Wisconsin Electric Power Co 10-Q for FY2020 Q3
Wisconsin Electric Power Co (WELPP)
10-Q
2020-11-06
For: 2020-09-30
View Original
Added on
April 11, 2026
About this 10-Q
Wisconsin Electric Power Co filed this 10-Q on November 6, 2020, covering the quarter ended September 30, 2020 (FY2020 Q3).
Headline figures
Quarter ended September 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $900.2M
- up 1.8% from $884.1M a year earlier
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, 2020
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. | ||||||||||||
(A Wisconsin Corporation)
(414 ) 221-2345
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.
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).
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 | ☐ | |||||||||||||||||
| ☒ | 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, $10 Par Value,
September 30, 2020
All of the common stock of Wisconsin Electric Power Company is held by WEC Energy Group, Inc.
WISCONSIN ELECTRIC POWER COMPANY
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended September 30, 2020
TABLE OF CONTENTS
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| 09/30/2020 Form 10-Q | i | Wisconsin Electric Power Company | ||||||
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 | |||||||
| UMERC | Upper Michigan Energy Resources Corporation | |||||||
| We Power | W.E. Power, LLC | |||||||
| WEC Energy Group | WEC Energy Group, Inc. | |||||||
| WG | Wisconsin Gas LLC | |||||||
| Federal and State Regulatory Agencies | ||||||||
| EPA | United States Environmental Protection Agency | |||||||
| PSCW | Public Service Commission of Wisconsin | |||||||
| SEC | United States Securities and Exchange Commission | |||||||
| 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 | |||||||
| BSER | Best System of Emission Reduction | |||||||
| BTA | Best Technology Available | |||||||
| CAA | Clean Air Act | |||||||
CO2 | Carbon Dioxide | |||||||
| ELG | Steam Electric Effluent Limitation Guidelines | |||||||
| FGD | Flue Gas Desulfurization | |||||||
| GHG | Greenhouse Gas | |||||||
| MATS | Mercury and Air Toxics Standards | |||||||
| RTR | Risk and Technology Review | |||||||
| The Combustion Turbine Rule | National Emission Standards for Hazardous Air Pollutants for Stationary Combustion Turbines | |||||||
| Measurements | ||||||||
| Dth | Dekatherm | |||||||
| MW | Megawatt | |||||||
| MWh | Megawatt-hour | |||||||
| Other Terms and Abbreviations | ||||||||
| AMI | Advanced Metering Infrastructure | |||||||
| Badger Hollow II | Badger Hollow Solar Park II | |||||||
| CDC | Centers for Disease Control and Prevention | |||||||
| COVID-19 | Coronavirus Disease – 2019 | |||||||
| D.C. Circuit Court of Appeals | United States Court of Appeals for the District of Columbia Circuit | |||||||
| ERGS | Elm Road Generating Station | |||||||
| Exchange Act | Securities Exchange Act of 1934, as amended | |||||||
| FTR | Financial Transmission Right | |||||||
| LIBOR | London Interbank Offered Rate | |||||||
| LNG | Liquefied Natural Gas | |||||||
| 09/30/2020 Form 10-Q | ii | Wisconsin Electric Power Company | ||||||
| MISO | Midcontinent Independent System Operator, Inc. | |||||||
| OCPP | Oak Creek Power Plant | |||||||
| OC 5 | Oak Creek Power Plant Unit 5 | |||||||
| OC 6 | Oak Creek Power Plant Unit 6 | |||||||
| OC 7 | Oak Creek Power Plant Unit 7 | |||||||
| OC 8 | Oak Creek Power Plant Unit 8 | |||||||
| PIPP | Presque Isle Power Plant | |||||||
| ROE | Return on Equity | |||||||
| SSR | System Support Resource | |||||||
| Tax Legislation | Tax Cuts and Jobs Act of 2017 | |||||||
| Tilden | Tilden Mining Company | |||||||
| WHO | World Health Organization | |||||||
| 09/30/2020 Form 10-Q | iii | Wisconsin Electric Power Company | ||||||
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
In this report, we make statements concerning our expectations, beliefs, plans, objectives, goals, strategies, and future events or performance. These statements are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. Readers are cautioned not to place undue reliance on these forward-looking statements. Forward-looking statements may be identified by reference to a future period or periods or by the use of terms such as "anticipates," "believes," "could," "estimates," "expects," "forecasts," "goals," "guidance," "intends," "may," "objectives," "plans," "possible," "potential," "projects," "seeks," "should," "targets," "will," or variations of these terms.
Forward-looking statements include, among other things, statements concerning management's expectations and projections regarding earnings, completion of capital projects, sales and customer growth, rate actions and related filings with regulatory authorities, environmental and other regulations and associated compliance costs, legal proceedings, effective tax rates, pension and OPEB plans, fuel costs, sources of electric energy supply, coal and natural gas deliveries, remediation costs, environmental matters, 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 this report and our 2019 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 developments, unusual weather, changes in economic conditions, customer growth and declines, commodity prices, energy conservation efforts, and continued adoption of distributed generation by customers;
•The timing, resolution, and impact of rate cases and negotiations, including recovery of deferred and current costs and the ability to earn a reasonable return on investment, and other regulatory decisions impacting our regulated operations;
•The impact of the COVID-19 pandemic on our business functions, financial condition, liquidity, and results of operations;
•The impact of recent and future 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, and tax laws, including the Tax Legislation as well as those that affect our ability to use production tax credits and investment tax credits;
•Federal and state legislative and regulatory changes relating to the environment, including climate change and other environmental regulations impacting generation facilities and renewable energy standards, the enforcement of these laws and regulations, changes in the interpretation of 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;
•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, technology advances, and the feasibility of competing generation projects;
•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 changing commodity prices, particularly natural gas and electricity, and the availability of sources of natural gas and other fossil fuels, purchased power, materials needed to operate environmental controls at our electric
| 09/30/2020 Form 10-Q | 1 | Wisconsin Electric Power Company | ||||||
generating facilities, or water supply due to high demand, shortages, transportation problems, nonperformance by electric energy or natural gas suppliers under existing power purchase or natural gas supply contracts, or other developments;
•Changes in credit ratings, interest rates, and our ability to access the capital markets, caused by volatility in the global credit markets, our capitalization structure, and market perceptions of the utility industry 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;
•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 ability to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act, while both integrating and continuing to consolidate WEC Energy Group's enterprise systems with those of its other utilities;
•The effect of accounting pronouncements issued periodically by standard-setting bodies; and
•Other considerations disclosed elsewhere herein and in other reports we file with the SEC or in other publicly disseminated written documents.
We expressly disclaim any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
| 09/30/2020 Form 10-Q | 2 | Wisconsin Electric Power Company | ||||||
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WISCONSIN ELECTRIC POWER COMPANY
| CONDENSED INCOME STATEMENTS (Unaudited) | Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||
| September 30 | September 30 | |||||||||||||||||||||||||
| (in millions) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||
| Operating revenues | $ | $ | $ | $ | ||||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||
| Cost of sales | ||||||||||||||||||||||||||
| Other operation and maintenance | ||||||||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||||
| Property and revenue taxes | ||||||||||||||||||||||||||
| Total operating expenses | ||||||||||||||||||||||||||
| Operating income | ||||||||||||||||||||||||||
| Other income, net | ||||||||||||||||||||||||||
| Interest expense | ||||||||||||||||||||||||||
| Other expense | ( | ( | ( | ( | ||||||||||||||||||||||
| Income before income taxes | ||||||||||||||||||||||||||
| Income tax expense (benefit) | ( | ( | ||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||
| Preferred stock dividend requirements | ||||||||||||||||||||||||||
| Net income attributed to common shareholder | $ | $ | $ | $ | ||||||||||||||||||||||
The accompanying Notes to Condensed Financial Statements are an integral part of these financial statements.
| 09/30/2020 Form 10-Q | 3 | Wisconsin Electric Power Company | ||||||
WISCONSIN ELECTRIC POWER COMPANY
CONDENSED BALANCE SHEETS (Unaudited) (in millions, except share and per share amounts) | September 30, 2020 | December 31, 2019 | ||||||||||||
| Assets | ||||||||||||||
| Current assets | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
Accounts receivable and unbilled revenues, net of reserves of $ | ||||||||||||||
| Accounts receivable from related parties | ||||||||||||||
| Materials, supplies, and inventories | ||||||||||||||
| Prepaid taxes | ||||||||||||||
| Other | ||||||||||||||
| Current assets | ||||||||||||||
| Long-term assets | ||||||||||||||
Property, plant, and equipment, net of accumulated depreciation and amortization of $ | ||||||||||||||
| Regulatory assets | ||||||||||||||
| Other | ||||||||||||||
| Long-term assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| Liabilities and Equity | ||||||||||||||
| Current liabilities | ||||||||||||||
| Short-term debt | $ | $ | ||||||||||||
| Current portion of long-term debt | ||||||||||||||
| Current portion of finance lease obligations | ||||||||||||||
| Accounts payable | ||||||||||||||
| Accounts payable to related parties | ||||||||||||||
| Accrued payroll and benefits | ||||||||||||||
| Other | ||||||||||||||
| Current liabilities | ||||||||||||||
| Long-term liabilities | ||||||||||||||
| Long-term debt | ||||||||||||||
| Finance lease obligations | ||||||||||||||
| Deferred income taxes | ||||||||||||||
| Regulatory liabilities | ||||||||||||||
| Pension and OPEB obligations | ||||||||||||||
| Other | ||||||||||||||
| Long-term liabilities | ||||||||||||||
| Commitments and contingencies (Note 17) | ||||||||||||||
| Common shareholder's equity | ||||||||||||||
Common stock – $ | ||||||||||||||
| Additional paid in capital | ||||||||||||||
| Retained earnings | ||||||||||||||
| Common shareholder's equity | ||||||||||||||
| Preferred stock | ||||||||||||||
| Total liabilities and equity | $ | $ | ||||||||||||
The accompanying Notes to Condensed Financial Statements are an integral part of these financial statements.
| 09/30/2020 Form 10-Q | 4 | Wisconsin Electric Power Company | ||||||
WISCONSIN ELECTRIC POWER COMPANY
| CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) | Nine Months Ended | |||||||||||||
| September 30 | ||||||||||||||
| (in millions) | 2020 | 2019 | ||||||||||||
| Operating activities | ||||||||||||||
| Net income | $ | $ | ||||||||||||
| Reconciliation to cash provided by operating activities | ||||||||||||||
| Depreciation and amortization | ||||||||||||||
| Deferred income taxes and investment tax credits, net | ( | ( | ||||||||||||
| Contributions and payments related to pension and OPEB plans | ( | ( | ||||||||||||
| Change in – | ||||||||||||||
| Accounts receivable and unbilled revenues, net | ||||||||||||||
| Prepaid taxes | ||||||||||||||
| Other current assets | ||||||||||||||
| Accounts payable | ( | ( | ||||||||||||
| Other current liabilities | ( | |||||||||||||
| Other, net | ||||||||||||||
| Net cash provided by operating activities | ||||||||||||||
| Investing activities | ||||||||||||||
| Capital expenditures | ( | ( | ||||||||||||
| Other, net | ||||||||||||||
| Net cash used in investing activities | ( | ( | ||||||||||||
| Financing activities | ||||||||||||||
| Change in short-term debt | ( | ( | ||||||||||||
| Payments for finance lease obligations | ( | ( | ||||||||||||
| Equity contribution from parent | ||||||||||||||
| Payment of dividends to parent | ( | ( | ||||||||||||
| Other, net | ( | ( | ||||||||||||
| Net cash used in financing activities | ( | ( | ||||||||||||
| Net change in cash and cash equivalents | ( | ( | ||||||||||||
| Cash and cash equivalents at beginning of period | ||||||||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||||||||
The accompanying Notes to Condensed Financial Statements are an integral part of these financial statements.
| 09/30/2020 Form 10-Q | 5 | Wisconsin Electric Power Company | ||||||
WISCONSIN ELECTRIC POWER COMPANY
| CONDENSED STATEMENTS OF EQUITY (Unaudited) | ||||||||||||||||||||||||||||||||||||||
| Wisconsin Electric Power Company Common Shareholder's Equity | ||||||||||||||||||||||||||||||||||||||
| (in millions) | Common Stock | Additional Paid In Capital | Retained Earnings | Total Common Shareholder's Equity | Preferred Stock | Total Equity | ||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
Net income attributed to common shareholder | ||||||||||||||||||||||||||||||||||||||
Payment of dividends to parent | ( | ( | ( | |||||||||||||||||||||||||||||||||||
Stock-based compensation and other | ||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
Net income attributed to common shareholder | ||||||||||||||||||||||||||||||||||||||
Payment of dividends to parent | ( | ( | ( | |||||||||||||||||||||||||||||||||||
| Equity contribution from parent | ||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
Net income attributed to common shareholder | ||||||||||||||||||||||||||||||||||||||
Payment of dividends to parent | ( | ( | ( | |||||||||||||||||||||||||||||||||||
| Equity contribution from parent | ||||||||||||||||||||||||||||||||||||||
| Stock-based compensation and other | ||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Wisconsin Electric Power Company Common Shareholder's Equity | ||||||||||||||||||||||||||||||||||||||
| (in millions) | Common Stock | Additional Paid In Capital | Retained Earnings | Total Common Shareholder's Equity | Preferred Stock | Total Equity | ||||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
Net income attributed to common shareholder | ||||||||||||||||||||||||||||||||||||||
Payment of dividends to parent | ( | ( | ( | |||||||||||||||||||||||||||||||||||
Stock-based compensation and other | ||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2019 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
Net income attributed to common shareholder | ||||||||||||||||||||||||||||||||||||||
Payment of dividends to parent | ( | ( | ( | |||||||||||||||||||||||||||||||||||
Equity contribution from parent | ||||||||||||||||||||||||||||||||||||||
| Transfer of net assets to UMERC | ( | ( | ( | |||||||||||||||||||||||||||||||||||
| Balance at June 30, 2019 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
Net income attributed to common shareholder | ||||||||||||||||||||||||||||||||||||||
Payment of dividends to parent | ( | ( | ( | |||||||||||||||||||||||||||||||||||
| Stock-based compensation and other | $ | $ | ||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2019 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
The accompanying Notes to Condensed Financial Statements are an integral part of these financial statements.
| 09/30/2020 Form 10-Q | 6 | Wisconsin Electric Power Company | ||||||
WISCONSIN ELECTRIC POWER COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
September 30, 2020
NOTE 1—GENERAL INFORMATION
Wisconsin Electric Power Company serves approximately 1.1 million electric customers and 0.5 million 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 Electric Power Company.
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 consolidated financial statements and footnotes in our Annual Report on Form 10-K for the year ended December 31, 2019. 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, 2020 are not necessarily indicative of expected results for 2020 due to seasonal variations and other factors, including any continuing financial impacts from the COVID-19 pandemic.
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—OPERATING REVENUES
For more information about our operating revenues, see Note 1(d), Operating Revenues, in our 2019 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.
| Wisconsin Electric Power Company | ||||||||||||||||||||||||||
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||
| (in millions) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||
| Electric utility | $ | $ | $ | $ | ||||||||||||||||||||||
| Natural gas utility | ||||||||||||||||||||||||||
| Total revenues from contracts with customers | ||||||||||||||||||||||||||
| Other operating revenues | ||||||||||||||||||||||||||
| Total operating revenues | $ | $ | $ | $ | ||||||||||||||||||||||
| 09/30/2020 Form 10-Q | 7 | Wisconsin Electric Power Company | ||||||
Revenues from Contracts with Customers
Electric Utility Operating Revenues
The following table disaggregates electric utility operating revenues into customer class:
| Electric Utility Operating Revenues | ||||||||||||||||||||||||||
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||
| (in millions) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||
| Residential | $ | $ | $ | $ | ||||||||||||||||||||||
| Small commercial and industrial | ||||||||||||||||||||||||||
| Large commercial and industrial | ||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||
| Total retail revenues | ||||||||||||||||||||||||||
| Wholesale | ||||||||||||||||||||||||||
| Resale | ||||||||||||||||||||||||||
| Steam | ||||||||||||||||||||||||||
| Other utility revenues | ( | |||||||||||||||||||||||||
| Total electric utility operating revenues | $ | $ | $ | $ | ||||||||||||||||||||||
Natural Gas Utility Operating Revenues
The following table disaggregates natural gas utility operating revenues into customer class:
| Natural Gas Utility Operating Revenues | ||||||||||||||||||||||||||
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||
| (in millions) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||
| Residential | $ | $ | $ | $ | ||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||||
| Total retail revenues | ||||||||||||||||||||||||||
| Transport | ||||||||||||||||||||||||||
Other utility revenues (1) | ||||||||||||||||||||||||||
| Total natural gas utility operating revenues | $ | $ | $ | $ | ||||||||||||||||||||||
(1)Includes amounts collected from customers for purchased gas adjustment costs.
Other Operating Revenues
Other operating revenues consist primarily of the following:
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||
| (in millions) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||
Late payment charges (1) | $ | $ | $ | $ | ||||||||||||||||||||||
| Rental revenues | ||||||||||||||||||||||||||
Alternative revenues (2) | ( | ( | ||||||||||||||||||||||||
| Total other operating revenues | $ | $ | $ | $ | ||||||||||||||||||||||
(1)The reduction in late payment charges is a result of a regulatory order from the PSCW in response to the COVID-19 pandemic, which includes the suspension of late payment charges during a designated time period. See Note 19, Regulatory Environment, for more information.
(2)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-up, as discussed in Note 1(d), Operating Revenues, in our 2019 Annual Report on Form 10-K.
| 09/30/2020 Form 10-Q | 8 | Wisconsin Electric Power Company | ||||||
NOTE 3—CREDIT LOSSES
Effective January 1, 2020, we adopted FASB ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, using the modified retrospective transition method. This ASU amends the impairment model to utilize an expected loss methodology in place of the incurred loss methodology for financial instruments, including trade receivables. The amendment requires entities to consider a broader range of information to estimate expected credit losses, which may result in earlier recognition of loss. The cumulative effect of adopting this standard was not significant to our financial statements.
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, 2020.
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. The incremental reserve included within our allowance for credit losses at September 30, 2020, specific to the economic risks associated with the COVID-19 pandemic, was not significant. We will continue to monitor the economic impacts of COVID-19 and the resulting effects that these impacts may have on the ability of our customers to pay their energy bills.
We have included a table below that shows our gross third-party receivable balances and related allowance for credit losses.
| (in millions) | September 30, 2020 | |||||||
| Accounts receivable and unbilled revenues | $ | |||||||
| Allowance for credit losses | ||||||||
Accounts receivable and unbilled revenues, net (1) | $ | |||||||
Total accounts receivable, net – past due greater than 90 days (1) | $ | |||||||
Past due greater than 90 days – collection risk mitigated by regulatory mechanisms (1) | % | |||||||
(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, 2020, $208.4 million, or 48.1 %, of our net accounts receivable and unbilled revenues balance had regulatory protections in place to mitigate the exposure to credit losses. In addition, we have received specific orders related to the deferral of certain costs (including credit losses) incurred as a result of the COVID-19 pandemic. The additional protections related to our September 30, 2020 accounts receivable and unbilled revenue balances provided by these orders are subject to prudency reviews and are still being assessed. They are not reflected in the percentage in the above table or this note. See Note 19, Regulatory Environment, for more information on these orders.
| 09/30/2020 Form 10-Q | 9 | Wisconsin Electric Power Company | ||||||
A rollforward of the allowance for credit losses for the three and nine months ended September 30, 2020, is included below:
| (in millions) | Three Months Ended September 30, 2020 | |||||||
| Balance at June 30, 2020 | $ | |||||||
| Provision for credit losses | ||||||||
| Provision for credit losses deferred for future recovery or refund | ||||||||
| Write-offs charged against the allowance | ( | |||||||
| Recoveries of amounts previously written off | ||||||||
| Balance at September 30, 2020 | $ | |||||||
| (in millions) | Nine Months Ended September 30, 2020 | |||||||
| Balance at December 31, 2019 | $ | |||||||
| Provision for credit losses | ||||||||
| Provision for credit losses deferred for future recovery or refund | ||||||||
| Write-offs charged against the allowance | ( | |||||||
| Recoveries of amounts previously written off | ||||||||
| Balance at September 30, 2020 | $ | |||||||
The increase in our allowance for credit losses in 2020 was driven by an increase in past due accounts receivable balances from December 31, 2019 to September 30, 2020. This is a trend we generally see over the winter moratorium months, when we are not allowed to disconnect customer service as a result of non-payment. In Wisconsin, the winter moratorium begins on November 1 and ends on April 15. However, as a result of the COVID-19 pandemic and related regulatory orders we have received, we were also unable to disconnect any of our customers during the second and third quarters of 2020. See Note 19, Regulatory Environment, for more information.
NOTE 4—REGULATORY ASSETS AND LIABILITIES
The following regulatory assets and liabilities were reflected on our balance sheets at September 30, 2020 and December 31, 2019. For more information on our regulatory assets and liabilities, see Note 5, Regulatory Assets and Liabilities, in our 2019 Annual Report on Form 10-K.
| (in millions) | September 30, 2020 | December 31, 2019 | ||||||||||||
| Regulatory assets | ||||||||||||||
| Finance leases | $ | $ | ||||||||||||
| Plant retirements | ||||||||||||||
| Pension and OPEB costs | ||||||||||||||
| Income tax related items | ||||||||||||||
| SSR | ||||||||||||||
| Other, net | ||||||||||||||
| Total regulatory assets | $ | $ | ||||||||||||
| 09/30/2020 Form 10-Q | 10 | Wisconsin Electric Power Company | ||||||
| (in millions) | September 30, 2020 | December 31, 2019 | ||||||||||||
| Regulatory liabilities | ||||||||||||||
| Income tax related items | $ | $ | ||||||||||||
| Removal costs | ||||||||||||||
| Pension and OPEB benefits | ||||||||||||||
| Electric transmission costs | ||||||||||||||
| Uncollectible expense | ||||||||||||||
| Energy efficiency programs | ||||||||||||||
| Other, net | ||||||||||||||
| Total regulatory liabilities | $ | $ | ||||||||||||
| Balance sheet presentation | ||||||||||||||
| Other current liabilities | $ | $ | ||||||||||||
| Regulatory liabilities | ||||||||||||||
| Total regulatory liabilities | $ | $ | ||||||||||||
NOTE 5—PROPERTY, PLANT, AND EQUIPMENT
NOTE 6—COMMON EQUITY
Various financing arrangements and regulatory requirements impose certain restrictions on our ability to transfer funds to WEC Energy Group 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 or its subsidiaries. See Note 8, Common Equity, in our 2019 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 7—SHORT-TERM DEBT AND LINES OF CREDIT
The following table shows our short-term borrowings and their corresponding weighted-average interest rates:
| (in millions, except percentages) | September 30, 2020 | December 31, 2019 | ||||||||||||
| Commercial paper | ||||||||||||||
| Amount outstanding | $ | $ | ||||||||||||
| Weighted-average interest rate on amounts outstanding | % | % | ||||||||||||
Our average amount of commercial paper borrowings based on daily outstanding balances during the nine months ended September 30, 2020 was $73.0 million with a weighted-average interest rate during the period of 1.53 %.
| 09/30/2020 Form 10-Q | 11 | Wisconsin Electric Power Company | ||||||
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:
| (in millions) | Maturity | September 30, 2020 | ||||||||||||
| Revolving credit facility | October 2022 | $ | ||||||||||||
| Less: | ||||||||||||||
| Letters of credit issued inside credit facility | $ | |||||||||||||
| Available capacity under existing credit facility | $ | |||||||||||||
NOTE 8—LEASES
See Note 12, Leases, in our 2019 Annual Report on Form 10-K for information related to the power plants we lease from We Power. As new capital projects are completed at these plants, our lease payments to We Power increase. In addition to increases in our lease payments to We Power, we also entered into lease agreements associated with our investment in Badger Hollow II in the second quarter of 2020, as discussed below.
We have partnered with an unaffiliated utility to construct Badger Hollow II in Iowa County, Wisconsin. Once constructed, we will own 100 MW of this project. The PSCW approved the acquisition of Badger Hollow II in March 2020 and commercial operation is targeted for December 2022.
Related to our investment in Badger Hollow II, we, along with an unaffiliated utility partner, entered into several land leases in Iowa County, Wisconsin that commenced in the second quarter of 2020. The leases are for a total of approximately 1,500 acres of land. 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 Badger Hollow II was $22.9 million at September 30, 2020, and will decrease to zero over the remaining lives of the leases. Long-term lease liabilities related to our finance leases for Badger Hollow II were included in finance lease obligations on the balance sheets. Our finance lease right of use asset related to Badger Hollow II was $22.7 million as of September 30, 2020, and was included in property, plant, and equipment on our balance sheets.
In accordance with Accounting Standard Codification Subtopic 980-842, Regulated Operations – Leases (Subtopic 980-842), the expense recognition pattern associated with the Badger Hollow II leases resembles that of an operating lease, as amortization of the right of use assets has been modified from what would typically be recorded for a finance lease under Topic 842. 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.
At September 30, 2020, our weighted-average discount rate for the Badger Hollow II finance leases was 3.44 %. We used the fully collateralized incremental borrowing rates based upon information available for similarly rated companies in determining the present value of lease payments.
| 09/30/2020 Form 10-Q | 12 | Wisconsin Electric Power Company | ||||||
Future minimum lease payments and the corresponding present value of our net minimum lease payments under the finance leases for Badger Hollow II as of September 30, 2020, were as follows:
| (in millions) | ||||||||
| 2021 | $ | |||||||
| 2022 | ||||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| Thereafter | ||||||||
| Total minimum lease payments | ||||||||
| Less: Interest | ( | |||||||
| Present value of minimum lease payments | ||||||||
| Less: Short-term lease liabilities | ||||||||
| Long-term lease liabilities | $ | |||||||
NOTE 9—MATERIALS, SUPPLIES, AND INVENTORIES
Our inventory consisted of:
| (in millions) | September 30, 2020 | December 31, 2019 | ||||||||||||
| Materials and supplies | $ | $ | ||||||||||||
| Fossil fuel | ||||||||||||||
| Natural gas in storage | ||||||||||||||
| Total | $ | $ | ||||||||||||
Substantially all materials and supplies, fossil fuel inventories, and natural gas in storage are recorded using the weighted-average cost method of accounting.
NOTE 10—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:
| Three Months Ended September 30, 2020 | Three Months Ended September 30, 2019 | |||||||||||||||||||||||||
| (in millions) | Amount | Effective Tax Rate | Amount | Effective Tax Rate | ||||||||||||||||||||||
| Statutory federal income tax | $ | % | $ | % | ||||||||||||||||||||||
| State income taxes net of federal tax benefit | % | % | ||||||||||||||||||||||||
| Federal excess deferred tax amortization – Wisconsin unprotected | ( | ( | % | % | ||||||||||||||||||||||
| Federal excess deferred tax amortization | ( | ( | % | ( | ( | % | ||||||||||||||||||||
| Wind production tax credits | ( | ( | % | ( | ( | % | ||||||||||||||||||||
| Tax repairs | % | ( | ( | % | ||||||||||||||||||||||
| Other | % | % | ||||||||||||||||||||||||
| Total income tax expense (benefit) | $ | % | $ | ( | ( | % | ||||||||||||||||||||
| 09/30/2020 Form 10-Q | 13 | Wisconsin Electric Power Company | ||||||
| Nine Months Ended September 30, 2020 | Nine Months Ended September 30, 2019 | |||||||||||||||||||||||||
| (in millions) | Amount | Effective Tax Rate | Amount | Effective Tax Rate | ||||||||||||||||||||||
| Statutory federal income tax | $ | % | $ | % | ||||||||||||||||||||||
| State income taxes net of federal tax benefit | % | % | ||||||||||||||||||||||||
| Federal excess deferred tax amortization – Wisconsin unprotected | ( | ( | % | % | ||||||||||||||||||||||
| Federal excess deferred tax amortization | ( | ( | % | ( | ( | % | ||||||||||||||||||||
| Wind production tax credits | ( | ( | % | ( | ( | % | ||||||||||||||||||||
| Tax repairs | % | ( | ( | % | ||||||||||||||||||||||
| Other | % | % | ||||||||||||||||||||||||
| Total income tax expense (benefit) | $ | % | $ | ( | ( | % | ||||||||||||||||||||
The effective tax rates of 14.3 % and 11.5 % for the three and nine months ended September 30, 2020, respectively, differ from the United States statutory federal income tax rate of 21 two years to four years , to reduce near-term rate impacts to our customers. In addition, the impact of the protected benefits associated with the Tax Legislation, as discussed in more detail below, and wind production tax credits drove a decrease in the effective tax rate, which was partially offset by state income taxes.
The effective tax rates of (15.2 )% and (13.6 )% for the three and nine months ended September 30, 2019, respectively, differ from the United States statutory federal income tax rate of 21 %, primarily due to the flow through of tax repairs in connection with the 2017 Wisconsin rate settlement, the impact of the protected benefits associated with the Tax Legislation, as discussed in more detail below, and wind production tax credits, 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 line above).
See Note 19, Regulatory Environment, for more information.
NOTE 11—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.
| 09/30/2020 Form 10-Q | 14 | Wisconsin Electric Power Company | ||||||
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:
| September 30, 2020 | ||||||||||||||||||||||||||
| (in millions) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||
| Derivative assets | ||||||||||||||||||||||||||
| Natural gas contracts | $ | $ | $ | $ | ||||||||||||||||||||||
| FTRs | ||||||||||||||||||||||||||
| Total derivative assets | $ | $ | $ | $ | ||||||||||||||||||||||
| Derivative liabilities | ||||||||||||||||||||||||||
| Natural gas contracts | $ | $ | $ | $ | ||||||||||||||||||||||
| Coal contracts | ||||||||||||||||||||||||||
| Total derivative liabilities | $ | $ | $ | $ | ||||||||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||||
| (in millions) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||
| Derivative assets | ||||||||||||||||||||||||||
| Natural gas contracts | $ | $ | $ | $ | ||||||||||||||||||||||
| FTRs | ||||||||||||||||||||||||||
| Coal contracts | ||||||||||||||||||||||||||
| Total derivative assets | $ | $ | $ | $ | ||||||||||||||||||||||
| Derivative liabilities | ||||||||||||||||||||||||||
| Natural gas contracts | $ | $ | $ | $ | ||||||||||||||||||||||
| Coal contracts | ||||||||||||||||||||||||||
| Total derivative liabilities | $ | $ | $ | $ | ||||||||||||||||||||||
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:
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||
| (in millions) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||
| Balance at the beginning of the period | $ | $ | $ | $ | ||||||||||||||||||||||
| Purchases | ||||||||||||||||||||||||||
| Settlements | ( | ( | ( | ( | ||||||||||||||||||||||
| Balance at the end of the period | $ | $ | $ | $ | ||||||||||||||||||||||
| 09/30/2020 Form 10-Q | 15 | Wisconsin Electric Power Company | ||||||
Fair Value of Financial Instruments
The following table shows the financial instruments included on our balance sheets that were not recorded at fair value:
| September 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||
| (in millions) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||||||||
| Preferred stock | $ | $ | $ | $ | ||||||||||||||||||||||
| Long-term debt, including current portion | ||||||||||||||||||||||||||
The fair values of our long-term debt and preferred stock are categorized within Level 2 of the fair value hierarchy.
NOTE 12—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.
The following table shows our derivative assets and derivative liabilities, along with their classification on our balance sheets. None of our derivatives are designated as hedging instruments.
| September 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||
| (in millions) | Derivative Assets | Derivative Liabilities | Derivative Assets | Derivative Liabilities | ||||||||||||||||||||||
| Other current | ||||||||||||||||||||||||||
| Natural gas contracts | $ | $ | $ | $ | ||||||||||||||||||||||
| FTRs | ||||||||||||||||||||||||||
| Coal contracts | ||||||||||||||||||||||||||
Total other current (1) | ||||||||||||||||||||||||||
| Other long-term | ||||||||||||||||||||||||||
| Natural gas contracts | ||||||||||||||||||||||||||
| Coal contracts | ||||||||||||||||||||||||||
Total other long-term (1) | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
(1)On our balance sheets, we classify derivative assets and liabilities as other current or other long-term based on the maturities of the underlying contracts.
Realized gains (losses) on derivatives are primarily recorded in cost of sales on the income statements. Our estimated notional sales volumes and realized gains (losses) were as follows:
| Three Months Ended September 30, 2020 | Three Months Ended September 30, 2019 | |||||||||||||||||||||||||
| (in millions) | Volumes | Gains (Losses) | Volumes | Gains (Losses) | ||||||||||||||||||||||
| Natural gas contracts | $ | ( | $ | ( | ||||||||||||||||||||||
| FTRs | ||||||||||||||||||||||||||
| Total | $ | ( | $ | ( | ||||||||||||||||||||||
| 09/30/2020 Form 10-Q | 16 | Wisconsin Electric Power Company | ||||||
| Nine Months Ended September 30, 2020 | Nine Months Ended September 30, 2019 | |||||||||||||||||||||||||
| (in millions) | Volumes | Gains (Losses) | Volumes | Gains (Losses) | ||||||||||||||||||||||
| Natural gas contracts | $ | ( | $ | ( | ||||||||||||||||||||||
| FTRs | ||||||||||||||||||||||||||
| Total | $ | ( | $ | ( | ||||||||||||||||||||||
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, 2020, we had received cash collateral of $3.3 million in our margin accounts. This amount was recorded on our balance sheet in other current liabilities. At December 31, 2019, we had posted cash collateral of $8.5 million in our margin accounts. This amount was recorded on our balance sheet 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:
| September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||
| (in millions) | Derivative Assets | Derivative Liabilities | Derivative Assets | Derivative Liabilities | |||||||||||||||||||||||||
| Gross amount recognized on the balance sheet | $ | $ | $ | $ | |||||||||||||||||||||||||
| Gross amount not offset on the balance sheet | ( | (1) | ( | ( | ( | (2) | |||||||||||||||||||||||
| Net amount | $ | $ | $ | $ | |||||||||||||||||||||||||
(1)Includes cash collateral received of $3.3 million.
(2)Includes cash collateral posted of $4.8 million.
NOTE 13—GUARANTEES
NOTE 14—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) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||
| Service cost | $ | $ | $ | $ | ||||||||||||||||||||||
| Interest cost | ||||||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | ||||||||||||||||||||||
| Loss on plan settlement | ||||||||||||||||||||||||||
| Amortization of prior service (credit) cost | ( | ( | ||||||||||||||||||||||||
| Amortization of net actuarial loss | ||||||||||||||||||||||||||
| Net periodic benefit cost | $ | $ | $ | $ | ||||||||||||||||||||||
| 09/30/2020 Form 10-Q | 17 | Wisconsin Electric Power Company | ||||||
| OPEB Benefits | ||||||||||||||||||||||||||
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||
| (in millions) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||
| Service cost | $ | $ | $ | $ | ||||||||||||||||||||||
| Interest cost | ||||||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | ||||||||||||||||||||||
| Amortization of prior service credit | ( | ( | ( | ( | ||||||||||||||||||||||
| Amortization of net actuarial gain | ( | ( | ( | ( | ||||||||||||||||||||||
| Net periodic benefit credit | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
During the nine months ended September 30, 2020, we made contributions and payments of $3.3 million related to our pension plans and $0.1 million related to our OPEB plans. Our expected contributions and payments related to our pension and OPEB plans for the remainder of the year are insignificant.
NOTE 15—SEGMENT INFORMATION
We use operating income to measure segment profitability and to allocate resources to our businesses. At September 30, 2020, we reported two segments, which are described below.
Our utility segment includes our electric utility operations, including steam operations, and our natural gas utility operations.
•Our electric utility operations are engaged in the generation, distribution, and sale of electricity to customers in southeastern Wisconsin (including metropolitan Milwaukee), east central Wisconsin, and northern Wisconsin. In addition, our steam operations produce, distribute, and sell steam to customers in metropolitan Milwaukee. Prior to April 1, 2019, we also provided electric service to Tilden, who owns an iron ore mine in the Upper Peninsula of Michigan. This customer was transferred to UMERC on April 1, 2019.
•Our natural gas utility operations are engaged in the purchase, distribution, and sale of natural gas to retail customers and the transportation of customer-owned natural gas in southeastern, east central, and northern Wisconsin.
NOTE 16—VARIABLE INTEREST ENTITIES
The primary beneficiary of a variable interest entity must consolidate the entity's assets and liabilities. In addition, certain disclosures are required for significant interest holders in variable interest entities.
We assess our relationships with potential variable interest entities, such as our coal suppliers, natural gas suppliers, coal transporters, natural gas transporters, and other counterparties related to power purchase agreements and investments. In making this assessment, we consider, along with other factors, the potential that our contracts or other arrangements provide subordinated financial support, the obligation to absorb the entity's losses, the right to receive residual returns of the entity, and the power to direct the activities that most significantly impact the entity's economic performance.
Power Purchase Agreement
We have a power purchase agreement that represents a variable interest. This agreement is for 236 MWs of firm capacity from a natural gas-fired cogeneration facility, and we account for it as a finance lease. The agreement includes no minimum energy requirements over the remaining term of approximately two years . We have examined the risks of the entity, including operations, maintenance, dispatch, financing, fuel costs, and other factors, and have determined that we are not the primary beneficiary of the entity. We do not hold an equity or debt interest in the entity, and there is no residual guarantee associated with the power purchase agreement.
We have $15.8 million of required capacity payments over the remaining term of this agreement. We believe that the required capacity payments under this contract will continue to be recoverable in rates, and our maximum exposure to loss is limited to these capacity payments.
| 09/30/2020 Form 10-Q | 18 | Wisconsin Electric Power Company | ||||||
NOTE 17—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.
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, 2020, were approximately $9.2 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, nitrogen oxide, 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
National Ambient Air Quality Standards
After completing its review of the 2008 ozone standard, the EPA released a final rule in October 2015, which lowered the limit for ground-level ozone, creating a more stringent standard than the 2008 National Ambient Air Quality Standards. The EPA issued final nonattainment area designations in April 2018. The following counties within our service territory were designated as partial nonattainment with the 2015 standard: Kenosha and Northern Milwaukee/Ozaukee. This re-designation was challenged in the D.C. Circuit Court of Appeals in Clean Wisconsin et al. v. U.S. Environmental Protection Agency. Petitioners in that case have argued that additional portions of Milwaukee, Waukesha, Ozaukee, and Washington Counties (among others) should be designated as nonattainment for ozone. In November 2019, the D.C. Circuit Court of Appeals heard oral arguments for that case. A decision was issued in July 2020 remanding the rule to the EPA for further evaluation. We expect that any subsequent EPA re-designation, if necessary, would take place in 2021. The State of Wisconsin submitted the "infrastructure" portion of its state implementation plan outlining how it will implement, maintain, and enforce the 2015 Ozone standard. The plan is subject to EPA review and approval. We believe we are well positioned to meet the requirements associated with the ozone standard and do not expect to incur significant costs to comply.
Mercury and Air Toxics Standards
In May 2020, the EPA finalized revisions to the Supplemental Cost Finding for the MATS rule as well as the CAA required RTR. The EPA was required by the United States Supreme Court to review both costs and benefits of complying with the MATS rule. After its review of costs, the EPA determined that it is not appropriate and necessary to regulate hazardous air pollutant emissions from power plants under Section 112 of the CAA. As a result, under the final rule, the emission standards and other requirements of the MATS rule first enacted in 2012 remain in place. The EPA did not remove coal- and oil-fired power plants from the list of sources that are regulated under Section 112. The EPA also determined that no revisions to MATS are warranted based on the results of the RTR. As a result, we do not expect the rule to have a material impact on our financial condition or results of operations.
Climate Change
The ACE rule became effective in September 2019. This rule provides existing coal-fired generating units with standards for achieving GHG emission reductions. The rule was finalized in conjunction with two other separate and distinct rulemakings, (1) the repeal of the Clean Power Plan, and (2) revised implementing regulations for ACE, ongoing emissions guidelines, and all future emission guidelines for existing sources issued under CAA section 111(d). Every state's plan to implement ACE is required to focus on reducing GHG emissions by improving the efficiency of fossil-fueled power plants. The rule is being litigated in challenges brought in the D.C. Circuit Court of Appeals by 22 states (including Wisconsin), local governments, and certain nongovernmental organizations. In the
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meantime, the Wisconsin Department of Natural Resources continues to work with state utilities and has begun the process of developing the implementation plan with respect to the ACE rule.
In December 2018, the EPA proposed to revise the New Source Performance Standards for GHG emissions from new, modified, and reconstructed fossil-fueled power plants. The EPA determined that the BSER for new, modified, and reconstructed coal units is highly efficient generation that would be equivalent to supercritical steam conditions for larger units and subcritical steam conditions for smaller units. This proposed BSER would replace the determination from the previous rule, which identified BSER as partial carbon capture and storage. The EPA has reviewed comments and intends to take final action on the proposed rule later in 2020.
WEC Energy Group has a plan (referred to as its ESG progress plan), which includes us, that includes the retirement of older, fossil-fueled generation, to be replaced with the construction of zero-carbon emitting renewable generation and clean natural gas-fired generation. We have already retired approximately 1,500 MW of coal-fired generation since the beginning of 2018, which included the 2019 retirement of the PIPP as well as the 2018 retirement of the Pleasant Prairie power plant. WEC Energy Group expects to retire approximately 1,800 MW of additional fossil-fueled generation by 2025. The retirements will contribute to meeting a new, near-term goal of reducing WEC Energy Group's CO2 emissions from its electric generation by 55 % below 2005 levels by 2025. In 2019, WEC Energy Group met and surpassed its original goal of reducing CO2 emissions by 40 % below 2005 levels by 2030. In July 2020, WEC Energy Group announced a new goal to reduce CO2 emissions from its electric generation by 70 % below 2005 levels by 2030 and to be net carbon neutral by 2050. In addition to retiring these older, fossil-fueled plants, WEC Energy Group expects to invest in low-cost renewable energy in Wisconsin. WEC Energy Group's plan is to replace a portion of the retired capacity by building and owning a combination of clean, natural gas-fired generation and zero-carbon-emitting renewable generation facilities.
WEC Energy Group also has a goal to decrease the rate of methane emissions from the natural gas distribution lines in its network by 30 % per mile by the year 2030 from a 2011 baseline. WEC Energy Group was over half way toward meeting that goal at the end of 2019.
National Emission Standards for Hazardous Air Pollutants for Stationary Combustion Turbines
Effective in March 2020, the EPA issued a final regulation, The Combustion Turbine Rule. The Combustion Turbine Rule was issued to complete the RTR required by the CAA every five years, and applies only to combustion turbines constructed or reconstructed after January 14, 2003. The Combustion Turbine Rule clarifies certain performance testing, semi-annual and excess emission reporting requirements, implements electronic reporting requirements, and changes certain requirements applicable during startup, shutdown, and malfunction. We have evaluated the rule and do not expect the rule will have a material impact on our financial condition or results of operations.
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 rule became effective in October 2014 and applies to all of our existing generating facilities with cooling water intake structures, except for the ERGS units, which were permitted under the rules governing new facilities.
We have received BTA determinations for OC 5 through OC 8 and Valley power plant. Although we currently believe that existing technology at the Port Washington Generating Station satisfies the BTA requirements, final determinations will not be made until the discharge permit is renewed for this facility, which is expected to be in 2021. We anticipate that the permit renewal will include a final BTA determination to address all of the Section 316(b) rule requirements.
As a result of past capital investments completed to address Section 316(b) compliance, we believe our fleet overall is well positioned to meet the regulation and do not expect to incur significant additional costs to comply with this regulation.
Steam Electric Effluent Limitation Guidelines
The EPA's final 2015 ELG rule took effect in January 2016. This rule created new requirements for several types of power plant wastewaters. The two new requirements that affect us relate to discharge limits for BATW and wet FGD wastewater. As a result of past capital investments, we believe our fleet is well positioned to meet the existing ELG regulations. Our power plant facilities already have advanced wastewater treatment technologies installed that meet many of the discharge limits established by this rule.
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There will, however, need to be modifications to the BATW systems at OC 7 and OC 8. Also, a wastewater treatment system modification may be required for the wet FGD discharges from the six units that make up the OCPP and ERGS. Based on preliminary engineering, we estimate that compliance with the current rule will require $50 million in capital costs.
The ELG requirements for BATW and wet FGD systems were being re-evaluated by the EPA. In September 2017, the EPA issued a final rule (Postponement Rule) to postpone the earliest compliance date to November 1, 2020 for the BATW and wet FGD wastewater requirements while it re-evaluated the ELG rule. The Postponement Rule left unchanged the latest ELG rule compliance date of December 31, 2023. In August 2020, the EPA Administrator signed the ELG Reconsideration Rule to revise the treatment technology requirements related to BATW and wet FGD wastewaters at existing facilities. This rule is effective December 14, 2020 and includes provisions that:
•Exempt facility owners from the new BATW and wet FGD requirements if a generating unit is retired by December 31, 2028.
•Would limit the investment required to meet these new rule requirements if the coal-fueled unit has a low utilization rate where the 2 -year average annual capacity utilization rating is less than 10 %.
•Modified the Voluntary Incentives Program to provide the certainty of more time (until December 31, 2028) to implement new requirements if a company adopts additional process changes and controls that achieve more stringent limitations on mercury, arsenic, selenium, nitrate/nitrite, bromide, and total dissolved solids in FGD wastewater.
We are currently evaluating what impact, if any, the rule may have on our estimated compliance cost of $50 million noted above.
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. We are also working with various state jurisdictions in our investigation and remediation planning. These sites are at various stages of investigation, monitoring, remediation, and closure.
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, 2020 | December 31, 2019 | ||||||||||||
| Regulatory assets | $ | $ | ||||||||||||
Reserves for future environmental remediation (1) | ||||||||||||||
(1)Recorded within other long-term liabilities on our balance sheets.
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.
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NOTE 18—SUPPLEMENTAL CASH FLOW INFORMATION
| Nine Months Ended September 30 | ||||||||||||||
| (in millions) | 2020 | 2019 | ||||||||||||
| Cash paid for interest, net of amount capitalized | $ | $ | ||||||||||||
| Cash paid for income taxes, net | ||||||||||||||
| Significant non-cash investing and financing transactions: | ||||||||||||||
| Accounts payable related to construction costs | ||||||||||||||
Receivable from a related party related to insurance proceeds for property damage (1) | ||||||||||||||
NOTE 19—REGULATORY ENVIRONMENT
Coronavirus Disease – 2019
The global outbreak of COVID-19 was declared a pandemic by the WHO and the CDC. COVID-19 has spread globally, including throughout the United States and, in turn, our service territory. In response to the COVID-19 pandemic, Wisconsin declared a public health emergency and issued a shelter-in-place order, which has since been lifted. On March 24, 2020, the PSCW issued two orders requiring certain actions to ensure that essential utility services were, and continue to be, available to our customers. The first order required all public utilities in the state of Wisconsin, including us, to temporarily suspend disconnections, the assessment of late fees, and deposit requirements for all customer classes. In addition, it required utilities to reconnect customers that were previously disconnected, offer deferred payment arrangements to all customers, and streamline the application process for customers applying for utility service.
In the second order issued on March 24, 2020, the PSCW authorized Wisconsin utilities to defer expenditures and certain foregone revenues resulting from compliance with the first order, and expenditures as otherwise incurred to ensure safe, reliable, and affordable access to utility services during the declared public health emergency. The PSCW has affirmed that this authorization for deferral includes the incremental increase in uncollectible expense above what is currently being recovered in rates. As we already have a cost recovery mechanism in place to recover uncollectible expense for residential customers, this new deferral only impacts the recovery of uncollectible expense for our commercial and industrial customers. The PSCW will review the recoverability and examine the prudency of any deferred amounts in future rate proceedings. As of September 30, 2020, we had deferred $3.2 million related to the COVID-19 pandemic.
On June 26, 2020, the PSCW issued a written order providing a timeline for the lifting of the temporary provisions required in the first March 24, 2020 order. Utilities were allowed to disconnect commercial and industrial customers and require deposits for new service as of July 25, 2020 and July 31, 2020, respectively. After August 15, 2020, utilities were no longer required to offer deferred payment arrangements to all customers. Additionally, utilities were authorized to reinstate late fees except for the period between the first order and this supplemental order. We resumed charging late payment fees in late August 2020. Late payment fees were not charged on outstanding balances that were billed between the first order and late August 2020.
The PSCW extended the moratorium on disconnections of residential customers until November 1, 2020. In accordance with Wisconsin regulations, utilities are generally not allowed to disconnect residential customers for non-payment during the winter moratorium, which begins on November 1 and ends on April 15. Utilities are allowed to continue assessing late fees during the winter moratorium.
2020 and 2021 Rates
In March 2019, we filed an application with the PSCW to increase our retail electric, natural gas, and steam rates, effective January 1, 2020. In August 2019, we filed an application with the PSCW for approval of a settlement agreement entered into with certain intervenors to resolve several outstanding issues in our rate case. In December 2019, the PSCW issued a written order that approved the settlement agreement without material modification and addressed the remaining outstanding issues that were not included in the settlement agreement. The new rates became effective January 1, 2020.
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The final order reflects the following:
| 2020 Effective rate increase | ||||||||||||||
Electric (1) | $ | million | / | |||||||||||
Gas (2) | $ | million | / | |||||||||||
| Steam | $ | million | / | |||||||||||
| ROE | ||||||||||||||
| Common equity component average on a financial basis | ||||||||||||||
(1)Amount is net of certain deferred tax benefits from the Tax Legislation that were utilized to reduce near-term rate impacts to our customers. The rate order reflects the majority of the unprotected deferred tax benefits from the Tax Legislation being amortized evenly over two years , which results in approximately $65
(2)Amount includes certain deferred tax expense from the Tax Legislation. The rate order reflects all of the unprotected deferred tax expense from the Tax Legislation being amortized evenly over four years , which results in approximately $5
In accordance with our rate order, we filed an application with the PSCW on July 20, 2020 to securitize $100 million of Pleasant Prairie power plant's book value, plus the carrying costs accrued on the $100 million during the securitization process and related fees. The securitization is expected to reduce the carrying costs for the $100 million, benefiting customers. In its meeting on November 5, 2020, the PSCW verbally approved our application without any known material adverse conditions. The terms of this approval are subject to our receipt and review of the final written order from the PSCW, which we expect to receive by November 17, 2020, the statutory deadline for an order to be issued in this proceeding.
We will continue having an earnings sharing mechanism through 2021. The earnings sharing mechanism was modified from its previous structure to one that is consistent with other Wisconsin investor-owned utilities. Under the new earnings sharing mechanism, if we earn above our authorized ROE: (i) we retain 100.0 % of earnings for the first 25 basis points above the authorized ROE; (ii) 50.0 % of the next 50 basis points is refunded to customers; and (iii) 100.0 % of any remaining excess earnings is refunded to customers. In addition, the rate order also requires us to maintain residential and small commercial electric and natural gas customer fixed charges at previously authorized rates and to maintain the status quo for our electric market-based rate programs for large industrial customers through 2021.
2018 and 2019 Rates
During April 2017, we, along with Wisconsin Public Service Corporation and WG, filed an application with the PSCW for approval of a settlement agreement we made with several of our commercial and industrial customers regarding 2018 and 2019 base rates. In September 2017, the PSCW issued an order that approved the settlement agreement, which froze base rates through 2019 for our electric, natural gas, and steam customers. Based on the PSCW order, our authorized ROE remained at 10.2 % and our capital cost structure remained unchanged through 2019.
In addition to freezing base rates, the settlement agreement extended and expanded the electric real-time market pricing program options for large commercial and industrial customers and mitigated the continued growth of certain escrowed costs during the base rate freeze period by accelerating the recognition of certain tax benefits. We were flowing through the tax benefit of our repair-related deferred tax liabilities in 2018 and 2019, to maintain certain regulatory asset balances at their December 31, 2017 levels. While we would typically follow the normalization accounting method and utilize the tax benefits of the deferred tax liabilities in rate making as an offset to rate base, benefiting customers over time, the federal tax code does allow for passing these tax repair-related benefits to ratepayers much sooner using the flow through accounting method. The flow through treatment of the repair-related deferred tax liabilities offset the negative income statement impact of holding the regulatory assets level, resulting in no change to net income.
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Pursuant to the settlement agreement, we also agreed to keep our earnings sharing mechanism in place through 2019. Under this earnings sharing mechanism, if we earned above our authorized ROE, 50 % of the first 50 basis points of additional utility earnings were required to be refunded to customers. All utility earnings above the first 50 basis points were also required to be refunded to customers.
Liquefied Natural Gas Facility
In November 2019, we filed an application with the PSCW requesting approval to construct a LNG facility. If approved, the facility would provide us with approximately one billion cubic feet of natural gas supply to meet anticipated peak demand without requiring the construction of additional interstate pipeline capacity. This facility is expected to reduce the likelihood of constraints on our natural gas system during the highest demand days of winter. The project is estimated to cost approximately $185 million. Commercial operation for the LNG facility is targeted for the end of 2023.
Solar Generation Project
NOTE 20—NEW ACCOUNTING PRONOUNCEMENTS
Cloud Computing
In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The standard allows entities who are customers in hosting arrangements that are service contracts to apply the existing internal-use software guidance to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The guidance specifies classification for capitalizing implementation costs and related amortization expense within the financial statements and requires additional disclosures. The adoption of ASU 2018-15, effective January 1, 2020, did not have a significant impact on our financial statements and related disclosures.
Disclosure Requirements for Defined Benefit Plans
In August 2018, the FASB issued ASU 2018-14, Disclosure Framework: Changes to the Disclosure Requirements for Defined Benefit Plans. The pronouncement modifies the disclosure requirements for defined benefit pension and OPEB plans. The guidance removes disclosures that are no longer considered cost beneficial, clarifies the specific requirements of disclosures and adds disclosure requirements identified as relevant. The modifications affect annual period disclosures and must be applied on a retrospective basis to all periods presented. The guidance will be effective for annual reporting periods ending after December 15, 2020, with early adoption permitted. We are currently evaluating the effects of this pronouncement on the notes to our financial statements.
Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The new standard removes certain exceptions for performing intraperiod allocation and calculating income taxes in interim periods and also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The guidance will be effective for annual and interim periods beginning after December 15, 2020. We plan to adopt the new standard effective January 1, 2021, and do not expect the adoption to have a material impact on our financial statements and related disclosures.
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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.
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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 financial statements and related notes and our 2019 Annual Report on Form 10-K.
Introduction
We are a wholly owned subsidiary of WEC Energy Group, and derive revenues primarily from the distribution and sale of electricity and natural gas to retail customers in Wisconsin. We conduct our business primarily through our utility reportable segment. See Note 15, 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: reliability; operating efficiency; financial discipline; customer care; and safety. WEC Energy Group's plan, referred to as its ESG progress plan, for efficiency, sustainability and growth will provide us a roadmap for achieving this goal. It is an aggressive plan to cut emissions, maintain superior reliability, deliver significant savings for customers, and grow our investment in the future of energy.
Creating a Cleaner Energy Future
WEC Energy Group's ESG progress plan includes the retirement of older, fossil-fueled generation, to be replaced with the construction of zero-carbon-emitting renewable generation and clean natural gas-fired generation. When taken together, the retirements and new investments should better balance our supply with our demand, while maintaining reliable, affordable energy for our customers. The retirements will contribute to meeting a new, near-term goal of reducing WEC Energy Group's carbon dioxide (CO2) emissions from electric generation by 55% below 2005 levels by 2025.
In 2019, WEC Energy Group met and surpassed its original goal to reduce CO2 emissions by 40% below 2005 levels by 2030. In July 2020, WEC Energy Group announced a new goal, to reduce CO2 emissions from electricity generation by 70% below 2005 levels by 2030 and to be net carbon neutral by 2050.
WEC Energy Group has already retired more than 1,800 megawatts (MW) of coal-fired generation since the beginning of 2018 across its electric utilities, which included the 2019 retirement of the Presque Isle power plant as well as the 2018 retirement of the Pleasant Prairie power plant. As part of its ESG progress plan, WEC Energy Group expects to retire approximately 1,800 MW of additional fossil-fueled generation by 2025.
In addition to retiring these older, fossil-fueled plants, WEC Energy Group expects to invest approximately $2 billion in low-cost renewable energy in Wisconsin. WEC Energy Group's plan is to replace a portion of the retired capacity by building and owning a combination of clean, natural gas-fired generation and zero-carbon-emitting renewable generation facilities that are anticipated to include:
•800 MW of utility-scale solar;
•600 MW of battery storage;
•100 MW of wind; and
•100 MW of reciprocating internal combustion engine (RICE) natural gas-fueled generation.
WEC Energy Group also plans to purchase 200 MW of capacity in the West Riverside Energy Center — a new, combined-cycle natural gas plant recently completed by Alliant Energy in Wisconsin. These new investments are in addition to the renewable projects currently underway.
We have partnered with an unaffiliated utility to construct a utility-scale solar project, Badger Hollow Solar Park II (Badger Hollow II), that will be located in Iowa County, Wisconsin. Once constructed, we will own 100 MW of the project. The Public Service Commission of Wisconsin (PSCW) issued a written order approving the acquisition of this project in March 2020. Commercial operation of Badger Hollow II is targeted for December 2022.
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In December 2018, we received approval from the PSCW for two renewable energy pilot programs. The Solar Now pilot is expected to add 35 MW of solar generation to our portfolio, allowing non-profit and governmental entities, as well as commercial and industrial customers to site utility owned solar arrays on their property. Under this program, in 2019, we constructed 5 MW of solar generation and are on track to construct more than that in 2020. The second program, the Dedicated Renewable Energy Resource pilot, would allow large commercial and industrial customers to access renewable resources that we would operate, adding up to 150 MW of renewables to our portfolio, and allowing these larger customers to meet their sustainability and renewable energy goals.
WEC Energy Group also has a goal to decrease the rate of methane emissions from the natural gas distribution lines in its network by 30% per mile by the year 2030 from a 2011 baseline. WEC Energy Group was over half way toward meeting that goal at the end of 2019. In April 2019, WEC Energy Group issued a climate report, which analyzes its GHG reduction goals with respect to international efforts to limit future global temperature increases to less than two degrees Celsius. WEC Energy Group will evaluate potential GHG reduction pathways as climate change policies and relevant technologies evolve over time.
Reliability
We have made significant reliability-related investments in recent years, and in accordance with WEC Energy Group's ESG progress plan, expect to continue strengthening and modernizing our generation fleet and distribution networks to further improve reliability. Our investments, coupled with our commitment to operating efficiency and customer care, resulted in We Energies being recognized in 2019 by PA Consulting Group, an independent consulting firm, as the most reliable utility in the Midwest for the ninth year in a row. We Energies is the trade name under which we and Wisconsin Gas LLC, another wholly owned subsidiary of WEC Energy Group, operate.
Below are a few examples of reliability projects that are proposed.
•We plan to install approximately 46 miles of natural gas transmission main in southeastern Wisconsin. This project, which was approved in a written order by the PSCW in June 2020, has been designated as the "Lakeshore Lateral Project." The primary purpose of this project is to increase the quantity and reliability of natural gas service, both on a peak day and annually, in southeastern Wisconsin. Construction for the project is tentatively scheduled to begin during the fourth quarter of 2020, and the project is expected to be completed by the end of 2021.
•We plan to construct a liquefied natural gas (LNG) facility. Subject to PSCW approval, the facility would provide us with approximately one billion cubic feet of natural gas supply to meet anticipated peak demand without requiring the construction of additional interstate pipeline capacity. This facility is expected to reduce the likelihood of constraints on our natural gas system during the highest demand days of winter. Commercial operation for the LNG facility is targeted for the end of 2023.
Operating Efficiency
We continually look for ways to optimize the operating efficiency of our company and will continue to do so under WEC Energy Group's ESG progress plan. For example, we are making progress on our Advanced Metering Infrastructure 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 while meeting all applicable legal and regulatory requirements. We also strive to provide the best value to our customers and WEC Energy Group's shareholders by embracing constructive change, leveraging capabilities and expertise, and using creative solutions to meet or exceed our customers' expectations.
Financial Discipline
A strong adherence to financial discipline is essential to earning our authorized ROE and maintaining a strong balance sheet, stable cash flows, and quality credit ratings.
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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 performing as intended, or have an unacceptable risk profile.
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.
Safety
We have a long-standing commitment to both workplace and public safety, and under our "Target Zero" mission, we have an ultimate goal of zero incidents, accidents, and injuries. We also set goals around injury-prevention activities that raise awareness and facilitate conversations about employee safety. 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, 2020
Earnings
The following table compares our results for the third quarter of 2020 with the third quarter of 2019, including favorable or better, "B", and unfavorable or worse, "W", variances:
| Three Months Ended September 30 | ||||||||||||||||||||||||||||||||
| (in millions) | 2020 | 2019 | B (W) | Change Related to 2019 Tax Repairs | Remaining Change B (W) | |||||||||||||||||||||||||||
| Operating revenues | $ | 900.2 | $ | 884.1 | $ | 16.1 | $ | 25.4 | $ | (9.3) | ||||||||||||||||||||||
| Cost of sales | 297.9 | 300.6 | 2.7 | — | 2.7 | |||||||||||||||||||||||||||
| Other operation and maintenance | 221.9 | 260.1 | 38.2 | 16.5 | 21.7 | |||||||||||||||||||||||||||
| Depreciation and amortization | 107.7 | 96.2 | (11.5) | — | (11.5) | |||||||||||||||||||||||||||
| Property and revenue taxes | 28.1 | 26.1 | (2.0) | — | (2.0) | |||||||||||||||||||||||||||
| Operating income | 244.6 | 201.1 | 43.5 | 41.9 | 1.6 | |||||||||||||||||||||||||||
| Other income, net | 5.7 | 5.8 | (0.1) | — | (0.1) | |||||||||||||||||||||||||||
| Interest expense | 116.3 | 119.3 | 3.0 | — | 3.0 | |||||||||||||||||||||||||||
| Income before income taxes | 134.0 | 87.6 | 46.4 | 41.9 | 4.5 | |||||||||||||||||||||||||||
| Income tax expense (benefit) | 19.1 | (13.3) | (32.4) | (41.9) | 9.5 | |||||||||||||||||||||||||||
| Preferred stock dividend requirements | 0.3 | 0.3 | — | — | — | |||||||||||||||||||||||||||
| Net income attributed to common shareholder | $ | 114.6 | $ | 100.6 | $ | 14.0 | $ | — | $ | 14.0 | ||||||||||||||||||||||
Our earnings increased $14.0 million during the third quarter of 2020, compared with the same quarter in 2019. The table above shows the income statement impacts due to the flow through of tax repairs during the third quarter of 2019. We were flowing through the tax benefit of our repair related deferred tax liabilities in 2018 and 2019, to maintain certain regulatory asset balances at their December 31, 2017 levels. As shown in the table above, the changes related to the flow through of tax repairs had no impact on net income attributed to common shareholder. See Note 19, Regulatory Environment, for more information on the flow through of tax repairs. See below for additional information on the $14.0 million increase in our earnings.
Non-GAAP Financial Measures
The discussion below addresses the operating income contribution of our utility segment and 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 margin (electric revenues less fuel and purchased power costs) and natural gas margin (natural
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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 our utility segment operating performance. Our utility segment operating income for the three months ended September 30, 2020 and 2019 was $244.6 million and $201.1 million, respectively. The operating income discussion below includes a table that provides the calculation of electric margins and natural gas margins, along with a reconciliation to utility segment operating income.
Utility Segment Contribution to Operating Income
| Three Months Ended September 30 | ||||||||||||||||||||
| (in millions) | 2020 | 2019 | B (W) | |||||||||||||||||
| Electric revenues | $ | 855.3 | $ | 842.7 | $ | 12.6 | ||||||||||||||
| Fuel and purchased power | 277.0 | 280.5 | 3.5 | |||||||||||||||||
| Total electric margins | 578.3 | 562.2 | 16.1 | |||||||||||||||||
| Natural gas revenues | 44.9 | 41.4 | 3.5 | |||||||||||||||||
| Cost of natural gas sold | 20.9 | 20.1 | (0.8) | |||||||||||||||||
| Total natural gas margins | 24.0 | 21.3 | 2.7 | |||||||||||||||||
| Total electric and natural gas margins | 602.3 | 583.5 | 18.8 | |||||||||||||||||
| Other operation and maintenance | 221.9 | 260.1 | 38.2 | |||||||||||||||||
| Depreciation and amortization | 107.7 | 96.2 | (11.5) | |||||||||||||||||
| Property and revenue taxes | 28.1 | 26.1 | (2.0) | |||||||||||||||||
| Operating income | $ | 244.6 | $ | 201.1 | $ | 43.5 | ||||||||||||||
The following table shows a breakdown of other operation and maintenance:
| Three Months Ended September 30 | ||||||||||||||||||||
| (in millions) | 2020 | 2019 | B (W) | |||||||||||||||||
| Operation and maintenance not included in line items below | $ | 93.4 | $ | 102.1 | $ | 8.7 | ||||||||||||||
Transmission (1) | 84.4 | 62.8 | (21.6) | |||||||||||||||||
We Power (2) | 29.3 | 36.9 | 7.6 | |||||||||||||||||
Regulatory amortizations and other pass through expenses (3) | 14.8 | 24.3 | 9.5 | |||||||||||||||||
Transmission expense related to Tax Legislation (4) | — | 17.5 | 17.5 | |||||||||||||||||
Transmission expense related to the flow through of tax repairs (5) | — | 16.5 | 16.5 | |||||||||||||||||
| Total other operation and maintenance | $ | 221.9 | $ | 260.1 | $ | 38.2 | ||||||||||||||
(1)Represents transmission expense that we are authorized to collect in rates, in accordance with the PSCW's approval of 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 three months ended September 30, 2020 and 2019, $82.4 million and $87.7 million, respectively, of costs were billed to us by transmission providers.
(2)Represents costs associated with the We Power generation units, including operating and maintenance costs we recognized. During the three months ended September 30, 2020 and 2019, $24.1 million and $26.6 million, respectively, of operating and maintenance costs were billed to or incurred by us related to the We Power generation units, with the difference in costs billed or incurred and expenses recognized, either deferred or deducted from the regulatory asset.
| 09/30/2020 Form 10-Q | 29 | Wisconsin Electric Power Company | ||||||
(3)Regulatory amortizations and other pass through expenses are substantially offset in margins and therefore do not have a significant impact on operating income.
(4)Represents additional transmission expense recorded in 2019 associated with the May 2018 PSCW order requiring us to use 80% of our current 2018 tax benefit, including the amortization associated with the revaluation of deferred taxes, to reduce our transmission regulatory asset balance. Since our transmission regulatory asset was eliminated at December 31, 2019, there were no tax benefits used in 2020.
(5)Represents additional transmission expense recorded in 2019 associated with the flow through of tax benefits of our repair-related deferred tax liabilities starting in 2018 in accordance with a settlement agreement with the PSCW, to maintain certain regulatory asset balances at their December 31, 2017 levels. This decrease in expenses was offset in income taxes. Since our transmission regulatory asset was eliminated at December 31, 2019, there were no tax benefits used in 2020.
The following tables provide information on delivered sales volumes by customer class and weather statistics:
| Three Months Ended September 30 | ||||||||||||||||||||
MWh (in thousands) | ||||||||||||||||||||
| Electric Sales Volumes | 2020 | 2019 | B (W) | |||||||||||||||||
| Customer Class | ||||||||||||||||||||
| Residential | 2,428.5 | 2,278.5 | 150.0 | |||||||||||||||||
| Small commercial and industrial | 2,285.6 | 2,378.4 | (92.8) | |||||||||||||||||
| Large commercial and industrial | 1,778.3 | 1,878.5 | (100.2) | |||||||||||||||||
| Other | 27.8 | 29.6 | (1.8) | |||||||||||||||||
| Total retail | 6,520.2 | 6,565.0 | (44.8) | |||||||||||||||||
| Wholesale | 266.3 | 276.4 | (10.1) | |||||||||||||||||
| Resale | 1,563.8 | 939.9 | 623.9 | |||||||||||||||||
| Total sales in MWh | 8,350.3 | 7,781.3 | 569.0 | |||||||||||||||||
| Three Months Ended September 30 | ||||||||||||||||||||
Therms (in millions) | ||||||||||||||||||||
| Natural Gas Sales Volumes | 2020 | 2019 | B (W) | |||||||||||||||||
| Customer Class | ||||||||||||||||||||
| Residential | 22.2 | 20.2 | 2.0 | |||||||||||||||||
| Commercial and industrial | 13.5 | 14.3 | (0.8) | |||||||||||||||||
| Total retail | 35.7 | 34.5 | 1.2 | |||||||||||||||||
| Transport | 55.8 | 71.3 | (15.5) | |||||||||||||||||
| Total sales in therms | 91.5 | 105.8 | (14.3) | |||||||||||||||||
| Three Months Ended September 30 | ||||||||||||||||||||
| Degree Days | ||||||||||||||||||||
Weather (1) | 2020 | 2019 | B (W) | |||||||||||||||||
| Heating (109 Normal) | 103 | 24 | 329.2 | % | ||||||||||||||||
| Cooling (565 Normal) | 708 | 649 | 9.1 | % | ||||||||||||||||
(1)Normal degree days are based on a 20-year moving average of monthly temperatures from Mitchell International Airport in Milwaukee, Wisconsin.
Electric Utility Margins
Electric utility margins increased $16.1 million during the third quarter of 2020, compared with the same quarter in 2019. The significant factors impacting the higher electric utility margins were:
•A $25.4 million increase in margins associated with the negative impact of the flow through of tax benefits of our repair-related deferred tax liabilities during the third quarter of 2019, in accordance with a settlement agreement with the PSCW to maintain
| 09/30/2020 Form 10-Q | 30 | Wisconsin Electric Power Company | ||||||
certain regulatory assets at their December 31, 2017 levels. These tax benefits were no longer in effect for 2020. This increase in margins was offset in income taxes.
•A $12.3 million quarter-over-quarter positive impact from collections of fuel and purchased power costs compared with costs approved in rates. Under the Wisconsin fuel rules, our margins are impacted by under- or over-collections of certain fuel and purchased power costs that are less than a 2% price variance from the costs included in rates, and the remaining variance that exceeds the 2% variance is deferred.
•A $9.0 million increase in margins related to higher residential sales volumes, primarily driven by the impact of favorable weather. As measured by cooling degree days, the third quarter of 2020 was 9.1% warmer than the same quarter in 2019. As measured by heating degree days, the third quarter of 2020 was 329.2% colder than the same quarter in 2019.
These increases in margins were partially offset by:
•A $17.8 million net decrease in margins related to the impact of our rate order approved by the PSCW, effective January 1, 2020. This decrease in margins includes the impact related to the Tax Legislation, including unprotected tax benefits, which we agreed to return to customers and is offset in income taxes.
•A $9.8 million decrease in margins related to other revenues, which included late payment charges and revenues from third party use of our assets.
Natural Gas Utility Margins
Natural gas utility margins increased $2.7 million during the third quarter of 2020, compared with the same quarter in 2019. The most significant factor impacting the higher natural gas utility margins was an increase related to the impact of our rate order approved by the PSCW, effective January 1, 2020. This increase in margins includes the impact related to the Tax Legislation, including unprotected tax benefits, which we agreed to return to customers and is offset in income taxes.
Operating Income
Operating income at the utility segment increased $43.5 million during the third quarter of 2020, compared with the same quarter in 2019. This increase was driven by $24.7 million of lower operating expenses (which include other operation and maintenance, depreciation and amortization, and property and revenue taxes), and the $18.8 million increase in margins discussed above.
The significant factors impacting the decrease in operating expenses during the third quarter of 2020, compared with the same quarter in 2019, were:
•A $17.5 million decrease in transmission expense associated with the May 2018 order from the PSCW related to our required treatment of the benefits associated with the Tax Legislation, as discussed in the notes under the other operation and maintenance table above. This decrease in transmission expense was offset by a corresponding decrease in margins.
•A $16.5 million decrease in transmission expense related to the flow through of tax repairs during the third quarter of 2019, as discussed in the notes under the other operation and maintenance table above. This decrease in transmission expense was offset in income taxes.
•A $9.5 million decrease in regulatory amortizations and other pass through expenses, as discussed in the notes under the other operation and maintenance table above.
•A $7.6 million decrease in other operation and maintenance expense related to the We Power leases, as discussed in the notes under the other operation and maintenance table above.
•A $7.6 million decrease in electric and natural gas distribution expenses,driven by lower maintenance and storm restoration expense, as well as our focus on operating efficiency.
| 09/30/2020 Form 10-Q | 31 | Wisconsin Electric Power Company | ||||||
These decreases in operating expenses were partially offset by:
•A $21.6 million increase in transmission expense as approved in the PSCW's 2019 rate order, which was effective January 1, 2020. See the notes under the other operation and maintenance table above for more information.
•An $11.5 million increase in depreciation and amortization, driven by assets being placed into service as we continue to execute on our capital plan as well as an increase related to the We Power leases.
Other Income, Net
| Three Months Ended September 30 | ||||||||||||||||||||
| (in millions) | 2020 | 2019 | B (W) | |||||||||||||||||
| Non-service components of net periodic benefit costs | $ | 3.7 | $ | 2.5 | $ | 1.2 | ||||||||||||||
| AFUDC – Equity | 2.1 | 1.0 | 1.1 | |||||||||||||||||
| Other, net | (0.1) | 2.3 | (2.4) | |||||||||||||||||
| Other income, net | $ | 5.7 | $ | 5.8 | $ | (0.1) | ||||||||||||||
Other income, net decreased $0.1 million during the third quarter of 2020, compared with the same quarter in 2019. The decrease was primarily driven by the 2019 deferral of costs that were offset in other income statement line items and had no impact on net income. Mostly offsetting this decrease were higher net credits from the non-service components of our net periodic pension and OPEB costs and higher AFUDC–Equity due to continued capital investment. See Note 14, Employee Benefits, for more information on our benefit costs.
Interest Expense
| Three Months Ended September 30 | ||||||||||||||||||||
| (in millions) | 2020 | 2019 | B (W) | |||||||||||||||||
| Interest expense | $ | 116.3 | $ | 119.3 | $ | 3.0 | ||||||||||||||
Interest expense decreased $3.0 million during the third quarter of 2020, compared with the same quarter in 2019, primarily due to lower interest expense on finance lease liabilities. Also contributing to the decrease was the lower interest rate on the long-term debt issued in December 2019, which was used to repay maturing long-term debt that had a higher interest rate.
Income Tax Expense (Benefit)
| Three Months Ended September 30 | ||||||||||||||||||||
| 2020 | 2019 | B (W) | ||||||||||||||||||
| Effective tax rate | 14.3 | % | (15.2) | % | (29.5) | % | ||||||||||||||
Our effective tax rate increased by 29.5% during the third quarter of 2020, compared with the same quarter in 2019. The increase was primarily due to the benefit from the flow through of tax repairs during the third quarter of 2019, in connection with the 2017 Wisconsin rate settlement. This increase in our effective tax rate was partially offset by the 2020 amortization of the unprotected excess deferred tax benefits from the Tax Legislation in connection with our Wisconsin rate order approved by the PSCW, effective January 1, 2020. These items did not impact earnings as they were offset in operating income. See Note 10, Income Taxes, and Note 19, Regulatory Environment, for more information.
| 09/30/2020 Form 10-Q | 32 | Wisconsin Electric Power Company | ||||||
NINE MONTHS ENDED SEPTEMBER 30, 2020
Earnings
The following table compares our results for the nine months ended September 30, 2020 with the nine months ended September 30, 2019, including favorable or better, "B", and unfavorable or worse, "W", variances:
| Nine Months Ended September 30 | ||||||||||||||||||||||||||||||||
| (in millions) | 2020 | 2019 | B (W) | Change Related to 2019 Tax Repairs | Remaining Change B (W) | |||||||||||||||||||||||||||
| Operating revenues | $ | 2,540.7 | $ | 2,636.6 | $ | (95.9) | $ | 76.3 | $ | (172.2) | ||||||||||||||||||||||
| Cost of sales | 822.7 | 911.3 | 88.6 | — | 88.6 | |||||||||||||||||||||||||||
| Other operation and maintenance | 640.8 | 753.3 | 112.5 | 48.3 | 64.2 | |||||||||||||||||||||||||||
| Depreciation and amortization | 318.4 | 287.4 | (31.0) | — | (31.0) | |||||||||||||||||||||||||||
| Property and revenue taxes | 78.6 | 78.0 | (0.6) | — | (0.6) | |||||||||||||||||||||||||||
| Operating income | 680.2 | 606.6 | 73.6 | 124.6 | (51.0) | |||||||||||||||||||||||||||
| Other income, net | 15.9 | 17.2 | (1.3) | — | (1.3) | |||||||||||||||||||||||||||
| Interest expense | 351.5 | 358.8 | 7.3 | — | 7.3 | |||||||||||||||||||||||||||
| Income before income taxes | 344.6 | 265.0 | 79.6 | 124.6 | (45.0) | |||||||||||||||||||||||||||
| Income tax expense (benefit) | 39.8 | (36.1) | (75.9) | (124.6) | 48.7 | |||||||||||||||||||||||||||
| Preferred stock dividend requirements | 0.9 | 0.9 | — | — | — | |||||||||||||||||||||||||||
| Net income attributed to common shareholder | $ | 303.9 | $ | 300.2 | $ | 3.7 | $ | — | $ | 3.7 | ||||||||||||||||||||||
Our earnings increased $3.7 million during the nine months ended September 30, 2020, compared with the same period in 2019. The table above shows the income statement impacts due to the flow through of tax repairs during the nine months ended September 30, 2019. We were flowing through the tax benefit of our repair related deferred tax liabilities in 2018 and 2019, to maintain certain regulatory asset balances at their December 31, 2017 levels. As shown in the table above, the changes related to the flow through of tax repairs had no impact on net income attributed to common shareholder. See below for additional information on the $3.7 million increase in earnings.
Non-GAAP Financial Measures
The discussion below addresses the operating income contribution of our utility segment and 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 margin (electric revenues less fuel and purchased power costs) and natural gas margin (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 our utility segment operating performance. Our utility segment operating income for the nine months ended September 30, 2020 and 2019 was $680.2 million and $606.6 million, respectively. The operating income discussion below includes a table that provides the calculation of electric margins and natural gas margins, along with a reconciliation to utility segment operating income.
| 09/30/2020 Form 10-Q | 33 | Wisconsin Electric Power Company | ||||||
Utility Segment Contribution to Operating Income
| Nine Months Ended September 30 | ||||||||||||||||||||
| (in millions) | 2020 | 2019 | B (W) | |||||||||||||||||
| Electric revenues | $ | 2,294.6 | $ | 2,351.8 | $ | (57.2) | ||||||||||||||
| Fuel and purchased power | 698.0 | 737.9 | 39.9 | |||||||||||||||||
| Total electric margins | 1,596.6 | 1,613.9 | (17.3) | |||||||||||||||||
| Natural gas revenues | 246.1 | 284.8 | (38.7) | |||||||||||||||||
| Cost of natural gas sold | 124.7 | 173.4 | 48.7 | |||||||||||||||||
| Total natural gas margins | 121.4 | 111.4 | 10.0 | |||||||||||||||||
| Total electric and natural gas margins | 1,718.0 | 1,725.3 | (7.3) | |||||||||||||||||
| Other operation and maintenance | 753.3 | 112.5 | ||||||||||||||||||
| Depreciation and amortization | 287.4 | (31.0) | ||||||||||||||||||
| Property and revenue taxes | 78.0 | (0.6) | ||||||||||||||||||
| Operating income | $ | 680.2 | $ | 606.6 | $ | 73.6 | ||||||||||||||
The following table shows a breakdown of other operation and maintenance:
| Nine Months Ended September 30 | ||||||||||||||||||||
| (in millions) | 2020 | 2019 | B (W) | |||||||||||||||||
| Operation and maintenance not included in line items below | $ | 249.3 | $ | 282.9 | $ | 33.6 | ||||||||||||||
Transmission (1) | 253.3 | 192.1 | (61.2) | |||||||||||||||||
We Power (2) | 89.5 | 107.0 | 17.5 | |||||||||||||||||
Regulatory amortizations and other pass through expenses (3) | 48.7 | 72.8 | 24.1 | |||||||||||||||||
Transmission expense related to Tax Legislation (4) | — | 50.2 | 50.2 | |||||||||||||||||
Transmission expense related to the flow through of tax repairs (5) | — | 48.3 | 48.3 | |||||||||||||||||
| Total other operation and maintenance | $ | 640.8 | $ | 753.3 | $ | 112.5 | ||||||||||||||
(1)Represents transmission expense that we are authorized to collect in rates, in accordance with the PSCW's approval of 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, 2020 and 2019, $235.3 million and $249.0 million, respectively, of costs were billed to us by transmission providers.
(2)Represents costs associated with the We Power generation units, including operating and maintenance costs we recognized. During the nine months ended September 30, 2020 and 2019, $84.7 million and $103.0 million, respectively, of operating and maintenance costs were billed to or incurred by us related to the We Power generation units, with the difference in costs billed or incurred and expenses recognized, either deferred or deducted from the regulatory asset.
(3)Regulatory amortizations and other pass through expenses are substantially offset in margins and therefore do not have a significant impact on operating income.
(4)Represents additional transmission expense recorded in 2019 associated with the May 2018 PSCW order requiring us to use 80% of our current 2018 tax benefit, including the amortization associated with the revaluation of deferred taxes, to reduce our transmission regulatory asset balance. Since our transmission regulatory asset was eliminated at December 31, 2019, there were no tax benefits used in 2020.
(5)Represents additional transmission expense recorded in 2019 associated with the flow through of tax benefits of our repair-related deferred tax liabilities starting in 2018 in accordance with a settlement agreement with the PSCW, to maintain certain regulatory asset balances at their December 31, 2017 levels. This decrease in expenses was offset in income taxes. Since our transmission regulatory asset was eliminated at December 31, 2019, there were no tax benefits used in 2020.
| 09/30/2020 Form 10-Q | 34 | Wisconsin Electric Power Company | ||||||
The following tables provide information on delivered sales volumes by customer class and weather statistics:
| Nine Months Ended September 30 | ||||||||||||||||||||
MWh (in thousands) | ||||||||||||||||||||
| Electric Sales Volumes | 2020 | 2019 | B (W) | |||||||||||||||||
| Customer Class | ||||||||||||||||||||
| Residential | 6,295.7 | 5,950.0 | 345.7 | |||||||||||||||||
| Small commercial and industrial | 6,238.6 | 6,590.1 | (351.5) | |||||||||||||||||
| Large commercial and industrial | 4,873.4 | 5,591.5 | (718.1) | |||||||||||||||||
| Other | 92.2 | 99.1 | (6.9) | |||||||||||||||||
| Total retail | 17,499.9 | 18,230.7 | (730.8) | |||||||||||||||||
| Wholesale | 757.1 | 1,019.6 | (262.5) | |||||||||||||||||
| Resale | 4,508.3 | 3,638.7 | 869.6 | |||||||||||||||||
| Total sales in MWh | 22,765.3 | 22,889.0 | (123.7) | |||||||||||||||||
| Nine Months Ended September 30 | ||||||||||||||||||||
Therms (in millions) | ||||||||||||||||||||
| Natural Gas Sales Volumes | 2020 | 2019 | B (W) | |||||||||||||||||
| Customer Class | ||||||||||||||||||||
| Residential | 248.9 | 272.8 | (23.9) | |||||||||||||||||
| Commercial and industrial | 133.8 | 150.2 | (16.4) | |||||||||||||||||
| Total retail | 382.7 | 423.0 | (40.3) | |||||||||||||||||
| Transport | 225.5 | 252.3 | (26.8) | |||||||||||||||||
| Total sales in therms | 608.2 | 675.3 | (67.1) | |||||||||||||||||
| Nine Months Ended September 30 | ||||||||||||||||||||
| Degree Days | ||||||||||||||||||||
Weather (1) | 2020 | 2019 | B (W) | |||||||||||||||||
| Heating (4,354 Normal) | 4,023 | 4,480 | (10.2) | % | ||||||||||||||||
| Cooling (726 Normal) | 931 | 725 | 28.4 | % | ||||||||||||||||
(1)Normal degree days are based on a 20-year moving average of monthly temperatures from Mitchell International Airport in Milwaukee, Wisconsin.
Electric Utility Margins
Electric utility margins decreased $17.3 million during the nine months ended September 30, 2020, compared with the same period in 2019. The significant factors impacting the lower electric utility margins were:
•A $65.3 million net decrease in margins related to the impact of our rate order approved by the PSCW, effective January 1, 2020. This decrease in margins includes the impact related to the Tax Legislation, including unprotected tax benefits, which we agreed to return to customers and is offset in income taxes.
•A $17.2 million decrease in margins related to other revenues, which included late payment charges and revenues from third party use of our assets.
•A $10.4 million decrease in margins related to lower wholesale sales volumes, driven by lower sales to UMERC. UMERC's new natural gas-fired generating units in the Upper Peninsula of Michigan began commercial operation on March 31, 2019, at which time we stopped providing wholesale services to UMERC.
•A $10.0 million net decrease in margins related to lower retail sales volumes, including the impact of weather. We recognized a $28.6 million net reduction in margins related to lower retail sales volumes driven by the COVID-19 pandemic. Sales volumes for our commercial and industrial customers decreased, primarily related to business interruptions and closings, while residential
| 09/30/2020 Form 10-Q | 35 | Wisconsin Electric Power Company | ||||||
sales volumes increased. These changes in volumes were both driven, in large part, by a shelter-in-place order issued by the state of Wisconsin during the COVID-19 pandemic. This net decrease from sales volumes was partially offset by an $18.6 million increase in margins related to favorable weather. As measured by cooling degree days, the nine months ended September 30, 2020 were 28.4% warmer than the same period in 2019.
•A $4.4 million decrease in margins related to Tilden, who owns an iron ore mine in the Upper Peninsula of Michigan. Tilden was our customer but became a customer of UMERC after UMERC's new natural gas-fired generating units began commercial operation on March 31, 2019.
These decreases in margins were partially offset by:
•A $76.3 million increase in margins associated with the negative impact of the flow through of tax benefits of our repair-related deferred tax liabilities during the nine months ended September 30, 2019, in accordance with a settlement agreement with the PSCW to maintain certain regulatory assets at their December 31, 2017 levels. These tax benefits were no longer in effect for 2020. This increase in margins was offset in income taxes.
•A $12.2 million period-over-period positive impact from collections of fuel and purchased power costs compared with costs approved in rates. Under the Wisconsin fuel rules, our margins are impacted by under- or over-collections of certain fuel and purchased power costs that are less than a 2% price variance from the costs included in rates, and the remaining variance that exceeds the 2% variance is deferred.
Natural Gas Utility Margins
Natural gas utility margins increased $10.0 million during the nine months ended September 30, 2020, compared with the same period in 2019. The most significant factor impacting the higher natural gas utility margins was a $14.7 million increase related to the impact of our rate order approved by the PSCW, effective January 1, 2020. This increase in margins includes the impact related to the Tax Legislation, including unprotected tax benefits, which we agreed to return to customers and is offset in income taxes.
This increase in margins was partially offset by a $6.7 million net reduction in margins related to lower sales volumes, driven by warmer winter weather during 2020. As measured by heating degree days, the nine months ended September 30, 2020 were 10.2% warmer than the same period in 2019. In addition to the weather impact, the decrease in sales volumes for our commercial and industrial customers was also driven by business interruptions and closings related to, in large part, a shelter-in-place order issued by the state of Wisconsin during the COVID-19 pandemic.
Operating Income
Operating income at the utility segment increased $73.6 million during the nine months ended September 30, 2020, compared with the same period in 2019. The increase was driven by $80.9 million of lower operating expenses (which include other operation and maintenance, depreciation and amortization, and property and revenue taxes), partially offset by the $7.3 million net decrease in margins discussed above.
The significant factors impacting the decrease in operating expenses during the nine months ended September 30, 2020, compared with the same period in 2019, were:
•A $50.2 million decrease in transmission expense associated with the May 2018 order from the PSCW related to our required treatment of the benefits associated with the Tax Legislation, as discussed in the notes under the other operation and maintenance table above. This decrease in transmission expense was offset by a corresponding decrease in margins.
•A $48.3 million decrease in transmission expense related to the flow through of tax repairs during 2019, as discussed in the notes under the other operation and maintenance table above. This decrease in transmission expense was offset in income taxes.
•A $24.1 million decrease in regulatory amortizations and other pass through expenses, as discussed in the notes under the other operation and maintenance table above.
•A $17.5 million decrease in other operation and maintenance expense related to the We Power leases, as discussed in the notes under the other operation and maintenance table above.
| 09/30/2020 Form 10-Q | 36 | Wisconsin Electric Power Company | ||||||
•A $15.6 million decrease in electric and natural gas distribution expenses, driven by lower maintenance and storm restoration expense, as well as our focus on operating efficiency.
•A $12.5 million decrease in benefit costs, primarily due to lower deferred compensation costs, stock-based compensation, and medical costs.
•A $6.7 million decrease in other operation and maintenance expense at our plants, driven by the retirement of PIPP in March 2019 and reduced operation of the OCPP.
These decreases in operating expenses were partially offset by:
•A $61.2 million increase in transmission expense as approved in the PSCW's 2019 rate order, which was effective January 1, 2020. See the notes under the other operation and maintenance table above for more information.
•A $31.0 million increase in depreciation and amortization, driven by assets being placed into service as we continue to execute on our capital plan as well as an increase related to the We Power leases.
Other Income, Net
| Nine Months Ended September 30 | ||||||||||||||||||||
| (in millions) | 2020 | 2019 | B (W) | |||||||||||||||||
| Non-service components of net periodic benefit costs | $ | 11.3 | $ | 6.8 | $ | 4.5 | ||||||||||||||
| AFUDC – Equity | 4.9 | 2.4 | 2.5 | |||||||||||||||||
| Other | (0.3) | 8.0 | (8.3) | |||||||||||||||||
| Other income, net | $ | 15.9 | $ | 17.2 | $ | (1.3) | ||||||||||||||
Other income, net decreased $1.3 million during the nine months ended September 30, 2020, compared with the same period in 2019. The decrease was primarily driven by the 2019 deferral of costs that were offset in other income statement line items and had no impact on net income. Partially offsetting this decrease were higher net credits from the non-service components of our net periodic pension and OPEB costs and higher AFUDC–Equity due to continued capital investment.
Interest Expense
| Nine Months Ended September 30 | ||||||||||||||||||||
| (in millions) | 2020 | 2019 | B (W) | |||||||||||||||||
| Interest expense | $ | 351.5 | $ | 358.8 | $ | 7.3 | ||||||||||||||
Interest expense decreased $7.3 million during the nine months ended September 30, 2020, compared with the same period in 2019, primarily due to the lower interest rate on the long-term debt issued in December 2019, which was used to repay maturing long-term debt that had a higher interest rate. Also contributing to the decrease was lower interest expense on finance lease liabilities.
Income Tax Expense (Benefit)
| Nine Months Ended September 30 | ||||||||||||||||||||
| 2020 | 2019 | B (W) | ||||||||||||||||||
| Effective tax rate | 11.5 | % | (13.6) | % | (25.1) | % | ||||||||||||||
Our effective tax rate increased by 25.1% during the nine months ended September 30, 2020, compared with the same period in 2019. The increase was primarily due to the benefit from the flow through of tax repairs during the nine months ended September 30, 2019, in connection with the 2017 Wisconsin rate settlement. This increase in our effective tax rate was partially offset by the 2020 amortization of the unprotected excess deferred tax benefits from the Tax Legislation in connection with our Wisconsin rate order approved by the PSCW, effective January 1, 2020. These items did not impact earnings as they were offset in operating income.
| 09/30/2020 Form 10-Q | 37 | Wisconsin Electric Power Company | ||||||
We expect our 2020 annual effective tax rate to be between 11% and 12%, which includes an estimated 11% effective tax rate benefit due to the amortization of unprotected excess deferred taxes in connection with our Wisconsin rate order approved by the PSCW, effective January 1, 2020. Excluding this estimated effective tax rate benefit, the expected 2020 range would be between 22% and 23%.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The following table summarizes our cash flows during the nine months ended September 30:
| (in millions) | 2020 | 2019 | Change in 2020 Over 2019 | |||||||||||||||||
| Cash provided by (used in): | ||||||||||||||||||||
| Operating activities | $ | 644.4 | $ | 673.1 | $ | (28.7) | ||||||||||||||
| Investing activities | (452.0) | (386.3) | (65.7) | |||||||||||||||||
| Financing activities | (209.6) | (301.3) | 91.7 | |||||||||||||||||
Operating Activities
Net cash provided by operating activities decreased $28.7 million during the nine months ended September 30, 2020, compared with the same period in 2019, driven by:
•A $102.0 million decrease in cash related to lower overall collections from customers. This decrease was driven by the impact of our rate order approved by the PSCW, effective January 1, 2020, including impacts from the Tax Legislation, which we agreed to return to customers. Other contributing factors include an increase in past due balances due to a moratorium on disconnections, lower sales volumes driven by both warmer winter weather during 2020 and business interruptions and closings during the COVID-19 pandemic, as well as the transfer of Tilden as a customer to UMERC on March 31, 2019.
•A $32.1 million decrease in cash related to an increase in cash paid for income taxes during the nine months ended September 30, 2020, compared with the same period in 2019. This increase in cash paid for income taxes was primarily due to a one-time tax deduction for the retirement of a coal plant that occurred in 2019.
These decreases in net cash provided by operating activities were partially offset by:
•A $59.3 million increase in cash related to lower payments for fuel and purchased power at our plants during the nine months ended September 30, 2020, compared with the same period in 2019. Our payments for fuel and purchased power decreased due to lower natural gas costs used to fuel our plants. The average per-unit cost of natural gas sold decreased 20.5% during the nine months ended September 30, 2020, compared to the same period in 2019. Lower fuel and purchased power costs were also driven by the retirement of PIPP in March 2019 and lower sales volumes. The lower sales volumes were driven by warmer winter weather during 2020 as well as business interruptions and closings during the COVID-19 pandemic.
•A $31.5 million increase in cash from lower payments for other operation and maintenance expenses. During the nine months ended September 30, 2020, compared with the same period in 2019, our payments were lower for electric and natural gas distribution expenses, benefits, operating and maintenance at our plants, and transmission. See Results of Operations – Utility Segment Contribution to Operating Income for the nine months ended September 30, 2020 for more information.
•A $14.8 million increase in cash due to lower collateral requirements, driven by an increase in the fair value of our natural gas derivative assets during the nine months ended September 30, 2020, compared with the same period in 2019.
Investing Activities
Net cash used in investing activities increased $65.7 million during nine months ended September 30, 2020, compared with the same period in 2019, driven by an increase in cash paid for capital expenditures, which is discussed in more detail below.
| 09/30/2020 Form 10-Q | 38 | Wisconsin Electric Power Company | ||||||
Capital Expenditures
Capital expenditures for the nine months ended September 30 were as follows:
| (in millions) | 2020 | 2019 | Change in 2020 Over 2019 | |||||||||||||||||
| Capital expenditures | $ | 462.8 | $ | 395.0 | $ | 67.8 | ||||||||||||||
The increase in cash paid for capital expenditures during the nine months ended September 30, 2020, compared with the same period in 2019, was primarily driven by upgrades to our electric distribution systems as well as capital expenditures related to Badger Hollow II and Solar Now.
See Capital Resources and Requirements – Capital Requirements – Significant Capital Projects below for more information.
Financing Activities
Net cash used in financing activities decreased $91.7 million during the nine months ended September 30, 2020, compared with the same period in 2019, driven by:
•A $90.0 million increase in cash due to lower dividends paid to our parent during the nine months ended September 30, 2020, compared with the same period in 2019, to balance our capital structure.
•A $25.0 million increase in equity contributions received from our parent during the nine months ended September 30, 2020, compared with the same period in 2019, to balance our capital structure.
These increases in cash were partially offset by:
•A $17.6 million decrease in cash related to higher net repayments of commercial paper during the nine months ended September 30, 2020, compared with the same period in 2019.
•A $5.8 million increase in our principal payments for finance lease obligations during the nine months ended September 30, 2020, compared with the same period in 2019.
Significant Financing Activities
For more information on our short-term financing activities, see Note 7, Short-Term Debt and Lines of Credit.
Capital Resources and Requirements
Capital Resources
Liquidity
We anticipate meeting our capital requirements for our existing operations through internally generated funds and short-term borrowings, supplemented by the issuance of intermediate or long-term debt securities, depending on market conditions and other factors, and equity contributions from our parent.
We currently have access to the capital markets and have been able to generate funds internally and externally to meet our capital requirements. Our ability to attract the necessary financial capital at reasonable terms is critical to our overall strategic plan. We currently believe that we have adequate capacity to fund our operations for the foreseeable future through our existing borrowing arrangements, access to capital markets, and internally generated cash. See Factors Affecting Results, Liquidity, and Capital Resources – Coronavirus Disease – 2019, for additional information on the impacts of the COVID-19 pandemic.
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
| 09/30/2020 Form 10-Q | 39 | Wisconsin Electric Power Company | ||||||
maintain adequate credit facilities to support our operations. See Note 7, Short-Term Debt and Lines of Credit, for more information on our credit facility.
Working Capital
As of September 30, 2020, our current liabilities exceeded our current assets by $104.4 million. We do not expect this to have any impact on our liquidity since we believe we have adequate back-up lines of credit in place for our ongoing operations. We also believe that we can access the capital markets to finance our construction programs and to refinance current maturities of long-term debt, if necessary.
Credit Rating Risk
We do not have any credit agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. However, we have certain agreements in the form of commodity contracts and employee benefit plans 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.
If we are unable to successfully take actions to manage any impacts from the COVID-19 pandemic and/or any additional adverse impacts of the Tax Legislation as a result of additional interpretations, regulations, amendments or technical corrections, these potential impacts could result in credit rating agencies placing our credit ratings on negative outlook or downgrading our credit ratings. Any such actions by credit rating agencies may make it more difficult and costly for us to issue future debt securities and certain other types of financing and could increase borrowing costs under our credit facility.
See Factors Affecting Results, Liquidity, and Capital Resources – Coronavirus Disease – 2019, for additional information.
Capital Requirements
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, impacts from the Tax Legislation, additional changes in tax laws and regulations, acquisition and development opportunities, market volatility, economic trends, and the COVID-19 pandemic. Our estimated capital expenditures for the next three years are as follows:
| (in millions) | ||||||||
| 2020 | $ | 678.2 | ||||||
| 2021 | 933.5 | |||||||
| 2022 | 1,032.0 | |||||||
| Total | $ | 2,643.7 | ||||||
The majority of spending consists of upgrading our electric and natural gas distribution systems to enhance reliability. These upgrades include 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, and battery storage. As part of this commitment, we have partnered with an unaffiliated utility to construct a utility-scale solar project, Badger Hollow II, that will be located in Iowa County, Wisconsin.
| 09/30/2020 Form 10-Q | 40 | Wisconsin Electric Power Company | ||||||
Once constructed, we will own 100 MW of the project. The PSCW issued a written order approving the acquisition of this project in March 2020. Our share of the cost of this project is estimated to be $130 million. Commercial operation of Badger Hollow II is targeted for December 2022.
We plan to install approximately 46 miles of natural gas transmission main in southeastern Wisconsin. This project, which was approved in a written order by the PSCW in June 2020, has been designated as the "Lakeshore Lateral Project." The primary purpose of this project is to increase the quantity and reliability of natural gas service, both on a peak day and annually, in southeastern Wisconsin. The cost of the project is estimated to be between $174 and $180 million. Construction for the project is tentatively scheduled to begin during the fourth quarter of 2020, and the project is expected to be completed by the end of 2021.
We plan to construct a LNG facility. Subject to PSCW approval, the facility will provide us with approximately one billion cubic feet of natural gas supply to meet anticipated peak demand without requiring the construction of additional interstate pipeline capacity. The facility is expected to reduce the likelihood of constraints on our natural gas system during the highest demand days of winter. The project is estimated to cost approximately $185 million. Commercial operation for the LNG facility is targeted for the end of 2023.
See Factors Affecting Results, Liquidity, and Capital Resources – Coronavirus Disease – 2019, for information on the impacts to our capital projects as a result of the COVID-19 pandemic.
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 letters of credit that primarily support our commodity contracts. 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 7, Short-Term Debt and Lines of Credit, Note 13, Guarantees, and Note 16, Variable Interest Entities.
Contractual Obligations
For information about our commitments, see Contractual Obligations in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources and Requirements in our 2019 Annual Report on Form 10-K. There were no material changes to our commitments outside the ordinary course of business during the nine months ended September 30, 2020.
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. The following 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 2019 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.
Coronavirus Disease – 2019
The global outbreak of COVID-19 was declared a pandemic by the WHO and the CDC and has spread globally, including throughout the United States. There is still considerable uncertainty regarding the extent to which COVID-19 will spread and the extent and duration of measures currently in place to try to contain the virus, such as travel bans and restrictions, quarantines, and limitations on business operations. Although the shelter-in-place order that was in effect for Wisconsin has expired, other orders limiting the capacity of various businesses have been adopted at the state and local levels. In addition, similar or more restrictive orders could be adopted in the future depending on how the virus continues to spread. Such measures have significantly disrupted economic activity in our service territory and have caused disruptions and volatility in the capital markets. See Item 1A. Risk Factors for more information on our risks related to COVID-19.
Liquidity and Financial Markets
Volatility and uncertainty in the financial markets and global economy have impacted us in a number of ways. Upon the initial enactment of certain COVID-19 related shelter-in-place orders in early to mid-March 2020, commercial paper markets became more
| 09/30/2020 Form 10-Q | 41 | Wisconsin Electric Power Company | ||||||
expensive and related terms became less flexible. In response to these signs of market instability, the Federal Reserve implemented certain measures, including a reduction in its benchmark Federal Funds rate and the establishment of various programs to restore liquidity and stability into the short-term funding markets. These measures have had a mitigating effect on commercial paper rates and availability. In addition, the initial disruption in the long-term debt markets as a result of the COVID-19 pandemic has subsided.
Our overall liquidity position remains strong. As of September 30, 2020, we had $499.0 million available under our credit facility, providing sufficient backing for our commercial paper program.
Pensions and Other Benefits
Our pension and OPEB plans were 97.6% funded at December 31, 2019, with total plan assets of $1,323.1 million and total benefit obligations of $1,355.6 million. There has been significant volatility in global capital markets during the COVID-19 pandemic, although the market losses recorded during the early stages of the pandemic in the first quarter of 2020 have reversed course in the second and third quarters of 2020 in response to government stimulus and relief efforts and the gradual reopening of businesses. During the nine months ended September 30, 2020, we recognized a $38 million increase in the value of long-term investments held in our pension and OPEB plan trusts as second and third quarter gains more than offset first quarter losses.
We could still see earnings volatility associated with certain other benefit plans maintained by our parent, WEC Energy Group, primarily related to performance units granted to certain of our employees, and deferred compensation plans. Certain of the liabilities associated with the deferred compensation plans are indexed to mutual funds and WEC Energy Group common stock, and the liabilities associated with outstanding performance units are indexed to WEC Energy Group common stock. These liabilities are marked to fair value through earnings each period, with earnings increasing as market prices decrease.
Allowance for Credit Losses
We evaluate the collectability of our accounts receivable and unbilled revenue balances considering a combination of factors. Risks identified that we do not believe are reflected in historical reserve percentages are assessed on a quarterly basis to determine whether further adjustments are required. Economic disruptions caused by the COVID-19 pandemic, including higher unemployment rates and the inability of some businesses to recover from the pandemic, could cause a higher percentage of accounts receivable to become uncollectible. An increase in credit losses could negatively impact our results of operations and could result in higher working capital requirements.
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. In addition, we have received specific orders related to the deferral of certain costs (including credit losses) and foregone revenues related to the COVID-19 pandemic. The additional protections provided by these COVID-19 specific regulatory orders are still being assessed and will be subject to prudency reviews. See Note 19, Regulatory Environment, for more information.
Loss of Business
We have seen a decrease in the consumption of electricity and natural gas by some of our commercial and industrial customers as they continue to experience lower demand for their products and services as a result of the COVID-19 pandemic. Many businesses in our service territory still are not operating at full capacity. The extent to which this decrease in consumption will impact our results of operations and liquidity is dependent upon the duration of the COVID-19 pandemic and the ability of our customers to resume and continue normal operations.
Supply Chain and Capital Projects
We have not yet experienced a significant disruption in our supply chain as a result of the COVID-19 pandemic. However, if the pandemic significantly impacts our key suppliers’ ability to manufacture or deliver critical equipment and supplies or provide services, we could experience delays in our ability to perform certain maintenance and capital project activities.
We are not currently aware of any major delays or changes related to our capital plan as a result of the COVID-19 pandemic, although we are continuing to monitor potential impacts on an ongoing basis.
| 09/30/2020 Form 10-Q | 42 | Wisconsin Electric Power Company | ||||||
Employee Safety
The health and safety of our employees during the COVID-19 pandemic is paramount and enables us to continue to provide critical services to our customers.
We are following CDC guidelines and have taken enhanced precautions with regard to employee hygiene and facility cleanliness, imposed travel limitations on our employees, provided additional employee benefits, and implemented remote work policies where appropriate. We have activated an incident management team and updated our pandemic continuity plan, which includes identifying critical work groups and ensuring safe harbor plans are in place. We have minimized the unnecessary risk of exposure to COVID-19 by implementing self-quarantine measures and have adopted additional precautionary measures for our critical work groups.
Additional protocols have been implemented for our field employees who travel to customer premises in order to protect them, our customers, and the public. We have modified our work protocols to ensure compliance with social distancing and face covering recommendations.
All of these safety measures have caused us to incur additional costs, and depending upon the duration of the COVID-19 pandemic, could have a material impact on our results of operations and liquidity.
Regulatory Environment
We have taken actions to ensure that essential utility services are available to our customers during the COVID-19 pandemic. In addition, the PSCW has issued written orders requiring certain actions by all public utilities in the state of Wisconsin. See Note 19, Regulatory Environment, for more information on these orders and the potential recovery of expenditures incurred as a result of the measures being taken.
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. 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 2019 Annual Report on Form 10-K for a discussion of significant risks applicable to us.
Environmental Matters
See Note 17, 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.
Other Matters
Tax Cuts and Jobs Act of 2017
In December 2017, the Tax Legislation was signed into law. In May 2018, the PSCW issued a written order regarding how to refund certain tax savings from the Tax Legislation to our ratepayers in Wisconsin. The various remaining impacts of the Tax Legislation on our Wisconsin operations were addressed in the rate order issued by the PSCW in December 2019. See Note 19, Regulatory Environment, for more information on our December 2019 rate order. Also, the Michigan Public Service Commission approved a settlement in May 2018 with Tilden that addressed all base rate impacts of the Tax Legislation. Tilden owns the iron ore mine located in the Upper Peninsula of Michigan that we provided retail electric service to prior to April 1, 2019. In addition, the Federal Energy Regulatory Commission approved our revised formula rate tariff that incorporated the impacts of the Tax Legislation in August 2020.
| 09/30/2020 Form 10-Q | 43 | Wisconsin Electric Power Company | ||||||
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 2019 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 – Coronavirus Disease – 2019 and Market Risks and Other Significant Risks in Item 2 of Part I of this report, as well as Note 11, Fair Value Measurements, Note 12, Derivative Instruments, and Note 13, 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 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| 09/30/2020 Form 10-Q | 44 | Wisconsin Electric Power Company | ||||||
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 2019 Annual Report on Form 10-K. See Note 17, Commitments and Contingencies, and Note 19, 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 17, Commitments and Contingencies, and Note 19, 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
The following risk factor updates and supplements those risk factors disclosed in Item 1A. Risk Factors in Part I of our 2019 Annual Report on Form 10-K and Part II of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020.
The ongoing COVID-19 pandemic could adversely affect our business functions, financial condition, liquidity, and results of operations.
The global outbreak of COVID-19 was declared a pandemic by the WHO and the CDC and has spread globally, including throughout the United States. There is still considerable uncertainty regarding the extent to which COVID-19 will spread and the extent and duration of measures currently in place to try to contain the virus, such as travel bans and restrictions, quarantines, and limitations on business operations. Although the shelter-in-place order that was in effect in Wisconsin has expired, other orders limiting the capacity of various businesses have been adopted at the state and local levels. In addition, similar or more restrictive orders could be adopted in the future depending on how the virus continues to spread.
Such measures have significantly disrupted economic activity in our service territory and have caused disruptions and volatility in the capital markets. In addition, we are continuing to temporarily suspend disconnections for non-payment by certain customer classes. The effects of the continued outbreak of COVID-19 and related government responses have included, and may continue to include, extended disruptions to supply chains and capital markets, reduced labor availability and productivity, and a prolonged reduction in economic activity. These effects could continue to have a variety of adverse impacts on us, including continued reductions in demand for energy, particularly from commercial and industrial customers; impairment of goodwill or long-lived assets; continued decreases in revenue due to the inability to collect late fees; increased bad debt expense; impairment of our ability to develop, construct, and operate facilities; and impaired ability to successfully access funds from credit and capital markets.
Any additional effects of COVID-19 on the U.S. capital markets may significantly impact us. For example, the costs related to our pension and other post-retirement benefit plans are based in part on the value of the plans’ assets. Adverse investment performance for these assets or the failure to maintain sustained growth in pension investments over time could increase our plan costs and funding requirements. Similarly, we rely on access to the capital markets to fund some of our operations and capital requirements. To the extent that access to the capital markets is adversely affected by COVID-19, we may need to consider alternative sources of funding for our operations and for working capital, which may increase our cost of, as well as adversely impact our access to, capital.
We have taken precautions with regard to employee hygiene and facility cleanliness, imposed travel limitations on our employees, and implemented remote work policies where appropriate. Additional protocols have been implemented for our field employees who travel to customer premises in order to protect them, our customers, and the public.
Despite our efforts to manage the impacts of the COVID-19 pandemic, the extent to which COVID-19 may continue to affect us depends on factors beyond our knowledge or control. Therefore, we are currently unable to determine what additional impact the COVID-19 pandemic may have on our business plans and operations, liquidity, financial condition, and results of operations, but will continue to monitor COVID-19 developments and modify our plans as conditions change.
| 09/30/2020 Form 10-Q | 45 | Wisconsin Electric Power Company | ||||||
ITEM 6. EXHIBITS
| Number | Exhibit | ||||||||||
| 31 | Rule 13a-14(a) / 15d-14(a) Certifications | ||||||||||
| 32 | Section 1350 Certifications | ||||||||||
| 101 | Interactive Data Files | ||||||||||
| 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 | ||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema | ||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | ||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | ||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | ||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | ||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | ||||||||||
| 09/30/2020 Form 10-Q | 46 | Wisconsin Electric Power Company | ||||||
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.
| WISCONSIN ELECTRIC POWER COMPANY | ||||||||
| (Registrant) | ||||||||
| /s/ WILLIAM J. GUC | ||||||||
| Date: | November 6, 2020 | William J. Guc | ||||||
| Vice President, Controller, and Assistant Corporate Secretary | ||||||||
| (Duly Authorized Officer and Chief Accounting Officer) | ||||||||
| 09/30/2020 Form 10-Q | 47 | Wisconsin Electric Power Company | ||||||