EMPLOYEE BENEFITS

Pension and Other Postretirement Employee Benefits

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

Generally, employees who started with us after 1995 receive a benefit based on a percentage of their annual salary plus an interest credit, while employees who started before 1996 receive a benefit based upon years of service and final average salary. New management employees hired after December 31, 2014 receive a 6% annual company contribution to their 401(k) savings plan instead of being enrolled in the defined benefit plans.

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

The following tables provide a reconciliation of the changes in our plans' benefit obligations and fair value of assets:



	Pension Costs						OPEB Costs
(in millions)	2016			2015			2016			2015
Change in benefit obligation
Obligation at January 1	$	1,290.6		$	1,315.2		$	313.8		$	322.3
Service cost	10.5			14.7			7.3			9.0
Interest cost	49.7			52.9			13.2			13.4
Participant contributions	—			—			8.8			8.8
Plan amendments	(2.6		)	—			—			—
Transfer to affiliates *	(121.1		)	(2.4		)	(17.0		)	—
Actuarial loss (gain)	25.3			(11.5		)	(9.7		)	(22.3		)
Benefit payments	(75.4		)	(78.3		)	(19.0		)	(18.7		)
Federal subsidy on benefits paid	N/A			N/A			1.1			1.3
Obligation at December 31	$	1,177.0		$	1,290.6		$	298.5		$	313.8

Change in fair value of plan assets
Fair value at January 1	$	1,179.3		$	1,160.0		$	216.1		$	224.9
Actual return on plan assets	73.0			(7.8		)	13.5			(1.5		)
Employer contributions	5.3			105.0			2.7			2.6
Participant contributions	—			—			8.8			8.8
Transfer to/from affiliates *	(79.4		)	0.4			(17.0		)	—
Benefit payments	(75.4		)	(78.3		)	(19.0		)	(18.7		)
Fair value at December 31	$	1,102.8		$	1,179.3		$	205.1		$	216.1
Funded status at December 31	$	(74.2	)	$	(111.3	)	$	(93.4	)	$	(97.7	)


*	Benefit obligations and plan assets were moved along with our employees who were transferred to/from affiliated entities. See Note 4, Related Parties, for more information.

The amounts recognized on our balance sheets at December 31 related to the funded status of the benefit plans were as follows:



	Pension Costs						OPEB Costs
(in millions)	2016			2015			2016			2015
Other long-term assets	$	—		$	—		$	—		$	1.9
Pension and OPEB obligations	74.2			111.3			93.4			99.6
Total net liabilities	$	(74.2	)	$	(111.3	)	$	(93.4	)	$	(97.7	)

The accumulated benefit obligation for all defined benefit pension plans was $1,175.8 million and $1,287.5 million as of December 31, 2016 and 2015, respectively.

The following table shows information for the pension plans for which we have an accumulated benefit obligation in excess of plan assets. Amounts presented are as of December 31:



(in millions)	2016		2015
Projected benefit obligation	$	1,177.0	$	1,290.2
Accumulated benefit obligation	1,175.8		1,289.5
Fair value of plan assets	1,102.8		1,178.9

The following table shows the amounts that have not yet been recognized in our net periodic benefit cost as of December 31:



	Pension Costs				OPEB Costs
(in millions)	2016		2015		2016			2015
Net regulatory assets
Net actuarial loss	$	518.5	$	520.9	$	4.6		$	14.7
Prior service cost (credit)	0.2		4.3		(3.0		)	(4.1		)
Total	$	518.7	$	525.2	$	1.6		$	10.6

The following table shows the estimated amounts that will be amortized into net periodic benefit cost during 2017:



(in millions)	Pension Costs		OPEB Costs
Net actuarial loss	$	35.4	$	1.0
Prior service costs (credits)	1.1		(1.1		)
Total 2017 – estimated amortization	$	36.5	$	(0.1	)

The components of net periodic benefit cost (including amounts capitalized to our balance sheets) for the years ended December 31 were as follows:



	Pension Costs									OPEB Costs
(in millions)	2016			2015			2014			2016			2015			2014
Service cost	$	10.5		$	14.7		$	9.4		$	7.3		$	9.0		$	8.1
Interest cost	49.7			52.9			59.3			13.2			13.4			14.4
Expected return on plan assets	(77.7		)	(83.6		)	(79.1		)	(14.0		)	(16.0		)	(16.2		)
Amortization of prior service cost (credit)	1.6			2.0			2.0			(1.1		)	(1.1		)	(1.7		)
Amortization of net actuarial loss	32.4			35.6			26.9			1.0			1.0			0.2
Net periodic benefit cost	$	16.5		$	21.6		$	18.5		$	6.4		$	6.3		$	4.8

The weighted-average assumptions used to determine the benefit obligations for the plans were as follows for the years ended December 31:



	Pension		OPEB
	2016	2015	2016	2015
Discount rate	4.15%	4.45%	4.20%	4.45%
Rate of compensation increase	3.20%	4.00%	N/A	N/A
Assumed medical cost trend rate	N/A	N/A	7.00%	7.50%
Ultimate trend rate	N/A	N/A	5.00%	5.00%
Year ultimate trend rate is reached	N/A	N/A	2021	2021

The weighted-average assumptions used to determine the net periodic benefit cost for the plans were as follows for the years ended December 31:



	Pension Costs
	2016	2015	2014
Discount rate	4.45%	4.15%	5.00%
Expected return on plan assets	7.00%	7.00%	7.25%
Rate of compensation increase	3.50%	4.00%	4.00%



	OPEB Costs
	2016	2015	2014
Discount rate	4.45%	4.20%	4.95%
Expected return on plan assets	7.25%	7.25%	7.50%
Assumed medical cost trend rate (Pre 65/Post 65)	7.50%	7.50%	7.50%
Ultimate trend rate	5.00%	5.00%	5.00%
Year ultimate trend rate is reached	2021	2021	2021

WEC Energy Group consults with its investment advisors on an annual basis to help forecast expected long-term returns on plan assets by reviewing historical returns as well as calculating expected total trust returns using the weighted-average of long-term market returns for each of the major target asset categories utilized in the fund. For 2017, the expected return on assets assumption is 7.00% for the pension plan and 7.25% for the OPEB plan.

Assumed health care cost trend rates have a significant effect on the amounts reported by us for the health care plans. For the year ended December 31, 2016, a one-percentage-point change in assumed health care cost trend rates would have had the following effects:



(in millions)	1% Increase		1% Decrease
Effect on total of service and interest cost components of net periodic postretirement health care benefit cost	$	2.9	$	(2.3	)
Effect on the health care component of the accumulated postretirement benefit obligation	31.5		(26.0		)

Plan Assets

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

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

Our pension trust target asset allocation is 35% equity investments, 55% fixed income investments, and 10% private equity and real estate investments. The OPEB trusts' target asset allocations are 60% equity investments and 40% fixed income investments. Equity securities include investments in large-cap, mid-cap, and small-cap companies primarily located in the United States. Fixed income securities include corporate bonds of companies from diversified industries, mortgage and other asset backed securities, commercial paper, and United States Treasuries.

Pension and OPEB plan investments are recorded at fair value. See Note 1(n), Fair Value Measurements, for more information regarding the fair value hierarchy and the classification of fair value measurements based on the types of inputs used. Following our adoption of ASU 2015-07 on January 1, 2016, the assets that are not subject to leveling are investments that are valued using the net asset value per share (or its equivalent) practical expedient. We have applied this approach retrospectively to the 2015 table for comparability.

The following table summarizes the fair values of our investments by asset class:



	December 31, 2016
	Pension Plan Assets								OPEB Assets
(in millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Asset Class
Cash and cash equivalents	$	1.1	$	19.2	$	—	$	20.3	$	6.5	$	1.3	$	—	$	7.8
Equity securities:
Unites States Equity	85.5		0.1		—		85.6		10.5		—		—		10.5
International Equity	17.7		—		—		17.7		1.3		—		—		1.3
Fixed income securities: *
United States Bonds	—		455.3		—		455.3		—		44.0		—		44.0
International Bonds	—		31.6		—		31.6		—		2.8		—		2.8
Private Equity and Real Estate	—		—		11.0		11.0		—		—		0.7		0.7
	$	104.3	$	506.2	$	11.0	$	621.5	$	18.3	$	48.1	$	0.7	$	67.1
Investments measured at net asset value							$	481.3							$	138.0
Total	$	104.3	$	506.2	$	11.0	$	1,102.8	$	18.3	$	48.1	$	0.7	$	205.1


*	This category represents investment grade bonds of United States and foreign issuers denominated in United States dollars from diverse industries.



	December 31, 2015
	Pension Plan Assets								OPEB Assets
(in millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Asset Class
Cash and cash equivalents	$	15.5	$	—	$	—	$	15.5	$	2.4	$	—	$	—	$	2.4
Equity securities:
United States equity	80.1		—		—		80.1		11.8		—		—		11.8
International equity	25.8		—		—		25.8		1.7		—		—		1.7
Fixed income securities: *
United States bonds	—		509.4		—		509.4		—		78.1		—		78.1
International bonds	—		32.6		—		32.6		—		4.5		—		4.5
Private Equity and Real Estate	—		—		4.5		4.5		—		—		0.3		0.3
	$	121.4	$	542.0	$	4.5	$	667.9	$	15.9	$	82.6	$	0.3	$	98.8
Investments measured at net asset value							$	511.4							$	117.3
Total	$	121.4	$	542.0	$	4.5	$	1,179.3	$	15.9	$	82.6	$	0.3	$	216.1


*	This category represents investment grade bonds of United States and foreign issuers denominated in United States dollars from diverse industries.

The following tables set forth a reconciliation of changes in the fair value of pension and OPEB plan assets categorized as Level 3 in the fair value hierarchy:



	Private Equity and Real Estate
(in millions)	Pension		OPEB
Beginning balance at January 1, 2016	$	4.5	$	0.3
Purchases	6.5		0.4
Ending balance at December 31, 2016	$	11.0	$	0.7



	Private Equity and Real Estate
(in millions)	Pension		OPEB
Beginning balance at January 1, 2015	$	—	$	—
Purchases	4.5		0.3
Ending balance at December 31, 2015	$	4.5	$	0.3

Cash Flows

We expect to contribute $4.9 million to the pension plans in 2017, dependent upon various factors affecting us, including our liquidity position and possible tax law changes. We do not expect to contribute to the OPEB plans in 2017.

The following table shows the payments, reflecting expected future service, that we expect to make for pension and OPEB:



(in millions)	Pension Costs		OPEB Costs
2017	$	90.7	$	13.3
2018	88.6		14.4
2019	86.6		15.3
2020	86.5		16.1
2021	82.7		16.8
2022-2026	381.1		89.3

Savings Plans

We sponsor 401(k) savings plans which allow employees to contribute a portion of their pre-tax and/or after-tax income in accordance with plan-specified guidelines. A percentage of employee contributions are matched by us through a contribution into the employee's savings plan account, up to certain limits. Total costs incurred under these plans were $10.4 million in 2016, and $13.0 million in both 2015 and 2014.