TEG-12.31.2013-Exhibit 99.2

EX-99.2 11 teg-12312013xexhibit992.htm EXHIBIT TEG-12.31.2013-Exhibit 99.2

Exhibit 99.2

AMERICAN TRANSMISSION COMPANY LLC

Financial Statements as of December 31, 2013 and 2012 and for the Years Ended December 31, 2013, 2012 and 2011 and Independent Auditors’ Report

Exhibit 99.2

American Transmission Company LLC

Table of Contents



Independent Auditors’ Report…………………………………..……………….………………….……........		3
Financial Statements
	Statements of Operations for the Years Ended December 31, 2013, 2012 and 2011…………….....	4
	Balance Sheets as of December 31, 2013 and 2012 ……..…………….…………….………….…....	5
	Statements of Cash Flows for the Years Ended December 31, 2013, 2012 and 2011………….......	6
	Statements of Changes in Members’ Equity for the Years Ended December 31, 2013, 2012 and 2011………………………………………………………………………………………….………………..	7
	Notes to Financial Statements as of December 31, 2013 and 2012 and for the Years Ended December 31, 2013, 2012 and 2011 ……………………….………………………………………..…...	8-31

Exhibit 99.2

INDEPENDENT AUDITORS' REPORT

To the Board of Directors of ATC Management Inc.,

Corporate Manager of American Transmission Company LLC

Pewaukee, Wisconsin

We have audited the accompanying financial statements of American Transmission Company LLC (the "Company"), which comprise the balance sheets as of December 31, 2013 and 2012, and the related statements of operations, changes in members’ equity, and cash flows for each of the three years then ended, and the related notes to the financial statements.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors' Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Transmission Company LLC as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years then ended in accordance with accounting principles generally accepted in the United States.

/s/ Deloitte & Touche LLP

Milwaukee, Wisconsin

February 3, 2014

Exhibit 99.2

American Transmission Company LLC

Statements of Operations

For the Years Ended December 31, 2013, 2012 and 2011



(In Thousands)
			2013		2012		2011
Operating Revenues
	Transmission Service Revenue		$	624,922	$	602,092	$	565,968
	Other Operating Revenue		1,414		1,162		1,206
		Total Operating Revenues	626,336		603,254		567,174

Operating Expenses
	Operations and Maintenance		161,129		158,271		147,121
	Depreciation and Amortization		114,808		107,230		100,247
	Taxes Other than Income		19,132		15,769		15,963
	Income Tax Provision of ATC LLC		—		(271)		(1,763)
		Total Operating Expenses	295,069		280,999		261,568

Operating Income			331,267		322,255		305,606


Other Income (Expense), Net			831		(2,533)		(1,332)

	Earnings Before Interest and Members' Income Taxes		332,098		319,722		304,274


Net Interest Expense			84,484		82,296		80,359

	Earnings Before Members' Income Taxes		$	247,614	$	237,426	$	223,915

The accompanying notes are an integral part of these financial statements.

Exhibit 99.2

American Transmission Company LLC

Balance Sheets

As of December 31, 2013 and 2012



(In Thousands)

ASSETS				2013		2012
Property, Plant and Equipment
	Transmission Plant			$	4,100,212	$	3,771,745
	General Plant			106,085		92,303
	Less-Accumulated Depreciation			(948,024)		(877,539)
				3,258,273		2,986,509
	Construction Work in Progress			206,530		269,501
		Net Property, Plant and Equipment		3,464,803		3,256,010

Current Assets
	Cash and Cash Equivalents			—		117
	Accounts Receivable			65,779		56,519
	Prepaid Expenses			5,363		4,619
	Current Portion of Regulatory Assets			6,443		—
	Other Current Assets			3,130		1,879
		Total Current Assets		80,715		63,134

Regulatory and Other Assets
	Equity Investment in Unconsolidated Subsidiary			31,719		776
	Regulatory Assets			718		7,329
	Other Assets			12,277		10,589
		Total Regulatory and Other Assets		44,714		18,694

			Total Assets	$	3,590,232	$	3,337,838

CAPITALIZATION AND LIABILITIES
Capitalization
	Members’ Equity (see Note 3 for redemption provisions)			$	1,532,598	$	1,440,468
	Long-term Debt			1,550,000		1,550,000
		Total Capitalization		3,082,598		2,990,468

Current Liabilities
	Accounts Payable			25,150		18,020
	Accrued Interest			22,033		22,033
	Other Accrued Liabilities			40,063		37,452
	Current Portion of Regulatory Liabilities			13,776		7,475
	Short-term Debt			280,445		166,561
		Total Current Liabilities		381,467		251,541

Regulatory and Other Long-term Liabilities
	Regulatory Liabilities			114,890		83,140
	Other Long-term Liabilities			11,277		12,689
		Total Regulatory and Other Long-term Liabilities		126,167		95,829


Commitments and Contingencies (See Note 7)				—		—

		Total Capitalization and Liabilities		$	3,590,232	$	3,337,838

The accompanying notes are an integral part of these financial statements.

Exhibit 99.2

American Transmission Company LLC

Statements of Cash Flows

For the Years Ended December 31, 2013, 2012 and 2011



(In Thousands)
						2013		2012		2011
Cash Flows from Operating Activities
	Earnings Before Members' Income Taxes					$	247,614	$	237,426	$	223,915
	Adjustments to Reconcile Earnings Before Members' Income Taxes to Net
		Cash Provided by Operating Activities-
			Depreciation and Amortization			114,808		107,230		100,247
			Bond Discount and Debt Issuance Cost Amortization			488		458		584
			Provision for Deferred Income Taxes of ATC LLC, Net			—		—		(2,070)
			Equity Loss (Earnings) in Unconsolidated Subsidiary Investment			(1,842)		1,574		—
			Change in-
				Accounts Receivable		(9,260)		(5,597)		(3,275)
				Current Assets		(3,010)		(679)		5,119
				Accounts Payable		1,576		813		(83)
				Accrued Liabilities		6,076		(3,627)		4,263
				Other, Net		9,766		(11,951)		(1,186)
					Total Adjustments	118,602		88,221		103,599
		Net Cash Provided by Operating Activities				366,216		325,647		327,514

Cash Flows from Investing Activities
	Capital Expenditures for Property, Plant and Equipment					(328,414)		(315,808)		(250,749)
	Investment in Unconsolidated Subsidiary					(32,800)		(2,350)		—
	Return of Capital from Unconsolidated Subsidiary					3,700		—		—
	Insurance Proceeds Received for Damaged Property, Plant and Equipment					—		—		1,668
		Net Cash Used in Investing Activities				(357,514)		(318,158)		(249,081)

Cash Flows from Financing Activities
	Distribution of Earnings to Members					(195,484)		(188,246)		(177,594)
	Issuance of Membership Units for Cash					40,000		60,000		25,000
	Issuance (Repayment) of Short-term Debt, Net					113,884		(17,782)		155,480
	Issuance of Long-term Debt, Net of Issuance Costs					—		148,972		224,959
	Repayment of Long-term Debt					—		—		(310,000)
	Advances Received Under Interconnection Agreements					—		2,524		6,621
	Repayments of Interconnection Agreements					—		(12,982)		(3,035)
	Advances Received for Construction					32,856		—		—
	Other, Net					(75)		(17)		16
		Net Cash Used in Financing Activities				(8,819)		(7,531)		(78,553)

Net Change in Cash and Cash Equivalents						(117)		(42)		(120)

Cash and Cash Equivalents, Beginning of Period						117		159		279
Cash and Cash Equivalents, End of Period						$	—	$	117	$	159

The accompanying notes are an integral part of these financial statements.

Exhibit 99.2

American Transmission Company LLC

Statements of Changes in Members’ Equity

For the Years Ended December 31, 2013, 2012 and 2011



(In Thousands)

Members’ Equity as of December 31, 2010			$	1,259,967

Membership Units Outstanding at December 31, 2010		76,656


	Issuance of Membership Units		$	25,000

	Earnings Before Members' Income Taxes		223,915

	Distribution of Earnings to Members		(177,594)

Members’ Equity as of December 31, 2011			$	1,331,288

Membership Units Outstanding at December 31, 2011		78,325


	Issuance of Membership Units		$	60,000

	Earnings Before Members' Income Taxes		237,426

	Distribution of Earnings to Members		(188,246)

Members’ Equity as of December 31, 2012			$	1,440,468

Membership Units Outstanding at December 31, 2012		82,154


	Issuance of Membership Units		$	40,000

	Earnings Before Members' Income Taxes		247,614

	Distribution of Earnings to Members		(195,484)

Members’ Equity as of December 31, 2013			$	1,532,598

Membership Units Outstanding at December 31, 2013		84,614

The accompanying notes are an integral part of these financial statements.

Exhibit 99.2

American Transmission Company LLC

Notes to Financial Statements as of December 31, 2013 and 2012 and for the Years Ended

December 31, 2013, 2012 and 2011


(1)	Nature of Operations and Summary of Significant Accounting Policies


(a)	General

American Transmission Company LLC (the “Company”) was organized, as a limited liability company under the Wisconsin Limited Liability Company Act, as a single-purpose, for-profit electric transmission company. The Company’s purpose is to plan, construct, operate, own and maintain electric transmission facilities to provide an adequate and reliable transmission system that meets the needs of all users on the system and supports equal access to a competitive, wholesale electric energy market.

The Company owns and operates the electric transmission system, under the direction of the Midcontinent Independent Transmission System Operator, Inc. (MISO), in parts of Wisconsin, Illinois, Minnesota and the Upper Peninsula of Michigan. The Company is subject to regulation by the Federal Energy Regulatory Commission (FERC) as to rates, terms of service and financing and by state regulatory commissions as to other aspects of business, including the construction of electric transmission assets.

The Company’s five largest customers are also members and account for over 80% of the Company’s operating revenues. The rates for these transmission services are subject to review and approval by the FERC. In addition, several members provide operations, maintenance and construction services to the Company. The agreements under which these services are provided are subject to review and approval by the Public Service Commission of Wisconsin (PSCW). See Note (8) for details of the various transactions between the Company and its members.

The Company evaluated potential subsequent events through February 3, 2014, which is the date these statements were available to be issued.


(b)	Corporate Manager

The Company is managed by a corporate manager, ATC Management Inc. (“Management Inc.”). The Company and Management Inc. have common ownership and operate as a single functional unit. Under the Company’s operating agreement, Management Inc. has complete discretion over the business of the Company and provides all management services to the Company at cost. The Company itself has no employees and no governance structure separate from Management Inc. The Company’s operating agreement establishes that all expenses of Management Inc. are the responsibility of the Company. These expenses consist primarily of payroll, benefits, payroll-related taxes and other employee-related expenses. All such expenses are recorded in the Company’s accounts as if they were direct expenses of the Company.

Exhibit 99.2

As of December 31, the following net payables to Management Inc. were included in the Company’s balance sheets (in thousands):



		2013		2012

Other Accrued Liabilities		$	13,803	$	15,259
Other Long-term Liabilities		2,054		5,383
	Net Amount Payable to Management Inc.	$	15,857	$	20,642

Amounts included in other accrued liabilities are primarily payroll- and benefit-related accruals. Amounts included in other long-term liabilities relate primarily to certain long-term compensation arrangements covering Management Inc. employees, as described in Note (2), offset by a $14.5 million and $12.6 million receivable as of December 31, 2013 and 2012, respectively, for income taxes paid on Management Inc.’s behalf by the Company. The income taxes paid are due to temporary differences relating to the tax deductibility of certain employee-related costs. As these temporary differences reverse in future years, Management Inc. will receive cash tax benefits and will then repay the advances from the Company.


(c)	Revenue Recognition

Wholesale electric transmission service for utilities, municipalities, municipal electric companies, electric cooperatives and other eligible entities is provided through the Company’s facilities under the MISO Open Access Transmission, Energy and Operating Reserve Markets Tariff (“MISO Tariff”) regulated by the FERC. The Company charges for these services under FERC-approved rates. The MISO Tariff specifies the general terms and conditions of service on the transmission system and the approved rates set forth the calculation of the amounts to be paid for those services. The Company does not take ownership of the electricity that it transmits.

The Company’s FERC-approved formula rate tariff (“Company’s Tariff”) for the revenue requirement determined under Attachment O of the MISO Tariff includes a true-up provision that meets the requirements of an alternative revenue program as defined in the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) Topic 980, “Regulated Operations.” Accordingly, revenue is recognized for transmission system access the Company provided during the reporting period based on the revenue requirement formula in the Company’s Tariff. Annually, the Company prepares a forecast for the upcoming rate year of total operating expenses, projected rate base resulting from planned construction and other capital expenditures, and projected amounts to be received from MISO. From this forecast, the Company computes an annual projected total revenue requirement for the reporting period. Based on the criteria in the MISO Tariff, the Company also calculates its regional cost-sharing revenue requirements which, in addition to other forecasted revenues from MISO and other sources, are subtracted from the total revenue requirement to determine the Company’s annual network revenue requirement. The annual network revenue requirement is billed to and collected from network transmission customers in equal monthly installments throughout the rate year. Subsequent to the rate year, the Company compares actual results from the rate year to the forecast to determine any under- or over-collection of revenue from network and regional customers. In accordance with ASC Topic 980, the Company accrues or defers revenues that are higher or lower, respectively, than the amounts collected during the reporting period. An accumulated

Exhibit 99.2

over-collected true-up balance is classified as a regulatory liability in the balance sheets and an accumulated under-collected true-up balance is classified as a regulatory asset in the balance sheets. The Company is required to refund any over-collected network amounts, plus interest, within two years subsequent to the rate year, with the option to accelerate all or a portion of any such refund, and is permitted to include any under-collected network amounts, plus interest, in annual network billings two fiscal years subsequent to the rate year. Under these true up provisions, the Company refunded, inclusive of interest, approximately $1.3 million, $8.0 million and $10.1 million to network customers through their monthly bills in 2013, 2012 and 2011, respectively. The Company also has FERC-approved true-up provisions for MISO regional cost-sharing revenues, including for Multi-Value Projects, to refund over-collections or receive under-collections in the second year following the rate year. The Company refunded, inclusive of interest, approximately $6.3 million and $5.5 million in 2013 and 2012, respectively, to regional customers and collected, inclusive of interest, approximately $3.8 million from regional customers in 2011. See Note 1(h) for more information on the Company’s true-up provisions.

The Company records a reserve for revenue subject to refund when such refund is probable and can be reasonably estimated.

The Company is currently operating under a settlement agreement approved by the FERC in 2004 which limits the rights of interested parties to challenge, through a FERC Section 206 proceeding, the provisions noted above for the term of the agreement. Certain provisions of the settlement agreement terminated on December 31, 2012; as such, the Company may elect to change, or intervenors may request a change to, the Company’s revenue requirement formula. A change to the revenue requirement formula could result in lowered rates and have an adverse effect on the Company’s financial position, results of operations and cash flows. If no filings are made by either the Company or other parties, the current terms of the settlement agreement will continue in effect.

On November 12, 2013, MISO, the Company, and numerous other MISO transmission owners were named as respondents in a complaint filed at the FERC pursuant to Section 206 of the Federal Power Act (FPA) by several customer groups located within the MISO service area. The complaint claims that the respondents’ transmission rates are no longer just and reasonable and seeks, among other things, to reduce the MISO base return on equity (ROE). The Company and the other MISO transmission owners responded to the complaint with a motion to dismiss and answer objecting to the claims of the complainants. Further details related to this complaint are discussed in Note 7(a).


(d)	Transmission and General Plant and Related Depreciation

Transmission plant is recorded at the original cost of construction. Assets transferred to the Company primarily by its members, which include investor-owned utilities, municipalities, municipal electric companies and electric cooperatives, have been recorded at their original cost in property, plant and equipment with the related reserves for accumulated depreciation also recorded.

The original cost of construction includes materials, construction overhead and outside contractor costs. Additions to, and significant replacements of, transmission assets are charged to property, plant and

Exhibit 99.2

equipment at cost; replacements of minor items are charged to maintenance expense. The cost of transmission plant is charged to accumulated depreciation when an asset is retired.

The provision for depreciation of transmission assets is an integral part of the Company’s cost of service under FERC-approved rates. Depreciation rates include estimates for future removal costs and salvage value. Amounts collected in depreciation rates for future non-legal removal costs are included in regulatory liabilities in the balance sheets, as described in Note 1(h). Removal costs incurred are charged against the regulatory liability. Depreciation expense, including a provision for removal costs, as a percentage of average transmission plant was 2.73%, 2.75% and 2.63% in 2013, 2012 and 2011, respectively.

The Company completed a depreciation study during 2011 and received approval from the FERC to revise its depreciation rates, effective January 1, 2012. The Company’s annual depreciation expense for 2012 increased by approximately $1.0 million as a result of implementing the adjusted rates.

General plant, which includes buildings, office furniture and equipment, and computer hardware and software, is recorded at cost. Depreciation is recorded at straight-line rates over the estimated useful lives of the assets, which range from five to 60 years.


(e)	Asset Retirement Obligations

Consistent with ASC Topic 410, “Asset Retirement and Environmental Obligations,” the Company records a liability at fair value for a legal asset retirement obligation (ARO) in the period in which it is incurred. When a new legal obligation is recorded, the costs of the liability are capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. In accordance with ASC Topic 980, the Company recognizes regulatory assets or liabilities, as described in Note 1(h), for the timing differences between when it recovers the ARO in rates and when it recognizes these costs under ASC Topic 410. At the end of the asset's useful life, the Company settles the obligation for its recorded amount and records the gain or loss in the appropriate regulatory account.

The Company has recognized AROs primarily related to asbestos, lead-based paint, and polychlorinated biphenyls contained in its electrical equipment. AROs are recorded as other long-term liabilities in the balance sheets. The following table describes all changes to AROs for the years ended December 31, 2013 and 2012 (in thousands):



	2013		2012

Asset Retirement Obligations at January 1	$	7,306	$	1,896
Accretion	378		133
Liabilities Recognized	-		5,354
Revision to Estimated Cash Flows	(333)		-
Liabilities Settled	(109)		(77)
Asset Retirement Obligations at December 31	$	7,242	$	7,306

Exhibit 99.2


(f)	Interconnection Agreements

The Company has entered into interconnection agreements with entities planning to build generation facilities. The Company will construct the interconnection facilities; however, the generator will finance and bear all financial risk of constructing the interconnection facilities under these agreements. The Company will own and operate the interconnection facilities when the generation facilities become operational and will reimburse the generator for construction costs, plus interest. If the generation facilities do not become operational, the Company has no obligation to reimburse the generator for costs incurred during construction.

In cases in which the Company is contractually obligated to construct the interconnection facilities, the Company receives cash advances for construction costs from the generators. During construction, the Company includes actual costs incurred in construction work in progress (CWIP) and records liabilities for the cash advances from the generators, along with accruals for interest. The accruals for interest are capitalized and included in CWIP. The construction costs and accrued interest related to interconnection agreements that are included in CWIP are not included as a component of the Company’s rate base until the generation facilities become operational and the Company has reimbursed the generator.

At December 31, 2013 and 2012 the Company had no active projects related to these agreements. Therefore, at December 31, 2013 and 2012 there were no amounts included in CWIP or liabilities related to cash advances from generator interconnection agreements.


(g)	Cash and Cash Equivalents

Cash and cash equivalents include highly liquid investments with original maturities of three months or less.

The Company paid cash for the following items during 2013, 2012 and 2011 (in millions):



	2013		2012		2011

Interest		$83.5		$80.0		$81.5

Income Taxes of ATC LLC	-		-		0.6

At December 31, 2013, 2012 and 2011, construction costs funded through accounts payable and accrued liabilities were $33.8 million, $25.5 million and $40.0 million, respectively. Accordingly, these noncash investing activities are not reported in the statements of cash flows until the period in which the payables are paid.


(h)	Regulatory Accounting

Exhibit 99.2

The Company’s accounting policies conform to ASC Topic 980. Accordingly, assets and liabilities that result from the regulated ratemaking process are recorded that would otherwise not be recorded under accounting principles generally accepted in the United States of America for non-regulated companies. Certain costs are recorded as regulatory assets as incurred and are recognized in the statements of operations at the time they are reflected in rates. As such, regulatory assets are not included as a component of rate base and do not earn a current return. Regulatory liabilities represent amounts that have been collected in current rates to recover costs that are expected to be incurred, or refunded to customers, in future periods.

In accordance with ASC Topic 715, “Compensation – Retirement Benefits,” the Company recognizes the funded status of its postretirement benefit plan, measured as the amount by which its accumulated postretirement benefit obligation is less than or greater than the fair value of the assets that fund its plan. Since the Company expects to refund or recover these amounts in future rates, a regulatory liability or asset has been established for an amount equal to the ASC Topic 715 asset or liability.

In accordance with ASC Topic 980, an accumulated over-collected revenue true-up balance is classified as a regulatory liability in the balance sheets and an accumulated under-collected revenue true-up balance is classified as a regulatory asset in the balance sheets.

The Company recognizes a regulatory asset or liability for the cumulative difference between amounts recognized for AROs under ASC Topic 410 and amounts recovered through depreciation rates related to these obligations.

As of December 31, regulatory assets included the following amounts (in thousands):



	2013		2012

2012 Network Revenue True-up to be Collected, Including Interest	$	2,062	$	2,058
2012 Multi-Value Projects Revenue True-up to be Collected, Including Interest	4,381		4,371
2013 Regional Cost-sharing Revenue True-up to be Collected, Including Interest	718		-
Postretirement Benefit Plan Amounts to be Recovered through Future Rates	-		900
Total Regulatory Assets	$	7,161	$	7,329

As of December 31, these amounts were classified in the balance sheets as follows (in thousands):



	2013		2012

Current Portion of Regulatory Assets	$	6,443	$	—
Regulatory Assets (long term)	718		7,329
Total Regulatory Assets	$	7,161	$	7,329

Exhibit 99.2

As described in Note 1(d), the Company’s depreciation rates include an estimate for future asset removal costs which do not represent AROs. The cumulative amounts that have been collected for future asset removal costs are reflected as regulatory liabilities.

As of December 31, regulatory liabilities included the following amounts (in thousands):



	2013		2012

2011 Network Revenue True-up Refunded in 2013, Including Interest	$	—	$	1,276
2011 Regional Cost-sharing Revenue True-up Refunded in 2013, Including Interest	—		6,199
2012 Regional Cost-sharing Revenue True-up to be Refunded, Including Interest	1,533		1,486
2013 Network Revenue True-up to be Refunded, Including Interest	16,960		—
2013 Multi-Value Projects Revenue True-up to be Refunded, Including Interest	4,331		—
Recognition of Over-funded Post Retirement Benefit Plan	3,949		—
Non-ARO Removal Costs Collected in Rates	99,400		79,794
Cumulative Difference between ARO Costs Collected in Rates and ARO Recognition under ASC Topic 410	2,493		1,860
Total Regulatory Liabilities	$	128,666	$	90,615

As of December 31, these amounts were classified in the balance sheets as follows (in thousands):



	2013		2012

Current Portion of Regulatory Liabilities	$	13,776	$	7,475
Regulatory Liabilities (long term)	114,890		83,140
Total Regulatory Liabilities	$	128,666	$	90,615

The Company continually assesses whether regulatory assets continue to meet the criteria for probability of future recovery. This assessment includes consideration of factors such as changes in the regulatory environment, recent rate orders to other regulated entities under the same jurisdiction and the status of any pending or potential deregulation legislation. If the likelihood of future recovery of any regulatory asset becomes less than probable, the affected assets would be written off in the period in which such determination is made.


(i)	Other Assets

As of December 31, other assets included the following (in thousands):

Exhibit 99.2



	2013		2012

Unamortized Debt Issuance Costs	$	8,281	$	8,694
Deferred Project Costs	2,324		198
Other	1,672		1,697
Total Other Assets	$	12,277	$	10,589

Deferred project costs are expenditures directly attributable to the construction of transmission assets. These costs are recorded as other assets in the balance sheets until all required regulatory approvals are obtained and construction begins, at which time the costs are transferred to CWIP. In accordance with its FERC-approved settlement agreement, the Company is allowed to expense and recover in rates, in the year incurred, certain preliminary survey and investigation costs related to study and planning work performed in the early stages of construction projects. Other costs, such as advance equipment purchases, continue to be deferred as described above. Approximately $19.0 million, $14.9 million and $10.9 million of preliminary survey and investigation costs were included in operations and maintenance expense for 2013, 2012 and 2011, respectively.


(j)	Impairment of Long-lived Assets

The Company reviews the carrying values of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying values may not be recoverable under ASC Topic 360, ”Property, Plant and Equipment.” Impairment would be determined based upon a comparison of the undiscounted future operating cash flows to be generated during the remaining life of the assets to their carrying amounts. An impairment loss would be measured as the amount that an asset’s carrying amount exceeds its fair value. As long as its assets continue to be recovered through the ratemaking process, the Company believes that such impairment is unlikely.


(k)	Income Taxes

The Company is a limited liability company that has elected to be treated as a partnership under the Internal Revenue Code and applicable state statutes. The Company’s members (except certain tax-exempt members) report their share of the Company’s earnings, gains, losses, deductions and tax credits on their respective federal and state income tax returns. Earnings before members’ income taxes reported in the statements of operations are the net income of the Company. Accordingly, these financial statements do not include a provision for federal income tax expense and only include a provision for income taxes for the state of Michigan for the twelve months ended December 31, 2011, since limited liability companies like the Company were considered taxable entities under the Michigan Business Tax (MBT) during that year. However, effective January 1, 2012, the MBT was replaced by a corporate income tax (CIT) in the state of Michigan. Pass-through entities, such as the Company, which were taxed at the entity level under the MBT, are not required to pay taxes or file returns under the CIT. The Company’s taxable members, not the Company, are subject to the CIT. The income tax provision reported in the statements of operations is derived in accordance with ASC Topic 740, “Income Taxes.” As such, deferred income taxes have been

Exhibit 99.2

recorded using current enacted tax rates for the differences between the tax basis of the Company’s assets and liabilities and the basis reported in the financial statements. See Note (6) for further discussion of income taxes, the CIT and the MBT.


(l)	Construction Agreement

In December 2012, the Company entered into an agreement with the Wisconsin Department of Transportation (WisDOT) to relocate seven overhead 138 kilovolt (kV) transmission lines as part of the WisDOT’s expansion of the interchange between Interstate Highway 894-94 and U.S. Highway 45 in Milwaukee, Wisconsin, known as the Zoo Interchange. Under the agreement, the WisDOT began making the first of its periodic advances to the Company in January 2013, which the Company is using to offset its costs to relocate the seven lines. During 2013, the Company received approximately $32.8 million in advances under the agreement.


(m)	Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to apply policies and make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used for items such as depreciable lives of property, plant and equipment, removal costs associated with asset retirements, tax provisions included in rates, actuarially determined benefit costs, accruals for construction costs and operations and maintenance expenses. As additional information becomes available, or actual amounts are determined, the recorded estimates are revised. Consequently, operating results can be affected by revisions to prior accounting estimates.


(2)	Benefits

Management Inc. sponsors several benefit plans for its employees. These plans include certain postretirement medical, dental, and life insurance benefits (“postretirement healthcare benefits”). The weighted-average assumptions related to the postretirement medical benefits, as of the measurement date, are as follows:



		2013	2012	2011

Discount Rate		4.95%	4.12%	4.64%
Medical Cost Trend:
	Immediate Range	7.50%	7.00%	7.80%
	Ultimate Range	4.00%	4.00%	5.00%
Long-term Rate of Return on Plan Assets		5.00%	6.00%	6.00%

The components of Management Inc.’s postretirement healthcare benefit costs for 2013, 2012 and 2011 are as follows (in thousands):

Exhibit 99.2



		2013		2012		2011

Service Cost		$	1,426	$	1,562	$	1,233
Interest Cost		960		977		881
Amortization of Prior Service Credit		(569)		(569)		(569)
Amortization of Net Actuarial Loss		308		286		38
Expected Return on Plan Assets		(1,375)		(1,259)		(1,102)
	Net Periodic Postretirement Cost	$	750	$	997	$	481

To recognize the funded status of its postretirement healthcare benefit plans in accordance with ASC Topic 715, the Company had long-term assets of $4.0 million and $0.8 million at December 31, 2013 and 2012, respectively. In addition, the Company had the following amounts not yet reflected in net periodic benefit cost and included in its regulatory accounts at December 31 (in thousands):



	2013			2012

Prior Service Credit	$	(3,585	)	$	(4,154	)
Accumulated Loss (Gain)	(364)			5,054
Regulatory Asset (Liability) for Amounts to be Included in Future Rates	$	(3,949	)	$	900

The assumed medical cost trend rates are critical assumptions in determining the service and interest cost and accumulated postretirement healthcare benefit obligation for the Company’s medical and dental plans. A one-percent change in the medical cost trend rates, holding all other assumptions constant, would have the following effects for 2013 (in thousands):



	One-Percent		One-Percent
	Increase		Decrease

Effect on Total of Service and Interest Cost Components	$	599	$	(451	)
Effect on Postretirement Benefit Obligation at the End of the Year	4,073		(3,204		)

In 2014, the Company will recognize a $569 thousand prior service credit in its net periodic postretirement healthcare benefit cost.

The funded status of the Company’s postretirement healthcare benefit plans as of December 31 is as follows (in thousands):

Exhibit 99.2



	2013		2012
Change in Projected Benefit Obligation:
Accumulated Postretirement Benefit Obligation at January 1	$	23,415	$	21,187
Service Cost	1,426		1,562
Interest Cost	960		977
Benefits Paid	(421)		(372)
Actuarial Losses (Gains)	(4,024)		61
Benefit Obligation at December 31	$	21,356	$	23,415

Change in Plan Assets:
Fair Value of Plan Assets at January 1	$	24,244	$	20,783
Employer Contributions	-		1,136
Actual Return on Plan Assets (Net of Expenses)	2,461		2,619
Net Benefits Paid	(1,350)		(294)
Fair Value at December 31	$	25,355	$	24,244

Funded Status at December 31	$	3,999	$	829

The Company anticipates contributing $0.4 million to the plan for postretirement healthcare benefit obligations during 2014.

The Company anticipates net retiree healthcare benefit payments for the next 10 years to be as follows (in thousands):



2014	$	325
2015	399
2016	475
2017	542
2018	633
2019-2023	4,276
Total	$	6,650

To fund postretirement healthcare benefit obligations, the Company periodically contributes to its Voluntary Employees’ Beneficiary Association (VEBA) trust. The VEBA trust, along with the 401(h) trust, are discretionary trusts with a long-term investment objective to preserve and enhance the post inflation value of the trusts’ assets, subject to cash flow requirements, while maintaining an acceptable level of volatility.

The composition of the fair value of total plan assets held in the trusts as of December 31, along with targeted allocation percentages for each major category of plan assets in the trusts, is as follows:

Exhibit 99.2



	2013	2012	Target	Range

U.S. Equities	48%	49%	50%	+/- 5%
Non-U.S. Equities	13%	11%	15%	+/- 4%
Fixed Income	39%	40%	35%	+/- 5%
	100%	100%	100%

The Company appoints a trustee to maintain investment discretion over trust assets. The trustee is responsible for holding and investing plan assets in accordance with the terms of the Company’s trust agreement, including investing within the targeted allocation percentages.

The asset classes designated above and described below serve as guides for the selection of individual investment vehicles by the trustee:


•	U.S. Equities – Strategy of achieving long-term growth of capital and dividend income through investing primarily in common stock of companies in the U.S. stock market with the Wilshire 5000 Index (or a comparable broad U.S. stock index) as the investment benchmark.


•	Non-U.S. Equities – Strategy of achieving long-term growth of capital and dividend income through investing primarily in common stock of companies in the non-U.S. stock markets with the Morgan Stanley Capital Index All Country World ex-U.S Index (or a comparable broad non-U.S. stock index) as the investment benchmark.


•	Fixed Income – Strategy of achieving total return from current income and capital appreciation by investing in a diversified portfolio of fixed-income securities with the Barclays Capital Aggregate Index (or a comparable broad bond index) as the investment benchmark.

The objective of the investment vehicles is to minimize risk of large losses by effective diversification. The investment vehicles will attempt to rank better than the median vehicle in their respective peer group. However, these investments are intended to be viewed over the long term; during the short term, there will be fluctuations in rates of return characteristic of the securities markets.

The Company measures its plan assets at fair value according to the hierarchy set forth in ASC Topic 715. The three levels of the fair value hierarchy under ASC Topic 715 are:


Level 1	Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company’s postretirement healthcare benefit plans have the ability to access.


Level 2	Inputs to the valuation methodology include:


•	Quoted prices for similar assets or liabilities in active markets


•	Quoted prices for identical or similar assets or liabilities in inactive markets


•	Inputs other than quoted prices that are observable for the asset or liability

Exhibit 99.2


•	Inputs that are derived principally from, or corroborated by, observable market data by correlation or other means

If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.


Level 3	Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

At December 31, 2013 and 2012, a description of the valuation methodologies used for investments measured at fair value is as follows:


•	Money Market Fund: Valued at cost plus accrued interest, which approximates the fair value of the net asset value of the shares held by the plan at year-end.


•	Mutual Funds: Valued at the net asset value of shares held by the plan at year-end.

Exhibit 99.2

The following table contains, by level within the fair value hierarchy, the Company’s postretirement healthcare benefit account investments at fair value as of December 31 (in thousands):



2013	Level 1		Level 2		Level 3		Total

U.S. Equity Mutual Funds	$	12,230	$	—	$	—	$	12,230
Non-U.S. Equity Mutual Fund	3,341		—		—		3,341
Fixed Income Mutual Funds	9,497		—		—		9,497
Money Market Fund	—		287		—		287
Total	$	25,068	$	287	$	—	$	25,355



2012	Level 1		Level 2		Level 3		Total

U.S. Equity Mutual Funds	$	11,875	$	—	$	—	$	11,875
Non-U.S. Equity Mutual Fund	2,785		—		—		2,785
Fixed Income Mutual Funds	9,288		—		—		9,288
Money Market Fund	—		296		—		296
Total	$	23,948	$	296	$	—	$	24,244

During 2013 and 2012, the Company had no transfers between Level 1 and Level 2 measurements and no transfers into or out of Level 3 measurements. Measurements for the Company’s Level 2 inputs are based on inputs other than quoted prices that are observable for these assets.

Management Inc. sponsors a defined contribution money-purchase pension plan, in which substantially all employees participate, and makes contributions to the plan for each participant based on several factors. Contributions made by Management Inc. to the plan and charged to expense totaled $3.1 million, $2.8 million and $2.6 million in 2013, 2012 and 2011, respectively.

Management Inc. also provides a deferred compensation plan for certain employees. The plan allows for the elective deferral of a portion of an employee’s base salary and incentive compensation and also contains a supplemental retirement and 401(k) component. Deferred amounts are taxable to the employee when paid, but the Company recognizes compensation expense in the period earned. As of December 31, 2013 and 2012, $16.4 million and $14.8 million, respectively, were included in other long-term liabilities related to this deferred compensation plan. Amounts charged to expense, including interest accruals, were $2.1 million in 2013 and $2.0 million in both 2012 and 2011.


(3)	Members’ Equity

Exhibit 99.2

The Company’s members include investor-owned utilities, municipalities, municipal electric companies, and electric cooperatives.

Distribution of earnings to members is at the discretion of Management Inc. The operating agreement of the Company established a target for distribution of 80% of annual earnings before members’ income taxes. During 2013, 2012 and 2011, the Company distributed $195 million, $188 million and $178 million, respectively, of its earnings to its members. On January 21, 2014, the board of directors of Management Inc. approved a distribution for the fourth quarter of 2013, in the amount of $50.5 million, that was paid on January 31, 2014, bringing the total distributions related to 2013 earnings to 80% of earnings before members’ income taxes.

Each of the Company’s members has the right to require the Company to redeem all or a portion of its membership interests, so long as such interests have been outstanding for at least 12 months. However, the Company is not required to effect the redemption by non-managing members if Management Inc., in its sole discretion as the corporate manager, elects to purchase, in lieu of redemption, such membership interests for either a specified amount of cash or a specified number of shares of its common stock. After such purchase, Management Inc. shall be deemed the owner of such membership interests.

During 2013, the Company issued 2,459,468 units to members in exchange for $40.0 million in cash.

Management Inc. has issued shares of its common stock to each of the Company’s members or their affiliates in proportion to their ownership interests in the Company. Holders of Management Inc. common stock have the rights of shareholders under Wisconsin law, including the right to elect directors of the corporate manager in accordance with the Company’s operating agreement.


(4)	Debt


(a)	Credit Facility

The Company has a $350 million, five-year revolving credit facility, which expires on December 7, 2017. The facility provides backup liquidity to the Company’s commercial paper program. While the Company does not intend to borrow under the revolving credit facility, interest rates on outstanding borrowings under the facility would be based on a floating rate plus a margin. The applicable margin, which is based on the Company’s debt rating of A1/A+ or equivalent, is currently 0.8%.

The revolving credit facility contains restrictive covenants, including restrictions on liens, certain mergers, sales of assets, acquisitions, investments, transactions with affiliates, change of control, conditions on prepayment of other debt, and the requirement of the Company to meet certain financial reporting obligations. The revolving credit facility provides for certain customary events of default, including a targeted total-debt-to-total-capitalization ratio that is not permitted to exceed 65% at any given time. The Company was not in violation of any financial covenants under its credit facility during the periods covered by these financial statements.

Exhibit 99.2

The Company had no outstanding balance under its credit facility as of December 31, 2013 or 2012.


(b)	Commercial Paper

The Company currently has a $350 million unsecured, private placement, commercial paper program. Investors are limited to qualified institutional buyers and institutionally-accredited investors. Maturities may be up to 364 days from date of issue, with proceeds to be used for working capital and other capital expenditures. Pricing is par, less a discount or, if interest-bearing, at par. The Company had $280 million of commercial paper outstanding as of December 31, 2013 at an average rate of 0.21% and $167 million of commercial paper outstanding as of December 31, 2012 at an average rate of 0.22%. Commercial paper is included in Short-term Debt in the balance sheets. As defined by the commercial paper program, no customary events of default took place during the periods covered by the accompanying financial statements.


(c)	Long-term Debt

The following table summarizes the Company’s long-term debt outstanding as of December 31 (in thousands):



		2013		2012

Senior Notes at stated rate of 7.02%, due August 31, 2032		$	50,000	$	50,000
Senior Notes at stated rate of 6.79%, due on dates ranging from August 31, 2024 to August 31, 2043		100,000		100,000
Senior Notes at stated rate of 4.992%, due April 15, 2015		100,000		100,000
Senior Notes at stated rate of 5.59%, due December 1, 2035		100,000		100,000
Senior Notes at stated rate of 5.91%, due August 1, 2037		250,000		250,000
Senior Notes at stated rate of 5.58%, due April 30, 2018		200,000		200,000
Senior Notes at stated rate of 5.40%, due May 15, 2019		150,000		150,000
Senior Notes at stated rate of 4.59%, due February 1, 2022		100,000		100,000
Senior Notes at stated rate of 5.72%, due April 1, 2040		50,000		50,000
Senior Notes at stated rate of 4.17%, due March 14, 2026		75,000		75,000
Senior Notes at stated rate of 4.27%, due March 14, 2026		75,000		75,000
Senior Notes at stated rate of 5.17%, due March 14, 2041		150,000		150,000
Senior Notes at stated rate of 4.37%, due April 18, 2042		150,000		150,000
	Total Long-term Debt	$	1,550,000	$	1,550,000

The senior notes rank equivalent in right of payment with all of the Company’s existing and future unsubordinated, unsecured indebtedness and senior in right of payment to all subordinated indebtedness of the Company.

The senior notes contain restrictive covenants, which include restrictions on liens, certain mergers and sales of assets, and the requirement of the Company to meet certain financial reporting obligations. The senior

Exhibit 99.2

notes also provide for certain customary events of default, none of which occurred during the periods covered by the accompanying financial statements.

Future maturities of the Company’s senior notes are as follows (in millions):



2014	$	—
2015	100
2016	-
2017	-
2018	200
Thereafter	1,250
	$	1,550

The senior notes contain an optional redemption provision whereby the Company is required to make the note holders whole on any redemption prior to maturity. The notes may be redeemed at any time, at the Company’s discretion, at a redemption price equal to the greater of 100% of the principal amount of the notes plus any accrued interest or the present value of the remaining scheduled payments of principal and interest from the redemption date to the maturity date discounted to the redemption date on a semiannual basis at the then-existing Treasury rate plus 30 to 50 basis points, plus any accrued interest.

During November 2013, the Company entered into an agreement with a group of investors, through a private placement offering, to issue $50 million of 15-year, unsecured 3.74% senior notes and $50 million of 30-year, unsecured 4.67% senior notes. The closing and funding of the notes occurred on January 22, 2014. The notes pay interest semiannually on January 22 and July 22, beginning on July 22, 2014. The notes will mature on January 22, 2029 and January 22, 2044, respectively.

During February 2012, the Company entered into an agreement with a group of investors, through a private placement offering, to issue $150 million of 30-year, unsecured 4.37% senior notes. The closing and funding of the notes occurred on April 18, 2012. The notes pay interest semiannually on April 18 and October 18 and will mature on April 18, 2042.


(5)	Fair Value of Financial Instruments

The carrying amount of the Company’s financial instruments included in current assets and current liabilities approximates fair value due to the short maturity of such financial instruments. The fair value of the Company’s long-term debt is estimated based upon quoted market values for the same or similar issues or upon the quoted market prices of U.S. Treasury issues having a similar term to maturity, adjusted for the Company’s credit ratings.

The carrying amount and the estimated fair value of the Company’s long-term debt at December 31 are as follows (in millions):

Exhibit 99.2



	2013		2012

Carrying Amount	$	1,550	$	1,550

Estimated Fair Value	1,705		1,836


(6)	Income Taxes

As mentioned in Note 1(k), the Company was considered a taxable entity under the MBT until the MBT was replaced with the CIT in 2012. The Company was subject to the MBT, which was accounted for as an income tax under the provisions of ASC Topic 740 and recovered as a component of the Company’s revenue requirement. As a result of the CIT, the Company recorded a non-cash credit of $2.1 million to income tax expense of ATC LLC during the second quarter of 2011 to reverse net deferred income taxes related to the MBT for periods beyond 2011. Partially offsetting this credit was a $0.3 million current provision for MBT recorded in 2011, which resulted in a net credit amount of $1.8 million in income tax expense of ATC LLC in the statement of operations for the twelve months ended December 31, 2011. During the third quarter of 2012, the Company filed its 2011 tax return with the state of Michigan and requested a refund of $0.3 million. As such, the Company recorded a credit of that same amount to income tax expense of ATC LLC in 2012. As of December 31, 2013 and 2012, the Company had no deferred tax amounts related to the MBT in other long-term liabilities in its statements of financial position.

The Company is allowed to recover in rates, as a component of its cost of service, its income taxes, as well as the amount of income taxes that are the responsibility of its members. Accordingly, the Company includes a provision for its members’ federal and state current and deferred income tax expenses and amortization of the excess deferred tax reserves and deferred investment tax credits associated with assets transferred to the Company by its members in its regulatory financial reports and rate filings. For purposes of determining the Company’s revenue requirement under FERC-approved rates, rate base is reduced by an amount equivalent to members’ net accumulated deferred income taxes, including excess deferred income tax reserves. Such amounts were approximately $498 million, $422 million and $364 million in 2013, 2012 and 2011, respectively, and are primarily related to accelerated tax depreciation and other plant-related differences. The 2013, 2012 and 2011 revenues include recovery of $98.9 million, $95.0 million and $86.4 million, respectively, of income tax expense.

On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“2010 Tax Act”) into law. One of the elements of the 2010 Tax Act increased bonus depreciation from 50% to 100% on assets placed in service after September 8, 2010 and before January 1, 2012. The 2010 Tax Act also allowed a transitional 100% bonus depreciation for self-constructed assets that had started construction before December 31, 2011 and were in service by December 31, 2012. On January 2, 2013, President Obama signed the American Taxpayer Relief Act of 2012, which extended the current 50% bonus depreciation through 2013.

ASC Topic 740 provides guidance on recognition thresholds and measurement of a tax position taken or expected to be taken in a tax return, including whether an entity is taxable in a particular jurisdiction. This guidance applies to all entities, including pass-through entities such as the Company. The Company does not

Exhibit 99.2

consider any of its tax positions to be uncertain, including the Company’s position that it qualifies as a pass-through entity in the federal and Wisconsin tax jurisdictions. Additionally, the Company had no unrecognized tax benefits and was assessed no material amounts of interest or penalties during 2013, 2012 or 2011. The Company is no longer subject to examination by the Internal Revenue Service for tax years prior to 2010 or any state jurisdiction for tax years prior to 2008. In the event the Company would be assessed interest or penalties by a taxing authority related to income taxes, interest would be recorded in interest expense and penalties would be recorded in other expense in the statements of operations.


(7)	Commitments and Contingencies


(a)	MISO Return on Equity Complaint

As mentioned above, MISO, the Company, and numerous other MISO transmission owners were named as respondents in a complaint filed with the FERC pursuant to Section 206 of the FPA by several customer groups located within the MISO service area. These complainants claimed that the following aspects of the respondents’ transmission rates were no longer just and reasonable: the base 12.38% ROE in MISO and the Company’s 12.2% ROE; hypothetical capital structures that have an equity component greater than 50%; and certain incentive ROE adders used by a limited number of MISO transmission owners, of which the Company is not one. The complainants requested the FERC to order the base MISO ROE re-set to 9.15%, equity components of hypothetical capital structures be restricted to 50%, and that relevant incentive ROE adders be discontinued. The complainants requested that the FERC establish expedited hearing and settlement procedures to address the issues raised, and that the FERC grant the effective date of any refund as the date of the complainants filing, which was November 12, 2013. The Company and the other MISO transmission owners responded to the complaint on January 6, 2014 with a motion to dismiss and answer objecting to the claims of the complainants. Since this matter is in an early stage and the Company and other transmission owners have objected to the claims of the complainants and filed a motion to dismiss the complaint, the Company believes that at this time, the probability of loss is reasonably possible.

Additionally, the Company has calculated that for each 10 basis-point reduction in the authorized base ROE, there would be a reduction in the Company’s earnings before members’ income taxes of approximately $2.3 million. However, due to the uncertainty of when the proceeding will conclude or what the outcome will be, the Company is, at this time, unable to determine the potential impact to its financial position, results of operations and cash flows.


(b)	Operating Leases

The Company leases office space and certain transmission-related equipment under non-cancelable operating leases. Amounts incurred during 2013, 2012 and 2011 totaled approximately $6.2 million, $5.9 million and $6.5 million, respectively.

Future minimum lease payments under non-cancelable operating leases for the years ending December 31 are as follows (in millions):

Exhibit 99.2



2014	$	6.1
2015	6.1
2016	6.0
2017	5.7
2018	5.2
Thereafter	41.9
	$	71.0


(c)	Smart Grid Agreements

On April 20, 2010, the Company entered into two agreements with the U.S. Department of Energy (DOE), accepting investment grants for up to 50% of the cost of the related projects. The grants, totaling $12.7 million, were used to invest in smart grid technologies which were incorporated into the Company’s transmission system. The funds the Company received from the DOE under the grant award agreements reduced the amount of investment in such projects upon which the Company earns a return. During construction, which was completed in October 2013, the Company invoiced the DOE and received payments under these agreements. Per the terms of these agreements, the Company completed independent audits of the smart grid projects during both 2012 and 2013, the results of which were submitted to the DOE. The reports were concluded with no audit findings.


(d)	MISO Revenue Distribution

Periodically, the Company receives adjustments to revenues that were allocated to it by MISO in prior periods. Some of these adjustments may result from disputes filed by transmission customers. The Company does not expect any such adjustments to have a significant impact on its financial position, results of operations or cash flows since adjustments of this nature are typically offset by its true-up provision in the revenue requirement formula.


(e)	Interconnection Agreements

The Company has entered into interconnection agreements with entities planning to build generation facilities. The Company will construct the interconnection facilities; however, the generator will finance and bear all financial risk of constructing the interconnection facilities under these agreements. The Company will own and operate the interconnection facilities when the generation facilities become operational and will reimburse the generator for construction costs plus interest. If the generation facilities do not become operational, the Company has no obligation to reimburse the generator for costs incurred during construction.

There may be transmission service requests that require the Company to construct additional, or modify existing, transmission facilities to accommodate such requests. Whether such additions or upgrades to the

Exhibit 99.2

Company’s transmission system are required depends on the state of the transmission system at the time the transmission service is requested. Under these agreements, the Company reimbursed, inclusive of interest, $13.0 million and $3.0 million to generators during 2012 and 2011, respectively. The Company did not make any reimbursements to generators in 2013, and does not expect to make any reimbursements to generators in 2014 under such agreements.


(f)	Potential Adverse Legal Proceedings

The Company has been, and will likely in the future become, party to lawsuits, potentially including suits that may involve claims for which it may not have sufficient insurance coverage. The Company’s liability related to utility activities is limited by FERC-approved provisions of the MISO Tariff that limit potential damages to direct damages caused by the Company’s gross negligence or intentional misconduct.


(g)	Environmental Matters

In the future, the Company may become party to proceedings pursuant to federal and/or state laws or regulations related to the discharge of materials into the environment. Such proceedings may involve property the Company acquired from the contributing utilities. Pursuant to the asset purchase agreements executed with the contributing utilities beginning January 1, 2001, the contributing utilities will indemnify the Company for 25 years from such date for any environmental liability resulting from the previous ownership of the property.


(8)	Related-Party Transactions


(a)	Membership Interests

To maintain its targeted debt-to-capitalization ratio, the Company was authorized by Management Inc.’s board of directors to request up to $75 million of additional capital through voluntary additional capital calls (VACCs) during 2014, including $15 million it received in January 2014. The Company also received a total of $40 million and $60 million through VACCs in 2013 and 2012, respectively. The participating members received additional membership units at the current book value per unit at the time of each contribution. Contributions from capital calls are recognized when received.


(b)	Duke-American Transmission Company, LLC

The Company and Duke Energy hold equal equity ownership in the Duke-American Transmission Company, LLC (DATC), which was created to seek opportunities to acquire, build, own, and operate new transmission projects that meet potential customers’ capacity, voltage requirements and future needs. DATC has proposed a set of transmission projects that include a portfolio of nine new transmission line projects in five Midwestern states. This portfolio, referred to as the DATC Midwest Portfolio, will fill gaps in the existing transmission grid, improve electric system reliability and market efficiency, provide economic benefits to

Exhibit 99.2

local utilities and enable increased delivery of high-quality renewable resources. The DATC Midwest Portfolio includes more than 1,200 circuit miles of 345 kV lines and 550 miles of 500 kV high-voltage direct-current lines and has a total estimated cost of approximately $4 billion. Construction of this portfolio is not expected to begin until 2019 or later. DATC has been working with MISO and PJM to include the projects in their respective regional transmission plans. DATC has received FERC approval for formula rate treatment and transmission rate incentives for the projects, including CWIP in rate base.

DATC owns the Zephyr Power Transmission Project (“Zephyr”) and is continuing the design and development of the proposed 850-mile transmission line, which would deliver wind energy generated in eastern Wyoming to California and the southwestern United States. DATC acquired Zephyr from a subsidiary of Pathfinder Renewable Wind Energy LLC (“Pathfinder”). The 500 kV high-voltage direct-current project has an estimated cost of approximately $3.5 billion. Pathfinder is developing a wind power project on more than 100,000 acres near Chugwater, Wyoming, and has committed to use at least 2,100 megawatts (MW) of the Zephyr project’s 3,000 MW capacity. If certain milestones materialize under the project agreement, DATC would be required to pay, directly or indirectly, Pathfinder’s share of regulatory phase project costs of up to $5 million incurred during the years 2012 through 2015; however, DATC has the right to terminate the project at any time prior to January 15, 2016. DATC has received FERC approval to charge negotiated rates consistent with FERC approvals for Zephyr’s previous owners.

Path 15 is an existing 84-mile, 500 kV transmission line in central California. DATC owns 72 percent of the transmission rights of Path 15, which it purchased from Atlantic Power Corporation in April 2013 for approximately $56 million cash and the assumption of approximately $137 million of debt. Pacific Gas & Electric has an 18 percent interest in the transmission rights to Path 15 through its ownership and operation of the connecting Los Banos and Gates substations. The remaining 10 percent interest in the transmission rights to Path 15 is owned by the Western Area Power Administration, which will continue to operate and maintain the line.

On July 18, 2013, DATC secured a $30 million, five-year credit facility from U.S. Bank N.A. As a stipulation of that facility, the Company and Duke Energy executed a guarantee agreement on that same date with U.S. Bank N.A. to each guarantee 50% of the obligations under the credit facility agreement. Currently, there is no outstanding balance under the credit facility.

The balance in the Company’s investment in DATC was $31.7 million and $0.8 million at December 31, 2013 and 2012, respectively, and is accounted for under the equity method of accounting.


(c)	Operations and Maintenance, Project Services and Common Facilities Agreements

The Company operates under Operation and Maintenance Agreements whereby certain contributing utilities, municipalities and cooperatives provide operational, maintenance and construction services to the Company at a fully-allocated cost.

In an order dated September 1, 2009 and later supplemented in an order dated May 24, 2013, the PSCW approved Project Services Agreements and Common Facilities Agreements, whereby the Company and

Exhibit 99.2

certain of its affiliates may perform engineering and construction services for each other, subject to the restrictions and reporting requirements specified in the orders. To prevent cross-subsidization between affiliated entities, the PSCW ordered that services be performed at a fully-allocated cost of the party providing services, and reported annually to the PSCW.

Some operation and maintenance agreements require the Company to utilize a minimum level of service. To date, the amount of services utilized by the Company has exceeded the minimum in each year.

Under these agreements, the Company was billed approximately $35.5 million, $35.3 million and $39.8 million in 2013, 2012 and 2011, respectively. Accounts payable and other accrued liabilities include amounts payable to these companies of $3.4 million and $3.7 million at December 31, 2013 and 2012, respectively.


(d)	Transmission Service

Revenues from the Company’s members were approximately 90% of the Company’s transmission service revenue for the years ended December 31, 2013, 2012 and 2011.


(e)	Agreement with Alliant Energy

The Company has an agreement with Alliant Energy (“Alliant”), under which it provides control center and operation services for Alliant’s 34.5 kV distribution system in the state of Wisconsin. The agreement automatically renews every two years, unless terminated by either party. Amounts the Company has received from Alliant for these services are not material to the financial statements.


(f)	Management Inc.

As discussed in Note 1(b), Management Inc. manages the Company. Management Inc. charged the Company approximately $96.6 million, $89.4 million and $82.6 million in 2013, 2012 and 2011, respectively, primarily for employee-related expenses. These amounts were charged to the applicable operating expense accounts, or capitalized as CWIP or other assets, as appropriate. The amounts are recorded in the Company's accounts in the same categories in which the amounts would have been recorded had the Company incurred the costs directly.


(g)	Interconnection Agreements

As discussed in Notes 1(f) and 7(e), the Company has interconnection agreements related to the capital improvements required to connect new generation equipment to the grid. Some of these agreements are with members or affiliates of members of the Company. At December 31, 2013 and 2012, there were no outstanding liabilities related to these agreements. While the Company did not make any reimbursements under such agreements in 2013, it reimbursed, inclusive of interest, $5.3 million to members under such

Exhibit 99.2

agreements in 2012. The Company does not expect to make any reimbursements to members in 2014 under such agreements.


(9)	Quarterly Financial Information (unaudited)



(In Thousands)	Three Months Ended

	2013
		March 31		June 30		September 30		December 31		Total

Operating Revenues		$	151,737	$	152,128	$	160,480	$	161,991	$	626,336
Operating Expenses		69,770		69,875		77,595		77,829		295,069
Operating Income		81,967		82,253		82,885		84,162		331,267

Other Expense (Income), Net		448		(116)		(917)		(246)		(831)
Interest Expense, Net		21,044		21,052		21,136		21,252		84,484

Earnings Before Members' Income Taxes		$	60,475	$	61,317	$	62,666	$	63,156	$	247,614


		2012
		March 31		June 30		September 30		December 31		Total

Operating Revenues		$	147,662	$	152,171	$	150,303	$	153,118	$	603,254
Operating Expenses		69,566		71,760		68,813		70,860		280,999
Operating Income		78,096		80,411		81,490		82,258		322,255

Other Expense (Income), Net		500		327		5		1,701		2,533
Interest Expense, Net		19,501		20,776		20,983		21,036		82,296

Earnings Before Members' Income Taxes		$	58,095	$	59,308	$	60,502	$	59,521	$	237,426

Because of seasonal factors impacting the Company’s business, particularly the maintenance and construction programs, quarterly results are not necessarily comparable. In general, due to the Company’s rate formula, revenues and operating income will increase throughout the year, as the Company’s rate base increases through expenditures for CWIP.