Company Quick10K Filing
Quick10K
Wisconsin Public Service
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-01-29 Other Events
8-K 2018-11-19 Other Events, Exhibits
NFG National Fuel Gas 4,910
SINA Sina 3,950
AAN Aaron's 3,840
ESE ESCO 1,930
STCN Steel Connect 119
SIF Sifco Industries 16
ALTA Alterola Biotech 0
TTCM Tautachrome 0
ALFA Alfacourse 0
MPAC Micropac Industries 0
WPS 2019-03-31
Part I. Financial Information
Item 1. Financial Statements
Note 1-General Information
Note 2-Acquisition
Note 3-Operating Revenues
Note 4-Regulatory Assets and Liabilities
Note 5-Common Equity
Note 6-Short-Term Debt and Lines of Credit
Note 7-Leases
Note 8-Materials, Supplies, and Inventories
Note 9-Income Taxes
Note 10-Fair Value Measurements
Note 11-Derivative Instruments
Note 12-Guarantees
Note 13-Employee Benefits
Note 14-Goodwill and Other Intangible Assets
Note 15-Segment Information
Note 16-Commitments and Contingencies
Note 17-Supplemental Cash Flow Information
Note 18-Regulatory Environment
Note 19-New Accounting Pronouncements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-31.1 a2019q1wps10qexhibit311.htm
EX-31.2 a2019q1wps10qexhibit312.htm
EX-32.1 a2019q1wps10qexhibit321.htm
EX-32.2 a2019q1wps10qexhibit322.htm

Wisconsin Public Service Earnings 2019-03-31

WPS 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a2019q1wps10q.htm WISCONSIN PUBLIC SERVICE MARCH 31, 2019 FORM 10-Q Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549 

FORM 10-Q

(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ___________________

Commission File Number
 
Registrant; State of Incorporation;
Address; and Telephone Number
 
IRS Employer
Identification No.
1-3016
 
WISCONSIN PUBLIC SERVICE CORPORATION
 
39-0715160
 
 
(A Wisconsin Corporation)
700 North Adams Street
P. O. Box 19001
Green Bay, WI 54307-9001
800-450-7260
 
 

Securities registered pursuant to Section 12(b) of the Act:

None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]    No [ ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes [X]    No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer [ ]
 
Accelerated filer [  ]
 
Non-accelerated filer [X]
 
Smaller reporting company [  ]
 
 
 
Emerging growth company [  ]




If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ]    No [X]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
 
Common Stock, $4 par value,
 
 
23,896,962 shares outstanding at
 
 
March 31, 2019
 

All of the common stock of Wisconsin Public Service Corporation is held by Integrys Holding, Inc., a wholly owned subsidiary of WEC Energy Group, Inc.
 



WISCONSIN PUBLIC SERVICE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended March 31, 2019
TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


03/31/2019 Form 10-Q
i
Wisconsin Public Service Corporation


GLOSSARY OF TERMS AND ABBREVIATIONS

The abbreviations and terms set forth below are used throughout this report and have the meanings assigned to them below:
Subsidiaries and Affiliates
Integrys
 
Integrys Holding, Inc.
WBS
 
WEC Business Services LLC
WEC Energy Group
 
WEC Energy Group, Inc.
WE
 
Wisconsin Electric Power Company
WG
 
Wisconsin Gas LLC
 
 
 
Federal and State Regulatory Agencies
EPA
 
United States Environmental Protection Agency
FERC
 
Federal Energy Regulatory Commission
IRS
 
United States Internal Revenue Service
PSCW
 
Public Service Commission of Wisconsin
SEC
 
United States Securities and Exchange Commission
WDNR
 
Wisconsin Department of Natural Resources
 
 
 
Accounting Terms
AFUDC
 
Allowance for Funds Used During Construction
ASU
 
Accounting Standards Update
FASB
 
Financial Accounting Standards Board
GAAP
 
United States Generally Accepted Accounting Principles
OPEB
 
Other Postretirement Employee Benefits
 
 
 
Environmental Terms
CAA
 
Clean Air Act
CO2
 
Carbon Dioxide
GHG
 
Greenhouse Gas
NOV
 
Notice of Violation
WPDES
 
Wisconsin Pollutant Discharge Elimination System
 
 
 
Measurements
Dth
 
Dekatherm
MW
 
Megawatt
MWh
 
Megawatt-hour
 
 
 
Other Terms and Abbreviations
Exchange Act
 
Securities Exchange Act of 1934, as amended
FTR
 
Financial Transmission Right
MISO
 
Midcontinent Independent System Operator, Inc.
ROE
 
Return on Equity
SMRP
 
System Modernization and Reliability Project
Tax Legislation
 
Tax Cuts and Jobs Act of 2017


03/31/2019 Form 10-Q
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Wisconsin Public Service Corporation


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

In this report, we make statements concerning our expectations, beliefs, plans, objectives, goals, strategies, and future events or performance. These statements are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. Readers are cautioned not to place undue reliance on these forward-looking statements. Forward-looking statements may be identified by reference to a future period or periods or by the use of terms such as "anticipates," "believes," "could," "estimates," "expects," "forecasts," "goals," "guidance," "intends," "may," "objectives," "plans," "possible," "potential," "projects," "seeks," "should," "targets," "will," or variations of these terms.

Forward-looking statements include, among other things, statements concerning management's expectations and projections regarding earnings, completion of capital projects, sales and customer growth, rate actions and related filings with regulatory authorities, environmental and other regulations and associated compliance costs, legal proceedings, effective tax rates, pension and OPEB plans, fuel costs, sources of electric energy supply, coal and natural gas deliveries, remediation costs, environmental matters, liquidity and capital resources, and other matters.

Forward-looking statements are subject to a number of risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in the statements. These risks and uncertainties include those described in risk factors as set forth in this report and our 2018 Annual Report on Form 10-K, and those identified below:

Factors affecting utility operations such as catastrophic weather-related damage, environmental incidents, unplanned facility outages and repairs and maintenance, and electric transmission or natural gas pipeline system constraints;

Factors affecting the demand for electricity and natural gas, including political developments, unusual weather, changes in economic conditions, customer growth and declines, commodity prices, energy conservation efforts, and continued adoption of distributed generation by customers;

The timing, resolution, and impact of rate cases and negotiations, including recovery of deferred and current costs and the ability to earn a reasonable return on investment, and other regulatory decisions impacting our regulated operations;

The ability to obtain and retain customers, including wholesale customers, due to increased competition in our electric and natural gas markets from retail choice and alternative electric suppliers, and continued industry consolidation;

The timely completion of capital projects within budgets, as well as the recovery of the related costs through rates;

The impact of federal, state, and local legislative and/or regulatory changes, including changes in rate-setting policies or procedures, deregulation and restructuring of the electric and/or natural gas utility industries, transmission or distribution system operation, the approval process for new construction, reliability standards, pipeline integrity and safety standards, allocation of energy assistance, energy efficiency mandates, and tax laws that affect our ability to use production tax credits and investment tax credits;

The remaining uncertainty surrounding the Tax Legislation enacted in December 2017, including implementing regulations and IRS interpretations, the amount to be returned to our ratepayers, and its impact, if any, on our credit ratings;

Federal and state legislative and regulatory changes relating to the environment, including climate change and other environmental regulations impacting generation facilities and renewable energy standards, the enforcement of these laws and regulations, changes in the interpretation of regulations or permit conditions by regulatory agencies, and the recovery of associated remediation and compliance costs;

Factors affecting the implementation of WEC Energy Group's generation reshaping plan, including related regulatory decisions, the cost of materials, supplies, and labor, and the feasibility of competing projects;

Increased pressure on WEC Energy Group and us by investors and other stakeholder groups to take more aggressive action to reduce future GHG emissions in order to limit future global temperature increases;

The risks associated with changing commodity prices, particularly natural gas and electricity, and the availability of sources of fossil fuel, natural gas, purchased power, materials needed to operate environmental controls at our electric generating facilities,

03/31/2019 Form 10-Q
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Wisconsin Public Service Corporation


or water supply due to high demand, shortages, transportation problems, nonperformance by electric energy or natural gas suppliers under existing power purchase or natural gas supply contracts, or other developments;

Changes in credit ratings, interest rates, and our ability to access the capital markets, caused by volatility in the global credit markets, our capitalization structure, and market perceptions of the utility industry or us;

Costs and effects of litigation, administrative proceedings, investigations, settlements, claims, and inquiries;

The risk of financial loss, including increases in bad debt expense, associated with the inability of our customers, counterparties, and affiliates to meet their obligations;

Changes in the creditworthiness of the counterparties with whom we have contractual arrangements, including participants in the energy trading markets and fuel suppliers and transporters;

The direct or indirect effect on our business resulting from terrorist attacks and cyber security intrusions, as well as the threat of such incidents, including the failure to maintain the security of personally identifiable information, the associated costs to protect our utility assets, technology systems, and personal information, and the costs to notify affected persons to mitigate their information security concerns and to comply with state notification laws;

The investment performance of our employee benefit plan assets, as well as unanticipated changes in related actuarial assumptions, which could impact future funding requirements;

Factors affecting the employee workforce, including loss of key personnel, internal restructuring, work stoppages, and collective bargaining agreements and negotiations with union employees;

Advances in technology, and related legislation or regulation supporting the use of that technology, that result in competitive disadvantages and create the potential for impairment of existing assets;

Potential business strategies to acquire and dispose of assets or businesses, which cannot be assured to be completed timely, if at all, or within budgets;

The timing and outcome of any audits, disputes, and other proceedings related to taxes;

The ability to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act, while both integrating and continuing to consolidate WEC Energy Group's enterprise systems with those of its other utilities;

The effect of accounting pronouncements issued periodically by standard-setting bodies; and

Other considerations disclosed elsewhere herein and in other reports we file with the SEC or in other publicly disseminated written documents.

We expressly disclaim any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.


03/31/2019 Form 10-Q
2
Wisconsin Public Service Corporation


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WISCONSIN PUBLIC SERVICE CORPORATION

CONDENSED INCOME STATEMENTS (Unaudited)
 
Three Months Ended
 
 
March 31
(in millions)
 
2019
 
2018
Operating revenues
 
$
395.8

 
$
393.6

 
 
 
 
 
Operating expenses
 
 
 
 
Cost of sales
 
180.3

 
175.8

Other operation and maintenance
 
104.4

 
102.7

Depreciation and amortization
 
40.3

 
35.9

Property and revenue taxes
 
10.2

 
10.0

Total operating expenses
 
335.2

 
324.4

 
 
 
 
 
Operating income
 
60.6

 
69.2

 
 
 
 
 
Other income, net
 
9.3

 
9.3

Interest expense
 
16.1

 
12.8

Other expense
 
(6.8
)
 
(3.5
)
 
 
 
 
 
Income before income taxes
 
53.8

 
65.7

Income tax expense
 
12.9

 
15.9

Net income
 
$
40.9

 
$
49.8


The accompanying Notes to Condensed Financial Statements are an integral part of these financial statements.


03/31/2019 Form 10-Q
3
Wisconsin Public Service Corporation


WISCONSIN PUBLIC SERVICE CORPORATION

CONDENSED BALANCE SHEETS (Unaudited)
 
March 31,
 
December 31,
(in millions, except share and per share amounts)
 
2019
 
2018
Assets
 
 

 
 

Current assets
 
 
 
 
Cash and cash equivalents
 
$
2.4

 
$
8.9

Accounts receivable and unbilled revenues, net of reserves of $4.2
 
213.3

 
217.1

Accounts receivable from related parties
 
21.5

 
26.6

Materials, supplies, and inventories
 
74.5

 
103.0

Prepaid taxes
 
31.6

 
41.4

Other
 
5.7

 
9.2

Current assets
 
349.0

 
406.2

 
 
 
 
 
Long-term assets
 
 
 
 
Property, plant, and equipment, net of accumulated depreciation of $1,644.5 and $1,620.5, respectively
 
4,140.7

 
4,150.1

Regulatory assets
 
497.4

 
485.6

Goodwill
 
36.4

 
36.4

Pension and OPEB assets
 
94.4

 
92.8

Other
 
50.7

 
46.6

Long-term assets
 
4,819.6

 
4,811.5

Total assets
 
$
5,168.6

 
$
5,217.7

 
 
 
 
 
Liabilities and Equity
 
 

 
 
Current liabilities
 
 
 
 
Short-term debt
 
$
166.0

 
$
284.4

Accounts payable
 
112.2

 
145.4

Accounts payable to related parties
 
46.2

 
54.2

Accrued interest
 
20.7

 
6.8

Other
 
63.8

 
72.6

Current liabilities
 
408.9

 
563.4

 
 
 
 
 
Long-term liabilities
 
 
 
 
Long-term debt
 
1,315.0

 
1,314.7

Deferred income taxes
 
540.2

 
520.8

Deferred investment tax credits
 
6.3

 
6.4

Regulatory liabilities
 
769.3

 
785.7

Environmental remediation liabilities
 
104.2

 
90.3

Pension and OPEB obligations
 
34.7

 
37.3

Payables to related parties
 
2.7

 
2.8

Other
 
101.5

 
126.4

Long-term liabilities
 
2,873.9

 
2,884.4

 
 
 
 
 
Commitments and contingencies (Note 16)
 


 


 
 
 
 
 
Common shareholder's equity
 
 
 
 
Common stock – $4 par value; 32,000,000 shares authorized; 23,896,962 shares issued and outstanding
 
95.6

 
95.6

Additional paid in capital
 
1,220.9

 
1,115.9

Retained earnings
 
569.3

 
558.4

Common shareholder's equity
 
1,885.8

 
1,769.9

Total liabilities and equity
 
$
5,168.6

 
$
5,217.7


The accompanying Notes to Condensed Financial Statements are an integral part of these financial statements.

03/31/2019 Form 10-Q
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Wisconsin Public Service Corporation


WISCONSIN PUBLIC SERVICE CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
 
Three Months Ended
 
 
March 31
(in millions)
 
2019
 
2018
Operating Activities
 
 

 
 

Net income
 
$
40.9

 
$
49.8

Reconciliation to cash provided by operating activities
 
 

 
 

Depreciation and amortization
 
40.3

 
35.9

Deferred income taxes and investment tax credits, net
 
17.4

 
3.5

Contributions and payments related to pension and OPEB plans
 
(0.2
)
 
(0.2
)
Change in –
 
 

 
 
Accounts receivable and unbilled revenues
 
6.1

 
(15.6
)
Materials, supplies, and inventories
 
28.5

 
7.2

Prepaid taxes
 
9.8

 
21.6

Other current assets
 
2.0

 
2.1

Accounts payable
 
(41.5
)
 
43.6

Amounts refundable to customers
 
8.2

 
12.2

Other current liabilities
 
(2.3
)
 
2.2

Other, net
 
(9.4
)
 
(2.6
)
Net cash provided by operating activities
 
99.8

 
159.7

 
 
 
 
 
Investing Activities
 
 

 
 

Capital expenditures
 
(70.0
)
 
(90.6
)
Proceeds from cash surrender value of life insurance
 
6.6

 

Payments for assets transferred from WBS
 

 
(23.3
)
Other, net
 
0.5

 
(0.4
)
Net cash used in investing activities
 
(62.9
)
 
(114.3
)
 
 
 
 
 
Financing Activities
 
 

 
 

Change in short-term debt
 
(118.4
)
 
(13.7
)
Payment of dividends to parent
 
(30.0
)
 
(30.0
)
Equity contribution from parent
 
105.0

 

Net cash used in financing activities
 
(43.4
)
 
(43.7
)
 
 
 
 
 
Net change in cash and cash equivalents
 
(6.5
)
 
1.7

Cash and cash equivalents at beginning of period
 
8.9

 
7.9

Cash and cash equivalents at end of period
 
$
2.4

 
$
9.6


The accompanying Notes to Condensed Financial Statements are an integral part of these financial statements.


03/31/2019 Form 10-Q
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Wisconsin Public Service Corporation


WISCONSIN PUBLIC SERVICE CORPORATION

CONDENSED STATEMENTS OF EQUITY (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
(in millions)
 
Common Stock
 
Additional Paid In Capital
 
Retained Earnings
 
Total Common Shareholder's Equity
Balance at December 31, 2018
 
$
95.6

 
$
1,115.9

 
$
558.4

 
$
1,769.9

Net income
 

 

 
40.9

 
40.9

Equity contribution from parent
 

 
105.0

 

 
105.0

Payment of dividends to parent
 

 

 
(30.0
)
 
(30.0
)
Balance at March 31, 2019
 
$
95.6

 
$
1,220.9

 
$
569.3

 
$
1,885.8


(in millions)
 
Common Stock
 
Additional Paid In Capital
 
Retained Earnings
 
Total Common Shareholder's Equity
Balance at December 31, 2017
 
$
95.6

 
$
996.1

 
$
525.6

 
$
1,617.3

Net income
 

 

 
49.8

 
49.8

Payment of dividends to parent
 

 

 
(30.0
)
 
(30.0
)
Balance at March 31, 2018
 
$
95.6

 
$
996.1

 
$
545.4

 
$
1,637.1


The accompanying Notes to Condensed Financial Statements are an integral part of these financial statements.


03/31/2019 Form 10-Q
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Wisconsin Public Service Corporation


WISCONSIN PUBLIC SERVICE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
March 31, 2019

NOTE 1—GENERAL INFORMATION

As used in these notes, the term "financial statements" refers to the condensed financial statements. This includes the income statements, balance sheets, statements of cash flows, and statements of equity, unless otherwise noted. In this report, when we refer to "the Company," "us," "we," "our," or "ours," we are referring to Wisconsin Public Service Corporation.

We have prepared the unaudited interim financial statements presented in this Form 10-Q pursuant to the rules and regulations of the SEC and GAAP. Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for annual financial statements. These financial statements should be read in conjunction with the consolidated financial statements and footnotes in our Annual Report on Form 10-K for the year ended December 31, 2018. Financial results for an interim period may not give a true indication of results for the year. In particular, the results of operations for the three months ended March 31, 2019 are not necessarily indicative of expected results for 2019 due to seasonal variations and other factors.

In management's opinion, we have included all adjustments, normal and recurring in nature, necessary for a fair presentation of our financial results.

NOTE 2—ACQUISITION

Acquisition of a Wind Energy Generation Facility in Wisconsin

In April 2018, we, along with two unaffiliated utilities, completed the purchase of Forward Wind Energy Center, which consists of 86 wind turbines located in Wisconsin with a total capacity of 138 MW. The aggregate purchase price was $172.9 million of which our proportionate share was 44.6%, or $77.1 million. In addition, we incurred transaction costs that are recorded to a regulatory asset. Since 2008 and up until the acquisition, we purchased 44.6% of the facility’s energy output under a power purchase agreement.

Under a joint ownership agreement with the two other utilities, we are entitled to our share of generating capability and output of the facility equal to our ownership interest. We are also paying our ownership share of additional capital expenditures and operating expenses. This acquisition was accounted for as an asset acquisition.

NOTE 3—OPERATING REVENUES

For more information about our significant accounting policies related to operating revenues, see Note 1(d), Operating Revenues, in our 2018 Annual Report on Form 10-K.

Disaggregation of Operating Revenues

The following table presents our operating revenues disaggregated by revenue source. We only have revenues associated with our utility segment. We do not have any revenues associated with our other segment. We disaggregate revenues into categories that depict how the nature, amount, timing, and uncertainty of revenues and cash flows are affected by economic factors. For our utility segment, revenues are further disaggregated by electric and natural gas operations and then by customer class. Each customer class within our electric and natural gas operations have different expectations of service, energy and demand requirements, and are impacted by regulatory activities within their jurisdictions.
 
 
Wisconsin Public Service Corporation
 
 
Three Months Ended March 31
(in millions)
 
2019
 
2018
Electric utility
 
$
277.0

 
$
282.1

Natural gas utility
 
117.6

 
110.6

Total revenues from contracts with customers
 
394.6

 
392.7

Other operating revenues
 
1.2

 
0.9

Total operating revenues
 
$
395.8

 
$
393.6



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Wisconsin Public Service Corporation


Revenues from Contracts with Customers

Electric Utility Operating Revenues

The following table disaggregates electric utility operating revenues into customer class:
 
 
Electric Utility Operating Revenues
 
 
Three Months Ended March 31
(in millions)
 
2019
 
2018
Residential
 
$
95.0

 
$
94.2

Small commercial and industrial
 
84.1

 
88.8

Large commercial and industrial
 
51.5

 
51.0

Other
 
2.1

 
2.1

Total retail revenues
 
232.7

 
236.1

Wholesale
 
29.4

 
33.6

Resale
 
9.5

 
10.1

Other utility revenues
 
5.4

 
2.3

Total electric utility operating revenues
 
$
277.0

 
$
282.1


Natural Gas Utility Operating Revenues

The following table disaggregates natural gas utility operating revenues into customer class:
 
 
Natural Gas Utility Operating Revenues
 
 
Three Months Ended March 31
(in millions)
 
2019
 
2018
Residential
 
$
73.7

 
$
70.7

Commercial and industrial
 
46.3

 
44.0

Total retail revenues
 
120.0

 
114.7

Transport
 
5.3

 
8.0

Other utility revenues *
 
(7.7
)
 
(12.1
)
Total natural gas utility operating revenues
 
$
117.6

 
$
110.6


*
Includes amounts refunded to customers for purchased gas adjustment costs.

Other Operating Revenues

Other operating revenues consist primarily of the following:
 
 
Three Months Ended March 31
(in millions)
 
2019
 
2018
Late payment charges
 
$
1.0

 
$
0.9

Alternative revenues
 
0.2

 

Total other operating revenues
 
$
1.2

 
$
0.9

 

03/31/2019 Form 10-Q
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Wisconsin Public Service Corporation


NOTE 4—REGULATORY ASSETS AND LIABILITIES

The following regulatory assets and liabilities were reflected on our balance sheets at March 31, 2019 and December 31, 2018. For more information on our regulatory assets and liabilities, see Note 5, Regulatory Assets and Liabilities, in our 2018 Annual Report on Form 10-K.
(in millions)
 
March 31, 2019
 
December 31, 2018
Regulatory assets
 
 
 
 
Pension and OPEB costs
 
$
186.6

 
$
189.8

Environmental remediation costs
 
122.6

 
108.3

Plant retirements
 
74.5

 
78.1

Income tax related items
 
38.0

 
38.1

Termination of a tolling agreement with Fox Energy Company LLC
 
19.4

 
21.7

Asset retirement obligations
 
17.8

 
11.5

De Pere Energy Center
 
7.6

 
10.1

Other, net
 
30.9

 
28.3

Total regulatory assets
 
$
497.4

 
$
485.9

 
 
 
 
 
Balance sheet presentation
 
 
 
 
Other current assets
 
$

 
$
0.3

Regulatory assets
 
497.4

 
485.6

Total regulatory assets
 
$
497.4

 
$
485.9


(in millions)
 
March 31, 2019
 
December 31, 2018
Regulatory liabilities
 
 
 
 
Income tax related items
 
$
416.5

 
$
418.8

Removal costs
 
231.1

 
241.8

Pension and OPEB costs
 
72.0

 
72.6

Energy costs refundable through rate adjustments
 
22.5

 
14.3

Earnings sharing mechanism
 
21.2

 
21.2

Electric transmission costs
 
8.4

 
9.7

Other, net
 
13.0

 
14.5

Total regulatory liabilities
 
$
784.7

 
$
792.9

 
 
 
 
 
Balance sheet presentation
 
 
 
 
Other current liabilities
 
$
15.4

 
$
7.2

Regulatory liabilities
 
769.3

 
785.7

Total regulatory liabilities
 
$
784.7

 
$
792.9


NOTE 5—COMMON EQUITY

Various financing arrangements and regulatory requirements impose certain restrictions on our ability to transfer funds to the sole holder of our common stock, Integrys, in the form of cash dividends, loans, or advances. In addition, Wisconsin law prohibits us from making loans to or guaranteeing obligations of WEC Energy Group, Integrys, or their subsidiaries. See Note 10, Common Equity, in our 2018 Annual Report on Form 10-K for additional information on these and other restrictions.

We do not believe that these restrictions will materially affect our operations or limit any dividend payments in the foreseeable future.


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Wisconsin Public Service Corporation


NOTE 6—SHORT-TERM DEBT AND LINES OF CREDIT

The following table shows our short-term borrowings and their corresponding weighted-average interest rates:
(in millions, except percentages)
 
March 31, 2019
 
December 31, 2018
Commercial paper
 
 
 
 
Amount outstanding
 
$
166.0

 
$
284.4

Weighted-average interest rate on amounts outstanding
 
2.64
%
 
2.85
%

Our average amount of commercial paper borrowings based on daily outstanding balances during the three months ended March 31, 2019, was $287.6 million with a weighted-average interest rate during the period of 2.74%.

The information in the table below relates to our revolving credit facility used to support our commercial paper borrowing program, including available capacity under this facility:
(in millions)
 
Maturity
 
March 31, 2019
Revolving credit facility
 
October 2022
 
$
400.0

 
 
 
 
 
Less:
 
 
 
 
Letters of credit issued inside credit facility
 
 
 
$
1.3

Commercial paper outstanding
 
 
 
166.0

Available capacity under existing agreement
 
 
 
$
232.7


NOTE 7—LEASES

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which revised the previous guidance (Topic 840) regarding accounting for leases. Revisions include requiring a lessee to recognize a lease asset and a lease liability on its balance sheet for each lease, including operating leases with an initial term greater than 12 months. In addition, required quantitative and qualitative disclosures related to lease agreements were expanded.

As required, we adopted Topic 842 effective January 1, 2019. We utilized the following practical expedients, which were available under ASU 2016-02, in our adoption of the new lease guidance.

We did not reassess whether any expired or existing contracts were leases or contained leases.
We did not reassess the lease classification for any expired or existing leases.
We did not reassess the accounting for initial direct costs for any existing leases.

We did not elect the practical expedient allowing entities to account for the nonlease components in lease contracts as part of the single lease component to which they were related. Instead, in accordance with Accounting Standards Codification 842-10-15-31, our policy is to account for each lease component separately from the nonlease components of the contract.

We did not elect the practical expedient to use hindsight in determining the lease term and in assessing impairment of our right of use assets. No impairment losses were included in the measurement of our right of use assets upon our adoption of Topic 842.

In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842, which is an amendment to ASU 2016-02. Land easements (also commonly referred to as rights of way) represent the right to use, access or cross another entity's land for a specified purpose. This new guidance permits an entity to elect a transitional practical expedient, to be applied consistently, to not evaluate under Topic 842 land easements that were already in existence or had expired at the time of the entity's adoption of Topic 842. Once Topic 842 is adopted, an entity is required to apply Topic 842 prospectively to all new (or modified) land easements to determine whether the arrangement should be accounted for as a lease. We elected this practical expedient, resulting in none of our land easements being treated as leases upon our adoption of Topic 842.

In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which amends ASU 2016-02 and allows entities the option to initially apply Topic 842 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, if required. We used the optional transition method to apply the new guidance as of January 1, 2019, rather than as of the earliest period presented. We documented our technical accounting issues, implemented required changes to internal controls and processes, and identified no significant operating or finance leases as a result of our implementation of the new lease guidance. As a result, the adoption of Topic 842 did not result in us recording any right of use assets or related lease liabilities related to operating leases, and we had no finance leases upon adoption.

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Wisconsin Public Service Corporation



Significant Judgments and Other Information

We are currently party to several easement agreements that allow us access to land we do not own for the purpose of constructing and maintaining certain electric power and natural gas equipment. The majority of payments we make related to easements relate to our wind farms. We have not classified our easements as leases because we view the entire parcel of land specified in our easement agreements to be the identified asset, not just that portion of the parcel that contains our easement. As such, we have concluded that we do not control the use of an identified asset related to our easement agreements, nor do we obtain substantially all of the economic benefits associated with these shared-use assets.

As of May 3, 2019, we have not entered into any material operating leases that have not yet commenced.

NOTE 8—MATERIALS, SUPPLIES, AND INVENTORIES

Our inventory consisted of:
(in millions)
 
March 31, 2019
 
December 31, 2018
Materials and supplies
 
$
52.6

 
$
48.9

Fossil fuel
 
18.5

 
29.2

Natural gas in storage
 
3.4

 
24.9

Total
 
$
74.5

 
$
103.0


Substantially all fossil fuel, materials and supplies, and natural gas in storage inventories are recorded using the weighted-average cost method of accounting.

NOTE 9—INCOME TAXES

The provision for income taxes differs from the amount of income tax determined by applying the applicable United States statutory federal income tax rate to income before income taxes as a result of the following:
 
 
Three Months Ended March 31, 2019
 
Three Months Ended March 31, 2018
(in millions)
 
Amount
 
Effective Tax Rate
 
Amount
 
Effective Tax Rate
Statutory federal income tax
 
$
11.3

 
21.0
 %
 
$
13.8

 
21.0
 %
State income taxes net of federal tax benefit
 
3.4

 
6.2
 %
 
4.1

 
6.2
 %
Federal excess deferred tax amortization
 
(1.3
)
 
(2.4
)%
 
(1.6
)
 
(2.5
)%
Other
 
(0.5
)
 
(0.8
)%
 
(0.4
)
 
(0.5
)%
Total income tax expense
 
$
12.9

 
24.0
 %
 
$
15.9

 
24.2
 %

The effective tax rates of 24.0% and 24.2% for the first quarter of 2019 and 2018, respectively, differ from the United States statutory federal income tax rate of 21%, primarily due to state income taxes, partially offset by the impact of the Tax Legislation.

The Tax Legislation, signed into law in December 2017, required our regulated utilities to remeasure their deferred income taxes and we began to amortize the resulting excess deferred income taxes beginning in 2018 in accordance with normalization requirements (see federal excess deferred tax amortization line above). See Note 18, Regulatory Environment, for more information about the Wisconsin rate settlement.

NOTE 10—FAIR VALUE MEASUREMENTS

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).

Fair value accounting rules provide a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are defined as follows:

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Wisconsin Public Service Corporation



Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 – Pricing inputs are observable, either directly or indirectly, but are not quoted prices included within Level 1. Level 2 includes those financial instruments that are valued using external inputs within models or other valuation methods.

Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methods that result in management's best estimate of fair value. Level 3 instruments include those that may be more structured or otherwise tailored to customers' needs.

Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. We use a mid-market pricing convention (the mid-point between bid and ask prices) as a practical measure for valuing certain derivative assets and liabilities. We primarily use a market approach for recurring fair value measurements and attempt to use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

When possible, we base the valuations of our derivative assets and liabilities on quoted prices for identical assets and liabilities in active markets. These valuations are classified in Level 1. The valuations of certain contracts not classified as Level 1 may be based on quoted market prices received from counterparties and/or observable inputs for similar instruments. Transactions valued using these inputs are classified in Level 2. Certain derivatives are categorized in Level 3 due to the significance of unobservable or internally-developed inputs.

We recognize transfers between levels of the fair value hierarchy at their value as of the end of the reporting period.

The following tables summarize our financial assets and liabilities that were accounted for at fair value on a recurring basis, categorized by level within the fair value hierarchy:
 
 
March 31, 2019
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Derivative assets
 
 

 
 

 
 

 
 

Natural gas contracts
 
$
0.9

 
$

 
$

 
$
0.9

FTRs
 

 

 
1.1

 
1.1

Coal contracts
 

 
0.7

 

 
0.7

Total derivative assets
 
$
0.9

 
$
0.7

 
$
1.1

 
$
2.7

 
 
 
 
 
 
 
 
 
Derivative liabilities
 
 

 
 

 
 

 
 

Natural gas contracts
 
$
0.2

 
$

 
$

 
$
0.2


 
 
December 31, 2018
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Derivative assets
 
 
 
 
 
 
 
 
Natural gas contracts
 
$
0.8

 
$

 
$

 
$
0.8

FTRs
 

 

 
3.0

 
3.0

Coal contracts
 

 
0.4

 

 
0.4

Total derivative assets
 
$
0.8

 
$
0.4

 
$
3.0

 
$
4.2

 
 
 
 
 
 
 
 
 
Derivative liabilities
 
 
 
 
 
 
 
 
Natural gas contracts
 
$
1.1

 
$

 
$

 
$
1.1


The derivative assets and liabilities listed in the tables above include options, futures, physical commodity contracts, and other instruments used to manage market risks related to changes in commodity prices. They also include FTRs, which are used to manage electric transmission congestion costs in the MISO Energy and Operating Reserves Markets.

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Wisconsin Public Service Corporation



The following table summarizes the changes to derivatives classified as Level 3 in the fair value hierarchy:
 
 
Three Months Ended March 31
 
(in millions)
 
2019
 
2018
 
Balance at the beginning of period
 
$
3.0

 
$
2.0

 
Settlements
 
(1.9
)
 
(1.3
)
 
Balance at the end of period
 
$
1.1

 
$
0.7

 

Fair Value of Financial Instruments

The following table shows the financial instruments included on our balance sheets that were not recorded at fair value:
 
 
March 31, 2019
 
December 31, 2018
(in millions)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Long-term debt
 
$
1,315.0

 
$
1,417.7

 
$
1,314.7

 
$
1,372.9


The fair value of long-term debt is categorized within Level 2 of the fair value hierarchy.

NOTE 11—DERIVATIVE INSTRUMENTS

We use derivatives as part of our risk management program to manage the risks associated with the price volatility of purchased power, generation, and natural gas costs for the benefit of our customers. Our approach is non-speculative and designed to mitigate risk. Our regulated hedging programs are approved by the PSCW.

We record derivative instruments on our balance sheets as an asset or liability measured at fair value unless they qualify for the normal purchases and sales exception, and are so designated. We continually assess our contracts designated as normal and will discontinue the treatment of these contracts as normal if the required criteria are no longer met. Changes in the derivative's fair value are recognized currently in earnings unless specific hedge accounting criteria are met or we receive regulatory treatment for the derivative. For most energy-related physical and financial contracts in our regulated operations that qualify as derivatives, the PSCW allows the effects of fair value accounting to be offset to regulatory assets and liabilities.

The following table shows our derivative assets and derivative liabilities, none of which are designated as hedging instruments.
 
 
March 31, 2019
 
December 31, 2018
(in millions)
 
Derivative Assets
 
Derivative Liabilities
 
Derivative Assets
 
Derivative Liabilities
Other current
 
 
 
 
 
 
 
 
Natural gas contracts
 
$
0.8

 
$
0.2

 
$
0.8

 
$
1.0

FTRs
 
1.1

 

 
3.0

 

Coal contracts
 
0.5

 

 
0.2

 

Total other current *
 
$
2.4

 
$
0.2

 
$
4.0

 
$
1.0

 
 
 
 
 
 
 
 
 
Other long-term
 
 
 
 
 
 
 
 
Natural gas contracts
 
$
0.1

 
$

 
$

 
$
0.1

Coal contracts
 
0.2

 

 
0.2

 

Total other long-term *
 
$
0.3

 
$

 
$
0.2

 
$
0.1

Total
 
$
2.7

 
$
0.2

 
$
4.2

 
$
1.1


*
On our balance sheets, we classify derivative assets and liabilities as other current or other long-term based on the maturities of the underlying contracts.


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Wisconsin Public Service Corporation


Realized gains (losses) on derivatives are primarily recorded in cost of sales on the income statements. Our estimated notional sales volumes and realized gains (losses) were as follows:
 
 
Three Months Ended March 31, 2019
 
Three Months Ended March 31, 2018
(in millions)
 
Volumes
 
Gains (Losses)
 
Volumes
 
Gains (Losses)
Natural gas contracts
 
12.1 Dth
 
$
(0.5
)
 
13.0 Dth
 
$
(1.7
)
Petroleum products contracts
 
— gallons
 

 
0.7 gallons
 
0.1

FTRs
 
2.6 MWh
 
0.7

 
2.4 MWh
 
2.9

Total
 
 
 
$
0.2

 
 
 
$
1.3


On our balance sheets, the amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral are not offset against the fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement. At both March 31, 2019 and December 31, 2018, we had posted cash collateral of $0.5 million in our margin accounts. These amounts were recorded on our balance sheets in other current assets.

The following table shows derivative assets and derivative liabilities if derivative instruments by counterparty were presented net on our balance sheets:
 
 
March 31, 2019
 
December 31, 2018
 
(in millions)
 
Derivative Assets
 
Derivative Liabilities
 
Derivative Assets
 
Derivative Liabilities
 
Gross amount recognized on the balance sheet
 
$
2.7

 
$
0.2

 
$
4.2

 
$
1.1

 
Gross amount not offset on the balance sheet
 
(0.2
)
 
(0.2
)
 
(0.8
)
 
(1.1
)
*
Net amount
 
$
2.5

 
$

 
$
3.4

 
$

 

*
Includes cash collateral posted of $0.3 million.
 
NOTE 12—GUARANTEES

As of March 31, 2019, we had $20.6 million of standby letters of credit issued by financial institutions for the benefit of third parties that extended credit to us which automatically renew each year unless proper termination notice is given. These amounts are not reflected on our balance sheets.

NOTE 13—EMPLOYEE BENEFITS

The following tables show the components of net periodic pension and OPEB costs for our benefit plans:
 
 
Pension Costs
 
 
Three Months Ended March 31
(in millions)
 
2019
 
2018
Service cost
 
$
2.3

 
$
2.6

Interest cost
 
7.1

 
6.5

Expected return on plan assets
 
(12.0
)
 
(12.2
)
Amortization of net actuarial loss
 
4.4

 
5.0

Net periodic benefit cost
 
$
1.8

 
$
1.9


 
 
OPEB Costs
 
 
Three Months Ended March 31
(in millions)
 
2019
 
2018
Service cost
 
$
1.1

 
$
1.6

Interest cost
 
1.6

 
2.0

Expected return on plan assets
 
(4.1
)
 
(4.4
)
Amortization of prior service credit
 
(2.9
)
 
(2.8
)
Amortization of net actuarial loss
 
0.4

 
0.6

Net periodic benefit credit
 
$
(3.9
)
 
$
(3.0
)


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Wisconsin Public Service Corporation


During the three months ended March 31, 2019, we made contributions and payments of $0.2 million related to our pension plans. We did not contribute to our OPEB plans. We expect to make contributions and payments of $0.5 million related to our pension plans and an insignificant amount related to our OPEB plans during the remainder of 2019, dependent upon various factors affecting us, including our liquidity position and the effects of the new Tax Legislation.

NOTE 14—GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill represents the excess of the cost of an acquisition over the fair value of the identifiable net assets acquired. We had no changes to the carrying amount of goodwill during the three months ended March 31, 2019.

The identifiable intangible assets other than goodwill listed below are classified as other long-term assets on our balance sheets.
 
 
March 31, 2019
 
December 31, 2018
(in millions)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Amortized intangible assets *
 
$
8.3

 
$
(7.1
)
 
$
1.2

 
$
8.3

 
$
(6.8
)
 
$
1.5

Unamortized intangible assets
 
0.4

 

 
0.4

 
0.4

 

 
0.4

Total intangible assets
 
$
8.7

 
$
(7.1
)
 
$
1.6

 
$
8.7

 
$
(6.8
)
 
$
1.9


*
Represents a contractual service agreement that provides for major maintenance and protection against unforeseen maintenance costs related to the combustion turbine generators at the Fox Energy Center. The remaining amortization period at March 31, 2019 was approximately one year.

NOTE 15—SEGMENT INFORMATION

We use operating income to measure segment profitability and to allocate resources to our businesses. At March 31, 2019, we reported two segments, which are described below.

Our utility segment includes our electric and natural gas utility operations, which serve customers in northeastern and central Wisconsin. Our electric utility operations are engaged in the generation, distribution, and sale of electricity. Our natural gas utility operations are engaged in the purchase, distribution, and sale of natural gas to retail customers as well as the transportation of customer-owned natural gas.

Our other segment includes non-utility activities, as well as equity earnings from our investment in Wisconsin River Power Company.

The following tables show summarized financial information for the three months ended March 31, 2019 and 2018, related to our reportable segments:
(in millions)
 
Utility
 
Other
 
Wisconsin Public Service Corporation
Three Months Ended March 31, 2019
 
 
 
 
 
 
Operating revenues
 
$
395.8

 
$

 
$
395.8

Other operation and maintenance
 
104.2

 
0.2

 
104.4

Depreciation and amortization
 
40.3

 

 
40.3

Operating income (loss)
 
60.8

 
(0.2
)
 
60.6

Other income, net
 
8.8

 
0.5

 
9.3

Interest expense
 
16.1

 

 
16.1


(in millions)
 
Utility
 
Other
 
Wisconsin Public Service Corporation
Three Months Ended March 31, 2018
 
 

 
 

 
 

Operating revenues
 
$
393.6

 
$

 
$
393.6

Other operation and maintenance
 
102.7

 

 
102.7

Depreciation and amortization
 
35.9

 

 
35.9

Operating income (loss)
 
69.3

 
(0.1
)
 
69.2

Other income, net
 
8.9

 
0.4

 
9.3

Interest expense
 
12.8

 

 
12.8


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Wisconsin Public Service Corporation



NOTE 16—COMMITMENTS AND CONTINGENCIES

We have significant commitments and contingencies arising from our operations, including those related to unconditional purchase obligations, environmental matters, and enforcement and litigation matters.

Unconditional Purchase Obligations

We have obligations to distribute and sell electricity and natural gas to our customers and expect to recover costs related to these obligations in future customer rates. In order to meet these obligations, we routinely enter into long-term purchase and sale commitments for various quantities and lengths of time. Our minimum future commitments related to these purchase obligations as of March 31, 2019, were $1,137.2 million.

Environmental Matters

Consistent with other companies in the energy industry, we face significant ongoing environmental compliance and remediation obligations related to current and past operations. Specific environmental issues affecting us include, but are not limited to, current and future regulation of air emissions such as sulfur dioxide, nitrogen oxide, fine particulates, mercury, and GHGs; water intake and discharges; disposal of coal combustion products such as fly ash; and remediation of impacted properties, including former manufactured gas plant sites.

Air Quality

National Ambient Air Quality Standards

After completing its review of the 2008 ozone standard, the EPA released a final rule in October 2015, which lowered the limit for ground-level ozone, creating a more stringent standard than the 2008 National Ambient Air Quality Standards. The EPA issued final nonattainment area designations on May 1, 2018. The following counties within our service territory were designated as partial nonattainment: Door, Manitowoc, and Sheboygan shorelines. The state of Wisconsin will need to develop a state implementation plan to bring these areas back into attainment. We will be required to comply with this state implementation plan no earlier than 2020. We believe we are well positioned to meet the requirements associated with the ozone standard and do not expect to incur significant costs to comply.

Mercury and Air Toxics Standards

In December 2018, the EPA proposed to revise the Supplemental Cost Finding for the mercury and air toxics standards (MATS) rule as well as the CAA required risk and technology review (RTR). The EPA was required by the United States Supreme Court to review both costs and benefits of complying with the MATS rule. After its review of costs, the EPA determined that it is not appropriate and necessary to regulate hazardous air pollutant emissions from power plants under Section 112 of the CAA. As a result, under the proposed rule, the emission standards and other requirements of the MATS rule first enacted in 2012 would remain in place. The EPA is not proposing to remove coal-and oil-fired power plants from the list of sources that are regulated under Section 112. The EPA also proposes that no revisions to MATS are warranted based on the results of the RTR. As a result, we do not expect the proposed rule to have a material impact on our financial condition or operations.

Climate Change

In August 2018, the EPA issued a proposed replacement rule for the Clean Power Plan, the Affordable Clean Energy (ACE) rule. The proposed ACE rule would require the EPA to develop emission guidelines for states to use to develop their individual state plans. The state plans would focus on reducing GHG emissions by improving the efficiency of fossil-fueled power plants.

In December 2018, the EPA proposed to revise the New Source Performance Standards for GHG emissions from new, modified, and reconstructed fossil-fueled power plants. The EPA determined that the best system of emission reduction (BSER) for new, modified, and reconstructed coal units is highly efficient generation that would be equivalent to supercritical steam conditions for larger units and subcritical steam conditions for smaller units. This proposed BSER would replace the determination from the previous rule, which identified BSER as partial carbon capture and storage.


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Wisconsin Public Service Corporation


In April 2019, WEC Energy Group issued a climate report, which analyzes its GHG reduction goals with respect to international efforts to limit future global temperature increases to less than two degrees Celsius. WEC Energy Group will continue to update this analysis as climate-change policies and relevant technologies evolve over time with a focus on preserving fuel diversity, lowering costs for customers, and reducing long-term GHG emissions.

WEC Energy Group's plan, which includes us, is to work with its industry peers, environmental groups, public policy makers, and customers, with goals of reducing CO2 emissions by approximately 40% and 80% below 2005 levels by 2030 and 2050, respectively. As a result of WEC Energy Group's generation reshaping plan, we have retired approximately 300 MW of coal generation in 2018, consisting of the Pulliam power plant and the jointly-owned Edgewater Unit 4 generation units.

We are required to report our CO2 equivalent emissions from our electric generating facilities under the EPA Greenhouse Gases Reporting Program. For 2018, we reported CO2 equivalent emissions of 6.4 million metric tonnes to the EPA.

We are also required to report CO2 equivalent emissions related to the natural gas that our natural gas operations distribute and sell. For 2018, we reported CO2 equivalent emissions of 3.6 million metric tonnes to the EPA.

Water Quality

Clean Water Act Cooling Water Intake Structure Rule

In August 2014, the EPA issued a final regulation under Section 316(b) of the Clean Water Act that requires the location, design, construction, and capacity of cooling water intake structures at existing power plants to reflect the Best Technology Available (BTA) for minimizing adverse environmental impacts. The rule became effective in October 2014 and applies to all of our existing generating facilities with cooling water intake structures.

The rule requires state permitting agencies to make BTA determinations, subject to EPA oversight, over the next several years as facility permits are reissued. Based on our assessment, we believe that existing technologies at our operating facilities, except for Weston Unit 2, satisfy the BTA requirements. Based on the March 2018 reissued WPDES permit for Weston, the WDNR will not require physical modifications to the Weston Unit 2 intake structure to meet the BTA requirements based on low capacity use of the unit.
 
The WDNR made an interim BTA determination as part of the March 2018 reissued WPDES permit for Weston Units 3 and 4. We expect that the WDNR will conclude in the next permit reissuance that the existing cooling tower systems for Weston Units 3 and 4 are BTA.

As a result of past capital investments completed to address 316(b) compliance, we believe our fleet overall is well positioned to meet the new regulation and do not expect to incur significant costs to comply with this regulation.

Steam Electric Effluent Limitation Guidelines

The EPA's final steam electric effluent limitation guidelines (ELG) rule took effect in January 2016. This rule created new requirements for several types of power plant wastewaters. The requirement that affects us relates to discharge limits for bottom ash transport water (BATW).

This rule is being litigated and various petitions challenging it were consolidated in the United States Court of Appeals for the Fifth Circuit (Fifth Circuit). In April 2017, the EPA issued an administrative stay of certain compliance deadlines while further reviewing the rule. In September 2017, the EPA issued a final rule (Postponement Rule) to postpone the earliest compliance date to November 1, 2020 for the BATW. The latest ELG rule compliance date remains December 31, 2023 for any new wastewater treatment requirements contained in power plant discharge permits.

As a result of past capital investments completed to address ELG compliance, we believe our fleet overall is well positioned to meet the regulations. Our power plant facilities already have advanced wastewater treatment technologies installed that meet many of the discharge limits established by this rule. However, as currently constructed, the ELG rule will require additional wastewater treatment retrofits as well as installation of other equipment to minimize process water use. Due to completed generating unit retirements, we believe the only facility that will require bottom ash system modifications is Weston Unit 3. Based on preliminary engineering, the estimated rule compliance cost is approximately $20 million.

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Wisconsin Public Service Corporation



The Fifth Circuit issued a ruling in April 2019, striking down several portions of the ELG rule. The Fifth Circuit held that the legacy wastewater and combustion residual leachate provisions in the rule failed to meet the requirements of the Clean Water Act and the Administrative Procedure Act.

Land Quality

Manufactured Gas Plant Remediation

We have identified sites at which we or a predecessor company owned or operated a manufactured gas plant or stored manufactured gas. We have also identified other sites that may have been impacted by historical manufactured gas plant activities. We are responsible for the environmental remediation of these sites, some of which are in the EPA Superfund Alternative Approach Program. We are also working with various state jurisdictions in our investigation and remediation planning. These sites are at various stages of investigation, monitoring, remediation, and closure.

In addition, we are coordinating the investigation and cleanup of some of these sites subject to the jurisdiction of the EPA under what is called a "multisite" program. This program involves prioritizing the work to be done at the sites, preparation and approval of documents common to all of the sites, and use of a consistent approach in selecting remedies. At this time, we cannot estimate future remediation costs associated with these sites beyond those described below.

The future costs for detailed site investigation, future remediation, and monitoring are dependent upon several variables including, among other things, the extent of remediation, changes in technology, and changes in regulation. Historically, our regulators have allowed us to recover incurred costs, net of insurance recoveries and recoveries from potentially responsible parties, associated with the remediation of manufactured gas plant sites. Accordingly, we have established regulatory assets for costs associated with these sites.

We have established the following regulatory assets and reserves related to manufactured gas plant sites:
(in millions)
 
March 31, 2019
 
December 31, 2018
Regulatory assets
 
$
122.6

 
$
108.3

Reserves for future remediation
 
104.2

 
90.3


Consent Decrees

Weston and Pulliam Power Plants Consent Decree

In November 2009, the EPA issued an NOV to us, which alleged violations of the CAA's New Source Review requirements relating to certain projects completed at the Weston and Pulliam power plants from 1994 to 2009. We entered into a Consent Decree with the EPA resolving this NOV. This Consent Decree was entered by the United States District Court for the Eastern District of Wisconsin in March 2013. We retired Pulliam Units 7 and 8 on October 21, 2018. We completed the mitigation projects required and received a completeness letter from the EPA in October 2018. We plan to start the process to terminate the Consent Decree in 2019.

Joint Ownership Power Plants Consent Decree – Columbia and Edgewater

In December 2009, the EPA issued an NOV to Wisconsin Power and Light, the operator of the Columbia and Edgewater plants, and the other joint owners of these plants, including Madison Gas and Electric, WE (former co-owner of an Edgewater unit), and us. The NOV alleged violations of the CAA's New Source Review requirements related to certain projects completed at those plants. We, along with Wisconsin Power and Light, Madison Gas and Electric, and WE, entered into a Consent Decree with the EPA resolving this NOV. This Consent Decree was entered by the United States District Court for the Western District of Wisconsin in June 2013. As a result of the continued implementation of the Consent Decree related to the jointly owned Columbia and Edgewater plants, the Edgewater 4 generating unit was retired on September 28, 2018.


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Enforcement and Litigation Matters

We are involved in legal and administrative proceedings before various courts and agencies with respect to matters arising in the ordinary course of business. Although we are unable to predict the outcome of these matters, management believes that appropriate reserves have been established and that final settlement of these actions will not have a material effect on our financial condition or results of operations.

NOTE 17—SUPPLEMENTAL CASH FLOW INFORMATION
 
 
Three Months Ended March 31
(in millions)
 
2019
 
2018
Cash (paid) for interest, net of amount capitalized
 
$
(1.9
)
 
$
(1.2
)
Significant non-cash transactions:
 
 
 
 
Accounts payable related to construction costs
 
4.7

 
8.1


NOTE 18—REGULATORY ENVIRONMENT

2020 and 2021 Rates

In March 2019, we filed an application with the PSCW to increase our retail electric and natural gas rates, effective January 1, 2020. Our proposal is targeting an effective electric rate increase of approximately $49 million (4.9%) in 2020 and an additional increase of $49 million (4.9%) in 2021. For our natural gas customers, the proposal is targeting an effective rate increase of approximately $7 million (2.4%) in 2020 and an additional increase of $7 million (2.4%) in 2021. Our proposal reflects a ROE of 10.35% and a common equity component average of 52.0% on a financial basis. We also proposed to continue having an earnings sharing mechanism through 2021.

The proposed increases in our electric rates were driven by the inclusion of our SMRP, the Forward Wind Energy Center, and our investments in two solar projects in rates, along with continued investments in system reliability and the recovery of various regulatory deferrals, including the deferral of the revenue requirement for ReACT™ costs above a previously authorized level. Our proposed electric rates reflect our request to use $40 million of previously deferred tax benefits from the Tax Legislation to partially offset these increases. Our proposal also includes our request for approval to continue collecting the carrying value of Pulliam units 7 and 8 and the Edgewater 4 generating unit using the current approved composite depreciation rates, in addition to a return on the remaining carrying value of the units.

The proposed increases at our natural gas utility were driven by continued investment in our natural gas distribution system. Our proposed 2020 natural gas rate increase is net of approximately $7 million of previously deferred tax benefits from the Tax Legislation.

A final order is expected from the PSCW by the end of 2019, with rates effective January 1, 2020.

2018 and 2019 Rates

During April 2017, we, along with WE and WG, filed an application with the PSCW for approval of a settlement agreement we made with several of our commercial and industrial customers regarding 2018 and 2019 base rates. In September 2017, the PSCW issued an order that approved the settlement agreement, which freezes base rates through 2019 for our electric and natural gas customers. Based on the PSCW order, our authorized ROE remains at 10.0%, and our current capital cost structure will remain unchanged through 2019.

In addition to freezing base rates, the settlement agreement extends and expands the electric real-time market pricing program options for large commercial and industrial customers. Additionally, the agreement allows us to extend, through 2019, the deferral for the revenue requirement of ReACT™ costs above the authorized $275.0 million level, and other deferrals related to our electric real-time market pricing program and network transmission expenses. The total cost of the ReACT™ project, excluding $51 million of AFUDC, was $342 million.

Pursuant to the settlement agreement, we also agreed to adopt, beginning in 2018, the earnings sharing mechanism that has been in place for WE and WG since January 2016, and agreed to keep the mechanism in place through 2019. Under this earnings sharing

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mechanism, if we earn above our authorized ROE, 50% of the first 50 basis points of additional utility earnings must be shared with customers. All utility earnings above the first 50 basis points must also be shared with customers.

Solar Generation Projects

On May 31, 2018, we, along with an unaffiliated utility, filed an application with the PSCW for approval to acquire ownership interests in two solar projects in Wisconsin. Badger Hollow Solar Farm will be located in Iowa County, Wisconsin, and Two Creeks Solar Project will be located in Manitowoc County, Wisconsin. We will own 100 MW of the output of each project for a total of 200 MW. Our share of the cost of both projects is estimated to be $260 million. The PSCW approved the acquisition of these two projects in April 2019.

NOTE 19—NEW ACCOUNTING PRONOUNCEMENTS

Financial Instruments Credit Losses

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This ASU introduces a new impairment model known as the current expected credit loss model. The ASU requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected. Previously, recognition of the full amount of credit losses was generally delayed until the loss was probable of occurring. We are currently assessing the effects this guidance may have on our financial statements.

Cloud Computing

In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The standard allows entities who are customers in hosting arrangements that are service contracts to apply the existing internal-use software guidance to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The guidance specifies classification for capitalizing implementation costs and related amortization expense within the financial statements and requires additional disclosures. The guidance will be effective for annual reporting periods, including interim reporting within those periods, beginning after December 15, 2019. Early adoption is permitted and can be applied either retrospectively or prospectively. We are currently evaluating the transition methods and the impact the adoption of this standard may have on our financial statements.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CORPORATE DEVELOPMENTS

The following discussion should be read in conjunction with the accompanying financial statements and related notes and our 2018 Annual Report on Form 10-K.

Introduction

We are an electric and natural gas utility and an indirect wholly owned subsidiary of WEC Energy Group. We derive revenues primarily from the distribution and sale of electricity and natural gas to retail customers in northeastern Wisconsin. We also provide wholesale electric service to numerous utilities and cooperatives for resale. We conduct our business primarily through our utility reportable segment. See Note 15, Segment Information, for more information on our reportable business segments.

Corporate Strategy

Our goal is to continue to build and sustain long-term value for customers and shareholders by focusing on the fundamentals of our business: reliability; operating efficiency; financial discipline; customer care; and safety.

Reshaping Our Generation Fleet

WEC Energy Group has developed and is executing a plan to reshape its generation portfolio. This plan will balance reliability and customer cost with environmental stewardship. Taken as a whole, this plan should reduce costs to customers, preserve fuel diversity, and lower carbon emissions. Generation reshaping includes retiring older fossil fuel generation units, building state-of-the-art natural gas generation, and investing in cost-effective zero-carbon generation with a goal of reducing CO2 emissions by approximately 40% below 2005 levels by 2030 and by approximately 80% below 2005 levels by 2050. WEC Energy Group has retired approximately 1,800 MW of coal generation since the beginning of 2018 across its electric utilities, and expects to add additional natural gas-fired generating units and renewable generation, including utility-scale solar projects. We retired the Edgewater 4 generating unit in September 2018, and the Pulliam power plant in October 2018.

As part of its commitment to invest in zero-carbon generation, WEC Energy Group plans to invest in utility scale solar of up to 350 MW within its Wisconsin segment, which includes us. We have partnered with an unaffiliated utility to acquire ownership interests in two proposed solar projects in Wisconsin. Badger Hollow Solar Farm will be located in Iowa County, Wisconsin, and Two Creeks Solar Project will be located in Manitowoc County, Wisconsin. We will own 100 MW of the output of each project for a total of 200 MW. The PSCW approved the acquisition of these two projects in April 2019. Commercial operation for both projects is targeted for the end of 2020. As the cost of renewable energy generation continues to decline, solar projects have become cost effective opportunities for us and our customers to participate in renewable energy.

Reliability

We have made significant reliability-related investments in recent years, and plan to continue strengthening and modernizing our generation fleet and distribution networks to further improve reliability.

We continue work on our SMRP, which involves modernizing parts of our electric distribution system, including burying or upgrading lines. The project focuses on constructing facilities to improve the reliability of electric service we provide to our customers. We also continue to upgrade our electric and natural gas distribution systems to enhance reliability.

Operating Efficiency

We continually look for ways to optimize the operating efficiency of our company. For example, we are making progress on our Advanced Metering Infrastructure program, replacing aging meter-reading equipment on both our network and customer property. An integrated system of smart meters, communication networks, and data management programs enables two-way communication between us and our customers. This program reduces the manual effort for disconnects and reconnects and enhances outage management capabilities.


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WEC Energy Group continues to focus on integrating and improving business processes and consolidating its IT infrastructure across all of its companies. We expect these efforts to continue to drive operational efficiency and to put us in position to effectively support plans for future growth.

Financial Discipline

A strong adherence to financial discipline is essential to earning our authorized ROE and maintaining a strong balance sheet, stable cash flows, and quality credit ratings.

We follow an asset management strategy that focuses on investing in and acquiring assets consistent with our strategic plans, as well as disposing of assets, including property, plants, and equipment, that are no longer performing as intended, or have an unacceptable risk profile. See Note 2, Acquisition, for more information about our acquisition of a portion of a wind energy generation facility in Wisconsin.

Exceptional Customer Care

Our approach is driven by an intense focus on delivering exceptional customer care every day. We strive to provide the best value for our customers by embracing constructive change, demonstrating personal responsibility for results, leveraging our capabilities and expertise, and using creative solutions to meet or exceed our customers’ expectations.

One example of how we obtain feedback from our customers is through our "We Care" calls, where our employees contact customers after a completed service call. Customer satisfaction is a priority, and making "We Care" calls is one of the main methods we use to gauge our performance to improve customer satisfaction.

Safety

We have a long-standing commitment to both workplace and public safety, and under our "Target Zero" mission, we have an ultimate goal of zero incidents, accidents, and injuries. We also set goals around injury-prevention activities that raise awareness and facilitate conversations about employee safety. Our corporate safety program provides a forum for addressing employee concerns, training employees and contractors on current safety standards, and recognizing those who demonstrate a safety focus.

RESULTS OF OPERATIONS
 
THREE MONTHS ENDED MARCH 31, 2019

Earnings

Our earnings for the three months ended March 31, 2019 were $40.9 million, compared to $49.8 million for the same quarter in 2018. See below for additional information on the $8.9 million decrease in earnings.

Non-GAAP Financial Measures

The discussion below addresses the operating income contribution of our utility segment and includes financial information prepared in accordance with GAAP, as well as electric margins and natural gas margins, which are not measures of financial performance under GAAP. Electric margin (electric revenues less fuel and purchased power costs) and natural gas margin (natural gas revenues less cost of natural gas sold) are non-GAAP financial measures because they exclude other operation and maintenance expense, depreciation and amortization, and property and revenue taxes.

We believe that electric and natural gas margins provide a useful basis for evaluating utility operations since the majority of prudently incurred fuel and purchased power costs, as well as prudently incurred natural gas costs, are passed through to customers in current rates. As a result, management uses electric and natural gas margins internally when assessing the operating performance of our utility segment as these measures exclude the majority of revenue fluctuations caused by changes in these expenses. Similarly, the presentation of electric and natural gas margins herein is intended to provide supplemental information for investors regarding our operating performance.


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Our electric margins and natural gas margins may not be comparable to similar measures presented by other companies.  Furthermore, these measures are not intended to replace operating income as determined in accordance with GAAP as an indicator of our utility segment operating performance. Our utility segment operating income for the three months ended March 31, 2019 and 2018 was $60.8 million and $69.3 million, respectively. The operating income discussion below includes a table that provides the calculation of electric margins and natural gas margins, along with a reconciliation to utility segment operating income.

Utility Segment Contribution to Operating Income

The following table compares our utility segment's contribution to operating income during the first quarter of 2019, compared with the same quarter in 2018, including favorable or better, "B", and unfavorable or worse, "W", variances.
 
 
Three Months Ended March 31
(in millions)
 
2019
 
2018
 
B (W)
Electric revenues
 
$
277.9

 
$
282.7

 
$
(4.8
)
Fuel and purchased power
 
100.9

 
101.3

 
0.4

Total electric margins
 
177.0

 
181.4

 
(4.4
)
 
 
 
 
 
 
 
Natural gas revenues
 
117.9

 
110.9

 
7.0

Cost of natural gas sold
 
79.4

 
74.5

 
(4.9
)
Total natural gas margins
 
38.5

 
36.4

 
2.1

 
 
 
 
 
 
 
Total electric and natural gas margins
 
215.5

 
217.8

 
(2.3
)
 
 
 
 
 
 
 
Other operation and maintenance
 
104.2

 
102.7

 
(1.5
)
Depreciation and amortization
 
40.3

 
35.9

 
(4.4
)
Property and revenue taxes
 
10.2

 
9.9

 
(0.3
)
Operating income
 
$
60.8

 
$
69.3

 
$
(8.5
)

The following table shows a breakdown of other operation and maintenance:
 
 
Three Months Ended March 31
(in millions)
 
2019
 
2018
 
B (W)
Operation and maintenance not included in line items below
 
$
58.5

 
$
57.4

 
$
(1.1
)
Transmission (1)
 
36.9

 
36.9

 

Regulatory amortizations and other pass through expenses (2)
 
8.8

 
8.4

 
(0.4
)
Total other operation and maintenance
 
$
104.2

 
$
102.7

 
$
(1.5
)

(1) 
The PSCW has approved escrow accounting for our American Transmission Company LLC and MISO network transmission expenses. As a result, we defer as a regulatory asset or liability, the difference between actual transmission costs and those included in rates until recovery or refund is authorized in a future rate proceeding. During the first quarter of 2019 and 2018, $35.6 million and $36.3 million, respectively, of costs were billed to us by transmission providers.

(2) 
Regulatory amortizations and other pass through expenses are substantially offset in margins and therefore do not have a significant impact on operating income.


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The following tables provide information on delivered sales volumes by customer class and weather statistics:
 
 
Three Months Ended March 31
 
 
MWh (in thousands)
Electric Sales Volumes
 
2019
 
2018
 
B (W)
Customer class
 
 

 
 

 
 
Residential
 
758.2

 
743.4

 
14.8

Small commercial and industrial
 
972.3

 
966.5

 
5.8

Large commercial and industrial
 
948.0

 
975.1

 
(27.1
)
Other
 
7.8

 
7.8

 

Total retail
 
2,686.3

 
2,692.8

 
(6.5
)
Wholesale
 
572.0

 
605.4

 
(33.4
)
Resale
 
261.2

 
252.2

 
9.0

Total sales in MWh
 
3,519.5

 
3,550.4


(30.9
)

 
 
Three Months Ended March 31
 
 
Therms (in millions)
Natural Gas Sales Volumes
 
2019
 
2018
 
B (W)
Customer class
 
 

 
 

 
 
Residential
 
127.7

 
116.8

 
10.9

Commercial and industrial
 
87.7

 
81.8

 
5.9

Total retail
 
215.4

 
198.6

 
16.8

Transport
 
133.3

 
132.2

 
1.1

Total sales in therms