10-K 1 wec1231201610-k.htm WEC 2016 FORM 10-K Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2016

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

For the transition period from ________________ to ___________________

Commission
File Number
 
Registrant; State of Incorporation;
Address; and Telephone Number
 
IRS Employer
Identification No.
 
 
wecenergygroup10klogoa01.jpg
 
 
001-09057
 
WEC ENERGY GROUP, INC.
 
39-1391525
 
 
(A Wisconsin Corporation)
231 West Michigan Street
P. O. Box 1331
Milwaukee, WI 53201
414-221-2345
 
 

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, $.01 Par Value
 
New York Stock Exchange

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

None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [X]    No [ ]

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes [ ]    No [X]




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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

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

 
Large accelerated filer [X]
Accelerated filer [ ]
 
 
Non-accelerated filer [ ]
Smaller reporting company [ ]
 

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

Yes [ ]    No [X]

The aggregate market value of the common stock of WEC Energy Group, Inc. held by non-affiliates was $20.6 billion based upon the reported closing price of such securities as of June 30, 2016.

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date (January 31, 2017):

Common Stock, $.01 par value, 315,587,523 shares outstanding

Documents incorporated by reference:

Portions of WEC Energy Group, Inc.'s Definitive Proxy Statement on Schedule 14A for its Annual Meeting of Stockholders, to be held on May 4, 2017, are incorporated by reference into Part III hereof.

 




WEC ENERGY GROUP, INC.
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 2016
TABLE OF CONTENTS
 
 
 
 
 
Page
 
 
 
 
 
 
 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2016 Form 10-K
i

WEC Energy Group, Inc.



 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




 
 
 
 
 


2016 Form 10-K
ii

WEC Energy Group, Inc.



GLOSSARY OF TERMS AND ABBREVIATIONS

The abbreviations and terms set forth below are used throughout this report and have the meanings assigned to them below:
Subsidiaries and Affiliates
 
 
ATC
 
American Transmission Company LLC
Bostco
 
Bostco LLC
DATC
 
Duke-American Transmission Company
ERGSS
 
Elm Road Generating Station Supercritical, LLC
Integrys
 
Integrys Holding, Inc. (previously known as Integrys Energy Group, Inc.)
ITF
 
Integrys Transportation Fuels, LLC
MERC
 
Minnesota Energy Resources Corporation
MGU
 
Michigan Gas Utilities Corporation
NSG
 
North Shore Gas Company
PDL
 
WPS Power Development LLC
PELLC
 
Peoples Energy, LLC
PGL
 
The Peoples Gas Light and Coke Company
UMERC
 
Upper Michigan Energy Resources Corporation
WBS
 
WEC Business Services LLC
WE
 
Wisconsin Electric Power Company
We Power
 
W.E. Power, LLC
WECC
 
Wisconsin Energy Capital Corporation
WG
 
Wisconsin Gas LLC
Wispark
 
Wispark LLC
Wisvest
 
Wisvest LLC
WPS
 
Wisconsin Public Service Corporation
WRPC
 
Wisconsin River Power Company
 
 
 
Federal and State Regulatory Agencies
EPA
 
United States Environmental Protection Agency
FERC
 
Federal Energy Regulatory Commission
ICC
 
Illinois Commerce Commission
MDEQ
 
Michigan Department of Environmental Quality
MPSC
 
Michigan Public Service Commission
MPUC
 
Minnesota Public Utilities Commission
PSCW
 
Public Service Commission of Wisconsin
SEC
 
Securities and Exchange Commission
WDNR
 
Wisconsin Department of Natural Resources
 
 
 
Accounting Terms
AFUDC
 
Allowance for Funds Used During Construction
ARO
 
Asset Retirement Obligation
ASC
 
Accounting Standards Codification
ASU
 
Accounting Standards Update
CWIP
 
Construction Work in Progress
FASB
 
Financial Accounting Standards Board
GAAP
 
Generally Accepted Accounting Principles
LIFO
 
Last-In, First-Out
OPEB
 
Other Postretirement Employee Benefits
 
 
 
 
 
 
 
 
 
 
 
 

2016 Form 10-K
iii

WEC Energy Group, Inc.



Environmental Terms
Act 141
 
2005 Wisconsin Act 141
CAA
 
Clean Air Act
CO2
 
Carbon Dioxide
CSAPR
 
Cross-State Air Pollution Rule
GHG
 
Greenhouse Gas
MATS
 
Mercury and Air Toxics Standards
NAAQS
 
National Ambient Air Quality Standards
NOV
 
Notice of Violation
NOx
 
Nitrogen Oxide
SO2
 
Sulfur Dioxide
 
 
 
Measurements
 
 
Dth
 
Dekatherm (One Dth equals one million Btu)
MDth
 
One thousand Dekatherms
MW
 
Megawatt (One MW equals one million Watts)
MWh
 
Megawatt-hour
 
 
 
Other Terms and Abbreviations
6.11% Junior Notes
 
Integrys's 2006 6.11% Junior Subordinated Notes Due 2066
ALJ
 
Administrative Law Judge
ARRs
 
Auction Revenue Rights
CNG
 
Compressed Natural Gas
Compensation Committee
 
Compensation Committee of the Board of Directors
D.C. Circuit Court of Appeals
 
United States Court of Appeals for the District of Columbia
ERGS
 
Elm Road Generating Station
ER 1
 
Elm Road Generating Station Unit 1
ER 2
 
Elm Road Generating Station Unit 2
Exchange Act
 
Securities Exchange Act of 1934, as amended
FTRs
 
Financial Transmission Rights
GCRM
 
Gas Cost Recovery Mechanism
LMP
 
Locational Marginal Price
MCPP
 
Milwaukee County Power Plant
Merger Agreement
 
Agreement and Plan of Merger, dated as of June 22, 2014, between Integrys Energy Group, Inc. and Wisconsin Energy Corporation
MISO
 
Midcontinent Independent System Operator, Inc.
MISO Energy Markets
 
MISO Energy and Operating Reserves Market
NYMEX
 
New York Mercantile Exchange
OCPP
 
Oak Creek Power Plant
OC 5
 
Oak Creek Power Plant Unit 5
OC 6
 
Oak Creek Power Plant Unit 6
OC 7
 
Oak Creek Power Plant Unit 7
OC 8
 
Oak Creek Power Plant Unit 8
Omnibus Stock Incentive Plan
 
WEC Energy Group 1993 Omnibus Stock Incentive Plan, Amended and Restated Effective as of January 1, 2016
PIPP
 
Presque Isle Power Plant
Point Beach
 
Point Beach Nuclear Power Plant
PWGS
 
Port Washington Generating Station
PWGS 1
 
Port Washington Generating Station Unit 1
PWGS 2
 
Port Washington Generating Station Unit 2
ROE
 
Return on Equity
RTO
 
Regional Transmission Organization

2016 Form 10-K
iv

WEC Energy Group, Inc.



SMP
 
Gas System Modernization Program
SMRP
 
System Modernization and Reliability Project
SSR
 
System Support Resource
Supreme Court
 
United States Supreme Court
Treasury Grant
 
Section 1603 Renewable Energy Treasury Grant
VAPP
 
Valley Power Plant


2016 Form 10-K
v

WEC Energy Group, Inc.



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, dividend payout ratios, effective tax rate, pension and OPEB plans, fuel costs, sources of electric energy supply, coal and natural gas deliveries, remediation costs, 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 Item 1A. Risk Factors 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 and regulatory changes, including changes in rate-setting policies or procedures, tax law changes, 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;

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 permit conditions by regulatory agencies, and the recovery of associated remediation and compliance costs;

The risks associated with changing commodity prices, particularly natural gas and electricity, and the availability of sources of fossil fuel, natural gas, purchased power, materials needed to operate environmental controls at our electric generating facilities, or water supply due to high demand, shortages, transportation problems, nonperformance by electric energy or natural gas suppliers under existing power purchase or natural gas supply contracts, or other developments;

Changes in credit ratings, interest rates, and our ability to access the capital markets, caused by volatility in the global credit markets, our capitalization structure, and market perceptions of the utility industry, us, or any of our subsidiaries;

Costs and effects of litigation, administrative proceedings, investigations, settlements, claims, and inquiries;

Restrictions imposed by various financing arrangements and regulatory requirements on the ability of our subsidiaries to transfer funds to us in the form of cash dividends, loans or advances;


2016 Form 10-K
1

WEC Energy Group, Inc.



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 incidents, the threat of terrorist incidents, and cyber security intrusion, including the failure to maintain the security of personally identifiable information, the associated costs to protect our assets and personal information, and the costs to notify affected persons to mitigate their information security concerns;

The financial performance of ATC and its corresponding contribution to our earnings, as well as the ability of ATC and DATC to obtain the required approvals for their transmission projects;

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 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 the Integrys acquisition;
 
The risk associated with the values of goodwill and other intangible assets and their possible impairment;

Potential business strategies to acquire and dispose of assets or businesses, which cannot be assured to be completed timely or within budgets, and legislative or regulatory restrictions or caps on non-utility acquisitions, investments or projects, including the State of Wisconsin's public utility holding company law;

The timing and outcome of any audits, disputes, and other proceedings related to taxes;

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.


2016 Form 10-K
2

WEC Energy Group, Inc.



PART I

ITEM 1. BUSINESS

A. INTRODUCTION

In this report, when we refer to "us," "we," "our," or "ours," we are referring to WEC Energy Group, Inc. The term "utility" refers to the regulated activities of the electric and natural gas utility companies, while the term "non-utility" refers to the activities of the electric and natural gas utility companies that are not regulated, as well as We Power. The term "nonregulated" refers to activities at WEC Energy Group holding company, the Integrys holding company, the PELLC holding company, Wispark, Bostco, Wisvest, WECC, WBS, PDL, and ITF (prior to the sale of this business in the first quarter of 2016). References to "Notes" are to the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

For more information about our business operations, including financial and geographic information about each reportable business segment, see Note 24, Segment Information, and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations.

WEC Energy Group, Inc.

We were incorporated in the state of Wisconsin in 1981 and became a diversified holding company in 1986. We maintain our principal executive offices in Milwaukee, Wisconsin. Our wholly owned subsidiaries provide regulated natural gas and electricity, as well as nonregulated renewable energy. Another subsidiary, ITF, provided CNG products and services prior to its sale in the first quarter of 2016. See Note 3, Dispositions, for more information on this sale. We have an approximately 60% equity interest in ATC (an electric transmission company operating in Illinois, Michigan, Minnesota, and Wisconsin). At December 31, 2016, we had six reportable segments which are discussed below. For additional information about our reportable segments, see Note 24, Segment Information.

Acquisition

On June 29, 2015, Wisconsin Energy Corporation acquired 100% of the outstanding common shares of Integrys and changed its name to WEC Energy Group, Inc. For additional information on this acquisition, see Note 2, Acquisitions.

Available Information

Our annual and periodic filings with the SEC are available, free of charge, on our website, www.wecenergygroup.com, as soon as reasonably practicable after they are filed with or furnished to the SEC.

You may obtain materials we filed with or furnished to the SEC at the SEC Public Reference Room at 100 F Street, NE, Washington, DC 20549. To obtain information on the operation of the Public Reference Room, you may call the SEC at 1-800-SEC-0330. You may also view information filed or furnished electronically with the SEC at the SEC's website at www.sec.gov.

B. UTILITY ENERGY OPERATIONS

Wisconsin Segment

Electric Utility Operations

For the periods presented in this Annual Report on Form 10-K, our electric utility operations included operations of WE for all periods and operations for WPS beginning July 1, 2015, due to the acquisition of Integrys and its subsidiaries. WE, which is the largest electric utility in the state of Wisconsin, generates and distributes electric energy to customers located in southeastern Wisconsin (including the metropolitan Milwaukee area), east central Wisconsin, and northern Wisconsin, and serves an iron ore mine owned by Tilden Mining Company (Tilden) in the Upper Peninsula of Michigan. For more information on the mine, see the discussion below under the heading "Large Electric Retail Customers." WPS generates and distributes electric energy to customers located in northeastern Wisconsin.


2016 Form 10-K
3

WEC Energy Group, Inc.



Through December 31, 2016, WE and WPS serviced electric customers in the Upper Peninsula of Michigan. Effective January 1, 2017, WE and WPS transferred their electric customers and electric distribution assets located in the Upper Peninsula of Michigan to UMERC, a new stand-alone utility. More information about UMERC is included at the end of the Wisconsin Segment section, under the heading "Upper Michigan Energy Resources Corporation." The operations of UMERC will continue to be reported as a part of the Wisconsin segment.

Operating Revenues

The following table shows electric utility operating revenues, including steam operations, for the past three years:
 
 
Year Ended December 31
(in millions)
 
2016
 
2015 (1)
 
2014
Operating revenues
 
 
 
 
 
 
Residential
 
$
1,620.7

 
$
1,398.5

 
$
1,199.3

Small commercial and industrial (2)
 
1,418.1

 
1,235.7

 
1,054.3

Large commercial and industrial (2)
 
949.5

 
858.8

 
640.7

Other
 
29.8

 
26.9

 
23.0

Total retail revenues (2)
 
4,018.1

 
3,519.9

 
2,917.3

Wholesale
 
231.2

 
181.4

 
131.9

Resale
 
247.1

 
248.7

 
264.1

Steam
 
27.2

 
41.0

 
44.1

Other operating revenues (3)
 
104.5

 
77.5

 
87.8

Total operating revenues (2)
 
$
4,628.1

 
$
4,068.5

 
$
3,445.2


(1) 
Includes the operations of WPS beginning July 1, 2015, as a result of the acquisition of Integrys on June 29, 2015.

(2) 
Includes distribution sales for customers who have purchased power from an alternative electric supplier in Michigan.

(3) 
Includes SSR revenue, amounts collected from (refunded to) customers for certain fuel and purchased power costs that exceed a 2% price variance from costs included in rates, and other revenues, partially offset by revenues from the mines that are being deferred until a future rate proceeding. For more information, see the discussion below under the heading "Large Electric Retail Customers."

Electric Sales

Our electric energy deliveries included supply and distribution sales to retail and wholesale customers and distribution sales to those customers who switched to an alternative electric supplier. In 2016, retail electric revenues accounted for 86.8% of total electric operating revenues, while wholesale and resale electric revenues accounted for 10.3% of total electric operating revenues. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Wisconsin Segment Contribution to Operating Income for information on MWh sales by customer class.

Our electric utilities are authorized to provide retail electric service in designated territories in the state of Wisconsin, as established by indeterminate permits and boundary agreements with other utilities, and in certain territories in the state of Michigan pursuant to franchises granted by municipalities.

Our electric utilities buy and sell wholesale electric power by participating in the MISO Energy Markets. The cost of our individual generation offered into the MISO Energy Markets, compared to our competitors, affects how often our generating units are dispatched and how we buy and sell power. For more information, see Item 1. Business – D. Regulation.

Steam Sales

WE has a steam utility that generates, distributes, and sells steam supplied by VAPP to customers in metropolitan Milwaukee, Wisconsin. Steam is used by customers for processing, space heating, domestic hot water, and humidification. Annual sales of steam fluctuate from year to year based on system growth and variations in weather conditions. In April 2016, we sold the MCPP steam generation and distribution assets, located in Wauwatosa, Wisconsin. MCPP primarily provided steam to the Milwaukee Regional Medical Center hospitals and other campus buildings. See Note 3, Dispositions, for more information.


2016 Form 10-K
4

WEC Energy Group, Inc.



Electric Sales Forecast

Our service territory experienced increased weather-normalized retail electric sales in 2016 due to both positive customer growth as well as the retirement of some customer generation as a result of EPA regulations. However, we currently forecast retail electric sales volumes, excluding the Tilden mine located in the Upper Peninsula of Michigan, to remain relatively flat over the next five years, assuming normal weather. The associated electric peak demand is expected to grow at a rate of approximately 0.1% over the next five years, also assuming normal weather. The expected decline in retail electric sales volumes is due in part to the closing of a large industrial customer at the end of 2016 and continued energy conservation by our customers.

Customers
 
 
Year Ended December 31
(in thousands)
 
2016
 
2015
 
2014
Electric customers – end of year
 
 
 
 
 
 
Residential
 
1,421.7

 
1,414.1

 
1,015.0

Small commercial and industrial
 
171.1

 
171.1

 
115.4

Large commercial and industrial
 
0.9

 
1.0

 
0.7

Other
 
3.0

 
3.1

 
2.5

Total electric customers – end of year
 
1,596.7

 
1,589.3

 
1,133.6

 
 
 
 
 
 
 
Electric customers – average
 
1,593.1

 
1,584.4

 
1,130.7

Steam customers – average
 
0.4

 
0.4

 
0.4


Large Electric Retail Customers

We provide electric utility service to a diversified base of customers in such industries as paper, governmental, food products, foundry, mining, health services, printing, and retail. In February 2015, our largest retail electric customers, two iron ore mines located in the Upper Peninsula of Michigan, returned as customers after choosing an alternative electric supplier in September 2013. For more information on alternative electric suppliers, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Factors Affecting Results, Liquidity, and Capital Resources – Industry Restructuring. WE entered into a contract with each of the mines to provide full requirements electric service through December 31, 2019. Since 2015, we have been deferring, and expect to continue to defer, the revenue less costs of sales from the mine sales and will apply these amounts for the benefit of Wisconsin retail electric customers in a future rate proceeding.

In 2016, one of the iron ore mines closed, and the related contract for full requirements electric service was terminated. In August 2016, we entered into a new agreement with the owner of the remaining mine under which it will purchase electric power from UMERC for 20 years. The agreement also calls for UMERC to construct and operate certain natural gas-fired generation located in the Upper Peninsula of Michigan. The remaining iron ore mine will continue to receive full requirements electric service from WE under the existing contract, as discussed above, until UMERC's proposed generation solution in the Upper Peninsula of Michigan begins commercial operation. See Note 22, Regulatory Environment, for more information, as well as the discussion under the heading "Upper Michigan Energy Resources Corporation" below.

Wholesale Customers

We provide wholesale electric service to various customers, including electric cooperatives, municipal joint action agencies, other investor-owned utilities, municipal utilities, and energy marketers. Wholesale sales accounted for 7.4%, 6.0%, and 5.3% of total electric energy sales during 2016, 2015, and 2014, respectively. Wholesale revenues accounted for 5.0%, 4.5%, and 3.8% of total electric operating revenues during 2016, 2015, and 2014, respectively.

Resale

The majority of our sales for resale are sold to one RTO, MISO, at market rates based on availability of our generation and RTO demand. Resale sales accounted for 17.5%, 20.9%, and 18.5% of total electric energy sales during 2016, 2015, and 2014, respectively. Resale revenues accounted for 5.3%, 6.1%, and 7.7% of total electric operating revenues during 2016, 2015, and 2014, respectively. Retail fuel costs are reduced by the amount that revenue exceeds the costs of sales derived from these opportunity sales.


2016 Form 10-K
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WEC Energy Group, Inc.



Electric Generation and Supply Mix

Our electric supply strategy is to provide our customers with energy from plants using a diverse fuel mix that is expected to maintain a stable, reliable, and affordable supply of electricity. Through our participation in the MISO Energy Markets, we supply a significant amount of electricity to our customers from power plants that we own. We supplement our internally generated power supply with long-term power purchase agreements, including the Point Beach power purchase agreement discussed under the heading "Power Purchase Commitments," and through spot purchases in the MISO Energy Markets. We also sell excess capacity into the MISO Energy Markets when it is economical, which reduces net fuel costs by offsetting costs of purchased power.

Our rated capacity by fuel type as of December 31 is shown below. For more information on our electric generation facilities, see Item 2. Properties.
 
 
Rated Capacity in MW (1)
 
 
2016
 
2015
 
2014
Coal
 
4,933

 
4,955

 
3,707

Natural gas:
 
 
 
 
 
 
Combined cycle
 
1,697

 
1,636

 
1,082

Steam turbine (2)
 
320

 
305

 
118

Natural gas/oil peaking units (3)
 
1,413

 
1,412

 
962

Renewables (4)
 
273

 
269

 
155

Total rated capacity
 
8,636

 
8,577

 
6,024


(1) 
Rated capacity is the net power output under average operating conditions with equipment in an average state of repair as of a given month in a given year. We are a summer peaking electric utility, and amounts are based on expected capacity ratings for the following summer. The values were established by tests and may change slightly from year to year.

(2) 
The natural gas steam turbine represents the rated capacity associated with the VAPP Units, which were converted from coal to natural gas in 2014 and 2015, as well as Weston Unit 2, which was converted from coal to natural gas in 2015.

(3) 
The dual-fueled facilities generally burn oil only if natural gas is not available due to constraints on the natural gas pipeline and/or at the local natural gas distribution company that delivers natural gas to the plants.

(4) 
Includes hydroelectric, biomass, and wind generation.

The table below indicates our sources of electric energy supply as a percentage of sales for the three years ended December 31, as well as estimates for 2017:
 
 
Estimate
 
Actual
 
 
2017
 
2016
 
2015
 
2014
Company-owned generation units:
 
 
 
 
 
 
 
 
Coal
 
51.3
%
 
45.7
%
 
51.5
%
 
55.2
%
Natural gas:
 
 
 
 
 
 
 
 
Combined cycle
 
11.3
%
 
18.2
%
 
14.6
%
 
8.7
%
Steam turbine
 
0.7
%
 
0.9
%
 
1.2
%
 
0.2
%
Natural gas/oil peaking units
 
0.2
%
 
1.1
%
 
0.6
%
 
0.2
%
Renewables
 
4.1
%
 
3.9
%
 
3.4
%
 
3.8
%
Total company-owned generation units
 
67.6
%
 
69.8
%
 
71.3
%
 
68.1
%
Power purchase contracts:
 
 
 
 
 
 
 
 
Nuclear
 
18.1
%
 
17.5
%
 
20.5
%
 
25.4
%
Natural gas
 
1.4
%
 
1.7
%
 
1.4
%
 
2.1
%
Renewables
 
3.2
%
 
2.8
%
 
1.5
%
 
2.7
%
Other
 
1.6
%
 
2.1
%
 
3.5
%
 
0.9
%
Total power purchase contracts
 
24.3
%
 
24.1
%
 
26.9
%
 
31.1
%
Purchased power from MISO
 
8.1
%
 
6.1
%
 
1.8
%
 
0.8
%
Total purchased power
 
32.4
%
 
30.2
%
 
28.7
%
 
31.9
%
Total electric utility supply
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%


2016 Form 10-K
6

WEC Energy Group, Inc.



Coal-Fired Generation

Our coal-fired generation consists of eight operating plants with a rated capacity of 4,933 MW as of December 31, 2016. For more information about our operating plants, see Item 2. Properties.

Natural Gas-Fired Generation

Our natural gas-fired generation consists of nine operating plants, including peaking units, with a rated capacity of 3,250 MW as of December 31, 2016. For more information about our operating plants, see Item 2. Properties.

Oil-Fired Generation

Fuel oil is used for combustion turbines at certain of our natural gas-fired plants as well as for ignition and flame stabilization at one of our coal-fired plants. Our oil-fired generation had a rated capacity of 180 MW as of December 31, 2016. We also have natural gas-fired peaking units with a rated capacity of 1,221 MW, which have the ability to burn oil if natural gas is not available due to delivery constraints. For more information about our operating plants, see Item 2. Properties.

Renewable Generation

In order to comply with renewable energy legislation in Wisconsin and Michigan, our electric utilities meet a portion of their electric generation supply with various renewable energy resources.

Hydroelectric

Our hydroelectric generating system consists of 30 operating plants with a total installed capacity of 171 MW and a rated capacity of 150 MW as of December 31, 2016. All of our hydroelectric facilities follow FERC guidelines and/or regulations.

Wind

We have six wind sites, consisting of 280 turbines, with an installed capacity of 447 MW and a rated capacity of 73 MW as of December 31, 2016.

Biomass

We have a biomass-fueled power plant at a Rothschild, Wisconsin paper mill site. Wood waste and wood shavings are used to produce a rated capacity of approximately 50 MW of electric power as well as steam to support the paper mill's operations. Fuel for the power plant is supplied by both the paper mill and through contracts with biomass suppliers.

Electric System Reliability

The PSCW requires us to maintain a planning reserve margin above our projected annual peak demand forecast to help ensure reliability of electric service to our customers. These planning reserve requirements are consistent with the MISO calculated planning reserve margin. In 2008, the PSCW established a 14.5% reserve margin requirement for long-term planning (planning years two through ten). For short-term planning (planning year one), the PSCW requires Wisconsin utilities to follow the planning reserve margin established by MISO. MISO has a 15.2% reserve margin requirement for the planning year from June 1, 2016, through May 31, 2017. Although MISO's short-term reserve margin changes from year-to-year, fluctuations are typically less than 0.5%. The MPSC does not have minimum guidelines for future supply reserves.

We had adequate capacity through company-owned generation units and power purchase contracts to meet the MISO calculated planning reserve margin during 2016 and expect to have adequate capacity to meet the planning reserve margin requirements during 2017. However, extremely hot weather, unexpected equipment failure or unavailability across the 15-state MISO footprint could require us to call upon load management procedures. Load management procedures allow for the reduction of energy use through agreements with customers to directly shut off their equipment or through interruptible service, where customers agree to reduce their load in the case of an emergency interruption.


2016 Form 10-K
7

WEC Energy Group, Inc.



Fuel and Purchased Power Costs

Our retail electric rates in Wisconsin are established by the PSCW and include base amounts for fuel and purchased power costs. The electric fuel rules set by the PSCW allow us to defer, for subsequent rate recovery or refund, under or over-collections of actual fuel and purchased power costs that exceed a 2% price variance from the costs included in the rates charged to customers. For more information about the fuel rules, see Item 1. Business – D. Regulation.

Our average fuel and purchased power costs per MWh by fuel type were as follows for the years ended December 31:
 
 
2016
 
2015
 
2014
Coal
 
$
23.09

 
$
25.57

 
$
27.68

Natural gas combined cycle
 
18.79

 
17.66

 
40.64

Natural gas/oil peaking units
 
45.08

 
56.99

 
129.83

Purchased power
 
40.11

 
43.50

 
47.47


We purchase coal under long-term contracts, which helps with price stability. Coal and associated transportation services have continued to see volatility in pricing due to changing domestic and world-wide demand for coal and the impacts of diesel costs, which are incorporated into fuel surcharges on rail transportation. Certain of our coal transportation contracts contain fuel cost adjustments that are tied to changes in diesel fuel and crude oil prices. Currently, diesel fuel contracts are not actively traded. Therefore, we use financial heating oil contracts to mitigate risk related to diesel fuel prices.

We purchase natural gas for our plants on the spot market from natural gas marketers, utilities, and producers, and we arrange for transportation of the natural gas to our plants. We have firm and interruptible transportation, as well as balancing and storage agreements, intended to support our plants' variable usage.

WE and WPS both have a PSCW-approved hedging program that allows them to hedge up to 75% of their potential risks related to fuel surcharge exposure. WE and WPS also have a program that allows them to hedge up to 75% of their estimated natural gas use for electric generation in order to help manage their natural gas price risk. These hedging programs are generally implemented on a 36-month forward-looking basis. The results of all of these programs are reflected in the average costs of natural gas and purchased power.

Coal Supply

We diversify the coal supply for our electric generating facilities and jointly-owned plants by purchasing coal from several mines in Wyoming, as well as from various other states. For 2017, approximately 76% of our total projected coal requirements of approximately 14 million tons are contracted under fixed-price contracts. See Note 18, Commitments and Contingencies, for more information on amounts of coal purchases and coal deliveries under contract.

The annual tonnage amounts contracted for the next three years are as follows:
(in thousands)
 
Annual Tonnage
2017
 
10,664

2018
 
7,968

2019
 
4,032


Coal Deliveries

All of our 2017 coal requirements are expected to be shipped by our owned or leased unit trains under existing transportation agreements. The unit trains transport the coal for electric generating facilities from mines in Wyoming, Pennsylvania, and Montana. The coal is transported by train to our rail-served electric-generating facilities and to dock storage in Superior, Wisconsin, until needed by our lake vessel-served facilities. Additional small volume agreements may also be used to supplement the normal coal supply for our facilities.

2016 Form 10-K
8

WEC Energy Group, Inc.




Midcontinent Independent System Operator Costs

In connection with its status as a FERC approved RTO, MISO developed and operates the MISO Energy Markets, which include its bid-based energy market and ancillary services market. We are participants in the MISO Energy Markets. For more information on MISO, see Item 1. Business – D. Regulation.

Power Purchase Commitments

We enter into short and long-term power purchase commitments to meet a portion of our anticipated electric energy supply needs. As of December 31, 2016, our power purchase commitments with unaffiliated parties for the next five years are 1,444 MW per year. This amount includes 1,033 MW per year related to a long-term power purchase agreement for electricity generated by Point Beach.

Other Matters

Seasonality

Our electric utility sales are impacted by seasonal factors and varying weather conditions. We sell more electricity during the summer months because of the residential cooling load. We continue to upgrade our electric distribution system, including substations, transformers, and lines, to meet the demand of our customers. Our generating plants performed as expected during the warmest periods of the summer, and all power purchase commitments under firm contract were received. During this period, WE did not require public appeals for conservation, and it did not interrupt or curtail service to non-firm customers who participate in load management programs. In addition, WPS did not require any public appeals for conservation, and it did not interrupt or curtail service to non-firm customers who participate in load management programs for capacity reasons. However, WPS did have service curtailments for economic interruptions. Economic interruptions are declared during times in which the price of electricity in the regional market significantly exceeds the cost of operating the company's peaking generation. During this time, interruptible customers can choose to continue using electricity at a price which exceeds the tariff rate.

Competition

Our electric utilities face competition from various entities and other forms of energy sources available to customers, including self-generation by large industrial customers and alternative energy sources. Our electric utilities compete with other utilities for sales to municipalities and cooperatives as well as with other utilities and marketers for wholesale electric business.

For more information on competition in our service territories, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Factors Affecting Results, Liquidity, and Capital Resources – Industry Restructuring.

Environmental Matters

For information regarding environmental matters, especially as they relate to coal-fired generating facilities, see Note 18, Commitments and Contingencies.

Natural Gas Utility Operations

For the periods presented in this Annual Report on Form 10-K, our Wisconsin natural gas utility operations include WG's and WE's natural gas operations for all periods and WPS's natural gas operations, including in the Upper Peninsula of Michigan, beginning July 1, 2015, due to the acquisition of Integrys and its subsidiaries.

Effective January 1, 2017, WPS natural gas customers and natural gas distribution assets located in the Upper Peninsula of Michigan were transferred to UMERC. More information about UMERC is included at the end of the Wisconsin segment section, under the heading Upper Michigan Resources Corporation.

We are authorized to provide retail natural gas distribution service in designated territories in the state of Wisconsin, as established by indeterminate permits and boundary agreements with other utilities. We also transport customer-owned natural gas. Together our natural gas distribution utilities are the largest in Wisconsin, and we operate throughout the state, including the City of Milwaukee and surrounding areas, northeastern Wisconsin, and in large areas of both central and western Wisconsin.

2016 Form 10-K
9

WEC Energy Group, Inc.




Natural Gas Utility Operating Statistics

The following table shows certain natural gas utility operating statistics at our Wisconsin segment for the past three years:
 
 
Year Ended December 31
 
 
2016
 
2015 (1)
 
2014
Operating revenues (in millions)
 
 
 
 
 
 
Residential
 
$
763.2

 
$
696.2

 
$
925.3

Commercial and industrial
 
355.3

 
332.8

 
506.0

Total retail revenues
 
1,118.5

 
1,029.0

 
1,431.3

Transport
 
69.7

 
62.8

 
54.2

Other operating revenues (2)
 
(10.6
)
 
30.8

 
10.6

Total
 
$
1,177.6

 
$
1,122.6

 
$
1,496.1

 
 
 
 
 
 
 
Customers – end of year (in thousands)
 
 
 
 
 
 
Residential
 
1,311.0

 
1,299.7

 
993.9

Commercial and industrial
 
124.3

 
123.4

 
93.3

Transport
 
2.6

 
2.6

 
1.8

Total customers
 
1,437.9

 
1,425.7

 
1,089.0

 
 
 
 
 
 
 
Customers – average (in thousands)
 
1,429.8

 
1,417.8

 
1,081.5


(1) 
Includes the operations of WPS beginning July 1, 2015, as a result of the acquisition of Integrys on June 29, 2015.

(2) 
Includes amounts (refunded to) collected from customers for purchased gas adjustment costs.

Natural Gas Deliveries

Our gas therm deliveries include customer-owned transported natural gas. Transported natural gas accounted for approximately 43.9% of the total volumes delivered during 2016, 41.8% during 2015, and 36.1% during 2014. Our peak daily send-out during 2016 was 23.5 million therms on January 18, 2016.

Large Natural Gas Customers

We provide natural gas utility service to a diversified base of industrial customers who are largely within our electric service territory. Major industries served include governmental, food products, education, real estate, and metals. Fuel used for WE's electric generation represents our largest transportation customer. Natural gas therms delivered to WE for electric generation represented 15.3% of total volumes delivered during each of 2016 and 2015, and 9.3% during 2014.

Natural Gas Sales Forecast

Our combined service territories in Wisconsin experienced growth in weather-normalized retail natural gas deliveries (excluding natural gas deliveries for electric generation) in 2016 due to positive customer growth, an improving economy, and favorable natural gas prices. We currently forecast retail natural gas delivery volumes to grow at a rate between flat and 0.5% over the next five years, assuming normal weather. The forecast projects positive customer growth being offset by energy efficiency.

Natural Gas Supply, Pipeline Capacity and Storage

We have been able to meet our contractual obligations with both our suppliers and our customers. For more information on our natural gas utility supply and transportation contracts, see Note 18, Commitments and Contingencies.


2016 Form 10-K
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WEC Energy Group, Inc.



Pipeline Capacity and Storage

The interstate pipelines serving Wisconsin originate in major natural gas producing areas of North America: the Oklahoma and Texas basins, western Canada, and the Rocky Mountains. We have contracted for long-term firm capacity from a number of these sources. This strategy reflects management's belief that overall supply security is enhanced by geographic diversification of the supply portfolio.

Due to the daily and seasonal variations in natural gas usage in Wisconsin, we have also contracted for substantial underground storage capacity, primarily in Michigan. We target storage inventory levels at approximately 35% of forecasted winter demand; November through March is considered the winter season. Storage capacity, along with our natural gas purchase contracts, enables us to manage significant changes in daily demand and to optimize our overall natural gas supply and capacity costs. We generally inject natural gas into storage during the spring and summer months when demand is lower and withdraw it in the winter months. As a result, we can contract for less long-line pipeline capacity during periods of peak usage than would otherwise be necessary and can purchase natural gas on a more uniform daily basis from suppliers year-round. Each of these capabilities enables us to reduce our overall costs.

We hold daily transportation and storage capacity entitlements with interstate pipeline companies as well as other service providers under varied-length long-term contracts.

In January 2017, we signed an agreement for the acquisition of a natural gas storage facility in Michigan that would provide approximately one-third of the storage needs for our Wisconsin natural gas utilities. See Note 2, Acquisitions, for more information on this transaction.

Term Natural Gas Supply

We have contracts for firm supplies with terms of 3–5 months with suppliers for natural gas acquired in the Chicago, Illinois market hub and in the producing areas discussed above. The pricing of the term contracts is based upon first of the month indices.

Combined with our storage capability, management believes that the volume of natural gas under contract is sufficient to meet our forecasted firm peak-day and seasonal demand. Our Wisconsin natural gas utilities' forecasted design peak-day throughput is 31.2 million therms for the 2016 through 2017 heating season.

Secondary Market Transactions

Pipeline and storage capacity and natural gas supplies under contract can be resold in secondary markets. As local distribution companies, our Wisconsin natural gas utilities must contract for capacity and supply sufficient to meet the firm peak-day demand of their customers. Peak or near peak demand days generally occur only a few times each year. The secondary markets facilitate higher utilization of contracted capacity and supply during those times when the full contracted capacity and supply are not needed by the utility, helping to mitigate the fixed costs associated with maintaining peak levels of capacity and natural gas supply. Through pre-arranged agreements and day-to-day electronic bulletin board postings, interested parties can purchase this excess capacity and supply. The proceeds from these transactions are passed through to customers, subject to our approved GCRMs. During 2016, we continued to participate in the secondary markets. For information on the GCRMs, see Note 1(d), Revenues and Customer Receivables.

Spot Market Natural Gas Supply

We expect to continue to make natural gas purchases in the spot market as price and other circumstances dictate. We have supply relationships with a number of sellers from whom we purchase natural gas in the spot market.

Hedging Natural Gas Supply Prices

WE and WG have PSCW approval to hedge up to 60% of planned winter demand and up to 15% of planned summer demand using a mix of NYMEX-based natural gas options and futures contracts. WPS has PSCW approval to hedge up to 67% of planned winter demand using a combination of planned withdrawals from storage and NYMEX financial instruments. These approvals allow these companies to pass 100% of the hedging costs (premiums and brokerage fees) and proceeds (gains and losses) to customers through their respective GCRMs. Hedge targets (volumes) are provided annually to the PSCW as part of each company's three-year natural gas supply plan and risk management filing.

2016 Form 10-K
11

WEC Energy Group, Inc.




To the extent that opportunities develop and physical supply operating plans are supportive, WE, WG, and WPS also have PSCW approval to utilize NYMEX-based natural gas derivatives to capture favorable forward-market price differentials. These approvals provide for 100% of the related proceeds to accrue to these companies' respective GCRMs.

Seasonality

Since the majority of our customers use natural gas for heating, customer use is sensitive to weather and is generally higher during the winter months. Accordingly, we are subject to some variations in earnings and working capital throughout the year as a result of changes in weather.

Our working capital needs are met by cash generated from operations and debt (both long-term and short-term). The seasonality of natural gas revenues causes the timing of cash collections to be concentrated from January through June. A portion of the winter natural gas supply needs is typically purchased and stored from April through November. Also, planned capital spending on our natural gas distribution facilities is concentrated in April through November. Because of these timing differences, the cash flow from customers is typically supplemented with temporary increases in short-term borrowings (from external sources) during the late summer and fall. Short-term debt is typically reduced over the January through June period.

Competition

Competition in varying degrees exists between natural gas and other forms of energy available to consumers. A number of our large commercial and industrial customers are dual-fuel customers that are equipped to switch between natural gas and alternative fuels. We are allowed to offer lower-priced natural gas sales and transportation services to dual-fuel customers. Under natural gas transportation agreements, customers purchase natural gas directly from natural gas marketers and arrange with interstate pipelines and us to have the natural gas transported to their facilities. We earn substantially the same operating income whether we sell and transport natural gas to customers or only transport their natural gas.

Our ability to maintain our share of the industrial dual-fuel market depends on our success and the success of third-party natural gas marketers in obtaining long-term and short-term supplies of natural gas at competitive prices compared to other sources and in arranging or facilitating competitively priced transportation service for those customers that desire to buy their own natural gas supplies.

Federal and state regulators continue to implement policies to bring more competition to the natural gas industry. While the natural gas utility distribution function is expected to remain a highly regulated, monopoly function, the sale of the natural gas commodity and related services are expected to remain subject to competition from third parties for large commercial and industrial customers.

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 became operational effective January 1, 2017, and WE and WPS 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. WPS transferred approximately 9,000 retail electric customers and 5,300 natural gas customers to UMERC, along with approximately 600 miles of electric distribution lines and approximately 100 miles of natural gas distribution mains. WE and WPS also transferred related electric distribution substations in the Upper Peninsula of Michigan and all property rights for the distribution assets to UMERC. The estimated net book value of the property, plant, and equipment transferred to UMERC from WE and WPS as of January 1, 2017, was $83 million and $19 million, respectively. This transaction was a non-cash equity transfer between entities under common control, and therefore, did not result in a gain or loss recognized.

UMERC obtains its energy through the MISO Energy Markets and meets its market obligations through power purchase agreements with WE and WPS. The new utility has also proposed a long-term generation solution for electric reliability in the region. See Note 22, Regulatory Environment, for more information. The Tilden Mining Company will remain a customer of WE until this new generation begins commercial operation.


2016 Form 10-K
12

WEC Energy Group, Inc.



Illinois Segment

Our Illinois segment includes the natural gas utility operations of PGL and NSG. PGL and NSG, both Illinois corporations, began operations in 1855 and 1900, respectively. We acquired PGL and NSG as a result of the acquisition of Integrys on June 29, 2015. Our customers are located in Chicago and the northern suburbs of Chicago.

Illinois Utilities Operating Statistics

The following table shows certain Illinois utility operating statistics since the acquisition of Integrys.
 
 
Year Ended December 31
 
 
2016
 
2015 *
Operating revenues (in millions)
 
 
 
 
Residential
 
$
839.2

 
$
309.8

Commercial and industrial
 
136.5

 
50.4

Total retail revenues
 
975.7

 
360.2

Transport
 
239.4

 
97.1

Other operating revenues
 
27.1

 
46.1

Total
 
$
1,242.2

 
$
503.4

 
 
 
 
 
Customers – end of year (in thousands)
 
 
 
 
Residential
 
846.8

 
838.2

Commercial and industrial
 
47.1

 
46.2

Transport
 
109.5

 
107.8

Total customers
 
1,003.4

 
992.2

 
 
 
 
 
Customers – average (in thousands)
 
1,005.3

 
982.3


*
Includes the operations of PGL and NSG beginning July 1, 2015, as a result of the acquisition of Integrys on June 29, 2015.

Natural Gas Supply, Pipeline Capacity and Storage

We manage portfolios of natural gas supply contracts, storage services, and pipeline transportation services designed to meet varying customer use patterns with safe, reliable natural gas supplies at the best value.

Our natural gas supply requirements are met through a combination of fixed-price purchases, index-priced purchases, contracted and owned storage, peak-shaving facilities, and natural gas supply call options. We contract for fixed-term firm natural gas supply each year to meet the demand of firm system sales customers. To supplement natural gas supply and manage risk, we purchase additional natural gas supply on the monthly and daily spot markets.

For more information on our natural gas utility supply and transportation contracts, see Note 18, Commitments and Contingencies.

We contract with local distribution companies and interstate pipelines to purchase firm transportation services. We believe that having multiple pipelines that serve our natural gas service territory benefits our customers by improving reliability, providing access to a diverse supply of natural gas, and fostering competition among these service providers. These benefits can lead to favorable conditions for our Illinois utilities when negotiating new agreements for transportation and storage services. Our Illinois utilities further reduce their supply cost volatility through the use of financial instruments, such as commodity futures, swaps, and options as part of their hedging programs. They hedge between 25% and 50% of natural gas purchases, with a target of 37.5%.

We own a 38.3 Bcf storage field (Manlove Field in central Illinois) and contract with various other underground storage service providers for additional storage services. Storage allows us to manage significant changes in daily natural gas demand and to purchase steady levels of natural gas on a year-round basis, which provides a hedge against supply cost volatility. We also own a natural gas pipeline system that connects Manlove Field to Chicago and eight major interstate pipelines. These assets are directed primarily to serving rate-regulated retail customers and are included in our regulatory rate base. We also use a portion of these company-owned storage and pipeline assets as a natural gas hub, which consists of providing transportation and storage services in interstate commerce to our wholesale customers. Customers deliver natural gas to us for storage through an injection into the storage reservoir, and we return the natural gas to the customers under an agreed schedule through a withdrawal from the storage

2016 Form 10-K
13

WEC Energy Group, Inc.



reservoir. Title to the natural gas does not transfer to us. We recognize service fees associated with the natural gas hub services provided to wholesale customers. These service fees reduce the cost of natural gas and services charged to retail customers in rates.

We had adequate capacity to meet all firm natural gas demand obligations during 2016 and expect to have adequate capacity to meet all firm demand obligations during 2017. Our Illinois utilities' forecasted design peak-day throughput is 24.4 million therms for the 2016 through 2017 heating season.

Gas System Modernization Program

PGL is continuing work on the SMP, a project that began in 2011 under which PGL is replacing approximately 2,000 miles of Chicago's aging natural gas pipeline infrastructure. PGL currently recovers these costs through a surcharge on customer bills pursuant to an ICC approved Qualifying Infrastructure Plant rider, which is in effect through 2023. For information on investigations related to the SMP, see Note 22, Regulatory Environment.

Seasonality

Since the majority of our customers use natural gas for heating, customer use is sensitive to weather and is generally higher during the winter months. Accordingly, we are subject to variations in earnings and working capital throughout the year as a result of changes in weather.

Our Illinois utilities' working capital needs are met by cash generated from operations and debt (both long-term and short-term). The seasonality of natural gas revenues causes the timing of cash collections to be concentrated from January through June. A portion of the winter natural gas supply needs is typically purchased and stored from April through November. Also, planned capital spending on our natural gas distribution facilities is concentrated in April through November. Because of these timing differences, the cash flow from customers is typically supplemented with temporary increases in short-term borrowings (from external sources) during the late summer and fall. Short-term debt is typically reduced over the January through June period.

Competition

Although our Illinois utilities' rates are regulated by the ICC, we still face varying degrees of competition from other entities and other forms of energy available to consumers. Absent extraordinary circumstances, potential competitors are not allowed to construct competing natural gas distribution systems in our service territory due to a judicial doctrine known as the "first in the field." In addition, we believe it would be impractical to construct competing duplicate distribution facilities due to the high cost of installation.

Since 2002, all our Illinois utilities' natural gas customers have had the opportunity to choose a natural gas supplier other than us. As a result, we offer natural gas transportation service to enable customers to directly manage their energy costs. Transportation customers purchase natural gas directly from third-party natural gas suppliers and use our distribution system to transport the natural gas to their facilities. We still earn a distribution charge for transporting the natural gas for these customers. As such, the loss of revenue associated with the cost of natural gas that our transportation customers purchase from third-party suppliers has little impact on our net income, as it is offset by an equal reduction to natural gas costs.

An interstate pipeline may seek to provide transportation service directly to end users, which would bypass our natural gas transportation service. However, we have a bypass rate approved by the ICC, which allows us to negotiate rates with customers that are potential bypass candidates to help ensure that such customers use our transportation service.

Other States Segment

Our other states segment includes the natural gas utility operations of MERC and MGU. We acquired the natural gas distribution operations of MERC and MGU, located in Minnesota and Michigan, respectively, on June 29, 2015, with the acquisition of Integrys. MERC serves customers in various cities and communities throughout Minnesota, and MGU serves customers in the southern portion of lower Michigan.


2016 Form 10-K
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WEC Energy Group, Inc.



Other States Utilities Operating Statistics

The following table shows certain other states utility operating statistics since the acquisition of Integrys.
 
 
Year Ended December 31
 
 
2016
 
2015 *
Operating revenues (in millions)
 
 
 
 
Residential
 
$
209.3

 
$
67.6

Commercial and industrial
 
110.7

 
38.8

Total retail revenues
 
320.0

 
106.4

Transport
 
31.7

 
11.5

Other operating revenues
 
24.8

 
31.4

Total
 
$
376.5

 
$
149.3

 
 
 
 
 
Customers – end of year (in thousands)
 
 
 
 
Residential
 
348.1

 
345.8

Commercial and industrial
 
34.1

 
33.8

Transport
 
24.8

 
23.0

Total customers
 
407.0

 
402.6

 
 
 
 
 
Customers – average (in thousands)
 
402.8

 
401.5


*
Includes the operations of MERC and MGU beginning July 1, 2015, as a result of the acquisition of Integrys on June 29, 2015.

Natural Gas Supply, Pipeline Capacity and Storage

We manage portfolios of natural gas supply contracts, storage services, and pipeline transportation services designed to meet varying customer use patterns with safe, reliable natural gas supplies at the best value.

Our natural gas supply requirements are met through a combination of fixed-price purchases, index-priced purchases, contracted and owned storage, peak-shaving facilities, and natural gas supply call options. We contract for fixed-term firm natural gas supply each year to meet the demand of firm system sales customers. To supplement natural gas supply and manage risk, we purchase additional natural gas supply on the monthly and daily spot markets.

For more information on our natural gas utility supply and transportation contracts, see Note 18, Commitments and Contingencies.

We own a storage field (Partello in Michigan) and contract with various other underground storage service providers for additional storage services. Storage allows us to manage significant changes in daily natural gas demand and to purchase steady levels of natural gas on a year-round basis, which provides a hedge against supply cost volatility. We contract with local distribution companies and interstate pipelines to purchase firm transportation services. We believe that having multiple pipelines that serve our natural gas service territory benefits our customers by improving reliability, providing access to a diverse supply of natural gas, and fostering competition among these service providers. These benefits can lead to favorable conditions for our other states utilities when negotiating new agreements for transportation and storage services. Our other states utilities further reduce their supply cost volatility through the use of financial instruments, such as commodity futures, swaps, and options as part of their hedging programs. MERC hedges up to 30% of planned winter demand using NYMEX financial instruments. MGU hedges up to 20% of its planned annual purchases using NYMEX financial instruments.

Combined with our storage capability, management believes that the volume of gas under contract is sufficient to meet our forecasted firm peak-day and seasonal demand. Forecasted design peak-day throughput for our other states utilities segment is 8.7 million therms for the 2016 through 2017 heating season.

Seasonality

Since the majority of our customers use natural gas for heating, customer use is sensitive to weather and is generally higher during the winter months. Accordingly, we are subject to variations in earnings and working capital throughout the year as a result of changes in weather.


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WEC Energy Group, Inc.



Our other states utilities' working capital needs are met by cash generated from operations and debt (both long-term and short-term). The seasonality of natural gas revenues causes the timing of cash collections to be concentrated from January through June. A portion of the winter natural gas supply needs is typically purchased and stored from April through November. Also, planned capital spending on our natural gas distribution facilities is concentrated in April through November. Because of these timing differences, the cash flow from customers is typically supplemented with temporary increases in short-term borrowings (from external sources) during the late summer and fall. Short-term debt is typically reduced over the January through June period.

Competition

Although our other states utilities' rates are regulated by the MPUC and MSPC, we still face varying degrees of competition from other entities and other forms of energy available to consumers. Many large commercial and industrial customers have the ability to switch between natural gas and alternative fuels. Due to the volatility of energy commodity prices, we have seen customers with dual fuel capability switch to alternative fuels for short periods of time, then switch back to natural gas as market rates change.

MERC commercial and industrial customers and all MGU customers have the opportunity to choose a natural gas supplier other than us. We offer natural gas transportation service and also offer interruptible natural gas sales to enable customers to better manage their energy costs. Transportation customers purchase natural gas directly from third-party natural gas suppliers and use our distribution systems to transport the natural gas to their facilities. We still earn a distribution charge for transporting the natural gas for these customers. As such, the loss of revenue associated with the cost of natural gas that our transportation customers purchase from third-party suppliers has little impact on our net income, as it is offset by an equal reduction to natural gas costs. Customers continue to switch between firm system supply, interruptible system supply, and transportation service each year as the economics and service options change.

Electric Transmission Segment

American Transmission Company 

ATC is a regional transmission company that owns, maintains, monitors, and operates electric transmission systems in Wisconsin, Michigan, Illinois, and Minnesota. ATC is expected to provide comparable service to all customers, including WE and WPS, and to support effective competition in energy markets without favoring any market participant. ATC is regulated by the FERC for all rate terms and conditions of service and is a transmission-owning member of MISO. MISO maintains operational control of ATC's transmission system, and WE and WPS are non-transmission owning members and customers of MISO. As of December 31, 2016, our ownership interest in ATC was approximately 60%. In addition, we own approximately 68% of ATC Holdco, LLC, a separate entity formed in December 2016 to invest in transmission related projects outside of ATC's traditional footprint. As of December 31, 2016, operations were not significant. In April 2011, ATC and Duke Energy announced the creation of a joint venture, DATC, that will seek opportunities to acquire, build, own, and operate new electric transmission infrastructure in North America to address increasing demand for affordable, reliable transmission capacity. In April 2013, DATC acquired a 72% interest in California's Path 15 transmission line. DATC continues to evaluate new projects and opportunities, along with participating in the competitive bidding process on projects it considers viable. However, in January 2017, a subsidiary of ATC Holdco, LLC and Arizona Electric Power Cooperative entered into a joint operating agreement, ATC Southwest, to develop transmission projects in Arizona and the southwestern United States. These projects are located in the service territories of several different RTOs around the country. See Note 4, Investment in American Transmission Company, for more information.
 
ATC is currently named in a complaint filed with the FERC requesting a reduction in the base ROE used by MISO transmission owners. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Factors Affecting Results, Liquidity, and Capital Resources – Other Matters – American Transmission Company Allowed Return on Equity Complaints, for more information.

C. NON-UTILITY OPERATIONS

We Power Segment

We Power, through wholly owned subsidiaries, designed and built approximately 2,350 MW of generation in Wisconsin. This generation is made up of capacity from the ERGS units, ER 1 and ER 2, which were placed in service in February 2010 and January 2011, respectively, and the PWGS units, PWGS 1 and PWGS 2, which were placed in service in July 2005 and May 2008, respectively. Two unaffiliated entities collectively own approximately 17%, or approximately 211 MW, of ER 1 and ER 2. All four of

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WEC Energy Group, Inc.



these units are being leased to WE under long-term leases (the ERGS units have 30-year leases and the PWGS units have 25-year leases), and are positioned to provide a significant portion of our future generation needs.

Because of the significant investment necessary to construct these generating units, we constructed the plants under Wisconsin's Leased Generation Law, which allows a non-utility affiliate to construct an electric generating facility and lease it to the public utility. The law allows a public utility that has entered into a lease approved by the PSCW to recover fully in its retail electric rates that portion of any payments under the lease that the PSCW has allocated to the public utility's Wisconsin retail electric service, and all other costs that are prudently incurred in the public utility's operation and maintenance of the electric generating facility allocated to the utility's Wisconsin retail electric service. In addition, the PSCW may not modify or terminate a lease it has approved under the Leased Generation Law except as specifically provided in the lease or the PSCW's order approving the lease. This law effectively created regulatory certainty in light of the significant investment being made to construct the units. All four units were constructed under leases approved by the PSCW.
 
We are recovering our costs of these units, including subsequent capital additions, through lease payments that are billed from We Power to WE and then recovered in WE's rates as authorized by the PSCW, the MPSC, and the FERC. Under the lease terms, our return is calculated using a 12.7% ROE and the equity ratio is assumed to be 55% for the ERGS units and 53% for the PWGS units.

Corporate and Other Segment

The corporate and other segment includes the operations of the WEC Energy Group holding company, the Integrys holding company, and the PELLC holding company, as well as the operations of Wispark, Bostco, Wisvest (prior to the sale of these assets in the first quarter of 2016), WECC, WBS, PDL, and ITF (prior to the sale of this business in the first quarter of 2016). See Note 3, Dispositions, for more information on the sale of Wisvest's assets and ITF.

Bostco and Wispark develop and invest in real estate, and combined they had $69.0 million in real estate holdings at December 31, 2016. Wispark has developed several business parks and other commercial real estate projects, primarily in southeastern Wisconsin.

Wisvest was originally formed to develop, own, and operate electric generating facilities and to invest in other energy-related entities. However, Wisvest discontinued its development activity several years ago. In April 2016, we sold the chilled water generation and distribution assets of Wisvest, which provided chilled water services to the Milwaukee Regional Medical Center. See Note 3, Dispositions, for more information. Wisvest no longer has significant operations.

WECC was originally formed to invest in non-utility projects, such as low income housing developments. However, due to a focus on our regulated utility business, WECC sold many of its non-utility investments and no longer has significant operations.

WBS is a wholly owned centralized service company that provides administrative and general support services to our regulated utilities. WBS also provides certain administrative and support services to our nonregulated entities.

PDL owns distributed renewable solar projects. During 2016, PDL sold its natural gas-fired cogeneration facility and its landfill gas facility. These facilities were not significant to our operations. PDL's solar facilities rely on solar irradiance, a renewable energy resource. There is no market price risk associated with the fuel supply of these solar projects. However, production at these facilities can be intermittent due to the variability of solar irradiance.

D. REGULATION

We are a holding company and are subject to the requirements of the Public Utility Holding Company Act of 2005 (PUHCA 2005). We also have various subsidiaries that meet the definition of a holding company under PUHCA 2005 and are also subject to its requirements.

Pursuant to the non-utility asset cap provisions of Wisconsin's public utility holding company law, the sum of certain assets of all non-utility affiliates in a holding company system may not exceed 25% of the assets of all public utility affiliates. However, among other items, the law exempts energy-related assets, including the generating plants constructed by We Power, from being counted against the asset cap provided that they are employed in qualifying businesses. We report to the PSCW annually our compliance with this law and provide supporting documentation to show that our non-utility assets are below the non-utility asset cap.


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WEC Energy Group, Inc.



Regulated Utility Operations

In addition to the specific regulations noted above and below, our utilities are also subject to regulations, where applicable, of the EPA, the WDNR, the MDEQ, the Michigan Department of Natural Resources, the Illinois Environmental Protection Agency, the United States Army Corps of Engineers, the Minnesota Department of Natural Resources, and the Minnesota Pollution Control Agency.

Rates

Our utilities' rates were regulated by the various commissions shown in the table below as of December 31, 2016. These commissions have general supervisory and regulatory powers over public utilities in their respective jurisdictions.
Regulated Rates
 
Regulatory Commission
WE
 
 
Retail electric, natural gas, and steam
 
PSCW
Retail electric
 
MPSC *
Wholesale power
 
FERC
WPS
 
 
Retail electric and natural gas
 
PSCW and MPSC *
Wholesale power
 
FERC
WG
 
 
Retail natural gas
 
PSCW
PGL
 
 
Retail natural gas
 
ICC
NSG
 
 
Retail natural gas
 
ICC
MERC
 
 
Retail natural gas
 
MPUC
MGU
 
 
Retail natural gas
 
MPSC

*
Effective January 1, 2017, all of WE's and WPS's electric and natural gas distribution assets and customers located in the Upper Peninsula of Michigan were transferred to UMERC, with the exception of the Tilden Mining Company which will continue to be a customer of WE. See Item 1. Business – B. Utility Energy Operations – Wisconsin Segment – Upper Michigan Energy Resources Corporation and Note 22, Regulatory Environment, for additional information.

Embedded within WE's and WPS’s electric rates is an amount to recover fuel and purchased power costs. The Wisconsin retail fuel rules require a utility to defer, for subsequent rate recovery or refund, any under-collection or over-collection of fuel and purchased power costs that are outside of the utility's symmetrical fuel cost tolerance, which the PSCW typically sets at plus or minus 2% of the utility's approved fuel and purchased power cost plan. The deferred fuel and purchased power costs are subject to an excess revenues test. If the utility's ROE in a given year exceeds the ROE authorized by the PSCW, the recovery of under-collected fuel and purchased power costs would be reduced by the amount by which the utility's return exceeds the authorized amount.

Prudently incurred fuel and purchased power costs are recovered dollar-for-dollar from our Michigan retail electric customers and our Wisconsin wholesale electric customers. Our natural gas utilities operate under GCRMs as approved by their respective state regulator. Generally, the GCRMs allow for a dollar-for-dollar recovery of prudently incurred natural gas costs.

For a summary of the significant mechanisms our utility subsidiaries had in place in 2016 that allowed them to recover or refund changes in prudently incurred costs from rate case-approved amounts, see Note 1(d), Revenues and Customer Receivables.

In May 2015, the PSCW approved the acquisition of Integrys on the condition that WE and WG each be subject to an earnings sharing mechanism for three years beginning January 1, 2016. See Note 2, Acquisitions, for more information on these earnings sharing mechanisms.


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For information on how rates are set for our regulated entities, see Note 22, Regulatory Environment. Orders from our respective regulators can be viewed at the following websites:
Regulatory Commission
 
Website
PSCW
 
 https://psc.wi.gov/
ICC
 
https://www.icc.illinois.gov/
MPSC
 
http://www.michigan.gov/mpsc/
MPUC
 
http://mn.gov/puc/
FERC
 
http://www.ferc.gov/

The material and information contained on these websites are not intended to be a part of, nor are they incorporated by reference into, this Annual Report on Form 10-K.

The following table compares our utility operating revenues by regulatory jurisdiction for each of the three years ended December 31:
 
 
2016
 
2015
 
2014
(in millions)
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
Electric *
 
 
 
 
 
 
 
 
 
 
 
 
Wisconsin
 
$
3,974.8

 
85.9
%
 
$
3,466.3

 
85.2
%
 
$
2,990.4

 
86.8
%
Michigan
 
175.0

 
3.8
%
 
173.1

 
4.3
%
 
58.8

 
1.7
%
FERC – Wholesale
 
478.3

 
10.3
%
 
429.1

 
10.5
%
 
396.0

 
11.5
%
Total
 
4,628.1

 
100.0
%
 
4,068.5

 
100.0
%
 
3,445.2

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Natural Gas *
 
 
 
 
 
 
 
 
 
 
 
 
Wisconsin
 
1,174.2

 
42.0
%
 
1,121.3

 
63.2
%
 
1,496.1

 
100.0
%
Illinois
 
1,242.2

 
44.4
%
 
503.4

 
28.4
%
 

 
%
Minnesota
 
249.4

 
8.9
%
 
98.3

 
5.5
%
 

 
%
Michigan
 
130.5

 
4.7
%
 
52.3

 
2.9
%
 

 
%
Total
 
2,796.3

 
100.0
%
 
1,775.3

 
100.0
%
 
1,496.1

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Total utility operating revenues
 
$
7,424.4

 


 
$
5,843.8

 


 
$
4,941.3

 



*
Includes the operations of WPS, PGL, NSG, MERC, and MGU beginning July 1, 2015, as a result of the acquisition of Integrys on June 29, 2015.

Electric Transmission, Capacity, and Energy Markets

In connection with its status as a FERC approved RTO, MISO developed bid-based energy markets, which were implemented on April 1, 2005. In January 2009, MISO enhanced the energy market by including an ancillary services market. In the MISO ancillary services market, we buy/sell regulation and contingency reserves from/to the market. The MISO ancillary services market has been able to reduce overall ancillary services costs in the MISO footprint, and has enabled MISO to assume significant balancing area responsibilities such as frequency control and disturbance control.

In MISO, base transmission costs are currently being paid by load-serving entities located in the service territories of each MISO transmission owner. The FERC has previously confirmed the use of the current transmission cost allocation methodology. Certain additional costs for new transmission projects are allocated throughout the MISO footprint.

As part of MISO, a market-based platform was developed for valuing transmission congestion premised upon the LMP system that has been implemented in certain northeastern and mid-Atlantic states. The LMP system includes the ability to hedge transmission congestion costs through ARRs and FTRs. ARRs are allocated to market participants by MISO, and FTRs are purchased through auctions. A new allocation and auction were completed for the period of June 1, 2016, through May 31, 2017. The resulting ARR valuation and the secured FTRs are expected to mitigate our transmission congestion risk for that period.

Beginning June 1, 2013, MISO instituted an annual zonal resource adequacy requirement to ensure there is sufficient generation capacity to serve the MISO market. To meet this requirement, capacity resources could be acquired through MISO's annual capacity auction, bilateral contracts for capacity, or provided from generating or demand response resources. Our capacity requirements during 2016 were fulfilled using our own capacity resources.

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WEC Energy Group, Inc.




Other Electric Regulations

WE and WPS are subject to the Federal Power Act and the corresponding regulations developed by certain federal agencies. The Energy Policy Act amended the Federal Power Act in 2005 to, among other things, make electric utility industry consolidation more feasible, authorize the FERC to review proposed mergers and the acquisition of generation facilities, change the FERC regulatory scheme applicable to qualifying cogeneration facilities, and modify certain other aspects of energy regulations and Federal tax policies applicable to us. Additionally, the Energy Policy Act created an Electric Reliability Organization to be overseen by the FERC, which established mandatory electric reliability standards and has the authority to levy monetary sanctions for failure to comply with these standards.

As of December 31, 2016, WPS and WE were subject to Act 141 in Wisconsin and Public Acts 295 and 342 in Michigan, which contain certain minimum requirements for renewable energy generation. See Note 18, Commitments and Contingencies, for more information. Due to the transfer of WPS's electric and natural gas distribution assets and customers located in the Upper Peninsula of Michigan to UMERC on January 1, 2017, WPS is no longer subject to Public Acts 295 and 342 in Michigan. WE will continue to be subject to the Michigan Acts, along with UMERC, as long as the Tilden Mining Company remains a customer of WE. See Item 1. Business – B. Utility Energy Operations – Wisconsin Segment – Upper Michigan Energy Resources Corporation and Note 22, Regulatory Environment, for additional information on the formation of UMERC.

All of our hydroelectric facilities follow FERC guidelines and/or regulations.

Other Natural Gas Regulations

Almost all of the natural gas we distribute is transported to our distribution systems by interstate pipelines. The pipelines' transportation and storage services, including PGL's natural gas hub, are regulated by the FERC under the Natural Gas Act and the Natural Gas Policy Act of 1978. In addition, the Pipeline and Hazardous Materials Safety Administration and the state commissions are responsible for monitoring and enforcing requirements governing our natural gas utilities' safety compliance programs for our pipelines under the United States Department of Transportation regulations. These regulations include 49 Code of Federal Regulations (CFR) Part 191 (Transportation of Natural and Other Gas by Pipeline; Annual Reports, Incident Reports, and Safety-Related Condition Reports), 49 CFR Part 192 (Transportation of Natural and Other Gas by Pipeline: Minimum Federal Safety Standards), and 49 CFR Part 195 (Transportation of Hazardous Liquids by Pipeline).

We are required to provide natural gas service and grant credit (with applicable deposit requirements) to customers within our service territories. We are generally not allowed to discontinue natural gas service during winter moratorium months to residential heating customers who do not pay their bills. Federal and certain state governments have programs that provide for a limited amount of funding for assistance to low-income customers of the utilities.

Non-Utility Operations

The generation facilities constructed by wholly owned subsidiaries of We Power are being leased on a long-term basis to WE. Environmental permits necessary for operating the facilities are the responsibility of the operating entity, WE. We Power received determinations from the FERC that upon the transfer of the facilities by lease to WE, We Power's subsidiaries would not be deemed public utilities under the Federal Power Act and thus would not be subject to the FERC's jurisdiction.

E. ENVIRONMENTAL COMPLIANCE

Our operations are subject to extensive environmental regulation by state and federal environmental agencies governing air and water quality, hazardous and solid waste management, environmental remediation, and management of natural resources. Costs associated with complying with these requirements are significant. Additional future environmental regulations or revisions to existing laws, including for example, additional regulation of GHG emissions, coal combustion products, air emissions, or wastewater discharges, could significantly increase these environmental compliance costs.

Anticipated expenditures for environmental compliance and remediation issues for the next three years are included in the estimated capital expenditures described in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Capital Requirements. For a discussion of matters related to manufactured gas plant sites and air and water quality, see Note 18, Commitments and Contingencies.

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WEC Energy Group, Inc.




F. EMPLOYEES

As of December 31, 2016, we had the following number of employees:
 
 
Total Employees
 
Number of Full-Time Employees
WE
 
3,099

 
3,021

WPS
 
1,224

 
1,169

WG
 
406

 
397

PGL
 
1,508

 
1,507

NSG
 
165

 
164

MERC
 
221

 
218

MGU
 
163

 
160

WBS
 
1,376

 
1,345

Other
 
2

 
2

Total employees
 
8,164

 
7,983



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WEC Energy Group, Inc.



As of December 31, 2016, we had employees represented under labor agreements with the following bargaining units:
 
 
Number of Employees
 
Expiration Date of Current Labor Agreement
WE
 
 
 
 
Local 2150 of International Brotherhood of Electrical Workers, AFL-CIO
 
1,667

 
August 15, 2017
Local 420 of International Union of Operating Engineers, AFL-CIO
 
458

 
September 30, 2017
Local 2006 Unit 1 of United Steel Workers of America, AFL-CIO
 
119

 
April 30, 2017
Local 510 of International Brotherhood of Electrical Workers, AFL-CIO
 
106

 
October 31, 2020
Total WE
 
2,350

 
 
 
 
 
 
 
WPS
 
 
 
 
Local 420 of International Union of Operating Engineers, AFL-CIO
 
863

 
April 16, 2021
 
 
 
 
 
WG
 
 
 
 
Local 2150 of International Brotherhood of Electrical Workers, AFL-CIO
 
85

 
August 15, 2017
Local 2006 Unit 1 of United Steel Workers of America, AFL-CIO
 
195

 
April 30, 2017
Local 2006 Unit 3 of United Steel Workers of America, AFL-CIO
 
3

 
February 28, 2018
Total WG
 
283

 
 
 
 
 
 
 
PGL
 
 
 
 
Local 18007 of Utility Workers Union of America, AFL-CIO
 
935

 
April 30, 2018
Local 18007(C) of Utility Workers Union of America, AFL-CIO *
 
80

 
July 31, 2018
Total PGL
 
1,015

 
 
 
 
 
 
 
NSG
 
 
 
 
Local 2285 of International Brotherhood of Electrical Workers, AFL-CIO
 
122

 
June 30, 2019
 
 
 
 
 
MERC
 
 
 
 
Local 31 of International Brotherhood of Electrical Workers, AFL-CIO
 
41

 
May 31, 2020
 
 
 
 
 
MGU
 
 
 
 
Local 12295 of United Steelworkers of America, AFL-CIO-CLC
 
78

 
January 15, 2020
Local 417 of Utility Workers Union of America, AFL-CIO
 
31

 
February 15, 2019
Total MGU
 
109

 
 
 
 
 
 
 
Total represented employees
 
4,783

 
 

*
In September 2016, Local 18007(C) of Utility Workers Union of America, AFL-CIO was formed under Local 18007 of the Utility Workers Union of America, AFL-CIO to add a group of customer service employees to the union.


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WEC Energy Group, Inc.



ITEM 1A. RISK FACTORS

We are subject to a variety of risks, many of which are beyond our control, that may adversely affect our business, financial condition, and results of operations. You should carefully consider the following risk factors, as well as the other information included in this report and other documents filed by us with the SEC from time to time, when making an investment decision.

Risks Related to Legislation and Regulation

Our business is significantly impacted by governmental regulation.

We are subject to significant state, local, and federal governmental regulation, including regulation by the various utility commissions in the states where we serve customers. This regulation significantly influences our operating environment and may affect our ability to recover costs from utility customers. Many aspects of our operations are regulated, including, but not limited to: the rates we charge our retail electric, natural gas, and steam customers; wholesale power service practices; electric reliability requirements and accounting; participation in the interstate natural gas pipeline capacity market; standards of service; issuance of securities; short-term debt obligations; construction and operation of facilities; transactions with affiliates; and billing practices. Our significant level of regulation imposes restrictions on our operations and causes us to incur substantial compliance costs. Failure to comply with any applicable rules or regulations may lead to customer refunds, penalties, and other payments, which could materially and adversely affect our results of operations and financial condition.

The rates, including adjustments determined under riders, we are allowed to charge our customers for retail and wholesale services have the most significant impact on our financial condition, results of operations, and liquidity. Rate regulation is based on providing an opportunity to recover prudently incurred costs and earn a reasonable rate of return on invested capital. However, our ability to obtain rate adjustments in the future is dependent on regulatory action, and there is no assurance that our regulators will consider all of our costs to have been prudently incurred. In addition, our rate proceedings may not always result in rates that fully recover our costs or provide for a reasonable ROE. We defer certain costs and revenues as regulatory assets and liabilities for future recovery or refund to customers, as authorized by our regulators. Future recovery of regulatory assets is not assured, and is subject to review and approval by our regulators. If recovery of regulatory assets is not approved or is no longer deemed probable, these costs would be recognized in current period expense and could have a material adverse impact on our results of operations, cash flows, and financial condition.

We believe we have obtained the necessary permits, approvals, authorizations, certificates, and licenses for our existing operations, have complied with all of their associated terms, and that our businesses are conducted in accordance with applicable laws. These permits, approvals, authorizations, certificates, and licenses may be revoked or modified by the agencies that granted them if facts develop that differ significantly from the facts assumed when they were issued. In addition, discharge permits and other approvals and licenses are often granted for a term that is less than the expected life of the associated facility. Licenses and permits may require periodic renewal, which may result in additional requirements being imposed by the granting agency. In addition, existing regulations may be revised or reinterpreted by federal, state, and local agencies, or these agencies may adopt new laws and regulations that apply to us. We cannot predict the impact on our business and operating results of any such actions by these agencies. Changes in regulations, interpretations of regulations, or the imposition of new regulations could influence our operating environment, may result in substantial compliance costs, or may require us to change our business operations.

If we are unable to obtain, renew, or comply with these governmental permits, approvals, authorizations, certificates, or licenses, or if we are unable to recover any increased costs of complying with additional requirements or any other associated costs in customer rates in a timely manner, our results of operations and financial condition could be materially and adversely affected.

We may face significant costs to comply with existing and future environmental laws and regulations.

Our operations are subject to numerous federal and state environmental laws and regulations. These laws and regulations govern, among other things, air emissions (including CO2, methane, mercury, SO2, and NOx), water quality, wastewater discharges, and management of hazardous, toxic, and solid wastes and substances. We incur significant costs to comply with these environmental requirements, including costs associated with the installation of pollution control equipment, environmental monitoring, emissions fees, and permits at our facilities. In addition, if we fail to comply with environmental laws and regulations, even if caused by factors beyond our control, that failure may result in the assessment of civil or criminal penalties and fines.

The EPA adopted and implemented (or is in the process of implementing) regulations governing the emission of NOx, SO2, fine particulate matter, mercury, and other air pollutants under the CAA through the NAAQS, the MATS rule, the Clean Power Plan, the

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WEC Energy Group, Inc.



CSAPR, and other air quality regulations. In addition, the EPA finalized regulations under the Clean Water Act that govern cooling water intake structures at our power plants and revised the effluent guidelines for steam electric generating plants. The EPA has also adopted a final rule that would expand traditional federal jurisdiction over navigable waters and related wetlands for permitting and other regulatory matters; however, this rule has been stayed. We continue to assess the potential cost of complying, and to explore different alternatives in order to comply, with these and other environmental regulations. In addition, as a result of the new Federal Executive Administration taking office in January 2017 and other factors, there is uncertainty as to what capital expenditures or additional costs may ultimately be required to comply with existing and future environmental laws and regulations.

Existing environmental laws and regulations may be revised or new laws or regulations may be adopted at the federal or state level that could result in significant additional expenditures for our generation units or distribution systems, including, without limitation, costs to further limit GHG emissions from our operations; operating restrictions on our facilities; and increased compliance costs. In addition, the operation of emission control equipment and compliance with rules regulating our intake and discharge of water could increase our operating costs and reduce the generating capacity of our power plants. Any such regulation may also create substantial additional costs in the form of taxes or emission allowances and could affect the availability and/or cost of fossil fuels.

As a result, certain of our coal-fired electric generating facilities may become uneconomical to maintain and operate, which could result in some of these units being retired early or converted to an alternative type of fuel. For example, we expect to retire the remaining Pulliam coal-fired units in the next several years. If generation facility owners in the Midwest, including us, retire a significant number of older coal-fired generation facilities, a potential reduction in the region's capacity reserve margin below acceptable risk levels may result. This could impair the reliability of the grid in the Midwest, particularly during peak demand periods. A reduction in available future capacity could also adversely affect our ability to serve our customers' needs.

Our electric and natural gas utilities are also subject to significant liabilities related to the investigation and remediation of environmental impacts at certain of our current and former facilities and at third-party owned sites. We accrue liabilities and defer costs (recorded as regulatory assets) incurred in connection with our former manufactured gas plant sites. These costs include all costs incurred to date that we expect to recover, management's best estimates of future costs for investigation and remediation, and related legal expenses, and are net of amounts recovered by or that may be recovered from insurance or other third parties. Due to the potential for imposition of stricter standards and greater regulation in the future, as well as the possibility that other potentially responsible parties may not be financially able to contribute to cleanup costs, conditions may change or additional contamination may be discovered, our remediation costs could increase, and the timing of our capital and/or operating expenditures in the future may accelerate or could vary from the amounts currently accrued.

In the event we are not able to recover all of our environmental expenditures and related costs from our customers in the future, our results of operations and financial condition could be adversely affected. Further, increased costs recovered through rates could contribute to reduced demand for electricity, which could adversely affect our results of operations, cash flows, and financial condition.

Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental laws and regulations, has increased generally throughout the United States. In particular, personal injury, property damage, and other claims for damages alleged to have been caused by environmental impacts and alleged exposure to hazardous materials have become more frequent. In addition to claims relating to our current facilities, we may also be subject to potential liability in connection with the environmental condition of facilities that we previously owned and operated, regardless of whether the liabilities arose before, during, or after the time we owned or operated these facilities. If we fail to comply with environmental laws and regulations or cause (or caused) harm to the environment or persons, that failure or harm may result in the assessment of civil penalties and damages against us. The incurrence of a material environmental liability or a material judgment in any action for personal injury or property damage related to environmental matters could have a significant adverse effect on our results of operations and financial condition.

We may face significant costs to comply with the regulation of greenhouse gas emissions.

Federal, state, regional, and international authorities have undertaken efforts to limit GHG emissions. In 2015, the EPA issued the Clean Power Plan, which is a final rule that regulates GHG emissions from existing generating units, as well as a proposed federal plan as an alternative to state compliance plans. The EPA also issued final performance standards for modified and reconstructed generating units, as well as for new fossil-fueled power plants. With the January 2017 change in the Federal Executive Administration, the legal and regulatory future of federal GHG regulations, including the Clean Power Plan, faces increased uncertainty. We are continuing to analyze the GHG emission profile of our electric generation resources and to work with other stakeholders to determine the potential impacts to our operations of the Clean Power Plan, any successor rule, and federal GHG

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WEC Energy Group, Inc.



regulations in general. In October 2015, numerous states (including Wisconsin and Michigan), trade associations, and private parties filed lawsuits challenging the Clean Power Plan, 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 Clean Power Plan rules 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. In addition, in February 2016, the Governor of Wisconsin issued Executive Order 186, which prohibits state agencies, departments, boards, commissions, or other state entities from developing or promoting the development of a state plan. The Clean Power Plan or its successor is not expected to result in significant additional compliance costs, including capital expenditures, but may impact how we operate our existing fossil-fueled power plants and biomass facility.

There is no guarantee that we will be allowed to fully recover costs incurred to comply with the Clean Power Plan or other federal regulations, or that cost recovery will not be delayed or otherwise conditioned. The Clean Power Plan and any other related regulations that may be adopted in the future, at either the federal or state level, may cause our environmental compliance spending to differ materially from the amounts currently estimated. In December 2016, Michigan enacted Act 342, which requires additional renewable energy requirements beyond 2015. The new legislation retains the 10% renewable energy portfolio requirement for years 2016 through 2018, increases the requirement to 12.5% for years 2019 through 2020, and increases the requirement to 15.0% for 2021. These regulations, as well as changes in the fuel markets and advances in technology, could make some of our electric generating units uneconomic to maintain or operate, and could affect unit retirement and replacement decisions. These regulations could also adversely affect our future results of operations, cash flows, and financial condition.

In addition, our natural gas delivery systems and natural gas storage fields may generate fugitive gas as a result of normal operations and as a result of excavation, construction, and repair. Fugitive gas typically vents to the atmosphere and consists primarily of methane. CO2 is also a byproduct of natural gas consumption. As a result, future regulation of GHG emissions could increase the price of natural gas, restrict the use of natural gas, and adversely affect our ability to operate our natural gas facilities. A significant increase in the price of natural gas may increase rates for our natural gas customers, which could reduce natural gas demand.

We may be negatively impacted by changes in federal income tax policy.

We are impacted by United States federal income tax policy. Both the new Federal Executive Administration and the Republicans in the House of Representatives have made public statements in support of comprehensive tax reform, including significant changes to corporate income tax laws. These proposed changes include, among other things, a reduction in the corporate income tax rate, the immediate deductibility of 100% of capital expenditures, and the elimination of the interest expense deduction. We are currently unable to predict whether these reform discussions will result in any significant changes to existing tax laws, or if any such changes would have a cumulative positive or negative impact on us. However, it is possible that changes in the United States federal income tax laws could have an adverse effect on our results of operations, financial condition, and liquidity. For example, any changes that eliminate the interest expense deduction, particularly to the extent applicable to existing indebtedness at our holding company and non-utility operations, could have a negative impact on our financial condition. In addition, the immediate deductibility of capital expenditures could have the effect of reducing growth in our regulated rate base, which could negatively impact our results of operations.

Our electric utilities could be subject to higher costs and penalties as a result of mandatory reliability standards.

Our electric utilities are subject to mandatory reliability and critical infrastructure protection standards established by the North American Electric Reliability Corporation and enforced by the FERC. The critical infrastructure protection standards focus on controlling access to critical physical and cyber security assets. Compliance with the mandatory reliability standards could subject our electric utilities to higher operating costs. If our electric utilities were ever found to be in noncompliance with the mandatory reliability standards, they could be subject to sanctions, including substantial monetary penalties.

Provisions of the Wisconsin Utility Holding Company Act limit our ability to invest in non-utility businesses and could deter takeover attempts by a potential purchaser of our common stock that would be willing to pay a premium for our common stock.

Under the Wisconsin Utility Holding Company Act, we remain subject to certain restrictions that have the potential of limiting our diversification into non-utility businesses. Under the Act, the sum of certain assets of all non-utility affiliates in a holding company system generally may not exceed 25% of the assets of all public utility affiliates in the system, subject to certain exceptions.

In addition, the Act precludes the acquisition of 10% or more of the voting shares of a holding company of a Wisconsin public utility unless the PSCW has first determined that the acquisition is in the best interests of utility customers, investors, and the public. This

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WEC Energy Group, Inc.



provision and other requirements of the Act may delay or reduce the likelihood of a sale or change of control of WEC Energy Group. As a result, stockholders may be deprived of opportunities to sell some or all of their shares of our common stock at prices that represent a premium over market prices.

Risks Related to the Operation of Our Business

Our operations are subject to risks arising from the reliability of our electric generation, transmission, and distribution facilities, natural gas infrastructure facilities, and other facilities, as well as the reliability of third-party transmission providers.

Our financial performance depends on the successful operation of our electric generation and natural gas and electric distribution facilities. The operation of these facilities involves many risks, including operator error and the breakdown or failure of equipment or processes. Potential breakdown or failure may occur due to severe weather; catastrophic events (i.e., fires, earthquakes, explosions, tornadoes, floods, droughts, pandemic health events, etc.); significant changes in water levels in waterways; fuel supply or transportation disruptions; accidents; employee labor disputes; construction delays or cost overruns; shortages of or delays in obtaining equipment, material, and/or labor; performance below expected levels; operating limitations that may be imposed by environmental or other regulatory requirements; terrorist attacks; or cyber security intrusions. Any of these events could lead to substantial financial losses.

Because our electric generation facilities are interconnected with third-party transmission facilities, the operation of our facilities could also be adversely affected by events impacting their systems. Unplanned outages at our power plants may reduce our revenues or cause us to incur significant costs if we are required to operate our higher cost electric generators or purchase replacement power to satisfy our obligations, and could result in additional maintenance expenses.

Insurance, warranties, performance guarantees, or recovery through the regulatory process may not cover any or all of these lost revenues or increased expenses, which could adversely affect our results of operations and cash flows.

Our operations are subject to various conditions that can result in fluctuations in energy sales to customers, including customer growth and general economic conditions in our service areas, varying weather conditions, and energy conservation efforts.

Our results of operations and cash flows are affected by the demand for electricity and natural gas, which can vary greatly based upon:

Fluctuations in customer growth and general economic conditions in our service areas. Customer growth and energy use can be negatively impacted by population declines as well as economic factors in our service territories, including job losses, decreases in income, and business closings. Our electric and natural gas utilities are impacted by economic cycles and the competitiveness of the commercial and industrial customers we serve. Any economic downturn or disruption of financial markets could adversely affect the financial condition of our customers and demand for their products. These risks could directly influence the demand for electricity and natural gas as well as the need for additional power generation and generating facilities. We could also be exposed to greater risks of accounts receivable write-offs if customers are unable to pay their bills.
Weather conditions. Demand for electricity is greater in the summer and winter months associated with cooling and heating. In addition, demand for natural gas peaks in the winter heating season. As a result, our overall results may fluctuate substantially on a seasonal basis. In addition, milder temperatures during the summer cooling season and during the winter heating season may result in lower revenues and net income.
Our customers' continued focus on energy conservation and ability to meet their own energy needs. Our customers' use of electricity and natural gas has decreased as a result of individual conservation efforts, including the use of more energy efficient technologies. These conservation efforts could continue. Customers could also voluntarily reduce their consumption of energy in response to decreases in their disposable income and increases in energy prices. Conservation of energy can be influenced by certain federal and state programs that are intended to influence how consumers use energy. In addition, several states, including Wisconsin and Michigan, have adopted energy efficiency targets to reduce energy consumption by certain dates.

As part of our planning process, we estimate the impacts of changes in customer growth and general economic conditions, weather, and customer energy conservation efforts, but risks still remain. Any of these matters, as well as any regulatory delay in adjusting rates as a result of reduced sales from effective conservation measures or the adoption of new technologies, could adversely impact our results of operations and financial condition.


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We are actively involved with several significant capital projects, which are subject to a number of risks and uncertainties that could adversely affect project costs and completion of construction projects.

Our business requires substantial capital expenditures for investments in, among other things, capital improvements to our electric generating facilities, electric and natural gas distribution infrastructure, natural gas storage, and other projects, including projects for environmental compliance. In addition, WBS has various capital projects that are primarily related to the development of software applications used to support our utilities.

Achieving the intended benefits of any large construction project is subject to many uncertainties, some of which we will have limited or no control over, that could adversely affect project costs and completion time. These risks include, but are not limited to, the ability to adhere to established budgets and time frames; the availability of labor or materials at estimated costs; the ability of contractors to perform under their contracts; strikes; adverse weather conditions; potential legal challenges; changes in applicable laws or regulations; other governmental actions; continued public and policymaker support for such projects; and events in the global economy. In addition, certain of these projects require the approval of our regulators. If construction of commission-approved projects should materially and adversely deviate from the schedules, estimates, and projections on which the approval was based, our regulators may deem the additional capital costs as imprudent and disallow recovery of them through rates.

To the extent that delays occur, costs become unrecoverable, or we otherwise become unable to effectively manage and complete our capital projects, our results of operations, cash flows, and financial condition may be adversely affected.

Advances in technology could make our electric generating facilities less competitive.

Research and development activities are ongoing for new technologies that produce power or reduce power consumption. These technologies include renewable energy, customer-oriented generation, energy storage, and energy efficiency. We generate power at central station power plants to achieve economies of scale and produce power at a competitive cost. There are distributed generation technologies that produce power, including fuel cells, microturbines, wind turbines, and solar cells, which have become more cost competitive. It is possible that legislation or regulations could be adopted supporting the use of these technologies. There is also a risk that advances in technology will continue to reduce the costs of these alternative methods of producing power to a level that is competitive with that of central station power production. If these technologies become cost competitive and achieve economies of scale, our market share could be eroded, and the value of our generating facilities could be reduced. Advances in technology could also change the channels through which our electric customers purchase or use power, which could reduce our sales and revenues or increase our expenses.

Our operations are subject to risks beyond our control, including but not limited to, cyber security intrusions, terrorist attacks, acts of war, or unauthorized access to personally identifiable information.

We face the risk of terrorist attacks and cyber intrusions, both threatened and actual, against our generation facilities, electric and natural gas distribution infrastructure, our information and technology systems, and network infrastructure, including that of third parties on which we rely, any of which could result in a full or partial disruption of our ability to generate, transmit, purchase, or distribute electricity or natural gas or cause environmental repercussions. Any operational disruption or environmental repercussions could result in a significant decrease in our revenues or significant reconstruction or remediation costs, which could materially and adversely affect our results of operations, financial condition, and cash flows.

We operate in an industry that requires the use of sophisticated information technology systems and network infrastructure, which control an interconnected system of generation, distribution, and transmission systems shared with third parties. A successful physical or cyber security intrusion may occur despite our security measures or those that we require our vendors to take, which include compliance with reliability standards and critical infrastructure protection standards. Successful cyber security intrusions, including those targeting the electronic control systems used at our generating facilities and electric and natural gas transmission, distribution, and storage systems, could disrupt our operations and result in loss of service to customers. These intrusions may cause unplanned outages at our power plants, which may reduce our revenues or cause us to incur significant costs if we are required to operate our higher cost electric generators or purchase replacement power to satisfy our obligations, and could result in additional maintenance expenses. The risk of such intrusions may also increase our capital and operating costs as a result of having to implement increased security measures for protection of our information technology and infrastructure.

We face on-going threats to our assets and technology systems. Despite the implementation of strong security measures, all assets and systems are potentially vulnerable to disability, failures, or unauthorized access due to human error or physical or cyber security

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WEC Energy Group, Inc.



intrusions. If our assets or systems were to fail, be physically damaged, or be breached and were not recovered in a timely manner, we may be unable to perform critical business functions, and sensitive and other data could be compromised.

Our business requires the collection and retention of personally identifiable information of our customers, stockholders, and employees, who expect that we will adequately protect such information. Security breaches may expose us to a risk of loss or misuse of confidential and proprietary information. A significant theft, loss, or fraudulent use of personally identifiable information may lead to potentially large costs to notify and protect the impacted persons, and/or could cause us to become subject to significant litigation, costs, liability, fines, or penalties, any of which could materially and adversely impact our results of operations as well as our reputation with customers, stockholders and regulators, among others. In addition, we may be required to incur significant costs associated with governmental actions in response to such intrusions or to strengthen our information and electronic control systems. We may also need to obtain additional insurance coverage related to the threat of such intrusions.

The costs of repairing damage to our facilities, protecting personally identifiable information, and notifying impacted persons, as well as related legal claims, may not be recoverable in rates, may exceed the insurance limits on our insurance policies, or, in some cases, may not be covered by insurance.

Transporting, distributing, and storing natural gas involves numerous risks that may result in accidents and other operating risks and costs.

Inherent in natural gas distribution activities are a variety of hazards and operational risks, such as leaks, accidental explosions, including third party damages, and mechanical problems, which could materially and adversely affect our results of operations, financial condition, and cash flows. In addition, these risks could result in serious injury to employees and non-employees, loss of human life, significant damage to property, environmental pollution, impairment of operations, and substantial losses to us. The location of natural gas pipelines and storage facilities near populated areas, including residential areas, commercial business centers, and industrial sites, could increase the level of damages resulting from these risks. These activities may subject us to litigation or administrative proceedings from time to time, which could result in substantial monetary judgments, fines, or penalties against us, or be resolved on unfavorable terms.

We are a holding company and rely on the earnings of our subsidiaries to meet our financial obligations.

As a holding company with no operations of our own, our ability to meet our financial obligations and pay dividends on our common stock is dependent upon the ability of our subsidiaries to pay amounts to us, whether through dividends or other payments. Our subsidiaries are separate legal entities that have no obligation to pay any of our obligations or to make any funds available for that purpose or for the payment of dividends on our common stock. The ability of our subsidiaries to pay amounts to us depends on their earnings, cash flows, capital requirements, and general financial condition, as well as regulatory limitations. Prior to distributing cash to us, our subsidiaries have financial obligations that must be satisfied, including, among others, debt service and preferred stock dividends. In addition, each subsidiary's ability to pay amounts to us depends on any statutory, regulatory, and/or contractual restrictions and limitations applicable to such subsidiary, which may include requirements to maintain specified levels of debt or equity ratios, working capital, or other assets. Our utility subsidiaries are regulated by various state utility commissions, which generally possess broad powers to ensure that the needs of the utility customers are being met.

We may fail to attract and retain an appropriately qualified workforce.

We operate in an industry that requires many of our employees to possess unique technical skill sets. Events such as an aging workforce without appropriate replacements, the mismatch of skill sets to future needs, or the unavailability of contract resources may lead to operating challenges or increased costs. These operating challenges include lack of resources, loss of knowledge, and a lengthy time period associated with skill development. In addition, current and prospective employees may determine that they do not wish to work for us. Failure to hire and obtain replacement employees, including the ability to transfer significant internal historical knowledge and expertise to the new employees, may adversely affect our ability to manage and operate our business. If we are unable to successfully attract and retain an appropriately qualified workforce, our results of operations could be adversely affected.

Failure of our counterparties to meet their obligations, including obligations under power purchase agreements, could have an adverse impact on our results of operations.

We are exposed to the risk that counterparties to various arrangements who owe us money, electricity, natural gas, or other commodities or services will not be able to perform their obligations. Should the counterparties to these arrangements fail to

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perform, we may be required to replace the underlying commitment at current market prices or we may be unable to meet all of our customers' electric and natural gas requirements unless or until alternative supply arrangements are put in place. In such event, we may incur losses, and our results of operations, financial position, or liquidity could be adversely affected.

We have entered into several power purchase agreements with non-affiliated companies, and continue to look for additional opportunities to enter into these agreements. Revenues are dependent on the continued performance by the purchasers of their obligations under the power purchase agreements. Although we have a comprehensive credit evaluation process and contractual protections, it is possible that one or more purchasers could fail to perform their obligations under the power purchase agreements. If this were to occur, we would expect that any operating and other costs that were initially allocated to a defaulting customer's power purchase agreement would be reallocated among our retail customers. To the extent there is any regulatory delay in adjusting rates, a customer default under a power purchase agreement could have a negative impact on our results of operations and cash flows.

We may not be able to use tax credits, net operating losses, and/or charitable contribution carryforwards.

We have significantly reduced our consolidated federal and state income tax liability in the past through tax credits, net operating losses, and charitable contribution deductions available under the applicable tax codes. We have not fully used the allowed tax credits, net operating losses, and charitable contribution deductions in our previous tax filings. We may not be able to fully use the tax credits, net operating losses, and charitable contribution deductions available as carryforwards if our future federal and state taxable income and related income tax liability is insufficient to permit their use. In addition, any future disallowance of some or all of those tax credits, net operating losses, or charitable contribution carryforwards as a result of legislation or an adverse determination by one of the applicable taxing jurisdictions could materially affect our tax obligations and financial results.

The acquisition of Integrys may not achieve its anticipated results, and we may be unable to integrate operations as expected.
 
The Merger Agreement was entered into with the expectation that the acquisition would result in various benefits, including, among other things, cost savings and operating efficiencies. Achieving the anticipated benefits of the acquisition is subject to a number of uncertainties, including whether the businesses of the two companies can continue to be integrated in an efficient, effective, and timely manner.

It is possible that the remaining integration efforts could take longer and be more costly than anticipated, and could result in the loss of valuable employees; the disruption of ongoing businesses, processes, and systems; or inconsistencies in standards, controls, procedures, practices, policies, and compensation arrangements, any of which could adversely affect our ability to achieve the anticipated benefits of the transaction as and when expected. Although we expect that the elimination of certain duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses of the two companies, will offset the incremental transaction-related costs over time, we may not achieve this net benefit in the near term, or at all. Failure to achieve the anticipated benefits of the acquisition could result in increased costs or decreases in the amount of expected revenues and could adversely affect our future business, financial condition, operating results, and prospects.

We have recorded goodwill that could become impaired and adversely affect financial results.

We assess goodwill for impairment on an annual basis or whenever events or circumstances occur that would indicate a potential for impairment. If goodwill is deemed to be impaired, we may be required to incur material non-cash charges that could materially adversely affect our results of operations.

Risks Related to Economic and Market Volatility

Our business is dependent on our ability to successfully access capital markets.

We rely on access to credit and capital markets to support our capital requirements, including expenditures for our utility infrastructure and to comply with future regulatory requirements, to the extent not satisfied by the cash flow generated by our operations. We have historically secured funds from a variety of sources, including the issuance of short-term and long-term debt securities. Successful implementation of our long-term business strategies, including capital investment, is dependent upon our ability to access the capital markets, including the banking and commercial paper markets, on competitive terms and rates. In addition, we rely on committed bank credit agreements as back-up liquidity, which allows us to access the low cost commercial paper markets.


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Our or our subsidiaries' access to the credit and capital markets could be limited, or our or our subsidiaries' cost of capital significantly increased, due to any of the following risks and uncertainties:

A rating downgrade;
An economic downturn or uncertainty;
Prevailing market conditions and rules;
Concerns over foreign economic conditions;
Changes in tax policy;
War or the threat of war; and
The overall health and view of the utility and financial institution industries.

If any of these risks or uncertainties limit our access to the credit and capital markets or significantly increase our cost of capital, it could limit our ability to implement, or increase the costs of implementing, our business plan, which, in turn, could materially and adversely affect our results of operations, cash flows, and financial condition, and could limit our ability to sustain our current common stock dividend level.

A downgrade in our or any of our subsidiaries' credit ratings could negatively affect our or our subsidiaries' ability to access capital at reasonable costs and/or require the posting of collateral.

There are a number of factors that impact our and our subsidiaries' credit ratings, including, but not limited to, capital structure, regulatory environment, the ability to cover liquidity requirements, and other requirements for capital. We or any of our subsidiaries could experience a downgrade in ratings if the rating agencies determine that the level of business or financial risk of us, our utilities, or the utility industry has deteriorated. Changes in rating methodologies by the rating agencies could also have a negative impact on credit ratings.

Any downgrade by the rating agencies could:

Increase borrowing costs under certain existing credit facilities;
Require the payment of higher interest rates in future financings and possibly reduce the pool of creditors;
Decrease funding sources by limiting our or our subsidiaries' access to the commercial paper market;
Limit the availability of adequate credit support for our subsidiaries' operations; and
Trigger collateral requirements in various contracts.

Fluctuating commodity prices could negatively impact our electric and natural gas utility operations.

Our operating and liquidity requirements are impacted by changes in the forward and current market prices of natural gas, coal, electricity, renewable energy credits, and ancillary services.

Our electric utilities burn natural gas in several of their electric generation plants and as a supplemental fuel at several coal-fired plants. In many instances the cost of purchased power is tied to the cost of natural gas. The cost of natural gas may increase because of disruptions in the supply of natural gas due to a curtailment in production or distribution, international market conditions, the demand for natural gas, and the availability of shale gas and potential regulations affecting its accessibility.

For Wisconsin retail electric customers, our utilities bear the risk for the recovery of fuel and purchased power costs within a symmetrical 2% fuel tolerance band compared to the forecast of fuel and purchased power costs established in their respective rate structures. Our natural gas utilities receive dollar-for-dollar recovery of prudently incurred natural gas costs.

Changes in commodity prices could result in:

Higher working capital requirements, particularly related to natural gas inventory, accounts receivable, and cash collateral postings;
Reduced profitability to the extent that lower revenues, increased bad debt, and interest expense are not recovered through rates;
Higher rates charged to our customers, which could impact our competitive position;
Reduced demand for energy, which could impact revenues and operating expenses; and
Shutting down of generation facilities if the cost of generation exceeds the market price for electricity.


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We may not be able to obtain an adequate supply of coal, which could limit our ability to operate our coal-fired facilities and engage in opportunity sales.

We are dependent on coal for much of our electric generating capacity. Although we generally carry sufficient coal inventory at our generating facilities to protect against an interruption or decline in supply, there can be no assurance that the inventory levels will be adequate. While we have coal supply and transportation contracts in place, we cannot assure that the counterparties to these agreements will be able to fulfill their obligations to supply coal to us or that we will be able to take delivery of all the coal volume contracted for. The suppliers under these agreements may experience financial or operational problems that inhibit their ability to fulfill their obligations to us, or we may experience operational problems or constraints that prevent us from taking delivery. In addition, suppliers under these agreements may not be required to supply coal to us under certain circumstances, such as in the event of a natural disaster. Furthermore, demand for coal can impact its availability and cost. If we are unable to obtain our coal requirements under our coal supply and transportation contracts, we may be required to purchase coal at higher prices or we may be forced to reduce generation at our coal-fired units and replace this lost generation through additional power purchases in the MISO Energy Markets. There is no guarantee that we would be able to fully recover any increased costs in rates or that recovery would not otherwise be delayed, either of which could adversely affect our cash flows.

Our electric generation frequently exceeds our customer load. When this occurs, we generally sell the excess generation into the MISO Energy Markets. If we do not have an adequate supply of coal for our coal-fired units or are unable to run our lower cost units, we may lose the ability to engage in these opportunity sales, which may adversely affect our results of operations.

The use of derivative contracts could result in financial losses.

We use derivative instruments such as swaps, options, futures, and forwards to manage commodity price exposure. We could recognize financial losses as a result of volatility in the market value of these contracts or if a counterparty fails to perform. These risks are managed through risk management policies, which might not work as planned and cannot entirely eliminate the risks associated with these activities. In addition, although the hedging programs of our utilities must be approved by the various state commissions, derivative contracts entered into for hedging purposes might not offset the underlying exposure being hedged as expected, resulting in financial losses. In the absence of actively quoted market prices and pricing information from external sources, the value of these financial instruments can involve management's judgment or use of estimates. Changes in the underlying assumptions or use of alternative valuation methods could affect the reported fair value of these contracts.

Restructuring in the regulated energy industry and competition in the retail and wholesale markets could have a negative impact on our business and revenues.

The regulated energy industry continues to experience significant structural changes. Increased competition in the retail and wholesale markets, which may result from restructuring efforts, could have a significant adverse financial impact on us.

Certain jurisdictions in which we operate, including Michigan and Illinois, have adopted retail choice. Under Michigan law, our retail customers may choose an alternative electric supplier to provide power supply service. The law limits customer choice to 10% of our Michigan retail load. The iron ore mine located in the Upper Peninsula of Michigan is excluded from this cap. When a customer switches to an alternative electric supplier, we continue to provide distribution and customer service functions for the customer. Although Illinois has adopted retail choice, there is currently little or no impact on the net income of our Illinois utilities as they still earn a distribution charge for transporting the natural gas for these customers. It is uncertain whether retail choice might be implemented in Wisconsin or Minnesota.

The FERC continues to support the existing RTOs that affect the structure of the wholesale market within these RTOs. In connection with its status as a FERC approved RTO, MISO implemented bid-based energy markets that are part of the MISO Energy Markets. The MISO Energy Markets rules require that all market participants submit day-ahead and/or real-time bids and offers for energy at locations across the MISO region. MISO then calculates the most efficient solution for all of the bids and offers made into the market that day and establishes an LMP that reflects the market price for energy. As a participant in the MISO Energy Markets, we are required to follow MISO's instructions when dispatching generating units to support MISO's responsibility for maintaining stability of the transmission system. MISO also implemented an ancillary services market for operating reserves that schedules energy and ancillary services at the same time as part of the energy market, allowing for more efficient use of generation assets in the MISO market. These market designs continue to have the potential to increase the costs of transmission, the costs associated with inefficient generation dispatching, the costs of participation in the MISO Energy Markets, and the costs associated with estimated payment settlements.


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The FERC rules related to transmission are designed to facilitate competition in the wholesale electricity markets among regulated utilities, non-utility generators, wholesale power marketers, and brokers by providing greater flexibility and more choices to wholesale customers, including initiatives designed to encourage the integration of renewable sources of supply. In addition, along with transactions contemplating physical delivery of energy, financial laws and regulations impact hedging and trading based on futures contracts and derivatives that are traded on various commodities exchanges, as well as over-the-counter. Technology changes in the power and fuel industries also have significant impacts on wholesale transactions and related costs. We currently cannot predict the impact of these and other developments or the effect of changes in levels of wholesale supply and demand, which are driven by factors beyond our control.

We may experience poor investment performance of benefit plan holdings due to changes in assumptions and market conditions.

We have significant obligations related to pension and OPEB plans. If we are unable to successfully manage our benefit plan assets and medical costs, our cash flows, financial condition, or results of operations could be adversely impacted.

Our cost of providing these plans is dependent upon a number of factors, including actual plan experience, changes made to the plans, and assumptions concerning the future. Types of assumptions include earnings on plan assets, discount rates, the level of interest rates used to measure the required minimum funding levels of the plans, future government regulation, estimated withdrawals by retirees, and our required or voluntary contributions to the plans. Plan assets are subject to market fluctuations and may yield returns that fall below projected return rates. In addition, medical costs for both active and retired employees may increase at a rate that is significantly higher than we currently anticipate. Our funding requirements could be impacted by a decline in the market value of plan assets, changes in interest rates, changes in demographics (including the number of retirements), or changes in life expectancy assumptions.

We may be unable to obtain insurance on acceptable terms or at all, and the insurance coverage we do obtain may not provide protection against all significant losses.

Our ability to obtain insurance, as well as the cost and coverage of such insurance, could be affected by developments affecting our business; international, national, state, or local events; and the financial condition of insurers. Insurance coverage may not continue to be available at all or at rates or terms similar to those presently available to us. In addition, our insurance may not be sufficient or effective under all circumstances and against all hazards or liabilities to which we may be subject. Any losses for which we are not fully insured or that are not covered by insurance at all could materially adversely affect our results of operations, cash flows, and financial position.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.


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ITEM 2. PROPERTIES

We own our principal properties outright, except the major portion of our electric utility distribution lines, steam utility distribution mains, and natural gas utility distribution mains and services are located, for the most part, on or under streets and highways, and on land owned by others and are generally subject to granted easements, consents, or permits.

A. REGULATED

Electric Facilities

The following table summarizes information on our electric generation facilities, including owned and jointly owned facilities, as of December 31, 2016:
Name
 
Location
 
Fuel
 
Number of Generating Units
 
Rated Capacity In MW (1)
 
Coal-fired plants
 
 
 
 
 
 
 
 
 
Columbia
 
Portage, WI
 
Coal
 
2

 
334

(2) 
Edgewater
 
Sheboygan, WI
 
Coal
 
1

 
98

(2) 
ERGS
 
Oak Creek, WI
 
Coal
 
2

 
1,057

(3) 
Pleasant Prairie
 
Pleasant Prairie, WI
 
Coal
 
2

 
1,188

(4) 
PIPP
 
Marquette, MI
 
Coal
 
5

 
344

 
Pulliam
 
Green Bay, WI
 
Coal
 
2

 
211

 
OCPP
 
Oak Creek, WI
 
Coal
 
4

 
993

 
Weston
 
Rothschild, WI
 
Coal
 
2

 
708

(2) 
Total coal-fired plants
 
 
 
 
 
20

 
4,933

 
Natural gas-fired plants
 
 
 
 
 
 
 
 
 
Concord Combustion Turbines
 
Watertown, WI
 
Natural Gas/Oil
 
4

 
352

 
De Pere Energy Center
 
De Pere, WI
 
Natural Gas/Oil
 
1

 
170

 
Fox Energy Center
 
Wrightstown, WI
 
Natural Gas
 
3

 
557

 
Germantown Combustion Turbines
 
Germantown, WI
 
Natural Gas/Oil
 
5

 
258

 
Paris Combustion Turbines
 
Union Grove, WI
 
Natural Gas/Oil
 
4

 
352

 
PWGS
 
Port Washington, WI
 
Natural Gas
 
2

 
1,140

 
Pulliam
 
Green Bay, WI
 
Natural Gas/Oil
 
1

 
81

 
VAPP
 
Milwaukee, WI
 
Natural Gas
 
2

 
240

 
West Marinette
 
Marinette, WI
 
Natural Gas/Oil
 
3

 
149

 
Weston
 
Rothschild, WI
 
Natural Gas/Oil
 
3

 
131

 
Total natural gas-fired plants
 
 
 
 
 
28

 
3,430

 
Renewables
 
 
 
 
 
 
 
 
 
Hydro Plants (30 in number)
 
WI and MI
 
Hydro
 
81

 
150

(5) 
Rothschild Biomass Plant
 
Rothschild, WI
 
Biomass
 
1

 
50

 
Blue Sky Green Field
 
Fond du Lac, WI
 
Wind
 
88

 
21

 
Byron Wind Turbines
 
Fond du Lac, WI
 
Wind
 
2

 

 
Crane Creek
 
Howard County, IA
 
Wind
 
66

 
21

 
Glacier Hills
 
Cambria, WI
 
Wind
 
90

 
28

 
Lincoln
 
Kewaunee County, WI
 
Wind
 
14

 
1

 
Montfort Wind Energy Center
 
Montfort, WI
 
Wind
 
20

 
2

 
Total renewables
 
 
 
 
 
362

 
273

 
Total system
 
 
 
 
 
410

 
8,636

 

(1) 
Based on expected capacity ratings for summer 2017, which can differ from nameplate capacity, especially on wind projects. The summer period is the most relevant for capacity planning purposes. This is a result of continually reaching demand peaks in the summer months, primarily due to air conditioning demand.

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(2) 
These facilities are jointly owned by WPS and various other utilities. The capacity indicated for each of these units is equal to WPS's portion of total plant capacity based on its percent of ownership.

Wisconsin Power and Light Company, an unaffiliated utility, operates the Columbia and Edgewater units. WPS holds a 31.8% ownership interest in these facilities. See Note 8, Jointly Owned Facilities, for more information on an impending decrease in WPS's ownership interest in the Columbia unit.
WPS operates the Weston 4 facility and holds a 70.0% ownership interest in this facility. Dairyland Power Cooperative holds the remaining 30.0% interest.

(3) 
This facility is jointly owned by We Power and various other utilities. The capacity indicated for the facility is equal to We Power's portion of total plant capacity based on its 83.34% ownership.

(4) 
Starting in 2017, Pleasant Prairie Power Plant will be placed into economic reserve during months of traditionally lower electric demand. From March through May and from September through November, the units will be on economic reserve.

(5)  
WRPC owns and operates the Castle Rock and Petenwell units. WPS holds a 50.0% ownership interest in WRPC and is entitled to 50.0% of the total capacity at Castle Rock and Petenwell. WPS's share of capacity for Castle Rock is 8.6 MWs, and WPS's share of capacity for Petenwell is 10.2 MWs.

As of December 31, 2016, we operated approximately 37,400 pole-miles of overhead distribution lines and 31,200 miles of underground distribution cable, as well as approximately 500 distribution substations and 492,770 line transformers.

Natural Gas Facilities

At December 31, 2016, our natural gas properties were located in Illinois, Wisconsin, Minnesota, and Michigan, and consisted of the following:

Approximately 45,600 miles of natural gas distribution mains,
Approximately 1,100 miles of natural gas transmission mains,
Approximately 2.3 million natural gas lateral services,
Approximately 500 natural gas distribution and transmission gate stations,
A 2.9 billion-cubic-foot underground natural gas storage field located in Michigan,
A 38.3 billion-cubic-foot underground natural gas storage field located in central Illinois,
A 2.0 billion-cubic-foot liquefied natural gas plant located in central Illinois,
A peak-shaving facility that can store the equivalent of approximately 80 MDth in liquefied petroleum gas located in Illinois,
Peak propane air systems providing approximately 2,960 Dth per day, and
Liquefied natural gas storage plants with a total send-out capability of 73,600 Dth per day.

Our natural gas distribution system included distribution mains and transmission mains connected to the pipeline transmission systems of ANR Pipeline Company, Guardian Pipeline L.L.C., Natural Gas Pipeline Company of America, Northern Natural Pipeline Company, Great Lakes Transmission Company, Viking Gas Transmission, and Michigan Consolidated Gas Company. Our liquefied natural gas storage plants convert and store, in liquefied form, natural gas received during periods of low consumption.

PGL owns and operates a reservoir in central Illinois (Manlove Field), and a natural gas pipeline system that connects Manlove Field to Chicago with eight major interstate pipelines. The underground storage reservoir also serves NSG under a contractual arrangement. PGL uses its natural gas storage and pipeline assets as a natural gas hub in the Chicago area.

We also own office buildings, natural gas regulating and metering stations, and major service centers, including garage and warehouse facilities, in certain communities we serve. Where distribution lines and services, and natural gas distribution mains and services occupy private property, we have in some, but not all instances, obtained consents, permits, or easements for these installations from the apparent owners or those in possession of those properties, generally without an examination of ownership records or title.


2016 Form 10-K
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WEC Energy Group, Inc.



Steam Facilities

As of December 31, 2016, the steam system supplied by the VAPP consisted of approximately 40 miles of both high pressure and low pressure steam piping, approximately four miles of walkable tunnels, and other pressure regulating equipment.

General

Substantially all of PGL's and NSG's properties are subject to the lien of the respective company's mortgage indenture for the benefit of bondholders.

B. CORPORATE AND OTHER

As of December 31, 2016, the corporate and other segment facilities consisted of energy asset facilities owned by PDL.

The energy asset facilities owned by PDL include a portfolio of residential solar facilities and a portfolio of commercial and industrial solar facilities. The solar facilities consist of distributed solar projects ranging from small residential roof top systems up to commercial and industrial solar systems of 4.5 MWs in size. The total capacity of these solar projects is 27.6 MWs. The majority of the solar facilities are wholly owned by subsidiaries of PDL while one is jointly owned by PDL and Duke Energy Generation Services. PDL's portion of the jointly owned solar capacity is 0.4 MWs.

ITEM 3. LEGAL PROCEEDINGS

The following should be read in conjunction with Note 18, Commitments and Contingencies, and Note 22, Regulatory Environment, in this report for additional information on material legal proceedings and matters related to us and our subsidiaries.

In addition to those legal proceedings discussed 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 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.

Environmental Matters

Sheboygan River Matter

We were contacted by the United States Department of Justice in March 2016 to commence discussions between WPS and the federal natural resource trustees to resolve WPS's alleged liability for natural resources damages (NRD) in the Sheboygan River related to the former Camp Marina manufactured gas plant site. WPS was originally notified about this claim in September 2012, but the WDNR chose not to be a party to the NRD claim negotiation in February 2014. However, the National Oceanic and Atmospheric Administration has co-equal trusteeship with the WDNR over the impacted Sheboygan River natural resources and is now pursuing the NRD claim. Substantial remediation of the uplands at the legacy Sheboygan Camp Marina manufactured gas plant site has already occurred. We received a proposed settlement offer in December 2016 from the Department of Justice, and the terms of the settlement offer, if accepted, will not have a material impact on our financial statements. 

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.


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WEC Energy Group, Inc.



EXECUTIVE OFFICERS OF THE REGISTRANT

The names, ages, and positions of our executive officers at December 31, 2016 are listed below along with their business experience during the past five years. All officers are appointed until they resign, die, or are removed pursuant to our Bylaws. There are no family relationships among these officers, nor is there any agreement or understanding between any officer and any other person pursuant to which the officer was selected.

Allen L. Leverett.   Age 50.
WEC Energy Group — Chief Executive Officer since May 2016. Director since January 2016. President since August 2013. Executive Vice President from May 2004 to July 2013. Chief Financial Officer from July 2003 to February 2011.
WE — Chairman of the Board and Chief Executive Officer since May 2016. Director since June 2015. President from June 2015 to May 2016. Executive Vice President from May 2004 to June 2015. Chief Financial Officer from July 2003 to February 2011.

J. Kevin Fletcher.   Age 58.
WE — President since May 2016. Director since June 2015. Executive Vice President - Customer Service and Operations from June 2015 to April 2016. Senior Vice President - Customer Operations from October 2011 to June 2015.

Robert M. Garvin.   Age 50.
WEC Energy Group — Executive Vice President - External Affairs since June 2015. Senior Vice President - External Affairs from April 2011 to June 2015.