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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2022
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. |
001-03016 | | WISCONSIN PUBLIC SERVICE CORPORATION | | 39-0715160 |
(A Wisconsin Corporation)
2830 South Ashland Avenue
P.O. Box 19001
Green Bay, WI 54307-9001
(800) 450-7260
Securities registered pursuant to Section 12(b) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | ☐ | | Accelerated filer | ☐ | |
| Non-accelerated filer | ☒ | | Smaller reporting company | ☐ |
| | | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
Common Stock, $4 par value,
23,896,962 shares outstanding at
September 30, 2022
All of the common stock of Wisconsin Public Service Corporation is held by Integrys Holding, Inc., a wholly owned subsidiary of WEC Energy Group, Inc.
WISCONSIN PUBLIC SERVICE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended September 30, 2022
TABLE OF CONTENTS
| | | | | | | | |
09/30/2022 Form 10-Q | i | Wisconsin Public Service Corporation |
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:
| | | | | | | | |
Affiliates |
ATC | | American Transmission Company LLC |
Integrys | | Integrys Holding, Inc. |
| | |
| | |
WE | | Wisconsin Electric Power Company |
WEC Energy Group | | WEC Energy Group, Inc. |
| | |
| | |
| | |
| | |
Federal and State Regulatory Agencies |
CBP | | United States Customs and Border Protection Agency |
DOC | | United States Department of Commerce |
EPA | | United States Environmental Protection Agency |
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| | |
| | |
PSCW | | Public Service Commission of Wisconsin |
SEC | | United States Securities and Exchange Commission |
WDNR | | Wisconsin Department of Natural Resources |
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Accounting Terms |
AFUDC | | Allowance for Funds Used During Construction |
| | |
ASU | | Accounting Standards Update |
FASB | | Financial Accounting Standards Board |
GAAP | | United States Generally Accepted Accounting Principles |
OPEB | | Other Postretirement Employee Benefits |
| | |
Environmental Terms |
ACE | | Affordable Clean Energy |
BATW | | Bottom Ash Transport Water |
| | |
BTA | | Best Technology Available |
CAA | | Clean Air Act |
CASAC | | Clean Air Scientific Advisory Committee |
CO2 | | Carbon Dioxide |
ELG | | Steam Electric Effluent Limitation Guidelines |
| | |
GHG | | Greenhouse Gas |
| | |
NAAQS | | National Ambient Air Quality Standards |
NOV | | Notice of Violation |
NOx | | Nitrogen Oxide |
WOTUS | | Waters of the United States |
NOx | | Nitrogen Oxide |
WPDES | | Wisconsin Pollutant Discharge Elimination System |
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| | |
| | |
Measurements |
Dth | | Dekatherm |
MW | | Megawatt |
MWh | | Megawatt-hour |
µg/m3 | | Micrograms Per Cubic Meter |
| | |
Other Terms and Abbreviations |
AD/CVD | | Antidumping and Countervailing Duties |
AMI | | Advanced Metering Infrastructure |
Badger Hollow I | | Badger Hollow Solar Park I |
| | |
COVID-19 | | Coronavirus Disease – 2019 |
Crane Creek | | Crane Creek Wind Park |
D.C. Circuit Court of Appeals | | United States Court of Appeals for the District of Columbia Circuit |
Darien | | Darien Solar-Battery Park |
DER | | Distributed Energy Resource |
EGU | | Electric Generating Unit |
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09/30/2022 Form 10-Q | ii | Wisconsin Public Service Corporation |
| | | | | | | | |
ESG Progress Plan
| | WEC Energy Group's Capital Investment Plan for Efficiency, Sustainability, and Growth for 2023-2027 |
EV | | Electric Vehicle |
Exchange Act | | Securities Exchange Act of 1934, as amended |
Executive Order 13990
| | Executive Order 13990 of January 20, 2021 – Protecting Public Health and the Environment and Restoring Science To Tackle the Climate Crisis |
FTR | | Financial Transmission Right |
ITC | | Investment Tax Credit |
LIBOR | | London Interbank Offered Rate |
MISO | | Midcontinent Independent System Operator, Inc. |
| | |
Paris | | Paris Solar-Battery Park |
PTC | | Production Tax Credit |
Red Barn | | Red Barn Wind Park |
RICE | | Reciprocating Internal Combustion Engine |
RNG | | Renewable Natural Gas |
ROE | | Return on Equity |
S&P | | Standard & Poor's |
| | |
Supreme Court | | United States Supreme Court |
Tax Legislation | | Tax Cuts and Jobs Act of 2017 |
| | |
UFLPA | | Uyghur Forced Labor Prevention Act |
West Riverside | | West Riverside Energy Center |
Whitewater | | Whitewater Cogeneration Facility |
WRO | | Withhold Release Order |
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09/30/2022 Form 10-Q | iii | Wisconsin Public Service Corporation |
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, including associated compliance costs, legal proceedings, effective tax rates, pension and OPEB plans, fuel costs, sources of electric energy supply, coal and natural gas deliveries, remediation costs, climate-related matters, the ESG Progress Plan, liquidity and capital resources, and other matters.
Forward-looking statements are subject to a number of risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in the statements. These risks and uncertainties include those described in risk factors as set forth in our 2021 Annual Report on Form 10-K, 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 or regulatory developments, varying, adverse, or unusually severe weather conditions, including those caused by climate change, 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 impact of federal, state, and local legislative and/or regulatory changes, including changes in rate-setting policies or procedures, deregulation and restructuring of the electric and/or natural gas utility industries, transmission or distribution system operation, the approval process for new construction, reliability standards, pipeline integrity and safety standards, allocation of energy assistance, energy efficiency mandates, electrification initiatives and other efforts to reduce the use of natural gas, and tax laws, including those that affect our ability to use PTCs and ITCs;
•Federal, state, and local legislative and regulatory changes relating to the environment, including climate change and other environmental regulations impacting generation facilities and renewable energy standards, the enforcement of these laws and regulations, changes in the interpretation of regulations or permit conditions by regulatory agencies, and the recovery of associated remediation and compliance costs;
•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 and the ability to recover the related costs through rates;
•The risk of delays and shortages, and increased costs of equipment, materials, or other resources that are critical to our business operations and corporate strategy, as a result of supply chain disruptions (including disruptions from rail congestion), inflation, and other factors;
•The impact of health pandemics, including any new developments relating to the COVID-19 pandemic, on our business functions, financial condition, liquidity, and results of operations;
•Factors affecting the implementation of WEC Energy Group's CO2 emission and/or methane emission reduction goals and opportunities and actions related to those goals, including related regulatory decisions, the cost of materials, supplies, and labor,
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09/30/2022 Form 10-Q | 1 | Wisconsin Public Service Corporation |
technology advances, the feasibility of competing generation projects, and the ability to execute WEC Energy Group's capital plan;
•The financial and operational feasibility of taking more aggressive action to further reduce GHG emissions in order to limit future global temperature increases;
•The risks associated with inflation and changing commodity prices, including natural gas and electricity;
•The availability and cost of sources of natural gas and other fossil fuels, 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;
•Any impacts on the global economy, supply chains and fuel prices, generally, from the ongoing conflict between Russia and Ukraine and related sanctions;
•Changes in credit ratings, interest rates, and our ability to access the capital markets, caused by volatility in the global credit markets, our capitalization structure, and market perceptions of the utility industry or us;
•Changes in the method of determining LIBOR or the replacement of LIBOR with an alternative reference rate;
•Costs and effects of litigation, administrative proceedings, investigations, settlements, claims, and inquiries;
•The direct or indirect effect on our business resulting from terrorist attacks and cyber security intrusions, as well as the threat of such incidents, including the failure to maintain the security of personally identifiable information, the associated costs to protect our utility assets, technology systems, and personal information, and the costs to notify affected persons to mitigate their information security concerns and to comply with state notification laws;
•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 investment performance of our employee benefit plan assets, as well as unanticipated changes in related actuarial assumptions, which could impact future funding requirements;
•Factors affecting the employee workforce, including loss of key personnel, internal restructuring, work stoppages, and collective bargaining agreements and negotiations with union employees;
•Advances in technology, and related legislation or regulation supporting the use of that technology, that result in competitive disadvantages and create the potential for impairment of existing assets;
•The risk associated with the values of goodwill, other intangible assets, long-lived assets, and equity method investments, and their possible impairment;
•Potential business strategies to acquire and dispose of assets, which cannot be assured to be completed timely or within budgets;
•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.
Except as may be required by law, 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.
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09/30/2022 Form 10-Q | 2 | Wisconsin Public Service Corporation |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WISCONSIN PUBLIC SERVICE CORPORATION
| | | | | | | | | | | | | | | | | | | | | | | | | | |
CONDENSED INCOME STATEMENTS (Unaudited) | | Three Months Ended | | Nine Months Ended |
| | September 30 | | September 30 |
(in millions) | | 2022 | | 2021 | | 2022 | | 2021 |
Operating revenues | | $ | 435.3 | | | $ | 381.1 | | | $ | 1,332.7 | | | $ | 1,127.6 | |
| | | | | | | | |
Operating expenses | | | | | | | | |
Cost of sales | | 198.5 | | | 131.3 | | | 610.7 | | | 413.0 | |
Other operation and maintenance | | 89.9 | | | 102.2 | | | 268.0 | | | 294.0 | |
Depreciation and amortization | | 50.1 | | | 47.4 | | | 149.3 | | | 140.0 | |
Property and revenue taxes | | 10.4 | | | 9.9 | | | 32.0 | | | 30.1 | |
Total operating expenses | | 348.9 | | | 290.8 | | | 1,060.0 | | | 877.1 | |
| | | | | | | | |
Operating income | | 86.4 | | | 90.3 | | | 272.7 | | | 250.5 | |
| | | | | | | | |
Other income, net | | 11.0 | | | 8.1 | | | 32.7 | | | 27.1 | |
Interest expense | | 17.3 | | | 16.1 | | | 50.5 | | | 48.6 | |
Other expense | | (6.3) | | | (8.0) | | | (17.8) | | | (21.5) | |
| | | | | | | | |
Income before income taxes | | 80.1 | | | 82.3 | | | 254.9 | | | 229.0 | |
Income tax expense | | 18.9 | | | 10.4 | | | 60.5 | | | 27.6 | |
Net income | | $ | 61.2 | | | $ | 71.9 | | | $ | 194.4 | | | $ | 201.4 | |
The accompanying Notes to Condensed Financial Statements are an integral part of these financial statements.
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09/30/2022 Form 10-Q | 3 | Wisconsin Public Service Corporation |
WISCONSIN PUBLIC SERVICE CORPORATION
| | | | | | | | | | | | | | |
CONDENSED BALANCE SHEETS (Unaudited) | | September 30, | | December 31, |
(in millions, except share and per share amounts) | | 2022 | | 2021 |
Assets | | | | |
Current assets | | | | |
Cash and cash equivalents | | $ | — | | | $ | 2.4 | |
| | | | |
Accounts receivable and unbilled revenues, net of reserves of $9.6 and $11.1, respectively | | 213.4 | | | 226.6 | |
Accounts receivable from related parties | | 27.1 | | | 26.1 | |
Materials, supplies, and inventories | | 168.9 | | | 112.9 | |
Derivative assets | | 26.2 | | | 22.2 | |
Prepaid taxes | | 30.0 | | | 40.0 | |
Other | | 9.4 | | | 12.3 | |
Current assets | | 475.0 | | | 442.5 | |
| | | | |
Long-term assets | | | | |
Property, plant, and equipment, net of accumulated depreciation and amortization of $1,864.2 and $1,808.4, respectively | | 5,290.5 | | | 5,098.6 | |
Regulatory assets | | 351.2 | | | 347.9 | |
| | | | |
Goodwill | | 36.4 | | | 36.4 | |
Pension and OPEB assets | | 288.3 | | | 260.7 | |
Other | | 49.1 | | | 49.6 | |
Long-term assets | | 6,015.5 | | | 5,793.2 | |
Total assets | | $ | 6,490.5 | | | $ | 6,235.7 | |
| | | | |
Liabilities and Equity | | | | |
Current liabilities | | | | |
Short-term debt | | $ | 271.4 | | | $ | 331.0 | |
| | | | |
Accounts payable | | 175.6 | | | 130.8 | |
Accounts payable to related parties | | 44.0 | | | 42.6 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Other | | 89.5 | | | 81.4 | |
Current liabilities | | 580.5 | | | 585.8 | |
| | | | |
Long-term liabilities | | | | |
| | | | |
Long-term debt | | 1,701.3 | | | 1,690.6 | |
Deferred income taxes | | 835.9 | | | 782.2 | |
Deferred ITCs | | 74.7 | | | 74.8 | |
Regulatory liabilities | | 703.1 | | | 735.5 | |
Environmental remediation liabilities | | 87.7 | | | 95.0 | |
| | | | |
| | | | |
Other | | 134.7 | | | 128.8 | |
Long-term liabilities | | 3,537.4 | | | 3,506.9 | |
| | | | |
Commitments and contingencies (Note 18) | | | | |
| | | | |
| | | | |
Common shareholder's equity | | | | |
Common stock – $4 par value; 32,000,000 shares authorized; 23,896,962 shares issued and outstanding | | 95.6 | | | 95.6 | |
Additional paid in capital | | 1,616.7 | | | 1,491.5 | |
Retained earnings | | 660.3 | | | 555.9 | |
Common shareholder's equity | | 2,372.6 | | | 2,143.0 | |
Total liabilities and equity | | $ | 6,490.5 | | | $ | 6,235.7 | |
The accompanying Notes to Condensed Financial Statements are an integral part of these financial statements.
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09/30/2022 Form 10-Q | 4 | Wisconsin Public Service Corporation |
WISCONSIN PUBLIC SERVICE CORPORATION
| | | | | | | | | | | | | | |
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) | | Nine Months Ended |
| | September 30 |
(in millions) | | 2022 | | 2021 |
Operating activities | | | | |
Net income | | $ | 194.4 | | | $ | 201.4 | |
Reconciliation to cash provided by operating activities | | | | |
Depreciation and amortization | | 149.3 | | | 140.0 | |
Deferred income taxes and ITCs, net | | 42.5 | | | 54.9 | |
| | | | |
| | | | |
Change in – | | | | |
Accounts receivable and unbilled revenues, net | | 3.6 | | | 7.1 | |
Materials, supplies, and inventories | | (56.0) | | | (4.7) | |
Prepaid taxes | | 10.0 | | | 10.9 | |
| | | | |
Other current assets | | 2.9 | | | 0.2 | |
Accounts payable | | 28.0 | | | (17.3) | |
Accrued taxes | | (3.2) | | | 14.2 | |
| | | | |
| | | | |
Other current liabilities | | 7.9 | | | 32.4 | |
Other, net | | (67.7) | | | (14.2) | |
Net cash provided by operating activities | | 311.7 | | | 424.9 | |
| | | | |
Investing activities | | | | |
Capital expenditures | | (306.3) | | | (280.2) | |
Reimbursement for ATC's construction costs | | 10.0 | | | — | |
Proceeds from cash surrender value of life insurance | | 4.4 | | | — | |
Payments for assets transferred from affiliates | | — | | | (5.3) | |
Other, net | | 2.8 | | | (0.2) | |
Net cash used in investing activities | | (289.1) | | | (285.7) | |
| | | | |
Financing activities | | | | |
| | | | |
Change in short-term debt | | (59.6) | | | (104.0) | |
Payment of dividends to parent | | (90.0) | | | (90.0) | |
Equity contribution from parent | | 125.0 | | | 55.0 | |
Other, net | | (0.4) | | | — | |
Net cash used in financing activities | | (25.0) | | | (139.0) | |
| | | | |
Net change in cash and cash equivalents | | (2.4) | | | 0.2 | |
Cash and cash equivalents at beginning of period | | 2.4 | | | 2.7 | |
Cash and cash equivalents at end of period | | $ | — | | | $ | 2.9 | |
The accompanying Notes to Condensed Financial Statements are an integral part of these financial statements.
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09/30/2022 Form 10-Q | 5 | Wisconsin Public Service Corporation |
WISCONSIN PUBLIC SERVICE CORPORATION
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CONDENSED STATEMENTS OF EQUITY (Unaudited) | | |
| | | | | | | | |
(in millions) | | Common Stock | | Additional Paid In Capital | | Retained Earnings | | Total Common Shareholder's Equity |
Balance at December 31, 2021 | | $ | 95.6 | | | $ | 1,491.5 | | | $ | 555.9 | | | $ | 2,143.0 | |
Net income | | — | | | — | | | 76.6 | | | 76.6 | |
Equity contribution from parent | | — | | | 125.0 | | | — | | | 125.0 | |
Payment of dividends to parent | | — | | | — | | | (30.0) | | | (30.0) | |
Stock-based compensation and other | | — | | | 0.2 | | | — | | | 0.2 | |
Balance at March 31, 2022 | | $ | 95.6 | | | $ | 1,616.7 | | | $ | 602.5 | | | $ | 2,314.8 | |
Net income | | — | | | — | | | 56.6 | | | 56.6 | |
Payment of dividends to parent | | — | | | — | | | (30.0) | | | (30.0) | |
Balance at June 30, 2022 | | $ | 95.6 | | | $ | 1,616.7 | | | $ | 629.1 | | | $ | 2,341.4 | |
Net income | | — | | | — | | | 61.2 | | | 61.2 | |
Payment of dividends to parent | | — | | | — | | | (30.0) | | | (30.0) | |
| | | | | | | | |
Balance at September 30, 2022 | | $ | 95.6 | | | $ | 1,616.7 | | | $ | 660.3 | | | $ | 2,372.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Common Stock | | Additional Paid In Capital | | Retained Earnings | | Total Common Shareholder's Equity | | | | |
Balance at December 31, 2020 | | $ | 95.6 | | | $ | 1,436.4 | | | $ | 584.7 | | | $ | 2,116.7 | | | | | |
Net income | | — | | | — | | | 69.3 | | | 69.3 | | | | | |
Payment of dividends to parent | | — | | | — | | | (30.0) | | | (30.0) | | | | | |
Stock-based compensation and other | | — | | | 0.1 | | | — | | | 0.1 | | | | | |
Balance at March 31, 2021 | | $ | 95.6 | | | $ | 1,436.5 | | | $ | 624.0 | | | $ | 2,156.1 | | | | | |
Net income | | — | | | — | | | 60.2 | | | 60.2 | | | | | |
Payment of dividends to parent | | — | | | — | | | (30.0) | | | (30.0) | | | | | |
Stock-based compensation and other | | — | | | 0.1 | | | — | | | 0.1 | | | | | |
Balance at June 30, 2021 | | $ | 95.6 | | | $ | 1,436.6 | | | $ | 654.2 | | | $ | 2,186.4 | | | | | |
Net income | | — | | | — | | | 71.9 | | | 71.9 | | | | | |
Payment of dividends to parent | | — | | | — | | | (30.0) | | | (30.0) | | | | | |
Equity contribution from parent | | — | | | 55.0 | | | — | | | 55.0 | | | | | |
Balance at September 30, 2021 | | $ | 95.6 | | | $ | 1,491.6 | | | $ | 696.1 | | | $ | 2,283.3 | | | | | |
The accompanying Notes to Condensed Financial Statements are an integral part of these financial statements.
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09/30/2022 Form 10-Q | 6 | Wisconsin Public Service Corporation |
WISCONSIN PUBLIC SERVICE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
September 30, 2022
NOTE 1—GENERAL INFORMATION
Wisconsin Public Service Corporation serves approximately 459,000 electric customers and 339,000 natural gas customers.
As used in these notes, the term "financial statements" refers to the condensed financial statements. This includes the income statements, balance sheets, statements of cash flows, and statements of equity, unless otherwise noted. In this report, when we refer to "the Company," "us," "we," "our," or "ours," we are referring to Wisconsin Public Service Corporation.
Investments in companies not controlled by us, but over which we have significant influence regarding the operating and financial policies of the investee, are accounted for using the equity method.
We have prepared the unaudited interim financial statements presented in this Form 10-Q pursuant to the rules and regulations of the SEC and GAAP. Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for annual financial statements. These financial statements should be read in conjunction with the financial statements and footnotes in our Annual Report on Form 10-K for the year ended December 31, 2021. Financial results for an interim period may not give a true indication of results for the year. In particular, the results of operations for the three and nine months ended September 30, 2022, are not necessarily indicative of expected results for 2022 due to seasonal variations and other factors.
In management's opinion, we have included all adjustments, normal and recurring in nature, necessary for a fair presentation of our financial results.
NOTE 2—ACQUISITIONS
In accordance with Topic 805: Clarifying the Definition of a Business (ASU 2017-01), transactions are evaluated and are accounted for as acquisitions (or disposals) of assets or businesses, and transaction costs are capitalized in asset acquisitions.
Acquisitions of Electric Generation Facilities in Wisconsin
In January 2022, we, along with an unaffiliated utility, received PSCW approval to acquire the Red Barn, a utility-scale wind-powered electric generating facility. The project will be located in Grant County, Wisconsin and once constructed, we will own 82 MW of this project. Our share of the cost of this project is estimated to be $160 million, with commercial operation expected to begin by early 2023, at which time the transaction is expected to close. Red Barn is expected to qualify for PTCs.
In November 2021, we, along with WE, signed an asset purchase agreement to acquire Whitewater, a commercially operational 236.5 MW dual-fueled (natural gas and low sulfur fuel oil) combined-cycle electrical generation facility in Whitewater, Wisconsin. WE currently purchases all of the capacity from this generation facility pursuant to a tolling agreement. In December 2021, we, along with WE, filed an application with the PSCW for approval to acquire Whitewater. If approved, our share of the cost of this facility is estimated to be $36.3 million, which excludes working capital and transaction costs, for 50% of the capacity. We expect a decision from the PSCW by the end of 2022, and for the transaction to close in early 2023.
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09/30/2022 Form 10-Q | 7 | Wisconsin Public Service Corporation |
NOTE 3—OPERATING REVENUES
For more information about our operating revenues, see Note 1(d), Operating Revenues, in our 2021 Annual Report on Form 10-K.
Disaggregation of Operating Revenues
The following tables present our operating revenues disaggregated by revenue source for our utility segment. We do not have any revenues associated with our other segment. We disaggregate revenues into categories that depict how the nature, amount, timing, and uncertainty of revenues and cash flows are affected by economic factors. Revenues are further disaggregated by electric and natural gas operations and then by customer class. Each customer class within our electric and natural gas operations have different expectations of service, energy and demand requirements, and can be impacted differently by regulatory activities within their jurisdictions.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 | | Nine Months Ended September 30 |
(in millions) | | 2022 | | 2021 | | 2022 | | 2021 |
Wisconsin Public Service Corporation | | | | | | | | |
Electric utility | | $ | 373.0 | | | $ | 337.9 | | | $ | 1,016.3 | | | $ | 896.9 | |
Natural gas utility | | 61.7 | | | 42.8 | | | 312.9 | | | 225.5 | |
Total revenues from contracts with customers | | 434.7 | | | 380.7 | | | 1,329.2 | | | 1,122.4 | |
Other operating revenues | | 0.6 | | | 0.4 | | | 3.5 | | | 5.2 | |
Total operating revenues | | $ | 435.3 | | | $ | 381.1 | | | $ | 1,332.7 | | | $ | 1,127.6 | |
Revenues from Contracts with Customers
Electric Utility Operating Revenues
The following table disaggregates electric utility operating revenues into customer class:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 | | Nine Months Ended September 30 |
(in millions) | | 2022 | | 2021 | | 2022 | | 2021 |
Residential | | $ | 122.6 | | | $ | 117.2 | | | $ | 351.0 | | | $ | 321.9 | |
Small commercial and industrial | | 116.8 | | | 109.4 | | | 318.4 | | | 286.9 | |
Large commercial and industrial | | 87.8 | | | 78.2 | | | 230.5 | | | 197.1 | |
Other | | 2.2 | | | 2.1 | | | 6.6 | | | 6.3 | |
Total retail revenues | | 329.4 | | | 306.9 | | | 906.5 | | | 812.2 | |
Wholesale | | 28.1 | | | 24.8 | | | 73.6 | | | 64.4 | |
Resale | | 9.1 | | | 1.3 | | | 21.2 | | | 8.1 | |
Other utility revenues | | 6.4 | | | 4.9 | | | 15.0 | | | 12.2 | |
Total electric utility operating revenues | | $ | 373.0 | | | $ | 337.9 | | | $ | 1,016.3 | | | $ | 896.9 | |
Natural Gas Utility Operating Revenues
The following table disaggregates natural gas utility operating revenues into customer class:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 | | Nine Months Ended September 30 |
(in millions) | | 2022 | | 2021 | | 2022 | | 2021 |
Residential | | $ | 29.6 | | | $ | 22.8 | | | $ | 178.6 | | | $ | 131.3 | |
Commercial and industrial | | 22.6 | | | 14.4 | | | 116.4 | | | 77.4 | |
Total retail revenues | | 52.2 | | | 37.2 | | | 295.0 | | | 208.7 | |
Transportation | | 3.9 | | | 3.9 | | | 14.6 | | | 14.1 | |
Other utility revenues (1) | | 5.6 | | | 1.7 | | | 3.3 | | | 2.7 | |
Total natural gas utility operating revenues | | $ | 61.7 | | | $ | 42.8 | | | $ | 312.9 | | | $ | 225.5 | |
(1)Includes the revenues subject to our purchased gas recovery mechanism.
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09/30/2022 Form 10-Q | 8 | Wisconsin Public Service Corporation |
Other Operating Revenues
Other operating revenues consist primarily of the following:
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| | Three Months Ended September 30 | | Nine Months Ended September 30 |
(in millions) | | 2022 | | 2021 | | 2022 | | 2021 |
Late payment charges | | $ | 0.8 | | | $ | 0.8 | | | $ | 3.0 | | | $ | 3.1 | |
Alternative revenues (1) | | (0.3) | | | (0.4) | | | 0.2 | | | 2.0 | |
Other | | 0.1 | | | — | | | 0.3 | | | 0.1 | |
Total other operating revenues | | $ | 0.6 | | | $ | 0.4 | | | $ | 3.5 | | | $ | 5.2 | |
(1)Negative amounts can result from alternative revenues being reversed to revenues from contracts with customers as the customer is billed for these alternative revenues. Negative amounts can also result from revenues to be refunded to wholesale customers subject to true-ups, as discussed in Note 1(d), Operating Revenues, in our 2021 Annual Report on Form 10-K.
NOTE 4—CREDIT LOSSES
Our exposure to credit losses is related to our accounts receivable and unbilled revenue balances, which are generated from the sale of electricity and natural gas by our regulated utility operations. Our regulated utility operations are included in our utility segment. No accounts receivable and unbilled revenue balances were reported in the other segment at September 30, 2022 and December 31, 2021.
We evaluate the collectability of our accounts receivable and unbilled revenue balances considering a combination of factors. For some of our larger customers and also in circumstances where we become aware of a specific customer's inability to meet its financial obligations to us, we record a specific allowance for credit losses against amounts due in order to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we use the accounts receivable aging method to calculate an allowance for credit losses. Using this method, we classify accounts receivable into different aging buckets and calculate a reserve percentage for each aging bucket based upon historical loss rates. The calculated reserve percentages are updated on at least an annual basis, in order to ensure recent macroeconomic, political, and regulatory trends are captured in the calculation, to the extent possible. Risks identified that we do not believe are reflected in the calculated reserve percentages, are assessed on a quarterly basis to determine whether further adjustments are required.
We monitor our ongoing credit exposure through active review of counterparty accounts receivable balances against contract terms and due dates. Our activities include timely account reconciliation, dispute resolution and payment confirmation. To the extent possible, we work with customers with past due balances to negotiate payment plans, but will disconnect customers for non-payment as allowed by the PSCW, if necessary, and employ collection agencies and legal counsel to pursue recovery of defaulted receivables. For our larger customers, detailed credit review procedures may be performed in advance of any sales being made. We sometimes require letters of credit, parental guarantees, prepayments or other forms of credit assurance from our larger customers to mitigate credit risk.
We have included a table below that shows our gross third-party receivable balances and related allowance for credit losses.
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(in millions) | | September 30, 2022 | | December 31, 2021 |
Accounts receivable and unbilled revenues | | $ | 223.0 | | | $ | 237.7 | |
Allowance for credit losses | | 9.6 | | | 11.1 | |
Accounts receivable and unbilled revenues, net (1) | | $ | 213.4 | | | $ | 226.6 | |
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Total accounts receivable, net – past due greater than 90 days (1) | | $ | 7.6 | | | $ | 8.0 | |
Past due greater than 90 days – collection risk mitigated by regulatory mechanisms (1) | | 96.5 | % | | 97.3 | % |
(1)Our exposure to credit losses for certain regulated utility customers is mitigated by a regulatory mechanism we have in place. Specifically, our residential tariffs include a mechanism for cost recovery or refund of uncollectible expense based on the difference between actual uncollectible write-offs and the amounts recovered in rates. As a result, at September 30, 2022, $86.3 million, or 40.4%, of our net accounts receivable and unbilled revenues balance had regulatory protections in place to mitigate the exposure to credit losses.
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09/30/2022 Form 10-Q | 9 | Wisconsin Public Service Corporation |
A rollforward of the allowance for credit losses is included below:
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| | Three Months Ended September 30 | | Nine Months Ended September 30 |
(in millions) | | 2022 | | 2021 | | 2022 | | 2021 |
Balance at the beginning of the period | | $ | 10.8 | | | $ | 13.3 | | | $ | 11.1 | | | $ | 18.3 | |
Provision for credit losses | | 1.6 | | | 1.5 | | | 5.6 | | | 4.0 | |
Provision for credit losses deferred for future recovery or refund | | (1.2) | | | (3.0) | | | (1.8) | | | (8.0) | |
Write-offs charged against the allowance | | (3.0) | | | (2.2) | | | (9.3) | | | (6.5) | |
Recoveries of amounts previously written off | | 1.4 | | | 0.9 | | | 4.0 | | | 2.7 | |
Balance at the end of the period | | $ | 9.6 | | | $ | 10.5 | | | $ | 9.6 | | | $ | 10.5 | |
There was a $1.5 million decrease in the allowance for credit losses at September 30, 2022, compared to December 31, 2021. The decrease was driven by customer write-offs related to collection practices returning to pre-pandemic levels in 2021, including the restoration of our ability to disconnect customers. After a customer is disconnected for a period of time without payment on their account, we will write off that customer balance. Partially offsetting the decrease in the allowance for credit losses, we believe that the high energy costs that customers are seeing, which have been driven by high natural gas prices, contributed to higher past due accounts receivable balances and a related increase in the allowance for credit losses.
The allowance for credit losses decreased over both the three and nine month periods ended September 30, 2021. The decrease in the allowance for credit losses over both periods was driven by lower past due accounts receivable balances, as we were able to ramp up collection efforts due to the return to normal collection practices in April 2021.
NOTE 5—REGULATORY ASSETS AND LIABILITIES
The following regulatory assets and liabilities were reflected on our balance sheets at September 30, 2022 and December 31, 2021. For more information on our regulatory assets and liabilities, see Note 6, Regulatory Assets and Liabilities, in our 2021 Annual Report on Form 10-K.
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(in millions) | | September 30, 2022 | | December 31, 2021 |
Regulatory assets | | | | |
Environmental remediation costs | | $ | 116.9 | | | $ | 120.1 | |
Pension and OPEB costs | | 64.5 | | | 74.1 | |
Income tax related items | | 57.2 | | | 54.5 | |
Plant retirement related items | | 44.8 | | | 50.2 | |
Asset retirement obligations | | 18.6 | | | 14.2 | |
ReACT™ | | 13.6 | | | 15.6 | |
Energy efficiency programs | | 11.2 | | | 6.1 | |
Energy costs recoverable through rate adjustments | | 8.7 | | | — | |
Uncollectible expense | | 3.7 | | | 5.5 | |
Other, net | | 12.0 | | | 7.6 | |
Total regulatory assets | | $ | 351.2 | | | $ | 347.9 | |
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09/30/2022 Form 10-Q | 10 | Wisconsin Public Service Corporation |
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(in millions) | | September 30, 2022 | | December 31, 2021 |
Regulatory liabilities | | | | |
Income tax related items | | $ | 342.7 | | | $ | 352.7 | |
Removal costs | | 189.5 | | | 189.9 | |
Pension and OPEB benefits | | 115.7 | | | 116.5 | |
Derivatives | | 30.1 | | | 26.9 | |
Earnings sharing mechanism (1) | | 8.4 | | | 26.7 | |
Energy costs refundable through rate adjustments | | 5.1 | | | 8.4 | |
Electric transmission costs (1) | | 2.8 | | | 19.7 | |
Other, net | | 13.9 | | | 3.1 | |
Total regulatory liabilities | | $ | 708.2 | | | $ | 743.9 | |
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Balance sheet presentation | | | | |
Other current liabilities | | $ | 5.1 | | | $ | 8.4 | |
Regulatory liabilities | | 703.1 | | | 735.5 | |
Total regulatory liabilities | | $ | 708.2 | | | $ | 743.9 | |
(1) The decrease in these regulatory liability balances was primarily related to the PSCW's approval of certain accounting treatments that allowed us to forego applying for a 2022 base rate increase, and instead maintain base rates consistent with 2021 levels. Among the accounting treatments approved was the amortization of certain regulatory liability balances in 2022, to offset a portion of our forecasted revenue deficiency. See Note 23, Regulatory Environment, in our 2021 Annual Report on Form 10-K for additional information on our 2022 base rates.
NOTE 6—PROPERTY, PLANT, AND EQUIPMENT
As a result of a MISO ruling received in June 2021, retirement of the jointly-owned Columbia generating units 1 and 2 became probable. Columbia generating units 1 and 2 are expected to be retired by June 1, 2026. The retirement date for these plants was pushed back from the end of 2023 for unit 1 and the end of 2024 for unit 2. See Note 20, Regulatory Environment, for more information on the Columbia generating units' retirement. The net book value of our ownership share of unit 1 and unit 2 was $85.2 million and $184.2 million, respectively, at September 30, 2022. These amounts were classified as plant to be retired within property, plant, and equipment on our balance sheets. These units are included in rate base, and we continue to depreciate them on a straight-line basis using the composite depreciation rates approved by the PSCW.
NOTE 7—COMMON EQUITY
Various financing arrangements and regulatory requirements impose certain restrictions on our ability to transfer funds to the sole holder of our common stock, Integrys, in the form of cash dividends, loans, or advances. In addition, Wisconsin law prohibits us from making loans to or guaranteeing obligations of WEC Energy Group, Integrys, or their subsidiaries. See Note 11, Common Equity, in our 2021 Annual Report on Form 10-K for additional information on these and other restrictions.
We do not believe that these restrictions will materially affect our operations or limit any dividend payments in the foreseeable future.
NOTE 8—SHORT-TERM DEBT AND LINES OF CREDIT
The following table shows our short-term borrowings and their corresponding weighted-average interest rates:
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(in millions, except percentages) | | September 30, 2022 | | December 31, 2021 |
Commercial paper | | | | |
Amount outstanding | | $ | 271.4 | | | $ | 331.0 | |
Weighted-average interest rate on amounts outstanding | | 3.29 | % | | 0.21 | % |
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Our average amount of commercial paper borrowings based on daily outstanding balances during the nine months ended September 30, 2022 was $177.2 million with a weighted-average interest rate during the period of 1.27%.
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09/30/2022 Form 10-Q | 11 | Wisconsin Public Service Corporation |
The information in the table below relates to our revolving credit facility used to support our commercial paper borrowing program, including available capacity under this facility:
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(in millions) | | Maturity | | September 30, 2022 |
Revolving credit facility | | September 2026 | | $ | 400.0 | |
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Less: | | | | |
Letters of credit issued inside credit facility | | | | $ | 1.3 | |
Commercial paper outstanding | | | | 271.4 | |
Available capacity under existing credit facility | | | | $ | 127.3 | |
NOTE 9—LEASES
We, along with WE and an unaffiliated utility, partnered to construct Paris, a utility-scale solar-powered electric generating facility with a battery energy storage system in Kenosha County, Wisconsin. We own 15% of Paris. Once fully constructed, we will own 30 MW of solar generation and 17 MW of battery storage of this project. The PSCW has approved the acquisition and construction of Paris, and commercial operation for the solar portion of the project is targeted for 2023.
Related to our investment in Paris, we, along with WE and an unaffiliated utility, entered into several land leases in Kenosha County, Wisconsin that commenced in the second quarter of 2022. Each lease has an initial construction term that ends upon achieving commercial operation, then automatically extends for 25 years with an option for an additional 25-year extension. We expect the optional extension to be exercised, and, as a result, the land leases are being amortized over the extended term of the leases. The lease payments will be recovered through rates.
Our total obligation under the land-related finance leases for Paris was $9.5 million at September 30, 2022, and will decrease to zero over the remaining lives of the leases. Long-term lease liabilities related to our finance land leases for Paris were included in long-term debt on our balance sheet. Our finance lease right of use asset related to Paris was approximately $9.3 million as of September 30, 2022, and was included in property, plant, and equipment on our balance sheet.
In accordance with Accounting Standards Codification Subtopic 980-842, Regulated Operations-Leases, the expense recognition pattern associated with the Paris leases resembles that of an operating lease. The difference between the minimum lease payments and the sum of imputed interest and unadjusted amortization costs calculated under Topic 842 is deferred as a regulatory asset in accordance with Subtopic 980-842 on our balance sheet.
Our weighted-average discount rate for the Paris finance leases was 5.28%. We used the fully collateralized incremental borrowing rates based upon information available for similarly rated companies in determining the present value of lease payments.
Future minimum lease payments and the corresponding present value of our net minimum lease payments under the finance leases for Paris as of September 30, 2022, were as follows:
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(in millions) | | |
Three months ended December 31, 2022 | | $ | 0.1 | |
2023 | | 0.4 | |
2024 | | 0.4 | |
2025 | | 0.4 | |
2026 | | 0.4 | |
2027 | | 0.4 | |
Thereafter | | 31.5 | |
Total minimum lease payments | | 33.6 | |
Less: Interest | | (24.1) | |
Present value of minimum lease payments | | 9.5 | |
Less: Short-term lease liabilities | | — | |
Long-term lease liabilities | | $ | 9.5 | |
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09/30/2022 Form 10-Q | 12 | Wisconsin Public Service Corporation |
NOTE 10—MATERIALS, SUPPLIES, AND INVENTORIES
Our inventory consisted of:
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(in millions) | | September 30, 2022 | | December 31, 2021 |
Natural gas in storage | | $ | 83.2 | | | $ | 33.5 | |
Materials and supplies | | 58.4 | | | 50.5 | |
Fossil fuel | | 27.3 | | | 28.9 | |
Total | | $ | 168.9 | | | $ | 112.9 | |
Substantially all natural gas in storage, materials and supplies, and fossil fuel inventories are recorded using the weighted-average cost method of accounting.
NOTE 11—INCOME TAXES
The provision for income taxes differs from the amount of income tax determined by applying the applicable United States statutory federal income tax rate to income before income taxes as a result of the following:
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| | Three Months Ended September 30, 2022 | | Three Months Ended September 30, 2021 |
(in millions) | | Amount | | Effective Tax Rate | | Amount | | Effective Tax Rate |
Statutory federal income tax | | $ | 16.8 | | | 21.0 | % | | $ | 17.3 | | | 21.0 | % |
State income taxes net of federal tax benefit | | 5.1 | | | 6.3 | % | | 5.1 | | | 6.2 | % |
Federal excess deferred tax amortization | | (1.3) | | | (1.6) | % | | (1.6) | | | (1.9) | % |
Federal excess deferred tax amortization – Wisconsin unprotected | | (0.9) | | | (1.1) | % | | (9.8) | | | (11.9) | % |
Other | | (0.8) | | | (1.0) | % | | (0.6) | | | (0.8) | % |
Total income tax expense | | $ | 18.9 | | | 23.6 | % | | $ | 10.4 | | | 12.6 | % |
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| | Nine Months Ended September 30, 2022 | | Nine Months Ended September 30, 2021 |
(in millions) | | Amount | | Effective Tax Rate | | Amount | | Effective Tax Rate |
Statutory federal income tax | | $ | 53.5 | | | 21.0 | % | | $ | 48.1 | | | 21.0 | % |
State income taxes net of federal tax benefit | | 16.1 | | | 6.3 | % | | 14.3 | | | 6.2 | % |
Federal excess deferred tax amortization | | (4.2) | | | (1.7) | % | | (4.5) | | | (2.0) | % |
Federal excess deferred tax amortization – Wisconsin unprotected | | (3.1) | | | (1.2) | % | | (28.7) | | | (12.5) | % |
Other | | (1.8) | | | (0.7) | % | | (1.6) | | | (0.6) | % |
Total income tax expense | | $ | 60.5 | | | 23.7 | % | | $ | 27.6 | | | 12.1 | % |
The effective tax rates of 23.6% and 23.7% for the three and nine months ended September 30, 2022, respectively, differ from the United States statutory federal income tax rate of 21%, primarily due to state income taxes. This item was partially offset by the impact of the protected deferred tax benefits associated with the Tax Legislation, as discussed in more detail below.
The effective tax rates of 12.6% and 12.1% for the three and nine months ended September 30, 2021, respectively, differ from the United States statutory federal income tax rate of 21%, primarily due to the recognition of certain unprotected deferred tax benefits created as a result of the Tax Legislation. Effective January 1, 2020, in accordance with the rate order received from the PSCW in December 2019, we began amortizing the unprotected deferred tax benefits over periods ranging from two years to four years, to reduce near-term rate impacts to our customers. In addition, as discussed in more detail below, the impact of the protected deferred tax benefits associated with the Tax Legislation drove a decrease in the effective tax rate. These items were partially offset by state income taxes.
The Tax Legislation required us to remeasure the deferred income taxes at our utility segment and we began to amortize the resulting excess protected deferred income taxes beginning in 2018 in accordance with normalization requirements (see federal excess deferred tax amortization lines above).
See Note 23, Regulatory Environment, in our 2021 Annual Report on Form 10-K for additional information on unprotected tax benefits.
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09/30/2022 Form 10-Q | 13 | Wisconsin Public Service Corporation |
NOTE 12—FAIR VALUE MEASUREMENTS
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).
Fair value accounting rules provide a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are defined as follows:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 – Pricing inputs are observable, either directly or indirectly, but are not quoted prices included within Level 1. Level 2 includes those financial instruments that are valued using external inputs within models or other valuation methods.
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methods that result in management's best estimate of fair value. Level 3 instruments include those that may be more structured or otherwise tailored to customers' needs.
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. We use a mid-market pricing convention (the mid-point price between bid and ask prices) as a practical measure for valuing certain derivative assets and liabilities. We primarily use a market approach for recurring fair value measurements and attempt to use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
When possible, we base the valuations of our derivative assets and liabilities on quoted prices for identical assets and liabilities in active markets. These valuations are classified in Level 1. The valuations of certain contracts not classified as Level 1 may be based on quoted market prices received from counterparties and/or observable inputs for similar instruments. Transactions valued using these inputs are classified in Level 2. Certain derivatives are categorized in Level 3 due to the significance of unobservable or internally-developed inputs. Our derivative instruments categorized as Level 3 consisted of FTRs at September 30, 2022 and December 31, 2021. These derivative instruments are valued using MISO auction prices.
The following tables summarize our financial assets and liabilities that were accounted for at fair value on a recurring basis, categorized by level within the fair value hierarchy:
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| | September 30, 2022 |
(in millions) | | Level 1 | | Level 2 | | Level 3 | | Total |
Derivative assets | | | | | | | | |
Natural gas contracts | | $ | 13.7 | | | $ | 4.3 | | | $ | — | | | $ | 18.0 | |
FTRs | | — | | | — | | | 6.4 | | | 6.4 | |
Coal contracts | | — | | | 3.4 | | | — | | | 3.4 | |
Total derivative assets | | $ | 13.7 | | | $ | 7.7 | | | $ | 6.4 | | | $ | 27.8 | |
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Derivative liabilities | | | | | | | | |
Natural gas contracts | | $ | 3.8 | | | $ | 0.7 | | | $ | — | | | $ | 4.5 | |
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| | December 31, 2021 |
(in millions) | | Level 1 | | Level 2 | | Level 3 | | Total |
Derivative assets | | | | | | | | |
Natural gas contracts | | $ | 6.5 | | | $ | 3.0 | | | $ | — | | | $ | 9.5 | |
FTRs | | — | | | — | | | 1.4 | | | 1.4 | |
Coal contracts | | — | | | 15.3 | | | — | | | 15.3 | |
Total derivative assets | | $ | 6.5 | | | $ | 18.3 | | | $ | 1.4 | | | $ | 26.2 | |
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Derivative liabilities | | | | | | | | |
Natural gas contracts | | $ | 1.4 | | | $ | 0.2 | | | $ | — | | | $ | 1.6 | |
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09/30/2022 Form 10-Q | 14 | Wisconsin Public Service Corporation |
The derivative assets and liabilities listed in the tables above include options, futures, physical commodity contracts, and other instruments used to manage market risks related to changes in commodity prices. They also include FTRs, which are used to manage electric transmission congestion costs in the MISO Energy and Operating Reserves Markets.
The following table summarizes the changes to derivatives classified as Level 3 in the fair value hierarchy:
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| | Three Months Ended September 30 | | Nine Months Ended September 30 |
(in millions) | | 2022 | | 2021 | | 2022 | | 2021 |
Balance at the beginning of the period | | $ | 10.3 | | | $ | 2.8 | | | $ | 1.4 | | | $ | 1.2 | |
Purchases | | 0.1 | | | — | | | 11.7 | | | 3.1 | |
Settlements | | (4.0) | | | (0.7) | | | (6.7) | | | (2.2) | |
Balance at the end of the period | | $ | 6.4 | | | $ | 2.1 | | | $ | 6.4 | | | $ | 2.1 | |
Fair Value of Financial Instruments
The following table shows the financial instruments included on our balance sheets that were not recorded at fair value:
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| | September 30, 2022 | | December 31, 2021 |
(in millions) | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Long-term debt (1) | | $ | 1,659.4 | | | $ | 1,299.3 | | | $ | 1,659.3 | | | $ | 1,903.2 | |
(1)The carrying amount of long-term debt excludes finance lease obligations of $41.9 million and $31.3 million at September 30, 2022 and December 31, 2021, respectively.
The fair value of our long-term debt is categorized within Level 2 of the fair value hierarchy.
NOTE 13—DERIVATIVE INSTRUMENTS
We use derivatives as part of our risk management program to manage the risks associated with the price volatility of purchased power, generation, and natural gas costs for the benefit of our customers. Our approach is non-speculative and designed to mitigate risk. Our regulated hedging programs are approved by the PSCW.
We record derivative instruments on our balance sheets as an asset or liability measured at fair value unless they qualify for the normal purchases and sales exception and are so designated. We continually assess our contracts designated as normal and will discontinue the treatment of these contracts as normal if the required criteria are no longer met. Changes in the derivative's fair value are recognized currently in earnings unless specific hedge accounting criteria are met or we receive regulatory treatment for the derivative. For most energy-related physical and financial contracts in our regulated operations that qualify as derivatives, the PSCW allows the effects of fair value accounting to be offset to regulatory assets and liabilities.
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None of our derivatives are designated as hedging instruments. On our balance sheets, we classify derivative assets and liabilities as current or long-term based on the maturities of the underlying contracts. Derivative assets and liabilities not shown separately on our balance sheets are included in the other current and other long-term line items. The following table shows our derivative assets and derivative liabilities.
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| | September 30, 2022 | | December 31, 2021 |
(in millions) | | Derivative Assets | | Derivative Liabilities | | Derivative Assets | | Derivative Liabilities |
Current | | | | | | | | |
Natural gas contracts (1) | | $ | 17.4 | | | $ | 4.1 | | | $ | 9.2 | | | $ | 1.5 | |
FTRs | | 6.4 | | | — | | | 1.4 | | | — | |
Coal contracts | | 2.4 | | | — | | | 11.6 | | | — | |
Total current | | 26.2 | | | 4.1 | | | 22.2 | | | 1.5 | |
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Long-term | | | | | | | | |
Natural gas contracts (1) | | 0.6 | | | 0.4 | | | 0.3 | | | 0.1 | |
Coal contracts | | 1.0 | | | — | | | 3.7 | | | — | |
Total long-term | | 1.6 | | | 0.4 | | | 4.0 | | | 0.1 | |
Total | | $ | 27.8 | | | $ | 4.5 | | | $ | 26.2 | | | $ | 1.6 | |
(1)Our natural gas derivative assets increased from December 31, 2021 to September 30, 2022 primarily due to the significant increase in natural gas prices.
Realized gains and losses on derivatives are primarily recorded in cost of sales upon settlement; however, they may be subsequently deferred for future rate recovery or refund as the gains and losses are included in our fuel and natural gas cost recovery mechanisms. Our estimated notional sales volumes and realized gains were as follows:
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| | Three Months Ended September 30, 2022 | | Three Months Ended September 30, 2021 |
(in millions) | | Volumes | | Gains | | Volumes | | Gains |
Natural gas contracts | | 5.4 Dth | | $ | 16.6 | | | 6.4 Dth | | $ | 6.0 | |
FTRs | | 2.0 MWh | | 1.6 | | | 0.9 MWh | | 1.8 | |
Total | | | | $ | 18.2 | | | | | $ | 7.8 | |
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| | Nine Months Ended September 30, 2022 | | Nine Months Ended September 30, 2021 |
(in millions) | | Volumes | | Gains | | Volumes | | Gains |
Natural gas contracts | | 24.5 Dth | | $ | 38.2 | | | 28.9 Dth | | $ | 4.7 | |
FTRs | | 6.0 MWh | | 2.3 | | | 5.3 MWh | | 7.2 | |
Total | | | | $ | 40.5 | | | | | $ | 11.9 | |
On our balance sheets, the amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral are not offset against the fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement. At September 30, 2022 and December 31, 2021, we had posted cash collateral of $6.5 million and $6.3 million, respectively. These amounts were recorded on our balance sheets in other current assets.
The following table shows derivative assets and derivative liabilities if derivative instruments by counterparty were presented net on our balance sheets:
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| | September 30, 2022 | | December 31, 2021 |
(in millions) | | Derivative Assets | | Derivative Liabilities | | Derivative Assets | | Derivative Liabilities |
Gross amount recognized on the balance sheet | | $ | 27.8 | | | $ | 4.5 | | | $ | 26.2 | | | $ | 1.6 | |
Gross amount not offset on the balance sheet | | (4.0) | | | (4.0) | | | (1.4) | | | (1.4) | |
Net amount | | $ | 23.8 | | | $ | 0.5 | | | $ | 24.8 | | | $ | 0.2 | |
NOTE 14—GUARANTEES
As of September 30, 2022, we had $20.6 million of standby letters of credit issued by financial institutions for the benefit of third parties that have extended credit to us, which automatically renew each year unless proper termination notice is given. These amounts are not reflected on our balance sheets.
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NOTE 15—EMPLOYEE BENEFITS
The following tables show the components of net periodic benefit cost (credit) for our benefit plans.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits |
| | Three Months Ended September 30 | | Nine Months Ended September 30 |
(in millions) | | 2022 | | 2021 | | 2022 | | 2021 |
Service cost | | $ | 2.3 | | | $ | 2.6 | | | $ | 6.8 | | | $ | 7.9 | |
Interest cost | | 5.7 | | | 5.4 | | | 17.0 | | | 16.4 | |
Expected return on plan assets | | (13.8) | | | (12.9) | | | (41.4) | | | (38.8) | |
| | | | | | | | |
Amortization of net actuarial loss | | 4.3 | | | 6.7 | | | 13.0 | | | 20.0 | |
Net periodic benefit cost (credit) | | $ | (1.5) | | | $ | 1.8 | | | $ | (4.6) | | | $ | 5.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | OPEB Benefits |
| | Three Months Ended September 30 | | Nine Months Ended September 30 |
(in millions) | | 2022 | | 2021 | | 2022 | | 2021 |
Service cost | | $ | 1.0 | | | $ | 1.1 | | | $ | 3.0 | | | $ | 3.2 | |
Interest cost | | 1.0 | | | 1.0 | | | 3.2 | | | 3.1 | |
Expected return on plan assets | | (5.2) | | | (5.0) | | | (15.7) | | | (15.2) | |
Amortization of prior service credit | | (2.5) | | | (2.5) | | | (7.6) | | | (7.7) | |
Amortization of net actuarial gain | | (0.6) | | | (0.8) | | | (1.9) | | | (2.6) | |
Net periodic benefit credit | | $ | (6.3) | | | $ | (6.2) | | | $ | (19.0) | | | $ | (19.2) | |
During the nine months ended September 30, 2022, we made contributions and payments of $0.4 million related to our pension plans and $0.6 million related to our OPEB plans. We expect to make contributions and payments of $0.2 million related to our pension plans and $0.4 million related to our OPEB plans during the remainder of 2022, dependent upon various factors affecting us, including our liquidity position and possible tax law changes.
NOTE 16—GOODWILL
Goodwill represents the excess of the cost of an acquisition over the fair value of the identifiable net assets acquired. We had no changes to the carrying amount of goodwill during the nine months ended September 30, 2022. We had no accumulated impairment losses related to our goodwill as of September 30, 2022.
During the third quarter of 2022, we completed our annual goodwill impairment test as of July 1, 2022. No impairment resulted from this test.
NOTE 17—SEGMENT INFORMATION
We use net income to measure segment profitability and to allocate resources to our businesses. At September 30, 2022, we reported two segments, which are described below.
Our utility segment includes our electric and natural gas utility operations, which serve customers in northeastern and central Wisconsin. Our electric utility operations are engaged in the generation, distribution, and sale of electricity. Our natural gas utility operations are engaged in the purchase, distribution, and sale of natural gas to retail customers as well as the transportation of customer-owned natural gas.
Our other segment primarily consists of equity earnings from our investment in Wisconsin River Power Company.
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09/30/2022 Form 10-Q | 17 | Wisconsin Public Service Corporation |
All of our operations and assets are located within the United States. The following tables show summarized financial information for the three and nine months ended September 30, 2022 and 2021, related to our reportable segments:
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Utility | | Other | | Wisconsin Public Service Corporation |
Three months ended September 30, 2022 | | | | | | |
Operating revenues | | $ | 435.3 | | | $ | — | | | $ | 435.3 | |
Other operation and maintenance | | 89.9 | | | — | | | 89.9 | |
Depreciation and amortization | | 50.1 | | | — | | | 50.1 | |
Other income, net | | 10.8 | | | 0.2 | | | 11.0 | |
Interest expense | | 17.3 | | | — | | | 17.3 | |
Income tax expense | | 18.8 | | | 0.1 | | | 18.9 | |
Net income | | 61.1 | | | 0.1 | | | 61.2 | |
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Utility | | Other | | Wisconsin Public Service Corporation |
Three months ended September 30, 2021 | | | | | | |
Operating revenues | | $ | 381.1 | | | $ | — | | | $ | 381.1 | |
Other operation and maintenance | | 102.2 | | | — | | | 102.2 | |
Depreciation and amortization | | 47.4 | | | — | | | 47.4 | |
Other income, net | | 7.7 | | | 0.4 | | | 8.1 | |
Interest expense | | 16.1 | | | — | | | 16.1 | |
Income tax expense | | 10.3 | | | 0.1 | | | 10.4 | |
Net income | | 71.6 | | | 0.3 | | | 71.9 | |
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Utility | | Other | | Wisconsin Public Service Corporation |
Nine Months Ended September 30, 2022 | | | | | | |
Operating revenues | | $ | 1,332.7 | | | $ | — | | | $ | 1,332.7 | |
Other operation and maintenance | | 268.0 | | | — | | | 268.0 | |
Depreciation and amortization | | 149.3 | | | — | | | 149.3 | |
Other income, net | | 31.7 | | | 1.0 | | | 32.7 | |
Interest expense | | 50.5 | | | — | | | 50.5 | |
Income tax expense | | 60.2 | | | 0.3 | | | 60.5 | |
Net income | | 193.7 | | | 0.7 | | | 194.4 | |
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Utility | | Other | | Wisconsin Public Service Corporation |
Nine Months Ended September 30, 2021 | | | | | | |
Operating revenues | | $ | 1,127.6 | | | $ | — | | | $ | 1,127.6 | |
Other operation and maintenance | | 294.0 | | | — | | | 294.0 | |
Depreciation and amortization | | 140.0 | | | — | | | 140.0 | |
Other income, net | | 25.8 | | | 1.3 | | | 27.1 | |
Interest expense | | 48.6 | | | — | | | 48.6 | |
Income tax expense | | 27.3 | | | 0.3 | | | 27.6 | |
Net income | | 200.4 | | | 1.0 | | | 201.4 | |
NOTE 18—COMMITMENTS AND CONTINGENCIES
We have significant commitments and contingencies arising from our operations, including those related to unconditional purchase obligations, environmental matters, and enforcement and litigation matters.
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Unconditional Purchase Obligations
We have obligations to distribute and sell electricity and natural gas to our customers and expect to recover costs related to these obligations in future customer rates. In order to meet these obligations, we routinely enter into long-term purchase and sale commitments for various quantities and lengths of time. Our minimum future commitments related to these purchase obligations as of September 30, 2022, were approximately $1.2 billion.
Environmental Matters
Consistent with other companies in the energy industry, we face significant ongoing environmental compliance and remediation obligations related to current and past operations. Specific environmental issues affecting us include, but are not limited to, current and future regulation of air emissions such as sulfur dioxide, NOx, fine particulates, mercury, and GHGs; water intake and discharges; management of coal combustion products such as fly ash; and remediation of impacted properties, including former manufactured gas plant sites.
Air Quality
Cross State Air Pollution Rule – Good Neighbor Plan
The EPA issued a proposed rule that would update and expand the Cross-State Air Pollution Rule's ozone-season NOx program to address the 2015 ozone NAAQS, resulting in more stringent regulation of ozone-season NOx emissions from EGUs in 26 states, relying on authorization through the CAA's “good neighbor provision." As part of the proposed rule, expected to take effect in May 2023, the EPA would establish a new trading program that would impose lower NOx emissions budgets on states, at levels that the EPA projected would be achievable through full operation of existing EGU emissions control equipment beginning during ozone season 2023, and through installation of additional control equipment at both EGU and non-EGU stationary sources by the start of the 2026 ozone season, as well as planned plant retirements.
Based on a review of our existing units' 2020 and 2021 actual ozone season emissions and projected future emissions versus proposed NOx ozone season allocations, we anticipate that we should be able to comply with the expanded rule requirements without procuring additional allowances on the open market.
Our planned RICE units in Wisconsin are not subject to this rule as proposed as each unit is expected to be less than 25 MW. We note that, to the extent we use RICE engines for natural gas distribution operations, those engines may be subject to the emission limits and operational requirements of the rule beginning in 2026. In June 2022, we submitted comments on this proposed rule seeking clarification of its applicability, as well as other items, and we will closely monitor the final rule for any changes from the proposed rule.
National Ambient Air Quality Standards
Ozone
After completing its review of the 2008 ozone standard, the EPA released a final rule in October 2015, creating a more stringent standard than the 2008 NAAQS. The 2015 ozone standard lowered the 8-hour limit for ground-level ozone. In December 2020, the EPA completed its 5-year review of the ozone standard and issued a final decision to retain, without any changes, the existing 2015 standard. Under Executive Order 13990, the Biden Administration ordered that all agencies review existing regulations, orders, guidance documents, policies, and similar actions promulgated, issued, or adopted between January 20, 2017 and January 20, 2021. In October 2021, the EPA announced that it will reconsider the December 2020 decision to retain the 2015 ozone standards with no changes and that it is targeting the end of 2023 to complete this reconsideration.
The EPA issued final nonattainment area designations for the 2015 ozone standard in April 2018. The following counties within our service territory were designated as partial nonattainment: Door, Sheboygan, and Manitowoc. The area designations were challenged in the D.C. Circuit Court of Appeals in Clean Wisconsin et al. v. U.S. Environmental Protection Agency. A decision was issued in July 2020 remanding the rule to the EPA for further evaluation. As a result of the July 2020 remand, in June 2021, the EPA published its final action to revise the nonattainment area designations and/or boundaries for 13 counties associated with six nonattainment areas, including several in Illinois and Wisconsin. Under the new designations, the partial nonattainment areas of Door, Sheboygan, and Manitowoc counties were also expanded.
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09/30/2022 Form 10-Q | 19 | Wisconsin Public Service Corporation |
In February 2022, revisions to the Wisconsin Administrative Code to adopt the 2015 standard were finalized. The amended regulations adopted the standard and incorporated by reference the federal air pollution monitoring requirements related to the standard. The WDNR submitted the rule updates as a State Implementation Plan revision to the EPA in April 2022, which the EPA proposed to approve in August 2022.
Particulate Matter
In December 2020, the EPA completed its 5-year review of the 2012 annual and 24-hour standards for fine particulate matter. The EPA determined that no revisions were necessary to the current annual standard of 12 µg/m3 or the 24-hour standard of 35 µg/m3. This determination was also subject to review under Executive Order 13990 and in June 2021, the EPA announced it would reconsider the December 2020 decision. Under the Biden Administration's policy review, the EPA concluded that the scientific evidence and information from the December 2020 determination supports revising the level of the annual standard for the particulate matter NAAQS to below the current level of 12 µg/m3, while retaining the 24-hour standard. In March 2022, the EPA’s CASAC sent a letter to the EPA finalizing its peer review of the particulate matter standards. Based on their review, the majority of the members of the CASAC found that lowering the annual standard to within a range of 8 to 10 µg/m3 was appropriate, while a minority of the members of the committee found that a range of 10 to 11 µg/m3 would be appropriate. Additionally, a majority of the CASAC members favored lowering the 24-hour standard, while a minority concurred with EPA’s preliminary conclusion to retain the 24-hour standard without revision. In May 2022, the EPA released its staff-written Policy Assessment for the reconsideration of the standard. Similar to the CASAC findings, the EPA staff found that conditions supported either an annual standard in the 10 to 12 µg/m3 range or in the 8 to 10 µg/m3 range.
In August 2022, the EPA sent a proposed rule regarding the review of the particulate matter standards to the Office of Management and Budget, which is expected to be released for public comment by the end of 2022. We anticipate the final rule to be released in spring 2023. All counties within our service territory are in attainment with the current 2012 standards. If the EPA lowers the annual standard to 10 or 11 µg/m3, our generating facilities within our service territory should remain in attainment. If the EPA lowers it to below 10 µg/m3, there could be some nonattainment areas that may affect permitting of some smaller ancillary equipment located at our facilities.
Climate Change
The ACE rule, which replaced the Clean Power Plan, was vacated by the D.C. Circuit Court of Appeals in January 2021. In October 2021, the Supreme Court agreed to review the D.C. Circuit Court's ruling vacating the EPA's ACE rule and in June 2022, the Supreme Court issued its decision. The Supreme Court found that the EPA may regulate GHGs under section 111 of the CAA but cannot rely on generation shifting to lower carbon emitting sources to do so. Based on an updated EPA regulatory timeline, we expect a new GHG replacement rule to be proposed in March 2023.
In January 2021, the EPA finalized a rule to revise the New Source Performance Standards for GHG emissions from new, modified, and reconstructed fossil-fueled power plants; however, it was vacated by the D.C. Circuit Court of Appeals in April 2021. Based on an updated EPA regulatory timeline, we expect a new rule to be proposed in March 2023. WEC Energy Group continues to move forward on the ESG Progress Plan, which is heavily focused on reducing GHG emissions.
The EPA released proposed regulations for the Greenhouse Gas Reporting Rule, 40 CFR Part 98, in June 2022. The proposed revisions could impact the reporting required of our natural gas utility operations with updates to emission factors for equipment counts and increased disclosure for large release events. We expect the final rule in late 2022 or early 2023, pending the EPA's review and consideration of public comments.
Additionally, we continue to assess the potential impacts of the waste emissions charge included in the IRA pending updates to the regulations.
The ESG Progress Plan includes the retirement of older, fossil-fueled generation, to be replaced with zero-carbon-emitting renewables and clean natural gas-fueled generation. We have already retired approximately 300 MW of coal-fired generation since the beginning of 2018. Through its ESG Progress Plan, WEC Energy Group expects to retire approximately 1,600 MW of additional fossil-fueled generation by the end of 2026, which includes the planned retirement by June 2026 of jointly-owned Columbia Units 1-2. See Note 20, Regulatory Environment, for more information on the timing of the retirements. In May 2021, WEC Energy Group announced goals to achieve reductions in carbon emissions from its electric generation fleet by 60% by the end of 2025 and by 80% by the end of 2030, both from a 2005 baseline. WEC Energy Group expects to achieve these goals by making operating
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09/30/2022 Form 10-Q | 20 | Wisconsin Public Service Corporation |
refinements, retiring less efficient generating units, and executing its capital plan. Over the longer term, the target for WEC Energy Group's generation fleet is net-zero CO2 emissions by 2050.
WEC Energy Group also continues to reduce methane emissions by improving its natural gas distribution systems, and has set a target across its natural gas distribution operations to achieve net-zero methane emissions by the end of 2030. WEC Energy Group plans to achieve its net-zero goal through an effort that includes both continuous operational improvements and equipment upgrades, as well as the use of RNG throughout its utility systems.
Water Quality
Clean Water Act Cooling Water Intake Structure Rule
In August 2014, the EPA issued a final regulation under Section 316(b) of the Clean Water Act that requires the location, design, construction, and capacity of cooling water intake structures at existing power plants to reflect the BTA for minimizing adverse environmental impacts. The federal rule became effective in October 2014 and applies to all of our existing generating facilities with cooling water intake structures.
In 2016, the WDNR initiated a state rulemaking process to incorporate the federal Section 316(b) requirements into the Wisconsin Administrative Code. This new state rule, NR 111, became effective in June 2020, and the WDNR will apply it when establishing BTA requirements for cooling water intake structures at existing facilities. These BTA requirements are incorporated into WPDES permits for our facilities.
We have received interim BTA determinations for Weston Units 2, 3, and 4. We believe that existing technology installed at the Weston facility will result in a final BTA determination during the WPDES permit reissuance in 2023.
As a result of past capital investments completed to address Section 316(b) compliance, we believe our fleet overall is well positioned to continue to meet this regulation and do not expect to incur significant additional compliance costs.
Steam Electric Effluent Limitation Guidelines
The EPA's final 2015 ELG rule took effect in January 2016 and was modified in 2020 to revise the treatment technology requirements related to BATW at existing facilities. This rule created new requirements for several types of power plant wastewaters. The new requirement that affects us relates to discharge limits for BATW. Our power plant facilities already have advanced wastewater treatment technologies installed that meet many of the discharge limits established by this rule. There will, however, need to be facility modifications to meet water permit requirements for the BATW system at Weston Unit 3, which is expected to be completed by December 2023. Based on engineering cost estimates, we expect that compliance with the ELG rule will require approximately $10 million in capital investment. The BATW modification does not require PSCW approval prior to construction. All of these ELG required projects are either in-service or are on track for completion by the WPDES permit deadline in December 2023.
In July 2021, the EPA announced that it intends to initiate rulemaking to revise the ELG Rule as modified in 2020. The EPA has stated that the ELG Rule will continue to be implemented and enforced while the agency pursues this rulemaking process. The EPA plans to propose a revised rule in the fourth quarter of 2022.
Waters of the United States
In December 2021, the EPA and the United States Army Corps of Engineers together released a proposed rule to repeal the April 2020 Navigable Waters Protection Rule that defined WOTUS. The purpose of this proposed rule will be to restore regulations defining WOTUS that were in place prior to 2015 and to update certain provisions to be consistent with relevant Supreme Court decisions. The pre-2015 approach involves applying factors established through case law and agency precedents to determine whether a wetland or surface drainage feature is subject to federal jurisdiction.
In January 2022, the Supreme Court granted certiorari in a case, Sackett v. Environmental Protection Agency, to evaluate the proper test for determining whether wetlands are WOTUS. The parcel at issue was determined to be a WOTUS by the U.S. Court of Appeals for the Ninth Circuit based on the “significant nexus” test. In October 2022, the Supreme Court heard oral arguments in this case during which Sackett's lawyers argued that the Ninth Circuit wrongly applied the "significant nexus" test to the property. A decision by the Supreme Court is expected in spring 2023.
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09/30/2022 Form 10-Q | 21 | Wisconsin Public Service Corporation |
At this point, our projects requiring federal permits are moving ahead, but we are monitoring these recent developments to better understand potential future impacts. This case, once decided, should provide some clarity regarding the definition of WOTUS. We will continue to monitor this litigation and any subsequent agency action.
Land Quality
Manufactured Gas Plant Remediation
We have identified sites at which we or a predecessor company owned or operated a manufactured gas plant or stored manufactured gas. We have also identified other sites that may have been impacted by historical manufactured gas plant activities. We are responsible for the environmental remediation of these sites, some of which are in the EPA Superfund Alternative Approach Program. We are also working with the state of Wisconsin in our investigation and remediation planning. These sites are at various stages of investigation, monitoring, remediation, and closure.
In addition, we are coordinating the investigation and cleanup of some of these sites subject to the jurisdiction of the EPA under what is called a "multisite" program. This program involves prioritizing the work to be done at the sites, preparation and approval of documents common to all of the sites, and use of a consistent approach in selecting remedies. At this time, we cannot estimate future remediation costs associated with these sites beyond those described below.
The future costs for detailed site investigation, future remediation, and monitoring are dependent upon several variables including, among other things, the extent of remediation, changes in technology, and changes in regulation. Historically, our regulators have allowed us to recover incurred costs, net of insurance recoveries and recoveries from potentially responsible parties, associated with the remediation of manufactured gas plant sites. Accordingly, we have established regulatory assets for costs associated with these sites.
We have established the following regulatory assets and reserves for manufactured gas plant sites:
| | | | | | | | | | | | | | |
(in millions) | | September 30, 2022 | | December 31, 2021 |
Regulatory assets | | $ | 116.9 | | | $ | 120.1 | |
Reserves for future environmental remediation | | 87.7 | | | 95.0 | |
Enforcement and Litigation Matters
We are involved in legal and administrative proceedings before various courts and agencies with respect to matters arising in the ordinary course of business. Although we are unable to predict the outcome of these matters, management believes that appropriate reserves have been established and that final settlement of these actions will not have a material impact on our financial condition or results of operations.
Consent Decrees
Weston and Pulliam Power Plants
In November 2009, the EPA issued an NOV to us, which alleged violations of the CAA's New Source Review requirements relating to certain projects completed at the Weston and Pulliam power plants from 1994 to 2009. We entered into a Consent Decree with the EPA resolving this NOV. This Consent Decree was entered by the United States District Court for the Eastern District of Wisconsin in March 2013. With the retirement of Pulliam Units 7 and 8 in October 2018, we completed the mitigation projects required by the Consent Decree and received a completeness letter from the EPA in October 2018. We are working with the EPA on a closeout process for the Consent Decree and expect that process to be completed in 2023.
Joint Ownership Power Plants – Columbia and Edgewater
In December 2009, the EPA issued an NOV to Wisconsin Power and Light Company, the operator of the Columbia and Edgewater plants, and the other joint owners of these plants, including Madison Gas and Electric Company, WE (former co-owner of an Edgewater unit), and us. The NOV alleged violations of the CAA's New Source Review requirements related to certain projects completed at those plants. We, along with Wisconsin Power and Light Company, Madison Gas and Electric Company, and WE, entered into a Consent Decree with the EPA resolving this NOV. This Consent Decree was entered by the United States District Court
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for the Western District of Wisconsin in June 2013. As a result of the continued implementation of the Consent Decree related to the jointly owned Columbia and Edgewater plants, the Edgewater 4 generating unit was retired in September 2018. Wisconsin Power and Light Company expects to start the process to close out this Consent Decree in early 2023.
NOTE 19—SUPPLEMENTAL CASH FLOW INFORMATION
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30 |
(in millions) | | 2022 | | 2021 |
Cash paid for interest, net of amount capitalized | | $ | 39.1 | | | $ | 35.9 | |
Cash paid (received) for income taxes, net | | 20.7 | | | (42.1) | |
Significant non-cash investing and financing transactions: | | | | |
Accounts payable related to construction costs | | 33.1 | | | 30.8 | |
Liabilities accrued for software licensing agreement | | 1.5 | | | — | |
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NOTE 20—REGULATORY ENVIRONMENT
2023 and 2024 Rates
In April 2022, we filed a request with the PSCW to increase our retail electric and natural gas rates, effective January 1, 2023. The requested increase in electric rates was driven by capital investments in new wind, solar, and battery storage; capital investments in natural gas generation; and changes in wholesale business with other utilities. Many of these investments have already been approved by the PSCW. The requested increase in natural gas rates primarily related to capital investments that have been made to maintain and improve safety and reliability.
In July 2022, we updated our rate request to reflect recent developments that impacted our original proposal for rate increases in 2023. These recent developments included:
•Delays in the in-service dates of Darien and the battery portion of Paris due to supply chain disruptions.
•Wisconsin Power & Light Company's decision to delay the retirements of the jointly-owned Columbia units. The retirements of the Columbia units, which were originally planned for the end of 2023 and 2024, were delayed until 2026. We hold a 27.5% ownership interest in these units.
•The effect of anticipated increases in interest rates on borrowing costs.
On September 29, 2022, we entered into a settlement agreement with certain intervenors to resolve most of the outstanding issues in our rate case. The settlement agreement, which is subject to PSCW review and approval, reflects the following:
| | | | | | | | | | | | | | |
2023 base rate increase | | | | |
Electric | | $ | 104.3 | million | / | 8.7% |
Gas | | $ | 31.3 | million | / | 8.6% |
Common equity component average on a financial basis | | 53.0% |
In addition to the above, the settlement agreement includes the following terms:
•We will keep our current earnings sharing mechanism, under which, if we earn above our authorized ROE: (i) we will retain 100.0% of earnings for the first 15 basis points above the authorized ROE; (ii) 50.0% of the next 60 basis points will be required to be refunded to ratepayers; and (iii) 100.0% of any remaining excess earnings will be required to be refunded to ratepayers.
•We will not propose any changes to our real-time pricing rates for large commercial and industrial electric customers through the end of 2024.
•We will lower monthly residential and small commercial electric customer fixed charges by $2.00 from currently authorized rates.
•We agreed to propose an additional voluntary renewable energy pilot for commercial and industrial customers.
•We, along with WE, made commitments related to certain low income assistance programs and agreed to collectively contribute $4.0 million to the Keep Wisconsin Warm Fund.
Our authorized ROE will be decided by the PSCW. We requested an authorized ROE of 10.0%.
We are seeking a limited rate case re-opener for 2024 to address additional revenue requirements associated with generation projects that are expected to be placed into service in 2023 and 2024.
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We expect a decision from the PSCW in the fourth quarter of 2022, with rate adjustments expected to be effective January 1, 2023.
NOTE 21—NEW ACCOUNTING PRONOUNCEMENTS
Reference Rate Reform
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. We are currently evaluating the impact this guidance may have on our financial statements and related disclosures.
Government Assistance
In November 2021, the FASB issued ASU No. 2021-10, Government Assistance (Topic 832). The amendments in this update increase the transparency surrounding government assistance by requiring disclosure of: (i) the types of assistance received; (ii) an entity’s accounting for the assistance; and (iii) the effect of the assistance on the entity’s financial statements. The update is effective for annual periods beginning after December 15, 2021. We plan to adopt this pronouncement for our fiscal year ending on December 31, 2022, and we are currently evaluating the impact this guidance may have on our financial statements and related disclosures.
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09/30/2022 Form 10-Q | 24 | Wisconsin Public Service Corporation |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CORPORATE DEVELOPMENTS
The following discussion should be read in conjunction with the accompanying unaudited financial statements and related notes and our 2021 Annual Report on Form 10-K.
Introduction
We are an electric and natural gas utility and an indirect wholly owned subsidiary of WEC Energy Group. We derive revenues primarily from the distribution and sale of electricity and natural gas to retail customers in Wisconsin. We also provide wholesale electric service to numerous utilities and cooperatives for resale. We conduct our business primarily through our utility reportable segment. See Note 17, Segment Information, for more information on our reportable business segments.
Corporate Strategy
Our goal is to continue to build and sustain long-term value for our customers and WEC Energy Group's shareholders by focusing on the fundamentals of our business: environmental stewardship; reliability; operating efficiency; financial discipline; exceptional customer care; and safety. WEC Energy Group's capital investment plan for efficiency, sustainability and growth, referred to as its ESG Progress Plan, provides a roadmap to achieve this goal. It is an aggressive plan to cut emissions, maintain superior reliability, deliver significant savings for customers, and grow WEC Energy Group's and our investment in the future of energy.
Throughout its strategic planning process, WEC Energy Group takes into account important developments, risks and opportunities, including new technologies, customer preferences and affordability, energy resiliency efforts, and sustainability. WEC Energy Group published the results of a priority sustainability issue assessment in 2020, identifying the issues that are most important to the company and its stakeholders over the short and long terms. This risk and priority assessment has formed WEC Energy Group's direction as a company.
Creating a Sustainable Future
WEC Energy Group's ESG Progress Plan includes the retirement of older, fossil-fueled generation, to be replaced with zero-carbon-emitting renewables and clean natural gas-fired generation at its electric utilities, including us. When taken together, the retirements and new investments should better balance supply with demand, while maintaining reliable, affordable energy for our customers. The retirements will contribute to meeting WEC Energy Group's and our goals to reduce CO2 emissions from electric generation.
In May 2021, WEC Energy Group announced goals to achieve reductions in carbon emissions from its electric generation fleet by 60% by the end of 2025 and by 80% by the end of 2030, both from a 2005 baseline. WEC Energy Group expects to achieve these goals by making operating refinements, retiring less efficient generating units and executing its capital plan. Over the longer term, the target for its generation fleet is net-zero CO2 emissions by 2050.
As part of the path toward these goals, by the end of 2030, WEC Energy Group expects to use coal as a backup fuel only, and WEC Energy Group believes it will be in a position to eliminate coal as an energy source by the end of 2035.
WEC Energy Group already has retired more than 1,800 MWs of coal-fired generation since the beginning of 2018, which included the 2018 retirement of the Pulliam power plant as well as the jointly-owned Edgewater Unit 4 generating units. Through the ESG Progress Plan, WEC Energy Group expects to retire approximately 1,600 MW of additional fossil-fueled generation by the end of 2026, which includes the planned retirement in 2026 of the jointly-owned Columbia Units 1-2. See Note 20, Regulatory Environment, for information on the delay of these planned retirements.
In addition to retiring these older, fossil-fueled plants, WEC Energy Group expects to invest approximately $5.4 billion from 2023-2027 in regulated renewable energy in Wisconsin. WEC Energy Group's plan is to replace a portion of the retired capacity by building and owning zero-carbon-emitting renewable generation facilities that are anticipated to include the following new investments made by either us or WE based on specific customer needs:
•1,800 MW of utility-scale solar;
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09/30/2022 Form 10-Q | 25 | Wisconsin Public Service Corporation |
•700 MW of battery storage; and
•700 MW of wind.
In addition, we partnered with an unaffiliated utility to construct two solar projects now in service in Wisconsin: Two Creeks Solar Park and Badger Hollow I. We own 100 MW of each project for a total of 200 MW.
WEC Energy Group also plans on investing in a combination of clean, natural gas-fired generation, made by either us or WE based on specific customer needs, including:
•100 MW of RICE natural gas-fueled generation;
•the planned purchase of 200 MW of capacity in West Riverside — a combined-cycle natural gas plant recently completed by Alliant Energy in Wisconsin; and
•the planned purchase of Whitewater, a natural gas-fired combined-cycle electric generating facility with a capacity of 236.5 MW.
For more details on these projects, see Liquidity and Capital Resources – Cash Requirements – Significant Capital Projects.
In August 2021, the PSCW approved pilot programs for us to install and maintain EV charging equipment for customers at their homes or businesses. The programs provide direct benefits to customers by removing cost barriers associated with installing EV equipment. In October 2021, subject to the receipt of any necessary regulatory approvals, WEC Energy Group pledged to expand the EV charging network within its utilities' electric service territories. In doing so, WEC Energy Group joined a coalition of utility companies in a unified effort to make EV charging convenient and widely available throughout the Midwest. The coalition WEC Energy Group joined is planning to help build and grow EV charging corridors, enabling the general public to safely and efficiently charge their vehicles.
WEC Energy Group also continues to reduce methane emissions by improving its natural gas distribution system, and has set a target across its natural gas distribution operations to achieve net-zero methane emissions by the end of 2030. WEC Energy Group plans to achieve its net-zero goal through an effort that includes both continuous operational improvements and equipment upgrades, as well as the use of RNG throughout its utility systems. In 2022, we received approval from the PSCW for an RNG pilot and we signed our first contract for RNG for our natural gas distribution system, which will be transporting the output of a local dairy farm onto our gas distribution system. The RNG supplied will directly replace higher-emission methane from natural gas that would have entered our pipes. In total, WEC Energy Group has four contracts that should bring the company to 90 percent of the RNG needed to achieve its 2030 goal and expects to have RNG flowing to its distribution network by the end of 2022.
Reliability
We have made significant reliability-related investments in recent years, and in accordance with the ESG Progress Plan, expect to continue strengthening and modernizing our generation fleet, as well as our electric and natural gas distribution networks to further improve reliability.
For more details, see Liquidity and Capital Resources – Cash Requirements – Significant Capital Projects.
Operating Efficiency
We continually look for ways to optimize the operating efficiency of our company and will continue to do so under the ESG Progress Plan. For example, we are making progress on our AMI program, replacing aging meter-reading equipment on both our network and customer property. An integrated system of smart meters, communication networks, and data management programs enables two-way communication between us and our customers. This program reduces the manual effort for disconnects and reconnects and enhances outage management capabilities.
WEC Energy Group continues to focus on integrating the resources of its businesses and finding the best and most efficient processes.
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Financial Discipline
A strong adherence to financial discipline is essential to meeting our earnings projections and maintaining a strong balance sheet, stable cash flows, and quality credit ratings.
We follow an asset management strategy that focuses on investing in and acquiring assets consistent with our strategic plans, as well as disposing of assets, including property, plants, and equipment, that are no longer strategic to operations, are not performing as intended, or have an unacceptable risk profile. See Note 2, Acquisitions, for more information on our planned acquisitions of Whitewater and Red Barn.
Exceptional Customer Care
Our approach is driven by an intense focus on delivering exceptional customer care every day. We strive to provide the best value for our customers by demonstrating personal responsibility for results, leveraging our capabilities and expertise, and using creative solutions to meet or exceed our customers’ expectations.
A multiyear effort is driving a standardized, seamless approach to digital customer service across all of the WEC Energy Group companies. It has moved all utilities, including us, to a common platform for all customer-facing self-service options. Using common systems and processes reduces costs, provides greater flexibility and enhances the consistent delivery of exceptional service to customers.
Safety
Safety is one of our core values and a critical component of our culture. We are committed to keeping our employees and the public safe through a comprehensive corporate safety program that focuses on employee engagement and elimination of at-risk behaviors.
Under our "Target Zero" mission, we have an ultimate goal of zero incidents, accidents, and injuries. Management and union leadership work together to reinforce the Target Zero culture. We set annual goals for safety results as well as measurable leading indicators, in order to raise awareness of at-risk behaviors and situations and guide injury-prevention activities. All employees are encouraged to report unsafe conditions or incidents that could have led to an injury. Injuries and tasks with high levels of risk are assessed, and findings and best practices are shared across the WEC Energy Group companies.
Our corporate safety program provides a forum for addressing employee concerns, training employees and contractors on current safety standards, and recognizing those who demonstrate a safety focus.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2022
Earnings
Our earnings for the third quarter of 2022 were $61.2 million, compared with $71.9 million for the same quarter in 2021. See below for additional information on the $10.7 million decrease in earnings.
Non-GAAP Financial Measures
The discussion below addresses the contribution of our utility segment to net income. The discussion includes financial information prepared in accordance with GAAP, as well as electric margins and natural gas margins, which are not measures of financial performance under GAAP. Electric margins (electric revenues less fuel and purchased power costs) and natural gas margins (natural gas revenues less cost of natural gas sold) are non-GAAP financial measures because they exclude other operation and maintenance expense, depreciation and amortization, and property and revenue taxes.
We believe that electric and natural gas margins provide a useful basis for evaluating utility operations since the majority of prudently incurred fuel and purchased power costs, as well as prudently incurred natural gas costs, are passed through to customers in current rates. As a result, management uses electric and natural gas margins internally when assessing the operating performance
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of our utility segment as these measures exclude the majority of revenue fluctuations caused by changes in these expenses. Similarly, the presentation of electric and natural gas margins herein is intended to provide supplemental information for investors regarding our operating performance.
Our electric margins and natural gas margins may not be comparable to similar measures presented by other companies. Furthermore, these measures are not intended to replace operating income as determined in accordance with GAAP as an indicator of operating performance. Our utility segment operating income for the three months ended September 30, 2022 and 2021 was $86.4 million and $90.3 million, respectively. The discussion below includes a table that provides the calculation of electric margins and natural gas margins, along with a reconciliation to the most directly comparable GAAP measure, operating income.
Utility Segment Contribution to Net Income
The following table compares our utility segment's contribution to net income for the third quarter of 2022, with the same quarter in 2021, including favorable or better, "B", and unfavorable or worse, "W", variances.
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 |
(in millions) | | 2022 | | 2021 | | B (W) |
Electric revenues | | $ | 373.4 | | | $ | 338.1 | | | $ | 35.3 | |
Fuel and purchased power | | 159.8 | | | 111.6 | | | (48.2) | |
Total electric margins | | 213.6 | | | 226.5 | | | (12.9) | |
| | | | | | |
Natural gas revenues | | 61.9 | | | 43.0 | | | 18.9 | |
Cost of natural gas sold | | 38.7 | | | 19.7 | | | (19.0) | |
Total natural gas margins | | 23.2 | | | 23.3 | | | (0.1) | |
| | | | | | |
Total electric and natural gas margins | | 236.8 | | | 249.8 | | | (13.0) | |
| | | | | | |
Other operation and maintenance | | 89.9 | | | 102.2 | | | 12.3 | |
Depreciation and amortization | | 50.1 | | | 47.4 | | | (2.7) | |
Property and revenue taxes | | 10.4 | | | 9.9 | | | (0.5) | |
Operating income | | 86.4 | | | 90.3 | | | (3.9) | |
| | | | | | |
Other income, net | | 10.8 | | | 7.7 | | | 3.1 | |
Interest expense | | 17.3 | | | 16.1 | | | (1.2) | |
Income before income taxes | | 79.9 | | | 81.9 | | | (2.0) | |
| | | | | | |
Income tax expense | | 18.8 | | | 10.3 | | | (8.5) | |
Net income | | $ | 61.1 | | | $ | 71.6 | | | $ | (10.5) | |
The following table shows a breakdown of other operation and maintenance:
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| | Three Months Ended September 30 |
(in millions) | | 2022 | | 2021 | | B (W) |
Operation and maintenance not included in line items below | | $ | 51.6 | | | $ | 54.5 | | | $ | 2.9 | |
Transmission (1) | | 33.5 | | | 38.1 | | | 4.6 | |
Regulatory amortizations and other pass through expenses (2) | | 10.2 | | | 9.6 | | | (0.6) | |
Earnings sharing mechanism (3) | | (5.4) | | | — | | | 5.4 | |
Total other operation and maintenance | | $ | 89.9 | | | $ | 102.2 | | | $ | 12.3 | |
(1)Represents transmission expense that we are authorized to collect in rates. The PSCW has approved escrow accounting for ATC and MISO network transmission expenses. As a result, we defer as a regulatory asset or liability, the difference between actual transmission costs and those included in rates until recovery or refund is authorized in a future rate proceeding. During the third quarter of 2022 and 2021, $40.2 million and $35.6 million, respectively, of costs were billed to us by transmission providers.
During the third quarter of 2022 we amortized $4.8 million of the regulatory liabilities associated with our transmission escrow to offset certain 2022 revenue deficiencies, as approved by the PSCW in order to forego filing for a 2022 base rate increase. This amortization drove the decrease in transmission expense during the third quarter of 2022, compared with the same quarter in 2021. See Note 23, Regulatory Environment, in our 2021 Annual Report on Form 10-K for additional information on 2022 base rates.
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(2)Regulatory amortizations and other pass through expenses are substantially offset in margins and therefore do not have a significant impact on net income.
(3)Represents amortization of a certain portion of our regulatory liability associated with our 2020 earnings sharing mechanism to offset certain 2022 revenue deficiencies, as approved by the PSCW in order to forego filing for a 2022 base rate increase. See Note 23, Regulatory Environment, in our 2021 Annual Report on Form 10-K for additional information on 2022 base rates.
The following tables provide information on delivered sales volumes by customer class and weather statistics:
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| | Three Months Ended September 30 |
| | MWh (in thousands) |
Electric Sales Volumes | | 2022 | | 2021 | | B (W) |
Customer class | | | | | | |
Residential | | 820.7 | | | 847.2 | | | (26.5) | |
Small commercial and industrial | | 1,098.3 | | | 1,109.4 | | | (11.1) | |
Large commercial and industrial | | 1,026.8 | | | 1,057.1 | | | (30.3) | |
Other | | 5.7 | | | 5.7 | | | — | |
Total retail | | 2,951.5 | | | 3,019.4 | | | (67.9) | |
Wholesale | | 438.4 | | | 485.4 | | | (47.0) | |
Resale | | 98.8 | | | 54.4 | | | 44.4 | |
Total sales in MWh | | 3,488.7 | | | 3,559.2 | | | (70.5) | |
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 |
| | Therms (in millions) |
Natural Gas Sales Volumes | | 2022 | | 2021 | | B (W) |
Customer class | | | | | | |
Residential | | 14.3 | | | 13.1 | | | 1.2 | |
Commercial and industrial | | 21.1 | | | 18.3 | | | 2.8 | |
Total retail | | 35.4 | | | 31.4 | | | 4.0 | |
Transportation | | 97.6 | | | 96.6 | | | 1.0 | |
Total sales in therms | | 133.0 | | | 128.0 | | | 5.0 | |
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| | Three Months Ended September 30 |
| | Degree Days |
Weather (1) | | 2022 | | 2021 | | B (W) |
Heating (177 Normal) | | 129 | | | 114 | | | 13.2 | % |
Cooling (388 Normal) | | 468 | | | 389 | | | 20.3 | % |
(1)Normal degree days are based on a 20-year moving average of monthly temperatures from the Green Bay, Wisconsin weather station.
Electric Revenues
Electric revenues increased $35.3 million during the third quarter of 2022, compared with the same quarter in 2021. To the extent that changes in fuel and purchased power costs are passed through to customers, the changes are offset by comparable changes in revenues. See the discussion of electric utility margins below for more information related to the recovery of fuel and purchased power costs and the remaining drivers of the changes in electric revenues.
Electric Utility Margins
Electric utility margins decreased $12.9 million during the third quarter of 2022, compared with the same quarter in 2021. The significant factor impacting the lower electric utility margins was a $24.5 million decrease in margins related to our expected fuel recovery, driven by higher fuel costs as well as our current fuel forecast and earnings assumptions. Under the Wisconsin fuel rules, our margins are impacted by under- or over-collections of certain fuel and purchased power costs that are within a 2% price variance from the costs included in rates, and the remaining variance beyond the 2% price variance is generally deferred for future recovery
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09/30/2022 Form 10-Q | 29 | Wisconsin Public Service Corporation |
or refund to customers. We will review our actual fuel costs and earnings results at the end of the year and will further adjust our expected fuel recovery accordingly.
This decrease in margins was partially offset by an $11.9 million increase in margins related to the impact of unprotected excess deferred taxes during the third quarter of 2021, which we agreed to return to customers in our PSCW-approved rate order. This increase in margins is offset in income taxes. See Note 23, Regulatory Environment, in our 2021 Annual Report on Form 10-K for additional information on our rate order.
Natural Gas Revenues
Natural gas revenues increased $18.9 million during the third quarter of 2022, compared with the same quarter in 2021. Because prudently incurred natural gas costs are passed through to our customers in current rates, the changes are offset by comparable changes in revenues. The average per-unit cost of natural gas increased 56% during the third quarter of 2022, compared with the same quarter in 2021.
Other Operating Expenses (includes other operation and maintenance, depreciation and amortization, and property and revenue taxes)
Other operating expenses at the utility segment decreased $9.1 million during the third quarter of 2022, compared with the same quarter in 2021. The significant factors impacting the decrease in operating expenses were:
•A $5.4 million decrease in expense driven by the amortization of a certain portion of our regulatory liability associated with our 2020 earnings sharing mechanism, as discussed in the notes under the other operation and maintenance table above.
•A $4.6 million decrease in transmission expense driven by the amortization of a certain portion of our regulatory liabilities associated with our transmission escrow balance, as discussed in the notes under the other operation and maintenance table above.
•A $1.0 million decrease in expense related to 2021 charitable projects supporting our customers and the communities within our service territories.
These decreases in other operating expenses were partially offset by a $2.7 million increase in depreciation and amortization, driven by assets being placed into service as we continue to execute on our capital plan.
Other Income, Net
Other income, net increased $3.1 million during the third quarter of 2022, compared with the same quarter in 2021, driven by higher net credits from the non-service components of our net periodic pension and OPEB costs. See Note 15, Employee Benefits, for more information on our benefit costs.
Interest Expense
Interest expense increased $1.2 million during the third quarter of 2022, compared with the same quarter in 2021, driven primarily by higher interest rates on short-term debt.
Income Tax Expense
Income tax expense increased $8.5 million during the third quarter of 2022, compared with the same quarter in 2021. The increase in income tax expense was due to an approximate $12 million negative impact related to lower quarter-over-quarter amortization of the unprotected excess deferred tax benefits from the Tax Legislation in connection with the rate order approved by the PSCW, effective January 1, 2020. The negative impact from the amortization of the unprotected excess deferred tax benefits from the Tax Legislation did not impact earnings as there was an offsetting impact in operating income. See Note 11, Income Taxes, for additional information on unprotected tax benefits.
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Other Segment Contribution to Net Income
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 |
(in millions) | | 2022 | | 2021 | | B (W) |
Net income | | $ | 0.1 | | | $ | 0.3 | | | $ | (0.2) | |
NINE MONTHS ENDED SEPTEMBER 30, 2022
Earnings
Our earnings for the nine months ended September 30, 2022 were $194.4 million, compared to $201.4 million for the same period in 2021. See below for additional information on the $7.0 million decrease in earnings.
Expected 2022 Annual Effective Tax Rate
We expect our 2022 annual effective tax rate to be between 23% and 24%. Our effective tax rate calculations are revised every quarter based on the best available year-end tax assumptions, adjusted in the following year after returns are filed. Tax accrual estimates are trued-up to the actual amounts claimed on the tax returns and further adjusted after examinations by taxing authorities, as needed.
Non-GAAP Financial Measures
The discussion below addresses the contribution of our utility segment to net income. The discussion includes financial information prepared in accordance with GAAP, as well as electric margins and natural gas margins, which are not measures of financial performance under GAAP. Electric margins (electric revenues less fuel and purchased power costs) and natural gas margins (natural gas revenues less cost of natural gas sold) are non-GAAP financial measures because they exclude other operation and maintenance expense, depreciation and amortization, and property and revenue taxes.
We believe that electric and natural gas margins provide a useful basis for evaluating utility operations since the majority of prudently incurred fuel and purchased power costs, as well as prudently incurred natural gas costs, are passed through to customers in current rates. As a result, management uses electric and natural gas margins internally when assessing the operating performance of our utility segment as these measures exclude the majority of revenue fluctuations caused by changes in these expenses. Similarly, the presentation of electric and natural gas margins herein is intended to provide supplemental information for investors regarding our operating performance.
Our electric margins and natural gas margins may not be comparable to similar measures presented by other companies. Furthermore, these measures are not intended to replace operating income as determined in accordance with GAAP as an indicator of operating performance. Our utility segment operating income for the nine months ended September 30, 2022 and 2021 was $272.7 million and $250.5 million, respectively. The discussion below includes a table that provides the calculation of electric margins and natural gas margins, along with a reconciliation to the most directly comparable GAAP measure, operating income.
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Utility Segment Contribution to Net Income
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30 |
(in millions) | | 2022 | | 2021 | | B (W) |
Electric revenues | | $ | 1,018.8 | | | $ | 901.2 | | | $ | 117.6 | |
Fuel and purchased power | | 395.3 | | | 280.6 | | | (114.7) | |
Total electric margins | | 623.5 | | | 620.6 | | | 2.9 | |
| | | | | | |
Natural gas revenues | | 313.9 | | | 226.4 | | | 87.5 | |
Cost of natural gas sold | | 215.4 | | | 132.4 | | | (83.0) | |
Total natural gas margins | | 98.5 | | | 94.0 | | | 4.5 | |
| | | | | | |
Total electric and natural gas margins | | 722.0 | | | 714.6 | | | 7.4 | |
| | | | | | |
Other operation and maintenance | | 268.0 | | | 294.0 | | | 26.0 | |
Depreciation and amortization | | 149.3 | | | 140.0 | | | (9.3) | |
Property and revenue taxes | | 32.0 | | | 30.1 | | | (1.9) | |
Operating income | | 272.7 | | | 250.5 | | | 22.2 | |
| | | | | | |
Other income, net | | 31.7 | | | 25.8 | | | 5.9 | |
Interest expense | | 50.5 | | | 48.6 | | | (1.9) | |
Income before income taxes | | 253.9 | | | 227.7 | | | 26.2 | |
| | | | | | |
Income tax expense | | 60.2 | | | 27.3 | | | (32.9) | |
Net income | | $ | 193.7 | | | $ | 200.4 | | | $ | (6.7) | |
The following table shows a breakdown of other operation and maintenance:
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30 |
(in millions) | | 2022 | | 2021 | | B (W) |
Operation and maintenance not included in line items below | | $ | 153.3 | | | $ | 151.4 | | | $ | (1.9) | |
Transmission (1) | | 100.1 | | | 114.0 | | | 13.9 | |
Regulatory amortizations and other pass through expenses (2) | | 30.8 | | | 28.6 | | | (2.2) | |
Earnings sharing mechanism (3) | | (16.2) | | | — | | | 16.2 | |
Total other operation and maintenance | | $ | 268.0 | | | $ | 294.0 | | | $ | 26.0 | |
(1)Represents transmission expense that we are authorized to collect in rates. The PSCW has approved escrow accounting for ATC and MISO network transmission expenses. As a result, we defer as a regulatory asset or liability, the difference between actual transmission costs and those included in rates until recovery or refund is authorized in a future rate proceeding. During the nine months ended September 30, 2022 and 2021, $117.2 million and $111.3 million, respectively, of costs were billed to us by transmission providers.
During the nine months ended September 30, 2022, we amortized $14.3 million of the regulatory liabilities associated with our transmission escrow to offset certain 2022 revenue deficiencies, as approved by the PSCW in order to forego filing for a 2022 base rate increase. This amortization drove the decrease in transmission expense during the nine months ended September 30, 2022, compared with the same period in 2021.
(2)Regulatory amortizations and other pass through expenses are substantially offset in margins and therefore do not have a significant impact on net income.
(3)Represents amortization of a certain portion of our regulatory liability associated with our 2020 earnings sharing mechanism to offset certain 2022 revenue deficiencies, as approved by the PSCW in order to forego filing for a 2022 base rate increase.
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The following tables provide information on delivered sales volumes by customer class and weather statistics:
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| | Nine Months Ended September 30 |
| | MWh (in thousands) |
Electric Sales Volumes | | 2022 | | 2021 | | B (W) |
Customer class | | | | | | |
Residential | | 2,308.0 | | | 2,307.6 | | | 0.4 | |
Small commercial and industrial | | 3,077.9 | | | 3,050.8 | | | 27.1 | |
Large commercial and industrial | | 3,002.9 | | | 2,996.9 | | | 6.0 | |
Other | | 18.4 | | | 18.7 | | | (0.3) | |
Total retail | | 8,407.2 | | | 8,374.0 | | | 33.2 | |
Wholesale | | 1,241.4 | | | 1,330.2 | | | (88.8) | |
Resale | | 279.9 | | | 187.3 | | | 92.6 | |
Total sales in MWh | | 9,928.5 | | | 9,891.5 | | | 37.0 | |
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30 |
| | Therms (in millions) |
Natural Gas Sales Volumes | | 2022 | | 2021 | | B (W) |
Customer Class | | | | | | |
Residential | | 186.3 | | | 163.4 | | | 22.9 | |
Commercial and industrial | | 144.9 | | | 120.1 | | | 24.8 | |
Total retail | | 331.2 | | | 283.5 | | | 47.7 | |
Transportation | | 360.0 | | | 347.5 | | | 12.5 | |
Total sales in therms | | 691.2 | | | 631.0 | | | 60.2 | |
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30 |
| | Degree Days |
Weather (1) | | 2022 | | 2021 | | B (W) |
Heating (4,787 Normal) | | 4,880 | | | 4,450 | | | 9.7 | % |
Cooling (532 Normal) | | 717 | | | 631 | | | 13.6 | % |
(1)Normal degree days are based on a 20-year moving average of monthly temperatures from the Green Bay, Wisconsin weather station.
Electric Revenues
Electric revenues increased $117.6 million during the nine months ended September 30, 2022, compared with the same period in 2021. To the extent that changes in fuel and purchased power costs are passed through to customers, the changes are offset by comparable changes in revenues. See the discussion of electric utility margins below for more information related to the recovery of fuel and purchased power costs and the remaining drivers of the changes in electric revenues.
Electric Utility Margins
Electric utility margins increased $2.9 million during the nine months ended September 30, 2022, compared with the same period in 2021. The significant factors impacting the higher electric utility margins were:
•A $32.9 million increase in margins related to the impact of unprotected excess deferred taxes during the nine months ended September 30, 2021, which we agreed to return to customers in our PSCW-approved rate order. This increase in margins is offset in income taxes.
•A $4.6 million net increase in margins related to higher retail sales volumes, driven by the impact of favorable weather during the nine months ended September 30, 2022, compared with the same period in 2021. As measured by heating degree days, the nine months ended September 30, 2022 were 9.7% colder than the same period in 2021. As measured by cooling degree days, the nine months ended September 30, 2022 were 13.6% warmer than the same period in 2021.
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These increases in margins were partially offset by a $35.2 million decrease in margins related to our expected fuel recovery, driven by higher fuel costs as well as our current fuel forecast and earnings assumptions. Under the Wisconsin fuel rules, our margins are impacted by under- or over-collections of certain fuel and purchased power costs that are within a 2% price variance from the costs included in rates, and the remaining variance beyond the 2% price variance is generally deferred for future recovery or refund to customers. We will review our actual fuel costs and earnings results at the end of the year and will further adjust our expected fuel recovery accordingly.
Natural Gas Revenues
Natural gas revenues increased $87.5 million during the nine months ended September 30, 2022, compared with the same period in 2021. Because prudently incurred natural gas costs are passed through to our customers in current rates, the changes are offset by comparable changes in revenues. The average per-unit cost of natural gas increased 37% during the nine months ended September 30, 2022, compared with the same period in 2021. The remaining drivers of changes in natural gas revenues are described in the discussion of natural gas utility margins below.
Natural Gas Utility Margins
Natural gas utility margins increased $4.5 million during the nine months ended September 30, 2022, compared with the same period in 2021. The most significant factor impacting the higher natural gas utility margins was an increase from higher sales volumes, primarily driven by the continued economic recovery in Wisconsin from the COVID-19 pandemic, as well as colder weather during the nine months ended September 30, 2022, compared with the same period in 2021.
Other Operating Expenses (includes other operation and maintenance, depreciation and amortization, and property and revenue taxes)
Other operating expenses at the utility segment decreased $14.8 million during the nine months ended September 30, 2022, compared with the same period in 2021. The significant factors impacting the decrease in operating expenses were:
•A $16.2 million decrease in expense driven by the amortization of a certain portion of our regulatory liability associated with our 2020 earnings sharing mechanism, as discussed in the notes under the other operation and maintenance table above.
•A $13.9 million decrease in transmission expense driven by the amortization of a certain portion of our regulatory liabilities associated with our transmission escrow balance, as discussed in the notes under the other operation and maintenance table above.
These decreases in operating expenses were partially offset by:
•A $9.3 million increase in depreciation and amortization, driven by assets being placed into service as we continue to execute on our capital plan.
•A $7.5 million increase in electric and natural gas distribution expenses, primarily driven by higher costs to maintain system reliability during the nine months ended September 30, 2022, compared with the same period in 2021.
Other Income, Net
Other income, net increased $5.9 million during the nine months ended September 30, 2022, compared with the same period in 2021, driven by higher net credits from the non-service components of our net periodic pension and OPEB costs. This increase was partially offset by lower AFUDC-Equity, driven by Badger Hollow I being placed in service in November 2021.
Interest Expense
Interest expense increased $1.9 million during the nine months ended September 30, 2022, compared with the same period in 2021. This increase was primarily due to higher interest rates on short-term debt. Also contributing to the increase was AFUDC-Debt, driven by Badger Hollow I being placed in service in November 2021.
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Income Tax Expense
Income tax expense increased $32.9 million during the nine months ended September 30, 2022, compared with the same period in 2021. This increase was primarily due to an approximate $33 million negative impact related to lower period-over-period amortization of the unprotected excess deferred tax benefits from the Tax Legislation in connection with the rate order approved by the PSCW, effective January 1, 2020. The negative impact from the amortization of the unprotected excess deferred tax benefits from the Tax Legislation did not impact earnings as there was an offsetting impact in operating income.
Other Segment Contribution to Operating Income
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| | Nine Months Ended September 30 |
(in millions) | | 2022 | | 2021 | | B (W) |
Net income | | $ | 0.7 | | | $ | 1.0 | | | $ | (0.3) | |
LIQUIDITY AND CAPITAL RESOURCES
Overview
We expect to maintain adequate liquidity to meet our cash requirements for the operation of our business and implementation of our corporate strategy through the internal generation of cash from operations and access to the capital markets.
Cash Flows
The following table summarizes our cash flows during the nine months ended September 30:
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(in millions) | | 2022 | | 2021 | | Change in 2022 Over 2021 |
Cash provided by (used in): | | | | | | |
Operating activities | | $ | 311.7 | | | $ | 424.9 | | | $ | (113.2) | |
Investing activities | | (289.1) | | | (285.7) | | | (3.4) | |
Financing activities | | (25.0) | | | (139.0) | | | 114.0 | |
Operating Activities
Net cash provided by operating activities decreased $113.2 million during the nine months ended September 30, 2022, compared with the same period in 2021, driven by:
•A $122.1 million decrease in cash from higher payments for fuel and purchased power at our plants during the nine months ended September 30, 2022, compared with the same period in 2021. Our plants incurred higher fuel costs during the nine months ended September 30, 2022, as a result of an increase in the price of natural gas.
•A $62.8 million decrease in cash related to $20.7 million of cash paid for income taxes during the nine months ended September 30, 2022, compared with $42.1 million of cash received for income taxes during the same period in 2021. The higher cash paid for income taxes was driven by the monetization of fewer tax credits and higher taxable income during the nine months ended September 30, 2022.
These decreases in net cash provided by operating activities were partially offset by:
•A $46.0 million increase in cash from higher overall collections from customers as a result of an increase in sales volumes during the nine months ended September 30, 2022, compared with the same period in 2021. This increase was driven by favorable weather and the continued economic recovery from the COVID-19 pandemic.
•A $22.2 million increase in cash related to lower payments for other operation and maintenance expenses, driven by the timing of payments for accounts payable.
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Investing Activities
Net cash used in investing activities increased $3.4 million during the nine months ended September 30, 2022, compared with the same period in 2021, driven by a $26.1 million increase in cash paid for capital expenditures during the nine months ended September 30, 2022.
This increase in net cash used in investing activities was partially offset by:
•Proceeds of $10.0 million received for reimbursement of ATC's construction costs during the nine months ended September 30, 2022. There were no proceeds received for reimbursement during the nine months ended September 30, 2021.
•Payments of $5.3 million to affiliates for assets transferred related to a customer billing system during the nine months ended September 30, 2021. There were no payments to affiliates for assets transferred during the nine months ended September 30, 2022.
•Proceeds of $4.4 million received for the cash surrender of life insurance during the nine months ended September 30, 2022.
Capital Expenditures
Capital expenditures for the nine months ended September 30 were as follows:
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(in millions) | | 2022 | | 2021 | | | | Change in 2022 Over 2021 | | |
Capital expenditures | | $ | 306.3 | | | $ | 280.2 | | | | | $ | 26.1 | | | |
The increase in cash paid for capital expenditures during the nine months ended September 30, 2022, compared with the same period in 2021, was driven by higher payments for capital expenditures related to Paris and other renewable energy projects and the new natural gas-fired generation being constructed at the existing Weston power plant site. These increases were partially offset by lower payments for capital expenditures related to upgrades to our natural gas and electric distribution systems and Crane Creek.
See Capital Resources and Requirements – Capital Requirements – Significant Capital Projects for more information.
Financing Activities
Net cash used in financing activities decreased $114.0 million during the nine months ended September 30, 2022, compared with the same period in 2021, driven by:
•A $70.0 million increase in cash related to higher equity contributions received from our parent during the nine months ended September 30, 2022, compared with the same period in 2021, to balance our capital structure.
•A $44.4 million increase in cash related to lower net repayments of commercial paper during the nine months ended September 30, 2022, compared with the same period in 2021.
For more information on our financing activities, see Note 8, Short-Term Debt and Lines of Credit.
Cash Requirements
We require funds to support and grow our business. Our significant cash requirements primarily consist of capital and investment expenditures, payments to retire and pay interest on long-term debt, the payment of common stock dividends to our parent, and the funding of our ongoing operations. See the discussion below and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Cash Requirements in our 2021 Annual Report on Form 10-K for additional information regarding our significant cash requirements.
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Significant Capital Projects
We have several capital projects that will require significant capital expenditures over the next three years and beyond. All projected capital requirements are subject to periodic review and may vary significantly from estimates, depending on a number of factors. These factors include environmental requirements, regulatory restraints and requirements, changes in tax laws and regulations, acquisition and development opportunities, market volatility, economic trends, supply chain disruptions, inflation, and interest rates. Our estimated capital expenditures and acquisitions for the next three years are reflected below. These amounts include anticipated expenditures for environmental compliance and certain remediation issues. For a discussion of certain environmental matters affecting us, see Note 18, Commitments and Contingencies.
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(in millions) | | | |
2022 | | $ | 517.3 | | (1) |
2023 | | 754.8 | | |
2024 | | 679.9 | | |
Total | | $ | 1,952.0 | | |
(1)This includes actual capital expenditures incurred through September 30, 2022, as well as estimated capital expenditures for the remainder of the year.
We continue to upgrade our electric and natural gas distribution systems to enhance reliability. These upgrades include addressing our aging infrastructure and system hardening and the AMI program. AMI is an integrated system of smart meters, communication networks, and data management systems that enable two-way communication between utilities and customers.
WEC Energy Group is committed to investing in solar, wind, battery storage, and clean natural gas-fired generation. Below are examples of projects that are proposed or currently underway.
•We, along with WE and an unaffiliated utility, received PSCW approval to acquire and construct Paris, a utility-scale solar-powered electric generating facility with a battery energy storage system. The project will be located in Kenosha County, Wisconsin and once fully constructed, we will own 30 MW of solar generation and 17 MW of battery storage of this project. Our share of the cost of this project is estimated to be approximately $65 million, with construction of the solar portion expected to be completed in 2023.
•We, along with WE, received approval to accelerate capital investments in two wind parks. Our share of the investment is expected to be approximately $69 million to repower major components of Crane Creek, which is expected to be completed by the end of 2022.
•In March 2021, we, along with WE and an unaffiliated utility, filed an application with the PSCW for approval to acquire and construct Darien, a utility-scale solar-powered electric generating facility with a battery energy storage system. The project will be located in Rock and Walworth counties, Wisconsin and once fully constructed, we will own 37 MW of solar generation and 12 MW of battery storage of this project. If approved, our share of the cost of this project is estimated to be approximately $65 million, with construction of the solar portion expected to be completed in 2024.
•We, along with an unaffiliated utility, received PSCW approval to acquire Red Barn, a utility-scale wind-powered electric generating facility. The project will be located in Grant County, Wisconsin and once constructed, we will own 82 MW of this project. Our share of the cost of this project is estimated to be approximately $160 million, with construction expected to be completed in early 2023.
•In April 2021, we, along with WE and an unaffiliated utility, filed an application with the PSCW for approval to acquire the Koshkonong Solar-Battery Park, a utility-scale solar-powered electric generating facility with a battery energy storage system. The project will be located in Dane County, Wisconsin and once fully constructed, we will own 45 MW of solar generation and 25 MW of battery storage of this project. If approved, our share of the cost of this project is estimated to be approximately $97 million, with construction of the solar portion expected to be completed in 2025.
•We, along with WE, received PSCW approval to construct a natural gas-fired generation facility at our existing Weston power plant site in northern Wisconsin. The new facility will consist of seven RICE units. Once constructed, we will own 64 MW of this project. Our share of the cost of this project is estimated to be approximately $85 million, with construction expected to be completed in 2023.
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•In November 2021, we, along with WE, signed an asset purchase agreement to acquire Whitewater, a commercially operational 236.5 MW dual-fueled (natural gas and low sulfur fuel oil) combined-cycle electrical generation facility in Whitewater, Wisconsin. In December 2021, we, along with WE, filed an application with the PSCW for approval to acquire Whitewater. If approved, our share of the cost of this facility is estimated to be approximately $37.5 million for 50% of the capacity, with the transaction expected to close in early 2023.
•In January 2022, we, along with an unaffiliated utility, filed an application with the PSCW for approval to acquire a portion of West Riverside's nameplate capacity. We are also requesting approval to assign the option to purchase part of West Riverside to WE. If approved, we or WE would acquire 100 MW of capacity, in the first of two potential option exercises. West Riverside is a combined-cycle natural gas plant recently completed by an unaffiliated utility in Rock County, Wisconsin. If approved, and we don't assign the option to WE, our share of the cost of this ownership interest would be approximately $91 million, with the transaction expected to close in the second quarter of 2023. In addition, we could exercise and request approval to assign to WE a second option to acquire an additional 100 MW of capacity. If approved, and we don't assign the option to WE, our share of the cost of this ownership interest would be approximately $90 million, with the transaction expected to close in 2024.
In March 2022, the DOC opened an investigation into whether new tariffs should be imposed on solar panels and cells imported from multiple southeast Asian countries. See Factors Affecting Results, Liquidity, and Capital Resources – Regulatory, Legislative, and Legal Matters – United States Department of Commerce Complaint and Factors Affecting Results, Liquidity, and Capital Resources – Regulatory, Legislative, and Legal Matters – Uyghur Forced Labor Prevention Act for information on the potential impacts to our solar projects as a result of the DOC investigation and CBP actions related to solar panels, respectively. The expected in-service dates identified above already reflect some of these impacts.
Long-Term Debt
There were no material changes in our outstanding long-term debt during the nine months ended September 30, 2022.
Common Stock Dividends
During the nine months ended September 30, 2022, we paid common stock dividends of $90.0 million to the sole holder of our common stock, Integrys.
Other Significant Cash Requirements
See Note 18, Commitments and Contingencies, for information regarding our minimum future commitments related to purchase obligations for the procurement of fuel, power, and gas supply, as well as the related storage and transportation. There were no material changes to our other significant commitments outside the ordinary course of business during the nine months ended September 30, 2022.
Off-Balance Sheet Arrangements
We are a party to various financial instruments with off-balance sheet risk as a part of our normal course of business, including financial guarantees and letters of credit that support construction projects, commodity contracts, and other payment obligations. We believe that these agreements do not have, and are not reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. For additional information, see Note 8, Short-Term Debt and Lines of Credit, and Note 14, Guarantees.
Sources of Cash
Liquidity
We anticipate meeting our short-term and long-term cash requirements to operate our business and implement our corporate strategy through internal generation of cash from operations, equity contributions from our parent, and access to the capital markets, which allows us to obtain external short-term borrowings, including commercial paper, and intermediate or long-term debt securities. Cash generated from operations is primarily driven by sales of electricity and natural gas to our utility customers, reduced
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by costs of operations. Our access to the capital markets is critical to our overall strategic plan and allows us to supplement cash flows from operations with external borrowings to manage seasonal variations, working capital needs, commodity price fluctuations, unplanned expenses, and unanticipated events.
We maintain a bank back-up credit facility, which provides liquidity support for our obligations with respect to commercial paper and for general corporate purposes. We review our bank back-up credit facility needs on an ongoing basis and expect to be able to maintain adequate credit facilities to support our operations.
The amount, type, and timing of any financings for the remainder of 2022, as well as in subsequent years, will be contingent on investment opportunities and our cash requirements and will depend upon prevailing market conditions, regulatory approvals, and other factors. We plan to maintain a capital structure consistent with that approved by the PSCW. For more information on our approved capital structure, see Item 1. Business – D. Regulation in our 2021 Annual Report on Form 10-K.
The issuance of our securities is subject to the approval of the PSCW. Additionally, with respect to the public offering of securities, we file registration statements with the SEC under the Securities Act of 1933, as amended (1933 Act). The amounts of securities authorized by the PSCW, as well as the securities registered under the 1933 Act, are closely monitored and appropriate filings are made to ensure flexibility in the capital markets.
At September 30, 2022, our current liabilities exceeded our current assets by $105.5 million. We do not expect this to have any impact on our liquidity as we currently believe that our cash and cash equivalents, our available capacity of $127.3 million under our existing revolving credit facility, cash generated from ongoing operations, and access to the capital markets are adequate to meet our short-term and long-term cash requirements.
See Note 8, Short-Term Debt and Lines of Credit, for more information about our credit facility and commercial paper.
Investments in Outside Trusts
We maintain investments in outside trusts to fund the obligation to provide pension and certain OPEB benefits to current and future retirees. These trusts had investments consisting of fixed income and equity securities that are subject to the volatility of the stock market and interest rates. For more information, see Investments in Outside Trusts in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Sources of Cash in our 2021 Annual Report on Form 10-K.
Debt Covenants
Certain of our short-term debt agreements contain financial covenants that we must satisfy, including a debt to capitalization ratio. At September 30, 2022, we were in compliance with all such covenants. We expect to be in compliance with all such debt covenants for the foreseeable future. See Note 13, Short-Term Debt and Lines of Credit, in our 2021 Annual Report on Form 10-K, for more information regarding our debt covenants.
Credit Rating Risk
Cash collateral postings and prepayments made with external parties, including postings related to exchange-traded contracts, and cash collateral posted by external parties were immaterial as of September 30, 2022. From time to time, we may enter into commodity contracts that could require collateral or a termination payment in the event of a credit rating change to below BBB- at S&P Global Ratings, a division of S&P Global Inc., and/or Baa3 at Moody’s Investors Service, Inc. We also have other commodity contracts that, in the event of a credit rating downgrade, could result in a reduction of our unsecured credit granted by counterparties.
In addition, access to capital markets at a reasonable cost is determined in large part by credit quality. Any credit ratings downgrade could impact our ability to access capital markets.
Subject to other factors affecting the credit markets as a whole, we believe our current ratings should provide a significant degree of flexibility in obtaining funds on competitive terms. However, these security ratings reflect the views of the rating agency only. An explanation of the significance of these ratings may be obtained from the rating agency. Such ratings are not a recommendation to buy, sell, or hold securities. Any rating can be revised upward or downward or withdrawn at any time by a rating agency.
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FACTORS AFFECTING RESULTS, LIQUIDITY, AND CAPITAL RESOURCES
The following is a discussion of certain factors that may affect our results of operations, liquidity, and capital resources. This discussion should be read together with the information in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Factors Affecting Results, Liquidity, and Capital Resources in our 2021 Annual Report on Form 10-K, which provides a more complete discussion of factors affecting us, including market risks and other significant risks, competitive markets, environmental matters, critical accounting policies and estimates, and other matters.
COVID-19 Pandemic
We have taken steps to mitigate the impact of the global COVID-19 pandemic. However, the extent to which the COVID-19 pandemic could continue to impact our results of operations and liquidity is largely dependent upon the ability of our customers to resume or maintain normal operations. Adverse impacts to us from a prolonged COVID-19 pandemic environment could include a decrease in revenues, increased bad debt expense, increases in past due accounts receivable balances, and access to the capital markets at unfavorable terms or rates.
We will continue to monitor COVID-19 pandemic-related developments affecting our workforce, customers, and suppliers and will implement additional actions that we determine to be necessary in order to mitigate any additional impacts. We cannot predict the full extent of the impacts of COVID-19, which will depend on, among other things, its duration through new variants, the rate and the effectiveness of both vaccinations and treatments, future regulatory and governmental actions, and the ability to maintain normal business activity.
Regulatory, Legislative, and Legal Matters
Petitions Before PSCW Regarding Third-Party Financed Distributed Energy Resources
In May 2022, two petitions were filed with the PSCW requesting a declaratory ruling that the owner of a third-party financed DER is not a “public utility” as defined under Wisconsin law and, therefore, is not subject to the PSCW’s jurisdiction under any statute or rule regulating public utilities. In July 2022, the PSCW granted the petitions, finding that the specific facts and circumstances merited the opening of a docket to consider whether to grant all or part of the requested declaratory ruling. The PSCW has indicated that it expects to make a decision no later than December 1, 2022.
The parties that filed the petitions provide financing to their customers for installation of DERs (including solar panels and energy storage) on the customer’s property. A DER is connected to the host customer’s utility meter and is used for the customer’s energy needs. It may also be connected to the grid for distribution. At this time we are unable to predict the outcome of these proceedings; however, management is currently assessing the potential for any impact to our financial condition or results of operations from a finding in favor of the petitioners.
Uyghur Forced Labor Prevention Act
The CBP issued a WRO in June 2021, applicable to certain silica-based products originating from the Xinjiang Uyghur Autonomous Region of China (Xinjiang), such as polysilicon, included in the manufacturing of solar panels. In June 2022, the WRO was superseded by the implementation of the UFLPA, which was signed into law by President Biden in December 2021. The UFLPA establishes a rebuttable presumption that any imports wholly or partially manufactured in Xinjiang are prohibited from entering the United States. While our suppliers were able to provide the CBP sufficient documentation to meet WRO compliance requirements, and we expect the same will be true for UFLPA purposes, we cannot currently predict what, if any, impact the UFLPA will have on the overall supply of solar panels into the United States and the related timing and cost of our solar projects included in WEC Energy Group's capital plan.
United States Department of Commerce Complaint
In August 2021, a group of anonymous domestic solar manufacturers filed a petition (AD/CVD) with the DOC seeking to impose new tariffs on solar panels and cells imported from several countries, including Malaysia, Vietnam, and Thailand. The petitioners claimed that Chinese solar manufacturers are shifting products to these countries to avoid the tariffs required on products imported from China. In November 2021, the DOC rejected this petition. In denying the petition, the DOC cited the anonymous group’s refusal of
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the DOC’s request to provide more detail and identify its members due to concerns about retribution from the dominant Chinese solar industry.
In February 2022, a California based company filed a petition (AD/CVD) with the DOC seeking to impose new tariffs on solar panels and cells imported from multiple countries, including Malaysia, Vietnam, Thailand, and Cambodia. While the petition is similar to the one rejected by the DOC in November 2021, there are notable differences. The group added Cambodia to the petition and is requesting that the DOC conduct a country-wide inquiry into each of the four countries. In March 2022, the DOC decided to act on the February petition and investigate the claim. A DOC decision is expected by January 2023. If the DOC determines that the petition has merit, it would be able to apply any final tariffs retroactively to November 4, 2021. If imposed, the new tariffs are expected to further disrupt the supply of solar modules to the United States, and could impact the cost and timing of our solar projects.
In June 2022, the Biden Administration used its executive powers to issue a 24-month tariff moratorium on solar panels manufactured in Cambodia, Malaysia, Thailand, and Vietnam. The moratorium comes as a direct response to concerns raised about the adverse impact from the ongoing DOC complaint on the U.S. solar industry. As the DOC will continue its investigation discussed above, companies may still be subject to tariffs after the moratorium ends; however, U.S. companies will reportedly be exempt from any retroactive tariffs that previously could have applied. The Biden Administration also announced that it plans to invoke the Defense Production Act to accelerate the production of solar panels in the U.S. The Biden Administration's actions did not address whether WROs applied to panels under previous complaints would be affected.
Infrastructure Investment and Jobs Act
In November 2021, President Biden signed into law the Infrastructure Investment and Jobs Act, which provides for approximately $1.2 trillion of federal spending over the next five years, including approximately $85 billion for investments in power, utilities, and renewables infrastructure across the United States. We expect funding from this Act will support the work we are doing to reduce GHG emissions, increase EV charging, and strengthen and protect the energy grid. Funding in the Act should also help to expand emerging technologies, like hydrogen and carbon management, as we continue the transition to a clean energy future. We believe the Infrastructure Investment and Jobs Act will accelerate investment in projects that will help us meet our net zero emission goals to the benefit of our customers, the communities we serve, and our company.
Inflation Reduction Act
In August 2022, President Biden signed into law the IRA, which provides for $258 billion in energy-related provisions over a 10-year period. The provisions of the IRA are intended to, among other things, lower gasoline and electricity prices, incentivize domestic clean energy investment, manufacturing, and production, and promote reductions in carbon emissions. We believe that we and our customers can benefit from the IRA’s provisions that extend tax benefits for renewable technologies, increase or restore higher rates for PTCs, add an option to claim PTCs for solar projects, expand qualified ITC facilities to include standalone energy storage, and its provision to allow companies to transfer tax credits generated from renewable projects. The IRA also implements a 15% corporate alternative minimum tax and a 1% excise tax on stock repurchases. Although significant regulatory guidance is expected on the tax provisions in the IRA, we currently believe the provisions on alternative minimum tax and stock repurchases will not have a material impact on us. Overall, we believe the IRA will help reduce our cost of investing in projects that will support our commitment to reduce emissions and provide customers affordable, reliable, and clean energy over the longer term.
Environmental Matters
See Note 18, Commitments and Contingencies, for a discussion of certain environmental matters affecting us, including rules and regulations relating to air quality, water quality, land quality, and climate change.
Market Risks and Other Significant Risks
We are exposed to market and other significant risks as a result of the nature of our business and the environment in which we operate. These risks include, but are not limited to, the inflation and supply chain disruptions described below. In addition, there is continuing uncertainty over the impact that the ongoing conflict between Russia and Ukraine will have on the global economy, supply chains, and fuel prices. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Factors Affecting Results, Liquidity, and Capital Resources – Market Risks and Other Significant Risks in our 2021 Annual Report on Form 10-K for a discussion of market and other significant risks applicable to us.
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Inflation and Supply Chain Disruptions
We continue to monitor the impact of inflation and supply chain disruptions. We monitor the costs of medical plans, fuel, transmission access, construction costs, regulatory and environmental compliance costs, and other costs in order to minimize inflationary effects in future years, to the extent possible, through pricing strategies, productivity improvements, and cost reductions. We monitor the global supply chain, and related disruptions, in order to ensure we are able to procure the necessary materials and other resources necessary to both maintain our energy services in a safe and reliable manner and to grow our infrastructure in accordance with WEC Energy Group's capital plan. For additional information concerning risks related to inflation and supply chain disruptions, see the two risk factors below that are disclosed in Part I of our 2021 Annual Report on Form 10-K.
•Item 1A. Risk Factors – Risks Related to the Operation of Our Business – Our operations and corporate strategy may be adversely affected by supply chain disruptions and inflation.
•Item 1A. Risk Factors – Risks Related to Economic and Market Volatility – Fluctuating commodity prices could negatively impact our electric and natural gas utility operations.
For additional information concerning risk factors, including market risks, see the Cautionary Statement Regarding Forward-Looking Information at the beginning of this report.
Critical Accounting Policies and Estimates
We have reviewed our critical accounting policies and considered whether any new critical accounting estimates or other significant changes to our accounting policies require any additional disclosures. We have found that the disclosures made in our 2021 Annual Report on Form 10-K are still current and that there have been no significant changes, except as follows:
Goodwill
We completed our annual goodwill impairment test for our utility reporting unit as of July 1, 2022. No impairment was recorded as a result of this test. At July 1, 2022, our utility reporting unit had $36.4 million of goodwill. The fair value calculated in step one of the test was greater than its carrying value. The fair value of our reporting unit was calculated using a combination of the income approach and the market approach.
For the income approach, we used internal forecasts to project cash flows. Any forecast contains a degree of uncertainty, and changes in these cash flows could significantly increase or decrease the calculated fair value of a reporting unit. Since our reporting unit is regulated, a fair recovery of and return on costs prudently incurred to serve customers is assumed. An unfavorable outcome in a rate case could cause the fair value of our reporting unit to decrease.
Key assumptions used in the income approach include ROE, the long-term growth rate used to determine the terminal value at the end of the discrete forecast period, and the discount rate. The discount rate is applied to estimated future cash flows and is one of the most significant assumptions used to determine fair value under the income approach. As interest rates rise, the calculated fair value will decrease. The discount rate is based on the weighted-average cost of capital, taking into account both the after-tax cost of debt and cost of equity. The terminal year ROE is driven by our current allowed ROE. The terminal growth rate is based primarily on a combination of historical and forecasted statistics for real gross domestic product and personal income for our service area.
For the market approach, we used a higher weighting for the guideline public company method than the guideline merged and acquired company method due to a low number of mergers and acquisitions in recent years. The guideline public company method uses financial metrics from similar publicly traded companies to determine fair value. The guideline merged and acquired company method calculates fair value by analyzing the actual prices paid for recent mergers and acquisitions in the industry. We applied multiples derived from these two methods to the appropriate operating metrics for our reporting unit to determine fair value.
The underlying assumptions and estimates used in the impairment test were made as of a point in time. Subsequent changes in these assumptions and estimates could change the result of the test.
At July, 1, 2022, the fair value of our reporting unit exceeded its carrying value by over 50%. Based on this result, our reporting unit is not at risk of failing step one of the goodwill impairment test.
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See Note 16, Goodwill, for more information.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes related to market risk from the disclosures presented in our 2021 Annual Report on Form 10-K. In addition to the Form 10-K disclosures, see Management's Discussion and Analysis of Financial Condition and Results of Operations – Factors Affecting Results, Liquidity, and Capital Resources – COVID-19 Pandemic and Market Risks and Other Significant Risks in Item 2 of Part I of this report, as well as Note 12, Fair Value Measurements, Note 13, Derivative Instruments, and Note 14, Guarantees, in this report for information concerning our market risk exposures.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon such evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective: (i) in recording, processing, summarizing, and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act; and (ii) to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the third quarter of 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following should be read in conjunction with Item 3. Legal Proceedings in Part I of our 2021 Annual Report on Form 10-K. See Note 18, Commitments and Contingencies, and Note 20, Regulatory Environment, in this report for additional information on material legal proceedings and matters related to us.
In addition to those legal proceedings discussed in Note 18, Commitments and Contingencies, and Note 20, Regulatory Environment, we are currently, and from time to time, subject to claims and suits arising in the ordinary course of business. Although the results of these additional legal proceedings cannot be predicted with certainty, management believes, after consultation with legal counsel, that the ultimate resolution of these proceedings will not have a material effect on our financial statements.
ITEM 1A. RISK FACTORS
There were no material changes from the risk factors disclosed in Item 1A. Risk Factors in Part I of our 2021 Annual Report on Form 10-K.
ITEM 6. EXHIBITS
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Number | | Exhibit |
31 | | Rule 13a-14(a) / 15d-14(a) Certifications |
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32 | | Section 1350 Certifications |
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101 | | Interactive Data Files |
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| | 101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
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| | 101.SCH | Inline XBRL Taxonomy Extension Schema |
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| | 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase |
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| | 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase |
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| | 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase |
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| | 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase |
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104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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09/30/2022 Form 10-Q | 44 | Wisconsin Public Service Corporation |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | WISCONSIN PUBLIC SERVICE CORPORATION |
| | (Registrant) |
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| | /s/ WILLIAM J. GUC |
Date: | November 3, 2022 | William J. Guc |
| | Vice President, Controller, and Assistant Corporate Secretary |
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| | (Duly Authorized Officer and Chief Accounting Officer) |
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09/30/2022 Form 10-Q | 45 | Wisconsin Public Service Corporation |