| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30 |
| | Therms (in millions) |
Natural Gas Sales Volumes | | 2022 | | 2021 | | B (W) |
Customer Class | | | | | | |
Residential | | 52.6 | | | 43.5 | | | 9.1 | |
Commercial and industrial | | 37.8 | | | 25.1 | | | 12.7 | |
Total retail | | 90.4 | | | 68.6 | | | 21.8 | |
Transportation | | 164.9 | | | 170.8 | | | (5.9) | |
Total sales in therms | | 255.3 | | | 239.4 | | | 15.9 | |
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| | Three Months Ended June 30 |
| | Degree Days |
Weather (1) | | 2022 | | 2021 | | B (W) |
MERC | | | | | | |
Heating (956 Normal) | | 1,112 | | | 911 | | | 22.1 | % |
| | | | | | |
MGU | | | | | | |
Heating (778 Normal) | | 796 | | | 810 | | | (1.7) | % |
(1)Normal heating degree days for MERC and MGU are based on a 20-year moving average and 15-year moving average, respectively, of monthly temperatures from various weather stations throughout their respective service territories.
Natural Gas Revenues
Natural gas revenues increased $27.8 million during the second quarter of 2022, compared with the same quarter in 2021. Because prudently incurred natural gas costs are passed through to our customers in current rates, the changes are offset by comparable changes in revenues. The average per-unit cost of natural gas sold increased 34% during the second quarter of 2022, compared with the same quarter in 2021. See the discussion of natural gas utility margins below for the remaining drivers of changes in natural gas revenues.
Natural Gas Utility Margins
Natural gas utility margins increased $4.4 million during the second quarter of 2022, compared to the same quarter in 2021. The increase in margins was primarily driven by:
•A $2.3 million increase related to the new rates at MGU that went into effect in 2022.
•A $1.6 million increase related to higher retail sales volumes due to both colder weather in our Minnesota service territories and continued economic recovery during the second quarter of 2022, as compared to the same quarter in 2021.
Other Operating Expenses (includes other operation and maintenance, depreciation and amortization, and property and revenue taxes)
Other operating expenses at the other states segment increased $2.7 million during the second quarter of 2022, compared to the same quarter in 2021. The significant factors impacting the increase in operating expenses were:
•A $1.5 million increase in natural gas operations and customer service expense, driven by various operation and maintenance projects approved in MGU's rate case and higher labor and external contracting costs.
•A $0.8 million increase in depreciation and amortization related to continued capital investment.
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06/30/2022 Form 10-Q | 55 | WEC Energy Group, Inc. |
Interest Expense
Interest expense at the other states segment increased $1.7 million during the second quarter of 2022, compared with the same quarter in 2021, primarily due to the deferral of $1.2 million of interest expense in the second quarter of 2021, as approved by the MPSC to mitigate the impacts from delaying the filing of its 2021 rate case. See Note 26, Regulatory Environment, in our 2021 Annual Report on Form 10-K for additional information. This deferred interest expense is now being amortized over a four-year period as a result of MGU's approved rate increase.
Electric Transmission Segment Contribution to Net Income Attributed to Common Shareholders
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| | Three Months Ended June 30 |
(in millions) | | 2022 | | 2021 | | B (W) |
Equity in earnings of transmission affiliates | | $ | 43.0 | | | $ | 41.3 | | | $ | 1.7 | |
Other income (expense), net | | 0.1 | | | (0.1) | | | 0.2 | |
Interest expense | | 4.8 | | | 4.8 | | | — | |
Income before income taxes | | 38.3 | | | 36.4 | | | 1.9 | |
| | | | | | |
Income tax expense | | 9.3 | | | 9.4 | | | 0.1 | |
Net income attributed to common shareholders | | $ | 29.0 | | | $ | 27.0 | | | $ | 2.0 | |
Non-Utility Energy Infrastructure Segment Contribution to Net Income Attributed to Common Shareholders
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| | Three Months Ended June 30 |
(in millions) | | 2022 | | 2021 | | B (W) |
Operating income | | $ | 90.4 | | | $ | 86.8 | | | $ | 3.6 | |
| | | | | | |
Interest expense | | 17.4 | | | 17.9 | | | 0.5 | |
Income before income taxes | | 73.0 | | | 68.9 | | | 4.1 | |
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Income tax expense (benefit) | | (7.3) | | | 0.7 | | | 8.0 | |
Net loss attributed to noncontrolling interests | | — | | | 0.6 | | | (0.6) | |
Net income attributed to common shareholders | | $ | 80.3 | | | $ | 68.8 | | | $ | 11.5 | |
Operating Income
Operating income at the non-utility energy infrastructure segment increased $3.6 million during the second quarter of 2022, compared with the same quarter in 2021. The increase was primarily due to a $3.7 million positive impact from a sharing arrangement with one of our Blooming Grove customers resulting from strong energy prices.
Income Tax Expense (Benefit)
At the non-utility energy infrastructure segment, $7.3 million of income tax benefit was recorded during the second quarter of 2022, compared with $0.7 million of income tax expense recorded during the same quarter in 2021. The change was primarily due to a $9.3 million increase in PTCs in 2022, driven by the Jayhawk wind park achieving commercial operation in December 2021, an increase in the PTC rate related to the PTC inflation adjustment issued by the IRS, and higher generation at our other wind parks. This favorable change in the income tax benefit was partially offset by higher pre-tax earnings during the second quarter of 2022, compared with same quarter in 2021.
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06/30/2022 Form 10-Q | 56 | WEC Energy Group, Inc. |
Corporate and Other Segment Contribution to Net Income Attributed to Common Shareholders
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| | Three Months Ended June 30 |
(in millions) | | 2022 | | 2021 | | B (W) |
Operating loss | | $ | (5.8) | | | $ | (3.6) | | | $ | (2.2) | |
| | | | | | |
Other income (expense), net | | (8.9) | | | 19.9 | | | (28.8) | |
Interest expense | | 24.6 | | | 24.6 | | | — | |
| | | | | | |
Loss before income taxes | | (39.3) | | | (8.3) | | | (31.0) | |
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Income tax expense (benefit) | | (10.0) | | | 4.1 | | | 14.1 | |
Net loss attributed to common shareholders | | $ | (29.3) | | | $ | (12.4) | | | $ | (16.9) | |
Operating Loss
The operating loss at the corporate and other segment increased $2.2 million during the second quarter of 2022, compared with the same quarter in 2021. The higher operating loss was driven by $2.6 million of gains on land sales at Wispark during the second quarter of 2021, which did not reoccur in the second quarter of 2022.
Other Income (Expense), Net
The corporate and other segment had other expense, net of $8.9 million during the second quarter of 2022, compared with other income, net of $19.9 million during the same quarter in 2021. The $28.8 million decrease in other income was driven by a $9.7 million net loss from the investments held in the Integrys rabbi trust during the second quarter of 2022, compared with a $6.0 million net gain during the same quarter in 2021. The gains and losses from the investments held in the rabbi trust partially offset the changes in benefits costs related to deferred compensation, which are included in other operation and maintenance expense in our operating segments. See Note 13, Fair Value Measurements, for more information on our investments held in the Integrys rabbi trust. A $13.7 million decrease in earnings from our equity method investments in technology and energy-focused investment funds also contributed to the decrease in other income.
Income Tax Expense (Benefit)
The corporate and other segment recorded a $10.0 million income tax benefit during the second quarter of 2022, compared with $4.1 million of income tax expense during the same quarter in 2021. The positive change in income taxes was driven by a higher pre-tax loss. Also contributing to the favorable change in the income tax benefit were a $2.0 million increase in excess tax benefits recognized related to stock option exercises and a $1.9 million increase in the interim tax benefit recorded to adjust consolidated income tax expense to the projected, annualized consolidated effective income tax rate, during the six months ended June 30, 2022, compared with the same period in 2021.
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06/30/2022 Form 10-Q | 57 | WEC Energy Group, Inc. |
SIX MONTHS ENDED JUNE 30, 2022
Consolidated Earnings
The following table compares our consolidated results for the six months ended June 30, 2022 with the six months ended June 30, 2021, including favorable or better, "B", and unfavorable or worse, "W", variances:
| | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30 |
(in millions, except per share data) | | 2022 | | 2021 | | B (W) | |
Wisconsin | | $ | 436.5 | | | $ | 402.8 | | | $ | 33.7 | | |
Illinois | | 169.8 | | | 155.7 | | | 14.1 | | |
Other states | | 34.2 | | | 27.2 | | | 7.0 | | |
Electric transmission | | 56.8 | | | 55.0 | | | 1.8 | | |
Non-utility energy infrastructure | | 171.8 | | | 140.2 | | | 31.6 | | |
Corporate and other | | (15.7) | | | 5.2 | | | (20.9) | | |
Net income attributed to common shareholders | | $ | 853.4 | | | $ | 786.1 | | | $ | 67.3 | | |
| | | | | | | |
Diluted Earnings Per Share | | $ | 2.70 | | | $ | 2.49 | | | $ | 0.21 | | |
Earnings increased $67.3 million during the six months ended June 30, 2022, compared with the same period in 2021. The significant factors impacting the $67.3 million increase in earnings were:
•A $33.7 million increase in net income attributed to common shareholders at the Wisconsin segment, driven by an increase in natural gas margins related to higher retail sales volumes, primarily due to the continued economic recovery in Wisconsin from the COVID-19 pandemic, as well as colder weather during the six months ended June 30, 2022, compared with the same period in 2021. Also contributing to the increase in earnings was lower operation and maintenance expense, driven by the amortization of certain regulatory liabilities to offset a portion of our 2022 forecasted revenue deficiencies, and higher net credits from the non-service components of our net periodic pension and OPEB costs. The amortization of the regulatory liabilities was approved by the PSCW in order to forego filing for 2022 base rate increases. These increases in earnings were partially offset by higher depreciation and amortization and the negative impact from actual fuel and purchased power costs compared with costs collected in rates.
•A $31.6 million increase in net income attributed to common shareholders at the non-utility energy infrastructure segment, driven by an increase in PTCs during 2022, primarily due to the Jayhawk wind park that achieved commercial operation in December 2021, an increase in the PTC rate related to the PTC inflation adjustment issued by the IRS, and higher generation at our other wind parks. Also contributing to the increase in net income was the recognition of revenue related to market settlements Upstream received from SPP in February 2021. Due to a complaint filed with the FERC, the revenue related to these settlements could not be recognized until the FERC issued an order denying the complaint in the first quarter of 2022.
•A $14.1 million increase in net income attributed to common shareholders at the Illinois segment, driven by a gain on the sale of certain real estate in Chicago, as well as higher natural gas margins due to PGL's continued capital investment in the SMP project under its QIP rider and NSG's rate increase, effective September 15, 2021. These positive impacts were partially offset by increases in various operating expenses, including expenses related to the settlement of legal claims, charitable projects, and benefit costs.
These increases in earnings were partially offset by a $20.9 million decrease in earnings from the corporate and other segment, driven by net losses from the investments held in the Integrys rabbi trust during the first half of 2022, compared with net gains during the same period in 2021. A decrease in earnings from our equity method investments in technology and energy-focused investment funds also contributed to the decrease in earnings.
Expected 2022 Annual Effective Tax Rate
We expect our 2022 annual effective tax rate to be between 18.5% and 19.5%. 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.
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06/30/2022 Form 10-Q | 58 | WEC Energy Group, Inc. |
Non-GAAP Financial Measures
The discussions below address the contribution of each of our segments to net income attributed to common shareholders. The discussions include 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 segments 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. The following table shows operating income by segment for our utility operations during the six months ended June 30, 2022 and 2021:
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| | Six Months Ended June 30 |
(in millions) | | 2022 | | 2021 |
Wisconsin | | $ | 806.8 | | | $ | 719.2 | |
Illinois | | 260.1 | | | 243.1 | |
Other states | | 50.9 | | | 38.9 | |
Each applicable segment discussion below includes a table that provides the calculation of electric margins and natural gas margins, as applicable, along with a reconciliation to the most directly comparable GAAP measure, operating income.
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06/30/2022 Form 10-Q | 59 | WEC Energy Group, Inc. |
Wisconsin Segment Contribution to Net Income Attributed to Common Shareholders
The Wisconsin segment's contribution to net income attributed to common shareholders was $436.5 million during the six months ended June 30, 2022, representing a $33.7 million, or 8.4%, increase over the same period in 2021. The higher earnings were driven by an increase in natural gas margins related to higher retail sales volumes, primarily due to the continued economic recovery in Wisconsin from the COVID-19 pandemic, as well as colder weather during the six months ended June 30, 2022, compared with the same period in 2021. Also contributing to the increase in earnings was lower operation and maintenance expense, driven by the amortization of certain regulatory liabilities to offset a portion of our 2022 forecasted revenue deficiencies, and higher net credits from the non-service components of our net periodic pension and OPEB costs. The amortization of the regulatory liabilities was approved by the PSCW in order to forego filing for 2022 base rate increases. These increases in earnings were partially offset by higher depreciation and amortization and the negative impact from actual fuel and purchased power costs compared with costs collected in rates.
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| | Six Months Ended June 30 |
(in millions) | | 2022 | | 2021 | | B (W) |
Electric revenues | | $ | 2,418.5 | | | $ | 2,193.8 | | | $ | 224.7 | |
Fuel and purchased power | | 879.8 | | | 695.5 | | | (184.3) | |
Total electric margins | | 1,538.7 | | | 1,498.3 | | | 40.4 | |
| | | | | | |
Natural gas revenues | | 1,081.2 | | | 845.4 | | | 235.8 | |
Cost of natural gas sold | | 706.0 | | | 504.3 | | | (201.7) | |
Total natural gas margins | | 375.2 | | | 341.1 | | | 34.1 | |
| | | | | | |
Total electric and natural gas margins | | 1,913.9 | | | 1,839.4 | | | 74.5 | |
| | | | | | |
Other operation and maintenance | | 650.5 | | | 688.0 | | | 37.5 | |
Depreciation and amortization | | 374.8 | | | 356.0 | | | (18.8) | |
Property and revenue taxes | | 81.8 | | | 76.2 | | | (5.6) | |
Operating income | | 806.8 | | | 719.2 | | | 87.6 | |
| | | | | | |
Other income, net | | 46.9 | | | 35.3 | | | 11.6 | |
Interest expense | | 271.9 | | | 279.9 | | | 8.0 | |
Income before income taxes | | 581.8 | | | 474.6 | | | 107.2 | |
| | | | | | |
Income tax expense | | 144.7 | | | 71.2 | | | (73.5) | |
Preferred stock dividends of subsidiary | | 0.6 | | | 0.6 | | | — | |
Net income attributed to common shareholders | | $ | 436.5 | | | $ | 402.8 | | | $ | 33.7 | |
The following table shows a breakdown of other operation and maintenance:
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30 |
(in millions) | | 2022 | | 2021 | | B (W) |
Operation and maintenance not included in line items below | | $ | 318.7 | | | $ | 303.4 | | | $ | (15.3) | |
Transmission (1) | | 215.3 | | | 255.3 | | | 40.0 | |
Regulatory amortizations and other pass through expenses (2) | | 72.4 | | | 70.5 | | | (1.9) | |
We Power (3) | | 54.9 | | | 58.8 | | | 3.9 | |
| | | | | | |
| | | | | | |
Earnings sharing mechanism (4) | | (10.8) | | | — | | | 10.8 | |
Total other operation and maintenance | | $ | 650.5 | | | $ | 688.0 | | | $ | 37.5 | |
(1)Represents transmission expense that our electric utilities are authorized to collect in rates. The PSCW has approved escrow accounting for ATC and MISO network transmission expenses for WE and WPS. As a result, WE and WPS 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 six months ended June 30, 2022 and 2021, $256.6 million and $255.4 million, respectively, of costs were billed to our electric utilities by transmission providers.
During the six months ended June 30, 2022, WE and WPS amortized $40.5 million of the regulatory liabilities associated with their transmission escrows to offset certain 2022 revenue deficiencies, as approved by the PSCW in order to forego filing for 2022 base rate increases. This amortization drove the decrease in transmission expense during the six months ended June 30, 2022, compared with the same period in 2021.
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06/30/2022 Form 10-Q | 60 | WEC Energy Group, Inc. |
(2)Regulatory amortizations and other pass through expenses are substantially offset in margins and therefore do not have a significant impact on net income.
(3)Represents costs associated with the We Power generation units, including operating and maintenance costs recognized by WE. During the six months ended June 30, 2022 and 2021, $50.9 million and $51.6 million, respectively, of costs were billed to or incurred by WE 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.
(4)Represents amortization of a certain portion of WPS's regulatory liability associated with its 2020 earnings sharing mechanism to offset certain 2022 revenue deficiencies, as approved by the PSCW in order to forego filing for 2022 base rate increases.
The following tables provide information on delivered sales volumes by customer class and weather statistics:
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| | Six Months Ended June 30 |
| | MWh (in thousands) |
Electric Sales Volumes | | 2022 | | 2021 | | B (W) |
Customer Class | | | | | | |
Residential | | 5,501.1 | | | 5,464.4 | | | 36.7 | |
Small commercial and industrial (1) | | 6,312.1 | | | 6,171.9 | | | 140.2 | |
Large commercial and industrial (1) | | 5,970.5 | | | 6,126.6 | | | (156.1) | |
Other | | 69.1 | | | 73.6 | | | (4.5) | |
Total retail (1) | | 17,852.8 | | | 17,836.5 | | | 16.3 | |
Wholesale | | 1,357.9 | | | 1,437.4 | | | (79.5) | |
Resale | | 2,094.2 | | | 3,282.2 | | | (1,188.0) | |
Total sales in MWh (1) | | 21,304.9 | | | 22,556.1 | | | (1,251.2) | |
(1)Includes distribution sales for customers who have purchased power from an alternative electric supplier in Michigan.
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| | Six Months Ended June 30 |
| | Therms (in millions) |
Natural Gas Sales Volumes | | 2022 | | 2021 | | B (W) |
Customer Class | | | | | | |
Residential | | 741.2 | | | 658.4 | | | 82.8 | |
Commercial and industrial | | 452.6 | | | 386.6 | | | 66.0 | |
Total retail | | 1,193.8 | | | 1,045.0 | | | 148.8 | |
Transportation | | 767.6 | | | 738.4 | | | 29.2 | |
Total sales in therms | | 1,961.4 | | | 1,783.4 | | | 178.0 | |
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| | Six Months Ended June 30 |
| | Degree Days |
Weather | | 2022 | | 2021 | | B (W) |
WE and WG (1) | | | | | | |
Heating (4,190 Normal) | | 4,165 | | | 3,858 | | | 8.0 | % |
Cooling (171 Normal) | | 259 | | | 303 | | | (14.5) | % |
| | | | | | |
WPS (2) | | | | | | |
Heating (4,610 Normal) | | 4,751 | | | 4,336 | | | 9.6 | % |
Cooling (144 Normal) | | 249 | | | 242 | | | 2.9 | % |
| | | | | | |
UMERC (3) | | | | | | |
Heating (5,157 Normal) | | 5,571 | | | 4,883 | | | 14.1 | % |
Cooling (82 Normal) | | 115 | | | 156 | | | (26.3) | % |
(1)Normal degree days are based on a 20-year moving average of monthly temperatures from Mitchell International Airport in Milwaukee, Wisconsin.
(2)Normal degree days are based on a 20-year moving average of monthly temperatures from the Green Bay, Wisconsin weather station.
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06/30/2022 Form 10-Q | 61 | WEC Energy Group, Inc. |
(3)Normal degree days are based on a 20-year moving average of monthly temperatures from the Iron Mountain, Michigan weather station.
Electric Revenues
Electric revenues increased $224.7 million during the six months ended June 30, 2022, compared with the same period in 2021. To the extent that changes in fuel and purchased power costs are passed through to customers, the changes are offset by comparable changes in revenues. See the discussion of electric utility margins below for more information related to the recovery of fuel and purchased power costs and the remaining drivers of the changes in electric revenues.
Electric Utility Margins
Electric utility margins at the Wisconsin segment increased $40.4 million during the six months ended June 30, 2022, compared with the same period in 2021. The significant factors impacting the higher electric utility margins were:
•A $54.1 million increase in margins related to the impact of unprotected excess deferred taxes during the six months ended June 30, 2021, which we agreed to return to customers in our PSCW-approved rate orders. This increase in margins is offset in income taxes.
•A $5.3 million increase in securitization revenues received during the six months ended June 30, 2022, compared with the same period in 2021, related to an environmental control charge collected from WE's retail electric distribution customers on behalf of WEPCo Environmental Trust. WE began assessing this charge in June 2021, subsequent to the issuance of the ETBs by WEPCo Environmental Trust in May 2021, in accordance with a November 2020 PSCW financing order. These revenues are offset in depreciation and amortization as well as interest expense.
•A $4.9 million net increase in margins related to higher retail sales volumes, driven by the impact of favorable weather during the six months ended June 30, 2022, compared with the same period in 2021. As measured by heating degree days, the six months ended June 30, 2022 were 8.0% and 9.6% colder than the same period in 2021 in the Milwaukee area and Green Bay area, respectively.
These increases in margins were partially offset by:
•An $18.4 million period-over-period negative impact from actual fuel and purchased power costs compared with costs collected in rates. Under the Wisconsin fuel rules, the margins of our electric utilities 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.
•Lower margins of $7.4 million driven by the expiration of certain wholesale contracts.
Natural Gas Revenues
Natural gas revenues increased $235.8 million during the six months ended June 30, 2022, compared with the same period in 2021. Because prudently incurred natural gas costs are passed through to our customers in current rates, the changes are offset by comparable changes in revenues. The average per-unit cost of natural gas increased 23% during the six months ended June 30, 2022, compared with the same period in 2021. The remaining drivers of changes in natural gas revenues are described in the discussion of natural gas utility margins below.
Natural Gas Utility Margins
Natural gas utility margins at the Wisconsin segment increased $34.1 million during the six months ended June 30, 2022, compared with the same period in 2021. The significant factors impacting the higher natural gas utility margins were:
•A $29.7 million increase in margins from higher sales volumes, primarily driven by the continued economic recovery in Wisconsin from the COVID-19 pandemic, as well as colder weather during the six months ended June 30, 2022, compared with the same period in 2021.
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06/30/2022 Form 10-Q | 62 | WEC Energy Group, Inc. |
•A $5.0 million increase in margins related to amortization of a certain portion of WG's regulatory liability consisting of credit balances associated with the escrow of natural gas storage service costs from Bluewater Gas Storage, LLC. In September 2021, the PSCW issued a written order for our Wisconsin utilities approving certain accounting treatments to offset certain 2022 revenue deficiencies in order to forego filing for 2022 base rate increases.
Other Operating Expenses (includes other operation and maintenance, depreciation and amortization, and property and revenue taxes)
Other operating expenses at the Wisconsin segment decreased $13.1 million during the six months ended June 30, 2022, compared with the same period in 2021. The significant factors impacting the decrease in operating expenses were:
•A $40.0 million decrease in transmission expense driven by the amortization of a certain portion of WE's and WPS's regulatory liabilities associated with transmission escrow balances, as discussed in the notes under the other operation and maintenance table above.
•A $10.8 million decrease in expense driven by the amortization of a certain portion of WPS's regulatory liability associated with its 2020 earnings sharing mechanism, as discussed in the notes under the other operation and maintenance table above.
•A $3.9 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 $2.1 million decrease related to a gain on land sales during the six months ended June 30, 2022, compared with the same period in 2021.
These decreases in operating expenses were partially offset by:
•An $18.8 million increase in depreciation and amortization, driven by assets being placed into service as we continue to execute on our capital plan, an increase related to the We Power leases, and an increase related to securitization amortization, which is offset in revenues. These increases were partially offset by $5.1 million of deferred depreciation related to capital investments made by WG since it's last rate case, as approved by the PSCW in an order that allowed our Wisconsin utilities to offset certain 2022 revenue deficiencies in order to forego filing for 2022 base rate increases.
•An $18.7 million increase in electric and natural gas distribution expenses, primarily driven by higher storm restoration expense during the six months ended June 30, 2022, and higher costs to maintain system reliability.
•A $5.6 million increase in property and revenue taxes, driven by higher gross receipt taxes.
Other Income, Net
Other income, net at the Wisconsin segment increased $11.6 million during the six months ended June 30, 2022, compared with the same period in 2021, driven by higher net credits from the non-service components of our net periodic pension and OPEB costs.
Interest Expense
Interest expense at the Wisconsin segment decreased $8.0 million during the six months ended June 30, 2022, compared with the same period in 2021, primarily due to the deferral of interest expense related to capital investments made by WG since its last rate case, as approved by the PSCW in an order that allowed our Wisconsin utilities to offset certain 2022 revenue deficiencies in order to forego filing for a 2022 base rate increase. Also contributing to the decrease was lower interest expense on finance lease liabilities, primarily related to the WE Power leases, as finance lease liabilities decrease each year as payments are made.
Income Tax Expense
Income tax expense at the Wisconsin segment increased $73.5 million during the six months ended June 30, 2022, compared with the same period in 2021. The increase was primarily due to an approximate $50 million negative impact related to the lower period-over-period amortization of the unprotected excess deferred tax benefits from the Tax Legislation in connection with the Wisconsin rate orders approved by the PSCW, effective January 1, 2020. The impact due to the benefit from the amortization of the
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unprotected excess deferred tax benefits in 2021 from the Tax Legislation did not impact earnings as there was an offsetting impact in operating income. Also contributing to the increase was higher pre-tax income in 2022.
Illinois Segment Contribution to Net Income Attributed to Common Shareholders
The Illinois segment's contribution to net income attributed to common shareholders was $169.8 million during the six months ended June 30, 2022, representing a $14.1 million, or 9.1%, increase over the same period in 2021. The increase was driven by a gain on the sale of certain real estate in Chicago, as well as higher natural gas margins due to PGL's continued capital investment in the SMP project under its QIP rider and NSG's rate increase, effective September 15, 2021. These positive impacts were partially offset by increases in various operating expenses, including expenses related to the settlement of legal claims, charitable projects, and benefit costs.
Since the majority of PGL and NSG customers use natural gas for heating, net income attributed to common shareholders at the Illinois segment is sensitive to weather and is generally higher during the winter months.
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30 |
(in millions) | | 2022 | | 2021 | | B (W) |
Natural gas revenues | | $ | 1,124.5 | | | $ | 978.9 | | | $ | 145.6 | |
Cost of natural gas sold | | 536.6 | | | $ | 412.6 | | | (124.0) | |
Total natural gas margins | | 587.9 | | | $ | 566.3 | | | 21.6 | |
| | | | | | |
Other operation and maintenance | | 192.7 | | | 200.1 | | | 7.4 | |
Depreciation and amortization | | 114.2 | | | 106.7 | | | (7.5) | |
Property and revenue taxes | | 20.9 | | | 16.4 | | | (4.5) | |
Operating income | | 260.1 | | | 243.1 | | | 17.0 | |
| | | | | | |
Other income, net | | 8.7 | | | 3.1 | | | 5.6 | |
Interest expense | | 35.7 | | | 33.1 | | | (2.6) | |
Income before income taxes | | 233.1 | | | 213.1 | | | 20.0 | |
| | | | | | |
Income tax expense | | 63.3 | | | 57.4 | | | (5.9) | |
Net income attributed to common shareholders | | $ | 169.8 | | | $ | 155.7 | | | $ | 14.1 | |
The following table shows a breakdown of other operation and maintenance:
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30 |
(in millions) | | 2022 | | 2021 | | B (W) |
Operation and maintenance not included in the line items below | | $ | 123.8 | | | $ | 135.5 | | | $ | 11.7 | |
Riders (1) | | 69.9 | | | 65.8 | | | (4.1) | |
Regulatory amortizations (1) | | (1.0) | | | (1.2) | | | (0.2) | |
| | | | | | |
Total other operation and maintenance | | $ | 192.7 | | | $ | 200.1 | | | $ | 7.4 | |
(1)These riders and regulatory amortizations are substantially offset in margins and therefore do not have a significant impact on net income.
The following tables provide information on delivered sales volumes by customer class and weather statistics:
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30 |
| | Therms (in millions) |
Natural Gas Sales Volumes | | 2022 | | 2021 | | B (W) |
Customer Class | | | | | | |
Residential | | 575.0 | | | 529.6 | | | 45.4 | |
Commercial and industrial | | 225.4 | | | 202.0 | | | 23.4 | |
Total retail | | 800.4 | | | 731.6 | | | 68.8 | |
Transportation | | 492.6 | | | 456.5 | | | 36.1 | |
Total sales in therms | | 1,293.0 | | | 1,188.1 | | | 104.9 | |
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| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30 |
| | Degree Days |
Weather (1) | | 2022 | | 2021 | | B (W) |
Heating (3,819 Normal) | | 3,931 | | | 3,655 | | | 7.6 | % |
(1)Normal heating degree days are based on a 12-year moving average of monthly temperatures from Chicago's O'Hare Airport.
Natural Gas Revenues
Natural gas revenues increased $145.6 million during the six months ended June 30, 2022, compared with the same period in 2021. Because prudently incurred natural gas costs are passed through to our customers in current rates, the changes are offset by comparable changes in revenues. The average per-unit cost of natural gas increased 19% during the six months ended June 30, 2022, compared with the same period in 2021. The remaining drivers of changes in natural gas revenues are described in the discussion of margins below.
Natural Gas Utility Margins
Natural gas utility margins at the Illinois segment, net of the $4.1 million impact of the riders referenced in the table above, increased $17.5 million during the six months ended June 30, 2022, compared with the same period in 2021. The increase in margins was primarily driven by:
•A $12.4 million increase in revenues at PGL due to continued capital investment in the SMP project. PGL recovers the costs related to the SMP through a surcharge on customer bills pursuant to an ICC approved QIP rider, which is in effect through 2023.
•A $7.7 million increase related to the impact of the NSG rate order approved by the ICC, effective September 15, 2021, which includes the Variable Income Tax Adjustment Rider in base rates.
•A $3.3 million increase in the invested capital tax adjustment rider, which did not impact net income as it was offset in property and revenue taxes. The invested capital tax adjustment rider is a mechanism that allows PGL and NSG to recover or refund the difference between the cost of invested capital tax incurred and the amount collected through base rates.
These increases in natural gas utility margins were partially offset by a $5.6 million decrease in fixed charges.
Other Operating Expenses (includes other operation and maintenance, depreciation and amortization, and property and revenue taxes)
Other operating expenses at the Illinois segment increased $0.5 million, net of the $4.1 million impact of the riders referenced in the table above, during the six months ended June 30, 2022, compared with the same period in 2021. The significant factors impacting the increase in operating expenses were:
•An $11.4 million increase in expenses associated with the settlement of legal claims.
•A $10.0 million increase in expenses related to charitable projects supporting our customers and the communities within our service territories.
•An $8.9 million increase in benefit costs, primarily due to higher pension and stock-based compensation costs.
•A $7.5 million increase in depreciation expense, primarily driven by PGL's continued capital investment in the SMP project.
•A $5.1 million increase in natural gas distribution and maintenance costs.
•A $4.7 million increase in costs associated with maintenance at the Manlove Gas Storage Field.
•A $4.5 million increase in property and revenue taxes, primarily driven by an increase in the invested capital tax related to continued capital investment. This increase was offset in natural gas utility margins.
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These increases in operating expenses were offset by a $54.5 million pre-tax gain on the sale of certain real estate in Chicago.
Other Income, Net
Other income, net at the Illinois segment increased $5.6 million during the six months ended June 30, 2022, compared with the same period in 2021, driven by higher net credits from the non-service components of our net periodic pension and OPEB costs.
Interest Expense
Interest expense at the Illinois segment increased $2.6 million during the six months ended June 30, 2022, compared with the same period in 2021, primarily due to $225.0 million of long-term debt issuances in November 2021.
Income Tax Expense
Income tax expense at the Illinois segment increased $5.9 million during the six months ended June 30, 2022, compared with the same period in 2021, driven by an increase in pre-tax income.
Other States Segment Contribution to Net Income Attributed to Common Shareholders
The other states segment's contribution to net income attributed to common shareholders was $34.2 million during the six months ended June 30, 2022, representing a $7.0 million, or 25.7%, increase over the same period in 2021. The increase was driven by higher natural gas margins due to a rate increase at MGU, effective January 1, 2022, and higher sales volumes during the first half of 2022, compared with the same period in 2021. These positive impacts were partially offset by increases in operating expenses, as well as interest expense, as discussed below.
Since the majority of MERC and MGU customers use natural gas for heating, operating income at the other states segment is sensitive to weather and is generally higher during the winter months.
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30 |
(in millions) | | 2022 | | 2021 | | B (W) |
Natural gas revenues | | $ | 340.8 | | | $ | 305.4 | | | $ | 35.4 | |
Cost of natural gas sold | | 212.7 | | | 194.1 | | | (18.6) | |
Total natural gas margins | | 128.1 | | | 111.3 | | | 16.8 | |
| | | | | | |
Other operation and maintenance | | 47.5 | | | 44.4 | | | (3.1) | |
Depreciation and amortization | | 20.2 | | | 18.6 | | | (1.6) | |
Property and revenue taxes | | 9.5 | | | 9.4 | | | (0.1) | |
Operating income | | 50.9 | | | 38.9 | | | 12.0 | |
| | | | | | |
Other income, net | | 1.1 | | | 0.5 | | | 0.6 | |
Interest expense | | 6.5 | | | 3.0 | | | (3.5) | |
Income before income taxes | | 45.5 | | | 36.4 | | | 9.1 | |
| | | | | | |
Income tax expense | | 11.3 | | | 9.2 | | (2.1) | |
Net income attributed to common shareholders | | $ | 34.2 | | | $ | 27.2 | | | $ | 7.0 | |
The following table shows a breakdown of other operation and maintenance:
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| | Six Months Ended June 30 |
(in millions) | | 2022 | | 2021 | | B (W) |
Operation and maintenance not included in line item below | | $ | 36.3 | | | $ | 32.6 | | | $ | (3.7) | |
Regulatory amortizations and other pass through expenses (1) | | 11.2 | | | 11.8 | | | 0.6 | |
| | | | | | |
Total other operation and maintenance | | $ | 47.5 | | | $ | 44.4 | | | $ | (3.1) | |
(1)Regulatory amortizations and other pass through expenses are substantially offset in margins and therefore do not have a significant impact on net income.
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The following tables provide information on sales volumes by customer class and weather statistics:
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| | Six Months Ended June 30 |
| | Therms (in millions) |
Natural Gas Sales Volumes | | 2022 | | 2021 | | B (W) |
Customer Class | | | | | | |
Residential | | 224.6 | | | 192.5 | | | 32.1 | |
Commercial and industrial | | 140.8 | | | 110.8 | | | 30.0 | |
Total retail | | 365.4 | | | 303.3 | | | 62.1 | |
Transportation | | 425.9 | | | 405.0 | | | 20.9 | |
Total sales in therms | | 791.3 | | | 708.3 | | | 83.0 | |
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30 |
| | Degree Days |
Weather (1) | | 2022 | | 2021 | | B (W) |
MERC | | | | | | |
Heating (4,914 Normal) | | 5,424 | | | 4,696 | | | 15.5 | % |
| | | | | | |
MGU | | | | | | |
Heating (3,934 Normal) | | 4,030 | | | 3,824 | | | 5.4 | % |
(1)Normal heating degree days for MERC and MGU are based on a 20-year moving average and 15-year moving average, respectively, of monthly temperatures from various weather stations throughout their respective service territories.
Natural Gas Revenues
Natural gas revenues increased $35.4 million during the six months ended June 30, 2022, compared with the same period in 2021. Because prudently incurred natural gas costs are passed through to our customers in current rates, the changes are offset by comparable changes in revenues. See the discussion of natural gas utility margins below for the remaining drivers of changes in natural gas revenues.
Natural Gas Utility Margins
Natural gas utility margins increased $16.8 million during the six months ended June 30, 2022, compared with the same period in 2021. The increase in margins was primarily driven by:
•An $8.8 million increase related to the new rates at MGU that went into effect in 2022.
•A $6.0 million increase related to higher sales volumes due to both continued economic recovery and colder weather during the six months ended June 30, 2022, as compared to the same period in 2021.
•A $1.5 million increase related to MERC CIP revenue, which was offset in operation and maintenance expense. Rebates and programs are available to residential and commercial customers of MERC through the CIP, which is funded by rate payers using the Conservation Cost Recovery Charge and the Conservation Cost Recovery Adjustment funds that are collected on their monthly billing statements.
Other Operating Expenses (includes other operation and maintenance, depreciation and amortization, and property and revenue taxes)
Other operating expenses at the other states segment increased $4.8 million during the six months ended June 30, 2022, compared with the same period in 2021. The significant factors impacting the increase in operating expenses were:
•A $2.2 million increase in natural gas operations and customer service expense, driven by various operation and maintenance projects approved in MGU's rate case and higher labor and external contracting costs.
•A $1.6 million increase in depreciation and amortization related to continued capital investment.
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•A $1.5 million increase in operation and maintenance expense related to MERC's CIP program, which has an offsetting increase in margins.
These increases in operating expenses were partially offset by a $2.2 million decrease in bad debt expense related to improvement in past due receivables.
Interest Expense
Interest expense at the other states segment increased $3.5 million during the six months ended June 30, 2022, compared with the same period in 2021, primarily due to the deferral of $2.4 million of interest expense during the first six months of 2021, as approved by the MPSC to mitigate the impacts from delaying the filing of its 2021 rate case. This deferred interest expense is now being amortized over a four-year period as a result of MGU's approved rate increase.
Income Tax Expense
Income tax expense at the other states segment increased $2.1 million during the six months ended June 30, 2022, compared with the same period in 2021, driven by an increase in pre-tax income.
Electric Transmission Segment Contribution to Net Income Attributed to Common Shareholders
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| | Six Months Ended June 30 |
(in millions) | | 2022 | | 2021 | | B (W) |
Equity in earnings of transmission affiliates | | $ | 84.7 | | | $ | 83.9 | | | $ | 0.8 | |
| | | | | | |
Interest expense | | 9.7 | | | 9.7 | | | — | |
Income before income taxes | | 75.0 | | | 74.2 | | | 0.8 | |
| | | | | | |
Income tax expense | | 18.2 | | | 19.2 | | | 1.0 | |
Net income attributed to common shareholders | | $ | 56.8 | | | $ | 55.0 | | | $ | 1.8 | |
Non-Utility Energy Infrastructure Segment Contribution to Net Income Attributed to Common Shareholders
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| | Six Months Ended June 30 |
(in millions) | | 2022 | | 2021 | | B (W) |
Operating income | | $ | 196.0 | | | $ | 176.2 | | | $ | 19.8 | |
| | | | | | |
Interest expense | | 34.6 | | | 35.9 | | | 1.3 | |
Income before income taxes | | 161.4 | | | 140.3 | | | 21.1 | |
| | | | | | |
Income tax expense (benefit) | | (12.2) | | | 0.8 | | | 13.0 | |
Net (income) loss attributed to noncontrolling interests | | (1.8) | | | 0.7 | | | (2.5) | |
Net income attributed to common shareholders | | $ | 171.8 | | | $ | 140.2 | | | $ | 31.6 | |
Operating Income
Operating income at the non-utility energy infrastructure segment increased $19.8 million during the six months ended June 30, 2022, compared with the same period in 2021. The increase was primarily due to the recognition of $15.2 million in revenue related to our Upstream wind park in the first quarter of 2022 that was associated with market settlements received from SPP in February 2021. These settlements were subject to a FERC complaint, so we were not able to recognize them as revenue until FERC issued an order denying that complaint in the first quarter of 2022. In addition, there was a $6.1 million positive impact from a sharing arrangement with one of our Blooming Grove customers resulting from strong energy prices.
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Interest Expense
Interest expense at the non-utility energy infrastructure segment decreased $1.3 million during six months ended June 30, 2022, compared with the same period in 2021, primarily due to a lower principal balance as a result of the semi-annual principal payments on long-term debt.
Income Tax Expense (Benefit)
At the non-utility energy infrastructure segment, $12.2 million of income tax benefit was recorded during the six months ended June 30, 2022, compared with $0.8 million of income tax expense recorded during the same period in 2021. The change was primarily due to an $18.5 million increase in PTCs in 2022, driven by the Jayhawk wind park that achieved commercial operation in December 2021, an increase in the PTC rate related to the PTC inflation adjustment issued by the IRS, and higher generation at our other wind parks. This favorable change in the income tax benefit was partially offset by higher pre-tax earnings during the six months ended June 30, 2022.
Corporate and Other Segment Contribution to Net Income Attributed to Common Shareholders
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30 |
(in millions) | | 2022 | | 2021 | | B (W) |
Operating loss | | $ | (6.3) | | | $ | (8.5) | | | $ | 2.2 | |
| | | | | | |
Other income, net | | 3.0 | | | 33.7 | | | (30.7) | |
Interest expense | | 47.2 | | | 48.8 | | | 1.6 | |
| | | | | | |
Loss before income taxes | | (50.5) | | | (23.6) | | | (26.9) | |
| | | | | | |
Income tax benefit | | (34.8) | | | (28.8) | | | 6.0 | |
Net income (loss) attributed to common shareholders | | $ | (15.7) | | | $ | 5.2 | | | $ | (20.9) | |
Operating Loss
The operating loss at the corporate and other segment decreased $2.2 million during the six months ended June 30, 2022, compared with the same period in 2021. The lower operating loss was driven by a decrease in benefit costs related to deferred compensation, which is partially offset by increased losses from the investments held in the Integrys rabbi trust. These investment losses are included in the other income, net line item discussed below.
Other Income, Net
Other income, net at the corporate and other segment decreased $30.7 million during the six months ended June 30, 2022, compared with the same period in 2021. The decrease was driven by a $14.4 million net loss from the investments held in the Integrys rabbi trust during the first half of 2022, compared with a $10.6 million net gain during the same period in 2021. An $8.1 million decrease in earnings from our equity method investments in technology and energy-focused investment funds also contributed to the lower other income, net.
Interest Expense
Interest expense at the corporate and other segment decreased $1.6 million during six months ended June 30, 2022, compared with the same period in 2021, as we refinanced long-term debt obligations during the fourth quarter of 2021 in order to take advantage of lower interest rates. This decrease is partially offset by an increase in short-term debt, driven by higher interest rates, compared with the same period in 2021.
Income Tax Benefit
The income tax benefit at the corporate and other segment increased $6.0 million during the six months ended June 30, 2022, compared with the same period in 2021, driven by a higher pre-tax loss. Also contributing to the increase in the income tax benefit was a $4.4 million increase in excess tax benefits recognized related to stock option exercises and a $1.5 million increase in the
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interim tax benefit recorded to adjust consolidated income tax expense to the projected, annualized consolidated effective income tax rate, during the six months ended June 30, 2022, compared with the same period in 2021. These increases in income tax benefits were partially offset by $8.2 million of uncertain tax positions in the first quarter of 2021.
LIQUIDITY AND CAPITAL RESOURCES
Overview
We expect to maintain adequate liquidity to meet our cash requirements for the operation of our businesses 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 six months ended June 30:
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | 2022 | | 2021 | | Change in 2022 Over 2021 |
Cash provided by (used in): | | | | | | |
Operating activities | | $ | 1,762.6 | | | $ | 1,226.2 | | | $ | 536.4 | |
Investing activities | | (937.5) | | | (1,074.6) | | | 137.1 | |
Financing activities | | (807.7) | | | (124.5) | | | (683.2) | |
Operating Activities
Net cash provided by operating activities increased $536.4 million during the six months ended June 30, 2022, compared with the same period in 2021, driven by:
•A $690.2 million increase in cash from higher overall collections from customers as a result of an increase in sales volumes during the six months ended June 30, 2022, compared with the same period in 2021, driven by colder weather and the continued economic recovery from the COVID-19 pandemic. We also over-collected natural gas costs during the six months ended June 30, 2022, due to these costs being lower than what was anticipated in rates. In addition, we continued to recover on the natural gas costs we under-collected from our Illinois and Minnesota customers related to the extreme weather conditions that occurred in February 2021, in accordance with orders from the ICC and MPUC, respectively. See Note 23, Regulatory Environment, for more information on the recovery of these natural gas costs.
•A $173.6 million increase in cash due to realized gains on derivative instruments as well as higher collateral received from counterparties during the six months ended June 30, 2022, both driven by higher natural gas prices.
These increases in net cash provided by operating activities were partially offset by:
•A $177.5 million decrease in cash from higher payments for fuel and purchased power at our plants during the six months ended June 30, 2022, compared with the same period in 2021. Our plants incurred higher fuel costs during the six months ended June 30, 2022, as a result of an increase in the price of natural gas.
•A $107.3 million decrease in cash from higher payments for other operation and maintenance expenses. During the six months ended June 30, 2022, our payments were higher for storm restoration, benefit costs, natural gas distribution and maintenance costs, and natural gas storage maintenance costs.
•A $35.3 million decrease in cash related to higher payments for environmental remediation from work completed on former manufactured gas plant sites during the six months ended June 30, 2022, compared with the same period in 2021.
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Investing Activities
Net cash used in investing activities decreased $137.1 million during the six months ended June 30, 2022, compared with the same period in 2021, driven by:
•The acquisition of a 90% ownership interest in Jayhawk in February 2021 for $119.7 million. See Note 2, Acquisitions, for more information. There were no acquisitions during the same period in 2022.
•A $44.2 million increase in proceeds from the sale of assets during the six months ended June 30, 2022, compared with the same period in 2021.
•Insurance proceeds of $41.3 million received during the six months ended June 30, 2022 for property damage, primarily related to the PSB water damage claim. See Note 7, Property, Plant, and Equipment, for more information.
These decreases in net cash used in investing activities were partially offset by:
•Capital contributions paid to transmission affiliates of $30.3 million during the six months ended June 30, 2022. See Note 18, Investment in Transmission Affiliates, for more information. There were no payments to transmission affiliates during the same period in 2021.
•An $18.7 million increase in cash paid for capital expenditures during the six months ended June 30, 2022, compared with the same period in 2021, which is discussed in more detail below.
Capital Expenditures
Capital expenditures by segment for the six months ended June 30 were as follows:
| | | | | | | | | | | | | | | | | | | | |
Reportable Segment (in millions) | | 2022 | | 2021 | | Change in 2022 Over 2021 |
Wisconsin | | $ | 716.2 | | | $ | 632.5 | | | $ | 83.7 | |
Illinois | | 232.9 | | | 251.1 | | | (18.2) | |
Other states | | 36.3 | | | 36.0 | | | 0.3 | |
Non-utility energy infrastructure | | 36.8 | | | 84.8 | | | (48.0) | |
Corporate and other | | 6.6 | | | 5.7 | | | 0.9 | |
Total capital expenditures | | $ | 1,028.8 | | | $ | 1,010.1 | | | $ | 18.7 | |
The increase in cash paid for capital expenditures at the Wisconsin segment during the six months ended June 30, 2022, compared with the same period in 2021, was primarily driven by higher payments for capital expenditures related to Paris, the new natural gas-fired generation facility being constructed at the Weston power plant, WG's LNG facility, and renewable energy projects. These increases were partially offset by lower capital expenditures related to the restoration of WE's PSB and upgrades to WE's and WPS's natural gas and electric distribution systems. See Note 7, Property, Plant, and Equipment, for more information on the PSB.
The decrease in cash paid for capital expenditures at the Illinois segment during the six months ended June 30, 2022, compared with the same period in 2021, was primarily driven by lower capital expenditures related to upgrades at the Manlove Gas Storage Field, partially offset by increased capital expenditures for upgrades to PGL's natural gas distribution system.
The decrease in cash paid for capital expenditures at the non-utility energy infrastructure segment during the six months ended June 30, 2022, compared with the same period in 2021, was primarily driven by lower capital expenditures related to the construction of Jayhawk, which went into commercial operation in December 2021. See Note 2, Acquisitions, for more information about Jayhawk.
See Capital Resources and Requirements – Capital Requirements – Significant Capital Projects for more information.
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06/30/2022 Form 10-Q | 71 | WEC Energy Group, Inc. |
Financing Activities
Net cash used in financing activities increased $683.2 million during the six months ended June 30, 2022, compared with the same period in 2021, driven by:
•A $1,018.8 million decrease in cash due to the issuance of long-term debt during the six months ended June 30, 2021. We did not issue any long-term debt during the same period in 2022.
•A $256.9 million decrease in cash due to higher net repayments of commercial paper during the six months ended June 30, 2022, compared with the same period in 2021.
•A $37.1 million decrease in cash due to an increase in common stock purchased during the six months ended June 30, 2022, compared with the same period in 2021, to satisfy requirements of our stock-based compensation plans.
•A $31.5 million decrease in cash due to higher dividends paid on our common stock during the six months ended June 30, 2022, compared with the same period in 2021. In January 2022, our Board of Directors increased our quarterly dividend by $0.05 per share (7.4%) effective with the March 2022 dividend payment.
These increases in net cash used in financing activities were partially offset by:
•A $340.0 million increase in cash due to a repayment of a 364-day term loan during the six months ended June 30, 2021. We did not repay any loans during the same period in 2022.
•A $292.1 million increase in cash due to a decrease in retirements of long-term debt during the six months ended June 30, 2022, compared with the same period in 2021.
•A $19.0 million increase in cash proceeds related to stock options exercised during the six months ended June 30, 2022, compared with the same period in 2021.
Significant Financing Activities
For more information on our financing activities, see Note 9, Short-Term Debt and Lines of Credit.
Cash Requirements
We require funds to support and grow our businesses. 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 shareholders, and the funding of our ongoing operations. See the discussion below and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Cash Requirements in our 2021 Annual Report on Form 10-K for additional information regarding our significant cash requirements.
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Significant Capital Projects
We have several capital projects that will require significant capital expenditures over the next three years and beyond. All projected capital requirements are subject to periodic review and may vary significantly from estimates, depending on a number of factors. These factors include environmental requirements, regulatory restraints and requirements, changes in tax laws and regulations, acquisition and development opportunities, market volatility, economic trends, supply chain disruptions, the COVID-19 pandemic, 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 21, Commitments and Contingencies.
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(in millions) | | 2022 (1) | | 2023 | | 2024 | | | | | |
Wisconsin | | $ | 2,131.7 | | | $ | 2,148.0 | | | $ | 2,114.1 | | | | | | |
Illinois | | 573.1 | | | 586.8 | | | 635.0 | | | | | | |
Other states | | 119.1 | | | 103.6 | | | 106.4 | | | | | | |
Non-utility energy infrastructure | | 870.8 | | | 325.7 | | | 297.5 | | | | | | |
Corporate and other | | 22.0 | | | 17.5 | | | 4.3 | | | | | | |
Total | | $ | 3,716.7 | | | $ | 3,181.6 | | | $ | 3,157.3 | | | | | | |
(1)This includes actual capital expenditures already incurred in 2022, as well as estimated capital expenditures for the remainder of the year.
Our utilities continue to upgrade their 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 are committed to investing in solar, wind, battery storage, and clean natural gas-fired generation. Below are examples of projects that are proposed or currently underway.
•We have received approval to invest in 100 MW of utility-scale solar within our Wisconsin segment. WE has partnered with an unaffiliated utility to construct a solar project, Badger Hollow II, that will be located in Iowa County, Wisconsin. Once constructed, WE will own 100 MW of this project. WE's share of the cost of this project is estimated to be approximately $151 million. Commercial operation of Badger Hollow II is targeted for the first half of 2023.
•WE and WPS, along with an unaffiliated utility, received PSCW approval to acquire and construct Paris, a utility-scale solar-powered electric generating facility with a battery energy storage system. The project will be located in Kenosha County, Wisconsin and once fully constructed, WE and WPS will collectively own 180 MW of solar generation and 99 MW of battery storage of this project. WE's and WPS's combined share of the cost of this project is estimated to be approximately $390 million, with construction of the solar portion expected to be completed in 2023.
•WE and WPS have received approval to accelerate capital investments in two wind parks. The investment is expected to be approximately $154 million to repower major components of Blue Sky Green Field Wind Park and Crane Creek Wind Park, which are expected to be completed by the end of 2022.
•In March 2021, WE and WPS, along with an unaffiliated utility, filed an application with the PSCW for approval to acquire and construct Darien, a utility-scale solar-powered electric generating facility with a battery energy storage system. The project will be located in Rock and Walworth counties, Wisconsin and once fully constructed, WE and WPS will collectively own 225 MW of solar generation and 68 MW of battery storage of this project. If approved, WE's and WPS's combined share of the cost of this project is estimated to be approximately $400 million, with construction of the solar portion expected to be completed in 2024.
•WPS, along with an unaffiliated utility, received PSCW approval to acquire the Red Barn Wind Park, a utility-scale wind-powered electric generating facility. The project will be located in Grant County, Wisconsin and once constructed, WPS will own 82 MW of this project. WPS's share of the cost of this project is estimated to be approximately $160 million, with construction expected to be completed by the end of 2022.
•In April 2021, WE and WPS, along with an unaffiliated utility, filed an application with the PSCW for approval to acquire the Koshkonong Solar-Battery Park, a utility-scale solar-powered electric generating facility with a battery energy storage system. The project will be located in Dane County, Wisconsin and once fully constructed, WE and WPS will collectively own 270 MW of solar
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generation and 149 MW of battery storage of this project. If approved, WE's and WPS's combined share of the cost of this project is estimated to be approximately $585 million, with construction of the solar portion expected to be completed in 2025.
•WE and WPS received PSCW approval to construct 128 MWs of natural gas-fired generation at WPS's existing Weston power plant site in northern Wisconsin. The new facility will consist of seven RICE units. We estimate the cost of this project to be approximately $170 million, with construction expected to be completed in 2023.
•In November 2021, WE and WPS signed an asset purchase agreement to acquire Whitewater, a commercially operational 236.5 MW dual-fueled (natural gas and low sulfur fuel oil) combined-cycle electrical generation facility in Whitewater, Wisconsin. In December 2021, WE and WPS filed an application with the PSCW for approval to acquire Whitewater. If approved, the cost of this facility will be $72.7 million, with the transaction expected to close in early 2023.
•In January 2022, WPS, along with an unaffiliated utility, filed an application with the PSCW for approval to acquire a portion of West Riverside's nameplate capacity. WPS is also requesting approval to assign the option to purchase part of West Riverside to WE. If approved, WPS or WE would acquire 100 MW of capacity, in the first of two potential option exercises. West Riverside is a combined-cycle natural gas plant recently completed by an unaffiliated utility in Rock County, Wisconsin. If approved, our share of the cost of this ownership interest is approximately $91 million, with the transaction expected to close in the second quarter of 2023. In addition, WPS could exercise a second option to acquire an additional 100 MW of capacity.
In March 2022, the DOC opened an investigation into whether new tariffs should be imposed on solar panels and cells imported from multiple southeast Asian countries. See Factors Affecting Results, Liquidity, and Capital Resources – Regulatory, Legislative, and Legal Matters – United States Department of Commerce Complaint and Factors Affecting Results, Liquidity, and Capital Resources – Regulatory, Legislative, and Legal Matters – Uyghur Forced Labor Prevention Act for information on the potential impacts to our solar projects as a result of the DOC investigation and CBP actions related to solar panels, respectively. The expected in-service dates identified above already reflect some of these impacts.
WE and WG have received PSCW approval to each construct its own LNG facility. Each facility would provide approximately one billion cubic feet of natural gas supply to meet anticipated peak demand without requiring the construction of additional interstate pipeline capacity. These facilities are expected to reduce the likelihood of constraints on WE's and WG's natural gas systems during the highest demand days of winter. The total cost of both projects is estimated to be approximately $370 million, with approximately half being invested by each utility. Commercial operation of the WE and WG LNG facilities is targeted for the end of 2023 and 2024, respectively.
PGL is continuing work on the SMP, a project under which PGL is replacing approximately 2,000 miles of Chicago's aging natural gas pipeline infrastructure. PGL currently recovers these costs through a surcharge on customer bills pursuant to an ICC approved QIP rider, which is in effect through 2023. PGL's projected average annual investment through 2024 is between $280 million and $300 million.
The non-utility energy infrastructure line item in the table above includes WECI's planned investments in Thunderhead and Sapphire Sky. See Note 2, Acquisitions, for more information on these wind projects.
We expect to provide total capital contributions to ATC (not included in the above table) of approximately $115 million from 2022 through 2024. We do not expect to make any contributions to ATC Holdco during that period.
Long-Term Debt
There were no material changes in our outstanding long-term debt during the six months ended June 30, 2022.
Common Stock Dividends
Our current quarterly dividend rate is $0.7275 per share, which equates to an annual dividend of $2.91 per share. For information related to our most recent common stock dividend declared, see Note 8, Common Equity.
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Other Significant Cash Requirements
See Note 21, 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 six months ended June 30, 2022.
Off-Balance Sheet Arrangements
We are a party to various financial instruments with off-balance sheet risk as a part of our normal course of business, including financial guarantees and letters of credit that support construction projects, commodity contracts, and other payment obligations. We believe that these agreements do not have, and are not reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. For additional information, see Note 9, Short-Term Debt and Lines of Credit, Note 15, Guarantees, and Note 20, Variable Interest Entities.
Sources of Cash
Liquidity
We anticipate meeting our short-term and long-term cash requirements to operate our businesses and implement our corporate strategy through internal generation of cash from operations and access to the capital markets, which allows us to obtain external short-term borrowings, including commercial paper and term loans, 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.
WEC Energy Group, WE, WPS, WG, and PGL maintain bank back-up credit facilities, which provide liquidity support for each company's 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 in 2022, as well as in subsequent years, will be contingent on investment opportunities and our cash requirements and will depend upon prevailing market conditions, regulatory approvals for certain subsidiaries, and other factors. Our regulated utilities plan to maintain capital structures consistent with those approved by their respective regulators. For more information on our utilities approved capital structures, see Item 1. Business – E. Regulation in our 2021 Annual Report on Form 10-K.
The issuance of securities by our utility companies is subject to the approval of the applicable state commissions or FERC. Additionally, with respect to the public offering of securities, WEC Energy Group, WE, and WPS file registration statements with the SEC under the Securities Act of 1933, as amended (1933 Act). The amounts of securities authorized by the appropriate regulatory authorities, as well as the securities registered under the 1933 Act, are closely monitored and appropriate filings are made to ensure flexibility in the capital markets.
At June 30, 2022, our current liabilities exceeded our current assets by $1,175.3 million. We do not expect this to have an impact on our liquidity as we currently believe that our cash and cash equivalents, our available capacity of $1,470.9 million under existing revolving credit facilities, 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 9, Short-Term Debt and Lines of Credit, for more information about our credit facilities 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
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of Financial Condition and Results of Operations – Liquidity and Capital Resources – Sources of Cash in our 2021 Annual Report on Form 10-K.
Capitalization Structure
The following table shows our capitalization structure as of June 30, 2022, as well as an adjusted capitalization structure that we believe is consistent with how a majority of the rating agencies currently view our 2007 Junior Notes:
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(in millions) | | Actual | | Adjusted |
Common shareholders' equity | | $ | 11,290.6 | | | $ | 11,540.6 | |
Preferred stock of subsidiary | | 30.4 | | | 30.4 | |
Long-term debt (including current portion) | | 13,697.8 | | | 13,447.8 | |
Short-term debt | | 1,629.1 | | | 1,629.1 | |
Total capitalization | | $ | 26,647.9 | | | $ | 26,647.9 | |
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Total debt | | $ | 15,326.9 | | | $ | 15,076.9 | |
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Ratio of debt to total capitalization | | 57.5 | % | | 56.6 | % |
Included in long-term debt on our balance sheet as of June 30, 2022, is $500.0 million principal amount of the 2007 Junior Notes. The adjusted presentation attributes $250.0 million of the 2007 Junior Notes to common shareholders' equity and $250.0 million to long-term debt.
The adjusted presentation of our consolidated capitalization structure is included as a complement to our capitalization structure presented in accordance with GAAP. Management evaluates and manages our capitalization structure, including our total debt to total capitalization ratio, using the GAAP calculation as adjusted to reflect the treatment of the 2007 Junior Notes by the majority of rating agencies. Therefore, we believe the non-GAAP adjusted presentation reflecting this treatment is useful and relevant to investors in understanding how management and the rating agencies evaluate our capitalization structure.
Debt Covenants
Certain of our short-term and long-term debt agreements contain financial covenants that we must satisfy, including debt to capitalization ratios and debt service coverage ratios. At June 30, 2022, we were in compliance with all such covenants related to outstanding short-term and long-term debt. We expect to be in compliance with all such debt covenants for the foreseeable future. See Note 13, Short-Term Debt and Lines of Credit, Note 14, Long-Term Debt, and Note 11, Common Equity, in our 2021 Annual Report on Form 10-K, for more information regarding our debt covenants.
Credit Rating Risk
Cash collateral postings and prepayments made with external parties, including postings related to exchange-traded contracts, and cash collateral posted by external parties were immaterial as of June 30, 2022. From time to time, we may enter into commodity contracts that could require collateral or a termination payment in the event of a credit rating change to below BBB- at S&P Global Ratings, a division of S&P Global Inc., and/or Baa3 at Moody’s Investors Service, Inc. If WE had a sub-investment grade credit rating at June 30, 2022, it could have been required to post $100 million of additional collateral or other assurances pursuant to the 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.
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FACTORS AFFECTING RESULTS, LIQUIDITY, AND CAPITAL RESOURCES
The following is a discussion of certain factors that may affect our results of operations, liquidity, and capital resources. This discussion should be read together with the information in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Factors Affecting Results, Liquidity, and Capital Resources in our 2021 Annual Report on Form 10-K, which provides a more complete discussion of factors affecting us, including market risks and other significant risks, competitive markets, environmental matters, critical accounting policies and estimates, and other matters.
COVID-19 Pandemic
We have taken steps to mitigate the impact of the global COVID-19 pandemic. However, the extent to which the COVID-19 pandemic could continue to impact our results of operations and liquidity is largely dependent upon the ability of our customers to resume or maintain normal operations. Adverse impacts to us and our subsidiaries from a prolonged COVID-19 pandemic environment could include a decrease in revenues, increased bad debt expense, increases in past due accounts receivable balances, and access to the capital markets at unfavorable terms or rates.
We will continue to monitor COVID-19 pandemic-related developments affecting our workforce, customers, and suppliers and will implement additional actions that we determine to be necessary in order to mitigate any additional impacts. We cannot predict the full extent of the impacts of COVID-19, which will depend on, among other things, its duration through new variants, the rate and the effectiveness of both vaccinations and treatments, future regulatory and governmental actions, and the ability to maintain normal business activity.
Regulatory, Legislative, and Legal Matters
Regulatory Recovery
Our utilities account for their regulated operations in accordance with accounting guidance under the Regulated Operations Topic of the FASB Accounting Standard Codification. Regulated entities are allowed to defer certain costs that would otherwise be charged to expense if the regulated entity believes the recovery of those costs is probable. We record regulatory assets pursuant to generic and/or specific orders issued by our regulators. Recovery of the deferred costs in future rates is subject to the review and approval by those regulators. We assume the risks and benefits of ultimate recovery of these items in future rates. If the recovery of the deferred costs, including those referenced below, is not approved by our regulators, the costs would be charged to income in the current period. Regulators can impose liabilities on a prospective basis for amounts previously collected from customers and for amounts that are expected to be refunded to customers. We record these items as regulatory liabilities. As of June 30, 2022, our regulatory assets were $3,278.9 million, and our regulatory liabilities were $4,084.0 million.
In January 2014, the ICC approved PGL's use of the QIP rider as a recovery mechanism for costs incurred related to investments in QIP. This rider is subject to an annual reconciliation whereby costs are reviewed for accuracy and prudency. In March 2022, PGL filed its 2021 reconciliation with the ICC, which, along with the 2020, 2019, 2018, 2017, and 2016 reconciliations, are still pending. As of June 30, 2022, there can be no assurance that all costs incurred under the QIP rider during the open reconciliation years will be deemed recoverable by the ICC.
See Note 23, Regulatory Environment, in this report, and Note 26, Regulatory Environment, in our 2021 Annual Report on Form 10-K for more information regarding recent and pending rate proceedings, orders, and investigations involving our utilities.
Climate and Equitable Jobs Act
On September 15, 2021, the state of Illinois signed into law the Climate and Equitable Jobs Act. This new legislation includes, among other things, a path for Illinois to move towards 100% clean energy, expanded commitments to energy efficiency and renewable energy, additional consumer protections, and expanded ethics reform. The provisions in this legislation with the potential to have the most significant financial impact on PGL and NSG relate to the new consumer protection requirements.
Effective September 15, 2021, the new legislation prohibits utilities from charging customers a fee when they elect to pay for service with a credit card. Utilities are now required to incur these expenses and seek recovery through a rate proceeding or by establishing a recovery mechanism. In December 2021, the ICC approved the use of a TPTFA rider for PGL. The TPTFA rider allows PGL to recover
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the costs incurred for these third-party transaction fees, effective December 27, 2021. NSG recovers costs related to these third-party transaction fees through its base rates, effective September 15, 2021.
In accordance with the new legislation, effective January 1, 2023, natural gas utilities will also no longer be allowed to charge late payment fees to low-income residential customers. We are currently evaluating the impact this legislation may have on our future results of operations.
Uyghur Forced Labor Prevention Act
The CBP issued a WRO in June 2021, applicable to certain silica-based products originating from the Xinjiang Uyghur Autonomous Region of China (Xinjiang), such as polysilicon, included in the manufacturing of solar panels. In June 2022, the WRO was superseded by the implementation of the UFLPA, which was signed into law by President Biden in December 2021. The UFLPA establishes a rebuttable presumption that any imports wholly or partially manufactured in Xinjiang are prohibited from entering the United States. While our suppliers were able to provide the CBP sufficient documentation to meet WRO compliance requirements, and we expect the same will be true for UFLPA purposes, we cannot currently predict what, if any, impact the UFLPA will have on the overall supply of solar panels into the United States and the related timing and cost of solar projects included in our capital plan.
United States Department of Commerce Complaints
In August 2021, a group of anonymous domestic solar manufacturers filed a petition (AD/CVD) with the DOC seeking to impose new tariffs on solar panels and cells imported from several countries, including Malaysia, Vietnam, and Thailand. The petitioners claimed that Chinese solar manufacturers are shifting products to these countries to avoid the tariffs required on products imported from China. In November 2021, the DOC rejected this petition. In denying the petition, the DOC cited the anonymous group’s refusal of the DOC’s request to provide more detail and identify its members due to concerns about retribution from the dominant Chinese solar industry.
In February 2022, a California based company filed a petition (AD/CVD) with the DOC seeking to impose new tariffs on solar panels and cells imported from multiple countries, including Malaysia, Vietnam, Thailand, and Cambodia. While the petition is similar to the one rejected by the DOC in November 2021, there are notable differences. The group added Cambodia to the petition and is requesting that the DOC conduct a country-wide inquiry into each of the four countries. In March 2022, the DOC decided to act on the February petition and investigate the claim. A DOC decision is expected by January 2023. If the DOC determines that the petition has merit, it would be able to apply any final tariffs retroactively to November 4, 2021. If imposed, the new tariffs are expected to further disrupt the supply of solar modules to the United States, and could impact the cost and timing of our solar projects.
In June 2022, the Biden Administration used its executive powers to issue a 24-month tariff moratorium on solar panels manufactured in Cambodia, Malaysia, Thailand, and Vietnam. The moratorium comes as a direct response to concerns raised about the adverse impact from the ongoing DOC complaint on the U.S. solar industry. As the DOC will continue its investigation discussed above, companies may still be subject to tariffs after the moratorium ends; however, U.S. companies will reportedly be exempt from any retroactive tariffs that previously could have applied. The Biden Administration also announced that it will invoke the Defense Production Act to accelerate the production of solar panels in the U.S. The Biden Administration's actions did not address whether WROs applied to panels under previous complaints would be affected.
Infrastructure Investment and Jobs Act
In November 2021, President Biden signed into law the Infrastructure Investment and Jobs Act, which provides for approximately $1.2 trillion of federal spending over the next five years, including approximately $85 billion for investments in power, utilities, and renewables infrastructure across the United States. We expect funding from this Act will support the work we are doing to reduce GHG emissions, increase EV charging, and strengthen and protect the energy grid. Funding in the Act should also help to expand emerging technologies, like hydrogen and carbon management, as we continue the transition to a clean energy future. We believe the Infrastructure Investment and Jobs Act will accelerate investment in projects that will help us meet our net zero emission goals to the benefit of our customers, the communities we serve, and our company.
Return on Equity Incentive for Membership in a Transmission Organization
The FERC currently allows transmission utilities, including ATC, to increase their ROE by 50 basis points as an incentive for membership in a transmission organization, such as MISO. This incentive was established to stimulate infrastructure development
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and to support the evolving electric grid. However, a Notice of Proposed Rulemaking was issued by the FERC on April 15, 2021 proposing to limit the 50 basis point increase in ROE to only be available to transmission utilities initially joining a transmission organization for the first three years of membership. If this proposal becomes a final rule, ATC would be required to submit, within 30 days of the final rule's effective date, a compliance filing eliminating the 50 basis point incentive from its tariff. As a result, this proposal, if adopted, would reduce our future after-tax equity earnings from ATC by approximately $7 million annually. The transmission costs WE and WPS are required to pay ATC after the effective date would also be reduced by this proposal.
American Transmission Company Allowed Return on Equity Complaints
On November 21, 2019, the FERC issued an order (November 2019 Order) related to the methodology used to calculate the base ROE for all MISO transmission owners, including ATC. Based on this order, the FERC expanded its base ROE methodology to include the capital-asset pricing model in addition to the discounted cash flow model to better reflect how investors make their investment decisions. The FERC's modified methodology reduced the base ROE that ATC is allowed to collect on a going-forward basis, as discussed below. In response to the FERC's decision, requests for the FERC to rehear the November 2019 Order in its entirety were filed by various parties.
On May 21, 2020, the FERC issued an order (May 2020 Order) that granted in part and denied in part the requests to rehear the November 2019 Order. In the May 2020 Order, the FERC made additional revisions to its base ROE methodology, including adding the use of the risk premium model. As discussed below, the additional revisions made by the FERC increased ATC's base ROE authorized in the November 2019 Order on a going-forward basis. Various parties filed requests to rehear certain parts of the May 2020 Order with the FERC, but the FERC issued an order in response to the rehearing requests during November 2020 (November 2020 Order) that confirmed the ROE authorized in the May 2020 Order. Petitions for review of the November 2019 Order, relevant parts of the May 2020 Order, and the November 2020 Order have also been filed with the D.C. Circuit Court of Appeals.
First Return on Equity Complaint
In November 2013, a group of MISO industrial customer organizations filed a complaint with the FERC requesting to reduce the base ROE used by MISO transmission owners, including ATC, from 12.2% to 9.15%. In September 2016, the FERC issued an order requiring MISO transmission owners to collect a reduced base ROE of 10.32%. This order also allowed the continued collection of any previously authorized ROE incentive adders. For MISO transmission owners, a 0.5% incentive adder was approved by the FERC in January 2015. The FERC then issued the November 2019 Order after directing MISO transmission owners and other stakeholders to provide briefs and comments on a proposed change to the methodology for calculating base ROE. The November 2019 Order further reduced the base ROE for all MISO transmission owners, including ATC, to 9.88%, effective as of September 28, 2016 and prospectively. The November 2019 Order also continued to allow the collection of previously authorized ROE incentive adders, but ATC's ROE incentive adder of 0.5% only applies to revenues collected after January 6, 2015. In response to the rehearing requests filed related to the November 2019 Order, the FERC issued another order in May 2020. This May 2020 Order increased the base ROE for all MISO transmission owners, including ATC, from the 9.88% authorized in the November 2019 Order to 10.02%, effective as of September 28, 2016 and prospectively. The May 2020 Order also allowed the continued collection of previously authorized ROE incentive adders. However, ATC's 0.5% ROE incentive adder may be eliminated going forward, as discussed above.
ATC was required to provide refunds, with interest, for the 15-month refund period from November 12, 2013 through February 11, 2015 and for the period from September 28, 2016 through November 19, 2020. In January 2022, ATC completed providing WE and WPS with net refunds related to the transmission costs they paid during the two refund periods. These refunds were applied to WE's and WPS's PSCW-approved escrow accounting for transmission expense.
Second Return on Equity Complaint
In February 2015, a second complaint was filed with the FERC requesting a reduction in the base ROE used by MISO transmission owners, including ATC, to 8.67%, with a refund effective date retroactive to February 12, 2015. The FERC also addressed this second complaint in the November 2019 Order. Similar to the first complaint, the November 2019 Order stated that the base ROE of 9.88% and the collection of previously authorized ROE incentive adders, such as ATC's 0.5% adder, were reasonable for the period covered by the second complaint, February 12, 2015 through May 10, 2016. However, in the November 2019 Order, the FERC relied on certain provisions of the Federal Power Act to dismiss the second complaint and to determine that refunds were not allowed for this period. In its May 2020 Order, the FERC stated the new base ROE of 10.02% and the collection of previously authorized ROE incentive adders were reasonable for the period covered by the second complaint. However, the FERC relied on the same provisions of the Federal Power Act to again dismiss the complaint and determine that refunds were not allowed for this period. The FERC also
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denied the requests to rehear both the dismissal of the second complaint and the determination that no refunds are allowed for the second complaint period.
Due to the various outstanding petitions related to the November 2019 Order, May 2020 Order, and November 2020 Order, refunds could still be required for the second complaint period. Therefore, our financials continue to reflect a liability of $39.1 million, reducing our equity earnings from ATC. This liability is based on a 10.52% ROE for the second complaint period. If it is ultimately determined that a refund is required for the second complaint period, we would not expect any such refund to have a material impact on our financial statements or results of operations in the future. In addition, WE and WPS would be entitled to receive a portion of the refund from ATC for the benefit of their customers.
Environmental Matters
See Note 21, 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 businesses and the environments in which those businesses operate. These risks include, but are not limited to, the inflation and supply chain disruptions described below. In addition, there is continuing uncertainty over the impact that the ongoing conflict between Russia and Ukraine will have on the global economy, supply chains, and fuel prices. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Factors Affecting Results, Liquidity, and Capital Resources – Market Risks and Other Significant Risks in our 2021 Annual Report on Form 10-K for a discussion of market and other significant risks applicable to us.
Inflation and Supply Chain Disruptions
We continue to monitor the impact of inflation and supply chain disruptions. We monitor the costs of medical plans, fuel, transmission access, construction costs, regulatory and environmental compliance costs, and other costs in order to minimize inflationary effects in future years, to the extent possible, through pricing strategies, productivity improvements, and cost reductions. We monitor the global supply chain, and related disruptions, in order to ensure we are able to procure the necessary materials and other resources necessary to both maintain our energy services in a safe and reliable manner and to grow our infrastructure in accordance with our capital plan. For additional information concerning risks related to inflation and supply chain disruptions, see the two risk factors below that are disclosed in Part I of our 2021 Annual Report on Form 10-K.
•Item 1A. Risk Factors – Risks Related to the Operation of Our Business – Our operations and corporate strategy may be adversely affected by supply chain disruptions and inflation.
•Item 1A. Risk Factors – Risks Related to Economic and Market Volatility – Fluctuating commodity prices could negatively impact our electric and natural gas utility operations.
For additional information concerning risk factors, including market risks, see the Cautionary Statement Regarding Forward-Looking Information at the beginning of this report.