EMPLOYEE BENEFITS

Pension and Other Postretirement Employee Benefits

We and our subsidiaries have defined benefit pension plans that cover substantially all of our employees, as well as several unfunded non-qualified retirement plans. In addition, we and our subsidiaries offer multiple OPEB plans to employees. The benefits for a portion of these plans are funded through irrevocable trusts, as allowed for income tax purposes. We also offer medical, dental, and life insurance benefits to active employees and their dependents. We expense the costs of these benefits as incurred.

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

For former Integrys employees, the defined benefit pension plans are closed to all new hires. In addition, the service accruals for the defined benefit pension plans were frozen for non-union employees as of January 1, 2013. These employees receive an annual company contribution to their 401(k) savings plan, which is calculated based on age, wages, and full years of vesting service as of December 31 each year.

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

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



	Pension Costs						OPEB Costs
(in millions)	2018			2017			2018			2017
Change in benefit obligation
Obligation at January 1	$	3,163.7		$	3,058.8		$	818.5		$	818.4
Service cost	47.1			44.6			23.7			24.1
Interest cost	114.3			121.8			29.9			32.9
Participant contributions	—			—			15.5			13.4
Plan amendments	—			—			(3.5		)	(36.4		)
Actuarial loss (gain)	(171.8		)	162.6			(222.6		)	12.9
Benefit payments	(226.1		)	(224.1		)	(55.4		)	(48.8		)
Federal subsidy on benefits paid	N/A			N/A			1.0			2.0
Transfer	—			—			1.1			—
Obligation at December 31	$	2,927.2		$	3,163.7		$	608.2		$	818.5

Change in fair value of plan assets
Fair value at January 1	$	2,966.8		$	2,709.2		$	841.5		$	773.5
Actual return on plan assets	(122.2		)	368.7			(35.2		)	95.9
Employer contributions	72.3			113.0			5.3			7.5
Participant contributions	—			—			15.5			13.4
Benefit payments	(226.1		)	(224.1		)	(55.4		)	(48.8		)
Fair value at December 31	$	2,690.8		$	2,966.8		$	771.7		$	841.5
Funded status at December 31	$	(236.4	)	$	(196.9	)	$	163.5		$	23.0

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



	Pension Costs						OPEB Costs
(in millions)	2018			2017			2018		2017
Other long-term assets	$	139.1		$	143.0		$	210.8	$	80.5
Pension and OPEB obligations	375.5			339.9			47.3		57.5
Total net (liabilities) assets	$	(236.4	)	$	(196.9	)	$	163.5	$	23.0

The accumulated benefit obligation for all defined benefit pension plans was $2,804.9 million and $3,057.7 million as of December 31, 2018 and 2017, respectively.

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



(in millions)	2018		2017
Projected benefit obligation	$	1,930.8	$	679.5
Accumulated benefit obligation	1,882.2		630.3
Fair value of plan assets	1,572.7		339.6

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



	Pension Costs				OPEB Costs
(in millions)	2018		2017		2018			2017
Pre-tax accumulated other comprehensive loss (income) ⁽¹⁾
Net actuarial loss (gain)	$	14.5	$	10.0	$	(1.6	)	$	(1.0	)
Prior service credits	—		—		(0.1		)	(0.1		)
Total	$	14.5	$	10.0	$	(1.7	)	$	(1.1	)

Net regulatory assets (liabilities) ⁽²⁾
Net actuarial loss (gain)	$	1,184.1	$	1,136.8	$	(133.0	)	$	(4.7	)
Prior service costs (credits)	4.9		7.5		(100.0		)	(111.8		)
Total	$	1,189.0	$	1,144.3	$	(233.0	)	$	(116.5	)


⁽¹⁾	Amounts related to the nonregulated entities are included in accumulated other comprehensive loss (income).


⁽²⁾	Amounts related to the utilities and WBS are recorded as net regulatory assets or liabilities.

The following table shows the estimated amounts that will be amortized into net periodic benefit cost during 2019:



(in millions)	Pension Costs		OPEB Costs
Net actuarial loss (gain)	$	76.1	$	(5.7	)
Prior service costs (credits)	2.2		(15.4		)
Total 2019 – estimated amortization	$	78.3	$	(21.1	)

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



	Pension Costs									OPEB Costs
(in millions)	2018			2017			2016			2018			2017			2016
Service cost	$	47.1		$	44.6		$	45.4		$	23.7		$	24.1		$	26.1
Interest cost	114.3			121.8			130.8			29.9			32.9			37.0
Expected return on plan assets	(196.5		)	(195.7		)	(195.9		)	(59.5		)	(55.5		)	(52.7		)
Plan settlement	1.0			9.0			16.5			—			—			—
Amortization of prior service cost (credit)	2.7			2.9			3.4			(15.4		)	(12.3		)	(9.4		)
Amortization of net actuarial loss	94.0			86.1			82.9			1.0			3.1			8.5
Net periodic benefit cost (credit)	$	62.6		$	68.7		$	83.1		$	(20.3	)	$	(7.7	)	$	9.5

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

As required by ASU 2017-07, our income statements for the years ended December 31, 2017 and 2016, were retroactively restated from what was previously presented in our 2017 Annual Report on Form 10-K. The impacts to our income statements from adoption of this standard are reflected in the table below.



	Year Ended December 31, 2017						Year Ended December 31, 2016
(in millions)	Form 10-K Income Statement		Impact of ASU 2017-07		Income Statement After Adoption		Form 10-K Income Statement		Impact of ASU 2017-07			Income Statement After Adoption
Operating expenses
Other operation and maintenance	$	2,047.0	$	9.1	$	2,056.1	$	2,185.5	$	(14.2	)	$	2,171.3

Other expense
Other income, net	64.6		9.1		73.7		80.8		(14.2		)	66.6

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

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



	Pension		OPEB
	2018	2017	2018	2017
Discount rate	4.30%	3.66%	4.27%	3.63%
Rate of compensation increase	3.66%	3.61%	N/A	N/A
Assumed medical cost trend rate (Pre 65)	N/A	N/A	6.25%	6.50%
Ultimate trend rate (Pre 65)	N/A	N/A	5.00%	5.00%
Year ultimate trend rate is reached (Pre 65)	N/A	N/A	2024	2024
Assumed medical cost trend rate (Post 65)	N/A	N/A	6.01%	6.09%
Ultimate trend rate (Post 65)	N/A	N/A	5.00%	5.00%
Year ultimate trend rate is reached (Post 65)	N/A	N/A	2028	2028

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



	Pension Costs
	2018	2017	2016
Discount rate	3.71%	4.11%	4.35%
Expected return on plan assets	7.12%	7.11%	7.12%
Rate of compensation increase	3.66%	3.60%	3.75%



	OPEB Costs
	2018	2017	2016
Discount rate	3.63%	4.04%	4.38%
Expected return on plan assets	7.25%	7.25%	7.25%
Assumed medical cost trend rate (Pre 65)	6.50%	7.00%	7.50%
Ultimate trend rate (Pre 65)	5.00%	5.00%	5.00%
Year ultimate trend rate is reached (Pre 65)	2024	2021	2021
Assumed medical cost trend rate (Post 65)	6.09%	7.00%	7.50%
Ultimate trend rate (Post 65)	5.00%	5.00%	5.00%
Year ultimate trend rate is reached (Post 65)	2028	2021	2021

We consult with our investment advisors on an annual basis to help us forecast expected long-term returns on plan assets by reviewing historical returns as well as calculating expected total trust returns using the weighted-average of long-term market returns for each of the major target asset categories utilized in the fund. For 2019, the expected return on assets assumption is 7.12% for the pension plans and 7.25% for the OPEB plans.

Assumed health care cost trend rates have a significant effect on the amounts reported by us for health care plans. For the year ended December 31, 2018, a one-percentage-point change in assumed health care cost trend rates would have had the following effects:



(in millions)	1% Increase		1% Decrease
Effect on total of service and interest cost components of net periodic postretirement health care benefit cost	$	7.5	$	(5.9	)
Effect on health care component of the accumulated postretirement benefit obligations	44.3		(37.1		)

Plan Assets

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

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

The legacy Wisconsin Energy Corporation pension trust target asset allocations are 35% equity investments, 55% fixed income investments, and 10% private equity and real estate investments. The legacy Integrys pension trust target asset allocation is 45% equity investments, 45% fixed income investments, and 10% private equity and real estate investments. The two legacy Wisconsin Energy Corporation OPEB trusts' target asset allocations are 50% equity investments and 50% fixed income investments, and 70% equity investments and 30% fixed income investments, respectively. The two largest legacy OPEB trusts for Integrys have target asset allocations of 45% equity investments and 55% fixed income, and 50% equity investments and 50% fixed income, respectively. Equity securities include investments in large-cap, mid-cap, and small-cap companies. Fixed income securities include corporate bonds of companies from diversified industries, mortgage and other asset backed securities, commercial paper, and United States Treasuries.

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

The following tables provide the fair values of our investments by asset class:



	December 31, 2018
	Pension Plan Assets								OPEB Assets
(in millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Asset Class
Equity securities:
United States Equity	$	281.7	$	—	$	—	$	281.7	$	88.2	$	—	$	—	$	88.2
International Equity	279.7		0.7		—		280.4		92.2		0.2		—		92.4
Fixed income securities: *
United States Bonds	123.7		838.8		—		962.5		119.6		150.8		—		270.4
International Bonds	16.1		85.5		—		101.6		7.1		8.9		—		16.0
	$	701.2	$	925.0	$	—	$	1,626.2	$	307.1	$	159.9	$	—	$	467.0
Investments measured at net asset value							$	1,064.6							$	304.7
Total	$	701.2	$	925.0	$	—	$	2,690.8	$	307.1	$	159.9	$	—	$	771.7


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



	December 31, 2017
	Pension Plan Assets								OPEB Assets
(in millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Asset Class
Cash and cash equivalents	$	—	$	53.6	$	—	$	53.6	$	19.6	$	2.3	$	—	$	21.9
Equity securities:
United States Equity	345.0		0.1		—		345.1		101.0		—		—		101.0
International Equity	352.1		—		0.8		352.9		115.3		—		0.2		115.5
Fixed income securities: *
United States Bonds	138.6		892.9		—		1,031.5		121.0		148.1		—		269.1
International Bonds	17.8		86.8		—		104.6		7.2		9.1		—		16.3
Private Equity and Real Estate	—		154.1		100.1		254.2		—		6.6		7.7		14.3
	$	853.5	$	1,187.5	$	100.9	$	2,141.9	$	364.1	$	166.1	$	7.9	$	538.1
Investments measured at net asset value							$	824.9							$	303.4
Total	$	853.5	$	1,187.5	$	100.9	$	2,966.8	$	364.1	$	166.1	$	7.9	$	841.5


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

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



	Private Equity and Real Estate						International Equity
(in millions)	Pension			OPEB			Pension			OPEB
Beginning balance at January 1, 2018	$	100.1		$	7.7		$	0.8		$	0.2
Realized and unrealized gains (losses)	8.0			1.1			(0.1		)	—
Purchases	18.3			1.5			—			—
Liquidations	(1.7		)	(0.2		)	—			—
Transfers out of level 3	(124.7		)	(10.1		)	(0.7		)	(0.2		)
Ending balance at December 31, 2018	$	—		$	—		$	—		$	—



	Private Equity and Real Estate				International Equity					U.S. Bonds
(in millions)	Pension		OPEB		Pension			OPEB		Pension
Beginning balance at January 1, 2017	$	14.6	$	1.3	$	—		$	—	$	0.8
Realized and unrealized gains (losses)	2.8		0.3		(0.2		)	—		(0.8		)
Purchases	55.5		3.6		1.0			0.2		—
Transfers into level 3	27.2		2.5		—			—		—
Ending balance at December 31, 2017	$	100.1	$	7.7	$	0.8		$	0.2	$	—

Cash Flows

We expect to contribute $11.9 million to the pension plans and $0.7 million to the OPEB plans in 2019, dependent upon various factors affecting us, including our liquidity position and the effects of the new Tax Legislation.

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



(in millions)	Pension Costs		OPEB Costs
2019	$	239.0	$	35.4
2020	233.0		39.6
2021	230.9		41.3
2022	225.7		41.6
2023	215.8		42.5
2024-2028	985.5		213.6

Savings Plans

We sponsor 401(k) savings plans which allow employees to contribute a portion of their pre-tax and/or after-tax income in accordance with plan-specified guidelines. A percentage of employee contributions are matched by us through a contribution into the employee's savings plan account, up to certain limits. The 401(k) savings plans include an Employee Stock Ownership Plan. Certain employees receive an employer retirement contribution, in which amounts are contributed to the employee's savings plan account based on the employee's wages, age, and years of service. Total costs incurred under all of these plans were $49.3 million, $47.9 million, and $44.3 million in 2018, 2017, and 2016, respectively.