WISCONSIN ELECTRIC POWER COMPANY CORPORATE DEVELOPMENTS
The following discussion should be read in conjunction with the accompanying unaudited financial statements and related notes and our 2022 Annual Report on Form 10-K. Introduction We are a wholly owned subsidiary ofWEC Energy Group , and derive revenues from the distribution and sale of electricity and natural gas to retail customers inWisconsin . We also provide wholesale electric service to numerous utilities and cooperatives for resale. We conduct our business primarily through our utility reportable segment. See Note 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 andWEC Energy Group's shareholders by focusing on the fundamentals of our business: environmental stewardship; reliability; operating efficiency; financial discipline; exceptional customer care; and safety.WEC Energy Group's capital investment plan for efficiency, sustainability and growth, referred to as its ESG Progress Plan, provides a roadmap to achieve this goal. It is an aggressive plan to cut emissions, maintain superior reliability, deliver significant savings for customers, and growWEC Energy Group's and our investment in the future of energy. Throughout its strategic planning process,WEC Energy Group takes into account important developments, risks and opportunities, including new technologies, customer preferences and affordability, energy resiliency efforts, and sustainability.
Creating a Sustainable Future
WEC Energy Group's ESG Progress Plan includes the retirement of older, fossil-fueled generation, to be replaced with zero-carbon-emitting renewables and clean natural gas-fired generation at its electric utilities, including us. When taken together, the retirements and new investments should better balance supply with demand, while maintaining reliable, affordable energy for our customers. The retirements will contribute to meetingWEC Energy Group's and our goals to reduce CO2 emissions from electric generation.WEC Energy Group announced goals to achieve reductions in carbon emissions from its electric generation fleet by 60% by the end of 2025 and by 80% by the end of 2030, both from a 2005 baseline.WEC Energy Group expects to achieve these goals by making operating refinements, retiring less efficient generating units, and executing its capital plan. Over the longer term, the target for its generation fleet is net-zero CO2 emissions by 2050. As part of the path toward these goals, we are exploring co-firing with natural gas at the ERGS coal-fired units. By the end of 2030,WEC Energy Group expects to use coal as a backup fuel only, andWEC Energy Group believes it will be in a position to eliminate coal as an energy source by the end of 2035.WEC Energy Group already has retired more than 1,900 MWs of coal-fired generation since the beginning of 2018, which included the 2019 retirement of thePresque Isle power plant as well as the 2018 retirement of thePleasant Prairie power plant. Through the ESG Progress Plan,WEC Energy Group expects to retire approximately 1,500 MWs of additional fossil-fueled generation by the end of 2026, which includes the planned retirement in 2024-2025 of OCPP Units 5-8. In addition to retiring these older, fossil-fueled plants,WEC Energy Group expects to invest approximately$5.4 billion from 2023-2027 in regulated renewable energy inWisconsin .WEC Energy Group's plan is to replace a portion of the retired capacity by building and owning zero-carbon-emitting renewable generation facilities that are anticipated to include the following new investments made by either us or WPS based on specific customer needs: •1,900 MWs of utility-scale solar; •700 MWs of battery storage; and •700 MWs of wind. 03/31/2023 Form 10-Q 23 Wisconsin Electric Power Company
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Table of ContentsWEC Energy Group also plans on investing in a combination of clean, natural gas-fired generation, made by either us or WPS based on specific customer needs, including:
•100 MWs of RICE natural gas-fueled generation; and
•the planned purchase of up to 200 MWs of capacity in West Riverside - a
combined cycle natural gas plant recently completed by Alliant Energy in
For more details, see Liquidity and Capital Resources - Cash Requirements - Significant Capital Projects.
InDecember 2018 , we received approval from the PSCW for two renewable energy pilot programs. The Solar Now pilot is expected to add a total of 35 MWs of solar generation to our portfolio, allowing non-profit and government entities, as well as commercial and industrial customers, to site utility owned solar arrays on their property. Under this program, we have energized 25 Solar Now projects and currently have another four under construction, together totaling more than 30 MWs. The second program, the Dedicated Renewable Energy Resource (DRER) pilot, would allow large commercial and industrial customers to access renewable resources that we would operate, and was adjusted down from 150 MWs to up to 35 MWs of renewables that could be added to our portfolio. The DRER pilot would help these larger customers meet their sustainability and renewable energy goals. InAugust 2021 , the PSCW approved pilot programs for us to install and maintain EV charging equipment for customers at their homes or businesses. The programs provide direct benefits to customers by removing cost barriers associated with installing EV equipment. InOctober 2021 , subject to the receipt of any necessary regulatory approvals,WEC Energy Group pledged to expand the EV charging network within its utilities' electric service territories. In doing so,WEC Energy Group joined a coalition of utility companies in a unified effort to make EV charging convenient and widely available throughout the Midwest. The coalitionWEC Energy Group joined is planning to help build and grow EV charging corridors, enabling the general public to safely and efficiently charge their vehicles.WEC Energy Group also continues to reduce methane emissions by improving its natural gas distribution system, and has set a target across its natural gas distribution operations to achieve net-zero methane emissions by the end of 2030.WEC Energy Group plans to achieve its net-zero goal through an effort that includes both continuous operational improvements and equipment upgrades, as well as the use of RNG throughout its natural gas utility systems. In 2022, we received approval from the PSCW for an RNG pilot associated with our natural gas distribution system.WEC Energy Group is planning a pilot program for the fourth-quarter of 2023 with theElectric Power Research Institute and CMBlu Energy, aGermany -based designer and manufacturer, to test a new form of long-duration energy storage on theU.S. electric grid. The program will test battery system performance, including the ability to store and discharge energy for up to twice as long as the typical lithium-ion batteries in use today.
Reliability
We have made significant reliability-related investments in recent years, and in accordance with the ESG Progress Plan, expect to continue strengthening and modernizing our generation fleet, as well as our electric and natural gas distribution networks to further improve reliability.
We received approval to construct an LNG facility to meet anticipated peak demand. Commercial operation of the LNG facility is targeted for the end of 2023.
For more details, see Liquidity and Capital Resources - Cash Requirements - Significant Capital Projects.
Operating Efficiency
We continually look for ways to optimize the operating efficiency of our company
and will continue to do so under the ESG Progress Plan. For example, we are
making progress on our AMI program, replacing aging meter-reading equipment on
both our network and customer property. An integrated system of smart meters,
communication networks, and data management programs enables two-way
communication between us and our customers. This program reduces the manual
effort for disconnects and reconnects and enhances outage management
capabilities.
03/31/2023 Form 10-Q 24 Wisconsin Electric Power Company
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Table of
Financial Discipline
A strong adherence to financial discipline is essential to meeting our earnings projections and maintaining a strong balance sheet, stable cash flows, and quality credit ratings.
We follow an asset management strategy that focuses on investing in and acquiring assets consistent with our strategic plans, as well as disposing of assets, including property, plants, and equipment, that are no longer strategic to operations, are not performing as intended, or have an unacceptable risk profile. See Note 2, Acquisitions, for more information on our acquisition ofWhitewater and pending acquisition of West Riverside.
Exceptional Customer Care
Our approach is driven by an intense focus on delivering exceptional customer care every day. We strive to provide the best value for our customers by demonstrating personal responsibility for results, leveraging our capabilities and expertise, and using creative solutions to meet or exceed our customers' expectations. A multiyear effort is driving a standardized, seamless approach to digital customer service across all of theWEC Energy Group companies. It has moved all utilities, including us, to a common platform for all customer-facing self-service options. Using common systems and processes reduces costs, provides greater flexibility and enhances the consistent delivery of exceptional service to customers. Safety Safety is one of our core values and a critical component of our culture. We are committed to keeping our employees and the public safe through a comprehensive corporate safety program that focuses on employee engagement and elimination of at-risk behaviors. Under our "Target Zero" mission, we have an ultimate goal of zero incidents, accidents, and injuries. Management and union leadership work together to reinforce the Target Zero culture. We set annual goals for safety results as well as measurable leading indicators, in order to raise awareness of at-risk behaviors and situations and guide injury-prevention activities. All employees are encouraged to report unsafe conditions or incidents that could have led to an injury. Injuries and tasks with high levels of risk are assessed, and findings and best practices are shared across theWEC Energy Group companies. Our corporate safety program provides a forum for addressing employee concerns, training employees and contractors on current safety standards, and recognizing those who demonstrate a safety focus.
RESULTS OF OPERATIONS
THREE MONTHS ENDED
Earnings
Our earnings for the first quarter of 2023 were$121.7 million , compared with$138.5 million for the same quarter in 2022. See below for information on the$16.8 million decrease in earnings.
Expected 2023 Annual Effective Tax Rate
We expect our 2023 annual effective tax rate to be between 22.5% and 23.5%. Our
effective tax rate calculations are revised every quarter based on the best
available year-end tax assumptions, adjusted in the following year after returns
are filed. Tax accrual estimates are trued-up to the actual amounts claimed on
the tax returns and further adjusted after examinations by taxing authorities,
as needed.
03/31/2023 Form 10-Q 25 Wisconsin Electric Power Company
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Table of Contents Non-GAAP Financial Measures The discussion below addresses the contribution of our utility segment to net income attributed to common shareholder. The discussion includes financial information prepared in accordance with GAAP, as well as electric margins and natural gas margins, which are not measures of financial performance under GAAP. Electric margins (electric revenues less fuel and purchased power costs) and natural gas margins (natural gas revenues less cost of natural gas sold) are non-GAAP financial measures because they exclude other operation and maintenance expense, depreciation and amortization, and property and revenue taxes. We believe that electric and natural gas margins provide a useful basis for evaluating utility operations since the majority of prudently incurred fuel and purchased power costs, as well as prudently incurred natural gas costs, are passed through to customers in current rates. As a result, management uses electric and natural gas margins internally when assessing the operating performance of our utility segment as these measures exclude the majority of revenue fluctuations caused by changes in these expenses. Similarly, the presentation of electric and natural gas margins herein is intended to provide supplemental information for investors regarding our operating performance. Our electric margins and natural gas margins may not be comparable to similar measures presented by other companies. Furthermore, these measures are not intended to replace operating income as determined in accordance with GAAP as an indicator of operating performance. Our utility segment operating income for the three months endedMarch 31, 2023 and 2022 was$257.4 million and$289.1 million , respectively. The discussion below includes a table that provides the calculation of electric margins and natural gas margins, along with a reconciliation to the most directly comparable GAAP measure, operating income.
Utility Segment Contribution to Net Income Attributed to Common Shareholder
The following table compares our utility segment's contribution to net income for the first quarter of 2023, with the same quarter in 2022, including favorable or better, "B", and unfavorable or worse, "W", variances.
Three Months Ended March 31
(in millions) 2023 2022 B (W)
Electric revenues $ 847.7 $ 835.5 $ 12.2
Fuel and purchased power 286.8 279.8 (7.0)
Total electric margins 560.9 555.7 5.2
Natural gas revenues 244.2 236.5 7.7
Cost of natural gas sold 157.7 164.4 6.7
Total natural gas margins 86.5 72.1 14.4
Total electric and natural gas margins 647.4 627.8 19.6
Other operation and maintenance 232.3 192.6 (39.7) Depreciation and amortization 127.8 119.1 (8.7) Property and revenue taxes 29.9 27.0 (2.9) Operating income 257.4 289.1 (31.7) Other income, net 15.1 10.6 4.5 Interest expense 117.8 113.4 (4.4) Income before income taxes 154.7 186.3 (31.6) Income tax expense 32.7 47.5 14.8 Preferred stock dividends of subsidiary 0.3 0.3 - Net income attributed to common shareholder$ 121.7 $ 138.5 $ (16.8) 03/31/2023 Form 10-Q 26 Wisconsin Electric Power Company
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The following table shows a breakdown of other operation and maintenance:
Three Months Ended March 31
(in millions) 2023 2022 B (W)
Operation and maintenance not included in line
items below $ 81.3 $ 78.9 $ (2.4)
Transmission (1) 90.6 68.9 (21.7)
We Power (2) 35.5 27.6 (7.9)
Regulatory amortizations and other pass through
expenses (3) 25.1 17.2 (7.9)
Earnings sharing mechanism (0.2) - 0.2
Total other operation and maintenance $ 232.3 (1)Represents transmission expense that we are authorized to collect in rates. The PSCW has approved escrow accounting forAmerican Transmission Company LLC 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 first quarter of 2023 and 2022,$82.6 million and$82.9 million , respectively, of costs were billed to us by transmission providers. (2)Represents costs associated with theWe Power generation units, including operating and maintenance costs we recognized. During the first quarter of 2023 and 2022,$26.6 million and$24.8 million , respectively, of costs were billed to or incurred by us related to theWe 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 net income. EffectiveJanuary 1, 2023 , the PSCW approved escrow accounting for pension and OPEB costs. As a result, we defer as a regulatory asset or liability, the difference between these actual costs and those included in rates until recovery or refund is authorized in a future rate proceeding. The following tables provide information on delivered sales volumes by customer class and weather statistics: Three Months Ended March 31 MWh (in thousands) Electric Sales Volumes 2023 2022 B (W) Customer Class Residential 1,881.2 1,986.6 (105.4) Small commercial and industrial 2,087.3 2,169.0
(81.7)
Large commercial and industrial 1,554.8 1,598.9 (44.1)
Other 30.2 31.9 (1.7)
Total retail 5,553.5 5,786.4 (232.9)
Wholesale 151.2 324.0 (172.8)
Resale 1,183.5 1,146.9 36.6
Total sales in MWh 6,888.2 7,257.3 (369.1)
Three Months Ended March 31
Therms (in millions)
Natural Gas Sales Volumes 2023 2022 B (W)
Customer Class
Residential 169.1 189.8 (20.7)
Commercial and industrial 94.9 107.7 (12.8)
Total retail 264.0 297.5 (33.5)
Transportation 74.9 98.4 (23.5)
Total sales in therms 338.9 395.9 (57.0)
Three Months Ended March 31
Degree Days
Weather (1) 2023 2022 B (W)
Heating (3,283 Normal) 2,833 3,325 (14.8) %
03/31/2023 Form 10-Q 27 Wisconsin Electric Power Company
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(1)Normal degree days are based on a 20-year moving average of monthly
temperatures from
Electric Revenues
Electric revenues increased$12.2 million during the first quarter of 2023, compared with the same quarter in 2022. To the extent that changes in fuel and purchased power costs are passed through to customers, the changes are offset by comparable changes in revenues. See the discussion of electric utility margins below for more information related to the recovery of fuel and purchased power costs and the remaining drivers of the changes in electric revenues.
Electric Utility Margins
Electric utility margins increased$5.2 million during the first quarter of 2023, compared with the same quarter in 2022. The significant factor impacting the higher electric utility margins was a$60.3 million increase in margins related to the impact of our rate order approved by the PSCW, effectiveJanuary 1, 2023 . See Note 23, Regulatory Environment, in our 2022 Annual Report on Form 10-K for more information on the 2023 rate order.
This increase in margins was partially offset by:
•A$29.3 million quarter-over-quarter negative impact from collections of fuel and purchased power costs compared with costs collected in rates. Under theWisconsin fuel rules, our margins are impacted by under- or over-collections of certain fuel and purchased power costs that are within a 2% price variance from the costs included in rates, and the remaining variance beyond the 2% price variance is generally deferred for future recovery or refund to customers. •An$18.0 million decrease in margins related to lower sales volumes, driven by the impact of warmer winter weather during the first quarter of 2023, compared with the same quarter in 2022. As measured by heating degree days, the first quarter of 2023 was 14.8% warmer than the same quarter in 2022.
•Lower margins of
Natural Gas Revenues
Natural gas revenues increased$7.7 million during the first quarter of 2023, compared with the same quarter in 2022. Because prudently incurred natural gas costs are passed through to our customers in current rates, the changes are offset by comparable changes in revenues. The average per-unit cost of natural gas increased 9% during the first quarter of 2023, compared with the same quarter in 2022. The remaining drivers of changes in natural gas revenues are described in the discussion of natural gas utility margins below.
Natural Gas Utility Margins
Natural gas utility margins increased$14.4 million during the first quarter of 2023, compared with the same quarter in 2022. The most significant factor impacting the higher natural gas utility margins was a$22.6 million increase in margins related to the impact of our rate order approved by the PSCW, effectiveJanuary 1, 2023 . This increase in margins was partially offset by a$7.1 million decrease in margins from lower sales volumes, driven by warmer winter weather during the first quarter of 2023, compared with the same quarter in 2022.
Other Operating Expenses (includes other operation and maintenance, depreciation and amortization, and property and revenue taxes)
Other operating expenses at the utility segment increased
•A
03/31/2023 Form 10-Q 28 Wisconsin Electric Power Company
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Table of Contents •An$8.7 million increase in depreciation and amortization, driven by assets being placed into service as we continue to execute on our capital plan. •A$7.9 million increase in regulatory amortizations and other pass through expenses, as discussed in the notes under the other operation and maintenance table above. •A$7.9 million increase in other operation and maintenance expense related to theWe Power leases, as discussed in the notes under the other operation and maintenance table above. Other Income, Net Other income, net increased$4.5 million during the first quarter of 2023, compared with the same quarter in 2022, driven by higher AFUDC-Equity due to continued capital investment. This increase was partially offset by lower net credits from the non-service components of our net periodic pension and OPEB costs. See Note 14, Employee Benefits, for more information on our benefit costs.
Interest Expense
Interest expense increased$4.4 million during the first quarter of 2023, compared with the same quarter in 2022, driven by a$500.0 million long-term debt issuance inSeptember 2022 and higher short-term debt interest rates. These increases were partially offset by higher AFUDC-Debt due to continued capital investment. Lower interest expense on finance lease liabilities, primarily related to theWe Power leases, as finance lease liabilities decrease each year as payments are made also contributed to the offset in interest expense.
Income Tax Expense
Income tax expense decreased$14.8 million during the first quarter of 2023, compared with the same quarter in 2022, driven by lower pre-tax income and a$4.6 million increase in PTCs.
LIQUIDITY AND CAPITAL RESOURCES
Overview
We expect to maintain adequate liquidity to meet our cash requirements for the operation of our business and implementation of our corporate strategy through the internal generation of cash from operations and access to the capital markets.
Cash Flows
The following table summarizes our cash flows during the three months endedMarch 31 : (in millions) 2023 2022 Change in 2023 Over 2022 Cash provided by (used in): Operating activities$ 215.5 $ 308.2 $ (92.7) Investing activities (249.3) (99.1) (150.2) Financing activities 3.2 (199.9) 203.1 Operating Activities
Net cash provided by operating activities decreased
•A
03/31/2023 Form 10-Q 29 Wisconsin Electric Power Company
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Table of Contents •A$43.4 million decrease in cash from higher payments for other operation and maintenance expenses. During the first quarter of 2023, our payments were higher for charitable projects accrued for at the end of 2022 andWe Power costs, as well as due to the timing of payments to related parties for accounts payable. •A$10.6 million decrease in cash from higher payments for interest, driven by the issuance of long-term debt during the third quarter of 2022, and higher short-term debt interest rates during the first quarter of 2023, compared with the same quarter in 2022. These decreases in net cash provided by operating activities were partially offset by a$66.3 million increase in cash from higher overall collections from customers during the first quarter of 2023, compared with the same quarter in 2022. This increase was driven by our rate order approved by the PSCW, effectiveJanuary 1, 2023 . See Note 23, Regulatory Environment, in our 2022 Annual Report on Form 10-K for more information on our 2023 rate order.
Investing Activities
Net cash used in investing activities increased
•A
•Insurance proceeds of
•The acquisition of
Capital Expenditures
Capital expenditures for the three months ended
(in millions) 2023 2022 Change in 2023 Over 2022 Capital expenditures$ 208.7 $ 139.5 $ 69.2 The increase in cash paid for capital expenditures during the first quarter of 2023, compared with the same quarter in 2022, was primarily driven by higher payments related to the new natural gas-fired generation being constructed at WPS's existingWeston power plant site and upgrades to our electric and natural gas distribution systems.
See Capital Resources and Requirements - Capital Requirements - Significant Capital Projects for more information.
Financing Activities
Net cash related to financing activities increased
•A
•A$50.0 million increase in cash due to lower dividends paid to our parent during the first quarter of 2023, compared with the same quarter in 2022, to balance our capital structure.
•A
Significant Financing Activities
For more information on our financing activities, see Note 8, Short-Term Debt and Lines of Credit.
03/31/2023 Form 10-Q 30 Wisconsin Electric Power Company
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Cash Requirements
We require funds to support and grow our business. Our significant cash requirements primarily consist of capital and investment expenditures, payments to retire and pay interest on long-term debt, the payment of common stock dividends to our parent, and the funding of our ongoing operations. See the discussion below and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Cash Requirements in our 2022 Annual Report on Form 10-K for additional information regarding our significant cash requirements.
Significant Capital Projects
We have several capital projects that will require significant capital expenditures over the next three years and beyond. All projected capital requirements are subject to periodic review and may vary significantly from estimates, depending on a number of factors. These factors include environmental requirements, regulatory restraints and requirements, changes in tax laws and regulations, acquisition and development opportunities, market volatility, economic trends, supply chain disruptions, inflation, and interest rates. Our estimated capital expenditures and acquisitions for the next three years are reflected below. These amounts include anticipated expenditures for environmental compliance and certain remediation issues. For a discussion of certain environmental matters affecting us, see Note 17, Commitments and Contingencies. (in millions) 2023$ 1,504.1 (1) 2024 1,478.2 2025 1,274.6 Total$ 4,256.9
(1)This includes actual capital expenditures incurred through
We continue to upgrade our electric and natural gas distribution systems to enhance reliability. These upgrades include addressing our aging infrastructure and system hardening and the AMI program. AMI is an integrated system of smart meters, communication networks, and data management systems that enable two-way communication between utilities and customers.
•We have partnered with an unaffiliated utility to construct a utility-scale solar project, Badger Hollow II, that will be located inIowa County, Wisconsin . Once constructed, we will own 100 MWs of the project. Our share of the cost of this project is estimated to be approximately$151 million . Commercial operation of Badger Hollow II is targeted for 2023. •We, along with WPS and an unaffiliated utility, received PSCW approval to acquire and constructParis Solar-Battery Park , a utility-scale solar-powered electric generating facility with a battery energy storage system. The project will be located inKenosha County, Wisconsin and once fully constructed, we will own 150 MWs of solar generation and 82 MWs of battery storage of this project. Our share of the cost of this project is estimated to be approximately$325 million , with construction of the solar portion expected to be completed in 2023. •We, along with WPS and an unaffiliated utility, received PSCW approval to acquire and constructDarien Solar-Battery Park , a utility-scale solar-powered electric generating facility with a battery energy storage system. The project will be located inRock andWalworth counties,Wisconsin and once fully constructed, we will own 188 MWs of solar generation and 56 MWs of battery storage of this project. Our share of the cost of this project is estimated to be approximately$335 million , with construction of the solar portion expected to be completed in 2024. •We, along with WPS and an unaffiliated utility, received PSCW approval to acquire theKoshkonong Solar-Battery Park , a utility-scale solar-powered electric generating facility with a battery energy storage system. The project will be located inDane County, Wisconsin and once fully constructed, we will own 225 MWs of solar generation and 124 MWs of battery storage of this project. Our share of the cost of this project is estimated to be approximately$488 million , with construction of the solar portion expected to be completed in 2025. 03/31/2023 Form 10-Q 31 Wisconsin Electric Power Company
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Table of Contents •We, along with WPS, received PSCW approval to construct a natural gas-fired generation facility at WPS's existingWeston power plant site in northernWisconsin . The new facility will consist of seven RICE units. Once constructed, we will own 64 MWs of this project. Our share of the cost of this project is estimated to be approximately$85 million , with construction expected to be completed in 2023. •InJanuary 2023 , we, along with WPS, completed the acquisition ofWhitewater , a commercially operational 236.5 MW dual fueled (natural gas and low sulfur fuel oil) combined cycle electrical generation facility inWhitewater, Wisconsin . Our share of the cost of this facility was$38.0 million for 50% of the capacity. •InFebruary 2023 , WPS, along with an unaffiliated utility, received PSCW approval to acquire a portion of West Riverside's nameplate capacity. WPS also received approval to assign the option to purchase part of West Riverside to us. We will acquire 100 MWs of capacity in the first of two potential option exercises. West Riverside is a combined cycle natural gas plant recently completed by an unaffiliated utility inRock County, Wisconsin . Our share of the cost of this ownership interest is expected to be approximately$102 million , with the transaction expected to close in the second quarter of 2023. In addition, WPS could exercise and request approval to assign to us a second option to acquire an additional 100 MWs of capacity. If approved, and WPS assigns the option to us, our share of the cost of this ownership interest is approximately$100 million , with the transaction expected to close in 2024. InMarch 2022 , the DOC opened an investigation into whether new tariffs should be imposed on solar panels and cells imported from multiple southeast Asian countries. See Factors Affecting Results, Liquidity, and Capital Resources - Regulatory, Legislative, and Legal Matters -United States Department of Commerce Complaint and Factors Affecting Results , Liquidity, and Capital Resources - Regulatory, Legislative, and Legal Matters - Uyghur Forced Labor Prevention Act for information on the potential impacts to our solar projects as a result of the DOC investigation and CBP actions related to solar panels, respectively. The expected in-service dates identified above already reflect some of these impacts. We have received approval to construct an LNG facility. 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. 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 of the LNG facility is targeted for the end of 2023.
Long-Term Debt
There were no material changes in our outstanding long-term debt during the
three months ended
Common Stock Dividends
During the three months ended
Other Significant Cash Requirements
See Note 17, Commitments and Contingencies, for information regarding our
minimum future commitments related to purchase obligations for the procurement
of fuel, power, and gas supply, as well as the related storage and
transportation. There were no material changes to our other significant
commitments outside the ordinary course of business during the three months
ended
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 8, Short-Term Debt and Lines of
Credit, Note 13, Guarantees, and Note 16, Variable Interest Entities.
03/31/2023 Form 10-Q 32 Wisconsin Electric Power Company
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Table of Contents Sources of Cash Liquidity We anticipate meeting our short-term and long-term cash requirements to operate our business and implement our corporate strategy through internal generation of cash from operations, equity contributions from our parent, and access to the capital markets, which allows us to obtain external short-term borrowings, including commercial paper, and intermediate or long-term debt securities. Cash generated from operations is primarily driven by sales of electricity and natural gas to our utility customers, reduced by costs of operations. Our access to the capital markets is critical to our overall strategic plan and allows us to supplement cash flows from operations with external borrowings to manage seasonal variations, working capital needs, commodity price fluctuations, unplanned expenses, and unanticipated events. We maintain a bank back-up credit facility, which provides liquidity support for our obligations with respect to commercial paper and for general corporate purposes. We review our bank back-up credit facility needs on an ongoing basis and expect to be able to maintain adequate credit facilities to support our operations. The amount, type, and timing of any financings for the remainder of 2023, as well as in subsequent years, will be contingent on investment opportunities and our cash requirements and will depend upon prevailing market conditions, regulatory approvals, and other factors. We plan to maintain a capital structure consistent with that approved by the PSCW. For more information on our approved capital structure, see Item 1. Business - C. Regulation in our 2022 Annual Report on Form 10-K.
The issuance of our securities is subject to the approval of the PSCW.
Additionally, with respect to the public offering of securities, we file
registration statements with the
Although not the case as ofMarch 31, 2023 , our current liabilities sometimes exceed our current assets. If this occurs, we do not expect that it would have any impact on our liquidity, as we currently believe that our cash and cash equivalents, our available capacity of$371.5 million under our existing revolving credit facility, cash generated from ongoing operations, and access to the capital markets are adequate to meet our short-term and long-term cash requirements.
See Note 8, Short-Term Debt and Lines of Credit, for more information about our credit facility and commercial paper.
Investments in Outside Trusts
We maintain investments in outside trusts to fund the obligation to provide pension and certain OPEB benefits to current and future retirees. These trusts had investments consisting of fixed income and equity securities that are subject to the volatility of the stock market and interest rates. For more information, see Investments in Outside Trusts in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Sources of Cash in our 2022 Annual Report on Form 10-K. Debt Covenants Certain of our short-term debt agreements contain financial covenants that we must satisfy, including a debt to capitalization ratio. AtMarch 31, 2023 , we were in compliance with all such covenants. We expect to be in compliance with all such debt covenants for the foreseeable future. See Note 12, Short-Term Debt and Lines of Credit, Note 13, Long-Term Debt, and Note 10, Common Equity, in our 2022 Annual Report on Form 10-K, for more information regarding our debt covenants.
Credit Rating Risk
Cash collateral postings and prepayments made with external parties, including postings related to exchange-traded contracts, and cash collateral posted by external parties were immaterial as ofMarch 31, 2023 . From time to time, we may enter into commodity contracts that could require collateral or a termination payment in the event of a credit rating change to below BBB- atS&P Global Ratings , a division of S&P Global Inc., and/or Baa3 atMoody's Investors Service, Inc. If we had a sub-investment grade credit rating atMarch 31, 2023 , we could have been required to post$100 million of additional collateral or other assurances pursuant to the 03/31/2023 Form 10-Q 33 Wisconsin Electric Power Company
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Table of Contents terms of a PPA. 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.
FACTORS AFFECTING RESULTS, LIQUIDITY, AND CAPITAL RESOURCES
The following is a discussion of certain factors that may affect our results of operations, liquidity, and capital resources. This discussion should be read together with the information in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors Affecting Results, Liquidity, and Capital Resources in our 2022 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.
Regulatory, Legislative, and Legal Matters
Petitions Before PSCW Regarding Third-Party Financed Distributed Energy Resources
InMay 2022 , two petitions were filed with the PSCW requesting a declaratory ruling that the owner of a third-party financed DER is not a "public utility" as defined underWisconsin law and, therefore, is not subject to the PSCW's jurisdiction under any statute or rule regulating public utilities. The parties that filed the petitions provide financing to their customers for installation of DERs (including solar panels and energy storage) on the customer's property. A DER is connected to the host customer's utility meter and is used for the customer's energy needs. It may also be connected to the grid for distribution. InJuly 2022 , the PSCW found that the specific facts and circumstances merited the opening of a docket for each petition to consider whether to grant all or part of the requested declaratory ruling. OnDecember 1, 2022 , the PSCW granted one petitioner's request for a declaratory ruling, finding that the owner of the third-party financed DER at issue in the petitioner's brief is not a public utility underWisconsin law. The ruling was limited to the specific facts and circumstances of the lease presented in that petition. A recent petition by several utilities to reopen or rehear the case expired without action by the PSCW. The second petition is also currently being considered. Although the finding in the first petition was limited to the specific facts and circumstances of the lease presented in that petition, similar findings or a broader policy position could adversely impact our business operations.
Uyghur Forced Labor Prevention Act
The CBP issued a WRO inJune 2021 , applicable to certain silica-based products originating from theXinjiang Uyghur Autonomous Region ofChina (Xinjiang ), such as polysilicon, included in the manufacturing of solar panels. InJune 2022 , the WRO was superseded by the implementation of the UFLPA, which was signed into law byPresident Biden inDecember 2021 . The UFLPA establishes a rebuttable presumption that any imports wholly or partially manufactured inXinjiang are prohibited from enteringthe United States . While our suppliers were able to provide the CBP sufficient documentation to meet WRO compliance requirements, and we expect the same will be true for UFLPA purposes, we cannot currently predict what, if any, long-term impact the UFLPA will have on the overall supply of solar panels intothe United States and the related long-term impact to timing and cost of our solar projects included inWEC Energy Group's capital plan. However, we are seeing some delays in the release of solar panels by the CBP, which are having an impact on the timing of certain of our solar projects.
InFebruary 2022 , aCalifornia based company filed a petition (AD/CVD) with the DOC seeking to impose new tariffs on solar panels and cells imported from multiple countries, includingMalaysia ,Vietnam ,Thailand , andCambodia . The petitioners claimed that Chinese solar manufacturers are shifting products to these countries to avoid the tariffs required on products imported fromChina 03/31/2023 Form 10-Q 34 Wisconsin Electric Power Company
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Table of Contents and requested that the DOC conduct a country-wide inquiry into each of the four countries. InMarch 2022 , the DOC decided to act on the petition and investigate the claim. OnDecember 2, 2022 , the DOC announced its preliminary determination that certain companies are circumventing anti-dumping and countervailing duty orders on solar cells and modules fromChina . If the DOC makes a final determination, which is currently expected in the second quarter of 2023, that such circumvention is occurring it would be able to apply any final tariffs retroactively toNovember 4, 2021 . If imposed, the new tariffs could further disrupt the supply of solar modules tothe United States , and could impact the cost and timing of our solar projects. InJune 2022 , theBiden Administration used its executive powers to issue a 24-month tariff moratorium on solar panels manufactured inCambodia ,Malaysia ,Thailand , andVietnam . The moratorium comes as a direct response to concerns raised about the adverse impact from the ongoing DOC complaint on theU.S. solar industry. As the DOC will continue its investigation discussed above, companies may still be subject to tariffs after the moratorium ends; however,U.S. companies will reportedly be exempt from any retroactive tariffs that previously could have applied.The Biden Administration also announced that it plans to invoke the Defense Production Act to accelerate the production of solar panels in theU.S. The Biden Administration's actions did not address whether WROs applied to panels under previous complaints would be affected.
InNovember 2021 ,President Biden signed into law theInfrastructure Investment and Jobs Act, which provides for approximately$1.2 trillion of federal spending over the next five years, including approximately$85 billion for investments in power, utilities, and renewables infrastructure acrossthe United States . We expect funding from this Act will support the work we are doing to reduce GHG emissions, increase EV charging, and strengthen and protect the energy grid. Funding in the Act should also help to expand emerging technologies, like hydrogen and carbon management, as we continue the transition to a clean energy future. We believe theInfrastructure Investment and Jobs Act will accelerate investment in projects that will help us meet our net zero emission goals to the benefit of our customers, the communities we serve, and our company.
Inflation Reduction Act
InAugust 2022 ,President Biden signed into law the IRA, which provides for$258 billion in energy-related provisions over a 10-year period. The provisions of the IRA are intended to, among other things, lower gasoline and electricity prices, incentivize domestic clean energy investment, manufacturing, and production, and promote reductions in carbon emissions. We believe that we and our customers can benefit from the IRA's provisions that extend tax benefits for renewable technologies, increase or restore higher rates for PTCs, add an option to claim PTCs for solar projects, expand qualified ITC facilities to include standalone energy storage, and its provision to allow companies to transfer tax credits generated from renewable projects. The IRA also implements a 15% corporate alternative minimum tax and a 1% excise tax on stock repurchases. Although significant regulatory guidance is expected on the tax provisions in the IRA, we currently believe the provisions on alternative minimum tax and stock repurchases will not have a material impact on us. Overall, we believe the IRA will help reduce our cost of investing in projects that will support our commitment to reduce emissions and provide customers affordable, reliable, and clean energy over the longer term.
Environmental Matters
See Note 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.
Market Risks and Other Significant Risks
We are exposed to market and other significant risks as a result of the nature of our business and the environment in which we operate. These risks include, but are not limited to, the inflation and supply chain disruptions described below. In addition, there is continuing uncertainty over the impact that the ongoing conflict betweenRussia andUkraine will have on the global economy, supply chains, and fuel prices. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors Affecting Results, Liquidity, and Capital Resources - Market Risks and Other Significant Risks in our 2022 Annual Report on Form 10-K for a discussion of market and other significant risks applicable to us.
Inflation and Supply Chain Disruptions
We continue to monitor the impact of inflation and supply chain disruptions. We
monitor the costs of medical plans, fuel, transmission access, construction
costs, regulatory and environmental compliance costs, and other costs in order
to minimize
03/31/2023 Form 10-Q 35 Wisconsin Electric Power Company
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Table of Contents inflationary effects in future years, to the extent possible, through pricing strategies, productivity improvements, and cost reductions. We monitor the global supply chain, and related disruptions, in order to ensure we are able to procure the necessary materials and other resources necessary to both maintain our energy services in a safe and reliable manner and to grow our infrastructure in accordance withWEC Energy Group's capital plan. For additional information concerning risks related to inflation and supply chain disruptions, see the three risk factors below that are disclosed in Part I of our 2022 Annual Report on Form 10-K.
•Item 1A. Risk Factors - Risks Related to the Operation of Our Business - Our operations and corporate strategy may be adversely affected by supply chain disruptions and inflation.
•Item 1A. Risk Factors - Risks Related to the Operation of Our Business - We are actively involved with multiple significant capital projects, which are subject to a number of risks and uncertainties that could adversely affect project costs and completion of construction projects. •Item 1A. Risk Factors - Risks Related to Economic and Market Volatility - Fluctuating commodity prices could negatively impact our electric and natural gas utility operations. For additional information concerning risk factors, including market risks, see the Cautionary Statement Regarding Forward-Looking Information at the beginning of this report.
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