 807.5
 876.3
2021 979.0
Total $1,958.5
 $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.

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

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expenses, results of operations, liquidity, capital expenditures, or capital resources. For additional information, see Note 6, Short-Term Debt and Lines of Credit, Note 12, Guarantees, and Note 13,15, Variable Interest Entities.

Contractual Obligations

For additional information about our commitments, see Contractual Obligations in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources and Requirements in our 20172018 Annual Report on Form 10-K. There were no material changes to our commitments outside the ordinary course of business during the first quarter of 2019.

FACTORS AFFECTING RESULTS, LIQUIDITY, AND CAPITAL RESOURCES

The following is a discussion of certain factors that may affect our results of operations, liquidity, and capital resources. The following discussion should be read together with the information in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Factors Affecting Results, Liquidity, and Capital Resources in our 20172018 Annual Report on Form 10-K, which provides a more complete discussion of factors affecting us, including market risks and other significant risks, industry restructuring,competitive markets, environmental matters, critical accounting policies and estimates, and other matters.

Market Risks and Other Significant Risks

We are exposed to market and other significant risks as a result of the nature of our business and the environment in which we operate. These risks include, but are not limited to, the regulatory recovery risk described below. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Factors Affecting Results, Liquidity, and Capital Resources – Market Risks and Other Significant Risks in our 2018 Annual Report on Form 10-K for a discussion of other significant risks applicable to us.


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Regulatory Recovery

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 the PSCW. Recovery of the deferred costs in future rates is subject to the review and approval by the PSCW. 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 the PSCW, the costs would be charged to income in the current period. The PSCW 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.

Due to the Tax Legislation signed into law in December 2017, we remeasured our deferred taxes and recorded a tax benefit of $1,102 million. We have been returning the amortization of this tax benefit to ratepayers through bill credits and reductions to other regulatory assets, which we expect to continue.

See Note 18, Regulatory Environment, for more information regarding our recent and pending rate proceedings and orders, including the rate proposal we filed with the PSCW in March 2019.

Environmental Matters

See Note 15,16, 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 FERC,In May 2018, the PSCW and MPSC are working with usissued a written order regarding how to return anyrefund certain tax savings from the Tax Legislation to customers. Ifour ratepayers in Wisconsin. In addition, the amounts our regulators order usMichigan Public Service Commission approved a settlement with the iron ore mine located in the Upper Peninsula of Michigan we provided retail electric service to returnprior to customers exceedApril 1, 2019, that addressed all base rate impacts of the actual tax savings realized or if our regulators requireTax Legislation. We expect that the tax savings to be applied in a manner other than we had expected, it could have a material adverse effectvarious remaining impacts of the Tax Legislation on our financial condition, results ofWisconsin operations and cash flow.will be addressed in our pending rate case we filed with the PSCW in March 2019. See Note 17,18, Regulatory Environment, for more information.information on our pending rate case. 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.


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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes related to market risk from the disclosures presented in our 2018 Annual Report on Form 10-K for the year ended December 31, 2017.10-K. In addition to the Form 10-K disclosures, see Note 9,10, Fair Value Measurements, Note 11, Derivative Instruments, and Note 10, Derivative Instruments,12, Guarantees, in this report for information concerning our market risk exposures.


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ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

During the first quarter of 2018, WEC Energy Group completed an enterprise resource planning (ERP) system integration project to bring all of its subsidiaries, including us, onto a consolidated ERP system. Accordingly, we are modifying the design and documentation of certain internal control processes and procedures related to the integrated ERP system. We do not believe that the implementation of the ERP system will have an adverse effect on our internal control over financial reporting.

With the exception of the ERP system implementation described above, thereThere were no changes in our internal control over financial reporting (as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the first quarter of 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The following should be read in conjunction with Item 3. Legal Proceedings in Part I of our 20172018 Annual Report on Form 10-K. See Note 15,16, Commitments and Contingencies, and Note 17,18, Regulatory Environment, in this report for more information on material legal proceedings and matters related to us.

In addition to those legal proceedings discussed in Note 15,16, Commitments and Contingencies, Note 17,18, Regulatory Environment, and below, we are currently, and from time to time, subject to claims and suits arising in the ordinary course of business. Although the results of these additional legal proceedings cannot be predicted with certainty, management believes, after consultation with legal counsel, that the ultimate resolution of these proceedings will not have a material effect on our financial statements.

Presque Isle Power Plant Matter

In March 2018, the EPA issued a Finding of Violation to us regarding alleged violations of mercury emission limits for the PIPP Units 5, 6, 8, and 9, as well as failingfailure to conduct low emittingmercury tests on our low-emitting electric utility steam generating units mercury testing once every 12 months. We observed atypical initial mercury test results in June 2017 and immediately began to troubleshoot the potential cause. We foundThe EPA has advised us that the supplier of dry sorbent injection material for the air quality control system that controls mercury had delivered material that was out of specification per our contract and permit requirements. In June 2017, we notified the MDEQ, who notified the EPA that the EPA had jurisdiction regarding this matter. We have been working with the EPA to resolveit is not pursuing this matter and do not expect it to have a material impact on our financial statements.any further.

ITEM 1A. RISK FACTORS

There were no material changes from the risk factors presented in our 2018 Annual Report on Form 10-K for the year ended December 31, 2017.10-K. See Item 1A. Risk Factors in Part I of our 2017 Annual Report on Form 10-K for a discussion of certain risk factors applicable to us.


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ITEM 6. EXHIBITS
Number Exhibit
12Statements re Computation of Ratios
12.1
Ratio of Earnings to Fixed Charges
31 Rule 13a-14(a) / 15d-14(a) Certifications
    
  
31.1
Certification Pursuant to Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
    
  
31.2
Certification Pursuant to Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
    
32 Section 1350 Certifications
    
  
32.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    
  
32.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    
101 Interactive Data File
 

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SIGNATURE

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



  WISCONSIN ELECTRIC POWER COMPANY
  (Registrant)
   
  /s/ WILLIAM J. GUC
Date:May 4, 20183, 2019William J. Guc
  Vice President and Controller
   
  (Duly Authorized Officer and Chief Accounting Officer)


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